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 June 30, 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
(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
----- -----
Number of shares of common stock, $.20 par value, outstanding as of August 6,
2002: 50,190,898
Part I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
June 30, December 31,
2002 2001
----------- -----------
Assets (Unaudited)
- ------
Investments:
Invested cash $ 337,757 $ 524,554
Fixed maturity securities:
Held to maturity, at cost (fair value $204,650 and $167,559) 189,125 156,464
Available for sale, at fair value (cost $2,764,427 and $2,236,321) 2,826,772 2,294,326
Equity securities, at fair value:
Available for sale (cost $145,799 and $93,710) 158,140 99,813
Trading account (cost $223,045 and $213,221) 219,531 211,291
Other investments 45,235 16,888
Cash 29,253 9,533
Premiums and fees receivable 699,949 537,814
Due from reinsurers 669,491 716,398
Accrued investment income 39,509 35,926
Prepaid reinsurance premiums 142,047 103,667
Deferred policy acquisition costs 257,268 224,110
Real estate, furniture & equipment at cost, less accumulated depreciation 124,511 118,344
Deferred federal and foreign income taxes 52,799 99,921
Goodwill 59,021 59,021
Trading account receivable from brokers and clearing organizations 162,891 351,707
Other assets 64,083 73,732
----------- -----------
Total assets $ 6,077,382 $ 5,633,509
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Reserves for losses and loss expenses $ 2,895,078 $ 2,817,682
Unearned premiums 1,155,825 879,640
Due to reinsurers 145,713 139,322
Trading securities sold but not yet purchased, at fair value
(proceeds $54,028 and $58,331) 49,698 56,990
Other liabilities 239,128 215,220
Long-term debt 362,769 370,554
----------- -----------
Total liabilities 4,848,211 4,479,408
----------- -----------
Trust preferred securities 198,231 198,210
Minority interest 18,319 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, 50,181,470 and 49,860,774 shares 12,991 12,991
Additional paid-in capital 655,032 654,936
Retained earnings 520,275 467,185
Accumulated other comprehensive income 58,741 37,340
Treasury stock, at cost, 14,774,296 and 15,094,992 shares (234,418) (240,857)
----------- -----------
Total stockholders' equity 1,012,621 931,595
----------- -----------
Total liabilities and stockholders' equity $ 6,077,382 $ 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 For the Six Months
Ended June 30, Ended June 30,
------------------------------ ------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenues:
Net premiums written $ 592,095 $ 453,888 $ 1,218,088 $ 885,799
Change in unearned premiums (82,407) (35,828) (230,934) (88,804)
----------- ----------- ----------- -----------
Premiums earned 509,688 418,060 987,154 796,995
Net investment income 44,564 50,368 88,716 100,798
Service fees 20,924 19,111 41,117 36,703
Realized investment gains (losses) (8,449) 2,561 (3,486) 4,397
Other income 208 897 320 1,257
----------- ----------- ----------- -----------
Total revenues 566,935 490,997 1,113,821 940,150
Expenses:
Losses and loss expenses 336,515 296,653 647,116 568,121
Other operating expenses 181,883 169,319 356,326 321,942
Interest expense 11,330 11,412 22,465 22,862
----------- ----------- ----------- -----------
Total expenses 529,728 477,384 1,025,907 912,925
----------- ----------- ----------- -----------
Income before income taxes and minority interest 37,207 13,613 87,914 27,225
Income tax expense (15,563) (3,074) (31,785) (5,558)
Minority interest 5,730 (941) 5,641 (1,803)
----------- ----------- ----------- -----------
Net income $ 27,374 $ 9,598 $ 61,770 $ 19,864
=========== =========== =========== ===========
Net income per share:
Basic $ 0.55 $ .22 $ 1.23 $ .47
=========== =========== =========== ===========
Diluted $ 0.52 $ .21 $ 1.18 $ .45
=========== =========== =========== ===========
Average shares outstanding:
Basic 50,125 43,485 50,020 41,963
=========== =========== =========== ===========
Diluted 52,399 45,077 52,304 43,865
=========== =========== =========== ===========
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 Six Months
Ended June 30,
------------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net income $ 61,770 $ 19,864
Adjustments to reconcile net income to cash
flows provided by operating activities:
Minority interest (5,641) 1,803
Change in reserves for losses
and loss expenses, net 120,071 34,955
Depreciation and amortization 8,840 9,272
Change in unearned premiums and
prepaid reinsurance premiums 236,037 88,622
Change in premiums and fees receivable (156,261) (58,939)
Change in federal and foreign income taxes 28,336 3,369
Change in deferred policy acquisition cost (33,158) (19,257)
Realized investment (gains) losses 3,486 (4,397)
Other, net (24,026) (32,144)
----------- -----------
Net cash flows provided by operating activities
before trading account 239,454 43,148
Decrease (increase) in trading account securities,
receivables and payables, net 173,288 (6,418)
----------- -----------
Net cash flows provided by operating activities 412,742 36,730
----------- -----------
Cash flows used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 374,818 281,031
Equity securities 13,282 17,983
Maturities and prepayments of fixed maturity securities 119,401 83,215
Cost of purchases, excluding trading account:
Fixed maturity securities available for sale (1,026,010) (427,746)
Equity securities (94,477) (10,526)
Change in balances due to/from security brokers 46,386 (7,892)
Net additions to real estate, furniture and equipment (15,672) (9,913)
Sale (purchase) of subsidiary (2,066) 2,348
Other, net (6,604) 969
----------- -----------
Net cash flows used in investing activities (590,942) (70,531)
----------- -----------
Cash flows provided by (used in) financing activities:
Net proceeds from issuance of common stock -- 121,400
Repayment and repurchase of debt (8,000) (10,000)
Cash dividends (8,571) (7,096)
Net proceeds from stock options exercised 6,534 4,966
Other, net 21,161 2,858
----------- -----------
Net cash flows provided by (used in) financing activities 11,124 112,128
----------- -----------
Net increase in cash and invested cash (167,076) 78,327
Cash and invested cash at beginning of year 534,086 309,131
----------- -----------
Cash and invested cash at end of period $ 367,010 $ 387,458
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 22,725 $ 22,758
=========== ===========
Federal income taxes paid, net $ 3,448 $ 1,230
=========== ===========
See accompanying notes to consolidated financial statements.
3
W. R. Berkley Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 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 being amortized. Pursuant to Statement
No. 142, goodwill must be periodically tested for impairment. The Company's
initial impairment review indicated that there was no goodwill 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 period. 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.
Per share amounts have been adjusted to reflect the 3-for-2 common
stock split effected July 2, 2002.
4. REINSURANCE CEDED
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.
4
Earned premiums and losses and loss expenses ceded under the
aggregate reinsurance agreement and other reinsurance contracts are as follows
(amounts in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Ceded premiums earned:
Aggregate reinsurance agreement:
Individual losses $ 19,172 -- $ 39,172 --
Aggregate losses 6,250 15,000 12,500 15,000
Other reinsurance contracts 77,335 76,510 145,269 153,211
-------- -------- -------- --------
Total $102,757 $ 91,510 $196,941 $168,211
======== ======== ======== ========
Ceded losses and loss expenses:
Aggregate reinsurance agreement:
Individual losses $ 8,977 -- $ 21,977 --
Aggregate losses 11,250 27,000 22,500 27,000
Other reinsurance contracts 41,234 34,146 77,807 103,490
-------- -------- -------- --------
Total $ 61,461 $ 61,146 $122,284 $130,490
======== ======== ======== ========
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 periods, goodwill amortization
had been expensed primarily in the alternative markets segment. A reconciliation
of the prior year's 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 Six Months
Ended June 30, 2001
---------------------------------
Basic Diluted
Earnings Earnings
Amount Per Share Per Share
------ --------- ---------
Reported net income $19,864 $0.47 $0.45
Add back goodwill amortization (net of tax) 1,590 0.04 0.04
------- ---- ----
Adjusted net income $21,454 $0.51 $0.49
======= ==== ====
<Table>
<Caption>
For the Three Months
Ended June 30, 2001
---------------------------------
Basic Diluted
Earnings Earnings
Amount Per Share Per Share
------ --------- ---------
Reported net income $ 9,598 $.22 $.21
Add back goodwill amortization
(net of tax) 795 .02 .02
------- ---- ----
Adjusted net income $10,393 $.24 $.23
======= ==== ====
</Table>
Amortization expense for amortizable intangible assets is estimated
to be $415,000 for each of the five years ended December 31, 2006.
5
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 For the six months
Ended June 30, Ended June 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income $ 27,374 $ 9,598 $ 61,770 $ 19,864
-------- -------- -------- --------
Other comprehensive income:
Unrealized foreign exchange gains (losses) 5,029 77 5,001 (383)
Unrealized holding gains (losses) on investment securities arising
during the period, net of taxes
38,038 (14,321) 17,277 4,060
Reclassification adjustment for realized gains (losses) included in
net income, net of taxes and minority interest
(4,103) 1,665 (877) 2,858
-------- -------- -------- --------
Other comprehensive income (loss) 38,964 (12,579) 21,401 6,535
-------- -------- -------- --------
Comprehensive income (loss) $ 66,338 $ (2,981) $ 83,171 $ 26,399
======== ======== ======== ========
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, 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 six months ended June 30, 2002 and 2001, the international
segment wrote life insurance net written premiums of $12.8 million and $15.7
million, 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.
6
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 June 30, 2002:
Specialty $ 11,457 $ 174,158 $ 475 $ 174,633 $ 34,512 $ (13,615)
Alternative Markets 9,207 81,161 705 81,866 14,895 (4,514)
Reinsurance 11,359 104,053 456 104,509 6,634 (2,450)
Regional 11,188 184,172 849 185,021 20,336 (6,366)
International 711 8,027 -- 8,027 (13,687) (133)
Discontinued Business 1,147 13,768 -- 13,768 (4,600) 1,610
Corporate other
and Eliminations (505) 1,596 (2,485) (889) (20,883) 9,905
--------- --------- --------- --------- --------- ---------
Consolidated $ 44,564 $ 566,935 $ -- $ 566,935 $ 37,207 $ (15,563)
========= ========= ========= ========= ========= =========
For the three months ended June 30, 2001:
Specialty $ 10,152 $ 102,118 $ 576 $ 102,694 $ 12,351 $ (3,260)
Alternative Markets 9,521 55,379 458 55,837 9,244 (3,221)
Reinsurance 11,179 61,631 592 62,223 6,783 (2,478)
Regional 13,414 153,369 320 153,689 11,873 (2,969)
International 3,213 37,444 -- 37,444 3,983 (1,601)
Discontinued Business 2,504 78,855 -- 78,855 (14,539) 6,412
Corporate other
and Eliminations 385 2,201 (1,946) 255 (16,082) 4,043
--------- --------- --------- --------- --------- ---------
Consolidated $ 50,368 $ 490,997 $ -- $ 490,997 $ 13,613 $ (3,074)
========= ========= ========= ========= ========= =========
Interest expense for the reinsurance and alternative market segment
was $581,000 and $772,000 for the three months ended June 30, 2002 and 2001,
respectively. Corporate interest expense (net of intercompany amounts) was
$10,749,000 and $10,640,000 for the corresponding periods.
INCOME
REVENUES (LOSS)
----------------------------------------- BEFORE INCOME TAX
INVESTMENT UNAFFILIATED INTER- INCOME (EXPENSE)
(AMOUNTS IN THOUSANDS) INCOME CUSTOMERS SEGMENT TOTAL TAXES BENEFITS
----------- ----------- ----------- ----------- ----------- -----------
For the Six months ended June 30, 2002:
Specialty $ 22,902 $ 326,687 $ 1,050 $ 327,737 $ 53,907 $ (19,900)
Alternative Markets 17,961 155,053 1,163 156,216 29,360 (8,642)
Reinsurance 22,208 190,089 914 191,003 19,114 (6,299)
Regional 21,207 351,637 1,177 352,814 43,964 (14,366)
International 2,163 49,543 -- 49,543 (12,545) (853)
Discontinued Business 3,016 38,000 -- 38,000 (4,654) 1,629
Corporate other
and Eliminations (741) 2,812 (4,304) (1,492) (41,232) 16,646
----------- ----------- ----------- ----------- ----------- -----------
Consolidated $ 88,716 $ 1,113,821 $ -- $ 1,113,821 $ 87,914 $ (31,785)
=========== =========== =========== =========== =========== ===========
For the Six months ended June 30, 2001:
Specialty $ 20,514 $ 188,202 $ 1,254 $ 189,456 $ 21,207 $ (4,665)
Alternative Markets 19,328 107,500 885 108,385 19,858 (5,781)
Reinsurance 22,656 137,952 1,056 139,008 9,970 (2,434)
Regional 26,567 291,457 681 292,138 17,594 (3,686)
International 6,536 72,633 -- 72,633 6,126 (2,196)
Discontinued Business 5,077 138,449 -- 138,449 (16,430) 5,751
Corporate other
and Eliminations 120 3,957 (3,876) 81 (31,100) 7,453
----------- ----------- ----------- ----------- ----------- -----------
Consolidated $ 100,798 $ 940,150 $ -- $ 940,150 $ 27,225 $ (5,558)
=========== =========== =========== =========== =========== ===========
7
Interest expense for the reinsurance and alternative market segments
was $1,167,000 and $1,537,000 for the six months ended June 30, 2002 and 2001,
respectively. Corporate interest expense (net of intercompany amounts) was
$21,298,000 and $21,325,000 for the corresponding periods. Identifiable assets
by segment are as follows (Amounts in thousands):
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
Specialty $ 1,802,716 $ 1,580,155
Alternative Markets 928,870 859,502
Reinsurance 2,017,940 1,751,428
Regional 1,570,829 1,462,861
International 154,360 209,473
Discontinued business 238,180 289,313
Corporate other and Elimination (635,513) (519,223)
----------- -----------
Consolidated $ 6,077,382 $ 5,633,509
=========== ===========
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 the contract terms in two reinsurance agreements. The
reinsurer's interpretation of the contract terms would reduce the amount due
from the reinsurer, as reflected in the balance sheet as of June 30, 2002, by
approximately $46 million undiscounted. Although the ultimate outcome of this
matter cannot be determined, management believes that its interpretation of the
contract is correct and intends to vigorously pursue this matter in arbitration.
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.
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.
In the fourth quarter of 2001, the Argentine government undertook a
series of measures that included the default and restructuring of 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. Following an analysis of the impact of these measures,
the Company recognized an impairment loss on its investments in Argentine
sovereign bonds of $18 million as of December 31, 2001. Economic conditions and
the market values of Argentine sovereign bonds continued to decline in 2002 and,
as a result, the Company recognized an additional impairment loss on its
investment in Argentine sovereign bonds of $9 million in the second quarter of
2002. The remaining amortized cost and market value of the Company's Argentine
sovereign bonds was approximately $40 million and $20 million, respectively, as
of June 30 2002.
The Company has also begun the process of extinguishing its life
insurance policies sold in Argentina. The Company does not expect that the
extinguishments of these policies will have a material effect on its financial
condition or result of operations.
At June 30, 2002, Berkley International LLC's capital investment in
the Argentine subsidiary was approximately $25 million and the Company's share
of the capital investment (net minority interest) was approximately $16 million.
8
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.
11. SAFE HARBOR STATEMENT
This is a "Safe Harbor" Statement under 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 our 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 and potential impairment of invested
assets, exchange rate and political risks, legislative and regulatory
developments, changes in the ratings assigned to us by ratings agencies,
uncertainty as to our reinsurance coverage for terrorist acts, the 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 our 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, 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.
9
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 SIX MONTHS OF 2002 AS COMPARED TO THE FIRST SIX
MONTHS OF 2001
The Company reported net income of $62 million, or $1.18 cents per
share, for 2002 compared with $20 million, or 45 cents per share, for 2001.
Following are the components of net income for the six months ended June 30,
2002 and 2001 (amounts in thousands):
2002 2001
--------- ---------
Underwriting income (loss) $ 36,072 $ (51,547)
Insurance services 6,984 4,410
Net investment income 88,716 100,798
Interest expense and other (40,372) (30,833)
--------- ---------
Pretax income before realized
investment gains (losses) 91,400 22,828
Realized investment gains (losses) (3,486) 4,397
Income tax expense and minority interest (26,144) (7,361)
--------- ---------
Net income $ 61,770 $ 19,864
========= =========
UNDERWRITING INCOME (LOSS) Gross and net premiums written increased by 39.1% and
37.5%, respectively, in 2002 compared with the earlier-year period. Following is
a summary of gross and net premiums written by business segment for the six
months ended June 30, 2002 and 2001 (amounts in thousands):
Gross Premiums Written Net Premiums Written
----------------------------------- -----------------------------------
2002 2001 % Change 2002 2001 % Change
---- ---- -------- ---- ---- --------
Specialty $ 435,038 $ 273,664 59.0% $ 382,825 $ 231,731 65.2%
Alternative Markets 146,040 78,914 85.1% 126,637 70,398 79.9%
Reinsurance 340,625 151,703 124.5% 277,067 111,055 149.5%
Regional 475,005 337,697 40.7% 376,358 285,708 31.7%
International 60,191 80,697 (25.4)% 52,256 70,641 (26.0)%
Discontinued Business 10,312 131,759 (92.2)% 2,945 116,266 (97.5)%
---------- ---------- ---------- ----------
Total $1,467,211 $1,054,434 39.1% $1,218,088 $ 885,799 37.5%
========== ========== ========== ==========
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 includes approximately $70 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 international
premiums reflects the effect of the lower exchange rate for the Argentine peso.
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.
10
Following is a summary of earned premiums and underwriting income
(loss) by business segment for the six months ended June 30, 2002 and 2001
(amounts in thousands):
Net Premiums Earned Underwriting Income (Loss)
-------------------- --------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Specialty $302,198 $167,233 $ 28,369 $ (1,018)
Alternative Markets 96,824 53,370 3,040 (3,117)
Reinsurance 165,115 113,902 (5,611) (13,973)
Regional 328,643 263,368 19,793 (11,176)
International 59,390 65,750 (1,849) (758)
Discontinued Business 34,984 133,372 (7,670) (21,505)
-------- -------- -------- --------
Total $987,154 $796,995 $ 36,072 $(51,547)
======== ======== ======== ========
Underwriting income (loss) represents net premiums earned less net
loss and loss adjustment expenses incurred and underwriting expenses incurred.
In 2002, earned premiums increased 24% to $987 million, losses and loss expenses
increased 14% to $647 million and underwriting expenses increased 8% to $304
million.
The loss ratio (losses and loss expenses incurred expressed as a
percentage of premiums earned) decreased to 65.6% in 2002 from 71.3% in 2001.
The lower ratio reflects the effect of premium rate increases and improved
policy terms and conditions. Weather-related losses were $28 million in 2002
compared with $40 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 30.8% in 2002 from 35.2% in 2001.
The decrease is a result of a 24% 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. Service fees
increased 12% to $41 million in 2002 as a result of new accounts and higher
revenues on existing accounts, and service fee income increased 58% to $7
million.
NET INVESTMENT INCOME Net investment income decreased to $89 million in the
first six months of 2002 from $101 million in 2001. Average invested assets were
$3,665 million in the first six months of 2002 compared with $3,176 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 6.6% in 2001. The decrease reflects lower average yields available on
arbitrage securities, lower interest rates and the non-accrual of interest
income on Argentine sovereign bonds. Interest credited to reinsurers for funds
held on their behalf was $10 million in 2002 compared with $4 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 $10 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. During 2002 the Company recognized an impairment loss on its
investment in Argentine sovereign bonds of $9 million. (See Note 9 of "Notes to
Consolidated Financial Statements.")
INCOME TAX BENEFIT (EXPENSE) AND MINORITY INTEREST The effective income tax rate
was 36% in 2002 and 20% in 2001. The effective tax rate differs from the federal
income tax rate of 35% primarily because of tax-exempt investment income and
non-deductible foreign losses. Minority interest represents the portion of the
Company's international operations held by outside investors.
11
OPERATING RESULTS FOR THE SECOND QUARTER OF 2002 AS COMPARED TO THE SECOND
QUARTER OF 2001
The Company reported net income of $27 million, or 52 cents per
share, for 2002 compared with $10 million, or 21 cents per share, for 2001.
Following are the components of net income for the quarters ended June 30, 2002
and 2001 (amounts in thousands):
2002 2001
-------- --------
Underwriting income (loss) $ 17,431 $(25,549)
Insurance services 3,534 2,081
Net investment income 44,564 50,368
Interest expense and other (19,873) (15,848)
-------- --------
Pretax income before realized
investment gains (losses) 45,656 11,052
Realized investment gains (losses) (8,449) 2,561
Income tax expense and minority interest (9,833) (4,015)
-------- --------
Net income $ 27,374 $ 9,598
======== ========
UNDERWRITING INCOME (LOSS) Gross and net premiums written increased by 32% and
30%, respectively, in 2002 compared with the earlier-year period. Following is a
summary of gross and net premiums written by business segment for the quarters
ended June 30, 2002 and 2001 (amounts in thousands):
Gross Premiums Written Net Premiums Written
---------------------------------------- ----------------------------------------
2002 2001 % Change 2002 2001 % Change
---- ---- -------- ---- ---- --------
Specialty $ 232,705 $ 142,279 63.6% $ 203,098 $ 125,708 61.6%
Alternative Markets 47,867 26,486 80.7% 42,057 23,842 76.4%
Reinsurance 177,079 78,651 125.1% 143,076 50,231 184.8%
Regional 236,686 170,375 38.9% 192,655 146,243 31.7%
International 13,973 42,071 (66.8)% 11,706 36,917 (68.3)%
Discontinued Business 1,693 79,301 (97.9)% (497) 70,947 (100.7)%
--------- --------- --------- ---------
Total $ 710,003 $ 539,163 31.7% $ 592,095 $ 453,888 30.4%
========= ========= ========= =========
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 $32 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 international
premiums reflects the effect of the lower exchange rate for the Argentine peso.
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.
Following is a summary of earned premiums and underwriting income
(loss) by business segment for the quarters ended June 30, 2002 and 2001
(amounts in thousands):
Net Premiums Earned Underwriting Income (Loss)
----------------------- --------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Specialty $161,554 $ 92,096 $ 21,434 $ 1,751
Alternative Markets 51,487 27,752 1,008 (132)
Reinsurance 91,758 49,347 (5,536) (7,362)
Regional 172,062 138,541 7,377 (3,275)
International 20,206 33,973 (1,105) 511
Discontinued Business 12,621 76,351 (5,747) (17,042)
-------- -------- -------- --------
Total $509,688 $418,060 $ 17,431 $(25,549)
======== ======== ======== ========
Underwriting income (loss) represents net premiums earned less net
loss and loss adjustment expenses incurred and underwriting expenses incurred.
In 2002, earned premiums increased 22% to $510 million, losses and loss expenses
increased 13% to $337 million and underwriting expenses increased 6% to $156
million.
The loss ratio (losses and loss expenses incurred expressed as a
percentage of premiums earned) decreased to 66.0% in 2002 from 71.0% in 2001.
The lower ratio reflects the effect of
12
premium rate increases and improved policy terms and conditions. Weather-related
losses were $21 million in 2002 compared with $31 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 30.6% in 2002 from 35.1% in 2001.
The decrease is a result of a 22% 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. Service fees
increased 10% to $21 million in 2002 as a result of new accounts and higher
revenues on existing accounts, and service fee income increased 70% to $3.5
million.
NET INVESTMENT INCOME Net investment income decreased to $45 million in the
second quarter of 2002 from $50 million in 2001, generally for the reason
discussed above.
FINANCING ACTIVITY
At June 30, 2002, the Company's outstanding long-term debt was $366
million (face amount). The maturities of the long term debt are $61 million in
2003, $40 million in 2005, $100 million in 2006, $89 million in 2008 and $76
million in 2022. The Company also has $200 million (face amount) of trust
preferred securities that mature in 2045.
At June 30, 2002, stockholders' equity was $1,013 million and total
capitalization (stockholders' equity, long-term debt and trust preferred
securities) was $1,574 million. The percentage of the Company's capital
attributable to long-term debt decreased to 23% at June 30, 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 June
30, 2002 and December 31, 2001 is as follows (amounts in millions):
JUNE DECEMBER
2002 2001
------ ------
Fixed maturities and invested cash $3,354 $2,975
Equity securities available for sale 158 100
Equity securities trading account(a) 333 506
Other Investments 45 17
------ ------
Total $3,890 $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 June 30, 2002 as compared
with December 31, 2001, the fixed maturities portfolio mix was as follows: U.S.
Government securities and cash equivalents were 31% (35% in 2001); state and
municipal securities were 20% (20% in 2001); corporate securities were 18% (19%
in 2001); mortgage-backed securities were 26% (22% in 2001); and foreign bonds
were 5% (4% in 2001).
13
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 80% (92% in 2001) 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.
OTHER INVESTMENTS Other investments consist of the Company's equity investment
in an insurance affiliate, Kiln plc, and other minority investments in
privately-held securities and limited partnerships. In 2002, the Company
purchased a 20.1% ownership in U.K based Kiln plc (for approximately $29
million), which conducts international insurance and reinsurance underwriting
through Lloyd's syndicates. The Company also entered into a qualifying quota
share reinsurance agreement with Kiln for the 2002 year of account.
OTHER MATTERS 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.
The Company has maintained approximately the same duration of its
investment portfolio to its liabilities from December 31, 2001 to June 30, 2002,
and the overall market risk relating to the Company's portfolio has remained
similar to the risk at December 31, 2001.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company has a pending arbitration proceeding pertaining to the
interpretation of the contract terms contained in two reinsurance agreements.
The reinsurer's interpretation of the contract terms would reduce the amount due
from the reinsurer, as reflected in the balance sheet as of June 30, 2002, by
approximately $46 million undiscounted. Although the ultimate outcome of this
matter cannot be determined, management believes that its interpretation of the
contract is correct and intends to vigorously pursue this matter in arbitration.
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 2. Changes in Securities and Use of Proceeds
On May 14, 2002, the Company issued 192 shares of its Common
Stock to each of its eight directors (1,526 shares in the aggregate).
The shares were issued as a portion of annual director's fees pursuant to the
Company's 1997 Director Stock Plan. The shares were not registered under the
Securities Act of 1933 in reliance on the exemption provided in Section 4(2)
thereof for transactions not involving a public offering.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 14, 2002.
The meeting involved the election of directors for a term to expire at the
Annual Meeting of Stockholders to be held in the year 2005, the approval of the
W. R. Berkley Corporation Annual Incentive Compensation Plan and the
ratification of the appointment of independent auditors for the year 2002. The
directors elected and the results of the voting are as follows:
(i) Election of Directors:
Nominee Votes For Votes Withheld
------- --------- --------------
Richard G. Merrill 32,443,271 302,168
Jack H. Nusbaum 32,217,916 527,523
Mark L. Shapiro 32,444,831 300,608
(ii) Approval of the W. R. Berkley Corporation Annual Incentive
Compensation Plan:
Votes For Votes Against, Abstained or Withheld
--------- ------------------------------------
31,514,804 1,230,625
(iii) Ratification of Auditors:
Votes For Votes Against, Abstained or Withheld
--------- ------------------------------------
32,468,964 276,475
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
15
(b) Reports on Form 8-K
During the quarter ended June 30, 2002, the Company filed the
following Reports on Form 8-K:
1. Report dated April 17, 2002, with respect to a press
release announcing the resignation of a director of the
Company (Under Item 5 or Form 8-K).
2. Report dated April 29, 2002, with respect to a press
release announcing result of operations of the Company for
the first quarter of 2002 (Under Item 5 or Form 8-K).
3. Report dated May 17, 2002, with respect to a press release
announcing a 3-for-2 split of the Company's common stock to
be paid in form of a stock dividend on July 2, 2002 to the
holders of record on June 17, 2002 and a regular quarterly
cash dividend (Under Item 5 of Form 8-K).
16
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: August 13, 2002 /s/ WILLIAM R. BERKLEY
------------------------------
William R. Berkley
Chairman of the Board and
Chief Executive Officer
Date: August 13, 2002 /s/ EUGENE G. BALLARD
------------------------------
Eugene G. Ballard
Senior Vice President,
Chief Financial Officer
and Treasurer
17