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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

for the Quarterly Period Ended March 31, 2005

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

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

127,476,794 shares of common stock of Safeco Corporation, no par value, were outstanding at April 29, 2005.

Table of Contents

Safeco Corporation and Subsidiaries

CONTENTS

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Safeco Corporation and Subsidiaries

Consolidated Statements of Income

(In Millions, Except Per Share Amounts)

See Condensed Notes to Consolidated Financial Statements.

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Safeco Corporation and Subsidiaries

Consolidated Balance Sheets

(In Millions)

See Condensed Notes to Consolidated Financial Statements.

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Safeco Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(In Millions)

See Condensed Notes to Consolidated Financial Statements.

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Safeco Corporation and Subsidiaries

Consolidated Statements of Cash Flows – Reconciliation of Net Income to Net Cash Provided by Operating Activities

(In Millions)

There were no significant non-cash financing or investing activities for the three months ended March 31, 2005 or 2004.

See Condensed Notes to Consolidated Financial Statements.

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Safeco Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(In Millions, except share amounts)

See Condensed Notes to Consolidated Financial Statements.

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Safeco Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts in millions except per share data, unless noted otherwise)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Safeco Corporation is a Washington State corporation operating across the United States, with insignificant non-U.S. activities. We sell property and casualty insurance. We generated virtually all of our revenues from continuing operations for the periods presented in this report from these activities.

Throughout our unaudited Consolidated Financial Statements, we refer to Safeco Corporation and its subsidiaries as “Safeco,” “we” and “our.” We refer to the property and casualty businesses as “Property & Casualty” and “P&C”. We refer to all other continuing activities, primarily the financing of our business activities, collectively as “Corporate.” We refer to the discontinued life insurance, group stop-loss medical insurance, trust, asset management and brokerage operations as “Discontinued Operations,” “Life & Investments” and “L&I.”

Basis of Consolidation and Reporting and Use of Estimates

We have prepared the unaudited Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q. Certain financial information, which is required in the annual financial statements prepared in conformity with GAAP, may not be required for interim financial reporting purposes and has been condensed or omitted. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair presentation of results for the interim periods have been included. Results for the three-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

These unaudited Consolidated Financial Statements and Condensed Notes to the Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in our 2004 Annual Report on Form 10-K that was previously filed with the Securities and Exchange Commission.

Preparing these interim Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that may affect amounts reported in these Consolidated Financial Statements and accompanying Condensed Notes to Consolidated Financial Statements. Actual results could differ from those estimates.

The unaudited Consolidated Financial Statements include Safeco Corporation and its subsidiaries. We have eliminated all significant intercompany transactions and balances in the Consolidated Financial Statements.

We made certain reclassifications to the prior-period amounts for consistency with our current-period presentation.

Earnings per Share

We calculate basic earnings per share by dividing net income by the weighted-average number of common shares outstanding during the quarter. Diluted earnings per share include the additional common shares assumed issued under the treasury stock method – this reflects the potential dilution that could occur if options were exercised and restricted stock rights were vested.

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We present the computation of net income per share below, based upon weighted-average and dilutive common shares outstanding:

Stock Compensation Expense

Prior to 2003, we applied Accounting Principles Board (APB) Opinion 25 in accounting for our stock options, as allowed under SFAS 123, “Accounting for Stock-Based Compensation,” as amended. Under APB 25, we recognized no compensation expense related to options because the exercise price of our employee stock options equaled the fair market value of the underlying stock on the date of grant. In May 2004, we replaced our annual stock option program to key employees with a restricted stock rights program.

In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” amending SFAS 123, to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation under SFAS 123. Effective January 1, 2003, we adopted the fair value method for accounting for stock options as defined in SFAS 123, using the prospective basis transition method. Under this method, we have recognized expense for awards granted, modified or settled after January 1, 2003. Stock-based compensation expense was $6.6 ($4.4 after tax) for the three months ended March 31, 2005 and $5.4 ($3.9 after tax) for the three months ended March 31, 2004.

The following table illustrates, on a pro forma basis, the effect on our net income and net income per share as if we applied the fair value method to all outstanding and unvested awards in each period:

Common Stock

When we repurchase any of our common shares, we reduce our capital stock and retained earnings to reflect the repurchase on our Consolidated Balance Sheets. In accordance with the Washington Business Corporation Act, we do not show treasury stock as a separate reduction to Shareholders’ Equity on our Consolidated Balance Sheets.

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On August 2, 2004, using our proceeds from the sale of L&I, we repurchased 13,247,863 shares, or 9.5% of our outstanding common stock, under an Accelerated Stock Buyback (ASB) program. We purchased the shares from a dealer at a price of $46.80 per share, for a total cost of $625.0, including transaction costs. The effect of the ASB program was to return excess capital resulting from the L&I sale to our shareholders, and it immediately reduced the number of our common shares outstanding. The dealer obtained the shares that we purchased by borrowing them in the open market, and the dealer repurchased shares in the market over a nine month period following our initial repurchase, to repay the borrowed shares. The ASB included $200.0 that is subject to a collar, a contract that sets a minimum and maximum price for us for the shares repurchased under the collar. We completed the ASB program in April 2005, paying a price adjustment of $16.1 to the dealer based on the volume weighted average price of our common stock during the period of the ASB repurchases. We will report this price adjustment in shareholders’ equity on our Consolidated Balance Sheet as of June 30, 2005.

On May 4, 2005, our Board of Directors declared a quarterly dividend of $0.25 per share, payable on July 25, 2005 to shareholders of record as of July 8, 2005. This represents a 13.6% increase per share over the previous quarterly dividend of $0.22 per share.

Employee Benefit Plans

Cash Balance Plan – The Safeco Cash Balance Plan (CBP) is a noncontributory defined benefit plan that provides benefits for each year of service by an employee after 1988. The CBP specifies the benefit amount each participant will receive based on eligible compensation plus a stipulated rate of return on the benefit balance. We make contributions to the CBP that are deductible for federal income tax purposes and that at least meet the minimum funding requirements set by the Employee Retirement Income Security Act (ERISA). In 2004, we contributed $39.9 in excess of the minimum funding requirement for 2004, which resulted in a prepaid asset. Consequently, we do not expect to make a contribution to the CBP in 2005.

Other Postretirement Benefits – We also provide certain healthcare and life insurance benefits, which we refer to as Other Postretirement Benefits (OPRB), for certain retired employees, their beneficiaries and eligible dependents. We do not fund this program. We contributed $1.3 in the first quarter of 2005 and expect to contribute a total of $5.3 to the OPRB program in 2005.

We amended our OPRB program in 2003. The amendments created negative prior service cost which are being amortized over the average remaining service period of all active participants. The related amortization resulted in a credit to OPRB expense of $2.5 pretax for the three months ended March 31, 2005 and $2.6 pretax for the three months ended March 31, 2004.

The following table summarizes CBP and OPRB costs charged (credited) to Income from Continuing Operations:

Income Taxes

Our provision for income taxes for the quarter ended March 31, 2005 included a $10.0 tax benefit stemming primarily from the favorable resolution of a state tax-related issue. We also realized a $9.0 federal tax benefit in the same quarter a year ago.

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New Accounting Standards

New accounting pronouncements that we will adopt in the near future are as follows:

SFAS 123(R), “Share-Based Payment” – As previously discussed, we recognize stock-based compensation expense in accordance with SFAS 123, as amended by SFAS 148. In December 2004, the FASB issued SFAS 123(R), “Share-Based Payment,” a revision of SFAS 123.

SFAS 123(R) requires all share-based compensation awards granted, modified or settled after December 15, 1994 to be accounted for using the fair value method of accounting. Under the modified prospective application, compensation cost is recognized for the outstanding, nonvested awards based on the grant-date fair value of those awards as calculated under SFAS 123. On April 14, 2005 the SEC announced that it would provide for a phased-in implementation process, requiring registrants that are not small business issuers to adopt SFAS 123(R) no later than the beginning of the first fiscal year beginning after June 15, 2005. We expect to adopt SFAS 123(R) on January 1, 2006. We do not expect our adoption of the statement to have a material impact on our financial condition or results of operations.

FASB Staff Position (FSP) 03-1-1, Effective Date of Paragraphs 10-20 of Emerging Issues Task Force (EITF) 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” – In September 2004, the FASB issued FSP 03-1-1 delaying the effective date for applying paragraphs 10-20 of EITF 03-1. Paragraphs 10-20 provide guidance for evaluating whether impairments of debt and equity holdings are “other-than-temporary” and require immediate recognition of such impairments in earnings. The effective date for applying the accounting guidance of EITF 03-1 is currently under review by the FASB. We have previously adopted the disclosure requirements of EITF 03-1, which were unchanged by FSP 03-1-1 and were effective for fiscal periods ending after December 15, 2003.

EITF 04-10, “Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds” – This guidance creates stricter standards for aggregating operating segments that do not meet the quantitative thresholds provided within SFAS 131, “Disclosures About Segments of an Enterprise and Related Information.” The EITF has delayed the effective date to coincide with an anticipated FSP that will address the meaning of “similar economic characteristics” in 2005. We do not anticipate any impact to the presentation of our reportable operating segments.

NOTE 2 – RESTRUCTURING CHARGES

2004/2005 RESTRUCTURING

We have identified expense reductions that will enable us to operate more efficiently following the sale of L&I.

Charges have been recognized and accrued as a restructuring charge and allocated to our reportable segments in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Other costs that do not meet the criteria for accrual are being expensed as restructuring charges when we incur them.

Costs incurred in 2004 and in the three months ended March 31, 2005 and total estimated costs we expect to incur associated with the restructuring are as follows:

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These costs are allocated to reportable segments as follows:

Activity related to the accrued restructuring charges as of March 31, 2005 was as follows:

NOTE 3 – COMPREHENSIVE INCOME (LOSS)

Comprehensive income is defined as all changes in shareholders’ equity except those arising from transactions with shareholders. Comprehensive income includes net income and other comprehensive income (loss), which for us consists of changes in unrealized gains or losses on investment securities and changes in foreign currency translation gains or losses. In 2004, Comprehensive Income included similar items for Discontinued Operations prior to the sale of L&I, along with deferred policy acquisition costs valuation allowance.

The components of other comprehensive income or loss were as follows:

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NOTE 4 – SEGMENT INFORMATION

P&C

Our P&C Insurance operations are organized around our four business segments: Safeco Personal Insurance (SPI), Safeco Business Insurance (SBI), Surety and P&C Other. These business segments are a combination of reportable segments that have similar products and services and are managed separately, as described below.

SPI

SPI offers auto, homeowners and other property and specialty insurance products for individuals, and the SPI operations are organized around three reportable segments – Auto, Property and Specialty.

The Auto segment provides coverage for liability of our customers to others for both bodily injury and property damage, for injuries sustained by our customers and for physical damage to our customers’ vehicles from collision and other hazards.

The Property segment provides homeowners, earthquake, dwelling fire and inland marine coverage for individuals. Property coverages protect homes, condominiums and rental property contents against losses from a wide variety of hazards. We also protect individuals from liability for accidents that occur on their property.

The Specialty segment provides umbrella, recreational vehicle, motorcycle and boat insurance coverage for individuals.

SBI

SBI offers business owner policies, commercial multi-peril packages, workers compensation, commercial property, general liability and commercial auto policies. SBI’s operations are organized around two segments: SBI Regular and SBI Special Accounts Facility.

SBI Regular is our core commercial segment, writing a variety of commercial insurance products for small- to medium-sized businesses (customers who pay annual written premiums of $200,000 or less). Our principal business insurance products include business owner policies, commercial auto, commercial multi-peril, workers compensation, commercial property and general liability.

SBI Special Accounts Facility writes larger commercial accounts for our key distributors who sell our core P&C products as well as our four specialty commercial programs, which are lender-placed property insurance, agents’ errors and omissions insurance (predominantly for Safeco distributors), property and liability insurance for mini-storage and warehouse properties, and professional and general liability insurance for non-profit social services organizations.

SURETY

We offer surety bonds primarily for construction, performance and legal matters that include appeals, probate and bankruptcies.

P&C OTHER

P&C Other includes runoff of assumed reinsurance, London operations we placed in runoff in 2002, large-commercial business accounts in runoff, and specialty programs we have exited.

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CORPORATE

In addition to these operating segments, certain activities such as interest expense, debt repurchases and intercompany eliminations are reported in the Corporate segment and not allocated to individual segments.

OUR RESULTS

Our management measures P&C segment profit or loss based on underwriting results and combined ratios. Underwriting results (profit or loss) represent the net amount of earned premiums less underwriting losses and expenses, on a pretax basis. Combined ratios show the relationship between underwriting profit or loss and net earned premiums. Using ratios helps us to see our operating trends without the effect of changes in net earned premiums. Management views underwriting results and combined ratios as critical measures to assess the effectiveness of the underwriting activities of the P&C operations.

Underwriting results and combined ratios are not a substitute for net income determined in accordance with GAAP.

The following tables present selected financial information by segment and reconcile segment revenues, underwriting and operating results to amounts reported in the Consolidated Statements of Income.

REVENUES

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PRETAX UNDERWRITING PROFIT (LOSS) AND NET INCOME