SAFECO CORP, 10-K/A, 1994-07-12

SAFECO CORP
10-K/A, 1994-07-12
FIRE, MARINE & CASUALTY INSURANCE

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<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A
AMENDMENT ONE

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the
fiscal year ended December 31, 1993.

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For
the transition period from
____________________ to _____________________.

Commission File Number 1-6563

SAFECO CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
WASHINGTON 91-0742146
---------- ----------
(State of Incorporation) (I.R.S. Employer I.D. No.)
</TABLE>

SAFECO PLAZA, SEATTLE, WASHINGTON - 98185
-----------------------------------------
(Address of principal executive offices) (Zip Code)

206-545-5000
------------
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, No Par Value
(62,943,607 shares were outstanding at January 31, 1994)

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].

Aggregate market value of voting stock held by non-affiliates of
registrant as of January 31, 1994:

$3,714,000,000

Documents Incorporated by Reference

<TABLE>
<S> <C>
Parts of This Form
Document: Into Which Incorporated:

Portions of the Parts I and II
1993 Annual Report to
Stockholders

Portions of the Part III
Definitive Proxy Statement
to be Filed Within 120 days
after December 31, 1993.
</TABLE>

SIGNATURES

Pursuant to the requirements 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.

SAFECO CORPORATION
------------------
(Registrant)

BOH A. DICKEY
------------------
Boh A. Dickey

Executive Vice President and
Dated July 12, 1994 Chief Financial Officer

ROD A. PIERSON
------------------
Rod A. Pierson

Senior Vice President, Secretary,
Dated July 12, 1994 Controller and Chief Accounting Officer

<PAGE> 2
PART I

ITEM 1. BUSINESS

SAFECO Corporation (SAFECO, or the Corporation) is a Washington
Corporation which directly or indirectly owns the stock of operating
subsidiaries engaged in various phases of the insurance business and
other operating subsidiaries engaged in other financially-related
lines of business. The Corporation also manages the SAFECO family of
mutual funds. The home offices of the Corporation and its principal
subsidiaries are in Seattle, Washington and Redmond, Washington. The
Corporation and its subsidiaries had 7,360 employees at December 31,
1993.

The insurance subsidiaries are engaged in two principal lines:
property and casualty insurance, and life and health insurance. Both
are subject to regulation and supervision in every jurisdiction in
which they do business. The nature and extent of such regulation
varies, but generally has its source in statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. Such regulation, supervision and administration
relate, among other things, to the standards of solvency which must
be met and maintained; the licensing of insurers and their agents;
the nature of limitation on investments; deposits of securities for
the benefit of policyholders; approval of policy forms and premium
rates; periodic examination of the affairs of insurance companies;
annual and other reports required to be filed on the financial
condition of insurers or for other purposes; the amount of dividends
which may be distributed to a parent corporation; requirements
regarding reserves for unearned premiums and losses and other
matters. Regulation requires that property and casualty rates be
adequate but not excessive nor unfairly discriminatory. See page 21
in the Annual Report to Stockholders, hereby incorporated by
reference (Exhibit 13), for more information on certain regulatory
matters. In 1988, California voters narrowly passed Proposition 103,
an initiative which significantly affects the property and casualty
insurance business in that state. See Note 5 on page 48 in the 1993
Annual Report to Stockholders for more details.

All areas of the insurance business are highly competitive due to the
marketing structure and the large number of stock and mutual insurance
companies and other entities competing. These factors prevent any one
insurance company or group of insurers from dominating the market.

Property and Casualty Operations
--------------------------------

Subsidiaries engaged in the property and casualty insurance business,
which insure commercial, personal and surety lines, are 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
Lloyds Insurance Company, SAFECO Surplus Lines Insurance Company, F.
B. Beattie & Co., Inc., COMAV Managers, Inc., and Whitehall Insurance
Brokers, Inc. Coverages include automobile, homeowners, fire and
allied lines, commercial multi-peril, miscellaneous casualty,
fidelity and workers' compensation. Their products are primarily
sold through independent insurance agents in nearly all states and
the District of Columbia. SAFECO sold its Canadian property and
casualty operations in June of 1991. See page 24 in the 1993 Annual
Report to Stockholders for more information.

- 1 -
<PAGE> 3

PART I

ITEM 1. BUSINESS (Continued)

The following table shows consolidated property and casualty gross
premiums written for SAFECO's ten largest states (amounts in
thousands):

<TABLE>
<CAPTION>
1993 1992 1991
---------------- ---------------- ----------------
% of % of % of
State Amount Total Amount Total Amount Total
----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
California $ 531,779 25% $ 479,003 25% $ 437,282 24%
Washington 351,231 16% 314,566 16% 268,998 15%
Oregon 144,534 7% 133,586 7% 122,371 7%
Texas 134,183 6% 107,208 6% 88,932 5%
Illinois 81,892 4% 74,382 4% 66,435 3%
Georgia 65,852 3% 59,925 3% 54,137 3%
Missouri 64,763 3% 59,883 3% 54,006 3%
Tennessee 54,207 3% 52,796 3% 48,952 3%
Idaho 47,867 2% 43,536 2% 38,885 2%
Connecticut 47,737 2% 43,929 2% 39,667 2%
---------- --- ---------- --- ---------- ---
1,524,045 71% 1,368,814 71% 1,219,665 67%
All Others 610,467 29% 568,276 29% 610,534 33%
---------- --- ---------- --- ---------- ---
TOTAL $2,134,512 100% $1,937,090 100% $1,830,199 100%
========== === ========== === ========== ===
</TABLE>

Voluntary personal, commercial and surety lines (which excludes
assigned risk, FAIR plans, etc.) comprise approximately 69%, 25% and
4%, respectively, of 1993 gross premiums written. Gross premiums
written growth of 10.2% in 1993 is comprised of a 10.4% increase for
personal and increases of 10.3% for commercial and 5.7% for surety
lines. Gross premiums written growth of 5.8% in 1992 was comprised
of a 6.0% increase for personal, and increases of 6.2% for commercial
and 0.8% for surety lines. Excluding Canadian premiums, 1992 gross
premiums written increased 10.9% over 1991, with personal up 13.1%
and commercial up 7.0%.

The growth in personal lines is the result of both rate increases and
an increase in policies in force. This increase in policies in force
is due, in part, to a number of companies in the past withdrawing or
restricting their writings of personal lines. Vehicles insured
increased 2.2% in 1993; however, the number of vehicles insured
declined slightly in the fourth quarter. Vehicles insured increased
6.2% in 1992. This declining trend in the growth rate has been
caused primarily by the rate increases placed in effect in recent
years. As a result, only modest rate increases are planned for 1994.
The number of homes insured increased 8.0% in 1993 and 10.8% in 1992.
It is expected that the number of homes insured will continue to
increase in 1994, although at a somewhat slower pace. SAFECO's
commercial lines premiums increased in 1993 and 1992 as a result of
both real growth and some rate increases. Continued growth in
commercial premiums written is expected in 1994. The larger increase
in surety premiums in 1993 versus 1992 is primarily due to new
commercial accounts acquired and a slightly improved construction
economy.

Additional financial information about SAFECO's business segments is
set forth in Note 16 on page 54 of the 1993 Annual Report to
Stockholders.

- 2 -
<PAGE> 4
PART I

ITEM 1. BUSINESS (Continued)

The consolidated financial statements include the estimated liability
(reserves) for unpaid losses and loss adjustment expense of SAFECO's
property and casualty insurance subsidiaries. The liability is
presented net of amounts recoverable from salvage and subrogation
recoveries and gross of amounts recoverable from reinsurance.

Reserves for losses that have been reported to SAFECO and certain
legal expenses are established on a "case basis" method. Claims
incurred but not reported (IBNR) and other adjustment expense are
estimated using statistical procedures. Salvage and subrogation
recoveries are accrued using the "case basis" method for large claims
and statistical procedures for smaller claims.

These reserves aggregate SAFECO's best estimates of the total
ultimate cost of claims that have been incurred but have not yet been
paid. The estimates are based on past claims experience and consider
current claims trends as well as social, legal and economic
conditions, including inflation. The reserves are not discounted.

Loss and loss adjustment expense reserve development is reviewed on a
regular basis to determine that the reserving assumptions and methods
are appropriate. Reserves initially determined are compared to the
amounts ultimately paid. A statistical estimate of the projected
amounts necessary to settle outstanding claims is made regularly and
compared to the recorded reserves.

The table on page 4 provides an analysis of changes in losses and
adjustment expense reserves for 1993, 1992 and 1991 (net of
reinsurance amounts). Changes in the reserves are reflected in the
income statement for the year when the changes are made. Operations
were credited $96.9 million, $44.6 million and $24.1 million in 1993,
1992, and 1991, respectively, as a result of a reduction in the
estimated amounts needed to settle prior years' claims.

- 3 -
<PAGE> 5
PART I

ITEM 1. BUSINESS (Continued)

Analysis of Changes in Losses and Adjustment Expense Reserves - (Net of
reinsurance amounts):

<TABLE>
<CAPTION>
1993 1992 1991
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Losses and adjustment expense
reserves at beginning of year . . $1,963,136 $1,865,319 $1,791,461
---------- ---------- ----------
Incurred losses and adjustment
expense for claims occurring
in the current year . . . . . . . 1,447,565 1,351,234 1,309,259

Decrease in estimated losses and
adjustment expense for claims
occurring in prior years . . . . . (96,937) (44,582) (24,057)
---------- ---------- ----------
Total incurred losses and
adjustment expense . . . . . . . . 1,350,628 1,306,652 1,285,202
---------- ---------- ----------
Losses and adjustment expense
payments for claims occurring
during: Current year . . . . . . 719,756 659,960 608,317
Prior years . . . . . . . . . . . 598,886 548,875 603,027
---------- ---------- ----------
Total losses and adjustment
expense payments . . . . . . . . . 1,318,642 1,208,835 1,211,344
---------- ---------- ----------
Losses and adjustment expense
reserves at end of year . . . . . $1,995,122 $1,963,136 $1,865,319
========== ========== ==========
</TABLE>

Reconciliation of Liability for Losses and Adjustment Expense Reserves (per
property and casualty balance sheet):

<TABLE>
<CAPTION>
(In Thousands)
<S> <C> <C> <C>
Losses and adjustment expense
reserves at end of year . . . . . $1,995,122 $1,963,136 $1,865,319

Reinsurance recoverables on
unpaid losses at end of year . . . 100,065 89,198 152,029
---------- ---------- ----------
Losses and adjustment expense
reserves, gross of reinsurance
recoverables, at end of year . . . $2,095,187 $2,052,334 $2,017,348
========== ========== ==========
</TABLE>

The table on page 5 presents the development of the losses and adjustment
expense reserves for 1983 through 1993. The top lines of the table show
the estimated liability for unpaid losses and adjustment expense at
December 31 for each of the indicated years, both gross and net of related
reinsurance amounts. The upper portion of the table shows the cumulative
amount paid with respect to the previously recorded liability as of the
end of each succeeding year. The next section shows the re-estimated
amount of the previously recorded liability 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.

- 4 -
<PAGE> 6
PART I

ITEM 1. BUSINESS (Continued)

Analysis of Losses and Adjustment Expense Reserve Development

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1983 1984 1985 1986 1987 1988
-------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses
and adjustment expense:
Gross of reinsurance........ $588,917 $647,656 $841,300 $1,095,163 $1,328,495 $1,523,554
Reinsurance................. 7,567 18,266 39,910 54,881 78,975 97,003
-------- -------- -------- ---------- ---------- ----------
Net $581,350 $629,390 $801,390 $1,040,282 $1,249,520 $1,426,551
======== ======== ======== ========== ========== ==========
</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1989 1990 1991 1992 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Liability for unpaid losses
and adjustment expense:
Gross of reinsurance ....... $1,702,458 $1,872,144 $2,017,348 $2,052,334 $2,095,187
Reinsurance................. 75,279 80,683 152,029 89,198 100,065
---------- ---------- ---------- ---------- ----------
Net $1,627,179 $1,791,461 $1,865,319 $1,963,136 $1,995,122
========== ========== ========== ========== ==========
</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1983 1984 1985 1986 1987 1988
-------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net paid (cumulative) as of:
1 Yr Later.................. $282,856 $274,748 $320,606 $ 382,274 $ 419,522 $ 443,056
2 Yrs Later.................. 411,443 427,283 526,276 610,331 677,053 725,684
3 Yrs Later.................. 497,009 544,725 664,680 771,278 848,174 902,480
4 Yrs Later.................. 563,150 624,475 758,202 875,910 936,447 1,010,271
5 Yrs Later.................. 608,491 677,612 820,514 945,436 1,033,741 1,083,462
6 Yrs Later.................. 638,686 717,637 837,182 991,806 1,082,759
7 Yrs Later.................. 661,075 746,826 895,193 1,029,619
8 Yrs Later.................. 675,394 765,662 922,963
9 Yrs Later.................. 690,290 787,597
10 Yrs Later.................. 710,492

</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------
1989 1990 1991 1992
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Net paid (cumulative) as of:
1 Yr Later.................. $ 540,198 $ 603,027 $548,875 $598,886
2 Yrs Later.................. 849,568 914,456 905,725
3 Yrs Later.................. 1,035,024 1,109,436
4 Yrs Later.................. 1,149,505
5 Yrs Later..................
</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------------
1983 1984 1985 1986 1987 1988
-------- -------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net liability re-estimated
as of:
1 Yr Later.................. $602,807 $681,465 $ 888,650 $1,094,095 $1,253,870 $1,397,704
2 Yrs Later.................. 637,666 747,037 946,871 1,118,222 1,258,193 1,368,128
3 Yrs Later.................. 670,317 784,297 961,356 1,121,243 1,258,017 1,355,793
4 Yrs Later.................. 696,877 800,150 969,202 1,140,282 1,264,839 1,338,568
5 Yrs Later.................. 715,462 810,458 989,095 1,149,075 1,266,261 1,360,496
6 Yrs Later.................. 722,250 825,823 1,005,888 1,168,725 1,299,601
7 Yrs Later.................. 737,526 847,874 1,031,969 1,210,457
8 Yrs Later.................. 755,032 875,820 1,075,759
9 Yrs Later.................. 782,969 919,446
10 Yrs Later.................. 826,864
</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------
1989 1990 1991 1992
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net liability re-estimated
as of:
1 Yr Later.................. $1,621,873 $1,767,404 $1,820,737 $1,866,199
2 Yrs Later.................. 1,593,554 1,705,835 1,732,844
3 Yrs Later.................. 1,541,434 1,666,124
4 Yrs Later.................. 1,544,767
</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------------------------
1983 1984 1985 1986 1987 1988
---------- ----------- ----------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Net redundancy (deficiency)
cumulative as of:
1 Yr Later.................. $ (21,457) $ (52,075) $ (87,260) $ (53,813) $ (4,350) $28,847
2 Yrs Later.................. (56,316) (117,647) (145,481) (77,940) (8,673) 58,423
3 Yrs Later.................. (88,967) (154,907) (159,966) (80,961) (8,497) 70,758
4 Yrs Later.................. (115,527) (170,760) (167,812) (100,000) (15,319) 87,983
5 Yrs Later.................. (134,112) (181,068) (187,705) (108,793) (16,741) 66,055
6 Yrs Later.................. (140,900) (196,433) (204,498) (128,443) (50,081)
7 Yrs Later.................. (156,176) (218,484) (230,579) (170,175)
8 Yrs Later.................. (173,682) (246,430) (274,369)
9 Yrs Later.................. (201,619) (290,056)
10 Yrs Later.................. (245,514)
</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------
1989 1990 1991 1992
---------- -------- -------- -------
<S> <C> <C> <C> <C>
Net redundancy (deficiency)
cumulative as of:
1 Yr Later................... $ 5,306 $ 24,057 $ 44,582 $96,937
2 Yrs Later.................. 33,625 85,626 132,475
3 Yrs Later.................. 85,745 125,337
4 Yrs Later.................. 82,412
</TABLE>

- 5 -
<PAGE> 7
PART I

ITEM 1. BUSINESS (Continued)

The lower section of the table on Page 5 shows the cumulative
redundancy (deficiency) developed with respect to the previously
recorded liability as of the end of each succeeding year. For
example, the 1983 reserve of $581.4 million developed a $21.5 million
deficiency after one year which grew over ten years to a deficiency
of $245.5 million. The reserve development deficiencies indicated
for the years 1983 through 1987 were due to the emergence of
liabilities for pollution, asbestos and other hazardous toxic claims
and related legal expenses and adverse development from the
automobile liability and workers' compensation lines due to
significant medical inflation and trends in the civil justice system.
In this same period, loss adjustment expenses were increasing
rapidly, reflecting higher legal costs and increased litigation.

The table below presents the approximate amounts of adverse reserve
development by major category for the calendar years 1983-1987 viewed
as of December 31, 1993. Note that each year below stands on its own
and the years should not be added together. For example, the amount
of adverse development recorded in 1987 or subsequent for losses
incurred in 1982, is included in the adverse development amounts for
each year shown below.
<TABLE>
<CAPTION>

1983 1984 1985 1986 1987
---- ---- ---- ---- ----
(In Millions)
<S> <C> <C> <C> <C> <C>
Environmental, asbestos and other $144 $144 $130 $107 $ 82
toxic claims (CTT) including related
loss adjustment expenses

Canadian Automobile Liability 30 22 27 35 29

Workers' Compensation 20 29 41 41 34

Loss Adjustment Expense excluding 38 54 57 28 (27)
CTT

Other 14 41 19 (41) (68)
---- ---- ---- ---- ----
Total adverse development as $246 $290 $274 $170 $ 50
reported in table on page 5 ==== ==== ==== ==== ====

As the trends noted above became apparent, the Corporation
aggressively increased reserves to address these deficiencies.

For 1988 and subsequent years, SAFECO's reserve development has
been favorable. This trend reflects the aggressive reserving
undertaken in prior years to correct deficiencies which is no longer
necessary, favorable legislation in the workers' compensation area,
and moderation of medical costs and inflation and claims department
changes. The favorable legislation in the workers' compensation area,
which relates primarily in the states of Oregon and California, has
helped reduce fraud, allowed for final settlement of claims and made
it more difficult to reopen claims -- all of which reduced SAFECO's
ultimate loss costs. The cost of claim settlements in several lines of
business has benefitted from changes in the organization of SAFECO's
claims department which has established separate specialized units
for workers' compensation, environmental exposures and fraud
investigation. In addition, increased focus on adjustment expenses
has helped reduce those costs.

The impact of reinsurance on the development information presented on
Page 5 is not significant. Reserve development gross of reinsurance
for the previous three years is as follows (in thousands):

1990 1991 1992
---------- ---------- ----------
<S> <C> <C> <C>
Gross reserves $1,872,144 $2,017,348 $2,052,334
========== ========== ==========

Cumulative development
net of reinsurance $ 125,337 $ 132,475 $ 96,937

Cumulative development
of reinsurance ceded 158 (3,868) (1,124)
---------- --------- ---------

Cumulative development
gross of reinsurance $ 125,495 $ 128,607 $ 95,813
========== ========== =========
</TABLE>

SAFECO'S objective is to set reserves which are adequate; that is, the
amounts originally recorded as reserves should at least equal the
amounts ultimately required to settle losses. Analysis indicates that
SAFECO's reserves are adequate and probably slightly redundant at
December 31, 1993, 1992 and 1991. Operations were credited $96.9
million, $44.6 million and $24.1 million in 1993, 1992 and 1991,
respectively, as a result of a reduction in the estimated amounts
needed to settle prior years' claims.

In evaluating the information contained in the reserve
development table on Page 5 and the table on Page 6, it should be
noted 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, 1992 reserves that relate to losses incurred in
1983 will be included in the cumulative redundancy or deficiency
amount for the years 1983 through 1991. This

- 6 -
<PAGE> 8
PART I

ITEM 1. BUSINESS (Continued)

table does not present accident or policy year development data,
which some readers may be more accustomed to analyzing. Conditions
and trends that have 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.

The vast majority of SAFECO's property and casualty insurance
subsidiaries' environmental, asbestos and other continuous toxic tort
(CTT) claims result from the general liability line of business. A
few of these types of losses occur in other coverages such as
umbrella and small commercial package policies. Approximately 1,100
CTT claims were pending at December 31, 1993 computed on an
occurrence basis. For the last three years, an average of 635 claims
were opened and an average of 658 claims were closed each year. Most
of SAFECO's pending environmental claims involve some type of
environmental-related coverage dispute. The average settlement cost
of each CTT claim for the last three years was $11,200 including
legal expenses and $6,200 excluding legal expenses.

The components of these reserves at December 31, 1993 are as follows
(in thousands):
<TABLE>
<CAPTION>
Loss
Adjustment
Loss Expense Total
------- ---------- --------
<S> <C> <C> <C>
Case . . . . . . . . $41,550 $11,360 $ 52,910
IBNR . . . . . . . . 29,000 31,500 60,500
------- ------- --------
Total . . . . . . . . $70,550 $42,860 $113,410
======= ======= ========

The following table presents the loss reserve activity analysis for
liability coverages related to environmental, asbestos and other
toxic claims:*
1993 1992 1991
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Reserves at beginning of year $110,543 $110,218 $100,938
Incurred losses and adjustment expense 9,364 10,070 15,177
Losses and adjustment expense payments (6,497) (9,745) (5,897)
------- -------- --------
Reserves at end of year $113,410 $110,543 $110,218
======== ======== ========
* Amounts are before the effect of reinsurance, which is insignificant.
</TABLE>
In view of the changes in environmental regulations and legal
decisions which affect the development of loss reserves, the process
to estimate loss reserves for these matters results in imprecise
estimates. Quantitative techniques have to be supplemented by
subjective considerations and managerial judgment. In view of these
conditions, trends that have affected development of these
liabilities in the past may not necessarily occur in the future. The
reserves carried for these claims at December 31, 1993 are estimates
based on the known facts and current law and are believed to be
adequate. SAFECO has generally avoided writing coverages for larger
companies with substantial exposure in these areas.

The property and casualty insurance subsidiaries are required to file
annual statements with state regulatory authorities prepared on an
accounting basis prescribed or permitted by such authorities
(statutory basis). The difference between the liability at December
31, 1993 for losses and adjustment expense reported in the
consolidated financial statements in accordance with generally
accepted accounting principles (GAAP) of $2,095,187,000 and
$1,995,122,000 reported in the annual statement filed with state
regulatory authorities relates to reinsurance recoverables. Under
FASB Statement 113 the GAAP-basis liability for losses and adjustment
expense is reported gross of amounts recoverable from reinsurance.
Statutory-basis financial statements show the liability net of
reinsurance.

- 7 -
<PAGE> 9
PART I

ITEM 1. BUSINESS (Continued)

SAFECO's property and casualty subsidiaries protect themselves from
excessive losses by reinsuring on treaty and facultative bases.
Reinsurance recoverables relating to unpaid losses and adjustment
expense were $100.1 million at December 31, 1993 and $89.2 million at
December 31, 1992. Reinsurance costs for catastrophe coverages have
increased in the last few years and are expected to remain higher in
the foreseeable future, given the large amount of catastrophe losses
in recent years. SAFECO's catastrophe property reinsurance program
for 1994 covers 90% of $150 million of single event losses in excess
of a $50 million retention. In the event of a substantial
catastrophe, SAFECO would, therefore, retain the first $50 million of
losses, 10% of the next $150 million and all losses in excess of $200
million. Both the retention level and the aggregate coverage limit
for 1994 are higher than in prior years.

SAFECO's insurance subsidiaries have not entered into retrospective
reinsurance contracts and have not participated in any unusual or
nonrecurring reinsurance transactions such as "swaps" of reserves or
portfolio loss transfers. SAFECO does not use "funding covers" and
has not participated in any surplus relief transactions. None of
SAFECO's significant reinsurers are experiencing financial
difficulties. Additional information on reinsurance can be found in
Note 4 on page 47 in the Annual Report to Stockholders. Reinsurance
amounts ceded in 1991 were higher due to the sale of SAFECO's
Canadian operations in 1991.

On January 17, 1994 a severe earthquake struck southern California.
Based on claims information available as of the date of this report
SAFECO expects its losses to be approximately $60 million, after
reinsurance. The losses will be recorded in the first quarter of
1994. This estimate is based on an expectation of approximately
8,000 claims, resulting in gross losses ranging from $150 million to
$175 million before reinsurance. As noted above, SAFECO's 1994
catastrophe reinsurance program covers 90% of single event losses
between $50 million and $200 million. Because of the size of this
loss, SAFECO will pay approximately $18 million of additional
premiums to reinstate its 1994 catastrophe reinsurance program for
the remainder of 1994. This additional expense will also be recorded
in the first quarter of 1994. In Note 14 on Page 52 in the 1993
Annual Report to Stockholders, SAFECO initially estimated that its
losses due to this quake would exceed $50 million, the threshold at
which the Corporation's reinsurance coverage begins. This initial
estimate was based on claims information available through February
11, 1994, the date of the 1993 Annual Report to Stockholders.

In 1992, approximately 2,400 active insurance companies competed for
$228 billion in property and casualty insurance premiums in the
United States. The SAFECO group of property and casualty companies
ranked 27th among significant groups of such companies, based on net
premiums written.

- 8 -
<PAGE> 10
PART I

ITEM 1. BUSINESS (Continued)

Life and Health Operations

Subsidiaries engaged in the life and health insurance business are
SAFECO Life Insurance Company, SAFECO National Life Insurance
Company, First SAFECO National Life Insurance Company of New York and
SAFECO Administrative Services, Inc. These companies offer
individual and group insurance products, pension plans and annuity
products. SAFECO Life's major market in the group operations is
excess loss medical insurance, sold to self-insured employers.
Products are marketed through professional agents in all states and
the District of Columbia.

SAFECO Life Insurance Company reinsures portions of its individual
and group life, accident and health insurance through commercial
reinsurance treaties, thus providing protection against large risks
and catastrophe situations.

In the life and health insurance field, SAFECO Life Insurance Company
competes against some of the largest corporations in the United
States. On the basis of 1992 statutory premiums, SAFECO Life
Insurance Company ranked 38th among life insurance companies doing
business in the United States.

- 9 -
<PAGE> 11

DETAIL OF SAFECO LIFE INSURANCE COMPANIES' FUNDS HELD UNDER DEPOSIT CONTRACTS

<TABLE>
<CAPTION>
Range of
Credited or
Assumed Interest
Outstanding at Rates at Approximate
December 31, 1993 December 31, Surrender
Product (In Thousands) Expected Maturities 1993 Surrender Charges Experience
------- ----------------- ------------------- --------------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Universal Individual Life $ 191,700 Approximately 5.50% to 7.90% Varies by issue age, 7% per annum
15-20 Years sex, and duration
from $1 to $58 per
Annuities: $1,000 of insurance

Structured Settlement
Immediate 3,196,007 25 Years & Over 4.0% to 12.4% Cannot surrender Cannot surrender

Non-Qualified Deferred 788,902 Approximately 3.8% to 9.0% Typically 5% in Year 5.5% per annum
8-12 Years 1 graded to 0% in
Year 6

Other 7,478 Approximately 7.25% to 8.25% None 5% per annum
7-10 Years
Pension:

Guaranteed Investment
Contacts 297,313 Typically 4 Years 4.85% to 10.05% Cannot surrender Less than 1%
except in extremely per annum
unusual circumstances

Other Qualified Annuities 2,748,039 Approximately 4.75% to 7.23% Typically 9% in Year 1 7% per annum
10-15 Years graded to 0% in year 9.
SAFECO has the option
to defer payout over
20 quarters for
one-half of these
contracts. In addition,
approximately $400
million of these
deposits have a market
value adjustment
provision.
----------
TOTAL $7,229,439
==========
</TABLE>

- 10 -

<PAGE> 12
PART I

ITEM 1. BUSINESS (Continued)

Investments
-----------

A description of SAFECO's investment portfolio begins on Page 27 of
the Annual Report to Stockholders. SAFECO's consolidated investments
in mortgage-backed securities (primarily residential collateralized
mortgage obligations, or CMOs, and pass-throughs) totaled $2.3
billion at December 31, 1993. The corresponding market value of
these securities at this date was $2.4 billion. Approximately 97% of
these securities are held in the life and health insurance portfolio,
with the balance held in the property and casualty insurance
portfolio. Approximately 91% of the mortgage- backed securities are
government/agency backed or AAA rated at December 31, 1993. Less
than 2% of SAFECO's mortgage-backed securities are of the riskier,
highly volatile type (e.g., interest only, floaters, etc.). SAFECO
has intentionally not invested significant amounts in the riskier
types of mortgage-backed securities. The following two tables detail
SAFECO's consolidated holdings of mortgage-backed securities.

SAFECO Consolidated Holdings of Mortgage-Backed Securities at
December 31, 1993 (dollar amounts in millions):

<TABLE>
<CAPTION>
GAAP Carrying Value GAAP Market Value
------------------- -------------------
Amount % Amount %
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Residential CMOs:
Planned Amortization
Class (PAC) and
Targeted Amortization
Class (TAC) (Fixed Coupon) $ 574.3 25.4% $ 595.7 24.6%
Sequential Pay (SEQ) 808.3 35.7 862.0 35.5
Accrual Coupon (Z-Tranche) 489.7 21.6 553.8 22.8
Companions/Supports 18.6 0.8 19.3 0.8
Principal Only 10.4 0.5 10.3 0.4
Inverse Floaters 8.0 0.4 9.1 0.4
Interest Only 2.0 0.1 1.1 -
-------- ----- -------- -----
Subtotal 1,911.3 84.5 2,051.3 84.5
-------- ----- -------- -----
Residential Mortgage-Backed
Pass-Throughs (Non-CMOs):

Government/Agency Backed
- all Fixed Coupon 124.9 5.5 139.2 5.8
Private Issuer-Fixed Coupon 80.4 3.6 85.5 3.5
Private Issuer-Floating 0.4 - 0.4 -
-------- ----- -------- -----
Subtotal 205.7 9.1 225.1 9.3
-------- ----- -------- -----
Securitized Commercial
Real Estate (Non-agency):

Pass-Throughs 85.0 3.8 87.2 3.6
CMOs 60.3 2.6 62.6 2.6
-------- ----- -------- -----
Subtotal 145.3 6.4 149.8 6.2
-------- ----- -------- -----
Asset-Backed Securities
(Non-Real Estate) - - - -
-------- ----- -------- -----
Total Mortgaged-Backed
Securities $2,262.3 100.0% $2,426.2 100.0%
======== ===== ======== =====
</TABLE>

- 11 -
<PAGE> 13
PART I

ITEM 1. BUSINESS (Continued)

The quality distribution of SAFECO's mortgage-backed security
portfolio as of December 31, 1993 as a percentage of GAAP carrying
value is as follows:

<TABLE>
<CAPTION>
Quality Percent
------------------------ -------
<S> <C>
Government/Agency Backed 58%
AAA 33
AA 6
A 1
BBB 1
BB or lower 1
---
100%
===
</TABLE>

The following table presents pretax investment income yields for
SAFECO's property and casualty and life and health insurance
subsidiaries (calculations based on GAAP amortized cost):

<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Property and Casualty 7.6% 8.2% 8.9%
Life and Health 8.8% 9.3% 9.7%
</TABLE>

The declines in the investment income yields in 1993 and 1992 for
both portfolios are primarily due to the lower interest rate
environment. The property and casualty decreases also reflect the
higher percentage of tax- exempt securities in this portfolio.

Other Operations
----------------

The other subsidiaries of the Corporation, which are engaged in lines
of business other than insurance, have been acquired or organized
since 1966 in the course of a program of diversification. These
include SAFECO Properties, Inc. and its subsidiaries (including
Winmar Company, Inc. and SAFECARE Company, Inc.), SAFECO Credit
Company, Inc., SAFECO Securities, Inc., SAFECO Services Corporation,
SAFECO Asset Management Company, PNMR Securities, Inc. and Talbot
Agency, Inc.

Winmar Company, Inc., acquired in 1967, invests in and operates real
estate properties, primarily regional shopping centers, in or near
Burlington, Seattle, Vancouver and Silverdale, Washington; Cleveland
and Columbus, Ohio; Louisville, Kentucky; West Valley City, Utah;
Palm Springs, California; Boise, Idaho; Medford, Albany, Progress,
Jantzen Beach and Portland, Oregon; Milwaukee, Wisconsin; San
Antonio, Texas; and Flagstaff, Arizona. Winmar also offers real
estate services, including property management, design and
construction management and tenant leasing services. See Item 2 -
Properties, for additional information.

SAFECARE Company, Inc., organized in 1968, owns and leases four
healthcare facilities (including convalescent centers and psychiatric
hospitals) and three medical office buildings to third parties. See
Item 2 - Properties, for additional information.

- 12 -
<PAGE> 14
PART I

ITEM 1. BUSINESS (Continued)

SAFECO Properties, Inc. sold its hospital operating and management
company (SAFECARE Health Services, Inc.) in May of 1992. See page 27
of the 1993 Annual Report to Stockholders for more information.

SAFECO Credit Company, Inc., organized in 1969, provides loans and
equipment financing and leasing to commercial businesses. A
significant portion of the business of SAFECO Credit Company, Inc.
consists of loans to other members of the SAFECO group. These loans
are limited to 50% or less of the total loans outstanding.

Summarized balance sheet information for SAFECO Credit at December
31, 1993 is as follows:
(In Thousands)
Finance Receivables................... $547,759
Other Assets.......................... 114,283
--------
Total Assets.................. $662,042
=========
Credit Company Borrowings............. $427,930
Other Liabilities..................... 150,380
--------
Total Liabilities............. $578,310
========

SAFECO Securities, Inc., organized in 1967, is the principal
underwriter for the SAFECO Common Stock Trust, SAFECO Bond Trust,
SAFECO Tax-Exempt Bond Trust and the SAFECO Money Market Trust, each
of which is a publicly- held mutual fund trust having four, three,
five and two investment portfolios, respectively (four trusts total,
with 14 "retail" portfolios available).

SAFECO Services Corporation, organized in 1972, is the transfer agent
for the SAFECO Mutual Funds.

SAFECO Asset Management Company, acquired by the Corporation in 1973,
serves as the investment advisor to the SAFECO Mutual Funds and
various institutional accounts of unrelated organizations.

PNMR Securities, Inc., organized in 1986, is the principal
underwriter for the SAFECO Resource Series Trust mutual fund, which
has five separate investment portfolios, and distributes
variable-return contracts issued by SAFECO Life Insurance Company.
In addition, PNMR acts as a broker-dealer, making shares of
unaffiliated mutual funds available to the public through its
registered representatives.

Talbot Agency, Inc., acquired by the Corporation in 1993, is a full
service insurance agency located in Albuquerque, New Mexico and is
the sole distributor of SAFECO life deferred annuity products to
customers of financial institutions.

- 13 -
<PAGE> 15
F-1

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in this Annual Report
(Form 10-K/A, Amendment 1) of SAFECO Corporation of our report dated February
11, 1994, included in the 1993 Annual Report to Shareholders of SAFECO
Corporation.

We also consent to the incorporation by reference in Registration Statements
(Form S-8 Nos. 2-58654 and 33-14381) of SAFECO Corporation of our report dated
February 11, 1994, with respect to the consolidated financial statements of
SAFECO Corporation included and/or incorporated by reference in the amended
Annual Report (Form 10-K/A, Amendment 1) for the year ended December 31, 1993.

ERNST & YOUNG

Seattle, Washington
July 12, 1994
<PAGE> 16
1993 ANNUAL REPORT

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

SAFECO Corporation (SAFECO, or the Corporation) is a Washington
corporation which owns operating subsidiaries in various segments of insurance
and other financially related businesses. The insurance subsidiaries are
engaged in both property and casualty insurance and life and health insurance.
SAFECO Properties and its subsidiaries invest in, develop and manage real
estate properties, primarily regional shopping centers. SAFECO Credit Company
provides loans and equipment financing and leasing to commercial businesses
including affiliated companies. SAFECO also manages the SAFECO family of
mutual funds through its investment management subsidiaries.

CAPITAL RESOURCES AND LIQUIDITY

Insurance premiums, dividends, interest and rental income are the
companies' primary sources of cash. 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. Any resulting cash flow is
used primarily to pay shareholder dividends and to expand the investment
portfolio.

Total cash provided by operating activities for the years ended December
31, 1993, 1992 and 1991 was $633.6 million, $664.6 million and $582.0 million,
respectively (see Statement of Cash Flows on page 34). The decrease in
operating cash flow in 1993, compared with 1992, is primarily the result of the
increase in income taxes paid, and the payment relating to the Proposition 103
settlement (see Note 5 on page 48). The increase in operating cash flow in
1992 was primarily due to a higher amount of property and casualty premiums,
resulting from a combination of rate increases and a higher number of policies
in force. Other operating receipts and other operating costs paid decreased in
1993 and 1992, due to the sale of the hospital operations in May of 1992.
Dividends and interest received increased in both 1993 and 1992 due mainly to
the increasing invested asset base of the life and health insurance companies.
The increases in proceeds from maturity of fixed maturities in 1993 and 1992
are due to higher levels of calls of fixed maturities and prepayments of
mortgage-backed securities resulting from lower interest rates.

The real estate and credit subsidiaries have ongoing needs for outside
capital. The real estate subsidiaries borrow from life insurance companies,
banks and savings and loan associations and other lenders. At December 31,
1993, the real estate subsidiaries had notes and mortgages payable to
non-affiliates of $225.1 million, of which amount $62.8 million was due within
one year. It is anticipated that these obligations will be met through a
combination of rollovers and replacement borrowings. The real estate
subsidiaries' debt is significantly lower in 1993 and 1992 due to the sale of
the hospital operations in 1992 and the reduction in related borrowings. The
real estate subsidiaries refinanced approximately $53 million of debt in 1993,
taking advantage of lower interest rates on longer-term borrowings.

SAFECO Credit Company's borrowings are primarily short to medium-term and
are obtained primarily from the issuance of commercial paper and medium-term
notes. SAFECO Credit had unaffiliated borrowings at December 31, 1993 of $427.9
million, of which amount $333.8 million was due within one year. The majority
of this current portion is comprised of short-term commercial paper borrowings.
It is anticipated that a major part of these commercial paper borrowings will
be rolled over in 1994.

A shelf registration providing for the issuance of up to $200 million of
debt securities by SAFECO Corporation and/or SAFECO Credit was declared
effective by the Securities and Exchange Commission in December 1990. SAFECO
Credit has issued $149.9 million of medium-term notes under this registration
of which amount $138.8 million are still outstanding as of December 31, 1993.
These debt securities issued by SAFECO Credit are guaranteed by SAFECO
Corporation. In addition to providing funds to expand SAFECO Credit's loan and
lease portfolio, the issuance of the medium-term notes has reduced SAFECO
Credit's reliance on short-term financing. As of December 31, 1993, SAFECO
Corporation had issued $50 million of medium-term notes under this
registration. No additional notes are to be issued under this shelf
registration.

SAFECO Corporation's $200 million of 10.75% notes are due in September of
1995. It is currently anticipated this obligation will be funded primarily by
the issuance of replacement debt. Proceeds from sales of securities owned by
SAFECO Corporation or dividends from SAFECO's subsidiaries may provide a
portion of the funds needed to retire this debt.

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 the Corporation's liquidity, capital resources or results of operations.

The state of Washington adopted new rules in 1993 governing the amount of
dividend payments that can be made by Washington domiciled insurance companies
without prior regulatory approval. These new rules are more restrictive than
the previous rules. However, it is expected they will not restrict SAFECO's
insurance subsidiaries from paying dividends to SAFECO Corporation (parent
company) in amounts similar to those presently being paid and those paid in the
past.

The National Association of Insurance Commissioners (NAIC) has adopted
new risk-based capital (RBC) formulas for both life insurers and property and
casualty insurers. For life insurers, the RBC guidelines became effective
December 31, 1993; the RBC guidelines for property and casualty companies are
effective December 31, 1994. The formulas are used as an early warning tool by
the NAIC and state regulators to identify companies that are under capitalized

21
<PAGE> 17
SAFECO CORPORATION

and which merit further regulatory attention or the initiation of regulatory
action. The life insurers' RBC formula establishes capital requirements
relating to amounts of insurance risk, business risk, asset credit risk and
interest rate risk. The property and casualty insurers' RBC formula establishes
capital requirements relating to amounts of underwriting risk, asset risk,
credit risk and off-balance sheet risk. SAFECO's life and property and casualty
companies have more than sufficient capital to meet the RBC requirements.

Similarly, the NAIC's proposed new Model Investment Law, if adopted by
certain states in which SAFECO operates, should not significantly impact SAFECO
as its assets are, and historically have been, conservatively invested.

SUMMARY OF FINANCIAL INFORMATION

The following summarized financial information sets forth the
contributions of each business segment to the consolidated net income of SAFECO
Corporation. The information should be read in conjunction with the related
statements of income on pages 37 through 41 of this report.

<TABLE>
<CAPTION>
Year Ended December 31
(In Thousands Except Per Share Amounts) 1993 1992 1991
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (Loss), Net of Income Taxes, Before Realized Gain:
Property and Casualty Insurance Companies . . . . . . . . . . . . . . . $217,187* $187,144 $145,421
Life and Health Insurance Companies . . . . . . . . . . . . . . . . . . 76,903 75,600 79,705
Real Estate Companies . . . . . . . . . . . . . . . . . . . . . . . . . 6,136 6,040 5,850
Credit Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,439 6,140 6,396
Asset Management Companies . . . . . . . . . . . . . . . . . . . . . . 4,255 4,261 3,397
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,934) (7,636) (3,852)
-------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306,986 271,549 236,917
-------- -------- --------
Realized Gain (Loss), Net of Income Taxes, from:
Security Investments . . . . . . . . . . . . . . . . . . . . . . . . . 113,506 40,431 23,214
Real Estate Investments . . . . . . . . . . . . . . . . . . . . . . . . 5,409 (686) (553)
-------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,915 39,745 22,661
-------- -------- --------
Income Before Cumulative Effect of Accounting Changes 425,901 311,294 259,578
Cumulative Effect of Accounting Changes . . . . . . . . . . . . . . . . . 2,877 - -
-------- -------- ---------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $428,778 $311,294 $ 259,578
======== ======== =========
Net Income Per Share of Common Stock:
Income Before Realized Gain . . . . . . . . . . . . . . . . . . . . . . $ 4.88 $ 4.33 $ 3.78
Realized Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.89 .63 .36
Cumulative Effect of Accounting Changes . . . . . . . . . . . . . . . . .05 - -
-------- -------- ---------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6.82 $ 4.96 $ 4.14
======== ======== =========
</TABLE>

*Includes a charge of $40 million ($26 million after tax, $0.41 per share) for
the Proposition 103 settlement.

PROPERTY AND CASUALTY--OPERATIONS

Through independent agents, SAFECO's property and casualty subsidiaries
write personal, commercial and surety lines of insurance including automobile,
homeowners, fire and allied lines, commercial multi-peril, miscellaneous
casualty, surety, fidelity and workers' compensation. Products are sold in
nearly all states and the District of Columbia. SAFECO sold its Canadian
property and casualty operations in June of 1991 (see discussion on page 24).
Approximately 25% of SAFECO's property and casualty premiums are written in
California and approximately 49% of premiums are written in the three west
coast states of California, Washington and Oregon.

Voluntary personal, commercial and surety lines (which excludes assigned
risk, FAIR plans, etc.) comprise approximately 69%, 25% and 4%, respectively,
of the 1993 gross premiums written. The gross premiums written growth set forth
in the table on page 23 of 10.2% in 1993 is comprised of a 10.4% increase for
personal, and increases of 10.3% for commercial and 5.7% for surety lines.
Gross premiums written growth of 5.8% in 1992 was comprised of a 6.0% increase
for personal, and increases of 6.2% for commercial and 0.8% for surety lines.
Excluding Canadian premiums, 1992 gross premiums written increased 10.9% over
1991, with personal up 13.1% and commercial up 7.0%.

The growth in personal lines premiums is the result of both rate
increases and an increase in policies in force.

22
<PAGE> 18
1993 ANNUAL REPORT

This increase in policies in force is due, in part, to a number of companies in
the past withdrawing or restricting their writings of personal lines. Vehicles
insured increased 2.2% in 1993; however, the number of vehicles insured
declined slightly in the fourth quarter. Vehicles insured increased 6.2% in
1992. This declining trend in the growth rate has been caused primarily by the
rate increases placed in effect in recent years. As a result, only modest rate
increases are planned for 1994. The number of homes insured increased 8.0% in
1993 and 10.8% in 1992. It is expected that the number of homes insured will
continue to increase in 1994, although at a somewhat slower pace. SAFECO's
commercial lines premiums increased in 1993 and 1992 as a result of both real
growth and some rate increases. Continued growth in commercial premiums written
is expected in 1994. The larger increase in surety premiums in 1993 versus 1992
is primarily due to new commercial accounts acquired and a slightly improved
construction economy resulting in higher contract bond premiums.

Voluntary personal auto, SAFECO's largest single line of business,
produced pre-tax underwriting profits of $37.3 million in 1993 and $5.6 million
in 1992, compared with a loss of $21.6 million in 1991. This improvement is due
to rates increasing faster than loss costs. Average auto rates were increased
6% in 1993 and 8% in 1992 while loss costs were up 4% in 1993 and 4% in 1992.
The severity or cost of settling claims has increased in each of the last three
years and the frequency of accidents increased in 1993 after declining in 1992
and 1991. The reduction in the number of accidents may be the result of the
slower economy and the increasing use of additional auto safety features such
as mounted rear window brake lights and anti-lock brakes. Auto rate increases
planned for 1994 will be less than the 1993 and 1992 increases.

The homeowners line produced pre-tax underwriting losses of $51.7
million, $62.1 million and $59.9 million in 1993, 1992 and 1991, respectively.
These losses reflect an unusually high level of weather-related and
catastrophic events in the last three years. However, there appears to be no
scientific evidence that the recent high level of weather-related catastrophes
indicate changes in long-term weather patterns, so SAFECO still believes this
is a good long-term business. Over time, weather-related catastrophes are
expected to continue their erratic historical patterns. Weather-related
catastrophe losses for homeowners, before reinsurance, totaled $51.8 million,
$90.7 million and $160.2 million in 1993, 1992 and 1991, respectively. After
reinsurance, these amounts totaled $51.5 million, $94.7 million and $86.1
million for the respective three years. The 1993 homeowners claims include
$26.6 million from the Puget Sound area windstorm in January and $7.4 million
from the California wildfires in November. The 1992 homeowners claims include
$31.7 million from hailstorms in Kansas and Texas and

PROPERTY AND CASUALTY OPERATING STATISTICS
<TABLE>
<CAPTION>
1993 1992 1991
- - --------------------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Over Prior Over Prior Over Prior
Amount Year Amount Year Amount Year
-----------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Gross Premiums Written . . . . . . . . . . . . $ 2,134,512 10.2% $1,937,090 5.8% $1,830,199 2.1%
=========== ========== ==========
Net Premiums Written . . . . . . . . . . . . . $ 2,000,165 9.9 $1,820,445 11.7 1,629,710 (3.5)
=========== ========== ==========
Earned Premiums . . . . . . . . . . . . . . . . $ 1,929,714 10.0 $1,754,460 7.2 1,636,660 (1.7)
=========== ========== ==========
Underwriting Profit (Loss) . . . . . . . . . . $ 9,848 $ (72,022) $(141,121)
Net Investment Income . . . . . . . . . . . . . 277,643 (1.1) 280,820 (1.8) 286,073 1.0
Proposition 103 Settlement . . . . . . . . . . (40,000) - -
----------- ---------- ----------
Income before Realized Investment
Gain and Income Taxes . . . . . . . . . . . $ 247,491 $ 208,798 $ 144,952
=========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1993 1992 1991
- - -----------------------------------------------------------------------------------------------------------------------
Operating Ratios as
a % of Earned Premiums
(GAAP Basis)
------------------------------
<S> <C> <C> <C>
Loss Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60.21% 63.93% 67.81%
Adjustment Expense Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.78 10.55 10.72
Expense Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.43 28.72 29.33
Dividends to Policyholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.07 .91 .76
----- ------ ------
Combined Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99.49% 104.11% 108.62%
===== ====== ======
</TABLE>
23
<PAGE> 19

SAFECO CORPORATION

$22.5 million resulting from an increase in the estimated cost of settling
claims from the October 1991 fire in Oakland, California. The 1991 homeowners
claims include $15.2 million, after reinsurance, from the Oakland fire and
$22.9 million from wind and hailstorms that hit Billings, Montana and Denver,
Colorado in June. SAFECO's total homeowners losses from the Oakland fire,
before reinsurance, were $107.8 million and were $38.2 million after
reinsurance. Homeowners rates were increased 7%, 5% and 3% in 1993, 1992 and
1991, respectively. A significant increase in premiums per policy is expected
in 1994 as a result of planned rate increases and the additional premiums that
are resulting from efforts to increase homeowners insurance to value. This is a
three year effort which was begun in 1993 to review the adequacy of coverage or
policy limits for nearly all homes.

Other personal lines produced underwriting profits of $20.6 million,
$18.1 million and $8.2 million in 1993, 1992 and 1991, respectively. Coverages
in these lines include dwelling fire, inland marine, earthquake, boats and
recreational vehicles. Although premiums from these lines total only 6% of
total property and casualty premiums, the underwriting profits they generate
are an important contributor to SAFECO's overall property and casualty results.

Commercial operations produced pre-tax underwriting losses of $5.5
million, $22.5 million and $58.4 million for 1993, 1992 and 1991, respectively.
Even with a continuation of the competitive commercial insurance market, SAFECO
has experienced modest renewal price increases of 3% to 4% per year for the
past three years. These price increases, together with reduced frequency and
severity in most product lines and lower expenses, are the reasons for this
improving trend. The frequency and severity reductions can be attributed to
continued disciplined risk selection, limited impact of weather-related losses
on SAFECO's commercial property risks and concentration of commercial writings
in states with the most favorable legal and regulatory climates.

The surety line produced pre-tax underwriting profits of $18.2 million,
$3.2 million and $11.1 million for 1993, 1992 and 1991, respectively. The 1992
results were impacted by several contract bond losses. Although the current
outlook is good, income for 1993 was a record, and may be difficult to achieve
again in 1994.

Other insurance product lines (primarily assigned risk and FAIR plans)
produced underwriting losses of $9.0 million, $14.3 million and $20.4 million
in 1993, 1992 and 1991, respectively. The lower losses are due to a reduction
in personal auto non-voluntary losses, due in turn to reduced losses from the
California Assigned Risk Plan and Canadian non-voluntary pool.

On January 17, 1994 a severe earthquake struck Southern California. Based
on claims information available as of the date of this report, SAFECO expects
its losses to exceed $50 million, the threshold at which the Corporation's
reinsurance coverage begins. Under SAFECO's catastrophe reinsurance program,
it is reimbursed for 90% of the losses between $50 million and $200 million. To
date, approximately 6,100 claims have been reported. Because of the extensive
damage to communications and transportation systems in the earthquake area, and
the time it takes to complete accurate surveys and inventories on homes and
businesses damaged in earthquakes, it will be some time before a reasonable
estimate of SAFECO's losses can be made. The loss will be recorded in the first
quarter of 1994.

PROPERTY AND CASUALTY--CANADA

SAFECO sold its Canadian property and casualty operations in June, 1991.
There was no significant gain or loss resulting from this transaction.
Underwriting results had been unsatisfactory, primarily as a result of
stringent and unrealistic auto rate regulation and high loss costs in Ontario.
These poor results and the expectation that they would continue were primary
reasons for the sale. Following is a summary of SAFECO's Canadian financial
data for each of the last three years:

<TABLE>
<CAPTION>
Year Ended December 31
1993 1992 1991
---------- -------- ---------
(In Thousands-Canadian $)

<S> <C> <C> <C>
Gross Written Premiums . . . . . . . . . . . . $ - $ 36 $ 82,886
Net Earned Premiums . . . . . . . . . . . . . - 180 44,440
Underwriting Profit
(Loss) . . . . . . . . . . . . . . . . . . 5,280 7,609 (6,352)
Canadian Assets . . . . . . . . . . . . . . . 219,598 275,951 334,797
</TABLE>

Although the Canadian underwriting losses SAFECO suffered in years prior
to the sale were significant, they were substantially offset by investment
income from the assets relating to the Canadian unearned premium, loss and
adjustment expense reserves. Therefore, the sale of the Canadian operations
has not had and is not expected to have a significant impact on future
earnings.

The 1993 and 1992 Canadian underwriting profits were the result of
reductions in the estimated cost of settling prior years' claims. Under the
sales agreement SAFECO retained the liabilities for losses incurred prior to
April 1, 1991.

PROPERTY AND CASUALTY--PROPOSITION 103

For discussion relating to California's Proposition 103, see Note 5 on
page 48.

PROPERTY AND CASUALTY--LOSS RESERVES

The liability (reserves) for losses and adjustment expense for the
property and casualty companies was $2,095.2 million at December 31, 1993,
compared with $2,052.3 million at December 31, 1992. The liability is presented
net of amounts recoverable from salvage and subrogation recoveries (see Note 1
on page 43) and gross of amounts recoverable from reinsurance (see Note 4 on
page 47). The amount of reinsurance

24
<PAGE> 20
1993 ANNUAL REPORT

recoverables related to the above gross liabilities was $100.1 million at
December 31, 1993 and $89.2 million at December 31, 1992.

Reserves for losses that have been reported to the Corporation and certain
legal expenses are established on the "case basis" method. Claims incurred but
not reported (IBNR) and other adjustment expense are estimated using
statistical procedures. Salvage and subrogation recoveries are accrued using
the "case basis" method for large claims and statistical procedures for smaller
claims.

These reserves aggregate SAFECO's best estimates of the total ultimate
cost of claims that have been incurred but have not yet been paid. The
estimates are based on past claims experience and consider current claims
trends as well as social, legal and economic conditions, including inflation.
The reserves are not discounted.

Loss and loss adjustment expense reserve development is reviewed on a
regular basis to determine that the reserving assumptions and methods are
appropriate. Reserves initially determined are compared to the amounts
ultimately paid. A statistical estimate of the projected amounts necessary to
settle outstanding claims is made regularly and compared to the recorded
reserves.

SAFECO's objective is to set reserves which are adequate; that is, the
amounts originally recorded as reserves should at least equal the amounts
ultimately required to settle losses. Analysis indicates that SAFECO's reserves
are adequate and probably slightly redundant at December 31, 1993, 1992 and
1991. Operations were credited $96.9 million, $44.6 million and $24.1 million in
1993, 1992 and 1991, respectively, as a result of a reduction in the estimated
amounts needed to settle prior years' claims.

SAFECO's property and casualty companies' reserves for losses and
adjustment expense for liability coverages related to environmental, asbestos
and other hazardous toxic claims totaled $113.4 million at December 31, 1993,
compared with $110.5 million at December 31, 1992. These amounts are before the
effect of reinsurance, which is insignificant. These reserves are approximately
5% of total property and casualty reserves for losses and adjustment expense at
both December 31, 1993 and 1992. The reserves include estimates for both
reported and IBNR losses and related legal expenses. The vast majority of
SAFECO's property and casualty insurance subsidiaries' environmental, asbestos
and other toxic claims result from the general liability line of business. A few
of these types of losses occur in other coverages such as umbrella and small
commercial package policies.

The following table presents the loss reserve activity analysis for
liability coverages related to environmental, asbestos and other toxic claims:*
<TABLE>
<CAPTION>

1993 1992 1991
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Reserves at beginning of year $110,543 $110,218 $100,938
Incurred losses and adjustment expense 9,364 10,070 15,177
Losses and adjustment expense payments (6,497) (9,745) (5,897)
-------- -------- --------
Reserves at end of year $113,410 $110,543 $110,218
======== ======== ========
* Amounts are before the effect of reinsurance, which is insignificant.

</TABLE>

In view of the changes in environmental regulations and legal decisions
which affect the development of loss reserves, the process to estimate loss
reserves for these matters results in imprecise estimates. Quantitative
techniques have to be supplemented by subjective considerations and managerial
judgment. In view of these conditions, trends that have affected development of
these liabilities in the past may not necessarily occur in the future. The
reserves carried for these claims at December 31, 1993 are estimates
based on the known facts and current law and are believed to be adequate.
SAFECO has generally avoided writing coverages for larger companies with
substantial exposure in these areas.

The property and casualty subsidiaries protect themselves from excessive
losses by reinsuring on treaty and facultative bases. As noted above, the
liability for unpaid losses and adjustment expense is reported gross of
reinsurance recoverables of $100.1 million at December 31, 1993 and $89.2
million at December 31, 1992. Reinsurance costs for catastrophe coverages have
increased in the last few years and are expected to remain higher in the
foreseeable future, given the large amount of catastrophe losses in recent
years. SAFECO's catastrophe property reinsurance program for 1994 covers 90% of
$150 million of single event losses in excess of a $50 million retention. In
the event of a substantial catastrophe, SAFECO would, therefore, retain the
first $50 million of losses, 10% of the next $150 million and all losses in
excess of $200 million. Both the retention level and the aggregate coverage
limit for 1994 are higher than in prior years.

SAFECO's insurance subsidiaries do not enter into retrospective
reinsurance contracts and have not participated in any unusual or nonrecurring
reinsurance transactions such as "swaps" of reserves or portfolio loss
transfers. SAFECO does not use "funding covers" and has not participated in any
surplus relief transactions. None of SAFECO's significant reinsurers are
experiencing financial difficulties. Additional information on reinsurance can
be found in Note 4 on page 47. Reinsurance amounts ceded in 1991 were higher
due to the sale of SAFECO's Canadian operations in 1991.

LIFE AND HEALTH

The life and health companies offer individual and group insurance
products, pension plans and annuity products, marketed through professional
agents in all states and the District of Columbia.

During 1993, all major lines of business contributed to the life and
health companies' earnings before investment transactions and income taxes
("pre-tax income") of $125.3 million, compared with $123.6 million in 1992 and
$124.1 million in 1991.

The group life and health operations contributed $27.7 million to 1993
pre-tax income, compared with income of $26.8 million and $39.7 million in 1992
and 1991, respectively. The major market of the group operation is excess loss
medical insurance, sold to self-insured employers, which accounted for $15.8
million, $16.3 million and $21.0 million of group income in 1993, 1992 and
1991, respectively. Total group premiums decreased 10% during 1993, compared
with a decrease of 3% in 1992 and an increase of 7% in 1991. The premium
declines in 1993 and 1992 are due to SAFECO's nearly completed withdrawal from
the small-case, fully insured market in many states and to greater competition
in the large-case, excess loss market. SAFECO has avoided writing business at
unsatisfactory rates and as a result, experienced the loss of some group
in-force medical business.

25
<PAGE> 21
SAFECO CORPORATION

The lower group profits in 1993 and 1992 were primarily the result of increased
industry competition, resulting in lower profit margins for this business. This
trend is expected to continue into 1994.

The Clinton administration's proposal on healthcare reform has also
contributed to the slowdown in the group medical business. The impact on SAFECO
of the effect of the various healthcare reform proposals is uncertain. If
healthcare reform were to pass that did not allow self-funded medical
programs, SAFECO would in all likelihood no longer be in the medical insurance
business. However, in this scenario, SAFECO intends to remain active in the
group insurance arena, offering primarily group life and disability coverage.
While the outcome of healthcare reform is uncertain, SAFECO will continue to
actively market large-case, self-funded medical programs.

Pension operations produced pre-tax income of $16.1 million, $15.8
million and $9.3 million in 1993, 1992 and 1991, respectively. The pension
operations had $3.0 billion of assets on deposit at December 31, 1993, compared
with $2.9 billion at December 31, 1992. New pension deposit growth has slowed
in recent years, especially for fixed rate products, primarily as a result of
the lower interest rate environment. This slowdown in new deposits has in turn
impacted pre-tax income in 1993. However, pension profits still increased in
1993 and 1992 as a result of fewer bond defaults, a larger asset base and
consistent management of interest rate margins stemming from adjustments in
credited interest rates. SAFECO plans to increase its offerings of variable
annuity products to assist it in competing in today's marketplace.

The annuity operations produced pre-tax income of $21.2 million, $20.1
million and $16.0 million in 1993, 1992 and 1991, respectively. Earnings in
1993 and 1992 benefited from higher investment income resulting from fewer bond
defaults and accelerated payments from mortgage-backed securities. Earnings in
1992 also were favorably impacted by the recapture of a block of assumed
reinsurance business and the release of reserves as a result of higher than
anticipated mortality experience. New deposits from single-premium immediate
annuity (SPIA) products were $447 million in 1993, compared with $348 million
in 1992 and $397 million in 1991. SPIA pre-tax income was $17.5 million, $15.7
million and $11.7 million in 1993, 1992 and 1991, respectively. Increased
interest spreads on new issues benefited this book of business in 1993. The
lower earnings in 1991 reflect the write-off of accrued interest on certain
investment grade securities that defaulted. Deferred annuity deposits were $218
million in 1993, compared with $221 million in 1992 and $105 million in 1991.
Total annuity assets amounted to $4.1 billion at December 31, 1993, compared
with $3.4 billion at December 31, 1992.

The individual life operations produced pre-tax income of $2.4 million,
$4.1 million and $9.5 million in 1993, 1992 and 1991, respectively. The lower
earnings in 1993 and 1992 were due to lower investment income, increased claims
costs and a change in the mix of new business written. New writings are
comprised of interest sensitive products such as universal life and variable
universal life products. Term insurance has accounted for over 90% of new
issues of traditional life products during the last two years and now comprises
more than 50% of the total traditional policies in force.

Investment income resulting from the investment of capital and prior
years' earnings of the operating lines of business is a major component of
SAFECO's life and health earnings, contributing pre-tax income of $54.5 million
in 1993, and $54.5 million and $46.1 million in 1992 and 1991, respectively.
The investment income in 1993 was impacted by the lower interest rate
environment. The increase in 1992 over 1991 is primarily due to the investment
income earned on the $75 million cash capital contribution SAFECO Corporation
made to SAFECO Life Insurance Company near the end of 1991.

Many life insurance companies' pension and annuity products have been
impacted by general economic conditions, lower investment returns, rating
downgrades, increased competition and decisions by plan sponsors to diversify
assets and fund management. SAFECO has experienced an increase in the level of
withdrawal of funds from its pension and annuity business (see Statement of
Cash Flows on page 34--Return of Funds Held Under Deposit Contracts), due to
scheduled payouts on distribution-type products and the lower interest rate
environment. However, SAFECO's overall withdrawal experience remains relatively
modest. Of the total of $7.2 billion in deposit contracts at December 31, 1993
approximately 44% are structured settlement immediate annuity products. These
annuities have average expected maturities of over 25 years and cannot be
surrendered by policyholders. Other annuity products, comprising approximately
11% of total deposit contracts, generally have expected maturities of between 8
to 12 years and associated surrender charges graded from 5% in year one to zero
in year six. SAFECO's guaranteed investment contracts (GICs) within its pension
area comprise approximately 4% of total deposit contracts. These contracts have
average maturities of four years and cannot be surrendered except in extremely
unusual circumstances. Other pension products, comprising approximately 38% of
total deposit contracts, have expected maturities of 10 to 15 years. Surrender
charges on these products are typically 9% in year one graded to zero in year
9, and SAFECO retains the option to defer payouts over five years on
approximately one-half of these contracts.

SAFECO's life insurance subsidiaries have not participated as a ceding
company in any assumptive reinsurance transactions. See Note 4 on page 47 for
additional information regarding reinsurance.

REAL ESTATE

SAFECO Properties, Inc. through Winmar Company, Inc., invests in and
manages real estate properties, primarily regional shopping centers, throughout
the United States. SAFECARE Company, Inc. invests in medical real estate,
primarily nursing

26
<PAGE> 22
1993 ANNUAL REPORT

homes and convalescent centers.

The real estate subsidiaries produced pre-tax income before investment
transactions of $10.1 million, $8.4 million and $8.5 million in 1993, 1992 and
1991, respectively. In addition, the sale of several mature medical properties
resulted in a pre-tax gain from real estate investments of $8.1 million in
1993. The commercial and medical real estate activities (excluding hospital
operations) resulted in pre-tax income before investment transactions of $10.1
million, $6.4 million and $5.0 million in 1993, 1992 and 1991, respectively.
The increase in 1993 is due primarily to the effect of lower interest rates on
borrowing costs combined with improved operating results for certain of
SAFECO's larger retail shopping centers. However, results in all three years
have been impacted by the slow economy and the overall depressed retail
industry. These conditions have led to the delay of two potential retail
developments which has resulted in the expensing of certain carrying costs,
totaling $3.6 million, $3.7 million and $4.3 million in 1993, 1992 and 1991,
respectively.

SAFECO Properties sold its hospital operating and management company
(SAFECARE Health Services, Inc.) in May of 1992. The $128 million cash sales
price resulted in a gain of approximately $6.4 million, which was substantially
offset by the write-down to estimated realizable value of certain other real
estate holdings. These hospital operations produced pre-tax income of $2.0
million in 1992 and $3.5 million in 1991. Despite improvement in recent years,
SAFECO concluded it should no longer be in the hospital management business, in
order to focus on its core business of commercial real estate. As the hospital
operations are not material to the consolidated financial statements, they have
not been reclassified as discontinued operations.

At December 31, 1993, investment real estate held by SAFECO Properties
totaled $441 million, approximately 3% of consolidated assets. Major retail
shopping centers (including land held for development) and healthcare
facilities comprise approximately 68% of the total. Approximately 51% of these
total holdings are located in the states of Washington and Oregon. Rental
properties included in investment real estate are detailed in Note 13 on page
52.

CREDIT

SAFECO Credit Company, Inc. provides loans and equipment financing and
leasing to commercial businesses, including affiliated companies. Credit
operations produced pre-tax income of $10.2 million in 1993, compared with $9.0
million in 1992 and $9.5 million in 1991. Loan and lease receivables from
non-affiliates grew 11% in 1993 and 16% in 1992. The strong earnings in all
three years are attributable primarily to the continuing increase in
receivables, combined with a decline in the cost of borrowed funds. Favorable
collection experience and low delinquencies, despite the sluggish economy, have
also contributed to the positive results. Continued strong earnings and growth
are expected in the near-term based on relatively low and stable interest
rates.

Approximately 66% of total loan and lease receivables outstanding at
December 31, 1993 are from commercial businesses involved in heavy
construction, transportation and manufacturing. Most of these businesses are
located in the West Coast and Rocky Mountain regions of the United States.
Loans and leases are fully secured by liens on the collateral financed. A
significant portion of SAFECO Credit's business consists of loans to affiliated
companies, limited to 50% or less of total loans and leases outstanding.

ASSET MANAGEMENT

SAFECO Asset Management Company is the investment advisor for the
fourteen SAFECO mutual funds, five variable annuity portfolios and a growing
number of outside pension accounts. These investment management activities
produced pre-tax income of $6.5 million in 1993, $6.5 million in 1992 and $5.2
million in 1991. Assets under management continue to grow and totaled $2.4
billion at December 31, 1993. Continued growth in assets under management, from
existing funds, new funds and from new pension accounts is expected.

INVESTMENT SUMMARY

SAFECO Corporation's consolidated pre-tax investment income increased to
$951.8 million during 1993 from $903.0 million in 1992 and $846.8 million in
1991. Substantially all of this investment income is produced by the investment
portfolios of SAFECO's property and casualty and life and health insurance
subsidiaries. The property and casualty companies' pre-tax investment income
decreased to $277.6 million in 1993 and $280.8 million in 1992 from $286.1
million in 1991, representing decreases of 1% and 2% in 1993 and 1992,
respectively. The slowdown in investment income in 1993 and 1992 is primarily
the result of lower investment yields and reduced cash flow caused by large
catastrophe losses and withdrawal from Canada.

The property and casualty fixed income portfolio, which amounted to $3.2
billion at December 31, 1993, is currently comprised of 74% tax-exempt and 26%
taxable investments. The property and casualty companies are presently
investing new money primarily in tax-exempt bonds and plan to continue to do so
in the foreseeable future. However, SAFECO may shift its investment of new
money between taxables and tax-exempts periodically in the future to maximize
the portfolio's after-tax return in view of the alternative minimum tax. Major
portfolio adjustments are not currently anticipated. The effective tax rate on
investment income for 1993 was 15%, down from 16% and 17% for 1992 and 1991,
respectively, which reflects the higher percentage of tax-exempt securities in
the portfolio. On an after-tax basis, investment income decreased 0.3% in 1993
and increased 0.2% and 3% in 1992 and 1991, respectively.

SAFECO's investment philosophy for the property and casualty portfolio is
to emphasize investment yield, but without sacrificing investment quality.
Equity investments make up 17% of the market value of the total property and

27
<PAGE> 23

SAFECO CORPORATION

casualty portfolio. The equity percentage of the portfolio may be increased
gradually in 1994 if investment opportunities become available. The quality of
the property and casualty companies' fixed income portfolio is detailed in the
following table:

<TABLE>
<CAPTION>
Percent at
Rating December 31, 1993
- - ------ -----------------
<S> <C>
AAA ........................... 44%
AA ............................ 24
A ............................. 25
BBB ........................... 6
BB or lower ................... 1
----
Total ...................... 100%
</TABLE>

A second major portfolio is held by the life and health insurance
companies. SAFECO matches the projected cash inflows of this portfolio with the
projected cash outflows of the liabilities of the various product lines within
the life and health operations. Fixed income securities comprise 92% of the
life and health companies' total investments at December 31, 1993. The quality
of the life and health companies' fixed income portfolio is detailed in the
following table:

<TABLE>
<CAPTION>
Percent at
Rating December 31, 1993
- - ------ -----------------
<S> <C>
AAA .......................... 39%
AA ........................... 7
A ............................ 25
BBB .......................... 27
BB or lower .................. 2
----
Total ..................... 100%
</TABLE>

This portfolio contains $152.0 million, at carrying value, of securities
below investment grade quality. This was approximately 2% of the total $7.4
billion life and health fixed income portfolio at December 31, 1993, compared
with 2% at December 31, 1992 and 5% at December 31, 1991. SAFECO's holdings of
below investment grade securities have declined as a result of the priority
placed on improving the quality of the life and health portfolio. The market
value of the below investment grade securities held by the life and health
insurance companies was $152.1 million at December 31, 1993. SAFECO
Corporation's non-life subsidiaries hold the remaining investments in below
investment grade securities. On a consolidated basis, below investment grade
securities with a carrying value of $173.2 million were held at December 31,
1993. This was approximately 1% of the total assets of SAFECO Corporation and
consolidated subsidiaries at December 31, 1993. The market value of
consolidated below investment grade securities was $173.7 million at December
31, 1993. Below investment grade securities generally involve a greater risk
than investment grade securities because of the creditworthiness and solvency
of the issuer, the fact that such securities are often unsecured and
subordinated, the relative youth and liquidity of the secondary trading market
for such securities, and the fact that such securities and the secondary
trading market are more vulnerable to economic and corporate developments.

SAFECO's consolidated investments in mortgage-backed securities
(primarily residential CMOs and pass-throughs) totaled $2.3 billion at December
31, 1993. The corresponding market value of these securities at this date was
$2.4 billion. Approximately 97% of these securities are held in the life and
health insurance portfolio, with the balance held in the property and casualty
insurance portfolio. Approximately 91% of the mortgage-backed securities are
government/agency backed or AAA rated at December 31, 1993. Less than 2% of
SAFECO's mortgage-backed securities are of the riskier, highly volatile type
(e.g., interest only, floaters, etc.). SAFECO has intentionally not invested
significant amounts in the riskier types of mortgage-backed securities.

The excess of market value over cost of the consolidated fixed income and
equity security portfolio was $1.6 billion at December 31, 1993 and $1.2
billion at December 31, 1992. The following is a summary of the consolidated
securities investment portfolio at December 31, 1993:

<TABLE>
<CAPTION>
Amortized Carrying Market
Cost Value Value
- - ------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Property and Casualty:
Fixed Income - taxable ........................... $ 860,064 $ 860,064 $ 987,404
Fixed Income - non-taxable ....................... 2,366,450 2,366,450 2,790,217
Equity Securities ................................ 424,089 775,603 775,603
Life and Health:
Fixed Income - taxable ........................... 7,424,662 7,424,662 8,114,458
Fixed Income - non-taxable ....................... 1,931 1,931 2,245
Equity Securities ................................ 16,380 26,713 26,713
SAFECO Corporation:
Fixed Income - taxable ........................... 51,803 51,803 54,122
Equity Securities ................................ 72,521 102,845 102,845
Miscellaneous ........................................ 16,214 21,157 22,376
Short-Term Investments ............................... 109,047 109,047 109,047
----------- ----------- -----------
Total ....................................... $11,343,161 $11,740,275 $12,985,030
=========== =========== ===========
</TABLE>

28
<PAGE> 24
1993 ANNUAL REPORT

Consolidated pre-tax realized gains from security investments totaled
$179.5 millon for 1993, compared with $60.6 million and $35.1 million in 1992
and 1991, respectively. The higher level of gains in 1993 and 1992 is due
primarily to falling interest rates producing calls, redemptions and mortgage
pay-downs on debt securities. 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 market value below cost is
monitored closely. If the decline is judged to be other than temporary the
security is written down to estimated realizable value. The amount of such
writedowns in 1993, 1992 and 1991 was $15.2 million, $20.6 million and $35.2
million, respectively. Fixed income securities purchased as below investment
grade included in these amounts were $3.0 million, $6.2 million and $12.0
million in 1993, 1992 and 1991, respectively. The remainder of the writedowns
relate primarily to fixed income securities which were investment grade when
purchased and later downgraded.

SAFECO Corporation, the parent company, holds an investment portfolio of
securities that totaled $195.9 million at market value at December 31, 1993,
compared with $140.0 million at December 31, 1992. The majority of these
securities are high quality preferred stocks and U.S. Treasuries.

For a discussion of the Corporation's investment in real estate, which is
made through SAFECO Properties, Inc., see page 26 of this report.

SAFECO Corporation's consolidated investment portfolio also included
$402.1 million of mortgage loan investments at December 31, 1993, approximately
3% of total assets. These loans are held by the life and health companies and
are secured by first mortgage liens on 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 60% of the total
in California. Individual loans generally do not exceed $5 million. At December
31, 1993, approximately 3% of the loans were non-performing, compared with
approximately 2% at December 31, 1992. The percentage of non-performing loans
will likely increase in 1994, due primarily to the slow California economy. The
allowance for mortgage loan losses was $7 million at December 31, 1993 and $3
million at December 31, 1992.

NEW ACCOUNTING STANDARDS

The Financial Accounting Standards Board (FASB) issued Statement 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," in
1990. SAFECO adopted the Statement in the first quarter of 1993. The transition
obligation (i.e., the accumulated postretirement benefit obligation) of $23.8
million was recorded as a cumulative effect adjustment in the first quarter of
1993 which net of tax resulted in a reduction of net income of $15.7 million.
Additional disclosures relating to this Statement are in Note 11 on page 51.

In 1992 the FASB issued Statement 109, "Accounting for Income Taxes."
SAFECO adopted the Statement in the first quarter of 1993. The cumulative
effect of adopting Statement 109 increased net income by $18.6 million. See
Note 15 on page 52 for additional disclosures relating to this Statement.

The FASB issued Statement 113, "Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts," in late 1992. SAFECO adopted
the Statement in the first quarter of 1993. Under Statement 113, balances
affected by reinsurance transactions are reported gross of reinsurance rather
than net in the balance sheet. Adoption had no effect on net income. See Note 4
on page 47 for disclosures relating to reinsurance.

In May, 1993, the FASB issued Statement 114, "Accounting by Creditors for
Impairment of a Loan." This Statement provides guidance on valuing impaired
loans and is effective for 1995. Based on current analysis, the impact of
adopting this Statement on SAFECO's net income and financial condition is not
expected to be significant.

In May of 1993, the FASB also issued Statement 115, "Accounting for
Certain Investments in Debt and Equity Securities," which expands the use of
the fair value accounting for debt and equity securities. Statement 115
requires that debt and equity securities be classified as trading,
available-for-sale or held-to-maturity. Debt securities that the Corporation
has the positive intent and ability to hold to maturity (as narrowly defined by
Statement 115) will be classified as held-to-maturity and will continue to be
reported at amortized cost. Debt securities classified as available-for-sale
will be carried at market value, with changes in unrealized gains and losses
recorded directly to stockholders' equity, net of applicable income taxes.
Trading securities are to be carried at market value with immediate recognition
in income of changes in market value. Statement 115 is effective for 1994 and
SAFECO will adopt it as of January 1, 1994. Adoption of this Statement is not
anticipated to affect net income as SAFECO does not expect to have a trading
portfolio of either debt or equity securities. SAFECO anticipates that less
than 20% of the debt securities portfolio will be classified as
held-to-maturity, with the remainder considered available-for-sale. The
increase in stockholders' equity due to adoption has not been quantified and
will depend on the amount of unrealized gain attributable to the
available-for-sale portfolio and the effect, if any, resulting from revaluation
of certain deferred policy acquisition costs.

DIVIDENDS

The Corporation has paid cash dividends continuously since 1933. Common
stock dividends paid were $1.72 per share in 1993, compared with $1.56 in 1992
and $1.42 in 1991. 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.

NUMBER OF STOCKHOLDERS

There were approximately 5,000 common stockholders of record at December
31, 1993.

29
<PAGE> 25
1993 ANNUAL REPORT

5. COMMITMENTS AND CONTINGENCIES

SAFECO leases office space, commercial real estate and certain
equipment under leases which expire at various dates through 2058. These
leases are accounted for as operating leases. Minimum rental commitments for
leases in effect at December 31, 1993 are as follows:

<TABLE>
<CAPTION>
Year Payable Minimum Rentals
- - -----------------------------------------------------------------------
<S> <C>
1994 . . . . . . . . . . . . . . . . . . . . . . $ 6,742
1995 . . . . . . . . . . . . . . . . . . . . . . 5,546
1996 . . . . . . . . . . . . . . . . . . . . . . 3,395
1997 . . . . . . . . . . . . . . . . . . . . . . 2,221
1998 . . . . . . . . . . . . . . . . . . . . . . 1,908
1999 and thereafter . . . . . . . . . . . . . . . 61,693
-------
Total . . . . . . . . . . . . . . . . . . . . $81,505
=======
</TABLE>

See Note 4 for discussion relating to reinsurance.

47
<PAGE> 26
SAFECO CORPORATION

5. COMMITMENTS AND CONTINGENCIES (CONTINUED)

The property and casualty companies have written financial guarantee
insurance covering municipal revenue bond issues, real estate partnership
borrowings and residual values of certain commercial buildings. The majority of
these guarantees were written in the period 1984 through 1987. At December 31,
1993, guarantees totaling $259,401 were outstanding. Substantially all
individual guarantees are supported by collateral (first mortgage liens) in the
underlying properties. At December 31, 1993, the reserve for losses and loss
adjustment expense for this business was $22,120 and the related unearned
premium reserve was $2,242.

At December 31, 1993, SAFECO Properties, Inc. is the guarantor of
$38,500 of outstanding debt financing for a not-for-profit hospital. SAFECO's
property and casualty companies have, in turn, guaranteed the full amount of
this potential obligation of SAFECO Properties and this amount is included in
the guarantee total of $259,401 noted in the paragraph above. The credit risk
exposure is limited to any excess of the outstanding debt over the value of the
collateral.

PROPOSITION 103

In November, 1988, California voters passed Proposition 103, an
initiative that, among other things, required property and casualty insurance
rates to be rolled back to levels 20% below their 1987 levels for the period
November 8, 1988 to November 7, 1989 (Rollback Period). In May 1989 the
California Supreme Court upheld as facially constitutional most, but not all,
of the provisions of Proposition 103. The Supreme Court held that insurance
companies were entitled to have the opportunity to earn a fair and reasonable
return. In addition, companies were to have the right to demonstrate through
rate filings that the insurance rates used during the Rollback Period met
applicable standards and, consequently, did not have to be rolled back.

In June 1989 SAFECO made rate filings that demonstrated its rates met
the applicable standards, should not be required to be reduced during the
Rollback Period and should be approved for use on and after November 8, 1989.
In 1990 the California Commissioner of Insurance approved the use of these
rates for use on and after November 8, 1989. The Department refused, however,
to review these filings for purposes of determining whether SAFECO had a
rollback obligation.

Instead, the Department insisted on calculating rate rollback
obligations based on the financial results of SAFECO for calendar year 1989.
While over time the Department used several different approaches, in October
1991 the Department alleged SAFECO had a rollback obligation of $88.7 million
plus interest.

SAFECO consistently contested the Department's approach concerning the
rollback matter in rate hearings and related litigation from 1989 through
August 1993. By 1993 SAFECO was engaged in appeals of two separate lawsuits
with the Department.

In August 1993, having concluded the courts would not force the
Department to review rate filings in connection with the rollback matter and in
order to end four years of proceedings and avoid future years of such
proceedings, SAFECO agreed to withdraw from the two appeals and to pay $40
million to policyholders who purchased or renewed policies covered by
Proposition 103 during the Rollback Period and who had not otherwise been paid
a rollback refund.

This $40 million settlement, $0.41 per share on an after-tax basis, was
reflected in the financial results for the third quarter and paid in the fourth
quarter of 1993. The settlement payment equates to one hundred eleven dollars
per policy.

ENVIRONMENTAL, ASBESTOS AND OTHER TOXIC CLAIMS

The property and casualty companies' liability for unpaid losses and
adjustment expense includes reserves for environmental, asbestos and other
toxic claims. Reserving for these claims is subject to significant
uncertainties. Such uncertainties include difficulties in predicting the
outcome of judicial decisions as case law evolves regarding liability exposure,
insurance coverage and interpretation of policy language and changes in
environmental regulations. In view of these conditions, trends that have
affected development of these liabilities in the past may not necessarily occur
in the future. The reserves carried for these claims at December 31, 1993
are estimates based on the known facts and current law and are believed to be
adequate.