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, 2005

or

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

for the Transition Period from                      to                     

Commission File Number 1-6563

Safeco Corporation

State of Incorporation: Washington

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

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

Telephone: 206-545-5000

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

Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, No Par Value

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. x

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  ¨

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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, 2005, was $6,900,000,000.

123,273,975 Shares of Common Stock were outstanding at February 15, 2006.

Documents Incorporated by Reference: Portions of the registrant’s definitive Proxy Statement for the 2006 annual shareholders meeting are incorporated by reference into Part III.

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Safeco Corporation and Subsidiaries

Index to Financial Statements, Schedules and Exhibits

Item	Description	Page
Part I
Item 1	Our Business	5
	Our Vision and Strategy	5
	Our Products	6
	Our Competition and Distribution	10
	Service and Claims Administration	11
	Loss and Loss Adjustment Expense Reserves	12
	Reinsurance	12
	Regulation	13
	Executive Officers of the Registrant	15
Item 1A	Risk Factors	18
Item 1B	Unresolved Staff Comments	22
Item 2	Properties	22
Item 3	Legal Proceedings	23
Item 4	Submission of Matters to a Vote of Security Holders	23
Part II
Item 5	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	24
Item 6	Selected Financial Data	26
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
	Summary	27
	Application of Critical Accounting Estimates	31
	Loss and Loss Adjustment Expense Reserves	31
	Consolidated Results of Operations	53
	Our P&C Operating Results	54
	Reinsurance	69
	Our Corporate Results	73
	Our Investment Results	73
	Capital Resources and Liquidity	80
Item 7A	Quantitative and Qualitative Disclosures about Market Risk	87
Item 8	Financial Statements and Supplementary Data	88
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	88
Item 9A	Controls and Procedures	88
Item 9B	Other Information	88
Part III
Item 10	Directors and Executive Officers of the Registrant	89
Item 11	Executive Compensation	89
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	89

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Item	Description	Page
Item 13	Certain Relationships and Related Transactions	90
Item 14	Principal Accounting Fees and Services	90
Part IV
Item 15	Exhibits and Financial Statement Schedules	90
	Signatures	90
	Index to Financial Statements, Schedules and Exhibits	92
	Management’s Report on Internal Control Over Financial Reporting	93
	Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting	94
	Report of Independent Registered Public Accounting Firm	95

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Part I

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

Item 1: OUR BUSINESS

We are a Washington State corporation with headquarters in Seattle. We had 9,181 employees at February 15, 2006. We’ve been in business since 1923 serving the insurance needs of drivers, home owners and small- and mid-sized businesses. Our business helps people protect what they value and deal with the unexpected.

As a focused property and casualty (P&C) company, we are intent on offering a competitive mix of insurance coverages and pricing to our distributors and customers, and fulfilling the promise of our insurance products when a loss occurs. In recent years, we’ve extended our market reach by expanding the number of price segments for our products. We continually refine our segmented models to find acceptably priced risks.

In 2005, we delivered underwriting profits in all our major lines of business, demonstrating our disciplined approach to risk selection. We also rolled out more products and self-service capabilities on Safeco Now ^® – our automated, Web-based sales-and-service platform. From auto and homeowners policies to business owner policies and commercial multi-peril insurance, we and our agents and brokers can quote and issue a suite of Safeco products through a single interface.

For 2006, our goals are to:

• Market our products in ways that mirror the diversity of consumers and their buying preferences

• Make progress to become a low-cost carrier

• Deploy our capital to provide meaningful returns to our shareholders for the long run

• Continue to build our infrastructure and technical capability

Our Vision and Strategy

Our vision is to be one of the top-performing P&C insurance companies in the industry.

Our strategy is principally to offer standardized auto, homeowners and small- and mid-sized commercial insurance products over a unified sales-and-service platform to meet the needs of our distributors and insurance consumers. We focus on the personal and commercial insurance products purchased by the vast majority of consumers in the United States. We call these “standardized” products because they don’t require significant customization and they’re well-suited to automated underwriting and sales-and-service support. We continually work to refine our segmented pricing models and accurately match rate to risk. We also are a top-tier surety carrier, and our surety products are primarily non-automated.

We deliver the majority of our products to our agents and brokers over our Safeco Now automated platform, which gives our distributors a single point of entry to sell our major P&C products in a matter of minutes. Most of our pricing, underwriting and servicing processes are presented through this platform.

We sell our insurance products principally through independent agents and brokers who provide customers with choice and advice. We motivate our distributors by giving them more to sell (multiple lines of personal and commercial insurance), making it easier for them to sell (through technology and other ease-of-business tools), helping them make more money selling our products (through increased operational efficiencies), and providing competitive compensation programs. We also sell directly on the Internet through our same, easy-to-use Web-based platform.

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We measure the success of our strategy by tracking our performance against the following three financial indicators:

• Earnings per share

• Return on equity

• Revenue growth

The following table shows the trends in these three key measures:

	2005			2004			2003
Net Income Per Diluted Share	$	5.43		$	4.16		$	2.44
Net Return on Equity		17.2	%		12.6	%		7.0	%
Total Revenues	$	6,351.1		$	6,195.4		$	5,450.1

Our Products

Our revenues come from the premiums we earn on the insurance policies we write in our four business segments and the income we earn from our investment of these premium dollars.

Our four business segments include:

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

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

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

• P&C Other – includes large-commercial business accounts in runoff and other business and programs we have exited

The charts below show net earned premiums, which is equivalent to our premium revenues. We use “net” because some of our premiums are ceded to reinsurers, which protect our capital just as insurers protect their customers.

Net earned premiums for our business segments were as follows:

YEAR ENDED DECEMBER 31	2005				2004				2003
	Amount		% of Total		Amount		% of Total		Amount		% of Total
Safeco Personal Insurance	$	3,831.8	66.0	%	$	3,639.4	65.8	%	$	3,245.4	66.2	%
Safeco Business Insurance		1,704.1	29.4			1,668.0	30.2			1,481.3	30.2
Surety		260.9	4.5			203.0	3.7			153.6	3.2
P&C Other		8.6	0.1			18.7	0.3			21.5	0.4
Total	$	5,805.4	100.0	%	$	5,529.1	100.0	%	$	4,901.8	100.0	%

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We sell our insurance products in all 50 states within the United States. Our top 10 states, measured by net earned premiums, were as follows:

YEAR ENDED DECEMBER 31	2005				2004				2003
	Amount		% of Total		Amount		% of Total		Amount		% of Total
California	$	952.7	16.4	%	$	940.3	17.0	%	$	833.3	17.0	%
Washington		646.2	11.2			647.4	11.7			602.4	12.3
Texas		587.5	10.1			577.1	10.4			476.1	9.7
Florida		304.6	5.3			248.7	4.5			191.0	3.9
Oregon		292.1	5.0			282.9	5.1			265.0	5.4
Connecticut		232.1	4.0			231.3	4.2			192.9	3.9
Missouri		220.5	3.8			209.1	3.8			190.9	3.9
Illinois		219.6	3.8			214.0	3.9			207.3	4.2
New York		146.2	2.5			127.7	2.3			103.0	2.1
Georgia		134.8	2.3			112.8	2.1			98.7	2.0
Total 10 Largest States		3,736.3	64.4			3,591.3	65.0			3,160.6	64.4
All Others		2,069.1	35.6			1,937.8	35.0			1,741.2	35.6
Total	$	5,805.4	100.0	%	$	5,529.1	100.0	%	$	4,901.8	100.0	%

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Safeco Personal Insurance

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

YEAR ENDED DECEMBER 31	2005		2004		2003
Auto	$	2,820.4	$	2,628.6	$	2,241.5
Property		913.3		920.6		920.9
Specialty		98.1		90.2		83.0
Total	$	3,831.8	$	3,639.4	$	3,245.4

Auto – We provide 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.

Our tiered auto product, available in 43 of the 44 states where we write auto business, covers more than 95% of all auto insurance applications in our agents’ offices, and allows us to match rates more closely to the risks we insure. Our automated underwriting and segmentation reflects both traditional underwriting methods and state-of-the-art predictive modeling techniques. This helps drive competitive pricing and profitability. Safeco Now – the platform for this automated underwriting process – allows agents and consumers to quote and sell or purchase policies faster, enabling us to simplify the sales process (see further discussion on page 10).

In 2004 and 2005, we enhanced Safeco Now to streamline the service process for agents and policyholders. Our agents now can efficiently handle most auto policy changes and endorsements online. These endorsements include vehicle additions and deletions, vehicle replacements or updates, coverage and deductible changes.

In 2005, we began launching our updated underwriting and pricing model for our auto product, which is now in place in 31 of the 44 states where we write auto business. The updated model further increases the sophistication and accuracy in our underwriting and pricing, giving us greater precision in matching rate to each risk. One of the primary changes we’ve made is to use our own vehicle groupings (known as rating symbols) based on our experience and data rather than industry vehicle rating symbols. Using these groupings allows us to vary some of our deductibles.

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

We target new property insurance business by offering competitive pricing on policies while carefully managing our exposure to catastrophic events, such as hurricanes, earthquakes and wildfires. As in our other lines of business, we look for growth in property insurance that meets our profitability targets.

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We employ our tiered pricing structure for homeowners insurance in 43 of the 44 states where we write property business. Like auto, our tiered homeowners product allows us to match rates more closely to the risks we insure, and our agents can quote and issue our property products over the online Safeco Now platform. In 2005, we completed the launch of our dwelling fire product on Safeco Now. Our dwelling fire product insures dwellings and personal property against covered losses, such as fire, wind, explosion, smoke and vandalism.

Specialty – We offer umbrella, recreational vehicle, motorcycle and boat owners insurance coverage for individuals. These specialty products round out our personal lines portfolio so we can provide products to meet the majority of our policyholders’ personal insurance needs. In 2005, we added our motorcycle product to the Safeco Now platform in 31 of the 44 states where we write specialty business. We will launch our umbrella product on our automated platform in 2006.

Safeco Business Insurance

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

YEAR ENDED DECEMBER 31	2005		2004		2003
SBI Regular	$	1,272.2	$	1,224.7	$	1,097.5
SBI Special Accounts Facility		431.9		443.3		383.8
Total	$	1,704.1	$	1,668.0	$	1,481.3

SBI Regular – We offer a variety of commercial insurance products designed for small- and mid-sized businesses (customers who pay annual premiums of $200,000 or less). Our principal business insurance products include business owner policies (BOP), commercial auto, commercial multi-peril, workers compensation, commercial property and general liability insurance.

We are one of the largest writers of small-business insurance selling primarily through independent agents and brokers in the United States. This market is highly fragmented and not precisely measured. Many companies write small-business insurance, each with a small share of the market. Given the increasing number of small businesses in the United States and the lack of a dominant market leader, we see growth potential in this segment. Our goal is to become the leading writer of small-business insurance.

In 2003 and 2004, we launched our BOP, commercial auto and workers compensation products on Safeco Now. In 2005, we became one of the first insurance companies to fully automate the sale of commercial multi-peril insurance to more than 800 classes of small- to mid-sized businesses. In all 50 states where we write commercial business, independent agents and brokers now can go online using Safeco Now and quote a commercial multi-peril policy with the same ease as writing a BOP policy.

SBI Special Accounts Facility – We write policies covering large-commercial accounts (customers who pay annual premiums of more than $200,000) for our key agents and brokers who sell our core products. We also write four specialty commercial programs: lender-placed property insurance, agents’ errors and omissions insurance, property and liability insurance for mini-storage and warehouse properties, and professional and general liability insurance for non-profit social service organizations.

Surety

We provide surety bonds for construction, performance and legal matters that include appeals, probate and bankruptcies.

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P&C Other

This segment includes results for large-commercial business accounts and commercial specialty programs we have placed in runoff, the London operations we sold in July 2005, and other product lines we have exited.

Corporate

In our Corporate segment, we include:

• Interest expense we pay on our debt

• Loss on debt repurchases

• Intercompany eliminations

• Miscellaneous corporate investment and other activities

In 2005, we repurchased 4.5 million shares, or 3.6%, of our outstanding common stock at a total cost of $239.2 under stock buyback programs. We also repurchased $25.9 of debt for $29.8, resulting in a $4.0 pretax ($2.6 after-tax) loss on debt repurchases. In 2004, we repurchased 13.2 million shares, or 9.5%, of our then outstanding common stock at a total cost of $625.0 under an accelerated stock buyback program. We also repurchased $618.4 of debt for $735.2, resulting in a $121.0 pretax ($78.7 after-tax) loss on debt repurchases.

Additional financial information on our segments can be found in the Our P&C Operating Results section on page 54 and Our Corporate Results section on page 73 of our Management’s Discussion and Analysis (MD&A) and Note 15 to our Consolidated Financial Statements.

Our Competition and Distribution

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

• Ease of doing business between insurers and distributors

• Product price

• Customer service

• Claims handling

• Agent/broker compensation structure

• Financial strength and ratings of insurers

• Reputation

• Brand recognition

Because we sell our products principally through independent distributors who represent more than one insurance carrier, we compete not only for personal and commercial insurance customers, but also for agents and brokers. As a result, our first sale is primarily to the agent or broker, then to the policyholder. Both are customers to us. Within our distributors’ offices, we compete with:

• National monoline carriers

• Major multiline carriers

• More than 2,000 small regional carriers

Since 2004, we have brought together our major auto, property and small- to mid-sized commercial products on our online Safeco Now sales-and-service platform. This agent workplace is Web-based and features a single point of entry for 11 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 or larger carriers that do not have as advanced tools.

Service and Claims Administration

Service

Like our policyholders, our agents and brokers value choice, too. We give them a choice when it comes to customer service support. If agents prefer to handle service transactions on their own, we offer on-demand training solutions – live, online virtual classrooms, recorded sessions, and robust user-assistance tools imbedded in our systems and applications to maximize their efficiency. This, in turn, enables our agents and brokers to easily learn how to place new business, service existing business and check status on bills and claims. We also offer phone support and expert troubleshooting if they need help completing a service transaction.

In 2005, we introduced a simplified billing system for personal lines policies. Once fully converted, this system will improve the agent and customer experience by providing combined account billing for personal auto and property policies. The Web-based billing screens will be easier to use and provide more detailed account history, along with greater self-service capability for our agents, such as the ability to change billing plans online. These changes also will help our customer service professionals provide more effective and efficient support to both distributors and policyholders.

If agents prefer not to handle their own service, we offer a “for fee” service center. The service center will then handle all service-related issues for the agents.

Claims Administration

Our products become real for our policyholders when they file claims. Our most visible product is the quality service and support we provide when a customer experiences a loss and files a claim – whether it’s a fender-bender or the loss of a home.

We have a team of more than 3,000 claims professionals across the country in 19 offices. They handled approximately 97% of our claims in 2005, including those from the hurricanes along the Gulf Coast and Florida.

When disaster strikes, our National Catastrophe Team immediately mobilizes to assess the damage, issue payments to cover temporary living expenses and emergency repairs, and provide support to our customers. In most cases, we issue some payment to customers on the spot following a disaster.

We contract with independent adjusters in remote locations where it’s impractical to use our own employees. We also use independent adjusters in extreme catastrophes when and where additional adjusters are needed. We supplemented our National Catastrophe Team with independent adjusters to service less-severe claims following Hurricanes Katrina, Rita and Wilma. Independent adjusters serviced 47% of the total 2005 hurricane claims.

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

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Customers can receive prompt repair estimates and claim checks in hand when their cars are damaged but drivable by visiting one of our drive-in claims centers. To better serve our customers and use resources efficiently, we are committed to our drive-in program. We increased the number of these centers by 80% in 2005 and plan further expansion in 2006.

Loss and Loss Adjustment Expense Reserves

Our ability to estimate our loss and loss adjustment expense (LAE) reserves accurately 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 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 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 on page 31.

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. 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

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Additional information about reinsurance can be found in the Reinsurance section of our MD&A on page 69.

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 distributors – We may only sell insurance through properly licensed distributors, such as agents and brokers who have met the eligibility requirements of the applicable state.

• 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 a 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 a state may deny a proposed price change altogether.

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

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

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

• 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, 2005, were:

• $4,909.9 in our annual financial statements filed with state regulatory authorities, in accordance with SAP, net of reinsurance

• $5,358.2 in our Consolidated GAAP Financial Statements

More information about state regulation can be found in the Regulatory Considerations section of our MD&A on page 85. More information about our loss and LAE reserves can be found in Note 5 to our Consolidated Financial Statements. More information about our reinsurance recoverables can be found in Note 6 to our Consolidated Financial Statements.

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EXECUTIVE OFFICERS OF THE REGISTRANT

Here are our executive officers as of February 15, 2006. No family relationships exist among our executive officers.

Officer Name	Age	Positions with Safeco and Business Experience
Paula Rosput Reynolds	49	President and Chief Executive Officer 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. Ms. Reynolds spent her prior career in the energy industry, serving as President of Atlanta Gas Light Company and President and Chief Executive Officer of Duke Energy North America of Houston before joining AGL Resources. In addition to serving on Safeco’s board of directors, Ms. Reynolds serves as a director for Coca-Cola Enterprises and Delta Air Lines.
Michael E. LaRocco	49	President and Chief Operating Officer, Safeco Insurance Companies, since February 2006. Co-President, Safeco Insurance Companies from November 2004 to February 2006. Prior to November 2004, Mr. LaRocco had served as the President and Chief Operating Officer, Safeco Personal Insurance since July 2001. From 1994 to July 2001, Mr. LaRocco was an executive at GEICO Corporation, where he served in a number of capacities, most recently Regional Vice President, Northeast Region from 1998 to 2001.
John Ammendola	40	Senior Vice President, Safeco Personal Insurance, Product and Underwriting, Safeco Insurance Companies, since November 2004. Vice President of P&C Service from May 2002 to November 2004. Prior to May 2002, Mr. Ammendola was employed at GEICO Corporation since January 2000, where he was the Mid-Atlantic Assistant Vice President and Director of Northeast Regional Sales and Underwriting.
Eleanor Barnard	57	Senior Vice President, Sales, Safeco Insurance Companies, since November 2004. Vice President, Sales and Distribution, Safeco Insurance Companies, May 2002 to November 2004. Before coming to Safeco, Ms. Barnard served in a number of capacities, most recently as Senior Vice President, Central Sales & Marketing with CNA Insurance Companies from 1996 to 2001.
Arthur Chong	52	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 November 2005.
Teresa J. Dalenta	41	Senior Vice President, Business Process Improvement and Chief Risk Officer, Safeco Insurance Companies, since February 2006. Senior Vice President, Finance, Risk and Investments, Safeco Insurance Companies, November 2004 to February 2006. Vice President, Corporate Actuarial and Risk Management from March 2002 to November 2004. Before joining Safeco, Ms. Dalenta was at Travelers Insurance Companies, where she was Senior Vice President, Personal Automobile Product Management and Actuarial, from 1999 to March 2002.

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EXECUTIVE OFFICERS OF THE REGISTRANT (cont.)

Charles F. Horne, Jr.	46	Senior Vice President and Controller, Safeco Corporation, since May 2005. Vice President, Audit Services, from July 2002 to May 2005. Before July 2002, Mr. Horne served as a finance Director at Dell Computer Corporation, filling that position and other financial roles at Dell since March 1998.
W. Myron Hendry	57	Senior Vice President, Service, Safeco Insurance Companies, since November 2004. Vice President, Service, Safeco Insurance Companies, September to November 2004. Before joining Safeco, Mr. Hendry was at CNA Insurance Companies, most recently serving as Senior Vice President, Worldwide Operations from January 2000 to August 2004.
Michael H. Hughes	51	Senior Vice President, Safeco Business Insurance, Safeco Insurance Companies, since April 2002. Prior to joining Safeco, Mr. Hughes spent more than 20 years in commercial underwriting at The Hartford Financial Services, most recently serving as Executive Vice President, Affinity Personal Lines from 1996 to 2002.
Dale E. Lauer	59	Executive Vice President, Claims and Service, Safeco Insurance Companies, since February 2006. Executive Vice President, Claims, Large Commercial and Surety, Safeco Insurance Companies, from November 2004 to February 2006. Mr. Lauer has been with Safeco since 1972. He served as President and Chief Operating Officer, Safeco Business Insurance beginning in July 2001, and Senior Vice President of Safeco Business Insurance from 1997 to 2001.
Allie R. Mysliwy	51	Executive Vice President, Chief Business Services Officer, Safeco Corporation, since February 2006. Executive Vice President, Human Resources and Operations, Safeco Corporation, November 2004 to February 2006. Mr. Mysliwy has been a Human Resources officer with Safeco since 1994, most recently serving as Senior Vice President, Human Resources from July 2001 to November 2004 and Vice President of Human Resources from July 1999 to July 2001.
Yomtov Senegor	47	Executive Vice President, Chief Information Officer, Safeco Corporation, since November 2004. Senior Vice President, Corporate Strategy and Chief Information Officer from October 2001 to November 2004. Mr. Senegor was formerly a partner with Accenture (formerly Andersen Consulting), a management and technology consulting company, where he served as Central Region Insurance Managing Partner from November 1997 to October 2001.

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Greg Tacchetti 37 Senior Vice President, P&C Business Process and Operations, Safeco Insurance Companies, since February 2006. Senior Vice President, Field Planning, Safeco Insurance Companies, November 2004 to February 2006. Senior Financial Officer, Safeco Personal Insurance, June 2002 to November 2004. Assistant Vice President, Personal Lines Underwriting, Safeco Insurance Companies, September 2001 to June 2002. Before joining Safeco, Mr. Tacchetti was the Operations Director, Northeast Region, GEICO Insurance from July 1999 to September 2001.

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Internet Web Site

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). The information found on our Web Site is not part of this or any other report we file with or furnish to the SEC.

Item 1A: RISK FACTORS

The following list describes several risk factors facing our company:

• We face strong competition from other property and casualty insurers, which may affect our growth and pressure our pricing – Competition within the property and casualty insurance industry continues to increase, particularly within our Auto and SBI segments. Many of our competitors have stronger brand recognition and access to greater financial resources than we do. Strong underwriting results in the personal auto insurance market have encouraged greater competition, and we are seeing increased competition for our mid-market commercial customers. Many providers are using increasingly sophisticated pricing models, and some are reducing prices. If we fail to maintain our discipline in pricing and underwriting in the face of this competition, our underwriting profits may be adversely affected.

Competition for customers has led to increased marketing and advertising by our competitors as well as the introduction of new insurance products. If we cannot effectively respond to increased competition for the business of our current and prospective customers, our policies-in-force may decline and our growth may slow.

• 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 many of our products, as well as tiered pricing structures to match our premium rates to the risks we insure. As our business grows, we will write more policies in markets where we have less geographic presence and experience.

If we fail to price the risks we insure appropriately or our claims experience is more frequent or severe than our underlying risk assumptions, our profit margins could be negatively affected. To the extent we have overpriced risks, it may reduce our sales and our competitiveness. Either scenario may have an adverse impact on our underwriting profit and results of 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 historically 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 high 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, a period of increased 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 and hailstorms, 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. 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 effectively manage expenses, which could adversely affect our profitability and our ability to compete in the property and casualty insurance markets – In the current competitive environment, expense reductions have become increasingly important to maintaining and increasing our profitability. If we are unable to realize expense efficiencies, it could affect our ability to establish competitive pricing and could have a negative effect on our operating results and financial condition.

• We may not be able to effectively 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 insurance agents and brokers to sell our insurance policies. This means that in addition to competing for policyholders, we also compete for agents and brokers to sell our 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 for its agents. We may be unable to compete with insurers who adopt more aggressive pricing policies or compensation structures; insurers who offer a broader array of products, allowing them to offer policies similar to ours at lower prices or as part of a package of products; and insurers with 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, which allow customers to purchase insurance products without going through an agent. 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, our ability to write new business and retain existing policyholders will be adversely affected, which may have a negative impact on our results of operations and prospects.

• If we are unable to maintain the availability of our systems and safeguard the security of our data, our ability to conduct our business may be compromised and our reputation may be harmed – We use computer systems, including our Safeco Now automated underwriting platform, to

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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 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 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.

A breach of security with respect to our systems also could jeopardize the confidentiality of our policyholders’ personal data, which could harm our reputation and expose us to possible liability. Our security measures could be circumvented to allow our proprietary information to be misappropriated or our operations to be interrupted.

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 errors, or other events or developments would not result in a breach of our security measures or an interruption of our business operations.

• 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 accurately estimate our loss and loss adjustment expense (LAE) reserves. 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.

• 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 legal 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 on page 13.

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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. 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.

• 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 have to retain a larger portion of the potential loss associated with our policies. This would require us to increase our reserves, which may reduce our ability to write new business and compete with insurers with greater financial resources. 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 Legal Proceedings on page 23.

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.

• 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 – 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. Continued inflationary pressures could increase the cost of claims. These inflationary pressures may require us to increase our reserves. If we are unable to adjust pricing for our products to account for cost increases, it may negatively impact our underwriting profit and financial results.

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• Our investment portfolio includes fixed-income and marketable equity securities, and fluctuations in the fixed-income 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 and general equity prices, as well as deterioration in the credit of companies 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-income 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 maturity investments is to hold them to maturity, including investments that have declined in value. This intent can change, however, due to financial market fluctuations 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-income or equity markets could negatively affect the timing and amount of our net investment income and cause our financial condition to fluctuate.

• Our business operations are dependent 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 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.

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

Our home office is in Seattle, Washington, where we occupy 760,000 square feet of owned property and 130,000 square feet of leased space.

We also own 1.6 million square feet in Redmond, Washington. On January 13, 2006, we entered into an agreement to sell our Redmond office campus, subject to contingencies. The sale does not include the 66,000 square-foot parcel containing our data center. We expect the sale to close in the latter part of 2006 when all contingencies are resolved. Following the close of the sale, we expect to enter into a lease for 550,000 square feet of office space and 70,000 square feet of warehouse space for a period of up to three years.

We own 276,000 square feet in Pleasant Hill, California; Westminster, Colorado; Portland, Oregon; and Spokane, Washington. We also occupy 1.8 million square feet of leased space throughout the United States, of which we sublease 138,000 square feet to third parties.

Our leased and owned space totals 4.5 million square feet.

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Item 3: LEGAL PROCEEDINGS

Because of the nature of our businesses, we are subject to legal actions filed or threatened in the ordinary course of our operations. Generally, our involvement in legal action involves defending third-party claims brought against our insureds (in our role as liability insurer) or principals of surety bonds and defending policy coverage claims brought against us.

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

On July 19, 2005, we received a shareholder demand letter asserting that our directors and certain former officers breached their duty of care and loyalty in approving the terms of the sale of Talbot Financial Corporation in July 2004. The letter called for us to commence an action against the directors who approved the transaction and the former officers involved in the transaction. In November 2005, a special committee of our board of directors, formed to review the matter, determined that the actions called for in the letter should not be undertaken.

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

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

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 2005.

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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 Nasdaq Stock Market under the symbol SAFC. Quarterly high and low bid prices for Safeco common shares for the last two years were:

MARKET PRICE RANGES	FIRST QUARTER		SECOND QUARTER		THIRD QUARTER		FOURTH QUARTER		ANNUAL
2005 –High	$	52.28	$	56.06	$	56.21	$	58.34	$	58.34
–Low		45.43		51.57		51.11		55.22		45.43
2004 –High		45.99		46.00		49.39		52.64		52.64
–Low		37.95		41.51		44.89		45.70		37.95

There were approximately 3,000 holders of record of our common stock at February 15, 2006. This number excludes the beneficial owners of shares (approximately 71,000) 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		TOTAL
2005	$	0.22	$	0.25	$	0.25	$	0.25	$	0.97
2004	$	0.185	$	0.185	$	0.22	$	0.22	$	0.81

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

• Our financial condition and earnings

• Capital requirements of our operating subsidiaries

• Legal requirements

• Regulatory constraints

• Prevailing interest rates and yields of peer companies with whom we compete for capital

• Other relevant considerations

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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)	Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs (2)
October 1-31	524,600	$	53.14	524,600	3,754,647
November 1-30	24,000		56.21	24,000	3,730,647
December 1-31	—		—	—	10,000,000
Total	548,600	$	53.28	548,600

(1) We announced on July 18, 2005, that we intended to repurchase $150.0 to $250.0 of our then outstanding common stock before the end of the year. We completed a Rule 10b5-1 trading program on November 1, 2005.

Information regarding the November 2005 settlement of our accelerated share repurchase program (which began July 25, 2005) is included in the Capital Resources and Liquidity section of MD&A.

(2) On December 1, 2005, our board of directors increased our share repurchase authorization to 10 million shares of common stock, including shares that remain available for repurchase under previously approved programs. These programs are not subject to an expiration date.

We announced on February 6, 2006, that we executed a Rule 10b5-1 trading plan to purchase up to $250.0 of our outstanding common stock.

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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	2005			2004			2003			2002			2001
(In millions except per-share values, dividends and ratios)
REVENUES
Net Earned Premiums	$	5,805.4		$	5,529.1		$	4,901.8		$	4,521.3		$	4,472.8
Net Investment Income		485.1			464.6			468.4			467.8			471.1
Net Realized Investment Gains		60.4			200.8			70.1			225.6			115.5
Other		0.2			0.9			9.8			10.7			10.4
Total Revenues		6,351.1			6,195.4			5,450.1			5,225.4			5,069.8
INCOME SUMMARY
Income (Loss) from Continuing Operations before Change in Accounting Principle (1)		691.1			620.2			285.5			239.1			(1,119.4	)
Net Income (Loss) (2)		691.1			562.4			339.2			301.1			(989.2	)
INCOME (LOSS) PER DILUTED SHARE OF COMMON STOCK
Income (Loss) from Continuing Operations before Change in Accounting Principle (1)		5.43			4.59			2.06			1.85			(8.76	)
Net Income (Loss) (2)		5.43			4.16			2.44			2.33			(7.75	)
Average Number of Diluted Shares (3) (4)		127.2			135.2			138.9			129.3			127.7
Dividends Declared	$	0.97		$	0.81		$	0.74		$	0.74		$	0.74
UNDERWRITING RATIOS
Loss Ratio		50.1	%		51.0	%		55.6	%		61.2	%		74.5	%
LAE Ratio		12.6			12.3			14.8			13.1			14.1
Expense Ratio		28.4			28.2			29.7			31.0			30.1
Combined Ratio (5)		91.1	%		91.5	%		100.1	%		105.3	%		118.7	%
AT DECEMBER 31
TOTAL ASSETS	$	14,887.0		$	14,587.2		$	36,141.6		$	34,951.7		$	31,836.2
DEBT
Current		—			—			—			507.4			342.2
Long-Term		1,307.0			1,332.9			1,951.3			1,459.8			1,592.1
Total		1,307.0			1,332.9			1,951.3			1,967.2			1,934.3
SHAREHOLDERS’ EQUITY		4,124.6			3,920.9			5,023.3			4,431.6			3,634.6
BOOK VALUE PER SHARE	$	33.38		$	30.88		$	36.24		$	32.07		$	28.45

(1) Our 2001 loss included a $916.9 after-tax goodwill write-off and a $2.1 after-tax charge related to the Change in Accounting Principle for derivatives.

(2) Discontinued Operations include our Life & Investments businesses that were sold in 2004.

(3) Our 2004 average diluted shares reflect the repurchase of 13.2 million shares pursuant to an accelerated stock buyback program.

(4) 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.

(5) 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 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 believe it is important to communicate our expectations to investors. However, there may be events in the future we are not able to predict accurately or that we do not fully control, which could cause actual results to differ materially from those expressed or implied by our forward-looking statements, including:

• Changes in general economic and business conditions and in the insurance industry

• Changes in our business strategies

• Other factors discussed under “Risk Factors” and elsewhere

Summary

The following section builds upon earlier discussion and provides more information about our company and our financial performance.

We are a property and casualty (P&C) insurance company with headquarters in Seattle, Washington. We sell insurance to drivers, home owners and owners of small- and mid-sized businesses through a national network of independent agents and brokers. Our business helps people protect what they value and deal with the unexpected. Our revenues come from the premiums we earn on the insurance policies we write and the income we earn from our investment of these premium dollars.

Our financial results have been affected by the major strategic actions we have taken to reshape our business and become a more focused and successful competitor.

Our major strategic initiatives included:

• Refining our business model

• Increasing efficiencies for our independent agents and brokers

• Meeting the needs of our customers at a fair price

• Focusing on our P&C operations

• Effectively managing our capital

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Refining our business model – During 2005, market conditions became more competitive. Through refinements to our business model, we continued to gain efficiencies that enabled us to grow profitably. Our market advantage is sustained by how we do business – offering standardized auto, homeowners and small- and mid-sized commercial insurance products over a unified sales-and-service platform to meet the needs of our distributors and insurance consumers.

We focus on the personal and commercial insurance products purchased by the vast majority of U.S. consumers. We call these “standardized” products because they don’t require significant customization, and they’re well suited to automated underwriting and sales-and-service support. Our claims operation, with its front-line experience and insight, is tightly aligned with our product development and underwriting teams. We continually refine our segmented pricing models and accurately match rate to risk.

We deliver the majority of our products to our agents and brokers over our Safeco Now automated Web-based sales-and-service platform, which gives our distributors a single point of entry to sell our major P&C products in a matter of minutes. Most of our pricing, underwriting and servicing processes are presented through this user-friendly tool. We sell our insurance products principally through independent agents and brokers who provide customers with choice and advice. We motivate our distributors by giving them more to sell (multiple lines of personal and commercial insurance), making it easier for them to sell (through technology and other ease-of-business tools), helping them make more money selling our products (through increased operational efficiencies) and providing competitive compensation programs.

Increasing efficiencies for our independent agents and brokers – During 2004 and 2005, we brought our major products together on Safeco Now, our automated Web-based sales-and-service platform. Safeco Now features a single point of entry for personal auto, homeowners, most small-commercial products and certain surety bonds. Products currently available on Safeco Now include: auto, homeowners, dwelling fire, motorcycle, business owner policies, commercial auto, workers compensation and commercial multi-peril. We also launched our policy change tool for handling most personal lines endorsements online. Ninety-eight percent of our personal lines policies are quoted and issued on Safeco Now, and 80% of our personal lines policy endorsements are made online. Eighty percent of our commercial lines policies also are quoted and issued on Safeco Now.

Meeting the needs of our customers at a fair price – We offer competitively priced products using sophisticated multivariate underwriting models, which enable us to appropriately match price to risk. We look at many variables to help predict future loss. For example, in our homeowners product, we may consider the number of stories of a home, the number of mortgages, the credit score or how long the policyholder has been a homeowner, as well as other variables. Each of these factors, in combination with others, applies to pricing points, allowing for multiple pricing tiers and segmentation. We analyze each of the characteristics in relation to one another – multivariate segmentation – which we believe allows us to match rate with risk at a finer level.

We focus on providing outstanding service by measuring ourselves against a “zero-defect” standard in our service transactions. We also have a team of more than 3,000 claims professionals across the country who deliver our most visible product – the quality service and support we provide when customers experience a loss and file a claim. Our cost reductions in recent years and ongoing expense discipline help us provide competitively priced products.

Focusing on P&C operations – During 2004, we completed the sale of our Life & Investments (L&I) businesses. Four critical ideas led us to sell L&I:

• The low interest rate environment, limited investment returns and weakened L&I earnings relative to our P&C lines

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• Our belief that relentless focus on what we do best drives the greatest benefits for Safeco and our shareholders

• Competing in multiple insurance sectors increased the complexity of our business, which in turn increased our costs

• Competitors of L&I delivered better results, despite the adverse conditions affecting all players in the life and investments business

Effectively managing our capital – During 2005, we repurchased 4.5 million shares, or 3.6%, of our outstanding common stock at a total cost of $239.2 under stock buyback programs. We also repurchased $25.9 in principal amount of our debt for $29.8, including transaction costs. In 2004, we used the majority of the $1,499.0 proceeds from the sale of L&I to return our debt-to-capital ratios to pre-sale levels and return excess capital to our shareholders. Specifically, we used $735.2, including transaction costs, to repurchase $618.4 of debt, and we used $625.0 to execute an accelerated stock buyback program of 13.2 million shares. We retained the balance of the sale proceeds for future flexibility and to pay transaction-related expenses.

Overall Results

Our vision is to be one of the top-performing insurance companies in the P&C industry. We measure the success of our strategy by tracking our performance against the following three financial indicators:

• Earnings per share

• Return on equity

• Revenue growth

The following table shows the trends in these three key measures:

	2005			2004			2003
Net Income Per Diluted Share	$	5.43		$	4.16		$	2.44
Net Return on Equity		17.2	%		12.6	%		7.0	%
Total Revenues	$	6,351.1		$	6,195.4		$	5,450.1

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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 reportable segments, we report certain transactions, such as the interest expense we pay on our debt, debt repurchases, intercompany eliminations and miscellaneous corporate investment and other activities in our Corporate segment and do not allocate these to individual reportable segments.

Along with the sale of our L&I businesses, all results related to L&I are included in Discontinued Operations in our Consolidated Financial Statements.

HOW WE MEASURE OUR RESULTS

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

• Premiums

• Underwriting profit or loss

• Combined ratio

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.

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 received, 95 cents is spent on losses, LAE and underwriting expenses, and 5 cents is underwriting profit. A lower combined ratio reflects better underwriting results than a higher combined ratio.

More information about our segment results can be found in the Our P&C Operating Results section on page 54.

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Investment activities are an important part of our business and represent a significant part of our total revenues. We don’t include our investment portfolio results when measuring the profitability of our individual segments because we manage them separately. We invest the insurance premiums we receive in a diversified portfolio until they’re needed to pay claims. Our first priority is to protect our policyholders, so we invest in a diversified portfolio of primarily high-grade fixed maturities. This strategy provides 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 diversified portfolio so we will achieve consistent investment performance.

More information about our investment results can be found in the Our Investment Results section on page 73.

Application of Critical Accounting Estimates

We have identified the accounting estimates listed below as critical to understanding our results of operations and financial condition. The application of these accounting estimates requires 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).

We consider our most critical accounting estimates to be:

• Loss and loss adjustment expense reserves

• Reinsurance recoverables

• Valuation of investments

LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

Our loss and loss adjustment expense (LAE) reserves reflect our estimates of the ultimate amounts for losses from claims and related settlement expenses 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.

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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 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 use actuarial methods combined with judgment to estimate IBNR reserves.

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 Reserves – 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 a change in the loss reserve estimate for the current year, which we report in current period earnings.

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PRIOR ACCIDENT YEARS LOSSES

For short-tailed lines of business, the beginning IBNR reserves for prior accident years is adjusted for expected emerged losses to calculate IBNR reserves, absent an explicit determination to adjust IBNR reserves beyond this activity. For long-tailed lines of business, the beginning IBNR reserves for prior accident years is adjusted for paid and case-basis reserve activity in the current period. This yields ending IBNR reserves, absent an explicit determination to adjust IBNR reserves 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.

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.

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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.

• 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 historic 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.

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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. The Chief Risk Officer has the ultimate responsibility for the independent determination of appropriate reserves.

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, 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 and non-catastrophe weather 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 on page 69.

Loss and LAE Reserves By Segment – At year-end 2005 and 2004, our loss and ALAE reserves, excluding ULAE reserves, by reportable segment before reinsurance were:

	2005							2004
DECEMBER 31	Case			IBNR		Total		Case			IBNR		Total
Safeco Personal Insurance
Auto	$	1,161.8		$	470.3	$	1,632.1	$	1,015.2		$	472.4	$	1,487.6
Property		181.3			107.4		288.7		185.4			106.9		292.3
Specialty		48.7			30.6		79.3		42.4			24.1		66.5
Total SPI		1,391.8			608.3		2,000.1		1,243.0			603.4		1,846.4
Safeco Business Insurance
SBI Regular		909.5			744.6		1,654.1		940.9			636.5		1,577.4
SBI Special Accounts Facility		192.2			182.2		374.4		156.3			145.9		302.2
Total SBI		1,101.7			926.8		2,028.5		1,097.2			782.4		1,879.6
P&C Other		636.7			433.1		1,069.8		716.2			527.7		1,243.9
Total SBI and P&C Other		1,738.4			1,359.9		3,098.3		1,813.4			1,310.1		3,123.5
Surety		(58.4	)		64.1		5.7		(34.7	)		46.9		12.2
Total Loss and ALAE Reserves	$	3,071.8		$	2,032.3		5,104.1	$	3,021.7		$	1,960.4		4,982.1
ULAE Reserves							254.1							227.2
Total						$	5,358.2						$	5,209.3

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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.

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Safeco Personal Insurance (SPI) – SPI loss and LAE reserves 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 – As our business grows, we write more policies in markets where we have not written significant business previously. We continue to write a higher proportion of standard and non-standard risks than we have historically. These risks have, on average, higher frequencies and lower severities than preferred risks.

• Our increase 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 (62.7%) 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.

To illustrate the sensitivity of our estimate, a one-point increase in our severity assumption for Auto BI would yield an increase of approximately $33 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.

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 runoff.

Our SBI and P&C Other segments have exposure to asbestos and environmental losses primarily from policies we no longer write. These segments also have exposure to construction defects losses and related expenses through the general liability, commercial multi-peril and umbrella coverages they provide. 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.

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

DECEMBER 31	2005		2004
Workers Compensation	$	958.9	$	864.1
Commercial Multi-Peril		332.5		392.7
Commercial Automobile		296.2		310.7
Monoline General Liability		272.2		282.2
Business Owners		163.5		144.0
Commercial Umbrella		116.9		118.5
Monoline Property		86.8		45.8
Other		193.2		245.6
Subtotal		2,420.2		2,403.6
Construction Defects		330.0		386.8
Asbestos		186.1		169.9
Environmental		162.0		163.2
Total SBI and P&C Other	$	3,098.3	$	3,123.5

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 runoff and included in the P&C Other segment. The table excludes ULAE reserves, which were $62.1 at year-end 2005, $41.6 at year-end 2004 and $43.8 at year-end 2003:

DECEMBER 31	2005		2004		2003
Loss and ALAE Payments	$	130.1	$	159.4	$	202.8
Reserves at Year-end, Before Reinsurance	$	958.9	$	864.1	$	904.9
Earned Premiums	$	157.5	$	155.6	$	145.6
Claims (Number of Claims):
Reported Claims in the Year		6,671		6,979		8,227
Open Claims at Year-end		8,236		9,489		11,138

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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 payout 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.

• Increases in life expectancy – Increases in life expectancy increase both the length of future payments and the 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 years ago.

• 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 $70 in our estimated reserves.

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.

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• 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.

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Asbestos – This table shows our loss and ALAE reserves for asbestos-related claims. The table excludes ULAE reserves, which were $16.1 at year-end 2005, $14.2 at year-end 2004 and $4.0 at year-end 2003:

DECEMBER 31	2005		2004		2003
Loss and ALAE Payments, Before Reinsurance	$	12.3	$	14.7	$	25.9
Loss and ALAE Payments, Net of Reinsurance	$	11.5	$	13.7	$	15.8
Reserves at End of Year, Before Reinsurance	$	186.1	$	169.9	$	142.0
Reserves at End of Year, Net of Reinsurance	$	158.9	$	141.8	$	125.9
Three-Year Survival Ratio, Gross		10.6		8.2		7.1
Three-Year Survival Ratio, Net		11.6		10.5		9.8
Claims and Average Costs: *
Open Claims at End of Year		3,061		2,818		2,723
Average Paid per Closed Claim	$	25,256	$	20,467	$	30,032
Average Case Reserve per Open Claim	$	39,230	$	37,561	$	28,389

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

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

Due to volatility and 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’s the breakout of our asbestos loss reserves, net of reinsurance:

• 55.6% relates to our runoff assumed reinsurance operations and our exposure to syndicates and pools.

• 44.4% relates to our direct exposure.

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

Our exposure through our runoff 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 runoff assumed reinsurance operations follows the general industry trend.

Our direct exposure is primarily due to smaller and more peripheral entities becoming defendants in asbestos claims. Our exposure to the major high-profile asbestos defendants is limited 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.

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Our IBNR reserves were 24.4% of our loss and ALAE reserves for asbestos claims at December 31, 2005 and 25.4% at December 31, 2004.

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

• Large asbestos accounts – Our policyholders with cumulative loss payments exceeding $100,000 as of December 31, 2005.

• Small asbestos accounts – Our policyholders with cumulative loss payments of less than $100,000 as of December 31, 2005.

These tables provide details about our policyholders and losses paid related to asbestos loss reserves:

DECEMBER 31, 2005	NUMBER OF POLICYHOLDERS	2005 NET PAID		NET ASBESTOS RESERVES		% OF ASBESTOS RESERVES
Assumed Reinsurance and Pools – Loss and ALAE	—	$	5.2	$	78.6	49.5	%
Policyholders with Active Claims
Large Asbestos Accounts - Loss	16		1.6		9.8	6.2
Small Asbestos Accounts - Loss	140		0.1		8.8	5.5
Total - Loss	156		1.7		18.6	11.7
Total ALAE	—		4.6		22.8	14.4
IBNR	—		—		38.9	24.4
Total	156	$	11.5	$	158.9	100.0	%
DECEMBER 31, 2004	NUMBER OF POLICYHOLDERS	2004 NET PAID		NET ASBESTOS RESERVES		% OF ASBESTOS RESERVES
Assumed Reinsurance and Pools – Loss and ALAE	—	$	5.9	$	66.5	46.9	%
Policyholders with Active Claims
Large Asbestos Accounts - Loss	12		1.6		9.9	7.0
Small Asbestos Accounts - Loss	142		1.7		8.8	6.2
Total - Loss	154		3.3		18.7	13.2
Total ALAE	—		4.5		20.6	14.5
IBNR	—		—		36.0	25.4
Total	154	$	13.7	$	141.8	100.0	%

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ESTIMATING LOSS RESERVES FOR ASBESTOS

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

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

• Insufficient data

• Inherent risk of major litigation

• Diverging legal interpretations

• Regulatory actions

• Legislative actions

• Increases in bankruptcy proceedings

• Non-impaired claimants being allowed to make claims

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

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

In estimating our loss reserves for asbestos claims, we:

• Consider applicable law and coverage litigation

• 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 $15.0 at year-end 2005, $16.0 at year-end 2004 and $9.8 at year-end 2003:

DECEMBER 31	2005		2004		2003
Loss and ALAE Payments, Before Reinsurance	$	16.7	$	13.8	$	27.3
Loss and ALAE Payments, Net of Reinsurance	$	13.1	$	11.3	$	25.9
Reserves at End of Year, Before Reinsurance	$	162.0	$	163.2	$	153.9
Reserves at End of Year, Net of Reinsurance	$	148.9	$	154.7	$	146.1
Three-Year Survival Ratio, Gross		8.4		9.4		9.3
Three-Year Survival Ratio, Net		8.9		9.9		9.6
Claims and Average Costs:*
Open Claims at End of Year		1,091		1,100		1,452
Average Paid per Closed Claim	$	43,386	$	15,824	$	18,689
Average Case Reserve per Open Claim	$	40,667	$	34,276	$	26,213

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

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OUR ENVIRONMENTAL CLAIMS EXPOSURE

Our environmental claims result from our runoff assumed reinsurance operations and our commercial general liability line that we write on a direct basis. We generally have avoided writing coverages for large companies with substantial exposures to environmental claims. As a result, our average environmental claim tends to be small.

Our IBNR reserves were 70.2% of our loss and ALAE reserves for environmental claims at December 31, 2005 and 75.6% at December 31, 2004.

In 2003, we reached a settlement on a large number of environmental claims related to coverage on general liability policies written for individual gasoline stations. Under these policies, there was a petrochemical company named as an “additional insured.” We have settled all claims with the additional insured. This $11.0 global settlement and future indemnification agreement is included in our 2003 payment activity. We have no other reported claims of this nature. Other payments in 2003 reflect year-to-year volatility in claim and payment activity. In 2004, our loss payments returned to levels more in line with our historical experience.

Our relatively limited environmental claims activity results in fluctuations in average values from period to period. The 2005 average paid closed environmental claim increased compared with 2004 due in part to a general liability settlement relating to contaminated land on a single private development project. Additionally, average payments were unusually low in 2003 and 2004 due to the above-mentioned settlement reached on a large number of individual environmental claims related to coverage on general liability policies written for individual gasoline stations.

ESTIMATING LOSS RESERVES FOR ENVIRONMENTAL

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

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Construction Defects – This table shows our loss and ALAE reserves for construction defects claims. The table excludes ULAE reserves, which were $28.5 at year-end 2005, $19.9 at year-end 2004 and $8.2 at year-end 2003:

DECEMBER 31	2005		2004		2003
Loss and ALAE Payments, Before Reinsurance	$	56.7	$	59.8	$	63.1
Loss and ALAE Payments, Net of Reinsurance	$	56.7	$	59.8	$	62.2
Reserves at End of Year, Before Reinsurance	$	330.0	$	386.8	$	431.2
Reserves at End of Year, Net of Reinsurance	$	330.0	$	386.8	$	431.2
Claims and Average Costs:*
Open Claims at End of Year		1,087		1,417		1,689
Average Paid per Closed Claim	$	49,441	$	41,908	$	43,641

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

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.

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 78.8% of our loss and ALAE reserves for construction defects claims at December 31, 2005 and 78.6% at December 31, 2004.

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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 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 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 three years, our number of open construction defects claims has decreased steadily – an average drop of 16.8% per year. Our loss reserve estimates assume that the number of open claims will continue to decrease, but at a slower rate.

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 insured exposure analysis

• Analysis of salvage and subrogation potential

Our Surety loss and ALAE reserves, net of salvage and subrogation recoveries, were $5.7 at December 31, 2005 and $12.2 at December 31, 2004. 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.

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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. We report changes in estimated reserves in our Consolidated Statements of Income the same year we make the change. This table shows the changes in our loss and LAE reserves for 2005, 2004 and 2003:

DECEMBER 31	2005			2004			2003
Loss and LAE Reserves at Beginning of Year	$	5,209.3		$	5,044.6		$	4,998.5
Less Reinsurance Recoverables		339.1			344.4			411.6
Net Balance at Beginning of Year		4,870.2			4,700.2			4,586.9
Incurred Loss and LAE for Claims Occurring During:
Current Year		3,680.9			3,534.2			3,202.3
Prior Years		(45.9	)		(39.0	)		249.9
Total Incurred Loss and LAE		3,635.0			3,495.2			3,452.2
Loss and LAE Payments for Claims Occurring During:
Current Year		1,912.1			1,884.5			1,757.5
Prior Years		1,616.5			1,440.7			1,581.4
Total Loss and LAE Payments		3,528.6			3,325.2			3,338.9
Sale of London Operations		(51.0	)		—			—
Net Balance at End of Year		4,925.6			4,870.2			4,700.2
Plus Reinsurance Recoverables		432.6			339.1			344.4
Loss and LAE Reserves at End of Year	$	5,358.2		$	5,209.3		$	5,044.6

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 runoff 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

2004 – In 2004, we reduced our estimates for prior years’ loss and LAE reserves by $39.0. This total decrease included:

• $42.9 reduction in personal property reserves, reflecting lower claims frequency than our original estimates

• $32.6 reduction in commercial auto reserves, primarily due to a favorable ruling related to Ohio uninsured motorists coverage

• $14.8 reduction in personal auto reserves, reflecting improved claims frequency in both our preferred and non-standard books of business

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• $20.7 increase in commercial multi-peril and other general liability reserves. This included an $8.6 reduction in World Trade Center loss estimates, a $29.6 increase in asbestos reserves and a $14.3 increase in environmental reserves

• $30.6 increase in a number of lines due to emerging claim trends and related loss data, including ULAE

2003 – In 2003, we increased our estimates for prior years’ loss and LAE reserves by $249.9. The total increase included:

• $205.0 increase as a result of higher medical cost trends for workers compensation than previously expected

• $44.9 increase in a number of lines due to emerging claim trends and related loss data

Of the $205.0 increase, $180.0 was related to loss and ALAE reserves. This increase included $130.0 in P&C Other, $48.0 in SBI Regular and $2.0 in SBI Special Accounts Facility. The largest amount of reserve development related to California, particularly in the large-commercial business we began exiting in 2001. We also increased ULAE reserves by $25.0. This increase included $14.9 in P&C Other, $9.6 in SBI Regular and $0.5 in SBI Special Accounts Facility. This increase reflected our estimate of the ongoing expense of servicing workers compensation claims. As claims remain open for longer periods, our costs to handle those claims rise.

Analysis of Losses and LAE Reserve Development – 10-Year Review – The Analysis of Losses and LAE Reserve Development table on page 50 shows the development of our loss and LAE reserves from 1995 through 2005. For 1997 to 2005, the table includes amounts for American States Financial Corporation, which we acquired in 1997.

In the table on page 50:

• Section A shows the unpaid loss and LAE reserves we recorded at December 31, 1995-2005. 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 1995 were $2,070.1.

• After 10 years, we’ve actually paid $1,705.0.

• 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 1995 were $2,070.1.

• Section C shows the annual reestimation of those reserves, and after 10 years our revised reserves were $1,911.1.

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• 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 1995 were $2,070.1.

• After one year those reserves developed a $77.7 redundancy, and after 10 years the redundancy grew to $159.0. 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:

• Favorable development in reserve estimates from 1995 through 1996

• Unfavorable development in reserve estimates from 1997 through 2003

• Favorable development in reserve estimates from 2004 through 2005

The favorable trend from 1995 through 1996 was primarily due to:

• Loss and LAE reserves that were ultimately conservative

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

• Favorable workers compensation legislation in the early 1990s

• Moderation in medical costs and inflation during the period

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, asbestos and environmental losses

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

• Lower-than-expected number of claims in our Auto and Property segments

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

• Lower-than-anticipated losses related to the World Trade Center

• 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	1995		1996		1997			1998			1999			2000			2001			2002			2003		2004		2005
A.     Reserve for Unpaid Losses and LAE
Gross of Reinsurance	$	2,180.8	$	2,059.1	$	4,310.5		$	4,219.9		$	4,378.6		$	4,612.7		$	5,053.7		$	4,998.5		$	5,044.6	$	5,209.3	$	5,358.2
Reinsurance		110.7		103.4		228.6			253.6			309.5			343.6			415.9			411.6			344.4		339.1		432.6
Net of Reinsurance	$	2,070.1	$	1,955.7	$	4,081.9		$	3,966.3		$	4,069.1		$	4,269.1		$	4,637.8		$	4,586.9		$	4,700.2	$	4,870.2	$	4,925.6
B.     Cumulative Net Amount Paid as of
One Year Later	$	755.4	$	772.9	$	1,345.5		$	1,389.2		$	1,510.7		$	1,618.7		$	1,672.1		$	1,581.4		$	1,440.7	$	1,616.5
Two Years Later		1,095.0		1,101.4		2,049.3			2,165.5			2,336.2			2,537.8			2,575.1			2,394.4			2,265.7
Three Years Later		1,267.6		1,287.9		2,516.3			2,638.0			2,895.0			3,106.6			3,112.6			2,934.4
Four Years Later		1,370.0		1,404.3		2,821.0			2,981.9			3,245.1			3,452.1			3,482.9
Five Years Later		1,440.5		1,485.3		3,059.1			3,201.3			3,468.7			3,705.6
Six Years Later		1,493.1		1,600.9		3,223.9			3,354.7			3,642.8
Seven Years Later		1,591.4		1,639.9		3,342.0			3,479.3
Eight Years Later		1,623.7		1,688.1		3,441.4
Nine Years Later		1,666.7		1,729.7
Ten Years Later		1,705.0
C.     Net Reserve Re-estimated as of
One Year Later	$	1,992.4	$	1,947.7	$	3,981.9		$	4,045.1		$	4,217.4		$	4,614.2		$	4,763.6		$	4,836.8		$	4,661.2	$	4,824.3
Two Years Later		1,889.9		1,861.4		3,989.0			4,070.3			4,447.8			4,709.7			5,004.2			4,826.9			4,662.5
Three Years Later		1,804.7		1,806.6		3,986.0			4,209.9			4,506.0			4,960.1			5,033.9			4,895.6
Four Years Later		1,757.1		1,799.6		4,097.1			4,252.4			4,708.5			4,974.7			5,171.4
Five Years Later		1,757.3		1,849.6		4,147.2			4,397.6			4,730.2			5,101.4
Six Years Later		1,803.3		1,872.4		4,281.0			4,426.4			4,848.9
Seven Years Later		1,830.8		1,901.6		4,288.4			4,537.1
Eight Years Later		1,848.2		1,925.6		4,401.7
Nine Years Later		1,887.8		1,948.5
Ten Years Later		1,911.1
D.     Cumulative Net Redundancy (Deficiency) as of
One Year Later	$	77.7	$	8.0	$	100.0		$	(78.8	)	$	(148.3	)	$	(345.1	)	$	(125.8	)	$	(249.9	)	$	39.0	$	45.9
Two Years Later		180.2		94.3		92.9			(104.0	)		(378.7	)		(440.6	)		(366.4	)		(240.0	)		37.7
Three Years Later		265.4		149.1		95.9			(243.6	)		(436.9	)		(691.0	)		(396.1	)		(308.7	)
Four Years Later		313.0		156.1		(15.2	)		(286.1	)		(639.4	)		(705.6	)		(533.6	)
Five Years Later		312.8		106.1		(65.3	)		(431.3	)		(661.1	)		(832.3	)
Six Years Later		266.8		83.3		(199.1	)		(460.1	)		(779.8	)
Seven Years Later		239.3		54.1		(206.5	)		(570.8	)
Eight Years Later		221.9		30.1		(319.8	)
Nine Years Later		182.3		7.2
Ten Years Later		159.0

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

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Reinsurance Recoverables

On page 12, we provided an overview of how we use reinsurance. Here, we focus on 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 $447.0 at December 31, 2005 and $355.4 at December 31, 2004 in reinsurance recoverables as assets on our Consolidated Balance Sheets. The increase in our reinsurance recoverables in 2005 is a result of estimated reinsurance recoveries related to workers compensation and Hurricane Katrina losses.

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 $12.5 at December 31, 2005 and $15.4 at December 31, 2004.

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.

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

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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 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

• 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 $15.5 in 2005, $9.0 in 2004 and $47.8 in 2003.

Determining the Fair Value of Our Investments – For the majority of our investments, we use 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

More about our investments can be found in the Our Investment Results section on page 73.

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Consolidated Results of Operations

The following table presents summary consolidated financial information. A detailed discussion of our results by segment can be found on page 54.

YEAR ENDED DECEMBER 31	2005		2004			2003
Net Earned Premiums	$	5,805.4	$	5,529.1		$	4,901.8
Net Investment Income		485.1		464.6			468.4
Net Realized Investment Gains		60.4		200.8			70.1
Other Revenues		0.2		0.9			9.8
Total Revenues		6,351.1		6,195.4			5,450.1
Losses and LAE		3,635.0		3,495.2			3,452.2
Amortization of Deferred Policy Acquisition Costs		973.1		924.6			846.2
Other Underwriting and Operating Expenses		662.0		648.1			635.3
Interest Expense		88.6		108.2			127.1
Loss on Debt Repurchases		4.0		121.0			—
Restructuring Charges		2.7		5.4			9.2
Total Expenses		5,365.4		5,302.5			5,070.0
Income from Continuing Operations before Income Taxes		985.7		892.9			380.1
Provision for Income Taxes		294.6		272.7			94.6
Income from Continuing Operations		691.1		620.2			285.5
Results from Discontinued Operations, Net of Taxes		—		(57.8	)		53.7
Net Income	$	691.1	$	562.4		$	339.2

Revenues

Total revenues increased 2.5% in 2005 compared with 2004, and increased 13.7% in 2004 compared with 2003. The increases were driven by:

• Net earned premiums – Our net earned premiums grew 5.0% in 2005 compared with 2004, and 12.8% in 2004 compared with 2003. These increases reflect growth in policies-in-force (PIF) as well as price increases primarily in our Auto segment. 2004 also included PIF growth and price increases in SBI Regular and Surety. In 2005, our growth slowed in the face of increased competitive pressures as some of our competitors increased advertising for auto insurance and lowered prices to attract new auto and commercial business.

• Net investment income – The increase in net investment income in 2005 compared with 2004 was due to an increase in average invested assets, as a result of positive operating cash flows partially offset by lower yields on new investments, compared with yields on matured or called investments.

• Net realized investment gains – Net realized investment gains decreased $140.4 in 2005 compared with 2004 and increased $130.7 in 2004 compared with 2003. These changes were due primarily to higher gains realized in 2004 related to the reduction of our equity holdings to our target level of approximately 10% of our investment portfolio. Net realized investment gains included pretax impairments of $15.5 in 2005, $9.0 in 2004 and $47.8 in 2003.

Net Income

Net income increased 22.9% in 2005 compared with 2004, while net income in 2004 increased 65.8% compared with 2003, driven by:

• Underwriting profit – Our underwriting profit increased by $46.9 in 2005 compared with 2004 due to improved results in SBI Regular. Our underwriting profit increased by $478.2 in 2004 compared with the underwriting loss in 2003, primarily due to improved results in Auto, Property and SBI Regular. Pretax net of reinsurance catastrophe losses were $267.4 in 2005, compared with

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$275.6 in 2004 and $153.7 in 2003. We had favorable prior-year reserve development of $44.0 in 2005 and $39.0 in 2004. This was driven primarily by favorable reserve development in our personal property, personal auto and commercial auto reserves. In 2003, we had unfavorable prior-year reserve development, primarily in workers compensation reserves, of $249.9.

• Other underwriting and operating expenses – Our expense reduction efforts that began in 2003 reduced our 2004 operating expenses by approximately $75, primarily by eliminating approximately 500 positions in our corporate departments. At the same time, our expenses reflected our business growth.

• Interest expense – Our interest expense decreased in 2005 and 2004 due to our debt repurchases described below.

• Loss on debt repurchases – In 2005, we repurchased $25.9 in principal amount of debt. Including transaction costs, this resulted in a loss on debt repurchases of $4.0. In 2004, we used $735.2 of the proceeds from the sale of L&I to repurchase $618.4 in principal amount of debt and capital securities. Including transaction costs, this resulted in a loss on debt repurchases of $121.0.

• Provision for income taxes – Our effective tax rate was 29.9% in 2005, 30.5% in 2004 and 24.9% in 2003. The increase in the effective tax rate in 2004 compared with 2003 was due to the change to an underwriting profit of $472.3 from an underwriting loss of $5.9. When the profit or loss approaches zero, our permanent differences - differences resulting from income that is not included in taxable income and will never be taxable, such as tax-exempt interest income - have a more significant impact on the effective tax rate.

• Discontinued operations – In 2004, Results from Discontinued Operations included the after-tax loss on the sale of our L&I operations of $131.0. This was partially offset by $73.2 in Income from Discontinued Operations. Income from Discontinued Operations was $53.7 in 2003.

Reconciling Segment Results

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

YEAR ENDED DECEMBER 31	2005			2004			2003
P&C	$	1,040.7		$	1,091.6		$	479.6
Corporate		(55.0	)		(198.7	)		(99.5	)
Income from Continuing Operations before Income Taxes	$	985.7		$	892.9		$	380.1

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

Our P&C Operating Results

The primary measures of our operating results include our 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.

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

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 reflected as revenue in the Consolidated Statements of Income as they are earned over the underlying policy period. Net written premiums

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applicable to the unexpired term of a policy are recorded as unearned premiums on our Consolidated Balance Sheets.

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

YEAR ENDED DECEMBER 31	2005		2004			2003
Net Written Premiums	$	5,802.1	$	5,672.3		$	5,108.8
Change in Unearned Premiums		3.3		(143.2	)		(207.0	)
Net Earned Premiums	$	5,805.4	$	5,529.1		$	4,901.8

Our net earned premiums by reportable segment were:

YEAR ENDED DECEMBER 31	2005		2004		2003
SAFECO PERSONAL INSURANCE
Auto	$	2,820.4	$	2,628.6	$	2,241.5
Property		913.3		920.6		920.9
Specialty		98.1		90.2		83.0
SPI Total		3,831.8		3,639.4		3,245.4
SAFECO BUSINESS INSURANCE
SBI Regular		1,272.2		1,224.7		1,097.5
SBI Special Accounts Facility		431.9		443.3		383.8
SBI Total		1,704.1		1,668.0		1,481.3
Surety		260.9		203.0		153.6
P&C Other		8.6		18.7		21.5
Total Net Earned Premiums	$	5,805.4	$	5,529.1	$	4,901.8

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Next, 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	2005			2004			2003
SAFECO PERSONAL INSURANCE
Auto	$	139.6		$	176.2		$	47.7
Property		198.2			209.2			108.9
Specialty		6.9			11.9			27.2
SPI Total		344.7			397.3			183.8
SAFECO BUSINESS INSURANCE
SBI Regular		117.9			47.2			(28.6	)
SBI Special Accounts Facility		32.6			26.3			23.5
SBI Total		150.5			73.5			(5.1	)
Surety		55.0			42.4			27.6
P&C Other		(31.0	)		(40.9	)		(212.2	)
Total Underwriting Profit (Loss)		519.2			472.3			(5.9	)
P&C Net Investment Income		460.6			445.0			453.0
Restructuring Charges		(2.7	)		(5.4	)		(8.3	)
Net Realized Investment Gains		63.6			179.7			40.8
P&C Income from Continuing Operations before Income Taxes	$	1,040.7		$	1,091.6		$	479.6

Finally, 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 net earned premiums:

YEAR ENDED DECEMBER 31	2005 +		2004 +		2003 +
SAFECO PERSONAL INSURANCE
Auto	95.1	%	93.3	%	97.9	%
Property	78.3		77.3		88.2
Specialty	93.0		86.8		67.2
SPI Total	91.0		89.1		94.3
SAFECO BUSINESS INSURANCE
SBI Regular	90.7		96.2		102.6
SBI Special Accounts Facility	92.4		94.1		93.9
SBI Total	91.2		95.6		100.3
Surety	78.9		79.1		82.0
P&C Other	*		*		*
Total Combined Ratio	91.1	%	91.5	%	100.1	%

+ 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 runoff business with minimal premium.

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Auto

YEAR ENDED DECEMBER 31	2005			2004			2003
Net Written Premiums	$	2,820.0		$	2,705.6		$	2,335.5
Net Earned Premiums	$	2,820.4		$	2,628.6		$	2,241.5
Underwriting Profit	$	139.6		$	176.2		$	47.7
Loss and LAE Ratio		72.1	%		71.0	%		74.6	%
Expense Ratio		23.0			22.3			23.3
Combined Ratio		95.1	%		93.3	%		97.9	%

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

Driving Our Results

We’ve achieved growth and underwriting profitability in our Auto business through our:

• Segmented auto insurance product

• Underwriting and pricing discipline

• Ease-of-doing business

Segmented Auto Insurance Product – Our segmented auto insurance product offers up to 15 underwriting tiers. These underwriting tiers are further refined using multivariate models to assess the risk of loss based on many factors, and provide a more accurate price for a wider range of risks. During 2005, we launched an updated underwriting and pricing model for our Auto product. The primary change involves using our own vehicle groupings (known as rating symbols) based on our experience and data rather than industry vehicle rating symbols, allowing us to vary some of our deductibles. This updated model, now in place in 31 of the 44 states where we write auto business, further increases our sophistication and accuracy in our underwriting and pricing, giving us greater precision in matching rate for each risk.

Underwriting and Pricing Discipline – In 2005, we experienced a more competitive marketplace as many insurers achieved strong underwriting results. Competitors increased marketing and advertising for new auto insurance customers. We also have seen rate decreases by competitors in some states and loosening of underwriting standards. We continue to adhere to our disciplined underwriting standards and pricing in this environment.

Ease-of-Doing Business – Our commitment to ease-of-doing business continued through further development of our Safeco Now automated underwriting platform, which lowers our agents’ costs and provides an easy-to-use, Web-based sales-and-service platform. Our auto product is available on Safeco Now in all of the states where we write auto business. In 2004 and 2005, we enhanced our Safeco Now platform to streamline the service process for distributors and auto customers so that our agents and brokers can efficiently handle most auto policy changes and endorsements online.

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PREMIUMS

Net written premiums increased $114.4, or 4.2%, in 2005 compared with 2004 and $370.1, or 15.8%, in 2004 compared with 2003. The increases in net written premiums were primarily driven by:

• Growth of PIF – PIF increased 0.6% in 2005, 8.9% in 2004 and 9.0% in 2003. This reflected stable retention of policies of 79.5% in 2005, 80.4% in 2004 and 79.9% in 2003. Competitive pressures dampened new business growth in 2005. New policies sold decreased 19.8% in 2005 compared with 2004, and increased 8.8% in 2004 compared with 2003. The 2004 growth was primarily driven by the introduction of our Safeco Now Web-based sales-and-service platform early in 2004.

• Changes in average premiums – We file rate changes on a state-by-state basis. Overall, we received approval for average rate decreases of 0.4% in 2005 and increases of 1.3% in 2004 and 5.6% in 2003. Rate changes are reflected on existing policies at renewal and are earned in our revenues over the six-month policy term. Premiums also are affected by the increased pricing for those policies that insure newer and more expensive cars, which we refer to as premium trend. They also are impacted by shifts in the mix of our business.

Net earned premiums increased $191.8, or 7.3%, in 2005 compared with 2004, and $387.1, or 17.3%, in 2004 compared with 2003. The increases in net earned premiums were primarily driven by:

• Growth of PIF – PIF growth increased net earned premiums by $118.7 in 2005 compared with 2004, and $201.0 in 2004 compared with 2003.

• Changes in average premiums – Changes in average premiums increased net earned premiums by $87.8 in 2005 compared with 2004, and $188.7 in 2004 compared with 2003.

UNDERWRITING RESULTS AND COMBINED RATIO

Our underwriting results decreased $36.6, and our combined ratio increased 1.8 points in 2005 compared with 2004. Our underwriting results increased $128.5, and our combined ratio decreased 4.6 points in 2004 compared with 2003. Our underwriting results and combined ratio were primarily driven by:

• Changes in average premiums – Our earned rate changes, combined with premium trend, decreased our Auto combined ratio by 3.0 points in 2005 compared with 2004, and 7.9 points in 2004 compared with 2003.

• Loss costs – In 2005, we experienced a mid-single-digit increase in severity – the average cost of a claim. This was in part due to the impact of medical costs inflation on bodily injury claims and a slight shift in business mix to states with higher bodily injury severity claims over the past 18 months. This also was partly due to the effect of our increased average deductible, which has eliminated some low-severity losses that are not reported because they are less than the now higher deductible amounts. The impact of the increase in severity was partially offset by the effect of a low-single-digit decrease in frequency – the average number of claims filed. These factors, net of reinsurance, increased our combined ratio by 3.5 points in 2005 compared with 2004. In 2004, the impact of loss-cost changes increased our combined ratio by 4.3 points compared with 2003.

• Prior-year reserve development – Our underwriting results in 2005 included favorable prior-year reserve development of $34.7 and in 2004 included favorable prior-year reserve development of $12.7, reflecting decreases in severity estimates for prior accident years across liability lines compared with our original estimates. Results in 2003 included unfavorable reserve development of $6.5 related to prior accident years. The favorable development in 2005 decreased the combined ratio by 0.8 points compared with 2004. The favorable development in 2004 decreased the combined ratio by 0.9 points compared with 2003.

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• Catastrophe losses – We categorize catastrophes as events resulting in losses greater than $0.5 per event and involving multiple claims and policyholders. We cannot accurately predict when catastrophes may occur, and the number and type of catastrophes can vary widely. The losses they cause may significantly exceed our prior experience. Catastrophes can be caused by natural events, such as hurricanes, tornadoes, wildfires, earthquakes and hailstorms or other factors such as terrorism, riots, hazardous material releases or utility outages. Pretax after reinsurance catastrophe losses were $24.3 in 2005 compared with $18.9 in 2004 and $26.8 in 2003. The higher catastrophe losses increased the combined ratio by 0.1 points in 2005 compared with 2004. The lighter catastrophe losses in 2004 decreased the combined ratio by 0.3 points compared with 2003.

• Expenses – The increase in our expense ratio of 0.7 points in 2005 compared with 2004 was driven by increased investment in technology and bad debt expense related primarily to non-standard policies, partially offset by decreased agent commissions resulting from slower growth and earned premium increases due to average premium changes. In 2004, the decrease in our expense ratio by 1.0 points compared with 2003 was the result of our expense improvement efforts, primarily as a result of the corporate restructuring initiatives. This was partly offset by higher bonus commission and employee performance bonus expenses due to our growth and improved underwriting results.

Where We’re Headed

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

Competitive Environment – We believe competition in the auto segment will continue through mass market advertising, higher agency compensation and lower prices. We will maintain our underwriting discipline and will not compete for business for which we cannot obtain our long-term target margins. While maintaining our discipline, we will be relentless in seeking ways to profitably grow our business during this competitive cycle. We carefully monitor our rates and offer our distributors choices in the area of compensation so they can match compensation to their business model. We also are committed to managing our expenses, as we recognize that our competitors are doing the same.

Underwriting Segmentation – Our segmented auto product offers up to 15 underwriting tiers using multivariate models to assess the risk of loss based on many factors, providing a more accurate price for a wider range of risks. Going forward, we expect to further refine our underwriting and pricing models. This continuous process will provide increasing precision in matching rate for each risk.

Ease-of-Doing Business – We believe that the combination of our ongoing product development through underwriting segmentation and continued improvements in our ease-of-doing business through Safeco Now will allow us to continue to build profitable growth in the face of increasing competition. We believe that having more verifiable data available at the point of sale, such as motor vehicle reports, police reports and credit reports will make our application process smoother. We anticipate the change in average premium will be in the low-single digits in 2006, with rate increases targeted to specific segments of our business.

Business Growth – As our business grows, we may write more policies with standard and non-standard risks, which have, on average, higher frequencies than preferred risks. However, preferred auto business will still remain our largest book of business and continue to be our greatest area of opportunity. We will continue to grow into eastern states where we currently have less geographic presence. We also will focus on the changing nature of the independent distribution channel through new agency appointments and customized business approaches. Finally, we will continue to study the purchasing behaviors of insurance consumers to be certain we are meeting their needs.

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Overall – In 2006, we anticipate our Auto revenue will continue to grow, while achieving our long-term target combined ratio of 96%.

Property

YEAR ENDED DECEMBER 31	2005			2004			2003
Net Written Premiums	$	908.2		$	918.3		$	923.8
Net Earned Premiums	$	913.3		$	920.6		$	920.9
Underwriting Profit	$	198.2		$	209.2		$	108.9
Loss and LAE Ratio		50.1	%		49.3	%		59.5	%
Expense Ratio		28.2			28.0			28.7
Combined Ratio		78.3	%		77.3	%		88.2	%

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.

Driving Our Results

We’ve achieved profitability in our Property business through our:

• Segmented property insurance products

• Ease-of-doing business

• Continued catastrophe management

Segmented Property Insurance Products – Our segmented homeowners product generally offers nine underwriting tiers. These underwriting tiers are further refined using multivariate models to assess the risk of loss based on many factors and provide a more accurate price for a wider range of risks. This increased segmentation means we are better able to align rate with risk, producing greater pricing precision. It also means we can grow by offering coverage to more home owners. We sell our segmented products in 43 of the 44 states where we write homeowners insurance. In 2005, we began to launch our new segmented dwelling fire product, a landlord protection policy that insures residential rental property. This is currently rolled out in 14 states, and we plan to complete the rollout of the new program by year-end 2006.

Ease-of-Doing Business – Our commitment to ease-of-doing business for our agents continues through our Safeco Now automated underwriting platform, which lowers our agents’ costs and provides an easy-to-use, Web-based sales-and-service platform. Our homeowners and dwelling fire products are available on Safeco Now in 43 of the 44 states where we write property business. As expected, this has contributed to an increase in new business.

Continued Catastrophe Management – We continue to actively manage our exposure to catastrophe risk through a combination of risk avoidance, risk mitigation and risk transfer strategies. Because of our catastrophe management strategies, our losses from the major hurricanes in 2005 and 2004 were less than our market share would indicate. In addition, our catastrophe losses due to tornadoes and hailstorms have dropped significantly over the past three years.

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Premiums

Net written premiums decreased $10.1, or 1.1%, in 2005 compared with 2004, and $5.5, or 0.6%, in 2004 compared with 2003. This reflected:

• Decline in PIF – The number of policies that did not renew with us in 2005, 2004 and 2003 exceeded the number of new policies written in each year, resulting in a decrease in PIF of 0.5% in 2005 compared with 2004, and 6.7% in 2004 compared with 2003. During 2004 and 2005, we launched our homeowners and dwelling fire products on our Safeco Now platform. This contributed to an increase in new Property policies written of 40.9% in 2005 compared with 2004. Our new business increased in 40 states in 2005, offset by a decline in new business in catastrophe-prone states. Our homeowners retention rates increased in 2005 to 85.2% compared with 83.7% in 2004 and 83.1% in 2003.

• 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 12 month policy term. Overall we received approval for average rate decreases in our homeowners business of 1.0% in 2005, and increases of 1.3% in 2004 and 8.3% in 2003. Premiums also are impacted by automatic increases in the amount of insurance coverage to adjust for inflation in building costs, which we refer to as premium trend. They also are impacted by shifts in the mix of our business.

Net earned premiums decreased $7.3, or 0.8%, in 2005 compared with 2004 and were flat in 2004 compared with 2003. This reflected:

• Decline in PIF – The decline in PIF reduced net earned premiums by $33.8 in 2005 compared with 2004, and $72.4 in 2004 compared with 2003.

• Changes in average premiums – Changes in average premiums increased net earned premiums by $25.1 in 2005 compared with 2004, and $72.8 in 2004 compared with 2003.

Underwriting Results and Combined Ratio

Our underwriting profit in Property decreased $11.0, and our combined ratio increased 1.0 points in 2005 compared with 2004. Our underwriting profit increased $100.3, and our combined ratio decreased 10.9 points in 2004 compared with 2003. Our underwriting results and combined ratios were primarily driven by:

• Changes in average premiums – Our homeowners rate changes combined with premium trend decreased our Property combined ratio by 2.1 points in 2005 compared with 2004, and 6.4 points in 2004 compared with 2003.

• Loss costs – During 2005, our homeowners loss costs changes were relatively flat. Loss costs for other Property lines were down, resulting in a net decrease in loss costs for the Property segment. This change reduced our combined ratio by 0.6 points in 2005 compared with 2004. In 2004, we experienced reductions in frequency of claims in the mid-teens, partially offset by a mid-teen increase in severity, decreasing our combined ratio by 2.2 points compared with 2003.

• Prior-year reserve development – Our underwriting results in 2005 included favorable prior-year reserve development of $11.0, including unfavorable prior-year reserve development of $10.5 in our estimates of the 2004 hurricanes in Florida and surrounding states. The favorable development reflected better-than-expected experience in our estimates of loss costs, primarily for accident years 2003 and 2004. Our underwriting results in 2004 included favorable prior-year reserve development of $47.5, primarily driven by changes in contract terms resulting in decreased frequency of claims beyond that previously expected. Results in 2003 included unfavorable prior-year reserve development of $16.0. The change in favorable reserve development in 2005 increased the combined ratio by 4.0 points compared with 2004. The change in reserve development in 2004 decreased the combined ratio by 6.9 points compared with 2003.

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• Catastrophe losses – We categorize catastrophes as events resulting in losses greater than $0.5 per event and involving multiple claims and policyholders. We cannot accurately predict when catastrophes may occur, and the number and type of catastrophes can vary widely. The losses they cause may significantly exceed our prior experience. Catastrophes can be caused by natural events, such as hurricanes, tornadoes, wildfires, earthquakes and hailstorms or other factors such as terrorism, riots, hazardous material releases or utility outages. Pretax after reinsurance catastrophe losses were $103.9 in 2005 (including the increase in reserves for the 2004 hurricanes described above) compared with $107.2 in 2004 and $101.9 in 2003. Catastrophe losses in 2005 (excluding the reserve increase for the 2004 hurricanes) decreased the combined ratio by 1.5 points in 2005 compared with 2004. The increase in 2004 catastrophe losses increased the combined ratio by 0.6 points in 2004 compared with 2003. Catastrophe losses in 2005 included $53.7 from hurricanes Katrina, Rita and Wilma in the Gulf States. Catastrophe losses in 2004 included $66.3 from the four hurricanes in Florida and surrounding states. Catastrophe losses in 2003 included $11.8 from the wildfires in California.

• Expenses – Higher agent bonus commission expenses, driven by increased dwelling fire new business and better-than-anticipated underwriting results, increased our expense ratio by 0.2 points in 2005 compared with 2004. Our expense improvement efforts, primarily from corporate restructuring initiatives, decreased our expense ratio by 0.7 points in 2004 compared with 2003.

Where We’re Headed

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

Business Growth – As our business grows, we may write more policies in markets where we previously have not written significant business. We will continue to grow into eastern states where we currently have less geographic presence, being selective where we write business to manage our catastrophe exposure. We also will focus on the changing nature of the independent distribution channel through new agency appointments and customized business approaches. As we promote growth, we will seek scale economies and ways to control expenses.

Underwriting Segmentation – We have replaced our existing dwelling fire product with our new tiered product in 14 states and plan to complete the rollout of the new program by year-end 2006.

Catastrophe Risk Management – Our underwriting strategy for property insurance is to target customers whose risk of loss provides us with the opportunity for profitable growth. We do this by managing exposure on policies in catastrophe-prone areas. In July 2005, we announced our withdrawal from the personal property business in Florida. We will stop renewing policies of existing personal property policyholders beginning in early 2006 as policies come up for renewal. In 2005, net earned premiums for personal property policies in Florida were $24.1.

Overall – We expect our Property segment revenue to grow modestly while operating at or better than our long-term target combined ratio of 92% in 2006. We do not, however, expect to experience favorable frequency trends. This will cause our margins to move closer to our target.

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Specialty

YEAR ENDED DECEMBER 31	2005			2004			2003
Net Written Premiums	$	101.3		$	93.4		$	85.7
Net Earned Premiums	$	98.1		$	90.2		$	83.0
Underwriting Profit	$	6.9		$	11.9		$	27.2
Loss and LAE Ratio		64.6	%		61.7	%		41.5	%
Expense Ratio		28.4			25.1			25.7
Combined Ratio		93.0	%		86.8	%		67.2	%

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

Premiums

Net written premiums increased $7.9, or 8.5%, in 2005 compared with 2004, and $7.7, or 9.0%, in 2004 compared with 2003. New-business policies sold decreased 2.7% in 2005 compared with 2004, and increased 24.7% in 2004 compared with 2003. The increased premiums in 2005 were driven by an increase in the number of policies that renewed with us, resulting in an increase in PIF, primarily in our umbrella, recreational vehicle and motorcycle policies. The growth in 2004 was driven by an increase in the sale of new boat owner, recreational vehicle and motorcycle policies.

Net earned premiums increased $7.9, or 8.8%, in 2005 compared with 2004, and $7.2, or 8.7%, in 2004 compared with 2003.

Underwriting Results and Combined Ratio

Our underwriting profit decreased $5.0, and our combined ratio increased 6.2 points in 2005 compared with 2004. Our underwriting profit decreased $15.3, and our combined ratio increased 19.6 points in 2004 compared with 2003. Our underwriting results and combined ratio were primarily driven by:

• Catastrophe losses – Pretax after reinsurance catastrophe losses were $9.3 in 2005 and $7.6 in 2004. The catastrophe losses were primarily due to hurricanes Katrina, Rita and Wilma in the Gulf States in 2005 and the four hurricanes in Florida and surrounding states in 2004. There were no catastrophe losses in 2003. Higher catastrophe losses increased the combined ratio by 0.9 points in 2005 compared with 2004, and 8.5 points in 2004 compared with 2003.

• Loss costs – We experienced increased losses in our umbrella business in 2005 and 2004 as a result of an increased number of claims reported. Higher umbrella losses increased our combined ratio by 6.3 points in 2005 compared with 2004, and 8.1 points in 2004 compared with 2003. In 2003, our claim experience for our umbrella business was unusually low, resulting in a lower combined ratio and higher underwriting profit. Umbrella loss costs can be volatile from period to period.

Where We’re Headed

We anticipate improved underwriting results in 2006, while achieving our long-term targets for each specialty line. In 2005, we began to launch our motorcycle product on Safeco Now. In 2006, we will launch our umbrella product on Safeco Now, enabling cross-sell opportunities with Auto.

SBI Regular

YEAR ENDED DECEMBER 31	2005			2004			2003
Net Written Premiums	$	1,263.0		$	1,258.5		$	1,156.9
Net Earned Premiums	$	1,272.2		$	1,224.7		$	1,097.5
Underwriting Profit (Loss)	$	117.9		$	47.2		$	(28.6	)
Loss and LAE Ratio		57.0	%		62.6	%		65.7	%
Expense Ratio		33.7			33.6			36.9
Combined Ratio		90.7	%		96.2	%		102.6	%

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Our SBI Regular segment provides insurance for small- to mid-sized businesses (those with annual premiums of $200,000 or less). This is our core commercial lines business featuring these main products:

• Business owner policies (BOP)

• Commercial auto

• Commercial multi-peril

• Workers compensation

• Commercial property

• General liability

Driving Our Results

We’ve achieved growth and profitability in SBI Regular through our:

• Automated underwriting platform

• Ease-of-doing business

• Field specialization model

• Catastrophe risk management

Automated Underwriting Platform – Our automated underwriting platform uses multivariate models to assess the risk of loss based on many factors and provides a more accurate price for a wider range of risks. This allows us to offer policies to a wider range of small businesses. We believe this capability is a key competitive advantage. It allows us to better segment our business with higher risks charged higher rates. We validate the underwriting factors we use by reviewing them every month for unusual patterns in quotes, close rates and other factors by state, zip code and agency.

Ease-of-Doing Business – Safeco Now contributed to increased new business as it allows our agents to quote and issue new small-commercial business online in just minutes. We have experienced growth in BOP, commercial auto and workers compensation, all of which have been on Safeco Now for more than a year. PIF for our automated products available on Safeco Now (BOP, commercial auto and workers compensation) increased 4.1% in 2005 compared with 2004, while PIF for our non-automated products decreased 5.1% in 2005 compared with 2004.

Our commitment to ease-of-doing business continued during 2005, as we further expanded our BOP product by adding more than 150 additional classes of business, increasing eligibility limits and expanding coverages in additional states. The expanded product is available in all states where we write commercial business. We also expanded our commercial auto automated underwriting model on the Safeco Now platform to include auto fleets of 15 vehicles, up from nine, and we enhanced our commercial multi-peril product by introducing quote and issue capabilities on Safeco Now for our package policies up to $20,000 in annual premium.

Field Specialization Model – We have two separate underwriting units – one for our core small-business accounts (customers who pay annual premiums up to approximately $25,000) and one for our mid-market business (customers who pay annual premiums of approximately $25,000 to $200,000). This “field specialization model” has increased efficiency and underwriting accuracy and reduced underwriting expenses with the automation of many of our underwriting processes and the use of multivariate models. Implemented in 2004, this model has increased productivity while reducing underwriting staff expenses.

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Catastrophe Risk Management – Our underwriting strategy is to target customers whose risk of loss provides us with the opportunity for profitable growth. We do this by managing exposure on policies in catastrophe-prone areas. Historically, for writing business in catastrophe-prone areas we have followed strict guidelines that include variables, such as building age and condition, coastal proximity and standards for policy deductibles. In the aftermath of the unprecedented hurricane season in 2004, we reviewed the performance of our underwriting standards. With the exception of some tightening in key areas, our guidelines have remained consistent. We continually monitor these guidelines.

Premiums

Net written premiums increased $4.5, or 0.4%, in 2005 compared with 2004, and $101.6, or 8.8%, in 2004 compared with 2003. The increase in net written premiums was driven by:

• Changes in PIF – PIF decreased 0.6% in 2005 compared with 2004, and increased 0.2% in 2004 compared with 2003. This reflected retention rates of 80.0% in 2005, 79.9% in 2004 and 75.9% in 2003. Our new policies sold decreased 7.3% in 2005 compared with 2004, and 1.2% in 2004 compared with 2003.

• Price changes – We file rate changes on a state-by-state basis. Our average prices, which include filed rate changes and exposure growth, were down slightly in 2005, after increasing 3% in 2004 and 10% in 2003. 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.

Net earned premiums increased $47.5, or 3.9%, in 2005 compared with 2004, and $127.2, or 11.6%, in 2004 compared with 2003. The increases in net earned premiums were driven by:

• Price changes – Price changes increased net earned premiums by $8.6 in 2005 compared with 2004, and $64.7 in 2004 compared with 2003.

• Mix of business – Mix of business increased net earned premiums by $40.9 in 2005 compared with 2004 and $50.4 in 2004 compared with 2003.

Underwriting Results and Combined Ratio

Our underwriting profit in SBI Regular increased $70.7, and our combined ratio decreased 5.5 points in 2005 compared with 2004. Our underwriting profit increased $75.8, and our combined ratio decreased 6.4 points in 2004 compared with 2003. Our underwriting results and combined ratio primarily reflected:

• Price changes – Our price changes decreased our combined ratio by 0.5 points in 2005 compared with 2004, and 9.2 points in 2004 compared with 2003.

• Loss costs – Loss costs increased slightly over the past year, reflecting increased claims severity in the mid-single digits due in part to higher labor and material costs, which was nearly offset by decreased claims frequency. This increased the combined ratio by 0.6 points in 2005 compared with 2004. In 2004, loss costs increased the combined ratio by 0.2 points compared with 2003.

• Prior-year reserve development – Our underwriting results in 2005 included favorable prior-year reserve development of $10.5, primarily related to decreases in auto and commercial multi-peril business due to lower-than-anticipated claim frequency. This was mostly offset by increases in workers compensation due to increased provisions for long-term medical claim inflation and associated claims adjustment expenses. Our underwriting results in 2004 included unfavorable prior-year reserve development of $1.6, primarily related to reserve strengthening for asbestos,

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partly offset by favorable reserve development associated with Ohio commercial auto business and World Trade Center losses. Our underwriting results in 2003 included unfavorable prior-year reserve development of $41.8, primarily related to medical inflation in workers compensation reserves. The difference in prior-year reserve development decreased the combined ratio by 1.0 points in 2005 compared with 2004, and 3.7 points in 2004 compared with 2003.

• Catastrophe losses – Our pretax after reinsurance catastrophe losses were $59.1 in 2005, $113.9 in 2004 and $19.0 in 2003. The lower catastrophe losses decreased our combined ratio by 4.4 points in 2005 compared with 2004, while higher catastrophe losses increased our combined ratio by 8.6 points in 2004 compared with 2003.

• Expenses – The expense ratio was relatively flat in 2005 compared with 2004. The decrease in our expense ratio of 3.3 points in 2004 compared with 2003 was the result of our expense improvement efforts. This was partially offset by higher employee performance bonus expenses related to our growth and improved underwriting results.

Where We’re Headed

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

Competition – We are experiencing increased competition in both our small- and mid-sized business with more intensity in mid-market. Historically, this business is more price-competitive as industry profit margins expand. We remain committed to disciplined pricing and underwriting based on loss cost trends, and we intend to meet our profit margin targets. We will further compete in this segment through our field specialization model, continued focus on agent relationships and our retention efforts through distinctive customer service. We also will continue to emphasize ease-of-doing business through product and service expansion on Safeco Now.

Service Capabilities – In 2006, we will provide our agents and brokers with self-service capabilities for as much as 60% of their business, up from 25% today. Agents will be able to initiate policy change requests electronically on Safeco Now, with real-time quoting and processing for a majority of these transactions. The billing and payment processes will be accessible through a Web-based tool, where both agents and customers will have quick access to billing information and a variety of electronic bill payment options. Agents will also be able to turn off receipt of paper output and access policies and forms electronically and have the ability to route policies and other policy related output from us directly to customers.

Expense Management – We expect to further reduce our expense ratio as we make productivity enhancements by providing more capabilities on our Safeco Now platform, including self-serve policy-change transactions as well as other overall improvements in efficiency.

Business Growth – Given the increasing number of small businesses in the United States and the lack of a dominant market leader, we see growth potential in this segment. Our goal is to be the leading small-business insurance writer in the independent agency channel. We will continue to appropriately match rate with risk through segmentation and disciplined underwriting. We will charge prices that will allow us to achieve our target profit margins, and we will decline to write business when pricing or risk factors do not allow us to earn our target returns. We also will focus on increasing our points of distribution with the appointment of new agents in 2006.

Overall – Despite competitive conditions in the marketplace, we expect our 2006 SBI Regular segment revenue to grow slightly. We expect to maintain our long-term target combined ratio of 95% or better in 2006.

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SBI Special Accounts Facility

YEAR ENDED DECEMBER 31	2005			2004			2003
Net Written Premiums	$	423.7		$	447.4		$	405.8
Net Earned Premiums	$	431.9		$	443.3		$	383.8
Underwriting Profit	$	32.6		$	26.3		$	23.5
Loss and LAE Ratio		55.9	%		55.7	%		56.0	%
Expense Ratio		36.5			38.4			37.9
Combined Ratio		92.4	%		94.1	%		93.9	%

Our SBI Special Accounts Facility (SAF) segment provides insurance for large-commercial accounts (customers who pay annual premiums of more than $200,000). 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 products. Agents who have placed large-commercial accounts with us produce almost 60% of our new business in SBI Regular.

SAF also provides insurance for the following specialty commercial programs:

• Lender-placed property insurance

• Agents’ errors and omissions insurance

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

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

Premiums

Net written premiums decreased $23.7, or 5.3%, in 2005 compared with 2004, and increased $41.6, or 10.3%, in 2004 compared with 2003. The decrease in 2005 compared with 2004 was primarily due to the non-renewal of a large account in our lender-placed property program and reduction in written premiums in our non-profit social services programs due to an increasingly competitive market. The increase in 2004 compared with 2003 was primarily due to rate increases.

Net earned premiums decreased $11.4, or 2.6%, in 2005 compared with 2004, and increased $59.5, or 15.5%, in 2004 compared with 2003.

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Underwriting Results and Combined Ratio

Our underwriting profit increased $6.3, and our combined ratio decreased 1.7 points in 2005 compared with 2004. Our underwriting profit increased $2.8, and our combined ratio increased 0.2 points in 2004 compared with 2003. Our underwriting results in 2005 included favorable prior-year reserve development of $35.7 primarily related to general liability coverages. The difference in prior-year reserve development decreased the combined ratio by 8.4 points in 2005 compared with 2004.

Our underwriting results also were driven by higher loss experience in 2005 in our lender-placed property program and our mini-storage and warehouse properties program, primarily due to Hurricanes Katrina, Rita and Wilma. Pretax after reinsurance catastrophe losses were $70.8 in 2005, $28.0 in 2004 and $7.1 in 2003. The higher catastrophe losses increased the combined ratio by 9.9 points in 2005 compared with 2004, and 4.5 points in 2004 compared with 2003.

Where We’re Headed

We plan to continue providing a limited large-commercial resource for those agents and brokers who also are writing auto, property or small- to mid-sized commercial insurance with us, and to continue writing specialty insurance programs to the extent this continuation fits our strategic objectives.

Surety

YEAR ENDED DECEMBER 31	2005			2004			2003
Net Written Premiums	$	278.4		$	231.4		$	178.8
Net Earned Premiums	$	260.9		$	203.0		$	153.6
Underwriting Profit	$	55.0		$	42.4		$	27.6
Loss and LAE Ratio		32.5	%		28.3	%		26.2	%
Expense Ratio		46.4			50.8			55.8
Combined Ratio		78.9	%		79.1	%		82.0	%

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

Driving Our Results

We’ve achieved growth and underwriting profitability in our Surety business through:

• Favorable market conditions

• Underwriting and pricing discipline

• Commission structure

Premiums

Net written premiums increased $47.0, or 20.3%, in 2005 compared with 2004, and $52.6, or 29.4%, in 2004 compared with 2003. The increase in net written premiums in 2005 compared with 2004 was driven by increased large contract new business. The favorable market conditions for construction and economic expansion fueled the growth in large contract business in 2005. The increase in net written premiums in 2004 compared with 2003 was driven by increased new business from a reduction in competitors due to consolidation of other surety companies and the opening of new offices in Glendale, California; Syracuse, New York; and Richmond, Virginia.

Net earned premiums increased $57.9, or 28.5%, in 2005 compared with 2004, and $49.4, or 32.2%, in 2004 compared with 2003. New business increased net earned premiums by $45.4 in 2005 compared with 2004, and $42.6 in 2004 compared with 2003.

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Underwriting Results and Combined Ratio

Our underwriting profit increased $12.6, and our combined ratio decreased 0.2 points in 2005 compared with 2004. Our underwriting profit increased $14.8, and our combined ratio decreased 2.9 points in 2004 compared with 2003. The results in both years reflected our disciplined underwriting, favorable loss experience and decreased commission expense.

Where We’re Headed

Continued Disciplined Underwriting – We have benefited from disarray in the surety market because we are a stable, long-term provider of surety bonds. Some competitors in the industry have experienced significant underwriting losses in recent years. We intend to maintain our disciplined underwriting approach as a priority while we grow this business.

Compensation – We will revise the commission structure of our large brokers in 2006, which will cause our expense ratio to increase slightly.

Overall – We expect the surety market to become more competitive as industry results have stabilized in 2005. As a result, we anticipate our growth rates will moderate in 2006. We do not expect significant changes in our underwriting results.

P&C Other

YEAR ENDED DECEMBER 31	2005			2004			2003
Net Written Premiums	$	7.5		$	17.7		$	22.3
Net Earned Premiums		8.6			18.7			21.5
Underwriting Loss		(31.0	)		(40.9	)		(212.2	)

Our P&C Other segment includes:

• Runoff assumed reinsurance business

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

• Runoff London operations, which we sold in 2005

Charges affecting our underwriting results included:

• $17.1 unfavorable prior-year reserve development in 2005, primarily driven by reserve increases in assumed reinsurance and asbestos and environmental, partially offset by favorable construction defects reserve development

• $22.5 unfavorable prior-year reserve development in 2004, primarily in asbestos and environmental reserves

• $183.4 unfavorable prior-year reserve development in 2003, including $144.9 of workers compensation reserve strengthening

Reinsurance

We collect money from reinsurers for losses we have that are covered by reinsurance. We had $447.0 of reinsurance recoverables at December 31, 2005, net of an allowance of $12.5 that we estimated as uncollectible. We had $355.4 of reinsurance recoverables at December 31, 2004, net of an allowance of $15.4 that we estimated as uncollectible.

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We analyze our reinsurance recoverables according to the credit ratings and types of reinsurers. At year-end 2005:

• 23.5% of our reinsurance recoverables were due from state and mandatory reinsurance pools

• 81.9% 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 exceed our prior experience. Catastrophes include hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter weather, fires and acts of terrorism.

Our property catastrophe reinsurance is excess-of-loss reinsurance, which provides us with reinsurance coverage over an agreed-upon amount. The terms of our property catastrophe reinsurance in 2006 are:

• The first $150.0 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 $350.0 of the loss. We absorb the other 10%.

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

• For earthquake events, we have an additional level of coverage. Our reinsurers reimburse us for 90% of $500.0 in excess of $500.0. The entire amount of any earthquake loss above $1,000.0 is ours.

The terms of our 2005 property catastrophe reinsurance were:

• The first $100.0 of any property catastrophe loss was our retention.

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

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

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

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

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

The terms of our workers compensation reinsurance in 2005 and 2006 are:

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

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

• Our reinsurers reimburse us 90% of the next $30.0.

• The entire amount above $50.0 is ours.

We can reinstate once with payment of an additional premium for reinsurance covering losses above $20.0.

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

The terms of our commercial property reinsurance in 2005 and 2006 are:

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

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

• Risks above $20.0 are reinsured individually for each individual risk (facultative reinsurance).

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

The terms of our commercial umbrella reinsurance in 2005 and 2006 are:

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

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

• Risks above $20.0 are facultatively reinsured.

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

The terms in 2005 and 2006 are:

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

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

• The entire amount above $100.0 is ours.

Impact of Terrorism

The Terrorism Risk Insurance Extension Act of 2005 (TRIA) extends the requirement of insurance companies to offer terrorism coverage to certain commercial policyholders, including workers compensation policyholders. Under the extension, TRIA now excludes automobile, burglary and theft, surety, professional liability and farm owners’ multi-peril insurance. Although TRIA excludes professional liability insurance from the commercial policies required to offer terrorism coverage, it explicitly retains directors’ and officers’ liability insurance.

U.S. Government Funding – Under TRIA, 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. The criteria for certification include: the act is

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dangerous to human life, property or infrastructure; and is committed by an individual or individuals on behalf of any foreign person or foreign interest. The extension adds a program trigger. Under this new provision, insurers will not be compensated unless the aggregate industry insured losses from a certified act of terrorism, occurring after March 31, 2006, exceed $50.0 in 2006 and $100.0 in 2007. Subject to the program trigger, the U.S. Government’s share is 90% of the certified losses in excess of individual insurance company deductibles in Program Year 4 (2006) and decreases to 85% in year 5 (2007). TRIA determines the deductibles for insurance companies as a percentage of their direct earned premiums. Our estimated deductible for 2006 is $209.4.

Terrorism Exclusions – Prior to the enactment of TRIA, our policies excluded losses due to foreign terrorism in states that had approved the exclusions. For TRIA-covered policies, we do not exclude losses due to foreign terrorism unless the policyholder rejects our mandatory offer of terrorism coverage. The Insurance Services Office (ISO) created coverage and pricing tools to help insurers respond to the TRIA requirements.

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

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 certified terrorist acts and also non-certified terrorist acts involving nuclear, chemical, biological or radioactive materials. Treaties providing both certified and non-certified terrorist acts include our workers compensation reinsurance program and our commercial umbrella reinsurance program. Our property catastrophe treaty provides non-certified terrorism coverage for 90% of $350.0 above the first $150.0 of loss.

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

With commercial insurance, our focus is on small- to 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. We decline to provide coverage in cases where we believe the exposure is potentially severe to terrorism.

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

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Our Corporate Results

YEAR ENDED DECEMBER 31	2005			2004			2003
Corporate Segment Results	$	(47.8	)	$	(98.8	)	$	(128.8	)
Loss on Debt Repurchases		(4.0	)		(121.0	)		—
Net Realized Investment Gains (Losses) before Taxes		(3.2	)		21.1			29.3
Loss from Continuing Operations before Income Taxes	$	(55.0	)	$	(198.7	)	$	(99.5	)

In our Corporate segment, we include:

• Interest expense on our debt

• Loss on debt repurchases

• Other corporate and investment activities

• Our intercompany eliminations

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.

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

The lower loss in our Corporate segment results in 2005 compared with 2004, and in 2004 compared with 2003 reflects lower interest expense as a result of the debt repurchases described above. Our interest expense was:

• $88.6 in 2005

• $108.2 in 2004

• $127.1 in 2003

Our Investment Results

Investment returns are an important part of our overall profitability. Investment returns are subject to various risks, such as interest rate, market and credit risks. Fluctuations in the fixed-income or equity markets could affect the timing and the amount of our net investment income. Defaults by third parties in the payment or performance of their obligations – primarily on our investments in corporate bonds – could reduce our net investment income or create net realized investment losses.

NET INVESTMENT INCOME

This table summarizes our pretax net investment income by portfolio:

YEAR ENDED DECEMBER 31	2005		2004		2003
P&C	$	460.6	$	445.0	$	453.0
Corporate		24.5		19.6		15.4
Total Net Investment Income	$	485.1	$	464.6	$	468.4

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Our investment income yields were:

YEAR ENDED DECEMBER 31	2005		2004		2003
Pretax	4.9	%	5.1	%	5.7	%
After-Tax	3.6	%	3.7	%	4.2	%

The increase in net investment income in 2005 compared with 2004 was due to an increase in average invested assets, as a result of positive operating cash flows partially offset by lower yields on new investments, compared with yields on matured or called investments. Similarly, in 2004, rates on reinvestment on securities matured or called were lower than these investments had been earning, which resulted in lower yields compared with 2003.

Our after-tax yields decreased in 2005 compared with 2004, however, at a lesser rate than our pretax yield due to our increased investment in tax-exempt municipal bonds. Our after-tax yields decreased in 2004 compared with 2003 due to our shift to shorter-term taxable bonds and the impact of declining interest rates. In addition, we shifted our asset allocation mix to reduce the amount of marketable equity securities we hold to a target of approximately 10% of the P&C investment portfolio.

NET REALIZED INVESTMENT GAINS AND LOSSES

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

YEAR ENDED DECEMBER 31	2005			2004		2003
P&C	$	63.6		$	179.7	$	40.8
Corporate		(3.2	)		21.1		29.3
Total Pretax Net Realized Investment Gains	$	60.4		$	200.8	$	70.1

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

YEAR ENDED DECEMBER 31	2005			2004			2003
Net Gains on Fixed Maturities Transactions	$	1.3		$	38.5		$	60.9
Net Gains on Marketable Equity Securities Transactions		76.2			158.1			37.4
Total Net Gains on Securities Transactions		77.5			196.6			98.3
Impairments on Fixed Maturities		(12.7	)		(8.8	)		(31.4	)
Impairments on Marketable Equity Securities		(2.8	)		(0.2	)		(16.4	)
Total Impairments		(15.5	)		(9.0	)		(47.8	)
Other, Net		(1.6	)		13.2			19.6
Total Pretax Net Realized Investment Gains	$	60.4		$	200.8		$	70.1

NET GAINS ON SECURITIES TRANSACTIONS

Net gains on fixed maturities transactions decreased $37.2 in 2005 compared with 2004, and $22.4 in 2004 compared with 2003. The 2004 and 2003 gains resulted primarily from calls – issuers redeeming bonds in which we’ve invested before the final maturity date – as well as fixed maturity sales initiated to manage our call risk and improve the yield of the underlying portfolio. These calls are an expected part of our investment activity, particularly when interest rates are low. We experienced less call activity in 2005.

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Net gains on marketable equity securities transactions decreased $81.9 in 2005 compared with 2004, and increased $120.7 in 2004 compared with 2003. The gains in 2004 included $76.3 from sales of marketable equity securities to reduce our holdings in marketable equity securities to our target of about 10% of the total investment portfolio.

IMPAIRMENTS

We closely monitor every investment that has declined in fair value to below our amortized cost. If we determine that the decline is other-than-temporary, we write down the security to its fair value and 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 Critical Accounting Estimates on page 31.

In our impairment determination process, we consider our intent and ability to hold to maturity investments with declines in value. However, our intent to hold the investment could change due to changes in the financial condition and near-term prospects of the issuer.

Pretax investment impairments by portfolio were:

YEAR ENDED DECEMBER 31		2005		2004		2003
P&C	Fixed Maturities	$	11.7	$	8.8	$	31.4
	Marketable Equity Securities		2.8		0.2		15.5
Corporate	Fixed Maturities		1.0		—		—
	Marketable Equity Securities		—		—		0.9
Total Pretax Investment Impairments		$	15.5	$	9.0	$	47.8

The higher level of impairments in 2003 primarily resulted from credit problems affecting some of the companies in which we had invested and credit deterioration in the airline and air transportation sectors.

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

• Improve credit quality

• Reduce our exposure to companies and industries with credit problems

• Manage call risk

In 2005, the fair value of fixed maturities that we sold at a loss was $809.4. Our total net realized investment loss on these sales was $13.0. In 2004, the fair value of fixed maturities that we sold at a loss was $202.0. Our total net realized investment loss on these sales was $12.7.

In 2005, the fair value of marketable equity securities that we sold at a loss was $42.9. Our total net realized investment loss on these sales was $7.3. In 2004, the fair value of marketable equity securities that we sold at a loss was $166.5. Our total net realized investment loss on these sales was $12.1.

We sold investments for the reasons discussed above. Also, as discussed previously, we sold marketable equity securities in 2004 to reduce our holdings to our target of about 10% of the total investment portfolio.

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Investment Portfolio

These tables summarize our investment portfolio at December 31, 2005 and 2004:

DECEMBER 31, 2005	COST OR AMORTIZED COST		CARRYING VALUE
P&C
Fixed Maturities – Taxable	$	5,965.6	$	5,994.3
Fixed Maturities – Non-taxable		2,868.1		3,009.1
CORPORATE
Fixed Maturities – Taxable		365.4		358.5
Total Fixed Maturities		9,199.1		9,361.9
Marketable Equity Securities		737.7		1,123.5
Other Invested Assets		10.7		10.7
Total Investment Portfolio	$	9,947.5	$	10,496.1
DECEMBER 31, 2004	COST OR AMORTIZED COST		CARRYING VALUE
P&C
Fixed Maturities – Taxable	$	6,488.5	$	6,674.4
Fixed Maturities – Non-taxable		2,058.4		2,209.5
CORPORATE
Fixed Maturities – Taxable		411.1		410.4
Total Fixed Maturities		8,958.0		9,294.3
Marketable Equity Securities		640.3		1,101.4
Other Invested Assets		8.5		8.5
Total Investment Portfolio	$	9,606.8	$	10,404.2

As of December 31, 2005, our fixed maturities, carried at $9,361.9, included:

• Gross unrealized gains of $254.1

• Gross unrealized losses of $91.3

As of December 31, 2005, our marketable equity securities, carried at $1,123.5, included:

• Gross unrealized gains of $393.9

• Gross unrealized losses of $8.1

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

• Gross unrealized gains of $358.1

• Gross unrealized losses of $21.8

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

• Gross unrealized gains of $463.3

• Gross unrealized losses of $2.2

Investments in the banking industry accounted for 12.4% of our total gross unrealized losses at December 31, 2005 and 14.7% of our total gross unrealized losses at December 31, 2004. Investments in secured finance mortgage-backed securities accounted for 11.4% of our total gross unrealized losses at December 31, 2005 and 3.8% of our total gross unrealized losses at December 31, 2004.

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We reviewed all our investments with unrealized losses at the end of 2005. 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 had the intent and ability to hold these securities until they had recovered in value.

This table shows by maturity, the total amount of gross unrealized losses on fixed maturities and marketable equity securities at December 31, 2005:

DECEMBER 31, 2005	COST OR AMORTIZED COST		FAIR VALUE		COST IN EXCESS OF FAIR VALUE
Fixed Maturities:
One Year or Less	$	209.7	$	208.6	$	(1.1	)
Over One Year through Five Years		2,511.3		2,460.8		(50.5	)
Over Five Years through Ten Years		618.9		605.3		(13.6	)
Over Ten Years		506.7		500.9		(5.8	)
Mortgage-Backed Securities		995.9		975.6		(20.3	)
Total Fixed Maturities		4,842.5		4,751.2		(91.3	)
Total Marketable Equity Securities		132.4		124.3		(8.1	)
Total	$	4,974.9	$	4,875.5	$	(99.4	)

Unrealized losses on our fixed maturities that have been in a loss position for more than a year at December 31, 2005 were $44.5, compared with $2.6 at December 31, 2004 reflecting changes in interest rates. Unrealized losses on our marketable equity securities that were in a loss position for more than a year at December 31, 2005 were $1.2. There were no unrealized losses on our marketable equity securities that were in a loss position for more than a year at December 31, 2004. These unrealized losses were less than 1% of our total portfolio value at both December 31, 2005 and 2004.

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

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DIVERSIFICATION

Our investment portfolio is well diversified by issuer and industry type with no single issuer, except U.S. Government fixed maturities, exceeding 1% of the fair value of our consolidated investment portfolio.

These tables show our investment types and industries of our fixed maturities and marketable equity securities that exceed 3% of our portfolio at year-end 2005 and 2004:

DECEMBER 31, 2005	CARRYING VALUE		PERCENT OF TOTAL
States and Political Subdivisions	$	3,365.1	32.1	%
Banks		1,134.5	10.8
U.S. Government and Agencies		1,005.0	9.6
Electric Utilities		409.5	3.9
Diversified Financial Services		391.5	3.7
Mortgage-Backed Securities		1,238.8	11.8
Other		2,941.0	28.0
Total Fixed Maturities and Marketable Equity Securities		10,485.4	99.9
Other Invested Assets		10.7	0.1
Total Investment Portfolio	$	10,496.1	100.0	%
DECEMBER 31, 2004	CARRYING VALUE		PERCENT OF TOTAL
States and Political Subdivisions	$	2,547.7	24.5	%
Banks		1,053.1	10.1
U.S. Government and Agencies		1,160.3	11.2
Diversified Financial Services		483.3	4.6
Electric Utilities		451.7	4.3
Mortgage-Backed Securities		1,283.1	12.3
Other		3,416.5	32.9
Total Fixed Maturities and Marketable Equity Securities		10,395.7	99.9
Other Invested Assets		8.5	0.1
Total Investment Portfolio	$	10,404.2	100.0	%

INVESTMENT PORTFOLIO QUALITY

The quality ratings of our fixed maturities portfolio were:

RATING	PERCENT AT DECEMBER 31, 2005		PERCENT AT DECEMBER 31, 2004
AAA	47	%	43	%
AA	12		11
A	26		29
BBB	13		14
Subtotal	98		97
BB or Lower	1		2
Not Rated	1		1
Total	100	%	100	%

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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:

• $103.1 at year-end 2005

• $166.2 at year-end 2004

As of December 31, 2005, these securities represented 1.1% of our total fixed maturities at fair value. As of December 31, 2004, these securities represented 1.8% of our total fixed maturities at fair value. The related amortized cost of the below investment grade fixed maturities was $99.5 at year-end 2005 and $155.4 at year-end 2004.

As of December 31, 2005, our below investment grade securities included gross unrealized investment gains of $4.5 and gross unrealized losses of $0.9. As of December 31, 2004, our below investment grade securities had both a gross and net unrealized investment gain of $10.8.

Our investment portfolio also included $129.3 of non-publicly traded fixed maturities and marketable equity securities – representing 1.2% of our total portfolio at year-end 2005, and $85.3 of not-rated fixed maturities – securities not rated by a national rating service – representing 0.8% of our total portfolio at year-end 2005. At year-end 2004, our portfolio included $122.8 of non-publicly traded fixed maturities and marketable equity securities – representing 1.2% of our total portfolio, and $89.1 of not-rated fixed maturities – representing 0.9% of our total portfolio.

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MORTGAGE-BACKED SECURITIES

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

This table summarizes our holdings of mortgage-backed securities at year-end 2005:

DECEMBER 31, 2005	AMORTIZED COST		CARRYING VALUE		PERCENT
RESIDENTIAL
Planned and Targeted Amortization Class and Sequential Pay CMOs	$	632.2	$	620.0	50.0	%
Subordinates		56.6		56.6	4.6
Accrual Coupon (Z-Tranche) CMOs		8.9		9.5	0.8
Residential Mortgage-Backed Pass-Throughs (Non-CMOs)		5.8		5.7	0.5
Total Residential		703.5		691.8	55.9
SECURITIZED COMMERCIAL REAL ESTATE
CMBS Seniors		327.2		326.5	26.3
CMBS Subordinates		92.0		94.5	7.6
Government /Agency-Backed		60.6		61.5	5.0
Total Securitized Commercial Real Estate		479.8		482.5	38.9
Asset-Backed Seniors		37.9		37.5	3.0
Asset-Backed Subordinates		27.4		27.0	2.2
Total	$	1,248.6	$	1,238.8	100.0	%

Here are the quality ratings of our mortgage-backed securities portfolio at year-end 2005:

RATING	PERCENT AT DECEMBER 31, 2005
Government/Agency Backed	36	%
AAA	51
AA	5
A	3
BBB	5
BB or Lower	—
Not Rated	—
Total	100	%

Capital Resources and Liquidity

OUR LIQUIDITY NEEDS

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

P&C insurance liabilities are somewhat unpredictable and largely short in duration. The payments we make to policyholders depend upon losses they suffer from accidents or other unpredictable events that are covered by insurance. Although we estimate how much cash we’ll need and when we’ll need it based on prior experience and the mix of business we write, we cannot predict all future events, particularly catastrophes. So 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.

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

SOURCES OF OUR FUNDS

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

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

Our cash flow from continuing operations for the past three years was:

YEAR ENDED DECEMBER 31	2005			2004			2003
Cash and Cash Equivalents – Beginning of Year	$	251.9		$	319.0		$	369.1
Net Cash Provided by (Used in):
Operating Activities		1,021.1			982.1			568.1
Investing Activities		(344.9	)		369.7			(515.1	)
Financing Activities		(371.8	)		(1,418.9	)		(103.1	)
Cash and Cash Equivalents – End of Year	$	556.3		$	251.9		$	319.0

The increase in cash provided by operating activities from continuing operations was primarily due to cash received from insurance premiums of $5.82 billion in 2005, $5.58 billion in 2004, and $5.08 billion in 2003, and lower insurance claims paid of $3.55 billion in 2005, $3.37 billion in 2004 and $3.37 billion in 2003, reflecting our improved underwriting results. Dividends and interest received on our investment portfolio of $532.8 in 2005, $512.5 in 2004 and $464.5 in 2003, also contributed to the increase in operating cash flows.

The increase in cash provided by investing activities from continuing operations in 2004 compared with cash used in financing activities in 2003 was due to proceeds received from the sale of our discontinued L&I operations.

Our cash flows from discontinued operations prior to the completion of the sale of L&I on August 2, 2004 and for the full year 2003 were:

	2004			2003
Net Cash Provided by (Used in):
Operating Activities	$	413.0		$	901.2
Investing Activities		59.2			(1,025.8	)
Financing Activities		(396.0	)		97.1
Net Cash Provided by (Used in) Discontinued Operations	$	76.2		$	(27.5	)

HOW WE USE OUR FUNDS

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

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

In 2005, we used $269.0 to repurchase stock and debt as described on page 82. On August 2, 2004, we completed the sale of our L&I operations, resulting in $1,499.0 of total sales proceeds. We used $1,360.2 of these proceeds to repurchase stock and debt as described on page 82.

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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	2005			2004
Total Debt	$	1,307.0		$	1,332.9
Equity Excluding Accumulated Other Comprehensive Income (AOCI)		3,767.8			3,405.6
AOCI		356.8			515.3
Total Shareholders’ Equity		4,124.6			3,920.9
Total Capitalization	$	5,431.6		$	5,253.8
Ratio of Debt to Equity		31.7	%		34.0	%
Ratio of Debt to Capitalization		24.1	%		25.4	%

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

Stock Repurchases – In 2005, we repurchased 4,508,578 shares or 3.6% of our outstanding common stock, at a total cost of $239.2 under the stock buyback programs described below.

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

We executed a Rule 10b5-1 trading plan to purchase up to an additional $100.0 of our outstanding common stock. This plan allowed us to repurchase our shares during periods when we would normally not be active in the market because of our own internal trading windows. Under this program, we repurchased a total of 1,756,278 shares at an average price of $53.13 per share for a total cost of $93.3.

In 2004, we repurchased 13,247,863 shares, or approximately 9.5% of our then outstanding common stock, under an accelerated stock buyback program. We purchased the shares from a dealer at a price of $46.80 per share, for a total cost of $625.0, including transaction costs. The effect of the repurchase program was to return excess capital resulting from the L&I sale to our shareholders, and it immediately reduced the number of our common shares outstanding. The dealer obtained the shares that we repurchased by borrowing them in the open market, and then purchased shares in the market over a nine-month period to repay the borrowed shares. The program included $200.0 that was subject to a collar, a contract that set a minimum and maximum price for us for the shares repurchased under the collar. We completed the

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program in April 2005, paying a price adjustment of $16.1 to the dealer based on the volume weighted average price of our common stock during the period of the repurchases. We reported this price adjustment as a reduction to Shareholders’ Equity on our Consolidated Balance Sheet as of December 31, 2005.

On December 1, 2005, our board of directors increased our share repurchase authorization to 10 million shares, including shares that remain available for repurchase under previously approved programs.

On February 6, 2006, we announced the execution of a Rule 10b5-1 trading plan to purchase up to $250.0 of our outstanding common stock. If the 10b5-1 program is fully executed, approximately 5 million shares will remain available for repurchase under board-approved repurchase programs.

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

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

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

We used the proceeds as follows:

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

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

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

• Pay a fee to have these funds available

• Maintain a specified minimum level of shareholders’ equity

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

The bank credit facility does not require us to maintain any deposits as compensating balances. At the end of 2005 and throughout 2005, 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 at the end of 2005 were:

	Payment by
	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Long-Term Debt, Including Interest	$	2,565.4	$	84.1	$	550.2	$	416.6	$	1,514.5
Operating Leases		244.4		45.6		83.8		53.2		61.8
Pension and Other Retirement Obligations		210.1		20.3		42.3		44.9		102.6
Purchase Obligations		324.2		142.5		95.2		37.8		48.7
Subtotal		3,344.1		292.5		771.5		552.5		1,727.6
Loss and LAE Reserves (1)		5,358.2		1,922.3		1,569.4		646.5		1,220.0
Total	$	8,702.3	$	2,214.8	$	2,340.9	$	1,199.0	$	2,947.6

(1) 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 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 & POOR’S
Safeco Corporation:
Senior Debt	bbb+	A-	Baa1	BBB+
Financial Strength:
P&C Subsidiaries	A	AA-	A1	A+

In 2005, A.M. Best, Standard & Poor’s and Moody’s affirmed our ratings and revised their outlooks to positive from stable. Also in 2005, Fitch affirmed our ratings and maintained its stable outlook.

We believe our financial position is sound. As we have continued to execute plans to improve P&C operating results, our financial position has strengthened. Our debt service coverage has improved over the last two years, and we expect to continue at our current level in 2006.

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

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• Marketing

• Investment operations

• Minimum policyholders’ surplus requirements

• Capital sufficiency to meet projected growth

• Access to capital

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

• Increase the number of customers who terminate their policies

• Decrease new sales

• Increase our borrowing costs

• Limit our access to capital

• Restrict our ability to compete

REGULATORY CONSIDERATIONS

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

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

Dividend Payments From Our Subsidiaries – Our insurance subsidiaries pay dividends to Safeco Corporation. We then use that money to pay dividends to our shareholders as well as to make principal and interest payments on our debt. Individual states limit the amount of dividends that our subsidiaries domiciled in those states can pay Safeco Corporation. Exceeding such limits would require prior regulatory approval. In the aggregate in 2006, our insurance subsidiaries can pay up to $769.2 in dividends without obtaining prior regulatory approval. These amounts are according to the limits states had in place at the end of 2005.

Risk-Based Capital – The National Association of Insurance Commissioners (NAIC) and state regulators use risk-based capital (RBC) formulae to identify companies that are undercapitalized and that may merit further regulatory attention or action. Our insurance subsidiaries have more than sufficient capital to meet RBC requirements.

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Income Taxes

At December 31, 2005, we had $646.0 of gross deferred income tax assets. Gross deferred income tax assets are composed of temporary differences created as a result of amounts deductible for taxes in future periods. Such temporary differences relate primarily to unrealized gains on investments and differences in the recognition of loss and loss adjustment expense reserves, deferred policy acquisition costs, goodwill and unearned premiums. 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.

Pension Plans

Our pension obligations resulted from the defined benefit (pension) plan we sponsor covering substantially all employees. More information can be found in Note 10 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, 2005, we used a discount rate assumption of 5.5% 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, 2005, we used a discount rate assumption of 5.5% and an expected long-term rate of return on plan assets assumption of 8.0%. 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 $1.4 in pension cost in 2005. A decrease of 100 basis points in the expected long-term rate of return on plan assets assumption would result in an increase of $1.4 in pension cost in 2005.

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, 2005 and 2004. 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:

	2005								2004
	Fair Value		Increase (Decrease) in Asset or Liability						Fair Value		Increase (Decrease) in Asset or Liability
DECEMBER 31			Change in Interest Rates			Change in Equity Prices					Change in Interest Rates			Change in Equity Prices
FINANCIAL ASSETS
Fixed Maturities	$	9,361.9	$	(440.0	)	$	—		$	9,294.3	$	(385.7	)	$	—
Marketable Equity Securities		1,123.5		—			(112.4	)		1,101.4		—			(110.1	)
Cash and Cash Equivalents		556.3		—			—			251.9		—			—
Interest Rate Swaps		2.4		(8.9	)		—			6.2		(10.0	)		—
FINANCIAL LIABILITIES
6.875% Notes Due 2007	$	204.7	$	(2.9	)	$	—		$	214.2	$	(4.9	)	$	—
4.200% Notes Due 2008		196.7		(3.8	)		—			202.1		(5.7	)		—
4.875% Notes Due 2010		297.8		(10.8	)		—			307.2		(13.4	)		—
7.250% Notes Due 2012		227.5		(11.4	)		—			262.5		(15.2	)		—
8.072% Debentures Due 2037		430.4		(51.2	)		—			462.4		(52.6	)		—
Interest Rate Swaps		5.0		(7.9	)		—			—		—			—

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.

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

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

Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements and schedules listed in the Index to Financial Statements, Schedules and Exhibits on page 92 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 Principal Accounting 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, the Chief Executive Officer and Principal Accounting 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, including 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 Principal Accounting 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” on page 93 and “Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting” on page 94.

Changes in Internal Control over Financial Reporting

As required by Rule 13a-15(d) of the Exchange Act, our management, including our Chief Executive Officer and Principal Accounting Officer, has evaluated our internal control over financial reporting to determine whether any 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

None.

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Part III

Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

This information will be contained in the definitive proxy statement to be filed 120 days after December 31, 2005 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 120 days after December 31, 2005 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, 2005 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, 2005 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 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, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans, (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders (1) (2)	4,012,736	$	33.97	3,874,998
Equity compensation plans not approved by security holders	—		—	855,005
Total	4,012,736	$	33.97	4,730,003

(1) This amount includes 784,994 shares that may be issued upon settlement of RSRs and PSRs granted to employees, which may be settled in stock or cash. The remaining 3,227,742 of this amount are shares that may be issued on exercise of options granted to our employees and directors.

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(2) 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 for 2,500 shares annually to each of our non-management directors. In 2006, our non-executive chairman will receive a grant of 7,500 RSRs in light of his enhanced responsibilities this year.

Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

This information will be contained in the definitive proxy statement to be filed 120 days after December 31, 2005 and is incorporated herein by reference.

Item 14: PRINCIPAL ACCOUNTING FEES AND SERVICES

This information will be contained in the definitive proxy statement to be filed 120 days after December 31, 2005 and is incorporated herein by reference.

Part IV

Item 15: EXHIBITS AND FINANCIAL STATEMENT 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 on page 92 are filed as a part of this report.

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 21, 2006.

Safeco Corporation

Registrant

/s/ PAULA ROSPUT REYNOLDS

Paula Rosput Reynolds, President and
Chief Executive Officer

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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 21, 2006.

Name	Title
/s/ PAULA ROSPUT REYNOLDS Paula Rosput Reynolds	President and Chief Executive Officer
/s/ CHARLES F. HORNE, JR. Charles F. Horne, Jr.	Senior Vice President and Controller, Principal Accounting Officer
/s/ JOSEPH W. BROWN Joseph W. Brown	Chairman
/s/ ROBERT S. CLINE Robert S. Cline	Lead Director
/s/ PETER L. S. CURRIE Peter L. S. Currie	Director
/s/ MARIA S. EITEL Maria S. Eitel	Director
/s/ JOSHUA GREEN III Joshua Green III	Director
/s/ G. THOMPSON HUTTON G. Thompson Hutton	Director
/s/ KERRY KILLINGER Kerry Killinger	Director
/s/ GARY F. LOCKE Gary F. Locke	Director
/s/ WILLIAM G. REED, JR. William G. Reed, Jr.	Director
/s/ JUDITH M. RUNSTAD Judith M. Runstad	Director

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I ndex to Financial Statements, Schedules and Exhibits

Audited Consolidated Financial Statements
Management’s Report on Internal Control Over Financial Reporting	93
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting	94
Report of Independent Registered Public Accounting Firm	95
Consolidated Statements of Income	96
Consolidated Balance Sheets	97
Consolidated Statements of Cash Flows	98
Consolidated Statements of Cash Flows – Reconciliation of Net Income to Net Cash Provided by Operating Activities	99
Consolidated Statements of Shareholders’ Equity	100
Consolidated Statements of Comprehensive Income (Loss)	100
Notes to Consolidated Financial Statements	101
Financial Statement Schedules
I        Summary of Investments - Other Than Investments in Related Parties	141
II      Condensed Financial Information of the Registrant (Parent Company)	142
Condensed Statements of Income	142
Condensed Balance Sheets	143
Condensed Statements of Cash Flows	144
Condensed Statements of Cash Flows – Reconciliation of Net Income to Net Cash Provided by Operating Activities	145
III     Supplemental Insurance Information	146
VI    Supplemental Information Concerning Consolidated Property & Casualty Insurance Operations	149
Exhibits
Index to Exhibits	150

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

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Management’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, 2005. 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, 2005 in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Ernst & Young LLP, Safeco’s independent registered public accountants, have issued an audit report on our assessment of the company’s internal control over financial reporting. Their report appears on page 94.

/s/ PAULA ROSPUT REYNOLDS

Paula Rosput Reynolds

President and Chief Executive Officer

/s/ CHARLES F. HORNE, JR.

Charles F. Horne, Jr.

Senior Vice President and Controller, Principal Accounting Officer

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Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

Board of Directors and Shareholders of Safeco Corporation:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Safeco Corporation and subsidiaries (Safeco) maintained effective internal control over financial reporting as of December 31, 2005, 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 about the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of 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, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, 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 authorization 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, management’s assessment that Safeco maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Safeco maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, 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, 2005 and 2004, and the related consolidated statements of income, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005 of Safeco and our report dated February 17, 2006 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Seattle, Washington

February 17, 2006

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Report of Independent Registered Public Accounting Firm

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, 2005 and 2004, and the related consolidated statements of income, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. 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, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, 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.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, 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 17, 2006 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Seattle, Washington

February 17, 2006

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FINANCIAL STATEMENTS

Consolidated Statements of Income

(In Millions, Except Per Share Amounts)

YEAR ENDED DECEMBER 31	2005		2004			2003
REVENUES
Net Earned Premiums	$	5,805.4	$	5,529.1		$	4,901.8
Net Investment Income		485.1		464.6			468.4
Net Realized Investment Gains		60.4		200.8			70.1
Other		0.2		0.9			9.8
Total Revenues		6,351.1		6,195.4			5,450.1
EXPENSES
Losses and Loss Adjustment Expenses		3,635.0		3,495.2			3,452.2
Amortization of Deferred Policy Acquisition Costs		973.1		924.6			846.2
Other Underwriting and Operating Expenses		662.0		648.1			635.3
Interest Expense		88.6		108.2			127.1
Loss on Debt Repurchases		4.0		121.0			—
Restructuring Charges		2.7		5.4			9.2
Total Expenses		5,365.4		5,302.5			5,070.0
Income from Continuing Operations before Income Taxes		985.7		892.9			380.1
Provision for Income Taxes		294.6		272.7			94.6
Income from Continuing Operations		691.1		620.2			285.5
Results from Discontinued Operations (Net of Taxes of ($52.3) in 2004 and $7.4 in 2003)		—		(57.8	)		53.7
Net Income	$	691.1	$	562.4		$	339.2
INCOME PER SHARE OF COMMON STOCK – DILUTED
Income from Continuing Operations	$	5.43	$	4.59		$	2.06
Results from Discontinued Operations, Net of Taxes		—		(0.43	)		0.38
Net Income Per Share of Common Stock – Diluted	$	5.43	$	4.16		$	2.44
INCOME PER SHARE OF COMMON STOCK – BASIC
Income from Continuing Operations	$	5.49	$	4.62		$	2.06
Results from Discontinued Operations, Net of Taxes		—		(0.43	)		0.39
Net Income Per Share of Common Stock – Basic	$	5.49	$	4.19		$	2.45
DIVIDENDS DECLARED PER SHARE	$	0.97	$	0.81		$	0.74
AVERAGE NUMBER OF SHARES OUTSTANDING:
Diluted		127.2		135.2			138.9
Basic		125.9		134.1			138.4

See Notes to Consolidated Financial Statements.

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Consolidated Balance Sheets

(In Millions)

DECEMBER 31	2005		2004
ASSETS
Investments:
Available-for-Sale Securities:
Fixed Maturities, at Fair Value (Cost or amortized cost: $9,199.1; $8,958.0)	$	9,361.9	$	9,294.3
Marketable Equity Securities, at Fair Value (Cost: $737.7; $640.3)		1,123.5		1,101.4
Other Invested Assets		10.7		8.5
Total Investments		10,496.1		10,404.2
Cash and Cash Equivalents		556.3		251.9
Accrued Investment Income		131.4		129.7
Premiums and Service Fees Receivable		1,084.7		1,147.6
Deferred Policy Acquisition Costs		376.4		382.2
Reinsurance Recoverables		447.0		355.4
Property and Equipment for Company Use (At cost less accumulated depreciation: $349.4; $312.9)		358.2		380.9
Current Income Taxes Recoverable		51.7		54.7
Net Deferred Income Tax Assets		280.4		292.6
Other Assets		130.2		256.1
Securities Lending Collateral		974.6		931.9
Total Assets	$	14,887.0	$	14,587.2
LIABILITIES AND SHAREHOLDERS’ EQUITY
Loss and Loss Adjustment Expense Reserves	$	5,358.2	$	5,209.3
Unearned Premiums		2,139.8		2,151.0
Debt		1,307.0		1,332.9
Other Liabilities		982.8		1,041.2
Securities Lending Payable		974.6		931.9
Total Liabilities		10,762.4		10,666.3
Commitments and Contingencies		—		—
Preferred Stock, No Par Value
Shares Authorized: 10
Shares Issued and Outstanding: None		—		—
Common Stock, No Par Value
Shares Authorized: 300
Shares Reserved for Stock Awards: 7.5; 9.1
Shares Issued and Outstanding: 123.6; 127.0		434.8		641.8
Retained Earnings		3,333.0		2,763.8
Accumulated Other Comprehensive Income, Net of Taxes		356.8		515.3
Total Shareholders’ Equity		4,124.6		3,920.9
Total Liabilities and Shareholders’ Equity	$	14,887.0	$	14,587.2

See Notes to Consolidated Financial Statements.

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Consolidated Statements of Cash Flows

(In Millions)

YEAR ENDED DECEMBER 31	2005			2004 Revised- See Note 1			2003 Revised- See Note 1
OPERATING ACTIVITIES
Insurance Premiums Received	$	5,824.6		$	5,582.6		$	5,077.4
Dividends and Interest Received		532.8			512.5			464.5
Losses and Loss Adjustment Expenses Paid		(3,547.8	)		(3,373.1	)		(3,368.7	)
Underwriting, Acquisition, Insurance and Other Operating Costs Paid		(1,497.9	)		(1,488.7	)		(1,461.3	)
Interest Paid		(86.5	)		(123.5	)		(127.8	)
Income Taxes Paid		(204.1	)		(127.7	)		(16.0	)
Discontinued Operations, Net		—			413.0			901.2
Net Cash Provided by Operating Activities		1,021.1			1,395.1			1,469.3
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale		(2,228.1	)		(2,997.1	)		(2,453.9	)
Marketable Equity Securities Available-for-Sale		(311.7	)		(472.6	)		(176.5	)
Maturities and Calls of Fixed Maturities Available-for-Sale		951.8			949.6			1,031.2
Sales of:
Fixed Maturities Available-for-Sale		984.1			721.9			892.3
Marketable Equity Securities Available-for-Sale		287.7			674.9			202.3
Proceeds from Sale of Subsidiaries		—			1,499.0			—
Other, Net		(28.7	)		(6.0	)		(10.5	)
Discontinued Operations, Net		—			59.2			(1,025.8	)
Net Cash Provided by (Used in) Investing Activities		(344.9	)		428.9			(1,540.9	)
FINANCING ACTIVITIES
Repurchase of Notes		(29.8	)		(735.2	)		(507.2	)
Dividends Paid to Shareholders		(118.9	)		(104.8	)		(102.4	)
Accelerated Stock Repurchase/Buyback		(162.0	)		(625.0	)		—
Common Stock Reacquired		(93.9	)		(38.0	)		—
Stock Options Exercised		32.8			84.1			10.6
Proceeds from Notes Issued		—			—			495.9
Discontinued Operations, Net		—			(396.0	)		97.1
Net Cash Used in Financing Activities		(371.8	)		(1,814.9	)		(6.0	)
Net (Increase) Decrease in Cash and Cash Equivalents, Discontinued Operations		—			(76.2	)		27.5
Net Increase (Decrease) in Cash and Cash Equivalents		304.4			(67.1	)		(50.1	)
Cash and Cash Equivalents at Beginning of Year		251.9			319.0			369.1
Cash and Cash Equivalents at End of Year	$	556.3		$	251.9		$	319.0

See Notes to Consolidated Financial Statements.

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Consolidated Statements of Cash Flows –

Reconciliation of Net Income to Net Cash Provided by Operating Activities

(In Millions)

YEAR ENDED DECEMBER 31	2005			2004 Revised— See Note 1			2003 Revised— See Note 1
Net Income	$	691.1		$	562.4		$	339.2
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net Realized Investment Gains		(60.4	)		(200.8	)		(70.1	)
Amortization of Fixed Maturities		48.3			49.4			13.7
Amortization and Depreciation		51.2			63.1			61.7
Deferred Income Tax Provision		90.4			44.2			78.3
Results from Discontinued Operations, Net of Taxes		—			57.8			(53.7	)
Other, Net		30.4			136.8			8.5
Changes in:
Accrued Investment Income		(1.7	)		(8.8	)		(12.0	)
Premiums and Service Fees Receivable		62.9			(109.6	)		(4.1	)
Current Income Taxes Recoverable		(2.1	)		(42.0	)		3.4
Deferred Policy Acquisition Costs		5.8			(25.4	)		(23.9	)
Loss and Loss Adjustment Expense Reserves		148.9			164.7			46.1
Unearned Premiums		(11.2	)		149.9			203.4
Other Assets and Liabilities		(32.5	)		140.4			(22.4	)
Discontinued Operations, Net		—			413.0			901.2
Total Adjustments		330.0			832.7			1,130.1
Net Cash Provided by Operating Activities	$	1,021.1		$	1,395.1		$	1,469.3

There were no significant non-cash financing or investing activities for the years ended December 31, 2005, 2004 or 2003.

See Notes to Consolidated Financial Statements.

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Consolidated Statements of Shareholders’ Equity

(In Millions, Except Share Amounts)

YEAR ENDED DECEMBER 31	2005			2004			2003
COMMON STOCK
Balance at Beginning of Year	$	641.8		$	1,197.3		$	1,178.1
Shares Issued for Options and Rights (including Taxes of $5.1; $7.8; $1.3)		37.9			91.9			11.9
Stock Compensation		11.0			15.6			7.3
Accelerated Stock Repurchase/Buyback		(162.0	)		(625.0	)		—
Shares Reacquired		(93.9	)		(38.0	)		—
Balance at End of Year		434.8			641.8			1,197.3
RETAINED EARNINGS
Balance at Beginning of Year		2,763.8			2,308.7			2,072.2
Net Income		691.1			562.4			339.2
Dividends Declared		(121.9	)		(107.3	)		(102.4	)
Common Stock Reacquired and Other		—			—			(0.3	)
Balance at End of Year		3,333.0			2,763.8			2,308.7
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES
Balance at Beginning of Year		515.3			1,517.3			1,181.3
Other Comprehensive Income (Loss)		(158.5	)		(1,002.0	)		336.0
Balance at End of Year		356.8			515.3			1,517.3
SHAREHOLDERS’ EQUITY	$	4,124.6		$	3,920.9		$	5,023.3
YEAR ENDED DECEMBER 31	2005			2004			2003
COMMON SHARES OUTSTANDING
Number of Shares Outstanding at Beginning of Year		126,958,493			138,604,840			138,195,596
Shares Issued for Stock Options and Rights		1,145,340			2,486,516			409,244
Accelerated Stock Repurchase/Buyback		(2,752,300	)		(13,247,863	)		—
Shares Reacquired		(1,766,940	)		(885,000	)		—
Number of Shares Outstanding at End of Year		123,584,593			126,958,493			138,604,840
Consolidated Statements of Comprehensive Income (Loss) (In Millions)
YEAR ENDED DECEMBER 31	2005			2004			2003
Net Income	$	691.1		$	562.4		$	339.2
Other Comprehensive Income (Loss), Net of Taxes:
Change in Unrealized Gains and Losses on Available-for-Sale Securities		(121.3	)		39.8			150.6
Reclassification Adjustment for Net Realized Investment Gains Included in Income from Continuing Operations		(43.5	)		(126.4	)		(45.9	)
Foreign Currency Translation Adjustments		6.3			2.5			6.9
Change in Minimum Pension Liability		—			5.7			3.1
Change in Discontinued Operations		—			(923.6	)		221.3
Other Comprehensive Income (Loss)		(158.5	)		(1,002.0	)		336.0
Comprehensive Income (Loss)	$	532.6		$	(439.6	)	$	675.2

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 State corporation operating across the United States. We sell property and casualty insurance to drivers, homeowners and small- and mid-sized businesses through independent agents and brokers. We generated virtually all of our revenues from continuing operations 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.” We refer to the discontinued life insurance, group stop-loss medical insurance, trust, asset management and brokerage operations as “Discontinued Operations” or “L&I.”

On March 15, 2004, we entered into definitive agreements to sell substantially all of our Life & Investments operations. On April 8, 2004, we entered into an agreement to sell the remaining part of our L&I operations. On August 2, 2004, we completed the sale of our life insurance, group stop-loss medical insurance and asset management operations to an investor group led by White Mountains Insurance Group, Ltd. and Berkshire Hathaway, Inc. We completed the sale of Talbot Financial Corporation (our brokerage operation) on July 1, 2004, and the sale of Safeco Trust Company on April 19, 2004. Therefore, we have presented L&I as a Discontinued Operation in these Consolidated Financial Statements in accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” See Note 16.

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 net income. In 2005, we have separately disclosed the operating, investing and financing positions of the cash flows attributable to our Discontinued Operations, which in prior years were excluded from our Consolidated Statements of Cash Flows.

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

We show the computation of net income per share below, based upon weighted-average and dilutive common shares outstanding:

YEAR ENDED DECEMBER 31	2005		2004		2003
(In Millions, Except Per Share Amounts)
Net Income	$	691.1	$	562.4	$	339.2
Average Number of Common Shares Outstanding		125.9		134.1		138.4
Basic Net Income Per Share	$	5.49	$	4.19	$	2.45
Net Income	$	691.1	$	562.4	$	339.2
Average Number of Common Shares Outstanding		125.9		134.1		138.4
Additional Common Shares Assumed Issued Under Treasury Stock Method		1.3		1.1		0.5
Average Number of Common Shares Outstanding - Diluted		127.2		135.2		138.9
Diluted Net Income Per Share	$	5.43	$	4.16	$	2.44

STOCK–BASED COMPENSATION EXPENSE

Under the Safeco Long–Term Incentive Plan of 1997 (the Plan), as amended, we grant incentive stock options, non–qualified stock options, RSRs, performance stock rights and stock appreciation rights to officers, key employees and members of our board of directors. We grant all such stock–based compensation awards at the fair market value of our stock on the date of the grant. In 2004, we replaced our annual stock option program to key employees with a restricted stock rights program.

Effective January 1, 2003, we adopted the fair value method for accounting for stock-based compensation awards as defined in SFAS 123, using the prospective basis transition method. Under this method, we have recognized expense using graded vesting for awards granted, modified or settled after January 1, 2003. Stock-based compensation expense was $25.7 ($17.1 after tax) for 2005, $25.1 ($17.6 after tax) for 2004 and $12.5 ($9.0 after tax) for 2003.

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We show on a pro forma basis, the effect on our net income and net income per share as if we had applied the fair value method to all outstanding and unvested awards in each year:

YEAR ENDED DECEMBER 31	2005			2004			2003
(In Millions, Except Per Share Amounts)
Net Income, as Reported	$	691.1		$	562.4		$	339.2
Add Back: After-Tax Stock-based Compensation Expense Included in Reported Net Income		17.1			17.6			9.0
Deduct: Pro Forma Stock-based Compensation Expense *		(18.3	)		(22.0	)		(16.8	)
Pro Forma Net Income	$	689.9		$	558.0		$	331.4
Net Income Per Share
Basic - as Reported	$	5.49		$	4.19		$	2.45
Diluted - as Reported		5.43			4.16			2.44
Basic - Pro Forma		5.48			4.16			2.39
Diluted - Pro Forma		5.42			4.13			2.39

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

We used the Black-Scholes method (which models the value over time of financial instruments) to estimate the fair value at grant date of the options in 2003 based on the factors shown below. RSRs are valued based upon the fair market value of our common stock on the date of the grant. No options were granted in 2004 or 2005.

YEAR ENDED DECEMBER 31	2005 RSRs		2004 RSRs		2003
Dividend Yield		—		—		2.5	%
Expected Volatility in Stock Price		—		—		35.0	%
Risk-Free Interest Rate		—		—		3.0	%
Expected Life of Stock Awards		—		—		5 years
Weighted-Average Fair Value at Grant Date	$	50.25	$	43.90	$	10.55

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. The fixed maturities we invest in include bonds, mortgage-backed securities and redeemable preferred stock. The marketable equity securities we invest in include common stocks 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) in our Consolidated Balance Sheets.

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

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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 are 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 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 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 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

• 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.

For the majority of our investments, we use available public market pricing information to determine the fair value. When such information is not available, as in the case for securities that are not publicly traded, we use other valuation techniques. These 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, 2005, included $101.0 of fixed maturities and $28.3 of marketable equity securities that were not publicly traded. Our investment portfolio at December 31, 2004, included $91.9 of fixed maturities and $30.9 of marketable equity securities that were not publicly traded.

We lend certain securities from our fixed maturities 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 value of the loaned securities is monitored on a daily basis, and additional collateral is added or refunded as the market value of the loaned securities fluctuates, maintaining a collateral value of 102% at all times. We maintain full ownership rights to the securities that we have loaned and accordingly the loaned securities are classified as Investments in our Consolidated Balance Sheets. We had a market value of $849.8 of fixed maturities and $102.6 of marketable equity securities loaned at December 31, 2005. We had a market value of $798.0 of fixed maturities and $111.6 of marketable equity securities loaned at December 31, 2004.

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We report the Securities Lending Collateral and the corresponding Securities Lending Payable on our Consolidated Balance Sheets as assets and liabilities.

CASH AND CASH EQUIVALENTS

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

DERIVATIVE FINANCIAL INSTRUMENTS

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 2005, 2004 and 2003, we recognized no amounts in earnings due to hedge ineffectiveness.

INCOME TAXES

We file a consolidated U.S. income tax return including all of our qualifying 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 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.

We consider deferred tax assets to be recoverable if it is more likely than not that the related tax losses can be offset by our future taxable income. We include future operating income, the reversal of existing temporary differences and tax planning strategies available to us in this assessment. We would record a valuation allowance if the deferred tax assets exceeded the amount expected to be recovered in future years. We have not recorded a valuation allowance as of December 31, 2005 or 2004 since we expect that we will fully realize our deferred tax assets.

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We report both current tax assets and liabilities and deferred tax assets and liabilities on a net basis on our Consolidated Balance Sheets.

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 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 Deferred Policy Acquisition Costs in our Consolidated Statements of Income. We perform this assessment of recoverability for total personal lines, total commercial lines and surety – this is consistent with our approach to issuing and servicing the underlying policies. We made no adjustments in 2005, 2004 or 2003.

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 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, using the straight-line method. Depreciation expense was $48.7 for 2005, $53.2 for 2004 and $59.2 for 2003.

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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 present 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, 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. We report changes to these reserves in Losses and Loss Adjustment Expenses in our Consolidated Statements of Income.

SALE OF LONDON OPERATIONS

On July 25, 2005, we completed the sale of our London operations, eliminating any further liabilities associated with those operations. The London operations were sold for a nominal amount, resulting in an after-tax loss of $1.4. Safeco Corporation retained a liability on our Consolidated Balance Sheets in the amount of $6.9, which was subsequently paid in February 2006, to cover future cash calls. We retained no other liabilities or commitments.

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COMMON STOCK

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

In 2005, we repurchased 4,508,578 shares, or 3.6%, of our outstanding common stock at a total cost of $239.2 under stock buyback programs as described below. In 2004, we also repurchased 13,247,863 shares, or 9.5%, of our outstanding common stock at a total cost of $625.0 and an additional price adjustment of $16.1 in 2005.

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

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

In 2004, using proceeds from the sale of L&I, we repurchased 13,247,863 shares, or 9.5% of our then outstanding common stock, under an accelerated stock buyback program. We purchased the shares from a dealer at a price of $46.80 per share, for a total cost of $625.0, including transaction costs. The effect of the repurchase program was to return excess capital resulting from the L&I sale to our shareholders, and it immediately reduced the number of our common shares outstanding. The dealer obtained the shares that we repurchased by borrowing them in the open market, and then purchased shares in the market over a nine-month period to repay the borrowed shares. The program included $200.0 that was subject to a collar, a contract that sets a minimum and maximum price for us for the shares repurchased under the collar. We completed the program in April 2005, paying a price adjustment of $16.1 to the dealer based on the volume weighted average price of our common stock during the period of the repurchases. We reported this price adjustment as a reduction to Shareholders’ Equity on our Consolidated Balance Sheet as of December 31, 2005.

VARIABLE INTEREST ENTITIES

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

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

• Equity investors 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

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FIN 46(R) 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 Debentures are the sole assets of the Trust, and payments under the Debentures are the sole revenues of the Trust. We anticipate that, until the liquidation, if any, of the Trust, each Debenture will be held for the benefit of the holders of the Capital Securities. Further, the holders of the Capital Securities represent the variable interests in the Trust, with none holding a significant interest, which means there is no primary beneficiary of the Trust.

NEW ACCOUNTING STANDARDS

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

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

SFAS 123(R) requires all share-based compensation awards granted, modified or settled after December 15, 1994 to be accounted for using the fair value method of accounting. The guidance provides two transition methods, the modified prospective and the modified retrospective applications. We will use the modified prospective method, which recognizes compensation cost for the outstanding, nonvested awards based on the grant-date fair value of those awards as calculated under SFAS 123 upon adoption of SFAS 123(R). We have elected to recognize compensation cost for prospective awards under the straight-line method. We also will classify our RSRs as liabilities. On April 14, 2005, the Securities and Exchange Commission provided a phased-in implementation process, requiring registrants to adopt SFAS 123(R) no later than the commencement of the first fiscal year beginning after June 15, 2005. SFAS 123(R) was effective on January 1, 2006 and did not have a material impact on our financial condition or results of operations.

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FASB Staff Position (FSP) SFAS 115-1/124-1, replacing Emerging Issues Task Force (EITF) 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” – On November 3, 2005, the FASB released FSP SFAS 115-1 and SFAS 124-1 replacing EITF 03-1. The final language on FSP SFAS 115-1 / SFAS 124-1 requires investors to recognize an impairment loss when the impairment is deemed other-than-temporary, even if a decision to sell has not been made. The FSP applies to reporting periods beginning after December 15, 2005. The adoption of the statement did not have a material impact on our financial condition or results of operations.

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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, 2005	COST OR AMORTIZED COST		GROSS UNREALIZED GAINS		GROSS UNREALIZED LOSSES			NET UNREALIZED GAINS (LOSSES)			FAIR VALUE
Fixed Maturities:
U.S. Government and Agencies	$	972.5	$	35.1	$	(8.7	)	$	26.4		$	998.9
States and Political Subdivisions		3,228.0		148.9		(11.8	)		137.1			3,365.1
Foreign Governments		66.4		8.2		(0.8	)		7.4			73.8
Corporate Securities:
Banks		873.7		10.2		(12.3	)		(2.1	)		871.6
Electric Utilities		376.9		1.9		(5.3	)		(3.4	)		373.5
Diversified Financial Services		343.8		4.5		(4.4	)		0.1			343.9
Other		2,089.2		34.8		(27.7	)		7.1			2,096.3
Total Corporate Securities		3,683.6		51.4		(49.7	)		1.7			3,685.3
Mortgage-Backed Securities		1,248.6		10.5		(20.3	)		(9.8	)		1,238.8
Total Fixed Maturities		9,199.1		254.1		(91.3	)		162.8			9,361.9
Marketable Equity Securities		737.7		393.9		(8.1	)		385.8			1,123.5
Total	$	9,936.8	$	648.0	$	(99.4	)	$	548.6		$	10,485.4

DECEMBER 31, 2004	COST OR AMORTIZED COST		GROSS UNREALIZED GAINS		GROSS UNREALIZED LOSSES			NET UNREALIZED GAINS		FAIR VALUE
Fixed Maturities:
U.S. Government and Agencies	$	1,105.0	$	45.0	$	(3.3	)	$	41.7	$	1,146.7
States and Political Subdivisions		2,394.3		155.6		(2.2	)		153.4		2,547.7
Foreign Governments		79.9		8.1		(0.5	)		7.6		87.5
Corporate Securities:
Banks		851.0		25.3		(2.9	)		22.4		873.4
Electric Utilities		419.1		7.1		(0.9	)		6.2		425.3
Diversified Financial Services		417.4		10.2		(1.5	)		8.7		426.1
Other		2,431.5		79.0		(6.0	)		73.0		2,504.5
Total Corporate Securities		4,119.0		121.6		(11.3	)		110.3		4,229.3
Mortgage-Backed Securities		1,259.8		27.8		(4.5	)		23.3		1,283.1
Total Fixed Maturities		8,958.0		358.1		(21.8	)		336.3		9,294.3
Marketable Equity Securities		640.3		463.3		(2.2	)		461.1		1,101.4
Total	$	9,598.3	$	821.4	$	(24.0	)	$	797.4	$	10,395.7

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The following table illustrates 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, 2005:

DESCRIPTION OF SECURITIES	LESS THAN 12 MONTHS					12 MONTHS OR MORE					TOTAL
	FAIR VALUE		UNREALIZED LOSSES			FAIR VALUE		UNREALIZED LOSSES			FAIR VALUE		UNREALIZED LOSSES
Fixed Maturities:
U.S. Government and Agencies	$	273.7	$	(3.8	)	$	205.9	$	(4.9	)	$	479.6	$	(8.7	)
States and Political Subdivisions		706.1		(7.8	)		160.7		(4.0	)		866.8		(11.8	)
Foreign Governments		3.1		(0.1	)		27.9		(0.7	)		31.0		(0.8	)
Corporate Securities		1,424.8		(25.2	)		973.4		(24.5	)		2,398.2		(49.7	)
Mortgage-Backed Securities		581.6		(9.9	)		394.0		(10.4	)		975.6		(20.3	)
Total Fixed Maturities		2,989.3		(46.8	)		1,761.9		(44.5	)		4,751.2		(91.3	)
Marketable Equity Securities		106.3		(6.9	)		18.0		(1.2	)		124.3		(8.1	)
Total	$	3,095.6	$	(53.7	)	$	1,779.9	$	(45.7	)	$	4,875.5	$	(99.4	)

We reviewed all our investments with unrealized losses at the end of 2005. Our evaluation concluded that none of these declines in fair value were other-than-temporary after considering:

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

• The period of time during which there has been a significant decline in value

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

FIXED MATURITIES BY MATURITY DATE

The following table summarizes the cost or amortized cost and fair value of our fixed maturities at December 31, 2005, 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	$	567.6	$	570.6
Over One Year through Five Years		3,432.3		3,416.7
Over Five Years through Ten Years		1,167.0		1,186.5
Over Ten Years		2,783.6		2,949.3
Mortgage-Backed Securities		1,248.6		1,238.8
Total Fixed Maturities	$	9,199.1	$	9,361.9

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SECURITIES ON DEPOSIT

We had securities on deposit with state regulatory authorities with an amortized cost of $434.4 at December 31, 2005 and $434.0 at December 31, 2004, and a market value of $457.2 at December 31, 2005 and $456.6 at December 31, 2004.

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NET INVESTMENT INCOME

The following table summarizes our net investment income:

YEAR ENDED DECEMBER 31	2005			2004			2003
Interest on Fixed Maturities	$	447.9		$	419.8		$	413.7
Dividends:
Marketable Equity Securities		30.1			28.2			33.3
Redeemable Preferred Stock		3.2			1.6			4.4
Other		10.6			21.0			22.3
Total Investment Income		491.8			470.6			473.7
Investment Expenses		(6.7	)		(6.0	)		(5.3	)
Net Investment Income	$	485.1		$	464.6		$	468.4

The carrying value of our investments in fixed maturities that have not produced income for the last 12 months was $3.2 at December 31, 2005 and $0.7 at December 31, 2004.

NET REALIZED INVESTMENT GAINS

The following table summarizes our net realized investment gains:

YEAR ENDED DECEMBER 31	2005			2004		2003
Net Realized Investment Gains (Losses) from:
Fixed Maturities	$	(11.4	)	$	29.7	$	29.5
Marketable Equity Securities		73.4			157.9		21.0
Other		(1.6	)		13.2		19.6
Net Realized Investment Gains	$	60.4		$	200.8	$	70.1

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

YEAR ENDED DECEMBER 31, 2005	Fixed Maturities Available-For-Sale			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 (Losses) 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

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YEAR ENDED DECEMBER 31, 2004	Fixed Maturities Available-For-Sale			Marketable Equity Securities			Other			Total
Proceeds from Sales	$	721.9		$	674.9		$	2.0		$	1,398.8
Gross Realized Investment Gains	$	30.2		$	170.2		$	2.0		$	202.4
Gross Realized Investment Losses		(12.7	)		(12.1	)		—			(24.8	)
Net Realized Investment Gains from Sales		17.5			158.1			2.0			177.6
Impairments		(8.8	)		(0.2	)		—			(9.0	)
Other, Including Gains on Calls and Redemptions		21.0			—			11.2			32.2
Net Realized Investment Gains	$	29.7		$	157.9		$	13.2		$	200.8
YEAR ENDED DECEMBER 31, 2003	Fixed Maturities Available-For-Sale			Marketable Equity Securities			Other			Total
Proceeds from Sales	$	892.3		$	202.3		$	4.2		$	1,098.8
Gross Realized Investment Gains	$	45.4		$	60.0		$	9.0		$	114.4
Gross Realized Investment Losses		(6.4	)		(22.6	)		(5.6	)		(34.6	)
Net Realized Investment Gains from Sales		39.0			37.4			3.4			79.8
Impairments		(31.4	)		(16.4	)		—			(47.8	)
Other, Including Gains on Calls and Redemptions		21.9			—			16.2			38.1
Net Realized Investment Gains	$	29.5		$	21.0		$	19.6		$	70.1

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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 use are interest rate swaps as a means of hedging exposure to interest rate risk on existing liabilities.

Interest rate risk is the risk of incurring economic losses due to changes in the level of interest rates. We manage interest rate risk through active portfolio management and selective use of interest rate swaps as hedges to change the characteristics of certain 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.

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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, 2005, we had $404.1 of notional amounts outstanding relating to such hedges compared with $430.0 at December 31, 2004. The fair value, which is equal to the carrying value, of these swaps, totaled ($2.6) at December 31, 2005 and $6.2 at December 31, 2004. 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.

In conjunction with the August 2005 repurchase of $25.9 of our 7.25% senior notes, we terminated our corresponding portion of the interest rate swap totaling $25.9 of notional amount. We reported a pretax gain of $0.3 on the termination of this fair value hedge in Net Realized Investment Gains in our Consolidated Statements of Income.

In conjunction with the buyback of $145.0 principal amount of our 7.25% senior notes on September 1, 2004, we terminated our corresponding portion of the interest rate swap totaling $145.0 notional amount. We reported a pretax gain of $2.0 on the termination of this fair value hedge 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 2005, 2004 and 2003, no amounts were recognized in earnings due to hedge ineffectiveness.

OTHER DERIVATIVES

Our investments in mortgage-backed securities principally include collateralized mortgage obligations and pass-through and commercial loan-backed mortgage obligations, which are technically defined as derivative instruments. However, they are exempt from derivative disclosure and accounting requirements under SFAS 133.

Note 4: Fair Value of Financial Instruments

The aggregate fair value amounts disclosed here do not represent the underlying value of Safeco and care should be exercised in drawing conclusions about our business or financial condition based on the fair value information disclosed below.

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.

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We determine fair value amounts for financial instruments using available third-party market information. When such information is not available, as is in the case of securities that are not publicly traded, we determine the fair value amounts using appropriate valuation methodologies, including discounted cash flows and market prices of comparable instruments. Significant judgment is required in developing certain of these estimates of fair value, and the estimates may not represent amounts at December 31, 2005 that would be realized in a current market exchange.

FIXED MATURITIES

We estimate fair values for fixed maturities, other than non-publicly traded fixed maturities, based on prices obtained from independent pricing services or quoted market prices. Our investment portfolio included non-publicly traded fixed maturities of $101.0 at December 31, 2005 and $91.9 at December 31, 2004.

MARKETABLE EQUITY SECURITIES

We estimate fair values for marketable equity securities, other than non-publicly traded marketable equity securities, based on prices obtained from independent pricing services or quoted market prices. Our investment portfolio included non-publicly traded marketable equity securities of $28.3 at December 31, 2005 and $30.9 at December 31, 2004.

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 quotes from broker/dealers 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 and are based on quoted market prices. See Note 3 for further discussion.

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

	2005				2004
DECEMBER 31	Carrying Amount		Fair Value		Carrying Amount		Fair Value
FINANCIAL ASSETS
Fixed Maturities	$	9,361.9	$	9,361.9	$	9,294.3	$	9,294.3
Marketable Equity Securities		1,123.5		1,123.5		1,101.4		1,101.4
Cash and Cash Equivalents		556.3		556.3		251.9		251.9
FINANCIAL LIABILITIES
6.875% Notes Due 2007		200.0		204.7		200.0		214.2
4.200% Notes Due 2008		200.0		196.7		200.0		202.1
4.875% Notes Due 2010		300.0		297.8		300.0		307.2
7.250% Notes Due 2012		204.1		227.5		230.0		262.5
8.072% Debentures Due 2037	$	402.9	$	430.4	$	402.9	$	462.4

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Note 5: Loss and LAE Reserves

The following table analyzes the changes in our loss and LAE reserves for 2005, 2004 and 2003. We report changes in estimated reserves in the Consolidated Statements of Income in the year we make the change:

YEAR ENDED DECEMBER 31	2005			2004			2003
Loss and LAE Reserves at Beginning of Year	$	5,209.3		$	5,044.6		$	4,998.5
Less Reinsurance Recoverables on Unpaid Losses		339.1			344.4			411.6
Net Balance at Beginning of Year		4,870.2			4,700.2			4,586.9
Incurred Loss and LAE for Claims Occurring During:
Current Year		3,680.9			3,534.2			3,202.3
Prior Years		(45.9	)		(39.0	)		249.9
Total Incurred Loss and LAE		3,635.0			3,495.2			3,452.2
Loss and LAE Payments for Claims Occurring During:
Current Year		1,912.1			1,884.5			1,757.5
Prior Years		1,616.5			1,440.7			1,581.4
Total Loss and LAE Payments		3,528.6			3,325.2			3,338.9
Sale of London Operations		(51.0	)		—			—
Net Balance at End of Year		4,925.6			4,870.2			4,700.2
Plus Reinsurance Recoverables on Unpaid Losses		432.6			339.1			344.4
Loss and LAE Reserves at End of Year	$	5,358.2		$	5,209.3		$	5,044.6

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 for prior accident years in our liability lines

• $26.3 reduction in construction defects reserves, reflecting claims frequency improvement in our runoff 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

2004

In 2004, we reduced our estimates for prior years’ loss and LAE reserves by $39.0. This total decrease included:

• $42.9 reduction in personal property reserves, reflecting lower claims frequency than our original estimates

• $32.6 reduction in commercial auto reserves, primarily due to a favorable ruling related to Ohio uninsured motorists coverage

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• $14.8 reduction in personal auto reserves, reflecting improved claims frequency in both our preferred and non-standard books of business

• $20.7 increase in commercial multi-peril and other general liability reserves. This included an $8.6 reduction in World Trade Center loss estimates, a $29.6 increase in asbestos reserves and a $14.3 increase in environmental reserves

• $30.6 increase in a number of lines due to emerging claim trends and related loss data, including unallocated LAE

2003

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

• $205.0 increase as a result of higher medical cost trends for workers compensation than previously expected

• $44.9 increase in a number of lines due to emerging claim trends and related loss data

Of the $205.0 increase, $180.0 was related to loss and ALAE reserves. This increase included $130.0 in P&C Other, $48.0 in SBI Regular and $2.0 in SBI Special Accounts Facility. The largest amount of reserve development related to California, particularly in the large-commercial business we began exiting in 2001. We also increased unallocated LAE reserves by $25.0. This increase included $14.9 in P&C Other, $9.6 in SBI Regular and $0.5 in SBI Special Accounts Facility. This increase reflected our estimate of the ongoing expense of servicing workers compensation claims. As claims remain open for longer periods, our costs to handle those claims rise.

Note 6: Reinsurance

Our reinsurance recoverables are composed of the following amounts:

DECEMBER 31	2005			2004
Reinsurance Recoverables on:
Unpaid Loss and LAE Reserves	$	432.6		$	339.1
Paid Losses and LAE		26.9			31.7
Allowance for Uncollectible Reinsurance		(12.5	)		(15.4	)
Total	$	447.0		$	355.4

The increase in our reinsurance recoverable is a result of estimated recoverables primarily related to workers compensation and Hurricane Katrina losses.

Of our total reinsurance recoverables balance at December 31, 2005, 23.5% was with mandatory reinsurance pools. Of the remaining amounts, 81.9% were due from reinsurers rated A– or higher by A.M. Best, including 59.8% with the following four reinsurers: Employers Reinsurance Corporation, American Reinsurance Corporation, General Reinsurance Corporation, and Swiss Reinsurance America 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	2005			2004			2003
Direct	$	5,771.5		$	5,497.4		$	4,953.1
Ceded		(131.3	)		(134.6	)		(144.1	)
Assumed		165.2			166.3			92.8
Net Earned Premiums	$	5,805.4		$	5,529.1		$	4,901.8
Assumed to Net		2.8	%		3.0	%		1.9	%

Reinsurance premiums ceded on a written basis are approximately equal to the ceded earned premiums disclosed above. The greater amount of assumed reinsurance in 2004 and 2005 was due to the growth in business in the state of Texas, which is written through another company and then assumed by us.

We show unearned premiums before the effects of reinsurance. We include the reinsurance amounts related to the unearned premium liability with Other Assets on our Consolidated Balance Sheets. These amounts totaled $34.1 at December 31, 2005 and $36.8 at December 31, 2004.

The effects of reinsurance on our incurred losses and loss adjustment expenses were as follows:

YEAR ENDED DECEMBER 31	2005			2004			2003
Direct	$	3,576.4		$	3,392.7		$	3,399.0
Ceded		(134.7	)		(41.1	)		(13.9	)
Assumed		193.3			143.6			67.1
Net Loss and LAE Incurred	$	3,635.0		$	3,495.2		$	3,452.2

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Note 7: Income Taxes

Our provision for income taxes differs from the expected amount computed by applying the U.S. federal income tax rate of 35% to Income from Continuing Operations before Income Taxes, as follows:

	2005					2004					2003
YEAR ENDED DECEMBER 31	Amount			% of Pretax Income		Amount			% of Pretax Income		Amount			% of Pretax Income
Income from Continuing Operations before Income Taxes	$	985.7		100.0	%	$	892.9		100.0	%	$	380.1		100.0	%
Computed “Expected” Tax Expense	$	345.0		35.0	%	$	312.5		35.0	%	$	133.0		35.0	%
Tax-Exempt Municipal Bond Income		(39.4	)	(4.0	)		(36.0	)	(4.0	)		(37.1	)	(9.8	)
Dividends Received Deduction		(8.5	)	(0.9	)		(8.0	)	(0.9	)		(9.2	)	(2.4	)
Other		(2.5	)	(0.2	)		4.2		0.4			7.9		2.1
Provision for Income Taxes	$	294.6		29.9	%	$	272.7		30.5	%	$	94.6		24.9	%
Current Provision for Income Taxes	$	204.2				$	228.5				$	16.3
Deferred Provision for Income Taxes		90.4					44.2					78.3
Provision for Income Taxes	$	294.6				$	272.7				$	94.6

The major components of our Net Deferred Income Tax Assets at December 31, 2005 and 2004 were as follows:

DECEMBER 31	2005		2004
Deferred Tax Assets
Discounting of Loss and LAE Reserves for Tax Purposes	$	205.8	$	211.3
Unearned Premium Liability		173.9		168.6
Goodwill		139.9		165.4
Postretirement Benefits		36.3		40.1
Investment Impairments		10.5		8.0
Alternative Minimum Tax Carryforwards		—		51.8
Other		79.6		101.1
Total Deferred Income Tax Assets		646.0		746.3
Deferred Tax Liabilities
Unrealized Gains on Investment Securities		191.8		272.4
Deferred Policy Acquisition Costs		131.7		133.8
Other		42.1		47.5
Total Deferred Income Tax Liabilities		365.6		453.7
Net Deferred Income Tax Assets	$	280.4	$	292.6

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Note 8: Debt

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

DECEMBER 31	2005		2004
6.875% Notes Due 2007	$	200.0	$	200.0
4.200% Notes Due 2008		200.0		200.0
4.875% Notes Due 2010		300.0		300.0
7.250% Notes Due 2012		204.1		230.0
8.072% Debentures Due 2037		402.9		402.9
Total Debt	$	1,307.0	$	1,332.9

At December 31, 2005, 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
2006	$	—
2007		200.0
2008		200.0
2009		—
2010		300.0
2011 and Thereafter		607.0
Total Debt	$	1,307.0

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.

Following the sale of L&I in the third quarter of 2004, we used $562.7 of the proceeds to repurchase $473.4 in principal amount of our 8.072% debentures and $170.9 to repurchase $145.0 in principal amount of our 7.25% senior notes, and at the same time to terminate $145.0 notional amount of our corresponding interest rate swap. Including transaction costs, we reported a loss on debt repurchases of $121.0 pretax ($78.7 after tax) in our Consolidated Statements of Income in 2004.

In January 2003, we issued $200.0 of senior notes with a coupon of 4.200% that mature in 2008 and $300.0 of senior notes with a coupon of 4.875% that mature in 2010. The notes are unsecured and rank equally

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with all other unsecured senior indebtedness of Safeco Corporation. The proceeds from the notes were used to repay $300.0 principal amount of 7.875% medium-term notes due in March 2003 and $200.0 principal amount of 7.875% notes that were due in 2005 but had a call date of April 1, 2003.

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 rate 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. As discussed above, in September 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 August 2005, we repurchased $25.9 in principal amount of those notes and terminated $25.9 notional amount of the related interest rate swap.

In July 1997, we issued $200.0 of non-callable senior notes with a coupon of 6.875% that mature in 2007. At the same time, we entered into two interest rate swaps, each at $100.0 notional amount, to effectively convert this fixed-rate senior note obligation into variable rate at 457.25 and 458.60 basis points over the 90-day LIBOR rate. We designated the interest rate swaps as fair value hedges pursuant to SFAS 133, and they are reported at fair value on our Consolidated Balance Sheets.

We maintain a bank credit facility with $300.0 available, which expires March 2010. The terms of the bank credit facility require us to pay a fee to have these funds available, maintain a specified minimum level of shareholders’ equity and keep our debt-to-capitalization ratio below a specified maximum. This facility does not require us to maintain any deposits as compensating balances. At the end of 2005 and throughout 2005, we had no borrowings under the bank credit facility, and we were in compliance with all its covenants.

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

We have the right, at any time, to defer payments of interest on the debentures for up to five years. Consequently, the distributions on the Capital Securities and the common securities would be deferred though such distributions would continue to accrue with interest. In no case may we extend the deferral of payments and distributions beyond the stated maturity dates of the securities. We cannot pay dividends on our common stock during such deferments. As discussed above, we repurchased $473.4 principal amount of debentures in August 2004.

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Note 9: Comprehensive Income

Comprehensive income is defined as all changes in Shareholders’ Equity except those arising from transactions with shareholders. Comprehensive income includes net income and other comprehensive income, which for us consists of changes in unrealized gains or losses on investment securities, foreign currency translation and minimum pension liability. In 2003 and 2004, comprehensive income included similar items for Discontinued Operations prior to the sale of L&I along with deferred policy acquisition costs valuation allowance and changes in the fair value of derivative financial instruments and hedging activities.

Our components of other comprehensive income or loss were:

	Net Unrealized Gains (Losses) on Available- for-Sale Securities			Net Unrealized Gains on Derivative Instruments			Foreign Currency Translation Adjustment			Deferred Policy Acquisition Costs Valuation Allowance			Minimum Pension Liability			Deferred Income Taxes			Accumulated Other Comprehensive Income (Loss)
Balances at January 1, 2003	$	1,882.2		$	20.9		$	(24.1	)	$	(54.4	)	$	(13.5	)	$	(629.8	)	$	1,181.3
Gross Unrealized Gains (Losses) on Investment Securities		231.8			—			—			—			—			(81.2	)		150.6
Reclassification Adjustment for Net Realized Investment Gains Included in Income from Continuing Operations		(70.1	)		—			—			—			—			24.2			(45.9	)
Foreign Currency Translation		—			—			10.5			—			—			(3.6	)		6.9
Minimum Pension Liability		—			—			—			—			4.7			(1.6	)		3.1
Discontinued Operations		376.5			(2.2	)		—			(33.6	)		—			(119.4	)		221.3
Balances at December 31, 2003		2,420.4			18.7			(13.6	)		(88.0	)		(8.8	)		(811.4	)		1,517.3
Gross Unrealized Gains (Losses) on Investment Securities		68.2			—			—			—			—			(28.4	)		39.8
Reclassification Adjustment for Net Realized Investment Gains Included in Income from Continuing Operations		(200.8	)		—			—			—			—			74.4			(126.4	)
Foreign Currency Translation		—			—			3.9			—			—			(1.4	)		2.5
Minimum Pension Liability		—			—			—			—			8.8			(3.1	)		5.7
Discontinued Operations		(1,490.4	)		(18.7	)		—			88.0			—			497.5			(923.6	)
Balances at December 31, 2004		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 Income from Continuing Operations		(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

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Note 10: 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.

401(k) PROFIT SHARING RETIREMENT PLAN

The Safeco 401(k)/Profit Sharing Retirement Plan is a defined contribution plan. In a defined contribution plan, the benefits a participant will receive from the plan results 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 when we meet certain criteria defined in the plan. In 2004 and 2005, we made additional profit-sharing contributions based on our earnings in those years.

The following table summarizes the costs we charged to Income from Continuing Operations:

YEAR ENDED DECEMBER 31	2005		2004		2003
Minimum Contributions	$	14.7	$	13.4	$	12.5
401(k) Matching Contributions		11.7		11.0		10.7
Profit Sharing Contributions		19.3		15.8		—
Total	$	45.7	$	40.2	$	23.2

CASH BALANCE PLAN

The Safeco Cash Balance Plan (CBP) is a noncontributory defined benefit plan that provides benefits for each year of service by an employee after 1988. The CBP specifies the benefit amount each participant will receive based on eligible compensation plus a stipulated rate of return on the benefit balance. We make contributions to the CBP that are deductible for federal income tax purposes and that at least meet the minimum funding requirements set by the Employee Retirement Income Security Act (ERISA).

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OBLIGATIONS AND FUNDED STATUS OF CBP

We use December 31 as the measurement date for calculating the obligations related to the CBP program. The following table summarizes our obligations and assets related to the CBP:

DECEMBER 31	2005			2004
CHANGE IN BENEFIT OBLIGATION
Benefit Obligation at Beginning of Year	$	146.3		$	137.9
Service Cost		12.0			11.4
Interest Cost		7.8			8.6
Actuarial Loss		2.9			10.7
Benefits Paid		(12.6	)		(22.3	)
Benefit Obligation at End of Year		156.4			146.3
CHANGE IN PLAN ASSETS
Fair Value of Plan Assets at Beginning of Year		150.3			112.0
Actual Return on Plan Assets		8.0			7.8
Employer Contributions		21.2			52.8
Benefits Paid		(12.6	)		(22.3	)
Fair Value of Plan Assets at End of Year		166.9			150.3
Funded Status of Plan		10.5			4.0
Unrecognized Net Actuarial Loss		23.2			17.7
Unrecognized Prior Service Cost		0.5			0.7
Net Asset Recognized	$	34.2		$	22.4

We made the following assumptions to calculate our December 31 obligation for the CBP:

DECEMBER 31	2005		2004
Discount Rate	5.50	%	5.50	%
Rate of Compensation Increases	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 CBP and other relevant factors.

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 2006, as well as the distribution of our CBP assets at year-end:

	Target Allocation		Percentage of Plan Assets At December 31
ASSET ALLOCATION	2006		2005		2004
Marketable Equity Securities	60.0	%	59.2	%	60.2	%
Fixed Maturities	40.0	%	38.9	%	37.8	%
Cash and Cash Equivalents	Up to 5.0	%	1.9	%	2.0	%

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The following table summarizes net periodic pension costs charged to Income from Continuing Operations for the CBP:

YEAR ENDED DECEMBER 31	2005			2004			2003
Service Cost	$	12.0		$	10.8		$	8.5
Interest Cost		7.9			8.2			7.4
Expected Return on Plan Assets		(11.5	)		(8.6	)		(6.7	)
Settlement Loss		—			2.6			—
Amortization of Prior Service Cost and Unrecognized Net Actuarial Loss		1.0			0.3			1.3
Total Net Periodic Pension Costs	$	9.4		$	13.3		$	10.5

We calculated net periodic pension costs for the CBP using the following assumptions:

DECEMBER 31	2005		2004		2003
Pension Benefits
Discount Rate	5.50	%	6.25	%	6.75	%
Expected Long-Term Rate of Return on Plan Assets	8.00	%	8.00	%	8.00	%
Rate of Compensation Increases	5.00	%	5.00	%	5.00	%

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.

We estimate that benefit payments from the CBP over the next 10 years will be as follows:

Year of Payment	Estimated Benefit Payment
2006	$	16.0
2007		16.4
2008		16.9
2009		17.2
2010		18.3
2011-2015	$	85.3

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OTHER POSTRETIREMENT BENEFITS

We provide certain healthcare and life insurance benefits, which we refer to as Other Postretirement Benefits (OPRB), for certain retired employees, their beneficiaries and eligible dependents.

We use December 31 as the measurement date for calculating the obligations related to the OPRB program. The following table summarizes our obligations and assets related to the OPRB:

DECEMBER 31	2005			2004
CHANGE IN BENEFIT OBLIGATION
Benefit Obligation at Beginning of Year	$	70.7		$	75.1
Service Cost		0.2			0.6
Interest Cost		3.7			4.5
Actuarial Gain		(3.6	)		(3.8	)
Amendments		(6.5	)		—
Participant Contributions		5.4			4.5
Benefits Paid		(11.3	)		(10.2	)
Benefit Obligation at End of Year		58.6			70.7
CHANGE IN PLAN ASSETS
Fair Value of Plan Assets at Beginning of Year		0.7			1.2
Employer Contributions		5.2			5.2
Participant Contributions		5.4			4.5
Benefits Paid		(11.3	)		(10.2	)
Fair Value of Plan Assets at End of Year		—			0.7
Underfunded Status of Plan		(58.6	)		(70.0	)
Unrecognized Net Actuarial Gain		(5.1	)		(1.5	)
Unrecognized Prior Service Cost		(39.9	)		(42.7	)
Net Liability Recognized	$	(103.6	)	$	(114.2	)

We amended the retiree healthcare plan in 2005 to coordinate prescription drug coverage with Medicare Part D. This amendment decreased our OPRB obligation by $6.5 at December 31, 2005.

We calculated our obligation for the OPRB using a discount rate of 5.50% at December 31, 2005, and 5.50% at December 31, 2004. 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, 2005, using a healthcare cost trend rate of 12% for 2006 and assumed it gradually decreases to 5% in 2013 and remains at that level thereafter. A 1% 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 charged (credited) to Income from Continuing Operations for this OPRB program:

YEAR ENDED DECEMBER 31	2005			2004			2003
Service Cost	$	0.2		$	0.6		$	4.1
Interest Cost		3.7			4.0			7.5
Expected Return on Plan Assets		—			(0.1	)		(0.1	)
Curtailment Gain		—			—			(12.8	)
Amortization of Prior Service Cost and Unrecognized Net Actuarial Gain		(9.3	)		(8.9	)		(0.9	)
Total Net Periodic Postretirement Benefit Credits	$	(5.4	)	$	(4.4	)	$	(2.2	)

We calculated the charges (credits) to Income from Continuing Operations for the OPRB program using a discount rate of 5.50% for 2005, 6.25% for 2004 and 6.75% for 2003.

During 2003, we curtailed and amended our OPRB program. As a result of these changes, retirees and employees who met certain age and service requirements at December 31, 2003 will continue to receive life insurance benefits and may receive subsidized healthcare benefits at retirement. Employees who did not meet the age and service criteria referenced above life and anyone hired after December 31, 2003, will not be eligible for retiree life or healthcare benefits at retirement.

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
2006	$	4.3
2007		4.4
2008		4.6
2009		4.7
2010		4.7
2011-2015	$	17.3

DEFERRED COMPENSATION PLANS

We sponsor a voluntary deferred compensation plan for certain executives. Eligible plan participants may elect to defer payment of a portion of their compensation, as defined by the plan. For participants who exceed IRS compensation limits, we make credits to their accounts based on the formula, used in the 401(k)/Profit Sharing Retirement Plan and the Cash Balance Plan.

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 upon the investment choices selected by the participant. Payments are generally made upon or after termination of employment.

We also sponsor a voluntary deferred compensation plan for directors. The crediting methodology and investment choices available to plan participants are similar to those offered under the executive deferred compensation plan.

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Expense for the deferred compensation plans amounted to $2.6 in 2005, $3.1 in 2004 and $0.5 in 2003. These expenses reflect Safeco’s credits to participants’ accounts and investment gains (losses) based on the investment choices selected by each participant.

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 (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 and we make grants to key employees and non-employee directors. Options generally vest on a straight-line basis over four years.

At December 31, 2005, we had 3,227,742 stock options outstanding (vested and unvested), 784,994 RSRs and PSRs awarded but not yet vested, and 3,486,731 shares of common stock reserved for future awards. As of December 31, 2005, the total pretax compensation cost related to non-vested awards not yet recognized in our Consolidated Financial Statements was $16.5, which is expected to be expensed over the remaining vesting period.

Changes in stock options for the three years ended December 31, 2005, were as follows:

	Options Outstanding
	Shares		Weighted- Average Price Per Share
Balance January 1, 2003	5,631,307		$	32.20
Granted	2,422,470			38.11
Exercised	(353,143	)		27.16
Canceled	(349,225	)		39.17
Balance December 31, 2003	7,351,409			34.24
Exercised	(2,426,623	)		33.58
Canceled	(385,299	)		40.78
Balance December 31, 2004	4,539,487			34.04
Exercised	(1,246,362	)		34.13
Canceled	(65,383	)		35.27
Balance December 31, 2005	3,227,742		$	33.97

Information about stock options outstanding and exercisable at December 31, 2005, was as follows:

Range of Exercise Prices	Options Outstanding				Options Exercisable
	Shares	Weighted - Average Price Per Share		Remaining Contractual Life (Years)	Shares	Weighted- Average Price Per Share
$20.00 – $26.00	367,800	$	23.48	4.94	67,800	$	20.10
$26.01 – $31.75	253,797		28.02	5.51	249,797		28.03
$31.76 – $36.00	1,236,795		33.30	6.34	956,589		33.30
$36.01 – $51.38	1,369,350		38.50	6.96	705,478		38.82
Total	3,227,742	$	33.97	6.38	1,979,664	$	34.15

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RSRs provide for the holder to receive a stated number of shares if the holder remains employed for a stated number of years. 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.

Vested RSRs and earned PSRs are issued in stock or, in some instances, paid in cash based on the fair market value of our stock on the issue/payment date. We charge RSRs compensation expense to operations over the vesting period and PSRs compensation expense when it is probable the performance goals will be achieved.

Changes in RSRs and PSRs for the three years ended December 31, 2005, were as follows:

Share Rights	RSRs		PSRs
Balance January 1, 2003	164,634		133,803
Awarded	96,344		51,395
Vested	(56,068	)	(26,062	)
Canceled	(9,097	)	(21,849	)
Balance December 31, 2003	195,813		137,287
Awarded	488,078		—
Vested	(65,423	)	(25,060	)
Canceled	(22,595	)	(20,463	)
Balance December 31, 2004	595,873		91,764
Awarded	467,454		12,812
Vested	(282,004	)	(60,824	)
Canceled	(32,931	)	(7,150	)
Balance December 31, 2005	748,392		36,602

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. Distributors meeting the eligibility requirements can purchase our common stock at a discount from the closing market price on the purchase day.

Common stock issued under the Agency Plan is held in a custodial account and restricted from sale, transfer or assignment during the two-year restriction period. As of December 31, 2005, a total of 97,769 cumulative shares had been purchased, all of which were held in the custodial account.

Note 12: Commitments and Contingencies

LEASES

We lease office space, commercial real estate and certain equipment under leases that expire at various dates through 2018. We account for these leases as operating leases. We do not have capitalized leases.

Our minimum rental commitments for the next five years and thereafter, including cost escalation clauses, for leases in effect at December 31, 2005, are as follows:

Year Payable	Minimum Rentals
2006	$	45.6
2007		43.6
2008		40.2
2009		33.8
2010		19.4
2011 and Thereafter		61.8
Total	$	244.4

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The amount of rent expense, net of sublease rental income, we charged to Income from Continuing Operations was $57.2 for 2005, $56.7 for 2004 and $54.6 for 2003.

INSURANCE ASSESSMENTS

Under state insolvency and guaranty laws, insurers licensed to do business in the state can be assessed or required to contribute to state guaranty funds to cover policyholder losses resulting from insurer insolvencies. We are also 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. We had liabilities of $14.7 at December 31, 2005 and $12.9 at December 31, 2004, for estimated guaranty fund assessments.

LITIGATION

Because of the nature of our business, our insurance and other subsidiaries are subject to legal actions filed or threatened in the ordinary course of business operations, generally as liability insurers defending third-party claims brought against insureds, or as insurers defending policy coverage claims brought against them. We do not believe that such litigation will have a material adverse effect on our financial condition, operating results or liquidity.

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Note 13: Restructuring Charges

2004 RESTRUCTURING

Following the sale of L&I, we identified expense reductions enabling us to operate more efficiently.

Charges have been recognized and accrued as a restructuring charge and allocated to our reportable segments. Other costs that do not meet the criteria for accrual are being expensed as restructuring charges when we incur them.

Costs accrued in 2004 and 2005 and total estimated costs we expect to incur associated with the restructuring were as follows:

			Costs Incurred To Date
	Total Expected Costs		2005		2004
Employee Termination Costs	$	0.8	$	0.4	$	0.4
Lease Termination and Other Costs		9.7		2.3		3.6
Total	$	10.5	$	2.7	$	4.0

These costs were allocated to reportable segments as follows:

			Costs Incurred To Date
	Total Expected Costs		2005		2004
Safeco Personal Insurance (SPI)
Auto	$	5.1	$	1.3	$	1.9
Property		1.7		0.4		0.7
Specialty		0.2		0.1		0.1
Total SPI		7.0		1.8		2.7
Safeco Business Insurance (SBI)
SBI Regular		2.3		0.6		0.9
SBI Special Accounts Facility		0.8		0.2		0.3
Total SBI		3.1		0.8		1.2
Surety		0.4		0.1		0.1
Total	$	10.5	$	2.7	$	4.0

Activity related to the accrued restructuring charges for 2005 was as follows:

	Balance at December 31, 2004		Costs Accrued		Amounts Paid		Balance at December 31, 2005
Employee Termination Costs	$	0.1	$	0.4	$	0.5	$	—
Lease Terminations and Other Costs		3.4		2.3		3.2		2.5
Total	$	3.5	$	2.7	$	3.7	$	2.5

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2003 RESTRUCTURING

We identified expense reductions across the company to enable us to better compete in property and casualty markets. In September 2003, we announced we would eliminate approximately 500 positions. By March 31, 2004, all such positions had been eliminated.

Costs accrued in 2004 and 2003 and total costs we incurred associated with this restructuring were as follows:

	Total Costs		2004		2003
Employee Termination Costs	$	9.6	$	1.4	$	8.2
Lease Termination and Other Costs		1.0		—		1.0
Total	$	10.6	$	1.4	$	9.2

These costs were allocated to reportable segments as follows:

	Total Costs		2004		2003
Safeco Personal Insurance (SPI)
Auto	$	4.5	$	0.7	$	3.8
Property		1.8		0.2		1.6
Specialty		0.1		—		0.1
Total SPI		6.4		0.9		5.5
Safeco Business Insurance (SBI)
SBI Regular		2.2		0.3		1.9
SBI Special Accounts Facility		0.7		0.1		0.6
Total SBI		2.9		0.4		2.5
Surety		0.4		0.1		0.3
Total P&C		9.7		1.4		8.3
Corporate		0.9		—		0.9
Total	$	10.6	$	1.4	$	9.2

Activity related to the restructuring charges for 2004 was as follows:

	Balance at December 31, 2003		Costs Accrued		Amounts Paid		Balance at December 31, 2004
Employee Termination Costs	$	0.2	$	1.4	$	1.6	$	—
Lease Terminations and Other Costs		0.7		—		0.7		—
Total	$	0.9	$	1.4	$	2.3	$	—

Note 14: 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. Generally, our insurance subsidiaries may pay dividends out of earned surplus without approval with 30 days prior written notice,

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within certain limits. 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, 2005, Safeco Corporation is able to receive up to $769.2 in dividends from our insurance subsidiaries in the aggregate in 2006 without obtaining prior regulatory approval.

State insurance regulatory authorities require our insurance subsidiaries to file annual statements prepared on an accounting basis prescribed by the National Association of Insurance Commissioners’ (NAIC) revised Accounting Practices and Procedures Manual or permitted by their respective state of domicile (that is, on a statutory basis). Prescribed statutory accounting practices include state laws, regulations and general administrative rules, as well as a variety of publications of the NAIC. Permitted statutory accounting practices encompass all accounting practices not so prescribed.

Statutory capital and surplus and statutory net income differ from amounts reported in accordance with GAAP primarily because policy acquisition costs are expensed when incurred, and income tax expense reflects only taxes paid or currently payable under statutory accounting rules.

Statutory net income and statutory capital and surplus were:

	2005		2004		2003
Statutory net income	$	793.7	$	768.8	$	382.3
Statutory capital and surplus at December 31	$	3,691.9	$	3,430.9	$	2,789.7

Note 15: 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.

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.

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

Our Specialty operations provide individuals with umbrella, recreational vehicle, motorcycle 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 is our core commercial segment, writing a variety of commercial insurance products for small- to mid-sized businesses (customers who pay annual premiums of $200,000 or less). Our principal business insurance products include business owner policies, commercial auto, commercial multi-peril, workers compensation, commercial property and general liability insurance.

SBI Special Accounts Facility writes larger-commercial accounts (customers who pay annual premiums of more than $200,000) for our key agents and brokers who sell our core products. We also write four specialty commercial insurance programs, which provide lender-placed property insurance, 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 services organizations.

SURETY

We offer surety bonds primarily for construction and commercial businesses.

P&C OTHER

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

CORPORATE

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

DISCONTINUED OPERATIONS

The Discontinued Operations include results of our L&I businesses until the sale was completed in August 2004. See Note 16 for more information.

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, loss adjustment expenses (LAE) and underwriting expenses, on a pretax basis. Combined ratio is our losses, LAE and underwriting expenses divided by our net earned premiums. Using ratios helps us see our operating trends without the effect of changes in net earned premiums. Management views underwriting results and combined ratios as critical measures to assess the effectiveness of our underwriting activities.

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

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

REVENUES

YEAR ENDED DECEMBER 31	2005		2004		2003
Net Earned Premiums
Safeco Personal Insurance (SPI)
Auto	$	2,820.4	$	2,628.6	$	2,241.5
Property		913.3		920.6		920.9
Specialty		98.1		90.2		83.0
Total SPI		3,831.8		3,639.4		3,245.4
Safeco Business Insurance (SBI)
SBI Regular		1,272.2		1,224.7		1,097.5
SBI Special Accounts Facility		431.9		443.3		383.8
Total SBI		1,704.1		1,668.0		1,481.3
Surety		260.9		203.0		153.6
P&C Other		8.6		18.7		21.5
Total Earned Premiums		5,805.4		5,529.1		4,901.8
P&C Net Investment Income		460.6		445.0		453.0
Total P&C Revenues		6,266.0		5,974.1		5,354.8
Corporate		24.7		20.5		25.2
Net Realized Investment Gains		60.4		200.8		70.1
Total Revenues	$	6,351.1	$	6,195.4	$	5,450.1

PRETAX UNDERWRITING PROFIT (LOSS) AND NET INCOME

YEAR ENDED DECEMBER 31	2005			2004			2003
Underwriting Profit (Loss)
Safeco Personal Insurance (SPI)
Auto	$	139.6		$	176.2		$	47.7
Property		198.2			209.2			108.9
Specialty		6.9			11.9			27.2
Total SPI		344.7			397.3			183.8
Safeco Business Insurance (SBI)
SBI Regular		117.9			47.2			(28.6	)
SBI Special Accounts Facility		32.6			26.3			23.5
Total SBI		150.5			73.5			(5.1	)
Surety		55.0			42.4			27.6
P&C Other		(31.0	)		(40.9	)		(212.2	)
Total Underwriting Profit (Loss)		519.2			472.3			(5.9	)
P&C Net Investment Income		460.6			445.0			453.0
Restructuring Charges		(2.7	)		(5.4	)		(8.3	)
Total P&C		977.1			911.9			438.8
Corporate		(47.8	)		(98.8	)		(128.8	)
Loss on Debt Repurchases		(4.0	)		(121.0	)		—
Net Realized Investment Gains		60.4			200.8			70.1
Income from Continuing Operations before Income Taxes		985.7			892.9			380.1
Provision for Income Taxes		294.6			272.7			94.6
Income from Continuing Operations		691.1			620.2			285.5
Results from Discontinued Operations, Net of Taxes		—			(57.8	)		53.7
Net Income	$	691.1		$	562.4		$	339.2

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COMBINED RATIOS +

YEAR ENDED DECEMBER 31	2005		2004		2003
Safeco Personal Insurance (SPI)
Auto	95.1	%	93.3	%	97.9	%
Property	78.3		77.3		88.2
Specialty	93.0		86.8		67.2
SPI Total	91.0		89.1		94.3
Safeco Business Insurance (SBI)
SBI Regular	90.7		96.2		102.6
SBI Special Accounts Facility	92.4		94.1		93.9
SBI Total	91.2		95.6		100.3
Surety	78.9		79.1		82.0
P&C Other	*		*		*
Total Combined Ratio	91.1	%	91.5	%	100.1	%

+ 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 runoff business with minimal premium.

The following table presents total assets, reported on our Consolidated Balance Sheets, by segment:

ASSETS

DECEMBER 31	2005		2004
Safeco Personal Insurance (SPI)
Auto	$	4,514.4	$	4,225.1
Property		2,115.6		2,134.6
Specialty		234.0		210.9
Total SPI		6,864.0		6,570.6
Safeco Business Insurance (SBI)
SBI Regular		3,602.7		3,475.8
SBI Special Accounts Facility		906.7		853.8
Total SBI		4,509.4		4,329.6
Surety		644.0		531.2
P&C Other		1,737.3		2,043.9
Total		13,754.7		13,475.3
Corporate		1,132.3		1,111.9
Total Assets	$	14,887.0	$	14,587.2

Note 16: Discontinued Operations

In 2004, we sold our life insurance, group stop-loss medical insurance and asset management operations for $1,403.0 to an investor group led by White Mountains Insurance Group, Ltd. and Berkshire Hathaway, Inc. In a separate transaction, we sold Talbot Financial Corporation (Talbot), our insurance brokerage operation for $90.0 to an investor group led by senior management of Talbot, with financial support from Hub International Limited. On April 8, 2004, we entered into a definitive agreement to sell Safeco Trust Company for $6.0 to Mellon Trust of Washington, and on April 19, 2004, this transaction was completed. The proceeds from these sales totaled $1,499.0, including a $64.3 pre-closing dividend from our life insurance subsidiaries, and the after-tax loss on the sales was $131.0.

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Results of Discontinued Operations for the period January 1 to August 2, 2004, and for the year ended December 31, 2003 were as follows:

	2004			2003
Total Revenues	$	1,140.5		$	1,908.0
Income from Discontinued Operations before Income Taxes	$	92.2		$	61.1
Provision for Income Taxes on Discontinued Operations		19.0			7.4
Income from Discontinued Operations, Net of Taxes		73.2			53.7
Loss on Disposition, Net of Taxes		(131.0	)		—
Results from Discontinued Operations, Net of Taxes	$	(57.8	)	$	53.7

Note 17: Subsequent Events

On February 6, 2006, we announced the execution of a Rule 10b5-1 trading plan to purchase up to $250.0 of our outstanding common stock. If the 10b5-1 program is fully executed, approximately 5 million shares will remain available for repurchase under board-approved repurchase programs.

On January 13, 2006, we entered into an agreement to sell our Redmond office campus, subject to contingencies. The sale does not include the 66,000 square-foot lot containing our data center. We expect the sale to close in the latter part of 2006 when all contingencies are resolved. Following the close of the sale, we expect to enter into a lease for 550,000 square feet of office space and 70,000 square feet of warehouse space for a period of up to three years. We expect to recognize a pretax gain of approximately $29.0 on the sale.

Note 18: Quarterly Results of Operations (Unaudited)

	First Quarter		Second Quarter		Third Quarter			Fourth Quarter		Full Year
Revenues
2005	$	1,580.5	$	1,590.7	$	1,585.6		$	1,594.3	$	6,351.1
2004		1,498.3		1,555.8		1,566.9			1,574.4		6,195.4
Net Income (Loss)
2005 (1)(2)	$	212.0	$	187.3	$	101.1		$	190.7	$	691.1
2004 (1)(2)(3)		236.2		247.5		(101.1	)		179.8		562.4
Net Income (Loss) Per Share – Per Diluted Share
2005 (1)(2)	$	1.65	$	1.46	$	0.80		$	1.53	$	5.43
2004 (1)(2)(3)		1.69		1.77		(0.76	)		1.41		4.16
Income from Continuing Operations, Net of Taxes
2005 (1)(2)	$	212.0	$	187.3	$	101.1		$	190.7	$	691.1
2004 (1)(2)		185.6		248.9		5.9			179.8		620.2
Income from Continuing Operations, Net of Taxes – Per Diluted Share
2005 (1)(2)	$	1.65	$	1.46	$	0.80		$	1.53	$	5.43
2004 (1)(2)		1.33		1.78		0.04			1.41		4.59

(1) Includes after-tax loss on debt repurchases of $2.6 in the third quarter of 2005 and after-tax loss on debt repurchases of $78.7 in the third quarter of 2004.

(2) Includes after-tax catastrophe losses of $115.8 in the third quarter of 2005 and $126.6 in the third quarter of 2004.

(3) Includes after-tax loss on sale of our L&I operations of $131.0 in the third quarter of 2004.

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FINANCIAL STATEMENT SCHEDULES
Summary of Investments – Other Than Investments in Related Parties	Schedule I

Type of Investments

(In Millions)

DECEMBER 31, 2005	Cost or Amortized Cost		Fair Value		Balance Sheet
Fixed Maturities
Bonds
U.S. Government and Agencies	$	972.5	$	998.9	$	998.9
States and Political Subdivisions		3,228.0		3,365.1		3,365.1
Foreign Governments		66.4		73.8		73.8
Public Utilities		610.7		609.1		609.1
Mortgage-Backed Securities		1,248.6		1,238.8		1,238.8
All Other Corporate Bonds		3,009.3		3,012.2		3,012.2
Redeemable Preferred Stocks		63.6		64.0		64.0
Total Fixed Maturities		9,199.1		9,361.9		9,361.9
Marketable Equity Securities
Common Stocks
Public Utilities		8.0		11.2		11.2
Banks, Trust and Insurance Companies		234.3		350.6		350.6
Industrial, Miscellaneous and All Other (1)		466.5		732.7		759.0
Non-Redeemable Preferred Stocks		2.6		2.7		2.7
Total Marketable Equity Securities		711.4		1,097.2		1,123.5
Other Invested Assets (2)		10.7		10.7		10.7
Total Investments	$	9,921.2	$	10,469.8	$	10,496.1

(1) Our Consolidated Balance Sheet includes $26.3 investment in Safeco Capital Trust, a related party. See Note 1.

(2) Other Invested Assets include limited partnerships.

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Condensed Statements of Income Schedule II

Condensed Financial Information of the Registrant (Parent Company)

(In Millions)

YEAR ENDED DECEMBER 31		2005			2004			2003
REVENUES
Dividends	- Non-affiliates	$	0.6		$	0.8		$	1.2
Interest	- Affiliates		13.0			10.9			11.8
	- Non-affiliates		18.0			6.6			2.0
Net Realized Investment Gains (Losses)			(1.2	)		15.8			2.1
Total Revenues			30.4			34.1			17.1
EXPENSES
Interest			88.6			108.9			129.4
Other			(5.7	)		18.1			14.7
Loss on Debt Repurchases			4.0			121.0			—
Total Expenses			86.9			248.0			144.1
Loss from Continuing Operations before Income Taxes			(56.5	)		(213.9	)		(127.0	)
Benefit from Income Taxes			(57.3	)		(81.7	)		(44.6	)
Income (Loss) before Equity in Net Income of Subsidiaries			0.8			(132.2	)		(82.4	)
Equity in Net Income of Subsidiaries			690.3			694.6			421.6
Consolidated Net Income		$	691.1		$	562.4		$	339.2

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Condensed Balance Sheets Schedule II

Condensed Financial Information of the Registrant (Parent Company)

(In Millions)

DECEMBER 31	2005		2004
ASSETS
Investments
Stock of Subsidiaries, at Cost Plus Equity in Undistributed Earnings	$	4,490.0	$	4,352.6
Fixed Maturities Available-for-Sale, at Fair Value (Amortized cost: $355.4; $401.1)		348.6		400.5
Marketable Equity Securities Available-for-Sale, at Fair Value (Cost: $48.6; $3.8)		59.0		13.7
Other Invested Assets		0.3		0.6
Total Investments		4,897.9		4,767.4
Cash and Cash Equivalents		199.4		56.4
Receivables from Affiliated Companies		284.6		312.1
Accrued Investment Income		10.6		18.8
Current Income Taxes Recoverable		88.0		145.1
Net Deferred Income Tax Assets		16.8		12.5
Other Assets		14.5		24.2
Securities Lending Collateral		159.8		264.3
Total Assets	$	5,671.6	$	5,600.8
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest Payable	$	35.7	$	36.3
Payables to Affiliated Companies		—		1.0
Dividends Payable to Shareholders		30.9		27.9
Debt		1,307.0		1,332.9
Other Liabilities		13.6		17.5
Securities Lending Payable		159.8		264.3
Total Liabilities		1,547.0		1,679.9
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: 7.5; 9.1
Shares Issued and Outstanding: 123.6; 127.0		434.8		641.8
Retained Earnings		3,333.0		2,763.8
Accumulated Other Comprehensive Income, Net of Taxes		356.8		515.3
Total Shareholders’ Equity		4,124.6		3,920.9
Total Liabilities and Shareholders’ Equity	$	5,671.6	$	5,600.8

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Condensed Statements of Cash Flows Schedule II

Condensed Financial Information of the Registrant (Parent Company)

(In Millions)

YEAR ENDED DECEMBER 31		2005			2004			2003
OPERATING ACTIVITIES
Dividends and Interest Received	- Affiliates	$	507.1		$	241.7		$	314.3
	- Non-affiliates		15.8			8.5			5.1
Interest Paid			(86.6	)		(123.0	)		(127.8	)
Income Taxes Received			113.2			117.5			63.3
Other, Net			(27.8	)		(0.7	)		(72.3	)
Net Cash Provided by Operating Activities			521.7			244.0			182.6
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale			(216.4	)		(335.6	)		(106.8	)
Equity Securities Available-for-Sale			(44.8	)		(38.0	)		(1.0	)
Other Invested Assets			(0.1	)		(1.6	)		—
Maturities and Calls of Fixed Maturities Available-for-Sale			55.8			0.6			—
Sales of:
Fixed Maturities Available-for-Sale			201.5			42.2			80.7
Equity Securities Available-for-Sale			—			52.3			2.6
Other Invested Assets			0.3			2.0			9.0
Proceeds from Sale of Subsidiaries						1,499.0			—
Net Capital Contributions to Subsidiaries			(3.2	)		(40.1	)		(13.5	)
Net Cash Provided by (Used in) Investing Activities			(6.9	)		1,180.8			(29.0	)
FINANCING ACTIVITIES
Repurchase of Notes			(29.8	)		(735.2	)		(507.2	)
Common Stock Reacquired			(255.9	)		(663.0	)		—
Dividends Paid to Shareholders			(118.9	)		(104.8	)		(102.4	)
Stock Options Exercised			32.8			84.1			10.6
Proceeds from Notes Issued			—			—			495.9
Net Cash Used in Financing Activities			(371.8	)		(1,418.9	)		(103.1	)
Net Increase in Cash and Cash Equivalents			143.0			5.9			50.5
Cash and Cash Equivalents at Beginning of Year			56.4			50.5			—
Cash and Cash Equivalents at End of Year		$	199.4		$	56.4		$	50.5

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Condensed Statements of Cash Flows Schedule II

Reconciliation of Net Income to Net Cash Provided by Operating Activities

Condensed Financial Information of the Registrant (Parent Company)

(In Millions)

YEAR ENDED DECEMBER 31	2005			2004			2003
Net Income	$	691.1		$	562.4		$	339.2
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Equity in Net Income of Consolidated Subsidiaries		(690.3	)		(694.6	)		(421.6	)
Dividends and Interest Received from Consolidated Subsidiaries		507.1			241.7			314.3
Net Realized Investment (Gains) Losses		1.2			(15.8	)		(2.1	)
Deferred Income Tax (Benefit) Provision		(4.3	)		5.6			30.1
Other, Net		19.9			144.4			8.6
Changes in:
Accrued Investment Income		8.2			(6.0	)		2.9
Interest Payable		(0.6	)		(21.2	)		0.7
Current Income Taxes Recoverable		52.0			(130.5	)		(9.3	)
Other Assets and Liabilities		(62.6	)		158.0			(80.2	)
Total Adjustments		(169.4	)		(318.4	)		(156.6	)
Net Cash Provided by Operating Activities	$	521.7		$	244.0		$	182.6

There were no significant non-cash financing or investing activities for the years ended December 31, 2005, 2004 or 2003.

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Supplemental Insurance Information Schedule III

DECEMBER 31, 2005

(In Millions)

Segment	Deferred Policy Acquisition Costs		Loss & Loss Adjustment Expense Reserves		Unearned Premiums		Earned Premiums		Net Investment Income		Losses and Loss Adjustment Expenses		Amortization of Deferred Policy Acquisition Costs		Other Operating Costs		Net Written Premiums
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		1,742.9		610.7		1,272.2		117.6		725.1		213.3		215.9		1,263.0
SBI Special Accounts Facility		22.0		385.3		124.9		431.9		27.7		241.5		105.5		52.3		423.7
Surety		58.7		17.1		170.5		260.9		17.1		84.8		92.6		28.5		278.4
P&C Other		—		1,132.6		10.9		8.6		70.1		29.8		—		9.8		7.5
Restructuring 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		—		—		76.5		—
Consolidated Totals	$	376.4	$	5,358.2	$	2,139.8	$	5,805.4	$	485.1	$	3,635.0	$	973.1	$	757.3	$	5,802.1

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Supplemental Insurance Information Schedule III

DECEMBER 31, 2004

(In Millions)

Segment	Deferred Policy Acquisition Costs		Loss & Loss Adjustment Expense Reserves		Unearned Premiums		Earned Premiums		Net Investment Income		Losses and Loss Adjustment Expenses		Amortization of Deferred Policy Acquisition Costs		Other Operating Costs		Net Written Premiums
Property & Casualty
SPI
Auto	$	100.4	$	1,545.1	$	693.7	$	2,628.6	$	133.8	$	1,865.7	$	346.2	$	240.5	$	2,705.6
Property		91.8		307.4		493.2		920.6		72.5		453.4		169.0		89.0		918.3
Specialty		7.0		67.6		40.1		90.2		6.7		55.6		15.3		7.4		93.4
SBI
SBI Regular		105.1		1,650.1		619.6		1,224.7		111.7		766.0		207.5		204.0		1,258.5
SBI Special Accounts Facility		23.3		314.4		132.8		443.3		24.2		246.8		109.6		60.6		447.4
Surety		54.6		21.3		154.4		203.0		13.0		57.5		77.0		26.1		231.4
P&C Other		—		1,303.4		17.2		18.7		83.1		50.2		—		9.4		17.7
Restructuring Charges		—		—		—		—		—		—		—		5.4		—
Total		382.2		5,209.3		2,151.0		5,529.1		445.0		3,495.2		924.6		642.4		5,672.3
Corporate		—		—		—		—		19.6		—		—		240.3		—
Consolidated Totals	$	382.2	$	5,209.3	$	2,151.0	$	5,529.1	$	464.6	$	3,495.2	$	924.6	$	882.7	$	5,672.3

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Supplemental Insurance Information Schedule III

DECEMBER 31, 2003

(In Millions)

Segment	Deferred Policy Acquisition Costs		Loss & Loss Adjustment Expense Reserves			Unearned Premiums		Earned Premiums		Net Investment Income		Losses and Loss Adjustment Expenses		Amortization of Deferred Policy Acquisition Costs		Other Operating Costs		Net Written Premiums
Property & Casualty
SPI
Auto	$	86.2	$	1,352.3		$	606.4	$	2,241.5	$	126.4	$	1,671.6	$	304.2	$	218.0	$	2,335.5
Property		94.0		351.6			492.5		920.9		80.3		547.9		172.9		91.2		923.8
Specialty		6.5		55.6			36.8		83.0		6.6		34.5		14.2		7.1		85.7
SBI
SBI Regular		102.0		1,549.0			590.0		1,097.5		111.8		720.9		192.7		212.5		1,156.9
SBI Special Accounts Facility		22.8		233.9			131.0		383.8		19.8		214.9		96.6		48.8		405.8
Surety		45.3		(12.2	)		124.9		153.6		10.4		40.3		65.0		20.7		178.8
P&C Other		—		1,514.4			19.5		21.5		97.7		222.1		0.6		11.0		22.3
Restructuring Charges		—		—			—		—		—		—		—		8.3		—
Total		356.8		5,044.6			2,001.1		4,901.8		453.0		3,452.2		846.2		617.6		5,108.8
Corporate		—		—			—		—		15.4		—		—		154.0		—
Consolidated Totals	$	356.8	$	5,044.6		$	2,001.1	$	4,901.8	$	468.4	$	3,452.2	$	846.2	$	771.6	$	5,108.8

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Reinsurance Schedule IV

See Note 6 to our Consolidated Financial Statements.

Valuation and Qualifying Accounts Schedule V

Not applicable.

Supplemental Information Concerning Schedule VI

Consolidated Property & Casualty Insurance Operations

Affiliation with Registrant: Property & Casualty Subsidiaries

(In Millions)

DECEMBER 31	2005			2004			2003
Deferred Policy Acquisition Costs	$	376.4		$	382.2		$	356.8
Loss and Loss Adjustment Expense Reserves		5,358.2			5,209.3			5,044.6
Unearned Premiums	$	2,139.8		$	2,151.0		$	2,001.1
YEAR ENDED DECEMBER 31	2005			2004			2003
Earned Premiums	$	5,805.4		$	5,529.1		$	4,901.8
Net Investment Income		460.6			445.0			453.0
Losses and Loss Adjustment Expenses Incurred Related to:
Current Year		3,680.9			3,534.2			3,202.3
Prior Years		(45.9	)		(39.0	)		249.9
Amortization of Deferred Policy Acquisition Costs		973.1			924.6			846.2
Paid Losses and Loss Adjustment Expenses		3,528.6			3,325.2			3,338.9
Net Written Premiums	$	5,802.1		$	5,672.3		$	5,108.8

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Index to Exhibits

3.1	Bylaws (as last amended February 2, 2005), filed as Exhibit 3.1 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.
3.2	Restated Articles of Incorporation (as amended May 7, 1997), filed as Exhibit 3.2 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 1-6563), are incorporated herein by this reference.
4.1	Indenture, dated as of July 15, 1997, between Safeco and The Chase Manhattan Bank N.A., as Trustee, filed as Exhibit 4.2 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 1-6563), is incorporated herein by this reference.
4.2	Form of Certificate of Exchange Junior Subordinated Debenture filed as Exhibit 4.2 to Safeco’s Registration Statement on Form S-4 (No. 333-38205) dated October 17, 1997, is incorporated herein by this reference.
4.3	Certificate of Trust of Safeco Capital Trust I dated June 18, 1997, filed as Exhibit 4.4 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 1-6563), is incorporated herein by this reference.
4.4	Amended and Restated Declaration of Trust of Safeco Capital Trust I dated as of July 15, 1997, filed as Exhibit 4.5 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 1-6563), is incorporated herein by this reference.
4.5	Form of Exchange Capital Security Certificate for Safeco Capital Trust I filed as Exhibit 4.5 to Safeco’s Registration Statement on Form S-4 (No. 333-38205) dated October 17, 1997, is incorporated herein by this reference.
4.6	Form of Exchange Guarantee of Safeco relating to the Exchange Capital Securities, filed as Exhibit 4.6 to Safeco’s Registration Statement on Form S-4 (No. 333-38205) dated October 17, 1997, is incorporated herein by this reference.
4.7	Indenture, dated as of February 15, 2000, among Safeco and The Chase Manhattan Bank, N.A., as Trustee, filed as Exhibit 4.8 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 1-6563), is incorporated herein by this reference.
4.8	Form of Safeco Agency Stock Purchase Plan Terms and Conditions as Agreed to by the Agency, filed as Exhibit 4.10 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.
4.9	Indenture for Debt Securities between J.P. Morgan Trust Company, National Association and Safeco, dated as of August 23, 2002, filed as Exhibit 4.11 to Safeco’s Current Report on Form 8-K dated January 28, 2003 (File No. 1-6563), is incorporated herein by this reference.
4.10	Form of 4.200% Senior Notes due 2008, filed as Exhibit 4.12 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 1-6563), is incorporated herein by this reference.
4.11	Form of 4.875% Senior Notes due 2010, filed as Exhibit 4.13 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 1-6563), is incorporated herein by this reference.
10.1	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.

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10.3	Form of Change in Control Severance Agreements between Safeco and each of Michael E. LaRocco, Dale E. Lauer, Allie R. Mysliwy and Yomtov Senegor, in each case dated as of November 7, 2001, filed as Exhibit 10.5 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 1-6563), is incorporated herein by this reference.
10.4	Safeco Long-Term Incentive Plan of 1997 as Amended and Restated February 2, 2005, included as Appendix B to Safeco’s Definitive Proxy Statement filed March 24, 2005 (File No. 1-6563), 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 10.6 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 1-6563), is incorporated herein by this reference.
10.6	Form of Non-Qualified Stock Option Award Agreement - Non-Employee Director granted under the Safeco Long-Term Incentive Plan of 1997, as Amended and Restated May 5, 1999, filed as Exhibit 10.4 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (File No. 1-6563), is incorporated herein by this reference.
10.7	Terms of Stock Award Program for Non-Employee Directors under the Safeco Long-Term Incentive Plan of 1997, filed as Exhibit 10.3 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (File No. 1-6563), is incorporated herein by this reference.
10.8	Form of Restricted Stock Rights Award Agreement Issued pursuant to Stock Award Program for Non-Employee Directors under the Safeco Long-Term Incentive Plan of 1997, filed as Exhibit 10.4 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (File No. 1-6563), is incorporated herein by this reference.
10.9	Form of Restricted Stock Rights Award Agreement issued under the Safeco Long-Term Incentive Plan of 1997, filed as Exhibit 10.2 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.
10.10	Form of Performance Stock Rights Award Agreement granted under the Safeco Long-Term Incentive Plan of 1997, filed as Exhibit 10.8 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 1-6563), is incorporated herein by this reference.
10.11	Safeco Incentive Plan of 1987 contained in the Prospectus dated November 10, 1989, as amended January 31, 1990, filed as Exhibit 10 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 1-6563), and the Supplement to such Prospectus dated November 8, 1990, filed as Exhibit 10 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 1-6563), are incorporated herein by this reference.
10.12	Form of Promissory Note in favor of General America Corporation by Michael E. LaRocco in the principal amount of $780,000 and dated October 8, 2001, filed as Exhibit 10.22 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 1-6563), is incorporated herein by this reference.
10.13	Safeco Leadership Performance Plan as Amended effective November 2, 2004, filed as Exhibit 10.1 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (File No. 1-6563), is incorporated herein by this reference.
10.14	Change in Control Severance Agreement between Safeco Corporation and Paula Rosput Reynolds, dated as of February 1, 2006.
10.15	Safeco 401(k)/Profit Sharing Retirement Plan as Amended and Restated effective January 1, 2004, filed as Exhibit 10.28 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (File No. 1-6563), is incorporated herein by this reference.
10.16	Safeco Flexible Benefits Program as Amended and Restated effective January 1, 2004, filed as Exhibit 10.29 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 (File No. 1-6563), is incorporated herein by this reference.

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10.17	Executive Transition Services Agreement between Safeco Corporation and Christine B. Mead, dated August 11, 2005, filed as Exhibit 10.1 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (File No. 1-6563), is incorporated herein by this reference.
10.18	Employment Agreement between Safeco Corporation and Arthur Chong, dated October 14, 2005, filed as Exhibit 10.2 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (File No. 1-6563), is incorporated herein by this reference.
10.19	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.
10.20	Purchase and Sale Agreement between General America Corporation and Microsoft Corporation, dated January 13, 2006.
10.21	First Amendment of Purchase and Sale Agreement between General America Corporation and Microsoft Corporation, dated February 17, 2006.
10.22	Second Amendment of Purchase and Sale Agreement between General America Corporation and Microsoft Corporation, dated February 17, 2006.
10.23	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.
10.24	Stock Purchase Agreement between Safeco Corporation and James W. Ruddy, dated June 16, 2005, filed as Exhibit 10.5 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (File No. 1-6563), is incorporated herein by this reference.
10.25	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.
10.26	Separation Agreement between Safeco Corporation and Jeffrey Roe, dated as of February 2, 2006.
11	Computation of Income per Share of Common Stock (See Note 1 to the Consolidated Financial Statements).
12	Computation of Ratio of Earnings (Loss) 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 21, 2006, in accordance with Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Accounting Officer of Safeco Corporation dated February 21, 2006, in accordance with Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer of Safeco Corporation dated February 21, 2006, 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 Principal Accounting Officer of Safeco Corporation dated February 21, 2006, in accordance with 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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EX-10.14

Exhibit 10.14

CHANGE IN CONTROL

SEVERANCE AGREEMENT

THIS AGREEMENT, effective February 1, 2006, is made by and between Safeco Corporation, a Washington corporation (“Safeco”), and Paula Rosput Reynolds (the “Executive”).

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.

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(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

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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

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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

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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,

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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.

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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

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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

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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

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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.

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(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.

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(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

13

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.

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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.

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(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/ Jay W. Brown	/s/ Paula Rosput Reynolds
		Name: Paula Rosput Reynolds
		Such address as may appear on the personnel records of Safeco or such other Person as Ms. Reynolds may specify in writing

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EX-10.20

Exhibit 10.20

PURCHASE AND SALE AGREEMENT

BETWEEN

GENERAL AMERICA CORPORATION

as Seller

AND

MICROSOFT CORPORATION

as Purchaser

with respect to

SAFECO REDMOND CAMPUS

TABLE OF CONTENTS

		Page
ARTICLE I.	Definitions	1
Section 1.1	Definitions	1
Section 1.2	References; Exhibits and Schedules	6
ARTICLE II.	Agreement of Purchase and Sale	7
Section 2.1	Agreement	7
Section 2.2	Indivisible Economic Package	7
Section 2.3	Special Termination Right	7
Section 2.4	GAC Lease	8
Section 2.5	Microsoft Lease Termination	8
Section 2.6	Data Center Agreement	8
ARTICLE III.	Consideration	8
Section 3.1	Purchase Price	8
Section 3.2	Method of Payment of Purchase Price	8
Section 3.3	Independent Consideration	8
ARTICLE IV.	Earnest Money Deposit and Escrow Instructions	9
Section 4.1	The Deposit	9
Section 4.2	Escrow Instructions	9
Section 4.3	Documents Deposited into Escrow	9
Section 4.4	Close of Escrow	9
Section 4.5	Maintenance of Confidentiality by Title Company	10
Section 4.6	Investment of Earnest Money Deposit	10
Section 4.7	Designation of Reporting Person	10
ARTICLE V.	Inspection of Property	11
Section 5.1	Entry and Inspection	11
Section 5.2	Document Review	12
Section 5.3	Entry and Inspection Obligations	13
Section 5.4	Data Center Agreement	14
Section 5.5	Termination Right	14
Section 5.6	Sale “As Is”	14
Section 5.7	Material Defects	16
Section 5.8	Hazardous Materials Waiver	16
ARTICLE VI.	Title and Survey Matters	16
Section 6.1	Survey	16
Section 6.2	Title Commitment	17
Section 6.3	Title Insurance	18

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ARTICLE VII.	Interim Operating Covenants	18
Section 7.1	Interim Operating Covenants	18
(a)	Operations	18
(b)	Maintain Insurance	18
(c)	Leases	18
(d)	Service Contracts	19
(e)	Personal Property	19
(f)	Notices	19
(g)	Comply with Governmental Regulations	19
ARTICLE VIII.	Representations and Warranties	19
Section 8.1	Seller’s Representations and Warranties	19
(a)	Due Formation and Authorization	19
(b)	Consent	19
(c)	Suits and Proceedings	20
(d)	Leases	20
(e)	Service Contracts	20
(f)	No Violations	20
(g)	Insolvency	20
(h)	Environmental	20
(i)	Bankruptcy	20
(j)	Condemnation	20
(k)	Insurance	20
Section 8.2	Purchaser’s Representations and Warranties	21
(a)	Due Formation and Authorization	21
(b)	Non-Contravention	21
(c)	Consents	21
ARTICLE IX.	Condemnation and Casualty	21
Section 9.1	Significant Casualty	21
Section 9.2	Casualty of Less Than a Significant Portion	22
Section 9.3	Condemnation of Property	22
ARTICLE X.	Closing	23
Section 10.1	Closing Conditions	23
	Section 10.1.1    Purchaser’s Closing Conditions	23
	Section 10.1.2    Seller’s Conditions to Closing	23
Section 10.2	Closing	23
Section 10.3	Purchaser’s Closing Obligations	24
Section 10.4	Seller’s Closing Obligations	25
Section 10.5	Prorations	26
Section 10.6	Delivery of Real Property	26
Section 10.7	Costs of Title Company and Closing Costs	26
Section 10.8	Microsoft Tenant Improvement Allowance	27
Section 10.9	Post-Closing Delivery of Service Contract Notice	27

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ARTICLE XI.	Brokerage	27
Section 11.1	Brokers	27
ARTICLE XII.	Confidentiality	27
Section 12.1	Confidentiality	27
ARTICLE XIII.	Remedies	28
Section 13.1	Purchaser’s Remedies	28
Section 13.2	Default By Purchaser	29
Section 13.3	Consequential and Punitive Damages	30
ARTICLE XIV.	Notices	30
Section 14.1	Notices	30
ARTICLE XV.	Assignment and Binding Effect	31
Section 15.1	Assignment; Binding Effect	31
ARTICLE XVI.	Claims Period	32
Section 16.1	Claims Period	32
ARTICLE XVII.	Miscellaneous	32
Section 17.1	Waivers	32
Section 17.2	Recovery of Certain Fees	32
Section 17.3	Time of Essence	32
Section 17.4	Construction	32
Section 17.5	Counterparts	33
Section 17.6	Severability	33
Section 17.7	Entire Agreement	33
Section 17.8	Governing Law	33
Section 17.9	No Recording	33
Section 17.10	Further Actions	33
Section 17.11	No Other Inducements	34
Section 17.12	Exhibits	34
Section 17.13	No Partnership	34
Section 17.14	Limitations on Benefits	34

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EXHIBITS

Exhibit A	Personal Property
Exhibit B	Legal Description
Exhibit C	Service Contracts
Exhibit D	Form of Earnest Money Note
Exhibit E	Pending Proceedings
Exhibit F	Form of GAC Lease
Exhibit G	Form of Blanket Conveyance
Exhibit H	Form of Deed
Exhibit I	Form of Certificate as to Non-Foreign Status
Exhibit J	Form of Microsoft Lease
Exhibit K	Form of Microsoft Lease Termination Agreement

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PURCHASE AND SALE AGREEMENT AND JOINT ESCROW INSTRUCTIONS

THIS PURCHASE AND SALE AGREEMENT AND JOINT ESCROW INSTRUCTIONS (this “Agreement”) is entered into and effective for all purposes as of January 13, 2006 (the “Effective Date”), by and between GENERAL AMERICA CORPORATION, a Washington corporation (“Seller”), and MICROSOFT CORPORATION, a Washington corporation (“Purchaser”).

In consideration of the mutual promises, covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Purchaser agree as follows:

ARTICLE I.

DEFINITIONS

Section 1.1 Definitions. For purposes of this Agreement, the following capitalized terms have the meanings set forth in this Section 1.1:

“Affiliate” means any person or entity that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with Purchaser or Seller, as the case may be. For the purposes of this definition, “control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person or entity, whether through the ownership of voting securities, by contract or otherwise, and the terms “controlling” and “controlled” have the meanings correlative to the foregoing.

“Authorities” means the various governmental and quasi-governmental bodies or agencies having jurisdiction over Seller, the Real Property, the Improvements, or any portion thereof.

“Blanket Conveyance” has the meaning ascribed to such term in Section 10.3(b).

“Brokers” has the meaning ascribed to such term in Section 11.1.

“Buildings” means the four (4) office buildings, commonly known as the Olympic Building, the Adams Building, the Shasta Building, and the Rainier Building, the warehouse building, commonly known as the Pacific Building, and the two (2) parking structures, all located on the Real Property.

“Business Day” means any day other than a Saturday, Sunday or a day on which national banking associations are authorized or required to close.

“Cancellation Charges” has the meaning ascribed to such term in Section 2.3.

“Certificate as to Foreign Status” has the meaning ascribed to such term in Section 10.4(g).

“Claims” has the meaning ascribed to such term in Section 5.3(b).

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“Closing” means the consummation of the purchase and sale of the Property contemplated by this Agreement, as provided for in Article X.

“Closing Date” means the date on which the Closing occurs, which date will be determined as provided in Section 10.2, or such earlier or later date to which Purchaser and Seller may hereafter agree in writing.

“Closing Surviving Obligations” means the rights, liabilities and obligations set forth in Sections 5.2, 5.3, 5.6 through 5.8, 8.1, 8.2, 10.5, 10.9, 11.1, 16.1 and 17.2.

“Commitment” has the meaning ascribed to such term in Section 6.2.

“Covenants” means the Declaration of Covenants, Conditions, and Restrictions recorded under Recording No. 20030307001274 of Official Records.

“Confidential Information” has the meaning ascribed to such term in Section 5.2(b).

“Data Center Agreement” means the agreement described in Section 5.4.

“Data Center Property” means Lot 4 of Safeco-Redmond Campus II Binding Site Plan according to Plat recorded in Volume 212 of Plats, at Pages 91 through 95, in King County, Washington.

“Deed” has the meaning ascribed to such term in Section 10.4(a).

“Deposit Time” has the meaning ascribed to such term in Section 3.2.

“Development Agreement” means the Development Agreement recorded under Recording No. 9808200229 of Official Records, as amended by instruments under Recording Nos. 20040223002040 and 20040811002099 of Official Records.

“Documents” has the meaning ascribed to such term in Section 5.2.

“Earnest Money Deposit” has the meaning ascribed to such term in Section 4.1.

“Earnest Money Note” means the promissory note in the form attached hereto as Exhibit D.

“Effective Date” has the meaning ascribed to such term in the opening paragraph of this Agreement.

“Environmental Laws” means all federal, state and local environmental laws, ordinances, rules, statutes, directives, binding written interpretations, binding written policies, and regulations issued by any Authorities and in effect as of the Effective Date with respect to or that otherwise pertain to or affect any portion of the Real Property or the Improvements or the use, ownership, occupancy or operation of any portion of the Real Property or the Improvements, as same have been amended, modified or supplemented from time to time prior to the date of this Agreement, including, but not limited to, the National Environmental Policy Act (42 U.S.C.

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§ 4321 et seq.), the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C. § 9601 et seq.) (“CERCLA”), as amended by the Superfund Amendments and Reauthorization Act of 1986 (42 U.S.C. § 9601 et seq.), the Hazardous Substances Transportation Act (49 U.S.C. § 1802 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. § 6901 et seq.) (“RCRA”), as amended by the Hazardous and Solid Wastes Amendments of 1984 (U.S.C. § et seq.), the Water Pollution Control Act (33 U.S.C. § 1251 et seq.), the Safe Drinking Water Act (42 U.S.C. § 300f et seq.), the Clean Air Act (42 U.S.C. § 7401 et seq.), the Clean Water Act (33 U.S.C. § 1321 et seq.), the Solid Waste Disposal Act (42 U.S.C. § 6901 et seq.), the Toxic Substances Control Act (15 U.S.C. § 2601 et seq.), the Emergency Planning and Community Right-to-Know Act of 1986 (42 U.S.C. § 11001 et seq.), the Radon and Indoor Air Quality Research Act (42 U.S.C. § 7401 note, et seq.), the Occupational Safety and Health Act (29 U.S.C. § 651 et seq.), as such laws have been amended and/or supplemented from time to time prior to the date of this Agreement, comparable state and local laws, and any and all rules and regulations promulgated under any of the above that have become effective prior to the Effective Date under any and all of the aforementioned laws.

“Escrow Instructions” has the meaning ascribed to such term in Section 4.2.

“GAC Lease” means the Lease of the Property (exclusive of Lot 1) from Purchaser to Seller in the form of Exhibit F.

“Governmental Regulations” means all federal, state and local laws, ordinances, rules, statutes, directives, binding written interpretations, binding written policies, and regulations issued by any Authorities applicable to Seller, the Real Property or the Improvements, or the use, ownership, occupancy or operation of any portion of the Real Property or the Improvements.

“Hazardous Substances” means all (a) asbestos, radon gas, electromagnetic waves, urea formaldehyde foam insulation and transformers or other equipment that contains dielectric fluid containing polychlorinated biphenyls (“PCBs”) of 50 ppm or greater, (b) any solid, liquid, gaseous or thermal contaminant, including smoke vapor, soot, fumes, acids, alkalis, chemicals, waste, petroleum products or byproducts, asbestos, PCBs, phosphates, lead or other heavy metals, chlorine, or radon gas, (c) any solid or liquid wastes (including hazardous wastes), hazardous air pollutants, hazardous substances, hazardous chemical substances and mixtures, toxic substances, pollutants and contaminants, as such terms are defined in any Environmental Law, and any and all rules and regulations promulgated under any of the above, and (d) any other chemical, material or substance, the use or presence of which, or exposure to the use or presence of which, is prohibited, limited or regulated by any Environmental Laws, as the same exist on the Effective Date.

“Improvements” means Seller’s interest in all buildings, structures, fixtures, parking areas and other improvements located on the Real Property prior to the Closing.

“Independent Consideration” has the meaning ascribed to such term in Section 3.3.

“Inspection Period” has the meaning ascribed to such term in Section 5.1(a).

“Inspections” has the meaning ascribed to such term in Section 5.1(a).

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“Invasive Testing” has the meaning ascribed to such term in Section 5.1(a).

“Invasive Testing Plan” has the meaning ascribed to such term in Section 5.1(a).

“Licensee Parties” has the meaning ascribed to such term in Section 5.1(a).

“Licenses and Permits” means all licenses, permits, certificates of occupancy, approvals, dedications, subdivision maps and entitlements now or hereafter issued, approved or granted by the Authorities in connection with the Real Property, the Improvements, or the Personal Property generally to the extent assignable or transferable (together with all renewals, supplements, and modifications thereof).

“Microsoft Lease” means that certain lease between Seller as landlord and Purchaser as tenant for 218,496 square feet of space in the Olympic Building in the form attached hereto as Exhibit J.

“Microsoft Lease Termination Agreement” means the instrument terminating the Microsoft Lease in the form of Exhibit K.

“Occupants” means the parties currently occupying portions of the Property, being Affiliates of Seller and certain licensees of Seller or such Affiliates.

“Official Records” means the Official Records of King County, Washington.

“Permitted Exceptions” means and includes all of the following: (a) matters attributable to the acts or omissions of Purchaser or its employees, agents, contractors or consultants; (b) rights reserved in federal patents or state deeds; (c) building and use restrictions general to the area; (d) building and zoning codes; and (e) the other matters approved or deemed approved by Purchaser pursuant to Section 6.2 hereof.

“Permitted Outside Parties” has the meaning ascribed to such term in Section 5.2(b).

“Personal Property” means all of Seller’s right, title and interest in and to all equipment, tools, supplies and other tangible personal property that is or will be attached to, appurtenant to, located in and used exclusively in connection with the use, ownership, occupancy, or operation of the Real Property, as opposed to the business of Seller, including the items described on Exhibit A attached hereto.

“Property” has the meaning ascribed to such term in Section 2.1.

“Purchase Price” has the meaning ascribed to such term in Section 3.1.

“Purchaser’s Closing Conditions” has the meaning ascribed to such term in Section 10.1.

“Purchaser’s Information” has the meaning ascribed to such term in Section 5.2(c).

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“Real Property” means those certain parcels of real property located in Redmond, Washington, as more particularly described on Exhibit B attached hereto and made a part hereof, together with all of Seller’s right, title and interest in and to any appurtenances pertaining thereto, including, but not limited to, Seller’s right, title and interest in and to the adjacent streets, alleys and right-of-ways, and any easement rights, air rights, subsurface rights, development rights, entitlements and water rights appurtenant thereto.

“Records and Plans” means, collectively: (i) books and records relating solely to the Real Property or the Improvements; (ii) structural reviews, architectural drawings and environmental, engineering, soils, seismic, geologic, architectural, and other consulting reports, studies and certificates pertaining to the Real Property or the Improvements; and (iii) all preliminary, final and proposed plans, specifications and drawings of the Improvements or the Real Property. The terms “Records and Plans” shall not include (1) any document or correspondence that is subject to the attorney-client privilege or constitutes work product; (2) any document or item that Seller is bound to keep strictly confidential pursuant to the terms of any Governmental Regulation that became effective prior to the date of this Agreement or to the terms of any arms-length contract entered into prior to the date of this Agreement with any person or entity that is not an Affiliate of Seller; (3) any documents pertaining to the marketing of the Property for sale to prospective purchasers; (4) any internal memoranda, reports or assessments of Seller or Seller’s Affiliates relating to Seller’s valuation of the Property; (5) appraisals of the Property; and (6) records and documents related to the business of Seller.

“Reporting Person” has the meaning ascribed to such term in Section 4.7.

“Safeco” means Safeco Insurance Company of America.

“Seller’s Control” means in the possession of or under the control of Seller or its Affiliates.

“Seller Representatives” has the meaning ascribed to such term in Section 5.1(a).

“Service Contracts” means, to the extent assignable or transferable, all service agreements, maintenance contracts, equipment leasing agreements, warranties, guarantees, bonds, open purchase orders and other contracts for the provision of labor, services, materials or supplies relating solely to the Property and under which Seller is or as of the Closing will be paying for or receiving compensation for services rendered in connection with the Property, including the contracts and other agreements listed and described on Exhibit C attached hereto, together with all renewals, supplements, amendments and modifications thereof, and any new such agreements entered into after the Effective Date, to the extent permitted by Section 7.1, except that any leasing, brokerage or management agreements will be terminated at the Closing and are excluded from such term, as are those Service Contracts that Purchaser advises Seller during the Inspection Period are not be assumed by Purchaser at Closing and which can be terminated at Closing without cost or penalty to Seller.

“Significant Portion” means, for purposes of Article IX, (i) loss or damage to the Property or any portion thereof such that the cost of repairing or restoring the premises in question to a condition substantially identical to that of the premises in question prior to the

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event of damage would be, in the opinion of a qualified unbiased architect selected by Purchaser in its reasonable discretion, equal to or greater than Ten Million Dollars ($10,000,000); or (ii) any loss due to a condemnation which permanently and materially impairs the current use of any of the Buildings.

“Survey” has the meaning ascribed to such term in Section 6.1.

“Termination Surviving Obligations” means the rights, liabilities and obligations set forth in Sections 5.2, 5.3, 5.6 through 5.8, 11.1, 12.1, Article XIII, and Section 17.2.

“Title Company” means First American Title Insurance Company, Seattle, Washington.

“Title Documents” has the meaning ascribed to such term in Section 6.2(a).

“Title Objections” has the meaning ascribed to such term in Section 6.2(b).

“Title Policy” has the meaning ascribed to such term in Section 6.3.

“To Seller’s Knowledge” or other similar phrases means only matters actually within the current, actual knowledge with no duty of due diligence or inquiry of Mark Thunberg and Jeff Hencz and expressly excludes imputed knowledge. Such persons have not undertaken or inquired into (having no duty to undertake or to inquire into) any independent investigation or verification of the matters set forth in any representation or warranty, including without limitation an investigation or review of any documents, certificates, agreements or information that may be in, or may hereafter come into, the possession of Seller or any entity affiliated in any manner with Seller. Purchaser acknowledges that the individuals named above are named solely for the purpose of defining and narrowing the scope of Seller’s knowledge and not for the purpose of imposing any liability on or creating any duties running from such individuals to Purchaser.

“Trip Cap Agreement” means the Safeco Trip Cap Agreement recorded under Recording No. 9804290364 of Official Records, as amended by instrument recorded under Recording No. 20040811002098 of Official Records, and as it may be affected by Section 4(c) of the Development Agreement.

Section 1.2 References; Exhibits and Schedules. Except as otherwise specifically indicated, all references in this Agreement to Articles or Sections refer to Articles or Sections of this Agreement, and all references to Exhibits or Schedules refer to Exhibits or Schedules attached hereto, all of which Exhibits and Schedules are incorporated into, and made a part of, this Agreement by reference. The words “herein,” “hereof,” “hereinafter” and words and phrases of similar import refer to this Agreement as a whole and not to any particular Section or Article.

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ARTICLE II.

AGREEMENT OF PURCHASE AND SALE

Section 2.1 Agreement. Seller hereby agrees to sell, convey and assign to Purchaser, and Purchaser hereby agrees to purchase and accept from Seller, on the Closing Date and subject to the terms and conditions of this Agreement, all of the following (collectively, the “Property”):

(a) the Real Property;

(b) the Improvements;

(c) the Personal Property;

(d) all of Seller’s interest under the Development Agreement;

(e) all of Seller’s interest under the Service Contracts and the Licenses and Permits;

(f) to the extent assignable or transferable, all of Seller’s interest in Property names, trade names and telephone numbers used by Seller exclusively in the operation and identification of the Improvements, but expressly excluding the names of Seller and its Affiliates and all derivations thereof;

(g) to the extent assignable or transferable, all of Seller’s interest in all other intangible rights and other interests, privileges and appurtenances related to or used exclusively in connection with the use, ownership, occupancy or operation of the Real Property or the Improvements;

(h) the Records and Plans, but only to the extent such Records and Plans are in Seller’s Control; and

(i) all of Seller’s interest under all assignable warranties relating to any of the Improvements.

Section 2.2 Indivisible Economic Package. Purchaser has no right to purchase, and Seller has no obligation to sell, less than all of the Property, it being the express agreement and understanding of Purchaser and Seller that, as a material inducement to Seller and Purchaser to enter into this Agreement, Purchaser has agreed to purchase, and Seller has agreed to sell, all of the Property, subject to and in accordance with the terms and conditions hereof.

Section 2.3 Special Termination Right. Notwithstanding any other provision of this Agreement, Seller shall have the right to terminate this Agreement by written notice of such termination given to Purchaser on or before the date that is three (3) months after the Effective Date, in the event Seller determines, in its discretion, that it is not prudent to proceed with the development of new buildings on Seller’s University District campus in Seattle, Washington. Otherwise, Seller’s right to terminate this Agreement pursuant to this Section 2.3 shall automatically lapse. If Seller terminates this Agreement pursuant to the preceding sentence,

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(i) Title Company shall return the Earnest Money Deposit to Purchaser, (ii) Purchaser shall promptly return the Purchaser’s Information to Seller, (iii) the parties shall equally share any cancellation charges imposed by the Title Company (“Cancellation Charges”), (iv) Seller shall reimburse Purchaser for all out-of-pocket expenses incurred by Purchaser in connection with its inspection of the Property pursuant to Article V, and (v) this Agreement shall terminate and be of no further force and effect except for the Termination Surviving Obligations. Purchaser shall provide Seller with a statement of such out-of-pocket expenses within ten (10) days after Purchaser’s receipt of Seller’s notice of termination pursuant to this Section, and Seller shall reimburse Purchaser for such expenses within ten (10) days after Seller’s receipt of Purchaser’s statement.

Section 2.4 GAC Lease. At the Closing, Purchaser and Seller shall execute and deliver the GAC Lease.

Section 2.5 Microsoft Lease Termination. At the Closing, the parties shall execute and deliver the Microsoft Lease Termination Agreement.

Section 2.6 Data Center Agreement. At the Closing, Microsoft and Seller shall execute and deliver the Data Center Agreement.

ARTICLE III.

CONSIDERATION

Section 3.1 Purchase Price. The purchase price for the Property (the “Purchase Price”) will be Two Hundred Nine Million Five Hundred Thousand and No/100 Dollars ($209,500,000.00) in lawful currency of the United States of America, payable as provided in Section 3.2.

Section 3.2 Method of Payment of Purchase Price. Not later than 3:00 p.m. Pacific Standard Time on the last business day preceding the Closing Date (the “Deposit Time”), Purchaser will deposit in escrow with the Title Company the Purchase Price (subject to adjustments described in Section 10.5), together with all other costs and amounts to be paid by Purchaser at Closing pursuant to the terms of this Agreement, by Federal Reserve wire transfer of immediately available funds to an account to be designated by the Title Company. On the Closing Date: (a) Purchaser will direct and instruct the Title Company to (i) pay to Seller by Federal Reserve wire transfer of immediately available funds to an account to be designated by Seller, the Purchase Price (subject to adjustments described in Section 10.5), less any costs or other amounts to be paid by Seller at Closing pursuant to the terms of this Agreement, and (ii) pay to all appropriate payees the other costs and amounts to be paid by Purchaser at Closing pursuant to the terms of this Agreement; and (b) Seller will cause the Title Company to pay to all appropriate payees, out of the proceeds of Closing payable to Seller, all costs and amounts to be paid by Seller at Closing pursuant to the terms of this Agreement.

Section 3.3 Independent Consideration. Contemporaneously with the execution and delivery of this Agreement, Purchaser has paid to Seller as further consideration for this Agreement, in cash, the sum of $100.00 (the “Independent Consideration”), in addition to the Earnest Money Deposit and the Purchase Price and independent of any other consideration

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provided hereunder, which Independent Consideration is fully earned by Seller and is not refundable under any circumstances.

ARTICLE IV.

EARNEST MONEY DEPOSIT AND ESCROW INSTRUCTIONS

Section 4.1 The Deposit. Within five (5) Business Days after the Effective Date, Purchaser shall deposit the Earnest Money Note with the Title Company. If Purchaser does not exercise its right to terminate this Agreement pursuant to Section 5.5 hereof, then on or before the expiration of the Inspection Period, Purchaser shall deposit cash in the amount of Four Million and No/100 Dollars ($4,000,000) with Title Company in payment of the Earnest Money Note, and the Earnest Money Note shall be returned to Purchaser. The Earnest Money Note and the cash deposited in payment thereof (together with any interest earned thereon, are referred to herein as the “Earnest Money Deposit”, which will be held in escrow by the Title Company and disbursed pursuant to the terms of this Agreement. Failure to deposit the Earnest Money Note or cash in payment thereof in accordance with the terms hereof shall result in the termination of this Agreement.

Section 4.2 Escrow Instructions. Article IV constitutes the escrow instructions to the Title Company with regard to the Earnest Money Deposit and the Closing (the “Escrow Instructions”). By its execution of the joinder attached hereto, the Title Company agrees to be bound by the provisions of this Article IV. If any requirements relating to the duties or obligations of the Title Company hereunder are not acceptable to the Title Company, or if the Title Company requires additional instructions, the parties agree to make such deletions, substitutions and additions to the Escrow Instructions as Purchaser and Seller hereafter mutually approve in writing, provided that neither party shall be obligated to make any such deletions, substitutions or additions that substantially alter this Agreement or its intent. In the event of any conflict between this Agreement and such additional escrow instructions, this Agreement will control.

Section 4.3 Documents Deposited into Escrow. On or before the date that is one (1) business day prior to the Closing Date, Purchaser will deliver in escrow to the Title Company the funds and documents described and provided for in Section 10.3 below and (c) Seller will deliver in escrow to the Title Company the documents described and provided for in Section 10.4 below.

Section 4.4 Close of Escrow. On the Closing Date, when Purchaser and Seller have delivered the documents required by Section 4.3, the Title Company will:

(a) If applicable and when required, file with the Internal Revenue Service (with copies to Purchaser and Seller) the reporting statement required under Section 6045(e) of the Internal Revenue Code of 1986 (the “Code”) and Section 4.7;

(b) Insert the applicable Closing Date as the date of any document delivered to the Title Company undated, and assemble counterparts into single instruments;

(c) Disburse to Seller, by wire transfer to Seller of immediately available federal funds by 10:00 a.m. Pacific Standard Time on the Closing Date, in accordance with wiring instructions to be obtained by the Title Company from Seller, all sums to be received by

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Seller from Purchaser at the Closing, comprised of the Purchase Price as adjusted in accordance with the provisions of this Agreement, less all amounts paid by the Title Company in satisfaction of any liens or encumbrances on the Real Property pursuant to the written instructions of Seller or Seller’s counsel, and less all costs and amounts to be paid by Seller at Closing pursuant to the terms of this Agreement;

(d) Deliver the Deed to Purchaser by causing same to be recorded in the Official Records;

(e) Issue to Purchaser the Title Policy required by Section 6.3 of this Agreement;

(f) Deliver to Seller all documents deposited with the Title Company for delivery to Seller at the Closing; and

(g) Deliver to Purchaser (i) all documents deposited with the Title Company for delivery to Purchaser at the Closing and (ii) any funds deposited by Purchaser in excess of the amount required to be paid by Purchaser pursuant to this Agreement.

Section 4.5 Maintenance of Confidentiality by Title Company. Except as may otherwise be required by law or by this Agreement, Title Company will maintain in strict confidence and not disclose to anyone the existence of this Agreement, the identity of the parties hereto, the amount of the Purchase Price, the provisions of this Agreement or any other information concerning the transactions contemplated hereby, without the prior written consent of Purchaser and Seller (which may be withheld in either party’s sole and absolute discretion).

Section 4.6 Investment of Earnest Money Deposit. When cash has been deposited with Title Company in payment of the Earnest Money Note, Title Company will invest and reinvest the Earnest Money Deposit, at the instruction and sole election of Purchaser, only in (a) bonds, notes, Treasury bills or other securities constituting direct obligations of, or guaranteed by the full faith and credit of, the United States of America, and in no event maturing beyond Closing Date, or (b) an interest-bearing account at a commercial bank acceptable to Seller, Purchaser and the Title Company. The investment of the Earnest Money Deposit will be at the sole risk of Purchaser and no loss on any investment will relieve Purchaser of its obligations to pay to Seller as liquidated damages the amount of the Earnest Money Deposit as provided in Section 13.2, or of its obligation to pay the Purchase Price. All interest earned on the Earnest Money Deposit will be the property of Purchaser and will be reported to the Internal Revenue Service as income. Purchaser will provide the Title Company with a taxpayer identification number and will pay all income taxes due by reason of interest accrual on the Earnest Money Deposit.

Section 4.7 Designation of Reporting Person. Title Company shall comply with all applicable federal, state and local reporting and withholding requirements relating to the close of the transactions contemplated herein. Without limiting the foregoing, pursuant to Section 6045 of the Code, Title Company shall be designated the “closing agent” hereunder and shall be solely responsible for complying with the Tax Reform Act of 1986 with regard to reporting all settlement information to the Internal Revenue Service.

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ARTICLE V.

INSPECTION OF PROPERTY

Section 5.1 Entry and Inspection.

(a) Subject to the provisions of this Section 5.1 and the obligations set forth in Section 5.3, from and after the Effective Date until 3:00 p.m. Pacific Standard Time on the date that is thirty (30) days after the Effective Date (the “Inspection Period”), Seller will permit Purchaser and its employees and authorized agents, representatives, contractors and consultants (the “Licensee Parties”) to enter upon the Real Property at all reasonable times during normal business hours to perform any inspections, investigations, studies, tests, evaluations and assessments of the Property (including, but not limited to, physical, structural, mechanical, architectural, engineering, soils, geotechnical, and environmental / asbestos tests (generally, “Inspections”) as Purchaser deems necessary, appropriate or prudent in any respect and for all purposes in connection with Purchaser’s acquisition of the Property and the consummation of the transaction contemplated by this Agreement. Purchaser shall notify Seller of the intention of Purchaser or any Licensee Party to enter the Real Property at least two (2) business days prior to such intended entry and specify the intended purpose therefor and the Inspections contemplated to be made and/or the service provider, Authorities, or any other person with whom Purchaser or any Licensee Party contemplates communicating. At Seller’s option, Seller or its employees or authorized agents, representatives, contractors or consultants (the “Seller Representatives”) may be present for any such entry or Inspection. With respect to any Inspection that will require excavations, borings, drilling, removal or demolition of any portion of the Property, or any other invasive activities on the Property (generally, “Invasive Testing”), Purchaser shall submit to Seller a written plan describing such Invasive Testing in reasonable detail (an “Invasive Testing Plan”) for Seller’s written approval, which approval may not be unreasonably withheld or delayed. Purchaser may not proceed with any Invasive Testing unless Seller has expressly approved in writing the relevant Invasive Testing Plan, and Purchaser shall conduct all Invasive Testing in compliance with the Invasive Testing Plan approved by Seller. Seller shall have the right to have a Seller Representative observe any testing activities and to request and receive split samples of any materials collected for analysis by Purchaser or any Licensee Party; provided, however, that Purchaser’s sole responsibility shall be to notify Seller when Purchaser’s testing activities will be taking place, and Seller shall be solely responsible for causing a Seller Representative to be present to observe and/or to request and receive split material samples. Purchaser Party shall repair any damage to the Property caused by any such Invasive Testing and restore it to its pre-existing condition promptly after any Invasive Testing, but in no event later than five (5) days after any disturbance or damage occurs.

(b) Solely as an accommodation to Purchaser in connection with Purchaser’s contemplated ownership and operation of the Property following the Closing and provided Purchaser has not exercised its right to terminate this Agreement pursuant to Section 5.5, Purchaser shall have the right, after the expiration of the Inspection Period, to continue to perform Inspections regarding the Property provided that Purchaser complies with the provisions of this Agreement.

(c) Subject to the obligations set forth in Section 5.3 below, the Licensee Parties shall have the right to communicate directly with Authorities for any good faith

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reasonable purpose in connection with the transaction contemplated by this Agreement; provided, however, Purchaser shall provide Seller notice at least two (2) business days prior to Purchaser communicating with any Authorities regarding the Property and Seller shall have the right to participate in any such communications.

Section 5.2 Document Review.

(a) Purchaser expressly acknowledges and confirms that during the Inspection Period and, if this Agreement is not terminated, thereafter (but subject to Section 5.1 and this Section 5.2), Purchaser and the Licensee Parties shall have, the right to review, inspect, examine, analyze, verify and photocopy, at either the office of Seller, Seller’s property manager or at the Real Property, all agreements, contracts, documents, information, reports, books, records and other materials pertinent to the use, ownership, occupancy, or operation of the Property, except those excluded by the terms of the definition of Records and Plans, that are in Seller’s Control (collectively, the “Documents”), including, but not limited to, the following: (i) assessments (special or otherwise) and ad valorem and personal property tax bills, covering the period of Seller’s ownership of the Property; (ii) copies of the Service Contracts, the Licenses and Permits, and the Records and Plans; and (iii) current inventories of the Personal Property.

(b) Purchaser acknowledges that information contained in any and all of the Documents may be proprietary and confidential in nature (“Confidential Information”) and that the Documents have been provided to Purchaser solely to assist Purchaser in determining the feasibility of purchasing the Property. Subject only to the provisions of Article XII, Purchaser agrees not to disclose any Confidential Information to any party outside of Purchaser’s organization other than its attorneys, partners, accountants, lenders, investors, or any Licensee Parties who need to know such Confidential Information for the purpose of giving advice to Purchaser with respect to the transactions contemplated by this Agreement (collectively, the “Permitted Outside Parties”). Purchaser further agrees that within its organization, or as to the Permitted Outside Parties, the Confidential Information will be disclosed and exhibited only to those persons within Purchaser’s organization or to those Permitted Outside Parties who are responsible for determining the feasibility of Purchaser’s acquisition of the Property. Purchaser agrees not to divulge any Confidential Information except in strict accordance with the confidentiality standards set forth in this Section 5.2 and Article XII. In permitting Purchaser and the Permitted Outside Parties to review the Confidential Information to assist Purchaser, Seller has not waived any privilege or claim of confidentiality with respect thereto, and no third party benefits or relationships of any kind, either express or implied, have been offered, intended or created by Seller and any such claims are expressly rejected by Seller and waived by Purchaser and the Permitted Outside Parties, for whom, by its execution of this Agreement, Purchaser is acting as an agent with regard to such waiver. Notwithstanding any of the foregoing, Confidential Information shall not include (i) information that is obtained by Purchaser from a third person who is not prohibited from transmitting the information to Purchaser, (ii) information that is available to the general public, or (iii) information that is independently developed by Purchaser without reliance on any Confidential information. This Section 5.2(b) shall survive any termination of this Agreement but shall not survive the Closing.

(c) Purchaser will use commercially reasonable efforts to return to Seller all copies Purchaser has made of the Documents and all copies of any studies, reports or test results

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regarding any part of the Property obtained by Purchaser, before or after the execution of this Agreement, in connection with Purchaser’s inspection of the Property, excluding (i) any proprietary documents or information (such as internally prepared valuations, projections or budgets or other analyses of the Property) and (ii) any attorney-client communications or other information which Purchaser is contractually or otherwise legally bound to a third party to keep confidential (collectively, “Purchaser’s Information”) not later than ten (10) Business Days following the time this Agreement is terminated for any reason. Any obligation to return Purchaser’s Information shall be subject to any legal requirement by which Purchaser may be bound to retain file copies and shall not require the return of any internal analysis of the Documents; provided, however, that to the extent such analysis reflects any Confidential Information, Purchaser will not divulge any such analysis except in strict accordance with the confidentiality standards set forth in this Section 5.2 and Article XII.

(d) Purchaser acknowledges that some of the Documents may have been prepared by third parties and may have been prepared prior to Seller’s ownership of the Property. Purchaser hereby acknowledges that, except as expressly provided in Section 8.1 below, Seller has not made and does not make any representation or warranty regarding the truth, accuracy or completeness of the Documents or the sources thereof, Seller has not undertaken any independent investigation as to the truth, accuracy or completeness of the Documents, and Seller is providing the Documents solely as an accommodation to Purchaser.

(e) Notwithstanding any provision of this Agreement to the contrary, no termination of this Agreement will terminate Purchaser’s obligations pursuant to this Section 5.2.

Section 5.3 Entry and Inspection Obligations.

(a) Purchaser agrees that in entering upon the Property and conducting any Inspections, Purchaser and the other Licensee Parties will not: (i) unreasonably disturb the Occupants or unreasonably interfere with their use of the Property; (ii) unreasonably or materially interfere with the operation and maintenance of the Real Property or Improvements; (iii) damage any part of the Property or any personal property owned or held by any Occupant or any other person or entity (except for such damage incident to Purchaser’s or any Licensee Parties’ activities on the Property that is repaired by Purchaser); (iv) injure or otherwise cause bodily harm to Seller or any Occupant, or to any of their respective agents, guests, invitees, contractors and employees, or to any other person or entity; (v) permit any liens to attach to the Real Property by reason of the exercise of Purchaser’s rights under this Article V; (vi) communicate with any Occupants, Authorities, or service providers without prior written notice as provided in this Article V; or (vii) reveal or disclose any Confidential Information concerning the Property and the Documents to anyone outside Purchaser’s organization, except in accordance with the confidentiality standards set forth in Section 5.2(b) and Article XII. Purchaser will: (x) maintain commercial general liability insurance in an amount not less than $5,000,000 covering any accident arising in connection with the presence of Purchaser or the other Licensee Parties on the Real Property or the Improvements, and deliver a certificate of insurance verifying such coverage to Seller prior to entry upon the Real Property or Improvements; (y) promptly pay when due the costs of all entry and Inspections done with regard to the Property; and (z) promptly repair any damage to the Real Property and Improvements caused by any such entry upon the Real Property.

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(b) Purchaser hereby indemnifies, defends and holds Seller and its partners, agents, employees, lenders, successors and assigns harmless from and against any and all liens, claims, causes of action, damages, liabilities, demands, suits, obligations to third parties, together with all losses, penalties, fines, costs and expenses relating to any of the foregoing (including but not limited to court costs and reasonable attorneys’ fees) (generally, “Claims”) arising out of any inspections, investigations, examinations, sampling or tests conducted by Purchaser or any Licensee Party, whether prior to or after the date hereof, or as a result of any violation of the provisions of this Section 5.3; provided, however, that Purchaser’s indemnity hereunder shall not include any Claims resulting from the discovery of pre-existing conditions at the Property except to the extent such condition is aggravated by an act of Purchaser or any Licensee Party as a result of the Inspections.

(c) Notwithstanding any provision of this Agreement to the contrary, neither the Closing nor a termination of this Agreement will terminate Purchaser’s obligations pursuant to this Section 5.3.

Section 5.4 Data Center Agreement. During the Inspection Period, Seller and Purchaser shall attempt to agree upon the form of an agreement between Seller and Purchaser (the “Data Center Agreement”) relating to (i) easements benefiting and burdening the Real Property and the Data Center Property, (ii) the Covenants, (iii) the Development Agreement, (iv) the Trip Cap Agreement as it relates to the Data Center Property, (v) a right of first offer in favor of Purchaser for the Data Center Property, and (vi) other matters relating to the separate ownership of the Real Property and the Data Center Property. If the parties are unable to agree on the form of the Data Center Agreement by the expiration of the Inspection Period, either party may, by written notice to the other, terminate this Agreement. If either party so terminates this Agreement, then the Title Company shall return the Earnest Money Note to Purchaser, Purchaser shall promptly return the Purchaser’s Information to Seller in accordance with Section 5.3, Seller and Purchaser shall equally share any Cancellation Charges, and this Agreement shall terminate and be of no further force or effect except for the Termination Surviving Obligations.

Section 5.5 Termination Right. Purchaser, in its sole and absolute discretion, prior to the expiration of the Inspection Period, may elect to terminate this Agreement and its obligations hereunder for any reason or no reason, without further liability except for the Termination Surviving Obligations. If Purchaser gives Seller written notice prior to the expiration of the Inspection Period that it is not removing its inspection contingency, then the Title Company shall return the Earnest Money Note to Purchaser, Purchaser shall promptly return the Purchaser’s Information to Seller in accordance with Section 5.3, Seller and Purchaser shall equally share any Cancellation Charges, and this Agreement shall terminate and be of no further force or effect except for the Termination Surviving Obligations. Otherwise, Purchaser’s right to terminate this Agreement pursuant to this Section 5.5 shall automatically lapse.

Section 5.6 Sale “As Is”. THE TRANSACTION CONTEMPLATED BY THIS AGREEMENT HAS BEEN NEGOTIATED BETWEEN SELLER AND PURCHASER, THIS AGREEMENT REFLECTS THE MUTUAL AGREEMENT OF SELLER AND PURCHASER, AND PURCHASER WILL CONDUCT DURING THE INSPECTION PERIOD ITS OWN INDEPENDENT EXAMINATION OF THE PROPERTY. OTHER THAN THE MATTERS REPRESENTED IN SECTION 8.1 HEREOF OR THE DOCUMENTS DELIVERED BY

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SELLER AT CLOSING, BY WHICH ALL OF THE FOLLOWING PROVISIONS OF THIS SECTION 5.6 ARE LIMITED, PURCHASER HAS NOT RELIED UPON AND WILL NOT RELY UPON, EITHER DIRECTLY OR INDIRECTLY, ANY REPRESENTATION OR WARRANTY OF SELLER OR ANY OF SELLER’S AGENTS OR REPRESENTATIVES. SELLER SPECIFICALLY DISCLAIMS ANY REPRESENTATION, WARRANTY OR ASSURANCE WHATSOEVER TO PURCHASER AND NO WARRANTIES OR REPRESENTATIONS OF ANY KIND OR CHARACTER, EITHER EXPRESS OR IMPLIED, MAY BE RELIED UPON BY PURCHASER WITH RESPECT TO THE STATUS OF TITLE TO OR THE MAINTENANCE, REPAIR, CONDITION, DESIGN OR MARKETABILITY OF ANY PORTION OF THE PROPERTY, INCLUDING BUT NOT LIMITED TO (a) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, (b) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, (c) ANY IMPLIED OR EXPRESS WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS, (d) THE FINANCIAL CONDITION OR PROSPECTS OF THE PROPERTY AND (e) THE COMPLIANCE OR LACK THEREOF OF THE REAL PROPERTY OR THE IMPROVEMENTS WITH GOVERNMENTAL REGULATIONS, IT BEING THE EXPRESS INTENTION OF SELLER AND PURCHASER THAT, EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT OR THE DOCUMENTS DELIVERED BY SELLER AT CLOSING, THE PROPERTY WILL BE CONVEYED AND TRANSFERRED TO PURCHASER IN ITS PRESENT CONDITION AND STATE OF REPAIR, “AS IS” AND “WHERE IS”, WITH ALL FAULTS. PURCHASER REPRESENTS THAT IT IS A KNOWLEDGEABLE, EXPERIENCED AND SOPHISTICATED PURCHASER OF REAL ESTATE, AND THAT IT IS RELYING SOLELY ON ITS OWN EXPERTISE AND THAT OF PURCHASER’S CONSULTANTS IN PURCHASING THE PROPERTY. DURING THE INSPECTION PERIOD, PURCHASER WILL CONDUCT SUCH INDEPENDENT INSPECTIONS OF THE PROPERTY AND RELATED MATTERS AS PURCHASER DEEMS NECESSARY, INCLUDING, BUT NOT LIMITED TO, THE PHYSICAL AND ENVIRONMENTAL CONDITIONS THEREOF, AND WILL RELY UPON SAME AND NOT UPON ANY STATEMENTS OF SELLER (EXCLUDING THE LIMITED MATTERS REPRESENTED BY SELLER IN SECTION 8.1 HEREOF OR THE DOCUMENTS DELIVERED BY SELLER AT CLOSING) OR OF ANY OFFICER, DIRECTOR, EMPLOYEE, AGENT OR ATTORNEY OF SELLER. PURCHASER ACKNOWLEDGES THAT ALL INFORMATION OBTAINED OR THAT WILL BE OBTAINED BY PURCHASER WAS OR WILL BE OBTAINED FROM A VARIETY OF SOURCES AND SELLER WILL NOT BE DEEMED TO HAVE REPRESENTED OR WARRANTED THE COMPLETENESS, TRUTH OR ACCURACY OF ANY OF THE DOCUMENTS OR OTHER SUCH INFORMATION HERETOFORE OR HEREAFTER FURNISHED TO PURCHASER THAT WAS CREATED, PREPARED, COMPILED, OR AUTHORED BY ANY PERSON OR ENTITY OTHER THAN SELLER OR ANY OF ITS AFFILIATES. EXCEPT AS MAY BE EXPRESSLY PROVIDED OTHERWISE IN THIS AGREEMENT OR THE DOCUMENTS DELIVERED BY SELLER AT CLOSING, UPON CLOSING, PURCHASER WILL ASSUME THE RISK THAT ADVERSE MATTERS, INCLUDING, BUT NOT LIMITED TO, ADVERSE PHYSICAL AND ENVIRONMENTAL CONDITIONS, MAY NOT HAVE BEEN REVEALED BY PURCHASER’S INSPECTIONS AND SELLER WILL SELL AND CONVEY TO PURCHASER, AND PURCHASER WILL ACCEPT THE PROPERTY, “AS IS, WHERE IS,” WITH ALL FAULTS. PURCHASER FURTHER ACKNOWLEDGES AND

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AGREES THAT SELLER IS NOT LIABLE OR BOUND IN ANY MANNER BY ANY ORAL OR WRITTEN STATEMENTS, REPRESENTATIONS OR INFORMATION PERTAINING TO THE PROPERTY FURNISHED BY ANY REAL ESTATE BROKER, AGENT, EMPLOYEE, SERVANT OR OTHER PERSON, UNLESS THE SAME ARE SPECIFICALLY SET FORTH OR REFERRED TO HEREIN. PURCHASER, WITH PURCHASER’S COUNSEL, HAS FULLY REVIEWED THE DISCLAIMERS AND WAIVERS SET FORTH IN THIS AGREEMENT, AND UNDERSTANDS THE SIGNIFICANCE AND EFFECT THEREOF. PURCHASER ACKNOWLEDGES AND AGREES THAT THE DISCLAIMERS AND OTHER AGREEMENTS SET FORTH HEREIN ARE AN INTEGRAL PART OF THIS AGREEMENT. THE TERMS AND CONDITIONS OF THIS SECTION 5.6 WILL EXPRESSLY SURVIVE THE CLOSING, WILL NOT MERGE WITH THE PROVISIONS OF ANY CLOSING DOCUMENTS AND WILL BE INCORPORATED INTO THE DEED.

/s/ CRO

Purchaser’s Initials

Section 5.7 Material Defects. Purchaser, on behalf of itself, its successors and assigns, hereby releases the Seller and its Affiliates, officers, directors, members, employees, contractors, agents, investment advisors and their respective successors and assigns (collectively “Indemnitees”) from and against any and all Claims known or unknown, arising out of, or related in any way to the condition of the Property, the condition of the structure of the Improvements or any equipment, systems and appliances related thereto, including any heating, ventilation, plumbing, electrical and air conditioning systems, wiring, telecommunications systems, paving, roofing and other such aspects of the Property, (including without limitation any liability of Indemnitees for latent defects). The foregoing shall not apply to any Claims based on a breach of the representations and warranties contained in Section 8.1 or the documents delivered by Seller at Closing. The provisions of this Section 5.7 shall survive indefinitely any Closing or termination of this Agreement and shall not be merged into the Closing documents.

Section 5.8 Hazardous Materials Waiver. Except with regard to any liability on the part of Seller for breach of Seller’s representations and warranties set forth in Section 8.1 of this Agreement or the documents delivered by Seller at Closing, Purchaser, on behalf of itself, its successors and assigns, hereby releases the Indemnitees from and against any and all Claims known or unknown, arising out of, related in any way to the presence, misuse, use, disposal, release or threatened release of any Hazardous Substances at the Property and any liability or Claim related to the Property arising under any Environmental Laws. Purchaser acknowledges that unknown and unsuspected Hazardous Substances may hereafter be discovered on or about the Property, and Purchaser knowingly releases Seller from any and all liability related thereto. The provisions of this Section 5.8 shall survive indefinitely any Closing or termination of this Agreement and shall not be merged into the Closing documents.

ARTICLE VI.

TITLE AND SURVEY MATTERS

Section 6.1 Survey. Seller shall deliver to Purchaser a copy of the survey prepared by Entranco Engineers in connection with the 2003 Binding Site Plan, and any later survey of the

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Property in Seller’s possession. Purchaser has ordered an update of the Entranco survey from W&H Pacific (collectively the “Survey”).

Section 6.2 Title Commitment.

(a) Purchaser has requested the Title Company to furnish to Purchaser and Seller a preliminary report (the “Commitment”) for an owner’s policy of title insurance in ALTA form, together with legible copies of all documents referenced as exceptions therein (the “Title Documents”).

(b) Purchaser shall have until 3:00 p.m. Pacific Standard Time on the date ten (10) days after the Effective Date to object in writing to any exceptions or matters shown on or disclosed by the Commitment, the Title Documents or the Survey (individually, a “Title Objection” and collectively, the “Title Objections”). Unless Purchaser shall timely object to any exceptions or matters shown on or disclosed by the Commitment, the Title Documents, or the Survey, all such exceptions and matters shall be deemed to constitute additional Permitted Exceptions. Seller may elect (but, subject to Section 6.2(c), shall not be obligated) to remove or cause to be removed, or insured over, at Seller’s expense, any Title Objections, and shall be entitled to a reasonable adjournment of the Closing (not to exceed thirty (30) days) for the purpose of such removal, which removal shall be deemed effected by the issuance of title insurance, in form and substance acceptable to Purchaser, eliminating or insuring against the effect of the Title Objections. Seller shall notify Purchaser in writing within five (5) Business Days after receipt of Purchaser’s notice of Title Objections whether Seller elects to remove or attempt to obtain title insurance endorsing over the same. If Seller fails to provide such notice, Seller shall be deemed to have elected not to cure such Title Objections. If Seller elects not to remove or endorse over one or more Title Objections, Purchaser may terminate this Agreement as provided in Section 5.5. If Seller elects to remove or attempt to obtain title insurance endorsing over the Title Objections and Seller does not remove or endorse over any Title Objections in a manner reasonably acceptable to Purchaser prior to the Closing, then, Purchaser may either (i) terminate this Agreement by giving written notice of such termination to Seller and the Title Company, in which event the Title Company shall return the Earnest Money Deposit (and any interest accrued thereon) to Purchaser, Purchaser shall promptly return the Purchaser’s Information to Seller in accordance with Section 5.3(c), the parties shall equally share the Cancellation Charges) and thereafter the parties shall have no further rights or obligations hereunder except for the Termination Surviving Obligations; or (ii) waive such Title Objections, in which event such Title Objections shall be deemed additional Permitted Exceptions and the Closing shall occur as herein provided without any reduction of or credit against the Purchase Price. Purchaser shall be deemed to have elected to waive such Title Objections pursuant to clause (ii) of the preceding sentence in the event Purchaser has not terminated this Agreement pursuant to clause (i) of the preceding sentence within two (2) business days after Purchaser receives notice that such Title Objections will not be cured to Purchaser’s reasonable satisfaction.

(c) Notwithstanding any provision of this Section 6.2 to the contrary, Seller will be obligated to cure exceptions to title to the Property relating to (i) liens and security interests securing loans obtained by Seller, (ii) any other monetary liens or security interests not created by Purchaser, (iii) all taxes and assessments due and payable for any period prior to the

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Closing, and (iv) all exceptions or matters created by Seller after the effective date of this Agreement without the prior written consent of Purchaser (which consent may be withheld in Purchaser’s sole and absolute discretion). If, prior to the Closing, Seller does not remove any of the foregoing exceptions, then Purchaser may (x) terminate this Agreement by delivering written notice of such termination to Seller and the Title Company, in which event the Title Company shall return the Earnest Money Deposit (and any interest accrued thereon) to Purchaser, Purchaser shall return the Purchaser’s Information to Seller in accordance with Section 5.3(c), the parties shall equally share the Cancellation Charges and thereafter the parties shall have no further rights or obligations hereunder except for the Termination Surviving Obligations; (y) waive Seller’s performance hereunder, in which event such exceptions shall be deemed additional Permitted Exceptions and the Closing shall occur as herein provided, without any reduction of or credit against the Purchase Price except that if the exception not removed is a lien described in this subsection (c)(i), (ii), or (iii), Purchaser shall be entitled to a credit against the Purchase Price in the amount of such lien, or (z) seek specific performance of this Agreement.

Section 6.3 Title Insurance. At Closing, the Title Company shall issue to Purchaser or be irrevocably committed to issue to Purchaser an ALTA Extended Coverage Owner’s Policy of Title Insurance in the amount of the Purchase Price, insuring fee simple title to the Real Property and the Improvements is vested in Purchaser in the form of, and with the endorsements contained in, the Commitment, subject only to the Permitted Exceptions (the “Title Policy”). Purchaser, at Purchaser’s expense, shall be entitled to request that the Title Company provide such endorsements to the Title Policy as Purchaser may require, provided that the Closing shall not be delayed as a result of Purchaser’s request for such endorsements.

ARTICLE VII.

INTERIM OPERATING COVENANTS

Section 7.1 Interim Operating Covenants. Seller covenants to Purchaser that Seller will:

(a) Operations. From the Effective Date until Closing, continue to operate, manage and maintain the Improvements in the ordinary course of Seller’s business and substantially in accordance with Seller’s practice as of the Effective Date, subject to ordinary wear and tear and further subject to Article IX of this Agreement.

(b) Maintain Insurance. From the Effective Date until Closing, maintain fire and extended coverage insurance on the Property in the amount of the full replacement cost thereof which is at least equivalent in all material respects to the insurance policies covering the Real Property and the Improvements as of the Effective Date.

(c) Leases. From the Effective Date until Closing, not enter into any new leases or any amendments, expansions or renewals of any lease, other than the Microsoft Lease, and not accept any rent from any tenant for more than one (1) month in advance of its due date without the prior written consent of Purchaser, which consent will be deemed given unless written objection thereto is given within five (5) Business Days after receipt of the relevant written information. Purchaser’s consent may be withheld in Purchaser’s sole and absolute discretion.

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(d) Service Contracts. From the Effective Date until Closing, not enter into any service agreement, maintenance contract, equipment leasing agreement, or other contract for the provision of labor, services, materials or supplies, unless such agreement or contract is terminable on not more than thirty (30) days notice without penalty or unless Purchaser consents thereto in writing, which consent will not be unreasonably withheld, delayed or conditioned.

(e) Personal Property. From the Effective Date until Closing, not transfer or remove any Personal Property from the Improvements except for the purpose of repair or replacement thereof, provided, that, such repair or replacement is completed at Seller’s cost prior to the Closing and any Personal Property so replaced is replaced with such Personal Property of a like kind and at least equal value to the Personal Property replaced.

(f) Notices. To the extent received by Seller, from the Effective Date until Closing, promptly deliver to Purchaser copies of written default notices, notices of lawsuits and notices of violations of Governmental Regulations affecting the Property.

(g) Comply with Governmental Regulations. From the Effective Date until Closing, not take any action that Seller knows would result in a failure to comply in all material respects with all Governmental Regulations applicable to the Property, it being understood and agreed, however, that prior to Closing, (i) Seller will have the right to contest any such Governmental Regulations, and (ii) Seller shall have no obligation to make any improvements or complete any modifications to the Real Property or Improvements or expend any funds with respect to such improvements or modifications or to effect compliance with any Governmental Regulations.

ARTICLE VIII.

REPRESENTATIONS AND WARRANTIES

Section 8.1 Seller’s Representations and Warranties. The following constitute the sole representations and warranties of Seller. Subject to the limitations set forth in Article XVI of this Agreement, Seller represents and warrants to Purchaser the following as of the Effective Date:

(a) Due Formation and Authorization. Seller is duly organized and validly existing under the laws of the state of its formation and has all requisite power, authority and legal right to execute, deliver and perform the terms of this Agreement. This Agreement has been duly authorized by all necessary action on Seller’s part and constitutes valid and legally binding obligations of Seller enforceable in accordance with their respective terms.

(b) Consent. No consent, approval or authorization by any individual or entity or any court, administrative agency or other governmental authority is required in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated by this Agreement by Seller other than those consents, approvals and authorizations which shall be obtained by Seller prior to Closing. The consummation of the transactions contemplated by this Agreement will not result in a breach of, or constitute a default under, any mortgage, deed of trust, bank loan, credit agreement or other instrument to which Seller is a party or by which Seller may be bound or affected.

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(c) Suits and Proceedings. To Seller’s knowledge and except as listed in Exhibit E, there are no legal actions, suits, or similar proceedings pending, or threatened, against Seller or the Property.

(d) Leases. There are no leases affecting the Property other than the Microsoft Lease and the rooftop agreement with respect to the Olympic Building. Except for Purchaser as tenant under the Microsoft Lease, and Seller or Affiliates of Seller, no other party has the right to occupy any portion of the Property other than licensees of Seller or its Affiliates pursuant to licenses terminable by Seller or such Affiliates on not more than thirty (30) days’ notice and the rooftop agreement with respect to the Olympic Building.

(e) Service Contracts. Attached as Exhibit C is, to Seller’s knowledge, a complete and accurate schedule of all Service Contracts affecting the Property to which Seller is a party or by which it or, the Property is bound as of the date hereof.

(f) No Violations. Seller has not received any written notification from an Authority that the Property is (and Seller has no knowledge that the Property is) in material violation of any applicable fire, health, building, use, occupancy or zoning laws or any other Governmental Regulation.

(g) Insolvency. No attachments, execution proceedings, assignments for the benefit of creditors, insolvency, or other similar proceedings are pending and served, or, to Seller’s Knowledge, threatened, against Seller or the Property.

(h) Environmental. Except as shown in any environmental reports covering the Real Property and Improvements and any other Documents delivered or otherwise made available to Purchaser pursuant to Section 5.2(a), to Seller’s Knowledge, Seller has not received prior to the Effective Date written notice from any Authorities, and, to Seller’s Knowledge, the Real Property and Improvements are not in violation of any Environmental Law which violations have not been corrected.

(i) Bankruptcy. Seller has not made a general assignment for the benefit of creditors nor been adjudicated a bankrupt or insolvent, nor has a receiver, liquidator, or trustee for any of Seller’s properties (including the Property) been appointed or a petition filed by or against Seller for bankruptcy, reorganization, or arrangement pursuant to the Federal Bankruptcy Act or any similar Federal or state statute, or any proceeding instituted for the dissolution or liquidation of Seller.

(j) Condemnation. To Seller’s knowledge, no condemnation or other taking by eminent domain of the Property or any portion thereof has been instituted affecting the Property or any portion thereof or its use. Section 9.3 hereof shall govern the parties’ rights and remedies in the event any condemnation or eminent domain proceedings are instituted after the Effective Date.

(k) Insurance. To Seller’s Knowledge, Seller has not received from any insurance company or any board of fire underwriters any letter of non-insurance citing a non-insurable condition at the Property which has not been remedied.

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If prior to Closing either party to this Agreement (each, a “Party”) comes to have actual knowledge of a fact or circumstance, that would render a representation or warranty by Seller herein inaccurate in any material respect, when made, that Party shall promptly advise the other Party thereof in writing. Upon receiving or giving such notification, Seller shall have the right take such action as shall be necessary in order to correct the representation or warranty which was incorrect. If Seller fails to notify Purchaser within ten (10) days after receiving Purchaser’s notice or giving Purchaser such notice that Seller intends to take such action, then Purchaser’s sole remedy shall be to terminate this Agreement by notice to Seller given within five (5) Business Days after the expiration of such ten (10) day period, in which case Purchaser shall be entitled to the return of the Deposit; otherwise, Purchaser shall be deemed to have waived any right to terminate this Agreement or to recover from Seller on account of such incorrectness.

Section 8.2 Purchaser’s Representations and Warranties. Purchaser represents and warrants to Seller the following:

(a) Due Formation and Authorization. Purchaser is duly organized and validly existing under the laws of the state of its formation is qualified to do business in the State of Washington and has all requisite power, authority and legal right to execute, deliver and perform the terms of this Agreement. This Agreement constitutes valid and legally binding obligations of Purchaser enforceable in accordance with their respective terms.

(b) Non-Contravention. The execution and delivery of this Agreement and all other documents to be delivered prior to or at the Closing by Purchaser and the consummation by Purchaser of the transactions contemplated hereby and thereby will not violate any Governmental Regulations or any judgment, order, injunction, decree, regulation or ruling of any court or Authority or conflict with, result in a breach of, or constitute a default under the organic documents of Purchaser, any note or other evidence of indebtedness, any mortgage, deed of trust or indenture, or any lease or other material agreement or instrument to which Purchaser is a party or by which it is bound.

(c) Consents. No consent, waiver, approval or authorization is required from any person or entity (that has not already been obtained) in connection with the execution and delivery of this Agreement by Purchaser or the performance by Purchaser of the transactions contemplated hereby.

ARTICLE IX.

CONDEMNATION AND CASUALTY

Section 9.1 Significant Casualty. If, prior to the Closing Date, all or a Significant Portion of the Real Property and Improvements are destroyed or damaged by fire or other casualty, Seller will notify Purchaser of such casualty and Purchaser will have the option to elect either: (x) to proceed with this transaction and Closing in accordance with this Agreement notwithstanding such damage or destruction, in which event Seller will have no obligation to repair such damage or destruction, and the Closing shall occur as otherwise provided in this Agreement; in such case, Seller shall assign to Purchaser upon the Closing all insurance proceeds paid or payable to Seller in connection with such occurrences, other than proceeds expended prior to Closing in restoration and repair undertaken by Seller in its reasonable discretion and

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any proceeds of business interruption or rent continuation insurance applicable to the period prior to Closing, and Purchaser shall receive a credit against the Purchase Price equal to the amount of any deductible under Seller’s insurance applicable to such occurrences; or (y) to terminate this Agreement. Purchaser’s failure to deliver either of such notices to Seller and Title Company within such five (5) business day period shall constitute Purchaser’s election to terminate this Agreement under clause (y) above. If this Agreement is terminated under clause (x) above, the Earnest Money Deposit and all interest accrued thereon will be returned to Purchaser, the parties shall equally share the Cancellation Charges, and thereafter neither Seller nor Purchaser will have any further rights or obligations to the other hereunder except with respect to the Termination Surviving Obligations.

Section 9.2 Casualty of Less Than a Significant Portion. If less than a Significant Portion of the Property is damaged as aforesaid, then Seller shall have no obligation to repair such damage or destruction, and the Closing nevertheless shall occur as otherwise provided for in this Agreement, except that Seller shall, at Seller’s option, either (A) perform any necessary repairs, or (B) assign to Purchaser upon the Closing all insurance proceeds paid or payable to Seller in connection with such occurrences, exclusive of any proceeds of business interruption or rent continuation insurance applicable to the period prior to Closing, in which event Purchaser shall receive a credit against the Purchase Price equal to the amount of any deductible under Seller’s insurance applicable to such occurrences.

Section 9.3 Condemnation of Property. In the event that all or any Significant Portion of the Property shall be taken in condemnation or under the right of eminent domain, Seller shall promptly notify Purchaser thereof. Within five (5) business days after receipt of the foregoing notice, Purchaser shall notify Seller, electing either: (a) to proceed with this transaction and Closing in accordance with this Agreement notwithstanding such condemnation; or (b) to terminate this Agreement. If Purchaser elects to proceed with this transaction pursuant to clause (a) above, or if there is a taking in condemnation or eminent domain that does not affect a Significant Portion of the Property, there shall be no reduction in the Purchase Price and Seller shall (x) deliver to Purchaser at the Closing, or as soon thereafter as available, any proceeds actually received by Seller attributable to the Property from such condemnation or eminent domain proceeding, and (y) transfer and assign to Purchaser any and all rights Seller may have with respect to payments by or from and with respect to recovery against any party for damages or compensation relating to the Property on account of such condemnation or eminent domain proceeding. A failure by Purchaser to notify Seller in writing within five (5) business days after receiving written notice of such taking shall be deemed an election to proceed under clause (b) in this subsection. If Purchaser elects to proceed under clause (a) in this subsection, Seller shall not compromise, settle or adjust any claims to such award without Purchaser’s prior written consent. In the event Purchaser notifies Seller (or is deemed to have notified Seller) of its election to terminate this Agreement pursuant to clause (b) above, the Earnest Money Deposit and all interest accrued thereon will be returned to Purchaser, the parties shall equally share the Cancellation Charges, and thereafter neither Seller nor Purchaser will have any further rights or obligations to the other hereunder except with respect to the Termination Surviving Obligations.

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ARTICLE X.

CLOSING

Section 10.1 Closing Conditions.

Section 10.1.1 Purchaser’s Closing Conditions. Purchaser’s obligation to consummate the Closing is subject to the following conditions precedent (“Purchaser’s Closing Conditions”), which conditions may be waived by Purchaser in writing as its option:

(a) All representations and warranties made by Seller in this Agreement shall be true and correct in all material respects on and as of the Closing Date, as if made on and as of such date, subject to any updates to the representations of which Seller notifies Purchaser after the Effective Date pursuant to Section 8.1 hereof.

(b) Seller shall have delivered all of the documents required to be delivered by Seller pursuant to Section 10.4 and shall have performed in all material respects all of its other obligations, hereunder required to be performed by the Closing Date and complied with all conditions, required by this Agreement to be performed or complied with by Seller at or prior to the Closing.

In the event the purchase and sale of the Property are not consummated because any condition precedent to Purchaser’s obligation to close set forth in this Section 10.1.1 has not been satisfied or waived by Purchaser in writing by the Closing Date, the Deposit shall be returned to Purchaser, this Agreement shall terminate and neither party shall have any further rights or obligations hereunder.

Section 10.1.2 Seller’s Conditions to Closing. Seller’s obligation to close the transactions contemplated by this Agreement is conditioned on all of the following, any or all of which may be waived by Seller in writing, at its sole option:

(a) All representations and warranties made by Purchaser in this Agreement shall be true and correct in all material respects on and as of the Closing Date, as if made on and as of such date; and

(b) Purchaser shall have delivered the funds required hereunder, including the balance of the Purchase Price, and all of the documents required to be executed by Purchaser and shall have performed in all material respects all of its other obligations hereunder required to be performed by the Closing Date, and complied with all conditions, required by this Agreement to be performed or complied with by Purchaser at or prior to the Closing.

Section 10.2 Closing. The Closing of the sale of the Property by Seller to Purchaser will occur on the Closing Date through the escrow established with the Title Company. At Closing, the events set forth in this Article X will occur, it being understood that the performance or tender of performance of all matters set forth in this Article X are mutually concurrent conditions which may be waived by the party for whose benefit they are intended.

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The Closing Date shall be the later of (i) the date ten (10) Business Days after the expiration of the Inspection Period, and (ii) the date thirty (30) calendar days following:

(a) Seller receiving an acceptable Master Use Permit Director’s Decision from the City of Seattle Department of Planning and Development with regard to the construction of Seller’s new corporate headquarters building in Seattle and the expiration of administrative and/or judicial appeal proceeds with no appeals being filed; or

(b) In the event of any appeals of the Director’s Decision to the City of Seattle Hearing Examiner or any subsequent judicial appeal therefrom, the final resolution of any such appeals to Seller’s satisfaction;

but if (a) or (b) has not been satisfied within twelve (12) months after the Effective Date, then either party shall have the right to terminate this Agreement, effective ten (10) days after written notice to the other Party unless (a) or (b) has been so satisfied prior to the end of such ten day period or Seller waives the protection of this contingency, in which event Closing shall occur within ten (10) business days thereafter. If either Party terminates this Agreement pursuant to the preceding sentence, (i) Title Company shall return the Earnest Money Deposit to Purchaser, (ii) Purchaser shall promptly return the Purchaser’s Information to Seller, (iii) the parties shall equally share any Cancellation Charges, (iv) Seller shall reimburse Purchaser for all out-of-pocket expenses incurred by Purchaser in connection with its inspection of the Property pursuant to Article V, and (v) this Agreement shall terminate and be of no further force and effect except for the Termination Surviving Obligations. Purchaser shall provide Seller with a statement of such out-of-pocket expenses within ten (10) days after Purchaser’s receipt of Seller’s notice of termination pursuant to this Section, and Seller shall reimburse Purchaser for such expenses within ten (10) days after Seller’s receipt of Purchaser’s statement.

Seller shall promptly file, when completed, an application for a MUP for its proposed new Seattle headquarters building and, subject to the responses thereto and implications thereof for the other subsequent applications and filings, diligently pursue all applications for permits and approvals required for the new Seattle headquarters building, and will, if deemed appropriate and effective, promptly and diligently contest any appeals described in (b) above.

Seller agrees to provide to Purchaser a brief report of the status of such applications and filings no less frequently than monthly after the Effective Date.

Section 10.3 Purchaser’s Closing Obligations. At least one (1) Business Day prior to the Closing Date (or at such times as may otherwise be provided herein), Purchaser, at its sole cost and expense, will deliver the following items in escrow with the Title Company pursuant to Section 4.3, for delivery to Seller at Closing as provided herein:

(a) The Purchase Price, after all adjustments are made at the Closing as herein provided, by Federal Reserve wire transfer of immediately available funds, in accordance with the timing and other requirements of Section 3.2;

(b) Two counterparts of the Blanket Conveyance, Bill of Sale, and Assignment and Assumption substantially in the form attached hereto as Exhibit G (the “Blanket Conveyance”) duly executed by Purchaser;

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(c) Evidence reasonably satisfactory to Title Company that the person executing the Closing documents on behalf of Purchaser has full right, power, and authority to do so;

(d) Two counterparts of the GAC Lease, duly executed by Purchaser;

(e) The Data Center Agreement, duly executed by Purchaser;

(f) The Microsoft Lease Termination Agreement duly executed by Purchaser;

(g) A replacement bond for the bond delivered by Seller to the City of Redmond in connection with the water treatment pond on the Property in form sufficient to allow the redelivery to Seller of its bond; and

(h) Such other documents as may be reasonably necessary or appropriate to effect the consummation of the transactions which are the subject of this Agreement.

Section 10.4 Seller’s Closing Obligations. Seller, at its sole cost and expense, will deliver (y) items (a), (b), (c), (d), (e), (f), (g) and (h) in escrow with the Title Company pursuant to Section 4.3, and (z) items (i), (j) and (k) to Purchaser at the Property:

(a) A special warranty deed in the form attached hereto as Exhibit H (the “Deed”), duly executed and acknowledged by Seller conveying to Purchaser the Real Property and the Improvements subject only to the Permitted Exceptions, which Deed shall be delivered to Purchaser by the Title Company causing same to be recorded in the Official Records;

(b) Two counterparts of the Blanket Conveyance duly executed by Seller;

(c) Two counterparts of the GAC Lease, duly executed by Seller;

(d) The Microsoft Lease Termination Agreement, duly executed by Seller;

(e) The Data Center Agreement, duly executed by Seller.

(f) Counterparts of the real estate excise tax affidavit;

(g) A certificate in the form attached hereto as Exhibit I (“Certificate as to Foreign Status”) certifying that Seller is not a “foreign person” as defined in Section 1445 of the Code, as well as any form or other document required under applicable laws to be executed by Seller in connection with any transfer tax applicable to the transaction contemplated by this Agreement;

(h) Such other documents as may be reasonably necessary or appropriate to effectuate the transaction which are the subject of this Agreement;

(i) The Personal Property;

(j) All original Licenses and Permits, and Service Contracts in Seller’s Control; and

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(k) All keys to the Improvements in Seller’s Control, identified by lock.

Section 10.5 Prorations.

(a) Subject to the concurrent proration of amounts due under terms of the Microsoft Lease, real property taxes and assessments; business improvement district charges; vault rent; water, sewer and utility charges; amounts payable under any Service Contracts or other agreements or documents; annual permits and/or inspection fees (calculated on the basis of the period covered); and any other expenses of the operation and maintenance of the Property shall all be prorated as of 11:59 p.m. on the date immediately preceding the Closing Date (i.e., Purchaser is entitled to the income and responsible for the expenses of the day of Closing), on the basis of a 365-day year. Excluded from such pro ratable expenses are all financing costs.

Seller and Purchaser hereby agree that if any of the aforesaid prorations and credits cannot be calculated accurately on the Closing Date or in the case of rents or other charges received from tenants, such amount have not been collected, then the same shall be calculated as soon as reasonably practicable after the Closing Date or the date such amounts have been collected, and either party owing the other party a sum of money based on such subsequent proration(s) or credits shall pay said sum to the other party within thirty (30) days thereafter. Any amounts not paid within such thirty (30) day period shall bear interest from the date actually received by the payor until paid at the greater of (i) the rate of ten percent (10%) per annum or (ii) the prime rate (or base rate) reported from time to time in the “Money Rates” column or section of The Wall Street Journal as being the base rate on corporate loans at larger United States money center commercial banks plus two (2) percent. Upon request of either party, the parties shall provide a detailed and accurate written statement signed by such party certifying as to the payments received by such party from tenants from and after Closing and to the manner in which such payments were applied, and shall make their books and records available for inspection by the other party during ordinary business hours upon reasonable advance notice.

(b) The provisions of this Section 10.5 shall survive Closing.

Section 10.6 Delivery of Real Property. Upon completion of the Closing, Seller will deliver to Purchaser possession of the Real Property and Improvements, subject to the Safeco Lease and the Permitted Exceptions.

Section 10.7 Costs of Title Company and Closing Costs. Purchaser will pay (i) all premiums and other costs for the Title Policy in excess of the premium for a standard owners policy, including, but not limited to, any endorsements and any mortgagee policy of title insurance, (ii) one-half of the Title Company’s closing and escrow fees, (iii) the costs associated with any updates to the Survey commissioned by Purchaser, and (iv) the recording fees required in connection with the transfer of the Property to Purchaser. Seller will pay (i) the premium for the Title Policy to the extent of the premium for a standard coverage policy, (ii) one-half of the Title Company’s closing and escrow fees, and (iii) the real estate excise tax and the sales/use tax, if any, due with respect to the Personal Property.

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Section 10.8 Microsoft Tenant Improvement Allowance. Any portion of the “Allowance” described in Section 8.2 of the Microsoft Lease that has not been disbursed to the tenant under the Microsoft Lease shall be credited to Purchaser at the Closing.

Section 10.9 Post-Closing Delivery of Service Contract Notice. Promptly following Closing, Seller will deliver to each of the providers under the Service Contracts being assumed by Purchaser, a letter acknowledging the sale of the Property to Purchaser and the assignment of the obligations under the Service Contracts to Purchaser. This Section 10.9 shall survive Closing.

ARTICLE XI.

BROKERAGE

Section 11.1 Brokers. Seller has agreed to pay to Pacific Real Estate Partners, Inc. and Secured Capital Corp. (“Brokers”) a real estate commission at Closing pursuant to a separate written agreement between Seller and Brokers (the “Broker Agreements”), and Purchaser has agreed to pay a real estate commission to Trammell Crow Company (“TCC”) pursuant to a separate written agreement between Purchaser and TCC. Other than as stated in the first sentence of this Section 11.1, Purchaser and Seller represent to the other that no real estate brokers, agents or finders’ fees or commissions are due or will be due or arise in conjunction with the execution of this Agreement or consummation of this transaction by reason of the acts of such party, and Purchaser and Seller will indemnify and hereby agree to hold the other party harmless from any brokerage or finder’s fee or commission claimed by any person asserting his entitlement thereto at the alleged instigation of the indemnifying party for or on account of this Agreement or the transactions contemplated hereby. The provisions of this Article XI will survive any Closing or termination of this Agreement.

ARTICLE XII.

CONFIDENTIALITY

Section 12.1 Confidentiality. Seller and Purchaser each expressly acknowledges and agrees that the transactions contemplated by this Agreement and the terms, conditions, and negotiations concerning the same will be held in the strictest confidence by each of them and will not be disclosed by either of them except to their respective legal counsel, accountants, consultants, officers, partners, directors, investors, members and shareholders, and except and only to the extent that such disclosure may be necessary for their respective performances hereunder or as otherwise required by applicable law. Purchaser further acknowledges and agrees that, unless and until the Closing occurs, all Confidential Information obtained by Purchaser in connection with the Property will not be disclosed by Purchaser to any third persons other than the Permitted Outside Parties without the prior written consent of Seller. Nothing contained in this Article XII will preclude or limit either party to this Agreement from disclosing or accessing any information otherwise deemed confidential under this Article XII in connection with that party’s enforcement of its rights following a disagreement hereunder, or in response to lawful process or subpoena or other valid or enforceable order of a court of competent jurisdiction or any filings with any Authorities required by reason of the transactions provided for herein pursuant to an opinion of counsel. The provisions of this Article XII will survive any termination of this Agreement.

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ARTICLE XIII.

REMEDIES

Section 13.1 PURCHASER’S REMEDIES. IN THE EVENT THE CLOSING OF THE PURCHASE AND SALE TRANSACTION PROVIDED FOR HEREIN DOES NOT OCCUR AS HEREIN PROVIDED SOLELY BY REASON OF MATERIAL DEFAULT OF SELLER, PURCHASER MAY, AS PURCHASER’S SOLE AND EXCLUSIVE REMEDY, ELECT BY NOTICE DELIVERED TO SELLER WITHIN TEN (10) BUSINESS DAYS FOLLOWING THE SCHEDULED CLOSING DATE, EITHER OF THE FOLLOWING:

(A) TERMINATE THIS AGREEMENT, IN WHICH EVENT: (I) PURCHASER WILL RECEIVE FROM THE TITLE COMPANY THE EARNEST MONEY DEPOSIT; AND (II) SELLER AND PURCHASER WILL HAVE NO FURTHER RIGHTS OR OBLIGATIONS UNDER THIS AGREEMENT, EXCEPT WITH RESPECT TO THE TERMINATION SURVIVING OBLIGATIONS; OR

(B) PURSUE SPECIFIC PERFORMANCE OF THIS AGREEMENT SO LONG AS ANY ACTION OR PROCEEDING FOR SPECIFIC PERFORMANCE COMMENCED BY PURCHASER AGAINST SELLER SHALL BE FILED WITHIN TEN (10) BUSINESS DAYS AFTER THE SCHEDULED CLOSING DATE; PROVIDED, HOWEVER, IF SPECIFIC PERFORMANCE IS NOT AN AVAILABLE REMEDY HEREUNDER, THEN PURCHASER’S SOLE REMEDY SHALL BE AS PROVIDED IN SECTION 13.1(A) ABOVE, EXCEPT THAT IF PURCHASER IS UNABLE TO PURSUE SPECIFIC PERFORMANCE SOLELY BECAUSE OF SELLER’S SALE OF THE PROPERTY, THEN IN ADDITION TO RECOVERING FROM THE TITLE COMPANY THE EARNEST MONEY DEPOSIT, PURCHASER SHALL ALSO BE ENTITLED TO RECOVER FROM SELLER CONTRACT DAMAGES EQUAL TO PURCHASER’S ACTUAL, REASONABLE LOSSES AS A RESULT THEREOF, SUBJECT TO SECTION 13.3 BELOW (BUT SUCH DAMAGES WITH RESPECT TO PURCHASER’S LOSS OF THE BENEFIT OF ITS BARGAIN SHALL NOT EXCEED THE NET EXCESS AMOUNT, IF ANY, THAT SELLER WOULD HAVE REALIZED HAD SELLER SOLD THE PROPERTY FOR ITS FAIR MARKET VALUE ON THE CLOSING DATE TO A BONA FIDE THIRD PARTY PURCHASER OVER THE PURCHASE PRICE), WHEREUPON PURCHASER AND SELLER SHALL HAVE NO FURTHER RIGHTS OR OBLIGATIONS UNDER THIS AGREEMENT EXCEPT WITH RESPECT TO THE TERMINATION SURVIVING OBLIGATIONS.

IN EITHER EVENT, PURCHASER HEREBY WAIVES ALL OTHER REMEDIES FOR A PRE-CLOSING DEFAULT BY SELLER, INCLUDING WITHOUT LIMITATION, ANY CLAIM AGAINST SELLER FOR DAMAGES (OTHER THAN AS EXPRESSLY PROVIDED HEREINABOVE) OF ANY TYPE OR KIND INCLUDING, WITHOUT LIMITATION, PUNITIVE DAMAGES. FAILURE OF PURCHASER TO MAKE THE FOREGOING ELECTION WITHIN THE FOREGOING TEN (10) BUSINESS DAY PERIOD (OR IF PURCHASER TIMELY ELECTED TO PURSUE SPECIFIC PERFORMANCE BUT FAILED TO FILE THE SPECIFIC PERFORMANCE ACTION WITHIN THE FOREGOING TEN (10) BUSINESS DAY PERIOD) SHALL BE DEEMED AN ELECTION BY PURCHASER TO PURSUE THE REMEDY IN SECTION 13.1(A) ABOVE, WHEREUPON

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SELLER AND PURCHASER WILL HAVE NO FURTHER RIGHTS OR OBLIGATIONS UNDER THIS AGREEMENT, EXCEPT WITH RESPECT TO THE TERMINATION SURVIVING OBLIGATIONS. NOTWITHSTANDING THE FOREGOING, NOTHING CONTAINED IN THIS SECTION 13.1 WILL LIMIT PURCHASER’S REMEDIES AT LAW, IN EQUITY OR AS HEREIN PROVIDED IN THE EVENT OF A BREACH BY SELLER OF ANY OF THE CLOSING SURVIVING OBLIGATIONS AFTER CLOSING OR THE TERMINATION SURVIVING OBLIGATIONS AFTER TERMINATION. NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, PURCHASER SHALL NOT SEEK A PERSONAL JUDGMENT AGAINST SELLER NOR ITS MEMBERS, MANAGERS, EMPLOYEES OR AGENTS, NOR THE SHAREHOLDERS, OFFICERS, DIRECTORS, EMPLOYEES, INVESTMENT ADVISORS OR AGENTS OF ANY OF THEM FOR ANY CLAIMS UNDER OR RELATED TO THIS AGREEMENT OR THE PROPERTY.

/s/ CRO	/s/ PRR
Purchaser’s Initials	Seller’s Initials

Section 13.2 DEFAULT BY PURCHASER. IN THE EVENT THE CLOSING AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREIN DO NOT OCCUR AS PROVIDED HEREIN BY REASON OF A DEFAULT BY PURCHASER, PURCHASER AND SELLER AGREE THAT IT WOULD BE IMPRACTICAL AND EXTREMELY DIFFICULT TO FIX THE DAMAGES WHICH SELLER MAY SUFFER AND THAT THE EARNEST MONEY DEPOSIT, EXCLUSIVE OF ANY INTEREST ACCRUED THEREON, IS A REASONABLE ESTIMATE OF SUCH DAMAGES. THE PARTIES THEREFORE AGREE THAT IN THE EVENT THAT THE CLOSING AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED HEREIN DO NOT OCCUR AS PROVIDED HEREIN SOLELY BY REASON OF ANY DEFAULT OF PURCHASER IN THE PERFORMANCE OF ITS OBLIGATIONS UNDER THIS AGREEMENT, THE EARNEST MONEY DEPOSIT, EXCLUSIVE OF ANY INTEREST ACCRUED THEREON, WILL BE SELLER’S FULL, AGREED AND LIQUIDATED DAMAGES AND WILL BE SELLER’S SOLE AND EXCLUSIVE REMEDY (WHETHER AT LAW OR IN EQUITY) IN LIEU OF ANY OTHER DAMAGES, SPECIFIC PERFORMANCE, OR ANY OTHER REMEDY SELLER MIGHT OTHERWISE HAVE AGAINST PURCHASER, WHEREUPON THIS AGREEMENT WILL TERMINATE AND SELLER AND PURCHASER WILL HAVE NO FURTHER RIGHTS OR OBLIGATIONS HEREUNDER, EXCEPT WITH RESPECT TO THE TERMINATION SURVIVING OBLIGATIONS. THIS SECTION SHALL NOT LIMIT SELLER’S RIGHT TO RECOVER ITS ATTORNEYS’ FEES ATTRIBUTABLE TO EFFORTS TO OBTAIN THE EARNEST MONEY DEPOSIT OR TO ENFORCE PURCHASER’S INDEMNIFICATION OBLIGATIONS, NOR WAIVE OR AFFECT SELLER’S RIGHTS AND PURCHASER’S INDEMNITY OBLIGATIONS UNDER OTHER SECTIONS OF THIS AGREEMENT (WHICH ARE NOT LIMITED BY THIS SECTION 13.2). THE PAYMENT OF SUCH AMOUNT AS LIQUIDATED DAMAGES IS NOT INTENDED AS A FORFEITURE OR PENALTY, BUT IS INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO SELLER. NOTWITHSTANDING THE FOREGOING, NOTHING CONTAINED HEREIN WILL LIMIT SELLER’S REMEDIES AT LAW, IN EQUITY OR AS HEREIN PROVIDED IN THE EVENT OF A BREACH BY PURCHASER OF ANY OF THE TERMINATION SURVIVING OBLIGATIONS. SELLER AND PURCHASER ACKNOWLEDGE THAT THEY HAVE

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READ AND UNDERSTAND THE PROVISIONS OF THIS SECTION 13.2, AND BY THEIR INITIALS IMMEDIATELY BELOW AGREE TO BE BOUND BY ITS TERMS.

/s/ CRO	/s/ PRR
Purchaser’s Initials	Seller’s Initials

Section 13.3 Consequential and Punitive Damages. Each of Seller and Purchaser waive any right to sue the other for consequential, incidental or punitive damages for matters arising under this Agreement. This Section 13.3 shall survive Closing or termination of this Agreement.

ARTICLE XIV.

NOTICES

Section 14.1 Notices. All notices or other communications required or permitted hereunder will be in writing, and will be given by (a) personal delivery, (b) professional expedited delivery service with proof of delivery, (c) United States mail, postage prepaid, registered or certified mail, return receipt requested, (d) prepaid telegram or telex (providing that such telegram or telex is confirmed by the sender by expedited delivery service or by mail in the manner previously described), or (e) by facsimile transmission, sent to the intended addressee at the address set forth below, or to such other address or to the attention of such other person as the addressee will have designated by written notice sent in accordance herewith and will be deemed to have been given either at the time of personal delivery, or, in the case of expedited delivery service or mail, as of the date of first attempted delivery at the address or in the manner provided herein, or, in the case of telegram, telex or facsimile transmission, upon receipt. Unless changed in accordance with the preceding sentence, the addresses for notices given pursuant to this Agreement will be as follows:

To Seller:	General America Corporation 4333 Brooklyn Ave. NE Seattle, WA 98189 Attn: Corporate Real Estate Fax: (206) 545-5477
And to:	General America Corporation 4333 Brooklyn Ave. NE Seattle, WA 98189 Attn: General Counsel Fax: (206) 545-5559
with copy to:	Alston, Courtnage & Bassetti LLP Attn: Michael S. Courtnage 1000 Second Avenue, Suite 3900 Seattle, WA 98104-1045 Fax: (206) 623-1752

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To Purchaser:	Microsoft Corporation One Microsoft Way Redmond, WA 98052 Attn: Chris Owen, General Manager, Real Estate & Facilities Fax: (425) 936-7329
with copy to:	Microsoft Corporation Law and Corporate Affairs One Microsoft Way, Building 8 Redmond, WA 98052-6399 Attn: Timothy R. Osborn, Senior Attorney Fax: (425) 936-7329
To Title Company:	First American Title Insurance Company 2101 4th Avenue, Suite 800 Seattle, WA 98121 Title Order No.: NCS-202518-WA1 Escrow No.: 202518 Attn: Mike Cooper Fax: (206) 615-3000

ARTICLE XV.

ASSIGNMENT AND BINDING EFFECT

Section 15.1 Assignment; Binding Effect. Neither party will have the right to assign this Agreement without the non-assigning party’s prior written consent, which consent may be withheld in such non-assigning party’s sole and absolute discretion. Any attempted assignment or delegation in violation of this Section 15.1 without the prior written consent of the other party hereto shall be void, and the purported assignee shall not have any rights hereunder. Notwithstanding the foregoing, Purchaser and Seller may each assign and delegate its rights and obligations under this Agreement to an Affiliate of such assigning party without the consent of the non-assigning party, provided that (i) as of the effective date of such assignment, such Affiliate assignee expressly assumes, for the benefit of the non-assigning party, all of the assigning party’s obligations under this Agreement, and (ii) any such assignment shall not relieve the assigning party of its obligations hereunder. Subject to the foregoing, this Agreement will be binding upon and inure to the benefit of Seller and Purchaser and their respective successors and permitted assigns, and no other party will be conferred any rights by virtue of this Agreement or be entitled to enforce any of the provisions hereof. Whenever a reference is made in this Agreement to Seller or Purchaser, such reference will include the successors and permitted assigns of such party under this Agreement.

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ARTICLE XVI.

CLAIMS PERIOD

Section 16.1 Claims Period. Notwithstanding any provision to the contrary contained in this Agreement or any documents executed by Seller pursuant hereto or in connection herewith, the maximum aggregate liability of Seller under this Agreement and any and all documents executed pursuant hereto or in connection herewith (including, without limitation, the breach of any representations and warranties of Seller contained in such documents) for which a claim is timely made by Purchaser shall not exceed three percent of the final Purchase Price. Purchaser will not have any right to bring any action against Seller as a result of any untruth or inaccuracy of such representations and warranties, or any such breach, unless and until the aggregate amount of all liability and losses arising out of any such untruth or inaccuracy, or any such breach, exceeds Fifty Thousand Dollars ($50,000). Any action, suit or proceeding brought by Purchaser against Seller arising from or related to this Agreement must be commenced and served, if at all, on or before the date which is nine (9) months after the date scheduled for the Closing Date. This Section 16.1 shall survive the Closing.

ARTICLE XVII.

MISCELLANEOUS

Section 17.1 Waivers. No waiver of any breach of any covenant or provisions contained herein will be deemed a waiver of any preceding or succeeding breach thereof, or of any other covenant or provision contained herein. No extension of time for performance of any obligation or act will be deemed an extension of the time for performance of any other obligation or act.

Section 17.2 Recovery of Certain Fees. In the event a party hereto files any action or suit against another party hereto relating to or arising out of this Agreement, the transaction described herein, or the enforcement hereof, then in that event the prevailing party will be entitled to have and recover of and from the other party all reasonable attorneys’ fees and costs resulting therefrom. For purposes of this Agreement, the term “attorneys’ fees” or “attorneys’ fees and costs” shall mean the fees and expenses of counsel to the parties hereto, which may include printing, photostating, duplicating and other expenses, air freight charges, and fees billed for law clerks, paralegals and other persons not admitted to the bar but performing services under the supervision of an attorney, and the costs and fees incurred in connection with the enforcement or collection of any judgment obtained in any such proceeding. The provisions of this Section 17.2 shall survive the entry of any judgment, and shall not merge, or be deemed to have merged, into any judgment.

Section 17.3 Time of Essence. Seller and Purchaser hereby acknowledge and agree that time is strictly of the essence with respect to each and every term, condition, obligation and provision hereof.

Section 17.4 Construction. Headings at the beginning of each article and section are solely for the convenience of the parties and are not a part of this Agreement. Whenever required by the context of this Agreement, the singular will include the plural and the masculine will include the feminine and vice versa. This Agreement will not be construed as if it had been

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prepared by one of the parties, but rather as if both parties had prepared the same. All exhibits and schedules referred to in this Agreement are attached and incorporated by this reference, and any capitalized term used in any exhibit or schedule which is not defined in such exhibit or schedule will have the meaning attributable to such term in the body of this Agreement. In the event the date on which Purchaser or Seller is required to take any action under the terms of this Agreement is not a Business Day, the action will be taken on the next succeeding Business Day.

Section 17.5. Counterparts. To facilitate execution of this Agreement, this Agreement may be executed in multiple counterparts, each of which, when assembled to include an original signature for each party contemplated to sign this Agreement, will constitute a complete and fully executed original. All such fully executed original counterparts will collectively constitute a single agreement.

Section 17.6 Severability. If any term or other provision of this Agreement is invalid, illegal, or incapable of being enforced by any rule of law or public policy, all of the other conditions and provisions of this Agreement will nevertheless remain in full force and effect, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any adverse manner to either party. Upon such determination that any term or other provision is invalid, illegal, or incapable of being enforced, the parties hereto will negotiate in good faith to modify this Agreement so as to reflect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible.

Section 17.7 Entire Agreement. This Agreement is the final expression of, and contains the entire agreement between, the parties with respect to the subject matter hereof, and supersedes all prior understandings with respect thereto. This Agreement may not be modified, changed, supplemented or terminated, nor may any obligations hereunder be waived, except by written instrument, signed by the party to be charged or by its agent duly authorized in writing, or as otherwise expressly permitted herein.

Section 17.8 Governing Law. This Agreement and the rights and obligations of the parties hereto shall be governed by and construed and enforced in accordance with the laws of the State of Washington, exclusive of the conflict of laws principles of such state. The parties consent to jurisdiction of the state courts located in King County, Washington in the event of any litigation arising out of this Agreement.

Section 17.9 Recording. The parties hereto agree that this Agreement will not be recorded. However, at Purchaser’s option, a Memorandum of this Agreement will be recorded in King County, Washington, so long as Seller has the right to record a termination of such memorandum, if this Agreement is terminated, and if Purchaser fails to file a termination of the memorandum within ten (10) days of termination of this Agreement.

Section 17.10 Further Actions. The parties agree to execute such instructions to the Title Company and such other instruments and to do such further acts as may be reasonably necessary to carry out the provisions of this Agreement.

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Section 17.11 No Other Inducements. The making, execution and delivery of this Agreement by the parties hereto has been induced by no representations, statements, warranties or agreements other than those expressly set forth herein.

Section 17.12 Exhibits. Exhibits A through K, inclusive, are incorporated herein by reference.

Section 17.13 No Partnership. Notwithstanding anything to the contrary contained herein, this Agreement shall not be deemed or construed to make the parties hereto partners or joint venturers, it being the intention of the parties to merely create the relationship of Seller and Purchaser with respect to the Property to be conveyed as contemplated hereby.

Section 17.14 Limitations on Benefits. It is the explicit intention of Purchaser and Seller that no person or entity other than Purchaser and Seller and their permitted successors and assigns is or shall be entitled to bring any action to enforce any provision of this Agreement against any of the parties hereto, and the covenants, undertakings and agreements set forth in this Agreement shall be solely for the benefit of, and shall be enforceable only by, Purchaser and Seller or their respective successors and assigns as permitted hereunder. Nothing contained in this Agreement shall under any circumstances whatsoever be deemed or construed, or be interpreted, as making any third party (including, without limitation, Broker) a beneficiary of any term or provision of this Agreement or any instrument or document delivered pursuant hereto, and Purchaser and Seller expressly reject any such intent, construction or interpretation of this Agreement.

IN WITNESS WHEREOF, Seller and Purchaser have respectively executed this Agreement to be effective as of the date first above written.

SELLER:
GENERAL AMERICA CORPORATION, a Washington corporation
By	/s/ Paula Rosput Reynolds
Its	President and Chief Executive Officer
PURCHASER:
MICROSOFT CORPORATION, a Washington corporation
By	/s/ Chris R. Owens
Its	General Manager, Real Estate & Facilities

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EX-10.21

Exhibit 10.21

FIRST AMENDMENT OF PURCHASE

AND SALE AGREEMENT

First Amendment of Purchase and Sale Agreement (this “Amendment”), made and entered into this I7^th day of February, 2006, by and between General America Corporation, a Washington corporation (“Seller”) and Microsoft Corporation, a Washington corporation (“Purchaser”).

RECITALS

A. Seller and Purchaser are the parties to that certain Purchase and Sale Agreement and Joint Escrow Instructions effective as of January 13, 2006 (the “Agreement”).

B. The parties desire to extend the “Inspection Period” as defined in the Agreement.

AGREEMENTS

1. Extension of Inspection Period. The first sentence of Section 5.1 (a) of the Agreement is hereby amended by deleting the words “the date that is thirty (30) days after the Effective Date” and substituting the words “February 17^th, 2006”.

2. No Other Amendments. Except as expressly amended by this Amendment, the Agreement remains unmodified and in full force and effect.

SELLER:
GENERAL AMERICA CORPORATION, a Washington corporation
By	/s/ Stephanie Daley-Watson
Its	Vice President & Secretary
PURCHASER:
MICROSOFT CORPORATION, a Washington corporation
By	/s/ James Ableson
Its	Director, Real Estate & Facilities

EX-10.22

Exhibit 10.22

SECOND AMENDMENT OF PURCHASE

AND SALE AGREEMENT

Second Amendment of Purchase and Sale Agreement (this “Amendment”), made and entered into this 17^th day of February, 2006, by and between General America Corporation, a Washington corporation (“Seller”) and Microsoft Corporation, a Washington corporation (“Purchaser”).

RECITALS

A. Seller and Purchaser are the parties to that certain Purchase and Sale Agreement and Joint Escrow Instructions effective as of January 13, 2006, as amended by First Amendment of Purchase and Sale Agreement dated February 17, 2006 (the “Agreement”).

B. The parties desire to amend the Agreement as set forth herein.

AGREEMENTS

1. Data Center Agreement. Pursuant to Section 5.4 of the Agreement the parties have agreed that the Data Center Agreement, as defined in that Section, shall be in the form of the document attached to this Amendment as Exhibit A, and that all references in the Agreement to the “Data Center Agreement” shall be deemed to refer to the document attached hereto as Exhibit A. Neither party shall have any further right to terminate the Agreement pursuant to the termination provisions of Section 5.4.

2. Certain Pre-Closing Matters. A new Article XVIII is added to the Agreement as follows:

“ARTICLE XVIII

CERTAIN PRE-CLOSING MATTERS

Section 18.1 Lot Line Adjustment. Provided that Seller does not exercise its right to terminate this Agreement pursuant to Section 2.3, then, provided Purchaser is not in default under this Agreement, promptly following the lapse (or earlier express waiver by Seller) of such termination right Seller shall, at the request of Purchaser, apply to City of Redmond (“COR”) for a boundary line adjustment of the boundary between Lot 4 and Lot 5 of the Real Property and Data Center Property to adjust such boundary to be as set forth in Exhibit L to this Agreement (the “BLA”). Seller shall execute such documents and make such applications as are necessary to obtain approval of the BLA, provided that (i) Purchaser shall provide at its expense such surveys and other technical documents and such personnel and other assistance as may be required to process the BLA application, (ii) Purchaser shall reimburse Seller for its out of pocket expenses incurred in connection with its making application for and obtaining the approval of the BLA within ten (10) business days of Purchaser’s receipt of each invoice therefor.

If the BLA is approved by COR, Purchaser shall at its expense, with contractors selected by and retained by Purchaser, reconfigure the parking lot on the Data Center Property as shown on Exhibit L, and shall, during such time as and to the extent that such parking lot is unavailable to the occupants of the Data Center Property by reason of such re-configuration, Purchaser shall provide at its expense (but on the Real Property, at such location as is designated by Seller) alternate parking for all such occupants of the Data Center Property. Seller agrees to execute such permit applications as are required to allow the reconfiguration of the parking lot on the Data Center Property and the provision of such alternate parking, provided that (i) Purchaser shall provide at its expense such plans and other technical documents as may be required by COR to process such permit applications, (ii) Purchaser shall reimburse Seller for its out of pocket expenses incurred in connection with its making application for and obtaining approval of such permits within ten (10) business days of Purchaser’s receipt of each invoice therefor.

Section 18.2 Detention Pond. Provided that Seller does not exercise its right to terminate this Agreement pursuant to Section 2.3, then, provided Purchaser is not in default under this Agreement, promptly following the lapse (or earlier express waiver by Seller) of such termination right Seller shall, at the request of Purchaser, apply to COR for the permits necessary to allow the filling of the detention pond located at the Northeast corner of Lot 2 of the Real Property. Seller shall execute such documents and make such applications as are necessary to obtain approval of such permits, provided that (i) Purchaser shall provide at its expense such plans and other technical documents and such personnel and other assistance as may be required to process such permit applications, (ii) Purchaser shall reimburse Seller for its out of pocket expenses incurred in connection with its making application for and obtaining the approval of such permits within ten (10) business days of Purchaser’s receipt of each invoice therefor.

If the necessary permits are obtained, Purchaser may, at its option, at its expense, with contractors selected by and retained by Purchaser, cause the filling of the detention pond in accordance with the permits.

Section 18.3 Access to Property. To permit Purchaser to perform the work contemplated by Sections 18.1 and 18.2, Seller will permit Purchaser and the Licensee Parties to enter upon the Real Property and Data Center Property as necessary to perform such work. Purchaser shall notify Seller of the intention of Purchaser or any Licensee Party to enter the Real Property and Data Center Property at least five (5) business days prior to such intended entry and specify the intended purpose therefor and the expected duration of such entry. At Seller’s option, Seller or Seller Representatives may be present for any such entry.

Purchaser agrees that in entering upon the Property and Data Center Property and performing any work pursuant to Sections 18.1 and 18.2, Purchaser and the other Licensee Parties will not: (i) unreasonably or materially disturb the Occupants or unreasonably interfere with their use of the Real Property or Data Center Property; (ii) unreasonably or materially interfere with the operation and maintenance of the Real Property or Data Center Property or Improvements (except such interference as is necessarily incident to the work contemplated by this Article XVIII); (iii) damage any part of the Real Property or Data Center Property or any personal property owned or held by any Occupant or any other person or entity (except for such damage as is within the scope of the work contemplated by this Article XVIII (e.g., the filling of

the detention pond and the reconfiguration of the parking lot); (iv) injure or otherwise cause bodily harm to Seller or any Occupant, or to any of their respective agents, guests, invitees, contractors and employees, or to any other person or entity; (v) permit any liens to attach to the Real Property or Data Center Property by reason of the exercise of Purchaser’s rights under this Article XVIII. Purchaser will: (x) maintain commercial general liability insurance in an amount not less than $5,000,000 covering any accident arising in connection with the presence of Purchaser or the other Licensee Parties on the Real Property and Data Center Property and deliver a certificate of insurance verifying such coverage to Seller prior to entry upon the Real Property or Data Center Property (provided, that Purchaser may elect to self insure any risks required to be insured under this Subsection 18.3), (y) promptly pay when due the costs of all work done pursuant to this Article XVIII, and (z) promptly repair any damage to the Real Property or Data Center Property and Improvements caused by any such entry upon the Real Property or Data Center Property (except for such damage as is within the scope of the work contemplated by this Article XVIII (e.g., the filling of the detention pond and the reconfiguration of the parking lot).

Purchaser hereby indemnifies, defends and holds Seller and its officers, directors, affiliates, agents, employees, lenders, successors and assigns harmless from and against any and all Claims arising out of any entry onto the Real Property or Data Center Property pursuant to this Article XVIII by Purchaser or any Licensee Party, as a result of any work done by Purchaser or such Licensee Parties pursuant to this Article XVIII, or as a result of any violation of the provisions of this Section 18.3; provided, however, that Purchaser’s indemnity hereunder shall not include any Claims resulting from the discovery of pre-existing conditions at the Real Property or Data Center Property except to the extent such condition is aggravated by an act of Purchaser or any Licensee Party.

Section 18.4 Survival. The obligations of the parties under this Article XVIII shall survive the Closing. In the event of the termination of this Agreement by Seller pursuant to Section 10.2, Purchaser shall have no further obligations under this Article XVIII except (i) to reimburse Seller for out of pocket expenses incurred by Seller in good faith prior to such termination, and (ii) the indemnification obligations set forth in Section 18.3. In the event of termination of this Agreement by either party pursuant to Section 10.2 Seller shall have no obligation to reimburse Purchaser for sums which Purchaser paid to Seller in connection with Sections 18.1 through 18.3 or under Section 3 of the Second Amendment or otherwise expended by Purchaser in connection therewith.”

3. Development Agreement Clarification. If Purchaser so requests in writing, Seller will cooperate, prior to Closing, and at Purchaser’s expense and in a commercially reasonable manner, with Purchaser’s efforts to obtain clarification from the City of Redmond as to questions that Purchaser may have regarding the number of additional square feet of improvements that can be built in Phase III under the Development Agreement. Purchaser shall reimburse Seller for its out-of-pocket costs incurred in connection with such cooperation within ten (10) business days of Purchaser’s receipt of each invoice therefor.

4. Waiver of Section 5.5 Termination Right. In consideration of, and effective upon, the execution of this Amendment, Purchaser waives its right to terminate the Agreement pursuant to Section 5.5 of the Agreement.

5. No Other Amendments. Except as expressly amended by this Amendment, the Agreement remains unmodified and in full force and effect.

SELLER:
GENERAL AMERICA CORPORATION, a Washington corporation
By	/s/ Stephanie Daley-Watson
Its	Vice President & Secretary
PURCHASER:
MICROSOFT CORPORATION, a Washington corporation
By	/s/ Chris R. Owens
Its	General Manager, Real Estate & Facilities

EX-10.26

Exhibit 10.26

SEPARATION AND GENERAL RELEASE AGREEMENT

This Separation Agreement (this “Agreement”) is made and entered into as of February 2, 2006 by and among Jeffrey E. Roe (the “Employee”) and Safeco Corporation, a Washington corporation (together with its successors and assigns, “Safeco”).

RECITALS

A. Employee has been employed by and has served Safeco’s subsidiaries (the “Safeco Subsidiaries”) as Co-President. Employee has tendered his notice of resignation from employment with the Safeco Subsidiaries effective February 2, 2006, which resignation is accepted.

B. The Parties agree that the separation contemplated and governed by this Agreement is not a performance-based action by Safeco but an action taken by Safeco due to a significant change in organizational structure.

C. To resolve any issues among Employee, Safeco and the Safeco Subsidiaries arising out of Employee’s employment, Employee and Safeco have voluntarily agreed to enter into this Agreement. This Agreement sets forth the complete understanding among Employee, Safeco and the Safeco Subsidiaries regarding Employee’s resignation as an officer and employee of the Safeco Subsidiaries, and the commitments and obligations arising out of the termination of the employment relationship.

AGREEMENT

1. Employment Termination.

1.1 Resignation. In consideration of the Severance Payment and other compensation and benefits described in this Agreement, Employee tenders his resignation of employment, including resignation as an officer and director of the Safeco Subsidiaries, effective February 2, 2006 (the “Termination Date”).

1.2 Compensation Through Termination Date. Safeco will pay Employee all base salary through the Termination Date. Until the Termination Date, Employee will continue to be eligible for employee benefit plan coverages available to Safeco employees generally.

1.3 Group Medical Benefits Coverage. Safeco shall continue to provide coverage under any group medical benefits plan under which Employee and/or his dependents were covered on the date hereof, through and including the Termination Date. Employee shall be responsible to pay any amounts chargeable as “employee premium contribution” amounts with respect to any such coverage. From and after the Termination Date, Safeco shall provide Employee and/or Employee’s dependents with

such benefits continuation or conversion coverage as may be available or required under the terms of Safeco’s benefits plans or policies (understanding that Safeco retains the right to modify, amend or terminate any of the plans at any time without advance notice). Employee and/or Employee’s covered spouse and dependents may be eligible to elect a temporary extension of group health plan coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as subsequently amended (“COBRA”). Safeco will pay Employee $9,000 for such coverage.

1.4 Payment for Accrued Vacation. Safeco will pay Employee for accrued but unused vacation that exists as of the Termination Date.

1.5 Reimbursement for Expenses Incurred. Safeco will reimburse Employee for reasonable and necessary business expenses incurred by Employee on or before the Termination Date to the extent such expenses are reimbursable under Safeco’s normal expense reimbursement policies and procedures, and provided that receipts or other acceptable documentation for such expenses are submitted to Human Resources by the Termination Date.

1.6 Acknowledgment of Full Compensation to Date. Employee acknowledges and agrees that, with the payment of his salary through the Termination Date, he will have received all compensation due and owing him (including base salary, bonus or other incentive payments) for services performed through the Termination Date.

1.7 No Authority To Act or Represent Safeco. From and after the Termination Date, Employee will have no further authority to bind Safeco or the Safeco Subsidiaries to any contract or agreement or to act on behalf of Safeco or to represent Safeco at any industry or business functions.

1.8 Return of Materials. On or before the Termination Date, Employee will return to Safeco all Company-owned equipment and materials, including, but not limited to, any computers, wireless communication devices, all documents (whether existing in paper or electronic/digital media), compilations of data, files, manuals, letters, notebooks, reports, diskettes, flash drives and all other materials and records of any kind, and any copies or other reproductions thereof, owned by Safeco or the Safeco Subsidiaries and used by Employee in the course of Employee’s employment.

1.9 Agreement to Cooperate. Employee agrees for a period of not longer than twelve (12) months from the date of this Agreement to respond promptly, and to cooperate with, reasonable requests for information that Safeco may make relating to matters on which Employee worked while he was employed by Safeco. Safeco agrees to directly pay or reimburse the Employee within seven (7) days for the actual expenses incurred by the Employee (including reasonable travel expenses) as a result of his compliance with this provision, provided the Employee submits proper documentation of the expenses he incurs as reasonably required by Safeco.

2. Payments; Contributions.

2.1 Severance Payment. As compensation to Employee, and in consideration of the termination of Employee’s role as an officer and Employee’s resignation as an officer and director of the Safeco Subsidiaries, Employee’s release agreement in Section 3 and other agreements made herein, in addition to the benefits provided under Section 1 above and the further consideration provided under Section 2.2 below, Safeco agrees to pay Employee a total sum of Four Hundred Thousand Dollars ($400,000) in cash as a severance payment (the “Severance Payment”). The Severance Payment will be subject to withholding and deduction for payroll taxes and other deductions as are required by federal and state law. The Severance Payment will be paid in a lump sum within ten (10) business days of the Effective Date of the Agreement (see Paragraph 9.4). Employee and Safeco agree that the Severance Payment represents sufficient consideration for the potential claims being released.

2.2 Payment in Lieu of Leadership Performance Plan Incentive. Safeco agrees to pay Employee the sum of Four Hundred Sixty Five Thousand Dollars ($465,000.00) in cash in lieu of any annual incentive payment Employee might have received in 2006 under the Leadership Performance Plan. For the current calendar year, Safeco also agrees to pay Employee his bonus at target in the amount of Four Hundred Thousand Dollars ($400,000) in cash, such sum being in addition to that provided in Section 2.1 above. Employee will not be entitled to any other bonus, incentive payment or other variable pay for past services. The sums specified in the Section shall also be paid in a lump sum within ten (10) business days of the Effective Date of the Agreement (see Paragraph 9.4).

2.3 Benefit Plan Contributions. Employee will continue to be eligible as an “employee” of Safeco through the Termination Date for employer contributions paid under Safeco’s employee benefit plans. Employee will be eligible to participate in and will receive pro rata contributions to the Safeco 401(k)/Profit Sharing Retirement Plan, as the same may be available to other employees. Employee acknowledges that any employer contributions to, or interest or other income credited to, any of the Safeco 401(k)/Profit Sharing Retirement Plan or Safeco Employees’ Cash Balance Plan will be additional compensation to Employee in excess of the total Severance Payment amount described above.

3. Release and Settlement.

3.1 Release. In consideration of Safeco’s delivery of the Severance Payment and other consideration and benefits provided to Employee under this Agreement, Employee releases Safeco and the Safeco Subsidiaries, insurers, employee benefit plans in which Employee participates, and the employees, agents, officers, directors and shareholders or any of them (including their respective spouses and marital communities), from all claims, demands, actions, causes of action, or damages, of any kind or nature whatsoever that Employee may now have or may ever have had against any of them, whether such claims are known or unknown, and including but not limited to the Claims as described below. However, nothing in this Agreement will create or imply any waiver by Employee of any claims (a) with respect to Employee’s entitlement to compensation for vested benefits arising under any Safeco pension, retirement or welfare benefit plan, program or agreement, in accordance with the terms and conditions of such plans, (b) arising under any insurance or investor account or similar client relationship, (c) with respect to any breach by Safeco of its obligations under this Agreement, all of which rights will be preserved and unaffected by this release, or (d) with respect to indemnification by Safeco, to the extent that such indemnification rights may arise or be provided under Safeco’s Articles of Incorporation or Bylaws, in connection with Employee’s official actions (or omissions) on behalf of Safeco during the period Employee served as an officer and director of the Safeco Subsidiaries. EMPLOYEE ACKNOWLEDGES AND AGREES THAT THROUGH THIS RELEASE EMPLOYEE IS GIVING UP ALL RIGHTS AND CLAIMS OF EVERY KIND AND NATURE WHATSOEVER, KNOWN OR UNKNOWN, CONTINGENT OR LIQUIDATED, THAT EMPLOYEE MAY HAVE AGAINST SAFECO AND THE SAFECO SUBSIDIARIES, AND THE OTHER PERSONS REFERENCED ABOVE, EXCEPT FOR THE RIGHTS SPECIFICALLY EXCLUDED ABOVE.

3.2 The Claims. For the purposes of this Agreement, “Claims” mean and include, without limitation, Claims with respect to any of the following: (i) breach of contract; (ii) discrimination, retaliation, or constructive or wrongful discharge; (iii) lost wages, lost employee benefits, physical and personal injury, stress, mental distress, or impaired reputation; (iv) Claims arising under the Age Discrimination in Employment Act (“ADEA”), the Older Workers Benefit Protection Act, the Washington State Law Against Discrimination, Title VII of the Civil Rights Act, the Equal Pay Act, the Americans with Disabilities Act, the Family Medical Leave Act, or any other federal, state or local laws or regulations prohibiting employment discrimination; (v) attorneys’ fees; and (vi) any other Claim arising from or relating to Employee’s employment with Safeco and/or Employee’s separation from service.

3.3 Consideration for Release. Safeco represents, and Employee acknowledges, that the Severance Payment and the other consideration and benefits provided hereunder exceed any amount Safeco may arguably be required to pay under any agreement or arrangement to which Employee is a party or under which Employee claims some benefit, or under the standard policies and procedures of Safeco, and represents valuable consideration to Employee for the release of the Claims described above.

4. No Admission.

Employee understands and acknowledges that neither the Severance Payment nor the other benefits provided hereunder, nor the execution and delivery of this Agreement by Safeco, constitutes an admission by Safeco to (i) any breach of an agreement with Employee, (ii) any violation of a federal, state or local statute, regulation or ordinance, or (iii) any other wrongdoing. Safeco understands and acknowledges that neither Employee’s acceptance of the Severance Payment and other benefits provided hereunder, nor Employee’s execution and delivery of this Agreement, constitutes an admission by Employee to (i) any breach of an agreement with Safeco, (ii) any violation of a federal, state or local statute, regulation or ordinance, or (iii) any other wrongdoing.

5. Confidential Information.

5.1 Possession of Proprietary Information and Trade Secrets. Employee recognizes that by virtue of Employee’s employment by Safeco, Employee has acquired significant proprietary information and trade secrets relating to Safeco’s strategic planning, customers, agents, distribution, underwriting, product, financial projections, capital planning and financing, staffing, operations and accounting information (the “Confidential Information”). Employee recognizes and acknowledges that the Confidential Information constitutes valuable, special and unique assets of Safeco and the Safeco Subsidiaries, access to and knowledge of which were essential to the performance of Employee’s duties during Employee’s employment. Employee acknowledges and agrees that even after the Termination Date he remains subject to any and all agreements of confidentiality that he has entered into with Safeco and the Safeco Subsidiaries.

5.2 Non-Disclosure. Employee agrees to hold the Confidential Information in trust and confidence. Employee agrees not to (i) directly or indirectly make use of the Confidential Information, (ii) reveal any Confidential Information to any other party, or (iii) divulge or use any Confidential Information for any purpose other than for the benefit of Safeco, except to the extent that Employee may be required to disclose such Confidential Information by lawful order or process of a court (in which event Employee will provide reasonable advance notice of such disclosure to Safeco and will cooperate with Safeco’s efforts to obtain protective treatment for such Confidential Information).

5.3 Materials. Employee will not remove from Safeco’s premises or possession any documents, marketing materials, compilations of data or other files or records of any nature, or any copy or reproduction thereof, that were created or developed by Employee while employed by the Safeco Subsidiaries, contain Confidential Information or that otherwise belong to Safeco and the Safeco Subsidiaries.

6. Non-Disparagement/Non-Solicitation.

Employee agrees not to make any disparaging or derogatory remarks about Safeco, the Safeco Subsidiaries or any of their officers, directors, employees or agents at any time. This Section 6 will not be construed to prohibit Employee from responding truthfully and publicly to incorrect public statements or from making truthful statements when required by law or order of a court or other person or body having jurisdiction. Employee agrees that for 12 months following the Termination Date, Employee will not directly or indirectly solicit or entice any person who is an employee, partner, affiliate, agent or prospective partner or agent of Safeco or the Safeco Subsidiaries to cease, terminate or reduce any relationship with the companies.

7. Legal Action.

7.1 No Claims. Employee represents that Employee has not filed a Claim or complaint against Safeco or the Safeco Subsidiaries, or any of their employees, agents, officers, directors or shareholders with any court or agency. Safeco represents that it is not aware of any legal action pending or potentially pending against Employee for acts or omissions as an employee of the Safeco Subsidiaries.

7.2 Indemnification. The existing rights of the Employee and obligations of Safeco with regard to indemnification of the Employee are not dependent upon Employee’s continued employment or holding an office or directorship with Safeco or an affiliate. To the extent provided as of the Termination Date in the indemnification provisions of Safeco’s articles of incorporation and bylaws and to the maximum extent permitted under the laws of the state of Washington, Employee will be entitled to indemnification, and advancement of expenses, in respect of matters that occurred during the time that he was an officer of Safeco.

7.3 No Action on Released Claims. Employee agrees not to sue or pursue any court or administrative action against Safeco or the Safeco Subsidiaries, or any of their employees, agents, officers, directors or shareholders, to the extent allowed by applicable law, regarding any Claims released herein or otherwise arising from Employee’s employment with Safeco or Employee’s separation from service, except with respect to any breach by Safeco of its obligations under this Agreement. If any government agency brings any claim or conducts any investigation against Safeco, Employee waives and agrees to relinquish any damages or other individual relief that may be awarded as a result of any such proceedings.

7.4 Liability for Defense Costs. If, notwithstanding this Agreement, Employee should file any lawsuit or other proceeding based on legal claims that Employee has released herein, Employee agrees to pay or reimburse Safeco for all reasonable costs, including attorneys’ fees, which it, or the Safeco Subsidiaires, or their employees, agents, officers or directors, incur in defending against Employee’s claims.

This paragraph will not apply to any claimed breach by Safeco of any of the terms or conditions of this Agreement.

8. Agreement Confidential.

8.1 Terms of Agreement. Employee and Safeco agree that neither of them will reveal nor publicize the existence of this Agreement or its terms, including but not limited to the amount of the Severance Payment, except as required by law, including as required by annual financial and other corporate reporting requirements (which means that this Agreement will be filed with the Securities and Exchange Commission in accordance with its rules and regulations). Other than as just described, the parties agree that they will not discuss with or make to the public at large or to any individual person or persons any statements with regard to this Agreement, or matters relating to its terms. Notwithstanding the foregoing, the parties may discuss the existence and terms of this Agreement with their respective attorneys, accountants, financial advisors to obtain counsel and advice, and, in Employee’s case, with members of Employee’s immediate family, and, in Safeco’s case, with members of Safeco’s Senior Leadership Team. Nothing in this confidentiality provision prohibits Employee from representing to third parties that Employee “resigned from Safeco on mutually agreeable terms” or that the parties “parted amicably.”

8.2 Employment References. Employee agrees to direct all requests for employment references from prospective employers to the attention of Allie Mysliwy, Executive Vice President and head of Human Resources for Safeco. If a prospective employer contacts Safeco for an employment reference with respect to Employee, Safeco will provide, unless required otherwise by law, only the following information: Employee’s dates of employment, and Employee’s title and salary at the Termination Date.

9. Acknowledgment.

9.1 Informed Agreement. Employee declares that Employee has read and fully understands the terms of this Agreement and its significance and consequence. Employee further declares that this Agreement is the product of good faith negotiations between Employee and Safeco, and that Employee voluntarily accepts the same for the purpose of resolving arrangements with respect to Employee’s resignation.

9.2 Attorney. Employee acknowledges that Safeco has advised Employee to review the terms of this Agreement with an attorney of Employee’s own choosing and that Employee has done so or knowingly waived Employee’s right to do so.

9.3 Voluntary Act. Employee acknowledges that this Agreement is voluntary and has not been given as a result or any coercion.

9.4 Review and Revocation Periods, Effective Date. Employee acknowledges that Safeco has given Employee at least twenty-one (21) days during

which to consider this Agreement before signing. Negotiations about the terms or language of this Agreement will not re-start the 21-day consideration period. Employee has seven (7) days after signing in which Employee may revoke this Agreement. This Agreement will not become effective or enforceable until such seven-day period has expired (the “Effective Date of the Agreement”). Employee understands that he may revoke this Agreement by delivering a written notice to the attention of Allie Mysliwy at Safeco Plaza, T-17, Seattle, WA 98185, no later than the close of business on the seventh day after Employee signs this Agreement. Employee understands and acknowledges that if Employee revokes this Agreement it will not be effective or enforceable and Employee will not receive the payments or other benefits described herein.

10. Entire Agreement.

This Agreement constitutes the entire agreement between Employee and Safeco, and it supersedes and replaces all prior written and oral agreements and understandings between the parties with respect to its subject matter other than any agreement of confidentiality entered into in connection with his employment. Neither Safeco nor any Safeco Subsidiary has made any promises to Employee other than those included within this Agreement.

11. Waiver.

No waiver of any provision of this Agreement shall be deemed, or shall constitute, a waiver of any other provisions, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver.

12. Costs.

Following the Termination Date, Safeco shall pay Employee a lump sum of Five Thousand Dollars ($5,000) to defray any attorney and tax advisor fees incurred in connection with Employee’s separation from employment with Safeco. Except for this payment to Employee, each party shall separately bear their costs and expenses incurred in connection with the negotiation and preparation of this Agreement.

13. Outplacement Services.

Safeco agrees to provide Employee with outplacement services for a period of one year following the Termination Date. Employee and Safeco shall direct that invoices for services obtained from such outplacement service organization be forwarded directly to Safeco for payment.

14. Injunctive Relief.

Employee recognizes that irreparable and continuing injury for which there is not adequate remedy at law will result to Safeco and the Safeco Subsidiaries and their

businesses and property if Employee breaches Employee’s obligations under this Agreement. In the event of any such breach or threatened breach, Safeco will be entitled to seek temporary injunctive relief upon a showing of such breach or threatened breach without proof of actual damage and without posting a bond therefore, and/or an order of temporary and permanent specific performance enforcing this Agreement, and any other remedies provided by applicable law. Employee agrees that in the event of any such proven breach, Safeco will be entitled to recover its costs associated with enforcing this Agreement, including reasonable attorney’s fees. Employee further understands and agrees that the word “temporary” as used herein will include both temporary and preliminary relief and/or remedies available.

15. Mediation.

Any dispute under this Agreement must be submitted in advance of litigation for mediation by a mutually agreed-upon mediator at Judicial Dispute Resolution, LLC, 1411 Fourth Avenue, Suite 200, Seattle, Washington.

16. Amendment.

No supplement, modification, or amendment of this Agreement will be valid, unless it is made in writing and signed by both parties hereto.

17. Severability.

If any provision or portion of this Agreement is held to be unenforceable or invalid by any court of competent jurisdiction, the remainder of this Agreement will remain in full force and effect and will in no way be affected or invalidated thereby.

18. Governing Law; Jurisdiction and Venue.

The parties acknowledge that this Agreement will be governed, interpreted and enforced in accordance with the laws of the state of Washington, without regard to its conflict of law principles. Any suit or action arising out of or in connection with this Agreement, or any breach hereof, will be brought and maintained in the federal or state courts located in Seattle, Washington. The parties irrevocably submit to the jurisdiction and venue of such courts for the purpose of such suit or action and expressly and irrevocably waive, to the fullest extent permitted by law, any objection they may now or hereafter have to the venue of any such suit or action in any such court and any claim that any such suit or action has been brought in an inconvenient forum.

PLEASE READ CAREFULLY.

THIS SEPARATION AND GENERAL RELEASE AGREEMENT

INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.

	EMPLOYEE
	/s/ Jeffrey E. Roe
	Jeffrey E. Roe
	Date: February 1, 2006
	SAFECO CORPORATION
By	/s/ Paula Rosput Reynolds
	Paula Rosput Reynolds
	Its President and Chief Executive Officer
	Date: February 1, 2006

EX-12

Computation of Ratio of Earnings (Loss) to Fixed Charges Exhibit 12

(In Millions Except Ratios)

YEAR ENDED DECEMBER 31	2005		2004		2003		2002		2001
EARNINGS (LOSS)
Income (Loss) from Continuing Operations before Income Taxes	$	985.7	$	892.9	$	380.1	$	299.5	$	(1,608.6	)
Total Fixed Charges		88.6		108.2		127.5		132.8		144.3
Less Interest Capitalized		—		—		—		—		(8.3	)
Total Earnings (Loss)		1,074.3		1,001.1		507.6		432.3		(1,472.6	)
FIXED CHARGES
Interest		88.6		108.2		127.1		131.5		134.8
Interest Capitalized		—		—		—		—		8.3
Amortization of Deferred Debt Expense		—		—		0.4		1.3		1.2
Total Fixed Charges	$	88.6	$	108.2	$	127.5	$	132.8	$	144.3
RATIO OF EARNINGS (LOSS) TO FIXED CHARGES		12.13		9.25		3.98		3.26		—
Dollar Amount of Deficiency in Earnings (Loss) to Fixed Charges		N/A		N/A		N/A		N/A	$	1,616.9

EX-21

Subsidiaries of the Registrant Exhibit 21

All subsidiaries listed below are wholly owned, directly or indirectly, by Safeco Corporation.

American Economy Insurance Company (IN)

American States Insurance Company of Texas (TX)

American States Insurance Company (IN)

American States Preferred Insurance Company (IN)

First National Insurance Company of America (WA)

General America Corporation (WA)

Safeco Financial Institution Solutions, Inc. (CA)

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)

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-88044) pertaining to the Safeco Long-Term Incentive Plan of 1997, in the Registration Statement (Form S-3 No. 333-102298) and related Prospectus pertaining to $775,000,000 in Safeco securities, in the Registration Statement (Form S-3 No. 333-33444) pertaining to the Safeco Agency Stock Purchase Plan, and in the Registration Statement (Form S-8 No. 333-130459) pertaining to the Safeco 401(K)/Profit Sharing Retirement Plan, of our reports dated February 17, 2006, with respect to the consolidated financial statements and schedules of Safeco Corporation and subsidiaries (Safeco), Safeco management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Safeco, included in this Annual Report (Form 10-K) for the year ended December 31, 2005.

/s/ Ernst & Young LLP

Seattle, Washington

February 22, 2006

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 of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 21, 2006

/s/ Paula Rosput Reynolds

Paula Rosput Reynolds

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Safeco Corporation and Subsidiaries

Certification of Principal Accounting Officer

I, Charles F. Horne, Jr., 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 of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 21, 2006

/s/ Charles F. Horne, Jr.

Charles F. Horne, Jr.

Senior Vice President and Principal Accounting Officer

EX-32.1

Exhibit 32.1

Certification Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to Section 906

of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of Safeco Corporation (the “Company”) on Form 10-K for the year ended December 31, 2005 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.

Dated: February 21, 2006

/s/ Paula Rosput Reynolds

Paula Rosput Reynolds

President and Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Safeco Corporation and will be retained by Safeco Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

Certification Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to Section 906

of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of Safeco Corporation (the “Company”) on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-K”), I, Charles F. Horne, Jr., Senior Vice President and Principal Accounting Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: February 21, 2006

/s/ Charles F. Horne, Jr.

Charles F. Horne, Jr.

Senior Vice President and Principal Accounting 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.