A.M. Best Reports on Safeco’s Plan of Definitive Agreement to Sell Life Operations

March 16, 2004

A.M. Best Co. has commented that the group financial strength rating of A (Excellent) of Safeco Life Insurance Company (Redmond, Wash.) and its life/health subsidiaries (collectively referred to as Safeco Life) remains under review with developing implications.

This follows the announcement by its parent, Safeco Corporation (Safeco) (Seattle), of a definitive agreement to sell Safeco Life to a private investor group for approximately $1.35 billion in cash. Safeco’s debt ratings as well as the financial strength ratings on its property/casualty subsidiaries are unaffected.

The closing of the transaction will be based upon Safeco Life’s financials as of June 30, 2004, and subject to receipt of regulatory approval. The under review status will remain in place pending an assessment of the company’s future business plans and financial flexibility, as well as the changes in corporate strategy that may occur, as the new owners’ objectives are incorporated in the near term. Upon completion of its review, A.M. Best believes Safeco Life’s rating will likely be affirmed.

Safeco’s life/health companies have historically produced solid, consistent operating earnings supported by a diversified product portfolio and multi-channel distribution platform. The new owners will retain Safeco Life’s distinct management team, which has operated conservatively and employed effective asset/liability management techniques. Currently the life/health operations are not dependent upon Safeco’s property/casualty distribution, and A.M. Best believes Safeco Life’s separate home office and administrative systems facilitate a successful divestiture.

However, Safeco Life will be challenged to establish a new brand, maintain its established positions in its core lines, revive existing and cultivate new distribution relationships as well as execute a move of over 1,200 employees to new offices within the next 12-18 months.

Given the favorable persistency and the stability of its field force since the announcement of the sale in the third quarter of 2003, A.M. Best believes Safeco Life is well-positioned to facilitate a smooth transition to new ownership. Additionally, the new holding company will have lower debt service requirements as compared to Safeco, enabling the life/health operations to retain earnings and continue building capital.

The sale price is consistent with A.M. Best’s expectations, though it will result in a small GAAP after-tax loss for Safeco. Safeco will utilize a portion of the proceeds to reduce holding company debt to maintain financial leverage at its current level – about 33 percent, including capital securities – which is reasonable for its ratings.

Although Safeco’s fixed charge coverage in the near term will be impacted by the lack of life/health earnings, A.M. Best believes significant earnings growth will emerge over time as Safeco realizes expense efficiencies and executes its focused property/casualty strategy through its streamlined business model. Safeco intends to return the vast majority of the remaining proceeds to shareholders in the form of a special dividend, stock repurchase or a combination of the two.

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