Our statements and filings with the Securities and Exchange Commission and
other statements may contain or incorporate by reference certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Some of these forward-looking statements can be identified by the use of
forward-looking words such as "believes", "expects", "potential", "continued",
"may", "will" , "should", "seeks", "approximately", "predicts", "intends",
"plans", "estimates", "anticipates" or the negative version of those words or
other comparable words. Any forward-looking statements contained or incorporated
by reference in such filings or statements, including statements related to our
performance for the year 2000 and beyond, are based upon our historical
performance and on current plans, estimates and expectations. Such
forward-looking statements are subject to various risks and uncertainties,
including but not limited to those described below. These risks could cause our
actual results for the year 2000 and beyond to differ materially from those
expressed in any forward-looking statement we make. Forward-looking statements
speak only as of the date on which they are made, and we undertake no obligation
to update publicly or revise any forward-looking statement, whether as a result
of new information, future developments or otherwise.
RISK FACTORS
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. In such case, the trading price of our common stock or other
securities could decline, and any purchaser of our common stock or other
securities may lose part or all of their investment. You should carefully
consider and evaluate all of the information contained or incorporated by
reference in our filings with the Securities and Exchange Commission, including
the risk factors listed below, before deciding whether to invest in our common
stock or other securities.
Insurance Industry Related Risks
Our results may fluctuate as a result of many factors, including cyclical
changes in the insurance and reinsurance industry.
The results of companies in the property casualty insurance industry
historically have been subject to significant fluctuations and uncertainties.
The industry's profitability can be affected significantly by
o rising levels of actual costs that are not known by companies at the
time they price their products;
o volatile and unpredictable developments (including weather-related and
other natural catastrophes);
o changes in reserves resulting from the general claims and legal
environments as different types of claims arise and judicial
interpretations relating to the scope of insurers' liability develop;
o fluctuations in interest rates, inflationary pressures and other
changes in the investment environment, which affect returns on
invested capital and may impact the ultimate payout of loss amounts;
and
o the long-tail and volatile nature of the reinsurance business, which
may impact our operating results and limit opportunities for adequate
returns.
The demand for property casualty insurance can also vary significantly,
rising as the overall level of economic activity increases and falling as such
activity decreases. The property casualty insurance industry historically has a
cyclical nature. Recently, the property casualty insurance industry and
especially the commercial lines business have been very competitive. These
fluctuations in demand and competition could produce underwriting results that
would have a negative impact on our results of operations and financial
condition.
We face significant competitive pressures in our businesses.
We compete with a large number of other companies in our selected lines of
business. We compete, and will continue to compete, with major U.S. and non-U.S.
insurers and reinsurers, other regional companies, as well as mutual companies,
specialty insurance companies, underwriting agencies and diversified financial
services companies. Some of our competitors, particularly in the reinsurance
business, have greater financial and marketing resources than we do.
A number of new, proposed or potential legislative or industry developments
could further increase competition in our industry. These developments include:
o the enactment of the Gramm-Leach-Bliley Act of 1999, which could
result in increased competition from new entrants to our markets;
o 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;
o programs in which state-sponsored entities provide property insurance
in catastrophe prone areas or other alternative markets types of
coverage; and
o changing practices caused by the Internet, which have led to greater
competition in the insurance business.
New competition from these developments could cause the supply and/or
demand for insurance or reinsurance to change, which could adversely affect our
results of operations and financial condition.
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In addition to competition in the operation of our businesses, we face
competition from a variety of sources in attracting and retaining qualified
employees. We cannot assure you that we will maintain our current competitive
position in the markets in which we operate, or that we will be able to expand
our operations into new markets. If we fail to do so, our businesses could be
materially adversely affected.
Our actual claims losses may exceed our reserves for claims.
We maintain loss reserves to cover our estimated liability for unpaid
losses and loss adjustment expenses, including legal and other fees as well as a
portion of our general expenses, for reported and unreported claims incurred as
of the end of each accounting period. Reserves do not represent an exact
calculation of liability. Rather, reserves represent an estimate of what we
expect the ultimate settlement and administration of claims will cost. These
estimates, which generally involve actuarial projections, are based on our
assessment of facts and circumstances then known, as well as estimates of future
trends in claims severity, frequency, judicial theories of liability and other
factors. In some cases, long-tail lines of business such as excess workers'
compensation and the workers' compensation portion of our reinsurance business
are reserved on a discounted basis. The variables described above are affected
by both internal and external events, such as changes in claims handling
procedures, inflation, judicial and litigation trends and legislative changes.
The risk of the occurrence of such events is especially present in our specialty
lines and reinsurance businesses. Many of these items are not directly
quantifiable in advance. In some areas of our business, the level of reserves we
establish is dependent in part upon the actions of third parties that are beyond
our control. In our reinsurance and excess workers' compensation businesses, we
may not establish sufficient reserves if third parties do not give us advance
notice or provide us with appropriate information regarding certain matters.
Additionally, there may be a significant delay between the occurrence of the
insured event and the time it is reported to us.
The inherent uncertainties of estimating reserves are greater for certain
types of liabilities, where the various considerations affecting these types of
claims are subject to change and long periods of time may elapse before a
definitive determination of liability is made. Reserve estimates are continually
refined in an ongoing process as experience develops and further claims are
reported and settled. Adjustments to reserves are reflected in the results of
the periods in which such estimates are changed. Because setting reserves is
inherently uncertain, we cannot assure you that our current reserves will prove
adequate in light of subsequent events.
We anticipate increasing our level of retention in our business.
We anticipate increasing our retention levels in 2001 for our operations
generally due to changes in market conditions and the pricing environment. We
expect to purchase less reinsurance (the process by which we transfer, or cede,
part of the risk we have assumed to a reinsurance company), thereby retaining
more risk. As a result, our earnings could be more volatile, and increased
severities could have a material adverse effect upon our results of operations
and financial condition. A significant change in our retention levels could also
cause our historical financial results, including compound annual growth rates,
to be inaccurate indicators of our future performance on a segment or
consolidated basis.
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As a property casualty insurer, we face losses from catastrophes.
Property casualty insurers are subject to claims arising out of
catastrophes that may have a significant effect on their results of operations,
liquidity and financial condition. Catastrophe losses have had a significant
impact on our results. Catastrophes can be caused by various events, including
hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter
weather and fires. The incidence and severity of catastrophes are inherently
unpredictable. The extent of losses from a catastrophe is a function of both the
total amount of insured exposure in the area affected by the event and the
severity of the event. Most catastrophes are restricted to small geographic
areas; however, hurricanes and earthquakes may produce significant damage in
large, heavily populated areas. Catastrophes can cause losses in a variety of
our property casualty lines, and most of our past catastrophe-related claims
have resulted from severe storms. Seasonal weather variations may affect the
severity and frequency of our losses. Insurance companies are not permitted to
reserve for a catastrophe until it has occurred. It is therefore possible that a
catastrophic event or multiple catastrophic events could have a material adverse
effect upon our results of operations and financial condition.
We are subject to extensive governmental regulation.
We are subject to extensive governmental regulation and supervision. Most
insurance regulations are designed to protect the interests of policyholders
rather than stockholders and other investors. This system of regulation,
generally administered by a department of insurance in each state in which we do
business, relates to, among other things:
o standards of solvency, including risk-based capital measurements;
o restrictions on the nature, quality and concentration of investments;
o requiring certain methods of accounting;
o requiring reserves for unearned premium, losses and other purposes;
and
o 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 cannot assure you that we have or can maintain all required licenses and
approvals or that our business fully complies with the wide variety of
applicable laws and regulations or the relevant authority's interpretation of
the laws and regulations. Also, some regulatory authorities have relatively
broad discretion to grant, renew or revoke licenses and approvals. If we do not
have the requisite licenses and approvals or do not comply with applicable
regulatory
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requirements, the insurance regulatory authorities could preclude or temporarily
suspend us from carrying on some or all of our activities or monetarily penalize
us. That type of action could have a material adverse effect on our business.
Also, changes in the level of regulation of the insurance industry (whether
federal, state or foreign), or changes in laws or regulations themselves or
interpretations by regulatory authorities, could have a material adverse effect
on our business.
We are rated by A.M. Best and Standard & Poor's, and a decline in these ratings
could adversely affect our operations.
Ratings have become an increasingly important factor in establishing the
competitive position of insurance companies. Our insurance company subsidiaries
are rated by A.M. Best and certain of our insurance company subsidiaries are
rated for their claims-paying ability by Standard & Poor's Corporation, or
Standard & Poor's. A.M. Best and Standard & Poor's ratings reflect their
opinions of an insurance company's financial strength, operating performance,
strategic position and ability to meet its obligations to policyholders, are not
evaluations directed to investors and are not recommendations to buy, sell or
hold our securities. Our ratings are subject to periodic review by A.M. Best and
Standard & Poor's and the continued retention of those ratings cannot be
assured. The Standard & Poor's 2001 outlook for the U.S. property casualty
insurance industry and the Standard & Poor's mid-year 2000 outlook for the U.S.
reinsurance industry were negative. Since March 2000, Standard & Poor's has
given us a negative rating outlook. While Standard & Poor's recently affirmed
our rating of "A+", as long as we remain on negative rating outlook, a downgrade
in our rating is possible. If our ratings are reduced from their current levels
by A.M. Best and/or Standard & Poor's, our results of operations could be
adversely affected.
A significant amount of our assets is invested in fixed income securities and is
subject to market fluctuations.
Our investment portfolio consists substantially of fixed income securities.
The fair market value of these assets and the investment income from these
assets fluctuate depending on general economic and market conditions. With
respect to our investments in fixed income securities, the fair market value of
these investments generally increases or decreases in an inverse relationship
with fluctuations in interest rates, while net investment income realized by us
from future investments in fixed income securities will generally increase or
decrease with interest rates. In addition, actual net investment income and/or
cash flows from investments that carry prepayment risk (such as mortgage-backed
and other asset-backed securities) may differ from those anticipated at the time
of investment as a result of interest rate fluctuations. Because substantially
all of our fixed income securities are classified as available for sale, changes
in the market value of our securities are reflected in our balance sheet.
Similar treatment is not available for liabilities. Therefore, interest rate
fluctuations could adversely affect our results of operations and financial
condition.
We invest some of our assets in merger arbitrage, which is subject to certain
risks.
We invest a portion of our investment portfolio in merger arbitrage. As of
September 30, 2000, our investment in merger arbitrage securities represented
approximately 15% of our total
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investment portfolio. Merger arbitrage is the business of investing in the
securities of publicly held companies which are the targets in announced tender
offers and mergers. Merger arbitrage differs from other types of investments in
its focus on transactions and events believed likely to bring about a change in
value over a relatively short time period (usually four months or less). While
our merger arbitrage positions are generally hedged against market declines,
these equity investments are exposed primarily to the risk associated with the
completion of announced deals, which are subject to regulatory as well as
political and other risks.
Our premium writings and profitability are affected by the availability of
reinsurance.
We purchase reinsurance for significant amounts of risk underwritten by our
insurance company subsidiaries, especially catastrophe risks. We also purchase
reinsurance on risks underwritten by others which we reinsure (a retrocession).
Market conditions beyond our control determine the availability and cost of the
reinsurance protection we purchase, which may affect the level of our business
and profitability. Our reinsurance facilities are generally subject to annual
renewal. We cannot assure you that we can maintain our current reinsurance
facilities or that we can obtain other reinsurance facilities in adequate
amounts and at favorable rates. If we are unable to renew our expiring
facilities or to obtain new reinsurance facilities, either our net exposures
would increase or, if we are unwilling to bear an increase in net exposures, we
would have to reduce the level of our underwriting commitments, especially
catastrophe exposed risks. Either of these potential developments could have a
material adverse effect on our business.
We do not yet know all the effects of the recent restructuring of certain of our
subsidiaries.
In 2000, we implemented a restructuring plan, pursuant to which we
refocused our domestic reinsurance operations. While this restructuring is
substantially complete, all of its operating effects are not yet known, and any
difficulties caused by such restructuring could adversely affect our results of
operations and financial condition.
We are an insurance holding company and, therefore, may not be able to receive
dividends in needed amounts.
Our principal assets are the shares of capital stock of our insurance
company subsidiaries. We have to rely on dividends from our insurance company
subsidiaries to meet our obligations for paying principal and interest on
outstanding debt obligations and for paying dividends to stockholders and
corporate expenses. The payment of dividends by our insurance company
subsidiaries is subject to regulatory restrictions and will depend on the
surplus and future earnings of these subsidiaries, as well as the regulatory
restrictions. As a result, we may not be able to receive dividends from these
subsidiaries at times and in amounts necessary to meet our obligations or pay
dividends.
We may not find suitable acquisition candidates and even if we do, we may not
successfully integrate any such acquired companies.
As part of our present strategy, we continue to evaluate possible
acquisition transactions on an ongoing basis, and at any given time, we may be
engaged in discussions with respect to possible acquisitions. We cannot assure
you that we will be able to identify suitable acquisition transactions, that
such transactions will be financed and completed on acceptable terms or that
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our future acquisitions will be successful. The process of integrating any
companies we do acquire may have a material adverse effect on our results of
operations and financial condition.
If we do not invest substantial amounts in our information systems and
technology, our business may be harmed.
Integrated management information and processing systems are vital to our
ability to monitor costs, collect receivables and achieve operating
efficiencies. As we continue our growth, the need for sophisticated information
systems and technology will increase significantly. The cost of implementing
such systems has been, and is expected to continue to be, substantial. The
failure of our information or processing systems, or our failure to upgrade
systems as necessary, could have a material adverse effect on our results of
operations and financial condition.
We cannot guarantee that our reinsurers will pay in a timely fashion, if at all.
We purchase reinsurance by transferring part of the risk that we have
assumed (known as ceding) to a reinsurance company in exchange for part of the
premium we receive in connection with the risk. Although reinsurance makes the
reinsurer liable to us to the extent the risk is transferred or ceded to the
reinsurer, it does not relieve us (the reinsured) of our liability to our
policyholders or, in cases where we are a reinsurer, to our reinsureds.
Accordingly, we bear credit risk with respect to our reinsurers. We cannot
assure you that our reinsurers will pay the reinsurance recoverables owed to us
or that they will pay such recoverables on a timely basis.
Our international operations expose us to risks.
Certain assets held by our foreign subsidiaries are subject to foreign
currency risk. Our principal area of exposure relates to fluctuations in
exchange rates between each of the Argentinean and Philippine peso and the U.S.
dollar. Consequently, a change in the exchange rate between the U.S. dollar and
either the Argentinean or Philippine peso could have an adverse effect on our
results of operations and financial condition. We are additionally subject to
political and economic risks in these countries.
Investment Related Risks
Our charter documents, Delaware law and stockholders rights plan, as well as
state insurance statutes, will make it more difficult to acquire us and may
discourage takeover attempts and thus depress the market price of our common
stock or other securities.
Certain provisions of Delaware law, our certificate of incorporation and
our by-laws have the effect of making more difficult or discouraging unsolicited
takeover bids from third parties. While these provisions have the effect of
encouraging persons seeking to acquire control of us to negotiate with our board
of directors, they could also limit our stockholders' opportunity to dispose of
their shares at the premium prices typically associated with such takeover
attempts.
For example, our certificate of incorporation and by-laws provide for a
board of directors divided into three classes, with one class being elected each
year to serve for a three-year term. As a result, at least two annual meetings
of stockholders may be required for stockholders to change a majority of our
board of directors. Pursuant to our share purchase rights plan, holders of
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our common stock will receive rights to purchase shares of preferred stock that
have the same dividend, liquidation and voting rights as shares of our common
stock upon the occurrence of certain events that could lead to a person or group
acquiring 15% or more of our outstanding common stock. In addition to being
subject to Section 203 of the Delaware General Corporation Law, which generally
prohibits a publicly held Delaware corporation from engaging in business
combinations with certain stockholders, our certificate of incorporation
requires the affirmative vote of 80% of our stockholders to approve mergers and
other similar transactions between us and certain stockholders.
We are subject to state statutes governing insurance holding company
systems which would commonly require that any person or entity desiring to
purchase more than 10% of our outstanding voting securities must 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 state regulatory approval. Applicable state insurance company laws and
regulations could delay or impede a change of control of W. R. Berkley.
Certain of our institutional stockholders and management may influence actions
requiring stockholder approval.
Based on public filings as of September 30, 2000, Franklin Resources, Inc.
and Neuberger & Berman Pension Management (with their respective affiliates)
held 4,533,940 and 1,521,542 shares of common stock, respectively, representing
approximately 17.7% and 5.9%, respectively, of our outstanding common stock as
of December 31, 2000. In addition, as of December 31, 2000, William R. Berkley,
our founder, chairman and president, held 4,038,569 shares of common stock
(including currently exercisable options), representing approximately 15.7% of
our outstanding common stock as of such date. As a result, these stockholders,
acting alone or together, may be able to influence matters requiring approval by
our stockholders.
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