Other buildings owned and occupied include the newly developed office space (343,000 gross square feet) in Redmond, Washington that was completed in late 2001. Additional company-owned facilities are regional and branch offices located in Fountain Valley and Pleasant Hill, California; Denver, Colorado; Carol Stream, Illinois; St. Louis, Missouri; Cincinnati, Ohio; Portland, Oregon; Mountlake Terrace and Spokane, Washington. These buildings, including the newly developed Redmond, Washington facility, total approximately 1,960,000 gross square feet. All other branch and service offices occupy leased premises totaling approximately 2,756,000 gross square feet, generally subject to lease periods of five years or less. Total leased and owned office space totals approximately 5,503,000 gross square feet.
The following selected consolidated financial data of SAFECO was derived from the consolidated financial statements of the Corporation. The following financial data should be read in conjunction with the Consolidated Financial Statements and accompanying notes.
Summary of Operations (unaudited) (Dollar amounts in millions except per share data)
SAFECO Corporation (the Corporation) is a Washington state corporation that owns operating subsidiaries engaged in property and casualty insurance, surety, life insurance and asset management. These operations generated virtually all of the 2001 revenues.
The Corporation and its subsidiaries are collectively referred to as “SAFECO.” The property and casualty insurance operations are collectively referred to as “Property & Casualty.” The life insurance and asset management operations are collectively referred to as “Life & Investments.” Other operations not included in either Property & Casualty or Life & Investments are collectively referred to as “Corporate.”
Many of the plans to address the urgent actions have been completed and others are in process. These actions are explained in more detail in the remainder of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
Rates were raised across all lines of business, with specific focus on the underperforming lines of homeowners and large commercial.
In February 2001, SAFECO announced a 50% reduction in its quarterly dividend from $0.37 per share to $0.185 per share starting with the April 2001 dividend payment to shareholders. This reduction provides the Corporation cash savings of approximately $95 per year and brought the dividend more in line with financial performance.
During the third quarter 2001, SAFECO completed a review, initially announced in May 2001, of Property & Casualty loss reserve adequacy and as a result increased reserves by $240, pretax. For additional information see the Property & Casualty - Operations, Loss Reserve Strengthening section of this MD&A.
In May 2001 Bruce Allenbaugh was named Senior Vice President of Corporate Marketing bringing wide experiences from Avenue A, NextLink and Pepsi-Cola to SAFECO;
The Board of Directors was also strengthened with the August 2001 election of Joseph W. “Jay” Brown, an insurance executive with nearly 30 years experience. Mr. Brown, Chairman and Chief Executive Officer of MBIA, Inc., formerly served as President and Chief Executive Officer of Firemen’s Fund Insurance Company and Chairman and Chief Executive Officer of Talegen Holdings, Inc., Xerox’s insurance holdings company.
The following summarized financial information should be read in conjunction with the Segment Footnote (Note 15) in the Notes to Consolidated Financial Statements. Detailed discussion of Property & Casualty and Life & Investments operations follows in this MD&A.
* Income (loss) before realized gain and income taxes in 2001 includes goodwill write-down of $1,214.1 ($925.5 after tax, $7.24 per share), Property & Casualty loss reserve strengthening of $240.0 ($156.0 after tax, $1.22 per share) and restructuring charges of $44.3 ($28.8 after tax, $.22 per share).
The following is a summary of the major items that affected SAFECO’s financial results in 2001:
Net catastrophe losses for 2001 were $268.0 before tax ($174.2 after tax) which was more than $100 higher than the highest year in SAFECO’s past (1998). These 2001 losses include $60.0 before tax ($39.0 after tax) for storm damages in the St. Louis area in April and $51.0 before tax ($33.2 after tax) of net losses from the World Trade Center attacks.
Completed a reserve review and increased loss reserves $240.0 before tax ($156.0 after tax).
Generated record pretax earnings (before goodwill write-down) of $197.5 for the year ($127.1 after tax).
Sale of SAFECO Credit resulting in a gain of $97.0 before tax ($54.0 after tax).
Quarterly dividend to shareholders was reduced from $0.37 cents to $0.185 cents per share resulting in annual cash savings of $94.5.
Through independent agents, Property & Casualty writes personal, commercial and surety lines of insurance. Included in the lines of insurance written are automobile, homeowners, fire, commercial multi-peril, workers’ compensation, miscellaneous casualty, surety and fidelity.
The following three tables for Property & Casualty reflect: (1) income (loss) before realized gains and income taxes, (2) operating ratios, and (3) underwriting profit (loss).
Operating ratios represent major components of expense expressed as a percentage of earned premiums and are commonly used measures of Property & Casualty’s profitability. Ratios exclude goodwill amortization, goodwill write-down and restructuring charges.
Information on the investment income generated by Property & Casualty is provided in the Investment Summary section of this MD&A.
$80.0 for workers’ compensation, $90.0 for construction defect and $70.0 for other coverages including asbestos and environmental.
The estimation of liabilities related to construction defect and asbestos and environmental claims is subject to greater subjectivity than for other claims. SAFECO’s reserve review noted the continued emergence of adverse loss experience for construction defect and asbestos and environmental claims due to newly emerging trends in the disposition of such cases. As a result of the review, management concluded that ultimate losses for these lines will be higher in the range of possible outcomes than previously estimated.
The $70.0 increase in reserves for Other lines, including asbestos and environmental claims, relates to the anticipated increase in asbestos claims relating primarily to the discontinued reinsurance operations acquired in the American States purchase. Consistent with recent insurance industry experience, trends observed include an expansion of defendants to include smaller and more peripheral firms such as installers in addition to asbestos manufacturers and producers.
The review of loss reserve adequacy concluded that personal lines reserves were adequate.
The decrease in policies in force in 2001 was most significant for preferred driver auto insurance policies. This decrease was offset in part by a substantial increase in non-standard auto insurance policies. Growth in the preferred auto line is key to long-term profitability in auto and retention of inforce business remains a critical issue for this line. The focus going forward is to seek a return to growth in policies in force aided by a new product with additional pricing tiers coupled with the automated underwriting initiative. SAFECO recently announced changes in agent compensation which provide greater incentives to agents for writing new auto business. In addition the personal auto, homeowners and specialty lines are now managed on an individual product line basis by state instead of the former regional management basis. This change will provide a closer focus on profitability on an individual product line basis.
Specialty lines (including earthquake, dwelling fire, inland marine and boats) produced underwriting profits of $3.9, $18.2 and $20.6 in 2001, 2000 and 1999, respectively. The Seattle earthquake that occurred in February impacted results in 2001.
Delivery and implementation of the redesigned business model will require a substantial effort in 2002. This represents a significant departure from the traditional individual risk underwriting approach. The success of this implementation will be critical to improved underwriting results in business insurance over the next few years.
In May 2001 Property & Casualty announced its decision to consolidate its commercial lines operations and reduce the number of regional offices. The consolidated operations are now known as SAFECO Business Insurance (SBI) and focus on small-to-medium business product lines. SBI includes a special facility to underwrite large commercial accounts produced by agents and brokers who support Property & Casualty’s core personal and small-to-medium business product lines. For reporting purposes these two segments have been shown separately through 2001 but will be combined into one segment beginning with the first quarter 2002.
Commercial Insurance focused on medium- to large-sized businesses. It produced underwriting losses of $276.2, $155.7 and $107.6 and operated at combined ratios of 144.0, 122.8 and 115.7 in 2001, 2000 and 1999, respectively. Included in the underwriting loss is the $90.0 reserve charge described earlier relating to construction defect, workers’ compensation and asbestos and environmental claims. The continued weakness in the underwriting results is due to several reasons, including the competitive underwriting environment, inadequate rates, adverse loss experience (particularly with workers’ compensation in California, Texas and Florida), reserve increases in recognition of unfavorable trends in loss costs and higher frequency of large losses. Property & Casualty has increased commercial prices by 21% and 17% in 2001 and 2000, respectively. Commercial insurance gross written premiums declined 12.3% to $617.2 in 2001 from $703.8 in 2000.
During 2001, SAFECO decided to exit approximately half of its $270.0 Select Markets business because these specialty commercial insurance products did not fit with SAFECO’s core business focus. Once the contracts for the discontinued lines expire, they will not be renewed. The runoff period may take up to three years. In September 2001, SAFECO acquired a book of lender-placed property business from ACE, with annual premiums of approximately $80.0, more than doubling SAFECO’s lender-placed property book of business.
Other insurance product lines produced underwriting losses of $118.3 and $1.1 in 2001 and 2000, respectively, and broke even in 1999. These lines include assumed reinsurance and other business in run-off. Included in the underwriting loss is the $85.0 reserve charge described earlier relating to construction defect and asbestos and environmental issues and $30.0 of reserves from the September 11, 2001 attacks on the World Trade Center, net of reinsurance. The $30.0 loss was incurred by SAFECO’s London subsidiary, R.F. Bailey Underwriting Agencies, Ltd. (R.F. Bailey) (see below for discussion of total losses from terrorism). SAFECO completed a review of R.F. Bailey in 2001 and its options in the Lloyd’s of London underwriting market. As a result of the review in the fourth quarter of 2001, SAFECO wrote off $13.1 of goodwill associated with the 1999 acquisition of R.F. Bailey.
The ISO terrorism exclusion for commercial property and casualty policies has been approved or conditionally approved in over 45 states. The conditional approval specifies either or both that the insurer demonstrate that reinsurance for terrorism is not available to it or that the exclusion may not be used if a federal law is in effect that addresses the treatment of losses arising from acts of terrorism. Two states, New York and California, have refused to approve the ISO exclusion. Although SAFECO writes a significant amount of commercial business in California, this state represents less than 20% of SAFECO’s commercial book of business and the book is primarily comprised of workers’ compensation risks. To date, ISO terrorism exclusions have not been approved for use on personal lines policies.
As a consequence of the action of SAFECO’s reinsurers described above and the current unavailability of the ISO exclusion for SAFECO’s commercial property and casualty policies in some states, SAFECO will continue to be exposed to commercial losses that arise from terrorism and to be without reinsurance for such losses. It will also have no reinsurance for terrorism related losses in its workers’ compensation line.
Reserves for loss and loss adjustment expenses (LAE) for Property & Casualty were $5,053.7 at December 31, 2001 compared with $4,612.7 at December 31, 2000. The increase in reserves at December 31, 2001 compared with December 31, 2000 reflected both increased loss severities and adverse prior year development in certain lines of business. The December 31, 2001 reserves included $240.0 of loss and LAE reserve strengthening (see Loss Reserve Strengthening section under the Property & Casualty - Operations section of this MD&A). The liability is presented net of amounts recoverable from salvage and subrogation (see Summary of Significant Accounting Policies in Note 1 of the Notes to Consolidated Financial Statements) and gross of amounts recoverable from reinsurance (see Note 5 in the Notes to Consolidated Financial Statements). The total amount of reinsurance recoverables was $415.9 at December 31, 2001 and $343.6 at December 31, 2000.
Reserves for losses that have been reported to Property & Casualty and certain legal expenses are established on the “case basis” method. Claims incurred but not reported (IBNR) and other LAE are estimated using actuarial procedures. Salvage and subrogation recoveries are accrued using the “case basis” method for large claims and statistical procedures for smaller claims.
The following table presents the loss and LAE reserve activity for liability coverages related to environmental, asbestos and other toxic claims, before reinsurance:
The total Property & Casualty reserves for construction defect claims were $382.9 at December 31, 2001 and $322.6 at December 31, 2000, representing approximately 8% of total Property and Casualty reserves for loss and LAE at both December 31, 2001 and 2000.
Property & Casualty uses treaty and facultative reinsurance to help manage exposures to loss. Property & Casualty’s reinsurance coverages relate to surety business and personal and commercial property coverages. As noted above, the liability for unpaid losses and LAE is reported gross of reinsurance recoverables of $415.9 at December 31, 2001 and $343.6 at December 31, 2000. This increase is due primarily to reinsurance recoverables related to the surety Enron loss (see Surety section of the MD&A for additional information) and losses resulting from the World Trade Center attacks. Because the amount of the reinsurance recoverables can vary depending on the size of an individual loss or, in some cases, the aggregate amount of all losses in a particular line of business, the exact amount of the reinsurance recoverables is not known until all losses are settled. Therefore, Property & Casualty must estimate the amount of reinsurance recoverables it anticipates receiving. To estimate this amount, Property & Casualty uses the terms of the reinsurance contracts and historical reinsurance recovery information and applies that information to the gross loss reserve estimate.
The availability and cost of reinsurance are subject to prevailing market conditions, both in terms of price and available capacity. Due to the recent tightening in the reinsurance marketplace, it is likely that the cost of reinsurance will increase in 2002. Although the reinsurer is liable to SAFECO to the extent of the reinsurance ceded, SAFECO remains primarily liable to the policyholder as the direct insurer on all risks insured. In addition, the magnitude of losses in the reinsurance industry resulting from the September 11, 2001 terrorist attacks is expected to impact the financial strength of reinsurers which may result in collectibility or recoverability issues. However, to SAFECO’s knowledge, none of its reinsurers is experiencing financial difficulties. SAFECO’s business is not substantially dependent upon any single reinsurance account.
Assets under management increased to $6.2 billion at December 31, 2001 from $6.1 billion at December 31, 2000 and decreased from $7.1 billion at December 31, 1999. Assets under management declined during the first two quarters of 2001 to $5.8 billion at June 30, 2001 due to unfavorable market conditions and increased during the last two quarters of 2001 to $6.2 billion at December 31, 2001. The decline in assets during 2000 was the result of withdrawals of GIC and other fixed accounts which also reduced fee income.
Total income annuity assets increased to $6.3 billion at December 31, 2001 compared with $6.2 billion at December 31, 2000 and $5.8 billion at December 31, 1999. New SPIA deposits were $99.0, $391.0 and $313.0 in 2001, 2000 and 1999, respectively. Deposits are down significantly in 2001 as a result of the ratings downgrade that is discussed further in the Ratings section of this MD&A.
SAFECO’s group insurance operations produced pretax income of $26.6 and $4.3 in 2001 and 2000, respectively, and a pretax loss of $19.4 in 1999. Group’s main product offering is excess loss insurance sold to employers with self-insured employee medical plans. Also offered are group life, accidental death & dismemberment and disability products. The increase in pretax income of $22.3 and $23.7 in 2001 and 2000, respectively, is due to a decrease in the medical loss ratio to 64% for 2001 from 68% in 2000 and 81% in 1999. Rate increases and underwriting actions have contributed to the decreases in the loss ratio.
Total group premiums increased 6% in 2001 and 61% during 2000 compared with a decrease of 4% in 1999. The increase in group premiums for 2000 is due primarily to the acquisition of excess loss business from ING Medical Risk Solutions at the end of 1999 as well as continued medical rate increases.
SAFECO Asset Management Company is the investment advisor for the SAFECO mutual funds, variable annuity portfolios and a number of outside pension and trust accounts. These investment management activities produced pretax income of $8.0, $13.0 and $13.6 in 2001, 2000 and 1999, respectively. Assets under management totaled $5.1 billion, $5.6 billion and $6.7 billion at December 31, 2001, 2000 and 1999, respectively. The decline in assets under management is due primarily to asset outflows of approximately $450.0 and $830.0 in 2001 and 2000 due to unfavorable market conditions and investment performance.
The other line is a major component of Life & Investments’ earnings, contributing pretax income of $76.7, $70.2 and $76.0 in 2001, 2000 and 1999, respectively. It is comprised mainly of investment income resulting from the investment of capital and prior years’ earnings of the operating lines of business and earnings from Talbot Financial Corporation (Talbot), a wholly-owned subsidiary. Talbot is an insurance agency that distributes both property and casualty and life insurance products. Talbot’s pretax income (loss) was $4.6, $(2.1) and $2.8 in 2001, 2000 and 1999, respectively. Excluding Talbot the other line contributed $72.2, $72.4 and $73.2 in 2001, 2000 and 1999, respectively.
The Corporate segment includes operating results for the Corporation, SAFECO Financial Products, SAFECO Properties, and intercompany transaction eliminations. The Corporation’s primary expense is interest expense on borrowings totaling $79.0, $89.0 and $72.0 in 2001, 2000 and 1999, respectively. These amounts do not include the expense for the distributions on SAFECO’s Capital Securities which is presented net of tax on the Consolidated Statements of Income (Loss).
The fair value of the liability due to writing S&P index options was $45.4 at December 31, 2001. In addition SFP had investment grade convertible bonds with market values totaling $38.4 at December 31, 2001.
In 1998, SAFECO decided to divest itself of its real estate operations (SAFECO Properties) and most of the assets were sold in 1999. A few properties remain and most are expected to be sold in 2002. Income from the real estate subsidiary will continue to decline as the remaining assets are sold. At December 31, 2001, investment real estate held by SAFECO Properties totaled $42.9, less than one percent of SAFECO’s
SAFECO uses funds to support operations, service and pay down debt, pay dividends to SAFECO shareholders and grow the investment portfolio. Cash from insurance operations is used primarily to pay claims and claim adjustment expenses. Most insurance premiums are received before or at the time premium revenues are recognized, while related claims are incurred and paid in subsequent months or years. Catastrophe claims, the timing and amount of which are inherently unpredictable, may create increased liquidity requirements.
Total cash provided by operating activities for 2001, 2000 and 1999 was $528.8, $619.2 and $718.1, respectively (see Consolidated Statements of Cash Flows for additional information). Property & Casualty’s operating cash flows were $37.0, $137.0 and $205.3 for 2001, 2000 and 1999, respectively. This decline is due mainly to the poor underwriting results and resultant claims expenses paid as well as a decline in premium
volume. Although Property & Casualty began raising premium rates in 2001 there has been an offsetting impact due to reductions in the number of policies in force. In addition, Property & Casualty’s after-tax cash flows from investment income have declined due to the relatively low interest rate environment, dividends paid to the Corporation (which reduce the amount of investable cash) and bond call activity (whereby higher yielding bonds are called and redeemed by issuers). Consolidated dividends and interest received have increased due to the higher invested asset base of Life & Investments. It is anticipated that the insurance subsidiaries will continue to pay dividends to the Corporation in 2002 in order to fund shareholder dividends and to service debt. The weak underwriting results in prior years have resulted in a reduction in the amount of available subsidiary dividends. This has impacted the Corporation’s liquidity and financial flexibility. Given the deterioration of earnings in recent years, in February 2001 the Board of Directors reduced the quarterly dividend by 50% from $0.37 to $0.185 per share.
The Corporation has a five-year bank credit facility available for $800.0 that was originated in 1997 and extends to September 2002. This facility is available for general corporate purposes and as a back up to the Corporation’s commercial paper program. The Corporation plans to renew the bank credit facility when it expires in September 2002. Based on the current financial position and expectations, SAFECO believes it will be able to renew this facility. In 2002, the Corporation plans to roll over its $299.0 of commercial paper borrowings outstanding at December 31, 2001.
As part of its capital management strategy, the Corporation periodically repurchases its common stock through open market and negotiated purchases, when given appropriate market conditions and liquidity availability. In February 2000 the Corporation’s Board of Directors approved the repurchase of 3.0 shares of common stock. Previous repurchase authorizations were in May 1999 for a total of 8.0 shares and in August 1998 for a total of $200.0. For the year ended December 31, 2001, the Corporation did not repurchase a material number or dollar amount of shares. For the year ended December 31, 2000, the Corporation repurchased 1.3 shares at a total cost of $30.3 for an average share price of $22.54. For the year ended December 31, 1999, the Corporation repurchased 7.5 shares at a total cost of $302.1 for an average share price of $40.14. Repurchases combined for 2001, 2000 and 1999 totaled approximately 7% of the Corporation’s outstanding common shares at the beginning of 1999. The Corporation received additional dividends from its insurance subsidiaries to fund these stock repurchases. Approximately 2.7 shares remain available for repurchase under the February 2000 authorization. SAFECO does not anticipate that it will repurchase any material amount of its common stock in 2002.
Limitations or prohibitions on the use of insurance scoring, which is partially based on personal credit information, could adversely affect Property & Casualty’s business plans, depending on the specifics of any such limitation or prohibition.
The National Association of Insurance Commissioners (NAIC) uses risk-based capital (RBC) formulas for both life insurers and property and casualty insurers. These serve as an early warning tool by the NAIC and state regulators to identify companies that are undercapitalized and merit further regulatory attention or the initiation of regulatory action. SAFECO’s life and property and casualty companies have more than sufficient capital to meet the RBC requirements.
As of December 31, 2001, SAFECO had approximately $1,163.1 of gross deferred tax assets ($319.0 net deferred tax asset), including net operating loss carryforwards that expire in 2020, for which no valuation allowance has been recorded. The realization of these assets is based upon estimates of future taxable income. In preparing estimates of future taxable income, SAFECO has used the assumptions and projections utilized in its internal financial projections. These projections of future profitable results are subject to uncertainties primarily related to the variability of Property & Casualty underwriting results. Should results not be as profitable as SAFECO has forecasted, a valuation allowance may be required to be established. Any such allowance would impact current operating results.
The Property & Casualty pretax investment income was $457.7, $460.5 and $462.3 in 2001, 2000 and 1999, respectively. On an after-tax basis investment income was $358.2, $363.0 and $387.6 for 2001, 2000 and 1999, respectively. Although Property & Casualty operating cash flow was positive in all three years, the amount of dividends paid to the Corporation over the three year period and the high level of claims payments, combined with the relatively low interest rate environment and bond call activity dampened the growth of investment income. After-tax investment income in 2002 is expected to be slightly lower due to lower market interest rates and slowed premium revenue cash flows. Dividends paid to the Corporation totaled $13.6, $362.0 and $717.5 for 2001, 2000 and 1999, respectively. Dividends to the Corporation have declined due to underwriting losses over the past several years and regulatory restrictions on dividend payments. Additional information about dividend restrictions can be found in Note 13 of the Notes to Consolidated Financial Statements.
Life & Investments pretax investment income was $1,180.3, $1,181.5 and $1,123.2 in 2001, 2000 and 1999, respectively. The growth in investment income from 1999 to 2000 was due primarily to the higher invested assets base related to the growth of funds held under deposit contracts. Although the investment portfolio has grown in 2001, investment income is flat due to lower investment yields and the overall decline in the equity security markets.
Consolidated realized gains from security investments are recorded net of losses on the sale or write-down of investments. Each investment that has declined in fair value below cost is monitored closely and if the decline is judged to be other than temporary, the security is written down to fair value. In determining whether a decline in the fair value of a security below cost is other than temporary, SAFECO considers the relevant facts and circumstances related to the security. These include: (1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer, including any specific events that influence the operations of the issuer or that affect its future earnings potential; and (3) SAFECO’s intent and ability to retain the investment for a period of time sufficient to allow for a recovery in value.
The amounts of such write-downs were $126.8, $35.7 and $0.6 in 2001, 2000 and 1999, respectively. In 2001, the write-downs amounted to $36.2, $66.5 and $24.1 for Property & Casualty, Life & Investments and Corporate, respectively. Nearly all of these write-downs for Property & Casualty and Life & Investments in 2001 and 2000 were on fixed maturities. The write-down of $24.1 for Corporate related to an equity security whose decline in fair value was other than temporary. The increases in write-downs in 2001 and 2000 were due to credit deterioration and corporate failures of several fixed-maturity issuers, particularly in the retail, auto parts supplier, and telecommunications areas. Included in the 2001 write-downs of $126.8 is $12.1 for investments in Enron, which filed for bankruptcy in the fourth quarter of 2001. Additional write-downs are possible in 2002 due to the continued weak economy, however, the timing and amount of any write-downs is not currently estimable.
The table below summarizes SAFECO’s consolidated securities investment portfolio at December 31, 2001. The fair value recorded amount exceeded the cost or amortized cost on fixed maturities and equity securities by $1.4 billion at December 31, 2001.
Life & Investments’ portfolio totaled $16.3 billion at fair value at December 31, 2001 compared with $15.6 billion at December 31, 2000. Fixed maturities securities, all of which are taxable, comprised 91% of this investment portfolio at December 31, 2001. The investment philosophy for this portfolio is to emphasize investment yield without sacrificing investment quality, and to provide for liquidity and diversification. Life & Investments also matches the projected cash inflows of this portfolio with the projected cash outflows of the liabilities of the various product lines within the Life & Investments operations. Effective October 1, 2000, the entire held-to-
maturity fixed maturities investment portfolio, with a fair value of $2.8 billion, was reclassified to available-for-sale. This reclassification was made to provide additional investment flexibility in managing the bond portfolio and resulted in an increase in other comprehensive income of $41.0 in the fourth quarter of 2000. All of SAFECO’s fixed maturities securities are now carried at fair value.
SAFECO has paid cash dividends continuously since 1933. Common stock dividends paid to shareholders were $0.93 per share in 2001 compared with $1.48 in 2000 and $1.44 in 1999. These dividends are funded with dividends to the Corporation from its subsidiaries. The Corporation expects to continue paying dividends in the foreseeable future. However, payment of future dividends is subject to the Board of Directors’ approval and is dependent upon earnings and the financial condition of the Corporation as well as dividend restrictions on its significant insurance subsidiaries as described in Note 13 of the Notes to Consolidated Financial Statements. Given the deterioration of earnings in recent years, in February 2001 the Board of Directors reduced the quarterly dividend 50% from $0.37 to $0.185 per share.
Success in implementing a new business entry model for personal and commercial lines;
The competitive pricing environment, initiatives by competitors and other changes in competition;
Weather conditions, including the severity and frequency of storms, hurricanes, snowfalls, hail and winter conditions;
The occurrence of significant disasters, such as the attack on September 11, 2001;
The occurrence of bankruptcies that result in losses under surety bonds;
Interpretation of insurance policy provisions by courts, court decisions regarding coverage and theories of liability, trends in litigation and changes in claims settlement practices;
Legislative and regulatory developments affecting the actions of insurers, including requirements regarding rates and availability of coverage;
Inflationary pressures on medical care costs, auto parts and repair, construction costs and other economic sectors that increase the severity of claims;
Because insurance rates in some jurisdictions are subject to regulatory review and approval, the achievement of rate increases may occur in amounts and on a time schedule different than planned, which may affect the efforts to restore earnings in the property and casualty lines. We assume no obligation to update any forward-looking statements contained in this report.