10-K 1 y58639e10-k.txt FORM 10-K 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, 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 (I.R.S. Employer of incorporation or organization) Identification Number) 165 Mason Street, Greenwich, CT 06830 (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: Common stock, par value $.20 per share Rights to purchase Series A Junior Participating Preferred Stock Securities registered pursuant to Section 12(g) of the Act: None 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 New York Stock Exchange as of March 20, 2002: $1,638,934,635. Number of shares of common stock, $.20 par value, outstanding as of March 20, 2002: 33,328,607. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's 2001 Annual Report to Stockholders for the year ended December 31, 2001 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, 2001, are incorporated herein by reference in Part III. W. R. BERKLEY CORPORATION ANNUAL REPORT ON FORM 10-K December 31, 2001
Page ---- SAFE HARBOR STATEMENT 3 PART I ITEM 1. BUSINESS 4 ITEM 2. PROPERTIES 24 ITEM 3. LEGAL PROCEEDINGS 24 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 26 ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 2001 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 28 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 29 ITEM 11. EXECUTIVE COMPENSATION 31 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 31 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 31 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 32
2 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 statements related to our outlook for the industry and for the Company's performance for the year 2002 and beyond, are based upon the Company's historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. 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, product demand and pricing, claims development and the process of estimating reserves, the uncertain nature of damage theories and loss amounts, the increased level of our retention, natural and man-made catastrophic losses, including as a result of terrorist activities, the impact of competition, the availability of reinsurance, the ability of our reinsurers to pay reinsurance recoverables owed to us, investment results, exchange rate and political risks, legislative and regulatory developments, changes in the ratings assigned to us by rating agencies, uncertainty as to reinsurance coverage for terrorist acts, availability of dividends from our insurance company subsidiaries, our successful integration of acquired companies or investment in new insurance ventures, our ability to attract and retain qualified employees and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. These risks could cause actual results of the industry or the Company's actual results for the year 2002 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. 3 PART I ITEM 1. BUSINESS W. R. Berkley Corporation, a Delaware corporation, is an insurance holding company which, through its subsidiaries, 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 us with the flexibility to respond to local or specific market conditions and to pursue specialty business niches. It also allows us to be closer to our customers in order 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, Southern (excluding Florida) and Mid Atlantic regions of the United States. International operations are conducted in Argentina and the Philippines. During 2001, the Company discontinued its regional personal lines and alternative markets reinsurance business. These discontinued businesses, which were previously reported in the regional and reinsurance segments, are now reported collectively as a separate Discontinued Business segment. Segment information for the prior period has been restated to reflect these changes. Net premiums written as reported, based on accounting principles generally accepted in the United States of America ("GAAP"), for each of the past five years were as follows:
Year Ended December 31, --------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (Amounts in thousands) Net premiums written: Specialty insurance operations $ 527,502 $ 285,525 $ 260,380 $ 253,472 $ 219,272 Alternative markets operations 151,942 98,001 73,089 66,418 57,848 Reinsurance operations 236,784 276,640 309,180 269,635 206,652 Regional insurance operations 598,149 499,526 497,041 486,213 467,793 International operations 150,090 118,981 86,172 75,106 42,079 Discontinued business 193,629 227,571 201,857 195,410 183,997 ---------- ---------- ---------- ---------- ---------- Total $1,858,096 $1,506,244 $1,427,719 $1,346,254 $1,177,641 ========== ========== ========== ========== ========== Percentage of net premiums written: Specialty insurance operations 28.4% 19.0% 18.2% 18.8% 18.6% Alternative markets operations 8.2 6.5 5.1 4.9 4.9 Reinsurance operations 12.7 18.4 21.7 20.0 17.6 Regional insurance operations 32.2 33.1 34.9 36.2 39.7 International operations 8.1 7.9 6.0 5.6 3.6 Discontinued business 10.4 15.1 14.1 14.5 15.6 ---------- ---------- ---------- ---------- ---------- Total 100.0% 100.0% 100.0% 100.0% 100.0% ========== ========== ========== ========== ==========
The following sections briefly describe our insurance segments. 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 states: "Best's Ratings reflect [its] opinion as to the relative financial strength and performance of each insurer in comparison with others, based on [its] analysis of the information provided to [it]. These ratings are not a warranty of an insurer's current or future ability to meet its 4 contractual obligations." A.M. Best reviews its ratings on a periodic basis, and ratings of the Company's subsidiaries are therefore subject to change. SPECIALTY INSURANCE OPERATIONS Our specialty segment underwrites complex and sophisticated third-party liability risks, principally within the excess and surplus ("E&S") lines, professional liability, commercial transportation and surety 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 Company ("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 non-exclusive brokers and coverages are provided to a wide variety of customers. Nautilus Insurance Company ("Nautilus") insures E&S risks which involve a lower degree of expected severity than those covered by Admiral. Nautilus obtains its business nationwide from 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. Monitor Liability Managers ("Monitor") is our professional liability underwriting unit. Monitor writes primarily directors' and officers' and lawyers' professional coverages. Monitor also writes management liability and employment practices liability insurance. Its business is developed nationally through a combination of wholesale and retail sources. Carolina Casualty Insurance Company ("Carolina") writes liability, physical damage and cargo insurance for the transportation industry, concentrating on long-haul trucking companies. It also writes public transportation insurance for various for-hire risks. Carolina's business is obtained nationwide from agents and brokers. 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. It also writes motorcycle coverages in upstate New York. Product distribution is through retail agents and wholesale brokers. Monitor Surety Managers ("Surety") writes surety bonds, 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, ------------------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Admiral 40.7% 39.5% 36.6% 37.7% 37.9% Carolina 19.5 10.9 18.1 20.5 18.7 Nautilus 17.9 24.8 24.7 23.0 24.7 Monitor 16.4 17.8 14.2 12.9 12.8 Clermont 3.7 4.5 4.2 4.0 4.1 Surety 1.8 2.5 2.2 1.9 1.8 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
5 The following table sets forth the percentages of direct premiums written, by line, by our specialty insurance operations:
Year Ended December 31, ------------------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- General Liability 42.4% 40.5% 30.5% 28.2% 34.1% Automobile Liability 15.2 10.6 18.3 19.0 17.7 Professional Liability 11.3 14.5 16.5 16.9 14.7 Fire and Allied Lines 9.1 9.2 7.7 7.1 7.5 Directors' and Officers' Liability 6.6 7.0 6.6 7.7 8.1 Commercial Multi-Peril 4.4 4.6 3.3 3.1 3.0 Automobile Physical Damage 3.8 4.3 6.4 6.1 4.9 Medical Malpractice 2.9 3.7 6.0 6.1 4.0 Surety 1.6 2.5 2.1 2.0 1.9 Inland Marine 2.0 1.6 1.9 1.8 1.5 Workers' Compensation 0.5 0.7 0.6 1.9 2.5 Other 0.2 0.8 0.1 0.1 0.1 ----- ----- ----- ----- ----- 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, insurers, and alternative markets funds 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 operating units 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; and providing non-risk bearing administrative services nationwide. Excess workers' compensation. We market and underwrite EWC insurance and related risk management services, including a full range of consulting services. 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. 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, government 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, 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. Primary workers'compensation. Primary workers' compensation insurance is provided in California and North Carolina. In California, insurance coverage is provided to owner-managed small employers. In North Carolina, coverage is offered primarily to employers moving out of association or individual self-insurance programs. 6 The following table sets forth the percentages of revenues, by major source of business, of our alternative markets operations:
Year Ended December 31, ------------------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Excess Workers' Compensation 36.5% 41.3% 41.8% 50.0% 56.3% Insurance Services 32.3 35.1 39.1 41.5 43.7 Primary Workers' Compensation 31.2 23.6 19.1 8.5 -- ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
REINSURANCE OPERATIONS Our reinsurance operations consist of four operating units, which specialize in underwriting property casualty reinsurance on both a treaty and a facultative basis. Treaty. Our Property Casualty Treaty Division is our largest reinsurance 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 2001, we continued 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. We also continued redirecting our treaty business toward casualty excess of loss treaties. These changes have allowed and will continue to allow us to have more significant participations and greater influence over the terms and conditions of coverage. 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. The Facultative Division also writes excess and surplus lines through its affiliate, Vela Insurance Services, Inc. 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 assess the needs of fidelity and surety primary writers. Business is marketed principally through brokers as well as directly to clients not served by intermediaries. Commencing January 1, 2002, we ceased writing business with exposures to large national risks and will focus primarily on our regional surety reinsurance business. Program Business. Our Program Business Division oversees managing general underwriting (MGU) program business, most recently through Berkley Underwriting Partners, LLC. The following table sets forth the percentages of gross premiums written, by line, by our reinsurance operations:
Year Ended December 31, ------------------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Treaty: Casualty and other 33.8% 41.3% 41.8% 39.7% 38.7% Property and related lines 4.3 11.4 15.1 19.1 16.1 Professional and specialty 7.9 9.1 10.1 8.4 5.5 Latin American and Caribbean 0.5 2.0 6.2 11.2 13.8 ----- ----- ----- ----- ----- Total Treaty 46.5 63.8 73.2 78.4 74.1 ----- ----- ----- ----- ----- Facultative: Facultative reinsurance 23.9 14.4 12.4 12.8 13.5 Excess and surplus lines 14.6 5.1 2.5 2.0 1.9 Fidelity and Surety 5.9 7.5 7.7 6.8 10.5 Program Business 9.1 9.2 4.2 -- -- ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
7 The following table sets forth the percentage of gross premiums written, by property versus casualty business, by our reinsurance operations:
Year Ended December 31, ------------------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Property 8.4% 14.4% 20.6% 31.4% 32.7% Casualty 91.6 85.6 79.4 68.6 67.3 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
REGIONAL INSURANCE OPERATIONS Our regional subsidiaries provide commercial insurance products to customers primarily in 23 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 W. R. Berkley. Our regional insurance operations are conducted through four geographic regions based on markets served: Midwest, New England, Southern 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 lines. The following table sets forth the direct premiums written by each region:
Year Ended December 31, ------------------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Midwest 42.3% 42.9% 45.1% 45.9% 46.3% New England 26.7 24.7 21.5 20.3 20.5 Southern 15.8 16.4 14.4 14.3 14.8 Mid Atlantic 15.2 16.0 19.0 19.5 18.4 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
The following table sets forth the percentages of direct premiums written, by line, by our regional insurance operations:
Year Ended December 31, ------------------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Commercial Multi-Peril 29.9% 28.9% 28.1% 26.9% 27.0% Workers' Compensation 24.3 22.7 22.8 24.2 25.4 Auto Liability 17.9 18.9 18.7 18.6 17.8 Auto Physical Damage 8.3 9.0 9.0 8.5 8.0 General Liability 8.3 8.7 8.7 8.8 8.7 Fire and Allied Lines 4.3 4.3 4.9 5.2 5.6 Inland Marine 3.9 4.1 4.4 4.2 3.9 Surety 1.0 1.0 0.9 0.9 0.5 Ocean Marine 0.9 1.0 0.9 0.8 0.7 Other 1.2 1.4 1.6 1.9 2.4 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
8 The following table sets forth the percentages of direct premiums written, by state, by our regional insurance operations:
Year Ended December 31, ----------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- State Kansas 7.9% 5.0% 4.8% 5.0% 5.1% Maine 7.9 8.0 6.8 8.0 9.2 New Hampshire 7.8 7.2 6.5 6.3 6.6 Massachusetts 7.2 5.8 4.6 2.9 0.3 Texas 6.3 6.0 5.3 5.3 5.6 Iowa 5.5 6.5 6.4 6.8 7.4 Nebraska 5.4 5.3 5.1 4.8 5.3 North Carolina 4.9 5.4 6.0 6.1 5.6 Minnesota 3.7 4.1 5.5 6.2 5.9 Vermont 3.7 3.2 3.0 3.2 3.6 Colorado 3.6 4.4 3.7 3.5 3.5 Missouri 3.5 3.7 4.4 4.4 4.7 South Dakota 3.4 2.9 3.0 3.1 3.6 Virginia 3.4 3.5 3.6 4.1 4.1 Wisconsin 2.9 2.7 3.0 3.0 3.0 Mississippi 2.5 3.1 3.1 4.0 4.3 Pennsylvania 2.4 2.1 3.7 3.3 3.9 Arkansas 2.3 2.7 2.2 2.3 2.4 Illinois 2.3 2.7 3.0 3.4 3.6 South Carolina 1.6 2.0 1.9 2.0 1.4 Tennessee 1.6 2.0 2.0 1.7 1.2 Oklahoma 1.5 1.3 1.0 0.8 0.8 Idaho 1.3 1.2 1.5 1.9 1.4 Other 7.4 9.2 9.9 7.9 7.5 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
INTERNATIONAL OPERATIONS In 1995, the Company and Northwestern Mutual Life International, Inc. ("NML"), a wholly-owned subsidiary of The Northwestern Mutual Life Insurance Company, entered into a joint venture to form Berkley International, LLC ("Berkley International"), a limited liability company. 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. International operations are conducted in Argentina and the Philippines. In Argentina, we offer commercial and personal property casualty insurance. Our Argentine business has also issued both universal life insurance and long duration contracts that, because of recent economic developments in Argentina, are subject to greater investment, political and economic risks (See "Certain Factors That May Affect Future Results.") In the Philippines, we provide savings and life products to customers, including endowment policies to pre-fund education costs and retirement income. 9 The following table set forth the percentages of direct premiums for our international operations:
Year Ended December 31, ------------------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Property casualty 77.9% 72.3% 72.3% 85.5% 96.3% Life 12.4 14.7 16.5 10.9 3.7 ----- ----- ----- ----- ----- Total Argentina 90.3 87.0 88.8 96.4 100.0 Philippines - Life 9.7 13.0 11.2 3.6 -- ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
DISCONTINUED BUSINESS In the third quarter of 2001, the Company discontinued its personal lines business, both homeowners and private passenger automobile, and the alternative markets division of its reinsurance segment, by not renewing existing policies or treaties and ceasing to write new business. The following table set forth the percentages of premiums for our inactive business:
Year Ended December 31, ------------------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Personal lines 61.8% 61.8% 74.3% 77.7% 82.6% Alternative markets reinsurance 38.2 38.2 25.7 22.3 17.4 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
RECENT DEVELOPMENTS Effective January 1, 2002, the Company entered into quota share reinsurance contracts with MAP Capital Limited, a Lloyd's corporate member, and two Lloyd's syndicates managed by Kiln plc. MAP Capital Limited and the Lloyd's syndicates are expected to underwrite, on a worldwide basis, a broad range of mainly short-tail classes of business. The Company recently announced the formation of Berkley Medical Excess Underwriters, LLC and Berkley Capital Underwriters, LLC. Berkley Medical Excess Underwriters will offer excess coverage for healthcare providers that are either self-insured or maintain their own captive facilities and reinsurance coverage for primary insurance companies that provide medical malpractice coverage to physicians and other commercial healthcare providers. Berkley Capital Underwriters will offer a proportional form of reinsurance for both domestic and international insurance operations with a strong emphasis on commercial and specialty casualty lines of insurance. Berkley Capital Underwriters will complement the Company's existing treaty operation, Signet Star Re, LLC, which primarily offers excess of loss treaty protection. 10 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, ---------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (Amounts in thousands) Specialty Insurance Total revenues $ 440,650 $ 324,859 $ 309,068 $ 311,955 $ 284,321 Income before income taxes 28,806 31,836 39,261 85,889 68,088 Alternative Markets Total revenues 234,121 189,795 169,221 162,682 151,848 Income before income taxes 32,971 35,315 20,593 34,241 31,969 Reinsurance Total revenues 281,490 349,164 341,940 297,144 242,086 Income (loss) before income taxes (54,502) 27,760 14,091 33,858 42,193 Regional Insurance Total revenues 614,924 565,327 541,368 526,099 487,098 Income (loss) before income taxes 44,403 8,761 (78,895) (3,736) 57,995 International Total revenues 137,683 118,234 93,878 80,287 45,360 Income (loss) before income taxes (6,082) 6,853 3,535 (7,017) (3,566) Discontinued business Total revenues 232,403 232,392 213,816 199,673 180,929 Loss before income taxes (133,480) (9,936) (14,141) (18,528) (7,607)
11 The table below represents summary underwriting ratios, on a GAAP 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, ------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Specialty Insurance Operations Loss ratio 71.4% 73.2% 68.0% 61.9% 62.8% Expense ratio 31.1 33.6 35.2 31.5 35.8 ----- ----- ----- ----- ----- Combined ratio 102.5% 106.8% 103.2% 93.4% 98.6% ===== ===== ===== ===== ===== Alternative Markets Operations Loss ratio 76.5% 70.2% 65.8% 61.4% 61.4% Expense ratio 32.9 38.7 41.5 43.4 39.2 ----- ----- ----- ----- ----- Combined ratio 109.4% 108.9% 107.3% 104.8% 100.6% ===== ===== ===== ===== ===== Reinsurance Operations Loss ratio 104.4% 73.2% 76.0% 74.3% 69.2% Expense ratio 36.8 33.2 33.4 31.6 31.7 ----- ----- ----- ----- ----- Combined ratio 141.2% 106.4% 109.4% 105.9% 100.9% ===== ===== ===== ===== ===== Regional Insurance Operations Loss ratio 67.2% 75.5% 87.1% 76.4% 64.5% Expense ratio 35.0 35.1 37.5 36.7 35.1 ----- ----- ----- ----- ----- Combined ratio 102.2% 110.6% 124.6% 113.1% 99.6% ===== ===== ===== ===== ===== International Operations Loss ratio 61.4% 62.1% 55.4% 59.7% 59.8% Expense ratio 40.6 41.7 47.5 59.9 62.6 ----- ----- ----- ----- ----- Combined ratio 102.0% 103.8% 102.9% 119.6% 122.4% ===== ===== ===== ===== ===== Discontinued Business Loss ratio 131.4% 75.9% 77.0% 76.0% 73.3% Expense ratio 33.0 32.8 34.0 37.4 35.2 ----- ----- ----- ----- ----- Combined ratio 164.4% 108.7% 111.0% 113.4% 108.5% ===== ===== ===== ===== ===== Total Loss ratio 82.1% 73.4% 76.8% 71.6% 66.1% Expense ratio 34.4 34.8 36.5 36.5 35.8 ----- ----- ----- ----- ----- Combined ratio 116.5% 108.2% 113.3% 108.1% 101.9% ===== ===== ===== ===== =====
12 Investments Investment results before income tax effects were as follows:
Year Ended December 31, ------------------------------------------------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (Amounts in thousands) Average investments, at cost $ 3,271,583 $3,032,281 $ 3,045,391 $2,996,707 $2,873,730 =========== ========== =========== ========== ========== Investment income, before expenses $ 206,656 $ 219,955 $ 198,556 $ 206,065 $ 205,812 =========== ========== =========== ========== ========== Percent earned on average investments 6.3% 7.3% 6.5% 6.9% 7.2% =========== ========== =========== ========== ========== Realized gains (losses) $ (11,494) $ 8,364 $ (6,064) $ 25,400 $ 13,186 =========== ========== =========== ========== ========== Change in unrealized investment gains (losses) (1) $ 19,783 $ 117,637 $ (173,084) $ 22,147 $ 66,306 =========== ========== =========== ========== ==========
(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.
2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- 1 year or less 3.2% 3.5% 3.0% 1.7% 4.4% Over 1 year through 5 years 20.5 22.1 16.4 16.0 26.4 Over 5 years through 10 years 23.2 21.8 26.0 24.4 19.1 Over 10 years 26.2 27.7 34.6 37.2 29.2 Mortgage-backed securities 26.9 24.9 20.0 20.7 20.9 ----- ----- ----- ----- ----- 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. In examining reserve adequacy, several factors are considered, including historical data, legal developments, changes in social attitudes and economic conditions, including the effects of inflation. The actuarial process relies on the basic assumption that past experience, adjusted judgmentally for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. Reserve amounts are necessarily based on management's informed estimates and judgments using data currently available. As additional experience and other data become available and are reviewed, these estimates and judgments are revised. This may result in increases or decreases to reserves for insured 13 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, other environmental exposures or man-made catastrophes, 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 for non-proportional business, and at the statutory rate for proportional business. The discount rates range from 4.3% to 6.5% with a weighted average rate of 5.5%. The aggregate net discount, after reflecting the effects of ceded reinsurance, is $243,000,000, $223,000,000 and $196,000,000 at December 31, 2001, 2000 and 1999, 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 $24,794,000 and $29,422,000 at December 31, 2001 and 2000, respectively. The Company's gross reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $43,405,000 and $57,167,000 at December 31, 2001 and 2000, respectively. Net incurred losses and loss expenses (recoveries) for reported asbestos and environmental claims were approximately ($4,503,000), $1,602,000 and $1,371,000 in 2001, 2000 and 1999, respectively. Net paid losses and loss expenses (receivables) for reported asbestos and environmental claims were approximately $125,000, $3,123,000 and $3,819,000 in 2001, 2000 and 1999, 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):
2001 2000 1999 ---- ---- ---- Gross Reserves: Property casualty $2,763,850 $2,475,805 $2,340,890 Life 53,832 58,112 20,348 ---------- ---------- ---------- Total $2,817,682 $2,533,917 $2,361,238 ========== ========== ========== Net provision for losses and loss expense: Property casualty $1,360,683 $1,072,632 $1,070,913 Life 19,817 21,779 14,913 ---------- ---------- ---------- Total $1,380,500 $1,094,411 $1,085,826 ========== ========== ==========
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):
2001 2000 1999 ---- ---- ---- Net reserves at beginning of year $1,818,049 $1,723,865 $1,583,304 ---------- ---------- ---------- Net provision for losses and loss expenses: Claims occurring during the current year 1,140,622 1,047,060 1,032,089 Increase in estimates for claims occurring in prior years 211,344 14,042 28,351 Net decrease in discount for prior years 8,717 11,530 10,473 ---------- ---------- ---------- 1,360,683 1,072,632 1,070,913 ---------- ---------- ---------- Net payments for claims: Current year 443,802 394,401 433,942 Prior years 701,637 584,047 496,410 ---------- ---------- ---------- 1,145,439 978,448 930,352 ---------- ---------- ---------- Net reserves at end of year 2,033,293 1,818,049 1,723,865 Ceded reserves at end of year 730,557 657,756 617,025 ---------- ---------- ---------- Gross reserves at end of year $2,763,850 $2,475,805 $2,340,890 ========== ========== ==========
A reconciliation, as of December 31, 2001, between the reserves reported in the accompanying consolidated financial statements which have been prepared in accordance with GAAP and those reported on the basis of statutory accounting principles ("SAP") is as follows (amounts in thousands): Net reserves reported on a SAP basis $ 2,031,705 Additions (deductions) to statutory reserves: International property & casualty reserves 30,753 Loss reserve discounting (2) (32,561) Outstanding drafts reclassified as reserves 3,396 ----------- Net reserves reported on a GAAP basis 2,033,293 Ceded reserves reclassified as assets 730,557 ----------- Gross reserves reported on a GAAP basis $ 2,763,850 ===========
(1) Claims occurring during the current year is net of discount of $24,781,000, $39,990,000 and $22,923,754 for the years ended December 31, 2001, 2000 and 1999, respectively. (2) For statutory purposes, we use a discount rate of 4.3% as permitted by the Department of Insurance of the State of Delaware. The following table presents the development of net reserves for 1991 through 2001. 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 1991 reserves have developed a $140 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 1991 is reserved for $2,000 as of December 31, 1991. Assuming this claim was settled for $2,300 in 2001, the $300 deficiency would appear as a deficiency in each year from 1991 through 2000. 15
(Amounts in millions) Year Ended December 31, 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 ----------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Discounted net reserves for losses and loss expenses $680 $710 $ 783 $ 895 $1,209 $1,333 $1,433 $ 1,583 $1,724 $1,818 $2,033 Reserve discounting -- -- -- -- 152 172 190 187 196 223 243 ---- ---- ------ ------ ------ ------ ------ ------- ------ ------ ------ Undiscounted net reserve 680 710 783 895 1,361 1,505 1,623 1,770 1,920 2,041 2,276 Net Re-estimated as of: One year later 676 704 776 885 1,346 1,481 1,580 1,798 1,934 2,252 Two years later 659 694 755 872 1,305 1,406 1,566 1,735 2,082 Three years later 650 665 744 833 1,236 1,356 1,446 1,805 Four years later 637 655 708 789 1,195 1,239 1,463 Five years later 631 630 672 764 1,112 1,248 Six years later 609 600 649 706 1,118 Seven years later 585 579 599 712 Eight years later 568 541 605 Nine years later 534 547 Ten years later 540 Cumulative redundancy (deficiency) undiscounted $140 $163 $ 178 $ 183 $ 243 $ 257 $ 160 $ (35) $ (162) $ (211) -- ==== ==== ====== ====== ====== ====== ====== ======= ====== ====== ====== Cumulative amount of net liability paid through: One year later $160 $169 $ 186 $ 221 $ 265 $ 332 $ 365 496 584 702 Two years later 264 275 221 355 434 523 574 795 1,011 Three years later 332 306 291 445 550 635 737 1,032 Four years later 346 344 334 501 616 714 852 Five years later 371 362 363 528 655 782 Six years later 384 375 373 543 701 Seven years later 394 376 373 577 Eight years later 392 370 393 Nine years later 383 384 Ten years later 395 Discounted net reserves 783 895 1,209 1,333 1,433 1,583 1,724 1,818 2,033 Ceded Reserves 1,233 1,176 451 450 477 538 617 658 731 ------ ------ ------ ------ ------ ------- ------ ------ ------ Discounted gross reserves 2,016 2,071 1,660 1,783 1,910 2,121 2,341 2,476 2,764 Reserve discounting -- -- 192 216 241 248 250 286 324 ------ ------ ------ ------ ------ ------ ------ ------ ------ Gross reserve $2,016 $2,071 $1,852 $1,999 $2,151 $2,369 $2,591 $2,762 $3,088 ====== ====== ====== ====== ====== ====== ====== ====== ====== Gross Re-estimated as of: One year later 2,010 2,043 1,827 1,965 2,132 2,390 2,653 2,827 Two years later 1,966 2,026 1,789 1,959 2,096 2,389 2,556 Three years later 1,955 1,983 1,754 1,909 2,010 2,218 Four years later 1,913 1,951 1,733 1,823 1,871 Five years later 1,855 1,928 1,681 1,739 Six years later 1,815 1,899 1,630 Seven years later 1,788 1,858 Eight years later 1,757 Gross cumulative redundancy (deficiency) undiscounted $ 259 $ 213 $ 222 $ 260 $ 280 $ 151 $ 35 $ (65) ====== ====== ====== ====== ====== ====== ====== ======
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. As a result of the attacks of September 11, many reinsurers have significantly changed their underwriting guidelines, and limit or no longer provide terrorism coverage. See "Management's Discussion and Analysis of Financial Condition and Result of Operations" and Note 9 of "Notes to Consolidated Financial Statements." 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 codified statutory accounting practices for certain insurance enterprises effective January 1, 2001. 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, 2001. 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 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 17 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. 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. Competition for the reinsurance business comes from domestic and foreign reinsurers, which produce their business either on a direct basis or through the broker market. These competitors include Employers Reinsurance, Berkshire Hathaway, and American Reinsurance, which collectively comprise a majority of the property casualty reinsurance market in the United States. 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. 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. Employees As of March 8, 2002, we employed 4,244 persons. Of this number, our subsidiaries employed 4,194 persons, of whom 2,175 were executive and administrative personnel and 2,069 were clerical personnel. We employed the remaining 50 persons at the parent company and in investment operations, of whom 38 were executive and administrative personnel and 12 were clerical personnel. 18 Other Information about the Company's business We maintain an interest in the acquisition or start up of complementary businesses and continue to evaluate possible acquisitions and new ventures on an ongoing basis. In addition, the insurance subsidiaries develop new coverages or lines of business to meet the needs of insureds. Seasonal weather variations and other events affect the severity and frequency of losses sustained by the insurance and reinsurance subsidiaries. Although the effect on our business of such catastrophes as tornadoes, hurricanes, hailstorms, earthquakes and terrorist acts may be 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. 19 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 demand for insurance is influenced primarily by general economic conditions, while the supply of insurance is directly related to available capacity. 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. These factors could produce results that would have a negative impact on our results of operations and financial condition. OUR ACTUAL CLAIMS LOSSES MAY EXCEED OUR RESERVES FOR CLAIMS, WHICH MAY REQUIRE US TO ESTABLISH ADDITIONAL RESERVES. 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 and reinsurance businesses as well as our discontinued alternative markets reinsurance business. 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. For example, there are greater uncertainties involved with establishing reserves relating to the World Trade Center attack, the Enron bankruptcy and asbestos and environmental claims. 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 cannot assure you that our current reserves will prove adequate in light of subsequent events. Should we need to increase our reserves, our net income for the period will decrease by a corresponding amount. OUR EARNINGS COULD BE MORE VOLATILE, ESPECIALLY SINCE WE HAVE INCREASED AND MAY FURTHER INCREASE OUR LEVEL OF RETENTION IN OUR BUSINESS. We increased our retention levels in 2000 and 2001 due to changes in market conditions and the pricing environment. We purchased 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. We may further increase our retention levels in the future. As a result, our earnings 20 could be more volatile and increased severities are more likely to have a material adverse effect on 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. AS A PROPERTY CASUALTY INSURER, WE FACE LOSSES FROM NATURAL AND MAN-MADE 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, as well as terrorist activities. The incidence and severity of catastrophes are inherently unpredictable. For example, during the five years ended December 31, 2001, our losses from natural and man-made catastrophes ranged from $33 million to $96 million. 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 produce unforeseen losses and have a material adverse effect on our results of operations and financial condition. WE FACE SIGNIFICANT COMPETITIVE PRESSURES IN OUR BUSINESSES, WHICH MAY REDUCE PREMIUM RATES AND PREVENT US FROM PRICING OUR PRODUCTS AT ATTRACTIVE RATES. 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. Competition in our businesses is based on many factors, including the perceived financial strength of the company, premium charges, other terms and conditions offered, services provided, ratings assigned by independent rating agencies, speed of claims payment and reputation and experience in the lines to be written. Some of our competitors, particularly in the reinsurance business, have greater financial and marketing resources than we do. These competitors within the reinsurance segment include Employers Reinsurance, Berkshire Hathaway and American Reinsurance, which collectively comprise a majority of the property casualty reinsurance market. We expect that perceived financial strength, in particular, will become more important as customers seek high quality reinsurers. A number of new, proposed or potential legislative or industry developments could further increase competition in our industry. These developments include: - an increase in capital-raising by companies in our lines of business, which could result in new entrants to our markets and an excess of capital in the industry; - 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 may lead 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 affect our ability to price our products at attractive rates and thereby adversely affect our underwriting results. 21 IF MARKET CONDITIONS CAUSE REINSURANCE TO BE MORE COSTLY OR UNAVAILABLE, WE MAY BE REQUIRED TO BEAR INCREASED RISKS OR REDUCE THE LEVEL OF OUR UNDERWRITING COMMITMENTS. As part of our overall risk and capacity management strategy, 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. 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 may be unable to maintain our current reinsurance facilities or to 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. As a result of the attacks of September 11, 2001 and reinsurance market conditions, we anticipate further price increases for reinsurance we purchase beginning in 2002. WE, AS A PRIMARY INSURER, MAY NOT BE ABLE TO OBTAIN REINSURANCE COVERAGE FOR TERRORIST ACTS. It is difficult to determine the full impact of the attacks of September 11, 2001 on coverage terms with respect to future acts of terrorism both on the primary and reinsurance levels. To the extent that reinsurers are able to and do exclude coverage for terrorist acts or price such coverage at a rate at which it is not practical for primary insurers to obtain such coverage, primary insurers might not be able to likewise exclude terrorist acts because of regulatory constraints. If this does occur, we, in our capacity as a primary insurer, would not have certain reinsurance protection and would be exposed for potential losses as a result of any terrorist acts. WE CANNOT GUARANTEE THAT OUR REINSURERS WILL PAY IN A TIMELY FASHION, IF AT ALL, AND, AS A RESULT, WE COULD EXPERIENCE LOSSES. 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. Our reinsurers may not pay the reinsurance recoverables that they owe to us or they may not pay such recoverables on a timely basis. Accordingly, we bear credit risk with respect to our reinsurers, and if our reinsurers fail to pay us, our financial results would be adversely affected. The attacks of September 11, 2001 may affect the financial resources of some of our reinsurers. WE INVEST SOME OF OUR ASSETS IN ALTERNATIVE INVESTMENTS, WHICH IS SUBJECT TO CERTAIN RISKS. We invest a portion of our investment portfolio in alternative investments which is primarily merger arbitrage. As of December 31, 2001, our investment in merger arbitrage securities represented approximately 13% 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. As a result of the reduced activity in the merger and acquisitions area, we may not be able achieve the returns that we have enjoyed in the past. Alternative investments also include investments in high-yield bonds and real estate investment trusts. 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 22 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 affect the value of our investments and could adversely affect our results of operations and financial condition. OUR OPERATIONS IN ARGENTINA AND THE PHILIPPINES EXPOSE US TO INVESTMENT, POLITICAL AND ECONOMIC RISKS. Our operations in Argentina and the Philippines expose us to investment, political and economic risks, including foreign currency and credit risk. Changes in the exchange rate between the U.S. dollar and either the Argentine or Philippine peso could have an adverse effect on our results of operations and financial condition. During 2001, Argentina experienced substantial political and economic problems, including high unemployment, increasing fiscal deficits and declining central bank reserves. The government responded to these problems by converting certain public bonds into guaranteed loans with longer maturities and lower interest rates, abandoning the fixed dollar-to-peso exchange rate and imposing various currency restrictions. It is likely that there will be further changes to Argentine economic and monetary policies in 2002. These changes may result in further impairment in value of Argentine bonds, a decline in investment income as a result of lower interest on bonds, and the surrender of all or substantially all life insurance policies-in-force. WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION, WHICH INCREASES OUR COSTS AND COULD RESTRICT THE CONDUCT OF OUR BUSINESS. 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 may be unable to maintain all required licenses and approvals and our business may not fully comply 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. 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, restrict the conduct of our business. The growing number of insolvencies in the insurance industry increases the possibility that we will be assessed pursuant to various state guaranty fund requirements. We cannot predict the outcome of proposed federal legislation on insurance coverage for terrorism, including the possibility that we may be required to contribute to a pool based on certain criteria, and the legal and financial effects that such legislation might have on us and the property casualty industry. 23 WE ARE RATED BY A.M. BEST AND STANDARD & POOR'S, AND A DECLINE IN THESE RATINGS COULD AFFECT OUR STANDING IN THE INSURANCE INDUSTRY AND CAUSE OUR SALES AND EARNINGS TO DECREASE. 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 we cannot assure you that we will be able to retain those ratings. Our A.M. Best rating is A+ (Superior) for Admiral Insurance Company and A (Excellent) for our other insurance companies rated by A. M. Best. The Standard & Poor's financial strengthen rating for our insurance subsidiaries is A+/negative. If our ratings are reduced from their current levels by A.M. Best and/or Standard & Poor's, our competitive position in the insurance industry could suffer and it would be more difficult for us to market our products. A significant downgrade could result in a substantial loss of business as policyholders move to other companies with higher claims-paying and financial strength ratings. 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. WE MAY NOT FIND SUITABLE ACQUISITION CANDIDATES OR NEW INSURANCE VENTURES AND EVEN IF WE DO, WE MAY NOT SUCCESSFULLY INTEGRATE ANY SUCH ACQUIRED COMPANIES OR SUCCESSFULLY INVEST IN SUCH VENTURES. As part of our present strategy, we continue to evaluate possible acquisition transactions and the start-up of complementary businesses on an ongoing basis, and at any given time, we may be engaged in discussions with respect to possible acquisitions and new ventures. We cannot assure you that we will be able to identify suitable acquisition transactions or insurance ventures, that such transactions will be financed and completed on acceptable terms or that our future acquisitions or ventures will be successful. The process of integrating any companies we do acquire or investing in new ventures may have a material adverse effect on our results of operations and financial condition. WE MAY BE UNABLE TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES. We depend on our ability to attract and retain experienced underwriting talent and other skilled employees who are knowledgeable about our business. If the quality of our underwriting team and other personnel decreases, we may be unable to maintain our current competitive position in the specialized markets in which we operate, and be unable to expand our operations into new markets. ITEM 2. PROPERTIES W. R. Berkley and its subsidiaries own or lease office buildings or office space suitable to conduct their operations. At December 31, 2001, the Company had aggregate office space of 1,157,569 square feet, of which 843,149 was owned and 314,420 was leased. Rental expense was approximately $18,021,000, $16,580,000 and $16,109,000 for 2001, 2000 and 1999, respectively. Future minimum lease payments (without provision for sublease income) are $14,979,000 in 2001; $11,569,000 in 2003; $7,953,000 in 2004; $5,962,000 in 2005; and $16,324,000 thereafter. 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 24 independent adjusters. Generally, the insurance subsidiary employs a staff of claims adjusters at its home office and at some regional offices. Some independent agents may have the authority to settle small claims. Independent claims adjusting firms are used to assist in handling various claims in areas where insurance volume does not warrant the maintenance of a staff adjuster. If a claim or loss cannot be settled and results in litigation, the subsidiary generally retains outside counsel. At present, neither W. R. Berkley nor any of its subsidiaries is engaged in 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 and reinsurance business. The Company has arbitration pending pertaining to a surety reinsurance contract coverage issue where it is the reinsurer. The proceeding is in the initial stages, and the Company believes it has meritorious defenses with respect to this issue. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 2001 to a vote of holders of the Company's Common Stock. 25 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Common Stock is traded on the New York Stock Exchange under the symbol "BER". The following table sets forth the high and low sale prices for the indicated periods, as reported on the Nasdaq Stock Market's National Market through May 8, 2001 and the New York Stock Exchange from May 9, 2001, and the quarterly cash dividends paid per share of our common stock during the periods indicated.
Common Price Range Dividends Paid ----------- -------------- High Low Per Share ---- --- --------- 2001: Fourth Quarter $58.40 $46.53 $.13 cash Third Quarter 49.60 38.10 $.13 cash Second Quarter 45.38 36.90 $.13 cash First Quarter 48.75 34.94 $.13 cash 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
The closing price of the Common Stock on March 20, 2002, as reported on the New York Stock Exchange, was $56.08 per share. The approximate number of record holders of the Common Stock on March 20, 2002 was 624. 26 ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 2001
Year Ended December 31, ------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (Amounts in thousands, except per share data) Net premiums written $ 1,858,096 $ 1,506,244 $ 1,427,719 $ 1,346,254 $ 1,177,641 Net premiums earned 1,680,469 1,491,014 1,414,384 1,278,399 1,111,747 Net investment income 195,021 210,448 190,316 202,420 199,588 Service fees 75,771 68,049 72,344 70,727 71,456 Realized investment gains (losses) (11,494) 8,364 (6,064) 25,400 13,186 Total revenues 1,941,797 1,781,287 1,673,668 1,582,517 1,400,310 Interest expense 45,719 47,596 50,801 48,819 48,869 Income (loss) before federal and foreign income taxes (151,394) 40,851 (79,248) 62,781 129,241 Federal and foreign income tax (expense) Benefit 56,661 (2,451) 45,766 (5,465) (30,668) Minority interest 3,187 (2,162) (566) 1,444 474 Preferred dividends -- -- (497) (7,548) (7,828) Net income (loss) before change in accounting and extraordinary gain(loss) (91,546) 36,238 (34,545) 51,212 91,219 Cumulative effect of change in accounting -- -- (3,250) -- -- Extraordinary gain (loss) -- -- 735 (5,017) -- Net income (loss) attributable to common stockholders (91,546) 36,238 (37,060) 46,195 91,219 Data per common share: Basic: Net income (loss) before change in accounting and extraordinary item (3.14) 1.41 (1.35) 1.82 3.09 Net income (loss) (3.14) 1.41 (1.44) 1.64 3.09 Diluted: Net income (loss) before change in accounting and extraordinary income (3.14) 1.39 (1.35) 1.76 3.02 Net income (loss) (3.14) 1.39 (1.44) 1.59 3.02 Stockholders' equity 28.03 26.54 23.10 28.80 28.72 Cash dividends declared $ .52 $ .52 $ .52 $ .48 $ .42 Weighted average shares outstanding: Basic 29,139 25,632 25,823 28,194 29,503 Diluted 30,555 25,991 25,927 29,115 30,185 Investments (1) $ 3,598,053 $ 3,111,602 $ 2,975,929 $ 3,233,458 $ 3,106,900 Total assets 5,633,509 5,022,070 4,784,791 4,983,431 4,544,318 Reserves for losses and loss expenses 2,817,682 2,533,917 2,361,238 2,126,566 1,909,688 Long-term debt 370,554 370,158 394,792 394,444 390,415 Trust preferred securities 198,210 198,169 198,126 207,988 207,944 Stockholders' equity 931,595 680,896 591,778 861,281 947,292
(1) Including trading account receivable from brokers and clearing organizations and trading account securities sold but not yet purchased. 27 (2) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained on pages 22 through 29 of the registrant's 2001 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 2001 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 2001 Annual Report to Stockholders and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 28 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 20, 2002:
Name Age Position ---- --- -------- William R. Berkley 56 Chairman of the Board, Chief Executive Officer, President and Chief Operating Officer Eugene G. Ballard 49 Senior Vice President - Chief Financial Officer and Treasurer William R. Berkley, Jr. 29 Senior Vice President, Director Robert P. Cole 51 Senior Vice President - Regional Operations Paul J. Hancock 40 Senior Vice President - Chief Corporate Actuary Robert C. Hewitt 41 Senior Vice President - Risk Management H. Raymond Lankford 59 Senior Vice President - Alternative Markets Operations Ira S. Lederman 48 Senior Vice President - General Counsel and Corporate Secretary Michael E. Lombardozzi 40 Senior Vice President - Planning and Operations James W. McCleary 55 Senior Vice President - Reinsurance Operations James G. Shiel 42 Senior Vice President - Investments Edward A. Thomas 53 Senior Vice President - Specialty Operations Clement P. Patafio 37 Vice President - Corporate Controller Ronald E. Blaylock 42 Director Mark E. Brockbank 49 Director George G. Daly 61 Director Robert B. Hodes 76 Director Richard G. Merrill 71 Director Jack H. Nusbaum 61 Director Mark L. Shapiro 57 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 2001, the term of a class consisting of three directors expired. William R. Berkley, Jr., Ronald E. Blaylock and Mark E. Brockbank were elected as directors to hold office for a term of three years until the Annual Meeting of Stockholders in 2004 and until their successors are duly elected and qualify. Henry Kaufman and Martin Stone, directors whose terms expired in 2001, did not stand for re-election. 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. and its subsidiaries; The Greenwich Bank & Trust Company and Westport National Bank; Strategic Distribution, Inc.; and Interlaken Capital, Inc. 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. William R. Berkley, Jr. has been a Director of the Company since 2001, a Senior Vice President since January 2002, 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 and as Vice President of the Company since May 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. and its subsidiary Westport National Bank; Middlesex Bank and Trust Company; GiftCertificates.com, Inc.; and Interlaken Capital, Inc. 29 Robert P. Cole has been Senior Vice President of the Company 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. He has been in the insurance/reinsurance business for more than 25 years. Paul J. Hancock has been Senior Vice President - Chief Corporate Actuary of the Company since January 2002. He joined the Company in 1997 and most recently served as a Vice President in the actuarial department. He came to the Company from Berkley Insurance Company, a subsidiary of the Company, where he was Vice President - Actuarial Manager. Robert C. Hewitt has been Senior Vice President - Risk Management of the Company since January 2002. He was most recently a Senior Vice President for Benfield Blanch Inc. (and its predecessor, E. W. Blanch Co., Inc.), where he served from 1986 - 2002 and managed its New York City office since 1995. Mr. Hewitt has over 20 years of experience in the reinsurance and insurance industries. H. Raymond Lankford has been Senior Vice President - Alternative Markets Operations of the Company 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 and Corporate Secretary of the Company since November 2001. Additionally, he has been General Counsel of Berkley International, LLC since January 1998. Previously, he was General Counsel - Insurance Operations from August 2000, Assistant Secretary from May 1986, 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. Michael E. Lombardozzi has been Senior Vice President - Planning and Operations of the Company since December 2001. He most recently was Senior Vice President, General Counsel and Secretary of Orius Corp. Prior thereto, he served as Senior Vice President, General Counsel and Corporate Secretary of Berkley Insurance Company, a subsidiary of the Company, from 1994 to January 2001. James W. McCleary has been Senior Vice President - Reinsurance Operations of the Company since August 2001. Mr. McCleary has served as President of Facultative ReSources, Inc., a Berkley subsidiary, since 1990 and chief underwriting officer since its inception. Mr. McCleary has over 28 years of experience in the reinsurance sector. 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 Berkley Insurance Company, a subsidiary of the Company, for more than five years. Clement P. Patafio has been Vice President - Corporate Controller of the Company 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. Ronald E. Blaylock has been a director of the Company since 2001. Mr. Blaylock is the Founder, Chairman and Chief Executive Officer of Blaylock & Partners, L.P., an investment banking firm. Mr. Blaylock held senior management positions with PaineWebber Group and Citicorp before launching Blaylock & Partners in 1993. Mr. Blaylock is also a director of the American General Life Insurance Company of New York. Mark E. Brockbank has been a director of the Company since 2001. Mr. Brockbank has been a self-employed insurance consultant since November 2000. Prior thereto, Mr. Brockbank served from 1995 to 2000 as Chief Executive of XL Brockbank LTD, an underwriting management agency at Lloyd's of London. Mr. Brockbank was a founder of the predecessor firm of XL Brockbank LTD and was a director of XL Brockbank LTD from 1983 to 2000. 30 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 nine 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 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. 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 also a director of Sysco Corporation. Mr. Merrill's current term as a director expires in 2002. Jack H. Nusbaum has been a director of the Company since 1967. Mr. Nusbaum is the Chairman of the New York law firm of Willkie Farr & Gallagher where he has been a partner for more than the last five years. He is a director of Associated Community Bankcorp, Inc., Neuberger Berman 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. 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, 2001, 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, 2001, 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, 2001, 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, 2001, 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, 2001, and which is incorporated herein by reference. 31 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 2001 Annual Report to Stockholders, are incorporated by reference in this Annual Report on Form 10-K. With the exception of the aforementioned information, the 2001 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 2001 Annual Report to Stockholders. Financial statement schedules not included in this Annual Report on Form 10-K have been omitted because they are not applicable or required information is shown in the financial statements or notes thereto.
Index to Financial Statement Schedules Page Independent Auditors' Report on Schedules and Consent 38 Schedule II - Condensed Financial Information of Registrant 39 Schedule III - Supplementary Insurance Information 43 Schedule IV - Reinsurance 44 Schedule VI - Supplementary Information concerning Property & Casualty Insurance Operations 45
(b) Reports on Form 8-K During the quarter ended December 31, 2001, the registrant filed the following Reports on Form 8-K: Report dated October 26, 2001 with respect to a press release relating to the earnings of the Company for the third quarter of 2001 (under Item 5 of Form 8-K). Report dated October 29, 2001 with respect to a press release relating to the announcement of a public offering of the Company's common stock (under Item 5 of Form 8-K). Report dated November 2, 2001 with respect to the pricing of the public offering of the Company's common stock and the Company's entering into an underwriting agreement (under Item 5 of Form 8-K). Report dated November 8, 2001 amending a Report filed February 6, 2001 with respect to risk factors faced by the Company (under Item 5 of Form 8-K). Report dated December 18, 2001 with respect to a press release relating to the Company's establishment of a reserve for Enron-related losses and its expected refocusing of its surety reinsurance business (under Item 5 of Form 8-K). Report dated December 19, 2001 with respect to a press release relating to the Company's entrance into the excess medical malpractice market and the formation of Berkley Medical Excess Underwriters, LLC (under Item 5 of Form 8-K). (c) Exhibits The exhibits filed as part of this report are listed on pages 35 and 36 hereof. 32 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 25, 2002 33 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 March 25, 2002 William R. Berkley Principal executive officer /s/ William R. Berkley, Jr. Director March 25, 2002 -------------------------------- William R. Berkley, Jr. /s/ Ronald E. Blaylock Director March 25, 2002 -------------------------------- Ronald E. Blaylock /s/ Mark E. Brockbank Director March 25, 2002 -------------------------------- Mark E. Brockbank /s/ George G. Daly Director March 25, 2002 -------------------------------- George G. Daly /s/ Robert B. Hodes Director March 25, 2002 -------------------------------- Robert B. Hodes /s/ Richard G. Merrill Director March 25, 2002 -------------------------------- Richard G. Merrill /s/ Jack H. Nusbaum Director March 25, 2002 -------------------------------- Jack H. Nusbaum /s/ Mark L. Shapiro Director March 25, 2002 -------------------------------- Mark L. Shapiro /s/ Eugene G. Ballard Senior Vice President, March 25, 2002 -------------------------------- Chief Financial Officer and Eugene G. Ballard Treasurer Principal accounting officer /s/ Clement P. Patafio Vice President, March 25, 2002 -------------------------------- Corporate Controller Clement P. Patafio
34 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 (incorporated by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K (File No. 0-7849) filed with the Commission on March 22, 2001). (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).
35 (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) 2001 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).
36 (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 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% 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% Union Insurance Company Nebraska 100% Union Standard Insurance Company Oklahoma 100% Key Risk Insurance Company North Carolina 100% Midwest Employers Casualty Company: Delaware 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.
37 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 14, 2002, incorporated by reference in the Form 10-K, included the related financial statement schedules as of December 31, 2001, and for each of the years in the three-year period ended December 31, 2001. 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. 333-00459) and (No. 333-57546) on Form S-3 and (No. 333-33935) and (No. 33-55726) on Form S-8 of W. R. Berkley Corporation. KPMG LLP New York, New York March 25, 2002 38 Schedule II W. R. Berkley Corporation Condensed Financial Information of Registrant Balance Sheets (Parent Company) (Amounts in thousands)
December 31, ---------------------------- 2001 2000 ----------- ----------- Assets Cash (including invested cash) $ 109,950 $ 16,619 Fixed maturity securities: Held to maturity, at cost (fair value $4,935 and $4,960) 4,935 4,960 Available for sale at fair value (cost $27,492 and $406) 27,585 396 Equity securities, at fair value: Available for sale (cost $698 and $698) 235 590 Trading account (cost $903 and $864) 903 864 Investments in subsidiaries 1,268,553 1,173,775 Due from subsidiaries 57,455 47,287 Current Federal income taxes receivable 17,126 6,482 Deferred Federal income taxes 101,088 50,080 Real estate, furniture & equipment at cost, less accumulated depreciation 2,592 18,390 Other assets 15,165 4,762 ----------- ----------- $ 1,605,587 $ 1,324,205 =========== =========== Liabilities, Debt and Stockholders' Equity Liabilities: Due to subsidiaries (principally deferred income taxes) $ 123,572 $ 82,304 Short-term debt -- 10,000 Other liabilities 25,449 26,471 ----------- ----------- 149,021 118,775 ----------- ----------- Long-term debt 326,802 326,365 Subsidiary trust junior subordinated debt 198,169 198,169 Stockholders' equity: Preferred stock -- -- Common stock 8,661 7,281 Additional paid-in capital 659,266 334,061 Retained earnings (including accumulated undistributed net income of subsidiaries of $352,011 and $410,794 in 2001 and 2000, respectively) 467,185 574,345 Accumulated other comprehensive income (loss) 37,340 19,371 Treasury stock, at cost (240,857) (254,162) ----------- ----------- 931,595 680,896 ----------- ----------- $ 1,605,587 $ 1,324,205 =========== ===========
See note to condensed financial statements. 39 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, ------------------------------------- 2001 2000 1999 ---- ---- ---- Management fees and investment income from affiliates, including dividends of $7,210, $44,533 and $96,817 for 2001, 2000 1999, respectively $ 12,550 $ 49,585 $ 102,963 Realized investment gains (losses) (221) (558) 321 Other income 4,678 4,051 3,975 -------- -------- --------- Total revenues 17,007 53,078 107,259 Expenses, other than interest expense 21,607 18,871 20,978 Restructuring charge -- -- 1,502 Interest expense 44,690 46,521 49,207 -------- -------- --------- Income (loss) before Federal income taxes (49,290) (12,314) 35,572 -------- -------- --------- Federal income taxes: Federal income taxes provided by Subsidiaries on a separate return Basis (42,357) 24,858 8,474 Federal income tax benefit (provision) on a Consolidated return basis 58,884 (630) 48,958 -------- -------- --------- Net benefit 16,527 24,228 57,432 -------- -------- --------- Income (loss) before undistributed equity in net income of subsidiaries and preferred Dividends (32,763) 11,914 93,004 Equity in undistributed net income (loss) of subsidiaries (58,783) 24,324 (130,232) Preferred dividends -- -- (567) -------- -------- --------- Net income (loss) before extraordinary gain (91,546) 36,238 (37,795) Extraordinary gain on early extinguishment of long term debt (net of taxes) -- -- 735 -------- -------- --------- Net income (loss) attributable to common stockholders $(91,546) $ 36,238 $ (37,060) ======== ======== =========
See note to condensed financial statements. 40 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, --------------------------------------- 2001 2000 1999 --------- --------- --------- Cash flows from operating activities: Net income (loss) before preferred dividends and extraordinary items $ (91,546) $ 36,238 $ (37,298) Adjustments to reconcile net income to net cash flows provided by operating activities: Equity in undistributed net income of subsidiaries 58,783 (24,324) 130,232 Tax payments received from (paid) to subsidiaries (9,668) 28,389 24,105 Federal income taxes provided by subsidiaries on a separate return basis 42,357 (24,859) (8,473) Change in Federal income taxes (71,459) 1,411 (35,415) Realized investment losses 221 558 (321) Other, net (9,960) 643 3,273 --------- --------- --------- Net cash provided (used) by operating activities before increase trading account securities (81,272) 18,056 76,103 Increase in trading account securities (39) (91) (75) --------- --------- --------- Net cash provided (used) by operating activities (81,311) 17,965 76,028 --------- --------- --------- Cash flow used in investing activities: Proceeds from sales, excluding trading account: Fixed maturity securities available for sale 11,221 -- 23,973 Equity securities -- -- -- Proceeds from maturities and prepayments of fixed maturity securities 4,114 365 222 Cost of purchases, excluding trading account: Fixed maturity securities (42,744) (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 (112,805) (70,049) (83,035) Net additions to real estate, furniture & equipment (1,469) (290) (357) Other, net (1) 500 -- --------- --------- --------- Net cash provided (used) in investing activities (141,684) 37,359 (49,279) --------- --------- --------- Cash flows from financing activities: Net proceeds from stock offering 315,840 -- -- Net change in short-term debt (10,000) (25,000) (20,500) Purchase of treasury shares (1,002) (7,020) (4,895) Cash dividends to common stockholders (14,707) (12,701) (13,888) Cash dividends to preferred shareholders -- -- (2,001) Purchase of preferred stock -- -- (98,092) Retirement of long-term debt -- (25,000) (9,171) Other, net 26,195 8,935 6,457 --------- --------- --------- Net cash provided (used) by financing activities 316,326 (60,786) (142,090) --------- --------- --------- Net increase in cash and invested cash 93,331 (5,462) (115,341) Cash and invested cash at beginning of year 16,619 22,081 137,422 --------- --------- --------- Cash and invested cash at end of year $ 109,950 $ 16,619 $ 22,081 ========= ========= =========
See note to condensed financial statements. 41 Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued December 31, 2001, 2000 and 1999 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 2000 and 1999 financial statements as originally reported to conform them to the presentation of the 2001 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. 42 Schedule III W. R. Berkley Corporation and Subsidiaries Supplementary Insurance Information December 31, 2001, 2000 and 1999 (Amounts in thousands)
Reserve for Deferred policy losses and Net acquisition loss Unearned Premiums investment cost expenses premiums earned income ---------------- -------- -------- ------ ------ December 31, 2001 Specialty $ 69,558 $ 776,483 $289,557 $ 401,611 $ 39,390 Alternative markets 9,763 448,762 61,146 123,173 37,765 Reinsurance 21,552 659,363 116,376 236,385 42,536 Regional 78,708 613,805 327,006 555,750 51,640 International 29,477 89,499 23,765 140,909 13,993 Discontinued 15,052 229,770 61,790 222,641 9,762 Corporate and adjustments -- -- -- -- (65) -------- ---------- -------- ---------- --------- Total $224,110 $2,817,682 $879,640 $1,680,469 $ 195,021 ======== ========== ======== ========== ========= December 31, 2000 Specialty $ 40,060 $ 753,238 $184,160 $ 270,896 $ 48,706 Alternative markets 3,976 393,282 28,730 88,872 37,722 Reinsurance 27,761 518,554 109,824 298,102 50,471 Regional 68,398 591,417 263,693 503,029 56,955 International 30,867 106,878 30,956 107,285 9,636 Discontinued 25,169 170,548 95,876 222,830 9,562 Corporate and adjustments -- -- -- -- (2,604) -------- ---------- -------- ---------- --------- Total $196,231 $2,533,917 $713,239 $1,491,014 $ 210,448 ======== ========== ======== ========== ========= December 31, 1999 Specialty $ 37,298 $ 722,689 $178,357 $ 256,155 $ 50,231 Alternative markets 2,765 364,907 19,832 75,979 30,827 Reinsurance 34,911 500,808 119,376 297,649 47,288 Regional 66,248 556,920 262,112 492,304 49,705 International 18,583 60,493 19,010 86,943 6,469 Discontinued 22,543 155,421 91,139 205,354 8,462 Corporate and adjustments -- -- -- -- (2,666) -------- ---------- -------- ---------- --------- Total $182,348 $2,361,238 $689,826 $1,414,384 $ 190,316 ======== ========== ======== ========== =========
Amortization of Loss and deferred policy Other Loss acquisition operating cost Net premiums expenses costs and expenses written -------- ----- ------------ ------- December 31, 2001 Specialty $ 286,865 $ 89,232 $ 35,747 $ 527,502 Alternative markets 94,258 30,653 74,785 151,942 Reinsurance 246,706 84,036 2,894 236,784 Regional 373,647 167,681 26,955 598,149 International 86,582 52,853 4,328 150,090 Discontinued 292,442 67,610 5,831 193,629 Corporate and adjustments -- -- 21,171 -- ---------- -------- -------- ---------- Total $1,380,500 $492,065 $171,711 $1,858,096 ========== ======== ======== ========== December 31, 2000 Specialty $ 198,237 $ 79,101 $ 15,685 $ 285,525 Alternative markets 62,416 26,808 65,257 98,001 Reinsurance 218,116 95,146 3,964 276,640 Regional 379,789 150,884 25,893 499,526 International 66,643 37,533 7,204 118,981 Discontinued 169,210 65,257 7,861 227,571 Corporate and adjustments -- -- 15,986 -- ---------- -------- -------- ---------- Total $1,094,411 $454,729 $141,850 $1,506,244 ========== ======== ======== ========== December 31, 1999 Specialty $ 174,251 $ 77,950 $ 17,606 $ 260,380 Alternative markets 49,963 24,623 73,982 73,089 Reinsurance 226,229 92,503 6,790 309,180 Regional 428,989 159,750 24,648 497,041 International 48,195 32,812 8,527 86,172 Discontinued 158,199 56,651 13,106 201,857 Corporate and adjustments -- -- 15,836 -- ---------- -------- -------- ---------- Total $1,085,826 $444,289 $160,495 $1,427,719 ========== ======== ======== ==========
43 Schedule IV W. R. Berkley Corporation and Subsidiaries Reinsurance Years ended December 31, 2001, 2000 and 1999 (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, 2001: Specialty $ 598,225 $ 83,862 $ 13,139 $ 527,502 2.5 Alternative markets 144,687 17,497 24,752 151,942 16.3 Reinsurance 88,183 95,598 244,199 236,784 103.1 Regional 698,114 106,852 6,887 598,149 1.2 International 170,600 20,510 -- 150,090 -- Discontinued 135,702 26,051 83,978 193,629 43.4 ---------- -------- -------- ---------- Total $1,835,511 $350,370 $372,955 $1,858,096 20.1% ========== ======== ======== ========== ===== Year ended December 31, 2000: Specialty $ 403,149 $122,020 $ 4,396 $ 285,525 1.5 Alternative markets 84,917 10,801 23,885 98,001 24.4 Reinsurance 57,210 47,206 266,636 276,640 96.4 Regional 574,079 80,364 5,811 499,526 1.2 International 143,523 24,542 -- 118,981 -- Discontinued 156,467 25,578 96,682 227,571 42.5 ---------- -------- -------- ---------- Total $1,419,345 $310,511 $397,410 $1,506,244 26.4% ========== ======== ======== ========== ===== Year ended December 31, 1999: Specialty $ 376,112 $126,069 $ 10,337 $ 260,380 4.0 Alternative markets 69,671 10,078 13,496 73,089 18.5 Reinsurance 9,096 32,101 332,185 309,180 107.4 Regional 591,318 98,355 4,078 497,041 0.8 International 107,254 21,082 -- 86,172 -- Discontinued 164,434 19,485 56,908 201,857 28.2 ---------- -------- -------- ---------- Total $1,317,885 $307,170 $417,004 $1,427,719 29.2% ========== ======== ======== ========== =====
44 Schedule VI W. R. Berkley Corporation and Subsidiaries Supplementary Information Concerning Property-Casualty Insurance Operations December 31, 2001, 2000 and 1999 (Amounts in thousands)
2001 2000 1999 Deferred policy acquisition costs $ 224,110 $ 196,231 $ 182,348 Reserves for losses and loss expenses 2,817,682 2,533,917 2,361,238 Unearned premium 879,640 713,239 689,826 Premiums earned 1,680,469 1,491,014 1,414,384 Net investment income 195,021 210,448 190,316 Losses and loss expenses incurred: Current Year 1,140,622 1,047,060 1,032,089 Prior Years 211,344 14,042 28,351 Net decrease in discount from prior years 8,717 11,530 10,473 Amortization of deferred policy acquisition costs 492,065 454,729 444,289 Paid losses and loss expenses 1,145,439 978,448 930,352 Net premiums written 1,858,096 1,506,244 1,427,719
45