SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Transition Period from ____ to ____.
Commission File Number 0-7849
W. R. BERKLEY CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 22-1867895
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
475 Steamboat Road, Greenwich, Connecticut 06830
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(203) 629-3000
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(Registrant's telephone number, including area code)
None
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) 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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
Number of shares of common stock, $.20 par value, outstanding as of May 7,
2003: 55,320,560
Part I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands)
March 31, December 31,
2003 2002
---- ----
(Unaudited)
Assets
Investments:
Cash and cash equivalents ...................................... $ 722,884 $ 594,183
Fixed maturity securities ...................................... 3,773,655 3,511,522
Equity securities available for sale ........................... 260,815 205,372
Equity securities trading account .............................. 200,501 165,642
Other investments .............................................. 87,005 45,187
----------- -----------
Total investments ............................................ 5,044,860 4,521,906
----------- -----------
Premiums and fees receivable ..................................... 945,224 822,060
Due from reinsurers .............................................. 802,478 734,687
Accrued investment income ........................................ 44,975 46,334
Prepaid reinsurance premiums ..................................... 230,215 164,284
Deferred policy acquisition costs ................................ 352,666 308,200
Real estate, furniture & equipment at cost,
less accumulated depreciation .................................. 136,085 135,488
Deferred federal and foreign income taxes ........................ 17,281 20,585
Goodwill ......................................................... 59,021 59,021
Trading account receivable from brokers and clearing organizations 185,678 177,309
Other assets ..................................................... 54,072 41,449
----------- -----------
Total assets ................................................. $ 7,872,555 $ 7,031,323
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Reserves for losses and loss expenses .......................... $ 3,381,172 $ 3,167,925
Unearned premiums .............................................. 1,648,268 1,390,246
Due to reinsurers .............................................. 216,549 184,912
Trading securities sold but not yet purchased .................. 76,096 36,115
Policyholders' account balances ................................ 47,347 42,707
Due to brokers and clearing organizations ...................... 92,386 --
Other liabilities .............................................. 296,609 294,334
Debt ........................................................... 499,186 362,985
----------- -----------
Total liabilities ............................................ 6,257,613 5,479,224
----------- -----------
Trust preferred securities ....................................... 198,262 198,251
Minority interest ................................................ 19,372 18,649
Stockholders' equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares; issued and outstanding - none ... -- --
Common stock, par value $.20 per share:
Authorized 80,000,000 shares, issued and outstanding,
net of treasury shares, 55,285,892 and 55,223,448 shares .... 13,934 13,934
Additional paid-in capital ..................................... 823,360 823,190
Retained earnings .............................................. 691,602 623,651
Accumulated other comprehensive income ......................... 97,339 104,603
Treasury stock, at cost, 14,383,658 and 14,446,102 shares ...... (228,927) (230,179)
----------- -----------
Total stockholders' equity ................................... 1,397,308 1,335,199
----------- -----------
Total liabilities and stockholders' equity ................... $ 7,872,555 $ 7,031,323
=========== ===========
See accompanying notes to consolidated financial statements.
1
W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(dollars in thousands except per share data)
For the Three Months
Ended March 31,
2003 2002
Revenues:
Net premiums written ............................. $ 892,059 $ 633,993
Change in unearned premiums ...................... (191,933) (155,527)
--------- ---------
Premiums earned ................................ 700,126 478,466
Net investment income ............................ 51,760 44,152
Service fees ..................................... 25,469 20,193
Realized investment gains ........................ 14,604 4,959
Foreign currency gains (losses) .................. (1,238) 4
Other income ..................................... 692 112
--------- ---------
Total revenues ................................. 791,413 547,886
--------- ---------
Expenses:
Losses and loss expenses ......................... 443,886 310,601
Other operating expenses ......................... 230,853 175,443
Interest expense ................................. 12,095 11,135
--------- ---------
Total expenses ................................. 686,834 497,179
--------- ---------
Income before income taxes and minority interest 104,579 50,707
Income tax expense ................................. (32,986) (16,222)
Minority interest .................................. 110 (89)
--------- ---------
Net income ..................................... $ 71,703 $ 34,396
========= =========
Net income per share:
Basic ............................................ $ 1.30 $ 0.69
========= =========
Diluted .......................................... $ 1.25 $ 0.66
========= =========
Average shares outstanding:
Basic ............................................ 55,249 49,914
========= =========
Diluted .......................................... 57,328 51,977
========= =========
See accompanying notes to consolidated financial statements.
2
W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)
For the Three Months
Ended March 31,
---------------
2003 2002
---- ----
Cash flows provided by operating activities:
Net income ................................................... $ 71,703 $ 34,396
Adjustments to reconcile net income to cash
flows provided by operating activities:
Minority interest .......................................... (110) 89
Change in reserves for losses
and loss expenses, net ................................... 181,733 55,123
Depreciation and amortization .............................. 5,783 4,071
Change in unearned premiums and
prepaid reinsurance premiums ............................. 192,091 147,417
Change in premiums and fees receivable ..................... (123,164) (120,608)
Change in federal and foreign income taxes ................. 29,242 15,369
Change in deferred policy acquisition cost ................. (44,466) (24,224)
Realized investment and foreign currency gains (losses) .... (13,366) (4,963)
Other, net ................................................. (23,615) (12,520)
--------- ---------
Net cash flows provided by operating activities
before trading account ............................. 275,831 94,150
Increase in trading account securities ....................... (3,247) (32,930)
--------- ---------
Net cash flows provided by operating activities .......... 272,584 61,220
--------- ---------
Cash flows used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities ................................. 278,714 104,468
Equity securities ......................................... 17,330 4,158
Maturities and prepayments of fixed maturity securities ... 145,561 72,051
Cost of purchases, excluding trading account:
Fixed maturity securities ................................. (676,576) (329,185)
Equity securities ......................................... (74,245) (3,971)
Other invested securities ................................. (41,424) --
Change in balances due to/from security brokers .............. 84,024 37,253
Net additions to real estate, furniture and equipment ........ (5,612) (10,416)
Other, net ................................................... -- 17
--------- ---------
Net cash flows used in investing activities ............... (272,228) (125,625)
--------- ---------
Cash flows provided by (used in) financing activities:
Net proceeds from issuance of debt ........................... 196,840 --
Repayment and repurchase of debt ............................. (60,793) (8,000)
Cash dividends ............................................... (10,473) (4,299)
Net proceeds from stock options exercised .................... 1,422 3,858
Other, net ................................................... 1,349 1,519
--------- ---------
Net cash flows provided by (used in) financing activities .. 128,345 (6,922)
--------- ---------
Net increase in cash and invested cash ..................... 128,701 (71,327)
Cash and invested cash at beginning of year .................... 594,183 534,087
--------- ---------
Cash and invested cash at end of period .................... $ 722,884 $ 462,760
========= =========
Supplemental disclosure of cash flow information:
Interest paid ................................................ $ 6,866 $ 6,457
========= =========
Federal income taxes paid, net ............................... $ 5,100 $ 883
========= =========
See accompanying notes to consolidated financial statements.
3
W. R. Berkley Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 2003
1. GENERAL
The accompanying consolidated financial statements should be read in
conjunction with the following notes and with the Notes to Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2002. Reclassifications have been made in the 2002
financial statements as originally reported to conform them to the presentation
of the 2003 financial statements.
In the fourth quarter of 2002, the Company modified the presentation of
reinsurance assumed from Lloyd's syndicates to reflect the Company's share of
the reinsurance and brokerage costs paid by the syndicates. Previously, these
amounts were netted against assumed premiums. Premiums and expenses for the
first three quarters of 2002 were reclassified to conform with this
presentation. There was no effect from this change on net income or net income
per share.
The federal and foreign income tax provision has been computed based on
the Company's estimated annual effective tax rate, which differs from the
federal income tax rate of 35% principally because of tax-exempt investment
income.
Basic earnings per share data is based upon the weighted average number of
shares outstanding during the period. Diluted earnings per share data reflects
the potential dilution that would occur if options granted under employee
stock-based compensation plans were exercised.
In the opinion of management, the financial information reflects all
adjustments which are necessary for a fair presentation of financial position
and results of operations for the interim periods. Seasonal weather variations
affect the severity and frequency of losses sustained by the insurance and
reinsurance subsidiaries. Although the effect on the Company's business of such
natural catastrophes as tornadoes, hurricanes, hailstorms and earthquakes is
mitigated by reinsurance, they nevertheless can have a significant impact on the
results of any one or more reporting periods.
2. COMPREHENSIVE INCOME
The following is a reconciliation of comprehensive income (dollars in
thousands):
For the Three Months
Ended March 31,
---------------
2003 2002
-------- --------
Net income ........................................ $ 71,703 $ 34,396
Other comprehensive income:
Change in unrealized foreign exchange losses ... (2,098) (28)
Unrealized holding gains (losses) on investment
securities arising during the period,
net of taxes ................................. 3,701 (14,269)
Reclassification adjustment for realized gains
included in net income, net of taxes ......... (8,867) (3,266)
-------- --------
Other comprehensive loss .......................... (7,264) (17,563)
-------- --------
Comprehensive income .............................. $ 64,439 $ 16,833
======== ========
4
W. R. Berkley Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
3. STOCK-BASED COMPENSATION
During the first quarter of 2003, the Company adopted the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, effective as of January 1, 2003. Under the prospective method of
adoption selected by the Company, the fair value provisions of FASB 123 will be
applied to all employee awards granted, modified or settled after January 1,
2003. The following table illustrates the effect on net income and earnings per
share as if the fair value based method had been applied to all outstanding and
unvested awards in each period (dollars in thousands, except per share data).
For the Three Months
Ended March 31,
---------------
2003 2002
---------- ----------
Net income, as reported .................. $ 71,703 $ 34,396
Add: Stock-based compensation expense
included in reported net income, net
of tax ................................... 3 --
Deduct: Total stock-based employee
compensation expense under fair value
based method for all awards, net of tax .. (1,194) (1,133)
---------- ----------
Pro forma net income ..................... $ 70,512 $ 33,263
========== ==========
Earnings per share:
Basic - as reported .................... $ 1.30 $ .69
Basic - pro forma ...................... $ 1.28 $ .67
Diluted - as reported .................. $ 1.25 $ .66
Diluted - pro forma .................... $ 1.23 $ .64
4. CHANGES IN STOCKHOLDERS' EQUITY
Changes in stockholder's equity were as follows (dollars in thousands):
For the Three Months
Ended March 31,
---------------
2003 2002
----------- -----------
Beginning of period ......... $ 1,335,199 $ 931,595
Net income .................. 71,703 34,396
Other comprehensive loss .... (7,264) (17,563)
Direct credit (1) ........... 1,775 --
Dividends ................... (5,527) (4,333)
Purchase of treasury stock .. 1,422 3,858
----------- -----------
End of period ............... $ 1,397,308 $ 947,953
=========== ===========
(1) From its inception in 1995 and through the fourth quarter of 2002, the
international segment's results were reported on a one-quarter lag to
facilitate the timely completion of the consolidated financial statements.
Improvements in reporting procedures now allow this segment to be reported
without a one-quarter lag. Beginning in the first quarter of 2003, the
international segment's results are reported in the consolidated statement
of operations without a one-quarter lag. In order to eliminate the
one-quarter lag, net income of the international segment for the fourth
quarter of 2002 was reported as a direct credit to consolidated retained
earnings during the first quarter of 2003.
5
W. R. Berkley Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
5. INVESTMENTS
The cost, fair value and carrying value of fixed maturity securities,
equity securities and trading account securities sold but not yet purchased are
as follows (dollars in thousands):
March 31, 2003 December 31, 2002
-------------- -----------------
Amortized Fair Carrying Amortized Fair Carrying
Cost Value Value Cost Value Value
---------- ---------- ---------- ---------- ---------- ----------
Fixed maturity:
Held to maturity ............ $ 190,676 $ 212,222 $ 190,676 $ 205,856 $ 227,610 $ 205,856
Available for sale .......... 3,415,551 3,582,979 3,582,979 3,129,993 3,305,666 3,305,666
---------- ---------- ---------- ---------- ---------- ----------
Total ................... $3,606,227 $3,795,201 $3,773,655 $3,335,849 $3,533,276 $3,511,522
========== ========== ========== ========== ========== ==========
Equity securities available
for sale .................... $ 260,212 $ 260,815 $ 260,815 $ 203,388 $ 205,372 $ 205,372
Equity securities trading
account ..................... 202,586 200,501 200,501 168,125 165,642 165,642
Trading account securities
sold but not yet purchased .. 78,069 76,096 76,096 38,347 36,115 36,115
Realized gains from the sale of fixed maturity securities during the three
months ended March 31, 2003 were $15,113,000. The amortized cost of fixed
maturity securities sold were $409,162,000.
6. REINSURANCE CEDED
The Company reinsures a portion of its exposures principally to reduce its
net liability on individual risks and to protect against catastrophic losses.
The following amounts arising under reinsurance ceded contracts have been
deducted in arriving at the amounts reflected in the statement of operations
(dollars in thousands):
For the Three Months
Ended March 31,
---------------
2003 2002
---- ----
Ceded premiums earned:
Aggregate reinsurance agreement:
Individual losses ................ $ 28,407 $ 15,676
Aggregate losses ................. 5,000 6,250
-------- --------
Total ............................ 33,407 21,926
Other reinsurance contracts ........ 97,641 73,633
-------- --------
Total ........................... $131,048 $ 95,559
======== ========
Ceded losses incurred:
Aggregate reinsurance agreement:
Individual losses ................ $ 20,401 $ 8,354
Aggregate losses ................. 9,000 11,250
-------- --------
Total ............................ 29,401 19,604
Other reinsurance contracts ........ 50,974 41,966
-------- --------
Total ............................ $ 80,375 $ 61,570
======== ========
6
W. R. Berkley Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
6. REINSURANCE CEDED (Continued)
Effective January 1, 2001, the Company entered into a multi-year aggregate
reinsurance agreement that provides two types of reinsurance coverage. The first
type of coverage provides protection for individual losses on an excess of loss
or quota share basis, as specified for each class of business covered by the
agreement. The second type of coverage provides aggregate accident year
protection for the Company's reinsurance segment for loss and loss adjustment
expenses incurred above a certain level. Loss recoveries are subject to annual
limits and an aggregate limit over the contract period. The agreement contains a
profit sharing provision under which the Company can recover a portion of
premiums paid to the reinsurer if certain profit conditions are met. Based on
its estimate of expected profits under the contract, the Company accrued return
premiums of $5.0 million for the three months ended March 31, 2003, none for the
same period in 2002. As of March 31, 2003 and December 31, 2002, funds held by
the Company under the aggregate reinsurance agreement exceeded the amount
recoverable from the reinsurer for losses and loss adjustment expenses.
Certain of the Company's reinsurance agreements, including the aggregate
reinsurance agreement, are structured on a funds held basis, whereby the Company
retains some or all of the ceded premiums in a separate account that is used to
fund ceded losses as they become due from the reinsurance company. Interest is
credited to reinsurers for funds held on their behalf at rates ranging from 7.0%
to 8.9% of the account balances, as defined under the agreements. Interest
credited to reinsurers, which is reported as a reduction of net investment
income, was $7.3 million for the three months ended March 31, 2003 and $3.9
million for the corresponding 2002 period.
7. INDUSTRY SEGMENTS
The Company's operations are presently conducted through five segments of
the insurance business: specialty lines of insurance (including excess and
surplus lines and commercial transportation); alternative markets (including the
management of alternative insurance market mechanisms); reinsurance; regional
property casualty insurance; and international. The specialty segment's business
is principally within the excess and surplus lines, professional liability,
commercial transportation and surety markets. The Company's alternative markets
segment offers workers' compensation insurance on an excess and primary basis
and provides fee-based services to help clients develop and administer
self-insurance programs. The Company's reinsurance segment specializes in
underwriting property, casualty and surety reinsurance on both a treaty and
facultative basis. The regional property casualty insurance segment provides
commercial property casualty insurance products. The international segment
offers personal and commercial property casualty insurance Argentina and savings
and life products in the Philippines. During 2001, the Company discontinued its
regional personal lines business and the alternative markets division of its
reinsurance segment. These discontinued businesses are reported collectively as
a separate business segment.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002, except as described
below. Realized investment and foreign currency gains and losses are not
allocated to segments. Income tax expense and benefits are calculated based upon
the Company's overall effective tax rate. Summary financial information about
the Company's operating segments is presented in the following table. Income
(loss) before income taxes by segment consists of revenues less expenses related
to the respective segment's operations, including allocated investment income.
Identifiable assets by segment are those assets used in or allocated to the
operation of each segment.
7
W. R. Berkley Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
7. INDUSTRY SEGMENTS (Continued)
Revenues
--------
Earned Investment Pre-Tax Net
(dollars in thousands) Premiums Income Other Total Income Income
--------- --------- --------- --------- --------- ---------
For the three months
ended March 31, 2003:
Specialty .............. $ 241,627 $ 16,194 $ -- $ 257,821 $ 48,541 $ 31,455
Alternative Markets .... 82,974 9,527 25,469 117,970 21,949 14,745
Reinsurance ............ 162,477 13,474 -- 175,951 9,669 6,724
Regional ............... 198,205 11,279 -- 209,484 32,195 21,463
International .......... 14,843 1,419 -- 16,262 1,235 351
Discontinued Business .. -- -- -- -- -- --
Corporate and
eliminations ......... -- (133) 692 559 (22,376) (11,902)
Realized gains ......... -- -- 13,366 13,366 13,366 8,867
--------- --------- --------- --------- --------- ---------
Consolidated ........... $ 700,126 $ 51,760 $ 39,527 $ 791,413 $ 104,579 $ 71,703
========= ========= ========= ========= ========= =========
For the three months
ended March 31, 2002:
Specialty (1) .......... $ 150,422 $ 12,110 $ -- $ 162,532 $ 20,379 $ 13,713
Alternative Markets .... 45,337 8,754 20,026 74,117 14,232 9,485
Reinsurance (1) ........ 64,579 10,182 (2) 74,759 8,191 6,242
Regional ............... 156,581 10,021 -- 166,602 22,435 15,156
International .......... 39,184 1,452 4 40,640 266 (95)
Discontinued Business .. 22,363 1,869 -- 24,232 (54) (35)
Corporate and
eliminations ......... -- (236) 277 41 (19,705) (13,296)
Realized gains ........ -- -- 4,963 4,963 4,963 3,226
--------- --------- --------- --------- --------- ---------
Consolidated ........... $ 478,466 $ 44,152 $ 25,268 $ 547,886 $ 50,707 $ 34,396
========= ========= ========= ========= ========= =========
(1) During the first quarter of 2003, management responsibility and financial
reporting for Vela Insurance Services, Inc., an excess and surplus lines
underwriting manager, were transferred from the reinsurance segment to the
specialty segment. Segment results for the prior period were restated to
reflect this change.
Interest expense for the reinsurance and alternative market segments was
$45,000 and $586,000 for the three months ended March 31, 2003 and 2002,
respectively. Corporate interest expense (net of intercompany amounts) was
$12,050,000 and $10,549,000 for the corresponding periods. Identifiable assets
by segment are as follows (dollars in thousands):
March 31, December 31,
2003 2002 (1)
----------- -----------
Specialty ..................... $ 2,473,483 $ 2,271,105
Alternative Markets ............... 1,424,746 1,197,977
Reinsurance ................... 2,771,596 2,431,429
Regional .......................... 1,660,108 1,590,913
International ..................... 142,171 126,528
Discontinued Business ............. 140,277 162,754
Corporate other and eliminations .. (739,826) (749,383)
----------- -----------
Consolidated ...................... $ 7,872,555 $ 7,031,323
=========== ===========
8. DEBT
In February 2003, the Company issued $200 million aggregate principal
amount of 5.875% senior notes due February 2013. The notes were issued at 99.07%
of their face value amount and the net proceeds after expenses were
$196,840,000.
During the first quarter of 2003, the Company repaid $35,793,000 of 6.5% senior
subordinated notes and $25,000,000 of 6.71% senior notes upon their respective
maturities.
8
W. R. Berkley Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
9. COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES
The Company's subsidiaries are regularly engaged in the defense of claims
arising out of the conduct of the insurance business. The Company does not
believe that such litigation, individually or in the aggregate, will have a
material effect on its financial condition or results of operations.
A subsidiary of the Company has a pending arbitration proceeding
pertaining to the interpretation of the contract terms in two reinsurance
agreements. As of March 31, 2003, the reinsurer's interpretation of the contract
terms would reduce the recoverable from the reinsurer by approximately $4
million for paid losses and approximately $46 million for unpaid losses.
Although the ultimate outcome of this matter cannot be determined, management
believes that the Company's interpretation of these agreements is correct and
intends to vigorously pursue this matter in arbitration.
There are two pending arbitrations pertaining to reinsurance contract
coverage issues where a subsidiary of the Company is the assuming reinsurer. The
Company's estimates of the cost of settling its insurance and reinsurance
claims, including claims in arbitrations and litigation, are reflected in its
aggregate reserves for losses and loss expenses. Accordingly, based on currently
available information, the Company believes that the resolution of the two
pending arbitrations will not have a material effect on its financial condition
or results of operations. However, if these two arbitrations are decided
adversely to the Company, the Company's potential exposure, in excess of the
amounts reserved, is up to $16 million, after tax.
10. SAFE HARBOR STATEMENT
This is a "Safe Harbor" Statement under the Private Securities Litigation
Reform Act of 1995. Any forward-looking statements contained herein, including
statements related to our outlook for the industry and for our performance for
the year 2003 and beyond, are based upon the Company's historical performance
and on current plans, estimates and expectations. The inclusion of this
forward-looking information should not be regarded as a representation by us or
any other person that the future plans, estimates or expectations contemplated
by us will be achieved. They are subject to various risks and uncertainties,
including but not limited to, the cyclical nature of the property casualty
industry, the long-tail and potentially volatile nature of the reinsurance
business, product demand and pricing, claims development and the process of
estimating reserves, the uncertain nature of damage theories and loss amounts,
the ultimate results of the various pending legal and arbitration proceedings,
the increased level of our retention, natural and man-made catastrophic losses,
including as a result of terrorist activities, the impact of competition, the
availability of reinsurance, the ability of our reinsurers to pay reinsurance
recoverables owed to us, investment results and potential impairment of invested
assets, exchange rate and political risks, legislative and regulatory
developments, changes in the ratings assigned to us by ratings agencies, our
exposure for terrorist acts, the availability of dividends from our insurance
company subsidiaries, our successful integration of acquired companies or
investment in new insurance ventures, our ability to attract and retain
qualified employees, and other risks detailed from time to time in the Company's
filings with the Securities and Exchange Commission. These risks could cause
actual results of the industry or our actual results for the year 2003 and
beyond to differ materially from those expressed in any forward-looking
statement made by or on behalf of the Company. Forward-looking statements speak
only as of the date on which they are made, and the Company undertakes no
obligation to update publicly or revise any forward-looking statement, whether
as a result of new information, future developments or otherwise.
9
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
CRITICAL ACCOUNTING POLICIES
The notes to the Company's financial statements, included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002, discuss its
significant accounting policies. Management considers certain of these policies
to be critical to the portrayal of the Company's financial condition and results
since they require management to establish estimates based on complex and
subjective judgments, often including the interplay of specific uncertainties
with related accounting measurements.
RESERVES FOR LOSSES AND LOSS EXPENSES The Company maintains reserves for losses
and loss expenses to cover its estimated liability for unpaid claims, including
legal and other fees, as well as a portion of its general expenses, for reported
and unreported claims incurred as of the end of each accounting period. Reserves
do not represent an exact calculation of liability. Rather, reserves represent
an estimate of what management expects the ultimate settlement and
administration of claims will cost. These estimates, which generally involve
actuarial projections, are based on management's assessment of facts and
circumstances then known, as well as estimates of future trends in claims
severity and frequency, judicial theories of liability and other factors,
including the actions of third parties which are beyond the Company's control.
The variables described above are affected by both internal and external events,
such as changes in claims handling procedures, inflation, judicial and
litigation trends and legislative changes. Additionally, there may be a
significant delay between the occurrence of the insured event and the time it is
reported to the Company.
The inherent uncertainties of estimating reserves are greater for certain
types of liabilities, where the various considerations affecting these types of
claims are subject to change and long periods of time may elapse before a
definitive determination of liability is made. Reserve estimates are continually
refined in an ongoing process as experience develops and further claims are
reported and settled. Adjustments to reserves are reflected in the results of
the periods in which such estimates are changed. Because setting reserves is
inherently uncertain, the Company cannot assure you that its current reserves
will prove adequate in light of subsequent events. Should the Company need to
increase its reserves, its net income for the period will decrease by a
corresponding amount.
RESULTS OF OPERATIONS
The Company reported net income of $71.7 million, or $1.25 per share, for
the three months ended March 31, 2003 compared with $34.4 million, or $.66 per
share, for the corresponding 2002 period. Following are the components of net
income for the three months ended March 31, 2003 and 2002 (dollars in
thousands):
2003 2002
---- ----
Underwriting income (1) ......................... $ 57,078 $ 18,641
Insurance services .............................. 5,652 3,450
Net investment income ........................... 51,760 44,152
Interest and other expenses ..................... (23,277) (20,499)
Realized investment and foreign currency gains .. 13,366 4,963
Income taxes and minority interest .............. (32,876) (16,311)
-------- --------
Net income .................................... $ 71,703 $ 34,396
======== ========
(1) Represents premiums earned less loss, loss expenses and underwriting
expenses incurred
10
UNDERWRITING Following is a summary of underwriting results for the three months
ended March 31, 2003 and 2002 (dollars in thousands):
2003 2002 % Change
---- ---- --------
Gross premiums written ... $1,066,473 $ 776,208 37%
Net premiums written ..... 892,059 633,933 41%
Premiums earned .......... 700,126 478,466 46%
Underwriting income ...... 57,078 18,641
Loss ratio (1) ........... 63.4% 64.9%
Expense ratio (2) ........ 28.4% 31.2%
Combined ratio ........... 91.8% 96.1%
(1) Represents losses and loss expenses incurred expressed as a percentage of
premiums earned.
(2) Represents underwriting expenses expressed as a percentage of premiums
earned.
The Company's operations are presently conducted through five segments:
specialty lines of insurance, alternative markets, reinsurance, regional
property casualty insurance, and international. In addition, the Company reports
the run-off of its discontinued personal lines and alternative markets
reinsurance business as a separate business segment.
During the first quarter of 2003, management responsibility and financial
reporting for Vela Insurance Services, Inc., an excess and surplus lines
underwriting manager, were transferred from the reinsurance segment to the
specialty segment. Segment result for the prior period were restated to reflect
this change. Additional information for the business segments follows.
SPECIALTY The specialty segment provides insurance products and services
principally to the excess and surplus lines, professional liability, commercial
transportation and surety markets. Following is a summary of underwriting
results for the specialty segment for the three months ended March 31, 2003 and
2002 (dollars in thousands):
2003 2002 % Change
---- ---- --------
Gross premiums written .. $321,306 $217,936 47%
Net premiums written .... 286,701 192,429 49%
Premiums earned ......... 241,627 150,422 61%
Underwriting income ..... 32,347 8,267
Loss ratio .............. 61.7% 66.2%
Expense ratio ........... 24.9% 28.3%
Combined ratio .......... 86.6% 94.5%
Net premiums written in 2003 increased by 49% compared with 2002 as a
result of higher prices and new business. Net premiums written increased 44% for
the Company's three excess and surplus lines companies, 57% for commercial
transportation business and 43% for Monitor Liability Managers, Inc., which
specializes in directors and officers and lawyers professional liability
business. Net premiums written in 2003 also included $8 million from the
Company's new underwriting unit, Berkley Medical Excess Underwriters, LLC.
The 2003 loss ratio decreased by 4.5 percentage points to 61.7%. The
improvement was primarily a result of higher prices and more favorable terms and
conditions for current business, partially offset by prior year reserve
development. The reserve development was principally for casualty business
written in 1998 and 1999. The 2003 expense ratio decreased by 3.4 percentage
points to 24.9% as a result of a 61% increase in earned premiums with no
significant increase in expenses other than commissions and premium taxes.
11
ALTERNATIVE MARKETS The alternative markets segment offers workers' compensation
insurance on an excess and primary basis and provides fee-based services to help
clients develop and administer self-insurance programs. Following is a summary
of underwriting results for the alternative markets segment for the three months
ended March 31, 2003 and 2002 (dollars in thousands):
2003 2002 % Change
---- ---- --------
Gross premiums written .. $170,181 $ 98,173 73%
Net premiums written .... 137,182 84,580 62%
Premiums earned ......... 82,974 45,337 83%
Underwriting income ..... 6,770 2,032
Loss ratio .............. 67.3% 66.8%
Expense ratio ........... 24.6% 28.7%
Combined ratio .......... 91.9% 95.5%
Net premiums written in 2003 increased by 62% compared with 2002. The
increase reflects higher prices as well as an increase in policies-in-force for
both primary and excess workers' compensation business. The expense ratio
decreased by 4.1 percentage points to 24.6% due to an 83% increase in premiums
earned with no significant increase in expenses other than commissions and
premium taxes.
Following is a summary of insurance services results for the alternative
markets segment for the three months ended March 31, 2003 and 2002 (dollars in
thousands):
2003 2002 % Change
---- ---- --------
Service revenues ............. $ 25,469 $ 20,026 27%
Service expenses ............. (19,817) (16,576) 20%
Service income before taxes .. 5,652 3,450 64%
Service revenues in 2003 increased 27% compared with 2002 primarily as a
result of an increase in service fees for managing assigned risk plans in nine
states. Service income before taxes increased 64% compared with 2002 due to
revenues increasing at a greater rate than expenses.
REINSURANCE The Company's reinsurance segment specializes in underwriting
property, casualty and surety reinsurance on both a treaty and facultative
basis. Following is a summary of underwriting results for the reinsurance
segment for the three months ended March 31, 2003 and 2002 (dollars in
thousands):
2003 2002 % Change
---- ---- --------
Gross premiums written .. $ 262,392 $ 166,943 57%
Net premiums written .... 214,799 129,289 66%
Premiums earned ......... 162,477 64,579 152%
Underwriting loss ....... (3,760) (1,407)
Loss ratio .............. 71.9% 69.5%
Expense ratio ........... 30.4% 32.7%
Combined ratio .......... 102.3% 102.2%
Net premiums written in 2003 increased by 66% compared with 2002 as a
result of higher prices and new business. Net premiums written increased 118% to
$63 million for facultative reinsurance, 35% to $62 million for Lloyd's
reinsurance, 34% to $60 million for standard treaty business and 195% to $30
million for the other reinsurance units, Berkley Capital Underwriters, LLC and
Berkley Underwriting Partners, LLC.
The 2003 loss ratio increased 2.4 percentage points to 71.9%. The increase
reflects the impact of reserve development on prior years, which was partially
offset by improved results for the current accident year as a result of higher
prices for both treaty and facultative risks. The prior year reserve development
related primarily to business written in underwriting years 1998 through 2000.
The 2003 and 2002 underwriting results also reflect loss recoveries under the
Company's aggregate reinsurance agreement. (See Note 7 of "Notes to Consolidated
Financial Statements".) The 2003 expense ratio decreased 2.3 percentage points
to 30.4% primarily as a result of a shift in the mix of business and increased
volume.
12
REGIONAL The regional property casualty insurance segment principally provides
commercial property casualty insurance products. Following is a summary of
underwriting results for the regional segment for the three months ended March
31, 2003 and 2002 (dollars in thousands):
2003 2002 % Change
---- ---- --------
Gross premiums written .. $295,858 $238,319 24%
Net premiums written .... 237,754 183,703 29%
Premiums earned ......... 198,205 156,581 27%
Underwriting income ..... 20,916 12,416
Loss ratio .............. 57.9% 60.5%
Expense ratio ........... 31.5% 31.6%
Combined ratio .......... 89.4% 92.1%
Net premiums written in 2003 increased by 29% compared with 2002. The
increase reflects higher prices across all four regional units. The 2003 loss
ratio decreased by 2.6 percentage points to 57.9% primarily as a result of
higher prices in 2002 and 2003. Weather-related losses for the regional segment
were $4.3 million in 2003 compared with $3.9 million in 2002.
INTERNATIONAL The international segment offers personal and commercial property
casualty insurance in Argentina and savings and life products in the
Philippines. Following is a summary of underwriting results for the
international segment for the three months ended March 31, 2003 and 2002
(dollars in thousands):
2003 2002 % Change
---- ---- --------
Gross premiums written ...... $ 16,736 $ 46,218 (64)%
Net premiums written ........ 15,623 40,550 (61)%
Premiums earned ............. 14,843 39,184 (62)%
Underwriting income (loss) .. 805 (744)
Loss ratio .................. 49.2% 60.1%
Expense ratio ............... 45.4% 41.8%
Combined ratio .............. 94.6% 101.9%
Net premiums written in 2003 decreased by 61% compared with 2002. The
decrease was the result of the withdrawal from life insurance business in
Argentina and of lower exchange rates for the Argentine peso in 2003. The
combined ratio increased 7.3 percentage points to 94.6% as a result of a
reduction in costs relating to the withdrawal from life insurance business in
Argentina and of improvement in underwriting results for the Argentine property
casualty business.
DISCONTINUED The discontinued segment consists of regional personal lines and
the alternative markets reinsurance, which were discontinued in 2001. Following
is a summary of underwriting results for the regional segment for the three
months ended March 31, 2003 and 2002 (dollars in thousands):
2003 2002
---- ----
Gross premiums written .. $ -- $ 8,619
Net premiums written .... -- 3,442
Premiums earned ......... -- 22,363
Underwriting loss ....... -- (1,923)
13
NET INVESTMENT INCOME Following is a summary of investment activity for the
three months ended March 31, 2003 and 2002 (dollars in thousands):
2003 2002 % Change
---- ---- --------
Net investment income ........... $ 51,760 $ 44,152 17%
Average invested assets ......... 4,670,404 3,593,257 30%
Annualized effective yield (1) 5.1% 5.4%
Realized gains .................. 14,604 4,959
Change in unrealized gains ...... (9,814) (27,137)
(1) Represents net investment income (before interest in funds held)
expressed as a percentage of average invested assets.
Net investment income in 2003 increased 17% compared with 2002. Average
invested assets increased 30% compared with 2002 as a result of cash flow from
operations and of the proceeds from a secondary stock offering in 2002 and a
$200 million debt offering in 2003. The average yield on investments was 5.1% in
2003 compared with 5.4% in 2002. The lower yield in 2003 reflects the decrease
in general interest rate levels as well as an increase in the portion of the
portfolio invested in municipal securities.
The carrying value of the Company's investment portfolio as of March 31,
2003 and December 31, 2002 is as follows (dollars in thousands):
March 31, December 31,
2003 2002
---- ----
Cash and cash equivalents ............. $ 722,884 $ 594,183
Fixed maturities ...................... 3,773,655 3,511,522
Equity securities available for sale .. 260,815 205,372
Trading account(a) .................... 310,083 306,836
Other investments ..................... 87,005 45,187
Due to brokers and clearing
organizations ....................... (92,386) --
----------- -----------
Total ........................... $ 5,062,056 $ 4,663,100
=========== ===========
(a) Represents trading account equity securities plus trading account
receivables from brokers and clearing organizations less trading account
equity securities sold but not yet purchased.
At March 31, 2003, as compared with December 31, 2002, the fixed maturity
portfolio mix was as follows: U.S. Government securities were 19% (20% in 2002);
state and municipal securities were 35% (29% in 2002); corporate securities were
13% (19% in 2002); mortgage-backed securities were 27% (27% in 2002); and
foreign bonds were 6% (5% in 2002).
INTEREST AND OTHER EXPENSES Interest and other expenses represents interest
expense, corporate expenses and other miscellaneous income and expenses.
Interest and other expenses were $23 million in 2003 compared with $20 million
in 2002. The increase reflects higher general and administrative expenses and an
increase in interest expense of $1 million as a result of a $200 million debt
offering in 2003.
REALIZED INVESTMENT GAINS Realized investment gains were $14.6 million,
primarily as a result of the sale of fixed income securities in order to
increase the portion of the portfolio invested in municipal securities.
INCOME TAXES AND MINORITY INTEREST The effective income tax rate was 32% in 2003
and 2002. The effective tax rate differs from the federal income tax rate of 35%
primarily because of tax-exempt investment income. Minority interest represents
the portion of the Company's international operations held by outside investors.
14
FINANCING ACTIVITY
In February 2003, the Company issued $200 million aggregate principal
amount of 5.875% senior notes due February 2013. The notes were issued at 99.07%
of their face value amount and the net proceeds after expenses were
$196,840,000.
During the first quarter of 2003, the Company repaid $35,793,000 of 6.5%
senior subordinated notes and $25,000,000 of 6.71% senior notes upon their
respective maturities.
At March 31, 2003, the Company's outstanding debt was $505 million (face
amount). The maturities of the debt are $40 million in 2005, $100 million in
2006, $89 million in 2008, $200 million in 2013 and $76 million in 2022. The
Company also has $200 million (face amount) of trust preferred securities that
mature in 2045.
At March 31, 2003, stockholders' equity was $1,397 million and total
capitalization (stockholders' equity, debt and trust preferred securities) was
$2,095 million. The percentage of the Company's capital attributable to debt was
24% at March 31, 2003 compared with 19% at December 31, 2002.
For background information concerning the Company's Liquidity and
Capital Resources, see the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.
15
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company's market risk generally represents the risk of gain or loss
that may result from the potential change in the fair value of the Company's
investment portfolio as a result of fluctuations in prices, interest rates and
currency exchange rates. The Company attempts to manage its interest rate risk
by maintaining an appropriate relationship between the average duration of the
investment portfolio and the approximate duration of its liabilities, i.e.,
policy claims and debt obligations.
The Company has maintained approximately the same duration of its
investment portfolio to its liabilities from December 31, 2002 to March 31,
2003, and the overall market risk relating to the Company's portfolio has
remained similar to the risk at December 31, 2002.
Item 4. Controls and Procedures
The Company's management, including its Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of the
Company's disclosure controls and procedures pursuant to Securities Exchange Act
Rule 13a-14 within the 90 days prior to the date of the filing of this quarterly
report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company has in place appropriate controls
and procedures designed to ensure that information required to be disclosed by
the Company in the reports it files or submits under the Securities Exchange Act
and the rules thereunder, is recorded, processed, summarized and reported within
the time periods specified in the Commission's rules and forms. There have been
no significant changes in internal controls, or in factors that could
significantly affect internal controls, subsequent to the date the Chief
Executive Officer and Chief Financial Officer completed their evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company's subsidiaries are regularly engaged in the defense of claims
arising out of the conduct of the insurance business. The Company does not
believe that such litigation, individually or in the aggregate, will have a
material effect on its financial condition or results of operations.
A subsidiary of the Company has a pending arbitration proceeding
pertaining to the interpretation of the contract terms in two reinsurance
agreements. As of March 31, 2003, the reinsurer's interpretation of the contract
terms would reduce the recoverable from the reinsurer by approximately $4
million for paid losses and approximately $46 million for unpaid losses.
Although the ultimate outcome of this matter cannot be determined, management
believes that the Company's interpretation of these agreements is correct and
intends to vigorously pursue this matter in arbitration.
There are two pending arbitrations pertaining to reinsurance contract
coverage issues where a subsidiary of the Company is the assuming reinsurer. The
Company's estimates of the cost of settling its insurance and reinsurance
claims, including claims in arbitrations and litigation, are reflected in its
aggregate reserves for losses and loss expenses. Accordingly, based on currently
available information, the Company believes that the resolution of the two
pending arbitrations will not have a material effect on its financial condition
or results of operations. However, if these two arbitrations are decided
adversely to the Company, the Company's potential exposure, in excess of the
amounts reserved, is up to $16 million, after tax.
16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number
------
(4.1) Indenture, dated as of February 14, 2003, between the Company and
The Bank of New York, as trustee, relating to $200,000,000
principle amount of the Company's 5.875% Senior Notes due 2013
(incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 2002).
(4.2) First Supplemental Indenture, dated February 14, 2003, between
the Company and The Bank of New York, as trustees, relating to
$200,000,000 principle amount of the Company's 5.875% Senior
Notes due 2013, including form of the Notes as Exhibit A
(incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 2002).
(99.1) Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(99.2) Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
During the quarter ended March 31, 2003, the Company filed the following
Reports on Form 8-K:
Report dated February 10, 2003 with respect to the press release relating
to the announcement of the Company's results of operations for the fourth
quarter of 2002 and the year then ended (under item 5 of Form 8-K).
Report dated February 11, 2003 with respect certain exhibits filed in
connection with the Prospectus Supplement dated February 11, 2003 to the
Prospectus dated June 7, 2002, filed as part of the Registration Statement on
Form S-3 (Registration No. 333-88920; declared effective on June 7, 2002) filed
by the Company with the Securities and Exchange Commission covering Debt
Securities issuable under an Indenture relating to Senior Debt Securities, to be
dated as of February 14, 2003, between the Company and The Bank of New York, as
trustee (the "Trustee") (under Item 5 of Form 8-K).
Report dated March 4, 2003 with respect to the press release relating to
the announcement of the Company's intention to form a United Kingdom authorized
insurance company, the engagement of Stuart Wright as the to-be-formed company's
chief executive officer, and the Company's discussions with Kiln plc about Kiln
holding a minority interest in the new company (under Item 5 of Form 8-K).
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
W. R. BERKLEY CORPORATION
Date: May 15, 2003 /s/ WILLIAM R. BERKLEY
------------------------------
William R. Berkley
Chairman of the Board and
Chief Executive Officer
Date: May 15, 2003 /s/ EUGENE G. BALLARD
------------------------------
Eugene G. Ballard
Senior Vice President,
Chief Financial Officer
and Treasurer
18
CERTIFICATIONS
I, William R. Berkley, Chairman of the Board and Chief Executive Officer
of W. R. Berkley Corporation (the "registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the registrant;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ WILLIAM R. BERKLEY
- ------------------------------
William R. Berkley
Chairman of the Board and
Chief Executive Officer
19
CERTIFICATIONS
I, Eugene G. Ballard, Senior Vice President, Chief Financial Officer and
Treasurer of W. R. Berkley Corporation (the "registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the registrant;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ EUGENE G. BALLARD
- --------------------------
Eugene G. Ballard
Senior Vice President,
Chief Financial Officer and
Treasurer
20