A.M. Best Affirms Ratings of SAFECO Subsidiaries

December 5, 2002

A.M. Best Co. has affirmed the financial strength ratings of A (Excellent) of SAFECO Corporation’s (Seattle) property/casualty and life/health insurance subsidiaries.

A.M. Best has also affirmed the “bbb+” and “bbb” ratings on SAFECO’s existing senior debt and capital securities, respectively. The rating outlook for the property/casualty subsidiaries and debt has been changed to stable from negative. The rating outlook for the life/health subsidiaries remains stable.

The ratings reflect SAFECO’s solid operating presence within the property/casualty industry, solid capitalization and recently improved operating results following significant restructuring of its property/casualty operations. The restructuring included attracting a number of senior executives with proven track records and renewing the group’s focus by emphasizing personal lines and small to mid-size commercial businesses following a period of unfavorable operating results. Corrective actions included aggressive rate increases across most of its lines of business, tightened underwriting, implementation of point-of-sale underwriting automation for personal automobile business, broader market segmentation of personal automobile products to price more accurately and termination of unprofitable agencies. As a result, of these operational changes and milder weather, SAFECO’s results improved considerably in 2002.

Additionally, the ratings consider the reduced financial leverage at the holding company, which was facilitated by the sale of SAFECO Credit and transfer of debt associated with that business. Furthermore, SAFECO has restructured its debt obligations with staggered maturities to enhance financial flexibility. Improved fixed charge coverage is reflective of the recent earnings turnaround and lower interest expense. A.M. Best believes SAFECO’s financial leverage (about 30 percent at Sept. 30, 2002, including capital securities) is reasonable for the current ratings.

SAFECO’s life/health operations (SAFECO Life) remain a core business and continue to generate significant earnings while providing much-needed diversification to the organization. The ratings on the life/health subsidiaries recognize SAFECO Life’s consistent operating performance, diversified product portfolio, leading position in the group excess loss, structured settlement and tax sheltered annuity 403(b) markets, conservative management style and effective asset/liability management. Over the last five years, SAFECO Life has generated solid earnings driven by strong operating fundamentals. A.M. Best anticipates this trend to continue in the near to medium term. Moreover, A.M. Best expects SAFECO Life’s earnings will be more than sufficient to provide SAFECO Corporation with dividends for holding company purposes without impacting its capital position.

SAFECO’s positive rating factors are somewhat offset by the property/casualty group’s unfavorable five year operating results and execution risk to produce sustainable earnings. The results were primarily driven by poor pricing and rising claims costs in personal automobile, weather-related loss events, restructuring costs and commercial lines loss reserve strengthening. However, with a significant part of SAFECO’s restructuring completed, A.M. Best believes the company is well-positioned to benefit from the hardening property/casualty market.

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