##### 



EXHIBIT 99.3 Report of Independent Auditors To the Board of Directors and
Shareholder    of
Talbot Financial Corporation: In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of earnings, deficit and cash flows present fairly, in
all material respects, the financial position of Talbot Financial Corporation
and its subsidiaries (the Company) at December 31, 2003, and the results of
its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion. (PricewaterhouseCoopers LLP)
Dallas, Texas
July 1, 2004, except for Note 15, as to which the date is September 10, 2004




---



##### 



Talbot Financial Corporation
Consolidated Balance Sheet As of December 31, 2003
(in thousands of U.S. dollars) ASSETSCurrent assetsCash and cash equivalents
    
    $
    13,367Trust cash
    
    
    11,360Marketable securities
    
    
    4,041Accounts and other receivables
    
    
    18,824Notes receivable
    
    
    1,357Deferred
income taxes - current
    
    
    1,590Prepaid and other current assets
    
    
    59Total current assets
    
    
    50,598Goodwill
    
    
    11,410Intangible assets - net
    
    
    20,324Property
and equipment - net
    
    
    4,057Deferred income taxes
    
    
    10,410Other assets
    
    
    115Total assets
    
    $
    96,914LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesInsurance company payables
    
    $
    25,216Accounts payable and accrued liabilities
    
    
    9,168Accrued benefits
    
    
    1,525Income taxes payable to parent
    
    
    1,467Notes payable to parent
    
    
    5,185Current portion long-term debt and capital leases
    
    
    4,951Total current liabilities
    
    
    47,512Long-term debt and capital leases
    
    
    8,987Deferred revenue
    
    
    124Deferred compensation liability
    
    
    3,656Total liabilities
    
    
    60,279Commitments and Contingencies (Note 10)Shareholders equityShare capital
    
    
    Contributed surplus
    
    
    41,033Accumulated other comprehensive income
    
    
    432Deficit
    
    
    (4,830
    )Total shareholders equity
    
    
    36,635Total liabilities and shareholders equity
    
    $
    96,914
 (the accompanying notes form an integral part of the financial statements) 2




---



##### 



Talbot Financial Corporation
Consolidated Statement of Earnings For the Year Ended December 31, 2003
(in thousands of U.S. dollars) RevenueCommission income
    
    $
    81,446Contingent commissions and volume overrides
    
    
    8,372Financial services commissions and fees
    
    
    9,963Other
    
    
    14899,929ExpensesCompensation and employee benefits
    
    
    66,179Facilities and equipment
    
    
    7,161Depreciation
    
    
    1,210Communications
    
    
    5,464Other operating expenses
    
    
    5,423Interest expense
    
    
    1,018Intangible asset amortization
    
    
    6,430Loss on write-off of goodwill and intangibles
    
    
    745Gain on debt termination
    
    
    (575
    )93,055Net earnings before income taxes
    
    
    6,874Provision for income tax expenseCurrent
    
    
    4,932Deferred
    
    
    (2,260
    )2,672Net earnings
    
    $
    4,202
 (the accompanying notes form an integral part of the financial statements) 3




---



##### 



Talbot Financial Corporation
Consolidated Statement of Deficit For the Year Ended December 31, 2003
(in thousands of U.S. dollars) Accumulated other comprehensive income  Beginning of year
    
    $
    (118
    )Change during year
    
    
    550
    
    
    $
    550Accumulated other comprehensive income  End of year
    
    $
    432Deficit  Beginning of year
    
    $
    (9,032
    )Net earnings
    
    
    4,202
    
    
    
    4,202Comprehensive income
    
    
    
    
    
    $
    4,752Deficit  End of year
    
    $
    (4,830
    )
 (the accompanying notes form an integral part of the financial statements) 4




---



##### 



Talbot Financial Corporation
Consolidated Statement of Cash Flows For the Year Ended December 31, 2003
(in thousands of U.S. dollars) OPERATING ACTIVITIESNet earnings
    
    $
    4,202Items not affecting working capitalAmortization and depreciation
    
    
    7,640Deferred income taxes
    
    
    (1,674
    )Gain on termination of debt
    
    
    (575
    )Loss on write-off of goodwill and intangibles
    
    
    745Non-cash stock based compensation
    
    
    235Change in non-operating cash working capital items, net of effects of
acquisitionsTrust cash
    
    
    (892
    )Accounts and other receivables
    
    
    (162
    )Notes receivables
    
    
    (1,233
    )Prepaid and other current assets
    
    
    1,522Accounts payable and accrued liabilities
    
    
    2,532Accrued benefits reserve
    
    
    115Deferred revenue
    
    
    (124
    )Deferred compensation liability
    
    
    1,247Income taxes payable to parent
    
    
    1,144Net cash flows from operating activities
    
    
    14,722INVESTING ACTIVITIESProperty and equipment  purchases
    
    
    (1,662
    )Purchases of investment held for sale
    
    
    (826
    )Purchase of subsidiaries, net of cash received
    
    
    (7,152
    )Net cash flows used for investing activities
    
    
    (9,640
    )FINANCING ACTIVITIESLong-term debt  repayments
    
    
    (4,690
    )Notes payable to Parent  repayments
    
    
    (2,173
    )Contribution from Parent
    
    
    4,000Net cash flows from financing activities
    
    
    (2,863
    )Change in cash and cash equivalents
    
    
    2,219Cash and cash equivalents  Beginning of year
    
    
    11,148Cash and cash equivalents  End of year
    
    $
    13,367
 Interest and income taxes paid for the year ending December 31, 2003 were: Interest paid
    
    $
    1,018Income taxes paid
    
    $
    3,238
 (the accompanying notes form an integral part of the financial statements) 5




---



##### 



Talbot Financial Corporation
Notes to Consolidated Financial Statements For the year ended December 31, 2003
(in thousands of U.S. dollars, or as otherwise indicated) 1. Nature of operations and recent significant transactions Business operations Talbot Financial Corporation (the Company) is an insurance brokerage that
provides a variety of property and casualty, life and health, employee
benefits, investment and risk management products and services primarily in the
western United States. Additionally, the Company provides training to
financial institutions on the selection and distribution of investment products
(including but not limited to fixed annuities, variable annuities, equities and
mutual funds) through the financial institutions branches. The Company is a
wholly owned subsidiary of Safeco Corporation (the Parent). 2. Summary of significant accounting policies Basis of presentation These consolidated financial statements of the Company have been prepared in
conformity with accounting principles generally accepted in the United States.
The consolidated financial statements include the accounts of the Company and
all of its subsidiaries. All material inter-company accounts and transactions
have been eliminated. Estimates and assumptions Preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and the reported amount of revenue and expense during the reporting
period. These estimates are based on historical experience and information
that is available to management about current events and actions the Company
may take in the future. The principal estimates used in the preparation of these financial statements
are the determination of the provision for cancelled policies relating to
revenue recognition, valuation allowance for receivables, obligations related
to the Companys self-insured medical plan, the measurement of stock based
compensation, the allocation of the purchase price on acquisitions, the
valuation of reporting units when testing the recoverability of goodwill and
other intangible assets and the estimation of the useful lives of definite life
intangible assets. Actual results could differ from those estimated. Revenue Recognition Commission income and fees are recognized as of the effective date of the
policy unless information is not available relating to the determination of the
clients policy premiums, in which case commission income and fees related to
that policy are recognized when that information becomes available and the
revenue can be reasonably determined. Commission income and fees related to
installment billing arrangements are recognized at the beginning of each month
over the period in which the client is billed for the installments. Commission
income is reported net of sub-broker commission expense. Commission and other
adjustments are recorded when they occur and the Company maintains an allowance
for estimated policy cancellations and commission returns by applying estimated
commission return rates to the current year revenue, adjusted for any known
deviations. The Company is entitled to contingent commissions and volume
overrides from insurance companies that are recorded in the period in which the
amounts are received. Financial services commissions are recognized as of the date of sale (effective
date of the underlying policy, in the case of fixed annuities) of the
investment product. Financial services commissions are reported net of
chargebacks. Chargebacks and other adjustments are recorded when they occur
and the Company maintains an allowance for estimated chargebacks by applying
chargeback rates to current year revenue. Other revenue primarily includes investment income and policy service fees.
Investment income is recorded when earned. Policy service fees are recorded on
the effective date of the policy, at which time the service has been provided. Cash and cash equivalents Cash and cash equivalents consist of cash and highly liquid investments,
including certificates of deposit, having maturities of three months or less at
the acquisition date. Marketable Securities The Company has classified all marketable securities as available-for-sale
which requires the securities to be reported at fair value, with unrealized
gains and losses, net of tax, reported as a separate component of shareholders
equity. Marketable securities relate primarily to the deferred compensation
plan described in Note 8. Accounts and Other Receivables Accounts and other receivables consist of premiums receivable from clients as
well as commissions receivable from insurance companies that are billed
directly by the insurance companies to the client. These balances are reported
net of an allowance for doubtful accounts in the accompanying balance sheet.
The Company does not perform ongoing credit evaluations of its customers
financial condition and generally requires no collateral. However, in acting
as agent on behalf of insurance companies, the Company has the ability to
cancel the insurance policies issued and receive a credit from the insurance
companies for the unearned premium. 6




---



##### 



Talbot Financial Corporation
Notes to Consolidated Financial Statements For the year ended December 31, 2003
(In thousands of U.S. dollars, or as otherwise indicated) The Companys policy for allowance for doubtful accounts is to reserve for
specific items identified as uncollectible and to cancel and write off any
receivable balances due from customers that have been outstanding in excess of
90 days. Concentration of credit risk The Companys financial instruments that are exposed to concentration of credit
risk consist primarily of cash and cash equivalents, accounts and other
receivables. The Company maintains cash with banks in excess of federally
insured limits and is exposed to the credit risk from this concentration of
cash. No single client, other than the Parent (see Note 9 for further
discussion), accounted for more than ten percent of total client premiums or
more than ten percent of revenue for the year ended December 31, 2003. Trust Cash Premiums collected on behalf of insurance companies (less commissions and other
deductions) but not yet remitted, are included in trust cash. Trust cash is
restricted as to use by contractual obligations and by laws in certain states
in which the Company operates. Property and equipment Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is recorded based on the useful economic lives of
the related assets as follows: for computer equipment on a straight-line basis
from 2 to 5 years; for furniture, fixtures, and office equipment on a
straight-line basis from 5 to 10 years. Leasehold improvements are amortized on
the straight-line method over the term of the related lease. Upon sale or
retirement, the cost and related accumulated depreciation or amortization is
removed from the accounts and any gain or loss is reflected in earnings. If the
carrying value of property and equipment is identifiable as impaired, it is
written down to its fair value. Business combinations Acquisitions of subsidiaries have been accounted for using the purchase method,
whereby the results of acquired companies are included only from the date of
acquisition. Consideration which is contingent on maintaining or achieving
specified earnings levels in future periods is recognized as an additional cost
of the purchase at the time of the transaction and is adjusted, if necessary,
downward, when the contingency is resolved. Goodwill Goodwill is not amortized but is subject to impairment tests on at least an
annual basis. Goodwill is allocated to reporting units and any potential
goodwill impairment is identified by comparing the carrying value of a
reporting unit with its fair value. If any potential impairment is indicated,
it is quantified by comparing the carrying value of goodwill to its fair value,
based on the fair value of the assets and liabilities of the reporting unit. The Company completed its impairment testing on the balance of goodwill and
intangible assets as of September 30, 2003. Based on the testing performed, one
impairment loss was incurred. As a result, goodwill and expiration lists
related to this acquisition in the amount of $745 were written off. Intangible Assets Intangible assets consist of covenants not to compete and customer expiration
lists. Customer expiration lists are listings of all customers from acquired
agencies with their policy expiration dates. Covenants not to compete are
agreements entered into with employees of acquired agencies that include
prohibitions against competition, solicitation of customer expiration lists
acquired by the Company, and confidentiality of the Companys business
practices. Covenants not to compete are amortized over their estimated useful
life which averages 5 years. Customer expiration lists are amortized on a
straight-line basis over their estimated useful life of 12 years. Deferred income taxes Income taxes reflect the expected future tax consequences of temporary
differences between the carrying amounts of assets or liabilities and their tax
bases. Deferred income tax assets and liabilities are determined for each
temporary difference based on the tax rates that are expected to be in effect
when the asset or liability is settled. The benefit of loss carry forwards is
recognized as an asset to the extent that it is more likely than not to be
realized. Stock based compensation Certain employees of the Company participate in the Parents stock based
incentive compensation plan. Prior to 2003, the Company applied Accounting
Principles Board Opinion 25 (APB 25) in accounting for stock options, as
allowed under SFAS 123, Accounting for Stock-Based Compensation, as amended.
Under APB 25, the Company recognized no compensation expense related to options
because the exercise price of the Parents stock options equaled the fair
market value of the underlying stock on the date of grant. 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,
the Company adopted the fair value method for accounting for stock options as
defined in SFAS 123, using the prospective basis transition method. Under the
method, the Company has recognized stock-based compensation expense for options
granted, modified or settled after January 1, 2003. The parent typically
grants options to employees in the second quarter of each year. Stock-based
compensation expense was $235 ($208 after tax) in the statement of earnings as
of December 31, 2003. 7




---



##### 



Talbot Financial Corporation
Notes to Consolidated Financial Statements For the year ended December 31, 2003
(In thousands of U.S. dollars, or as otherwise indicated) The following table illustrates the effect on net income if the fair value
based method had been applied to all outstanding and unvested awards for the
year ended December 31, 2003. Net earnings, as reported
    
    $
    4,202Add: Stock-based employee compensation expense included
in reported net earnings, net of related tax effects
    
    
    208Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects
    
    
    (457
    )Pro forma net earnings
    
    $
    3,953
 3. Acquisitions The Companys strategic business plan includes the regular and systematic
evaluation and acquisition of insurance brokerages in new and existing markets.
Insurance brokerages, due to their nature, typically maintain a very low
capital to earnings ratio. As a result, the Company recorded a substantial
amount of goodwill and other intangible assets in connection with these
acquisitions. The Company typically pays a portion of the consideration for an acquired
brokerage in cash. Consideration for the remainder of the purchase price is
normally in the form of notes payable held by the acquired brokerage and/or the
former owners of the acquired brokerage. During 2003, the Company acquired 10 insurance brokerages for total
consideration of approximately $13,353, of which $7,509 was cash and the
remainder of $5,844 in long-term debt. These acquisitions were accounted for
under the purchase method. The allocation of aggregate purchase prices to the
fair value of the assets acquired was as follows: goodwill  $8,045, expiration
lists  $5,164, covenants not to compete  $66, current assets  $3,151,
property and equipment  $262, current liabilities  $3,335. The allocation of the purchase price, including goodwill and other identifiable
intangible assets, and the cost of the acquired brokerages in 2003 are
summarized as follows: Goreham-Moore
    
    Willis Insurance
    
    T.H.E.& Associates, Inc.
    
    Brokerage of Utah, Inc.
    
    Financial Group, Ltd.
    
    Other
    
    TotalAcquisition Date
    
    May 1, 2003
    
    May 1, 2003
    
    Sept. 1, 2003
    
    VariousWorking capital
    
    $
    (368
    )
    
    $
    (40
    )
    
    $
    227
    
    
    $
    (3
    )
    
    $
    (184
    )Property, equipment and other assets
    
    
    36
    
    
    
    131
    
    
    
    60
    
    
    
    35
    
    
    
    262Net assets (liabilities) at fair value
    
    $
    (332
    )
    
    $
    91
    
    
    $
    287
    
    
    $
    32
    
    
    $
    78ConsiderationCash
    
    $
    913
    
    
    $
    3,500
    
    
    $
    1,487
    
    
    $
    1,609
    
    
    $
    7,509Debt
    
    
    1,695
    
    
    
    
    
    
    
    1,800
    
    
    
    2,349
    
    
    
    5,844$
    2,608
    
    
    $
    3,500
    
    
    $
    3,287
    
    
    $
    3,958
    
    
    $
    13,353Goodwill
    
    $
    1,782
    
    
    $
    2,066
    
    
    $
    1,818
    
    
    $
    2,379
    
    
    $
    8,045Expiration lists
    
    
    1,144
    
    
    
    1,326
    
    
    
    1,167
    
    
    
    1,527
    
    
    
    5,164Covenants not to compete
    
    
    14
    
    
    
    17
    
    
    
    15
    
    
    
    20
    
    
    
    66$
    2,940
    
    
    $
    3,409
    
    
    $
    3,000
    
    
    $
    3,926
    
    
    $
    13,275
 Contingent consideration In addition to the consideration shown above, the previous owners of certain
other acquisitions are entitled to contingent consideration if certain revenue
or profitability targets are met. See note 10, Commitments and contingencies. 8




---



##### 



Talbot Financial Corporation
Notes to Consolidated Financial Statements For the year ended December 31, 2003
(In thousands of U.S. dollars, or as otherwise indicated) 4. Accounts and other receivables Accounts and other receivables consist of the following as of December 31,
2003: Client premiums receivable
    
    $
    15,165Commissions receivable
    
    
    5,033Less: Allowance for doubtful accounts
    
    
    (874
    )Less: Allowance for policy cancellations
    
    
    (500
    )18,824Notes receivable
    
    
    1,357$
    20,181
 Notes receivable are non-interest bearing and consist primarily of receivables
related to the sale of customer expiration lists in 2003. Allowance for doubtful accounts consists of the following as of December 31,
2003: Balance, January 1
    
    $
    306Charged to net earnings before income taxes
    
    
    1,220Deductions of amounts previously charged to the provision
    
    
    (652
    )Balance, December 31
    
    $
    874
 Losses relating to the non-collection of client premium receivables may be
mitigated by cancellation of the underlying insurance policy. 5. Intangible assets As of December 31, 2003 the gross carrying amount and accumulated amortization
of intangible assets other than goodwill were as follows: GrossCarrying
    
    AccumulatedAmount
    
    Amortization
    
    TotalDefinite life intangible assets:Expiration lists
    
    $
    64,804
    
    
    $
    45,386
    
    
    $
    19,418Covenants not to compete
    
    
    9,614
    
    
    
    8,708
    
    
    
    906Total
    
    $
    74,418
    
    
    $
    54,094
    
    
    $
    20,324
 Additions during 2003 were as follows: Definite life intangible assets:Expiration lists
    
    $
    5,164Covenants not to compete
    
    
    66Total
    
    $
    5,230
 9




---



##### 



Talbot Financial Corporation
Notes to Consolidated Financial Statements For the year ended December 31, 2003
(In thousands of U.S. dollars, or as otherwise indicated) The changes in the carrying amount of goodwill for the year ended December 31,
2003 are as follows: Balance as of December 31, 2002
    
    $
    3,576Goodwill acquired during 2003
    
    
    8,045Goodwill impairment losses
    
    
    (211
    )Balance as of December 31, 2003
    
    $
    11,410
 For the year ended December 31, 2003, amortization has been comprised of the
following: Expiration lists
    
    $
    5,379Covenants not to compete
    
    
    1,051Total
    
    $
    6,430
 The Company completed its impairment testing on the balance of goodwill and
intangible assets as of September 30, 2003. Based on the testing performed, one
impairment loss was incurred. The acquisition of Cerelle Corporation
(Cerelle) that was completed in June of 2002 was determined by the Company to
be impaired at September 30, 2003 based on a decline in expected future cash
flows and performance. As a result of the impairment, the Company wrote off
goodwill and expiration lists related to this acquisition in the amount of
$745, which is reflected in the accompanying statement of earnings. During 2003, the Company terminated $575 of notes payable regarding the
acquisition of Joline & Associates, in compliance with the purchase agreement.
As the Company had already recorded an impairment of the goodwill and
intangibles for this acquisition prior to 2003, the Company recorded a gain on
debt termination for the above amount, which is reflected in the accompanying
statement of earnings. The Company estimates the amortization charges for 2004 through 2008 for all
acquisitions consummated to date will be: Year ended December 31,
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008Expiration lists
    
    $
    4,652
    
    
    $
    4,302
    
    
    $
    3,473
    
    
    $
    2,357
    
    
    $
    904Covenants not to compete
    
    
    543
    
    
    
    363
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    5,195
    
    
    $
    4,665
    
    
    $
    3,473
    
    
    $
    2,357
    
    
    $
    904
 6. Property and equipment 2003Accumulated
    
    Net BookCost
    
    Depreciation
    
    ValueLeasehold improvements
    
    $
    2,291
    
    
    $
    1,020
    
    
    $
    1,271Office equipment
    
    
    4,634
    
    
    
    2,838
    
    
    
    1,796Computer equipment
    
    
    6,645
    
    
    
    5,655
    
    
    
    990$
    13,570
    
    
    $
    9,513
    
    
    $
    4,057
 During 2003 property and equipment was acquired at an aggregate cost of $1,881.
Depreciation expense of $1,210 was charged against these assets for the year
ended December 31, 2003.  10




---



##### 



Talbot Financial Corporation
Notes to Consolidated Financial Statements For the year ended December 31, 2003
(In thousands of U.S. dollars, or as otherwise indicated) 7. Debt Note payable to Parent, with interest at the 3-Month
Commercial Paper Rate, plus 225 basis points (1)
    
    $
    4,700Notes payable to Parent (3)
    
    
    485Term loan, principal plus interest at 8%, due December 2008 (2)
    
    
    1,122Various secured notes payable due to former principals (4)
    
    
    12,661Capital leases
    
    
    155Long-term debt
    
    
    19,123Less current portion
    
    
    (10,136
    )$
    8,987
 Future repayments of long-term debt are as follows: For the year ending December 31,2004
    
    $
    10,1362005
    
    
    2,7262006
    
    
    2,6512007
    
    
    2,2712008
    
    
    1,2432009 and thereafter
    
    
    96$
    19,123
  (1)
    
    Note Payable to Parent  Effective October
13, 2000, the Company entered into a
Promissory Note with the Parent in the
amount of $8,600,000. Principal payments
of $300,000, plus accrued interest at an
effective rate of 3.30% as of December 31,
2003, will be made on September 30,
December 30, March 30 and June 30 of each
year, commencing December 30, 2000.
Accrued interest payments will continue
until the Note has been paid in full.
Principal payments will continue through
and including September 30, 2004. A final
principal payment in the amount of the
unpaid balance of this note (together with
accrued interest) shall be due on September
30, 2004. Accordingly, the entire
outstanding balance of this Note is
reflected in the accompanying financial
statements as current. This note is
secured by 100% of the issued and
outstanding common stock of Talbot Agency,
Inc., a wholly owned subsidiary of the
Company.  (2)
    
    As part of the Companys
acquisition of the
outstanding stock of
Integrated Financial &
Insurance Services, Inc.
(Integrated) on April 1,
1999, the Company assumed
this liability. The loan
is a 10-year loan with
monthly payments of
principal plus interest at
8%, in the amount of $24,
maturing on December 2,
2008. This term loan is
guaranteed by one of the
former principals of
Integrated.  (3)
    
    Notes payable to Parent 
During 1999, the Company
completed the acquisition
of three separate
entities. In lieu of a
capital contribution, the
Parent elected to lend the
money necessary for the
down payments to the
Company under 3 separate
term loan agreements. The
loan agreements call for
monthly principal payments
ranging from $12 to $38,
together with interest at
rates ranging from 7.58%
to 9.10%. Of the balance
outstanding at December
31, 2003, $37 has matured
prior to the issuance of
this report. The loans
mature between January
2004 and November 2004.  (4)
    
    In the normal course of
business, the Company
completed acquisitions of
insurance agencies,
primarily in the Western
United States. In
accordance with the
purchase agreements, the
Company financed these
agreements through a
combination of cash and
notes payable to the
former principals of these
agencies. All loans call
for monthly principal plus
interest payments, with
rates ranging from 4.35%
to 8.00%, with the latest
maturing in May of 2009. For all long term debt and capital leases, certain property, plant and
equipment have been pledged as collateral in amounts not less than the
outstanding balance of the loan at December 31, 2003. In accordance with the terms of two separate acquisitions done by the Company,
the holders of the notes identified in (4) above, have the right to accelerate
the outstanding payment due to them from the Company as a result of the sale to
Hub disclosed in Note 15. The amount of debt included in these financial
statements that is subject to an acceleration clause is $2,296. 11




---



##### 



Talbot Financial Corporation
Notes to Consolidated Financial Statements For the year ended December 31, 2003
(In thousands of U.S. dollars, or as otherwise indicated) 8. Employee Benefit Plans 401(k) and Profit-Sharing Plan Substantially all officers and employees of the Company are entitled to
participate in a 401(k) and profit-sharing plan (401(k) plan). The 401(k)
plan provides for employee contributions on a pre-tax basis, up to certain
limits as defined the 401(k) plan document. The Company will match the
employee contribution in an amount equal to 100% of the employee contribution
up to a maximum of 6% of the employees compensation. Additionally, the
Company may contribute additional amounts at its discretion. Contributions by
the Company to the 401(k) plan were $2,883 for 2003. Deferred Compensation Plan The Company offers a nonqualified deferred compensation plan (the Plan) for a
select group of management or highly compensated employees. The Plan is an
unfunded, unsecured plan for which obligations are paid to participants out of
the Companys general assets, including assets held in a grantor trust,
described below. Under the Plan terms, eligible employees will be permitted to
defer a portion of the compensation not yet earned until they attain their
benefit distribution date, as defined in the Plan. Participants shall have no
right, either directly or indirectly, to anticipate, sell, assign or otherwise
transfer any benefit accrued under the Plan. In addition, no participant shall
have any interest in any Company assets set aside as a source of funds to
satisfy its benefit obligations under the Plan, including the establishment of
any trust under the terms of Revenue Procedure 92-64 or under the terms of any
amendment thereof or successor thereto. Participants shall have the status of
general unsecured creditors of the Company and the Plan constitutes an
unsecured promise by the Company to make benefit payments in the future. The Company established a grantor trust to provide funding of obligations under
the Plan. The trust is revocable and the principal of the trust, and any
earnings thereon, shall be held separate and apart from the Companys other
funds and shall be used exclusively for the uses and purposes of the Plan
participants and the Companys general creditors. Assets held in the trust
amounted to $3,656 at December 31, 2003 and are included in marketable
securities on the balance sheet. In addition, a long-term liability in the
amount of $3,656 at December 31, 2003 is included on the balance sheet.
Included in the 2003 statement of earnings were costs related to this plan in
the amount of $420. Self-insured Medical Plan The Company is self-insured for purposes of paying for employee group health
claims. The self-insured portion of the liability for unpaid claims and
associated expenses, including claims incurred but not reported, is determined
using an estimate of the average monthly claims actually paid by the Company.
As of December 31, 2003, the Company has a liability of $1,525 for its estimate
of claims that have been incurred but not reported. This amount reflects
approximately 4 months of actual paid claims as of December 31, 2003. 9. Related Party Transactions The Company places certain insurance policies through the Parent and its
subsidiaries. The Parent owns a property and casualty insurer, Safeco
Insurance Company of America (Safeco Insurance) and also has a life insurance
company subsidiary, Safeco Life Insurance Company (Safeco Life). The Company
recognized commissions from Safeco Insurance on the placement of property and
casualty insurance policies in the amount of $7,850 during the year ended
December 31, 2003; $1,532 in commissions from Safeco Life on the sale of fixed
annuity contracts during the year ended December 31, 2003; and received
contingent commissions from Safeco Insurance in the amount of $2,603 during the
year ended December 31, 2003. The Company leases office space from the Parent for its brokerage operation
located in Pleasant Hill, CA. The lease is for a period of 7 years, expiring
December of 2009. Annual rental payments to the Parent amounting to $93 are
included in facilities and equipment in the statement of earnings as of
December 31, 2003. 10. Commitments and contingencies The Company is committed under lease agreements for office premises and
computer equipment. At December 31, 2003, aggregate minimum rental commitments
under operating leases are as follows: 2004
    
    $
    4,0932005
    
    
    3,5852006
    
    
    2,3192007
    
    
    1,3152008
    
    
    8802009 and thereafter
    
    
    374$
    12,566
 Rent expense for the year ended December 31, 2003 amounted to $4,778. 12




---



##### 



Talbot Financial Corporation
Notes to Consolidated Financial Statements For the year ended December 31, 2003
(In thousands of U.S. dollars, or as otherwise indicated) Included in the accounts payable and accrued liabilities on the balance sheet
was an amount equal to $602 for future lease payments on space in the Companys
Chicago, IL office. In accordance with Statement of Accounting Standards
(SFAS) No. 146 Accounting for Costs Associated with Exit or Disposal
Activities, a liability for costs to terminate a contract before the end of its
term shall be recognized and measured at its fair value when the entity ceases
using the right conveyed by the contract, in this case, the right to use the
leased property. The Company is currently not using approximately 6,000 square
feet out of a total of approximately 11,000 square feet in its Chicago, IL
office location. The lease for this location expires in July 2008. In
accordance with SFAS 146, the Company took a charge for the pro-rata cost of
the office space currently not being occupied, using the current rental rates
as well as the future rental rates on this location, as a charge to earnings in
the 2003. The charge of $602 is included in facilities and equipment expense
in the statement of earnings as of December 31, 2003. In connection with other various acquisitions completed through December 31,
2003, the Company may be entitled to reduce the outstanding debt obligations up
to a maximum sum of approximately $3,460 based upon the acquired brokerages
failing to achieve certain operating earnings targets. These clawback
provisions are calculated on various dates through September 2006 according to
the terms and conditions of each purchase agreement. Any reduction of the
outstanding debt will be recorded as an adjustment to goodwill once the
contingency is resolved.
In connection with one acquisition completed in May 2003, the Company may be
obligated to pay cash contingent consideration up to a maximum of $2.8 million
based upon the acquired brokerage achieving certain operating earnings targets.
The contingent payment is payable in July 2005. Any additional consideration
will be recorded as an adjustment to goodwill once the contingency is resolved.
In connection with contingent consideration earned as of December 31, 2003,
the financial statements do not reflect a liability as of December 31, 2003 as
the contingency has not yet been resolved.
In the ordinary course of business, the Company and its subsidiaries are
subject to various claims and lawsuits consisting primarily of alleged errors
and omissions in connection with the placement of insurance. In the opinion of
management, the ultimate resolution of all asserted and potential claims and
lawsuits will not have a material adverse effect on the consolidated financial
position or results of operations of the Company. 11. Shareholders equity Share capital At December 31, 2003 there were 100,000, no par value common shares authorized,
of which 1,000 were issued and outstanding. Contributed surplus Balance at December 31, 2002
    
    $
    36,798Contribution from Parent
    
    
    4,000Contribution of stock options by Parent
    
    
    235Balance at December 31, 2003
    
    $
    41,033
 12. Equity Incentive Plan On May 7, 2003, the Parent of the Company issued options exercisable for 64,000
common shares at an exercise price of $38.19 per share to certain employees of
the Company. The maximum option term is ten years, and the options vest as to
one-fifth per year over five years of continuous employment. A summary of the stock option activity and related information for the year
ended December 31, 2003 consists of the following: Number
    
    Weighted-Average(000s)
    
    Exercise PriceBalance, December 31, 2002
    
    
    144
    
    
    $
    31.97Granted
    
    
    64
    
    
    $
    38.19Exercised
    
    
    (4
    )
    
    $
    25.56Balance, December 31, 2003
    
    
    204
    
    
    $
    34.04
 13




---



##### 



Talbot Financial Corporation
Notes to Consolidated Financial Statements For the year ended December 31, 2003
(In thousands of U.S. dollars, or as otherwise indicated) The following table summarizes information about the stock options outstanding
at December 31, 2003: 2003Number
    
    Weighted-average
    
    NumberExercise
    
    Outstanding
    
    Remaining
    
    Exercisableprice
    
    (000s)
    
    Contractual life
    
    (000s)$
    25.49
    
    
    
    42
    
    
    5.87 years
    
    
    31$
    33.32
    
    
    
    62
    
    
    8.34 years
    
    
    16$
    38.11
    
    
    
    100
    
    
    7.65 years
    
    
    36204
    
    
    7.49 years
    
    
    83
 The fair value of the stock options granted in 2003 was approximately $675
(weighted average exercise price was $38.19 per share). The aggregate fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for the
options issued in 2003: 2003Dividend yield
    
    
    2.50
    %Expected volatility
    
    
    35.0
    %Risk free interest rate
    
    
    3.00
    %Expected life
    
    5 years
 Non-cash stock based compensation related to stock options of $235 for the year
ended December 31, 2003 was expensed with offsetting credits to contributed
surplus. 13. Fair value of financial instruments The carrying amounts of the Companys financial assets and liabilities,
including cash and cash equivalents, accounts and other receivables, accounts
payable and accrued liabilities at December 31, 2003, approximate fair value
because of the short -term nature of these instruments. The carrying value of
the Companys variable rate debt at December 31, 2003 approximates fair market
value. The carrying values of long-term debt approximate fair values. 14. Income taxes Income taxes for 2003 amounted to $2,672, resulting in an effective tax rate of
39% in 2003. The provision for income tax expense differs from the result that would have
been obtained by applying the combined statutory federal income tax rate of
35.00% in 2003 as follows: 2003Provision for tax at statutory rates
    
    $
    2,406State and local tax
    
    
    355Permanent differences
    
    
    88Adjustment to prior years
    
    
    (139
    )Other
    
    
    (38
    )Provision for tax
    
    $
    2,672
 14




---



##### 



Talbot Financial Corporation
Notes to Consolidated Financial Statements For the year ended December 31, 2003
(In thousands of U.S. dollars, or as otherwise indicated) The components of the deferred tax assets and liabilities at December 31, 2003
were as follows: 2003Deferred income tax assetsAmortization of intangibles
    
    $
    9,193Deferred compensation
    
    
    1,280Non-deductible book reserves
    
    
    1,590Non-cash stock based compensation
    
    
    87Total deferred income tax assets
    
    
    12,150Less: current portion deferred income tax assets
    
    
    1,590Deferred income tax assets
    
    $
    10,560Deferred income tax liabilitiesOther
    
    $
    150Deferred income tax liabilities
    
    $
    150
 15. Reconciliation to Canadian GAAP The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States (U.S. GAAP),
which differs in certain respects from accounting principles generally accepted
in Canada (Canadian GAAP). Net Earnings There were no differences between U.S. GAAP and Canadian GAAP affecting net
earnings for the year ended December 31, 2003. Shareholders Equity The table below sets out the differences between U.S. GAAP and Canadian GAAP
that affect shareholders equity at December 31, 2003: Shareholders equity based on U.S. GAAP
    
    $
    36,635Adjustment to carrying value of marketable
securities, net of tax of $233
    
    
    (432
    )Shareholders equity based on Canadian GAAP
    
    $
    36,203
 Under U.S. GAAP, the Company has classified all marketable securities as
available-for-sale which requires the securities to be reported at fair value,
with unrealized gains and loses, net of tax, reported as a separate component
of shareholders equity. Under Canadian GAAP, such securities are reported at
cost less any provision for other than temporary losses in value. 16. Subsequent event Effective July 1, 2004, the Company was acquired by Hub International Limited. 15