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, 2002
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.)
475 Steamboat Road, 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 May 1, 2002:
33,411,430
Part I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
--------------------
March 31, December 31,
2002 2001
---- ----
(Unaudited)
Assets
Investments:
Invested cash $ 459,317 $ 524,554
Fixed maturity securities:
Held to maturity, at cost (fair value $175,536 and $167,559) 164,632 156,464
Available for sale, at fair value (cost $2,390,785 and $2,241,321) 2,419,161 2,299,326
Equity securities, at fair value:
Available for sale (cost $103,675 and $103,011) 112,461 109,114
Trading account (cost $210,014 and $215,808) 208,705 213,878
Cash 3,443 9,533
Premiums and fees receivable 658,422 537,814
Due from reinsurers 730,755 716,398
Accrued investment income 31,874 35,926
Prepaid reinsurance premiums 153,277 103,667
Deferred policy acquisition costs 248,334 224,110
Real estate, furniture & equipment at cost, less accumulated depreciation 124,066 118,344
Deferred federal and foreign income taxes 94,014 99,921
Goodwill 59,021 59,021
Trading account receivable from brokers and clearing organizations 372,973 351,707
Other assets 67,076 73,732
--------- ---------
Total assets $5,907,531 $5,633,509
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Reserves for losses and loss expenses $2,874,627 $2,817,682
Unearned premiums 1,076,667 879,640
Due to reinsurers 151,857 139,322
Trading securities sold but not yet purchased, at fair value
(proceeds $38,690 and $58,331) 40,262 56,990
Other liabilities 229,351 215,220
Long-term debt 362,661 370,554
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Total liabilities 4,735,425 4,479,408
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Trust preferred securities 198,221 198,210
Minority interest 25,932 24,296
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, 33,373,446 and 33,240,516 shares 8,661 8,661
Additional paid-in capital 659,197 659,266
Retained earnings 497,249 467,185
Accumulated other comprehensive income 19,777 37,340
Treasury stock, at cost, 9,930,398 and 10,063,328 shares (236,931) (240,857)
--------- ---------
Total stockholders' equity 947,953 931,595
--------- ---------
Total liabilities and stockholders' equity $5,907,531 $5,633,509
========= =========
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
Ended March 31,
---------------
2002 2001
---- ----
Revenues:
Net premiums written $ 625,993 $ 431,911
Change in unearned premiums (148,527) (52,976)
---------- ----------
Premiums earned 477,466 378,935
Net investment income 44,152 50,430
Service fees 20,193 17,592
Realized investment gains 4,963 1,836
Other income 112 360
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Total revenues 546,886 449,153
---------- ----------
Expenses:
Losses and loss expenses 310,601 271,468
Other operating expenses 174,443 152,623
Interest expense 11,135 11,450
---------- ----------
Total expenses 496,179 435,541
---------- ----------
Income before income taxes and minority interest 50,707 13,612
Income tax expense (16,222) (2,484)
Minority interest (89) (862)
---------- ----------
Net income $ 34,396 $ 10,266
========== ==========
Net income per share:
Basic $ 1.03 $ .38
========== ==========
Diluted $ .99 $ .36
========== ==========
Average shares outstanding:
Basic 33,276 26,949
========== ==========
Diluted 34,651 28,255
========== ==========
See accompanying notes to consolidated financial statements.
2
W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
For the Three Months
Ended March 31,
---------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 34,396 $ 10,266
Adjustments to reconcile net income to cash
flows provided by operating activities:
Minority interest 89 862
Change in reserves for losses
and loss expenses, net 55,123 1,354
Depreciation and amortization 4,071 5,141
Change in unearned premiums and
prepaid reinsurance premiums 147,417 52,827
Change in premiums and fees receivable (120,608) (33,710)
Change in federal and foreign income taxes 15,369 2,030
Change in deferred policy acquisition cost (24,224) (10,798)
Realized investment gains (4,963) (1,836)
Other, net (12,520) (19,035)
--------- ---------
Net cash flows provided by operating activities
before trading account 94,150 7,101
Decrease (increase) in trading account securities (32,930) 2,120
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Net cash flows provided by operating activities 61,220 9,221
--------- ---------
Cash flows used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 104,468 198,196
Equity securities 4,158 4,573
Maturities and prepayments of fixed maturity securities 72,051 38,356
Cost of purchases, excluding trading account:
Fixed maturity securities available for sale (329,185) (269,045)
Equity securities (3,971) (5,775)
Change in balances due to/from security brokers 37,253 2,087
Net additions to real estate, furniture and equipment (10,416) (6,033)
Other, net 17 136
--------- ---------
Net cash flows used in investing activities (125,625) (37,505)
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Cash flows provided by (used in) financing activities:
Net proceeds from issuance of common stock -- 121,385
Repayment and repurchase of debt (8,000) (10,000)
Cash dividends (4,299) (3,332)
Net proceeds from stock options exercised 3,858 5,567
Purchase of treasury shares -- (289)
Other, net 1,519 (1,137)
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Net cash flows provided by (used in) financing activities (6,922) 112,194
--------- ---------
Net increase in cash and invested cash (71,327) 83,910
Cash and invested cash at beginning of year 534,087 309,131
--------- ---------
Cash and invested cash at end of period $ 462,760 $ 393,041
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 6,457 $ 6,778
========= =========
Federal income taxes paid, net $ 883 $ 279
========= =========
See accompanying notes to consolidated financial statements.
3
W. R. Berkley Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2002
(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, 2001.
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. ACCOUNTING CHANGES
Effective January 1, 2002, the Company adopted FASB Statement No. 142,
Goodwill and Other Intangible Assets. As a result of adopting Statement No. 142,
the Company's goodwill is no longer amortized. Pursuant to Statement No. 142,
goodwill must be periodically tested for impairment and the new standard
provides six months to complete the impairment review. During the quarter, the
Company completed its impairment review which indicated that there was no
impairment as of January 1, 2002.
The Company also has adopted FASB Statement No. 141, Business
Combinations. In accordance with Statement No. 141, other intangible assets that
meet the criteria for recognition apart from goodwill (as defined by Statement
No. 141) are to be reclassified and accounted for as an asset apart from
goodwill upon adoption of the statement. The Company has reclassified $5 million
of intangible assets, net of accumulated amortization, from goodwill to other
assets as of January 1, 2002. The December 31, 2001 consolidated balance sheet
has been changed to reflect this reclassification.
The Company also adopted FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, effective January 1, 2002. The
adoption of Statement No. 144 did not have a material impact on the Company's
consolidated financial statements.
3. EARNINGS PER SHARE
Basic earnings per share data is based upon the weighted average number
of shares outstanding during the year. Diluted earnings per share data reflects
the potential dilution that would occur if options granted under 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 earnings per share amounts. The related amounts due from
shareholders are excluded from stockholders' equity.
4. 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,
---------
2002 2001
---- ----
Ceded premiums written $131,215 $ 83,360
======== ========
Ceded premiums earned $ 94,184 $ 76,701
======== ========
Ceded losses and loss expenses $ 60,823 $ 69,344
======== ========
4
The Company reinsures a portion of its business under a multi-year
aggregate reinsurance agreement that provides two types of reinsurance coverage.
The first type of coverage 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. The second type of coverage provides aggregate
accident year protection for our reinsurance segment for loss and loss
adjustment expenses incurred above a certain level. Loss recoveries are subject
to annual limits and an aggregate limit over the contract period. For the three
months ended March 31, 2002, earned premiums and losses and loss expenses ceded
under the aggregate reinsurance agreement were $20 million and $13 million,
respectively, for the individual loss protection and $6 million and $11 million,
respectively, for the aggregate accident year protection. There were no premiums
or losses ceded under the aggregate reinsurance agreement for the three months
ended March 31, 2001.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
In accordance with FASB Statement No. 142, all of the Company's
goodwill will no longer be amortized. In prior years, goodwill amortization has
been expensed primarily in the alternative markets segment. A reconciliation of
the prior year's quarter reported net income to adjusted net income had
Statement No. 142 and the reclassification provisions of Statement No. 141 been
applied as of January 1, 2001 follows (amount in thousands, except per share
data):
For Three Months
Ended March 31, 2001
--------------------
Basic Diluted
Earnings Earnings
Amount Per Share Per Share
------ --------- ---------
Reported net income $10,266 $ .38 $ .36
Add back goodwill amortization (net of tax) 795 .03 .03
------- ------- -------
Adjusted net income $11,061 $ .41 $ .39
======= ======= =======
Amortization expense for amortizable intangible assets is estimated to
be $415,000 for each of the five years ended December 31, 2006.
6. 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,
---------------
2002 2001
---- ----
Net income $ 34,396 $ 10,266
Other comprehensive income:
Change in unrealized foreign exchange losses (28) (460)
Unrealized holding gains (losses) on investment securities arising
during the period, net of taxes (14,269) 20,767
Reclassification adjustment for realized gains included in net income,
net of taxes (3,266) (1,193)
-------- --------
Other comprehensive income (loss) (17,563) 19,114
-------- --------
Comprehensive income $ 16,833 $ 29,380
======== ========
7. INDUSTRY SEGMENTS
The Company's operations are presently conducted through five segments
of the 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. The specialty segment's business
is principally within the excess and surplus lines, professional liability,
5
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, in Argentina and the Philippines. For the
three months ended March 31, 2002 and 2001, the international segment wrote life
insurance premiums of $7,607,000 and $7,854,000, respectively. During 2001, the
Company discontinued its regional 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 discontinued business
segment. Prior period segment information has been restated to reflect these
changes.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. Income tax expense and
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.
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, 2002:
Specialty $ 11,445 $ 152,512 $ 592 $ 153,104 $ 19,395 $ (6,285)
Alternative Markets 8,754 73,897 453 74,350 14,465 (4,128)
Reinsurance 5,209 86,033 461 86,494 12,480 (3,849)
Regional 7,766 164,841 2,952 167,793 23,628 (8,000)
International 1,452 41,516 -- 41,516 1,142 (720)
Discontinued Business 9,762 24,232 -- 24,232 (54) 19
Corporate other
and Eliminations (236) 3,855 (4,458) (603) (20,349) 6,741
--------- --------- --------- --------- --------- ---------
Consolidated $ 44,152 $ 546,886 $ -- $ 546,886 $ 50,707 $ (16,222)
========= ========= ========= ========= ========= =========
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 10,614 (2,560)
Reinsurance 11,477 76,321 464 76,785 3,187 44
Regional 13,153 138,088 361 138,449 5,721 (716)
International 3,323 35,189 -- 35,189 2,143 (595)
Discontinued Business 2,573 59,594 -- 59,594 (1,891) (662)
Corporate other
and Eliminations (265) 1,756 (1,930) (174) (15,018) 3,410
--------- --------- --------- --------- --------- ---------
Consolidated $ 50,430 $ 449,153 $ -- $ 449,153 $ 13,612 $ (2,484)
========= ========= ========= ========= ========= =========
Interest expense for the reinsurance and alternative market segments
was $586,000 and $765,000 for the three months ended March 31, 2001 and 2001,
respectively. Corporate interest expense (net of intercompany amounts) was
$10,549,000 and $10,685,000 for the corresponding periods. Identifiable assets
by segment are as follows (Amounts in thousands):
MARCH 31, DECEMBER 31,
2002 2001
---- ----
Specialty $ 1,713,078 $ 1,580,155
Alternative Markets 892,572 859,502
Reinsurance 1,949,031 1,751,428
Regional 1,488,162 1,462,861
International 220,695 209,473
Discontinued business 237,874 289,313
Corporate other and Elimination (593,881) (519,223)
----------- -----------
Consolidated $ 5,907,531 $ 5,633,509
=========== ===========
6
8. COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES
As is common with other insurance companies, the Company's subsidiaries
are regularly engaged in the defense of claims arising out of the conduct of the
insurance business. The Company does not believe that such litigation will have
a material effect on its financial condition or results of operations.
The Company has a pending arbitration proceeding pertaining to the
interpretation of a contract provision contained in certain reinsurance
agreements. As of March 31, 2002, the net amount recoverable by the Company from
the reinsurer under these reinsurance agreements was approximately $44 million.
Management believes that its interpretation of the contract is correct and
intends to vigorously pursue this matter in arbitration. In addition, the
Company has two pending arbitration proceedings pertaining to reinsurance
contract coverage issues where the Company is the assuming reinsurer. The
Company estimate of its remaining liabilities under these assumed contracts is
based on information currently available and is reflected in reserves for losses
and loss expenses. These proceedings are all in the initial stages of
development.
9. INTERNATIONAL BUSINESS
The Company owns 65% of Berkley International, LLC, which through
subsidiaries conducts insurance operations in Argentina and the Philippines. The
international activities are reported in the Company's financial statements on a
one quarter lag to facilitate the timely completion of the consolidated
financial statements. During 2001, Argentina experienced substantial economic
turmoil, which included the default and restructuring its sovereign debt, the
introduction of floating exchange rates and devaluation of the peso, and various
government-imposed restrictions on the banking system and commercial
transactions in general. During 2002, the government has continued to announce
measures and countermeasures, some of which have been contradicted by judicial
decisions.
Following an analysis of the impact of these changes on its operations
and financial statements, the Company recorded a realized loss of $18 million in
its fourth quarter 2001 financial statements to reflect the impairment of
Argentine sovereign bonds held by its Argentine subsidiary. At March 31, 2002,
Berkley International, LLC's capital investment in the Argentine subsidiary was
$45 million (of which the Company's share was $30 million), which was
approximately equal to the Argentine subsidiary's investment in US dollar
denominated securities held outside of Argentina.
The actions taken by the Argentine government may significantly impact
the operations and financial statements of the Argentine subsidiary. The Company
has made certain assumptions and estimates with respect to its investments and
operations in Argentina. These include assumptions regarding recoverability of
assets, including recoverability of deferred acquisition costs and impairment of
investments deemed other than temporary, and the settlement value of
liabilities, including reserves for losses and future policyholder benefits.
Given the inherent uncertainty and complexity of the situation, considerable
judgment was used by management to establish its estimates using all information
available. These estimates may change as more information becomes available.
10. OTHER MATTERS
Reclassifications have been made in the 2001 financial statements as
originally reported to conform them to the presentation of the 2002 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
11. 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 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 ultimate results of the various pending arbitration proceedings, 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.
8
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
CRITICAL ACCOUNTING POLICIES Management considers certain of its accounting
policies to be critical to the portrayal of the Company's financial condition
and results since they require management to establish estimates based on
complex and subjective judgments, often including the interplay of specific
uncertainties with related accounting measurements. The Company's critical
accounting policies include assumptions and estimates relating to loss reserves
and foreign investments and operations, as described in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
OPERATING RESULTS FOR THE FIRST THREE MONTHS OF 2002 AS COMPARED TO THE FIRST
THREE MONTHS OF 2001
The Company reported net income of $34 million, or 99 cents per share,
for 2002 compared with $10 million, or 36 cents per share, for 2001. Following
are the components of net income for the three months ended March 31, 2002 and
2001 (amounts in thousands):
2002 2001
---- ----
Underwriting income (loss) $ 18,641 $(25,998)
Insurance services 3,450 2,329
Net investment income 44,152 50,430
Interest expense and other (20,499) (14,985)
-------- --------
Pretax income before realized
investment gains 45,744 11,776
Realized investment gains 4,963 1,836
Income tax expense and minority interest (16,311) (3,346)
-------- --------
Net income $ 34,396 $ 10,266
======== ========
UNDERWRITING INCOME (LOSS) Gross and net premiums written increased by 47% and
45%, respectively, in 2002 compared with the earlier-year period. Following is a
summary of gross and net premiums written by business segment for the three
months ended March 31, 2002 and 2001 (amounts in thousands):
Gross Premiums Written Net Premiums Written
---------------------- --------------------
2002 2001 % Change 2002 2001 % Change
---- ---- -------- ---- ---- --------
Specialty $202,333 $131,385 54% $179,727 $106,023 70%
Alternative Markets 98,173 52,428 87% 84,580 46,556 82%
Reinsurance 163,546 73,052 124% 133,991 60,824 120%
Regional 238,319 167,322 42% 183,703 139,465 32%
International 46,218 38,626 20% 40,550 33,724 20%
Discontinued Business 8,619 52,458 (84%) 3,442 45,319 (92%)
-------- -------- -------- -------- -------- --------
Total $757,208 $515,271 47% $625,993 $431,911 45%
======== ======== ======== ======== ======== ========
The increase in gross premiums written reflects generally higher prices
and a modest increase in policies. In addition, the reinsurance segment's gross
premiums in 2002 included approximately $38 million related to new reinsurance
contracts with certain Lloyd's syndicates that underwrite a broad range of
mainly short-tail classes of business. The decrease in discontinued business
premiums reflects the run-off of personal lines and alternative markets
reinsurance following our withdrawal from those markets in the fourth quarter of
2001. Ceded premiums written, expressed as a percentage of gross premiums
written, increased to 17.3% from 16.2%.
Following is a summary of earned premiums and underwriting income
(loss) by business segment for the three months ended March 31, 2002 and 2001
(amounts in thousands):
Net Premiums Earned Underwriting Income (Loss)
------------------- --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Specialty $140,644 $ 75,137 $ 6,935 $ (2,769)
Alternative Markets 45,337 25,618 2,032 (2,985)
Reinsurance 73,357 64,555 (75) (6,611)
Regional 156,581 124,827 12,416 (7,901)
International 39,184 31,777 (744) (1,269)
Discontinued Business 22,363 57,021 (1,923) (4,463)
-------- -------- -------- --------
Total $477,466 $378,935 $ 18,641 $(25,998)
======== ======== ======== ========
9
Underwriting income (loss) represents net premiums earned less net loss
and loss adjustment expenses incurred and underwriting expenses incurred. In
2002, earned premiums increased 26% to $477 million, losses and loss expenses
increased 14% to $311 million and underwriting expenses increased 11% to $147
million.
The loss ratio (losses and loss expenses incurred expressed as a
percentage of premiums earned) decreased to 65.1% in 2002 from 71.6% in 2001.
The lower ratio reflects the effect of premium rate increases and improved
policy terms and conditions. Weather-related losses were $7 million in 2002
compared with $8 million in 2001. The reinsurance segment's 2002 underwriting
results also reflect loss recoveries under the Company's aggregate reinsurance
agreement. (See Note 4 of "Notes to Consolidated Financial Statements.")
The underwriting expense ratio (underwriting expenses expressed as a
percentage of premiums earned) decreased to 31.0% in 2002 from 35.2% in 2001.
The decrease is a result of a 26% increase in earned premiums with no
significant change in the general expenses (underwriting expenses other than
commissions and premium taxes).
INSURANCE SERVICES Insurance services income represents service fees less
related costs and expenses for the insurance services business. Insurance fees
increased 15% to $20 million in 2002 as a result of new accounts and higher
revenues on existing accounts, and service fee income increased 48% to $3
million.
NET INVESTMENT INCOME Net investment income decreased to $44 million in the
first three months of 2002 from $50 million in 2001. Average invested assets
were $3,587 million in the first three months of 2002 compared with $3,130
million in 2001. The increase in invested assets reflects proceeds received from
stock offerings in 2001 and cash flow from operations. (See "Liquidity and
Capital Resources.") The average annualized yield on investments decreased to
5.4% in 2002 from 6.7% in 2001. The decrease reflects lower average yields
available on merger arbitrage securities, lower interest rates on invested cash,
and the non-accrual of interest on Argentine bonds of approximately $1 million.
Interest credited to reinsurers for funds held on their behalf was $4 million in
2002 compared with $2 million in 2001.
INTEREST EXPENSE AND OTHER Interest expense and other represents interest
expense, corporate expenses and other miscellaneous income and expenses. Other
expenses increased $6 million in 2002 due to an increase in accruals for
incentive compensation and other general and administrative expenses.
REALIZED INVESTMENT GAINS (LOSSES) Realized investment gains and losses result
from sales of securities and for provisions for other than temporary impairment
in securities.
INCOME TAX BENEFIT (EXPENSE) AND MINORITY INTEREST The effective income tax rate
was 32% in 2002 and 18% in 2001. The effective tax rate differs from the federal
income tax rate of 35% primarily because of tax-exempt investment income.
Minority interest represents the portion of the Company's international
operations held by outside investors.
FINANCING ACTIVITY
In February 2002, the Company entered into a one year unsecured bank
credit facility which provides for borrowing up to $25 million. The facility
replaces a previous bank facility that expired in December 2001.
At March 31, 2002, the Company's outstanding long-term debt was $363
million (face amount). The maturities of the long term debt are $61 million in
2003, $40 million in 2005, $99 million in 2006, $87 million in 2008 and $76
million in 2022. The Company also has $200 million (face amount) of trust
preferred securities that mature in 2045.
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At March 31, 2002, stockholders' equity was $948 million and total
capitalization (stockholders' equity, long-term debt and trust preferred
securities) was $1,509 million. The percentage of the Company's capital
attributable to long-term debt decreased to 24% at March 31, 2002 from 25% at
December 31, 2001.
INVESTMENTS As part of its investment strategy, the Company establishes a level
of cash and highly liquid short-term and intermediate-term securities which,
combined with expected cash flow, it believes adequate to meet foreseeable
payment obligations. The Company also attempts to maintain 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 carrying value of the Company's investment portfolio as of March
31, 2002 and December 31, 2001 is as follows (amounts in millions):
MARCH DECEMBER
2002 2001
---- ----
Fixed maturities and invested cash $3,043 $2,980
Equity securities available for sale 113 109
Equity securities trading account(a) 541 509
------ ------
Total $3,697 $3,598
====== ======
(a) Represents trading account equity securities plus trading account
receivables from brokers and clearing organizations less trading account equity
securities sold but not yet purchased.
FIXED MATURITIES AND INVESTED CASH The Company's investment policy with respect
to fixed maturity securities is generally to purchase instruments with the
expectation of holding them to their maturity. However, active management of the
portfolio is considered necessary to maintain an approximate matching of assets
and liabilities as well as to adjust the portfolio as a result of changes in
financial market conditions and tax considerations. At March 31, 2002 as
compared with December 31, 2001, the fixed maturities portfolio mix was as
follows: U.S. Government securities and cash equivalents were 34% (35% in 2001);
state and municipal securities were 20% (20% in 2001); corporate securities were
18% (19% in 2001); mortgage-backed securities were 24% (22% in 2001); and
foreign bonds were 4% (4% in 2001).
EQUITY SECURITIES AVAILABLE FOR SALE Equity securities available for sale
represent primarily investments in common and preferred stocks of publicly
traded real estate investment trusts (REITs).
EQUITY SECURITIES TRADING ACCOUNT The equity securities trading account is
comprised of merger arbitrage securities, which represent 88% of the trading
account securities, and convertible arbitrage securities. Merger arbitrage is
the business of investing in the securities of publicly held companies which are
the targets in announced tender offers and mergers. Convertible arbitrage is the
business of investing in convertible securities with the goal of capitalizing on
price differentials between these securities and their underlying equities.
In the second quarter of 2002 the Company shifted approximately $150
million from the merger arbitrage account to other investments.
As described in Note 9 of "Notes to Consolidated Financial Statements,"
Argentina experienced substantial economic turmoil during 2001 and 2002. Given
the inherent uncertainty and complexity of the situation, considerable judgment
was used by management to establish its estimates with respect to its
investments and operations in Argentina using all information available. These
estimates may change as more information becomes available.
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, 2001.
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.
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The Company has maintained approximately the same duration of its
investment portfolio to its liabilities from December 31, 2001 to March 31,
2002, and the overall market risk relating to the Company's portfolio has
remained similar to the risk at December 31, 2001.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company has a pending arbitration proceeding pertaining to the
interpretation of a contract provision contained in certain reinsurance
agreements. As of March 31, 2002, the net amount recoverable by the Company from
the reinsurer under these reinsurance agreements was approximately $44 million.
Management believes that its interpretation of the contract is correct and
intends to vigorously pursue this matter in arbitration. In addition, the
Company has two pending arbitration proceedings pertaining to reinsurance
contract coverage issues where the Company is the assuming reinsurer. The
Company's estimate of its remaining liabilities under these assumed contracts is
based on information currently available and is reflected in reserves for losses
and loss expenses. These proceedings are all in the initial stages of
development.
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, 2002, the Company filed the
following Reports on Form 8-K:
Report dated February 5, 2002 with respect to a press release
announcing (i) increase in reinsurance reserves established by the Company for
its discontinued alternative markets reinsurance business and its treaty
reinsurance business; (ii) realized losses for a reduction in the carrying value
of investments held by a subsidiary in Argentina; and (iii) its expected
financial results for the fourth quarter of 2001 and outlook for 2002 (under
Item 5 of Form 8-K).
Report dated February 6, 2002 with respect to a press release
announcing the formation of Berkley Capital Underwriters, LLC (under Item 5 of
Form 8-K).
Report dated February 14, 2002 with respect to a press release
announcing the results of operations of the Company for the year ended December
31, 2001 (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 14, 2002 /s/ WILLIAM R. BERKLEY
------------------------------
William R. Berkley
Chairman of the Board and
Chief Executive Officer
Date: May 14, 2002 /s/ EUGENE G. BALLARD
------------------------------
Eugene G. Ballard
Senior Vice President,
Chief Financial Officer
and Treasurer
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