-----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, OT2r2EawIeOMrvPWQs6e1Tv0ip0Os4j88AaJzy08Oh4Pjr3bI9R9jD41vl2DDJGc eDMgK3TSan0cVqtAjI9kBw== 0000914039-01-500077.txt : 20010516 0000914039-01-500077.hdr.sgml : 20010516 ACCESSION NUMBER: 0000914039-01-500077 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 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-Q SEC ACT: SEC FILE NUMBER: 000-07849 FILM NUMBER: 1637680 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-Q 1 y49099e10-q.txt FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark one) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2001 or / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the Transition Period from ____ to ____. Commission File Number 0-7849 W. R. BERKLEY CORPORATION (Exact name of registrant as specified in its charter) Delaware 22-1867895 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 165 Mason Street, Greenwich, Connecticut 06836-2518 (Address of principal executive offices) (Zip Code)
(203) 629-3000 (Registrant's telephone number, including area code) None Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Number of shares of common stock, $.20 par value, outstanding as of May 3, 2001: 28,979,954 2 Part I - FINANCIAL INFORMATION ITEM 1. Financial Statements W. R. Berkley Corporation and Subsidiaries Consolidated Balance Sheets (Dollars in thousands)
March 31, December 31, 2001 2000 ----------- ----------- Assets (Unaudited) Investments: Invested cash $ 387,115 $ 308,193 Fixed maturity securities: Held to maturity, at cost (fair value $167,320 and $164,229) 157,220 156,067 Available for sale, at fair value (cost $2,120,600 and 2,178,106 2,115,824 $ 2,087,338) Equity securities, at fair value: Available for sale (cost $78,119 and $76,545) 86,753 83,823 Trading account (cost $312,609 and $340,617) 303,503 347,271 Cash 5,926 938 Premiums and fees receivable 449,953 416,243 Due from reinsurers 734,916 713,392 Accrued investment income 30,180 36,578 Prepaid reinsurance premiums 106,766 99,444 Deferred policy acquisition costs 207,029 196,231 Real estate, furniture & equipment at cost, less accumulated 119,899 118,282 depreciation Excess of cost over net assets acquired 70,297 71,496 Trading account receivable from brokers and clearing organizations 304,765 269,444 Deferred federal and foreign income taxes 37,200 47,567 Other assets 37,238 41,277 ----------- ----------- Total assets $ 5,216,866 $ 5,022,070 =========== =========== Liabilities and Stockholders' Equity Liabilities: Reserves for losses and loss expenses $ 2,538,650 $ 2,533,917 Unearned premiums 773,388 713,239 Due to reinsurers 150,666 132,521 Short-term debt -- 10,000 Trading securities sold but not yet purchased, at fair value (proceeds $171,778 and $164,312) 162,783 169,020 Long-term debt 370,257 370,158 Other liabilities 157,441 182,273 ----------- ----------- Total Liabilities 4,153,185 4,111,128 ----------- ----------- Trust preferred securities 198,179 198,169 Minority interest 32,324 31,877 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, 28,977,079 and 25,656,362 shares 7,902 7,281 Additional paid-in capital 455,887 334,061 Retained earnings 580,847 574,345 Accumulated other comprehensive income 38,485 19,371 Treasury stock, at cost, 10,531,765 and 10,747,482 shares (249,943) (254,162) ----------- ----------- 833,178 680,896 ----------- ----------- $ 5,216,866 $ 5,022,070 =========== ===========
See accompanying notes to consolidated financial statements. 1 3 W. R. Berkley Corporation and Subsidiaries Consolidated Statements of Operations (Unaudited) (Amounts in thousands except per share data)
For the Three Months Ended March 31, ------------------------ 2001 2000 --------- --------- Revenues: Net premiums written $ 431,911 $ 385,761 Change in unearned premiums (52,976) (27,017) --------- --------- Premiums earned 378,935 358,744 Net investment income 50,430 46,928 Service fees 17,592 16,526 Realized investment gains 1,836 468 Other income 360 658 --------- --------- Total revenues 449,153 423,324 --------- --------- Expenses: Losses and loss expenses 271,468 261,759 Other operating expenses 152,623 145,357 Interest expense 11,450 12,493 Restructuring charge -- 1,850 --------- --------- Total expenses 435,541 421,459 --------- --------- Income before income taxes and minority interest 13,612 1,865 Income tax (expense) benefit (2,484) 2,652 Minority interest (862) (171) --------- --------- Net income $ 10,266 $ 4,346 ========= ========= Net income per share: Basic $ .38 $ .17 ========= ========= Diluted $ .36 $ .17 ========= ========= Average shares outstanding: Basic 26,949 25,617 ========= ========= Diluted 28,255 25,679 ========= =========
See accompanying notes to consolidated financial statements. 2 4 W. R. Berkley Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands)
For the Three Months Ended March 31, 2001 2000 --------- --------- Cash flows from operating activities: Net income $ 10,266 $ 4,346 Adjustments to reconcile net income to cash flows provided by operating activities: Minority interest 862 171 Change in reserves for losses and loss expenses, net 1,354 25,960 Depreciation and amortization 5,141 5,724 Change in unearned premiums and prepaid reinsurance premiums 52,827 26,558 Change in premiums and fees receivable (33,710) (25,993) Change in federal and foreign income taxes 2,030 (2,586) Change in deferred policy acquisition cost (10,798) (9,234) Realized investment gains (1,836) (468) Other, net (19,035) (7,269) --------- --------- Net cash flows provided by operating activities before trading account 7,101 17,209 Decrease (increase) in trading account securities 2,120 (7,152) --------- --------- Net cash flows provided by operating activities 9,221 10,057 --------- --------- Cash flows provided by (used in) investing activities: Proceeds from sales, excluding trading account: Fixed maturity securities available for sale 198,196 638,365 Equity securities 4,573 -- Maturities and prepayments of fixed maturity securities 38,356 51,679 Cost of purchases, excluding trading account: Fixed maturity securities available for sale (269,045) (617,692) Equity securities (5,775) (26,060) Change in balances due to/from security brokers 2,087 33,614 Net additions to real estate, furniture and equipment (6,033) (3,310) Other, net 136 -- --------- --------- Net cash flows provided by (used in) investing activities (37,505) 76,596 --------- --------- Cash flows provided by (used in) financing activities: Net proceeds from issuance of common stock 121,385 -- Net change in short-term debt (10,000) 10,000 Cash dividends (3,332) (2,738) Purchase of treasury shares (289) -- Repayment of long-term debt -- (25,000) Other, net 4,430 365 --------- --------- Net cash flows provided by (used in) financing 112,194 (17,373) --------- --------- activities Net increase in cash and invested cash 83,910 69,280 Cash and invested cash at beginning of year 309,131 315,474 --------- --------- Cash and invested cash at end of period $ 393,041 $ 384,754 ========= ========= Supplemental disclosure of cash flow information: Interest paid $ 6,778 $ 7,649 ========= ========= Federal income taxes paid, net $ 279 $ 167 ========= =========
See accompanying notes to consolidated financial statements. 3 5 W. R. Berkley Corporation and Subsidiaries Notes to Consolidated Financial Statements March 31, 2001 (Unaudited) The accompanying consolidated financial statements should be read in conjunction with the following notes and with the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 1. FEDERAL AND FOREIGN INCOME TAXES The federal and foreign income tax provision has been computed based on the Company's estimated annual effective tax rate which differs from the Federal income tax rate of 35% principally because of tax-exempt investment income. 2. 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 purpose of calculating basic per share amounts. The related amounts due from shareholders are excluded from stockholders' equity. On March 6, 2001 the Company issued 3,105,000 shares of its common stock. The Company received net proceeds of $121 million from the offering. 3. REINSURANCE CEDED The amounts of ceded reinsurance included in the statements of operations are as follows (amounts in thousands):
For the Three Months Ended March 31, -------------------- 2001 2000 ---- ---- Ceded premiums written $83,360 $76,630 ======= ======= Ceded premiums earned $76,701 $70,040 ======= ======= Ceded losses and loss expenses $69,344 $55,694 ======= =======
4. COMPREHENSIVE INCOME The differences between comprehensive income and net income are unrealized foreign exchange gains (losses) as well as unrealized gains (losses) on securities. The following is a reconciliation of comprehensive income (amounts in thousands):
For the three months Ended March 31, ---------------------- 2001 2000 -------- -------- Net income $ 10,266 $ 4,346 Other comprehensive income: Change in unrealized foreign exchange gains (losses) (460) 131 Unrealized holding gains (losses) on investment securities arising during the period, net of taxes 20,767 5,726 Reclassification adjustment for realized gains included in net income, net of taxes (1,193) (304) -------- -------- Other comprehensive income 19,114 5,553 -------- -------- Comprehensive income $ 29,380 $ 9,899 ======== ========
4 6 5. INDUSTRY SEGMENTS The Company's operations are presently conducted through five segments: specialty; alternative markets; reinsurance; regional property casualty insurance 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 segment writes property and casualty insurance, as well as life insurance, in Argentina and the Philippines. For the three months ended March 31, 2001 and 2000, the international segment wrote life insurance premiums of $7.9 million and $8.3 million, respectively. Effective January 1, 2001, management responsibility and financial reporting for alternative markets business produced through traditional reinsurance intermediaries was transferred from the alternative markets segment to the reinsurance segment. Segment information for the prior period has been restated to reflect the change. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Income tax expense (benefits) were calculated in accordance with the Company's tax sharing agreements, which provide for the recognition of tax loss carry-forwards 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 inter-company 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.
INCOME REVENUES (LOSS) -------------------------------------- BEFORE INCOME TAX INVESTMENT UNAFFILIATED INTER- INCOME (EXPENSE) (AMOUNTS IN THOUSANDS) INCOME CUSTOMERS SEGMENT TOTAL TAXES BENEFITS --------- --------- --------- --------- --------- --------- For the three months ended March 31, 2001: Specialty $ 10,362 $ 86,084 $ 678 $ 86,762 $ 8,856 $ 1,405 Alternative Markets 9,807 52,121 427 52,548 8,764 2,560 Reinsurance 13,316 100,622 464 101,086 1,582 518 Regional 13,887 173,381 361 173,742 5,435 816 International 3,323 35,189 -- 35,189 2,143 595 Corporate other and Eliminations (265) 1,756 (1,930) (174) (15,018) (3,410) --------- --------- --------- --------- --------- --------- Consolidated $ 50,430 $ 449,153 -- $ 449,153 $ 11,762 $ 2,484 ========= ========= ========= ========= ========= ========= For the three months ended March 31, 2000: Specialty $ 11,114 $ 76,520 $ 254 $ 76,774 $ 3,868 $ (493) Alternative Markets 8,306 40,035 367 40,402 5,961 (1,571) Reinsurance 13,100 99,784 102 99,886 5,452 (923) Regional 13,124 179,792 135 179,927 1,836 (1,636) International 2,067 26,183 -- 26,183 929 (379) Corporate other and Eliminations (783) 1,010 (858) 152 (16,181) 7,654 --------- --------- --------- --------- --------- --------- Consolidated $ 46,928 $ 423,324 $ -- $ 423,324 $ 1,865 $ 2,652 ========= ========= ========= ========= ========= =========
5 7 Interest expense for the reinsurance and alternative market segments was $765,000 and $717,000 for the three months ended March 31, 2001 and 2000, respectively. Corporate interest expense (net of intercompany amounts) was $10,685,000 and $11,776,000 for the corresponding periods. Identifiable assets by segment are as follows (Amounts in thousands):
MARCH 31, DECEMBER 31, 2001 2000 ----------- ----------- Specialty $ 1,425,301 $ 1,425,123 Alternative Markets 832,720 759,935 Reinsurance 1,799,539 1,787,940 Regional 1,532,749 1,498,179 International 259,834 248,243 Corporate other and Elimination (633,277) (697,350) ----------- ----------- Consolidated $ 5,216,866 $ 5,022,070 =========== ===========
6. OTHER MATTERS Reclassifications have been made in the 2000 financial statements as originally reported to conform them to the presentation of the 2001 financial statements. In the opinion of management, the summarized financial information reflects all adjustments which are necessary for a fair presentation of financial position and results of operations for the interim periods. Seasonal weather variations affect the severity and frequency of losses sustained by the insurance and reinsurance subsidiaries. Although the effect on the Company's business of such natural catastrophes as tornadoes, hurricanes, hailstorms and earthquakes is mitigated by reinsurance, they nevertheless can have a significant impact on the results of any one or more reporting periods. 7. RECENT ACCOUNTING PRONOUNCEMENTS In the first quarter 2001 the Company adopted FAS 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments. The adoption of this statement did not have a material impact on the Company's results of operations or financial condition. 8. SAFE HARBOR STATEMENT This Quarterly Report on Form 10-Q 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, catastrophe and storm losses, legislative and regulatory developments, investment results, availability and use of reinsurance, and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. These risks could cause the Company's actual results for the 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. 6 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Operating Results for the First Three Months of 2001 Compared to the First Three Months of 2000 Net income was $10.3 million ($.36 per diluted share) for the first quarter of 2001 compared with a $4.3 million ($.17 per diluted share) for the corresponding 2000 period. Operating income, which is defined as net income before realized investment gains, was $9.1 million ($.32 per diluted share) for the first quarter of 2001 compared with $4.0 million ($.15 per diluted share) in the corresponding 2000 quarter. Adjusting for the restructuring charge, operating income was $5.2 million ($.20 per diluted share) for the first quarter of 2000. Net premiums written during the first quarter of 2001 increased by 12% to $432 million from $386 million written in the comparable 2000 period. Specialty net premiums written increased by $37.8 million, or 55% due to an increase in policy rates and a decrease in premiums ceded. Alternative markets net premiums written increased $10.6 million, or 29%, due to an increase in workers' compensation rates and policy counts. Net premiums written by the reinsurance operations decreased by $14.4 million, or 16%, primarily due to the planned reduction in treaty business, which was partially offset by an increase in facultative business. Net premiums written by the regional segment increased by $4.9 million, or 3%, as price increases were offset by a decrease in policy count. International net premiums written increased $7.3 million, or 28%, due to growth in Argentina. Net investment income increased by 7% to $50.4 million for the three months ended March 31, 2001. The increase in investment income was due to a higher yield on the fixed income portfolio and an increase in average investable assets. The yield on the Company's merger arbitrage portfolio was 6.1% in 2001 compared with 8.3% in 2000 (see "Liquidity and Capital Resources"). Service fees consist primarily of revenues earned by the alternative markets segment. During the first quarter of 2001, service fees increased 6% to $17.6 million due to new accounts and higher revenues on existing accounts. Realized investment gains increased to $1.8 million from $0.5 million earned in the comparable 2000 period. Realized investment gains and losses result from security sales and from the change in provision for other than temporary impairment of securities. Losses and loss expenses increased 4% to $271 million. The GAAP loss ratio (losses and loss expenses expressed as a percentage of premiums earned) for the property casualty business decreased to 72.0% in 2001 from 73.1% in 2000. The decrease was due to lower loss ratios for the specialty and regional businesses, primarily as a result of price increases and other underwriting actions. These were partially offset by an increase in the reinsurance loss ratio due primarily to higher claim activity for the treaty business. 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 5% to $152.6 million. The increase in other operating costs and expenses is primarily due to the growth in premiums earned which in turn results in an increase in underwriting expenses. The GAAP expense ratio (underwriting expenses expressed as a percentage of premiums earned) for the property casualty business was 34.1% in 2001 compared with 33.9% in 2000. First quarter 2000 results include an after-tax restructuring charge of $1.2 million, or 5 cents per diluted share, related to the reorganization of the Company's reinsurance operations. 7 9 The Federal income tax expense in 2001 was $2.5 million compared with a benefit of $2.7 million for the comparable 2000 period. The effective tax rate differs from the Federal income tax rate of 35% principally because of tax-exempt investment income. Liquidity and Capital Resources Cash flow from operating activities before trading account decreased to $7.1 million for the first quarter of 2001 from $17.2 million for the same period in 2000 due to an increase in claim activity. The investment portfolio, (including account receivable from brokers and clearing organizations and securities sold but not yet purchased), on a cost basis, increased by $114.7 million to $3,188.6 million at March 31, 2001 from $3,073.9 million at December 31, 2000 due to the proceeds of $121 million from the common stock offering. At March 31, 2001, as compared with December 31, 2000, the fixed maturity investment portfolio was as follows: U.S. Government and cash equivalent were 31% (32% in 2000); state and municipal securities were 24% (22% in 2000); mortgage-backed securities were 22% (22% in 2000); corporate securities were 20% (21% in 2000) and Argentine and Philippine sovereign bonds were 3% (3% in 2000). 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 $445 million as of March 31, 2001 compared with $448 million as of December 31, 2000. On March 6, 2001, the Company issued 3,105,000 shares of its common stock and received net proceeds of $121 million. In March, the Company repaid $10 million short-term debt that was outstanding since December 31, 2000. For the first quarter of 2001, stockholders' equity increased by approximately $152 million to $833 million due to the common stock offering of $121 million and comprehensive income of $29 million. At March 31, 2001 the Company's total capitalization was $1,402 million and the percentage of the Company's capital attributable to long-term debt was 26%, compared with 30% at December 31, 2000. For background information concerning discussion of the Company's Liquidity and Capital Resources, see the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Item 3. Quantitative and Qualitative Disclosure About Market Risk The Company's market risk generally represents the risk of gain or loss that may result from the potential change in the fair value of the Company's investment portfolio as a result of fluctuations in prices, interest rates and currency exchange rates. The Company attempts to manage its interest rate risk by maintaining an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities, i.e., policy claims and debt obligations. The Company has maintained approximately the same duration of its investment portfolio to its liabilities from December 31, 2000 to March 31, 2001, and the overall market risk relating to the Company's portfolio has remained similar to the risk at December 31, 2000. 8 10 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Number None (b) Reports on Form 8-K During the quarter ended March 31, 2001, the Company filed the following Reports on Form 8-K: 1. Report dated January 24, 2001 with respect to an amendment of the Company's credit agreement (under Item 5 of Form 8-K). 2. Report dated February 6, 2001 with respect to a press release announcing certain matters relating to results of operations of the Company for the year ended December 31, 2000 (under Item 5 of Form 8-K). 3. Report dated February 26, 2001 with respect to copy of the edited conference call transcript regarding the results of operations for the year ended December 31, 2000 (under Item 5 of Form 8-K). 4. Report dated February 28, 2001 with respect to the Company entering into an underwriting agreement with several underwriters with respect to the issue and sale of the Company's common stock (under Item 5 of Form 8-K). 9 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. W. R. BERKLEY CORPORATION Date: May 15, 2001 /s/ WILLIAM R. BERKLEY -------------------------------- William R. Berkley Chairman of the Board and Chief Executive Officer Date: May 15, 2001 /s/ EUGENE G. BALLARD -------------------------------- Eugene G. Ballard Senior Vice President, Chief Financial Officer and Treasurer 10 -----END PRIVACY-ENHANCED MESSAGE-----