A.M. Best Affirms Financial Strength and Debt Ratings of Safeco Insurance Cos.

December 18, 2003

A.M. Best Co. has affirmed the financial strength rating of A (Excellent) of Seattle-based Safeco Insurance Companies.

Concurrently, A.M. Best has affirmed the “bbb+” and “bbb” ratings on Safeco Corporation’s existing senior debt and capital securities, respectively. Additionally, A.M. Best has affirmed the indicative ratings on the remaining $275 million under the company’s shelf registration. The outlook for all the ratings is stable. The financial strength rating of A (Excellent) of Safeco Life Insurance Company (Redmond, Wash.) and the remaining life/health subsidiaries is unaffected and remains under review with developing implications.

These ratings reflect Safeco’s solid operating presence within the property/casualty industry, excellent capitalization and recently improved operating results following significant restructuring. Safeco’s proven senior management team has implemented corrective actions, which include aggressive rate increases across most lines of business, tightened underwriting guidelines, the implementation of point of sale underwriting automation, broader market segmentation of personal automobile products to price more accurately and termination of unprofitable agencies.

As a result of the operational changes and somewhat milder weather, operating earnings have improved in recent years driven by recent accident year results.

As of year-end 2002, Safeco maintains a strong operating presence within the U.S. property/casualty industry as the 18th largest insurer as measured by net premiums written of $4.6 billion. Additionally, Safeco’s financial leverage is reasonable for the current rating level, and it will continue following the potential disposition of the life/health business. Improved fixed charge coverage is reflective of the earnings improvement in recent years and the lower interest expense.

Despite these strengths, negative rating factors include adverse loss reserve development and a high expense ratio, which have tempered the recent operating performance. The reserve strengthening of $205 million in 2003 was limited to workers’ compensation reserves primarily for accident years 2000 and prior.

In addition, the expense ratio is several points higher than the norms, although Safeco has recently implemented cost saving measures targeted at becoming more efficient. Safeco also maintains a somewhat high gross exposure to earthquakes, particularly in California.

However, the group’s net exposure is within manageable levels given its capital position and reinsurance protection. With the restructuring of the property/casualty operations completed, Safeco’s primary challenge has shifted to producing sustainable earnings throughout the underwriting cycle while maintaining strong capitalization.

A.M. Best views Safeco’s rating outlook as stable since it believes the group is well positioned to benefit from the significant corrective actions over recent years and firm market conditions.

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