-----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, C0UvkwL4/GenPKeql71NpLTW0Cp3jRyOkLRHVyCa6uXaeQExmCtoCXWOrvqRAnju dkIFc0lMbWi6C7SSSWSqfg== 0000914039-01-000093.txt : 20010326 0000914039-01-000093.hdr.sgml : 20010326 ACCESSION NUMBER: 0000914039-01-000093 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010323 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: 1576956 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 y46799e10-k.txt 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, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______. Commission file number 0-7849 W. R. BERKLEY CORPORATION (Exact name of registrant as specified in its charter)
Delaware 22-1867895 (State or other jurisdiction (I.R.S. Employer of 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. [ ] Aggregate market value 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 7, 2001: $1,156,879,996. Number of shares of common stock, $.20 par value, outstanding as of March 7, 2001: 28,861,309 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's 2000 Annual Report to Stockholders for the year ended December 31, 2000 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, 2000, are incorporated herein by reference in Part III. 2 W. R. BERKLEY CORPORATION ANNUAL REPORT ON FORM 10-K December 31, 2000
Page ---- SAFE HARBOR STATEMENT 3 PART I ITEM 1. BUSINESS 4 ITEM 2. PROPERTIES 22 ITEM 3. LEGAL PROCEEDINGS 22 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, 2000 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 28 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 28 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 28
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 2001 and beyond, 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 cyclical nature of the property casualty industry, the long-tail and potentially volatile nature of the reinsurance business, the impact of competition, product demand and pricing, claims development and the process of estimating reserves, the level of the Company's retentions, catastrophe and storm losses, legislative and regulatory developments, changes in the ratings assigned to the Company by rating agencies, investment results, availability of reinsurance, the effects of our recent restructuring, availability of dividends from our insurance company subsidiaries, our successful integration of acquired companies, investing substantial amounts in our information systems and technology, the ability of our reinsurers to pay reinsurance recoverables owed to us, exchange rate and political risks and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission, including this Annual Report on Form 10-K (see "Certain Factors That May Affect Future Results" herein). These risks could cause the Company's actual results for the year 2001 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 W. R. Berkley Corporation, a Delaware corporation, is an insurance holding company which, through our subsidiaries, presently operates in five segments of the property casualty insurance business: specialty lines of insurance (including excess and surplus lines and commercial transportation); alternative markets (including the management of alternative insurance market mechanisms); reinsurance; regional property casualty insurance; and international. This structure provides the flexibility to respond to local or specific market conditions and pursue specialty business niches. It also allows us to be closer to our customers to better understand their individual needs and risk characteristics. The holding company structure allows us to capitalize on the benefits of economies of scale through centralized capital, investment and reinsurance management and actuarial, financial and legal staff support. Unless otherwise indicated, all references in this Form 10-K to "W. R. Berkley," "we," "us," "our," the "Company" or similar terms refer to W. R. Berkley Corporation together with its subsidiaries. Our specialty insurance, alternative markets and reinsurance operations are conducted nationwide. Regional insurance operations are conducted primarily in the Midwest, New England, South, and Mid Atlantic regions of the United States. 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 each of the past five years were as follows:
Year Ended December 31, --------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Amounts in thousands) Net premiums written: Specialty insurance operations $ 285,525 $ 260,380 $ 254,003 $ 219,272 $ 214,738 Alternative markets operations 184,255 122,137 106,195 90,870 76,876 Reinsurance operations 276,640 309,181 269,634 206,652 218,200 Regional insurance operations 640,843 649,849 641,316 618,768 517,515 International operations 118,981 86,172 75,106 42,079 25,182 ---------- ---------- ---------- ---------- ---------- Total $1,506,244 $1,427,719 $1,346,254 $1,177,641 $1,052,511 ========== ========== ========== ========== ========== Percentage of net premiums written: Specialty insurance operations 19.0% 18.2% 18.9% 18.6% 20.4% Alternative markets operations 12.2 8.6 7.9 7.7 7.3 Reinsurance operations 18.4 21.7 20.0 17.5 20.7 Regional insurance operations 42.5 45.5 47.6 52.6 49.2 International operations 7.9 6.0 5.6 3.6 2.4 ---------- ---------- ---------- ---------- --------- Total 100.0% 100.0% 100.0% 100.0% 100.0% ========== ========== ========== ========== =========
The following sections briefly describe our insurance segments. The statutory information contained herein is derived from that reported to state regulatory authorities in accordance with statutory accounting practices ("SAP"). All of the domestic insurance subsidiaries have an A.M. Best Company, Inc. ("A.M. Best") rating of "A (Excellent)", other than Admiral Insurance Company, which has a rating of "A+ (Superior)". 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 reviews its ratings on a periodic basis, and ratings of the Company's subsidiaries are therefore subject to change. 4 5 SPECIALTY INSURANCE OPERATIONS Our specialty segment underwrites complex and sophisticated third-party liability risks, principally within the excess and surplus ("E&S") lines, property, professional liability, surety and commercial transportation markets. The specialty business is conducted through six operating units. The different companies within the segment are divided along the different customer bases and product lines which they serve. The specialty units deliver their products through a variety of distribution channels depending on the customer base and particular risks insured. The customers in this segment are highly diverse. Admiral Insurance ("Admiral") specializes in E&S coverages, including general liability, professional liability and property. 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. Admiral operates primarily on a non-admitted basis. Admiral's business is obtained on a nationwide basis from approximately 190 non-exclusive brokers. Coverages are provided to a wide variety of customers which, until February 2000, included nursing homes and assisted care facilities. In February 2000, Admiral ceased issuing policies to such facilities due to the difficult legal environment and underwriting results for this business. Nautilus Insurance ("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 operates primarily on a non-admitted basis. Nautilus also writes transportation risks, as well as other specialty losses, on an admitted basis. Monitor Liability Managers ("Monitor") is our professional liability underwriting unit. Monitor writes directors' and officers' and lawyers' professional coverages. Monitor continues to develop two other insurance lines - management liability and employment practices liability. Its business is developed nationally through a combination of wholesale and retail sources. Carolina Casualty ("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 make up a substantial part of Carolina's business. Carolina's business is obtained nationwide from approximately 120 agents and brokers. During 2000, in response to the competitive market environment, we substantially reduced our writings of commercial transportation business; however, we expect to increase our writings in 2001 as market conditions improve. Clermont Specialty Managers ("Clermont") writes specialty commercial lines in the New York City metropolitan area. These include package insurance programs for luxury condominium, cooperative and rental apartment buildings and restaurants, and motorcycle coverages. Product distribution is through retail agents and wholesale brokers. Monitor Surety Managers ("Surety") writes surety bonds in all 50 states, primarily serving the bonding needs of mid-sized contractors. It operates five regional offices producing business mostly from retail agents specializing in surety. The following table sets forth the percentage of direct premiums written by each specialty unit:
Year Ended December 31, --------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Admiral 39.5% 36.6% 37.7% 37.9% 34.0% Nautilus 24.8 24.7 23.0 24.7 23.5 Monitor 17.8 14.2 12.9 12.8 12.5 Carolina 10.9 18.1 20.5 18.7 23.7 Clermont 4.5 4.2 4.0 4.1 5.1 Surety 2.5 2.2 1.9 1.8 1.2 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
5 6 The following table sets forth the percentages of direct premiums written, by line, by our specialty insurance operations:
Year Ended December 31, --------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- General Liability 40.5% 30.5% 28.2% 34.1% 35.3% Professional Liability 14.5 16.5 16.9 14.7 12.1 Automobile Liability 10.6 18.3 19.0 17.7 20.9 Fire and Allied Lines 9.2 7.7 7.1 7.5 7.1 Directors' and Officers' Liability 7.0 6.6 7.7 8.1 10.0 Commercial Multi-Peril 4.6 3.3 3.1 3.0 1.0 Automobile Physical Damage 4.3 6.4 6.1 4.9 5.3 Medical Malpractice 3.7 6.0 6.1 4.0 3.3 Surety 2.5 2.1 2.0 1.9 1.3 Inland Marine 1.6 1.9 1.8 1.5 1.6 Workers' Compensation 0.7 0.6 1.9 2.5 1.7 Other 0.8 0.1 0.1 0.1 0.4 ------ ------ ------ ------ ------ Total 100.0% 100.0% 100.0% 100.0% 100.0% ====== ====== ====== ====== ======
ALTERNATIVE MARKETS Our alternative markets operations specialize in developing, insuring, reinsuring and administering self-insurance programs and other alternative risk transfer mechanisms. Our clients include employers, employer groups, reinsurers, alternative markets funds and other insurers seeking less costly, more efficient ways to manage exposure to risks. In addition to providing insurance, the alternative markets segment also provides a wide variety of fee-based services, including consulting and administrative services. Each of our alternative markets divisions is involved in risk management and is organized according to one of the following product areas: insuring excess workers' compensation, or EWC, risks; insuring primary workers' compensation risks; providing non-risk bearing administrative services nationwide and offering reinsurance products to alternative markets clients. Excess workers' compensation. We market and underwrite EWC insurance and related risk management services, including a full range of consulting services. EWC insurance is marketed primarily to employers and employer groups that self-insure their workers' compensation programs. EWC insurance provides coverage to self-insured employers and employer groups once their losses exceed a specified retention amount. We offer a complete line of products, including specific and aggregate insurance policies and surety bonds. Primary workers' compensation. Primary workers' compensation insurance is provided in California to the small employer market and in North Carolina primarily to employers moving out of associations or individual self-insurance. Insurance services. Our alternative markets insurance service operations offer 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. Interaction with clients through consulting and other advisory services is central to marketing efforts in the alternative markets. Our services include property casualty and workers' compensation third-party administration, claims adjustment and management, employee benefit consulting and administration, accounting services, insurance and reinsurance risk transfer, loss control and safety consulting, management information systems, regulatory compliance and relations, risk management consulting, alternative markets plan management, statistical analysis, underwriting and rating and policy issuance. Reinsurance. The alternative markets reinsurance division provides custom designed reinsurance products and services to alternative markets clients, such as captive insurance companies, risk retention groups, public entity insurance trusts and governmental pools. These clients are generally self-insured vehicles which provide insurance buyers with a 6 7 mechanism for retaining part of their own risk, managing their exposures, modifying their loss costs and, ultimately, participating in the underwriting results. The following table sets forth the percentages of revenues, by major source of business, of our alternative markets operations:
Year Ended December 31, ---------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Excess Workers' Compensation 29.3% 32.3% 39.0% 46.1% 48.8% Primary Workers' Compensation 16.7 14.7 6.6 -- -- Insurance Services 25.0 30.5 32.4 35.9 37.5 Reinsurance Division 29.1 22.5 22.0 18.0 13.7 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
REINSURANCE OPERATIONS Our reinsurance operations consist of three operating units, which specialize in underwriting property casualty and surety reinsurance on both a treaty and a facultative basis. Treaty. Our Property Casualty Treaty Division is our largest business unit in terms of personnel and premiums written. This division 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. In 2000, we began to focus on reinsurance lines of business which are more specialty-focused and where knowledge and expertise in a specific area is valued over the capital scale of the reinsurance provider. It is in those situations where we can best utilize our intellectual capital to drive the underwriting process. In the first quarter of 2000, we also began redirecting our reinsurance business away from the property sub-segments, which expose us to weather-related and other natural catastrophes, and decided to withdraw altogether from the Latin American and Caribbean market. In addition, within the treaty sub-segment, we are shifting our focus toward excess of loss treaties, which we believe present more profitable opportunities. We anticipate that these changes will allow us to have more significant participations and greater influence over the terms and conditions of coverage. However, due to the shift in our focus, we are expecting a reduction in reinsurance premiums. Facultative. Our Facultative Division specializes in individual certificate and program facultative business. Its 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. We develop this business through brokers and on a direct basis where the client does not choose to use an intermediary. Fidelity and Surety. Our Fidelity and Surety Division 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. 7 8 The following table sets forth the percentages of gross premiums written, by line, by our reinsurance operations:
Year Ended December 31, --------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Treaty: Casualty and other 50.5% 46.0% 39.7% 38.7% 45.1% Property and related lines 11.4 15.1 19.1 16.1 23.3 Professional and specialty 9.1 10.1 8.4 5.5 4.7 Latin American and Caribbean 2.0 6.2 11.2 13.8 5.7 ----- ----- ----- ----- ----- Total Treaty 73.0 77.4 78.4 74.1 78.8 ----- ----- ----- ----- ----- Facultative 19.4 14.9 14.8 15.4 11.7 Fidelity and Surety 7.6 7.7 6.8 10.5 9.5 ----- ----- ----- ----- ----- 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 our reinsurance operations:
Year Ended December 31, -------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Property 14.4% 20.6% 31.4% 32.7% 35.2% Casualty 85.6 79.4 68.6 67.3 64.8 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
REGIONAL INSURANCE OPERATIONS Our regional subsidiaries provide commercial and personal property casualty insurance products to customers primarily in 39 states. Key clients of this segment are small-to-mid-sized businesses and governmental entities. The regional subsidiaries are organized geographically, which provides them with the flexibility to adapt to local market conditions, while enjoying the superior administrative capabilities and financial strength of the W. R. Berkley group. Our regional insurance operations are conducted through four geographic regions based on markets served: Midwest, New England, South and Mid Atlantic. Our regional insurance subsidiaries primarily sell our insurance products through a network of non-exclusive independent agents who are compensated on a commission basis. Our regional companies underwrite all major commercial and personal lines with an emphasis on commercial lines. The following table sets forth the direct premiums written by each region:
Year Ended December 31, -------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Midwest 42.4% 44.2% 44.5% 45.2% 50.8% New England 24.1 21.4 20.5 20.3 20.4 South 16.9 15.6 16.0 16.6 17.7 Mid Atlantic 16.6 18.8 19.0 17.9 11.1 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
8 9 The following table sets forth the percentages of direct premiums written, by line, by our regional insurance operations:
Year Ended December 31, ----------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Commercial Multi-Peril 22.9% 21.9% 20.7% 20.5% 20.8% Workers' Compensation 18.0 17.8 18.6 19.3 20.1 Automobile: Commercial 22.1 21.7 20.8 19.6 17.4 Personal 12.9 14.3 14.8 15.2 16.4 General Liability 7.1 7.0 6.9 6.8 6.5 Homeowners 6.1 5.8 6.3 7.1 7.9 Fire and Allied Lines 4.0 4.5 4.7 5.0 4.7 Inland Marine 3.5 3.6 3.4 2.0 2.8 Other 3.4 3.4 3.8 4.5 3.4 ----- ----- ----- ----- ----- 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 our regional insurance operations:
Year Ended December 31, ----------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Maine 9.2% 8.2% 9.4% 10.2% 10.8% Iowa 7.2 7.2 7.5 7.7 8.4 Nebraska 7.2 7.1 7.0 7.5 8.2 Texas 6.8 6.3 6.3 6.8 7.5 New Hampshire 6.7 6.0 5.8 5.8 6.0 Kansas 4.6 4.3 4.5 4.6 4.8 Massachusetts 4.6 3.6 2.2 0.2 0.1 North Carolina 4.4 4.8 4.8 4.2 1.5 Colorado 4.3 3.7 3.5 3.5 3.8 Pennsylvania 4.1 5.4 5.0 4.8 2.2 Minnesota 3.9 5.0 5.4 5.3 5.4 Virginia 3.6 3.7 4.1 4.2 3.7 Mississippi 3.3 3.9 5.0 5.7 6.1 South Dakota 3.3 3.5 3.7 4.2 5.4 Vermont 3.2 3.0 3.0 3.2 3.1 Missouri 3.1 3.5 3.4 3.6 3.6 Wisconsin 2.4 2.5 2.5 2.6 2.9 Arkansas 2.2 1.7 1.7 1.8 1.8 Illinois 2.2 2.4 2.6 2.8 3.1 Tennessee 1.7 1.6 1.3 1.0 0.4 Oklahoma 1.6 1.3 1.3 1.3 1.3 South Carolina 1.6 1.4 1.5 1.0 -- Idaho 1.0 1.2 1.4 1.1 0.6 Montana 1.0 1.1 1.2 1.3 1.4 North Dakota 0.9 0.9 1.0 1.2 1.6 Arizona 0.7 0.7 -- -- -- Maryland 0.6 0.7 0.6 0.7 0.7 New Mexico 0.7 0.4 0.1 -- -- Ohio 0.4 0.8 0.6 0.5 0.5 Oregon 0.7 0.7 0.6 0.6 0.5 Other 2.8 3.4 3.0 2.6 4.6 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
9 10 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. We 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. Applying the same approach that we take for our domestic businesses, we believe that decentralized control is key to the success of our international effort. For example, we hire local insurance executives who have specialized knowledge of their customers, markets and products, and we link their compensation to meeting performance objectives. Presently international operations are conducted primarily in Argentina and the Philippines. In Argentina, we offer customers commercial and personal property casualty insurance in addition to life insurance and workers' compensation. In the Philippines, we provide savings and life products to customers, including endowment policies to pre-fund education costs and retirement income. The following table set forth the percentages of direct premiums for our international operations:
Year Ended December 31, ---------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Property casualty 72.3% 72.3% 85.5% 96.3% 100.0% Life 14.7 16.5 10.9 3.7 -- ----- ----- ----- ----- ----- Total Argentina 87.0 88.8 96.4 100.0 100.0 Philippines - Life 13.0 11.2 3.6 -- -- ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
Results by Industry Segment Summary financial information about our operating segments is presented on a GAAP basis in the following table (all amounts include realized capital gains and losses):
Year Ended December 31, ------------------------------------------------------------------ 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Amounts in thousands) Specialty Insurance Total revenues $324,859 $309,068 $311,955 $284,321 $247,131 Income before income taxes 31,836 39,261 85,889 68,088 52,113 Alternative Markets Total revenues 269,025 222,276 205,935 184,733 172,027 Income before income taxes 31,592 24,919 36,501 34,733 32,278 Reinsurance Total revenues 349,164 341,940 297,144 242,086 244,066 Income before income taxes 27,760 14,091 33,858 42,193 32,756 Regional Insurance Total revenues 718,489 702,129 682,519 635,142 529,479 Income (loss) before income taxes 2,548 (97,362) (24,524) 47,624 35,169 International Total revenues 118,234 93,878 80,287 45,360 26,435 Income (loss) before income taxes 6,853 3,535 (7,017) (3,566) (1,283)
10 11 The table below represents summary underwriting ratios, on a statutory accounting basis for our insurance companies and the insurance industry. 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:
Year Ended December 31, ------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Specialty Insurance Operations Loss ratio 73.1% 66.0% 61.8% 61.9% 68.4% Expense ratio 32.0 32.9 31.7 33.3 30.9 Policyholders' dividend ratio .1 .2 .3 .5 .3 ----- ----- ----- ----- ----- Combined ratio 105.2% 99.1% 93.8% 95.7% 99.6% ===== ==== ==== ==== ==== Alternative Markets Operations Loss ratio 71.2% 67.4% 63.7% 73.1% 74.8% Expense ratio 36.2 37.3 36.0 35.8 34.9 ----- ----- ----- ----- ----- Combined ratio 107.4% 104.7% 99.7% 108.9% 109.7% ===== ===== ===== ===== ===== Reinsurance Operations Loss ratio 73.2% 76.0% 74.3% 69.2% 73.3% Expense ratio 32.5 33.2 31.5 32.1 30.1 ----- ----- ----- ----- ----- Combined ratio 105.7% 109.2% 105.8% 101.3% 103.4% ===== ===== ===== ===== ===== Regional Insurance Operations Loss ratio 75.1% 84.7% 76.0% 66.6% 66.8% Expense ratio 33.5 36.1 35.8 34.0 34.1 Policyholders' dividend ratio .8 .7 .9 .5 .6 ----- ----- ----- ----- ----- Combined ratio 109.4% 121.5% 112.7% 101.1% 101.5% ===== ===== ===== ===== ===== International Operations Loss ratio 60.5% 53.3% 59.7% 59.8% 49.7% Expense ratio 36.6 46.4 48.5 54.6 49.9 ----- ----- ----- ----- ----- Combined ratio 97.1% 99.7% 108.2% 114.4% 99.6% ===== ===== ===== ===== ===== Combined Insurance Operations Loss ratio 73.1% 76.5% 71.2% 66.4% 68.7% Expense ratio 33.5 35.4 34.9 34.4 33.1 Policyholders' dividend ratio .4 .3 .5 .4 .4 ----- ----- ----- ----- ----- Combined ratio 107.0% 112.2% 106.6% 101.2% 102.2% ===== ===== ===== ===== ===== Combined Insurance Operations Premiums to surplus ratio (1) 1.8 1.6 1.4 1.2 1.2 ===== ===== ===== ===== ===== Industry Ratios Combined ratio 110.3% (2) 107.1% (3) 104.9% (3) 101.5% (3) 106.3% (3) Premiums to surplus ratio .9% (2) .9% (4) .8% (4) .9% (4) 1.0% (4)
(1) Based on the Company's consolidated net premiums written to statutory surplus. (2) Estimated by A.M. Best. (3) Source: A.M. Best Aggregates & Averages, for stock companies. (4) Source: A.M. Best Aggregates & Averages, for total industry. 11 12 Investments Investment results before income tax effects were as follows:
Year Ended December 31, ---------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Amounts in thousands) Average investments, at cost $3,032,281 $3,045,391 $2,996,707 $2,873,730 $2,538,806 ========== ========== ========== ========== ========== Investment income, before expenses $ 219,955 $ 198,556 $ 206,065 $ 205,812 $ 171,047 ========== ========== ========== ========== ========== Percent earned on average investments 7.3% 6.5% 6.9% 7.2% 6.7% ========== ========== ========== ========== ========== Realized gains (losses) $ 8,364 $ (6,064) $ 25,400 $ 13,186 $ 7,437 ========== ========== ========== ========== ========== Change in unrealized investment gains (losses) (1) $ 117,637 $ (173,084) $ 22,147 $ 66,306 $ (22,409) ========== ========== ========== ========== ==========
(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.
2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- 1 year or less 3.5% 3.0% 1.7% 4.4% 3.1% Over 1 year through 5 years 22.1% 16.4% 16.0% 26.4% 20.7% Over 5 years through 10 years 21.8% 26.0% 24.4% 19.1% 25.0% Over 10 years 27.7% 34.6% 37.2% 29.2% 27.1% Mortgage-backed securities 24.9% 20.0% 20.7% 20.9% 24.1% ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
Loss and Loss Adjustment Expense Reserves In the property casualty insurance 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. Our loss reserves reflect current estimates of the ultimate cost of closing outstanding claims. Other than our excess workers' compensation business and the workers' compensation portion of our reinsurance business, as discussed below, we do not discount our reserves for financial reporting purposes. 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 the computation of estimated ultimate losses. In examining reserve adequacy, several factors are considered, including historical data, legal developments, changes in social attitudes and economic conditions, including the 12 13 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. We discount our liabilities for excess workers' compensation business and the workers' compensation portion of our reinsurance business because of the long period of time over which losses are paid. 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 similar business. 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. The discount rates range from 5.16% to 6.49% with a weighted average rate of 5.85%. The aggregate net discount, after reflecting the effects of ceded reinsurance, is $223,000,000, $196,000,000 and $187,000,000, at December 31, 2000, 1999 and 1998 respectively. To date, known asbestos and environmental claims at our insurance company subsidiaries have not had a material impact on our operations. Environmental claims have not materially impacted us because these subsidiaries generally did not insure the larger industrial companies which are subject to significant environmental exposures. Our net reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $29,422,000 and $30,944,000 at December 31, 2000 and 1999, respectively. The Company's gross reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $57,167,000 and $65,966,000 at December 31, 2000 and 1999, respectively. Net incurred losses and loss expenses for reported asbestos and environmental claims were approximately $1,602,000, $1,371,000 and $2,227,000 in 2000, 1999 and 1998, respectively. Net paid losses and loss expenses for reported asbestos and environmental claims were approximately $3,123,000, $3,819,000 and $2,614,000 in 2000, 1999 and 1998, 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 following table sets forth the components of our gross loss reserves and net provision for losses and loss expense (amounts in thousands):
2000 1999 1998 ---- ---- ---- Gross Reserves: Property casualty $2,475,805 $2,340,890 $2,120,523 Life 58,112 20,348 6,043 ---------- ---------- --------- Total $2,533,917 $2,361,238 $2,126,566 ========== ========== ========== Net provision for losses and loss expense: Property casualty $1,072,632 $1,070,913 $ 911,069 Life 21,779 14,913 3,693 ---------- ---------- --------- Total $1,094,411 $1,085,826 $ 914,762 ========== ========== =========
13 14 The table below provides a reconciliation of the beginning and ending property casualty reserves, on a gross of reinsurance basis (amounts in thousands)(1):
2000 1999 1998 ---- ---- ---- Net reserves at beginning of year $1,723,865 $1,583,304 $1,433,011 ---------- ---------- ---------- Net reserves of acquired companies -- -- 2,189 Net provision for losses and loss expenses: Claims occurring during the current year 1,047,060 1,032,089 944,887 Increase (decrease) in estimates for claims occurring in prior years 14,042 28,351 (42,929) Amortization of discount 11,530 10,473 9,111 ---------- ---------- ---------- 1,072,632 1,070,913 911,069 ---------- ---------- ---------- Net payments for claims: Current year 394,401 433,942 397,787 Prior years 584,047 496,410 365,178 --------- --------- --------- 978,448 930,352 762,965 ---------- ---------- ---------- Net reserves at end of year 1,818,049 1,723,865 1,583,304 Ceded reserves at end of year 657,756 617,025 537,219 ---------- ---------- ---------- Gross reserves at end of year $2,475,805 $2,340,890 $2,120,523 ========== ========== ==========
A reconciliation, as of December 31, 2000, 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 (amounts in thousands): Net reserves reported on a SAP basis $1,801,078 Additions (deductions) to statutory reserves: International property & casualty reserves 40,142 Loss reserve discounting (2) (31,289) Outstanding drafts reclassified as reserves 13,488 Other (5,370) ---------- Net reserves reported on a GAAP basis 1,818,049 Ceded reserves reclassified as assets 657,756 ---------- Gross reserves reported on a GAAP basis $2,475,805 ==========
(1) Claims occurring during the current year is net of discount of $39,990,000, $22,923,754 and $20,354,000 for the years ended December 31, 2000, 1999 and 1998, respectively. (2) For statutory purposes, we use a discount rate of 4.5% as permitted by the Department of Insurance of the State of Delaware. For GAAP purposes, we use a discount rate based on the U. S. Treasury yield curve weighted for the expected payout period, as described above. The following table presents the development of net reserves for 1990 through 2000. 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 us. 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 1990 reserves have developed a $141 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 1990 is reserved for $2,000 as of December 31, 1990. Assuming this claim was settled for $2,300 in 2000, the $300 deficiency would appear as a deficiency in each year from 1990 through 1999. 14 15
Year Ended December 31, 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 - ----------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (Amounts in millions) Discounted net reserves for losses and loss expenses $ 643 $ 680 $ 710 $ 783 $ 895 $ 1,209 $ 1,333 $1,433 $1,583 $ 1,724 $1,818 Reserve discounting -- -- -- -- -- 152 172 190 187 196 223 Undiscounted net reserve Net Re-estimated as of: One year later 635 676 704 776 885 1,346 1,481 1,580 1,798 1,934 Two years later 632 659 694 755 872 1,305 1,406 1,566 1,735 Three years later 619 650 665 744 833 1,236 1,356 1,446 Four years later 612 637 655 708 789 1,195 1,239 Five years later 603 631 630 672 764 1,112 Six years later 588 609 600 649 706 Seven years later 569 585 579 599 Eight years later 550 568 541 Nine years later 534 534 Ten years later 502 Cumulative redundancy (deficiency) undiscounted 141 146 169 184 189 249 266 177 35 (14) Cumulative amount of net liability paid through: One year later $ 139 $ 160 $ 169 $ 186 $ 221 $ 265 $ 332 $ 365 $ 496 $ 584 Two years later 235 264 275 221 355 434 523 574 795 Three years later 304 332 306 291 445 550 635 737 Four years later 345 346 344 334 501 616 714 Five years later 377 371 362 363 528 655 Six years later 395 384 375 373 543 Seven years later 402 394 376 373 Eight years later 409 392 370 Nine years later 405 383 Ten years later 394 Discounted net reserves 783 895 1,209 1,333 1,433 1,583 1,724 1,818 Ceded Reserves 1,233 1,176 451 450 477 538 617 658 ----- ------ ------- ------- ------ ------ ------- ------ Discounted gross reserves 2,016 2,071 1,660 1,783 1,910 2,121 2,341 2,476 Reserve discounting -- -- 192 216 241 248 250 286 ----- ------ ------- ------- ------ ------ ------- ------ Gross reserve $2,016 2,071 $1,852 $1,999 $2,151 $2,369 $ 2,591 $2,762 ===== ====== ======= ======= ====== ====== ======= ====== Gross Re-estimated as of: One year later 2,010 2,043 1,827 1,965 2,132 2,390 2,653 Two years later 1,966 2,026 1,789 1,959 2,096 2,389 Three years later 1,955 1,983 1,754 1,909 2,010 Four years later 1,913 1,951 1,733 1,823 Five years later 1,855 1,928 1,681 Six years later 1,815 1,899 Seven years later 1,788 Gross cumulative redundancy (deficiency) undiscounted $ 228 $ 172 $ 171 $ 176 $ 141 $ (20) $ (62) ====== ======= ======= ====== ====== ======= ======
15 16 Reinsurance We follow the customary industry practice of reinsuring a portion of our exposures and paying to reinsurers a part of the premiums received on the policies that we write. 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. We monitor the financial condition of our reinsurers and attempt to place our coverages only with substantial, financially sound carriers. As a result, generally the reinsurers who reinsure our casualty insurance must have an A.M. Best rating of "A (Excellent)" or better with $250 million in policyholder surplus and the reinsurers who cover our property insurance must have an A.M. Best rating of "A-(Excellent)" or better with $150 million in policyholder surplus. Regulation Our insurance subsidiaries are subject to varying degrees of regulation and supervision in the jurisdictions in which they do business. They are subject to 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. Our 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. Our E&S and reinsurance subsidiaries generally operate free of rate and form regulation. In addition to regulatory supervision of our insurance subsidiaries, we are subject to state statutes governing insurance holding company systems. Typically, such statutes require that we periodically file information with the state insurance commissioner, including information concerning our 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 our outstanding voting securities would be required to obtain regulatory approval of the purchase. Under Florida law, which is applicable to us due to our ownership of Carolina Casualty Insurance Company, a Florida domiciled insurer, the acquisition of more than 5% of our 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." 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 recently completed a process intended to codify statutory accounting practices for certain insurance enterprises effective January 1, 2001. The accounting codification will not have a material impact on our insurance subsidiaries' results of operations or statutory surplus. The NAIC is also considering model laws on commercial lines deregulation. 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. No assurance can be given that future legislative or regulatory changes resulting from such activity will not adversely affect our insurance subsidiaries. The NAIC utilizes a Risk Based Capital (RBC) formula which is designed to measure the adequacy of an insurer's statutory surplus in relation to the risks inherent in its business. The RBC formula develops a risk adjusted target level of adjusted statutory capital by applying certain factors to various asset, premium and reserve items. The RBC Model Law provides for four incremental levels of regulatory attention for insurers whose surplus is below the calculated RBC target. These levels of attention range in severity from requiring the insurer to submit a plan for corrective action to actually placing the insurer under regulatory control. The RBC of each of our domestic insurance subsidiaries was above the authorized control level RBC as of December 31, 2000. The Gramm-Leach-Bliley Act, or Financial Services Modernization Act of 1999 (the "Act"), was enacted in 1999 and significantly affects the financial services industry, including 16 17 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 adopted a model regulation on privacy, and a model law on agents' licensing, which have been enacted or are currently being considered by various state legislatures and insurance departments. It is not anticipated that the insurance regulatory aspects of the Act will have a material effect on our operations. Our 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 our 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. We receive funds from our insurance subsidiaries in the form of dividends and fees for certain management services. Annual dividends in excess of maximum amounts prescribed by state statutes 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 businesses are competitive, with over 2,000 insurance companies transacting business in the United States. We compete directly with a large number of these companies. Our strategy in this highly fragmented industry is to seek specialized areas or geographic regions where our insurance subsidiaries can gain a competitive advantage by responding quickly to changing market conditions. Each of our 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. Competition for specialty and alternative markets business comes from other specialty insurers, regional carriers, large national multi-line companies and reinsurers. Under certain market conditions, standard carriers also compete for E&S business. With the implementation of commercial lines deregulation (see "Regulation"), competition for E&S business might increase significantly. Competition for the reinsurance business comes from domestic and foreign reinsurers, which place their business either on a direct basis or through the broker market. 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. 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 multinational companies. 17 18 Employees As of March 5, 2001, we employed 4,426 persons. Of this number, our subsidiaries employed 4,378 persons, of whom 2,256 were executive and administrative personnel and 2,122 were clerical personnel. We employed the remaining 48 persons at the parent company and in investment operations, of whom 36 were executive and administrative personnel and 12 were clerical personnel. Other Information about the Company's business We maintain 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 our 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. We have no customer which accounts for 10 percent or more of our consolidated revenues. Compliance by W. R. Berkley 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 our capital expenditures, earnings or competitive position. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS Our business faces significant risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations. If any of the events or circumstances described as risks below actually occurs, our business, results of operations or financial condition could be materially and adversely affected. OUR RESULTS MAY FLUCTUATE AS A RESULT OF MANY FACTORS, INCLUDING CYCLICAL CHANGES IN THE INSURANCE AND REINSURANCE INDUSTRY. The results of companies in the property casualty insurance industry historically have been subject to significant fluctuations and uncertainties. The industry's profitability can be affected significantly by: - - rising levels of actual costs that are not known by companies at the time they price their products; - - volatile and unpredictable developments (including weather-related and other natural catastrophes); - - changes in reserves resulting from the general claims and legal environments as different types of claims arise and judicial interpretations relating to the scope of insurers' liability develop; - - fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested capital and may impact the ultimate payout of loss amounts; and - - the long-tail and volatile nature of the reinsurance business, which may impact our operating results and limit opportunities for adequate returns. The demand for property casualty insurance can also vary significantly, rising as the overall level of economic activity increases and falling as such activity decreases. The property casualty insurance industry historically has a cyclical nature. Recently, the property casualty insurance industry and especially the commercial lines business have been very competitive. These fluctuations in demand and competition could produce underwriting results that would have a negative impact on our results of operations and financial condition. WE FACE SIGNIFICANT COMPETITIVE PRESSURES IN OUR BUSINESSES. We compete with a large number of other companies in our selected lines of business. We compete, and will continue to compete, with major U.S. and non-U.S. insurers and reinsurers, other regional companies, as well as mutual companies, specialty insurance companies, underwriting agencies and diversified financial services companies. Some of our competitors, 18 19 particularly in the reinsurance business, have greater financial and marketing resources than we do. A number of new, proposed or potential legislative or industry developments could further increase competition in our industry. These developments include: - - the enactment of the Gramm-Leach-Bliley Act of 1999, which could result in increased competition from new entrants to our markets; - - the implementation of commercial lines deregulation in several states, which could increase competition from standard carriers for our excess and surplus lines of insurance business; - - programs in which state-sponsored entities provide property insurance in catastrophe prone areas or other alternative markets types of coverage; and - - changing practices caused by the Internet, which have led to greater competition in the insurance business. New competition from these developments could cause the supply and/or demand for insurance or reinsurance to change, which could adversely affect our results of operations and financial condition. In addition to competition in the operation of our businesses, we face competition from a variety of sources in attracting and retaining qualified employees. We can provide no assurance that we will maintain our current competitive position in the markets in which we operate, or that we will be able to expand our operations into new markets. If we fail to do so, our businesses could be materially adversely affected. OUR ACTUAL CLAIMS LOSSES MAY EXCEED OUR RESERVES FOR CLAIMS. We maintain loss reserves to cover our estimated liability for unpaid losses and loss adjustment expenses, including legal and other fees as well as a portion of our general expenses, for reported and unreported claims incurred as of the end of each accounting period. Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what we expect the ultimate settlement and administration of claims will cost. These estimates, which generally involve actuarial projections, are based on our assessment of facts and circumstances then known, as well as estimates of future trends in claims severity, frequency, judicial theories of liability and other factors. In some cases, long-tail lines of business such as excess workers' compensation and the workers' compensation portion of our reinsurance business are reserved on a discounted basis. The variables described above are affected by both internal and external events, such as changes in claims handling procedures, inflation, judicial and litigation trends and legislative changes. The risk of the occurrence of such events is especially present in our specialty lines and reinsurance businesses. Many of these items are not directly quantifiable in advance. In some areas of our business, the level of reserves we establish is dependent in part upon the actions of third parties that are beyond our control. In our reinsurance and excess workers' compensation businesses, we may not establish sufficient reserves if third parties do not give us advance notice or provide us with appropriate information regarding certain matters. Additionally, there may be a significant delay between the occurrence of the insured event and the time it is reported to us. The inherent uncertainties of estimating reserves are greater for certain types of liabilities, where the various considerations affecting these types of claims are subject to change and long periods of time may elapse before a definitive determination of liability is made. Reserve estimates are continually refined in an ongoing process as experience develops and further claims are reported and settled. Adjustments to reserves are reflected in the results of the periods in which such estimates are changed. Because setting reserves is inherently uncertain, we can provide no assurance that our current reserves will prove adequate in light of subsequent events. WE ANTICIPATE INCREASING OUR LEVEL OF RETENTION IN OUR BUSINESS. We anticipate increasing our retention levels in 2001 for our operations generally due to changes in market conditions and the pricing environment. We expect to purchase less reinsurance (the process by which we transfer, or cede, part of the risk we have assumed to a reinsurance company), thereby retaining more risk. As a result, our earnings could be more volatile, and increased severities could have a material adverse effect upon our results of operations and financial condition. A significant change in our retention levels could also cause our historical financial results, including compound annual growth rates, to be inaccurate indicators of our future performance on a segment or consolidated basis. 19 20 AS A PROPERTY CASUALTY INSURER, WE FACE LOSSES FROM CATASTROPHES. Property casualty insurers are subject to claims arising out of catastrophes that may have a significant effect on their results of operations, liquidity and financial condition. Catastrophe losses have had a significant impact on our results. Catastrophes can be caused by various events, including hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter weather and fires. The incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophes are restricted to small geographic areas; however, hurricanes and earthquakes may produce significant damage in large, heavily populated areas. Catastrophes can cause losses in a variety of our property casualty lines, and most of our past catastrophe-related claims have resulted from severe storms. Seasonal weather variations may affect the severity and frequency of our losses. Insurance companies are not permitted to reserve for a catastrophe until it has occurred. It is therefore possible that a catastrophic event or multiple catastrophic events could have a material adverse effect upon our results of operations and financial condition. WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION. We are subject to extensive governmental regulation and supervision. Most insurance regulations are designed to protect the interests of policyholders rather than stockholders and other investors. This system of regulation, generally administered by a department of insurance in each state in which we do business, relates to, among other things: [ ] standards of solvency, including risk-based capital measurements; [ ] restrictions on the nature, quality and concentration of investments; [ ] requiring certain methods of accounting; [ ] requiring reserves for unearned premium, losses and other purposes; and [ ] potential assessments for the provision of funds necessary for the settlement of covered claims under certain policies provided by impaired, insolvent or failed insurance companies. State insurance departments conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies, holding company issues and other matters. Recently adopted federal financial services modernization legislation is expected to lead to additional federal regulation of the insurance industry in the coming years. Also, foreign governments regulate our international operations. We can provide no assurance that we have or can maintain all required licenses and approvals or that our business fully complies with the wide variety of applicable laws and regulations or the relevant authority's interpretation of the laws and regulations. Also, some regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or monetarily penalize us. That type of action could have a material adverse effect on our business. Also, changes in the level of regulation of the insurance industry (whether federal, state or foreign), or changes in laws or regulations themselves or interpretations by regulatory authorities, could have a material adverse effect on our business. WE ARE RATED BY A.M. BEST AND STANDARD & POOR'S, AND A DECLINE IN THESE RATINGS COULD ADVERSELY AFFECT OUR OPERATIONS. Ratings have become an increasingly important factor in establishing the competitive position of insurance companies. Our insurance company subsidiaries are rated by A.M. Best and certain of our insurance company subsidiaries are rated for their claims-paying ability by Standard & Poor's Corporation, or Standard & Poor's. A.M. Best and Standard & Poor's ratings reflect their opinions of an insurance company's financial strength, operating performance, strategic position and ability to meet its obligations to policyholders, are not evaluations directed to investors and are not recommendations to buy, sell or hold our securities. Our ratings are subject to periodic review by A.M. Best and Standard & Poor's and the continued retention of those ratings cannot be assured. The Standard & Poor's 2001 outlook for the U.S. property casualty insurance industry and the Standard & Poor's mid-year 2000 outlook for the U.S. reinsurance industry were negative. Since March 2000, Standard & Poor's has given us a negative rating outlook. While Standard & Poor's recently affirmed our rating of "A+", as long as we remain on negative rating outlook, a downgrade in our rating is possible. If our ratings 20 21 are reduced from their current levels by A.M. Best and/or Standard & Poor's, our results of operations could be adversely affected. A SIGNIFICANT AMOUNT OF OUR ASSETS IS INVESTED IN FIXED INCOME SECURITIES AND IS SUBJECT TO MARKET FLUCTUATIONS. Our investment portfolio consists substantially of fixed income securities. The fair market value of these assets and the investment income from these assets fluctuate depending on general economic and market conditions. With respect to our investments in fixed income securities, the fair market value of these investments generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us from future investments in fixed income securities will generally increase or decrease with interest rates. In addition, actual net investment income and/or cash flows from investments that carry prepayment risk (such as mortgage-backed and other asset-backed securities) may differ from those anticipated at the time of investment as a result of interest rate fluctuations. Because substantially all of our fixed income securities are classified as available for sale, changes in the market value of our securities are reflected in our balance sheet. Similar treatment is not available for liabilities. Therefore, interest rate fluctuations could adversely affect our results of operations and financial condition. WE INVEST SOME OF OUR ASSETS IN MERGER ARBITRAGE, WHICH IS SUBJECT TO CERTAIN RISKS. We invest a portion of our investment portfolio in merger arbitrage. As of December 31, 2000, our investment in merger arbitrage securities represented approximately 14% of our total investment portfolio. 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). While our merger arbitrage positions are generally hedged against market declines, these equity investments are exposed primarily to the risk associated with the completion of announced deals, which are subject to regulatory as well as political and other risks. OUR PREMIUM WRITINGS AND PROFITABILITY ARE AFFECTED BY THE AVAILABILITY OF REINSURANCE. We purchase reinsurance for significant amounts of risk underwritten by our insurance company subsidiaries, especially catastrophe risks. We also purchase reinsurance on risks underwritten by others which we reinsure (a retrocession). Market conditions beyond our control determine the availability and cost of the reinsurance protection we purchase, which may affect the level of our business and profitability. Our reinsurance facilities are generally subject to annual renewal. We can provide no assurance that we can maintain our current reinsurance facilities or that we can obtain other reinsurance facilities in adequate amounts and at favorable rates. If we are unable to renew our expiring facilities or to obtain new reinsurance facilities, either our net exposures would increase or, if we are unwilling to bear an increase in net exposures, we would have to reduce the level of our underwriting commitments, especially catastrophe exposed risks. Either of these potential developments could have a material adverse effect on our business. WE DO NOT YET KNOW ALL THE EFFECTS OF THE RECENT RESTRUCTURING OF CERTAIN OF OUR SUBSIDIARIES. In 2000, we implemented a restructuring plan, pursuant to which we refocused our domestic reinsurance operations. While this restructuring is substantially complete, all of its operating effects are not yet known, and any difficulties caused by such restructuring could adversely affect our results of operations and financial condition. WE ARE AN INSURANCE HOLDING COMPANY AND, THEREFORE, MAY NOT BE ABLE TO RECEIVE DIVIDENDS IN NEEDED AMOUNTS. Our principal assets are the shares of capital stock of our insurance company subsidiaries. We have to rely on dividends from our insurance company subsidiaries to meet our obligations for paying principal and interest on outstanding debt obligations and for paying dividends to stockholders and corporate expenses. The payment of dividends by our insurance company subsidiaries is subject to regulatory restrictions and will depend on the surplus and future earnings of these subsidiaries, as well as the regulatory restrictions. As a result, we may not be able to receive dividends from these subsidiaries at times and in amounts necessary to meet our obligations or pay dividends. 21 22 WE MAY NOT FIND SUITABLE ACQUISITION CANDIDATES AND EVEN IF WE DO, WE MAY NOT SUCCESSFULLY INTEGRATE ANY SUCH ACQUIRED COMPANIES. As part of our present strategy, we continue to evaluate possible acquisition transactions on an ongoing basis, and at any given time, we may be engaged in discussions with respect to possible acquisitions. We can provide no assurance that we will be able to identify suitable acquisition transactions, that such transactions will be financed and completed on acceptable terms or that our future acquisitions will be successful. The process of integrating any companies we do acquire may have a material adverse effect on our results of operations and financial condition. IF WE DO NOT INVEST SUBSTANTIAL AMOUNTS IN OUR INFORMATION SYSTEMS AND TECHNOLOGY, OUR BUSINESS MAY BE HARMED. Integrated management information and processing systems are vital to our ability to monitor costs, collect receivables and achieve operating efficiencies. As we continue our growth, the need for sophisticated information systems and technology will increase significantly. The cost of implementing such systems has been, and is expected to continue to be, substantial. The failure of our information or processing systems, or our failure to upgrade systems as necessary, could have a material adverse effect on our results of operations and financial condition. WE CANNOT GUARANTEE THAT OUR REINSURERS WILL PAY IN A TIMELY FASHION, IF AT ALL. We purchase reinsurance by transferring part of the risk that we have assumed (known as ceding) to a reinsurance company in exchange for part of the premium we receive in connection with the risk. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, it does not relieve us (the reinsured) of our liability to our policyholders or, in cases where we are a reinsurer, to our reinsureds. Accordingly, we bear credit risk with respect to our reinsurers. We can provide no assurance that our reinsurers will pay the reinsurance recoverables owed to us or that they will pay such recoverables on a timely basis. OUR INTERNATIONAL OPERATIONS EXPOSE US TO RISKS. Certain assets held by our foreign subsidiaries are subject to foreign currency risk. Our principal area of exposure relates to fluctuations in exchange rates between each of the Argentinean and Philippine peso and the U.S. dollar. Consequently, a change in the exchange rate between the U.S. dollar and either the Argentinean or Philippine peso could have an adverse effect on our results of operations and financial condition. We are additionally subject to political and economic risks in these countries. ITEM 2. PROPERTIES W. R. Berkley and its subsidiaries own or lease office buildings or office space suitable to conduct their operations. The owned property is as follows:
Location Company Size (sq. ft.) -------- ------- -------------- Cherry Hill, New Jersey Admiral Insurance Company 42,000 Lincoln, Nebraska Union Insurance Company 43,000 Lincoln, Nebraska Continental Western Insurance Company 20,000 Luverne, Minnesota Tri-State Insurance Company 33,000 Meridian, Mississippi Great River Insurance Company 30,000 Scottsdale, Arizona Nautilus Insurance Company 34,000 Urbandale, Iowa Continental Western Insurance Company 80,000 Westbrook, Maine Acadia Insurance Company 54,000
In addition, W. R. Berkley and its subsidiaries lease office facilities in various other cities under leases with varying terms and expiration dates. ITEM 3. LEGAL PROCEEDINGS Claims under insurance policies written by our 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 22 23 staff adjuster. If a claim or loss cannot be settled and results in litigation, the subsidiary generally retains outside counsel. At present, neither W. R. Berkley nor any of its subsidiaries is engaged in any litigation known to us which is expected to have a material adverse effect upon our business. As is common with property casualty insurance companies, our 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 2000 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 Our Common Stock 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 ---- --- --------- 2000: Fourth Quarter $ 47.63 $ 30.75 $ .13 cash Third Quarter 35.23 18.38 $ .13 cash Second Quarter 23.19 18.13 $ .13 cash First Quarter 23.48 14.00 $ .13 cash 1999: Fourth Quarter $ 23.75 $ 19.81 $ .13 cash Third Quarter 27.94 21.63 $ .13 cash Second Quarter 29.13 24.38 $ .13 cash First Quarter 36.25 23.75 $ .12 cash
The closing price of the Common Stock on March 7, 2001, as reported on the Nasdaq National Market, was $47.00 per share. The approximate number of record holders of the Common Stock on March 7, 2001 was 671. On November 7, 2000 we made a restricted share grant of 10,000 shares of common stock to an employee. The grant was made in consideration of past and future services pursuant to a restricted shares agreement. 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, 2000
Year Ended December 31, ------------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Amounts in thousands, except per share data) Net premiums written $ 1,506,244 $ 1,427,719 $ 1,346,254 $ 1,177,641 $ 1,052,511 Net premiums earned 1,491,014 1,414,384 1,278,399 1,111,747 981,221 Net investment income 210,448 190,316 202,420 199,588 164,490 Management fees and commissions 68,049 72,344 70,727 71,456 69,246 Realized investment gains (losses) 8,364 (6,064) 25,400 13,186 7,437 Total revenues 1,781,287 1,673,668 1,582,517 1,400,310 1,225,166 Interest expense 47,596 50,801 48,819 48,869 31,963 Income (loss) before Federal and foreign income taxes 40,851 (79,248) 62,781 129,241 115,049 Federal and foreign income tax (expense) benefit (2,451) 45,766 (5,465) (30,668) (25,102) Minority interest (2,162) (566) 1,444 474 316 Preferred dividends -- (497) (7,548) (7,828) (13,909) Net income (loss) before change in accounting and extraordinary gain (loss) 36,238 (34,545) 51,212 91,219 76,354 Cumulative effect of change in accounting -- (3,250) -- -- -- Extraordinary gain (loss) -- 735 (5,017) -- -- Net income (loss) attributable to common stockholders 36,238 (37,060) 46,195 91,219 76,354 Data per common share: Basic: Net income (loss) before change in accounting and extraordinary item 1.41 (1.35) 1.82 3.09 2.56 Net income (loss) 1.41 (1.44) 1.64 3.09 2.56 Diluted: Net income (loss) before change in accounting and extraordinary income 1.39 (1.34) 1.76 3.02 2.53 Net income (loss) 1.39 (1.43) 1.59 3.02 2.53 Stockholders' equity 26.54 23.10 28.80 28.72 25.13 Cash dividends declared $ .52 $ .52 $ .48 $ .42 $ .35 Weighted average shares outstanding: Basic 25,632 25,823 28,194 29,503 29,792 Diluted 25,991 25,927 29,115 30,185 30,130 Investments (1) $ 3,111,602 $ 2,975,929 $ 3,233,458 $ 3,106,900 $ 2,991,606 Total assets 5,022,070 4,784,791 4,983,431 4,544,318 4,136,973 Reserves for losses and loss expenses 2,533,917 2,361,238 2,126,566 1,909,688 1,782,703 Long-term debt 370,158 394,792 394,444 390,415 390,104 Trust Preferred Securities 198,169 198,126 207,988 207,944 207,901 Stockholders' equity 680,896 591,778 861,281 947,292 879,732
(1) Including trading account receivable from brokers and clearing organizations and trading account securities sold but not yet purchased. 24 25 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 22 through 29 of the registrant's 2000 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 27 and 28 of the registrant's 2000 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 30 through 46 of registrant's 2000 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 5, 2001:
Name Age Position ---- --- -------- William R. Berkley 55 Chairman of the Board and Chief Executive Officer Eugene G. Ballard 48 Senior Vice President - Chief Financial Officer and Treasurer Robert P. Cole 50 Senior Vice President - Regional Operations E. LeRoy Heer 62 Senior Vice President - Chief Corporate Actuary H. Raymond Lankford 58 Senior Vice President - Alternative Markets Operations Ira S. Lederman 47 Senior Vice President - General Counsel Insurance Operations and Assistant Secretary James G. Shiel 41 Senior Vice President - Investments Edward A. Thomas 52 Senior Vice President - Specialty Operations William R. Berkley, Jr. 28 Vice President Clement P. Patafio 36 Vice President - Corporate Controller George G. Daly 60 Director Robert B. Hodes 75 Director Henry Kaufman 73 Director Richard G. Merrill 70 Director Jack H. Nusbaum 60 Director Mark L. Shapiro 56 Director Martin Stone 72 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, except William R. Berkley, Jr. is the son of William R. Berkley. Each year the term of office of one class expires. In May 2000, the term of a class consisting of three directors expired. William R. Berkley, George G. Daly and Robert R. Hodes were elected as directors to hold office for a term of three years until the Annual Meeting of Stockholders in 2003 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 and Chief Operating Officer, 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 Bancorp, Inc., 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 2003. 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. 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 New York, which was purchased by Folksamerica Reinsurance Company in 1996, and prior to that was associated with reinsurers for twenty years. E. LeRoy Heer (deceased on March 18, 2001) had been Senior Vice President - Chief Corporate Actuary since January 1991. Prior thereto, he had been Vice President - Corporate Actuary since May 1978. 26 27 H. Raymond Lankford 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 and General Counsel-Insurance Operations since August 2000. Additionally, he has been General Counsel of Berkley International, LLC since January 1998. He has been Assistant Secretary since May 1986. Previously, he was Assistant General Counsel from July 1989 until August 2000 and 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. William R. Berkley, Jr. has been a Vice President of the Company since May 2000, and additionally serves as President of Berkley International, LLC since January 2001. He served previously as Executive Vice President of Berkley International, LLC from March 2000. Mr. Berkley joined the Company in September 1997. From July 1995 to August 1997, Mr. Berkley served in the Corporate Finance Department of Merrill Lynch Investment Company. Mr. Berkley is also a director of Associated Community Bancorp, Inc., Middlesex Bank and Trust Company, Master Protection Holdings, Inc. and Interlaken Capital, Inc. 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. 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 2003. 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.; Leveraged Capital Holdings, N.V. and R.V.I. Guaranty, Ltd. Mr. Hodes' current term as a director expires in 2003. Henry Kaufman has been a director of the Company since 1994. Dr. Kaufman has been President of Henry Kaufman & Company, Inc., an investment, economic and financial consulting company since its establishment in 1988. Dr. Kaufman serves as Chairman Emeritus 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 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. 27 28 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 Associated Community Bankcorp, Inc., 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 has been the controlling investor in Sports Tech, LLC, an operator of four sports performance training centers for elite athletes, since the second quarter of 2000. Previously, Mr. Stone was Chairman of Professional Sports, Inc. (the Tucson Sidewinders AAA baseball team) and Chairman of Adirondack Corporation, each for more than the past five years. Mr. Stone is 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. 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, 2000, 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, 2000, 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, 2000, 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, 2000, 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, 2000, 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 22 through 46 of the Company's 2000 Annual Report to Stockholders, are incorporated by reference in this Annual Report on Form 10-K. With the exception of the aforementioned information, the 2000 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 2000 Annual Report to Stockholders. Financial statement schedules not included in this Annual Report on Form 10-K have been omitted because 28 29 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
(b) Reports on Form 8-K During the quarter ended December 31, 2000, the registrant filed the following Reports on Form 8-K: Report dated October 30, 2000 with respect to a press release relating to earnings of the Company for the third quarter of 2000 (under Item 5 of Form 8-K). (c) Exhibits The exhibits filed as part of this report are listed on pages 32 and 33 hereof. 29 30 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 22, 2001 30 31 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 - ------------------------------------------------ President William R. Berkley March 22, 2001 Principal executive officer /s/ George G. Daly Director March 22, 2001 - ------------------------------------------------ George G. Daly /s/ Robert B. Hodes Director March 22, 2001 - ------------------------------------------------ Robert B. Hodes /s/ Henry Kaufman Director March 22, 2001 - ------------------------------------------------ Henry Kaufman /s/ Richard G. Merrill Director March 22, 2001 - ------------------------------------------------ Richard G. Merrill /s/ Jack H. Nusbaum Director March 22, 2001 - ------------------------------------------------ Jack H. Nusbaum /s/ Mark L. Shapiro Director March 22, 2001 - ------------------------------------------------ Mark L. Shapiro /s/ Martin Stone Director March 22, 2001 - ------------------------------------------------ Martin Stone /s/ Eugene G. Ballard Senior Vice President, March 22, 2001 - ------------------------------------------------ Chief Financial Officer and Eugene G. Ballard Treasurer Principal financial officer /s/ Clement P. Patafio Vice President, March 22, 2001 - ------------------------------------------------ Corporate Controller Clement P. Patafio
31 32 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) Loan Agreement, dated as of January 5, 2001, between the Company and William R. Berkley (filed herewithin). (10.2) First Amendment to the Credit Agreement, dated as of December 8, 2000, between the Company and Bank of America, NA (incorporated by reference as Exhibit 10.1 of the Company's Current Report on Form 8-K (File No. 0-7849) filed with the Commission on January 24, 2001). (10.3) Augmenting Agreement, dated as of December 14, 2000, among the Company, Bank of America, NA, as Administrative Agent, and Wells Fargo Bank, NA (incorporated by reference as Exhibit 10.2 of the Company's Current Report on Form 8-K (File No. 0-7849) filed with the Commission on January 24, 2001). (10.4) Amendment dated March 9, 2000 to the First Amended and Restated W. R. Berkley Corporation 1992 Stock Option Plan (incorporated by reference to exhibit 4.1 of the Company's Quarterly Report on Form 10-Q (File No. 0-7849) filed with the Commission on May 12, 2000). (10.5) 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 (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 27, 2000). (10.6) 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). (10.7) 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).
32 33 (10.8) 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). (10.9) 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. (10.10) 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). (10.11) 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). (10.12) 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). (10.13) 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). (10.14) 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). (10.15) Separation Agreement dated January 24, 2000 between John D. Vollaro and the Company (incorporated by reference to Exhibit 10.12 of the Company's Annual Report on Form 10-K (File No. 0-7849) filed with the Commission on March 27, 2000). (13) 2000 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).
33 34 (21) Following is a list of the Company's significant subsidiaries and other operating entities. 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 ---------------- ---------- 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 Administrators Company, LLC Minnesota 100% Nautilus Insurance Company: Arizona 100% Great Divide Insurance Company North Dakota 100% Key Risk Management Services, Inc. North Carolina 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% Berkley Insurance Company Delaware 100% Berkley Regional Insurance Company Delaware 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. Delaware 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% Key Risk Insurance Company North Carolina 100% Midwest Employers Casualty Company: Ohio 100% Preferred Employers Insurance Company California 100% Riverport Insurance Company of California California 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 23, 2001, except for Note 20 which is as of March 6, 2001 incorporated by reference in the Form 10-K, included the related financial statement schedules as of December 31, 2000, and for each of the years in the three-year period ended December 31, 2000. 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 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 22, 2001 35 36 Schedule II W. R. Berkley Corporation Condensed Financial Information of Registrant Balance Sheets (Parent Company) (Amounts in thousands)
December 31, ------------------------------- 2000 1999 ----------- ----------- Assets Cash (including invested cash) $ 16,619 $ 22,081 Fixed maturity securities: Held to maturity, at cost (fair value $4,960 and $5,523) 4,960 5,523 Available for sale at fair value (cost $406 and $714) 396 705 Equity securities, at fair value: Available for sale (cost $698 and $698) 590 1,110 Trading account (cost $864 and $773) 864 773 Investments in subsidiaries 1,173,775 1,091,312 Due from subsidiaries 47,287 52,124 Current Federal income taxes receivable 6,482 9,911 Deferred Federal income taxes 50,080 82,896 Real estate, furniture & equipment at cost, less accumulated depreciation 18,390 18,962 Other assets 4,762 4,654 ----------- ----------- $ 1,324,205 $ 1,290,051 =========== =========== Liabilities, Debt and Stockholders' Equity Liabilities: Due to subsidiaries (principally deferred income taxes) $ 82,304 $ 86,680 Short-term debt 10,000 35,000 Deferred Federal income taxes -- -- Other liabilities 26,469 27,468 ----------- ----------- 118,773 149,148 ----------- ----------- Long-term debt 326,365 350,999 Subsidiary trust junior subordinated debt 198,169 198,126 Stockholders' equity: Preferred stock -- -- Common stock 7,281 7,281 Additional paid-in capital 334,061 331,640 Retained earnings (including accumulated undistributed net income of subsidiaries of $410,794 and $386,470 in 2000 and 1999, respectively) 574,345 551,401 Accumulated other comprehensive income (loss) 19,371 (44,500) Treasury stock, at cost (254,162) (254,044) ----------- ----------- 680,896 591,778 ----------- ----------- $ 1,324,205 $ 1,290,051 =========== ===========
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, ------------------------------------------- 2000 1999 1998 -------- --------- -------- Management fees and investment income from affiliates, including dividends of $44,533, $96,817 and $65,836 for 2000, 1999 and 1998, respectively $ 49,585 $ 102,963 $ 72,812 Realized investment gains (losses) (558) 321 -- Other income 4,051 3,975 10,506 -------- --------- -------- Total revenues 53,078 107,259 83,318 Expenses, other than interest expense 18,871 20,978 22,201 Restructuring charge -- 1,502 -- Interest expense 46,521 49,207 47,571 -------- --------- -------- Income (loss) before Federal income taxes (12,314) 35,572 13,546 -------- --------- -------- Federal income taxes: Federal income taxes provided by Subsidiaries on a separate return Basis 24,858 8,474 44,370 Federal income tax benefit (provision) on a Consolidated return basis (630) 48,958 (5,115) -------- --------- -------- Net benefit 24,228 57,432 39,255 -------- --------- -------- Income (loss) before undistributed equity in net income of subsidiaries and preferred dividends 11,914 93,004 52,801 Equity in undistributed net income (loss) of subsidiaries 24,324 (130,232) 6,835 Preferred dividends -- (567) (8,424) -------- --------- -------- Net income (loss) before extraordinary gain (loss) 36,238 37,795 51,212 Extraordinary gain (loss) -- 735 (5,017) -------- --------- -------- Net income (loss) attributable to common stockholders $ 36,238 $ (37,060) $ 46,195 ======== ========= ========
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, -------------------------------------------- 2000 1999 1998 -------- --------- --------- Cash flows from operating activities: Net income (loss) before preferred dividends and extraordinary items $ 36,238 $ (37,298) $ 59,636 Adjustments to reconcile net income to net cash flows provided by operating activities: Equity in undistributed net income of subsidiaries (24,324) 130,232 (6,835) Tax payments received from subsidiaries 28,389 24,105 63,199 Federal income taxes provided by subsidiaries on a separate return basis (24,859) (8,473) (44,370) Change in Federal income taxes 2,478 (35,018) (29,342) Realized investment losses 558 (321) -- Other, net 643 3,274 (1,790) -------- --------- --------- Net cash provided by operating activities before increase trading account securities 19,123 76,501 40,498 Increase in trading account securities (91) (75) (79) -------- --------- --------- Net cash provided by operating activities 19,032 76,426 40,419 -------- --------- --------- Cash flow used in investing activities: Proceeds from sales, excluding trading account: Fixed maturity securities available for sale -- 23,973 3,167 Equity securities -- -- -- Proceeds from maturities and prepayments of fixed maturity securities 365 222 112,643 Cost of purchases, excluding trading account: Fixed maturity securities (558) (23,648) -- Equity securities -- -- Cost of companies acquired -- -- -- Proceeds from sale of assets to subsidiaries 107,391 33,566 -- Investments in and advances to subsidiaries, net (70,439) (77,362) (5,775) Net additions to real estate, furniture & equipment (290) (357) 201 Other, net 500 -- -- -------- --------- --------- Net cash used in investing activities 36,969 (43,606) 110,236 -------- --------- --------- Cash flows from financing activities: Net proceeds from issuance of long-term debt -- -- 39,882 Net change in short-term debt (25,000) (20,500) 55,500 Purchase of treasury shares (7,020) (4,895) (59,240) Cash dividends to common stockholders (12,701) (13,888) (13,518) Cash dividends to preferred shareholders -- (2,001) (7,356) Purchase of preferred stock -- (98,092) -- Retirement of long-term debt (25,000) (9,171) (49,104) Other, net 8,258 386 2,585 -------- --------- --------- Net cash provided by financing activities (61,463) (148,161) (31,251) -------- --------- --------- Net increase in cash and invested cash (5,462) (115,341) 119,404 Cash and invested cash at beginning of year 22,081 137,422 18,018 -------- --------- --------- Cash and invested cash at end of year $ 16,619 $ 22,081 $ 137,422 ======== ========= =========
See note to condensed financial statements. 38 39 Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued December 31, 2000, 1999 and 1998 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 1999 and 1998 financial statements as originally reported to conform them to the presentation of the 2000 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. 39 40 Schedule III W. R. Berkley Corporation and Subsidiaries Supplementary Insurance Information December 31, 2000, 1999 and 1998 (Amounts in thousands)
Deferred policy Reserve for Net Loss and acquisition losses and loss Unearned Premiums investment Loss cost expenses premiums earned income expenses ---- -------- -------- ------ ------ -------- December 31, 2000 Regional $ 84,081 $ 660,190 $331,066 $ 653,257 $ 59,889 $ 494,143 Reinsurance 27,761 518,554 109,824 298,103 50,471 218,116 Specialty 40,060 753,238 184,160 270,896 48,706 198,237 Alternative markets 13,462 495,057 57,233 161,473 44,350 117,272 International 30,867 106,878 30,956 107,285 9,636 66,643 Corporate and adjustments -- -- -- -- (2,604) -- -------- ---------- -------- ---------- --------- ---------- Total $196,231 $2,533,917 $713,239 $1,491,014 $ 210,448 $1,094,411 ======== ========== ======== ========== ========= ========== December 31, 1999 Regional $ 84,046 $ 635,115 $338,237 $ 650,131 $ 52,639 $ 554,394 Reinsurance 34,911 500,808 119,376 297,650 47,288 226,229 Specialty 37,298 722,689 178,357 256,156 50,231 174,251 Alternative markets 7,510 442,133 34,846 123,504 36,355 82,757 International 18,583 60,493 19,010 86,943 6,469 48,195 Corporate and adjustments -- -- -- -- (2,666) -- -------- ---------- -------- ---------- --------- ---------- Total $182,348 $2,361,238 $689,826 $1,414,384 $ 190,316 $1,085,826 ======== ========== ======== ========== ========= ========== December 31, 1998 Regional $ 83,613 $ 495,164 $337,414 $ 622,280 $ 53,942 $ 476,920 Reinsurance 29,906 435,920 102,566 246,277 47,643 183,020 Specialty 37,148 745,790 167,648 235,055 59,345 145,624 Alternative markets 7,531 399,560 37,061 101,755 34,667 65,634 International 10,696 50,132 20,172 73,032 5,469 43,564 Corporate and adjustments -- -- -- -- 1,354 -- -------- ---------- -------- ---------- --------- ---------- Total $168,894 $2,126,566 $664,861 $1,278,399 $ 202,420 $ 914,762 ======== ========== ======== ========== ========= ==========
Amortization of deferred policy Other acquisition operating cost Net premiums costs and expenses written ----- ------------ ------- December 31, 2000 Regional $188,702 $ 33,096 $ 640,843 Reinsurance 95,146 3,965 276,640 Specialty 79,101 15,685 285,525 Alternative markets 54,247 65,914 184,255 International 37,532 7,205 118,981 Corporate and adjustments -- 15,986 -- -------- -------- ---------- Total $454,729 $141,850 $1,506,244 ======== ======== ========== December 31, 1999 Regional $204,961 $ 33,261 $ 649,849 Reinsurance 92,503 6,790 309,181 Specialty 77,950 17,606 260,380 Alternative markets 36,063 78,476 122,137 International 32,812 8,526 86,172 Corporate and adjustments -- 15,836 -- -------- -------- ---------- Total $444,289 $160,495 $1,427,719 ======== ======== ========== December 31, 1998 Regional $196,391 $ 33,732 $ 641,316 Reinsurance 62,855 15,084 269,634 Specialty 75,968 4,474 254,003 Alternative markets 30,903 72,897 106,195 International 28,495 15,244 75,106 Corporate and adjustments -- 20,112 -- -------- -------- ---------- Total $394,612 $161,543 $1,346,254 ======== ======== ==========
40 41 Schedule IV W. R. Berkley Corporation and Subsidiaries Reinsurance Years ended December 31, 2000, 1999 and 1998 (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, 2000: Regional insurance $ 730,546 $ 95,514 $ 5,811 $ 640,843 .9% Reinsurance 57,210 47,206 266,636 276,640 96.4% Specialty insurance 403,149 122,020 4,396 285,525 1.5% Alternative markets 84,916 21,228 120,567 184,255 65.4% International 143,524 24,543 -- 118,981 -- ---------- -------- -------- ---------- Total $1,419,345 $310,511 $397,410 $1,506,244 26.4% ========== ======== ======== ========== ===== 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% ========== ======== ======== ========== =====
41 42 Schedule VI W. R. Berkley Corporation and Subsidiaries Supplementary Information Concerning Property-Casualty Insurance Operations December 31, 2000, 1999 and 1998 (Amounts in thousands)
2000 1999 1998 Deferred policy acquisition costs $ 196,231 $ 182,348 $ 168,894 Reserves for losses and loss expenses 2,533,917 2,361,238 2,126,566 Unearned premium 713,239 689,826 664,861 Premiums earned 1,491,014 1,414,384 1,278,399 Net investment income 210,448 190,316 202,420 Losses and loss expenses incurred: Current Year 1,047,060 1,032,089 944,887 Prior Years 14,042 28,351 (42,929) Amortization of discount 11,530 10,473 9,111 Amortization of deferred policy acquisition costs 454,729 444,289 394,612 Paid losses and loss expenses 978,448 930,352 762,965 Net premiums written 1,506,244 1,427,719 1,346,254
42 EX-10.1 2 y46799ex10-1.txt EXHIBIT 10.1 1 Exhibit 10.1 LOAN AGREEMENT This Loan Agreement, dated as of January 5, 2001, is by and between W.R. Berkley Corporation, a Delaware corporation (the "Company"), and William R. Berkley ("Berkley"). The parties hereto agree as follows: 1. The Company hereby agrees to loan to Berkley $1,500,000. 2. The loan shall be evidenced by a recourse promissory note dated the date of such loan in the form of Annex A attached hereto (the "Note"). The Note shall be unsecured. 3. Berkley and the Company each hereby represents that he or it, as the case may be, has all power and authority necessary to enter into this Agreement and that this Agreement is valid and enforceable against Berkley or the Company, as the case may be, in accordance with its terms. 4. If any of the following events ("Events of Default") shall occur: (a) Berkley shall default in the payment of principal or interest on the Note when the same shall become due and payable, whether at maturity, by acceleration or otherwise, and such default continues for more than ten days after receipt of written notice from the Company; or (b) Berkley shall file a petition seeking bankruptcy or other similar relief or any such petition shall be filed against Berkley and not dismissed within 60 days; then the holder of the Note may by written notice to Berkley (or without such notice with respect to subsection (b) above), declare the entire unpaid principal of and the interest then accrued on the Note to be forthwith due and payable, without other notices or demands of any kind, all of which are hereby waived by Berkley. 5. All notices and communications provided for herein shall be delivered or mailed by registered or certified mail, postage prepaid, or by courier service, addressed as follows: If to the Company: 165 Mason Street Greenwich, Connecticut 06836-2518 Facsimile No.: (203) 629-3492 Attention: Chief Financial Officer 2 If to Berkley: c/o W.R. Berkley Corporation 165 Mason Street Greenwich, Connecticut 06836-2518 or to such other address or to the attention of such other person as the recipient party shall have specified. 6. No delay on the part of the Company in exercising any right, power or privilege hereunder or in respect hereof shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude other or further exercise thereof or the exercise of any other right, power or privilege. 7. This Agreement and the Note shall be governed by and interpreted and enforced in accordance with the laws of the State of Delaware without giving effect to the choice of law provisions thereof. 8. This Agreement shall be binding upon the successors and assigns of the parties hereto. 9. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall be considered one and the same agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. W.R. BERKLEY CORPORATION By: /s/ Eugene Ballard --------------------------------- Name: Eugene Ballard Title: Senior Vice President /s/ William R. Berkley --------------------------------- WILLIAM R. BERKLEY -2- 3 ANNEX A TO LOAN AGREEMENT PROMISSORY NOTE $1,500,000 January 5, 2001 FOR VALUE RECEIVED, William R. Berkley ("Maker" or "Berkley") hereby promises to pay to the order of W.R. Berkley Corporation, a Delaware corporation (the "Company"), at 165 Mason Street, Greenwich, Connecticut, or at such other address as the Company or the holder or this Note shall have given to the Maker, the principal sum of One Million Five Hundred Thousand Dollars ($1,500,000) on June 1, 2001, together with interest, at the minimum rate which can be charged without causing this obligation to be treated as a "below market loan" for purposes of Section 7872 of the Internal Revenue Code of 1986, as amended. Payments of principal and interest shall be made in such currency of the United States as at the time of payment shall be legal tender for the payment of public and private debts. This Note evidences a recourse loan made by the Company under the Loan Agreement, dated as of the date hereof, between the Company and the Maker (the "Agreement"), which provides, among other things, for the acceleration of the maturity of this Note following an Event of Default, on the terms set forth in the Agreement. This Note may be prepaid in whole or in part at any time and from time to time without penalty or premium. The Maker hereby waives presentment, demand, protest, notice of protest, notice of dishonor of this Note and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note. This Note shall be governed by and interpreted and enforced in accordance with the laws of the State of Delaware without giving effect to the choice of law provisions thereof and shall be binding upon the heirs or legal representatives of the Maker and shall inure to the benefit of the successors and assigns of the Company. /s/ William R. Berkley ------------------------------------- William R. BERKLEY EX-13 3 y46799ex13.txt 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. OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 2000 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1999 Net income attributable to common stockholders for 2000 was $36 million, or $1.39 per diluted share, compared with a net loss of $37 million, or $1.43 per diluted share, in 1999. Operating income, which is defined as net income before realized investment gains and losses, extraordinary items and changes in accounting principle was $31 million, or $1.18 per diluted share, in 2000 compared with an operating loss of $31 million, or $1.19 per diluted share, in 1999. Adjusting for the restructuring charges (see Note 4 of "Notes to Consolidated Financial Statements"), operating income was $32 million, or $1.23 per diluted share, in 2000 compared with an operating loss of $23 million, or $.91 per diluted share, in 1999. The improved results in 2000 reflect the impact of more favorable market conditions, including higher prices and better terms and conditions, and higher investment income. Net premiums written increased 6% to $1,506 million for 2000 from $1,428 million for 1999. Regional premiums decreased 1% to $641 million as price increases were more than offset by a decline in policy count. Reinsurance premiums decreased 11% to $277 million as a result of the business restructuring implemented in the first quarter of 2000 (see Note 4 of "Notes to Consolidated Financial Statements"). Specialty premiums were $286 million, an increase of 10% over 1999, as new business growth was partially offset by a decrease in commercial transportation business. Alternative markets premiums increased 51% to $184 million due to an increase in excess and reinsured workers' compensation business. International premiums increased 38% to $119 million due to growth in both Argentina and the Philippines. Net investment income increased 11% to $210 million in 2000. The average gross pre-tax yield earned on the portfolio increased to 7.3% in 2000 from 6.5% in 1999 due primarily to changes in asset allocations during 2000. (See "Liquidity and Capital Resources.") Service fees consist primarily of fees earned by the alternative markets segment. Service fees decreased 6% to $68 million in 2000 principally due to the sale of All American Agency Facilities, Inc. (See Note 3 of "Notes to Consolidated Financial Statements.") 22 2 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Realized investment gains were $8 million in 2000 compared with realized investment losses of $6 million in 1999. Realized gains and losses result from security sales and from the change in provision for other than temporary impairment of securities. Realized investment gains for 2000 were primarily a result of the sale of equity securities and All American Agency Facilities, Inc. Loss and loss expenses increased 1% to $1,094 million in 2000 from $1,086 million in 1999. The statutory loss ratio (losses and loss expenses incurred expressed as a percentage of premiums earned) decreased to 73.1% from 76.5% primarily as a result of decreased losses in the regional segment. In the fourth quarter of 1999, the regional segment established additional loss reserves of $55 million, of which approximately $40 million related to losses incurred in 1998 and prior years. There was no comparable reserve adjustment in 2000. Weather-related losses for the Company were $49 million in 2000 compared with $60 million in 1999. 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, decreased by 1% to $597 million from $605 million in 1999. The statutory expense ratio of the Company's insurance operations (underwriting expenses expressed as a percentage of premiums written) decreased to 33.5% for 2000 from 35.4% for 1999 due primarily to expense savings related to the regional restructuring in 1999. 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 statutory combined ratio (after policyholders dividends) decreased to 107.0% in 2000 from 112.2% in 1999 as a result of the decreases in the loss and expense ratios referred to above. The Federal and foreign income tax expense in 2000 was $2 million compared with a tax benefit of $46 million in 1999. The income tax expense/benefit differs from the amount computed by applying the Federal tax rate of 35% principally because of tax-exempt investment income. (See "Liquidity and Capital Resources.") The Company reported an after-tax restructuring charge of $1.2 million, or 5 cents per diluted share, in 2000 related to the reorganization of the reinsurance operations. The restructuring, which has been substantially completed, is expected to result in annual after-tax savings of approximately $2.5 million. 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 the regional operations. The restructuring was substantially completed 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 investment gains and losses, changes in accounting 23 3 principle and extraordinary items, 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 Note 4 of "Notes to Consolidated Financial Statements"), 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 premiums grew 1% to $650 million as growth opportunities were impeded by inadequate rates and competitive market conditions. Reinsurance premiums increased 15% to $309 million due primarily to growth in pro-rata treaty business. Specialty premiums 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 premiums increased 15% to $122 million due primarily to growth in businesses that began operations in 1998. International premiums 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 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. Service fees consist primarily of fees earned by the alternative markets segment. Service fees 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. The majority of the 1999 and 1998 realized gains and losses resulted from sales and provisions for permanent impairment of fixed maturity securities. The statutory combined ratio 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 statutory 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 24 4 W. R. BERKLEY CORPORATION AND SUBSIDIARIES offset by recoveries under the aggregate reinsurance cover (see Note 9 of "Notes to Consolidated Financial Statements") 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 statutory 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. 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. 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. LIQUIDITY AND CAPITAL RESOURCES GENERAL The net cash provided from operating activities (before increase in trading account sales) was $76 million in 2000, $82 million in 1999 and $257 million in 1998. The decrease in cash flow in 2000 and 1999 was primarily due to a higher level of claims activity. As a holding company, the Company derives cash from its subsidiaries in the form of dividends, tax payments and management fees. The Company uses cash to pay debt service, Federal income taxes, operating expenses and dividends. The Company also provides capital to its subsidiaries. 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.") 25 5 The Company's subsidiaries are highly liquid, receiving substantial cash from premiums, investment income, service fees and proceeds from sales and maturities of portfolio investments. The principal outflows of cash are payments of claims, taxes, interest, operating expenses and dividends. FINANCING ACTIVITY During 2000, the Company repaid $25 million (face value) of senior notes upon maturity. In 1999, the Company redeemed all outstanding Series A Preferred Stock for $98 million and repurchased $10 million (face value) of trust preferred securities for $8.8 million. During 1998, the Company issued $40 million medium-term notes due April 15, 2005, and one of the Company's subsidiaries issued an $8 million note due December 30, 2003. Also in 1998, the Company repurchased $34.7 million (face amount) senior notes and debentures for $41.8 million and retired $10 million (face value) senior notes upon maturity. During 2000, the Company purchased 300,000 shares of its common stock for approximately $7 million leaving a balance as of December 31, 2000 of 795,000 shares available for repurchase under its current authorization. During 1999, the Company purchased 905,000 shares of its common stock for approximately $22 million. During 1998, the Company purchased 3,172,222 shares of its common stock for approximately $118 million. As of December 31, 2000 and 1999, the Company had $10 million and $35 million, respectively, of outstanding short-term debt under its unsecured bank credit facility. As of December 31, 2000, the Company had an additional $65 million of short-term debt available under this facility. The credit facility expires on December 7, 2001. CAPITALIZATION For the year ended December 31, 2000, stockholders' equity increased by approximately $89 million. The increase in stockholders' equity is primarily attributable to after-tax unrealized investment gains of approximately $64 million and to net income of $36 million. The Company's total capitalization was $1,249 million at December 31, 2000 and the percentage of the Company's capital attributable to long-term debt decreased to 30% at December 31, 2000 from 33% at December 31, 1999. On March 6, 2001, the Company issued 3,105,000 shares of its common stock and received net proceeds of $122 million. The proceeds will be used to provide additional capital for its insurance subsidiaries and for general corporate purposes. The Company may also use the proceeds of this offering to reduce some of its indebtedness, depending on market conditions. INVESTMENTS As part of its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities which, combined with expected cash flow, is believed adequate to meet foreseeable payment obligations. The Company also attempts to maintain an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities, i.e., policy claims and debt obligations. The 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 26 6 W. R. BERKLEY CORPORATION AND SUBSIDIARIES assets and liabilities as well as to adjust the portfolio as a result of changes in financial market conditions and tax considerations. The investment portfolio (including account receivable from brokers and clearing organizations and securities sold but not yet purchased), on a cost basis, increased in 2000 by $35 million to approximately $3,074 million. The Company's investments are currently comprised of fixed income securities and equity securities. At December 31, 2000, the portfolio mix was as follows: U.S. Government securities and cash equivalents were 26% (21% in 1999); state and municipal securities were 20% (35% in 1999); corporate fixed maturity securities were 19% (15% in 1999); mortgage-backed securities were 18% (15% in 1999); and the balance of 17% (14% in 1999) was invested in equity securities. The Company's equity portfolio is comprised of merger arbitrage securities, which are classified as trading account assets, and other equity investments, which are classified as available for sale. Net trading account assets (trading account equity securities plus trading account receivable from brokers and clearing organizations less trading account equity securities sold but not yet purchased) were $448 million as of December 31, 2000, compared with $356 million as of December 31, 1999. Net trading account assets represented approximately 14% and 12% of the Company's net invested assets as of December 31, 2000 and 1999, 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 5.5% 4.93 $ 493,624 - ---------------------------------------------------------------------- State and municipal 5.0 6.48 615,169 - ---------------------------------------------------------------------- Corporate 7.4 5.16 604,946 - ---------------------------------------------------------------------- Mortgage-backed securities 7.0 5.87 566,314 - ---------------------------------------------------------------------- Total 6.3% 5.64 $2,280,053 ======================================================================
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 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 securi- 27 7 ties static. The fair value at specified levels at December 31, 2000 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 $1,940,197 $(339,856) - ---------------------------------------------------------------------- 200 basis point rise 2,043,680 (236,373) - ---------------------------------------------------------------------- 100 basis point rise 2,156,867 (123,186) - ---------------------------------------------------------------------- Base scenario 2,280,053 -- - ---------------------------------------------------------------------- 100 basis point decline 2,399,529 119,476 - ---------------------------------------------------------------------- 200 basis point decline 2,524,443 244,390 - ---------------------------------------------------------------------- 300 basis point decline 2,661,338 381,285 - ----------------------------------------------------------------------
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 trading account securities are used 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's investments in foreign subsidiaries are subject to foreign currency risk. In order to mitigate foreign currency risks, the foreign subsidiaries maintain a portion of their invested assets in US Dollar denominated securities. The Company's foreign subsidiaries operate primarily in Argentina and the Philippines. Argentina has established a currency board exchange rate mechanism that creates a dollar for dollar relationship between the US Dollar and the Argentine Peso. 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 $67,000, 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, 2000, the Company had a deferred tax asset of $141 million (which primarily relates to the discounting of loss reserves for Federal income tax purposes, unearned premiums and an alternative minimum tax credit carry forward) and a deferred tax liability of $93 million (which primarily relates to deferred policy acquisition costs, unrealized investment gains and intangible assets). 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. 28 8 W. R. BERKLEY CORPORATION AND SUBSIDIARIES 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 2000, the regional companies generally retained $500,000 on individual property casualty risks and up to $2.1 million per bond for surety business. 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 2001, the regional companies will generally retain up to $1 million on individual property casualty risks for most classes of business, and the catastrophe protection will increase to $48.5 million in excess of the $6 million. REINSURANCE OPERATIONS The catastrophe retrocession program provided coverage for property losses for 100% of $19.2 million in excess of $3.2 million per occurrence. Property facultative business retains $262,500 per risk and casualty facultative business retains up to $3 million per risk over variable layers. Fidelity & Surety retains $750,000 per risk after an annual aggregate deductible. SPECIALTY OPERATIONS Specialty companies generally retained up to $300,000 for most classes of business, other than business written by Monitor Liability Managers and Monitor Surety Managers. Retentions were up to $5 million for business written by Monitor Liability Managers and up to $500,000 for business written by Monitor Surety Managers. The specialty group (other than Carolina Casualty Insurance Company) was also covered under the regional group's property catastrophe reinsurance. In 2001, specialty companies other than Monitor Liability Managers will generally retain up to $1 million for most classes of business. ALTERNATIVE MARKETS OPERATIONS Excess workers' compensation retention was generally $1 million per occurrence above the self-insured's underlying retention. Primary workers' compensation companies retained up to $300,000 per risk. INTERNATIONAL OPERATIONS The international operations generally retained between $50,000 and $250,000 per occurrence or individual risk. 29 9 CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data)
Years ended December 31, 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- Revenues: Net premiums written $ 1,506,244 $ 1,427,719 $ 1,346,254 Change in net unearned premiums (15,230) (13,335) (67,855) - --------------------------------------------------------------------------------------------------------------------------------- Premiums earned 1,491,014 1,414,384 1,278,399 Net investment income 210,448 190,316 202,420 Service fees 68,049 72,344 70,727 Realized investment gains (losses) 8,364 (6,064) 25,400 Other income 3,412 2,688 5,571 - --------------------------------------------------------------------------------------------------------------------------------- Total revenues 1,781,287 1,673,668 1,582,517 Operating costs and expenses: Losses and loss expenses 1,094,411 1,085,826 914,762 Other operating costs and expenses 596,579 604,784 556,155 Interest expense 47,596 50,801 48,819 Restructuring charge 1,850 11,505 -- - --------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 40,851 (79,248) 62,781 Income tax benefit (expense) (2,451) 45,766 (5,465) - --------------------------------------------------------------------------------------------------------------------------------- Income (loss) before minority interest and preferred dividends 38,400 (33,482) 57,316 Minority interest (2,162) (566) 1,444 Preferred dividends -- (497) (7,548) - --------------------------------------------------------------------------------------------------------------------------------- Net income (loss) before change in accounting and extraordinary gain (loss) 36,238 (34,545) 51,212 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 $ 36,238 $ (37,060) $ 46,195 ================================================================================================================================== Earnings (loss) per share: Basic Net income (loss) before change in accounting and extraordinary gain (loss) $ 1.41 $ (1.35) $ 1.82 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 $ 1.41 $ (1.44) $ 1.64 ================================================================================================================================== Diluted Net income (loss) before change in accounting and extraordinary gain (loss) $ 1.39 $ (1.34) $ 1.76 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 $ 1.39 $ (1.43) $ 1.59 ==================================================================================================================================
See accompanying notes to consolidated financial statements. 30 10 W.R. BERKLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
December 31, 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------------- Assets Investments: Invested cash $ 308,193 $ 295,423 Fixed maturity securities: Held to maturity, at cost (fair value $164,229 and $150,465) 156,067 152,657 Available for sale, at fair value (cost $2,087,338 and $2,180,509) 2,115,824 2,110,411 Equity securities, at fair value: Available for sale (cost $76,545 and $54,437) 83,823 61,380 Trading account (cost $340,617 and $236,453) 347,271 253,430 Cash 938 20,051 Premiums and fees receivable 416,243 380,887 Due from reinsurers 713,392 620,446 Accrued investment income 36,578 36,925 Prepaid reinsurance premiums 99,444 91,005 Deferred policy acquisition costs 196,231 182,348 Real estate, furniture and equipment at cost, less accumulated depreciation 118,282 128,735 Deferred Federal and foreign income taxes 47,567 81,976 Excess of cost over net assets acquired 71,496 76,523 Trading account receivable from brokers and clearing organizations 269,444 258,454 Other assets 41,277 34,140 - ----------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 5,022,070 $ 4,784,791 =================================================================================================================================== Liabilities and Stockholders' Equity Liabilities: Reserves for losses and loss expenses $ 2,533,917 $ 2,361,238 Unearned premiums 713,239 689,826 Due to reinsurers 132,521 144,712 Trading securities sold but not yet purchased, at fair value (proceeds $164,312 and $138,731) 169,020 155,826 Short-term debt 10,000 35,000 Other liabilities 182,273 183,218 Long-term debt 370,158 394,792 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 4,111,128 3,964,612 - ----------------------------------------------------------------------------------------------------------------------------------- Trust preferred securities 198,169 198,126 Minority interest 31,877 30,275 - ----------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Preferred stock, par value $.10 per share: Authorized 5,000,000 shares, issued and outstanding - none -- -- Common stock, par value $.20 per share: Authorized 80,000,000 shares, issued and outstanding, net of treasury shares, 25,656,362 and 25,616,578 shares 7,281 7,281 Additional paid-in capital 334,061 331,640 Retained earnings 574,345 551,401 Accumulated other comprehensive income (loss) 19,371 (44,500) Treasury stock, at cost, 10,747,482 and 10,787,489 shares (254,162) (254,044) - ----------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 680,896 591,778 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 5,022,070 $ 4,784,791 ===================================================================================================================================
See accompanying notes to consolidated financial statements. 31 11 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands, except per share data) Years ended December 31, 2000, 1999 and 1998
Preferred and common stock and Accumulated Total additional other stockholders' paid-in Retained comprehensive Treasury equity capital earnings income (loss) stock - ------------------------------------------------------------------------------------------------------------------------------------ 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 ($.52 per share) (13,447) -- (13,447) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1999 591,778 338,921 551,401 (44,500) (254,044) Net income attributable to common stockholders 36,238 -- 36,238 -- -- Change in other comprehensive income (loss) 63,871 -- -- 63,871 -- Issuance of common shares 9,323 2,421 -- -- 6,902 Purchase of treasury stock (7,020) -- -- -- (7,020) Dividends to common stockholders ($.52 per share) (13,294) -- (13,294) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 2000 $ 680,896 $ 341,342 $ 574,345 $ 19,371 $(254,162) ====================================================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Dollars in thousands)
2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- Net income (loss) attributable to common stockholders $ 36,238 $ (37,060) $ 46,195 - --------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) Unrealized holding gains (losses) on investment securities arising during the period, net of taxes of ($37,762), $55,491 and ($7,839) 70,129 (103,055) 14,558 Less: Reclassification adjustment for realized (gains) losses included in net income (5,436) 3,942 (16,510) - --------------------------------------------------------------------------------------------------------------------------------- Net change in unrealized gains (losses) during the period 64,693 (99,113) (1,952) Change in unrealized foreign exchange (losses) (822) (59) (1,582) - --------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) 63,871 (99,172) (3,534) - --------------------------------------------------------------------------------------------------------------------------------- Comprehensive income (loss) $100,109 $(136,232) $42,661 =================================================================================================================================
See accompanying notes to consolidated financial statements. 32 12 W. R. BERKLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Years ended December 31, 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- Cash flows (used in) provided by operating activities: Net income (loss) before minority interest, preferred dividends and extraordinary items $ 38,400 $ (36,732) $ 57,316 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 69,417 141,718 169,285 Depreciation and amortization 21,700 23,598 22,658 Change in unearned premiums and prepaid reinsurance premiums 14,974 13,490 68,095 Change in premiums and fees receivable (35,356) (3,386) (45,727) Change in Federal and foreign income taxes 2,138 (34,289) (26,923) Change in deferred policy acquisition costs (13,883) (12,457) (22,057) Realized investment (gains) losses (8,364) 6,064 (25,400) Other, net (12,692) (15,959) 60,021 - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities before increase in trading account securities 76,334 82,047 257,268 Increase in trading account securities (89,609) (32,978) (37,565) - --------------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by operating activities (13,275) 49,069 219,703 - --------------------------------------------------------------------------------------------------------------------------------- Cash flows provided by (used in) investing activities: Proceeds from sales, excluding trading account: Fixed maturity securities available for sale 725,961 594,993 715,459 Equity securities 48,079 17,200 52,727 Proceeds from maturities and prepayments of fixed maturity securities 142,636 147,668 297,303 Cost of purchases, excluding trading account: Fixed maturity securities available for sale (773,804) (695,928) (1,033,190) Fixed maturity securities held to maturity -- -- (3,034) Equity securities (70,988) (14,397) (33,217) Proceeds (cost) of acquired/sold companies, net of acquired cash and invested cash 2,187 (1,533) (3,304) Net additions to real estate, furniture and equipment (7,529) (8,127) (27,167) Other, net 1,176 (435) 3,956 - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 67,718 39,441 (30,467) - --------------------------------------------------------------------------------------------------------------------------------- Cash flows provided by (used in) financing activities: Repurchase of long-term debt (25,000) -- (49,104) Net change in short-term debt (25,000) (20,500) 55,500 Cash dividends to common stockholders (12,701) (13,888) (13,518) purchase of common treasury shares (7,020) (22,119) (117,944) Other, net 8,935 6,060 735 Repurchase of preferred stock -- (98,092) -- Repurchase of trust preferred securities -- (8,774) -- Cash dividends to preferred stockholders -- (2,001) (7,356) Net proceeds from issuance of long-term debt -- -- 47,882 - --------------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (60,786) (159,314) (83,805) - --------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and invested cash (6,343) (70,804) 105,431 Cash and invested cash at beginning of year 315,474 386,278 280,847 - --------------------------------------------------------------------------------------------------------------------------------- Cash and invested cash at end of year $ 309,131 $ 315,474 $ 386,278 ================================================================================================================================= Supplemental disclosure of cash flow information: Interest paid on debt $ 48,053 $ 50,801 $ 48,976 ================================================================================================================================= Federal income taxes (received) paid $ (1,079) $ (12,973) $ 32,090 =================================================================================================================================
See accompanying notes to consolidated financial statements. 33 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2000, 1999 and 1998 (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 accounting principles generally accepted in the United States of America ("GAAP"). All significant intercompany transactions and balances have been eliminated. Reclassifications have been made in the 1999 and 1998 financial statements to conform them to the presentation of the 2000 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. Service fees on insurance service contracts are recorded as earned primarily on a pro-rata basis over the policy period. (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 a component of 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 Equity securities purchased (long portfolio positions) are presented in the balance sheet as trading account assets. Equity securities sold but not yet purchased (short sales and short call options) are presented as trading securities sold but not yet purchased. Unsettled trades and the net margin balances held by the clearing broker are presented as trading account receivable from brokers and clearing organizations. The Company's trading account portfolio is recorded at fair value. Realized and unrealized gains and losses from trading activity are reported as net investment income. (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. The related amounts due from shareholders are 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 34 14 W. R. BERKLEY CORPORATION AND SUBSIDIARIES assumed; and (3) estimates for losses incurred but not reported (based on Company and industry experience). These estimates are 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 reserves for excess and assumed workers' compensation claims using a "risk-free" rate. (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 $4,036,000, $3,866,000 and $3,178,000 for 2000, 1999 and 1998, 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 uses the intrinsic-value method of accounting for stock-based awards granted to employees and, accordingly, does not recognize compensation expense for its stock-based awards to employees. (See Note 10 of Notes to Consolidated 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 $4,174,000 and $3,352,000 as of December 31, 2000 and 1999, respectively) resulting from translating foreign currency financial statements are reported as a component of common stockholders' equity. Gains or losses (gains of $775,000 and $1,543,000 for 2000 and 1998, respectively, and losses of $381,000 for 1999) resulting from foreign currency transactions (transactions denominated in a currency other than the entity's functional currency) are included 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 $17,704,000, $16,291,000 and $17,114,000 for 2000, 1999 and 1998, respectively. (N) Comprehensive Income (loss) Comprehensive income (loss) encompasses all changes in stockholders' equity (except those arising from transactions with stockholders) 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 recognize 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. 35 15 (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. In September 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125". This statement will not have a material impact on the Company's results of operations or financial condition. (2) LEASE OBLIGATIONS The Company and 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: $16,580,000, $16,109,000 and $14,095,000 for 2000, 1999 and 1998, respectively. Future minimum lease payments (without provision for sublease income) are $14,456,000 in 2001; $11,626,000 in 2002; $9,375,000 in 2003; $6,071,000 in 2004; and $10,101,000 thereafter. (3) ACQUISITIONS AND ASSET SALES During 2000, the company sold the assets of All American Agency Facilities Inc. ("All American"), a managing general agency, and reported a realized gain of $3,179,000. All American's revenues and operating profits (losses) were $1,819,000 and ($638,000) in 2000, $7,480,000 and $381,000 in 1999 and $5,659,000 and $39,000 in 1998. During 1999 and 1998, several international and other acquisitions were completed for an aggregate consideration of approximately $1,533,000 and $13,389,000, 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 and 1998 were as follows: cash and investments of $0 and $11,871,000; excess of cost over net assets acquired of $3,744,000 and $6,847,000; and other liabilities, net of other assets, of $5,277,000 and $5,329,000, respectively. (4) RESTRUCTURING PLAN In the first quarter of 2000, the Company implemented a plan to reorganize its reinsurance business. Under the plan, the reinsurance segment has withdrawn from the Latin American and Caribbean market, and the domestic reinsurance operations have focused on specialty reinsurance lines while de-emphasizing certain commodity-type lines. The Company reduced its permanent workforce by approximately 37 employees in connection with the plan. The Company reported a restructuring charge of $1,850,000 to reflect costs related to the plan. This charge consisted mainly of severance payments of $1,439,000 and contractual lease payments related to abandoned facilities. The activities under the plan were substantially completed in 2000. 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; combined two of its international units; and reduced 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. This charge consists mainly of severance payments of $7,562,000, contractual lease payments related to abandoned facilities and abandoned equipment and property owned. The Company has paid $10,873,000 related to the restructuring charges of which $7,636,000 relates to severance payments. The remaining restructuring accrual is $2,482,000 at December 31, 2000, of which certain payments extend through 2003. 36 16 W. R. BERKLEY CORPORATION AND SUBSIDIARIES (5) DEBT Long-term debt consists of the following:
Description Rate Maturity Face Value Carrying Value - ------------------------------------------------------------------------------------------------------- Senior Notes 6.71% March 4, 2003 $ 25,000,000 $ 24,957,000 Senior Subordinated Notes 6.50% July 1, 2003 35,793,000 35,793,000 Note Payable (1) December 30, 2003 8,000,000 8,000,000 Senior Notes 6.375% April 15, 2005 40,000,000 39,854,000 Senior Notes 6.25% January 15, 2006 100,000,000 99,323,000 Senior Notes 9.875% May 15, 2008 88,800,000 86,561,000 Senior Debentures 8.70% January 1, 2022 76,503,000 75,670,000 - ------------------------------------------------------------------------------------------------------- $374,096,000 $370,158,000 =======================================================================================================
(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. SHORT-TERM DEBT As of December 31, 2000 and 1999, the Company had $10,000,000 and $35,000,000, respectively, of outstanding short-term debt under its unsecured line-of-credit. During 2000 and 1999, the average interest rate of the Company's short-term debt was 6.87% and 5.36%. As of December 31, 2000, the Company had an additional $65,000,000 of short-term debt available under its line-of-credit. (6) Trust Preferred Securities The Company-obligated mandatorily redeemable preferred securities of a subsidiary trust holding solely junior subordinated debentures ("Trust Preferred 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 Trust Preferred Securities, when taken together with the Company's obligations under the Trust Agreement under which the Trust Preferred 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 Trust Preferred Securities), provide a full and unconditional guarantee of the Trust's obligations under the Trust Preferred 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 Trust Preferred 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 Trust Preferred Securities for $8,774,000. 37 17 (7) 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. (8) SUPPLEMENTAL FINANCIAL STATEMENT DATA Other operating costs and expenses consist of the following:
(Dollars in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------- Amortization of deferred policy acquisition costs $454,729 $444,289 $394,612 Other operating costs and expenses of insurance operations 67,254 77,617 77,596 Other costs and expenses 74,596 82,878 83,947 - -------------------------------------------------------------------------------- Total $596,579 $604,784 $556,155 ================================================================================
(9) 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) 2000 1999 1998 - -------------------------------------------------------------------------------- Premiums written $310,511 $307,170 $292,238 - -------------------------------------------------------------------------------- Premiums earned $301,835 $294,823 $286,170 - -------------------------------------------------------------------------------- Losses and loss expenses $267,804 $248,767 $211,389 - --------------------------------------------------------------------------------
In 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 occurring 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. (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:
2000 1999 1998 ------------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - ---------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 3,662,785 $34.12 3,929,333 $34.25 3,218,762 $29.52 Granted 872,000 19.34 68,600 25.73 1,036,975 47.08 Exercised 342,266 24.36 14,925 21.91 106,938 23.57 Canceled 206,440 37.07 320,223 34.39 219,466 30.56 - ---------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 3,986,079 $31.57 3,662,785 $34.12 3,929,333 $34.25 - ---------------------------------------------------------------------------------------------------------------------- Options exercisable at year end 952,726 $27.43 998,450 $25.28 640,161 $23.72 - ---------------------------------------------------------------------------------------------------------------------- Options available for future grant 2,647,916 3,326,102 3,073,916 - ----------------------------------------------------------------------------------------------------------------------
38 18 W. R. BERKLEY CORPORATION AND SUBSIDIARIES 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 2000 and 1999, respectively: (a) dividend yield of 1%, (b) expected volatility of 20%, (c) risk free interest rate of 6.63% and 5.61% and (d) expected life of 7.5 years. The following table summarizes information about stock options outstanding at December 31, 2000 and 1999:
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, 2000 $14 to $27 1,363,366 7.0 $21.05 456,666 $24.39 27 to 32 661,812 5.1 28.99 433,927 29.01 32 to 48 1,960,901 6.8 39.76 62,133 38.71 - -------------------------------------------------------------------------------------------- Total 3,986,079 6.6 $31.57 952,726 $27.43 ============================================================================================ 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 ============================================================================================
The Company uses the intrinsic-value method of accounting for stock-based awards granted to employees and, accordingly, does not recognize compensation expense for its stock-based awards to employees. 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, 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 - ------------------------------------------------------------------------------------------------------------------------------------ 2000 Before change in accounting and extraordinary item $36,238 $33,331 $1.41 $1.30 $1.39 $1.28 Attributable to common stockholders $36,238 $33,331 $1.41 $1.30 $1.39 $1.28 - ------------------------------------------------------------------------------------------------------------------------------------ 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) - ------------------------------------------------------------------------------------------------------------------------------------
(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 $7,672,000, $7,768,000 and $8,524,000 for 2000, 1999 and 1998, respectively. In May 1997, the common stockholders approved the Long-Term Incentive Compensation Plan ("LTIP"). The LTIP provides for incentive compensation to key executives based on long-term corporate performance and other 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. The Company awarded 266,250 units in 1997. There were no units awarded and no LTIP expense in 2000, 1999 or 1998. 39 19 (12) INVESTMENTS At December 31, 2000 and 1999, there were no investments, other than investments in United States government securities, which exceeded 10% of stockholders' equity. At December 31, 2000 and 1999, investments were as follows: (Dollars in thousands) - --------------------------------------------------------------------------------
Gross Gross unrealized unrealized Fair Carrying Type of investment Cost(a) gains losses value value - ----------------------------------------------------------------------------------------------------------------------------------- December 31, 2000 Fixed maturity securities held to maturity: State and municipal $ 54,659 $ 4,122 $ (115) $ 58,666 $ 54,659 Corporate 11,592 654 (85) 12,161 11,592 Mortgage-backed securities 89,816 3,586 -- 93,402 89,816 - ----------------------------------------------------------------------------------------------------------------------------------- Total fixed maturity securities held to maturity 156,067 8,362 (200) 164,229 156,067 - ----------------------------------------------------------------------------------------------------------------------------------- Fixed maturity securities available for sale: United States Government(b) 480,871 14,327 (1,574) 493,624 493,624 State and municipal 544,015 14,169 (1,681) 556,503 556,503 Corporate 593,308 10,703 (11,226) 592,785 592,785 Mortgage-backed securities 469,144 9,144 (5,376) 472,912 472,912 - ----------------------------------------------------------------------------------------------------------------------------------- Total fixed maturity securities available for sale 2,087,338 48,343 (19,857) 2,115,824 2,115,824 - ----------------------------------------------------------------------------------------------------------------------------------- Equity securities available for sale: Common stocks 49,976 7,830 (1,161) 56,645 56,645 Preferred stocks 26,569 770 (161) 27,178 27,178 - ----------------------------------------------------------------------------------------------------------------------------------- Total equity securities available for sale 76,545 8,600 (1,322) 83,823 83,823 - ----------------------------------------------------------------------------------------------------------------------------------- Equity securities trading: Long positions(c) 340,617 16,159 (9,505) 347,271 347,271 Receivable from brokers 269,444 -- -- 269,444 269,444 Securities sold but not yet purchased (164,312) 8,286 (12,994) (169,020) (169,020) - ----------------------------------------------------------------------------------------------------------------------------------- Total equity securities trading 445,749 24,445 (22,499) 447,695 447,695 - ----------------------------------------------------------------------------------------------------------------------------------- Invested cash(d) 308,193 -- -- 308,193 308,193 - ----------------------------------------------------------------------------------------------------------------------------------- Total investments $ 3,073,892 $ 89,750 $ (43,878) $ 3,119,764 $ 3,111,602 =================================================================================================================================== 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 - ----------------------------------------------------------------------------------------------------------------------------------- Equity securities available for sale: 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 - ----------------------------------------------------------------------------------------------------------------------------------- Equity securities trading: Long positions 236,453 24,241 (7,264) 253,430 253,430 Receivable from brokers 258,454 -- -- 258,454 258,454 Securities sold but not yet purchased (138,731) 5,115 (22,210) (155,826) (155,826) - ----------------------------------------------------------------------------------------------------------------------------------- Total equity securities trading 356,176 29,356 (29,474) 356,058 356,058 - ----------------------------------------------------------------------------------------------------------------------------------- Invested cash(d) 295,423 -- -- 295,423 295,423 - ----------------------------------------------------------------------------------------------------------------------------------- Total investments $ 3,039,202 $ 53,023 $ (118,488) $ 2,973,737 $ 2,975,929 ===================================================================================================================================
(a) Adjusted as necessary for amortization of premium or discount. (b) Includes United States government agencies and authorities. (c) Includes an investment of $53 million in a merger arbritage limited liability corporation. (d) Short-term investments which mature within three months of the date of purchase. 40 20 W.R. BERKLEY CORPORATION AND SUBSIDIARIES The amortized cost and fair value of fixed maturity securities at December 31, 2000, 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) 2000 - -------------------------------------------------------------------------------- Cost Fair value - -------------------------------------------------------------------------------- Due in one year or less $ 78,642 $ 79,071 Due after one year through five years 495,813 505,324 Due after five years through ten years 489,439 496,721 Due after ten years 620,551 632,623 Mortgage-backed securities 558,960 566,314 - -------------------------------------------------------------------------------- Total $2,243,405 $2,280,053 ================================================================================
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) 2000 1999 1998 - -------------------------------------------------------------------------------- Realized gains (losses): Fixed maturity securities(a) $ (2,573) $ 2,792 $ 23,004 Equity securities 9,420 (76) 3,506 Net change in provision for other than temporary impairment(b): Fixed maturity securities (3,299) (8,300) -- Equity securities -- -- -- Other 4,816 (480) (1,110) - -------------------------------------------------------------------------------- 8,364 (6,064) 25,400 - -------------------------------------------------------------------------------- Change in difference between fair value and cost of investments, not including trading securities: Fixed maturity securities 108,938 (167,984) 877 Equity securities 335 964 (4,130) - -------------------------------------------------------------------------------- 109,273 (167,020) (3,253) - -------------------------------------------------------------------------------- Total $ 117,637 $(173,084) $ 22,147 ================================================================================
(a) During 2000, 1999 and 1998, gross gains of $11,586,000, $15,022,000 and $26,054,000, respectively, and gross losses of $14,159,000, $12,230,000, and $3,050,000, respectively, were realized. (b) The provision for other than temporary impairment of investments is $14,399,000, $11,100,000 and $2,800,000 as of December 31, 2000, 1999 and 1998, respectively.
Investment income consists of the following: (Dollars in thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------- Investment income earned on: Fixed maturity securities $ 152,806 $ 148,081 $ 156,961 Trading account(a) 42,741 33,532 32,997 Invested cash 14,771 12,804 9,771 Equity securities 6,448 3,306 4,670 Other 3,189 833 1,666 - ----------------------------------------------------------------------------------------------------- Gross investment income 219,955 198,556 206,065 Interest on funds held under reinsurance treaties (9,507) (8,240) (3,645) - ----------------------------------------------------------------------------------------------------- Net investment income $ 210,448 $ 190,316 $ 202,420 =====================================================================================================
(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, 2000, the notional amount of long option contracts outstanding is $22,634,000 and short option contracts outstanding is $40,875,000. Investment income earned from net trading account activity includes unrealized trading gains of $1,899,000 and $1,291,000 for 2000 and 1998, respectively, and unrealized trading losses of $4,897,000 for 1999. 41 21 (13) Stockholders' Equity COMMON EQUITY The weighted average number of shares used in the computation of basic earnings per share was 25,632,000, 25,823,000 and 28,194,000 for 2000, 1999 and 1998, respectively. The weighted average number of shares used in the computations of diluted earnings per share was 25,991,000, 25,927,000 and 29,115,000 for 2000, 1999 and 1998, respectively. Treasury shares have been excluded from average outstanding shares from the date of acquisition. 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) 2000 1999 1998 - -------------------------------------------------------------------------------- Balance, beginning of year 25,617 26,504 29,568 Shares issued 339 18 108 Shares repurchased (300) (905) (3,172) - -------------------------------------------------------------------------------- Balance, end of year 25,656 25,617 26,504 ================================================================================
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) 2000 1999 1998 - -------------------------------------------------------------------------------- Current (expense) benefit $(2,574) $11,785 $(30,283) Deferred (expense) benefit 123 33,981 24,818 - -------------------------------------------------------------------------------- Total (expense) benefit $(2,451) $45,766 $ (5,465) ================================================================================
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) 2000 1999 1998 - -------------------------------------------------------------------------------- Computed "expected" tax (expense) benefit $(14,298) $27,737 $(21,973) Tax-exempt investment income 13,543 17,853 18,412 Other, net (1,696) 176 (1,904) - -------------------------------------------------------------------------------- Total (expense) benefit $ (2,451) $45,766 $ (5,465) ================================================================================
At December 31, 2000 and 1999, 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) 2000 1999 - -------------------------------------------------------------------------------- DEFERRED TAX ASSET Loss reserve discounting $ 60,737 $ 64,946 Unearned premiums 40,885 40,663 Deferred taxes on unrealized investment losses -- 22,297 Alternative minimum tax credit carryforward 29,610 20,656 Other 16,550 22,097 - -------------------------------------------------------------------------------- Gross deferred tax asset 147,782 170,659 Less: valuation allowance (7,000) (7,000) - -------------------------------------------------------------------------------- Deferred tax asset 140,782 163,659 ================================================================================ DEFERRED TAX LIABILITY Amortization of intangibles 7,995 9,625 Deferred policy acquisition costs 57,877 57,317 Deferred taxes on unrealized investment gains 12,678 -- Depreciation 8,088 8,985 Other 6,577 5,756 - -------------------------------------------------------------------------------- Deferred tax liability 93,215 81,683 - -------------------------------------------------------------------------------- Net deferred tax asset $47,567 $ 81,976 ================================================================================
Federal income tax expense (benefit) applicable to realized investment gains (losses) was $2,928,000, ($2,122,000) and $8,890,000 in 2000, 1999 and 1998, respectively. The Company had a current income tax receivable of $6,376,000 and $8,939,000 at December 31, 2000 and 1999, 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. 42 22 W. R. BERKLEY CORPORATION AND SUBSIDIARIES (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) 2000 1999 1998 - ----------------------------------------------------------------------------------------------- Net reserves at beginning of year $1,723,865 $1,583,304 $ 1,433,011 - ----------------------------------------------------------------------------------------------- Net reserves of companies acquired -- -- 2,189 Net provision for losses and loss expenses: Claims occurring during the current year 1,047,060 1,032,089 944,887 Increase (decrease) in estimates for claims occurring in prior years 14,042 28,351 (42,929) Amortization of discount 11,530 10,473 9,111 - ----------------------------------------------------------------------------------------------- 1,072,632 1,070,913 911,069 - ----------------------------------------------------------------------------------------------- Net payments for claims Current year 394,401 433,942 397,787 Prior years 584,047 496,410 365,178 - ----------------------------------------------------------------------------------------------- 978,448 930,352 762,965 - ----------------------------------------------------------------------------------------------- Net reserves at end of year 1,818,049 1,723,865 1,583,304 Ceded reserves at end of year 657,756 617,025 537,219 - ----------------------------------------------------------------------------------------------- Gross reserves at end of year $2,475,805 $2,340,890 $ 2,120,523 ===============================================================================================
The balance sheet includes $58,112,000 and $20,348,000 as of December 31, 2000 and 1999, respectively, relating to reserves for life insurance which are not included in the table above, and the statement of operations includes $21,779,000, $14,913,000 and $3,693,000 for the years ended December 31, 2000, 1999 and 1998, respectively, relating to the policy-holder 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. The Company discounts its liabilities for excess and assumed workers' compensation business because of the long period of time over which losses are paid. 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 similar business. 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. The weighted average discount rate for accident years 2000, 1999, 1998, 1997, 1996 and 1995 and prior is 5.88%, 5.90%, 5.16%, 6.43%, 6.49% and 5.80%, respectively. The aggregate net discount, after reflecting the effects of ceded reinsurance, is $223,000,000, $196,000,000 and $187,000,000 at December 31, 2000, 1999 and 1998, respectively. For statutory purposes, the Company uses a discount rate of 4.5% as permitted by the Department of Insurance of the State of Delaware. To date, known asbestos 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 asbestos and environmental claims were $29,422,000 and $30,944,000 at December 31, 2000 and 1999, respectively. The Company's gross reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $57,167,000 and $65,966,000 at December 31, 2000 and 1999, respectively. Net incurred losses and loss expenses for reported asbestos and environmental claims were approximately $1,602,000, $1,371,000 and $2,227,000 in 2000, 1999 and 1998, respectively. Net paid losses and loss expenses were approximately $3,123,000, $3,819,000 and $2,614,000 in 2000, 1999 and 1998, 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. 43 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. 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, in Argentina and the Philippines. The joint venture wrote life premiums of $33,183,000, $24,548,000 and $7,994,000 for the years ended December 31, 2000, 1999 and 1998, 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, 2000: Regional $ 59,889 $ 717,287 $ 1,202 $ 718,489 $ 2,548 $ 308 Reinsurance 50,471 348,707 457 349,164 27,760 7,387 Specialty 48,706 322,618 2,241 324,859 31,836 9,058 Alternative Markets 44,350 268,888 137 269,025 31,592 8,675 International 9,636 118,234 -- 118,234 6,853 1,820 Corporate, other and eliminations (2,604) 5,553 (4,037) 1,516 (59,738) (24,797) - -------------------------------------------------------------------------------------------------------------------------- Consolidated $ 210,448 $1,781,287 -- $ 1,781,287 $ 40,851 $ 2,451 ========================================================================================================================= 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, other and eliminations (2,666) 5,859 (1,482) 4,377 (63,692) (54,957) - -------------------------------------------------------------------------------------------------------------------------- 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, other and eliminations 1,354 11,554 (6,877) 4,677 (61,926) (38,972) - -------------------------------------------------------------------------------------------------------------------------- Consolidated $ 202,420 $1,582,517 -- $ 1,582,517 $ 62,781 $ 5,465 =========================================================================================================================
44 24 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Interest expense for the alternative markets and reinsurance segments was $2,921,000, $2,870,000 and $2,327,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Additionally, corporate interest expense (net of intercompany amounts) was $44,675,000, $47,931,000 and $46,492,000 for the corresponding periods. Identifiable assets by segment are as follows:
December 31, 2000 1999 1998 - ----------------------------------------------------------------------------------------- Regional $ 1,498,179 $ 1,436,575 $ 1,370,849 Reinsurance 1,258,155 1,022,776 996,186 Specialty 1,425,123 1,370,837 1,502,366 Alternative Markets 924,785 878,125 863,578 International 248,243 177,675 151,832 Corporate, other and eliminations (332,415) (101,197) 98,620 - ----------------------------------------------------------------------------------------- Consolidated $ 5,022,070 $ 4,784,791 $ 4,983,431 ==========================================================================================
(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, 2000 and 1999:
(Dollars in thousands) 2000 1999 - ----------------------------------------------------------------------------------------------- Carrying Carrying Amount Fair value Amount Fair value - ----------------------------------------------------------------------------------------------- Investments $3,111,602 $3,119,764 $2,975,929 $2,973,737 Long-term debt 370,158 362,375 394,792 383,901 Trust preferred securities 198,169 136,800 198,126 172,547 - -----------------------------------------------------------------------------------------------
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 and the trust preferred securities are 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 2001, the maximum amount of dividends which can be paid without such approval is approximately $85,510,000. 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) 2000 1999 1998 - -------------------------------------------------------------------------------- Net income (loss) $ 57,226 $ (34,598) $ 67,014 ================================================================================ Policyholders' surplus $846,658 $ 851,449 $941,853 ================================================================================
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, excess and assumed workers compensation reserves are discounted at a 4.5% rate and certain assets designated as "non-admitted assets" are charged against surplus. At December 31, 2000 and 1999, bonds with a fair value of $221,194,000 and $209,485,000 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. All of the Company's insurance 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 effective January 1, 2001. The accounting codification will not have a material impact on the results of operations or policyholders' surplus of the Company's insurance subsidiaries. 45 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, 2000 1999 2000 1999 2000 1999 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues $423,324 $407,713 $431,933 $416,250 $445,957 $427,823 $480,073 $421,882 =================================================================================================================================== Net income (loss) before preferred dividends $ 4,346 $ 2,472 $ 6,636 $ 5,624 $ 7,092 $ (1,356) $ 18,164 $(40,788) =================================================================================================================================== Net income (loss) attributable to common stockholders $ 4,346 $ (1,275) $ 6,636 $ 5,624 $ 7,092 $ (621) $ 18,164 $(40,788) =================================================================================================================================== Earnings (loss) per share: Basic Before change in accounting and extraordinary gain (loss) $ .17 $ .07 $ .26 $ .22 $ .28 $ (.06) $ .71 $ (1.59) Net income (loss) $ .17 $ (.05) $ .26 $ .22 $ .28 $ (.02) $ .71 $ (1.59) Diluted Before change in accounting and extraordinary gain (loss) $ .17 $ .07 $ .26 $ .22 $ .27 $ (.05) $ .68 $ (1.59) Net income (loss) $ .17 $ (.05) $ .26 $ .22 $ .27 $ (.02) $ .68 $ (1.59) ===================================================================================================================================
(20) SUBSEQUENT EVENT On March 6, 2001, the Company issued 3,105,000 shares of its common stock and received net proceeds of $122 million. The proceeds will be used to provide additional capital for its insurance subsidiaries and for general corporate purposes. The Company may also use the proceeds of this offering to reduce some of its indebtedness, depending on market conditions. 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, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted in the United States of America. 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 as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 23, 2001, except for Note 20 which is as of March 6, 2001 46 EX-27 4 y46799ex27.txt EXHIBIT 27
7 1,000 U.S. DOLLAR 12-MOS DEC-31-2000 JAN-01-2000 DEC-31-2000 1 2,115,824 156,067 164,229 431,094 0 0 2,702,985 309,131 0 196,231 5,022,070 2,533,917 713,239 0 0 578,327 0 0 7,281 673,615 5,022,070 1,491,014 210,448 8,364 3,412 1,094,411 454,729 141,850 40,851 2,451 38,400 0 0 0 36,238 1.41 1.39 1,723,865 1,047,060 14,042 394,401 584,047 1,818,049 14,042
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