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United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K

For the Year Ended December 31, 2003

or

For the Transition Period from              to             

Commission File Number 1-6563

Safeco Corporation

State of Incorporation: Washington

I.R.S. Employer I.D. No.: 91-0742146

Address of Principal Executive Offices: Safeco Plaza, Seattle, Washington 98185

Telephone: 206-545-5000

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, No Par Value: 139,028,980 shares were outstanding at February 27, 2004.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     YES  x     NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    YES  x    NO  ¨

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2003, was $4,900,000,000.

Documents incorporated by reference: Portions of the registrant’s definitive Proxy Statement for the 2004 annual shareholders meeting are incorporated by reference into Part III.

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Safeco Corporation and Subsidiaries

Index to Financial Statements, Schedules and Exhibits

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Part I

(Dollar amounts in millions except for ratios and per share data unless noted otherwise)

Item 1: OUR BUSINESS:

We are a Washington State corporation with headquarters in Seattle. We had 11,200 employees at February 27, 2004. We sell insurance and investment products through a national network of independent agents, brokers and financial advisors. Our businesses help people protect what they value and deal with the unexpected.

We started our business in 1923. Even though we’ve been in the insurance business for more than 80 years, we’re still working hard to simplify (hence our marketing brand “Uncomplicate”) the process of buying, selling and owning insurance for our distribution partners and customers.

We have two major businesses:

In September 2003, however, we announced our decision to focus on our P&C operations and to sell our L&I businesses. More information about our decision can be found on pages 16-17.

The earned premiums of our P&C business in 2003 were as follows:

The premiums, net investment income and other revenues for our L&I business in 2003 were as follows:

Our Vision and Strategy

In light of our planned divestiture of the L&I businesses, in this section we discuss our forward-looking vision and strategy for our P&C business. Our vision is to be one of the top-performing property and casualty companies in the industry. We’ll measure our success by tracking our performance against these three financial goals:

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To achieve our vision, we must be distinctly good at motivating our independent distributors to sell our products. We will do this by continuing to develop and service P&C insurance products in ways that:

Our P&C distributors are the 7,300 independent agents and brokers who sell our insurance products throughout the United States.

Our strategy focuses on:

Our P&C Products

We are the 18th largest property and casualty insurance company in the United States based on 2002 total direct written premiums as reported by A.M. Best, an insurance rating and information agency. A.M. Best ranks companies based on written premiums, which are premiums charged for policies issued. However, premiums are earned and recorded as revenues over the policy term. As a result, the charts below use the net earned premiums measure, which is equivalent to our premium revenues. We use “net” because some of our premiums are ceded to reinsurers, which protect our capital just as insurers protect their customers.

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The 10 states with the largest amount of net earned premiums in 2003 were as follows:

Our P&C business has four business segments:

Net earned premiums for our P&C business segments are as follows:

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Safeco Personal Insurance

Net earned premiums for our Safeco Personal Insurance business segment are as follows:

Personal Auto –We are the 14th largest writer of auto insurance in the United States, based on 2002 direct written premiums as reported by A.M. Best. We provide coverage for the liability of our customers to others for both bodily injury and property damage, for injuries sustained by our customers and for damage to our customers’ vehicles from collision and other hazards.

Our tiered auto product, now available in 43 of the 44 states where we write business, can cover more than 95% of all applicants in our agents’ offices. This product blends traditional underwriting methods with an automated underwriting and segmentation process that enables us to assign the price appropriate to the corresponding level of risk that we assume, driving greater competitive pricing precision and profitability. Our new point-of-sale (POS) technology, enabled by this automated underwriting process, allows distributors to quote and sell policies faster, allowing us to streamline the sales process.

Homeowners – We are the 10th largest writer of homeowners insurance in the United States, based on 2002 direct written premiums as reported by A.M. Best. We protect homes, condominiums and rental property contents against losses from a wide variety of hazards. We protect individuals from liability for accidents that occur on their property.

Due to our focus on profitability, we have not aggressively grown our homeowners business. We have, however, taken a number of actions to improve our results in this line of business and achieve returns appropriate for the risks insured.

Like auto, we’ve rolled out our tiered pricing structure for homeowners insurance in 43 of the 44 states where we write business. Also like auto, our tiered homeowners product allows us to match rates more closely to the risks that we insure and connects to our POS technology.

Specialty – We also offer umbrella, earthquake, dwelling fire, inland marine, recreational vehicle, motorcycle and boat insurance coverage for individuals. These specialty products broaden our personal lines portfolio so we can provide products to meet the majority of our policyholders’ personal insurance needs.

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Safeco Business Insurance

Net earned premiums for our Safeco Business Insurance business segment are as follows:

SBI Regular – This line offers a variety of commercial insurance products designed for small- and medium-sized businesses (customers who pay annual written premiums of $100,000 or less). Our principal business insurance products include business owner policies, commercial multi-peril, workers compensation, property, general liability and commercial auto. We are one of the largest writers of small-business insurance that sells primarily through independent agents in the United States. This market is highly fragmented, however. Given the increasing number of small businesses in the United States and the lack of a dominant market leader, we see growth potential in this segment and aim to become the top insurance writer.

We continued to roll out our automated underwriting platform, point-of-sale technology and customer service unit in 2003, enabling agents to quote, sell and service business policies more efficiently.

SBI Special Accounts Facility –We write large commercial accounts for our key agents who sell our core P&C products as well as four specialty commercial insurance programs which are lender-placed property, agents’ errors and omissions, mini-storage and warehouse properties and non-profit social service organizations.

SBI Runoff – SBI Runoff includes results for the large-commercial business accounts and specialty programs that we have exited.

Surety – We are the fifth largest writer of surety bonds in the United States, based on 2002 direct written premiums as reported by A.M Best. We provide surety bonds for construction, performance and legal matters that include appeals, probate and bankruptcies.

P&C Other – This segment includes runoff assumed reinsurance business, results from our London operations that are in runoff, and other product lines we have exited. It also includes our non-voluntary personal lines business.

Financial information on our segments can be found in Management’s Discussion and Analysis (MD&A) and Note 20 to the Consolidated Financial Statements.

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Our P&C Competition

We operate in a highly competitive property and casualty industry. We compete for independent distributors and policyholders with thousands of domestic and foreign insurance companies. Competitive factors include:

Because we focus on selling through independent distributors, we compete not only for business and individual customers, but also for distributors. Our products are sold to our policyholders by others. As a result, our first sale is to our distributors, then to the policyholders. Both are customers to us. Within our distributors’ offices, we compete with:

Our competitive positioning is driven by three key ideas:

We believe that our ability to provide multiple property and casualty products gives us a “shelf space” advantage in our distributors’ offices over monoline carriers who offer just one product. This means that we can help our distributors meet all of their customers’ needs in an efficient way.

Our standardized personal auto, homeowners and small business products serve the insurance protection needs of the majority of insurance buyers in the U.S. marketplace. Our complete focus on these products and our investment in automation so these products can be sold and serviced over a common platform provide us with a competitive advantage over multiline carriers.

Our point-of-sale (POS) technology is easy for our independent distributors to use, drives operating efficiencies in their offices and gives us a competitive advantage over smaller carriers who have not made (or cannot afford) such investments.

In 2004, we’ll make this technology even easier to use with our rollout of Safeco Now – a one-stop, unified sales-and-service platform for our major P&C products. Safeco Now initially will feature a single point of entry for personal auto, homeowners, most small-commercial products and certain surety bonds. This will allow distributors to quote and sell these products in minutes and will provide them seamless cross-sell opportunities. The full range of P&C products are scheduled to go online over the next two years.

We also want to make buying and owning our products easy for our policyholders. Our claims are handled by professionals with the appropriate technical expertise necessary to handle coverage, liability and damage issues. We recognize the importance of the specialized and extensive training required for efficient claims handling so our policyholders have issues resolved quickly and receive prompt attention.

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P&C Sales and Distribution

We are committed to distributing our products through independent distributors because they provide expertise to match the best product to a customer’s specific needs and build close, long-term advisory relationships with customers.

Our mission is to make our insurance products easy for our distributors to sell and easy for our policyholders to buy and service. We strive to motivate our distributors in this way and to lower their cost of selling our products so that they will sell our products more often.

P&C Service and Claims Administration

SERVICE

Like our customers, our independent distribution partners value choice, too. And we give them a choice when it comes to customer service support. If distributors prefer to handle service transactions on their own, we offer extensive online training to maximize efficiency. Through free e-school lessons, our partners learn how to inquire about claims status, account billings and premium payments. We also offer online and phone support if they need help completing a service transaction.

For distributors who want to focus on sales and growth and leave customer service transactions to us, we offer fee-based, Gold Service programs for both personal and business insurance. With Gold Service, we provide full-service customer support on behalf of our distribution partners through our regional service centers. Either way, we measure ourselves against a “zero-defect” standard in all our service transactions.

CLAIMS

In selling insurance policies for drivers, homeowners and small businesses, our most visible product is the personalized service and support we provide when customers experience a loss and file a claim. In our business, it is the moment of truth and the ultimate value of the product. We have a team of nearly 3,000 claims professionals across the country. They handled approximately 97% of our claims in 2003, including those from the devastating tornadoes and hailstorms in the South and Midwest, and the wildfires in California.

When disasters strike, our National Catastrophe Team immediately mobilizes to assess the damage, write checks to cover temporary living expenses and emergency repairs, and provide comfort and support to customers. In most cases, we issue payments to customers on the spot following a disaster. Within 14 days, we make payments on 73% of all catastrophe-related claims. This percentage increases to nearly 90% within 21 days of the event. Our job is to help our customers put their lives back together as quickly as possible.

We also contract with independent adjusters in remote locations where it’s impractical to have our own employees. Independent adjusters are also available to help us in extreme catastrophes when and where additional adjusters are needed.

Our claims processing combines the efficiency of centralized claims handling and customer service centers with the flexibility of field representatives. Our client service system supports a paperless claims environment, so our field representatives are not restricted to a specific physical location. We have also established distinct claims handling functions to address complex claims such as surety, workers compensation, asbestos, environmental and construction defects.

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P&C Loss and Loss Adjustment Expense Reserves

Before we turn to an overview of our L&I operations, we first will address two major areas that could affect the viability and strength of our P&C business:

We’ll start with loss and LAE reserves, which are management’s estimates of losses from claims and related settlement expenses that we have not yet paid and that we include on our Consolidated Balance Sheets.

We record two kinds of loss and LAE reserves:

Case basis reserves are estimates established by claims adjusters of the amount we will have to pay for losses that have already been reported to us. These amounts include related legal expenses and other costs associated with resolving and settling a particular claim.

In addition, at the end of every reporting period, IBNR reserves are established to estimate the amount we will have to pay for:

We use actuarial methods and management judgment to estimate IBNR reserves.

ESTIMATING LOSS AND LAE RESERVES

Estimating loss and LAE reserves is complex. It requires us to make significant judgments and assumptions about a number of internal variables and external factors. Examples of internal variables that affect estimating these reserves include changes in our claims handling practices and changes in our business mix. Examples of external factors that affect estimating these reserves include:

In addition, certain claims may be paid out over a number of years, and there may be a significant lag between the time a loss that is insured by us occurs and the time it is reported to us.

These variables and factors affect in a variety of ways the amounts we have to pay for losses and related expenses. As a result, it’s not always possible to quantify their impact on our future payments. Our management arrives at its best estimate by examining actuarial estimates, holding discussions with claims and underwriting management, and considering changes in the internal and external environment. Because estimating reserves requires us to use assumptions and judgment, our actual future losses will differ from our estimates.

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Some actuarial techniques rely on our past losses and LAE to estimate our future payments. The changes we’ve made in our business in recent years, however, will affect our future payments. For instance, we have introduced new products, tightened our underwriting criteria and improved our claims handling practices. As a result, we also consider these changes when estimating future payments.

In our most volatile lines of business, we use multiple actuarial techniques to help management evaluate results and trends. In some cases, using multiple actuarial techniques produces estimates within a relatively small range. This gives us added confidence in our reserve estimate. In other cases, however, using multiple actuarial techniques produces conflicting estimates. For these, we review the assumptions used in the techniques and management determines the best estimate to use for our loss and LAE reserves within the actuarial range.

REVISING LOSS AND LAE RESERVES

Reviewing and refining our loss and LAE reserve estimates is an ongoing process. We record any adjustments to these reserves in the periods in which we change the estimates. We record changes to these reserves in our results of operations.

We do not discount any of our reserves to present value.

We reduce our reserves by the amounts we expect to recover from salvage – the amount we recover from property that becomes ours after we pay for a total loss – and subrogation – our right to recover payments from third parties. We accrue salvage and subrogation recoveries on an individual case basis for large claims. We use actuarial techniques to estimate the amount for small claims.

We purchase reinsurance to limit our exposure to potential large losses. We record the amounts that we expect to recover from reinsurers as reinsurance recoverable assets on our Consolidated Balance Sheets. For more discussion on reinsurance, see P&C Reinsurance on page 14.

ANALYSIS OF LOSSES AND LAE RESERVE DEVELOPMENT

The Analysis of Losses and LAE Reserve Development table on page 13 shows the development of our loss and LAE reserves from 1993 through 2003. For 1997 to 2003, the table includes amounts for American States Financial Corporation, which we acquired in 1997.

In the table on page 13:

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Our Analysis of Losses and LAE Reserve Development table shows two trends:

The favorable trend from 1993 through 1996 was due to:

The unfavorable trend from 1997 through 2003 was due to:

In the Analysis of Losses and LAE Reserve Development table, all amounts include the effects of changes in amounts for prior periods.

Conditions and trends that affected our loss and LAE reserves in the past may not occur in the future. For example, substantial reduction in our large commercial insurance and program business in 2001 will distort trends in these tables. As a result, our Analysis of Losses and LAE Reserve Development table is not a basis for estimating future redundancies or deficiencies.

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P&C - Analysis of Losses and LAE Reserve Development

For further discussion of loss and LAE reserve development, see MD&A Section “P&C – Loss and Loss Adjustment Expense Reserves” on page 59 and Note 5 on page 118.

Gross loss and LAE reserve development approximates the net loss and LAE reserve development disclosed above.

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P&C Reinsurance

Our policyholders buy insurance from us to reduce the financial impact of the losses they may suffer. In turn, Safeco then buys reinsurance to limit the financial impact of losses that may affect our results in covering the losses of our policyholders.

The reinsurance we buy limits our losses on certain individual risks or reduces our exposure to catastrophic events. We buy reinsurance from several providers and are not dependent upon any single reinsurer. Reinsurance does not affect our liability to our policyholders. We remain primarily liable to policyholders for the risks we insure.

We collect money from reinsurers for any losses we have that are covered by reinsurance. We had $372.0 of P&C reinsurance recoverables at December 31, 2003, net of an allowance of $16.3 that we have estimated as uncollectible. We had $419.9 of P&C reinsurance recoverables at December 31, 2002, net of an allowance of $12.5 that we estimated as uncollectible.

We analyze our reinsurance recoverables according to the credit ratings and types of reinsurers. At year-end 2003:

To help reduce the financial impact of losses in our P&C business, our primary purchases of reinsurance cover:

The availability of terrorism reinsurance is limited in the commercial market. Our current reinsurance program provides limited terrorism coverage. All reinsurance treaties with the exception of commercial and personal umbrella exclude certified terrorist acts. Additionally, all terrorist acts involving nuclear, chemical, biological or radioactive materials are excluded from all reinsurance contracts.

Property Catastrophe Reinsurance - Our property catastrophe reinsurance reduces the financial impact a catastrophe could have on our personal property and commercial insurance lines. Catastrophes involve multiple claims and policyholders. We cannot accurately predict catastrophes, and the number and type of catastrophes can vary widely. The resulting losses could significantly exceed our prior experience. Catastrophes include hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter weather, fires and acts of terrorism.

Our property catastrophe reinsurance is excess of loss reinsurance, which provides us with reinsurance coverage over an agreed-upon amount. The terms of our 2004 property catastrophe reinsurance are:

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Should we make a catastrophe claim to our reinsurers, we can reinstate this reinsurance coverage once with payment of an additional premium.

Workers Compensation Reinsurance – Our workers compensation reinsurance reduces the financial impact a single-event or catastrophe loss may have on our results. It is excess of loss coverage.

In 2003, the terms were:

In 2004, the terms are:

We can reinstate once with payment of an additional premium.

Commercial Property Reinsurance – Our commercial property reinsurance reduces the financial impact that any single loss can have on us. It is excess of loss reinsurance.

For 2003, the terms were:

For 2004, the terms are:

Commercial Umbrella Reinsurance – Our commercial umbrella reinsurance reduces the financial impact of losses in this line of our business. We provide our customers with umbrella insurance to cover losses that exceed the amounts covered by other insurance policies they own. For our commercial umbrella business, we have excess of loss reinsurance.

In 2003, the terms were:

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In 2004, the terms are:

Commercial Basket Retention Reinsurance – Beginning in 2004, we purchased a basket retention coverage, that reduces the financial loss to us when two or more lines of business are involved in the same loss event. The lines of business that are covered by this reinsurance are workers compensation, commercial property and commercial umbrella. If two or more of these lines are impacted by the same loss events:

Surety Reinsurance – For our surety business, we have excess of loss reinsurance.

In 2003, the terms were:

In 2004, the terms are:

Our Decision to Sell Our L&I Businesses

On September 29, 2003, we announced our decision to put our L&I operations up for sale. This was by far the most difficult and important decision of 2003. We have been building our life insurance business since 1957, and the 1,550 people who work there are capable and dedicated.

Four critical ideas led us to pursue a sale of L&I:

EARNINGS POWER

Pretax operating earnings in our L&I businesses declined in 2003 after hitting a high in 2002 (see MD&A page 61). We also strengthened capital by $100.0 in 2002. With declining earnings and increasing capital, L&I’s return on equity was falling. The opposite was taking place in our P&C lines. From the poor results of the late 1990s, the P&C business returned to profitability in 2002, befitting, we think, its historic strength. By the end of 2003, our P&C return on equity was approaching our targets.

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THE VALUE OF FOCUS

Because of these results, we believe that concentrating our efforts and our capital on the P&C business is right for our shareholders. The risk, of course, is that tough times will likely return someday in the P&C cycle, which will not be offset by L&I earnings (as was the case in 2000 and 2001). In our view, the antidote to this risk is focus. Many companies in the P&C sector made it through the last difficult P&C pricing cycle with results far better than ours. The difference was focus and discipline. We believe companies with these attributes are not necessarily immune to the effects of P&C cycles, but they have historically outperformed the sector throughout the cycle. This is what we seek to do for our shareholders.

THE COST OF COMPLEXITY

We know that competing in diverse businesses adds to the costs (at least in our existing structure) of overseeing these businesses and expense management is critical to our success.

OBSERVING OUR L&I COMPETITORS

Despite difficult market conditions affecting all life and investments companies, we observed that competitors of L&I deliver better results.

Given our P&C strength and prospects, given the importance of focus, given the sensitivity of our products to expense levels and the cost of complexity, and given the advantages of our L&I competitors, we came to the conclusion that we should sell the L&I operations.

As of December 31, 2003, we did not classify L&I as a discontinued operation because we had not met all of the “held for sale” criteria under Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” at this date. Accordingly, these operations will continue to be treated as part of our ongoing operations until we meet such criteria.

Our L&I Products

Our L&I businesses provide a broad range of products and services, including individual and group insurance, annuities, mutual funds and investment advisory services.

Our L&I business has six reportable segments:

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Revenues for L&I’s reportable segments include Premiums, Net Investment Income and Other Revenues and are as follows:

GROUP

Our principal group product is stop-loss medical insurance for employers. We sell this product to companies with self-insured medical plans. Stop-loss medical insurance limits an employer’s risk. It provides coverage to protect an employer’s self-funded plan against large claims by its employees. When large claims occur, we reimburse the employer based on contract limits. Each contract sets a specific limit for each individual employee and an aggregate limit for the plan as a whole.

In July 2002, we acquired the stop-loss medical business of Swiss Re Life & Health America Holding Company (Swiss Re) to build a greater presence in the stop-loss medical market and leverage our expertise in this business line. Our other Group products are life insurance, accidental death and dismemberment insurance and disability insurance.

INCOME ANNUITIES

We provide owners of income annuities with a set monthly income for a specified period of time or until death. We sell two types of income annuities: structured settlement annuities and non-structured fixed annuities.

Structured settlement annuities fund third-party personal injury settlements, providing the injured party with a reliable income stream. High financial strength ratings are critical to an insurance company’s ability to market structured settlement annuities. Accordingly, our ratings downgrades in 2001 significantly limited our ability to sell this product.

Non-structured fixed annuities provide an immediate, regular monthly payment to the owner. Once purchased, an owner cannot cash in or change the terms of a non-structured fixed annuity with the original issuer of the annuity. We fund income annuity payments with long-term investments, primarily long-duration bonds and mortgage-backed securities.

RETIREMENT SERVICES

Our primary retirement services products are fixed deferred annuities and variable annuities. Annuities allow the owner to save for the future on a tax-deferred basis and allow payout options that meet the owner’s need for income upon maturity. This can be in the form of a lump sum, income for life or income for a period of time.

Here’s how our fixed deferred annuities work:

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Here’s how our variable annuities work:

The profitability of our fixed deferred and variable annuities depends on our ability to price these products to earn a margin over the cost of providing benefits, the expense of acquiring customers and the cost of advertising those products. Specifically:

Profitability also depends on our persistency experience, or how long this business stays with us, as this affects our ability to recover the costs of acquiring new business over the lives of the contracts. Accordingly, if a contract owner withdraws funds during the early years of the contract – usually during the first seven or eight years – we keep a certain percentage of the withdrawal, as a surrender charge, to help recoup our acquisition costs. Some contracts allow us to pay the requested withdrawal out over five years.

In 2003, we refiled fixed annuity products with regulators in all 50 states in response to a decline in investment yields and obtained approval to lower our crediting rates in all but three states. At various times, we have suspended sales of our products pending approval of these changes.

We previously offered equity indexed annuities in 1997 and 1998 and continued to offer guaranteed investment contracts to a limited extent.

INDIVIDUAL

Our primary individual products are term life insurance, universal life insurance, variable universal life insurance and bank-owned life insurance (BOLI).

Here’s how our term life insurance works:

Our universal life insurance provides flexible permanent coverage, while also offering an investment opportunity. Here’s how it works:

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Our variable universal life insurance works the same as our universal life insurance, including the payment of a death benefit, except that it provides policyholders with more investment options. A portion of the policyholder’s premium is deposited in separate accounts that are invested in funds selected by the policyholder.

BOLI provides a universal life insurance policy covering key employees of the bank as the insured persons. High financial strength ratings are critical to an insurance company’s ability to sell BOLI. Our ratings downgrades in 2001 significantly decreased our sales of this product, and we had no new deposits in 2003.

ASSET MANAGEMENT

The assets that we manage include:

Results in this segment are significantly influenced by the overall performance of the equity markets. The markets impact the fair value of our assets under management, which affects the amount of fees we receive.

L&I OTHER

Our L&I Other segment includes investment income on the capital and accumulated earnings of our other L&I business segments and earnings from Talbot Financial Corporation, our insurance agency that distributes property and casualty and life insurance products.

Our L&I Competition and Distribution Channels

The life and investments business is highly competitive. We compete with a large number of domestic and foreign insurers and with non-insurance financial services companies, such as banks, broker-dealers and asset managers. We compete not only for business and individual customers, but also for distributors. Some of our competitors offer a broader array of products, have more competitive pricing, have lower cost structures, have greater financial resources or, with respect to insurers, have higher financial strength ratings. We have been counteracting their strengths with opportunistic management of distribution channels combined with rapid product development.

L&I Reinsurance

We use reinsurance in managing our exposure to potential losses. We reinsure all or a portion of our risk to reinsurers for certain types of directly written business. In addition, we reinsure through pools to cover catastrophic losses.

We collect money from reinsurers for any losses we have that are covered by reinsurance. We had $179.7 of L&I reinsurance recoverables at December 31, 2003 and $158.9 of L&I reinsurance recoverables at December 31, 2002. We had no reserve for uncollectible reinsurance at December 31, 2003 and 2002.

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We analyze reinsurance recoverables according to the credit ratings and types of our reinsurers. At year-end 2003, approximately 93.7% of our L&I reinsurance recoverables was due from reinsurers rated A or higher by A.M. Best.

None of our L&I reinsurance contracts exclude certified terrorist acts.

Catastrophic loss coverage – We have catastrophic loss coverage for our group life, individual life and aggregate stop loss medical business. Catastrophic coverage for group and individual life coverage is provided through participation in pools involving several major writers that are managed by a third party.

Individual Life Reinsurance – For our individual life business, we have coinsurance agreements where the reinsurer reimburses us based on the percentage in the contract that range from 50% to 80%, based upon the year that the policy was written. For policies written prior to 2000, we recover 50% of the death benefit that we pay on covered claims from the reinsurer. This percentage was increased in 2000 to 80% for a majority of the policies written, and was increased in 2002 to cover 80% of all policies written.

L&I Funds Held Under Deposit Contracts

Premiums from Income Annuities, Retirement Services and Universal Life Insurance contracts (known as universal life and investment-type contracts) are reported in our financial statements as Funds Held Under Deposit Contracts. We earn an investment return on these deposits, net of amounts we credit to policyholders, plus any mortality charges, policy administration charges and surrender charges that we earn on these contracts.

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The table below summarizes the components of our funds held under deposit contracts at December 31, 2003 and describes the applicable surrender charges and surrender experience over the last 12 months ended December 31, 2003:

Funds held under deposit contracts at December 31, 2003