SAFECO CORPORATION

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AlppOpMikQaAAO4T1DSon+CAjxw1gFwLAyyjlf35YkqMCBwJfM9Mr0s20kz+rTYl m/bFvBK7YejjzrNGut8vpg== 0000891020-02-000223.txt : 20020415 0000891020-02-000223.hdr.sgml : 20020415 ACCESSION NUMBER: 0000891020-02-000223 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020306 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFECO CORP CENTRAL INDEX KEY: 0000086104 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 910742146 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-06563 FILM NUMBER: 02568696 BUSINESS ADDRESS: STREET 1: 4333 BROOKLYN AVE NE STREET 2: SAFECO PLAZA CITY: SEATTLE STATE: WA ZIP: 98185 BUSINESS PHONE: 2065455000 MAIL ADDRESS: STREET 1: 4333 BROOKLYN AVE NE CITY: SEATTLE STATE: WA ZIP: 98185 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL AMERICA CORP DATE OF NAME CHANGE: 19680529 10-K405 1 v79351e10-k405.htm FORM 10-K FOR PERIOD ENDING DECEMBER 31, 2001. SAFECO CORPORATION

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the Year Ended December 31, 2001

Commission File Number 1-6563

SAFECO CORPORATION

State of Incorporation: Washington
I.R.S. Employer I.D. No.: 91-0742146

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

Telephone: 206-545-5000

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

Common Stock, No Par Value: 127,760,084 shares were outstanding at January 31, 2002

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].

The aggregate market value of the voting stock held by nonaffiliates of the registrant as of January 31, 2002, was $3,900,000,000.

Documents incorporated by reference:

Portions of the registrant’s definitive Proxy Statement for the 2002 annual shareholders meeting are incorporated by reference into Part III.

TABLE OF CONTENTS


Part I
	ITEM 1 — BUSINESS
	ITEM 2 — PROPERTIES
	ITEM 3 — LEGAL PROCEEDINGS
	ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	Executive Officers of the Registrant
Part II
	ITEM 5 — MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
	ITEM 6 — SELECTED FINANCIAL DATA
	ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	ITEM 9 — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Part III
	ITEM 10 — DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
	ITEM 11 — EXECUTIVE COMPENSATION
	ITEM 12 — SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
	ITEM 13 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Part IV
	ITEM 14 — EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
		(a) (1) Financial Statements
		(a) (2) Financial Statement Schedules
		(a) (3) Exhibits
		(b) Reports on Form 8-K
Signatures
	Management’s Report
Index to Financial Statements, Schedules and Exhibits
Index to Exhibits
EXHIBIT 3.1
EXHIBIT 10.3
EXHIBIT 10.5
EXHIBIT 10.6
EXHIBIT 10.15
EXHIBIT 10.22
EXHIBIT 10.23
EXHIBIT 11
EXHIBIT 12
EXHIBIT 21
EXHIBIT 23.1

SAFECO Corporation and Subsidiaries

Contents


	Item	Description	Page

		Financial Information

Part I	1	Business	1
	2	Properties	12
	3	Legal Proceedings	12
	4	Submission of Matters to a Vote of Security Holders	13
	—	Executive Officers of the Registrant	13

Part II	5	Market for Registrant’s Common Stock and Related Security Holder Matters	14
	6	Selected Financial Data	15
	7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	7A	Quantitative and Qualitative Disclosures About Market Risk	41
	8	Financial Statements and Supplementary Data	42
	9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	42

Part III	10	Directors and Executive Officers of the Registrant	43
	11	Executive Compensation	43
	12	Security Ownership of Certain Beneficial Owners and Management	43
	13	Certain Relationships and Related Transactions	43

		Exhibits, Financial Statement Schedules, and Reports on Form 8-K

Part IV	14	(a)(1) — Financial Statements	44
	14	(a)(2) — Financial Statement Schedules	44
	14	(a)(3) — Exhibits	44
	14	(b) — Reports on Form 8-K	44
		Signatures	45

		Management’s Report	46

		Index to Financial Statements, Schedules and Exhibits	FS-1

SAFECO Corporation and Subsidiaries

Part I

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

ITEM 1 — BUSINESS

General

SAFECO Corporation (the Corporation) is a Washington state corporation, operating on a nationwide basis. Non-U.S. operations are insignificant. The various operating subsidiaries are engaged in property and casualty insurance, surety, life insurance and asset management. These operations generated virtually all of the 2001 revenues.

The Corporation and its subsidiaries are collectively referred to as “SAFECO” or the “Corporation.” The property and casualty insurance operations are collectively referred to as “Property & Casualty.” The life insurance and asset management operations are collectively referred to as “Life & Investments.” Other operations not included in either Property & Casualty or Life & Investments are collectively referred to as “Corporate.”

The home offices of the Corporation and its principal subsidiaries are located in Seattle and Redmond, Washington. As of December 31, 2001, SAFECO had approximately 12,000 employees.

For additional information on SAFECO’s other businesses, see Other Operations of this section and Note 15 of the Notes to Consolidated Financial Statements.

The Corporation and its insurance subsidiaries are subject to extensive regulation and supervision, primarily designed to protect the interests of policyholders rather than shareholders and other investors. Such regulation, generally administered by a department of insurance in each state in which the insurance subsidiaries do business, relates to, among other things the:

       •    standards of solvency that must be met and maintained;

       •    licensing of insurers and their agents;

       •    nature of and limitations on investments;

       •    ability to enter into or withdraw from the state;

       •    approval of premium rates;

       •    restrictions on the size of risks that may be insured under a single policy;

       •    required reserves and provisions for unearned premiums, losses and other purposes;

       •    deposits of securities for the benefit of policyholders;

       •    approval of policy forms; and

       •    regulation of market conduct, including underwriting and claims practices.

State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies, holding company issues and other matters. The Corporation’s insurance subsidiaries are collectively licensed to transact insurance business in all 50 states and the District of Columbia. See additional information in Part II, Item 7, - Regulatory Issues in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).

Property & Casualty

Through independent agents, Property & Casualty writes personal, commercial and surety lines of insurance. Included in the lines of insurance written are automobile, homeowners, fire, commercial multi-peril, workers’ compensation, miscellaneous casualty, surety and fidelity. Products are sold in all states and the District of Columbia. A listing of the Corporation’s property and casualty insurance subsidiaries is included in Note 15 Segment Information (Property & Casualty Operations) of the Notes to Consolidated Financial Statements.

Consolidated gross written premiums for Property & Casualty’s ten largest states are as follows:


YEAR ENDED DECEMBER 31	2001					2000					1999

			% of					% of					% of
State	Amount		Total			Amount		Total			Amount		Total

California	$	785.8		17	%	$	758.4		16	%	$	688.4		15	%
Washington		582.2		13			585.3		12			594.5		13
Texas		325.2		7			327.8		7			323.4		7
Illinois		243.6		5			280.0		6			286.7		6
Oregon		239.8		5			241.7		5			239.5		5
Missouri		196.1		4			211.2		5			221.6		5
Florida		166.3		4			173.3		4			174.2		4
Colorado		120.4		3			110.1		2			99.4		2
Michigan		119.3		3			133.5		3			144.3		3
Connecticut		118.2		3			113.8		2			115.7		2

Total ten largest states		2,896.9		64			2,935.1		62			2,887.7		62
All others		1,673.3		36			1,774.0		38			1,757.3		38

Total	$	4,570.2		100	%	$	4,709.1		100	%	$	4,645.0		100	%

Personal Insurance, Business Insurance, Commercial Insurance and Surety lines comprised approximately 61%, 22%, 14% and 3%, respectively, of the 2001 gross written premiums of $4,570.2.

Property & Casualty — Loss Reserves

The consolidated financial statements include the estimated reserves for unpaid losses and loss adjustment expenses (LAE) of Property & Casualty. The reserves are presented net of amounts from expected salvage and subrogation recoveries and gross of amounts recoverable from reinsurance.

Reserves for losses that have been reported to Property & Casualty and certain legal expenses are established on the “case basis” method. Claims incurred but not reported (IBNR) and other LAE are estimated using actuarial procedures. Salvage and subrogation recoveries are accrued using the “case basis” method for large claims and statistical procedures for smaller claims.

SAFECO’s objective is to set reserves that are adequate; that is, the amounts originally recorded as reserves should equal the amounts ultimately required to settle losses. SAFECO’s reserves reflect its aggregate best estimate of the total ultimate cost of claims that have been incurred but have not yet been paid. SAFECO believes its reserves are adequate as of December 31, 2001. The estimates are based on past claims experience and consider current claim trends as well as social, legal and economic conditions, including inflation. The reserves are not discounted.

The process of estimating claim reserves is complex and imprecise due to a number of variables. These variables are affected by both internal and external events such as changes in claims handling procedures, trends in loss costs, inflation, judicial trends and legislative changes. Many of these items are difficult to quantify, particularly on a prospective basis. Additionally, there may be significant lags between the occurrence of the insured event and the time it is actually reported to the insurer. SAFECO continually refines reserve estimates in a regular ongoing process as experience develops and further claims are reported and settled. SAFECO records adjustments to reserves in the results of operations in the periods in which the estimates are changed. In establishing reserves, SAFECO takes into account estimated recoveries for reinsurance, salvage and subrogation.

Property & Casualty Loss Reserve Strengthening

During the third quarter 2001, SAFECO completed a review of Property & Casualty’s loss reserve adequacy. As a result of this review, which included an independent actuarial study, Property & Casualty increased reserves by $240.0, pretax. The $240.0 reserve addition related to Property & Casualty segments as follows: $65.0 for Business Insurance, $90.0 for Commercial Insurance, and $85.0 in the Other lines of business. The Other lines include the discontinued reinsurance operation SAFECO acquired when it purchased American States in 1997. The $240.0 reserve addition relates to recent developments in prior year claims as follows: $80.0 for workers’ compensation, $90.0 for construction defect and $70.0 for other coverages including asbestos and environmental.

In the case of workers’ compensation, the $80.0 is due to unexpected development of prior year claims and continued increases in medical costs. This includes the impact of administrative rulings that have recently been more favorable to plaintiffs’ claims for compensation, particularly in the states of California and Florida.

The estimation of liabilities related to construction defect and asbestos and environmental claims is subject to greater subjectivity than for other claims. SAFECO’s reserve review noted the continued emergence of adverse loss experience for construction defect and asbestos and environmental claims due to newly emerging trends in the disposition of such cases. As a result of the review, management concluded that ultimate losses for these lines will be higher in the range of possible outcomes than previously estimated.

The $90.0 increase in construction defect reserves is due to continued adverse development on prior year claims and the expansion of the number of claims in states outside California. Recent state courts’ rulings have expanded the number of potential claims beyond those contemplated by SAFECO’s original estimate.

The $70.0 increase in reserves for Other lines, including asbestos and environmental claims, relates to the anticipated increase in asbestos claims relating primarily to the discontinued reinsurance operations acquired in the American States purchase. Consistent with recent insurance industry experience, trends observed include an expansion of defendants to include smaller and more peripheral firms such as installers in addition to asbestos manufacturers and producers.

The review of loss reserve adequacy concluded that personal lines reserves were adequate.

To mitigate the capital impact of the reserve strengthening, the Corporation contributed $250.0 of capital to Property & Casualty on September 28, 2001. The source of the capital contribution was the proceeds from the sale of SAFECO Credit. See additional information in the Discontinued Operations — SAFECO Credit section in the MD&A.

The following table provides an analysis of changes in loss and LAE reserves (net of reinsurance amounts) for 2001, 2000 and 1999. Changes in reserves are reflected in the income statement for the year when the changes are made.


DECEMBER 31	2001		2000		1999

Loss and LAE Reserves at Beginning of Year	$	4,269.1	$	4,069.1	$	3,966.3

Incurred Loss and LAE for Claims Occurring in the Current Year		3,619.1		3,621.7		3,353.0
Increase in Estimated Loss and LAE for Claims Occurring in Prior Years		345.1		148.3		78.8

Total Incurred Loss and LAE		3,964.2		3,770.0		3,431.8

Loss and LAE Payments for Claims Occurring During
Current Year		1,976.8		2,059.3		1,926.4
Prior Years		1,618.7		1,510.7		1,402.6

Total Loss and LAE Payments		3,595.5		3,570.0		3,329.0

Loss and LAE Reserves at End of Year, Net of Reinsurance	$	4,637.8	$	4,269.1	$	4,069.1

RECONCILIATION
Loss and LAE Reserves at End of Year, Net of Reinsurance	$	4,637.8	$	4,269.1	$	4,069.1
Add: Reinsurance Recoverables on Unpaid Losses		415.9		343.6		309.5

Loss and LAE Reserves at End of Year, Gross of Reinsurance	$	5,053.7	$	4,612.7	$	4,378.6

The amounts above do not include SAFECO’s life subsidiaries’ loss reserves for accident and health claims, as these amounts are not material in relation to consolidated loss and LAE reserves. In addition, the majority of these claims are incurred and paid in full within a one-year period.

Property & Casualty operations in 2000 were charged $148.3 from increases in estimated loss and loss and LAE for claims occurring in prior years. These increases were due to adverse development within commercial operations in workers’ compensation ($50.9), general liability ($44.4) primarily related to construction defect, commercial auto ($23.5) and in other lines of business ($29.5) as the costs of settling claims increased. Workers’ compensation development was due to continued adverse development of prior reported claims as well as IBNR reserve additions. General liability development was due primarily to continued adverse development of construction defect claims related to the SAFECO Business Insurance operation. Commercial auto development was due to higher than expected loss costs in commercial operations on prior reported claims.

Property & Casualty operations in 1999 were charged $78.8 from increases in estimated loss and LAE for claims occurring in prior years, primarily in construction defect, asbestos and environmental and workers’ compensation. For both construction defect and asbestos and environmental, increased reserve estimates resulted from higher than expected reported claims in 1999. The increased reserve estimates for workers’ compensation resulted from SAFECO’s re-evaluation of loss exposures on claims related to larger commercial insureds and to an upturn in medical costs and less favorable workers’ compensation legislation.

The following table (Analysis of Losses and Loss Adjustment Expenses Reserve Development) presents the development of the loss and LAE reserves for 1991 through 2001. The amounts reported in the table for the 1996 and prior year balances are for SAFECO only (i.e., do not include any amounts for American States). The top lines of the table present the recorded reserve for unpaid loss and LAE at December 31 for each of the indicated years, both gross and net of related reinsurance amounts. The upper portion of the table displays the cumulative amount paid with respect to the previously recorded reserves as of the end of each succeeding year. The next section reports the re-estimated amount of the previously recorded reserves based on experience as of each succeeding year. The estimate is increased or decreased as more information becomes known about individual claims and as changes in conditions and claim trends become apparent. The lower section of the table presents the cumulative redundancy (deficiency) developed with respect to the previously

recorded liability as of the end of each succeeding year. For example, the 1991 reserve of $1,865.3 developed a $44.6 redundancy after one year which grew over ten years to a redundancy of $265.2.

For 1991 through 1996, inclusive, SAFECO’s reserve development had been favorable. This trend reflected several factors: conservative reserving previously undertaken to correct deficiencies in years prior to 1988, favorable workers’ compensation legislation, moderation of medical costs and inflation and claims department changes. The favorable legislation in workers’ compensation, which relates primarily to the states of Oregon and California in the early 1990’s, helped reduce fraud, allowed for faster claim settlements and made it more difficult to reopen claims — all of which reduced SAFECO’s ultimate loss costs. During this period, the cost of claim settlements in several lines of business had benefited from changes in the organization of SAFECO’s claims department which established separate specialized units for workers’ compensation, environmental exposures and fraud investigations. In addition, increased focus on loss adjustment expenses helped reduce these costs.

Starting in 1997 unfavorable trends began to emerge with respect to the combined reserves of SAFECO and American States. Adverse loss experience in construction defect, asbestos and environmental, as well as workers’ compensation significantly contributed to the unfavorable trends. As discussed above, these unfavorable trends prompted SAFECO to perform a reserve review which was completed in the third quarter of 2001. As a result of this review Property & Casualty increased reserves by $240.0 which is reflected in the $345.1 adverse development for 2000.

As discussed previously, the development for 1999 was unfavorable due to commercial lines adverse development in workers’ compensation, general liability and commercial auto.

In evaluating the following reserve development table (Analysis of Losses and Loss Adjustment Expenses Reserve Development), note that each amount includes the effects of all changes in amounts for prior periods. For example, the amount of the redundancy shown for the December 31, 1996 reserves that relates to losses incurred in 1991 is also included in the cumulative redundancy amount for the years 1991 through 1995. Conditions and trends that affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table.

Analysis of Losses and Loss Adjustment Expenses Reserve Development

December 31 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

RESERVE FOR UNPAID LOSSES AND LAE

Gross of Reinsurance
$ 2,017.3 $ 2,052.3 $ 2,095.2 $ 2,236.8 $ 2,180.8 $ 2,059.1 $ 4,310.5 $ 4,219.9 $ 4,378.6 $ 4,612.7 $ 5,053.7

Reinsurance
152.0 89.2 100.1 143.9 110.7 103.4 228.6 253.6 309.5 343.6 415.9

Net of Reinsurance
$ 1,865.3 $ 1,963.1 $ 1,995.1 $ 2,092.9 $ 2,070.1 $ 1,955.7 $ 4,081.9 $ 3,966.3 $ 4,069.1 $ 4,269.1 $ 4,637.8

CUMULATIVE NET AMOUNT PAID AS OF

One Year Later
$ 584.9 $ 598.9 $ 620.5 $ 693.0 $ 755.4 $ 772.9 $ 1,345.5 $ 1,389.2 $ 1,510.7 $ 1,618.7

Two Years Later
905.7 913.4 947.6 1,068.3 1,095.0 1,101.4 2,049.3 2,165.5 2,336.2

Three Years Later
1,086.5 1,106.0 1,147.6 1,252.9 1,267.6 1,287.9 2,516.3 2,638.0

Four Years Later
1,207.2 1,230.6 1,252.5 1,341.5 1,370.0 1,404.3 2,821.0

Five Years Later
1,294.4 1,295.7 1,300.2 1,403.5 1,440.5 1,485.3

Six Years Later
1,336.7 1,326.1 1,342.9 1,449.6 1,493.1

Seven Years Later
1,356.9 1,357.8 1,377.0 1,488.9

Eight Years Later
1,381.4 1,386.6 1,406.1

Nine Years Later
1,406.2 1,412.4

Ten Years Later
1,429.5

NET RESERVE RE-ESTIMATED AS OF

One Year Later
$ 1,820.7 $ 1,866.2 $ 1,913.8 $ 2,033.2 $ 1,992.4 $ 1,947.7 $ 3,981.9 $ 4,045.1 $ 4,217.4 $ 4,614.2

Two Years Later
1,732.8 1,782.1 1,818.3 1,902.3 1,889.9 1,861.4 3,989.0 4,070.3 4,447.8

Three Years Later
1,686.0 1,712.2 1,716.1 1,801.9 1,804.7 1,806.6 3,986.0 4,209.9

Four Years Later
1,650.7 1,642.3 1,643.6 1,733.8 1,757.1 1,799.6 4,097.1

Five Years Later
1,594.9 1,600.9 1,599.8 1,702.8 1,757.3 1,849.6

Six Years Later
1,569.5 1,554.7 1,568.3 1,691.2 1,803.3

Seven Years Later
1,548.7 1,549.8 1,578.3 1,733.2

Eight Years Later
1,551.0 1,567.2 1,616.3

Nine Years Later
1,570.1 1,601.2

Ten Years Later
1,600.1

CUMULATIVE NET REDUNDANCY (DEFICIENCY) AS OF

One Year Later
$ 44.6 $ 96.9 $ 81.3 $ 59.7 $ 77.7 $ 8.0 $ 100.0 $ (78.8 ) $ (148.3 ) $ (345.1 )

Two Years Later
132.5 181.0 176.8 190.6 180.2 94.3 92.9 (104.0 ) (378.7 )

Three Years Later
179.3 250.9 279.0 291.0 265.4 149.1 95.9 (243.6 )

Four Years Later
214.6 320.8 351.5 359.1 313.0 156.1 (15.2 )

Five Years Later
270.4 362.2 395.3 390.1 312.8 106.1

Six Years Later
295.8 408.4 426.8 401.7 266.8

Seven Years Later
316.6 413.3 416.8 359.7

Eight Years Later
314.3 395.9 378.8

Nine Years Later
295.2 361.9

Ten Years Later
265.2

The following table summarizes reserve development, gross of reinsurance, for the last three years as of December 31, 2001.


DECEMBER 31	2000			1999			1998

Gross Reserves	$	4,612.7		$	4,378.6		$	4,219.9

CUMULATIVE DEVELOPMENT
Net of Reinsurance	$	(345.1	)	$	(378.7	)	$	(243.6	)
Reinsurance		(25.6	)		(53.0	)		(115.4	)

Gross of Reinsurance	$	(370.7	)	$	(431.7	)	$	(359.0	)

Environmental and Asbestos Claims

Property & Casualty reserves for loss and LAE for liability coverages related to environmental, asbestos and other toxic claims totaled $340.7 at December 31, 2001, compared with $315.5 at December 31, 2000. These amounts are before the effect of reinsurance, which totaled $19.7 and $28.8 at December 31, 2001 and 2000, respectively. These reserves are approximately 7% of total property and casualty reserves for loss and LAE at both December 31, 2001 and 2000. The reserves included estimates for both reported and IBNR claims and related legal expenses.

The vast majority of Property & Casualty’s environmental, asbestos and other toxic claims resulted from the commercial general liability line of business and the discontinued assumed reinsurance operations of American States. Approximately 4,800 of these claims, computed on an occurrence basis, were pending at December 31, 2001. The average settlement cost of each environmental, asbestos and other toxic claim for 2001 was fifteen thousand dollars including legal expenses.

The following table presents the loss reserve activity for liability coverages related to environmental, asbestos and other toxic claims, before reinsurance:


DECEMBER 31	2001			2000			1999

Reserves at Beginning of Year	$	315.5		$	332.3		$	329.8
Incurred Losses and LAE		51.7			9.6			24.8
Losses and LAE Payments		(26.5	)		(26.4	)		(22.3	)

Reserves at End of Year	$	340.7		$	315.5		$	332.3

IBNR reserves comprise 69% of total environmental and asbestos reserves at December 31, 2001. The incurred losses and LAE amount of $51.7 in the table above includes $50.0 of loss reserve strengthening in September 2001. Continued emergence of these claims has resulted in higher ultimate expected losses than previously estimated. While Property & Casualty has generally avoided writing coverages for larger companies with substantial exposure in these areas, recent industry experience with asbestos claims has shown an expansion of defendants to include smaller and more peripheral firms. The exposure of the assumed reinsurance operations also follows the general industry trend. This has resulted in higher estimates of ultimate losses. Developing industry trends will continue to be monitored and used in conjunction with other quantitative loss reserving techniques to evaluate reserves on an ongoing basis.

The significant uncertainties involved in the reserving for these claims include future court resolution, judicial interpretations, regulatory actions, industry experience as well as company experience. Changes in these factors could result in future claims significantly different from those currently predicted. The impact upon reserves of changes in these factors would be reflected in future operating results.

Construction Defect Claims

The total Property & Casualty reserves for construction defect claims were $382.9 at December 31, 2001 and $322.6 at December 31, 2000, representing approximately 8% of total Property & Casualty reserves for loss and LAE at both December 31, 2001 and 2000.

Construction defect claims are a subset of claims that arise from coverage provided by general property damage liability insurance. Construction defect claims arise from the alleged defective work performed in the construction of large habitation structures, such as apartments, condominiums and large developments of single-family dwellings or other housing. In addition to damages arising directly from the alleged defective work, construction defect claims often also allege that the economic value of the structure has been diminished. The vast majority of Property & Casualty’s construction defect claims arise from past contractor business written in the state of California. Commercial Insurance, which does not include Business Insurance, has avoided writing the construction class of business in California since 1989 and has limited exposure to these types of claims. However, American States, prior to its acquisition by SAFECO, was a major writer of California contractor business until 1994 when it implemented significant restrictions in this line. Continued loss development in California as well as emerging claims in other states resulted in additions to reserves of $90.0 as part of the loss reserve strengthening in September 2001.

The following table presents the loss and LAE reserve activity for liability coverages related to construction defect claims, before reinsurance:


DECEMBER 31	2001			2000			1999

Reserves at Beginning of Year	$	322.6		$	306.1		$	328.6
Incurred Losses and LAE		119.2			71.5			28.1
Losses and LAE Payments		(58.9	)		(55.0	)		(50.6	)

Reserves at End of Year	$	382.9		$	322.6		$	306.1

Reinsurance

Property & Casualty uses treaty and facultative reinsurance to help manage exposures to loss. Property & Casualty’s reinsurance coverages relate to surety business and personal and commercial property coverages. As noted above, the liability for unpaid losses and LAE is reported gross of reinsurance recoverables of $415.9 at December 31, 2001 and $343.6 at December 31, 2000. This increase is due primarily to reinsurance recoverables related to the surety Enron loss (see Surety section of the MD&A for additional information) and losses resulting from the World Trade Center attacks. Because the amount of the reinsurance recoverables can vary depending on the size of an individual loss or, in some cases, the aggregate amount of all losses in a particular line of business, the exact amount of the reinsurance recoverables is not known until all losses are settled. Therefore, Property & Casualty must estimate the amount of reinsurance recoverables it anticipates receiving. To estimate this amount, Property & Casualty uses the terms of the reinsurance contracts and historical reinsurance recovery information and applies that information to the gross loss reserve estimate.

The availability and cost of reinsurance are subject to prevailing market conditions, both in terms of price and available capacity. Due to the recent tightening in the reinsurance marketplace, it is likely that the cost of reinsurance will increase in 2002. Although the reinsurer is liable to SAFECO to the extent of the reinsurance ceded, SAFECO remains primarily liable to the policyholder as the direct insurer on all risks insured. In addition, the magnitude of losses in the reinsurance industry resulting from the September 11, 2001 terrorist attacks is expected to impact the financial strength of reinsurers which may result in collectibility or recoverability issues. However, to SAFECO’s knowledge, none of its reinsurers is currently experiencing financial difficulties. SAFECO’s business is not substantially dependent upon any single reinsurance account.

See discussion on Impact of Terrorism and its impact on reinsurance in the MD&A.

Approximately 42% of the total reinsurance recoverables balance at December 31, 2001 was with the following four reinsurers: American Re-Insurance, Employers Reinsurance Corporation, Swiss Reinsurance America Corporation and General Reinsurance Corporation all of whom are rated A++ by A.M. Best. The reinsurance recoverables balance categorized by reinsurer rating (by A.M. Best Company on a scale ranging from A++ to F) at December 31, 2001 is presented below:


	Percent at
RATING	December 31, 2001

A++		43.7	%
A+		8.7
A		4.3
A-		0.5
B		0.2
Lloyds of London		3.7
Non-Rated		6.6

Total Domestic Reinsurers		67.7

State Reinsurance Pools		23.7
Other Reinsurance Pools		2.1
Foreign Reinsurers		6.5

Total Reinsurance Pools and Foreign Reinsurers		32.3

Total		100.0	%

Property & Casualty’s nationwide catastrophe property reinsurance program for 2002, covering 90% of $400.0 of single-event losses in excess of $100.0 retention, is unchanged from 2001. In a large catastrophe, Property & Casualty retains the first $100.0 of losses, 10% of the next $400.0 and all losses in excess of $500.0. In 2001, in addition to this nationwide coverage, for all states other than California, SAFECO had a supplemental earthquake-only reinsurance contract that covered 90% of $250.0 of single-event earthquake losses in excess of $500.0. Given Property & Casualty’s successful efforts to reduce West Coast earthquake exposure, it was no longer considered necessary to continue this excess contract in 2002. Catastrophe property reinsurance contracts for 2002 include provisions for one reinstatement for a second catastrophe event in 2002 at current rates.

Property & Casualty does not enter into retrospective reinsurance contracts and does not participate in any unusual or nonrecurring reinsurance transactions such as “swaps” of reserves or loss portfolio transfers. Property & Casualty does not use funding covers and does not participate in any surplus relief transactions. See Note 5 of the Notes to Consolidated Financial Statements for additional information on reinsurance.

Statutory Accounting

State insurance regulatory authorities require the property and casualty 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). The difference between the $5,053.7 reserve at December 31, 2001, for the losses and LAE disclosed in the consolidated financial statements in accordance with accounting principles generally accepted in the United States (GAAP), and the $4,637.8 reported in the annual statements filed with state regulatory authorities relates to reinsurance recoverables. Under Statement of Financial Accounting Standards No. 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts,” the GAAP-basis liability for losses and LAE is reported gross of amounts recoverable from reinsurance. Statutory-basis financial statements report the liability net of reinsurance.

Life & Investments

Life & Investments offers individual and group insurance products, retirement services, annuity products, mutual funds and investment advisory services. The most significant product lines in terms of premium and deposit volume include single premium immediate and deferred annuities, business owned life insurance, variable annuities, tax-sheltered annuities, corporate retirement plans, excess loss group medical insurance and individual life insurance. SAFECO Life reinsures portions of its individual and group life, accident and health insurance through commercial reinsurance treaties, providing protection against large risks and catastrophe situations. A listing of the Corporation’s life insurance & investment subsidiaries is included in Note 15 Segment Information (Life & Investments Operations) of the Notes to Consolidated Financial Statements.

Funds held under deposit contracts relate primarily to annuity, retirement services and individual products. The table below summarizes the components of funds held under deposit contracts at December 31, 2001, and describes the applicable surrender charges and surrender experience.

Detail of Funds Held Under Deposit Contracts at December 31, 2001

Range of Credited

Expected Maturities or Assumed Approximate

Outstanding of Liabilities Interest Rates as Surrender

PRODUCT Balance (at issue date) of 12/31/01 Surrender Charges Experience

Income Annuities $ 6,245.3 Over 25 years 3.50% to 12.20% Cannot surrender Cannot surrender

Other
Annuities &
Deposits 4,574.3 Approximately
5-20 years 4.00% to 7.95% Highest surrender charges range from 10% to 5%, graded down to 0% within 5 to 10 years. SAFECO has the option to defer payout over 5 years for 20% of these contracts. 14.5% per annum

Universal
Individual Life 3,204.2 Approximately
10-25 years 5.00% to 6.00% Varies by issue age, sex and duration from $1 to $58 per $1,000 of insurance. 8% per annum

Guaranteed
Investment
Contracts 391.7 Typically
2-5 years 5.63% to 8.40% Market value
adjustment or
cannot surrender in
first year. Less than 1%
per annum

Equity
Indexed
Annuities (EIA) 208.7 Approximately 6 years at original issuance, remaining expected maturity of approximately 3 years. Equity return credited is based on S&P 500 performance with no minimum guarantee. Floor return based on a minimum fixed return on a portion (typically 90%) of the original deposit amount. Typically 8% in year 1 graded to 0% after year 6. More than 45% due to an offer to EIA policyholders in 2001 to surrender their policies and receive December 31, 2000 account value with no surrender charge.

Total $14,624.2

Effective December 31, 2001, SAFECO’s asset management companies and Talbot Financial Corporation are reported as part of Life & Investments’ operating results. These subsidiaries include the following:

SAFECO Asset Management Company, acquired in 1973, serves as the investment advisor for the SAFECO mutual funds, variable annuity portfolios and outside pension and trust accounts.

SAFECO Securities, Inc., organized in 1967, is the principal underwriter of the SAFECO Mutual Funds, comprising the SAFECO Common Stock Trust, SAFECO Taxable Bond Trust, SAFECO Tax-Exempt Bond Trust, SAFECO Money Market Trust and SAFECO Managed Bond Trust. These five trusts are made up of nineteen separate investment portfolios, all of which are sold on a “no-load” basis directly to the public. Seventeen of these portfolios have two to three additional classes of stock which are sold to the public through intermediaries. In addition, SAFECO Securities, Inc. is the principal underwriter for the SAFECO Resource Series Trust, a registered investment company with six separate investment portfolios. SAFECO Securities is also the principal underwriter for the variable insurance products issued by SAFECO Resource Variable Account B, SAFECO Separate Account SL, SAFECO Deferred Variable Annuity Account and SAFECO Separate Account C, all of which are separate accounts of SAFECO Life Insurance Company and for First SAFECO Separate Account S, which is a separate account of First SAFECO National Life Insurance Company of New York.

SAFECO Services Corporation, organized in 1972, is the transfer agent for the SAFECO mutual funds.

SAFECO Trust Company, organized in 1994, provides asset management and trust administrative services to high net worth individuals and unrelated organizations.

SAFECO Investment Services, Inc., organized in 1986, is a broker/dealer and registered investment advisor that distributes affiliated and nonaffiliated mutual funds, variable insurance products and securities through its registered representatives.

Talbot Financial Corporation, acquired in 1993, is a broad-based insurance broker with a concentrated emphasis on the distribution of qualified and nonqualified annuity products and mutual funds through the banking and brokerage arenas.

Other Operations

SAFECO Financial Products (SFP), organized in 2000, engages in limited activity by writing S&P 500 index options, selling single credit default swaps and investing in convertible bonds. For additional information see the Corporate section of the MD&A.

Discontinued Operations

SAFECO Credit Company, Inc. (SAFECO Credit) — SAFECO Credit provided loans and equipment financing and leasing to commercial businesses, insurance agents and affiliated companies. In March 2001, SAFECO announced its intention to sell SAFECO Credit. A plan of disposal was formalized establishing the measurement date as March 31, 2001; consequently, SAFECO Credit was accounted for as a discontinued operation, effective March 31, 2001. In July 2001, the Corporation announced that it had reached a definitive agreement to sell SAFECO Credit to General Electric Capital Corporation (GECC). On August 15, 2001, SAFECO completed the sale (effective July 31, 2001) of SAFECO Credit to GECC. See Note 11 of the Notes to Consolidated Financial Statements.

SAFECO Properties, Inc. — In February 1998, SAFECO decided to sell its real estate subsidiary, SAFECO Properties, Inc., to focus on its core insurance and financial services businesses. See Note 11 of the Notes to Consolidated Financial Statements.

A listing of the Corporation’s subsidiaries is shown on Exhibit 21 of this report.

Subsequent Event

On March 4, 2002, SAFECO reached a definitive agreement to acquire Swiss Re’s medical excess-loss and group life insurance business. SAFECO is acquiring $240 in annual excess-loss medical insurance premium and $10 in group-life insurance premium. Pending regulatory approval, the acquisition is expected to close in June 2002.

ITEM 2 — PROPERTIES

General America Corporation (a wholly-owned subsidiary of SAFECO Corporation) leases office space to both Property & Casualty and Life & Investments. Property & Casualty’s and Corporate’s home office facility (567,000 gross square feet) is located in Seattle, Washington. A 700-car parking garage is connected to this facility. Life & Investments’ headquarters facility (220,000 gross square feet) is located in Redmond, Washington.

Other buildings owned and occupied include the newly developed office space (343,000 gross square feet) in Redmond, Washington that was completed in late 2001. Additional company-owned facilities are regional and branch offices located in Fountain Valley and Pleasant Hill, California; Denver, Colorado; Carol Stream, Illinois; St. Louis, Missouri; Cincinnati, Ohio; Portland, Oregon; Mountlake Terrace and Spokane, Washington. These buildings, including the newly developed Redmond, Washington facility, total approximately 1,960,000 gross square feet. All other branch and service offices occupy leased premises totaling approximately 2,756,000 gross square feet, generally subject to lease periods of five years or less. Total leased and owned office space totals approximately 5,503,000 gross square feet.

ITEM 3 — LEGAL PROCEEDINGS

(Dollar amounts in millions)

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

The property and casualty insurance subsidiaries of the Corporation are parties to a number of lawsuits for liability coverages related to environmental claims. Although estimation of reserves for environmental claims is difficult, the loss and loss adjustment expenses with respect to any such lawsuit, or all lawsuits related to a single incident combined, are not expected to be material to the Corporation’s financial condition. For more information regarding the liability of such subsidiaries for environmental claims and the difficult process of estimating environmental reserves see the Property & Casualty — Loss Reserve section under Part I, Item 1.

General Insurance Company of America (“General”) is a defendant in Hobbs v. State Farm Mutual Automobile Insurance Co., et al., a putative class-action lawsuit filed in 1999 in Illinois state court against seven property and casualty insurance groups. The plaintiffs allege that the defendants’ support of the Certified Auto Parts Association (“CAPA”), an independent organization that certifies the quality of non-original equipment manufactured parts for vehicles, constituted a conspiracy to further the improper use of those parts. The plaintiffs seek damages and injunctive relief. General is vigorously defending against these claims.

In July 2000, SAFECO Insurance Company of America filed suit in U.S. District Court for the Middle District of North Carolina to collect amounts due from a workers’ compensation policyholder, Magna Corporation (“Magna”). Under a contract with SAFECO Insurance Company of America, Magna, on behalf of its Professional Employee Organizations and their client companies, assumed obligations for significant deductibles and expense reimbursements. On March 19, 2001, Magna filed a petition under Chapter 7 of the United States Bankruptcy Code. Because of the uncertainty of recovering amounts due, SAFECO Insurance Company of America has written-off all receivable amounts totaling $27 due from Magna.

The SAFECO property and casualty insurance companies have been sued in U.S. District Court for the Northern District of Ohio and in California state court by plaintiffs who purport to represent classes of present and former claims adjusters. They claim that claims adjusters should have been considered non-exempt employees under the labor laws, and seek damages representing back overtime pay for certain hours worked. SAFECO intends to vigorously defend against these allegations.

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 2001.

Executive Officers of the Registrant

As of March 6, 2002, these are the names, ages and positions of the executive officers of the registrant as required by Item 10. No family relationships exist.

Name Age Position

Bruce M. Allenbaugh 45 Senior Vice President of Corporate Marketing since May 7, 2001. Vice President of Marketing for Avenue A from November 1999 to January 2001. Vice President of Marketing for Nextlink (now XO Communications) from 1994 to 1999. Held a series of management positions with Pepsi-Cola from 1985 to 1994.

Michael E. LaRocco 45 President of SAFECO Personal Insurance since July 16, 2001. Regional Vice President, Northeast Region for GEICO Corporation from 1998 to July 2001. Vice President of Underwriting and Product Management for GEICO from 1996 through 1998, Vice President of GEICO Casualty from 1994 to 1996, and held a series of management positions with GEICO from 1993 through 1998.

Dale E. Lauer 55 President of SAFECO Business Insurance since July 16, 2001. Senior Vice President of SAFECO Business Insurance from 1997 to July 2001. Vice President of commercial lines underwriting for the SAFECO property and casualty insurance companies from 1992 to 1997.

Michael S. McGavick 44 President, Chief Executive Officer and Director since January 30, 2001. President and Chief Operating Officer of CNA Agency Market Operations from October 1997 until January 2001, and President of CNA’s Commercial Lines group from January until October 1997, and held a series of executive positions with CNA’s commercial insurance operations from 1995 through October 1997. Director of the Superfund Improvement Project for the American Insurance Association from 1992 to 1995.

Christine B. Mead 46 Named Senior Vice President, Chief Financial Officer and Secretary effective January 24, 2002. Senior Vice President and Chief Financial Officer for Travelers Insurance Group from 2000 to January 2002; Senior Vice President and Chief Financial Officer for Travelers Property Casualty Corp - Personal Lines from 1996 to 2000; held a series of management positions with Travelers Corporation from 1989 to 1996.

Allie R. Mysliwy 47 Senior Vice President of Human Resources since July 2001. Vice President of Human Resources from July 1999 to July 2001; Vice President of Human Resources for SAFECO Life Insurance Company from 1994 to 1999.

James W. Ruddy 52 Senior Vice President since 1992. General Counsel since 1989. Vice President from 1989 to 1992. Associate General Counsel from 1985 to 1989.

Yomtov Senegor 43 Senior Vice President and Chief Information Officer since October 1, 2001. Central Region Insurance Managing Partner with Accenture (formerly Andersen Consulting) from November 1997 to October 2001, and Partner from 1992 to 1997.

Randall H. Talbot 47 President of SAFECO Life Insurance companies since February 1998. Chief Executive Officer and President of Talbot Financial Corporation from 1988 to 1998.

SAFECO Corporation and Subsidiaries

Part II

ITEM 5 — MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS

Market Information

SAFECO Corporation’s common stock trades on the NASDAQ Stock Market under the symbol SAFC. High and low market prices of the Corporation’s common shares were as follows:

First

Second

Third

Fourth

MARKET PRICE RANGES

Quarter

Annual

2001 - High

32.06

30.11

31.72

32.79

- Low

21.75

25.41

26.02

29.11

21.75

2000 - High

26.56

26.31

27.63

35.69

- Low

18.56

19.88

20.81

22.94

18.56

There were approximately 3,300 common shareholders of record at December 31, 2001.

Dividends

SAFECO has paid cash dividends continuously since 1933. Common stock dividends paid to shareholders were $0.93 per share in 2001 compared with $1.48 in 2000 and $1.44 in 1999. These dividends are funded with dividends to the Corporation from its subsidiaries. The Corporation expects to continue paying dividends in the foreseeable future. However, payment of future dividends is subject to the Board of Directors’ approval and is dependent upon earnings and the financial condition of the Corporation as well as dividend restrictions on its significant insurance subsidiaries as described in Note 13 of the Notes to Consolidated Financial Statements. Given the deterioration of earnings in recent years, in February 2001 the Board of Directors reduced the quarterly dividend 50% from $0.37 to $0.185 per share.


	First		Second		Third		Fourth
DIVIDENDS PAID	Quarter		Quarter		Quarter		Quarter		Total

2001	$	.370	$	.185	$	.185	$	.185	$	.925
2000		.370		.370		.370		.370		1.480
1999		.350		.350		.370		.370		1.440

ITEM 6 — SELECTED FINANCIAL DATA

The following selected consolidated financial data of SAFECO was derived from the consolidated financial statements of the Corporation. The following financial data should be read in conjunction with the Consolidated Financial Statements and accompanying notes.

Summary of Operations (unaudited) (Dollar amounts in millions except per share data)


YEAR ENDED DECEMBER 31		2001			2000			1999			1998			1997

REVENUES (EXCLUDING REALIZED GAIN)
Insurance
	Property & Casualty (Gross written premiums)	$	4,570.2		$	4,709.1		$	4,645.0		$	4,441.8		$	2,987.4
	Life & Investments		637.0			618.2			473.9			447.0			363.1
Net Investment Income
	Property & Casualty		457.7			460.5			462.3			480.2			327.0
	Life & Investments		1,180.3			1,181.5			1,123.2			1,044.7			919.3
	Corporate		11.3			6.0			2.8			(2.3	)		1.4
Real Estate			—			—			—			77.9			75.1
Corporate			10.4			20.5			39.2			3.1			0.9

Total		$	6,866.9		$	6,995.8		$	6,746.4		$	6,492.4		$	4,674.2

INCOME SUMMARY (NET OF TAX)
Income (Loss), Before Realized Gain*
	Property & Casualty	$	(1,115.3	)	$	(10.6	)	$	114.8		$	310.2		$	260.2
	Life & Investments		88.6			107.7			126.9			53.5			102.4
	Real Estate		—			—			—			3.4			6.2
	Corporate		(35.3	)		(40.8	)		(35.7	)		(46.6	)		(16.8	)

Total			(1,062.0	)		56.3			206.0			320.5			352.0
Realized Gain			61.5			90.4			76.5			61.9			78.7

Income (Loss) Before Distributions on Capital Securities			(1,000.5	)		146.7			282.5			382.4			430.7
Distributions on Capital Securities			(44.8	)		(44.8	)		(44.8	)		(44.9	)		(14.8	)
Discontinued Credit Operations			58.2			12.7			14.5			14.4			14.1
Cumulative Effect of Accounting Change			(2.1	)		—			—			—			—

Net Income (Loss)		$	(989.2	)	$	114.6		$	252.2		$	351.9		$	430.0

PER SHARE OF COMMON STOCK
Net Income (Loss) — Diluted
	Income (Loss) Before Realized Gain*+	$	(8.66	)	$	.09		$	1.21		$	1.97		$	2.60
	Realized Gain		.48			.71			.58			.44			.60
	Discontinued Credit Operations		.45			.10			.11			.10			.11
	Cumulative Effect of Accounting Change		(0.02	)		—			—			—			—

	Net Income (Loss)	$	(7.75	)	$	.90		$	1.90		$	2.51		$	3.31

	Average Number of Shares (in millions)		127.7			127.8			132.8			139.9			129.8
Net Income (Loss) — Basic
	Income (Loss) Before Realized Gain*+	$	(8.66	)	$	.09		$	1.21		$	1.98		$	2.61
	Realized Gain		.48			.71			.58			.44			.61
	Discontinued Credit Operations		.45			.10			.11			.10			.11
	Cumulative Effect of Accounting Change		(0.02	)		—			—			—			—

	Net Income (Loss)	$	(7.75	)	$	.90		$	1.90		$	2.52		$	3.33

	Average Number of Shares (in millions)		127.7			127.8			132.7			139.4			129.2
Dividends Paid		$	0.93		$	1.48		$	1.44		$	1.34		$	1.22

* Income (Loss) Before Realized Gain is a standard industry measurement used by management to analyze income from core operations and is presented to supplement net income as a measure of profitability.

+ Net income (loss) per share amounts are after distributions on capital securities.

Summary of Operations (unaudited) (continued)

Additional Supplemental Data


		2001			2000			1999			1998			1997

PROPERTY & CASUALTY WRITTEN PREMIUMS
Personal Auto		$	1,797.0		$	1,726.4		$	1,725.6		$	1,745.8		$	1,295.2
Homeowners			762.7			756.6			736.5			717.4			547.8
Specialty			229.5			229.1			225.6			217.2			182.0

Total Personal			2,789.2			2,712.1			2,687.7			2,680.4			2,025.0
Business Insurance			1,000.8			1,159.5			1,138.0			952.3			195.7
Commercial Insurance			617.2			703.8			701.5			687.2			642.1
Surety			154.7			125.2			110.7			107.2			99.5
Other			8.3			8.5			7.1			14.7			25.1

Gross Written Premiums			4,570.2			4,709.1			4,645.0			4,441.8			2,987.4
Ceded Reinsurance Premiums			131.0			169.4			161.2			185.2			159.2

Net Written Premiums		$	4,439.2		$	4,539.7		$	4,483.8		$	4,256.6		$	2,828.2

PROPERTY & CASUALTY OPERATING RATIOS*+
Losses			74.5	%		70.4	%		66.4	%		61.3	%		58.4	%
Adjustment Expenses			14.1			12.2			12.0			11.5			11.2
Underwriting Expenses			30.1			28.8			30.0			29.8			29.1

Combined Ratio			118.7	%		111.4	%		108.4	%		102.6	%		98.7	%

Net Written Premiums to Policyholders’ Surplus			2.0:1			2.0:1			1.6:1			1.3:1			1.3:1
PRETAX INCOME (LOSS) BEFORE REALIZED GAIN
Property & Casualty
	Underwriting	$	(837.5	)	$	(521.9	)	$	(366.7	)	$	(109.4	)	$	36.2
	Nonrecurring Acquisition Charges		—			—			—			—			(60.0	)
	Net Investment Income		457.7			460.5			462.3			480.2			327.0
	Goodwill Amortization		(11.0	)		(44.0	)		(43.8	)		(43.0	)		(11.0	)
	Write-off of Goodwill		(1,165.2	)		—			—			—			—
	Restructuring Charges		(44.3	)		—			—			—			—
Life & Investments			197.5			168.5			195.1			131.1			156.9
	Write-off of Goodwill		(48.9	)		—			—			—			—
	Write-off of Deferred Acquisition Costs		—			—			—			(46.8	)		—
Real Estate			—			—			—			5.3			9.6
Corporate			(54.6	)		(63.2	)		(55.0	)		(71.9	)		(27.0	)

Total		$	(1,506.3	)	$	(0.1	)	$	191.9		$	345.5		$	431.7





SHAREHOLDERS’ EQUITY		$	3,634.6		$	4,695.8		$	4,294.1		$	5,575.8		$	5,461.7

BOOK VALUE PER SHARE			28.45			36.79			33.31			40.92			38.69

LONG-TERM DEBT (Excludes Capital Securities)			748.8			774.2			478.5			589.5			570.6

TOTAL ASSETS			30,092.5			30,257.7			29,223.6			29,553.0			28,502.2

* Operating ratios are GAAP basis and are based on expenses expressed as a percentage of earned premiums. Ratios exclude goodwill write-off, goodwill amortization, restructuring charges and nonrecurring acquisition charges.

+ Includes Loss Reserve Strengthening of $240.0 in 2001. Excluding this adjustment the Combined Ratio was 113.4%; the Loss Ratio was 70.7% and the Adjustment Expense Ratio was 12.6%.

ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollar amounts in millions unless noted otherwise)

SAFECO Corporation (the Corporation) is a Washington state corporation that owns operating subsidiaries engaged in property and casualty insurance, surety, life insurance and asset management. These operations generated virtually all of the 2001 revenues.

The Corporation and its subsidiaries are collectively referred to as “SAFECO.” The property and casualty insurance operations are collectively referred to as “Property & Casualty.” The life insurance and asset management operations are collectively referred to as “Life & Investments.” Other operations not included in either Property & Casualty or Life & Investments are collectively referred to as “Corporate.”

Since joining SAFECO as Chief Executive Officer in late January 2001, Michael S. McGavick and the senior leadership team have engaged in a review of SAFECO’s operations with a particular emphasis on the Property & Casualty operations. This review resulted in actions that focused on:

        (1)    Ensuring that the recovery plans for Property & Casualty operations had the rigor and urgency necessary to succeed;

        (2)    Analyzing and reducing expenses;

        (3)    Strengthening the balance sheet; and

        (4)    Investing in SAFECO’s employees.

Many of the plans to address the urgent actions have been completed and others are in process. These actions are explained in more detail in the remainder of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).

Actions

(1) A comprehensive review of the entire operation confirmed that the core strengths and most profitable opportunities for SAFECO were in personal auto, small-to-medium commercial insurance and life and investments. The recovery plans for Property & Casualty involved actions on several fronts:

        •    Rates were raised across all lines of business, with specific focus on the underperforming lines of homeowners and large commercial.

       •    Nearly 1,000 underperforming agents no longer represent SAFECO.

       •    Additional underwriting actions were taken on unprofitable individual accounts.

       •    SAFECO exited lines of business not core to its strategy. For example, 15 of 19 Select Markets programs were cancelled.

   For further discussion of these and other actions see the Property & Casualty — Operations section of this MD&A.

(2)    A rigorous company-wide effort to reduce expenses was commenced and continues. In July 2001, SAFECO announced that it would eliminate approximately 1,200 jobs by the end of 2003 with half of the reductions expected to be completed in 2001. SAFECO’s total employment declined by approximately 900 in 2001, excluding the reduction due to the sale of SAFECO Credit. Positions being eliminated are in the corporate headquarters and regional Property & Casualty operations. When fully implemented, these actions are expected to reduce SAFECO’s annual operating expenses by approximately $100.

   Restructuring charges and period costs associated with these changes are expected to total approximately $65 through 2002. This includes pretax charges incurred in 2001 of $44 and $21 to be incurred throughout 2002 as the restructuring actions occur. Additional information can be found in Note 12 in the Notes to Consolidated Financial Statements.

(3) In strengthening SAFECO’s balance sheet, four separate actions were taken.

        •    In February 2001, SAFECO announced a 50% reduction in its quarterly dividend from $0.37 per share to $0.185 per share starting with the April 2001 dividend payment to shareholders. This reduction provides the Corporation cash savings of approximately $95 per year and brought the dividend more in line with financial performance.

       •    Effective March 31, 2001, SAFECO wrote off $1.2 billion of goodwill associated with the 1997 American States Insurance acquisition (Property & Casualty $1,152.1, Life & Investments $48.9). See Note 1 in the Notes to Consolidated Financial Statements for additional information.

       •    In August 2001, SAFECO Credit was sold, generating $250 in net proceeds, resulting in a pretax gain of $97, and reducing SAFECO’s debt by approximately one-half or $1.5 billion. SAFECO Credit is reported as a discontinued operation as described in the Discontinued Operations - SAFECO Credit section of this MD&A.

       •    During the third quarter 2001, SAFECO completed a review, initially announced in May 2001, of Property & Casualty loss reserve adequacy and as a result increased reserves by $240, pretax. For additional information see the Property & Casualty — Operations, Loss Reserve Strengthening section of this MD&A.

(4) Investing in SAFECO’s employees has been accomplished as follows:

        •    Increased emphasis on employee training to strengthen the tools and capabilities of the workforce.

       •    A performance-based compensation system based on the achievement of specific goals linked directly to SAFECO’s business plan was developed and is being implemented in early 2002. The new compensation system applies to all SAFECO employees, including the senior leadership team, and is designed to motivate and reward superior performance. In addition employee communication was increased to help all employees better understand SAFECO’s business plans and their role in helping achieve them.

       •    SAFECO added several strong leaders and completed the formation of a new senior leadership team:

              Ø    In May 2001 Bruce Allenbaugh was named Senior Vice President of Corporate Marketing bringing wide experiences from Avenue A, NextLink and Pepsi-Cola to SAFECO;

       Ø    In July 2001 Michael LaRocco was appointed President and Chief Operating Officer of SAFECO Personal Insurance. Mr. LaRocco most recently headed the $1.2 billion northeastern operations for GEICO;

       Ø    In September 2001 Yomtov Senegor was named Chief Information Officer bringing extensive information systems experience from Accenture (formerly Andersen Consulting);

       Ø    In January 2002 Christine Mead was named Senior Vice President and Chief Financial Officer. Ms. Mead most recently was the Chief Financial Officer for Travelers Insurance Group’s property and casualty business bringing extensive experience in financial management and strategy from that company as well as prior public accounting experience with Deloitte & Touche and PricewaterhouseCoopers; and

       Ø    The Board of Directors was also strengthened with the August 2001 election of Joseph W. “Jay” Brown, an insurance executive with nearly 30 years experience. Mr. Brown, Chairman and Chief Executive Officer of MBIA, Inc., formerly served as President and Chief Executive Officer of Firemen’s Fund Insurance Company and Chairman and Chief Executive Officer of Talegen Holdings, Inc., Xerox’s insurance holdings company.

• Introduced a corporate-wide program on diversity to prepare SAFECO to compete in a more diverse America and to increase workforce effectiveness.

SAFECO’s leaders have identified four focus areas for the coming year. They are:

(1) Improving sales growth through independent agents;

(2) Improving levels of service and claims handling;

(3) Driving execution through enhanced metrics and management practices; and

(4) Continuing investment in SAFECO’s employees.

Summary of Financial Information

The following summarized financial information should be read in conjunction with the Segment Footnote (Note 15) in the Notes to Consolidated Financial Statements. Detailed discussion of Property & Casualty and Life & Investments operations follows in this MD&A.

YEAR ENDED DECEMBER 31 2001 2000 1999

INCOME (LOSS)

Property & Casualty
$ (1,600.3 ) $ (105.4 ) $ 51.8

Life & Investments
148.6 168.5 195.1

Corporate
(54.6 ) (63.2 ) (55.0 )

Income (Loss) Before Realized Gain and Income Taxes *
(1,506.3 ) (0.1 ) 191.9

Income Tax Benefit
(444.3 ) (56.4 ) (14.1 )

Income (Loss) Before Realized Gain
(1,062.0 ) 56.3 206.0

Realized Investment Gain, Net of Taxes
61.5 90.4 76.5

Distribution on Capital Securities, Net of Taxes
(44.8 ) (44.8 ) (44.8 )

Income (Loss) from Continuing Operations
(1,045.3 ) 101.9 237.7

Discontinued Credit Operations, Including Gain on Disposition, Net of Taxes
58.2 12.7 14.5

Cumulative Effect of Change in Accounting Principle, Net of Taxes
(2.1 ) — —

Net Income (Loss)
$ (989.2 ) $ 114.6 $ 252.2

PER DILUTED SHARE OF COMMON STOCK

Income (Loss) Before Realized Gain *
$ (8.66 ) $ .09 $ 1.21

Realized Investment Gain
.48 .71 .58

Income (Loss) from Continuing Operations
(8.18 ) .80 1.79

Discontinued Credit Operations, Including Gain on Disposition
.45 .10 .11

Cumulative Effect of Change in Accounting Principle
(.02 ) — —

Net Income (Loss)
$ (7.75 ) $ .90 $ 1.90

* Income (loss) before realized gain and income taxes in 2001 includes goodwill write-down of $1,214.1 ($925.5 after tax, $7.24 per share), Property & Casualty loss reserve strengthening of $240.0 ($156.0 after tax, $1.22 per share) and restructuring charges of $44.3 ($28.8 after tax, $.22 per share).

The following is a summary of the major items that affected SAFECO’s financial results in 2001:

Property & Casualty

•      Recognized goodwill write-down of $1,165.2 before tax ($886.9 after tax).

•      Net catastrophe losses for 2001 were $268.0 before tax ($174.2 after tax) which was more than $100 higher than the highest year in SAFECO’s past (1998). These 2001 losses include $60.0 before tax ($39.0 after tax) for storm damages in the St. Louis area in April and $51.0 before tax ($33.2 after tax) of net losses from the World Trade Center attacks.

•      Completed a reserve review and increased loss reserves $240.0 before tax ($156.0 after tax).

•      Consolidated commercial lines and recognized restructuring charges of $44.3 before tax ($28.8 after tax).

Life & Investments

• Generated record pretax earnings (before goodwill write-down) of $197.5 for the year ($127.1 after tax).

• Recognized goodwill write-down of $48.9 before tax ($38.7 after tax).

SAFECO Corporation

•      Sale of SAFECO Credit resulting in a gain of $97.0 before tax ($54.0 after tax).

•      Recognized investment write-downs of $126.8 before tax ($82.4 after tax) due to credit deterioration and corporate failures of certain investment holdings.

•      Quarterly dividend to shareholders was reduced from $0.37 cents to $0.185 cents per share resulting in annual cash savings of $94.5.

Property & Casualty — Operations

Approximately 17% of Property & Casualty premiums are written in the state of California, and approximately 35% of premiums are written in the three West Coast states of California, Washington and Oregon. SAFECO purchased American States Financial Corporation (American States) in October 1997. This purchase broadened the product mix available to the combined companies and geographically diversified SAFECO’s revenue and risk exposure. The purchase also increased Property & Casualty’s risk exposure to the types of commercial business written by American States as well as to weather-related losses in the midwest.

Personal Insurance, Business Insurance, Commercial Insurance and Surety comprised approximately 61%, 22%, 14% and 3%, respectively, of the 2001 gross written premiums of $4.6 billion. Gross written premiums decreased $138.9 (2.9%) in 2001 due to re-underwriting efforts which included non-renewing underpriced risks and reducing underperforming and unprofitable lines. In addition, relationships with approximately 1,000 underperforming agents were terminated in 2001. These actions resulted in an overall net decrease in premiums, more than offsetting the impact of premium rate increases.

Property & Casualty Operating Statistics

The following three tables for Property & Casualty reflect: (1) income (loss) before realized gains and income taxes, (2) operating ratios, and (3) underwriting profit (loss).


	Income (Loss) Before Realized Gains
	and Income Taxes

YEAR ENDED DECEMBER 31	2001			2000			1999

Net Earned Premiums	$	4,472.8		$	4,563.4		$	4,382.9

Underwriting Loss *+	$	(837.5	)	$	(521.9	)	$	(366.7	)
Net Investment Income		457.7			460.5			462.3
Goodwill Amortization		(11.0	)		(44.0	)		(43.8	)
Goodwill Write-down		(1,165.2	)		—			—
Restructuring Charges		(44.3	)		—			—

Income (Loss) Before Realized Gains and Income Taxes	$	(1,600.3	)	$	(105.4	)	$	51.8

* Underwriting profit or loss is a standard industry measurement used by management to analyze core Property & Casualty operations. This measurement represents the net amount of earned premiums less underwriting losses and expenses; it does not include realized investment gains and losses, goodwill amortization, goodwill write-down, restructuring charges, net investment income and taxes. This measurement does not replace net income as a measure of profitability, but is presented to supplement the other financial measurements provided.

+ Includes Loss Reserve Strengthening of $240.0 in 2001 (see discussion in the next section for more information). Excluding this adjustment the underwriting loss was $(597.5).


	GAAP Operating Ratios*

YEAR ENDED DECEMBER 31	2001+			2000			1999

Loss Ratio		74.5	%		70.4	%		66.4	%
Loss Adjustment Expense Ratio		14.1			12.2			12.0
Expense Ratio		30.1			28.8			30.0

Combined Ratio		118.7	%		111.4	%		108.4	%

* Operating ratios represent major components of expense expressed as a percentage of earned premiums and are commonly used measures of Property & Casualty’s profitability. Ratios exclude goodwill amortization, goodwill write-down and restructuring charges.

+ Includes Loss Reserve Strengthening of $240.0 in 2001. Excluding this adjustment the Combined Ratio was 113.4%; the Loss Ratio was 70.7% and the Loss Adjustment Expense Ratio was 12.6%.

Underwriting Profit (Loss)*

2001 2000 1999

YEAR ENDED DECEMBER 31 Amount Combined Ratio Amount Combined Ratio Amount Combined Ratio

PERSONAL LINES

Personal Auto
$ (80.5 ) 104.6 % $ (123.0 ) 107.1 % $ (63.3 ) 103.7 %

Homeowners
(205.6 ) 127.8 (116.7 ) 116.0 (48.2 ) 106.8

Specialty
3.9 98.0 18.2 90.3 20.6 88.4

COMMERCIAL LINES

Business Insurance
(163.2 ) 115.8 (155.3 ) 113.3 (183.4 ) 118.0

Commercial Insurance
(276.2 ) 144.0 (155.7 ) 122.8 (107.6 ) 115.7

Surety
2.4 97.5 11.7 81.0 15.2 74.4

Other
(118.3 ) — (1.1 ) — — —

Total
$ (837.5 ) 118.7 % $ (521.9 ) 111.4 % $ (366.7 ) 108.4 %

* Catastrophe losses for all lines, net of reinsurance, totaled $268.0, $136.0 and $103.0 in 2001, 2000 and 1999, respectively. Catastrophes are defined as events resulting in losses greater than $0.5, involving multiple claims and policyholders.

Property & Casualty had steadily deteriorating results from the underwriting of insurance from 1999 to 2001. In each of these three years the loss ratio increased (1999 — 66.4%, 2000 — 70.4% and 2001 — 74.5%) which in turn caused the combined ratio for each year to increase (1999 — 108.4%, 2000 — 111.4% and 2001 — 118.7%). Excluding the $240.0 loss reserve strengthening described further in the Loss Reserve Strengthening section below, the loss ratio in 2001 was 70.7% and the combined ratio was 113.4%. Details on the results by line of insurance as well as actions being taken to improve these underwriting results are described below. Operating results started showing signs of a positive turnaround in the fourth quarter of 2001 which produced a combined ratio of 111.3% compared with 113.4% for all of 2001 (excluding the loss reserve strengthening).

Information on the investment income generated by Property & Casualty is provided in the Investment Summary section of this MD&A.

Loss Reserve Strengthening

$80.0 for workers’ compensation, $90.0 for construction defect and $70.0 for other coverages including asbestos and environmental.

The review of loss reserve adequacy concluded that personal lines reserves were adequate.

Additional information about loss reserves can be found in the Property & Casualty — Loss Reserves section of this MD&A.

Personal Insurance — Auto

Rate increases, agency cancellations and tighter underwriting have helped to reduce the combined ratio from 107.1 in 2000 to 104.6 in 2001. The losses from underwriting of $80.5 in 2001, $123.0 in 2000 and $63.3 in 1999 were primarily the result of rate decreases in 1999 and 1998 which were taken to retain American States business and to respond to competition. Average auto rates increased 9% and 6% in 2001 and 2000, respectively, and decreased 2% in 1999. SAFECO plans to increase personal auto rates on average 7% (including inflation adjustments) in 2002. Actions taken in 2001 to re-underwrite all personal lines business and these rate increases are contributing to the improvements in personal auto results. These actions have resulted in the decline in the number of personal auto policies inforce by 4% offset by an increase in written premiums by 4% in 2001. SAFECO expects further rate increases to depress the growth in the number of policies and to contribute to improved underwriting results.

In 2000 Property & Casualty expanded the use of “insurance-scoring” (utilizing multiple variants to classify risk) which is in use by several competitors. As expected the use of insurance-scoring along with tighter underwriting standards has resulted in a better match of rate and risk. In August 2001 SAFECO began to launch a new automated underwriting initiative with point of sale technology that allows its agent partners to more efficiently quote and sell policies. This technology also includes the updated version of the automated multi-variant underwriting model. This automated approach is expected eventually to handle the majority of new business. The automation initiative, rate increases and tighter underwriting actions are expected to help improve the overall quality of this line of business going forward. The use of insurance-scoring is the subject of both legislative and regulatory review in several states where Property & Casualty has a concentration of business, including Washington state. Property & Casualty will comply with any limitation imposed by regulation or legislation on the use of insurance-scoring, including modification of its underwriting model as may be necessary.

The decrease in policies in force in 2001 was most significant for preferred driver auto insurance policies. This decrease was offset in part by a substantial increase in non-standard auto insurance policies. Growth in the preferred auto line is key to long-term profitability in auto and retention of inforce business remains a critical issue for this line. The focus going forward is to seek a return to growth in policies in force aided by a new product with additional pricing tiers coupled with the automated underwriting initiative. SAFECO recently announced changes in agent compensation which provide greater incentives to agents for writing new auto business. In addition the personal auto, homeowners and specialty lines are now managed on an individual product line basis by state instead of the former regional management basis. This change will provide a closer focus on profitability on an individual product line basis.

Personal Insurance — Homeowners

The homeowners line operated at a combined ratio of 127.8, 116.0 and 106.8 and the underwriting losses by year were $205.6, $116.7 and $48.2 in 2001, 2000 and 1999, respectively. The acquisition of American States in 1997 increased SAFECO’s exposure to large, single weather-related events due to geographic concentration of homeowners risk particularly in the midwest. Losses due to large, single events (nearly all weather-related) were $145.0, $86.0 and $52.0 for 2001, 2000 and 1999, respectively. In 2001 the increase includes $60.0 for a single catastrophic storm in St. Louis. Non-weather losses, particularly from fire and water damage, increased by $26.5 in 2001 over similar losses in 2000. Non-weather losses in 2000 increased $44.4 over similar losses in 1999.

Property & Casualty is executing an aggressive profit restoration plan for homeowners. Elements of the plan include pricing the product to generate an appropriate return based on risk characteristics, adding new pricing tiers, restricting policy terms, insurance to value efforts (involves updating policyholders coverage levels) and a willingness to exit geographic markets that do not respond to pricing actions. This action plan is expected to take up to two years to restore acceptable underwriting results. Average homeowners rates (including inflation adjustments) increased approximately 12%, 6% and 1% in 2001, 2000 and 1999, respectively. These actions have resulted in a reduction in new business production of 41% in 2001, and total homeowners policies inforce decreased 8% in 2001 and were flat in 2000, compared with an increase of 4% in 1999. Under the new agent compensation plan, commissions for new monoline homeowners business have been reduced. In addition, a moratorium on writing homeowners business in Texas was established in September 2001 in response to concern about the rising number of mold claims.

Personal Insurance — Specialty

Specialty lines (including earthquake, dwelling fire, inland marine and boats) produced underwriting profits of $3.9, $18.2 and $20.6 in 2001, 2000 and 1999, respectively. The Seattle earthquake that occurred in February impacted results in 2001.

Business Insurance

Business Insurance focuses on small-to-medium-sized businesses. It produced underwriting losses of $163.2, $155.3 and $183.4 and operated at combined ratios of 115.8, 113.3 and 118.0 in 2001, 2000 and 1999, respectively. Written premiums decreased 14% in 2001 and increased 2% in 2000. The 2001 underwriting loss includes a $65.0 reserve charge described earlier relating to unfavorable prior year development on construction defect and workers’ compensation claims. In addition, following the acquisition of American States in 1997, Property & Casualty sought both to underwrite and to price this business to ensure retention of inforce business, resulting in higher underwriting losses. In recent years, the overall competitive marketplace (particularly in workers’ compensation) led to further price reductions. Property & Casualty took aggressive action in 2001 and 2000 to reverse the underwriting losses in this line by re-underwriting existing business, strengthening underwriting criteria and discipline, terminating relationships with agents who produced poor quality business, and obtaining rate increases, particularly in workers’ compensation and commercial auto. Workers’ compensation remains an unprofitable line as medical loss costs are expected to continue to rise. As a result new business production has been substantially curtailed. Workers’ compensation net written premiums were down 32% in 2001 from 2000 despite rate increases of approximately 14%.

Re-underwriting this book of business and agency cancellations resulted in the reduction of $90.0 of unprofitable business in 2001. In 2002 the focus is to improve profitability by achieving rate adequacy with a goal of increasing rates on average 20% on the small-to-medium-sized businesses, and 30% on the medium-to-larger-sized businesses. In 2002 the focus on the agents will be to secure profitable growth. A redesigned

business model with three new capabilities will be introduced to support business growth in 2002. These new capabilities include an automated underwriting platform, a commercial service center and a new business agency interface system. In combination, these capabilities will support policy growth by delivering more accurate pricing, reduced transaction time, ease of doing business with SAFECO and expanded services for business customers. Top line premium growth is not expected until 2003.

Delivery and implementation of the redesigned business model will require a substantial effort in 2002. This represents a significant departure from the traditional individual risk underwriting approach. The success of this implementation will be critical to improved underwriting results in business insurance over the next few years.

In May 2001 Property & Casualty announced its decision to consolidate its commercial lines operations and reduce the number of regional offices. The consolidated operations are now known as SAFECO Business Insurance (SBI) and focus on small-to-medium business product lines. SBI includes a special facility to underwrite large commercial accounts produced by agents and brokers who support Property & Casualty’s core personal and small-to-medium business product lines. For reporting purposes these two segments have been shown separately through 2001 but will be combined into one segment beginning with the first quarter 2002.

Commercial Insurance

As discussed above Property & Casualty has now completed the process of consolidating its commercial lines operations and will focus on small-to-medium business product lines going forward. Starting in May 2001, Property & Casualty discontinued its pursuit of large single account business as it was significantly unprofitable. Accounts above one hundred thousand dollars in premiums are now underwritten by a special facility within SBI.

Commercial Insurance focused on medium- to large-sized businesses. It produced underwriting losses of $276.2, $155.7 and $107.6 and operated at combined ratios of 144.0, 122.8 and 115.7 in 2001, 2000 and 1999, respectively. Included in the underwriting loss is the $90.0 reserve charge described earlier relating to construction defect, workers’ compensation and asbestos and environmental claims. The continued weakness in the underwriting results is due to several reasons, including the competitive underwriting environment, inadequate rates, adverse loss experience (particularly with workers’ compensation in California, Texas and Florida), reserve increases in recognition of unfavorable trends in loss costs and higher frequency of large losses. Property & Casualty has increased commercial prices by 21% and 17% in 2001 and 2000, respectively. Commercial insurance gross written premiums declined 12.3% to $617.2 in 2001 from $703.8 in 2000.

During 2001, SAFECO decided to exit approximately half of its $270.0 Select Markets business because these specialty commercial insurance products did not fit with SAFECO’s core business focus. Once the contracts for the discontinued lines expire, they will not be renewed. The runoff period may take up to three years. In September 2001, SAFECO acquired a book of lender-placed property business from ACE, with annual premiums of approximately $80.0, more than doubling SAFECO’s lender-placed property book of business.

Surety

The surety line produced pretax underwriting profits of $2.4, $11.7 and $15.2 in 2001, 2000 and 1999, respectively. Fourth quarter 2001 results were adversely affected by an $18.0 loss, after reinsurance, from the bankruptcy of Enron, a large energy company. Surety issued advance pay and payment guaranty bonds for Enron totaling $193.5. The estimated gross loss related to these bonds is $59.5. Excluding the loss related to Enron, Surety profits in 2001 were $20.4. Due to the complex nature of the Enron bankruptcy, additional losses may occur as further information develops. Additional losses, if any, cannot be estimated at this time and any such losses would impact current operating results.

As a result of extraordinary loss experience in the industry in all major lines of surety in 2001, prices of surety bonds have increased and industry capacity has been reduced. Continued availability of adequate reinsurance is integral to SAFECO’s ability to profitably grow the surety line in the future.

Other

Other insurance product lines produced underwriting losses of $118.3 and $1.1 in 2001 and 2000, respectively, and broke even in 1999. These lines include assumed reinsurance and other business in run-off. Included in the underwriting loss is the $85.0 reserve charge described earlier relating to construction defect and asbestos and environmental issues and $30.0 of reserves from the September 11, 2001 attacks on the World Trade Center, net of reinsurance. The $30.0 loss was incurred by SAFECO’s London subsidiary, R.F. Bailey Underwriting Agencies, Ltd. (R.F. Bailey) (see below for discussion of total losses from terrorism). SAFECO completed a review of R.F. Bailey in 2001 and its options in the Lloyd’s of London underwriting market. As a result of the review in the fourth quarter of 2001, SAFECO wrote off $13.1 of goodwill associated with the 1999 acquisition of R.F. Bailey.

Impact of Terrorism

As a result of the September 11, 2001 terrorist attacks, SAFECO estimated its losses net of reinsurance at $52.0, of which $21.0 is attributable to SBI accounts, $30.0 to reinsurance written through R.F. Bailey and $1.0 to Life & Investments. Effective January 1, 2002, SAFECO’s reinsurers stopped providing terrorism coverage in SAFECO’s commercial property and casualty reinsurance treaties. The impact is immediate with respect to new business and affects renewal business as the policies come up for renewal throughout the year. Consequently, except with respect to certain property risks with policy limits in excess of $10.0 for which there may be limited reinsurance for terrorism, SAFECO does not have reinsurance coverage for terrorism losses on its commercial property and casualty policies. Terrorism was similarly excluded from the workers’ compensation reinsurance treaties but is not excluded on the surety treaties. The existing reinsurance treaty for homeowners does not have a terrorism exclusion although SAFECO has received notice that its personal lines treaties may be modified. SAFECO’s catastrophe treaty also excludes terrorism except for personal lines losses other than from biological, chemical or nuclear contamination.

For its direct writings in 2002, SAFECO has adopted the commercial property and casualty terrorism exclusion developed and filed for approval by the Insurance Services Office (ISO). This exclusion is absolute with respect to losses from terrorism arising from biological, chemical or nuclear hazards. With respect to non-biological, non-chemical and non-nuclear losses from terrorism, the exclusions only apply if the total losses from a terrorist event exceed $25.0. In addition, for casualty policies, the exclusion will apply if the terrorist event involves the deaths or serious injury to 50 or more persons. The property exclusion does not apply to losses arising from fire following a terrorist event in the 29 states that follow the standard fire policy form.

The ISO terrorism exclusion for commercial property and casualty policies has been approved or conditionally approved in over 45 states. The conditional approval specifies either or both that the insurer demonstrate that reinsurance for terrorism is not available to it or that the exclusion may not be used if a federal law is in effect that addresses the treatment of losses arising from acts of terrorism. Two states, New York and California, have refused to approve the ISO exclusion. Although SAFECO writes a significant amount of commercial business in California, this state represents less than 20% of SAFECO’s commercial book of business and the book is primarily comprised of workers’ compensation risks. To date, ISO terrorism exclusions have not been approved for use on personal lines policies.

As a consequence of the action of SAFECO’s reinsurers described above and the current unavailability of the ISO exclusion for SAFECO’s commercial property and casualty policies in some states, SAFECO will continue to be exposed to commercial losses that arise from terrorism and to be without reinsurance for such losses. It will also have no reinsurance for terrorism related losses in its workers’ compensation line.

With regard to commercial lines policies, SAFECO’s focus is on the small-to-medium account business. Few of its customers are viewed as potential terrorism targets. In states where exclusions for terrorism are approved, they are being added to policies for certain classes of business, in geographic areas where the potential for attack may be greater and where SAFECO insures a high concentration of values. For workers’ compensation the number of employees covered is monitored and coverage is declined in cases where the exposure is severe. SAFECO’s exposure to personal lines losses currently is relatively modest due to small individual exposure and wide spread of risk. Therefore, SAFECO believes its terrorism exposure is relatively modest across all product lines.

Property & Casualty — Loss Reserves

Reserves for loss and loss adjustment expenses (LAE) for Property & Casualty were $5,053.7 at December 31, 2001 compared with $4,612.7 at December 31, 2000. The increase in reserves at December 31, 2001 compared with December 31, 2000 reflected both increased loss severities and adverse prior year development in certain lines of business. The December 31, 2001 reserves included $240.0 of loss and LAE reserve strengthening (see Loss Reserve Strengthening section under the Property & Casualty — Operations section of this MD&A). The liability is presented net of amounts recoverable from salvage and subrogation (see Summary of Significant Accounting Policies in Note 1 of the Notes to Consolidated Financial Statements) and gross of amounts recoverable from reinsurance (see Note 5 in the Notes to Consolidated Financial Statements). The total amount of reinsurance recoverables was $415.9 at December 31, 2001 and $343.6 at December 31, 2000.

Property & Casualty operations in 2001 were charged $345.1 from increases in estimated loss and LAE for claims occurring in prior years. These increases included $142.6 in workers’ compensation, $132.8 in general liability, as well as $21.6 in homeowners, $23.1 in commercial auto and $25.0 in all other lines. This adverse development includes the $240.0 of loss reserve strengthening discussed earlier. Operations were charged $148.3 in 2000 from increases in estimated loss and LAE for claims occurring in prior years. These increases were due to adverse development within commercial operations in workers’ compensation ($50.9), general liability ($44.4) primarily related to construction defect, commercial auto ($23.5), and in other ($29.5) lines of business as the costs of settling claims increased. Property & Casualty operations were charged $78.8 in 1999 due to increased losses including construction defect, asbestos and environmental, and workers’ compensation.

Environmental and Asbestos Claims

The vast majority of Property & Casualty’s environmental, asbestos and other toxic claims resulted from the commercial general liability line of business and the discontinued assumed reinsurance operations of American States. Approximately 4,800 of these claims, computed on an occurrence basis, were pending at December 31, 2001. The average settlement cost of each environmental, asbestos and other toxic claims for 2001 was fifteen thousand dollars including legal expenses.

The following table presents the loss and LAE reserve activity for liability coverages related to environmental, asbestos and other toxic claims, before reinsurance:


DECEMBER 31	2001			2000			1999

Reserves at Beginning of Year	$	315.5		$	332.3		$	329.8
Incurred Losses and LAE		51.7			9.6			24.8
Losses and LAE Payments		(26.5	)		(26.4	)		(22.3	)

Reserves at End of Year	$	340.7		$	315.5		$	332.3

IBNR reserves comprise 69% of total environmental and asbestos reserves at December 31, 2001. The incurred losses and LAE amount of $51.7 in the table above includes $50.0 of loss reserve strengthening. Continued emergence of these claims has resulted in higher ultimate expected losses than previously estimated. While Property & Casualty has generally avoided writing coverages for larger companies with substantial exposure in these areas, recent industry experience with asbestos claims has shown an expansion of defendants to include smaller and more peripheral firms. The exposure of the assumed reinsurance operations also follows the general industry trend. This has resulted in higher estimates of ultimate losses. Developing industry trends will continue to be monitored and used in conjunction with other quantitative loss reserving techniques to evaluate reserves on an ongoing basis.

Construction Defect Claims

The total Property & Casualty reserves for construction defect claims were $382.9 at December 31, 2001 and $322.6 at December 31, 2000, representing approximately 8% of total Property and Casualty reserves for loss and LAE at both December 31, 2001 and 2000.

Construction defect claims are a subset of claims that arise from coverage provided by general property damage liability insurance. Construction defect claims arise from the alleged defective work performed in the construction of large habitation structures, such as apartments, condominiums and large developments of single-family dwellings or other housing. In addition to damages arising directly from the alleged defective work, construction defect claims often also allege that the economic value of the structure has been diminished. The vast majority of Property & Casualty’s construction defect claims arise from past contractor business written in the state of California. Commercial Insurance, which does not include SBI, has avoided writing the construction class of business in California since 1989 and has limited exposure to these types of claims. However, American States, prior to its acquisition by SAFECO, was a major writer of California contractor business until 1994 when it implemented significant restrictions in this line. Continued loss development in California as well as emerging claims in other states resulted in additions to reserves of $90.0 as part of the loss reserve strengthening in September 2001.

The following table presents the loss and LAE reserve activity for liability coverages related to construction defect claims, before reinsurance:


DECEMBER 31	2001			2000			1999

Reserves at Beginning of Year	$	322.6		$	306.1		$	328.6
Incurred Losses and LAE		119.2			71.5			28.1
Losses and LAE Payments		(58.9	)		(55.0	)		(50.6	)

Reserves at End of Year	$	382.9		$	322.6		$	306.1

The significant uncertainties involved in the reserving for these claims include future court resolution, judicial interpretations, regulatory actions, and industry experience as well as company experience. Changes in these factors could result in future claims significantly different from those currently predicted. The impact upon reserves of changes in these factors would be reflected in future operating results.

Reinsurance

The availability and cost of reinsurance are subject to prevailing market conditions, both in terms of price and available capacity. Due to the recent tightening in the reinsurance marketplace, it is likely that the cost of reinsurance will increase in 2002. Although the reinsurer is liable to SAFECO to the extent of the reinsurance ceded, SAFECO remains primarily liable to the policyholder as the direct insurer on all risks insured. In addition, the magnitude of losses in the reinsurance industry resulting from the September 11, 2001 terrorist attacks is expected to impact the financial strength of reinsurers which may result in collectibility or recoverability issues. However, to SAFECO’s knowledge, none of its reinsurers is experiencing financial difficulties. SAFECO’s business is not substantially dependent upon any single reinsurance account.

See discussion on Impact of Terrorism and its impact on reinsurance.


	Percent at
RATING	December 31, 2001

A++		43.7	%
A+		8.7
A		4.3
A-		0.5
B		0.2
Lloyds of London		3.7
Non-Rated		6.6

Total Domestic Reinsurers		67.7

State Reinsurance Pools		23.7
Other Reinsurance Pools		2.1
Foreign Reinsurers		6.5

Total Reinsurance Pools and Foreign Reinsurers		32.3

Total		100.0	%

Property & Casualty does not enter into retrospective reinsurance contracts and does not participate in any unusual or nonrecurring reinsurance transactions such as “swaps” of reserves or loss portfolio transfers. Property & Casualty does not use funding covers and does not participate in any surplus relief transactions. Additional information on reinsurance can be found in Note 5 of the Notes to Consolidated Financial Statements.

Life & Investments

Earnings before investment losses and income taxes (pretax income) for all lines combined were $148.6 ($197.5 before goodwill write-down), $168.5 and $195.1 in 2001, 2000 and 1999, respectively. The main reason for the increase in income in 2001 (before goodwill write-down) versus 2000 was due to improved results in Income Annuities and Group.

SAFECO’s ratings downgrades in early 2001 have impacted Life & Investments’ ability to sell some of its products. The impact of the ratings downgrades and other information about the lines of business are explained further below.

The following table summarizes the pretax income (loss) for Life & Investments major product lines:


	Pretax Income (Loss)

YEAR ENDED DECEMBER 31	2001			2000		1999

Retirement Services	$	15.6		$	30.0	$	52.6
Income Annuities		47.8			26.4		42.2
Group		26.6			4.3		(19.4	)
Individual		22.8			24.6		30.1
Asset Management *		8.0			13.0		13.6
Other *		76.7			70.2		76.0
Goodwill Write-down		(48.9	)		—		—

Pretax Income	$	148.6		$	168.5	$	195.1

* Effective December 31, 2001, SAFECO’s asset management companies and Talbot Financial Corporation are reported as part of the Life & Investments operating results. Prior period information has been reclassified to reflect this change.

Retirement Services

SAFECO’s retirement services operations produced pretax income of $15.6, $30.0 and $52.6 in 2001, 2000 and 1999, respectively. Retirement services products are primarily tax-sheltered annuities (marketed primarily to teachers and not-for-profit organizations), fixed and variable deferred annuities (both qualified and non-qualified), guaranteed investment contracts (GIC) and corporate retirement funds. This line has protection against early withdrawals of most of these products in the form of surrender charges during the initial years of each policy or the option to defer payouts over five years. Pretax income declined by $14.4 in 2001 due to the decline in assets under management during the first two quarters of 2001, a reduction in variable product fee revenue due to unfavorable market conditions and an increase in operating costs. Pretax income declined $22.6 in 2000 compared to 1999 mainly due to losses from the Equity Index Annuity (EIA) product and a decline in assets under management.

Losses on the EIA product were $14.4, $15.3 and $2.9 in 2001, 2000 and 1999, respectively. In 2001 and 2000, offers were extended to EIA policyholders to surrender their policies and receive their account values with no surrender charge. This resulted in a charge to income totaling $5.8 and $12.0 in 2001 and 2000, respectively. At December 31, 2001, $161.0 remained on deposit for the EIA product compared to $305.0 and $596.0 at December 31, 2000 and 1999, respectively. Life & Investments stopped marketing this product in 1999.

Assets under management increased to $6.2 billion at December 31, 2001 from $6.1 billion at December 31, 2000 and decreased from $7.1 billion at December 31, 1999. Assets under management declined during the first two quarters of 2001 to $5.8 billion at June 30, 2001 due to unfavorable market conditions and increased during the last two quarters of 2001 to $6.2 billion at December 31, 2001. The decline in assets during 2000 was the result of withdrawals of GIC and other fixed accounts which also reduced fee income.

New deposits from fixed return products were $788.0, $205.0 and $354.0 in 2001, 2000 and 1999, respectively. In 2001, $693.0 of the new deposits were from the new SAFECO Select deferred annuity product sold during the second half of 2001. New deposits from variable return products were $299.0, $248.0 and $265.0 in 2001, 2000 and 1999, respectively.

Income Annuities

Life & Investments’ income annuities operations produced pretax income of $47.8, $26.4 and $42.2 in 2001, 2000 and 1999, respectively. Income annuities’ main product is the single-premium immediate annuity (SPIA) which is sold to fund third-party personal injury settlements. This product is extremely sensitive to financial strength ratings. These contracts are non-surrenderable and are intended to provide a reliable income stream to the injured party. The increase in pretax income in 2001 is due primarily to the release of reserves upon death due to favorable experience and an increase in investment income due to faster paydowns on collateralized mortgage obligation (CMO) investments. Pretax income in 2000 decreased from 1999 due to increased legal expenses to defend the qualified assignment contract terms of SPIA policies and also a decrease in investment income due to slower paydowns on CMO’s.

Total income annuity assets increased to $6.3 billion at December 31, 2001 compared with $6.2 billion at December 31, 2000 and $5.8 billion at December 31, 1999. New SPIA deposits were $99.0, $391.0 and $313.0 in 2001, 2000 and 1999, respectively. Deposits are down significantly in 2001 as a result of the ratings downgrade that is discussed further in the Ratings section of this MD&A.

Group

SAFECO’s group insurance operations produced pretax income of $26.6 and $4.3 in 2001 and 2000, respectively, and a pretax loss of $19.4 in 1999. Group’s main product offering is excess loss insurance sold to employers with self-insured employee medical plans. Also offered are group life, accidental death & dismemberment and disability products. The increase in pretax income of $22.3 and $23.7 in 2001 and 2000, respectively, is due to a decrease in the medical loss ratio to 64% for 2001 from 68% in 2000 and 81% in 1999. Rate increases and underwriting actions have contributed to the decreases in the loss ratio.

Total group premiums increased 6% in 2001 and 61% during 2000 compared with a decrease of 4% in 1999. The increase in group premiums for 2000 is due primarily to the acquisition of excess loss business from ING Medical Risk Solutions at the end of 1999 as well as continued medical rate increases.

Individual

SAFECO’s individual life operations produced pretax income of $22.8, $24.6 and $30.1 in 2001, 2000 and 1999, respectively. Individual products include term, universal and variable universal life and business owned life insurance (BOLI). BOLI is universal life insurance sold to banks and is extremely sensitive to financial strength ratings. Pretax income declined $1.8 in 2001 due to increased claims experience which was partially offset by increased earnings on BOLI, permanent and term life products. New BOLI deposits were $120.0, $710.0 and $705.0 in 2001, 2000 and 1999, respectively. The decline in the BOLI deposits in 2001 is due to the ratings downgrade that is discussed further in the Ratings section of this MD&A.

Asset Management

SAFECO Asset Management Company is the investment advisor for the SAFECO mutual funds, variable annuity portfolios and a number of outside pension and trust accounts. These investment management activities produced pretax income of $8.0, $13.0 and $13.6 in 2001, 2000 and 1999, respectively. Assets under management totaled $5.1 billion, $5.6 billion and $6.7 billion at December 31, 2001, 2000 and 1999, respectively. The decline in assets under management is due primarily to asset outflows of approximately $450.0 and $830.0 in 2001 and 2000 due to unfavorable market conditions and investment performance.

Other

The other line is a major component of Life & Investments’ earnings, contributing pretax income of $76.7, $70.2 and $76.0 in 2001, 2000 and 1999, respectively. It is comprised mainly of investment income resulting from the investment of capital and prior years’ earnings of the operating lines of business and earnings from Talbot Financial Corporation (Talbot), a wholly-owned subsidiary. Talbot is an insurance agency that distributes both property and casualty and life insurance products. Talbot’s pretax income (loss) was $4.6, $(2.1) and $2.8 in 2001, 2000 and 1999, respectively. Excluding Talbot the other line contributed $72.2, $72.4 and $73.2 in 2001, 2000 and 1999, respectively.

Corporate

The Corporate segment includes operating results for the Corporation, SAFECO Financial Products, SAFECO Properties, and intercompany transaction eliminations. The Corporation’s primary expense is interest expense on borrowings totaling $79.0, $89.0 and $72.0 in 2001, 2000 and 1999, respectively. These amounts do not include the expense for the distributions on SAFECO’s Capital Securities which is presented net of tax on the Consolidated Statements of Income (Loss).

The Corporation has made loans to certain officers and other members of management related to stock option exercises and home purchases related to relocations upon initial hiring. At December 31, 2001 these related-party loans totaled less than $10.0. Corresponding interest income on the related party loans is included in the Corporate segment.

The Corporation’s wholly-owned subsidiary, SAFECO Financial Products (SFP) was organized in 2000, to write S&P 500 index options to mitigate the risk associated with the EIA (see Life & Investments section for further discussion on EIA). Due to the success of this activity, SFP also engaged in limited activity for its own account in 2001 by writing S&P 500 index options, selling single credit default swaps and investing in convertible bonds. These activities are not designed as hedging activities. Consequently, both changes in the fair values of these instruments and any realized gain or loss are recognized in current income. Net investment income includes the premium income on the single credit default swaps and the earnings and fair value adjustments for the S&P 500 index options and the convertible bonds. Realized gain or loss includes the fair value adjustments and realized gains or losses from the single credit default swaps. Pretax income before realized loss was $6.7 and $2.3 for 2001 and 2000, respectively. Realized loss was $18.2 in 2001 including a $7.8 loss from an Enron single credit default swap. There were no realized gains or losses in 2000.

At December 31, 2001, SFP had single credit default swaps with notional amounts outstanding totaling $490.0. These single credit default swaps involve selling credit protection for a fee that covers certain credit events on assets owned by the buyer (financial institutions and investment banks) such that if a credit event occurs SFP would make a payment to the buyer.

The table below summarizes the quality of the single credit default swap portfolio:


	Percent at
RATING	December 31, 2001

AAA		6	%
AA		10
A		51
BBB		33
BB or lower		—

Total		100	%

The fair value of the liability due to writing S&P index options was $45.4 at December 31, 2001. In addition SFP had investment grade convertible bonds with market values totaling $38.4 at December 31, 2001.

consolidated investments. Because the assets and operations are not material to the consolidated financial statements, they have not been reclassified as discontinued operations. In the Consolidated Statements of Income (Loss), revenues for SAFECO Properties are included in Other Revenues and related expenses are included in Other Expenses. For 2001, 2000 and 1999, these revenues totaled $10.4, $20.5 and $39.3 and expenses totaled $9.9, $16.7 and $32.1, respectively. SAFECO Properties’ income before realized gains and income taxes is included in the Corporate segment and totaled $0.5, $3.8 and $7.2, for 2001, 2000 and 1999, respectively.

Discontinued Credit Operations

SAFECO Credit provided loans and equipment financing and leasing to commercial businesses, insurance agents and affiliated companies. In March 2001 SAFECO announced its intention to sell SAFECO Credit. A plan of disposal was formalized establishing the measurement date as March 31, 2001; consequently, SAFECO Credit was accounted for as a discontinued operation, effective March 31, 2001.

On July 24, 2001, the Corporation announced that it had reached a definitive agreement to sell SAFECO Credit to General Electric Capital Corporation (GECC). On August 15, 2001, SAFECO completed the sale (effective July 31, 2001) of SAFECO Credit to GECC for total cash proceeds of $918.9, which included the repayment of loans to SAFECO Credit and settlement of other affiliated transactions between SAFECO Credit and the Corporation totaling $668.9. The sale resulted in net proceeds of $250.0 and a pretax gain of $97.0. The after-tax gain on the sale of $54.0 is reported in the Consolidated Statements of Income (Loss). The sale of SAFECO Credit was completed pursuant to the terms of an Amended and Restated Stock Purchase Agreement, dated as of July 23, 2001 by and among GECC, the Corporation and SAFECO Credit.

SAFECO Credit generated after tax profits for the seven months ended July 31, 2001 of $4.2 and years ended December 31, 2000 and 1999 of $12.7 and $14.5, respectively.

Capital Resources and Liquidity

Sources and Uses of Funds

SAFECO’s operations have liquidity requirements that vary among the segments and their principal product lines. Life insurance, retirement services and annuity product reserves are primarily longer-term liabilities that are typically predictable in nature and are supported by investments that are generally longer-term. Property & Casualty liabilities are both short-term and long-term. These liabilities are less predictable in nature and generally require greater liquidity in the investment portfolio.

The Corporation’s liquidity needs are met by dividends from its subsidiary operations, the sale and maturity of invested assets, bank borrowings and issuances of commercial paper and debt. The subsidiaries’ primary sources of cash from operations are insurance premiums, funds received under deposit contracts, dividends, interest and asset management fees. SAFECO has not engaged in the sale by securitization of any investments or other assets.

Given the number of changes underway, SAFECO’s ability to achieve the goals of improving the profitability of Property & Casualty and maintaining the profitability of its entire operations involves uncertainty. SAFECO’s liquidity needs are currently being met and the successful achievement of its goals will enhance its liquidity position; conversely, further deterioration of profitability may adversely affect its capital resources and liquidity position.

SAFECO uses funds to support operations, service and pay down debt, pay dividends to SAFECO shareholders and grow the investment portfolio. Cash from insurance operations is used primarily to pay claims and claim adjustment expenses. Most insurance premiums are received before or at the time premium revenues are recognized, while related claims are incurred and paid in subsequent months or years. Catastrophe claims, the timing and amount of which are inherently unpredictable, may create increased liquidity requirements.

Total cash provided by operating activities for 2001, 2000 and 1999 was $528.8, $619.2 and $718.1, respectively (see Consolidated Statements of Cash Flows for additional information). Property & Casualty’s operating cash flows were $37.0, $137.0 and $205.3 for 2001, 2000 and 1999, respectively. This decline is due mainly to the poor underwriting results and resultant claims expenses paid as well as a decline in premium

volume. Although Property & Casualty began raising premium rates in 2001 there has been an offsetting impact due to reductions in the number of policies in force. In addition, Property & Casualty’s after-tax cash flows from investment income have declined due to the relatively low interest rate environment, dividends paid to the Corporation (which reduce the amount of investable cash) and bond call activity (whereby higher yielding bonds are called and redeemed by issuers). Consolidated dividends and interest received have increased due to the higher invested asset base of Life & Investments. It is anticipated that the insurance subsidiaries will continue to pay dividends to the Corporation in 2002 in order to fund shareholder dividends and to service debt. The weak underwriting results in prior years have resulted in a reduction in the amount of available subsidiary dividends. This has impacted the Corporation’s liquidity and financial flexibility. Given the deterioration of earnings in recent years, in February 2001 the Board of Directors reduced the quarterly dividend by 50% from $0.37 to $0.185 per share.

Short-term investments and cash at December 31, 2001 were significantly higher than at December 31, 2000 due primarily to proceeds received from the sale of SAFECO Credit in August 2001. The cash received was invested in primarily short-term commercial paper and will be re-invested long term as the commercial paper matures during the first half of 2002.

Funds received under deposit contracts relate primarily to annuity, retirement services and individual products of Life & Investments. Of the total $14.6 billion in deposit contracts at December 31, 2001, approximately 43% are structured settlement immediate annuity products. These annuities have an average expected maturity of over 25 years at issuance and cannot be surrendered by policyholders. Equity indexed annuities (EIA), comprising approximately 1% of total deposit contracts, have remaining expected maturities of approximately 4 years and associated surrender charges ranging from 8% in year one to zero after year six. During 2000 and 2001, Life & Investments offered to waive surrender charges on several different occasions in order to induce EIA policyholders to surrender their contracts. These offers were successful and resulted in a reduction of the EIA policy account balance of $144.0 and $291.0 in 2001 and 2000, respectively. Since the EIA book of business had been generating ongoing losses, reducing the size of the book will reduce the amount of future losses. These surrenders accounted for the majority of the increase in the return of funds held under deposit contracts in 2000 compared with 1999 (see Consolidated Statements of Cash Flows for more information). Other annuity and retirement services products comprise approximately 31% of total deposit contracts. These products generally have expected maturities of 5 to 20 years at issuance and associated surrender charges ranging from 10% to 5% in year one reduced to zero within 5 to 10 years. Life & Investments retains the option to defer payouts over 5 years on approximately 20% of these contracts. Universal life products comprise approximately 22% of total deposit contracts. Of the total universal life product deposit contracts, 80% are business owned life insurance (BOLI) policies which have expected maturities of 20 to 25 years at issuance with surrender charges varying according to policy type. As a result of the downgrade in SAFECO’s ratings, Life & Investments new BOLI deposits declined to $120.0 in 2001 compared to $710.0 and $705.0 in 2000 and 1999, respectively. The guaranteed investment contracts within the retirement services area comprise the remaining 3% of total deposit contracts.

The high level of proceeds from the maturity of fixed maturities in all three years was due primarily to the high number of calls of fixed maturities and prepayments of mortgage-backed securities. These calls and prepayments were primarily due to the lower interest rate environment during the past three years and issuer-driven actions. The high level of purchase and sale activity related to fixed maturities available-for-sale in 2000 and 1999 was due in part to shifting a portion of Property & Casualty’s bond holdings from tax-exempt to taxable bonds. The reason for this shift was to maximize the portfolio’s after-tax return in view of the higher level of underwriting losses in 2000 and 1999 and the resulting alternative minimum tax. The high level of proceeds from equity securities in 2000 is mainly due to approximately $300.0 of planned equity securities sales out of Property & Casualty’s investment portfolio in the third quarter. The proceeds from these equity securities sales were reinvested in taxable fixed-income securities. These sales resulted in increased realized gains from equity securities in 2000 compared with 1999. Additional information on realized gains can be found in Note 2 of the Notes to Consolidated Financial Statements.

In order to reduce refinancing risk, on March 16, 2000, the Corporation issued $300.0 of medium-term notes at 7.875% which mature on March 15, 2003. In conjunction with this debt issue, the Corporation entered into interest rate swap agreements. The swaps are for notional amounts totaling $300.0 and replace the fixed rates of the medium-term notes with variable rates at 65.03 basis points over the 90-day LIBOR rate. The swaps mature in March 2003. The $300.0 of medium-term notes issued is part of a shelf offering of $800.0 made earlier in 2000. The Corporation has available $500.0 under the existing shelf registration.

The Corporation has a five-year bank credit facility available for $800.0 that was originated in 1997 and extends to September 2002. This facility is available for general corporate purposes and as a back up to the Corporation’s commercial paper program. The Corporation plans to renew the bank credit facility when it expires in September 2002. Based on the current financial position and expectations, SAFECO believes it will be able to renew this facility. In 2002, the Corporation plans to roll over its $299.0 of commercial paper borrowings outstanding at December 31, 2001.

As part of its capital management strategy, the Corporation periodically repurchases its common stock through open market and negotiated purchases, when given appropriate market conditions and liquidity availability. In February 2000 the Corporation’s Board of Directors approved the repurchase of 3.0 shares of common stock. Previous repurchase authorizations were in May 1999 for a total of 8.0 shares and in August 1998 for a total of $200.0. For the year ended December 31, 2001, the Corporation did not repurchase a material number or dollar amount of shares. For the year ended December 31, 2000, the Corporation repurchased 1.3 shares at a total cost of $30.3 for an average share price of $22.54. For the year ended December 31, 1999, the Corporation repurchased 7.5 shares at a total cost of $302.1 for an average share price of $40.14. Repurchases combined for 2001, 2000 and 1999 totaled approximately 7% of the Corporation’s outstanding common shares at the beginning of 1999. The Corporation received additional dividends from its insurance subsidiaries to fund these stock repurchases. Approximately 2.7 shares remain available for repurchase under the February 2000 authorization. SAFECO does not anticipate that it will repurchase any material amount of its common stock in 2002.

Ratings

The claims-paying abilities of insurers are rated to provide both insurance consumers and industry participants with comparative information on specific insurance companies. Claims-paying ratings are important for the marketing of certain insurance products, e.g., structured settlement annuities, business owned life insurance. Higher ratings generally indicate greater financial strength and a stronger ability to pay claims. Ratings focus on factors such as results of operations, capital resources, debt-to-capital ratio, demonstrated management expertise in the insurance business, marketing, investment operations, minimum policyholders’ surplus requirements and capital sufficiency to meet projected growth, as well as access to such traditional capital as may be necessary to continue to meet standards for capital adequacy.

Due primarily to Property & Casualty ‘s continued poor underwriting results, SAFECO’s claims-paying and corporate credit ratings have been lowered in recent years, most recently in the first half of 2001. As of December 31, 2001, A.M. Best maintains a negative outlook on Property & Casualty’s financial strength rating and the Corporation’s debt rating. All other rating agency ratings are stable. Lower operating results combined with increased operating leverage in Property & Casualty contributed to lower debt service coverage for the Corporation. Although overall interest expense for the Corporation has decreased due to the general market decline in short term borrowing rates in 2001, SAFECO’s relative interest rates on short term borrowing are higher due to the ratings downgrades. SAFECO believes its financial position is sound and has action plans in place to improve Property & Casualty results. It is, however, possible that further negative ratings actions may occur. Lower ratings have significantly affected Life & Investments ability to sell income annuities and business owned life insurance products. If ratings are further lowered, SAFECO may incur higher borrowing costs, may have more limited means to access capital, and may have additional difficulties marketing certain of its insurance products that are dependent upon ratings being at or above a particular level of risk.

The following table summarizes SAFECO’s current ratings:

Standard

A.M. Best

Fitch

Moody's

& Poor's

SAFECO Corporation

Senior Debt

bbb+

A-

Baa1

BBB+

Capital Securities

bbb

BBB+

baa1

BBB-

Commercial Paper

—

F-2

P-2

A-2

Financial Strength/Claims-Paying Ability

Property & Casualty Subsidiaries

AA-

A+

Life Subsidiaries

AA-

A+

Regulatory Issues

SAFECO is not aware of any recently passed or current recommendations by regulatory authorities which have or would have, if passed, a material effect on its liquidity, capital resources or results of operations.

Limitations or prohibitions on the use of insurance scoring, which is partially based on personal credit information, could adversely affect Property & Casualty’s business plans, depending on the specifics of any such limitation or prohibition.

Those states in which SAFECO’s insurance subsidiaries are domiciled or deemed to be commercially domiciled limit the amount of dividend payments that can be made by those subsidiaries without prior regulatory approval. These limitations are not anticipated to keep the insurance subsidiaries from paying dividends to the Corporation in 2002 in amounts sufficient to fund its shareholder dividends and service debt. Based on the statutory limits as of December 31, 2001, the Corporation is able to receive approximately $470.0 in dividends from its subsidiaries in 2002 without obtaining prior regulatory approval.

The National Association of Insurance Commissioners (NAIC) uses risk-based capital (RBC) formulas for both life insurers and property and casualty insurers. These serve as an early warning tool by the NAIC and state regulators to identify companies that are undercapitalized and merit further regulatory attention or the initiation of regulatory action. SAFECO’s life and property and casualty companies have more than sufficient capital to meet the RBC requirements.

Effective January 1, 2001, the Corporation’s insurance subsidiaries adopted the NAIC’s revised Accounting Practices and Procedures Manual and the domiciliary states of the Corporation’s insurance subsidiaries have adopted the provisions of the revised manual. The revised manual has changed, to some extent, prescribed statutory accounting practices and resulted in changes to the accounting practices that the Corporation’s insurance subsidiaries use to prepare their statutory-basis financial statements. Upon adoption, SAFECO’s property and casualty insurance companies’ statutory surplus increased by $207.4 and the life insurance companies by $45.3. Nearly all of the increase in the amounts of statutory surplus relates to the recording of a deferred tax asset that was not recorded in the statutory basis financial statements under the prior statutory accounting guidance.

Income Taxes

As of December 31, 2001, SAFECO had approximately $1,163.1 of gross deferred tax assets ($319.0 net deferred tax asset), including net operating loss carryforwards that expire in 2020, for which no valuation allowance has been recorded. The realization of these assets is based upon estimates of future taxable income. In preparing estimates of future taxable income, SAFECO has used the assumptions and projections utilized in its internal financial projections. These projections of future profitable results are subject to uncertainties primarily related to the variability of Property & Casualty underwriting results. Should results not be as profitable as SAFECO has forecasted, a valuation allowance may be required to be established. Any such allowance would impact current operating results.

Investment Summary

Net Investment Income

SAFECO’s consolidated pretax investment income increased to $1,649.3 during 2001 from $1,633.5 and $1,588.3 in 2000 and 1999, respectively. Substantially all of this investment income is produced by the investment portfolios of Property & Casualty and Life & Investments. The net investment income (loss) detail is presented below:


	Net Pretax Investment Income (Loss)

YEAR ENDED DECEMBER 31	2001		2000			1999

Property & Casualty	$	457.7	$	460.5		$	462.3
Life & Investments		1,180.3		1,181.5			1,123.2
Corporate		11.3		(8.5	)		2.8

Total	$	1,649.3	$	1,633.5		$	1,588.3


	Pretax Investment Income Yields

YEAR ENDED DECEMBER 31	2001			2000			1999

Property & Casualty		6.3	%		6.4	%		6.2	%
Life & Investments		7.5	%		7.7	%		7.7	%

The Property & Casualty pretax investment income was $457.7, $460.5 and $462.3 in 2001, 2000 and 1999, respectively. On an after-tax basis investment income was $358.2, $363.0 and $387.6 for 2001, 2000 and 1999, respectively. Although Property & Casualty operating cash flow was positive in all three years, the amount of dividends paid to the Corporation over the three year period and the high level of claims payments, combined with the relatively low interest rate environment and bond call activity dampened the growth of investment income. After-tax investment income in 2002 is expected to be slightly lower due to lower market interest rates and slowed premium revenue cash flows. Dividends paid to the Corporation totaled $13.6, $362.0 and $717.5 for 2001, 2000 and 1999, respectively. Dividends to the Corporation have declined due to underwriting losses over the past several years and regulatory restrictions on dividend payments. Additional information about dividend restrictions can be found in Note 13 of the Notes to Consolidated Financial Statements.

Life & Investments pretax investment income was $1,180.3, $1,181.5 and $1,123.2 in 2001, 2000 and 1999, respectively. The growth in investment income from 1999 to 2000 was due primarily to the higher invested assets base related to the growth of funds held under deposit contracts. Although the investment portfolio has grown in 2001, investment income is flat due to lower investment yields and the overall decline in the equity security markets.

Realized Investment Gains

Consolidated pretax realized gains from security investments totaled $93.0, $139.5, and $82.6 in 2001, 2000 and 1999, respectively. The increase in realized gains in 2000 is mainly due to realized gains on approximately $300.0 of planned equity securities sales out of Property & Casualty’s investment portfolio during the third quarter 2000. The proceeds from these equity securities sales were reinvested in taxable fixed-income securities. Additional information on realized gains can be found in Note 2 of the Notes to Consolidated Financial Statements.

Consolidated realized gains from security investments are recorded net of losses on the sale or write-down of investments. Each investment that has declined in fair value below cost is monitored closely and if the decline is judged to be other than temporary, the security is written down to fair value. In determining whether a decline in the fair value of a security below cost is other than temporary, SAFECO considers the relevant facts and circumstances related to the security. These include: (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer, including any specific events that influence the operations of the issuer or that affect its future earnings potential; and (3) SAFECO’s intent and ability to retain the investment for a period of time sufficient to allow for a recovery in value.

The amounts of such write-downs were $126.8, $35.7 and $0.6 in 2001, 2000 and 1999, respectively. In 2001, the write-downs amounted to $36.2, $66.5 and $24.1 for Property & Casualty, Life & Investments and Corporate, respectively. Nearly all of these write-downs for Property & Casualty and Life & Investments in 2001 and 2000 were on fixed maturities. The write-down of $24.1 for Corporate related to an equity security whose decline in fair value was other than temporary. The increases in write-downs in 2001 and 2000 were due to credit deterioration and corporate failures of several fixed-maturity issuers, particularly in the retail, auto parts supplier, and telecommunications areas. Included in the 2001 write-downs of $126.8 is $12.1 for investments in Enron, which filed for bankruptcy in the fourth quarter of 2001. Additional write-downs are possible in 2002 due to the continued weak economy, however, the timing and amount of any write-downs is not currently estimable.

Investment Portfolio

The table below summarizes SAFECO’s consolidated securities investment portfolio at December 31, 2001. The fair value recorded amount exceeded the cost or amortized cost on fixed maturities and equity securities by $1.4 billion at December 31, 2001.


		Cost or
		Amortized		Fair
DECEMBER 31, 2001		Cost		Value

PROPERTY & CASUALTY
	Fixed Maturities — Taxable	$	3,673.5	$	3,792.9
	Fixed Maturities — Non-taxable		2,500.8		2,727.2
	Equity Securities		850.2		1,482.6
	Short-Term Investments		354.0		354.0

LIFE & INVESTMENTS
	Fixed Maturities — Taxable		14,460.8		14,877.8
	Equity Securities		62.9		67.8
	Short-Term Investments		262.4		262.4

CORPORATE
	Fixed Maturities — Taxable		42.0		46.2
	Equity Securities		27.4		46.0
	Short-Term Investments		56.5		56.5

Total		$	22,290.5	$	23,713.4

Property & Casualty’s investment portfolio totaled $8.5 billion at estimated fair value at December 31, 2001, compared with $8.3 billion at December 31, 2000. The investment philosophy for Property & Casualty’s portfolio is to emphasize investment yield without sacrificing investment quality, and to provide for liquidity and diversification. Fixed maturities securities comprised 77% of this portfolio while equity securities comprised 18%.

Property & Casualty’s fixed maturities portfolio, which totaled $6.5 billion at estimated fair value at December 31, 2001, is currently comprised of 42% tax-exempt and 58% taxable investments compared with 46% tax-exempt and 54% taxable at December 31, 2000. Property & Casualty has been investing new money primarily in taxable bonds and shifting holdings from tax-exempts to taxables to maximize the portfolio’s after-tax return in view of the higher level of underwriting losses in 2001 and 2000, and the resulting alternative minimum tax. The effective tax rate on investment income was 22%, 21% and 16% in 2001, 2000 and 1999, respectively, reflecting the shift to a higher level of taxable bond holdings.

The quality of Property & Casualty’s fixed maturities portfolio is detailed in the following table:


	Percent at
RATING	December 31, 2001

AAA		50	%
AA		17
A		19
BBB		11
BB or lower		3

Total		100	%

Life & Investments’ portfolio totaled $16.3 billion at fair value at December 31, 2001 compared with $15.6 billion at December 31, 2000. Fixed maturities securities, all of which are taxable, comprised 91% of this investment portfolio at December 31, 2001. The investment philosophy for this portfolio is to emphasize investment yield without sacrificing investment quality, and to provide for liquidity and diversification. Life & Investments also matches the projected cash inflows of this portfolio with the projected cash outflows of the liabilities of the various product lines within the Life & Investments operations. Effective October 1, 2000, the entire held-to-

maturity fixed maturities investment portfolio, with a fair value of $2.8 billion, was reclassified to available-for-sale. This reclassification was made to provide additional investment flexibility in managing the bond portfolio and resulted in an increase in other comprehensive income of $41.0 in the fourth quarter of 2000. All of SAFECO’s fixed maturities securities are now carried at fair value.

The quality of Life & Investments’ fixed maturities portfolio is detailed in the following table:


	Percent at
RATING	December 31, 2001

AAA		33	%
AA		10
A		26
BBB		27
BB or lower		4

Total		100	%

This portfolio contains $643.1 at fair value of securities rated below investment-grade quality. These securities represent approximately 4% of the total $16.3 billion Life & Investments portfolio at fair value at December 31, 2001. On a consolidated basis, below investment-grade securities with a fair value of $790.8 were held at December 31, 2001. (The related amortized cost amount is $858.9 or 109% of the fair value.) These securities represented approximately 4% of total consolidated securities investments at fair value at December 31, 2001. As discussed above, investment write-downs impacting income have and may continue to occur on these below investment grade securities.

SAFECO’s investment portfolio includes approximately $297.0 and $403.8 of fixed maturities at December 31, 2001 and 2000, respectively that are not publicly traded. This represents less than 2% of total fixed maturity investments. Fair values for these securities have been estimated using quoted market prices of comparable instruments and/or internally prepared valuations using third party modeling tools.

SAFECO’s consolidated investment in mortgage-backed securities of $4.8 billion at fair value at December 31, 2001, consists mainly of residential collateralized mortgage obligations (CMOs), pass-throughs and commercial loan-backed mortgage obligations (CMBS). Life & Investments portfolio holds 82% while Property & Casualty holds 18% of these securities. Approximately 87% of the mortgage-backed securities are government/agency-backed or AAA rated at December 31, 2001. SAFECO has intentionally limited its investment in riskier, more volatile CMOs and CMBS (e.g., principal only, inverse floaters, etc.) to less than 1% of total mortgage-backed securities at December 31, 2001.

The table below summarizes SAFECO’s consolidated holdings of mortgage-backed securities at December 31, 2001:

Carrying Value

Amortized

DECEMBER 31, 2001

Cost

Amount

Percent

RESIDENTIAL

Planned and Targeted Amortization Class, and Sequential Pay CMOs

1,790.9

1,843.5

38.8

Accrual Coupon (Z-Tranche) CMOs

626.1

687.5

14.4

Floating Rate CMOs

79.1

82.5

1.7

Companion/Support, Principal Only, Inverse Floater CMOs

22.5

23.7

0.5

Residential Mortgage-Backed Pass-Throughs (Non-CMOs)

309.8

321.3

6.7

Subtotal

2,828.4

2,958.5

62.1

SECURITIZED COMMERCIAL REAL ESTATE

Government/Agency-Backed

414.8

428.7

9.0

CMOs and Pass-Throughs (Non-agency)

1,049.6

1,079.9

22.7

Subtotal

1,464.4

1,508.6

31.7

Other CMO’s — Asset Backed Securities (Non-Real Estate)

289.5

293.0

6.2

Total Mortgaged-Backed Securities

4,582.3

4,760.1

100.0

The quality rating of SAFECO’s mortgage-backed security portfolio is shown in the following table:


	Percent at
RATING	December 31, 2001

Government/Agency Backed		49	%
AAA		38
AA		7
A		3
BBB		3
BB or Lower		-

Total		100	%

SAFECO’s consolidated investment portfolio also included $924.2 of mortgage loan investments at December 31, 2001, representing approximately 4% of total investments. The collateral value of the mortgage portfolio was approximately $1.6 billion at December 31, 2001 making the loan-to-value on the mortgage portfolio less than 60%. Historically the mortgage portfolio has performed well and the loan charge-off rate has been very low on this portfolio over the past three years (see additional information about the allowance for mortgage loans in Note 2 of the Notes to Consolidated Financial Statements). The majority of these loans are held by Life & Investments and are secured by first mortgage liens on completed, income-producing commercial real estate, primarily in the retail, industrial and office building sectors. The majority of the properties are located in the western United States, with approximately 69% of the total in the states of Washington (32%), Oregon (11%) and California (26%). Individual loans generally do not exceed $10. Less than 1% of the loans were non-performing at both December 31, 2001 and 2000. The allowance for mortgage loan losses was $10.5 and $10.8 at December 31, 2001 and 2000, respectively.

New Accounting Standards

See discussion of new accounting standards in Note 1 of the Notes to Consolidated Financial Statements.

Dividends

Forward-looking information is subject to risk and uncertainty

Statements made in this report that relate to anticipated financial performance, business prospects and plans, regulatory developments and similar matters are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Statements in this report that are not historical information are forward-looking. The operations, performance and development of SAFECO’s business are subject to certain risks and uncertainties which may cause actual results to differ materially from those contained in or suggested by the forward-looking statements in this report. The risks and uncertainties include:

•      The ability to obtain rate increases and non-renew underpriced insurance accounts;

•      Achievement of premium targets and profitability;

•      Realization of growth and business retention estimates;

•      Decrease in large-commercial premium volume;

•      Achievement of expense savings from consolidation of commercial operations;

•      Achievement of overall expense reduction goals;

•      Success in implementing a new business entry model for personal and commercial lines;

•      Success in obtaining regulatory approval of price tiered products and the use of insurance scores;

•      The ability to freely enter and exit lines of business;

•      Changes in the nature of the property and casualty book of business;

•      Driving patterns;

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

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

•      The occurrence of significant natural disasters, including earthquakes;

•      The occurrence of significant disasters, such as the attack on September 11, 2001;

•      The occurrence of bankruptcies that result in losses under surety bonds;

•      The adequacy of loss reserves;

•      The availability, pricing and ability to collect reinsurance;

•      The ability to manage exposure to the Lloyd’s of London underwriting market;

•      The ability to exclude and to reinsure the risk of loss from terrorism;

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

•      The outcome of litigation against SAFECO;

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

•      Changes in tax laws and regulations that affect the favorable taxation of certain life insurance products or that decrease the usefulness of life insurance products for estate planning purposes;

•      Negative changes to SAFECO’s rates by rating agencies;

•      The effect of current insurance and credit ratings levels on business production;

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

•      Availability of bank credit facilities;

•      Fluctuations in interest rates;

•      Performance of financial markets; and

•      General economic and market conditions.

Because insurance rates in some jurisdictions are subject to regulatory review and approval, the achievement of rate increases may occur in amounts and on a time schedule different than planned, which may affect the efforts to restore earnings in the property and casualty lines. We assume no obligation to update any forward-looking statements contained in this report.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Disclosures for Financial Instruments

The first two columns of the following table under each year show the financial statement carrying values and related current fair values of certain of SAFECO’s financial instruments as of December 31, 2001 and 2000. The third column shows the effect on current fair values assuming a 100 basis point increase in market interest rates and a 10% decline in equity prices (sensitivity analysis).

2001 2000

Fair Value Fair Value

Fair Value At Adjusted Fair Value At Adjusted

At Current Market Rates At Current Market Rates

Carrying Market (Sensitivity Carrying Market (Sensitivity

DECEMBER 31 Value Rates/Prices Analysis) Value Rates/Prices Analysis)

(In Millions)

Interest Rate Risk

FINANCIAL ASSETS

Fixed Maturities

Available-for-Sale
$ 21,444.1 $ 21,444.1 $ 20,127.0 $ 20,830.2 $ 20,830.2 $ 19,331.0

Mortgage Loans
924.2 928.0 876.0 823.0 792.0 749.0

Derivative Financial Instruments Interest Rate Swaps
49.8 49.8 43.0 — 2.3 2.0

Options/Futures
11.9 11.9 12.0 0.4 0.4 0.5

FINANCIAL LIABILITIES

Funds Held under Deposit Contracts
14,624.2 14,314.0 13,711.0 14,085.7 13,977.0 13,457.0

Commercial Paper
299.0 299.0 299.0 349.8 349.8 349.8

7.875% Notes Due 2003
323.0 323.0 320.0 300.0 305.0 299.0

7.875% Notes Due 2005
200.0 207.0 204.0 200.0 203.0 196.0

6.875% Notes Due 2007
200.0 196.0 188.0 200.0 193.0 184.0

Other Debt
74.6 76.0 76.0 80.7 80.0 80.0

Derivative Financial Instruments

Single Credit Default Swaps
10.4 10.4 10.0 — — —

Interest Rate Swaps
18.0 18.0 8.0 — 3.9 4.0

Options/Futures
47.1 47.1 47.0 — — —

Capital Securities
843.4 721.0 652.0 843.0 700.0 635.0

Equity Price Risk

Marketable Equity Securities
1,596.4 1,596.4 1,437.0 1,815.4 1,815.4 1,634.0

Market risk means the potential loss from adverse changes in market prices and interest rates. In addition to market risk, SAFECO is exposed to other risks, including the credit risk related to its financial instruments and the underlying insurance risk related to its core business. The sensitivity analysis above summarizes only the exposure to market risk.

SAFECO manages its market risk by matching the projected cash inflows of assets with the projected cash outflows of liabilities of its investment and financial products (e.g., annuities, retirement services products). For all of its financial assets and liabilities, SAFECO seeks to maintain reasonable average durations, consistent with the maximization of income without sacrificing investment quality and providing for liquidity and diversification. SAFECO uses certain derivative financial instruments to increase its matching of cash flows. For example, interest rate swaps are used to convert debt liabilities with variable rates to fixed rates to better match the fixed-rate assets the debt supports. In addition, S&P 500 call option contracts and futures are purchased to hedge the liability of SAFECO Life’s equity indexed annuity products.

The fair values at current market rates for financial instruments subject to interest rate risk in the preceding table are the same as those disclosed in Note 3 of the Notes to Consolidated Financial Statements. The estimated fair values at the adjusted market rates (assuming a 100 basis point increase in market interest rates) are calculated using discounted cash flow analysis and duration modeling, where appropriate. The estimated values do not consider the effect that changing interest rates could have on prepayment activity (e.g., CMO’s and annuities).

This sensitivity analysis provides only a limited, point-in-time view of the market risk sensitivity of certain of SAFECO’s financial instruments. The actual impact of market interest rate and price changes on the financial instruments may differ significantly from those shown in the sensitivity analysis. The sensitivity analysis is further limited as it does not consider any actions SAFECO could take in response to actual and/or anticipated changes in interest rates and equity prices. As allowed under the guidance for these disclosures, certain financial instruments (e.g., lease receivables) are not required to be included in the sensitivity analysis. In addition, certain non-financial instruments (e.g., insurance liabilities and real estate) are excluded from the sensitivity analysis. Accordingly, any aggregation of the estimated fair value amounts or adjusted fair value amounts would not represent the underlying fair value of net equity.

ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and schedules listed in the Index to Financial Statements, Schedules and Exhibits on page FS-1 are filed as part of this report.

ITEM 9 — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

SAFECO Corporation and Subsidiaries

Part III

The definitive proxy statement to be filed within 120 days after December 31, 2001, excluding the section Annual Report of the Compensation Committee on Executive Compensation, is incorporated herein by reference to fulfill the requirements of Items 10 — 13 below.

ITEM 10 — DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(except for the portion of Item 10 relating to executive officers that appears in Part I — Executive Officers of the Registrant on Form 10-K).

ITEM 11 — EXECUTIVE COMPENSATION

ITEM 12— SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

SAFECO Corporation and Subsidiaries

Part IV

ITEM 14— EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) (1) Financial Statements

(a) (2) Financial Statement Schedules

(a) (3) Exhibits

The financial statements, financial statement schedules and exhibits listed in the Index to Financial Statements, Schedules and Exhibits on page FS-1 are filed as a part of this report.

(b) Reports on Form 8-K

The registrant filed the following 8-K’s during the quarter ended December 31, 2001 and for the period up to the filing date of this Form 10-K.

Filing dated Under Filing related to:

December 11, 2001 Item 5 (Other Items) Announcement relating to expected losses from the Enron bankruptcy and continued difficulties in Homeowners line.

January 24, 2002 Item 5 (Other Items) Announcement relating to the appointment of Christine B. Mead as Chief Financial Officer of SAFECO Corporation.

March 5, 2002 Item 5 (Other Items) Announcement relating to SAFECO's acquisition of Swiss Re's medical excess-loss and group life insurance business.

SAFECO Corporation and Subsidiaries

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 6, 2002.

SAFECO CORPORATION

Registrant

/s/ MICHAEL S. MCGAVICK

Michael S. McGavick, President,
Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 6, 2002.

Name Title

/s/ MICHAEL S. MCGAVICK
      Michael S. McGavick President, Chief Executive Officer and Director

/s/ CHRISTINE B. MEAD
      Christine B. Mead Senior Vice President, Chief Financial Officer and Secretary

/s/ H. PAUL LOWBER
      H. Paul Lowber Vice President, Controller and Chief Accounting Officer

/s/ JOSEPH W. BROWN
      Joseph W. Brown Director

/s/ PHYLLIS J. CAMPBELL
      Phyllis J. Campbell Director

/s/ ROBERT S. CLINE
      Robert S. Cline Director

/s/ WILLIAM P. GERBERDING
      William P. Gerberding Director

/s/ JOSHUA GREEN III
      Joshua Green III Director

/s/ WILLIAM W. KRIPPAEHNE, JR.
      William W. Krippaehne, Jr. Director

/s/ WILLIAM G. REED, JR.
      William G. Reed, Jr. Chairman

/s/ NORMAN B. RICE
      Norman B. Rice Director

/s/ JUDITH M. RUNSTAD
      Judith M. Runstad Director

/s/ PAUL W. SKINNER
      Paul W. Skinner Director

SAFECO Corporation and Subsidiaries

Management’s Report

The management of SAFECO is responsible for the financial statements, related notes and all other information presented in this annual report. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States appropriate in the circumstances and include amounts based on the best estimates and judgments of management.

In order to safeguard assets and to maintain the integrity and objectivity of data in these consolidated financial statements, SAFECO maintains a comprehensive system of internal accounting controls. These controls are supported by the careful selection and training of qualified personnel, by the appropriate division of duties and responsibilities and by written policies and procedures. In addition, an integral part of the comprehensive system of internal control is an effective internal audit department. SAFECO’s Internal Audit Department systematically evaluates the adequacy and effectiveness of internal accounting controls and measures adherence to established policies and procedures.

The consolidated financial statements for the years ended December 31, 2001, 2000 and 1999 have been audited by Ernst & Young LLP, independent auditors. Their audits were performed in accordance with auditing standards generally accepted in the United States and included a review of the system of internal accounting controls to the extent necessary to express an opinion on the consolidated financial statements.

The Audit Committee of the Board of Directors, comprised solely of outside directors, meets regularly with the independent auditors, management and internal auditors to review the scope and results of the audit work performed. The independent auditors have unrestricted access to the Audit Committee, without the presence of management, to discuss the results of their audit, the adequacy of internal accounting controls and the quality of accounting policies and financial reporting.

The management of SAFECO believes that as of December 31, 2001, its system of internal control is adequate to accomplish the objectives discussed herein.

/s/ MIKE MCGAVICK
Mike McGavick
President and Chief Executive Officer

SAFECO Corporation and Subsidiaries

Index to Financial Statements, Schedules and Exhibits


Description			Page

Financial Statements
Report of Independent Auditors			FS-2
Consolidated Statements of Income (Loss)			FS-3
Consolidated Balance Sheets			FS-4
Consolidated Statements of Cash Flows			FS-6
Consolidated Statements of Cash Flows — Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities			FS-7
Consolidated Statements of Shareholders’ Equity			FS-8
Consolidated Statements of Comprehensive Income (Loss)			FS-8
Notes to Consolidated Financial Statements			FS-9
Supplemental Consolidating Information (unaudited)
	Statements of Income (Loss) (unaudited)		FS-39
	Balance Sheets (unaudited)		FS-40
	Statements of Cash Flows (unaudited)		FS-42
	Statements of Cash Flows — Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities (unaudited)		FS-43
Financial Statement Schedules
I Summary of Investments Other Than Investments in Related Parties				S-1
II Condensed Financial Information of Registrant
		Statements of Income (Loss)		S-2
		Balance Sheets		S-3
		Statements of Cash Flows		S-4
		Statements of Cash Flows — Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities		S-5
III Supplemental Insurance Information				S-6
IV Reinsurance				S-12
VI Supplemental Information Concerning Property & Casualty Insurance Operations				S-13
Exhibits
Index to Exhibits				E-1
11 Computation of Income (Loss) Per Share of Common Stock				E-4
12 Computation of Ratio of Earnings (Loss) to Fixed Charges				E-5
21 Subsidiaries of Registrant				E-6

Schedules other than those listed above are omitted because they are not applicable or the information is otherwise contained in the Consolidated Financial Statements.

FS-1

SAFECO Corporation and Subsidiaries


Report of Ernst & Young LLP		Independent Auditors

Board of Directors and Shareholders of SAFECO Corporation:

We have audited the accompanying consolidated balance sheets of SAFECO Corporation and its subsidiaries (the Corporation) as of December 31, 2001 and 2000, and the related consolidated statements of income (loss), comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedules listed in the Index at Item 14(a).These financial statements and schedules are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SAFECO Corporation and its subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

As described in Note 1 to the consolidated financial statements, SAFECO Corporation and its subsidiaries changed its method of accounting for goodwill and also changed its method of accounting for derivative financial instruments.

/s/ ERNST & YOUNG LLP

Seattle, Washington
February 8, 2002

FS-2

SAFECO Corporation and Subsidiaries

Consolidated Statements of Income (Loss)


YEAR ENDED DECEMBER 31		2001			2000			1999

(In Millions Except Per Share Amounts)
REVENUES
Insurance
	Property & Casualty Earned Premiums	$	4,472.8		$	4,563.4		$	4,382.9
	Life & Investments Premiums and Other Revenues		637.0			618.2			473.9

Total			5,109.8			5,181.6			4,856.8
Other			10.4			20.5			39.2
Net Investment Income (Note 2)			1,649.3			1,633.5			1,588.3
Realized Investment Gain (Note 2)			93.0			139.5			117.7

Total			6,862.5			6,975.1			6,602.0

EXPENSES
Losses, Loss Adjustment Expenses and Policy Benefits (Note 4)			5,199.1			4,987.6			4,504.0
Commissions			818.2			794.9			796.4
Personnel Costs			496.4			484.8			448.0
Interest			65.7			73.2			70.6
Goodwill and Intangibles Amortization			26.7			60.5			55.8
Other			446.7			435.9			444.3
Amortization of Deferred Policy Acquisition Costs			824.5			834.2			840.1
Deferral of Policy Acquisition Costs			(859.9	)		(835.4	)		(866.8	)
Write-off of Goodwill (Note 1)			1,214.1			—			—
Restructuring Charges (Note 12)			44.3			—			—

Total			8,275.8			6,835.7			6,292.4

Income (Loss) from Continuing Operations Before Income Taxes			(1,413.3	)		139.4			309.6

Provision (Benefit) for Income Taxes (Note 6)
	Current		(7.6	)		39.6			67.1
	Deferred		(405.2	)		(46.9	)		(40.0	)


Total			(412.8	)		(7.3	)		27.1

Income (Loss) from Continuing Operations before Distributions on Capital Securities			(1,000.5	)		146.7			282.5
Distributions on Capital Securities, Net of Tax (Note 7)			(44.8	)		(44.8	)		(44.8	)

Income (Loss) from Continuing Operations			(1,045.3	)		101.9			237.7

Income from Discontinued Credit Operations, Net of Tax (Note 11)			4.2			12.7			14.5
Gain from Sale of Credit Operations, Net of Tax (Note 11)			54.0			—			—

Total Income from Discontinued Operations			58.2			12.7			14.5

Income (Loss) before Cumulative Effect of Change in Accounting Principle			(987.1	)		114.6			252.2
Cumulative Effect of Change in Accounting Principle, Net of Tax (Notes 1 and 3)			(2.1	)		—			—

Net Income (Loss)		$	(989.2	)	$	114.6		$	252.2

INCOME (LOSS) PER SHARE OF COMMON STOCK
Income (Loss) from Continuing Operations		$	(8.18	)	$	0.80		$	1.79
Income from Discontinued Operations			0.45			0.10			0.11
Cumulative Effect of Change in Accounting Principle			(0.02	)		—			—

Net Income (Loss) Per Share of Common Stock— Diluted & Basic		$	(7.75	)	$	0.90		$	1.90

See notes to consolidated financial statements.

FS-3

SAFECO Corporation and Subsidiaries

Consolidated Balance Sheets


DECEMBER 31		2001		2000

(In Millions)
ASSETS
Investments (Note 2)
	Fixed Maturities Available-for-Sale, at Fair Value (Cost or amortized cost: $20,677.1; $20,388.1)	$	21,444.1	$	20,830.2
	Marketable Equity Securities, at Fair Value (Cost: $940.5; $875.9)		1,596.4		1,815.4
	Mortgage Loans		924.2		823.0
	Other Investment Assets		236.9		160.3
	Short-Term Investments		672.9		182.3

Total Investments			24,874.5		23,811.2
Cash			269.3		186.3
Accrued Investment Income			323.8		327.8
Premiums and Service Fees Receivable			973.0		1,063.0
Other Notes and Accounts Receivable			163.4		37.6
Deferred Income Tax Recoverable (Note 6)			319.0		—
Reinsurance Recoverables (Note 5)			523.2		461.7
Deferred Policy Acquisition Costs			626.8		605.4
Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation: $285.0; $241.5)			552.0		440.1
Goodwill and Intangibles (Note 1) (Accumulated amortization: $57.6; $202.8)			95.0		1,307.4
Other Assets			164.4		260.9
Net Assets of Discontinued Credit Operations (Note 11)			—		481.2
Separate Account Assets			1,208.1		1,275.1

Total Assets		$	30,092.5	$	30,257.7

See notes to consolidated financial statements.

FS-4

SAFECO Corporation and Subsidiaries

Consolidated Balance Sheets


DECEMBER 31		2001		2000

(In Millions)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Losses and Loss Adjustment Expenses (Note 4)		$	5,118.4	$	4,686.9
Life Policy Liabilities			327.1		342.1
Unearned Premiums			1,782.2		1,836.5
Funds Held Under Deposit Contracts			14,624.2		14,085.7
Debt (Note 7)
	Commercial Paper		299.0		349.8
	7.875% Medium-Term Notes Due 2003		323.0		300.0
	7.875% Notes Due 2005		200.0		200.0
	6.875% Notes Due 2007		200.0		200.0
	Other		74.6		80.7
Other Liabilities			1,423.0		1,269.1
Income Taxes (Note 6)
	Current		34.9		25.8
	Deferred		—		67.2
Separate Account Liabilities			1,208.1		1,275.1

Total Liabilities			25,614.5		24,718.9

Commitments and Contingencies (Note 10)			—		—
Corporation-Obligated, Mandatorily Redeemable Capital Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Corporation (Capital Securities) (Note 7)			843.4		843.0

Preferred Stock, No Par value Shares Authorized: 10 Shares Issued and Outstanding: None			—		—
Common Stock, No Par Value (Note 9) Shares Authorized: 300 Shares Reserved for Option: 6.4; 7.1 Shares Issued and Outstanding: 127.7; 127.6			841.9		834.5
Retained Earnings (Note 13)			1,875.9		2,966.4
Accumulated Other Comprehensive Income, Net of Tax			916.8		894.9

Total Shareholders’ Equity			3,634.6		4,695.8

Total Liabilities and Shareholders’ Equity		$	30,092.5	$	30,257.7

See notes to consolidated financial statements.

FS-5

SAFECO Corporation and Subsidiaries

Consolidated Statements of Cash Flows


YEAR ENDED DECEMBER 31		2001			2000			1999

(In Millions)
OPERATING ACTIVITIES
Insurance Premiums Received		$	4,873.8		$	4,890.2		$	4,636.8
Dividends and Interest Received			1,547.1			1,584.5			1,479.5
Other Operating Receipts			190.2			190.7			212.9
Insurance Claims and Policy Benefits Paid			(4,074.5	)		(4,156.5	)		(3,706.2	)
Underwriting, Acquisition and Insurance Operating Costs Paid			(1,751.1	)		(1,652.8	)		(1,604.8	)
Interest Paid and Distributions on Capital Securities			(127.1	)		(139.1	)		(147.1	)
Other Operating Costs Paid			(88.3	)		(104.6	)		(113.5	)
Income Taxes Refunded (Paid)			(41.3	)		6.9			(39.6	)

Net Cash Provided by Operating Activities			528.8			619.3			718.0

INVESTING ACTIVITIES
Purchases of
	Fixed Maturities Available-for-Sale		(3,988.5	)		(3,604.0	)		(5,422.1	)
	Fixed Maturities Held-to-Maturity		—			(2.2	)		(0.9	)
	Equities		(364.6	)		(372.6	)		(231.9	)
	Other Investment Assets		(301.2	)		(362.0	)		(460.6	)
Maturities of Fixed Maturities Available-for-Sale			1,443.7			972.2			1,174.0
Maturities of Fixed Maturities Held-to-Maturity			—			8.7			13.3
Sales of
	Fixed Maturities Available-for-Sale		2,418.0			2,265.4			3,715.4
	Fixed Maturities Held-to-Maturity (Note 2)		—			0.1			6.3
	Equities		437.6			661.7			298.1
	Other Investment Assets		257.6			412.2			830.5
Net Decrease (Increase) in Short-Term Investments			(436.1	)		281.4			(163.7	)
Gain from Sale of Credit Operations			97.0			—			—
Other			(75.5	)		(79.7	)		(85.3	)

Net Cash Provided by (Used in) Investing Activities			(512.0	)		181.2			(326.9	)

FINANCING ACTIVITIES
Funds Received Under Deposit Contracts			1,051.1			1,266.0			1,849.5
Return of Funds Held under Deposit Contracts			(1,301.1	)		(1,603.1	)		(1,077.3	)
Proceeds from Notes and Mortgage Borrowings			—			300.0			—
Repayment of Notes and Mortgage Borrowings			(6.2	)		(6.0	)		(138.1	)
Repayment of Short-Term Borrowings			(46.6	)		(153.2	)		(252.8	)
Common Stock Reacquired			(8.1	)		(30.4	)		(303.2	)
Dividends Paid to Shareholders			(118.1	)		(189.4	)		(192.2	)
Other			14.0			(5.0	)		(64.7	)

Net Cash Used in Financing Activities			(415.0	)		(421.1	)		(178.8	)

Cash Provided by (Used In) Discontinued Credit Operations			481.2			(296.2	)		(179.5	)

Net increase in Cash			83.0			83.2			32.8
Cash at Beginning of Year			186.3			103.1			70.3

Cash at End of Year		$	269.3		$	186.3		$	103.1

See notes to consolidated financial statements.

FS-6

SAFECO Corporation and Subsidiaries

Consolidated Statements of Cash Flows —
Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities


YEAR ENDED DECEMBER 31		2001			2000			1999

(In Millions)
Net Income (Loss)		$	(989.2	)	$	114.6		$	252.2

ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Income from Discontinued Credit Operations, Net of Tax			(4.2	)		(12.7	)		(14.5	)
Cumulative Effect of Change in Accounting Principle, Net of Tax			2.1			—			—
Gain from Sale of Credit Operations, Net of Tax			(54.0	)		—			—
Realized Investment Gain			(93.0	)		(139.5	)		(117.7	)
Amortization and Depreciation			87.1			123.6			128.2
Amortization of Fixed Maturity Investments			(62.0	)		(41.6	)		(46.3	)
Deferred Income Tax Benefit			(405.2	)		(46.9	)		(40.0	)
Interest Expense on Deposit Contracts			732.0			485.4			583.3
Write-off of Goodwill			1,214.1			—			—
Other Adjustments			(79.9	)		(5.5	)		(5.3	)
Changes in
	Losses and Loss Adjustment Expenses		431.5			270.5			153.7
	Life Policy Liabilities		(15.0	)		60.6			4.7
	Unearned Premiums		(54.3	)		(16.6	)		102.2
	Accrued Income Taxes		9.1			22.5			0.6
	Accrued Interest on Accrual Bonds		(42.8	)		(45.9	)		(45.4	)
	Accrued Investment Income		4.0			(3.7	)		(5.7	)
	Deferred Policy Acquisition Costs		(21.4	)		(6.6	)		(28.9	)
	Other Assets and Liabilities		(130.1	)		(138.9	)		(203.1	)

Total Adjustments			1,518.0			504.7			465.8

Net Cash Provided by Operating Activities		$	528.8		$	619.3		$	718.0

There were no significant non-cash financing or investing activities for the years ended December 31, 2001, 2000 and 1999.

See notes to consolidated financial statements.

FS-7

SAFECO Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity


DECEMBER 31	2001			2000			1999

(In Millions Except Share Amounts)
COMMON STOCK (NOTE 9)
Balance at Beginning of Year	$	834.5		$	841.7		$	885.0
Stock Issued for Options and Rights		8.6			1.5			5.2
Common Stock Reacquired		(1.7	)		(8.8	)		(49.1	)
Other		0.5			0.1			0.6

Balance at End of Year		841.9			834.5			841.7

RETAINED EARNINGS (NOTE 13)
Balance at Beginning of Year		2,966.4			3,062.7			3,257.2
Net Income (Loss)		(989.2	)		114.6			252.2
Amortization of Underwriting Compensation on Capital Securities		(0.4	)		(0.4	)		(0.4	)
Dividends Declared		(94.5	)		(188.9	)		(192.2	)
Common Stock Reacquired		(6.4	)		(21.6	)		(254.1	)

Balance at End of Year		1,875.9			2,966.4			3,062.7

ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAX (NOTE 2)
Balance at Beginning of Year		894.9			389.7			1,433.6
Other Comprehensive Income (Loss)		21.9			505.2			(1,043.9	)

Balance at End of Year		916.8			894.9			389.7

Shareholders’ Equity	$	3,634.6		$	4,695.8		$	4,294.1


DECEMBER 31	2001			2000			1999

COMMON SHARES OUTSTANDING
Number of Shares Outstanding at Beginning of Year		127,649,087			128,925,000			136,262,170
Shares Issued for Stock Options and Rights		352,250			70,668			212,440
Shares Reacquired		(268,086	)		(1,346,581	)		(7,549,610	)

Number of Shares Outstanding at End of Year		127,733,251			127,649,087			128,925,000

See notes to consolidated financial statements

Consolidated Statements of Comprehensive Income (Loss)


YEAR ENDED DECEMBER 31			2001			2000			1999

(In Millions)
Net Income (Loss)			$	(989.2	)	$	114.6		$	252.2

Other Comprehensive Income (Loss), Net of Tax
	Change in Unrealized Appreciation (Depreciation) of Investment Securities*			88.3			595.9			(1,018.0	)
	Less Reclassification Adjustment for Realized Gain Included in Net Income			(61.5	)		(90.4	)		(58.3	)
	Deferred Policy Acquisition Costs Valuation Allowance			(6.0	)		0.1			31.8
	Foreign Currency and Other Adjustments			1.1			(0.4	)		0.6

		Other Comprehensive Income (Loss)		21.9			505.2			(1,043.9	)

Comprehensive Income (Loss)			$	(967.3	)	$	619.8		$	(791.7	)

Effective October 1, 2000, the fixed maturities held-to-maturity portfolio was reclassified to available-for-sale (Note 1).

See notes to consolidated financial statements.

FS-8

SAFECO Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

SAFECO Corporation (SAFECO or the Corporation) is a Washington corporation that owns operating subsidiaries engaged in property and casualty insurance, surety, life insurance and asset management. These operations generated virtually all of the 2001 revenues. SAFECO’s businesses operate on a nationwide basis. Non-U.S. operations are insignificant. Products are marketed primarily through independent agents. Approximately 35% of SAFECO’s property and casualty premiums are written in the three West Coast states of California, Washington and Oregon.

Basis of Consolidation and Reporting

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include amounts based on the best estimates and judgments of management. The consolidated financial statements include SAFECO Corporation and its subsidiaries. SAFECO has no material unconsolidated subsidiaries and no interests in off-balance sheet special purpose entities. All significant intercompany transactions and accounts have been eliminated in the consolidated financial statements. Prior year information has been reclassified to conform to the current year presentation.

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and claims and expenses during the reporting period. Actual results could differ from those estimates.

Accounting For Property & Casualty Operations

Premiums Earned

Property and casualty insurance premiums are included in income as earned over the terms of the respective policies. The unearned portion is determined using a daily pro rata basis and is reflected as a liability for unearned premiums, before the effect of reinsurance. See Note 5 for more information on reinsurance.

Losses and Loss Adjustment Expenses

Unpaid losses and loss adjustment expenses (LAE) represent the estimated liability for claims reported plus losses incurred but not yet reported and the related estimated LAE. The liability for losses and LAE is determined using “case basis” evaluations and statistical analyses, and represents an estimate of the ultimate net cost of all losses incurred but not paid through December 31 of each year. These estimates are continually reviewed and adjusted as necessary; such adjustments are reflected in current operations. See Note 4 for more information on loss and LAE reserves.

The process of estimating claim reserves is complex and imprecise due to a number of variables. These variables are affected by both internal and external events such as changes in claims handling procedures, trends in loss costs, inflation, judicial trends and legislative changes. Many of these items are difficult to quantify, particularly on a prospective basis. Additionally, there may be significant lags between the occurrence of the insured event and the time it is actually reported to the insurer. SAFECO continually refines reserve estimates in a regular ongoing process as experience develops and further claims are reported and settled. SAFECO reflects adjustments to reserves in the results of operations in the periods in which the estimates are

FS-9

changed. In establishing reserves, SAFECO takes into account estimated recoveries for reinsurance, salvage and subrogation.

Salvage and subrogation recoverables are accrued using the “case basis” method for large recoverables and statistical estimates based on historical experience for smaller recoverables. Estimated recoverable amounts deducted from the liability for losses and LAE net of reinsurance were $254.4 and $231.7 at December 31, 2001 and 2000, respectively.

The property and casualty insurance companies’ reserves for unpaid losses and LAE are presented gross of amounts recoverable from reinsurers. See Note 5 for more information on reinsurance.

Policy Acquisition Expenses

Property and casualty insurance acquisition costs, consisting of commissions and certain other underwriting expenses, that vary with and are primarily related to the production of business, are deferred and amortized over the effective period of the related insurance policies. Investment income is considered in determining whether a premium deficiency exists. If investment income was not considered, a premium deficiency would exist. This assessment of recoverability is performed in aggregate at the following levels: total personal lines, total commercial lines and surety. Any premium deficiencies would result in additional deferred acquisition cost amortization in the period determined; no deficiencies have been indicated in the periods presented.

Accounting for Life & Investments Operations

Premiums Earned

Life insurance premiums for traditional individual life policies are reported as income when due from the policyholder. These policies, which include whole life and guaranteed renewable term policies, are long-duration contracts. Group life and health policy revenue is recognized when earned, over the life of the policy. The unearned premiums are reflected as liabilities on the balance sheet. Group life and health policies are short-duration contracts that include provisions allowing SAFECO to adjust the premiums for the group or cancel the group contract.

Funds received under retirement services deposit contracts, annuity contracts and universal life policies were $1,051.1, $1,266.0 and $1,849.5 in 2001, 2000 and 1999, respectively. These amounts are recorded as liabilities rather than premium income when received. Revenues for universal life products consist of front-end loads and mortality and expense charges assessed against individual policyholder account balances. Front-end loads are recognized as income when earned, over the life of the policy. Mortality and expense charges are recognized as income when earned, as amounts are assessed against individual policyholder account balances ratably over the contract year. Administration fees are recognized as income as services are provided and amounts are assessed against policyholder account balances.

Life Policy Liabilities

Liabilities for universal life insurance policies, deferred annuity contracts and retirement services deposit contracts are equal to the accumulated account value of such policies or contracts as of the valuation date. For structured settlement annuities, future benefits are either fully guaranteed or are contingent on the survivorship of the annuitant. Contingent future benefits are discounted with best-estimate mortality assumptions, which include provisions for ongoing mortality improvement. Guaranteed and contingent future benefits are discounted at interest rates that grade from an average of 8.07% to ultimate rates that average 7.23%.

Liabilities for future policy benefits under traditional individual life insurance policies have been computed on the level premium method and reflect interest, mortality and persistency assumptions based on actual experience modified to provide for adverse deviation. These liabilities are contingent upon the death of the insured while the policy is in force. Estimates of future benefits are based upon assumptions of mortality and policy persistency that include provisions for adverse deviation from best estimates. Mortality assumptions are derived from both company-specific and industry statistics. Future benefits are discounted at interest rates that vary by year of issue and average 6.5%.

FS-10

Policy Acquisition Expenses

Life insurance acquisition costs, consisting of commissions and certain other underwriting expenses, that vary with and are primarily related to the production of new business, are deferred. Acquisition costs for deferred annuity contracts, retirement services deposit contracts and universal life insurance policies are amortized over the lives of the contracts or policies in proportion to the present value of estimated future gross profits. To the extent actual experience differs from assumptions and to the extent estimates of future gross profits require revision, the unamortized balance of deferred policy acquisition costs is adjusted accordingly; such adjustments are included in current operations. No material adjustments were made in 2001 or 2000. In 1999 a $13.0 write-off of deferred policy acquisition cost related to the discontinued equity indexed annuity product was made. The unamortized balance of deferred policy acquisition costs is adjusted for the impact on estimated future gross profits as if net unrealized appreciation and depreciation on securities had been realized at the balance sheet date. The impact of this adjustment, net of tax, is included in accumulated other comprehensive income (loss) in shareholders’ equity. Acquisition costs for traditional individual life insurance policies are amortized over the premium payment period of the related policies using assumptions consistent with those used in computing policy benefit liabilities.

Accounting for Investments

Effective October 1, 2000, SAFECO reclassified its fixed maturities held-to-maturity investment portfolio to available-for-sale. Fixed maturities are classified as available-for-sale and are carried at fair value, with changes in unrealized appreciation and depreciation recorded directly to shareholders’ equity (other comprehensive income), net of deferred income taxes and deferred policy acquisition costs valuation allowance.

All marketable equity securities are classified as available-for-sale and are carried at fair value, with changes in unrealized appreciation and depreciation recorded directly to shareholders’ equity (other comprehensive income), net of deferred income taxes.

Derivative financial instruments are carried at fair value. Changes in the fair value of cash flow hedges are recorded in other comprehensive income, net of deferred income taxes. Changes in the value of fair value hedges are recorded in current period earnings.

When the collectibility of income for certain investments is considered doubtful, they are placed on non-accrual status and thereafter interest income is recognized only when payment is received. Each investment that has declined in fair value below cost is monitored closely and if the decline is judged to be other than temporary, the security is written down to fair value. In determining whether a decline in the fair value of a security below cost is other than temporary, SAFECO considers the relevant facts and circumstances related to the security. These include: (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer, including any specific events that influence the operations of the issuer or that affect its future earnings potential; and (3) SAFECO’s intent and ability to retain the investment for a period of time sufficient to allow for a recovery in value.

The cost of security investments sold is determined by the “identified cost” method.

Mortgage loans are carried at outstanding principal balances, less an allowance for mortgage loan losses. The allowance for mortgage loan losses was $10.5 and $10.8 at December 31, 2001 and 2000, respectively. A mortgage loan is considered impaired when it is probable that SAFECO will be unable to collect principal and interest amounts due. For mortgage loans that are determined to be impaired, a reserve is established for the difference between the amortized cost and fair value of the underlying collateral. Impaired loans were not significant at December 31, 2001 and 2000.

Short-term investments are carried at cost, which approximates market value.

SAFECO engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time. Initial collateral is required at a rate of 102% of the market value of a loaned security. The collateral is deposited by the borrower with a lending agent and retained and invested by the lending agent to generate additional income according to SAFECO’s guidelines. The market value of the loaned securities is monitored on a daily basis, with additional collateral obtained or refunded as the market value of the loaned securities fluctuates.

FS-11

Land, Buildings and Equipment

Land, buildings and equipment are classified as other investments or as land, buildings and equipment for company use and are carried at cost less accumulated depreciation.

SAFECO provides depreciation on buildings for company use, furniture and automobiles at various rates based on estimated useful lives using straight-line and accelerated methods. Depreciation expense was $69.0, $55.0 and $54.0 for 2001, 2000 and 1999, respectively.

Goodwill

Goodwill represents the excess of the cost of businesses acquired over the fair value of their net assets. Prior to March 31, 2001 goodwill was amortized on a straight-line basis over periods, not exceeding 30 years, that corresponded with the benefits estimated to be derived from the acquisitions.

In the first quarter of 2001, effective March 31, 2001, SAFECO elected to change its accounting policy for assessing goodwill from one based on undiscounted cash flows to one based on a market-value method. The market-value method was determined to be a preferable way to assess the current value of goodwill. As a result, SAFECO recorded a write-off of $1,201.0 ($916.9 after-tax) in the first quarter.

The market value method used to assess the recoverability of goodwill compared SAFECO’s market capitalization (stock price multiplied by shares outstanding) to the reported book value (total shareholders’ equity) of the Corporation. Given the extent of the shortfall of market capitalization compared to the reported book value as of March 31, 2001 and that a similar shortfall had existed for almost two years, SAFECO concluded that under the new method the entire goodwill asset was impaired and a write-off of the full amount was necessary. The vast majority of this goodwill (97%) resulted from the 1997 acquisition of American States Financial Corporation (American States) whose operations have been fully integrated into those of the Corporation.

In the fourth quarter of 2001, after completion of a study, SAFECO determined that its goodwill in R.F. Bailey (Underwriting Agencies) Ltd. was impaired resulting in an additional write-down of $13.1 ($8.5 after tax).

See the New Accounting Standards section of this note for FASB Statement 141 “Business Combinations” and FASB Statement 142 “Goodwill and Other Intangible Assets” for recent authoritative literature addressing goodwill.

Common Stock

The Washington Business Corporation Act provides that reacquired shares of a Washington State corporation revert to the status of authorized but unissued shares. Accordingly, the Corporation has reduced capital stock and retained earnings to reflect the repurchase of shares and does not show treasury stock as a separate reduction.

Earnings Per Share

Basic earnings per share are calculated by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if options granted under various stock-based compensation plans were exercised resulting in the issuance of common shares that would then share in the Corporation’s earnings.

Due to the net loss in 2001 the Corporation used basic weighted-average shares outstanding to calculate earnings per share of common stock. Using diluted weighted-average shares outstanding would have resulted in a lower net loss per share of common stock.

FS-12

New Accounting Standards

Financial Accounting Standards Board (FASB) pronouncements which have recently affected SAFECO or will in the near future are as follows:

FASB Statement 133, “Accounting for Derivative Instruments and Hedging Activities”

The FASB issued Statement 133 (SFAS 133), “Accounting for Derivative Instruments and Hedging Activities” in June 1998. The Statement amends or supersedes several previous FASB statements and requires recognizing all derivatives (including certain derivative instruments embedded in other contracts) as either assets or liabilities in the statement of financial position and measuring those instruments at fair value. A derivative is typically defined as an instrument whose value is “derived” from an underlying instrument, index or rate, has a notional amount and can be net settled. The accounting for changes in the fair value of a derivative depends on the use of the derivative and the nature of any hedge designation thereon.

In June 2000, the FASB issued Statement 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities”, which addresses a limited number of implementation issues arising from SFAS 133.

Effective January 1, 2001, SAFECO adopted SFAS 133, as amended. All derivatives, whether designated anew in hedging relationships on January 1, 2001 or not, are required to be recorded on the balance sheet at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability (fair value hedge), (b) a hedge of the exposure to variable cash flows of a forecasted transaction (cash flow hedge), or (c) a hedge of the foreign currency exposure of a net investment in foreign operation. Additional information on the impact of adoption of SFAS 133 is in Note 3.

FASB Statement 141, “Business Combinations”

The FASB issued Statement 141 (SFAS 141), “Business Combinations” in July 2001. This statement changes the approach companies use to account for a business combination. It eliminates the pooling-of-interests method of accounting for business combinations and further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of SFAS 141 are effective for any business combination completed after June 30, 2001. SAFECO adopted this statement effective July 1, 2001 with no impact on its financial statements.

FASB Statement 142, “Goodwill and Other Intangible Assets”

The FASB issued Statement 142 (SFAS 142), “Goodwill and Other Intangible Assets” in July 2001. Under SFAS 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt SFAS 142 in fiscal years beginning after December 15, 2001. The Corporation will adopt SFAS 142 effective January 1, 2002. SAFECO does not expect the adoption of SFAS 142 to have a material impact on its financial statements.

FASB Statement 143, “Accounting for Asset Retirement Obligations”

The FASB issued Statement 143 (SFAS 143), “Accounting for Asset Retirement Obligations” in August 2001. This standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The standard is effective for fiscal years beginning after June 15, 2002. The Corporation will adopt SFAS 143 effective January 1, 2003. SAFECO does not expect the adoption of this statement to have a material impact on its financial statements.

FASB Statement 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”

The FASB issued Statement 144 (SFAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets” in October 2001. The FASB’s new rules on asset impairment supersede FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” and

FS-13

provide a single accounting model for long-lived assets to be disposed of. The standard is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years, with early application encouraged. The Corporation will adopt SFAS 144 effective January 1, 2002. SAFECO does not expect the adoption of this statement to have a material impact on its financial statements.

NOTE 2 — INVESTMENTS

Fixed Maturities and Marketable Equity Securities

The following is a summary of fixed maturities and marketable equity securities.

Cost or

Gross

Net

Amortized

Unrealized

Fair

DECEMBER 31, 2001

Cost

Gains

Losses

Gain

Value

Fixed Maturities

U.S. Government & Agencies

1,408.1

146.3

(2.1

)

144.2

1,552.3

State and Political Subdivisions

2,887.1

278.5

(23.4

)

255.1

3,142.2

Foreign Governments

290.8

59.7

(0.1

)

59.6

350.4

Corporate Securities

11,508.8

430.7

(300.4

)

130.3

11,639.1

Mortgage-Backed Securities

4,582.3

203.6

(25.8

)

177.8

4,760.1

Total Fixed Maturities

20,677.1

1,118.8

(351.8

)

767.0

21,444.1

Marketable Equity Securities

940.5

714.0

(58.1

)

655.9

1,596.4

Total

21,617.6

1,832.8

(409.9

)

1,422.9

23,040.5


		Cost or		Gross		Gross			Net
		Amortized		Unrealized		Unrealized			Unrealized			Fair
DECEMBER 31, 2000		Cost		Gains		Losses			Gain (Loss)			Value

Fixed Maturities
	U.S. Government & Agencies	$	1,582.5	$	178.4	$	(4.7	)	$	173.7		$	1,756.2
	State and Political Subdivisions		2,916.6		315.9		(12.0	)		303.9			3,220.5
	Foreign Governments		303.6		52.2		(1.2	)		51.0			354.6
	Corporate Securities		11,240.5		261.7		(477.4	)		(215.7	)		11,024.8
	Mortgage-Backed Securities		4,344.9		149.6		(20.4	)		129.2			4,474.1

	Total Fixed Maturities		20,388.1		957.8		(515.7	)		442.1			20,830.2
Marketable Equity Securities			875.9		996.3		(56.8	)		939.5			1,815.4

Total		$	21,264.0	$	1,954.1	$	(572.5	)	$	1,381.6		$	22,645.6

Fixed Maturities by Maturity Date

The cost or amortized cost and fair value of fixed maturities at December 31, 2001, by contractual years-to-maturity, are presented below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.


	Cost or
	Amortized		Fair
DECEMBER 31, 2001	Cost		Value

One Year or Less	$	598.4	$	608.3
Over One Year Through Five Years		4,067.4		4,191.0
Over Five Years Through Ten Years		2,438.0		2,515.3
Over Ten Years		8,991.0		9,369.4
Mortgage-Backed Securities		4,582.3		4,760.1

Total Fixed Maturities	$	20,677.1	$	21,444.1

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The following summarizes the components of Accumulated Other Comprehensive Income included in the Consolidated Balance Sheets:


DECEMBER 31	2001			2000*			1999

Fixed Maturities & Marketable Equity Securities+	$	1,422.9		$	1,381.6		$	604.0
Foreign Currency and Other Adjustments†		(9.4	)		(11.2	)		(10.4	)
Deferred Policy Acquisition Costs Valuation Allowance‡		(9.3	)		—			(0.2	)
Deferred Income Taxes		(487.4	)		(475.5	)		(203.7	)

Accumulated Other Comprehensive Income	$	916.8		$	894.9		$	389.7

*		Effective October 1, 2000, the fixed maturities held-to-maturity portfolio was reclassified to available-for-sale.




+		Related income tax expense: $494.0, $479.4 and $207.4.




†		Related income tax benefit: $3.3, $3.9 and $3.6.




‡		Related income tax benefit: $3.3, $0.0 and $0.1.

The following analysis summarizes the changes in unrealized appreciation (depreciation) on investment securities (includes fixed maturities held-to-maturity and available-for-sale):


DECEMBER 31	2001			2000*			1999

CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Fixed Maturities and Marketable Equity Securities	$	41.3		$	777.6		$	(1,655.7	)
Foreign Currency and Other Adjustments		1.8			(0.8	)		1.0
Deferred Policy Acquisition Costs Valuation Allowance		(9.3	)		0.2			48.9
Deferred Income Taxes		(11.9	)		(271.8	)		561.9

Change in Unrealized Appreciation (Depreciation)	$	21.9		$	505.2		$	(1,043.9	)

Effective October 1, 2000, the fixed maturities held-to-maturity portfolio was reclassified to available-for-sale.

Net Investment Income

The following is a summary of net investment income.


YEAR ENDED DECEMBER 31		2001			2000			1999

Interest
	Fixed Maturities	$	1,450.6		$	1,478.5		$	1,429.5
	Mortgage Loans		68.3			65.6			57.6
	Short-Term Investments		43.4			27.1			19.5
Dividends
	Marketable Equity Securities		38.2			47.6			53.1
	Redeemable Preferred Stock		24.1			24.3			21.1
Other Investment Income			36.6			1.7			14.5

Total Investment Income			1,661.2			1,644.8			1,595.3
Investment Expenses			(11.9	)		(11.3	)		(7.0	)

Net Investment Income		$	1,649.3		$	1,633.5		$	1,588.3

The carrying value of investments in fixed maturities and mortgage loans that have not produced income for the last twelve months is less than 1% of the total of such investments at December 31, 2001.

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Realized Investment Gains (Losses)


YEAR ENDED DECEMBER 31		2001			2000			1999

REALIZED INVESTMENT GAINS (LOSSES)*
Fixed Maturities		$	(35.5	)	$	(51.1	)	$	(0.2	)
Marketable Equity Securities			142.6			190.6			82.8
Financial Instruments			(14.1	)		—			—
Investment Real Estate			—			—			35.1

	Realized Investment Gain Before Income Taxes		93.0			139.5			117.7
Applicable Income Taxes			(31.5	)		(49.1	)		(41.2	)

Realized Investment Gain		$	61.5		$	90.4		$	76.5

Amounts include investment write-downs of $126.8, $35.7 and $0.6, pretax, for the years ended December 31, 2001, 2000 and 1999, respectively.

The proceeds from sales of investment securities and related gains (losses) for 2001 are as follows:

Fixed

Maturities

Marketable

Available-

Equity

Financial

YEAR ENDED DECEMBER 31, 2001

For-Sale

Securities

Instruments

Proceeds from Sales

2,418.0

437.6

—

Gross Realized Gains

86.5

194.7

—

Gross Realized Losses

(31.9

)

(24.2

)

(7.8

)

Realized Gains (Losses)

54.6

170.5

(7.8

)

Write-downs

(98.4

)

(28.4

)

—

Other, Including Gains (Losses) on Calls and Redemptions

8.3

0.5

(6.3

)

Total Realized Gain (Loss)

(35.5

)

142.6

(14.1

)

The proceeds from sales of investment securities and related gains (losses) for 2000 are as follows:


	Fixed			Fixed
	Maturities			Maturities		Marketable
	Available-			Held-To-		Equity
YEAR ENDED DECEMBER 31, 2000	For-Sale			Maturity		Securities

Proceeds from Sales	$	2,265.4		$	0.1	$	661.7

Gross Realized Gains	$	47.5		$	—	$	268.5
Gross Realized Losses		(82.1	)		—		(77.9	)

Realized Gains (Losses)		(34.6	)		—		190.6
Write-downs		(35.7	)		—		—
Other, Including Gains on Calls and Redemptions		19.2			—		—

Total Realized Gain (Loss)	$	(51.1	)	$	—	$	190.6

FS-16

The proceeds from sales of investment securities and related gains (losses) for 1999 are as follows:


	Fixed			Fixed
	Maturities			Maturities			Marketable
	Available-			Held-To-			Equity
YEAR ENDED DECEMBER 31, 1999	For-Sale			Maturity			Securities

Proceeds from Sales	$	3,715.4		$	6.3		$	298.1

Gross Realized Gains	$	90.0		$	—		$	111.0
Gross Realized Losses		(85.8	)		(6.3	)		(28.2	)

Realized Gains (Losses)		4.2			(6.3	)		82.8
Write-downs		(0.6	)		—			—
Other, Including Gains on Calls and Redemptions		2.5			—			—

Total Realized Gain (Loss)	$	6.1		$	(6.3	)	$	82.8

The 2000 and 1999 sales of fixed maturities held-to-maturity were made due to evidence of significant deterioration in the bond issuer’s creditworthiness.

The following table summarizes SAFECO’s allowance for mortgage loan losses:


DECEMBER 31	2001			2000		1999

Allowance at Beginning of Year	$	10.8		$	10.8	$	11.2
Loans Charged-off as Uncollectible		(0.3	)		—		(0.4	)

Allowance at End of Year	$	10.5		$	10.8	$	10.8

These allowances relate to mortgage loan investments ($924.2 and $823.0 at December 31, 2001 and 2000, respectively), the majority of which are held by SAFECO Life Insurance Company. The total investment in impaired loans was less than $1.0 at December 31, 2001 and 2000.

NOTE 3 — FINANCIAL INSTRUMENTS

Fair value amounts of financial instruments have been determined using available market information and appropriate valuation methodologies including discounted cash flows, as appropriate for the various financial instruments. Considerable judgment is required in developing certain of the estimates of fair value. They are not necessarily indicative of the amounts that could be realized in a current market exchange.

Fair value amounts for fixed maturities and marketable equity securities were determined using market prices for publicly traded securities. SAFECO’s investment portfolio includes approximately $297.0 and $403.8 of fixed maturities at December 31, 2001 and 2000, respectively that are not publicly traded. Fair values for these securities have been estimated using quoted market prices of comparable instruments and/or internally prepared valuations using third party modeling tools.

The fair values for mortgage loans have been estimated by discounting the projected cash flows using the current rate at which loans would be made to borrowers with similar credit ratings and for the same maturities.

For cash, short-term investments, accounts receivable, policy loans and other liabilities, carrying value is a reasonable estimate of fair value.

The fair values of investment contracts (funds held under deposit contracts) with defined maturities are estimated by discounting projected cash flows using rates that would be offered for similar contracts with the same remaining maturities. For investment contracts with no defined maturities, fair values are estimated to be the present surrender value.

The carrying values of the Corporation’s commercial paper, as well as other debts that have variable interest rates, are reasonable estimates of fair value. The fair values of the 7.875% Medium-Term notes, the 7.875% notes, the 6.875% notes and the Capital Securities are estimated based on quotes from broker/dealers who make markets in similar securities.

FS-17

The fair values of the derivative financial instruments generally represent the estimated amounts that SAFECO would expect to receive or pay upon termination of the contracts at the reporting date. Quoted fair values are available for most derivatives. For derivative financial instruments not actively traded, fair values are estimated using values obtained from independent pricing services, internal modeling or quoted market prices of comparable instruments.

Other insurance-related financial instruments are exempt from fair value disclosure requirements.

Fair values of financial instruments are as follows:

DECEMBER 31

2001

2000

Carrying

Amount

Fair Value

Amount

Fair Value

FINANCIAL ASSETS

Fixed Maturities

21,444.1

20,830.2

Marketable Equity Securities

1,596.4

1,815.4

Mortgage Loans

924.2

928.0

823.0

792.0

Separate Account Assets

1,208.1

1,275.1

Derivative Financial Instruments

Interest Rate Swaps

49.8

—

2.3

Options/Futures

11.9

0.4

FINANCIAL LIABILITIES

Funds Held Under Deposit Contracts

14,624.2

14,314.0

14,085.7

13,977.0

Commercial Paper

299.0

349.8

7.875% Medium Term Notes Due 2003

323.0

300.0

305.0

7.875% Notes Due 2005

200.0

207.0

200.0

203.0

6.875% Notes Due 2007

200.0

196.0

200.0

193.0

Other Debt

74.6

76.0

80.7

80.0

Separate Account Liabilities

1,208.1

1,275.1

Derivative Financial Instruments

Single Credit Default Swaps

10.4

—

Interest Rate Swaps

18.0

—

3.9

Options/Futures

47.1

—

Capital Securities

843.4

721.0

843.0

700.0

Derivative Financial Instruments

SAFECO uses derivative financial instruments, including interest rate swaps, options, forward contracts and financial futures, as a means of hedging exposure to equity price changes and/or interest rate risk on anticipated transactions or existing assets and liabilities. The Corporation’s insurance subsidiaries do not hold or issue derivative instruments for trading purposes.

These derivative financial instruments have off-balance sheet risk. Derivative financial instruments with off-balance sheet risk involve, to varying degrees, elements of credit and market risk in excess of the amount recognized on the consolidated balance sheet. The contract or notional amounts of these instruments reflect the extent of involvement SAFECO has in a particular class of derivative financial instrument. However, the maximum loss of cash flow associated with these instruments can be less than these amounts. For interest rate swaps, forward contracts and financial futures, credit risk is limited to the amount that it would cost SAFECO to replace the contract. SAFECO is the writer of option contracts and as such has no credit risk since the counterparty has no performance obligation after it has paid a premium.

SAFECO monitors the creditworthiness of counterparties to these derivative financial instruments by using criteria of acceptable risk that are consistent with on-balance sheet derivative financial instruments. The controls include credit approvals, limits and other monitoring procedures.

SAFECO’s consolidated investments in mortgage-backed securities of $4,760.1 at market value at December 31, 2001 ($4,474.1 at December 31, 2000) are primarily residential collateralized mortgage obligations (CMOs), pass-throughs and commercial loan-backed mortgage obligations (CMBS). CMOs and CMBS, while

FS-18

technically defined as derivative instruments, are exempt from derivative disclosure requirements. SAFECO’s investment in CMOs and CMBS comprised of the riskier, more volatile type (e.g., principal only, inverse floaters, etc.) has been intentionally limited to only a small amount — less than 1% of total mortgage-backed securities at both December 31, 2001 and 2000.

The Corporation has two interest rate swap agreements outstanding with notional amounts totaling $300.0 ($150.0 each) that replace variable rates with fixed rates of 5.9% at December 31, 2001 and 2000. The two swaps were entered into in December 1997 and mature in December 2002 and December 2007. The estimated fair value of the liability for these interest rate swaps at December 31, 2001 and 2000 was $13.6 and $3.9, respectively. These interest rate swaps are classified as cash flow hedges in accordance with SFAS 133. See discussion below regarding the impact of SFAS 133 on these interest rate swaps.

The Corporation also has interest rate swap agreements outstanding with notional amounts totaling $300.0 ($150.0 each) that replace fixed rates with variable rates at 65.03 basis points over the 90-day LIBOR rate. These swaps were entered into in March 2000 and mature in March 2003. The estimated fair value of the assets for these interest rate swaps at December 31, 2001 and 2000 was $23.0 and $8.9, respectively. These interest rate swaps are classified as fair value hedges in accordance with SFAS 133. See discussion below regarding the impact of SFAS 133 on these interest rate swaps.

There were no material swap terminations in 2001, 2000 or 1999. The net interest accrued under these agreements is recorded as an adjustment to interest expense. Exposure to credit risk relating to interest rate swaps is the risk that the counterparty will be unable to perform its obligations. This risk is mitigated through credit review, approval controls and by entering into agreements with only highly rated counterparties.

As a result of adopting SFAS 133 on January 1, 2001 and in accordance with the transition provisions, SAFECO recorded a loss of $3.2 ($2.1 after-tax or $0.02 per share), which represents the cumulative effect of the adoption in the Consolidated Statements of Income (Loss). In addition, the Corporation also recorded a loss of $3.0 ($1.9 after-tax) to accumulated other comprehensive income (AOCI) related to the adoption impact of SFAS 133.

SAFECO formally documents all relationships between the hedging instruments and hedged items, as well as its risk-management objectives and strategies for undertaking various hedge transactions. SAFECO links all hedges that are designated as fair value hedges to specific assets or liabilities on the balance sheet. SAFECO links all hedges that are designated as cash flow hedges to forecasted transactions. SAFECO also assesses, both at the inception of the hedge and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge, SAFECO discontinues hedge accounting prospectively. No fair value hedges or cash flow hedges were not recognized or discontinued during the year ended December 31, 2001.

SAFECO’s derivatives and hedges are described further below:

Fair Value Hedges

SAFECO uses interest rate swaps to offset the change in value of certain fixed rate assets and liabilities. In calculating the effective portion of the fair value hedges, the changes in the fair value of the hedge and the hedged item are recognized in realized gains in the Consolidated Statements of Income (Loss). Differences between the changes in the fair value of the hedge and the hedged item represent hedge ineffectiveness and are recognized in realized gain or loss. Fair value hedge ineffectiveness resulted in a gain of $4.0 for the year ended December 31, 2001. At January 1, 2001, the cumulative effect of the adoption of SFAS 133 related to fair value hedges was a loss of $2.6 ($1.7 after-tax). This cumulative loss at adoption was reported as the cumulative effect of change in accounting principle reported in the Consolidated Statements of Income (Loss).

FS-19

Cash Flow Hedges

SAFECO also uses interest rate swaps to hedge the variability of future cash flows associated with variable rate assets and debt. The changes in the fair value of the hedge and the related interest are recognized in AOCI. Differences between the changes in the fair value of the hedge and the hedged items represent hedge ineffectiveness and are recognized in interest expense. Cash flow hedge ineffectiveness related to continuing operations resulted in a decrease of $0.3 to interest expense for 2001. At January 1, 2001, the cumulative effect of the adoption of SFAS 133 was a loss of $3.0 ($1.9 after-tax) and was recorded to AOCI. At December 31, 2001, AOCI included a loss of $1.5 ($1.0 after-tax) for the changes in fair value of cash flow hedges. The Corporation estimates that $13.3 of derivative instrument and hedging activity gains included in AOCI will be reclassified into earnings during the next twelve months.

For the seven months ended July 31, 2001, a loss of $1.4, related to cash flow hedge ineffectiveness was included in Income from Discontinued Credit Operations.

Other Derivatives

SAFECO Credit owned a number of derivatives (swaptions) that did not qualify for hedge treatment as defined under SFAS 133. Changes in the fair value of the swaptions were recognized in interest expense. For the seven months ended July 31, 2001 a loss of $0.1 was reported as an increase to interest expense for discontinued operations. SAFECO Credit’s operating results have been reported as discontinued operations on the Consolidated Statements of Income (Loss). At January 1, 2001, the cumulative effect of the adoption of SFAS 133 related to the swaptions was a loss of $0.6 ($0.4 after-tax). This cumulative loss at adoption was reported as the cumulative effect of change in accounting principle reported in the Consolidated Statements of Income (Loss). As described further in Note 11 the Corporation completed the sale of SAFECO Credit to GECC on August 15, 2001. These derivatives were transferred to GECC as part of the sale of SAFECO Credit to GECC.

In 1997, SAFECO introduced an equity indexed annuity (EIA) product that credits the policyholder based on a percentage of the gain in the S&P 500 Index. SAFECO has a hedging program with the objective to hedge the exposure to changes in the S&P 500 Index. The program consists of buying and writing S&P 500 options, buying Treasury interest rate futures and trading S&P 500 futures and swaps. Sales of the EIA product were suspended in the fourth quarter of 1998. As permitted under a grandfathering clause in SFAS 133, SAFECO elected not to apply the fair value adjustment requirement of this statement to the embedded derivatives contained in the liability related to EIA products sold prior to January 1, 1999. The change in fair value of the options, futures and swaps used to hedge the EIA liability is recognized as an adjustment to realized investment gain in the Consolidated Statements of Income (Loss). For 2001, SAFECO recognized losses of $0.3 on these options, futures and swaps.

The Corporation’s wholly-owned subsidiary, SAFECO Financial Products (SFP) was incorporated in 2000, to write S&P 500 index options to mitigate the risk associated with the equity indexed annuity. Due to the success of this activity, SFP engaged in limited trading for its own account in 2001 by focusing on selling credit protection through single credit default swaps and investing in convertible bonds. SFP’s activities are not designed as hedging activities. Consequently, both changes in the fair values of these instruments and any realized gain or loss are recognized in current income. Income before realized loss was $6.7 and $2.3 for 2001 and 2000, respectively. Realized loss was $18.2 for 2001 including the $7.8 loss from the Enron single credit default swap. There were no realized gains or losses in 2000.

FS-20

NOTE 4 — PROPERTY & CASUALTY LOSS RESERVES

Unpaid losses and loss adjustment expenses (LAE) represent the estimated reserves for claims reported plus losses incurred but not reported (IBNR) and the related LAE. Although considerable variability is inherent in such estimates, SAFECO believes that the liability for unpaid losses and LAE is adequate as of December 31, 2001. The process of estimating claim reserves is complex and imprecise due to a number of variables. These variables are affected by both internal and external events such as changes in claims handling procedures, trends in loss costs, inflation, judicial trends and legislative changes. Many of these items are difficult to quantify, particularly on a prospective basis. Additionally, there may be significant lags between the occurrence of the insured event and the time it is actually reported to the insurer. SAFECO continually refines reserve estimates in a regular ongoing process as experience develops and further claims are reported and settled. SAFECO reflects adjustments to reserves in the results of operations in the periods in which the estimates are changed. In establishing reserves, SAFECO takes into account estimated recoveries for reinsurance, salvage and subrogation.

Property & Casualty Loss Reserve Strengthening

The review of loss reserve adequacy concluded that personal lines reserves were adequate.

FS-21

The following is a summary of the activity related to SAFECO’s property and casualty insurance companies’ reserves for losses and LAE. The year-end reserve amounts below are net of related reinsurance recoverables of $415.9, $343.6 and $309.5 for 2001, 2000 and 1999, respectively.


DECEMBER 31		2001		2000		1999

Loss and LAE Reserves at Beginning of Year		$	4,269.1	$	4,069.1	$	3,966.3

Incurred Loss and LAE for Claims Occurring in the Current Year			3,619.1		3,621.7		3,353.0
Increase in Estimated Loss and LAE for Claims Occurring in Prior Years			345.1		148.3		78.8

Total Incurred Loss and LAE			3,964.2		3,770.0		3,431.8

Loss and LAE Payments for Claims Occurring During
	Current Year		1,976.8		2,059.3		1,926.4
	Prior Years		1,618.7		1,510.7		1,402.6

	Total Loss and LAE Payments		3,595.5		3,570.0		3,329.0

Total Loss and LAE Reserves at End of Year		$	4,637.8	$	4,269.1	$	4,069.1

Property & Casualty operations in 2000 were charged $148.3 from increases in estimated loss and loss and LAE for claims occurring in prior years. These increases were due to adverse development within commercial operations in workers’ compensation ($50.9), general liability ($44.4), commercial auto ($23.5) and in other lines of business ($29.5) as the costs of settling claims increased. Workers’ compensation development was due to continued adverse development of prior reported claims as well as IBNR reserve additions. General liability development was due primarily to continued adverse development of construction defect claims related to the SAFECO Business Insurance operation. Commercial auto development was due to higher than expected loss costs in commercial operations on prior reported claims.

Property & Casualty operations in 1999 were charged $78.8 from increases in estimated loss and LAE for claims occurring in prior years, primarily in construction defect, asbestos and environmental, and workers’ compensation. For both construction defect and asbestos and environmental, increased reserve estimates resulted from higher than expected reported claims in 1999. The increased reserve estimates for workers’ compensation resulted from SAFECO’s re-evaluation of loss exposures on claims related to larger commercial insureds and to an upturn in medical costs and less favorable workers’ compensation legislation.

NOTE 5 — REINSURANCE

SAFECO’s insurance subsidiaries use treaty and facultative reinsurance to help manage exposures to loss. The availability and cost of reinsurance are subject to prevailing market conditions, both in terms of price and available capacity.

Although the reinsurer is liable to SAFECO to the extent of the reinsurance ceded, SAFECO remains primarily liable to the policyholder as the direct insurer on all risks reinsured. SAFECO evaluates the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies. The magnitude of recent losses in the reinsurance industry is expected to impact the financial strength of reinsurers which may result in collectibility or recoverability issues. However, to SAFECO’s knowledge, none of its reinsurers is currently experiencing financial difficulties. SAFECO’s business is not substantially dependent upon any single reinsurance account.

Because the amount of reinsurance recoverables can vary depending on the size of an individual loss or, in some cases, the aggregate amount of all losses in a particular line of business, the exact amount of the

FS-22

reinsurance recoverables is not known until all losses are settled. As a result, SAFECO must estimate the amount of reinsurance recoverables it anticipates receiving based on the terms of the reinsurance contract and historical reinsurance recovery information.

SAFECO’s insurance subsidiaries do not enter into retrospective reinsurance contracts and do not participate in any unusual or nonrecurring reinsurance transactions such as “swaps” of reserves or loss portfolio transfers. SAFECO does not use funding covers and does not participate in any surplus relief transactions.

Reinsurance recoverables are comprised of the following amounts at December 31:


DECEMBER 31		2001		2000

PROPERTY & CASUALTY INSURANCE
Reinsurance Recoverables on
	Unpaid Loss and LAE Reserves	$	415.9	$	343.6
	Paid Losses and LAE		17.2		18.9
LIFE INSURANCE
Reinsurance Recoverables on
	Policy and Contract Claim Reserves		2.5		3.2
	Paid Claims		2.5		2.9
	Life Policy Liabilities		85.1		93.1

Total Reinsurance Recoverables		$	523.2	$	461.7

The unearned premium liability is presented before the effect of reinsurance. The reinsurance amounts related to the unearned premium liability are included with other assets in the balance sheets and totaled $40.4 and $60.9 at December 31, 2001 and 2000, respectively.

The effects of reinsurance are netted against the insurance revenue and loss amounts in the Consolidated Statements of Income (Loss). These amounts are as follows:


YEAR ENDED DECEMBER 31	2001		2000		1999

Property & Casualty Insurance Ceded Earned Premiums	$	151.5	$	163.0	$	164.4
Life Insurance Ceded Earned Premiums		34.6		32.7		25.8

Total Ceded Earned Premiums	$	186.1	$	195.7	$	190.2

Property & Casualty Insurance Ceded Losses and LAE	$	130.5	$	105.3	$	147.3
Life Insurance Ceded Policy Benefits		13.2		35.6		11.8

Total Ceded Losses, LAE and Policy Benefits	$	143.7	$	140.9	$	159.1

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

FS-23

NOTE 6 — INCOME TAXES

SAFECO uses the liability method of accounting for income taxes under which deferred tax assets and liabilities are determined based on the differences between their financial reporting and their tax bases and are measured using the enacted tax rates.

Differences between income tax computed by applying the U.S. Federal income tax rate of 35% to income (loss) before income taxes and the consolidated provision (benefit) for income taxes are as follows:


YEAR ENDED DECEMBER 31	2001			2000			1999

Computed “Expected” Tax Expense (Benefit)	$	(494.7	)	$	48.8		$	108.4
Write-Off of Goodwill		137.7			—			—
Tax-Exempt Municipal Bond Income		(54.1	)		(58.2	)		(85.6	)
Dividends Received Deduction		(10.1	)		(11.9	)		(13.3	)
Proration Adjustment		8.2			9.0			12.5
Other		0.2			5.0			5.1

Consolidated Provision (Benefit) for Income Taxes	$	(412.8	)	$	(7.3	)	$	27.1

The tax effects of temporary differences which give rise to the deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000 are as follows:


DECEMBER 31	2001		2000

DEFERRED TAX ASSETS
Goodwill	$	237.8	$	—
Discounting of Loss and Loss Adjustment Expense Reserves		228.1		254.9
Unearned Premium Liability		131.3		127.3
Adjustment to Life Policy Liabilities		71.9		54.0
Capitalization of Life Policy Acquisition Costs		84.3		84.9
Impaired Security Write-downs		58.5		18.2
Postretirement Benefits		44.3		40.0
Nondeductible Accruals		25.3		29.1
Alternative Minimum Tax Carryforward		—		35.4
Net Operating Loss Carryforward		218.5		73.2
Other		63.1		52.0

Total Deferred Tax Assets		1,163.1		769.0

DEFERRED TAX LIABILITIES
Deferred Policy Acquisition Costs		222.6		212.1
Bond Discount Accrual		46.5		35.5
Accelerated Depreciation		16.6		17.0
Unrealized Appreciation of Investment Securities, Derivative Financial Instruments, Deferred Policy Acquisition Cost Valuation Allowance and Foreign Currency Adjustment		497.7		478.7
Other		60.7		92.9

Total Deferred Tax Liabilities		844.1		836.2

Net Deferred Tax Asset (Liability)	$	319.0	$	(67.2	)

The following table reconciles the deferred tax expense (benefit) in the Consolidated Statements of Income (Loss) to the net change in the deferred tax liability in the Consolidated Balance Sheets:


DECEMBER 31	2001			2000			1999

Deferred Tax Benefit	$	(405.2	)	$	(46.9	)	$	(40.0	)
Deferred Tax Changes Reported in Shareholders’ Equity
Increase (Decrease) in Liability Related to Unrealized Appreciation (Depreciation) of Investment Securities, Derivative Financial Instruments, Deferred Policy Acquisition Cost Valuation Allowance and Foreign Currency Adjustment		19.0			270.9			(562.2	)

Increase (Decrease) in Net Deferred Tax Asset or Liability	$	(386.2	)	$	224.0		$	(602.2	)

FS-24

NOTE 7 — DEBT AND CAPITAL SECURITIES

The total amount, current portions, interest rates and maturities of debt and capital securities at December 31 are as follows:


DECEMBER 31		2001				2000

		Total		Current		Total		Current

Commercial Paper, Interest Rates at December 31:
	Range: 2.5% to 3.3%; 7.0% to 7.9% Weighted Average: 3.0%; 7.1%	$	299.0	$	299.0	$	349.8	$	349.8
7.875% Medium-Term Notes Due 2003			323.0		—		300.0		—
7.875% Notes Due 2005			200.0		—		200.0		—
6.875% Notes Due 2007			200.0		—		200.0		—
Medium-Term Notes, Due 2002 and 2003; Weighted-Average Interest Rates at December 31: 7.1%; 7.1%			50.0		42.9		50.0		—
Notes and Loans Payable; Weighted-Average Interest Rates at December 31: 7.7%; 7.4%			24.6		5.9		30.7		6.5

Total Debt (Excluding Capital Securities)			1,096.6		347.8		1,130.5		356.3
8.072% Capital Securities Due 2037			843.4		—		843.0		—

Total Debt and Capital Securities		$	1,940.0	$	347.8	$	1,973.5	$	356.3

Aggregate annual principal installments payable under these obligations for each of the five years subsequent to 2001 are as follows: 2002 — $347.8; 2003 — $311.9; 2004 — $5.4; 2005 — $200.8; and 2006 — $0.8.

Debt

At December 31, 2001, the Corporation had commercial paper borrowings outstanding of $299.0. The maximum amount of commercial paper outstanding during 2001 was $449.0 and the average amount outstanding during the year was $289.3. The weighted-average interest rate for the year was 5.2%.

The Corporation entered into interest rate swap agreements to reduce the impact of changes in interest rates. The interest rate swap agreements provide only for the exchange of interest on the notional amount at the stated rates, with no multiplier or leverage. The Corporation has two interest rate swap agreements outstanding with notional amounts totaling $300.0 ($150.0 each) that replace variable rates with fixed rates of 5.9% at December 31, 2001 and 2000. The two swaps were entered into in December 1997 and mature in December 2002 and December 2007.

In March 2000, SAFECO issued $300 of medium-term notes at 7.875% which mature in March 2003. The Corporation also has interest rate swap agreements outstanding with notional amounts totaling $300.0 ($150.0 each) that replace fixed rates with variable rates at 65.03 basis points over the 90-day LIBOR rate. These swaps were entered into in March 2000 and mature in March 2003.

There were no material swap terminations in 2001, 2000, or 1999. The net interest accrued under these agreements is recorded as an adjustment to interest expense. Exposure to credit risk relating to interest rate swaps is the risk that the counterparty will be unable to perform its obligations. This risk is mitigated through credit review, approval controls and by entering into agreements with only highly rated counterparties.

The Notes and Loans Payable include real estate mortgages which are collateralized by the related investment real estate buildings and property.

SAFECO has a bank credit facility available for $800.0. The five-year facility originated in 1997 and extends to September 2002. There were no borrowings outstanding under this facility as of December 31, 2001 or 2000. The Corporation pays a fee to have the facility available and does not maintain deposits as compensating balances. This facility carries certain covenants that requires SAFECO to maintain a specified minimum level of shareholders’ equity and a maximum debt-to-capitalization ratio. As of December 31, 2001 and 2000, SAFECO was in compliance with all such covenants.

FS-25

Capital Securities

On July 15, 1997, SAFECO Capital Trust I (Capital Trust), a consolidated wholly-owned subsidiary of SAFECO Corporation, issued $850.0 of 8.072% Corporation-Obligated, Mandatorily Redeemable Capital Securities (the Capital Securities). In connection with Capital Trust’s issuance of the Capital Securities and the related purchase by the Corporation of all of Capital Trust’s common securities (the Common Securities), SAFECO Corporation issued to Capital Trust the principal amount of $876.3 of its 8.072% Junior Subordinated Deferrable Interest Debentures, due July 15, 2037 (the Subordinated Debentures). The sole assets of Capital Trust are and will be the Subordinated Debentures and any interest due thereon. The interest and other payment dates on the Subordinated Debentures correspond to the distribution and other payment dates on the Capital Securities and the Common Securities. Distributions on the Capital Securities and the Common Securities are cumulative and payable semi-annually in arrears. The Subordinated Debentures and the related income effects are eliminated in SAFECO’s financial statements.

For federal income tax purposes, the Subordinated Debentures are classified as indebtedness. Accordingly, interest on the Subordinated Debentures is deductible at the federal statutory rate of 35%.

The Capital Securities are mandatorily redeemable on July 15, 2037, the same date the Subordinated Debentures are due. The Capital Securities may be redeemed, contemporaneously with the Subordinated Debentures, beginning in 2007, at a price of 104% of principal, with the call premium graded down to zero in 2017. The Corporation’s obligations under the Subordinated Debentures and related agreements, taken together, constitute a full and unconditional guarantee of payments due on the Capital Securities.

The Corporation has the right, at any time, to defer payments of interest on the Subordinated Debentures for up to five years. Consequently, the distributions on the Capital Securities and the Common Securities would be deferred (though such distributions would continue to accrue with interest since interest would accrue on the Subordinated Debentures during any such extended interest payment period). In no case may the deferral of payments and distributions extend beyond the stated maturity dates of the respective securities. The Corporation cannot pay dividends on its common stock during such deferments.

NOTE 8 — EMPLOYEE BENEFIT PLANS

The Corporation sponsors defined contribution and defined benefit plans covering substantially all employees. A bonus plan based on overall company profit, payable to employees based on compensation, is being replaced effective January 1, 2002. The replacement plan continues to be based on company profit but is payable to employees based on business unit profitability and individual performance. The defined contribution plans include 401(k) plans and profit-sharing retirement plans. SAFECO’s 401(k) plan has a matching component under which SAFECO contributes 66.6% of the employee’s contribution, up to 6% of compensation, for eligible employees. Employer matching contributions, as well as profit-sharing contributions, are made in cash. SAFECO’s Cash Balance Plan (CBP) is a defined benefit plan that provides benefits for each year of service after 1988, based on the employee’s compensation level plus a stipulated rate of return on the benefit balance. It is SAFECO’s policy to fund the CBP on a current basis to the full extent deductible under federal income tax regulations.

In addition, SAFECO provides certain healthcare and life insurance benefits (Other Post-Retirement Benefits or OPRB) for retired employees. Substantially all employees become eligible for these benefits if they reach retirement age while working for SAFECO. The cost of these benefits is shared by SAFECO and the retiree.

FS-26

The following table summarizes the plan’s benefit obligations and assets and SAFECO’s net accrued benefit liabilities:


								Other Post-
		Pension Benefits (CBP)						Retirement Benefits

DECEMBER 31		2001			2000			2001			2000

CHANGE IN BENEFIT OBLIGATION
Benefit Obligation at Beginning of Year		$	145.9		$	143.9		$	143.5		$	135.0
	Service and Interest Costs		16.9			16.7			15.6			15.3
	Liability (Gain) Loss		0.7			2.8			(21.0	)		(2.9	)
	Net Benefits Paid		(16.7	)		(17.5	)		(4.6	)		(3.9	)

Benefit Obligation at End of Year			146.8			145.9			133.5			143.5

CHANGE IN PLAN ASSETS
Fair value of Plan Assets at Beginning of Year			129.4			141.2			3.2			2.4
	Actual Return on Plan Assets		2.1			4.2			0.1			0.1
	Company Contributions		10.2			1.5			4.2			4.6
	Benefits Paid		(16.7	)		(17.5	)		(4.6	)		(3.9	)

Fair Value of Plan Assets at End of Year			125.0			129.4			2.9			3.2

Funded Status of Plan			(21.8	)		(16.5	)		(130.6	)		(140.3	)
Unrecognized Net Actuarial (Gain) Loss			9.6			(0.6	)		(2.9	)		18.5
Unrecognized Prior Service Cost			—			—			6.7			7.6

Accrued Benefit Liabilities		$	(12.2	)	$	(17.1	)	$	(126.8	)	$	(114.2	)

Actuarial assumptions for the above disclosures are set forth in the following table:


DECEMBER 31	2001			2000			1999

PENSION BENEFITS
Discount Rate		7.25	%		7.50	%		7.50	%
Expected Return on Plan Assets		9.00			9.00			9.00
Rate of Compensation Increases		5.00			6.00			6.00
OTHER POSTRETIREMENT BENEFITS
Discount Rate		7.25	%		7.50	%		7.50	%

The cost of the plans discussed above (excluding OPRB’s) charged to income is as follows:


YEAR ENDED DECEMBER 31	2001		2000		1999

Defined Contribution — 401(k)	$	16.0	$	15.5	$	15.0
Defined Contribution — (Profit Sharing)		14.5		14.3		14.0
Defined Benefit — (CBP)		5.4		4.4		2.7
Profit-Sharing and Other Incentive Bonuses		4.5		3.3		0.6

Total	$	40.4	$	37.5	$	32.3

The following table summarizes other postretirement benefit costs:


YEAR ENDED DECEMBER 31	2001		2000		1999

Service Cost	$	5.1	$	5.4	$	4.7
Interest Cost		10.5		9.9		8.0
Amortization		1.1		1.5		0.8

Total	$	16.7	$	16.8	$	13.5

FS-27

The accumulated postretirement benefit obligation at December 31, 2001 was determined using a healthcare cost trend rate of 9% for 2002, gradually decreasing to 5% in 2006 and remaining at that level thereafter. A 1% point increase (or decrease) in the assumed healthcare cost trend rate for each year would increase (or decrease) the accumulated other postretirement benefit obligation as of December 31, 2001 by $14.2 (or $11.9) and the annual net periodic other postretirement benefit cost for the year then ended by $2.4 (or $1.9).

NOTE 9 — STOCK INCENTIVE PLANS

The SAFECO Long-Term Incentive Plan of 1997 (the Plan) provides for the issuance of up to 6,000,000 shares of the Corporation’s common stock. Stock options, restricted stock rights (RSR), performance stock rights (PSR) and stock appreciation rights are authorized under the Plan. Stock options are granted at exercise prices not less than the fair market value of the stock on the date of the grant. The terms and conditions upon which options become exercisable may vary among grants; however, option rights expire no later than ten years from the date of grant.

The SAFECO Agency Stock Purchase Plan of 2000 (Agency Plan) provides for the issuance of up to 1,000,000 shares of the Corporation’s common stock to agents that meet certain eligibility requirements. Agents meeting the eligibility requirements can purchase the Corporation’s common stock at a discount off the close 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, 2001, 41,826 shares had been purchased and were held in the custodial account.

At December 31, 2001 there were 3,446,152 shares of common stock reserved for future options and rights.

SAFECO continues to apply Accounting Principles Board (APB) Opinion 25 in accounting for its stock options, as allowed under FASB Statement 123. Under APB 25, because the exercise price of SAFECO’s employee stock options equals the fair market value of the underlying stock on the date of grant, no compensation expense is recognized. If compensation expense had been recorded using the fair value method described in Statement 123, SAFECO would have recognized additional expense in its Consolidated Statements of Income (Loss) by $4.4, $3.8 and $3.5 in 2001, 2000 and 1999, respectively. Basic and diluted income (loss) per share would also have been reduced by $0.03 for each of these years. The weighted-average fair value (at grant date) of options granted in 2001, 2000 and 1999 was $7, $6 and $9 per share, respectively. The fair values were estimated using the Black-Scholes option pricing model, with the following assumptions for 2001: risk-free interest rate of 4.5%, dividend yield of 2.5%, volatility factor of 35% and expected life of 4 years.

Changes in stock options for the three years ended December 31, 2001 are as follows:


		Options Outstanding

					Weighted
					Average Price
		Shares			Per Share

Balance December 31, 1998			1,947,317		$	33.85
	Granted		697,200			34.72
	Exercised		(208,954	)		23.43
	Canceled		(37,625	)		41.73

Balance December 31, 1999			2,397,938			34.89
	Granted		726,000			20.47
	Exercised		(61,009	)		20.11
	Canceled		(145,250	)		33.14

Balance December 31, 2000			2,917,679			31.69
	Granted		894,750			26.45
	Exercised		(317,293	)		23.74
	Canceled		(710,902	)		32.33

Balance December 31, 2001			2,784,234		$	30.75

FS-28

Information about stock options outstanding and exercisable at December 31, 2001 are as follows:

Options Outstanding

Options Exercisable

Remaining

Weighted-

Weighted

Contractual

Average Price

RANGE OF EXERCISE PRICES

Life (Years)

Per Share

$20.00–25.56

911,160

8.1

21.88

230,610

20.99

26.75–31.75

899,368

7.1

27.97

274,118

28.72

$32.13–51.38

973,706

5.2

41.62

834,781

41.59

Total

2,784,234

6.8

30.75

1,339,509

35.41

RSR’s provide for the holder to receive a stated number of share rights if the holder remains employed for the stated number of years. PSR’s provide for the holder to receive a stated number of share rights if the holder attains certain specified performance goals within a stated performance cycle. Performance goals may include net income, return on equity, stock price appreciation and/or other criteria.

Matured RSR’s and earned PSR’s are issued in stock and/or paid in cash at the option of the holder based on the fair market value of SAFECO’s stock on the issue/payment date. During 2001, 2000 and 1999, $1.4, ($0.6) and $0.8, respectively, were charged to operations for the compensation element of restricted and performance stock rights. These expense amounts are determined based on variable plan accounting under APB 25. RSR’s compensation expense is charged to operations over the vesting period and PSR’s compensation expense is charged to operations when it is probable the performance goal will be achieved.

Changes in RSR’s and PSR’s for the three years ended December 31, 2001 are as follows:


		Share Rights

Balance December 31, 1998			188,383
	Awarded		114,725
	Matured		(39,534	)
	Canceled		(1,250	)

Balance December 31, 1999			262,324
	Awarded		130,242
	Matured		(41,581	)
	Canceled		(95,041	)

Balance December 31, 2000			255,944
	Awarded		110,591
	Matured		(29,929	)
	Canceled		(167,494	)

Balance December 31, 2001			169,112

FS-29

NOTE 10 — COMMITMENTS AND CONTINGENCIES

SAFECO leases office space, commercial real estate and certain equipment under leases which expire at various dates through 2018. These leases are accounted for as operating leases. Minimum rental commitments for leases in effect at December 31, 2001 are as follows:


YEAR PAYABLE	Minimum Rentals

2002	$	49.2
2003		50.6
2004		45.9
2005		41.4
2006		38.6
2007 and Thereafter		169.7

Total	$	395.4

In addition, SAFECO has commitments under real estate construction and development contracts that total approximately $44.4 at December 31, 2001. Approximately $38.0 of this amount is expected to be paid in 2002.

The amount of rent charged to operations was $45.0, $43.0 and $36.0 for 2001, 2000 and 1999, respectively.

For information on environmental, asbestos and other toxic claim liabilities, see Note 4. For information on reinsurance, see Note 5.

NOTE 11 — DISCONTINUED OPERATIONS

SAFECO Credit Company, Inc.

SAFECO Properties, Inc.

In 1998, SAFECO decided to divest itself of its real estate operations (SAFECO Properties) and most of the assets were sold in 1999. A few properties remain and most are expected to be sold in 2002. Income from the real estate subsidiary will continue to decline as the remaining assets are sold. At December 31, 2001, investment real estate held by SAFECO Properties totaled $42.9, less than one percent of SAFECO’s consolidated investments. Because the assets and operations are not material to the consolidated financial statements, they have not been reclassified as discontinued operations. In the Consolidated Statements of Income (Loss), revenues for SAFECO Properties are included in Other Revenues and related expenses are included in Other Expenses. For 2001, 2000 and 1999, these revenues totaled $10.4, $20.5 and $39.3 and expenses totaled $9.9, $16.7 and $32.1, respectively. SAFECO Properties’ income before realized gains and income taxes is included in the Corporate segment and totaled $0.5, $3.8 and $7.2, for 2001, 2000 and 1999, respectively.

FS-30

NOTE 12 — RESTRUCTURING CHARGES

In July 2001, SAFECO announced that it would be eliminating approximately 1,200 jobs by the end of 2003 with half of the reductions expected to be completed by the end of 2001. Since the beginning of 2001 SAFECO’s total employment has declined by approximately 900, excluding the reduction due to the sale of SAFECO Credit. Positions being eliminated are in the corporate headquarters and regional property and casualty operations.

Restructuring charges and period costs associated with these changes are expected to total approximately $65 through 2002. This includes the pretax charge against earnings this year of $44.3 ($28.8 after tax). The remaining costs are expected to be incurred in 2002. These charges include estimated severance costs, stay bonuses, employee transfer costs, recruiting and training expenses, related consulting fees and certain office closure costs. Charges that meet the definition of exit costs include severance costs and lease termination costs. These have been recognized and accrued as a restructuring charge in accordance with accounting principles generally accepted in the United States. Other charges that do not meet the definition of exit costs have been expensed as restructuring charges in the period incurred. These period costs include stay bonuses, employee transfer costs, recruiting and training expenses, related consulting fees and certain office closure costs.

The activity related to the accrued restructuring charges at December 31, 2001 was as follows:

Lease

Termination

Severance

and Other

DECEMBER 31, 2001

Costs

Total

Accrual

13.0

5.0

18.0

Amounts Paid

(8.0

)

(1.5

)

(9.5

)

Liability at End of Year

5.0

3.5

8.5

Other related restructuring charges that have been expensed as incurred totaled $26.3. These costs are primarily comprised of employee transfer costs and employee stay bonuses.

NOTE 13 — DIVIDEND RESTRICTIONS

The Corporation’s insurance subsidiaries are restricted by state regulations as to the aggregate amount of dividends they may pay in any consecutive twelve-month period without regulatory approval. Generally, dividends may be paid out of earned surplus without approval with 30 days’ prior written notice within certain limits. The limits are generally based on the greater of 10% of the prior year statutory surplus or prior year statutory net income. 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, 2001, the Corporation is able to receive approximately $470.0 in dividends from its subsidiaries in 2002 without obtaining prior regulatory approval.

NOTE 14 — STATUTORY FINANCIAL INFORMATION

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

Statutory net income differs from the net income reported in accordance with accounting principles generally accepted in the United States primarily because policy acquisition costs are expensed when incurred, life insurance reserves are based on different assumptions and income tax expense reflects only taxes paid or currently payable.

FS-31

Statutory net income (loss) and equity are as follows:

Statutory Net Income (Loss)


YEAR ENDED DECEMBER 31	2001			2000		1999

Property & Casualty	$	(218.2	)	$	155.2	$	296.6
Life		132.0			85.6		114.0

Statutory Shareholder’s Equity


DECEMBER 31	2001		2000

Property & Casualty	$	2,266.9	$	2,286.8
Life		782.9		706.0

The NAIC revised the Accounting Practices and Procedures Manual in a process referred to as Codification effective January 1, 2001. The domiciliary states of the Corporation’s insurance subsidiaries have adopted the provisions of the revised manual. The revised manual has changed, to some extent, prescribed statutory accounting practices and resulted in changes to the accounting practices that the Corporation’s insurance subsidiaries use to prepare their statutory-basis financial statements. Upon adoption, SAFECO’s property and casualty insurance companies statutory surplus increased by $207.4 and the life insurance companies by $45.3. Nearly all of the increase in the amount of statutory surplus relates to the recording of deferred tax assets that were not recorded in the statutory basis financial statements under the prior statutory accounting guidance.

NOTE 15 — SEGMENT INFORMATION

The operating segments presented are based on SAFECO’s internal reporting structure and how management analyzes the operating results. These segments generally represent groups of related products.

Property & Casualty’s operations include four main reportable underwriting segments. The underwriting segments are Personal Lines, Commercial Lines, Surety and Other. Personal Lines is further split into Personal Auto, Homeowners and Specialty. Commercial Lines is further split into Business Insurance and Commercial Insurance. Business Insurance delivers insurance products and services to small-to-medium sized businesses, while Commercial Insurance delivers insurance products and services to medium-to-large complex commercial clients. The operating results for Business Insurance and Commercial Insurance will be combined beginning in 2002.

Life & Investments operations include six reportable segments: Retirement Services, Income Annuities, Group, Individual, Asset Management and Other. Effective December 31, 2001, SAFECO’s asset management companies and Talbot Financial Corporation are reported as part of the Life & Investments operating results. Prior year information has been reclassified to conform to the current year presentation.

The Credit operation provided loans and equipment financing and leasing to commercial business, insurance agents and affiliated companies. As disclosed in Note 11, the sale (effective July 31, 2001) of SAFECO Credit was completed on August 15, 2001 so this segment is accounted for as a discontinued operation.

The Corporate segment includes operating results for the Parent Company, SAFECO Financial Products, SAFECO Properties and intercompany transaction eliminations.

FS-32

NOTE 15 — SEGMENT INFORMATION (continued)

Underwriting

Net

Pretax

Realized

Net

Gain

Investment

Income

Gain

Income

Total

2001

Revenues*

(Loss)

Income*

(Loss)+

(Loss)*

(Loss)

Assets

PROPERTY & CASUALTY

Personal Lines

Personal Auto

1,767.4

(80.5

)

127.3

46.8

43.0

3,149.3

Homeowners

740.6

(205.6

)

56.5

(149.1

)

20.0

1,444.8

Specialty

201.6

3.9

19.3

23.2

8.1

482.9

Commercial Lines

Business Insurance

1,033.0

(163.2

)

126.5

(36.7

)

35.1

3,334.5

Commercial Insurance

627.7

(276.2

)

93.1

(183.1

)

22.5

2,328.8

Surety

95.6

2.4

9.9

12.3

6.0

275.7

Other

6.9

(118.3

)

25.1

(104.2

)

4.1

214.3

Write-off of Goodwill

—

(1,165.2

)

—

Restructuring Charges

—

(44.3

)

—

Total

4,472.8

(837.5

)

457.7

(1,600.3

)

138.8

(1,024.3

)

11,230.3

LIFE & INVESTMENTS†

Retirement Services

27.9

339.2

15.6

(29.2

)

6,252.4

Income Annuities

0.4

529.6

47.8

10.6

6,832.6

Group

332.5

3.7

26.6

(1.6

)

172.5

Individual

141.1

226.7

22.8

(7.4

)

3,875.5

Asset Management

33.6

2.3

8.0

—

69.3

Other

101.5

78.8

76.7

5.1

1,239.1

Write-off of Goodwill

—

(48.9

)

—

Total

637.0

1,180.3

148.6

(22.5

)

72.5

18,441.4

Discontinued Credit Operations

—

4.2

—

Gain on Sale of Credit Operations

—

54.0

—

Cumulative Effect of Change in Accounting Principle

—

(2.1

)

—

Corporate

10.4

11.3

(54.6

)

(23.3

)

(93.5

)

420.8

Consolidated Totals

5,120.2

1,649.3

(1,506.3

)

93.0

(989.2

)

30,092.5

*		Revenues combined with Net Investment Income and Realized Gain equal Total Revenue on the Consolidated Statements of Income (Loss).




+		Earnings before realized gains (losses), distributions on capital securities and income taxes. This is a standard industry measurement and is used by management as the key measurement of segment profit or loss. It is presented as a supplement to net income as a measure of profitability. Property and Casualty’s pretax income amounts include goodwill amortization expense of $11.0, $44.0 and $43.8 for 2001, 2000 and 1999, respectively.




†		Effective December 31, 2001, SAFECO’s asset management companies and Talbot Financial Corporation are reported as part of the Life & Investments operating results.

FS-33

NOTE 15 — SEGMENT INFORMATION (continued)


				Underwriting			Net			Pretax			Realized			Net
				Gain			Investment			Income			Gain			Income			Total
2000		Revenues*		(Loss)			Income *			(Loss)+			(Loss)*			(Loss)			Assets

PROPERTY & CASUALTY
Personal Lines
	Personal Auto	$	1,723.6	$	(123.0	)	$	125.3		$	2.3		$	45.9					$	3,146.0
	Homeowners		729.8		(116.7	)		52.9			(63.8	)		21.5						1,382.7
	Specialty		186.7		18.2			16.3			34.5			8.2						419.8
Commercial Lines
	Business Insurance		1,171.7		(155.3	)		145.1			(10.2	)		43.6						3,814.5
	Commercial Insurance		683.4		(155.7	)		98.5			(57.2	)		26.6						2,492.0
Surety			61.6		11.7			3.6			15.3			4.2						138.0
Other			6.6		(1.1	)		18.8			(26.3	)		4.4						405.2

Total			4,563.4	$	(521.9	)		460.5			(105.4	)		154.4		$	89.5			11,798.2

LIFE & INVESTMENTS†
Retirement Services			36.8					392.5			30.0			(25.4	)					6,169.1
Income Annuities			1.2					495.8			26.4			17.5						6,605.7
Group			313.6					2.0			4.3			(3.5	)					192.2
Individual			133.8					206.9			24.6			(3.2	)					3,615.0
Asset Management			37.0					5.9			13.0			—						68.7
Other			95.8					78.4			70.2			(1.6	)					1,192.0

Total			618.2					1,181.5			168.5			(16.2	)		97.2			17,842.7

Discontinued Credit Operations			—					—			—			—			12.7			481.2
Corporate			20.5					(8.5	)		(63.2	)		1.3			(84.8	)		135.6

Consolidated Totals		$	5,202.1				$	1,633.5		$	(0.1	)	$	139.5		$	114.6		$	30,257.7

*		Revenues combined with Net Investment Income and Realized Gain equal Total Revenue on the Consolidated Statements of Income (Loss).




+		Earnings before realized gains (losses), distributions on capital securities and income taxes. This is a standard industry measurement and is used by management as the key measurement of segment profit or loss. It is presented as a supplement to net income as a measure of profitability. Property and Casualty’s pretax income amounts include goodwill amortization expense of $11.0, $44.0 and $43.8 for 2001, 2000 and 1999, respectively.




†		Effective December 31, 2001, SAFECO’s asset management companies and Talbot Financial Corporation are reported as part of the Life & Investments operating results. Prior year information has been reclassified to conform to the current year presentation.

FS-34

NOTE 15 — SEGMENT INFORMATION (continued)


				Underwriting			Net		Pretax			Realized			Net
				Gain			Investment		Income			Gain			Income			Total
1999		Revenues*		(Loss)			Income *		(Loss)+			(Loss)*			(Loss)			Assets

PROPERTY & CASUALTY
Personal Lines
	Personal Auto	$	1,725.6	$	(63.3	)	$	131.0	$	67.7		$	27.2					$	3,238.9
	Homeowners		708.3		(48.2	)		51.9		3.7			12.4						1,345.6
	Specialty		177.7		20.6			15.8		36.4			4.6						402.0
Commercial Lines
	Business Insurance		1,017.6		(183.4	)		141.7		(41.7	)		22.4						3,705.8
	Commercial Insurance		686.4		(107.6	)		97.2		(10.4	)		15.7						2,434.6
Surety			59.4		15.2			3.0		18.2			2.4						99.8
Other			7.9		—			21.7		(22.1	)		2.6						486.7

Total			4,382.9	$	(366.7	)		462.3		51.8			87.3		$	172.1			11,713.4

LIFE & INVESTMENTS†
Retirement Services			32.9					410.9		52.6			(1.0	)					7,204.8
Income Annuities			1.1					486.6		42.2			(6.0	)					6,011.3
Group			193.9					1.8		(19.4	)		0.3						104.8
Individual			119.8					144.7		30.1			(1.9	)					2,959.7
Asset Management			41.7					2.6		13.6			—						73.7
Other			84.5					76.6		76.0			1.7						1,018.7

Total			473.9					1,123.2		195.1			(6.9	)		122.3			17,373.0

Discontinued Credit Operations			—					—		—			—			14.5			173.8
Corporate			39.2					2.8		(55.0	)		37.3			(56.7	)		(36.6	)

Consolidated Totals		$	4,896.0				$	1,588.3	$	191.9		$	117.7		$	252.2		$	29,223.6

*		Revenues combined with Net Investment Income and Realized Gain equal Total Revenue on the Consolidated Statements of Income (Loss).




+		Earnings before realized gains (losses), distributions on capital securities and income taxes. This is a standard industry measurement and is used by management as the key measurement of segment profit or loss. It is presented as a supplement to net income as a measure of profitability. Property and Casualty’s pretax income amounts include goodwill amortization expense of $11.0, $44.0 and $43.8 for 2001, 2000 and 1999, respectively.




†		Effective December 31, 2001, SAFECO’s asset management companies and Talbot Financial Corporation are reported as part of the Life & Investments operating results. Prior year information has been reclassified to conform to the current year presentation.

FS-35

NOTE 15 — SEGMENT INFORMATION (continued)

Combined Statements of Income (Loss)
Property & Casualty Operations*
Supplemental Segment Data


YEAR ENDED DECEMBER 31		2001			2000			1999

Earned Premiums		$	4,472.8		$	4,563.4		$	4,382.9

Losses and Expenses
	Losses and Loss Adjustment Expenses		3,964.2			3,770.0			3,431.8
	Commissions		709.8			689.1			714.1
	Personnel Costs		345.9			342.5			322.6
	Taxes Other than Payroll and Income Taxes		113.3			116.3			123.2
	Dividends to Policyholders		5.5			9.5			10.5
	Other Operating Expenses		182.3			144.6			164.7
	Amortization of Deferred Policy Acquisition Costs		792.2			796.6			793.0
	Deferral of Policy Acquisition Costs		(802.9	)		(783.3	)		(810.3	)

Total			5,310.3			5,085.3			4,749.6

Underwriting Loss			(837.5	)		(521.9	)		(366.7	)
Net Investment Income			457.7			460.5			462.3
Goodwill Amortization			(11.0	)		(44.0	)		(43.8	)
Write-off of Goodwill+			(1,165.2	)		—			—
Restructuring Charges			(44.3	)		—			—

Income (Loss) Before Realized Gain and Income Taxes†			(1,600.3	)		(105.4	)		51.8
Realized Gain from Security Investments Before Income Taxes			138.8			154.4			87.3

Income (Loss) Before Income Taxes			(1,461.5	)		49.0			139.1
Benefit for Income Taxes (Including tax provision on realized gain: $47.8; $54.3; $30.0)			(437.2	)		(40.5	)		(33.0	)

Net Income (Loss)		$	(1,024.3	)	$	89.5		$	172.1

*		SAFECO Insurance Company of America / General Insurance Company of America / First National Insurance Company of America / SAFECO National Insurance Company / SAFECO Insurance Company of Illinois / SAFECO Insurance Company of Oregon / SAFECO Management Corporation / SAFECO Surplus Lines Insurance Company / SAFECO Insurance Company of Pennsylvania / Insurance Company of Illinois / SAFECO Lloyds Insurance Company / American States Insurance Company / American Economy Insurance Company / American States Preferred Insurance Company / American States Insurance Company of Texas / American States Lloyds Insurance Company / F.B. Beattie & Company, Inc. / SAFECO Financial Institution Solutions, Inc. / R.F. Bailey Holdings, Ltd. / SAFECO UK, Ltd.




+		In 2001, SAFECO changed its method of assessing recoverability of goodwill from an undiscounted cash flow approach to the market value approach which resulted in the write-off of goodwill in the amount of $1,152.1 pretax. An additional pretax write-off of $13.1 occurred during the fourth quarter.




†		Income (Loss) Before Realized Gain and Income Taxes is a standard industry measurement used by management to analyze income from core operations and is presented to supplement net income as a measure of profitability.

FS-36

NOTE 15 — SEGMENT INFORMATION (continued)

Combined Statements of Income
Life & Investments Operations*‡
Supplemental Segment Data


YEAR ENDED DECEMBER 31		2001			2000			1999

Premiums and Other Revenue		$	637.0		$	618.2		$	473.9
Net Investment Income			1,180.3			1,181.5			1,123.2

Total			1,817.3			1,799.7			1,597.1

Benefits and Expenses
	Policy Benefits		1,234.9			1,232.2			1,072.2
	Commissions		108.4			105.8			82.2
	Personnel Costs		150.5			142.3			125.4
	Taxes Other than Payroll and Income Taxes		13.6			24.4			26.3
	Other Operating Expenses		137.1			141.0			105.3
	Amortization of Deferred Policy Acquisition Costs		32.3			37.6			47.1
	Deferral of Policy Acquisition Costs		(57.0	)		(52.1	)		(56.5	)
	Write-off of Goodwill+		48.9			—			—

Total			1,668.7			1,631.2			1,402.0

Income Before Realized Investment Loss and Income Taxes†			148.6			168.5			195.1
Realized Loss from Security Investments Before Income Taxes			(22.5	)		(16.2	)		(6.9	)

Income Before Income Taxes			126.1			152.3			188.2
Provision for Income Taxes (Including tax benefit on realized loss: $8.1; $5.7; $2.3)			51.9			55.1			65.9

Income before Cumulative Effect of Change in Accounting Principle			74.2			97.2			122.3
Cumulative Effect of Change in Accounting Principle			(1.7	)		—			—

Net Income		$	72.5		$	97.2		$	122.3

*		SAFECO Life Insurance Company / First SAFECO National Life Insurance Company of New York / SAFECO National Life Insurance Company / American States Life Insurance Company / Medical Risk Managers, Inc. / SAFECO Administrative Services, Inc. / Employee Benefit Claims of Wisconsin, Inc. / Wisconsin Pension and Group Services, Inc. / SAFECO Assigned Benefits Service Company / SAFECO Asset Management Company / SAFECO Securities, Inc. / SAFECO Services Corporation / SAFECO Trust Company / SAFECO Investment Services, Inc. / Talbot Financial Corporation.




+		In 2001, SAFECO changed its method of assessing recoverability of goodwill from an undiscounted cash flow approach to the market value approach which resulted in the write-off of goodwill in the amount of $48.9 pretax.




†		Income Before Realized Loss and Income Taxes is a standard industry measurement used by management to analyze income from core operations and is presented to supplement net income as a measure of profitability.




‡		Effective December 31, 2001, SAFECO’s asset management companies and Talbot Financial Corporation are reported as part of the Life & Investments operating results. Prior year information has been reclassified to conform to the current year presentation.

FS-37

NOTE 16 — QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)


		First			Second			Third			Fourth
		Quarter			Quarter			Quarter			Quarter		Annual

REVENUES
	2001	$	1,732.9		$	1,715.7		$	1,708.1		$	1,705.8	$	6,862.5
	2000		1,730.0			1,734.3			1,769.9			1,740.9		6,975.1
	1999		1,639.3			1,639.2			1,642.0			1,681.5		6,602.0
NET INCOME (LOSS)
	2001*	$	(882.8	)	$	(14.4	)	$	(100.6	)	$	8.6	$	(989.2	)
	2000		29.8			29.1			45.5			10.2		114.6
	1999		118.5			73.1			16.1			44.5		252.2
NET INCOME (LOSS) PER SHARE
	2001*	$	(6.91	)	$	(.11	)	$	(.79	)	$	.06	$	(7.75	)
	2000		.23			.23			.36			.08		.90
	1999		.87			.54			.12			.34		1.90

*		Included in the 2001 income (loss) amounts are the following:




		First quarter — goodwill write-off of $1,201.0 ($917.0 after tax, $7.17 per share)




		Third quarter — Property & Casualty’s loss reserve strengthening of $240.0 ($156.0 after tax, $1.22 per share) and restructuring charges of $31.8 ($20.7 after tax, $0.16 per share)




		Fourth quarter — goodwill write-off of $13.1 ($8.5 after tax, $0.07 per share) and restructuring charges of $12.5 ($8.1 after tax, $0.06 per share)

FS-38

SAFECO Corporation and Subsidiaries

Statements of Income (Loss) — Supplemental Consolidating Information (Unaudited)

Property &

Life &

YEAR ENDED DECEMBER 31, 2001

Casualty

Investments

Corporate

Consolidated

(In Millions)

REVENUES

Insurance

Property & Casualty Earned Premiums

4,472.8

—

4,472.8

Life & Investments Premiums & Other Revenues

—

637.0

—

637.0

Total

4,472.8

637.0

—

5,109.8

Other

—

10.4

Net Investment Income

457.7

1,180.3

11.3

1,649.3

Realized Investment Gain (Loss)

138.8

(22.5

)

(23.3

)

93.0

Total

5,069.3

1,794.8

(1.6

)

6,862.5

EXPENSES

Losses, Loss Adjustment Expenses and Policy Benefits

3,964.2

1,234.9

—

5,199.1

Commissions

709.8

108.4

—

818.2

Personnel Costs

345.9

150.5

—

496.4

Interest

—

2.1

63.6

65.7

Goodwill and Intangibles Amortization

11.0

15.7

—

26.7

Other

301.1

132.9

12.7

446.7

Amortization of Deferred Policy Acquisition Costs

792.2

32.3

—

824.5

Deferral of Policy Acquisition Costs

(802.9

)

(57.0

)

—

(859.9

)

Write-off of Goodwill

1,165.2

48.9

—

1,214.1

Restructuring Charges

44.3

—

44.3

Total

6,530.8

1,668.7

76.3

8,275.8

Income (Loss) from Continuing Operations Before Income Taxes

(1,461.5

)

126.1

(77.9

)

(1,413.3

)

Provision (Benefit) for Income Taxes

Current

(69.5

)

82.9

(21.0

)

(7.6

)

Deferred

(367.7

)

(31.0

)

(6.5

)

(405.2

)

Total

(437.2

)

51.9

(27.5

)

(412.8

)

Income (Loss) from Continuing Operations before Distributions on Capital Securities

(1,024.3

)

74.2

(50.4

)

(1,000.5

)

Distributions on Capital Securities, Net of Tax

—

(44.8

)

(44.8

)

Income (Loss) from Continuing Operations

(1,024.3

)

74.2

(95.2

)

(1,045.3

)

Income from Discontinued Credit Operations, Net of Tax

—

4.2

Gain from Sale of Credit Operations, Net of Tax

—

54.0

Total Income from Discontinued Operations

—

58.2

Income (Loss) before Cumulative Effect of Change in Accounting Principle

(1,024.3

)

74.2

(37.0

)

(987.1

)

Cumulative Effect of Change in Accounting Principle, Net of Tax

—

(1.7

)

(0.4

)

(2.1

)

Net Income (Loss)

(1,024.3

)

72.5

(37.4

)

(989.2

)

FS-39

SAFECO Corporation and Subsidiaries

Balance Sheets — Supplemental Consolidating Information (Unaudited)

Property &

Life &

DECEMBER 31, 2001

Casualty

Investments

Corporate

Consolidated

(In Millions)

ASSETS

Investments

Fixed Maturities Available-for-Sale, at Fair Value

6,520.1

14,877.8

46.2

21,444.1

Marketable Equity Securities, at Fair Value

1,482.6

67.8

46.0

1,596.4

Mortgage Loans

61.6

946.7

(84.1

)

924.2

Other Investment Assets

38.8

132.0

66.1

236.9

Short-Term Investments

354.0

262.4

56.5

672.9

Total Investments

8,457.1

16,286.7

130.7

24,874.5

Cash

173.2

88.7

7.4

269.3

Accrued Investment Income

100.8

220.5

2.5

323.8

Premiums and Service Fees Receivable

945.2

27.8

—

973.0

Other Notes and Accounts Receivable

4.3

52.4

106.7

163.4

Deferred Income Tax Recoverable

336.5

—

(17.5

)

319.0

Reinsurance Recoverables

433.1

90.1

—

523.2

Deferred Policy Acquisition Costs

322.7

304.1

—

626.8

Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation)

327.6

5.1

219.3

552.0

Goodwill and Intangibles (At cost less accumulated amortization)

6.0

89.0

—

95.0

Other Assets

123.8

68.9

(28.3

)

164.4

Separate Account Assets

—

1,208.1

—

1,208.1

Total Assets

11,230.3

18,441.4

420.8

30,092.5

LIABILITIES AND SHAREHOLDERS’ EQUITY

Losses and Loss Adjustment Expenses

5,053.7

64.7

—

5,118.4

Life Policy Liabilities

—

327.1

—

327.1

Unearned Premiums

1,772.9

9.3

—

1,782.2

Funds Held Under Deposit Contracts

—

14,624.2

—

14,624.2

Debt

Commercial Paper

—

299.0

7.875% Medium-Term Notes Due 2003

—

323.0

7.875% Notes Due 2005

—

200.0

6.875% Notes Due 2007

—

200.0

Other

—

15.6

59.0

74.6

Other Liabilities

955.2

305.0

162.8

1,423.0

Income Taxes

Current Income Taxes

6.4

4.2

24.3

34.9

Deferred Income Taxes

—

96.6

(96.6

)

—

Separate Account Liabilities

—

1,208.1

—

1,208.1

Total Liabilities

7,788.2

16,654.8

1,171.5

25,614.5

Capital Securities

—

843.4

Common Stock

37.9

7.5

796.5

841.9

Additional Paid-in Capital

3,269.1

319.2

(3,588.3

)

—

Retained Earnings (Deficit)

(495.2

)

1,176.0

1,195.1

1,875.9

Accumulated Other Comprehensive Income, Net of Tax

630.3

283.9

2.6

916.8

Total Shareholders’ Equity

3,442.1

1,786.6

(1,594.1

)

3,634.6

Total Liabilities and Shareholders’ Equity

11,230.3

18,441.4

420.8

30,092.5

FS-40

SAFECO Corporation and Subsidiaries

Balance Sheets — Supplemental Consolidating Information (Unaudited)


		Property &			Life &
DECEMBER 31, 2000		Casualty			Investments		Corporate			Consolidated

(In Millions)
ASSETS
Investments
	Fixed Maturities Available-for-Sale, at Fair Value	$	6,347.4		$	14,420.0	$	62.8		$	20,830.2
	Marketable Equity Securities, at Fair Value		1,695.0			57.9		62.5			1,815.4
	Mortgage Loans		58.9			848.1		(84.0	)		823.0
	Other Investment Assets		16.6			95.2		48.5			160.3
	Short-Term Investments		172.6			154.6		(144.9	)		182.3

	Total Investments		8,290.5			15,575.8		(55.1	)		23,811.2
Cash			134.0			51.8		0.5			186.3
Accrued Investment Income			101.8			224.8		1.2			327.8
Premiums and Service Fees Receivable			993.9			68.4		0.7			1,063.0
Other Notes and Accounts Receivable			—			25.1		12.5			37.6
Reinsurance Recoverables			362.5			99.2		—			461.7
Deferred Policy Acquisition Costs			312.1			293.3		—			605.4
Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation)			258.2			6.0		175.9			440.1
Goodwill and Intangibles (At cost less accumulated amortization)			1,163.1			144.3		—			1,307.4
Other Assets			182.1			78.9		(0.1	)		260.9
Net Assets of Discontinued Credit Operations			—			—		481.2			481.2
Separate Account Assets			—			1,275.1		—			1,275.1

Total Assets		$	11,798.2		$	17,842.7	$	616.8		$	30,257.7

LIABILITIES AND SHAREHOLDERS’ EQUITY
Losses and Loss Adjustment Expenses		$	4,612.7		$	74.2	$	—		$	4,686.9
Life Policy Liabilities			—			342.1		—			342.1
Unearned Premiums			1,826.9			9.6		—			1,836.5
Funds Held Under Deposit Contracts			—			14,085.7		—			14,085.7
Debt
	Commercial Paper		—			—		349.8			349.8
	7.875% Medium-Term Notes Due 2003		—			—		300.0			300.0
	7.875% Notes Due 2005		—			—		200.0			200.0
	6.875% Notes Due 2007		—			—		200.0			200.0
	Other		—			21.5		59.2			80.7
Other Liabilities			836.1			368.1		64.9			1,269.1
Income Taxes
	Current Income Taxes		(10.7	)		36.5		—			25.8
	Deferred Income Taxes		132.7			13.6		(79.1	)		67.2
Separate Account Liabilities			—			1,275.1		—			1,275.1

Total Liabilities			7,397.7			16,226.4		1,094.8			24,718.9

Capital Securities			—			—		843.0			843.0

Common Stock			37.9			7.5		789.1			834.5
Additional Paid-in Capital			3,000.5			319.2		(3,319.7	)		—
Retained Earnings			543.5			1,219.0		1,203.9			2,966.4
Accumulated Other Comprehensive Income, Net of Tax			818.6			70.6		5.7			894.9

Total Shareholders’ Equity			4,400.5			1,616.3		(1,321.0	)		4,695.8

Total Liabilities and Shareholders’ Equity		$	11,798.2		$	17,842.7	$	616.8		$	30,257.7

FS-41

SAFECO Corporation and Subsidiaries

Statements of Cash Flows — Supplemental Consolidating Information (Unaudited)

Property &

Life &

YEAR ENDED DECEMBER 31, 2001

Casualty

Investments

Corporate

Consolidated

(In Millions)

OPERATING ACTIVITIES

Insurance Premiums Received

4,489.9

383.9

—

4,873.8

Dividends and Interest Received

462.6

1,067.0

17.5

1,547.1

Other Operating Receipts

—

178.7

11.5

190.2

Insurance Claims and Policy Benefits Paid

(3,574.9

)

(499.6

)

—

(4,074.5

)

Underwriting, Acquisition and Insurance Operating Costs Paid

(1,426.5

)

(305.4

)

(19.2

)

(1,751.1

)

Interest Paid and Distributions on Capital Securities

—

(2.0

)

(125.1

)

(127.1

)

Other Operating Costs Paid

—

(97.0

)

8.7

(88.3

)

Income Taxes Refunded (Paid)

85.9

(110.4

)

(16.8

)

(41.3

)

Net Cash Provided by (Used in) Operating Activities

37.0

615.2

(123.4

)

528.8

INVESTING ACTIVITIES

Purchases of

Fixed Maturities

(1,107.0

)

(2,867.3

)

(14.2

)

(3,988.5

)

Equities

(329.7

)

(21.4

)

(13.5

)

(364.6

)

Other Investment Assets

(24.8

)

(266.2

)

(10.2

)

(301.2

)

Maturities of Fixed Maturities

232.1

1,211.6

—

1,443.7

Sales of

Fixed Maturities

683.1

1,676.5

58.4

2,418.0

Equities

398.9

11.1

27.6

437.6

Other Investment Assets

90.0

154.4

13.2

257.6

Net Increase in Short-Term Investments

(90.5

)

(73.4

)

(272.2

)

(436.1

)

Gain from Sale of Credit Operations

—

97.0

Other

(71.6

)

(0.6

)

(3.3

)

(75.5

)

Net Cash Used in Investing Activities

(219.5

)

(175.3

)

(117.2

)

(512.0

)

FINANCING ACTIVITIES

Funds Received Under Deposit Contracts

—

1,051.1

—

1,051.1

Return of Funds Held under Deposit Contracts

—

(1,301.1

)

—

(1,301.1

)

Repayment of Notes and Mortgage Borrowings

—

(6.0

)

(0.2

)

(6.2

)

Net Proceeds from (Repayment of) Short-Term Borrowings

—

4.2

(50.8

)

(46.6

)

Common Stock Reacquired

—

(8.1

)

(8.1

)

Dividends Paid to Shareholders

(14.4

)

(114.8

)

11.1

(118.1

)

Capital Contribution

254.1

—

(254.1

)

—

Other

(18.0

)

(36.4

)

68.4

14.0

Net Cash Provided by (Used in) Financing Activities

221.7

(403.0

)

(233.7

)

(415.0

)

Cash Provided by Discontinued Credit Operations

—

481.2

Net increase in Cash

39.2

36.9

6.9

83.0

Cash at Beginning of Year

134.0

51.8

0.5

186.3

Cash at End of Year

173.2

88.7

7.4

269.3

FS-42

SAFECO Corporation and Subsidiaries

Statements of Cash Flows — Supplemental Consolidating Information —
Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities (Unaudited)

Property &

Life &

YEAR ENDED DECEMBER 31, 2001

Casualty

Investments

Corporate

Consolidated

(In Millions)

Net Income (Loss)

(1,024.3

)

72.5

(37.4

)

(989.2

)

ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES

Income from Discontinued Credit Operations, Net of Tax

—

(4.2

)

(4.2

)

Cumulative Effect of Change in Accounting Principle, Net of Tax

—

1.7

0.4

2.1

Gain from Sale of Credit Operations, Net of Tax

—

(54.0

)

(54.0

)

Realized Investment Gain (Loss)

(138.8

)

22.5

23.3

(93.0

)

Amortization and Depreciation

58.4

24.1

4.6

87.1

Amortization of Fixed Maturity Investments

(11.8

)

(50.2

)

—

(62.0

)

Deferred Income Tax Benefit

(367.7

)

(31.0

)

(6.5

)

(405.2

)

Interest Expense on Deposit Contracts

—

732.0

—

732.0

Write-off of Goodwill

1,165.2

48.9

—

1,214.1

Other Adjustments

—

(77.0

)

(2.9

)

(79.9

)

Changes in

Losses and Loss Adjustment Expenses

441.0

(9.5

)

—

431.5

Life Policy Liabilities

—

(15.0

)

—

(15.0

)

Unearned Premiums

(54.0

)

(0.3

)

—

(54.3

)

Accrued Income Taxes

17.1

(32.3

)

24.3

9.1

Accrued Interest on Accrual Bonds

—

(42.8

)

—

(42.8

)

Accrued Investment Income

1.0

4.3

(1.3

)

4.0

Deferred Policy Acquisition Costs

(10.6

)

(10.8

)

—

(21.4

)

Other Assets and Liabilities

(38.5

)

(21.9

)

(69.7

)

(130.1

)

Total Adjustments

1,061.3

542.7

(86.0

)

1,518.0

Net Cash Provided by Operating Activities

37.0

615.2

(123.4

)

528.8

There were no significant non-cash financing or investing activities for the years ended December 31, 2001, 2000 and 1999.

FS-43

SAFECO Corporation and Subsidiaries

FINANCIAL SCHEDULES

SAFECO Corporation and Subsidiaries


Summary of Investments — Other Than Investments in Related Parties		Schedule I

TYPE OF INVESTMENTS

Cost or

Balance

Amortized

Fair

Sheet

DECEMBER 31, 2001

Cost

Value

Amount

(In Millions)

FIXED MATURITIES

Bonds

U.S. Government & Agencies

1,408.1

1,552.3

States and Political Subdivisions

2,887.1

3,142.2

Foreign Governments

290.8

350.4

Public Utilities

2,083.7

2,088.3

Convertible Bonds

124.1

135.3

Mortgage-Backed Securities

4,582.3

4,760.1

All Other Corporate Bonds

9,018.4

9,131.3

Redeemable Preferred Stocks

282.6

284.2

Total Fixed Maturities(1)

20,677.1

21,444.1

EQUITY SECURITIES

Common Stocks

Public Utilities

31.0

71.0

Banks, Trust and Insurance Companies

46.0

141.4

Industrial, Miscellaneous and All Other

723.4

1,246.8

Non-Redeemable Preferred Stocks

140.1

137.2

Total Equity Securities

940.5

1,596.4

OTHER

Mortgage Loans on Real Estate(1)

924.2

Policy Loans

91.0

Other Investment Assets(1)

104.2

145.9

Short-Term Investments

672.9

Total Other

1,792.3

1,834.0

Total Investments

23,409.9

24,874.5

(1)

The carrying value of investments in fixed maturities, mortgage loans and real estate (included in other investment assets) that have not produced income for the last twelve months is less than one percent of the total of such investments at December 31, 2001.

S-1

SAFECO Corporation and Subsidiaries


Condensed Statements of Income (Loss) Condensed Financial Information of the Registrant (Parent Company)		Schedule II


YEAR ENDED DECEMBER 31		2001			2000			1999

(In Millions)
REVENUES
Dividends — Nonaffiliates		$	1.5		$	1.9		$	2.3
Interest
	— Affiliates		16.8			20.6			0.9
	— Others		1.1			4.9			7.0
Realized Investment Gain (Loss)			(13.0	)		0.8			(0.5	)

Total			6.4			28.2			9.7

EXPENSES
Interest (Includes Distributions on Capital Securities)			147.8			157.6			140.9
Other			5.4			8.6			1.1

Total			153.2			166.2			142.0

Loss before Income Taxes			(146.8	)		(138.0	)		(132.3	)
Benefit for Income Taxes (Includes provision (benefit) on realized gain (loss): $(4.6); $0.3; $(0.2))			(52.0	)		(48.7	)		(47.0	)

Loss from Continuing Operations			(94.8	)		(89.3	)		(85.3	)
Income from Discontinued Credit Operations, Net of Tax			4.2			—			—
Gain from Sale of Credit Operations, Net of Tax			54.0			—			—

Loss before Equity in Net Loss of Subsidiaries			(36.6	)		(89.3	)		(85.3	)
Equity in Net Income (Loss) of Subsidiaries			(952.6	)		203.9			337.5

Consolidated Net Income (Loss)		$	(989.2	)	$	114.6		$	252.2

S-2

SAFECO Corporation and Subsidiaries


Condensed Balance Sheets Condensed Financial Information of the Registrant (Parent Company)		Schedule II


DECEMBER 31			2001		2000

(In Millions)
ASSETS
Investments
		Stock of Subsidiaries — At Cost Plus Equity in Undistributed Earnings	$	5,330.4	$	6,226.9
		Fixed Maturities Available-for-Sale, at Market Value (Amortized cost: $4.2; $58.4)		5.5		60.5
		Marketable Equity Securities, at Market Value (Cost: $27.8; $54.8)		45.8		62.6
		Other Invested Assets		23.0		—
		Short-Term Investments		5.5		19.1

Total Investments				5,410.2		6,369.1
Cash				—		0.1
Notes Receivable from Affiliated Companies				—		300.0
Receivables from Affiliated Companies				222.6		4.9
Income Tax Recoverable
	— Current			—		2.9
	— Deferred			52.5		47.4
Other Assets				13.0		24.4

Total Assets			$	5,698.3	$	6,748.8

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest Payable			$	48.7	$	48.7
Payables to Affiliated Companies				3.4		4.1
Other Liabilities				49.8		10.2
Current Income Taxes Payable				22.8		—
Dividends Payable to Shareholders				23.6		47.2
Debt
		Commercial Paper		299.0		349.8
		Medium-Term Notes Due 2002		50.0		50.0
		7.875% Medium-Term Notes Due 2003		323.0		300.0
		7.875% Notes Due 2005		200.0		200.0
		6.875% Notes Due 2007		200.0		200.0
		8.072% Junior Subordinated Debentures (Capital Securities)		843.4		843.0

Total Liabilities				2,063.7		2,053.0

Preferred Stock, No Par Value Shares Authorized: 10 Shares Issued and Outstanding: None
Common Stock, No Par Value Shares Authorized: 300 Shares Reserved for Options: 6.4; 7.1 Shares Issued and Outstanding: 127.7; 127.6				841.9		834.5
Retained Earnings				1,875.9		2,966.4
Accumulated Other Comprehensive Income, Net of Tax				916.8		894.9

Total Shareholders’ Equity				3,634.6		4,695.8

Total Liabilities and Shareholders’ Equity			$	5,698.3	$	6,748.8

S-3

SAFECO Corporation and Subsidiaries


Condensed Statements of Cash Flows Condensed Financial Information of the Registrant (Parent Company)		Schedule II


YEAR ENDED DECEMBER 31		2001			2000			1999

(In Millions)
OPERATING ACTIVITIES
Dividends and Interest Received
	— Affiliates	$	220.3		$	486.9		$	761.3
	— Others		10.1			6.6			10.4
Interest Paid and Distributions on Capital Securities			(147.5	)		(150.1	)		(143.4	)
Other Operating Costs Paid			6.0			(2.2	)		(6.8	)
Income Taxes Refunded (Paid)			(13.4	)		6.6			50.0

Net Cash Provided by Operating Activities			75.5			347.8			671.5

INVESTING ACTIVITIES
Purchases of
	Fixed Maturities		(4.1	)		(14.9	)		—
	Equities		(13.6	)		(93.8	)		(0.1	)
Maturities of Fixed Maturities			—			20.0			19.4
Sales of
	Fixed Maturities		58.3			13.2			—
	Equities		27.5			63.3			9.7
Funds Loaned to Affiliate			—			(300.0	)		—
Net Decrease in Short-Term Investments			13.6			43.7			19.5
Proceeds from Sale of Credit Operations			250.0			—			—
Funds Repaid by Affiliate			96.1			—			—
Capital Contribution to Subsidiaries			(324.1	)		—			—
Other			(9.7	)		—			—

Net Cash Provided by (Used in) Investing Activities			94.0			(268.5	)		48.5

FINANCING ACTIVITIES
Proceeds from Medium-Term Notes			—			300.0			—
Net Repayment of Short Term Borrowings			(50.8	)		(159.1	)		(229.9	)
Common Stock Reacquired			(8.1	)		(30.4	)		(303.1	)
Dividends Paid to Shareholders			(118.1	)		(189.4	)		(192.2	)
Other			7.4			(0.4	)		5.0

Net Cash Used in Financing Activities			(169.6	)		(79.3	)		(720.2	)

Net Decrease in Cash			(0.1	)		—			(0.2	)
Cash at Beginning of Year			0.1			0.1			0.3

Cash at End of Year		$	—		$	0.1		$	0.1

S-4

SAFECO Corporation and Subsidiaries


Condensed Statements of Cash Flows — Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities Condensed Financial Information of the Registrant (Parent Company)		Schedule II


YEAR ENDED DECEMBER 31		2001			2000			1999

(In Millions)
Net Income (Loss)		$	(989.2	)	$	114.6		$	252.2

ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Equity in Net Income (Loss) of Consolidated Subsidiaries			952.6			(203.9	)		(337.5	)
Dividends Received from Consolidated Subsidiaries			207.6			465.1			746.1
Gain from Sale of Credit Operations, Net of Tax			(54.0	)		—			—
Realized Investment (Gain) Loss			13.0			(0.8	)		0.5
Deferred Income Tax Benefit			(10.2	)		(50.7	)		—
Other			(0.3	)		1.4			1.6
Changes in
	Accrued Income Taxes		25.7			8.6			2.6
	Interest Payable		—			6.9			(3.1	)
	Other Assets and Liabilities		(69.7	)		6.6			9.1

Total Adjustments			1,064.7			233.2			419.3

Net Cash Provided by Operating Activities		$	75.5		$	347.8		$	671.5

There were no significant non-cash financing or investing activities for the years ended December 31, 2001, 2000 and 1999.

S-5

SAFECO Corporation and Subsidiaries

Supplemental Insurance Information

DECEMBER 31, 2001

(In Millions)

Reserve for

Future Policy

Benefits,

Other

Deferred

Losses,

Policy

Claims

Claims and

Acquisition

and Loss

Unearned

Benefits

SEGMENT

Costs

Expenses

Premiums

Payable

PROPERTY & CASUALTY

Personal Lines

Personal Auto

64.4

1,172.5

465.4

Homeowners

79.8

298.5

406.0

Specialty

24.6

98.3

119.8

Commercial Lines

Business Insurance

87.0

1,439.1

484.5

Commercial Insurance

32.8

1,357.1

194.2

Surety

33.7

57.1

87.6

Other

0.4

631.1

15.4

Write-off of Goodwill

—

Restructuring Charges

—

Total

322.7

5,053.7

1,772.9

LIFE & INVESTMENTS*

Retirement Services

120.2

14.7

—

5,174.7

Income Annuities

—

6,245.3

Group

16.5

142.0

2.3

—

Individual

167.4

235.1

7.0

3,204.2

Asset Management

—

Other

—

Write-off of Goodwill

—

Total

304.1

391.8

9.3

14,624.2

Other and Eliminations

—

Consolidated Totals

626.8

5,445.5

1,782.2

14,624.2

Effective December 31, 2001, SAFECO’s asset management companies and Talbot Financial Corporation are reported as part of the Life & Investments operating results.

S-6

Schedule III

Year Ended December 31, 2001

Premiums

Benefits,

Amortization

and

Claims,

of Deferred

Service

Net

Losses and

Policy

Other

Fee

Investment

Adjustment

Acquisition

Operating

Net Written

Revenues

Income

Expenses

Costs

Premiums

1,767.4

127.3

1,429.2

295.0

123.7

1,795.2

740.6

56.5

724.1

114.0

108.1

743.0

201.6

19.3

130.1

36.1

31.5

204.2

1,033.0

126.5

845.0

185.8

165.4

983.3

627.7

93.1

684.1

115.4

104.4

575.7

95.6

9.9

30.3

42.6

20.3

131.5

6.9

25.1

121.4

3.3

11.5

6.3

—

1,165.2

—

44.3

—

4,472.8

457.7

3,964.2

792.2

1,774.4

4,439.2

27.9

339.2

284.5

17.0

50.0

0.4

529.6

463.9

—

18.3

332.5

3.7

212.2

5.7

91.7

141.1

226.7

274.3

9.6

61.1

33.6

2.3

—

27.9

101.5

78.8

—

103.6

—

48.9

637.0

1,180.3

1,234.9

32.3

401.5

—

11.3

—

76.3

5,109.8

1,649.3

5,199.1

824.5

2,252.2

S-7

SAFECO Corporation and Subsidiaries

Supplemental Insurance Information (continued)


DECEMBER 31, 2000

(In Millions)
				Reserve for
				Future Policy
				Benefits,					Other
		Deferred		Losses,					Policy
		Policy		Claims					Claims and
		Acquisition		and Loss			Unearned		Benefits
SEGMENT		Costs		Expenses			Premiums		Payable

PROPERTY & CASUALTY
Personal Lines
	Personal Auto	$	61.5	$	1,134.7		$	437.6
	Homeowners		80.9		261.0			403.5
	Specialty		24.1		86.4			119.7
Commercial Lines
	Business Insurance		93.8		1,625.1			534.8
	Commercial Insurance		38.6		1,201.4			245.0
Surety			12.9		(11.8	)		70.4
Other			0.3		315.9			15.9

Total			312.1		4,612.7			1,826.9

LIFE & INVESTMENTS*
Retirement Services			104.3		14.1			—	$	4,925.8
Income			—		—			—		6,167.8
Group			17.8		173.1			2.9		—
Individual			171.2		229.1			6.7		2,992.1
Asset Management			—		—			—		—
Other			—		—			—		—

Total			293.3		416.3			9.6		14,085.7

Other and Eliminations			—		—			—		—

Consolidated Totals		$	605.4	$	5,029.0		$	1,836.5	$	14,085.7

• Effective December 31, 2001, SAFECO’s asset management companies and Talbot Financial Corporation are reported as part of the Life & Investments operating results. Prior year information has been reclassified to conform to the current year presentation.

S-8

Schedule III


Year Ended December 31, 2000

Premiums					Benefits,			Amortization
and					Claims,			of Deferred
Service		Net			Losses and			Policy		Other
Fee		Investment			Adjustment			Acquisition		Operating		Net Written
Revenues		Income			Expenses			Costs		Costs		Premiums

$	1,723.6	$	125.3		$	1,446.9		$	294.4	$	105.3	$	1,725.6
	729.8		52.9			626.9			116.6		103.0		738.7
	186.7		16.3			108.2			30.3		30.0		193.3
	1,171.7		145.1			948.5			209.5		169.0		1,140.9
	683.4		98.5			612.8			120.3		106.0		671.1
	61.6		3.6			21.2			22.0		6.7		63.8
	6.6		18.8			5.5			3.5		42.7		6.3

	4,563.4		460.5			3,770.0			796.6		562.7	$	4,539.7

	36.8		392.5			328.8			22.8		47.7
	1.2		495.8			440.3			—		30.3
	313.6		2.0			214.7			5.3		91.3
	133.8		206.9			248.4			9.5		58.2
	37.0		5.9			—			—		29.9
	95.8		78.4			—			—		104.0

	618.2		1,181.5			1,232.2			37.6		361.4

	—		(8.5	)		(14.6	)		—		89.8

$	5,181.6	$	1,633.5		$	4,987.6		$	834.2	$	1,013.9

S-9

SAFECO Corporation and Subsidiaries

Supplemental Insurance Information (continued)


DECEMBER 31, 1999

(In Millions)
				Reserve for
				Future Policy
				Benefits,					Other
		Deferred		Losses,					Policy
		Policy		Claims					Claims and
		Acquisition		and Loss			Unearned		Benefits
SEGMENT		Costs		Expenses			Premiums		Payable

PROPERTY & CASUALTY
Personal Lines
	Personal Auto	$	65.6	$	1,125.2		$	435.6
	Homeowners		82.5		223.1			394.9
	Specialty		22.8		79.9			118.6
Commercial Lines
	Business Insurance		102.5		1,561.1			561.1
	Commercial Insurance		40.1		1,119.6			255.0
Surety			11.6		(58.8	)		62.9
Other			0.3		328.5			16.2

Total			325.4		4,378.6			1,844.3

LIFE & INVESTMENTS*
Retirement Services			103.4		12.7			—	$	5,782.3
Income Annuities			—		—			—		5,823.4
Group			13.7		80.9			2.2		—
Individual			156.3		225.7			6.6		2,157.2
Asset Management			—		—			—		—
Other			—		—			—		—

Total			273.4		319.3			8.8		13,762.9

Other and Eliminations			—		—			—		—

Consolidated Totals		$	598.8	$	4,697.9		$	1,853.1	$	13,762.9

S-10

Schedule III


Year Ended December 31, 1999

Premiums				Benefits,		Amortization
and				Claims,		of Deferred
Service		Net		Losses and		Policy		Other
Fee		Investment		Adjustment		Acquisition		Operating		Net Written
Revenues		Income		Expenses		Costs		Costs		Premiums

$	1,725.6	$	131.0	$	1,382.7	$	304.3	$	101.9	$	1,722.5
	708.3		51.9		544.5		120.0		92.0		722.5
	177.7		15.8		97.8		31.6		27.7		182.2
	1,017.6		141.7		830.8		190.7		179.5		1,115.7
	686.4		97.2		553.8		125.0		115.2		676.0
	59.4		3.0		17.9		17.9		8.4		59.8
	7.9		21.7		4.3		3.5		43.9		5.1

	4,382.9		462.3		3,431.8		793.0		568.6	$	4,483.8

	32.9		410.9		310.5		37.2		43.5
	1.1		486.6		423.0		—		22.5
	193.9		1.8		157.1		4.4		53.6
	119.8		144.7		181.6		5.5		47.3
	41.7		2.6		—		—		30.7
	84.5		76.6		—		—		85.1

	473.9		1,123.2		1,072.2		47.1		282.7

	—		2.8		—		—		97.0

$	4,856.8	$	1,588.3	$	4,504.0	$	840.1	$	948.3

S-11

SAFECO Corporation and Subsidiaries


Reinsurance		Schedule IV


				Ceded to			Assumed
		Gross		Other			from Other		Net		Assumed
YEAR ENDED DECEMBER 31		Amount		Companies			Companies		Amount		to Net

(In Millions)
2001
Life Insurance in Force at Year End		$	57,330.1	$	(9,846.3	)	$	181.3	$	47,665.1		0.4	%

Premiums Earned
	Life & Investments	$	368.0	$	(21.8	)	$	4.8	$	351.0		1.4	%
	Accident & Health Insurance		299.6		(13.6	)		—		286.0		0.0	%
	Property & Casualty Insurance		4,597.3		(151.4	)		26.9		4,472.8		0.6	%

	Total	$	5,264.9	$	(186.8	)	$	31.7	$	5,109.8		0.6	%

2000
Life Insurance in Force at Year End		$	55,077.6	$	(8,815.0	)	$	184.2	$	46,446.8		0.4	%

Premiums Earned
	Life & Investments	$	347.2	$	(18.8	)	$	16.6	$	345.0		4.8	%
	Accident & Health Insurance		269.1		(15.1	)		19.2		273.2		7.0	%
	Property & Casualty Insurance		4,717.6		(163.0	)		8.8		4,563.4		0.2	%

	Total	$	5,333.9	$	(196.9	)	$	44.6	$	5,181.6		0.9	%

1999
Life Insurance in Force at Year End		$	48,021.0	$	(6,168.8	)	$	153.8	$	42,006.0		0.4	%

Premiums Earned
	Life & Investments	$	328.2	$	(14.2	)	$	0.7	$	314.7		0.2	%
	Accident & Health Insurance		171.9		(12.7	)		—		159.2		0.0	%
	Property & Casualty Insurance		4,539.4		(164.4	)		7.9		4,382.9		0.2	%

	Total	$	5,039.5	$	(191.3	)	$	8.6	$	4,856.8		0.2	%

S-12

SAFECO Corporation and Subsidiaries


Supplemental Information Concerning Consolidated Property & Casualty Insurance Operations		Schedule VI

AFFILIATION WITH REGISTRANT: PROPERTY & CASUALTY SUBSIDIARIES


DECEMBER 31	2001		2000		1999

(In Millions)
Deferred Policy Acquisition Costs	$	322.7	$	312.1	$	325.4
Reserve for Losses and Loss Adjustment Expenses		5,053.7		4,612.7		4,378.6
Discount Deducted from Loss Reserves		—		—		—
Unearned Premiums		1,772.9		1,826.9		1,844.3


YEAR ENDED DECEMBER 31		2001		2000		1999

Earned Premiums		$	4,472.8	$	4,563.4	$	4,382.9
Net Investment Income			457.7		460.5		462.3
Loss and Loss Adjustment Expenses Incurred Related to
	Current Year		3,619.1		3,621.7		3,353.0
	Prior Year		345.1		148.3		78.8
Amortization of Deferred Policy Acquisition Expenses			792.2		796.6		793.0
Paid Losses and Loss Adjustment Expenses			3,595.5		3,570.0		3,329.0
Net Written Premiums			4,439.2		4,539.7		4,483.8

S-13

SAFECO Corporation and Subsidiaries

EXHIBITS

SAFECO Corporation and Subsidiaries

Index to Exhibits


		3.1		Bylaws (as last amended November 7, 2001).




		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		SAFECO agrees to furnish the Securities and Exchange Commission, upon request, with copies of all instruments defining rights of holders of long-term debt of SAFECO and its consolidated subsidiaries.




		4.2		Indenture, dated as of July 15, 1997, between SAFECO and The Chase Manhattan Bank, 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.




		4.3		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.




		4.4		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.




		4.5		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.




		4.6		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.




		4.7		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.




		4.8		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.




		4.9		Form of 7.875% Notes due 2003, filed as Exhibit 4.9 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.




		4.10		Form of SAFECO Agency Stock Purchase Plan Terms and Conditions as Agreed to by the Agency, filed as Exhibit 4.1 to SAFECO’s Annual Report on Form 10-K for the fiscal year ended December, 2000 (File No. 1-6563), is incorporated herein by this reference.




		10.1		Five-Year Credit Agreement dated as of September 24, 1997, among SAFECO; Bank of America National Trust and Savings Association, as Agent; Mellon Bank, N.A., as Documentation Agent; The Chase Manhattan Bank, as Syndication Agent; and the various co-agents, lead managers, and financial institutions identified in said Credit Agreement as a party thereto, filed as Exhibit 10.1 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.




		10.2		SAFECO Corporation Deferred Compensation Plan for Directors, as Amended and Restated on August 2, 2000, filed as Exhibit 10.1 to SAFECO’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 1-6563), is incorporated herein by this reference.




		10.3		SAFECO Deferred Compensation Plan for Executives, as Amended November 7, 2001.

E-1

SAFECO Corporation and Subsidiaries

Index to Exhibits (continued)


		10.4		Amended and Restated Stock Purchase Agreement among General Electric Capital Corporation, SAFECO Corporation and SAFECO Credit Company, Inc., dated as of July 23, 2001, filed as Exhibit 2 to SAFECO’s Current Report on Form 8-K on August 15, 2001 (File No. 1-6563), is incorporated herein by this reference. SAFECO agrees to furnish the Securities and Exchange Commission, upon request, with copies of all omitted schedules to the foregoing Purchase and Sale Agreement.




		10.5		Form of Change in Control Severance Agreements between SAFECO and each of Bruce M. Allenbaugh, Michael E. LaRocco, Dale E. Lauer, Michael S. McGavick, Allie R. Mysliwy, James W. Ruddy, Yomtov Senegor and Randall H. Talbot, in each case dated as of November 7, 2001.




		10.6		SAFECO Long-Term Incentive Plan of 1997 as Amended and Restated February 7, 2001.




		10.7		Form of Stock Option Contract granted under the SAFECO Long-Term Incentive Plan of 1997, filed as Exhibit 10.6 to SAFECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 1-6563), is incorporated herein by this reference.




		10.8		Form of Nonqualified Stock Option Award Agreement — Non-Employee Director granted under the SAFECO Long-Term Incentive Plan of 1997, filed as Exhibit 10.4 to SAFECO’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (File No. 1-6563), is incorporated herein by this reference.




		10.9		Form of Restricted Stock Rights Award Agreement granted under the SAFECO Long-Term Incentive Plan of 1997, filed as Exhibit 10.7 to SAFECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 1-6563), is incorporated herein by this reference.




		10.10		Form of Performance Stock Rights Award Agreement granted under the SAFECO Long-Term Incentive Plan of 1997, filed as Exhibit 10.8 to SAFECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 1-6563), is incorporated herein by this reference.




		10.11		SAFECO Incentive Plan of 1987 contained in the Prospectus dated November 10, 1989, as amended January 31, 1990, filed as Exhibit 10 to SAFECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 1-6563), and the Supplement to such Prospectus dated November 8, 1990, filed as Exhibit 10 to SAFECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 1-6563), are incorporated herein by this reference.




		10.12		Separation Agreement between SAFECO Insurance Company of America and W. Randall Stoddard dated August 2, 2000, filed as Exhibit 10.3 to SAFECO’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 1-6563), is incorporated herein by this reference.




		10.13		Separation Agreement between SAFECO Corporation and Roger H. Eigsti dated October 3, 2000, filed as Exhibit 10.13 to SAFECO’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 1-6563), is incorporated herein by this reference.




		10.14		Retirement Agreement between SAFECO Corporation and Boh A. Dickey dated as of January 29, 2001, filed as Exhibit 10.1 to SAFECO’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File No. 1-6563), is incorporated herein by this reference.




		10.15		Retirement Agreement between SAFECO Corporation and Rod A. Pierson dated October 15, 2001.




		10.16		Employment Agreement between SAFECO Corporation and Michael S. McGavick dated as of January 26, 2001, filed as Exhibit 10.2 to SAFECO’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File No. 1-6563), is incorporated herein by this reference.

E-2

SAFECO Corporation and Subsidiaries

Index to Exhibits


		10.17		Incentive Compensation Plan for President/Chief Executive Officer 2001, filed as Exhibit 10.3 to SAFECO’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File No. 1-6563), is incorporated herein by this reference.




		10.18		Nonqualified Stock Option Contract between SAFECO and Michael S. McGavick dated January 26, 2001, filed as Exhibit 10.4 to SAFECO’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File No. 1-6563), is incorporated herein by this reference.




		10.19		Restricted Stock Rights Award Agreement issued under the SAFECO Long-Term Incentive Plan of 1997 between SAFECO and Michael S. McGavick dated January 26, 2001, filed as Exhibit 10.5 to SAFECO’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File No. 1-6563), is incorporated herein by this reference.




		10.20		Performance Stock Rights Award Agreement issued under the SAFECO Long-Term Incentive Plan of 1997 between SAFECO and Michael S. McGavick dated March 27, 2001, filed as Exhibit 10.7 to SAFECO’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File No. 1-6563), is incorporated herein by this reference.




		10.21		Description of the SAFECO Corporation Interim Leadership Performance Program, filed as Exhibit 10 to SAFECO’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (File No. 1-6563), is incorporated herein by this reference.




		10.22		Form of Promissory Note in favor of General America Corporation by each of Michael S. McGavick, Michael E. LaRocco and Yomtov Senegor; in the case of Mr. McGavick in the principal amount of $1,275,000 and dated June 28, 2001; in the case of Mr. LaRocco in the principal amount of $780,000 and dated October 8, 2001; and in the case of Mr. Senegor in the principal amount of $1,000,000 and dated October 11, 2001.




		10.23		SAFECO Leadership Performance Plan, dated as of January 1, 2002.




		11		Computation of Income (Loss) Per Share of Common Stock




		12		Computation of Ratio of Earnings (Loss) to Fixed Charges




		18		Letter from Ernst & Young LLP dated May 11, 2001 regarding change in accounting principles, filed as Exhibit 18 to SAFECO’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File No. 1-6563), is incorporated herein by this reference.




		21		Subsidiaries of the Registrant




		23.1		Consent of Ernst & Young LLP, Independent Auditors

E-3 EX-3.1 3 v79351ex3-1.txt EXHIBIT 3.1 Exhibit 3.1 BYLAWS OF SAFECO CORPORATION (As last amended effective November 7, 2001) ARTICLE I STOCKHOLDERS' MEETINGS 1. ANNUAL MEETING. (a) The annual meeting of the stockholders of the corporation for the election of Directors to succeed those whose terms expire, and for the transaction of such other business as may properly come before the meeting, shall be held at 11:00 o'clock in the morning on the first Wednesday in May or, if such day is a legal holiday, then on the following business day or on such other day as may be designated by the Chairman of the Board of Directors, the President, or the Board of Directors ("Board of Directors"). The meeting shall be held at the principal executive office of the corporation or at such other place as may be designated in the notice of the meeting. (b) For business to be properly brought before the annual meeting in accordance with these Bylaws, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (iii) otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before the annual meeting by a stockholder, the stockholder must file a written notice of intention to bring such business ("Business Notice") with the Secretary of the corporation not less than 90 days before the date specified in Section 1(a) of this Article I, or if the meeting is not held within 14 days of the date specified in Section 1(a) of this Article I, then 90 days before the date of the meeting. The Business Notice shall state the name, address, telephone number and class and number of shares of capital stock owned by the stockholder who intends to bring such business before the meeting; and, as to each matter the stockholder proposes to bring before the annual meeting, a brief description of the business desired to be brought before the annual meeting, the reasons for conducting such business at the annual meeting and any material interest of the stockholder in such business. (c) No business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 1; provided, however, that nothing in this Section 1 shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting. The presiding officer of an annual meeting shall, if the facts warrant, determine that business was not properly brought before the meeting in accordance with the foregoing procedure and, if the presiding officer should so determine, the presiding officer shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. SAFECO Corporation Bylaws November 7, 2001 Page 2 2. SPECIAL MEETINGS. Special meetings of the stockholders may be called only by the Board of Directors. Such special meetings may be for any purpose or purposes, which shall be described in the notice of such special meeting, and shall be at the date, time and place prescribed in the notice of the meeting. 3. NOTICE OF MEETING. (a) Written notice of each annual and special stockholders' meeting shall be given to all stockholders of record entitled to notice of such meeting no fewer than 10 nor more than 60 days before the meeting date, except that notice of a stockholders' meeting to act on an amendment to the articles of incorporation, a plan of merger or share exchange, a proposed sale of assets other than in the regular course of business or the dissolution of the corporation shall be given no fewer than 20 nor more than 60 days before the meeting date. If such written notice is placed in the United States mail, postage prepaid, and correctly addressed to the stockholder's address shown in the corporation's current record of stockholders, then the notice is effective when mailed. (b) Notice of any stockholders' meeting may be waived in writing by any stockholder at any time, either before or after the meeting. In addition, notice of the date, time, place and purpose of the meeting shall be deemed waived by any stockholder who attends a stockholders' meeting in person or by proxy, unless the stockholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting. 4. ORGANIZATION OF MEETING - QUORUM. A stockholders' meeting, duly called, can be organized for the transaction of business whenever a quorum is present. The presence, in person or by proxy, of the holders of a majority of the votes entitled to be cast at the meeting shall constitute a quorum. Once a share is represented for any purpose at a meeting, other than solely to object to holding the meeting or transacting business at the meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting. 5. ADJOURNED MEETINGS. Unless a new record date is or must be set for an adjourned meeting, an adjournment or adjournments of any stockholders' meeting may be taken to the date, time and place announced by the presiding officer at the meeting, without new notice being given; but any meeting at which directors are to be elected shall be adjourned only from day to day until such directors are elected. 6. VOTING AT MEETINGS. Each holder of common stock shall be entitled to one vote for each share of common stock then of record in the holder's name on the books of the corporation. Each holder of a share of capital stock other than common stock shall have the right to vote on those matters prescribed by the Board of Directors in establishing the preferences, limitations and relative rights for that class of capital stock. Every stockholder shall have the right to vote either in person or by proxy. All voting at stockholders' meetings shall be viva voce, unless any qualified voter shall demand a vote by ballot. In the case of voting by ballot, each ballot shall state the name of the stockholder voting, the number of shares owned by the SAFECO Corporation Bylaws November 7, 2001 Page 3 stockholder, and, in addition, if such vote be cast by proxy it shall also state the name of the proxy. ARTICLE II BOARD OF DIRECTORS 1. NUMBER AND QUALIFICATIONS. The business and affairs of the corporation shall be managed under the direction of a Board of Directors of from 10 to 18 directors, as set from time to time by resolution of the Executive Committee, which directors need not be stockholders of the corporation. 2. ELECTION - TERM OF OFFICE. The directors shall be divided into three classes, designated Class 1, Class 2, and Class 3. Each class shall consist, as nearly as may be possible, of one-third of the total number of Directors constituting the entire Board of Directors. At each annual meeting of stockholders successors to the class of Directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of Directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of Directors in each class as nearly equal as possible, but in no case will a decrease in the number of Directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which the director's term expires and until the director's successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. In the event of a failure to hold an election of Directors at any annual stockholders' meeting, election of Directors may be held at a special meeting of the stockholders called for that purpose; provided, that notice thereof be given all stockholders entitled to vote at such meeting at least 30 days prior to the date set for such special meeting. 3. VACANCIES. Any vacancy on the Board of Directors shall be filled by the Board of Directors or, if the directors in office constitute fewer than a quorum of the Board of Directors, then by the affirmative vote of the majority of all directors in office. 4. NOMINATIONS OF DIRECTORS. (a) The Board of Directors or at its direction a committee of the Board of Directors shall nominate individuals for election as directors at the annual meeting of stockholders and at any special meeting of stockholders called for the purpose of electing directors. Nominations may also be made by any stockholder entitled to vote for the election of Directors at such meeting who complies with the notice procedures set forth in this Section 4. (b) A nomination for election as director, other than nominations made by or at the direction of the Board of Directors, may be made only if a written notice of intention to nominate ("Nomination Notice") has been received by the secretary to the Board of Directors not less than 90 days before the date specified in Section 1(a) of Article I above, or if the meeting is not held within 14 days of the date specified in Section 1(a) of Article I above, then 90 days before the SAFECO Corporation Bylaws November 7, 2001 Page 4 date of the meeting. The Nomination Notice shall state the name, address, telephone number and class and number of shares of capital stock owned by the stockholder who intends to make a nomination; the name, age, address and telephone number of each nominee; a description of each nominee's business experience for the past five years; a statement whether the nominee has ever been prosecuted for any crime or been a party to any proceeding in which it was alleged the nominee or any affiliate of the nominee violated any law or regulation and, if so, a complete description of such prosecution or proceeding; and any other information relating to each nominee that is required to be disclosed in solicitations for proxies for election of Directors pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended. The corporation may require any proposed nominee to furnish such additional information as may reasonably be required to determine the eligibility of such proposed nominee. In order to be considered valid the Nomination Notice must be accompanied by the written consent of each nominee to be nominated and a statement of each nominee's intention to serve as a director if elected. (c) No person shall be eligible for election as a director unless nominated in accordance with the procedures set forth in this Section 4. The presiding officer at the stockholders' meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure and, if the presiding officer should so determine, the presiding officer shall so declare to the meeting and the defective nomination shall be disregarded. 5. ANNUAL MEETING. The first meeting of each newly elected Board of Directors shall be known as the annual meeting thereof. 6. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held quarterly, on the first Wednesday in February, May, August and November of each year, at such time and place as designated in the notice of the meeting. 7. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any place at any time when called by the Chairman of the Board of Directors or the President, or when called by the Secretary or an Assistant Secretary on request of three directors, or when called by any director during a national emergency of the kind that would make emergency bylaws operative for domestic insurers under the provisions of Sections 48.07.160 through 48.07.200 of the Revised Code of Washington. 8. NOTICE OF MEETINGS. (a) Notice of the time and place of meetings of the Board of Directors and of meetings of committees of the Board of Directors shall be given by the secretary to the Board of Directors, or by the person calling the meeting, in writing or orally at least two days prior to the day upon which the meeting is to be held. Notice may be given by mail, private carrier, personal delivery, telegraph or teletype, telephone, electronic transmission or by wire or wireless equipment which transmits a facsimile of the notice. SAFECO Corporation Bylaws November 7, 2001 Page 5 (b) A director may waive notice of any meeting of the Board of Directors or any committee of the Board of Directors in writing before or after the date and time of the meeting and such waiver shall be deemed the equivalent of giving notice of the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors or any committee of the Board of Directors need be specified in the waiver of notice of such meeting. (c) A director's attendance at or participation in a Board of Directors or committee meeting shall constitute a waiver of notice of such meeting, unless the director at the beginning of the meeting, or promptly upon the director's arrival at the meeting, objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. 9. QUORUM. A majority of the total number of Directors fixed by or in the manner provided in these Bylaws or, if vacancies exist on the Board of Directors, a majority of the total number of Directors then serving on the Board of Directors shall constitute a quorum for the transaction of business at any Board of Directors' meeting; provided, however, that a quorum may not be less than one-third of the total number of Directors fixed by or in the manner provided by these Bylaws. When a quorum is present, a majority of the directors in attendance at a meeting shall be sufficient to transact business and to adjourn the meeting from time-to-time without further notice. 10. CHAIRMAN OF THE BOARD OF DIRECTORS. The Directors shall appoint one member of the Board of Directors to serve as Chairman of the Board of Directors. The Chairman of the Board of Directors shall preside at all meetings of the stockholders and Directors and shall have such other duties and responsibilities as the Board of Directors may assign from time-to-time. ARTICLE III EXECUTIVE COMMITTEE 1. MEMBERSHIP. The Executive Committee shall consist of no fewer than three members and shall include (i) the lead director of the Board of Directors, (ii) the chairs of each of the Audit, Compensation, Finance and Nominating Committees, and (iii) any other director of the corporation appointed by the Board of Directors. The lead director shall be the chair of the Executive Committee, unless the Board of Directors designates some other member of the Executive Committee as chair. 2. POWERS AND DUTIES. (a) Other than those powers specifically denied to a committee of a Board of Directors under Washington law, the Executive Committee may exercise all the powers of the Board of Directors in the management of the business of the SAFECO Corporation Bylaws November 7, 2001 Page 6 corporation when the Board of Directors is not in session. All such actions of the Executive Committee shall be reported to the Board of Directors at its meeting next succeeding such action and shall be subject to revision or alteration by the Board of Directors; provided, that no rights of third parties shall be affected by any such revision or alteration. (b) The Executive Committee shall determine the corporation's policy regarding charitable contributions and shall review and make recommendations to the Board of Directors as appropriate on fundamental matters, including election of Directors, succession planning, appointment of officers of the corporation and its principal subsidiaries, capital allocation among the corporation's operations, issuance and repurchase or redemption of securities, dividends to shareholders, formation of subsidiaries, and material acquisitions or dispositions of subsidiaries or assets. 3. RULES OF PROCEDURE. The Executive Committee shall fix its own rules of procedure and shall meet where and as provided by such rules or by resolution of the Board of Directors. Special meetings of the Executive Committee may be called at any time by the chair of the Executive Committee or any two members. At all meetings of the Executive Committee, the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business. ARTICLE IV FINANCE COMMITTEE 1. MEMBERSHIP. The Finance Committee shall consist of no fewer than five members appointed by the Board of Directors, one of whom shall be designated as its chair by the Board of Directors. Each member of the Finance Committee shall continue as a member at the pleasure of the Board of Directors. 2. CHARTER. The Finance Committee shall be governed under a Finance Committee Charter, which shall be adopted by the Board of Directors. 3. RULES OF PROCEDURE. The Finance Committee shall, consistent with its Charter, fix its own rules of procedure and shall meet where and as provided by its Charter, its rules or the Board of Directors. Special meetings of the Committee may be called at any time by the chair of the Finance Committee or by any two members. At all meetings, the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business. SAFECO Corporation Bylaws November 7, 2001 Page 7 ARTICLE V AUDIT COMMITTEE 1. MEMBERSHIP. The Audit Committee shall consist of no fewer than three members who meet the qualifications described in the Audit Committee Charter and who are appointed by the Board of Directors. The Board of Directors shall designate one member of the Audit Committee as its chair. Each member of the Audit Committee shall continue as a member at the pleasure of the Board of Directors. 2. CHARTER. The Audit Committee shall be governed under an Audit Committee Charter which shall be adopted by the Board of Directors. 3. RULES OF PROCEDURE. The Audit Committee shall, consistent with its Charter, fix its own rules of procedure and meet where and as provided by its Charter, its rules of procedure or the Board of Directors. Special meetings of the Audit Committee may be called at any time by the chair of the Audit Committee or by any two members. At all meetings the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business. ARTICLE VI NOMINATING COMMITTEE 1. MEMBERSHIP. The Nominating Committee shall consist of no fewer than three members appointed by the Board of Directors, not more than one of whom shall be an employee of the corporation or any of its subsidiaries. The Board of Directors shall designate one member of the Nominating Committee as its chair. Each member of the Nominating Committee shall continue as a member at the pleasure of the Board of Directors. 2. POWERS AND DUTIES. (a) The Nominating Committee shall: (1) Review qualifications of candidates for Board of Directors membership from whatever source received; (2) Recommend to the Executive Committee the slate of director candidates to be proposed for election by stockholders at the annual meeting; (3) Recommend to the Executive Committee candidates to fill director vacancies which occur between annual meetings of stockholders; SAFECO Corporation Bylaws November 7, 2001 Page 8 (4) Recommend to the Board of Directors criteria regarding personal qualifications for nomination as director, including experience, skills, affiliations and characteristics; (5) Recommend to the Board of Directors criteria regarding the composition of the Board of Directors, including total size and number of employee-directors; (6) Recommend to the Board of Directors criteria relating to tenure as a director, including retirement age and continuation of a director in an honorary or similar capacity; and (7) Recommend to the Board of Directors the fees to be paid to directors, including retainer, meeting and committee meeting fees, and any additional fees to be paid to a director for particular service, e.g., to the chairman of the Board of Directors or chair of any committee. The Committee shall not recommend that any such fees be paid to any director who is also an employee of the corporation or its subsidiaries. (b) All actions of the Nominating Committee shall be recorded in minutes of its meetings and reported to the Board of Directors. 3. RULES OF PROCEDURE. The Nominating Committee shall fix its own rules of procedure and shall meet where and as provided by such rules or by resolution of the Board of Directors. Special meetings of the Nominating Committee may be called at any time by the chair of the Nominating Committee or by any two members. At all meetings, the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business. ARTICLE VII COMPENSATION COMMITTEE 1. MEMBERSHIP. The Compensation Committee shall consist of no fewer than three members appointed by the Board of Directors, none of whom shall be an employee of the corporation or any of its subsidiaries. The Board of Directors shall designate one member of the Compensation Committee as its chair. Each member of the Compensation Committee shall continue as a member at the pleasure of the Board of Directors. 2. POWERS AND DUTIES. (a) The Compensation Committee shall: (1) Review and approve in advance salary increases for officers of the corporation and employees of its subsidiaries where the proposed salary exceeds an amount set from time-to-time by the Board of Directors; SAFECO Corporation Bylaws November 7, 2001 Page 9 (2) Report to the Board of Directors remuneration information concerning the chief executive officer and through the chief executive officer make such information as to any employee available to any director upon request; (3) Review and recommend to the Board of Directors any additional employee benefit program of a substantial nature and material changes to existing programs; (4) Review and approve changes required by law to be made to existing employee benefit programs and non-material changes to existing programs; and (5) Administer the corporation's stock option program. (b) All actions of the Compensation Committee shall be recorded in minutes of its meetings and reported to the Board of Directors. 3. RULES OF PROCEDURE. The Compensation Committee shall fix its own rules of procedure and shall meet where and as provided by such rules or by resolution of the Board of Directors. Special meetings of the Compensation Committee may be called at any time by the chair of the Compensation Committee or by any two members. At all meetings, the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business. ARTICLE VIII OTHER COMMITTEES The Board of Directors shall have authority to establish by resolution such other committees as the Board of Directors may from time to time deem necessary or advisable. The membership, duties and authority of such committees shall be as the Board of Directors may from time to time establish. ARTICLE IX OFFICERS 1. OFFICERS ENUMERATED - APPOINTMENT. The officers of the corporation shall be a President, one or more Vice Presidents, one or more Assistant Vice Presidents, a Secretary, one or more Assistant Secretaries, a Treasurer, and one or more Assistant Treasurers, all of whom shall be appointed by the Board of Directors at the annual meeting thereof, to hold office for the term of one year and until their successors are appointed and qualified. SAFECO Corporation Bylaws November 7, 2001 Page 10 2. QUALIFICATIONS. None of the officers of the corporation need be a director. Any two or more corporate offices may be combined in one person. 3. PRESIDENT. The President shall be the chief executive officer of the corporation and shall have general charge, supervision and control over the business and affairs of the corporation and of its subsidiaries, subject to the ultimate authority of the Board of Directors. In the absence of the Chairman of the Board of Directors the President shall act in the place of the Chairman of the Board of Directors with the authority to exercise all of the Chairman's powers and perform the Chairman's duties. 4. VICE PRESIDENTS. In the absence or disability of the President, one of the Vice Presidents, in the order determined by seniority of responsibility and then order of their appointment, shall act as President until such time as the Board of Directors acts to appoint an individual to the office of President. One or more of the vice presidents may be designated by the Board of Directors as executive vice president, senior vice president or such other title as the Board of Directors deems appropriate for the position and duties. 6. SECRETARY. The Secretary shall be the custodian of the records, books of account, and seal of the corporation, and, in general, shall perform all duties usually incident to the office of Secretary, and make such reports and perform such other duties as may from time to time be requested of or assigned by the Board of Directors, the Executive Committee or the chief executive officer of the corporation. 7. ASSISTANT SECRETARIES. The Assistant Secretaries shall perform such duties as may be assigned to them by the Secretary of the corporation, the Board of Directors, the Executive Committee, or the chief executive officer of the corporation. 8. TREASURER. The Treasurer shall have charge and custody of and be responsible for all funds and securities of the corporation. The Treasurer shall deposit all such funds in the name of the corporation in such depositories or invest them in such investments as may be designated or approved by the Finance Committee or the Board of Directors, and shall authorize disbursement of the funds of the corporation in payment of just demands against the corporation, or as may be ordered by the Board of Directors, the Executive Committee, or the Finance Committee on securing proper vouchers for such disbursements. The Treasurer shall render to the Board of Directors from time to time as may be required an account of all transactions as Treasurer, and shall perform such other duties as may from time to time be assigned by the Board of Directors, the Executive Committee, the Finance Committee, or the chief executive officer of the corporation. 9. ASSISTANT TREASURERS. The Assistant Treasurers shall perform such duties as may be assigned to them by the Treasurer, the Board of Directors, the Executive Committee, or the chief executive officer of the corporation. SAFECO Corporation Bylaws November 7, 2001 Page 11 10. OTHER OFFICERS AND AGENTS. The Board of Directors may appoint such other officers and agents as it shall deem necessary to exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. 11. REMOVAL. Any officer of the corporation may be removed by the affirmative vote of a majority of the whole Board of Directors; such removal, however, shall be without prejudice to the contract rights of the person so removed. ARTICLE X CORPORATION PROXIES Unless otherwise ordered by the Board of Directors, any and all shares of stock owned or held by the corporation in any other corporation shall be represented and voted at any meeting of the stockholders of such other corporation by any one of the following officers of the corporation in the following order who may attend such meeting; i.e., the President, a Vice President, or the Treasurer, and such representation by any one of the officers above named shall be deemed and considered a representation in person by the corporation at such meeting. Any one of the officers above named may execute a proxy appointing any other person as attorney and proxy to represent the corporation at such stockholders' meeting and to vote all stock of such corporation owned or held by the corporation with all power and authority in the premises that any of the officers above named would possess if personally present. The Board of Directors by resolution may from time to time confer like powers upon any other person or persons. ARTICLE XI STOCK 1. CERTIFICATES OF STOCK. Certificates of stock of the corporation shall be issued in such form in accordance with the corporation law of the State of Washington as may be approved by the Board of Directors, and may be signed by the chief executive officer or any Vice President, and by the Secretary or any Assistant Secretary. 2. TRANSFERS. Shares of stock may be transferred by delivery of the certificates therefor accompanied either by an assignment in writing on the back of the certificate or by a written power of attorney to sell, assign and transfer the same by the record holder of the certificate. No transfer shall be valid except as between the parties thereto until such transfer shall have been made on the books of the corporation. Except as specifically provided in these Bylaws, no shares of stock shall be transferred on the books of the corporation until the outstanding certificate therefor has been surrendered to the corporation. 3. STOCKHOLDERS OF RECORD. The corporation shall be entitled to treat the holder of record on the books of the corporation of any share or shares of stock as the holder in fact thereof SAFECO Corporation Bylaws November 7, 2001 Page 12 for all purposes, including the payment of dividends on such stock and the right to vote such stock. 4. LOSS OR DESTRUCTION OF CERTIFICATES. In the case of loss or destruction of any certificate of stock, another may be issued in its place upon proof of such loss or destruction, and upon the giving of a satisfactory bond or indemnity to the corporation. A new certificate may be issued without requiring any bond when in the judgment of the Treasurer it is proper to do so. 5. The Board of Directors shall have the power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, conversion and registration of certificates for shares of the stock of the corporation not inconsistent with these Bylaws, the Articles of Incorporation, or the laws of the State of Washington. ARTICLE XII INDEMNIFICATION 1. DIRECTORS. (a) Each person who was or is a party to any proceeding (whether brought by or in the right of the corporation or otherwise) by reason of the fact that he or she is or was a director of the corporation, or, while a director of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan (an "Indemnitee"), whether the basis of a proceeding is an alleged action in an official capacity as such a director, officer, partner, trustee, employee, or agent or in any other capacity while serving as such a director, officer, partner, trustee, employee, or agent, shall be indemnified and held harmless by the corporation against all judgments, penalties, fines, settlements, and reasonable expenses actually incurred by the Indemnitee in connection with such proceeding. Except as provided in paragraph (d) of this Section 1 with respect to proceedings seeking to enforce rights to indemnification, the corporation shall indemnify any Indemnitee only if the proceeding (or part thereof) was authorized or ratified by the Board of Directors. (b) No indemnification shall be provided to any Indemnitee for acts or omissions of the Indemnitee finally adjudged to be intentional misconduct or a knowing violation of law, for conduct of the Indemnitee finally adjudged to be in violation of Section 23B.08.310 of the Washington Business Corporation Act, for any transaction with respect to which it was finally adjudged that such Indemnitee personally received a benefit in money, property or services to which the Indemnitee was not legally entitled or if the corporation is otherwise prohibited by applicable law from paying such indemnification, except that if Section 23B.08.560 or any successor provision is hereafter amended, the restrictions on indemnification set forth in this paragraph (b) shall be as set forth in such amended statutory provision. SAFECO Corporation Bylaws November 7, 2001 Page 13 (c) The right to indemnification conferred under this Article XII shall include the right to be paid by the corporation the expenses incurred in defending any proceeding in advance of its final disposition. An advancement of expenses shall be made upon delivery to the corporation of an undertaking, by or on behalf of an Indemnitee, to repay all amounts so advanced if it is ultimately determined by final judicial decision from which there is no right to appeal that such Indemnitee is not entitled to be indemnified for such expenses under this Article XII. (d) If a claim under this Section 1 is not paid in full by the corporation within 60 days after a written claim has been received by the corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the Indemnitee may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. An Indemnitee shall be presumed to be entitled to indemnification under this Article XII upon submission of a written claim (and, in an action brought to enforce a claim for an advancement of expenses, where the required undertaking has been tendered to the corporation), and the corporation shall have the burden of proof to overcome the presumption that the Indemnitee is so entitled. 2. OFFICERS. The corporation shall extend rights to indemnification and advancement of expenses in the same manner and to the same extent provided to directors under Section 1 of this Article to any person, not a director of the corporation, who is or was an officer of the corporation or is or was serving at the request of the corporation as a director, officer, partner, trustee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan. 3. OTHER EMPLOYEES AND AGENTS. The corporation may, by action of the Board of Directors, grant rights to indemnification and advancement of expenses to employees and agents or any class or group of employees and agents of the corporation (i) with the same scope and effect as the provisions of this Article with respect to the indemnification and advancement of expenses of directors; (ii) pursuant to rights provided by the Washington Business Corporation Act; or (iii) as are otherwise consistent with law. 4. DEFINITIONS. For purposes of this Article XII, the terms "director," "corporation," "expenses," "party" and "proceeding" have those meanings assigned to them in Section 23B.08.500 of the Washington Business Corporation Act. 5. SERVICE AT THE REQUEST OF THE CORPORATION. Any person who, while a director, officer or employee of the corporation, is or was serving (a) as a director or officer of another corporation of which a majority of the shares entitled to vote is held by the corporation or (b) as a partner, trustee or otherwise in a management capacity in a partnership, joint venture, trust or other enterprise of which the corporation or a wholly-owned subsidiary of the corporation SAFECO Corporation Bylaws November 7, 2001 Page 14 is a general partner or has a majority ownership shall be deemed to be so serving at the request of the corporation. 6. PROCEDURES EXCLUSIVE. Pursuant to Section 23B.08.560(2) or any successor provision of the Washington Business Corporation Act, the procedures for indemnification and advancement of expenses set forth in this Article are in lieu of the procedures required by Section 23B.08.550 or any successor provision of the Washington Business Corporation Act. 7. NOT EXCLUSIVE -- CONTINUING. The indemnification provided by this Article shall not be deemed exclusive of other rights to which the director, officer, employee or agent may be entitled as a matter of law or by contract, and shall continue as to a person who has ceased to be a director, officer, partner, trustee, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. 8. INSURANCE. The corporation may maintain insurance at its expense to protect itself and any director, officer, partner, trustee, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Washington Business Corporation Act. ARTICLE XIII SEAL The seal of this corporation shall consist of a flat-faced, circular die which shall include: "SAFECO CORPORATION," "Corporate Seal, 1929" and the corporation's logo design. ARTICLE XIV COPIES OF RESOLUTIONS Any person dealing with the corporation may rely upon a copy of any of the records of the proceedings, resolutions, or votes of the stockholders, the Board of Directors, and any committees of or established by the Board of Directors, when certified by the chief executive officer, a Vice President, Secretary, or an Assistant Secretary. SAFECO Corporation Bylaws November 7, 2001 Page 15 ARTICLE XV AMENDMENT OF BYLAWS 1. BY THE STOCKHOLDERS. These Bylaws may be amended, altered or repealed at any meeting of the stockholders, if notice of the proposed alteration or amendment is contained in the notice of the meeting. 2. BY THE BOARD OF DIRECTORS. These Bylaws may be amended, altered or repealed by the affirmative vote of a majority of the Board of Directors at any regular meeting of the Board of Directors, or at any special meeting if notice of the proposed alteration or amendment is contained in the notice of such special meeting; provided, however, that the Board of Directors shall not amend, alter or repeal any Bylaw in such a manner as to affect in any way the qualification, classification, or term of office of the directors. Any action of the Board of Directors with respect to the amendment, alteration or repeal of these Bylaws is hereby made expressly subject to change or repeal by the stockholders. EX-10.3 4 v79351ex10-3.txt EXHIBIT 10.3 EXHIBIT 10.3 SAFECO DEFERRED COMPENSATION PLAN FOR EXECUTIVES AS AMENDED AND RESTATED NOVEMBER 4, 1998 (AS LAST AMENDED NOVEMBER 7, 2001) 1. PURPOSE The purpose of the SAFECO Deferred Compensation Plan for Executives (the "Plan") is to provide a select group of management or highly compensated employees of SAFECO Corporation ("SAFECO") and its Subsidiaries with an opportunity to defer all or part of the Eligible Compensation payable to such employees and all or part of such employees' Excess Contributions to the Savings Plan. The Plan shall be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. 2. DEFINITIONS 2.01 Account. The term "Account" means a separate deferred compensation account established by SAFECO under this Plan in the name of a Participant. 2.02 Administrative Committee. The "Administrative Committee" means the three-person committee appointed by the SAFECO Board of Directors to administer the Corporation's qualified retirement and savings plans. 2.03 Annual Installment Method. "Annual Installment Method" means a distribution of a Participant's Account in annual installments over a stated number of years (not to exceed 20), with each installment paid in January as soon as practicable after year-end. The amount of the installment payable following any given year-end shall be determined by valuing the Participant's Account as of the close of business on the last business day of the year and then multiplying that value by a fraction, the numerator of which is one and the denominator of which is the remaining number of annual payments. (For example, for an Annual Installment Method of 10 years, the first payment will be 1/10 of the Account, the following year, 1/9 of the Account, etc.) 2.04 Beneficial Owner. "Beneficial Owner" has the meaning set forth in Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended. 2.05 Beneficiary. "Beneficiary" refers to one or more trusts, estates, other entities or individuals designated by the Participant to receive certain benefits described in the Plan in the event of the Participant's death. 2.06 Board of Directors or Board. The "Board of Directors" or the "Board" refers to the Board of Directors of SAFECO Corporation. 1 2.07 Change in Control. A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs has occurred: (a) Any Person is or becomes the Beneficial Owner, directly or indirectly, of SAFECO securities (not including in the securities beneficially owned by such Person any securities acquired directly from SAFECO or its affiliates, as defined in Rule 12b-2 adopted under the Exchange Act ("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 (x) of paragraph (c) of this Section 2.07; or (b) The following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who were directors of SAFECO on the date the Plan was adopted by the SAFECO Board of Directors, 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 of Directors or nomination for election by SAFECO's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors on the date the Plan was adopted or whose appointment, election or nomination for election was previously so approved or recommended; or (c) There is consummated a merger or consolidation of SAFECO or any Subsidiary with any other corporation, other than (x) 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, 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 (y) 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 other than in connection with the acquisition by SAFECO or its Affiliates of a business) representing 25% or more of the combined voting power of SAFECO's then outstanding securities; or (d) The shareholders of SAFECO approve a plan of complete liquidation or dissolution or there is consummated an agreement for the sale or disposition 2 of all or substantially all of SAFECO's assets, other than a sale or disposition by SAFECO of all or substantially all of its assets to an entity of which at least 75% of the combined voting power is owned by shareholders 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 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 SAFECO's assets immediately following such transaction or series of transactions. 2.08 Closing Price. "Closing Price" means the price at which the last trade of SAFECO Common Stock was made prior to 1:00 p.m. Pacific Coast time on the NASDAQ Stock Market. 2.09 Code. "Code" means the Internal Revenue Code of 1986, as amended. 2.10 Common Stock. "Common Stock" means SAFECO Corporation common stock. 2.11 Compensation Committee. "Compensation Committee" means the Compensation Committee of the Board of Directors. 2.12 Corporation. "Corporation" means SAFECO Corporation and its Subsidiaries, collectively. 2.13 Deferral Election. "Deferral Election" means a written document in the form prescribed by the Administrative Committee which an employee of SAFECO or any of its Subsidiaries has signed and delivered to the Administrative Committee, and which the Administrative Committee has accepted, indicating the employee's intent to participate in the Plan and the amount or percentage of Eligible Compensation, Qualifying Gains and/or Excess Contributions which the employee desires to have credited to his or her Account in the Plan. 2.14 Deferrals. "Deferrals" refers to the Eligible Compensation, Qualifying Gains and/or Excess Contributions that a Participant designates in his or her Deferral Election(s) pursuant to the terms and conditions of the Plan. 2.15 Disability. "Disability" means a physical or mental condition occurring prior to the Participant's Retirement which, in the sole judgment of the Administrative Committee, based upon medical reports and other evidence satisfactory to the Administrative Committee, presumably permanently prevents a Participant from satisfactorily performing his or her usual duties for the Corporation or the duties of 3 any other position or positions for the Corporation for which such Participant is qualified by reason of training, education or experience. 2.16 Eligible Compensation. "Eligible Compensation" means compensation payable to a Participant by the Corporation in the form of Salary, bonus, settlements of RSRs, dividend equivalents payable on RSRs, settlements of PSRs, and any other form that the Compensation Committee may determine in its sole discretion, excluding gains on the exercise of stock options. 2.17 Eligible Stock Option. "Eligible Stock Option" means a nonqualified stock option to purchase Common Stock exercisable under any plan or arrangement designated by the Compensation Committee that permits a Participant to defer gain on the exercise of the option. 2.18 Excess Contribution. "Excess Contribution" means the amount of Salary (not to exceed 16%) that a Participant has elected to contribute to the Savings Plan which is in excess of applicable Code limitations on contributions to the Savings Plan. 2.19 Exchange Act. "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2.20 Hardship. "Hardship" means an unforeseeable emergency resulting from a sudden and unexpected illness or accident of the Participant or a Participant's dependent (as defined in Section 152(a) of the Code), loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising from events beyond the Participant's control. 2.21 Match. "Match" means, once a Participant becomes eligible for employer matching contributions under the Savings Plan, an amount, not to exceed 4% of Salary, equal to two-thirds of the Excess Contributions which a Participant has elected to defer under this Plan. 2.22 Measurement Fund. "Measurement Fund" means a phantom investment designated by the Administrative Committee for use as an index to value the portion, if any, of a Participant's Account allocated to that phantom investment. 2.23 Measurement Fund Election. "Measurement Fund Election" means a written document in the form prescribed by the Administrative Committee that a Participant has signed and delivered to the Administrative Committee, and which the Administrative Committee has accepted, indicating the manner in which the Participant's Deferrals and/or Account are to be allocated among the available Measurement Funds. 2.24 Participant. A "Participant" means an employee eligible to participate in the Plan who has timely filed a Deferral Election in accordance with Section 3 and whose Deferral Election has been accepted by the Administrative Committee. Any such 4 person shall be a Participant as of the effective date of his or her first Deferral Election and shall continue until the date his or her entire Account has been paid out in accordance with the Plan. 2.25 PSRs. "PSRs" refers to performance stock rights issued under the SAFECO Long-Term Incentive Plan of 1997 or any successor incentive plan. 2.26 Person. "Person" for purposes of Section 2.07 means any person (as defined in Section 2(a)(9) of the Exchange Act, and as such term is modified in Section 13(d) and 14(d) of the Exchange Act) other than (i) any employee plan established by SAFECO, (ii) 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 SAFECO shareholders in substantially the same proportions as their ownership of SAFECO. 2.27 Phantom Stock Fund. "Phantom Stock Fund" refers to a Measurement Fund tied to the performance of the Common Stock, as more specifically described in Section 5.06. 2.28 Qualifying Gain. "Qualifying Gain" means the net value accrued upon a stock-for stock exercise of an Eligible Stock Option (i.e., the amount by which the total value of the shares exercised exceeds the value of the shares used to pay the exercise price, where both the shares paid and the shares exercised are valued at the Closing Price on the date of exercise). For example, a Participant elects to defer the Qualifying Gain accrued upon exercise of an Eligible Stock Option to purchase 1,000 shares at an exercise price of $20 per share. The Closing Price of the Common Stock on the date of exercise is $25. The Participant delivers 800 shares of Common Stock (worth $20,000) to pay the exercise price. In return, the Participant receives 800 shares of Common Stock worth $20,000 and his or her Account is credited with a Qualifying Gain of $5,000. 2.29 RSRs. "RSRs" refers to restricted stock rights issued under the SAFECO Incentive Plan of 1987, the SAFECO Long-Term Incentive Plan of 1997, or any successor incentive plan. 2.30 Retirement. "Retirement" means a Participant's termination of employment with the Corporation occurring at or after age 55 (other than as a result of death or Disability), provided the sum of the Participant's age and the Participant's years of service with the Corporation equals or exceeds 75. 2.31 Rollover. "Rollover" means an amount transferred to a Participant's Account from another nonqualified plan of SAFECO or any Subsidiary, including but not limited to: (a) the 401(a)(17) Savings Plan Benefit under the SAFECO Employees' Supplemental Retirement Plan B, as amended November 4, 1998 5 ("SRP B"), if any, deemed transferred to a Participant's Account on January 1, 1999 in accordance with Section 6.2 of SRP B; (b) the sum of the 401(a)(17) Cash Balance Benefit, the 401(a)(17) PSRP Benefit, and the Supplemental Percentage Cash Balance Benefit (as those terms are defined in SRP B) under SRP B, if any, deemed transferred to a Participant's Account in accordance with Section 7.2(a) of SRP B upon the Participant's Retirement; (c) any benefit under the SAFECO Employees' Supplemental Retirement Plan A ("SRP A") deemed transferred in accordance with Section 7.2(a) of SRP A upon the Participant's Retirement; and (d) any other amount deemed transferred from any nonqualified plan of SAFECO or any Subsidiary with the Administrative Committee's permission, which may be unreasonably withheld. 2.32 Salary. "Salary" means a Participant's base annual salary before reduction for (i) compensation voluntarily deferred or contributed by the Participant under qualified or nonqualified plans of SAFECO or any Subsidiary and (ii) amounts not included in the Participant's gross income under Code Sections 125, 402(e), and 402(h) pursuant to plans established by SAFECO or any Subsidiary. 2.33 Savings Plan. "Savings Plan" means the SAFECO 401(k)/Profit Sharing Retirement Plan as presently in effect and as may be amended from time to time. 2.34 Subsidiary. "Subsidiary" means any corporation of which 50% or more of the voting stock is owned, directly or indirectly, by SAFECO Corporation. 3. DEFERRAL ELECTIONS 3.01 Filing of Deferral Election. An eligible employee who wishes to participate in the Plan must file a Deferral Election with SAFECO on the form(s) prescribed by the Administrative Committee. A Participant may elect to defer all or any portion of the Participant's Eligible Compensation and/or Qualifying Gains. If a Participant elects to defer Excess Contributions, 100% of the Participant's Excess Contributions must be deferred. 3.02 Deferral Election Irrevocable. (a) A Deferral Election is irrevocable as to the amount or percentage of Eligible Compensation or Excess Contributions to be deferred for the year or years to which the Deferral Election relates. Any request to change the amount or percentage to be deferred shall not be effective until January 1 of the next calendar year, except that (i) in the case of RSRs, the change request shall not be effective 6 until the second settlement date following the date of the request, and (ii) an election with respect to a PSR may never be modified or revoked. (b) A Deferral Election to defer Qualifying Gains with respect to a designated Eligible Stock Option is irrevocable. 3.03 Timing of Deferral Election (a) Except as otherwise provided in this paragraph and in Section 3.04, a Deferral Election for Eligible Compensation shall be filed with the Administrative Committee no later than December 31 and shall be effective for Eligible Compensation earned on or after January 1 of the following calendar year. A Deferral Election to defer amounts payable in settlement of RSRs, however, shall not take effect until one additional year later. A Deferral Election to defer payments in settlement of PSRs must be made within 10 business days of the grant of the PSR. Notwithstanding the foregoing, if in its discretion the Compensation Committee designates as "Eligible Compensation" any form of compensation that is not specifically identified in Section 2.16 or that has not been previously designated as Eligible Compensation, a Deferral Election with respect to the newly designated Eligible Compensation shall be filed with the Administrative Committee by such time as the Administrative Committee shall determine but in no event later than the date the Participant becomes entitled to receive payment of such compensation. Further notwithstanding the foregoing, in the first year in which an employee becomes eligible to participate in the Plan, the newly eligible employee shall have 30 days after becoming eligible in which to make a Deferral Election to defer Eligible Compensation for services to be performed subsequent to the election. (b) A Deferral Election for Excess Contributions shall be filed with the Administrative Committee no later than December 31 of the year prior to the year in which the Excess Contributions will occur; provided, however, that in the first year in which an employee of SAFECO or any Subsidiary becomes eligible to participate in the Plan, the newly eligible employee shall have 30 days after becoming eligible in which to file a Deferral Election for Excess Contributions. (c) A Deferral Election to defer a Rollover described in Section 2.30(d) must be filed with the Administrative Committee no later than one calendar year prior to the date on which the Rollover will be credited to the Participant's Account under the Plan. (No Deferral Election is required for a Rollover described in Section 2.30(d) if the Rollover to the Participant's Account is required by the Corporation.) (d) A Deferral Election to defer Qualifying Gain upon exercise of an Eligible Stock Option shall be valid only if: (i) a separate Deferral Election is made by the Participant with respect to the Eligible Stock Option; (ii) the Deferral Election is delivered to and accepted by the Committee at least six months 7 before the Participant elects to exercise the Eligible Stock Option; and (iii) the exercise price of the Eligible Stock Option is paid in Common Stock (either through physical delivery or attestation). 3.04 Special Rules. Eligible employees shall have until May 15, 1998 to file Deferral Elections with respect to Eligible Compensation earned and/or Excess Contributions made during the remainder of 1998 as well as settlements of RSRs payable in February 1999. Eligible employees shall have until February 15, 2000 to file Deferral Elections with respect to PSRs granted in February 1999 (excluding any settlements payable under such PSRs in February 2000). 4. DEFERRAL ACCOUNTS 4.01 Establishment of Accounts. An Account shall be established for each Participant to which all Deferrals, Matches and Rollovers attributable to the Participant, and the earnings thereon, shall be credited. A Participant's Account shall at all times be a bookkeeping entry only and shall not represent any investment made by SAFECO or any Subsidiary on the Participant's behalf. 4.02 Crediting of Accounts. (a) Deferrals of Eligible Compensation shall be credited to a Participant's Account on the date such Deferrals would otherwise be payable to the Participant. (b) Deferrals of Excess Contributions and the corresponding Match shall be credited to a Participant's Account on the date the Excess Contributions would have been contributed to the Savings Plan but for applicable Code limitations. (c) Qualifying Gains shall be credited to a Participant's Account on the date that the Eligible Stock Option to which they relate is exercised; (d) Rollovers shall be credited to a Participant's Account on the date they are deemed transferred to the Plan. 4.03 Vesting. A Participant shall be fully vested at all times in his or her Deferrals. A Participant shall be vested in Matches credited to his or her Account to the same extent that the Participant is vested in the employer match provided under the Savings Plan. A Participant shall be fully vested in Rollovers to the Participant's Account; provided, however, that in the case of a Rollover described in Section 2.30(d), the Participant initially shall be vested only to the extent the Participant was vested in the benefit under the terms of the plan from which it was deemed transferred, as determined at the time of deemed transfer to the Participant's Account. 8 5. MEASUREMENT FUNDS 5.01 Measurement Funds. A Participant's Account shall be allocated among the Measurement Funds selected by the Participant in accordance with the Participant's most recent Measurement Fund Election and such rules as the Administrative Committee may establish from time to time. The Account of each Participant shall be credited (or debited) on a daily basis according to the performance of each Measurement Fund selected by the Participant. If a Participant fails to file a Measurement Fund Election, the Participant's Account shall be allocated to the Money Market Portfolio Measurement Fund until such time as the Participant files a Measurement Fund Election making a different allocation. 5.02 Measurement Fund Elections. Each time a Participant files a new Measurement Fund Election, the Participant shall indicate whether his or her new allocation among the various Measurement Funds is intended to apply to the Participant's entire Account or instead only to future Deferrals, Matches, and Rollovers. A Measurement Fund Election will be given effect no later than the next business day after it is received by the Administrative Committee, subject to the limitation set forth in Section 5.03. 5.03 Limitation Applicable to Section 16 Reporters. In the case of a Participant who is subject to reporting under Section 16(a) of the Exchange Act, a Measurement Fund Election applicable to amounts already accrued in a Participant's Account will not be given effect if it would generate a "non-exempt" transaction for purposes of the rules promulgated under Section 16 of the Exchange Act. (A "non-exempt" transaction would result if a Participant's Measurement Fund Election caused a transfer of all or part of the Participant's Account into (or out of) the Phantom Stock Fund less than six months after the Participant elected an opposite-way transfer into or out of that Fund.) 5.04 Availability of Measurement Funds. The Measurement Funds available to Participants at any given time shall be set forth in Appendix A. SAFECO is under no obligation to offer any particular investment as a Measurement Fund and reserves the right to eliminate, change, and add Measurement Funds at any time. 5.05 No Actual Investment. Notwithstanding any other Plan provision that may be interpreted to the contrary, the Measurement Funds are to be used for measurement purposes only. Neither a Participant's election of any Measurement Fund nor the crediting or debiting of amounts to the Participant's Account in accordance with that election shall be construed as an actual investment of the Participant's Account in any Measurement Fund. 5.06 Phantom Stock. (a) The portion of a Participant's Account that is allocated to the Phantom Stock Fund, if any, shall be credited or debited, as the case may be, as if it were 100% invested in Common Stock. Each amount credited to the 9 Phantom Stock Fund shall be credited in units ("Units" or "Phantom Stock Units") based on the Closing Price of the Common Stock on the date of crediting. Fractional Units shall be credited to a minimum of three decimal points. (b) To the extent cash dividends are paid on the Common Stock, a Participant's Account shall be credited with phantom dividends. Phantom dividends shall equal the per-share dividend paid on the Common Stock multiplied by the number of Phantom Stock Units in the Participant's Account on the record date for the cash dividend. Phantom dividends shall be credited to a Participant's Account in the form of additional Phantom Stock Units. The number of additional Units credited shall be determined based on the Closing Price of the Common Stock on the dividend payment date. (c) No actual shares of Common Stock will be issued directly or indirectly under the Plan in respect of Phantom Stock Units. No voting or other rights of any kind associated with ownership of the Common Stock shall inure to a Participant by virtue of the Participant's allocation of all or any portion of his or her Account to the Phantom Stock Fund. (d) In the event of any change in the Common Stock reason of an issuance of additional shares, recapitalization, reclassification, merger, reorganization, stock split, reverse stock split, combination of shares, stock dividend or similar transaction, the number of Phantom Stock Units held by a Participant under the Plan shall be proportionately adjusted by the Administrative Committee. 6. DISTRIBUTION OF DEFERRED COMPENSATION ACCOUNT 6.01 General. Except as otherwise expressly provided in this Plan, no withdrawal or payment shall be made from a Participant's Account except following the earliest to occur of the Participant's death, Disability, Retirement or other termination of service with the Corporation. Payments shall be made in accordance with Sections 6.02 and 6.03 unless the Participant has filed an election pursuant to Section 6.04 requesting an alternative distribution type and/or time period. The portion, if any, of a Participant's Account that is not vested as of the date of the Participant's termination of service shall not be distributed to the Participant (unless the Participant is terminated following a Change in Control, as described in Section 10.01). All payments shall be made in cash, regardless of the Measurement Funds selected by the Participant. 6.02 Retirement and Disability Distributions. If a Participant terminates service with the Corporation on account of Retirement or Disability, the Participant's Account shall be paid to the Participant using an Annual Installment Method of 10 years, commencing in January of the year following the Participant's Retirement or termination on account of Disability. 10 6.03 Distributions Following Death. If a Participant dies prior to Retirement, the Participant's Account shall be paid out in a single lump sum within 30 days of the date the Corporation is notified, in a form acceptable to the Administrative Committee, of the Participant's death. The value of the Participant's Account shall be determined as of the date of the Participant's death. 6.04 Distributions Following Other Terminating Events. If a Participant terminates employment with the Corporation for any reason other than Retirement, Disability, or death, the Participant's Account shall be paid out in a single lump sum within 30 days of the Participant's termination of employment, with the value of the Participant's Account determined as of the termination date. 6.05 Distribution Election. (a) A Participant shall be permitted, in accordance with such rules as the Administrative Committee may establish from time to time, to elect a distribution that is different from the default provisions set forth in Sections 6.02 and 6.03 (but not 6.04) and may revoke his or her distribution election or file a new distribution election with the Administrative Committee at any time, subject to paragraph (b) below. Such distribution may consist of a lump sum, an Annual Installment Method over a stated period of up to 20 years, or a combination of the two. Payments under any alternative distribution elected by a Participant must commence no later than January of the year following the year in which the Participant terminates employment, unless the Administrative Committee permits otherwise in its sole discretion, which may be unreasonably withheld. To be effective, a distribution election must be accepted by the Administrative Committee at least 12 months prior to the Participant's termination of employment. Any distribution election filed by a Participant shall apply to the entire Account, including amounts credited to the Account prior to the date of the election and those credited later, without regard to the way the Account is allocated among Measurement Funds. (b) In the case of a Participant making a Deferral Election to defer Eligible Compensation, Qualifying Gains and/or Excess Contributions for the first time, a distribution election filed at the same time as the Participant's initial Deferral Election shall be given effect even if the Participant terminates employment within 12 months of the filing. A distribution election filed with the Administrative Committee at the same time as the Participant's initial Deferral Election shall be irrevocable for 12 months. 6.06 Distribution in the Event of Taxation. If, for any reason, all or any portion of a Participant's Account becomes taxable to the Participant prior to distribution in accordance with the Plan, a Participant may petition the Administrative Committee for a special distribution of the taxable portion. Upon the grant of such a petition, 11 which shall not be unreasonably withheld, SAFECO shall promptly distribute to the Participant the portion of his or her Account that has become taxable. 7. DESIGNATION OF BENEFICIARY A Participant may designate one or more Beneficiaries to receive amounts payable under the Plan in the event of the Participant's death. To designate a Beneficiary, the Participant shall complete a Beneficiary designation form in accordance with the Administrative Committee's rules and procedures as in effect from time to time. A Participant may change a Beneficiary designation at any time by filing a new Beneficiary designation form with the Administrative Committee. Upon acceptance by the Administrative Committee of the new form, all Beneficiary designations previously filed by the Participant shall be canceled. If the Participant names someone other than his or her spouse as primary Beneficiary, a spousal consent in the form established by the Administrative Committee must be signed by the Participant's spouse and returned to the Administrative Committee. If a Participant fails to designate a Beneficiary or if the designated Beneficiary predeceases the Participant, then the Account of the deceased Participant shall be paid to the Participant's surviving spouse, or if none, to the personal representative of the Participant's probate estate. 8. HARDSHIP WITHDRAWALS A Participant may petition the Administrative Committee to make an immediate, accelerated distribution from his or her Account in the event the Participant has incurred a severe financial Hardship. Distributions will not be made to the extent the Hardship can be relieved through insurance proceeds, liquidation of the Participant's assets (but only to the extent that such liquidation would not itself cause a severe financial Hardship) or by cessation of deferrals under the Plan. Payments for severe financial Hardship under this Plan are limited to the amount necessary to relieve an "unforeseeable emergency" as defined in Treas. Reg. Section 1.457-2(h)(4) and (5). The Administrative Committee shall determine whether the Participant has incurred a severe financial Hardship and may, in its sole discretion, grant the immediate, accelerated distribution of all or any portion of the Participant's Account; provided, however, that such distribution shall not exceed the amount determined by the Administrative Committee to be necessary to alleviate the severe financial Hardship. Notwithstanding anything in this Plan to the contrary, if a Participant obtains a Hardship withdrawal, the Participant's Deferral Election will be automatically suspended for a period of twelve months, beginning with the first day of the next regularly scheduled payroll period. 9. EARLY WITHDRAWAL SUBJECT TO PENALTY A Participant (or, after a Participant's death, his or her Beneficiary) may elect, at any time, to withdraw all (but not part) of his or her Account, less a withdrawal penalty equal to 10% of such amount. (The net amount shall be referred to as the "Withdrawal Amount".) This election may be made at any time, before or after the Participant's Retirement, death, Disability or termination of employment, and whether or not the Participant (or 12 Beneficiary) is in the process of being paid pursuant to an Annual Installment Method. If the early withdrawal election is made before the Participant's Retirement, Disability or death, a Participant's Withdrawal Amount shall be his or her Account calculated as if a termination of employment had occurred on the date of the election. The Participant (or Beneficiary) shall make this election by giving the Administrative Committee written notice in the form determined from time to time by the Administrative Committee. The Participant (or Beneficiary) shall be paid the Withdrawal Amount within 30 days of his or her election. Once the Withdrawal Amount is paid, the Participant's participation in the Plan shall terminate and the Participant shall not be eligible to participate in the Plan in the future. 10. CHANGE IN CONTROL 10.01 Termination Following a Change in Control. In the event a Participant's employment with SAFECO and all Subsidiaries is terminated within two years following a Change in Control, the Participant's entire Account, including any unvested portion, shall be paid to the Participant (or the Participant's Beneficiary) in a single lump sum within 30 days after the termination of employment. 10.02 Distributions Triggered by Termination Following a Change in Control. For purposes of calculating the lump sum distribution payable under Section 10.01, the Participant's Account shall be valued as of the date of his or her termination of employment. Phantom Stock units shall be valued at the higher of (x) and (y), where (x) equals the Closing Price of the Common Stock on the date of termination and (y) equals: (a) If the Change in Control was of the type described in paragraph (a) of Section 2.07, the highest price paid for shares of Common Stock by any Person who became a Beneficial Owner of securities representing 25% or more of the combined voting power of SAFECO's outstanding securities; and (b) If the Change in Control was of any type other than that described in paragraph (a) of Section 2.07, the highest Closing Price of the Common Stock during the last 10 trading days prior to and including the date of the Change in Control. 10.03 Administration. Upon and after the occurrence of a Change in Control, the Plan shall be administered by the Administrator appointed under Section 11.02. 10.04 Legal Fees to Enforce Rights After Change in Control. SAFECO is aware that upon the occurrence of a Change in Control, the Board or a shareholder of SAFECO (or the board of directors or a shareholder of a successor corporation) might take action adverse to one or more Participants, such as (i) causing or attempting to cause SAFECO or such successor to refuse to comply with its obligations under the Plan; and (ii) instituting litigation or causing or attempting to 13 cause SAFECO or such successor to institute litigation seeking to deny Participants the benefits intended under the Plan. In these circumstances, the purpose of the Plan could be frustrated. Accordingly, if, following a Change in Control, (i) it should appear to a Participant that SAFECO or any successor to SAFECO has failed to comply with its obligations under the Plan or (ii) SAFECO or any successor to SAFECO takes any action to declare the Plan void or unenforceable or institutes any litigation or other legal action designed to deny, diminish or recover from any Participant the benefits intended to be provided under the Plan, then the Participant shall be authorized to retain counsel of his or her choice, at the expense of SAFECO or any successor to SAFECO, to represent the Participant in connection with the initiation or defense of any litigation or other legal action, whether by or against SAFECO, such successor, or any director, officer, shareholder or other person affiliated with SAFECO or such successor, in any jurisdiction. 11. ADMINISTRATION 11.01 Committee Duties. (a) Except as otherwise provided in this Section 11, the Plan shall be administered by the Administrative Committee, which shall have exclusive authority over all matters involving administration of the Plan, including the selection of employees eligible to participate and the type or types of Deferrals that a given Participant is permitted to elect. The Administrative Committee shall have the discretion and authority (i) to make, amend, interpret, and enforce such rules as it deems necessary or desirable for the administration of the Plan and (ii) to interpret the Plan and decide or resolve any and all questions that may arise in connection with the Plan from time to time, subject to the Plan's express provisions. The decision or action of the Administrative Committee with respect to any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules it may adopt thereunder shall be final, conclusive and binding upon all persons having any interest in the Plan. (b) The Administrative Committee may make equitable adjustments under the Plan from time to time, including retroactive adjustments, to correct mathematical, accounting, or factual errors made in good faith by SAFECO or a Participant. (c) The Administrative Committee may delegate administrative duties to other persons, including officers of SAFECO, and may retain the services of lawyers, accountants, or other outside third parties to assist with the administration of the Plan. (d) In cases where a decision or Plan interpretation by the Administrative Committee relates specifically to the benefits to which a member of the 14 Administrative Committee may be entitled, the decision or interpretation shall be subject to review and approval by the Compensation Committee. 11.02 Administration upon a Change in Control. Upon and after a Change in Control, the administrative powers and responsibilities of the Administrative Committee shall pass to an "Administrator," who shall be an independent third party selected by the individual who was the Chief Executive Officer of SAFECO immediately prior to the Change in Control (the "Ex-CEO"). The Administrator shall have the discretionary power to determine all questions arising in connection with the administration and interpretation of the Plan, including without limitation benefit entitlement determinations. Upon and after a Change in Control, SAFECO must: (i) pay all reasonable expenses and fees of the Administrator; (ii) indemnify the Administrator against all costs, expenses and liabilities, including without limitation attorneys' fees, arising in connection with the performance of the Administrator's duties hereunder, except with respect to matters resulting from the gross negligence or willful misconduct of the Administrator or its employees or agents; and (iii) supply complete and timely information to the Administrator about all matters relating to the Plan, including the Participants and their Beneficiaries; Participant Accounts; the Retirement, death, Disability or termination of employment of Participants; and such other information as the Administrator may reasonably require. The Administrator may be terminated (and a replacement appointed) only by the Ex-CEO or by such other person as the Ex-CEO may designate in writing. SAFECO or any successor to SAFECO may not terminate the Administrator. 12. AMENDMENT OF THE PLAN The Compensation Committee may from time to time make such amendments to the Plan as it deems appropriate; provided, however, that (i) no amendment which cancels or reduces the benefits to which a Participant is entitled as of the date of the amendment shall be effective without the written consent of the Participant, and (ii) Sections 10 and 11.02 and this Section 12 shall not be amended following a Change in Control without the written consent of 66.67% of the Participants. The Administrative Committee shall be authorized to make amendments to the Plan which are immaterial or clerical in nature or which are, in the opinion of counsel, required by local, state or federal law or regulation. 13. TERMINATION OF THE PLAN The Corporation reserves the right to terminate the Plan at any time by action of the Board of Directors, subject to the limitations on amendments set forth in Section 12. Unless the Board determines otherwise, in the event the Plan is terminated, the Account of each Participant shall be valued as of the date specified for such purpose by the Board, and the value of the Account shall be paid in cash to the Participant within 30 days after the valuation date. 15 14. CLAIMS PROCEDURES 14.01 Presentation of Claim. Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a "Claimant") may deliver to the Administrative Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If the claim relates to the contents of a notice received by the Claimant, the claim must be made within 60 days after the Claimant received such notice. All other claims must be made within 180 days of the date on which the event that gave rise to the claim occurred. The claim must state with particularity the determination desired by the Claimant. 14.02 Notification of Decision. The Administrative Committee shall consider a Claimant's claim within a reasonable time and shall notify the Claimant in writing: (a) that the Claimant's requested determination has been made and the claim has been allowed in full; or (b) that the Administrative Committee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, in which case the notice must set forth in a manner calculated to be understood by the Claimant: (i) the specific reason(s) for the denial of the claim (or any part of it); (ii) specific reference to the provisions of the Plan upon which such denial was based; (iii) a description of any additional material or information necessary for the Claimant to perfect the claim and an explanation of why such material or information is necessary; and (iv) an explanation of the claim review procedure set forth in Section 14.03. 14.03 Review of a Denied Claim. Within 60 days after receiving a notice from the Administrative Committee indicating that a claim has been denied, in whole or in part, a Claimant may file with the Administrative Committee a written request for a review of the denial of the claim. Thereafter, but not later than 30 days after the review procedure began, the Claimant (or the Claimant's duly authorized representative) may review pertinent documents, submit written comments or other documents, and/or request a hearing, which the Administrative Committee in its sole discretion may grant. 14.04 Decision on Review. The Administrative Committee shall render its decision on review promptly and in any case within 60 days after the Claimant's filing of a 16 written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Administrative Committee's decision must be rendered within 120 days after such date. The decision must be written in a manner calculated to be understood by the Claimant and shall contain (i) the specific reasons for the decision, (ii) specific reference to the Plan provisions upon which the decision was based, and (iii) such other matters as the Administrative Committee deems relevant. 14.05 Legal Action. A Claimant's compliance with the provisions of this Section 14 is a mandatory prerequisite to a Claimant's right to commence any legal action with respect to any claim for benefits under the Plan. 15. MISCELLANEOUS 15.01 No Employment Rights. Nothing in the Plan shall confer upon any Participant any right to be continued in the employment SAFECO or any Subsidiary or to interfere in any way with the right of SAFECO or any Subsidiary, in its sole discretion, to terminate a Participant's employment at any time. 15.02 No Right to Assets. Participants shall have no right to any assets of the funds selected as Measurement Funds. The rights of a Participant (and of his or her Beneficiary) under the Plan shall be solely those of an unsecured general creditor of SAFECO and shall not constitute an interest in any specific asset of SAFECO or any of its Subsidiaries. 15.03 Employment Taxes; FICA; Withholding. SAFECO will collect applicable employment taxes, including FICA, on all Deferrals, Rollovers and Matches credited to a Participant's Account; provided, however, that in the case of a Rollover or Match in which the Participant is not fully vested under Section 4.03 at the time the amount is credited to the Participant's Account, employment taxes will be collected only as the Match or Rollover becomes vested. From distributions under the Plan, SAFECO will deduct federal, state, and local taxes and such other amounts as may be required by law to be withheld with respect to such payments. 15.04 Governing Law; Severability. This Plan shall be governed by and interpreted in accordance with the internal laws of the State of Washington without regard to conflicts of law principles. If any provision of the Plan is held to be invalid or unenforceable, such invalidity or unenforceability shall in no way affect the validity or enforceability of any other Plan provision. 15.05 Binding Provisions. All of the provisions of the Plan, as it may be amended from time to time, shall be binding upon and inure to the benefit of SAFECO, its successors and assigns, each Participant, every Beneficiary or guardian of a Participant, and the personal representative or executor of a Participant's estate. 17 15.06 Transferability. Interests in the Plan may not be transferred, assigned, pledged or encumbered. Prior to the time payment of an Account is actually made to a Participant, the Participant shall have no rights by way of anticipation or otherwise to assign or dispose of any interest under the Plan. 15.07 Effective Date. The effective date of the Plan is May 6, 1998. 18 Appendix A MEASUREMENT FUNDS UNDER THE SAFECO DEFERRED COMPENSATION PLAN FOR EXECUTIVES The following Measurement Funds shall be available under the Plan: a. Phantom Stock Fund b. Interest-Accruing Fund (interest credited at an annual rate equal to the applicable federal long-term rate for purposes of Section 1274 of the Internal Revenue Code of 1986, as amended, in effect at January 1 of each year) c. SAFECO 401(k) Savings Plan Investment Options: o Diversified Common Stock Portfolio o Intermediate Term Bond Portfolio o Money Market Portfolio o SAFECO Dividend Income Fund o SAFECO Equity Fund o SAFECO Growth Opportunities Fund o SAFECO High-Yield Bond Fund o SAFECO International Stock Fund o SAFECO Small Company Value Fund o Fidelity Growth Company Fund o RS Emerging Growth Fund o Vanguard Balanced Index Fund o Vanguard Growth Index Fund o Vanguard Total Bond Market Index Fund o Vanguard Total Stock Market Index Fund 19 20 EX-10.5 5 v79351ex10-5.txt EXHIBIT 10.5 Exhibit 10.5 CHANGE IN CONTROL SEVERANCE AGREEMENT THIS AGREEMENT, effective November 7, 2001, is made by and between SAFECO Corporation, a Washington corporation ("SAFECO"), and Name (the "Executive"). WHEREAS, SAFECO (together with its subsidiaries, collectively, the "Company"), considers it essential to the best interests of its stockholders 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. 1 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. 2 (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. The 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 3 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 his 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 4 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 his 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 5 by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period. 6.2 "Gross-Up Payment." (A) Whether or not the Executive becomes entitled to the Severance Payments, if any of the payments or benefits received or to be received by the Executive in connection with a Change in Control or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the "Total Payments") will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, and after taking into account the phase out of the itemized deductions attributable to the Gross-Up Payment, shall be equal to the Total Payments. (B) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" (within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of tax counsel selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent accountant (the "Accountant") and which tax counsel is reasonably acceptable to the Executive ("Tax Counsel"), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Accountant in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (C) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the 6 Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income or employment tax deduction) plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) at the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 6.3 Severance Payments Pay Date. The payments provided in subsections (A) and (C) of Section 6.1 and in Section 6.2 shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2, in accordance with Section 6.2, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Accountant or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 Executive's Legal Fees. The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1 Notice of Termination. After a Change in Control and during the Term, any 7 purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall state in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct stated in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2) and shall not be offset against or reduce any other amounts due under this 8 Agreement. 9 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 Executive Officer 10 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. 12. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. (A) All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Committee and shall be in writing. Any denial by the Committee of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall state the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Committee shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Committee a decision of the Committee within sixty (60) days after notification by the Committee that the Executive's claim has been denied. (B) Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Seattle, Washington in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 11 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Accountant" shall have the meaning stated in Section 6.2. (B) "Affiliate" shall have the meaning stated in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (C) "Base Amount" shall have the meaning stated in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning stated in Rule 13d-3 under the Exchange Act. (E) "Board" shall mean the Board of Directors of SAFECO. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Committee by clear and convincing evidence that Cause exists. (G) A "Change in Control" shall be deemed to have occurred if the event stated in any one of the following paragraphs shall have occurred: (i) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of SAFECO (not including in the securities beneficially owned by such Person any securities acquired directly from SAFECO or its affiliates) representing 25% or more of the combined voting power of SAFECO's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (a) of paragraph (iii) below; or (ii) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating 12 to the election of directors of SAFECO) whose appointment or election by the Board or nomination for election by SAFECO's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) there is consummated a merger or consolidation of SAFECO or any direct or indirect subsidiary of SAFECO with any other corporation, other than (a) a merger or consolidation which would result in the voting securities of SAFECO outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of SAFECO or any subsidiary of SAFECO, at least 75% of the combined voting power of the securities of SAFECO or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (b) a merger or consolidation effected to implement a recapitalization of SAFECO (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of SAFECO (not including in the securities Beneficially Owned by such Person any securities acquired directly from SAFECO or its Affiliates) representing 25% or more of the combined voting power of SAFECO's then outstanding securities; or (iv) the stockholders of SAFECO approve a plan of complete liquidation or dissolution of SAFECO or there is consummated an agreement for the sale or disposition by SAFECO of all or substantially all of SAFECO's assets, other than a sale or disposition by SAFECO of all or substantially all of SAFECO's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders of SAFECO in substantially the same proportions as their ownership of SAFECO immediately prior to such sale. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of SAFECO immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of SAFECO immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Committee" shall mean (i) the individuals (not fewer than three in number) who, on the date six months before a Change in Control, constitute the Compensation Committee of the Board, plus (ii) in the event that fewer than three individuals are available from the group specified in clause (i) above for any reason, such individuals as may be appointed by the individual or individuals so available (including for this purpose any individual or individuals previously so appointed under this clause (ii)). (J) "Company" shall mean SAFECO and its subsidiaries, collectively. 13 (K) "Date of Termination" shall have the meaning stated in Section 7.2. (L) "Deferred Benefit" shall have the meaning stated in Section 5.4. (M) "Deferred Benefit Commencement Date" shall have the meaning stated in Section 5.4. (N) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of one hundred and thirty (130) consecutive business days, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (O) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (P) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (Q) "Executive" shall mean the individual named in the first paragraph of this Agreement. (R) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in Control under the circumstances described in clause (ii) of the second sentence of Section 6.1 (treating all references in paragraphs (i) through (vii) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (i), (v), (vi) or (vii) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (i) the assignment to the Executive of any duties inconsistent with the Executive's status as a senior executive officer of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control; (ii) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (iii) the relocation of the Executive's principal place of employment to a location outside of King County, Washington (or, if different, the county in which such principal place of employment is located immediately prior to the Change in Control) or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted 14 relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (iv) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (v) the failure by the Company to continue in effect any compensation plan (including stock option, restricted stock, stock appreciation right, incentive compensation and bonus plans) in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control; (vi) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's profit sharing, pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (vii) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Committee by clear and convincing evidence that Good Reason does not exist. (S) "Gross-Up Payment" shall have the meaning stated in Section 6.2. (T) "Notice of Termination" shall have the meaning stated in Section 7.1. 15 (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 SAFECO's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from SAFECO or its affiliates); or (iv) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (W) "Retirement" shall be deemed the reason for the termination by the Company or the Executive of the Executive's employment if such employment is terminated on or after the date Executive attains age 65. (X) "SAFECO" shall mean SAFECO Corporation and, except in determining under Section 15(G) whether or not any Change in Control has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. (Y) "Severance Payments" shall mean the payments so described in Section 6.1. (Z) "Severance Period" shall have the meaning stated in Section 6.1(B). (AA) "Tax Counsel" shall have the meaning stated in Section 6.2. (BB) "Term" shall mean the period of time described in Section 2 (including any extension, continuation or termination described therein). 16 (CC) "Total Payments" shall mean the payments so described in Section 6.2. SAFECO CORPORATION By: --------------------------- ------------------------------------------- Name Such address as may appear on the personnel records of SAFECO or such other address as Name may specify in writing 17 EX-10.6 6 v79351ex10-6.txt EXHIBIT 10.6 Exhibit 10.6 SAFECO LONG-TERM INCENTIVE PLAN OF 1997 AS AMENDED AND RESTATED FEBRUARY 7, 2001 1. PURPOSE The purpose of the SAFECO Long-Term Incentive Plan of 1997 (the "Plan") is to enhance the long-term profitability and shareholder value of SAFECO Corporation (the "Company") by offering incentives and rewards to non-employee directors of the Company and selected eligible employees of the Company and its Subsidiaries (as defined in Section 2) who are key to the Company's growth and success as an inducement to them to remain in the service of the Company and to acquire and maintain stock ownership in the Company. 2. DEFINITIONS (a) "Affiliate" means a person controlling, controlled by or under common control with the Company. (b) "Award" shall mean any award or grant made pursuant to the Plan, including, without limitation, awards or grants of stock options, stock appreciation rights, restricted stock rights, performance stock rights or any combination of the foregoing. Awards may be granted singly, in combination, or in tandem so that the settlement or payment of one automatically reduces or cancels the other. (c) "Award Agreement" means a written agreement between the Company and a Plan participant evidencing an Award. (d) "Beneficial Owner" has the meaning set forth in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (e) "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs has occurred: (i) Any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (x) of paragraph (iii) of this Section 2(e); or (ii) The following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date the Plan is adopted by the Company's shareholders, constitute the Board of Directors of the Company and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) There is consummated a merger or consolidation of the Company or any Subsidiary with any other corporation, other than (x) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary at least 75% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (y) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates other than in connection with the acquisition by the Company or its Affiliates of a business) representing 25% or more of the combined voting power of the Company's then outstanding securities; or (iv) The shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the Company's common stock immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the Company's assets immediately following such transaction or series of transactions. (f) "Committee" shall mean the Company's Board of Directors or a committee or sub-committee described in Section 3 selected by the Company's Board of Directors to administer the Plan. 2 (g) "Fair Market Value" shall mean, with respect to the Company's common stock, the price at which the last trade of the Company's common stock was made prior to 1:00 p.m. West Coast time on the Nasdaq National Market on the date in question. (h) "Person" for purposes of Section 2(e) means any person (as defined in Section 2(a)(9) of the Exchange Act, as such term is modified in Section 13(d) and 14(d) of the Exchange Act) other than (i) any employee plan established by the Company, (ii) the Company or any of its affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act), (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by shareholders of the Company in substantially the same proportions as their ownership of the Company. (i) "Retirement" shall mean a termination of employment with the Company or a Subsidiary occurring on or after an individual attains age 65, or such other termination of employment as the Committee may approve as a retirement from time to time for purposes of the Plan. (j) "Subsidiary" shall mean any corporation of which more than 50% of the total combined voting power of all classes of stock entitled to vote is directly or indirectly owned by the Company. 3. ADMINISTRATION (a) The Plan shall be administered by a Committee to be appointed from time to time by the Company's Board of Directors and shall consist of at least two members of the Board, each of whom is an "outside director" as defined in regulations promulgated under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). In addition, if the Committee does not also consist solely of "non-employee directors" as defined in Rule 16b-3 under the Exchange Act, the Plan shall be administered with respect to officers subject to Section 16 of the Exchange Act by a sub-committee of the Committee to be appointed from time to time by the Company's Board of Directors and consisting of at least two members of the Board, each of whom is a "non-employee director." (b) Except for the terms and conditions explicitly set forth in the Plan, the Committee shall have the exclusive authority to determine, in its sole discretion, all matters relating to Awards under the Plan, including the selection of individuals to be granted Awards; the type of Awards; the number of shares of common stock subject to an Award; all terms, conditions, restrictions and limitations, if any, of an Award; and the terms of any instrument that evidences the Award. The Committee may, in its discretion, accelerate the exercisability of or waive any or all of the restrictions and conditions applicable to any Award and may, with the consent of the holder, modify any agreement governing an Award. The Committee may permit or require the deferral of any Award payment, subject to such rules and procedures as it may establish, which may include provisions for the payment or crediting of interest or dividend equivalents on the deferred payment. Any deferred payment 3 may require the payment to be forfeited under certain circumstances in accordance with Section 15. The Committee shall also have exclusive authority to interpret the Plan and may adopt, amend and rescind rules and procedures relating to the Plan. The Committee may delegate administrative duties to such of the Company's officers as it so determines; provided, however, that decisions concerning the terms and conditions of an Award and the selection of recipients of Awards shall not be delegated. (c) The Board of Directors shall designate one member of the Committee as its Chair, and the Committee shall hold its meetings at such times and places as it shall deem advisable. At least one-half of its members shall constitute a quorum for the conduct of business, and any decision or determination approved by a majority of members present at any meeting in which a quorum exists shall be deemed to have been made by the Committee. In addition, any decision or determination reduced to writing and signed by all of the members shall be deemed to have been made by the Committee. The Committee may appoint a secretary, shall keep minutes of its meetings, and may make such rules and regulations for the conduct of its business and for the carrying out of the Plan as it deems appropriate. (d) The interpretation and construction by the Committee of any provisions of the Plan and of Awards thereunder and all actions taken and determinations made by the Committee pursuant to the Plan shall be final and conclusive on all persons having any interest therein. (e) Notwithstanding anything in the Plan to the contrary, the Committee, in its absolute discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan to participants who are subject to Section 16 of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other participants in the Plan. 4. SHARES SUBJECT TO PLAN (a) Subject to the provisions of Section 21 (relating to adjustments due to changes in capital structure), a maximum of 6,000,000 shares of the Company's common stock shall be available for issuance pursuant to Awards under the Plan. No more than 3,000,000 shares may be issued in connection with restricted stock rights and performance stock rights granted under the provisions of Sections 12 and 13. (b) Any shares of the Company's common stock that have been made subject to an Award and that subsequently cease to be subject to the Award (other than by reason of exercise or payment of the Award to the extent it is exercised for or settled in shares of common stock) shall again be available for issuance in connection with future grants of Awards under the Plan; provided, however, that for purposes of Section 4(c), any such shares shall be counted in accordance with the requirements of Section 162(m) of the Code. 4 (c) Subject to the provisions of Section 21 (relating to adjustments due to changes in capital structure), the maximum number of shares with respect to which options may be granted under the Plan to any individual during any calendar year is 500,000, and the maximum number of shares payable under a performance stock right for any Performance Cycle (as defined in Section 13(a)) is 500,000 shares, or in the event the performance stock right is paid in cash, the equivalent cash value on the date the performance stock right would otherwise be settled in shares, such limitations to be applied in a manner consistent with the requirements of, and only to the extent required for compliance with, the exclusion from the limitation on deductibility of compensation under Section 162(m) of the Code. 5. ELIGIBILITY Awards may be granted only to non-employee directors of the Company and salaried key management employees of the Company or a Subsidiary (including salaried employees who are also directors) who, in the judgment of the Committee, will perform services of special importance in the management, operation and development of the business of the Company or the businesses of one or more of its Subsidiaries, provided the grant date for options and performance stock rights for an employee shall not occur during or after the calendar year in which the employee reaches the age of 65. 6. PRICE AND TERM OF OPTIONS (a) The exercise price for shares purchased under each option will be determined by the Committee but shall not be less than 100% of the Fair Market Value of the shares of stock covered by the option on the date of grant of the option. (b) The term of each option shall be as determined by the Committee, but not in excess of ten years from the date it is granted. An option granted for an initial term of less than ten years may be extended by amendment for a period of up to ten years from the date of the initial grant, provided that no such amendment of an incentive stock option shall be made without the prior consent of the optionee. 7. LIMITATIONS ON EXERCISE OF OPTIONS (a) Any minimum period during which an optionee must provide services or be continuously employed prior to an option becoming exercisable and the increments in which an option will become exercisable shall be set forth in the Award Agreement evidencing the option. Such provisions may be waived or modified by the Committee at any time. Absence on leave shall not be deemed an interruption of employment or services for purposes of the Plan, except that with respect to incentive stock options a leave of absence shall be subject to any requirements of Section 422 of the Code. (b) Incentive stock options shall be granted to employees only. To the extent the aggregate Fair Market Value (determined at the time the options are granted) of the stock with respect to which any individual employee's incentive stock options are 5 exercisable for the first time during any calendar year exceeds $100,000, the portion in excess of $100,000 shall be treated as a nonqualified stock option. For purposes of this determination, incentive stock options granted under the Plan shall be aggregated with those granted under any other stock option plan of the Company. 8. METHOD OF EXERCISE Each exercise of an option granted hereunder, whether in whole or in part, shall be by written notice to the Chief Executive Officer of the Company designating the number of shares as to which the option is exercised, and shall be accompanied by payment in full for the number of shares so designated. Stock to be purchased under an option may be paid for in cash, in shares of the Company's common stock (either through physical delivery or by attestation) at their Fair Market Value on the date of exercise, or in a combination thereof, or in such other consideration as the Committee in its discretion may permit. Fractional shares may not be purchased under an option, and fractional shares may not be delivered to the Company for payment of the option price. 9. FORM OF OPTION AGREEMENT Each Award Agreement evidencing an option shall contain the essential terms of the option and such other provisions as the Committee shall from time to time determine, but such Award Agreements need not be identical. If the option is an incentive stock option, the Award Agreement shall contain such terms and provisions relating to exercise and otherwise as may be necessary to render it an incentive stock option under the applicable provisions of the Code (presently Section 422 thereof), and the regulations thereunder. 10. FINANCING OF OPTIONS The Company declares its belief that the purposes of the Plan can be fully achieved only if those employees to whom options are granted hereunder are able financially to purchase the stock covered by their options should they wish to do so. Thus, within the limits of and in compliance with applicable statutes and regulations, the Company and its Subsidiaries may extend credit, arrange credit, guarantee obligations, and otherwise aid such employees in needed financing of their purchases of stock pursuant to options. 11. STOCK APPRECIATION RIGHTS (a) In connection with the grant of any stock option, the Committee may grant a stock appreciation right ("SAR") pursuant to which the optionee shall have the right to surrender all or part of such stock option and to exercise the SAR and thereby obtain payment of an amount equal to the difference between the aggregate option price of the shares so surrendered and the Fair Market Value of such shares on the date of surrender. In all other respects, a SAR will have the same terms and provisions as the related option. (b) The exercise of a SAR shall be by written notice to the Chief Executive Officer of the Company designating the number of shares as to which the SAR is exercised 6 and shall be subject to such limitations as the Committee may deem appropriate. Payment to the holder upon the call of a SAR may be made in shares of the Company's common stock (at their Fair Market Value on the date of exercise), in cash, or partly in shares and partly in cash, at the discretion of the Committee. 12. RESTRICTED STOCK RIGHTS (a) The Committee may grant any eligible employee restricted stock rights ("RSRs") which entitle such employee to receive a stated number of shares of the Company's common stock if the employee for a stated period remains continuously employed by the Company or a Subsidiary or, following the employee's Retirement, serves on the Board of Directors of the Company or in another capacity approved by the Committee (the "Restricted Period"). At the time an RSR is issued, the Committee shall designate the length of the Restricted Period and the service that will qualify under the Restricted Period; provided, however, in no event may the Restricted Period extend beyond the fifth anniversary date of the employee's termination of employment. The Committee shall also have full and final authority to select the employees who receive RSRs, to specify the number of shares of stock subject to each RSR, and to establish the other terms, conditions and definitions that govern RSRs. (b) The Company shall pay to each holder of an unexpired RSR during the Restricted Period, as additional compensation, an amount of cash equal to the dividends that would have been payable to the holder of the RSR during the Restricted Period if the holder had owned the stock subject to the RSR. Such amount shall be paid as near in time as reasonably practical to the applicable dividend payment dates. (c) At the expiration of each Restricted Period and provided all conditions relating to an RSR have been met, the Company shall issue to the holder the shares of stock which relate to such Restricted Period or, at the request of the holder, make a payment of an amount equal to the Fair Market Value of such shares (or any portion thereof) determined as of the settlement date or, alternatively, over such period as may be established by the Committee at the time of grant. (d) Upon grant of an RSR, the Company shall deliver to the recipient an Award Agreement which sets forth the terms and conditions of the RSR. 13. PERFORMANCE STOCK RIGHTS (a) The Committee may grant to an eligible employee performance stock rights ("PSRs") which entitle such employee to receive a stated number of shares of the Company's common stock if the employee attains certain specified performance goals ("Performance Goals") within a stated three-year performance period (the "Performance Cycle"). The Committee shall have full and final authority to select the employees who receive PSRs, to specify the number of shares of stock subject to each such right, to establish the Performance Goals, to establish the Performance Cycle and to establish the terms, conditions and definitions that govern such rights. 7 (b) The Committee shall establish Performance Goals for each Performance Cycle on the basis of such criteria and to accomplish such objectives as the Committee may from time to time select. Performance Goals selected by the Committee may include performance criteria for the Company, a Subsidiary, or an operating group, division, or unit of the Company or a Subsidiary. During any Performance Cycle, the Committee may adjust the Performance Goals for such Performance Cycle as it deems equitable in recognition of unusual or nonrecurring events affecting the Company, changes in applicable tax laws or accounting principles, or such other factors as the Committee may determine; provided, however, that the Committee may not adjust Performance Goals for any participant who is a covered employee for purposes of Section 162(m) of the Code for the year in which such PSR (or any portion thereof) is settled in such a manner as would increase the amount of compensation otherwise payable to such covered employee. (c) As soon as practical after the end of a Performance Cycle (or any interim measurement period within the Performance Cycle), the Committee shall determine the extent to which a PSR has been earned on the basis of performance in relation to the established Performance Goals. To the extent that the Performance Goals of a PSR are satisfied, the Company shall settle the earned portion of the PSR by the issuance and delivery of unrestricted shares equal to the number of earned shares, by the payment of cash equal to the Fair Market Value of the earned shares on the date the PSR would otherwise be settled in shares, or by a combination of cash and shares, as requested by the holder. If the Performance Goals are not met by the expiration of the Performance Cycle, the PSR shall expire and the holder thereof shall have no further rights thereunder. (d) Upon granting a PSR, the Company shall issue to the recipient an Award Agreement which sets forth the terms and conditions of the PSR. (e) The Performance Goals shall be any one or a combination of net income, earnings per share, return on equity, return on assets, stock price appreciation, total shareholder return, cash flow, revenues, item count, market share, assets, assets under management, any profit-related ratio or calculation, or any growth, concentration-of-business or market-share ratio or calculation. Such Performance Goals may be measured on an absolute basis or relative to a group of peer companies selected by the Committee, relative to internal goals, or relative to levels attained in prior years. The Committee will establish specific Performance Goals for each PSR not later than 90 days after the beginning of the Performance Cycle for the Award. (f) The Company shall not make dividend equivalent payments with respect to shares subject to PSRs. 14. TERMINATION OF EMPLOYMENT, RETIREMENT, DISABILITY AND DEATH (a) In the event the employment of a Plan participant by the Company or a Subsidiary terminates, then unless otherwise provided in the Award Agreement, any 8 unexercised option or SAR granted to such participant may be exercised, but only to the extent exercisable on the date of termination of employment, at any time within three months following such termination of employment, except that: (i) If the participant's termination of employment is on account of Retirement, then the option or SAR, to the extent exercisable at the date of termination of employment, may be exercised at any time prior to the expiration of its stated term, but in no event later than the fifth anniversary date of the participant's termination of employment. (ii) If the participant's termination of employment is on account of a permanent and total disability within the meaning of Section 22(e)(3) of the Code, then the option or SAR, to the extent exercisable at the date of termination of employment, may be exercised at any time within one year after the date of termination. (iii) If the participant's termination of employment is caused by the death of the participant, then the option or SAR may be exercised at any time prior to the expiration of the term stated in the Award Agreement by the person(s) to whom the participant's rights pass by will or by operation of law without regard to any requirements related to continued employment or installment vesting. (iv) If the participant dies following termination of employment and during the period in which the option or SAR is exercisable under paragraph (i) or (ii) of this Section 14(a), then, to the extent the option or SAR was vested at the date of the participant's termination of employment, the option or SAR may be exercised at any time prior to the expiration of the term stated in the Award Agreement by the person(s) to whom the participant's rights pass by will or by operation of law. (b) Any portion of an option or SAR that is not exercisable on the date of termination of the participant's employment shall terminate on such date, unless the Committee determines otherwise. (c) To the extent that the option or SAR of any deceased or disabled participant or of any participant whose employment has terminated shall not have been exercised within the time periods provided above, all further rights to exercise such option or SAR shall terminate at the expiration of the applicable period. (d) In the event a holder of an RSR issued under the provisions of Section 12 fails to satisfy the employment or service requirements of the RSR, such holder shall lose the right to receive stock or cash under the provisions of the RSR, except that in the event a holder of an RSR is unable to satisfy such requirements because of death or disability within the meaning of Section 22(e)(3) of the Code, then as soon as practical following the date of death or the date of determination of disability (the "Disability Determination Date"), the holder or the personal representative of the 9 holder's estate, as the case may be, shall be issued shares of the Company's common stock equal in number to the total number of unissued shares covered by such RSR or, in lieu thereof, at the request of such holder or personal representative, receive a cash payment equal to the Fair Market Value of such shares (or any portion thereof) at the date of death or the Disability Determination Date, as the case may be. Such shares shall be issued or payment made without regard to any employment or other service requirement stated in the RSR. (e) Except as provided in Section 22, in the event the employment of an employee who holds a PSR granted under the provisions of Section 13 terminates for any reason prior to the expiration of the Performance Cycle specified in the PSR, then, except to the extent the Committee may decide otherwise in select situations, such employee shall lose all rights to thereafter receive any stock or payment under such PSR. (f) If a corporation ceases to be a Subsidiary of the Company, then, except to the extent the Committee determines otherwise, employees of such corporation shall be deemed to have terminated their employment with the Company or a Subsidiary of the Company for purposes of this Section 14 as of the date such corporation's status as a Subsidiary terminates. 15. FORFEITURE Subject to the Committee's discretion, the grant of any Award under the Plan may be conditioned on the participant's agreement to forfeit unexercised Awards and pay the value of previously exercised or settled Awards to the Company in the event that the participant engages in any activity in competition with the Company or otherwise contrary to the Company's interests while employed by the Company or a Subsidiary or within a specified period following termination of employment or exercise or settlement of an Award. 16. TRANSFERABILITY Except as otherwise provided in this Section 16, Awards shall not be transferable other than by will or the laws of descent and distribution and shall be exercisable during the lifetime of a participant only by the participant or, in the event the participant becomes legally incompetent, by the participant's guardian or legal representative. Notwithstanding the foregoing, and to the extent permitted by Section 422 of the Code, the Committee, in its discretion, may provide in any Award Agreement or otherwise that the Award is transferable, without payment of consideration, (i) to immediate family members (including grandchildren) of the participant or (ii) to a trust or trusts for the benefit of such family members or (iii) to a partnership or similar organization composed of such family members ("Permitted Family Transferees"). Any Award assigned or transferred to Permitted Family Transferees shall be subject to all the same terms and conditions contained in the Award Agreement, and the events of termination of employment stated in Section 14 shall continue to be applied with respect to the original Award recipient, following which termination the Award shall be exercisable by the transferee only to the extent and for the periods specified in Section 14. 10 17. WITHHOLDING The Company may require the holder of an Award to pay to the Company the amount of any taxes that the Company is required to withhold with respect to the grant, exercise, payment or settlement of an Award. The Company shall have the right to withhold from any Award or any shares of stock issuable pursuant to an Award an amount equal to such taxes. 18. RIGHTS AS SHAREHOLDER Neither a person to whom an Award is granted, nor such person's legal representative, heir, legatee, distributee or Permitted Family Transferee shall be deemed to be the holder of, or to have any rights of a holder with respect to, any shares subject to such Award until after the shares are issued. 19. AMENDMENTS TO THE PLAN The Company's Board of Directors may from time to time make such amendments to the Plan as it may deem proper and in the best interests of the Company or a Subsidiary, provided that: (a) No amendment shall be made which would impair, without the consent of the applicable participant, any Award previously granted under the Plan or deprive any participant of any shares of stock of the Company that the participant may have acquired through or as a result of the Plan. (b) Any such amendment which would (i) increase the number of securities which may be issued under the Plan or (ii) materially modify the requirements as to eligibility for participation in the Plan shall be submitted to the shareholders of the Company for their approval at the next annual or special meeting after adoption by the Board of Directors, and if such shareholder approval is not obtained, the amendment, together with any actions taken under the Plan on the necessary authority of such amendment, shall be null and void. 20. TERMINATION OF THE PLAN The Plan shall remain in effect until Awards have been granted covering all the shares of the Company's common stock authorized under Section 4(a) or until the Plan is otherwise terminated by the Company's Board of Directors; provided, however, that no incentive stock option shall be granted more than ten years after the date on which the Plan is approved by the shareholders of the Company, i.e., the effective date of the Plan. Termination of the Plan shall not affect outstanding Awards. 21. CHANGES IN CAPITAL STRUCTURE Except as otherwise provided in Section 22, in the event the outstanding shares of common stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of any reorganization, merger, consolidation, recapitalization, reclassification, stock split, spin-off, combination of shares, dividend payable in shares, rights offering, change in the corporate structure 11 of the Company, or otherwise, then the Committee shall make proportional adjustments to the maximum number and class of shares subject to the Plan and to the maximum number and class of shares with respect to which Awards may be granted or paid to any individual participant as set forth in Sections 4(a) and (c). In addition, the Committee shall make an appropriate adjustment to the number and class of shares as to which outstanding Awards, or portions thereof then unexercised, shall be exercisable or settled and the per share price of such shares, to the end that the participant's proportionate interest shall be maintained as before the occurrence of such event, without any change in the total price applicable to the unexercised portion of any Award. Any such adjustment made by the Committee shall be conclusive. 22. CHANGE IN CONTROL (a) Notwithstanding any other provision of the Plan to the contrary, if, while any Awards remain outstanding under the Plan, a Change in Control of the Company shall occur, then: (i) All options and SARs granted under the Plan that are outstanding at the time of such Change in Control shall become exercisable in full immediately prior to the Change in Control; (ii) To the extent deemed earned, each outstanding PSR shall become immediately payable in cash, and the remainder of each outstanding PSR shall be canceled for no value. All outstanding PSRs shall be deemed to have been earned to the extent of the greater of: (1) The number of shares of the Company's common stock determined by the Committee based on the extent to which the Performance Goals specified in the Award Agreement have been achieved during the portion of the Performance Cycle ending on the last day of the last fiscal quarter of the Company ending on or before the date of the Change in Control; or (2) The number of shares of the Company's common stock equal to the product of the target shares identified in the Award Agreement multiplied by a fraction with a numerator equal to the whole number of calendar months beginning with the month in which the Award was granted and ending on the date of the Change in Control and a denominator equal to the whole number of calendar months in the entire Performance Cycle specified in the Award Agreement, less any shares previously issued under the Award Agreement. (iii) All restrictions with respect to RSRs shall lapse and all outstanding RSRs shall be settled by a payment in cash to each holder of such Award; and (iv) All other restrictions with respect to outstanding Awards not described in paragraphs (i) through (iii) of this Section 22(a) shall lapse, and such Awards shall be fully vested and nonforfeitable. 12 (b) For purposes of this Section 22, with respect to determining the cash equivalent value of an RSR or PSR or the spread payable upon exercise of a SAR, the Fair Market Value of a share of the Company's stock shall be deemed to equal the greater of (i) the Fair Market Value of a share of stock as of the date on which a Change in Control occurs and (ii) the highest price of a share of stock which is paid or offered to be paid, by any Person or entity, in connection with any transaction which constitutes a Change in Control. (c) The phrase "immediately prior to the Change in Control" shall be understood to mean sufficiently in advance of a Change in Control to permit the holder of an Award to take all steps reasonably necessary to exercise all options and SARs and take any actions with respect to the shares of stock underlying Awards of any nature so that such shares may be treated in the same manner as the shares of stock of other shareholders in connection with the Change in Control. 23. APPROVALS The obligations of the Company under the Plan shall be subject to the approval of such state or federal authorities or agencies, if any, as may have jurisdiction in the matter. Shares shall not be issued with respect to an Award unless the exercise and the issuance and delivery of the shares comply with all relevant provisions of law, including, without limitation, any applicable state securities laws, the Securities Act of 1933, as amended, the Exchange Act, the Code, the respective rules and regulations promulgated thereunder, and the requirements of any stock exchange or market on which the shares may then be listed or traded, and shall be further subject to the approval of counsel for the Company with respect to such compliance. Inability of the Company to obtain from any regulatory body having jurisdiction the authority deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares hereunder shall relieve the Company of any liability for the nonissuance or sale of such shares. The Board of Directors may require any action or agreement by a holder of an Award as may from time to time be necessary to comply with the federal and state securities laws. The Company shall not be obliged to register stock issued under the Plan or options or any other rights to acquire stock granted under the Plan. 24. EMPLOYMENT RIGHTS Nothing in this Plan or any Award granted pursuant hereto shall confer upon any employee any right to be continued in the employment of the Company or any Subsidiary of the Company or to interfere in any way with the right of the Company, in its sole discretion, to terminate such employee's employment at any time. 25. EFFECTIVE DATE OF THE PLAN The effective date of this Plan is May 7, 1997. 13 EX-10.15 7 v79351ex10-15.txt EXHIBIT 10.15 Exhibit 10.15 RETIREMENT AGREEMENT This Retirement Agreement (including its Exhibits, the "AGREEMENT") is made and entered into as of October 15, 2001 (the "EFFECTIVE DATE") by and between RODNEY A. PIERSON (the "EXECUTIVE") and SAFECO CORPORATION, a Washington corporation (together with its successors and assigns, the "COMPANY"). RECITALS WHEREAS, the Executive is employed by the Company as Senior Vice President and Chief Financial Officer; WHEREAS, the Executive and the Company (the "PARTIES") have mutually agreed to the Executive's retirement from the Company and resignation as an officer, employee and member of the Board of Directors of subsidiaries of the Company; and WHEREAS, the Parties have mutually agreed to the final terms and conditions of such retirement. NOW, THEREFORE, in consideration of the covenants and agreements hereinafter set forth in this Agreement, the Parties hereby agree as follows: AGREEMENT 1. CONTINUED EMPLOYMENT. 1.1 EMPLOYMENT PERIOD. Under the terms and subject to the conditions of this Agreement, the Executive's status as an employee of the Company shall continue through December 31, 2001 (the "RETIREMENT DATE"), and he shall be paid his current salary through such date. The Executive shall retire from employment with the Company effective at the close of business on the Retirement Date. 1.2 GROUP INSURANCE BENEFITS COVERAGE. The Company shall continue to provide, through the Retirement Date, coverage to the Executive and his dependents under any group insurance benefits plan under which they were covered on the Effective Date. The Executive shall remain responsible, in accordance with past practice, to pay any amounts chargeable as "employee premium contribution" amounts with respect to any such coverage. After the Retirement Date, the Executive and his dependents shall be eligible for such benefits continuation, or conversion coverage, as may be available under the terms of the Company's benefits plans or policies, or as may be required under the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, as subsequently amended ("COBRA"), or other applicable federal or state law. After the Retirement Date, the Company agrees to treat the Executive as a retiree for purposes of medical benefits. 1 1.3 ELIGIBILITY FOR OTHER GROUP BENEFITS. As an employee of the Company through the Retirement Date, the Executive (a) shall be entitled to participate in any group benefit under the Company's employee benefit plans and (b) shall be entitled to participate in, and shall be the beneficiary of pro rata Company contributions to, the SAFECO Employees' Profit Sharing Retirement Plan, Savings Plan, and Cash Balance Plan, as well as any "supplemental" or "excess benefit" plans that relate to such plans. 1.4 INCENTIVE BONUS. The Company shall pay the Executive the amount, if any, earned by the Executive under the Company's Leadership Performance Plan for 2001 determined pursuant to the performance contract between the Executive and the Company dated September 7, 2001 promptly following the determination of the amount of any bonus and in any event no later than February 28, 2002. 1.5 SPECIAL BONUS INCENTIVE. As an inducement to the Executive to complete the responsibilities listed on Exhibit A to this Agreement before December 31, 2001, the Company agrees to pay the Executive all or a portion of $162,500 upon the determination by the chief executive officer of the Company in his sole discretion that all or a portion of the responsibilities listed on Exhibit A have been completed. The chief executive officer of the Company shall determine by January 31, 2002 the extent to which the responsibilities have been completed and the Company shall make the payment, if any, on February 15, 2002. 1.6 PAYMENT FOR ACCRUED SICK LEAVE AND VACATION UNITS. The Company shall promptly pay the Executive for any vested sick leave units and vacation pay accrued, but unused, by him as of the Retirement Date, but only to the extent compensable under the Company's normal sick leave and vacation policies and procedures. 1.7 REIMBURSEMENT FOR EXPENSES INCURRED. The Company shall promptly reimburse the Executive for business expenses reasonably incurred by him on or before the Retirement Date, but not submitted for reimbursement at such date, to the extent reimbursable under the Company's normal expense reimbursement policies and procedures, provided that such expenses are submitted for reimbursement either within fifteen calendar days of the Retirement Date, or as promptly as reasonably practicable thereafter, but in no event later than thirty calendar days following the Retirement Date.. 1.8 RESTRICTED STOCK RIGHTS. The Executive acknowledges and agrees that, as a consequence of his retirement on the Retirement Date, any unvested rights he may have under any restricted stock right award (an "RSR") granted under the SAFECO Incentive Plan of 1987 (the "1987 PLAN") or the SAFECO Long-Term Incentive Plan of 1997 (the "1997 PLAN") shall expire as of such date, and that he shall not be entitled to any payment in respect of any RSR that remains unvested as of such date. 1.9 PERFORMANCE STOCK RIGHTS. The Company and the Executive agree that he shall be entitled to receive any payment that would otherwise be due to him under any unvested performance stock right (a "PSR") granted under the 1997 Plan for any period ending December 2 31, 2001, and that such payment, if any, shall be made to the Executive following the determination that such a payment is due and no later than February 28, 2002. In addition, the Executive acknowledges and agrees that, as a consequence of his retirement on the Retirement Date, he shall not be entitled to any payment in respect of any unvested PSR for any period ending after December 31, 2001. 1.10 STOCK OPTIONS. Each of the Executive's stock options, other than the 24,000 share "hurdle" option granted to the Executive in November of 1999 (the "NOVEMBER 1999 OPTION"), shall be fully vested, fully exercisable, and wholly non-forfeitable as of the Retirement Date. The November 1999 Option shall become vested, exercisable and non-forfeitable to the extent that the relevant "price hurdles" are satisfied on or before the third anniversary of the Retirement Date. Pursuant to the provisions of the 1987 Plan and 1997 Plan relating to the termination of employment by retirement and to the provisions of Section 3.1 below, each outstanding stock option shall, to the extent that it is or becomes exercisable as of the Retirement Date, remain exercisable (a) for three months following the Retirement Date (in the case of options granted under the 1987 Plan) and (b) through the third anniversary of the Retirement Date (in the case of options granted under the 1997 Plan); provided, however, that no stock option shall remain exercisable beyond its maximum stated term. Exhibit B to this Agreement lists the Executive's outstanding options and their post-retirement exercise periods. 2. PAYMENTS. As compensation to the Executive, and in consideration of his retirement as an employee and his resignation as an officer of the Company and as an officer and director of certain of the Company's subsidiaries and the release he is granting in Section 5 below, the Company unconditionally and irrevocably agrees (subject only to the Executive's not revoking this Agreement during the seven-day revocation period described in Section 16.3) to pay an amount equal to the sum of (a) $487,500 plus (b) an amount equal to the product obtained by multiplying (i) 6,623 times (ii) the closing price of SAFECO Corporation common stock as reported on NASDAQ on the Retirement Date (such product being the "CALCULATED PAYMENT"). This sum shall be allocated and paid as follows: 2.1 RELEASE PAYMENT. $243,750 shall be allocated as consideration for the Executive's release of claims as set forth in Section 5 below (the "RELEASE PAYMENT") and shall be made on January 15, 2002. 2.2 ADDITIONAL PAYMENTS. In consideration of his agreements set forth in Sections 8.1, 8.2, 8.3 and 8.4 (which agreements relate to restraints on competition, solicitation, disparagement and matters adverse to the Company), the Company shall pay the Executive the sum of the Calculated Payment and $243,750 on January 15, 2003. 3. FURTHER CONSIDERATION. As further consideration to the Executive for the release granted by him under Section 5, the Company unconditionally and irrevocably agrees (subject only to the Executive not revoking this Agreement during the seven-day revocation period described in Section 16.3 and executing a reaffirmation of the release in the form stated on Exhibit C) to provide the following benefits to the Executive, at no cost to the Executive: 3 3.1 SAFECO STOCK OPTION EXTENSION. The Company, through the Compensation Committee of its Board of Directors (the "COMPENSATION COMMITTEE"), has approved or will approve at its November 2001 meeting the Executive's retirement for purposes of the 1987 Plan and 1997 Plan. As a retiree, the Executive shall be entitled (a) to exercise any outstanding stock option issued under the 1987 Plan for three months following the Retirement Date and (b) to exercise any outstanding and vested stock option issued under the 1997 Plan through the third anniversary of the Retirement Date; provided, however, that no stock option shall remain exercisable beyond its maximum stated term. Contingent upon the Executive's execution of this Agreement and the expiration of the Revocation Period, the Compensation Committee has agreed or will agree to amend the terms of all Company stock options that have been granted to the Executive and that will not otherwise be fully vested and exercisable as of the Retirement Date (other than the November 1999 Option), so that each such stock option shall, as of such date, be fully vested, fully exercisable and non-forfeitable. With respect to the November 1999 Option the Compensation Committee has agreed or will agree to amend the exercise period and term of that option to the third anniversary of the Retirement Date. 3.2 ATTORNEY AND TAX CONSULTANT FEES. Contingent upon the Executive's execution of this Agreement and the expiration of the seven-day revocation period described in Section 16.3, the Company agrees to pay all attorneys' and tax consultants' fees and charges incurred by the Executive on or before the expiration of the Revocation Period in connection with entering into this Agreement, up to a maximum of $5,000. 3.3 OUTPLACEMENT ASSISTANCE. The Company agrees to provide the Executive outplacement services of such kind and for such time as the Company and the Executive subsequently agree. 3.4 SPECIAL PAYMENT AND MATCHING CHARITABLE GIFTS. Contingent upon the Executive's execution of this Agreement and the expiration of the seven-day revocation period described in Section 16.3, the Company shall make a special payment of $20,000 to the Executive on the next pay period following the revocation period and shall treat the Executive as a retiree for purposes of the matching charitable gifts program. 4. RETIREMENT AND RESIGNATION. 4.1 RETIREMENT AND RESIGNATION AS AN OFFICER AND DIRECTOR. In consideration of the payments and other compensation described above, the Executive (a) notifies the Company of his retirement as an employee of the Company, effective on the Retirement Date, and (b) tenders his resignations as an officer of the Company and officer and director of any and all of its subsidiaries, effective on the Retirement Date. 4.2 NO AUTHORITY TO ACT. After the Retirement Date, the Executive shall have no further authority to bind the Company to any contract or agreement or to act on its behalf. The Company shall have no obligation to reimburse the Executive for any expenses incurred by him after the Retirement Date, except as expressly provided in this Agreement or as otherwise agreed in writing by the Company. 4 4.3 RETURN OF MATERIALS. No later than seven days after the Retirement Date, the Executive shall return all devices and materials in his possession that are owned by the Company and were used by the Executive in the course of his employment. Anything to the contrary notwithstanding, nothing in this Section 4.3 or in Section 7.3 shall prevent the Executive from retaining papers and other materials of a personal nature, including personal diaries, calendars and Rolodexes, information showing his compensation or relating to reimbursement of expenses, information that may be needed for tax purposes, or copies of plans, programs and agreements relating to his employment or compensation. 5. RELEASES AND SETTLEMENT. 5.1 RELEASE PAYMENT. For the purposes of this Agreement, "RELEASE PAYMENT" means the payment specified in Section 2.1. 5.2 RELEASE BY THE EXECUTIVE. In consideration of the Company's delivery of the Release Payment to the Executive in accordance with the terms of Section 2.1, the Executive hereby releases the Company and its affiliated companies, and the employees, agents, officers, directors and shareholders of any of them, from all claims, demands, actions or causes of action of any kind or nature whatsoever which the Executive 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 defined in Section 5.3, based upon any matter, cause or thing whatsoever related to or arising out of the Executive's employment with the Company or the termination thereof, provided, however, that this release shall not apply to any rights (a) relating to indemnification (or advancement of expenses) under this Agreement, the Articles of Incorporation or By-Laws of the Company, or under any applicable insurance policy, or to obtain contribution as permitted by law in the event of entry of judgment against the Executive as a result of any act or failure to act for which the Executive and any released person are jointly liable, (b) arising under, or preserved by, this Agreement, (c) arising after the Retirement Date, (d) under any Company stock option, restricted stock right, performance share right, stock purchase, deferred compensation or other similar plan, program, agreement or agreement, (e) under any Company pension, retirement or welfare benefit plan, program, agreement or arrangement or (f) arising out of any investor, account, insurance or client relationship, which rights shall be preserved, unaffected by this release. 5.3 THE CLAIMS. For the purposes of this Agreement, "CLAIMS" shall mean claims with respect to any of the following: (a) breach of contract; (b) discrimination, retaliation, or constructive or wrongful discharge; (c) lost wages, lost employee benefits, physical and personal injury, stress, mental distress, or impaired reputation; (d) claims arising under the Age Discrimination in Employment Act ("ADEA"), Title VII of the Civil Rights Act, the Equal Pay Act, or any other federal, state or local laws or regulations prohibiting employment discrimination; (e) attorneys' fees or (f) any other claim arising from or relating to the Executive's employment with the Company and/or his separation from service, including claims with respect to the Severance Agreement dated May 5, 1999 between the Executive and the Company, which the Parties agree is terminated by mutual consent as of the date of the expiration of the seven-day 5 revocation period described in Section 16.3, provided, however, that the term "Claim" shall not include any claims reserved by the Executive pursuant to Section 5.2 above. 5.4 CONSIDERATION FOR RELEASE. The Company represents, and the Executive acknowledges, that the Release Payment and the further consideration described in Section 3 exceed any amount the Company may arguably be required to pay under any agreement or arrangement to which the Executive is a party or under which he claims some benefit, or under the standard policies and procedures of the Company, and represents valuable consideration to him for the release of his ADEA and other claims described above. 6. INDEMNIFICATION. 6.1 INDEMNIFICATION. To the extent (a) provided as of the Effective Date in the indemnification provisions of the Company's bylaws and (b) permitted under the laws of the State of Washington, the Executive shall be entitled to indemnification, and advancement of expenses, in respect of matters that occurred during the time he was an officer or director of the Company. 6.2 DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. The Company agrees to continue and maintain directors' and officers' liability insurance coverage for the Executive that is no less favorable in any respect than the coverage then provided to any present or former senior executive officer or director of the Company. 7. CONFIDENTIAL INFORMATION. 7.1 CONFIDENTIAL INFORMATION. The Executive recognizes that, by virtue of his employment by the Company, he has acquired certain non-public, proprietary information with respect to the Company and its operations (the "CONFIDENTIAL INFORMATION"). The Executive recognizes and acknowledges that the Confidential Information constitutes valuable, special and unique assets of the Company, access to and knowledge of which were essential to the performance of the Executive's duties during his employment. 7.2 NON-DISCLOSURE. The Executive agrees to hold the Confidential Information in trust and confidence. The Executive agrees not to (a) reveal any Confidential Information to any other person or (b) divulge or use any Confidential Information for any purpose other than for the benefit of the Company or with the written authorization of the Company, provided, however, this Section 7.2 shall not apply (i) when disclosure is required by law or by any court, arbitrator, or administrative or legislative body (including any committee thereof) with apparent jurisdiction to order the Executive to disclose or make accessible any information (in which event, the Executive shall, to the extent practicable, provide reasonable advance notice of such disclosure to the Company and shall cooperate reasonably, at the Company's sole expense, with the Company's efforts to obtain protective treatment for such information), (ii) to disclosure or use in connection with enforcing this Agreement, (iii) to Confidential Information that becomes generally known to the public or within the relevant trade or industry other than due to the 6 Executive's violation of this Section 7.2 or (iv) to disclosures in confidence to counsel for the purpose of obtaining legal advice. 7.3 MATERIALS. Unless the Company otherwise agrees and except as provided for in Section 4.3 above, the Executive shall not remove from the Company's premises or possession any documents, compilations of data or other files or records of any nature, or any copy or reproduction thereof, that contain Confidential Information or that belong to the Company. 8. NO COMPETING EMPLOYMENT; NO SOLICITATION OF EMPLOYEES. 8.1 NO COMPETING EMPLOYMENT. The Executive agrees that until the first anniversary of the Retirement Date, without the prior written consent of the chief executive officer of the Company, he shall not work for, or consult with, any person or entity that competes directly and materially with the Company in any of the Company's principal lines of business (i.e., the property and casualty insurance business, including surety, the life and health insurance business and the asset management business) or in the Company's insurance brokerage business. The Executive agrees that through the first anniversary of the Retirement Date he shall give the Company notice of his intent to work for or consult with any person or entity, whether it competes with the Company or not, before commencing such activity. 8.2 NO SOLICITATION OF EMPLOYEES. The Executive agrees that until the first anniversary of the Retirement Date, without the prior written consent of the chief executive officer of the Company, he shall at no time solicit, directly or indirectly, any individual who he knows is then an employee of the Company (or of any of its affiliates) to leave such employment and/or to become an employee, officer or consultant of or to any other enterprise. Anything to the contrary notwithstanding, the Company agrees that neither (a) the Executive's responding to an unsolicited request from an employee of the Company (or any of its affiliates) nor (b) the Executive's responding to an unsolicited request for an employment reference regarding an employee of the Company (or any of its affiliates) from such employee, or from a third party, by providing a reference setting forth his personal views about such employee, shall be deemed a violation of this Section 8.2. 8.3 NON-DISPARAGEMENT. The Executive agrees that he shall not intentionally make any public statement that is intended to criticize or disparage the Company, its affiliates, or any of its or their directors, officers or employees. The Company agrees that it shall use its best efforts to cause its senior executive officers (senior vice presidents and above) and directors not to make any public statement that is intended to criticize or disparage the Executive. This Section 8.3 shall not be construed to prohibit either Party from responding publicly to incorrect public statements or from making truthful statements when required by law or order of a court or other person or body having jurisdiction. 8.4 CONDUCT ADVERSE TO THE COMPANY. The Executive agrees that until the first anniversary of the Retirement Date, without the prior written consent of the chief executive officer of the Company, he shall not work for or consult with any person or entity with respect to any claim such person or entity may have that is adverse to the interests of the Company or with 7 respect to any offer to acquire, or to merge with, the Company that such person or entity is considering making, is preparing to make or is making. 9. PRE-EMPTION AND ENFORCEMENT. Sections 7 and 8 of this Agreement shall supersede, to the extent less favorable to the Executive than the provisions in such Sections, any provision in any plan, policy, agreement, award or other arrangement of the Company or any of its predecessors or affiliates relating to non-competition, non-solicitation, non-hire, confidentiality, disparagement or other restrictions on conduct. Such Sections, and other surviving restrictions, may be enforced through injunction and claims for damages. Each Party shall be entitled to seek injunctive relief against breaches of Section 7 or Section 8 in any court of competent jurisdiction. 10. NO ADMISSION. Each Party understands and acknowledges that neither the Release Payment, nor the execution and delivery of this Agreement, constitutes an admission by the other Party to (a) any breach of any agreement between them, (b) any violation of any federal, state or local statute, regulation or ordinance or (c) any other wrongdoing. 11. LIABILITY FOR DEFENSE COSTS. If, notwithstanding the release in Section 5, the Executive should pursue, in any forum, any claim released by the Executive in Section 5 above, the Executive agrees to pay, or reimburse, the Company for all reasonable costs incurred in defending against such released claim. 12. REPRESENTATIONS OF THE COMPANY. The Company represents and warrants to the Executive that (a) all corporate action required to be taken by the Company to authorize fully the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby has been duly and effectively taken, (b) the execution, delivery and performance of this Agreement does not violate any applicable law, regulation, order, judgment or decree or any agreement, arrangement, plan or corporate governance document to which the Company is a party or by which it is bound and (c) upon the execution and delivery of this Agreement by the Parties, it shall be a valid and binding obligation of the Company, enforceable against it in accordance with its terms, except to the extent that enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally. The Company acknowledges that the Executive has relied upon the foregoing representations and warranties in entering into this Agreement. 13. ARBITRATION. 13.1 NOTICE AND SELECTION OF ARBITRATOR. The Parties agree that any claim or dispute arising under or relating to this Agreement, the Executive's employment with the Company, or the termination thereof (a "COVERED CLAIM") shall, except to the extent otherwise provided in Section 9 above, be resolved through binding confidential arbitration in Seattle, Washington, before a disinterested arbitrator. Arbitration shall be commenced by service on the other party to the dispute by a written request for arbitration, containing a brief description of the matter at issue and the names and addresses of three arbitrators acceptable to the petitioner. The other party shall, within thirty (30) days following receipt of such notice, either select one of the proposed arbitrators or provide the names and addresses of three other arbitrators acceptable to 8 the proposing party. If the parties are unable to select an impartial arbitrator in the foregoing fashion, the American Arbitration Association shall choose an impartial arbitrator. 13.2 RULES OF PROCEEDING. Arbitration proceedings shall be conducted under the Commercial Arbitration Rules (and not the National Rules for the Resolution of Employment Disputes) of the American Arbitration Association. The arbitrator shall not be bound to any formal rules of evidence. 13.3 DECISION FINAL AND BINDING. The decision of the arbitrator shall be final and binding on the parties, and may be entered and enforced in any court of competent jurisdiction. 13.4 EXPENSES. Each Party shall share equally the expenses of the arbitrator and other arbitration expenses. Attorney fees, witness fees and other expenses incurred by a Party in preparing for the arbitration are not "arbitration expenses" and shall be paid by the Party incurring them. 14. PUBLICITY. 14.1 TERMS OF AGREEMENT. The Parties agree that neither of them shall reveal or publicize the existence of this Agreement or its terms, including but not limited to the amount of the Release Payment, except under compulsion of law or as required under the rules and regulations of the Securities and Exchange Commission ("SEC"). The Executive acknowledges that a copy of this Agreement will be filed as an exhibit to a filing made by the Company with the SEC and that a description of compensation paid or to be paid to him under this Agreement will be included in the Company's proxy statement. Further, the Parties agree that they shall not discuss with or make to the public at large or to any individual person or persons any statements about this Agreement, or matters relating to its terms. Notwithstanding the provisions of this Section 14.1, each Party may disclose the terms of this Agreement to such Party's attorneys, accountants and financial and tax advisors to the extent necessary to obtain counsel and advice therefrom. The Executive may also disclose the terms of this Agreement in confidence to the members of his immediate family and may disclose the terms of Sections 7 through 9 in confidence to any prospective employer. 14.2 ANNOUNCEMENT CONCERNING RETIREMENT FROM SERVICE. The Parties shall discuss and coordinate with respect to any public announcement, or any internal or private announcement, concerning the severance of their employment relationship. 15. COSTS. Except for the Company's agreement to pay for the Executive's legal and tax consultation fees and charges as stated and limited in Section 3.2, each Party shall bear its and his own costs and expenses incurred in connection with the negotiation and preparation of this Agreement. 9 16. ACKNOWLEDGMENT. 16.1 INFORMED AGREEMENT. The Executive declares that he has read and fully understands the terms of this Agreement, and its significance and consequence. The Executive further declares that this Agreement is the product of good faith negotiations between himself and the Company, and that he voluntarily accepts the same for the purpose of resolving arrangements with respect to his retirement. The Executive understands and acknowledges that, in exchange for the Release Payment he is waiving and giving up, to the extent provided in Section 5, claims arising out of his employment with the Company and/or his separation from service. 16.2 ATTORNEY REVIEW. The Executive acknowledges that the Company has advised him to review the terms of this Agreement with an attorney and that he has done so or has knowingly waived his right to do so. 16.3 REVIEW AND REVOCATION PERIODS. The Executive acknowledges that the Company has given him at least 21 days during which to consider this Agreement prior to signing, and understands that he has seven days after signing in which he may revoke this Agreement. This Agreement shall not become effective or enforceable until such seven-day period has expired. The Executive understands that he may revoke this Agreement by delivering a written notice to Allie Mysliwy at SAFECO Plaza, Seattle, WA 98185, no later than the close of business on the seventh day after his execution hereof. The Executive understands and acknowledges that if he revokes this Agreement it shall not be effective or enforceable and he shall not receive the payments described herein. 17. NOTICES. Any notice, request, or other communication given in connection with this Agreement shall be in writing and shall be deemed to have been given (a) when delivered personally to the recipient or (b) if written acknowledgment of receipt is obtained, five days after being sent by prepaid certified or registered mail, or two days after being sent by a nationally recognized overnight courier. Any notice, request or other communication shall, if to the Executive, be addressed to him at his principal residence and, if to the Company and except to the extent otherwise provided in Section 16.3, shall be addressed to the Company at its corporate headquarters, to the attention of its General Counsel. 18. SUCCESSORS AND ASSIGNS. 18.1 EFFECT ON SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of the Executive) and assigns. 18.2 LIMITATIONS ON ASSIGNMENT BY THE COMPANY. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger, consolidation or other combination in which the Company is not the continuing entity, or a sale or liquidation of all or substantially all of the business and assets of the Company, provided that the assignee or 10 transferee is the successor to all or substantially all of the business and assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company as set forth in this Agreement, either expressly or by operation of law. 18.3 LIMITATIONS ON ASSIGNMENT BY THE EXECUTIVE. No rights or obligations of the Executive under this Agreement may be assigned or transferred by the Executive other than his rights to compensation and benefits, which may be transferred only by will or operation of law, except as provided in Section 19.4. 19. MISCELLANEOUS. 19.1 ENTIRE AGREEMENT. This Agreement contains the entire understanding and agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, term sheets, discussions, negotiations and undertakings, whether written or oral, between them relating to this Agreement. In the event of any inconsistency between any provision of this Agreement and any provision of any plan, employee handbook, personnel manual, program, policy, arrangement or agreement of the Company or any of its affiliates, the provisions of this Agreement shall control. 19.2 AMENDMENT OR WAIVER. No provision in this Agreement may be amended unless such amendment is set forth in a writing that expressly refers to this Agreement and that is signed by the Executive and by an authorized (or apparently authorized) officer of the Company. No waiver by any person of any breach of any condition or provision contained in this Agreement shall be deemed a waiver of any similar or dissimilar condition or provision at the same or any prior or subsequent time. To be effective, any waiver must be set forth in a writing signed by the waiving person and must specifically refer to the condition(s) or provision(s) of this Agreement being waived. 19.3 HEADINGS. The headings of the Sections and sub-sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 19.4 BENEFICIARIES/REFERENCES. The Executive shall be entitled, to the extent permitted under applicable law and applicable plans of the Company, to select and change a beneficiary or beneficiaries to receive any compensation or benefit hereunder following the Executive's death by giving the Company written notice thereof. In the event of the Executive's death or a judicial determination of his incompetence, references in this Agreement to the Executive shall be deemed, where appropriate, to refer to his beneficiary, estate or other legal representative. 19.5 NO MITIGATION; NO OFFSET. The Executive shall be under no obligation to seek other employment or to become self-employed and there shall be no offset against amounts due the Executive, under this Agreement or otherwise, on account of any remuneration attributable to any subsequent employment that he may obtain or any claims the Company may have against him. 11 19.6 WITHHOLDING TAXES. The Company may withhold from any amounts or benefits payable under this Agreement taxes that are required to be withheld pursuant to any applicable law or regulation. 19.7 SEVERABILITY. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions and portions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 19.8 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall be deemed to be one and the same instrument. 19.9 GOVERNING LAW. The Parties acknowledge that this Agreement shall be interpreted under and enforced by and consistent with the laws of the State of Washington. SAFECO CORPORATION _____________________ By_____________________ RODNEY A. PIERSON MICHAEL S. MCGAVICK President and Chief Executive Officer Dated:________________ Dated:__________________ 12 EXHIBIT A RESPONSIBILITIES TO BE COMPLETED BY DECEMBER 31, 2001 o Expense Reduction Plan o Implementation Plan for Financial Dashboard Project o Reserve Adequacy Review o Financial goal setting work in connection with pay for performance project o Annual Five-Year Financial Plan 13 EXHIBIT B THE EXECUTIVE'S FULLY VESTED STOCK OPTIONS (AS OF THE RETIREMENT DATE)
NUMBER OF VESTED POST-TERMINATION EXERCISE GRANT DATE OPTION SHARES EXERCISE PRICE PERIOD ---------------------------------------------------------------------------------- 08/05/92 6,000 $25.5625 THROUGH 03/31/02 08/03/94 8,000 $28.00 THROUGH 03/31/02 05/01/96 5,414 $32.125 THROUGH 03/31/02 05/01/96 4,586 $32.125 THROUGH 03/31/02 04/28/97 1,871 $39.625 THROUGH 03/31/02 04/28/97 3,629 $39.625 THROUGH 03/31/02 05/06/98 9,008 $48.625 THROUGH 12/31/04 05/06/98 2,992 $48.625 THROUGH 12/31/04 05/05/99 2,461 $40.625 THROUGH 12/31/04 05/05/99 9,539 $40.625 THROUGH 12/31/04 11/03/99 24,000 $28.3125 THROUGH 12/31/04 05/03/00 11,250 $20.00 THROUGH 12/31/04 05/03/00 3,750 $20.00 THROUGH 12/31/04 05/02/01 4,580 $27.29 THROUGH 12/31/04 05/02/01 10,420 $27.29 THROUGH 12/31/04
14 EXHIBIT C REAFFIRMATION OF RELEASE PURSUANT TO SECTION 3 SAFECO CORPORATION _____________________ By_____________________ RODNEY A. PIERSON Name: Title: Dated:________________ Dated:__________________ 15 EX-10.22 8 v79351ex10-22.txt EXHIBIT 10.22 Exhibit 10.22 PROMISSORY NOTE SECURED BY A DEED OF TRUST $____________ Seattle, Washington ___________, 2001 _______________________________________, jointly and severally (collectively "Borrower"), for value received, hereby promise to pay to the order of GENERAL AMERICA CORPORATION ("Lender"), the principal sum of _______________ Dollars ($___________), together with any accrued interest thereon, upon the terms and conditions specified herein, and all costs and fees, including reasonable attorney fees, incurred by Lender in enforcing the obligations of this Note. Principal hereof and any accrued interest are payable to Lender at 18th Floor, 4333 Brooklyn Avenue, Seattle, WA 98185, or such other place as Lender may direct, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. Principal and any accrued interest shall be payable as follows: (i) The principal sum and any unpaid and accrued interest of this Note shall be due in full on the earlier of (which date is the Note's maturity date): (a) __________, 2016, or (b) one year after the date that _____________ employment with Safeco Corporation is terminated for any reason, including, but not limited to, death or total disability of _____________. (ii) No interest shall accrue under this Note while _______________ continues in employment with the Safeco Corporation. (iii) The proceeds of the loan evidenced by this Note shall be applied solely to the purchase of the Borrower's new principal residence (within the meaning of Section 217 of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder) in King County. Borrower shall have the right, at any time, to prepay the whole or any part hereof. This Note is secured by the short form deed of trust of even date herewith ("Deed of Trust") covering real and personal property situated in King County, Washington, to which reference is hereby made for a description of the nature and extent of the security provided thereby and the rights and limitations of rights of Lender and of Borrower in respect of such security. If default be made with respect to any payment herein provided for which continues for five days after written notice of default, or in case an event of default (as defined in the Deed of Trust or any other documents executed in connection with or to secure this Note, collectively referred to as "Loan Documents") shall occur, the principal balance of this Note shall thereafter bear interest at the minimum per annum rate, compounded semi-annually, PAGE 1 required to avoid the imputation of compensation income to the Borrower under the Federal tax laws plus 5 percent per annum, and the principal of this Note and any accrued interest and all other indebtedness secured or to be secured by the Loan Documents may be declared due and payable. Failure to exercise this option shall not constitute a waiver of the right to exercise the same at any other time. The benefits of the interest arrangements under this Note are not transferable by the Borrower. Upon termination of ___________________'s employment with Safeco Corporation, interest shall accrue on any unpaid principal balance at the rate of 5.43 percent per annum, compounded annually. For purposes of applying the provisions of this Note, _________________ shall be considered to remain in the employ of Safeco Corporation for so long as ________________ renders services as a full-time employee of Safeco Corporation, any successor entity of Safeco Corporation or one or more subsidiaries of Safeco Corporation in which Safeco Corporation has at least a fifty percent (50%) direct or indirect ownership interest. The Borrower certifies that the Borrower reasonably expects to be entitled to and will itemize deductions for Federal income tax purposes for each year the Note is outstanding. Borrower recognizes that default by Borrower in making the payments under this Note and/or in any of the other Loan Documents when due will result in Lender incurring additional expense servicing the loan, loss to Lender of the use of the money due, and frustration to Lender in meeting its other commitments. In the event that any payment or portion thereof is not paid within 15 days after the date it is due, the holder hereof may collect, and Borrower agrees to pay with such payment a "late charge" of 5 percent of any overdue amount as liquidated damages for the additional expense of handling such delinquent payments. Such late charge represents the reasonable estimate by the parties of a fair average compensation due to the failure of the undersigned to make timely payments. Such late charge shall be paid without prejudice to the rights of holder hereof to collect any other amounts provided to be paid or to declare a default hereunder or under the Loan Documents. In the event that Borrower defaults with respect to any payment herein provided for or in case of an event of default under any of the Loan Documents, Lender shall have the right, at Borrower's expense, to consult an attorney or collection agency, to make any demand, enforce any remedy, or otherwise protect its rights under this Note and the Loan Documents. Borrower promises to pay all costs, fees and expenses so incurred by Lender, including, without limitation, reasonable attorney fees (with or without litigation), and court costs, collection agency charges, notice expenses and title search expenses, and the failure of the defaulting Borrower to pay the same shall, in itself, constitute a further and additional default. In the event that suit or action is instituted by Lender to enforce this Note or any rights under the Loan Documents, Borrower hereby promises to pay, in addition to costs and expenses provided by statute or otherwise, such sums as the court may adjudge reasonable as attorney PAGE 2 fees in such proceeding and on any appeals from any judgment or decree entered therein and the costs and attorney fees for collection of the amount due therein. Borrower further agrees to pay immediately upon demand all costs and expenses of Lender including reasonable attorney fees: (a) if Lender seeks to have the property securing this Note abandoned by any estate in bankruptcy; (b) if Lender attempts to have any stay or injunction prohibiting the enforcement or collection of the Note, prohibiting the foreclosure of the Deed of Trust, or prohibiting the enforcement of the Deed of Trust or any other Loan Document lifted by any bankruptcy or other court; (c) if Lender participates in any subsequent proceedings or appeals from any order or judgment entered in any such proceeding; (d) if Lender deems it appropriate to file a proof of claim or in any other manner participate in any bankruptcy or similar proceedings; or (e) if Lender retains legal counsel in connection with any amendments or modifications to this Note, the Deed of Trust or any other Loan Document. Any notice to be given pursuant to this Note shall be sent to the address of the applicable party as set forth in the Deed of Trust. Time is of the essence. All reimbursements and payments required by this Note shall be immediately due and payable on demand. Each and every maker hereof agrees that they have received valuable consideration hereunder, that they sign this Note as makers and not as sureties, and that any and all suretyship defenses are hereby waived. Borrower for itself and all drawers and endorsers severally waives presentment for payment, protest, notice of protest and notice of nonpayment of this Note. This Note is governed by the law of the state of Washington without regard for conflict of laws principles. [The remainder of this page intentionally left blank.] PAGE 3 BORROWER ACKNOWLEDGES THAT ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. BORROWER: --------------------------------------- --------------------------------------- PAGE 4 EX-10.23 9 v79351ex10-23.txt EXHIBIT 10.23 Exhibit 10.23 SAFECO LEADERSHIP PERFORMANCE PLAN Effective January 1, 2002 Adopted by SAFECO Corporation effective as of January 1, 2002. TABLE OF CONTENTS SECTION 1: PURPOSE....................................................................3 SECTION 2: DEFINITIONS................................................................4 2.1 Business Unit..........................................................4 2.2 Change in Control......................................................4 2.3 Committee..............................................................4 2.4 Company................................................................4 2.5 Corporate..............................................................4 2.6 Corporation............................................................4 2.7 Disability.............................................................4 2.8 Effective Date.........................................................4 2.9 Eligible Employee......................................................4 2.10 Employee...............................................................5 2.11 Incentive Award........................................................5 2.12 Minimum Financial Requirement..........................................5 2.13 Participant............................................................5 2.14 Performance Period.....................................................5 2.15 Plan...................................................................5 2.16 Retirement.............................................................5 2.17 Salary.................................................................5 2.18 Senior Leadership......................................................6 2.19 Target Award...........................................................6 SECTION 3: PARTICIPATION..............................................................7 3.1 Eligible Employees.....................................................7 3.2 Participation Date.....................................................7 3.3 Rehired Eligible Employees.............................................7 SECTION 4: INCENTIVE POOL.............................................................8 4.1 Funding Performance Measures...........................................8 4.2 Incentive Pool Calculation.............................................8 SECTION 5: INCENTIVE AWARDS..........................................................10 5.1 Calculation of Incentive Award........................................10 5.2 Condition Precedent to Payment of Incentive Award.....................10 5.3 Payment of Incentive Award............................................11 5.4 Termination of Employment.............................................11 SECTION 6: ADMINISTRATION............................................................12 6.1 Activities, Duties and Responsibilities of the Committee..............12 6.2 Notices...............................................................12 SECTION 7: AMENDMENT AND TERMINATION.................................................13 7.1 Amendment and Termination of the Plan.................................13

SECTION 8: MISCELLANEOUS.............................................................14 8.1 Tax Withholding.......................................................14 8.2 Continuation of Employment............................................14 8.3 Products and Underwriting.............................................14 8.4 No Trust or Fund......................................................14 8.5 Governing Law; Severability...........................................14 8.6 Spendthrift Clause....................................................15 8.7 Entire Plan...........................................................15 8.8 Effective Date and Term...............................................15

SAFECO LEADERSHIP PERFORMANCE PLAN Effective January 1, 2002 2 SECTION 1: PURPOSE The purpose of the SAFECO Leadership Performance Plan (the "Plan") is to provide certain managers and other salaried employees of the Company with the opportunity to earn an incentive bonus based on achievement of specified performance goals during a Performance Period, thereby motivating participating employees to achieve company financial and operational objectives. SAFECO LEADERSHIP PERFORMANCE PLAN Effective January 1, 2002 3 SECTION 2: DEFINITIONS 2.1 Business Unit "Business Unit" means the following operating organizations of SAFECO Corporation's subsidiaries: Life & Investments, Property & Casualty, SAFECO Business Insurance, SAFECO Personal Insurance, and Surety. 2.2 Change in Control "Change in Control" has the meaning set forth in the SAFECO Long-Term Incentive Plan of 1997, or any successor plan thereto. 2.3 Committee "Committee" means the Compensation Committee of the SAFECO Corporation Board of Directors. 2.4 Company "Company" means collectively SAFECO Corporation and its subsidiaries. 2.5 Corporate "Corporate" means the overall administrative organization for the Corporation, which organization supports and is distinct from the Business Units. 2.6 Corporation "Corporation" means the SAFECO Corporation. 2.7 Disability "Disability" has the meaning set forth in the SAFECO 401(k)/Profit Sharing Retirement Plan or any successor plan thereto. 2.8 Effective Date "Effective Date" has the meaning set forth in Section 8.8. 2.9 Eligible Employee "Eligible Employee" means an Employee who has satisfied the eligibility criteria of Section 3.1. SAFECO LEADERSHIP PERFORMANCE PLAN Effective January 1, 2002 4 2.10 Employee "Employee" means any person who is employed on a salaried basis other than someone who is (a) a non-union hourly Employee, (b) included in a unit of persons covered by a collective bargaining agreement, or (c) is a leased employee within the meaning of Internal Revenue Code section 414(n)(2). 2.11 Incentive Award "Incentive Award" means the annual amount awarded to an Eligible Employee under the Plan pursuant to Section 5.1. 2.12 Minimum Financial Requirement "Minimum Financial Requirement" means an overall financial result established for the Corporation by the Committee below which no Incentive Awards are made under the Plan, unless at the discretion of the Committee. 2.13 Participant "Participant" means an Eligible Employee who qualifies for participation as provided in Section 3.2. 2.14 Performance Period "Performance Period" means the calendar year period during which performance goals are established and an Eligible Employee's performance is measured in order to determine whether the Eligible Employee is eligible for an Incentive Award. 2.15 Plan "Plan" means this SAFECO Leadership Performance Plan. 2.16 Retirement "Retirement" has the meaning set forth in the SAFECO 401(k)/Profit Sharing Retirement Plan or any successor plan thereto. 2.17 Salary "Salary" means for each Performance Period the total of all amounts the Employer paid to an Eligible Employee (while a Participant) for personal services, including: (a) Base salary; SAFECO LEADERSHIP PERFORMANCE PLAN Effective January 1, 2002 5 (b) Amounts paid to a Participant while on an Authorized Leave of Absence or short term disability; and (c) Any pre-tax Employee contributions made by the Employer on behalf of the Employee for the Plan Year to the SAFECO Flexible Benefits Program or the SAFECO 401(k)/Profit Sharing Retirement Plan; but excluding: (d) Amounts paid for overtime; (e) All Employer contributions to deferred compensation or other fringe benefit plans; (f) Cash incentives and bonuses paid, accrued or earned under any incentive compensation plan; (g) Long-term disability benefits; (h) Severance pay; and (i) Any other payments or benefits. 2.18 Senior Leadership "Senior Leadership Team" means the Senior Leadership Team appointed from time to time by the Corporation's Chief Executive Officer. 2.19 Target Award "Target Award" means the value, stated as a percentage of Salary or as a dollar amount, which represents the Participant's expected payment when Corporate, Business Unit and personal goals are achieved. SAFECO LEADERSHIP PERFORMANCE PLAN Effective January 1, 2002 6 SECTION 3: PARTICIPATION 3.1 Eligible Employees An Employee of the Company shall be eligible to participate in the Plan if he or she: (a) is a key management employee, or a non-management employee holding a key leadership position with the Company as determined at the discretion of the Corporation's Chief Executive Officer or a Business Unit President; (b) occupies a position that is assigned to a pay band within the Corporation's compensation structure at the level of Band 10 or higher; and (c) is not eligible to participate in the SAFECO Success Sharing Plan or any other Company-sponsored variable pay or annual bonus plan. Provided however, that the Committee may extend participation in the Plan to any Employee in its sole discretion. 3.2 Participation Date An Eligible Employee shall commence participation on the later of: (a) the Effective Date; (b) the date when transferred or promoted from an ineligible position into a Plan-eligible position; (c) if hired by the Company after September 30 in a Performance Period, January 1 of the next following Performance Period. 3.3 Rehired Eligible Employees An individual who terminates employment and is rehired during the same Performance Period and who satisfies the eligibility criteria of Section 3.1 shall be eligible to participate in the Plan for such Performance Period only if he or she has been employed for at least 90 consecutive days during such Performance Period. SAFECO LEADERSHIP PERFORMANCE PLAN Effective January 1, 2002 7 SECTION 4: INCENTIVE POOL 4.1 Funding Performance Measures (a) The Committee shall establish Corporate and Business Unit funding performance measures ("Funding Performance Measures") and a Corporation Minimum Financial Requirement for each Performance Period on the basis of such criteria and to accomplish such objectives as the Committee may from time to time select. Funding Performance Measures may include performance criteria for the Corporation, a subsidiary, a Business Unit, an operating group, or a division of the Company or a subsidiary. (b) During any Performance Period, the Committee may adjust the Funding Performance Measures for such Performance Period as it deems equitable in recognition of unusual or nonrecurring events affecting the Company, changes in applicable tax laws or accounting principles, or such other factors as the Committee may determine. (c) The Funding Performance Measures shall be any one or a combination of net income, earnings per share, return on equity, return on assets, stock price appreciation, total shareholder return, cash flow, revenues, item count, market share, assets, assets under management, any profit-related ratio or calculation, or any growth, concentration-of-business or market-share ratio or calculation. Such Funding Performance Measures may be measured on an absolute basis or relative to a group of peer companies selected by the Committee, relative to internal goals, or relative to levels attained in prior years. (d) The Committee will establish Funding Performance Measures and the Minimum Financial Requirement not later than 90 days after the beginning of the Performance Period. 4.2 Incentive Pool Calculation For each Performance Period, the Committee shall establish a target incentive pool based on the sum of Target Awards for all Corporate Participants. The Committee shall further establish Business Unit target incentive pools based on the sum of Target Awards for all Business Unit Participants. The target incentive pools shall then be adjusted as follows: (a) for Corporate, the target incentive pool shall be adjusted based on Corporate performance results relative to Corporate Funding Performance Measures established under Section 4.1; and SAFECO LEADERSHIP PERFORMANCE PLAN Effective January 1, 2002 8 (b) for Business Units, the target incentive pool shall be adjusted based on a combination of Corporate and relevant Business Unit results relative to Funding Performance Measures established under Section 4.1. After such adjustments, the incentive pools shall be allocated among Corporate and the Business Units in order to calculate Incentive Awards to Participants. SAFECO LEADERSHIP PERFORMANCE PLAN Effective January 1, 2002 9 SECTION 5: INCENTIVE AWARDS 5.1 Calculation of Incentive Award (a) The Participant's Incentive Award for a Performance Period shall be based on (1) the amount of the incentive pool (if any) for the relevant Corporate or Business Unit assignment, (2) the Participant's paid Salary during the Performance Period, (3) the Participant's Target Award, and (4) individual performance measures. As soon as practical after the end of a Performance Period, the Participant's management shall assess individual performance by measuring results attributable to performance goals established for the Performance Period. Such performance goals may represent any combination and weighting of Business Unit, operating group, division, unit or individual objectives. Assessment of results shall occur through application of Company-approved performance evaluation tools. (b) In the event that the performance of Corporate or a Business Unit does not meet the threshold level of performance to result in the funding of an incentive pool under Section 4.2, an Incentive Award may nonetheless be paid to a Participant in the discretion of the Committee or the Corporation's Chief Executive Officer; provided, however, that the Incentive Award shall not exceed 25% of the Participant's Target Award. No Incentive Awards may be granted under the Plan unless the Corporation's Minimum Financial Requirement has been satisfied. (c) In no event may the Participant's Incentive Award exceed 200% of his or her Target Award. (d) In the event of promotion, position reclassification, or transfer between incentive pools occurring during a Performance Period; prorating of the Incentive Award of a Participant for that Performance Period will be determined according to any reasonable methodology chosen by the Committee. 5.2 Condition Precedent to Payment of Incentive Award To receive an Incentive Award under Section 5.1, a Participant must have received his or her written performance evaluation from his or her manager. SAFECO LEADERSHIP PERFORMANCE PLAN Effective January 1, 2002 10 5.3 Payment of Incentive Award Subject to the conditions set forth below, Incentive Awards shall be paid to Participants in a lump sum as soon as administratively feasible after the close of the Performance Period. Such payment shall consist of 100% cash; provided, however: (a) The Committee may direct that Participants who are also members of the Senior Leadership Team receive all or a portion of their respective Incentive Awards in the form of restricted stock rights ("RSRs") under the SAFECO Long-Term Incentive Plan of 1997. The actual amount of such RSRs will be determined pursuant to any reasonable methodology chosen by the Committee. The Committee, in accordance with the SAFECO Long-Term Incentive Plan of 1997, shall have full and final authority to establish the terms, conditions and definitions that govern such RSRs. (b) The Committee may permit deferral of some or all of a Participant's Incentive Award to the SAFECO Deferred Compensation Plan for Executives in accordance with such plan's terms. 5.4 Termination of Employment An Eligible Employees shall not be entitled to an Incentive Award unless he or she is a Participant on the last day of the Performance Period; provided, however: (a) in the event the Participant's employment with the Company terminates during the Performance Period on account of Retirement, death or Disability, the Participant (or his or her estate) will be entitled to receive an Incentive Award based on his/her Salary for the portion of the Performance Period ending on the Participant's employment termination date, calculated pursuant to any reasonable methodology chosen by the Committee. (b) in the event the employment of a Participant who has executed a Change in Control Severance Agreement is terminated without cause (as determined in the sole discretion of the Committee) during the Performance Period by the Company (or an acquirer corporation or affiliate thereof) following a Change in Control, the Participant shall be eligible to receive an Incentive Award for the entire Performance Period, calculated and paid in accordance with Section 5.1, notwithstanding the Participant's termination of employment. If the extent to which the Funding Performance Measures are achieved following the Change in Control cannot be determined because the Company or its operations are merged into or otherwise combined with those of the acquirer corporation, then the amount of the Incentive Award payable to the Participant shall be determined by annualizing the performance results of the calendar quarters completed prior to such merger or combination. SAFECO LEADERSHIP PERFORMANCE PLAN Effective January 1, 2002 11 SECTION 6: ADMINISTRATION 6.1 Activities, Duties and Responsibilities of the Committee This Plan shall be administered by the Committee. The Committee shall have exclusive authority, in its discretion, to determine all matters relating to Incentive Awards under the Plan. The Committee shall also have exclusive authority to interpret the Plan and may from time to time adopt and change rules and regulations of general application for the Plan's administration. The Committee's interpretation of the Plan and its rules and regulations, and all actions taken and determinations made by the Committee pursuant to the Plan, shall be conclusive and binding on all parties involved or affected. The Committee may delegate administrative duties to the Company's officers or managers. 6.2 Notices All notices and communications to the Committee in connection with this Plan shall be in writing, shall be delivered by first class mail, by courier or by hand, shall be addressed to the Committee at the following address: SAFECO Leadership Performance Plan, Attn: Corporate Human Resources, SAFECO Corporation, SAFECO Plaza, T-18, 4333 Brooklyn N.E., Seattle, WA 98185, and shall be deemed to have been given and delivered only upon actual receipt by the Committee. All notices and communications from the Committee to an Eligible Employee shall be in writing and shall be delivered to the Eligible Employee at his or her residence address last appearing on the records of the Company. SAFECO LEADERSHIP PERFORMANCE PLAN Effective January 1, 2002 12 SECTION 7: AMENDMENT AND TERMINATION 7.1 Amendment and Termination of the Plan The Committee shall each have the right to amend or terminate the Plan at any time and to discontinue (either temporarily or permanently) the distribution of Incentive Awards; provided, however, that no amendment or termination of the Plan shall adversely affect an Eligible Employee's right to payment of an Incentive Award that was earned and awarded prior to the date of the amendment or termination. SAFECO LEADERSHIP PERFORMANCE PLAN Effective January 1, 2002 13 SECTION 8: MISCELLANEOUS 8.1 Tax Withholding The Company shall withhold from Incentive Awards all amounts necessary to satisfy applicable federal, state and local withholding tax requirements. 8.2 Continuation of Employment The existence of the Plan does not create any employment contract, any guarantee of continued employment, or any right or assurance as to any minimum length of employment. An Eligible Employee's employment may be terminated at any time, with or without reason and with or without prior notice, at the option of the Company or the Eligible Employee. 8.3 Products and Underwriting The Company reserves the right to withdraw existing products from distribution, reassign distribution of specific products, make new products available, adjust production credit, revise its business plans and strategies and modify its underwriting, reserves, claims, employment and other practices and policies without the Eligible Employee's consent and without adjusting the performance measures. 8.4 No Trust or Fund The Plan is intended to constitute an "unfunded" plan. Nothing contained herein shall require the Company to segregate any monies or other property, or to create any trusts, and no Eligible Employee shall have any rights that are greater than those of a general unsecured creditor of the Company. 8.5 Governing Law; Severability The Plan shall be governed by the laws of the State of Washington, without regard to its choice of law or conflict of law provisions. The federal and state courts in King County, Washington, shall have exclusive jurisdiction and venue to resolve issues that may arise out of or relate to the Plan. If any provision of the Plan is held to be invalid or unenforceable, such invalidity or unenforceability shall in no way affect the validity or enforceability of any other Plan provision. SAFECO LEADERSHIP PERFORMANCE PLAN Effective January 1, 2002 14 8.6 Spendthrift Clause Except as may be otherwise provided by law, no benefit, payment or distribution under the Plan, or right to receive such a benefit, payment or distribution, shall be subject either to the claim of any creditor of an Eligible Employee or to attachment, garnishment, levy, execution or other legal or equitable process by any creditor of such person. No Eligible Employee shall have any right to alienate, commute, anticipate or assign (either in law or equity) all or any portion of any benefit, payment or distribution under the Plan. 8.7 Entire Plan The Plan contains the entire understanding and undertaking of the Company with respect to the provision of an incentive plan for Eligible Employees and, as to that subject, supersedes any and all prior and contemporaneous undertakings, agreements, understandings, practices, policies, inducements or conditions, whether express or implied, oral or written, except as herein contained. 8.8 Effective Date and Term The effective date of the Plan is January 1, 2002. The Plan shall continue from year to year until terminated in accordance with Section 7. SAFECO LEADERSHIP PERFORMANCE PLAN Effective January 1, 2002 15 EX-11 10 v79351ex11.txt EXHIBIT 11 SAFECO Corporation and Subsidiaries - -------------------------------------------------------------------------------- COMPUTATION OF INCOME (LOSS) PER SHARE OF COMMON STOCK Exhibit 11 - --------------------------------------------------------------------------------
Year Ended December 31 2001 2000 1999 - ------------------------------------------------------------------- -------- -------- -------- (In Millions Except Per Share Amounts) BASIC NET INCOME (LOSS) PER SHARE Net Income (Loss) $ (989.2) $ 114.6 $ 252.2 -------- -------- -------- Average Number of Common Shares Outstanding 127.7 127.8 132.7 -------- -------- -------- Basic Net Income (Loss) Per Share $ (7.75) $ 0.90 $ 1.90 -------- -------- -------- DILUTED NET INCOME (LOSS) PER SHARE Net Income (Loss) $ (989.2) $ 114.6 $ 252.2 -------- -------- -------- Average Number of Common Shares Outstanding 127.7 127.8 132.7 Additional Common Shares Assumed Issued Under Treasury Stock Method (All due to employee stock options) 0.2 -- 0.1 -------- -------- -------- Average Number of Common Shares Outstanding 127.9 127.8 132.8 -------- -------- -------- Diluted Net Income (Loss) Per Share $ (7.73) $ 0.90 $ 1.90 ======== ======== ========
Basic earnings per share are calculated by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if options granted under various stock-based compensation plans were exercised resulting in the issuance of common shares. Due to the net loss in 2001, SAFECO used basic weighted-average shares outstanding to calculate income (loss) per share of common stock. Using diluted weighted-average shares outstanding would have resulted in a lower net loss per share of common stock. E-4 EX-12 11 v79351ex12.txt EXHIBIT 12 SAFECO Corporation and Subsidiaries - -------------------------------------------------------------------------------- COMPUTATION OF RATIO OF EARNINGS (LOSS) TO FIXED CHARGES Exhibit 12 - -------------------------------------------------------------------------------- RATIO OF EARNINGS (LOSS) TO FIXED CHARGES EXCLUDING DISTRIBUTIONS ON CAPITAL SECURITIES
Year Ended December 31 2001 2000 1999 1998 1997 - --------------------------------------------------- --------- ------- ------- ------- ------- (In Millions Except For Ratios) EARNINGS (LOSS) Income (Loss) Before Income Taxes and Distributions on Capital Securities $(1,413.3) $ 139.4 $ 309.6 $ 440.1 $ 551.1 Total Fixed Charges 90.2 94.6 83.7 101.1 53.0 Less Interest Capitalized (8.3) (6.1) -- (0.5) (2.0) --------- ------- ------- ------- ------- Total Earnings (Loss) $(1,331.4) $ 227.9 $ 393.3 $ 540.7 $ 602.1 --------- ------- ------- ------- ------- FIXED CHARGES Interest $ 65.7 $ 73.2 $ 70.6 $ 92.5 $ 45.5 Interest Capitalized 8.3 6.1 -- 0.5 2.0 Interest Portion of Rental Expense 15.0 14.3 12.0 6.7 4.8 Amortization of Deferred Debt Expense 1.2 1.0 1.1 1.4 0.7 --------- ------- ------- ------- ------- Total Fixed Charges $ 90.2 $ 94.6 $ 83.7 $ 101.1 $ 53.0 --------- ------- ------- ------- ------- RATIO OF EARNINGS (LOSS) TO FIXED CHARGES EXCLUDING DISTRIBUTIONS ON CAPITAL SECURITIES (14.8) 2.4 4.7 5.4 11.4 Dollar Amount of Deficiency in Earnings (Loss) to Fixed Charges $ 1,421.6 N/A N/A N/A N/A ========= ======= ======= ======= =======
RATIO OF EARNINGS (LOSS) TO FIXED CHARGES INCLUDING DISTRIBUTIONS ON CAPITAL SECURITIES
YEAR ENDED DECEMBER 31 2001 2000 1999 1998 1997 - --------------------------------------------------- --------- -------- -------- -------- -------- (In Millions Except For Ratios) EARNINGS (LOSS) Income (Loss) Before Income Taxes $(1,482.3) $ 70.4 $ 240.6 $ 371.0 $ 528.3 Total Fixed Charges 159.2 163.6 152.7 170.2 75.8 Less Interest Capitalized (8.3) (6.1) -- (0.5) (2.0) --------- -------- -------- -------- -------- Total Earnings (Loss) $(1,331.4) $ 227.9 $ 393.3 $ 540.7 $ 602.1 --------- -------- -------- -------- -------- FIXED CHARGES Interest $ 65.7 $ 73.2 $ 70.6 $ 92.5 $ 45.5 Distributions on Capital Securities 69.0 69.0 69.0 69.1 22.8 Interest Capitalized 8.3 6.1 -- 0.5 2.0 Interest Portion of Rental Expense 15.0 14.3 12.0 6.7 4.8 Amortization of Deferred Debt Expense 1.2 1.0 1.1 1.4 0.7 --------- -------- -------- -------- -------- Total Fixed Charges $ 159.2 $ 163.6 $ 152.7 $ 170.2 $ 75.8 --------- -------- -------- -------- -------- RATIO OF EARNINGS (LOSS) TO FIXED CHARGES INCLUDING DISTRIBUTIONS ON CAPITAL SECURITIES (8.4) 1.4 2.6 3.2 7.9 Dollar Amount of Deficiency in Earnings (Loss) to Fixed Charges $ 1,490.6 N/A N/A N/A N/A ========= ======== ======== ======== ========
E-5 EX-21 12 v79351ex21.txt EXHIBIT 21 SAFECO Corporation and Subsidiaries - -------------------------------------------------------------------------------- SUBSIDIARIES OF THE REGISTRANT Exhibit 21 - -------------------------------------------------------------------------------- The listing below includes the material subsidiaries of the Corporation. All subsidiaries are owned 100% by SAFECO Corporation. The Corporation does not have ownership interests in any special purpose entities that are not included in the Consolidated Financial Statements. 1. SAFECO Insurance Company of America (WA) A. SAFECO Insurance Company of Oregon (OR) B. SAFECO Management Corporation (NY) C. SAFECO Surplus Lines Insurance Company (WA) 2. General Insurance Company of America (WA) A. SAFECO Insurance Co. of Pennsylvania (PA) 3. First National Insurance Company of America (WA) 4. SAFECO National Insurance Company (MO) 5. SAFECO Insurance Company of Illinois (IL) A. Insurance Company of Illinois (IL) 6. American States Insurance Company (IN) 7. American Economy Insurance Company (IN) A. American States Insurance Co. of Texas (TX) 8. American States Preferred Insurance Co. (IN) 9. SAFECO Life Insurance Company (WA) A. American States Life Insurance Company (IN) B. First SAFECO National Life Insurance Company of New York (NY) C. Medical Risk Managers, Inc. (DE) D. SAFECO National Life Insurance Company (WA) 10. SAFECO Administrative Services, Inc. (WA) A. Employee Benefit Claims of Wisconsin, Inc. (WI) B. Wisconsin Pension and Group Services, Inc. (WI) 11. SAFECO Assigned Benefits Service Company (WA) 12. SAFECO Asset Management Company (WA) 13. SAFECO Securities, Inc. (WA) 14. SAFECO Services Corporation (WA) 15. SAFECO Trust Company (WA) 16. SAFECO Financial Products, Inc. (WA) 17. SAFECO Capital Trust I (WA) 18. SAFECO Properties, Inc. (WA) 19. General America Corporation (WA) A. F.B. Beattie & Co., Inc. (WA) B. General America Corporation of Texas (TX) -- (Attorney-in-fact) for: a. American States Lloyds Insurance Company (TX) b. SAFECO Lloyds Insurance Company (TX) C. R.F. Bailey Holdings, Ltd. (UK) D. SAFECO Financial Institution Solutions, Inc. (CA) E. SAFECO Investment Services, Inc. (WA) F. Talbot Financial Corporation (WA) 20. SAFECO UK, Limited (UK) E-6 EX-23.1 13 v79351ex23-1.txt EXHIBIT 23.1 EXHIBIT 23.1 SAFECO Corporation and Subsidiaries - -------------------------------------------------------------------------------- CONSENT OF ERNST & YOUNG LLP Independent Auditors - -------------------------------------------------------------------------------- We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-26393) pertaining to the SAFECO Long-Term Incentive Plan of 1997 and the incorporation by reference in the Registration Statements (Forms S-3) pertaining to the $800,000,000 in SAFECO debt securities and the SAFECO Agency Stock Purchase Plan, of our report dated February 8, 2002, with respect to the consolidated financial statements and schedules of SAFECO Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 2001. /s/ ERNST & YOUNG LLP Seattle, Washington March 6, 2002 -----END PRIVACY-ENHANCED MESSAGE-----

	•		standards of solvency that must be met and maintained;

	•		licensing of insurers and their agents;

	•		nature of and limitations on investments;

	•		ability to enter into or withdraw from the state;

	•		approval of premium rates;

	•		restrictions on the size of risks that may be insured under a single policy;

	•		required reserves and provisions for unearned premiums, losses and other purposes;

	•		deposits of securities for the benefit of policyholders;

	•		approval of policy forms; and

	•		regulation of market conduct, including underwriting and claims practices.


December 31	1991		1992		1993		1994		1995		1996		1997			1998			1999			2000			2001

RESERVE FOR UNPAID LOSSES AND LAE
Gross of Reinsurance	$	2,017.3	$	2,052.3	$	2,095.2	$	2,236.8	$	2,180.8	$	2,059.1	$	4,310.5		$	4,219.9		$	4,378.6		$	4,612.7		$	5,053.7
Reinsurance		152.0		89.2		100.1		143.9		110.7		103.4		228.6			253.6			309.5			343.6			415.9

Net of Reinsurance	$	1,865.3	$	1,963.1	$	1,995.1	$	2,092.9	$	2,070.1	$	1,955.7	$	4,081.9		$	3,966.3		$	4,069.1		$	4,269.1		$	4,637.8


CUMULATIVE NET AMOUNT PAID AS OF
One Year Later	$	584.9	$	598.9	$	620.5	$	693.0	$	755.4	$	772.9	$	1,345.5		$	1,389.2		$	1,510.7		$	1,618.7
Two Years Later		905.7		913.4		947.6		1,068.3		1,095.0		1,101.4		2,049.3			2,165.5			2,336.2
Three Years Later		1,086.5		1,106.0		1,147.6		1,252.9		1,267.6		1,287.9		2,516.3			2,638.0
Four Years Later		1,207.2		1,230.6		1,252.5		1,341.5		1,370.0		1,404.3		2,821.0
Five Years Later		1,294.4		1,295.7		1,300.2		1,403.5		1,440.5		1,485.3
Six Years Later		1,336.7		1,326.1		1,342.9		1,449.6		1,493.1
Seven Years Later		1,356.9		1,357.8		1,377.0		1,488.9
Eight Years Later		1,381.4		1,386.6		1,406.1
Nine Years Later		1,406.2		1,412.4
Ten Years Later		1,429.5

NET RESERVE RE-ESTIMATED AS OF
One Year Later	$	1,820.7	$	1,866.2	$	1,913.8	$	2,033.2	$	1,992.4	$	1,947.7	$	3,981.9		$	4,045.1		$	4,217.4		$	4,614.2
Two Years Later		1,732.8		1,782.1		1,818.3		1,902.3		1,889.9		1,861.4		3,989.0			4,070.3			4,447.8
Three Years Later		1,686.0		1,712.2		1,716.1		1,801.9		1,804.7		1,806.6		3,986.0			4,209.9
Four Years Later		1,650.7		1,642.3		1,643.6		1,733.8		1,757.1		1,799.6		4,097.1
Five Years Later		1,594.9		1,600.9		1,599.8		1,702.8		1,757.3		1,849.6
Six Years Later		1,569.5		1,554.7		1,568.3		1,691.2		1,803.3
Seven Years Later		1,548.7		1,549.8		1,578.3		1,733.2
Eight Years Later		1,551.0		1,567.2		1,616.3
Nine Years Later		1,570.1		1,601.2
Ten Years Later		1,600.1

CUMULATIVE NET REDUNDANCY (DEFICIENCY) AS OF
One Year Later	$	44.6	$	96.9	$	81.3	$	59.7	$	77.7	$	8.0	$	100.0		$	(78.8	)	$	(148.3	)	$	(345.1	)
Two Years Later		132.5		181.0		176.8		190.6		180.2		94.3		92.9			(104.0	)		(378.7	)
Three Years Later		179.3		250.9		279.0		291.0		265.4		149.1		95.9			(243.6	)
Four Years Later		214.6		320.8		351.5		359.1		313.0		156.1		(15.2	)
Five Years Later		270.4		362.2		395.3		390.1		312.8		106.1
Six Years Later		295.8		408.4		426.8		401.7		266.8
Seven Years Later		316.6		413.3		416.8		359.7
Eight Years Later		314.3		395.9		378.8
Nine Years Later		295.2		361.9
Ten Years Later		265.2


Name	Age		Position

Bruce M. Allenbaugh		45	Senior Vice President of Corporate Marketing since May 7, 2001. Vice President of Marketing for Avenue A from November 1999 to January 2001. Vice President of Marketing for Nextlink (now XO Communications) from 1994 to 1999. Held a series of management positions with Pepsi-Cola from 1985 to 1994.

Michael E. LaRocco		45	President of SAFECO Personal Insurance since July 16, 2001. Regional Vice President, Northeast Region for GEICO Corporation from 1998 to July 2001. Vice President of Underwriting and Product Management for GEICO from 1996 through 1998, Vice President of GEICO Casualty from 1994 to 1996, and held a series of management positions with GEICO from 1993 through 1998.

Dale E. Lauer		55	President of SAFECO Business Insurance since July 16, 2001. Senior Vice President of SAFECO Business Insurance from 1997 to July 2001. Vice President of commercial lines underwriting for the SAFECO property and casualty insurance companies from 1992 to 1997.

Michael S. McGavick		44	President, Chief Executive Officer and Director since January 30, 2001. President and Chief Operating Officer of CNA Agency Market Operations from October 1997 until January 2001, and President of CNA’s Commercial Lines group from January until October 1997, and held a series of executive positions with CNA’s commercial insurance operations from 1995 through October 1997. Director of the Superfund Improvement Project for the American Insurance Association from 1992 to 1995.

Christine B. Mead		46	Named Senior Vice President, Chief Financial Officer and Secretary effective January 24, 2002. Senior Vice President and Chief Financial Officer for Travelers Insurance Group from 2000 to January 2002; Senior Vice President and Chief Financial Officer for Travelers Property Casualty Corp - Personal Lines from 1996 to 2000; held a series of management positions with Travelers Corporation from 1989 to 1996.

Allie R. Mysliwy		47	Senior Vice President of Human Resources since July 2001. Vice President of Human Resources from July 1999 to July 2001; Vice President of Human Resources for SAFECO Life Insurance Company from 1994 to 1999.

James W. Ruddy		52	Senior Vice President since 1992. General Counsel since 1989. Vice President from 1989 to 1992. Associate General Counsel from 1985 to 1989.

Yomtov Senegor		43	Senior Vice President and Chief Information Officer since October 1, 2001. Central Region Insurance Managing Partner with Accenture (formerly Andersen Consulting) from November 1997 to October 2001, and Partner from 1992 to 1997.

Randall H. Talbot		47	President of SAFECO Life Insurance companies since February 1998. Chief Executive Officer and President of Talbot Financial Corporation from 1988 to 1998.

*		Income (Loss) Before Realized Gain is a standard industry measurement used by management to analyze income from core operations and is presented to supplement net income as a measure of profitability.

+		Net income (loss) per share amounts are after distributions on capital securities.

*		Operating ratios are GAAP basis and are based on expenses expressed as a percentage of earned premiums. Ratios exclude goodwill write-off, goodwill amortization, restructuring charges and nonrecurring acquisition charges.

+		Includes Loss Reserve Strengthening of $240.0 in 2001. Excluding this adjustment the Combined Ratio was 113.4%; the Loss Ratio was 70.7% and the Adjustment Expense Ratio was 12.6%.

	(1)		Ensuring that the recovery plans for Property & Casualty operations had the rigor and urgency necessary to succeed;

	(2)		Analyzing and reducing expenses;

	(3)		Strengthening the balance sheet; and

	(4)		Investing in SAFECO’s employees.

	•		Rates were raised across all lines of business, with specific focus on the underperforming lines of homeowners and large commercial.

	•		Nearly 1,000 underperforming agents no longer represent SAFECO.

	•		Additional underwriting actions were taken on unprofitable individual accounts.

	•		SAFECO exited lines of business not core to its strategy. For example, 15 of 19 Select Markets programs were cancelled.

		For further discussion of these and other actions see the Property & Casualty — Operations section of this MD&A.

(2)		A rigorous company-wide effort to reduce expenses was commenced and continues. In July 2001, SAFECO announced that it would eliminate approximately 1,200 jobs by the end of 2003 with half of the reductions expected to be completed in 2001. SAFECO’s total employment declined by approximately 900 in 2001, excluding the reduction due to the sale of SAFECO Credit. Positions being eliminated are in the corporate headquarters and regional Property & Casualty operations. When fully implemented, these actions are expected to reduce SAFECO’s annual operating expenses by approximately $100.

		Restructuring charges and period costs associated with these changes are expected to total approximately $65 through 2002. This includes pretax charges incurred in 2001 of $44 and $21 to be incurred throughout 2002 as the restructuring actions occur. Additional information can be found in Note 12 in the Notes to Consolidated Financial Statements.

	•		In February 2001, SAFECO announced a 50% reduction in its quarterly dividend from $0.37 per share to $0.185 per share starting with the April 2001 dividend payment to shareholders. This reduction provides the Corporation cash savings of approximately $95 per year and brought the dividend more in line with financial performance.

	•		Effective March 31, 2001, SAFECO wrote off $1.2 billion of goodwill associated with the 1997 American States Insurance acquisition (Property & Casualty $1,152.1, Life & Investments $48.9). See Note 1 in the Notes to Consolidated Financial Statements for additional information.

	•		In August 2001, SAFECO Credit was sold, generating $250 in net proceeds, resulting in a pretax gain of $97, and reducing SAFECO’s debt by approximately one-half or $1.5 billion. SAFECO Credit is reported as a discontinued operation as described in the Discontinued Operations - SAFECO Credit section of this MD&A.

	•		During the third quarter 2001, SAFECO completed a review, initially announced in May 2001, of Property & Casualty loss reserve adequacy and as a result increased reserves by $240, pretax. For additional information see the Property & Casualty — Operations, Loss Reserve Strengthening section of this MD&A.

	•		Increased emphasis on employee training to strengthen the tools and capabilities of the workforce.

	•		A performance-based compensation system based on the achievement of specific goals linked directly to SAFECO’s business plan was developed and is being implemented in early 2002. The new compensation system applies to all SAFECO employees, including the senior leadership team, and is designed to motivate and reward superior performance. In addition employee communication was increased to help all employees better understand SAFECO’s business plans and their role in helping achieve them.

	•		SAFECO added several strong leaders and completed the formation of a new senior leadership team:

	Ø		In May 2001 Bruce Allenbaugh was named Senior Vice President of Corporate Marketing bringing wide experiences from Avenue A, NextLink and Pepsi-Cola to SAFECO;

	Ø		In July 2001 Michael LaRocco was appointed President and Chief Operating Officer of SAFECO Personal Insurance. Mr. LaRocco most recently headed the $1.2 billion northeastern operations for GEICO;

	Ø		In September 2001 Yomtov Senegor was named Chief Information Officer bringing extensive information systems experience from Accenture (formerly Andersen Consulting);

	Ø		In January 2002 Christine Mead was named Senior Vice President and Chief Financial Officer. Ms. Mead most recently was the Chief Financial Officer for Travelers Insurance Group’s property and casualty business bringing extensive experience in financial management and strategy from that company as well as prior public accounting experience with Deloitte & Touche and PricewaterhouseCoopers; and

	Ø		The Board of Directors was also strengthened with the August 2001 election of Joseph W. “Jay” Brown, an insurance executive with nearly 30 years experience. Mr. Brown, Chairman and Chief Executive Officer of MBIA, Inc., formerly served as President and Chief Executive Officer of Firemen’s Fund Insurance Company and Chairman and Chief Executive Officer of Talegen Holdings, Inc., Xerox’s insurance holdings company.

•		Recognized goodwill write-down of $1,165.2 before tax ($886.9 after tax).

•		Net catastrophe losses for 2001 were $268.0 before tax ($174.2 after tax) which was more than $100 higher than the highest year in SAFECO’s past (1998). These 2001 losses include $60.0 before tax ($39.0 after tax) for storm damages in the St. Louis area in April and $51.0 before tax ($33.2 after tax) of net losses from the World Trade Center attacks.

•		Completed a reserve review and increased loss reserves $240.0 before tax ($156.0 after tax).

•		Consolidated commercial lines and recognized restructuring charges of $44.3 before tax ($28.8 after tax).

•		Sale of SAFECO Credit resulting in a gain of $97.0 before tax ($54.0 after tax).

•		Recognized investment write-downs of $126.8 before tax ($82.4 after tax) due to credit deterioration and corporate failures of certain investment holdings.

•		Quarterly dividend to shareholders was reduced from $0.37 cents to $0.185 cents per share resulting in annual cash savings of $94.5.

*		Underwriting profit or loss is a standard industry measurement used by management to analyze core Property & Casualty operations. This measurement represents the net amount of earned premiums less underwriting losses and expenses; it does not include realized investment gains and losses, goodwill amortization, goodwill write-down, restructuring charges, net investment income and taxes. This measurement does not replace net income as a measure of profitability, but is presented to supplement the other financial measurements provided.

+		Includes Loss Reserve Strengthening of $240.0 in 2001 (see discussion in the next section for more information). Excluding this adjustment the underwriting loss was $(597.5).

*		Operating ratios represent major components of expense expressed as a percentage of earned premiums and are commonly used measures of Property & Casualty’s profitability. Ratios exclude goodwill amortization, goodwill write-down and restructuring charges.

+		Includes Loss Reserve Strengthening of $240.0 in 2001. Excluding this adjustment the Combined Ratio was 113.4%; the Loss Ratio was 70.7% and the Loss Adjustment Expense Ratio was 12.6%.


	Underwriting Profit (Loss)*

	2001						2000						1999

YEAR ENDED DECEMBER 31	Amount			Combined Ratio			Amount			Combined Ratio			Amount			Combined Ratio

PERSONAL LINES
Personal Auto	$	(80.5	)		104.6	%	$	(123.0	)		107.1	%	$	(63.3	)		103.7	%
Homeowners		(205.6	)		127.8			(116.7	)		116.0			(48.2	)		106.8
Specialty		3.9			98.0			18.2			90.3			20.6			88.4
COMMERCIAL LINES
Business Insurance		(163.2	)		115.8			(155.3	)		113.3			(183.4	)		118.0
Commercial Insurance		(276.2	)		144.0			(155.7	)		122.8			(107.6	)		115.7
Surety		2.4			97.5			11.7			81.0			15.2			74.4
Other		(118.3	)		—			(1.1	)		—			—			—

Total	$	(837.5	)		118.7	%	$	(521.9	)		111.4	%	$	(366.7	)		108.4	%

•		The ability to obtain rate increases and non-renew underpriced insurance accounts;

•		Achievement of premium targets and profitability;

•		Realization of growth and business retention estimates;

•		Decrease in large-commercial premium volume;

•		Achievement of expense savings from consolidation of commercial operations;

•		Achievement of overall expense reduction goals;

•		Success in implementing a new business entry model for personal and commercial lines;

•		Success in obtaining regulatory approval of price tiered products and the use of insurance scores;

•		The ability to freely enter and exit lines of business;

•		Changes in the nature of the property and casualty book of business;

•		Driving patterns;

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

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

•		The occurrence of significant natural disasters, including earthquakes;

•		The occurrence of significant disasters, such as the attack on September 11, 2001;

•		The occurrence of bankruptcies that result in losses under surety bonds;

•		The adequacy of loss reserves;

•		The availability, pricing and ability to collect reinsurance;

•		The ability to manage exposure to the Lloyd’s of London underwriting market;

•		The ability to exclude and to reinsure the risk of loss from terrorism;

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

•		The outcome of litigation against SAFECO;

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

•		Changes in tax laws and regulations that affect the favorable taxation of certain life insurance products or that decrease the usefulness of life insurance products for estate planning purposes;

•		Negative changes to SAFECO’s rates by rating agencies;

•		The effect of current insurance and credit ratings levels on business production;

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

•		Availability of bank credit facilities;

•		Fluctuations in interest rates;

•		Performance of financial markets; and

•		General economic and market conditions.


	The financial statements, financial statement schedules and exhibits listed in the Index to Financial Statements, Schedules and Exhibits on page FS-1 are filed as a part of this report.


Filing dated	Under	Filing related to:

December 11, 2001	Item 5 (Other Items)	Announcement relating to expected losses from the Enron bankruptcy and continued difficulties in Homeowners line.

January 24, 2002	Item 5 (Other Items)	Announcement relating to the appointment of Christine B. Mead as Chief Financial Officer of SAFECO Corporation.

March 5, 2002	Item 5 (Other Items)	Announcement relating to SAFECO's acquisition of Swiss Re's medical excess-loss and group life insurance business.


Name		Title


/s/ MICHAEL S. MCGAVICK Michael S. McGavick		President, Chief Executive Officer and Director

/s/ CHRISTINE B. MEAD Christine B. Mead		Senior Vice President, Chief Financial Officer and Secretary

/s/ H. PAUL LOWBER H. Paul Lowber		Vice President, Controller and Chief Accounting Officer

/s/ JOSEPH W. BROWN Joseph W. Brown		Director

/s/ PHYLLIS J. CAMPBELL Phyllis J. Campbell		Director

/s/ ROBERT S. CLINE Robert S. Cline		Director

/s/ WILLIAM P. GERBERDING William P. Gerberding		Director

/s/ JOSHUA GREEN III Joshua Green III		Director

/s/ WILLIAM W. KRIPPAEHNE, JR. William W. Krippaehne, Jr.		Director

/s/ WILLIAM G. REED, JR. William G. Reed, Jr.		Chairman

/s/ NORMAN B. RICE Norman B. Rice		Director

/s/ JUDITH M. RUNSTAD Judith M. Runstad		Director

/s/ PAUL W. SKINNER Paul W. Skinner		Director