AM Best

A.M. Best Affirms Ratings of Safeco Insurance Companies and Revises Outlook to Positive; Assigns Issuer Credit Ratings

Bob Podolski
(908) 439-2200, ext. 5731

Gary Davis
(908) 439-2200, ext. 5665
Public Relations
Jim Peavy
(908) 439-2200, ext. 5644

Rachelle Striegel
(908) 439-2200, ext. 5378


OLDWICK, N.J. - MAY 03, 2005 12:00 AM (EDT)
A.M. Best Co. has affirmed the financial strength rating of A (Excellent) of the Safeco Insurance Companies (Safeco) (Seattle, WA). A.M. Best has also affirmed the debt ratings of "bbb+" and "bbb" on Safeco Corporation's [NYSE: SAFC] existing senior debt and capital securities, respectively.

Concurrently, A.M. Best has assigned an issuer credit rating (ICR) of "a+" to the eight pool members, led by Safeco Insurance Company of America, and six reinsured subsidiaries. A.M. Best has also assigned an ICR of "bbb+" to Safeco Corporation, the publicly traded holding company. (See below for a complete listing of companies.) The outlook for all ratings has been revised to positive from stable.

The ratings reflect the solid operating presence of Safeco within the property/casualty industry, excellent capitalization and improved operating results in 2004 following significant restructuring. These positive rating factors are somewhat offset by the group's adverse loss reserve development in prior years and a high expense ratio.

Safeco's positive rating attributes are derived from a focus on personal and small commercial lines through restructured operations. The group's proven senior management team implemented corrective actions that included aggressive rate increases across most lines of business, stricter underwriting guidelines, the implementation of point-of-sale-underwriting automation, broader market segmentation of personal lines and commercial lines products and the termination of unprofitable agencies. As a result of the operational changes and firm market conditions, operating earnings have improved in recent years. Safeco maintains a strong operating presence within the United States property/casualty industry as one of the top 20 writers, with $5.7 billion of net written premiums in 2004.

Also, Safeco maintains reasonable financial leverage, and improved fixed charge coverage is reflective of the earnings improvement in recent years and lower interest expense.

Negative rating factors include the group's adverse loss reserve development, particularly in the workers' compensation line, and high expense ratio, which have tempered the operating performance. Safeco has recently implemented cost-saving measures targeted at becoming more efficient. The group also maintains somewhat elevated gross exposure to earthquakes, particularly in California. The group's net exposure, however, is within manageable levels given its capital position and reinsurance protection. With the restructuring of property/casualty operations completed, Safeco's primary challenge has shifted to producing sustainable earnings throughout the underwriting cycle while maintaining strong capitalization.

The financial strength rating of A (Excellent) has been affirmed and an issuer credit rating of "a+" has been assigned for the following members of the Safeco Insurance Companies:

- American Economy Insurance Company

- American States Insurance Company

- American States Insurance Company of Texas

- American States Lloyds Insurance Company

- American States Preferred Insurance Company

- First National Insurance Company of America

- General Insurance Company of America

- Safeco Insurance Company of America

- Safeco Insurance Company of Illinois

- Safeco Insurance Company of Indiana

- Safeco Insurance Company of Oregon

- Safeco National Insurance Company

- Safeco Lloyds Insurance Company

- Safeco Surplus Lines Insurance Company

An issuer credit rating of "bbb+" has been assigned to Safeco Corporation.

The following debt ratings have been affirmed:

Safeco Corporation-

- "bbb+" on $200 million 6.875% senior notes, due 2007

- "bbb+" on $200 million 4.2% senior notes, due 2008

- "bbb+" on $300 million 4.875% senior notes, due 2010

- "bbb+" on $230 million 7.25% senior notes, due 2012

Safeco Capital Trust I-

- "bbb" on $402.9 million 8.072% capital securities, due 2037

The following indicative ratings have been affirmed:

Safeco Corporation-

- "bbb+" on senior notes

- "bbb" on subordinated debt

- "bbb-" on preferred stock

For Best's Debt Ratings, all other Best's Ratings, an overview of the rating process and rating methodologies, please visit Best's Rating Center.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source.

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