S&P Comments on Safeco Corp., Subsidiaries

Standard & Poor’s Ratings Services commented on SAFECO Corp. and its subsidiaries.

On Sept. 29, Standard & Poor’s affirmed its ‘BBB+’ counterparty credit rating on SAFECO Corp. and its ‘A+’ counterparty credit and financial strength ratings on the members of the SAFECO Insurance Co. Intercompany Pool (SAFECO), which are SAFECO Corp.’s property/casualty companies. The outlook on these companies is stable.

At the same time, Standard & Poor’s lowered its counterparty credit and financial strength ratings on SAFECO Life Insurance Co. and its wholly owned subsidiaries – SAFECO National Life Insurance Co. and First SAFECO National Life Insurance Co. NY – (collectively referred to as SAFECO Life) to ‘A-‘ from ‘A’ and placed the ratings on CreditWatch with developing implications.

Standard & Poor’s took these rating actions after SAFECO Corp. announced on Sept. 29, 2003, that it intends to sell its life companies. As a result, Standard & Poor’s also revised its view of the life companies’ position to not strategically important from strategically important.

SAFECO Life had historically maintained good capitalization, but in 2002 through the second quarter of 2003, capitalization dropped to the low ‘BBB’ range of Standard & Poor’s capital adequacy model. Despite strong operating performance and growth, historical large dividend payments to SAFECO Corp. in 2001 and early 2002 contributed to strained capital at SAFECO Life. Standard & Poor’s believes that any acquirer of all or part of SAFECO Life could need to supplement capital for it to be commensurate with the ratings.

Outlook
Although Standard & Poor’s believes corrective actions will enable SAFECO’s operating results to continue improving, the group faces moderate execution risk to produce sustainable earnings, especially in light of disposition of its noncore lines of business, which historically were reliable sources of income for the group. SAFECO’s operating performance is expected to show continued improvement over the next two years, with a combined ratio of 100 percent – 102 percent in 2003. Capital adequacy for the property/casualty group only is expected to be about 160 percent at year-end 2003 and increase to about 170 percent over the medium term. Financial leverage is expected to remain at current levels or decrease, while interest coverage is expected to be 5x-6x in 2003 and 2004. With the significant part of SAFECO’s restructuring completed to improved earnings, Standard & Poor’s believes the group is well positioned to benefit from the significant corrective actions and hardening property/casualty market.

The ratings on SAFECO Life could be lowered if part (rather than all) of the business is sold, as SAFECO Corp.’s renewed focus on property/casualty suggests that any part of the life business remaining from a partial sale will not be capitalized at a level appropriate for the current rating. The ratings could also be raised if an acquirer rated higher than ‘A-‘ provides capital enhancement to the life companies. Standard & Poor’s expects to resolve the CreditWatch status of the ratings within 90 days.