SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: Commission File Number:
MARCH 31, 2003 1-15731
- ---------------------- -----------------------
EVEREST RE GROUP, LTD.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
BERMUDA 98-0365432
- --------------------------- ----------------------------
(State or other juris- (IRS Employer Identification
diction of incorporation Number)
or organization)
c/o ABG FINANCIAL & MANAGEMENT SERVICES, INC.
PARKER HOUSE
WILDEY BUSINESS PARK, WILDEY ROAD
ST. MICHAEL, BARBADOS
(246) 228-7398
(Address,including zip code, and telephone number, including area
code, of registrant's principal executive office)
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days.
YES X NO
------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act).
YES X NO
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Class at May 1, 2002
----- ----------------------------
COMMON SHARES, $.01 PAR VALUE 50,937,708
EVEREST RE GROUP, LTD.
INDEX TO FORM 10-Q
PART I
FINANCIAL INFORMATION
---------------------
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
--------------------
Consolidated Balance Sheets at March 31, 2003 (unaudited)
and December 31, 2002 3
Consolidated Statements of Operations and Comprehensive Income
for the three months ended
March 31, 2003 and 2002 (unaudited) 4
Consolidated Statements of Changes in Shareholders'
Equity for the three months ended
March 31, 2003 and 2002 (unaudited) 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 and 2002 (unaudited) 6
Notes to Consolidated Interim Financial Statements (unaudited) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF
-------------------------------------
OPERATIONS 17
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
----------------------------------------
ABOUT MARKET RISK 32
-----------------
ITEM 4. CONTROLS AND PROCEDURES 33
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PART II
OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS 34
-----------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None
-----------------------------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None
-------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
----------------------------------
SECURITY HOLDERS None
----------------
ITEM 5. OTHER INFORMATION None
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 35
--------------------------------
Part I - Item 1
EVEREST RE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value per share)
March 31, December 31,
----------- -----------
2003 2002
----------- -----------
(unaudited)
ASSETS:
Fixed maturities - available for sale, at market value
(amortized cost: 2003, $6,727,217; 2002, $6,460,839) $ 7,083,954 $ 6,779,858
Equity securities, at market value
(cost: 2003, $56,779; 2002, $56,841) 45,382 47,473
Short-term investments 242,237 169,116
Other invested assets 57,779 53,856
Cash 153,721 208,830
----------- -----------
Total investments and cash 7,583,073 7,259,133
----------- -----------
Accrued investment income 101,569 85,959
Premiums receivable 816,053 673,377
Reinsurance receivables 1,097,016 1,116,362
Funds held by reinsureds 134,595 121,308
Deferred acquisition costs 245,588 207,416
Prepaid reinsurance premiums 75,420 63,437
Deferred tax asset 143,409 139,176
Other assets 173,605 198,435
----------- -----------
TOTAL ASSETS $10,370,328 $ 9,864,603
=========== ===========
LIABILITIES:
Reserve for losses and adjustment expenses $ 5,100,240 $ 4,905,582
Future policy benefit reserve 224,716 227,925
Unearned premium reserve 1,092,548 872,340
Funds held under reinsurance treaties 346,103 347,360
Losses in the course of payment 64,282 45,511
Contingent commissions (2,477) 1,932
Other net payable to reinsurers 70,934 61,244
Current federal income taxes 9,607 (16,696)
8.5% Senior notes due 3/15/2005 249,803 249,780
8.75% Senior notes due 3/15/2010 199,179 199,158
Revolving credit agreement borrowings 70,000 70,000
Accrued interest on debt and borrowings 3,744 13,481
Other liabilities 242,321 308,340
----------- -----------
Total liabilities 7,671,000 7,285,957
----------- -----------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY
SUBORDINATED DEBENTURES ("TRUST PREFERRED SECURITIES") 210,000 210,000
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred shares, par value: $0.01; 50 million shares
authorized; no shares issued and outstanding - -
Common shares, par value: $0.01; 200 million shares
authorized; 50.9 million shares issued in 2003
and 50.9 million shares issued in 2002 514 513
Additional paid-in capital 619,407 618,521
Unearned compensation (319) (340)
Accumulated other comprehensive income, net of
deferred income taxes of $85.5 million in 2003 and
$74.4 million in 2002 251,530 221,542
Retained earnings 1,641,146 1,551,360
Treasury shares, at cost; 0.5 million shares in
2003 and 0.5 million shares in 20 (22,950) (22,950)
----------- -----------
Total shareholders' equity 2,489,328 2,368,646
----------- -----------
TOTAL LIABILITIES, TRUST PREFERRED SECURTIES
AND SHAREHOLDERS' EQUITY $10,370,328 $ 9,864,603
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
3
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
Three Months Ended
March 31,
--------------------------
2003 2002
--------- ---------
(unaudited)
REVENUES:
Premiums earned $ 744,870 $ 491,208
Net investment income 93,377 85,540
Net realized capital (loss) (13,235) (3,855)
Net derivative (expense) (2,700) (250)
Other (expense) income (1,147) 1,337
--------- ---------
Total revenues 821,165 573,980
--------- ---------
CLAIMS AND EXPENSES:
Incurred loss and loss adjustment expenses 513,471 352,506
Commission, brokerage, taxes and fees 162,805 121,009
Other underwriting expenses 19,864 14,125
Distributions related to trust preferred securities 4,121 -
Interest expense on senior notes 9,731 9,728
Interest expense on credit facility 360 909
--------- ---------
Total claims and expenses 710,352 498,277
--------- ---------
INCOME BEFORE TAXES 110,813 75,703
Income tax expense 16,446 14,642
--------- ---------
NET INCOME $ 94,367 $ 61,061
========= =========
Other comprehensive income (loss), net of tax 29,988 (68,126)
--------- ---------
COMPREHENSIVE INCOME (LOSS) $ 124,355 $ (7,065)
========= =========
PER SHARE DATA:
Average shares outstanding (000's) 50,897 48,108
Net income per common share - basic $ 1.85 $ 1.27
========= =========
Average diluted shares outstanding (000's) 51,521 49,087
Net income per common share - diluted $ 1.83 $ 1.24
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
4
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
Three Months End
March 31,
-----------------------------
2003 2002
----------- -----------
(unaudited)
COMMON SHARES (shares outstanding):
Balance, beginning of period 50,881,693 46,269,015
Issued during the period, net 26,950 5,017,450
----------- -----------
Balance, end of period 50,908,643 51,286,465
=========== ===========
COMMON SHARES (par value):
Balance, beginning of period $ 513 $ 463
Issued during the period 1 50
----------- -----------
Balance, end of period 514 513
----------- -----------
ADDITIONAL PAID IN CAPITAL:
Balance, beginning of period 618,521 269,945
Common shares issued during the period 886 346,563
----------- -----------
Balance, end of period 619,407 616,508
----------- -----------
UNEARNED COMPENSATION:
Balance, beginning of period (340) (115)
Net increase during the period 21 -
----------- -----------
Balance, end of period (319) (115)
----------- -----------
ACCUMULATED OTHER COMPREHENSIVE INCOME,
NET OF DEFERRED INCOME TAXES:
Balance, beginning of period 221,542 113,880
Net increase (decrease) during the period 29,988 (68,126)
----------- -----------
Balance, end of period 251,530 45,754
----------- -----------
RETAINED EARNINGS:
Balance, beginning of period 1,551,360 1,336,404
Net income 94,367 61,061
Dividends declared ($0.09 per share in 2003
and $0.08 per share in 2002) (4,581) (4,102)
----------- -----------
Balance, end of period 1,641,146 1,393,363
----------- -----------
TREASURY SHARES AT COST:
Balance, beginning of period (22,950) (55)
Treasury shares acquired during the period - -
----------- -----------
Balance, end of period (22,950) (55)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD $ 2,489,328 $ 2,055,968
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
5
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended
March 31,
------------------------
2003 2002
--------- ---------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 94,367 $ 61,061
Adjustments to reconcile net income to net cash
provided by operating activities:
(Increase) in premiums receivable (143,600) (66,264)
(Increase) decrease in funds held, net (13,945) 19,980
Decrease (increase) in reinsurance receivables 22,674 (29,554)
(Increase) decrease in deferred tax asset (15,274) 25,158
Increase in reserve for losses and loss adjustment
expenses 181,783 67,527
(Decrease) increase in future policy benefit reserve (3,209) 4,712
Increase in unearned premiums 219,163 74,778
(Increase) in other assets and liabilities (27,441) (53,882)
Non cash compensation expense 21 -
Accrual of bond discount/amortization of bond premium (163) (1,911)
Amortization of underwriting discount on senior notes 44 41
Realized capital losses 13,235 3,855
--------- ---------
Net cash provided by operating activities 327,655 105,501
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities matured/called -
available for sa1e 96,985 147,594
Proceeds from fixed maturities sold -
available for sale 465,679 416,572
Proceeds from equity securities sold 120 5,370
Proceeds from other invested assets sold 10 3,261
Cost of fixed maturities acquired - available for sale (928,353) (859,060)
Cost of equity securities acquired - (9,227)
Cost of other invested assets acquired (3,048) (328)
Net (purchases) of short-term securities (72,283) (137,219)
Net (decrease) increase in unsettled
securities transactions (35,881) 18,879
--------- ---------
Net cash (used in) investing activities (376,771) (414,158)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common shares issued during the period 887 346,613
Dividends paid to shareholders (4,581) (4,102)
Borrowing on revolving credit agreement - 20,000
Repayments on revolving credit agreement - (20,000)
--------- ---------
Net cash (used in) provided by financing activities (3,694) 342,511
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,299) (3,979)
--------- ---------
Net (decrease) increase in cash (55,109) 29,875
Cash, beginning of period 208,830 71,878
--------- ---------
Cash, end of period $ 153,721 $ 101,753
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash transactions:
Income taxes paid (refunded), net $ 5,453 $ (17,397)
Interest paid $ 23,905 $ 20,299
Non-cash financing transaction:
Issuance of common shares $ 21 $ -
The accompanying notes are an integral part of the consolidated financial
statements.
6
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
1. GENERAL
As used in this document, "Group" means Everest Re Group, Ltd., "Holdings" means
Everest Reinsurance Holdings, Inc., "Everest Re" means Everest Reinsurance
Company and the "Company" means Everest Re Group, Ltd. and its subsidiaries.
The consolidated financial statements of the Company for the three months ended
March 31, 2003 and 2002 include all adjustments, consisting of normal recurring
accruals, which, in the opinion of management, are necessary for a fair
presentation of the results on an interim basis. Certain financial information,
which is normally included in annual financial statements prepared in accordance
with generally accepted accounting principles in the United States of America,
has been omitted since it is not required for interim reporting purposes. The
year-end consolidated balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles in the United States of America. The results for the three
months ended March 31, 2003 and 2002 are not necessarily indicative of the
results for a full year. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the years ended December 31, 2002, 2001 and 2000 included in the Company's
most recent Form 10-K filing.
2. CAPITAL RESOURCES
On July 30, 2002, the Company filed a shelf registration statement on Form S-3
with the Securities and Exchange Commission, which provides for the issuance of
up to $475.0 million of securities. Generally, under this shelf registration
statement, Group was authorized to issue common shares, preferred shares, debt,
warrants and hybrid securities, Holdings was authorized to issue debt securities
and warrants and Everest Re Capital Trust was authorized to issue trust
preferred securities. This shelf registration statement became effective on
September 26, 2002.
In November 2002, pursuant to a trust agreement between Holdings and J.P. Morgan
Chase Bank, the property trustee, and Chase Manhattan Bank USA, the Delaware
trustee, Capital Trust completed a public offering of $210.0 million of 7.85%
trust preferred securities, resulting in net proceeds of $203.4 million. The
proceeds of the issuance were used to purchase $210 million of 7.85% junior
subordinated debt securities of Holdings that will be held in trust by the
property trustee for the benefit of the holders of the trust preferred
securities. Holdings used the proceeds from the sale of the junior subordinated
debt for general corporate purposes and made capital contributions to its
operating subsidiaries.
Capital Trust will redeem all of the outstanding trust preferred securities when
the junior subordinated debt securities are paid at maturity on November 15,
2032. Holdings may elect to redeem the junior subordinated debt securities, in
whole or in part, at any time after November 14, 2007. If such an early
redemption occurs, the outstanding trust preferred securities will also be
proportionately redeemed.
7
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Distributions on the trust preferred securities are cumulative and pay quarterly
in arrears. Distributions relating to the trust preferred securities for the
period ended March 31, 2003 were $4.1 million.
On April 23, 2003, the Company expanded the size of the remaining shelf
registration to $318 million by filing under rule 462B of the Securities Act of
1933, as amended, and General Instruction IV of Form S-3 promulgated thereunder.
On the same date, the Company issued 4,480,135 of its common shares at a price
of $70.75 per share, which resulted in $317.0 million in proceeds, before
expenses of approximately $0.2 million. This transaction effectively exhausted
the September 26, 2002 shelf registration.
On November 7, 2001, the Company filed a shelf registration statement on Form
S-3 with the Securities and Exchange Commission, which provided for the issuance
of up to $575 million of common equity. On February 27, 2002, pursuant to this
registration statement, the Company completed a secondary offering of 5,000,000
of its common shares at a price of $69.25 per share, which resulted in $346.3
million of proceeds, before expenses of approximately $0.5 million, related to
the offering. The Company used the net proceeds for working capital and general
corporate purposes. The remaining amount available under this shelf registration
statement as of September 30, 2002 was $228.7 million. On October 2, 2002, the
Company filed a post-effective amendment to this registration statement that
removed the remaining securities from registration.
3. EARNINGS PER COMMON SHARE
Net income per common share has been computed as follows:
(shares and dollar amounts in thousands
except per share amounts) Three Months Ended
March 31,
2003 2002
-------- --------
Net income (numerator) $ 94,367 $ 61,061
======== ========
Weighted average common and effect of
dilutive shares used in the computation of
net income per share:
Average shares outstanding -
basic (denominator) 50,897 48,108
Effect of dilutive shares 624 979
-------- --------
Average shares outstanding -
diluted (denominator) 51,521 49,087
Net income per common share:
Basic $ 1.85 $ 1.27
Diluted $ 1.83 $ 1.24
8
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
As of March 31, 2003 and 2002, options to purchase 697,000 and 2,000 shares of
common stock, respectively, were outstanding but were not included in the
computation of diluted earnings per share for the three month period ended on
such dates, because the options' exercise price was greater than the average
market price of the common shares during the period.
On May 22, 2002, shareholders of the Company approved the 2002 Stock Incentive
Plan ("The 2002 Plan"), which replaces the 1995 stock incentive plan for key
employees ("The 1995 Employee Plan"). The 2002 Plan provides for a maximum of
4,000,000 shares of common stock to be awarded to employees of the Company. With
the adoption of The 2002 Plan, no further awards will be granted under The 1995
Employee Plan.
In the third quarter of 2002, the Company adopted prospectively Financial
Accounting Standards Board ("FASB") Financial Accounting Standard No. 123, as
amended, "Accounting for Stock-Based Compensation - Transition and Disclosure".
The pre-tax impact of adopting this standard on the Company's statement of
operations for the three months ended March 31, 2003 was $552,262 or $0.01 per
diluted share.
4. CONTINGENCIES
In the ordinary course of business, the Company is involved in lawsuits,
arbitrations and other formal and informal dispute resolution procedures, the
outcomes of which will determine the Company's rights and obligations under
insurance and reinsurance agreements and other more general contracts. In some
disputes, the Company seeks to enforce its rights under an agreement or to
collect funds owing to it. In other disputes, the Company is resisting attempts
by others to collect funds or enforce alleged rights. Such disputes are resolved
through formal and informal means, including litigation and arbitration.
In all such matters, the Company believes that its positions are legally and
commercially reasonable. The Company also regularly evaluates those positions,
and where appropriate, establishes or adjusts insurance reserves to reflect its
evaluation. The Company's aggregate reserves take into account the possibility
that the Company may not ultimately prevail in each and every disputed matter.
The Company believes its aggregate reserves reduce the potential that an adverse
resolution of one or more of these matters, at any point in time, would have a
material impact on the Company's financial condition or results of operations.
However, there can be no assurances that adverse resolutions of such matters in
any one period or in the aggregate will not result in a material adverse effect
on the Company's results of operations.
The Company does not believe that there are any other material pending legal
proceedings to which it or any of its subsidiaries or their properties are
subject.
9
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
The Prudential Insurance Company of America ("The Prudential") sells annuities,
which are purchased by property and casualty insurance companies to settle
certain types of claim liabilities. In 1993 and prior years, the Company, for a
fee, accepted the claim payment obligation of these property and casualty
insurers, and, concurrently, became the owner of the annuity or assignee of the
annuity proceeds. In these circumstances, the Company would be liable if The
Prudential were unable to make the annuity payments. The estimated cost to
replace all such annuities for which the Company was contingently liable at
March 31, 2003 was $151.1 million.
The Company has purchased annuities from an unaffiliated life insurance company
with an A+ (Superior) rating from A.M. Best to settle certain claim liabilities
of the Company. Should the life insurance company become unable to make the
annuity payments, the Company would be liable for those claim liabilities. The
estimated cost to replace such annuities at March 31, 2003 was $15.1 million.
5. OTHER COMPREHENSIVE INCOME (LOSS)
The Company's other comprehensive income (loss) is comprised as follows:
(dollar amounts in thousands) Three Months Ended
March 31,
2003 2002
-----------------------
Net unrealized appreciation
(depreciation) of investments,
net of deferred income taxes $ 26,473 $ (67,139)
Currency translation adjustments, net
of deferred income taxes
3,515 (987)
-----------------------
Other comprehensive income (loss), net of
deferred income taxes $ 29,988 $ (68,126)
=======================
10
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
6. CREDIT LINE
On December 21, 1999, Holdings entered into a three-year senior revolving credit
facility with a syndicate of lenders (the "Credit Facility"). On November 21,
2002, the maturity date of the Credit Facility was extended to December 19,
2003. Wachovia Bank, National Association (formerly First Union National Bank)
is the administrative agent for the Credit Facility. The Credit Facility is used
for liquidity and general corporate purposes. The Credit Facility provides for
the borrowing of up to $150.0 million with interest at a rate selected by
Holdings equal to either (1) the Base Rate (as defined below) or (2) an adjusted
London InterBank Offered Rate ("LIBOR") plus a margin. The Base Rate is the
higher of the rate of interest established by Wachovia Bank from time to time as
its prime rate or the Federal Funds rate plus 0.5% per annum. The amount of
margin and the fees payable for the Credit Facility depend upon Holding's senior
unsecured debt rating. Group has guaranteed Holdings' obligations under the
Credit Facility.
The Credit Facility agreement requires the Company to maintain a debt to capital
ratio of not greater than 0.35 to 1, Holdings to maintain a minimum interest
coverage ratio of 2.5 to 1 and Everest Re to maintain statutory surplus at
$850.0 million plus 25% of future aggregate net income and 25% of future
aggregate capital contributions. As of March 31, 2003, the Company was in
compliance with these requirements.
During the three months ended March 31, 2003, Holdings made no payments and no
borrowings on the Credit Facility. For the period ended March 31, 2002, Holdings
made a payment on the Credit Facility of $20.0 million and had new Credit
Facility borrowings of $20.0 million. As of March 31, 2003 and 2002, Holdings
had outstanding Credit Facility borrowings of $70.0 million and $105.0 million,
respectively. Interest expense incurred in connection with these borrowings was
$0.4 million and $0.9 million for the periods ended March 31, 2003 and 2002,
respectively.
7. LETTERS OF CREDIT
The Company has arrangements available for the issuance of letters of credit,
which letters are generally collateralized by the Company's cash and
investments. At March 31, 2003 and 2002, $154.7 million and $10.3 million of
letters of credit were issued and outstanding under these arrangements,
generally supporting reinsurance provided by the Company's non-U.S. operations.
The following table summarizes the Company's letters of credit as of March 31,
2003. All dollar amounts are in thousands.
11
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Year of
Bank Commitment In Use Expiry
- ---------------- ---------- -------- ----------
Citibank $ 100,000 $ 25,411 12/31/2003
$ 63,331 12/31/2006
Wachovia $ 100,000 $ - N/A
Citibank (London) Individual $ 952 12/31/2003
$ 3,167 01/28/2005
$ 55,491 12/31/2006
$ 6,333 12/31/2007
8. SENIOR NOTES
During the first quarter of 2000, Holdings completed a public offering of $200.0
million in principal amount of 8.75% senior notes due March 15, 2010 and $250.0
million in principal amount of 8.5% senior notes due March 15, 2005.
Interest expense incurred in connection with these senior notes was $9.7 and
$9.7 million, respectively, for the three months ended March 31, 2003 and 2002.
9. SEGMENT REPORTING
The Company, through its subsidiaries, operates in five segments: U.S.
Reinsurance, U.S. Insurance, Specialty Underwriting, International and Bermuda.
The U.S. Reinsurance operation writes property and casualty reinsurance on both
a treaty and facultative basis through reinsurance brokers as well as directly
with ceding companies within the United States. The U.S. Insurance operation
writes property and casualty insurance primarily through general agent
relationships and surplus lines brokers within the United States. The Specialty
Underwriting operation writes accident and health, marine, aviation and surety
business within the United States and worldwide through brokers and directly
with ceding companies. The International operation writes property and casualty
reinsurance through the Company's branches in London, Canada, and Singapore, in
addition to foreign business written through the Company's New Jersey
headquarters and Miami office. The Bermuda operation writes property, casualty,
life and annuity business through brokers and directly with ceding companies.
These segments are managed in a carefully coordinated fashion with strong
elements of central control, including with respect to capital, investments and
support operations. As a result, management monitors and evaluates the financial
performance of these operating segments based upon their underwriting gain or
loss ("underwriting results"). The Company utilizes inter-affiliate reinsurance
and such reinsurance does not impact segment results, since business is
generally reported within the segment in which the business was first produced.
12
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Underwriting results include earned premium less losses and loss adjustment
expenses ("LAE") incurred, commission and brokerage expenses and other
underwriting expenses.
The Company does not maintain separate balance sheet data for its operating
segments. Accordingly, the Company does not review and evaluate the financial
results of its operating segments based upon balance sheet data.
The following tables present the relevant underwriting results for the operating
segments for the three months ended March 31, 2003 and 2002.
U.S. Reinsurance
- ----------------------------------------------------------------------------------------------------------
(dollar values in thousands) Three Months Ended
March 31,
2003 2002
--------------------------
Earned premiums $ 261,188 $ 176,558
Incurred losses and loss adjustment
expenses 177,410 123,574
Commission and brokerage 60,670 45,989
Other underwriting expenses 4,906 4,169
--------------------------
Underwriting gain $ 18,202 $ 2,826
==========================
U.S. Insurance
- ----------------------------------------------------------------------------------------------------------
(dollar values in thousands) Three Months Ended
March 31,
2003 2002
--------------------------
Earned premiums $ 183,106 $ 108,845
Incurred losses and loss adjustment
expenses 129,995 80,697
Commission and brokerage 36,206 23,697
Other underwriting expenses 7,885 4,740
--------------------------
Underwriting gain (loss) $ 9,020 ($ 289)
==========================
13
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Specialty Underwriting
- ---------------------------------------------------------------------------------------------------------
(dollar values in thousands) Three Months Ended
March 31,
2003 2002
-------------------------
Earned premiums $ 124,525 $ 114,369
Incurred losses and loss adjustment
expenses 98,893 86,593
Commission and brokerage 35,129 33,242
Other underwriting expenses 1,338 1,366
-------------------------
Underwriting (loss) ($ 10,835) ($ 6,832)
=========================
International
- ---------------------------------------------------------------------------------------------------------
(dollar values in thousands) Three Months Ended
March 31,
2003 2002
-------------------------
Earned premiums $ 142,897 $ 87,275
Incurred losses and loss adjustment
expenses 85,351 57,292
Commission and brokerage 23,085 16,880
Other underwriting expenses 3,146 3,009
-------------------------
Underwriting gain $ 31,315 $ 10,094
=========================
Bermuda Operations
- ---------------------------------------------------------------------------------------------------------
(dollar values in thousands) Three Months Ended
March 31,
2003 2002
-------------------------
Earned premiums $ 33,154 $ 4,161
Incurred losses and loss adjustment
expenses 21,822 4,350
Commission and brokerage 7,716 1,201
Other underwriting expenses 989 374
-------------------------
Underwriting gain (loss) $ 2,627 ($ 1,764)
=========================
14
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
The following table reconciles the underwriting results for the operating
segments to income before tax as reported in the consolidated statements of
operations and comprehensive income.
----------------------------
(dollar values in thousands) Three Months Ended
March 31,
2003 2002
----------------------------
Underwriting gain $ 50,329 $ 4,035
Net investment income 93,377 85,540
Net realized capital (loss) (13,235) (3,855)
Net derivative (expense) (2,700) (250)
Corporate expenses (467)
(1,599)
Interest expense (10,091) (10,637)
Distributions on Trust
Preferred Securities (4,121) -
Other (expense) income (1,147) 1,337
----------------------------
Income before taxes $ 110,813 $ 75,703
============================
The Company produces business in its United States, Bermuda and international
operations. The net income and assets of the individual foreign countries in
which the Company writes business are not identifiable in the Company's
financial records. The largest country, other than the United States, in which
the Company writes business is the United Kingdom, with $ 67.4 million of
written premiums for the three months ended March 31, 2003. No other country
represented more than 5% of the Company's revenues.
10. DERIVATIVES
The Company has in its product portfolio three credit default swaps, which it no
longer offers, and five specialized equity put options. These products meet the
definition of a derivative under Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133").
The Company's position in these contracts is unhedged and is accounted for as a
derivative in accordance with FAS 133. Accordingly, these contracts are carried
at fair value with changes in fair value recorded in the statement of
operations.
15
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
11. NEW ACCOUNTING PRONOUNCEMENT
In June 2001, the FASB issued Financial Accounting Standard 142, "Goodwill and
Other Intangible Assets" ("FAS 142"). FAS 142 established new accounting and
reporting standards for acquired goodwill and other intangible assets. It
requires that an entity determine if other intangible assets have an indefinite
useful life or a finite useful life. Goodwill and those intangible assets with
indefinite useful lives are not subject to amortization and must be tested at
least annually for impairment. Those with finite useful lives are subject to
amortization and must be tested annually for impairment. This statement is
effective for all fiscal quarters of all fiscal years beginning after December
15, 2001. The Company adopted FAS 142 on January 1, 2002. The implementation of
this statement has not had a material impact on the financial position, results
of operations or cash flows of the Company.
12. RELATED-PARTY TRANSACTIONS
During the normal course of business, the Company, through its affiliates,
engages in reinsurance and brokerage and commission business transactions which
management believes to be at arm's-length with companies controlled by or
affiliated with one of its outside directors. Such transactions, individually
and in the aggregate, are immaterial to the Company's financial condition,
results of operations and cash flows.
13. SUBSEQUENT EVENTS
On April 23, 2003, the Company expanded the size of the remaining shelf
registration by filing under rule 462B of the Securities Act of 1933, as
amended, and General Instruction IV of Form S-3 promulgated thereunder. On the
same date, the Company issued 4,480,135 of its common shares at a price of
$70.75 per share, which resulted in $317.0 million in proceeds, before expenses
of approximately $0.2 million.
16
PART I - ITEM 2
EVEREST RE GROUP, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
INDUSTRY CONDITIONS
The worldwide reinsurance and insurance businesses are highly competitive yet
cyclical by product and market. The terrorist attacks on September 11, 2001 (the
"September 11 attacks") resulted in losses which reduced industry capacity and
were of sufficient magnitude to cause most individual companies to reassess
their capital position, tolerance for risk, exposure control mechanisms and the
pricing terms and conditions at which they are willing to take on risk. The
gradual and variable improving trend that had been apparent through 2000 and
earlier in 2001 firmed significantly. This firming generally took the form of
immediate and significant upward pressure on prices, more restrictive terms and
conditions and a reduction of coverage limits and capacity availability. Such
pressures were widespread with variability depending on the product and markets
involved, but mainly depending on the characteristics of the underlying risk
exposures. The magnitude of the changes was sufficient to create temporary
disequilibrium in some markets as individual buyers and sellers adapted to
changes in both their internal and market dynamics.
Through 2002, our markets, and reinsurance and insurance markets in general,
continued to firm, reflecting the continuing implications of losses arising from
the September 11 attacks as well as aggregate company reactions to broad and
growing recognition that competition in the late 1990's reached extremes in many
classes and markets, which ultimately led to inadequate pricing and overly broad
terms, conditions and coverages. The effect of these extremes, which continues
to become apparent through excessive loss emergence, varies widely by company
depending on product offerings, markets accessed, underwriting and operating
practices, competitive strategies and business volumes. Across all market
participants, however, the aggregate effect was impaired financial results and
erosion of the industry capital base. Coupled with deteriorating investment
market conditions and results, and renewed concerns regarding longer term
industry specific issues, including asbestos exposure and sub-par capital
returns, these financial impacts introduced substantial, and in some cases
extreme, pressure for the initiation and/or strengthening of corrective action
by individual market participants. These pressures, aggregating across industry
participants, resulted in firming prices, more restrictive terms and conditions,
tightened coverage availability across most classes and markets and increasing
concern with respect to the financial security of insurance and reinsurance
providers.
Thusfar in 2003 these general trends have continued, generally sustaining upward
pressure on pricing, continued constriction of terms, conditions and coverages
and constrained capacity. There are signs that pressures for incremental firming
may be beginning to abate for some property classes, but these are offset by
clear signs that pressures for incremental firming continue to build for
casualty classes in general. More broadly, the industry remains exposed to the
fundamental issues that negatively impacted 2002, including difficult investment
17
market conditions and adverse loss emergence, both of which have continued to
erode the industry's aggregate financial performance and perceptions of the
financial strength of industry participants. These factors indicate the current
strong market conditions are likely to persist until further corrective action
combines with improved investment conditions to restore more normal competitive
conditions.
These current trends reflect a clear reversal of the general trend from 1987
through 1999 toward increasingly competitive global market conditions across
most lines of business, as reflected by decreasing prices and broadening
contract terms. The earlier trend resulted from a number of factors, including
the emergence of significant reinsurance capacity in Bermuda, changes in the
Lloyd's market, consolidation and increased capital levels in the insurance and
reinsurance industries, as well as the emergence of new reinsurance and
financial products addressing traditional exposures in alternative fashions.
Many of these factors continue to operate and may take on additional importance
as the result of the firming market conditions that have emerged. As a result,
although the Company is encouraged by recent industry developments, which
operate to its advantage, and more generally, current market conditions, the
Company cannot predict with any reasonable certainty whether and to what extent
these favorable conditions will persist.
SEGMENT INFORMATION
The Company, through its subsidiaries, operates in five segments: U.S.
Reinsurance, U.S. Insurance, Specialty Underwriting, International and Bermuda.
The U.S. Reinsurance operation writes property and casualty reinsurance on both
a treaty and facultative basis through reinsurance brokers as well as directly
with ceding companies within the United States. The U.S. Insurance operation
writes property and casualty insurance primarily through general agent
relationships and surplus lines brokers within the United States. The Specialty
Underwriting operation writes accident and health, marine, aviation and surety
business within the United States and worldwide through brokers and directly
with ceding companies. The International operation writes property and casualty
reinsurance through the Company's branches in London, Canada, and Singapore, in
addition to foreign business written through the Company's New Jersey
headquarters and Miami office. The Bermuda operation writes property, casualty,
life and annuity business through brokers and directly with ceding companies.
These segments are managed in a carefully coordinated fashion with strong
elements of central control, including with respect to capital, investments and
support operations. As a result, management monitors and evaluates the financial
performance of these operating segments principally based upon their
underwriting results. The Company utilizes inter-affiliate reinsurance but such
reinsurance does not impact segment results, since business is generally
reported within the segment in which the business was first produced.
18
PREMIUMS. Gross premiums written increased 68.0% to $1.002 billion in the three
months ended March 31, 2003 from $596.3 million in the three months ended March
31, 2002, as the Company took advantage of the general firming of rates, terms
and conditions and selected growth opportunities, while continuing to maintain a
disciplined underwriting approach. Premium growth areas included a 88.3% ($160.6
million) increase in the U.S. Reinsurance operation, principally attributable to
growth across property and casualty lines, a 77.8% ($74.0 million) increase in
the International operation, mainly attributable to growth in the London, Canada
and Latin American markets, a 56.2% ($111.8 million) increase in the U.S.
Insurance operation, principally attributable to growth in workers' compensation
insurance, a 12.6% ($14.8 million) increase in the Specialty underwriting
operation and a $44.3 million increase in the Bermuda operation. Although
premium volumes have increased significantly, the Company continued to decline
business that did not meet its objectives regarding underwriting profitability.
Ceded premiums increased to $49.9 million in the three months ended March 31,
2003 from $31.3 million in the three months ended March 31, 2002, principally
reflecting growth in specific reinsurance of the Company's primary insurance
business.
Net premiums written increased by 68.5% to $951.9 million in the three months
ended March 31, 2003 from $565.0 million in the three months ended March 31,
2002, reflecting the increase in gross premiums written, which exceeded the
growth in ceded premiums.
PREMIUM REVENUES. Net premiums earned increased by 51.6% to $744.9 million in
the three months ended March 31, 2003 from $491.2 million in the three months
ended March 31, 2002. Contributing to this increase was a 68.2% ($74.3 million)
increase in the U.S. Insurance operation, a 63.7% ($55.6 million) increase in
the International operation, a 47.9% ($84.6 million) increase in the U.S.
Reinsurance operation, an 8.9% ($10.2 million) increase in the Specialty
underwriting, and a $29.0 million increase in the Bermuda operation. All of
these changes reflect period to period changes in net written premiums and
business mix together with normal variability in earnings patterns. Business mix
changes occur not only as the Company shifts emphasis between products, lines of
business, distribution channels and markets but also as individual contracts
renew or non-renew, almost always with changes in coverage, structure, prices
and/or terms, and as new contracts are accepted with coverages, structures,
prices and/or terms different from those of expiring contracts. As premium
reporting and earnings and loss and commission characteristics derive from the
provisions of individual contracts, the continuous turnover of individual
contracts, arising from both strategic shifts and day to day underwriting, can
and does introduce appreciable background variability in various underwriting
line items.
EXPENSES. Incurred LAE increased by 45.7% to $513.5 million in the three months
ended March 31, 2003 from $352.5 million in the three months ended March 31,
2002. The increase in incurred losses and LAE was principally attributable to
the increase in net premiums earned, partially offset by a decrease in
catastrophe losses and also reflects the impact of changes in the Company's mix
of business.
19
Incurred losses and LAE include catastrophe losses, which include the impact of
both current period events and favorable and unfavorable development on prior
period events, and are net of reinsurance. A catastrophe is an event that causes
a pre-tax loss on property exposures of at least $5.0 million and has an event
date of January 1, 1988 or later. Catastrophe losses, net of contract specific
cessions but before cessions under the corporate retrocessional program, were
$0.1 million in the three months ended March 31, 2003 compared to $1.4 million
in the three months ended March 31, 2002. Incurred losses and LAE for the three
months ended March 31, 2003 reflected ceded losses and LAE of $10.4 million
compared to ceded losses and LAE in the three months ended March 31, 2002 of
$38.0 million .
Contributing to the increase in incurred losses and LAE in the three months
ended March 31, 2003 from the three months ended March 31, 2002 were a 61.1%
($49.3 million) increase in the U.S Insurance operation, a 49.0% ($28.1 million)
increase in the International operation, a 43.6% ($53.8 million) increase in
U.S. Reinsurance operations, a 14.2% ($12.3 million) increase in Specialty
underwriting, and a $17.5 million increase in the Bermuda operation. Incurred
losses and LAE for each operation were also impacted by variability relating to
changes in the level of premium volume and the mix of business by class and
type.
The Company's loss and LAE ratio ("loss ratio"), which is calculated by dividing
incurred losses and LAE by net premiums earned, decreased by 2.9 percentage
points to 68.9 % in the three months ended March 31, 2003 from 71.8% in the
three months ended March 31, 2002, reflecting the premiums earned and incurred
losses and LAE discussed above, as well as the general firming of rates, terms
and conditions.
The following table shows the loss ratios for each of the Company's operating
segments for the three months ended March 31, 2003 and 2002.
The loss ratios for all operations were impacted by the expense factors noted
above.
Operating Segment Loss Ratios
- --------------------------------------------------------------------------
Segment 2003 2002
- --------------------------------------------------------------------------
U.S. Reinsurance 68.0% 70.0%
U.S. Insurance 71.0% 74.1%
Specialty Underwriting 79.4% 75.7%
International 59.7% 65.6%
Bermuda 65.8% 104.5%
Underwriting expenses increased by 35.2% to $182.7 million in the three months
ended March 31, 2003 from $135.1 million in the three months ended March 31,
2002. Commission, brokerage, taxes and fees increased by $41.8 million,
principally reflecting increases in premium volume and changes in the mix of
business, together with the Company's emphasis on acquisition cost control.
Other underwriting expenses increased by $5.7 million as the Company expanded
operations to support its increased business volume.
20
Contributing to these underwriting expense increases were a 55.0% ($15.7
million) increase in the U.S. Insurance operations, a 31.9% ($6.3 million)
increase in the International operation, a 30.7% ($15.4 million) increase in the
U.S. Reinsurance operation, a 5.4% ($1.9 million) increase in the Specialty
underwriting operation, and a $7.1 million increase in the Bermuda operation.
The changes for each operation's expenses principally resulted from changes in
commission expenses related to changes in premium volume and business mix by
class and type and, in some cases, changes in the use of specific reinsurance
and the underwriting performance of the underlying business. The Company's
expense ratio, which is calculated by dividing underwriting expenses by net
premiums earned, was 24.5% for the three months ended March 31, 2003 compared to
27.5% for the three months ended March 31, 2002.
The Company's combined ratio, which is the sum of the loss and expense ratios,
decreased by 5.8 percentage points to 93.5% in the three months ended March 31,
2003 compared to 99.3% in the three months ended March 31, 2002. The following
table shows the combined ratios for each of the Company's operating segments for
the three months ended March 31, 2003 and 2002. The combined ratios for all
operations were impacted by the loss and expense ratio variability noted above.
Operating Segment Combined Ratios
- ---------------------------------------------------------------------------
Segment 2003 2002
- ---------------------------------------------------------------------------
U.S. Reinsurance 93.0% 98.4%
U.S. Insurance 95.1% 100.3%
Specialty Underwriting 108.7% 106.0%
International 78.1% 88.4%
Bermuda 92.1% 142.4%
INVESTMENT RESULTS. Net investment income increased 9.2% to $93.4 million in the
three months ended March 31, 2003 from $85.5 million in the three months ended
March 31, 2002, principally reflecting the effects of investing $958.3 million
of cash flow from operations for the twelve months ended March 31, 2003, $345.8
million of net proceeds from an offering of common shares in February 2002, and
$210.0 million of net proceeds from the issuance of trust preferred securities
in November 2002, all partially offset by the effects of the lower interest rate
environment.
21
The following table shows a comparison of various investment yields for the
periods indicated:
2003 2002
------------------------
Imbedded pre-tax yield of cash and invested
assets at March 31, 2003 and December 31, 2002 5.2% 5.3%
Imbedded after-tax yield of cash and invested
assets at March 31, 2003 and December 31, 2002 4.6% 4.6%
Annualized pre-tax yield on average cash and
invested assets for the three months ended March 31,
2003 and 2002 5.3% 5.9%
Annualized after-tax yield on average cash and
invested assets for the three months ended March 31,
2003 and 2002 4.5% 4.8%
Net realized capital losses were $13.2 million in the three months ended March
31, 2003, reflecting realized capital losses on the Company's investments of
$27.9 million, which included $21.2 million relating to write-downs in the value
of securities deemed to be impaired on an other than temporary basis, partially
offset by $14.7 million of realized capital gains, compared to net realized
capital losses of $3.9 million in the three months ended March 31, 2002. The net
realized capital losses in the three months ended March 31, 2002 reflected
realized capital losses of $9.7 million, partially offset by $5.8 million of
realized capital gains, which included $3.8 million relating to write-downs in
the value of securities deemed to be impaired on an other than temporary basis.
Interest expense for the three months ended March 31, 2003 was $10.1 million
compared to $10.6 million for the three months ended March 31, 2002. Interest
expense for the three months ended March 31, 2003 reflected $9.7 million
relating to Holdings' issuance of senior notes and $0.4 million relating to
Holdings' borrowings under its revolving credit facility. Interest expense for
the three months ended March 31, 2002 reflected $9.7 million relating to
Holdings' issuance of senior notes and $0.9 million relating to Holdings'
borrowings under its revolving credit facility.
Distributions on the trust preferred securities are cumulative and pay quarterly
in arrears. Distributions relating to the trust preferred securities for the
period ended March 31, 2003 were $4.1 million.
Other expense for the three months ended March 31, 2003 was $1.1 million
compared to other income of $1.3 million for the three months ended March 31,
2002. Significant contributors to other expense for the three months ended March
31, 2003 were foreign exchange losses, normal provisions for uncollectible audit
premiums in the U.S. Insurance operation and the amortization of deferred
expenses relating to Holdings' issuance of senior notes. Other income for the
three months ended March 31, 2002 principally included foreign exchange gains
and fee income.
The Company has a small number of credit default swaps, which it no longer
writes, and specialized equity put options in its product portfolio. These
products meet the definition of a derivative under Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"). Net derivative expense from these derivative
transactions for the three months ending March 31, 2003, was $2.7 million
principally reflecting changes in fair value of the specialized equity put
options, compared
22
to $0.3 million for the three months ending March 31, 2002, which principally
related to the discontinued credit default swaps.
INCOME TAXES. The Company recognized income tax expense of $16.4 million in the
three months ended March 31, 2003 compared to $14.6 million in the three months
ended March 31, 2002. The increase in taxes generally reflects the improved
underwriting and investment income results, partially offset by the increase in
realized capital losses.
NET INCOME. Net income was $94.4 million in the three months ended March 31,
2003 compared to net income of $61.1 million in the three months ended March 31,
2002, reflecting the factors noted above.
FINANCIAL CONDITION
CASH AND INVESTED ASSETS. Aggregate invested assets, including cash and
short-term investments, were $7,583.1 million at March 31, 2003 and $7,259.1
million at December 31, 2002. The increase in cash and invested assets resulted
primarily from $327.7 million in cash flows from operations and unrealized
appreciation on investments of $35.5 million, with an offset of $13.2 million
related to realized capital losses. Gross unrealized appreciation and
depreciation across the Company's investment portfolio were $380.5 million and
$35.1 million, respectively, at March 31, 2003 compared to gross unrealized
appreciation and depreciation at December 31, 2002 of $356.5 million and $46.8
million, respectively.
LOSS AND LAE RESERVES. Gross loss and LAE reserves totaled $5,100.2 million at
March 31, 2003 and $4,905.6 million at December 31, 2002. The increase during
the three months ended March 31, 2003 was primarily attributable to increased
earned premiums and normal variability in claim settlements. Reinsurance
receivables were $1,097.0 million at March 31, 2003 and $1,116.4 million at
December 31, 2002, with the decrease in reinsurance receivables reflecting the
impact of normal activity as respects specific reinsurance protections. At March
31, 2003, $440.0 million, or 40.1%, was receivable from subsidiaries of London
Reinsurance Group. These receivables are effectively secured by a combination of
letters of credit and funds held arrangements under which the Company has
retained the premium payments due the retrocessionaires, recognized liabilities
for such amounts and reduced such liabilities as payments are due from the
retrocessionaire. In addition, $145.0 million, or 13.2%, was receivable from
Continental Insurance Company, which is partially secured by funds held
arrangements, and $84.5 million or 7.7%, was receivable from Prudential Property
and Casualty Insurance Company ("Prupac"), whose obligations are guaranteed by
The Prudential. No other retrocessionaire accounted for more than 5% of the
Company's receivables.
ASBESTOS AND ENVIRONMENTAL RESERVES. The Company continues to receive claims
under expired contracts which assert alleged injuries and/or damages relating to
or resulting from environmental pollution and hazardous substances, including
asbestos. The Company's asbestos claims typically involve potential liability
for bodily injury from exposure to asbestos or for property damage resulting
from asbestos or products containing asbestos. The Company's environmental
claims typically involve potential liability for (a) the mitigation or
remediation of environmental contamination or (b) bodily injury or property
damages caused by the release of hazardous substances into the land, air or
water.
23
The Company's reserves include an estimate of the Company's ultimate liability
for asbestos and environmental ("A&E") claims for which ultimate value cannot be
estimated using traditional reserving techniques. There are significant
uncertainties in estimating the amount of the Company's potential losses from
A&E claims. Among the complications are: (a) potentially long waiting periods
between exposure and manifestation of any bodily injury or property damage; (b)
difficulty in identifying sources of asbestos or environmental contamination;
(c) difficulty in properly allocating responsibility and/or liability for
asbestos or environmental damage; (d) changes in underlying laws and judicial
interpretation of those laws; (e) potential for an asbestos or environmental
claim to involve many insurance providers over many policy periods; (f) long
reporting delays, both from insureds to insurance companies and ceding companies
to reinsurers; (g) historical data on A&E losses, which is more limited and
variable than historical information on other types of casualty claims; (h)
questions concerning interpretation and application of insurance and reinsurance
coverage; and (i) uncertainty regarding the number and identity of insureds with
potential asbestos or environmental exposure.
With respect to asbestos claims in particular, several additional factors
further compound the difficulty in estimating the Company's liability. These
include: (a) the aggressiveness of the plaintiff bar; (b) claims filed by
individuals with no functional injury from asbestos, claims with little to no
financial value; (c) the number and significance of bankruptcy filings by
companies as a result of asbestos claims; (d) claim filings against defendants
formerly regarded as "peripheral"; (e) concentrations of claims in a small
number of states that favor plaintiffs; (f) the number of claims that might
impact the general liability portion of insurance policies rather than the
product liability portion; (g) responses in which specific courts have adopted
measures to ameliorate the worst procedural abuses; and (h) the potential that
the U. S. Congress may consider legislation to address the asbestos litigation
issue.
Management believes that these factors continue to render reserves for A&E
losses significantly less subject to traditional actuarial methods than are
reserves on other types of losses. Given these uncertainties, management
believes that no meaningful range for such ultimate losses can be established.
The Company establishes reserves to the extent that, in the judgment of
management, the facts and prevailing law reflect an exposure for the Company or
its ceding companies.
In connection with the acquisition of Mt. McKinley Insurance Company ("Mt.
McKinley"), which has significant exposure to A&E claims, Prupac, a subsidiary
of The Prudential, provided reinsurance to Mt. McKinley covering 80% ($160.0
million) of the first $200.0 million of any adverse development of Mt.
McKinley's reserves as of September 19, 2000 and The Prudential guaranteed
Prupac's obligations to Mt. McKinley. Through March 31, 2003, cessions under
this reinsurance agreement have reduced the available remaining limits to $75.6
million net of coinsurance. Due to the uncertainties discussed above, the
ultimate losses may vary materially from current loss reserves and, depending on
coverage under the Company's various reinsurance arrangements, could have a
material adverse effect on the Company's future financial condition, results of
operations and cash flows.
24
The following table shows the development of prior year A&E reserves on both a
gross and net of retrocessional basis for the three months ended March 31, 2003
and 2002:
(dollar amounts in thousands) Three Months Ended
March 31,
2003 2002
--------------------------
Gross basis:
Beginning of period reserves $667,922 $644,390
Incurred losses 17,673 10,000
Paid losses (18,635) (22,612)
--------------------------
End of period reserves $666,960 $631,778
==========================
Net basis:
Beginning of period reserves $527,462 $568,592
Incurred losses 11,360 2,477
Paid losses (17,358) (20,493)
--------------------------
End of period reserves $521,464 $550,576
==========================
At March 31, 2003, the gross reserves for A&E losses were comprised of $118.3
million representing case reserves reported by ceding companies, $62.1 million
representing additional case reserves established by the Company on assumed
reinsurance claims, $256.1 million representing case reserves established by the
Company on direct excess insurance claims, including Mt. McKinley, and $230.4
million representing incurred but not reported ("IBNR") reserves.
Industry analysts have developed a measurement, known as the survival ratio, to
compare the A&E reserves among companies with such liabilities. The survival
ratio is typically calculated by dividing a company's current reserves by the
three-year average of paid losses, and therefore measures the number of years
that it would take to exhaust the current reserves based on historical payment
patterns. Using this measurement, the Company's net three-year A&E survival
ratio was 8.6 years at March 31, 2003. Adjusting the ratio to include the effect
of the remaining limit the reinsurance agreement with Prupac, the measure rises
to the equivalent of 9.9 years at March 31, 2003. The Company's net three year
survival ratio on its asbestos exposures is 10.4 years for the period ended
March 31, 2003. This three year survival ratio when adjusted to exclude the
coverage in place ("CIP") and actively managed claims is 14.1 years for the
period ended March 31, 2003, and when adjusted to exclude the CIP and actively
managed claims and to include stop loss protection from The Prudential was 17.4
years. Because the survival ratio was developed as a comparative measure of
reserve strength and not of absolute reserve adequacy, the Company considers,
but does not rely on, the survival ratio when evaluating its reserves
SHAREHOLDERS' EQUITY. The Company's shareholders' equity increased to $2,489.3
million as of March 31, 2003, from $2,368.6 million as of December 31, 2002,
principally reflecting net income of $94.4 million for the three months ended
March 31, 2003, together with $26.5 million of net unrealized appreciation on
the Company's investments. Dividends of $4.6 million were declared and paid by
25
the Company in the three months ended March 31, 2003. The Company did not
repurchase shares during the three months ended March 31, 2003, and has 1.73
million shares remaining under its existing repurchase authorization.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL. The Company's business operations are in part dependent on the
Company's financial strength, and the market's perception thereof, as measured
in part by shareholders' equity, which was $2,489.3 million and $2,368.6 million
at March 31, 2003 and December 31, 2002, respectively. The Company has
flexibility with respect to capitalization as the result of its perceived
financial strength, including its financial strength ratings as assigned by
independent rating agencies, and its access to the debt and equity markets. The
Company continuously monitors its capital and financial position, as well as
investment and security market conditions in general and with respect to the
Company's securities, and responds accordingly.
On July 30, 2002, the Company filed a shelf registration statement on Form S-3
with the Securities and Exchange Commission, which provides for the issuance of
up to $475.0 million of securities. Generally, under this shelf registration
statement, Group was authorized to issue common shares, preferred shares, debt,
warrants and hybrid securities, Holdings was authorized to issue debt securities
and warrants and Everest Re Capital Trust was authorized to issue trust
preferred securities. This shelf registration statement became effective on
September 26, 2002.
In November 2002, pursuant to a trust agreement between Holdings and JPMorgan
Chase Bank, the property trustee, and Chase Manhattan Bank USA, the Delaware
trustee, Capital Trust completed a public offering of $210.0 million of 7.85%
trust preferred securities, resulting in net proceeds of $203.4 million. The
proceeds of the issuance were used to purchase $210 million of 7.85% junior
subordinated debt securities of Holdings that will be held in trust by the
property trustee for the benefit of the holders of the preferred securities.
Holdings used the proceeds from the sale of the junior subordinated debt for
general corporate purposes and made capital contributions to its operating
subsidiaries.
Holdings may elect to redeem the junior subordinated debt securities, in whole
or in part, at any time after November 14, 2007. If such an early redemption
occurs, the outstanding preferred securities will also be proportionately
redeemed. If there is no early redemption, Capital Trust will redeem all of the
outstanding preferred securities when the junior subordinated debt securities
are paid at maturity on November 15, 2032.
Distributions on the preferred securities are cumulative and pay quarterly in
arrears. Distributions relating to the preferred securities for the year ended
March 31, 2003 were $4.1 million.
On April 23, 2003, the Company expanded the size of the remaining shelf
registration to $318 million by filing under rule 462B of the Securities Act of
1933, as amended, and General Instruction IV of Form S-3 promulgated thereunder.
On the same date, Company issued 4,480,135 of its common shares at a price of
$70.75 per share, which resulted in $317.0 million in proceeds, before expenses
of approximately $0.2 million. This transaction effectively exhausted the
September 26, 2002 shelf registration.
26
On November 7, 2001, the Company filed a shelf registration statement on Form
S-3 with the Securities and Exchange Commission, which provided for the issuance
of up to $575.0 million of common equity. On February 27, 2002, pursuant to this
registration statement, the Company completed an offering of 5,000,000 of its
common shares at a price of $69.25 per share, which resulted in $346.3 million
of proceeds before expenses of approximately $0.5 million related to the
offering. The Company used the net proceeds for working capital and general
corporate purposes. On October 2, 2002, the Company filed a post-effective
amendment to this registration statement that removed the remaining securities
from registration.
On March 14, 2000, Holdings completed public offerings of $200.0 million in
principal amount of 8.75% senior notes due March 15, 2010 and $250.0 million in
principal amount of 8.5% senior notes due March 15, 2005. During 2000, the net
proceeds of these offerings and additional funds were distributed by Holdings to
Group. Interest expense incurred in connection with these senior notes was $38.9
million, $38.9 million and $30.9 million for the years ended December 31, 2002,
2001 and 2000, respectively.
LIQUIDITY. The Company's current investment strategy seeks to maximize after-tax
income through a high quality, diversified, taxable bond and tax-preferenced
fixed maturity portfolio, while maintaining an adequate level of liquidity. The
Company's mix of taxable and tax-preferenced investments is adjusted
continuously, consistent with the Company's current and projected operating
results, market conditions and tax position. Additionally, the Company invests
in equity securities, which it believes will enhance the risk-adjusted total
return of the investment portfolio.
The Company's liquidity requirements are met on both a short- and long-term
basis by funds provided by premiums collected, investment income, collected
reinsurance receivable balances and the sale and maturity of investments,
together with the availability of funds under the Company's revolving credit
facility. The Company's net cash flows from operating activities were $327.7
million for the three months ended March 31, 2003, compared to $105.5 million
for the three months ended March 31, 2002.
The following table shows cash flows from operating activities, as well as the
impacts of select transactions on those cash flows, for the three months ended
March 31, 2003 and 2002.
----------------------
Three Months Ended
March 31,
2003 2002
----------------------
Cash flow from operations $ 327.7 $ 105.5
Catastrophe loss payments 20.0 15.8
Derivative settlement payments 3.6 23.6
Net tax payments 5.5 (17.4)
----------------------
Cash flow from operations, net of adjustments $ 356.8 $ 127.5
----------------------
Management believes that net cash flows from operating activities are generally
consistent with expectations given the Company's investment strategies, mix of
business and the normal variability of premium collections and the payout of
loss reserves.
27
Proceeds from sales, calls and maturities and investment asset acquisitions were
$662.8 million and $1,039.6 million, respectively, in the three months ended
March 31, 2003, compared to $591.7 million and $1,005.8 million, respectively,
in the three months ended March 31, 2002.
On December 21, 1999, Holdings entered into a three-year senior revolving credit
facility with a syndicate of lenders (the "Credit Facility"). On November 21,
2002, the maturity date of the Credit Facility was extended to December 19,
2003. Wachovia Bank, National Association (formerly First Union National Bank)
is the administrative agent for the Credit Facility. The Credit Facility is used
for liquidity and general corporate purposes. The Credit Facility provides for
the borrowing of up to $150.0 million with interest at a rate selected by
Holdings equal to either (1) the Base Rate (as defined below) or (2) an adjusted
London InterBank Offered Rate ("LIBOR") plus a margin. The Base Rate is the
higher of the rate of interest established by Wachovia Bank from time to time as
its prime rate or the Federal Funds rate plus 0.5% per annum. The amount of
margin and the fees payable for the Credit Facility depend upon Holding's senior
unsecured debt rating. Group has guaranteed Holdings' obligations under the
Credit Facility.
The Credit Facility requires Group to maintain a debt to capital ratio of not
greater than 0.35 to 1, Holdings to maintain a minimum interest coverage ratio
of 2.5 to 1 and Everest Re to maintain its statutory surplus at $850.0 million
plus 25% of aggregate net income and 25% of aggregate capital contributions. As
of March 31, 2003, the Company was in compliance with these covenants.
During the three months ended March 31, 2002, Holdings made a payment on the
Credit Facility of $20.0 million. As of March 31, 2003 and 2002, Holdings had
outstanding Credit Facility borrowings of $70.0 million and $105.0 million,
respectively. Interest expense incurred in connection with these borrowings was
$0.4 million and $0.9 million for the three months ended March 31, 2003 and
2002, respectively.
MARKET SENSITIVE INSTRUMENTS. The Securities and Exchange Commission Financial
Reporting Release #48 requires registrants to clarify and expand upon the
existing financial statement disclosure requirements for derivative financial
instruments, derivative commodity instruments, and other financial instruments
(collectively, "market sensitive instruments"). The Company does not enter into
market sensitive instruments for trading purposes.
The Company's current investment strategy seeks to maximize after-tax income
through a high quality, diversified, taxable and tax-preferenced fixed maturity
portfolio, while maintaining an adequate level of liquidity. The Company's mix
of taxable and tax-preferenced investments is adjusted continuously, consistent
with its current and projected operating results, market conditions, and tax
position. The fixed maturities in the investment portfolio are comprised of
non-trading available for sale securities. Additionally, the Company invests in
equity securities, which it believes will enhance the risk-adjusted total return
of the investment portfolio. The Company has also engaged in a small number of
credit default swaps and specialized equity options.
28
The overall investment strategy considers the scope of present and anticipated
Company operations. In particular, estimates of the financial impact resulting
from non-investment asset and liability transactions, together with the
Company's capital structure and other factors, are used to develop a net
liability analysis. This analysis includes estimated payout characteristics for
which the investments of the Company provide liquidity. This analysis is
considered in the development of specific investment strategies for asset
allocation, duration and credit quality. The change in overall market sensitive
risk exposure principally reflects the asset changes that took place during the
year, with no material change in the underlying risk characteristics.
The Company's risks associated with market sensitive instruments have not
changed materially since the period ended December 31, 2002. Although not
considered material in the context of the Company's aggregate exposure to market
sensitive instruments, the Company has issued five specialized equity put
options based on the Standard & Poor's 500 ("S&P 500") index that are market
sensitive and sufficiently unique to warrant supplemental disclosure.
During 2001, the Company sold five specialized equity put options based on the
S&P 500 index for total consideration, net of commission, of $16.9 million.
These contracts each have a single exercise date, with maturities ranging from
18 to 30 years and strike prices ranging from $1,141.21 to $1,540.63. No amounts
will be payable under these contracts if the S&P 500 index is at or above the
strike price on the exercise dates. If the S&P 500 index is lower than the
strike price on the applicable exercise date, the amount due will vary
proportionately with the percentage the index was below the strike price. Based
on historical index volatilities and trends and the March 31, 2003 index value,
the Company estimates the probability for each contract of the S&P index being
below the strike price on the exercise date is less than 15%. The theoretical
maximum payouts under the contracts would occur if on each of the exercise dates
the S&P 500 index value were zero.
As these specialized equity put options are derivatives within the framework of
FAS 133, the Company is required to report the fair value of these instruments
in its balance sheet and record any changes to fair value in its statement of
operations.
The Company has recorded fair values for its obligations on these specialized
equity put options at March 31, 2003 and December 31, 2002 of $25.1 million and
$22.4 million, respectively; however, the Company does not believe that the
ultimate settlement of these transactions is likely to require a payment that
would exceed the initial consideration received or any payment at all.
As there is no active market for these instruments, the determination of their
fair value is based on an accepted option pricing model that requires estimates
and assumptions, including those regarding volatility and expected rates of
return.
The table below estimates the impact of potential movements in interest rates
and the S&P 500 index, the principal factors affecting fair value of these
instruments, looking forward from the fair value at March 31, 2003. These are
estimates and there can be no assurances regarding future market performance.
29
As of March 31, 2003
S & P 500 Index Put Options Obligation -
Sensitivity Analysis (Dollar amounts in
millions)
Interest Rate Shift in Basis Points: -100 -50 0 50 100
----------------------------------------------------
Total Market Value $39.5 $31.6 $25.1 $19.8 $15.6
Market Value Change from Base (%) -57.4% -25.8% 0.0% 21.0% 38.0%
S & P Index Shift in Points: -200 -100 0 100 200
----------------------------------------------------
Total Market Value $36.7 $30.2 $25.1 $21.0 $17.7
Market Value Change from Base (%) -43.2% -20.4% 0.0% 16.4% 29.5%
Combined Interest Rate / S & P Index Shift:
-100/-200 -50/-100 0/0 50/100 100/200
----------------------------------------------------
Total Market Value $55.2 $37.6 $25.1 $16.4 $10.5
Market Value Change from Base (%) -120.0% -49.9% 0.0% 34.7% 58.1%
30
SAFE HARBOR DISCLOSURE. This report contains forward-looking statements within
the meaning of the U.S. federal securities laws. The Company intends these
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in the federal securities laws. In some cases, these
statements can be identified by the use of forward-looking words such as "may",
"will", "should", "could", "anticipate", "estimate", "expect", "plan",
"believe", "predict", "potential" and "intend". Forward-looking statements
contained in this report include information regarding the Company's reserves
for losses and LAE, the adequacy of the company's provision for uncollectible
balances, estimates of the Company's catastrophe exposure, and the effects of
catastrophe events on the Company's financial statements, the ability of the
Company's subsidiaries to pay dividends and the settlement costs of the
Company's specialized put options. Forward-looking statements only reflect the
company's expectations and are not guarantees of performance. These statements
involve risks, uncertainties and assumptions. Actual events or results may
differ materially from the Company's expectations. Important factors that could
cause the Company's actual results to be materially different from its
expectations include the uncertainties that surround the estimating of reserves
for losses and LAE, those discussed in Note 4 to the Financial Statements
included in this report and the risks described under the caption "Risk Factors"
in the Company's most recent Report on Form 10-K. The Company undertakes no
obligation to update or revise publicly any forward-looking statements, whether
as a result of new information, future events or otherwise.
31
PART I - ITEM 3
EVEREST RE GROUP, LTD.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
MARKET RISK INSTRUMENTS. See "Market Sensitive Instruments" in Part I - Item 2.
32
PART I - ITEM 4
EVEREST RE GROUP, LTD.
CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the disclosure controls and procedures (as defined in
Rule 13a-14c under the Securities Exchange Act of 1934 (the "Exchange Act")).
Based on their evaluation, the Chief Executive Officer and Chief Financial
Officer believe that the Company's disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. Subsequent to the date of their evaluation,
there were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
33
EVEREST RE GROUP, LTD.
OTHER INFORMATION
Part II - ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, the Company is involved in lawsuits,
arbitrations and other formal and informal dispute resolution procedures, the
outcomes of which will determine the Company's rights and obligations under
insurance and reinsurance agreements and other more general contracts. In some
disputes, the Company seeks to enforce its rights under an agreement or to
collect funds owing to it. In other disputes, the Company is resisting attempts
by others to collect funds or enforce alleged rights. Such disputes are resolved
through formal and informal means, including litigation and arbitration.
In all such matters, the Company believes that its positions are legally and
commercially reasonable. The Company also regularly evaluates those positions,
and where appropriate, establishes or adjusts insurance reserves to reflect its
evaluation. The Company's aggregate reserves take into account the possibility
that the Company may not ultimately prevail in each and every disputed matter.
The Company believes its aggregate reserves reduce the potential that an adverse
resolution of one or more of these matters, at any point in time, would have a
material impact on the Company's financial condition or results of operations.
However, there can be no assurances that adverse resolutions of such matters in
any one period or in the aggregate will not result in a material adverse effect
on the Company's results of operations.
34
Part II - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit Index:
Exhibit No. Description
- ----------- -----------------------------------------
10.1 Amendment of Employment Agreement
by and among Everest Reinsurance (Bermuda)
Ltd. and Peter Bennett, dated April 24, 2003
11.1 Statement regarding computation of per
share earnings
99.1 CEO and CFO certification of Form 10-Q
b) A report on Form 8-K dated February 20, 2003 was filed on February 20, 2003
reporting an increase to Everest Re Group, Ltd.'s quarterly shareholder dividend
and declaring a dividend.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
35
EVEREST RE GROUP, LTD.
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.
Everest Re Group, Ltd.
(Registrant)
/S/ STEPHEN L. LIMAURO
--------------------------------------
Stephen L. Limauro
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
Dated: May 13, 2003
I, Joseph V. Taranto, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Everest Re Group,
Ltd;
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.
May 13, 2003 /s/ JOSEPH V. TARANTO
- ------------ -----------------------
Joseph V. Taranto
Chairman and
Chief Executive Officer
I, Stephen L. Limauro, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Everest Re Group,
Ltd;
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.
May 13, 2003 /s/ STPEHEN L. LIMAURO
- ------------ ---------------------------
Stephen L. Limauro
Executive Vice President
and Chief Financial Officer