10-K

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Fiscal Year Ended December 31, 2007

or

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

Commission File Number 1-6563

Safeco Corporation

State of Incorporation: Washington

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

Address of Principal Executive Offices: Safeco Plaza, 1001 Fourth Avenue, Seattle, Washington 98154

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES  x    NO  ¨

Indicate by check mark if the registrant is not required to file reports, pursuant to Section 13 or Section 15(d) of the Act. YES  ¨    NO  x

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

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

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2007, was $6,300,000,000.

89,742,213 Shares of Common Stock were outstanding at February 15, 2008.

Documents Incorporated by Reference: Portions of the registrant’s definitive Proxy Statement for the 2008 annual shareholders meeting are incorporated by reference into Part III.

Safeco Corporation and Subsidiaries

Index to Financial Statements, Schedules and Exhibits

Item	Description	Page
Part I
Item 1	Our Business	4
	Our Business Products	5
	Competition	8
	Distribution	8
	Claims	9
	Loss and Loss Adjustment Expense Reserves	10
	Reinsurance	10
	Regulation	10
	Executive Officers of the Registrant	12
Item 1A	Risk Factors	14
Item 1B	Unresolved Staff Comments	18
Item 2	Properties	18
Item 3	Legal Proceedings	18
Item 4	Submission of Matters to a Vote of Security Holders	18
Part II
Item 5	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	19
Item 6	Selected Financial Data	21
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations Summary	22
	Consolidated Results of Operations	26
	Our P&C Operating Results	29
	Reinsurance	39
	Our Corporate Results	42
	Application of Critical Accounting Estimates	43
	Loss and Loss Adjustment Expense Reserves	43
	Reinsurance Recoverables	57
	Valuation of Investments	57
	Our Investment Results	58
	Capital Resources and Liquidity	65
Item 7A	Quantitative and Qualitative Disclosures about Market Risk	71
Item 8	Financial Statements and Supplementary Data	72
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	72
Item 9A	Controls and Procedures	72
Item 9B	Other Information	72
Part III
Item 10	Directors, Executive Officers and Corporate Governance	73
Item 11	Executive Compensation	73
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	73
Item 13	Certain Relationships, Related Transactions and Director Independence	74
Item 14	Principal Accountant Fees and Services	74

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Item	Description	Page
Part IV
Item 15	Exhibits and Financial Statement Schedules	75
	Signatures	76
	Index to Financial Statements, Schedules and Exhibits	78
	Management’s Report on Internal Control Over Financial Reporting	79
	Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting	80
	Report of Independent Registered Public Accounting Firm	81

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Part I

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

Item 1: OUR BUSINESS

OVERVIEW

We have been in business serving the insurance needs of customers since 1923. Safeco Corporation is an insurance holding company incorporated in the state of Washington. We are licensed to provide property and casualty insurance along with related services to individuals and small- to mid-size businesses in all 50 states through our insurance subsidiaries and as of February 15, 2008, we had 7,057 employees located throughout the United States. We also sell surety bonds to contractors and businesses. Our revenues are generated from the premiums we earn on the insurance policies we write and the income we earn from our investment of premium dollars.

We sell our insurance products principally through independent agents. According to A.M. Best, an insurance rating agency, we are one of the 20 largest domestic insurance carriers, the 6^th largest domestic property and casualty insurance carrier selling through independent agents and our surety business is the 4^th largest in the United States, based on 2006 direct written premiums.

We deliver the majority of our products over our Safeco Now automated platform, which gives our agents a single point of entry to sell our core property and casualty products and select transactional surety bonds. Most of our pricing, underwriting and servicing processes are presented through this platform. Consumers can also purchase certain policies directly and online at www.Safeco.com. Today, over 95% of our personal lines and small commercial business lines are automated and priced using multi-variate and predictive models.

OUR VISION AND STRATEGY

Our vision is to be the indispensable carrier of choice for customers and their agents through excellence in the solutions we provide, ease of doing business with us and the competitiveness of our products.

Our strategy centers on developing long-term customers who value insurance products and proactively manage their risks. We focus on the personal and commercial insurance products that are purchased by the vast majority of U.S. households and small businesses.

2007 ACCOMPLISHMENTS

In 2007, we focused our efforts on maintaining disciplined underwriting, managing our expenses and capital, developing and introducing new products and improving our technology infrastructure.

• Underwriting Profitability – We took actions in 2007 to sustain our underwriting profitability through:

^¡ Continued refinements in our underwriting discipline

^¡ Catastrophe risk management

^¡ Claims management

^¡ Refinements in our producer review process

• Expense Management – We achieved expense savings of approximately $50 million for 2007, offset in part by reinvestment in our research and development unit – Open Seas^™, increased advertising and marketing spend, and strategic technology investments. We increased productivity as of December 31, 2007 to 593 Policies in Force per Full Time Equivalent (PIF per FTE) from 557 as of December 31, 2006.

• Capital Management – We increased our common stock dividend rate by 33%. We paid $545.9 of our high cost debt and repurchased $1.0 billion of our outstanding shares.

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• Development and Introduction of New Products – We launched a new version of our multi-variate pricing segmentation model called Safeco True Pricing™. This product, which applies to our auto and property lines, evaluates customers at every renewal and re-underwrites them so that we can better match rate for risk. The evolution of our multi-variate segmented pricing model is designed to increase our pricing accuracy, improve our retention and competitively price new business.

In 2007, we rolled out more coverage options for our agents and customers through our Safeco Optimum Package™ products which offer customers the choice of additional coverages for auto, homeowners and small commercial policies. We launched Teensurance™ in the second quarter of 2007, highlighting our drive to innovate. Teensurance is a product for parents and their teen drivers which features special pricing when a tracking device is installed in the vehicle. We have additional product innovations in pilot phase in various markets.

• Technology Infrastructure Investment – We evaluated key technologies that will support our business strategy. These included applications that pull together disparate legacy data to create a more holistic view of our customers, advanced data mining tools, and modernized workplace technologies. We established an IT governance structure for our technology investments.

OUR FOCUS IN 2008

In 2008, our goals are as follows:

• Drive the Economics of our Business – Provide sustainable expense savings through improvements in business process; relentlessly address environmental factors, procedures and practices that impede performance and demonstrate momentum in achieving best-in-class in expense and loss-cost management.

• Add Value through Innovative Thinking – Deliver accurate data, deep analytics and technology that will enable us to identify trends, design products and services, and improve risk management, combining these capabilities with a strong talent management initiative that leverages the full capacity of our people to deliver for the customer.

• Enhance the Safeco Experience – Respect the time of agents and customers by providing an integrated approach to logistics, customer support and technology, and make our personal engagement in the business unmistakable to agents and customers.

• Deliver Superior Performance – Perform for our owners by driving book value growth and maintaining ROE that is among the best in the Property and Casualty (P&C) industry, and deploy a combination of underwriting discipline, superior selection, investment performance, and active capital management to deliver stable results and demonstrate clear potential to outperform peers.

We have various internal metrics by which we chart our progress in achieving these goals.

OUR BUSINESS PRODUCTS

Insurance products blunt the economic effect of large financial losses on customers by pooling the risks of many individuals and businesses and transferring these risks to an insurance company in return for a premium. The type of risks that are pooled for insurance include risks that are definable, accidental in nature, and part of a group of similar risks large enough to make losses predictable. We offer a range of insurance products in our four business segments that address these risks.

Our four business segments include:

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

• Safeco Business Insurance – offers businessowner policies, commercial auto, commercial multi-peril, workers’ compensation, commercial property and general liability policies for small- and mid-sized businesses

• Surety – offers bonds that provide payment and performance guarantees for various businesses

• P&C Other – run-off assumed reinsurance, large-commercial business accounts and commercial specialty programs in run-off, our own self-insurance, asbestos and environmental results, run-off religious institutions and other business and programs we have exited.

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Safeco Now – our automated underwriting platform used to sell these products – allows agents and consumers to quote and sell or purchase policies faster, enabling us to streamline the sales process. Our agents can handle most auto policy changes and endorsements online. These endorsements include vehicle additions and deletions, vehicle replacements or updates and coverage and deductible changes. This automation also has facilitated the comparison of our products online and within software packages that offer the agent and the consumer the ability to compare product quotes.

The table below shows net earned premiums, which is equivalent to our premium revenues. We use “net” because some of our premiums are ceded to reinsurers.

Net earned premiums for our business segments were as follows:

YEAR ENDED DECEMBER 31,	2007				2006				2005
	Amount		% of Total		Amount		% of Total		Amount		% of Total
Safeco Personal Insurance	$	3,663.0	65.7	%	$	3,727.6	66.5	%	$	3,831.8	66.0	%
Safeco Business Insurance		1,559.1	28.0			1,509.6	26.9			1,555.4	26.8
Surety		352.9	6.3			297.5	5.3			260.9	4.5
P&C Other		1.0	—			73.6	1.3			157.3	2.7
Total	$	5,576.0	100.0	%	$	5,608.3	100.0	%	$	5,805.4	100.0	%

SAFECO PERSONAL INSURANCE

Net earned premiums for Safeco Personal Insurance by reportable segment were as follows:

YEAR ENDED DECEMBER 31	2007		2006		2005
Auto	$	2,604.8	$	2,713.2	$	2,820.4
Property		942.3		909.0		913.3
Specialty		115.9		105.4		98.1
Total	$	3,663.0	$	3,727.6	$	3,831.8

Auto – We sell insurance products that provide coverage for our customers’ liability to others after a collision 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.

Our tiered auto product uses multi-variate modeling to match rates to the risks we are willing to insure. This allows us to quote a spectrum of customers and is intended to reduce volatility in our underwriting results over time. Safeco True Pricing makes our pricing more accurate for existing customers, charging the right rate for the customer’s evolving risk profile and adjusting the premiums at every renewal period. It also seeks to create a more accurate and competitive rate for new business quotes.

Policyholders can purchase our Safeco Optimum Package as an endorsement to the personal auto policy. With the package, customers can make more coverage choices, be rewarded for good driving and elect extra protection.

Property – We provide solutions to insure dwellings, contents and liability exposures. We offer homeowners, renter, condo owners, dwelling fire and earthquake policies. Our policies protect our insureds against losses from hazards such as hurricanes, tornadoes, wildfires, earthquakes, hail and windstorms along with other exposures.

As in our other lines of business, we look for growth in property insurance that meets our profitability targets. We target new property business by offering competitive pricing on policies, while carefully managing our exposure to catastrophic events. Like auto, our tiered property product enables us to better match rates to the risks we insure.

Specialty – We offer umbrella, motorcycle, recreational vehicle, classic cars and boat owners insurance coverage for individuals. These specialty products serve to round out our personal lines portfolio so we can provide products to meet the majority of our policyholders’ personal insurance needs. The umbrella product provides cross-sell opportunities with auto.

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SAFECO BUSINESS INSURANCE

Net earned premiums for Safeco Business Insurance by reportable segment were as follows:

YEAR ENDED DECEMBER 31	2007		2006		2005
SBI Regular	$	1,297.8	$	1,245.4	$	1,272.2
SBI Special Accounts Facility		261.3		264.2		283.2
Total	$	1,559.1	$	1,509.6	$	1,555.4

SBI Regular – We offer a variety of commercial insurance products designed for small- and mid-sized businesses. Our principal business insurance products include business owner policies (BOP), commercial auto, commercial multi-peril, workers’ compensation, commercial property and general liability insurance. Of the businesses we insure, 95% of our policies in force are from customers who pay annual premiums of $10,000 or less and have 99 or fewer employees.

Our lead product in this segment is BOP and it is fully automated on our Safeco Now platform. Our BOP product is designed for customers with up to $15 million in insured values and up to $15 million in annual sales. BOP policies can be issued over Safeco Now for more than 350 classes of business.

Safeco BOP Access™ is designed to target risks that do not fit a traditional businessowners’ policy, but do not require a complex package policy. Packed with enhanced coverages and customizable options, Safeco BOP Access makes policies for “in-between” customers easy to sell, write and maintain. It completes our entire suite of commercial products to cover the small-to-medium marketplace.

Our commercial auto product includes non-fleet and small fleet commercial auto business. We principally insure fleets that include up to 15 vehicles. Approximately 80% of this product is transacted on our automated platform.

Our commercial multi-peril product offers enhanced liability and property coverages that can be tailored to the customer’s needs. This packaged product allows the customer to obtain those coverages that are important to their specific situation.

Our workers’ compensation product targets small- to mid-sized manufacturing, retail and service companies similar to those who buy our BOP and commercial multi-peril product. We require the companies we insure to show a demonstrable concern for employee safety and have formalized loss-prevention plans. Approximately 95% of our workers’ compensation coverage is automated on our Safeco Now platform.

Other products within SBI Regular include farm risks, equipment breakdown, excess liability and umbrella coverage.

SBI Special Accounts Facility – Our Special Accounts Facility segment writes policies covering large-commercial accounts (customers who pay annual premiums of more than $250,000) for our key agents and brokers who deliver a strong flow of our small- to mid-sized commercial products. We also write three specialty commercial programs – agents’ errors and omissions insurance, property and liability insurance for mini-storage and warehouse properties, and property, auto, professional and general liability insurance for non-profit social service organizations. We limit our appetite in the large commercial account business because of our belief that this business is more susceptible to unprofitable price competition in soft market cycles resulting in earnings volatility.

SURETY

We provide surety bonds for construction, performance and legal matters such as appeals, probate and bankruptcies. Our business relies principally on the increasing needs of long-term customers. Surety differs from traditional insurance as it resembles a credit function. We charge a fee for lending our credit to customers who then indemnify us, whereas insurance pools the risks of many customers.

There are three parties to a surety contract – the principal (our customer), Safeco and the beneficiary. All three parties have an obligation under the contract. We are the party who guarantees fulfillment of the principal’s obligation to its beneficiary. In addition, we are generally entitled to recover from the principal any losses and expenses paid to third parties. We are responsible for evaluating the risk and determining if the principal meets the underlying requirements for the bond. We step in on behalf of our principals in the event of a default. We use outside attorneys and engineers to determine contract completion performance or recovery and salvage potential.

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We offer two broad types of surety products – contract surety and commercial surety. Contract surety bonds secure a contractor’s performance or payment obligation generally with respect to a construction project. Contract surety bonds are generally required by federal, state and local governments for public works projects. Commercial surety bonds include all surety bonds other than contract and cover obligations typically required by law or regulation. We also market transactional surety bond obligations to individuals and small business through our web-based Surety Online ™ product.

P&C OTHER

This segment includes run-off assumed reinsurance, large-commercial business accounts and commercial specialty programs in run-off, our own self-insurance asbestos and environmental results, run-off religious institutions and other business and programs we have exited, including Safeco Financial Institution Solutions (SFIS), which we sold in April 2006.

CORPORATE

In our Corporate segment, we include:

• Interest expense we pay on our debt

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

• Our intercompany eliminations

Additional financial information on our segments can be found in the Our P&C Operating Results section Our Corporate Results section in Item 7: Management’s Discussion and Analysis (MD&A) as well as in the Notes to our Consolidated Financial Statements.

COMPETITION

We operate in a highly competitive environment for the sale of property and casualty insurance. We compete with thousands of domestic and foreign insurance companies for placement with quality independent agents and brokers. Factors that influence carrier-distributor relationships include:

• Availability of capacity and coverage terms

• Ease of doing business

• Product price

• Claims handling

• Compensation structure

• Financial strength and ratings

• Reputation

We also compete in the marketplace for the business of the retail consumer. There, the same issues regarding coverage, ease, price, service, claims handling, financial strength and reputation are all factors. In the retail market, not only do we compete against other insurance carriers that are represented by independent agents, but also carriers with captive agents and carriers that write directly without agents. Several competing carriers have brands that are more commonly known and spend significantly more on advertising than we do. Because we do not support our brand through extensive advertising, we are reliant on our ability to:

• Manage our costs to remain competitive

• Provide coverage and service that will commend us to agents and customers

• Maintain positive relationships with our agents

• Invest in innovation in our products and services to differentiate Safeco

DISTRIBUTION

We offer our products principally through independent agents. Our agency relationship is important to us and we provide our agents with a competitive compensation package and tools to enhance their business.

We have brought together our major auto, property, specialty and small- to mid-sized commercial products on our online Safeco Now sales-and-service platform. This agent workplace tool is Web-based and features a single point of entry for Safeco personal and commercial products, including certain surety bonds. Safeco Now allows agents and brokers to quote and sell these products in minutes and provides them with seamless cross-sell opportunities.

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Safeco Now is easy for our agents and brokers to use relative to manual underwriting, drives operating efficiencies in their offices, and gives us a competitive advantage over small regional carriers that have not made (or cannot afford) such investments in technology and larger carriers whose tools may not be as advanced.

Our sales force educates agents on our products and our overall value proposition. This enables us to achieve top-of-mind status with agents and help agents grow their businesses thereby growing ours. We strive to deepen our agency relationships by responding to survey feedback and engaging senior management in regular dialogues to understand agent needs.

We offer our agents on-demand training solutions – live, online virtual classrooms, recorded sessions, and robust user-assistance tools embedded in our systems and applications to maximize their efficiency for agents who prefer to handle service transactions on their own. This enables our agents and brokers to easily learn how to place new business, service existing business and check the status of bills and claims. We also offer phone support and expert troubleshooting if our agents need help placing or renewing business with Safeco.

We offer a “fee and service” option for agents who prefer not to handle their customers’ service transactions. This service, known as Gold Service™, offers licensed Safeco Customer Care professionals who handle all service-related issues directly with the policyholder. In turn, this allows agents to focus on growing their books of business while we focus on providing a consistent and high-value service experience. Participating agents also get the benefit of Safeco cross-selling their book of business to help drive new business and retention.

We sell a modest amount of our products directly through licensed agents who are Safeco employees and through our website, www.Safeco.com.

CLAIMS

We have a team of more than 2,500 claims professionals across the country. They handled 97% of our claims in 2007; the remainder was handled by independent adjusters. We have specialized claims-handling functions to address complex claims such as surety, workers’ compensation, asbestos, environmental and construction defects.

Customers can receive repair estimates and claim checks by visiting one of our drive-in claims centers, or our new Safeco OneStop™ repair facilities. At Safeco OneStop repair facilities, customers simply drop off their drivable car, and the estimate, rental car and repair are taken care of at one convenient location. We have vendor partnerships and reward vendors who meet our customers’ satisfaction criteria.

CATASTROPHE MANAGEMENT

As a property and casualty insurer, our results can be affected by claims arising out of natural or man-made catastrophes. Depending on their severity, such catastrophic events can have a significant impact on our results of operations and financial condition. Catastrophes can be caused by various events, including severe weather, earthquakes, terrorism, fires and explosions. We actively attempt to limit our exposure to catastrophe risk through a combination of risk avoidance, risk mitigation and risk transfer strategies. We maintain proprietary data on selected risks to conduct our own analysis of exposures as well as using industry data.

Our underwriting strategy across all segments of our business is to target customers whose risk of loss provides us with the opportunity for profitable growth. When writing business in catastrophe-prone areas we attempt to limit our exposure by adhering to strict guidelines that include variables such as building age and condition, coastal proximity, standards for policy deductibles and wildfire mapping. Due to our conservative catastrophe management strategy, our catastrophe losses have been lower than would be predicted by our applicable market share for nearly all major catastrophes.

As part of our on-going catastrophe expense management efforts, we are evaluating whether to join the California Earthquake Authority (CEA). The CEA is a privately-financed, publicly managed state agency created to provide insurance coverage for earthquake damage in California. Insurers selling homeowners policies in California are required to offer earthquake insurance to their customers either through their company or through participation in the CEA. Participation in the CEA would limit our exposure to earthquake losses.

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LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

Our ability to accurately estimate our loss and loss adjustment expense (LAE) reserves affects the viability and financial strength of our operations. Loss and LAE reserves reflect our estimates of ultimate amounts for losses from claims and related settlement expenses that we have not yet paid to settle both reported and unreported claims.

We record two categories of loss and LAE reserves – case-basis reserves and incurred but not reported (IBNR) reserves.

We estimate case-basis reserves as the amount we will have to pay for losses that have already been reported to us but are not yet fully paid. These amounts include related legal expenses and other costs associated with resolving and settling a particular claim.

We establish IBNR reserves at the end of every reporting period to estimate the amount we will have to pay for:

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

• Losses that have been reported to us that may ultimately be paid out differently than expected in our case-basis reserves

• Losses that have been paid and closed, but may reopen and require future payment

• Expenses related to resolving and settling these losses

We use actuarial methods combined with judgment to estimate IBNR reserves.

Additional information about loss and LAE reserves can be found in the Loss and Loss Adjustment Expense Reserves section of our MD&A.

REINSURANCE

Our policyholders buy insurance from us to reduce the financial impact of the losses they may suffer. In turn, we purchase reinsurance to limit the financial impact of policyholder losses and our exposure to catastrophic events.

We purchase reinsurance from several providers and are not dependent upon any single reinsurer. When we select reinsurers, we have requirements on minimum financial strength ratings, surplus level and the number of years a company has acted as a reinsurer. Reinsurance does not eliminate our liability to our policyholders, and we remain primarily liable to policyholders for the risks we insure.

We purchase reinsurance primarily to cover:

• Property catastrophes

• Workers’ compensation

• Commercial property

• Commercial umbrella

• Surety

Additional information about reinsurance can be found in the Reinsurance section of our MD&A.

REGULATION

Insurance is a highly regulated industry in the United States. Our insurance subsidiaries do business in and operate under the regulations of all 50 states and the District of Columbia. States regulate the insurance industry primarily to protect the interest of policyholders and to ensure the financial viability of the insurance companies they regulate.

The nature and extent of such regulation and supervision vary from state to state, and regulation of the insurance industry is subject to change. In general, the current regulations under which we operate include:

• Licensing of insurers – Our insurance subsidiaries are licensed and supervised by departments of insurance in each of the states where we do business.

• Regulation of agents – We may only sell insurance through properly licensed agents and brokers who have met the eligibility requirements of the applicable state.

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• Capital and surplus requirements – The amount of premiums we can write is limited in relation to our total policyholders’ surplus. The limit is dependent on factors such as the type of insurance we write, the reasonableness of our reserves, and the quality of our assets.

• Investment and dividend limitations – As an insurance holding company, we rely on dividends from our insurance subsidiaries to pay shareholder dividends and to pay principal and interest on our debt. State regulations limit the amount of dividends our insurance subsidiaries can pay to us without regulatory approval.

• Authority to discontinue business or exit a market – Most states regulate our ability to discontinue business or exit a market, and limit our ability to cancel or refuse to renew policies. Some states prohibit us from withdrawing from one or more lines of business within the state unless a plan is approved by the state department of insurance.

• Insurance premium rates and policy forms – All states prohibit insurance premiums from being excessive, inadequate or unfairly discriminatory. Most states require that we file price schedules, policy forms and supporting information for review by the insurance department. The filing and approval process can affect our ability to adjust pricing in a timely manner, and states may deny proposed price changes altogether.

• Reasonableness of reserves for losses – States require that we analyze the reasonableness of our reserves annually and report this information to their departments of insurance.

• Transactions with affiliates – We are required to provide notice to the state before entering into certain material transactions with our insurance subsidiaries. Some transactions require state approval as well.

• Changes in control – Any acquisition or “change of control” of an insurer requires prior approval by the domiciled state insurance regulator.

• Guaranty funds and other non-voluntary participations – Some states require that we contribute to state guaranty funds to cover policyholder losses resulting from the impairment or insolvency of other insurers. As a condition of writing policies in certain states, we also are required to participate in assigned risk plans, reinsurance facilities and joint underwriting associations that provide insurance to individuals or entities who otherwise would be unable to purchase such coverage.

• Market conduct and financial examination – State laws govern and state insurance departments periodically examine our financial condition and many aspects of our conduct in the market. They also require that we file financial and other reports on an annual and quarterly basis.

STATUTORY ACCOUNTING

The accounting standards required by the state regulatory authorities are called statutory accounting principles, or SAP. These principles differ in some respects from U.S. generally accepted accounting principles (GAAP). For example, in reporting loss and LAE reserves on our Consolidated Balance Sheets:

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

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

As a result, our loss and LAE reserves at December 31, 2007, were:

• $4,730.0 in our annual financial statements filed with state regulatory authorities, in accordance with SAP, net of reinsurance

• $5,185.0 in our Consolidated GAAP Financial Statements

More information about our loss and LAE reserves and our reinsurance recoverables can be found in the Notes to our Consolidated Financial Statements.

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EXECUTIVE OFFICERS OF THE REGISTRANT

Here are our executive officers as of February 26, 2008. No family relationships exist among our executive officers.

Officer Name	Age	Positions with Safeco and Business Experience
Paula Rosput Reynolds	51	President and Chief Executive Officer, Safeco Corporation, since January 2006. Before joining Safeco, Ms. Reynolds was employed at AGL Resources, an Atlanta-based energy services holding company, where she served as Chairman (beginning in 2002) and President and Chief Executive Officer from 2000 to 2005. Previously, Ms. Reynolds served as President of Atlanta Gas Light Company, a subsidiary of AGL. In addition to serving on Safeco’s board of directors, Ms. Reynolds serves as a director for Delta Air Lines and Anadarko Petroleum Corporation.
Ross J. Kari	49	Executive Vice President, and Chief Financial Officer, Safeco Corporation, since June 2006. Before joining Safeco, Mr. Kari was the Chief Operating Officer and Chief Financial Officer for Federal Home Loan Bank of San Francisco from 2002 to May 2006.
Arthur Chong	54	Executive Vice President and Chief Legal Officer, Safeco Corporation, since November 2005. Prior to joining Safeco, Mr. Chong served as Deputy General Counsel of McKesson Corporation, a healthcare services company, from 1999 to October 2005.
Michael H. Hughes	53	Executive Vice President, Insurance Operations, Safeco Corporation, since July 2006 and Senior Vice President, Safeco Business Insurance, Safeco Corporation, since April 2002. Prior to joining Safeco, Mr. Hughes spent more than 20 years in commercial underwriting at The Hartford Financial Services, most recently as Executive Vice President, Affinity Personal Lines from 1996 to 2002.
Robert Ingram	49	Executive Vice President and Chief Information Officer, Safeco Corporation since February 11, 2008. Prior to joining Safeco, Mr. Ingram served as Chief Information Officer for Argonaut Group from 2006 to 2008. Mr. Ingram held a number of leadership positions at Andersen Consulting, IBM and USAA, where from 1998 to 2006, he served as senior vice president in Information Technology, supporting USAA’s property and casualty business.
R. Eric Martinez	39	Executive Vice President, Claims, Customer Care and Fulfillment, Safeco Corporation, since June 2007. Prior to joining Safeco, Mr. Martinez held a number of leadership positions from 1989 to 2006 at AGL Resources, most recently, Executive Vice President, Utility Operations.
Rauline Gonzales Ochs	49	Executive Vice President, Sales & Marketing, Safeco Corporation since January 22, 2008. Prior to joining Safeco, Ms. Ochs was senior vice president for North American Alliances and Channels at Oracle Corporation from 2003 to 2008 and senior vice president of Worldwide Alliances for BEA Systems from 2000 to 2002.
Kris L. Hill	41	Vice President and Controller, Safeco Corporation, since November 2006 and Principal Accounting Officer since February 2007. Assistant Vice President and Assistant Controller, Safeco Corporation, from December 2002 to November 2006. Before joining Safeco, Ms. Hill was Vice President of Finance at Northstar Communications Group, Inc., from 1998 to 2002.

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CORPORATE INFORMATION

Safeco Corporation was formed as a Washington corporation in 1923.

We make our periodic and current financial reports and related amendments available on our Web site at www.safeco.com/ir at the same time as they are electronically filed with the Securities and Exchange Commission (SEC). They are also available at the SEC’s website, www.sec.gov. The information found on our Web site is not part of this or any other report we file with or furnish to the SEC.

We submitted the certification of our Chief Executive Officer required by Section 303A.12(a) of the New York Exchange (NYSE) List Company Manual, relating to our compliance with the NYSE’s corporate governance listing standards, to the NYSE with no qualifications. The Company has filed the Chief Executive Officer and Chief Financial Officer certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 required to be filed with the SEC.

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Item 1A: RISK FACTORS

Our business involves various risks and uncertainties. Additional risks and uncertainties that are presently unknown to us or that we currently believe to be immaterial may also adversely affect our business. If any such risks or uncertainties, or any of the following risks or uncertainties, develop into actual events, this could have a materially adverse effect on our business, financial condition or results of operations. In that case, the market price of our common stock could decline materially.

This information should be considered carefully together with the other information contained in this report and in the other reports and materials filed by us with the SEC, as well as news releases and other information publicly disseminated by us from time to time.

The following list describes the most significant risks facing our company:

• Our ability to respond to the competitive initiatives of other property and casualty insurers could affect our growth and pressure our pricing – We compete within the property and casualty insurance industry not only for personal and commercial insurance customers, but also for employees and agents and brokers, particularly within our personal auto and small-business segments. We compete most notably on types of product, price, quality and depth of coverage, customer service, claims handling, and in the case of agents and brokers, compensation. With respect to employees, we not only compete with other carriers for a specialized and well educated workforce but we also compete with other large employers in our region.

Competition for customers and agents has led to increased marketing and advertising by our competitors, varied agent compensation structures, as well as the introduction of new insurance products and aggressive pricing. If we cannot effectively respond to increased competition for the business of our current and prospective customers, we may not be able to grow our business or we may lose market share.

• Our underwriting results are dependent on our ability to match rate to risk. If our pricing models fail to price risks accurately, our profitability may be adversely affected – The profitability of our business substantially depends on the extent to which our actual claims experience is consistent with the assumptions we use in pricing our policies. We use automated underwriting tools for the preponderance of our products, as well as tiered pricing structures to match our premium rates to the risks we insure. As we expand our appetite into different markets and products, we will write more policies in markets and geographical areas where we have less data specific to these new markets, and accordingly may be more susceptible to error in our models or claims adjustment. If we fail to appropriately price the risks we insure, change our pricing model to reflect our current experience, or our claims experience is more frequent or severe than our underlying risk assumptions, our profit margins may be negatively affected. To the extent we have overpriced risks, new-business growth and retention of our existing business may be adversely affected.

• If we are unable to maintain the availability of our information technology systems and safeguard the security of our data, our ability to conduct our business may be compromised or our reputation may be harmed – We use computer systems, including our automated underwriting platform, to store, retrieve, evaluate and utilize customer and company data and information. Our information technology and telecommunications systems, in turn, interface with and rely upon third-party systems. Our business is highly dependent on our ability, and the ability of our employees, agents and brokers, to access these systems to perform necessary business functions, such as providing new-business quotes, processing new and renewal business, making changes to existing policies, filing and paying claims, and providing customer support. Systems failures or outages and an inability to recover from these failures and outages could compromise our ability to perform these functions on a timely basis, which could hurt our business and our relationships with our agents and policyholders. In addition, systems failures (either our own or those of third parties) could jeopardize the confidentiality of our policyholders’ personal data, which could harm our reputation and expose us to possible liability. We rely on encryption and authentication technology licensed from third parties to provide security and authentication capabilities. But there can be no guarantee that advances in computer capabilities, new computer viruses, programming or human errors, or other events or developments would not result in a breach of our security measures, misappropriation of our proprietary information or an interruption of our business operations.

• Our financial results may be adversely affected by the cyclical nature of the property and casualty business in which we participate – The property and casualty insurance market is traditionally cyclical, experiencing periods characterized by relatively high levels of price competition, less restrictive underwriting standards and relatively low premium rates, followed by periods of relatively low levels of competition, more selective underwriting standards and relatively high premium rates. We are currently operating in a period characterized by significant price competition. While both types of periods pose challenges to us, if we were to relax our underwriting standards or pricing in response to the competitive market, the associated claims activity could adversely affect our financial condition and results of operations.

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• Increased claims activity resulting from catastrophic events, whether natural or man-made, may result in significant losses – We experience increased claims activity when catastrophic events affect areas where our policyholders live or do business. Catastrophes can be caused by natural events, such as hurricanes, tornadoes, wildfires, earthquakes, snow, hail and windstorms, or other factors, such as terrorism, riots, hazardous material releases or utility outages. The extent of our losses in connection with catastrophic events is a function of the severity of the event and the total amount of policyholder exposure in the affected area. Where we have geographic concentrations of policyholders, a single catastrophe (such as an earthquake) or destructive weather trend affecting a region may have a significant impact on our financial condition and results of operations. We cannot accurately predict catastrophes, or the number and type of catastrophic events that will affect us. As a result, our operating and financial results may vary significantly from one period to the next. It is possible that changing climate conditions have added to the unpredictability and frequency of natural disasters and created additional uncertainty as to future trends and exposures. In particular, the increased severity and frequency of storms experienced in 2005 although not necessarily evident over the past two years, may continue in the foreseeable future. While we anticipate and plan for catastrophe losses, there can be no assurance that our financial results will not be adversely affected by our exposure to losses arising from catastrophic events in the future that exceed our previous experience and assumptions.

• We may not be able to manage expenses effectively, which could adversely affect our profitability and our ability to compete in the property and casualty insurance markets – Ongoing expense management is important to maintaining and increasing our growth and profitability. If we are unable to execute effectively on our process improvement and outsourcing efforts to realize expense efficiencies, it could affect our ability to maintain competitive pricing and could have a negative effect on our new-business growth and retention of existing business.

• We may not be able to attract and retain distributors for our products or our distributors may be unable to sell our policies, which may adversely affect our market share and our business – We rely principally on independent agents and brokers to sell our insurance policies. The number of traditional independent agency distributors has decreased due to consolidation from mergers and acquisitions, and independent distributors have increasing leverage with insurers seeking their business. Many insurers offer products similar to ours. In choosing an insurance carrier, an agent may consider ease-of-doing business, reputation, price of product, customer service, claims handling and the insurer’s compensation structure. We may be unable to compete with insurers that adopt more aggressive pricing policies or more generous compensation structures; insurers that offer a broader array of products; and insurers that have extensive promotional and advertising campaigns.

Because we depend principally on our independent agents and brokers to make the ultimate sale to our policyholders, we also face competition from insurers that employ other distribution methods through captive agents or direct sales, including the Internet. While we are expanding our means of distribution, we must continue to maintain an independent distribution network. If we are unable to maintain a strong network of independent agents and brokers, or our agents and brokers are unable to compete effectively with other distribution models, it will adversely affect our ability to write new business and retain existing policyholders, which may have a negative impact on our results of operations and prospects.

• Claims payments could exceed our reserves and adversely affect the viability and financial strength of our operations – The profitability and viability of our business depend on our ability to estimate our loss and loss adjustment expense (LAE) reserves accurately. For each of our product lines, we maintain loss and LAE reserves, reflecting our best estimates of losses insured by us and related settlement expenses we may be required to pay in connection with both reported and unreported claims.

We establish reserves at levels we expect to be sufficient to meet our insurance policy obligations. The ultimate cost of losses and the impact of unforeseen events may vary materially from recorded reserves, and variances may adversely affect our operating results and financial condition.

• Inflationary pressures on medical care costs, auto parts and repair, construction costs and other economic factors may increase the amount we pay for claims and negatively affect our underwriting results – Inflationary pressures may require us to increase our reserves. If we are unable to adjust pricing for our products to account for cost increases or find other offsetting supply chain and business efficiencies, these inflationary trends may negatively affect our underwriting profit and financial results. Rising medical costs require us to make higher payouts in connection with bodily injury claims under our policies. Likewise, increases in costs for auto parts and repair services, construction costs and other commodities result in higher loss costs for property damage claims.

• Other adverse economic factors including recession, inflation, periods of high unemployment or lower economic activity could result in fewer policies sold and/or an increase in premium defaults which, in turn, could affect our policy growth and retention – Negative economic factors may also affect our ability to receive the appropriate rate for the risk we insure with our policyholders and may impact our policy flow. In an economic downturn, the degree to which prospective policyholders apply for insurance and fail to pay all balances owed may increase. Existing policyholders may exaggerate or even falsify claims to obtain higher claims payments. These outcomes would reduce our underwriting profit to the extent these effects are not reflected in our rates.

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• Emerging claim and coverage issues could negatively impact our business – As industry practices and legal, judicial, social and other conditions outside of our control change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by extending coverage beyond our underwriting intent or increasing the type, number or size of claims. Such emerging claims and coverage issues include: (i) increases in the number and size of claims relating to construction defects that can present complex coverage and damage valuation questions; (ii) evolving theories of liability and judicial decisions expanding the interpretation of our policy provisions and thereby increasing the amount of damages for which we are liable; and (iii) a growing trend of plaintiffs targeting property and casualty insurers in purported class action litigation relating to claim handling, consumer notification and other practices. The effects of these and other related, unforeseen emerging issues are extremely hard to predict and could harm our business and adversely affect our operating results and financial condition.

• Our investment portfolio includes fixed-maturities and marketable equity securities, and fluctuations in the fixed-maturities or equity markets could adversely affect the valuation of our investment portfolio, our net investment income and our overall profitability – Our investment portfolio is subject to market risks, primarily risks associated with changes in interest rates, as well as deterioration in the credit of companies and public entities in which we have invested. When interest rates rise, the value of our investment portfolio may decline due to decreases in the fair value of our fixed-maturities securities that comprise a substantial majority of our investment portfolio. In a declining interest-rate environment, prepayments and redemptions affecting our securities may increase as issuers seek to refinance at lower rates. Such a decline in market rates could reduce our investment income as new funds are invested at lower yields. Our general intent with respect to all of our fixed-maturities investments is to hold them to maturity, including investments that have declined in value. This intent can change, however, due to financial market fluctuations, changes in our investment strategy or changes in our evaluation of the issuer’s financial condition and prospects. Investment returns are an important part of our overall profitability, and fluctuations in the fixed-maturities or equity markets could negatively affect the timing and amount of our net investment income and cause our financial condition to fluctuate. Volatile conditions in certain credit markets such as the well-publicized mortgage-backed securities market situation result in less liquidity, widening of credit spreads, and lack of price transparency. A decline in the quality of our investment portfolio due to adverse market conditions, the effectiveness of our investment strategy and oversight of our outsourcing relationships could cause additional realized losses on our securities.

• The insurance industry is subject to extensive regulation, and changes within this regulatory environment could adversely affect our operating costs and limit the growth of our business – We conduct our business in a highly regulated environment. State insurance regulators are charged with protecting policyholders, not shareholders, and have broad supervisory powers over our business practices. For example, state departments of insurance regulate and approve underwriting practices and rate changes, which can delay the implementation of premium rate changes or prevent us from making changes we believe are necessary to match rate to risk.

Because the laws and regulations under which we operate are administered and enforced by a diverse group of governmental authorities, there is always the risk that compliance with one regulator’s interpretation of a matter may conflict with another authority’s interpretation of the same issue. In addition, there is a risk that a regulator’s interpretation of an issue will change over time to our detriment. While the U.S. federal government does not directly regulate the insurance industry, federal legislation and administrative policies can affect us, and Congress and various federal agencies periodically discuss proposals that would provide for a federal charter for insurance companies. We cannot predict whether any such laws will be enacted or what effect they would have on our business. For an overview of regulations affecting Safeco, see the Regulation section of Item 1: Our Business.

Changes in the overall legal and regulatory environment also may expand our liability in connection with existing policies or require us to reassess the actions we need to take to comply with evolving perceptions of law. We believe we are in substantial compliance with applicable laws, rules and regulations; however, they are subject to regular modification and change. There can be no assurance that changes will not be made to current laws, rules and regulations, or that any other laws, rules or regulations will not be adopted in the future that could adversely affect our business and financial condition.

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• Our exposure to individual risks and catastrophic losses may increase if we are unable to purchase sufficient reinsurance at acceptable rates or our reinsurers are unable to pay – We purchase reinsurance to reduce our exposure to catastrophe losses and limit our financial losses on large individual risks. This allows us to stabilize our loss experience and increases our capacity to write policies. The availability and cost of reinsurance are determined by market conditions outside our control. No assurance can be made that we will be able to obtain and maintain reinsurance at the same levels and on the same terms as we do today.

If we are not able to obtain or maintain reinsurance in amounts we consider appropriate for our business, or if the cost of obtaining such reinsurance increases materially, we may choose to retain a larger portion of the potential loss associated with our policies. If we are unable to collect reinsurance proceeds because a reinsurer is unable or unwilling to pay, we may incur greater losses. If we are unable to mitigate our exposure to large losses through reinsurance for any reason, our financial condition could be adversely affected in the event of a significant catastrophe.

• Judicial decisions affecting the interpretation of insurance policy provisions and coverage, together with changing theories of liability, may cause us to incur increased losses and damages – We are involved in numerous threatened or filed legal actions in the ordinary course of our operations. As a liability insurer, our involvement in legal actions typically relates to our defense of third-party claims brought against our policyholders, or our principals in the case of surety bonds. We also are commonly a defendant in policy coverage claims brought against us. For a description of our current legal proceedings, see Item 3: Legal Proceedings.

While we do not expect any of these actions to have a material adverse impact on our financial condition or operating results, evolving theories of liability and judicial decisions expanding the interpretation of our policy provisions could increase the amount of damages for which we are liable, and increase our costs associated with defending and settling such lawsuits. Such a scenario could require us to set higher reserves for claims.

• Our business operations depend on our ability to appropriately execute and administer our policies and claims – Our primary business is writing and servicing property and casualty insurance policies for individuals, families and small- to mid-sized commercial businesses. Because we deal with large numbers of similar policies, any problems or discrepancies that arise in our pricing, underwriting, billing, processing, claims handling or other practices, whether as a result of employee or outsourced vendor error or technological problems, could have negative repercussions on our financial results and our reputation if such problems or discrepancies are replicated through multiple policies or claims.

• Our access to capital markets, our financing arrangements and our business operations are dependent on favorable evaluations and ratings by credit and other rating agencies – Our credit strength and financial strength of our insurance subsidiaries are evaluated and rated by various rating agencies, such as Standard and Poor’s, Moody’s Investor Services, Fitch Ratings, and A.M. Best. Downgrades in our credit ratings could adversely affect both our ability to sell new business in our surety line and our ability to access the capital markets which may increase our borrowing costs in the future. Downgrades in the ratings of our insurance subsidiaries could have a negative impact on perceptions of our company by investors, producers, other businesses and consumers which may result in lower or negative premium growth. Such downgrades could have a material adverse impact on our financial performance and results of operations.

• If we experience difficulties with outsourcing relationships our ability to conduct our business might be negatively impacted – We outsource certain functions to third parties and plan to do so increasingly in the future. If we do not effectively develop and implement our outsourcing strategy and as a result we experience technological or other problems with an outsourcing transition, we may not realize productivity improvements or cost efficiencies. In addition, we may experience operational difficulties, increased costs and a loss of business if third party providers do not perform as anticipated. Our ability to receive services from third party providers outside of the United States on an on-going basis could be impacted by cultural differences, political instability and unanticipated regulatory requirements or policies inside or outside of the United States. As a result, our ability to conduct our business might be adversely affected.

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Item 1B: UNRESOLVED STAFF COMMENTS

We have no written comments from the SEC staff regarding our periodic or current reports that are unresolved as of the date of this filing.

Item 2: PROPERTIES

We lease our current headquarters of 305,000 square feet in Seattle, Washington. We own data centers of 97,000 square feet in Washington and Colorado and lease an additional 1.8 million square feet of space throughout the United States.

Item 3: LEGAL PROCEEDINGS

In common with the insurance and financial service industries in general, we are subject to legal actions filed or threatened, including claims for punitive damages, 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.

Litigation arising from claims settlement activities is generally considered in the establishment of our reserve for Loss and LAE. However, in certain circumstances, we may deem it necessary to provide disclosure due to the size or nature of the potential liability to us.

Based on information currently known to us, we believe that the ultimate outcome of any pending matters is not likely to have a material adverse effect on our financial position or results of operations.

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

There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of 2007.

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Part II

Item 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION

Our common stock is quoted and traded on the New York Stock Exchange (NYSE) under the symbol SAF. Our common shares were quoted and traded on the Nasdaq Stock Market under the symbol SAFC until November 30, 2006 when Safeco commenced trading on the NYSE. The quarterly high and low prices for Safeco common shares for the last two years were:

MARKET PRICE RANGES	FIRST QUARTER		SECOND QUARTER		THIRD QUARTER		FOURTH QUARTER		ANNUAL
2007 –High	$	69.15	$	67.32	$	64.26	$	62.40	$	69.15
–Low		57.43		60.68		54.46		53.18		53.18
2006 –High		58.86		57.44		59.15		64.85		64.85
–Low	$	50.14	$	49.09	$	51.75	$	57.88	$	49.09

There were approximately 2,400 holders of record of our common stock at February 15, 2008. This number excludes the beneficial owners of shares (approximately 50,000) held by brokers and other institutions on behalf of shareholders.

DIVIDENDS

We have paid cash dividends each year since 1933.

We fund dividends paid to shareholders with dividends paid to us by our operating subsidiaries. Our dividends declared for the last two years were:

DIVIDENDS DECLARED	FIRST QUARTER		SECOND QUARTER		THIRD QUARTER		FOURTH QUARTER		ANNUAL
2007	$	0.30	$	0.40	$	0.40	$	0.40	$	1.50
2006	$	0.25	$	0.30	$	0.30	$	0.30	$	1.15

We expect to continue paying dividends in the foreseeable future. However, payment of future dividends depends on the discretion of our board of directors and compliance with regulatory constraints discussed in our business section and the Notes to our Financial Statements.

ISSUER PURCHASES OF EQUITY SECURITIES

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)	Approximate Dollar Value of Shares that may yet be Purchased under the Plans or Programs
October 1-31	2,664,513	$	59.39	2,664,513	$	218.6
November 1-30	3,190,856		56.06	3,190,856		39.7
December 1-31	685,429		57.91	685,429	$	500.0
Total	6,540,798	$	57.61	6,540,798

(1) In May 2007, we implemented a Rule 10b5-1 trading plan to repurchase up to $250.0 of our outstanding common stock. We completed this plan on July 24, 2007. In August 2007, we received approval from the Board to purchase up to $750.0 of our outstanding common stock. We completed this plan on December 6, 2007. In December 2007, we received approval from our Board to repurchase up to $500.0 of our outstanding common stock. No repurchases have been made under this plan as of December 31, 2007.

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MARKET PRICE OF OUR DIVIDENDS ON COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Our performance graph below provides a graphical comparison of our stock performance to comparable industry indices over five years.

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Item 6: SELECTED FINANCIAL DATA

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

YEAR ENDED DECEMBER 31,	2007			2006			2005			2004			2003
(In millions except per share values and ratios)
REVENUES
Net Earned Premiums	$	5,576.0		$	5,608.3		$	5,805.4		$	5,529.1		$	4,901.8
Net Investment Income		486.7			509.1			485.1			464.6			468.4
Net Realized Investment Gains		146.1			3.8			60.4			200.8			70.1
Gains on Sales of Real Estate		—			168.7			—			—			—
Total Revenues		6,208.8			6,289.9			6,350.9			6,194.5			5,440.3
INCOME SUMMARY
Income from Continuing Operations		707.8			880.0			691.1			620.2			285.5
Net Income (1)	$	707.8		$	880.0		$	691.1		$	562.4		$	339.2
INCOME PER DILUTED SHARE OF COMMON STOCK
Income from Continuing Operations	$	6.97		$	7.51		$	5.43		$	4.59		$	2.06
Net Income (1)		6.97			7.51			5.43			4.16			2.44
Dividends Declared	$	1.50		$	1.15		$	0.97		$	0.81		$	0.74
Average Number of Diluted Shares (2, 3, 4,5)		101.6			117.1			127.2			135.2			138.9
UNDERWRITING RATIOS
Loss Ratio		53.5	%		47.2	%		50.1	%		51.0	%		55.6	%
LAE Ratio		9.6			11.3			12.6			12.3			14.8
Expense Ratio		28.3			28.8			28.4			28.2			29.7
Combined Ratio (6)		91.4	%		87.3	%		91.1	%		91.5	%		100.1	%
AT DECEMBER 31,	2007			2006			2005			2004			2003
TOTAL ASSETS	$	12,640.4		$	14,213.0		$	14,887.0		$	14,587.2		$	36,141.6
DEBT
Current	$	200.0		$	197.3		$	—		$	—		$	—
Long-Term		504.0			1,052.7			1,307.0			1,332.9			1,951.3
Total	$	704.0		$	1,250.0		$	1,307.0		$	1,332.9		$	1,951.3
SHAREHOLDERS’ EQUITY	$	3,392.6		$	3,927.9		$	4,124.6		$	3,920.9		$	5,023.3
BOOK VALUE PER SHARE	$	37.81		$	37.29		$	33.38		$	30.88		$	36.24

(1) Discontinued Operations reflect our Life & Investments (L&I) businesses that were sold in 2004.

(2) Our 2004 average diluted shares reflect the repurchase of 13.2 million shares pursuant to an accelerated share repurchase program.

(3) Our 2005 average diluted shares reflect the repurchase of 2.8 million shares pursuant to an accelerated share repurchase program and 1.7 million shares pursuant to a Rule 10b5-1 trading plan.

(4) Our 2006 average diluted shares reflect the repurchase of 10.2 million shares pursuant to an accelerated share repurchase program and 10.0 million shares pursuant to Rule 10b5-1 trading plans.

(5) Our 2007 average diluted shares reflect the repurchase of 13.6 million shares pursuant to a Rule 10b5-1 trading plan and 3.4 million shares as a result of open market purchases. 2007 also includes (0.9) million shares issued to settle an accelerated share repurchase settlement.

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

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

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

This discussion should be read with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements included elsewhere in this report. Certain reclassifications have been made to prior-year financial information for consistency with the current-year presentation.

Forward-Looking Information

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

We have made statements under the captions “Our Business,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Form 10-K that are forward-looking statements. We have tried, whenever 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 that 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 are included under “Risk Factors” and elsewhere in this Form 10-K.

Overview

We have been in business serving the insurance needs of our customers since 1923. Safeco Corporation is an insurance holding company. We are licensed to provide property and casualty insurance along with related services to individuals and small to mid-size businesses in all 50 states through our insurance subsidiaries. We also sell surety bonds to contractors and businesses. Our revenues come primarily from the premiums we earn on the insurance policies we write and the income we earn from our investment of premium dollars.

We sell our insurance products principally through independent agents and deliver the majority of our products over our Safeco Now^® automated platform. Safeco Now gives our agents a single point of entry to sell our core property and casualty products and select transactional surety bonds in a matter of minutes. Most of our pricing, underwriting and servicing processes are presented through this platform. Consumers can also purchase certain policies online at www.Safeco.com. Today, over 95% of our personal lines and small commercial business lines are automated and priced based on predictive models.

We manage our business through four segments, Safeco Personal Insurance, Safeco Business Insurance, Surety and P&C Other.

In 2007, we focused on achieving a balance between growth and profitability. We:

• Improved our pricing models in our Homeowners and Auto lines using Safeco True Pricing

• Introduced new products including Safeco Optimum Package and Teensurance

• Generated Return on Equity (ROE) of 18.5% that is competitive relative to our peers

• Achieved overall underwriting profitability for the year of $479.8, with a total combined ratio of 91.4%

• Exercised careful stewardship of our invested assets, generating net investment income of $486.7, with no subprime exposure; and

• Managed our capital actively for the benefit of our shareholders, as we increased our dividend rate by 33%, repurchased $1.0 billion of our common stock and repaid of $545.9 of our higher cost debt

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Our long-term focus remains to pursue growth only where we see opportunities to maintain overall underwriting profitability. Net written premiums overall remained essentially flat in 2007 compared with the prior year as growth in Property, SBI Regular and Surety were offset by a decline in Auto. This reflects a combination of softness in rates and our unwillingness to write risks at prices we believe to be uneconomic. We expect the rate environment for each of our business segments in 2008 to be similar to that of 2007, with some opportunity for selective rate increases. As a result, we do not expect overall significant net written premium growth in 2008 compared with 2007.

Our Auto combined ratio increased to 98.8% in 2007 and exceeded 100% for the 4^th quarter, as loss costs, principally related to bodily injury, increased faster than our ability to increase rates. We plan to maintain our underwriting discipline and not compete for business that we do not believe will meet our long-term target margins. In 2008, we will focus on lowering our combined ratio to our target of 96.0% in Auto, rather than pursuing growth opportunities. Our ability to achieve this will depend in part on the effectiveness of current efforts to reduce loss costs through improved training and logistics management and our ability to obtain rate increases necessary to properly match rate to risk. As our loss costs have risen, we have taken steps to offset with rate increases. In 2007, we increased our Auto premium rates an average of 4%, most of which will be earned into premium in 2008. Rates are subject to regulatory approval on a state-by state basis and increases may take time to implement.

The strong growth in premiums in our Property segment was due in part to rate changes throughout 2006 and 2007, increased commissions and improved cross-selling with our Auto product. We have filed additional rate changes in Property across the country. While we are expecting increased rate competition in non-coastal states, our new business trends in Property remain favorable. Our ability to maintain strong underwriting results in our property line will be dependent on the effectiveness of our multi-variate tiered pricing model and continued catastrophe management. As part of our ongoing catastrophe expense management efforts, we are evaluating whether to join the CEA. If we decide to join the CEA and our application for membership is approved, we estimate that our cost of entry to the CEA will be an up-front payment in the range of $40 to $50 million. This amount would be recognized as an expense in our personal property line in the period when we begin issuing policies under the CEA. We would also be subject to additional assessments in the event that the initial capitalization and retained earnings of the CEA are exhausted by claim payments.

The premium growth in our SBI Regular segment was due in part to automating several products on the Safeco Now platform as well as the mix of the coverages our customers chose and the nature of the risk. We do not intend to write business when pricing or risk factors indicate we will be putting our target returns at risk, which could limit our growth opportunities.

In our commercial surety business, we continued to focus on Fortune 1000 and other large companies with high credit quality to drive that business at a solid pace and we increased capacity on our highest rated accounts. We have grown our Surety business in 2007 by focusing on our highest credit quality accounts and new account growth. We achieved record underwriting profits in our Surety segment in 2007. We do not expect to be able to maintain that level of profitability in 2008 as we do not expect historically low loss levels to recur.

In 2008, we must realize benefits from 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. We met our targeted annualized expense savings in 2007 offset in part by increased spending associated with strategic technology and claims initiatives and increased advertising. In 2008, we expect to achieve $25 to $50 million in expense savings. Some of these savings will benefit the bottom line directly, and we may choose to reinvest a portion in various strategic initiatives. We expect the savings will be derived from a number of projects, including for example, further outsourcing of administrative functions to lower-cost markets and continued review of in-house operations to create efficiencies using Lean Six Sigma methodologies.

We are committed to further reducing our expenses, which will allow us flexibility to enhance our competitive position while still achieving our target margins. We plan to continue to retain customers and maintain opportunities to quote new business through enhancements to our Safeco Now Sales-and-Service platform, our focus on agency relationships, customer retention efforts and distinctive customer service.

Overall Results

We measure our success by tracking our operating and financial performance according to the following indicators:

• Combined ratio

• Earnings per share

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• 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).

The following table shows the trends in these key measures:

YEAR ENDED DECEMBER 31,	2007		2006		2005
Combined Ratio		91.4%		87.3%		91.1%
Net Income per Diluted Share	$	6.97	$	7.51	$	5.43
Net Return on Equity		18.5%		21.7%		17.0%
Total Revenues	$	6,208.8	$	6,289.9	$	6,350.9
PIF per FTE		593		557		484
Expense per PIF 1,2	$	231	$	255	$	247

(1) Excluding impact of SFIS, which we sold on April 30, 2006, for all periods.

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

SEGMENT RESULTS

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 in our corporate segment, 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 (the Foundation) and other corporate activities and do not allocate these to individual reportable segments.

How We Measure Our Results

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

• Premiums

• Underwriting profit or loss

• Combined ratio

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.

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Combined ratio is our losses, LAE and underwriting expenses divided by our net earned premiums. We report combined ratio as a percentage. For example, a combined ratio of 95% means that for every dollar of premium earned, 95 cents is spent on losses, LAE and underwriting expenses, and 5 cents is underwriting profit. The lower the combined ratio, the better the results.

More information about our segment results can be found in Our P&C Operating Results section of Item 7: MD&A.

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 in the event they are needed to pay claims. This strategy is designed to provide protection for our policyholders and a 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 conservatively invested but diversified portfolio so we will achieve consistent investment performance.

More information about our investment results can be found in Our Investment Results section of Item 7: MD&A.

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CONSOLIDATED RESULTS OF OPERATIONS

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

YEAR ENDED DECEMBER 31,	2007		2006		2005
REVENUES
Net Earned Premiums	$	5,576.0	$	5,608.3	$	5,805.4
Net Investment Income		486.7		509.1		485.1
Net Realized Investment Gains		146.1		3.8		60.4
Gains on Sales of Real Estate		—		168.7		—
Total Revenues		6,208.8		6,289.9		6,350.9
EXPENSES
Losses and Loss Adjustment Expenses		3,520.5		3,279.8		3,635.0
Amortization of Deferred Policy Acquisition Costs		954.2		927.9		973.1
Other Underwriting and Operating Expenses		633.6		691.1		661.8
Interest Expense		68.7		91.4		88.6
Contributions to Safeco Insurance Foundation		60.0		30.0		—
Losses on Debt Repurchases		16.6		4.5		4.0
Restructuring and Asset Impairment Charges		3.1		25.7		2.7
Total Expenses		5,256.7		5,050.4		5,365.2
Income before Income Taxes		952.1		1,239.5		985.7
Provision for Income Taxes		244.3		359.5		294.6
Net Income	$	707.8	$	880.0	$	691.1

REVENUES

Total revenues decreased 1.3% in 2007 compared with 2006, and decreased 1.0% in 2006 compared with 2005. The changes were driven by:

• Net earned premiums – Our net earned premiums decreased 0.6% in 2007 compared with 2006, and decreased 3.4% in 2006 compared with 2005. The decrease in net earned premiums in 2007 compared with 2006 reflects decreases in Auto partially offset by growth in Property, SBI Regular and Surety. In 2007 and 2006, Auto premiums decreased in the face of increased competitive pressures, as some of our competitors have increased advertising for auto insurance to attract customers, offered incentives to agents and lowered prices to attract new auto business. Despite increasing competitive pressures, we remain disciplined in our underwriting and continue to strive toward our long-term profitability targets. In 2006, SBI Regular growth also slowed in the face of increased competitive pressures. In addition, net earned premiums decreased by $76.4 due to the sale of our lender-placed property insurance business in 2006.

• Net investment income – Our net investment income decreased 4.4% in 2007 compared with 2006, and increased 4.9% in 2006 compared with 2005. The decrease in 2007 compared with 2006 was the result of the shift in our portfolio strategy throughout 2006 to tax-exempt municipal bonds, and an overall lower invested asset base due primarily to the sale of securities to fund the maturity and redemption of our debt and the special dividend paid by our operating subsidiaries to Safeco Corporation that has not been reinvested. The increase in 2006 compared with 2005 was due to slightly higher interest rates in 2006.

• Net realized investment gains – Net realized investment gains increased $142.3 in 2007 compared with 2006, and decreased $56.6 in 2006 compared with 2005. The increase in 2007 compared with 2006 was due primarily to a $28.7 tax-exempt increase in the gain from the contributions of highly appreciated marketable equity securities to Safeco Insurance Foundation (the Foundation), the sale of securities to fund the special dividend paid by our insurance subsidiaries to Safeco Corporation and the sale of securities to increase our cash position for future share repurchases. The decrease in 2006 compared with 2005 was due to losses on securities sold and increased impairments caused primarily by changes in fair value (driven by interest rates) on securities that we may not hold until they recover in value. The 2006 net realized investment gains included a tax-exempt gain of $29.2 on securities contributed to the Foundation. Net realized investment gains included pretax impairments of $56.0 in 2007, $79.2 in 2006 and $15.5 in 2005.

• Gains on sales of real estate – In connection with our real estate strategy, we sold various real estate properties in 2006 for total proceeds of $372.1 and a pretax gain of $168.7.

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NET INCOME

Net income decreased 19.6% in 2007 compared with 2006, while net income increased 27.3% in 2006 compared with 2005, driven by:

• Losses and Loss Adjustment Expenses – Losses and loss adjustment expenses increased 7.3% in 2007 compared with 2006 due primarily to increased bodily injury costs in Auto, and decreased 9.8% in 2006 compared with 2005 primarily due to fewer-than-expected bodily injury and uninsured motorist claims. In 2007, we reduced our estimates for prior years’ loss and LAE reserves by $123.6, primarily due to favorable prior-year reserve development in our personal auto, construction defects, workers’ compensation and surety lines. In 2006, we reduced our estimates for prior years’ loss and LAE reserves by $146.2, reflecting favorable prior-year reserve development in our personal auto and SBI segments, compared with $45.9 of favorable prior-year reserve development in 2005. The favorable prior-year reserve development in 2005 was related to our personal property, personal auto and commercial auto reserves. In addition, LAE were impacted by catastrophe losses described below.

• Catastrophe Losses – In 2007 and prior years, we categorize catastrophes as events resulting in losses greater than $0.5 per event and involving multiple claims and policyholders. Beginning in 2008, catastrophes are events resulting in losses greater than $1.0 involving multiple claims and policyholders. Pretax catastrophe losses, net of reinsurance, were $104.3 in 2007 compared with $155.3 in 2006 and $267.4 in 2005. Catastrophe losses in 2005 were primarily from hurricanes Katrina and Rita along the Gulf Coast.

• Other Underwriting and Operating Expenses – Other Underwriting and Operating Expenses decreased 8.3% in 2007 compared with 2006 due primarily to a decrease in payroll and employee benefit related expenses. The increase of 4.4% in 2006 compared with 2005 was primarily related to increased spending in technology and business process improvements partially offset by a decrease in payroll and employee benefit related expenses.

• Interest expense – Interest expense decreased $22.7 in 2007 compared with 2006 as a result of our redemption and the maturity of debt in July 2007. The increase of $2.8 in 2006 compared with 2005 was due to increased interest rates on the portion of our debt that is swapped to floating rates, partially offset by a decrease in interest expense as a result of our debt repurchases described below.

• Contributions to the Foundation – We made contributions to the Foundation with a non-revocable, non-refundable contribution of appreciated marketable equity securities with a fair value of $60.0 and a cost of $2.1 in 2007, compared with a fair value of $30.0 and a cost of $0.8 in 2006. No such contribution was made in 2005.

• Losses on debt repurchases –We repurchased $545.9 in principal amount of debt in 2007, $57.0 in 2006 and $25.9 in 2005. Including transaction costs, these debt repurchases resulted in pretax losses of $16.6 in 2007, $4.5 in 2006 and $4.0 in 2005.

• Restructuring and asset impairment charges – During 2007, we completed our organizational design initiative and our real estate consolidation strategy. Our pretax restructuring and asset impairment charges were $3.1 in 2007 compared with $25.7 in 2006 and $2.7 in 2005.

• Net realized investment gains – After-tax net realized investment gains were $115.3 in 2007, compared with $11.7 in 2006 and $43.5 in 2005. Results for 2007 included a tax-exempt gain of $57.9 on securities contributed to the Foundation, compared with a $29.2 of tax-exempt gain on our contribution of securities to the Foundation in 2006. The increase in 2007 when compared with 2006 was also attributable to the sale of securities to fund the special dividend paid by our insurance operating subsidiaries to the parent company and the sale of securities to increase our cash position for future share repurchases.

• Gains on sales of real estate – After-tax net gains on sales of real estate were $109.6 in 2006. There were no such gains in 2007 or 2005.

• Provision for income taxes – Our effective tax rate was 25.7% in 2007, 29.0% in 2006 and 29.9% in 2005. The decrease in our effective tax rate in 2007 primarily reflected increased investments in tax-exempt fixed maturities and the tax-exempt contribution of highly appreciated marketable equity securities to the Foundation. The decrease in our effective tax rate in 2006 reflected increased investments in tax-exempt fixed maturities, the tax-exempt contribution to the Foundation and interest received on a tax refund. Included in our 2005 results was a $10.6 tax benefit stemming primarily from the favorable resolution of state tax-related issues.

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OTHER UNDERWRITING AND OPERATING EXPENSES

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

YEAR ENDED DECEMBER 31,	2007			2006			2005
Commissions (including bonus commissions)	$	888.2		$	861.3		$	896.1
Salaries		471.2			493.8			492.0
Legal Defense Costs		203.6			225.3			235.0
Employee Benefits		132.6			185.9			189.4
Premium Taxes		125.1			125.0			127.4
Office Expenses		100.7			102.1			103.6
Rent & Depreciation		86.0			83.4			91.8
Professional Services		83.9			56.5			40.2
Risk & Cost Containment		61.1			55.2			53.0
Advertising		36.5			18.4			16.4
Travel & Entertainment		32.8			33.6			30.8
Other Taxes, Licenses and Fees		11.4			10.8			19.1
Change in Deferred Policy Acquisition Costs		(31.8	)		(7.6	)		5.8
Other Expenses *		(24.4	)		12.0			2.9
Total	$	2,176.9		$	2,255.7		$	2,303.5
Loss Adjustment Expenses	$	589.1		$	636.7		$	668.6
Operating Expenses +		1,587.8			1,619.0			1,634.9
Total	$	2,176.9		$	2,255.7		$	2,303.5

* Includes service fee income, policyholder dividends, brokerage expenses and other miscellaneous corporate expenses.

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

The decrease in our other underwriting and operating expenses in 2007 compared with 2006 primarily reflects the implementation of our organizational design and business process improvement initiatives, which have decreased our headcount and related costs, increased productivity, and reduced our dependence upon outside legal counsel. The overall decrease was offset primarily by increased agent commissions, increased advertising in targeted markets and additional professional services attributable to our business process improvement initiatives.

The decrease in our other underwriting and operating expenses in 2006 compared with 2005 primarily reflects a reduction in costs related to business process improvement efforts, reductions in rent and other expenses due to consolidation of regional offices and the sale of our life insurance group, and lower loss based assessment surcharges and state taxes. The overall decrease was offset primarily by increases in our deferred policy acquisition costs due to premium growth, and increases in professional services due to business process improvement efforts.

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:

YEAR ENDED DECEMBER 31,	2007			2006		2005
P&C	$	1,002.3		$	1,140.6	$	1,040.7
Corporate		(50.2	)		98.9		(55.0	)
Income before Income Taxes	$	952.1		$	1,239.5	$	985.7

In addition to financial measures presented in the consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP), we also use certain non-GAAP financial measures to analyze and report our financial results. Management believes that these non-GAAP measures, when used in conjunction with the consolidated financial statements, can aid in understanding our financial condition and results of operations. These non-GAAP measures are not a substitute for GAAP measures, and where these measures are described we provide tables that reconcile the non-GAAP measures to the GAAP measures reported in our consolidated financial statements.

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YEAR ENDED DECEMBER 31,	2007			2006			2005
OPERATING EARNINGS
Net Income	$	707.8		$	880.0		$	691.1
Net Realized Investment Gains, Net of Tax		(115.3	)		(11.7	)		(43.5	)
Gains on Sales of Real Estate, Net of Tax		—			(109.6	)		—
Contributions to Safeco Insurance Foundation, Net of Tax		39.0			19.5			—
Losses on Debt Repurchases, Net of Tax		10.8			2.9			2.6
Operating Earnings	$	642.3		$	781.1		$	650.2
NET RETURN ON EQUITY
Net Income	$	707.8		$	880.0		$	691.1
Average Shareholders’ Equity	$	3,821.8		$	4,053.8		$	4,054.3
Net Return on Equity		18.5	%		21.7	%		17.0	%

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 last three years. 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.

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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:

YEAR ENDED DECEMBER 31,	2007			2006			2005
Net Written Premiums
Safeco Personal Insurance (SPI)
Auto	$	2,581.7		$	2,677.7		$	2,820.0
Property		972.4			924.2			908.2
Specialty		120.2			110.6			101.3
Total SPI		3,674.3			3,712.5			3,829.5
Safeco Business Insurance (SBI)
SBI Regular		1,324.1			1,262.9			1,263.0
SBI Special Accounts Facility		249.6			267.5			275.1
Total SBI		1,573.7			1,530.4			1,538.1
Surety		388.1			326.3			278.4
P&C Other		3.7			72.7			156.1
Total Net Written Premiums		5,639.8			5,641.9			5,802.1
Change in Net Unearned Premiums		(63.8	)		(33.6	)		3.3
Net Earned Premiums	$	5,576.0		$	5,608.3		$	5,805.4

Our net earned premiums by reportable segment were:

YEAR ENDED DECEMBER 31,	2007		2006		2005
Net Earned Premiums
Safeco Personal Insurance (SPI)
Auto	$	2,604.8	$	2,713.2	$	2,820.4
Property		942.3		909.0		913.3
Specialty		115.9		105.4		98.1
Total SPI		3,663.0		3,727.6		3,831.8
Safeco Business Insurance (SBI)
SBI Regular		1,297.8		1,245.4		1,272.2
SBI Special Accounts Facility		261.3		264.2		283.2
Total SBI		1,559.1		1,509.6		1,555.4
Surety		352.9		297.5		260.9
P&C Other		1.0		73.6		157.3
Total Earned Premiums	$	5,576.0	$	5,608.3	$	5,805.4

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Underwriting profit or loss is our measure of each segment’s performance. Underwriting profit or loss is our net earned premiums less our losses from claims, LAE and underwriting expenses:

YEAR ENDED DECEMBER 31,	2007			2006			2005
Underwriting Profit (Loss)
Safeco Personal Insurance (SPI)
Auto	$	31.8		$	244.1		$	139.6
Property		126.1			163.7			198.2
Specialty		17.7			29.0			6.9
Total SPI		175.6			436.8			344.7
Safeco Business Insurance (SBI)
SBI Regular		131.8			162.2			144.7
SBI Special Accounts Facility		58.5			68.7			78.7
Total SBI		190.3			230.9			223.4
Surety		148.0			98.4			55.0
P&C Other		(34.1	)		(54.4	)		(103.9	)
Total Underwriting Profit		479.8			711.7			519.2
P&C Net Investment Income		462.2			476.6			460.6
Restructuring and Asset Impairment Charges		(3.1	)		(25.7	)		(2.7	)
Net Realized Investment Gains (Losses)		63.4			(22.0	)		63.6
P&C Income before Income Taxes	$	1,002.3		$	1,140.6		$	1,040.7

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

YEAR ENDED DECEMBER 31,	2007		2006		2005
Safeco Personal Insurance (SPI)
Auto	98.8	%	91.0	%	95.1	%
Property	86.6		82.0		78.3
Specialty	84.7		72.5		93.0
Total SPI	95.2		88.3		91.0
Safeco Business Insurance (SBI)
SBI Regular	89.8		87.0		88.6
SBI Special Accounts Facility	77.6		74.0		72.2
Total SBI	87.8		84.7		85.6
Surety	58.1		66.9		78.9
P&C Other	*		*		*
Total Combined Ratio +	91.4	%	87.3	%	91.1	%

+ 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 run-off business with declining premium.

AUTO

YEAR ENDED DECEMBER 31,	2007			2006			2005
Net Written Premiums	$	2,581.7		$	2,677.7		$	2,820.0
Net Earned Premiums		2,604.8			2,713.2			2,820.4
Underwriting Profit	$	31.8		$	244.1		$	139.6
Loss and LAE Ratio		74.9	%		67.7	%		72.1	%
Expense Ratio		23.9			23.3			23.0
Combined Ratio		98.8	%		91.0	%		95.1	%
Favorable Prior-Year Reserve Development	$	20.4		$	98.2		$	34.7
Pretax Catastrophe Losses	$	11.3		$	30.8		$	24.3

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Premiums

Net written premiums decreased $96.0, or 3.6%, in 2007 compared with 2006 and decreased $142.3, or 5.0%, in 2006 compared with 2005. The changes in net written premiums were primarily driven by:

• Policies-in-force (PIF) – PIF decreased 3.4% in 2007 compared with 2006 and decreased 4.1% in 2006 compared with 2005. This decrease reflected increased competition that resulted in decreased new business in 2007, 2006 and 2005. New policies sold decreased 1.8% in 2007 compared with 2006, and 23.0% in 2006 compared with 2005. Retention of policies was 80.2% in 2007 and 79.5% in both 2006 and 2005.

• 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 4.2% in 2007, increases of 1.2% in 2006 and decreases of 0.4% in 2005. Premiums also are affected by the increased pricing for those policies that cover newer and more expensive cars, as well as by changes in the risk profile of the book of business, which we refer to as premium trend. Premium trend was negative in 2007 and 2006, resulting from a change in our mix of business to lower average premium policies. This is primarily due to a reduced premium base of non-standard policies, or drivers who represent relatively higher risks.

Net earned premiums decreased $108.4, or 4.0%, in 2007 compared with 2006, and decreased $107.2, or 3.8%, in 2006 compared with 2005. The decreases in net earned premiums were primarily driven by:

• Policies-in-force (PIF) – PIF decline decreased net earned premiums by $88.7 in 2007 compared with 2006, and PIF decline decreased net earned premiums by $66.1 in 2006 compared with 2005.

• Changes in average premiums – Changes in average premiums decreased net earned premiums by $19.7 in 2007 compared with 2006, and decreased net earned premiums by $41.1 in 2006 compared with 2005.

Underwriting Results and Combined Ratio

Our underwriting results decreased $212.3, and our combined ratio increased 7.8 points in 2007 compared with 2006. Our underwriting results increased $104.5, and our combined ratio decreased 4.1 points in 2006 compared with 2005. The changes in our underwriting results and combined ratio were primarily driven by:

• Changes in average premiums – Our earned rate changes, combined with premium trend, increased our Auto combined ratio by 0.7 points in 2007 compared with 2006, and increased our Auto combined ratio by 1.4 points in 2006 compared with 2005.

• Loss costs – We experienced percentage increases in the mid-single digits in our loss costs in 2007 compared with 2006. This was driven by a mid-single-digit percentage increase in severity (the average cost of a claim) while frequency (the average number of claims filed) remained flat. This was due primarily to higher costs for bodily injury and personal injury protection claims. These factors, net of reinsurance, increased our combined ratio by 5.0 points in 2007 compared with 2006. Our loss costs decreased our combined ratio by 1.8 points in 2006 compared with 2005. This was in part due to fewer-than-expected bodily injury and uninsured motorist claims.

• Prior-year reserve development – The favorable prior-year reserve development in 2007 and in 2006 reflected lower-than-expected severity on bodily injury claims, primarily in accident years 2004 and 2005. The favorable prior-year reserve development in 2005 reflected a decrease in severity estimates for prior accident years across liability lines compared with our original estimates. The change in prior-year reserve development increased our combined ratio by 2.8 points in 2007 compared with 2006, and the change in prior-year reserve development decreased our combined ratio by 2.4 points in 2006 compared with 2005.

• Catastrophe losses – The lower catastrophe losses decreased the combined ratio by 0.8 points in 2007 compared with 2006, and the higher catastrophe losses increased the combined ratio by 0.3 points in 2006 compared with 2005.

• Expenses – The increase in our expense ratio of 0.6 points in 2007 compared with 2006 was driven by additional agent commission resulting from our restructured 2007 agent compensation program, partly offset by our ongoing process improvement efforts and expense reduction initiatives. The increase in our expense ratio of 0.3 points in 2006 compared with 2005 was driven by our increased investment in technology and costs related to the implementation of our process improvement efforts.

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Outlook – Our long-term target is a 96.0% combined ratio. Our outlook for 2008 includes improvement in our profitability while competitive pressures continue to challenge our growth.

PROPERTY

YEAR ENDED DECEMBER 31,	2007			2006			2005
Net Written Premiums	$	972.4		$	924.2		$	908.2
Net Earned Premiums		942.3			909.0			913.3
Underwriting Profit	$	126.1		$	163.7		$	198.2
Loss and LAE Ratio		57.7	%		52.9	%		50.1
Expense Ratio		28.9			29.1			28.2
Combined Ratio		86.6	%		82.0	%		78.3	%
Favorable Prior-Year Reserve Development	$	10.1		$	15.7		$	11.0
Pretax Catastrophe Losses	$	77.0		$	106.2		$	103.9

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.

Premiums

Net written premiums increased $48.2, or 5.2%, in 2007 compared with 2006, and increased $16.0, or 1.8%, in 2006 compared with 2005. This reflected:

• Changes in PIF – PIF grew 8.4% in 2007 compared with 2006, and grew 1.9% in 2006 compared with 2005. The increase in 2007 was due in part to rate decreases throughout 2006 and 2007, increased commissions and improved cross-selling with our preferred auto product. New Property policies written increased 28.3% in 2007 compared with 2006 and increased 19.9% in 2006 compared with 2005. Our homeowners retention rates were 86.7% in 2007 compared with 84.1% in 2006 and 85.2% in 2005.

• 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 homeowners business of 3.8% in 2007, 2.9% in 2006 and average rate increases of 1.0% in 2005. Average premiums also are 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. For example, a shift in our mix of business between homeowners’ and renters’ coverage could impact our premium trend because renters’ coverage yields a much lower average premium. Premium trend resulted in an increase to net written premiums in 2007 compared with 2006, due in part to inflation guard increases and new business from higher average premium states.

Net earned premiums increased $33.3, or 3.7%, in 2007 compared with 2006, and decreased $4.3, or 0.5%, in 2006 compared with 2005. This reflected:

• Changes in PIF – The change in PIF increased net earned premiums by $46.9 in 2007 compared with 2006, and the change in PIF increased net earned premiums by $4.9 in 2006 compared with 2005.

• Changes in average premiums – Changes in average premiums decreased net earned premiums by $13.6 in 2007 compared with 2006 and decreased net earned premiums by $9.2 in 2006 compared with 2005.

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Underwriting Results and Combined Ratio

Our underwriting profit in Property decreased $37.6, and our combined ratio increased 4.6 points in 2007 compared with 2006. Our underwriting profit decreased $34.5, and our combined ratio increased 3.7 points in 2006 compared with 2005. The changes in our underwriting results 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 0.6 points in 2007 compared with 2006, and increased our combined ratio by 0.5 points in 2006 compared with 2005.

• Loss costs – Our Property loss costs in 2007 compared with 2006 experienced percentage increases in the mid teens due to mid-single digit percentage increases in frequency, resulting from an increased number of non-catastrophe weather claims during the year, and percentage increases in the low teens in severity due to a number of non-catastrophe large fire losses. These factors, net of reinsurance, increased our Property combined ratio by 7.1 points in 2007 compared with 2006. Net of reinsurance, loss costs increased our Property combined ratio by 1.7 points in 2006 compared with 2005, due to increases in severity from the increased cost of building materials.

• Prior-year reserve development – The favorable prior-year reserve development in 2007 and in 2006 was due to lower-than-expected severity for homeowners claims. The favorable prior-year reserve development in 2005 (including unfavorable prior-year reserve development of $10.5 in our estimates of the 2004 hurricanes in Florida and surrounding states), reflected better-than-expected experience in our estimates of loss costs, primarily for accident years 2003 and 2004. The change in prior-year reserve development increased the combined ratio by 0.6 points in 2007 compared with 2006 and by 0.5 points in 2006 compared with 2005.

• Catastrophe losses – Pretax catastrophe losses in 2007 included $20.0 related to the California wildfires. Excluding the impact of prior-year reserve development, catastrophe losses decreased the combined ratio by 3.3 points in 2007 compared with 2006. Pretax catastrophe losses in 2006 included $22.5 related to the Pacific Northwest windstorm in December 2006. Pretax catastrophe losses in 2006 decreased the combined ratio by 1.6 points in 2006 compared with 2005. Pretax catastrophe losses in 2005 included $53.7 from Hurricanes Katrina, Rita and Wilma along the Gulf Coast.

• Expenses – Our expense ratio decreased by 0.2 points in 2007 compared with 2006, due to the results of ongoing process improvement efforts and expense reduction initiatives, partially offset by increased agent compensation in our homeowners product line. Increased investment in technology and costs related to the implementation of our process improvement efforts increased our expense ratio by 0.9 points in 2006 compared with 2005.

Outlook – We remain focused on our business process improvement efforts and goal of streamlining processes while building our infrastructure and technological capabilities. Our use of our multi-variate predictive underwriting model and our adherence to our catastrophe management guidelines set the course for us to continue to operate at or below our long-term target combined ratio of 92.0% in 2008.

SPECIALTY

YEAR ENDED DECEMBER 31,	2007			2006			2005
Net Written Premiums	$	120.2		$	110.6		$	101.3
Net Earned Premiums		115.9			105.4			98.1
Underwriting Profit	$	17.7		$	29.0		$	6.9
Loss and LAE Ratio		56.6	%		42.5	%		64.6	%
Expense Ratio		28.1			30.0			28.4
Combined Ratio		84.7	%		72.5	%		93.0	%
Favorable (Unfavorable) Prior-Year Reserve Development	$	(3.2	)	$	12.5		$	2.3
Pretax Catastrophe Losses	$	(0.1	)	$	(3.2	)	$	9.3

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

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Premiums

Net written premiums increased $9.6, or 8.7%, in 2007 compared with 2006, and $9.3, or 9.2%, in 2006 compared with 2005. New-business policies sold increased 17.4% in 2007 compared with 2006, and 18.8% in 2006 compared with 2005. Net written premium growth in 2007 was primarily driven by an increase in new business in our umbrella and motorcycle products. New business growth in 2007 was primarily driven by improvements in automation, rating and increased customer awareness of our products. The increased premiums in 2006 were due to an increase in new motorcycle policies and in the numbers of motorcycle policies that renewed with us, resulting in an increase in PIF.

Net earned premiums increased $10.5, or 10.0%, in 2007 compared with 2006 and $7.3, or 7.4%, in 2006 compared with 2005.

Underwriting Results and Combined Ratio

Our underwriting profit decreased $11.3, and our combined ratio increased 12.2 points in 2007 compared with 2006. Our underwriting profit increased $22.1, and our combined ratio decreased 20.5 points in 2006 compared with 2005. The changes in our underwriting results and combined ratio were primarily driven by:

• Prior-year reserve development – The unfavorable prior-year reserve development in 2007 was primarily related to umbrella policies and specialty vehicles. The favorable prior-year reserve development in 2006 was related to reduced estimates of catastrophe losses from Hurricane Wilma as well as better-than-expected frequency for 2005 umbrella claims. These changes in prior-year reserve development increased our combined ratio by 14.7 points in 2007 compared with 2006 and decreased our combined ratio by 9.5 points in 2006 compared with 2005.

• Catastrophe losses – The negative catastrophe losses in 2006 and 2007 were due to reduced estimates of pretax catastrophe losses from Hurricane Wilma. The 2005 catastrophe losses were primarily due to Hurricanes Katrina, Rita and Wilma in the Gulf States. Excluding prior-year reserve development, higher catastrophe losses increased the combined ratio by 0.2 points in 2007 compared with 2006. Lower catastrophe losses in 2006 decreased the combined ratio by 9.6 points compared with 2005.

• Expenses – The decrease in our expense ratio of 1.9 points in 2007 compared with 2006 was due to our ongoing process improvement efforts and expense reduction initiatives. The increase in our expense ratio was 1.6 points in 2006 compared with 2005 and primarily reflected our increased investment in technology and costs related to the implementation of our strategic goals as well as higher commission expense due to change in mix of business.

Outlook – We expect to continue to grow our specialty product modestly in non-catastrophe prone areas, while operating at or below our long-term target combined ratio of 92.0% in 2008.

SBI REGULAR

YEAR ENDED DECEMBER 31,	2007			2006			2005
Net Written Premiums	$	1,324.1		$	1,262.9		$	1,263.0
Net Earned Premiums		1,297.8			1,245.4			1,272.2
Underwriting Profit	$	131.8		$	162.2		$	144.7
Loss and LAE Ratio		56.9	%		52.5	%		54.9	%
Expense Ratio		32.9			34.5			33.7
Combined Ratio		89.8	%		87.0	%		88.6	%
Favorable Prior-Year Reserve Development	$	37.0		$	26.6		$	37.2
Pretax Catastrophe Losses	$	15.9		$	21.8		$	59.1

Our SBI Regular segment provides insurance for small- to mid-sized businesses (customers who typically pay annual premiums of $250,000 or less). This is our core commercial lines business featuring these main products:

• Businessowner policies (BOP)

• Commercial auto

• Commercial multi-peril (CMP)

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• Workers’ compensation

• Commercial property

• General liability

Premiums

Net written premiums increased $61.2, or 4.8% in 2007 compared with 2006, and were flat in 2006 compared with 2005. The changes in net written premiums were driven by:

• Changes in PIF – PIF increased 2.5% in 2007 compared with 2006, and decreased 1.1% in 2006 compared with 2005. This reflected retention rates of 81.8% in 2007, 79.5% in 2006 and 80.0% in 2005. Our new policies sold increased 6.7% in 2007 compared with 2006 and 3.0% in 2006 compared with 2005.

• Price changes – We file rate changes on a state-by-state basis. Our average prices, which include filed rate changes and exposure growth, increased 0.5% in 2007, after decreasing 1.4% in 2006 compared with 2005. Premiums 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 impacted by changes in average policy size and mix of coverages our customers choose as well as the nature of the risk.

Net earned premiums increased $52.4, or 4.2%, in 2007 compared with 2006, and decreased $26.8, or 2.1%, in 2006 compared with 2005. The changes in net earned premiums were driven by:

• Price changes – Price changes decreased net earned premiums by $6.3 in 2007 compared with 2006, and decreased net earned premiums by $22.5 in 2006 compared with 2005.

• Mix of business – Mix of business increased net earned premiums by $27.9 in 2007 compared with 2006 and $0.7 in 2006 compared with 2005.

Underwriting Results and Combined Ratio

Our underwriting profit in SBI Regular decreased $30.4, and our combined ratio increased 2.8 points in 2007 compared with 2006. Our underwriting profit increased $17.5, and our combined ratio decreased 1.6 points in 2006 compared with 2005. The changes in our underwriting results and combined ratio primarily reflected:

• Price changes – Our price changes increased our combined ratio by 0.4 points in 2007 compared with 2006, and increased our combined ratio by 1.2 points in 2006 compared with 2005.

• Loss costs – We booked a provision for increased severity for all lines in 2007 which added 4.7 points to the combined ratio compared with 2006. Large property losses in our BOP product and auto liability claims were key drivers of this increase. In contrast, loss cost increases in accident year 2006 added 1.2 points to its combined ratio compared with 2005.

• Prior-year reserve development – The favorable prior-year reserve development in 2007 was due to better-than-expected loss experience on long-term workers’ compensation medical claims and favorable claim frequency for umbrella and construction defects claims, partially offset by increased claim severity in auto liability. The favorable prior-year reserve development in 2006 was due to lower-than-expected claims frequency in CMP partially offset by an increase in auto liability claims severity. The change in prior-year reserve development decreased the combined ratio by 0.8 points in 2007 compared with 2006 and increased the combined ratio by 0.8 points in 2006 compared with 2005.

• Catastrophe losses – The lower catastrophe losses decreased our combined ratio by 0.4 points in 2007 compared with 2006 and 2.4 points in 2006 compared with 2005.

• Expenses – The decrease in our expense ratio of 1.6 points in 2007 compared with 2006 reflects our ongoing focus on expense management. The increase in our expense ratio of 0.8 points in 2006 compared with 2005 was the result of higher agent bonus commissions and employee performance bonus expenses related to our improved underwriting results.

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Outlook – We anticipate a challenging market for premium growth in our SBI Regular segment in 2008, in a continuing soft market in which loss cost increases may outpace earned price increases. Our long-term target combined ratio is 95.0%.

SBI SPECIAL ACCOUNTS FACILITY

YEAR ENDED DECEMBER 31,	2007			2006			2005
Net Written Premiums	$	249.6		$	267.5		$	275.1
Net Earned Premiums		261.3			264.2			283.2
Underwriting Profit	$	58.5		$	68.7		$	78.7
Loss and LAE Ratio		44.4	%		39.1	%		42.1	%
Expense Ratio		33.2			34.9			30.1
Combined Ratio		77.6	%		74.0	%		72.2	%
Favorable Prior-Year Reserve Development	$	26.2		$	38.2		$	42.4
Pretax Catastrophe Losses	$	6.5		$	0.1		$	17.5

Our SBI Special Accounts Facility segment includes insurance for large-commercial accounts (those with annual premiums of more than $250,000). 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

• Property, auto and professional and general liability insurance for non-profit social service organizations

Premiums

Net written premiums decreased $17.9, or 6.7% in 2007 compared with 2006 and $7.6, or 2.8%, in 2006 compared with 2005. Net written premiums decreased in 2007 due to competitive market conditions which continue to exert downward pressure in this segment. Net written premiums decreased in 2006 compared with 2005 due to a slight decrease in average premiums, rate decreases and a slight decrease in policies-in-force.

Net earned premiums decreased $2.9, or 1.1% in 2007 compared with 2006 and decreased $19.0, or 6.7%, in 2006 compared with 2005.

Underwriting Results and Combined Ratio

Our underwriting profit decreased $10.2, and our combined ratio increased 3.6 points in 2007 compared with 2006. Our underwriting profit decreased $10.0, and our combined ratio increased 1.8 points in 2006 compared with 2005. The changes in our underwriting results and combined ratio primarily reflected:

• Prior-year reserve development – The favorable prior-year reserve development in 2007, 2006 and 2005 was primarily related to general liability coverages. The change in prior-year reserve development increased our combined ratio by 4.5 points in 2007 compared with 2006, and the change in prior-year reserve development increased our combined ratio by 0.5 points in 2006 compared with 2005.

• Catastrophe losses – The higher catastrophe losses increased our combined ratio by 1.6 points in 2007 compared with 2006. The lower catastrophe losses decreased our combined ratio by 3.2 points in 2006 compared with 2005.

• Expenses – Our expense ratio decreased 1.7 points in 2007 compared with 2006 due to a reduction in agent bonus commissions. Our expense ratio increased by 4.8 points in 2006 compared with 2005 primarily due to an increase in bonus commissions related to our social services program.

Outlook – We expect significant competition in this segment in 2008 due to pricing pressures, and as such expect flat to decreasing premium volume in these lines of our business.

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SURETY

YEAR ENDED DECEMBER 31,	2007			2006			2005
Net Written Premiums	$	388.1		$	326.3		$	278.4
Net Earned Premiums		352.9			297.5			260.9
Underwriting Profit	$	148.0		$	98.4		$	55.0
Loss and LAE Ratio		17.1	%		22.6	%		32.5	%
Expense Ratio		41.0			44.3			46.4
Combined Ratio		58.1	%		66.9	%		78.9	%

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

Premiums

Net written premiums increased $61.8, or 18.9%, in 2007 compared with 2006, and $47.9, or 17.2%, in 2006 compared with 2005. The increases in net written premiums over the past two years were driven by growth in large contract new business and focus on our highest credit quality accounts. Favorable market conditions for construction and economic expansion fueled the growth in large contract business in both years.

Net earned premiums increased $55.4, or 18.6%, in 2007 compared with 2006 and $36.6, or 14.0%, in 2006 compared with 2005. New business increased net earned premiums by $45.0 in 2007 compared with 2006 and $32.2 in 2006 compared with 2005.

Underwriting Results and Combined Ratio

Our underwriting profit increased $49.6, and our combined ratio decreased 8.8 points in 2007 compared with 2006. Our underwriting profit increased $43.4, and our combined ratio decreased 12.0 points in 2006 compared with 2005. The increases were driven by premium growth combined with historically low levels of loss experience, loss cost containment, and expense management.

Outlook – Industry results were again stable in 2007. As a result, we expect the surety market to remain healthy in 2008. We expect that infrastructure improvement needs will drive demand. However, current economic uncertainty may alter our risk assessments and temper future growth. Overall, we expect our growth rates to moderate and we anticipate some shift from the historically low level of loss experience in 2007 back to more typical losses in 2008.

P&C OTHER

YEAR ENDED DECEMBER 31,	2007			2006			2005
Net Written Premiums	$	3.7		$	72.7		$	156.1
Net Earned Premiums		1.0			73.6			157.3
Underwriting Loss	$	(34.1	)	$	(54.4	)	$	(103.9	)
Unfavorable Prior-Year Reserve Development	$	(12.9	)	$	(50.3	)	$	(48.2	)
Pretax Catastrophe Losses	$	(6.3	)	$	(0.4	)	$	53.3

Our P&C Other segment includes:

• Run-off assumed reinsurance business

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

• Our own self-insurance

• Asbestos and environmental results

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• Run-off religious institutions

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

Premiums

Net written premiums decreased $69.0, or 94.9%, in 2007 compared with 2006 and $83.4, or 53.4%, in 2006 compared with 2005. Net earned premiums decreased $72.6, or 98.6%, in 2007 compared with 2006 and $83.7, or 53.2%, in 2006 compared with 2005. The decreases in 2007 compared with 2006 were due to the sale of SFIS. Net written premiums related to this business were $71.9 in 2006 through the sale date of April 30, 2006, compared with $148.6 in 2005. Net earned premiums were $72.3 in 2006 compared with $148.7 in 2005.

Underwriting Results

Our underwriting results increased $20.3 in 2007 compared with 2006 and increased $49.5 in 2006 compared with 2005. Our underwriting results and combined ratio primarily reflected:

• Prior-year reserve development – Our 2007 underwriting results included $12.9 of unfavorable prior-year reserve development in 2007, primarily related to reserve increases for asbestos exposure claims and for allegations against religious institutions, partially offset by reduced estimates for construction defects. In 2006, $50.3 of unfavorable prior-year reserve development was primarily related to asbestos claims and allegations against religious institutions. In 2005, $48.2 of unfavorable prior-year reserve development was primarily driven by reserve increases in assumed reinsurance and asbestos and environmental claims, partially offset by favorable construction defects reserve development.

• SFIS – Our 2006 underwriting results included the results of SFIS through April 30, 2006. SFIS underwriting profit was $10.8 in 2006 compared with an underwriting loss of $46.1 in 2005. Catastrophe losses for SFIS were $(0.4) in 2006 compared with losses of $53.3 in 2005. The higher catastrophe losses in 2005 were primarily due to Hurricanes Katrina, Rita and Wilma in the Gulf States.

REINSURANCE

We collect money from reinsurers for losses we incur that are covered by reinsurance. We had $461.9 of reinsurance recoverables at December 31, 2007, net of an allowance of $35.9 that we estimated as uncollectible. We had $429.9 of reinsurance recoverables at December 31, 2006, net of an allowance of $12.9 that we estimated as uncollectible.

We analyze our reinsurance recoverables according to the credit ratings and types of reinsurers. At year-end 2007:

• 25.6% of our reinsurance recoverables were due from state and mandatory reinsurance pools

• 88.6% of the remaining amounts due from our reinsurers outside the mandatory pools were due from reinsurers rated A– or higher by A.M. Best

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

• Property catastrophes

• Workers’ compensation

• Commercial property

• Commercial umbrella

• Surety

Property Catastrophe Reinsurance – Our property catastrophe reinsurance reduces the financial impact a catastrophe could have on our personal and commercial property insurance lines. Catastrophes involve multiple claims and policyholders. We cannot accurately predict catastrophes, and the number and type of catastrophes can vary widely. The resulting losses could significantly impact our results.

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Our property catastrophe reinsurance is excess-of-loss reinsurance, which provides us with reinsurance coverage over an agreed-upon amount. The terms of our property catastrophe reinsurance in 2008 are:

• The first $200.0 of any property catastrophe loss is entirely ours. This is our retention – the amount of losses we absorb before the reinsurers reimburse us.

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

• For events other than earthquake, the entire amount above $600.0 is ours.

• For earthquake events, we have an additional level of coverage. Our reinsurers reimburse us for 90% of $500.0 in excess of the first $600.0 of the loss. The entire amount of any earthquake loss above $1,100.0 is ours.

The terms of our 2007 property catastrophe reinsurance were:

• The first $200.0 of any property catastrophe loss was entirely ours. This is our retention – the amount of losses we absorb before the reinsurers reimburse us.

• Our reinsurers reimbursed us 90% for the next $300.0 of the loss. We absorbed the other 10%.

• For events other than earthquake, the entire amount above $500.0 was ours.

• For earthquake events, we had an additional level of coverage. Our reinsurers reimbursed us for 90% of $500.0 in excess of the first $500.0 of the loss. The entire amount of any earthquake loss above $1,000.0 was ours.

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

Workers’ Compensation Reinsurance – Our workers’ compensation reinsurance reduces the financial impact a catastrophe loss or a single event may have on our results. Our catastrophe treaty protects us against losses that involve multiple claims and policyholders. Additionally, we purchase reinsurance specifically for the working layer (layers where we expect to have losses). Both treaties are excess-of-loss reinsurance.

The terms of our workers’ compensation reinsurance in 2007 and 2008 are:

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

• Under our working layer, our reinsurer reimburses us for the next $15.0 of the loss.

• Under our catastrophe treaty, our reinsurers reimburse us 90% of the next $30.0.

• The entire amount above $50.0 is ours.

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

Commercial Property Reinsurance – We purchase reinsurance specifically for the working layer (layers in which we expect to have losses) on our commercial property. Our commercial property reinsurance reduces the financial impact that any single loss can have on us. It is excess-of-loss reinsurance.

The terms of our commercial property reinsurance in 2007 and 2008 are:

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

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

• The treaty is structured in three $5.0 layers. We are granted free reinstatements at each layer as follows: three for layer 1; two for layer 2 and one for layer 3.

• In 2008, individual risks above $20.0 will generally be reinsured.

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

The terms of our commercial umbrella reinsurance in 2007 and 2008 are:

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

• Our reinsurer reimburses us for 80% of the next $16.0 for each commercial umbrella loss on each policy.

• Risks above $20.0 are facultatively reinsured.

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

The terms of our Surety reinsurance in 2008 are:

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

• Our reinsurers reimburse us 80% of the next $110.0 of the loss under each of the three layers of coverage.

• The entire amount above $130.0 is ours.

The terms of our Surety reinsurance in 2007 were:

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

• Our reinsurers reimbursed us 80% of the next $80.0 of the loss under each of the three layers of coverage.

• The entire amount above $100.0 was ours.

IMPACT OF TERRORISM

On December 26, 2007, President Bush signed into law the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”). TRIPRA keeps in place the basic framework of the Terrorism Risk Insurance Act (“TRIA”) enacted in 2002 and extended in 2005 by the Terrorism Risk Insurance Extension Act (“TRIEA”), while amending the law in certain key ways to clarify the program and enhance its scope. TRIPRA reauthorizes the federal terrorism risk insurance program for an additional seven years, until December 31, 2014. In order to trigger inclusion within the federal program, an act of terrorism must result in aggregate industry insured losses of at least $100 million. TRIPRA retains the current $100 million trigger throughout the seven-year duration.

U.S. Government Funding – Under TRIPRA, the U.S. Government will provide funding to the insurance industry if a terrorist attack is certified as such by the Secretary of the Treasury in concurrence with the Secretary of State and Attorney General of the United States. Each property-casualty insurer that has insured losses is required to retain and pay insured losses from an act (or acts) of terrorism during a program year equal to 20% of its prior calendar year direct earned premium for covered commercial property-casualty lines. Above that individual deductible, or “retention,” each insurer must pay 15 cents on each dollar of its insured losses up to the annual program cap of $100 billion in aggregate insured losses, with the federal government responsible for paying the other 85 cents on the dollar. The program is capped at $100 billion in annual aggregate insured losses, with Treasury prohibited from making payment for any portion of losses exceeding that amount, and insurers that have met their deductibles having no liability for the payment of any portion of such excess losses. TRIPRA adds language clarifying that an insurer’s financial responsibility is limited to its applicable deductible and co-share only up to the annual program cap. Additional amendments also clarify that the $100 billion in annual aggregate losses is a hard cap.

Terrorism Exclusions –The definition of “act of terrorism” has been altered to remove the requirement that an act be committed “on behalf of any foreign person or foreign interest.” Effectively, this means that domestic acts of terrorism can now be certified as “acts of terrorism” within the federal program, subject to those acts meeting the other definitional requirements of TRIPRA. TRIPRA does not change the lines of insurance that were covered by TRIEA. As a result, the federal program covers all commercial property-casualty lines except crop, private mortgage insurance (PMI), title, financial guaranty, medical malpractice, flood, reinsurance, commercial auto, burglary/theft, surety, professional liability, and farmowners’ multi-peril insurance. Life/health insurance is not included within the scope of the program.

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Like the “mandatory availability” provisions in TRIA and TRIEA, under TRIPRA, insurers are required to make available coverage for “acts of terrorism” on the same material terms and conditions as other covered types of loss (i.e., insurers can use general exclusions where permitted by state law, but not terrorism-specific exclusions unless allowed by state law and the make available provision has been satisfied). If the policyholder does reject our mandatory offer of terrorism coverage, we can then exclude coverage for losses due to foreign terrorism. The ISO has filed exclusions for acts of terrorism as defined by TRIEA, and we have adopted those filings. However, some states limit the use of terrorism exclusions.

TRIPRA maintains the original TRIA disclosure provisions, requiring clear and conspicuous indication of the terrorism premium charge and the federal share of compensation. TRIPRA does add a new policyholder disclosure requirement with respect to the $100 billion program cap, but the program cap disclosure does not need to be included in an insurer’s policy form.

Reinsurance Options – The availability of terrorism reinsurance is limited in the commercial reinsurance market. Our current reinsurance program provides limited terrorism coverage. All reinsurance treaties exclude acts involving nuclear, chemical, biological or radioactive materials. Treaties providing coverage for both certified and non-certified terrorist acts include our workers’ compensation reinsurance program and our commercial umbrella reinsurance program. Additionally, our commercial property treaty provides coverage for non-certified terrorist acts. Our property catastrophe treaty provides coverage for non-certified terrorist acts for 90% of $400.0 above the first $200.0 of loss.

Our Exposure is Modest – We have strict underwriting guidelines, and believe our exposure to potential terrorism losses is relatively modest across all our product lines. With commercial insurance, our focus is on small- to mid-sized businesses – generally not viewed as likely potential terrorism targets. Similarly, with workers’ compensation policies, the number of employees covered is a key consideration. Our internal guidelines decline coverage in cases where we believe the exposure to terrorism has the greatest potential. With regard to our personal lines of insurance, we believe that losses due to terrorism would be relatively modest.

OUR CORPORATE RESULTS

YEAR ENDED DECEMBER 31,	2007			2006			2005
Corporate Segment Results	$	(56.3	)	$	(61.1	)	$	(47.8	)
Contributions to Safeco Insurance Foundation		(60.0	)		(30.0	)		—
Net Realized Investment Gains on Contributions to Safeco Insurance Foundation		57.9			29.2			—
Losses on Debt Repurchases		(16.6	)		(4.5	)		(4.0	)
Gains on Sales of Real Estate		—			168.7			—
Net Realized Investment Gains (Losses)		24.8			(3.4	)		(3.2	)
Income (Loss) before Income Taxes	$	(50.2	)	$	98.9		$	(55.0	)

In our Corporate segment, we include:

• Interest expense on our debt

• Miscellaneous corporate investment and other activities, including real estate holdings, transactions and losses on debt repurchases and contributions to the Foundation

• Our intercompany eliminations

Gains on sales of real estate – In connection with our revision in our real estate strategy, we sold various real estate in 2006, detailed in the table below:

YEAR ENDED DECEMBER 31, 2006	Proceeds		Pretax Gain on Sale		After-Tax Gain on Sale
Redmond, Washington	$	212.6	$	41.1	$	26.7
University District, Seattle, Washington		124.1		107.4		69.8
Portland, Oregon		19.4		15.2		9.9
Pleasant Hill, California		10.2		2.8		1.8
Spokane, Washington		5.8		2.2		1.4
Total Real Estate Sold	$	372.1	$	168.7	$	109.6

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Our corporate segment results for the year ended December 31, 2007 include a non-recourse, non-refundable marketable equity securities contribution of $60.0 to the Foundation, a separate 501(c)(3) endowment fund and $30.0 for the year ended December 31, 2006. Since the Foundation’s inception, we have provided at no charge certain resources to the Foundation such as accounting, legal and investment management services and office space.

In 2007, we redeemed the remaining balance of $322.3 of our 8.072% Debentures for $335.3. The Debentures were redeemed at a price of 104% of principal. We reported a pretax loss of $16.6 ($10.8 after tax), including the write-off of deferred debt costs in the Consolidated Statements of Income. We also retired $26.3 of related Capital Trust equity securities. In addition, we repaid $197.3 of our 6.875% senior notes, which matured in 2007.

In 2006, we repurchased $54.3 in principal amount of 8.072% Debentures for $58.8 and $2.7 in principal amount of 6.875% senior notes for $2.7. Including transaction costs, we reported a pretax loss on debt repurchases of $4.5 ($2.9 after tax) in the Consolidated Statements of Income. In 2005, we repurchased $25.9 in principal amount of 7.25% senior notes for $29.8. Including transaction costs, we reported a pretax loss on debt repurchase of $4.0 ($2.6 after tax) in the Consolidated Statements of Income.

Our interest expense was:

• $68.7 in 2007

• $91.4 in 2006

• $88.6 in 2005

The decrease in 2007 compared with 2006 reflects a reduction in outstanding debt due to maturities and the redemption of Debentures in 2006 and 2007. The increase in 2006 compared with 2005 was due to increased interest rates on the portion of our debt that was swapped to floating rates partially offset by a decrease in interest expense as a result of our debt repurchases described previously.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

We have identified the accounting estimates for loss and loss adjustment expense reserves, reinsurance recoverables, and valuation of investments 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. An understanding of them may help readers to better understand our Consolidated Financial Statements and Management’s Discussion and Analysis (MD&A).

LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

Our loss reserves reflect our estimates of the ultimate amounts to be paid for losses arising from both reported and unreported claims, while our loss adjustment expense (LAE) reserves reflect our estimates for claim settlement expenses related to those losses, including legal expenses and other costs, that we have not yet paid to settle both reported and unreported claims. We report these amounts in our Loss and LAE Reserves on our Consolidated Balance Sheets.

We record two categories of loss and LAE reserves – case-basis reserves and incurred but not reported (IBNR) reserves.

We estimate case-basis reserves as the amount we will have to pay for losses that have already been reported to us but are not yet fully paid. These amounts include related legal expenses and other costs associated with resolving and settling a particular claim.

We establish IBNR reserves at the end of every reporting period to estimate the amount we will have to pay for:

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

• Losses that have been reported to us that may ultimately be paid out differently than expected in our case-basis reserves

• Losses that have been paid and closed, but may reopen and require future payment

• Expenses related to resolving and settling these losses

We use actuarial methods combined with judgment to estimate IBNR reserves.

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PROCESS AND METHODOLOGY FOR ESTABLISHING LOSS AND LAE RESERVES

The process for establishing loss and LAE reserves differs for case-basis versus IBNR reserves.

Case-Basis Reserve – For reported losses, we establish a reserve estimate for each claim based on the known facts regarding the claim and the parameters of the coverage that our policy provides. Case-basis reserves are adjusted as additional facts become available to us. Case-basis reserves are reduced as we make payments for our reported claims.

IBNR Reserves – To establish our IBNR reserves, we use different approaches for:

• Current accident year losses

• Prior accident years losses

• Allocated loss adjustment expenses (ALAE)

• Unallocated loss adjustment expenses (ULAE)

These approaches exclude exceptional loss activity associated with catastrophic weather losses, non-catastrophe weather losses and other large loss or salvage – the amount we recover from property that becomes ours after we pay for a total loss, and subrogation – our right to recover payments from third parties. The methodologies used to establish IBNR reserves differ for the current accident year (the year in which a claim occurs) versus prior accident years. The methodologies also differ for long-tailed lines of business versus short-tailed lines of business. Generally speaking, short-tailed lines of business are those lines where the vast majority of claims from a particular accident year are both reported and settled within two years.

Current Accident Year Losses

For short-tailed lines of business, we use a ratio of IBNR reserves to earned premiums. Under this approach, an IBNR percentage is applied to current period earned premiums resulting in current period IBNR reserves. For long-tailed lines of business, we use an annual expected loss ratio approach. Under this approach, an expected loss ratio is applied to current period earned premiums resulting in an estimate of ultimate losses. The resulting estimate of ultimate losses is reduced by the current period paid and case-basis reserve activity, resulting in the current period IBNR reserves.

Expected loss ratios and IBNR-to-earned premiums percentages are developed based on our analysis of prior accident years supplemented with data about changes in our book of business, changes in the external environment in which we operate, changes in our pricing and underwriting, and changes in our claims-handling practices. We review these ratios throughout the year, and we revise the expected loss ratio and IBNR percentage periodically based on these analyses. Changes in the selection of the expected loss ratio or IBNR percentage result in changes in the loss reserve estimate for the current year, which we report in current period earnings.

Prior Accident Years Losses

For short-tailed lines of business, beginning IBNR reserves for prior accident years may be adjusted for expected paid and case activity, as well as explicit adjustments beyond this activity. For long-tailed lines of business, the beginning IBNR reserves for prior accident years may be adjusted for actual paid and case activity, as well as explicit adjustments beyond this activity.

Allocated Loss Adjustment Expenses (ALAE)

ALAE reserves represent an estimate of the claims settlement expenses that can be identified to a specific claim. ALAE reserve estimates are generally established as a function of losses. For some small lines, estimates of ultimate ALAE are established as a percentage of earned premiums. These ALAE factors are established based on historical ratios supplemented for changes in our internal and external environments. ALAE IBNR reserves are determined by subtracting paid and case-basis activity from the ultimate ALAE estimate.

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Unallocated Loss Adjustment Expenses (ULAE)

ULAE reserves represent an estimate of the claims settlement expenses that cannot be identified to a specific claim. ULAE reserves are booked in aggregate for current and prior accident years combined. In general, prior reserves are carried forward and supplemented with either a percentage of earned premiums or with a fixed dollar amount of additional reserves to account for growth in the line of business.

Estimating Loss and LAE Reserves – Estimating loss and LAE reserves is a complex process because the ultimate losses are uncertain. Some claims will be paid out over a number of years, and there may be a significant lag between the time a loss occurs and the time it is reported to us. We make significant judgments and assumptions about many internal variables and external factors. Examples of internal variables include:

• Changes in our claims-handling practices

• Changes in our business mix

Examples of external factors include:

• Trends in loss costs

• Economic inflation

• Judicial changes

• Legislative changes

• Regulatory changes

These variables and factors affect the amounts we are ultimately required to pay for losses and related expenses. As a result, it is not always possible to quantify their final impact on our future payments. Our process for arriving at our estimate of ultimate loss and LAE is based on actuarial analysis and judgment. It involves reviewing actuarial assumptions, holding discussions with claims and underwriting management, and considering changes in the internal and external environment. Because estimating reserves requires us to use assumptions and judgment, our actual future losses may differ from our estimates.

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

For most of our lines of business, we use multiple estimation methods that vary depending on the particular facts and circumstances of the claim liabilities being evaluated to establish our estimate of ultimate losses.

Our estimate of IBNR reserves is the difference between our projection of ultimate losses and the payments we have made and case-basis reserves we have established for those losses. Our analyses are applied to historical claim activity and experience, supplemented with data about changes in our book of business, changes in the external environment in which we operate, changes in our pricing and underwriting policies, and changes in our claims-handling practices. The standard actuarial methods we use include:

• Paid Loss Development – Historical payment patterns for prior claims are used to estimate future payment patterns for current claims. These patterns are applied to current payments by accident year to yield expected ultimate losses.

• Incurred Loss Development – Historical case incurred patterns (paid losses plus case-basis reserves) for past claims are used to estimate future case incurred patterns for current claims. These patterns are applied to current case incurred by accident year to yield expected ultimate losses.

• Average Claim Value and Claim Count Development – Loss payment and/or case incurred amounts are divided by the number of claims to generate average costs per claim. Using historical patterns, the expected ultimate average cost per claim by accident year is projected. Separately, the expected ultimate number of claims is projected by accident year. The product of the expected ultimate average cost per claim and the expected ultimate number of claims yields expected ultimate losses.

• Expected Loss Ratio – Loss ratios are developed for recent accident years based on historical accident year loss ratios, adjusted to reflect current economic conditions and current rate levels. The expected loss ratio for each accident year is then applied to the actual earned premiums to calculate expected ultimate losses.

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• Bornhuetter/Ferguson – This approach blends the expected loss ratio method with either the paid or incurred loss development method. Both methods are used with weights applied to each of them based on the maturity of the accident year. As an example, if the current accident year for personal automobile bodily injury is estimated to be 10% paid, then the paid loss development method would receive a weight of 10%, and the expected loss ratio method would receive a 90% weight.

We use many of the above methods to estimate reserves for each product line. The merits of each method are evaluated given the facts at hand. An estimate of the ultimate losses is then made based on the particular method or combination of methods deemed most appropriate. For example, if a particular line has been subject to significant changes in claims-handling practices that would impact the comparability of case-basis reserves between periods, we would give little or no credibility to the incurred loss development approach.

There is uncertainty in our estimates of ultimate losses. This uncertainty can stem from such factors as irregular claim reporting and payment patterns and changes in our mix of business. We consider this uncertainty by looking at historical claim patterns by line of business and by examining our historical reserve accuracy. For each line, we consider expected volatility when estimating and recording reserves.

The various assumptions, estimates and other factors that may have an impact on our ultimate losses are discussed with management to determine our best estimate of ultimate losses and LAE, and our estimate of IBNR reserves is then recorded.

We use range analyses only as a retrospective view to test whether previously established estimates for reserves for our lines of business are reasonable, using subsequent information.

Our estimate of our ultimate loss and LAE reserves is subject to change as additional data emerge. This could occur as a result of:

• The emergence of exceptional loss activity

• An actuarial study

• The emergence of internal variables or external factors that would alter our view

In general, we review our reserves quarterly. This review includes either an actuarial analysis involving the application of standard actuarial techniques or the review of the paid and incurred activity in the quarter relative to the assumptions from our previous actuarial analyses. In addition, special studies are undertaken periodically for certain lines of business or exposures.

We segregate the activities of estimating losses for product pricing purposes from those of determining reserves to be reported in our financial statements. Management has the ultimate responsibility for the determination of appropriate reserves, based on recommendations from the appointed actuary.

Estimating our loss and LAE reserves is an ongoing process. Our loss and LAE reserves represent our best estimate of the ultimate future payments associated with losses and related expenses net of salvage (the amount we recover from property that becomes ours after we pay for a total loss) and subrogation (our right to recover payments from third parties), giving consideration to the uncertainties inherent in the estimates. We record any adjustments to these reserves in the periods in which we change the estimates. We report changes to these reserves in our Consolidated Statements of Income.

Catastrophe loss reserves are established by event by the claims department when the event occurs. These estimates are revised as the actual loss experience develops and claims are reported and settled over time.

We reduce our reserves by the amounts we expect to recover from salvage and subrogation. We accrue salvage and subrogation recoveries on an individual case basis for large claims. We use actuarial techniques to estimate the amount for small claims. We may determine that certain loss or salvage/subrogation activity is beyond the scope of what was anticipated in the initial establishment of loss reserves. In that case, we would adjust IBNR reserves to directly reflect this activity.

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

We purchase reinsurance to limit our exposure to potential large losses. We report the amounts we expect to recover from reinsurers as reinsurance recoverable assets on our Consolidated Balance Sheets. For more discussion on reinsurance, see the Reinsurance section of Item 7: MD&A.

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Loss and LAE Reserves By Segment – At year-end 2007 and 2006, our loss and ALAE reserves, excluding ULAE reserves, by reportable segment before reinsurance were:

DECEMBER 31,	2007							2006
	Case			IBNR		Total		Case			IBNR		Total
Safeco Personal Insurance
Auto	$	1,214.3		$	335.9	$	1,550.2	$	1,156.1		$	400.8	$	1,556.9
Property		188.7			70.1		258.8		173.4			93.6		267.0
Specialty		47.2			31.6		78.8		46.6			26.2		72.8
Total SPI		1,450.2			437.6		1,887.8		1,376.1			520.6		1,896.7
Safeco Business Insurance
SBI Regular		924.3			687.1		1,611.4		833.4			711.9		1,545.3
SBI Special Accounts Facility		179.3			129.5		308.8		165.0			139.5		304.5
Total SBI		1,103.6			816.6		1,920.2		998.4			851.4		1,849.8
P&C Other		655.3			408.3		1,063.6		673.6			474.4		1,148.0
Total SBI and P&C Other		1,758.9			1,224.9		2,983.8		1,672.0			1,325.8		2,997.8
Surety		(38.2	)		139.6		101.4		(53.8	)		101.3		47.5
Total Loss and ALAE Reserves	$	3,170.9		$	1,802.1	$	4,973.0	$	2,994.3		$	1,947.7	$	4,942.0
ULAE Reserves							212.0							229.4
Total						$	5,185.0						$	5,171.4

Loss and LAE Reserve Variability – Loss and LAE reserves are subject to variability, particularly the IBNR component. For the lines of business we write, variability in the frequency (the average number of claims filed), or severity (the average cost of a claim) is generally a function of one or more of the following factors:

• Payout period – Lines of business involving claims that stay open for long periods are subject to greater reserve variability. This is driven by the difficulty in estimating future economic, social and legal trends that impact both the time that such claims remain open and their future costs.

• Size of the reserve balance – Slight variations in large reserve balances can generate significant financial volatility.

• Policy limits – Lines of business involving policies with high or unlimited policy limits are subject to greater variation.

• Policy deductibles – Lines of business involving excess policies with large deductibles, or policies that provide coverage for claims that exceed the policy limit of an underlying policy, are subject to greater variability. The existence of large policy deductibles considerably increases the lag between the occurrence of a claim and the time it is reported to us.

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

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

In arriving at our estimates, we consider:

• Our changing mix of business – We have migrated to writing more preferred and standard risks than we wrote in past periods. These risks have on average lower frequencies and higher severities than non-standard risks.

• Our change in new business – New business generally has higher claim frequencies than business that has been on the books for longer than one year.

• General inflation and medical cost trends.

Bodily injury (BI) coverage represents the largest portion (61.0%) of our loss and ALAE reserves held for Auto. Small variations from our assumptions can yield significant financial volatility given the magnitude of these reserve balances.

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To illustrate the sensitivity of our estimate, a one-point increase in our severity assumption for Auto BI would yield an increase of approximately $28.0 in the estimated reserve.

Our Property and Specialty lines are predominantly short-tailed business, and most claims are reported and settled within 12 months. We use standard actuarial techniques and judgment to estimate reserves for those lines. Changes to our reserve estimates for Property and Specialty generally result from frequency or severity differences from historical patterns or development on catastrophe-related losses, which can be difficult to estimate due to the associated widespread damage.

Safeco Business Insurance (SBI) and P&C Other – SBI primarily writes commercial multi-peril, property, workers’ compensation, commercial auto and general liability insurance for small- to mid-sized businesses. P&C Other is composed of large-commercial business and other businesses we have placed in run-off.

Our P&C Other segment has exposure to asbestos and environmental losses primarily from policies we no longer write. Our SBI segment has exposure to construction defect losses and related expenses through the general liability, commercial multi-peril and umbrella coverages it provides. These exposures and the risks they present are discussed in aggregate for SBI and P&C Other as they are estimated by product and like exposure.

The table below provides our loss and ALAE reserves, excluding ULAE reserves, before reinsurance for our commercial products:

DECEMBER 31,	2007		2006
Workers’ Compensation	$	863.5	$	922.1
Commercial Multi-Peril		321.7		322.0
Commercial Automobile		376.2		320.9
Monoline General Liability		238.5		250.3
Business Owners		170.4		157.0
Commercial Umbrella		112.5		102.4
Monoline Property		58.8		48.4
Other		204.8		192.7
Subtotal		2,346.4		2,315.8
Construction Defects		279.8		322.6
Asbestos		227.8		206.3
Environmental		129.8		153.1
Total SBI and P&C Other	$	2,983.8	$	2,997.8

Workers’ Compensation – The following table shows our loss and ALAE reserves for voluntary and non-voluntary workers’ compensation and other relevant data. The data shown reflects workers’ compensation policies written in SBI, as well as those workers’ compensation policies that are in run-off and included in the P&C Other segment. The table excludes ULAE reserves, which were $58.2 at year-end 2007, $59.9 at year-end 2006 and $62.1 at year-end 2005:

YEAR ENDED DECEMBER 31,	2007		2006		2005
Loss and ALAE Payments	$	98.0	$	99.3	$	130.1
Reserves at Year-end, before Reinsurance		863.5		922.1		958.9
Earned Premiums	$	149.8	$	142.4	$	157.5
Claims (Number of Claims):
Reported Claims in the Year		6,377		6,203		6,671
Open Claims at Year-end		6,895		7,473		8,236

Factors in Estimating Loss Reserves for Workers’ Compensation

Estimating reserves for workers’ compensation involves a significant degree of uncertainty and judgment. This is driven by:

• Long payout periods – Workers’ compensation claims can remain open 50 years or more, introducing variability in the ultimate length of the payout. The cumulative effect of inflation trends over time, particularly medical cost inflation, can be significant.

• Unlimited liability nature of workers’ compensation policies – Many claims can pay out for the lifetime of the claimant with no limit on the total payment amount.

• Changes in future benefit levels – Legislative actions and judicial interpretations can affect the cost of future benefits.

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• Increases in life expectancy – Increases in life expectancy increase both the duration of future payments and the ultimate cost of treatment.

• Claim reporting lags – Some claims are not made immediately; as a result, we remain exposed to workers’ compensation losses arising from policies written in prior years.

• Changes in our business – Changes in our claims-handling practices, changes in our writings of large versus small- to mid-sized accounts, and changes in the mix of states where these policies are written can affect our ability to predict ultimate payout based on historical data.

In determining our best estimate for workers’ compensation reserves, long-term medical cost inflation trends over the average claim payout period represent our most significant assumption. We have assumed that double-digit medical cost inflation will continue in the near-term, moderating over time to historical levels. Our best estimate of workers’ compensation reserves presents risk of unfavorable reserve development should medical inflation trends not abate. A one-point increase in our estimate of the average medical cost severity trend would yield an increase of approximately $68.0 in the estimated reserve.

Other Commercial Products – Excluding commercial liability products, which are discussed below, the payout periods for our other commercial products, primarily commercial auto and commercial property, are relatively short. As a result, our estimated loss reserves for these products are subject to less volatility than our workers’ compensation reserves. We use standard actuarial techniques combined with judgment to estimate these loss reserves.

Commercial Liability Products – Our commercial multi-peril policies, business owners policies, general liability and commercial umbrella policies provide third-party liability coverage to our policyholders.

Estimating reserves for third-party liability involves a significant degree of uncertainty and judgment. This is driven by:

• Long payout periods – Many third-party liability claims are paid years after the occurrence of the loss. As a result, the cumulative effect of inflation can be significant.

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

• Changes in coverage interpretation – Legislative actions and judicial interpretations can affect the cost of future payments.

• Changes in our business – Changes in our claims-handling practices, changes in our writings of large versus small- to mid-sized accounts, and changes in the mix of types of business can affect our ability to predict ultimate payout based on historical data.

These factors give rise to latent claim emergence and evolving coverage precedents for claims regarding such things as asbestos, environmental and construction defects. We discuss each of these claim types in further detail below.

Construction Defects – This table shows our loss and ALAE reserves for construction defects claims. The table excludes ULAE reserves, which were $20.1 at year-end 2007, $22.2 at year-end 2006 and $28.5 at year-end 2005:

YEAR ENDED DECEMBER 31,	2007		2006		2005
Loss and ALAE Payments, Before Reinsurance	$	37.9	$	35.4	$	56.7
Loss and ALAE Payments, Net of Reinsurance		35.3		33.8		56.7
Reserves at End of Year, Before Reinsurance		279.8		322.6		330.0
Reserves at End of Year, Net of Reinsurance	$	276.9	$	318.4	$	330.0
Claims and Average Costs *
Open Claims at Year-end		629		852		1,087
Average Paid per Closed Claim	$	54,790	$	42,678	$	49,441

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

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Our Construction Defects Claims Exposure

Our exposure to construction defects claims comes from general liability and commercial multi-peril coverages we provide to contractors. Construction defects claims result from alleged defective work performed in the construction of large structures that include apartments, condominiums and large developments of single-family dwellings or other housing. We no longer write new business with large contractors, but periodically have claims arise from prior periods.

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

Our IBNR reserves were 80.2% of our loss and ALAE reserves for construction defects claims at December 31, 2007 and 77.9% of our loss and ALAE reserves for construction defects claims at December 31, 2006.

We have taken a number of actions to mitigate our exposure to construction defects claims, enabling us to vigorously defend our coverage position. They include:

• Stricter underwriting standards

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

• Relationships with external legal counsel specializing in construction defects claims

Estimating Loss Reserves For Construction Defects Claims

The main factors driving the uncertainty and judgment in estimating loss reserves for construction defects claims are:

• Changing legal and regulatory environments

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

• Diminished value claims

• Involvement of multiple plaintiffs, defendants and insurers

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

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

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

Over the last four years, the number of open construction defects claims has decreased steadily – an average drop exceeding 20% per year. Our loss reserve estimates assume that the number of open claims will continue to decrease, but at a slower rate, and that severity will increase due to inflationary pressure.

Asbestos – This table shows our loss and ALAE reserves for asbestos-related claims. The table excludes ULAE reserves, which were $13.5 at year-end 2007, $15.1 at year-end 2006 and $16.1 at year-end 2005:

YEAR ENDED DECEMBER 31,	2007			2006			2005
Loss and ALAE Payments, Before Reinsurance	$	22.4		$	14.4		$	12.3
Loss and ALAE Payments, Net of Reinsurance		18.2			13.8			11.5
Reserves at End of Year, Before Reinsurance		227.8			206.3			186.1
Reserves at End of Year, Net of Reinsurance		189.0			171.0			158.9
Three-Year Survival Ratio, Gross		13.9	%		15.0	%		10.6	%
Three Year Survival Ratio, Net		13.1	%		13.2	%		11.6	%
Claims and Average Costs: *
Open Claims at End of Year		2,951			3,047			3,061
Average Paid per Closed Claim	$	29,380		$	30,648		$	25,256
Average Case Reserve per Open Claim	$	43,137		$	44,997		$	39,230

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

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

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

Our Asbestos Liability Exposure – Here is the breakout of our asbestos loss reserves, net of reinsurance:

• 58.0% relates to our run-off assumed reinsurance operations and our exposure to syndicates and pools.

• 42.0% relates to our direct exposure.

Accordingly, we have two separate special claims-handling functions, one that specializes in asbestos claims related to our run-off assumed reinsurance operations, and one that specializes in asbestos claims related to our direct exposure.

Our exposure through our run-off assumed reinsurance operations is primarily excess-of-loss reinsurance. Pools are groups of insurers that enter into agreements to share exposure related to specific insureds. Our loss reserve estimates for pools reflect the loss reserve estimates provided by the pools’ independent actuaries. The loss experience of our run-off assumed reinsurance operations follows the general industry trend.

Our direct exposure is primarily due to smaller and more peripheral entities becoming defendants in asbestos claims. Our exposure to the major high-profile asbestos defendants is limited for our direct business. This stems from our historical business strategy to not write direct coverages for larger companies. In addition, we do not have direct exposure to businesses that are the subject of settlement agreements.

Our IBNR reserves were 32.6% of our loss and ALAE reserves for asbestos claims at December 31, 2007 and 19.8% of our loss and ALAE reserves from asbestos claims at December 31, 2006.

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

YEAR ENDED DECEMBER 31,	2007						2006
	2007 Net Paid		Net Asbestos Reserves		% of Asbestos Reserves		2006 Net Paid		Net Asbestos Reserves		% of Asbestos Reserves
Direct
Loss	$	2.9	$	22.9	12.1	%	$	1.4	$	35.1	20.6	%
ALAE		6.3		23.8	12.6			6.7		27.4	16.0
IBNR		—		32.6	17.3			—		20.0	11.7
Loss and ALAE		9.2		79.3	42.0			8.1		82.5	48.3
Assumed
Loss		8.7		80.6	42.6			4.9		74.6	43.6
ALAE		0.3		—	—			0.8		—	—
IBNR		—		29.1	15.4			—		13.9	8.1
Loss and ALAE		9.0		109.7	58.0			5.7		88.5	51.7
Total
Loss		11.6		103.5	54.7			6.3		109.7	64.2
ALAE		6.6		23.8	12.6			7.5		27.4	16.0
IBNR		—		61.7	32.7			—		33.9	19.8
Loss and ALAE	$	18.2	$	189.0	100.0	%	$	13.8	$	171.0	100.0	%
Total number of policyholders					150						155

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Estimating Loss Reserves for Asbestos

Estimating loss reserves for asbestos claims requires more judgment than most of our other lines of business. This is primarily because past claim experience may not be representative of future claims.

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

• Insufficient data

• Inherent risk of major litigation

• Diverging legal interpretations

• Regulatory actions

• Legislative actions

• Increases in bankruptcy proceedings

• Non-impaired claimants being allowed to make claims

• Efforts by insureds to seek coverage interpretation not subject to aggregate limits

• Uncertainty in the reinsurance markets

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

In estimating our loss reserves for asbestos claims, we:

• Consider applicable law and coverage litigation

• Analyze claim statistics and trends

• Review industry information to test the reasonableness of our reserves

• Do not consider ongoing Congressional reform efforts

Some asbestos-related claims are subject to non-product liability coverage rather than product liability coverage. Non-product liability coverage may not be subject to policy aggregate limits, resulting in higher asbestos claims payments and related expenses.

Environmental – This table shows our loss and ALAE reserves for our liability coverages related to environmental claims. The table excludes ULAE reserves, which were $12.2 at year-end 2007, $13.8 at year-end 2006 and $15.0 at year-end 2005:

YEAR ENDED DECEMBER 31,	2007			2006			2005
Loss and ALAE Payments, Before Reinsurance	$	23.8		$	16.0		$	16.7
Loss and ALAE Payments, Net of Reinsurance		18.9			15.2			13.1
Reserves at End of Year, Before Reinsurance		129.8			153.1			162.0
Reserves at End of Year, Net of Reinsurance		118.8			135.3			148.9
Three-Year Survival Ratio, Gross		6.9	%		9.9	%		8.4	%
Three-Year Survival Ratio, Net		7.6	%		10.3	%		8.9	%
Claims and Average Costs *
Open Claims at End of Year		968			980			1,091
Average Paid per Closed Claim	$	75,337		$	50,448		$	43,386
Average Case Reserve per Open Claim	$	37,260		$	49,225		$	40,667

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

Our Environmental Claims Exposure

Our environmental claims result from our assumed reinsurance operations that are in run-off status and from our commercial general liability line that we write on a direct basis. We have attempted to avoid writing coverages for large companies with substantial exposures to environmental claims. As a result, our average environmental claim tends to be small.

Our IBNR reserves were 69.6% of our loss and ALAE reserves for environmental claims at December 31, 2007 and 64.4% of our loss and ALAE reserves for environmental claims at December 31, 2006.

Our relatively limited environmental claims activity results in fluctuations in average values from period to period. The 2006 average paid closed environmental claim increased compared with 2005 due to numerous settlements of large exposures.

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Estimating Loss Reserves for Environmental Claims

The volatility of actuarial estimates of liabilities for environmental claims is often greater than that of other exposures. This is due to several factors including:

• Insufficient data

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

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

In light of these factors, we estimate loss reserves for environmental claims including consideration of:

• Claim statistics and trends

• Directional trends in survival ratios

• Applicable law and coverage litigation

• Industry data

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

To estimate loss reserves for Surety, we examine:

• Actuarial analysis

• Large claim analysis

• Reinsurance terms and conditions

• Individual obligation exposure analysis

• Analysis of salvage and subrogation potential

Our Surety loss and ALAE reserves, net of salvage and subrogation recoveries, were $101.4 at December 31, 2007 and $47.5 at December 31, 2006. Surety reserves fluctuate from period to period due to the lag between the time payments are made on a claim and the time we receive salvage and subrogation amounts.

Loss and LAE Reserves – Three-Year Review – In this section, we provide the actual reserve estimates for the last three years and discuss changes in those estimates. This table shows the changes in our loss and LAE reserves for 2007, 2006 and 2005.

YEAR ENDED DECEMBER 31,	2007			2006			2005
Loss and LAE Reserves at Beginning of Year	$	5,171.4		$	5,358.2		$	5,209.3
Less Reinsurance Recoverables on Unpaid Losses, Net of Allowance		415.0			420.1			323.6
Net Balance at Beginning of Year		4,756.4			4,938.1			4,885.7
Incurred Loss and LAE for Claims Occurring During:
Current Year		3,644.1			3,426.0			3,680.9
Prior Years		(123.6	)		(146.2	)		(45.9	)
Total Incurred Loss and LAE		3,520.5			3,279.8			3,635.0
Loss and LAE Payments for Claims Occurring During:
Current Year		1,910.1			1,886.6			1,912.1
Prior Years		1,594.9			1,574.9			1,619.5
Total Loss and LAE Payments		3,505.0			3,461.5			3,531.6
Sale of London Operations		—			—			(51.0	)
Net Balance at End of Year		4,771.9			4,756.4			4,938.1
Plus Reinsurance Recoverables on Unpaid Losses, Net of Allowance		413.1			415.0			420.1
Loss and LAE Reserves at End of Year	$	5,185.0		$	5,171.4		$	5,358.2

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2007

In 2007, we reduced our estimates for prior years’ loss and LAE reserves by $123.6. This total decrease included:

• $43.9 reduction in Surety reserves due to lower-than-expected number of claims

• $42.9 reduction in workers’ compensation reserves due to lower-than-expected severity

• $37.1 reduction in construction defect reserves due to lower-than-expected number of claims

• $17.9 reduction in personal auto reserves excluding catastrophes due to lower-than-expected severity

• $13.3 reduction in commercial umbrella reserves due to lower-than-expected number of claims

• $11.4 reduction in commercial multi-peril reserves excluding catastrophes and other than asbestos, environmental and construction defects due to lower-than-expected number of claims

• $10.2 reduction in personal property reserves due to lower-than-expected severity, including a $3.5 reduction for non-voluntary assessments, and a $3.0 reduction in catastrophe losses reflecting decreases in severity estimates primarily for the 2005 hurricanes

• $35.8 increase in asbestos reserves primarily due to liabilities assumed from others

• $26.6 increase in commercial auto reserves related to higher-than-expected severity

• $9.3 reduction in a number of lines due to emerging claim trends and related loss data, including Unallocated LAE (ULAE)

2006

In 2006, we reduced our estimates for prior years’ loss and LAE reserves by $146.2. This total decrease included:

• $98.2 reduction in personal auto reserves, reflecting decreases in severity estimates primarily for prior accident years 2004 and 2005 in our liability lines

• $39.5 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

• $26.6 reduction in commercial umbrella reserves due to lower-than-expected number of claims

• $25.9 increase in our asbestos reserves related to large loss activity

• $23.2 increase in our general liability reserves in our run-off lines primarily due to religious institution allegations

• $16.1 increase in commercial auto reserves, reflecting increases in severity estimates for prior accident years in our liability lines

• $15.7 reduction in personal property reserves due to lower-than-expected severity

• $12.9 reduction in workers’ compensation reserves due to reforms in California and Texas

• $12.5 reduction in personal specialty lines, reflecting decreases in personal umbrella severity estimates for prior accident years

• $12.2 increase in our assumed reinsurance run-off lines driven by large loss activity

• $11.2 reduction in SFIS prior accident year reserves driven by a reduction of hurricane assessments

• $7.0 reduction in a number of lines due to emerging claim trends and related loss data, including ULAE

2005

In 2005, we reduced our estimates for prior years’ loss and LAE reserves by $45.9. This total decrease included:

• $77.3 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

• $36.7 reduction in personal auto reserves, reflecting decreases in severity estimates for prior accident years in our liability lines

• $26.3 reduction in construction defects reserves, reflecting claims frequency improvement in our run-off lines

• $11.0 reduction in personal property reserves, reflecting improvement in severity relative to our original estimates

• $30.5 increase in our Surety reserves related to large loss activity in our contract lines

• $47.0 increase in workers’ compensation reserves to reflect increased provisions for long-term medical claim inflation and associated claims adjustment expenses

• $35.8 increase in our asbestos and environmental reserves to reflect increases in defense and containment costs

• $7.9 reduction in a number of lines due to emerging claim trends and related loss data, including ULAE

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Analysis of Losses and LAE Reserve Development – 10-Year Review – The Analysis of Losses and LAE Reserve Development table which follows shows the development of our loss and LAE reserves from 1997 through 2007.

In the table:

• Section A shows the unpaid loss and LAE reserves we recorded at December 31, 1997-2007. It breaks out these reserves as:

^¡ Gross of Reinsurance – Our total amount of loss and LAE reserves

^¡ Reinsurance – The amount we expect to be reimbursed by our reinsurers

^¡ Net of Reinsurance – The amount of our loss and LAE reserves after reinsurance

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

^¡ As shown in Section A, our loss and LAE reserves net of reinsurance at year-end 1997 were $4,081.9

^¡ After 10 years, we’ve actually paid $3,629.5

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

^¡ As shown in Section A, our reserves net of reinsurance at year-end 1997 were $4,081.9

^¡ Section C shows the annual reestimation of those reserves, and after 10 years our revised reserves were $4,506.5

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

^¡ As shown in Section A, our loss and LAE reserves net of reinsurance at year-end 1997 were $4,081.9

^¡ After one year those reserves developed a $100.0 redundancy, and after 10 years these reserves developed a $424.6 deficiency. This is the difference between the reserves shown in Section A net of reinsurance, and the reestimated amounts in Section C.

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

• Unfavorable development in reserve estimates from 1997 through 2003

• Favorable development in reserve estimates from 2004 through 2007

The unfavorable trend from 1997 through 2003 was primarily due to:

• Significant increases in workers’ compensation medical costs

• Legislative and regulatory developments

• Higher-than-expected number of construction defects, religious institution allegations, asbestos and environmental losses

The favorable development from 2004 through 2005 was primarily due to:

• Lower-than-expected severity in our Auto and Property segments

• Lower-than-expected number of claims in commercial auto and liability

• Lower-than-expected number of claims in construction defects

The favorable development from 2006 through 2007 was primarily due to:

• Lower-than-expected severity in our SPI Auto and Property segments

• Significant decreases in workers’ compensation payments due to regulatory reforms

• Lower-than-expected number of claims in our Surety segment

• Lower-than-expected number of claims in construction defects

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

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

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ANALYSIS OF LOSSES AND LAE RESERVE DEVELOPMENT

DECEMBER 31,	1997			1998			1999			2000			2001			2002			2003		2004		2005		2006		2007
A. RESERVE FOR UNPAID LOSSES AND LAE
Gross	$	4,310.5		$	4,219.9		$	4,378.6		$	4,612.7		$	5,053.7		$	4,998.5		$	5,044.6	$	5,209.3	$	5,358.2	$	5,171.4	$	5,185.0
Ceded		228.6			253.6			309.5			343.6			415.9			399.1			329.3		323.6		420.1		415.0		413.1
Net	$	4,081.9		$	3,966.3		$	4,069.1		$	4,269.1		$	4,637.8		$	4,599.4		$	4,715.3	$	4,885.7	$	4,938.1	$	4,756.4	$	4,771.9
B. CUMULATIVE NET AMOUNT PAID AS OF
End of Year
One Year Later	$	1,345.5		$	1,389.2		$	1,510.7		$	1,618.7		$	1,659.6		$	1,578.8		$	1,440.3	$	1,619.5	$	1,574.9	$	1,594.9
Two Years Later		2,049.3			2,165.5			2,336.2			2,525.3			2,572.5			2,394.0			2,268.6		2,437.1		2,422.8
Three Years Later		2,516.3			2,638.0			2,882.5			3,104.0			3,112.2			2,937.4			2,742.1		2,953.1
Four Years Later		2,821.0			2,969.4			3,242.5			3,451.7			3,485.9			3,245.9			3,076.3
Five Years Later		3,046.6			3,198.7			3,468.4			3,708.6			3,715.3			3,476.9
Six Years Later		3,221.3			3,354.3			3,645.8			3,881.1			3,896.2
Seven Years Later		3,341.6			3,482.3			3,787.4			4,029.9
Eight Years Later		3,444.4			3,593.3			3,910.4
Nine Years Later		3,539.1			3,697.2
Ten Years Later		3,629.5
C. NET RESERVE RE-ESTIMATED AS OF
One Year Later	$	3,981.9		$	4,045.1		$	4,217.4		$	4,614.2		$	4,763.6		$	4,849.4		$	4,676.2	$	4,839.8	$	4,791.9	$	4,632.8
Two Years Later		3,989.0			4,070.3			4,447.8			4,709.7			5,016.7			4,842.0			4,678.0		4,812.3		4,653.1
Three Years Later		3,986.0			4,209.9			4,506.0			4,972.6			5,049.0			4,911.1			4,689.5		4,774.0
Four Years Later		4,097.1			4,252.4			4,721.0			4,989.8			5,186.8			4,948.6			4,677.1
Five Years Later		4,147.2			4,410.1			4,745.3			5,116.9			5,241.5			4,937.8
Six Years Later		4,293.5			4,441.5			4,864.4			5,183.2			5,238.0
Seven Years Later		4,303.5			4,552.6			4,939.2			5,192.3
Eight Years Later		4,417.2			4,617.7			4,958.7
Nine Years Later		4,476.5			4,646.5
Ten Years Later		4,506.5
D. CUMULATIVE NET REDUNDANCY (DEFICIENCY) AS OF
One Year Later	$	100.0		$	(78.8	)	$	(148.3	)	$	(345.1	)	$	(125.8	)	$	(250.0	)	$	39.1	$	45.9	$	146.2	$	123.6
Two Years Later		92.9			(104.0	)		(378.7	)		(440.6	)		(378.9	)		(242.6	)		37.4		73.4		285.0
Three Years Later		95.9			(243.6	)		(436.9	)		(703.5	)		(411.2	)		(311.7	)		25.8		111.7
Four Years Later		(15.2	)		(286.1	)		(651.9	)		(720.7	)		(549.0	)		(349.2	)		38.2
Five Years Later		(65.3	)		(443.8	)		(676.2	)		(847.8	)		(603.7	)		(338.4	)
Six Years Later		(211.6	)		(475.2	)		(795.3	)		(914.1	)		(600.2	)
Seven Years Later		(221.6	)		(586.3	)		(870.1	)		(923.2	)
Eight Years Later		(335.3	)		(651.4	)		(889.6	)
Nine Years Later		(394.6	)		(680.2	)
Ten Years Later		(424.6	)

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REINSURANCE RECOVERABLES

In this section, we discuss how we estimate reinsurance recoverables.

The reinsurance we buy limits our losses on certain individual risks and reduces our exposure to catastrophic events. We purchase reinsurance from several reinsurers and are not dependent upon any single reinsurer. Reinsurance recoverables are the amounts our reinsurers owe us related to the losses we have incurred. We reported $461.9 at December 31, 2007 and $429.9 at December 31, 2006 in reinsurance recoverables as assets on our Consolidated Balance Sheets. The increase in our reinsurance recoverables in 2007 is a result of an increase in recoverables on losses from historical casualty business in run-off partially offset by an increase in the related allowance for uncollectible reinsurance.

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

To estimate reinsurance recoverables, we:

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

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

• Compare our estimates with past reinsurance recoverables

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

• Examine actuarial data with and without reinsurance recoverables

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

• Historical collection experience

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

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

• Trends in default rates by credit rating

Our estimated allowance for uncollectible reinsurance was $35.9 at December 31, 2007 and $12.9 at December 31, 2006. The increase in our allowance was primarily due to an increase in the provision for losses of $22.2 from historical casualty business in run-off.

VALUATION OF INVESTMENTS

Our investments include fixed maturities and marketable equity securities, which we report at fair value as Available-for-Sale Securities on our Consolidated Balance Sheets. Our investments also include other invested assets, which we report at cost, which approximates fair value.

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

How We Determine Other-than-Temporary Declines in the Value of Our Investments – We regularly review the fair value of our investments. Invested assets are subject to various risks, such as interest rate, market and credit risks. Periodic changes in fair values of our investments are reported as a component of accumulated other comprehensive income on our Consolidated Balance Sheets and are not reflected in the operating results of any period until we sell the security or when declines in fair value are determined to be other-than-temporary. If the fair value of any of our investments falls below our cost or amortized cost basis in the investment, we analyze the decrease to determine whether it is an other-than-temporary decline in value.

To make this determination for each security, we consider:

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

57

• Any downgrades of the security by a rating agency

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

Based on our analysis, we make a judgment as to whether the decline is other-than-temporary. Sometimes, an investment decline we consider temporary in one quarter can become other-than-temporary in a future quarter. If the decline is other-than-temporary, we report an impairment charge within Net Realized Investment Gains in our Consolidated Statements of Income in the period we make that determination. We reported impairment charges of $56.0 in 2007 compared with $79.2 in 2006 and $15.5 in 2005.

Determining the Fair Value of Our Investments – For the majority of our investments, we use quoted market prices or available public market price information to determine the fair value. When such information is not available, as is the case for securities that are not publicly traded, we use other valuation techniques. These techniques include:

• Using independent pricing sources, including brokers

• Evaluating discounted cash flows

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

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

OUR INVESTMENT RESULTS

Our investment portfolios are primarily divided between Corporate and P&C. They are managed by BlackRock Financial Management, Inc. The primary investment objective for the Corporate portfolio is to maximize economic value while generating after-tax income to meet policyholder and corporate obligations. The Corporate investment strategy is developed based on a variety of factors including business needs, regulatory requirements and tax considerations. The primary investment objective for the Property & Casualty portfolio is to ensure the full and timely payment of all liabilities.

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.

58

INVESTMENT PORTFOLIO

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

DECEMBER 31, 2007	COST OR AMORTIZED COST		GROSS UNREALIZED GAINS		GROSS UNREALIZED LOSSES			NET UNREALIZED GAINS		CARRYING VALUE
P&C
Fixed Maturities – Taxable	$	2,766.6	$	80.6	$	(14.0	)	$	66.6	$	2,833.2
Fixed Maturities – Non-taxable		4,685.2		132.6		(52.1	)		80.5		4,765.7
Marketable Equity Securities		950.7		410.3		(13.4	)		396.9		1,347.6
Other Invested Assets		47.0		—		—			—		47.0
Total P&C		8,449.5		623.5		(79.5	)		544.0		8,993.5
Corporate
Fixed Maturities – Taxable		163.4		1.9		(0.3	)		1.6		165.0
Marketable Equity Securities		42.5		13.2		(0.7	)		12.5		55.0
Other Invested Assets		1.6		—		—			—		1.6
Total Corporate		207.5		15.1		(1.0	)		14.1		221.6
Total Investment Portfolio	$	8,657.0	$	638.6	$	(80.5	)	$	558.1	$	9,215.1

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

As of December 31, 2007, our fixed maturities, carried at $7,763.9, included:

• Gross unrealized gains of $215.1

• Gross unrealized losses of $66.4

As of December 31, 2007, our marketable equity securities, carried at $1,402.6, included:

• Gross unrealized gains of $423.5

• Gross unrealized losses of $14.1

As of December 31, 2006, our fixed maturities, carried at $9,119.0, included:

• Gross unrealized gains of $256.7

• Gross unrealized losses of $39.3

As of December 31, 2006, our marketable equity securities, carried at $1,529.7, included:

• Gross unrealized gains of $514.3

• Gross unrealized losses of $3.0

At December 31, 2007, there were no investments in any one industry that accounted for more than 10% of our total gross unrealized losses. At December 31, 2006, investments in secured finance mortgage-backed securities accounted for 17.6% of our total gross unrealized losses.

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

This table shows by maturity, the total amount of gross unrealized losses on fixed maturities and marketable equity securities at December 31, 2007:

DECEMBER 31, 2007	COST OR AMORTIZED COST		FAIR VALUE		COST IN EXCESS OF FAIR VALUE
Fixed Maturities:
One Year or Less	$	41.2	$	41.1	$	(0.1	)
Over One Year through Five Years		215.2		213.2		(2.0	)
Over Five Years through Ten Years		266.4		260.8		(5.6	)
Over Ten Years		1,841.8		1,789.9		(51.9	)
Mortgage-Backed Securities		448.8		442.0		(6.8	)
Total Fixed Maturities		2,813.4		2,747.0		(66.4	)
Total Marketable Equity Securities		208.2		194.1		(14.1	)
Total	$	3,021.6	$	2,941.1	$	(80.5	)

Unrealized losses on our fixed maturities that have been in a loss position for more than a year at December 31, 2007 were $6.1, compared with $32.3 at December 31, 2006, reflecting higher interest rates. There were no unrealized losses on our marketable equity securities that were in a loss position for more than a year at December 31, 2007 or 2006. Total unrealized losses were less than 1% of our total portfolio value at both December 31, 2007 and December 31, 2006.

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

DIVERSIFICATION

Our investment portfolio is diversified by issuer and industry type with no single issuer, except the U.S. Government fixed maturities, exceeding 1% of the fair value of our consolidated investment portfolio. We do not rely on the presence of bond insurance in the selection of securities for our portfolio. We evaluate the underlying creditworthiness of the entity in our selection process.

These tables show our investment types and industries of our fixed maturities and marketable equity securities that exceed 3% of our portfolio at year-end 2007 or 2006:

DECEMBER 31, 2007	CARRYING VALUE		% OF TOTAL
States and Political Subdivisions	$	4,825.9	52.4	%
Banks		322.1	3.5
U.S. Government and Agencies		384.2	4.2
Mortgage-Backed Securities		1,012.0	11.0
Other		2,622.3	28.4
Total Fixed Maturities and Marketable Equity Securities		9,166.5	99.5
Other Invested Assets		48.6	0.5
Total Investment Portfolio	$	9,215.1	100.0	%

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DECEMBER 31, 2006	CARRYING VALUE		% 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	%

INVESTMENT PORTFOLIO QUALITY

The quality ratings of our fixed maturities portfolio were:

RATING	PERCENT AT DECEMBER 31, 2007		PERCENT AT DECEMBER 31, 2006
AAA	59	%	54	%
AA	16		15
A	12		19
BBB	8		10
Subtotal	95		98
BB or lower	3		1
Not Rated	2		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:

• $228.2 at year-end 2007

• $83.0 at year-end 2006

The increase in fair value of these investments reflects a higher mix of high-yield securities, consistent with our overall investment strategy in our portfolio in 2007 when compared with 2006.

As of December 31, 2007, these securities represented 2.9% 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 $229.1 at year-end 2007 and $79.1 at year-end 2006.

As of December 31, 2007, our below investment grade securities included gross unrealized investment gains of $2.9 and gross unrealized losses of $3.8. 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 also included $149.8 of non-publicly traded fixed maturities and marketable equity securities – representing 1.6% of our total portfolio at year-end 2007, and $127.5 of not-rated fixed maturities – securities not rated by a national rating service – representing 1.4% of our total portfolio at year-end 2007. At year-end 2006, our portfolio 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.

MORTGAGE-BACKED SECURITIES

Our mortgage-backed securities consist mainly of commercial mortgage-backed securities (CMBSs), residential collateralized mortgage obligations (CMOs) and residential mortgage-bonded pass-throughs. We have no collateralized debt obligations (CDOs), home equity lines of credit (HELOCs) or similar securities in our portfolio.

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This table summarizes our holdings of mortgage-backed securities at year-end 2007:

DECEMBER 31, 2007	AMORTIZED COST		CARRYING VALUE		% OF TOTAL
RESIDENTIAL
CMOs	$	430.3	$	434.1	42.9	%
Subordinates		11.7		11.6	1.2
Mortgaged-Backed Pass-Throughs		57.0		58.1	5.7
Total Residential		499.0		503.8	49.8
COMMERCIAL REAL ESTATE
CMBS Seniors		287.2		292.6	28.9
CMBS Subordinates		45.4		46.3	4.6
Total Securitized Commercial Real Estate		332.6		338.9	33.5
ASSET-BACKED SECURITIES
ABS Seniors		95.5		95.0	9.4
ABS Subordinates		75.0		74.3	7.3
Total Asset-Backed Securities		170.5		169.3	16.7
Total Mortgage-Backed Securities	$	1,002.1	$	1,012.0	100.0	%

Here are the quality ratings of our mortgage-backed securities portfolio at year-end 2007:

RATING	PERCENT AT DECEMBER 31, 2007
Government/Agency Backed	27	%
AAA	58
AA	4
A	6
BBB	4
BB or lower	—
Not Rated	1
Total	100	%

OUR INVESTMENT RETURNS

We measure our investment returns by net investment income and net realized investment gains and losses. Our net investment income is measured by after-tax yields and portfolio duration. These measurements may be impacted by impairments we report due to investment declines we determine to be other-than-temporary.

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NET INVESTMENT INCOME

This table summarizes our pretax net investment income by portfolio:

YEAR ENDED DECEMBER 31,	2007		2006		2005
P&C	$	462.2	$	476.6	$	460.6
Corporate		24.5		32.5		24.5
Total Net Investment Income	$	486.7	$	509.1	$	485.1

Our investment income yields were:

YEAR ENDED DECEMBER 31,	2007		2006		2005
Pretax	5.0	%	4.9	%	4.9	%
After-Tax	4.0	%	3.7	%	3.6	%

The decrease in net investment income in 2007 compared with 2006 was a result of the shift in our portfolio strategy throughout 2006 to tax-exempt municipal bonds, and an overall lower invested asset base due primarily to the sale of securities to fund our debt maturity and redemption and the special dividend paid by our insurance subsidiaries to Safeco Corporation that have not been invested. The increase in net investment income in 2006 compared with 2005 was due to higher interest rates on new purchases of fixed income investments.

Our after-tax yields increased in 2007 and 2006 due to our increased investment in tax-exempt municipal bonds.

Our portfolio duration is an important part of our investment returns. Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. The bigger the duration number, the greater the interest-rate risk or reward for bond prices. Our effective duration was 4.82 at December 31, 2007, compared with 4.66 at December 31, 2006 and 4.75 at December 31, 2005.

NET REALIZED INVESTMENT GAINS AND LOSSES

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

YEAR ENDED DECEMBER 31,	2007		2006			2005
P&C	$	63.4	$	(22.0	)	$	63.6
Corporate		24.8		(3.4	)		(3.2	)
Net Realized Investment Gains on Contributions to the Foundation		57.9		29.2			—
Total Pretax Net Realized Investment Gains	$	146.1	$	3.8		$	60.4

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

YEAR ENDED DECEMBER 31,	2007			2006			2005
Gross Gains on Fixed Maturities Transactions	$	19.7		$	26.7		$	15.3
Gross Losses on Fixed Maturities Transactions		(20.2	)		(13.1	)		(14.0	)
Gross Gains on Marketable Equity Securities Transactions		199.6			73.8			83.5
Gross Losses on Marketable Equity Securities Transactions		(13.4	)		(9.2	)		(7.3	)
Total Net Gains on Securities Transactions		185.7			78.2			77.5
Impairments on Fixed Maturities		(23.7	)		(64.5	)		(12.7	)
Impairments on Marketable Equity Securities		(32.3	)		(14.7	)		(2.8	)
Total Impairments		(56.0	)		(79.2	)		(15.5	)
Other, Net		16.4			4.8			(1.6	)
Total Pretax Net Realized Investment Gains	$	146.1		$	3.8		$	60.4

Our net realized investment gains in 2007 were due primarily to the gain of $57.9 from the contribution of highly appreciated marketable equity securities to the Foundation, and the sale of securities to fund the special dividend paid by our insurance subsidiaries to Safeco Corporation and to increase our cash position for future share repurchases. Net realized investment gains decreased in 2006 compared with 2005 primarily due to higher impairments in 2006.

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NET GAINS ON SECURITIES TRANSACTIONS

Net gains on fixed maturities transactions decreased $14.1 in 2007 compared with 2006, and increased $12.3 in 2006 compared with 2005.

Net gains on marketable equity securities transactions increased $121.6 in 2007 compared with 2006, and decreased $11.6 in 2006 compared with 2005.

In 2007, the fair value of fixed maturities that we sold at a loss was $1,011.7. Our total net realized investment loss on these sales was $19.3. In 2006, the fair value of fixed maturities that we sold at a loss was $815.8. Our total net realized investment loss on these sales was $11.5. In 2007, the fair value of marketable equity securities that we sold at a loss was $92.2. Our total net realized investment loss on these sales was $13.4. In 2006, the fair value of marketable equity securities that we sold at a loss was $100.2. Our total net realized investment loss on these sales was $9.2. The securities sold at a loss during 2007 primarily related to non-performing securities sold to purchase tax-exempt bonds and securities with credit-related losses in connection with market volatility that emerged during 2007. Our net realized investment losses on transactions in 2006 were primarily related to additional impairments of securities initially impaired in prior periods, securities that became impaired during the year ended December 31, 2006, and sales of securities that had substantially recovered in value. The securities sold at a loss during 2006 and 2005 were due to sales of fixed maturities to fund our accelerated share repurchase program and the sale of lower-yielding taxable bonds to purchase tax-exempt securities to grow our municipal bond portfolio.

IMPAIRMENTS

We closely monitor every investment that has declined in fair value to below our 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 Item 7: MD&A.

In our impairment determination process, we consider our intent and ability to hold to recovery those investments with declines in value. Our intent to hold the 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.

Pretax investment impairments by portfolio were:

YEAR ENDED DECEMBER 31,	2007		2006		2005
P&C
Fixed Maturities	$	22.3	$	56.9	$	11.7
Marketable Equity Securities		30.8		14.7		2.8
Corporate
Fixed Maturities		1.4		7.6		1.0
Marketable Equity Securities		1.5		—		—
Total Pretax Investment Impairments	$	56.0	$	79.2	$	15.5

Impairments in 2007 were primarily due to credit-related events caused by recent market volatility. Impairments in 2006 were primarily due to changes in management which resulted in a shift in our portfolio strategy to tax-exempt municipal bonds and a change to our real estate strategy. These changes resulted in a review of our investment portfolio and as a result, we changed our intent to hold certain securities long enough for them to recover to full value.

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

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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 will need and when we will 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. We use Insurance Bureau Scores (IBS), which are based on information from consumer credit reports, along with application information to evaluate new and renewal auto and homeowners insurance policies. Our auto policyholders are at or above 83% of the the IBS average and our homeowners policyholders are at or above 99% of the the IBS average. In addition, 74% of our small commercial business customers are in the top 30% of commercial credit scores. The strong credit scores of our customers along with the short-tail nature of our businesses, position us to be particularly well-suited to weather a potential recession or the current trend of rising inflation. For more information about our financial strength, see the Financial Strength Ratings section of Item 7: MD&A.

SOURCES OF OUR FUNDS

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

The amount of dividends that our subsidiaries can pay us is subject to regulatory limits imposed by certain states where our subsidiaries are domiciled. Dividends in excess of those limits require prior regulatory approval. Based on state limits in place at the end of 2007, our insurance subsidiaries can pay us up to $584.4 in aggregate dividends without obtaining prior regulatory approval. We do not expect these regulatory restrictions to have any impact on our ability to meet our obligations.

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

Our cash flow for the past three years was:

YEAR ENDED DECEMBER 31,	2007			2006			2005
Cash and Cash Equivalents – Beginning of Year	$	287.6		$	556.3		$	251.9
Net Cash Provided by (Used in):
Operating Activities		763.0			728.5			1,021.1
Investing Activities		1,596.9			56.2			(387.6	)
Financing Activities		(2,115.5	)		(1,053.4	)		(329.1	)
Cash and Cash Equivalents – End of Year	$	532.0		$	287.6		$	556.3

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Cash provided by operating activities increased in 2007 compared with 2006 primarily due to lower income tax payments and administrative expenses, offset in part by higher loss expenses paid and lower dividends and interest received. Cash provided by operating activities decreased in 2006 compared with 2005 primarily as a result of the cash lower insurance premiums received, higher income taxes, underwriting and operating expenses, partially offset by lower loss expenses and higher dividends and interest income received.

The increase in cash provided by investing activities in 2007 compared with 2006 was a result of increased sales of fixed maturities and marketable equity securities. The increase in cash provided by investing activities in 2006 compared with 2005 was a result of increased sales of fixed maturities, marketable equity securities, and activities related to our securities lending program, as well as our real estate sales.

The changes in cash from financing activities were the result of 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, grow our investment portfolio, and repurchase shares of common stock. 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 and expenses incurred.

In 2007, we used $1.56 billion to repurchase stock and debt, compared with $1.23 billion in 2006.

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:

DECEMBER 31,	2007			2006
Total Debt	$	704.0		$	1,250.0
Equity Excluding Accumulated Other Comprehensive Income (AOCI)		3,025.3			3,443.7
AOCI		367.3			484.2
Total Shareholders’ Equity		3,392.6			3,927.9
Total Capitalization	$	4,096.6		$	5,177.9
Ratio of Debt to Equity		20.8	%		31.8	%
Ratio of Debt to Capitalization		17.2	%		24.1	%

Repurchases of Debt – In July 2007, we called and redeemed the remaining balance of $322.3 of our 8.072% Debentures for $335.3. The Debentures were redeemed at a price of 104% of principal. We reported a pretax loss on our debt repurchase of $16.6 ($10.8 after tax), including the write-off of deferred debt costs in the Consolidated Statements of Income. We also retired our $26.3 Capital Trust equity investment. In addition, we repaid $197.3 of our 6.875% senior notes, which matured on July 15, 2007.

In 2006, we repurchased $54.3 in principal amount of 8.072% Debentures for $58.8 and $2.7 in principal amount of 6.875% senior notes for $2.7. Including transaction costs, we reported a loss on debt repurchases of $4.5 pretax ($2.9 after tax) in the Consolidated Statements of Income. In 2005, we repurchased $25.9 in principal amount of 7.25% senior notes for $29.8. Including transaction costs, we reported a loss on debt repurchase of $4.0 pretax ($2.6 after tax) in the Consolidated Statements of Income.

On February 1, 2008, our 4.2% Notes matured and we paid the $200.0 balance in full.

Share Repurchases – We repurchase shares under Rule 10b5-1 trading plans, open market purchases and accelerated share repurchase 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 accelerated share repurchase 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 purchases shares in the market over time to repay the borrowed shares.

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We summarize our share repurchase activity for 2005, 2006 and 2007 below:

Program	Number of Shares Purchased (issued)		Average Price Paid Per Share (*)		Total Cost
2005 Repurchases
2005 Accelerated Share Repurchases	2,752,300		$	54.50	$	145.9
10b5-1Plans	1,756,278			53.06		93.3
Other	10,662			55.17		0.6
2004 Accelerated Share Repurchase Settlement	—			—		16.1
Total 2005 Repurchases	4,519,240			56.62		255.9
2006 Repurchases
2006 Accelerated Share Repurchases	10,212,766		$	58.75	$	603.1
Open Market Purchases, 2006	477,800			53.69		25.7
10b5-1 Plans	9,966,970			53.80		536.4
Total 2006 Repurchases	20,657,536		$	56.24	$	1,165.2
2007 Repurchases
10b5-1 Plans	13,551,929		$	59.30	$	803.9
Open Market Purchases	3,409,800			57.50		196.1
Repurchases under 10b5-1 Plans and Open Market Purchases	16,961,729			58.94		1,000.0
2006 Accelerated Share Repurchase Settlement	(866,685	)		—		—
Total 2007 Repurchases	16,095,044		$	58.94	$	1,000.0

* Transaction costs and price adjustments are excluded from the average price per share amount.

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 minimum level of $2,700.0 shareholders’ equity plus 50% of accumulated net income

• Keep our debt-to-capitalization ratio below a maximum of 37.5%

The bank credit facility does not require us to maintain any deposits as compensating balances. As of December 31, 2007 we had no borrowings under the bank credit facility and we were in compliance with all its covenants.

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OUR CONTRACTUAL OBLIGATIONS

Our contractual obligations as of December 31, 2007 were:

	Payment By
	TOTAL		LESS THAN 1 YEAR		1-3 YEARS		3-5 YEARS		MORE THAN 5 YEARS
Long-Term Debt, Including Interest	$	818.8	$	233.6	$	351.5	$	233.7	$	—
Real Estate Operating Leases		256.3		44.4		70.7		49.8		91.4
Pension and Other Retirement Obligations		220.3		22.9		170.2		8.5		18.7
Other Commitments		140.8		45.7		43.2		17.5		34.4
Investments in Limited Partnerships (1)		71.4		37.7		19.3		14.4		—
Purchase Obligations		3.8		1.8		2.0		—		—
Subtotal		1,511.4		386.1		656.9		323.9		144.5
Loss and LAE Reserves (2)		5,185.0		1,331.4		1,420.8		912.5		1,520.3
Total	$	6,696.4	$	1,717.5	$	2,077.7	$	1,236.4	$	1,664.8

(1) We have commitments to invest a certain amount of capital in various limited partnerships and investment funds. Our total remaining commitments to these limited partnerships and investment funds was approximately $71.4 as of December 31, 2007. The actual timing and amount of payments could differ from our current estimates.

(2) Loss and LAE reserves represent our best estimate of losses from claims and related settlement costs. Because of the nature of insurance policies, there is typically no minimum contractual commitment associated with covered claims. Both the amounts and timing of such payments are estimates, and the inherent variability of resolving claims as well as changes in market conditions make the timing of cash outflows uncertain. Therefore, the ultimate amount and timing of Loss and LAE payments could differ significantly from our estimates.

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+

We believe our financial position is sound. Our debt service coverage has improved over the last two years, and we expect at least to maintain ratings at the current levels.

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

• Results of operations

• Capital resources

• Debt-to-capital ratio

• Management expertise

• Marketing

• Investment operations

• Minimum policyholders’ surplus requirements

• Capital sufficiency to meet projected growth

• Access to capital

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

• Cause customers to terminate their policies

• Decrease new sales, particularly in Surety

• Increase our borrowing costs

• Limit our access to capital

• Restrict our ability to compete

INCOME TAXES

At December 31, 2007, we had $524.6 and at December 31, 2006, we had $568.1 of gross deferred income tax assets. Gross deferred income tax assets are composed of temporary differences created as a result of amounts deductible for taxes in future periods. Although realization of deferred income tax assets is not assured, we believe they will be realized through future earnings, including but not limited to the generation of future operating income, reversal of existing temporary differences and available tax planning strategies. Accordingly, we have not recorded a valuation allowance for these assets. More information on income taxes can be found in Note 7 to our Consolidated Financial Statements.

We adopted the provisions of FASB Interpretation No. (FIN) 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.

At the end of 2007, we had a $3.8 of gross unrecognized tax benefits, of which $3.4 would affect our effective tax rate if recognized. The difference between the gross unrecognized tax benefits and the amount that would affect our effective tax rate is attributable to the federal tax benefit of state income tax.

CHANGE IN UNCERTAIN INCOME TAX POSITIONS
Balance at January 1, 2007	$	5.0
Reductions for tax positions of prior years		(0.7	)
Lapse of the applicable statute of limitations		(0.5	)
Balance at December 31, 2007	$	3.8

It is expected that the amount of unrecognized tax benefits will change in 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 $7.3 accrued for interest and no liability for penalties as of December 31, 2007.

We are currently under a routine audit by the Internal Revenue Service (IRS) for calendar years 2004 and 2005. Calendar years 2006 and 2007 remain subject to IRS examination and the IRS examinations for calendar years 2003 and prior have been completed.

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PENSION PLANS

Our pension obligations (assets) resulting from the defined benefit (pension) plan we sponsor covering substantially all employees are recorded on our Consolidated Balance Sheets. More information can be found in Note 9 to our Consolidated Financial Statements.

Amounts recorded for our pension obligation and pension cost are affected by assumptions used to calculate them, including the discount rate and expected long-term rate of return on plan assets. To calculate our benefit obligation, as of December 31, 2007, we used a discount rate assumption of 4.75% based on consideration of the general interest rate environment, the calculation of an equivalent discount rate based on a hypothetical portfolio of high-quality fixed maturities with future cash flows that are similar to the timing and amount of our estimated future pension benefit payments and other relevant factors.

To calculate pension cost for the year ended December 31, 2007, we used a discount rate assumption of 5.50%, an expected long-term rate of return on plan assets assumption of 7.00% and a compensation increase of 5.00% compounded annually. We determined the expected long-term rate of return on plan assets assumption by considering the mix of investments within the plan, the expected future investment performance of those asset sectors, actual investment experience during the lifetime of our plan and other relevant factors. A decrease of 100 basis points in the discount rate would result in an increase of $2.5 in pension cost in 2007. A decrease of 100 basis points in the expected long-term rate of return on plan assets assumption would result in an increase of $1.9 in pension cost in 2007.

NEW ACCOUNTING STANDARDS

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

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Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK DISCLOSURES FOR FINANCIAL INSTRUMENTS

This table shows the fair values of certain of our financial instruments on our Consolidated Balance Sheets at December 31, 2007 and 2006. To analyze the sensitivity of our financial instruments to changes in interest rates and equity prices, we show in the second column in the table for each year the effect a 100 basis-point increase in market interest rates would have on the fair values. In the third column for each year we show the effect a 10% decline in equity prices would have on fair values:

DECEMBER 31	2007								2006
			INCREASE (DECREASE) IN ASSET OR LIABILITY								INCREASE (DECREASE) IN ASSET OR LIABILITY
	FAIR VALUE		CHANGE IN INTEREST RATES			CHANGE IN EQUITY PRICES			FAIR VALUE		CHANGE IN INTEREST RATES			CHANGE IN EQUITY PRICES
FINANCIAL ASSETS
Fixed Maturities	$	7,763.9	$	(374.2	)	$	—		$	9,119.0	$	(419.5	)	$	—
Marketable Equity Securities		1,402.6		—			(140.3	)		1,529.7		—			(153.0	)
Other Invested Assets		48.6		(0.6	)		—			14.3		—			—
Cash and Cash Equivalents		532.0		—			—			287.6		—			—
Interest Rate Swaps		9.4		(9.3	)		—			0.6		(9.8	)		—
FINANCIAL LIABILITIES
6.875% Notes Due 2007	$	—	$	—		$	—		$	199.0	$	(1.0	)	$	—
4.200% Notes Due 2008		199.9		(0.1	)		—			197.3		(2.0	)		—
4.875% Notes Due 2010		300.1		(5.7	)		—			296.7		(8.4	)		—
7.250% Notes Due 2012		208.4		(8.0	)		—			220.6		(10.3	)		—
8.072% Debentures Due 2037		—		—			—			364.9		(42.5	)		—
Interest Rate Swaps		—		—			—			1.3		0.9			—

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

• Credit risk related to our investments

• Underlying insurance risk related to our core businesses

The sensitivity analysis used for the table summarizes only the market risk related to our recorded financial assets and liabilities. We seek to maintain a laddered maturity portfolio of fixed income investments with reasonable average durations. We keep sufficient cash and short-term investments to provide for the liquidity needs of the operating companies. In our fixed income allocation, we try to maximize after-tax income without sacrificing investment quality or assuming too much interest rate and call risks. In our equity portfolio, we invest in a diversified group of high quality companies providing us with portfolio diversification, capital appreciation and dividend income.

We calculate the estimated fair values at the adjusted market rates by using discounted cash flow analysis and duration modeling, where appropriate. The adjusted market rates assume a 100 basis-point, simultaneous, parallel increase in market interest rates. Assuming 89.7 million shares outstanding, if there were a 100 basis-point increase in interest rates, our book value per share of $37.81 would decline by $4.42 per share, or 11.7%.

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

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

71

Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None.

Item 9A: CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act), our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on 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.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The information required to be furnished under this heading is set forth under the captions “Management’s Report on Internal Control over Financial Reporting” and “Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting” in Part IV of this report.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

As required by Rule 13a-15(d) of the Exchange Act, under 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 occurred during the fourth fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the fourth quarter.

Item 9B: OTHER INFORMATION

On February 26, 2008 we named Kris Hill, Vice President and Controller, as our Principal Accounting Officer. Ross Kari, who had been Principal Accounting Officer, will continue to serve as Executive Vice President and Chief Financial Officer, and as our Principal Financial Officer.

72

Part III

Item 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

This information will be contained in the definitive proxy statement to be filed within 120 days after December 31, 2007 and is incorporated herein by reference, except for the portion about executive officers, which is included in Part I.

Item 11: EXECUTIVE COMPENSATION

This information will be contained in the definitive proxy statement to be filed within 120 days after December 31, 2007 and is incorporated herein by reference.

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

This information will be contained in the definitive proxy statement to be filed 120 days after December 31, 2007 and is incorporated herein by reference, except for the required disclosure about equity compensation plans, which is included below.

This table provides information as of December 31, 2007 about the number of shares of Safeco common stock that may be issued upon the exercise or settlement of outstanding equity and equity-based awards under our existing equity compensation plans. It also includes the number of shares that remain available for future issuance under these plans.

Our shareholder-approved, equity-compensation plans are our 1987 Long-Term Incentive Plan and our 1997 Long-Term Incentive Plan. We also have an Agency Stock Purchase Plan. This plan permits our highest-producing agents to purchase Safeco stock annually at a discount. One million shares were authorized for issuance under this Agency Stock Purchase Plan.

Column (a) sets forth the number of shares of our common stock that may be issued on exercise or settlement of outstanding awards. Column (b) states the weighted average exercise price for the outstanding options under our shareholder-approved plan. Column (c) includes the aggregate number of shares available for future issuance only under our 1997 Long-Term Incentive Plan in the first row and under our Agency Stock Purchase Plan in the second row. No shares remain available for issuance under our 1987 Long-Term Incentive Plan.

PLAN CATEGORY	NUMBER OF SECURITIES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS (A)		WEIGHTED- AVERAGE EXERCISE PRICE OF OUTSTANDING OPTIONS (B)		NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER EQUITY COMPENSATION PLANS, (EXCLUDING SECURITIES REFLECTED IN COLUMN (A)) (C)
Equity compensation plans approved by security holders	1,406,009	(y)	$	50.02	3,652,129	(z)
Equity compensation plans not approved by security holders	—			—	817,565
Total	1,406,009		$	50.02	4,469,694

(y) This amount includes 628,867 shares that may be issued upon settlement of RSRs granted to employees which are settled in stock. The remaining 777,142 of this amount are shares that may be issued on exercise of options granted to our employees and directors.

(z) Certain securities remaining available for issuance are subject to an automatic grant program for our non-management directors under our Long-Term Incentive Plan. This program provides automatic grants of RSRs valued at $120,000 annually to each of our non-management directors. In 2007, our non-executive chairman received a grant of 7,500 RSRs.

73

Item 13: CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

This information will be contained in the definitive proxy statement to be filed 120 days after December 31, 2007 and is incorporated herein by reference.

Item 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES

This information will be contained in the definitive proxy statement to be filed 120 days after December 31, 2007 and is incorporated herein by reference.

74

Part IV

It em 15: EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

(a)(1) Financial Statements

(a)(2) Financial Statement Schedules

(a)(3) Exhibits

The financial statements, financial statement schedules and exhibits listed in the Index to Financial Statements, Schedules and Exhibits which follow are filed as a part of this report.

75

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 26, 2008.

Safeco Corporation Registrant

/s/ PAULA ROSPUT REYNOLDS

Paula Rosput Reynolds, President,

Chief Executive Officer and Director

76

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 26, 2008.

Name	Title
/s/ PAULA ROSPUT REYNOLDS	President, Chief Executive Officer and Director
Paula Rosput Reynolds
/s/ ROSS J. KARI	Executive Vice President and Chief Financial Officer
Ross J. Kari
/s/ KRIS L. HILL	Vice President, Controller and Principal Accounting Officer
Kris L. Hill
/s/ JOSEPH W. BROWN	Chairman
Joseph W. Brown
/s/ ROBERT S. CLINE	Director
Robert S. Cline
/s/ PETER L. S. CURRIE	Director
Peter L. S. Currie
/s/ MARIA S. EITEL	Director
Maria S. Eitel
/s/ JOSHUA GREEN III	Director
Joshua Green III
/s/ JOHN S. HAMLIN	Director
John S. Hamlin
/s/ KERRY KILLINGER	Director
Kerry Killinger
/s/ GARY F. LOCKE	Director
Gary F. Locke
/s/ GERARDO I. LOPEZ	Director
Gerardo I. Lopez
/s/ WILLIAM G. REED, JR.	Director
William G. Reed, Jr.
/s/ CHARLES R. RINEHART	Director
Charles R. Rinehart
/s/ JUDITH M. RUNSTAD	Director
Judith M. Runstad

77

I NDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS

	Page
Audited Consolidated Financial Statements
Management’s Report on Internal Control over Financial Reporting	79
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting	80
Report of Independent Registered Public Accounting Firm	81
Consolidated Statements of Income	82
Consolidated Balance Sheets	83
Consolidated Statements of Cash Flows	84
Consolidated Statements of Cash Flows – Reconciliation of Net Income to Net Cash Provided by Operating Activities	84
Consolidated Statements of Shareholders’ Equity	86
Consolidated Statements of Comprehensive Income	87
Notes to Consolidated Financial Statements	88
Financial Statement Schedules
I Summary of Investments – Other Than Investments in Related Parties	120
II Condensed Financial Information of the Registrant (Parent Company)	121
Condensed Statements of Income	121
Condensed Balance Sheets	122
Condensed Statements of Cash Flows	123
Condensed Statements of Cash Flows – Reconciliation of Net Income to Net Cash Provided by Operating Activities	124
III Supplemental Insurance Information	125
VI Supplemental Information Concerning Consolidated Property & Casualty Insurance Operations	128

EXHIBITS

Index to Exhibits	129
12 Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Registrant

We omit other schedules from this list – and from this Form 10-K – because either they are not applicable or the information is included in our Consolidated Financial Statements.

78

M ANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over Safeco’s financial reporting. Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. We assessed the effectiveness of Safeco’s internal control over financial reporting as of December 31, 2007. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework.

Based on our assessment using those criteria, we conclude that Safeco’s internal control over financial reporting is effective as of December 31, 2007 in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (GAAP). Ernst & Young LLP, Safeco’s independent registered public accounting firm, has issued an audit report on our internal control over financial reporting. Their report follows.

/s/ PAULA ROSPUT REYNOLDS

Paula Rosput Reynolds

President, Chief Executive Officer and Director

/s/ ROSS J. KARI

Ross J. Kari

Executive Vice President and Chief Financial Officer

79

R EPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Shareholders of Safeco Corporation:

We have audited Safeco Corporation and subsidiaries’ (Safeco) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Safeco’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Safeco maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Safeco as of December 31, 2007 and 2006, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007 and our report dated February 26, 2008 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Seattle, Washington

February 26, 2008

80

R EPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Safeco Corporation:

We have audited the accompanying consolidated balance sheets of Safeco Corporation and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Safeco Corporation and subsidiaries at December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

As described in Note 1 to the consolidated financial statements, in 2006 Safeco Corporation and subsidiaries changed their method of accounting for share-based payments and their method of accounting for defined benefit pension and other postretirement benefits.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2008 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Seattle, Washington

February 26, 2008

81

FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF INCOME

(In Millions, Except Per Share Amounts)

YEAR ENDED DECEMBER 31,	2007		2006		2005
REVENUES
Net Earned Premiums	$	5,576.0	$	5,608.3	$	5,805.4
Net Investment Income		486.7		509.1		485.1
Net Realized Investment Gains		146.1		3.8		60.4
Gains on Sales of Real Estate		—		168.7		—
Total Revenues		6,208.8		6,289.9		6,350.9
EXPENSES
Losses and Loss Adjustment Expenses		3,520.5		3,279.8		3,635.0
Amortization of Deferred Policy Acquisition Costs		954.2		927.9		973.1
Other Underwriting and Operating Expenses		633.6		691.1		661.8
Interest Expense		68.7		91.4		88.6
Contributions to Safeco Insurance Foundation		60.0		30.0		—
Losses on Debt Repurchases		16.6		4.5		4.0
Restructuring and Asset Impairment Charges		3.1		25.7		2.7
Total Expenses		5,256.7		5,050.4		5,365.2
Income before Income Taxes		952.1		1,239.5		985.7
Provision for Income Taxes		244.3		359.5		294.6
Net Income	$	707.8	$	880.0	$	691.1
NET INCOME PER SHARE OF COMMON STOCK
Net Income Per Share of Common Stock – Diluted	$	6.97	$	7.51	$	5.43
Net Income Per Share of Common Stock – Basic	$	7.01	$	7.56	$	5.49
DIVIDENDS DECLARED PER SHARE	$	1.50	$	1.15	$	0.97

See Notes to Consolidated Financial Statements.

82

CONSOLIDATED BALANCE SHEETS

(In Millions)

DECEMBER 31,	2007		2006
ASSETS
Investments
Available-for-Sale Securities:
Fixed Maturities, at Fair Value (Cost or amortized cost: $7,615.2; $8,901.6)	$	7,763.9	$	9,119.0
Marketable Equity Securities, at Fair Value (Cost: $993.2; $1,018.4)		1,402.6		1,529.7
Other Invested Assets, at cost which approximates fair value		48.6		14.3
Total Investments		9,215.1		10,663.0
Cash and Cash Equivalents		532.0		287.6
Accrued Investment Income		108.4		126.5
Premiums and Service Fees Receivable		1,074.7		1,085.6
Deferred Policy Acquisition Costs		415.7		383.9
Reinsurance Recoverables		461.9		429.9
Property and Equipment for Company Use (At cost less accumulated depreciation: $204.6; $211.9)		214.8		144.4
Current Income Taxes Recoverable		32.3		74.8
Net Deferred Income Tax Assets		157.9		143.7
Other Assets		96.6		114.6
Securities Lending Collateral		331.0		759.0
Total Assets	$	12,640.4	$	14,213.0
LIABILITIES AND SHAREHOLDERS’ EQUITY
Loss and Loss Adjustment Expense Reserves	$	5,185.0	$	5,171.4
Unearned Premiums		2,240.9		2,175.3
Debt		704.0		1,250.0
Other Liabilities		765.4		913.1
Securities Lending Payable		331.0		759.0
Total Liabilities		9,226.3		10,268.8
Commitment and Contingencies		—		—
Restricted Stock Rights		21.5		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: 4.3; 4.9 Shares Issued and Outstanding: 89.7; 105.3		—		3.2
Retained Earnings		3,025.3		3,440.5
Accumulated Other Comprehensive Income, Net of Taxes		367.3		484.2
Total Shareholders’ Equity		3,392.6		3,927.9
Total Liabilities & Shareholders’ Equity	$	12,640.4	$	14,213.0

See Notes to Consolidated Financial Statements.

83

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Millions)

YEAR ENDED DECEMBER 31,	2007			2006			2005
OPERATING ACTIVITIES
Insurance Premiums Received	$	5,632.5		$	5,637.4		$	5,824.6
Dividends and Interest Received		527.9			554.0			532.8
Losses and Loss Adjustment Expenses Paid		(3,555.3	)		(3,436.3	)		(3,547.8	)
Underwriting, Acquisition and Other Operating Costs Paid		(1,610.2	)		(1,635.6	)		(1,497.9	)
Interest Paid		(82.0	)		(91.4	)		(86.5	)
Income Taxes Paid		(149.9	)		(299.6	)		(204.1	)
Net Cash Provided by Operating Activities		763.0			728.5			1,021.1
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale		(1,587.2	)		(2,469.9	)		(2,228.1	)
Marketable Equity Securities Available-for-Sale		(587.0	)		(595.1	)		(311.7	)
Property and Equipment for Company Use		(114.3	)		(46.6	)		(28.6	)
Sales of:
Fixed Maturities Available-for-Sale		1,945.2			1,911.0			984.1
Marketable Equity Securities Available-for-Sale		679.1			332.5			287.7
Real Estate		2.1			372.1			—
Maturities and Calls of Fixed Maturities Available-for-Sale		817.2			803.5			951.8
Retirement of Capital Trust Securities		26.3			—			—
Securities Lending Collateral Returned (Invested)		428.0			(215.6	)		(42.7	)
Sale of Subsidiary, Net of Cash Sold		5.4			(34.2	)		—
Other, Net		(17.9	)		(1.5	)		(0.1	)
Net Cash Provided by (Used in) Investing Activities		1,596.9			56.2			(387.6	)
FINANCING ACTIVITIES
Common Shares Reacquired		(1,000.0	)		(1,165.2	)		(255.9	)
Repurchases of Debt		(558.9	)		(60.4	)		(29.8	)
Securities Lending Collateral (Paid) Received		(428.0	)		215.6			42.7
Dividends Paid to Shareholders		(144.2	)		(130.2	)		(118.9	)
Stock Options Exercised		15.6			86.8			32.8
Net Cash Used in Financing Activities		(2,115.5	)		(1,053.4	)		(329.1	)
Net Increase (Decrease) in Cash and Cash Equivalents		244.4			(268.7	)		304.4
Cash and Cash Equivalents at Beginning of Year		287.6			556.3			251.9
Cash and Cash Equivalents at End of Year	$	532.0		$	287.6		$	556.3

See Notes to Consolidated Financial Statements.

84

CONSOLIDATED STATEMENTS OF CASH FLOWS –

RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES

(In Millions)

YEAR ENDED DECEMBER 31,	2007			2006			2005
Net Income	$	707.8		$	880.0		$	691.1
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Realized Investment Gains		(146.1	)		(3.8	)		(60.4	)
Accretion of Discount and Amortization of Premium on Fixed Maturities		23.8			39.3			48.3
Amortization, Depreciation and Impairments		49.4			59.7			51.2
Deferred Income Tax Provision		48.5			70.0			90.4
Gains on Sales of Real Estate		—			(168.7	)		—
Non-cash Contributions to Safeco Insurance Foundation		60.0			30.0			—
Losses on Debt Repurchases		16.6			4.5			4.1
Other, Net		6.2			(6.0	)		26.3
Changes in, Net of Dispositions:
Accrued Investment Income		18.1			4.9			(1.7	)
Premiums and Service Fees Receivable		10.9			(0.9	)		62.9
Current Income Taxes Recoverable		42.5			(23.1	)		(2.1	)
Deferred Policy Acquisition Costs		(31.8	)		(7.5	)		5.8
Loss and Loss Adjustment Expense Reserves		13.6			(186.8	)		148.9
Unearned Premiums		65.6			35.5			(11.2	)
Other Assets and Liabilities		(122.1	)		1.4			(32.5	)
Total Adjustments		55.2			(151.5	)		330.0
Net Cash Provided by Operating Activities	$	763.0		$	728.5		$	1,021.1

As described in Note 1, we issued 866,685 shares to settle an accelerated share repurchase program in the year ended December 31, 2007.

There were no significant non-cash financing or investing activities for the years ended December 31, 2007, 2006 or 2005, except as provided above.

See Notes to Consolidated Financial Statements.

85

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In Millions, Except Share Amounts)

YEAR ENDED DECEMBER 31,	2007			2006			2005
COMMON STOCK
Balance at Beginning of Year	$	3.2		$	434.8		$	641.8
Shares Issued for Options and Rights (includes Taxes of $3.4; $12.6; $5.1)		16.7			94.4			37.9
Share-based Compensation		7.9			3.0			11.0
Shares Reacquired		(27.8	)		(523.6	)		(255.9	)
Reclassification of Share-Based Payments to Liabilities		—			(5.4	)		—
Balance at End of Year		—			3.2			434.8
RETAINED EARNINGS
Balance at Beginning of Year		3,440.5			3,333.0			2,763.8
Net Income		707.8			880.0			691.1
Dividends Declared		(150.1	)		(130.9	)		(121.9	)
Shares Reacquired		(972.2	)		(641.6	)		—
Cumulative Effect of Adoption of FIN 48		(0.7	)		—			—
Balance at End of Year		3,025.3			3,440.5			3,333.0
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES
Balance at Beginning of Year		484.2			356.8			515.3
Adoption of SFAS 158		—			10.4			—
Other Comprehensive Income (Loss)		(116.9	)		117.0			(158.5	)
Balance at End of Year		367.3			484.2			356.8
SHAREHOLDERS’ EQUITY	$	3,392.6		$	3,927.9		$	4,124.6
YEAR ENDED DECEMBER 31,
COMMON SHARES OUTSTANDING
Number of Shares Outstanding at Beginning of Year		105,341,791			123,584,593			126,958,493
Shares Issued for Accelerated Share Repurchase Settlement		866,685			—			—
Shares Issued for Options and Rights		484,399			2,414,734			1,145,340
Shares Reacquired		(16,961,729	)		(20,657,536	)		(4,519,240	)
Number of Shares Outstanding at End of Year		89,731,146			105,341,791			123,584,593

See Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Millions)

YEAR ENDED DECEMBER 31,	2007			2006			2005
Net Income	$	707.8		$	880.0		$	691.1
Other Comprehensive Income (Loss), Net of Taxes:
Change in Unrealized Gains and Loss on Available-for-Sale Securities		4.2			128.7			(121.3	)
Reclassification Adjustment for Net Realized Investment Gains Included in Net Income		(115.3	)		(11.7	)		(43.5	)
Amortization of Pension and Other Postretirement Benefit Amounts		(5.8	)		—			—
Foreign Currency Translation Adjustments		—			—			6.3
Other Comprehensive Income (Loss)		(116.9	)		117.0			(158.5	)
Comprehensive Income	$	590.9		$	997.0		$	532.6

See Notes to Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in millions except for ratios and per 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 continuing 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). Preparing 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 Notes to the 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-year amounts for consistency with our current-year presentation. These reclassifications did not affect shareholders’ equity, or net income and has an immaterial effect on cash flows from operations and financing activities. The net effect on cash flows from operations was $1.1, due to the reclassification of the write-off of deferred debt costs from financing activities to operating activities.

PREMIUM REVENUE RECOGNITION

We include insurance premiums in revenues as they are earned over the terms of the policies. We determine the earned portion on a daily pro-rata basis – an equal portion of the premium is reported as earned premium revenue for each day of the policy term. We report the unearned portion of the policy premium as a liability on our Consolidated Balance Sheets, before the effect of any reinsurance.

EARNINGS PER SHARE

We calculate basic earnings per share by dividing net income by the weighted-average number of common shares outstanding during the year. We do not consider our RSRs to be participating securities in calculating basic earnings per share even though dividends are paid on these awards prior to vesting. Diluted earnings per share include the weighted-average common shares outstanding during the year plus the weighted-average of potential dilutive common shares outstanding during the year. 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. In 2007, we excluded 494,000 stock options from the dilutive earnings per share calculation because their inclusion would have been antidilutive compared with 259,770 stock options excluded in 2006. No stock options were antidilutive in 2005.

Diluted and Basic Average Shares Outstanding and Net Income per Share are summarized as follows:

YEAR ENDED DECEMBER 31,	2007		2006		2005
NET INCOME COMPUTATION OF NET INCOME PER SHARE
Diluted:
Average Number of Common Shares Outstanding		101.0		116.4		125.9
Additional Common Shares Assumed Issued		0.6		0.7		1.3
Average Shares Outstanding- Diluted		101.6		117.1		127.2
Net Income Per Share – Diluted	$	6.97	$	7.51	$	5.43
Basic:
Average Number of Common Shares Outstanding		101.0		116.4		125.9
Net Income Per Share – Basic	$	7.01	$	7.56	$	5.49

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INVESTMENTS

Our investments include fixed maturities and marketable equity securities, which we report at fair value as Available-for-Sale Securities on our Consolidated Balance Sheets and other invested assets, which are reported at cost or equity, which approximates fair value. The fixed maturities we invest in include bonds, mortgage-backed securities and redeemable preferred stock. The marketable equity securities we invest in include common stock and non-redeemable preferred stock. We report fluctuations between cost and fair value of these securities as unrealized investment gains and losses, net of deferred income taxes, in Accumulated Other Comprehensive Income (AOCI) on our Consolidated Balance Sheets, with changes from period to period in Other Comprehensive Income.

Other Invested Assets includes our investments in various limited partnerships. We invest in limited partnerships that seek either long-term capital appreciation, the benefit of providing tax credits or to capitalize on recent credit market activity. Investments in limited partnerships are stated at their underlying equity value. As a limited liability partner, we contribute capital and share an interest in the limited partnership profits, losses or tax credits.

Investment income consists primarily of interest and dividends. Interest is recognized on an accrual basis and dividends are recognized on the date of record.

We adjust the cost of fixed maturities for amortization of purchase premiums and accretion of purchase discounts from the time of purchase of the security to its maturity. This amortization and accretion is included in Net Investment Income in our Consolidated Statements of Income.

For mortgage-backed securities, we recognize income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. Quarterly, we compare our prepayments received to our scheduled prepayments to recalculate the effective yield. The effective yield reflects actual payments-to-date plus anticipated future payments. We include any resulting difference from this comparison as an adjustment to Net Investment Income in our Consolidated Statements of Income and recognize future income using the revised effective yield.

When we consider the collectibility of interest income for fixed maturities to be doubtful, we reverse any accrued but uncollectible interest income against Net Investment Income in the current period. We then place the securities on non-accrual status and do not restore them to accrual status until all the delinquent interest and principal is paid.

We determine net realized investment gains by identifying the cost and calculating the gain or loss of each specific security sold. We regularly review the fair value of our investments. Invested assets are subject to various risks, such as interest rate, market and credit risks. Periodic changes in fair values of our investments are reported as a component of AOCI on our Consolidated Balance Sheets and are not reflected in the operating results of any period until we sell the security or when declines in fair value are determined to be other-than-temporary. If the fair value of any of our investments falls below our cost or amortized cost basis in the investment, we analyze the decrease to determine whether it is an other-than-temporary decline in fair value.

To make this determination for each security, we consider:

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

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

We use a variety of sources and methods to determine the fair value of our investments. Where quoted market prices or other public market pricing information is not available, as in the case of securities that are not publicly traded, we use other valuation techniques. These valuation techniques include using independent pricing sources, identifying comparable securities with quoted market prices, evaluating discounted cash flows and using internally prepared valuations based on certain modeling and pricing methods. Our investment portfolio at December 31, 2007 included $71.3 of fixed maturities and $78.5 of marketable equity securities that were not publicly traded. Our investment portfolio at December 31, 2006 included $114.8 of fixed maturities and $29.4 of marketable equity securities that were not publicly traded.

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SECURITIES LENDING

We lend certain securities from our investment portfolio to other institutions for short periods of time. We receive initial collateral at 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 values of the loaned securities are monitored on a daily basis. Additional collateral is added or refunded as the market values of the loaned securities fluctuate, maintaining collateral values of at least 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 the changes to these balances in our Consolidated Statements of Cash Flows as investing activities and financing activities.

We had a market value of $233.3 of fixed maturities and $90.8 of marketable equity securities loaned at December 31, 2007. We had a market value of $578.1 of fixed maturities and $159.9 of marketable equity securities loaned at December 31, 2006.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents are short-term highly liquid investments that have original maturities of three months or less at the time we purchase them. We report cash and cash equivalents at our cost, which approximates fair value.

DERIVATIVE FINANCIAL INSTRUMENTS

Derivative financial instruments are reported at fair value in our Consolidated Balance Sheets. We recognize the change in fair value of a derivative depending on our intended use of the derivative and whether it is effective as part of a hedging transaction. We apply hedge accounting treatment under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” for derivatives that are highly effective and that we designate as hedges.

We formally document all relationships between the hedging instruments and hedged items, as well as our risk-management objectives and strategies for undertaking various hedge transactions. We also assess, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting the changes in fair values of hedged items. When we determine that a derivative is not highly effective as a hedge, we discontinue hedge accounting on a prospective basis.

When the change in fair value of the derivative does not perfectly offset the changes in fair value of the hedged transaction, we recognize the ineffective portion in Net Realized Investment Gains in the Consolidated Statements of Income. For derivatives that do not qualify for hedge accounting treatment under SFAS 133, we report the changes in fair value of these derivatives in Net Realized Investment Gains in our Consolidated Statements of Income. During 2007, 2006 and 2005, we recognized no amounts in earnings due to hedge ineffectiveness.

Our investments in mortgage-backed securities principally include collateralized mortgage obligations and pass-through and commercial loan-backed mortgage obligations. Such instruments are exempt from the derivative disclosure and accounting requirements under SFAS 133 at December 31, 2006. Effective January 1, 2007, we adopted SFAS 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140,” which applies to these types of instruments if acquired, issued, or are 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.

INCOME TAXES

We file a consolidated U.S. income tax return including all of our subsidiaries. We account for income taxes using the liability method. The provision for income taxes has two components, amounts currently payable or receivable and deferred amounts. We recognize deferred income taxes for temporary differences – the differences between the GAAP financial statement carrying amounts of assets and liabilities and those we are required to use in the tax return. Such temporary differences relate primarily to unrealized gains and losses on investments and differences in the recognition of deferred policy acquisition costs, loss and loss adjustment expense reserves, goodwill and unearned premiums. We report the tax effect of these temporary differences as deferred income tax assets and liabilities on our Consolidated Balance Sheets, measured using enacted laws and income tax rates that are currently in effect.

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At December 31, 2007, we had $524.6 of gross deferred income tax assets compared with $568.1 in 2006. Gross deferred income tax assets are composed of temporary differences created as a result of amounts deductible for taxes in future periods. Although realization of deferred income tax assets is not assured, we believe they will be realized through future earnings, including but not limited to the generation of future operating income, reversal of existing temporary differences and available tax planning strategies. Accordingly, we have not recorded a valuation allowance for these assets.

We adopted the provisions of FASB Interpretation No.(FIN) 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. Prior to 2007, we determined our tax contingencies in accordance with SFAS 5, “Accounting for Contingencies.”

REINSURANCE

The reinsurance we buy limits our losses on certain individual risks and reduces our exposure to catastrophic events. We purchase reinsurance from several reinsurers and are not dependent upon any single reinsurer. Reinsurance does not eliminate our liability to our policyholders. We remain primarily liable to policyholders for the risks we insure in the event reinsurers do not meet their obligations.

We assess our reinsurance contracts to ensure that underwriting risk – the reasonable possibility of significant loss – and timing risk – the reasonable possibility of a significant variation in the timing of cash flows – are transferred to the reinsurer.

Our income recognition for reinsurance contracts follows that of the underlying policies. We estimate reinsurance recoverables in a manner consistent with the claim liability associated with the reinsured policy.

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

DEFERRED POLICY ACQUISITION COSTS

When we issue an insurance policy, we defer certain directly related costs, including commissions, premium taxes, underwriting and other costs. These Deferred Policy Acquisition Costs (DAC) are amortized into expenses over the period the related premiums are earned in our Consolidated Statements of Income. We report DAC net of acquisition costs that we cede to our reinsurers. Every quarter, we evaluate DAC for recoverability by comparing our unearned premiums to our estimated total expected claim costs and related expenses, offset by anticipated investment income. We perform this assessment of recoverability for all Safeco Personal Insurance (SPI) lines, all Safeco Business Insurance (SBI) lines and Surety products – this is consistent with our approach to issuing and servicing the underlying policies. We do not record DAC for our P&C Other business. We would reduce the DAC asset if unearned premiums were less than expected claims and expenses after considering investment income. We report any adjustments in Amortization of DAC in our Consolidated Statements of Income. We made no such adjustments in 2007, 2006 or 2005.

PROPERTY AND EQUIPMENT FOR COMPANY USE

We report property and equipment used in operations, including certain costs incurred to develop or purchase computer software for internal use, on our Consolidated Balance Sheets at cost less accumulated depreciation.

We record depreciation using the straight-line method on buildings for company use, equipment and capitalized software at various rates based on our estimates of their useful lives, which generally range from 3 to 25 years. Depreciation expense was $45.5 for 2007, $40.1 for 2006 and $48.7 for 2005. We record amortization on leasehold improvements over the terms of the leases which range from 1 to 15 years.

We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. We recognize an impairment loss when the fair value of an asset is less than the carrying value of the asset and we reduce the carrying amount of the asset to its estimated fair value based on quoted market prices or other valuation techniques.

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LEASES

We review our leases for capital or operating classification at their inception under the guidance of SFAS 13, “Accounting for Leases,” as amended. Our operating leases include cost escalation clauses and require payment of real estate taxes, insurance and common area maintenance, in addition to rent, with staggered lease terms that run to 2018 with options to renew to 2039. We recognize our rent expense on a straight-line basis from the date we take possession of the property to the end of the lease term, with differences between rent expense and rent paid recorded in other liabilities on our Consolidated Balance Sheets.

LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

Loss and Loss Adjustment Expense (LAE) Reserves reflect our estimates of ultimate amounts for losses from claims and related settlement expenses that we have not yet paid to settle both reported and unreported claims.

We record two categories of loss and LAE reserves – case-basis reserves and incurred but not reported (IBNR) reserves.

We estimate case-basis reserves as the amounts we will have to pay for losses that have already been reported to us but are not yet fully paid. These amounts include related legal expenses and other costs associated with resolving and settling a particular claim.

We establish IBNR reserves at the end of each reporting period to estimate the amount we will have to pay for:

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

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

• Losses that have been paid and closed, but may reopen and require future payment

• Expenses related to resolving and settling these losses

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

We use actuarial methods combined with judgment to estimate IBNR reserves. Estimating loss and LAE reserves is a complex process because the ultimate losses are uncertain. Some claims will be paid out over a number of years, and there may be a significant lag between the time a loss occurs and the time it is reported to us. We make significant judgments and assumptions about many internal variables and external factors. Examples of internal variables include changes in our claims handling practices and changes in our business mix. Examples of external factors include trends in loss costs, economic inflation, judicial changes, legislative changes and regulatory changes. Because estimating reserves requires us to use assumptions and judgments, our actual future losses may differ from our estimates.

Estimating our loss and LAE reserves is an ongoing process. Our loss and LAE reserves represent our best estimate of ultimate future payments associated with losses and related expenses net of salvage (the amount we recover from property that becomes ours after we pay for a total loss) and subrogation (our right to recover payments from third parties), giving consideration to the uncertainties inherent to the estimates. We record any adjustments to these reserves in the periods in which we change the estimates to Losses and Loss Adjustment Expenses in our Consolidated Statements of Income.

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. Rule 10b5-1 trading plans allow 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. When we repurchase shares through ASR programs we are required to 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.

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In December 2007, we received approval from our Board of Directors (the Board) to repurchase up to $500.0 of our outstanding common stock in open market purchases. As of December 31, 2007, we purchased no shares under this plan.

We summarize our share activity for 2005, 2006 and 2007 below:

PROGRAM	NUMBER OF SHARES PURCHASED (ISSUED)		AVERAGE PRICE PAID PER SHARE (*)		TOTAL COST
2005 Repurchases
2005 Accelerated Share Repurchases	2,752,300		$	54.50	$	145.9
10b5-1 Plans	1,756,278			53.06		93.3
Other	10,662			55.17		0.6
2004 Accelerated Share Repurchase Settlement	—			—		16.1
Total 2005 Repurchases	4,519,240		$	56.62	$	255.9
2006 Repurchases
2006 Accelerated Share Repurchases	10,212,766		$	58.75	$	603.1
10b5-1 Plans	9,966,970			53.80		536.4
Open Market Purchases	477,800			53.69		25.7
Total 2006 Repurchases	20,657,536		$	56.24	$	1,165.2
2007 Repurchases
10b5-1 Plans	13,551,929		$	59.30	$	803.9
Open Market Purchases	3,409,800			57.50		196.1
Repurchases under 10b5-1 Plans and Open Market Purchases	16,961,729			58.94		1,000.0
2006 Accelerated Share Repurchase Settlement	(866,685	)		—		—
Total 2007 Repurchases	16,095,044		$	58.94	$	1,000.0

* Transaction costs and price adjustments are excluded from the average price per share amount.

SHARE–BASED COMPENSATION EXPENSE

Effective January 1, 2003, we adopted the fair value method of accounting for stock-based compensation awards as defined in SFAS 123, “Accounting for Stock-Based Compensation,” using the prospective basis transition method. On January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R) using the modified prospective transition method. Under that transition method, we recognized compensation cost upon adoption for all share-based payments granted prior to January 1, 2003, but not vested as of January 1, 2006, in accordance with the original provisions of SFAS 123. We also recognized compensation cost in 2006 for all share-based payments granted after January 1, 2006, based on the grant date fair value. Effective January 1, 2006, we began recognizing compensation cost for prospective awards using the straight-line method.

As a result of adopting SFAS 123(R), our 2006 income before income taxes was $1.3 higher, our 2006 net income was $0.8 higher and our basic and diluted earnings per share both were $0.01 higher than if we had continued to recognize compensation cost under SFAS 123. Our adoption of SFAS 123(R) did not have a material impact on our Consolidated Balance Sheets or Consolidated Statements of Cash Flows.

Prior to the adoption of SFAS 123(R), we presented all tax benefits of deductions resulting from the exercise of stock options as cash flows from operating activities in our Consolidated Statement of Cash Flows. Effective January 1, 2006, the cash flows resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) are presented as cash flows from financing activities. We did not restate results for prior periods.

Effective January 1, 2006, with the adoption of SFAS 123(R), we classified our outstanding restricted stock rights and performance measure restricted stock rights as liability awards, as the holder had the option to settle the awards in cash. On December 28, 2006, we modified our RSRs to require settlement in shares unless settled as a result of a change in control. As a result, we classified our restricted stock rights in the temporary equity section of our Consolidated Balance Sheets as of that date.

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VARIABLE INTEREST ENTITIES

An entity is considered a Variable Interest Entity (VIE) if it has:

• Equity investment at risk that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties

• Equity investors who cannot make significant decisions about the entity’s operations, or do not absorb the expected losses or receive the expected returns of the entity

FASB Interpretation (FIN) 46(R), “Consolidation of Variable Interest Entities” requires VIEs to be consolidated by their primary beneficiary, which is the party that has a majority of the expected losses or a majority of the expected residual returns of the VIE, or both. We have identified certain interests in VIEs as defined by FIN 46(R). However, we do not meet the FIN 46(R) definition of “primary beneficiary” for any of these entities and therefore have not consolidated them. FIN 46(R) requires disclosure of the nature of any significant interests in a VIE, a description of the VIE’s activities and the maximum exposure to potential losses due to our involvement.

In June 1997, Safeco Corporation formed Safeco Capital Trust (the Trust) for the sole purpose of issuing $850.0 in Trust Preferred Securities (Capital Securities) to the public. The Trust used the proceeds from the sale of the Capital Securities to purchase $876.3 of Junior Subordinated Debentures (Debentures) from Safeco Corporation. The balance of these Debentures was $348.6 at December 31, 2006. The Debentures were the sole assets of the Trust, and payments under the Debentures were the sole receipts of the Trust. Upon redemption of these Debentures in July 2007, the Trust was liquidated. We have no other significant interest in a VIE.

NEW ACCOUNTING STANDARDS

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

SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an Amendment to FASB Statement Number 87, 88, 106 and 132(R)” – in September 2006, the FASB issued SFAS 158, which requires us to recognize the over-funded or under-funded status of defined benefit and other postretirement plans as an asset or liability on our consolidated balance sheet. Actuarial gains and losses and prior service costs and credits that have not yet been recognized as a component of net periodic benefit cost as of the statement adoption date are recorded as a component of accumulated other comprehensive income (AOCI). We adopted SFAS 158 as of December 31, 2006 and recorded an adjustment to AOCI of $10.4.

Financial Interpretation Number (FIN) 48, “Accounting for Uncertainty in Income Taxes” – In June 2006, the FASB issued an interpretation of Statement of Financial Accounting Standards (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 upon adoption on our Consolidated Balance Sheet and Statement of Shareholders’ Equity was $0.7.

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 adopted this statement as of January 1, 2008, and the impact on our financial condition or results of operations was not material.

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 in earnings. The

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statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We adopted SFAS 159 on January 1, 2008. The adoption of the statement did not impact our financial condition or results of operations as we did not elect the fair value option for any of our instruments.

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 September 15, 2007. We adopted Issue No. 06-11 as of January 1, 2008, and the impact on our financial condition and results of operations was not material.

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NOTE 2: INVESTMENTS

FIXED MATURITIES AND MARKETABLE EQUITY SECURITIES

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

DECEMBER 31, 2007	COST OR AMORTIZED COST		GROSS UNREALIZED GAINS		GROSS UNREALIZED LOSSES			NET UNREALIZED GAINS		FAIR VALUE
Fixed Maturities:
U.S. Government and Agencies	$	290.2	$	20.3	$	(0.2	)	$	20.1	$	310.3
States and Political Subdivisions		4,770.3		135.3		(52.2	)		83.1		4,853.4
Foreign Governments		23.9		6.3		—			6.3		30.2
Corporate Securities:
Banks		150.4		4.9		(0.2	)		4.7		155.1
Utilities		236.7		6.3		(0.6	)		5.7		242.4
Diversified Financial Services		379.0		6.9		(2.2	)		4.7		383.7
Other		762.6		18.4		(4.2	)		14.2		776.8
Total Corporate Securities		1,528.7		36.5		(7.2	)		29.3		1,558.0
Mortgage-Backed Securities		1,002.1		16.7		(6.8	)		9.9		1,012.0
Total Fixed Maturities		7,615.2		215.1		(66.4	)		148.7		7,763.9
Marketable Equity Securities		993.2		423.5		(14.1	)		409.4		1,402.6
Total	$	8,608.4	$	638.6	$	(80.5	)	$	558.1	$	9,166.5

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

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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 December 31, 2007 and 2006:

DECEMBER 31, 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	$	13.4	$	(0.1	)	$	2.2	$	(0.1	)	$	15.6	$	(0.2	)
States and Political Subdivisions		1,768.5		(50.7	)		62.6		(1.5	)		1,831.1		(52.2	)
Foreign Governments		—		—			1.3		—			1.3		—
Corporate Securities		304.0		(5.0	)		153.0		(2.2	)		457.0		(7.2	)
Mortgage-Backed Securities		176.3		(4.5	)		265.7		(2.3	)		442.0		(6.8	)
Total Fixed Maturities		2,262.2		(60.3	)		484.8		(6.1	)		2,747.0		(66.4	)
Marketable Equity Securities		194.1		(14.1	)		—		—			194.1		(14.1	)
Total	$	2,456.3	$	(74.4	)	$	484.8	$	(6.1	)	$	2,941.1	$	(80.5	)

DECEMBER 31, 2006	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	$	102.0	$	(1.1	)	$	79.1	$	(1.5	)	$	181.1	$	(2.6	)
States and Political Subdivisions		322.1		(2.4	)		176.8		(2.3	)		498.9		(4.7	)
Foreign Governments		—		—			6.1		(0.2	)		6.1		(0.2	)
Corporate Securities		374.4		(2.7	)		1,182.9		(17.8	)		1,557.3		(20.5	)
Mortgage-Backed Securities		93.0		(0.8	)		660.2		(10.5	)		753.2		(11.3	)
Total Fixed Maturities		891.5		(7.0	)		2,105.1		(32.3	)		2,996.6		(39.3	)
Marketable Equity Securities		96.0		(3.0	)		—		—			96.0		(3.0	)
Total	$	987.5	$	(10.0	)	$	2,105.1	$	(32.3	)	$	3,092.6	$	(42.3	)

We reviewed all our investments with unrealized losses at the end of 2007 and 2006. 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

FIXED MATURITIES BY MATURITY DATE

The following table summarizes the cost or amortized cost and fair value of our fixed maturities at December 31, 2007, by contractual years-to-maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties:

MATURITY	COST OR AMORTIZED COST		FAIR VALUE
One Year or Less	$	244.5	$	247.4
Over One Year through Five Years		1,201.6		1,228.1
Over Five Years through Ten Years		992.7		1,023.9
Over Ten Years		4,174.3		4,252.5
Mortgage-Backed Securities		1,002.1		1,012.0
Total Fixed Maturities	$	7,615.2	$	7,763.9

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SECURITIES ON DEPOSIT

We had securities on deposit with state regulatory authorities with an amortized cost of $432.6 at December 31, 2007 and $427.4 at December 31, 2006, and a fair value of $455.4 at December 31, 2007 and $456.9 at December 31, 2006.

NET INVESTMENT INCOME

The following table summarizes our net investment income:

YEAR ENDED DECEMBER 31,	2007			2006			2005
Interest on Fixed Maturities:
Taxable	$	219.4		$	286.2		$	332.5
Non-Taxable		217.4			168.7			115.4
Dividends:
Marketable Equity Securities		29.3			30.5			30.1
Redeemable Preferred Stock		6.2			4.1			3.2
Other		23.7			26.5			10.6
Total Investment Income		496.0			516.0			491.8
Investment Expenses		(9.3	)		(6.9	)		(6.7	)
Net Investment Income	$	486.7		$	509.1		$	485.1

The decrease in net investment income is a result of the shift throughout 2006 to tax-exempt municipal bonds, and an overall lower invested asset base in 2007 due primarily to the sale of securities to fund our debt maturity and redemption, share repurchases and the special dividend paid by our insurance subsidiaries to Safeco Corporation that has not been reinvested.

NET REALIZED INVESTMENT GAINS

The following table summarizes our net realized investment gains:

YEAR ENDED DECEMBER 31,	2007			2006			2005
Net Realized Investment Gains (Losses) from:
Fixed Maturities	$	(24.2	)	$	(50.9	)	$	(11.4	)
Marketable Equity Securities		153.9			49.9			73.4
Other		16.4			4.8			(1.6	)
Net Realized Investment Gains	$	146.1		$	3.8		$	60.4

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

YEAR ENDED DECEMBER 31, 2007	FIXED MATURITIES			MARKETABLE EQUITY SECURITIES			OTHER		TOTAL
Proceeds from Sales	$	1,945.2		$	679.1		$	22.8	$	2,647.1
Gross Realized Investment Gains		14.1			199.6			—		213.7
Gross Realized Investment Losses		(19.3	)		(13.4	)		—		(32.7	)
Net Realized Investment Gains from Sales		(5.2	)		186.2			—		181.0
Impairments		(23.7	)		(32.3	)		—		(56.0	)
Other, Including Gains on Calls and Redemptions		4.7			—			16.4		21.1
Net Realized Investment Gains (Losses)	$	(24.2	)	$	153.9		$	16.4	$	146.1

98

YEAR ENDED DECEMBER 31, 2006	FIXED MATURITIES			MARKETABLE EQUITY SECURITIES			OTHER			TOTAL
Proceeds from Sales	$	1,911.0		$	332.5		$	20.2	(a)	$	2,263.7
Gross Realized Investment Gains		17.2			73.8			—			91.0
Gross Realized Investment Losses		(11.5	)		(9.2	)		—			(20.7	)
Net Realized Investment Gains from Sales		5.7			64.6			—			70.3
Impairments		(64.5	)		(14.7	)		—			(79.2	)
Other, Including Gains on Calls and Redemptions		7.9			—			4.8			12.7
Net Realized Investment Gains (Losses)	$	(50.9	)	$	49.9		$	4.8		$	3.8

(a) Includes proceeds related to the sale of SFIS. See Note 16.

YEAR ENDED DECEMBER 31, 2005	FIXED MATURITIES			MARKETABLE EQUITY SECURITIES			OTHER			TOTAL
Proceeds from Sales	$	984.1		$	287.7		$	0.7		$	1,272.5
Gross Realized Investment Gains		6.4			83.5			0.3			90.2
Gross Realized Investment Losses		(13.0	)		(7.3	)		—			(20.3	)
Net Realized Investment Gains from Sales		(6.6	)		76.2			0.3			69.9
Impairments		(12.7	)		(2.8	)		—			(15.5	)
Other, Including Gains on Calls and Redemptions		7.9			—			(1.9	)		6.0
Net Realized Investment Gains (Losses)	$	(11.4	)	$	73.4		$	(1.6	)	$	60.4

NOTE 3: DERIVATIVE FINANCIAL INSTRUMENTS

Derivatives are instruments whose values are derived from underlying instruments, indices or rates, have notional amounts and can be net settled. This may include derivatives that are “embedded” in other instruments or in certain existing assets or liabilities. The derivative financial instruments we have are interest rate swaps used as a means of hedging exposure to interest rate risk on a portion of our debt.

Interest rate risk is the risk of incurring economic losses due to changes in the level of interest rates. We selectively use interest rate swaps as hedges to change the characteristics of certain liabilities. With interest rate swap agreements, we exchange with a counterparty, at specified intervals, interest rate payments of differing character (for example, fixed-rate payments exchanged for variable-rate payments), based on an underlying principal balance (notional amount). No cash is exchanged at the outset of the contract, and no principal payments are made by either party. We report the net interest accrued and the net interest payments made at each interest payment due date in Interest Expense in the Consolidated Statements of Income.

FAIR VALUE HEDGES

We use interest rate swaps to hedge the change in fair value of certain of the fixed-rate debt we have outstanding. At December 31, 2007, we had $204.0 of notional amounts relating to such hedges compared with $401.4 at December 31, 2006. The fair value, which is equal to the carrying value, of these swaps totaled $9.4 at December 31, 2007 and $(0.7) at December 31, 2006. These derivatives have been designated as fair value hedges and, because they have been determined to be highly effective, we report changes in their fair value and the fair value changes of the related portions of the debt that they hedge on a net basis in Net Realized Investment Gains in our Consolidated Statements of Income.

Differences between the changes in fair value of these derivatives and the hedged items represent hedge ineffectiveness. In 2007, 2006 and 2005, no amounts were recognized in earnings due to hedge ineffectiveness.

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NOTE 4: FAIR VALUE OF FINANCIAL INSTRUMENTS

FIXED MATURITIES, MARKETABLE EQUITY SECURITIES, AND OTHER INVESTED ASSETS

We report fixed maturities and marketable equity securities at fair value. We report other invested assets at cost, which approximates fair value. See Notes 1 and 2 for further discussion of our valuation methods and holdings.

CASH AND CASH EQUIVALENTS

For cash and cash equivalents, the value we report on our Consolidated Balance Sheets is a reasonable estimate of fair value.

DEBT

The fair values of our fixed-rated debt are estimated based on prices obtained from brokers/dealers or independent pricing sources who market similar debt instruments.

DERIVATIVE FINANCIAL INSTRUMENTS

The fair values of the derivative financial instruments represent the estimated amounts we would expect to receive or pay upon termination of the contracts as of the reporting date. See Note 3 for further discussion of our derivative holdings.

Non-financial instruments such as property and equipment, deferred policy acquisition costs, deferred income taxes and loss and LAE reserves are excluded from the fair value disclosures.

The following table summarizes the carrying or reported values and corresponding fair values of financial instruments:

	2007				2006
DECEMBER 31,	CARRYING AMOUNT		FAIR VALUE		CARRYING AMOUNT		FAIR VALUE
FINANCIAL ASSETS
Fixed Maturities	$	7,763.9	$	7,763.9	$	9,119.0	$	9,119.0
Marketable Equity Securities		1,402.6		1,402.6		1,529.7		1,529.7
Other Invested Assets		48.6		48.6		14.3		14.3
Cash and Cash Equivalents		532.0		532.0		287.6		287.6
Interest Rate Swaps		9.4		9.4		0.6		0.6
FINANCIAL LIABILITIES
6.875% Notes due 2007		—		—		197.3		199.0
4.200% Notes Due 2008		200.0		199.9		200.0		197.3
4.875% Notes Due 2010		300.0		300.1		300.0		296.7
7.250% Notes Due 2012		204.0		208.4		204.1		220.6
8.072% Debentures Due 2037		—		—		348.6		364.9
Interest Rate Swaps	$	—	$	—	$	1.3	$	1.3

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NOTE 5: LOSS AND LAE RESERVES

The following table analyzes the changes in our loss and LAE reserves for 2007, 2006 and 2005. We report changes in estimated reserves in the Consolidated Statements of Income in the year we make the change:

YEAR ENDED DECEMBER 31,	2007			2006			2005
Loss and LAE Reserves at Beginning of Year	$	5,171.4		$	5,358.2		$	5,209.3
Less Reinsurance Recoverables on Unpaid Losses, Net of Allowance		415.0			420.1			323.6
Net Balance at Beginning of Year		4,756.4			4,938.1			4,885.7
Incurred Loss and LAE for Claims Occurring During:
Current Year		3,644.1			3,426.0			3,680.9
Prior Years		(123.6	)		(146.2	)		(45.9	)
Total Incurred Loss and LAE		3,520.5			3,279.8			3,635.0
Loss and LAE Payments for Claims Occurring During:
Current Year		1,910.1			1,886.6			1,912.1
Prior Years		1,594.9			1,574.9			1,619.5
Total Loss and LAE Payments		3,505.0			3,461.5			3,531.6
Sale of London Operations		—			—			(51.0	)
Net Balance at End of Year		4,771.9			4,756.4			4,938.1
Plus Reinsurance Recoverables on Unpaid Losses, Net of Allowance		413.1			415.0			420.1
Loss and LAE Reserves at End of Year	$	5,185.0		$	5,171.4		$	5,358.2

2007

In 2007, we reduced our estimates for prior years’ loss and LAE reserves by $123.6. This total decrease included:

• $43.9 reduction in Surety reserves due to lower-than-expected number of claims

• $42.9 reduction in workers’ compensation reserves due to lower-than-expected severity

• $37.1 reduction in construction defect reserves due to lower-than-expected number of claims

• $17.9 reduction in personal auto reserves excluding catastrophes due to lower-than-expected severity

• $13.3 reduction in commercial umbrella reserves due to lower-than-expected number of claims

• $11.4 reduction in commercial multi-peril reserves excluding catastrophe and other than asbestos, environmental and construction defects due to lower-than-expected number of claims

• $10.2 reduction in personal property reserves due to lower-than-expected severity, including a $3.5 reduction for non-voluntary assessments, and a $3.0 reduction in catastrophe losses reflecting decreases in severity estimates primarily for the 2005 hurricanes

• $35.8 increase in asbestos reserves primarily due to higher liabilities from assumed reinsurance

• $26.6 increase in commercial auto reserves related to higher-than-expected severity

• $9.3 reduction in a number of lines due to emerging claim trends and related loss data, including unallocated LAE

2006

In 2006, we reduced our estimates for prior years’ loss and LAE reserves by $146.2. This total decrease included:

• $98.2 reduction in personal auto reserves, reflecting decreases in severity estimates primarily for prior accident years 2004 and 2005 in our liability lines

• $39.5 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

• $26.6 reduction in commercial umbrella reserves due to lower-than-expected number of claims

• $25.9 increase in asbestos reserves related to large loss activity

• $23.2 increase in our general liability reserves in our run-off lines primarily due to religious institution allegations

• $16.1 increase in commercial auto reserves, reflecting increases in severity estimates for prior accident years in our liability lines

• $15.7 reduction in personal property reserves, due to lower-than-expected severity

• $12.9 reduction in workers’ compensation reserves due to reforms in California and Texas

101

• $12.5 reduction in personal specialty lines reflecting decreases in personal umbrella severity estimates for prior accident years

• $12.2 increase in our assumed reinsurance run-off lines driven by large loss activity

• $11.2 reduction in SFIS prior accident year reserves driven by a reduction of hurricane assessments

• $7.0 reduction in a number of lines due to emerging claim trends and related loss data, including unallocated LAE

2005

In 2005, we reduced our estimates for prior years’ loss and LAE reserves by $45.9. This total decrease included:

• $77.3 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

• $36.7 reduction in personal auto reserves, reflecting decreases in severity estimates for prior accident years in our liability lines

• $26.3 reduction in construction defects reserves, reflecting claims frequency improvement in our run-off lines

• $11.0 reduction in personal property reserves, reflecting improvement in severity relative to our original estimates

• $30.5 increase in our Surety reserves related to large loss activity in our contract lines

• $47.0 increase in workers’ compensation reserves to reflect increased provisions for long-term medical claim inflation and associated claims adjustment expenses

• $35.8 increase in our asbestos and environmental reserves to reflect increases in defense and containment costs

• $7.9 reduction in a number of lines due to emerging claim trends and related loss data, including unallocated LAE

NOTE 6: REINSURANCE

Our reinsurance recoverables are composed of the following amounts:

YEAR ENDED DECEMBER 31,	2007			2006
Reinsurance Recoverables on:
Unpaid Loss and LAE Reserves	$	449.0		$	427.9
Paid Losses and LAE		48.8			14.9
Allowance for Uncollectible Reinsurance		(35.9	)		(12.9	)
Total	$	461.9		$	429.9

The increase of $33.9 in the Reinsurance Recoverables on Paid Losses and LAE and $23.0 in the Allowance for Uncollectible Reinsurance were both primarily attributable to an increase in ceded historical casualty business in run-off in 2007 when compared with 2006.

Of our total reinsurance recoverables balance at December 31, 2007, 25.6% was with mandatory reinsurance pools. Of the remaining amounts, 88.6% were due from reinsurers rated A– or higher by A.M. Best, including 52.0% with the following four reinsurers: Employers Reinsurance Corporation, Munich Re America, Inc., Swiss Reinsurance America Corporation and General Reinsurance Corporation.

We evaluate the financial condition of our reinsurers to minimize our exposure to losses from reinsurer insolvencies. To our knowledge, none of our major reinsurers is currently experiencing material financial difficulties. Our business is not substantially dependent upon any single reinsurer.

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

YEAR ENDED DECEMBER 31,	2007			2006			2005
Direct	$	5,831.4		$	5,700.6		$	5,771.5
Ceded		(372.9	)		(229.5	)		(131.3	)
Assumed		117.5			137.2			165.2
Net Earned Premiums	$	5,576.0		$	5,608.3		$	5,805.4
Assumed to Net		2.1	%		2.4	%		2.8	%

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

The effects of reinsurance on our incurred losses and LAE were as follows:

YEAR ENDED DECEMBER 31,	2007			2006			2005
Direct	$	3,502.7		$	3,203.5		$	3,576.4
Ceded		(116.8	)		(43.6	)		(134.7	)
Assumed		134.6			119.9			193.3
Net Loss and LAE Incurred	$	3,520.5		$	3,279.8		$	3,635.0

In connection with the sale of Safeco Financial Institution Solutions (SFIS) in 2006, we entered into a reinsurance agreement under which we cede 100% of our lender-placed property insurance business. SFIS generated $239.8 of ceded premiums in 2007 and $109.2 of ceded premiums in 2006. SFIS generated $50.6 of ceded losses in 2007 and $15.3 of ceded losses in 2006.

We show unearned premiums before the effects of reinsurance. We report the reinsurance amounts related to the unearned premium liability in Other Assets on our Consolidated Balance Sheets. These amounts totaled $38.9 at December 31, 2007 and $37.1 at December 31, 2006.

NOTE 7: INCOME TAXES

Our provision for income taxes differs from the amount that would be computed by applying the U.S. federal income tax rate of 35% to Income before Income Taxes, as follows:

	2007					2006					2005
YEAR ENDED DECEMBER 31,	Amount			% of Pretax Income		Amount			% of Pretax Income		Amount			% of Pretax Income
Income before Income Taxes	$	952.1		100.0	%	$	1,239.5		100.0	%	$	985.7		100.0	%
Computed “Expected” Tax Expense		333.2		35.0			433.8		35.0			345.0		35.0
Tax-Exempt Municipal Bond Income		(74.6	)	(7.8	)		(57.8	)	(4.7	)		(39.4	)	(4.0	)
Dividends Received Deduction		(8.4	)	(0.9	)		(8.4	)	(0.7	)		(8.5	)	(0.9	)
Proration		12.3		1.3			9.9		0.8			7.0		0.7
Stock Contributions to Safeco Insurance Foundation		(20.3	)	(2.1	)		(10.2	)	(0.8	)		—		—
Other		2.1		0.2			(7.8	)	(0.6	)		(9.5	)	(0.9	)
Provision for Income Taxes		244.3		25.7	%		359.5		29.0	%		294.6		29.9	%
Current Provision for Income Taxes		195.8					289.5					204.2
Deferred Provision for Income Taxes		48.5					70.0					90.4
Provision for Income Taxes	$	244.3				$	359.5				$	294.6

103

The major components of our Net Deferred Income Tax Assets at December 31, 2007 and 2006 were as follows:

DECEMBER 31,	2007		2006
Deferred Tax Assets
Discounting of Loss and LAE Reserves for Tax Purposes	$	160.8	$	186.2
Unearned Premiums		160.0		152.5
Goodwill		98.2		118.8
Postretirement Benefits		29.2		32.9
Investment Impairments		18.3		13.3
Other		58.1		64.4
Total Deferred Income Tax Assets		524.6		568.1
Deferred Tax Liabilities
Unrealized Gains on Investments		195.4		254.9
Unrecognized Pension Costs		2.4		5.6
Accumulated Other Comprehensive Income		197.8		260.5
Deferred Policy Acquisition Costs		145.5		134.4
Other		23.4		29.5
Total Deferred Income Tax Liabilities		366.7		424.4
Net Deferred Income Tax Assets	$	157.9	$	143.7

At the end of 2007, we had $3.8 of gross unrecognized tax benefits, of which $3.4 would affect our effective tax rate if recognized. The difference between the gross unrecognized tax benefits and the amount that would affect our effective tax rate is attributable to the federal tax benefit for state income taxes.

CHANGE IN UNCERTAIN TAX POSITIONS
Balance at January 1, 2007	$	5.0
Reductions for tax positions of prior years		(0.7	)
Lapse of the applicable statute of limitations		(0.5	)
Balance at December 31, 2007	$	3.8

It is expected that the amount of unrecognized tax benefits will change in 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 and penalties in the Provision for Income Taxes and penalties in Other Underwriting and Operating Expenses in our Consolidated Statements of Income. We are currently under routine audit by the Internal Revenue Service (IRS) for calendar years 2004 and 2005. Calendar years 2006 and 2007 remain subject to IRS examination and the IRS examinations for calendar years 2003 and prior have been completed. We had $7.3 accrued for interest and no liability for penalties as of December 31, 2007.

NOTE 8: DEBT

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

	2007						2006
DECEMBER 31,	TOTAL		CURRENT		LONG-TERM		TOTAL		CURRENT		LONG-TERM
6.875% Notes Due 2007	$	—	$	—	$	—	$	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		204.0		—		204.0		204.1		—		204.1
8.072% Debentures Due 2037		—		—		—		348.6		—		348.6
Total Debt	$	704.0	$	200.0	$	504.0	$	1,250.0	$	197.3	$	1,052.7

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At December 31, 2007, the aggregate annual principal amounts contractually payable under these obligations in each of the next five years and thereafter were as follows:

YEAR PAYABLE	AMOUNT DUE
2008	$	200.0
2009		—
2010		300.0
2011		—
2012		204.0
2013 and Thereafter		—
Total Debt	$	704.0

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 obligation 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 $335.3. The Debentures were redeemed at a price of 104% of principal. We reported a pretax loss on our debt repurchase of $16.6 ($10.8 after tax), including the write-off of deferred debt costs in our Consolidated Statements of Income. We also retired our $26.3 Capital Trust equity investment, which was also reported as debt on our Consolidated Balance Sheets. In addition, we paid $197.3 for our 6.875% senior notes which matured in July 2007.

In 2006, we repurchased $54.3 in principal amount of 8.072% Debentures for $58.8 and $2.7 in principal amount of 6.875% senior notes for $2.7, and at the same time terminated $2.7 notional amount of our corresponding interest rate swap. Including transaction costs, we reported a loss on debt repurchases of $4.5 pretax ($2.9 after tax) in our Consolidated Statements of Income.

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

In January 2003, we issued $200.0 of senior notes with a coupon of 4.200% that matured in and were paid in full in February 2008 and $300.0 of senior notes with a coupon of 4.875% that mature in 2010. The notes are unsecured and rank equally with all other unsecured senior indebtedness of Safeco Corporation.

In August 2002, we issued $375.0 of senior notes at an interest rate of 7.25%. The notes mature in 2012. At the same time, we entered into a $375.0 notional interest rate swap. This converted our 7.25% fixed debt into a LIBOR-based floating rate obligation. We mark-to-market the fair value of the interest rate swap and we include the fair value of the interest rate swap as an offset to Debt on our Consolidated Balance Sheets. In 2004, we repurchased $145.0 in principal amount of these notes and terminated $145.0 notional amount of the related interest rate swap, and in 2005, we repurchased $25.9 in principal amount of those notes and terminated $25.9 notional amount of the related interest rate swap.

We maintain a bank credit facility of $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 minimum level of $2,700.0 shareholders’ equity plus 50% of accumulated net income, and keep our debt-to-capitalization ratio below a maximum of 37.5%. This facility does not require us to maintain any deposits as compensating balances. As of December 31, 2007 we had no borrowings under the bank credit facility and we were in compliance with all its covenants.

NOTE 9: EMPLOYEE BENEFIT PLANS

We sponsor defined contribution and defined benefit plans covering substantially all employees and provide a postretirement benefit program for certain retired employees. Eligibility for participation in the various plans is generally based on the employee’s date of hire or on completion of a specified period of service. Employer contributions to these plans are made in cash.

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401(k)/PROFIT SHARING RETIREMENT PLAN

The Safeco 401(k)/Profit Sharing Retirement Plan (401(k) Plan) is a defined contribution plan. In a defined contribution plan, the benefits a participant will receive from the plan result from regular contributions made by the participant or the company. Our plan includes a minimum company contribution of 3% of each eligible participant’s compensation and a matching contribution of 66.6% of a participant’s contributions up to 6% of eligible compensation. An additional profit-sharing amount may also be contributed at the discretion of the Board.

Effective January 1, 2008, we increased our matching contributions to 100% of participants’ contributions up to 6% of eligible compensation. Additionally, our company contributions are immediately vested and employees are eligible to participate in the program as of their date of hire.

The following table summarizes the costs we charged to Expense:

YEAR ENDED DECEMBER 31,	2007		2006		2005
Minimum Contributions	$	13.2	$	14.4	$	14.7
401(k) Matching Contributions		10.8		11.8		11.7
Discretionary Profit Sharing Contributions		—		23.4		19.3
Total	$	24.0	$	49.6	$	45.7

The 401(k) Plan includes Safeco stock as an investment option. The 401(k) Plan held 1.7 million shares of Safeco stock at December 31, 2007 and 2.0 million shares at December 31, 2006.

CASH BALANCE PLAN

The Safeco Cash Balance Plan (CBP) is a noncontributory defined benefit plan. The CBP specifies the benefit amount each participant will receive based on eligible compensation plus a stipulated rate of return on the benefit balance. We make contributions to the CBP that are deductible for federal income tax purposes and that at least meet the minimum funding requirements set by the Employee Retirement Income Security Act (ERISA).

Effective January 1, 2008, benefit accruals under the CBP were frozen and we do not expect to make any future contributions. Participants will continue to accrue a 5% annual interest credit on their benefit balances until the plan is terminated. We expect to terminate the CBP in 2008 and distribute plan assets to eligible participants as soon as administratively practical. The distribution of assets is likely to occur 2 to 3 years after filing a request for approval of the plan termination with applicable regulators.

PROJECTED BENEFIT OBLIGATION AND FUNDED STATUS OF CBP

We use December 31 as the measurement date for calculating the projected benefit obligation related to the CBP program. The following table summarizes our obligations and assets related to the CBP:

DECEMBER 31,	2007			2006
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected Benefit Obligation at Beginning of Year	$	161.6		$	156.4
Service Cost		11.4			12.4
Interest Cost		8.5			8.4
Actuarial (Gain) Loss		(1.0	)		1.9
Benefits Paid		(22.8	)		(17.6	)
Curtailment		0.9			—
Change in Assumptions (a)		9.6			0.1
Projected Benefit Obligation at End of Year		168.2			161.6
CHANGE IN FAIR VALUE OF PLAN ASSETS
Fair Value of Plan Assets at Beginning of Year		188.6			166.9
Actual Return on Plan Assets		13.0			20.0
Employer Contributions		—			19.3
Benefits Paid		(22.8	)		(17.6	)
Fair Value of Plan Assets at End of Year		178.8			188.6
Funded Status at End of Year	$	10.6		$	27.0

(a) Includes discount rate, mortality, retention, rate of salary growth and other assumptions, longevity of plan beneficiaries, length of service and other items. The 2007 amounts primarily relate to the changes in the discount rate.

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To calculate our benefit obligation, we used a discount rate assumption of 4.75% at December 31, 2007 and 5.5% at December 31, 2006.

The following table summarizes the amounts in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit cost:

DECEMBER 31,	2007		2006
Unrecognized Actuarial Loss	$	22.0	$	16.8
Unrecognized Prior Service Cost		—		0.3
Total Recognized in Accumulated Other Comprehensive Income	$	22.0	$	17.1

We expect to continue amortizing unrecognized actuarial losses into net periodic benefit cost in 2008 until remaining payments are complete. When the payments are complete, the remaining balance of the unrecognized actuarial losses will be recognized in our Consolidated Statements of Income.

We invest our CBP assets in fixed maturities and marketable equity securities. Our investment strategy is intended to manage investment risk through diversification among asset classes, investment styles, industry weightings and issuer weightings. The following table displays our target allocations for 2008, as well as the distribution of our CBP assets at year-end:

	TARGET ALLOCATION		PERCENTAGE OF PLAN ASSETS AT DECEMBER 31,
	2008		2007		2006
ASSET ALLOCATION
Marketable Equity Securities	30.0	%	26.7	%	59.9	%
Fixed Maturities	55.0		50.0		36.1
Cash and Cash Equivalents	15.0		15.3		4.0
Other Assets	0.0	%	8.0	%	0.0	%

The following table summarizes net periodic pension costs charged to expense:

YEAR ENDED DECEMBER 31,	2007			2006			2005
Service Cost	$	11.4		$	12.4		$	12.0
Interest Cost		8.5			8.4			7.8
Expected Return on Plan Assets		(12.6	)		(12.8	)		(11.4	)
Settlement Loss		2.9			—			—
Curtailment		1.1			—			—
Amortization of Prior Service Cost and Unrecognized Actuarial Loss		0.1			1.5			1.0
Net Periodic Pension Costs Recognized	$	11.4		$	9.5		$	9.4

We calculated net periodic pension costs for the CBP using the following assumptions:

DECEMBER 31,	2007		2006		2005
Pension Benefits:
Discount Rate	5.50	%	5.50	%	5.50	%
Expected Long-Term Rate of Return on Plan Assets	7.00		8.00		8.00
Rate of Compensation Increases	5.00	%	5.00	%	5.00	%

We determined the discount rate assumption by considering the general interest rate environment, calculation of an equivalent discount rate on a hypothetical portfolio of high-quality fixed maturities with future cash flows that are similar to the timing and amount of our estimated future benefit payments from the CBP, and other relevant factors.

We determined the expected long-term rate of return on plan assets assumption based on an evaluation of the expected allocation of plan assets, the historical and anticipated long-term future performance of various asset sectors and other relevant factors.

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We estimate that benefit payments from the CBP over the next three years will be as follows:

YEAR OF PAYMENT	ESTIMATED BENEFIT PAYMENT
2008	$	18.6
2009		18.6
2010 (a)		142.9

(a) Includes estimated benefit payments upon termination of the CBP.

OTHER POSTRETIREMENT BENEFITS

We provide healthcare and life insurance benefits, which we refer to as Other Postretirement Benefits (OPRB), for certain active employees hired before 2004, as well as certain retired employees, their beneficiaries and eligible dependents.

The following table summarizes our accumulated benefit obligation and assets related to the OPRB program:

DECEMBER 31,	2007			2006
CHANGE IN ACCUMULATED BENEFIT OBLIGATION
Accumulated Benefit Obligation at Beginning of Year	$	58.7		$	58.6
Service Cost		0.2			0.5
Interest Cost		3.1			3.1
Actuarial Gain		(7.9	)		(1.5	)
Participant Contributions		3.6			4.0
Benefits Paid		(6.2	)		(6.0	)
Accumulated Benefit Obligation at End of Year		51.5			58.7
CHANGE IN FAIR VALUE OF PLAN ASSETS
Fair Value of Plan Assets at Beginning of Year		—			—
Employer Contributions		2.6			2.0
Participant Contributions		3.6			4.0
Benefits Paid		(6.2	)		(6.0	)
Fair Value of Plan Assets at End of Year		—			—
Funded Status at End of Year	$	(51.5	)	$	(58.7	)

The following table summarizes the amounts in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit cost:

DECEMBER 31,	2007			2006
Unrecognized Actuarial Gain	$	(13.0	)	$	(6.0	)
Unrecognized Prior Service Benefit		(19.0	)		(29.4	)
Total Recognized in Accumulated Other Comprehensive Income	$	(32.0	)	$	(35.4	)

We expect to amortize $2.0 of the actuarial gain and $10.5 of the prior service benefit from accumulated comprehensive income into net periodic benefit in 2008.

We calculated our obligation for the OPRB using a discount rate of 5.75% at December 31, 2007, and 5.50% at December 31, 2006. We determined the discount rate assumption by considering the general interest rate environment, calculation of an equivalent discount rate on a hypothetical portfolio of high-quality fixed maturities with future cash flows similar to the timing and amount of our estimated future OPRB payments and other relevant factors.

We calculated our OPRB obligation at December 31, 2007, using a healthcare cost trend rate of 11.00% for 2008 and assumed it gradually decreases to 5.00% in 2014 and remains at that level thereafter. A 1.00% increase or decrease in the assumed healthcare cost trend rate for each year would not have a material impact on our OPRB obligation or OPRB cost.

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The following table summarizes costs credited to Income for this OPRB program:

YEAR ENDED DECEMBER 31,	2007			2006			2005
Service Cost	$	0.2		$	0.5		$	0.2
Interest Cost		3.1			3.1			3.7
Amortization of Prior Service Benefit and Unrecognized Actuarial Gain		(11.3	)		(11.1	)		(9.3	)
Net Periodic Pension Benefit Recognized	$	(8.0	)	$	(7.5	)	$	(5.4	)

We calculated the net periodic postretirement benefit charges (credits) for the OPRB program using a discount rate of 5.50% for 2007, 2006 and 2005.

We estimate that benefit payments related to our OPRB program over the next ten years will be as follows:

YEAR OF PAYMENT	ESTIMATED BENEFIT PAYMENT
2008	$	4.3
2009		4.3
2010		4.4
2011		4.3
2012		4.2
2013 – 2017		18.7

DEFERRED COMPENSATION PLANS

We sponsor a voluntary deferred compensation plan for certain executives. The primary purpose of the Deferred Compensation Plan (DCP) is to restore the retirement benefits to which participating executives would be entitled under the terms of the 401(k) Plan and CBP absent Internal Revenue Code limitations. The amounts deferred by the executives, if any, and by Safeco are credited with earnings tied to the performance of designated measurement funds also offered in our 401(k) Plan and CBP.

Plan participants may select from a variety of investment choices for purposes of calculating the investment return attributable to their deferral. Under the terms of this plan, we credit accounts with gains (losses) based on the investment choices selected by the participant. Payments are generally made at termination of employment or upon retirement.

We also sponsor a voluntary DCP for directors. The crediting methodology and investment choices available to plan participants are similar to those offered under the executive DCP.

Expense for the DCP for both the executives and directors amounted to $1.4 in 2007, $2.1 in 2006 and $2.6 in 2005. These expenses reflect Safeco’s credits to participants’ accounts and investment gains (losses) based on the investment choices selected by each participant.

NOTE 10: 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, foreign currency translation, defined benefit and other postretirement benefit pension plans. With the adoption of SFAS 158, an adjustment to accumulated other comprehensive income was made to record gains or losses and prior service costs or credits for defined benefit and other postretirement benefit pension plans that had not yet been included in net periodic benefit cost.

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Our components of accumulated other comprehensive income or loss were:

	NET UNREALIZED GAINS (LOSSES) ON AVAILABLE- FOR-SALE SECURITIES			FOREIGN CURRENCY TRANSLATION ADJUSTMENT			UNRECOGNIZED PENSION COSTS			DEFERRED INCOME TAX			ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balances at January 1, 2005	$	797.4		$	(9.7	)	$	—		$	(272.4	)	$	515.3
Gross Unrealized Gains (Losses) on Investment Securities		(188.4	)		—			—			67.1			(121.3	)
Reclassification Adjustment for Net Realized Investment Gains Included in Net Income		(60.4	)		—			—			16.9			(43.5	)
Foreign Currency Translation		—			9.7			—			(3.4	)		6.3
Balances at December 31, 2005		548.6			—			—			(191.8	)		356.8
Gross Unrealized Gains (Losses) on Investment Securities		183.9			—			—			(55.2	)		128.7
Reclassification Adjustment for Net Realized Investment Gains Included in Net Income		(3.8	)		—			—			(7.9	)		(11.7	)
Adjustment to Initially Apply SFAS 158		—			—			16.0			(5.6	)		10.4
Balances at December 31, 2006		728.7			—			16.0			(260.5	)		484.2
Gross Unrealized Gains (Losses) on Investment Securities		(24.5	)		—			—			28.7			4.2
Reclassification Adjustment for Net Realized Investment Gains Included in Net Income		(146.1	)		—			—			30.8			(115.3	)
Amortization of Pension and Other Postretirement Benefit Amounts		—			—			(9.0	)		3.2			(5.8	)
Balances at December 31, 2007	$	558.1		$	—		$	7.0		$	(197.8	)	$	367.3

NOTE 11: STOCK INCENTIVE PLANS

The Safeco Long-Term Incentive Plan of 1997 (the Plan), as amended, provides for the issuance of up to 12,000,000 shares of our common stock. Incentive stock options, non-qualified stock options, restricted stock rights and performance-measure restricted stock rights (collectively, RSRs), performance stock rights (PSRs), and stock appreciation rights are authorized under the Plan. The terms and conditions upon which options become exercisable vary among grants. However, option rights expire no later than 10 years from the date of grant. We make grants to key employees and non-employee directors. We grant all such stock-based compensation awards at the fair market value of our common stock on the date of the grant.

COMPENSATION EXPENSE

Our pretax and after-tax share-based compensation expense is summarized as follows:

YEAR ENDED DECEMBER 31	2007		2006		2005
Share-based Compensation Expense	$	16.1	$	19.9	$	25.7
Income Tax Benefit		5.5		6.7		8.6
Share-based Compensation Expense After Tax	$	10.6	$	13.2	$	17.1

The compensation cost related to non-vested share-based compensation arrangements granted under the Plan but not yet recognized was $24.2 at December 31, 2007. We expect to recognize that cost over a weighted-average period of two years.

We recognize compensation expense associated with our share-based awards over the requisite service period. This is the period of time between the grant date and the awards’ stated vesting term except for retiree eligible employees. Compensation expense is recognized net of estimated forfeitures. Estimated forfeitures are based on historical data. To the extent actual forfeitures or revised estimates differ from the estimate used, cumulative adjustments will be made in the period that estimates are revised. We recognize RSR compensation expense to operations over the requisite service period and PSR compensation expense when it is probable the performance goals will be achieved.

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At December 31, 2007, we had 777,142 stock options outstanding (vested and unvested), 628,867 RSRs awarded but not yet vested, and 2,922,900 shares of common stock reserved for future awards. We issue reserved shares to satisfy stock option exercises and the vesting of RSRs and PSRs settled in stock.

RSR AND PSR ACTIVITY

RSRs provide for the holder to receive a stated number of shares if the holder remains employed for a stated period of time. PSRs provide for the holder to receive a stated number of shares if the company attains certain specified performance goals within a stated performance cycle. There were no outstanding PSRs as of December 31, 2006 or 2007.

RSRs granted during 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. In 2007, RSRs cliff vest after two years.

We summarize our RSR activity for the year ended December 31, 2007 below:

	SHARES		WEIGHTED AVERAGE GRANT DATE FAIR VALUE
Non-vested at January 1, 2007	575,065		$	50.70
Granted	308,734			66.20
Vested	(145,208	)		49.62
Forfeited	(109,724	)		56.70
Non-vested at December 31, 2007	628,867		$	57.51

We paid $2.9 for 2007, $14.2 for 2006 and $8.0 for 2005 to settle RSRs in cash which includes employees’ tax withholding obligations. We used stock valued at $6.3 in 2007, $3.6 in 2006 and $3.5 in 2005 to settle RSRs.

We paid $1.8 in cash in 2006 and $1.5 in 2005 to settle PSRs. We used stock valued at $0.4 in 2006 and $1.3 in 2005 to settle PSRs.

We summarize our RSRs and PSRs granted and vested for the three years ended December 31 below:

YEAR ENDED DECEMBER 31,	2007		2006		2005
Weighted Average Grant-Date Fair Value of RSRs	$	66.20	$	52.87	$	50.25
Weighted Average Grant-Date Fair Value of PSRs	$	—	$	50.67	$	46.61
Fair Value of RSRs Vested	$	9.2	$	17.8	$	11.5
Fair Value of PSRs Vested	$	—	$	2.2	$	2.8

STOCK OPTION ACTIVITY

We summarize stock option activity for the year ended December 31, 2007 below:

	SHARES		WEIGHTED- AVERAGE EXERCISE PRICE PER SHARE		WEIGHED- AVERAGE REMAINING CONTRACTUAL TERM (IN YEARS)	AGGREGATE INTRINSIC VALUE
Outstanding at January 1, 2007	1,006,126		$	40.71	6.37	$	22.0
Granted	202,650			67.89
Exercised	(379,572	)		34.49
Forfeited	(52,062	)		52.96
Outstanding at December 31, 2007	777,142			50.02	6.73		7.0
Vested or Expected to Vest at December 31, 2007	712,288			48.95	6.57		7.0
Exercisable at December 31, 2007	344,781		$	35.29	4.51	$	7.0

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Stock options granted during 2007 cliff vest after three years and expire in seven years. Previously, the awards generally vested on a pro-rata basis over four years and expire in ten years.

We summarize the cash received, the income tax benefits, and the intrinsic value from our stock options exercised for the three years ended December 31 below:

YEAR ENDED DECEMBER 31,	2007		2006		2005
Cash from Stock Options Exercised	$	13.1	$	77.1	$	42.5
Income Tax Benefits from Stock Options Exercised		3.4		16.0		6.0
Intrinsic Value of Options Exercised	$	10.8	$	47.1	$	19.3

STOCK OPTION VALUATION

We use the Black-Scholes method (which models the value over time of financial instruments) to estimate the fair value at grant date of the options. The Black-Scholes method uses several assumptions to value an option. We use the following assumptions:

• Expected Dividend Yield – reflects our average stock price for the last two years and our current dividend payout.

• Expected Volatility in Stock Price – reflects the historical change in our stock price over the expected term of the stock option.

• Risk-free Interest Rate – reflects the average rate on the treasury bond with maturity equal to the expected term of the option.

• Expected Life of Stock Awards – As allowed under SFAS 123(R) and Staff Accounting Bulletin (SAB) 107, we elected the simplified method to calculate an expected life based on the midpoint between the vesting date and the end of the contractual term of the stock award. We will use the historical method after December 31, 2007.

We show the weighted-average assumptions used in the option pricing model for awards below:

YEAR ENDED DECEMBER 31,	2007		2006
Expected Dividend Yield		2.2%		2.1%
Weighted-Average Volatility in Stock Price		20.0%		31.3%
Risk-Free Interest Rate		4.8%		4.4%
Expected Life of Stock Awards		5.0 years		6.9 years
Weighted Average Fair Value at Grant Date	$	14.15	$	18.78

SAFECO AGENCY STOCK PURCHASE PLAN

The Safeco Agency Stock Purchase Plan of 2000 (Agency Plan) provides for the issuance of up to 1,000,000 shares of our common stock to agents who meet certain eligibility requirements. Agents meeting the eligibility requirements can purchase our common stock at a discount from the closing market price on the purchase day.

Common Stock issued under the Agency Plan is held in a custodial account and restricted from sale, transfer or assignment during a two-year restriction period. Cumulative shares purchased were 182,435 as of December 31, 2007 and 106,415 as of December 31, 2006.

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NOTE 12: SALES OF REAL ESTATE

In 2006, we revised our real estate strategy. In 2007, we re-established our corporate headquarters in leased space in downtown Seattle, Washington. During 2006, we sold five properties for proceeds of $372.1 and reported a net pretax gain of $168.7 ($109.6 after tax), detailed in the table below:

REAL ESTATE SOLD	PROCEEDS		PRETAX GAIN ON SALE		AFTER-TAX GAIN ON SALE
Redmond, Washington	$	212.6	$	41.1	$	26.7
University District, Seattle, Washington		124.1		107.4		69.8
Portland, Oregon		19.4		15.2		9.9
Pleasant Hill, California		10.2		2.8		1.8
Spokane, Washington		5.8		2.2		1.4
Total Real Estate Sold	$	372.1	$	168.7	$	109.6

NOTE 13: COMMITMENTS AND CONTINGENCIES

INSURANCE ASSESSMENTS

Under state insolvency and guaranty laws, insurers licensed to do business in each state can be assessed or required to contribute to state guaranty funds to cover policyholder losses resulting from insurer insolvencies. We also are required to participate in assigned risk plans, reinsurance facilities and joint underwriting associations that provide insurance to individuals or entities who otherwise would be unable to purchase such coverage. We do not discount or report liabilities for guaranty funds net of premium taxes, and we include them in Other Liabilities on the Consolidated Balance Sheets. We had liabilities of $8.2 at December 31, 2007 and $8.9 at December 31, 2006 for estimated guaranty fund assessments.

LEASES

We lease office space, commercial real estate and certain equipment under leases that expire at various dates through 2018 with options for renewal to 2039. We account for these leases as operating leases. We do not have any capitalized leases.

In addition to the short-term leases entered into in connection with the sales of our owned facilities, in May 2006, we entered into commitments to lease office space in Seattle, Washington for our corporate headquarters and Northwest regional office. We began accounting for these leases as operating leases in August 2006, the effective date of the first lease.

Our minimum rental and other commitments for the next five years and thereafter, including cost escalation clauses, for real estate leases and other commitments in effect at December 31, 2007 are as follows:

YEAR PAYABLE	REAL ESTATE LEASE COMMITMENTS		OTHER COMMITMENTS		TOTAL
2008	$	44.4	$	21.8	$	66.2
2009		43.2		8.7		51.9
2010		27.5		5.3		32.8
2011		26.2		5.4		31.6
2012		23.6		5.4		29.0
2013 and Thereafter		91.4		34.4		125.8
Total	$	256.3	$	81.0	$	337.3

The amount of rent expense, net of sublease rental income, we charged to expense was $59.3 for 2007, $53.6 for 2006 and $57.2 for 2005. Rent expense in 2007 includes $10.0 for the lease of our new corporate headquarters and $9.0 for the short-term lease of our former headquarters which expired on December 31, 2007.

LEGAL PROCEEDINGS

As is common in the insurance and financial service industries in general, we are subject to legal actions filed or threatened, including punitive damages, 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.

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Litigation arising from claims settlement activities is generally considered in the establishment of our reserve for Loss and Loss Adjustment Expense (LAE). However, in certain circumstances, we may deem it necessary to provide disclosure due to the size or nature of the potential liability to us.

Based on information currently known to us, we believe that the ultimate outcome of any pending matters is not likely to have a material adverse effect on our financial position or results from operations.

INVESTMENTS IN LIMITED PARTNERSHIPS

We have commitments to invest a certain amount of capital in various limited partnerships and investment funds. Our total remaining commitments to these limited partnerships and investment funds was approximately $71.4 as of December 31, 2007 payable at various dates over the next five years. The actual timing and amount of payments could differ from our current estimates.

NOTE 14: CONTRIBUTIONS TO SAFECO INSURANCE FOUNDATION

In 2007, we made a non-revocable, non-refundable contribution to Safeco Insurance Foundation, (the Foundation), a separate 501(c)3 endowment fund, of appreciated marketable equity securities with a fair value of $60.0 and a book value of $2.1. In 2006, we funded the Foundation with a non-revocable, non-refundable contribution of appreciated marketable equity securities with a fair value of $30.0 and a book value of $0.8. The Foundation was organized exclusively for charitable, scientific, literary or educational purposes. The Board of the Foundation currently consists of Safeco employees and may include outside members. Since the Foundation’s inception, we have provided at no charge certain services and resources to the Foundation such as accounting, legal and investment management services and office space.

The contributions had the following impact on our Consolidated Statements of Income for years ended December 31, 2007 and 2006:

DECEMBER 31,	2007			2006
Contributions to Safeco Insurance Foundation	$	(60.0	)	$	(30.0	)
Net Realized Investment Gains		57.9			29.2
Total Loss before Income Taxes		(2.1	)		(0.8	)
Income Tax Benefit		21.0			10.5
Impact on Net Income	$	18.9		$	9.7

NOTE 15: 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. We completed our 2006 restructuring plan in 2007.

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.

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Costs and total estimated costs we incurred in connection with the restructuring and asset impairment are as follows:

	TOTAL EXPECTED COSTS		COSTS INCURRED TO DATE		YEAR ENDED DECEMBER 31
					2007		2006
Employee Termination Benefits	$	12.3	$	12.3	$	1.6	$	10.7
Asset Impairment		11.9		11.9		0.2		11.7
Lease Termination and Other Costs		2.5		2.5		1.3		1.2
Total	$	26.7	$	26.7	$	3.1	$	23.6

These costs are allocated to reportable segments as follows:

	TOTAL EXPECTED COSTS		COSTS INCURRED TO DATE		YEAR ENDED DECEMBER 31
					2007		2006
Safeco Personal Insurance (SPI)
Auto	$	12.9	$	12.9	$	1.5	$	11.4
Property		4.3		4.3		0.5		3.8
Specialty		0.5		0.5		—		0.5
Total SPI		17.7		17.7		2.0		15.7
Safeco Business Insurance (SBI)
SBI Regular		5.9		5.9		0.7		5.2
SBI Special Accounts Facility		1.3		1.3		0.2		1.1
Total SBI		7.2		7.2		0.9		6.3
Surety		1.4		1.4		0.1		1.3
Other		0.4		0.4		0.1		0.3
Total	$	26.7	$	26.7	$	3.1	$	23.6

Activity related to restructuring and asset impairment charges for 2007 was as follows:

	ACCRUAL AT DECEMBER 31, 2006		COSTS INCURRED		AMOUNTS PAID AND ASSETS IMPAIRED		ACCRUAL AT DECEMBER 31, 2007
Employee Termination Benefits	$	3.8	$	1.6	$	5.4	$	—
Lease Termination and Other Costs		0.1		1.5		1.6		—
Total	$	3.9	$	3.1	$	7.0	$	—

NOTE 16: SALE OF SAFECO FINANCIAL INSTITUTION SOLUTIONS

On April 30, 2006, we completed the sale of Safeco Financial Institution Solutions (SFIS), our lender-placed property insurance business, to Assurant, Inc. We received initial consideration of $11.0. The agreement provides for future payments up to $30.0 contingent on various factors. Two contingent payments for a total of $12.5 were based on the retention of key clients through October 27, 2006 and January 25, 2007. The contingencies were resolved by virtue of key client renewals, and we received payments of $7.5 on November 1, 2006 and $5.0 on January 30, 2007. The agreement also provides for the payments of $5.0 in 2008 based on retained gross written premium levels. In 2006, we recognized a pretax gain on this sale of $3.1 ($0.1 after tax) in net realized investment gains in our Consolidated Statements of Income. In 2007, we recognized a pretax gain on this sale of $5.4 ($3.2 after tax) in net realized investment gains in our Consolidated Statements of Income.

In connection with the sale of SFIS, we entered into a reinsurance agreement under which we ceded 100% of our lender-placed property insurance business with policy issue dates on or after January 1, 2006, as well as losses occurring on or after January 1, 2006, on policies in force prior to that date. The reinsurance agreement for the period January 1, 2006 through April 30, 2006 was accounted for as retroactive reinsurance.

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NOTE 17: DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION

Our insurance subsidiaries are restricted by state regulations as to the aggregate amount of dividends they may pay in any consecutive 12-month period without regulatory approval. Within defined limits, our insurance subsidiaries may pay dividends out of earned surplus without approval with 30 days prior written notice to the applicable state insurance commission. The limits are generally based on the greater of 10% of the prior year’s statutory surplus or prior year’s statutory net gain from operations. Dividends in excess of the prescribed limits or the subsidiary’s earned surplus require formal state insurance commission approval. Based on statutory limits as of December 31, 2007, Safeco Corporation is able to receive up to $584.4 in dividends from our insurance subsidiaries in the aggregate in 2008 without obtaining prior regulatory approval.

When insurance subsidiaries pay dividends to Safeco Corporation, we then use that money to pay dividends to our shareholders, repurchase common stock and to make principal and interest payments on our debt.

In addition to the regularly scheduled dividends from our insurance subsidiaries in 2007, we received approval from state regulators for special dividends totaling $700.0, which was paid in August 2007.

State insurance regulatory authorities require our insurance subsidiaries to file annual statements prepared on an accounting basis prescribed by the National Association of Insurance Commissioners’ (NAIC) Accounting Practices and Procedures Manual or permitted by their respective state of domicile (that is, on a statutory basis). Prescribed statutory accounting practices include state laws, regulations and general administrative rules, as well as a variety of publications of the NAIC. Permitted statutory accounting practices encompass all accounting practices not so prescribed. We do not use any permitted statutory accounting practices.

Statutory capital and surplus and statutory net income differ from amounts reported in accordance with GAAP primarily because policy acquisition costs are expensed when incurred, fixed maturities are reported at amortized cost, and income tax expense reflects only taxes paid or currently payable under statutory accounting rules.

Statutory net income and statutory capital and surplus were:

DECEMBER 31,	2007		2006		2005
Statutory net income	$	752.0	$	900.1	$	793.7
Statutory capital and surplus at December 31,	$	2,924.1	$	3,908.4	$	3,691.9

NOTE 18: 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 segments: SBI Regular and SBI Special Accounts Facility.

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SBI Regular – SBI Regular is our core commercial segment, writing a variety of commercial insurance products for small- to mid-sized businesses (customers who pay annual premiums of $250,000 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 (customers who pay annual premiums of more than $250,000) 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 professional and general liability 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 run-off assumed reinsurance, large-commercial business accounts and commercial specialty programs in run-off our own self-insurance, asbestos and environmental results, run-off religious institutions and other business and programs that we have exited.

CORPORATE

The Corporate segment includes certain transactions such as the interest expense we pay on our debt, debt repurchases, miscellaneous corporate investment income and intercompany eliminations, real estate holdings, contributions to the 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 results and combined ratios. Underwriting profit or loss is our net earned premiums less our losses from claims, LAE and underwriting expenses, on a pretax basis. Combined ratio is our losses, LAE and underwriting expenses divided by our net earned premiums. Management views underwriting results and combined ratios as critical measures to assess the effectiveness of our underwriting activities.

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

YEAR ENDED DECEMBER 31,	2007		2006		2005
Net Earned Premiums
SPI
Auto	$	2,604.8	$	2,713.2	$	2,820.4
Property		942.3		909.0		913.3
Specialty		115.9		105.4		98.1
Total SPI		3,663.0		3,727.6		3,831.8
SBI
SBI Regular		1,297.8		1,245.4		1,272.2
SBI Special Accounts Facility		261.3		264.2		283.2
Total SBI		1,559.1		1,509.6		1,555.4
Surety		352.9		297.5		260.9
P&C Other		1.0		73.6		157.3
Total Earned Premiums		5,576.0		5,608.3		5,805.4
P&C Net Investment Income		462.2		476.6		460.6
Total P&C Revenues		6,038.2		6,084.9		6,266.0
Corporate		24.5		32.5		24.5
Gains on Sales of Real Estate		—		168.7		—
Net Realized Investment Gains		146.1		3.8		60.4
Total Revenues	$	6,208.8	$	6,289.9	$	6,350.9

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Pretax Underwriting Profit (Loss) and Net Income

YEAR ENDED DECEMBER 31,	2007			2006			2005
Underwriting Profit (Loss)
SPI
Auto	$	31.8		$	244.1		$	139.6
Property		126.1			163.7			198.2
Specialty		17.7			29.0			6.9
Total SPI		175.6			436.8			344.7
SBI
SBI Regular		131.8			162.2			144.7
SBI Special Accounts Facility		58.5			68.7			78.7
Total SBI		190.3			230.9			223.4
Surety		148.0			98.4			55.0
P&C Other		(34.1	)		(54.4	)		(103.9	)
Total Underwriting Profit		479.8			711.7			519.2
P&C Net Investment Income		462.2			476.6			460.6
Restructuring and Asset Impairment Charges		(3.1	)		(25.7	)		(2.7	)
P&C Net Realized Investment Gains (Losses)		63.4			(22.0	)		63.6
Total P&C		1,002.3			1,140.6			1,040.7
Corporate		(56.3	)		(61.1	)		(47.8	)
Gains on Sales of Real Estate		—			168.7			—
Contributions to Safeco Insurance Foundation		(60.0	)		(30.0	)		—
Losses on Debt Repurchases		(16.6	)		(4.5	)		(4.0	)
Corporate Net Realized Investment Gains (Losses)		82.7			25.8			(3.2	)
Income before Income Taxes		952.1			1,239.5			985.7
Provision for Income Taxes		244.3			359.5			294.6
Net Income	$	707.8		$	880.0		$	691.1
Combined Ratio
YEAR ENDED DECEMBER 31,	2007			2006			2005
SPI
Auto		98.8	%		91.0	%		95.1	%
Property		86.6			82.0			78.3
Specialty		84.7			72.5			93.0
Total SPI		95.2			88.3			91.0
SBI
SBI Regular		89.8			87.0			88.6
SBI Special Accounts Facility		77.6			74.0			72.2
Total SBI		87.8			84.7			85.6
Surety		58.1			66.9			78.9
P&C Other		*			*			*
Total Combined Ratio +		91.4	%		87.3	%		91.1	%

+ 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 run-off business with minimal premium.

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The following table presents total assets, reported on our Consolidated Balance Sheets, by segment:

Assets

DECEMBER 31,	2007		2006
SPI
Auto	$	3,713.2	$	4,388.1
Property		1,830.9		2,146.8
Specialty		230.4		245.2
Total SPI		5,774.5		6,780.1
SBI
SBI Regular		3,305.6		3,642.1
SBI Special Accounts Facility		618.3		707.0
Total SBI		3,923.9		4,349.1
Surety		818.6		804.2
P&C Other		1,648.7		1,671.1
Total		12,165.7		13,604.5
Corporate		474.7		608.5
Total Assets	$	12,640.4	$	14,213.0

NOTE 19: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

	FIRST QUARTER		SECOND QUARTER		THIRD QUARTER		FOURTH QUARTER		FULL YEAR
Revenues
2007	$	1,506.6	$	1,539.6	$	1,638.2	$	1,524.4	$	6,208.8
2006 (a)		1,561.5		1,535.9		1,659.8		1,532.7		6,289.9
Net Income
2007	$	182.5	$	186.4	$	194.4	$	144.5	$	707.8
2006 (a)		208.2		199.7		255.7		216.4		880.0
Net Income Per Share:
Diluted
2007	$	1.71	$	1.75	$	1.93	$	1.56	$	6.97
2006 (a)		1.69		1.68		2.20		1.96		7.51
Basic
2007	$	1.73	$	1.76	$	1.93	$	1.56	$	7.01
2006 (a)		1.71		1.69		2.21		1.98		7.56

(a) Includes pretax gains on sales of real estate of $32.8 ($21.3 after tax) in the second quarter of 2006, $122.6 ($79.7 after tax) in the third quarter of 2006 and $13.3 ($8.6 after tax) in the fourth quarter of 2006.

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FINANCIAL STATEMENT SCHEDULES

SCHEDULE I: SUMMARY OF INVESTMENTS – OTHER THAN INVESTMENTS IN RELATED PARTIES

(In Millions)

DECEMBER 31, 2007	COST OR AMORTIZED COST		FAIR VALUE		BALANCE SHEET
Fixed Maturities
Bonds
U.S. Government and Agencies	$	287.7	$	307.8	$	307.8
States and Political Subdivisions		4,770.3		4,853.4		4,853.4
Foreign Governments		23.9		30.2		30.2
Public Utilities		235.5		241.1		241.1
Mortgage-Backed Securities		1,002.1		1,012.0		1,012.0
All Other Corporate Bonds		1,275.6		1,299.1		1,299.1
Redeemable Preferred Stocks		20.1		20.3		20.3
Total Fixed Maturities		7,615.2		7,763.9		7,763.9
Marketable Equity Securities
Common Stocks
Public Utilities		40.4		74.4		74.4
Banks, Trust and Insurance Companies		194.2		231.4		231.4
Industrial, Miscellaneous and All Other		580.6		926.4		926.4
Non-Redeemable Preferred Stocks		178.0		170.4		170.4
Total Marketable Equity Securities		993.2		1,402.6		1,402.6
Other Invested Assets (1)		48.6		48.6		48.6
Total Investments	$	8,657.0	$	9,215.1	$	9,215.1

(1) Other Invested Assets include limited partnerships.

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SCHEDULE II: CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (PARENT COMPANY)

CONDENSED STATEMENTS OF INCOME

(In Millions)

YEAR ENDED DECEMBER 31,	2007			2006			2005
REVENUES
Dividends — Non-affiliates	$	2.6		$	3.0		$	0.6
Interest — Affiliates		1.1			6.6			13.0
— Non-affiliates		19.8			25.6			18.0
Net Realized Investment Gains (Losses)		19.3			(6.5	)		(1.2	)
Total Revenues		42.8			28.7			30.4
EXPENSES
Interest		68.7			91.4			88.6
Other		14.9			6.1			(5.7	)
Losses on Debt Repurchases		16.6			4.5			4.0
Total Expenses		100.2			102.0			86.9
Loss before Income Taxes		(57.4	)		(73.3	)		(56.5	)
Benefit from Income Taxes		(17.8	)		(38.4	)		(57.3	)
Income (Loss) before Equity in Net Income of Subsidiaries		(39.6	)		(34.9	)		0.8
Equity in Net Income of Subsidiaries		747.4			914.9			690.3
Consolidated Net Income	$	707.8		$	880.0		$	691.1

121

SCHEDULE II: CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (PARENT COMPANY)

CONDENSED BALANCE SHEETS

(In Millions)

DECEMBER 31,	2007		2006
ASSETS
Investments
Stock of Subsidiaries, at Cost Plus Equity in Undistributed Earnings	$	3,745.0	$	4,705.0
Fixed Maturities Available-for-Sale, at Fair Value (Cost or amortized cost: $163.4; $283.5)		165.0		284.1
Marketable Equity Securities Available-for-Sale, at Fair Value (Cost: $42.5; $97.4)		55.0		92.4
Other Invested Assets		1.6		1.2
Total Investments		3,966.6		5,082.7
Cash and Cash Equivalents		197.6		114.8
Receivables from Affiliated Companies		—		1.2
Accrued Investment Income		5.1		8.8
Current Income Taxes Recoverable		5.4		51.3
Net Deferred Income Tax Assets		6.8		3.1
Other Assets		3.1		10.5
Securities Lending Collateral		10.3		75.0
Total Assets	$	4,194.9	$	5,347.4
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest Payable	$	14.5	$	33.6
Dividends Payable to Shareholders		37.4		31.6
Debt		704.0		1,250.0
Other Liabilities		14.6		13.0
Securities Lending Payable		10.3		75.0
Total Liabilities		780.8		1,403.2
Commitments and Contingencies		—		—
Restricted Stock Rights		21.5		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: 4.3; 4.9
Shares Issued and Outstanding: 89.7; 105.3		—		3.2
Retained Earnings		3,025.3		3,440.5
Accumulated Other Comprehensive Income, Net of Taxes		367.3		484.2
Total Shareholders’ Equity		3,392.6		3,927.9
Total Liabilities and Shareholders’ Equity	$	4,194.9	$	5,347.4

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SCHEDULE II: CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (PARENT COMPANY)

CONDENSED STATEMENTS OF CASH FLOWS

(In Millions)

YEAR ENDED DECEMBER 31,	2007			2006			2005
OPERATING ACTIVITIES
Dividends and Interest Received — Affiliates	$	1,577.9		$	795.0		$	507.1
— Non-affiliates		25.5			26.7			15.8
Interest Paid		(82.0	)		(91.4	)		(86.5	)
Income Taxes Received		65.4			94.9			113.2
Other, Net		(0.8	)		12.5			16.3
Net Cash Provided by Operating Activities		1,586.0			837.7			565.9
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale		(112.3	)		(140.9	)		(216.4	)
Marketable Equity Securities Available-for-Sale		(162.0	)		(29.0	)		(44.8	)
Other Invested Assets		(0.8	)		(0.4	)		(0.1	)
Maturities and Calls of Fixed Maturities Available-for-Sale		48.5			49.5			55.8
Sales of:
Fixed Maturities Available-for-Sale		183.2			156.5			201.5
Marketable Equity Securities Available-for-Sale		200.5			6.9			—
Other Invested Assets		10.4			—			0.3
Retirement of Capital Trust Securities		26.3			—			—
Funds Repaid by Subsidiaries		—			213.5			—
Net Capital (Contributions) Distributions to Subsidiaries		(8.7	)		20.6			(3.2	)
Securities Lending Collateral Returned (Invested)		(64.7	)		84.8			104.5
Other, Net		(0.8	)		—			—
Net Cash Provided by Investing Activities		119.6			361.5			97.6
FINANCING ACTIVITIES
Common Stock Reacquired		(1,000.0	)		(1,165.2	)		(255.9	)
Repurchases of Debt		(558.9	)		(60.4	)		(29.8	)
Securities Lending Collateral (Paid) Received		64.7			(84.8	)		(104.5	)
Dividends Paid to Shareholders		(144.2	)		(130.2	)		(118.9	)
Stock Options Exercised		15.6			86.8			32.8
Net Cash Used in Financing Activities		(1,622.8	)		(1,353.8	)		(476.3	)
Net Increase (Decrease) in Cash and Cash Equivalents		82.8			(154.6	)		187.2
Cash and Cash Equivalents at Beginning of Year		114.8			269.4			82.2
Cash and Cash Equivalents at End of Year	$	197.6		$	114.8		$	269.4

123

SCHEDULE II: CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (PARENT COMPANY)

CONDENSED STATEMENTS OF CASH FLOWS

Reconciliation of Net Income to Net Cash Provided by Operating Activities

(In Millions)

YEAR ENDED DECEMBER 31,	2007			2006			2005
Net Income	$	707.8		$	880.0		$	691.1
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Equity in Net Income of Consolidated Subsidiaries		(747.4	)		(914.9	)		(690.3	)
Dividends and Interest Received from Consolidated Subsidiaries		1,577.9			795.0			507.1
Net Realized Investment (Gains) Losses		(19.3	)		6.5			1.2
Amortization and Depreciation		3.8			3.8			4.4
Deferred Income Tax (Benefit) Provision		(1.0	)		7.3			(4.3	)
Losses on Debt Repurchases		16.6			4.5			4.0
Other, Net		5.5			(6.0	)		15.9
Changes in:
Accrued Investment Income		3.7			1.8			8.2
Interest Payable		(19.1	)		(2.1	)		(0.6	)
Current Income Taxes Recoverable		45.9			36.7			52.0
Other Assets and Liabilities		11.6			25.1			(22.8	)
Total Adjustments		878.2			(42.3	)		(125.2	)
Net Cash Provided by Operating Activities	$	1,586.0		$	837.7		$	565.9

As described in Note 1, we issued 866,685 shares to settle an accelerated share repurchase program in the year ended December 31, 2007.

There were no significant non-cash financing or investing activities for the years ended December 31, 2007, 2006 or 2005, except as provided above.

124

SCHEDULE III: SUPPLEMENTAL INSURANCE INFORMATION

Segment	DEFERRED POLICY ACQUISITION COSTS		LOSS & LOSS ADJUSTMENT EXPENSE RESERVES		UNEARNED PREMIUMS		NET EARNED PREMIUMS		NET INVESTMENT INCOME		LOSSES AND LOSS ADJUSTMENT EXPENSES		AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS		OTHER UNDERWRITING AND OPERATING COSTS			NET WRITTEN PREMIUMS
December 31, 2007
Property & Casualty
SPI
Auto	$	99.1	$	1,602.2	$	634.1	$	2,604.8	$	145.6	$	1,950.0	$	390.3	$	232.7		$	2,581.7
Property		98.2		272.6		534.2		942.3		71.0		543.5		176.0		96.7			972.4
Specialty		9.6		79.9		51.1		115.9		8.9		65.6		20.6		12.0			120.2
SBI
SBI Regular		107.8		1,675.0		656.4		1,297.8		120.3		738.6		213.9		213.5			1,324.1
SBI Special Accounts Facility		21.0		317.6		117.1		261.3		23.1		116.2		47.9		38.7			249.6
Surety		80.0		111.7		236.1		352.9		27.9		60.4		105.5		39.0			388.1
P&C Other		—		1,126.0		11.9		1.0		65.4		46.2		—		(11.1	)		3.7
Restructuring and Asset Impairment Charges		—		—		—		—		—		—		—		3.1			—
Total		415.7		5,185.0		2,240.9		5,576.0		462.2		3,520.5		954.2		624.6			5,639.8
Corporate		—		—		—		—		24.5		—		—		157.4			—
Consolidated Totals	$	415.7	$	5,185.0	$	2,240.9	$	5,576.0	$	486.7	$	3,520.5	$	954.2	$	782.0		$	5,639.8

125

SCHEDULE III: SUPPLEMENTAL INSURANCE INFORMATION

Segment	DEFERRED POLICY ACQUISITION COSTS		LOSS & LOSS ADJUSTMENT EXPENSE RESERVES		UNEARNED PREMIUMS		NET EARNED PREMIUMS		NET INVESTMENT INCOME		LOSSES AND LOSS ADJUSTMENT EXPENSES		AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS		OTHER UNDERWRITING AND OPERATING COSTS		NET WRITTEN PREMIUMS
December 31, 2006
Property & Casualty
SPI
Auto	$	91.7	$	1,611.5	$	657.4	$	2,713.2	$	155.9	$	1,836.2	$	365.0	$	267.9	$	2,677.7
Property		91.3		282.1		503.7		909.0		73.7		481.0		166.8		97.5		924.2
Specialty		8.6		74.0		46.8		105.4		8.6		44.8		18.6		13.0		110.6
SBI
SBI Regular		101.5		1,615.7		628.8		1,245.4		123.2		654.1		207.0		222.1		1,262.9
SBI Special Accounts Facility		22.2		313.6		129.1		264.2		27.2		103.3		49.6		42.6		267.5
Surety		68.6		58.0		200.2		297.5		22.6		67.4		98.0		33.7		326.3
P&C Other		—		1,216.5		9.3		73.6		65.4		93.0		22.9		12.1		72.7
Restructuring and Asset Impairment Charges		—		—		—		—		—		—		—		25.7		—
Total		383.9		5,171.4		2,175.3		5,608.3		476.6		3,279.8		927.9		714.6		5,641.9
Corporate		—		—		—		—		32.5		—		—		128.1		—
Consolidated Totals	$	383.9	$	5,171.4	$	2,175.3	$	5,608.3	$	509.1	$	3,279.8	$	927.9	$	842.7	$	5,641.9

126

SCHEDULE III: SUPPLEMENTAL INSURANCE INFORMATION

Segment	DEFERRED POLICY ACQUISITION COSTS		LOSS & LOSS ADJUSTMENT EXPENSE RESERVES		UNEARNED PREMIUMS		NET EARNED PREMIUMS		NET INVESTMENT INCOME		LOSSES AND LOSS ADJUSTMENT EXPENSES		AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS		OTHER UNDERWRITING AND OPERATING COSTS		NET WRITTEN PREMIUMS
December 31, 2005
Property & Casualty
SPI
Auto	$	99.2	$	1,694.3	$	692.6	$	2,820.4	$	149.7	$	2,032.6	$	377.2	$	271.0	$	2,820.0
Property		90.8		305.5		488.8		913.3		71.0		457.8		167.5		89.8		908.2
Specialty		8.0		80.5		41.4		98.1		7.4		63.4		17.0		10.8		101.3
SBI
SBI Regular		97.7		1,502.1		610.7		1,272.2		117.6		698.3		213.3		215.9		1,263.0
SBI Special Accounts Facility		22.0		320.8		124.9		283.2		20.0		119.2		82.6		2.7		275.1
Surety		58.7		17.1		170.5		260.9		17.1		84.8		92.6		28.5		278.4
P&C Other		—		1,437.9		10.9		157.3		77.8		178.9		22.9		59.4		156.1
Restructuring and Asset Impairment Charges		—		—		—		—		—		—		—		2.7		—
Total		376.4		5,358.2		2,139.8		5,805.4		460.6		3,635.0		973.1		680.8		5,802.1
Corporate		—		—		—		—		24.5		—		—		76.3		—
Consolidated Totals	$	376.4	$	5,358.2	$	2,139.8	$	5,805.4	$	485.1	$	3,635.0	$	973.1	$	757.1	$	5,802.1

127

SCHEDULE VI: SUPPLEMENTAL INFORMATION CONCERNING CONSOLIDATED PROPERTY & CASUALTY INSURANCE OPERATIONS

AFFILIATION WITH REGISTRANT: PROPERTY & CASUALTY SUBSIDIARIES

(In Millions)

DECEMBER 31,	2007			2006			2005
Deferred Policy Acquisition Costs	$	415.7		$	383.9		$	376.4
Loss and Loss Adjustment Expense Reserves		5,185.0			5,171.4			5,358.2
Unearned Premiums	$	2,240.9		$	2,175.3		$	2,139.8
YEAR ENDED DECEMBER 31,	2007			2006			2005
Earned Premiums	$	5,576.0		$	5,608.3		$	5,805.4
Net Investment Income		462.2			476.6			460.6
Losses and Loss Adjustment Expenses Incurred Related to:
Current Year		3,644.1			3,426.0			3,680.9
Prior Years		(123.6	)		(146.2	)		(45.9	)
Amortization of Deferred Policy Acquisition Costs		954.2			927.9			973.1
Paid Losses and Loss Adjustment Expenses		3,505.0			3,461.5			3,531.6
Net Written Premiums	$	5,639.8		$	5,641.9		$	5,802.1

128

INDEX TO EXHIBITS

3.1	Bylaws (as amended December 14, 2007), filed as Exhibit 3.1 to Safeco’s Current Report on Form 8-K dated December 18, 2007, is incorporated herein by this reference.
3.2	Restated Articles of Incorporation (as amended May 7, 1997), filed as Exhibit 3.2 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 1-6563), are incorporated herein by this reference.
4.1	Indenture, dated as of February 15, 2000, among Safeco and The Chase Manhattan Bank, N.A., as Trustee, filed as Exhibit 4.8 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 1-6563), is incorporated herein by this reference.
4.2	Form of Safeco Agency Stock Purchase Plan Terms and Conditions as Agreed to by the Agency, filed as Exhibit 4.10 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 1-6563), is incorporated herein by this reference.
4.3	Indenture for Debt Securities between J.P. Morgan Trust Company, National Association and Safeco, dated as of August 23, 2002, filed as Exhibit 4.11 to Safeco’s Current Report on Form 8-K dated January 28, 2003 (File No. 1-6563), is incorporated herein by this reference.
4.4	Form of 4.200% Senior Notes due 2008, filed as Exhibit 4.12 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 1-6563), is incorporated herein by this reference.
4.5	Form of 4.875% Senior Notes due 2010, filed as Exhibit 4.13 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 1-6563), is incorporated herein by this reference.
10.1	Safeco Corporation Deferred Compensation Plan for Directors, as Amended and Restated effective November 1, 2004, filed as Exhibit 10.1 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (File No. 1-6563), is incorporated herein by this reference.
10.2	Safeco Deferred Compensation Plan and Supplemental Benefit for Executives, as Amended and Restated effective November 1, 2004, filed as Exhibit 10.2 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (File No. 1-6563), is incorporated herein by this reference.
10.3	Separation Agreement between Safeco and Allie R. Mysliwy dated as of December 27, 2007, filed as Exhibit 10.1 to Safeco’s Current Report on Form 8-K dated December 28, 2007, is incorporated herein by this reference.
10.4	Safeco Long-Term Incentive Plan of 1997 as Amended and Restated May 2, 2007, filed as Exhibit 10.4 to Safeco’s Quarterly Report on Form 10-Q dated July 31, 2007, is incorporated herein by this reference.
10.5	Form of Stock Option Grant Agreement granted under the Safeco Long-Term Incentive Plan of 1997, filed as Exhibit 10.5 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, is incorporated herein by this reference.
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, filed as Exhibit 10.6 to Safeco’s Quarterly Report on Form 10-Q dated July 31, 2007, is incorporated herein by this reference.

129

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, filed as Exhibit 10.7 to Safeco’s Quarterly Report on Form 10-Q dated July 31, 2007, is incorporated herein by this reference.
10.8	Form of Restricted Stock Rights Award Agreement issued under the Safeco Long-Term Incentive Plan of 1997, filed as Exhibit 10.9 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, is incorporated herein by this reference.
10.9	Safeco Incentive Plan of 1987 contained in the Prospectus dated November 10, 1989, as amended January 31, 1990, filed as Exhibit 10 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 1-6563), and the Supplement to such Prospectus dated November 8, 1990, filed as Exhibit 10 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 1-6563), are incorporated herein by this reference.
10.10	Safeco Leadership Performance Plan, as Amended and Restated effective December 14, 2007.
10.11	Form of Change in Control Severance Agreement.
10.12	Safeco 401(k)Plan as Amended and Restated December 14, 2007.
10.13	Safeco Flexible Benefits Program as Amended and Restated effective December 14, 2007.
10.14	Executive Transition Services Agreement between Safeco Corporation and Michael S. McGavick, dated as of December 6, 2005, filed as Exhibit 10.1 to Safeco’s Current Report on Form 8-K dated December 1, 2005 (File No. 1-6563), is incorporated herein by this reference.
10.15	Safeco Performance Incentive Compensation Plan, included as Appendix A to Safeco’s Definitive Proxy Statement filed March 24, 2005 (File No. 1-6563), is incorporated herein by this reference.
10.16	Credit Agreement among Safeco Corporation, the Lenders thereto and J.P. Morgan Chase Bank, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, dated as of March 31, 2005, filed as Exhibit 10.1 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (File No. 1-6563), is incorporated herein by this reference.
10.17	Amendment No. 1 to Credit Agreement as of October 29, 2007, among Safeco Corporation, the Lenders thereto and JPMorgan Chase Bank, N.A., as Administrative Agent for the Lenders, filed as Exhibit 10.1 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, is incorporated herein by this reference.
10.18	Office Building Lease Agreement between Safeco Insurance Company of America and NOP 1001 Fourth L.L.C., dated May 23, 2006, as amended December 11, 2007, filed as Exhibit 10.21 to Safeco’s Current Report on Form 8-K dated December 13, 2007, is incorporated here by this reference.

130

10.19	Office Building Lease Agreement between Safeco Insurance Company of American and WA-Second & Seneca, L.L.C., dated May 23, 2006, filed as Exhibit 10.3 to Safeco’s quarterly report on Form 10-Q for the quarter ended June 30, 2006 (File No. 1-6563), is incorporated herein by this reference.
10.20	Purchase and Sale Agreement between General America Corporation, General Insurance Company of America and Safeco Insurance Company of America, collectively as Seller and the Board of Regents of the University of Washington, an agency of the State of Washington, as Purchaser, with respect to University District Properties, Seattle, Washington, dated August 28, 2006, filed as Exhibit 10.1 to Safeco’s report on Form 10-Q for the quarter ended September 30, 2006 (File No. 1-6563), is incorporated herein by this reference.
10.21	Lease between the Board of Regents of the University of Washington, as Landlord, and Safeco Insurance Company of America, as Tenant, dated September 27, 2006, filed as Exhibit 10.2 to Safeco’s report on Form 10-Q for the quarter ended September 30, 2006 (File No. 1-6563), is incorporated herein by this reference.
10.22	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, filed as Exhibit 10.1 to Safeco’s Quarterly Report on Form 10-Q dated July 31, 2007, is incorporated herein by this reference.
10.23	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, is incorporated herein by this reference.
10.24	Safeco Success Sharing Plan, as Amended May 2, 2007, filed as Exhibit 10.3 to Safeco’s Quarterly Report on Form 10-Q dated July 31, 2007, is incorporated herein by this reference.
11	Computation of Income per Share of Common Stock (See Note 1 to the Consolidated Financial Statements).
12	Computation of Ratio of Earnings to Fixed Charges.
21	Subsidiaries of the Registrant.
23.1	Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
31.1	Certification of Chief Executive Officer of Safeco Corporation dated February 25, 2008, in accordance with Rule 13a-14 or Rule 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 February 25, 2008, in accordance with Rule 13a-14 or Rule 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 February 25, 2008, 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 February 25, 2008, in accordance with 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

131

EX-10.10

Exhibit 10.10

SAFECO LEADERSHIP PERFORMANCE PLAN

Effective January 1, 2002

(As last amended December 13, 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.

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).

2

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:

3

(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.

2.16 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:

4

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

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

3.2 Participation Date

An Eligible Employee shall commence participation on the later of:

(a) the Effective Date;

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

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

3.3 Rehired Eligible Employees

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

5

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

6

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.

7

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.

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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 employment of a Participant who has executed a Change in Control Severance Agreement is terminated without cause (as determined in

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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.

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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.

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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.

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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.

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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.

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EX-10.11

Exhibit 10.11

FORM OF CHANGE IN CONTROL

SEVERANCE AGREEMENT

[FORM OF CHANGE IN CONTROL SEVERANCE AGREEMENT ENTERED INTO BY PAULA ROSPUT REYNOLDS, ROSS J, KARI, ARTHUR CHONG AND MICHAEL H. HUGHES]

THIS AGREEMENT, effective [DATE], is made by and between Safeco Corporation, a Washington corporation (“Safeco”), and [NAME].

WHEREAS, Safeco (together with its subsidiaries, collectively, the “Company”), considers it essential to the best interests of its shareholders to foster the continued employment of key management personnel; and

WHEREAS, Safeco recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and

WHEREAS, Safeco has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company’s management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control;

NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive agree as follows:

1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in Section 15.

2. Term of Agreement. The Term of this Agreement shall commence on the date hereof and shall continue in effect until the earlier of (i) the date it is terminated by written agreement between the Company and the Executive and (ii) seventh anniversary of a Change in Control.

3. Company’s Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive’s covenants stated in Section 4, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 5.1, Section 5.4, Section 6.2(A), and Section 9.1, no amount or benefit shall be payable under this Agreement unless there shall have been a termination of the Executive’s employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company.

4. The Executive’s Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive’s employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive’s employment for any reason.

5. Compensation Other Than Severance Payments.

5.1 Salary During Incapacity or Illness. Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive’s fulltime duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive’s full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any applicable compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Executive’s employment is terminated by the Company for Disability.

5.2 Salary During Term. If the Executive’s employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive’s full salary to the Executive through the Date of Termination at the rate in effect at the time the Notice of Termination is given or, if higher, the rate in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company’s compensation and benefit plans, programs or arrangements.

5.3 Post-Termination Compensation and Benefits. If the Executive’s employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company’s applicable retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason.

5.4 Incentive Awards.

(A) Stock Options and SARs. Immediately prior to the Change in Control, all awards of stock options and stock appreciation rights (“SARs”) previously granted to the Executive shall become fully vested and exercisable. The phrase “immediately prior to the Change in Control” shall be understood to mean sufficiently in advance of a Change in Control to permit the Executive to take all steps reasonably necessary to exercise all options and SARs and to deal with the shares of stock underlying the awards of stock options and SARs 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.

(B) Performance Stock Rights. To the extent deemed earned, each outstanding performance stock right (“PSR”) previously granted to the Executive shall become immediately payable in cash upon a Change in Control, 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:

(i) the number of shares determined by the Committee based on the extent to which the performance goals specified in the PSR award agreement have been achieved during the portion of the performance period ending on the last day of the last fiscal quarter of the Company ending on or before the date of the Change in Control, and

(ii) the number of shares equal to the product of the target shares identified in the PSR award agreement multiplied by a fraction with a numerator equal to the whole number of calendar months beginning with the month in which the PSR 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 period covered by the PSR award agreement and less any shares previously issued under the PSR award agreement.

(C) Restricted Stock Rights. All restrictions with respect to restricted stock rights (“RSRs”) shall lapse upon a Change in Control, and all outstanding RSRs of the Executive shall be immediately settled by a cash payment.

(D) Leadership Performance Plan. Executive shall be eligible to receive an incentive award pursuant to the terms of the Leadership Performance Plan.

(E) Other Incentive Awards. All other restrictions with respect to outstanding incentive awards of the Executive not described in subsections (A) through (D) of this Section 5.4 shall lapse upon a Change in Control, and such awards shall be fully vested and nonforfeitable.

(F) Fair Market Value. For purposes of this Section 5.4, with respect to determining the cash equivalent value of an RSR or PSR or the spread payable upon exercise of an 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.

5.5 Deferral Election. The Executive may elect to defer all or a portion of the payments that are to be made to the Executive under Section 6.1(A) and Section 6.2. The Executive may exercise such election by delivering a notice of election (in accordance with Section 10) prior to the occurrence of the Change in Control, which notice shall state the portion of such payments that is to be deferred (expressed as a dollar amount or as a percentage (“the Deferred Benefit”)), the date the payment of the Deferred Benefit shall commence (“the Deferred Benefit Commencement Date”), and the number of equal consecutive monthly installments (not to exceed 120) that the Deferred Benefit is to be paid in. In no event shall the Deferred Benefit Commencement Date be subsequent to the first day of January of the year immediately following the Executive’s sixty-fifth birthday. In the event such an election is made:

(A) The amount that would have otherwise been paid under the provisions of Section 6.1(A) and Section 6.2 shall be reduced by an amount equal to the Deferred Benefit.

(B) The Deferred Benefit, together with simple interest calculated at an annual rate of ten percent (10%) on the unpaid balance of the Deferred Benefit from the date that payment of the Deferred Benefit would have otherwise been made, shall be paid in the number of equal consecutive monthly installments selected by the Executive, with the first such installment being made on the Deferred Benefit Commencement Date and a subsequent payment being made on the first day of each month thereafter.

(C) If the Executive dies prior to receiving the full amount of the Deferred Benefit, the Company shall continue to pay the Deferred Benefit to the estate of the Executive in the same manner as the Deferred Benefit would have been paid to the Executive if the Executive had not died.

(D) The Deferred Benefit shall in no event be set aside or deposited to a separate account or fund, and the rights of the Executive to the Deferred Benefit shall not be greater than the rights of any other general, unsecured creditor of the Company.

(E) The Executive, the Executive’s spouse, and any other person or entity claiming through or under the Executive shall not have any power or authority to commute, encumber, or dispose of any right to receive payment of the Deferred Benefit, all of which payments are expressly declared to be non-assignable. In the event of any attempt at assignment or other disposition, the Company shall have no further liability to pay the Deferred Benefit. The Deferred Benefit provided for in this Agreement shall not be subject to seizure for the payment of any debts, judgments, alimony, separate maintenance or child support, or be reached or transferred by operation of law, or in the event of bankruptcy, insolvency or otherwise.

6. Severance Payments.

6.1 Severance Payments Enumerated. The Company shall pay the Executive the payments described in this Section 6.1 (the “Severance Payments”) upon the termination of the Executive’s employment following a Change in Control and during the Term, in addition to any payments and benefits to which the Executive is then entitled under Section 5, unless such termination is (i) by the Company for Cause, (ii) by reason of death, Disability or Retirement, or (iii) by the Executive without Good Reason. Additionally, during the one-month period beginning with the first day of the month immediately following the first anniversary of the Change in Control, the Executive may voluntarily terminate her employment for any reason and, upon such termination, the Company shall pay the Executive the Severance Payments and the Gross-Up Payment, in addition to any payments and benefits to which the Executive is

then entitled under Section 5. For purposes of this Agreement, the Executive’s employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive’s employment is terminated by the Company without Cause prior to a Change in Control and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates her employment with Good Reason prior to a Change in Control and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person, or (iii) the Executive’s employment is terminated by the Company without Cause prior to a Change in Control and the Executive reasonably demonstrates that such termination is otherwise in connection with or in anticipation of a Change in Control.

(A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three (or, if less, the number of years, rounded to the nearest hundredth of a year, remaining until December 31 of the year in which the Executive attains age 65) times the higher of the Executive’s annual base salary in effect immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based and the Executive’s base salary in effect immediately prior to Date of Termination.

(B) For the thirty-six (36) month period immediately following the Date of Termination or, if shorter, for the period commencing immediately following the Date of Termination and ending on December 31 of the year in which the Executive attains age 65 (such applicable period, the “Severance Period”), the Company shall arrange to provide the Executive with life, disability, accident and health insurance benefits substantially similar to those which the Executive is receiving immediately prior to the Date of Termination; provided , however , that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of “parachute payments” pursuant to Section 6.2), such health insurance benefits shall be provided through a third-party insurer. Benefits otherwise receivable by the Executive pursuant to this Section 6.1 (B) shall be reduced to the extent comparable benefits are actually received by or made available to the Executive (other than benefits available pursuant to the Consolidated Omnibus Budget Reform Act of 1985) during the Severance Period (and any such benefits actually received by or made available to the Executive shall be reported to the Company by the Executive).

(C) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any incentive compensation which has been allocated or awarded to the Executive for a completed year or other measuring period preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the level that would produce the maximum award, of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period.

6.2 “Gross-Up Payment.”

(A) Whether or not the Executive becomes entitled to the Severance Payments, if any of the payments or benefits received or to be received by the Executive in connection with a Change in Control or the Executive’s termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the “Total Payments”) will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the “Gross-Up Payment”) such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, and after taking into account the phase out of the itemized deductions attributable to the Gross-Up Payment, shall be equal to the Total Payments.

(B) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as “parachute payments” (within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of tax counsel selected by the accounting firm which was, immediately prior to the Change in Control, the Company’s independent accountant (the “Accountant”) and which tax counsel is reasonably acceptable to the Executive (“Tax Counsel”), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all “excess parachute payments” within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Accountant in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive’s residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.

(C) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being

repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income or employment tax deduction) plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) at the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments.

6.3 Severance Payments Pay Date. The payments provided in subsections (A) and (C) of Section 6.1 and in Section 6.2 shall be made not later than the fifth day following the Date of Termination; provided , however , that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2, in accordance with Section 6.2, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Accountant or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement).

6.4 Executive’s Legal Fees. The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive’s employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive’s written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require.

7. Termination Procedures and Compensation During Dispute.

7.1 Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive’s employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10. For purposes of this Agreement, a “Notice of Termination” shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall state in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive’s counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct stated in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail.

7.2 Date of Termination. “Date of Termination,” with respect to any purported termination of the Executive’s employment after a Change in Control and during the Term, shall mean (i) if the Executive’s employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive’s duties during such thirty (30) day period), and (ii) if the Executive’s employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given).

7.3 Dispute Concerning Termination. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however , that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence.

7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2) and shall not be offset against or reduce any other amounts due under this Agreement.

8. No Mitigation. The Company agrees that, if the Executive’s employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 or Section 7.4. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B)) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise.

9. Successors; Binding Agreement.

9.1 Safeco Successors. In addition to any obligations imposed by law upon any successor to Safeco, Safeco will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Safeco to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Safeco would be required to perform it if no such succession had taken place. Failure of Safeco to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive’s employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination.

9.2 Executive’s Successors. This Agreement shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive’s estate.

10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive’s signature on the final page and, if to the Company, to the address stated below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of a change of address shall be effective only upon actual receipt:

To the Company:

Safeco Corporation

Safeco Plaza

Seattle, WA 98185

Attention: Chief Legal Officer

11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and an officer of Safeco. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to its subject matter which have been made by either party. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the state of Washington. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7) shall survive such expiration. The parties acknowledge that this Agreement may need to be modified in the future to comply with new Section 409(A) of the Code (added to the Code pursuant to the Jobs Creation Act of 2004) but such modifications will not diminish the benefits to which Executive is entitled unless Executive receives substantially comparable benefits in substitution.

12. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

14. Settlement of Disputes; Arbitration.

(A) All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Committee and shall be in writing. Any denial by the Committee of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall state the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Committee shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Committee a decision of the Committee within sixty (60) days after notification by the Committee that the Executive’s claim has been denied.

(B) Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Seattle, Washington in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive’s right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement.

15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below:

(A) “Accountant” shall have the meaning stated in Section 6.2.

(B) “Affiliate” shall have the meaning stated in Rule 12b-2 promulgated under Section 12 of the Exchange Act.

(C) “Base Amount” shall have the meaning stated in section 280G(b)(3) of the Code.

(D) “Beneficial Owner” shall have the meaning stated in Rule 13d-3 under the Exchange Act.

(E) “Board” shall mean the Board of Directors of Safeco.

(F) “Cause” for termination by the Company of the Executive’s employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive’s duties with the Company (other than any such failure resulting from the Executive’s incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive’s duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive’s part shall be deemed “willful” unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive’s act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Committee by clear and convincing evidence that Cause exists.

(G) A “Change in Control” shall be deemed to have occurred if the event stated in any one of the following paragraphs shall have occurred:

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

(ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of Safeco) whose appointment or election by the Board or nomination for election by Safeco’s stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or

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

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

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

(H) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.

(I) “Committee” shall mean (i) the individuals (not fewer than three in number) who, on the date six months before a Change in Control, constitute the Compensation Committee of the Board, plus (ii) in the event that fewer than three individuals are available from the group specified in clause (i) above for any reason, such individuals as may be appointed by the individual or individuals so available (including for this purpose any individual or individuals previously so appointed under this clause (ii)).

(J) “Company” shall mean Safeco and its subsidiaries, collectively.

(K) “Date of Termination” shall have the meaning stated in Section 7.2.

(L) “Deferred Benefit” shall have the meaning stated in Section 5.5.

(M) “Deferred Benefit Commencement Date” shall have the meaning stated in Section 5.5.

(N) “Disability” shall be deemed the reason for the termination by the Company of the Executive’s employment, if, as a result of the Executive’s incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive’s duties with the Company for a period of one hundred and thirty (130) consecutive business days, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive’s duties.

(O) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time.

(P) “Excise Tax” shall mean any excise tax imposed under section 4999 of the Code.

(Q) “Executive” shall mean the individual named in the first paragraph of this Agreement.

(R) “Good Reason” for termination by the Executive of the Executive’s employment shall mean the occurrence (without the Executive’s express written consent) after any Change in Control, or prior to a Change in Control under the circumstances described in clause (ii) of the second sentence of Section 6.1 (treating all references in paragraphs (i) through (vii) below to a “Change in Control” as references to a “Potential Change in Control”), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (i), (v), (vi) or (vii) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof:

(i) the assignment to the Executive of any duties inconsistent with the Executive’s status as a senior executive officer of the Company or a substantial adverse alteration in the nature or status of the Executive’s responsibilities from those in effect immediately prior to the Change in Control;

(ii) a reduction by the Company in the Executive’s annual base salary as in effect on the date hereof or as the same may be increased from time to time;

(iii) the relocation of the Executive’s principal place of employment to a location outside of King County, Washington (or, if different, the county in which such principal place of employment is located immediately prior to the Change in Control) or the Company’s requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company’s business to an extent substantially consistent with the Executive’s present business travel obligations;

(iv) the failure by the Company to pay to the Executive any portion of the Executive’s current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due;

(v) the failure by the Company to continue in effect any compensation plan (including stock option, restricted stock, stock appreciation right, incentive compensation and bonus plans) in which the Executive participates immediately prior to the Change in Control which is material to the Executive’s total compensation, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive’s participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive’s participation relative to other participants, as existed immediately prior to the Change in Control;

(vi) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company’s profit sharing, pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company’s normal vacation policy in effect at the time of the Change in Control; or

(vii) any purported termination of the Executive’s employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1; for purposes of this Agreement, no such purported termination shall be effective.

The Executive’s right to terminate the Executive’s employment for Good Reason shall not be affected by the Executive’s incapacity due to physical or mental illness. The Executive’s continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder.

For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that Good Reason does not exist.

(S) “Gross-Up Payment” shall have the meaning stated in Section 6.2.

(T) “Notice of Termination” shall have the meaning stated in Section 7.1.

(U) “Person” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) Safeco or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of Safeco or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of Safeco in substantially the same proportions as their ownership of stock of Safeco.

(V) “Potential Change in Control” shall be deemed to have occurred if the event stated in any one of the following paragraphs shall have occurred:

(i) Safeco enters into an agreement, the consummation of which would result in the occurrence of a Change in Control;

(ii) Safeco or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control;

(iii) any Person becomes the Beneficial Owner, directly or indirectly, of securities of Safeco representing 10% or more of either the then outstanding shares of common stock of Safeco or the combined voting power of the Safeco’s then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from Safeco or its affiliates); or

(iv) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred.

(W) “Retirement” shall be deemed the reason for the termination by the Company or the Executive of the Executive’s employment if such employment is terminated on or after the date Executive attains age 65.

(X) “Safeco” shall mean Safeco Corporation and, except in determining under Section 15(G) whether or not any Change in Control has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise.

(Y) “Severance Payments” shall mean the payments so described in Section 6.1.

(Z) “Severance Period” shall have the meaning stated in Section 6.1(B).

(AA) “Tax Counsel” shall have the meaning stated in Section 6.2.

(BB) “Term” shall mean the period of time described in Section 2 (including any extension, continuation or termination described therein).

(CC) “Total Payments” shall mean the payments so described in Section 6.2.

Safeco Corporation		Executive
By:	/s/ [NAME]	/s/ [NAME]

EX-10.12

Exhibit 10.12

SAFECO 401(K) PLAN

AS AMENDED AND RESTATED

EFFECTIVE

JANUARY 1, 2008

CONTENTS

ARTICLE 1: INTRODUCTION	1-1
1.1     Restatement of the Plan	1-1
1.2     Purpose of the Plan	1-1
1.3     Applicability of the Restated Plan	1-1
ARTICLE 2: DEFINITIONS	2-1
2.1     Account	2-1
2.2     Administrative Committee	2-1
2.3     Affiliate	2-1
2.4     After-Tax Contribution Account	2-1
2.5     Allocable Income	2-2
2.6     American States Plan	2-2
2.7     Annuity Starting Date	2-2
2.8     Authorized Leave of Absence	2-2
2.9     Beneficiary	2-2
2.10   Board	2-3
2.11   Bonus	2-3
2.12   Break-in-Service	2-3
2.13   Code	2-3
2.14   Company	2-3
2.15   Company Stock	2-3
2.16   Compensation	2-4
2.17   Dependent Child	2-4
2.18   Disabled	2-4
2.19   Dividend Account	2-5
2.20   Dividends	2-5
2.21   Domestic Partner	2-5
2.22   Early Retirement Date	2-5
2.23   Earnings	2-5
2.24   Eligible Employee	2-6
2.25   Employee	2-6
2.26   Employer	2-7
2.27   Employer Matching Contribution Account	2-7
2.28   ERISA	2-7
2.29   Fixed Contribution Account	2-7
2.30   Highly Compensated Employee	2-7
2.31   Hour of Service	2-8
2.32   Normal Retirement Date	2-8
2.33   Participant	2-9
2.34   Plan	2-9
2.35   Plan Administrator	2-9
2.36   Plan Year	2-9
2.37   Pre-tax Contribution Account	2-9
2.38   Profit Sharing Contribution Account	2-9

i

2.39   Required Beginning Date	2-9
2.40   Rollover Account	2-10
2.41   Safeco Stock Ownership Fund	2-10
2.42   Section 415 Compensation	2-10
2.43   Trust Agreement	2-12
2.44   Trust or Trust Fund	2-12
2.45   Trustee	2-12
2.46   Valuation Date	2-12
2.47   Year of Service	2-12
2.48   Additional Definitions in Plan	2-13
ARTICLE 3: PARTICIPATION	3-1
3.1     Eligibility for Participation	3-1
3.2     Inactive Participant	3-2
3.3     Reemployment After Termination	3-2
ARTICLE 4: SALARY DEFERRAL	4-1
4.1     Payroll Deduction Agreement	4-1
4.2     Participant Modification of Payroll Deduction Agreement	4-2
4.3     Procedure for Making and Revoking Payroll Deduction Agreement	4-2
4.4     Nondiscrimination Test for Deferrals (“ADP Test”)	4-2
ARTICLE 5: PLAN CONTRIBUTIONS	5-1
5.1     Participant and Employer Contributions	5-1
5.2     Contribution of Stock	5-4
5.3     Nondiscrimination Test for Matching and After-Tax Contributions (“ACP Test”)	5-4
5.4     Corrective Procedures to Satisfy Discrimination Tests	5-6
5.5     Return of Contributions	5-9
5.6     Recharacterization of Excess Pre-Tax Contributions	5-10
5.7     Allocation of Forfeitures	5-10
5.8     Maximum Annual Additions to Accounts	5-10
ARTICLE 6: ACCOUNT ADMINISTRATION	6-1
6.1     Types of Accounts	6-1
6.2     Investment	6-1
6.3     Establishment of Rules and Procedures	6-3
6.4     Investment Manager	6-4
6.5     Dividends	6-4
6.6     Voting Company Stock	6-6
6.7     Valuation of the Trust Fund	6-7
6.8     Allocation of Trust Fund Earnings and Losses to Participant Accounts	6-8
6.9     Account Statements	6-8

ii

ARTICLE 7: VESTING	7-1
7.1     Vesting	7-1
7.2     Forfeitures	7-4
7.3     Reemployment	7-4
ARTICLE 8: WITHDRAWALS AND LOANS	8-1
8.1     Withdrawals Prior to Termination	8-1
8.2     Hardship Withdrawals	8-2
8.3     Loans	8-4
ARTICLE 9: BENEFITS AND FORMS OF PAYMENT	9-1
9.1     Eligibility for Benefits	9-1
9.2     Benefit Commencement	9-1
9.3     Form of Payment	9-3
9.4     Benefits for Terminated Participants	9-7
9.5     Direct Rollovers	9-7
9.6     Minimum Distribution Requirements	9-10
ARTICLE 10: TOP-HEAVY PROVISIONS	10-1
10.1     Scope	10-1
10.2     Top-Heavy Status	10-1
10.3     Minimum Contribution	10-3
ARTICLE 11: ADMINISTRATION	11-1
11.1     Administrative Committee	11-1
11.2     Activities, Duties and Responsibilities of the Administrative Committee	11-1
11.3     Allocation of Fiduciary Responsibility	11-4
11.4     Fidelity Bonds	11-4
11.5     Data	11-4
11.6     Missing Persons	11-4
11.7     Claims Procedure	11-5
11.8     Effect of a Mistake	11-9
11.9     No Enlargement of Employee Rights	11-9
11.10   Notice of Address	11-9
11.11   Incompetency	11-10
11.12   Non-Alienation and Domestic Relations Orders	11-10
11.13   Applicable Law	11-12
11.14   Expenses	11-12
11.15   Masculine and Feminine, Singular and Plural	11-12
11.16   Disclosure to Participants	11-12
11.17   Income Tax Withholding Requirements	11-13
11.18   Severability	11-13
11.19   Uniformed Services Employment and Reemployment Rights Act of 1994 (“USERRA”)	11-13
11.20   Plan Qualification	11-14

iii

11.21   Beneficiary Disputes	11-14
ARTICLE 12: AMENDMENT AND TERMINATION	12-1
12.1     Amendment - General	12-1
12.2     Amendment - Vesting Schedule	12-1
12.3     Amendment - Consolidation or Merger	12-1
12.4     Termination of the Plan	12-2
12.5     Action Upon Discontinuance of Contributions or Termination of the Plan	12-2
ARTICLE 13: FUNDING	13-1
13.1     Contributions to the Trust	13-1
13.2     Trust for Exclusive Benefit of Participants	13-1
13.3     Trustee	13-1

iv

ARTICLE 1: INTRODUCTION

Restatement of the Plan

Safeco Corporation (the “Company”) maintains the Safeco 401(k) Plan (formerly known as the Safeco 401(k)/Profit Sharing Retirement Plan) (the “Plan”) for the benefit of its eligible employees. Effective January 1, 2004, the Plan was amended and restated to include an employee stock ownership plan, within the meaning of Code Section 4975(e)(7), in addition to the profit sharing and 401(k) components of the Plan. Effective January 1, 2008, the Plan is hereby amended and restated to incorporate all prior amendments and make certain other clarifying amendments.

Purpose of the Plan

The Plan is intended to allow Participants to save all or a portion of their Earnings and Bonuses for retirement and to share in the Employer’s earnings. For tax purposes, the Plan is intended to qualify as a profit sharing plan with a qualified cash or deferred arrangement, except for the Safeco Stock Ownership Fund, which is intended to constitute an employee stock ownership plan, within the meaning of Code Section 4975(e)(7). The ESOP and the non-ESOP portions of the Plan are intended to constitute a single plan.

Applicability of the Restated Plan

Except to the extent that an earlier effective date is specifically provided for in this restatement, the provisions of this restatement are effective July 1, 2006. This restatement and any amendment thereto, unless it expressly provides otherwise, shall not be applied retroactively to increase the vested percentage of a former Participant whose employment terminated before January 1, 2008 unless and until the individual again becomes a Participant.

Notwithstanding any contrary Plan provision, if any modification of the Code (or regulations or rulings thereunder) requires that a conforming Plan amendment be adopted as of a stated effective date in order for the Plan to continue to be a qualified plan, the Plan shall be operated in accordance with such requirements until the date when a conforming Plan amendment is adopted, or the date when a clear and unambiguous nonconforming Plan amendment is adopted, whichever occurs first.

Except as otherwise specifically provided in the Plan, all rights under the Plan shall be determined under the terms of the Plan as in effect at the time the determination is made.

1-1

ARTICLE 2: DEFINITIONS

The following terms when used herein shall have the following meanings, unless a different meaning is plainly required by the context. Capitalized terms are used throughout the Plan text for terms defined in this or other sections.

Account

“Account” means the aggregate of a Participant’s Pre-tax Contribution Account, Employer Matching Contribution Account, After-tax Contribution Account, Fixed Contribution Account (formerly referred to as the Guaranteed Contribution Account), Profit Sharing Contribution Account, Dividend Account and Rollover Account, or each such Account individually, as the context requires.

Administrative Committee

“Administrative Committee” means the committee as from time to time constituted and appointed by the Company to administer the Plan.

Affiliate

“Affiliate” means:

(a) any corporation that is a member of a controlled group of corporations that includes an Employer (as defined in Code Section 414(b));

(b) any trade or business under common control with an Employer (as defined in Code Section 414(c));

(c) any member of an affiliated service group that includes an Employer (as defined in Code Section 414(m)); or

(d) any business or entity that is treated as a single company with an Employer under Code Section 414(o).

For purposes of the limitation on benefits in Section 5.9, the determination of whether an entity is an Affiliate will be made by modifying Code Sections 414(b) and (c) as specified in Code Section 415(h).

After-Tax Contribution Account

“After-tax Contribution Account” means an account established and maintained by the Plan Administrator or Trustee to hold a Participant’s after-tax contributions to the Plan and including any gains or losses (other than Dividends)of the Trust attributable thereto.

2-1

Allocable Income

“Allocable Income” means, effective January 1, 2007, net earnings or net loss allocable to excess deferrals, excess contributions and excess aggregate contributions for the Plan Year in which they are contributed and the portion of the following Plan Year preceding a date which is not more than seven days before the date such excesses are distributed (i.e., the “gap period”); provided, however, that gap period income shall apply to excess contributions and excess aggregate contributions solely with respect to Plan Years ending on or before December 31, 2007. The Administrative Committee shall calculate Allocable Income using a uniform, nondiscriminatory method that reasonably reflects the manner used by the Plan to allocate income to the Participant’s Accounts.

American States Plan

“American States Plan” means the predecessor American States Financial Corporation Employees’ Savings and Profit Sharing Plan.

Annuity Starting Date

“Annuity Starting Date” means the first day of the first period for which a Plan benefit is payable.

Authorized Leave of Absence

“Authorized Leave of Absence” means any absence authorized by the Company or an Affiliate under its standard personnel practices, provided that all persons under similar circumstances must be treated alike in the granting of such Authorized Leaves of Absence, and provided further that the Participant returns within the period of authorized absence. Any absence due to service in the Armed Forces of the United States shall be considered an Authorized Leave of Absence, provided that the Participant returns to employment with the Company or an Affiliate within the period provided by law.

Beneficiary

“Beneficiary” means the person or persons designated by the Participant to receive the Participant’s Account in the event of the Participant’s death. Each Participant may designate a Beneficiary on a form prescribed by the Administrative Committee, and such designation shall be effective when properly filed with the Administrative Committee, and shall revoke all prior designations by the same Participant. The Administrative Committee shall require that a married Participant, who designates a Beneficiary other than the Participant’s spouse, obtain and submit to the Administrative Committee the spouse’s written consent to the designation of each such Beneficiary on a form that discloses to the

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spouse the potential effect of such consent. Such consent must be witnessed by a notary public or a Plan representative. No spousal consent shall be required if it is established to the satisfaction of a Plan representative that such consent cannot be obtained because there is no spouse, because the spouse cannot be located, because the Participant is legally separated or the Participant has been abandoned (within the meaning of local law) and the Participant has a court order to such effect (unless a Qualified Domestic Relations Order, within the meaning of Section 11.12(b), provides otherwise), or because of such other circumstances as may be prescribed by Treasury regulations. If no designated Beneficiary survives the Participant or exists, the Participant’s Beneficiary shall be the Participant’s spouse at date of death (if such spouse survives the Participant), or, if there is no surviving spouse, the Participant’s estate.

Board

“Board” means the Board of Directors of the Company.

Bonus

“Bonus” means any bonus earned under the Employer’s incentive pay plans including the Success Sharing Plan, Leadership Performance Plan and President/CEO Incentive Compensation Plan. “Bonus” also includes amounts earned under substitute incentive pay plans for Participants who are not also participants in one of the above named plans. “Bonus” excludes recognition bonuses, retention bonuses, sign-on bonuses and other earnings.

Break-in-Service

“Break-in-Service” means any Plan Year in which an Employee is credited with less than 501 Hours of Service.

Code

“Code” means the Internal Revenue Code of 1986, as amended, and including all regulations promulgated pursuant thereto.

Company

“Company” means Safeco Corporation, a corporation organized under the laws of the State of Washington, and any successor thereto that assumes sponsorship of the Plan.

Company Stock

“Company Stock” means the common stock of the Company.

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Compensation

“Compensation,” for any Plan Year, means an Eligible Employee’s Section 415 Compensation for such Plan Year paid to an Eligible Employee while a Participant by an Employer, but taking into account only amounts which would be payable in cash, and excluding reimbursements and other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation, severance pay, welfare benefits (other than short-term disability), equity-based awards under the SAFECO Long-Term Incentive Plan of 1997, foreign compensation as described in Section 2.44(D), [and amounts described in Section 2.44(B) that are paid after the [first paycheck] following severance from employment].

Dependent Child

“Dependent Child” means the Participant’s unmarried child who resides with the Participant or at school or in an institution, who is:

(a) less than 19 years old,

(b) at least 19 years old but less than 23 years old and who is enrolled in school as a full–time student and who is primarily supported by the Participant, or

(c) at least 19 years old and who is primarily supported by the Participant and who is incapable of self–sustaining employment by reason of mental or physical handicap.

A child includes a natural child, stepchild, foster child, a child for whom the Participant is a legal guardian, or a legally adopted child (from the date the child is placed in the Participant’s home and the Participant assumes financial responsibility for the adopted child).

Notwithstanding the foregoing, a child described above shall not be a “Dependent Child” if the Participant has joint custody of the child and the Participant has custody for less than 50% of the time.

Disabled

“Disabled” and similar terms such as “Disability” mean a physical or mental condition of a Participant occurring prior to the Participant’s Normal Retirement Date, which in the sole judgment of the Administrative Committee, based on evidence satisfactory to the Administrative Committee, presumably permanently prevents a Participant from satisfactorily performing the Participant’s usual duties for the Participant’s Employer or the duties of such other position or job for the Employer for which such Participant is qualified by reason of training, education or experience.

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Dividend Account

“Dividend Account” means an account established and maintained by the Plan Administrator or Trustee to record a Participant’s share of any Dividends and any gains or losses of the Trust attributable thereto.

Dividends

“Dividends” means cash dividends paid on shares of Company Stock held in the Safeco Stock Ownership Fund.

Domestic Partner

“Domestic Partner” means a same-sex or opposite-sex individual, age 18 or older, who, for a period of 12 months or more prior to enrolling in the Program, meets the following criteria: The individual is neither married nor related by blood or marriage to a Participant; is the Participant’s sole spousal equivalent and intends to remain so indefinitely; lives together with a Participant in the same principal residence and intends to do so indefinitely; is emotionally committed to the Participant and shares joint responsibilities for common welfare and financial obligations; and is not related to the Participant by blood closer than would prohibit marriage in the state in which the Participant resides.

Early Retirement Date

“Early Retirement Date” means the first day of the month commencing after the Participant terminates employment with the Company and its Affiliates provided the Participant has attained age 55 and the Participant’s age plus Years of Service equals or exceeds 75 on the date of such termination of employment; provided, however, that with respect to a former participant in the American States Insurance Company Retirement Plan who attained age 50 on or before January 1, 1999, “Early Retirement Date” means the first day of the month commencing after the Participant terminates employment with the Company and its Affiliates provided the Participant has attained age 55 and has at least 10 Years of Service on the date of such termination.

Earnings

“Earnings” for each Plan Year means the total of all amounts paid to an Eligible Employee, while a Participant, by an Employer for personal services, including:

(a) base salary; and

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(b) amounts paid to the Participant while on an Authorized Leave of Absence, or short-term disability;

but excluding:

(c) Bonus and incentive payments under any bonus or incentive plan or arrangement maintained by the Employer, including without limitation, Bonuses;

(d) overtime pay;

(e) cash and noncash fringe benefits;

(f) long–term disability benefits;

(g) severance pay; and

(h) any other payments or benefits.

Earnings shall be calculated prior to any reduction for pre-tax Employee contributions to the Plan, and prior to any salary reductions to the SAFECO Flexible Benefits Program or for qualified transportation fringe benefits pursuant to Code Section 132(f)(4). Notwithstanding the foregoing, a Participant’s Earnings for a Plan Year shall be disregarded to the extent they exceed the maximum permissible dollar limitation in effect under Code Section 401(a)(17) for such Plan Year.

Eligible Employee

“Eligible Employee” means any Employee who is employed on a salaried basis, other than a salaried Employee who is (a) a leased Employee, (b) a nonresident alien who receives no U.S.-source earned income (within the meaning of Code Section 911(d)(2)) from an Employer, or (c) a member of a unit of Employees covered by a collective bargaining agreement that does not provide for participation in the Plan. Notwithstanding the foregoing, an individual who is not treated by an Employer as an employee for payroll tax purposes, but who is subsequently determined by a government agency, by the conclusion or settlement of threatened or pending litigation, or otherwise to be (or to have been) a common law employee of the Employer shall not be an Eligible Employee, unless and until (and only to the extent) the Administrative Committee determines otherwise.

Employee

“Employee” means any person who is employed by an Employer as a common law employee and any leased employee within the meaning of Code Section 414(n)(2); provided, however, if leased employees constitute 20% or less of the

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Employer’s nonhighly compensated work force, the term “Employee” shall not include a leased employee who is covered by a plan maintained by the leasing organization that meets the requirements of Code Section 414(n)(5).

Employer

“Employer” means the Company and any Affiliate that with the consent of the Board elects to adopt the Plan. A participating Employer shall be deemed to appoint the Company as its exclusive agent with respect to all power and authority conferred by the Plan on an Employer.

Employer Matching Contribution Account

“Employer Matching Contribution Account” means an account established and maintained by the Plan Administrator or Trustee to record a Participant’s share of Employer matching contributions to the Plan and any gains or losses (other than Dividends) of the Trust attributable thereto.

ERISA

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and including all regulations promulgated pursuant thereto.Fixed Contribution Account

“Fixed Contribution Account” means an Account established and maintained by the Administrative Committee or Trustee to hold a Participant’s fixed contributions (formerly known as guaranteed contributions) made pursuant to Section 5.1(c) and any gains or losses of the Trust (other than Dividends) attributable thereto.

Highly Compensated Employee

“Highly Compensated Employee” means an Employee who is included in at least one of the following categories within the meaning of Code Section 414(q) and regulations thereunder:

(a) an Employee who was a 5% owner (within the meaning of Code Section 414(q)(2)) of the Employer at any time during the Plan Year or the 12 month period preceding the Plan Year; or

(b) an Employee who received aggregate Section 415 Compensation from an Employer for the 12 month period preceding the Plan Year in excess of the dollar limitation contained in Code Section 414(q)(1)(B)(i).

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A former Employee shall be considered a Highly Compensated Employee if he or she was a Highly Compensated Employee (i) when he or she separated from service or (ii) at any time after attaining age 55.

Hour of Service

“Hour of Service” means:

(a) each hour for which an Employee is paid or entitled to payment by the Company or any Affiliate on account of performance of duties;

(b) each hour for which an Employee is paid or entitled to payment by the Company or any Affiliate on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence;

(c) each hour for which an Employee is paid or entitled to payment by the Company or any Affiliate on account of an award of back pay, irrespective of mitigation of damages, agreed to by the Company or any Affiliate. However, hours credited under subsection (a) or (b) above shall not also be credited under this subsection (c);

(d) each hour credited pursuant to applicable ERISA regulations for unpaid periods of absence for service in the United States Armed Forces or Public Health Service during which the Employee’s reemployment rights are guaranteed by law, provided that the Employee is reemployed by the Company or an Affiliate within the time limits prescribed by such law; and

(e) each hour for which the Employee is on unpaid Authorized Leave of Absence or “days without pay” status.

An Employee who is not compensated on an hourly basis shall be credited with 190 Hours of Service for each month in which he or she is credited with at least one Hour of Service.

All Hours of Service shall be determined and credited to computation periods in accordance with reasonable standards and policies consistent with Department of Labor Regulations Sections 2530.200b-2(b) and (c).

Normal Retirement Date

“Normal Retirement Date” means the first day of the month coinciding with or following the Participant’s 65th birthday.

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Participant

“Participant” means any Eligible Employee who has become a Participant pursuant to Section 3.1. A Participant shall remain a Participant until the Participant’s entire vested interest under the Plan has been distributed.

Plan

“Plan” means the Safeco 401(k) Plan (formerly known as the Safeco 401(k)/Profit Sharing Retirement Plan) as set forth herein, together with any amendments hereto.

Plan Administrator

“Plan Administrator” means the person or entity designated in Section 11 to administer the Plan.

Plan Year

“Plan Year” means the calendar year.

Pre-tax Contribution Account

“Pre-tax Contribution Account” means an account established and maintained by the Plan Administrator or Trustee to reflect a Participant’s pre-tax contributions to the Plan and any gains or losses (other than Dividends) of the Trust attributable thereto.

Profit Sharing Contribution Account

“Profit Sharing Contribution Account” means an Account established and maintained by the Administrative Committee or Trustee to hold a Participant’s account balance as of December 31, 2001 under the SAFECO Employees’ Profit Sharing Retirement Plan (which plan was merged into this Plan as of January 1, 2002) and profit-based contributions made to this Plan thereafter and any gains or losses of the Trust (other than Dividends) attributable thereto. Profit-based contributions to the Plan are discontinued for Plan Years beginning after December 31, 2007.

Required Beginning Date

Except as provided below, “Required Beginning Date” means April 1 following the later of (a) the close of the calendar year in which the Participant attains age 70 ¹/2 and (b) the close of the calendar year in which the Participant separates from service with the Company and its Affiliates or becomes Disabled; provided that

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clause (b) shall not apply to a Participant who is a 5% owner (as defined in Code Section 416) with respect to the calendar year in which the Participant attains age 70 ¹/2. The “Required Beginning Date” for a Participant who is not a 5% owner and who attained age 70 ¹/2 prior to January 1, 1999 and after December 31, 1995 is April 1 of the calendar year following the calendar year in which the Participant attained age 70 ¹/2 unless the Participant elected prior to such date (or, in the case of a Participant who attained age 70 ¹/2 in 1996, prior to December 31, 1997) to postpone benefit commencement until April 1 of the calendar year following the calendar year in which the Participant terminates employment.

Rollover Account

“Rollover Account” means an account established and maintained by the Plan Administrator or Trustee to reflect a Participant’s rollover contribution to the Plan and any gains or losses (other than Dividends) of the Trust attributable thereto.

Safeco Stock Ownership Fund

“Safeco Stock Ownership Fund” means an investment subfund that is designed to be invested primarily (or exclusively) in shares of Common Sock and that is intended to constitute an employee stock ownership plan, within the meaning of Code Section 4975(e)(7).

Section 415 Compensation

“Section 415 Compensation,” for any Plan Year, means an Employee’s wages, salaries, commissions, professional fees, and other amounts received during such Plan Year (without regard to whether or not an amount is paid in cash) for personal services rendered in the course of employment with the Company and Affiliates to the extent the amounts are includable in gross income (or to the extent amounts would have been received and includable in gross income but for an election under Code Section 125(a), 132(f)(4), 402(e)(3), 402(h)(1(B), 402(k) or 457(b)). These amounts include, but are not limited to, ( (i) commissions paid to salespersons, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits and reimbursements or other expense allowances under a nonaccountable plan (as described in Treasury Regulation Section 1.62-2(c)), [(ii) amounts described in Code Section 104(a)(3), 105(a), or 105(h), but only to the extent that these amounts are includable in the gross income of the Employee, (iii) amounts paid or reimbursed by the Company and Affiliates for moving expenses incurred by the Employee, but only to the extent that at the time of the payment it is reasonable to believe that these amounts are not deductible by the Employee under Code Section 217; (iv) the value of a nonstatutory option (which is an option other than a statutory option as defined in Treasury Regulation Section 1.421-1(b)) granted to an Employee by the Company and Affiliates, but only to the extent that the value of the option is includable in the gross income of the Employee for the

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taxable year in which granted, (v) the amount includable in gross income upon making the election described in Code Section 83(b), and (vi) amounts includable in the Employee’s gross income under the rules of Code Section 409A or 457(f)(1)(A) or because the amounts are constructively received by the Employee.

Section 415 Compensation does not include (a) contributions (other than elective contributions described in Code Section 402(e)(3), 408(k)(6), 408(p)(2)(A)(i) or 457(b)) made by the Company and Affiliates to a plan of deferred compensation (including a simplified employee pension described in Code Section 408(k) or a simple retirement account described in Code Section 408(p), and whether or not qualified) to the extent that the contributions are not includable in the gross income of the Employee for the taxable year in which contributed, (b) distributions from a plan of deferred compensation (whether or not qualified), regardless of whether such amounts are includable in the gross income of the Employee when distributed; (c) amounts realized from the exercise of a nonstatutory option (which is an option other than a statutory option as defined in Treasury Regulation Section 1.421-1(b)), or when restricted stock or other property held by an Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture, (d) amounts realized from the sale, exchange, or other disposition of stock acquired under a statutory stock option (as defined in Treasury Regulation Section 1.421-1(b)), (e) other amounts that receive special tax benefits, such as premiums for group-term life insurance (but only to the extent that the premiums are not includable in the gross income of the Employee and are not salary reduction amounts that are described in Code Section 125); and (f) other items of remuneration that are similar to any of the items listed in (a) through (e) above.

Section 415 Compensation shall also include the following:

(A) Amounts earned during the Plan Year but not paid during that Plan Year solely because of the timing of pay periods and pay dates provided the amounts are paid during the first few weeks of the next Plan Year, the amounts are included on a uniform and consistent basis with respect to all similarly situated employees and no compensation is included in more than one Plan Year;

(B) By including compensation paid after severance from employment as described in Treasury Regulation Section 1.415(c)-2(e)(3)(i), (ii) and (iii), but excluding other post-severance payments as described in Treasury Regulation Section 1.415(c)-2(e)(3)(iv);

(C) By including salary continuation payments for military service as described in Treasury Regulation Section 1.415(c)-2(e)(4); and

(D) By including foreign compensation as described in Treasury Regulation Section 1.415(c)-2(g)(5), but excluding any such compensation paid to a nonresident alien who is not a Participant in the Plan to the extent such compensation is excludable from gross income and is not connected with the conduct of a trade or business within the United States.

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Notwithstanding the foregoing, Section 415 Compensation for any Plan Year shall not exceed the amount permitted under Code Section 401(a)(17), as adjusted for cost of living in accordance with Code Section 401(a)(17)(B).

Trust Agreement

“Trust Agreement” means any agreement in the nature of a trust established to form a part of the Plan and to receive, hold, invest, and dispose of the Trust Fund.

Trust or Trust Fund

“Trust” or “Trust Fund” means the trust fund or funds into which shall be paid all contributions and from which all benefits shall be paid under the Plan.

Trustee

“Trustee” means the trustee or trustees who receive, hold, invest, and disburse the assets of the Trust in accordance with the terms and provisions of the Trust Agreement by and between the Company and the Trustee. Said Trust Agreement constitutes a part of the Plan and its terms are incorporated herein by reference.

Valuation Date

“Valuation Date” means each day on which the New York Stock Exchange is open for trading.

Year of Service

“Year of Service” means each Plan Year during which an Employee has 1,000 or more Hours of Service. Notwithstanding the foregoing, “Years of Service” for any Employee who was a participant in the SAFECO Employees Profit Sharing Retirement Plan as of December 31, 2001 shall not be less than the years of “Vesting Service” that the individual had under the provisions of that plan as in effect on December 31, 2001. Also, “Years of Service” as of January 1, 1999 for any Employee with vesting service credit under the American States Plan shall not be less than the Employee’s years of service for vesting purposes under the American States Plan on December 31, 1998.

Where the Company maintains the plan of a predecessor employer, service for such predecessor employer will be treated as service for the Company to the extent required by the Code.

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Years of Service will also include service described in Appendix A. If a business entity becomes an Affiliate or a part of the Company or an Affiliate on or after January 1, 2002, prior service with such entity shall be credited as Years of Service hereunder for purposes of eligibility and vesting for individuals who become Eligible Employees immediately following and as a direct result of such acquisition, except to the extent that the Administrative Committee determines otherwise.

Additional Definitions in Plan

The following terms are defined in the following Sections of the Plan:

	Section
ACP Test	5.2
ADP Test	4.4
Aggregate Account	10.2(d)
Aggregation Group	10.2(g)
Annual Additions	5.8(b)
Determination Date	10.2(b)
Distributee	9.5(a)
Eligible Retirement Plan	9.5(a)
Employer Contributions	3.1(b)
Investment Manager	6.4
Key Employee	10.2(f)
Lump Sum	9.3(a)(1)
Present Value of Accrued Benefits	10.2(e)
Qualified Domestic Relations Order	11.12(b)
Top-Heavy	10.2(a)
Valuation Date (for Top-Heavy)	10.2(c)

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ARTICLE 3: PARTICIPATION

Eligibility for Participation

(a) Payroll Deduction Contributions

Each Eligible Employee who was a participant in the Plan on December 31, 2007 for purposes of making pre-tax and after-tax payroll deduction contributions shall continue as a Participant in this Plan for such purposes. Each Eligible Employee who was not a participant in the Plan on December 31, 2007 for purposes of making pre-tax and after-tax payroll deduction contributions, shall become a Participant in the Plan for such purposes on or as soon as administratively practicable after the later to occur of (1) the date on which the Eligible Employee first completes an Hour of Service as an Eligible Employee, and (2) the date the Eligible Employee’s payroll deduction agreement is received and processed by the Administrative Committee.

(b) Employer Contributions

Each Eligible Employee who was a participant in the Plan on December 31, 2007 for purposes of receiving Employer matching contributions andEmployer fixed contributions (collectively referred to as “Employer Contributions”) shall continue as a Participant in the Plan for such purposes. Each Eligible Employee who was not a participant in the Plan on December 31, 2007 for the purpose of receiving Employer Contributions shall become a Participant in the Plan as follows:

(i) For purposes of Employer matching contributions, as of the date the Eligible Employee makes pre-tax or after-tax payroll deduction contributions to the Plan.

(ii) For purposes of Employer fixed contributions, the latest of:

(A) the first day of the month following the Eligible Employee’s completion of at least one Hour of Service during twelve different months (nonconsecutive months are aggregated),

(B) the first day of the month following the date the individual is credited with 1,000 Hours of Service, or

(C) the first day of the month coinciding with or next following the date the individual becomes an Eligible Employee.

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Notwithstanding the foregoing, an Eligible Employee shall become a Participant for purposes of receiving Employer fixed contributions no later than (1) the first day of the month coinciding with or next following the first anniversary of the date on which such individual first completes an Hour of Service, provided that the individual is credited with at least 1,000 Hours of Service during the preceding 12–month period, or (2) if the individual is not credited with at least 1,000 Hours of Service by such anniversary date, the first day of the Plan Year next following the Plan Year in which the individual is first credited with at least 1,000 Hours of Service.

Inactive Participant

Any Participant who remains employed by the Company or an Affiliate but is no longer an Eligible Employee shall become an inactive Participant. An inactive Participant shall not be eligible to make pre-tax or after-tax payroll deduction contributions, or receive Employer Contributions for the period of time that the individual is an inactive Participant. The individual will, however, continue to earn Years of Service. The individual’s Account shall continue to be held under the Plan until the Participant becomes entitled to a distribution under the provisions of Article 8.

Reemployment After Termination

Upon the reemployment of a terminated Participant or former Participant as an Eligible Employee, the individual shall immediately resume active participation in the Plan (to the same extent as the individual was participating in the Plan prior to the individual’s termination). Payroll deduction contributions shall begin as soon as administratively practicable following the date the individual’s payroll deduction agreement is received and processed by the Administrative Committee.

An Employee who terminates prior to becoming a Participant for purposes of receiving Employer Contributions and is later reemployed shall qualify to become a Participant for such purposes upon satisfying the requirements of Section 3.1. Hours of Service credited prior to termination shall be forfeited for purposes of this Section 3 only if the Employee incurs five consecutive Breaks-in-Service.

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ARTICLE 4: SALARY DEFERRAL

Payroll Deduction Agreement

(a) Deferral of Earnings and Bonuses

An Eligible Employee may elect to make payroll deduction contributions by entering into a payroll deduction agreement with the Employer. Such agreement shall authorize the Employer to make payroll deductions, designated as pre-tax or after-tax contributions or a combination thereof, equal to a whole percentage (from 1% to 100%) of the Eligible Employee’s Earnings for each payroll period. In addition (or instead), such agreement may authorize the Employer to make payroll deductions, designated as pre-tax, equal to a whole percentage (from 1% to 100%) of any Bonuses paid to the Eligible Employee.

(b) Effective Time of Payroll Deduction Agreements

An Eligible Employee’s payroll deduction agreement shall be effective as soon as administratively practicable after it is received and processed by the Administrative Committee (but not prior to the date on which the Eligible Employee becomes a Participant for purposes of making payroll deduction contributions), and shall remain in effect until it is superseded by a subsequent agreement or revoked. Amounts shall be deducted from Participant Earnings or Bonuses, as applicable, each payroll period, after applying other applicable payroll deductions (e.g., income and social security tax withholding, wage or salary garnishments, and payroll deductions under the Employers’ cafeteria plan). In the event the amount of the Eligible Employee’s Earnings for a payroll period remaining after other payroll deductions is less than the amount of payroll deduction contributions elected by the Eligible Employee for such payroll period, then the Eligible Employee’s payroll deduction contribution for such payroll period shall equal such lesser amount.

(c) Maximum Dollar Contribution

Notwithstanding the foregoing, except to the extent permitted under Section 4.1(d) and Code Section 414(v), pre–tax contributions to the Plan (and any other plans of the Company or any Affiliate subject to Code Section 402(g)) for any calendar year shall not exceed the maximum dollar limitation on elective deferrals in effect under Code Section 402(g) for such year.

In the event a Participant has elected to make pre–tax contributions in excess of this limit, such election shall be automatically modified so that contributions in excess of this limit are designated as after-tax contributions.

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(d) Catch-Up Contributions

Subject to the last two sentences of Section 4.1(b), all Employees who are eligible to make payroll deduction contributions under this Plan and who have attained age 50 before the close of the Plan Year shall be eligible to make catch-up contributions in accordance with, and subject to the limitations of, Code Section 414(v). Such catch-up contributions shall not be taken into account for purposes of the provisions of the Plan implementing the required limitations of Code Sections 402(g) (other than those specified in Code Section 402(g)(1)(C)), 401(k)(3), 401(k)(12), 410(b), 415 and 416 (but catch-up contributions made in prior years will be counted in determining whether the Plan is top-heavy), and the Plan shall not be treated as failing to satisfy the provisions of the Plan implementing the requirements of such Code Sections, by reason of the making of such catch-up contributions. No Employer matching contributions will be made with respect to such catch-up contributions. Catch-up contributions shall be treated as pre-tax payroll deduction contributions for all purposes of the Plan.

Participant Modification of Payroll Deduction Agreement

The payroll deduction percentage designated in the Participant’s payroll deduction agreement shall continue in effect regardless of changes in Earnings or Bonuses until the Participant changes the election. A Participant may change the percentage or suspend deductions by completing a new payroll deduction agreement or suspension election and submitting it to the Administrative Committee. Such change or suspension shall be effective as soon as administratively practicable after such new agreement is received and processed by the Administrative Committee. Once a Participant’s payroll deduction agreement or suspension election becomes effective, it shall automatically revoke any prior payroll deduction agreement entered into by the Participant.

Procedure for Making and Revoking Payroll Deduction Agreement

The payroll deduction agreement and any modification or revocation thereof shall be made by the Participant in such form, within such time, and in accordance with such rules and procedures as are prescribed by the Administrative Committee.

Nondiscrimination Test for Deferrals (“ADP Test”)

The Plan is intended to satisfy the alternative method of meeting the nondiscrimination requirements of Code Section 401(k)(12)(C), based on fixed contributions made by the Employer pursuant to Section 5.1(c). With respect to Eligible Employees who have not become Participants for purposes of receiving fixed contributions (pursuant to Section 3.1(b)(ii)), for each Plan Year the Plan

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must meet one of the average deferral percentage (hereinafter “ADP”) tests described below to satisfy this nondiscrimination requirement. For purposes of this ADP Test, Eligible Employees who have become Participants for purposes of receiving fixed contributions (pursuant to Section 3.1(b)) shall not be considered.

(a) The ADP for such Plan Year for the group of Eligible Employees who are Highly Compensated Employees does not exceed the ADP for such Plan Year for all other Eligible Employees multiplied by 1.25; or

(b) The ADP for such Plan Year for the group of Eligible Employees who are Highly Compensated Employees (i) is not more than two percentage points higher than the ADP for such Plan Year for all other Eligible Employees and (ii) does not exceed the ADP for such Plan Year for all other Eligible Employees multiplied by two.

The ADP for a Plan Year for a specified group of Eligible Employees shall be the average of the ratios (calculated separately for each Employee in the group to the nearest one–hundredth of one percent of the Employee’s Section 415 Compensation) of (1) the sum of the Employee’s pre–tax contributions, if any, for such Plan Year (such pre–tax contributions are sometimes referred to herein as “ADP Contributions”) to (2) the Employee’s Section 415 Compensation for such Plan Year, or while an Eligible Employee during such Plan Year (as determined by the Administrative Committee), determined in accordance with Code Section 401(k) and regulations pursuant thereto, provided that for purposes of the ADP Tests, the definition of “Section 415 Compensation” may be modified by the Administrative Committee to mean any definition of “compensation” that complies with Code Section 414(s). In calculating the deferral percentage for an Eligible Employee for a Plan Year, such Employee’s ADP Contributions shall include any excess deferrals made by such Employee for such Plan Year, except for excess deferrals that arise solely from pre–tax contributions by Employees who are not Highly Compensated Employees under plans maintained by the Affiliates.

If for any Plan Year a Highly Compensated Employee is also eligible to participate in another plan offering ADP Contributions maintained by any Affiliate, the ADP of such Highly Compensated Employee shall be determined by aggregating all such contributions made on behalf of such Highly Compensated Employee.

Further, for purposes of the foregoing tests, all ADP Contributions made to the Plan and any other plan that is aggregated with this Plan for purposes of satisfying the coverage requirements of Code Section 410(b) (except the average benefits percentage test) shall be treated as made to a single plan. In addition, ADP Contributions made to this Plan may be permissively aggregated with ADP Contributions made to another plan, so long as the aggregated plans (1) satisfy the requirements of Code Sections 401(a)(4) and 410(b) as if they were a single plan, (2) have the same Plan Year, and (3) use the same ADP testing method.

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ARTICLE 5: PLAN CONTRIBUTIONS

Participant and Employer Contributions

(a) Participant Payroll Deduction Contributions

Plan fiduciaries shall satisfy applicable ERISA requirements if the Participants’ payroll deduction contributions for each payroll period are paid to the Trustee as of the earliest date on which such contributions can reasonably be segregated from the Employer’s general assets, but not later than the 15th business day of the month following the month in which such contributions are withheld from the Participants’ Earnings or Bonus, as applicable.

(b) Employer Matching Contributions

The Employer shall make an Employer matching contribution for each payroll period on behalf of each eligible Participant in an amount equal to:

(1) 100% multiplied by

(2) such Participant’s combined pre-tax and after–tax contributions (excluding catch-up contributions and contributions from Bonuses) up to 6% of Earnings during such payroll period but not in excess of the limits contained in Sections 4.1(c) (Maximum Dollar Contributions) and 5.3 (Nondiscrimination Test for After-Tax Contributions). The Employer matching contribution shall be credited to the eligible Participant’s Employer Matching Contribution Account.

The Employer shall pay the Employer matching contributions for each payroll period to the Trustee by the due date (including extensions) of the Employer’s federal income tax return.

(c) Fixed Contributions

For each payroll period, the Employer shall make a fixed contribution on behalf of each Participant who was an Eligible Employee on any day during that payroll period (and who was a Participant pursuant to Section 3.1(b)(ii) for such purposes at any time during that payroll period) equal to 3% of such Participant’s Compensation during that payroll period. The Employer’s fixed contribution on behalf of a Participant for a payroll period shall be allocated to such Participant’s Fixed Contribution Account.

The Employer shall pay the Employer fixed contributions for a payroll period to the Trustee by the due date (including extensions) of the Employer’s federal income tax return.

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(d) Profit Sharing Contributions

For any Plan Year beginning prior to January 1, 2008 in which the Company has “net profits” (as determined below), it may make a profit sharing contribution on behalf of eligible Participants. The Employer’s profit sharing contribution for a Plan Year may not exceed the lesser of (1) 9% of the Participants’ Compensation for the Plan Year, and (2) the Company’s net profit (as determined below) for such year. The Board shall determine each year whether a profit sharing contribution will be made and the amount of any such contribution.

(1) Eligible Participant

A Participant will be eligible to share in the Employer profit sharing contribution for a Plan Year if he or she was a Participant (pursuant to Section 3.1(b)(ii)) for such purposes at any time during such Plan Year and he or she:

(i) completed at least 1,000 Hours of Service during such Plan Year and was actively employed by an Employer on the last day of such Plan Year;

(ii) transferred during such Plan Year from the employ of the Employer to the employ of an Affiliate that has not elected to adopt the Plan, completed at least 1,000 Hours of Service and was actively employed by the Affiliate on the last day of the Plan Year;

(iii) retired during such Plan Year on or after the Participant’s Early or Normal Retirement Date;

(iv) died during such Plan Year; or

(v) incurred a Disability during such Plan Year.

(2) Definition of “Net Profits”

Net profits shall be computed on the basis of the consolidated operations of the Company and shall include all Employers that are, directly or indirectly, at least 20% owned by the Company during the Plan Year. The determination of net profits shall be made before any deduction for contributions to (or other expenses related to) the Plan, the Safeco Employees’ Cash Balance Plan or the SAFECO Deferred Compensation Plan for Executives and also before any deduction of federal, state or foreign taxes on income for the Plan Year.

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The amount of net profits for the Plan Year shall be determined in accordance with United States generally accepted accounting principles for the purposes of reporting the Company’s earnings to its shareholders. Income from corporations not controlled by the Company through direct or indirect ownership of at least 20% of all voting rights shall be included only to the extent of dividends actually received by the Company from those corporations.

Notwithstanding the foregoing, in no event shall the Employer make a contribution for any Plan Year that, in the determination of the Board at the time the contribution is made, is greater than the maximum amount currently deductible from income under the applicable provisions of the Code.

The Employer profit sharing contribution for a Plan Year shall be allocated among the Profit Sharing Contribution Accounts of Participants eligible therefor in the same ratio that each such Participant’s Compensation during such Plan Year bears to the total Compensation during such Plan Year of all eligible Participants.

Employer profit sharing contributions shall not be made for Plan Years beginning on or after January 1, 2008.

(e) Participant Rollovers

An Eligible Employee may request in writing on forms required by and filed with the Administrative Committee that the Administrative Committee accept a rollover amount that was distributed from another qualified plan described in Code Section 401(a) or 403(a), excluding after-tax employee contributions, or a conduit Individual Retirement Account (IRA). The Administrative Committee may accept the rollover amount subject to the following terms and conditions:

(1) The amount must be a direct rollover or must be deposited with the Trustee within 60 days after the Participant’s receipt of the distribution from another qualified plan or conduit IRA;

(2) The Administrative Committee must determine that such amount is a valid rollover contribution. The Eligible Employee shall provide the Administrative Committee with such information as the Administrative Committee deems necessary for it to make this determination; and

(3) A rollover of any type of property other than cash will not be accepted.

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A rollover amount shall be allocated to a Participant’s Rollover Account. The Rollover Account shall be a fully vested account subject to the same terms of the Plan as other amounts in a Pre–tax Contribution Account, except that the entire Rollover Account including earnings may be withdrawn pursuant to Section 9.1.

No Eligible Employee has any right to have a rollover amount transferred to the Trust, and the Administrative Committee may, in its sole and absolute discretion, approve or deny such a request for any reason that it deems sufficient.

Subject to the preceding provisions of this subsection (e), an Eligible Employee who receives (or is entitled to receive) an eligible rollover distribution from The Safeco Employees Cash Balance Plan may request that such distribution be rolled over to this Plan. Solely for purposes of the immediately preceding sentence, the term “Eligible Employee” includes a former Eligible Employee.

(f) Time of Contribution

In no event shall contributions for any Plan Year be made later than the time prescribed by law (i) for the deduction of such contributions for purposes of federal income tax, as determined by the applicable provisions of the Code, or (ii) for making such contributions under a cash or deferred arrangements (within the meaning of Code Section 401(k)).

Contribution of Stock

The Company may require the Employers to pay all or any portion of the Employer Contributions to the Trustee in Company Stock, rather than in cash, in which case the amount of Company Stock to be contributed will be determined by dividing the value of the Employer matching or fixed contributions to be made in shares of Company Stock by the closing price of the Company Stock on the Nasdaq for the last trading date immediately preceding the date such shares are contributed to the Plan.

Nondiscrimination Test for Matching and After-Tax Contributions (“ACP Test”)

The Plan is intended to satisfy the alternative method of meeting the nondiscrimination requirements of Code Section 401(m)(11), based on fixed contributions made by the Employer pursuant to Section 5.1(c). Notwithstanding the foregoing, for each Plan Year the Plan must meet one of the average contribution percentage (hereinafter “ACP”) tests described below with respect to Employer matching contributions made on behalf of Eligible Employees who have not become Participants for purposes of receiving fixed contributions

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(pursuant to Section 3.1(b)(ii)) and after-tax contributions to satisfy the nondiscrimination requirements. For purposes of the ACP Test, Employer matching contributions allocated to Eligible Employees who have become Participants for purposes of receiving fixed contributions (pursuant to Section 3.1(b)(ii)) shall not be considered unless the Administrative Committee elects, in its sole and absolute discretion, to aggregate Employer matching contributions with Participant after-tax contributions for purposes of the ACP Test.

(a) The ACP for such Plan Year for the group of Eligible Employees who are Highly Compensated Employees does not exceed the ACP for such Plan Year for all other Eligible Employees multiplied by 1.25; or

(b) The ACP for such Plan Year for the group of Eligible Employees who are Highly Compensated Employees (i) is not more than two percentage points higher than the ACP for such Plan Year for all other Eligible Employees and (ii) does not exceed the ACP for such Plan Year for all other Eligible Employees multiplied by two.

The ACP for a Plan Year for a specified group of Eligible Employees shall be the average of the ratios (calculated separately for each Employee in the group to the nearest one-hundredth of one percent of the Employee’s Section 415 Compensation) of (1) the sum of (i) the Employee’s after-tax contributions, if any, for such Plan Year and (ii) any matching contributions taken into account for such Plan Year pursuant to this Section 5.3 (such after-tax contribution and matching contributions are sometimes collectively referred to herein as “ACP Contributions”) to (2) the Employee’s Section 415 Compensation for such Plan Year, or while an Eligible Employee during such Plan Year (as determined by the Administrative Committee), determined in accordance with Code Section 401(m) and regulations pursuant thereto, provided that for purposes of the ACP Tests, the definition of “Section 415 Compensation” may be modified by the Administrative Committee to mean any definition of “compensation” that complies with Code Section 414(s).

If for any Plan Year a Highly Compensated Employee is also eligible to participate in another plan offering ACP Contributions maintained by any Affiliate, the ACP of such Highly Compensated Employee shall be determined by aggregating all such contributions made on behalf of such Highly Compensated Employee.

Further, for purposes of the foregoing tests, all ACP Contributions made to the Plan and any other plan that is aggregated with the Plan for purposes of satisfying the coverage requirements of Code Section 410(b) (except the average benefits percentage test) shall be treated as made to a single plan. In addition, ACP Contributions made to the Plan may be permissively aggregated with ACP Contributions made to another plan, so long as the aggregated plans satisfy the requirements of Code Sections 401(a)(4) and 410(b) as if they were a single plan.

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In the event the Plan is restructured for purposes of meeting the coverage requirements of Code Section 410(b), each restructured group shall be considered a separate plan for purposes of ACP testing and shall be separately tested.

If the Administrative Committee elects to aggregate Employer matching contributions with after-tax contributions for purposes of the ACP Test, then the foregoing provisions of this Section 5.3 shall be interpreted to include matching contributions.

Corrective Procedures to Satisfy Discrimination Tests

(a) Reduction of Contributions

If at any time during a Plan Year the Administrative Committee determines on a projected basis that it is necessary to reduce the Participant pre-tax contributions or after-tax contributions to satisfy the dollar limit on annual deferrals, the ADP nondiscrimination test, or the ACP nondiscrimination test, it shall have the authority to do so in such amounts and for such periods of time as it deems necessary under the circumstances.

(b) Contributions in Excess of Dollar Limitation

An excess deferral exists for a Participant if pre-tax contributions under the Plan, together with any other plans subject to the deferral limit in Code Section 402(g), exceed such dollar limitation for any calendar year.

In the event an excess deferral exists in plans maintained by the Company (and Affiliates, if applicable), such excess deferral, adjusted for Allocable Income, shall be distributed no later than April 15 following the calendar year in which the excess deferral occurred.

In the event an excess deferral exists in plans maintained by the Company and any unrelated employers, and a Participant submits a written request for a return of excess deferrals by March 1 following the calendar year in which an excess deferral occurs, the Administrative Committee shall distribute such excess deferral, adjusted for Allocable Income, no later than April 15 following the calendar year in which the excess deferral occurred. Such written request shall contain such information as the Administrative Committee may require.

(c) ADP Excess Contributions

ADP excess contributions exist with respect to a Plan Year if contributions under the Plan on behalf of Highly Compensated Employees fail to meet the ADP Test described in Section 4.4 for such Plan Year. The Administrative Committee shall determine

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the amount of the excess contributions for a Plan Year in accordance with paragraph (1) below and will then allocate the excess contributions to Highly Compensated Employees on the basis of the dollar amount of their pre–tax contributions for the Plan Year in accordance with paragraph (2) below. Such excess contributions shall be distributed to affected Highly Compensated Employees (to the extent they have not been distributed previously), together with Allocable Income thereon, within 12 months after the end of the Plan Year in which the excess contributions occurred; provided, however, that the amount of excess contributions to be distributed to any Highly Compensated Employee with respect to any Plan Year shall be reduced by the amount of excess deferrals previously distributed to such Employee with respect to such Plan Year; and provided further that to the extent a Highly Compensated Employee has not reached his or her catch-up contribution limit for such Plan Year, the excess contributions allocated to such Highly Compensated Employee shall be reclassified as catch-up contributions and shall not be distributed.

(1) Determination of Total Excess Contributions

The deferral percentage of the Highly Compensated Employee with the highest deferral percentage will be reduced to the extent necessary to (i) enable the Plan to satisfy Section 4.4, or (ii) cause such Employee’s deferral percentage to equal the deferral percentage of the Highly Compensated Employee with the next highest deferral percentage. This procedure shall be repeated until the Plan satisfies Section 4.4. The total excess contributions for the Plan Year shall equal the sum of the dollar amounts attributable to the various percentage reductions for the Highly Compensated Employees.

(2) Allocation of Total Excess Contributions

The total excess contributions for a Plan Year shall be allocated among the Highly Compensated Employees according to the dollar amount of their pre-tax contributions for such Plan Year. Excess contributions shall be allocated first to the Highly Compensated Employee with the highest amount of pre-tax contributions for the Plan Year. Excess contributions shall be allocated to that Highly Compensated Employee until the dollar amount of that individual’s pre-tax contributions has been reduced to equal that of the Highly Compensated Employee with the next highest dollar amount. This process shall be repeated until the total dollar amount of excess contributions has been allocated.

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(d) ACP Excess Aggregate Contributions

ACP excess aggregate contributions exist with respect to a Plan Year if contributions under the Plan on behalf of Highly Compensated Employees fail to meet the ACP Test described in Section 5.3 for such Plan Year. The Administrative Committee shall determine the amount of the excess aggregate contributions for a Plan Year in accordance with paragraph (1) below and then allocate the excess aggregate contributions to Highly Compensated Employees on the basis of the dollar amount of their after-tax contributions and matching contributions (to the extent taken into account under Section 5.3) for the Plan Year in accordance with paragraph (2) below. Such excess aggregate contributions shall be distributed to affected Highly Compensated Employees (to the extent the affected Highly Compensated Employees are vested in them and they have not been distributed previously) or forfeited by affected Highly Compensated Employees (to the extent the affected Highly Compensated Employees are not vested in them and they have not been forfeited previously), together with Allocable Income thereon, within 12 months after the end of the Plan Year in which the excess aggregate contributions occurred. Distributions and forfeitures of the excess aggregate contributions allocable to a Highly Compensated Employee shall first be made from the Highly Compensated Employee’s unmatched after-tax contributions, then from the Highly Compensated Employee’s matched after-tax contributions and the related matching contributions and lastly from matching contributions on the Highly Compensated Employee’s pre-tax contributions. If matching contributions are not taken into account under Section 5.3, then any matching contributions related to returned after-tax contributions shall be forfeited (even if otherwise vested). Matching contributions shall be deemed to be attributable to pre-tax contributions to the maximum extent possible under Section 5.1(b) prior to being attributed to after-tax contributions. The Administrative Committee shall determine ACP excess aggregate contributions after determining excess deferrals.

(1) Determination of Total Excess Aggregate Contributions

The contribution percentage of the Highly Compensated Employee with the highest contribution percentage will be reduced to the extent necessary to (i) enable the Plan to satisfy Section 5.3, or (ii) cause such Employee’s contribution percentage to equal the contribution percentage of the Highly Compensated Employee with the next highest contribution percentage. This procedure shall be repeated until the Plan satisfies Section 5.3. The total excess aggregate contributions for the Plan Year shall equal the sum of the dollar amounts attributable to the various percentage reductions for the Highly Compensated Employees.

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(2) Allocation of Total Excess Aggregate Contributions

The total excess aggregate contributions for a Plan Year shall be allocated among the Highly Compensated Employees according to the dollar amount of their after-tax contributions and matching contributions (to the extent taken into account under Section 5.3) for such Plan Year. Excess aggregate contributions shall be allocated first to the Highly Compensated Employee with the highest amount of after-tax contributions and matching contributions (to the extent taken into account under Section 5.3) for the Plan Year. Excess aggregate contributions shall be allocated to that Highly Compensated Employee until the dollar amount of that individual’s after-tax contributions and matching contributions (to the extent taken into account under Section 5.3) has been reduced to equal that of the Highly Compensated Employee with the next highest dollar amount. This process shall be repeated until the total dollar amount of excess aggregate contributions has been allocated.

Return of Contributions

(a) Nondeductible Contributions

Notwithstanding anything herein to the contrary, all contributions by the Employer to the Trust Fund are conditioned on the deductibility of such contributions under the Code. To the extent that any such deduction is disallowed, the Employer may within one year following a final determination of the disallowance, demand repayment of such disallowed contribution and the Trustee shall return such contribution less any losses attributable thereto to the Employer.

(b) Mistake of Fact

If the amount of contribution made to the Plan by an Employer for any Plan Year is in excess of the amount required under Section 5.1, and such excess payment is due to mistake of fact, the Employer shall have the right to recover such excess contribution within one year after the date the contribution is made to the Trustee. The return of a contribution shall be permitted hereunder only if the amount so returned (i) is the excess of the amount actually contributed over the amount that would have otherwise been contributed, (ii) does not include the earnings attributable to such contribution, and (iii) is reduced by any losses attributable to such contribution.

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Recharacterization of Excess Pre-Tax Contributions

Pre-tax contributions made to the Plan that exceed the limitations of Section 4.1(c) (dollar limitation) at the election of the Employee at commencement of participation shall be recharacterized as after-tax contributions.

Income related to a recharacterized excess shall not be treated as an amount recharacterized, but shall remain attributed to the applicable Pre-tax Contribution Account.

An amount recharacterized shall be treated as an Employer contribution for purposes of Sections 9 and 10. Amounts recharacterized will be treated as pre-tax contributions for purposes of withdrawals under Sections 8.1 and 8.2.

Allocation of Forfeitures

Any amounts forfeited by a Participant from the Participant’s Employer Matching Contribution Account or Profit Sharing Contribution Account pursuant to Section 7 shall be used first to restore Accounts pursuant to Section 7.2, and then shall be used to reduce subsequent Employer matching and/or Employer fixed contributions.

Maximum Annual Additions to Accounts

For purposes of this Section 5.9, the Company and any Affiliate shall be considered a single employer, to the extent required by the Code.

(a) Primary Rule

Except to the extent permitted under Section 4.1(d) and Code Section 414(v), notwithstanding any other Plan provision to the contrary, the Annual Additions to a Participant’s Accounts in the Plan and any other defined contribution plan maintained by the Company or any Affiliate for any Plan Year shall not exceed the lesser of (i) 100% of the Participant’s Section 415 Compensation, or (ii) $40,000. The Plan Year shall be the “limitation year” for purposes of Treasury Regulation Section 1.415(j)-1 and applying the limits of this Section 5.9. If there is a short Plan Year because of a change in Plan Year or if the Plan is terminated effective as of a date other than the last day of the Plan Year, the $40,000 dollar limit (as adjusted) shall be prorated under the short limitation year rules.

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(b) Annual Additions Defined

For purposes of this Section 5.9, the term “Annual Additions” for any Participant in any Plan Year means the sum of:

(1) the amount of Employer contributions and Participant pre-tax and after-tax contributions (other than catch-up contributions made pursuant to Section 4.1(d)) allocated to the Participant’s Accounts;

(2) forfeitures allocated to the Participant’s Accounts; and

(3) with respect only to the $40,000 limitation, amounts attributable to retiree medical benefits on behalf of a Key Employee in a separate account in a welfare fund subject to Code Section 419A.

(c) Cost-of-Living Adjustment

The $40,000 limit prescribed above shall be automatically adjusted for cost-of-living increases, to the maximum permissible dollar limitation determined by the Commissioner of Internal Revenue. The dollar amount applicable in computing the maximum contribution for any Participant shall be the dollar amount in effect for the calendar year in which the contribution is made.

(d) Remedy

If for any Plan Year the Annual Additions exceed the foregoing limitations, then the Plan shall correct such excess in accordance with the Employee Plans Compliance Resolution System (EPCRS) as set forth in Revenue Procedure 2006-27 or any superseding guidance, including, but not limited to, the preamble to the final Section 415 Treasury Regulations.

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ARTICLE 6: ACCOUNT ADMINISTRATION

Types of Accounts

All contributions shall be made to the Trust, which will have the following types of Accounts for each Participant:

(a) Pre-tax Contribution Account

(b) After-tax Contribution Account

(c) Employer Matching Contribution Account

(d) Fixed Contribution Account

(e) Profit Sharing Contribution Account

(f) Rollover Account

(g) Dividend Account

Investment

(a) Investment Options

(1) The Trust shall be divided into such investment subfunds as the Administrative Committee, in its sole discretion, may determine. Any subfund may hold for investment any assets permitted by the terms of the Trust agreement, including, without limitation, cash or other types of short-term investments. The Administrative Committee may add, eliminate, or modify the available subfunds at any time and for any reason.

(2) Subject to Section 6.2(c), one investment fund shall be the Safeco Stock Ownership Fund, which is intended to constitute an employee stock ownership plan, within the meaning of Code Section 4975(e)(7). The Safeco Stock Ownership Fund shall be invested primarily (or exclusively) in Company Stock in accordance with the directions of the Administrative Committee. The Administrative Committee may direct the Trustee to invest up to 100% of the Safeco Stock Ownership Fund in Company Stock. To the extent directed by the Administrative Committee, the Trustee may also invest the Safeco Stock Ownership Fund in such other prudent investments (or hold such assets temporarily in cash) as the Administrative Committee deems appropriate.

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(b) Investment of Participant Accounts

Subject to Section 6.2(c), each Participant shall direct the investment of the Participant’s Accounts among the available investment subfunds. An investment request shall remain effective with regard to all subsequent amounts credited to a Participant’s Accounts, until changed in accordance with the provisions of this Section 6.2. The Plan is intended to constitute a plan described in Section 404(c) of ERISA with respect to Participant Accounts.

(1) When Participation Commences

When participation commences, a Participant shall allocate future contributions to the Participant’s Accounts among the available investment subfunds in any whole percentage increments in accordance with and subject to such rules and procedures as the Administrative Committee shall establish. If a Participant fails to direct the investment of any portion of the future contributions to the Participant’s Accounts, then the Participant will be deemed to have directed that such contributions be invested in such investment subfund or subfunds as the Administrative Committee shall designate for such purpose.

(2) Changing Future Contributions

A Participant may change the Participant’s investment election with respect to future contributions to the Participant’s Accounts at any time in accordance with and subject to such rules and procedures as the Administrative Committee shall establish. Any such change shall be effective as soon as administratively feasible after the Administrative Committee receives the Participant’s proper change election. Future contributions must be allocated among the investment subfunds in whole percentage increments.

(3) Changing Existing Account Balances

A Participant may reallocate the existing balances in the Participant’s Accounts among the investment subfunds then available for such purposes at any time in accordance with and subject to such rules and procedures as the Administrative Committee shall establish. Existing balances in a Participant’s Accounts may be reallocated among the various investment subfunds so that (i) the amount invested in each particular subfund as of the Valuation Date on which the reallocation occurs represents any whole percentage of the total value of the Participant’s Accounts as of that Valuation Date or (ii) a percentage of the amount invested in a particular subfund is

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transferred to another subfund. Assets shall be moved among investment subfunds to effect this reallocation as soon as administratively feasible after the Administrative Committee receives the Participant’s proper reallocation election.

Notwithstanding the foregoing, if a Participant elects to transfer all or a portion of the Participant’s interest in the Safeco Stock Ownership Fund to another investment subfund after the ex-dividend date for a Dividend, but before the payment date for such Dividend, then the portion of the Dividend paid with respect to the transferred interest shall be reinvested in the Safeco Stock Ownership Fund or distributed in accordance with the Participant’s prior election under Section 6.5(a)(2), as applicable.

(4) Asset Allocation Investment Election

Subject to Section 6.2(c), a Participant may direct the investment of the Participant’s Accounts in accordance with and subject to such asset allocation rules and procedures as the Administrative Committee may establish. While such investment direction remains effective, future contributions may be allocated and existing balances may be reallocated by the Administrative Committee on behalf of the Participant among the various investment subfunds.

(c) Restrictions on Investment in Certain Investment Funds

Notwithstanding the foregoing, the Administrative Committee may, in its sole and absolute discretion, (i) limit the availability of specific investment subfund(s) to amounts held in specific Account(s), (ii) restrict or prohibit a Participant or group of Participants from investing in any particular investment subfund(s), (iii) restrict or prohibit a Participant or group of Participants from making transfers to or from any particular investment subfund(s), (iv) limit the amount that a Participant or group of Participants may invest in any particular investment subfund(s); and (v) impose such other requirements or restrictions on investments in any particular investment subfund(s) as it, in its sole and absolute discretion, deems appropriate; provided, however, that none of the foregoing causes the Plan to violate the requirements of Code Section 401(a)(28)(B).

Establishment of Rules and Procedures

The Administrative Committee shall prescribe uniform and nondiscriminatory rules and procedures for making elections under Sections 6.2, including, without limitation, the deadlines for making such elections, the frequency with which such elections may be made, and the date as of which such elections shall take effect.

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The Administrative Committee shall provide such forms as may be necessary or appropriate to implement the investment elections described in Sections 6.2. Elections shall remain in effect until a new election is timely and properly received by the Administrative Committee.

Investment Manager

The Administrative Committee has the power to appoint, remove or change from time to time an Investment Manager to direct the investment of all or a portion of the Trust Fund held by a Trustee. For purposes of this Article 6, “Investment Manager” shall mean any fiduciary (other than a Trustee) who:

(a) has the power to manage, acquire, or dispose of any asset of the Plan;

(b) is (1) registered as an investment adviser under the Investment Advisers Act of 1940, (2) a bank, or (3) an insurance company qualified under the laws of more than one state to perform the services described in subparagraph (a); and

(c) has acknowledged in writing that he, she or it is a fiduciary with respect to the Plan.

In the event the Administrative Committee appoints any Investment Manager, the Trustee shall not be liable for the acts or omissions of the Investment Manager or have any responsibility to invest or otherwise manage any portion of the Trust Fund subject to the management and control of the Investment Manager.

Dividends

(a) Allocation of Dividends

(1) Subject to Section 6.5(e), all Dividends paid with respect to Company Stock deemed to be allocated to the Participant’s Accounts by virtue of such Accounts’ investment in the Safeco Stock Ownership Fund shall initially be allocated to the Participant’s Dividend Account.

(2) A Participant may elect that all of the Dividends paid with respect to Company Stock deemed to be allocated to the Participant’s Accounts by virtue of such Accounts’ investment in the Safeco Stock Ownership Fund be handled under either (1) or (2) below:

(i) Dividends may be paid to the Trustee and reinvested in the Safeco Stock Ownership Fund; or

(ii) Dividends may be paid to the Trustee and distributed to the Participant. In general, Dividends will be distributed on a quarterly basis, but no later than 90 days after the close of the Plan Year in which the Dividends are paid to the Trustee.

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(b) Participant Elections

All Participant elections under Section 6.5(a)(2) must be made in accordance with and subject to the rules and procedures as the Administrative Committee shall establish. To be effective for a Dividend, an election with respect to such Dividend must be made by a Participant prior to the date such Dividend is paid to the Plan. An election made by a Participant (including a deemed election described in Section 6.5(c)) will generally remain in effect for all Dividends paid, until changed by the Participant in accordance with and subject to such rules and procedures as the Administrative Committee shall establish.

(c) Deemed Elections

(1) General

In general, a Participant shall be deemed to elect automatic reinvestment under Section 6.5(a)(2)(i), absent a timely election to the contrary in accordance with and subject to such rules and procedures as the Administrative Committee shall establish.

(2) Exception for Withdrawals

Notwithstanding the foregoing, a Participant will be deemed to have elected Dividend distribution under Section 6.5(a)(2)(ii) for the applicable Dividend if the Participant requests a withdrawal under Section 8.1 from the portion of any of the Participant’s Accounts that is invested in the Safeco Stock Ownership Fund, which withdrawal is approved between the ex-dividend date for such Dividend and the payment date for such Dividend.

For subsequent Dividends, this deemed election will lapse, and the Participant’s prior election under Section 6.5(b) will be restored. If the Participant made no prior election, then a deemed election described in Section 6.5(c)(1) will apply.

(d) Determination of Non-Deductibility

Distribution of Dividends under Section 6.5(a)(2)(ii) will not be made if the Administrative Committee determines that the distributed Dividends will not be deductible for federal income tax purposes by the Company under the provisions of the Code, including, without limitation, Code Section 404(k) or any successor provision.

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(e) Direct Payment of Dividends

The Company may, in its sole discretion, distribute Dividends directly to Participants in accordance with Section 6.5(a)(2)(ii), rather than paying them to the Trustee for distribution to Participants.

(f) Notwithstanding the foregoing, a Participant who is a non-resident alien with no U.S.-source income during the year in which a dividend is paid may not make the election described in Section 6.5(a)(2)(ii) with respect to such dividend. Rather, such Participant’s allocable share of any such dividend will be reinvested in the Safeco Stock Ownership Fund.

Voting Company Stock

(a) Voting

Each Participant (or Beneficiary, as applicable) shall have the right, with respect to the shares of Company Stock deemed to be allocated to the Participant’s Accounts by virtue of such Accounts’ investment in the Safeco Stock Ownership Fund, to direct the Trustee as to the manner in which to vote such Company Stock in any matter put to a shareholder vote. Upon receipt of timely and proper directions from a Participant (or Beneficiary), the Trustee shall vote such shares of Company Stock in accordance therewith. The Trustee shall vote any allocated shares of Company Stock with respect to which the Trustee does not receive timely and proper direction and any shares of Company Stock that are not deemed to be allocated to Participant Accounts in the same proportion on each matter as it votes the allocated shares for which it has received timely and proper direction on such matter.

(b) Tender Offer

Each Participant (or Beneficiary, if applicable) shall have the right, with respect to the shares of Company Stock deemed to be allocated to the Participant’s Accounts by virtue of such Accounts’ investment in the Safeco Stock Ownership Fund, to direct the Trustee as to whether to tender such shares in any tender (or other purchase or exchange) offer made with respect to such shares. Upon receipt of timely and proper directions from a Participant (or Beneficiary), the Trustee will tender or not tender such shares of Company Stock in accordance therewith. The Trustee will not tender any shares of Company Stock held in the Safeco Stock Ownership Fund with respect to which the Trustee does not receive timely and proper directions from the Participant (or Beneficiary) to whose Account such shares are deemed to be allocated. The Trustee will tender or not tender any shares of Company Stock held in the Safeco Stock Ownership Fund that are not deemed to be allocated to Participant Accounts in the same proportion as it tenders or does not tender, as applicable, the allocated shares for which it has received timely and proper direction.

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(c) Participants as Named Fiduciaries

Each Participant shall be a “named fiduciary,” as defined in ERISA Section 402(a), with respect to the shares of Company Stock deemed to be allocated to his or her Accounts by virtue of such Accounts’ investment in the Safeco Stock Ownership Fund and to a proportionate number of any shares of Common Stock held in the Safeco Stock Ownership Fund that are not deemed to be allocated to any Participant’s Account.

(d) Determination of Shares Allocated to Participant Accounts

For purposes of this Section 6.6, the number of shares deemed to be allocated to a Participant’s Accounts by virtue of such Accounts’ investment in the Safeco Stock Ownership Fund shall be determined by multiplying (1) the number of shares of Company Stock held in the Safeco Stock Ownership Fund on the record date for such vote or other action by (2) a fraction, the numerator of which is the value of the Participant’s interest in the Safeco Stock Ownership Fund on such date and the denominator of which is the total value of the Safeco Stock Ownership Fund on such date.

(e) Distribution of Information

On any matter in which a Participant (or Beneficiary) is entitled to direct the Trustee under Section 6.6(a) or (b), the Trustee will solicit such directions by distributing to each Participant and Beneficiary to whose Account Company Stock has been deemed to be allocated, such information as shall be distributed to shareholders of Company Stock generally in connection with a shareholder vote or other shareholder action, together with such additional information as the Trustee deems appropriate for each Participant (or Beneficiary) to give proper directions to the Trustee. The directions received from any Participant will be held in confidence by the Trustee, and will not be individually divulged or released to the Employer, the Administrative Committee, the Administrative Committee or any other person, except to the extent required by law or as may be unavoidable in complying with Section 6.6(a) or (b).

Valuation of the Trust Fund

The fair market value of the Trust Fund shall be determined as of each Valuation Date.

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Allocation of Trust Fund Earnings and Losses to Participant Accounts

As of each Valuation Date, any increase or decrease in the fair market value (including interest, dividends, realized and unrealized gains and losses) of any subfund shall be allocated among the Participant Accounts on the basis of the interests in the particular subfund held in the Accounts as of the immediately preceding Valuation Date, adjusted for contributions, distributions and transfers made since the immediately preceding Valuation Date. For purposes of the preceding sentence, amounts forfeited from Participant Accounts pursuant to Section 7.2 shall share in Trust Fund earnings and losses until such time as they are applied pursuant to Section 5.8 or 7.2(a) to reduce Employer contributions or restore Participant Accounts, as applicable

Account Statements

Each Participant shall be provided with a statement of the Participant’s Accounts under the Plan showing the Account values as of the last Valuation Date in each calendar quarter. If within 90 days after the statement is mailed the Participant makes no objection to the statement, it shall become binding and conclusive on the Participant and any Beneficiary.

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ARTICLE 7: VESTING

Vesting

(a) Participant Pre-tax Contribution, After-tax Contribution, Employer Matching Contribution, Fixed Contribution, Rollover and Dividend Accounts

Except as provided in the next sentence, each Participant shall at all times have a 100% vested, nonforfeitable right to the Participant’s Pre-tax Contribution Account, After-tax Contribution Account, Employer Matching Contribution Account, Fixed Contribution Account; Rollover Account and Dividend Account. Each Participant who does not complete an Hour of Service with the Company or an Affiliate on or after January 1, 2008, shall become vested in such Participant’s Employer Matching Contribution Account in accordance with the vesting schedule set forth in Section 7.1(b)(1) below.

(b) Profit Sharing Contribution Accounts

(1) General

Each Participant shall earn a vested, nonforfeitable right to the Participant’s Profit Sharing Contribution Account in accordance with the following table, based on the Participant’s Years of Service:

Years of Services	Percent Vested
Less than 2	0	%
2	25	%
3	50	%
4	75	%
5 or more	100	%

In addition, each Participant shall have a 100% vested, nonforfeitable right to the Participant’s Profit Sharing Contribution Account on the date the Participant dies, becomes Disabled, or attains age 65, provided the Participant is an Employee on such date.

(2) Former Employees of American States

Notwithstanding the foregoing, any Participant who is not 100% vested in such Participant’s Employer Matching Contribution Account under Section 7.1(a) above and who (i) was an employee of American States Financial Corporation or its subsidiaries on December 31, 1998, (ii) is a terminated employee of American

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States Financial Corporation or its subsidiaries and at December 31, 1998 had a vested benefit under the American States Plan, or (iii) is eligible to have an Employer Matching Contribution benefit restored under the provisions of Section 7.2 of the Plan with respect to contributions made under the American States Plan on or before December 31, 1998, shall earn a vested, nonforfeitable right to the Participant’s Employer Matching Contribution Account in accordance with the following table, based on the Participant’s Years of Service:

Years of Services	Percent Vested
Less than 2	0
2	50	%
3 or more	100	%

In addition to the vesting provisions of Section 7.1(b)(1), such Participant shall have a 100% vested, nonforfeitable right to the Participant’s Employer Matching Contribution Account upon attainment of age 55, provided the Participant is an Employee on such date.

(3) Vesting of Terminated Employees of SAFECO Properties

Notwithstanding the foregoing, a Participant (i) who, as of February 1, 1998, was employed by SAFECO Properties, Inc. in its home office located in Seattle, Washington, and (ii) whose employment with SAFECO Properties, Inc. is terminated by the Employer solely as a result of or in anticipation of the sale of substantially all of the assets or stock of SAFECO Properties, Inc. to a third party shall be 100% vested in the Participant’s Account balance at the time of the Participant’s termination.

(4) Former Employees of Safeco Life & Investments

Notwithstanding the foregoing:

(a) Each Participant who was employed in the Safeco Life & Investments operations on August 1, 2004, the date on which the Company’s sale of such operations pursuant to that certain Stock Purchase Agreement by and among the Company, General America Corporation, White Mountains Insurance Group, Ltd. and Occum Acquisition Corp. closed, shall be 100% vested in the Participant’s Account balance as of such date; and

(b) Each Participant whose primary responsibility on August 1, 2004 was to provide services to the Safeco Life & Investments operations, and whose employment was terminated by the

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Employer and the Affiliates on or prior to such date and solely as a result of such sale, shall be 100% vested in the Participant’s Account balance at the time of such termination.

(5) Former Employees of Safeco Trust Company.

Notwithstanding the foregoing, each Participant who was employed by Safeco Trust Company on April 19, 2004, the date on which the Company’s sale of Safeco Trust Company pursuant to the Plan of Merger between the Company, Safeco Trust Company and Mellon Trust of Washington closed, shall be 100% vested in the Participant’s Account balance as of such date.

(6) Former Employees of Safeco Financial Institution Solutions, Inc.

Each Participant who was employed by Safeco Financial Institution Solutions, Inc. on May 1, 2006, the date of the sale of Safeco Financial Institution Solutions, Inc., and whose employment was terminated by the Employer and the Affiliates on or before such date and solely as a result of such sale, shall be 100% vested in the Participant’s Account balance as of such date.

(7) Adjustment for Prior Distribution

In the event the Participant has received a prior distribution from the Participant’s Employer Matching Contribution Account or Profit Sharing Contribution Account (prior to the time that such account(s) are 100% vested), the vested portion of the relevant Account balance (including the amount that may yet be restored pursuant to Section 7.2) following the distribution shall be determined by application of the following formula:

X = P(AB+D) – D; where X equals the vested amount; P equals the Employee’s vested interest in the Employer Matching Contribution Account and Profit Sharing Contribution Account at the time of subsequent distribution; AB equals the balance of the Account at the time of subsequent distribution; and D equals the amount previously distributed from the Employer Matching Contribution Account and the Profit Sharing Contribution Account.

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Forfeitures

(a) General

In the event a Participant terminates employment prior to becoming 100% vested in the Participant’s Employer Matching Contribution Account or Profit Sharing Contribution Account, the non–vested portion shall be forfeited upon the earlier of:

(1) the last day of the Plan Year in which the Participant incurs the Participant’s fifth consecutive Break-in-Service; or

(2) the date the Participant receives a distribution of the Participant’s total vested benefit from the Plan following termination.

If such Participant returns to service after forfeiting a portion of the Participant’s Accounts but before incurring five consecutive Breaks-in-Service, the amount forfeited shall be restored as of the date on which the Participant returns to service. Assets to restore amounts forfeited shall be taken first from current forfeitures. In the event that current year forfeitures are insufficient to fully reinstate the Account, the Employer shall make a contribution in addition to the contributions required under Section 5.1 equal to the additional amount necessary to fully reinstate the Account.

If a terminated Participant is reemployed after sustaining five consecutive Breaks-in-Service, the amount forfeited shall not be restored.

(b) Deemed Cash-Out

If a Participant terminates when the Participant’s vested Account balance is zero, the Participant shall be deemed to have received a distribution of such Account balance upon termination for purposes of Section 7.2(a)(2) and to be cashed out from the Plan.

Reemployment

If a terminated Employee subsequently becomes a Participant following reemployment, all Years of Service before and after the Break-in-Service shall be taken into account in determining the Participant’s vested interest in such Participant’s Account.

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ARTICLE 8: WITHDRAWALS AND LOANS

Withdrawals Prior to Termination

A Participant may apply to the Administrative Committee for withdrawal of all or a portion of the following Accounts, paid in cash, at the following times prior to termination of employment with the Company and all Affiliates. Each withdrawal request must be at least equal to $100. The amount available for withdrawal in any Account is reduced by the Participant’s outstanding loan balance, if any, under Section 8.3.

Participant pre-tax and after-tax contributions shall be suspended for the time periods specified following the withdrawal. In the event contributions are suspended, a Participant must complete a new payroll deduction election following the period of suspension to reinstate Participant contributions.

Account	Time of Withdrawal	Suspension
After-Tax Contribution Account	Before age 59 1/2	After-tax and pre-tax contributions are suspended for six (6) months
After-Tax Contribution Account	On or After age 59 1/2	None
Pre-Tax Contribution Account	On or After age 59 1/2	None
Vested Employer Matching Contribution Account	Before age 59 1/2 — Two (2) years after matching contributions were made, or anytime after Employee has been a Participant for five (5) years	None
Vested Employer Matching Contribution Account	On or After age 59 1/2	None
Vested Fixed Contribution, Profit Sharing Contribution and Dividend Accounts	After age 65	None
Rollover Account	Anytime	None

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A withdrawal shall be paid within a reasonable time following the day the Administrative Committee receives the request. In-service withdrawals from a Participant’s After-Tax Contribution Account shall be deducted first from the after-tax contributions made by the Participant prior to January 1, 1987.

Hardship Withdrawals

(a) Amount

A Participant may apply to the Administrative Committee for a hardship withdrawal prior to termination of employment with the Company and its Affiliates of the Participant’s:

(1) Pre-tax Contribution Account balance as of December 31, 1988, and

(2) Pre-tax contributions after December 31, 1988, excluding earnings thereon;

provided, however, that a Participant may withdraw only up to the amount necessary to meet the expense that causes hardship (including any penalties and taxes incurred as a result of the hardship distribution) and in the event a loan is outstanding under Section 8.3, the Participant may not withdraw any amounts that are pledged as collateral for the loan.

(b) Availability

All hardship withdrawals are subject to Administrative Committee approval. A hardship withdrawal shall be approved only if it is for a type of expense specified in Section 8.2(c) and if it is necessary to satisfy such expense.

(c) Hardship Expenses

Hardship withdrawals are available only to pay for the following:

(1) expenses for (or necessary to obtain) medical care that would be deductible by the Participant under Code Section 213(d) (determined without regard to whether the expenses exceed 7.5% of adjusted gross income);

(2) costs directly related to the purchase of a principal residence for the Participant (excluding mortgage payments);

(3) tuition, related educational fees and room and board expenses for up to the next 12 months of post–secondary education for the Participant, or the Participant’s spouse, children, or dependents (as defined in Code Section 152, without regard to Code Sections 152(b)(1), (b)(2) and (d)(1)(B));

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(4) preventing eviction of the Participant from the Participant’s principal residence or foreclosure on the mortgage of the Participant’s principal residence;

(5) burial or funeral expenses for the Participant’s deceased parent, spouse, children or dependents (as defined in Code Section 152, without regard to Code Section 152(d)(1)(B)); or

(6) expenses for the repair of damage to the Participant’s principal residence that would qualify for the casualty deduction under Code Section 165 (determined without regard to whether the loss exceeds 10% of adjusted gross income).

(d) Determination of Necessity

A distribution shall be deemed to be necessary to satisfy an expense described in Section 8.2(c) if all of the following requirements are satisfied:

(1) the distribution is not in excess of the amount of such expense (including any excise tax or income tax liability arising from the distribution);

(2) the Participant has obtained all distributions (other than hardship distributions), and all nontaxable loans currently available under all plans maintained by the Company;

(3) the Participant has elected to have Dividends paid under Section 6.5(a)(2)(ii) to the extent Dividends are currently available to the Participant); and

(4) Participant pre-tax and after-tax contributions to this or any other qualified retirement plan or non-qualified deferred compensation plan, including stock option, stock purchase and similar plans, maintained by the Company shall be suspended for six months after a hardship withdrawal.

Notwithstanding the foregoing, a Participant whose contributions have been suspended under Section 8.2(d)(3) shall be deemed to be an Eligible Employee for purposes of the ACP Test in Section 5.3. Following such suspension, the Participant may resume contributions pursuant to Section 4.2.

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Loans

(a) General

A Participant who is a “party-in-interest” pursuant to ERISA may apply to the Administrative Committee for a loan from the Participant’s vested Pre-tax Contribution Account, After-tax Contribution Account, Employer Matching Contribution Account or Rollover Account. The Administrative Committee has authority to administer all loans, and shall administer loans in a manner that does not discriminate in favor of Highly Compensated Employees, officers, or shareholders. The Administrative Committee shall approve all loans that meet the requirements set forth in this Section 8.3 or in any loan policy or procedures adopted by the Administrative Committee.

For record-keeping purposes, loan amounts shall be deducted from a Participant’s Accounts in the following order: first from the Pre–tax Contribution Account, then the Employer Matching Contribution Account, then the Rollover Account, and finally the After-Tax Contribution Account. In the event the amount in one of these Accounts exceeds the amount needed to fund the loan, the loan amount shall be deducted from the investment subfunds in which the Account is invested in the same proportion that the Account is invested in each subfund.

A Participant must request a loan in the manner specified by the Administrative Committee. Such request must include the total amount of the loan requested. Only one loan may be outstanding at any time.

A loan application fee of $50 will be deducted from the Participant’s Account balance. All loan fees shall be used to pay Plan expenses.

(b) Minimum and Maximum Loan Amount

The minimum amount that may be borrowed is $1,000. In no event shall a loan at the time it is made, when added to the outstanding balance of all other loans from any Company-sponsored qualified plans, exceed the lesser of:

(1) 50% of the Participant’s total vested Account balance as of the date the loan is made or

(2) $50,000, reduced by the excess (if any) of (A) the highest outstanding loan balance during the one-year period ending on the day before the date on which the current loan is made, over (B) the outstanding loan balance on the date on which the current loan is made.

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(c) Repayments

The Participant may elect to repay the loan over any number of months that do not exceed 60; provided, however, that the term for a loan used to purchase a primary residence for the Participant may not be longer than 240 months. Notwithstanding the repayment period elected, the remaining outstanding loan balance plus accrued interest shall be immediately due and payable upon termination of employment.

Once the loan is made, the repayment term may not be changed; provided, however, that the Participant may elect to prepay the full outstanding loan balance at any time during the repayment term. Loans shall be repaid in level payments made through payroll deduction each payroll period until the loan is repaid. Payroll deductions shall commence as soon as administratively feasible following the loan distribution.

The Administrative Committee may suspend loan repayments for a Participant who is on an approved unpaid leave of absence, provided that suspension does not exceed one year and does not result in exceeding the maximum repayment period stated above. Upon return from leave, the outstanding loan balance, including accrued interest, will be reamortized over the remaining term of the loan. Notwithstanding the foregoing, in the event a Participant takes an approved leave of absence pursuant to the Uniformed Services Employment and Reemployment Rights Act of 1994, the Administrative Committee may suspend loan repayments to the extent permitted under Code Section 414(u)(4).

Each repayment shall be credited to each Account of a Participant in accordance with the administrative procedures established by the Administrative Committee.

(d) Interest Rate

A fixed reasonable rate of interest shall be charged for the term of the loan. The interest rate shall be the prime corporate lending rate offered by the Trustee plus one; provided that if the Administrative Committee determines that such rate is not reasonable, the interest rate shall be another rate that the Administrative Committee determines is reasonable considering the prevailing interest rate charged on similar commercial loans by persons in the business of lending money, current economic conditions and the facts and circumstances of the loan application. The interest rate for all loans made during a calendar month shall be determined on the first business day of such month.

In the event the reasonable interest rate determined by the Administrative Committee under the preceding paragraph would violate applicable state usury laws, the Administrative Committee shall deny the loan application.

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(e) Default

A loan shall be in default if a payment remains unpaid for 90 days after the due date for the payment. Payments are considered made when received by the Plan. The defaulted loan balance shall be reported as taxable income to the Participant for the year in which the default occurs. If a loan is in default, the Plan shall foreclose on the Participant’s Account balance to the extent of the unpaid balance of the loan as of the earliest date on which the Participant is eligible for a distribution.

(f) Outstanding Loans as of January 1, 1999

Loans to Participants that were originated under the American States Plan and that are outstanding on January 1, 1999, shall be reamortized to reflect the change in payroll periods from biweekly payroll periods to semimonthly payroll periods. Notwithstanding any other Plan provisions, loans that were originated under the American States Plan prior to January 1, 1999, (i) shall not be due and payable upon termination of employment, unless provided otherwise by their terms, and (ii) shall be deemed to be in default only to the extent they would be in default under the terms of the American States Plan as in effect on December 31, 1998.

(g) Loans to Employees of Safeco Life & Investments

Notwithstanding the foregoing, loans to Participants who are employed in the Safeco Life & Investments operations on the date on which the Company’s sale of such operations pursuant to the Agreement is closed shall not be due and payable upon the closing of the sale, provided they are rolled over to another employer’s tax-qualified plan by the last day of the calendar quarter following the calendar quarter in which such sale is closed (or, if earlier, by the end of the loan term).

(h) Loans to Employees of Safeco Financial Institution Solutions, Inc.

Notwithstanding the foregoing, loans to Participants who are employed by Safeco Financial Institution Solutions, Inc. on the Closing Date shall not be due and payable upon closing of the sale, provided they are rolled over to another employer’s tax-qualified plan by the last day of the calendar quarter following the calendar quarter in which the Closing Date occurs (or, if earlier, by the end of the loan term).

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ARTICLE 9: BENEFITS AND FORMS OF PAYMENT

Eligibility for Benefits

A Participant shall be eligible to receive a distribution of the Participant’s Accounts, to the extent vested, upon becoming Disabled or terminating employment with the Company and any Affiliates. Notwithstanding the foregoing, if a Participant terminates employment and then is rehired as an Employee prior to attaining age 65 and prior to receiving a distribution, the Participant shall not be entitled to a distribution due to such termination of employment.

If the Participant dies before the Participant’s entire vested Account balance is distributed, the Participant’s Beneficiary shall be eligible to receive a distribution of the remaining balance of the Participant’s vested Accounts upon the death of the Participant.

Benefit Commencement

(a) Time of Benefit Commencement

Except as provided below, benefits shall be paid (or commence to be paid) as soon as administratively practicable following the later of (i) the Participant’s termination of employment, death or Disability, or (ii) the Administrative Committee’s receipt of a properly completed request for benefit commencement, together with such other information as the Administrative Committee deems necessary for the proper administration of the Plan.

Participants and Beneficiaries may request benefit commencement as described below.

(1) Participant

A Participant who is eligible for benefits may request benefit commencement by notice to the Administrative Committee in such form as the Administrative Committee requires. Benefits may commence at any time following termination of employment or Disability and on or before the Participant’s Required Beginning Date. If such a Participant fails to request benefit commencement or fails to elect to defer benefit commencement, the Participant shall be deemed to have elected to defer benefit commencement to the Participant’s Required Beginning Date. A Participant’s benefits must commence to be distributed to the Participant by such Participant’s Required Beginning Date.

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(2) Spouse Beneficiary

A spouse Beneficiary who is eligible for benefits may request benefit commencement by notice to the Administrative Committee in such form as the Administrative Committee requires. Subject to Section 9.6, benefits may commence at any time following the Participant’s death and on or before the later of (i) the end of the calendar year immediately following the calendar year in which the Participant died, or (ii) if the spouse is the Participant’s sole Beneficiary, the end of the calendar year in which the Participant would have attained age 70 ¹/2. If such a spouse Beneficiary fails to request benefit commencement or fails to elect to defer benefit commencement, the spouse Beneficiary shall be deemed to have elected to defer benefit commencement to the later of (i) the end of the calendar year immediately following the calendar year in which the Participant died, or (ii) if the spouse is the Participant’s sole Beneficiary, the end of the calendar year in which the Participant would have attained age 70 ¹/2.

(3) Domestic Partner or Dependent Child

Benefits shall be paid or commence to be paid to a Beneficiary who is the Participant’s Domestic Partner or Dependent Child (and who is eligible for benefits) as soon as administratively practicable following the Administrative Committee’s receipt of notice of the Participant’s death, but in any event on or before December 31 of the calendar year following the calendar year in which the Participant dies, unless such Domestic Partner or Dependent Child elects on or before such date to receive the distribution by December 31 of the calendar year containing the 5th anniversary of the Participant’s death.

(4) Other Beneficiary

Benefits shall be paid to a Beneficiary who is not the Participant’s spouse, Domestic Partner or Dependent Child (but who is eligible for benefits) as soon as administratively practicable following the Administrative Committee’s receipt of notice of the Participant’s death, but in any event on or before December 31 of the calendar year following the calendar year in which the Participant dies.

(b) Amount of Payment

Except as provided otherwise herein, the amount distributed shall be based on the Account balance determined as of the Valuation Date on which the distribution is processed.

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(c) Small Benefits

Notwithstanding any provision of the Plan to the contrary, if a Participant’s vested Account balance does not exceed $1,000, such vested Account balance shall be paid in a Lump Sum distribution without the Participant’s or spouse’s consent as soon as administratively practicable following the date on which the Participant terminates employment, dies or becomes Disabled.

(d) Earliest Distribution Date

Notwithstanding the foregoing and except for in-service withdrawals permitted under Article 8, a Participant’s vested Account balance may not be distributed prior to the earliest of:

(1) the Participant’s severance from employment, death or Disability;

(2) the termination of the Plan without the establishment or maintenance of another defined contribution plan, other than an employee stock ownership plan (within the meaning of Code Section 4975(e)(7)); and

(3) the Participant’s attainment of age 59 ¹/2.

Form of Payment

Subject to Section 9.6, a Participant or Beneficiary may elect one of the following payment options. If benefits are required to commence and the Participant or Beneficiary fails to elect a form of payment, benefits shall be paid in the form of a Lump Sum.

(a) Participant or Spouse Beneficiary

A Participant or spouse Beneficiary may elect one of the following forms of payment under the Plan:

(1) Lump Sum

A lump sum distribution of the Participant’s entire vested interest in the Plan. Unless the context clearly indicates otherwise, the term “Lump Sum” shall mean a distribution of the Participant’s entire vested interest in the Plan.

A Participant or spouse Beneficiary may also elect to receive a partial Lump Sum payment from the Participant’s remaining Account, equal to $100 or more, after benefits commence and regardless of the form of payment previously elected. A Participant or spouse Beneficiary may request up to four such partial Lump Sum payments each calendar year.

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(2) Installments

(A) Fixed Term

Installment payments payable quarterly over a specified number of years commencing on the date of the first installment payment, not to exceed the lesser of the applicable life expectancy determined under Treasury Regulation Section 1.72-9 or 20 years. Each installment payment shall be determined by dividing the total value of the Participant’s Accounts immediately before the installment is paid by the number of such remaining installments (including that installment) provided that the first installment payment shall not be less than $150. The Participant’s Accounts that are not yet distributed shall continue to be credited with investment earnings and losses pursuant to Section 6.8.

For purposes of determining the maximum fixed term allowable under this Section 9.3(a)(2)(A), the Participant’s life expectancy shall be used for installments elected by the Participant and the surviving spouse’s life expectancy shall be used for installments elected by the surviving spouse.

(B) Over Life Expectancy, Recalculated Annually

Installment payments payable quarterly over the applicable life expectancy determined at the time benefits commence and recalculated annually, with remaining installments adjusted accordingly, provided that the first installment payment shall not be less than $150. The Participant’s Accounts which are not yet distributed shall continue to be credited with investment earnings and losses pursuant to Section 6.8.

The life expectancy tables in Treasury Regulations Section 1.72-9 will be used to determine life expectancy, unless the Participant or spouse elects, prior to January 1, 2001, to have life expectancy determined under the table in Treasury Regulations Section 20.2031-7(d)(6).

For purposes of determining life expectancy under this Section 9.3(a)(2)(B), the Participant’s life expectancy shall be used for installments elected by the Participant and the surviving spouse’s life expectancy shall be used for installments elected by the surviving spouse.

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(C) Annual Minimum Required Distributions

Annual installment payments commencing no later than the Participant’s Required Beginning Date and payable by December 31 of each subsequent distribution year equal to the minimum required distribution amount calculated under Code Section 401(a)(9) and regulations issued thereunder. The Participant’s Accounts which are not yet distributed shall continue to be credited with investment earnings and losses pursuant to Section 6.8.

(D) Death Following Required Beginning Date

In the event a Participant who is receiving installment payments dies on or after the Participant’s Required Beginning Date, a spouse Beneficiary may elect to receive any remaining installments over the remainder of the installment period elected by the Participant (or over any shorter period elected by the spouse Beneficiary); provided, however, that if the Participant had elected installments under the life expectancy recalculated installment option (Section 9.3(a)(2)(B)), then, except to the extent that a shorter period is required by law or the terms of the Plan or is otherwise elected by the spouse Beneficiary, the remaining installment period shall equal the Participant’s life expectancy immediately prior to the Participant’s death. In no event, however, shall the remaining installments be paid over a period that extends beyond the Beneficiary’s life expectancy as determined under Section 9.6. A spouse Beneficiary may also elect to receive a Lump Sum.

(E) Suspension

A Participant or spouse Beneficiary may elect to suspend installment payments (other than those that are required to be paid on or after the Participant’s Required Beginning Date) after they have commenced. Such an election will remain in effect until the Participant or spouse Beneficiary elects to recommence benefit payments under an alternate payment option.

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(3) Combination of Lump Sum and Installments

A Lump Sum distribution of an elected dollar amount or percentage of the Participant’s vested Account balance shall be paid according to the Participant’s or spouse Beneficiary’s election, with the remaining value of the vested Account balance paid in the form of the installment option elected from those available under Section 9.3(a)(2). The Participant’s Accounts which are not yet distributed shall continue to be credited with investment earnings and losses pursuant to Section 6.8.

(b) Domestic Partner or Dependent Child Beneficiary

Subject to Section 9.6, a Beneficiary who is the Participant’s Domestic Partner or Dependent Child may elect one of the following forms of payment:

(1) A Lump Sum payment of the Participant’s remaining vested Account balance.

(2) If the Participant dies on or after the Participant’s Required Beginning Date, remaining installments over the remainder of the installment period elected by the Participant (or over any shorter period elected by the Domestic Partner or Dependent Child Beneficiary); provided, however, that if the Participant had elected installments under the life expectancy recalculated installment option (Section 9.3(a)(2)(B)), then, except to the extent that a shorter period is required by law or the terms of the Plan or is otherwise elected by the Beneficiary, the remaining installment period shall equal the Participant’s life expectancy immediately prior to the Participant’s death.

(3) If the Participant dies prior to the Participant’s Required Beginning Date, the Domestic Partner or Dependent Child may elect quarterly fixed term installments (under Section 9.3(a)(2)(A)) commencing as soon as administratively practicable following the Administrative Committee’s receipt of notice of the Participant’s death and not later than December 31 of the calendar year following the calendar year in which the Participant died, and payable over any period not exceeding the lesser of 15 years or the period permitted under Section 9.6.

(4) A Lump Sum distribution of an elected dollar amount or percentage of the Participant’s vested Account balance according to the Beneficiary’s election, with the remaining value of the vested Account balance paid in the form of an installment under Section 9.3(b)(2) or (3).

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(5) A partial Lump Sum payment from the Participant’s remaining Account, equal to $100 or more, after benefits commence and regardless of the form of payment previously elected. A Beneficiary may request up to four such partial Lump Sum payments each calendar year.

(c) Other Beneficiaries

Notwithstanding any other Plan provision, a Beneficiary who is not the Participant’s spouse, Domestic Partner or Dependent Child shall receive a Lump Sum payment of the Participant’s remaining vested Account balance.

(d) In-Kind Distribution

Notwithstanding the foregoing, a Participant or Beneficiary may elect to receive that portion of the vested balance in the Participant’s Accounts that is deemed to be invested in shares of Company Stock by virtue of such Account’s investment in the Safeco Stock Ownership Fund in whole shares of Company Stock (with cash for any fractional share), rather than in cash. For purposes of this subsection (d), the number of shares deemed to be allocated to a Participant’s Accounts by virtue of such Accounts’ investment in the Safeco Stock Ownership Fund shall be determined by multiplying the number of shares of Company Stock held in the Safeco Stock Ownership Fund on the Valuation Date on which the Participant’s (or Beneficiary’s) distribution is processed by a fraction, the numerator of which is the value of the Participant’s interest in the Safeco Stock Ownership Fund on such date and the denominator of which is the total value of the Safeco Stock Ownership Fund on such date.

Benefits for Terminated Participants

Except as specifically provided otherwise herein, benefits under the Plan shall be determined and paid in accordance with the provisions of the Plan in effect on the Participant’s most recent date of termination of employment with the Company and all Affiliates.

Direct Rollovers

(a) General Rule

A Participant, spouse Beneficiary or spouse or former spouse alternate payee under a “Qualified Domestic Relations Order, “ as defined in Section 11.12(b) (each referred to as a “Distributee”), who is entitled to or elects a Lump Sum distribution, a partial Lump Sum distribution, installment payments over a period of less than ten years or an in-service

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nonhardship withdrawal may direct the Administrative Committee to pay part or all of the benefit to a trustee or custodian of an Eligible Retirement Plan that accepts such direct rollovers, subject to the following provisions:

(1) a Distributee may not request a direct rollover of an amount distributed due to the minimum required distribution provision under Section 9.6;

(2) the rollover of a distribution may be directed to only one Eligible Retirement Plan;

(3) a Distributee may not elect a direct rollover of an outstanding loan balance that is treated as distributed upon termination of the Participant’s employment, or in the event of default;

(4) a rollover direction regarding installments shall apply to all installments, unless the direction is changed by the Distributee;

(5) a spouse Beneficiary or former spouse alternate payee may direct a rollover under the same terms and conditions as a Participant;

(6) a Distributee must provide the information or documentation reasonably requested by the Administrative Committee;

(7) a Distributee may not elect a direct rollover of a hardship withdrawal;

(8) a Distributee may not elect a direct rollover of after-tax contributions except to an individual retirement account or annuity described in Code Section 408(a) or (b), or to a qualified defined contribution plan described in Code Section 401(a) or 403(a) that agrees to separately account for amounts so transferred including separately accounting for the portion of such distribution that is includable in gross income and the portion of such distribution that is not so includable; and

(9) a Distributee may not elect a direct rollover of any Dividends distributed pursuant to an election under Section 6.5(a)(2)(ii).

An “Eligible Retirement Plan” for purposes of this Section 9.5 means any of the following plans that accept the eligible rollover distribution: an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), a qualified trust described in Code Section 401(a), an annuity contract described in Code Section 403(b) and an eligible plan under Code Section 457(b) that is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and that agrees to separately account for amounts transferred into such plan from the Plan.

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(b) Non-Spouse Beneficiary Direct Rollover

Effective for Lump Sum distributions on or after November 1, 2007, a non-spouse Beneficiary who is a “designated beneficiary” under Code Section 401(a)(9)(E) and the regulations thereunder, by a direct trustee-to-trustee transfer (“direct rollover”), may roll over all or any portion of his or her distribution to an individual retirement account (“IRA”) the Beneficiary establishes for purposes of receiving the distribution. In order to be able to roll over the distribution, the distribution otherwise must satisfy the definition of an eligible rollover distribution in Section 9.5(a). Although a non-spouse Beneficiary may elect a direct rollover of the distribution, the distribution is not subject to the direct rollover requirements of Code Section 401(a)(31), the notice requirements of Code Section 402(f) or the mandatory withholding requirements of Code Section 3405(c). If a non-spouse beneficiary receives a distribution from the Plan, the distribution is not eligible for a “60-day” rollover. Further, if the Participant’s named Beneficiary is a trust, the Plan may make a direct rollover to an IRA on behalf of the trust, provided the trust satisfies the requirements to be a designated Beneficiary within the meaning of Code Section 401(a)(9)(E). A non-spouse Beneficiary may not roll over an amount which is a required minimum distribution, as determined under applicable Treasury regulations and other Revenue Service guidance. If the Participant dies before his or her Required Beginning Date and the non-spouse Beneficiary rolls the maximum amount eligible for rollover into an IRA, the beneficiary may elect to use either the 5-year rule or the life expectancy rule, pursuant to Treasury Regulation Section 1.401(a)(9)-3, A-4(c) in determining the required minimum distributions from the IRA that receives the non-spouse Beneficiary’s distribution.

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(c) Notice to Participants

The Administrative Committee shall furnish each Participant, spouse Beneficiary and alternate payee eligible for a direct rollover under Section 9.5(a) with a written explanation of the direct rollover opportunity and related withholding consequences of not choosing a direct rollover within a reasonable period (at least 30 but not more than 180 days) prior to the Participant’s, spouse Beneficiary’s or alternate payee’s Annuity Starting Date. The explanation shall clearly indicate that the Participant, spouse Beneficiary or alternate payee has a right to a 30 day waiting period to consider the election. A Participant, spouse Beneficiary or alternate payee may waive the 30 day period by an affirmative written election on form(s) provided by the Administrative Committee to make or not make a direct rollover.

Minimum Distribution Requirements

(a) General Rules

(1) Effective Date.

The provisions of this Section 9.6 will apply for purposes of determining required minimum distributions for calendar years beginning with the 2003 calendar year.

(2) Precedence.

The requirements of this Section 9.6 will take precedence over any inconsistent provisions of the Plan.

(3) Requirements of Treasury Regulations Incorporated.

All distributions required under this Section 9.6 will be determined and made in accordance with the Treasury regulations under Code Section 401(a)(9).

(b) Time and Manner of Distribution.

(1) Required Beginning Date.

The Participant’s entire interest will be distributed, or begin to be distributed, to the Participant no later than the Participant’s Required Beginning Date.

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(2) Death of Participant Before Distributions Begin.

If the Participant dies before distributions begin, the Participant’s entire interest will be distributed, or begin to be distributed, no later than as follows:

(A) If the Participant’s surviving spouse is the Participant’s sole Designated Beneficiary, then distributions to the surviving spouse will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 70 ¹/2, if later.

(B) If the Participant’s surviving spouse is not the Participant’s sole Designated Beneficiary, then, except as provided in Section 9.2(a)(3), distributions to the Designated Beneficiary will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died.

(C) If there is no Designated Beneficiary as of September 30 of the year following the year of the Participant’s death, the Participant’s entire interest will be distributed by December 31 of the calendar year immediately following the calendar year in which the Participant died.

(D) If the Participant’s surviving spouse is the Participant’s sole Designated Beneficiary and the surviving spouse dies after the Participant but before distributions to the surviving spouse begin, this Section 9.6(b)(2), other than Section 9.6(b)(2)(A), will apply as if the surviving spouse were the Participant.

For purposes of this Section 9.6(b)(2) and Section 9.6(d), unless Section 9.6(b)(2)(D) applies, distributions are considered to begin on the Participant’s Required Beginning Date. If Section 9.6(b)(2)(D) applies, distributions are considered to begin on the date distributions are required to begin to the surviving spouse under Section 9.6(b)(2)(A). If distributions under an annuity purchased from an insurance company irrevocably commence to the Participant before the Participant’s Required Beginning Date (or to the Participant’s surviving spouse before the date distributions are required to begin to the surviving spouse under Section 9.6(b)(2)(A)), the date distributions are considered to begin is the date distributions actually commence.

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(3) Forms of Distribution.

Unless the Participant’s interest is distributed in the form of an annuity purchased from an insurance company or in a single sum on or before the Required Beginning Date, as of the first Distribution Calendar Year distributions will be made in accordance with Sections 9.6(c) and (d). If the Participant’s interest is distributed in the form of an annuity purchased from an insurance company, distributions thereunder will be made in accordance with the requirements of Code Section 401(a)(9) and the Treasury regulations.

(c) Required Minimum Distributions During Participant’s Lifetime.

(1) Amount of Required Minimum Distribution For Each Distribution Calendar Year.

During the Participant’s lifetime, the minimum amount that will be distributed for each Distribution Calendar Year is the lesser of:

(A) the quotient obtained by dividing the Participant’s Account Balance by the distribution period in the Uniform Lifetime Table set forth in Treasury Regulation Section 1.401(a)(9)-9, using the Participant’s age as of the Participant’s birthday in the Distribution Calendar Year; or

(B) if the Participant’s sole Designated Beneficiary for the Distribution Calendar Year is the Participant’s spouse, the quotient obtained by dividing the Participant’s Account Balance by the number in the Joint and Last Survivor Table set forth in Treasury Regulation Section 1.401(a)(9)-9, using the Participant’s and spouse’s attained ages as of the Participant’s and spouse’s birthdays in the Distribution Calendar Year.

(2) Lifetime Required Minimum Distributions Continue Through Year of Participant’s Death.

Required minimum distributions will be determined under this Section 9.6(c) beginning with the first Distribution Calendar Year and up to and including the Distribution Calendar Year that includes the Participant’s date of death.

(d) Required Minimum Distributions After Participant’s Death.

(1) Death On or After Date Distributions Begin.

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(A) Participant Survived by Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is a Designated Beneficiary, the minimum amount that will be distributed for each Distribution Calendar Year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s Account Balance by the longer of the remaining Life Expectancy of the Participant or the remaining Life Expectancy of the Participant’s Designated Beneficiary, determined as follows:

(i) The Participant’s remaining Life Expectancy is calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.

(ii) If the Participant’s surviving spouse is the Participant’s sole Designated Beneficiary, the remaining Life Expectancy of the surviving spouse is calculated for each Distribution Calendar Year after the year of the Participant’s death using the surviving spouse’s age as of the spouse’s birthday in that year. For Distribution Calendar Years after the year of the surviving spouse’s death, the remaining Life Expectancy of the surviving spouse is calculated using the age of the surviving spouse as of the spouse’s birthday in the calendar year of the spouse’s death, reduced by one for each subsequent calendar year.

(iii) If the Participant’s surviving spouse is not the Participant’s sole Designated Beneficiary, the Designated Beneficiary’s remaining Life Expectancy is calculated using the age of the Beneficiary in the year following the year of the Participant’s death, reduced by one for each subsequent year.

(B) No Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is no Designated Beneficiary as of September 30 of the year after the year of the Participant’s death, the minimum amount that will be distributed for each Distribution Calendar Year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s Account Balance by the Participant’s remaining Life Expectancy calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.

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(2) Death Before Date Distributions Begin.

(A) Participant Survived by Designated Beneficiary. Except as provided in Section 9.2(a)(3) of the Plan, if the Participant dies before the date distributions begin and there is a Designated Beneficiary, the minimum amount that will be distributed for each Distribution Calendar Year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s Account Balance by the remaining Life Expectancy of the Participant’s Designated Beneficiary, determined as provided in Section 9.6(d)(1).

(B) No Designated Beneficiary. If the Participant dies before the date distributions begin and there is no Designated Beneficiary as of September 30 of the year following the year of the Participant’s death, distribution of the Participant’s entire interest will be completed by December 31 of the calendar year following the calendar year of the Participant’s death.

(C) Death of Surviving Spouse Before Distributions to Surviving Spouse Are Required to Begin. If the Participant dies before the date distributions begin, the Participant’s surviving spouse is the Participant’s sole Designated Beneficiary, and the surviving spouse dies before distributions are required to begin to the surviving spouse under Section 9.6(b)(2)(A), this Section 9.6(d)(2) will apply as if the surviving spouse were the Participant.

(e) Definitions.

(1) Designated Beneficiary. The individual who is designated as the Beneficiary under Section 2.9 of the Plan and is the designated beneficiary under Code Section 401(a)(9) and Treasury Regulation Section 1.401(a)(9)-4, Q&A-1.

(2) Distribution Calendar Year. A calendar year for which a minimum distribution is required. For distributions beginning before the Participant’s death, the first Distribution Calendar Year is the calendar year immediately preceding the calendar year which contains the Participant’s Required Beginning Date. For distributions beginning after the Participant’s death, the first Distribution Calendar Year is the calendar year in which distributions are required to begin under Section 9.6(b)(2). The required minimum distribution for the Participant’s first Distribution Calendar Year will be made on or before the Participant’s Required Beginning Date. The required minimum

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distribution for other Distribution Calendar Years, including the required minimum distribution for the Distribution Calendar Year in which the Participant’s Required Beginning Date occurs, will be made on or before December 31 of that Distribution Calendar Year.

(3) Life Expectancy. Life expectancy as computed by use of the Single Life Table in Treasury Regulation Section 1.401(a)(9)-9.

(4) Participant’s Account Balance. The account balance as of the last valuation date in the calendar year immediately preceding the Distribution Calendar Year (valuation calendar year) increased by the amount of any contributions made and allocated or forfeitures allocated to the account balance as of dates in the valuation calendar year after the valuation date and decreased by distributions made in the valuation calendar year after the valuation date. The account balance for the valuation calendar year includes any amounts rolled over or transferred to the Plan either in the valuation calendar year or in the Distribution Calendar Year if distributed or transferred in the valuation calendar year.

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ARTICLE 10: TOP-HEAVY PROVISIONS

Scope

Notwithstanding any Plan provision to the contrary, for any Plan Year in which the Plan is “Top-Heavy” within the meaning of Code Section 416(g), the provisions of this Section 10 shall govern to the extent they conflict with or specify additional requirements to the Plan provisions governing Plan Years that are not Top-Heavy.

Top-Heavy Status

(a) Top-Heavy

The Plan shall be “Top-Heavy” if, as of the Determination Date, (1) the Present Value of Accrued Benefits of Key Employees, and/or (2) the sum of the Aggregate Accounts of Key Employees under the Plan and any plan of an Aggregation Group, exceeds 60% of the Present Value of Accrued Benefits or the Aggregate Accounts of all Participants under the Plan and any plan of an Aggregation Group, determined in accordance with Code Section 416(g) and regulations thereunder.

The Present Value of Accrued Benefits and/or Aggregate Account balance of a Participant who was previously a Key Employee but is no longer a Key Employee (or the Participant’s Beneficiary) shall not be taken into account for purposes of determining Top-Heavy status. Further, a Participant’s Present Value of Accrued Benefits and/or Aggregate Account balance shall not be taken into account if he or she has not performed services for the Company or any Affiliate at any time during the one year period ending on the Determination Date.

(b) Determination Date

Whether the Plan is Top-Heavy for any Plan Year shall be determined as of the Determination Date. “Determination Date” means (a) the last day of the preceding Plan Year, or (b) in the case of the first Plan Year, the last day of such Plan Year.

(c) Valuation Date

“Valuation Date” means, for purposes of determining Top Heaviness, the Determination Date instead of the meaning set forth in Section 2.48.

(d) Aggregate Account

“Aggregate Account” means, with respect to a Participant, the sum of:

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(1) the Participant’s Account balances as of the Valuation Date;

(2) contributions after the Valuation Date due as of the Determination Date; and

(3) distributions made during the one year period ending on the Determination Date, including distributions under a terminated plan that, had it not been terminated, would have been aggregated with the Plan under Code Section 416(g)(2)(A)(i). In the case of a distribution made for a reason other than separation from service, death or Disability, this provision shall be applied by substituting the words “five year period” for the words “one year period. “

(e) Present Value of Accrued Benefits

The “Present Value of Accrued Benefits” with respect to a defined benefit plan shall be based on the Participant’s accrued benefits and the actuarial assumptions as determined under the provisions of the applicable defined benefit plan.

(f) Key Employee

“Key Employee” means an Employee or former Employee (including any deceased employee) who, at any time during the Plan Year that includes the Determination Date, was:

(1) an officer of an Employer with annual Section 415 Compensation from the Employer or any Affiliate that exceeds $130,000 (as adjusted under Code Section 416(i)(1) for Plan Years beginning after December 31, 2002);

(2) an Employee who owns more than 5% of an Employer; or

(3) an Employee who owns more than 1% of an Employer with annual aggregate Section 415 Compensation from the Employer and any Affiliate that exceeds $150,000.

The determination of who is a Key Employee will be made in accordance with Code Section 416(i)(1) and the applicable regulations and other guidance of general applicability issued thereunder.

(g) Aggregation Group

“Aggregation Group” means the group of plans that must be considered as a single plan for purposes of determining whether the plans within the group are Top–Heavy (“Required Aggregation Group”), or the group of plans that may be aggregated for purposes of Top–Heavy testing (“Permissive Aggregation Group”). The Determination Date for each plan must fall within the same calendar year in order to aggregate the plans.

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(1) The Required Aggregation Group includes each plan of the Affiliates in which a Key Employee is a participant in the Plan Year containing the Determination Date, and each other plan of the Affiliates that, during this period, enables any plan in which a Key Employee participates to meet the minimum participation standards or nondiscriminatory contribution requirements of Code Sections 401(a)(4) and 410.

(2) A Permissive Aggregation Group may include any plan sponsored by an Affiliate, provided the group as a whole continues to satisfy the minimum participation standards and nondiscriminatory contribution requirements of Code Sections 401(a)(4) and 410.

Each plan belonging to a Required Aggregation Group shall be deemed Top–Heavy or non–Top–Heavy in accordance with the group’s status. In a Permissive Aggregation Group that is determined to be Top–Heavy, only those plans that are required to be aggregated shall be Top–Heavy. In a Permissive Aggregation Group that is not Top–Heavy, no plan in the group shall be Top–Heavy.

Minimum Contribution

(a) General Rule

For any Plan Year in which the Plan is Top–Heavy, the total Employer contributions under Article 5 (other than Participant contributions under Section 5.1(a)) shall not be less than 3% of such non-Key Employee Participant’s Section 415 Compensation. However, in the event the Employer contributions and forfeitures allocated to each Key Employee’s Account do not exceed 3% of the Key Employee’s Section 415 Compensation, such Employer contributions and forfeitures for non–Key Employee Participants are required to equal only the highest percentage of Section 415 Compensation allocated to any Key Employee’s Accounts for that Plan Year under any defined contribution plans sponsored by the Company or any Affiliate.

The minimum contribution must be made on behalf of all non–Key Employee Participants who are employed on the last day of the Plan Year including non–Key Employee Participants who (1) failed to complete a Year of Service, or (2) declined to make any mandatory contributions to the Plan or enter a payroll deduction agreement.

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Employer matching contributions shall be taken into account for purposes of satisfying the minimum contribution requirement of this Section 10.3 and Code Section 416(c)(2). Employer matching contributions that are used to satisfy the minimum contribution requirements shall be treated as matching contributions for purposes of the actual contribution percentage test, if applicable, and all other requirements of Code Section 401(m).

(b) Special Two (2) Plan Rule

Where the Plan and a defined benefit plan belong to an Aggregation Group that is determined to be Top–Heavy, the minimum contribution required under subsection (a) above shall be increased to 5%.

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ARTICLE 11: ADMINISTRATION

Administrative Committee

The Board shall appoint an Administrative Committee of three or more members, who may but need not be Employees. The members of the Administrative Committee shall serve without compensation for their services, but shall receive reimbursement from the Trust Fund for expenses properly incurred to the extent not paid by the Company. All members of the Administrative Committee shall serve at the pleasure of the Board and may resign by giving ten days advance written notice to the Board. Vacancies shall be filled by the Board.

Activities, Duties and Responsibilities of the Administrative Committee

(a) Plan Administrator

The Administrative Committee is the “named fiduciary” and “plan administrator” in accordance with the provisions of ERISA. Notwithstanding the foregoing, the Administrative Committee shall be the “named fiduciary” with respect to the determination of the investment subfunds to be offered under the Plan, the appointment of any Investment Manager with respect to any portion of the Trust Fund and the exercise of the authority granted to the Administrative Committee under Section 6.6. Except as otherwise provided, the Administrative Committee shall have the authority to control and manage the operation and administration of the Plan and to take such actions as are necessary or appropriate to facilitate the management and control of the Trust Fund. The Company may allocate to the Administrative Committee additional responsibility for administration of the Plan.

(b) Administrative Committee Action

The Administrative Committee may take action with or without a meeting upon the vote of a majority of its members qualified to vote with respect to such action. In the event the Administrative Committee members qualified to vote on any question are unable to reach a decision of the majority, the question shall be determined by the Board or its authorized delegate. A member of the Administrative Committee who is a Participant shall not vote on any question relating specifically to that member.

(c) Organizational Records

The Administrative Committee shall keep proper records of its proceedings and acts. Each member of the Administrative Committee is authorized to execute or deliver any instrument or instruments on behalf of the Administrative Committee.

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(d) Powers and Duties

The Administrative Committee shall administer the Plan in a nondiscriminatory manner for the exclusive benefit of Participants and their Beneficiaries. The Administrative Committee shall have such powers and duties as may be necessary or appropriate to discharge its functions, including, but not limited to, the following:

(1) To construe and interpret the Plan, to receive certification by the Company of any Employee’s satisfaction of the eligibility requirements of the Plan, to decide all questions of eligibility, and to determine the amount, manner and time of payment of any benefit;

(2) To make a determination as to the right of any person to a benefit;

(3) To provide for and receive forms necessary or appropriate for administration of the Plan and to obtain from Employees such information as may be necessary or appropriate for the proper administration of the Plan and, when appropriate, to furnish such information promptly to the Trustee or other persons entitled thereto;

(4) To prepare and distribute to Participants and Beneficiaries, in such manner as the Company determines to be appropriate, information explaining the Plan;

(5) To keep such records and accounts as the Administrative Committee deems necessary to administer the Plan, using such books and methods of accounting as the Administrative Committee shall determine;

(6) To instruct the Trustee with respect to the payment of benefits and expenses;

(7) To prepare and file any reports or other documents required by the Code or ERISA; and

(8) To engage an independent public accountant to conduct such examinations and to render such opinions as may be required by ERISA.

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(e) Delegation of Duties

The Administrative Committee may utilize and rely on the services of agents and such clerical, legal, actuarial, accounting, and other means of assistance (including services of persons employed by or rendering services to the Company or any Affiliate) as it shall from time to time deem necessary or desirable. An opinion of legal counsel, independent public accountant or other expert or advisor shall be full and complete authorization and protection with respect to any action taken, omitted or suffered by the Administrative Committee in good faith and in accordance with such opinion. Payment for such services or assistance shall be made from the Trust Fund to the extent not paid by the Company.

(f) Plan Interpretation

The Administrative Committee shall have all powers necessary or appropriate to carry out its duties, including the discretionary authority to interpret the provisions of the Plan and the facts and circumstances of claims for benefits. The Administrative Committee may from time to time establish rules and procedures for administration of the Plan not inconsistent with its provisions, and administer the Plan in accordance with its provisions and such rules and procedures. The Administrative Committee shall have the exclusive right to interpret the terms and provisions of the Plan and to resolve all questions arising thereunder, including, without limitation, the right to resolve and remedy ambiguities, inconsistencies, or omissions in the Plan. The Administrative Committee shall endeavor to act in such a way as not to discriminate in favor of any class of Employees, Participants or other persons. All interpretations, determinations and decisions of the Administrative Committee in respect of any matter or question arising under the Plan shall be final, conclusive, and binding upon all persons, including, without limitation, Employees, Participants, and any and all other persons having or claiming to have any interest in or under the Plan.

The Plan shall be interpreted by the Administrative Committee in accordance with its terms and their intended meaning. If, due to errors in drafting, a provision does not accurately reflect its intended meaning, as demonstrated by consistent interpretations by the Administrative Committee or other evidence of intention, the provision shall be considered ambiguous and shall be interpreted by the Administrative Committee in a fashion consistent with its intent. This subsection (f) may not be invoked by a Participant, Beneficiary or any other person to require the Plan to be interpreted in a manner that is inconsistent with its interpretation by the Administrative Committee.

(g) Electronic and Telephonic Directions

Notwithstanding any provision in the Plan to the contrary, to the extent permitted by the Administrative Committee, payroll deduction agreements

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and modifications and revocations thereof, investment elections, changes or transfers, loans, withdrawal decisions, and any other decision or election by a Participant (or Beneficiary) under the Plan may be accomplished by electronic or telephonic means that are not otherwise prohibited by law and that are in accordance with procedures and/or systems approved or arranged by the Administrative Committee or its delegates.

Allocation of Fiduciary Responsibility

The Administrative Committee may allocate its fiduciary responsibilities among its members and may delegate to other persons or organizations any of its rights, powers, responsibilities and duties to the fullest extent permitted by ERISA. Any such allocation or delegation shall be made in writing and shall be terminable upon such notice as the Administrative Committee deems reasonable under the circumstances.

Fidelity Bonds

Every person who handles funds or other property of the Plan shall be bonded in amounts at least meeting the minimum requirements of ERISA Section 412. Trust Funds may be used to purchase such fidelity bonds.

Data

All persons entitled to benefits from the Plan must furnish to the Administrative Committee such documents, evidence or information as the Administrative Committee considers necessary or appropriate for the purpose of administering the Plan, including information concerning marital status; and it shall be a condition of the Plan that each such person must furnish such information and sign such documents as the Administrative Committee may require before any benefits become payable from the Plan. The Administrative Committee shall be entitled to pay benefits to a nonspouse Beneficiary in reliance on the signed statement of a Participant that he or she is unmarried without any further liability to a spouse if such statement is false.

Missing Persons

If the Administrative Committee shall be unable within two years after any amount becomes due and payable from the Plan to a Participant, spouse or Beneficiary to make payment because the identity or whereabouts of such person cannot be ascertained after using a government or commercial locator service, the Administrative Committee may mail a notice by registered mail to the last known address of such person stating that unless such person makes written reply to the Administrative Committee within 60 days from the mailing of such notice, the

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Administrative Committee will direct that such amount and all further benefits with respect to such person shall be forfeited and such forfeited amount shall be applied in the same manner as a forfeiture under Section 7.2; provided, however, that in the event of the subsequent reappearance of the Participant, spouse or Beneficiary prior to termination of the Plan, the benefits that were due and payable and that such person missed shall be paid, without interest, in a single sum, and any future benefits due such person shall be reinstated in full.

The Administrative Committee may adopt such procedures as it deems appropriate from time to time relating to uncashed checks.

Claims Procedure

(a) Filing Claim

A Participant or a Beneficiary, or the authorized representative of either (the “Claimant”), who believes that the Participant or Beneficiary, as applicable has been denied a benefit to which the Participant or Beneficiary is entitled under the Plan may file a written claim for such benefits with the Company’s Director, Corporate Compensation/Benefits, or his or her delegate (or such other person as may be appointed by the Administrative Committee for such purpose) (the “Initial Claim Reviewer”). The Initial Claim Reviewer may prescribe a form for filing such claims, and, if he or she does so, a claim will not be deemed properly filed unless such form is used, but the Initial Claim Reviewer shall provide a copy of such form to any person whose claim for benefits is improper solely for this reason.

(b) Claim Review

Claims that are properly filed will be reviewed by the Initial Claim Reviewer, which will make his or her decision with respect to such claim and notify the Claimant in writing of such decision within 90 days (45 days in the case of a claim related to the Participant’s Disability) after the Initial Claim Reviewer’s receipt of the written claim; provided that the 90-day period (45-day period in the case of a claim related to the Participant’s Disability) can be extended for up to an additional 90 days (30 days, or such longer period permitted under 29 C.F.R. § 2560.503-1(f)(3), in the case of a claim related to the Participant’s Disability) if the Initial Claim Reviewer determines that special circumstances require an extension of time to process the claim and the Claimant is notified in writing of the extension, the special circumstances requiring the extension and the date by which the Initial Claim Reviewer expects to render a decision, prior to the commencement of the extension. Claims related to the Participant’s Disability shall be subject to such additional procedures as are specified in 29 C.F.R. § 2560.503-1 for disability claims.

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If the claim is wholly or partially denied, the written response to the Claimant shall include:

(1) The specific reason or reasons for the denial;

(2) Reference to the specific Plan provisions on which the denial is based;

(3) A description of any additional material or information necessary for the Claimant to perfect the claim and an explanation why such material or information is necessary;

(4) A description of the Plan’s claim appeal procedure (and the time limits applicable thereto), as set forth in subsection (c) immediately below, including a statement of the Claimant’s right to bring a civil action under Section 502(a) of ERISA following an adverse determination on appeal; and

(5) In the case of an adverse benefit determination related to the Participant’s Disability:

(i) if an internal rule, guideline, protocol or other similar criterion was relied upon in making the adverse determination, either the specific rule, guideline, protocol or other similar criterion; or a statement that such a rule, guideline, protocol or similar criterion was relied upon in making the adverse determination and that a copy of such rule, guideline, protocol or other criterion will be provided free of charge to the Claimant upon request; or

(ii) if the adverse benefit determination is based on a medical necessity or experimental treatment or similar exclusion or limit, either an explanation of the scientific or clinical judgment for the determination, applying the terms of the Plan to the Claimant’s medical circumstances, or a statement that such explanation will be provided free of charge upon request.

(c) Appeal

If the claim is denied in whole or in part, the Claimant may appeal such denial by filing a written appeal with the Secretary of the Administrative Committee (the “Secretary”) within 60 days (180 days in the case of a claim related to the Participant’s Disability) of receiving written notice that the claim has been denied. Such written appeal should include:

(1) A statement of the grounds on which the appeal is based;

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(2) Reference to the specific Plan provisions that support the claim;

(3) The reason(s) or argument(s) why the Claimant believes the claim should be granted and evidence supporting each reason or argument; and

(4) Any other comments, documents, records or information relating to the claim that the Claimant wishes to include.

The Claimant will be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (within the meaning of 29 C.F.R. § 2560.503-1(m)(8)) to his claim.

Except as set forth in the next paragraph, appeals will be considered (and decided) by the Administrative Committee no later than the date of its first meeting following the Secretary’s receipt of the written appeal, unless the written appeal is received by the Secretary within 30 days of such meeting, in which case the appeal will be considered (and decided) by the Administrative Committee no later than the date of its second meeting following the Secretary’s receipt of the written appeal. If the Administrative Committee determines that special circumstances require an extension of time to process the appeal, then the appeal will be considered (and decided) by the Administrative Committee no later than the date of its third meeting following the Secretary’s receipt of the written appeal. If such an extension of time is required because of special circumstances, then the Administrative Committee shall provide the Claimant with written notice of the extension, the special circumstances requiring the extension, and the date by which the Administrative Committee expects to render its decision, prior to the commencement of the extension. The Administrative Committee shall notify the Claimant of its decision on the appeal as soon as possible, but not later than five days after the decision is made.

Appeals of claims related to the Participant’s Disability will be considered (and decided) by the Administrative Committee, and the Claimant will be notified in writing of the Administrative Committee’s decision, within 45 days after the Secretary’s receipt of the written appeal; provided that the 45-day period can be extended for up to an additional 45 days if the Administrative Committee determines that special circumstances require an extension of time to process the appeal and the Claimant is notified in writing of the extension, the special circumstances requiring the extension, and the date by which the Administrative Committee expects to render its decision, prior to the commencement of the extension. Appeals related to the Participant’s Disability shall be subject to such additional procedures as are specified in 29 C.F.R. § 2560.503-1 for the review of disability claim denials.

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In considering any appeal, the Administrative Committee (1) will take into account all comments, documents, records and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial determination, and (2) will not afford deference to the Initial Claim Reviewer’s initial denial.

In the event the claim is denied on appeal, the written denial will include:

(1) The specific reason or reasons for the denial;

(2) Reference to the specific Plan provisions on which the denial is based;

(3) A statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents records, and other information relevant (within the meaning of 29 C.F.R. § 2560.503-1(m)(8)) to his claim;

(4) A statement of the Claimant’s right to bring an action under Section 502(a) of ERISA; and

(5) in the case of an adverse benefit determination related to the Participant’s Disability:

(i) if an internal rule, guideline, protocol or other similar criterion was relied upon in making the adverse determination, either the specific rule, guideline, protocol or other similar criterion; or a statement that such a rule, guideline, protocol or similar criterion was relied upon in making the adverse determination and that a copy of such rule, guideline, protocol or other criterion will be provided free of charge to the Claimant upon request;

(ii) if the adverse benefit determination is based on a medical necessity or experimental treatment or similar exclusion or limit, either an explanation of the scientific or clinical judgment for the determination, applying the terms of the Plan to the Claimant’s medical circumstances, or a statement that such explanation will be provided free of charge upon request; and

(iii) the following statement: “You and your Plan may have other voluntary alternative dispute resolution options, such as mediation. One way to find out what may be available is to contact your local U.S. Department of Labor Office or your State insurance regulatory agency. “

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(d) Statute of Limitations and Standard of Review

A Claimant may not bring an action under Section 502(a) of ERISA or otherwise with respect to his claim until he has exhausted the foregoing procedure. Any such action must be filed in a court of competent jurisdiction within 180 days after the date on which the Claimant receives the Administrative Committee’s written denial of the Claimant’s claim on appeal or it shall be forever barred. Any further review, judicial or otherwise, of the Administrative Committee’s decision on the Claimant’s claim will be limited to whether, in the particular instance, the Administrative Committee abused its discretion. In no event will such further review, judicial or otherwise, be on a de novo basis, because the Administrative Committee has discretionary authority to determine eligibility for benefits and to construe and interpret the terms of the Plan.

Effect of a Mistake

In the event of a mistake or misstatement as to the eligibility, participation, or service of any Participant, or the amount of payments made or to be made to a Participant, spouse or Beneficiary, the Administrative Committee shall, if possible, cause to be withheld or accelerated or otherwise make adjustment of the amounts of payments as will in its sole judgment result in the Participant, spouse or Beneficiary receiving the proper amount of payments under the Plan.

No Enlargement of Employee Rights

The Plan is strictly a voluntary undertaking on the part of the Company and shall not be deemed to constitute a contract between the Company (or any Affiliate) and any Employee or Participant, or to be considered for, or an inducement to, or a condition of, the employment of any Employee. Nothing contained in the Plan shall be deemed to give any Employee the right to be retained in the service of the Company or any Affiliate or to interfere with the right of the Company or any Affiliate to discharge or retire any person at any time. No Participant, prior to the Participant’s retirement under conditions of eligibility for retirement benefits, or prior to the Participant’s satisfying the vesting requirements, shall have any right or interest in or to any portion of the Trust Fund. No one shall have any right to retirement benefits, except to the extent provided herein.

Notice of Address

Each person entitled to benefits from the Trust Fund must file with the Administrative Committee, in writing, notice of that person’s post office address and each change of post office address. Any communication, statement, or notice

11-9

addressed to such a person at the latest reported post office address will be binding on such person for all purposes of the Plan and the Company, the Administrative Committee, and the Trustee shall not be obliged to search for or ascertain that person’s whereabouts, except to the extent required by ERISA.

Incompetency

Every person receiving or claiming benefits under the Plan shall be conclusively presumed to be mentally competent and of legal age until the date on which the Administrative Committee receives a written notice, in a form and manner acceptable to the Administrative Committee, that such person is incompetent or a minor, for whom a guardian or other person legally vested with the care of the person or estate has been appointed; provided, however, that if the Administrative Committee shall find that any person to whom a benefit is payable under the Plan is unable to care for his or her affairs because of incompetency, or is a minor, any payment due (unless a prior claim therefor shall have been made by a duly appointed legal representative) may be paid to the spouse, a child, a parent or a brother or sister, or to any person or institution deemed by the Administrative Committee to have incurred expense for such person otherwise entitled to payment. To the extent permitted by law, any such payment so made shall be a complete discharge of liability therefor under the Plan.

In the event a guardian of the estate of any person receiving or claiming benefits under the Plan shall be appointed by a court of competent jurisdiction, benefit payments may be made to such guardian provided that proper proof of appointment and continuing qualification is furnished in a form and manner acceptable to the Administrative Committee. To the extent permitted by law, any such payment so made shall be a complete discharge of any liability therefor under the Plan.

Non-Alienation and Domestic Relations Orders

(a) General

Except as permitted by the Plan in accordance with Code Section 401(a)(13) and ERISA Section 206(d) with respect to assignments to alternate payees under “Qualified Domestic Relations Orders” or as provided in a judgment, order, decree or settlement agreement described in Code Section 401(a)(13), no benefit payable at any time under the Plan shall be subject to the debts or liabilities of a Participant or the Participant’s Beneficiary, and any attempt to alienate, sell, transfer, assign, pledge, or otherwise encumber any such benefit, whether presently or thereafter payable, shall be void. Subject to the foregoing exception, no benefit under the Plan shall be subject in any manner to attachment, garnishment, or encumbrance of any kind.

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(b) Domestic Relations Orders

In accordance with procedures consistent with Code Section 414(p) that are established by the Administrative Committee (including procedures requiring prompt notification of the affected Participant and each alternate payee of the Plan’s receipt of a domestic relations order and its procedures for determining the qualified status of such order), a domestic relations order shall be honored by the Plan if the Administrative Committee determines that it constitutes a “Qualified Domestic Relations Order.”

A “Qualified Domestic Relations Order” is a judgment, decree, or order (including approval of a property settlement agreement) that in accordance with Code Section 414(p):

(1) relates to the provision of child support, alimony payments or marital property rights to a spouse, former spouse, child or other dependent of a Participant;

(2) is made pursuant to a state domestic relations law (including a community property law);

(3) creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable to a Participant under the Plan;

(4) specifies the name and last known address of the Participant and each alternate payee;

(5) specifies the amount or method of determining the amount of benefit payable to an alternate payee;

(6) specifies the number of payments or period during which payments are to be made;

(7) names each plan to which the order applies;

(8) does not require any form, type or amount of benefit not otherwise provided under the Plan; and

(9) does not conflict with a prior domestic relations order that meets the requirements of this Section 11.12(b).

Except as may otherwise be required by regulations of the Secretary of Labor, such orders may not require a retroactive transfer of all or part of a Participant’s Account to or from the benefit of an alternate payee without permitting an appropriate adjustment for earnings and investment gains or losses that have occurred in the interim, nor shall such orders require the Plan to provide loans, self-directed investment elections, or other rights to alternate payees that are not available to Beneficiaries generally.

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To the full extent permitted by Code Section 414(p)(10) and by the terms of a Qualified Domestic Relations Order, amounts assigned to an alternate payee may be paid as soon as possible in a lump sum, notwithstanding the age, financial hardship, employment status, or other factors affecting the ability of the Participant to make a withdrawal or otherwise receive a distribution of balances to the Participant’s credit under the Plan. In cases where such full and prompt payment of amounts assigned to an alternate payee will not be made, the assigned amounts shall be maintained in a separate Account, for the benefit of the alternate payee. Such alternate payee shall have the same investment options set forth in Section 5 as a Participant. An alternate payee may elect to commence benefits at any time a spouse Beneficiary would be entitled to commence benefits and may only elect a Lump Sum (full or partial) form of payment.

Applicable Law

Except to the extent superseded by ERISA, the Plan and all rights hereunder shall be governed, construed, and administered in accordance with the laws of the State of Washington with the exception that any Trust Agreement that may constitute a part of the Plan shall be construed and enforced in all respects under and by the laws of the state specified in the Trust Agreement.

Expenses

All reasonable expenses that are necessary to operate and administer the Plan shall be deducted from the Trust Fund, to the extent not paid directly by the Company.

Masculine and Feminine, Singular and Plural

Whenever used herein, pronouns shall include the opposite gender, and the singular shall include the plural, and the plural shall include the singular, whenever the context shall plainly so require.

Disclosure to Participants

Each Participant shall be advised of the general provisions of the Plan and, upon written request addressed to the Administrative Committee, shall be furnished any information requested regarding the Participant’s status, rights and privileges under the Plan as may be required by law.

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Income Tax Withholding Requirements

Any retirement benefit payment made under the Plan will be subject to any applicable income tax withholding requirements. For this purpose, the Administrative Committee shall provide the Trustee with any information the Trustee reasonably needs to satisfy such withholding obligations and with any other information that may be required by regulations promulgated under the Code.

Severability

If any provision of the Plan shall be held illegal or invalid for any reason, such determination shall not affect the remaining provisions as if said illegal or invalid provision had never been included.

Uniformed Services Employment and Reemployment Rights Act of 1994 (“USERRA”)

Effective December 12, 1994, notwithstanding any provision of the Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Code Section 414(u).

A Participant who was on a USERRA leave may elect to makeup pre-tax and after-tax contributions to the Plan that the Participant could not make as a result of such leave, subject to the limits of the Plan and Code Section 414(u). The Participant shall have up to at least three times the length of the Participant’s USERRA leave to make up contributions. If such Participant contributions are made timely, the Employer shall contribute all Employer matching contributions that would have been required under the Plan, as if the make-up contributions had actually been made during the USERRA leave.

If a Participant returns from a USERRA leave that is 15 or fewer working days, the Participant shall be deemed to have elected to makeup pre-tax and after-tax contributions to the Plan that would have been made had the Participant not been on USERRA leave. The amount of the make-up contributions shall be determined with regard to the Participant’s payroll deduction agreement in place at the commencement of the leave, if any. The contributions shall be based on the amount of the Earnings and/or Bonuses, as applicable, the Participant would have received had the Participant not taken the USERRA leave and such make-up contributions shall be deducted over a specified number of payroll periods, as follows:

Length of Absence	Number of Payroll Periods
1 - 4 days	1
5 - 9 days	2
10 - 14 days	3
15 days	4

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In the event a Participant does not wish to make up contributions as described above, the Participant may elect to change the amount of, or suspend, the contributions as provided in Section 4.2.

Plan Qualification

Any modification or amendment of the Plan may be made retroactive, as necessary or appropriate, to establish and maintain a “qualified plan” pursuant to Code Section 401 and regulations thereunder and exempt status of the Trust Fund under Code Section 501 or to satisfy the requirements of ERISA, any regulation thereunder or other applicable law.

Beneficiary Disputes

If at any time there is doubt as to the right of any Beneficiary to receive any amount, the Administrative Committee may direct the Trustee to retain such amount, without liability for any interest thereon, until the rights thereto are determined, or may direct the Trustee to pay such amount into any court of competent jurisdiction, in which case none of the Administrative Committee, the Trustee, the Company, the Board or any Employer will have (or be under) any further liability to anyone.

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ARTICLE 12: AMENDMENT AND TERMINATION

Amendment - General

It is the Company’s intention that the Plan will continue indefinitely. However, the Company shall have the right to amend, terminate, or partially terminate the Plan at any time, in any way and for any reason subject to any advance notice or other requirements of ERISA and the Code.

Any amendment or termination shall be made in writing, adopted by (i) the Compensation Committee of the Board, if such Compensation Committee finds that the amendment will not significantly increase or decrease costs or benefits, or (ii) by the Board at any time. Adoption of any amendment will be evidenced by a certified copy of the Compensation Committee or Board resolution authorizing such action.

Amendment - Vesting Schedule

The Company reserves the right to amend the vesting schedule at any time pursuant to Section 12.1; however, no such amendment shall reduce the nonforfeitable percentage of a Participant’s Account balance, determined as of the date immediately preceding the later of the date on which such amendment is adopted or effective, to a percentage that is less than the Participant’s nonforfeitable percentage as computed under the Plan without regard to the amendment.

In the event the Company amends the vesting schedule, each Participant having at least three Years of Service with the Company or any Affiliate may elect to have the Participant’s nonforfeitable Account balance computed under the Plan without regard to the amendment. The Participant must file such an election with the Administrative Committee within 60 days of the latest of: (a) the Company’s adoption of the amendment; (b) the effective date of the amendment; or (c) the Participant’s receipt of written notice of the amendment. Notwithstanding the above, a Participant is not entitled to make the election if the Participant’s nonforfeitable percentage determined under the Plan, as amended, is at all times at least as great as the Participant’s nonforfeitable percentage determined under the Plan without regard to the amendment. For purposes of this Section 12.2, an amendment to the vesting schedule includes any Plan amendment that directly or indirectly affects the nonforfeitable percentage of a Participant’s right to the Participant’s Account balance.

Amendment - Consolidation or Merger

In the event the Plan’s assets and liabilities are merged into, transferred to or otherwise consolidated with any other retirement plan, then such must be accomplished so as to ensure that each Participant would (if the other retirement

12-1

plan then terminated) receive a benefit immediately after the merger, transfer or consolidation, that is equal to or greater than the benefit the Participant would have been entitled to receive immediately before the merger, transfer or consolidation (as if the Plan had then terminated). This provision shall not be construed as limiting the powers of the Company to appoint a successor Trustee.

Termination of the Plan

The termination of the Plan shall not cause or permit any part of the Trust Fund to be diverted to purposes other than for the exclusive benefit of the Participants or to defray reasonable expenses of administering the Plan and Trust, or cause or permit any portion of the Trust Fund to revert to or become the property of the Company or any Employer at any time prior to the satisfaction of all liabilities with respect to the Participants.

Upon termination of the Plan, the Administrative Committee shall continue to act for the purpose of complying with the preceding paragraph and shall have all power necessary or convenient to the winding up and dissolution of the Plan as herein provided. While so acting, the Administrative Committee shall be in the same status and position with respect to other persons as if the Plan remained in existence.

Action Upon Discontinuance of Contributions or Termination of the Plan

(a) If the Company determines in its sole discretion that the Plan has been terminated partially or completely, within the meaning of regulations under Code Section 411, the Company shall determine the date of such termination and the Participants affected by the termination. The Accounts of all Participants affected by the termination who were Employees on the date thereof shall be fully vested to the extent then funded. In addition, the Company in its sole discretion may vest the Accounts of a group of Participants because they are affected by a business divestiture, layoff or other similar transaction (even when a true “partial termination” has not occurred). The Company or its delegate shall document in writing any decision to vest under this Section 12.5 and Section 7.1 certain Participants in their Accounts and the reason therefor. The Company’s action in any one event shall not be considered as establishing a precedent or requiring a similar action in another event. The discontinuance of contributions by any participating employer shall not, in the absence of a determination by the Company under this Section 12.5, terminate the Plan or operate to accelerate any vesting, payments or distributions to or for the benefit of Participants.

(b) Upon a complete termination of the Plan, the Accounts of Participants vested by such termination shall be distributed, as directed by the Administrative Committee, in accordance with the provisions of the Plan and applicable law.

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ARTICLE 13: FUNDING

Contributions to the Trust

As a part of the Plan the Company shall maintain a Trust. Employers shall make such contributions to the Trust Fund as are required by the Plan, subject to the right of the Company to discontinue the Plan. All benefits under the Plan shall be payable only from the Trust Fund, and no liability for the payment of benefits under the Plan shall be imposed on the Company or any Affiliate (or any officers, directors, or shareholders of such an entity). Nothing in the Plan shall be construed as a guarantee by the Company, any Employer or the Trustee of the value of any security in the Trust Fund, or as an indemnity against any investment losses.

Trust for Exclusive Benefit of Participants

The Trust is for the exclusive benefit of Participants and for defraying reasonable expenses of administering the Plan and Trust. Except as provided in Sections 5.6 (Return of Contributions) and 11.12(b) (Domestic Relations Orders), no portion of the Trust shall be diverted to purposes other than this or revert to or become the property of the Company or any Employer at any time prior to the satisfaction of all liabilities with respect to the Participants.

Trustee

As a part of the Plan, the Company has entered into a Trust Agreement with the Trustee. The Company has the power and duty to appoint a Trustee and it shall have the power to remove a Trustee and appoint successors at any time. As a condition to exercising its power to remove any Trustee hereunder, the Company must first enter into an agreement with a successor Trustee with respect to assets held by the outgoing Trustee. By entering into such Trust Agreements, the Company shall vest in the Trustee, or in one or more Investment Managers appointed under the terms of any Trust Agreement by action of the Administrative Committee, responsibility for the management and control of the Trust Fund.

* * *

The Company has caused this amendment and restatement to be executed on the date indicated below.

	SAFECO CORPORATION
Dated:	By:
	Its:

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APPENDIX A

Predecessor Employer Service

Service for eligibility and vesting also includes the following service:

(a) For Employees who became employed by the Company or any Affiliate effective January 1, 2000, as a result of that certain Purchase Agreement dated as of October 14, 1999, by and among SAFECO Life Insurance Company, as purchaser, and ING America Insurance Holdings, Inc., Southland Life Insurance Company, Security Life of Denver Insurance Company and Life Insurance Company of Georgia, as “Selling Parties,” prior service with any of the Selling Parties or with Medical Risk Managers, Inc. shall be credited under the Plan for eligibility and vesting purposes.

(b) For Employees who became employed by the Company or any Affiliate effective January 1, 1998, as a result of that certain Stock Purchase Agreement dated as of September 2, 1997, by and among SAFECO Life Insurance Company, as purchaser, and Washington Mutual, Inc., WM Life Insurance Company and Empire Life Insurance Company, as “Selling Parties,” prior service with WM Life Insurance Company or Empire Life Insurance Company shall be credited under the Plan for eligibility and vesting purposes.

(c) For Employees who became employed by the Company or any Affiliate effective September 6, 2001, or within 45 days thereafter, as a result of that certain Asset Purchase Agreement dated as of September 6, 2001, by and among SAFECO Select Insurance Services, Inc., as purchaser, and Bankers Standard Insurance Company, ACE American Insurance Company, ACE Property and Casualty Insurance Company, Insurance Company of North America, Indemnity Insurance Company of North America, Illinois Union Insurance Company, ACE INA Financial Institutions Solutions, Inc., and Recovery Services International, Inc., as “Selling Parties,” prior service with any of the Selling Parties shall be credited under the Plan for eligibility and vesting purposes.

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EX-10.13

Exhibit 10.13

SAFECO

DEPENDENT CARE

REIMBURSEMENT PLAN

(A Component Plan of the

Safeco

Flexible Benefits Program)

AS AMENDED AND RESTATED

EFFECTIVE JANUARY 1, 2004

(As last amended December 13, 2007)

TABLE OF CONTENTS

	Page
PREAMBLE	1
SECTION 1 - DEFINITIONS	2
1.1 Dependent	2
1.2 Dependent Care Expense	2
1.3 Earned Income	2
1.4 Household Services	3
1.5 Plan	3
1.6 Program	3
SECTION 2 - BENEFITS	4
2.1 Reimbursement Options	4
2.2 Election of Reimbursement	4
2.3 Payment of Reimbursements	4
2.4 Maximum Reimbursements	5
2.5 Annual Statement of Benefits	5
SECTION 3 - DEPENDENT CARE EXPENSES	6
3.1 In General	6
3.2 Exclusions	6

i

PREAMBLE

THIS DEPENDENT CARE REIMBURSEMENT PLAN (hereinafter the “Plan” and known as the Safeco Dependent Care Reimbursement Plan) was originally adopted effective January 1, 1999 by Safeco Corporation (hereinafter the “Company”).

WHEREAS, the purpose of the Plan is to allow Employees who become covered under the Plan to elect to receive reimbursement of dependent care expenses which are excluded from gross income under Section 129 of the Internal Revenue Code of 1986, as amended (hereinafter the “Code”), as provided herein and in the terms of the Safeco Flexible Benefits Program (hereinafter the “Program”); and

WHEREAS, the Plan is a Component Plan of the Program and, except to the extent otherwise expressly provided herein, is governed by the terms of that Program, and

WHEREAS, the Plan shall be maintained for the exclusive purpose of providing benefits to covered Employees and is intended to qualify as a dependent care assistance plan within the meaning of Code Section 129 and comply with any other applicable provisions of law;

WHEREAS, the Company wishes to amend the Plan to reflect certain regulatory and administrative changes;

NOW, THEREFORE, the Company hereby adopts the Amendment of the Plan as set forth in the following pages, effective January 1, 2004.

SECTION 1

DEFINITIONS

The terms used herein which are defined in Section 1 of the Program shall have the same meaning as therein defined and the following additional terms shall have the following meanings, unless a different meaning is plainly required by the context. Capitalized terms are used throughout the Plan text for terms defined by this and other sections.

1.1 Dependent. “Dependent” means:

(a) a child who is under the age of thirteen (13) and with respect to whom a Participant or his or her spouse is entitled to a dependent exemption under Code Section 151(c); or

(b) a relative or household member of a Participant over one-half (1/2) of whose support is received from the Participant and who is physically or mentally incapable of caring for himself or herself and who regularly spends at least eight (8) hours per day in the Participant’s household; or

(c) the spouse of a Participant who is physically or mentally incapable of caring for himself or herself and who regularly spends at least eight (8) hours per day in the Participant’s household.

1.2 Dependent Care Expense. “Dependent Care Expense” means an Eligible Expense for which documentation approved by the Plan Administrator has been provided, which is incurred prior to the date participation in the Plan terminates, and which meets the requirements of Section 3. A Dependent Care Expense is incurred at the time the service which gave rise to the expense is performed.

1.3 Earned Income. “Earned Income” means wages, salaries, tips and other Employee Compensation, plus net earnings from self-employment, computed without regard to any community property laws and excluding any amounts received as a pension or annuity, or paid or incurred by an employer for dependent care assistance including reimbursement of Eligible Expenses. A Participant’s spouse who is either a student or incapable of caring for himself or herself shall be deemed, for each month during which such spouse is either a full-time student at an educational institution or a Dependent, to be gainfully employed and to have Earned Income of not less than:

(a) $250 per month, if the Participant has only one (1) Dependent for the Plan Year, or

(b) $500 per month, if the Participant has two (2) or more Dependents for the Plan Year.

2

1.4 Household Services. “Household Services” means ordinary and usual services done in and around a home that are necessary to run the home and which are at least partially for the well-being and protection of a Dependent.

1.5 Plan. “Plan” means the Safeco Dependent Care Reimbursement Plan as amended from time to time.

1.6 Program. “Program” means the Safeco Flexible Benefits Program as amended from time to time.

3

SECTION 2

BENEFITS

2.1 Reimbursement Options. Subject to the conditions and limitations set forth in the Plan and the Program, each Participant who elects to participate in the Plan may designate any amount from a minimum of $50 annually to a maximum of $5,000 annually during the Plan Year for reimbursement of Dependent Care Expenses. The total amount designated for reimbursement per Plan Year, combined with any other dependent care assistance expected to be received through an employment-related plan by the Participant or his or her spouse, may not exceed the least of:

(a) $5,000 for single Participants and married Participants who file a joint federal income tax return, or $2,500 for married Participants who file separate returns;

(b) the Participant’s anticipated Earned Income for the Plan Year; and

(c) if the Participant is married on the last day of the Plan Year, the spouse’s anticipated Earned Income for the Plan Year.

Dependent Care Expenses may be incurred and reimbursed at any time during the Coverage Period, subject to the other provisions of the Plan and the Program.

2.2 Election of Reimbursement. A Participant may elect to participate in the Plan by submitting an Annual Enrollment Election to the Plan Administrator and may claim reimbursement by submitting the incurred expenses in a form (including online submission or paper form submission) prescribed by the Plan Administrator. All claims must be submitted on or before the end of the claims runout period (as communicated by the Plan Administrator) following the Plan Year. In the event a Participant does not claim or qualify for reimbursement of the amount elected during the Plan Year, the difference between the amount elected and actual reimbursement shall be forfeited. Any forfeited amount shall be used to offset the Plan’s administrative expenses and any balance remaining thereafter shall be used in any manner permitted by Code Section 125.

In the event of a Participant’s death, the surviving spouse or the administrator or executor of a deceased Participant’s estate may claim reimbursement of Dependent Care Expenses incurred, provided the expense was incurred while the Participant was actively participating in the Dependent Care Reimbursement Plan and the claim is submitted on or before the March 31 after the end of the Plan Year.

2.3 Payment of Reimbursements. The Plan Administrator shall reimburse Dependent Care Expenses which are properly documented only to the extent that the Dependent Care Expenses do not exceed a Participant’s account balance. The Plan Administrator shall reimburse a Participant who is entitled to a reimbursement as soon as practical after the Participant submits the claim. No Participant shall have any rights or be entitled to any such reimbursements under the Plan unless the claim is submitted as required by the

4

Plan Administrator. The Plan Administrator will review each claim for reimbursement submitted to determine whether (i) the expenses for which reimbursement is sought are reimbursable Dependent Care Expenses and (ii) the claim is accompanied by the required documentation.

Each claim for reimbursement must include the following, and any other information which may be required by the Plan Administrator:

(a) a written statement from an independent third party that the expense has been incurred, the date it was incurred, and the amount of the expense,

(b) a written statement from the Participant that the expense has not been reimbursed and is not reimbursable under any other dependent care assistance plan, and

(c) either:

(1) the name, address and taxpayer identification number of the person performing the services to which the Request for Reimbursement relates, or

(2) if such person is an organization described in Code Section 501(c)(3) and exempt from tax under Code Section 501(a), the name and address of the person performing the services to which the Request for Reimbursement relates.

2.4 Maximum Reimbursements. Reimbursements during a Plan Year shall not exceed the least of:

(a) the total annual amount designated via the Annual Enrollment Election for Dependent Care Expenses for such Plan Year,

(b) the Participant’s account balance designated for benefits under the Plan, or

(c) the amount of Dependent Care Expenses for which reimbursement is properly requested.

Prior to the end of each Plan Year, a Participant shall notify the Plan Administrator if the amount of reimbursement under the Plan exceeds the lesser of the Participant’s or his or her spouse’s actual or deemed Earned Income for the Plan Year. The Company shall report such excess reimbursements as taxable benefits on the Participant’s Form W-2.

2.5 Annual Statement of Benefits. On or before January 31 of each calendar year, the Plan Administrator shall furnish to each Participant a statement of all dependent care benefits paid to or on behalf of such Participant during the preceding calendar year.

5

SECTION 3

DEPENDENT CARE EXPENSES

3.1 In General. Dependent Care Expenses are amounts paid by a Participant for Household Services and for the care of a Dependent which are incurred to enable the Participant (and, if married, spouse) to be gainfully employed for any period for which he or she has one or more Dependents, provided that:

(a) if such expenses are incurred for services outside a Participant’s household, they are incurred for the care of a child as defined in Section 1.1(a), or of any other Dependent defined in Section 1.1(b) or (c) who regularly spends at least eight (8) hours each day in the Participant’s household, and

(b) if such outside services are provided by a dependent care center, which is a facility that (i) provides care for more than six (6) individuals (other than individuals who reside at the facility), and (ii) receives a fee, payment or grant for providing services for any of the individuals (regardless of whether such facility is operated for profit), then such center must comply with the applicable state and local government laws and regulations.

3.2 Exclusions. Notwithstanding any Plan or Program provision to the contrary, Dependent Care Expenses shall in no event include amounts paid by a Participant to an individual:

(a) with respect to whom a deduction is allowable to the Participant or the spouse under Code Section 151(c) (relating to personal exemptions for dependents),

(b) who is a child (within the meaning of Code Section 151(c)(3)) of either the Participant or the Participant’s spouse (if filing jointly) under the age of nineteen (19) at the close of the Plan Year in which such amounts are paid, or

(c) to reimburse expenses incurred for overnight camp.

6

EX-12

EXHIBIT 12

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(In Millions Except Ratios)

YEAR ENDED DECEMBER, 31	2007		2006		2005		2004		2003
EARNINGS
Income from Operations before Income Taxes	$	952.1	$	1,239.5	$	985.7	$	892.9	$	380.1
Total Fixed Charges		86.5		107.5		105.8		125.2		143.5
Total Earnings		1,038.6		1,347.0		1,091.5		1,018.1		523.6
FIXED CHARGES
Interest		64.8		89.2		86.5		105.8		125.6
Interest Factor of Rent Expense		17.8		16.1		17.2		17.0		16.4
Amortization of Deferred Debt Expense		3.9		2.2		2.1		2.4		1.5
Total Fixed Charges	$	86.5	$	107.5	$	105.8	$	125.2	$	143.5
RATIO OF EARNINGS TO FIXED CHARGES		12.01		12.53		10.32		8.13		3.65

EX-21

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

The listing below includes the significant subsidiaries of the Corporation. All subsidiaries are wholly owned, directly or indirectly, by Safeco Corporation.

American States Insurance Company (IN)

American Economy Insurance Company (IN)

American States Insurance Company of Texas (TX)

American States Preferred Insurance Company (IN)

First National Insurance Company of America (WA)

General America Corporation (WA)

F.B. Beattie & Company, Inc. (WA)

General America Corporation of Texas (TX)

American States Lloyds Insurance Company (TX)

Safeco Lloyds Insurance Company (TX)

General Insurance Company of America (WA)

Safeco General Agency, Inc. (TX)

Safeco Insurance Company of Indiana (IN)

Safeco Insurance Company of America (WA)

Safeco Insurance Company of Oregon (OR)

Safeco Surplus Lines Insurance Company (WA)

Emerald City Insurance Agency, Inc. (WA)

Safeco Insurance Company of Illinois (IL)

Insurance Company of Illinois (IL)

Safeco National Insurance Company (MO)

Safeco Properties, Inc. (WA)

Safecare Company, Inc. (WA)

Winmar Company, Inc. (WA)

Safeco Offshore Sourcing Private, Ltd. (India)

Open Seas Solutions, Inc. (WA)

Rianoc Research Corporation (WA)

EX-23.1

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following registration statements:

(1) Registration Statement (Form S-3 No. 333-141160) of Safeco Corporation and subsidiaries (Safeco) and in the related Prospectus,

(2) Registration Statement (Form S-3 No. 333-33444) of Safeco and in the related Prospectus,

(3) Registration Statement (Form S-8 No. 333-88044) pertaining to the Safeco Long-Term Incentive Plan of 1997, and

(4) Registration Statement (Form S-8 No. 333-130459) pertaining to the Safeco 401(k)/Profit Sharing Retirement Plan

of our reports dated February 26, 2008, with respect to the consolidated financial statements and schedules of Safeco and the effectiveness of internal control over financial reporting of Safeco, included in this Annual Report (Form 10-K) of Safeco for the year ended December 31, 2007.

/s/ ERNST & YOUNG LLP

Seattle, Washington

February 26, 2008

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 Annual Report on Form 10-K of Safeco Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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 (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: February 26, 2008

/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 Annual Report on Form 10-K of Safeco Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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 (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: February 26, 2008

/s/ Ross J. Kari

Ross J. Kari

Executive Vice-President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Safeco Corporation (the “Company”) on Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-K”), I, Paula Rosput Reynolds, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 26, 2008

/s/ Paula Rosput Reynolds

Paula Rosput Reynolds

President, Chief Executive Officer and Director

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Safeco Corporation and will be retained by Safeco Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Safeco Corporation (the “Company”) on Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-K”), I, Ross J. Kari, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 26, 2008

/s/ Ross J. Kari

Ross J. Kari

Executive Vice-President, and Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Safeco Corporation and will be retained by Safeco Corporation and furnished to the Securities and Exchange Commission or its staff upon request.