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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2001
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Transition Period from ____ to ____.
Commission File Number 0-7849
W. R. BERKLEY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-1867895
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
165 Mason Street, Greenwich, Connecticut 06836-2518
(Address of principal executive offices) (Zip Code)
(203) 629-3000
(Registrant's telephone number, including area code)
None
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes /X/ No / /
Number of shares of common stock, $.20 par value, outstanding as of May 3,
2001: 28,979,954
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Part I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
March 31, December 31,
2001 2000
----------- -----------
Assets (Unaudited)
Investments:
Invested cash $ 387,115 $ 308,193
Fixed maturity securities:
Held to maturity, at cost (fair value $167,320 and $164,229) 157,220 156,067
Available for sale, at fair value (cost $2,120,600 and 2,178,106 2,115,824
$ 2,087,338)
Equity securities, at fair value:
Available for sale (cost $78,119 and $76,545) 86,753 83,823
Trading account (cost $312,609 and $340,617) 303,503 347,271
Cash 5,926 938
Premiums and fees receivable 449,953 416,243
Due from reinsurers 734,916 713,392
Accrued investment income 30,180 36,578
Prepaid reinsurance premiums 106,766 99,444
Deferred policy acquisition costs 207,029 196,231
Real estate, furniture & equipment at cost, less accumulated 119,899 118,282
depreciation
Excess of cost over net assets acquired 70,297 71,496
Trading account receivable from brokers and clearing organizations 304,765 269,444
Deferred federal and foreign income taxes 37,200 47,567
Other assets 37,238 41,277
----------- -----------
Total assets $ 5,216,866 $ 5,022,070
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Reserves for losses and loss expenses $ 2,538,650 $ 2,533,917
Unearned premiums 773,388 713,239
Due to reinsurers 150,666 132,521
Short-term debt -- 10,000
Trading securities sold but not yet purchased, at fair value
(proceeds $171,778 and $164,312) 162,783 169,020
Long-term debt 370,257 370,158
Other liabilities 157,441 182,273
----------- -----------
Total Liabilities 4,153,185 4,111,128
----------- -----------
Trust preferred securities 198,179 198,169
Minority interest 32,324 31,877
Stockholders' equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares; issued and outstanding - none -- --
Common stock, par value $.20 per share:
Authorized 80,000,000 shares, issued and outstanding,
net of treasury shares, 28,977,079 and 25,656,362 shares 7,902 7,281
Additional paid-in capital 455,887 334,061
Retained earnings 580,847 574,345
Accumulated other comprehensive income 38,485 19,371
Treasury stock, at cost, 10,531,765 and 10,747,482 shares (249,943) (254,162)
----------- -----------
833,178 680,896
----------- -----------
$ 5,216,866 $ 5,022,070
=========== ===========
See accompanying notes to consolidated financial statements.
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W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands except per share data)
For the Three Months
Ended March 31,
------------------------
2001 2000
--------- ---------
Revenues:
Net premiums written $ 431,911 $ 385,761
Change in unearned premiums (52,976) (27,017)
--------- ---------
Premiums earned 378,935 358,744
Net investment income 50,430 46,928
Service fees 17,592 16,526
Realized investment gains 1,836 468
Other income 360 658
--------- ---------
Total revenues 449,153 423,324
--------- ---------
Expenses:
Losses and loss expenses 271,468 261,759
Other operating expenses 152,623 145,357
Interest expense 11,450 12,493
Restructuring charge -- 1,850
--------- ---------
Total expenses 435,541 421,459
--------- ---------
Income before income taxes and minority interest 13,612 1,865
Income tax (expense) benefit (2,484) 2,652
Minority interest (862) (171)
--------- ---------
Net income $ 10,266 $ 4,346
========= =========
Net income per share:
Basic $ .38 $ .17
========= =========
Diluted $ .36 $ .17
========= =========
Average shares outstanding:
Basic 26,949 25,617
========= =========
Diluted 28,255 25,679
========= =========
See accompanying notes to consolidated financial statements.
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W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
For the Three Months
Ended March 31,
2001 2000
--------- ---------
Cash flows from operating activities:
Net income $ 10,266 $ 4,346
Adjustments to reconcile net income to cash
flows provided by operating activities:
Minority interest 862 171
Change in reserves for losses
and loss expenses, net 1,354 25,960
Depreciation and amortization 5,141 5,724
Change in unearned premiums and
prepaid reinsurance premiums 52,827 26,558
Change in premiums and fees receivable (33,710) (25,993)
Change in federal and foreign income taxes 2,030 (2,586)
Change in deferred policy acquisition cost (10,798) (9,234)
Realized investment gains (1,836) (468)
Other, net (19,035) (7,269)
--------- ---------
Net cash flows provided by operating activities
before trading account 7,101 17,209
Decrease (increase) in trading account securities 2,120 (7,152)
--------- ---------
Net cash flows provided by operating activities 9,221 10,057
--------- ---------
Cash flows provided by (used in) investing activities: Proceeds from sales,
excluding trading account:
Fixed maturity securities available for sale 198,196 638,365
Equity securities 4,573 --
Maturities and prepayments of fixed maturity securities 38,356 51,679
Cost of purchases, excluding trading account:
Fixed maturity securities available for sale (269,045) (617,692)
Equity securities (5,775) (26,060)
Change in balances due to/from security brokers 2,087 33,614
Net additions to real estate, furniture and equipment (6,033) (3,310)
Other, net 136 --
--------- ---------
Net cash flows provided by (used in) investing activities (37,505) 76,596
--------- ---------
Cash flows provided by (used in) financing activities:
Net proceeds from issuance of common stock 121,385 --
Net change in short-term debt (10,000) 10,000
Cash dividends (3,332) (2,738)
Purchase of treasury shares (289) --
Repayment of long-term debt -- (25,000)
Other, net 4,430 365
--------- ---------
Net cash flows provided by (used in) financing 112,194 (17,373)
--------- ---------
activities
Net increase in cash and invested cash 83,910 69,280
Cash and invested cash at beginning of year 309,131 315,474
--------- ---------
Cash and invested cash at end of period $ 393,041 $ 384,754
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 6,778 $ 7,649
========= =========
Federal income taxes paid, net $ 279 $ 167
========= =========
See accompanying notes to consolidated financial statements.
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W. R. Berkley Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2001
(Unaudited)
The accompanying consolidated financial statements should be read in
conjunction with the following notes and with the Notes to Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2000.
1. FEDERAL AND FOREIGN INCOME TAXES
The federal and foreign income tax provision has been computed based on
the Company's estimated annual effective tax rate which differs from the Federal
income tax rate of 35% principally because of tax-exempt investment income.
2. PER SHARE DATA
Basic per share data is based upon the weighted average number of shares
outstanding during the year. Diluted per share data reflects the potential
dilution that would occur if employee stock-based compensation plans were
exercised. Shares issued in connection with loans to shareholders are not
considered to be outstanding for the purpose of calculating basic per share
amounts. The related amounts due from shareholders are excluded from
stockholders' equity. On March 6, 2001 the Company issued 3,105,000 shares of
its common stock. The Company received net proceeds of $121 million from the
offering.
3. REINSURANCE CEDED
The amounts of ceded reinsurance included in the statements of operations
are as follows (amounts in thousands):
For the Three Months
Ended March 31,
--------------------
2001 2000
---- ----
Ceded premiums written $83,360 $76,630
======= =======
Ceded premiums earned $76,701 $70,040
======= =======
Ceded losses and loss expenses $69,344 $55,694
======= =======
4. COMPREHENSIVE INCOME
The differences between comprehensive income and net income are unrealized
foreign exchange gains (losses) as well as unrealized gains (losses) on
securities. The following is a reconciliation of comprehensive income (amounts
in thousands):
For the three months
Ended March 31,
----------------------
2001 2000
-------- --------
Net income $ 10,266 $ 4,346
Other comprehensive income:
Change in unrealized foreign exchange gains
(losses) (460) 131
Unrealized holding gains (losses) on investment
securities arising during the period, net of
taxes 20,767 5,726
Reclassification adjustment for realized gains
included in net income, net of taxes (1,193) (304)
-------- --------
Other comprehensive income 19,114 5,553
-------- --------
Comprehensive income $ 29,380 $ 9,899
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5. INDUSTRY SEGMENTS
The Company's operations are presently conducted through five segments:
specialty; alternative markets; reinsurance; regional property casualty
insurance and international. The specialty lines of insurance consist primarily
of excess and surplus lines, commercial transportation, professional liability,
directors and officers liability and surety. The Company's alternative markets
segment specializes in insuring, reinsuring, and administering self-insurance
programs and other alternative risk transfer mechanisms for public entities,
private employers and associations. The Company's reinsurance segment
specializes in underwriting property, casualty and surety reinsurance on both a
treaty and facultative basis. The regional property casualty insurance segment
writes standard commercial and personal lines insurance for such risks as
automobiles, homes and businesses. The international segment writes property and
casualty insurance, as well as life insurance, in Argentina and the Philippines.
For the three months ended March 31, 2001 and 2000, the international segment
wrote life insurance premiums of $7.9 million and $8.3 million, respectively.
Effective January 1, 2001, management responsibility and financial
reporting for alternative markets business produced through traditional
reinsurance intermediaries was transferred from the alternative markets segment
to the reinsurance segment. Segment information for the prior period has been
restated to reflect the change.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000. Income tax expense (benefits)
were calculated in accordance with the Company's tax sharing agreements, which
provide for the recognition of tax loss carry-forwards only to the extent of
taxes previously paid. Summary financial information about the Company's
operating segments is presented in the following table. Income before income
taxes by segment consists of revenues less expenses related to the respective
segment's operations. These amounts include realized gains (losses) where
applicable. Intersegment revenues consist primarily of dividends, interest on
inter-company debt and fees paid by subsidiaries for portfolio management and
other services to the Company. Identifiable assets by segment are those assets
used in the operation of each segment.
INCOME
REVENUES (LOSS)
-------------------------------------- BEFORE INCOME TAX
INVESTMENT UNAFFILIATED INTER- INCOME (EXPENSE)
(AMOUNTS IN THOUSANDS) INCOME CUSTOMERS SEGMENT TOTAL TAXES BENEFITS
--------- --------- --------- --------- --------- ---------
For the three months
ended March 31, 2001:
Specialty $ 10,362 $ 86,084 $ 678 $ 86,762 $ 8,856 $ 1,405
Alternative Markets 9,807 52,121 427 52,548 8,764 2,560
Reinsurance 13,316 100,622 464 101,086 1,582 518
Regional 13,887 173,381 361 173,742 5,435 816
International 3,323 35,189 -- 35,189 2,143 595
Corporate other
and Eliminations (265) 1,756 (1,930) (174) (15,018) (3,410)
--------- --------- --------- --------- --------- ---------
Consolidated $ 50,430 $ 449,153 -- $ 449,153 $ 11,762 $ 2,484
========= ========= ========= ========= ========= =========
For the three months ended March 31, 2000:
Specialty $ 11,114 $ 76,520 $ 254 $ 76,774 $ 3,868 $ (493)
Alternative Markets 8,306 40,035 367 40,402 5,961 (1,571)
Reinsurance 13,100 99,784 102 99,886 5,452 (923)
Regional 13,124 179,792 135 179,927 1,836 (1,636)
International 2,067 26,183 -- 26,183 929 (379)
Corporate other
and Eliminations (783) 1,010 (858) 152 (16,181) 7,654
--------- --------- --------- --------- --------- ---------
Consolidated $ 46,928 $ 423,324 $ -- $ 423,324 $ 1,865 $ 2,652
========= ========= ========= ========= ========= =========
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Interest expense for the reinsurance and alternative market segments was
$765,000 and $717,000 for the three months ended March 31, 2001 and 2000,
respectively. Corporate interest expense (net of intercompany amounts) was
$10,685,000 and $11,776,000 for the corresponding periods. Identifiable assets
by segment are as follows (Amounts in thousands):
MARCH 31, DECEMBER 31,
2001 2000
----------- -----------
Specialty $ 1,425,301 $ 1,425,123
Alternative Markets 832,720 759,935
Reinsurance 1,799,539 1,787,940
Regional 1,532,749 1,498,179
International 259,834 248,243
Corporate other and
Elimination (633,277) (697,350)
----------- -----------
Consolidated $ 5,216,866 $ 5,022,070
=========== ===========
6. OTHER MATTERS
Reclassifications have been made in the 2000 financial statements as
originally reported to conform them to the presentation of the 2001 financial
statements.
In the opinion of management, the summarized financial information
reflects all adjustments which are necessary for a fair presentation of
financial position and results of operations for the interim periods. Seasonal
weather variations affect the severity and frequency of losses sustained by the
insurance and reinsurance subsidiaries. Although the effect on the Company's
business of such natural catastrophes as tornadoes, hurricanes, hailstorms and
earthquakes is mitigated by reinsurance, they nevertheless can have a
significant impact on the results of any one or more reporting periods.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In the first quarter 2001 the Company adopted FAS 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments. The adoption of this statement
did not have a material impact on the Company's results of operations or
financial condition.
8. SAFE HARBOR STATEMENT
This Quarterly Report on Form 10-Q may contain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Any
forward-looking statements contained herein, including those related to the
Company's performance for the year 2001 and beyond, are based upon the Company's
historical performance and on current plans, estimates and expectations. They
are subject to various risks and uncertainties, including but not limited to,
the cyclical nature of the property casualty industry, the long-tail and
potentially volatile nature of the reinsurance business, the impact of
competition, product demand and pricing, claims development and the process of
estimating reserves, catastrophe and storm losses, legislative and regulatory
developments, investment results, availability and use of reinsurance, and other
risks detailed from time to time in the Company's filings with the Securities
and Exchange Commission. These risks could cause the Company's actual results
for the year 2001 and beyond to differ materially from those expressed in any
forward-looking statement made by or on behalf of the Company. Forward-looking
statements speak only as of the date on which they are made, and the Company
undertakes no obligation to update publicly or revise any forward-looking
statement, whether as a result of new information, future developments or
otherwise.
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Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Operating Results for the First Three Months of 2001 Compared to the First
Three Months of 2000
Net income was $10.3 million ($.36 per diluted share) for the first
quarter of 2001 compared with a $4.3 million ($.17 per diluted share) for the
corresponding 2000 period. Operating income, which is defined as net income
before realized investment gains, was $9.1 million ($.32 per diluted share) for
the first quarter of 2001 compared with $4.0 million ($.15 per diluted share) in
the corresponding 2000 quarter. Adjusting for the restructuring charge,
operating income was $5.2 million ($.20 per diluted share) for the first quarter
of 2000.
Net premiums written during the first quarter of 2001 increased by 12% to
$432 million from $386 million written in the comparable 2000 period. Specialty
net premiums written increased by $37.8 million, or 55% due to an increase in
policy rates and a decrease in premiums ceded. Alternative markets net premiums
written increased $10.6 million, or 29%, due to an increase in workers'
compensation rates and policy counts. Net premiums written by the reinsurance
operations decreased by $14.4 million, or 16%, primarily due to the planned
reduction in treaty business, which was partially offset by an increase in
facultative business. Net premiums written by the regional segment increased by
$4.9 million, or 3%, as price increases were offset by a decrease in policy
count. International net premiums written increased $7.3 million, or 28%, due to
growth in Argentina.
Net investment income increased by 7% to $50.4 million for the three
months ended March 31, 2001. The increase in investment income was due to a
higher yield on the fixed income portfolio and an increase in average investable
assets. The yield on the Company's merger arbitrage portfolio was 6.1% in 2001
compared with 8.3% in 2000 (see "Liquidity and Capital Resources").
Service fees consist primarily of revenues earned by the alternative
markets segment. During the first quarter of 2001, service fees increased 6% to
$17.6 million due to new accounts and higher revenues on existing accounts.
Realized investment gains increased to $1.8 million from $0.5 million
earned in the comparable 2000 period. Realized investment gains and losses
result from security sales and from the change in provision for other than
temporary impairment of securities.
Losses and loss expenses increased 4% to $271 million. The GAAP loss ratio
(losses and loss expenses expressed as a percentage of premiums earned) for the
property casualty business decreased to 72.0% in 2001 from 73.1% in 2000. The
decrease was due to lower loss ratios for the specialty and regional businesses,
primarily as a result of price increases and other underwriting actions. These
were partially offset by an increase in the reinsurance loss ratio due primarily
to higher claim activity for the treaty business.
Other operating costs and expenses, which consist of the expenses of the
Company's insurance and alternative markets operations as well as the Company's
corporate and investment expenses, increased by 5% to $152.6 million. The
increase in other operating costs and expenses is primarily due to the growth in
premiums earned which in turn results in an increase in underwriting expenses.
The GAAP expense ratio (underwriting expenses expressed as a percentage of
premiums earned) for the property casualty business was 34.1% in 2001 compared
with 33.9% in 2000.
First quarter 2000 results include an after-tax restructuring charge of
$1.2 million, or 5 cents per diluted share, related to the reorganization of the
Company's reinsurance operations.
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The Federal income tax expense in 2001 was $2.5 million compared with a
benefit of $2.7 million for the comparable 2000 period. The effective tax rate
differs from the Federal income tax rate of 35% principally because of
tax-exempt investment income.
Liquidity and Capital Resources
Cash flow from operating activities before trading account decreased to
$7.1 million for the first quarter of 2001 from $17.2 million for the same
period in 2000 due to an increase in claim activity. The investment portfolio,
(including account receivable from brokers and clearing organizations and
securities sold but not yet purchased), on a cost basis, increased by $114.7
million to $3,188.6 million at March 31, 2001 from $3,073.9 million at December
31, 2000 due to the proceeds of $121 million from the common stock offering.
At March 31, 2001, as compared with December 31, 2000, the fixed maturity
investment portfolio was as follows: U.S. Government and cash equivalent were
31% (32% in 2000); state and municipal securities were 24% (22% in 2000);
mortgage-backed securities were 22% (22% in 2000); corporate securities were 20%
(21% in 2000) and Argentine and Philippine sovereign bonds were 3% (3% in 2000).
The Company's equity portfolio is comprised of merger arbitrage
securities, which are classified as trading account assets, and other equity
investments, which are classified as available for sale. Net trading account
assets (trading account equity securities plus trading account receivable from
brokers and clearing organizations less trading account equity securities sold
but not yet purchased) were $445 million as of March 31, 2001 compared with $448
million as of December 31, 2000.
On March 6, 2001, the Company issued 3,105,000 shares of its common stock
and received net proceeds of $121 million. In March, the Company repaid $10
million short-term debt that was outstanding since December 31, 2000.
For the first quarter of 2001, stockholders' equity increased by
approximately $152 million to $833 million due to the common stock offering of
$121 million and comprehensive income of $29 million. At March 31, 2001 the
Company's total capitalization was $1,402 million and the percentage of the
Company's capital attributable to long-term debt was 26%, compared with 30% at
December 31, 2000.
For background information concerning discussion of the Company's
Liquidity and Capital Resources, see the Company's Annual Report on Form 10-K
for the year ended December 31, 2000.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company's market risk generally represents the risk of gain or loss
that may result from the potential change in the fair value of the Company's
investment portfolio as a result of fluctuations in prices, interest rates and
currency exchange rates. The Company attempts to manage its interest rate risk
by maintaining an appropriate relationship between the average duration of the
investment portfolio and the approximate duration of its liabilities, i.e.,
policy claims and debt obligations.
The Company has maintained approximately the same duration of its
investment portfolio to its liabilities from December 31, 2000 to March 31,
2001, and the overall market risk relating to the Company's portfolio has
remained similar to the risk at December 31, 2000.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number
None
(b) Reports on Form 8-K
During the quarter ended March 31, 2001, the Company filed the following
Reports on Form 8-K:
1. Report dated January 24, 2001 with respect to an amendment of the
Company's credit agreement (under Item 5 of Form 8-K).
2. Report dated February 6, 2001 with respect to a press release
announcing certain matters relating to results of operations of the
Company for the year ended December 31, 2000 (under Item 5 of Form
8-K).
3. Report dated February 26, 2001 with respect to copy of the edited
conference call transcript regarding the results of operations for
the year ended December 31, 2000 (under Item 5 of Form 8-K).
4. Report dated February 28, 2001 with respect to the Company entering
into an underwriting agreement with several underwriters with
respect to the issue and sale of the Company's common stock (under
Item 5 of Form 8-K).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
W. R. BERKLEY CORPORATION
Date: May 15, 2001 /s/ WILLIAM R. BERKLEY
--------------------------------
William R. Berkley
Chairman of the Board and
Chief Executive Officer
Date: May 15, 2001 /s/ EUGENE G. BALLARD
--------------------------------
Eugene G. Ballard
Senior Vice President,
Chief Financial Officer
and Treasurer
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