SAFECO CORP, S-3, 1997-08-19

SAFECO CORP
S-3, 1997-08-19
FIRE, MARINE & CASUALTY INSURANCE

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 19, 1997
REGISTRATION NO. 333-
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

---------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

---------------
SAFECO CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
WASHINGTON 91-0742146
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>

4333 BROOKLYN AVENUE N.E.
SEATTLE, WASHINGTON 98185
(206) 545-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

---------------
JAMES W. RUDDY
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
4333 BROOKLYN AVENUE N.E.
SEATTLE, WASHINGTON 98185
(206) 545-5000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE OF PROCESS)

COPIES TO:
<TABLE>
<S> <C>
EVELYN CRUZ SROUFE SUSAN J. SUTHERLAND
STEPHANIE G. DALEY-WATSON SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
PERKINS COIE 919 THIRD AVENUE
1201 THIRD AVENUE, 40TH FLOOR NEW YORK, NEW YORK 10022
SEATTLE, WASHINGTON 98101-3099 (212) 735-3000
(206) 583-8888
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==========================================================================================
TITLE OF EACH CLASS OF
SECURITIES TO BE PROPOSED MAXIMUM AMOUNT OF
REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, no par value.... $750,000,000 $227,273
==========================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
===============================================================================
<PAGE>

EXPLANATORY NOTE

This Registration Statement contains two forms of prospectus: one to be used
in connection with an underwritten public offering in the United States and
Canada (the "U.S. Prospectus"), and one to be used in a concurrent
underwritten public offering outside the United States and Canada (the
"International Prospectus"). The Prospectuses are identical except for the
front and back cover pages. The form of U.S. Prospectus is included herein and
is followed by the alternate pages to be used in the International Prospectus.
Each of the alternate pages for the International Prospectus included herein
is labeled "International Prospectus--Alternate Page." Final forms of each
Prospectus will be filed with the Securities and Exchange Commission under
Rule 424(b) under the Securities Act of 1933, as amended.
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED AUGUST 19, 1997

PROSPECTUS

14,000,000 SHARES

[LOGO OF SAFECO SAFECO CORPORATION
APPEARS HERE]

COMMON STOCK

--------

All the 14,000,000 shares of the Common Stock of SAFECO Corporation (the
"Company") being offered hereby are being sold by the Company. The Common Stock
of the Company is traded on the Nasdaq National Market ("Nasdaq") under the
symbol "SAFC." On , 1997, the last reported sale price for the
Company's Common Stock on Nasdaq was $ per share. See "Price Range of
Common Stock and Dividend Policy."

Of the 14,000,000 shares being offered, 11,200,000 shares are being offered
in the United States and Canada (the "U.S. Offering") by the U.S. Underwriters
and 2,800,000 shares are being offered in a concurrent international offering
(the "International Offering" and, together with the U.S. Offering, the
"Offerings") outside the United States and Canada by the Managers. The U.S.
Underwriters and the Managers are collectively referred to as the
"Underwriters." The Price to Public and the Underwriting Discounts and
Commissions for each of the Offerings will be identical.

SEE "RISK FACTORS" BEGINNING ON PAGE 17 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.

--------

<TABLE>
<CAPTION>
===========================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS(1) TO COMPANY(2)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- -------------------------------------------------------------------------------------------
Total(3) $ $ $
===========================================================================================
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $ payable by the Company.
(3) The Company has granted to the U.S. Underwriters a 30-day option to
purchase up to additional shares of Common Stock solely to
cover over-allotments, if any. See "Underwriting." If such option is
exercised in full, the Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively.

--------

The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock will be available for delivery on or about , 1997 at
the office of Smith Barney Inc., 333 West 34th Street, New York, New York
10001.

--------

SMITH BARNEY INC.
, 1997
<PAGE>

FORWARD-LOOKING INFORMATION

This Prospectus includes "forward-looking statements" within the meaning of
The Private Securities Litigation Reform Act of 1995 (the "PSLRA"). The PSLRA
provides a "safe harbor" for such statements to encourage companies to provide
prospective information about themselves so long as such information is
identified as forward-looking and is accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in the information. All statements
other than statements of historical fact made in this Prospectus or
incorporated by reference are forward-looking. In particular, the statements
under the headings "Prospectus Summary," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business" and those
located elsewhere herein regarding industry prospects, the Company's future
results of operations or financial position and pro forma information are
forward-looking statements. Forward-looking statements represent management's
current expectations and are inherently uncertain. Investors are warned that
the Company's actual results may differ significantly from management's
expectations and, therefore, from the results discussed in such forward-
looking statements. Factors that might cause such differences include, but are
not limited to, the "Risk Factors" described herein.

----------------

The Company owns, directly or indirectly, all the outstanding voting
securities of property and casualty and life and health insurance companies
domiciled or deemed to be commercially domiciled in eight states in the United
States. State insurance regulatory laws require prior approval by state
insurance departments of any acquisition of control of a domestic insurance
company or commercially domiciled insurance company or of any company that
controls such an insurance company. In the states where the Company's
insurance subsidiaries are domiciled or deemed to be commercially domiciled,
"control" is generally presumed to exist through the ownership of 10% or more
of the voting securities of such an insurance company or any company that
controls such an insurance company. Any purchase of shares of Common Stock
that would result in the purchaser's owning 10% or more of the voting power of
the Company will be presumed to result in the acquisition of control of the
Company's insurance subsidiaries. Such an acquisition of Common Stock would
require prior regulatory approval unless the Insurance Commissioner in each
state in which the Company's insurance subsidiaries are domiciled or deemed to
be commercially domiciled determines otherwise. In addition, many state
insurance regulatory laws contain provisions that require prenotification to
state agencies of a change of control of a nondomestic insurance company
licensed in that state in the event specified market concentration thresholds
are triggered by an acquisition. See "Description of Capital Stock--Insurance
Regulations Concerning Change of Control."

CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION
OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THE OFFERINGS, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE
WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"). SEE "UNDERWRITING."

2
<PAGE>

PROSPECTUS SUMMARY

The following information is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus or incorporated by reference herein. The
information contained in this Prospectus reflects the October 1, 1997
acquisition (the "Acquisition") of American States Financial Corporation
through a merger of American States with a newly formed subsidiary of SAFECO
Corporation. The Company and American States are insurance holding companies.
Each conducts its operations through its subsidiaries and has no direct
operations. The Company's principal assets are the shares of capital stock of
its subsidiaries. As used in this Prospectus, unless the context otherwise
requires, "SAFECO" refers to SAFECO Corporation and its consolidated
subsidiaries, excluding American States, "American States" refers to American
States Financial Corporation and its consolidated subsidiaries, and the
"Company" refers to SAFECO, together with its consolidated subsidiaries,
including American States. Unless the context otherwise requires, historical
data for the Company refer to combined historical data from SAFECO and American
States on a pro forma basis giving effect to the Acquisition.

Unless otherwise indicated, all data in this Prospectus assume that the U.S.
Underwriters' over-allotment option is not exercised. Prospective investors
should consider carefully the factors set forth herein under "Risk Factors."

Unless otherwise indicated, financial information and operating statistics
applicable to the Company, SAFECO and American States set forth in this
Prospectus or incorporated by reference are based on U.S. generally accepted
accounting principles ("GAAP"), not statutory accounting practices ("SAP"). In
conformity with industry practice, financial information and operating
statistics applicable to the insurance company subsidiaries of the Company and
data derived from A.M. Best Company, Inc. ("A.M. Best") and National
Association of Insurance Commissioners ("NAIC") sources, generally used for
industry comparisons, are based on SAP. Industry rankings for the Company,
which are based on A.M. Best 1996 data, have been adjusted to give effect to
the Acquisition.

THE COMPANY

OVERVIEW

The Company is one of the largest property and casualty insurance companies
in the United States. On a pro forma basis giving effect to the Acquisition and
related financings, the Company had consolidated revenues of $5.9 billion in
1996, and total assets of $27.3 billion and total stockholders' equity of $5.0
billion at June 30, 1997. The Company provides a broad range of personal and
commercial property and casualty insurance to individuals, businesses,
government units and associations. SAFECO and American States have each
underwritten property and casualty insurance since the 1920s. Through its
insurance subsidiaries, the Company is licensed as a property and casualty
insurer in all 50 states and the District of Columbia, with a significant
presence in the Pacific Northwest and the Midwest. The Company's property and
casualty operations generated approximately 92% of the Company's insurance
revenues in 1996. Of the Company's 1996 net written property and casualty
premiums of $3.9 billion, personal and commercial lines accounted for 60% and
40%, respectively.

The Company is the third largest writer of personal lines insurance through
independent agents in the United States and one of the largest writers of
personal lines insurance overall, based on 1996 net written premiums published
by A.M. Best. The Company's principal personal lines are automobile and
homeowners insurance, which accounted for 66% and 27%, respectively, of the
Company's approximately $2.4 billion of personal lines 1996 net written
premiums. See "Business--Property and Casualty Insurance Product Lines--
Personal Lines."

SAFECO significantly expanded its commercial lines business through the
Acquisition. Management believes that American States is one of the largest
writers in the United States of property and casualty insurance for businesses
with fewer than 50 employees, which comprise a fast-growing segment of the
United States economy. The Company's principal commercial lines are commercial
multi-peril, commercial automobile,

3
<PAGE>

workers' compensation and surety, which accounted for 33%, 22%, 21% and 4%,
respectively, of the Company's approximately $1.6 billion of commercial lines
1996 net written premiums. See "Business--Property and Casualty Insurance--
Product Lines--Commercial Lines."

The Company also offers annuities, retirement services and group life and
health and individual life insurance. In addition, the Company conducts
commercial lending and leasing, asset management, insurance agency and
financial services distribution operations, and real estate investment and
management.

The Company believes that it has the following competitive advantages: (i) an
ability to generate superior underwriting results as demonstrated by SAFECO's
and American States' combined ratios being consistently lower than industry
averages over the past ten years; (ii) a demonstrated ability to manage an
independent agent distribution system effectively; (iii) a broad selection of
products marketed in a variety of business segments; (iv) a focused presence in
geographic areas where management believes it can underwrite and price
profitably; and (v) a management team consisting of highly qualified and
experienced professionals with recognized expertise in both personal and
commercial lines.

STRATEGY

The Company's strategic objective is to be the leading insurer in the United
States that markets its products through independent insurance agents. The
Acquisition was an integral step in furthering this strategic objective. In
management's view, the Acquisition solidified the Company's position as a
national market leader within the property and casualty insurance industry by
providing an important additional source of long-term revenue and earnings
growth and by expanding the Company's product mix and geographic reach. In
particular, the Acquisition coupled SAFECO's premier personal lines business
with American States' similarly successful commercial lines business, and
accelerated the Company's growth into the Midwest.

The Company believes that the combined financial strength and capital
resources of SAFECO and American States, together with the experience of the
two companies' management teams, provide the Company with a significantly
stronger financial and operational base. By capitalizing on cross-selling
opportunities arising from the Acquisition and capturing a larger share of
business generated by existing agents, management projects that incremental
annual revenues will increase to approximately $170 million for the year 2000.
Management has also identified annual cost savings from the Acquisition to be
realized through improved efficiencies and cost reductions that will increase
to approximately $80 million for the year 2000. Management believes that there
are additional opportunities to increase revenues and reduce costs beyond the
year 2000.

Management has established the following strategic initiatives for the
Company:

Be the Leading Company Distributing Through Independent Agents. The
Company intends to be the leading insurer in the United States that markets
its products and services through independent insurance agents. The
Acquisition added approximately 4,000 independent agents to SAFECO's agent
force for a combined SAFECO and American States total of approximately
8,000 independent agents, or nearly 20% of the independent agents in the
United States. Management believes that its relationship with its agent
force is excellent. Through further development of its relationships with
agents, the Company seeks to become the first or second largest provider of
insurance and services to its agents and thereby capture a larger share of
the most profitable business generated by such agents.

Capitalize on Enhanced Product Portfolio and Cross-Selling
Opportunities. The combination of SAFECO and American States provides
independent agents a broader range of products than either company offered
on a stand-alone basis. The Acquisition increases the Company's
opportunities to cross-sell products and leverage existing marketing and
distribution systems, particularly by introducing American States' small
commercial lines products to existing SAFECO agents and SAFECO's personal
and large

4
<PAGE>

commercial lines products to existing American States agents. The
Acquisition also creates additional opportunities to market the Company's
life and health insurance and financial services through a broader agent
network.

Integrate American States and SAFECO. The Company plans to benefit from
the respective strengths of SAFECO and American States and to leverage the
"best practices" of each. While personal lines represented approximately
72% of SAFECO's net written property and casualty premiums in 1996,
commercial lines represented approximately 57% of American States' 1996 net
written property and casualty premiums. The Company believes that combining
SAFECO's premier personal lines business with American States' strong
commercial lines business will allow the Company to achieve better results
than either company could achieve on a stand-alone basis. A transition team
of managers from SAFECO and American States is working to enhance revenues,
improve efficiencies and reduce costs.

Increase Underwriting in Profitable States and Manage Exposures. The
combination of SAFECO and American States geographically diversifies the
Company's revenue and earnings base and its catastrophic risk exposure by
accelerating the Company's growth east of the Rocky Mountains, as
illustrated by the map below. Management believes that insurers generally
have been able to manage risk selection and pricing effectively in the
Midwest. Giving effect to the Acquisition, 34% of the Company's 1996 direct
written property and casualty premiums were generated in Washington, Oregon
and California, which represents a reduction from 45% for SAFECO prior to
the Acquisition. See "Business--Property and Casualty Geographic
Distribution."

[Map of United States showing location of SAFECO's top ten states based on net
written premiums in 1996 and states with over $20 million of direct written
premiums in 1996 by American States with the following language: "SAFECO's
top ten states, based on direct written premiums in 1996" and "States with
over $20 million of direct written premiums in 1996 by American States that
do not overlap with SAFECO's top ten states."]

Capitalize on Effective Use of Technology. The Company will continue to
use technology and automated systems to deliver exceptional service and
innovative products and to develop and strengthen its relationships with
agents. SAFECO and American States were among the first in the industry to
implement on-line integrated policy rating, billing, issuing and servicing
systems to interface electronically with agents. Management believes that
the Company continues to be an industry leader in the use of technology.
This

5
<PAGE>

use of technology enables the Company to deliver superior customer service
and to reduce the handling costs associated with the low-premium, high-
volume nature of small commercial and personal lines insurance. See
"Business--Technology."

ACQUISITION OF AMERICAN STATES

Effective October 1, 1997, SAFECO acquired American States through the merger
of American States with a newly formed subsidiary of SAFECO. In connection with
the Acquisition, each share of outstanding common stock of American States was
converted into the right to receive $47.00 in cash, for an aggregate purchase
price of approximately $2.8 billion. SAFECO also repaid approximately $300
million of outstanding debt obligations of American States. SAFECO financed the
purchase price for the Acquisition from various sources, including proceeds
from the issuance of $200 million aggregate principal amount of senior notes
and $850 million aggregate liquidation amount of capital securities by a
subsidiary trust. See "Capitalization" and "Unaudited Pro Forma Combined
Condensed Financial Statements."

THE OFFERINGS

<TABLE>
<C> <S>
Common Stock offered:
U.S. Offering................... 11,200,000 shares
International Offering.......... 2,800,000 shares
Total....................... 14,000,000 shares
Common Stock Outstanding After
Offerings......................... 140,343,401 shares(1)
Use of Proceeds.................... The Company intends to use the net
proceeds from the Offerings to retire
certain indebtedness incurred in
connection with the Acquisition. See "Use
of Proceeds."
Dividend Policy.................... SAFECO has paid dividends to stockholders
continuously since 1933. SAFECO paid a
cash dividend of $0.32 per share with
respect to the quarter ended June 30,
1997. See "Price Range of Common Stock
and Dividend Policy."
Nasdaq Symbol...................... SAFC
Risk Factors....................... Prospective investors should consider
carefully all the information in this
Prospectus and, in particular, should
evaluate the items set forth under "Risk
Factors" before purchasing shares of
Common Stock offered hereby.
</TABLE>
- --------
(1) Excludes 2,074,930 shares issuable upon exercise of employee stock options
outstanding at June 30, 1997.

6
<PAGE>

SELECTED FINANCIAL INFORMATION

SELECTED GAAP CONSOLIDATED HISTORICAL FINANCIAL INFORMATION OF SAFECO

The selected consolidated financial information presented below is derived
from the consolidated financial statements of SAFECO and its subsidiaries.
Such financial statements have been audited by Ernst & Young LLP, independent
auditors, for each of the three years in the period ended December 31, 1996.
The consolidated financial statements of SAFECO and its subsidiaries as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996 are incorporated by reference to the SAFECO Annual Report on
Form 10-K for the year ended December 31, 1996 (the "SAFECO Annual Report"),
and the information set forth below should be read in conjunction with such
consolidated financial statements and the notes thereto. See "Incorporation of
Certain Documents by Reference." The selected consolidated financial
information as of June 30, 1997 and for the six months ended June 30, 1997 and
1996 are derived from unaudited consolidated financial statements of SAFECO
which, in the opinion of management, include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of such
financial information. The results for the six months ended June 30, 1997 do
not necessarily indicate the results for the entire year.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------- --------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Insurance:
Property and casualty earned
premiums........................ $1,176.4 $1,112.4 $2,275.4 $2,162.1 $2,053.4
Life and health premiums and
other revenues.................. 134.9 132.3 265.9 261.6 276.8
-------- -------- -------- -------- --------
Total........................... 1,311.3 1,244.7 2,541.3 2,423.7 2,330.2
Other............................ 110.5 106.3 217.3 191.6 201.8
Net investment income............ 583.7 549.8 1,116.7 1,075.3 991.6
Realized investment gain......... 40.8 52.8 90.1 64.3 39.0
-------- -------- -------- -------- --------
Total revenues.................. 2,046.3 1,953.6 3,965.4 3,754.9 3,562.6
-------- -------- -------- -------- --------
Expenses:
Losses, adjustment expense and
policy benefits................. 1,210.3 1,167.7 2,362.7 2,250.4 2,202.3
Commissions...................... 226.6 201.4 415.7 401.2 394.1
Interest......................... 37.4 35.4 72.4 85.4 70.3
Other............................ 271.9 264.3 536.1 504.1 506.2
-------- -------- -------- -------- --------
Total expenses.................. 1,746.2 1,668.8 3,386.9 3,241.1 3,172.9
-------- -------- -------- -------- --------
Income before income taxes........ 300.1 284.8 578.5 513.8 389.7
Provision for federal income
taxes............................ 71.4 68.1 139.5 114.8 75.3
-------- -------- -------- -------- --------
Net income........................ $ 228.7 $ 216.7 $ 439.0 $ 399.0 $ 314.4
======== ======== ======== ======== ========
Net income per share of common
stock:
Income before realized gain...... $ 1.60 $ 1.45 $ 3.02 $ 2.84 $ 2.29
Realized gain.................... .21 .27 .46 .33 .21
-------- -------- -------- -------- --------
Net income per share.............. $ 1.81 $ 1.72 $ 3.48 $ 3.17 $ 2.50
======== ======== ======== ======== ========
Weighted average shares
outstanding...................... 126.3 126.0 126.1 126.0 125.9
</TABLE>

(Continued on next page)

7
<PAGE>

(Continued from previous page)

<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, -------------------------------
1997 1996 1995 1994
----------- --------- --------- ---------
(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets:
Investments:
Fixed maturities available-
for-sale, at market value.. $12,238.2 $11,936.2 $11,928.1 $ 9,509.1
Fixed maturities held-to-
maturity, at amortized
cost....................... 2,698.1 2,488.3 2,044.5 2,053.1
Marketable equity
securities, at market
value...................... 1,501.1 1,298.8 1,119.4 855.1
Other invested assets....... 1,244.4 1,166.2 1,040.2 1,049.7
--------- --------- --------- ---------
Total investments.......... 17,681.8 16,889.5 16,132.2 13,467.0
Finance receivables.......... 913.8 829.1 741.2 619.1
Premiums and other service
fees receivable............. 486.9 467.2 444.6 418.7
Deferred policy acquisition
costs....................... 411.6 396.1 356.4 388.8
Other assets................. 894.7 844.6 817.0 849.8
Separate account assets...... 662.2 491.2 276.4 158.3
--------- --------- --------- ---------
Total assets............... $21,051.0 $19,917.7 $18,767.8 $15,901.7
========= ========= ========= =========
Liabilities and Stockholders'
Equity:
Losses, adjustment expense
and future policy benefits.. $ 2,128.8 $ 2,237.8 $ 2,361.3 $ 2,421.2
Unearned premiums............ 981.7 946.9 910.8 867.0
Funds held under deposit
contracts................... 10,402.8 9,792.7 8,756.4 7,988.5
Short-term debt.............. 906.3 793.4 608.6 639.3
Long-term debt............... 434.9 440.1 458.9 343.6
Other liabilities............ 1,163.7 1,100.3 1,412.8 654.3
Separate account liabilities. 662.2 491.2 276.4 158.3
--------- --------- --------- ---------
Total liabilities.......... 16,680.4 15,802.4 14,785.2 13,072.2
--------- --------- --------- ---------
Common stock................. 227.9 225.3 217.4 211.2
Retained earnings............ 3,190.4 3,042.2 2,755.5 2,495.8
Unrealized appreciation of
investment securities, net
of tax/other................ 952.3 847.8 1,009.7 122.5
--------- --------- --------- ---------
Total stockholders' equity. 4,370.6 4,115.3 3,982.6 2,829.5
--------- --------- --------- ---------
Total liabilities and
stockholders' equity...... $21,051.0 $19,917.7 $18,767.8 $15,901.7
========= ========= ========= =========
OTHER PROPERTY AND CASUALTY DATA--STATUTORY
BASIS:
Policyholders' surplus(1)..... $ 2,431.1 $ 2,166.2 $ 1,864.7 $ 1,506.1
Ratio of net written premiums
to policyholders' surplus(2). 1.0x 1.1x 1.2x 1.4x
Combined ratio(3)............. 97.6% 98.8% 99.6% 103.6%
Industry combined ratio(4).... N/A 105.8% 106.5% 108.4%
</TABLE>
- --------
(1) Excludes surplus of SAFECO's life and health subsidiaries of $619.0,
$587.7, $504.7 and $416.8 at June 30, 1997 and December 31, 1996, 1995 and
1994, respectively.

(2) Annual ratios represent statutory net written premiums for the year
divided by statutory policyholders' surplus at the end of the year
attributable to the property and casualty business. The six-month ratio is
based on annualized statutory net written premiums divided by statutory
policyholders' surplus at the end of the six-month period.

(3) The combined ratio is an industry measurement of the results of property
and casualty insurance underwriting. This ratio is the sum of the ratio of
incurred losses and loss adjustment expenses to net earned premiums (the
"loss and LAE ratio"), the ratio of underwriting expenses incurred to net
written premiums (the "underwriting expense ratio") and, where applicable,
the ratio of dividends to policyholders to net earned premiums. A combined
ratio under 100% generally indicates an underwriting profit; a combined
ratio over 100% generally indicates an underwriting loss.

(4) Source: A.M. Best; data for 1997 are not yet available.

8
<PAGE>

SELECTED GAAP CONSOLIDATED HISTORICAL FINANCIAL INFORMATION OF AMERICAN STATES

The selected consolidated financial information presented below is derived
from the consolidated financial statements of American States and its
subsidiaries. Such financial statements have been audited by Ernst & Young
LLP, independent auditors, for each of the three years in the period ended
December 31, 1996. The consolidated financial statements of American States
and its subsidiaries as of December 31, 1996 and 1995 and for each of the
three years in the period ended December 31, 1996 are incorporated by
reference to the American States Annual Report on Form 10-K, Form 10-K/A(1)
and Form 10-K/A(2) for the year ended December 31, 1996 (the "American States
Annual Report"), and the information set forth below should be read in
conjunction with such consolidated financial statements and the notes thereto.
See "Incorporation of Certain Documents by Reference." The selected
consolidated financial information as of June 30, 1997 and for the six months
ended June 30, 1997 and 1996 are derived from unaudited consolidated financial
statements of American States which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such financial information. The results for the six
months ended June 30, 1997 do not necessarily indicate the results for the
entire year.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
----------------- ---------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Insurance:
Property and casualty earned
premiums....................... $ 824.1 $ 819.6 $1,617.2 $1,689.6 $1,693.5
Life and health premiums and
other revenues................. 29.0 28.9 56.9 56.8 52.5
-------- -------- -------- -------- --------
Total.......................... 853.1 848.5 1,674.1 1,746.4 1,746.0
Other........................... 6.7 -- -- (28.4) --
Net investment income........... 133.0 134.5 274.3 266.6 260.5
Realized investment gain........ 19.4 28.4 35.6 41.0 19.9
-------- -------- -------- -------- --------
Total revenues................. 1,012.2 1,011.4 1,984.0 2,025.6 2,026.4
-------- -------- -------- -------- --------
Expenses:
Losses, adjustment expense and
policy benefits................ 620.9 655.9 1,248.9 1,242.3 1,272.0
Commissions..................... 140.8 144.4 283.0 291.6 296.9
Interest........................ 10.4 1.8 12.4 -- --
Other........................... 120.8 122.4 244.0 282.6 257.2
-------- -------- -------- -------- --------
Total expenses................. 892.9 924.5 1,788.3 1,816.5 1,826.1
-------- -------- -------- -------- --------
Income before income taxes....... 119.3 86.9 195.7 209.1 200.3
Provision for federal income
taxes........................... 21.0 10.2 26.0 30.8 15.7
-------- -------- -------- -------- --------
Net income....................... $ 98.3 $ 76.7 $ 169.7 $ 178.3 $ 184.6
======== ======== ======== ======== ========
Net income before realized
investment gain................. $ 88.0 $ 59.6 $ 146.2 $ 156.7 $ 171.6
</TABLE>

(Continued on next page)

9
<PAGE>

(Continued from previous page)

<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, ----------------------------
1997 1996 1995 1994
----------- -------- -------- --------
(IN MILLIONS, EXCEPT RATIOS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Assets:
Investments:
Fixed maturities available-for-
sale, at market value............. $3,787.6 $3,763.9 $3,860.9 $3,429.9
Marketable equity securities, at
market value...................... 460.6 435.1 437.7 522.5
Other invested assets.............. 135.5 143.6 131.6 188.9
-------- -------- -------- --------
Total investments................. 4,383.7 4,342.6 4,430.2 4,141.3
Premiums receivable................. 482.8 413.4 377.8 384.0
Deferred policy acquisition costs... 212.3 202.2 199.2 210.8
Other assets........................ 573.1 582.9 532.0 683.2
-------- -------- -------- --------
Total assets...................... $5,651.9 $5,541.1 $5,539.2 $5,419.3
======== ======== ======== ========
Liabilities and Stockholders' Equity:
Losses, adjustment expense and
future policy benefits............. $2,854.7 $2,868.3 $2,828.3 $2,878.2
Unearned premiums................... 746.1 712.0 718.5 725.4
Short-term debt..................... 66.7 66.7 -- --
Long-term debt...................... 232.9 232.9 -- --
Other liabilities................... 334.5 325.2 323.7 347.1
-------- -------- -------- --------
Total liabilities................. 4,234.9 4,205.1 3,870.5 3,950.7
-------- -------- -------- --------
Common stock........................ 304.5 304.5 387.5 387.5
Retained earnings................... 941.0 867.9 1,069.4 1,090.1
Unrealized appreciation
(depreciation) of investment
securities, net of tax............. 171.5 163.6 211.8 (9.0)
-------- -------- -------- --------
Total stockholders' equity........ 1,417.0 1,336.0 1,668.7 1,468.6
-------- -------- -------- --------
Total liabilities and
stockholders' equity............. $5,651.9 $5,541.1 $5,539.2 $5,419.3
======== ======== ======== ========
OTHER PROPERTY AND CASUALTY DATA--STATUTORY BASIS:
Policyholders' surplus(1)............ $1,092.9 $ 966.0 $1,011.0 $ 980.7
Ratio of net written premiums to
policyholders' surplus(2)........... 1.5x 1.7x 1.7x 1.7x
Combined ratio(3).................... 102.9% 105.8% 103.6% 104.6%
Industry combined ratio(4)........... N/A 105.8% 106.5% 108.4%
</TABLE>
- --------
(1) Excludes surplus of American States Life Insurance Company of $60.6,
$57.4, $51.7 and $61.2 at June 30, 1997 and December 31, 1996, 1995 and
1994, respectively.

(3) The combined ratio is an industry measurement of the results of property
and casualty insurance underwriting. This ratio is the sum of the loss and
LAE ratio, the underwriting expense ratio and, where applicable, the ratio
of dividends to policyholders to net earned premiums. A combined ratio
under 100% generally indicates an underwriting profit; a combined ratio
over 100% generally indicates an underwriting loss.

(4)Source: A.M. Best; data for 1997 are not yet available.

10
<PAGE>

UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

The following unaudited pro forma combined condensed statements of income of
the Company for the six months ended June 30, 1997 and for the year ended
December 31, 1996 present results for the Company as if the Acquisition, the
Offerings and the other financings consummated by the Company in connection
with the Acquisition (including the Related Financings, as hereinafter
defined) had occurred at January 1, 1996. See "Capitalization." The
accompanying unaudited pro forma combined condensed balance sheet as of June
30, 1997 gives effect to the Acquisition, the Offerings and the other
financings consummated by the Company in connection with the Acquisition
(including the Related Financings) as if they had occurred as of June 30,
1997. The unaudited pro forma combined condensed financial statements do not
purport to represent the Company's financial position or the operating results
that would have been achieved had the Acquisition been consummated as of the
dates indicated and should not be construed as projecting the Company's future
financial position or operating results. The unaudited pro forma combined
condensed financial statements do not reflect any projected revenue increases
or cost savings. The pro forma adjustments are based on available information
and certain assumptions that the Company currently believes are reasonable
under the circumstances.

The unaudited pro forma combined condensed financial statements should be
read in conjunction with the accompanying notes thereto, the historical
consolidated financial statements of SAFECO as of and for the year ended
December 31, 1996 and the six months ended June 30, 1997 and the historical
consolidated financial statements of American States as of and for the year
ended December 31, 1996 and the six months ended June 30, 1997, in each case
incorporated by reference in this Prospectus. See "Incorporation of Certain
Documents by Reference."

The pro forma adjustments are applied to the historical financial statements
to account for, among other things, the Acquisition using the purchase method
of accounting. Under purchase accounting, the total purchase cost for the
Acquisition has been allocated to the assets and liabilities of American
States based on their fair values. Allocations are subject to valuations as of
the date of the Acquisition based on appraisals and other studies which are
not yet completed. Accordingly, the final allocations will be different from
the amounts reflected herein. Although the final allocations will differ, the
unaudited pro forma combined condensed financial statements reflect
management's best estimates based on currently available information as of the
date of this Prospectus.

As part of the Acquisition, SAFECO and Lincoln National Corporation
("Lincoln National"), as the majority shareholder of American States, jointly
elected to treat the purchase of American States by SAFECO as an asset
acquisition for federal income tax purposes pursuant to Section 338(h)(10) of
the Internal Revenue Code of 1986, as amended. This election allows the
Company to deduct the amortization of goodwill recorded in the Acquisition,
thereby significantly improving the Company's future cash flows.

11
<PAGE>

PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JUNE 30, 1997 (UNAUDITED)

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------- ADJUSTMENTS
AMERICAN INCREASE NOTE PRO FORMA
SAFECO STATES (DECREASE) REFERENCE COMBINED
--------- -------- ----------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments:
Fixed maturities
available-for-sale, at
market value............ $12,238.2 $3,787.6 $(600.0) (a) $15,425.8
Fixed maturities held-to-
maturity, at amortized
cost.................... 2,698.1 -- 2,698.1
Marketable equity
securities, at market
value................... 1,501.1 460.6 1,961.7
Mortgage loans........... 460.3 21.9 482.2
Real estate.............. 614.6 -- 614.6
Short-term investments... 110.1 74.2 184.3
Other invested assets.... 59.4 39.4 98.8
--------- -------- ------- --- ---------
Total investments....... 17,681.8 4,383.7 (600.0) 21,465.5
Cash..................... 80.5 19.3 (42.0) (b) 57.8
Accrued investment
income.................. 247.6 64.9 312.5
Finance receivables...... 913.8 -- 913.8
Premiums and other
service fees receivable. 486.9 482.8 969.7
Reinsurance recoverables. 129.9 175.1 305.0
Deferred policy
acquisition costs....... 411.6 212.3 623.9
Deferred federal income
taxes recoverable....... -- 121.1 102.5 (b) 0.0
(223.6) (b)
Land, buildings and
equipment for company
use..................... 171.7 31.8 203.5
Cost in excess of net
assets of acquired
subsidiaries............ 41.1 96.1 (96.1) (b) 1,525.1
1,484.0 (b)
Other assets............. 223.9 64.8 288.7
Separate account assets.. 662.2 -- 662.2
--------- -------- ------- ---------
Total assets............ $21,051.0 $5,651.9 $ 624.8 $27,327.7
========= ======== ======= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Losses, adjustment
expense and future
policy benefits......... $ 2,128.8 $2,854.7 (c) $ 4,983.5
Unearned premiums........ 981.7 746.1 1,727.8
Funds held under deposit
contracts............... 10,402.8 -- 10,402.8
Short-term debt.......... 906.3 66.7 $ (66.7) (a) 1,613.3
707.0 (a)
Long-term debt........... 434.9 232.9 (232.9) (a) 634.9
200.0 (a)
Other liabilities........ 669.3 334.5 41.0 (b) 1,044.8
(d)
Current federal income
taxes payable........... 12.3 -- 12.3
Deferred federal income
taxes payable........... 482.1 -- (223.6) (b) 258.5
Separate account
liabilities............. 662.2 -- 662.2
--------- -------- ------- ---------
Total liabilities....... 16,680.4 4,234.9 424.8 21,340.1
Company-obligated,
mandatorily redeemable
capital securities of
subsidiary trusts
holding solely junior
subordinated debentures
of the Company.......... 990.0 (a) 990.0
--------- -------- ------- ---------
Common stock............. 227.9 304.5 (304.5) (e) 854.9
627.0 (a)
Retained earnings........ 3,190.4 941.0 (941.0) (e) 3,190.4
Unrealized appreciation
of investment
securities, net of tax.. 956.6 171.5 (171.5) (e) 956.6
Unrealized loss from
foreign currency
translation, net of tax. (4.3) -- (4.3)
--------- -------- ------- ---------
Total stockholders'
equity................. 4,370.6 1,417.0 (790.0) 4,997.6
--------- -------- ------- ---------
Total liabilities and
stockholders' equity... $21,051.0 $5,651.9 $ 624.8 $27,327.7
========= ======== ======= =========
</TABLE>

12
<PAGE>

PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------ ADJUSTMENTS PRO
AMERICAN INCREASE NOTE FORMA
SAFECO STATES (DECREASE) REFERENCE COMBINED
-------- -------- ----------- --------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Insurance:
Property and casualty
earned premiums.......... $1,176.4 $ 824.1 $2,000.5
Life and health premiums
and other revenues....... 134.9 29.0 163.9
-------- -------- --------
Total.................... 1,311.3 853.1 2,164.4
Real estate............... 32.7 -- 32.7
Finance................... 41.0 -- 41.0
Asset management.......... 11.7 -- 11.7
Other..................... 25.1 6.7 31.8
Net investment income..... 583.7 133.0 $(16.2) (f) 700.5
Realized investment gain.. 40.8 19.4 60.2
-------- -------- ------ --------
Total revenues........... 2,046.3 1,012.2 (16.2) 3,042.3
-------- -------- ------ --------
EXPENSES:
Losses, adjustment expense
and policy benefits...... 1,210.3 620.9 1,831.2
Commissions............... 226.6 148.3 374.9
Interest.................. 37.4 10.4 18.1 (f) 65.9
Other..................... 284.9 122.4 24.8 (f) 431.3
(0.8) (f)
Amortization of deferred
policy acquisition costs. 223.1 169.0 392.1
Deferral of policy
acquisition costs........ (236.1) (178.1) (414.2)
-------- -------- ------ --------
Total expenses........... 1,746.2 892.9 42.1 2,681.2
-------- -------- ------ --------
Income before income taxes. 300.1 119.3 (58.3) 361.1
Provision (benefit) for
federal income taxes...... 71.4 21.0 (13.2) (g) 79.2
-------- -------- ------ --------
Income before distributions
on capital securities..... 228.7 98.3 (45.1) 281.9
Distributions on capital
securities, net of tax.... -- -- 26.8 (h) 26.8
-------- -------- ------ --------
Net income available to
common stockholders....... $ 228.7 $ 98.3 $(71.9) $ 255.1
======== ======== ====== ========
Net income per share of
common stock:
Income before realized
gain..................... $ 1.60 $ 1.55
Realized gain............. .21 .27
-------- --------
Net income per share....... $ 1.81 $ 1.82
======== ========
Weighted average shares
outstanding............... 126.3 (i) 140.1
</TABLE>

13
<PAGE>

PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------ ADJUSTMENTS PRO
AMERICAN INCREASE NOTE FORMA
SAFECO STATES (DECREASE) REFERENCE COMBINED
-------- -------- ----------- --------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Insurance:
Property and casualty
earned premiums.......... $2,275.4 $1,617.2 $3,892.6
Life and health premiums
and other revenues....... 265.9 56.9 322.8
-------- -------- --------
Total.................... 2,541.3 1,674.1 4,215.4
Real estate............... 79.9 -- 79.9
Finance................... 75.7 -- 75.7
Asset management.......... 23.2 -- 23.2
Other..................... 38.5 -- 38.5
Net investment income..... 1,116.7 274.3 $ (32.4) (f) 1,358.6
Realized investment gain.. 90.1 35.6 125.7
-------- -------- -------- --------
Total revenues........... 3,965.4 1,984.0 (32.4) 5,917.0
-------- -------- -------- --------
EXPENSES:
Losses, adjustment expense
and policy benefits...... 2,362.7 1,248.9 3,611.6
Commissions............... 415.7 283.0 698.7
Interest.................. 72.4 12.4 36.1 (f) 120.9
Other..................... 552.6 243.8 49.5 (f) 844.4
(1.5) (f)
Amortization of deferred
policy acquisition costs. 426.9 338.0 764.9
Deferral of policy
acquisition costs........ (443.4) (337.8) (781.2)
-------- -------- -------- --------
Total expenses........... 3,386.9 1,788.3 84.1 5,259.3
-------- -------- -------- --------
Income before income taxes. 578.5 195.7 (116.5) 657.7
Provision (benefit) for
federal income taxes...... 139.5 26.0 (26.3) (g) 139.2
-------- -------- -------- --------
Income before distributions
on capital securities..... 439.0 169.7 (90.2) 518.5
Distributions on capital
securities, net of tax.... -- -- 53.6 (h) 53.6
-------- -------- -------- --------
Net income available to
common stockholders....... $ 439.0 $ 169.7 $ (143.8) $ 464.9
======== ======== ======== ========
Net income per share of
common stock:
Income before realized
gain..................... $ 3.02 $ 2.73
Realized gain............. .46 .59
-------- --------
Net income per share....... $ 3.48 $ 3.32
======== ========
Weighted average shares
outstanding............... 126.1 (i) 139.9
</TABLE>

14
<PAGE>

NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)

(a) The following adjustments reflect the funding of the Acquisition:

<TABLE>
<S> <C>
SOURCES:
Proceeds from issuance of commercial paper (after application of
the net proceeds of the Offerings)............................. $ 707.0
Proceeds from issuance of 6 7/8% Notes due 2007 (the "Senior
Notes")........................................................ 200.0
Net proceeds from issuance of capital securities................ 990.0
Net proceeds from issuance of common stock...................... 627.0
Dividend from SAFECO's property and casualty subsidiaries....... 600.0
--------
Total......................................................... $3,124.0
========
USES:
Purchase price of outstanding shares of common stock of American
States (60,093,615 shares x $47)............................... $2,824.4
Retirement of American States debt.............................. 299.6
--------
Total......................................................... $3,124.0
========

(b) The following adjustments result from the allocation of the purchase
price for the Acquisition based on the fair value of the net assets acquired:

<CAPTION>
DEBIT
(CREDIT)
--------
<S> <C>
ASSETS:
Record the direct out-of-pocket costs of the Acquisition........ $ (42.0)
Adjustment to reflect the deferred tax benefit of purchase
accounting adjustments......................................... 102.5
Net American States' deferred tax asset against SAFECO's
deferred tax liability......................................... (223.6)
Eliminate American States' goodwill............................. (96.1)
Record the excess of the cost to acquire American States over
the fair value of net assets acquired (goodwill)............... 1,484.0
LIABILITIES:
Adjustments to other liabilities:
Record lease-related fair value adjustments.................... $ (18.0)
Record the estimated liability for change of control and other
costs for certain executive officers and employees of American
States........................................................ (30.0)
Increase liability for pension obligations..................... (9.6)
Reduce liability for postretirement obligations................ 16.6
--------
Total adjustments to other liabilities........................ $ (41.0)
========
</TABLE>

(c) Adjustments of unpaid loss and loss adjustment expense resulting from
the Company's evaluation of American States' reserves will be recorded in
operations in the period determined. The Company expects to record $40.0 of
additional reserves in the fourth quarter of 1997, which will result in an
after-tax charge of $26.0 for such quarter.

(d) The Company expects to accrue in the fourth quarter of 1997 an estimated
liability of $23.0 ($15.0 after-tax) for first-year incentive commissions on
certain American States' personal lines business.

(Continued on next page)

15
<PAGE>

(Continued from previous page)

(e) Adjustment to eliminate American States' equity:

<TABLE>
<S> <C>
Common stock...................................................... $(304.5)
Retained earnings................................................. (941.0)
Unrealized gain................................................... (171.5)
</TABLE>

(f) The following adjustments reflect the annual income statement effect of
the pro forma adjustments. The income statement adjustments for the six-month
period ended June 30, 1997 are equal to one-half of the annual amounts
presented:

<TABLE>
<CAPTION>
ANNUAL INCREASE
(DECREASE) IN
PRETAX INCOME
---------------
<S> <C>
Investment income:
Loss of investment income due to dividend from SAFECO's
property and casualty subsidiaries ($600.0 x 5.4%, rate
based on market yields for tax-exempt securities at
August 4, 1997).......................................... $ (32.4)
Interest expense:
Retire existing American States debt ($100.0 x 7 1/8%,
$200.0 x 6.7%)........................................... $ 20.5
Commercial paper interest expense ($707.0 x 6.0%)......... (42.4)
Senior Notes interest expense ($200.0 x 7.1%)............. (14.2)
-------
Total interest expense effect........................... (36.1)
-------
Record the amortization of goodwill over 30 years........... (49.5)
Record amortization of unfavorable lease obligation......... 1.5
-------
Total pretax income effect.............................. $(116.5)
=======
(g) Record income tax expense (benefit) of the pro forma
adjustments............................................. $ (26.3)
(h) Distributions on capital securities, net of tax
($1,000 x 8.25% = 82.5) x (100% - 35%).................. $ 53.6
</TABLE>

The interest rate on the Senior Notes and the distribution rate on the
capital securities are based on effective cost, including the cost of an
interest rate lock, of the Senior Notes and $850 aggregate liquidation value
of 8.072% capital securities (the "8.072% Capital Securities") issued on
July 15, 1997. The Company, through a subsidiary trust, may issue an
additional $150 aggregate liquidation amount of capital securities in 1997.
The interest rate on commercial paper is based on current market rates.

(i) Reflects the issuance of shares of Common Stock assuming gross proceeds
of $650 and an offering price of $47.125 per share.

16
<PAGE>

RISK FACTORS

The Company identifies the following important factors which could cause
actual results to differ materially from any results that might be projected,
forecast, estimated or budgeted by the Company as forward-looking information.
All such factors are difficult to predict and the majority are beyond the
control of the Company. Prospective purchasers of the Common Stock should
carefully review the information contained elsewhere in this Prospectus and
should particularly consider the information stated below. See "Forward-
Looking Information."

FLUCTUATION AND UNCERTAINTY OF PROPERTY AND CASUALTY INSURANCE INDUSTRY
RESULTS

The results of companies in the property and casualty insurance industry
historically have been subject to significant fluctuations and uncertainties.
The industry's profitability can be affected significantly by volatile and
unpredictable developments (including catastrophes); changes in reserves
resulting from the general claims and legal environments as different types of
claims arise and judicial interpretations relating to the scope of insurers'
liability develop; fluctuations in interest rates and other changes in the
investment environment, which affect returns on invested capital; and
inflationary pressures that affect the size of losses. The demand for property
and casualty insurance can also vary significantly, generally rising as the
overall level of economic activity increases and falling as such activity
decreases. The property and casualty insurance industry historically has been
cyclical, and the commercial lines business has been in a soft market since
the late 1980s, primarily due to premium rate competition, which has resulted
in lower underwriting profitability. The Company's results of operations may
be adversely affected by these fluctuations. See "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

CATASTROPHE LOSSES

Property and casualty insurers are subject to claims arising out of
catastrophes that may have a significant effect on their results of operations
and financial condition. Losses caused by catastrophes have had a significant
impact on the Company's results. Catastrophes can be caused by various events,
including hurricanes, windstorms, earthquakes, hailstorms, explosions, severe
winter weather and fires. The incidence and severity of catastrophes are
inherently unpredictable. The extent of losses from a catastrophe is a
function of both the total amount of insured exposure in the area affected by
the event and the severity of the event. Most catastrophes are restricted to
small geographic areas; however, hurricanes and earthquakes may produce
significant damage in large, heavily populated areas. Although catastrophes
can cause losses in a variety of the Company's property and casualty lines,
most of the Company's past catastrophe-related claims have related to
homeowners and other personal lines coverage. Insurance companies are not
permitted to reserve for a catastrophe until it has occurred. Subject to
restrictions imposed by insurance regulatory authorities and as dictated by
business considerations, the Company attempts to limit its exposure to
acceptable risk levels through selective underwriting practices, catastrophe
reinsurance and higher deductibles on earthquake coverage in certain states.
There can be no assurance, however, that such attempts will be successful. It
is therefore possible that a catastrophic event or multiple catastrophic
events could have a material adverse effect on the Company. See "Business--
Property and Casualty Loss Reserves" and "--Reinsurance," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
SAFECO Results of Operations" and "--American States Results of Operations."

PROPERTY AND CASUALTY LOSS RESERVES

The Company maintains property and casualty loss reserves to cover the
estimated liability for unpaid losses and loss adjustment expenses for
reported and unreported claims incurred as of the end of each accounting
period. Reserves do not represent an exact calculation of liability. Rather,
reserves represent estimates of what the Company expects the ultimate
settlement and administration of claims will cost. These estimates, which
generally involve actuarial projections, are based on the Company's assessment
of facts and circumstances then known, as well as estimates of future trends
in claims severity, frequency, judicial theories of liability and other

17
<PAGE>

factors. These variables are affected by both internal and external events,
such as changes in claims handling procedures, inflation, judicial trends and
legislative changes. Many of these items are not directly quantifiable,
particularly on a prospective basis. Additionally, there may be a significant
reporting lag between the occurrence of the insured event and the time it is
reported to the Company. The inherent uncertainties of estimating reserves are
greater for certain types of property and casualty liabilities, particularly
for environmental, asbestos and construction defect claims where the
technological, judicial and political considerations affecting these types of
claims are subject to change and long periods of time may elapse before a
definitive determination of liability is made. Reserve estimates are
continually refined in a regular and ongoing process as experience develops
and further claims are reported and settled. Adjustments to reserves are
reflected in the results of the periods in which such estimates are changed.
Because setting reserves is inherently uncertain, there can be no assurance
that current reserves will prove adequate for the Company in light of
subsequent actual experience. See "--Insurance Regulation" and "Business--
Property and Casualty Loss Reserves--Environmental and Asbestos Claims."

INTEGRATION; ACHIEVEMENT OF REVENUE ENHANCEMENTS AND EXPENSE SAVINGS

The pro forma combined results of operations of SAFECO and American States
do not necessarily indicate the Company's future results. Since SAFECO and
American States both engage in the property and casualty insurance business
and write many of the same lines of insurance throughout the United States, it
is possible that, despite the differences in geographic and product line
concentrations of SAFECO and American States, the Company could experience a
loss of customers and agents as a result of the Acquisition. Management has
estimated that capitalizing on cross-selling opportunities and capturing a
larger share of business generated by existing agents will produce incremental
annual revenues that will increase to approximately $170 million for the year
2000. In addition, management is working to integrate the operations of SAFECO
and American States and to achieve significant expense savings by eliminating
redundant expenses and facilities, streamlining corporate infrastructure and
improving efficiency. Management has identified annual cost savings from the
Acquisition that will increase to approximately $80 million for the year 2000.
There can be no assurance that the Company will generate the projected
revenues or achieve the projected savings. See "Prospectus Summary--Strategy."

INSURANCE REGULATION

The Company and its insurance subsidiaries are subject to extensive
regulation and supervision. This regulation is generally designed to protect
the interests of policyholders rather than stockholders and other investors.
Such regulation, generally administered by a department of insurance in each
state in which the insurance subsidiaries do business, relates to, among other
things, the standards of solvency that must be met and maintained; the
licensing of insurers and their agents; the nature of and limitations on
investments; the ability to withdraw from the state; the approval of premium
rates; restrictions on the size of risks that may be insured under a single
policy; reserves and provisions for unearned premiums, losses and other
purposes; deposits of securities for the benefit of policyholders; approval of
policy forms; and the regulation of market conduct, including underwriting and
claims practices. State insurance departments also conduct periodic
examinations of the affairs of insurance companies and require the filing of
annual and other reports relating to the financial condition of insurance
companies, holding company issues and other matters. The Company's insurance
subsidiaries are collectively licensed to transact insurance business in all
50 states and the District of Columbia. See "--Holding Company Structure and
Dividend and Distribution Restrictions."

An insurance company's capacity for premium growth is in part a function of
the amount of its statutory surplus. Maintaining appropriate levels of
statutory surplus is considered important by state insurance regulatory
authorities and the private agencies that rate insurers' claims-paying
abilities and financial strength. Failure to maintain certain levels of
statutory surplus could result in increased regulatory scrutiny, action by
state regulatory authorities or a downgrade by rating agencies.

18
<PAGE>

The NAIC has adopted a system of assessing minimum capital adequacy which is
applicable to the Company's insurance subsidiaries. This system, known as
risk-based capital ("RBC"), develops a risk profile of the insurer by
comparing its adjusted surplus to its required surplus in order to determine
whether the insurer merits further regulatory action. At June 30, 1997, the
RBC ratios of the Company's insurance subsidiaries were substantially in
excess of levels that would require regulatory action.

In recent years the state insurance regulatory framework has come under
increased federal scrutiny, and certain state legislatures have considered or
enacted laws that altered and, in many cases, increased state authority to
regulate insurance companies and insurance holding companies. Further, the
NAIC and state insurance regulators are reexamining existing laws and
regulations, specifically focusing on investment laws and regulations,
modifications to holding company regulations, codification of statutory
accounting practices, RBC guidelines, interpretations of existing laws and the
development of new laws. Finally, various consumer movements have exerted
pressure on elected officials to regulate or roll back property and casualty
insurance rates. While most of these provisions have failed to become law,
these initiatives may continue as legislators and regulators try to respond to
availability and affordability concerns. The Company cannot predict with
certainty the effect any proposed or future legislation or NAIC initiative may
have on the conduct of its business, its financial condition or its results of
operations.

All 50 states of the United States and the District of Columbia have laws
requiring all property and casualty insurance companies doing business within
the jurisdiction to participate in guaranty funds or associations, which are
organized to pay contractual obligations under insurance policies issued by
impaired or insolvent insurance companies and are funded by assessments based
on a proportionate share of certain premiums written by such companies. These
assessments may increase in the future depending on the rate of insurance
company insolvencies. In addition, as a condition to the ability to conduct
business in various states, the Company's insurance subsidiaries are required
to participate in mandatory property and casualty shared market mechanisms or
pooling arrangements, which provide various types of insurance coverage to
individuals or other entities that otherwise are unable to purchase such
coverage voluntarily from private insurers. The underwriting results of these
pools traditionally have been unprofitable.

COMPETITION

The insurance business is highly competitive. Competition is based on many
factors, including the perceived overall financial strength of the insurer,
pricing and other terms and conditions of products offered, levels of customer
service (including the speed with which claims are paid) and experience in the
business. Some of the insurers that compete with the Company have greater
financial resources or lower cost structures than the Company. The Company
also competes with insurance companies that use captive agents or salaried
employees to sell their products. Because these companies generally do not pay
commissions, they may be able to obtain business at a lower cost than the
Company. In addition, the Company competes with organizations offering
alternative forms of risk protection, including self-insurance and large-
deductible programs. Finally, in recent years marketwide premium rates have
leveled or been reduced in certain lines of business in which the Company
competes.

HOLDING COMPANY STRUCTURE AND DIVIDEND AND DISTRIBUTION RESTRICTIONS

The Company's principal assets are the shares of capital stock of its
insurance subsidiaries. The Company relies primarily on dividends from its
subsidiaries to meet its obligations for paying principal and interest on
outstanding debt obligations, distributions on capital securities, dividends
to stockholders and corporate expenses. Except to the extent that a holding
company may itself be a creditor with recognized claims against its
subsidiaries, claims of creditors of such subsidiaries, including
policyholders, have priority with respect to the assets and earnings of such
subsidiaries over the claims of creditors of the holding company. In the event
of the insolvency, liquidation or other reorganization of any of the Company's
subsidiaries, the creditors and stockholders of the Company will have no right
to proceed against the assets of such subsidiary or to cause the liquidation,
bankruptcy or winding-up of such subsidiary under applicable liquidation,
bankruptcy or winding-up

19
<PAGE>

laws. The applicable insurance laws of the domiciliary jurisdiction of each of
the Company's insurance subsidiaries would govern any proceedings relating to
such insurance subsidiary, and the relevant insurance authority would act as a
liquidator or rehabilitator for such subsidiary. Both creditors and
policyholders of such subsidiary would be entitled to payment in full from
such assets before the Company, as a stockholder, would be entitled to receive
any distribution therefrom.

The payment of dividends to the Company by its insurance subsidiaries is
subject to limitations imposed by the insurance laws of the states in which
such subsidiaries are domiciled or deemed to be commercially domiciled, which
are Washington, Indiana, California, Missouri, Illinois, Texas, Pennsylvania
and New York. It is generally the case that unless an insurance subsidiary
receives advance approval from the Insurance Commissioner in its state of
domicile, it may not pay a dividend which, together with any other dividends
paid within the prior 12-month period, would exceed the greater of (i) 10% of
such subsidiary's surplus as of the prior calendar year end and (ii) the net
income from such subsidiary's operations for the prior calendar year. In the
case of a Missouri-domiciled property and casualty insurance company, in the
absence of advance approval, dividends cannot be paid if, together with any
other dividends paid within the prior 12-month period, such aggregate
dividends would exceed the insurance company's prior year investment income.
Regulatory authorities may, from time to time, impose other restrictions which
may affect the actual amounts available for dividends. Based on the applicable
dividend restrictions, the annual limit on the amount of dividends available
for payment by the Company's insurance subsidiaries for 1997 without
regulatory approval is $665 million. Three of SAFECO's insurance subsidiaries
received approval in July 1997 to pay dividends totaling $600 million to
SAFECO to fund a portion of the purchase price for the Acquisition.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 14,000,000 shares of
Common Stock offered hereby at an assumed offering price of $ per share
(after deducting the underwriting discounts and commissions and estimated
offering expenses) will be approximately $ (approximately
$ if the U.S. Underwriters' over-allotment option is exercised in
full). The Company intends to use the net proceeds from the sale of the Common
Stock to retire an equal principal amount of % commercial paper maturing
, 199 . The commercial paper was sold by the Company in order to
finance a portion of the purchase price for the Acquisition.

20
<PAGE>

CAPITALIZATION

The following table sets forth the unaudited consolidated capitalization of
SAFECO as of June 30, 1997, as adjusted to reflect the consummation of the
Acquisition and the issuance of the Senior Notes, the 8.072% Capital
Securities, an additional $150 million aggregate liquidation amount of capital
securities and $1,334 million of commercial paper (collectively, the "Related
Financings"), and as further adjusted to reflect the Offerings and the
application of the net proceeds therefrom as described in "Use of Proceeds."
The information presented below should be read in conjunction with the
historical consolidated financial statements of SAFECO and the related notes
thereto, the historical consolidated financial statements of American States
and the related notes thereto and the unaudited pro forma combined condensed
financial statements of the Company, included elsewhere in this Prospectus or
incorporated by reference herein from the SAFECO Annual Report and the
American States Annual Report, as the case may be.

<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------------------
AS ADJUSTED
FOR THE ACQUISITION AS ADJUSTED
SAFECO AND THE RELATED FOR THE
ACTUAL FINANCINGS OFFERINGS
-------- ------------------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Credit company debt................... $ 907.7 $ 907.7 $ 907.7
Commercial paper...................... -- 1,334.0
7 7/8% Notes due 2005................. 200.0 200.0 200.0
Senior Notes.......................... -- 200.0 200.0
Other notes and mortgages............. 233.5 233.5 233.5
-------- -------- --------
Total debt........................ 1,341.2 2,875.2
-------- -------- --------
Company-obligated, mandatorily
redeemable capital securities of
subsidiary trusts holding solely
junior subordinated debentures of the
Company.............................. -- 990.0 990.0
-------- -------- --------
Stockholders' equity:
Preferred Stock, no par value;
10,000,000 shares authorized; no
shares issued and outstanding...... -- -- --
Common Stock, no par value;
300,000,000 shares authorized;
126,343,401 shares issued and
outstanding (actual); 140,343,401
shares issued and outstanding (as
adjusted for the Offerings)(1)..... 227.9 227.9
Retained earnings................... 3,190.4 3,190.4 3,190.4
Unrealized appreciation............. 952.3 952.3 952.3
-------- -------- --------
Total stockholders' equity........ 4,370.6 4,370.6
-------- -------- --------
Total capitalization............ $5,711.8 $8,235.8 $8,235.8
======== ======== ========
</TABLE>
- --------
(1) Excludes 2,074,930 shares issuable upon exercise of employee stock options
outstanding at June 30, 1997.

21
<PAGE>

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Common Stock trades under the symbol "SAFC" on Nasdaq. The following
table sets forth, for the periods indicated, the high and low closing price
for the Common Stock as reported by Nasdaq and the dividends paid by SAFECO
with respect to the prior quarter.

<TABLE>
<CAPTION>
PRICE PER
SHARE OF
COMMON STOCK DIVIDENDS
------------- PAID PER
HIGH LOW SHARE
------ ------ ---------
<S> <C> <C> <C>
1995
1st Quarter....................................... $27.94 $25.25 $0.245
2nd Quarter....................................... 29.75 27.25 0.245
3rd Quarter....................................... 33.56 28.06 0.265
4th Quarter....................................... 37.63 31.25 0.265
1996
1st Quarter....................................... $39.19 $33.13 $0.265
2nd Quarter....................................... 35.38 30.88 0.265
3rd Quarter....................................... 35.50 32.00 0.290
4th Quarter....................................... 41.63 35.19 0.290
1997
1st Quarter....................................... $43.06 $36.75 $0.290
2nd Quarter....................................... 48.91 38.75 0.290
3rd Quarter (through , 1997).............. 0.320
</TABLE>

On , 1997, the last sale price of the Common Stock as reported by
Nasdaq was $ per share. As of , 1997, there were approximately
holders of record of the Common Stock.

SAFECO has paid cash dividends to stockholders continuously since 1933. The
declaration and payment of future dividends to holders of the Common Stock
will be at the discretion of the Company's Board of Directors and will depend
upon many factors, including the Company's financial condition, earnings,
capital requirements of its operating subsidiaries, legal requirements,
regulatory constraints and such other factors as the Board of Directors deems
relevant. See "Risk Factors--Holding Company Structure and Dividend and
Distribution Restrictions."

22
<PAGE>

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

The SAFECO results of operations presented in this section reflect the
consolidated results of operations of SAFECO and its subsidiaries for the
periods presented. The American States results of operations reflect the
consolidated results of operations of American States and its subsidiaries for
the periods presented. The section entitled "Combined Liquidity and Capital
Resources" presents the financial position of the Company on a combined basis,
after giving effect to the Acquisition and the Related Financings. The
information set forth below should be read in conjunction with the historical
consolidated financial statements of SAFECO and the notes thereto and the
historical consolidated financial statements of American States and the notes
thereto, each incorporated by reference into this Prospectus from the SAFECO
Annual Report and the SAFECO Quarterly Report on Form 10-Q for the six months
ended June 30, 1997 and the American States Annual Report and the American
States Quarterly Report on Form 10-Q for the six months ended June 30, 1997,
as the case may be. The information set forth below summarizes in certain
respects, and should be read in conjunction with, the information contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in such documents incorporated by reference into this
Prospectus. See "Incorporation of Certain Documents by Reference."

SAFECO RESULTS OF OPERATIONS

The following summary financial information sets forth the contributions of
each business segment to the consolidated net income of SAFECO:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ ----------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND
RATIOS)
<S> <C> <C> <C> <C> <C>
Income (loss) before realized
gain and income taxes:
Property and casualty
insurance:
Underwriting gain (loss).... $ 30,872 $ 6,482 $ 38,456 $ 6,348 $(77,345)
Net investment income....... 139,477 140,777 281,580 291,450 283,481
-------- -------- -------- -------- --------
Total property and
casualty.................. 170,349 147,259 320,036 297,798 206,136
Life and health insurance... 72,842 69,311 136,681 135,573 131,015
Real estate................. 5,507 6,509 13,052 9,060 10,152
Credit...................... 9,837 8,768 19,081 13,300 10,761
Asset management............ 2,448 3,784 7,610 6,897 6,351
Corporate................... (1,623) (3,655) (8,049) (13,099) (13,714)
-------- -------- -------- -------- --------
Total...................... 259,360 231,976 488,411 449,529 350,701
-------- -------- -------- -------- --------
Realized gain (loss), before
tax, from:
Security investments........ 40,733 52,888 92,661 65,089 39,214
Real estate investments..... 28 (42) (2,611) (818) (174)
-------- -------- -------- -------- --------
Total...................... 40,761 52,846 90,050 64,271 39,040
-------- -------- -------- -------- --------
Income before income taxes... 300,121 284,822 578,461 513,800 389,741
-------- -------- -------- -------- --------
Provision for income taxes
on:
Income before realized gain. 58,102 49,892 108,194 92,122 62,249
Realized gain............... 13,282 18,244 31,316 22,719 13,118
-------- -------- -------- -------- --------
Total...................... 71,384 68,136 139,510 114,841 75,367
-------- -------- -------- -------- --------
Net income................... $228,737 $216,686 $438,951 $398,959 $314,374
======== ======== ======== ======== ========
Net income per share of
common stock:
Income before realized gain. $ 1.60 $ 1.45 $ 3.02 $ 2.84 $ 2.29
Realized gain............... .21 .27 .46 .33 .21
-------- -------- -------- -------- --------
Net income per share......... $ 1.81 $ 1.72 $ 3.48 $ 3.17 $ 2.50
======== ======== ======== ======== ========
Property and casualty ratios
(statutory basis):
Loss and LAE................ 68.1% 70.6% 69.5% 70.6% 74.4%
Underwriting expense........ 28.7 28.1 28.6 28.3 28.1
Policyholder dividends...... 0.8 0.7 0.7 0.7 1.1
-------- -------- -------- -------- --------
Combined ratio.............. 97.6% 99.4% 98.8% 99.6% 103.6%
======== ======== ======== ======== ========
</TABLE>

23
<PAGE>

SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996

Net income for the first six months of 1997 was $228.7 million, or $1.81 per
share, compared to $1.72 per share for the comparable period of 1996. If
realized gain from investments is excluded, income was $1.60 per share in the
1997 period, compared to $1.45 in the 1996 period.

Property and Casualty Insurance

Property and casualty operations for the first six months of 1997 produced
pretax income of $170.3 million before realized gain from investments,
compared to $147.3 million for the first six months of 1996. Premiums written
for the first six months of 1997 increased 5% over a year ago, with personal
lines up 6%, commercial lines up 5% and surety down 4%. SAFECO showed an
underwriting profit of $30.9 million for the first half of 1997, compared to
$6.5 million for the same period last year. The combined loss and expense
ratio was 97.4% for the first six months of 1997, compared to 99.4% in the
same period last year. Investment income was $139.5 million for the first six
months of 1997, down 1% from the comparable period in 1996, primarily as a
result of the relatively lower interest rate environment.

Personal automobile, SAFECO's largest line, reported an underwriting profit
of $28.5 million for the first six months of 1997, compared to a profit of
$27.9 million for the first six months of 1996. The number of vehicles insured
at June 30, 1997 was 7% higher than at June 30, 1996. Average loss costs were
down slightly during the first six months of 1997 due to a decline in both the
frequency and severity of automobile bodily injury claims. Homeowners' results
improved to an underwriting loss of $15.6 million for the first six months of
1997, compared to a loss of $40.8 million for the first half of 1996.
Catastrophe losses for this line were $22 million, compared to $30 million for
the first six months of 1996. Other personal lines, which provide coverage for
earthquake, dwelling fire, inland marine and boats, produced an underwriting
profit of $9.7 million for the first six months of 1997, compared to a profit
of $8.5 million for the first six months last year.

For the first six months of 1997, commercial lines had an underwriting loss
of $3.3 million, operating at a combined ratio of 101.1%, compared to an
underwriting loss of $1.2 million for the first six months of 1996 and a
combined ratio of 100.4%. This strong performance relative to industry results
reflects target marketing initiatives, a focus on efficient operations and the
ability to deliver value-added service to customers. In addition, SAFECO
continues to maintain rate adequacy in the face of stiff price competition.
The profit for the surety line was $10.0 million for the first six months of
1997, compared to a profit of $11.6 million for the first six months last
year.

Life and Health Insurance

SAFECO's life and health companies produced a pretax profit, before realized
gain from investments, of $72.8 million for the first six months of 1997,
compared to $69.3 million for the same period last year. The annuity and
retirement services lines' combined six month earnings were $26.4 million for
the first six months of 1997, compared to $26.5 million for the first half of
1996. Competitive marketplace pressures have kept profit margins for the
annuity and retirement services lines relatively flat during the two reporting
periods. Combined assets under management for both lines of business totaled
$10.3 billion at June 30, 1997, up from $9.7 billion at 1996 year-end. Group
insurance profit was $6.8 million for the first six months of 1997, compared
to $6.0 million for the same period of 1996. Earnings from individual life
were $2.6 million for the first six months of 1997, compared to $2.8 million
for the comparable period of 1996.

Other Operations

Commercial lending and leasing through SAFECO Credit Company, Inc. produced
a record pretax profit of $9.8 million for the first six months of 1997,
compared to $8.8 million for the first six months of 1996. The results reflect
continuing portfolio growth, low write-off and delinquency experience and a
decreasing operating expense ratio. The pretax income from asset management
activities for the first six months of 1997 was $2.4 million, the same as last
year's results, after excluding a $1.4 million one-time gain recognized in
1996.

24
<PAGE>

The pretax income of SAFECO Properties, Inc. was $5.5 million for the first
six months of 1997, compared to $6.5 million for the same period of 1996. This
decrease was principally attributable to land sales not duplicated in 1997.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEARS ENDED DECEMBER 31, 1995 AND
1994

Property and Casualty Insurance

Gross written premiums increased 4.1% in 1996 due to a 4.8% increase in
personal lines, a 2.3% increase in commercial lines and a 3.1% increase in
surety. The 1996 growth in personal lines premiums resulted from increases in
both rates and policies in force. The number of vehicles insured increased
5.3% in 1996, compared to 1.8% in 1995 and 1.3% in 1994. The modest growth
rates in 1995 and 1994 were caused primarily by rate increases. Continued
growth in the number of vehicles insured is expected in 1997, particularly in
target states. The number of homes insured increased 2.4% in 1996, 1.2% in
1995 and 2.7% in 1994. This moderate growth rate was due to rate increases in
recent years offset by SAFECO's moratorium on the writing of new homeowners
policies in California.

SAFECO's commercial lines premiums were affected in both 1996 and 1995 by
increased rate competition in workers' compensation, particularly in
California following rate deregulation, and increased rate competition in
commercial automobile. The increase in surety premiums in 1996 and 1995 was
primarily due to new commercial and contract accounts acquired.

Losses caused by catastrophes have had a significant impact on SAFECO's
results of operations. Catastrophe losses for all lines, net of reinsurance,
totaled $104 million, $143 million and $153 million in 1996, 1995 and 1994,
respectively. These losses related primarily to homeowners and other personal
lines coverages (which include earthquake coverages). The January 1994 Los
Angeles earthquake was a significant factor in the 1995 and 1994 catastrophe
losses. SAFECO's losses for all lines, before reinsurance, from the earthquake
were $267 million. Net of reinsurance, the losses were $132 million. Of this
net amount, $90 million was reflected in 1994 results and $42 million in 1995
results. The 1995 losses were due to subsequent increases in the estimated
cost of claims from the earthquake. The total 1994 amount charged to earnings
from the earthquake of $113 million included $23 million to reinstate
reinsurance coverage for a second catastrophe in the event it occurred in
1994.

SAFECO's strategy to reduce the impact of future catastrophe losses includes
maintaining a strong catastrophe reinsurance program and reducing exposures by
requiring higher policy deductibles on earthquake coverages in certain states.
SAFECO has restricted the writing of new property business in catastrophe-
prone states and has implemented geographic spread-of-risk strategies in
certain states such as Colorado, Texas and Florida to help mitigate the
effects of hailstorm, windstorm and hurricane losses. In addition, for the
last several years SAFECO has invested in earthquake and wind modeling
technologies which allow it to better monitor exposures.

Personal automobile produced pretax underwriting profits of $57.2 million,
$87.4 million and $43.4 million for the years ended December 31, 1996, 1995
and 1994, respectively. Average personal automobile rates decreased 1% in
1996, after increases of 3% in both 1995 and 1994. This trend reflects
increased competition in this line. Average loss costs (which reflect the
severity or cost of settling claims and the frequency of accidents) increased
by 3% in 1996 over 1995, after declining slightly in 1995 compared to 1994.
Due to the increasing competition in the personal automobile business, the
underwriting profit levels of 1996 and 1995 may be difficult to achieve in
1997.

The homeowners line produced pretax underwriting losses of $73.1 million,
$54.2 million and $33.6 million in 1996, 1995 and 1994, respectively. Losses
due to catastrophes continue to affect results for this line. Catastrophe
losses for homeowners totaled $69 million, $70 million and $36 million after
reinsurance in 1996, 1995 and 1994, respectively.

25
<PAGE>

In addition, weather-related losses not classified as catastrophes increased
by $16 million in 1996 over 1995. Some of the more significant catastrophe
losses in 1996 included $16 million from a late December storm in the Puget
Sound area, $7 million from windstorms and hailstorms in Kentucky and Illinois
in early May and $5 million from a windstorm in Arizona in August. Significant
losses in 1995 included $18 million from two late spring hailstorms in Texas,
$16 million from West Coast storms in December and $11 million from storms in
California in January and March. Average homeowners rates were increased 6%,
8% and 6% in 1996, 1995 and 1994, respectively. SAFECO's total homeowners
premiums increased 7%, 9% and 11% in 1996, 1995 and 1994, respectively, due to
rate increases, increases in the number of homes insured and continuing
efforts to increase homeowners insurance-to-value. Rate increases and
insurance-to-value efforts, combined with restricted writings, higher
deductibles and geographic spread of risk strategies in catastrophe-prone
areas, are being pursued to improve future results in homeowners. A continuing
increase in premiums per policy is expected in 1997 as a result of planned
rate increases and the ongoing insurance-to-value effort. Excluding the impact
of catastrophes, these measures are expected to improve homeowners results in
1997.

Other personal lines produced an underwriting gain of $20.2 million in 1996
and losses of $30.9 million in 1995 and $76.1 million in 1994. Coverages in
these lines include earthquake, dwelling fire, inland marine and boats. The
losses in 1995 and 1994 were due to the January 1994 Los Angeles earthquake.
Losses from the earthquake, net of reinsurance, included in these lines
totaled $40 million in 1995 and $105 million in 1994 (including a $23 million
reinsurance reinstatement premium). SAFECO suspended writing new homeowners,
dwelling fire and condominium policies in California in July 1994 because
California requires insurers to offer earthquake coverage in connection with
homeowners and other residential policies. SAFECO received approval of a new
earthquake mini-policy in California in September 1996 and upon renewal began
to convert the earthquake coverage in existing homeowners policies to the more
limited coverage provided by the mini-policy. SAFECO also modified its
earthquake policies in several other states to increase the deductibles.

Commercial operations produced a pretax underwriting gain of $1.6 million in
1996, compared to underwriting losses of $12.7 million and $22.5 million in
1995 and 1994, respectively. In a competitive commercial insurance market,
SAFECO has achieved some modest renewal price increases for the past three
years. The underwriting gain in 1996 was due mainly to improved results in the
commercial automobile line and the run-off of loss reserves related to certain
discontinued commercial liability coverages. This improvement was partly
offset by $16 million of commercial losses caused by the December 1996 Puget
Sound storm. The lower loss in 1995 compared to 1994 was due mainly to
improved results in the general liability line. Workers' compensation produced
underwriting gains in all three years. However, continued rate competition
resulting from certain states enacting workers' compensation reforms has
reduced premiums. This rate competition is expected to continue. The effects
of lower rates are expected to be partly offset by the beneficial impact of
these reforms. Overall, SAFECO's voluntary commercial lines' combined ratio
was 98.8%, 102.4% and 104.3% for 1996, 1995 and 1994, respectively. The
combined ratios for all three years compare favorably with the industry's and
resulted from continued disciplined risk selection, relatively limited impact
of weather-related losses and concentration of commercial writings in states
with favorable legal and regulatory climates.

The surety line produced pretax underwriting profits of $26.9 million, $22.3
million and $16.1 million for 1996, 1995 and 1994, respectively. Results in
both the contract and commercial lines were excellent in all three years. Due
to continuing intense competition in both lines, the record level of income in
1996 may be difficult to achieve in 1997.

Other insurance lines (primarily assigned risk and other state-mandated
plans) produced an underwriting gain of $5.7 million in 1996, compared to
losses of $5.5 million and $4.6 million in 1995 and 1994, respectively. The
improvement in 1996 was due to reduced losses in both commercial and personal
assigned risk business and to the continued depopulation of these plans in
many states.

26
<PAGE>

Life and Health Insurance

SAFECO's life and health companies produced a pretax profit, before realized
gains from investments, of $136.7 million in 1996, compared to $135.6 million
in 1995 and $131.0 million in 1994. The following table summarizes the profit
contributions of the life and health companies' major product lines:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Annuities................................. $ 27,738 $ 31,249 $ 28,363
Retirement services....................... 23,901 27,277 19,298
Group..................................... 12,606 13,329 23,129
Individual................................ 4,173 (1,272) 1,579
Corporate and other....................... 68,263 64,990 58,646
-------- -------- --------
Pretax income........................... $136,681 $135,573 $131,015
======== ======== ========
</TABLE>

The annuity operations produced pretax income of $27.7 million, $31.2
million and $28.4 million in 1996, 1995 and 1994, respectively. Approximately
80% ($4.7 billion at December 31, 1996) of annuity assets relate to single
premium immediate annuities ("SPIAs"), which are sold to fund third-party
personal injury settlements and are nonsurrenderable contracts. The invested
assets supporting these annuities are primarily long-maturity bonds. New SPIA
deposits were $460 million in 1996, compared to $488 million in 1995 and $402
million in 1994. SPIA pretax income was $23.0 million, $24.9 million and $23.3
million in 1996, 1995 and 1994, respectively. The remaining 20% of annuity
assets are deferred annuities, which are primarily fixed-rate annuities
marketed through financial institutions by a SAFECO subsidiary. Deferred
annuity deposits were $164 million in 1996, $188 million in 1995 and $296
million in 1994. Lower interest rates and competition from equity-linked
products were the main reasons for lower income from annuity operations in
1996, as well as the decline in deposit volume for both the SPIA and deferred
annuity lines. Total annuity assets amounted to $5.9 billion at December 31,
1996, compared to $5.4 billion at December 31, 1995 and $4.7 billion at
December 31, 1994.

Retirement services operations produced pretax income of $23.9 million,
$27.3 million and $19.3 million in 1996, 1995 and 1994, respectively.
Retirement services' profits in all three years have benefited from improved
investment performance and a larger asset base. The decline in 1996 income
compared to 1995 was primarily due to a gradual increase in interest rates
credited to policyholders caused by competitive market conditions. Retirement
services had $3.8 billion of assets on deposit at December 31, 1996 compared
to $3.5 billion at December 31, 1995 and $3.3 billion at December 31, 1994.
New retirement services deposit growth has slowed in recent years as lower
interest rates have hampered sales of fixed return products.

The group life and health operations contributed $12.6 million to 1996
pretax income, compared to income of $13.3 million in 1995 and $23.1 million
in 1994. The strategic focus of the group operation is excess loss medical
insurance, sold to self-insured employers, which accounted for $11.8 million,
$14.4 million and $18.5 million of income in 1996, 1995 and 1994,
respectively. Total medical profit, which includes some small-case, fully
insured businesses, declined in 1996. Total group premiums decreased 1% during
1996, compared to decreases of 8% in 1995 and 12% in 1994. The decline in
premiums in the past three years was due primarily to greater competition in
the excess loss market. With the defeat of national healthcare reform
legislation, SAFECO has begun to increase its writings of excess loss medical
insurance. In 1996 the results of the group operations were affected by
adverse medical claims experience and competitive conditions. In 1995, the
results were affected by adverse medical and life claims experience. In 1996
SAFECO began reinsuring 100% of its long-term disability business, which
should benefit future earnings. SAFECO continues to sell life and disability
coverages in combination with medical coverages, but no longer actively
pursues the stand-alone life and disability market.

27
<PAGE>

The individual life operations produced a pretax gain of $4.2 million in
1996, a loss of $1.3 million in 1995 and a gain of $1.6 million in 1994.
Results in 1995 and 1994 reflected increased death claims. The improvement in
1996 results was due in part to lower death claims and profits from a new
bank-owned life insurance program.

The corporate and other line is primarily comprised of investment income
resulting from the investment of capital and prior years' earnings of the
operating lines of business. It is a major component of SAFECO's life and
health earnings, contributing pretax income of $68.3 million in 1996, $65.0
million in 1995 and $58.6 million in 1994.

Other Operations

Credit operations produced pretax income of $19.1 million in 1996, compared
to $13.3 million in 1995 and $10.8 million in 1994. Loan and lease receivables
from nonaffiliates grew 14% in 1996 and 21% in 1995. Continued growth in
receivables is expected.

Investment management activities produced pretax income of $7.6 million in
1996, $6.9 million in 1995 and $6.4 million in 1994.

SAFECO's real estate subsidiaries produced pretax income of $13.1 million,
$9.1 million and $10.2 million in 1996, 1995 and 1994, respectively. These
pretax income amounts include gains from the sale of properties held for sale
of $2.7 million, $1.9 million and $5.6 million in 1996, 1995 and 1994,
respectively.

Investment Summary

SAFECO's consolidated pretax investment income increased to $1,116.7 million
during 1996 from $1,075.3 million in 1995 and $991.6 million in 1994.
Substantially all of this investment income is produced by the investment
portfolios of SAFECO's insurance subsidiaries.

The property and casualty companies' pretax investment income was $281.6
million in 1996, $291.5 million in 1995 and $283.5 million in 1994,
representing a decrease of 3% in 1996, and increases of 3% in 1995 and 2% in
1994. Although property and casualty cash flow was positive in all three
years, the recent high level of catastrophe losses combined with the
relatively low interest rate environment and a high level of bond call
activity has dampened the growth of investment income. The decline in 1996
investment income was particularly affected by reduced cash flow in the first
part of the year caused by catastrophe and weather-related claim payments.
Growth in investment income in 1997 is expected to be slowed by the lower
interest rate environment.

The life and health companies' pretax investment income was $836.7 million
in 1996, $778.2 million in 1995 and $706.2 million in 1994. The growth in all
years was due primarily to the increasing amount of retirement services and
annuity assets under management.

Consolidated pretax realized gains from security investments totaled $92.7
million in 1996 compared to $65.1 million and $39.2 million in 1995 and 1994,
respectively. The higher level of gains in 1996 and 1995 was due primarily to
falling interest rates, which produced calls, redemptions and mortgage pay-
downs on debt securities, and to the strong stock market.

AMERICAN STATES RESULTS OF OPERATIONS

In 1991, American States implemented its "New Directions" initiative, in
which it elected to reduce market share in lines of business and geographic
areas that were producing less than acceptable results. In addition, during
1996, American States began to implement a planned realignment (the
"Realignment") of its field structure, including management and office
consolidation, designed to reduce expenses, contribute to improvement of the
combined ratio and enhance growth, for which a charge was taken in 1995.
American States' results of operations for the following periods reflect the
impact of both the New Directions initiative and the Realignment.

28
<PAGE>

The following summary financial information sets forth the contributions of
each business segment to the consolidated net income of American States.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ ----------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND
RATIOS)
<S> <C> <C> <C> <C> <C>
Income (loss) before
realized gain and income
taxes:
Property and casualty
insurance:
Underwriting loss.......... $(21,036) $(67,068) $(88,131) $(56,853) $(69,044)
Net investment income...... 114,331 117,310 238,227 233,759 230,945
-------- -------- -------- -------- --------
Total property and
casualty................. 93,295 50,242 150,096 176,906 161,901
Life insurance............. 10,316 9,924 20,837 19,512 18,430
Other...................... (3,721) (1,786) (10,789) (28,350) --
-------- -------- -------- -------- --------
Total..................... 99,890 58,380 160,144 168,068 180,331
Realized gain before tax
from security investments.. 19,443 28,470 35,538 41,044 19,936
-------- -------- -------- -------- --------
Income before income taxes.. 119,333 86,850 195,682 209,112 200,267
-------- -------- -------- -------- --------
Provision (benefit) for
income taxes on:
Income before realized
gain...................... 11,932 (1,205) 13,944 11,337 8,731
Realized gain.............. 9,135 11,383 12,032 19,511 6,978
-------- -------- -------- -------- --------
Total..................... 21,067 10,178 25,976 30,848 15,709
-------- -------- -------- -------- --------
Net income.................. $ 98,266 $ 76,672 $169,706 $178,264 $184,558
======== ======== ======== ======== ========
Net income per share of
common stock:
Income before realized
gain...................... $ 1.47 $ 1.15 $ 2.61 $ 3.14 $ 3.43
Realized gain.............. .17 .33 .42 .43 .26
-------- -------- -------- -------- --------
Net income per share........ $ 1.64 $ 1.48 $ 3.03 $ 3.57 $ 3.69
======== ======== ======== ======== ========
Property and casualty ratios
(statutory basis):
Loss and LAE............... 72.5% 77.4% 74.5% 71.1% 72.9%
Underwriting expense....... 30.1 31.2 31.2 32.3 31.6
Policyholder dividends..... 0.3 0.2 0.1 0.2 0.1
-------- -------- -------- -------- --------
Combined ratio............. 102.9% 108.8% 105.8% 103.6% 104.6%
======== ======== ======== ======== ========
</TABLE>

SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996

American States' consolidated revenues increased 0.1%, or $0.8 million, to
$1,012.2 million in the first six months of 1997 from $1,011.4 million in the
first six months of 1996. Net earned premiums and other revenue decreased
0.5%, or $4.6 million, to $853.1 million in the first six months of 1997 from
$848.5 million in the first six months of 1996. Net investment income
decreased 1.1%, or $1.5 million, to $133.0 million in the first six months of
1997 from $134.5 million in the first six months of 1996. Realized gains on
investments decreased $9.1 million to $19.4 million in the first six months of
1997 from $28.5 million in the first six months of 1996.

Benefits and settlement expenses decreased 5.3%, or $35.0 million, to $620.9
million in the first six months of 1997 from $655.9 million in the first six
months of 1996. Commissions decreased 2.5%, or $3.6 million, to $140.8 million
in the first six months of 1997 from $144.4 million in the first six months of
1996. Operating and administrative expenses decreased 3.1%, or $3.2 million,
to $99.0 million in the first six months of 1997 from $102.2 million in the
first six months of 1996. American States incurred interest on debt of $10.4
million in the first six months of 1997.

Pretax losses incurred by American States from catastrophes, net of
reinsurance, were $17 million and $64 million for the six months ended June
30, 1997 and 1996, respectively.

Net income for the first six months of 1997 was $98.3 million, or $1.64 per
share, compared to $76.7 million, or $1.48 per share, for the first six months
of 1996. Excluding realized gain on investments, American States earned $88.0
million, or $1.47 per share, for the first six months of 1997.

29
<PAGE>

Property and Casualty Insurance

Net written premiums increased 3.6%, or $29.3 million, to $854.2 million in
the first six months of 1997 from $824.9 million in the first six months of
1996. The increase in net written premiums can be attributed to American
States' various growth initiatives, as well as market acceptance of the
Realignment. Net written premiums within American States' eight core states
(Illinois, Washington, Indiana, Missouri, Ohio, Michigan, Kansas and Oregon)
increased 6.4%, or $26.0 million, in the first six months of 1997 compared to
the first six months of 1996. Excluding California and Florida, where American
States is reducing its exposure, net written premiums increased 4.9%, or $36.1
million, in the first six months of 1997 compared to the first six months of
1996.

Net earned premiums and other revenue (primarily finance and service fees)
increased 0.5%, or $4.5 million, to $824.1 million in the first six months of
1997 from $819.6 million in the first six months of 1996.

Loss and loss adjustment expense ("LAE") decreased 5.7%, or $35.8 million,
to $595.1 million in the first six months of 1997 from $630.9 million in the
first six months of 1996. The loss ratio for the first six months of 1997 was
61.4% compared to 65.9% for the first six months of 1996. The 4.5 point
decrease was due to a decrease in natural peril losses. American States
incurred natural peril losses of $57.2 million in the first six months of 1997
compared to natural peril losses of $99.3 million in the first six months of
1996. The natural peril losses incurred in the first six months of 1997 are in
line with historic norms. The LAE ratio declined slightly to 11.1% in the
first six months of 1997 from 11.5% in the first six months of 1996. This
decrease was due to continued expense reductions resulting from the
Realignment, as well as slightly increased earned premiums.

The underwriting expense ratio decreased 1.1 points to 30.1%. Other costs
and expenses decreased 2.3% or $5.8 million to $250.0 million in the first six
months of 1997 from $255.8 million in the first six months of 1996. The
Realignment and implementation of internal cost controls announced in the
fourth quarter of 1995 continued to produce expense savings which were in line
with management expectations.

The combined ratio, after policyholder dividends, was 102.9% and 108.8% for
the first six months of 1997 and 1996, respectively. The decrease in combined
ratio was due primarily to a decrease in natural peril losses.

Net investment income decreased 2.6%, or $3.0 million, to $114.3 million in
the first six months of 1997 from $117.3 million in the first six months of
1996. This decrease was due primarily to a decline in total average invested
assets. The pretax yield on invested assets (excluding realized and unrealized
gains) was 6.4% and 6.6% for the first six months of 1997 and 1996,
respectively.

Income tax expense was $21.0 million for the first six months of 1997
compared to $7.1 million for the first six months of 1996. The increase in
expense was due primarily to improved underwriting results.

Life Insurance

Policy income was $28.9 million in the first six months of 1997 and 1996.
Account values at June 30, 1997 decreased by 6.9% from June 30, 1996. Net
investment income increased 5.4% to $17.7 million in the first six months of
1997 compared to the first six months of 1996. The pretax yield on invested
assets (excluding realized and unrealized gains) was 7.5% and 7.6% for the
first six months of 1997 and 1996, respectively. Net income for the first six
months of 1997 was $6.8 million compared to $6.5 million for the first six
months of 1996.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

American States' consolidated revenues decreased 2.1%, or $41.6 million, to
$1,984.0 million in 1996 from $2,025.6 million in 1995. Net earned premiums
and other revenue decreased 4.1%, or $72.3 million, to

30
<PAGE>

$1,674.1 million in 1996 from $1,746.4 million in 1995. Net investment income
increased by $7.7 million, or 2.9%, while realized gain on investments
decreased by $5.5 million.

Pretax losses incurred by American States from catastrophes, net of
reinsurance, were $103 million and $80 million in 1996 and 1995, respectively.

American States' net income of $169.7 million for 1996 was down 4.8% from
$178.3 million for 1995. The provision for consolidated income taxes was $26.0
million in 1996 compared to $30.8 million in 1995.

Property and Casualty Insurance

Net Written Premiums. Total reported net written premiums decreased by $70.7
million, or 4.2%, to $1,600.9 million for 1996, from $1,671.6 million for
1995. This premium decline was attributable to (i) lower volume from
involuntary workers' compensation, (ii) American States' reduction of exposure
in California and Florida, and (iii) a decrease in premium related to a
retrospectively rated errors and omissions ("E&O") policy written on Lincoln
National.

Involuntary workers' compensation net written premiums, primarily from
state-mandated pools and associations, decreased $40.1 million, to $3.5
million, in 1996. This decrease was due in large part to the continuing impact
of aggressive pricing and depopulation programs implemented by most large
state workers' compensation pools over the last few years. Another
contributing factor was the decrease in American States' share of the
voluntary workers' compensation market in several states in 1995. Finally,
reported premiums were negatively impacted by the re-estimation of premiums
receivable, due to a lag in reporting from the National Council of
Compensation Insurers ("NCCI"). Reported premiums from NCCI declined
dramatically in 1996, requiring a decrease in premiums receivable of
approximately $12.9 million.

American States' continued planned reduction of exposure in California and
Florida, excluding all involuntary markets premiums, decreased premiums by
$25.9 million, to $150.3 million, in 1996. In addition, premiums on the
retrospectively rated Lincoln National E&O policy decreased $15.1 million in
1996. Prior year premiums were unusually high due to the settlement of a large
casualty claim in 1995.

Net written premiums written for commercial lines products decreased by
$76.1 million, or 7.7%, to $915.5 million for 1996, compared to $991.6 million
for 1995. Net written premiums written for personal lines products increased
by $3.4 million, or .5%, to $684.5 million for 1996, compared to $681.1
million for 1995.

Net Earned Premiums and Other Revenue. Consistent with the decrease in net
written premiums, net earned premiums and other revenue (primarily finance and
service fees) decreased by $72.4 million to $1,617.2 million for 1996, from
$1,689.6 million for 1995.

Losses and LAE. Losses and LAE increased by $6.2 million to $1,199.9 million
for 1996 from $1,193.7 million for 1995. The loss ratio for 1996 was 61.0%
compared to 59.3% for 1995. The 1.7 percentage point increase in the loss
ratio in 1996 was the net result of several factors.

The loss ratio was adversely affected by an increase of $43.5 million in
natural peril losses in 1996 resulting from widespread severe winter storm
activity and frequent windstorms and hailstorms across the Midwest, as well as
a severe Pacific Northwest winter storm in late December 1996. Natural peril
losses were $165.6 million and $122.1 million for 1996 and 1995, respectively.

In addition, American States experienced $45.7 million in favorable prior
year loss reserve development in 1996, an increase of $5.8 million when
compared to favorable loss reserve development of $39.9 million in 1995. Of
the total $45.7 million favorable loss development in 1996, $71.9 million was
attributable to personal and commercial lines (excluding reinsurance in run-
off), offset by unfavorable development of $26.2 million

31
<PAGE>

attributable to the reinsurance operations. Of the total $39.9 million
favorable loss development in 1995, $109.2 million was attributable to
personal and commercial lines (excluding reinsurance in run-off), offset by
unfavorable development of $69.3 million attributable to the reinsurance
operations.

Finally, as a result of continued price competition in the industry, the
loss ratio for 1996 was adversely impacted by a slight deterioration in the
1996 accident year underlying loss ratio on most commercial and personal lines
of business. The underlying loss ratio is the total loss ratio less (i)
natural peril losses and (ii) development on prior accident year loss
reserves.

The LAE ratio was 13.6% for 1996 compared to 11.8% for 1995. The increase
was attributable primarily to an increase in LAE reserves of approximately
$18.7 million compared to a $6.0 million decrease in 1995. This LAE reserve
increase was driven primarily by an increase in legal expense reserves related
to construction defect claims. As noted in the "Other Costs and Expenses"
section below, the LAE ratio also benefited to a slight degree from
Realignment savings. Finally, earned premium decreased $68.6 million in 1996,
creating upward pressure on the LAE ratio.

Other Costs and Expenses. Other costs and expenses decreased by
$47.4 million, or 8.6%, to $505.4 million for 1996, from $552.8 million for
1995. American States experienced a $16.7 million, or 5.1%, decrease in
variable expenses, primarily commission expense and premium taxes, due to a
4.2% decline in net written premiums in 1996. Realignment-related fixed
expense savings totaled approximately $13.4 million in 1996. Approximately 77%
of these savings, or $10.3 million, was attributable to other costs and
expenses, with the remaining 23%, or $3.1 million, reducing LAE expense. In
addition, the Realignment, office closings prior to the Realignment and an
early retirement program added $21.9 million to expenses in 1995.

The underwriting expense ratio for 1996 was 31.2%, compared to 32.3% for
1995. Realignment expense savings accounted for a reduction of approximately
0.7% in the underwriting expense ratio in 1996. In 1995, the Realignment,
office closings prior to the Realignment and early retirement accounted for
1.3% of the underwriting expense ratio. The operational implementation of this
plan was nearly 75% complete as of year-end 1996.

Combined Ratio. The combined ratio, after policyholder dividends, was 105.8%
in 1996, compared to 103.6% in 1995. After peaking at 112.5% in 1992, American
States' combined ratio decreased in 1993 through 1995, then increased in 1996
due primarily to natural peril losses. The reinsurance in run-off had a
negative impact of 1.6 percentage points on American States' combined ratio in
1996, compared to 4.2 percentage points in 1995.

Commercial Lines. Commercial lines results weakened in 1996, with the
combined ratio increasing to 100.4% from 95.8% in 1995. The majority of this
increase was due to an increase in the LAE ratio, driven primarily by an
increase in legal expense reserves related to construction defect claims.
Increased natural peril losses accounted for the remainder of deterioration in
the combined ratio.

Personal Lines. In 1996 the personal lines combined ratio also increased to
109.3%, from 104.8% in 1995, with all of the increase being attributable to
the loss ratio component. Natural peril losses accounted for approximately
half of this deterioration, with the most significant impact in the homeowners
business. Personal automobile results also deteriorated due to price
competition and increased loss costs, primarily physical damage coverages.

Net Investment Income. Net investment income increased $4.4 million, or
1.9%, to $238.2 million for 1996, from $233.8 million in 1995. This increase
was due primarily to an increased investment in taxable securities. The pretax
yield on invested assets (excluding realized and unrealized gains) was 6.6%
for 1996, compared to 6.3% in 1995. The increase in net investment income
occurred despite a decrease in average invested assets.

32
<PAGE>

Realized Gain on Investments. Realized gain on investments was $34.2 million
for 1996, compared to $38.8 million in 1995. This decrease was due primarily
to the reduction in American States' investment in unaffiliated common stocks
during 1995, many of which were sold at a gain.

Loss on Operating Properties. In 1995, a $28.4 million provision was made to
recognize the expected loss on operating properties which American States
occupied and planned to sell in connection with the Realignment.

Life Insurance

Life insurance policy income was flat in 1996 compared to 1995. Account
values at December 31, 1996 increased by 8.2% from December 31, 1995 levels.
Net investment income increased by 3.7% during 1996, reflecting the growth in
account values as well as the general growth of invested assets. Net
investment income increased despite a decrease in the average pretax yield
from 7.7% in 1995 to 7.5% in 1996. Realized gain on investments decreased by
$1.1 million to $1.2 million primarily as a result of 1995 sales of securities
to take advantage of market opportunities. Net income declined slightly to
$14.4 million compared to $14.5 million in 1995.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

American States' consolidated revenues for 1995 aggregated $2,025.6 million,
virtually unchanged from its 1994 revenues, which totaled $2,026.4 million.
Net earned premiums and other revenue of $1,746.4 million for 1995 slightly
exceeded the $1,746.0 million recorded in 1994. Net investment income
increased by $6.1 million, or 2.3%, while realized gain on investments
increased by $21.1 million. Pretax losses incurred by American States from
catastrophes, net of reinsurance, were $80 million and $72 million in 1995 and
1994, respectively.

American States' net income of $178.3 million for 1995 was down 3.4% from
$184.6 million for 1994. The cost relating to Realignment, which aggregated
$49.5 million, resulted in the decrease in net income despite significant
improved underwriting results. Realized gain on investments increased $21.1
million to $41.0 million in 1995 compared to $19.9 million in 1994. The
provision for consolidated income taxes was $30.8 million in 1995 compared to
$15.7 million in 1994. This increase was due to improved underwriting results
and a greater proportion of taxable investment income.

Property and Casualty Insurance

Net Written Premiums. Net written premiums increased by $16.1 million, or
1.0%, to $1,671.6 million for 1995, from $1,655.5 million for 1994. This
growth was attributable largely to an increase in premiums written on personal
automobile and business owners' policies designed specifically for small
businesses. Net written premiums for commercial lines products increased by
$6.5 million, or 0.7%, to $991.6 million for 1995, compared to $985.1 million
for 1994. Net written premiums for personal lines products increased by
$12.8 million, or 1.9%, to $681.1 million for 1995, compared to $668.3 million
for 1994. For Illinois, Indiana, Kansas, Michigan, Missouri, Ohio, Oregon and
Washington, which comprise the most significant part of American States'
target market, direct written premiums increased by 3.6% in 1995, while for
California and Florida, where American States has been reducing its exposure
due to unfavorable results, direct written premiums decreased by 6.5%. For all
other states, 1995 direct written premiums were virtually unchanged from 1994.

Net Earned Premiums and Other Revenue. Net earned premiums and other revenue
(primarily finance and service fees) decreased by $3.9 million to $1,689.6
million for 1995, from $1,693.5 million for 1994.

Losses and LAE. Losses and LAE decreased by $32.5 million to $1,193.7
million for 1995, from $1,226.2 million for 1994. The loss ratio for 1995 was
59.3% compared to 61.1% for 1994. The 1.8 percentage point decline in the loss
ratio in 1995 was due primarily to the New Directions initiative implemented
in late 1991. American States' results of operations benefited materially in
1995 and 1994 as a result of reductions in the estimated amounts needed to
settle prior years' claims, with such benefits being most significant in 1994.

33
<PAGE>

The overall favorable reserve development in both 1995 and 1994 was the result
of improving trends, both industry-wide and related to the New Directions
initiative, as well as improvements made in the claims evaluation process.

For 1995, natural peril losses were $122.1 million compared to $140.5
million for 1994. During the Spring of 1995, American States experienced a
relatively high frequency of windstorm and hailstorm losses. Hurricane Opal,
which struck the Florida Panhandle in October 1995, caused approximately $15.0
million of losses to American States in Florida and other southeastern states.
Natural peril losses in 1994 were largely due to a severe winter freeze and
the Northridge, California earthquake. Gross losses from Northridge were $32.4
million, or $31.1 million net of reinsurance recoveries. Additional incurred
losses from the earthquake of $2.6 million were recorded in 1995.

The LAE ratio was 11.8% for 1995, the same as in 1994. While American
States' loss ratio decreased due to its New Directions strategy and other
initiatives, the impact on American States' LAE ratio has been less evident,
due partially to increases in legal expense reserves relating to environmental
claims. In 1995, the LAE ratio was favorably impacted by approximately $10.7
million of LAE reserve release due to positive development of prior accident
years. Offsetting this, some unusual items increased expenses in 1995. In the
first quarter of 1995, American States announced an early retirement plan for
certain levels of management and the closing of two division offices and a
service office. The second quarter of 1995 included the costs of settling a
lawsuit and the fourth quarter included the costs of the Realignment. These
unusual items added $9.5 million of LAE-related expense during 1995.

Other Costs and Expenses. Other costs and expenses increased by $16.5
million, or 3.1%, to $552.8 million for 1995 from $536.3 million for 1994. The
underwriting expense ratio for 1995 was 32.3%, compared to 31.6% for 1994. The
Realignment, office closings prior to the Realignment and early retirement
added $21.9 million to expenses and accounted for 1.3% of the underwriting
expense ratio for 1995.

Combined Ratio. The combined ratio, after policyholder dividends, was 103.6%
in 1995, versus 104.6% in 1994. After peaking at 112.5% in 1992, American
States' combined ratio has decreased each of the last three years. Both
commercial and personal lines reflected improvement due to lower natural peril
losses, the continued favorable impact of the New Directions initiative and
the release of loss and LAE reserves related to prior accident years. The
reinsurance in run-off had a negative impact of 4.2 percentage points on
American States' combined ratio in 1995, versus 1.4 percentage points in 1994.

Commercial Lines. Commercial lines results were substantially improved in
1995, with the combined ratio decreasing to 95.8% from 100.1% in 1994.
Improved results, as reflected by the loss ratio, were spread across most
commercial lines. The key lines of business owner policies, commercial multi-
peril, commercial automobile and workers' compensation all improved.

Personal Lines. The personal lines combined ratio also improved in 1995,
decreasing to 104.8% from 107.8% in 1994. Improvement, as reflected by the
loss ratio, was evident in both personal automobile and homeowners.

Net Investment Income. Net investment income increased $2.9 million, or
1.2%, to $233.8 million for 1995, from $230.9 million in 1994. This increase
was due primarily to an increase in higher yielding securities, a reduction in
unaffiliated common stock holdings and subsequent reinvestment of proceeds in
an unconsolidated subsidiary, EMPHESYS Financial Group, Inc. The pretax yield
on invested assets (excluding realized and unrealized gains) was 6.3% for
1995, compared with 6.2% in 1994.

Realized Gain on Investments. Realized gain on investments was $38.8 million
for 1995, compared to $19.2 million in 1994. This increase was due to the
reduction in American States' investment in unaffiliated common stocks, many
of which were sold at a gain.

34
<PAGE>

Income Tax Expense. Federal income taxes increased by $14.1 million to $23.5
million for 1995 from $9.4 million for 1994. The increase was due primarily to
improved underwriting results and net investment income which reflected an
investment portfolio containing a higher proportion of taxable securities.

Life Insurance

Life insurance results reflected steady growth in policy income, which
increased by 8.2% for 1995, compared to 1994. Sales of life insurance,
primarily universal life products, were strong. Account values at
December 31, 1995 increased by 10.4% from December 31, 1994 levels. Net
investment income increased by 10.8% during 1995, reflecting the growth in
account values as well as the general growth of invested assets. Realized gain
on investments increased $1.6 million to $2.3 million primarily as a result of
sales of securities to take advantage of market opportunities. Net income
declined slightly by 12.4% to $14.5 million in 1995, compared to 1994.

COMBINED LIQUIDITY AND CAPITAL RESOURCES

Sources of Funds

The Company's liquidity requirements are met primarily by funds generated
from operations, the sale and maturity of invested assets, bank borrowings and
issuances of securities. The Company's primary sources of cash from operations
are insurance premiums, funds received under deposit contracts, dividends,
interest, rental income and asset management fees. For 1996, the Company's
operating cash flows totaled $730 million.

The Company has periodically issued debt securities to fund its liquidity
needs and more recently issued debt and capital securities to fund a portion
of the purchase price for the Acquisition. On July 15, 1997, the Company
issued $200 million aggregate principal amount of Senior Notes and, through a
subsidiary trust, issued $850 million aggregate liquidation amount of 8.072%
Capital Securities. Prior to the consummation of the Acquisition, the Company
also issued an aggregate of $1,334 million of commercial paper, a portion of
which will be repaid with the net proceeds of the Offerings. The Company,
through a subsidiary trust, may issue an additional $150 million aggregate
liquidation amount of capital securities in 1997. In 1995, the Company issued
$200 million of 7 7/8% notes due 2005. Certain of the Company's subsidiaries
also issue securities or incur indebtedness to fund their operations. See "--
Uses of Funds" below. The Company believes that future liquidity needs will be
met primarily by cash generated from operations.

The Company also has an existing bank facility under which it can borrow up
to $1.6 billion at an aggregate cost of 22.5 basis points above LIBOR or use
the facility to back up the commercial paper debt described above. The
facility consists of a 364-day revolving credit facility for $500 million and
a five-year credit facility for $1.1 billion. As of October 1, 1997, $266
million was available under this facility. The Company intends to use the net
proceeds from the Offerings to retire a portion of the commercial paper backed
by this facility. The facility is subject to a financial covenant that
requires the Company to maintain a specified minimum level of stockholders'
equity.

Uses of Funds

The Company's primary uses of funds are to fund the Company's operations, to
service outstanding debt, to pay dividends to the Company's stockholders and
to expand the Company's investment portfolio. See "Business--Investments."

Cash from insurance operations is used primarily to pay claims and claim
adjustment expenses. 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. Catastrophe claims, the timing and amount
of which are inherently unpredictable, may create increased liquidity
requirements.

35
<PAGE>

The Company's credit and real estate subsidiaries have ongoing needs for
outside capital. SAFECO Credit Company's borrowings are short- to medium-term
and are obtained primarily from the issuance of commercial paper and medium-
term notes. SAFECO Credit Company had unaffiliated borrowings at June 30, 1997
of $907.7 million, of which $863.8 million was due within one year. Almost all
of this current portion consists of short-term commercial paper borrowings
which the Company expects to replace with similar commercial paper borrowings
in 1997. The Company's real estate subsidiaries borrow from life insurance
companies, banks, savings and loan associations and other lenders. At June 30,
1997, the real estate subsidiaries had notes and mortgages payable to
nonaffiliates of $176.0 million, of which $40.1 million was due within one
year. The Company anticipates that these obligations will be met through
rollovers of existing borrowings and/or replacement borrowings.

Ratings

The claims paying ability of an insurance company is rated to provide both
industry participants and insurance consumers with comparative information on
specific insurance companies. Higher ratings generally indicate greater
financial stability and a stronger ability to pay claims. These ratings are
based upon factors relevant to policyholders and are not designed to protect
equity investors. Such ratings are neither a rating of securities nor a
recommendation to buy, hold or sell any security. Ratings focus on the
following factors: capital resources, financial strength, demonstrated
management expertise in the insurance business, credit analysis, systems
development, marketing, investment operations, minimum policyholders' surplus
requirements and capital sufficiency to meet projected growth, as well as
access to such traditional capital as may be necessary to continue to meet
standards for capital adequacy.

In connection with the Acquisition and the Related Financings, Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's Rating Service
("S&P") issued revised ratings for the Company's property and casualty and
life subsidiaries' claims paying ability/financial strength and the Company's
senior debt. Also rated were the Company's capital securities and commercial
paper. In addition, A.M. Best has announced that the ratings of the Company's
property and casualty and life subsidiaries are under review with negative
implications. The following table summarizes current ratings:

<TABLE>
<CAPTION>
A.M.
MOODY'S S&P BEST
------- --- ----
<S> <C> <C> <C>
Claims Paying Ability/Financial Strength:
Property and casualty subsidiaries...................... A1 AA+ A++
Life subsidiaries....................................... A1 AA A++
SAFECO Corporation Obligations:
Senior debt............................................. A3 A+ --
Capital securities...................................... a3 A --
Commercial paper........................................ P-2 A-1 --
</TABLE>

Regulatory Issues

Those states in which the Company's insurance subsidiaries are domiciled or
deemed to be commercially domiciled limit the amount of dividend payments that
can be made by those subsidiaries without prior regulatory approval. See "Risk
Factors--Holding Company Structure and Dividend and Distribution
Restrictions." Based on the applicable dividend restrictions, the annual limit
on the amounts of dividends available for payment by the Company's insurance
subsidiaries in 1997 (in the absence of regulatory approval) is $665 million.
Three of SAFECO's insurance subsidiaries received approval in July 1997 to pay
dividends totaling $600 million to fund a portion of the purchase price for
the Acquisition.

The Company is not aware of any recently passed laws or regulations or
current recommendations by regulatory authorities which have had or, if
passed, would have a material effect on its liquidity, capital resources or
results of operations.

36
<PAGE>

BUSINESS

OVERVIEW

The Company is one of the largest property and casualty insurance companies
in the United States. On a pro forma basis giving effect to the Acquisition
and the Related Financings, the Company had consolidated revenues of $5.9
billion in 1996, and total assets of $27.3 billion and total stockholders'
equity of $5.0 billion at June 30, 1997. The Company provides a broad range of
personal and commercial property and casualty insurance to individuals,
businesses, government units and associations. SAFECO and American States have
each underwritten property and casualty insurance since the 1920s. Through its
insurance subsidiaries, the Company is licensed as a property and casualty
insurer in all 50 states and the District of Columbia, with a significant
presence in the Pacific Northwest and the Midwest. The Company's property and
casualty operations generated approximately 92% of the Company's insurance
revenues in 1996. Of the Company's 1996 net written property and casualty
premiums of $3.9 billion, personal and commercial lines accounted for 60% and
40%, respectively.

The Company's principal executive offices are located at 4333 Brooklyn
Avenue N.E., Seattle, Washington 98185, and its telephone number is (206) 545-
5000.

PROPERTY AND CASUALTY INSURANCE

Selected Product and Ratio Information

Products. The following table shows by product line net written premiums for
each of SAFECO and American States individually and for SAFECO and American
States on a combined basis. For a description of the product lines referred to
in the table below, see "--Product Lines--Personal Lines" and "--Product
Lines--Commercial Lines."

NET WRITTEN PREMIUMS BY PRODUCT LINE

<TABLE>
<CAPTION>
PERCENT OF
TOTAL NET
WRITTEN
SAFECO AMERICAN STATES COMBINED PREMIUMS
-------------------------- -------------------------- -------------------------- ----------
1996 1995 1994 1996 1995 1994 1996 1995 1994 1996
-------- -------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS)
Personal lines:
Personal automobile.... $1,085.0 $1,040.9 $1,004.4 $ 474.4 $ 464.6 $ 452.4 $1,559.4 $1,505.5 $1,456.8 39.8%
Homeowners............. 448.5 421.5 383.7 185.3 189.1 189.9 633.8 610.6 573.6 16.2
Other.................. 142.8 137.3 119.4 24.8 27.5 26.1 167.6 164.8 145.5 4.3
-------- -------- -------- -------- -------- -------- -------- -------- -------- -----
Total personal lines... 1,676.3 1,599.7 1,507.5 684.5 681.2 668.4 2,360.8 2,280.9 2,175.9 60.3
-------- -------- -------- -------- -------- -------- -------- -------- -------- -----
Commercial lines:
Commercial multi-peril. 152.0 132.3 111.1 363.3 357.6 355.6 515.3 489.9 466.7 13.2
Commercial automobile.. 104.9 107.4 120.3 238.5 239.4 245.5 343.4 346.8 365.8 8.8
Workers' compensation.. 177.0 175.8 179.0 142.6 199.8 198.0 319.6 375.6 377.0 8.2
Surety................. 52.9 50.3 45.1 9.1 8.9 9.0 62.0 59.2 54.1 1.6
Other.................. 150.0 141.5 140.4 162.9 184.7 179.0 312.9 326.2 319.4 8.0
-------- -------- -------- -------- -------- -------- -------- -------- -------- -----
Total commercial lines. 636.8 607.3 595.9 916.4 990.4 987.1 1,553.2 1,597.7 1,583.0 39.7
-------- -------- -------- -------- -------- -------- -------- -------- -------- -----
Total net written premi-
ums.................... $2,313.1 $2,207.0 $2,103.4 $1,600.9 $1,671.6 $1,655.5 $3,914.0 $3,878.6 $3,758.9 100.0%
======== ======== ======== ======== ======== ======== ======== ======== ======== =====
</TABLE>

37
<PAGE>

Combined Ratios. The following table states the loss and LAE ratios,
underwriting expense ratios, policyholder dividend ratios and combined ratios
for the periods indicated for each of SAFECO and American States individually,
for SAFECO and American States on a combined basis and for the United States
property and casualty insurance industry as a whole, based on data published
by A.M. Best.

OPERATING RATIOS

<TABLE>
<CAPTION>
SAFECO AMERICAN STATES COMBINED INDUSTRY
------------------ ------------------- ------------------- -------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994 1996 1995 1994
---- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Personal lines:
Loss and LAE .......... 72.9% 73.1% 77.7% 82.6% 76.1% 79.7% 75.8% 74.1% 78.4% 80.7% 78.9% 80.3%
Underwriting expense... 27.0 26.9 26.7 26.7 28.7 28.1 26.9 27.4 27.1 23.4 23.7 23.5
Policyholder dividends. -- -- -- -- -- -- -- -- -- 0.8 1.0 0.7
---- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Combined ratio......... 99.9 100.0 104.4 109.3 104.8 107.8 102.7 101.5 105.5 104.9 103.6 104.5
Commercial lines:
Loss and LAE .......... 60.2 64.0 66.0 65.7 60.8 66.0 63.4 61.9 66.0 76.0 78.9 82.1
Underwriting expense... 32.9 32.0 31.9 34.5 34.7 33.9 33.8 33.7 33.2 29.6 29.2 28.7
Policyholder dividends. 2.6 2.5 3.9 0.2 0.3 0.2 1.2 1.2 1.5 1.5 1.8 2.0
---- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Combined ratio......... 95.7 98.5 101.8 100.4 95.8 100.1 98.4 96.8 100.7 107.1 109.9 112.8
Total:
Loss and LAE .......... 69.5 70.6 74.4 74.5 71.1 72.9 71.6 70.8 73.7 78.3 78.8 81.0
Underwriting expense... 28.6 28.3 28.1 31.2 32.3 31.6 29.6 30.0 29.7 26.4 26.3 26.1
Policyholder dividends. 0.7 0.7 1.1 0.1 0.2 0.1 0.5 0.5 0.7 1.1 1.4 1.3
---- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Combined ratio......... 98.8% 99.6% 103.6% 105.8% 103.6% 104.6% 101.7% 101.3% 104.1% 105.8% 106.5% 108.4%
</TABLE>

Product Lines

Personal Lines. The principal coverages offered by the Company's personal
lines are automobile and homeowners insurance sold to individuals. The Company
had approximately 2.8 million personal automobile and homeowners policies in
force at December 31, 1996. The Company is the third largest writer of
personal lines insurance through independent agents and one of the largest
writers of personal lines insurance overall in the United States, based on
1996 direct written premiums published by A.M. Best.

Personal Automobile Insurance provides coverage for liability to others for
both bodily injury and property damage and for physical damage to an insured's
own vehicle from collision and various other perils. In addition, many states
require policies to provide first-party personal injury protection, frequently
referred to as no-fault coverage. SAFECO's personal automobile insurance line,
its largest line, focuses on a broad segment of the personal automobile
insurance market. American States has historically focused on the "preferred"
or lower-risk segment of the personal automobile insurance market. Based on
1996 net written premiums published by A.M. Best, the Company is the third
largest writer in the United States of personal automobile insurance through
independent agents.

Homeowners Insurance provides protection against losses to dwellings and
contents from a wide variety of perils, as well as coverage for liability
arising from ownership or occupancy. The Company writes homeowners insurance
for dwellings, condominiums, mobile homes and rental property contents. Based
on 1996 net written premiums published by A.M. Best, the Company is the second
largest writer in the United States of homeowners insurance through
independent agents. In recent years SAFECO and American States have restricted
writings in California and Florida to improve results. Other initiatives at
SAFECO have included higher premiums, increased deductibles, nationwide
programs to increase insurance-to-value and geographic spread-of-risk
strategies in certain states such as Colorado, Texas and Florida in an effort
to mitigate the effect of hailstorm, windstorm and hurricane losses. The
Company intends to implement such strategies as part of the integration of
American States. Management believes that the implementation of these
strategies will improve the results of the American States' homeowners line.

38
<PAGE>

Other Personal Lines Insurance includes coverage for earthquake, dwelling
fire, inland marine and boats as well as involuntary assigned risk and other
state-mandated plans. For the year ended December 31, 1996, the Company
generated $168 million of net written premiums on such other personal lines
policies.

Commercial Lines. The Company is one of the largest writers in the United
States of commercial lines insurance through independent agents based on 1996
net written premiums published by A.M. Best. The Company writes a broad range
of commercial property and casualty insurance for risks of all sizes. The
Company's principal commercial property and casualty product lines are
commercial multi-peril, commercial automobile, workers' compensation and
surety. Historically, SAFECO's commercial lines operations have been
concentrated in large commercial accounts, while American States' commercial
lines operations have been concentrated in small to medium-sized commercial
accounts.

Management believes that American States is one of the largest writers in
the United States of commercial property and casualty insurance for businesses
with fewer than 50 employees, which comprise a fast-growing segment of the
United States economy. Unlike larger, more complex accounts, the lower insured
values typical of this target market reduce the importance of claim severity
and increase the importance of claim frequency as an underwriting
consideration.

Commercial Multi-Peril provides coverage for businesses against third-party
liability from accidents occurring on their premises or arising out of their
operations such as injuries sustained from products sold. It also insures
business property for damage such as that caused by fire, wind, hail, water,
theft and vandalism, and protects businesses from financial loss due to
business interruption.

Commercial Automobile provides coverage for businesses against losses
incurred from personal bodily injury, bodily injury to third parties, property
damage to an insured's vehicle, property damage to other vehicles and damage
to other property resulting from the ownership, maintenance or use of
automobiles and trucks in a business.

Workers' Compensation provides coverage for the obligation of an employer
under state law to provide its employees with specified benefits for work-
related injuries, deaths and diseases, regardless of fault. There are
typically four types of benefits payable under workers' compensation policies:
medical, disability, death and vocational rehabilitation. Workers'
compensation policies are often written in conjunction with other commercial
policies.

Surety provides a third party guarantee of a statutory or contractual
obligation of an insured. Surety bonds are generally provided for construction
performance and legal matters such as appeals, bankruptcies and probate.

PROPERTY AND CASUALTY MARKETING

Independent Agency System

The Company distributes its property and casualty lines products primarily
through a network of approximately 8,000 independent agents located throughout
the United States, supported by field marketing offices, customer service
centers and specialized marketing divisions organized to address specific
market segments. The Company believes that the independent agent distribution
system offers certain service and underwriting advantages. For example, the
Company believes that independent agents are better able to match products to
a customer's specific needs, thereby providing a higher level of expertise and
service than agents offering a single line of products. In addition, the
Company believes that independent agents are able to establish close, long-
term relationships with their customers.

Marketing Operations

The Company's marketing operations are organized into groups that
concentrate on particular lines of business or a particular customer base.

39
<PAGE>

. Field Organization--Focuses on agents who provide personal lines and
small-to-medium commercial lines coverage. These agents are supported by
a combination of SAFECO's 16 field marketing offices and 10 customer
service centers, as well as American States' 24 field marketing offices.
SAFECO's customer service centers provide routine policyholder services
on behalf of the agents for policyholders representing almost 20% of
SAFECO's 1996 total personal lines premiums. By using customer service
centers, agents can concentrate on producing new business, improving
retention and building customer loyalty.

. National Distribution Division--Focuses on agents who write personal
lines nationally in connection with an affinity or other customer
relationship. In 1996, the National Distribution Division added a
personal lines distribution capability that allows SAFECO to respond to
high-volume marketing opportunities presented on a multiple-state or
national basis.

. SAFECO Commercial--Focuses on agents who specialize in large commercial
risks. SAFECO Commercial professionals have specialized underwriting and
sales expertise directed to the requirements of large commercial risks
and often work in close partnership with agents and Company underwriters
to sell SAFECO products and services.

. Surety--Focuses on agents who offer surety coverage for both contract
bonding and general business bonds.

. Select Markets--Focuses on agents who offer excess and surplus lines
insurance, specialized program business and national commercial accounts.

Integration of American States

To be the leading company distributing insurance through independent agents,
the Company intends to expand its marketing reach, extending American States'
commercial lines franchise to approximately 3,000 SAFECO agents who did not
sell SAFECO's commercial lines insurance prior to the Acquisition, and
extending SAFECO's premier personal lines franchise to approximately 4,000
American States agents. The Company intends to merge the field marketing
operations of SAFECO and American States to support the business written by
the agents who currently represent either company. Management believes that
once SAFECO's agents are appointed by American States to write small-to-medium
commercial lines and American States' agents are appointed by SAFECO to write
personal lines, the Company will write a greater percentage of the premiums
generated by these agents.

Through American States, the Company will develop and maintain long-term
relationships with the best-performing agents focused on the small-to-medium
commercial market, capitalizing on American States' experience in this market
and its successful use of technology to serve these agents. Through SAFECO
Commercial, the Company will continue to emphasize the appointment and
development of experienced agents focused on large commercial risks.

In its personal lines, the Company will continue to emphasize coordination
between its marketing and underwriting professionals and its agents,
attractive product pricing and agent compensation programs designed to retain
profitable customers who value the additional service provided by an
independent agent. Management believes that American States' agents will
benefit from SAFECO's personal lines franchise and, to help agents defray
costs of the transition from American States' products to SAFECO's products,
the Company will pay a one-time incentive to American States' agents on
certain personal lines business.

In an effort to implement cost reductions and productivity enhancements as
part of the integration process, the Company expects to reorganize the home
office functions of its insurance businesses as follows: integrate the small-
to-medium commercial lines business into American States' facilities in
Indianapolis, Indiana; retain the large commercial business in Seattle,
Washington; and integrate the personal lines business into SAFECO's facilities
in Seattle.

40
<PAGE>

After a two-year transition period, management expects that all commercial
insurance for small to medium-sized businesses will be written under American
States' brand name and all commercial insurance for large commercial risks and
all personal lines will be written under SAFECO's brand name. Management
believes that this alignment creates the potential for enhanced national
advertising and increased recognition for both SAFECO's and American States'
brand names.

Agent Relationship Management and Compensation

The Company attributes its success in developing and maintaining
relationships with independent agents to the following factors: (i) close
working relationships between the Company and its independent agents; (ii) the
use of interactive and knowledge-based technology systems which reduce
handling costs and facilitate improved service to policyholders; (iii) prompt
and responsive claims handling support; (iv) its financial strength;
(v) creative bonus and incentive compensation programs; and (vi) a broad range
of innovative products.

The Company compensates its agents through commissions, bonuses and special
promotions. Commissions vary among lines of business and from state to state.
In addition to the commissions set forth in the Company's standard commission
schedules, agents have the opportunity to earn bonus commissions based on the
profitability of and growth in the business produced. Integrating the best
aspects of SAFECO's and American States' commission and incentive structures,
the Company intends to develop incentive commission programs designed to make
the Company the preferred provider for personal lines, small-to-medium
commercial lines and large commercial lines for its agents.

PROPERTY AND CASUALTY GEOGRAPHIC DISTRIBUTION

The combination of SAFECO and American States accelerates the Company's
growth east of the Rocky Mountains and enhances its market position in the
Midwest, thereby geographically diversifying the Company's revenue and
earnings base and its catastrophic risk exposure. Management believes that
insurers generally have been able to manage risk selection and pricing
effectively in the Midwest. Giving effect to the Acquisition, 34% of the
Company's 1996 direct written property and casualty premiums were generated in
Washington, Oregon and California, which represents a reduction from 45% for
SAFECO prior to the Acquisition. The following table illustrates this
geographic diversification by showing the distribution of personal, commercial
and total property and casualty direct written premiums of SAFECO and the
combined Company for the year ended December 31, 1996:

<TABLE>
<CAPTION>
PERSONAL COMMERCIAL TOTAL
---------------- ---------------- ----------------
SAFECO COMBINED SAFECO COMBINED SAFECO COMBINED
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
California................ 21.2% 17.2% 25.8% 14.0% 22.6% 15.9%
Washington................ 17.6 14.8 11.9 10.6 16.0 13.1
Texas..................... 7.6 7.5 7.4 6.2 7.5 7.0
Illinois.................. 4.9 5.7 3.9 7.7 4.6 6.5
Oregon.................... 6.3 5.1 6.5 5.4 6.4 5.2
Missouri.................. 4.2 5.1 1.1 4.7 3.3 4.9
Indiana................... 0.8 3.4 0.6 4.7 0.7 3.9
Florida................... 2.8 3.0 6.1 4.7 3.8 3.7
Michigan.................. 1.4 2.3 2.3 3.6 1.7 2.8
Ohio...................... 1.9 3.1 0.5 2.0 1.5 2.7
All other................. 31.3 32.8 33.9 36.4 31.9 34.3
----- ----- ----- ----- ----- -----
All States................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>

41
<PAGE>

PROPERTY AND CASUALTY CLAIMS ADMINISTRATION

The Company employs approximately 2,500 claims employees in approximately
400 locations throughout the United States. These employees include telephone
and field adjusters, appraisers, litigation specialists, staff attorneys,
regional and home office management and support staff. The Company handles
over 97% of its claims internally and employs independent adjusters primarily
where geographic location makes it impractical to use the Company's employees.
The Company's claims are handled by professionals with the technical expertise
necessary to deal with complex coverage, liability and damage issues. The
Company recognizes the importance of the specialized and extensive training
required for claims adjusting and has committed significant resources and
efforts to the development of its claims staff.

The Company intends to use SAFECO's innovative claims handling procedures,
systems and technology to handle claims for the combined Company. In handling
claims, SAFECO strives to provide superior customer service while effectively
managing loss exposure and controlling claims expense. To resolve claims
efficiently, SAFECO grants claims settlement authority to claims personnel
based on the experience of each individual and, to the extent possible,
assigns personnel with expertise in the particular issues involved in each
claim. The home office claims department periodically conducts file reviews of
SAFECO's claims offices to monitor adherence to claims policies and
procedures, the adequacy of case reserves, claims loss control, claims expense
control, productivity and service standards. Regional claims managers
periodically audit sample files of claims representatives as part of their
supervisory process. SAFECO emphasizes proactive claims management. Management
believes that prompt contact and personalized service help to reduce claims
litigation and the associated costs.

In addition to adjusters and appraisers, the field staff includes special
investigative units to detect and deter fraudulent claims. SAFECO uses a
number of programs, including national electronic databases, to combat fraud.
SAFECO has reduced the cost of claims settlement in several lines of business
by establishing separate specialized units for workers' compensation,
environmental exposures and fraud investigations. See "--Property and Casualty
Loss Reserves--Environmental and Asbestos Claims." In order to reduce the
costs of claims settlement and litigation, SAFECO encourages alternative
dispute resolution to the extent possible, and where litigation is necessary,
relies on staff attorneys for handling up to 90% of its litigation in
locations where staff counsel are present.

SAFECO's claims processing is highly automated and combines the efficiency
of centralized claims handling with the flexibility of field representatives.
SAFECO believes that it is an industry leader in using a proprietary client
server system that supports a "paperless" claims environment. As a result,
SAFECO's field representatives are not restricted to a specific office or
physical location. This flexibility adds significant savings and efficiencies
to the claims-handling process. SAFECO's sophisticated automated claims-
handling systems have improved the speed and quality of claims service and, in
conjunction with preferred provider programs for glass replacement, automobile
rentals, medical cost containment and emergency response, have lowered the
cost of settling claims and shortened the time to claim payment. For example,
management believes that for 1996 the automated glass replacement program
resulted in a 15% savings over nonautomated glass claims processing with one
of the highest repair-to-replacement ratios in the industry; the automobile
rental program reduced the average rental period by two days below the
industry average and at negotiated rates; and the audit and management of
health care costs resulted in an annual 15% savings, net of expense. SAFECO's
claims department also provides automated feedback from claims handlers to
underwriters to help with risk assessment and pricing.

The Company believes that implementing SAFECO's approach to claims
administration at American States will reduce both loss costs and adjustment
expenses, particularly in the areas of automobile bodily injury claims,
construction defect claims, asbestos and environmental claims and catastrophe
claims.

42
<PAGE>

LIFE AND HEALTH INSURANCE

Product Lines

Annuities. For 1996, approximately 80% of SAFECO's annuities consisted of
single premium immediate annuities ("SPIAs"). SPIAs are sold to fund third
party personal injury settlements and are nonsurrenderable contracts,
supported by invested assets consisting primarily of long-maturity bonds.
Deferred annuities (primarily fixed rate products) accounted for the remaining
20% of SAFECO's 1996 annuity assets.

Retirement Services. These services primarily consist of tax-sheltered
annuities which are marketed to teachers and employees of hospitals and
charitable organizations, IRAs and corporate retirement funds. SAFECO also
offers a relatively small number of variable return products and expects to
focus greater efforts on these products in the future.

Group Life and Health. SAFECO is a major provider of excess loss group
medical insurance sold to self-insured employers.

Individual Life. American States focuses on the sale of universal life and
term life policies, although it also writes whole life, individual annuities
and disability income policies. SAFECO also offers individual life insurance.

Marketing

The Company markets its life, annuity and group insurance products in all 50
states and the District of Columbia. Product sales are through independent
agents who sell multi-line property and casualty insurance and/or life,
annuity and group insurance. The Company's deferred annuities are primarily
marketed through financial institutions by its subsidiary, Talbot Financial
Corporation.

The Company believes its marketing force of 8,000 agents presents an
opportunity to increase sales of individual life insurance through multi-line
property and casualty agents. In addition, the Company is exploring other
initiatives to broaden the distribution of its products. For example, the
Company expects to establish new marketing relationships with financial
institutions to offer fixed annuities and indexed annuities. The Company also
intends to expand its group insurance distribution network, develop
competitive group insurance pricing in select markets, and contract with
business partners who seek to maintain a long-term marketing relationship with
the Company.

OTHER OPERATIONS

The Company's other operations include subsidiaries involved in commercial
lending and leasing, asset management, insurance agency and financial
distribution operations, and real estate investment and management. Management
believes that the Acquisition will increase opportunities to cross-sell the
services provided by these operations.

SAFECO Credit Company, Inc. provides loans and equipment financing and
leasing to commercial businesses, including affiliated companies.

SAFECO Asset Management Company manages 25 SAFECO mutual funds and several
outside pension accounts. At June 30, 1997, it had $4.3 billion under
management. SAFECO Trust Company provides asset and trust management services.
Talbot Financial Corporation and its subsidiaries market insurance directly as
agent/brokers and also distribute financial products through banks.

SAFECO Properties, Inc., and its subsidiaries Winmar Company, Inc.
("Winmar") and SAFECARE Company, Inc. ("SAFECARE"), invest in and manage real
estate properties throughout the United States.

43
<PAGE>

Winmar primarily invests in retail shopping centers and also offers real
estate services, including property management, design and construction
management and tenant leasing services. SAFECARE invests in medical real
estate, primarily skilled nursing facilities.

TECHNOLOGY

The Company believes that a critical component of its success is the
integration of people and processes with leading-edge technology. SAFECO and
American States were among the first in the industry to develop on-line
integrated policy rating, billing, issuing and servicing systems that enable
the Company to interface electronically with independent agents. These systems
allow independent agents to provide timely service to their customers and to
achieve cost efficiencies for the agents and the Company. The Company intends
to use the most effective technology and systems available from each of SAFECO
and American States and believes that these efforts will improve customer
service and reduce costs in all of its businesses.

The Company's informations systems staff consists of approximately 1,400
professionals, who represent an array of technical and business disciplines.
The Company maintains this position by attracting and retaining high-quality
professionals, an aggressive campus recruiting program and a strong focus on
continuing education.

REINSURANCE

The Company uses treaty and facultative reinsurance to help manage its
exposure to loss. The availability and cost of reinsurance are subject to
prevailing market conditions, both in terms of price and available capacity.
Although the reinsurer is liable to the Company to the extent of the
reinsurance ceded, the Company remains primarily liable to the policyholder as
the direct insurer on all risks reinsured. To the Company's knowledge, none of
its reinsurers is experiencing financial difficulties. The Company's combined
liability for unpaid losses and adjustment expense is reported gross of
reinsurance recoverables which totaled $242.7 million at June 30, 1997, $267.8
million at December 31, 1996 and $230.9 million at December 31, 1995.

The Company does not enter into retrospective reinsurance contracts or
participate in any unusual or nonrecurring reinsurance transactions such as
reserve "swaps" or loss portfolio transfers. The Company does not use funding
covers and does not participate in any surplus relief transactions.

The Company expects to purchase $200 million of territory specific
reinsurance in excess of its current retention, effective October 1, 1997, to
protect against potential earthquake claims in connection with the New Madrid
fault located in the central United States. The Company also obtains excess-
of-loss, quota share and other forms of reinsurance coverage as is generally
standard for its business. Set forth below is a description of SAFECO's and
American States' catastrophe reinsurance programs in effect before the
Acquisition. At the end of 1997 management expects to replace such reinsurance
programs with new programs.

For 1997 SAFECO's nationwide catastrophe property reinsurance program covers
90% of $400 million of single-event losses in excess of a $100 million
retention. In a large catastrophe, SAFECO would retain the first $100 million
of losses, 10% of the next $400 million and all losses in excess of $500
million. SAFECO also has in place an additional earthquake reinsurance
contract for 1997 for Washington and Oregon that covers 90% of $100 million of
single-event earthquake losses in excess of $500 million. Both of these 1997
catastrophe property reinsurance contracts include provisions for one
reinstatement for a second catastrophe event in 1997 at current rates.

For 1997 American States' property catastrophe reinsurance program provides
protection of 90% of $150 million of single event losses in excess of a $30
million retention. American States also has an additional coverage layer of
90% of $100 million, solely for non-California earthquake exposure.

44
<PAGE>

SAFECO reinsures portions of its individual and group life, accident and
health insurance through commercial reinsurance treaties, providing protection
against large risk and catastrophe situations. In 1996 SAFECO began reinsuring
100% of its long-term disability business. American States also reinsures
portions of its individual life and annuity business with commercial
reinsurers.

PROPERTY AND CASUALTY LOSS RESERVES

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

The Company establishes reserves for losses that have been reported to the
Company and certain legal expenses on the "case basis" method. The Company
estimates claims incurred but not reported ("IBNR") and other adjustment
expense using statistical procedures. The Company accrues salvage and
subrogation recoveries using the "case basis" method for large claims and
statistical procedures for smaller claims.

The Company's objective is to set reserves that are adequate; that is, the
amounts originally recorded as reserves should at least equal the amounts
ultimately required to settle losses. The Company's reserves aggregate its
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 reflect current claims trends as well as social, legal and economic
conditions, including inflation. The reserves are not discounted.

The Company reviews its loss and adjustment expense reserve development on a
regular basis to determine whether the reserving assumptions and methods are
appropriate. Reserves initially determined are compared to the amounts
ultimately paid. The Company regularly makes statistical estimates of the
projected amounts necessary to settle outstanding claims, compares these
estimates to the recorded reserves and adjusts the reserves as necessary. The
adjustments are reflected in current operations.

The following tables provide an analysis of changes in losses and adjustment
expense reserves for 1996, 1995 and 1994 (net of reinsurance amounts) for
SAFECO and American States. Changes in the reserves have been reflected in
each company's income statement for the year when the changes were made.

Both SAFECO and American States have shown decreases to the liability for
estimated losses and adjustment expense for claims occurring in prior years.
SAFECO's operations were credited $77.7 million, $59.7 million and $81.3
million in 1996, 1995 and 1994, respectively, as a result of a reduction in
the estimated amounts needed to settle prior years' claims. American States'
operations were credited $45.7 million, $39.9 million and $92.0 million in
1996, 1995 and 1994, respectively. Such reserve adjustments, which affected
current operations during each of the years, resulted from developed losses
from prior years being different than were anticipated when the liability for
losses and loss expense were originally estimated. These development trends
have been considered in establishing the current year liabilities.

45
<PAGE>

ANALYSIS OF CHANGES IN LOSS AND LAE RESERVES, NET OF REINSURANCE

<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
SAFECO
Loss and LAE reserves at beginning of year...... $2,070.1 $2,092.9 $1,995.1
-------- -------- --------
Incurred loss and LAE for claims occurring in
the current year............................... 1,658.2 1,586.7 1,609.4
Decrease in estimated loss and LAE for claims
occurring in prior years....................... (77.7) (59.7) (81.3)
-------- -------- --------
Total incurred loss and LAE ................... 1,580.5 1,527.0 1,528.1
-------- -------- --------
Loss and LAE payments for claims occurring
during:
Current year................................... 939.5 856.8 809.8
Prior years.................................... 755.4 693.0 620.5
-------- -------- --------
Total loss and LAE payments.................... 1,694.9 1,549.8 1,430.3
-------- -------- --------
Loss and LAE reserves at end of year............ $1,955.7 $2,070.1 $2,092.9
======== ======== ========
Reconciliation:
Loss and LAE reserves, net of reinsurance...... $1,955.7 $2,070.1 $2,092.9
Add: reinsurance recoverables on unpaid losses
at end of year................................ 103.4 110.7 143.9
-------- -------- --------
Loss and LAE reserves at end of year, gross of
reinsurance.................................... $2,059.1 $2,180.8 $2,236.8
======== ======== ========
AMERICAN STATES
Loss and LAE reserves at beginning of year...... $2,294.5 $2,377.3 $2,458.5
-------- -------- --------
Incurred loss and LAE for claims occurring in
the current year............................... 1,245.6 1,233.6 1,318.2
Decrease in estimated loss and LAE for claims
occurring in prior years ...................... (45.7) (39.9) (92.0)
-------- -------- --------
Total incurred loss and LAE ................... 1,199.9 1,193.7 1,226.2
-------- -------- --------
Loss and LAE payments for claims occurring
during:
Current year................................... 654.0 613.6 617.4
Prior years.................................... 578.7 662.9 690.0
-------- -------- --------
Total loss and LAE payments.................... 1,232.7 1,276.5 1,307.4
-------- -------- --------
Loss and LAE reserves at end of year............ $2,261.7 $2,294.5 $2,377.3
======== ======== ========
Reconciliation:
Loss and LAE reserves, net of reinsurance...... $2,261.7 $2,294.5 $2,377.3
Add: reinsurance recoverables on unpaid losses
at end of year................................ 164.4 120.1 119.4
-------- -------- --------
Loss and LAE reserves at end of year, gross of
reinsurance.................................... $2,426.1 $2,414.6 $2,496.7
======== ======== ========
</TABLE>

Analysis of Loss and LAE Reserve Development

The following tables present the development of the loss and LAE reserves
for 1986 through 1996 for SAFECO and American States. The top lines of the
table show the estimated reserve for unpaid loss and LAE 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 reserve as of the end of each succeeding
year. The next section shows the reestimated amount of the previously recorded
reserve 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. The
lower section of the table shows the cumulative redundancy (deficiency)
developed with respect to the previously recorded liability as of the end of
1996. For example, SAFECO's 1990 reserve of $1,791.5 million developed over
six years to a redundancy of $182.9 million. Favorable loss reserve
development on prior accident years may not necessarily occur in the future,
and there can be no assurance that earnings will continue to benefit from
positive reserve developments.

46
<PAGE>

SAFECO. Since 1988, SAFECO's reserve development has been favorable. This
trend reflects several factors: aggressive reserving previously undertaken to
correct deficiencies in years prior to 1988, favorable legislation in workers'
compensation, moderation of medical costs and inflation, and improvements in
claims handling processes. The favorable legislation in workers' compensation,
which relates primarily to Oregon and California, has helped reduce fraud,
allowed for faster claim settlement 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 benefited from changes in the
organization of SAFECO's claims department, which established separate
specialized units for workers' compensation, environmental exposures and fraud
investigations. In addition, increased focus on loss adjustment expenses has
helped reduce these costs. The deficiencies indicated for 1986 and 1987 arose
from the emergence of liabilities for pollution, asbestos and other hazardous
toxic claims and adverse development of the automobile liability and workers'
compensation lines due to significant medical inflation and trends in the
civil justice system. In this same period, SAFECO's loss adjustment expenses
increased, reflecting higher legal costs and increased litigation.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve for unpaid
losses and
adjustment
expense:
Gross of reinsur-
ance............. $1,095.2 $1,328.5 $1,523.6 $1,702.5 $1,872.1 $2,017.3 $2,052.3 $2,095.2 $2,236.8 $2,180.8 $2,059.1
Reinsurance....... 54.9 79.0 97.0 75.3 80.7 152.0 89.2 100.1 143.9 110.7 103.4
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net of
reinsurance...... 1,040.3 1,249.5 1,426.6 1,627.2 1,791.4 1,865.3 1,963.1 1,995.1 2,092.9 2,070.1 1,955.7
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Cumulative net
amount paid as of:
One year later.... 382.3 419.5 443.1 540.2 603.0 548.9 598.9 620.5 693.0 755.4
Two years later... 610.3 677.1 725.7 849.6 914.5 905.7 913.4 947.6 1,068.3
Three years later. 771.3 848.2 902.5 1,035.0 1,109.4 1,086.5 1,106.5 1,147.6
Four years later.. 875.9 936.4 1,010.3 1,149.5 1,221.6 1,207.2 1,230.6
Five years later.. 945.4 1,033.7 1,083.5 1,222.1 1,301.1 1,294.4
Six years later... 991.8 1,082.8 1,129.9 1,276.4 1,368.9
Seven years later. 1,029.6 1,119.8 1,169.9 1,323.0
Eight years later. 1,057.3 1,151.0 1,203.4
Nine years later.. 1,082.0 1,177.6
Ten years later... 1,100.5
Net reserve re-es-
timated as of:
One year later.... 1,094.1 1,253.9 1,397.7 1,621.9 1,767.4 1,820.7 1,866.2 1,913.8 2,033.2 1,992.4
Two years later... 1,118.2 1,258.2 1,368.1 1,593.6 1,705.8 1,732.8 1,782.1 1,818.3 1,902.3
Three years later. 1,121.2 1,258.0 1,355.8 1,541.4 1,666.1 1,686.0 1,712.2 1,716.1
Four years later.. 1,140.3 1,264.8 1,338.6 1,544.8 1,657.2 1,650.7 1,642.3
Five years later.. 1,149.1 1,266.3 1,360.5 1,549.9 1,637.5 1,594.9
Six years later... 1,168.7 1,299.6 1,386.7 1,546.9 1,608.5
Seven years later. 1,210.5 1,332.4 1,383.3 1,525.4
Eight years later. 1,240.9 1,328.6 1,373.7
Nine years later.. 1,239.9 1,324.4
Ten years later... 1,239.6
Cumulative net
redundancy........ $(199.3) $(74.9) $52.9 $101.8 $182.9 $270.4 $320.8 $279.0 $190.6 $77.7
</TABLE>

47
<PAGE>

American States. For 1993 and subsequent years, American States' reserve
development has been favorable. This positive development was consistent with
industry trends, but was also due in part to the continuing effects of the New
Directions initiative. Under the New Directions initiative, American States
reduced market share in lines of business and geographic areas which were
producing less than acceptable loss ratios. The New Directions initiative has
been primarily responsible for the 10.6% improvement in American States' loss
ratio from 71.6% for 1991 to 61.0% for 1996. Other factors contributing to
favorable loss reserve development were the ongoing improvements in the claim
evaluation and management process and consistent application of American
States' reserving philosophy. Additionally, workers' compensation reform and
tort reform have created improvement in loss cost trends for both American
States and the industry. The unfavorable development of reserves prior to 1993
is primarily due to construction defects and environmental and asbestos
claims.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve for unpaid
losses and
adjustment
expense:
Gross of
reinsurance..... $1,406.5 $1,548.0 $1,797.9 $2,020.2 $2,276.1 $2,498.1 $2,671.2 $2,585.4 $2,496.7 $2,414.6 $2,426.1
Reinsurance...... 148.9 152.2 154.0 129.5 127.5 127.8 132.7 127.0 119.5 120.1 164.4
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net of
reinsurance..... 1,257.6 1,395.8 1,643.9 1,890.7 2,148.6 2,370.3 2,538.5 2,458.4 2,377.2 2,294.5 2,261.7
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Cumulative net
amount paid as
of:
One year later... 477.0 509.5 606.0 710.3 777.7 779.7 800.6 690.0 662.9 578.7
Two years later.. 727.1 785.2 937.0 1,096.2 1,183.1 1,230.8 1,225.1 1,094.3 996.8
Three years
later........... 887.6 931.0 1,152.6 1,321.7 1,453.7 1,495.6 1,501.6 1,322.7
Four years later. 971.6 1,052.4 1,272.2 1,479.7 1,617.9 1,685.4 1,663.6
Five years later. 1,046.3 1,124.7 1,361.9 1,580.1 1,740.6 1,807.5
Six years later.. 1,095.7 1,180.3 1,422.1 1,659.9 1,828.1
Seven years
later........... 1,134.3 1,219.8 1,471.4 1,716.6
Eight years
later........... 1,164.1 1,253.5 1,509.8
Nine years later. 1,190.4 1,282.9
Ten years later.. 1,214.1
Net reserve re-
estimated as of:
One year later... 1,189.2 1,335.6 1,608.7 1,900.9 2,153.4 2,397.9 2,490.4 2,366.4 2,337.3 2,248.8
Two years later.. 1,205.9 1,328.7 1,635.5 1,924.6 2,195.5 2,407.0 2,458.0 2,399.5 2,342.7
Three years
later........... 1,227.9 1,354.6 1,651.4 1,969.1 2,247.7 2,402.5 2,534.3 2,454.6
Four years later. 1,259.6 1,375.3 1,685.6 2,028.9 2,265.3 2,505.3 2,618.1
Five years later. 1,285.2 1,420.9 1,764.7 2,052.7 2,373.5 2,603.1
Six years later.. 1,326.6 1,507.0 1,779.4 2,159.3 2,472.5
Seven years
later........... 1,410.9 1,515.1 1,871.8 2,237.8
Eight years
later........... 1,417.4 1,604.7 1,935.6
Nine years later. 1,507.1 1,655.0
Ten years later.. 1,543.0
Cumulative net
redundancy
(deficiency):
Personal and
commercial
lines........... $ (48.5) $ (36.2) $ (75.8) $ (99.6) $ (87.1) $ (12.1) $ 78.5 $ 126.5 $ 129.5 $ 71.9
Reinsurance
business in run-
off............. (236.9) (223.0) (215.9) (247.5) (236.8) (220.7) (158.1) (122.7) (95.0) (26.2)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total........... $ (285.4) $ (259.2) $ (291.7) $ (347.1) $ (323.9) $ (232.8) $ (79.6) $ 3.8 $ 34.5 $ 45.7
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>

48
<PAGE>

Construction Defect Claims

American States experienced adverse loss development on construction defect
claims which is netted within the aggregate 1996 favorable development on
prior years' loss and LAE reserves. Construction defect claims are a subset of
claims that arise from coverage provided by general property damage liability
insurance. The Company defines construction defect claims as those involving
allegations of defective work which result in claims for damages related to
the diminution in value of large construction projects, such as condominiums,
office buildings, shopping centers and housing developments. Prior to 1993 the
number of construction defect claims reported to American States were
insignificant relative to the total number of general property damage
liability claims; therefore, these claims were not separated for the purpose
of American States' reserve analysis. SAFECO has not historically separated
these claims for the purpose of reserve analysis. The reporting pattern and
incurred loss and LAE for American States' construction defect claims are as
follows:

<TABLE>
<CAPTION>
NUMBER OF INCURRED LOSS
CONSTRUCTION DEFECTS REPORTED CLAIMS AND LAE(1)
-------------------- --------------- -------------
(IN MILLIONS)
<S> <C> <C>
1991 and prior.............................. 442 $ 12.0
1992........................................ 804 25.0
1993........................................ 1,257 46.1
1994........................................ 1,274 88.8
1995........................................ 1,227 110.8
1996........................................ 1,709 134.3
</TABLE>
- --------
(1) Incurred loss and LAE include reported claims and IBNR claims, net of
reinsurance.

The table below shows the loss reserve activity analysis of American States
for construction defect claims:

<TABLE>
<CAPTION>
CONSTRUCTION DEFECTS 1996 1995 1994
-------------------- ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Reserves at beginning of year..................... $245.5 $173.9 $114.9
Incurred loss and LAE ............................ 134.3 110.8 88.8
Loss and LAE payments............................. (49.8) (39.2) (29.8)
------ ------ ------
Reserves at end of year........................... $330.0 $245.5 $173.9
====== ====== ======
</TABLE>

Approximately 90% of American States' reported construction defect claims
through 1996 involved construction activity in California, with the majority
of such reported claims being incurred in accident years prior to 1994.
American States believes that the increase in 1996 reportings is attributable,
in large part, to the California Supreme Court's landmark decision in Montrose
Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 654 (1995). In Montrose the
court held that in progressive damage cases (where damage begins in one policy
period and advances in subsequent policy periods), such as environmental and
construction defect cases, any policy in effect while the damage progressed is
triggered and is potentially exposed to the loss. The adoption of this
"continuous" trigger theory in the interpretation of liability insurance
policies marked a significant departure from the "manifestation" trigger the
court had adopted in the interpretation of first-party property insurance
policies, which many intermediate California courts had applied prior to
Montrose. The adoption of the continuous trigger in conjunction with the ten-
year statute of limitations for construction defect claims greatly expanded
the number of primary carriers which would potentially have exposure for
losses arising from any one project. Those factors combined with an aggressive
plaintiffs' bar and a receptive California judiciary to produce the
experienced growth in reportings.

From an operational perspective, in late 1992, American States established a
dedicated claim unit specifically for the management of construction defect
claims. Also, beginning in 1993, American States intentionally began reducing
the volume of new contractor business written in California, and currently is
not writing any new California contractor business. American States also has
significantly reduced its in-force book of contractor business in California.
Further, as the number of construction defect claims increased during 1993

49
<PAGE>

and 1994, American States decided, at the end of 1994, to segregate
construction defect claims from all other general property damage liability
claims for reserve analysis. As a result of a separate analysis of the
construction defect losses, the reserves were increased. In addition, in 1996,
American States engaged an outside consulting firm to perform a construction
defect reserve analysis and claims management study. American States adopted
the firm's recommendations resulting from the study and recorded the proposed
addition of $44 million to construction defect loss and LAE reserves as of
December 31, 1996.

In connection with the Acquisition, SAFECO engaged its own outside
consulting firm to perform a reserve analysis on American States. Based on the
consultant's analysis, the Company intends to strengthen construction defect
reserves by up to $40 million in the fourth quarter of 1997.

Environmental and Asbestos Claims

Although estimation of environmental and asbestos claims is difficult, the
Company believes that the reserves established for these claims at December
31, 1996 are adequate based on the known facts and current law. The Company
has generally avoided directly writing coverages for larger companies with
substantial exposure in these areas. In view of changes in environmental
regulations and evolving case law which affect the development of loss
reserves, the process of estimating loss reserves for environmental, asbestos
and other toxic claims 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.

SAFECO. SAFECO's reserves for loss and LAE for liability coverages related
to environmental, asbestos and other toxic claims totaled $102.8 million at
December 31, 1996, compared with $107.5 million at December 31, 1995. These
amounts do not reflect the effect of reinsurance, which is insignificant. The
reserves were approximately 5% of SAFECO's total property and casualty
reserves for loss and LAE at both December 31, 1996 and 1995. The reserves
include estimates for both reported and IBNR losses and related legal
expenses.

The majority of SAFECO's environmental, asbestos and other toxic claims come
from the general liability line of business. A few of these losses occur in
other coverages such as umbrella, small commercial package policies and
personal lines. Approximately 1,100 of these claims were pending at December
31, 1996, computed on an occurrence basis. For the last three years, an
average of 411 claims were opened and an average of 416 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 of
SAFECO's environmental, asbestos and other toxic claims for the last three
years was $27,900, including legal expenses, and $16,500, excluding legal
expenses.

The table below shows SAFECO's loss reserve activity analysis for liability
coverages related to environmental, asbestos and other toxic claims:

<TABLE>
<CAPTION>
ENVIRONMENTAL AND ASBESTOS 1996 1995 1994
-------------------------- ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Reserves at beginning of year.................... $107.5 $108.2 $113.4
Incurred loss and LAE............................ 4.6 9.3 10.2
Loss and LAE payments............................ (9.3) (10.0) (15.4)
------ ------ ------
Reserves at end of year.......................... $102.8 $107.5 $108.2
====== ====== ======
</TABLE>

American States. American States' reserves for loss and LAE for liability
coverages related to environmental, asbestos and other toxic tort claims
totaled $250.5 million at December 31, 1996, compared with $241.2 million at
December 31, 1995, net of reinsurance. Reinsurance recoverables for these
exposures are

50
<PAGE>

estimated to be $30.5 million at December 31, 1996 and $20.3 million at
December 31, 1995. The reserves were approximately 11% of American States'
total property and casualty reserves for loss and LAE at both December 31,
1996 and 1995.

American States' reinsurance in run-off business incurred adverse prior year
loss reserve development in 1996 largely due to asbestos and environmental
loss exposures related to accident years prior to 1988. American States
engaged an independent actuarial firm in 1996 to review the sufficiency of
total reinsurance in run-off reserves, with a particular emphasis on asbestos
and environmental reserves. American States also obtained previously
unavailable information from a large property and casualty pool from which
American States assumed an approximate 2% pro rata share, which information
indicated that the pool was experiencing adverse development related to its
asbestos and environmental exposure. The cumulative effect of these
initiatives has been to help identify the various components of the adverse
development--approximately $13.0 million related to the pool and $13.2 million
related primarily to various casualty excess-of-loss exposures.

As a result of the above, American States increased its asbestos and
environmental reinsurance in run-off reserves, net of reinsurance
recoverables, to $143.9 million at year end 1996, up from $127.1 million at
year end 1995. In addition, in January of 1996 American States agreed to
assume $61.4 million of reserves, from an affiliate of Lincoln National, on a
closed block of specialty lines business. This run-off business covers
primarily property, casualty, accident and health exposures on sports, leisure
and entertainment venues. Reserves as of December 31, 1996 totaled $41.3
million. Due to the increase in asbestos and environmental reserves and the
assumption of the closed block of specialty business, total reinsurance in
run-off reserves, net of reinsurance recoverables, increased to $262.4 million
at year end 1996, up from $210.3 million at year end 1995. The Company
believes that American States' total reinsurance in run-off loss reserves were
adequate as of December 31, 1996.

The table below shows American States' loss reserve activity analysis for
liability coverages related to environmental, asbestos and other toxic claims:

<TABLE>
<CAPTION>
ENVIRONMENTAL AND ASBESTOS 1996 1995 1994
-------------------------- ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Reserves at beginning of year...................... $241.2 $198.2 $200.7
Incurred loss and LAE ............................. 22.9 56.9 11.5
Loss and LAE payments.............................. (13.6) (13.9) (14.0)
------ ------ ------
Reserves at end of year............................ $250.5 $241.2 $198.2
====== ====== ======
</TABLE>

INVESTMENTS

Insurance company investments must comply with applicable state laws and
regulations which prescribe the kind, quality and concentration of
investments. In general, these laws and regulations permit investments, within
specified limits and subject to certain qualifications, in federal, state and
municipal obligations, corporate bonds, preferred and common equity
securities, real estate mortgages and real estate.

The Company's investment policies are determined by the Finance Committee of
the Company's Board of Directors and are reviewed on a regular basis. The
Company's investment strategy is designed to emphasize investment yield
without sacrificing investment quality, and to provide for liquidity and
diversification. The Company's property and casualty portfolio's composition
of taxable and tax-exempt securities is periodically adjusted to maximize its
after-tax return in view of the alternative minimum tax. For the Company's
life and health portfolio, projected cash inflows are designed to match the
projected cash outflows of the liabilities of the various product lines. At
December 31, 1996, the average duration of the Company's property and casualty
insurance fixed-maturity portfolio was eight years and for the Company's life
insurance fixed-maturity portfolio, seven years.

51
<PAGE>

The following three tables set forth information regarding the combined
investments of the Company. These tables do not reflect any activity after
December 31, 1996, including the liquidation by SAFECO of investments to pay
the $600 million dividend used to fund a portion of the purchase price for the
Acquisition. See note 2 of notes to the consolidated financial statements of
SAFECO and note 3 of notes to the consolidated financial statements of
American States incorporated by reference into this Prospectus from the SAFECO
Annual Report and the American States Annual Report, as the case may be, for
information regarding the respective investment portfolios. See "Incorporation
of Certain Documents by Reference."

The table below reflects the average amount of combined investments, net
investment income earned and the yield thereon for the years ended December
31, 1996, 1995 and 1994:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Average investments(1)................... $18,616.5 $17,547.6 $16,507.4
Net investment income(2)................. $ 1,391.0 $ 1,341.9 $ 1,252.1
Average yield............................ 7.5% 7.6% 7.6%
</TABLE>
- --------
(1) Average of combined investments at the beginning and end of the period
stated at amortized cost. Real estate investments, which totaled $554.0
million at December 31, 1996 (or 2.6% of the Company's combined investment
portfolio at December 31, 1996), are excluded from the amounts and yields.

(2) Net investment income amounts are net of investment expenses, are pretax
and do not include realized gains and losses on investments.

The following table summarizes by type, the combined investments of the
Company at December 31, 1996:

<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
------------------------
PERCENT OF
AMOUNT PORTFOLIO
------------- ----------
(IN MILLIONS)
<S> <C> <C>
Mortgage-backed securities--principally
obligations of U.S. Government agencies......... $3,181.3 15.0%
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies............ 1,609.2 7.6
Obligations of states and political subdivisions. 5,583.1 26.3
Debt securities issued by foreign governments.... 404.7 1.9
Corporate debt securities........................ 7,136.1 33.6
Redeemable preferred stock....................... 274.1 1.3
--------- -----
Total fixed-maturities......................... 18,188.5 85.7
Equity securities................................ 1,733.9 8.2
Mortgage loans................................... 480.3 2.3
Real estate...................................... 554.0 2.6
Short-term investments........................... 179.2 0.8
Other investments................................ 96.1 0.4
--------- -----
Total investments.............................. $21,232.0 100.0%
========= =====
</TABLE>

52
<PAGE>

The quality of the combined fixed-maturities portfolio of the Company is
detailed in the following table:

<TABLE>
<CAPTION>
PERCENT OF
TOTAL AT
DECEMBER 31,
RATING(1) 1996
--------- ------------
<S> <C>
AAA......................................................... 41%
AA.......................................................... 15
A........................................................... 26
BBB......................................................... 17
BB or lower................................................. 1
---
Total..................................................... 100%
===
</TABLE>
- --------
(1) The ratings referenced in the above table are based on the S&P rating
system or the equivalent rating of another nationally recognized rating
organization or, if not rated, are internal ratings assigned by the
Company based on SAFECO's and American States' internal analyses of such
securities.

The Company's combined investment in "exotic" securities and high-risk
derivatives was less than 1% of the Company's combined total investments at
December 31, 1996. The Company does not enter into financial instruments for
trading or speculative purposes.

LEGAL PROCEEDINGS

Because of the nature of their businesses, the Company's insurance
subsidiaries are subject to certain legal actions filed or threatened in the
ordinary course of their business operations either as a liability insurer
defending third-party claims brought against its insureds or as an insurer
defending coverage claims brought against it. Although there can be no
assurances, the Company believes, based on the known facts and the law, that
the ultimate resolution of this litigation is not likely to have a material
adverse effect on its financial condition, future operating results or
liquidity.

The Company's property and casualty insurance subsidiaries are parties to a
number of lawsuits for liability coverages related to environmental claims.
Although estimation of environmental claims loss reserves is difficult, the
Company believes that the reserves established for these claims are adequate
based on the known facts and current law. The loss and LAE with respect to any
such lawsuit, or all lawsuits related to a single incident combined, are not
expected to be material to the financial condition of the Company. See "--
Property and Casualty Loss Reserves--Environmental and Asbestos Claims" for
more information regarding the liability of such subsidiaries for
environmental claims and the process of estimating environmental loss
reserves.

On February 14, 1996, four of the Company's property and casualty insurance
subsidiaries were among 23 underwriters of real property insurance named
defendants in a case brought in the United States District Court for the
Western District of Missouri alleging that their underwriting, sales and
marketing practices violated a number of civil rights laws (including, without
limitation, the Fair Housing Act). The plaintiffs sought to represent
themselves and a putative class of similarly situated persons in the State of
Missouri. This action sought injunctive relief, unspecified compensatory
damages, punitive damages and attorneys' fees. In response to motions filed by
the defendants, the court dismissed a conspiracy count by Order dated October
2, 1996, and dismissed the remaining counts by Order dated June 19, 1997.
Prior to dismissing the action, the court also refused to certify the
plaintiff class. The plaintiff has filed notice of appeal with the Eighth
Circuit Court of Appeals. Management believes, based on current information,
that the Company's underwriting, sales and marketing practices have complied
in all material respects with the applicable requirements of both state and
federal law. The Company intends to vigorously defend the action on appeal.

EMPLOYEES

As of December 31, 1996, the Company had approximately 11,200 employees on a
combined basis.

53
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS OF THE COMPANY

Set forth below are the names, ages and positions of the executive officers
of the Company as of the date hereof. Executive officers serve at the pleasure
of the Board of Directors.

<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<C> <C> <S>
Roger H. Eigsti......... 55 Chairman of the Board and Chief Executive Officer
Boh A. Dickey........... 53 President and Chief Operating Officer of the
Company and Chairman of the Boards for the
SAFECO mutual funds
Rodney A. Pierson....... 49 Chief Financial Officer, Senior Vice President
and Secretary
James W. Ruddy.......... 48 Senior Vice President and General Counsel
W. Randall Stoddard..... 49 President of SAFECO's property and casualty
insurance companies
Richard E. Zunker....... 59 President of SAFECO's life and health insurance
companies
</TABLE>

Roger H. Eigsti has been Chairman of the Board and Chief Executive Officer
of SAFECO since May 1993. Mr. Eigsti has been an executive officer of SAFECO
or its subsidiaries since 1980 and a SAFECO director since 1988. Mr. Eigsti
was SAFECO's President from January 1992 to August 1996, President and Chief
Operating Officer from May 1989 to December 1991 and Executive Vice President
and Chief Financial Officer from 1985 to May 1989. Mr. Eigsti is a director of
Washington Mutual, Inc. and Washington Mutual Bank.

Boh A. Dickey has been President and Chief Operating Officer of SAFECO since
August 1996, and Chairman of the Boards for the 25 SAFECO mutual funds since
May 1989. Mr. Dickey has been an executive officer of SAFECO since 1982 and a
director since 1993. Mr. Dickey was Executive Vice President from January 1992
to August 1996, Chief Financial Officer from May 1989 to August 1996, Senior
Vice President from May 1989 to December 1991, Secretary from 1985 to November
1991 and Vice President and Controller from 1982 to May 1990.

Rodney A. Pierson has been SAFECO's Chief Financial Officer since August
1996, a Senior Vice President since February 1994 and Secretary since November
1991. Mr. Pierson served as Vice President from May 1990 to January 1994, as
Controller from May 1990 to August 1997, as Vice President of SAFECO's
property and casualty insurance companies from 1987 to May 1990 and as
Controller of SAFECO's property and casualty insurance companies from 1984 to
May 1990.

James W. Ruddy has been a Senior Vice President of SAFECO since November
1992 and General Counsel since May 1989. Mr. Ruddy was a Vice President of
SAFECO from May 1989 to November 1992 and Associate General Counsel from 1985
to May 1989.

W. Randall Stoddard has been President of SAFECO's property and casualty
insurance companies since July 1997. Mr. Stoddard was Senior Vice President of
SAFECO's property and casualty insurance companies from July 1994 to June 1997
and Chief Operating Officer of such companies from September 1996 to June
1997. He is not an officer of the Company.

Richard E. Zunker has been President of SAFECO's life and health insurance
companies since 1985. He is not an officer of the Company.

54
<PAGE>

DIRECTORS OF THE COMPANY

Set forth below are the names of the directors of the Company as of the date
hereof and the year their terms expire. The biographies of Messrs. Eigsti and
Dickey can be found under "--Executive Officers of the Company."

<TABLE>
<CAPTION>
TERM
NAME AGE EXPIRING
---- --- --------
<S> <C> <C>
Roger H. Eigsti............................................. 55 1998
Phyllis J. Campbell......................................... 46 1999
Robert S. Cline............................................. 60 1998
Boh A. Dickey............................................... 53 1999
John W. Ellis............................................... 69 1998
William P. Gerberding....................................... 68 1999
Joshua Green III............................................ 61 2000
William W. Krippaehne, Jr. ................................. 46 1998
William G. Reed, Jr. ....................................... 58 2000
Judith M. Runstad........................................... 53 2000
Paul W. Skinner............................................. 50 1999
George H. Weyerhaeuser...................................... 71 2000
</TABLE>

Phyllis J. Campbell is President and Chief Executive Officer of U.S. Bank of
Washington, N.A. of which she has been an executive officer since 1989. She is
also Executive Vice President of U.S. Bancorp. Ms. Campbell has been a
director of the Company since 1994. She is also a director of Puget Sound
Energy, Inc.

Robert S. Cline is Chairman and Chief Executive Officer of Airborne Freight
Corporation, an air freight carrier. Mr. Cline has been a director of the
Company since 1992. He is also an advisory director of Seafirst Corporation
and a director of Metricom, Inc.

John W. Ellis is Chairman and Chief Executive Officer of the corporate
general partner of The Baseball Club of Seattle, L.P., the owner of the
Seattle Mariners baseball team. Mr. Ellis is a director of Puget Sound Energy,
Inc. and was its Chief Executive Officer from 1976 to 1992 and its Chairman
from 1987 to 1993. Mr. Ellis has been a director of the Company since 1981. He
is also a director of Washington Mutual, Inc. and Washington Mutual Bank,
UTILX Corporation and Associated Electric & Gas Insurance Services, Ltd.

William P. Gerberding is President Emeritus of the University of Washington,
where he served as President from 1979 until his retirement in 1995. Dr.
Gerberding has been a director of the Company since 1981. He is also a
director of Washington Mutual, Inc. and Washington Mutual Bank.

Joshua Green III is Chairman and Chief Executive Officer of the Joshua Green
Corporation, a family investment firm, and Chairman of its wholly owned
subsidiary, Sage Manufacturing Corporation. Mr. Green has been a director of
the Company since 1981. He is also a director of U.S. Bancorp.

William W. Krippaehne, Jr. is President and Chief Executive Officer of
Fisher Companies Inc., the primary subsidiaries of which are engaged in
broadcasting, flour milling and real estate ownership and development.
Mr. Krippaehne has been an executive officer of Fisher Companies Inc. since
1982. He has been a director of the Company since 1996.

William G. Reed, Jr. was the Chairman of Simpson Investment Company, a
forest products holding company. Mr. Reed has been a director of the Company
since 1974. He is also a director of Microsoft Corporation, The Seattle Times,
Washington Mutual, Inc. and Washington Mutual Bank.

55
<PAGE>

Judith M. Runstad is a partner of the Seattle law firm Foster Pepper &
Shefelman. Mrs. Runstad has been a director of SAFECO since 1990. She is also
Chairman of the Board of the Federal Reserve Bank of San Francisco.

Paul W. Skinner is President of Skinner Corporation, an investment company.
Mr. Skinner has been a director of the Company since 1988. He is also an
advisory director of Seafirst Corporation and Seattle-First National Bank.

George H. Weyerhaeuser is Chairman of the Board of Weyerhaeuser Company, a
forest products company, and was its Chief Executive Officer from 1966 until
his retirement in 1991. Mr. Weyerhaeuser has been a director of the Company
since 1978. He is also a director of The Boeing Company and Chevron
Corporation. Under the terms of the Company's retirement policy for directors,
Mr. Weyerhaeuser will retire as a director at the Company's 1999 Annual
Meeting of Stockholders.

56
<PAGE>

DESCRIPTION OF CAPITAL STOCK

GENERAL

The authorized capital stock of the Company consists of 300,000,000 shares
of Common Stock, no par value, and 10,000,000 shares of Preferred Stock, no
par value. The following summary description of the capital stock is qualified
in its entirety by reference to the Restated Articles and Bylaws of the
Company, which are incorporated by reference as exhibits to the Registration
Statement of which this Prospectus forms a part.

COMMON STOCK

On June 30, 1997, there were 126,343,401 shares of Common Stock outstanding,
held of record by approximately 4,300 holders. Holders of Common Stock are
entitled to one vote per share on all matters submitted to a vote of
shareholders. There are no cumulative voting rights for the election of
directors. Holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of legally
available funds, subject to preferences that may be applicable to any
outstanding Preferred Stock. In the event of the liquidation, dissolution or
winding up of the Company, holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the
liquidation preference of any outstanding Preferred Stock. Holders of Common
Stock have no preemptive, subscription, redemption or conversion rights. All
outstanding shares of Common Stock are, and all shares of Common Stock to be
outstanding upon completion of the Offerings will be, fully paid and
nonassessable.

PREFERRED STOCK

The Restated Articles permit the Board of Directors, without further
shareholder authorization, to issue Preferred Stock in one or more series and
to fix the terms and provisions of each series, including dividend rights and
preferences over dividends on the Common Stock; conversion rights, if any;
voting rights, if any (in addition to those provided by law); redemption
rights, if any, and the terms of any sinking fund therefor; and rights on
liquidation, including preferences over the Common Stock, which action could
adversely affect the rights of holders of Common Stock. As of the date hereof,
the Company had no shares of Preferred Stock outstanding.

ANTITAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS AND WASHINGTON LAW

Except as otherwise described below (and in addition to any voting rights
granted to holders of Preferred Stock), the approval of any merger, share
exchange, sale, lease, exchange or disposition of all or substantially all of
the Company's property, otherwise than in the usual and regular course of
business, or proposal to dissolve, requires the affirmative vote of the
holders of not less than a majority of the outstanding shares of voting stock.
In addition, the Restated Articles, which provide for the foregoing
provisions, as well as the staggered terms for directors and the availability
of Preferred Stock for issuance without shareholder approval, may deter any
potential unfriendly offers or other efforts to obtain control of the Company
that are not approved by the Board of Directors, and could thereby deprive
shareholders of opportunities to realize a premium on their Common Stock and
make removal of incumbent management more difficult. On the other hand, these
provisions may induce any persons seeking control of the Company or a business
combination with the Company to negotiate terms acceptable to the Board of
Directors.

The laws of the state of Washington contain certain provisions that may have
the effect of delaying, deferring or preventing a change of control of the
Company. Chapter 23B.19 of the Washington Business Corporation Act prohibits a
"Target Corporation," with certain exceptions, from engaging in certain
"Significant Business Transactions" with a person or group of persons which
beneficially owns 10% or more of the voting securities of the Target
Corporation (an "Acquiring Person") for a period of five years after such
acquisition, unless the transaction or acquisition of shares is approved by a
majority of the members of the Target Corporation's board of directors prior
to the time of acquisition. Such prohibited transactions include, among

57
<PAGE>

other things, a merger or consolidation with, disposition of assets to, or
issuance or redemption of stock to or from, the Acquiring Person, termination
of 5% or more of the employees of the Target Corporation as a result of the
Acquiring Person's acquisition of 10% or more of the shares or allowing the
Acquiring Person to receive any disproportionate benefit as a shareholder.
After the five-year period, a Significant Business Transaction may occur as
long as it complies with certain fair price provisions of the statute or is
approved by a majority of disinterested shareholders within each voting group
entitled to vote separately at an annual meeting of shareholders called
earlier than five years after the Acquiring Person's acquisition of shares. A
corporation may not "opt out" of this statute.

INSURANCE REGULATIONS CONCERNING CHANGE OF CONTROL

State insurance regulatory laws intended primarily for the protection of
policyholders contain provisions that require advance approval by state
agencies of any change of control of an insurance company or insurance holding
company that is domiciled (or, in some cases, having such substantial business
that it is deemed to be commercially domiciled) in that state. The Company
owns, directly or indirectly, all the shares of stock of certain property and
casualty insurance companies domiciled or deemed to be commercially domiciled
in Washington, Indiana, California, Illinois, Texas, Missouri, Pennsylvania
and New York. In the states where the Company's insurance subsidiaries are
domiciled or deemed to be commercially domiciled, "control" is generally
presumed to exist through the ownership of 10% or more of the voting
securities of such an insurance company or of any company that controls such
an insurance company. Any purchase of shares of Common Stock that would result
in the purchaser's owning 10% or more of the voting power of the Company will
be presumed to result in the acquisition of control of the Company's insurance
subsidiaries. Such an acquisition of Common Stock would require prior
regulatory approval unless the Insurance Commissioner in each state in which
the Company's insurance subsidiaries are domiciled or deemed to be
commercially domiciled determines otherwise. In addition, many state insurance
regulatory laws contain provisions that require prenotification to state
agencies of a change of control of a nondomestic insurance company licensed in
that state in the event specific market concentration thresholds are triggered
by an acquisition. While such prenotification statutes do not authorize the
state agency to disapprove the change of control, such statutes do authorize
issuance of a cease and desist order with respect to the nondomestic admitted
insurer if certain conditions exist such as undue market concentration. Such
insurance regulatory requirements may deter, delay or prevent certain
transactions affecting the control of the Company or the ownership of Common
Stock, including transactions that could be advantageous to the shareholders
of the Company.

LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS

The Restated Articles include a provision permitted by Washington law that
limits the liability of the Company's directors. Under the provision, no
director shall be personally liable to the Company or its shareholders for
monetary damages for conduct as a director, excluding, however, liability for
acts or omissions involving intentional misconduct by the director or knowing
violations of law by the director, distributions illegal under Washington law,
or transactions from which the director will personally receive a benefit in
money, property or services to which the director is not legally entitled. In
addition, Washington law provides for broad indemnification by the Company of
its officers and directors. The Company's Bylaws implement this
indemnification to the extent permitted by law. Insofar as the indemnity for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"), may be permitted to directors or officers of the Company
pursuant to the foregoing provisions, the Company has been informed that in
the opinion of the Securities and Exchange Commission (the "Commission") such
indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.

REGISTRAR AND TRANSFER AGENT

The registrar and transfer agent for the Common Stock is First Chicago Bank.

58
<PAGE>

CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS

The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a Non-U.S. Holder. For this purpose, a "Non-U.S. Holder" is any
person who is, for United States federal income tax purposes, an individual or
entity other than (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in the United
States or under the laws of the United States or of any state thereof, (iii)
an estate the income of which is includable in gross income for United States
federal income tax purposes regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over
the administration of the trust, and one or more United States fiduciaries
have the authority to control all substantial decisions of the trust. This
discussion does not address all aspects of United States federal income and
estate taxes that may be relevant to such Non-U.S. Holders in light of their
personal circumstances or any foreign, state or local tax consequences.
Furthermore, this discussion is based on provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), existing and proposed regulations
promulgated thereunder and administrative and judicial interpretations
thereof, as of the date hereof, all of which are subject to change, possibly
on a retroactive basis. EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED
TO CONSULT A TAX ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX
CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF COMMON STOCK, AS WELL AS
ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY FOREIGN, STATE,
LOCAL OR OTHER TAXING JURISDICTION.

DIVIDENDS

Dividends paid to a Non-U.S. Holder of Common Stock generally will be
subject to withholding of United States federal income tax at a 30% rate or
such lower rates as may be specified by an applicable income tax treaty.
However, dividends that are effectively connected with the conduct of a trade
or business by the Non-U.S. Holder within the United States are not subject to
the withholding tax, but instead are subject to United States federal income
tax on a net income basis at applicable graduated individual or corporate
rates. Any such effectively connected dividends received by a foreign
corporation may, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate or such lower rates as may be specified by
an applicable income tax treaty.

Under current law, dividends paid to an address outside the United States
are presumed to be paid to a resident of such country (unless the payer has
knowledge to the contrary) for purposes of the withholding tax discussed above
and, under the current United States Treasury regulations, for purposes of
determining the applicability of a tax treaty rate. Under proposed United
States Treasury regulations not currently in effect, a Non-U.S. Holder of
Common Stock who wishes to claim the benefit of an applicable treaty rate (and
avoid back-up withholding as discussed below) would be required to satisfy
applicable certification and other requirements, including the filing of an
Internal Revenue Service ("IRS") Form W-8 certifying entitlement to a treaty
benefit. Also, those proposed regulations would provide, among other things,
rules for determining whether, for purposes of treaty eligibility, dividends
paid to a Non-U.S. Holder that is an entity should be treated as paid to the
entity or those holding an interest in the entity. Currently, certain
certification and disclosure requirements must be complied with in order to be
exempt from withholding under the effectively connected income exemption
discussed above.

A Non-U.S. Holder of Common Stock eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
IRS.

GAIN ON DISPOSITION OF COMMON STOCK

A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i) the gain is effectively connected with a trade or
business of the Non-U.S. Holder in the United States, (ii) in the case of a
Non-U.S. Holder who is an

59
<PAGE>

individual and holds the Common Stock as a capital asset, such holder is
present in the United States for 183 or more days in the taxable year of the
sale or other disposition and certain other conditions are met, or (iii) the
Company is or has been a "U.S. real property holding corporation" for United
States federal income tax purposes at any time within the shorter of the five-
year period preceding such disposition or such Non-U.S. Holder's holding
period.

An individual Non-U.S. Holder described in clause (i) above will be taxed on
the net gain derived from the sale under regular graduated United States
federal income tax rates. An individual Non-U.S. Holder described in clause
(ii) above will be subject to a flat 30% tax on the gain derived from the
sale, which may be offset by United States capital losses (notwithstanding the
fact that the individual is not considered a United States resident). If a
Non-U.S. Holder that is a foreign corporation falls under clause (i) above, it
will be taxed on its gain under regular graduated United States federal income
tax rates and, in addition, may be subject to the branch profits tax equal to
30% of its effectively connected earnings and profits within the meaning of
the Code for the taxable year, as adjusted for certain items, unless it
qualifies for a lower rate under an applicable income tax treaty.

The Company has not determined whether it is a "U.S. real property holding
corporation" for federal income tax purposes, but does not believe it ever has
been, and does not anticipate that it will become, a U.S. real property
holding corporation. If the Company is or becomes a U.S. real property holding
corporation, so long as the Common Stock continues to be regularly traded on
an established securities market, only a Non-U.S. Holder who holds or held (at
any time during the shorter of the five-year period preceding the date of
disposition or the holder's holding period) more than 5% of the Common Stock
will be subject to United States federal income tax on the disposition of the
Common Stock.

FEDERAL ESTATE TAX

Common Stock held by an individual Non-U.S. Holder at the time of his or her
death will be included in such holder's gross estate for United States federal
estate tax purposes, unless an applicable estate tax treaty provides
otherwise.

INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to such holder and the tax withheld with respect to
such dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides under the provisions of an applicable income tax treaty.

Under current law, backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons who fail to furnish
certain information under the United States information reporting
requirements) generally will not apply to dividends paid to a Non-U.S. Holder
at an address outside the United States (unless the payer has knowledge that
the payee is a United States person). Under proposed United States Treasury
regulations not currently in effect, however, a Non-U.S. Holder will be
subject to back-up withholding unless applicable certification requirements
are met.

Payment of the proceeds of a sale of Common Stock by or through a United
States office of a broker is subject to both backup withholding and
information reporting unless the beneficial owner certifies under penalties of
perjury that it is a Non-U.S. Holder, or otherwise establishes an exemption.
In general, backup withholding and information reporting will not apply to a
payment of the proceeds of a sale of Common Stock by or through a foreign
office of a broker. If, however, such broker is, for United States federal
income tax purposes, a United States person, a controlled foreign corporation,
or a foreign person that derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States, such
payments will be subject to information reporting, but not backup withholding,
unless (i) such broker has documentary evidence in its records that the
beneficial owner is a Non-U.S. Holder and certain other conditions are met or
(ii) the beneficial owner otherwise establishes an exemption.

Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.

60
<PAGE>

UNDERWRITING

Under the terms and subject to the conditions in the U.S. Underwriting
Agreement dated the date hereof, each of the underwriters of the U.S. Offering
named below (the "U.S. Underwriters"), for whom Smith Barney Inc. and
are acting as the representatives (the "Representatives"), has
severally agreed to purchase, and the Company has agreed to sell to each U.S.
Underwriter, shares of Common Stock which equal the number of shares set forth
opposite the name of such U.S. Underwriter below:

<TABLE>
<CAPTION>
U.S. UNDERWRITERS NUMBER OF SHARES
----------------- ----------------
<S> <C>
Smith Barney Inc........................................
----------
Total................................................. 11,200,000
==========
</TABLE>

Under the terms and subject to the conditions contained in the International
Underwriting Agreement dated the date hereof, each of the managers of the
concurrent International Offering named below (the "Manager"), for whom Smith
Barney Inc. is acting as the lead manager (the "Lead Manager"), has severally
agreed to purchase, and the Company has agreed to sell to each Manager, shares
of Common Stock which equal the number of shares set forth opposite the name
of such Manager below:

<TABLE>
<CAPTION>
MANAGERS NUMBER OF SHARES
-------- ----------------
<S> <C>
Smith Barney Inc........................................
---------
Total................................................. 2,800,000
=========
</TABLE>

The U.S. Underwriters and the Managers (collectively, the "Underwriters")
initially propose to offer part of the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus and part to certain dealers at a price that represents a concession
not in excess of $ per share below the public offering price. The U.S.
Underwriters and the Managers may allow, and such dealers may reallow, a
concession not in excess of $ per share to other U.S. Managers or to
certain other dealers. After the public offering, the public offering price
and other selling terms may be changed by the U.S. Underwriters and the
Managers. Each of the U.S. Underwriting Agreement and the International
Underwriting Agreement provides that the obligations of the U.S. Underwriters
and the several Managers to pay for and accept delivery of the shares of
Common Stock offered hereby are subject to the approval of certain legal
matters by counsel and to certain other conditions. The U.S. Underwriters and
the Managers are obligated to take and pay for all the shares of Common Stock
offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.

The Company has granted to the U.S. Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to an aggregate of
additional shares of Common Stock at the price to public set forth
on the cover page of this Prospectus, less underwriting discounts and
commissions. The U.S. Underwriters may exercise such option to purchase
additional shares of Common Stock solely for the purpose of covering over-
allotments, if any, in connection with the sale of the shares of Common Stock
offered hereby. To the extent such option is exercised, the U.S. Underwriters
will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
the number of shares of Common Stock set forth opposite the U.S. Underwriters'
names in the preceding table bears to the total number of shares in such
table.

The Company has agreed to indemnify the U.S. Underwriters and the Managers
against certain liabilities, including liabilities under the Securities Act.

The Company and its directors and executive officers have agreed, subject to
certain limited exceptions, that, for a period of 90 days after the date of
this Prospectus, they will not, without the prior written consent

61
<PAGE>

of Smith Barney Inc., offer, sell, contract to sell or otherwise dispose of
any Common Stock (or any securities convertible into or exercisable or
exchangeable for Common Stock) or grant any options or warrants to purchase
Common Stock.

The U.S. Underwriters and the Managers have entered into an Agreement
Between U.S. Underwriters and Managers pursuant to which the U.S. Underwriters
have agreed that, as part of the distribution of the 11,200,000 shares of
Common Stock offered in the U.S. Offering, (i) it is not purchasing any such
shares for the account of anyone other than a U.S. or Canadian Person (as
defined below) and (ii) it has not offered or sold, and will not offer, sell,
resell or deliver, directly or indirectly, any of such shares or distribute
any prospectus relating to the U.S. Offering outside the United States or
Canada or to anyone other than a U.S. or Canadian Person. In addition, each
Manager has agreed that as part of the distribution of the 2,800,000 shares of
Common Stock offered in the International Offering (i) it is not purchasing
any such shares for the account of any U.S. or Canadian Person and (ii) it has
not offered or sold, and will not offer, sell, resell or deliver, directly or
indirectly, any of such shares or distribute any prospectus relating to the
International Offering in the United States or Canada or to any U.S. or
Canadian Person. Each Manager has also agreed that it will offer to sell
shares only in compliance with all relevant requirements of any applicable
laws.

The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the U.S. Underwriting Agreement, the
International Underwriting Agreement and the Agreement Between U.S.
Underwriters and Managers, including: (i) certain purchases and sales between
the U.S. Underwriters and the Managers; (ii) certain offers, sales, resales,
deliveries or distributions to or through investment advisors or other persons
exercising investment discretion; (iii) purchases, offers or sales by a U.S.
Underwriter who is also acting as a Manager or by a Manager who is also acting
as a U.S. Underwriter; and (iv) other transactions specifically approved by
the Representatives and the Lead Managers. As used herein, "U.S. or Canadian
Person" means any resident or national of the United States or Canada, any
corporation, partnership or other entity created or organized in or under the
laws of the United States or Canada or any estate or trust the income of which
is subject to United States or Canadian income taxation regardless of the
source of its income (other than the foreign branch of any U.S. or Canadian
Person), and includes any United States or Canadian branch of a person other
than a U.S. or Canadian Person.

Any offer of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the relevant province of Canada
in which such offer is made.

Each Manager has represented and agreed that (i) it has not offered or sold
and will not offer or sell in the United Kingdom, by means of any document,
any shares of Common Stock other than to persons whose ordinary business it is
to buy or sell shares or debentures, whether as principal or agent or in
circumstances which do not constitute an offer to the public within the
meaning of the Public Offering of Securities Regulation 1995, (ii) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the
shares in, from, or otherwise involving, the United Kingdom, and (iii) it has
only issued or passed on and will only issue or pass on to any person in the
United Kingdom any document received by it in connection with the issuance of
the shares if that person is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exceptions) Order
1996 or is a person to whom the document may otherwise lawfully be issued or
passed on.

No action has been or will be taken in any jurisdiction by the Company, the
U.S. Underwriters or the Managers that would permit any offering to the
general public of the shares of Common Stock offered hereby in any
jurisdiction other than the United States.

Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price set forth on the
cover page hereof.

62
<PAGE>

Pursuant to the Agreement Between U.S. Underwriters and Managers, sales may
be made between the U.S. Underwriters and the Managers of such number of
shares of Common Stock as may be mutually agreed. The price of any shares so
sold shall be the public offering price as then in effect for shares being
sold by the U.S. Underwriters and the Managers, less all or any part of the
selling concession, unless otherwise determined by mutual agreement. To the
extent that there are sales between the U.S. Underwriters and the Managers
pursuant to the Agreement Between U.S. Underwriter and Managers, the number of
shares initially available for sale by the U.S. Underwriters and by the
Managers may be more or less than the number of shares appearing on the front
cover of this Prospectus.

In connection with the Offerings and in compliance with applicable law, the
Underwriters may overallot (i.e., sell more Common Stock than the total amount
shown on the list of Underwriters and participations which appears above) and
may effect transactions which stabilize, maintain or otherwise affect the
market price of the Common Stock at levels above those which might otherwise
prevail in the open market. Such transactions may include placing bids for the
Common Stock or effecting purchases of the Common Stock for the purpose of
pegging, fixing or maintaining the price of the Common Stock or for the
purpose of reducing a syndicate short position created in connection with the
Offerings. A syndicate short position may be covered by exercise of the option
described above in lieu of or in addition to open market purchases. In
addition, the contractual arrangements among the Underwriters include a
provision whereby, if the Representatives or Lead Manager purchase Common
Stock in the open market for the account of the underwriting syndicate and the
securities purchased can be traced to a particular U.S. Underwriter, Manager
or syndicate member, the underwriting syndicate may require the U.S.
Underwriter, Manager or syndicate member in question to purchase the Common
Stock in question at the cost price to the syndicate or may recover from (or
decline to pay to) to the U.S. Underwriter, manager or syndicate member in
question the selling concession applicable to the securities in question. The
Underwriters are not required to engage in any of these activities and any
such activities, if commenced, may be discontinued at any time.

Any or all of the Underwriters may serve as a financial advisor to the
Company and its affiliates from time to time in the future. Smith Barney Inc.
served as financial advisor to the Company in connection with the Acquisition
and has received customary fees in respect of such activities.

63
<PAGE>

EXPERTS

The consolidated financial statements of SAFECO at December 31, 1996 and
1995, and for each of the three years in the period ended December 31, 1996,
incorporated by reference in the SAFECO Annual Report for the year ended
December 31, 1996, have been incorporated by reference into this Prospectus
and the Registration Statement (as defined below) and have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
also incorporated by reference in the SAFECO Annual Report, and are included
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.

The consolidated financial statements of American States at December 31,
1996 and 1995, and for each of the three years in the period ended December
31, 1996, included in the American States Annual Report for the year ended
December 31, 1996, have been incorporated by reference into this Prospectus
and the Registration Statement and have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon also included in
the American States Annual Report, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.

LEGAL MATTERS

The validity of the Common Stock will be passed upon for the Company by
Perkins Coie, Seattle, Washington and for the Underwriters by Skadden, Arps,
Slate, Meagher & Flom LLP, New York, New York.

AVAILABLE INFORMATION

The Company is, and American States prior to the Acquisition was, subject to
the informational requirements of the Exchange Act and in accordance therewith
files (or filed, with respect to American States prior to the Acquisition)
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information may be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional
offices at 7 World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material may also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Such information may also be accessed electronically by
means of the Commission's Web site (http://www.sec.gov). In addition, such
reports, proxy statements and other information concerning the Company may be
inspected at the offices of the Nasdaq Stock Market, 1735 K Street, N.W.,
Washington, D.C. 20006 on which certain securities of the Company are quoted
and such reports, proxy statements and other information concerning American
States may be inspected at the offices of the New York Stock Exchange, 20
Broad Street, New York, New York 10005, on which certain of American States
securities were listed prior to the Acquisition.

The Company has filed with the Commission a Registration Statement on Form
S-3, of which this Prospectus forms a part (the "Registration Statement"), to
register the securities offered hereby. This Prospectus does not contain all
the information set forth in the Registration Statement, certain parts of
which are omitted from this Prospectus in accordance with the rules and
regulations of the Commission. Statements made in this Prospectus as to the
contents of any contract, agreement or other document do not purport to be
complete. With respect to each such contract, agreement or other document
filed as an exhibit to the Registration Statement, reference is made to the
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. Items
omitted from this Prospectus but contained in the Registration Statement may
be inspected and copied as described above.

64
<PAGE>

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

Effective October 1, 1997, SAFECO acquired American States through the
Acquisition. The following documents filed with the Commission pursuant to the
Exchange Act by SAFECO and American States are incorporated into this
Prospectus by reference and shall be deemed to be a part hereof:

1. SAFECO's Annual Report on Form 10-K for the year ended December 31,
1996 (File No. 1-6563);

2. SAFECO's Quarterly Reports on Forms 10-Q for the quarters ended March
31, 1997 (File No. 1-6563) and June 30, 1997 (File No. 1-6563);

3. SAFECO's Current Report on Form 8-K filed with the Commission on June
24, 1997 (File No. 1-6563);

4. The description of the Common Stock set forth in SAFECO's Registration
Statement filed with the Commission under the Exchange Act (File No. 1-
6563);

5. SAFECO's Proxy Statement on Schedule 14A dated March 14, 1997 (File
No. 1-6563);

6. American States' Annual Report on Form 10-K, Form 10-K/A(1) and Form
10-K/A(2) for the year ended December 31, 1996 (File No. 1-11733);

7. American States' Quarterly Reports on Forms 10-Q for the quarters
ended March 31, 1997 (File No. 1-11733) and June 30, 1997 (File No. 1-
11733);

8. American States' Current Reports on Forms 8-K filed with the
Commission on March 28, 1997 (File No. 1-11733) and June 17, 1997 (File No.
1-11733); and

9. American States' Proxy Statement on Schedule 14A dated August 15, 1997
(File No. 1-11733).

All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to the
termination of the Offerings shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from their respective dates of
filing. Any statement made in this Prospectus or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that another
statement made in this Prospectus or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any modified or superseded statement shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.

The terms "Prospectus" and "herein" mean this Prospectus, including the
documents incorporated or deemed to be incorporated herein by reference, as
the same may be amended, supplemented or otherwise modified from time to time.
Unless otherwise indicated, all references in this Prospectus to documents
"incorporated by reference" are to documents incorporated by reference into
this Prospectus. The Company will provide without charge to any person to whom
this Prospectus is delivered, on such person's request, a copy of any or all
of the documents incorporated by reference (other than exhibits not
specifically incorporated by reference into the texts of such documents).
Requests for such documents should be directed to SAFECO Investor Relations,
SAFECO Corporation, SAFECO Plaza, 4333 Brooklyn Avenue N.E., Seattle,
Washington 98185. Telephone requests may be directed to SAFECO Investor
Relations at (206) 545-5000.

65
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED HEREIN AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO PURCHASE ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER
TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION
PROVIDED HEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO ITS DATE.

------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Information............................................... 2
Prospectus Summary........................................................ 3
Selected Financial Information............................................ 7
Unaudited Pro Forma Combined Condensed Financial Statements............... 11
Risk Factors.............................................................. 17
Use of Proceeds........................................................... 20
Capitalization............................................................ 21
Price Range of Common Stock and Dividend Policy........................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 23
Business.................................................................. 37
Management................................................................ 54
Description of Capital Stock.............................................. 57
Certain U.S. Federal Income Tax Considerations for Non-U.S. Holders....... 59
Underwriting.............................................................. 61
Experts................................................................... 64
Legal Matters............................................................. 64
Available Information..................................................... 64
Incorporation of Certain Documents by Reference........................... 65
</TABLE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

14,000,000 SHARES

[LOGO OF SAFECO]

SAFECO CORPORATION

COMMON STOCK

------------

PROSPECTUS

, 1997

------------

SMITH BARNEY INC.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

INTERNATIONAL PROSPECTUS -- ALTERNATE PAGE
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED AUGUST 19, 1997

PROSPECTUS

14,000,000 SHARES

[LOGO OF SAFECO SAFECO CORPORATION
APPEARS HERE]
COMMON STOCK

--------

Of the 14,000,000 shares being offered, 2,800,000 shares are being offered
outside the United States and Canada (the "International Offering") by the
Managers and 11,200,000 shares are being offered in the United States and
Canada (the "U.S. Offering" and, together with the International Offering, the
"Offerings") by the U.S. Underwriters. The Managers and the U.S. Underwriters
are collectively referred to as the "Underwriters." The Price to Public and the
Underwriting Discounts and Commissions for each of the Offerings will be
identical.

SEE "RISK FACTORS" BEGINNING ON PAGE 17 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.

--------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===========================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS(1) TO COMPANY(2)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- -------------------------------------------------------------------------------------------
Total(3) $ $ $
===========================================================================================
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $ payable by the Company.
(3) The Company has granted to the U.S. Underwriters a 30-day option to
purchase up to additional shares of Common Stock solely to
cover over-allotments, if any. See "Underwriting." If such option is
exercised in full, the Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively.

--------

SMITH BARNEY INC.
, 1997
<PAGE>

INTERNATIONAL PROSPECTUS -- ALTERNATE PAGE

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED HEREIN AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO PURCHASE ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO,
OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION PROVIDED
HEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO ITS DATE.

------------

TABLE OF CONTENTS

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

14,000,000 SHARES

[LOGO OF SAFECO]

SAFECO CORPORATION

COMMON STOCK

------------

PROSPECTUS

, 1997

------------

SMITH BARNEY INC.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant in
connection with the offering of the Common Stock being registered hereby. All
amounts shown are estimates, except the Securities and Exchange Commission
(the "Commission") registration fee and the Nasdaq additional listing fee:

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................ $227,273
Nasdaq Additional Listing Fee...................................... 17,500
Blue Sky Fees and Expenses......................................... *
Printing and Engraving Expenses.................................... *
Legal Fees and Expenses............................................ *
Accounting Fees and Expenses....................................... *
Transfer Agent Expenses............................................ *
Miscellaneous...................................................... *
--------
Total............................................................ $ *
========
</TABLE>
- --------
* To be filed by amendment.

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a court to award, or a corporation's
board of directors to grant, indemnification to directors and officers on
terms sufficiently broad to permit indemnification under certain circumstances
for liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article VII of the registrant's Bylaws, as amended (the
"Bylaws"), provides for indemnification of the registrant's directors,
officers, employees and agents to the maximum extent permitted by Washington
law.

Section 23B.08.320 of the WBCA authorizes a corporation to eliminate or
limit a director's personal liability to the corporation or its shareholders
for monetary damages for conduct as a director, except in certain
circumstances involving acts or omissions, intentional misconduct by a
director or knowing violations of law by a director or distributions illegal
under Washington law, or any transaction from which the director will
personally receive a benefit in money, property or services to which the
director is not legally entitled. Article VIII of the registrant's Restated
Articles of Incorporation (the "Articles of Incorporation") contains
provisions implementing, to the fullest extent permitted by Washington law,
such limitations on a director's liability to the registrant and its
shareholders.

Officers and directors of the registrant are covered by insurance (with
certain exceptions and certain limitations) that indemnifies them against
losses and liabilities arising from certain alleged "wrongful acts," including
alleged errors or misstatements, or certain other alleged wrongful acts or
omissions constituting neglect or breach of duty.

The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification
by the Underwriters of the registrant and its executive officers and
directors, and by the registrant of the Underwriters, for certain liabilities,
including liabilities arising under the Securities Act, in connection with
matters specifically provided in writing by the Underwriters for inclusion in
this Registration Statement.

The above discussion of the WBCA and the registrant's Bylaws and Articles of
Incorporation is not intended to be exhaustive and is qualified in its
entirety by reference to such statute, the Bylaws and the Articles of
Incorporation.

II-1
<PAGE>

ITEM 16. EXHIBITS

<TABLE>
<C> <S>
1.1 Form of U.S. Underwriting Agreement (1)
1.2 Form of International Underwriting Agreement (1)
2.1 Agreement and Plan of Merger dated as of June 6, 1997 (incorporated by
reference to the registrant's Current Report on Form 8-K filed with
the Commission on June 24, 1997 (File No. 1-6563))
2.2 Voting, Support, and Indemnification Agreement, dated June 6, 1997, by
and among SAFECO Corporation and Lincoln National Corporation
(incorporated by reference to the registrant's Schedule 13D dated June
6, 1997)
3.1 Amended and Restated Articles of Incorporation (incorporated by
reference to the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 filed with the Commission on August 14,
1997 (File No. 1-6563) (the "Quarterly Report"))
3.2 Bylaws (incorporated by reference to the Quarterly Report)
4.1 Indenture, dated as of July 15, 1997, between the registrant and The
Chase Manhattan Bank, as Trustee (incorporated by reference to the
Quarterly Report)
4.2 Form of Junior Subordinated Deferrable Interest Debenture (included in
the Indenture incorporated by reference to Exhibit 4.1 to this
Registration Statement and to the Quarterly Report)
4.3 Certificate of Trust of SAFECO Capital Trust I (the "Trust") dated June
18, 1997 (incorporated by reference to the Quarterly Report)
4.4 Amended and Restated Declaration of Trust of the Trust, dated as of
July 15, 1997, among the registrant, as sponsor, the Administrators
thereof, Chase Manhattan Bank Delaware, as Delaware Trustee, The Chase
Manhattan Bank, as Property Trustee and the holders from time to time
of undivided interests in the assets of the Trust (incorporated by
reference to the Quarterly Report)
4.5 Form of Capital Security Certificate for the Trust (included in the
Amended and Restated Declaration of Trust incorporated by reference to
Exhibit 4.4 to this Registration Statement) (incorporated by reference
to the Quarterly Report)
4.6 Capital Securities Guarantee Agreement, dated as of July 15, 1997,
between the registrant and The Chase Manhattan Bank, as Guarantee
Trustee (incorporated by reference to the Quarterly Report)
5.1 Opinion of Perkins Coie regarding legality of shares (1)
8.1 Form of Opinion of Perkins Coie as to tax matters
23.1 Consent of Ernst & Young LLP
23.2 Consent of Perkins Coie (included in Exhibit 8.1)
24.1 Power of Attorney (contained on the signature page hereto)
</TABLE>
- --------
(1) To be filed by amendment.

ITEM 17. UNDERTAKINGS

(a) The undersigned registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934, as amended, that is incorporated by reference
in this Registration Statement shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.

(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions under Item 15 above, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by

II-2
<PAGE>

a director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Seattle, State of Washington, on
this 19th day of August, 1997.

SAFECO CORPORATION

/S/ ROGER H. EIGSTI
By __________________________________
Roger H. Eigsti
Chairman and Chief Executive Officer

POWER OF ATTORNEY

Each person whose individual signature appears below hereby authorizes and
appoints Boh A. Dickey and Rod A. Pierson, and each of them, with full power
of substitution and resubstitution and full power to act without the other, as
his or her true and lawful attorney-in-fact and agent to act in his or her
name, place and stead and to execute in the name and on behalf of each person,
individually and in each capacity stated below, and to file, any and all
amendments to this Registration Statement, including any and all post-
effective amendments, and any registration statement relating to the same
offering as this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing, ratifying and confirming all that
said attorneys-in-fact and agents or any of them or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated below on the 19th day of August, 1997.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----

<C> <S>
/S/ ROGER H. EIGSTI Chairman of the Board and Chief Executive
____________________________________ Officer (Principal Executive Officer)
Roger H. Eigsti

/S/ BOH A. DICKEY President, Chief Operating Officer and
____________________________________ Director
Boh A. Dickey

/S/ ROD A. PIERSON Senior Vice President, Chief Financial
____________________________________ Officer and Secretary (Principal
Rod A. Pierson Financial Officer)

/S/ H. PAUL LOWBER Vice President and Controller (Principal
____________________________________ Accounting Officer)
H. Paul Lowber
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
Director
____________________________________
Phyllis J. Campbell

/S/ ROBERT S. CLINE Director
____________________________________
Robert S. Cline

/S/ JOHN W. ELLIS Director
____________________________________
John W. Ellis

/S/ WILLIAM P. GERBERDING Director
____________________________________
William P. Gerberding

/S/ JOSHUA GREEN III Director
____________________________________
Joshua Green III

/S/ WILLIAM W. KRIPPAEHNE, JR. Director
____________________________________
William W. Krippaehne, Jr.

/S/ WILLIAM G. REED, JR. Director
____________________________________
William G. Reed, Jr.

/S/ JUDITH M. RUNSTAD Director
____________________________________
Judith M. Runstad

/S/ PAUL W. SKINNER Director
____________________________________
Paul W. Skinner

/S/ GEORGE H. WEYERHAEUSER Director
____________________________________
George H. Weyerhaeuser
</TABLE>

II-5
<PAGE>

EXHIBIT INDEX

<TABLE>
<C> <S>
1.1 Form of U.S. Underwriting Agreement (1)
1.2 Form of International Underwriting Agreement (1)
2.1 Agreement and Plan of Merger dated as of June 6, 1997 (incorporated by
reference to the registrant's Current Report on Form 8-K filed with the
Commission on June 24, 1997 (File No. 1-6563))
2.2 Voting, Support, and Indemnification Agreement, dated June 6, 1997, by
and among SAFECO Corporation and Lincoln National Corporation
(incorporated by reference to the registrant's Schedule 13D dated June
6, 1997)
3.1 Amended and Restated Articles of Incorporation (incorporated by reference
to the registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 filed with the Commission on August 14, 1997 (File No. 1-
6563) (the "Quarterly Report"))
3.2 Bylaws (incorporated by reference to the Quarterly Report)
4.1 Indenture, dated as of July 15, 1997, between the registrant and The
Chase Manhattan Bank, as Trustee (incorporated by reference to the
Quarterly Report)
4.2 Form of Junior Subordinated Deferrable Interest Debenture (included in
the Indenture incorporated by reference to Exhibit 4.1 to this
Registration Statement and to the Quarterly Report)
4.3 Certificate of Trust of SAFECO Capital Trust I (the "Trust") dated June
18, 1997 (incorporated by reference to the Quarterly Report)
4.4 Amended and Restated Declaration of Trust of the Trust, dated as of July
15, 1997, among the registrant, as sponsor, the Administrators thereof,
Chase Manhattan Bank Delaware, as Delaware Trustee, The Chase Manhattan
Bank, as Property Trustee and the holders from time to time of undivided
interests in the assets of the Trust (incorporated by reference to the
Quarterly Report)
4.5 Form of Capital Security Certificate for the Trust (included in the
Amended and Restated Declaration of Trust incorporated by reference to
Exhibit 4.4 to this Registration Statement) (incorporated by reference
to the Quarterly Report)
4.6 Capital Securities Guarantee Agreement, dated as of July 15, 1997,
between the registrant and The Chase Manhattan Bank, as Guarantee
Trustee (incorporated by reference to the Quarterly Report)
5.1 Opinion of Perkins Coie regarding legality of shares (1)
8.1 Form of Opinion of Perkins Coie as to tax matters
23.1 Consent of Ernst & Young LLP
23.2 Consent of Perkins Coie (included in Exhibit 8.1)
24.1 Power of Attorney (contained on the signature page hereto)
</TABLE>
- --------
(1) To be filed by amendment.

<PAGE>

EXHIBIT 8.1

PERKINS COIE
A Law Partnership Including Professional Corporations
1201 Third Avenue, 40th Floor Seattle, Washington 98101-3099
Telephone: 206 583-8888 Facsimile: 206 583-8500

___________, 1997

SAFECO CORPORATION
4333 Brooklyn Avenue N.E.
Seattle, WA 98185

RE: ___________ SHARES OF SAFECO CORPORATION COMMON STOCK

Ladies and Gentlemen:

We have acted as counsel to you in connection with the offer and sale by
SAFECO Corporation, a Washington corporation (the "Corporation"), of up to
________ shares of the Corporation's common stock, having no par value (the
"Common Stock"), as described in a registration statement on Form S-3 filed with
the Securities and Exchange Commission on August 19, 1997 and the Prospectus
contained therein (together with amendments thereto, the "Registration
Statement"). Capitalized terms used herein without definition have the
respective meanings specified in the Registration Statement.

In connection with this opinion, we have examined the Registration
Statement and such other documents as we have deemed necessary. Furthermore, we
have relied upon certain statements and representations made by officers of the
Corporation and others. We have also examined originals or copies, certified or
otherwise identified to our satisfaction, of such other documents, certificates
and records as we have deemed necessary or appropriate as a basis for the
opinion set forth herein.

In rendering our opinion, we have participated in the preparation of the
Registration Statement. Our opinion is conditioned on, among other things, the
initial and continuing accuracy of the facts, information, covenants and
representations set forth in the documents referred to above and the statements
and representations made by officers of the Corporation and others. In our
examination, we have assumed the genuineness of all signatures, the legal
capacity of natural persons, the authenticity of
<PAGE>

SAFECO CORPORATION
______ __, 1997
Page 2

all documents submitted to us as originals, the conformity to original documents
of all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such documents. We also have assumed that the
transactions related to the issuance and sale of the Common Stock will be
consummated in the manner contemplated by the Registration Statement.

In rendering our opinion, we have considered the provisions of the Internal
Revenue Code of 1986, as amended, Treasury Regulations promulgated thereunder,
judicial decisions, and Internal Revenue Service rulings, all as in effect on
the date hereof and all of which are subject to change, which changes may be
retroactively applied. A change in the authorities upon which our opinion is
based could affect our conclusions.

Based upon and subject to the foregoing, and subject to the discussion and
limitations set forth in the Registration Statement under the heading "CERTAIN
U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS," we are of the
opinion that, although the discussion set forth in the Registration Statement
under the heading "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S.
HOLDERS" does not purport to discuss all possible United States federal income
tax consequences of the purchase, ownership and disposition of Common Stock by a
Non-U.S. Holder, such discussion constitutes a fair and accurate summary of the
material United States federal income tax considerations (other than
considerations that are material to a Non-U.S. Holder based on such Non-U.S.
Holder's particular tax situation) for Non-U.S. Holders of the Common Stock
under current law.

Except as set forth above, we express no opinion to any party as to the tax
consequences, whether federal, state, local or foreign, of the issuance or sale
of the Common Stock or any transactions related to or contemplated by such
issuance or sale. We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and any amendment thereto. In giving such consent,
we do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended.
<PAGE>

SAFECO CORPORATION
______ __, 1997
Page 3

We disclaim any undertaking to advise you of any subsequent changes of the facts
assumed herein or any subsequent changes in applicable law.

Very truly yours,

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the headings "Selected
Financial Information" and "Experts" in the Registration Statement (Form S-3
No. 333- ) and related Prospectus of SAFECO Corporation and to the
incorporation by reference therein of our report dated February 14, 1997, with
respect to the consolidated financial statements of SAFECO Corporation and
subsidiaries incorporated by reference in its Annual Report (Form 10-K) for
the year ended December 31, 1996 and the related financial statement schedules
included in the Annual Report, filed with the Securities and Exchange
Commission, and to the incorporation by reference therein of our report dated
January 28, 1997 with respect to the consolidated financial statements and
schedules of American States Financial Corporation and subsidiaries included
in its Annual Report (Form 10-K, Form 10-K/A(1) and Form 10-K/A(2)) for the
year ended December 31, 1996, filed with the Securities and Exchange
Commission.

Ernst & Young LLP

Seattle, Washington
August 19, 1997