10-Q 1 y52458e10-q.txt 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 June 30, 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 06830 -------------------------------------------------------------------------------- (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 August 2, 2001: 29,063,800 2 Part I - FINANCIAL INFORMATION ITEM 1. Financial Statements W. R. Berkley Corporation and Subsidiaries Consolidated Balance Sheets
(Dollars in thousands) June 30, December 31, 2001 2000 ----------- ----------- Assets (Unaudited) Investments: Invested cash $ 369,148 $ 308,193 Fixed maturity securities: Held to maturity, at cost (fair value $166,388 and $164,229) 157,027 156,067 Available for sale, at fair value (cost $2,147,020 and $2,087,338) 2,180,207 2,115,824 Equity securities, at fair value: Available for sale (cost $72,041 and $76,545) 85,009 83,823 Trading account (cost $247,708 and $340,617) 250,313 347,271 Cash 18,310 938 Premiums and fees receivable 474,244 416,243 Due from reinsurers 724,673 713,392 Accrued investment income 35,924 36,578 Prepaid reinsurance premiums 100,147 99,444 Deferred policy acquisition costs 215,488 196,231 Real estate, furniture & equipment at cost, less accumulated depreciation 119,553 118,282 Excess of cost over net assets acquired 68,158 71,496 Trading account receivable from brokers and clearing organizations 303,666 269,444 Deferred federal and foreign income taxes 46,772 47,567 Other assets 48,576 41,277 ----------- ----------- Total assets $ 5,197,215 $ 5,022,070 =========== =========== Liabilities and Stockholders' Equity Liabilities: Reserves for losses and loss expenses $ 2,544,854 $ 2,533,917 Unearned premiums 802,564 713,239 Due to reinsurers 167,820 132,521 Short-term debt -- 10,000 Trading securities sold but not yet purchased, at fair value (proceeds $93,480 and $164,312) 97,648 169,020 Long-term debt 370,356 370,158 Other liabilities 159,284 182,273 ----------- ----------- Total Liabilities 4,142,526 4,111,128 ----------- ----------- Trust preferred securities 198,189 198,169 Minority interest 28,940 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, 29,013,787 and 25,656,362 shares 7,902 7,281 Additional paid-in capital 456,273 334,061 Retained earnings 586,675 574,345 Accumulated other comprehensive income 25,906 19,371 Treasury stock, at cost, 10,495,057 and 10,747,482 shares (249,196) (254,162) ----------- ----------- Total stockholders' equity 827,560 680,896 ----------- ----------- Total liabilities and stockholders' equity $ 5,197,215 $ 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 For the Six Months Ended June 30, Ended June 30, ----------------------------- ------------------------------ Revenues: 2001 2000 2001 2000 --------- --------- --------- --------- Net premiums written $ 453,888 $ 350,081 $ 885,799 $ 735,842 Change in unearned premiums (35,828) 12,026 (88,804) (14,991) --------- --------- --------- --------- Premiums earned 418,060 362,107 796,995 720,851 Net investment income 50,368 49,584 100,798 96,512 Service fees 19,111 19,191 36,703 35,717 Realized investment gains 2,561 325 4,397 793 Other income 897 726 1,257 1,384 --------- --------- --------- --------- Total revenues 490,997 431,933 940,150 855,257 Expenses: Losses and loss expenses 296,653 265,493 568,121 527,252 Other operating expenses 169,319 148,220 321,942 293,577 Interest expense 11,412 11,791 22,862 24,284 Restructuring charge -- -- -- 1,850 --------- --------- --------- --------- Total expenses 477,384 425,504 912,925 846,963 --------- --------- --------- --------- Income before income tax and minority interest 13,613 6,429 27,225 8,294 Income tax (expense) benefit (3,074) 564 (5,558) 3,216 Minority interest (941) (357) (1,803) (528) --------- --------- --------- --------- Net income $ 9,598 $ 6,636 $ 19,864 $ 10,982 ========= ========= ========= ========= Net income per share: Basic $ .33 $ .26 $ .71 $ .43 ========= ========= ========= ========= Diluted $ .32 $ .26 $ .68 $ .43 ========= ========= ========= ========= Average shares outstanding: Basic 28,990 25,621 27,975 25,619 ========= ========= ========= ========= Diluted 30,051 25,796 29,243 25,725 ========= ========= ========= =========
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 Six Months Ended June 30, 2001 2000 --------- --------- Cash flows from (used in) operating activities: Net income $ 19,864 $ 10,982 Adjustments to reconcile net income to cash flows from (used in) operating activities: Minority interest 1,803 528 Change in reserves for losses and loss expenses, net of due to/from reinsurers 34,955 37,987 Depreciation and amortization 9,272 10,207 Change in unearned premiums and prepaid reinsurance premiums 88,622 14,878 Change in premiums and fees receivable (58,939) (22,045) Change in Federal and foreign income taxes 3,369 (3,304) Change in deferred acquisition cost (19,257) (9,139) Realized gains on investments (4,397) (793) Other, net (32,144) (25,057) --------- --------- Net cash flows from operating activities before trading account sales 43,148 14,244 Trading account sales, net (6,418) (17,545) --------- --------- Net cash flows from (used in) operating activities 36,730 (3,301) --------- --------- Cash flows from (used in) investing activities: Proceeds from sales, excluding trading account: Fixed maturity securities available for sale 281,031 752,816 Equity securities 17,983 29,884 Proceeds from maturities and prepayments of fixed maturity securities 83,215 87,610 Cost of purchases, excluding trading account: Fixed maturity securities available for sale (427,746) (762,630) Equity securities (10,526) (58,238) Change in balances due to/from security brokers (7,892) (4,489) Net additions to real estate, furniture & equipment (9,913) (4,389) Net proceeds from sale (purchase) of subsidiaries 2,348 2,532 Other, net 969 1,000 --------- --------- Net cash flows from (used in) investing activities (70,531) 44,096 --------- --------- Cash flows from (used in) financing activities: Net proceeds from stock offering 121,400 -- Net repayment of short-term debt (10,000) (35,000) Cash dividends to common stockholders (7,096) (6,067) Net proceeds from issuance of treasury shares 4,966 143 Retirement of long-term debt -- (25,000) Other, net 2,858 124 --------- --------- Net cash flows from (used in) financing activities 112,128 (65,800) --------- --------- Net increase (decrease) in cash and invested cash 78,327 (25,005) Cash and invested cash at beginning of year 309,131 315,474 --------- --------- Cash and invested cash at end of period 387,458 290,469 ========= ========= Supplemental disclosure of cash flow information: Interest paid $ 22,758 $ 24,532 ========= ========= Federal and foreign income taxes paid, net $ 1,230 $ 218 ========= =========
See accompanying notes to consolidated financial statements. 3 5 W. R. Berkley Corporation and Subsidiaries Notes to Consolidated Financial Statements June 30, 2001 (Unaudited) The accompanying interim consolidated financial statements should be read in conjunction with the following notes and with the 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. 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. Diluted per share data reflects the potential dilution that would occur if dilutive employee stock options were exercised. 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 For the Six Months Ended June 30, Ended June 30, ------------------------ ------------------------ 2001 2000 2001 2000 -------- -------- -------- -------- Ceded premiums written $ 85,275 $ 84,196 $168,635 $160,826 ======== ======== ======== ======== Ceded premiums earned $ 91,510 $ 76,304 $168,211 $146,344 ======== ======== ======== ======== Ceded losses and loss expenses $ 61,146 $ 46,101 $130,490 $101,795 ======== ======== ======== ========
Ceded earned premiums were $168 million in the first six months of 2001 and included ceded earned premiums of $15 million in the second quarter under the aggregate reinsurance agreement. In 2001, the Company implemented a series of changes to its ceded reinsurance program. These changes included increasing the catastrophe reinsurance protection for weather-related losses to a maximum of $48.5 million (from $34 million in 2000) above our retention of $6 million, increasing retention levels for individual property casualty risks (generally to $1 million in 2001 from $300,000 to $500,000 in 2000) and replacing various individual reinsurance contracts with a multi-year aggregate reinsurance agreement. The aggregate reinsurance agreement provides protection for individual losses on an excess of loss or quota share basis, as specified for each class of business covered by the agreement, and also provides protection for our reinsurance segment for loss and loss adjustment expenses incurred above a certain level beginning for the 2001 accident year. Coverage begins as the various predecessor treaties expire through April 1, 2002 and is subject to annual limits and an aggregate limit over the contract period. 4 6 W. R. Berkley Corporation and Subsidiaries Notes to Consolidated Financial Statements, Continued 4. COMPREHENSIVE INCOME (LOSS) The differences between comprehensive income (loss) 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 (loss)(amounts in thousands):
For the Three Months For the Six Months Ended June 30, Ended June 30, 2001 2000 2001 2000 -------- -------- -------- -------- Net income $ 9,598 $ 6,636 $ 19,864 $ 10,982 -------- -------- -------- -------- Other comprehensive income (loss): Change in unrealized foreign exchange gains (losses) 77 (174) (383) (43) Unrealized holding gains(losses)on investment securities arising during the period (14,321) 2,782 4,060 7,900 Reclassification adjustment for gains included in net income, net of tax 1,665 211 2,858 515 -------- -------- -------- -------- Other comprehensive income (loss) (12,579) 2,819 6,535 8,372 -------- -------- -------- -------- Comprehensive income (loss) $ (2,981) $ 9,455 $ 26,399 $ 19,354 ======== ======== ======== ========
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 writing workers' compensation insurance and providing insurance services for public entities, provide 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 six months ended June 30, 2001 and 2000, the international segment wrote life insurance premiums of $15.7 million and $16.4 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 and interest on inter-company debt. Identifiable assets by segment are those assets used in the operation of each segment. 5 7 W. R. Berkley Corporation and Subsidiaries Notes to Consolidated Financial Statements, Continued
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 June 30, 2001: Specialty $ 10,152 $102,118 $ 576 $102,694 $ 12,351 $ (3,260) Alternative Markets 9,521 55,379 458 55,837 11,094 (3,221) Reinsurance 12,950 105,663 592 106,255 1,873 (283) Regional 14,147 188,192 320 188,512 394 1,248 International 3,213 37,444 -- 37,444 3,983 (1,601) Corporate other and Eliminations 385 2,201 (1,946) 255 (16,082) 4,043 ------- ------- ------ ------- ------- ------- Consolidated $ 50,368 $490,997 $ -- $490,997 $ 13,613 $ (3,074) ======= ======== ======= ======= ======== ======== For the three months ended June 30 2000: Specialty $ 11,838 $ 79,976 $ 1,068 $ 81,044 $ 6,799 $ (1,954) Alternative Markets 7,717 49,253 (345) 48,908 10,352 (2,361) Reinsurance 13,340 97,834 297 98,131 4,135 (867) Regional 14,754 174,217 746 174,963 (3,153) 2,740 International 2,096 27,388 -- 27,388 1,178 (233) Corporate other and Eliminations (161) 3,265 (1,766) 1,499 (12,882) 3,239 ------- ------- ------- ------- ------- -------- Consolidated $ 49,584 $431,933 $ -- $431,933 $ 6,429 $ 564 ======= ======= ======= ======= ======= ========
Interest expense for the reinsurance and alternative market segments was $772,000 and $743,000 for the three months ended June 30, 2001 and 2000, respectively. Corporate interest expense (net of intercompany amounts) was $10,640,000 and $11,048,000 for the corresponding periods.
Income Revenues (Loss) ---------------------------------------------- Before Income Tax Investment Unaffiliated Inter- Income (Expense) (Amounts in thousands) Income Customers Segment Total Taxes Benefits --------- --------- --------- --------- --------- --------- For the six months ended June 30, 2001: Specialty $ 20,514 $ 188,202 $ 1,254 $ 189,456 $ 21,207 $ (4,665) Alternative Markets 19,328 107,500 885 108,385 19,858 (5,781) Reinsurance 26,266 206,285 1,056 207,341 5,305 (801) Regional 28,034 361,573 681 362,254 5,829 432 International 6,536 72,633 -- 72,633 6,126 (2,196) Corporate other and Eliminations 120 3,957 (3,876) 81 (31,100) 7,453 --------- --------- --------- --------- --------- --------- Consolidated $ 100,798 $ 940,150 $ -- $ 940,150 $ 27,225 $ (5,558) ========= ========= ========= ========= ========= ========= For the six months ended June 30, 2000: Specialty $ 22,952 $ 156,496 $ 1,322 $ 157,818 $ 10,667 $ (2,447) Alternative Markets 16,023 89,288 22 89,310 16,313 (3,932) Reinsurance 26,440 197,618 399 198,017 9,587 (1,790) Regional 27,878 354,009 881 354,890 (1,317) 1,104 International 4,163 53,571 -- 53,571 2,107 (612) Corporate other and Eliminations (944) 4,275 (2,624) 1,651 (29,063) 10,893 --------- --------- --------- --------- --------- --------- Consolidated $ 96,512 $ 855,257 $ -- $ 855,257 $ 8,294 $ 3,216 ========= ========= ========= ========= ========= =========
Interest expense for the reinsurance and alternative market segments was $1,537,000 and $1,460,000 for the six months ended June 30, 2001 and 2000, respectively. Corporate interest expense (net of intercompany amounts) was $21,325,000 and $22,824,000 for the corresponding periods. Identifiable assets by segment are as follows (amounts in thousands):
June 30, December 31, 2001 2000 ---------- ---------- Specialty $ 1,401,180 $ 1,425,123 Alternative Markets 817,179 759,935 Reinsurance 1,817,350 1,787,940 Regional 1,537,715 1,498,179 International 267,720 248,243 Corporate other and eliminations (643,929) (697,350) ---------- ---------- Consolidated $ 5,197,215 $ 5,022,070 ========== ==========
6 8 W. R. Berkley Corporation and Subsidiaries Notes to Consolidated Financial Statements, Continued 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 (consisting of normal recurring accrual or adjustments)which are necessary for a fair presentation of financial position and results of operations for the interim periods. The consolidated results of operations for the interim periods are not necessarily indicative of the results to be anticipated for the entire year. 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. In July 2001, the FASB issued Statement No. 141, "Business Combinations", and Statement No. 142, "Goodwill and Other Intangible Assets". Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Amortization of goodwill was $2,071,000 and $1,953,000 for the six months ended June 30, 2001 and 2000, respectively. Statement 142 will also require that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with FAS Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Statement 142 is effective in fiscal years beginning after December 15, 2001. Impairment losses for goodwill and indefinite-lived intangible assets that arise due to the initial application of this Statement (resulting from a transitional impairment test) are to be reported as resulting from a change in accounting principle. Retroactive application is not permitted. The Company has not yet determined the impact of Statement 142 to its consolidated financial statements. 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, impairment of investments, including foreign securities, 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. 7 9 W. R. Berkley Corporation and Subsidiaries MD&A Financial Condition and Results of Operations Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Operating Results for the First Six Months of 2001 as Compared to the First Six Months of 2000 Net income was $20 million, or 68 cents per diluted share, in the first six months of 2001 compared with $11 million, or 43 cents per diluted share, in the earlier-year period. Following are the components of net income for the six months ended June 30, 2001 and 2000 (amounts in thousands).
2001 2000 --------- --------- Underwriting loss $ (51,547) $ (59,549) Insurance services 4,269 2,722 Net investment income 100,798 96,512 Interest expense and other (30,692) (30,334) Restructuring charge -- (1,850) --------- --------- Pretax income before realized investment gains 22,828 7,501 Realized investment gains 4,397 793 Income tax (expense) benefit and minority interest (7,361) 2,688 --------- --------- Net income $ 19,864 $ 10,982 ========= =========
Underwriting - Gross and net written premiums increased by 18% and 20%, respectively, in the first six months of 2001 compared with the earlier-year period. Following is a summary of gross and net written premiums by business segment for the six months ended June 30, 2001 and 2000 (amounts in thousands).
Gross Written Premiums Net Written Premiums 2001 2000 % Change 2001 2000 % Change ---------- ---------- ---------- ---------- ---------- ---------- Specialty $ 273,664 $ 204,389 34% $ 231,731 $ 137,691 68% Alternative Markets 78,914 54,807 44% 70,398 49,580 42% Reinsurance 209,904 195,472 7% 160,222 168,294 (5%) Regional 411,255 375,203 10% 352,807 326,518 8% International 80,697 66,797 21% 70,641 53,759 31% ---------- ---------- ---------- ---------- ---------- ---------- Total $1,054,434 $ 896,668 18% $ 885,799 $ 735,842 20% ========== ========== ========== ========== ========== ==========
The increase in gross written premiums reflects higher prices for all five business segments and an increase in new business for the alternative markets and international segments. Gross written premiums for the reinsurance segment also reflect a planned reduction in pro rata treaty business. Ceded premiums written expressed as a percentage of gross premiums written decreased to 16% from 18% in the prior year. The decrease reflects higher net retentions for business written by the specialty and regional segments, which was partially offset by premiums ceded under the aggregate reinsurance agreement (see Note 3 of "Notes to Consolidated Financial Statements"). 8 10 W. R. Berkley Corporation and Subsidiaries MD&A Financial Condition and Results of Operations Continued Underwriting results represent premiums earned less loss and loss expenses incurred and underwriting expenses incurred. Underwriting losses decreased by 13% to $52 million in for the six months ended June 30, 2001 compared with $60 million in the earlier-year period. Underwriting losses included weather-related losses of $40 million in 2001 compared with $24 million in 2000. The increase in weather-related losses was the result of a higher frequency of storms in the midwest states. Ceded losses and loss expenses were $130 million in the first six months 2001 and included loss recoveries of $27 million in the second quarter under the aggregate reinsurance agreement. Following is a summary of earned premiums and combined ratios (losses, loss expenses and underwriting expenses expressed as a percentage of premiums earned) by business segment for the six months ended June 30, 2001 and 2000 (amounts in thousands).
Earned premiums Combined Ratio 2001 2000 2001 2000 ---- ---- ---- ---- Specialty $ 167,233 $ 132,148 100.6% 108.8% Alternative Markets 53,370 39,729 105.8% 109.8% Reinsurance 178,625 172,729 112.4% 107.3% Regional 332,017 327,000 107.4% 108.9% International 65,750 49,245 101.1% 104.5% ---------- --------- ----- ----- Total $ 796,995 $ 720,851 106.5% 108.2% ========= ========= ===== =====
The decrease in the specialty combined ratio reflects the impact of pricing actions and other underwriting initiatives, particularly for excess and surplus lines and commercial transportation business. The decrease in the alternative markets combined ratio reflects a lower expense ratio as a result of higher premium volume. The increase in the reinsurance combined ratio reflects unfavorable prior year loss development for treaty business, somewhat offset by the benefits of the various reinsurance agreements including the aggregate reinsurance agreement. The decrease in the regional combined ratio reflects the impact of pricing actions and other underwriting initiatives. The regional combined ratio also reflects the impact of higher storm losses. The decrease in the international combined ratio reflects lower losses and expenses for automobile business in Argentina. Insurance Services - Insurance services income represents service fees less related costs and expenses for the alternative markets' insurance services business. Insurance service fees increased 13% to $36 million as a result of new accounts and higher revenues on existing accounts, and insurance services income increased 57% to $4 million. Investments - The increase in net investment income of 4% reflects a higher yield on the fixed income portfolio as a result of changes in asset allocations and an increase in average invested assets. Net investment income also reflects a decrease in the yield on the merger arbitrage account to 5.9% in 2001 from 9.5% in 2000. Other Items - Interest and other represents interest expense, corporate expenses, and other miscellaneous income and expenses. The restructuring charge in 2000 related to the reorganization of the reinsurance operations. Realized investment gains and losses result from security sales and from changes in provisions for other than temporary impairment of securities. The effective income tax rate differs from the federal income tax rate of 35% principally because of tax-exempt investment income. Operating Results for the Second Quarter of 2001 as Compared to the Second Quarter of 2000 Net income was $10 million, or 32 cents per diluted share, for the second quarter of 2001 compared with a $7 million, or 26 cents per diluted share, for the corresponding 2000 period. Following are the components of net income for the second quarters of 2001 and 2000 (amounts in thousands). 9 11 W. R. Berkley Corporation and Subsidiaries MD&A Financial Condition and Results of Operations, Continued
2001 2000 -------- -------- Underwriting loss $(25,549) $(31,243) Insurance services 1,975 1,924 Net investment income 50,368 49,584 Interest and other (15,742) (14,161) -------- -------- Pretax income before realized investment gains 11,052 6,104 Realized investment gains 2,561 325 Income tax (expense) benefit and minority interest (4,015) 207 -------- -------- Net income $ 9,598 $ 6,636 ======== ========
Gross and net premiums increased by 24% and 30%, respectively, reflecting price increases and changes in reinsurance costs as discussed above. Underwriting losses decreased by $6 million and the combined ratio improved to 106.1% from 108.6% in the earlier-year period, generally for the reasons discussed above. Net investment income increased by 2%, generally for the reasons discussed above. Liquidity and Capital Resources Cash flow from operating activities (before trading account sales) increased to $43 million for the first six months of 2001 from $14 million for the same period in 2000. The increase in cash flow reflects higher collected premiums, which more than offset an increase in paid losses. The cost basis of the investment portfolio (including account receivable from brokers and clearing organizations and securities sold but not yet purchased) was $3,203 million at June 30, 2001 compared with $3,074 million at December 31, 2000. The majority of the increase reflects the proceeds of $121 million from the common stock offering completed in the first quarter of 2001. At June 30, 2001, as compared with December 31, 2000, the fixed maturity investment portfolio was as follows: U.S. Government and cash equivalent were 29.0% (28.6% in 2000); state and municipal securities were 22.0% (23.7% in 2000); mortgage-backed securities were 22.5% (21.8% in 2000); corporate securities were 18.9% (18.0% in 2000) and foreign bonds were 7.6% (7.9% 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 $456 million as of June 30, 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 2001, the Company repaid $10 million short-term debt that was outstanding since December 31, 2000. For the first six months of 2001, stockholders' equity increased by approximately $147 million to $828 million due to the common stock offering of $121 million and net income of $20 million. At June 30, 2001 the Company's total capitalization was $1,396 million and the percentage of the Company's capital attributable to long-term debt was 27%, 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. 10 12 W. R. Berkley Corporation and Subsidiaries Part II - Other Information Item 2. Changes in Securities and Use of Proceeds On May 15, 2001 the company issued 188 shares of its Common Stock to each of its six directors (1,128 shares in the aggregate). The shares were issued as a portion of annual director's fees pursuant to the company's 1997 Director Stock Plan. The shares were not registered under the Securities Act of 1933 in reliance on the exemption provided in Section 4 (2) thereof for transactions not involving a public offering. 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 cost of the Company's investments in Argentine bonds and bank deposits was $127 million at June 30, 2001. The Company mitigates foreign currency exchange rate risk associated with these investments by maintaining its capital in US dollar denominated securities. Investments in Argentine bonds and bank deposits, including those denominated in US dollars, are subject to risks of changes in general political and economic conditions in Argentina and to possible impairment in value as a result of further deterioration in credit quality of such investments. 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 June 30, 2001, and the overall market risk relating to the Company's portfolio has remained similar to the risk at December 31, 2000. Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Stockholders on May 15, 2001. The meeting involved the election of directors for a term to expire at the Annual Meeting of Stockholders to be held in the year 2004 and the ratification of the appointment of independent auditors for the year 2001. The directors elected and the results of the voting are as follows: (i) Election of Directors:
Nominee Votes For Votes Withheld ------- --------- -------------- William R. Berkley, Jr 25,423,026 2,584,614 Ronald E. Blaylock 27,696,471 311,169 Mark E. Brockbank 27,696,471 311,169
(ii) Ratification of Auditors:
Votes For Votes Against, Abstained or Withheld --------- ------------------------------------ 27,811,397 196,243
11 13 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Number ------ None (b) Reports on Form 8-K During the quarter ended June 30, 2001, the Company filed the following Reports on Form 8-K: 1. Report dated April 5, 2001 with respect to the Registration Statement on Form S-3 (File No. 333-57546) (the "Registration Statement") filed by W. R. Berkley Corporation (the "Company"), W. R. Berkley Capital Trust II ("Trust II") and W. R. Berkley Capital Trust III ("Trust III" and, together with the Company and Trust II, the "Registrants") with the Securities and Exchange Commission on March 23, 2001, relating to the registration of $500,000,000 aggregate amount of securities for sale by the Registrants in accordance with the provisions of the Securities Act of 1933, as amended. 2. Report filed April 23, 2001 with respect to a press release announcing that the Company would list its common stock on the New York Stock Exchange starting on May 9, 2001 under the ticker symbol "BER". 3. Report filed May 1, 2001 with respect to a press release announcing results of operations of the Company for the first quarter of 2001. 4. Report filed May 16, 2001 with respect to a press release announcing the Company's newly elected directors. 5. Report flied June 25, 2001 amending to the form 8-K dated February 6, 2001 describing certain risk factors. That may affect the Company's business, results of operations, prospects and financial condition. 12 14 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: August 7, 2001 /s/ WILLIAM R. BERKLEY --------------------------------- William R. Berkley Chairman of the Board and Chief Executive Officer Date: August 7, 2001 /s/ EUGENE G. BALLARD --------------------------------- Eugene G. Ballard Senior Vice President, Chief Financial Officer and Treasurer 13