10-Q 1 y65549e10vq.txt FORM 10-Q 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 September 30, 2002 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 (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 (Registrant's telephone number, including area code) None 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 November 4, 2002: 50,221,105 Part I - FINANCIAL INFORMATION ITEM 1. Financial Statements W. R. Berkley Corporation and Subsidiaries Consolidated Balance Sheets (Dollars in thousands)
September 30, December 31, 2002 2001 ---- ---- (Unaudited) Assets Investments: Invested cash $ 354,849 $ 524,554 Fixed maturity securities: Held to maturity, at cost (fair value $229,061 and $167,559) 204,986 156,464 Available for sale, at fair value (cost $2,918,037 and $2,236,321) 3,112,128 2,294,326 Equity securities, at fair value: Available for sale (cost $227,015 and $93,710) 233,209 99,813 Trading account (cost $193,581 and $213,221) 184,402 211,291 Other investments 43,945 16,888 Cash 31,471 9,533 Premiums and fees receivable 749,828 537,814 Due from reinsurers 652,148 716,398 Accrued investment income 38,833 35,926 Prepaid reinsurance premiums 161,410 103,667 Deferred policy acquisition costs 287,908 224,110 Real estate, furniture & equipment at cost, less accumulated depreciation 133,770 118,344 Deferred federal and foreign income taxes 17,052 99,921 Goodwill 59,021 59,021 Trading account receivable from brokers and clearing organizations 180,022 351,707 Other assets 43,732 73,732 ----------- ----------- Total assets $ 6,488,714 $ 5,633,509 =========== =========== Liabilities and Stockholders' Equity Liabilities: Reserves for losses and loss expenses $ 3,003,247 $ 2,817,682 Unearned premiums 1,286,910 879,640 Due to reinsurers 188,056 139,322 Trading securities sold but not yet purchased, at fair value (proceeds $34,592 and $58,331) 31,132 56,990 Due to security brokers 54,500 -- Other liabilities 236,852 215,220 Long-term debt 362,877 370,554 ----------- ----------- Total liabilities 5,163,574 4,479,408 ----------- ----------- Trust preferred securities 198,241 198,210 Minority interest 16,070 24,296 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, 50,215,669 and 49,860,774 shares 12,991 12,991 Additional paid-in capital 654,982 654,936 Retained earnings 556,300 467,185 Accumulated other comprehensive income 120,421 37,340 Treasury stock, at cost, 14,741,097 and 15,094,992 shares (233,865) (240,857) ----------- ----------- Total stockholders' equity 1,110,829 931,595 ----------- ----------- Total liabilities and stockholders' equity $ 6,488,714 $ 5,633,509 =========== ===========
See accompanying notes to consolidated financial statements. 1 W. R. Berkley Corporation and Subsidiaries Consolidated Statements of Operations (Unaudited) (Amounts in thousands except per share data)
For the Three Months For the Nine Months Ended September 30, Ended September 30, ---------------------------- ---------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Revenues: Net premiums written $ 678,990 $ 469,227 $ 1,897,078 $ 1,355,026 Change in unearned premiums (116,519) (43,832) (347,453) (132,636) ----------- ----------- ----------- ----------- Premiums earned 562,471 425,395 1,549,625 1,222,390 Net investment income 48,316 46,802 137,032 147,600 Service fees 21,650 19,849 62,767 56,552 Realized investment gains (losses) 628 7,385 (2,858) 11,782 Other income 1,006 641 1,326 1,898 ----------- ----------- ----------- ----------- Total revenues 634,071 500,072 1,747,892 1,440,222 Expenses: Losses and loss expenses 368,763 391,477 1,015,879 959,598 Other operating expenses 194,182 170,864 550,508 492,806 Interest expense 11,593 11,570 34,058 34,432 ----------- ----------- ----------- ----------- Total expenses 574,538 573,911 1,600,445 1,486,836 ----------- ----------- ----------- ----------- Income (loss) before income taxes and minority interest 59,533 (73,839) 147,447 (46,614) Income tax (expense) benefit (19,470) 27,117 (51,255) 21,559 Minority interest 481 (524) 6,122 (2,327) ----------- ----------- ----------- ----------- Net income (loss) $ 40,544 $ (47,246) $ 102,314 $ (27,382) =========== =========== =========== =========== Net income (loss) per share: Basic $ .81 $ (1.08) $ 2.04 $ (.64) =========== =========== =========== =========== Diluted $ .78 $ (1.08) $ 1.96 $ (.64) =========== =========== =========== =========== Average shares outstanding: Basic 50,196 43,574 50,080 42,506 =========== =========== =========== =========== Diluted 51,990 45,080 52,328 44,405 =========== =========== =========== ===========
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 Nine Months Ended September 30, ----------------------------- 2002 2001 ----------------------------- Cash flows from operating activities: Net income (loss) $ 102,314 $ (27,382) Adjustments to reconcile net income (loss) to cash flows provided by operating activities: Minority interest (6,122) 2,327 Change in reserves for losses and loss expenses, net 287,926 184,526 Depreciation and amortization 13,680 13,474 Change in unearned premiums and prepaid reinsurance premiums 347,759 131,747 Change in premiums and fees receivable (206,140) (104,911) Change in federal and foreign income taxes 52,213 (22,978) Change in deferred policy acquisition cost (63,798) (28,168) Realized investment (gains) losses 2,858 (11,782) Other, net 12,226 (7,949) ----------- ----------- Net cash flows provided by operating activities before trading account 542,916 128,904 Decrease (increase) in trading account securities, receivables and payables, net 172,742 (9,547) ----------- ----------- Net cash flows provided by operating activities 715,658 119,357 ----------- ----------- Cash flows used in investing activities: Proceeds from sales, excluding trading account: Fixed maturity securities available for sale 460,332 428,592 Equity securities 27,014 57,869 Maturities and prepayments of fixed maturity securities 204,767 128,601 Cost of purchases, excluding trading account: Fixed maturity securities available for sale (1,366,262) (668,565) Equity securities (187,034) (65,577) Change in balances due to/from security brokers 62,482 33,191 Net additions to real estate, furniture and equipment (30,854) (12,857) Sale (purchase) of subsidiary (2,053) 3,027 Other, net (16,034) 725 ----------- ----------- Net cash flows used in investing activities (847,642) (94,994) ----------- ----------- Cash flows provided by (used in) financing activities: Net proceeds from issuance of common stock -- 121,400 Repayment and repurchase of debt (8,000) (10,000) Cash dividends (12,982) (10,866) Net proceeds from stock options exercised 7,037 6,480 Other, net (1,838) 2,831 ----------- ----------- Net cash flows provided by (used in) financing activities (15,783) 109,845 ----------- ----------- Net increase (decrease) in cash and invested cash (147,767) 134,208 Cash and invested cash at beginning of year 534,087 309,131 ----------- ----------- Cash and invested cash at end of period $ 386,320 $ 443,339 =========== =========== Supplemental disclosure of cash flow information: Interest paid $ 29,178 $ 29,308 =========== =========== Federal income taxes paid, net $ 2,647 $ 752 =========== ===========
See accompanying notes consolidated financial statements. 3 W. R. Berkley Corporation and Subsidiaries Notes to Consolidated Financial Statements September 30, 2002 (Unaudited) 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, 2001. 1. FEDERAL AND FOREIGN INCOME TAXES 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 and net operating losses of foreign subsidiaries. 2. ACCOUNTING CHANGES The Company adopted FASB Statement No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002. As a result of adopting Statement No. 142, the Company's goodwill is no longer being amortized. Pursuant to Statement No. 142, goodwill must be periodically tested for impairment. The Company's initial impairment review indicated that there was no goodwill impairment as of January 1, 2002. The Company also adopted FASB Statement No. 141, Business Combinations, effective January 1, 2002. In accordance with Statement No. 141, other intangible assets that meet the criteria for recognition apart from goodwill (as defined by Statement No. 141) are to be reclassified and accounted for as an asset apart from goodwill upon adoption of the statement. The Company reclassified $5 million of intangible assets, net of accumulated amortization, from goodwill to other assets as of January 1, 2002. The December 31, 2001 consolidated balance sheet was changed to reflect this reclassification. The Company also adopted FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective January 1, 2002. The adoption of Statement No. 144 did not have any impact on the Company's results of operations or financial condition. In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which is effective for exit and disposal activities that are initiated after December 31, 2002. The adoption of Statement No. 146 will not have a material impact on the Company's results of operations or financial condition. 3. EARNINGS PER SHARE 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. Shares issued in connection with loans to shareholders are not considered to be outstanding for the purpose of calculating basic earnings per share amounts. The related amounts due from shareholders are excluded from stockholders' equity. Per share amounts have been adjusted to reflect the 3-for-2 common stock split effected July 2, 2002. 4 REINSURANCE CEDED The Company reinsures a portion of its business under 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 our 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. Earned premiums and losses and loss expenses ceded under the aggregate reinsurance agreement and other reinsurance contracts are as follows (amounts in thousands):
Three Months Nine Months Ended September 30, Ended September 30, ------------------- ------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Ceded premiums earned: Aggregate reinsurance agreement: Individual losses $ 32,612 9,324 $ 71,784 9,324 Aggregate losses 6,250 7,500 18,750 22,500 Other reinsurance contracts 65,864 73,321 211,133 226,532 --------- -------- --------- -------- Total $ 104,726 $ 90,145 $ 301,667 $258,356 ========= ======== ========= ======== Ceded losses and loss expenses: Aggregate reinsurance agreement: Individual losses $ 10,093 2,578 $ 32,070 2,578 Aggregate losses 11,250 13,500 33,750 40,500 Other reinsurance contracts 46,983 85,540 124,790 189,030 --------- -------- --------- -------- Total $ 68,326 $101,618 $ 190,610 $232,108 ========= ======== ========= ========
Certain of the Company's reinsurance agreements 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 $14 million and $8 million for the first nine months of 2002 and 2001, respectively. 5. GOODWILL AND OTHER INTANGIBLE ASSETS In accordance with FASB Statement No. 142, all of the Company's goodwill will no longer be amortized. In prior periods, goodwill amortization had been expensed primarily in the alternative markets segment. A reconciliation of the reported net loss to adjusted net loss had Statement No. 142 and Statement No. 141 been applied as of January 1, 2001 follows (amount in thousands, except per share data):
Basic Loss Diluted Loss Amount Per Share Per Share ------ --------- --------- For the nine months ended September 30, 2002: Reported net loss $(27,382) $ (.64) $ (.64) Add back goodwill amortization (net of tax) 2,384 .06 .06 --------- ------ ------- Adjusted net loss $(24,998) $ (.58) $ (.58) ======== ====== ======= For the three months ended September 30, 2002: Reported net loss $(47,246) $ (1.08) $ (1.08) Add back goodwill amortization (net of tax) 795 $ .02 $ .02 --------- ------- ------- Adjusted net loss $(46,451) $ (1.06) $ (1.06) ======== ======= =======
Amortization expense for amortizable intangible assets is estimated to be $415,000 for each of the five years ended December 31, 2006. 5 6. COMPREHENSIVE INCOME (LOSS) The differences between comprehensive income (loss) and net income (loss) are unrealized foreign exchange gains (losses) as well as unrealized gains (losses) on securities. The following is a reconciliation of comprehensive income (loss) (amounts in thousands):
For the three months For the Nine months Ended September 30, Ended September 30, ------------------------ ------------------------ 2002 2001 2002 2001 --------- --------- --------- --------- Net income (loss) $ 40,544 $ (47,246) $ 102,314 $ (27,382) Other comprehensive income (loss): Unrealized foreign exchange gains (losses) (9,094) 15 (4,093) (368) Unrealized holding gains on investment securities arising during the period, net of taxes 70,041 26,669 87,318 30,729 Reclassification adjustment for realized gains (losses) included in net income, net of taxes and minority interest 733 4,800 (144) 7,658 --------- --------- --------- --------- Other comprehensive income 61,680 31,484 83,081 38,019 --------- --------- --------- --------- Comprehensive income (loss) $ 102,224 $ (15,762) $ 185,395 $ 10,637 ========= ========= ========= =========
7. INVESTMENT IN KILN PLC During 2002, the Company purchased a 20.1% ownership in Kiln plc for approximately $29 million. Kiln plc is based in the U.K. and conducts international insurance and reinsurance underwriting through Lloyd's syndicates. The Company's investment in Kiln plc is reported under the equity method of accounting, and the Company's share of the earnings of Kiln plc is reported on a one quarter lag in order to facilitate the timely completion of the consolidated financial statements. The Company also entered into quota share reinsurance agreements with two Lloyd's syndicates managed by Kiln plc for the 2002 underwriting year. Net premiums written under these quota share agreements were $75 million for the first nine months of 2002. 8. 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 specializes in developing, insuring and administering self-insurance programs and various alternative risk transfer mechanisms for employers, employer groups, insurers and alternative markets funds. 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 underwrites commercial property casualty insurance. The international segment currently writes property casualty and life insurance in Argentina and life insurance in the Philippines. For the nine months ended September 30, 2002 and 2001, the international segment reported life insurance net written premiums of $18 million and $24 million, respectively. During 2001, the Company discontinued its regional personal lines business and the alternative markets division of its reinsurance segment. These discontinued businesses are now being managed and reported collectively as a separate discontinued business segment. 6 The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Income tax expense and benefits are calculated based upon the Company's effective tax rate. Income (loss) before income taxes by segment consists of revenues less expenses related to the respective segment's operations. These amounts include realized gains (losses) where applicable. Intersegment revenues consist primarily of dividends and interest on inter-company debt. Identifiable assets by segment are those assets used in the operation of each segment. Summary financial information for the Company's operating segments for the three months ended September 30, 2002 is presented in the following table.
REVENUES -------------------------------------- PRE-TAX INCOME TAX INVESTMENT UNAFFILIATED INTER- INCOME (EXPENSE) (AMOUNTS IN THOUSANDS) INCOME CUSTOMERS SEGMENT TOTAL LOSS BENEFITS ------ --------- ------- ----- ---- -------- Specialty $ 13,035 $ 198,615 $ 952 $ 199,567 $ 32,030 $ (10,499) Alternative Markets 9,759 92,446 843 93,289 16,494 (5,934) Reinsurance 11,974 121,222 460 121,682 11,173 (2,670) Regional 11,723 195,172 (289) 194,883 26,472 (9,008) International 1,502 14,753 -- 14,753 (3,955) 1,582 Discontinued Business 801 9,938 -- 9,938 (3,282) 1,149 Corporate other and Eliminations (478) 1,925 (1,966) (41) (19,399) 5,910 --------- --------- --------- --------- --------- --------- Consolidated $ 48,316 $ 634,071 $ -- $ 634,071 $ 59,533 $ (19,470) ========= ========= ========= ========= ========= ========= For the three months ended September 30, 2001: Specialty $ 9,218 $ 118,287 $ 191 $ 118,478 $ (767) $ (376) Alternative Markets 9,389 60,170 108 60,278 8,061 (2,242) Reinsurance 10,223 63,267 1,105 64,372 (19,403) 24,388 Regional 12,428 156,275 301 156,576 11,840 (19,430) International 3,339 39,933 -- 39,933 2,851 (1,427) Discontinued Business 2,441 60,258 -- 60,258 (61,358) 21,475 Corporate other and Eliminations (236) 1,882 (1,705) 177 (15,063) 4,729 --------- --------- --------- --------- --------- --------- Consolidated $ 46,802 $ 500,072 $ -- $ 500,072 $ (73,839) $ 27,117 ========= ========= ========= ========= ========= =========
Interest expense for the reinsurance and alternative market segment was $582,000 and $666,000 for the three months ended September 30, 2002 and 2001, respectively. Corporate interest expense (net of intercompany amounts) was $11,011,000 and $10,904,000 for the corresponding periods. Summary financial information for the Company's operating segments for the nine months ended September 30, 2002 is presented in the following table.
REVENUES -------------------------------------- PRE-TAX INCOME TAX INVESTMENT UNAFFILIATED INTER- INCOME (EXPENSE) (AMOUNTS IN THOUSANDS) INCOME CUSTOMERS SEGMENT TOTAL LOSS BENEFITS ------ --------- ------- ----- ---- -------- Specialty $ 35,937 $ 525,302 $ 2,002 $ 527,304 $ 85,937 $ (30,399) Alternative Markets 27,720 247,499 2,006 249,505 45,854 (14,576) Reinsurance 34,182 311,311 1,374 312,685 30,287 (8,969) Regional 32,930 546,809 888 547,697 70,436 (23,374) International 3,665 64,296 -- 64,296 (16,500) 729 Discontinued Business 3,817 47,938 -- 47,938 (7,936) 2,778 Corporate other and Eliminations (1,219) 4,737 (6,270) (1,533) (60,631) 22,556 ----------- ----------- ----------- ----------- ----------- ----------- Consolidated $ 137,032 $ 1,747,892 $ -- $ 1,747,892 $ 147,447 $ (51,255) =========== =========== =========== =========== =========== =========== For the nine months ended September 30, 2001: Specialty $ 29,732 $ 306,489 $ 1,445 $ 307,934 $ 20,440 $ (5,041) Alternative Markets 28,717 167,670 993 168,663 27,919 (8,023) Reinsurance 32,879 201,219 2,161 203,380 (9,433) 21,954 Regional 38,995 447,733 982 448,715 29,435 (23,116) International 9,875 112,566 -- 112,566 8,977 (3,623) Discontinued Business 7,518 198,706 -- 198,706 (77,789) 27,226 Corporate other and Eliminations (116) 5,839 (5,581) 258 (46,163) 12,182 ----------- ----------- ----------- ----------- ----------- ----------- Consolidated $ 147,600 $ 1,440,222 $ -- $ 1,440,222 $ (46,614) $ 21,559 =========== =========== =========== =========== =========== ===========
7 Interest expense for the reinsurance and alternative market segments was $1,749,000 and $2,203,000 for the nine months ended September 30, 2002 and 2001, respectively. Corporate interest expense (net of intercompany amounts) was $32,309,000 and $32,229,000 for the corresponding periods. Identifiable assets by segment are as follows (Amounts in thousands):
SEPTEMBER 30, DECEMBER 31, 2002 2001 ----------- ----------- Specialty $ 1,935,131 $ 1,580,155 Alternative Markets 1,020,057 859,502 Reinsurance 2,204,837 1,751,428 Regional 1,643,902 1,462,861 International 146,764 209,473 Discontinued Business 199,626 289,313 Corporate other and Elimination (661,603) (519,223) ----------- ----------- Consolidated $ 6,488,714 $ 5,633,509 =========== ===========
9. COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES As is common with other insurance companies, 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 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. The reinsurer's interpretation of the contract terms would reduce the amount due from the reinsurer, as reflected in the Company's balance sheet as of September 30, 2002, by approximately $46 million. Although the ultimate outcome of this matter cannot be determined, management believes that the Company's interpretation of this contract is correct and intends to vigorously pursue this matter in arbitration. There are two pending arbitrations and a legal proceeding pertaining to reinsurance contract coverage issues where subsidiaries of the Company are the assuming reinsurers. The Company's estimates of its liabilities under these contracts are based on information currently available and are reflected in reserves for losses and loss expenses. These proceedings are all in the initial stages of development. 10. INTERNATIONAL BUSINESS The Company owns 65% of Berkley International, LLC, which through subsidiaries conducts insurance operations in Argentina and the Philippines. The international activities are reported in the Company's financial statements on a one quarter lag to facilitate the timely completion of the consolidated financial statements. In the fourth quarter of 2001, the Argentine government undertook a series of measures that included the default and restructuring of its sovereign debt, the introduction of floating exchange rates and devaluation of the peso, and various government-imposed restrictions on the banking system and commercial transactions in general. Following an analysis of the impact of these measures, the Company recognized an impairment loss on its investments in Argentine sovereign bonds of $18 million as of December 31, 2001. Economic conditions and the market values of Argentine sovereign bonds continued to decline in 2002 and, as a result, the Company recognized an additional impairment loss on its investment in Argentine sovereign bonds of $10 million in the second quarter of 2002. The remaining amortized cost and fair value of the Company's Argentine sovereign bonds was approximately $13 million as of September 30 2002. 8 The Company ceased writing life insurance business in Argentina during the first quarter of 2002 and is in the process of negotiating the cancellation of its outstanding Argentine life insurance policies. The Company does not expect the cost of canceling these policies to have a material effect on its financial condition or result of operations. At September 30, 2002, Berkley International LLC's investment in the Argentine subsidiary was approximately $10 million (net of unrealized foreign exchange losses of approximately $12 million) and the Company's share of the investment (net of minority interest) was approximately $7 million. 11. OTHER MATTERS Reclassifications have been made in the 2001 financial statements as originally reported to conform them to the presentation of the 2002 financial statements. In the opinion of management, the summarized 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. 12. 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 2002 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 arbitration proceedings and legal 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, uncertainty as to our reinsurance coverage 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 2002 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 Management considers certain of its accounting 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. The Company's critical accounting policies include assumptions and estimates relating to loss reserves and foreign investments and operations, as described in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. OPERATING RESULTS FOR THE FIRST NINE MONTHS OF 2002 AS COMPARED TO THE FIRST NINE MONTHS OF 2001 The Company reported net income of $102 million, or $1.96 cents per share, for the first nine months of 2002 compared with a loss of $27 million, or 64 cents per share, for the earlier year period. Following are the components of net income (loss) for the nine months ended September 30, 2002 and 2001 (amounts in thousands):
2002 2001 --------- --------- Underwriting income (loss) $ 61,358 $(165,342) Insurance services 12,939 7,503 Net investment income 137,032 147,600 Interest expense and other (61,024) (48,157) --------- --------- Pretax income (loss) before realized investment gains (losses) 150,305 (58,396) Realized investment gains (losses) (2,858) 11,782 Income tax (expense) benefit and minority interest (45,133) 19,232 --------- --------- Net income (loss) $ 102,314 $ (27,382) ========= =========
UNDERWRITING INCOME (LOSS) Gross and net premiums written increased by 41% and 40%, respectively, in 2002 compared with the earlier-year period. Following is a summary of gross and net premiums written by business segment for the nine months ended September 30, 2002 and 2001 (amounts in thousands):
Gross Premiums Written Net Premiums Written ---------------------- -------------------- 2002 2001 % Change 2002 2001 % Change ---- ---- -------- ---- ---- -------- Specialty $ 684,136 $ 427,357 60.1% $ 604,889 $ 366,632 65.0% Alternative Markets 248,803 127,365 95.3% 215,771 113,275 90.5% Reinsurance 528,946 234,295 125.8% 432,383 167,174 158.6% Regional 711,217 511,168 39.1% 575,716 432,878 33.0% International 73,236 123,181 (40.5%) 65,359 107,536 (39.2%) Discontinued Business 22,485 191,172 (88.2%) 2,960 167,531 (98.2%) ---------- ---------- ---------- ---------- Total $2,268,823 $1,614,538 40.5% $1,897,078 $1,355,026 40.0% ========== ========== ========== ==========
The increase in gross premiums written reflects generally higher prices and a modest increase in policies. In addition, the reinsurance segment's gross premiums in 2002 includes approximately $105 million related to new reinsurance contracts with certain Lloyd's syndicates that underwrite a broad range of mainly short-tail classes of business. The decrease in international premiums reflects the effect of the lower exchange rate for the Argentine peso. The decrease in discontinued business premiums reflects the run-off of personal lines and alternative markets reinsurance following our withdrawal from those markets in the fourth quarter of 2001. 10 Following is a summary of earned premiums and underwriting income (loss) by business segment for the nine months ended September 30, 2002 and 2001 (amounts in thousands):
Net Premiums Earned Underwriting Income (Loss) ------------------- -------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Specialty $ 487,387 $ 275,895 $ 46,020 $ (11,599) Alternative Markets 157,901 84,851 4,206 (5,716) Reinsurance 273,792 167,243 (6,861) (43,825) Regional 512,067 401,177 34,806 (18,103) International 74,357 102,036 (5,060) (793) Discontinued Business 44,121 191,188 (11,753) (85,306) ----------- ---------- --------- ----------- Total $ 1,549,625 $1,222,390 $ 61,358 $ (165,342) =========== ========== ========= ===========
Underwriting income (loss) represents net premiums earned less net loss and loss adjustment expenses incurred and underwriting expenses incurred. In 2002, earned premiums increased 27% to $1,550 million, losses and loss expenses increased 6% to $1,016 million and underwriting expenses increased 10% to $472 million. The loss ratio (losses and loss expenses incurred expressed as a percentage of premiums earned) decreased to 65.6% in 2002 from 78.5% in 2001. The underwriting expense ratio (underwriting expenses expressed as a percentage of premiums earned) decreased to 30.5% in 2002 from 35.0% in 2001. The underwriting results in 2002 and the underwriting improvement compared with the prior year period reflect the following items: - The 2002 underwriting results reflect the effect of premium rate increases and improved terms and conditions for most product lines that began in late 2001 and continued through the third quarter of 2002. - The 2001 underwriting loss includes losses related to the World Trade Center of $35 million, including $26 million for the reinsurance segment and $9 million for the specialty segment. - The 2001 underwriting loss for the discontinued business segment includes an increase in prior year loss reserves of $50 million in the third quarter of 2001. - Weather-related losses were $43 million in 2002 compared with $66 million in 2001. - The reinsurance underwriting results reflect loss recoveries under the Company's aggregate reinsurance agreement (See Note 4 of "Notes to Consolidated Financial Statements.") - The 2002 underwriting loss for the international segment reflects the impact of the economic disruption in Argentina and the costs of discontinuing the Argentine life insurance business. - The underwriting expense ratio decreased as a result of a 27% increase in earned premiums with no significant change in general expenses (underwriting expenses other than commissions and premium taxes). INSURANCE SERVICES Insurance services income represents service fees less related costs and expenses for the insurance services business. Service fees increased 11% to $63 million in 2002 as a result of new accounts and higher revenues on existing accounts, and service fee income increased 72% to $13 million. 11 NET INVESTMENT INCOME Net investment income decreased to $137 million in the first nine months of 2002 from $148 million in 2001. Average invested assets were $3,736 million in the first nine months of 2002 compared with $3,217 million in 2001. The increase in invested assets reflects proceeds received from stock offerings in 2001 and cash flow from operations. See "Liquidity and Capital Resources." The average annualized yield on investments decreased to 5.5% in 2002 from 6.4% in 2001. The decrease reflects lower average yields available on arbitrage securities, lower interest rates and the non-accrual of interest income on Argentine sovereign bonds. Interest credited to reinsurers for funds held on their behalf was $14 million in 2002 compared with $8 million in 2001, as a result of an increase in the funds held account. INTEREST EXPENSE AND OTHER Interest expense and other represents interest expense, corporate expenses and other miscellaneous income and expenses. Other expenses increased $13 million in 2002 due to an increase in accruals for incentive compensation and other general and administrative expenses. REALIZED INVESTMENT GAINS (LOSSES) Realized investment gains and losses result from sales of securities and for provisions for other than temporary impairment in securities. During 2002 the Company recognized an impairment loss on its investment in Argentine sovereign bonds of $10 million. INCOME TAX BENEFIT (EXPENSE) AND MINORITY INTEREST The effective income tax rate was 35% in 2002 and 46% in 2001. The effective tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income and net operating losses of foreign subsidiaries. Minority interest represents the portion of the Company's international operations held by outside investors. OPERATING RESULTS FOR THE THIRD QUARTER OF 2002 AS COMPARED TO THE THIRD QUARTER OF 2001 The Company reported net income of $41 million, or 78 cents per share, for 2002 compared with a loss of $47 million, or $1.08 per share, for 2001. Following are the components of net income (loss) for the quarters ended September 30, 2002 and 2001 (amounts in thousands):
2002 2001 --------- --------- Underwriting income (loss) $ 25,286 $(113,795) Insurance services 5,955 3,093 Net investment income 48,316 46,802 Interest expense and other (20,652) (17,324) --------- --------- Pretax income (loss) before realized investment gains (losses) 58,905 (81,224) Realized investment gains (losses) 628 7,385 Income tax (expense) benefit and minority interest (18,989) 26,593 --------- --------- Net income (loss) $ 40,544 $ (47,246) ========= =========
UNDERWRITING INCOME (LOSS) Gross and net premiums written increased by 43% and 45%, respectively, in 2002 compared with the earlier-year period. Following is a summary of gross and net premiums written by business segment for the quarters ended September 30, 2002 and 2001 (amounts in thousands):
Gross Premiums Written Net Premiums Written ---------------------- -------------------- 2002 2001 % Change 2002 2001 % Change ---- ---- -------- ---- ---- -------- Specialty $ 249,098 $ 153,693 62.1% $ 222,064 $ 134,901 64.6% Alternative Markets 102,763 48,451 112.1% 89,134 42,877 107.9% Reinsurance 188,321 82,592 128.0% 155,316 56,119 176.8% Regional 236,212 173,471 36.2% 199,358 147,170 35.5% International 13,045 42,484 (69.3%) 13,103 36,895 (64.5%) Discontinued Business 12,173 59,413 (79.5%) 15 51,265 (100.0%) --------- --------- ---------- --------- Total $ 801,612 $ 560,104 43.1% $ 678,990 $ 469,227 44.7% ========= ========= ========== =========
12 The increase in gross premiums written reflects generally higher prices and a modest increase in policies. In addition, the reinsurance segment's gross premiums in 2002 included approximately $35 million related to new reinsurance contracts with certain Lloyd's syndicates that underwrite a broad range of mainly short-tail classes of business. The decrease in international premiums reflects the effect of the lower exchange rate for the Argentine peso. The decrease in discontinued business premiums reflects the run-off of personal lines and alternative markets reinsurance following our withdrawal from those markets in the fourth quarter of 2001. Following is a summary of earned premiums and underwriting income (loss) by business segment for the quarters ended September 30, 2002 and 2001 (amounts in thousands):
Net Premiums Earned Underwriting Income (Loss) ----------------------- ------------------------ 2002 2001 2002 2001 --------- --------- --------- --------- Specialty $ 185,189 $ 108,662 $ 17,651 $ (10,581) Alternative Markets 61,077 31,481 1,166 (2,599) Reinsurance 108,677 53,341 (1,250) (29,852) Regional 183,424 137,809 15,013 (6,927) International 14,967 36,286 (3,211) (35) Discontinued Business 9,137 57,816 (4,083) (63,801) --------- --------- --------- --------- Total $ 562,471 $ 425,395 $ 25,286 $(113,795) ========= ========= ========= =========
Underwriting income (loss) represents net premiums earned less net loss and loss adjustment expenses incurred and underwriting expenses incurred. In 2002, earned premiums increased 32% to $562 million, losses and loss expenses decreased 6% to $369 million and underwriting expenses increased 14% to $168 million. The loss ratio (losses and loss expenses incurred expressed as a percentage of premiums earned) decreased to 65.6% in 2002 from 92.0% in 2001. The lower ratio reflects the effect of premium rate increases and improved policy terms and conditions. Weather-related losses were $15 million in 2002 compared with $26 million in 2001. The third quarter of 2001 reflects World Trade Center losses of $35 million. The reinsurance segment's 2002 and 2001 underwriting results also reflect loss recoveries under the Company's aggregate reinsurance agreement. (See Note 4 of "Notes to Consolidated Financial Statements.") The underwriting expense ratio (underwriting expenses expressed as a percentage of premiums earned) decreased to 29.9% in 2002 from 34.7% in 2001. The decrease is a result of a 32% increase in earned premiums with no significant change in general expenses (underwriting expenses other than commissions and premium taxes). INSURANCE SERVICES Insurance services income represents service fees less related costs and expenses for the insurance services business. Service fees increased 9% to $22 million in 2002 as a result of new accounts and higher revenues on existing accounts, and service fee income increased 93% to $6 million. NET INVESTMENT INCOME Net investment income increased to $48 million in the third quarter of 2002 from $47 million in 2001, due to an increase in investable assets. FINANCING ACTIVITY At September 30, 2002, the Company's outstanding long-term debt was $366 million (face amount). The maturities of the long-term debt are $61 million in 2003, $40 million in 2005, $100 million in 2006, $89 million in 2008 and $76 million in 2022. The Company also has $200 million (face amount) of trust preferred securities that mature in 2045. At September 30, 2002, stockholders' equity was $1,111 million and total capitalization (stockholders' equity, long-term debt and trust preferred securities) was $1,672 million. The percentage of the Company's capital attributable to long-term debt decreased to 22% at September 30, 2002 from 25% at December 31, 2001. 13 INVESTMENTS As part of its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities which, combined with expected cash flow, it believes adequate to meet foreseeable payment obligations. The Company also attempts to maintain 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 carrying value of the Company's investment portfolio as of September 30, 2002 and December 31, 2001 is as follows (amounts in thousands):
SEPTEMBER DECEMBER 2002 2001 ----------- ----------- Fixed maturities and invested cash $ 3,671,963 $ 2,975,344 Equity securities available for sale 233,209 99,813 Equity securities trading account(a) 333,292 506,008 Due to security broker (54,500) -- Other Investments 43,945 16,888 ----------- ----------- Total $ 4,227,909 $ 3,598,053 =========== ===========
(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. FIXED MATURITIES AND INVESTED CASH The Company's investment policy with respect to fixed maturity securities is generally to purchase instruments with the expectation of holding them to their maturity. However, active management of the portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as a result of changes in financial market conditions and tax considerations. At September 30, 2002 as compared with December 31, 2001, the fixed maturities portfolio mix was as follows: U.S. Government securities and cash equivalents (net of due to security broker) were 31% (35% in 2001); state and municipal securities were 22% (20% in 2001); corporate securities were 16% (19% in 2001); mortgage-backed securities were 25% (22% in 2001); and foreign bonds were 6% (4% in 2001). EQUITY SECURITIES AVAILABLE FOR SALE Equity securities available for sale represent primarily investments in common stocks and preferred stocks of publicly traded real estate investment trusts (REITs) and utilities. EQUITY SECURITIES TRADING ACCOUNT The equity securities trading account is comprised of merger arbitrage securities, which represent 80% (92% in 2001) of the trading account securities, and convertible arbitrage securities. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Convertible arbitrage is the business of investing in convertible securities with the goal of capitalizing on price differentials between these securities and their underlying equities. OTHER INVESTMENTS Other investments consist of the Company's equity investment in Kiln plc (See Note 7 of "Notes to Consolidated Financial Statements") and other minority investments in privately-held securities and limited partnerships. For background information concerning discussion of the Company's Liquidity and Capital Resources, see the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 14 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 overall market risk relating to the Company's investment portfolio as of September 30, 2002 is similar to the overall market risk at December 31, 2001. 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 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 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. 15 PART II - OTHER INFORMATION Item 1. Legal Proceedings As is common with other insurance companies, 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 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. The reinsurer's interpretation of the contract terms would reduce the amount due from the reinsurer, as reflected in the Company's balance sheet as of September 30, 2002, by approximately $46 million. Although the ultimate outcome of this matter cannot be determined, management believes that the Company's interpretation of this contract is correct and intends to vigorously pursue this matter in arbitration. There are two pending arbitrations and a legal proceeding pertaining to reinsurance contract coverage issues where subsidiaries of the Company are the assuming reinsurers. The Company's estimates of its liabilities under these contracts are based on information currently available and are reflected in reserves for losses and loss expenses. These proceedings are all in the initial stages of development. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Number 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 September 30, 2002, the Company filed the following Reports on Form 8-K: A Form 8-K was filed on July 25, 2002, under Item 5, incorporating by reference the Company's July 24, 2002 press release setting forth the Company's second-quarter 2002 earnings. A Form 8-K was filed on August 8, 2002, under Item 5, incorporating by reference the Company's August 8, 2002 press release announcing the appointment of Philip J. Ablove to the Company's Board of Directors. A Form 8-K was filed on August 13, 2002, under Item 5, attaching copies of sworn statements submitted to the SEC by the Company's Principal Executive Officer, William R. Berkley, and Principal Financial Officer, Eugene G. Ballard, pursuant to Securities and Exchange Commission Order No. 4-460. A Form 8-K was filed on September 13, 2002, under Item 5, incorporating by reference the Company's September 13, 2002 press release announcing the formation of B F Re Underwriters, LLC and the naming of Daniel L. Avery as President of B F Re Underwriters. 16 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: November 12, 2002 /s/ WILLIAM R. BERKLEY ------------------------------ William R. Berkley Chairman of the Board and Chief Executive Officer Date: November 12, 2002 /s/ EUGENE G. BALLARD ------------------------------ Eugene G. Ballard Senior Vice President, Chief Financial Officer and Treasurer 17 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: November 12, 2002 /s/ WILLIAM R. BERKLEY ------------------------------ William R. Berkley Chairman of the Board and Chief Executive Officer 18 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: November 12, 2002 /s/ EUGENE G. BALLARD -------------------------- Eugene G. Ballard Senior Vice President, Chief Financial Officer and Treasurer 19