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 September 30, 2001
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ____ to ____.
Commission File Number 0-7849
W. R. BERKLEY CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 22-1867895
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
165 Mason Street, Greenwich, Connecticut 06830
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(Address of principal executive offices) (Zip Code)
(203) 629-3000
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(Registrant's telephone number, including area code)
None
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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
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Number of shares of common stock, $.20 par value, outstanding as of November 6,
2001: 32,955,927
Part I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
Amounts in thousands
September 30, December 31,
2001 2000
---------- ----------
Assets (Unaudited)
Investments:
Invested cash $439,824 $308,193
Fixed maturity securities:
Held to maturity, at cost (fair value $170,346 and $164,229) 156,595 156,067
Available for sale, at fair value (cost $2,198,417 and $2,087,338) 2,288,810 2,115,824
Equity securities, at fair value:
Available for sale (cost $92,626 and $76,545) 96,070 83,823
Trading account (cost $253,758 and $340,617) 240,634 347,271
Cash 3,515 938
Premiums and fees receivable 520,216 416,243
Due from reinsurers 758,654 713,392
Accrued investment income 32,731 36,578
Prepaid reinsurance premiums 100,746 99,444
Deferred policy acquisition costs 224,399 196,231
Real estate, furniture & equipment at cost, less accumulated
depreciation 118,497 118,282
Excess of cost over net assets acquired 66,519 71,496
Trading account receivable from brokers and clearing organizations 338,932 269,444
Deferred federal and foreign income taxes 34,705 47,567
Other assets 60,465 41,277
----------- -----------
Total assets $5,481,312 $5,022,070
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Reserves for losses and loss expenses $2,701,487 $2,533,917
Unearned premiums 846,288 713,239
Due to reinsurers 194,739 132,521
Short-term debt -- 10,000
Trading securities sold but not yet purchased, at fair value
(proceeds $130,431 and $164,312) 119,447 169,020
Long-term debt 370,456 370,158
Other liabilities 212,915 182,273
----------- -----------
Total liabilities 4,445,332 4,111,128
----------- -----------
Trust preferred securities 198,199 198,169
Minority interest 28,246 31,877
Stockholders' equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares; issued and outstanding - none -- --
Common stock, par value $.20 per share:
Authorized 80,000,000 shares, issued and outstanding,
net of treasury shares, 29,069,664 and 25,656,362 shares 7,902 7,281
Additional paid-in capital 456,652 334,061
Retained earnings 535,651 574,345
Accumulated other comprehensive income 57,390 19,371
Treasury stock, at cost, 10,439,180 and 10,747,482 shares (248,060) (254,162)
----------- -----------
Total stockholders' equity 809,535 680,896
----------- -----------
Total liabilities and stockholders' equity $5,481,312 $5,022,070
=========== ===========
See accompanying notes to consolidated financial statements.
1
W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands except per share data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------- -------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues:
Net premiums written $469,227 $376,084 $1,355,026 $1,111,926
Change in unearned premiums (43,832) (5,252) (132,636) (20,243)
----------- ----------- ----------- -----------
Premiums earned 425,395 370,832 1,222,390 1,091,683
Net investment income 46,802 56,513 147,600 153,025
Service fees 19,849 15,818 56,552 51,535
Realized investment gains 7,385 1,092 11,782 1,885
Other income 641 1,702 1,898 3,086
----------- ----------- ----------- -----------
Total revenues 500,072 445,957 1,440,222 1,301,214
Expenses:
Losses and loss expenses 391,477 276,344 959,598 803,596
Other operating expenses 170,864 150,829 492,806 444,406
Interest expense 11,570 11,670 34,432 35,954
Restructuring charge -- -- -- 1,850
----------- ----------- ----------- -----------
Total expenses 573,911 438,843 1,486,836 1,285,806
Income (loss) before income tax and
minority interest (73,839) 7,114 (46,614) 15,408
Income tax benefit 27,117 869 21,559 4,085
Minority interest (524) (891) (2,327) (1,419)
----------- ----------- ----------- -----------
Net income (loss) $(47,246) $7,092 $(27,382) $18,074
=========== =========== =========== ===========
Net income (loss) per share:
Basic $(1.63) $.28 $(.97) $.71
=========== =========== =========== ===========
Diluted $(1.63) $.27 $(.97) $.70
=========== =========== =========== ===========
Average shares outstanding:
Basic 29,049 25,476 28,337 25,571
=========== =========== =========== ===========
Diluted 30,053 25,807 29,603 25,769
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
2
W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
For the Nine Months
Ended September 30,
2001 2000
--------- ---------
Cash flows from (used in) operating activities:
Net income (loss) $(27,382) $18,074
Adjustments to reconcile net income (loss) to cash
flows from (used in) operating activities:
Minority interest 2,327 1,419
Change in reserves for losses
and loss expenses, net of due to/from reinsurers 184,526 61,872
Depreciation and amortization 13,474 15,594
Change in unearned premiums and
prepaid reinsurance premiums 131,747 20,304
Change in premiums and fees receivable (104,911) (29,594)
Change in federal and foreign income taxes (22,978) 5,338
Change in deferred policy acquisition costs (28,168) (13,029)
Realized gains on investments (11,782) (1,885)
Other, net (7,949) 1,336
--------- ---------
Net cash flows from operating activities
before trading account sales 128,904 79,429
Trading account purchases, net (9,547) (83,013)
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Net cash flows from (used in) operating activities 119,357 (3,584)
--------- ---------
Cash flows from (used in) investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 428,592 616,430
Equity securities 57,869 19,847
Proceeds from maturities and prepayments of
fixed maturity securities 128,601 117,320
Cost of purchases, excluding trading account:
Fixed maturity securities available for sale (668,565) (649,662)
Equity securities (65,577) (59,212)
Change in balances due to/from security brokers 33,191 (636)
Net additions to real estate, furniture & equipment (12,857) (7,514)
Net proceeds from sale of subsidiaries 3,027 2,532
Other, net 725 1,000
--------- ---------
Net cash flows from (used in) investing activities (94,994) 40,105
--------- ---------
Cash flows from (used in) financing activities:
Net proceeds from stock offering 121,400 --
Net repayment of short-term debt (10,000) (25,000)
Cash dividends to common stockholders (10,866) (9,399)
Purchase of treasury shares -- (7,020)
Retirement of long-term debt -- (25,000)
Other, net 9,311 1,688
--------- ---------
Net cash flows from (used in) financing activities 109,845 (64,731)
--------- ---------
Net increase (decrease) in cash and invested cash 134,208 (28,210)
Cash and invested cash at beginning of year 309,131 315,474
--------- ---------
Cash and invested cash at end of period $443,339 $287,264
========= =========
Supplemental disclosure of cash flow information:
Interest paid
$29,308 $31,351
========= =========
Federal and foreign income taxes paid (received), net $752 $(9,806)
========= =========
See accompanying notes to consolidated financial statements.
3
W. R. Berkley Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2001
(Unaudited)
The accompanying interim consolidated financial statements should be
read in conjunction with the following notes and with the Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.
1. FEDERAL AND FOREIGN INCOME TAXES
The federal and foreign income tax provision has been computed based on
the Company's estimated annual effective tax rate which differs from the federal
income tax rate of 35% principally because of tax-exempt investment income.
2. PER SHARE DATA
Basic per share data is based upon the weighted average number of shares
outstanding during the year. Shares issued in connection with loans to
shareholders are not considered to be outstanding for the purpose of calculating
basic per share amounts unless and until the loan is fully satisfied. The
related amounts due from shareholders are excluded from stockholders' equity.
Diluted per share data reflects the dilution that would occur if dilutive
employee stock options were exercised. On March 6, 2001 the Company issued
3,105,000 shares of its common stock in a public offering. The Company received
net proceeds of $121 million from such offering.
3. REINSURANCE CEDED
The amounts of reinsurance ceded included in the statements of
operations are as follows (amounts in thousands):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Ceded premiums written $90,877 $77,606 $259,512 $238,432
======== ======== ======== ========
Ceded premiums earned $90,145 $79,618 $258,356 $225,962
======== ======== ======== ========
Ceded losses and loss expenses $101,618 $76,458 $232,108 $178,253
======== ======== ======== ========
Ceded premiums earned were $258 million in the first nine months of 2001
and included ceded earned premiums of $31 million under the aggregate
reinsurance agreement described below. In 2001, the Company implemented a series
of changes to its ceded reinsurance program. These changes included increasing
the catastrophe reinsurance protection for weather-related losses to a maximum
of $48.5 million (from $34 million in 2000) above our retention of $6 million,
increasing retention levels for individual property casualty risks (generally to
$1 million in 2001 from $300,000 to $500,000 in 2000) and replacing various
individual reinsurance contracts with a multi-year aggregate reinsurance
agreement. The aggregate reinsurance agreement provides protection for
individual losses on an excess of loss or quota share basis, as specified for
each class of business covered by the agreement, and also provides protection
for our reinsurance segment for loss and loss adjustment expenses incurred above
a certain level beginning for the 2001 accident year. Coverage begins as the
various predecessor treaties expire through April 1, 2002 and is subject to
annual limits and an aggregate limit over the contract period.
4
W. R. Berkley Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
4. COMPREHENSIVE INCOME (LOSS)
The differences between comprehensive income (loss) and net income
(loss) are unrealized foreign exchange gains (losses) as well as unrealized
gains (losses) on securities. The following is a reconciliation of comprehensive
income (loss)(amounts in thousands):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net income (loss) $(47,246) $7,092 $(27,382) $18,074
Other comprehensive income (loss):
Change in unrealized foreign exchange
gains (losses) 15 (357) (368) (400)
Unrealized holding gains on investment
securities arising during the period 26,669 17,526 30,729 25,426
Reclassification adjustment for gains
included in net income, net of tax 4,800 709 7,658 1,224
-------- -------- -------- --------
Other comprehensive income 31,484 17,878 38,019 26,250
-------- -------- -------- --------
Comprehensive income (loss) $(15,762) $24,970 $10,637 $44,324
======== ======== ======== ========
5. INDUSTRY SEGMENTS
In the third quarter of 2001, the Company announced its plans to
discontinue its personal lines business and the alternative markets division of
its reinsurance segment. These discontinued businesses are now being managed and
reported collectively as a separate business segment ("inactive business").
Segment information for the prior period has been restated to reflect these
changes.
The Company's operations are now conducted through six 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; international; and inactive
business. The specialty segment's business is principally within the excess and
surplus lines, professional liability, commercial transportation and surety
markets. The Company's alternative markets segment specializes in developing,
insuring and administering self-insurance programs and various alternative risk
transfer mechanisms for employers, employer groups, insurers and alternative
markets funds. 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 principally provides
commercial property casualty insurance products. The international segment
writes property and casualty insurance, as well as life insurance, and has
business in Argentina and the Philippines. For the nine months ended September
30, 2001 and 2000, the international segment wrote life insurance premiums of
$23.6 million and $24.7 million, respectively.
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 fiscal year ended December 31, 2000. Income tax expense
(benefits) are 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 (loss)
before income taxes by segment consists of revenues less expenses related to the
respective segment's operations. These amounts include realized gains (losses)
where applicable. Intersegment revenues consist primarily of dividends and
interest on inter-company debt. Identifiable assets by segment are those assets
used in the operation of each segment.
5
W. R. Berkley Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
Income
Revenues (Loss)
--------------------------------------- Before Income Tax
(Amounts in thousands) Investment Unaffiliated Inter- Income (Expense)
For the three months ended Income Customers Segment Total Taxes Benefits
--------- --------- --------- --------- --------- ---------
September 30, 2001:
Specialty $9,218 $118,287 $191 $118,478 $(767) $(376)
Alternative Markets 9,389 60,170 108 60,278 8,061 (2,242)
Reinsurance 10,223 63,267 1,105 64,372 (19,403) 24,388
Regional 12,428 156,275 301 156,576 11,840 (19,430)
International 3,339 39,933 -- 39,933 2,851 (1,427)
Inactive Business 2,441 60,258 -- 60,258 (61,358) 21,475
Corporate other
and Eliminations (236) 1,882 (1,705) 177 (15,063) 4,729
--------- --------- --------- --------- --------- ---------
Consolidated $46,802 $500,072 $-- $500,072 $(73,839) $27,117
========= ========= ========= ========= ========= =========
For the three months ended September 30, 2000:
Specialty $12,892 $79,851 $402 $80,253 $6,193 $(2,209)
Alternative Markets 10,740 49,156 149 49,305 10,275 (3,137)
Reinsurance 13,163 85,044 627 85,671 6,539 (1,888)
Regional 15,247 145,269 134 145,403 902 259
International 2,719 30,748 -- 30,748 1,600 216
Inactive Business 2,566 55,506 -- 55,506 (3,530) 1,347
Corporate other
and Eliminations (814) 383 (1,312) (929) (14,865) 6,281
--------- --------- --------- --------- --------- ---------
Consolidated $56,513 $445,957 $-- $445,957 $7,114 $869
========= ========= ========= ========= ========= =========
Interest expense for the reinsurance and alternative market segments was
$666,000 and $726,000 for the three months ended September 30, 2001 and 2000,
respectively. Corporate interest expense (net of intercompany amounts) was
$10,904,000 and $10,944,000 for the corresponding periods.
Income
Revenues (Loss)
----------------------------------------- Before Income Tax
(Amounts in thousands) Investment Unaffiliated Inter- Income (Expense)
Income Customers Segment Total Taxes Benefits
---------- ------------ ---------- ---------- ---------- ----------
For the nine months ended
September 30, 2001:
Specialty $29,732 $306,489 $1,445 $307,934 $20,440 $(5,041)
Alternative Markets 28,717 167,670 993 168,663 27,919 (8,023)
Reinsurance 32,879 201,219 2,161 203,380 (9,433) 21,954
Regional 38,995 447,733 982 448,715 29,435 (23,216)
International 9,875 112,566 -- 112,566 8,977 (3,623)
Inactive Business 7,518 198,706 -- 198,706 (77,789) 27,226
Corporate other
and Eliminations (116) 5,839 (5,581) 258 (46,163) 12,182
---------- ---------- ---------- ---------- ---------- ----------
Consolidated $147,600 $1,440,222 $-- $1,440,222 $(46,614) $21,559
========== ========== ========== ========== ========== ==========
For the nine months ended September 30, 2000:
Specialty $35,844 $236,347 $1,724 $238,071 $16,860 $(4,656)
Alternative Markets 26,763 138,444 171 138,615 26,588 (7,069)
Reinsurance 36,643 251,371 1,026 252,397 17,253 (4,312)
Regional 41,658 425,095 1,015 426,110 6,335 (1,000)
International 6,882 84,319 -- 84,319 3,707 (396)
Inactive Business 6,993 160,980 -- 160,980 (11,407) 4,344
Corporate other
and Eliminations (1,758) 4,658 (3,936) 722 (43,928) 17,174
---------- ---------- ---------- ---------- ---------- ----------
Consolidated $153,025 $1,301,214 $-- $1,301,214 $15,408 $4,085
========== ========== ========== ========== ========== ==========
Interest expense for the reinsurance and alternative market segments was
$2,203,000 and $2,186,000 for the nine months ended September 30, 2001 and 2000,
respectively. Corporate interest expense (net of intercompany amounts) was
$32,229,000 and $33,768,000 for the corresponding periods. Identifiable assets
by segment are as follows (amounts in thousands):
September 30, December 31,
2001 2000
---- ----
Specialty $ 1,479,078 $ 1,425,123
Alternative Markets 843,064 759,935
Reinsurance 1,737,058 1,637,756
Regional 1,451,936 1,315,850
International 279,290 248,243
Inactive Business 275,498 332,513
Corporate other and eliminations (584,612) (697,350)
---------- ----------
Consolidated $ 5,481,312 $ 5,022,070
========== ==========
6
W. R. Berkley Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
6. OTHER MATTERS
Reclassifications have been made in the 2000 financial statements as
originally reported to conform them to the presentation of the 2001 financial
statements.
In the opinion of management, the summarized financial information
reflects all adjustments (consisting of normal recurring accrual or adjustments)
which are necessary for a fair presentation of financial position and results of
operations for the interim periods. The consolidated results of operations for
the interim periods are not necessarily indicative of the results to be
anticipated for the entire year. Seasonal weather variations and other
catastrophes 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 and man made catastrophes as tornadoes, hurricanes,
hailstorms, earthquakes and terrorist acts is mitigated by reinsurance, they
nevertheless can have a significant impact on the results of any one or more
reporting periods.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In the first quarter 2001 the Company adopted FAS 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments. The adoption of this statement
did not have a material impact on the Company's results of operations or
financial condition.
In July 2001, the FASB issued Statement No. 141, "Business
Combinations", and Statement No. 142, "Goodwill and Other Intangible Assets".
Statement 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001 as well as all purchase
method business combinations completed after June 30, 2001. Statement 142 will
require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Amortization of goodwill was
$3,031,000 and $2,932,000 for the nine months ended September 30, 2001 and 2000,
respectively. Statement 142 is effective in fiscal years beginning after
December 15, 2001. The Company has not yet determined the impact of Statement
142 to its consolidated financial statements.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The provisions of this Statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001. The adoption of this
Statement will not have a material impact on the Company's results of operations
or financial condition.
8. SUBSEQUENT EVENT
On November 6, 2001 the Company issued 3,795,000 shares of its common
stock in a public offering and received net proceeds of $194.4 million. Proceeds
of the offering will be used to provide additional capital for the Company's
insurance subsidiaries and for general corporate purposes.
7
W. R. Berkley Corporation and Subsidiaries
Notes to Consolidated Financial Statements, Continued
9. 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
potential 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 and the development of
additional facts related to the attacks of September 11, 2001, the increased
level of our retention, natural and man-made catastrophic losses, including as a
result of terrorist activities, the impact of competition, 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, the effects of the refocusing of our business, including our
withdrawal from the personal lines business, 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 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.
8
W. R. Berkley Corporation and Subsidiaries
MD&A Financial Condition and Results of Operations
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Operating Results for the First Nine Months of 2001 as Compared to the First
Nine Months of 2000
The Company reported a net loss of $27 million, or 97 cents per diluted
share, in the first nine months of 2001, compared with net income of $18
million, or 70 cents per diluted share, in the earlier-year period. Following
are the components of net income (loss) for the nine months ended September 30,
2001 and 2000 (amounts in thousands).
2001 2000
--------- ---------
Underwriting loss $(165,342) $(97,258)
Insurance services 6,329 5,222
Net investment income 147,600 153,025
Interest expense and other (46,983) (45,616)
Restructuring charge -- (1,850)
--------- ---------
Pretax income (loss) before realized
investment gains (58,396) 13,523
Realized investment gains 11,782 1,885
Income tax benefit and minority interest 19,232 2,666
--------- ---------
Net income (loss) $(27,382) $18,074
========= =========
In the third quarter of 2001, the Company prepared a plan to
discontinue its personal lines business and the alternative markets division of
its reinsurance segment. The Company is withdrawing from the personal lines
business, both homeowners and private passenger automobile, by not renewing
existing policies and ceasing to write new personal lines business. The
after-tax loss related to the discontinued businesses was $51 million, or $1.78
per diluted share, for the first nine months of 2001. The Company also expects
to incur an after-tax charge of approximately $2 million for severance and
related costs in the fourth quarter of 2001.
Underwriting - Gross and net premiums written increased by 19.6% and
21.9%, respectively, in the first nine months of 2001, compared with the
earlier-year period. Following is a summary of gross and net premiums written by
business segment for the nine months ended September 30, 2001 and 2000 (amounts
in thousands).
Gross Premiums Written Net Premiums Written
2001 2000 % Change 2001 2000 % Change
-------- -------- -------- -------- -------- --------
Specialty $427,357 $302,990 41.0% $366,632 $207,930 76.3%
Alternative Markets 127,365 86,601 47.1% 113,275 77,987 45.2%
Reinsurance 234,295 236,613 -1.0% 167,174 200,606 -16.7%
Regional 511,168 447,033 14.3% 432,878 382,231 13.3%
International 123,181 102,038 20.7% 107,536 82,557 30.3%
Inactive Business 191,172 175,083 9.2% 167,531 160,615 4.3%
------- ------- ------- -------
Total $1,614,538 $1,350,358 19.6% $1,355,026 $1,111,926 21.9%
========= ========= ========== =========
The increase in gross premiums written reflects higher prices and an
increase in new business. Gross premiums written for the reinsurance segment
also reflect a planned reduction in pro rata treaty business. Ceded premiums
written, expressed as a percentage of gross premiums written, decreased to 16.1%
from 17.7% in the prior year. The decrease reflects higher net retentions for
the specialty segment, which was partially offset by additional premiums ceded
by the reinsurance segment under the aggregate reinsurance agreement (see Note 3
of "Notes to Consolidated Financial Statements").
9
W. R. Berkley Corporation and Subsidiaries
MD&A Financial Condition and Results of Operations, Continued
Underwriting results represent net premiums earned less net loss and
loss adjustment expenses incurred and underwriting expenses incurred.
Underwriting losses increased to $165 million in the nine months ended September
30, 2001 compared with $97 million in the earlier-year period. The increase in
underwriting losses reflects higher underwriting losses for the inactive
business segment and higher catastrophe losses. Underwriting losses for the
inactive business segment increased to $85 million in 2001 from $17 million in
2000 as a result of prior year loss development for the alternative markets
reinsurance division. Catastrophe losses were $92 million in 2001 compared with
$43 million in 2000. Catastrophe losses related to the September 11, 2001 events
were $35 million, including $26 million for the reinsurance segment and $9
million for the specialty segment. This represents our maximum retention for
property and business interruption coverages and our estimated policy limits on
risks exposed to casualty losses. These estimates are based on our analysis to
date and our examination of known exposures and may need to be increased as more
information becomes available. Ceded losses and loss expenses were $232 million
in the first nine months 2001 and included loss recoveries of $42 million under
the aggregate reinsurance agreement. Following is a summary of earned premiums
and combined ratios (losses, loss expenses and underwriting expenses expressed
as a percentage of premiums earned) by business segment for the nine months
ended September 30, 2001 and 2000 (amounts in thousands).
Net Premiums Earned GAAP Combined Ratio
---------------------------- ----------------------
2001 2000 %Change 2001 2000
---------- ----------- ------- --------- --------
Specialty $275,895 $198,887 38.7% 104.3% 109.4%
Alternative Markets 84,851 62,656 35.4% 106.8% 109.9%
Reinsurance 167,243 216,190 -22.6% 126.2% 107.1%
Regional 401,177 382,666 4.8% 104.5% 109.7%
International 102,036 76,355 33.6% 100.8% 105.6%
Inactive Business 191,188 154,929 23.4% 144.6% 111.2%
------- -------
Total $1,222,390 $1,091,683 12.0% 113.5% 109.1%
========= =========
The decrease in the specialty combined ratio reflects the impact of
pricing actions and other underwriting initiatives, which were offset by losses
related to the September 11, 2001 events. The decrease in the alternative
markets combined ratio reflects a lower expense ratio as a result of higher
premium volume. The increase in the reinsurance combined ratio reflects losses
related to the September 11, 2001 events and unfavorable prior year loss
development, which were offset by loss recoveries under the aggregate
reinsurance agreement. The decrease in the regional combined ratio reflects the
impact of pricing actions and other underwriting initiatives. The decrease in
the international combined ratio reflects lower losses and expenses for
automobile business in Argentina.
Insurance Services - Insurance services income represents service fees
less related costs and expenses for the insurance services business. Insurance
service fees increased 17% to $55 million as a result of new accounts and higher
revenues on existing accounts, and insurance services income increased 21% to $6
million.
Investments - The decrease in net investment income of 4% reflects a
decrease in the yield on the merger arbitrage account to 4.9% in 2001 from 10.5%
in 2000. This was somewhat offset by a higher yield on the fixed income
portfolio as a result of changes in asset allocations and an increase in average
invested assets.
Other Items - Interest and other represents interest expense, corporate
expenses, and other miscellaneous income and expenses. The restructuring charge
in 2000 related to the reorganization of the reinsurance operations. Realized
investment gains and losses result from security sales and from changes in
provisions for other than temporary impairment of securities. The effective
income tax rate differs from the federal income tax rate of 35% principally
because of tax-exempt investment income.
Operating Results for the Third Quarter of 2001 as Compared to the Third Quarter
of 2000
Net loss was $47 million, or $1.63 cents per diluted share, for the
third quarter of 2001 compared with net income of $7 million, or 27 cents per
diluted share, for the corresponding 2000 period. Following are the components
of net income for the third quarters of 2001 and 2000 (amounts in thousands).
10
W. R. Berkley Corporation and Subsidiaries
MD&A Financial Condition and Results of Operations, Continued
2001 2000
--------- ---------
Underwriting loss $(113,795) $(39,559)
Insurance services 1,741 2,100
Net investment income 46,802 56,513
Interest expense & other (15,972) (13,032)
--------- ---------
Pretax income (loss) before realized
investment gains (81,224) 6,022
Realized investment gains 7,385 1,092
Income tax (expense) benefit and
Minority interest 26,593 (22)
--------- ---------
Net income (loss) $(47,246) $7,092
========= =========
Gross and net premiums increased by 23.5% and 24.8%, respectively,
reflecting price increases and changes in reinsurance costs as discussed above.
Underwriting losses increased by $74 million and the combined ratio deteriorated
to 126.7% from 110.6% in the earlier-year period, generally for the reasons
discussed above. Net investment income decreased by 17%, generally for the
reasons discussed above.
Liquidity and Capital Resources
Cash flow from operating activities (before trading account purchases)
increased to $129 million for the first nine months of 2001 from $79 million for
the same period in 2000. The increase in cash flow reflects higher collected
premiums, which more than offset an increase in paid losses. The cost basis of
the investment portfolio (including account receivable from brokers and clearing
organizations and securities sold but not yet purchased) was $3,350 million at
September 30, 2001 compared with $3,074 million at December 31, 2000. The
increase reflects cash flow from operations and the proceeds from the common
stock public offering completed in the first quarter of 2001.
At September 30, 2001, as compared with December 31, 2000, the fixed
maturity investment portfolio was as follows: U.S. Government and cash
equivalent were 33.1% (31.1% in 2000); state and municipal securities were 19.5%
(23.7% in 2000); mortgage-backed securities were 22.5% (21.8% in 2000);
corporate securities were 19.7% (18.0% in 2000) and foreign bonds were 5.2%
(5.4% 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 $460 million as of September 30, 2001 compared with
$448 million as of December 31, 2000.
On March 6, 2001, the Company issued 3,105,000 shares of its common
stock in a public offering and received net proceeds of $121 million. In March
2001, the Company repaid $10 million short-term debt that was outstanding since
December 31, 2000.
For the first nine months of 2001, stockholders' equity increased by
approximately $129 million to $810 million as a result of the common stock
public offering of $121 million and comprehensive income of $11 million. At
September 30, 2001 the Company's total capitalization was $1,378 million and the
percentage of the Company's capital attributable to long-term debt was 27%,
compared with 30% at December 31, 2000.
On November 6, 2001, the Company issued 3,795,000 shares of its common
stock in a public offering and received net proceeds of $194.4 million. Proceeds
of the offering will be used to provide additional capital for the Company's
insurance subsidiaries and for general corporate purposes.
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 fiscal year ended December 31, 2000.
11
W. R. Berkley Corporation and Subsidiaries
Part II - Other Information
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company's market risk generally represents the risk of gain or loss
that may result from the potential change in the fair value of the Company's
investment portfolio as a result of fluctuations in prices, interest rates and
currency exchange rates.
The cost of the Company's investments in Argentine bonds and bank
deposits was $129 million at September 30, 2001. The Company seeks to mitigate
foreign currency exchange rate risk associated with these investments by
maintaining its capital in US dollar denominated securities. Investments in
Argentine bonds and bank deposits, including those denominated in US dollars,
are subject to risks of changes in general political and economic conditions in
Argentina and to possible impairment in value as a result of further
deterioration in credit quality of such investments.
The Company attempts to manage its interest rate risk by maintaining an
appropriate relationship between the average duration of the investment
portfolio and the approximate duration of its liabilities, i.e., policy claims
and debt obligations. The Company has maintained approximately the same duration
of its investment portfolio to its liabilities from December 31, 2000 to
September 30, 2001, and the overall market risk relating to the Company's
portfolio has remained similar to the risk at December 31, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number
None
(b) Reports on Form 8-K
During the quarter ended September 30, 2001, the Company filed the
following Reports on Form 8-K:
1. Report filed on July 30, 2001 with respect to a press release announcing
results of operations of the company for the second quarter of 2001.
2. Report filed on September 17, 2001 with respect to a press release
announcing the company's estimated losses resulting from the September
11, 2001 events.
12
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: November 14, 2001 /s/ WILLIAM R. BERKLEY
------------------------------
William R. Berkley
Chairman of the Board and
Chief Executive Officer
Date: November 14, 2001 /s/ EUGENE G. BALLARD
------------------------------
Eugene G. Ballard
Senior Vice President,
Chief Financial Officer
and Treasurer
14