-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WrKLxagUm0XapN8g+tCWJNGsefi4rsqdvomzlhy6QLYJHi84OYReL+vz7atisjcB TgDjlGOyAyIlH/oM8DEL8g== 0000914039-00-000142.txt : 20000328 0000914039-00-000142.hdr.sgml : 20000328 ACCESSION NUMBER: 0000914039-00-000142 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BERKLEY W R CORP CENTRAL INDEX KEY: 0000011544 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 221867895 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-07849 FILM NUMBER: 580022 BUSINESS ADDRESS: STREET 1: 165 MASON ST STREET 2: P O BOX 2518 CITY: GREENWICH STATE: CT ZIP: 06836-2518 BUSINESS PHONE: 2036293000 MAIL ADDRESS: STREET 1: 165 MASON ST STREET 2: PO BOX 2518 CITY: GREENWICH STATE: CT ZIP: 06836-2518 10-K 1 FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________. COMMISSION FILE NUMBER 0-7849 ------------------------ W.R. BERKLEY CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 22-1867895 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 165 MASON STREET, P.O. BOX 2518, GREENWICH, CT 06836-2518 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
------------------------ REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 629-3000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $.20 per share ------------------------ 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 twelve 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market of voting stock held by non-affiliates of the registrant based on the closing price of such stock on the Nasdaq National Market as of March 3, 2000: $327,382,427. Number of shares of common stock, $.20 par value, outstanding as of March 3, 2000: 25,616,578. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's 1999 Annual Report to Stockholders for the year ended December 31, 1999 are incorporated herein by reference in Part II, and portions of the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1999, are incorporated herein by reference in Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 W. R. BERKLEY CORPORATION ANNUAL REPORT ON FORM 10-K December 31, 1999
Page SAFE HARBOR STATEMENT 3 PART I ITEM 1. BUSINESS 4 ITEM 2. PROPERTIES 22 ITEM 3. LEGAL PROCEEDINGS 23 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 23 ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 1999 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 25 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 25 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 25 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 26 ITEM 11. EXECUTIVE COMPENSATION 29 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 29 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 29
2 3 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein, including those related to the Company's performance for the year 2000, are based upon the Company's historical performance and on current plans, estimates and expectations. They are subject to various risks and uncertainties, including but not limited to, the impact of competition, product demand and pricing, claims development, catastrophe and storm losses, investment results, legislative and regulatory developments and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. These risks could cause the Company's actual results for the 2000 fiscal year and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company. Forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. 3 4 PART I ITEM 1. BUSINESS General Description of the Company's Business W. R. Berkley Corporation (the "Company"), a Delaware corporation, is an insurance holding company which, through its subsidiaries, presently operates in all segments of the property casualty insurance business: regional property casualty insurance; reinsurance; specialty lines of insurance (including excess and surplus lines and commercial transportation); alternative markets (including the management of alternative insurance market mechanisms); and international. The Company was founded on the concept that a group of autonomous regional and specialty insurance entities could compete effectively in selected markets within a very large industry. Decentralized control allows each subsidiary or regional group to respond to local or specialty market conditions while capitalizing on the effectiveness of centralized investment and reinsurance management and actuarial, financial and legal staff support. The Company's regional insurance operations are conducted primarily in the New England, Mid Atlantic, Midwest and Southern regions of the United States. Reinsurance, specialty insurance and alternative markets operations are conducted nationwide. Presently, international operations are conducted primarily in Argentina and the Philippines. Net premiums written, as reported on a generally accepted accounting principles ("GAAP") basis, by the Company's five major insurance industry segments for the five years ended December 31, 1999 were as follows:
Year Ended December 31, -------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Amounts in thousands) Net premiums written: Regional insurance operations $ 649,849 $ 641,316 $ 618,768 $ 517,515 $ 460,732 Reinsurance operations 309,181 269,634 206,652 218,200 196,299 Specialty insurance operations 260,380 254,003 219,272 214,738 171,520 Alternative markets operations 122,137 106,195 90,870 76,876 25,998 International operations 86,172 75,106 42,079 25,182 5,872 ------------ ------------ ------------ ------------ ---------- Total $ 1,427,719 $ 1,346,254 $ 1,177,641 $ 1,052,511 $ 860,421 ============ ============ ============ ============ ========== Percentage of net premiums written: Regional insurance operations 45.5% 47.6% 52.6% 49.2% 53.6% Reinsurance operations 21.7 20.0 17.5 20.7 22.8 Specialty insurance operations 18.2 18.9 18.6 20.4 19.9 Alternative markets operations 8.6 7.9 7.7 7.3 3.0 International operations 6.0 5.6 3.6 2.4 .7 ------------ ------------ ------------ ------------ ---------- Total 100.0% 100.0% 100.0% 100.0% 100.0% ============ ============ ============ ============ ==========
4 5 The following sections briefly describe the Company's insurance segments and subsidiaries. The statutory information contained herein is derived from that reported to state regulatory authorities in accordance with statutory accounting practices ("SAP"). The descriptions contain each significant insurance subsidiary's rating by A.M. Best and Company, Inc. ("A.M. Best"). A.M. Best's ratings are based upon factors of concern to policyholders, insurance agents and brokers and are not directed toward the protection of investors. A.M. Best states: "Best's Ratings reflect [its] opinion as to the relative financial strength and performance of each insurer in comparison with others, based on [its] analysis of the information provided to [it]. These ratings are not a warranty of an insurer's current or future ability to meet its contractual obligations." A.M. Best reviews its ratings on a periodic basis, and ratings of the Company's subsidiaries are therefore subject to change. REGIONAL INSURANCE OPERATIONS The Company's regional property casualty subsidiaries write standard commercial and personal lines insurance for such risks as automobiles, homes and businesses. The Company's regional insurance operations have historically been conducted through ten principal operating subsidiaries. In 1999, the Company restructured the management and back-office operations of these ten companies into four geographic units based on markets served. As part of the restructuring, certain back office functions and operating redundancies were minimized or eliminated. The regional groups, and the primary regional company for each group, are as follows: - New England - Acadia Insurance Company - Mid Atlantic - Firemen's Insurance Company of Washington, D.C. - Midwest - Continental Western Insurance Company - Southern Tier - Union Standard Insurance Company Berkley Regional Insurance Company ("BRIC"), an intermediate holding company, owns all of the capital stock of the regional insurance companies and reinsures varying portions of the business written by the regional operations. BRIC is currently rated A by A.M. Best. This is a group rating which applies to each of the regional insurance companies and certain other subsidiaries as noted herein. NEW ENGLAND REGIONAL INSURANCE GROUP Acadia Insurance Company ("Acadia") writes multiple line property and casualty coverages principally in the States of Maine, New Hampshire, Vermont and Massachusetts and sells its personal and commercial coverages through independent agencies. Acadia's net premiums written for the year ended December 31, 1999 were $133,168,000. Acadia utilizes its subsidiary, Cadillac Mountain Insurance Company, as a companion writer. MID ATLANTIC REGIONAL INSURANCE GROUP The Mid Atlantic regional insurance group consists of Firemen's Insurance Company of Washington, D.C. ("Firemen's), Berkley Insurance Company of the Carolinas ("BICC"), Chesapeake Bay Property and Casualty Insurance Company ("Chesapeake") and The Presque Isle Insurance Division of Firemen's. Firemen's is the lead company in the Mid Atlantic group and manages the affairs of the group from its headquarters in Richmond, Virginia. Firemen's, Chesapeake and BICC sell their policies primarily through agents in the District of Columbia and the States of Maryland, North Carolina, Pennsylvania and Virginia. Firemen's Insurance Company of Washington, D.C. writes homeowners, other personal lines and commercial risks in the District of Columbia and in the States of Maryland, North Carolina and Virginia. In March 1995, Firemen's established The Presque Isle Insurance Division in order to expand its operations into the Commonwealth of Pennsylvania. Firemen's net premiums written for the year ended December 31, 1999 were $60,231,000. 5 6 Berkley Insurance Company of the Carolinas writes personal and commercial lines in North Carolina and is expanding to surrounding states. Its net premiums written for the year ended December 31, 1999 were $33,805,000. Chesapeake Bay Property and Casualty Insurance Company writes personal and commercial lines in the State of Virginia. Chesapeake's net premiums written for the year ended December 31, 1999 were $28,573,000. MIDWEST REGIONAL INSURANCE GROUP The Midwest regional insurance group consists of Continental Western Insurance Company ("Continental Western"), American West Insurance Company ("American West"), Tri-State Insurance Company of Minnesota ("Tri-State") and Union Insurance Company ("Union"). Continental Western is the lead company in the group and manages group affairs from its office in Urbandale, Iowa. Continental Western, Tri-State and Union obtain their business primarily in the smaller communities of the Midwest through independent insurance agencies, which represent them on a non-exclusive basis and are compensated on a commission basis. The following are brief descriptions of the companies in the Midwest regional group: Continental Western Insurance Company writes a diverse commercial lines book of business as well as personal lines principally in the States of Iowa, Nebraska, Kansas, Illinois, Missouri, Wisconsin and Montana. Continental Western's net premiums written for the year ended December 31, 1999 were $167,395,000. American West Insurance Company's business consists primarily of personal lines in the States of Minnesota, Montana, Wisconsin and South Dakota. American West's net premiums written for the year ended December 31, 1999 were $8,871,000. Tri-State Insurance Company of Minnesota writes commercial lines (specializing in grain elevator coverages), as well as personal lines, primarily in the States of Minnesota, Iowa, North and South Dakota, Nebraska, Wisconsin and Illinois. Tri-State's net premiums written for the year ended December 31, 1999 were $52,782,000. Union Insurance Company's business consists of personal lines as well as commercial lines insurance concentrated in the States of Nebraska, Kansas, Colorado and South Dakota. Union's net premiums written for the year ended December 31, 1999 were $56,468,000. SOUTHERN TIER REGIONAL INSURANCE GROUP The Southern Tier regional insurance group consists of Union Standard Insurance Company ("Union Standard") and Great River Insurance Company ("Great River"). Union Standard is the lead company in the group and manages group affairs from its office in Irving, Texas. Union Standard and Great River obtain their business primarily in the smaller communities of the Southwest through independent insurance agencies, which represent them on a non-exclusive basis and are compensated on a commission basis. The following are brief descriptions of the companies in the Southern Tier regional group: Union Standard Insurance Company writes personal lines and commercial lines of insurance for small businesses in the States of Texas, Oklahoma, Arkansas, Colorado and Arizona. Union Standard's net premiums written for the year ended December 31, 1999 were $69,715,000. Great River Insurance Company writes personal and commercial lines in Mississippi, Tennessee, Alabama and Louisiana and is expanding to surrounding states. Great River's net premiums written for the year ended December 31, 1999 were $38,841,000. 6 7 Regional Operations: Business The following table sets forth the percentages of direct premiums written, by line, by the Company's regional insurance operations:
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Commercial Multi-Peril 21.9% 20.7% 20.5% 20.8% 21.5% Workers' Compensation 17.8 18.6 19.3 20.1 20.8 Automobile: Personal 14.3 14.8 15.2 16.4 17.4 Commercial 21.7 20.8 19.6 17.4 15.6 General Liability 7.0 6.9 6.8 6.5 6.1 Homeowners 5.8 6.3 7.1 7.9 8.7 Fire and Allied Lines 4.5 4.7 5.0 4.7 4.6 Inland Marine 3.6 3.4 2.0 2.8 2.6 Other 3.4 3.8 4.5 3.4 2.7 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
The following table sets forth the percentages of direct premiums written, by state, by the Company's regional insurance operations:
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Maine 8.2% 9.4% 10.2% 10.8% 10.8% Iowa 7.2 7.5 7.7 8.4 9.4 Nebraska 7.1 7.0 7.5 8.2 9.1 Texas 6.3 6.3 6.8 7.5 8.0 New Hampshire 6.0 5.8 5.8 6.0 6.0 Pennsylvania 5.4 5.0 4.8 2.2 -- Minnesota 5.0 5.4 5.3 5.4 5.6 North Carolina 4.8 4.8 4.2 1.5 0.1 Kansas 4.3 4.5 4.6 4.8 4.9 Mississippi 3.9 5.0 5.7 6.1 5.5 Virginia 3.7 4.1 4.2 3.7 2.9 Colorado 3.7 3.5 3.5 3.8 4.1 Massachusetts 3.6 2.2 0.2 0.1 -- Missouri 3.5 3.4 3.6 3.6 3.8 South Dakota 3.5 3.7 4.2 5.4 6.8 Vermont 3.0 3.0 3.2 3.1 2.4 Wisconsin 2.5 2.5 2.6 2.9 3.6 Illinois 2.4 2.6 2.8 3.1 3.5 Arkansas 1.7 1.7 1.8 1.8 2.1 Tennessee 1.6 1.3 1.0 0.4 -- South Carolina 1.4 1.5 1.0 -- Oklahoma 1.3 1.3 1.3 1.3 1.4 Idaho 1.2 1.4 1.1 0.6 0.2 Montana 1.1 1.2 1.3 1.4 1.4 North Dakota 0.9 1.0 1.2 1.6 2.6 Ohio 0.8 0.6 0.5 0.5 0.1 Arizona 0.7 -- -- -- -- Maryland 0.7 0.6 0.7 0.7 0.7 Oregon 0.7 0.6 0.6 0.5 0.3 Other 3.8 3.1 2.6 4.6 4.7 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
7 8 REINSURANCE OPERATIONS The Company's reinsurance operations consist of six operating units, which specialize in underwriting property, casualty and surety reinsurance on both a treaty and a facultative basis. The Company's reinsurance operations are conducted by Signet Star Holdings, Inc. through its subsidiary Signet Star Reinsurance Company ("Signet Star"). For financial segment reporting purposes, the results of the alternative market division of Signet Star are included in the Company's alternative markets segment. Signet Star is rated A by A.M. Best. The Property Casualty Treaty Division is the largest business unit in terms of personnel and premiums written. This division of Signet Star is committed exclusively to the broker market segment of the treaty reinsurance industry. It functions as a traditional reinsurer in specialty and standard reinsurance lines. This unit is de-emphasizing commodity lines of business, which are experiencing intense competition brought on, in part, by excess capacity. Facultative ReSources, Inc. ("Fac Re"), an underwriting manager, specializes in individual certificate and program facultative business. Fac Re's highly experienced underwriters seek to offset the underwriting and pricing cycles in the underlying insurance business by developing risk management solutions and through superior risk selection. Fac Re develops its business through brokers and on a direct basis where the client does not choose to use an intermediary. The Fidelity and Surety Division ("F&S") operates as a lead reinsurer in a niche market of the property casualty industry where its highly specialized knowledge and expertise are essential to meet the needs of fidelity and surety primary writers. Business is marketed principally through brokers as well as directly to clients not served by intermediaries. Gemini Insurance Company is an excess and surplus line insurance company which commenced business in 1997 to provide Signet Star with primary issuing carrier capability and thereby generate "reverse flow" business. Under the reverse flow concept, a reinsurer writes primary business through a subsidiary or affiliated carrier that is then ceded back to the reinsurer. It operates as an authorized insurance company in the State of Delaware and will operate nationwide, as necessary legal and regulatory requirements are met, as an approved excess and surplus line carrier. Gemini is rated A by A.M. Best. StarNet Insurance Company ("StarNet") was acquired by Signet Star in 1998 to write reverse flow business on an admitted basis. Signet Star will seek to license StarNet broadly to serve as an adjunct to Gemini to write primary business on an admitted basis nationwide. StarNet is rated A by A.M. Best. The Latin American and Caribbean Division was established in 1996 to write business exclusively in Latin America and the Caribbean. In January 2000, Signet Star decided to withdraw from this market place, with no new business being written after February 1, 2000. The Division's net premiums written for the year ended December 31, 1999 were $21,088,000. 8 9 Reinsurance Operations: Business The following table sets forth the percentages of gross premiums written, by line, by the Company's reinsurance operations:
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Treaty: Casualty and other 46.0% 39.7% 38.7% 45.1% 46.6% Property and related lines 15.1 19.1 16.1 23.3 26.8 Professional and specialty 10.1 8.4 5.5 4.7 4.8 ---- ---- ---- ---- ---- Total Treaty 71.2 67.2 60.3 73.1 78.2 Facultative: 14.9 14.8 15.4 11.7 14.2 Fidelity and Surety 7.7 6.8 10.5 9.5 7.6 Latin American and Caribbean 6.2 11.2 13.8 5.7 -- ----- ---- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
The following table sets forth the percentage of gross premiums written, by property versus casualty business, by the Company's reinsurance operations:
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Property 20.6% 31.4% 32.7 35.2% 33.4% Casualty 79.4% 68.6% 67.3 64.8 66.6 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ====== ===== ===== ===== =====
SPECIALTY INSURANCE OPERATIONS The Company's specialty lines of insurance consist primarily of excess and surplus lines ("E & S"), commercial transportation, professional liability, directors and officers liability and surety. Admiral Insurance Company ("Admiral") specializes in E & S general liability coverages, including products liability and professional liability. Admiral insures risks requiring specialized treatment not available in the conventional market, with coverage designed to meet the specific needs of the insured. Business is received from wholesale brokers via retail agents, whose clients are the insureds. E & S carriers operate on a non-admitted basis in the states where they write business. They are generally free from rate regulation and policy form requirements. Admiral's business is obtained on a nationwide basis from approximately 190 non-exclusive brokers, who are compensated on a commission basis. Admiral also writes directors and officers liability insurance through operations conducted by Monitor Liability Managers, Inc., an underwriting manager established by the Company. Admiral is rated A++ by A.M. Best. Admiral's net premiums written for the year ended December 31, 1999 were $103,738,000. In 1999, Admiral purchased FICO Insurance Company from Firemen's and changed its name to Admiral Indemnity Insurance Company ("Admiral Indemnity"). As an admitted company, Admiral Indemnity will compete for certain risks that might be subject to the commercial lines deregulation enactments (see "Regulation") as well as other risks which prefer an admitted carrier. Admiral Indemnity will also continue to write commercial business consisting primarily of multiple dwelling and restaurant coverages principally in the State of New York through operations conducted by Clermont Specialty Managers, Ltd., an underwriting manager which is owned by the Company. Admiral Indemnity is rated A by A.M. Best (BRIC group rating). Admiral Indemnity's net premiums written for the year ended December 31, 1999 were $13,320,000. 9 10 Carolina Casualty Insurance Company ("Carolina") writes liability, physical damage and cargo insurance for the transportation industry, concentrating on long-haul trucking companies. Public transportation insurance for such risks as charter buses and school buses also makes up a substantial part of Carolina's book of business. Carolina's business is obtained nationwide from approximately 120 agents and brokers who are compensated on a commission basis. Carolina also writes surety bonds through operations conducted by Monitor Surety Managers, Inc., an underwriting manager established by the Company. In December 1998, Carolina began writing directors and officers liability insurance through operations conducted by Monitor Liability Managers, Inc., an underwriting manager established by the Company. Carolina is rated A by A.M. Best. Carolina's net premiums written for the year ended December 31, 1999 were $82,673,000. Nautilus Insurance Company ("Nautilus") insures E & S risks which involve a lower degree of expected severity than those covered by Admiral. Nautilus obtains its business nationwide from approximately 135 non-exclusive general agents, some of which also provide business to Admiral. A substantial portion of Nautilus' business is written on a binding authority basis, subject to certain contractual limitations. Nautilus is rated A by A.M. Best. Nautilus' net premiums written for the year ended December 31, 1999 were $60,649,000. Great Divide Insurance Company ("Great Divide"), a subsidiary of Nautilus also rated A by A.M. Best, writes transportation risks, as well as other specialty lines, on an admitted basis. Specialty Operations: Business The following table sets forth the percentages of gross premiums written, by line, by the Company's specialty insurance operations:
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- General Liability 30.5% 28.2% 34.1% 35.3% 37.6% Automobile Liability 18.3 19.0 17.7 20.9 27.5 Professional Liability 16.5 16.9 14.7 12.1 7.0 Directors and Officers Liability 6.6 7.7 8.1 10.0 9.0 Fire and Allied Lines 7.7 7.1 7.5 7.1 4.9 Automobile Physical Damage 6.4 6.1 4.9 5.3 6.8 Medical Malpractice 6.0 6.1 4.0 3.3 2.3 Inland Marine 1.9 1.8 1.5 1.6 2.1 Commercial Multi-Peril 3.3 3.1 3.0 1.0 0.7 Surety 2.1 2.0 1.9 1.3 0.8 Workers' Compensation 0.6 1.9 2.5 1.7 0.7 Other 0.1 0.1 0.1 0.4 0.6 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
ALTERNATIVE MARKETS The Company's alternative markets operations specialize in insuring, reinsuring and administering self-insurance programs and other alternative risk transfer mechanisms for public entities, private employers and associations. Typical clients are those who are driven by various factors to seek less costly and more efficient techniques to manage their exposure to claims. The Company's alternative markets segment consists of both excess and primary workers' compensation insurance; insurance services operations which manage alternative market mechanisms; and reinsurance of alternative risk business. 10 11 WORKERS' COMPENSATION INSURANCE Midwest Employers Casualty Company ("Midwest Employers") markets and underwrites excess workers' compensation ("EWC") insurance and related risk management services, including a full range of consulting services. EWC insurance is marketed primarily to employers and employer groups which have elected and have qualified or been approved by state regulatory authorities to self-insure their workers' compensation programs. EWC insurance provides coverage to a self-insured employer once the employer's losses exceed the employer's retention amount. Midwest Employers offers a complete line of EWC products, including specific and aggregate EWC insurance policies and surety bonds. Midwest Employers is rated A- by A.M.Best. Midwest Employers net premiums written for the year ended December 31, 1999 were $41,287,000. Preferred Employers Insurance Company ("Preferred Employers") was established in 1998 to insure workers' compensation risks in California, focusing on the small employer market. Preferred Employers is rated A by A.M. Best (BRIC group rating). Preferred Employers net premiums written for the year ended December 31, 1999 were $4,073,000. Key Risk Insurance Company (Key Risk), a North Carolina insurance company, was organized in 1998 to target the business of funds or other entities moving out of self-insurance. Key Risk has an A.M. Best rating of A (BRIC group rating). Its net premiums written for the year ended December 31, 1999 were $28,103,000. INSURANCE SERVICES OPERATIONS The alternative markets insurance service operations are conducted by Berkley Risk Administrators Company, LLC. This business offer a variety of products, which include underwriting and claims administration and management of alternative insurance market mechanisms. In addition, the insurance services operations provide agency and brokerage services to both affiliated and unaffiliated entities. Berkley Risk Administrators Company, LLC ("BRAC") offers a full range of alternative solutions customized to meet risk financing needs for various structures, such as assigned risk plans, captive insurance companies, retention pools, risk retention groups, self-funded plans and specialty insurance company programs. Program management services include property casualty and workers' compensation third-party administration, claims adjustment and management, employee benefit consulting, employee benefit third-party administration, financial accounting, insurance and reinsurance risk transfer, loss control and safety consulting, management information systems, regulatory compliance and relations, risk management consulting, assigned risk plan management, statistical analysis, underwriting, rating and policy issuance and managed care. Through its 42 offices in 18 states, BRAC serves a national customer base that includes businesses, governments, educational institutions, tribal nations, non-profit entities and insurers. REINSURANCE Signet Star - Alternative Markets Division specializes in providing custom designed reinsurance products and services to alternative markets ("ARM") clients, such as captive insurance companies, risk retention groups, public entity insurance trusts and governmental pools. ARM clients are generally self-insured vehicles which provide insurance buyers with a mechanism for assuming part of their own risk, managing their exposures, modifying their loss costs and, ultimately, participating in the underwriting results. Signet Star has been an active reinsurer of ARM clients for over ten years and is considered to be one of the leading broker market reinsurers of ARM business. The Alternative Markets operation is expanding its efforts in single-parent captives by leveraging its resources and its relationships with affiliates and establishing strategic alliances with nonaffiliated captive managers. Its net premiums written for the year ended December 31, 1999 were $49,048,000. 11 12 Alternative Markets Operations: Business The following table sets forth the percentages of revenues, by major source of business, of the alternative markets operations:
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Workers' Compensation Insurance 49.9% 48.8% 52.7% 56.9% 28.4% Insurance Service Operations 27.6 29.6 29.3 29.4 49.5 Reinsurance 22.5 21.6 18.0 13.7 22.1 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
INTERNATIONAL OPERATIONS In 1995, the Company and Northwestern Mutual Life International, Inc. ("NML"), a wholly-owned subsidiary of The Northwestern Mutual Life Insurance Company, entered into a joint venture to form Berkley International LLC ("Berkley International"), a limited liability company. The Company agreed to contribute up to $65 million to Berkley International in exchange for a 65% membership interest and NML agreed to contribute up to $35 million to Berkley International in exchange for a 35% membership interest. Berkley International owns 99.9% of Berkley International Argentina S.A. ("Berkley S.A."), an Argentine holding company. It also owns 59% of Philippine Insurance Holdings, Inc., a Philippine holding company, as well as 67% of Family First, Inc., a direct sales and marketing operation. Berkley S.A. offers property casualty insurance and life insurance in Argentina. Philippine Insurance Holdings, Inc. provides endowment policies to fund educational and retirement needs and diversified life products in the Philippines. International Operations: Business The following table set forth the percentages of gross premiums for the Company's international operations:
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Property and Casualty 72.3% 85.5% 96.3% 100.0 100.0% Life 16.5 10.9 3.7 -- -- ---- ---- ----- ----- ----- Total Argentina 88.8 96.4 100.0 100.0 100.0 Philippines 11.2 3.6 -- -- -- ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
12 13 Results by Industry Segment Summary financial information about the Company's operating segments is presented on a GAAP basis in the following table (all amounts include realized capital gains and losses):
Year Ended December 31, ------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Amounts in thousands) Regional Insurance Operations Total revenues $ 702,129 $ 682,519 $ 635,142 $ 529,479 $ 467,009 Income (loss) before income taxes (97,362) (24,524) 47,624 35,169 38,171 Reinsurance Operations Total revenues 341,940 297,144 242,086 244,066 221,241 Income before income taxes 14,091 33,858 42,193 32,756 19,661 Specialty Insurance Operations Total revenues 309,068 311,955 284,321 247,131 212,484 Income before income taxes 39,261 85,889 68,088 52,113 37,640 Alternative Markets Operations Total revenues 222,276 205,935 184,733 172,027 103,656 Income before income taxes 24,919 36,501 34,733 32,278 10,254 International Operations Total revenues 93,878 80,287 45,360 26,435 7,313 Income (loss) before income taxes 3,535 (7,017) (3,566) (1,283) (259)
13 14 The combined ratio represents a measure of underwriting profitability, excluding investment income. A number in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit. Summary information for the Company's insurance companies and the insurance industry is presented in the following table (1):
Year Ended December 31, ------------------------------------------------------------------ 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Regional Insurance Operations Loss ratio 84.7% 76.0% 66.6% 66.8% 65.1% Expense ratio 36.1 35.8 34.0 34.1 34.1 Policyholders' dividend ratio .7 .9 .5 .6 .9 ----- ----- ----- ----- ----- Combined ratio 121.5% 112.7% 101.1% 101.5% 100.1% ===== ===== ===== ===== ===== Reinsurance Operations Loss ratio 76.0% 74.3% 69.2% 73.3% 78.1% Expense ratio 33.2 31.5 32.1 30.1 26.4 ----- ----- ----- ----- ----- Combined ratio 109.2% 105.8% 101.3% 103.4% 104.5% ===== ===== ===== ===== ===== Specialty Insurance Operations Loss ratio 66.0% 61.8% 61.9% 68.4% 77.9% Expense ratio 32.9 31.7 33.3 30.9 28.2 Policyholders' dividend ratio .2 .3 .5 .3 .3 ----- ----- ----- ----- ----- Combined ratio 99.1% 93.8% 95.7% 99.6% 106.4% ===== ===== ===== ===== ===== Alternative Markets Operations Loss ratio 67.4% 63.7% 73.1% 74.8% 72.3% Expense ratio 37.3 36.0 35.8 34.9 31.9 ----- ----- ----- ----- ----- Combined ratio 104.7% 99.7% 108.9% 109.7% 104.2% ===== ===== ===== ===== ===== International Operations Loss ratio 53.3% 59.7% 59.8% 49.7% 50.0% Expense ratio 46.4 48.5 54.6 49.9 58.3 ----- ----- ----- ----- ----- Combined ratio 99.7% 108.2% 114.4% 99.6% 108.3% ===== ===== ===== ===== ===== Combined Insurance Operations Loss ratio 76.5% 71.2% 66.4% 68.7% 70.7% Expense ratio 35.4 34.9 34.4 33.1 31.3 Policyholders' dividend ratio .3 .5 .4 .4 .5 ----- ----- ----- ----- ----- Combined ratio 112.2% 106.6% 101.2% 102.2% 102.5% ===== ===== ===== ===== ===== Combined Insurance Operations Premiums to surplus ratio (2) 1.6 1.4 1.2 1.2 1.0 ===== ===== ===== ===== ===== Industry Ratios Combined ratio 107.5% (3) 105.0%(4) 101.6%(4) 107.0%(4) 107.2%(5) Premiums to surplus ratio .9% (3) .8%(5) .9%(5) 1.0%(5) 1.2%(5)
(1) Based on U.S. statutory accounting practices. (2) Based on the Company's consolidated net premiums written to statutory surplus. (3) Estimated by A.M. Best. (4) Source: A.M. Best Aggregates & Averages, for stock companies. (5) Source: A.M. Best Aggregates & Averages, for total industry. 14 15 Investments Investment results before income tax effects were as follows:
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Amounts in thousands) Average investments, at cost $3,045,391 $2,996,707 $2,873,730 $2,538,806 $2,081,547 ========== ========== ========== ========== ========== Investment income, before expenses $ 198,556 $ 206,065 $ 205,812 $ 171,047 $ 143,527 ========== ========== ========== ========== ========== Percent earned on average investments 6.5% 6.9% 7.2% 6.7% 6.9% ========== ========== ========== ========== ========== Realized gains (losses) $ (6,064) $ 25,400 $ 13,186 $ 7,437 $ 10,357 ========== ========== ========== ========== ========== Change in unrealized investment gains (losses) (1) $ (173,084) $ 22,147 $ 66,306 $ (22,409) $ 142,475 ========== ========== ========== ========== ==========
(1) The change in unrealized investment gains (losses) represents the difference between fair value and cost of investments at the beginning and end of the calendar year, including investments carried at cost. The percentages of the fixed maturity portfolio categorized by contractual maturity, based on fair value, on the dates indicated, are set forth below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations.
December 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- 1 year or less 3.0% 1.7% 4.4% 3.1% 4.2% Over 1 year through 5 years 16.4 16.0 26.4 20.7 17.9 Over 5 years through 10 years 26.0 24.4 19.1 25.0 29.4 Over 10 years 34.6 37.2 29.2 27.1 26.2 Mortgage-backed securities 20.0 20.7 20.9 24.1 22.3 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
Loss and Loss Adjustment Expense Reserves In the property casualty industry, it is not unusual for significant periods of time to elapse between the occurrence of an insured loss, the report of the loss to the insurer and the insurer's payment of that loss. To recognize liabilities for unpaid losses, insurers establish reserves, which is a balance sheet account representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. The Company's loss reserves reflect current estimates of the ultimate cost of closing outstanding claims; other than its excess workers' compensation ("EWC") business, as discussed below, the Company does not discount its reserves to estimated present value for financial reporting purposes. 15 16 In general, when a claim is reported, claims personnel establish a "case reserve" for the estimated amount of the ultimate payment. The estimate represents an informed judgment based on general reserving practices and reflects the experience and knowledge of the claims personnel regarding the nature and value of the specific type of claim. Reserves are also established on an aggregate basis which provide for losses incurred but not yet reported to the insurer, potential inadequacy of case reserves, the estimated expenses of settling claims, including legal and other fees and general expenses of administering the claims adjustment process ("LAE"), and a provision for potentially uncollectible reinsurance. Each insurance subsidiary's net retention for each line of insurance is taken into consideration in computation of ultimate losses. In examining reserve adequacy, several factors are considered, including historical data, legal developments, changes in social attitudes and economic conditions, including the effects of inflation. The actuarial process relies on the basic assumption that past experience, adjusted judgmentally for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. Reserve amounts are necessarily based on management's informed estimates and judgments using data currently available. As additional experience and other data become available and are reviewed, these estimates and judgments are revised. This may result in increases or decreases to reserves for insured events of prior years. The reserving process implicitly recognizes the impact of inflation and other factors affecting loss costs by taking into account changes in historical claim patterns and perceived trends. There is no precise method to evaluate the impact of any specific factor on the adequacy of reserves, because the ultimate cost of closing claims is influenced by numerous factors. While the methods for establishing the reserves are well tested over time, some of the major assumptions about anticipated loss emergence patterns are subject to fluctuation. In particular, high levels of jury verdicts against insurers, as well as judicial decisions which "re-formulate" policies to expand coverage to include previously unforeseen theories of liability, e.g., those regarding pollution and other environmental exposures, have produced unanticipated claims and increased the difficulty of estimating the loss and loss adjustment expense reserves provided by the Company. Due to the nature of EWC business and the long period of time over which losses are paid in this line of business, the Company discounts its liabilities for EWC losses and loss expenses. Discounting liabilities for losses and loss expenses gives recognition to the time value of money set aside to pay claims in the future and is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from loss payout experience and is supplemented with data compiled by insurance companies writing workers' compensation on an excess-of-loss basis. The expected payout pattern has a very long duration because it reflects the nature of losses which generally penetrate self-insured retention limits contained in EWC policies. The Company has limited the expected payout duration to 30 years in order to introduce an additional level of conservatism into the discounting process. These liabilities have been discounted using "risk-free" discount rates determined by reference to the U.S. Treasury yield curve weighted for EWC premium volume to reflect the seasonality of the anticipated duration of losses associated with such coverages. The average discount rate for accident years 1999, 1998, 1997, 1996 and 1995 and prior was approximately 5.90% 5.90%, 5.98%, 5.90% and 5.80%, respectively. The aggregate net discount, after reflecting the effects of ceded reinsurance, is $186,981,000, $186,964,000, $189,600,000 and $172,415,000 at December 31, 1999, 1998, 1997 and 1996, respectively. To date, known pollution and environmental claims at the Company's insurance company subsidiaries have not had a material impact on the Company's operations. Environmental claims have not materially impacted the Company because these subsidiaries generally did not insure the larger industrial companies which are subject to significant environmental exposures. 16 17 The Company's net reserves for losses and loss adjustment expenses relating to pollution and environmental claims were $30,944,000 and $33,391,000 at December 31, 1999 and 1998, respectively. The Company's gross reserves for losses and loss adjustment expenses relating to pollution and environmental claims were $65,966,000 and $69,283,000 at December 31, 1999 and 1998, respectively. Net incurred losses and loss expenses for reported pollution and environmental claims were approximately $1,371,000, $2,227,000 and $79,000 in 1999, 1998 and 1997, respectively. Net paid losses and loss expenses were approximately $3,819,000, $2,614,000 and $2,175,000 in 1999, 1998 and 1997, respectively. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make a reasonable actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential affect of significant unresolved legal matters, including coverage issues as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties are highly uncertain. The table below provides a reconciliation of the beginning and ending reserve balances, on a gross of reinsurance basis (dollars in thousands)(1):
1999 1998 1997 ---- ---- ---- Net reserves at beginning of year $ 1,583,304 $ 1,433,011 $ 1,333,122 ----------- ----------- ----------- Net reserves of acquired companies -- 2,189 4,984 Net provision for losses and loss expenses: Claims occurring during the current year (2) 1,032,089 944,887 747,977 Increase (decrease) in estimates for claims occurring in prior years 28,351 (42,929) (21,313) Amortization of discount 10,473 9,111 7,760 ----------- ----------- ----------- 1,070,913 911,069 734,424 ----------- ----------- ----------- Net payments for claims Current year 433,942 397,787 315,370 Prior years 496,410 365,178 324,149 ----------- ----------- ----------- 930,352 762,965 639,519 ----------- ----------- ----------- Net reserves at end of year 1,723,865 1,583,304 1,433,011 Ceded reserves at end of year 617,025 537,219 476,677 ----------- ----------- ----------- Gross reserves at end of year $ 2,340,890 $ 2,120,523 $ 1,909,688 =========== =========== ===========
A reconciliation, as of December 31, 1999, between the reserves reported in the accompanying consolidated financial statements which have been prepared in accordance with GAAP and those reported on a SAP basis is as follows (in thousands): Net reserves reported on a SAP basis $1,780,069 Additions (deductions) to statutory reserves: Loss reserve discounting (3) (70,810) Outstanding drafts reclassified as reserves 14,606 ---------- Net reserves reported on a GAAP basis 1,723,865 Ceded reserves reclassified as assets 617,025 ---------- Gross reserves reported on a GAAP basis $2,340,890 ==========
(1) The balance sheet includes $20,348,000 and $6,043,000 as of December 31, 1999 and 1998, respectively, relating to reserves for life insurance which are not included in the table above, and the statement of operations includes $14,913,000 and $3,693,000 for the year ended December 31, 1999 and 1998, respectively, relating to policyholder benefits incurred on life insurance which are not included in the above table. (2) Claims occurring during the current year is net of discount of $22,923,754, $20,354,000 and $29,783,000 for the years ended December 31, 1999, 1998 and 1997, respectively. (3) For statutory purposes, Midwest Employers uses a discount rate of 3% as permitted by the Department of Insurance of the State of Ohio. For GAAP purposes, Midwest Employers uses a discount rate based on the U. S. Treasury yield curve weighted for the expected payout period, as described above. 17 18 The following table presents the development of net reserves for 1989 through 1999. The top line of the table shows the estimated reserves for unpaid losses and loss expenses recorded at the balance sheet date for each of the indicated years. This represents the estimated amount of losses and loss expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Company. The upper portion of the table shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The "cumulative redundancy (deficiency)" represents the aggregate change in the estimates over all prior years. For example, the 1989 reserves have developed a $84 million redundancy over ten years. That amount has been reflected in income over the ten years. The impact on the results of operations of the past three years of changes in reserve estimates is shown in the reconciliation tables above. It should be noted that the table presents a "run off" of balance sheet reserves, rather than accident or policy year loss development. Therefore, each amount in the table includes the effects of changes in reserves for all prior years. For example, assume a claim that occurred in 1989 is reserved for $2,000 as of December 31, 1989. Assuming this claim was settled for $2,300 in 1999, the $300 deficiency would appear as a deficiency in each year from 1989 through 1998. 18 19
Year Ended December 31, 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (Amounts in millions) Discounted net reserves for losses and loss expenses $ 611 $ 643 $ 680 $ 710 $ 783 $ 895 $ 1,209 $ 1,333 $ 1,433 $ 1,583 $ 1,724 Reserve discounting -- -- -- -- -- -- 152 172 190 187 187 Undiscounted net reserve for loss and loss expenses 611 643 680 710 783 895 1,361 1,505 Net Re-estimated as of: One year later 605 635 676 704 776 885 1,346 1,481 1,580 1,798 Two years later 599 632 659 694 775 872 1,305 1,406 1,566 Three years later 596 620 650 665 744 833 1,236 1,356 Four years later 587 612 637 655 708 789 1,195 Five years later 581 603 631 630 672 764 Six years later 585 588 609 600 649 Seven years later 574 569 585 579 Eight years later 557 550 568 Nine years later 541 534 Ten years later 527 Cumulative redundancy (deficiency) undiscounted 84 109 112 131 134 131 166 149 57 (28) ===== ===== ===== ===== ======= ======= ======= ======= ======= ======= Cumulative amount of net liability paid through: One year later $ 158 $ 139 $ 160 $ 169 $ 186 $ 221 $ 265 $ 332 $ 365 496 Two years later 234 235 264 275 221 355 434 523 574 Three years later 294 304 332 306 291 445 550 635 Four years later 334 345 346 344 334 501 616 Five years later 358 377 371 362 363 528 Six years later 380 395 384 375 373 Seven years later 392 402 394 376 Eight years later 396 409 392 Nine years later 400 405 Ten years later 394 Discounted net Reserves 783 895 1,209 1,333 1,433 1,583 1,724 Ceded Reserves 1,233 1,176 451 450 477 537 617 ------- ------- ------- ------ ------- ------- ------- Discounted gross Reserves 2,016 2,071 1,660 1,783 1,910 2,121 2,341 Reserve discounting -- -- 192 216 241 248 250 ------- ------- ------- ------ ------- ------- ------- Gross reserve $ 2,016 $ 2,071 1,852 1,999 2,151 2,369 2,591 ======= ======= ======= ======= ======= ======= ======= Gross Re-estimated as of One year later 2,010 2,043 1,827 1,965 2,132 2,390 Two years later 1,966 2,026 1,789 1,959 2,096 Three years later 1,955 1,983 1,754 1,909 Four years later 1,913 1,951 1,733 Five years later 1,855 1,928 Six years later 1,815 Gross cumulative redundancy (deficiency) undiscounted $ 201 $ 143 $ 119 $ 90 $ 55 $ (21) ======= ======= ======= ======= ======= =======
19 20 Regulation The Company's insurance subsidiaries are subject to varying degrees of regulation and supervision in the jurisdictions in which they do business, under statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. This regulation relates to such matters as the standards of solvency which must be met and maintained; the licensing of insurers and their agents; the nature of and limitations on investments; deposits of securities for the benefit of policyholders; approval of policy forms and premium rates; periodic examination of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; establishment and maintenance of reserves for unearned premiums and losses; and requirements regarding numerous other matters. The Company's property casualty subsidiaries, other than E & S and reinsurance subsidiaries, must file all rates for personal and commercial insurance with the insurance department of each state in which they operate. The Company's E & S and reinsurance subsidiaries generally operate free of rate and form regulation. In addition to regulatory supervision of its insurance subsidiaries, the Company is subject to state statutes governing insurance holding company systems. Typically, such statutes require the Company periodically to file information with the state insurance commissioner, including information concerning its capital structure, ownership, financial condition and general business operations. Under the terms of applicable state statutes, any person or entity desiring to purchase more than a specified percentage (commonly 10%) of the Company's outstanding voting securities would be required to obtain regulatory approval of the purchase. Under Florida law, which is applicable to the Company due to its ownership of Carolina, a Florida domiciled insurer, the acquisition of more than 5% of the Company's capital stock must receive regulatory approval. Further, state insurance statutes typically place limitations on the amount of dividends or other distributions payable by insurance companies in order to protect their solvency. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." During the past several years, various regulatory and legislative bodies adopted or proposed new laws or regulations to deal with the cyclical nature of the insurance industry, catastrophic events and their effects on shortage of capacity and pricing. These regulations, which have not had a material impact on the Company's operations, include (i) the creation of "market assistance plans" under which insurers are induced to provide certain coverages, (ii) restrictions on the ability of insurers to cancel certain policies in mid-term, (iii) advance notice requirements or limitations imposed for certain policy non-renewals and (iv) limitations upon or decreases in rates permitted to be charged. The passage of Proposition 103 in the State of California did not have a material adverse impact on the Company's operations because the Company's subsidiaries operated in that State primarily on a non-admitted basis. The non-admitted market in California, however, has been subjected to increased levels of regulation. Admiral and Nautilus, both of which derive significant premiums from California, may be adversely impacted by increased regulation which causes business to remain in the admitted market. Additionally, a number of states have adopted and others are considering adopting forms of commercial lines deregulation laws which, depending upon factors such as the relatively high amount of premium or revenue of an insured, would permit an insurer to provide insurance without being subject to rate and/or form filing requirements. Various state and federal organizations, including Congressional committees and the National Association of Insurance Commissioners ("NAIC"), have been conducting reviews into various aspects of the insurance business. The NAIC has adopted risk based capital ("RBC") requirements that require insurance companies to calculate and report information under a risk-based formula which measures statutory capital and surplus needs based on a regulatory definition of risk in a company's mix of products and its balance sheet. The implementation of RBC did not affect the operations of the Company's insurance subsidiaries since all of its subsidiaries have a RBC amount above the authorized control level RBC, as defined by the NAIC. The NAIC recently completed a process intended to codify statutory accounting practices for certain insurance enterprises. As a result of this process, the NAIC will issue a revised statutory accounting practices and procedures manual, which will be effective January 1, 2001. The Company has not yet determined the impact that this change will have on the statutory capital and surplus of its insurance subsidiaries. The NAIC is considering model laws on commercial lines deregulation. Federal legislation is being considered which would either abolish or limit the current exemption of the insurance industry from portions of the antitrust laws, impose direct federal oversight or federal solvency standards. No assurance can be given that future legislative or regulatory changes resulting from such activity will not adversely affect the Company's insurance subsidiaries. 20 21 The Gramm-Leach-Bliley Act, or Financial Services Modernization Act of 1999 (the "Act"), was enacted in 1999, significantly affecting the financial services industry, including insurance companies, banks and securities firms. The Act modifies federal law to permit the creation of financial holding companies ("FHCs"), which, as regulated by the Act, can maintain cross-holdings in insurance companies, banks and securities firms to an extent not previously allowed. The Act also permits or facilitates certain types of combinations or affiliations for FHCs. The Act establishes a functional regulatory scheme under which state insurance departments will maintain primary regulation over insurance activities, subject to provisions for certain federal preemptions. Important provisions of the Act involve requirements for adoption of (i) multi-state agents' licensing reforms and uniformity requirements and (ii) privacy protections, giving the states the ability to enact these laws in the first instance or be preempted. The NAIC is considering adoption of a model law on privacy. It has also adopted a model law on agents' licensing which has been enacted or is currently being considered by various state legislatures. It is not anticipated that the insurance regulatory aspects of the Act will have a material effect on the operations of the Company. The Company's insurance subsidiaries are also subject to assessment by state guaranty funds when an insurer in that jurisdiction has been judicially declared insolvent and insufficient funds are available from the liquidated company to pay policyholders and claimants. The protection afforded under a state's guaranty fund to policyholders of the insolvent insurer varies from state to state. Generally, all licensed property casualty insurers are considered to be members of the fund, and assessments are based upon their pro rata share of direct written premiums. The NAIC Model Post-Assessment Guaranty Fund Act, which many states have adopted, limits assessments to an insurer to 2% of its subject premium and permits recoupment of assessments through rate setting. Likewise, several states (or underwriting organizations of which the Company's insurance subsidiaries are required to be members) have limited assessment authority with regard to deficits in certain lines of business. To date, assessments have not had a material adverse impact on operations. The Company receives funds from its insurance subsidiaries in the form of dividends and fees for certain management services. Annual dividends in excess of maximum amounts prescribed by state statutes ("extraordinary dividends") may not be paid without the approval of the insurance commissioner of the state in which an insurance subsidiary is domiciled. Competition The property casualty insurance and reinsurance business is competitive, with over 2,000 insurance companies transacting business in the United States. The Company competes directly with a large number of these companies. The Company's strategy in this highly fragmented industry is to seek specialized areas or geographic regions where its insurance subsidiaries can gain a competitive advantage by responding quickly to changing market conditions. Each of the Company's subsidiaries establishes its own pricing practices. Such practices are based upon a Company-wide philosophy to price products with the general intent of making an underwriting profit. Competition in the industry generally changes with profitability. The regional property casualty subsidiaries compete with mutual and other regional stock companies as well as national carriers. Direct writers of property casualty insurance compete with the regional subsidiaries by writing insurance through their salaried employees, generally at a lower cost than through independent agents such as those used by the Company. Also, certain personal lines have become more competitive due to Internet-based competition. Signet Star's competition comes from domestic and foreign reinsurers, many of which have greater financial resources than Signet Star and which place their business either on a direct basis or through the broker market. The E & S area is a highly specialized segment of the insurance industry. Admiral and Nautilus compete with other E & S carriers, some of which are larger and have greater resources than Admiral and Nautilus. Under certain market conditions, standard carriers may compete for the types of business written by Admiral and Nautilus. With the implementation of commercial lines deregulation (see "Regulation") in several states and with many other states in the process of considering or adopting such laws, competition for "E & S type risks" might increase significantly. Such standard carriers would under such deregulation be free to compete with more liberal rate and form requirements. In addition, there are regional and 21 22 specialty carriers competing with Admiral and Nautilus when they underwrite business in their regions or specialties. Carolina and Great Divide's competition comes mainly from other specialty transportation insurers, regional carriers and large national multi-line companies. Each of Admiral Indemnity, Preferred and Key Risk Insurance compete with local regional companies as well as national carriers. Midwest Employers' competition comes from insurance and reinsurance companies, some of which have greater financial resources than Midwest Employers. Most of theses carriers write specific EWC coverage, do not offer aggregate EWC coverage and tend to focus on risks larger than those targeted by Midwest Employers. In addition, Midwest Employers competes with other specialty EWC insurers. The Insurance Services Operations face competition from several large nationally known service organizations as well as local competitors. The International Operations compete with native insurance operations both large and small, which may be related to government entities, as well as with branch or local subsidiaries of multi-national companies. Employees As of March 3, 2000, the Company employed 4,181 persons. Of this number, the Company's subsidiaries employed 4,131 persons, of whom 2,690 were executive and administrative personnel and 1,441 were clerical personnel. The Company employed the remaining 50 persons in its parent company and investment operations, of whom 36 were executive and administrative personnel and 14 were clerical personnel. Other information about the Company's business The Company maintains an ongoing interest in acquiring additional companies and developing new insurance entities, products and packages as opportunities arise. In addition, the insurance subsidiaries develop new coverages or lines of business to meet the needs of insureds. Seasonal weather variations affect the severity and frequency of losses sustained by the insurance and reinsurance subsidiaries. Although the effect on the Company's business of such natural catastrophes as tornadoes, hurricanes, hailstorms and earthquakes is mitigated by reinsurance, they nevertheless can have a significant impact on the results of any one or more reporting periods. The Company has no customer which accounts for 10 percent or more of its consolidated revenues. Compliance by the Company and its subsidiaries with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to protection of the environment has not had a material effect upon the capital expenditures, earnings or competitive position of the Company. ITEM 2. PROPERTIES The Company and its subsidiaries own or lease office buildings or office space suitable to conduct their operations. Such owned property is as follows:
Location Company Size (sq. ft.) -------- ------- -------------- Cherry Hill, New Jersey Admiral 42,000 Lincoln, Nebraska Union 43,000 Lincoln, Nebraska Continental Western 20,000 Luverne, Minnesota Tri-State 33,000 Meridian, Mississippi Great River 30,000 Scottsdale, Arizona Nautilus 34,000 Urbandale, Iowa Continental Western 80,000 Westbrook, Maine Acadia 54,000
In addition, the Company and its subsidiaries lease office facilities in various other cities under leases with varying terms and expiration dates. 22 23 ITEM 3. LEGAL PROCEEDINGS Claims under insurance policies written by the Company's insurance subsidiaries are investigated and settled either by claims adjusters employed by them, by their independent agents or by independent adjusters. Generally, the insurance subsidiary employs a staff of claims adjusters at its home office and at some regional offices. Some independent agents may have the authority to settle small claims. Independent claims adjusting firms are used to assist in handling various claims in areas where insurance volume does not warrant the maintenance of a staff adjuster. If a claim or loss cannot be settled and results in litigation, the subsidiary generally retains outside counsel. At present, neither the Company nor any of its subsidiaries is engaged in any litigation known to the Company which is expected to have a material adverse effect upon the Company's business. As is common with property casualty insurance companies, the Company's subsidiaries are regularly engaged in the defense of claims arising out of the conduct of the insurance business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1999 to a vote of holders of the Company's Common Stock. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock of the Company is traded on the Nasdaq National Market under the symbol "BKLY". The following table sets forth the high and low sale prices for the indicated periods, all as reported on such market.
Common Price Range Dividends Paid ----------- -------------- High Low Per Share ---- --- --------- 1999: Fourth Quarter $ 23 3/4 $ 19 13/16 $ .13 cash Third Quarter 27 15/16 21 5/8 $ .13 cash Second Quarter 29 1/8 24 3/8 $ .13 cash First Quarter 36 1/4 23 3/4 $ .12 cash 1998: Fourth Quarter $ 35 3/4 $ 27 1/2 $ .12 cash Third Quarter 40 15/16 29 13/16 $ .12 cash Second Quarter 49 40 1/16 $ .12 cash First Quarter 47 3/8 41 $ .11 cash
The closing price of the Common Stock on March 3, 2000, as reported on the Nasdaq National Market, was $15 3/8 per share. The approximate number of record holders of the Common Stock on March 3, 2000 was 724. On May 11, 1999 the Company issued 250 shares of its Common Stock to each of its nine directors (2,250 share in the aggregate). The shares were issued as payment of a portion of annual directors' fees pursuant to the Company's 1997 Directors Stock Plan. The shares were not registered under the Securities Act of 1933 in reliance on the exemption provided in Section 4(2) thereof for transactions not involving a public offering. 23 24 ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 1999
Year Ended December 31, ----------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Amounts in thousands, except per share data) Net premiums written $ 1,427,719 $ 1,346,254 $ 1,177,641 $ 1,052,511 $ 860,421 Net premiums earned 1,414,384 1,278,399 1,111,747 981,221 803,336 Net investment income 190,316 202,420 199,588 164,490 137,332 Management fees and commissions 72,344 70,727 71,456 69,246 68,457 Realized investment gains (losses) (6,064) 25,400 13,186 7,437 10,357 Total revenues 1,673,668 1,582,517 1,400,310 1,225,166 1,021,943 Interest expense 50,801 48,819 48,869 31,963 28,209 Income (loss) before Federal and foreign income taxes (79,248) 62,781 129,241 115,049 82,747 Federal and foreign income tax (expense) benefit 45,766 (5,465) (30,668) (25,102) (17,554) Income (loss) before minority interest (33,482) 57,316 98,573 89,947 65,193 Net income (loss) before preferred dividends (34,048) 58,760 99,047 90,263 60,882 Preferred dividends (497) (7,548) (7,828) (13,909) (11,062) Cumulative effect of change in accounting principle (net of taxes) (3,250) -- -- -- -- Extraordinary gain (loss) 735 (5,017) -- -- -- Net income (loss) attributable to common stockholders (37,060) 46,195 91,219 76,354 49,820 Data per common share: Basic: Net income (loss) before change in accounting and extraordinary item (1.35) 1.82 3.09 2.56 1.91 Net income (loss) (1.44) 1.64 3.09 2.56 1.91 Diluted: Net income (loss) before change in (1.34) 1.76 3.02 2.53 1.90 accounting and extraordinary income Net income (loss) (1.43) 1.59 3.02 2.53 1.90 Stockholders' equity 23.10 28.80 28.72 25.13 23.59 Cash dividends declared $ .52 $ .48 $ .42 $ .35 $ .32 Weighted average shares outstanding: Basic 25,823 28,194 29,503 29,792 26,121 Diluted 25,927 29,115 30,185 30,130 26,262 Investments (1) $ 2,975,929 $ 3,233,458 $ 3,106,900 $ 2,991,606 $ 2,588,346 Total assets 4,784,791 4,983,431 4,544,318 4,136,973 3,618,684 Reserves for losses and loss expenses 2,361,238 2,126,566 1,909,688 1,782,703 1,660,020 Long-term debt 394,792 394,444 390,415 390,104 319,287 Company-obligated mandatorily redeemable capital securities of a subsidiary trust holding solely 8.197% junior subordinated debentures 198,126 207,988 207,944 207,901 -- Stockholders' equity 591,778 861,281 947,292 879,732 929,815
(1) Including trading account receivable from brokers and clearing organizations and trading account securities sold but not yet purchased. 24 25 (2)ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained on pages 18 through 25 of the registrant's 1999 Annual Report to Stockholders, which information is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to the information under "Market Risk" under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained on pages 22 and 23 of the registrant's 1999 Annual Report to Stockholders, which information is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the registrant are contained on pages 26 through 42 of registrant's 1999 Annual Report to Stockholders and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 25 26 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following information is provided as to the directors and executive officers of the Company as of March 3, 2000:
Name Age Position ---- --- -------- William R. Berkley 54 Chairman of the Board and President Eugene G. Ballard 47 Senior Vice President - Chief Financial Officer and Treasurer Robert P. Cole 49 Senior Vice President - Regional Operations Cornelius T. Finnegan, III 55 Senior Vice President - General Counsel and Secretary E. LeRoy Heer 61 Senior Vice President - Chief Corporate Actuary H. Raymond Lankford, Jr. 57 Senior Vice President - Alternative Markets Operations Ira S. Lederman 46 Senior Vice President - Assistant General Counsel and Assistant Secretary James G. Shiel 40 Senior Vice President - Investments Edward A. Thomas 51 Senior Vice President - Specialty Operations Donald J. Veldkamp 61 Senior Vice President - Technology and Distribution Systems Paul J. Hancock 38 Vice President - Actuary Edward F. Linekin 36 Vice President - Investments Clement P. Patafio 35 Vice President - Corporate Controller Joseph M. Pennachio 52 Vice President - Human Resources Scott A. Siegel 41 Vice President - Taxes George G. Daly 59 Director Robert B. Hodes 74 Director Henry Kaufman 72 Director Richard G. Merrill 69 Director Jack H. Nusbaum 59 Director Mark L. Shapiro 55 Director Martin Stone 71 Director
As permitted by Delaware law, the Board of Directors of the Company is divided into three classes, the classes being divided as equally as possible and each class having a term of three years. Directors generally serve until their respective successors are elected at the annual meeting of stockholders which ends their term. None of the Company's directors has any family relationship with any other director or executive officer. Each year the term of office of one class expires. In May 1999, the term of a class consisting of three directors expired. Richard G. Merrill, Jack H. Nusbaum and Mark L. Shapiro were elected as directors to hold office for a term of three years until the Annual Meeting of Stockholders in 2002 and until their successors are duly elected and qualify. As a result of the resignation of John D. Vollaro as a director effective March 1, 2000, the Board presently has one vacancy in the class of directors with a term expiring in 2001. William R. Berkley has been Chairman of the Board and Chief Executive Officer of the Company since its formation in 1967. He also currently serves as President, a position which he has held since March 1, 2000 and has held at various times from 1967 to 1995. He also serves as Chairman of the Board or Director of a number of public and private companies. These include Associated Community Corp., a bank holding company that owns all of the issued and outstanding capital stock of The Greenwich Bank & Trust Company, a Connecticut chartered bank; Westport National Bank, a national bank; Pioneer companies, Inc., a chemical manufacturing and marketing company; Strategic Distribution, Inc., an industrial products distribution and services company; and Interlaken Capital, Inc., a private investment firm with interests in various businesses. His current term as a director expires in 2000. Eugene G. Ballard has been Senior Vice President - Chief Financial Officer and Treasurer of the Company since June 1, 1999. Before joining the Company, Mr. Ballard was Executive Vice President and Chief Financial Officer of GRE Insurance Group, New York, New York since 1995. 26 27 Robert P. Cole has been Senior Vice President since January 1998. Prior thereto, he was Vice President since October 1996. Before joining the Company, Mr. Cole was, since 1992, a senior Officer of Christania General Insurance Corp. of N.Y., which was purchased by Folksamerica Reinsurance Company in 1996, and prior to that was associated with reinsurers for twenty years. Cornelius T. Finnegan, III has been Senior Vice President - General Counsel and Secretary since February 1, 1999. Before joining the Company, Mr. Finnegan was a partner at the New York law firm of Willkie Farr & Gallagher for more than the last five years. E. LeRoy Heer has been Senior Vice President - Chief Corporate Actuary since January 1991. Prior thereto, he had been Vice President - Corporate Actuary since May 1978. H. Raymond Lankford, Jr. has been Senior Vice President - Alternative Markets Operations since May 1996. Prior thereto, he was President of All American Agency Facilities, Inc., a subsidiary of the Company, from October 1991, having joined All American in 1990. He has been in the insurance business in various capacities for more than 30 years. Ira S. Lederman has been Senior Vice President since January 1997. Additionally, he has been General Counsel of Berkley International since January 1998. He is also Assistant General Counsel, a position he has held since July 1989, and Assistant Secretary since May 1986. Previously, he was Vice President from May 1986 until January 1997. Prior thereto, he was Insurance Counsel of the Company since May 1986 and Associate Counsel from April 1983. James G. Shiel has been Senior Vice President - Investments of the Company since January 1997. Prior thereto, he was Vice President - Investments of the Company since January 1992. Since February 1994, he has been President of Berkley Dean & Company, Inc., a subsidiary of the Company, which he joined in 1987. Edward A. Thomas has been Senior Vice President - Specialty Operations of the Company since April 1991. Prior thereto, he was President of Signet Reinsurance Company, a subsidiary of the Company, for more than five years. Donald J. Veldkamp has been Senior Vice President, Technology and Distribution Systems since January 1998. He most recently served as Chairman of Union Insurance Company, a subsidiary of the Company, since July 1997. Prior to that, he was President of Union Insurance Company from May 1990 to July 1997 and President of Tri-State Insurance Company of Minnesota, also a subsidiary of the Company, from February 1980 to May 1990. Paul J. Hancock has been Vice President - Actuary since May 1998. Previously, he was Assistant Vice President - Actuary since June 1997. Prior thereto, he was employed since July 1991 by Signet Star Reinsurance Company, a subsidiary of the Company, serving as Vice President and Corporate Actuarial Manager from August 1996 to June 1997 and Assistant Vice President from October 1995 to August 1996. Signet Star Reinsurance Company (formerly known as North Star Reinsurance Company) was purchased by the Company in July 1993. Edward F. Linekin has been Vice President - Investments since May 1998. Mr. Linekin has been an employee of the Company since April 1995. He has been a Vice President of the Company's investment subsidiary, Berkley Dean & Company, Inc., since April 1995. Prior thereto, he was Assistant Portfolio Manager - Senior Investment Officer of Home Insurance Company from April 1993. Clement P. Patafio has been Vice President - Corporate Controller since January 1997. Prior thereto, he was Assistant Vice President - Corporate Controller since July 1994 and Assistant Controller since May 1993. Before joining the Company, Mr. Patafio was with KPMG LLP from 1986 to 1993. Joseph M. Pennachio has been Vice President - Human Resources of the Company since May 1999. Prior thereto, he was Assistant Vice President - Human Resources of the Company since April 1986. Before joining the Company, Mr. Pennachio was with AMF Incorporated from 1975 to 1986, where he held a variety of managerial positions in the benefits area. Scott A. Siegel has been Vice President - Taxes since January 1997. Prior thereto, he was Director of Taxes since September 1991. Before joining the Company, Mr. Siegel was with KPMG LLP from 1981 to 1991. 27 28 George G. Daly has been a director of the Company since 1998. Dr. Daly is Dean of Stern School of Business, and Dean Richard R. West Professor of Business, New York University for more than the past five years. In addition to his academic career, Dr. Daly served as Chief Economist at the U.S. Office of Energy Research and Development in 1974. Mr. Daly's term as a director expires in 2000. Robert B. Hodes has been a director of the Company since 1970. Mr. Hodes is Counsel to the New York law firm of Willkie Farr & Gallagher, where prior thereto he had been a partner for more than five years. He is also a director of Globalstar Telecommunications, Limited; K&F Industries, Inc.; Loral Space & Communications, Ltd.; Mueller Industries, Inc.; and Restructured Capital Holdings, Ltd. Mr. Hodes' current term as a director expires in 2000. Henry Kaufman has been a director of the Company since 1994. Dr. Kaufman is President of Henry Kaufman & Company, Inc., an investment, economic and financial consulting company since its establishment in 1988. Dr. Kaufman serves as Chairman of the Board of Overseers, Stern School of Business of New York University; Chairman of the Board of Trustees, Institute of International Education; Member of the Board of Directors, Federal Home Loan Mortgage Corporation; Member of the Board of Directors, Lehman Brothers Holdings Inc.; Member of the Board of Directors, The Statute of Liberty-Ellis Island Foundation, Inc.; Member of the Board of Trustees, New York University; Member of the Board of Trustees, The Animal Medical Center; Treasurer (and former trustee), The Economic Club of New York; Member of the International Capital Markets Advisory Committee of the Federal Reserve Bank of New York; Member of the Board of Trustees, Whitney Museum of American Art; Member of the Advisory Committee to the Investment Committee, International Monetary Fund Staff Retirement Plan; and Member of the Board of Governors, Tel-Aviv University. Dr. Kaufman's current term as a director expires in 2001. Richard G. Merrill has been a director of the Company since 1994. Mr. Merrill was Executive Vice President of Prudential Insurance Company of America from August 1987 to March 1991 when he retired. Prior thereto, Mr. Merrill served as Chairman and President of Prudential Asset Management Company since 1985. Mr. Merrill is a director of Sysco Corporation. Mr. Merrill's current term as a director expires in 2002. Jack H. Nusbaum has been a director of the Company since 1967. Mr. Nusbaum is the Chairman of the New York law firm of Willkie Farr & Gallagher where he has been a partner for more than the last five years. He is a director of Neuberger Berman Inc., Pioneer Companies, Inc., Prime Hospitality Corp., Strategic Distribution, Inc. and The Topps Company, Inc. Mr. Nusbaum's current term as a director expires in 2002. Mark L. Shapiro has been a director of the Company since 1974. Since September 1998, Mr. Shapiro has been a private investor. From July 1997 through August 1998, Mr. Shapiro was a Senior Consultant to the Export-Import Bank of the United States. Previously, he was a Managing Director in the investment banking firm of Schroder & Co. Inc. for more than the past five years. Mr. Shapiro's current term as a director expires in 2002. Martin Stone has been a director of the Company since 1990. Mr. Stone is Chairman of Professional Sports, Inc. (the Tucson Sidewinders AAA baseball team) and Chairman of Adirondack Corporation, all for more than the past five years. Mr. Stone is also a director of Canyon Ranch, Inc. and a member of the Advisory Board of Yosemite National Park. Mr. Stone's current term as a director expires in 2001. 28 29 ITEM 11. EXECUTIVE COMPENSATION Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1999, and which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security ownership of certain beneficial owners Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1999, and which is incorporated herein by reference. (b) Security ownership of management Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1999, and which is incorporated herein by reference. (c) Changes in control Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1999, and which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1999, and which is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Index to Financial Statements The Management's Discussion and Analysis of Financial Condition and Results of Operations, and the Company's financial statements, together with the report thereon of KPMG LLP, appearing on pages 18 through 42 of the Company's 1999 Annual Report to Stockholders, are incorporated by reference in this Annual Report on Form 10-K. With the exception of the aforementioned information, the 1999 Annual Report to Stockholders is not deemed to be filed as part of this report. The schedules to the financial statements listed below should be read in conjunction with the financial statements in such 1999 Annual Report to Stockholders. Financial statement schedules not included in this Annual Report on Form 10-K have been omitted because they are not applicable or required information is shown in the financial statements or notes thereto.
Index to Financial Statement Schedules Page Independent Auditors' Report on Schedules and Consent 35 Schedule II - Condensed Financial Information of Registrant 36 Schedule III - Supplementary Insurance Information 40 Schedule IV - Reinsurance 41 Schedule VI - Supplementary Information concerning Property & Casualty Insurance Operations 42
29 30 (b) Reports on Form 8-K During the quarter ended December 31, 1999, the registrant filed the following Reports on Form 8-K: Report dated October 22, 1999 with respect to a press release relating to earnings of the Company for the third quarter of 1999 (under Item 5 of Form 8-K). (c) Exhibits The exhibits filed as part of this report are listed on pages 33 and 34 hereof. 30 31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. W. R. BERKLEY CORPORATION By /s/ William R. Berkley ---------------------------------------------- William R. Berkley, Chairman of the Board and President March 24, 2000 31 32 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ William R. Berkley Chairman of the Board and March 24, 2000 - ----------------------------------------- President William R. Berkley Principal executive officer /s/ George G. Daly Director March 24, 2000 - ----------------------------------------- George G. Daly /s/ Robert B. Hodes Director March 24, 2000 - ----------------------------------------- Robert B. Hodes /s/ Henry Kaufman Director March 24, 2000 - ----------------------------------------- Henry Kaufman /s/ Richard G. Merrill Director March 24, 2000 - ----------------------------------------- Richard G. Merrill /s/ Jack H. Nusbaum Director March 24, 2000 - ----------------------------------------- Jack H. Nusbaum /s/ Mark L. Shapiro Director March 24, 2000 - ----------------------------------------- Mark L. Shapiro /s/ Martin Stone Director March 24, 2000 - ----------------------------------------- Martin Stone /s/ Eugene G. Ballard Senior Vice President, March 24, 2000 - ----------------------------------------- Chief Financial Officer and Eugene G. Ballard Treasurer Principal financial officer /s/ Clement P. Patafio Vice President, March 24, 2000 - ----------------------------------------- Corporate Controller Clement P. Patafio
32 33 ITEM 14. (c) EXHIBITS Number (2.1) Agreement and Plan of Merger between the Company, Berkley Newco Corp. and MECC, Inc. (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K (File No. 0-7849) filed with the Commission on September 28, 1995). (2.2) Agreement and Plan of Restructuring, dated July 20, 1995, by and among the Company, Signet Star Holdings, Inc., Signet Star Reinsurance Company, Signet Reinsurance Company and General Re Corporation (incorporated by reference to Exhibit 2.2 of the Company's Current Report on Form 8-K (File No. 0-7849) filed with the Commission on September 28, 1995). (3.1) Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K (File No. 0-7849) filed with the Commission on March 30, 1994). (3.2) Amendment, dated May 12, 1998, to the Company's Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K (File No. 0-7849) filed with the Commission on March 23, 1999). (3.3) Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q (File No. 0-7849) filed with the Commission on August 11, 1999). (3.4) Amended and Restated By-Laws (incorporated by reference to Exhibit 3(ii) of the Company's Current Report on Form 8-K (File No. 0-7849) filed with the Commission on May 11, 1999). (4) The instruments defining the rights of holders of the long-term debt securities of the Company are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Company agrees to furnish supplementally copies of these instruments to the Commission upon request. (10.1) Credit Agreement dated as of December 10, 1999 among the Company, Bank of America, National Association, as Administrative Agent, and the other financial institutions party thereto (filed herewith). (10.2) Rights Agreement, dated as of May 11, 1999, between the Company and ChaseMellon Shareholder Services, LLC, as Rights Agent (incorporated by reference to Exhibit 99.1 of the Company's Current Report on Form 8-K (File No. 0-7849) filed with the Commission on May 11, 1999). (10.3) The Company's 1982 Stock Option Plan (incorporated by reference to Exhibit 10.1 of the Company's Registration Statement on Form S-1 (File No. 2-98396) filed with the Commission on June 14, 1985). (10.4) First Amended and Restated W. R. Berkley Corporation 1992 Stock Option Plan (incorporated by reference to Exhibit 10.2 of the Company's Annual Report on Form 10-K (File No. 0-7849) filed with the Commission on March 23, 1999). (10.5) The Company's lease dated June 3, 1983 with the Ahneman, Devaul and Devaul Partnership, incorporated by reference to Exhibit 10.3 of the Company's Registration Statement on Form S-1 (File No. 2-98396) filed with the Commission on June 14, 1985. (10.6) W.R. Berkley Corporation Deferred Compensation Plan for Officers as amended January 1, 1991 (incorporated by reference to Exhibit 10.4 of the Company's Annual Report on Form 10-K (File No. 0-7849) filed with the Commission on March 26, 1996). (10.7) W. R. Berkley Corporation Deferred Compensation Plan for Directors as adopted March 7, 1996 (incorporated by reference to Exhibit 10.5 of the Company's Annual Report on Form 10-K (File No. 0-7849) filed with the Commission on March 26, 1996). (10.8) W. R. Berkley Corporation Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.7 of the Company's Annual Report on Form 10-K (File No. 0-7849) filed with the Commission on March 27, 1998). 33 34 (10.9) W. R. Berkley Corporation Long Term Incentive Plan (incorporated by reference to Exhibit 10.8 of the Company's Annual Report on Form 10-K (File No. 0-7849) filed with the Commission on March 27, 1998). (10.10) 1997 Directors Stock Plan, as Amended and Restated as of May 11, 1999 (incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q (File No. 0-7849) filed with the Commission on August 11, 1999). (10.11) Letter agreement between the Company and its Senior Vice President-General Counsel (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q (File No. 0-7849) filed with the Commission on August 11, 1999). (10.12) Separation Agreement dated January 24, 2000 between John D. Vollaro and the Company (filed herewith). (13) 1999 Annual Report to Stockholders of W.R. Berkley Corporation (only those portions of such Annual Report that are incorporated by reference in this Report on Form 10-K are deemed filed) (filed herewith). (21) Following is a list of the Company's significant subsidiaries. Subsidiaries of subsidiaries are indented and the parent of each such corporation owns 100% of the outstanding voting securities of such corporation except as noted below.
Jurisdiction of Percentage Incorporation owned ------------- ----- All American Agency Facilities, Inc. Delaware 100% Berkley Regional Insurance Company: Missouri 100% Acadia Insurance Company: Maine 100% Chesapeake Bay Property and Casualty Insurance Company Maine 100% Berkley Insurance Company of the Carolinas North Carolina 100% Continental Western Insurance Company Iowa 100% Firemen's Insurance Company of Washington, D.C.: Maryland 100% Great River Insurance Company Mississippi 100% Tri-State Insurance Company of Minnesota: Minnesota 100% American West Insurance Company North Dakota 100% Union Insurance Company Nebraska 100% Union Standard Insurance Company Oklahoma 100% Berkley International, LLC New York 65% Carolina Casualty Insurance Company Florida 100% Clermont Specialty Managers, Ltd. New Jersey 100% J/I Holding Corporation: Delaware 100% Admiral Insurance Company: Delaware 100% Admiral Indemnity Insurance Company Delaware 100% Berkley Risk Services, LLC. Minnesota 100% Nautilus Insurance Company: Arizona 100% Great Divide Insurance Company North Dakota 100% Key Risk Management Services, Inc. North Carolina 100% Key Risk Insurance Company North Carolina 100% MECC, Inc.: Delaware 100% Midwest Employers Casualty Company: Ohio 100% Preferred Employers Insurance Company California 100% Riverport Insurance Company of California California 100% Monitor Liability Managers, Inc. Delaware 100% Monitor Surety Managers, Inc. Delaware 100% Queen's Island Insurance Company, Ltd. Bermuda 100% Signet Star Holdings, Inc.: Delaware 100% Signet Star Reinsurance Company Delaware 100% Facultative ReSources, Inc. Connecticut 100% Gemini Insurance Company Delaware 100% Starnet Insurance Company Delaware 100%
(23) See Independent Auditors' report on schedules and consent. (27) Financial Data Schedule. 34 35 INDEPENDENT AUDITORS' REPORT ON SCHEDULES AND CONSENT Board of Directors and Stockholders W. R. Berkley Corporation The audits referred to in our report dated February 24, 2000, included the related financial statement schedules as of December 31, 1999 and 1998 incorporated by reference in the Form 10-K, and for each of the years in the three-year period ended December 31, 1999. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for insurance-related assessments in 1999. We consent to the use of our reports incorporated by reference in the Registration Statements, (No. 33-95552) and (No. 333-00459) on Form S-3 and (No. 33-7488), (No. 33-88640), (No. 333-33935) and (No. 33-55726) on Form S-8 of W. R. Berkley Corporation. KPMG LLP New York, New York March 24, 2000 35 36 Schedule II W. R. Berkley Corporation Condensed Financial Information of Registrant Balance Sheets (Parent Company) (Amounts in thousands)
December 31, ------------ 1999 1998 ---- ---- Assets Cash (including invested cash) $ 22,081 $ 137,422 Fixed maturity securities: Held to maturity, at cost (fair value $5,523 and $5,563) 5,523 5,563 Available for sale at fair value (cost $714 and $898) 705 894 Equity securities, at fair value: Available for sale (cost $698 and $698) 1,110 755 Trading account (cost $773 and $698) 773 698 Investments in subsidiaries 1,091,312 1,353,201 Due from subsidiaries 52,124 54,753 Current Federal income taxes receivable 9,911 11,620 Deferred Federal income taxes 82,896 -- Real estate, furniture & equipment at cost, less accumulated depreciation 18,962 19,514 Other assets 4,654 5,571 ----------- ----------- $ 1,290,051 $ 1,589,991 =========== =========== Liabilities, Debt and Stockholders' Equity Liabilities: Due to subsidiaries (principally deferred income taxes) $ 86,680 $ 77,951 Short-term debt 35,000 55,500 Deferred Federal income taxes -- 7,198 Other liabilities 27,468 29,421 ----------- ----------- 149,148 170,070 ----------- ----------- Long-term debt 350,999 350,651 Subsidiary trust junior subordinated debt 198,126 207,988 Stockholders' equity: Preferred stock -- 65 Common stock 7,281 7,281 Additional paid-in capital 331,640 429,612 Retained earnings (including accumulated undistributed net income of subsidiaries of $386,470 and $517,649 in 1999 and 1998, respectively) 551,401 601,908 Accumulated other comprehensive income (loss) (44,500) 54,672 Treasury stock, at cost (254,044) (232,256) ----------- ----------- 591,778 861,282 ----------- ----------- $ 1,290,051 $ 1,589,991 =========== ===========
See note to condensed financial statements. 36 37 Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued Statements of Operations (Parent Company) (Amounts in thousands)
Years ended December 31, ------------------------ 1999 1998 1997 ---- ---- ---- Management fees and investment income from affiliates, including dividends of $96,817, $65,836 and $33,911 for 1999, 1998 and 1997, respectively $ 102,963 $ 72,812 $ 40,058 Realized investment gains (losses) 321 -- 2,739 Other income 3,975 10,506 10,972 --------- --------- --------- Total revenues 107,259 83,318 53,769 Expenses, other than interest expense 20,978 22,201 23,801 Restructuring charge 1,502 -- -- Interest expense 49,207 47,571 47,645 --------- --------- --------- Income (loss) before Federal income taxes 35,572 13,546 (17,677) --------- --------- --------- Federal income taxes: Federal income taxes provided by Subsidiaries on a separate return Basis 8,474 44,370 54,884 Federal income tax benefit (provision) on a Consolidated return basis 48,958 (5,115) (30,849) --------- --------- --------- Net benefit 57,432 39,255 24,035 --------- --------- --------- Income (loss) before undistributed equity in net income of subsidiaries 93,004 52,801 6,358 Equity in undistributed net income (loss) of subsidiaries (130,232) 6,835 93,210 --------- --------- --------- Income (loss) before preferred dividends (37,228) 59,636 99,568 Preferred dividends (567) (8,424) (8,349) --------- --------- --------- Net income (loss) before extraordinary gain (loss) 37,795 51,212 91,219 Extraordinary gain (loss) 735 (5,017) -- --------- --------- --------- Net income (loss) attributable to common stockholders $ (37,060) $ 46,195 $ 91,219 ========= ========= =========
See note to condensed financial statements. 37 38 Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued Statement of Cash Flows (Parent Company) (Amounts in thousands)
Years ended December 31, ------------------------ 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net income (loss) before preferred dividends and extraordinary items $ (37,298) $ 59,636 $ 99,568 Adjustments to reconcile net income to net cash flows provided by operating activities: Equity in undistributed net income of subsidiaries 130,232 (6,835) (93,210) Tax payments received from subsidiaries 24,105 63,199 45,999 Federal income taxes provided by subsidiaries on a separate return basis (8,473) (44,370) (54,884) Change in Federal income taxes (35,018) (29,342) (1,409) Realized investment losses (321) -- (2,739) Other, net 3,274 (1,790) 4,114 --------- --------- --------- Net cash provided by operating activities before trading account sales (purchases) 76,501 40,498 (2,561) Trading account sales (purchases), net (75) (79) 32,712 --------- --------- --------- Net cash provided by operating activities 76,426 40,419 30,151 --------- --------- --------- Cash flow used in investing activities: Proceeds from sales, excluding trading account: Fixed maturity securities available for sale 23,973 3,167 19,954 Equity securities -- -- 1,432 Proceeds from maturities and prepayments of fixed maturity securities 222 112,643 -- Cost of purchases, excluding trading account: Fixed maturity securities (23,648) -- (9,305) Equity securities -- -- (2,098) Cost of companies acquired -- -- (7,238) Proceeds from sale of membership interest to subsidiaries 33,566 -- -- Investments in and advances to subsidiaries, net (77,362) (5,775) (14,986) Net additions to real estate, furniture & equipment (357) 201 444 Other, net -- -- 5,539 --------- --------- --------- Net cash used in investing activities (43,606) 110,236 (6,258) --------- --------- --------- Cash flows from financing activities: Net proceeds from issuance of long-term debt -- 39,882 -- Net proceeds from issuance of short-term debt (20,500) 55,500 -- Purchase of treasury shares (4,895) (59,240) -- Cash dividends to common stockholders (13,888) (13,518) (11,695) Cash dividends to preferred shareholders (2,001) (7,356) (8,717) Purchase of preferred stock (98,092) -- (41,523) Retirement of long-term debt (9,171) (49,104) -- Other, net 386 2,585 755 --------- --------- --------- Net cash provided by financing activities (148,161) (31,251) (61,180) --------- --------- --------- Net increase in cash and invested cash (115,341) 119,404 (37,287) Cash and invested cash at beginning of year 137,422 18,018 55,305 --------- --------- --------- Cash and invested cash at end of year $ 22,081 $ 137,422 $ 18,018 ========= ========= =========
See note to condensed financial statements. 38 39 Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued December 31, 1999, 1998 and 1997 Note to Condensed Financial Statements (Parent Company) The accompanying condensed financial statements should be read in conjunction with the notes to consolidated financial statements included elsewhere herein. Reclassifications have been made in the 1998 and 1997 financial statements as originally reported to conform them to the presentation of the 1999 financial statements. The Company files a consolidated federal tax return with the results of its domestic insurance subsidiaries included on a statutory basis. Under present Company policy, Federal income taxes payable by (or refundable to) subsidiary companies on a separate-return basis are paid to (or refunded by) W. R. Berkley Corporation, and the Company pays the tax due on a consolidated return basis. Included in invested cash at December 31, 1998 is $114,520,667 placed in a trust to service the remaining outstanding shares of the Series A Preferred Stock. The Company redeemed the Series A Preferred Stock on January 25, 1999. 39 40 Schedule III W. R. Berkley Corporation and Subsidiaries Supplementary Insurance Information December 31, 1999, 1998 and 1997 (Amounts in thousands)
Reserve for Deferred policy losses and Net acquisition loss Unearned Premiums investment cost expenses premiums earned income ---------- ---------- ---------- ---------- ---------- December 31, 1999 Regional $ 84,046 $ 635,115 $ 338,237 $ 650,131 $ 52,639 Reinsurance 34,911 500,808 119,376 297,650 47,288 Specialty 37,298 722,689 178,357 256,156 50,231 Alternative markets 7,510 442,133 34,846 123,504 36,355 International 18,583 60,493 19,010 86,943 6,469 Corporate and adjustments -- -- -- -- (2,666) ---------- ---------- ---------- ---------- ---------- Total $ 182,348 $2,361,238 $ 689,826 $1,414,384 $ 190,316 ========== ========== ========== ========== ========== December 31, 1998 Regional $ 83,613 $ 495,164 $ 337,414 $ 622,280 $ 53,942 Reinsurance 29,906 435,920 102,566 246,277 47,643 Specialty 37,148 745,790 167,648 235,055 59,345 Alternative markets 7,531 399,560 37,061 101,755 34,667 International 10,696 50,132 20,172 73,032 5,469 Corporate and adjustments -- -- -- -- 1,354 ---------- ---------- ---------- ---------- ---------- Total $ 168,894 $2,126,566 $ 664,861 $1,278,399 $ 202,420 ========== ========== ========== ========== ========== December 31, 1997 Regional $ 79,726 $ 396,648 $ 315,978 $ 575,911 $ 51,920 Reinsurance 22,620 389,285 77,159 195,825 45,520 Specialty 29,949 751,068 147,443 213,794 60,162 Alternative markets 7,618 344,302 31,018 86,229 34,390 International 5,824 28,385 17,786 39,988 3,623 Corporate and adjustments -- -- -- -- 3,973 ---------- ---------- ---------- ---------- ---------- Total $ 145,737 $1,909,688 $ 589,384 $1,111,747 $ 199,588 ========== ========== ========== ========== ==========
Amortization of Loss and deferred policy Other operating Loss acquisition cost and Net premiums expenses costs expenses written ---------- ---------- ---------- ---------- December 31, 1999 Regional $ 554,394 $ 204,961 $ 33,261 $ 649,849 Reinsurance 226,229 92,503 6,790 309,181 Specialty 174,251 77,950 17,606 260,380 Alternative markets 82,757 36,063 78,476 122,137 International 48,195 32,812 8,526 86,172 Corporate and adjustments -- -- 15,836 -- ---------- ---------- ---------- ---------- Total $1,085,826 $ 444,289 $ 160,495 $1,427,719 ========== ========== ========== ========== December 31, 1998 Regional $ 476,920 $ 196,391 $ 33,732 $ 641,316 Reinsurance 183,020 62,855 15,084 269,634 Specialty 145,624 75,968 4,474 254,003 Alternative markets 65,634 30,903 72,897 106,195 International 43,564 28,495 15,244 75,106 Corporate and adjustments -- -- 20,112 -- ---------- ---------- ---------- ---------- Total $ 914,762 $ 394,612 $ 161,543 $1,346,254 ========== ========== ========== ========== December 31, 1997 Regional $ 385,285 $ 168,474 $ 33,759 $ 618,768 Reinsurance 135,530 58,200 3,836 206,652 Specialty 134,313 73,056 8,865 219,272 Alternative markets 55,386 26,002 69,044 90,870 International 23,910 12,139 12,874 42,079 Corporate and adjustments -- -- 21,527 -- ---------- ---------- ---------- ---------- Total $ 734,424 $ 337,871 $ 149,905 $1,177,641 ========== ========== ========== ==========
40 41 Schedule IV W. R. Berkley Corporation and Subsidiaries Reinsurance Years ended December 31, 1999, 1998 and 1997 (Amounts in thousands)
Assumed Percentage Ceded from of amount Direct to other other Net assumed to amount companies companies amount net ---------- ---------- ---------- ---------- ------- Premiums written: Year ended December 31, 1999: Regional insurance $ 755,752 $ 109,981 $ 4,078 $ 649,849 .6% Reinsurance 9,094 29,703 329,790 309,181 106.7% Specialty insurance 376,111 126,068 10,337 260,380 4.0% Alternative markets 69,671 20,333 72,799 122,137 59.6% International 107,257 21,085 -- 86,172 -- ---------- ---------- ---------- ---------- ------- Total $1,317,885 $ 307,170 $ 417,004 $1,427,719 29.2% ========== ========== ========== ========== ======= Year ended December 31, 1998: Regional insurance $ 744,560 $ 108,741 $ 5,497 $ 641,316 .9% Reinsurance 1,240 27,544 295,938 269,634 109.8% Specialty insurance 364,564 120,111 9,550 254,003 3.8% Alternative markets 62,942 15,078 58,331 106,195 54.9% International 95,870 20,764 -- 75,106 -- ---------- ---------- ---------- ---------- ------- Total $1,269,176 $ 292,238 $ 369,316 $1,346,254 27.4% ========== ========== ========== ========== ======= Year ended December 31, 1997: Regional insurance $ 691,431 $ 82,598 $ 9,935 $ 618,768 1.6% Reinsurance -- 17,059 223,711 206,652 108.3% Specialty insurance 329,266 118,868 8,874 219,272 4.0% Alternative markets 56,759 7,384 41,495 90,870 45.7% International 56,924 14,845 -- 42,079 -- ---------- ---------- ---------- ---------- ------- Total $1,134,380 $ 240,754 $ 284,015 $1,177,641 24.1% ========== ========== ========== ========== =======
41 42 Schedule VI W. R. Berkley Corporation and Subsidiaries Supplementary Information Concerning Property-Casualty Insurance Operations December 31, 1999, 1998 and 1997 (Amounts in thousands)
1999 1998 1997 ---- ---- ---- Deferred policy acquisition costs $ 182,348 $ 168,894 $ 145,737 Reserves for losses and loss expenses 2,361,238 2,126,566 1,909,688 Unearned premium 689,826 664,861 589,384 Premiums earned 1,414,384 1,278,399 1,111,747 Net investment income 190,316 202,420 199,588 Losses and loss expenses incurred: Current Year 1,032,089 944,887 747,977 Prior Years 28,351 (42,929) (21,313) Amortization of discount 10,473 9,111 7,760 Amortization of deferred policy acquisition costs 444,289 394,612 337,871 Paid losses and loss expenses 930,352 762,965 639,519 Net premiums written 1,427,719 1,346,254 1,177,641
42 EX-10.1 2 EXHIBIT 10.1 1 Exhibit 10.1 CREDIT AGREEMENT DATED AS OF DECEMBER 10, 1999 AMONG W.R. BERKLEY CORPORATION, BANK OF AMERICA, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT, AND THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO ARRANGED BY BANC OF AMERICA SECURITIES LLC, AS SOLE BOOK MANAGER AND SOLE LEAD ARRANGER 2 TABLE OF CONTENTS
Section Page ARTICLE I DEFINITIONS 1 1.1 Certain Defined Terms 1 1.2 Other Interpretive Provisions 19 1.3 Accounting Principles 21 ARTICLE II THE CREDITS 21 2.1 Amounts and Terms of Commitments 21 2.2 Loan Accounts 21 2.3 Procedure for Borrowing 22 2.4 Conversion and Continuation Elections 23 2.5 Voluntary Termination or Reduction of Commitments 25 2.6 Optional Prepayments 25 2.7 Repayment 25 2.8 Interest 25 2.9 Fees 26 (a) Arrangement, Agency Fees 26 (b) Facility Fees 27 (c) Utilization Fees 27 2.10 Computation of Fees and Interest 27 2.11 Payments by the Company 28 2.12 Payments by the Banks to the Agent 29 2.13 Sharing of Payments, Etc. 29 2.14 Termination Date 30 2.15 Increase of Commitments 31 ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY 31 3.1 Taxes 32 3.2 Illegality 33 3.3 Increased Costs and Reduction of Return 34 3.4 Funding Losses 34 3.5 Inability to Determine Rates 35 3.6 Certificates of Banks 36 3.7 Survival 36 ARTICLE IV CONDITIONS PRECEDENT 36 4.1 Conditions of Initial Loans 36
3 (a) Credit Agreement and Notes 36 (b) Resolutions; Incumbency 36 (c) Organization Documents; Good Standing 37 (d) Legal Opinions 37 (e) Payment of Fees 37 (f) Certificate 37 (g) Other Documents 38 4.2 Conditions to All Borrowings 38 (a) Notice of Borrowing 38 (b) Continuation of Representations and Warranties 38 (c) No Existing Default 38 ARTICLE V REPRESENTATIONS AND WARRANTIES 38 5.1 Corporate Existence and Power 38 5.2 Corporate Authorization; No Contravention 39 5.3 Governmental Authorization 39 5.4 Binding Effect 40 5.5 Litigation 40 5.6 No Default 40 5.7 ERISA Compliance 40 5.8 Use of Proceeds; Margin Regulations 41 5.9 Title to Properties 41 5.10 Taxes 42 5.11 Financial Condition 42 5.12 Environmental Matters 42 5.13 Regulated Entities 42 5.14 No Burdensome Restrictions 43 5.15 Copyrights, Patents, Trademarks and Licenses, etc. 43 5.16 Subsidiaries 43 5.17 Insurance 43 5.18 Full Disclosure 43 5.19 Solvency 44 5.20 Insurance Subsidiaries 44 5.21 Year 2000 44 ARTICLE VI AFFIRMATIVE COVENANTS 44 6.1 Financial Statements 45 6.2 Certificates; Other Information 47 6.3 Notices 48 6.4 Preservation of Corporate Existence, Etc. 49 6.5 Maintenance of Property 50 6.6 Insurance 50 6.7 Payment of Obligations 50 6.8 Compliance with Laws 51
-iii- 4 6.9 Compliance with ERISA 51 6.10 Inspection of Property and Books and Records 51 6.11 Environmental Laws 52 6.12 Use of Proceeds 52 ARTICLE VII NEGATIVE COVENANTS 52 7.1 Limitation on Liens 52 7.2 Disposition of Assets 54 7.3 Consolidations and Mergers 55 7.4 Transactions with Affiliates 55 7.5 Use of Proceeds 55 7.6 ERISA 56 7.7 Change in Business 56 7.8 Accounting Changes 56 7.9 Financial Covenants 56 7.10 Deferrable Interest Debentures 57 ARTICLE VIII EVENTS OF DEFAULT 57 8.1 Event of Default 57 (a) Non-Payment 57 (b) Representation or Warranty 57 (c) Specific Defaults 57 (d) Other Defaults 57 (e) Cross-Default 57 (f) Insolvency; Voluntary Proceedings 58 (g) Involuntary Proceedings 58 (h) Employee Benefit Plans 59 (i) Monetary Judgments 59 (j) Non-Monetary Judgments 59 (k) Change of Control 59 (l) Loss of Licenses 59 (m) Adverse Change 60 (n) Change in Regulation 60 8.2 Remedies 60 8.3 Rights Not Exclusive 61 ARTICLE IX THE AGENT 61 9.1 Appointment and Authorization 61 9.2 Delegation of Duties 61 9.3 Liability of Agent 61 9.4 Reliance by Agent 62 9.5 Notice of Default 63
-iv- 5 9.6 Credit Decision 63 9.7 Indemnification 64 9.8 Agent in Individual Capacity 64 9.9 Successor Agent 65 9.10 Withholding Tax 65 ARTICLE X MISCELLANEOUS 67 10.1 Amendments and Waivers 67 10.2 Notices 68 10.3 No Waiver; Cumulative Remedies 69 10.4 Costs and Expenses 69 10.5 Indemnity 70 10.6 Payments Set Aside 71 10.7 Successors and Assigns 71 10.8 Assignments, Participations, etc. 71 10.9 Confidentiality 73 10.10 Set-off 74 10.11 Notification of Addresses, Lending Offices, Etc. 75 10.12 Counterparts 75 10.13 Severability 75 10.14 No Third Parties Benefited 75 10.15 Governing Law and Jurisdiction 75 10.16 Waiver of Jury Trial 76 10.17 Entire Agreement 76
SCHEDULES Schedule 2.1 Commitments Schedule 5.7 ERISA Schedule 5.16 Subsidiaries and Minority Interests Schedule 7.1 Permitted Liens Schedule 7.1(k) Purchase Money Security Interests Schedule 10.2 Lending Offices; Addresses for Notices EXHIBITS Exhibit A Form of Notice of Borrowing Exhibit B Form of Notice of Conversion/Continuation Exhibit C Form of Compliance Certificate Exhibit D Form of Legal Opinion of Company's Counsel Exhibit E Form of Assignment and Acceptance Exhibit F Form of Promissory Note -v- 6 CREDIT AGREEMENT This CREDIT AGREEMENT is entered into as of December 10, 1999, among W.R. Berkley Corporation, a Delaware corporation (the "Company"), the several financial institutions from time to time party to this Agreement (collectively, the "Banks"; individually, a "Bank"), and Bank of America, National Association, as administrative agent for the Banks. WHEREAS, the Banks have agreed to make available to the Company a revolving credit facility upon the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.1 Certain Defined Terms. The following terms have the following meanings: "Acquisition" means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of any business or division of a Person, (b) the acquisition of in excess of 50% of the capital stock, partnership interests or equity of any Person, or otherwise causing any Person to become a Subsidiary, or (c) a merger or consolidation or any other combination with another Person (other than a Person that is a Subsidiary) provided that the Company or the Subsidiary is the surviving entity. "Affiliate" means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, by contract, or otherwise. "Agent" means BofA in its capacity as administrative agent for the Banks hereunder, and any successor agent arising under Section 9.9. 7 "Agent-Related Persons" means BofA and any successor administrative agent arising under Section 9.9, together with their respective Affiliates (including, in the case of BofA, the Arranger), and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. "Agent's Payment Office" means the address for payments set forth on the signature page hereto in relation to the Agent, or such other address as the Agent may from time to time specify. "Agreement" means this Credit Agreement. "Annual Statement" means the annual financial statement of any insurance company as required to be filed with the Department, together with all exhibits or schedules filed therewith, prepared in conformity with SAP. "Applicable Facility Fee Rate", "Applicable Margin" and "Applicable Utilization Fee Rate" means the following percentages (expressed in basis points) from time to time based upon the then applicable senior unsecured, unsupported debt rating of the Company assigned by S&P and Moody's:
LEVEL I LEVEL II LEVEL III LEVEL IV > or = > or = > or = < or = SENIOR UNSECURED DEBT RATING A+/A1 OR A-/A3 BBB+/Baa1 BBB/Baa2 A/A2 Applicable Facility Fee Rate 7.50 bps 8.50 bps 10.00 bps 15.00 bps Applicable Margin for Offshore Rate Loans 37.50 bps 46.50 bps 55.00 bps 70.00 bps Application Margin for Base Rate Loans 0 bps 0 bps 0 bps 0 bps Applicable Utilization Fee Rate 5.0 bps 5.0 bps 10.0 bps 10.0 bps
Notwithstanding the foregoing, the Applicable Margin during the period from the date hereof to and including January 31, 2000 shall be increased by 150 basis points with respect to all Loans made on the date hereof in excess of $35,000,000 (or for an Interest Period of one month) and all Loans made after the date hereof. The Applicable Facility Fee Rate, Applicable Margin and Applicable Utilization Fee Rate shall be determined based upon the higher of the Company's senior debt rating from S&P or Moody's except that if the Company's senior debt rating differs by more than one level between such ratings from S&P and Moody's, the Applicable Facility Fee Rate, Applicable -2- 8 Margin and Applicable Utilization Fee Rate shall be one level higher than the lower such rating. In the event the Company's senior debt is unrated by both S&P and Moody's, the Applicable Facility Fee Rate, the Applicable Margin and the Applicable Utilization Fee Rate shall be determined as if Level IV were applicable until the senior debt shall be rated. "Arranger" means Banc of America Securities LLC, a Delaware limited liability company, as sole lead arranger hereunder. "Assignee" has the meaning specified in subsection 10.8(a). "Attorney Costs" means and includes all fees and disbursements of any law firm or other external counsel, the allocated cost of internal legal services and all disbursements of internal counsel. "Bank" has the meaning specified in the introductory clause hereto. "Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. Section 101, et seq.). "Base Rate" means, for any day, the higher of: (a) 0.50% per annum above the latest Federal Funds Rate; and (b) the rate of interest in effect for such day as publicly announced from time to time by BofA in Charlotte, North Carolina as its "prime rate" (the "prime rate" being a rate set by BofA based upon various factors including BofA's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate). Any change in the prime rate announced by BofA shall take effect at the opening of business on the day specified in the public announcement of such change. Each interest rate based upon the Base Rate shall be adjusted simultaneously with any change in the Base Rate. "Base Rate Loan" means a Loan that bears interest based on the Base Rate. "BofA" means Bank of America, National Association, a national banking association. "Borrowing" means a borrowing hereunder consisting of Loans of the same Type made to the Company on the same day by the Banks under Article II, and having the same Interest Period. -3- 9 "Borrowing Date" means any date on which a Borrowing occurs under Section 2.3. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in San Francisco, California are authorized or required by law to close and, if the applicable Business Day relates to any Offshore Rate Loan, means such a day on which dealings are carried on in the applicable offshore dollar interbank market. "Capital Adequacy Regulation" means any guideline, request or directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank. "Change of Control" means (a) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company; (b) any "person" as such term is used in Sections 13(d) and 14(d) of the Exchange Act is or becomes, directly or indirectly, the "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, of securities of the Company that represent 51% or more of the combined voting power of the Company's then outstanding securities (other than William R. Berkley or any Affiliate of William R. Berkley); or (c) individuals who are Continuing Directors shall cease for any reason to constitute at least a majority of the Board of Directors of the Company. "Closing Date" means the date on which all conditions precedent set forth in Section 4.1 are satisfied or waived by all Banks (or, in the case of subsection 4.1(e), waived by the Person entitled to receive such payment). "Code" means the Internal Revenue Code of 1986, and regulations promulgated thereunder. "Commitment", as to each Bank, has the meaning specified in Section 2.1. "Common Stockholder's Equity" means, as of a particular date, the common stockholder's equity (including common stock, additional paid-in capital and retained earnings after deducting treasury stock) which would appear on a consolidated balance sheet of the Company and its consolidated Subsidiaries prepared as of such date in accordance with GAAP but without giving effect to Statement of Financial Accounting Standards No. 115. -4- 10 "Compliance Certificate" means a certificate substantially in the form of Exhibit C. "Contingent Obligation" means, as to any Person, without duplication, any direct or indirect liability of that Person, whether or not contingent, with or without recourse, (a) with respect to any Indebtedness, lease, dividend, letter of credit or other obligation (the "primary obligations") of another Person (the "primary obligor"), including any obligation of that Person (i) to purchase, repurchase or otherwise acquire such primary obligations or any security therefor, (ii) to advance or provide funds for the payment or discharge of any such primary obligation, or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (iv) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof (each, a "Guaranty Obligation"); (b) with respect to any Surety Instrument issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings or payments; or (c) to purchase any materials, supplies or other property from, or to obtain the services of, another Person if the relevant contract or other related document or obligation requires that payment for such materials, supplies or other property, or for such services, shall be made regardless of whether delivery of such materials, supplies or other property is ever made or tendered, or such services are ever performed or tendered, or (d) in respect of any Swap Contract; provided, however, that Contingent Obligations shall not include liabilities under policies or agreements of insurance or reinsurance entered into by the Company or its Subsidiaries in the ordinary course of business. "Continuing Director" means (i) any Person who on the date of this Agreement was a member of the Board of Directors of the Company, while such Person is a member of the Board, or (ii) any Person who subsequently becomes a member of the Board, while such Person is a member of the Board, if such Person's nomination for election or election to the Board is recommended or approved by a majority of the Continuing Directors. "Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of -5- 11 trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound. "Controlled Group" means the Company and any corporation, trade or business that is, along with the Company, a member of a controlled group of corporations or a controlled group of trades or businesses as described in sections 414(b) and 414(c), respectively, of the Code or in section 4001 of ERISA. "Conversion/Continuation Date" means any date on which, under Section 2.4, the Company (a) converts Loans of one Type to another Type, or (b) continues as Loans of the same Type, but with a new Interest Period, Loans having Interest Periods expiring on such date. "Debt Ratio" shall mean the ratio of (i) all Indebtedness of the Company (other than obligations under Swap Contracts consisting only of options with respect to equity investments held in a merger arbitrage portfolio of the Company or any Subsidiary which obligations were entered into for the purpose of hedging risk with respect to such portfolio) to (ii) Total Capital of the Company. "Default" means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. "Deferrable Interest Debentures" means the 8.197% Junior Subordinated Deferrable Interest Debentures due December 15, 2045 issued pursuant to an Indenture dated as of December 20, 1996, as amended and supplemented from time to time, between the Company and The Bank of New York. "Department" means the applicable Governmental Authority of the state of domicile of an insurance company responsible for the regulation of said insurance company. "Dollars", "dollars" and "$" each mean lawful money of the United States. "Eligible Assignee" means (i) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (ii) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development, or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, provided that such bank -6- 12 is acting through a branch or agency located in United States; (iii) a Person that is primarily engaged in the business of commercial banking and that is (A) a Subsidiary of a Bank, (B) a Subsidiary of a Person of which a Bank is a Subsidiary, or (C) a Person of which a Bank is a Subsidiary; and (iv) a Person to which the Company and the Agent shall agree. "Environmental Claims" means all claims, however asserted, by any Governmental Authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for release or injury to the environment. "Environmental Laws" means all federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authorities, in each case relating to environmental, health and safety matters. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, together with the regulations promulgated thereunder and under the Code, in each case as in effect from time to time. References to sections of ERISA also refer to successor sections. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Company within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "Eurodollar Reserve Percentage" has the meaning specified in the definition of "Offshore Rate". "Event of Default" means any of the events or circumstances specified in Section 8.1. "Exchange Act" means the Securities Exchange Act of 1934, and regulations promulgated thereunder. "Federal Funds Rate" means, for any day, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Bank of New York (including any such successor, "H.15(519)") on the preceding Business Day opposite the caption "Federal Funds (Effective)"; or, if for any relevant day such rate is not so published on any such preceding Business Day, the rate for such day will be the -7- 13 arithmetic mean as determined by the Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Agent. "Fee Letter" has the meaning specified in subsection 2.9(a). "FRB" means the Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions. "GAAP" means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Guaranty Obligation" has the meaning specified in the definition of "Contingent Obligation." "Indebtedness" of any Person means, without duplication, (a) all indebtedness for borrowed money; (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business on ordinary terms); (c) all non-contingent reimbursement or payment obligations with respect to Surety Instruments (other than obligations with respect to insurance products issued in the normal course of business by Subsidiaries that are insurance companies); (d) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (e) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by the Person -8- 14 (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property); (f) all obligations with respect to the principal portion of capital leases; (g) all net obligations with respect to Swap Contracts; (h) all indebtedness referred to in clauses (a) through (g) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; and (i) all Guaranty Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (a) through (g) above. For all purposes of this Agreement, the Indebtedness of any Person shall include all recourse Indebtedness of any partnership or joint venture or limited liability company in which such Person is a general partner or a joint venturer or a member. For purposes of this definition, Indebtedness shall not include the Deferrable Interest Debentures to the extent such Deferrable Interest Debentures constitute less than 15% of Total Capital. If the Deferrable Interest Debentures constitute more than 15% of Total Capital, then the portion of the Deferrable Interest Debentures exceeding 15% of Total Capital will be included in Indebtedness. Notwithstanding the foregoing, the Deferrable Interest Debentures shall constitute Indebtedness for the purpose of Section 8.1(e). "Indemnified Liabilities" has the meaning specified in Section 10.5. "Indemnified Person" has the meaning specified in Section 10.5. "Independent Auditor" has the meaning specified in subsection 6.1(a). "Insolvency Proceeding" means (a) any case, action or proceeding before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors, or other similar arrangement in respect of its creditors generally or any substantial portion of its creditors undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code. "Insurance Code" means, with respect to any insurance company, the insurance code of its state of domicile and any successor statute of similar import, together with the -9- 15 regulations thereunder, as amended or otherwise modified and in effect from time to time. References to sections of the Insurance Code shall be construed also to refer to successor sections. "Insurance Subsidiary" means Berkley Regional Insurance Company, Continental Western Insurance Company, Signet Star Reinsurance Company, Midwest Employers Casualty Company, Admiral Insurance Company and any other Subsidiary of the Company, including Subsidiaries of Subsidiaries, which is engaged in the insurance business and which shall have assets in excess of $250,000,000 on a SAP basis. "Interest Payment Date" means, as to any Offshore Rate Loan, the last day of each Interest Period applicable to such Loan and, as to any Base Rate Loan, the last Business Day of each calendar quarter, provided, however, that if any Interest Period for an Offshore Rate Loan exceeds three months, the date that falls three months after the beginning of such Interest Period and after each Interest Payment Date thereafter is also an Interest Payment Date. "Interest Period" means, as to any Offshore Rate Loan, the period commencing on the Borrowing Date of such Loan or on the Conversion/Continuation Date on which the Loan is converted into or continued as an Offshore Rate Loan, and ending on the date one, two, three or six months thereafter as selected by the Company in its Notice of Borrowing or Notice of Conversion/Continuation; provided that: (i) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; (ii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) no Interest Period for any Loan shall extend beyond the Revolving Termination Date. -10- 16 "IRS" means the Internal Revenue Service, and any Governmental Authority succeeding to any of its principal functions under the Code. "Lending Office" means, as to any Bank, the office or offices of such Bank specified as its "Lending Office" or "Domestic Lending Office" or "Offshore Lending Office", as the case may be, on Schedule 10.2, or such other office or offices as such Bank may from time to time notify the Company and the Agent. "Lien" means any security interest, mortgage, deed of trust, pledge, hypothecation, assignment, charge or deposit arrangement, encumbrance, lien (statutory or other) or preferential arrangement of any kind or nature whatsoever in respect of any property (including those created by, arising under or evidenced by any conditional sale or other title retention agreement, the interest of a lessor under a capital lease, any financing lease having substantially the same economic effect as any of the foregoing, or the filing of any financing statement naming the owner of the asset to which such lien relates as debtor, under the Uniform Commercial Code or any comparable law) and any contingent or other agreement to provide any of the foregoing, but not including the interest of a lessor under an operating lease. "Loan" means an extension of credit by a Bank to the Company under Article II, and may be a Base Rate Loan or an Offshore Rate Loan (each, a "Type" of Loan). "Loan Documents" means this Agreement, any Notes, the Fee Letter and all other documents delivered to the Agent or any Bank in connection herewith. "Margin Stock" means "margin stock" as such term is defined in Regulation T, U or X of the FRB. "Material Adverse Effect" means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties or condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole; (b) a material impairment of the ability of the Company to perform under any Loan Document and to avoid any Event of Default; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Company of any Loan Document. "Moody's" means Moody's Investor Service, Inc. "Multiemployer Plan" means a "multiemployer plan", within the meaning of Section 4001(a)(3) of ERISA, to which the Company or any ERISA Affiliate makes, is making, or is obligated -11- 17 to make contributions or, during the preceding three calendar years, has made, or been obligated to make, contributions. "NAIC" means the National Association of Insurance Commissioners or any successor thereto. "Note" means a promissory note executed by the Company in favor of a Bank pursuant to subsection 2.2(b), in substantially the form of Exhibit F. "Notice of Borrowing" means a notice in substantially the form of Exhibit A. "Notice of Conversion/Continuation" means a notice in substantially the form of Exhibit B. "Obligations" means all advances, debts, liabilities, obligations, covenants and duties arising under any Loan Document owing by the Company to any Bank, the Agent, or any Indemnified Person, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising. "Offshore Rate" means, for any Interest Period, with respect to Offshore Rate Loans comprising part of the same Borrowing, the rate of interest per annum (rounded upward to the next 1/100th of 1%) determined by the Agent as follows: Offshore Rate = LIBOR ------------------------------------ 1.00 - Eurodollar Reserve Percentage Where, "Eurodollar Reserve Percentage" means for any day for any Interest Period the maximum reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day (whether or not applicable to any Bank) under regulations issued from time to time by the FRB for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"); "LIBOR" means the rate per annum appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, LIBOR shall be, for -12- 18 any Interest Period, the rate per annum appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates. If for any reason none of the foregoing rates is available, LIBOR shall be, for any Interest Period, the rate per annum determined by Agent as the rate of interest at which dollar deposits in the approximate amount of the Offshore Rate Loan comprising part of such Borrowing would be offered by the BofA's London Branch to major banks in the offshore dollar market at their request at or about 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. The Offshore Rate shall be adjusted automatically as to all Offshore Rate Loans then outstanding as of the effective date of any change in the Eurodollar Reserve Percentage. "Offshore Rate Loan" means a Loan that bears interest based on the Offshore Rate. "Organization Documents" means, for any corporation, the certificate or articles of incorporation, the bylaws, any certificate of determination or instrument relating to the rights of preferred shareholders of such corporation, any shareholder rights agreement, and all applicable resolutions of the board of directors (or any committee thereof) of such corporation. "Other Taxes" means any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Documents. "Participant" has the meaning specified in subsection 10.8(d). "PBGC" means the Pension Benefit Guaranty Corporation, or any Governmental Authority succeeding to any of its principal functions under ERISA. "Permitted Liens" has the meaning specified in Section 7.1. -13- 19 "Person" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or Governmental Authority. "Plan" means any "employee pension benefit plan," as such term is defined in ERISA, which is subject to Title IV of ERISA (other than a "Multiemployer Plan"), and as to which any entity in the Controlled Group has or may have any liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA for any time within the preceding five years or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. "Pro Rata Share" means, as to any Bank at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Bank's Commitment divided by the combined Commitments of all Banks. "Reportable Event" means any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder, other than any such event for which the 30-day notice requirement under ERISA has been waived in regulations issued by the PBGC. "Required Banks" means at any time Banks then holding at least 75% of the then aggregate unpaid principal amount of the Loans, or, if no amounts are outstanding, Banks then having at least 75% of the aggregate amount of the Commitments. "Requirement of Law" means, as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject. "Responsible Officer" means the chief executive officer or the president of the Company, or any other officer having substantially the same authority and responsibility; or, with respect to compliance with financial covenants, the chief financial officer or the treasurer of the Company, or any other officer having substantially the same authority and responsibility. "Revolving Termination Date" means the earlier to occur of: (a) December 8, 2000 (the "Scheduled Termination Date) as such date may be extended pursuant to Section 2.14; and -14- 20 (b) the date on which the Commitments terminate in accordance with the provisions of this Agreement. "S&P" means Standard & Poor's Ratings Group. "SAP" shall mean, as to each Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the Department for the preparation of annual financial statements and other financial reports by insurance corporations, or in the event the Department fails to prescribe or address such practices, the NAIC guidelines. "Scheduled Termination Date" has the meaning specified in the definition of Revolving Termination Date. "SEC" means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions. "Stockholder's Equity" means, as of a particular date, total stockholder's equity (including capital stock, additional paid-in capital and retained earnings after deducting treasury stock) which would appear on a consolidated balance sheet of the Company and its consolidated Subsidiaries prepared as of such date in accordance with GAAP without giving effect to Statement of Financial Accounting Standards No. 115. "Subsidiary" of a Person means any corporation, association, partnership, limited liability company, joint venture or other business entity of which more than 50% of the voting stock or other equity interests (in the case of Persons other than corporations), is owned or controlled directly or indirectly by the Person, or one or more of the Subsidiaries of the Person, or a combination thereof. Unless the context otherwise clearly requires, references herein to a "Subsidiary" refer to a Subsidiary of the Company. "Surety Instruments" means all letters of credit (including standby and commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds and similar instruments. "Swap Contract" means any agreement (including any master agreement and any agreement, whether or not in writing, relating to any single transaction) that is an interest rate swap agreement, basis swap, forward rate agreement, commodity swap, commodity option, equity or equity index swap or option, bond option, interest rate option, forward foreign exchange agreement, rate cap, collar or floor agreement, currency swap agreement, cross-currency rate swap agreement, swaption, currency option or any other, similar agreement (including any option to enter into any of the foregoing). -15- 21 "Taxes" means any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank and the Agent, such taxes (including income taxes or franchise taxes) as are imposed on or measured by each Bank's net income by the jurisdiction (or any political subdivision thereof) under the laws of which such Bank or the Agent, as the case may be, is organized or maintains a lending office. "Total Capital" means Stockholder's Equity plus Indebtedness plus the principal amount of Deferrable Interest Debentures. "Type" has the meaning specified in the definition of "Loan." "United States" and "U.S." each means the United States of America. "Welfare Plan" means any "employee welfare benefit plan," as such term is defined in ERISA, as to which the Company has any liability. 1.2 Other Interpretive Provisions. (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. (b) The words "hereof", "herein", "hereunder" and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement; and subsection, Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (c) (i) The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. (ii) The term "including" is not limiting and means "including without limitation." (iii) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including." (d) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the -16- 22 terms of any Loan Document, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. (e) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. (f) This Agreement and the other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. Unless otherwise expressly provided, any reference to any action of any Bank by way of consent, approval or waiver shall be deemed modified by the phrase "in its sole discretion." (g) This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Agent, the Company and the other parties, and are the products of all parties. Accordingly, they shall not be construed against the Banks or the Agent merely because of the Agent's or Banks' involvement in their preparation. 1.3 Accounting Principles. (a) Unless the context otherwise clearly requires, all accounting terms not expressly defined herein shall be construed, and all financial computations required under this Agreement shall be made, in accordance with GAAP, consistently applied (except for changes in which the Independent Auditor concurs). (b) References herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of the Company. ARTICLE II THE CREDITS 2.1 Amounts and Terms of Commitments. Each Bank severally agrees, on the terms and conditions set forth herein, to make loans to the Company from time to time on any Business Day during the period from the Closing Date to the Revolving Termination Date, in an aggregate amount not to exceed at any time outstanding the amount set forth on Schedule 2.1 (such amount as the same may be reduced under Section 2.5, reduced or increased as a result of one or more assignments under Section 10.8 or increased under Section 2.15, the Bank's "Commitment"); provided, however, that, after giving effect to any Borrowing, the aggregate principal amount of all outstanding Loans shall not at any time exceed the -17- 23 combined Commitments. Within the limits of each Bank's Commitment, and subject to the other terms and conditions hereof, the Company may borrow under this Section 2.1, prepay under Section 2.6 and reborrow under this Section 2.1. 2.2 Loan Accounts. (a) The Loans made by each Bank shall be evidenced by one or more loan accounts or records maintained by such Bank in the ordinary course of business. The loan accounts or records maintained by the Agent and each Bank shall be conclusive absent manifest error of the amount of the Loans made by the Banks to the Company and the interest and payments thereon. Any failure so to record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Company hereunder to pay any amount owing with respect to the Loans. (b) Upon the request of any Bank made through the Agent, the Loans made by such Bank may be evidenced by one or more Notes, instead of loan accounts. Each such Bank shall endorse on the schedules annexed to its Note(s) the date, amount and maturity of each Loan made by it and the amount of each payment of principal made by the Company with respect thereto. Each such Bank is irrevocably authorized by the Company to endorse its Note(s) and each Bank's record shall be conclusive absent manifest error; provided, however, that the failure of a Bank to make, or an error in making, a notation thereon with respect to any Loan shall not limit or otherwise affect the obligations of the Company hereunder or under any such Note to such Bank. 2.3 Procedure for Borrowing. (a) Each Borrowing shall be made upon the Company's irrevocable written notice delivered to the Agent in the form of a Notice of Borrowing (which notice must be received by the Agent prior to 9:00 a.m. (San Francisco time) (i) three Business Days prior to the requested Borrowing Date, in the case of Offshore Rate Loans; and (ii) on the requested Borrowing Date, in the case of Base Rate Loans, specifying: (A) the amount of the Borrowing, which shall be in an aggregate minimum amount of $5,000,000 or any multiple of $1,000,000 in excess thereof; (B) the requested Borrowing Date, which shall be a Business Day; (C) the Type of Loans comprising the Borrowing; and (D) if applicable, the duration of the Interest Period applicable to such Loans included in such notice. If the Notice of Borrowing fails to specify the duration of the Interest Period for any -18- 24 Borrowing comprised of Offshore Rate Loans, such Interest Period shall be three months. (b) The Agent will promptly notify each Bank of its receipt of any Notice of Borrowing and of the amount of such Bank's Pro Rata Share of that Borrowing. (c) Each Bank will make the amount of its Pro Rata Share of each Borrowing available to the Agent for the account of the Company at the Agent's Payment Office by 11:00 a.m. (San Francisco time) on the Borrowing Date requested by the Company in funds immediately available to the Agent. The proceeds of all such Loans will then be made available to the Company by the Agent at such office by crediting the account of the Company on the books of BofA with the aggregate of the amounts made available to the Agent by the Banks or by wire transfer in accordance with written instructions provided to the Agent by the Company, of like funds as received by the Agent. (d) After giving effect to any Borrowing, there may not be more than five different Interest Periods in effect. 2.4 Conversion and Continuation Elections. (a) The Company may, upon irrevocable written notice to the Agent in accordance with subsection 2.4(b): (i) elect, as of any Business Day, in the case of Base Rate Loans, or as of the last day of the applicable Interest Period, in the case of Offshore Rate Loans, to convert any such Loans (or any part thereof in an amount not less than $5,000,000, or that is in an integral multiple of $1,000,000 in excess thereof) into Loans of the other Type; or (ii) elect, as of the last day of the applicable Interest Period, to continue any Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than $5,000,000, or that is in an integral multiple of $1,000,000 in excess thereof); provided, that if at any time the aggregate amount of Offshore Rate Loans in respect of any Borrowing is reduced, by payment, prepayment, or conversion of part thereof to be less than $1,000,000, such Offshore Rate Loans shall automatically convert into Base Rate Loans, and on and after such date the right of the Company to continue such Loans as, and convert such Loans into, Offshore Rate Loans shall terminate. (b) The Company shall deliver a Notice of Conversion/ Continuation to be received by the Agent not later than 9:00 a.m. (San Francisco time) at least (i) three Business Days in advance of the Conversion/Continuation Date, if the Loans are to be converted -19- 25 into or continued as Offshore Rate Loans; and (ii) on the Conversion/ Continuation Date, if the Loans are to be converted into Base Rate Loans, specifying: (A) the proposed Conversion/Continuation Date; (B) the aggregate amount of Loans to be converted or renewed; (C) the Type of Loans resulting from the proposed conversion or continuation; and (D) if applicable, the duration of the requested Interest Period. (c) If upon the expiration of any Interest Period applicable to Offshore Rate Loans, the Company has failed to select timely a new Interest Period to be applicable to such Offshore Rate Loans, or if any Default or Event of Default then exists, the Company shall be deemed to have elected to convert such Offshore Rate Loans into Base Rate Loans effective as of the expiration date of such Interest Period. (d) The Agent will promptly notify each Bank of its receipt of a Notice of Conversion/Continuation, or, if no timely notice is provided by the Company, the Agent will promptly notify each Bank of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective outstanding principal amounts of the Loans with respect to which the notice was given held by each Bank. (e) Unless the Required Banks otherwise agree, during the existence of a Default or Event of Default, the Company may not elect to have a Loan converted into or continued as an Offshore Rate Loan. (f) After giving effect to any conversion or continuation of Loans, there may not be more than five different Interest Periods in effect. 2.5 Voluntary Termination or Reduction of Commitments. The Company may, upon not less than five Business Days' prior notice to the Agent, terminate the Commitments, or permanently reduce the Commitments by an aggregate minimum amount of $5,000,000 or any multiple of $1,000,000 in excess thereof; unless, after giving effect thereto and to any prepayments of Loans made on the effective date thereof, the then-outstanding principal amount of the Loans would exceed the amount of the combined Commitments then in effect. Once reduced in accordance with this Section, the Commitments may not be increased. Any reduction of the Commitments -20- 26 shall be applied to each Bank according to its Pro Rata Share. All accrued commitment fees to, but not including the effective date of any reduction or termination of Commitments, shall be paid on the effective date of such reduction or termination. 2.6 Optional Prepayments. Subject to Section 3.4, the Company may, at any time or from time to time, upon not less than three Business Days' irrevocable notice to the Agent, ratably prepay Loans in whole or in part, in minimum aggregate amounts of $5,000,000 or any multiple of $1,000,000 in excess thereof. Such notice of prepayment shall specify the date and amount of such prepayment and the Type(s) of Loans to be prepaid. The Agent will promptly notify each Bank of its receipt of any such notice, and of such Bank's Pro Rata Share of such prepayment. If such notice is given by the Company, the Company shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to each such date on the amount prepaid and any amounts required pursuant to Section 3.4. 2.7 Repayment. The Company shall repay to the Banks on the Revolving Termination Date the aggregate principal amount of Loans outstanding on such date. 2.8 Interest. (a) Each Loan shall bear interest on the outstanding principal amount thereof from the applicable Borrowing Date at a rate per annum equal to the Offshore Rate plus the Applicable Margin or the Base Rate, plus the Applicable Margin, as the case may be (and subject to the Company's right to convert to other Types of Loans under Section 2.4). (b) Interest on each Loan shall be paid in arrears on each Interest Payment Date. Interest shall also be paid on the date of any prepayment of Offshore Rate Loans under Section 2.6 for the portion of the Loans so prepaid and upon payment (including prepayment) in full thereof and, during the existence of any Event of Default, interest shall be paid on demand of the Agent at the request or with the consent of the Required Banks. (c) Notwithstanding subsection (a) of this Section, while any Event of Default exists or after acceleration, the Company shall pay interest (after as well as before entry of judgment thereon to the extent permitted by law) on the principal amount of all outstanding Loans, at a rate per annum which is determined by adding 2% per annum to the interest rate calculated pursuant to subsection (a) above for such Loans; provided, however, that, on and after the expiration of any Interest Period applicable to any Offshore Rate Loan outstanding on the date of occurrence of such Event of Default or acceleration, the principal amount of such Loan shall, during the continuation of such Event of Default or -21- 27 after acceleration, bear interest at a rate per annum equal to the Base Rate plus the Applicable Margin for Base Rate Loans plus 2%. (d) Anything herein to the contrary notwithstanding, the obligations of the Company to any Bank hereunder shall be subject to the limitation that payments of interest shall not be required for any period for which interest is computed hereunder, to the extent (but only to the extent) that contracting for or receiving such payment by such Bank would be contrary to the provisions of any law applicable to such Bank limiting the highest rate of interest that may be lawfully contracted for, charged or received by such Bank, and in such event the Company shall pay such Bank interest at the highest rate permitted by applicable law. 2.9 Fees. (a) Arrangement, Agency Fees. The Company shall pay an arrangement fee to the Arranger for the Arranger's own account, and shall pay an agency fee to the Agent for the Agent's own account, as required by the letter agreement ("Fee Letter") between the Company and the Arranger and Agent dated May 26, 1999. (b) Facility Fees. The Company shall pay to the Agent for the account of each Bank a facility fee on the average daily amount of such Bank's Commitment (whether or not used), computed on a quarterly basis in arrears on the last Business Day of each calendar quarter based upon the daily amount of the Commitments for that quarter as calculated by the Agent, equal to the Applicable Facility Fee Rate per annum. Such facility fee shall accrue from the date hereof to the Revolving Termination Date and shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter commencing on the first such date after the date hereof through the Revolving Termination Date, with the final payment to be made on the Revolving Termination Date; provided that, in connection with any reduction or termination of Commitments under Section 2.5, the accrued facility fee calculated for the period ending on such date shall also be paid on the date of such reduction or termination, with the following quarterly payment being calculated on the basis of the period from such reduction or termination date to such quarterly payment date. The facility fees provided in this subsection shall accrue at all times after the above-mentioned commencement date, including at any time during which one or more conditions in Article IV are not met. (c) Utilization Fees. The Company shall pay to the Agent for the account of each Bank a utilization fee on the actual daily outstanding principal amount of the Loans for any day on which the outstanding principal amount of the Loans exceeds one-half (1/2) of the aggregate Commitments computed on a quarterly basis in arrears on the last Business Day of each calendar quarter based upon the daily amount of the Commitments and outstanding Loans for that quarter as calculated by the Agent, equal to the Applicable Utilization Fee Rate per annum. Such utilization fee -22- 28 shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter in which such fee shall accrue commencing on the first such date after the date hereof through the Revolving Termination Date, with the final payment to be made on the Revolving Termination Date. 2.10 Computation of Fees and Interest. (a) All computations of interest for Base Rate Loans when the Base Rate is determined by BofA's "prime rate" shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more interest being paid than if computed on the basis of a 365-day year). Interest and fees shall accrue during each period during which interest or such fees are computed from the first day thereof to the last day thereof. (b) Each determination of an interest rate by the Agent shall be conclusive and binding on the Company and the Banks in the absence of manifest error. 2.11 Payments by the Company. (a) All payments to be made by the Company shall be made without set-off, recoupment or counterclaim. Except as otherwise expressly provided herein, all payments by the Company shall be made to the Agent for the account of the Banks at the Agent's Payment Office, and shall be made in dollars and in immediately available funds, no later than 11:00 a.m. (San Francisco time) on the date specified herein. The Agent will promptly distribute to each Bank its Pro Rata Share (or other applicable share as expressly provided herein) of such payment in like funds as received. Any payment received by the Agent later than 11:00 a.m. (San Francisco time) shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue. (b) Subject to the provisions set forth in the definition of "Interest Period" herein, whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. (c) Unless the Agent receives notice from the Company prior to the date on which any payment is due to the Banks that the Company will not make such payment in full as and when required, the Agent may assume that the Company has made such payment in full to the Agent on such date in immediately available funds and the Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent the Company has not made such payment in full to the Agent, each Bank -23- 29 shall repay to the Agent on demand such amount distributed to such Bank, together with interest thereon at the Federal Funds Rate for each day from the date such amount is distributed to such Bank until the date repaid. 2.12 Payments by the Banks to the Agent. (a) Unless the Agent receives notice from a Bank on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, at least one Business Day prior to the date of such Borrowing, that such Bank will not make available as and when required hereunder to the Agent for the account of the Company the amount of that Bank's Pro Rata Share of the Borrowing, the Agent may assume that each Bank has made such amount available to the Agent in immediately available funds on the Borrowing Date and the Agent may (but shall not be so required), in reliance upon such assumption, make available to the Company on such date a corresponding amount. If and to the extent any Bank shall not have made its full amount available to the Agent in immediately available funds and the Agent in such circumstances has made available to the Company such amount, that Bank shall on the Business Day following such Borrowing Date make such amount available to the Agent, together with interest at the Federal Funds Rate for each day during such period. A notice of the Agent submitted to any Bank with respect to amounts owing under this subsection (a) shall be conclusive, absent manifest error. If such amount is so made available, the principal portion of such payment to the Agent shall constitute such Bank's Loan on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to the Agent on the Business Day following the Borrowing Date, the Agent will notify the Company of such failure to fund and, upon demand by the Agent, the Company shall pay such principal portion of such payment to the Agent for the Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Loans comprising such Borrowing. (b) The failure of any Bank to make any Loan on any Borrowing Date shall not relieve any other Bank of any obligation hereunder to make a Loan on such Borrowing Date, but no Bank shall be responsible for the failure of any other Bank to make the Loan to be made by such other Bank on any Borrowing Date. 2.13 Sharing of Payments, Etc. If, other than as expressly provided elsewhere herein, any Bank shall obtain on account of the Loans made by it any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its Pro Rata Share, such Bank shall immediately (a) notify the Agent of such fact, and (b) purchase from the other Banks such participations in the Loans made by them as shall be necessary to cause such purchasing Bank to share the excess payment pro rata with each of them; provided, however, that if all or any -24- 30 portion of such excess payment is thereafter recovered from the purchasing Bank, such purchase shall to that extent be rescinded and each other Bank shall repay to the purchasing Bank the purchase price paid therefor, together with an amount equal to such paying Bank's ratable share (according to the proportion of (i) the amount of such paying Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The Company agrees that any Bank so purchasing a participation from another Bank may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off, but subject to Section 10.10) with respect to such participation as fully as if such Bank were the direct creditor of the Company in the amount of such participation. The Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section and will in each case notify the Banks following any such purchases or repayments. 2.14 Termination Date. The Company may request an extension of the Scheduled Termination Date by submitting a request for an extension to the Agent (an "Extension Request") no more than 60 days or less than 45 days prior to the then effective Scheduled Termination Date. The Extension Request must specify the new Scheduled Termination Date requested by the Company and the date (which must be at least 30 days after the Extension Request is delivered to the Agent) as of which the Banks must respond to the Extension Request (the "Response Date"). The new Scheduled Termination Date shall be no more than 364 days after the Scheduled Termination Date in effect at the time the Extension Request is received, including the Scheduled Termination Date as one of the days in the calculation of the days elapsed. Promptly upon receipt of an Extension Request, the Agent shall notify each Bank of the contents thereof and shall request each Bank to approve the Extension Request. Each Bank approving the Extension Request shall deliver its written consent no later than the Response Date. If the consent of each of the Banks is received by the Agent, the Scheduled Termination Date specified in the Extension Request shall become effective on the existing Scheduled Termination Date and the Agent shall promptly notify the Company and each Bank of the new Scheduled Termination Date. If any Bank shall not so consent, the Scheduled Termination Date shall not be extended. 2.15 Increase of Commitments. The Company may from time to time, by notice to the Agent, request that the total aggregate Commitments (the "Total Aggregate Commitment") be increased to an amount not exceeding $100,000,000. Each such notice shall set forth the requested amount of the increase in the Total Aggregate Commitment and the date on which such increase is to become effective. The increase in the Total Aggregate Commitment may be assumed by any Bank or any other financial institution agreed to by -25- 31 the Company and the Agent (any such Bank or other financial institution being called an "Augmenting Bank") and shall be effective upon the consent of the Company and the Augmenting Bank. Upon the effectiveness of any increase pursuant to this Section 2.15 of the Total Aggregate Commitment and any resulting adjustment in the Pro Rata Shares, the Banks and the Augmenting Banks will purchase from each other and sell to each other outstanding Loans sufficient to cause the outstanding Loans of each Bank and Augmenting Bank to equal its Pro Rata Share (as so adjusted) of the aggregate principal amount of the Total Aggregate Commitment. Such purchase and sale shall be made pursuant to Section 10.8 except that no minimum amount shall be required, no processing fee shall be charged and, if any Bank shall suffer a loss or incur an expense as a result of the effectiveness of such purchase or sale the Company shall pay such Bank the amount of such loss or expense. Each such Bank shall furnish the Company with a certificate setting forth the basis for determining the amount to be paid to it hereunder. ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY 3.1 Taxes. (a) Any and all payments by the Company to each Bank or the Agent under this Agreement and any other Loan Document shall be made free and clear of, and without deduction or withholding for any Taxes. In addition, the Company shall pay all Other Taxes. (b) The Company agrees to indemnify and hold harmless each Bank and the Agent for the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section) paid by the Bank or the Agent and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Payment under this indemnification shall be made within 30 days after the date the Bank or the Agent makes written demand therefor. (c) If the Company shall be required by law to deduct or withhold any Taxes or Other Taxes from or in respect of any sum payable hereunder to any Bank or the Agent, then: (i) the sum payable shall be increased as necessary so that after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section) such Bank or the Agent, as the case may be, receives an amount equal to the -26- 32 sum it would have received had no such deductions or withholdings been made; (ii) the Company shall make such deductions and withholdings; (iii) the Company shall pay the full amount deducted or withheld to the relevant taxing authority or other authority in accordance with applicable law; and (iv) the Company shall also pay to each Bank or the Agent for the account of such Bank, at the time interest is paid, all additional amounts which the respective Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes or Other Taxes had not been imposed. (d) Within 30 days after the date of any payment by the Company of Taxes or Other Taxes, the Company shall furnish the Agent the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to the Agent. (e) If the Company is required to pay additional amounts to any Bank or the Agent pursuant to subsection (c) of this Section, then such Bank shall use reasonable efforts (consistent with legal and regulatory restrictions) to change the jurisdiction of its Lending Office so as to eliminate any such additional payment by the Company which may thereafter accrue, if such change in the judgment of such Bank is not otherwise disadvantageous to such Bank. 3.2 Illegality. (a) If any Bank determines that the introduction of any Requirement of Law, or any change in any Requirement of Law, or in the interpretation or administration of any Requirement of Law, has made it unlawful, or that any central bank or other Governmental Authority has asserted that it is unlawful, for any Bank or its applicable Lending Office to make Offshore Rate Loans, then, on notice thereof by the Bank to the Company through the Agent, any obligation of that Bank to make Offshore Rate Loans shall be suspended until the Bank notifies the Agent and the Company that the circumstances giving rise to such determination no longer exist. (b) If a Bank determines that it is unlawful to maintain any Offshore Rate Loan, the Company shall, upon its receipt of notice of such fact and demand from such Bank (with a copy to the Agent), prepay in full such Offshore Rate Loans of that Bank then outstanding, together with interest accrued thereon and amounts required under Section 3.4, either on the last day of the Interest Period thereof, if the Bank may lawfully continue to -27- 33 maintain such Offshore Rate Loans to such day, or immediately, if the Bank may not lawfully continue to maintain such Offshore Rate Loan. If the Company is required to so prepay any Offshore Rate Loan, then concurrently with such prepayment, the Company shall borrow from the affected Bank, in the amount of such repayment, a Base Rate Loan. 3.3 Increased Costs and Reduction of Return. (a) If any Bank determines that, due to either (i) the introduction of or any change (other than any change by way of imposition of or increase in reserve requirements included in the calculation of the Offshore Rate) in or in the interpretation of any law or regulation or (ii) the compliance by that Bank with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Bank of agreeing to make or making, funding or maintaining any Offshore Rate Loans, then the Company shall be liable for, and shall from time to time, upon demand (with a copy of such demand to be sent to the Agent), pay to the Agent for the account of such Bank, additional amounts as are sufficient to compensate such Bank for such increased costs. (b) If any Bank shall have determined that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by the Bank (or its Lending Office) or any corporation controlling the Bank with any Capital Adequacy Regulation, affects or would affect the amount of capital required or expected to be maintained by the Bank or any corporation controlling the Bank and (taking into consideration such Bank's or such corporation's policies with respect to capital adequacy and such Bank's desired return on capital) determines that the amount of such capital is increased as a consequence of its Commitment, loans, credits or obligations under this Agreement, then, upon demand of such Bank to the Company through the Agent, the Company shall pay to the Bank, from time to time as specified by the Bank, additional amounts sufficient to compensate the Bank for such increase. 3.4 Funding Losses. The Company shall reimburse each Bank and hold each Bank harmless from any loss or expense which the Bank may sustain or incur as a consequence of: (a) the failure of the Company to make on a timely basis any payment of principal of any Offshore Rate Loan; (b) the failure of the Company to borrow, continue or convert a Loan after the Company has given (or is deemed to have -28- 34 given) a Notice of Borrowing or a Notice of Conversion/Continuation; (c) the failure of the Company to make any prepayment in accordance with any notice delivered under Section 2.6; (d) the prepayment or other payment (including after acceleration thereof) of an Offshore Rate Loan on a day that is not the last day of the relevant Interest Period; or (e) the automatic conversion under Section 2.4 of any Offshore Rate Loan to a Base Rate Loan on a day that is not the last day of the relevant Interest Period; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Offshore Rate Loans or from fees payable to terminate the deposits from which such funds were obtained. For purposes of calculating amounts payable by the Company to the Banks under this Section and under subsection 3.3(a), each Offshore Rate Loan made by a Bank (and each related reserve, special deposit or similar requirement) shall be conclusively deemed to have been funded at the LIBOR used in determining the Offshore Rate for such Offshore Rate Loan by a matching deposit or other borrowing in the interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Offshore Rate Loan is in fact so funded. 3.5 Inability to Determine Rates. If the Required Banks determine that for any reason adequate and reasonable means do not exist for determining the Offshore Rate for any requested Interest Period with respect to a proposed Offshore Rate Loan, or that the Offshore Rate applicable pursuant to subsection 2.8(a) for any requested Interest Period with respect to a proposed Offshore Rate Loan does not adequately and fairly reflect the cost to such Banks of funding such Loan, the Agent will promptly so notify the Company and each Bank. Thereafter, the obligation of the Banks to make or maintain Offshore Rate Loans hereunder shall be suspended until the Agent upon the instruction of the Required Banks revokes such notice in writing. Upon receipt of such notice, the Company may revoke any Notice of Borrowing or Notice of Conversion/Continuation then submitted by it. If the Company does not revoke such Notice, the Banks shall make, convert or continue the Loans, as proposed by the Company, in the amount specified in the applicable notice submitted by the Company, but such Loans shall be made, converted or continued as Base Rate Loans instead of Offshore Rate Loans. 3.6 Certificates of Banks. Any Bank claiming reimbursement or compensation under this Article III shall deliver to the Company (with a copy to the Agent) a certificate setting forth in reasonable detail the amount payable to the Bank hereunder and such -29- 35 certificate shall be conclusive and binding on the Company in the absence of manifest error. 3.7 Survival. The agreements and obligations of the Company in this Article III shall survive the payment of all other Obligations. ARTICLE IV CONDITIONS PRECEDENT 4.1 Conditions of Initial Loans. The obligation of each Bank to make its initial Loan hereunder is subject to the condition that the Agent have received on or before the Closing Date all of the following, in form and substance satisfactory to the Agent and each Bank, and in sufficient copies for each Bank: (a) Credit Agreement and Notes. This Agreement and the Notes executed by each party thereto; (b) Resolutions; Incumbency. (i) Copies of the resolutions of the board of directors of the Company authorizing the transactions contemplated hereby, certified as of the Closing Date by the Secretary or an Assistant Secretary of the Company; and (ii) A certificate of the Secretary or Assistant Secretary of the Company certifying the names and true signatures of the officers of the Company authorized to execute, deliver and perform, as applicable, this Agreement, and all other Loan Documents to be delivered by it hereunder; (c) Organization Documents; Good Standing. Each of the following documents: (i) the articles or certificate of incorporation and the bylaws of the Company as in effect on the Closing Date, certified by the Secretary or Assistant Secretary of the Company as of the Closing Date; and (ii) a good standing certificate for the Company from the Secretary of State (or similar, applicable Governmental Authority) of its state of incorporation; (d) Legal Opinion. Opinion of Willkie Farr & Gallagher, special counsel to the Company and addressed to the Agent and the Banks, substantially in the form of Exhibits D. -30- 36 (e) Payment of Fees. Evidence of payment by the Company of all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with Attorney Costs of BofA to the extent invoiced prior to or on the Closing Date, plus such additional amounts of Attorney Costs as shall constitute BofA's reasonable estimate of Attorney Costs incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between the Company and BofA); including any such costs, fees and expenses arising under or referenced in Sections 2.9 and 10.4; (f) Certificate. A certificate signed by a Responsible Officer, dated as of the Closing Date, stating that: (i) the representations and warranties contained in Article V are true and correct on and as of such date, as though made on and as of such date; and (ii) there has occurred since December 31, 1998, no event or circumstance that has resulted or could reasonably be expected to result in a Material Adverse Effect except for those, if any, as may be set forth in reports filed by the Company with the SEC after December 31, 1998 and prior to the date of this Agreement; and (g) Other Documents. Such other approvals, opinions, documents or materials as the Agent or any Bank may request. 4.2 Conditions to All Borrowings. The obligation of each Bank to make any Loan to be made by it (including its initial Loan) is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date: (a) Notice of Borrowing. The Agent shall have received (with a copy for each Bank) a Notice of Borrowing; (b) Continuation of Representations and Warranties. The representations and warranties in Article V shall be true and correct in all material respects on and as of such Borrowing Date with the same effect as if made on and as of such Borrowing Date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they shall be true and correct in all material respects as of such earlier date); and (c) No Existing Default. No Default or Event of Default shall exist or shall result from such Borrowing. Each Notice of Borrowing submitted by the Company hereunder shall constitute a representation and warranty by the Company hereunder, -31- 37 as of the date of each such notice and as of each Borrowing Date, that the conditions in Section 4.2 are satisfied. ARTICLE V REPRESENTATIONS AND WARRANTIES The Company represents and warrants to the Agent and each Bank that: 5.1 Corporate Existence and Power. The Company and each of its Insurance Subsidiaries: (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or domicile; (b) has the power and authority and all governmental licenses, authorizations, consents, certificates of authority and approvals (i) to own its assets and carry on its business, and (ii) in the case of the Company, to execute, deliver, and perform its obligations under the Loan Documents; (c) is duly qualified or, in the case of any Insurance Subsidiary, licensed as a foreign corporation or as a foreign insurance corporation, as the case may be, and is in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification or license; and (d) is in compliance with all Requirements of Law; except, in each case referred to in clause (b) (i), clause(c) or clause (d), to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect. 5.2 Corporate Authorization; No Contravention. The execution, delivery and performance by the Company of this Agreement and each other Loan Document to which the Company is party, have been duly authorized by all necessary corporate action, and do not: (a) contravene the terms of any of the Company's Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, any document evidencing any Contractual Obligation to which the Company is a party or any order, injunction, writ or decree of any Governmental Authority to which the Company or its property is subject; or -32- 38 (c) violate any Requirement of Law. 5.3 Governmental Authorization. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Company of this Agreement or any other Loan Document. 5.4 Binding Effect. This Agreement and each other Loan Document to which the Company is a party constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. 5.5 Litigation. There are no actions, suits, proceedings, claims or disputes pending, or to the best knowledge of the Company, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, against the Company, or its Subsidiaries or any of their respective properties which: (a) purport to affect or pertain to this Agreement or any other Loan Document, or any of the transactions contemplated hereby or thereby; or (b) would reasonably be expected to have a Material Adverse Effect. No injunction, writ, temporary restraining order or any order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery or performance of this Agreement or any other Loan Document, or directing that the transactions provided for herein or therein not be consummated as herein or therein provided. 5.6 No Default. No Default or Event of Default exists or would result from the incurring of any Obligations by the Company. As of the Closing Date, neither the Company nor any Subsidiary is in default under or with respect to any Contractual Obligation in any respect which, individually or together with all such defaults, could reasonably be expected to have a Material Adverse Effect, or that would, if such default had occurred after the Closing Date, create an Event of Default under subsection 8.1(e). 5.7 ERISA Compliance. Set forth on Schedule 5.7 is a list of all welfare plans and all pension plans, within the meaning of sections 3(1) and (2) of ERISA, respectively, which, to the knowledge of the Company, are maintained with respect to employees of the Company or its Subsidiaries. Also set forth in Schedule 5.7 is a list of all Multiemployer Plans, all Welfare Plans and all -33- 39 Plans which the Company has adopted or expects to adopt. All required contributions to such Multiemployer Plans, Welfare Plans and Plans have been made, and no event has occurred with respect to any of the foregoing that would reasonably be expected to result in the incurrence by the Company or any of its Subsidiaries of any material liability, fine or penalty. No entity in the Controlled Group has initiated any steps to withdraw from any Plan, or terminate any Plan under a distress termination. 5.8 Use of Proceeds; Margin Regulations. The proceeds of the Loans are to be used solely for the purposes set forth in and permitted by Section 6.12 and Section 7.5. Neither the Company nor any Subsidiary is generally engaged in the business of purchasing or selling Margin Stock or extending credit for the purpose of purchasing or carrying Margin Stock in any manner that would result in a violation by the Company or any Subsidiary of Regulation T, U or X of the FRB. 5.9 Title to Properties. The Company and each of the Insurance Subsidiaries have good and marketable title to all material properties and assets owned by them free and clear of all Liens except for such Liens that could not, individually or in the aggregate, have a Material Adverse Effect. All of the leases and subleases material to the business of the Company and the Insurance Subsidiaries, under which either the Company or any of the Insurance Subsidiaries holds properties, are in full force and effect, and neither the Company nor any of the Insurance Subsidiaries is in default in respect of any of the terms or provisions of any of such leases or subleases, the effect of which would reasonably be expected to have a Material Adverse Effect. The Company has no notice of any material claim of any kind which has been asserted by anyone adverse either to the Company's or any of its Insurance Subsidiaries' rights as lessee or sublessee under any of the leases or subleases mentioned above, or affecting or questioning the Company's or any of its Insurance Subsidiaries' rights to the continued possession of the leased or subleased premises under any such lease or sublease, which if determined adversely, would reasonably be expected to have a Material Adverse Effect. 5.10 Taxes. The Company and its Subsidiaries have filed all Federal and other material tax returns and reports required to be filed, and have paid all Federal and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except those which are being contested in good faith by appropriate proceedings and for which adequate reserves have been provided in accordance with GAAP. There is no proposed tax assessment against the Company or any Subsidiary that would, if made, have a Material Adverse Effect. -34- 40 5.11 Financial Condition. The audited consolidated balance sheet of the Company and its Subsidiaries dated December 31, 1998, and the unaudited consolidated balance sheet of the Company and its Subsidiaries dated September 30, 1999, and the related consolidated statements of income or operations and cash flows for the fiscal year and quarter, respectively, ended on such dates: (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, subject to ordinary, good faith year end audit adjustments; and (ii) fairly present the consolidated financial condition of the Company and its Subsidiaries as of the date thereof and results of operations for the period covered thereby. Since December 31, 1998, there has been no Material Adverse Effect except as may be set forth in reports filed by the Company with the SEC after December 31, 1998 and prior to the date of this Agreement. 5.12 Environmental Matters. The Company's and its Subsidiaries' business, operations and properties are conducted and maintained in all material respects in compliance with Environmental Laws. 5.13 Regulated Entities. None of the Company, any Person controlling the Company, or any Subsidiary, is an "Investment Company" within the meaning of the Investment Company Act of 1940. The Company is not subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code, or any other Federal or state statute or regulation limiting its ability to incur Indebtedness. 5.14 No Burdensome Restrictions. Neither the Company nor any Subsidiary is a party to or bound by any Contractual Obligation, or subject to any restriction in any Organization Document, or any Requirement of Law, which could reasonably be expected to have a Material Adverse Effect. 5.15 Copyrights, Patents, Trademarks and Licenses, etc. The Company and the Insurance Subsidiaries own or possess, or can acquire on reasonable terms, adequate trademarks, service marks and trade names necessary to conduct the business now operated by them, and neither the Company nor any of the Insurance Subsidiaries has received any notice of infringement of or conflict with asserted rights of others with respect to any trademarks, service marks or trade names which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would reasonably be expected to have a Material Adverse Effect. 5.16 Subsidiaries. As of the Closing Date, the Company has no Significant Subsidiaries, as defined in Rule 12b-2 under the Exchange Act, other than as set forth in Exhibit 21 of the -35- 41 Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1998 and has no equity investments in any other corporation or entity other than wholly owned Subsidiaries and other than those specifically disclosed in Schedule 5.16. 5.17 Insurance. The properties of the Company and its Insurance Subsidiaries are insured with financially sound and reputable insurance companies not Affiliates of the Company, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where the Company or such Insurance Subsidiary operates. 5.18 Full Disclosure. None of the representations or warranties made by the Company in the Loan Documents as of the date such representations and warranties are made or deemed made, and none of the statements contained in any exhibit, report, statement or certificate furnished by or on behalf of the Company in connection with the Loan Documents, contains any untrue statement of a material fact or omits any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading as of the time when made or delivered. 5.19 Solvency. After giving effect to the funding of the initial Loans, the application of proceeds thereof as contemplated by this Agreement and the payment of all estimated legal, accounting and other fees related hereto, the Company will be solvent as of and on the Closing Date. 5.20 Insurance Subsidiaries. All of the Annual Statements or any other financial or similar statement of the Insurance Subsidiaries provided to the Agent, or which shall hereafter be provided to the Agent pursuant to the terms of this Agreement and any other Loan Document, are, in all material respects, true and complete statements of all of the assets and liabilities and of the condition and affairs of the said insurer prepared in accordance with SAP. 5.21 Year 2000. The Company reasonably believes that (a) it and its Subsidiaries are taking all necessary and appropriate steps to ascertain the extent of, and to address appropriately, business and financial risks facing the Company and its Subsidiaries as a result of what is commonly referred to as the "Year 2000 problem" (i.e., the inability of certain computer applications to recognize correctly and perform date-sensitive functions involving certain dates prior to and after December 31, 1999), including risks resulting from the failure of key vendors and customers of the Company and its Subsidiaries to successfully address the Year 2000 problem, and (b) its and its Subsidiaries' material computer -36- 42 applications will, on a timely basis, adequately address the Year 2000 problem in all material respects. ARTICLE VI AFFIRMATIVE COVENANTS So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Required Banks waive compliance in writing: 6.1 Financial Statements. The Company shall deliver to the Agent, in form and detail satisfactory to the Agent and the Required Banks (it being agreed that the delivery to the Agent of the Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the Company shall satisfy the requirements for the delivery of financial statements set forth in subparagraphs (a) and (b) below), with sufficient copies for each Bank: (a) as soon as available, but not later than 90 days after the end of each fiscal year (commencing with the fiscal year ended December 31, 1999), a copy of the audited consolidated balance sheet of the Company and its Subsidiaries as at the end of such year and the related consolidated statements of income or operations, stockholders' equity and cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, and accompanied by the opinion of KPMG LLP or another nationally-recognized independent public accounting firm ("Independent Auditor") which report shall state that such consolidated financial statements present fairly, in all material respects, the financial position for the periods indicated in conformity with GAAP applied on a basis consistent with prior years (except for changes in which the Independent Auditor concurs). Such opinion shall not be qualified or limited because of a restricted or limited examination by the Independent Auditor of any material portion of the Company's or any Subsidiary's records and shall be delivered to the Agent pursuant to a reliance agreement between the Agent and Banks and such Independent Auditor in form and substance satisfactory to the Agent; (b) as soon as available, but not later than 60 days after the end of each of the first three fiscal quarters of each fiscal year (commencing with the fiscal quarter ended March 30, 2000), a copy of the unaudited consolidated balance sheet of the Company and its Subsidiaries as of the end of such quarter and the related consolidated statements of income, stockholders' equity and cash flows for the period commencing on the first day and ending on the last day of such quarter, and certified by a Responsible Officer as fairly presenting, in accordance with GAAP (subject to ordinary, good faith year-end audit adjustments), the financial -37- 43 position and the results of operations of the Company and its Subsidiaries; (c) as soon as available, but not later than 90 days after the end of each fiscal year (commencing with the fiscal year ended December 31, 1999), a copy of an unaudited consolidating balance sheet of the Company and its Subsidiaries as at the end of such year and the related consolidating statements of income, stockholders' equity and cash flows for such year, certified by a Responsible Officer as having been developed and used in connection with the preparation of the financial statements referred to in subsection 6.1(a); (d) as soon as available, but not later than 60 days after the end of each of the first three fiscal quarters of each fiscal year (commencing with the fiscal quarter ended March 30, 2000), a copy of the unaudited consolidating balance sheets of the Company and its Subsidiaries, and the related consolidating statements of income, stockholders' equity and cash flows for such quarter, all certified by a Responsible Officer as having been developed and used in connection with the preparation of the financial statements referred to in subsection 6.1(b). (e) as soon as available, but not later than 90 days after the end of each fiscal year, a copy of the Annual Statement of each Insurance Subsidiary for such fiscal year prepared in accordance with SAP and accompanied by the certification of the chief executive officer or the chief financial officer of such Insurance Subsidiary that such Annual Statement is complete and correct in all material respects and presents fairly in accordance with SAP the financial position of such Insurance Subsidiary for the period then ended; and (f) as soon as possible, but not later than 60 days after the end of each of the first three fiscal quarters of each fiscal year, a copy of the quarterly statement of each Insurance Subsidiary for each such fiscal quarter, all prepared in accordance with SAP and accompanied by the certification of the chief executive officer or the chief financial officer of such Insurance Subsidiary that such quarterly statements are complete and correct in all material respects and present fairly in accordance with SAP the financial position of such Insurance Subsidiary for the period then ended. 6.2 Certificates; Other Information. The Company shall furnish to the Agent, with sufficient copies for each Bank: (a) concurrently with the delivery of the financial statements referred to in subsection 6.1(a), a letter of the Independent Auditor stating that in making the examination necessary therefor no knowledge was obtained by such Independent -38- 44 Auditor of any Default or Event of Default, except as specified in such letter; (b) concurrently with the delivery of the financial statements referred to in subsections 6.1(a), (b), (e) and (f), a Compliance Certificate executed by a Responsible Officer; (c) promptly, copies of all financial statements and regular, periodic or special reports (including Form 10-K, 10-Q and 8-K) that the Company makes to, or files with, the SEC and copies of any other communications made to its stockholders that would be of material interest to the Banks; (d) the following certificates and other information: (i) upon request of the Agent, a copy of any financial examination report or market conduct examination report by a Governmental Authority with respect to any Insurance Subsidiary (or with respect to the Company if it at any time becomes involved in the business of insurance), relating to the insurance business of such Insurance Subsidiary or, if applicable, the Company (when, and if, prepared); provided, that such Insurance Subsidiary or, if applicable, the Company, shall not have to deliver any interim report hereunder so long as, if requested by the Agent, a final report is issued and delivered to the Agent within 60 days of such interim report; (ii) within two Business Days of the receipt of such notice, notice of the actual suspension, termination or revocation of any material license of the Company or any Insurance Subsidiary by any Governmental Authority, the loss of which is reasonably likely to have a Material Adverse Effect, or notice from any Governmental Authority notifying the Company or any Insurance Subsidiary of a hearing relating to such a suspension, termination or revocation, including any request by a Governmental Authority which commits the Company or any Insurance Subsidiary to take, or refrain from taking, any action which is reasonably likely to have a Material Adverse Effect; (iii) within two Business Days of the receipt by the Company or an Insurance Subsidiary of such notice, notice of any material pending or threatened investigation or regulatory proceeding (other than routine periodic investigations or reviews) by any Governmental Authority concerning the business, practices or operations of the Company or any Insurance Subsidiary, including any agent or managing general agent thereof; (iv) promptly upon the receipt by the Company or any Insurance Subsidiary of such notice, notice of any actual material changes in the Insurance Code governing the investment or dividend practices of insurance companies domiciled in any of the -39- 45 states in which any Insurance Subsidiary is domiciled, which could reasonably be expected to have a Material Adverse Effect; and (e) promptly, such additional information regarding the business, financial or corporate affairs of the Company or any Subsidiary as the Agent, at the request of any Bank, may from time to time request. 6.3 Notices. The Company shall promptly notify the Agent and each Bank: (a) of the occurrence of any Default or Event of Default, and of the occurrence or existence of any event or circumstance that would reasonably be expected to become a Default or Event of Default; (b) of any matter known to the Company that has resulted or could reasonably be expected to result in a Material Adverse Effect, including (i) breach or non-performance of, or any default under, a Contractual Obligation of the Company or any Insurance Subsidiary; (ii) any dispute, litigation, investigation, proceeding or suspension between the Company or any Insurance Subsidiary and any Governmental Authority (including any Internal Revenue Service or Department of Labor proceeding with respect to any Plan or Welfare Plan); or (iii) the commencement of, or any material development in, any litigation or proceeding affecting the Company or any Insurance Subsidiary; including pursuant to any applicable Environmental Laws; (c) of the failure of any Person in the Controlled Group to make a required contribution to any Plan if such failure is sufficient to give rise to a Lien under section 302(f)(1) of ERISA; (d) of the institution of any steps by any entity in the Controlled Group to withdraw from, or the institution of any steps by the Company or any other Person to terminate under a distress termination, any Plan, or the occurrence of any event with respect to any Plan, in each case, which would reasonably be expected to result in the incurrence by the Company or any of its Subsidiaries of any material liability (other than a liability for contributions or premiums), fine or penalty; and (e) of any material change in accounting policies or financial reporting practices by the Company or any of the Insurance Subsidiaries. Each notice under this Section shall be accompanied by a written statement by a Responsible Officer setting forth in reasonable detail the occurrence referred to therein, and stating -40- 46 what action the Company or any affected Subsidiary proposes to take with respect thereto and at what time. 6.4 Preservation of Corporate Existence, Etc. The Company shall, and shall cause each Insurance Subsidiary to: (a) except as otherwise may be permitted pursuant to Section 7.3 hereof, preserve and maintain in full force and effect its corporate existence and good standing under the laws of its state or jurisdiction of incorporation where the failure so to preserve and maintain its corporate existence and good standing would reasonably be expected to have a Material Adverse Effect; (b) preserve and maintain in full force and effect all governmental rights, privileges, qualifications, permits, licenses and franchises necessary or desirable in the normal conduct of its business except in connection with transactions permitted by Section 7.3 and sales of assets permitted by Section 7.2, the failure of which to preserve or maintain would reasonably be expected to have a Material Adverse Effect; (c) use reasonable efforts, in the ordinary course of business, to preserve its business organization and goodwill, the failure of which to preserve or maintain would reasonably be expected to have a Material Adverse Effect; and (d) preserve or renew all of its registered patents, trademarks, trade names and service marks, the non-preservation of which would reasonably be expected to have a Material Adverse Effect. 6.5 Maintenance of Property. The Company shall maintain, and shall cause each Insurance Subsidiary to maintain, and preserve all its property which is used or useful in its business in good working order and condition, ordinary wear and tear excepted, the failure of which to preserve or maintain would reasonably be expected to have a Material Adverse Effect. 6.6 Insurance. The Company shall maintain, and shall cause each Insurance Subsidiary to maintain, with financially sound and reputable insurers, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types and in such amounts as are customarily carried under similar circumstances by such other Persons. 6.7 Payment of Obligations. The Company shall, and shall cause each Insurance Subsidiary to, pay and discharge as the same shall become due and payable, all their respective obligations and liabilities, including: -41- 47 (a) all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Company or such Subsidiary; (b) all lawful claims which, if unpaid, would by law become a Lien upon its property; and (c) all indebtedness, as and when due and payable, but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness. 6.8 Compliance with Laws. The Company shall comply, and shall cause each Insurance Subsidiary to comply, in all material respects with all Requirements of Law of any Governmental Authority having jurisdiction over it or its business (including the Federal Fair Labor Standards Act), except such as may be contested in good faith or as to which a bona fide dispute may exist, and except where the failure so to comply would not be reasonably likely to have a Material Adverse Effect. 6.9 Compliance with ERISA. The Company shall, and shall cause each of its ERISA Affiliates to: (a) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law; (b) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification; and (c) make all required contributions to any Plan subject to Section 412 of the Code. 6.10 Inspection of Property and Books and Records. The Company shall maintain and shall cause each consolidated Subsidiary to maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP or SAP, as applicable, consistently applied (except for changes in which the Independent Auditor concurs) shall be made of all financial transactions and matters involving the assets and business of the Company and such consolidated Subsidiary. The Company shall permit, and shall cause each Insurance Subsidiary to permit, representatives and independent contractors of the Agent or any Bank to visit and inspect any of their respective properties, to examine their respective corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective directors, officers, and independent public accountants, all at the expense of the Company and at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to the Company; provided, however, when an Event of Default exists the Agent or any Bank may do any of the foregoing at the expense of the Company at any time during normal business hours and without advance notice. -42- 48 6.11 Environmental Laws. The Company shall, and shall cause each Insurance Subsidiary to, conduct its operations and keep and maintain its property in compliance in all material respects with all Environmental Laws. 6.12 Use of Proceeds. The Company shall use the proceeds of the Loans for working capital and other general corporate purposes, including the refinancing of the Company's existing debt and acquisition of common stock of the Company but not for purposes of undertaking an Acquisition. ARTICLE VII NEGATIVE COVENANTS So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Required Banks waive compliance in writing: 7.1 Limitation on Liens. The Company shall not, and shall not suffer or permit any Insurance Subsidiary to, directly or indirectly, make, create, incur, assume or suffer to exist any Lien upon or with respect to any part of its property, whether now owned or hereafter acquired, other than the following ("Permitted Liens"): (a) any Lien existing on property of the Company or any Subsidiary on the Closing Date and set forth in Schedule 7.1 securing Indebtedness outstanding on such date; (b) any Lien created under any Loan Document; (c) Liens for taxes, fees, assessments or other governmental charges which are not delinquent or remain payable without penalty, or to the extent that non-payment thereof is permitted by Section 6.7, provided that no notice of Lien has been filed or recorded under the Code; (d) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or other similar Liens arising in the ordinary course of business which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto; (e) Liens (other than any Lien imposed by ERISA) consisting of pledges or deposits required in the ordinary course of business in connection with workers' compensation, unemployment insurance and other social security legislation; -43- 49 (f) Liens on the property of the Company or any Subsidiary securing (i) the non-delinquent performance of bids, trade contracts (other than for borrowed money), leases or statutory obligations, (ii) contingent obligations on surety and appeal bonds, and (iii) other non-delinquent obligations of a like nature; in each case, incurred in the ordinary course of business provided all such Liens in the aggregate would not (even if enforced) cause a Material Adverse Effect; (g) Liens consisting of judgment or judicial attachment liens, provided that the enforcement of such Liens is effectively stayed and all such Liens in the aggregate at any time outstanding for the Company and the Insurance Subsidiaries do not exceed $10,000,000; (h) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the businesses of the Company and the Insurance Subsidiaries; (i) deposits made by an Insurance Subsidiary, or other statutory Liens against the assets of any Insurance Subsidiary, in each case made or incurred in favor of policyholders of such Insurance Subsidiary in the ordinary course of business pursuant to insurance regulatory requirements; (j) Liens on assets of corporations which become Insurance Subsidiaries after the date of this Agreement, provided, however, that such Liens existed at the time the respective corporations became Subsidiaries and were not created in anticipation thereof; (k) purchase money security interests on any property acquired or held by the Company or its Insurance Subsidiaries in the ordinary course of business, securing Indebtedness incurred or assumed for the purpose of financing all or any part of the cost of acquiring such property (which property shall include the property set forth on Schedule 7.1(k) hereto); provided that (i) any such Lien attaches to such property concurrently with or within 20 days after the acquisition thereof, (ii) such Lien attaches solely to the property so acquired in such transaction and (iii) the principal amount of the debt secured thereby does not exceed 100% of the cost of such property; (l) Liens securing obligations in respect of capital leases on assets subject to such leases, provided that such capital leases are otherwise permitted hereunder; -44- 50 (m) Liens in favor of securities brokers or other securities intermediaries arising in the ordinary course of the merger arbitage investment activities of the Company or any Insurance Subsidiary which activities do not involve leverage in excess of 50%, and which activities are conducted in accordance with applicable margin rules; and (n) Liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; provided that (i) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by the Company in excess of those set forth by regulations promulgated by the FRB, and (ii) such deposit account is not intended by the Company or any Subsidiary to provide collateral to the depository institution. 7.2 Disposition of Assets. The Company: (i) shall not, and shall not suffer or permit any Subsidiary to, directly or indirectly, sell, assign, lease, convey, transfer or otherwise dispose of (whether in one transaction or in a series of related transactions) any property (including accounts and notes receivable, with or without recourse) or enter into any agreement to do any of the foregoing, except in the ordinary course of business consistent with past practices; and (ii) shall not, and shall not permit any Subsidiary to, directly or indirectly, sell, assign, lease, convey, transfer or otherwise dispose of (whether in one transaction or in a series of related transactions) shares of stock held by it in any of the Subsidiaries, or enter into any agreement to do any of the foregoing; provided, however, that notwithstanding the foregoing, the Company and such Subsidiaries may engage in the transactions described in subsections (i) and (ii) above, if the fair value of such transactions does not exceed $50,000,000, and if fair value shall have been determined in good faith by the Board of Directors of the Company, in the case of transactions in excess of $10,000,000, or if such transaction is otherwise permitted by Section 7.3 and, provided, further that sales, assignments, leases, conveyances, transfers or dispositions may be made to the Company or wholly owned Subsidiaries. 7.3 Consolidations and Mergers. The Company shall not, and shall not suffer or permit any Insurance Subsidiary to, merge, consolidate with or into any Person, except: (a) any merger or consolidation in which the Company or an Insurance Subsidiary is the continuing or surviving corporation; and (b) any Insurance Subsidiary may merge with the Company, provided that the Company shall be the continuing or -45- 51 surviving corporation, or may merge with any one or more Insurance Subsidiaries. 7.4 Transactions with Affiliates. The Company shall not suffer or permit any Subsidiary to, enter into any transaction with any Affiliate of the Company (other than a wholly owned Subsidiary), except upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would obtain in a comparable arm's-length transaction with a Person not an Affiliate of the Company or such Subsidiary. 7.5 Use of Proceeds. The Company shall not, and shall not suffer or permit any Subsidiary to, use any portion of the Loan proceeds, directly or indirectly, (i) to purchase or carry Margin Stock, (ii) to repay or otherwise refinance indebtedness of the Company or others incurred to purchase or carry Margin Stock, (iii) to extend credit for the purpose of purchasing or carrying any Margin Stock, or (iv) to acquire any security in any transaction that is subject to Section 13 or 14 of the Exchange Act; provided, however, that the Company may purchase its own stock with the proceeds of the Loans. 7.6 ERISA. The Company shall not, and shall not suffer or permit any of its ERISA Affiliates to: (a) engage in a prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan which has resulted or could reasonably expected to result in liability of the Company in an aggregate amount in excess of $10,000,000; or (b) engage in a transaction that could be subject to Section 4069 or 4212(c) of ERISA. 7.7 Change in Business. The Company shall not, and shall not suffer or permit any Subsidiary to, engage in any material line of business substantially different from the types of lines of business carried on by the Company and its Subsidiaries on the date hereof and that would result in the Company and its Subsidiaries, taken as a whole, no longer remaining primarily engaged in the property and casualty insurance and reinsurance business and businesses directly related thereto. 7.8 Accounting Changes. The Company shall not, and shall not suffer or permit any Insurance Subsidiary to, make any significant change in accounting treatment or reporting practices, except as required by GAAP or SAP, or change the fiscal year of the Company or of any Insurance Subsidiary. 7.9 Financial Covenants. (a) Minimum Common Stockholder's Equity. The Company shall not at any time permit Common Stockholder's Equity to be less than $625,000,000 plus 25% of net income (if positive) determined on a cumulative basis for the period commencing October 1, 1999. -46- 52 (b) Debt Ratio. The Company shall not permit the Debt Ratio to be greater than 0.40:1 at the end of any fiscal quarter. 7.10 Deferrable Interest Debentures. The Company shall not permit any prepayment of the Deferrable Interest Debentures. ARTICLE VIII EVENTS OF DEFAULT 8.1 Event of Default. Any of the following shall constitute an "Event of Default": (a) Non-Payment. The Company fails to pay, (i) when and as required to be paid herein, any amount of principal of any Loan, or (ii) within four days after the same becomes due, any interest, fee or any other amount payable hereunder or under any other Loan Document; or (b) Representation or Warranty. Any representation or warranty by the Company made or deemed made herein, in any other Loan Document, or which is contained in any certificate, document or financial or other statement by the Company or any Responsible Officer, furnished at any time under this Agreement, or in or under any other Loan Document, is incorrect in any material respect on or as of the date made or deemed made; or (c) Specific Defaults. The Company fails to perform or observe any term, covenant or agreement contained in any of Sections 6.2(d)(ii)-(iv), 6.3 or 6.4 or in Article VII; or (d) Other Defaults. The Company fails to perform or observe any other term or covenant contained in this Agreement or any other Loan Document, and such default shall continue unremedied for a period of 30 days after the earlier of (i) the date upon which a Responsible Officer knew or reasonably should have known of such failure or (ii) the date upon which written notice thereof is given to the Company by the Agent or any Bank; or (e) Cross-Default. The Company or any Subsidiary (i) fails to make any payment in respect of any Indebtedness or Contingent Obligation in excess of $10,000,000 when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure; or (ii) fails to perform or observe any other condition or covenant, or any other event shall occur or condition exist, under any agreement or instrument relating to any such Indebtedness or Contingent Obligation, and such failure continues -47- 53 after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure if the effect of such failure, event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Indebtedness (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause such Indebtedness to be declared to be due and payable prior to its stated maturity, or such Contingent Obligation to become payable or cash collateral in respect thereof to be demanded; or (f) Insolvency; Voluntary Proceedings. The Company or any Insurance Subsidiary (i) ceases or fails to be solvent, or generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace periods, if any, whether at stated maturity or otherwise; (ii) voluntarily ceases to conduct its business in the ordinary course; (iii) commences any Insolvency Proceeding with respect to itself; or (iv) takes any action to effectuate or authorize any of the foregoing; or (g) Involuntary Proceedings. (i) Any involuntary Insolvency Proceeding is commenced or filed against the Company or any Insurance Subsidiary, or any writ, judgment, warrant of attachment, execution or similar process, is issued or levied against a substantial part of the Company's or any Insurance Subsidiary's properties, and any such proceeding or petition shall not be dismissed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded within 60 days after commencement, filing or levy; (ii) the Company or any Insurance Subsidiary admits the material allegations of a petition against it in any Insolvency Proceeding, or an order for relief (or similar order under non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) the Company or any Insurance Subsidiary acquiesces in the appointment of a receiver, trustee, custodian, conservator, liquidator, mortgagee in possession (or agent therefor), or other similar Person for itself or a substantial portion of its property or business; or (h) Employee Benefit Plans. A contribution failure occurs with respect to any Plan sufficient to give rise to a Lien against the Company or any of its Subsidiaries under section 302(f)(1) of ERISA (as in effect on the Closing Date); or withdrawal by one or more companies in the Controlled Group from one or more Multiemployer Plans to which it or they have an obligation to contribute and the withdrawal liability (without unaccrued interest) to Multiemployer Plans as a result of such withdrawal or withdrawals (including any outstanding withdrawal liability that the Controlled Group has incurred on the date of such liability) is $10,000,000 or more; or the occurrence of any other event with respect to a Plan which would reasonably be expected to result in the incurrence by the Company or any of its -48- 54 Subsidiaries of a liability, fine or penalty of $10,000,000 or more; or (i) Monetary Judgments. One or more non-interlocutory judgments, non-interlocutory orders, decrees or arbitration awards is entered against the Company or any Insurance Subsidiary involving in the aggregate a liability (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage) as to any single or related series of transactions, incidents or conditions, of $10,000,000 or more, and the same shall remain unsatisfied, unvacated and unstayed pending appeal for a period of 30 days after the entry thereof; or (j) Non-Monetary Judgments. Any non-monetary judgment, order or decree is entered against the Company or any Subsidiary which does or would reasonably be expected to have a Material Adverse Effect, and there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (k) Change of Control. There occurs any Change of Control; or (l) Loss of Licenses. The insurance department of any state in which any of the Insurance Subsidiaries is licensed or any other Governmental Authority revokes or fails to renew any material license, permit or franchise of the Company or any Insurance Subsidiary, or the Company or any Insurance Subsidiary for any reason loses any material license, permit or franchise, or the Company or any Insurance Subsidiary suffers the imposition of any restraining order, escrow, suspension or impound of funds in connection with any proceeding (judicial or administrative) with respect to any material license, permit or franchise, and any of the foregoing results or is reasonably likely to result in a Material Adverse Effect; or (m) Adverse Change. There occurs a Material Adverse Effect; or (n) Change in Regulation. Any change is made in the laws or regulations of the states of organization or domicile of any Insurance Subsidiary affecting the investment or dividend practices of any Insurance Subsidiary and which would reasonably be expected to result in a Material Adverse Effect. 8.2 Remedies. If any Event of Default occurs, the Agent shall, at the request of, or may, with the consent of, the Required Banks, -49- 55 (a) declare the commitment of each Bank to make Loans to be terminated, whereupon such commitments shall be terminated; (b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Company; and (c) exercise on behalf of itself and the Banks all rights and remedies available to it and the Banks under the Loan Documents or applicable law; provided, however, that upon the occurrence of any event specified in subsection (f) or (g) of Section 8.1 (in the case of clause (i) of subsection (g) upon the expiration of the 60-day period mentioned therein), the obligation of each Bank to make Loans shall automatically terminate and the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable without further act of the Agent or any Bank. 8.3 Rights Not Exclusive. The rights provided for in this Agreement and the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. ARTICLE IX THE AGENT 9.1 Appointment and Authorization. Each Bank hereby irrevocably (subject to Section 9.9) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. -50- 56 9.2 Delegation of Duties. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. 9.3 Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Banks for any recital, statement, representation or warranty made by the Company or any Subsidiary or Affiliate of the Company, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Company or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company or any of the Company's Subsidiaries or Affiliates. 9.4 Reliance by Agent. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Banks as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Required Banks and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Banks. -51- 57 9.5 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Banks, unless the Agent shall have received written notice from a Bank or the Company referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". The Agent will notify the Banks of its receipt of any such notice. The Agent shall take such action with respect to such Default or Event of Default as may be requested by the Required Banks in accordance with Article VIII; provided, however, that unless and until the Agent has received any such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Banks. 9.6 Credit Decision. Each Bank acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by the Agent hereinafter taken, including any review of the affairs of the Company and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Bank. Each Bank represents to the Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of the Company and its Subsidiaries, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Company hereunder. Each Bank also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of the Company. Except for notices, reports and other documents expressly herein required to be furnished to the Banks by the Agent, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of the Company which may come into the possession of any of the Agent-Related Persons. 9.7 Indemnification. Whether or not the transactions contemplated hereby are consummated, the Banks shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by -52- 58 or on behalf of the Company and without limiting the obligation of the Company to do so), pro rata, from and against any and all Indemnified Liabilities; provided, however, that no Bank shall be liable for the payment to the Agent-Related Persons of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Company. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of the Agent. 9.8 Agent in Individual Capacity. BofA and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Company and its Subsidiaries and Affiliates as though BofA were not the Agent hereunder and without notice to or consent of the Banks. The Banks acknowledge that, pursuant to such activities, BofA or its Affiliates may receive information regarding the Company or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Company or such Subsidiary) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to its Loans, BofA shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Agent, and the terms "Bank" and "Banks" include BofA in its individual capacity. 9.9 Successor Agent. The Agent may, and at the request of the Required Banks shall, resign as Agent upon 30 days' notice to the Banks. If the Agent resigns under this Agreement, the Required Banks shall appoint from among the Banks a successor agent for the Banks which successor agent shall be approved by the Company. If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Banks and the Company, a successor agent from among the Banks. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this -53- 59 Article IX and Sections 10.4 and 10.5 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Banks shall perform all of the duties of the Agent hereunder until such time, if any, as the Required Banks appoint a successor agent as provided for above. 9.10 Withholding Tax. (a) If any Bank is a "foreign corporation, partnership or trust" within the meaning of the Code and such Bank claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such Bank agrees with and in favor of the Agent, to deliver to the Agent: (i) if such Bank claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed IRS Forms 1001 and W-8 before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; (ii) if such Bank claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Bank, two properly completed and executed copies of IRS Form 4224 before the payment of any interest is due in the first taxable year of such Bank and in each succeeding taxable year of such Bank during which interest may be paid under this Agreement, and IRS Form W-9; and (iii) such other form or forms as may be required under the Code or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Bank agrees to promptly notify the Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Bank claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form 1001 and such Bank sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to notify the Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of the Company to such Bank. To the extent of such percentage amount, the Agent will treat such Bank's IRS Form 1001 as no longer valid. -54- 60 (c) If any Bank claiming exemption from United States withholding tax by filing IRS Form 4224 with the Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code. (d) If any Bank is entitled to a reduction in the applicable withholding tax, the Agent may withhold from any interest payment to such Bank an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsection (a) of this Section are not delivered to the Agent, then the Agent may withhold from any interest payment to such Bank not providing such forms or other documentation an amount equivalent to the applicable withholding tax. (e) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Bank (because the appropriate form was not delivered, was not properly executed, or because such Bank failed to notify the Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Bank shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Agent under this Section, together with all costs and expenses (including Attorney Costs). The obligation of the Banks under this subsection shall survive the payment of all Obligations and the resignation or replacement of the Agent. ARTICLE X MISCELLANEOUS 10.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Company therefrom, shall be effective unless the same shall be in writing and signed by the Required Banks (or by the Agent at the written request of the Required Banks) and the Company and acknowledged by the Agent, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all the Banks and the Company and acknowledged by the Agent, do any of the following: -55- 61 (a) increase or extend the Commitment of any Bank (or reinstate any Commitment terminated pursuant to Section 8.2); (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Banks (or any of them) hereunder or under any other Loan Document; (c) reduce the principal of, or the rate of interest specified herein on any Loan, or (subject to clause (ii) below) any fees or other amounts payable hereunder or under any other Loan Document; (d) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans which is required for the Banks or any of them to take any action hereunder; or (e) amend this Section, or Section 2.14, or any provision herein providing for consent or other action by all Banks; and, provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Required Banks or all the Banks, as the case may be, affect the rights or duties of the Agent under this Agreement or any other Loan Document, and (ii) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed by the parties thereto. 10.2 Notices. (a) All notices, requests and other communications shall be in writing (including, unless the context expressly otherwise provides, by facsimile transmission, provided that any matter transmitted by the Company by facsimile (i) shall be immediately confirmed by a telephone call to the recipient at the number specified on Schedule 10.2, and (ii) shall be followed promptly by delivery of a hard copy original thereof) and mailed, faxed or delivered, to the address or facsimile number specified for notices on Schedule 10.2; or, as directed to the Company or the Agent, to such other address as shall be designated by such party in a written notice to the other parties, and as directed to any other party, at such other address as shall be designated by such party in a written notice to the Company and the Agent. (b) All such notices, requests and communications shall, when transmitted by overnight delivery, or faxed, be effective when delivered for overnight (next-day) delivery, or transmitted in legible form by facsimile machine, respectively, or if mailed, upon the third Business Day after the date deposited into the U.S. mail, or if delivered, upon delivery; except that notices pursuant to Article II or IX shall not be effective until actually received by the Agent. -56- 62 (c) Any agreement of the Agent and the Banks herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Company. The Agent and the Banks shall be entitled to rely on the authority of any Person purporting to be a Person authorized by the Company to give such notice and the Agent and the Banks shall not have any liability to the Company or other Person on account of any action taken or not taken by the Agent or the Banks in reliance upon such telephonic or facsimile notice. The obligation of the Company to repay the Loans shall not be affected in any way or to any extent by any failure by the Agent and the Banks to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agent and the Banks of a confirmation which is at variance with the terms understood by the Agent and the Banks to be contained in the telephonic or facsimile notice. 10.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Bank, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. 10.4 Costs and Expenses. The Company shall: (a) whether or not the transactions contemplated hereby are consummated, pay or reimburse BofA (including in its capacity as Agent) within five Business Days after demand (subject to subsection 4.1(e)) for all costs and expenses incurred by BofA (including in its capacity as Agent) in connection with the development, preparation, delivery, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including reasonable Attorney Costs incurred by BofA (including in its capacity as Agent) with respect thereto; and (b) pay or reimburse the Agent, the Arranger and each Bank within five Business Days after demand (subject to subsection 4.1(e)) for all costs and expenses (including Attorney Costs) incurred by them in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Loan Document during the existence of an Event of Default or after acceleration of the Loans (including in connection with any "workout" or restructuring regarding the Loans, and including in any Insolvency Proceeding or appellate proceeding). -57- 63 10.5 Indemnity. Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify and hold the Agent-Related Persons, and each Bank and each of its respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans and the termination, resignation or replacement of the Agent or replacement of any Bank) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any Insolvency Proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that the Company shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting solely from the gross negligence or willful misconduct of such Indemnified Person or to any Bank on account of interest required to be paid by such Bank to the Agent pursuant to Section 2.12. The agreements in this Section shall survive payment of all other Obligations. 10.6 Payments Set Aside. To the extent that the Company makes a payment to the Agent or the Banks, or the Agent or the Banks exercise their right of set-off, and such payment or the proceeds of such set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent or such Bank in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any Insolvency Proceeding or otherwise, then (a) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred, and (b) each Bank severally agrees to pay to the Agent upon demand its pro rata share of any amount so recovered from or repaid by the Agent. 10.7 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Company may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Agent and each Bank. -58- 64 10.8 Assignments, Participations, etc. (a) Any Bank may, with the written consent of the Company at all times other than during the existence of an Event of Default and the Agent, which consents shall not be unreasonably withheld, at any time assign and delegate to one or more Eligible Assignees (provided that no written consent of the Company or the Agent shall be required in connection with any assignment and delegation by a Bank to an Eligible Assignee that is an Affiliate of such Bank) (each an "Assignee") all, or any ratable part of all, of the Loans, the Commitments and the other rights and obligations of such Bank hereunder, in a minimum amount of $10,000,000; provided, however, that the Company and the Agent may continue to deal solely and directly with such Bank in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee, shall have been given to the Company and the Agent by such Bank and the Assignee; (ii) such Bank and its Assignee shall have delivered to the Company and the Agent an Assignment and Acceptance in the form of Exhibit E ("Assignment and Acceptance") together with any Note or Notes subject to such assignment and (iii) the assignor Bank has paid to the Agent a processing fee in the amount of $3,500. (b) From and after the date that the Agent notifies the assignor Bank that it has received (and provided its consent with respect to) an executed Assignment and Acceptance and payment of the above-referenced processing fee, and provided that the consent of the Company, if required pursuant to subsection 10.8(a), shall have been obtained, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Bank under the Loan Documents, and (ii) the assignor Bank shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Documents. (c) Within five Business Days after its receipt of notice by the Agent that it has received an executed Assignment and Acceptance and payment of the processing fee, (and provided that it consents to such assignment in accordance with subsection 10.8(a), the Company shall execute and deliver to the Agent, new Notes evidencing such Assignee's assigned Loans and Commitment and, if the assignor Bank has retained a portion of its Loans and its Commitment, replacement Notes in the principal amount of the Loans retained by the assignor Bank (such Notes to be in exchange for, but not in payment of, the Notes held by such Bank). Immediately upon each Assignee's making its processing fee payment under the Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect -59- 65 the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Bank pro tanto. (d) Any Bank may at any time sell to one or more commercial banks or other Persons not Affiliates of the Company (a "Participant") participating interests in any Loans, the Commitment of that Bank and the other interests of that Bank (the "originating Bank") hereunder and under the other Loan Documents; provided, however, that (i) the originating Bank's obligations under this Agreement shall remain unchanged, (ii) the originating Bank shall remain solely responsible for the performance of such obligations, (iii) the Company and the Agent shall continue to deal solely and directly with the originating Bank in connection with the originating Bank's rights and obligations under this Agreement and the other Loan Documents, and (iv) no Bank shall transfer or grant any participating interest under which the Participant has rights to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment, consent or waiver would require unanimous consent of the Banks as described in the first proviso to Section 10.1. In the case of any such participation, the Participant shall be entitled to the benefit of Sections 3.1, 3.3 and 10.5 as though it were also a Bank hereunder, and not have any rights under this Agreement, or any of the other Loan Documents, and all amounts payable by the Company hereunder shall be determined as if such Bank had not sold such participation; except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Bank under this Agreement. (e) Notwithstanding any other provision in this Agreement, any Bank may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and the Note held by it in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CAR Section203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 10.9 Confidentiality. Each Bank agrees to take and to cause its Affiliates to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all information identified as "confidential" or "secret" by the Company and provided to it by the Company or any Subsidiary, or by the Agent on such Company's or Subsidiary's behalf, under this -60- 66 Agreement or any other Loan Document, and neither it nor any of its Affiliates shall use any such information other than in connection with or in enforcement of this Agreement and the other Loan Documents or in connection with other business now or hereafter existing or contemplated with the Company or any Subsidiary; except to the extent such information (i) was or becomes generally available to the public other than as a result of disclosure by the Bank, or (ii) was or becomes available on a non-confidential basis from a source other than the Company, provided that such source is not bound by a confidentiality agreement with the Company known to the Bank; provided, however, that any Bank may disclose such information (A) at the request or pursuant to any requirement of any Governmental Authority to which the Bank is subject or in connection with an examination of such Bank by any such authority; (B) pursuant to subpoena or other court process; (C) when required to do so in accordance with the provisions of any applicable Requirement of Law; (D) to the extent reasonably required in connection with any litigation or proceeding to which the Agent, any Bank or their respective Affiliates may be party; (E) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document; (F) to such Bank's independent auditors and other professional advisors; (G) to any Participant or Assignee, actual or potential, provided that such Person agrees in writing to keep such information confidential to the same extent required of the Banks hereunder; (H) as to any Bank or its Affiliate, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which the Company or any Subsidiary is party or is deemed party with such Bank or such Affiliate; and (I) to its Affiliates. 10.10 Set-off. In addition to any rights and remedies of the Banks provided by law, if an Event of Default exists or the Loans have been accelerated, each Bank is authorized at any time and from time to time, without prior notice to the Company, any such notice being waived by the Company to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, such Bank to or for the credit or the account of the Company against any and all Obligations owing to such Bank, now or hereafter existing, irrespective of whether or not the Agent or such Bank shall have made demand under this Agreement or any Loan Document and although such Obligations may be contingent or unmatured. Each Bank agrees promptly to notify the Company and the Agent after any such set-off and application made by such Bank; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. 10.11 Notification of Addresses, Lending Offices, Etc. Each Bank shall notify the Agent in writing of any changes in the address to which notices to the Bank should be directed, of -61- 67 addresses of any Lending Office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as the Agent shall reasonably request. 10.12 Counterparts. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. 10.13 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 10.14 No Third Parties Benefited. This Agreement is made and entered into for the sole protection and legal benefit of the Company, the Banks, the Agent and the Agent-Related Persons, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. 10.15 Governing Law and Jurisdiction. (a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF ILLINOIS; PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY, THE AGENT AND THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE COMPANY, THE AGENT AND THE BANKS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANY, THE AGENT AND THE BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY ILLINOIS LAW. 10.16 Waiver of Jury Trial. THE COMPANY, THE BANKS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY -62- 68 OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, THE BANKS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 10.17 Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the Company, the Banks and the Agent, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered in by their proper and duly authorized officers as of the day and year first above written. W.R. BERKLEY CORPORATION By: ----------------------------------- Title: -------------------------------- BANK OF AMERICA, NATIONAL ASSOCIATION, as Administrative Agent By: ----------------------------------- Title: -------------------------------- BANK OF AMERICA, NATIONAL ASSOCIATION, as a Bank By: ----------------------------------- Title: -------------------------------- WELLS FARGO BANK, N. A. By: ----------------------------------- Title: -------------------------------- -63- 69 SCHEDULE 2.1 COMMITMENTS AND PRO RATA SHARES
Pro Rata Bank Commitment Share ---- ---------- ----- Bank of America, National Association $50,000,000 66 2/3% Wells Fargo Bank, N.A. $25,000,000 33 1/3% TOTAL $75,000,000 100%
-64- 70 SCHEDULE 10.2 OFFSHORE AND DOMESTIC LENDING OFFICES, ADDRESSES FOR NOTICES BANK OF AMERICA, NATIONAL ASSOCIATION, as Agent Bank of America, National Association 1850 Gateway Boulevard, Fifth Floor Concord, California 94521 Attention: Clayton Choo/Corwin Lewis Telephone: 925-675-8368/925-675-8357 Facsimile: 925-969-2804 BANK OF AMERICA, NATIONAL ASSOCIATION, as a Bank Domestic and Offshore Lending Office: 1850 Gateway Boulevard, Fourth Floor Concord, California 94520 Notices (other than Notices of Borrowing and Notices of Conversion/Continuation): Bank of America, National Association 231 South LaSalle Street 10th Floor Chicago, Illinois 60697 Attention: Elizabeth Bishop Telephone: 312-828-6550 Facsimile: 312-987-0889 WELLS FARGO BANK, N.A. Domestic and Offshore Lending Office: 201 Third Street, MAC 0187-081 San Francisco, California 94103 -65- 71 Notices (other than Notices of Borrowing and Notices of Conversion/Continuation): Wells Fargo Bank, N.A. 230 West Monroe Street Suite 2900 Chicago, Illinois 60606 Attention: Robert Meyer Telephone: 312-345-8623 Facsimile: 312-553-4783 -66- 72 EXHIBIT A NOTICE OF BORROWING Date: _________________________ To: Bank of America, National Association as Administrative Agent for the Banks parties to the Credit Agreement dated as of December 10, 1999 (as extended, renewed, amended or restated from time to time, the "Credit Agreement") among W.R. Berkley Corporation, certain Banks which are signatories thereto and Bank of America, National Association, as administrative agent Ladies and Gentlemen: The undersigned, W.R. Berkley Corporation (the "Company"), refers to the Credit Agreement, the terms defined therein being used herein as therein defined, and hereby gives you notice irrevocably, pursuant to Section 2.3 of the Credit Agreement, of the Borrowing specified below: 1. The Business Day of the proposed Borrowing is __________. 2. The aggregate amount of the proposed Borrowing is $_____. 3. The Borrowing is to be comprised of $__________ of [Base Rate] [Offshore Rate] Loans. 4. [The duration of the Interest Period for the Offshore Rate Loans included in the Borrowing shall be _____ months.] The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the proposed Borrowing, before and after giving effect thereto and to the application of the proceeds therefrom: (a) the representations and warranties of the Company contained in Article V of the Credit Agreement are true and correct in all material respects as though made on and as of such date (except to the extent such representations and warranties relate to an earlier date, in which case they are true and correct in all material respects as of such date); -67- 73 (b) no Default or Event of Default has occurred and is continuing, or would result from such proposed Borrowing; and (c) The proposed Borrowing will not cause the aggregate principal amount of all outstanding Loans to exceed the combined Commitments of the Banks. W.R. BERKLEY CORPORATION By:______________________________________ Title:___________________________________ -68- 74 EXHIBIT B NOTICE OF CONVERSION/CONTINUATION Date:____________________ To: Bank of America ,National Association, as Administrative Agent for the Banks parties to the Credit Agreement dated as of December 10, 1999 (as extended, renewed, amended or restated from time to time, the "Credit Agreement") among W.R. Berkley Corporation, certain Banks which are signatories thereto and Bank of America, National Association, as administrative agent Ladies and Gentlemen: The undersigned, W.R. Berkley Corporation (the "Company"), refers to the Credit Agreement, the terms defined therein being used herein as therein defined, and hereby gives you notice irrevocably, pursuant to Section 2.4 of the Credit Agreement, of the [conversion] [continuation] of the Loans specified herein, that: 1. The Conversion/Continuation Date is ___________________, __________________. 2. The aggregate amount of the Loans to be [converted] [continued] is $_______________. 3. The Loans are to be [converted into] [continued as] [Offshore Rate] [Base Rate] Loans. 4. [If applicable:] The duration of the Interest Period for the Offshore Rate Loans included in the [conversion] [continuation] shall be _____ months. W.R. BERKLEY CORPORATION By:______________________________________ Title:___________________________________ -69- 75 EXHIBIT C W.R. BERKLEY CORPORATION COMPLIANCE CERTIFICATE Financial Statement Date:____________________________, Reference is made to that certain Credit Agreement dated as of December 10, 1999 (as extended, renewed, amended or restated from time to time, the "Credit Agreement") among W.R. Berkley (the "Company"), the several financial institutions from time to time parties thereto (the "Banks") and Bank of America, National Association, as administrative agent for the Banks (in such capacity, the "Agent"). Unless otherwise defined herein, capitalized terms used herein have the respective meanings assigned to them in the Credit Agreement. The undersigned Responsible Officer of the Company, hereby certifies as of the date hereof that he/she is the _____________________________ of the Company, and that, as such, he/she is authorized to execute and deliver this Certificate to the Banks and the Agent on the behalf of the Company and its consolidated Subsidiaries, and that: 1. Enclosed herewith is a copy of the [annual audit/quarterly] report of the Company as at consolidated (the "Computation Date") which report fairly presents the financial condition and results of operation of the Company and its Subsidiaries, as of the Computation Date. 2. The undersigned has reviewed and is familiar with the terms of the Credit Agreement and has made, or has caused to be made under his/her supervision, a detailed review of the transactions and conditions (financial or otherwise) of the Company during the accounting period covered by the attached financial statements. 3. To the best of the undersigned's knowledge, the Company, during such period, has observed, performed or satisfied all of its covenants and other agreements, and satisfied every condition in the Credit Agreement to be observed, performed or satisfied by the Company, and the undersigned has no knowledge of any Default or Event of Default. 4. The following financial covenant analyses and information set forth on Schedule 2 attached hereto are true and accurate on and as of the date of this Certificate. -70- 76 IN WITNESS WHEREOF, the undersigned has executed this Certificate as of __________________________, ____________. W.R. BERKLEY CORPORATION By:______________________________________ Title:___________________________________ -71- 77 Date: ______________, ____ For the fiscal quarter/year ended ______________, ____ SCHEDULE 2 to the Compliance Certificate
Actual Required/Permitted ------ ------------------ 1. Section 7.9(a) a. Common Stockholders' a. $625,000,000 $______ Equity b. 25% of net income $______ (if positive) for period since October 1, 1999 c. Required (a) plus $______ (b) Actual $______
-72- 78 [SAMPLE]
2. Section 7.9(b) Maximum Permitted -------------- ----------------- a. Indebtedness (excluding $______ Deferrable Interest Debentures) b. Portion of Deferrable $______ Interest Debentures treated as Indebtedness c. Total Indebtedness (a) $______ plus (b) d. Common Stockholders' $______ Equity e. Deferrable Interest $______ Debenture treated as Common Stockholders' Equity f. Total Capital $______ (c) plus (d) plus (e) ____to 0.40 to 1.0 1.0 e. Indebtedness to Total Capital (c) to (f)
-73- 79 EXHIBIT D _______________________, 1999 Bank of America, National Association, as Administrative Agent 231 South LaSalle Street Chicago, Illinois 60697 Ladies and Gentlemen: We have acted as counsel to W.R. Berkley Corporation ("Company") in connection with the preparation, execution and delivery of the Credit Agreement, dated as of December 10, 1999 (the "Credit Agreement") (together with the documents referred to therein, the "Loan Documents"), among the Company, certain banks and Bank of America, National Association, as administrative agent. This opinion is rendered to you pursuant to Section 4.1(d) of the Credit Agreement. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings ascribed to them in the Credit Agreement. In so acting, we have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents as we have deemed necessary or appropriate as a basis for the opinions hereinafter set forth. In examining such documents, we have assumed the genuineness of the signatures of all parties, the authenticity of all documents purporting to be originals and the conformity to originals of all documents purporting to be copied. As to various questions of fact material to such opinions, we have relied upon certificates of responsible officers of the Company and public officials. Based upon the foregoing, and subject to the qualifications set forth below, we are of the opinion that: 1. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 2. The Company is duly qualified as a foreign corporation to do or transact business in, and is in good standing under the laws of, each jurisdiction in which the ownership or lease of its property or the conduct of its business requires such qualification, except for jurisdictions in which failure by it so to qualify would not have a Material Adverse Effect. 3. The Company has the requisite corporate power and authority and all governmental licenses, authorizations, -74- 80 consents, certificates of authority and approvals to own or lease its assets or properties and to conduct its business as currently conducted. The Company has the requisite corporate power and authority to execute, deliver and enter into, and to incur and perform its obligations under, the Loan Documents. 4. The execution, delivery and performance by the Company of its obligations under the Loan Documents: (a) have been duly and validly authorized by all necessary corporate action; (b) do not violate, conflict with or result in a violation or breach of, accelerate any performance required by the Company under, or create or impose any Lien on, any of the Company's properties or assess (except as may be provided in and pursuant to the Loan Documents) by reason of the terms of (i) the Certificate of Incorporation or by laws of the Company, (ii) any law, rule or regulation of any Governmental Authority applicable to the Company or by or to which the Company or its properties are bound or subject; or (iii) to our knowledge, any order, writ, judgment, injunction or decree of any court or other Governmental Authority, or, to our knowledge, any indenture, mortgage, deed of trust, lease, security agreement or any other instrument or agreement to which the Company is a party or subject or by which the Company or its properties are bound; and (c) do not require any consent or approval of, or registration or filing with, any court, Governmental Authority or other Person which has not been obtained or filed as of the date hereof. 5. The Loan Documents have been duly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, subject only to (i) bankruptcy, insolvency, reorganization, moratorium, arrangement or similar laws relating to or affecting the rights of creditors generally and (ii) general principles of equity with respect to availability of equitable remedies, regardless of whether enforcement is sought in proceedings at law or in equity. 6. To our knowledge, there are no actions, suits, investigations or proceedings (whether or not purportedly on behalf of the Company) pending or threatened against the Company before or by any governmental agency, or court, arbitrator or grand jury that, if adversely determined, could reasonably be expected to have a Material Adverse Effect. To our knowledge, the Company is not in default with respect to any judgment, order, writ, injunction, decree, demand, rule or regulation of any court, arbitrator, grand jury, or of any governmental agency, which default could reasonably be expected to have a Material Adverse Effect. We are members only of the Bar of the Sate of New York and do not purport to be experts in the laws of jurisdictions other than the State of New York, except for The General Corporation Law of the State of Delaware and federal laws of the United States of America, and the opinions set forth herein are accordingly limited to said laws of those jurisdictions. To the -75- 81 extent the opinions expressed herein involve the laws of the State of Illinois, we have assumed that the laws of the State of Illinois are the same as those of the State of New York. The opinions hereinbefore expressed are limited by principles of equity which may limit the availability of certain rights and remedies, and do not reflect the effect of bankruptcy, insolvency, reorganization, moratorium and other laws applicable to creditors' rights and debtors' obligations generally. This opinion is being provided to the Banks in connection with the transactions contemplated by the Loan Documents and may not be relied upon by the Banks for any other purpose and may not be relied upon by any other person, firm, corporation or entity, except for successors to the Banks and Assignees and Participants. Very truly yours, -76- 82 EXHIBIT E [FORM OF] ASSIGNMENT AND ACCEPTANCE AGREEMENT This ASSIGNMENT AND ACCEPTANCE AGREEMENT (this "Assignment and Acceptance") dated as of __________, ____ is made between ______________________________ (the "Assignor") and __________________________ (the "Assignee"). RECITALS WHEREAS, the Assignor is party to that certain Credit Agreement dated as of December 10, 1999 (as amended, amended and restated, modified, supplemented or renewed, the "Credit Agreement") among W.R. Berkley Corporation (the "Company"), the financial institutions from time to time party thereto (including the Assignor, the "Banks"), and Bank of America, National Association, as administrative agent for the Banks (the "Agent"). Any terms defined in the Credit Agreement and not defined in this Assignment and Acceptance are used herein as defined in the Credit Agreement; WHEREAS, as provided under the Credit Agreement, the Assignor has committed to making Loans (the "Loans") to the Company in an aggregate amount not to exceed $__________ (the "Commitment"); WHEREAS, [the Assignor has made Loans in the aggregate principal amount of $__________ to the Company] [no Loans are outstanding under the Credit Agreement]; and WHEREAS, the Assignor wishes to assign to the Assignee [part of the] [all] rights and obligations of the Assignor under the Credit Agreement in respect of its Commitment, [together with a corresponding portion of each of its outstanding Loans] in an amount equal to $__________ (the "Assigned Amount") on the terms and subject to the conditions set forth herein and the Assignee wishes to accept assignment of such rights and to assume such obligations from the Assignor on such terms and subject to such conditions; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: 1. Assignment and Acceptance. (a) Subject to the terms and conditions of this Assignment and Acceptance, (i) the Assignor hereby sells, transfers and assigns to the Assignee, and (ii) the Assignee -77- 83 hereby purchases, assumes and undertakes from the Assignor, without recourse and without representation or warranty (except as provided in this Assignment and Acceptance) __% (the "Assignee's Percentage Share") of (A) the Commitment [and the Loans] of the Assignor and (B) all related rights, benefits, obligations, liabilities and indemnities of the Assignor under and in connection with the Credit Agreement and the Loan Documents. [If appropriate, add paragraph specifying payment to Assignor by Assignee of outstanding principal of, accrued interest on, and fees with respect to, Loans assigned.] (b) With effect on and after the Effective Date (as defined in Section 5 hereof), the Assignee shall be a party to the Credit Agreement and succeed to all of the rights and be obligated to perform all of the obligations of a Bank under the Credit Agreement, including the requirements concerning confidentiality and the payment of indemnification, with a Commitment in an amount equal to the Assigned Amount. The Assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Bank. It is the intent of the parties hereto that the Commitment of the Assignor shall, as of the Effective Date, be reduced by an amount equal to the Assigned Amount and the Assignor shall relinquish its rights and be released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee; provided, however, the Assignor shall not relinquish its rights under Sections 10.4 and 10.5 of the Credit Agreement to the extent such rights relate to the time prior to the Effective Date. (c) After giving effect to the assignment and assumption set forth herein, on the Effective Date the Assignee's Commitment will be $__________. (d) After giving effect to the assignment and assumption set forth herein, on the Effective Date the Assignor's Commitment will be $__________. 2. Payments. (a) As consideration for the sale, assignment and transfer contemplated in Section 1 hereof, the Assignee shall pay to the Assignor on the Effective Date in immediately available funds an amount equal to $__________, representing the Assignee's Pro Rata Share of the principal amount of all Loans. (b) The Assignor further agrees to pay to the Agent a processing fee in the amount specified in Section 10.8 of the Credit Agreement. -78- 84 3. Reallocation of Payments. Any interest, fees and other payments accrued to the Effective Date with respect to the Commitment and Loans shall be for the account of the Assignor. Any interest, fees and other payments accrued on and after the Effective Date with respect to the Assigned Amount shall be for the account of the Assignee. Each of the Assignor and the Assignee agrees that it will hold in trust for the other party any interest, fees and other amounts which it may receive to which the other party is entitled pursuant to the preceding sentence and pay to the other party any such amounts which it may receive promptly upon receipt. 4. Independent Credit Decision. The Assignee (a) acknowledges that it has received a copy of the Credit Agreement and the Schedules and Exhibits thereto, together with copies of the most recent financial statements referred to in Section 6.1 of the Credit Agreement, and such other documents and information as it has deemed appropriate to make its own credit and legal analysis and decision to enter into this Assignment and Acceptance; and (b) agrees that it will, independently and without reliance upon the Assignor, the Agent or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit and legal decisions in taking or not taking action under the Credit Agreement. 5. Effective Date; Notices. (a) As between the Assignor and the Assignee, the effective date for this Assignment and Acceptance shall be __________, (the "Effective Date"); provided that the following conditions precedent have been satisfied on or before the Effective Date: (i) this Assignment and Acceptance shall be executed and delivered by the Assignor and the Assignee; (ii) the consent of the Company and the Agent required for an effective assignment of the Assigned Amount by the Assignor to the Assignee under Section 10.8 of the Credit Agreement shall have been duly obtained and shall be in full force and effect as of the Effective Date; (iii) the Assignee shall pay to the Assignor all amounts due to the Assignor under this Assignment and Acceptance; (v) the processing fee referred to in Section 2(b) hereof and in Section 10.8(a) of the Credit Agreement shall have been paid to the Agent; and -79- 85 (vi) the Assignor shall have assigned and the Assignee shall have assumed a percentage equal to the Assignee's Percentage Share of the rights and obligations of the Assignor under the Credit Agreement (if such agreement exists). (b) Promptly following the execution of this Assignment and Acceptance, the Assignor shall deliver to the Company and the Agent for acknowledgment by the Agent, a Notice of Assignment substantially in the form attached hereto as Schedule 1. [6. Agent. [INCLUDE ONLY IF ASSIGNOR IS AGENT] (a) The Assignee hereby appoints and authorizes the Assignor to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Agent by the Banks pursuant to the terms of the Credit Agreement. (b) The Assignee shall assume no duties or obligations held by the Assignor in its capacity as Agent under the Credit Agreement.] 7. Withholding Tax. The Assignee (a) represents and warrants to the Bank, the Agent and the Company that under applicable law and treaties no tax will be required to be withheld by the Bank with respect to any payments to be made to the Assignee hereunder, (b) agrees to furnish (if it is organized under the laws of any jurisdiction other than the United States or any State thereof) to the Agent and the Company prior to the time that the Agent or Company is required to make any payment of principal, interest or fees hereunder, duplicate executed originals of either U.S. Internal Revenue Service Form 4224 or U.S. Internal Revenue Service Form 1001 (wherein the Assignee claims entitlement to the benefits of a tax treaty that provides for a complete exemption from U.S. federal income withholding tax on all payments hereunder) and agrees to provide new Forms 4224 or 1001 upon the expiration of any previously delivered form or comparable statements in accordance with applicable U.S. law and regulations and amendments thereto, duly executed and completed by the Assignee, and (c) agrees to comply with all applicable U.S. laws and regulations with regard to such withholding tax exemption. 8. Representations and Warranties. (a) The Assignor represents and warrants that (i) it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any Lien or other adverse claim; (ii) it is duly organized and existing and it has the full power and -80- 86 authority to take, and has taken, all action necessary to execute and deliver this Assignment and Acceptance and any other documents required or permitted to be executed or delivered by it in connection with this Assignment and Acceptance and to fulfill its obligations hereunder; (iii) no notices to, or consents, authorizations or approvals of, any Person are required (other than any already given or obtained) for its due execution, delivery and performance of this Assignment and Acceptance, and apart from any agreements or undertakings or filings required by the Credit Agreement, no further action by, or notice to, or filing with, any Person is required of it for such execution, delivery or performance; and (iv) this Assignment and Acceptance has been duly executed and delivered by it and constitutes the legal, valid and binding obligation of the Assignor, enforceable against the Assignor in accordance with the terms hereof, subject, as to enforcement, to bankruptcy, insolvency, moratorium, reorganization and other laws of general application relating to or affecting creditors' rights and to general equitable principles. (b) The Assignor makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto. The Assignor makes no representation or warranty in connection with, and assumes no responsibility with respect to, the solvency, financial condition or statements of the Company, or the performance or observance by the Company, of any of its respective obligations under the Credit Agreement or any other instrument or document furnished in connection therewith. (c) The Assignee represents and warrants that (i) it is duly organized and existing and it has full power and authority to take, and has taken, all action necessary to execute and deliver this Assignment and Acceptance and any other documents required or permitted to be executed or delivered by it in connection with this Assignment and Acceptance, and to fulfill its obligations hereunder; (ii) no notices to, or consents, authorizations or approvals of, any Person are required (other than any already given or obtained) for its due execution, delivery and performance of this Assignment and Acceptance; and apart from any agreements or undertakings or filings required by the Credit Agreement, no further action by, or notice to, or filing with, any Person is required of it for such execution, delivery or performance; (iii) this Assignment and Acceptance has been duly executed and delivered by it and constitutes the legal, valid and binding obligation of the Assignee, enforceable against the Assignee in accordance with the terms hereof, subject, as to enforcement, to bankruptcy, insolvency, moratorium, reorganization and other -81- 87 laws of general application relating to or affecting creditors' rights and to general equitable principles; and (iv) it is an Eligible Assignee. 9. Further Assurances. The Assignor and the Assignee each hereby agree to execute and deliver such other instruments, and take such other action, as either party may reasonably request in connection with the transactions contemplated by this Assignment and Acceptance, including the delivery of any notices or other documents or instruments to the Company or the Agent, which may be required in connection with the assignment and assumption contemplated hereby. 10. Miscellaneous. (a) Any amendment or waiver of any provision of this Assignment and Acceptance shall be in writing and signed by the parties hereto. No failure or delay by either party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof and any waiver of any breach of the provisions of this Assignment and Acceptance shall be without prejudice to any rights with respect to any other or further breach thereof. (b) All payments made hereunder shall be made without any set-off or counterclaim. (c) The Assignor and the Assignee shall each pay its own costs and expenses incurred in connection with the negotiation, preparation, execution and performance of this Assignment and Acceptance. (d) This Assignment and Acceptance may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument. (e) THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF ILLINOIS. The Assignor and the Assignee each irrevocably submits to the non-exclusive jurisdiction of any State or Federal court sitting in Illinois over any suit, action or proceeding arising out of or relating to this Assignment and Acceptance and irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Illinois State or Federal court. Each party to this Assignment and Acceptance hereby irrevocably waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum to the maintenance of such action or proceeding. (f) THE ASSIGNOR AND THE ASSIGNEE EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS -82- 88 THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS ASSIGNMENT AND ACCEPTANCE, THE CREDIT AGREEMENT, ANY RELATED DOCUMENTS AND AGREEMENTS OR ANY COURSE OF CONDUCT, COURSE OF DEALING, OR STATEMENTS (WHETHER ORAL OR WRITTEN). [Other provisions to be added as may be negotiated between the Assignor and the Assignee, provided that such provisions are not inconsistent with the Credit Agreement.] IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Assignment and Acceptance to be executed and delivered by their duly authorized officers as of the date first above written. [ASSIGNOR] By:___________________________________ Title:________________________________ Address:______________________________ -83- 89 [ASSIGNEE] By:___________________________________ Title:________________________________ Address:______________________________ -84- 90 SCHEDULE 1 NOTICE OF ASSIGNMENT AND ACCEPTANCE _______________, _____ Bank of America, National Association, as Administrative Agent 1850 Gateway Boulevard Fifth Floor Concord, California 94521 W.R. Berkley Corporation 165 Mason Street P.O. Box 2518 Greenwich, CT 06836-2518 Ladies and Gentlemen: We refer to the Credit Agreement dated as of December 10, 1999(as amended, amended and restated, modified, supplemented or renewed from time to time the "Credit Agreement") among W.R. Berkley Corporation (the "Company"), the Banks referred to therein and Bank of America, National Association, as administrative agent for the Banks (the "Agent"). Terms defined in the Credit Agreement are used herein as therein defined. 1. We hereby give you notice of, and request your consent to, the assignment by __________________ (the "Assignor") to _______________ (the "Assignee") of _____% of the right, title and interest of the Assignor in and to the Credit Agreement (including, without limitation, the right, title and interest of the Assignor in and to the Commitments of the Assignor and all outstanding Loans made by the Assignor) pursuant to the Assignment and Acceptance Agreement attached hereto (the "Assignment and Acceptance"). Before giving effect to such assignment the Assignor's Commitment is $ ___________[,] [and] the aggregate amount of its outstanding Loans is $_____________. 2. The Assignee agrees that, upon receiving the consent of the Agent and, if applicable, the Company to such assignment, the Assignee will be bound by the terms of the Credit Agreement as fully and to the same extent as if the Assignee were the Bank originally holding such interest in the Credit Agreement. 3. The following administrative details apply to the Assignee: -85- 91 (A) Notice Address: Assignee name: __________________________ Address: _______________________________ _______________________________ _______________________________ Attention: _____________________________ Telephone: (___) _______________________ Telecopier: (___) ______________________ (B) Payment Instructions: Account No.: ___________________________ At: ___________________________ ___________________________ ___________________________ Reference: ___________________________ Attention: ___________________________ 4. You are entitled to rely upon the representations, warranties and covenants of each of the Assignor and Assignee contained in the Assignment and Acceptance. IN WITNESS WHEREOF, the Assignor and the Assignee have caused this Notice of Assignment and Acceptance to be executed by their respective duly authorized officials, officers or agents as of the date first above mentioned. Very truly yours, [NAME OF ASSIGNOR] By:_________________________________________ Title:______________________________________ [NAME OF ASSIGNEE] By:_________________________________________ Title:______________________________________ -86- 92 ACKNOWLEDGED AND ASSIGNMENT CONSENTED TO: W.R. BERKLEY CORPORATION By:_______________________________ Title: __________________________ BANK OF AMERICA, NATIONAL ASSOCIATION, as Administrative Agent By: ______________________________ Its: _____________________________ -87- 93 EXHIBIT F [FORM OF] PROMISSORY NOTE $____________________ _____________, 199_ FOR VALUE RECEIVED, the undersigned, W.R. Berkley Corporation, a Delaware corporation (the "Company"), hereby promises to pay to the order of the "Bank") the principal sum of Dollars ($ ) or, if less, the aggregate unpaid principal amount of all Loans made by the Bank to the Company pursuant to the Credit Agreement, dated as of December 10, 1999 (such Credit Agreement, as it may be amended, restated, supplemented or otherwise modified from time to time, being hereinafter called the "Credit Agreement"), among the Company, the Bank, the other banks parties thereto, and Bank of America, National Association, as Administrative Agent for the Banks, on the dates and in the amounts provided in the Credit Agreement. The Company further promises to pay interest on the unpaid principal amount of the Loans evidenced hereby from time to time at the rates, on the dates, and otherwise as provided in the Credit Agreement. The Bank is authorized to endorse the amount and the date on which each Loan is made, the maturity date therefor and each payment of principal with respect thereto on the schedules annexed hereto and made a part hereof, or on continuations thereof which shall be attached hereto and made a part hereof; provided, that any failure to endorse such information on such schedule or continuation thereof shall not in any manner affect any obligation of the Company under the Credit Agreement and this Promissory Note (the "Note"). This Note is one of the Notes referred to in, and is entitled to the benefits of, the Credit Agreement, which Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. -88- 94 Terms defined in the Credit Agreement are used herein with their defined meanings therein unless otherwise defined herein. This Note shall be governed by, and construed and interpreted in accordance with, the laws of the State of Illinois applicable to contracts made and to be performed entirely within such State. W.R. BERKLEY CORPORATION By:_______________________________________ Title:_____________________________________ -89- 95 Schedule A to Note BASE RATE LOANS AND REPAYMENT OF BASE RATE LOANS (2) (3) (4) Amount Maturity Amount of of Date of Base (5) (1) Base Base Rate Loan Notation Date Rate Loan Rate Loan Repaid Made By __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ -90- 96 Schedule B to Note OFFSHORE RATE LOANS AND REPAYMENT OF OFFSHORE RATE LOANS (2) (3) (4) Amount Maturity Amount of of Date of Offshore (5) (1) Offshore Offshore Rate Notation Date Rate Loan Rate Loan Loan Repaid Made By __________ __________ __________ ___________ __________ __________ __________ __________ ___________ __________ __________ __________ __________ ___________ __________ __________ __________ __________ ___________ __________ __________ __________ __________ ___________ __________ __________ __________ __________ ___________ __________ __________ __________ __________ ___________ __________ __________ __________ __________ ___________ __________ __________ __________ __________ ___________ __________ __________ __________ __________ ___________ __________ __________ __________ __________ ___________ __________ __________ __________ __________ ___________ __________ __________ __________ __________ ___________ __________ __________ __________ __________ ___________ __________ __________ __________ __________ ___________ __________ __________ __________ __________ ___________ __________ __________ __________ __________ ___________ __________ __________ __________ __________ ___________ __________ __________ __________ __________ ___________ __________ -91- EX-10.12 3 EXHIBIT 10.12 1 (Exhibit 10.12) January 24, 2000 John D. Vollaro 26 Old Orchard Hill Lane Greenwich, Connecticut 06831 Dear John: In recognition of your many years of service and highly valued contributions, I am pleased to set forth our mutual agreement regarding your resignation as President and Chief Operating Officer of W.R. Berkley Corporation (the "Company"). 1. Your resignation from the Company as President and Chief Operating Officer will be effective as of the close of business on March 1, 2000. 2. You will continue to have the use of your current office and secretarial arrangements through March 1, 2000. Thereafter, at your request, the Company will provide a temporary office for your use until the earlier of one year from the date hereof or the date on which you commence other employment. 3. The Company will pay you annual compensation at the rate of $620,000 per year for the period commencing on March 1, 2000 and terminating on February 28, 2001 and at the rate of $650,000 per year for the period commencing on March 1, 2001 and terminating on February 28, 2003. Such payments will be made on a biweekly basis on the Company's regular payroll cycle. 4. The Company will make additional payments to you of $300,000 on January 1, 2001 and $300,000 on January 1, 2002; provided, however, that you will not be entitled to the payment of $300,000 on January 1, 2002 (the "Second Installment Payment") if, prior to such date, you have commenced other employment, whether or not you continue to be employed on January 1, 2002. For purposes of this letter agreement, "other employment" shall include any services as an employee, independent contractor, consultant or advisor other than Limited Consulting Services. Limited Consulting Services means services provided by you to any one or more unrelated 2 January 24, 2000 Page 2 employers or businesses (other than the Company) prior to or as of January 1, 2002 which (i) consist solely of consultation and advice directed to specific aspects of the business or affairs of such employer or business (each, with its affiliates, an "Employer") and not to the business or affairs of the Employer, or of an operating unit or segment thereof, as a whole; (ii) do not extend, for any Employer, for a period of more than 120 days, whether or not consecutive; (iii) do not involve or result in your employment by an Employer, or the provision by you of consulting or advisory services (other than Limited Consulting Services) to such Employer, or your becoming an officer or director of such Employer, in each such case at any time prior to March 1, 2003; (iv) do not involve or result in an agreement or arrangement (whether or not in writing), at any time prior to March 1, 2003, for your employment by, or your provision of consulting or advisory services to, or your becoming an officer or director of, an Employer; (v) do not result in your being eligible for benefits from the Employer of a kind referred to in the second sentence of paragraph 8 hereof; and (vi) do not preclude you from performing your obligations under paragraph 7 hereof. You will, prior to performing Limited Consulting Services for any Employer, advise the Company in writing of the name of such Employer (except that you need not advise the Company of the name of an Employer that does not engage in any business that is competitive with any business of the Company) and the nature and principal terms of such Limited Consulting Services and shall certify in writing that such services will constitute Limited Consulting Services hereunder. In the event that the Chairman of the Board of the Company believes that any services so to be provided by you should not be deemed to be Limited Consulting Services, such matter shall be referred for resolution to Jack H. Nusbaum, whose determination with respect thereto shall be final and binding upon you and the Company, and each of you and the Company agrees not to challenge such determination in any action or proceeding. In the event of a breach by you of any of the provisions of this paragraph 4, or if you should receive any payment or benefits under this letter agreement to which you are not entitled because you commenced other employment, and without limiting any other rights or remedies available to the Company with respect to such breach, the Company shall be entitled to (i) recover the Second Installment Payment, if already made, together with the costs of any such benefits, and/or (ii) without duplication of any recovery under clause (i), cease making payments under this letter agreement provided that the amount of payments ceased being made shall 3 January 24, 2000 Page 3 not exceed the amount of the Second Installment Payment plus the amount of any such costs. 5. Options to purchase shares of the Company's common stock granted to you under the W.R. Berkley Corporation First Amended and Restated 1992 Stock Option Plan which shall have vested as of the earlier of the dates hereinafter referred to shall be canceled and of no force or effect from and after the earlier of March 1, 2003 or the date on which you commence other employment, and, except as otherwise provided herein, prior to such cancellation shall continue to be subject to the terms and conditions of the option agreements between you and the Company pursuant to which such options were granted. You will not be granted any options after the date of this letter agreement. 6. Your active responsibilities as an officer of the Company will terminate immediately and your regular employment with the Company will terminate effective as of the close of business on March 1, 2000. To the extent otherwise eligible, you will continue to participate in all Company benefit plans through that date. 7. The Company will distribute your accumulated benefits under the Company's Profit Sharing Plan, Deferred Compensation Plan and Benefit Replacement Plan in accordance with each Plan's provisions and, to the extent consistent therewith, per your written direction. Anything herein to the contrary notwithstanding, to the extent that a distribution of your accumulated benefits under the terms any of the foregoing plans is conditioned on your termination of employment with the Company, you will not be allowed to receive a distribution from such plan until your employment has terminated as provided in paragraph 8 hereof. You acknowledge and agree that you will not be entitled to any distribution of benefits accrued as of the date of this letter agreement under the Company's Annual Incentive Compensation Plan and hereby waive any right to any such benefits. You further acknowledge and agree that all outstanding Units (as therein defined) awarded to you under the Company's Long-Term Incentive Compensation Plan shall be canceled and all of your rights with respect thereto and under such plan shall expire upon the date of this letter agreement. 8. From March 1, 2000 until the earlier of March 1, 2003 or the date on which you commence other employment, you will have the status of standby employee but you hereby waive any right you have to participate during such period in the Company's Profit 4 January 24, 2000 Page 4 Sharing Plan, Deferred Compensation Plan, Benefit Replacement Plan, Annual Incentive Compensation Plan and Long-Term Incentive Compensation Plan, and in all of the Company's other executive compensation or benefit plans, other than the Company's Flexible Compensation Plan, in which you will have the right to continue to participate during such period. During such period, the Company will provide you with continued medical, term life insurance and long-term disability benefits equivalent to that (and at the same cost basis to you) provided for other employees or will reimburse you for the cost of comparable coverage. Thereafter, you will be able to elect continuation coverage for yourself and your covered dependents under the Company's medical plan in accordance with the Consolidated Omnibus Budget Reconciliation Act of 1986, as amended ("COBRA"). The foregoing provisions are not intended to affect your rights, if any, under the Company's group term life insurance plan to convert such coverage to individual coverage at your expense upon termination of employment. At the time your status as a standby employee terminates as provided herein, you shall not be entitled to any form of termination pay or other benefit under any severance benefit plan or similar arrangement for former employees of the Company. You acknowledge and agree that as of March 1, 2000, you will not, except as otherwise expressly provided in this letter agreement, be entitled to any bonus, commission, fees, vacation pay or other payment (other than any accrued salary) from the Company or any of its subsidiaries or affiliates for any period. As a standby employee, you agree to furnish to the Company your best advice, information, judgment and knowledge with respect to the operations of the Company's businesses. You shall furnish such advice at the request of the Company's Chairman of the Board at mutually agreeable times. You may furnish your services in person, by telephone or other means of electronic communication during normal business hours. 9. Simultaneously herewith, you will execute the General Release in the form annexed hereto as Attachment 1 and made a part hereof. 10. Simultaneously herewith, you will deliver your resignation from various boards and committees in the form annexed hereto as Attachment 2 to be effective as of the date set forth therein. 11. This letter agreement and the annexed General Release and resignation, and all of our respective rights thereunder, shall be binding upon, inure to the benefit of, and be 5 January 24, 2000 Page 5 enforceable by, the parties hereto and their respective successors, assigns, personal or legal representatives, executors, administrators, heirs, distributees, devisees and legatees. If you should die while any amounts would still be payable to you hereunder, all such amounts shall be payable in accordance with the terms of this letter agreement to your estate, but your rights under this letter agreement are otherwise non-transferable. 12. You agree that, without the prior written consent of the Company, you will not disclose or use any non-public confidential information of the Company disclosed to or learned by you during the course of your employment so long as such information is not publicly known or available, except for such disclosures as are otherwise required by law. You further agree that you will not make any statements at any time that disparage the reputation of the Company or its officers. The Company, on behalf of itself and its executive officers, agrees that it will not make any statements at any time that disparage your reputation. 13. Unless the Company has specifically consented thereto in writing, you agree not to solicit, induce or knowingly hire, or to cause, or recommend to, any entity with which you are affiliated to solicit, induce or hire, or to make any such entity aware of the qualifications of, any key employee employed (or formerly employed within six months prior to the date of solicitation, inducement or hiring) by the Company, during the period beginning on the date hereof and ending six months from the date the final payment is made to you pursuant to paragraph 3 of this letter agreement. For purposes of this letter agreement, a key employee means any officer of the Company and any other person employed by the Company who was a participant in any stock option, stock bonus, stock loan, stock purchase or similar stock plan of the Company during the one year period prior to the date of solicitation, inducement or hire. 14. At all times, you agree, for so long as this letter agreement is otherwise confidential, to keep confidential both the fact of and the terms of this letter agreement, and you agree not to disclose, display, discuss or make public in any way its terms with anyone except members of your immediate family and except as may be required to your certified public accountant, tax preparer, attorney or where compelled by law. Before disclosing this letter agreement to any person at any time when this letter agreement is otherwise confidential, you agree to advise the party to whom disclosure is made that such 6 January 24, 2000 Page 6 information is confidential and such party is not to the disclose same. You and the Company will consult and cooperate with each other, consistent with applicable law, with a view to agreeing in a timely manner on the contents of any press release or other public announcement to be made by the Company with respect to this letter agreement. 15. You acknowledge that the payments and benefits provided under this Agreement are in consideration for the obligations you have undertaken in paragraphs 12, 13 and 14 hereof and your execution of the General Release annexed hereto. You agree that the Company will suffer irreparable damage if the provisions of any of such paragraphs are breached and that in such event, and in the event you revoke the General Release in accordance with the terms thereof, the Company shall be entitled as a matter of right to terminate all remaining payments and benefits provided under this Agreement, and you shall have no further right thereto. Upon demand by the Company, you shall immediately repay to the Company the gross, pre-tax amount of all payments made to you hereunder prior to such time. You agree that the amount of such prior and future payments shall constitute liquidated damages for the breach of this letter agreement. 16. Should any provision of this letter agreement or of the annexed General Release be held invalid or illegal, such illegality shall not invalidate the whole of this letter agreement, or General Release, but rather such letter agreement and General Release shall be construed as if it did not contain the illegal part, and the rights and obligations of the parties shall be construed and enforced accordingly. If any of the restrictions contained herein shall be deemed to be unenforceable by reason of the extent, duration or geographical scope thereof, or otherwise, then the court making such determination shall have the right to reduce such extent, duration, geographical scope or other provisions hereof, and in its reduced form this letter agreement shall then be enforceable in the manner contemplated hereby. 17. The payments due to you hereunder shall be subject to reduction to satisfy all applicable Federal, state and local withholding tax obligations. The Company makes no representation regarding the taxation of any payments or benefits to be provided to you under, or the tax ramifications of any of the matters contemplated by, this letter agreement. It is your obligation and responsibility to determine whether any such payment or benefit is includible in gross income for Federal, state and local income tax purposes. 7 January 24, 2000 Page 7 18. Reference in this letter agreement to the Company shall include all subsidiaries and affiliates of the Company and for purposes of this letter agreement and the General Release, the term "affiliate" shall be limited to entities that are engaged in the business of insurance or insurance services and are directly or indirectly controlled by or under common control with the Company. 19. You will promptly provide the Company with a notice of your acceptance of other employment and the commencement date thereof. YOU EXPRESSLY ACKNOWLEDGE, REPRESENT AND WARRANT THAT YOU HAVE READ THIS LETTER AGREEMENT AND THE GENERAL RELEASE CAREFULLY; THAT YOU FULLY UNDERSTAND THE TERMS, CONDITIONS AND SIGNIFICANCE OF THIS LETTER AGREEMENT AND THE GENERAL RELEASE; THAT THE COMPANY HAS ADVISED AND URGED YOU TO CONSULT WITH YOUR ATTORNEY CONCERNING THIS LETTER AGREEMENT AND THE GENERAL RELEASE; THAT YOU HAVE BEEN REPRESENTED BY COUNSEL AND HAVE HAD A FULL OPPORTUNITY TO REVIEW THIS LETTER AGREEMENT AND THE GENERAL RELEASE WITH YOUR ATTORNEY AND HAVE DONE SO; THAT YOU HAVE HAD AMPLE OPPORTUNITY TO NEGOTIATE THROUGH YOUR ATTORNEY; AND THAT YOU HAVE EXECUTED THIS LETTER AGREEMENT VOLUNTARILY, KNOWINGLY AND WITH SUCH ADVICE FROM YOUR ATTORNEY AS YOU HAVE DEEMED APPROPRIATE. You acknowledge that you have 21 days to review and consider the terms described above and the financial consequences to you and your family. With the advice of the Company, you have had a reasonable opportunity to consider advice from your legal counsel before signing this letter. Fully understanding the above terms, you are entering into this letter agreement knowingly and voluntarily. If the foregoing is acceptable to you, please sign, date and return the attached copy of this letter to me no later than February 14, 2000. Once you have signed the letter, our agreement will not take effect or be enforceable until seven days after your signing this letter and you may revoke it at any time prior to the end of the 8 January 24, 2000 Page 8 seventh day after your signing by delivering a written revocation to the undersigned. Sincerely, W.R. BERKLEY CORPORATION By: ____________________________ William R. Berkley Chairman of the Board and Chief Executive Officer AGREED: _______________________________ _______________ John D. Vollaro Date 9 ATTACHMENT 1 GENERAL RELEASE In consideration of the payments, benefits, agreements, and other consideration to be provided to John D. Vollaro by W.R. Berkley Corporation as described in the letter agreement between W.R. Berkley Corporation and John D. Vollaro dated January 24, 2000 (the "Agreement") to which this Release is annexed, John D. Vollaro for himself and for his heirs, executors, administrators, and their respective successors and assigns (collectively "Vollaro") hereby releases and forever discharges W.R. Berkley Corporation, and all of its subsidiaries, affiliates, divisions, officers, directors, employees, agents, successors and assigns (hereinafter collectively referred to as "Berkley"), and all plan administrators and trustees of employee benefit plans maintained by Berkley, of and from all or any manner of actions, causes and causes of actions, suits, debts, obligations, damages, complaints, liabilities, losses, covenants, contracts, controversies, agreements, promises, variances, trespasses, judgments and expenses (including attorneys' fees and costs), executions, claims and demands whatsoever at law or in equity (such actions, etc., being referred to herein as "Actions"), specifically including by way of example but not limitation, Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of 1866, the Age Discrimination in Employment Act (ADEA), the Employee Retirement Income Security Act of 1974, as amended (ERISA), the Americans with Disabilities Act, any and all 10 Connecticut fair employment, employment discrimination and human rights laws, claims for wrongful discharge, personal injury, defamation, mental anguish, injury to health and reputation and any and all claims and rights under all foreign and United States federal, state, local and decisional law and ordinances, including all those concerning equal employment, which Vollaro ever had, now has, or which Vollaro hereafter can, shall or may have for, upon or by reason of any matter, cause or thing whatsoever, arising on or prior to the effective date hereof, in the course of, or in any way related to, his employment by or termination of employment from Berkley. Vollaro takes this action fully aware of his rights under the laws of the United States (and any state thereof) and voluntarily waives such rights. The provisions of any laws providing in substance that releases shall not extend to claims which are unknown or unsuspected at the time, to the person executing such release, are hereby waived. Vollaro hereby agrees never individually or with any person to file, commence or aid in any fashion the filing of, any charges, lawsuits or complaints with any governmental agency or against Berkley or any of the parties released by him in this General Release with respect to any of the matters covered by this Release. Notwithstanding the foregoing, by signing this Release, Vollaro shall not have relinquished (i) his right to indemnification for acts occurring or liabilities arising on or prior to March 1, 2000, including any right for reimbursement of expenses (including, without limitation, attorneys' fees and -2- 11 costs) from Berkley under charter provision, by law or insurance arrangement or under applicable law with respect to the conduct of Vollaro, or any claim asserted against Vollaro, in his capacity as a director, officer or employee of Berkley or as a trustee of any Berkley employee benefit plan, or as a member of any Berkley company committee or Berkley employee benefit plan committee, which right shall be no greater nor less than the indemnification rights of other Berkley officers and directors, (ii) Vollaro's right to payments or benefits under, or to enforce the provisions of, this Release or the Agreement to which it is annexed or (iii) any rights or claims Vollaro may have under ADEA that arise after the date on which he executes this Release. Berkley hereby releases and forever discharges Vollaro from all or any manner of Actions which Berkley ever had, now has, or which Berkley hereafter can, shall or may have for, upon or by reason of any activities undertaken within the scope of Vollaro's employment with the Company and in compliance with applicable laws, regulations and written Company policies, on or prior to the effective date hereof; provided, however, that Berkley shall not thereby release Berkley's right to enforce the provisions of this Release or the Agreement to which it is annexed. VOLLARO EXPRESSLY ACKNOWLEDGES, REPRESENTS AND WARRANTS THAT HE HAS READ THIS RELEASE CAREFULLY; THAT HE FULLY UNDERSTANDS THE TERMS, CONDITIONS AND SIGNIFICANCE OF THIS RELEASE; THAT THE COMPANY HAS ADVISED AND URGED HIM TO CONSULT WITH HIS ATTORNEY CONCERNING THIS RELEASE; THAT HE HAS BEEN REPRESENTED BY COUNSEL AND HAS HAD A FULL OPPORTUNITY TO REVIEW THIS RELEASE WITH HIS ATTORNEY AND HAS DONE SO; THAT HE HAS HAD AMPLE OPPORTUNITY TO NEGOTIATE THROUGH HIS ATTORNEY; THAT THE PAYMENTS AND BENEFITS THAT ARE TO BE PROVIDED TO HIM UNDER THE AGREEMENT TO WHICH THIS RELEASE IS ANNEXED ARE IN ADDITION TO ANYTHING OF VALUE TO WHICH HE IS ALREADY ENTITLED; AND THAT HE HAS EXECUTED THIS RELEASE -3- 12 VOLUNTARILY, KNOWINGLY AND WITH SUCH ADVICE FROM HIS ATTORNEY AS HE DEEMED APPROPRIATE. -4- 13 IN WITNESS WHEREOF, John D. Vollaro and W.R. Berkley Corporation have executed this General Release this 24th day of January, 2000, John D. Vollaro having had the opportunity to review it with counsel of his choice and having had the right to consider it for twenty-one (21) days and seven (7) days after execution to revoke it. AGREED: ________________________________ ________________ John D. Vollaro Date W.R. BERKLEY CORPORATION By: _____________________________ ________________ William R. Berkley Date Chairman of the Board and Chief Executive Officer -5- 14 ATTACHMENT 2 John D. Vollaro 26 Old Orchard Hill Lane Greenwich, Connecticut 06831 January 24, 2000 William R. Berkley Chairman and Chief Executive officer W.R. Berkley Corporation 165 Mason Street P.O. Box 2518 Greenwich, CT 06836-2518 Dear Bill: In connection with my resignation as President and Chief Operating Officer of W.R. Berkley Corporation (the "Company") this will confirm my irrevocable resignation, effective March 1, 2000, from the Board of Directors of the Company, all committees thereof, all boards of directors of the Company's subsidiaries and affiliates, and all company committees, trusteeships and employee benefit plan committees on which I am currently serving with respect to the Company, all of its subsidiaries and affiliates, and their related employee benefit plans. Very truly yours, EX-13 4 EXHIBIT 13 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INDUSTRY OVERVIEW The demand for insurance is influenced primarily by general economic conditions, while the supply of insurance is directly related to available capacity, i.e., the level of policyholders' surplus employed in the industry and the willingness of insurance management to risk that capital. The adequacy of premium rates is affected mainly by the severity and frequency of claims, which are influenced by many factors, including natural disasters, regulatory measures and court decisions that define and expand the extent of coverage and the effects of economic inflation on the amount of compensation due for injuries or losses. In addition, investment rates of return may impact policy rates. These factors can have a significant impact on ultimate profitability because a property casualty insurance policy is priced before its costs are known, as premiums usually are determined long before claims are reported. Over the past several years a significant increase in capacity has produced a trend of increasing price competition, which continued in 1999. OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1999 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1998 The net loss attributable to common stockholders for 1999 was $37 million, or $1.43 per diluted share, compared to net income of $46 million, or $1.59 per diluted share, in 1998. The operating loss, which is defined as net loss before realized gains and losses, changes in accounting principle and extraordinary gains and losses on early extinguishments of long-term debt, was $31 million in 1999, or $1.19 per diluted share, compared with operating income of $35 million, or $1.19 per diluted share, in 1998. Adjusting for the restructuring charge (see page 19), the operating loss was $23 million, or $.91 per diluted share, in 1999. The deterioration in operating results in 1999 was primarily due to an increase in loss reserves and to the effects of competition on rate adequacy. Net premiums written increased 6% to $1,428 million from $1,346 million written during 1998. Regional net premiums written grew 1% to $650 million as growth opportunities were impeded by inadequate rates and competitive market conditions. Reinsurance net premiums written increased 15% to $309 million due primarily to growth in pro-rata treaty business. Specialty net premiums written were $260 million, an increase of 3% over 1998, as new business growth was partially offset by the non-renewal of loss-producing business, primarily in the commercial transportation unit. Alternative markets net premiums written increased 15% to $122 million due primarily to growth in businesses that began operations in 1998. International net premiums written increased 15% to $86 million, reflecting the first full year of operations in the Philippines. Net investment income decreased 6% to $190 million in 1999 due to a reduction in invested assets, which resulted from the repurchase of common and preferred shares during 1998 and 1999, and to a lower average pre-tax return on investments. (See "Liquidity and Capital Resources.") The portfolio yield decreased to approximately 6.5% in 1999 from approximately 6.9% in 1998 as a result of a higher concentration in municipal bonds on average during 1999 and a lower yield on the trading portfolio. Management fees and commissions consist primarily of fees earned by the alternative markets segment. Management fees and commissions increased 2% to $72 million in 1999 as market conditions continued to restrain the growth of the alternative risk market. Realized investment losses were $6 million in 1999 compared to realized investment gains of $25 million in 1998. Realized gains and losses on fixed income securities resulted primarily from the Company's strategy of maintaining an appropriate balance between the duration of its fixed income portfolio and the duration of its liabilities and from provisions for other than temporary impairment of securities; realized gains and losses on equity securities arise primarily as a result of a vari- 18 2 ety of factors which influence the Company's valuation criteria for such securities. The majority of the 1999 and 1998 realized gains and losses resulted from fixed maturity securities. The combined ratio represents a measure of underwriting profitability, excluding investment income. A number in excess of 100 generally indicates an underwriting loss; a number below 100 generally indicates an underwriting gain. The consolidated combined ratio (on a statutory basis) of the Company's insurance operations increased to 112.2% in 1999 from 106.6% in 1998 mainly due to an increase in the consolidated loss ratio. The consolidated loss ratio (losses and loss expenses incurred expressed as a percentage of premiums earned) increased to 76.5% from 71.2% primarily as a result of increased losses in the regional segment and commercial transportation unit. The regional segment loss ratio increased to 84.7% from 76.0% in 1998 due to a loss reserve adjustment of $55 million in the fourth quarter of 1999 and to the continued effects of competition on rate adequacy. Approximately $40 million of the loss reserve adjustment related to losses incurred in 1998 and prior years, with the balance relating to losses incurred in 1999. In 1998, the Company reported a pre-tax charge of $31 million for additional reinsurance premiums and loss reserves for the regional segment. The increased losses in the commercial transportation unit were the result of a rise in claim frequency and severity and of intense price competition. Weather-related losses for the Company were $60 million in 1999 compared with $59 million in 1998. The overall increase in incurred losses in 1999 was partially offset by recoveries under the aggregate reinsurance cover (see "Reinsurance") and by favorable reserve development on business written in prior years by the specialty and alternative markets segments. Other operating costs and expenses, which consist of the expenses of the Company's insurance and alternative markets operations, as well as the Company's corporate and investment expenses, increased by 9% to $605 million from $556 million in 1998. The increase in other operating costs is primarily due to a 10% growth in premiums earned, which in turn results in an increase in underwriting expenses. The consolidated expense ratio of the Company's insurance operations (underwriting expenses expressed as a percentage of premiums written) increased to 35.4% for the 1999 period from 34.9% for the comparable 1998 period due primarily to higher reinsurance commissions rates for the specialty and reinsurance segments. The regional expense ratio increased to 36.1% from 35.8% due to the impact of additional reinsurance premiums and to certain costs directly attributable to the restructuring. Adjusting for these items, the regional expense ratio would have been 34.1% in 1999. The Federal and foreign income tax benefit in 1999 was $46 million compared with an expense of $5 million in 1998. The tax benefit in 1999, as compared to a tax expense in 1998, was due to a loss before income taxes in 1999 and to an increase in the percentage of revenues that are tax-exempt. In addition, the 1999 Federal income tax benefit reflects the closing with the Internal Revenue Service of tax years 1992 through 1994. (See "Liquidity and Capital Resources.") The 1999 results include an after-tax restructuring charge of $7 million, or $.28 per diluted share, primarily related to the Company's restructuring of certain of its operating units. The restructuring, which was substantially completed in 1999, is expected to result in annual after-tax savings of approximately $12 million. Under generally accepted accounting principles, the restructuring charge does not include additional costs related to system changes, financial incentives and other activities, although they are directly related to the restructuring plan. The Company incurred such additional costs of approximately $3 million, on an after-tax basis, in 1999. As previously disclosed, during 1999 the Company adopted AICPA Statement of Position 97-3, "Accounting By Insurance and Other Enterprises for Insurance-Related Assessments." The adoption of this statement resulted in a non-cash, after-tax charge of $3 million, or $.12 per diluted share, which is reflected as a cumulative effect of a change in accounting principle. 19 3 The Company reported an after-tax extraordinary gain of $735,000 in 1999, related to the repurchase and retirement of $10 million (face amount) of capital trust securities. In 1998, the Company reported an after-tax extraordinary loss of $5 million, related to the repurchase and retirement of $34.7 million (face amount) of long-term debt. OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 Net income attributable to common stockholders for 1998 declined to $46 million, or $1.59 per share diluted, from $91 million, or $3.02 diluted, in 1997. Operating income in 1998 was $35 million or $1.19 per diluted share compared to $83 million or $2.74 per diluted share in 1997. The decline in earnings was due primarily to deterioration in underwriting results, attributable to an increase in weather-related losses and the effects of competition on rate adequacy. Net premiums written in 1998 rose 14% to $1,346 million from $1,178 million written during 1997 due to growth recorded by all segments of the Company. Net premiums written by the regional operations grew by 4% to $641 million from $619 million written in 1997. The growth was generated by the issuance of additional policies. Net premiums written by the reinsurance segment increased by 30% to $270 million from $207 million in 1997. This increase was substantially due to an increase in pro rata treaty business. Net premiums written by the specialty operations grew by 16% to $254 million from $219 million in 1997, due to increases in all sectors of this business. This growth was due to an increase in units insured. Net premiums written by the alternative markets operations grew by 16% to $106 million from $91 million in 1997 due to the commencement of operations of Key Risk Insurance Company (which underwrote business previously managed on behalf of a self-insurance association). This increase more than offset a decline in premiums written by Midwest Employers Casualty Company. Net premiums written by the international operations grew by 79% to $75 million from $42 million. This increase was due to 1997 acquisitions in Argentina and the start-up of a life insurance and endowment insurance company in the Philippines. Pre-tax net investment income increased to $202 million from $200 million earned in 1997. This growth was due to an increase in investable assets produced by cash flow from operations, which was partially offset by the effects of the repurchase of common stock, and a decrease in pre-tax investment yield. The decline in pre-tax investment yield was due to an increase in the percentage of the portfolio invested in municipal bonds and lower yields earned on the trading portfolio. (See "Liquidity and Capital Resources.") Management fees and commissions consist primarily of fees earned by the alternative markets segment. Management fees and commissions remained at $71 million as intense competition inhibited growth. Realized investment gains increased to $25 million from $13 million in 1997. Realized gains on fixed income securities resulted primarily from the Company's strategy of maintaining an appropriate balance between the duration of its fixed income portfolio and the duration of its liabilities; realized gains on equity securities arise primarily as a result of a variety of factors which influence the Company's valuation criteria for such securities. The majority of the 1998 realized gains resulted from the sale of fixed maturity securities while the majority of 1997 realized gains resulted from the sale of equity securities. The consolidated combined ratio (on a statutory basis) of the Company's insurance operations increased to 106.6% in 1998 from 101.2% in 1997 mainly due to an increase in the consolidated loss ratio. The consolidated loss ratio (losses and loss expenses incurred expressed as a percentage of premiums earned) increased to 71.2% from 66.4% due to a number of factors. Weather-related losses for 1998 were $59 million compared with $33 million in 1997, which accounted for an increase of 1.6% of the loss ratio. The regional operations were adversely impacted by a rise in the frequency and sever- 20 4 ity of commercial property and liability claims, especially in the fourth quarter. The increase in severity resulted in an accrual for additional ceded premiums due under certain sliding scale reinsurance treaties. These factors were somewhat offset by favorable loss development on business written in prior years. Other operating costs and expenses, which consist of the expenses of the Company's insurance and alternative markets operations, as well as the Company's corporate and investment expenses, increased by 14% to $556 million from $488 million in 1997. The increase in other operating costs is primarily due to the substantial premium growth discussed above, which in turn results in an increase in underwriting expenses. The consolidated expense ratio of the Company's insurance operations increased to 34.9% for the 1998 period from 34.4% for the comparable 1997 period. This increase resulted primarily from the cost of expansion incurred by several regional companies and higher growth rate in international operations, which operate at a higher expense ratio than domestic operations. The Federal income tax provision resulted in an effective tax rate of 9% in 1998 (24% in 1997). The tax rate is lower than the statutory tax rate of 35% because a substantial portion of investment income is tax-exempt. The decrease in the effective tax rate in 1998 is due primarily to an increase in the percentage of pre-tax income that is tax-exempt. LIQUIDITY AND CAPITAL RESOURCES GENERAL The Company's subsidiaries are highly liquid, receiving substantial cash from premiums, investment income, management fees and proceeds from sales and maturities of portfolio investments. The principal outflows of cash are payments of claims, taxes, interest and operating expenses. The net cash provided from operating activities (before trading account transactions) was $49 million in 1999, $224 million in 1998 and $229 million in 1997. The decrease in cash flow in 1999 was primarily due to a higher level of claims activity. The 1998 cash flow was impacted favorably by the assumption of a portfolio of loss reserves for which the Company received proceeds of approximately $60 million. As a holding company, the Company derives cash from its subsidiaries in the form of dividends, tax payments and management fees. The Company is obligated to service its debt, pay consolidated Federal income taxes and pay its expenses. The Company also provides capital to its subsidiaries, including amounts required under agreements with state insurance departments. Tax payments and management fees from the insurance subsidiaries are made under agreements which generally are subject to approval by state insurance departments. Maximum amounts of dividends that can be taken without regulatory approval are prescribed by statute. (See Note 18 of "Notes to Consolidated Financial Statements.") In addition to its other cash requirements in 2000, the Company is required to repay $25 million of senior notes that mature on March 6, 2000 and to contribute approximately $28 million to an insurance subsidiary during the first quarter of 2000. The Company anticipates receiving additional distributions from insurance subsidiaries and borrowing under its credit facility to satisfy these requirements. FINANCING ACTIVITY During 1998, the Company issued $40 million face value of 6.375% medium term notes due April 15, 2005. Also in 1998, the Company repurchased $34.7 million face amount of 9.875% and 8.7% senior notes and debentures for $41.8 million and retired $10 million face value of 8.95% senior notes upon maturity. In December 1998, one of the Company's subsidiaries issued an $8 million five-year note. In 1999, the Company redeemed all outstanding Series A Preferred Stock for $98 million and repurchased $10 million (face value) of capital trust securities for $8.8 million. During 1998, the Company purchased 3,172,222 shares of its common stock for approximately $118 million. During 1999, the Company purchased 905,000 shares of its common stock for approximately $22 million, leaving a balance as of December 31, 1999 of 1,095,000 shares available for repurchase under its current authorization. 21 5 As of December 31, 1999 and 1998, the Company had $35 million and $55.5 million, respectively, of outstanding short-term debt under its unsecured bank credit facility. As of December 31, 1999, the Company had an additional $40 million of short-term debt available under this facility. The credit facility expires on and must be extended by December 8, 2000. The Company has on file a "shelf" registration statement with the Securities and Exchange Commission with a remaining balance of $150 million in additional equity and/or debt securities. The securities may be offered from time to time as determined by funding requirements and market conditions. INVESTMENTS In its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities which, combined with expected cash flow, is believed adequate to meet foreseeable payment obligations. As part of this strategy, the Company attempts to maintain an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities, i.e., policy claims and debt obligations. The Company's investment policy with respect to fixed maturity securities is generally to purchase instruments with the expectation of holding them to their maturity. However, active management of the portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as changes in financial market conditions alter the assumptions underlying the purchase of certain securities. The investment portfolio (including the trading account receivable from brokers and clearing organizations and trading securities sold but not yet purchased), on a cost basis, decreased in 1999 by $104 million to approximately $3,040 million primarily due to the repurchases of common and preferred stock discussed above. The Company's investments are currently comprised of fixed income securities and trading account equity securities. At December 31, 1999, the portfolio mix of the fixed income securities was as follows: tax-exempt securities were 40% (42% in 1998); U.S. Government securities and cash equivalents were 24% (23% in 1998); mortgage-backed securities were 17% (18% in 1998); corporate fixed maturity securities were 17% (15% in 1998); and the balance of 2% was invested in other fixed income securities. The Company had net trading account assets (trading account equity securities plus trading account receivables from brokers and clearing organizations less trading account equity securities sold but not yet purchased) of $356 million as of December 31, 1999, as compared to $321 million as of December 31, 1998. The net trading account assets represented approximately 12% and 10% of the Company's net invested assets as of December 31, 1999 and 1998, respectively. MARKET RISK The Company's market risk generally represents the risk of gain or loss that may result from the potential change in the fair value of the Company's investment portfolio as a result of fluctuations in prices, interest rates and currency exchange rates. As discussed above, the Company attempts to manage its interest rate risk by maintaining an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities, i.e., policy claims and debt obligations. The Company's investments are categorized as either fixed maturity securities or equity securities. The principal market risk for the Company's fixed maturity securities is interest rate risk. The Company uses various models and stress test scenarios to monitor and manage interest rate risk. The following table outlines the groups of fixed maturity securities and the components of the interest rate risk:
Market Effective Fair Value Group Yield Duration (000's) - ------------------------------------------------------------------ U. S. Government securities 6.48% 4.56 $ 319,168 State and municipal 5.58 6.24 1,057,142 Corporate 7.99 4.42 432,283 Mortgage-backed securities 7.51 7.10 452,283 - ------------------------------------------------------------------ Total 6.49% 5.80 $2,260,876 ==================================================================
As a general rule, a portfolio's duration measures the expected change in portfolio value due to a change in interest rates. The portfolio's duration is further modified to accurately 22 6 reflect a portfolio's expected price movement as interest rates change. Based upon a pricing model, the Company determines the estimated change in fair value of the fixed maturity securities, assuming immediate parallel shifts in the treasury yield curve while keeping spreads between individual securities and treasury securities static. The fair value at specified levels at December 31, 1999 would be as follows:
Estimated Fair Estimated Value of Financial Change in Instruments Fair Value Change in interest rates $(000's) $(000's) - -------------------------------------------------------------- 300 basis point rise $1,902,197 $(358,679) 200 basis point rise 2,012,189 (248,687) 100 basis point rise 2,131,397 (129,479) base scenario 2,260,876 -- 100 basis point decline 2,396,814 135,938 200 basis point decline 2,536,639 275,763 300 basis point decline 2,687,992 427,116 ==============================================================
The estimated changes in fair value, based upon the above table, would be offset by the Company's liabilities if they were marked to market. The Company's equity securities are used primarily for merger arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Merger arbitrage differs from other types of investments in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less). The Company believes that this makes merger arbitrage investments less vulnerable to changes in general stock market conditions. Potential changes in market conditions are also mitigated by the implementation of hedging strategies, including short sales. Additionally, the merger arbitrage positions are generally hedged against market declines by purchasing put options, selling call options or entering into swap contracts. Based upon these characteristics, the Company's equity securities are primarily exposed to the completion of announced deals, which are subject to regulatory as well as political and other risks. The Company also has net assets held by its foreign subsidiaries that are subject to foreign currency risk. As of December 31, 1999, the Company had $28 million (net of minority interest) invested in subsidiaries in Argentina, as well as $7 million (net of minority interest) invested in subsidiaries in the Philippines. As of December 31, 1999, approximately 81% and 49% of the invested assets in Argentina and the Philippines, respectively, were denominated in US Dollars. The effect of foreign subsidiaries maintaining US Dollar denominated assets is an offset against fluctuations in foreign currency. Argentina has established a currency board exchange rate mechanism that creates a dollar for dollar relationship between the US Dollar and the Argentine Peso. Because of this dollar for dollar relationship, devaluation risk is viewed to be low. The Company's investment in the Philippines is affected by fluctuations in the exchange rate between the US Dollar and the Philippine Peso. For every one percent change in the exchange rate, the Company's unrealized foreign currency gain/(loss) would change approximately $73,000, net of minority interest. FEDERAL AND FOREIGN INCOME TAXES The Company files a consolidated income tax return in the U.S. and foreign tax returns in the countries of its overseas operations. At December 31, 1999, the Company had a deferred tax liability of $82 million, which primarily relates to deferred policy acquisition costs and intangible assets, and a deferred tax asset of $164 million, which primarily relates to the discounting of loss reserves for Federal income tax purposes, unearned premiums, unrealized investment losses and an alternative minimum tax credit carry forward. The realization of the deferred tax asset is dependent upon the Company's ability to generate sufficient taxable income in future periods. Based on historical results and the prospects for current operations, management anticipates that it is more likely than not that future taxable income will be sufficient for the realization of this asset. 23 7 REINSURANCE The Company follows the customary industry practice of reinsuring a portion of its exposures, paying to reinsurers a part of the premiums received on the policies it writes. Reinsurance is purchased principally to reduce net liability on individual risks and to protect against catastrophic losses. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policies, it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance coverage. The Company monitors the financial condition of its reinsurers and attempts to place its coverages only with substantial, financially sound carriers. REGIONAL OPERATIONS In 1999, the Mid-Atlantic and Southern regional companies generally retained $300,000 on individual property casualty risks while the Midwest and New England companies generally retained $500,000 on individual property casualty risks. The New England company retained up to $2.1 million per bond for surety business. The other regional companies writing surety business retained up to $450,000. The regional group also maintained catastrophe reinsurance protection for approximately 100% of weather-related losses above $6 million per occurrence up to a maximum of $34 million. In addition, the regional operating units carried additional aggregate catastrophe protection of 74% of $4.5 million in excess of $7 million for storms exceeding $1.5 million. Effective January 1, 1999, the Company purchased additional aggregate reinsurance protection for the regional property casualty insurance segment. Pursuant to the contract, the reinsurer will indemnify the regional companies for losses occurring during 1999 in excess of 71% of earned premiums, up to a limit of $35 million. Premiums of $21 million and losses of $35 million were ceded to the reinsurer in 1999. REINSURANCE OPERATIONS Signet Star's catastrophe retrocession program provides coverage for property losses in five layers as follows: (i) 100% of $7.5 million in excess of $6 million per occurrence; (ii) 95% of $6.5 million in excess of $13.5 million per occurrence; (iii) 95% of $10 million in excess of $20 million per occurrence; (iv) 95% of $10 million in excess of $30 million per occurrence; and (v) 100% of $25 million (for California only and only under certain conditions) and 100% of $10 million (for Florida only and only under certain conditions). In 1999, Signet Star had a variable quota share program on its casualty facultative business with retentions varying from $425,000 up to $2.5 million depending on the certificate limit. Property facultative business is covered on a per risk basis for $700,000 in excess of $300,000 and 98.5% of $4 million in excess of $1 million. These coverages apply to Signet Star's individual certificate and master certificate business. During 1999, Signet Star had retrocession coverage for its fidelity and surety business for 100% of each loss up to $2.5 million in excess of $750,000 per occurrence and 100% of each loss up to $2.5 million in excess of $3.25 million per occurrence and 86.5% of each surety loss up to $13 million in excess of $5.75 million per occurrence. During 1999, the Latin American and Caribbean division retained $250,000 per risk for property, marine, energy and aviation business and $500,000 per risk for casualty. SPECIALTY OPERATIONS Admiral's retention in 1999 was $183,750 from January 1 to June 30 and $173,750 from July 1 to December 31 per risk for most classes of business. Retentions varied between $2 million and $5 million based upon policy size, per insured, for business written by Monitor Liability Managers. Nautilus generally retained $140,000 per risk in 1999 and Carolina maintained its retention at $300,000 on property liability exposures. In 1999, Carolina (on business underwritten by Monitor Surety Managers) retained up to $500,000 on a per principal basis. Great Divide retained $140,000 per risk in 1999. The specialty group (except Carolina) is also covered under the regional group's property catastrophe protection for 100% of $34 million in excess of $6 million. 24 8 ALTERNATIVE MARKETS OPERATIONS Midwest Employers' retention is generally $1 million per occurrence above the self-insured's underlying retention. Key Risk Insurance Company's retention in 1999 was $300,000 per risk. Signet Star's alternative markets operation maintains specific retrocessional coverage on certain treaties and is also covered under the reinsurance group's catastrophe retrocessional program. Preferred Employers' retention in 1999 was $250,000 per risk. INTERNATIONAL OPERATIONS The international operations generally retained between $50,000 and $250,000 per occurrence or individual risk. Year 2000 the Company's critical primary operating software was modified or replaced as necessary for Year 2000 compliance, and the Company did not experience any significant disruption or other adverse impact on its business at January 1, 2000 or thereafter as a result of the Year 2000 date change. It is the Company's practice in the normal course of business to upgrade technology, including hardware and software, as appropriate. As a result of this practice, much of the Company's Year 2000 readiness was accomplished in the ordinary course. Through December 31, 1999, the Company incurred approximately $7 million of costs for Year 2000 compliance. The Year 2000 issue may be a concern for the Company from an underwriting standpoint to the extent of possible liability for coverage under general liability, property, directors and officers liability and other policies. Through December 31, 1999, no significant losses have arisen or come to light with respect to Year 2000 claims exposure for the Company's insurance and reinsurance subsidiaries. Additionally, certain of the Company's insurance subsidiaries may either include or exclude insurance coverage for Year 2000 exposures. However, claims have been made against other insurers seeking recovery of costs incurred to achieve Year 2000 compliance. While these or other kinds of Year 2000 claims against insurers may not prove successful, there exists a potential for judicial decisions which reformulate policies to expand their coverage for previously unforeseen theories of liability which may produce unanticipated claims. As a result, and because there is no prior history of such claims, the amount of any such potential Year 2000 coverage liabilities is not determinable. The discussion herein with regard to Year 2000 matters contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. The inclusion of such forward-looking statements herein shall not be considered a representation by the Company that the objectives, plans or expectations of the Company, or other matters addressed by the forward-looking statements, will be achieved. CAPITALIZATION For the year ended December 31, 1999, stockholders' equity decreased by approximately $270 million. The decrease in stockholders' equity is primarily attributable to the Company's repurchase of shares of its common and preferred stock for approximately $120 million; to an after-tax decline in unrealized investment gains (losses) of approximately $99 million; and to a net loss of $37 million. Accordingly, the Company's total capitalization decreased to $1,185 million at December 31, 1999 and the percentage of the Company's capital attributable to long-term debt increased to 33% at December 31, 1999 from 27% at December 31, 1998. 25 9 CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data)
Years ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues: Net premiums written $1,427,719 $1,346,254 $1,177,641 Change in net unearned premiums (13,335) (67,855) (65,894) - ----------------------------------------------------------------------------------------------------------------------------------- Premiums earned 1,414,384 1,278,399 1,111,747 Net investment income 190,316 202,420 199,588 Management fees and commissions 72,344 70,727 71,456 Realized investment gains (losses) (6,064) 25,400 13,186 Other income 2,688 5,571 4,333 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues 1,673,668 1,582,517 1,400,310 Operating costs and expenses: Losses and loss expenses 1,085,826 914,762 734,424 Other operating costs and expenses 604,784 556,155 487,776 Interest expense 50,801 48,819 48,869 Restructuring charge 11,505 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes and minority interest (79,248) 62,781 129,241 Federal and foreign income tax benefit (expense) 45,766 (5,465) (30,668) - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before minority interest (33,482) 57,316 98,573 Minority interest (566) 1,444 474 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) before preferred dividends (34,048) 58,760 99,047 Preferred dividends (497) (7,548) (7,828) - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) before change in accounting and extraordinary gain (loss) (34,545) 51,212 91,219 Cumulative effect of change in accounting principle (net of taxes) (3,250) -- -- Extraordinary gain (loss) on early extinguishment of long-term debt (net of taxes) 735 (5,017) -- =================================================================================================================================== Net income (loss) attributable to common stockholders $ (37,060) $ 46,195 $ 91,219 =================================================================================================================================== Earnings (loss) per share: Basic Net income (loss) before change in accounting and extraordinary gain (loss) $ (1.35) $ 1.82 $ 3.09 Cumulative effect of change in accounting principle (net of taxes) (.12) -- -- Extraordinary gain (loss) on early extinguishment of long-term debt .03 (.18) -- =================================================================================================================================== Net income (loss) attributable to common stockholders $ (1.44) $ 1.64 $ 3.09 =================================================================================================================================== Diluted Net income (loss) before change in accounting and extraordinary gain (loss) $ (1.34) $ 1.76 $ 3.02 Cumulative effect of change in accounting principle (net of taxes) (.12) -- -- Extraordinary gain (loss) on early extinguishment of long-term debt .03 (.17) -- =================================================================================================================================== Net income (loss) attributable to common stockholders $ (1.43) $ 1.59 $ 3.02 ===================================================================================================================================
See accompanying notes to consolidated financial statements. 26 10 CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
December 31, 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Investments: Invested cash $ 295,423 $ 370,155 Fixed maturity securities: Held to maturity, at cost (fair value $150,465 and $183,469) 152,657 170,150 Available for sale, at fair value (cost $2,180,509 and $2,224,244) 2,110,411 2,306,619 Equity securities, at fair value: Available for sale (cost $54,437 and $59,890) 61,380 65,869 Trading account (cost $236,453 and $373,164) 253,430 389,310 Cash 20,051 16,123 Premiums and fees receivable 380,887 377,501 Due from reinsurers 620,446 513,297 Accrued investment income 36,925 37,842 Prepaid reinsurance premiums 91,005 79,530 Deferred policy acquisition costs 182,348 168,894 Real estate, furniture and equipment at cost, less accumulated depreciation 128,735 136,884 Deferred Federal and foreign income taxes 81,976 -- Excess of cost over net assets acquired 76,523 76,645 Trading account receivable from brokers and clearing organizations 258,454 229,520 Other assets 34,140 45,092 - ---------------------------------------------------------------------------------------------------------------------------------- $4,784,791 $4,983,431 ================================================================================================================================== LIABILITIES, RESERVES, DEBT AND STOCKHOLDERS' EQUITY Liabilities and reserves: Reserves for losses and loss expenses $2,361,238 $2,126,566 Unearned premiums 689,826 664,861 Due to reinsurers 144,712 130,517 Deferred Federal and foreign income taxes -- 6,877 Trading securities sold but not yet purchased, at fair value (proceeds $137,801 and $283,310) 155,826 298,165 Short-term debt 35,000 55,500 Other liabilities 183,218 213,453 - ---------------------------------------------------------------------------------------------------------------------------------- 3,569,820 3,495,939 - ---------------------------------------------------------------------------------------------------------------------------------- Long-term debt 394,792 394,444 - ---------------------------------------------------------------------------------------------------------------------------------- Company-obligated mandatorily redeemable capital securities of a subsidiary trust holding solely 8.197% junior subordinated debentures of the corporation due December 15, 2045 198,126 207,988 Minority interest 30,275 23,779 - ---------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock, par value $.10 per share: Authorized 5,000,000 shares: 7 3/8% Series A Cumulative Redeemable Preferred Stock 653,952 shares issued and outstanding -- 65 Common stock, par value $.20 per share: Authorized 80,000,000 shares, issued and outstanding, net of treasury shares, 25,616,578 and 26,504,404 shares 7,281 7,281 Additional paid-in capital 331,640 429,611 Retained earnings 551,401 601,908 Accumulated other comprehensive income (loss) (44,500) 54,672 Treasury stock, at cost, 10,787,489 and 9,899,663 shares (254,044) (232,256) - ---------------------------------------------------------------------------------------------------------------------------------- 591,778 861,281 - ---------------------------------------------------------------------------------------------------------------------------------- $4,784,791 $4,983,431 ==================================================================================================================================
See accompanying notes to consolidated financial statements. 27 11 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands, except per share data) Years ended December 31, 1999, 1998 and 1997
Preferred and common stock and Accumulated Total additional other stockholders' paid-in Retained comprehensive Treasury equity capital earnings income (loss) stock - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $879,732 $476,439 $490,338 $ 31,075 $(118,120) Net income attributable to common stockholders 91,219 -- 91,219 -- -- Change in other comprehensive income 27,131 -- -- 27,131 -- Issuance of common shares 3,130 1,190 -- -- 1,940 Repurchase of preferred stock (41,523) (41,523) -- -- -- Dividends to common stockholders ($.42 per share) (12,397) -- (12,397) -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 947,292 436,106 569,160 58,206 (116,180) Net income attributable to common stockholders 46,195 -- 46,195 -- -- Change in other comprehensive income (loss) (3,534) -- -- (3,534) -- Issuance of common shares 2,719 851 -- -- 1,868 Purchase of treasury stock (117,944) -- -- -- (117,944) Dividends to common stockholders ($.48 per share) (13,447) -- (13,447) -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 861,281 436,957 601,908 54,672 (232,256) Net (loss) attributable to common stockholders (37,060) -- (37,060) -- -- Change in other comprehensive income (loss) (99,172) -- -- (99,172) -- Issuance of common shares 387 56 -- -- 331 Purchase of treasury stock (22,119) -- -- -- (22,119) Repurchase of preferred stock (98,092) (98,092) -- -- -- Dividends to common stockholders ($.52 per share) (13,447) -- (13,447) -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 $591,778 $338,921 $551,401 $(44,500) $(254,044) ===================================================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands)
1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) attributable to common stockholders $ (37,060) $46,195 $ 91,219 - ----------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) Unrealized holding gain (losses) on investment securities arising during the period (net of taxes of ($51,246), ($9,941) and $10,915) ( 95,171) (18,462) 20,271 Less: Reclassification adjustment for net change in unrealized gains (losses) during the period (net of taxes of ($2,122), $8,890 and $4,615) (3,942) 16,510 8,571 - ----------------------------------------------------------------------------------------------------------------------------------- Net unrealized gain (loss) (99,113) (1,952) 28,842 Change in unrealized foreign exchange (losses) (59) (1,582) (1,711) - ----------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) (99,172) (3,534) 27,131 - ----------------------------------------------------------------------------------------------------------------------------------- Comprehensive income (loss) $(136,232) $42,661 $118,350 ===================================================================================================================================
See accompanying notes to consolidated financial statements. 28 12 CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Years ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income (loss) before minority interest, preferred dividends and extraordinary items $ (36,732) $ 57,316 $ 98,573 Adjustments to reconcile net income to net cash flows provided by operating activities: Increase in reserves for losses and loss expenses, net of due to/from reinsurers 141,718 169,285 137,312 Depreciation and amortization 23,598 22,658 11,852 Change in unearned premiums and prepaid reinsurance premiums 13,490 68,095 67,023 Change in premiums and fees receivable (3,386) (45,727) (64,858) Change in Federal income taxes (34,289) (26,923) (1,408) Change in deferred policy acquisition costs (12,457) (22,057) (24,465) Realized investment (gains) losses 6,064) (25,400) (13,186) Other, net (49,491) 27,023 18,601 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities before trading account sales (purchases) 48,515 224,270 229,444 Trading account sales (purchases), net 554 (4,567) (89,245) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 49,069 219,703 140,199 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows provided by (used in) investing activities: Proceeds from sales, excluding trading account: Fixed maturity securities available for sale 594,993 715,459 718,789 Equity securities 17,200 52,727 43,204 Proceeds from maturities and prepayments of fixed maturity securities 147,668 297,303 120,944 Cost of purchases, excluding trading account: Fixed maturity securities available for sale (695,928) (1,033,190) (984,961) Fixed maturity securities held to maturity -- (3,034) -- Equity securities (14,397) (33,217) (28,028) Cost of acquired companies, net of acquired cash and invested cash (1,533) (3,304) 585 Net additions to real estate, furniture and equipment (8,127) (27,167) (17,898) Other, net (435) 3,956) (9,904) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities 39,441 (30,467) (157,269) - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Repurchase of preferred stock (98,092) -- (41,523) purchase of common treasury shares (22,119) (117,944) -- Net change in short-term debt (20,500) 55,500 -- Repurchase of Company-obligated mandatorily redeemable capital securities of a subsidiary trust holding solely 8.197% junior subordinated debentures (8,774) -- -- Cash dividends to common stockholders (13,888) (13,518) (11,695) Cash dividends to preferred stockholders (2,001) (7,356) (8,717) Other, net (6,060) 735 13,367 Net proceeds from issuance of long-term debt -- 47,882 -- Repurchase of long-term debt -- (49,104) -- - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities (159,314) (83,805) (48,568) - ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and invested cash (70,804) 105,431 (65,638) Cash and invested cash at beginning of year 386,278 280,847 346,485 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and invested cash at end of year $315,474 $386,278 $280,847 ==================================================================================================================================== Supplemental disclosure of cash flow information: Interest paid on debt $ 50,801 $ 48,976 $ 45,950 ==================================================================================================================================== Federal income taxes (received) paid $(12,973) $ 32,090 $ 32,258 ====================================================================================================================================
See accompanying notes to consolidated financial statements. 29 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 1999, 1998 and 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) Principles of consolidation and basis of presentation The consolidated financial statements, which include the accounts of W. R. Berkley Corporation and its subsidiaries ("the Company"), have been prepared on the basis of generally accepted accounting principles ("GAAP"). All significant intercompany transactions and balances have been eliminated. Reclassifications have been made in the 1998 and 1997 financial statements to conform them to the presentation of the 1999 financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the revenues and expenses reflected during the reporting period. Actual results could differ from those estimates. (B) Revenue recognition Insurance premiums written are recognized as earned generally on a pro-rata basis over the contract period. Management fees on insurance service contracts are recorded as earned primarily on a pro-rata basis over the policy period. Commission income is recognized as earned on the effective date of the applicable insurance policies. (C) Investments The Company has classified its investments into three categories. Securities that the Company has the positive intent and ability to hold to maturity are classified as "held to maturity" and reported at amortized cost. Securities which the Company purchased with the intent to sell in the near-term are classified as "trading" and are reported at estimated fair value, with unrealized gains and losses reflected in the statement of operations. The remaining securities are classified as "available for sale" and carried at estimated fair value, with unrealized gains and losses, net of applicable income taxes, excluded from earnings and reported as comprehensive income (loss) and a separate component of stockholders' equity. Fair value is generally determined using published market values. Realized gains or losses represent the difference between the cost of securities sold and the proceeds realized upon sale. The cost of securities is adjusted where appropriate to include a provision for significant decline in value which is considered to be other than temporary. The Company uses the specific identification method where possible, and the first-in, first-out method in other instances, to determine the cost of securities sold. Realized gains or losses, including any provision for decline in value, are included in the statement of operations. (D) Trading account The long portfolio positions are presented in the balance sheet as trading account assets. The short sales and short call options used in trading account activities are presented as trading securities sold but not yet purchased. The trading account receivable from brokers and clearing organizations is comprised of unsettled trades within the trading account and the net margin balances held by the clearing broker. (E) Per share data Basic per share data is based upon the weighted average number of shares outstanding during the year. Diluted per share data reflects the potential dilution that would occur if employee stock-based compensation plans were exercised. Shares issued in connection with loans to shareholders are not considered to be outstanding for the purposes of calculating basic per share amounts and have been excluded from stockholders' equity. (F) Deferred policy acquisition costs Acquisition costs (primarily commissions and premium taxes) incurred in writing insurance and reinsurance business are deferred and amortized ratably over the terms of the related contracts. Deferred policy acquisition costs are limited to the amounts estimated to be recoverable from the applicable unearned premiums and the related anticipated investment income by giving effect to anticipated losses, loss adjustment expenses and expenses necessary to maintain the contracts in force. (G) Reserves for losses and loss expenses Reserves for losses and loss expenses are an accumulation of amounts determined on the basis of (1) evaluation of claims for business written directly by the Company; (2) estimates received from other companies for reinsurance assumed; and (3) estimates for losses incurred but not reported (based on Company and industry experience). These estimates are 30 14 periodically reviewed and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments are reflected in results of operations in the period in which they are determined. The Company discounts its liabilities for excess workers' compensation ("EWC") losses and loss expenses using a "risk-free" rate. EWC liabilities are discounted because of the long period of time over which it pays losses. The Company believes that utilizing a "risk-free" rate to discount these reserves more closely reflects the economics associated with the EWC line of business (see Note 15 of notes to consolidated financial statements). (H) Reinsurance ceded Ceded unearned premiums are reported as prepaid reinsurance premiums and estimated amounts of reinsurance recoverable on unpaid losses are included in due from reinsurers. To the extent any reinsurer does not meet its obligations under reinsurance agreements, the Company must discharge the liability. Amounts due from reinsurers are reflected net of funds held where the right of offset is present. The Company has provided reserves for uncollectible reinsurance. (I) Excess of cost over net assets acquired Costs in excess of the net assets of subsidiaries acquired are being amortized on a straight-line basis over 25 to 40 years. The Company continually evaluates the amortization period of its intangible assets. Estimates of useful lives are revised when circumstances or events indicate that the original estimate is no longer appropriate. Amortization (including adjustments) of the excess of cost over net assets acquired was $3,866,000, $3,178,000 and $2,950,000 for 1999, 1998 and 1997, respectively. (J) Federal and foreign income taxes The Company files a consolidated income tax return in the U.S. and foreign tax returns in the countries of its overseas operations. The Company's method of accounting for income taxes is the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are measured using tax rates currently in effect or expected to apply in the years in which those temporary differences are expected to reverse. (K) Stock options The Company accounts for its stock options in accordance with Financial Accounting Standards Board ("FASB") Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123), which provides that stock-based compensation may be disclosed in the footnotes to financial statements. (L) Foreign currency Revenues and expenses in foreign currencies are translated at the weighted average exchange rate during the year. Assets and liabilities are translated at the rate of exchange in effect at the close of the period. Unrealized gains or losses (losses of $3,352,000 and $3,293,000 as of December 31, 1999 and 1998, respectively) resulting from translating foreign currency financial statements are reported as a component of common stockholders' equity. Gains or losses (losses of $381,000 for 1999 and gains of $1,543,000 and $1,408,000 for 1998 and 1997, respectively) resulting from foreign currency transactions (transactions denominated in a currency other than the entity's functional currency) are included in other income (gains) or other operating costs and expenses (losses) in the statement of operations. (M) Real estate, furniture and equipment Real estate, furniture and equipment are carried at cost less accumulated depreciation. Depreciation is calculated using the estimated useful lives of the respective assets. Depreciation expense was $16,291,000, $17,114,000 and $12,799,000 for 1999, 1998 and 1997, respectively. (N) Other Comprehensive Income (loss) Comprehensive income (loss) encompasses all changes in stockholder's equity (except those arising from transactions with shareholders) and includes net income, net unrealized capital gains or losses on available-for-sale securities and unrealized foreign currency translation adjustments. (O) Insurance Related Assessments As of January 1, 1999, the Company adopted the American Institute of Certified Public Accountants (AICPA) Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance Related Assessments." This statement provides guidance for determining when an entity should recog- 31 15 nize liabilities for guarantee fund and other insurance related assessments, how to measure those liabilities and when an asset may be recognized for the recovery of such assessments through premium tax offsets or policy surcharges. The adoption of this statement resulted in an after tax charge of $3,250,000 for the year ended December 31, 1999, which is reflected as a cumulative effect of a change in accounting principle. (P) RECENT ACCOUNTING PRONOUNCEMENTS During 1999, the FASB issued FAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB 133, and Amendment of FASB 133" which extended the effective date of FAS 133 to January 1, 2001. FAS 133, "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments. This statement will not have a material impact on the Company's results of operations or financial condition. (2) ACQUISITIONS During 1999, 1998 and 1997, several international and other acquisitions were completed for an aggregate consideration of approximately $1,533,000, $13,389,000 and $7,238,000, respectively. The acquisitions were accounted for as purchases and, accordingly, the results of operations of the companies have been included from the respective dates of acquisition. Proforma results of operations have been omitted as such effects are not significant. Net assets of the acquired companies for 1999, 1998 and 1997 were as follows: Investments in fixed maturity and equity securities of $0, $1,786,000 and $2,192,000; cash and invested cash of $0, $10,085,000 and $7,823,000; excess of cost over net assets acquired of $3,744,000, $6,847,000 and $2,688,000; and other liabilities, net of other assets of $5,277,000, $5,329,000 and $5,465,000. (3) COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES Neither the Company nor any of its subsidiaries is engaged in any litigation known to the Company which management believes will have a material adverse effect upon the Company's business. As is common with other insurance companies, the Company's subsidiaries are regularly engaged in the defense of claims arising out of the conduct of the insurance business. (4) LEASE OBLIGATIONS The Company and several of its subsidiaries use office space and equipment under leases expiring at various dates through September 1, 2004. These leases are considered operating leases for financial reporting purposes. Some of these leases have options to extend the length of the leases and contain clauses for cost of living, operating expense and real estate tax adjustments. Rental expense was approximately: $16,109,000, $14,095,000 and $12,564,000 for 1999, 1998 and 1997, respectively. Future minimum lease payments (without provision for sublease income) are $13,059,000 in 2000; $9,887,000 in 2001; $7,611,000 in 2002; $5,653,000 in 2003; and $4,368,000 thereafter. (5) RESTRUCTURING PLAN In the first quarter of 1999, the Company implemented a plan to restructure certain of its operating units. Under the plan, the Company consolidated ten of its regional units into four; merged two of its alternative market units; and combined two of its international units. In connection with the restructuring plan, the Company expects to reduce its workforce by approximately 386 employees. The Company reported a restructuring charge of $11,505,000 in the first quarter of 1999 to reflect the estimated costs of the plan. These charges consist mainly of severance payments of $7,562,000, contractual lease payments related to abandoned facilities and abandoned equipment and property owned. The activities under the plan were substantially completed in 1999. The Company has paid $6,916,000 related to the restructuring charge of which $4,221,000 relates to severance payments. The remaining restructuring accrual is $4,589,000 at December 31, 1999. 32 16 (6) DEBT Long-term debt consists of the following:
Description Rate Maturity Face Value Carrying Value - ----------------------------------------------------------------------------------------------------------------------------- Senior Notes 6.31% March 6, 2000 $ 25,000,000 $ 24,995,000 Senior Notes 6.71% March 4, 2003 25,000,000 24,939,000 Note Payable (1) December 30, 2003 8,000,000 8,000,000 Senior Subordinated Notes 6.50% July 1, 2003 35,793,000 35,793,000 Senior Notes 6.375% April 15, 2005 40,000,000 39,825,000 Senior Notes 6.25% January 15, 2006 100,000,000 99,215,000 Senior Notes 9.875% May 15, 2008 88,800,000 86,368,000 Senior Debentures 8.70% January 1, 2022 76,503,000 75,657,000 - ----------------------------------------------------------------------------------------------------------------------------- $399,096,000 $394,792,000 =============================================================================================================================
(1)Floating rate equal to Libor plus 50 basis points. The difference between the face value of long-term debt and the carrying value is unamortized discount. All outstanding long-term debt is not redeemable until maturity and ranks on a parity with all other outstanding indebtedness of the Company. The Company has on file a "shelf" registration statement with the Securities and Exchange Commission with a remaining balance of $150,000,000 in additional equity and/or debt securities. The securities may be offered from time to time as determined by funding requirements and market conditions. SHORT-TERM DEBT As of December 31, 1999 and 1998, the Company had $35,000,000 and $55,500,000, respectively, of outstanding short-term debt under its unsecured line-of-credit. During 1999 and 1998, the average interest rate of the Company's short-term debt was 5.36% and 5.59%. As of December 31, 1999, the Company had an additional $40,000,000 of short-term debt available under its line-of-credit. (7) COMPANY-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF A SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE CORPORATION DUE DECEMBER 15, 2045 The Company-obligated mandatorily redeemable preferred securities of a subsidiary trust holding solely junior subordinated debentures ("Capital Trust Securities") were issued by the W.R. Berkley Capital Trust ("the Trust") in 1996. All of the common securities of the Trust are owned by the Company. The sole assets of the Trust are $210,000,000 aggregate principal amount of 8.197% Junior Subordinated Debentures due December 15, 2045, issued by the Company (the "Junior Subordinated Debentures"). The Company's guarantee of payments of cash distributions and payments on liquidation of the Trust and redemption of the Capital Trust Securities, when taken together with the Company's obligations under the Trust Agreement under which the Capital Trust Securities were issued, the Junior Subordinated Debentures and the Indenture under which the Junior Subordinated Debentures were issued, including its obligations to pay costs, expenses, debts and liabilities of the Trust (other than with respect to the Capital Trust Securities), provide a full and unconditional guarantee of the Trust's obligations under the Capital Trust Securities. The Company records the preferential cumulative cash dividends arising from the payments of interest on the Junior Subordinated Debentures as interest expense in its consolidated statement of operations. The Capital Trust Securities are subject to mandatory redemption in a like amount (i) in whole but not in part, on the stated maturity date, upon repayment of the Junior subordinated Debentures, (ii) in whole but not in part, at any time contemporaneously with the optional prepayment of the Junior Subordinated Debentures by the Company upon the occurrence and continuation of a certain event and (iii) in whole or in part, on or after December 15, 2006, contemporaneously with the optional prepayment by the Company of Junior Subordinated Debentures. In September 1999, a subsidiary of the Company purchased $10 million (face amount) of the Capital Trust Securities for $8,774,000. 33 17 (8) REINSURANCE CEDED The Company follows the customary industry practice of reinsuring a portion of its exposures principally to reduce net liability on individual risks and to protect against catastrophic losses. The following amounts arising under reinsurance ceded contracts have been deducted in arriving at the amounts reflected in the statement of operations:
(Dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------ Premiums written $307,170 $292,238 $240,754 Premiums earned $294,823 $286,170 $239,233 Losses and loss expenses $248,767 $211,389 $129,405
Effective January 1, 1999, the Company purchased additional aggregate reinsurance protection for its regional segment. Pursuant to the contract, the reinsurer will indemnify the regional companies for losses occuring during 1999 in excess of 71% of earned premiums, up to a limit of $35,000,000. Premiums of $21,000,000 and losses of $35,000,000 were ceded to the reinsurer in 1999. (9) SUPPLEMENTAL FINANCIAL STATEMENT DATA Other operating costs and expenses consist of the following:
(Dollars in thousands) 1999 1998 1997 - --------------------------------------------------------------------- Amortization of deferred policy acquisition costs $444,289 $394,612 $337,871 Other operating costs and expenses of insurance operations 77,617 77,596 65,993 Other costs and expenses 82,878 83,947 83,912 - --------------------------------------------------------------------- Total $604,784 $556,155 $487,776 =====================================================================
(10) STOCK OPTION PLAN The Company has a stock option plan (the "Stock Option Plan") under which 7,125,000 shares of Common Stock were reserved for issuance. Pursuant to the Stock Option Plan, options may be granted at prices determined by the Board of Directors but not less than fair market value on the date of grant. The following table summarizes option information, including options granted under both the 1992 and prior plans:
- ---------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 -------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - ---------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 3,929,333 $34.25 3,218,762 $29.52 2,491,222 $26.03 Granted 68,600 25.73 1,036,975 47.08 1,154,354 34.68 Exercised 14,925 21.91 106,938 23.57 280,498 20.87 Canceled 320,223 34.39 219,466 30.56 146,316 27.42 - ---------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 3,662,785 $34.12 3,929,333 $34.25 3,218,762 $29.52 - ---------------------------------------------------------------------------------------------------------------------------- Options exercisable at year end 998,450 $25.28 640,161 $23.72 558,210 $22.66 - ---------------------------------------------------------------------------------------------------------------------------- Options available for future grant 3,326,102 3,073,916 3,892,439 ============================================================================================================================
The fair value of the options granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1999 and 1998, respectively: (a) dividend yield of 1%, (b) expected volatility of 20%, (c) risk free interest rate of 5.61% and 5.79% and (d) expected life of 7.5 years. The following table summarizes information about stock options outstanding at December 31, 1999 and 1998: 34 18
- ---------------------------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ------------------------------------------------------------ Weighted Weighted Range of Remaining Weighted Average Exercise Number Contractual Average Number Exercise Prices Outstanding Life Price Exercisable Price - ---------------------------------------------------------------------------------------------------------------------------- December 31, 1999 $14 to $27 736,415 3.9 $23.40 654,815 $23.14 27 to 32 875,144 6.2 29.06 337,210 29.17 32 to 48 2,051,226 7.8 40.13 6,425 38.29 - ---------------------------------------------------------------------------------------------------------------------------- Total 3,662,785 6.6 $34.12 998,450 $25.28 ============================================================================================================================ December 31, 1998 $14 to $27 731,983 4.4 $23.25 554,759 $22.67 27 to 32 1,034,346 7.1 29.12 84,502 30.35 32 to 48 2,163,004 8.8 40.43 900 47.38 - ---------------------------------------------------------------------------------------------------------------------------- Total 3,929,333 7.6 $34.25 640,161 $23.72 ============================================================================================================================
The Company applies APB Opinion 25 and related interpretations in accounting for these plans. Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (000's omitted except per share data):
Net Income Basic Earnings per Share Diluted Earnings per Share ---------------------- ------------------------ -------------------------- As Reported Proforma As Reported Proforma As Reported Proforma - ----------------------------------------------------------------------------------------------------------------------------------- 1999 Before change in accounting and extraordinary item $(34,545) $(37,644) $(1.35) $(1.46) $(1.34) $(1.45) Attributable to Common Stockholders $(37,060) $(40,159) $(1.44) $(1.56) $(1.43) $(1.55) - ----------------------------------------------------------------------------------------------------------------------------------- 1998 Before change in accounting and extraordinary item $ 51,212 $ 48,078 $ 1.82 $ 1.71 $ 1.76 $ 1.65 Attributable to Common Stockholders $ 46,195 $ 43,061 $ 1.64 $ 1.53 $ 1.59 $ 1.48 - -----------------------------------------------------------------------------------------------------------------------------------
(11) COMPENSATION PLAN The Company and its subsidiaries have profit sharing retirement plans in which substantially all employees participate. The plans provide for minimum annual contributions of 5% of eligible compensation; contributions above the minimum are discretionary and vary with each participating subsidiary's profitability. Employees become eligible to participate in the Retirement Plans on the first day of the month following the first full three months in which they are employed. Profit sharing expense amounted to $7,768,000, $8,524,000 and $8,402,000 for 1999, 1998 and 1997, respectively. In May 1997, the Common Stockholders approved the Long-Term Incentive Compensation Plan ("LTIP"). The LTIP provides for incentive compensation to key executives, is based on long-term corporate performance and is based upon criteria established by the Compensation and Stock Option Committee of the Board of Directors (the "Committee"). Key employees are awarded participation units ("units") as determined by the Committee. The Units vest and become exercisable over a maximum term of five years from the date of their award. The units are payable in cash or up to 50% in shares of Common Stock. In 1997, 266,250 units were awarded which amounted to an expense of $1,705,000. There was no LTIP expense in 1998 or 1999. 35 19 (12) INVESTMENTS At December 31, 1999 and 1998, there were no investments, other than investments in United States government securities, which exceeded 10% of stockholders' equity. At December 31, 1999 and 1998, investments were as follows: (Dollars in thousands)
Gross Gross unrealized unrealized Fair Carrying Type of investment Cost(a) gains losses value value - ---------------------------------------------------------------------------------------------------------------------------------- December 31, 1999 Fixed maturity securities held to maturity: State and municipal $ 56,172 $ 2,268 $ (951) $ 57,489 $ 56,172 Corporate 12,839 78 (248) 12,669 12,839 Mortgage-backed securities 83,646 135 (3,474) 80,307 83,646 - ---------------------------------------------------------------------------------------------------------------------------------- Total fixed maturity securities held to maturity 152,657 2,481 (4,673) 150,465 152,657 - ---------------------------------------------------------------------------------------------------------------------------------- Fixed maturity securities available for sale: United States Government(b) 334,114 473 (15,419) 319,168 319,168 State and municipal 1,020,716 9,905 (30,968) 999,653 999,653 Corporate 437,501 1,332 (19,219) 419,614 419,614 Mortgage-backed securities 388,178 1,657 (17,859) 371,976 371,976 - ---------------------------------------------------------------------------------------------------------------------------------- Total fixed maturity securities available for sale 2,180,509 13,367 (83,465) 2,110,411 2,110,411 - ---------------------------------------------------------------------------------------------------------------------------------- Common stocks 8,676 7,613 (80) 16,209 16,209 Preferred stocks 45,761 206 (796) 45,171 45,171 - ---------------------------------------------------------------------------------------------------------------------------------- Total equity securities available for sale 54,437 7,819 (876) 61,380 61,380 - ---------------------------------------------------------------------------------------------------------------------------------- Trading account 236,453 24,241 (7,264) 253,430 253,430 - ---------------------------------------------------------------------------------------------------------------------------------- Invested cash(c) 295,423 -- -- 295,423 295,423 - ---------------------------------------------------------------------------------------------------------------------------------- Total investments $2,919,479 $47,908 $(96,278) $2,871,109 $2,873,301 ================================================================================================================================== December 31, 1998 Fixed maturity securities held to maturity: State and municipal $ 60,492 $6,528 $ (72) $ 66,948 $ 60,492 Corporate 13,353 772 -- 14,125 13,353 Mortgage-backed securities 96,305 6,091 -- 102,396 96,305 - ---------------------------------------------------------------------------------------------------------------------------------- Total fixed maturity securities held to maturity 170,150 13,391 (72) 183,469 170,150 - ---------------------------------------------------------------------------------------------------------------------------------- Fixed maturity securities available for sale: United States Government(b) 293,761 9,797 (170) 303,388 303,388 State and municipal 1,117,691 53,387 (959) 1,170,119 1,170,119 Corporate 411,234 15,047 (6,106) 420,175 420,175 Mortgage-backed securities 401,558 12,278 (899) 412,937 412,937 - ---------------------------------------------------------------------------------------------------------------------------------- Total fixed maturity securities available for sale 2,224,244 90,509 (8,134) 2,306,619 2,306,619 - ---------------------------------------------------------------------------------------------------------------------------------- Common stocks 8,150 4,712 (341) 12,521 12,521 Preferred stocks 51,740 1,750 (142) 53,348 53,348 - ---------------------------------------------------------------------------------------------------------------------------------- Total equity securities available for sale 59,890 6,462 (483) 65,869 65,869 - ---------------------------------------------------------------------------------------------------------------------------------- Trading account 373,164 23,371 (7,225) 389,310 389,310 - ---------------------------------------------------------------------------------------------------------------------------------- Invested cash(c) 370,155 -- -- 370,155 370,155 - ---------------------------------------------------------------------------------------------------------------------------------- Total investments $3,197,603 $133,733 $(15,914) $3,315,422 $3,302,103 ==================================================================================================================================
(a) Adjusted as necessary for amortization of premium or discount. (b) Includes United States government agencies and authorities. (c) Short-term investments which mature within three months of the date of purchase. 36 20 The amortized cost and fair value of fixed maturity securities at December 31, 1999, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay obligations:
(Dollars in thousands) 1999 - ----------------------------------------------------------------------------------------------- Cost Fair value - ----------------------------------------------------------------------------------------------- Due in one year or less $ 68,307 $ 68,329 Due after one year through five years 372,376 371,743 Due after five years through ten years 600,055 586,027 Due after ten years 820,604 782,494 Mortgage-backed securities 471,824 452,283 - ----------------------------------------------------------------------------------------------- Total $2,333,166 $2,260,876 ===============================================================================================
Realized gains (losses) and the change in difference between fair value and cost of investments, before applicable income taxes, are as follows:
(Dollars in thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- Realized gains (losses): Fixed maturity securities(a) $ 2,792 $23,004 $ (3,308) Equity securities (76) 3,506 16,537 Net change in provision for decline in value(b): Fixed maturity securities (8,300) -- 103 Equity securities -- -- 581 Other (480) (1,110) (727) - ----------------------------------------------------------------------------------------------------------------------------- (6,064) 25,400 13,186 - ----------------------------------------------------------------------------------------------------------------------------- Change in difference between fair value and cost of investments: Fixed maturity securities (167,984) 877 58,476 Equity securities 964 (4,130) (5,356) - ----------------------------------------------------------------------------------------------------------------------------- (167,020) (3,253) 53,120 - ----------------------------------------------------------------------------------------------------------------------------- Total $(173,084) $22,147 $66,306 =============================================================================================================================
(a) During 1999, 1998 and 1997, gross gains of $15,022,000, $26,054,000, and $7,988,000, respectively, and gross losses of $12,230,000, $3,050,000, and $11,296,000, respectively, were realized. (b) The provision for decline in value of investments is $11,100,000, $2,800,000, and $2,800,000 as of December 31, 1999, 1998 and 1997, respectively. Investment income consists of the following:
(Dollars in thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- Investment income earned on: Fixed maturity securities $148,081 $156,961 $159,199 Invested cash 12,804 9,771 10,829 Equity securities 3,306 4,670 5,139 Trading account(a) 33,532 32,997 28,831 Other 833 1,666 1,814 - ----------------------------------------------------------------------------------------------------------------------------- Gross investment income 198,556 206,065 205,812 Interest on funds held under reinsurance treaties (8,240) (3,645) (6,224) - ----------------------------------------------------------------------------------------------------------------------------- Net investment income $190,316 $202,420 $199,588 =============================================================================================================================
(a) The primary focus of the trading account is merger arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Merger arbitrage differs from other types of investments in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less). The Company believes that this makes merger arbitrage investments less vulnerable to changes in general financial market conditions. Potential changes in market conditions are also mitigated by the implementation of hedging strategies, including short sales. The arbitrage positions are generally hedged against market declines by purchasing put options, selling call options or entering into swap contracts. Therefore, just as long portfolio positions may incur losses during market declines, hedge positions may also incur losses during market advances. As of December 31, 1999, the notional amount of long option contracts outstanding is $36,331,000 and short option contracts outstanding is $50,797,000. Investment income earned from net trading account activity includes unrealized trading losses of $4,897,000 for 1999 and unrealized trading gains of $1,291,000 and $13,737,000 for 1998 and 1997, respectively. 37 21 (13) STOCKHOLDERS' EQUITY COMMON EQUITY The Company has calculated per share data in accordance with FAS 128. Treasury shares have been excluded from average outstanding shares from the date of acquisition. The weighted average number of shares used in the computation of basic earnings per share was 25,823,000, 28,194,000 and 29,503,000 for 1999, 1998 and 1997, respectively. The weighted average number of shares used in the computations of diluted earnings per share was 25,927,000, 29,115,000 and 30,185,000 for 1999, 1998 and 1997, respectively. The difference in calculating basic and diluted earnings per share is attributable entirely to the dilutive effect of stock-based compensation plans. Changes in shares of Common Stock outstanding, net of treasury shares, are as follows:
(in thousands) 1999 1998 1997 - ------------------------------------------------------------------ Balance, beginning of year 26,504 29,568 29,454 Shares issued 18 108 114 Shares repurchased (905) (3,172) -- - ------------------------------------------------------------------ Balance, end of year 25,617 26,504 29,568 ==================================================================
PREFERRED EQUITY During 1997, the Company purchased 276,855 shares of Series A Preferred Stock for an aggregate cost of $41,523,000. On January 25, 1999, all remaining outstanding shares of the Series A Preferred Stock were redeemed for $98,092,000. On May 11, 1999, the Company declared a dividend distribution of one Right for each outstanding share of Common Stock. Each Right entitles the holder to purchase a unit consisting of one one-thousandth of a share of Series A Junior Participating Preferred Stock at a purchase price of $120 per unit (subject to adjustment) upon the occurrence of certain events relating to potential changes in control of the Company. The Rights expire on May 11, 2009, unless earlier redeemed by the Company as provided in the Rights Agreement. (14) FEDERAL AND FOREIGN INCOME TAXES Federal and foreign income tax expense (before the cumulative effect of change in accounting and extraordinary items) consists of:
(Dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------- Current (expense) benefit $11,785 $(30,283) $(21,999) Deferred (expense) benefit 33,981 (24,818) (8,669) - ------------------------------------------------------------------- Total (expense) benefit $45,766 $ (5,465) $(30,668) ===================================================================
A reconciliation of Federal and foreign income tax (expense) benefit and the amounts computed by applying the Federal and foreign income tax rate of 35% to pre-tax income are as follows:
(Dollars in thousands) 1999 1998 1997 - -------------------------------------------------------------------- Computed "expected" tax (expense) benefit $27,737 $(21,973) $(45,234) Tax-exempt investment income 17,853 18,412 15,432 Other, net 176 (1,904) (866) - -------------------------------------------------------------------- Total (expense) benefit $45,766 $ (5,465) $(30,668) ====================================================================
At December 31, 1999 and 1998, the tax effects of differences that give rise to significant portions of the deferred tax asset and deferred tax liability are as follows:
(Dollars in thousands) 1999 1998 - ---------------------------------------------------------------------- DEFERRED TAX ASSET Loss reserve discounting $64,946 $62,288 Unearned premiums 40,663 39,652 Deferred taxes on unrealized investment losses 22,297 -- Alternative minimum tax credit carry forward 20,656 -- Other 22,097 11,389 - ---------------------------------------------------------------------- Gross deferred tax asset 170,659 113,329 Less: valuation allowance (7,000) (7,000) - ---------------------------------------------------------------------- Deferred tax asset 163,659 106,329 ====================================================================== DEFERRED TAX LIABILITY Amortization of intangibles 9,625 11,460 Deferred policy acquisition costs 57,317 55,370 Realized investment gains -- 2,960 Deferred taxes on unrealized investment gains -- 31,070 Depreciation 8,985 5,900 Other 5,756 6,446 - ---------------------------------------------------------------------- Deferred tax liability 81,683 113,206 - ---------------------------------------------------------------------- Net deferred tax asset (liability) $81,976 $(6,877) ======================================================================
Federal income tax expense (benefit) applicable to realized investment gains (losses) was ($2,122,000), $8,890,000 and $4,615,000 in 1999, 1998 and 1997, respectively. The Company had a current income tax receivable of $8,939,000 and $10,532,000 at December 31, 1999 and 1998, respectively. The Company's tax returns through December 31, 1994 have been examined by the Internal Revenue Service. The realization of the deferred tax asset is dependent upon the Company's ability to generate sufficient taxable income in future periods. Based on historical results and the prospects for current operations, management anticipates that it is more likely than not that future taxable income will be sufficient for the realization of this net asset. 38 22 (15) RESERVES FOR LOSSES AND LOSS EXPENSES The table below provides a reconciliation of the beginning and ending reserve balances, on a gross of reinsurance basis:
(Dollars in thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- Net reserves at beginning of year $1,583,304 $1,433,011 $1,333,122 - ----------------------------------------------------------------------------------------------------------------------------- Net reserves of companies acquired 2,189 4,984 Net provision for losses and loss expenses: Claims occurring during the current year 1,032,089 944,887 747,977 Increase (decrease) in estimates for claims occurring in prior years 28,351 (42,929) (21,313) Amortization of discount 10,473 9,111 7,760 - ----------------------------------------------------------------------------------------------------------------------------- 1,070,913 911,069 734,424 ============================================================================================================================= Net payments for claims Current year 433,942 397,787 315,370 Prior years 496,410 365,178 324,149 - ----------------------------------------------------------------------------------------------------------------------------- 930,352 762,965 639,519 - ----------------------------------------------------------------------------------------------------------------------------- Net reserves at end of year 1,723,865 1,583,304 1,433,011 Ceded reserves at end of year 617,025 537,219 476,677 - ----------------------------------------------------------------------------------------------------------------------------- Gross reserves at end of year $2,340,890 $2,120,523 $1,909,688 =============================================================================================================================
The balance sheet includes $20,348,000 and $6,043,000 as of december 31, 1999 and 1998, respectively, relating to reserves for life insurance which are not included in the table above, and the statement of operations includes $14,913,000 and $3,693,000 for the years ended december 31, 1999 and 1998, respectively, relating to the policyholder benefits incurred on life insurance which are not included in the above table. The 1999 increase in reserves related to prior years is due to reserve strengthening in the regional segment partially offset by favorable reserve development in the specialty and alternative markets segments. Due to the nature of Excess Workers Compensation ("EWC") business and the long period of time over which losses are paid in this line of business, the Company discounts the liability for losses and loss expenses established for the EWC line of business. Discounting liabilities for losses and loss expenses gives recognition to the time value of money. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from the Company's loss payout experience and is supplemented with data compiled from insurance companies writing workers' compensation on an excess-of-loss basis. The expected payout pattern has a very long duration because it reflects the nature of losses generally which penetrate self-insured retention limits contained in EWC policies. The Company has limited the estimated payout duration to 30 years in order to introduce an additional level of conservatism into the discounting process. The liabilities for losses and loss expenses have been discounted using "risk-free" discount rates determined by reference to the U.S. Treasury yield curve weighted for the EWC premium volume to reflect the seasonality of the anticipated duration of losses associated with such coverages. The weighted average discount rate for accident years 1999, 1998, 1997, 1996 and 1995 and prior is 5.90%, 5.90%, 5.98%, 5.90% and 5.80%, respectively. The aggregate net discount, after reflecting the effects of ceded reinsurance, is $186,981,000, $186,964,000 and $189,600,000 at December 31, 1999, 1998 and 1997, respectively. For statutory purposes, the Company uses a discount rate of 3.0% as permitted by the Department of Insurance of the State of Ohio. To date, known pollution and environmental claims at the insurance company subsidiaries have not had a material impact on the Company's operations. Environmental claims have not materially impacted the Company because its subsidiaries generally did not insure larger industrial companies which are subject to significant environmental exposures. The Company's net reserves for losses and loss adjustment expenses relating to pollution and environmental claims were $30,944,000 and $33,391,000 at December 31, 1999 and 1998, respectively. The Company's gross reserves for losses and loss adjustment expenses relating to pollution and environmental claims were $65,966,000 and $69,283,000 at December 31, 1999 and 1998, respectively. Net incurred losses and loss expenses for reported pollution and environmental claims were approximately $1,371,000, $2,227,000 and $79,000 in 1999, 1998 and 1997, respectively. Net paid losses and loss expenses were approximately $3,819,000, $2,614,000 and $2,175,000 in 1999, 1998 and 1997, respectively. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make a reasonable actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential effect of significant unresolved legal matters, including coverage issues as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties are highly uncertain. 39 23 (16) INDUSTRY SEGMENTS The Company's operations are presently conducted through five basic segments: specialty; alternative markets; reinsurance; regional; and international. The specialty lines of insurance consist primarily of excess and surplus lines, commercial transportation, professional liability, directors and officers liability and surety. The Company's alternative markets segment specializes in insuring, reinsuring and administering self-insurance programs and other alternative risk transfer mechanisms for public entities, private employers and associations. The Company's reinsurance segment specializes in underwriting property, casualty and surety reinsurance on both a treaty and facultative basis. The regional property casualty insurance segment writes standard commercial and personal lines insurance for such risks as automobiles, homes and businesses. Finally, the international operations represent the Company's joint venture with Northwestern Mutual Life International (65% owned by the Company), which writes property and casualty, as well as life insurance, internationally. For the years ended December 31, 1999, 1998 and 1997, the joint venture wrote life premiums of $24,548,000, $7,994,000 and $639,000, respectively. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Income tax expense (benefits) were calculated in accordance with the Company's tax sharing agreements, which provide for the recognition of tax loss carryforwards only to the extent of taxes previously paid. Summary financial information about the company's operating segments is presented in the following table. Income before income taxes by segment consists of revenues less expenses related to the respective segment's operations. These amounts include realized gains (losses) where applicable. intersegment revenues consist primarily of dividends, interest on intercompany debt and fees paid by subsidiaries for portfolio management and other services to the Company. Identifiable assets by segment are those assets used in the operation of each segment.
Revenues --------------------------------------------------------- Income Income Tax Investment Unaffiliated Inter- (loss) before Expense (Dollars in thousands) Income Customers Segment Total income taxes (Benefits) - ---------------------------------------------------------------------------------------------------------------------------- December 31, 1999: Regional $ 52,639 $ 700,667 $ 1,462 $ 702,129 $(97,362) $ (7,589) Reinsurance 47,288 341,201 739 341,940 14,091 1,992 Specialty 50,231 310,373 (1,305) 309,068 39,261 8,692 Alternative Markets 36,355 221,690 586 222,276 24,919 4,653 International 6,469 93,878 -- 93,878 3,535 1,443 Corporate and other 1,011 5,859 114,398 120,257 32,612 (47,210) Adjustments and eliminations (3,677) -- (115,880) (115,880) (96,304) (7,747) - ---------------------------------------------------------------------------------------------------------------------------- Consolidated $ 190,316 $ 1,673,668 -- $1,673,668 $(79,248) $ (45,766) ============================================================================================================================ December 31, 1998: Regional $ 53,942 $ 680,505 $ 2,014 $ 682,519 $(24,524) $ 3,323 Reinsurance 47,643 296,100 1,044 297,144 33,858 6,911 Specialty 59,345 309,047 2,908 311,955 85,889 24,349 Alternative Markets 34,667 205,024 911 205,935 36,501 9,505 International 5,469 80,287 -- 80,287 (7,017) 349 Corporate and other 7,927 11,554 81,983 93,537 9,288 5,465 Adjustments and eliminations (6,573) -- (88,860) (88,860) (71,214) (44,437) - ---------------------------------------------------------------------------------------------------------------------------- Consolidated $ 202,420 $ 1,582,517 -- $ 1,582,517 $ 62,781 $ 5,465 ============================================================================================================================ December 31, 1997: Regional $ 51,920 $ 634,468 $ 674 $ 635,142 $ 47,624 $ 14,833 Reinsurance 45,520 241,204 882 242,086 42,193 10,641 Specialty 60,162 281,630 2,691 284,321 68,088 18,529 Alternative Markets 34,390 183,904 829 184,733 34,733 10,257 International 3,623 45,360 -- 45,360 (3,566) (181) Corporate and other 10,565 13,744 48,351 62,095 (19,815) 30,849 Adjustments and eliminations (6,592) -- (53,427) (53,427) (40,016) (54,260) - ---------------------------------------------------------------------------------------------------------------------------- Consolidated $ 199,588 $1,400,310 -- $ 1,400,310 $129,241 $ 30,668 ============================================================================================================================
40 24 W.R. BERKLEY CORPORATION AND SUBSIDIARIES Interest expense for the alternative markets and reinsurance segments was $2,870,000, $2,327,000 and $2,327,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Additionally, corporate interest expense (net of intercompany amounts) was $47,931,000, $46,492,000 and $46,542,000 for the corresponding periods. Identifiable assets by segment are as follows:
December 31, 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------- Regional $1,436,575 $1,370,849 $1,264,962 Reinsurance 1,022,776 996,186 863,784 Specialty 1,370,837 1,502,366 1,403,068 Alternative Markets 878,125 863,578 749,724 International 177,675 151,832 119,792 Corporate and other 1,362,345 1,545,744 1,602,907 Elimination (1,463,542) (1,447,124) (1,459,919) - --------------------------------------------------------------------------------------------------------------- Consolidated $4,784,791 $4,983,431 $4,544,318 ===============================================================================================================
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair values of the Company's financial instruments as of December 31, 1999 and 1998:
(Dollars in thousands) 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- Carrying Carrying Amount Fair value Amount Fair value - ----------------------------------------------------------------------------------------------------------------------------- Investments $2,873,301 $2,871,109 $3,302,103 $3,315,422 Long-term debt 394,792 383,901 394,444 435,702 Capital Trust Securities 198,126 172,547 207,988 206,464 - -----------------------------------------------------------------------------------------------------------------------------
The estimated fair value of investments is based on quoted market prices as of the respective reporting dates. The fair value of the long-term debt is based on rates available for borrowings similar to the Company's outstanding debt as of the respective reporting dates. (18) DIVIDENDS FROM SUBSIDIARIES AND STATUTORY FINANCIAL INFORMATION The Company's insurance subsidiaries are restricted by law as to the amount of dividends they may pay without the approval of regulatory authorities. During 2000, the maximum amount of dividends which can be paid without such approval is approximately $77,264,000. Combined net income and policyholders' surplus of the Company's consolidated insurance subsidiaries, as determined in accordance with statutory accounting practices, are as follows:
(Dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------ Net income (loss) $ (34,598) $ 67,014 $121,300 ============================================================ Policyholders' surplus $865,672 $941,853 $971,749 ============================================================
The significant variances between statutory accounting practices and GAAP are: For statutory purposes, bonds are carried at amortized cost, acquisition costs are charged to operations as incurred, deferred federal income taxes are not provided for temporary differences between book and tax assets and liabilities, EWC reserves are discounted at a 3.0% rate and certain assets designated as "non-admitted assets" are charged against surplus. At December 31, 1999 and 1998, bonds with a fair value of $209,485,000 and $185,206,000 were on deposit with various state insurance departments as required by state laws. The National Association of Insurance Commissioners ("NAIC") has risk-based capital ("RBC") requirements that require insurance companies to calculate and report information under a risk-based formula which measures statutory capital and surplus needs based on a regulatory definition of risk in a company's mix of products and its balance sheet. RBC did not affect the operations of the Company's insurance subsidiaries since all of its subsidiaries have an RBC amount above the authorized control level RBC, as defined by the NAIC. The NAIC recently completed a process intended to codify statutory accounting practices for certain insurance enterprises. As a result of this process, the NAIC will issue a revised statutory accounting practices and procedures manual, which will be effective January 1, 2001. The Company has not yet determined the impact that this change will have on the statutory capital and surplus of its insurance subsidiaries. 41 25 (19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a summary of quarterly financial data: (Dollars in thousands except per share data)
Three months ended ---------------------------------------------------------------------------------------------- March 31, June 30, September 30, December 31, 1999 1998 1999 1998 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues $407,713 $383,275 $416,250 $396,910 $427,823 $394,425 $421,882 $407,907 =================================================================================================================================== Net income (loss) before preferred dividends $ 2,472 $ 25,673 $ 5,624 $ 22,743 $ (1,356) $ 12,261 $(40,788) $ (1,917) ==================================================================================================================================== Net income (loss) before change in accounting and extraordinary gain (loss) $ 1,975 $ 23,786 $ 5,624 $ 20,856 $ (1,356) $ 10,374 $(40,788) $ (3,804) =================================================================================================================================== Net income (loss) attributable to common stockholders $ (1,275) $ 21,351 $ 5,624 $ 18,274 $ (621) $ 10,374 $(40,788) $ (3,804) =================================================================================================================================== Earnings (loss) per share: Basic Before change in accounting and extraordinary gain (loss) $ .07 $ .81 $ .22 $ .73 $ (.06) $ .37 $ (1.59) $ (.14) Net income (loss) $ (.05) $ .73 $ .22 $ .64 $ (.02) $ .37 $ (1.59) $ (.14) Diluted Before change in accounting and extraordinary gain (loss) $ .07) $ .78 $ .22 $ .70 $ (.05) $ .36 $ (1.59) $ (.14) Net income (loss) $ (.05) $ .71 $ .22 $ .61 $ (.02) $ .36 $ (1.59) $ (.14) ===================================================================================================================================
INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders W.R. Berkley Corporation We have audited the consolidated balance sheets of W. R. Berkley Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of W. R. Berkley Corporation and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for insurance-related assessments in 1999. New York, New York KPMG LLP February 24, 2000 42 EX-27 5 EXHIBIT 27
7 1,000 U.S. DOLLAR YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1 2,110,411 152,657 150,465 314,810 0 0 2,577,878 315,474 0 182,348 4,784,791 2,361,238 689,826 0 0 627,918 0 0 7,281 584,497 4,784,791 1,414,384 190,316 (6,064) 2,688 1,085,826 0 0 (79,248) (45,766) (34,545) 0 735 (3,250) (37,060) (1.44) (1.43) 1,583,304 1,032,089 28,351 433,942 496,410 1,723,865 28,351
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