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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission file number 333-55268
THE PHOENIX COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0493340
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One American Row, Hartford, Connecticut 06102-5056
(860) 403-5000
(Address, including zip code, and telephone number,
including area code, of principal executive offices)
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 such filing requirements for the
past 90 days.
Yes X. No ___.
Indicated by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Yes X. No ___.
On October 31, 2003, the registrant had 94,378,543 shares of common stock outstanding.
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1
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet at September 30, 2003 (unaudited) and December 31, 2002............ 3
Consolidated Statement of Income and Comprehensive Income for the three and nine months
ended September 30, 2003 and 2002 (unaudited)............................................... 4
Consolidated Statement of Cash Flows for the three and nine months ended September 30, 2003
and 2002 (unaudited)........................................................................ 5
Consolidated Statement of Changes in Stockholders' Equity for the three and nine months ended
September 30, 2003 and 2002 (unaudited)..................................................... 6
Notes to Consolidated Financial Statements for the three and nine months ended
September 30, 2003 and 2002 (unaudited)..................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 64
Item 4. Controls and Procedures......................................................................... 67
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... 69
Item 2. Changes in Securities and Use of Proceeds....................................................... 70
Item 3. Defaults Upon Senior Securities................................................................. 70
Item 4. Submission of Matters to a Vote of Security Holders............................................. 70
Item 5. Other Information............................................................................... 70
Item 6. Exhibits and Reports on Form 8-K................................................................ 70
Signature................................................................................................. 72
2
PART I.
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THE PHOENIX COMPANIES, INC.
Consolidated Balance Sheet
($ amounts in millions, except per share data)
September 30, 2003 (unaudited) and December 31, 2002
2003 2002
--------------- ---------------
ASSETS:
Available-for-sale debt securities, at fair value........................... $ 13,007.5 $ 11,894.1
Equity securities, at fair value............................................ 357.4 391.2
Mortgage loans, at unpaid principal balances................................ 328.1 468.8
Venture capital partnerships, at equity in net assets....................... 240.3 228.6
Affiliate equity securities, at cost plus equity in undistributed earnings.. 41.9 134.7
Policy loans, at unpaid principal balances.................................. 2,212.1 2,195.9
Other investments........................................................... 413.5 398.9
--------------- ---------------
Total investments........................................................... 16,600.8 15,712.2
Cash and cash equivalents................................................... 628.3 1,058.5
Accrued investment income................................................... 237.5 192.3
Receivables................................................................. 184.5 217.3
Deferred policy acquisition costs........................................... 1,335.6 1,234.1
Deferred income taxes....................................................... 60.9 41.4
Intangible assets with definite lives....................................... 273.6 291.7
Goodwill and other indefinite-lived intangible assets....................... 463.7 456.0
Other general account assets................................................ 238.8 239.5
Separate account and investment trust assets................................ 7,082.5 5,793.1
--------------- ---------------
Total assets................................................................ $ 27,106.2 $ 25,236.1
=============== ===============
LIABILITIES:
Policy liabilities and accruals............................................. $ 12,964.7 $ 12,680.0
Policyholder deposit funds.................................................. 3,737.8 3,395.7
Stock purchase contracts.................................................... 124.1 137.6
Indebtedness................................................................ 642.5 644.3
Other general account liabilities........................................... 542.5 542.9
Separate account and investment trust liabilities........................... 7,082.5 5,793.1
--------------- ---------------
Total liabilities........................................................... 25,094.1 23,193.6
--------------- ---------------
MINORITY INTEREST:
Minority interest in net assets of consolidated subsidiaries................ 6.5 10.8
--------------- ---------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: 106,376,291 and 106,374,510 shares issued..... 1.0 1.0
Additional paid-in capital.................................................. 2,429.0 2,424.4
Deferred compensation on restricted stock units............................. (3.9) --
Accumulated deficit......................................................... (340.0) (292.6)
Accumulated other comprehensive income...................................... 110.5 94.6
Treasury stock, at cost: 12,036,586 and 12,330,000 shares................... (191.0) (195.7)
--------------- ---------------
Total stockholders' equity.................................................. 2,005.6 2,031.7
--------------- ---------------
Total liabilities, minority interest and stockholders' equity............... $ 27,106.2 $ 25,236.1
=============== ===============
The accompanying notes are an integral part of these financial statements.
3
THE PHOENIX COMPANIES, INC.
Consolidated Statement of Income and Comprehensive Income
($ amounts in millions, except per share data)
Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
Three Months Nine Months
--------------------------- -------------------------
2003 2002 2003 2002
------------ ------------ ----------- ------------
REVENUES:
Premiums............................................... $ 286.9 $ 297.1 $ 781.5 $ 813.9
Insurance and investment product fees.................. 143.6 139.4 410.3 425.6
Investment income, net of expenses..................... 254.2 228.8 794.7 675.7
Net realized investment losses......................... (2.6) (10.5) (119.5) (74.1)
------------ ------------ ----------- ------------
Total revenues......................................... 682.1 654.8 1,867.0 1,841.1
------------ ------------ ----------- ------------
BENEFITS AND EXPENSES:
Policy benefits, excluding policyholder dividends...... 389.0 397.9 1,088.2 1,070.7
Policyholder dividends................................. 99.5 112.7 310.2 294.4
Policy acquisition cost amortization................... 22.7 41.1 76.6 41.6
Intangible asset amortization.......................... 8.3 8.9 24.9 24.8
Intangible asset impairments........................... -- 66.3 -- 66.3
Interest expense....................................... 9.8 7.7 29.5 23.1
Other operating expenses............................... 130.3 136.1 393.3 452.7
------------ ------------ ----------- ------------
Total benefits and expenses............................ 659.6 770.7 1,922.7 1,973.6
------------ ------------ ----------- ------------
Income (loss) before income taxes and minority interest 22.5 (115.9) (55.7) (132.5)
Applicable income taxes (benefit)...................... 5.6 (26.0) (31.4) (40.4)
------------ ------------ ----------- ------------
Income (loss) before minority interest................. 16.9 (89.9) (24.3) (92.1)
Minority interest in net income of
consolidated subsidiaries............................ 2.9 3.1 8.0 9.2
------------ ------------ ----------- ------------
Income (loss) before cumulative effect of
accounting change.................................... 14.0 (93.0) (32.3) (101.3)
Cumulative effect of accounting change for
goodwill and other intangible assets................. -- -- -- (130.3)
------------ ------------ ----------- ------------
Net income (loss) ..................................... $ 14.0 $ (93.0) $ (32.3) $ (231.6)
============ ============ =========== ============
EARNINGS PER SHARE:
Weighted average common shares
outstanding (in thousands):
Basic.............................................. 94,276 96,570 94,158 99,087
Diluted............................................ 98,272 96,570 94,158 99,087
============ ============ =========== ============
Income (loss) before cumulative effect of
accounting change:
Basic.............................................. $ 0.15 $ (.96) $ (.34) $ (1.02)
Diluted............................................ $ 0.14 $ (.96) $ (.34) $ (1.02)
============ ============ =========== ============
Net income (loss):
Basic.............................................. $ 0.15 $ (.96) $ (.34) $ (2.34)
Diluted............................................ $ 0.14 $ (.96) $ (.34) $ (2.34)
============ ============ =========== ============
COMPREHENSIVE INCOME:
Net income (loss)...................................... $ 14.0 $ (93.0) $ (32.3) $ (231.6)
------------ ------------ ----------- ------------
Net unrealized investment gains (losses)............... (34.7) (33.0) 5.3 11.0
Net unrealized foreign currency translation adjustment. (1.0) 3.0 3.8 (2.1)
Net unrealized derivative instruments gains (losses)... (1.1) 0.7 6.8 2.0
------------ ------------ ----------- ------------
Other comprehensive income (loss)...................... (36.8) (29.3) 15.9 10.9
------------ ------------ ----------- ------------
Comprehensive loss..................................... $ (22.8) $ (122.3) $ (16.4) $ (220.7)
============ ============ =========== ============
The accompanying notes are an integral part of these financial statements.
4
THE PHOENIX COMPANIES, INC.
Consolidated Statement of Cash Flows
($ amounts in millions)
Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
Three Months Nine Months
------------------------- ------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
OPERATING ACTIVITIES:
Premiums collected...................................... $ 286.6 $ 298.0 $ 772.1 $ 807.0
Insurance and investment product fees collected......... 138.8 127.2 413.2 422.8
Investment income collected............................. 221.3 228.9 710.3 675.7
Policy benefits paid, excluding policyholder dividends.. (268.6) (331.1) (794.1) (845.4)
Policyholder dividends paid............................. (105.0) (100.7) (292.0) (282.8)
Policy acquisition costs paid........................... (49.4) (56.6) (150.0) (169.2)
Interest expense paid................................... (6.3) (4.5) (24.2) (16.6)
Other operating expenses paid........................... (122.2) (120.4) (404.2) (428.9)
Income taxes refunded (paid)............................ (3.0) 3.2 6.6 2.9
----------- ----------- ----------- -----------
Cash from continuing operations......................... 92.2 44.0 237.7 165.5
Discontinued operations, net............................ (15.0) 12.2 (60.0) (62.0)
----------- ----------- ----------- -----------
Cash from operating activities.......................... 77.2 56.2 177.7 103.5
----------- ----------- ----------- -----------
INVESTING ACTIVITIES:
Investment purchases.................................... (1,086.6) (1,572.2) (4,196.7) (3,865.9)
Investment sales, repayments and maturities............. 1,016.8 909.7 3,314.4 2,329.4
Subsidiary purchases.................................... (4.4) (1.7) (23.5) (136.1)
Premises and equipment additions........................ (5.8) (3.9) (11.7) (11.7)
Discontinued operations, net............................ -- (12.1) (6.7) 23.4
----------- ----------- ----------- -----------
Cash for investing activities........................... (80.0) (680.2) (924.2) (1,660.9)
----------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Policyholder deposit fund receipts (repayments), net ... (6.7) 745.2 342.1 1,602.0
Common stock purchases ................................. -- (56.0) -- (124.5)
Common stock dividends paid ............................ (15.1) (15.8) (15.1) (15.8)
Minority interest distributions......................... (1.4) (0.1) (10.7) (7.8)
----------- ----------- ----------- -----------
Cash from (for) financing activities.................... (23.2) 673.3 316.3 1,453.9
----------- ----------- ----------- -----------
Change in cash and cash equivalents..................... (26.0) 49.3 (430.2) (103.5)
Cash and cash equivalents, beginning of period.......... 654.3 662.7 1,058.5 815.5
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period................ $ 628.3 $ 712.0 $ 628.3 $ 712.0
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
5
THE PHOENIX COMPANIES, INC.
Consolidated Statement of Changes in Stockholders' Equity
($ amounts in millions, except share and per share data)
Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
Three Months Nine Months
-------------------------- -------------------------
2003 2002 2003 2002
------------ ------------ ------------ -----------
COMMON STOCK AND
ADDITIONAL PAID-IN CAPITAL:
Additional common shares issued in demutualization
(54; 54; 1,781 and 2,624 shares)..................... $ -- $ -- $ -- $ --
Restricted stock units awarded as compensation
(5,537; 573,477; 655,278 and 573,477 units).......... 0.1 8.0 5.1 8.0
Restricted stock units awarded as payment of
deferred compensation liabilities (161,768 units).... -- -- 1.5 --
Excess of cost over fair value of common shares
contributed to employee savings plan................. (0.7) -- (2.0) --
Income tax benefit..................................... -- 6.0 -- 6.0
DEFERRED COMPENSATION ON
RESTRICTED STOCK UNITS:
Compensation deferred on restricted stock units awarded -- -- (5.0) --
Compensation expense recognized - restricted stock units 0.6 -- 1.1 --
RETAINED EARNINGS
(ACCUMULATED DEFICIT):
Net income (loss)...................................... 14.0 (93.0) (32.3) (231.6)
Common stock dividend declared ($0.16 per share)....... -- -- (15.1) (15.8)
ACCUMULATED OTHER
COMPREHENSIVE INCOME:
Other comprehensive income (loss)...................... (36.8) (29.3) 15.9 10.9
TREASURY STOCK:
Common shares purchased (3,631,400
and 7,546,500 shares)................................ -- (55.7) -- (125.6)
Common shares contributed to employee savings
plan (135,977 and 293,414 shares).................... 2.2 -- 4.7 --
------------ ------------ ------------ ------------
Change in stockholders' equity......................... (20.6) (164.0) (26.1) (348.1)
Stockholders' equity, beginning of period.............. 2,026.2 2,211.6 2,031.7 2,395.7
------------ ------------ ------------ ------------
Stockholders' equity, end of period.................... $ 2,005.6 $ 2,047.6 $ 2,005.6 $ 2,047.6
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
6
THE PHOENIX COMPANIES, INC.
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)
1. Organization and Operations
Our consolidated financial statements include the accounts of The Phoenix Companies, Inc. and its subsidiaries.
The Phoenix Companies, Inc. is a holding company and our operations are conducted through subsidiaries, the
principal ones of which are Phoenix Life Insurance Company (Phoenix Life) and Phoenix Investment Partners, Ltd.
(PXP). We have eliminated significant intercompany accounts and transactions in consolidating these financial
statements. Also, we have reclassified certain amounts for 2002 to conform with 2003 presentations.
We have prepared these financial statements in accordance with generally accepted accounting principles (GAAP).
In preparing these financial statements in conformity with GAAP, we are required to make estimates and
assumptions that affect the reported amounts of assets and liabilities at reporting dates and the reported
amounts of revenues and expenses during the reporting periods. Actual results will differ from these estimates
and assumptions. We employ significant estimates and assumptions in the determination of deferred policy
acquisition costs; policyholder liabilities and accruals; the valuation of intangible assets; the valuation of
investments in debt and equity securities and venture capital partnerships; pension and other post-employment
benefits liabilities; and accruals for contingent liabilities. Our significant accounting policies are
presented in the notes to our consolidated financial statements in our 2002 Annual Report on Form 10-K.
Our interim financial statements do not include all of the disclosures required by GAAP for annual financial
statements. In our opinion, we have included all adjustments, consisting of normal, recurring adjustments,
considered necessary for a fair statement of the results for the interim periods. Operating results for the
three and nine month periods in 2003 are not necessarily indicative of the results that may be expected for the
year 2003. These unaudited consolidated financial statements should be read in conjunction with our
consolidated financial statements in our 2002 Annual Report on Form 10-K.
In December 1999, we began the process of reorganizing and demutualizing our then principal operating company,
Phoenix Home Life Mutual Insurance Company. We completed the process in June 2001, when all policyholder
membership interests in this mutual company were extinguished and eligible policyholders of the mutual company
received shares of common stock of The Phoenix Companies, Inc., together with cash and policy credits, as
compensation. To protect the future dividends of these policyholders, we also established a closed block for
their existing policies, which we describe in Note 3. Concurrent with the demutualization, we sold additional
shares of common stock of The Phoenix Companies, Inc. to the public.
Accounting changes
Goodwill and Other Intangible Assets: In the first quarter of 2002, we adopted the new accounting
standard for goodwill and other intangible assets, including amounts reflected in our carrying value of
equity-method investments. Under this new standard, we discontinued recording amortization expense on goodwill
and other intangible assets with indefinite lives, but we continue recording amortization expense for those
intangible assets with definite estimated lives. For more information, see Note 4 to our consolidated financial
statements in our 2002 Annual Report on Form 10-K.
Variable Interest Entities: In the fourth quarter of 2003, we will be adopting the new standard
interpretation for the consolidation of variable interest entities. Variable interest entities are required to
be consolidated by their primary beneficiaries if they do not effectively disperse risks among all parties
involved. The primary beneficiary of a variable interest entity is the party that absorbs a majority of the
entity's expected losses, receives a majority of its expected residual returns, or both, as a result of holding
variable interests.
7
We are involved with various entities in the normal course of business that may be deemed to be variable
interest entities and, as a result, we may hold interests in those entities. We serve as the investment advisor
to nine collateralized bond obligations (CBOs) that were motivated by bond market arbitrage opportunities. We
currently consolidate three of these CBOs. The remaining six CBOs have aggregate assets with a fair value of
$1.5 billion that are invested in a variety of fixed income securities that were purchased from third parties.
The CBOs reside in bankruptcy remote special purpose entities for which we neither provide recourse or
guarantees. Our exposure under the new standard stems from our debt and equity investments in certain of these
CBOs. Our maximum exposure to loss with respect to the CBOs that we currently do not consolidate was $60.1
million at September 30, 2003 and $67.3 million at year-end 2002, which represents the fair value of our debt
and equity investments in the CBOs.
We are still evaluating the effect of the adoption on our consolidation practices as certain aspects of the
standard are still evolving. For more information, see Note 8 to our consolidated financial statements in our
2002 Annual Report on Form 10-K.
Stock-based Compensation: A new standard was issued in December 2002 which amends an existing standard on
accounting for stock-based compensation. The new standard provides methods of transition for a voluntary change
to fair value accounting for stock-based compensation. We adopted fair value accounting for stock-based
compensation in 2003 using the prospective method of transition provided by the new standard, which results in
expense recognition for stock options awarded after December 31, 2002. For more information, see Note 8.
Business combinations
On May 1, 2003, we acquired the remaining interest in PFG Holdings, Inc. not already owned by us for initial
consideration of $16.7 million. Under the terms of the purchase agreement, we may be obligated to pay
additional consideration of up to $89.0 million to the selling shareholders, including $13.0 million during the
years 2004 through 2007 based on certain financial performance targets being met, and the balance in 2008 based
on the appraised value of PFG Holdings as of December 31, 2007. We have accounted for our acquisition of the
remaining interest in PFG Holdings as a step-purchase. Accordingly, we recorded a definite-lived intangible
asset of $9.8 million related to the present value of future profits (PVFP) acquired and a related deferred
income tax liability of $3.4 million. The PVFP intangible asset will be amortized over the remaining estimated
life of the underlying insurance inforce acquired, estimated to be 40 years. The remaining acquisition price of
$7.6 million has been assigned to goodwill.
On June 30, 2003, we acquired the remaining interest in Capital West Asset Management, LLC not already owned by
us for $1.1 million. We have accounted for our acquisition of the remaining interest as a step-purchase. We
recorded $0.7 million for definite-lived investment management contracts and assigned the remaining acquisition
price of $1.0 million to goodwill.
We acquired a 60% interest in Kayne Anderson Rudnick Investment Management, LLC (Kayne Anderson Rudnick) for
$102.4 million on January 29, 2002; management of the company retained the remaining ownership interest. In
addition to the initial cost of the purchase, we may be obligated to make a subsequent payment, which could be
as much as $65.0 million in 2004 based upon management fee revenue for the purchased business through the end
of 2003. We currently estimate this payment to be between $27.5 million and $32.5 million. We are also
obligated to purchase an additional 15% interest in the company by 2007. We allocated $0.3 million of the
purchase price to tangible net assets acquired and $102.1 million to intangible assets ($58.3 million to
investment management contracts and $43.8 million to goodwill).
In August 2003, certain members of KAR accelerated their put/call arrangement. The purchase price for these
units totaled $4.4 million, which was recorded as additional purchase price by PXP and allocated to goodwill
and definite-lived intangible assets.
8
We have not presented pro forma information as if the minority interests in PFG Holdings and Capital West Asset
Management had been acquired at the beginning of 2003 or as if the majority interest in Kayne Anderson Rudnick
had been acquired at the beginning of 2002, since such pro forma information does not differ materially from
our financial statements.
2. Business Segments
Segment information on assets at September 30, 2003 and year-end 2002 and
revenues and income for the three and nine month periods ended September 30,
2003 and 2002 follow ($ amounts in millions):
2003 2002
-------------- --------------
Segment Assets
Life and annuity segment....................................................... $ 23,728.3 $ 21,534.0
Asset management segment....................................................... 824.0 844.3
-------------- --------------
Operating segment assets....................................................... 24,552.3 22,378.3
Venture capital segment........................................................ 202.5 227.8
Corporate and other segment.................................................... 2,330.6 2,609.2
-------------- --------------
Total segment assets........................................................... 27,085.4 25,215.3
Net assets of discontinued operations.......................................... 20.8 20.8
-------------- --------------
Total assets................................................................... $ 27,106.2 $ 25,236.1
============== ==============
Three Months Nine Months
----------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Segment Revenues
Life and annuity segment........................... $ 614.8 $ 620.9 $ 1,766.8 $ 1,754.5
Asset management segment........................... 61.2 63.0 173.5 200.2
Elimination of inter-segment revenues.............. (3.5) (3.8) (10.5) (12.7)
------------- ------------- ------------- -------------
Operating segment revenues......................... 672.5 680.1 1,929.8 1,942.0
Venture capital segment............................ 5.1 (22.0) 34.8 (56.9)
Corporate and other segment........................ 7.1 7.2 21.9 30.1
------------- ------------- ------------- -------------
Total segment revenues............................. 684.7 665.3 1,986.5 1,915.2
Net realized investment losses..................... (2.6) (10.5) (119.5) (74.1)
------------- ------------- ------------- -------------
Total revenues..................................... $ 682.1 $ 654.8 $ 1,867.0 $ 1,841.1
============= ============= ============= =============
Segment Income
Life and annuity segment........................... $ 24.4 $ (1.9) $ 69.0 $ 54.2
Asset management segment........................... (3.1) (67.8) (14.6) (71.5)
------------- ------------- ------------- -------------
Operating segment pre-tax income (loss)............ 21.3 (69.7) 54.4 (17.3)
Venture capital segment............................ 5.1 (22.0) 34.8 (56.9)
Corporate and other segment........................ (10.5) (10.1) (34.4) (24.4)
------------- ------------- ------------- -------------
Total segment income before income taxes........... 15.9 (101.8) 54.8 (98.6)
Applicable income taxes (benefit).................. 4.4 (20.0) 15.0 (25.5)
------------- ------------- ------------- -------------
Total segment income (loss)........................ 11.5 (81.8) 39.8 (73.1)
Net realized investment gains (losses),
net of income taxes and other offsets............ 2.5 (7.6) (69.1) (16.7)
Restructuring and early retirement costs,
net of income taxes.............................. -- (3.6) (4.3) (25.4)
Other income, net of income taxes.................. -- -- 1.3 --
Deferred acquisition cost adjustment,
net of income taxes.............................. -- -- -- 15.1
Demutualization related items, net of income taxes. -- -- -- (1.2)
Cumulative effect of accounting change............. -- -- -- (130.3)
------------- ------------- ------------- -------------
Net income (loss).................................. $ 14.0 $ (93.0) $ (32.3) $ (231.6)
============= ============= ============= =============
9
During the three month period ended June 30, 2003, we transferred our equity investment in Aberdeen Asset
Management PLC from our Asset Management segment to the Corporate and Other segment. As a result, we have
reclassified prior year information for consistency.
3. Life and Annuity Segment
The Life and Annuity segment includes individual life insurance and annuity products and results of Phoenix
Life and certain of its subsidiaries and affiliates (together, our Life Companies), including universal life,
variable universal life, term life and fixed and variable annuities. It also includes the results of our closed
block, which consists primarily of participating whole life products. Segment information on assets as of
September 30, 2003 and year-end 2002 and operating income for the three and nine month periods ended September
30, 2003 and 2002 follows ($ amounts in millions):
2003 2002
--------------- ---------------
Life and Annuity Segment Assets
Investments.................................................................. $ 15,739.6 $ 14,480.0
Cash and cash equivalents.................................................... 496.3 924.0
Receivables.................................................................. 238.0 236.4
Deferred policy acquisition costs............................................ 1,335.6 1,234.1
Deferred income taxes........................................................ 285.0 328.2
Goodwill and other intangible assets......................................... 15.2 7.1
Other general account assets................................................. 204.7 192.5
Separate accounts............................................................ 5,413.9 4,131.7
--------------- ---------------
Total segment assets......................................................... 23,728.3 21,534.0
--------------- ---------------
Policy liabilities and accruals.............................................. 12,843.4 12,695.6
Policyholder deposit funds................................................... 3,727.4 3,237.9
Other general account liabilities............................................ 251.3 171.0
Separate accounts............................................................ 5,413.9 4,131.7
Minority interest............................................................ 0.1 1.6
--------------- ---------------
Total segment liabilities and minority interest.............................. 22,236.1 20,237.8
--------------- ---------------
Segment net assets........................................................... $ 1,492.2 $ 1,296.2
=============== ===============
10
Three Months Nine Months
----------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Life and Annuity Segment Income
Premiums.......................................... $ 286.9 $ 297.1 $ 781.5 $ 813.9
Insurance and investment product fees............. 84.7 78.7 242.5 235.2
Net investment income............................. 243.2 245.1 742.8 705.4
------------- ------------- ------------- -------------
Total segment revenues............................ 614.8 620.9 1,766.8 1,754.5
------------- ------------- ------------- -------------
Policy benefits, including policyholder dividends. 491.8 506.0 1,397.0 1,400.7
Policy acquisition cost amortization.............. 25.5 41.2 77.7 68.2
Other operating expenses.......................... 73.1 75.6 222.7 231.4
------------- ------------- ------------- -------------
Total segment benefits and expenses............... 590.4 622.8 1,697.4 1,700.3
------------- ------------- ------------- -------------
Segment income (loss) before income taxes and
minority interest............................... 24.4 (1.9) 69.4 54.2
Allocated income taxes (benefit).................. 10.5 (0.7) 22.5 19.0
------------- ------------- ------------- -------------
Segment income (loss) before minority interest.... 13.9 (1.2) 46.9 35.2
Minority interest in segment income of
consolidated subsidiaries....................... -- -- 0.4 --
------------- ------------- ------------- -------------
Segment income (loss)............................. 13.9 (1.2) 46.5 35.2
Net realized investment gains (losses),
net of income taxes and other offsets........... (1.7) 0.9 0.9 (5.7)
Deferred acquisition cost adjustment,
net of income taxes............................. -- -- -- 14.4
Other adjustments, net of income taxes............ -- -- -- 0.7
------------- ------------- ------------- -------------
Segment net income (loss)......................... $ 12.2 $ (0.3) $ 47.4 $ 44.6
============= ============= ============= =============
Deferred policy acquisition costs
The activity in deferred policy acquisition costs for the three and nine month periods ended September 30, 2003
and 2002 follows ($ amounts in millions):
Three Months Nine Months
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Acquisition costs deferred............................. $ 49.4 $ 56.6 $ 150.0 $ 169.2
Acquisition costs recognized in:
PFG Holdings minority interest acquisition......... 9.8 -- 9.8 --
Valley Forge Life acquisition...................... -- 48.5 -- 48.5
Costs amortized to expenses:
Recurring costs related to segment income.......... (25.5) (41.2) (77.7) (68.2)
Credit related to realized investment
gains or losses.................................. 2.8 0.1 1.1 4.5
Change in actuarial assumption..................... -- -- -- 22.1
Offsets to net unrealized investment gains or losses
included in other comprehensive income............... 51.1 (40.6) 18.3 (64.3)
------------ ------------ ------------ ------------
Change in deferred policy acquisition costs............ 87.6 23.4 101.5 111.8
Deferred policy acquisition costs, beginning of period. 1,248.0 1,212.1 1,234.1 1,123.7
------------ ------------ ------------ ------------
Deferred policy acquisition costs, end of period....... $ 1,335.6 $ 1,235.5 $ 1,335.6 $ 1,235.5
============ ============ ============ ============
In the first quarter 2002, we revised the mortality assumptions used in the development of estimated gross
margins for the traditional participating block of business to reflect favorable experience. This revision
resulted in a decrease in deferred policy acquisition cost amortization of $22.1 million ($14.4 million after
income taxes).
11
We have included in deferred policy acquisition costs the present value of future profits from two major
reinsurance assumed transactions and the purchase of the minority interest in a subsidiary. The amounts
included at September 30, 2003 and year end 2002 follow: Confederation Life ($38.2 million and $45.7 million,
respectively), Valley Forge Life ($39.8 million and $43.5 million, respectively) and PFG Holdings ($9.8 million
and $0, respectively).
Policy liabilities and accruals
Policyholder liabilities are primarily for participating life insurance policies and universal life insurance
policies. For universal life, this includes deposits received from customers and investment earnings on their
fund balances, which range from 4.0% to 6.25% at September 30, 2003 and 4.0% to 7.0% at year-end 2002, less
administrative and mortality charges.
Policyholder deposit funds
Policyholder deposit funds primarily consist of annuity deposits received from customers, dividend
accumulations and investment earnings on their fund balances, which range from 1.0% to 12.3% at September 30,
2003 and 1.6% to 12.3% at year-end 2002, less administrative charges.
Participating life insurance
Participating life insurance in-force was 40.6% and 45.5% of the face value of total individual life insurance
in-force at September 30, 2003 and year-end 2002, respectively. The premiums on participating life insurance
policies were 70.9% and 76.4% of total individual life insurance premiums for the three months ended September
30, 2003 and 2002, respectively, and 70.0% and 72.0% of total individual life insurance premiums for the nine
months ended September 30, 2003 and 2002, respectively.
Funds under management
Activity in annuity funds under management for the three and nine month periods ended September 30, 2003 and 2002
follows ($ amounts in millions):
Three Months Nine Months
------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- --------------- --------------
Deposits..................................... $ 452.0 $ 804.2 $ 1,255.2 $ 2,040.6
Performance.................................. 140.1 (294.7) 511.6 (515.1)
Fees......................................... (14.4) (13.8) (41.3) (45.4)
Benefits and surrenders...................... (231.3) (191.9) (693.7) (524.5)
-------------- -------------- --------------- --------------
Change in funds under management............. 346.4 303.8 1,031.8 955.6
Funds under management, beginning of period.. 6,518.9 5,400.9 5,833.5 4,749.1
-------------- -------------- --------------- --------------
Funds under management, end of period........ $ 6,865.3 $ 5,704.7 $ 6,865.3 $ 5,704.7
============== ============== =============== ==============
12
Closed Block
Summarized information on closed block assets and liabilities at September 30, 2003, year-end 2002 and
inception (December 31, 1999) and on closed block revenues and expenses and changes in the policyholder
dividend obligation, all for the cumulative period from inception to September 30, 2003 and the nine month
periods ended September 30, 2003 and 2002, follows ($ amounts in millions):
2003 2002 Inception
------------- ------------ -----------
Debt securities....................................................... $ 6,763.9 $ 6,431.1 $ 4,773.1
Equity securities..................................................... 49.9 -- --
Mortgage loans........................................................ 268.5 373.2 399.0
Venture capital partnerships.......................................... 37.8 0.8 --
Policy loans.......................................................... 1,391.5 1,399.0 1,380.0
Other invested assets................................................. 45.8 -- --
------------- ------------ -----------
Total closed block investments........................................ 8,557.4 8,204.1 6,552.1
Cash and cash equivalents............................................. 104.7 187.1 --
Accrued investment income............................................. 125.5 110.9 106.8
Receivables........................................................... 42.1 42.1 35.2
Deferred income taxes................................................. 392.8 402.7 389.4
Other closed block assets............................................. 39.0 45.2 6.2
------------- ------------ -----------
Total closed block assets............................................. 9,261.5 8,992.1 7,089.7
------------- ------------ -----------
Policy liabilities and accruals....................................... 9,664.6 9,449.0 8,301.7
Policyholder dividends payable........................................ 375.9 363.4 325.1
Policyholder dividend obligation...................................... 506.7 547.3 --
Other closed block liabilities........................................ 73.9 24.2 12.3
------------- ------------ -----------
Total closed block liabilities........................................ 10,621.1 10,383.9 8,639.1
------------- ------------ -----------
Excess of closed block liabilities over closed block assets........... $ 1,359.6 $ 1,391.8 $ 1,549.4
============= ============ ===========
Nine Months
-------------------------
Cumulative 2003 2002
------------- ------------ -----------
Premiums.............................................................. $ 3,992.4 $ 754.4 $ 788.9
Net investment income ................................................ 2,063.5 425.4 422.8
Net realized investment losses........................................ (85.2) (5.5) (50.3)
------------- ------------ -----------
Total revenues........................................................ 5,970.7 1,174.3 1,161.4
------------- ------------ -----------
Policy benefits, excluding dividends.................................. 4,100.7 798.2 811.4
Other operating expenses.............................................. 47.2 8.2 8.6
------------- ------------ -----------
Total benefits and expenses, excluding policyholder dividends......... 4,147.9 806.4 820.0
------------- ------------ -----------
Closed block contribution to income before dividends and income taxes. 1,822.8 367.9 341.4
Policyholder dividends................................................ 1,486.7 309.8 293.6
------------- ------------ -----------
Closed block contribution to income before income taxes............... 336.1 58.1 47.8
Applicable income taxes............................................... 118.2 20.5 16.6
------------- ------------ -----------
Closed block contribution to income................................... $ 217.9 $ 37.6 $ 31.2
============= ============ ===========
Policyholder dividends provided through earnings...................... $ 1,531.9 $ 309.8 $ 293.6
Policyholder dividends provided through other comprehensive income.... 432.2 (46.0) 364.4
------------- ------------ -----------
Additions to policyholder dividend liabilities........................ 1,964.1 263.8 658.0
Policyholder dividends paid........................................... (1,406.6) (291.9) (282.4)
------------- ------------ -----------
Increase in policyholder dividend liabilities......................... 557.5 (28.1) 375.6
Policyholder dividend liabilities, beginning of period................ 325.1 910.7 524.5
------------- ------------ -----------
Policyholder dividend liabilities, end of period...................... 882.6 882.6 900.1
Less: policyholder dividends payable, end of period................... 375.9 375.9 369.5
------------- ------------ -----------
Policyholder dividend obligation, end of period....................... $ 506.7 $ 506.7 $ 530.6
============= ============ ===========
13
4. Asset Management Segment
We conduct activities in our Asset Management segment through our subsidiary, PXP. Two lines of business,
private client and institutional, comprise these activities. We provide investment management services through
our affiliated asset managers. We provide our affiliated asset managers with a consolidated platform of
distribution and administrative support. Each manager has autonomy with its investment process while we monitor
performance and ensure that each manager adheres to its stated investment style.
Segment information on assets as of September 30, 2003 and year-end 2002 and on operating income for the three
and nine month periods ended September 30, 2003 and 2002 follows ($ amounts in millions):
2003 2002
------------ -----------
Asset Management Segment Assets
Investments......................................................................... $ 10.6 $ 5.6
Cash and cash equivalents........................................................... 39.9 44.2
Receivables......................................................................... 29.6 31.6
Intangible assets with definite lives............................................... 270.2 291.7
Goodwill and other indefinite-lived intangible assets............................... 451.9 448.9
Other assets........................................................................ 21.8 22.3
------------ -----------
Total segment assets................................................................ 824.0 844.3
------------ -----------
Liabilities......................................................................... 140.2 141.7
Minority interest................................................................... 6.4 9.0
------------ -----------
Total segment liabilities and minority interest..................................... 146.6 150.7
------------ -----------
Segment net assets.................................................................. $ 677.4 $ 693.6
============ ===========
Three Months Nine Months
--------------------------- -------------------------
2003 2002 2003 2002
------------ ------------ ------------ -----------
Asset Management Segment Income
Investment product fees................................ $ 61.1 $ 62.6 $ 173.2 $ 199.4
Net investment income.................................. 0.1 0.4 0.3 0.8
------------ ------------ ------------ -----------
Total segment revenues................................. 61.2 63.0 173.5 200.2
------------ ------------ ------------ -----------
Intangible asset amortization.......................... 8.3 8.7 24.9 24.6
Intangible asset impairments........................... -- 66.3 -- 66.3
Other operating expenses............................... 53.1 52.7 155.6 171.6
------------ ------------ ------------ -----------
Total segment expenses................................. 61.4 127.7 180.5 262.5
------------ ------------ ------------ -----------
Segment loss before income taxes
and minority interest................................ (0.2) (64.7) (7.0) (62.3)
Allocated income tax benefit........................... (1.2) (5.2) (5.6) (7.1)
------------ ------------ ------------ -----------
Segment income (loss) before minority interest......... 1.0 (59.5) (1.4) (55.2)
Minority interest in segment income of
consolidated subsidiaries............................ 2.9 3.1 7.6 9.2
------------ ------------ ------------ -----------
Segment loss........................................... (1.9) (62.6) (9.0) (64.4)
Restructuring charges, net of income taxes............. -- 1.5 (3.1) (7.8)
Cumulative effect of accounting change................. -- -- -- (119.9)
------------ ------------ ------------ -----------
Segment net loss....................................... $ (1.9) $ (61.1) $ (12.1) $ (192.1)
============ ============ ============ ===========
14
Goodwill and other intangible assets
Details of gross and net carrying amounts for definite-lived intangible assets and goodwill and other
indefinite-lived intangible assets at September 30, 2003 and year-end 2002 follow ($ amounts in millions):
2003 2002
------------ ------------
Asset management contracts.......................................................... $ 396.2 $ 392.8
Less: accumulated amortization...................................................... 126.0 101.1
------------ ------------
Intangible assets with definite lives............................................... $ 270.2 $ 291.7
============ ============
Goodwill............................................................................ $ 378.6 $ 375.6
Investment management contracts..................................................... 73.3 73.3
------------ ------------
Goodwill and other indefinite-live intangible assets................................ $ 451.9 $ 448.9
============ ============
The activity in intangible assets with definite lives and goodwill and other indefinite-lived intangible assets
for the three and nine month periods ended September 30, 2003 and 2002 follows ($ amounts in millions):
Three Months Nine Months
----------------------------- --------------------------
2003 2002 2003 2002
------------- ------------- ------------ ------------
Intangible assets with definite lives:
Asset purchases..................................... $ 2.6 $ 0.9 $ 3.4 $ 78.2
Asset reclassification.............................. -- 20.8 -- 9.7
Asset amortization.................................. (8.3) (8.7) (24.9) (24.6)
------------- ------------- ------------ ------------
Change in intangible assets......................... (5.7) 13.0 (21.5) 63.3
Balance, beginning of period........................ 275.9 293.8 291.7 243.5
------------- ------------- ------------ ------------
Balance, end of period.............................. $ 270.2 $ 306.8 $ 270.2 $ 306.8
============= ============= ============ ============
Goodwill and other indefinite-lived intangible assets:
Asset purchases..................................... $ 1.8 $ 0.8 $ 3.0 $ 60.0
Asset reclassification.............................. -- (20.8) -- (9.7)
Asset impairments................................... -- (66.3) -- (197.7)
------------- ------------- ------------ ------------
Change in goodwill and other intangible assets...... 1.8 (86.3) 3.0 (147.4)
Balance, beginning of period........................ 450.1 527.8 448.9 588.9
------------- ------------- ------------ ------------
Balance, end of period.............................. $ 451.9 $ 441.5 $ 451.9 $ 441.5
============= ============= ============ ============
For purposes of our testing for goodwill and indefinite-lived intangible asset impairments, we calculate the
fair value of each reporting unit based on the sum of a multiple of revenue and the fair value of the unit's
tangible net assets. We calculate the fair value of definite-lived intangible assets based on their discounted
cash flows. We compare the calculated fair value to the recorded values and record an impairment, if warranted.
The estimated aggregate intangible asset amortization expense in future periods is: 2003 - $8.2 million, 2004 -
$33.0 million, 2005 - $32.2 million, 2006 - $27.2 million, 2007 - $26.1 million, 2008 - $25.7 million and
thereafter - $117.8 million. At September 30, 2003, the weighted-average amortization period for definite-lived
intangible assets is 9.6 years.
15
5. Investing Activities
Debt and equity securities
Fair value and cost of our debt and equity securities at September 30, 2003 and year-end 2002 follow ($ amounts
in millions):
2003 2002
------------------------------ ----------------------------
Fair Value Cost Fair Value Cost
------------- -------------- ------------- -------------
U.S. government and agency................... $ 549.1 $ 520.2 $ 461.6 $ 431.3
State and political subdivision.............. 558.9 508.8 534.7 481.9
Foreign government........................... 196.6 176.4 183.9 168.4
Corporate.................................... 6,537.5 6,187.0 5,485.2 5,138.7
Mortgage-backed.............................. 3,238.2 3,078.5 3,099.9 2,901.9
Other asset-backed........................... 1,927.2 1,920.4 2,128.8 2,122.1
------------- -------------- ------------- -------------
Debt securities.............................. $ 13,007.5 $ 12,391.3 $ 11,894.1 $ 11,244.3
============= ============== ============= =============
Amounts applicable to the closed block....... $ 6,763.9 $ 6,329.2 $ 6,431.1 $ 5,952.9
============= ============== ============= =============
2003 2002
------------------------------ ----------------------------
Fair Value Cost Fair Value Cost
------------- -------------- ------------- -------------
Hilb, Rogal and Hamilton (HRH) common stock.. $ 112.6 $ 42.1 $ 159.3 $ 44.7
GE Life and Annuity Assurance and
GE Group Life Assurance common stock....... 69.3 50.4 60.5 50.4
PXRE Group common stock...................... 20.3 9.4 27.7 9.4
Other equity securities...................... 155.2 149.8 143.7 157.7
------------- -------------- ------------- -------------
Equity securities............................ $ 357.4 $ 251.7 $ 391.2 $ 262.2
============= ============== ============= =============
Amounts applicable to the closed block....... $ 49.9 $ 49.7 $ -- $ --
============= ============== ============= =============
Our holdings in HRH common stock as of September 30, 2003 are available to be used in November 2005 to settle
stock purchase contracts issued by us. Upon settlement of such stock purchase contracts, we will recognize a
gross investment gain of $91.8 million ($32.4 net of offsets for applicable deferred acquisition costs and
deferred income taxes). See Note 6 for additional information.
Gross and net unrealized gains and losses from debt and equity securities at September 30, 2003 and year-end
2002 follow ($ amounts in millions):
2003 2002
------------------------------- ------------------------------
Gains Losses Gains Losses
-------------- -------------- -------------- --------------
U.S. government and agency................... $ 29.7 $ (0.8) $ 30.5 $ (0.2)
State and political subdivision.............. 51.4 (1.3) 53.1 (0.3)
Foreign government........................... 21.3 (1.1) 20.2 (4.7)
Corporate.................................... 400.9 (50.4) 442.8 (96.3)
Mortgage-backed.............................. 168.1 (8.4) 198.5 (0.5)
Other asset-backed........................... 62.5 (55.7) 85.0 (78.3)
-------------- -------------- -------------- --------------
Debt securities gains and losses............. $ 733.9 $ (117.7) $ 830.1 $ (180.3)
============== ============== ============== ==============
Debt securities net gains.................... $ 616.2 $ 649.8
============== ==============
Equity securities gains and losses........... $ 108.5 $ (2.8) $ 144.4 $ (15.4)
============== ============== ============== ==============
Equity securities net gains.................. $ 105.7 $ 129.0
============== ==============
16
Mortgage loans
The carrying values of our investments in mortgage loans by property type at September 30, 2003 and year-end
2002 follow ($ amounts in millions):
2003 2002
--------------- ---------------
Apartment buildings.......................................................... $ 130.9 $ 159.0
Office buildings............................................................. 56.4 131.5
Retail stores................................................................ 116.0 151.5
Industrial buildings......................................................... 37.5 42.2
Other........................................................................ 0.1 0.1
--------------- ---------------
Subtotal..................................................................... 340.9 484.3
Less: valuation allowances................................................... (12.8) (15.5)
--------------- ---------------
Mortgage loans............................................................... $ 328.1 $ 468.8
=============== ===============
Amounts applicable to the closed block....................................... $ 268.5 $ 373.2
=============== ===============
Venture capital partnerships
The components of net investment income related to venture capital partnerships for the three and nine month
periods ended September 30, 2003 and 2002 follow ($ amounts in millions):
Three Months Nine Months
--------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net realized gains (losses) on partnership
cash and stock distributions..................... $ 10.0 $ (2.1) $ 11.5 $ (7.2)
Net unrealized gains (losses) on partnership
investments...................................... 2.4 (17.8) 40.1 (44.0)
Partnership operating expenses..................... (2.2) (2.1) (6.0) (5.7)
------------ ------------ ------------ ------------
Net investment income (loss)....................... $ 10.2 $ (22.0) $ 45.6 $ (56.9)
============ ============ ============ ============
Amounts applicable to the closed block............. $ 5.1 $ -- $ 10.8 $ --
============ ============ ============ ============
Amounts applicable to the venture capital segment.. $ 5.1 $ (22.0) $ 34.8 $ (56.9)
============ ============ ============ ============
The effect of our adjusting estimated partnership results to actual results reflected in partnership financial
statements was to increase (decrease) net investment income as follows ($ amounts in millions):
Three Months Nine Months
--------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Closed block....................................... $ 4.7 $ -- $ -- $ --
Venture capital segment............................ (0.4) (0.8) 33.4 12.8
------------ ------------ ------------ ------------
Total.............................................. $ 4.3 $ (0.8) $ 33.4 $ 12.8
============ ============ ============ ============
17
Our investments in venture capital partnerships and unfunded commitments thereon at September 30, 2003 and
year-end 2002 by type of investment follow ($ amounts in millions):
2003 2002
------------ -----------
Technology.......................................................................... $ 42.2 $ 25.0
Telecommunications.................................................................. 15.3 10.2
Biotechnology....................................................................... 18.6 11.1
Health care......................................................................... 8.3 9.2
Consumer and business products and services......................................... 30.6 45.9
Financial services.................................................................. 29.2 28.1
Other............................................................................... 45.0 50.6
------------ -----------
Private holdings.................................................................... 189.2 180.1
Public holdings..................................................................... 27.0 23.0
Cash and cash equivalents........................................................... 12.8 22.4
Other............................................................................... 11.3 3.1
------------ -----------
Venture capital partnerships........................................................ $ 240.3 $ 228.6
============ ===========
Unfunded commitments................................................................ $ 135.6 $ 157.7
============ ===========
Amounts applicable to the closed block:
Venture capital partnerships........................................................ $ 37.8 $ 0.8
============ ===========
Unfunded commitments................................................................ $ 53.2 $ 24.4
============ ===========
Amounts applicable to venture capital segment:
Venture capital partnerships........................................................ $ 202.5 $ 227.8
============ ===========
Unfunded commitments................................................................ $ 82.4 $ 133.3
============ ===========
Investment activity in venture capital partnerships for the three and nine month periods ended September 30,
2003 and 2002 follow ($ amounts in millions):
Three Months Nine Months
----------------------- ------------------------
2003 2002 2003 2002
---------- ---------- ---------- -----------
Contributions............................................... $ 9.4 $ 10.2 $ 34.2 $ 30.7
Equity in earnings of partnerships.......................... 10.2 (22.0) 45.6 (56.9)
Distributions............................................... (16.4) (19.4) (27.7) (34.9)
Proceeds from sale of partnership interests................. -- -- (26.1) --
Realized loss on sale of partnership interests.............. -- -- (14.3) --
---------- ---------- ---------- -----------
Change in venture capital partnerships...................... 3.2 (31.2) 11.7 (61.1)
Venture capital partnership investments, beginning of period 237.1 261.8 228.6 291.7
---------- ---------- ---------- -----------
Venture capital partnership investments, end of period...... $ 240.3 $ 230.6 $ 240.3 $ 230.6
========== ========== ========== ===========
Affiliate equity securities
The fair value of our investment in Aberdeen common stock, based on the London Stock Exchange closing price at
September 30, 2003 and year-end 2002, was $44.6 million and $43.6 million, respectively. The carrying value of
our investment in Aberdeen on the equity method of accounting totaled $34.1 million and $119.3 million at
September 30, 2003 and year-end 2002, respectively. During the second quarter of 2003, we recorded an $89.1
million pre-tax, non-cash charge related to the other-than-temporary impairment of our equity investment in
Aberdeen.
18
Net investment income
Sources of net investment income for the three and nine month periods ended September 30, 2003 and 2002 follow
($ amounts in millions):
Three Months Nine Months
--------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Debt securities........................................ $ 184.0 $ 192.7 $ 570.2 $ 552.7
Equity securities...................................... 0.9 0.9 3.1 3.1
Mortgage loans......................................... 7.0 9.8 26.4 31.1
Venture capital partnerships........................... 10.2 (22.0) 45.6 (56.9)
Affiliate equity securities............................ -- 0.2 0.7 7.2
Policy loans........................................... 42.2 42.7 127.4 127.5
Other investments...................................... 11.0 4.3 23.4 11.6
Cash and cash equivalents.............................. 1.4 3.0 5.9 7.8
------------ ------------ ------------ ------------
Total investment income................................ 256.7 231.6 802.7 684.1
Less: investment expenses.............................. 2.5 2.8 8.0 8.4
------------ ------------ ------------ ------------
Net investment income.................................. $ 254.2 $ 228.8 $ 794.7 $ 675.7
============ ============ ============ ============
Amounts applicable to the closed block................. $ 138.8 $ 143.0 $ 425.4 $ 422.8
============ ============ ============ ============
Net realized investment gains (losses)
Sources and types of net realized investment gains (losses) for the three and nine month periods ended
September 30, 2003 and 2002 follow ($ amounts in millions):
Three Months Nine Months
--------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Debt securities........................................ $ (15.0) $ (8.9) $ (60.4) $ (80.7)
Equity securities...................................... (3.2) -- (4.3) --
Mortgage loans......................................... (0.9) -- (4.1) --
Venture capital partnerships........................... -- -- (4.6) --
Affiliate equity securities............................ -- -- (96.9) --
Other invested assets.................................. (0.4) -- (10.3) --
------------ ------------ ------------ ------------
Impairment losses...................................... (19.5) (8.9) (180.6) (80.7)
------------ ------------ ------------ ------------
Debt securities gains.................................. 12.4 15.7 82.7 54.5
Debt securities losses................................. (1.3) (9.1) (25.1) (33.6)
Equity securities gains................................ 5.5 3.4 21.1 6.2
Equity securities losses............................... (0.6) (9.0) (11.0) (20.5)
Mortgage loans......................................... (0.6) 0.2 (1.4) 0.2
Venture capital partnerships........................... -- -- (9.7) --
Other invested assets.................................. 1.5 (2.8) 4.5 (0.2)
------------ ------------ ------------ ------------
Net transaction gains (losses)......................... 16.9 (1.6) 61.1 6.6
------------ ------------ ------------ ------------
Net realized investment losses......................... $ (2.6) $ (10.5) $ (119.5) $ (74.1)
============ ============ ============ ============
Net realized investment losses......................... $ (2.6) $ (10.5) $ (119.5) $ (74.1)
------------ ------------ ------------ ------------
Applicable closed block policyholder
dividend obligation (reduction)...................... (3.5) 1.2 (4.5) (44.0)
Applicable deferred policy acquisition costs (benefit). (2.8) (0.1) (1.1) (4.5)
Applicable deferred income taxes (benefit)............. 1.2 (4.0) (44.8) (8.9)
------------ ------------ ------------ ------------
Offsets to realized investment losses.................. (5.1) (2.9) (50.4) (57.4)
------------ ------------ ------------ ------------
Net realized investment gains (losses)
included in net income............................... $ 2.5 $ (7.6) $ (69.1) $ (16.7)
============ ============ ============ ============
19
Unrealized investment gains (losses)
Sources of net unrealized investment gains (losses) for the three and nine month periods ended September 30,
2003 and 2002 follow ($ amounts in millions):
Three Months Nine Months
--------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Debt securities........................................ $ (292.9) $ 279.5 $ (33.6) $ 462.1
Equity securities...................................... (27.6) (54.7) (23.3) (25.2)
Other investments ..................................... 5.9 4.5 0.2 9.2
------------ ------------ ------------ ------------
Net unrealized investment gains (losses)............... $ (314.6) $ 229.3 $ (56.7) $ 446.1
============ ============ ============ ============
Net unrealized investment gains (losses)............... $ (314.6) $ 229.3 $ (56.7) $ 446.1
------------ ------------ ------------ ------------
Applicable closed block policyholder
dividend obligation (reduction)...................... (209.8) 235.8 (46.0) 364.4
Applicable deferred policy acquisition costs (benefit). (51.1) 40.6 (18.3) 64.3
Applicable deferred income taxes (benefit)............. (19.0) (14.1) 2.3 6.4
------------ ------------ ------------ ------------
Offsets to net unrealized investment gains (losses).... (279.9) 262.3 (62.0) 435.1
------------ ------------ ------------ ------------
Net unrealized investment gains (losses)
included in other comprehensive income............... $ (34.7) $ (33.0) $ 5.3 $ 11.0
============ ============ ============ ============
6. Financing Activities
Stock Purchase Contracts
In November 2002, we issued stock purchase contracts in a public offering. The stock purchase contracts are
prepaid forward contracts issued by us that will be settled in shares of Hilb, Rogal and Hamilton Company (HRH)
common stock. Upon issuance of the stock purchase contracts, we designated the embedded derivative instrument
as a hedge of the forecasted sale of our investment in HRH, whose shares underlie the stock purchase contracts.
All changes in the fair value of the embedded derivative instrument are recorded in other comprehensive income.
For the three months ended September 30, 2003, we recognized a decrease in the fair value of the embedded
derivative instrument of $0.9 million before income taxes ($0.6 million after income taxes) in other
comprehensive income, primarily due to a decrease in the time value of the option offset by an increase in the
intrinsic value of the option due to a decrease in the quoted market price of HRH common stock. For the nine
months ended September 30, 2003, we recognized an increase in the fair value of the embedded derivative
instrument of $11.3 million before income taxes ($7.3 million after income taxes) in other comprehensive
income, primarily due to a decrease in the quoted market price of HRH common stock during the period. The
quoted market price of HRH common stock ($31.04) at September 30, 2003 was below the price that we received at
issuance of the stock purchase contracts. For more information, see Notes 5 and 6 to our consolidated financial
statements in our 2002 Annual Report on Form 10-K.
20
Indebtedness
Carrying value and fair value of our indebtedness at September 30, 2003 and year-end 2002 follow ($ amounts in
millions):
2003 2002
--------------------------------- --------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------------- --------------- --------------- ---------------
Surplus notes......................... $ 175.0 $ 187.4 $ 175.0 $ 182.5
Equity units.......................... 153.7 159.3 153.7 156.5
Senior unsecured bonds................ 300.0 304.6 300.0 259.8
Interest rate swap.................... 13.8 13.8 15.6 15.6
--------------- --------------- --------------- ---------------
Total indebtedness.................... $ 642.5 $ 665.1 $ 644.3 $ 614.4
=============== =============== =============== ===============
Interest expense on our indebtedness, including amortization of debt issuance costs, for the three and nine
month periods ended September 30, 2003 and 2002 follows ($ amounts in millions):
Three Months Nine Months
--------------------------------- --------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Surplus notes......................... $ 3.0 $ 3.0 $ 9.1 $ 9.1
Equity units.......................... 3.0 -- 9.1 --
Senior unsecured bonds................ 3.7 3.9 11.1 11.5
Bank credit facility and other........ 0.1 0.8 0.2 2.5
--------------- --------------- --------------- ---------------
Total interest expense................ $ 9.8 $ 7.7 $ 29.5 $ 23.1
=============== =============== =============== ===============
Common Stock Dividends
On April 28, 2003, we declared a dividend of $0.16 per share to our shareholders of record on June 13, 2003;
we paid the dividend on July 11, 2003. In the prior year, we declared a dividend of $0.16 per share on May 15,
2002 to our shareholders of record on June 14, 2002; we paid that dividend on July 10, 2002.
7. Income Taxes
The allocation of income taxes to elements of comprehensive income (loss) and between current and deferred for
the three and nine month periods ended September 30, 2003 and 2002 follows ($ amounts in millions):
Three Months Nine Months
--------------------------------- --------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Income taxes (benefit) applicable to:
Income (loss) before cumulative
effect of accounting change........... $ 5.6 $ (26.0) $ (31.4) $ (40.4)
Cumulative effect of accounting
change................................ -- -- -- (11.4)
--------------- --------------- --------------- ---------------
Net income (loss)....................... $ 5.6 $ (26.0) $ (31.4) $ (51.8)
Other comprehensive income (loss)....... (20.8) (10.4) 6.5 11.2
--------------- --------------- --------------- ---------------
Comprehensive loss...................... $ (15.2) $ (36.4) $ (24.9) $ (40.6)
=============== =============== =============== ===============
Current................................. $ (2.6) $ 24.3 $ (5.4) $ (3.7)
Deferred................................ (12.6) (60.7) (19.5) (36.9)
--------------- --------------- --------------- ---------------
Income tax benefit applicable to
comprehensive (income) loss........... $ (15.2) $ (36.4) $ (24.9) $ (40.6)
=============== =============== =============== ===============
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For the three and nine months ended September 30, 2003 and 2002, the effective income tax rates applicable to
income from continuing operations differ from the 35.0% U.S. federal statutory tax rate. Items giving rise to
the differences and the effects are as follows ($ amounts in millions):
Three Months Nine Months
--------------------------------- --------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Income taxes at statutory rate.......... $ 7.9 $ (40.6) $ (19.5) $ (46.4)
Tax advantaged investment income........ (2.0) (2.6) (5.0) (5.7)
Non-taxable minority interest income.... (1.0) (1.1) (2.7) (3.2)
Intangible assets impairments........... -- 19.5 -- 19.5
Other, net.............................. 0.7 (1.2) (4.2) (4.6)
--------------- --------------- --------------- ---------------
Income taxes (benefit) applicable to
continuing operations................. $ 5.6 $ (26.0) $ (31.4) $ (40.4)
=============== =============== =============== ===============
Effective income tax (benefit) rates.... 25% (22)% (56)% (30)%
=============== =============== =============== ===============
8. Employee Benefits
During the three and nine month periods ended September 30, 2003, we contributed 135,977 and 293,414 treasury
shares, respectively, to fund the employer match for our saving and investment benefit plans. These shares had
a cost basis of $2.2 million and $4.7 million (weighted average cost of $15.83 per share) and an aggregate
market value of $1.4 million and $2.6 million for the three and nine month periods, respectively.
Stock-based Compensation
Pro forma earnings and earnings per share as if we had applied the fair value method of accounting for all
stock-based compensation for the three and nine month periods ended September 30, 2003 and 2002 follow ($
amounts in millions, except per share amounts):
Three Months Nine Months
--------------------------------- --------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net income (loss), as reported.......... $ 14.0 $ (93.0) $ (32.3) $ (231.6)
Add: Employee stock option compensation
expense included in net income (loss),
net of applicable income taxes........ 0.1 -- 0.1 --
Deduct: Employee stock option
compensation expense determined under
fair value accounting for all awards,
net of applicable income taxes........ 1.2 2.4 3.4 5.3
--------------- --------------- --------------- ---------------
Pro forma net income (loss)............. $ 12.9 $ (95.4) $ (35.6) $ (236.9)
=============== =============== =============== ===============
Basic earnings (loss) per share:
As reported......................... $ .15 $ (.96) $ (.34) $ (2.34)
Pro forma........................... $ .14 $ (.99) $ (.38) $ (2.39)
Diluted earnings (loss) per share:
As reported......................... $ .14 $ (.96) $ (.34) $ (2.34)
Pro forma........................... $ .13 $ (.99) $ (.38) $ (2.39)
During the third quarter of 2003, we granted 431,089 stock options which vest over three years. The options
had a weighted-average fair value of $4.15 per option ($1.8 million aggregate) which we are expensing over
their three-year vesting period.
22
During the second quarter of 2003, we granted 100,000 stock options which vest over three years. The options
have a weighted-average fair value of $3.65 per option ($0.4 million aggregate) which we are expensing over
their three-year vesting period.
Restricted Stock Units
On July 1, 2003, we awarded 5,537 restricted stock units valued at $9.03 per share ($0.1 million aggregate) to
certain directors as payment of their retainer for the current quarter. We recognized the expense associated
with this grant during the current quarter.
On June 26, 2003, we awarded 161,769 restricted stock units valued at $9.07 per share ($1.5 million aggregate)
to certain employees to satisfy our deferred compensation liabilities with them. We recognized no expense
associated with this issuance as the expense was recognized previously when the liabilities were accrued.
On April 14, 2003, we awarded 255,004 restricted stock units valued at $7.843 per share ($2.0 million
aggregate) to an employee; on January 1, 2003, we awarded 394,737 restricted stock units valued at $7.60 per
share ($3.0 million aggregate) to an employee. We recognized $0.4 million and $1.1 million in compensation
expense for these awards during the three and nine month periods ended September 30, 2003, respectively.
During the third quarter of 2002, we awarded 573,477 restricted stock units valued at $13.95 per share ($8.0
million aggregate) to an employee. We recognized the expense associated with the award during that quarter.
At September 30, 2003, we had 1,390,524 restricted stock units issued (573,477 units at year-end 2002). We
will issue the shares underlying these awards on the later of June 26, 2006 or each employee's and each
director's termination or retirement.
9. Earnings Per Share
The following table presents the shares used in the calculation of basic and diluted earnings per share for
the three and nine month periods ended September 30, 2003 and 2002 (amounts in thousands):
Three Months Nine Months
--------------------------------- --------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Weighted average common shares
outstanding........................... 94,276 96,570 94,158 99,087
--------------- --------------- --------------- ---------------
Effect of potential common shares:
Equity units.......................... 2,531 -- -- --
Restricted stock units................ 1,390 19 1,181 6
Employee stock options................ 75 -- 5 --
--------------- --------------- --------------- ---------------
Potentially dilutive common shares...... 3,996 19 1,186 6
Less: anti-dilutive potential common
shares................................ -- 19 1,186 6
--------------- --------------- --------------- ---------------
Dilutive potential common shares........ 3,996 -- -- --
--------------- --------------- --------------- ---------------
Weighted average common shares
outstanding and dilutive potential
common shares......................... 98,272 96,570 94,158 99,087
=============== =============== =============== ===============
Other common stock equivalents have exercise prices that were above the average closing price of our common
stock during the periods presented. During the three month period ended September 30, 2003, these primarily
include stock options related to 4,087,146 of our common shares. The stock option exercise prices of $10.49 to
$16.20 per share were greater than the average per share market price of our common stock of $10.32 for the
three month period ended September 30, 2003. During the nine month period ended September 30, 2003, these
include stock options (as discussed above) and equity units (related to 17,423,859 to 21,256,826 of our common
shares depending on our February 2006 quoted market price). The stock options' exercise price and equity
units'
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threshold appreciation price of $8.8206 were greater than the average market price of our common stock of
$8.74 for the nine month period ended September 30, 2003.
Treasury Stock
During the three and nine month periods ended September 30, 2002, we purchased 3.6 million and 7.5 million
shares, respectively, of our common stock in the market at weighted average per share prices of $15.41 and
$16.61, respectively.
10. Contingent Liabilities
In 1999, we discontinued our reinsurance operations through a combination of sale, reinsurance and placement
of certain retained group accident and health reinsurance business into run-off. We adopted a formal plan to
stop writing new contracts covering these risks and to end the existing contracts as soon as those contracts
would permit. However, we remain liable for claims under those contracts.
We have established reserves and reinsurance recoverables for claims and related expenses that we expect to
pay on our discontinued group accident and health reinsurance business. These reserves and reinsurance
recoverables are a net present value amount that is based on currently known facts and estimates about, among
other things, the amount of insured losses and expenses that we believe we will pay, the period over which
they will be paid, the amount of reinsurance we believe we will collect under our finite aggregate
excess-of-loss reinsurance (finite reinsurance) and other reinsurance to cover our losses and the likely legal
and administrative costs of winding down the business.
Our total reserves were $80.0 million and our total reinsurance recoverable balances related to paid losses
were $175.0 million at September 30, 2003. In addition, in 1999 we purchased finite reinsurance to further
protect us from unfavorable results from this discontinued business. The maximum coverage available from our
finite reinsurance is currently $120.0 million. The amount of our total financial provisions at September 30,
2003 was, therefore, $25.0 million, consisting of reserves, less reinsurance recoverable balances, plus the
amount currently available from our finite reinsurance. We did not establish any additional financial
provisions during the three and nine month periods ended September 30, 2003 and 2002.
We expect our reserves and reinsurance to cover the run-off of the business; however, the nature of the
underlying risks is such that the claims may take years to reach the reinsurers involved. Therefore, we expect
to pay claims out of existing estimated reserves for up to ten years as the level of business diminishes.
Given the uncertainty associated with litigation and other dispute resolution proceedings, as described below,
our estimated amount of the loss on disposal of reinsurance discontinued operations may differ from actual
results. However, it is our opinion, after consideration of the provisions made in these financial statements,
as described above, that future developments will not have a material effect on our financial position.
Unicover Managers, Inc.
A significant portion of the claims arising from our discontinued group accident and health reinsurance
business arises from the activities of Unicover Managers, Inc. (Unicover). Unicover organized and managed a
group, or pool, of insurance companies (Unicover pool) and two other facilities (Unicover facilities), which
reinsured the life and health insurance components of workers' compensation insurance policies issued by
various property and casualty insurance companies. We were a member of the Unicover pool but terminated our
participation in the pool effective March 1, 1999.
We are involved in disputes relating to the activities of Unicover. Under Unicover's underwriting authority,
the Unicover pool and Unicover facilities wrote a dollar amount of reinsurance coverage that was many times
greater than originally estimated. As a member of the Unicover pool, we are involved in several proceedings in
24
which the pool members assert that they can deny coverage to certain insurers that claim that they purchased
reinsurance coverage from the pool.
Further, we were, along with Sun Life Assurance of Canada (Sun Life) and Cologne Life Reinsurance Company
(Cologne Life), a retrocessionaire (meaning a reinsurer of other reinsurers) of the Unicover pool and two
other Unicover facilities, providing the pool and facility members with reinsurance of the risks that the pool
and facility members had assumed. In September 1999, we joined an arbitration proceeding that Sun Life had
begun against the members of the Unicover pool and the Unicover facilities. In this arbitration, we and Sun
Life sought to cancel our retrocession agreements on the grounds that material misstatements and
nondisclosures were made to us about, among other things, the amount of risks we would be reinsuring. The
arbitration proceeded only with respect to the Unicover pool because we, Sun Life and Cologne Life reached
settlement with the two Unicover facilities in the first quarter of 2000. In October 2002, the arbitration
panel issued its decision that the agreement by which we provided retrocessional reinsurance to the pool was
valid only to the extent of business bound or renewed to that agreement on or before August 31, 1998. This
decision had the effect of granting us a substantial discount on our potential liabilities, because most of
the business was bound or renewed to the agreement after August 31, 1998. In a clarification dated January 4,
2003, the arbitration panel confirmed its decision. A significant portion of our remaining potential
liabilities as a retrocessionaire of the pool may be recovered from our retrocessionaires.
In one of the Unicover facilities' settlements, the Reliance facility settlement of January 2000, we paid a
settlement amount of $97.9 million and were released from all of our obligations as a retrocessionaire of the
facility. Subsequently, we were reimbursed by one of our retrocessionaires for $38.8 million of the amount we
paid under the settlement. A significant portion of the remainder of the settlement payment may be recovered
from certain of our other retrocessionaires.
In the other Unicover facilities' settlement, the Lincoln facility settlement of March 2000, we paid a
settlement amount of $11.6 million and were released from all of our obligations as a retrocessionaire of the
facility. A significant portion of the settlement payment may be recovered from certain of our
retrocessionaires. The likelihood of obtaining the additional recoveries from our retrocessionaires cannot be
estimated with a reliable degree of certainty at this stage of our recovery efforts. This is due in part to
the lack of sufficient claims information (which has resulted from disputes among ceding reinsurers leading to
delayed processing, reporting blockages and standstill agreements among reinsurers) and in part to the matters
discussed below under "Related Proceedings."
The amounts paid and results achieved in the above settlements and arbitration decision are reflected in our
consolidated financial statements. As the amounts previously reserved for these matters were sufficient, we
established no additional reserves with respect to these settlements and arbitration decision.
Related Proceedings
In our capacity as a retrocessionaire of the Unicover business, we had an extensive program of our own
reinsurance in place to protect us from financial exposure to the risks we had assumed. Currently, we are
involved in separate arbitration proceedings with two of our own retrocessionaires which are seeking on
various grounds to avoid paying any amounts to us. Because the same retrocession program that covers our
Unicover business covers a significant portion of our other remaining group accident and health reinsurance
business, we could have additional material losses if one or more of our retrocessionaires successfully avoids
its obligations.
With one of those retrocessionaires, we have three disputes. One concerns an agreement under which the
retrocessionaire reinsures us for up to $45 thousand per loss in excess of a $5 thousand retention. In June
2003, the arbitration panel issued its decision which upheld in all material respects the retrocessional
obligations to us. The decision is the subject of a pending appeal only with respect to the Unicover business.
The other two disputes will not have a material effect on our reinsurance recoverable balances. As of
September 30, 2003, the
25
reinsurance recoverable balance from this retrocessionaire related to paid losses was $57.0 million, subject
to further development.
The dispute with the other retrocessionaire, which seeks to avoid an excess-of-loss retrocession agreement, a
surplus share retrocession agreement and a quota share retrocession agreement, is the subject of a pending
arbitration that is scheduled for November, 2003. As of September 30, 2003, the reinsurance recoverable
balance from this retrocessionaire related to paid losses was $9.0 million, subject to further development.
We have entered into a standstill agreement with another retrocessionaire under which both parties have agreed
not to commence any proceedings against the other without providing written notice within a specified period.
The purpose of the agreement is to allow the parties to investigate the existence and extent of their
contractual obligations to each other. As of September 30, 2003, the reinsurance recoverable balance from this
retrocessionaire related to paid losses was $71.0 million, subject to further development.
At this stage, we cannot predict the outcome of the above matters, nor can we estimate the amount at risk with
a reliable degree of certainty. This is due in part to our lack of sufficient claims information (which has
resulted from disputes among ceding reinsurers that have led to delayed processing, reporting blockages, and
standstill agreements among reinsurers). This applies with regard both to business related to Unicover and not
related to Unicover.
Other Proceedings
Another set of disputes involves personal accident business that was reinsured in the mid-1990s in the London
reinsurance market in which we participated. These disputes involve multiple layers of reinsurance and
allegations that the reinsurance program created by the brokers involved in placing those layers was
interrelated and devised to disproportionately pass losses to a top layer of reinsurers. Many companies who
participated in this business are involved in litigation or arbitration in attempts to avoid their obligations
on the basis of misrepresentation. Because of the complexity of the disputes and the reinsurance arrangements,
many of these companies are currently participating in negotiations of the disputes for certain contract
years, and we believe that similar discussions will follow for the remaining years. Although we are vigorously
defending our contractual rights, we are actively involved in the attempt to reach negotiated business
solutions. At this stage, we cannot predict the outcome, nor can we estimate the amount at risk with a
reliable degree of certainty. This is due in part to our lack of sufficient claims information (which has
resulted from disputes among ceding reinsurers that have led to delayed processing, reporting blockages, and
standstill agreements among reinsurers).
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENT
The following discussion may contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The company intends these forward-looking statements to be covered by the safe
harbor provisions of the federal securities laws relating to forward-looking statements. These include
statements relating to trends in, or representing management's beliefs about, the company's future strategies,
operations and financial results, as well as other statements including words such as "anticipate," "believe,"
"plan," "estimate," "expect," "intend," "may," "should" and other similar expressions. Forward-looking
statements are made based upon management's current expectations and beliefs concerning trends and future
developments and their potential effects on the company.