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, 2003
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Number of shares of common stock, $.20 par value, outstanding as of August 1,
2003: 55,427,393
Part I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands)
June 30, December 31,
2003 2002
------------ ------------
(Unaudited)
Assets
Investments:
Cash and cash equivalents $ 1,099,232 $ 594,183
Fixed maturity securities 3,721,275 3,511,522
Equity securities available for sale 305,874 205,372
Equity securities trading account 238,085 165,642
Other investments 89,377 45,187
------------ ------------
Total investments 5,453,843 4,521,906
------------ ------------
Premiums and fees receivable 987,712 822,060
Due from reinsurers 782,687 734,687
Accrued investment income 45,765 46,334
Prepaid reinsurance premiums 238,198 164,284
Deferred policy acquisition costs 370,653 308,200
Real estate, furniture & equipment at cost, less accumulated depreciation 140,027 135,488
Deferred federal and foreign income taxes 10,003 20,585
Goodwill 59,021 59,021
Trading account receivable from brokers and clearing organizations 153,413 177,309
Other assets 62,935 41,449
------------ ------------
Total assets $ 8,304,257 $ 7,031,323
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Reserves for losses and loss expenses $ 3,633,849 $ 3,167,925
Unearned premiums 1,725,064 1,390,246
Due to reinsurers 190,046 184,912
Trading securities sold but not yet purchased 77,967 36,115
Policyholders' account balances 48,847 42,707
Due to brokers and clearing organizations 68,060 --
Other liabilities 320,995 294,334
Debt 499,377 362,985
Trust preferred securities 193,316 198,251
------------ ------------
Total liabilities 6,757,521 5,677,475
------------ ------------
Minority interest 21,490 18,649
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 150,000,000 shares, issued and outstanding,
net of treasury shares, 55,404,998 and 55,223,448 shares 13,934 13,934
Additional paid-in capital 824,222 823,190
Retained earnings 781,904 623,651
Accumulated other comprehensive income 131,725 104,603
Treasury stock, at cost, 14,264,552 and 14,446,102 shares (226,539) (230,179)
------------ ------------
Total stockholders' equity 1,525,246 1,335,199
------------ ------------
Total liabilities and stockholders' equity $ 8,304,257 $ 7,031,323
============ ============
See accompanying notes to consolidated financial statements.
2
W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(dollars in thousands, except per share data)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues:
Net premiums written $ 875,457 $ 601,095 $ 1,767,516 $ 1,235,088
Change in unearned premiums, net (68,989) (88,407) (260,922) (243,934)
----------- ----------- ----------- -----------
Premiums earned 806,468 512,688 1,506,594 991,154
Net investment income 50,421 44,564 102,181 88,716
Service fees 25,910 20,924 51,379 41,117
Realized investment gains (losses) 43,673 (8,383) 58,277 (3,424)
Foreign currency gains (losses) 44 (66) (1,194) (62)
Other income 441 208 1,133 320
----------- ----------- ----------- -----------
Total revenues 926,957 569,935 1,718,370 1,117,821
----------- ----------- ----------- -----------
Expenses:
Losses and loss expenses 514,157 336,515 958,043 647,116
Other operating expenses 258,160 184,883 489,013 360,326
Interest expense 13,273 11,330 25,368 22,465
----------- ----------- ----------- -----------
Total expenses 785,590 532,728 1,472,424 1,029,907
----------- ----------- ----------- -----------
Income before income taxes and minority interest 141,367 37,207 245,946 87,914
Income tax expense (44,230) (15,563) (77,216) (31,785)
Minority interest (1,297) 5,730 (1,187) 5,641
----------- ----------- ----------- -----------
Net income $ 95,840 $ 27,374 $ 167,543 $ 61,770
=========== =========== =========== ===========
Net income per share:
Basic $ 1.73 $ 0.55 $ 3.03 $ 1.23
=========== =========== =========== ===========
Diluted $ 1.65 $ 0.52 $ 2.90 $ 1.18
=========== =========== =========== ===========
Average shares outstanding:
Basic $ 55,343 $ 50,125 $ 55,296 $ 50,020
=========== =========== =========== ===========
Diluted $ 58,035 $ 52,399 $ 57,774 $ 52,304
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
3
W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
Six Months ended Year Ended
June 30, 2003 December 31, 2002
---------------- -----------------
(Unaudited)
Common stock:
Beginning of period $ 13,934 $ 12,991
Issuance of common stock -- 943
--------- ---------
End of period $ 13,934 $ 13,934
========= =========
Additional paid in capital:
Beginning of period $ 823,190 $ 654,936
Issuance of common stock 393 168,254
Restricted stock units earned 639 --
--------- ---------
End of period $ 824,222 $ 823,190
========= =========
Retained earnings:
Beginning of period $ 623,651 $ 467,185
Net income 167,543 175,045
Elimination of international reporting lag (1,776) --
Dividends to stockholders' (7,514) (18,579)
--------- ---------
End of period $ 781,904 $ 623,651
========= =========
Accumulated other comprehensive income:
Unrealized investment gains:
Beginning of period $ 114,664 $ 41,731
Net change in period 33,876 72,933
--------- ---------
End of period 148,540 114,664
--------- ---------
Currency translation adjustments:
Beginning of period (10,061) (4,391)
Net change in period (6,754) (5,670)
--------- ---------
End of period (16,815) (10,061)
--------- ---------
Total accumulated other comprehensive income $ 131,725 $ 104,603
========= =========
Treasury stock:
Beginning of period $(230,179) $(240,857)
Issuance under stock option plan 3,640 10,749
Purchase of common stock -- (71)
--------- ---------
End of period $(226,539) $(230,179)
========= =========
See accompanying notes to consolidated financial statements.
4
W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)
For the Six Months
Ended June 30,
--------------------------
2003 2002
----------- -----------
Cash flows provided by operating activities:
Net income $ 167,543 $ 61,770
Adjustments to reconcile net income to cash
flows provided by operating activities:
Minority interest 1,187 (5,641)
Change in reserves for losses
and loss expenses, net 429,198 120,071
Depreciation and amortization 11,032 8,840
Change in unearned premiums and
prepaid reinsurance premiums 260,904 236,037
Change in premiums and fees receivable (165,652) (156,261)
Change in federal and foreign income taxes 11,096 28,336
Change in deferred policy acquisition cost (62,453) (33,158)
Realized investment and foreign currency (gains) losses (57,083) 3,486
Other, net 647 (24,026)
----------- -----------
Net cash flows provided by operating activities
before trading account 596,419 239,454
Change in trading account securities (6,695) 173,288
----------- -----------
Net cash flows provided by operating activities 589,724 412,742
----------- -----------
Cash flows used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities 661,975 374,818
Equity securities 35,036 13,282
Maturities and prepayments of fixed maturity securities 284,163 119,401
Cost of purchases, excluding trading account:
Fixed maturity securities (1,059,270) (1,026,010)
Equity securities (120,210) (94,477)
Other invested securities (41,097) 46,386
Change in balances due to/from security brokers 51,315 (15,672)
Net additions to real estate, furniture and equipment (14,568) (2,066)
Other, net -- (6,604)
----------- -----------
Net cash flows used in investing activities (202,656) (590,942)
----------- -----------
Cash flows provided by financing activities:
Net proceeds from issuance of debt 196,840 --
Repayment and repurchase of debt and trust preferred securities (65,750) (8,000)
Cash dividends (10,472) (8,571)
Net proceeds from stock options exercised 4,672 6,534
Other, net (7,309) 21,161
----------- -----------
Net cash flows provided by financing activities 117,981 11,124
----------- -----------
Net increase (decrease) in cash and cash equivalents 505,049 (167,076)
Cash and cash equivalents at beginning of year 594,183 534,086
----------- -----------
Cash and cash equivalents at end of period $ 1,099,232 $ 367,010
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 21,132 $ 22,725
=========== ===========
Federal income taxes paid, net $ 65,909 $ 3,448
=========== ===========
See accompanying notes to consolidated financial statements.
5
W. R. Berkley Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
June 30, 2003
1. GENERAL
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, 2002. Reclassifications have been made in the 2002
financial statements as originally reported to conform them to the presentation
of the 2003 financial statements.
In the fourth quarter of 2002, the Company modified the presentation of
reinsurance assumed from Lloyd's syndicates to reflect the Company's share of
the reinsurance and brokerage costs paid by the syndicates. Previously, these
amounts were netted against assumed premiums. Premiums and expenses for the
first three quarters of 2002 were reclassified to conform with this
presentation. There was no effect from this change on net income or net income
per share.
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.
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 and restricted stock
units earned were delivered.
In the opinion of management, the 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.
2. COMPREHENSIVE INCOME
The following is a reconciliation of comprehensive income (dollars in
thousands):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income $ 95,840 $ 27,374 $ 167,543 $ 61,770
Other comprehensive income:
Unrealized holding gains (losses) on investments, net of
taxes 10,755 38,038 (3,278) 17,277
Reclassification for realized gains included in net
income, net of taxes 28,287 (4,103) 37,154 (877)
--------- --------- --------- ---------
Unrealized investment gains, net of taxes 39,042 33,935 33,876 16,400
Currency translation adjustments, net of
taxes (4,656) 5,029 (6,754) 5,001
--------- --------- --------- ---------
Other comprehensive income 34,386 38,964 27,122 21,401
--------- --------- --------- ---------
Comprehensive income $ 130,226 $ 66,338 $ 194,665 $ 83,171
========= ========= ========= =========
6
W. R. Berkley Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
June 30, 2003
3. STOCK-BASED COMPENSATION
During the first quarter of 2003, the Company adopted the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, effective as of January 1, 2003. Under the prospective method of
adoption selected by the Company, the fair value recognition provisions of FASB
123 are applied to all employee awards granted, modified or settled after
January 1, 2003. The following table illustrates the effect on net income and
earnings per share as if the fair value based method had been applied to all
outstanding and unvested awards in each period (dollars in thousands, except per
share data).
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income, as reported $ 95,840 $ 27,374 $ 167,543 $ 61,770
Add: Stock-based compensation expense
included in reported net income, net of tax 10 -- 12 --
Deduct: Total stock-based employee
compensation expense under fair value based
method for all awards, net of tax
(1,196) (1,133) (2,390) (2,267)
----------- ----------- ----------- -----------
Pro forma net income $ 94,654 $ 26,241 $ 165,165 $ 59,503
=========== =========== =========== ===========
Earnings per share:
Basic - as reported $ 1.73 $ 0.55 $ 3.03 $ 1.23
Basic - pro forma $ 1.71 $ 0.52 $ 2.99 $ 1.19
Diluted - as reported $ 1.65 $ 0.52 $ 2.90 $ 1.18
Diluted - pro forma $ 1.63 $ 0.50 $ 2.86 $ 1.14
On April 4, 2003, 300,000 Restricted Stock Units (RSU) were awarded to
officers of the Company and its subsidiaries. Each RSU represents the right to
receive one share of common stock, conditioned on the employee's satisfying
certain requirements outlined in the award agreement. The RSU's vest after five
years of continuous employment. The Company determines the cost of the RSU's
awarded based on the market value of the stock at the time of the award. The
cost is recognized as compensation expense as the units are earned over the
vesting period. The Company recognized compensation expense related to RSU's of
$639,000 in the second quarter of 2003. The remaining unearned compensation for
outstanding RSU's was $12,141,000 as of June 30, 2003.
7
W. R. Berkley Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
June 30, 2003
4. INVESTMENTS
The cost, fair value and carrying value of fixed maturity securities
and equity securities available for sale are as follows (dollars in thousands):
Gross Gross
Unrealized Unrealized Fair Carrying
Cost (a) Gain Loss Value Value
---------- ---------- ---------- ---------- ----------
June 30, 2003
Fixed maturity securities:
Held to maturity $ 190,133 $ 21,938 $ (83) $ 211,988 $ 190,133
Available for sale 3,320,183 215,139 (4,180) 3,531,142 3,531,142
---------- ---------- ---------- ---------- ----------
Total $3,510,316 $ 237,077 $ (4,263) $3,743,130 $3,721,275
========== ========== ========== ========== ==========
Equity securities available
for sale $ 287,778 $ 21,414 $ (3,318) $ 305,874 $ 305,874
December 31, 2002
Fixed maturity securities:
Held to maturity $ 205,856 $ 21,861 $ (107) $ 227,610 $ 205,856
Available for sale 3,129,993 184,751 (9,078) 3,305,666 3,305,666
---------- ---------- ---------- ---------- ----------
Total $3,335,849 $ 206,612 $ (9,185) $3,533,276 $3,511,522
========== ========== ========== ========== ==========
Equity securities available
for sale $ 203,388 $ 8,232 $ (6,248) $ 205,372 $ 205,372
(a) Adjusted as necessary for amortization of premium or discount
5. REINSURANCE CEDED
The Company reinsures a portion of its exposures principally to reduce
its net liability on individual risks and to protect against catastrophic
losses. The following amounts arising under reinsurance ceded contracts have
been deducted in arriving at the amounts reflected in the statement of
operations (dollars in thousands):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- -------------------
2003 2002 2003 2002
--------- -------- -------- --------
Ceded premiums earned:
Aggregate reinsurance agreement:
Individual losses $ 31,362 $ 23,496 $ 59,769 $ 39,172
Aggregate losses 5,000 6,250 10,000 12,500
--------- -------- -------- --------
Total 36,362 29,746 69,769 51,672
--------- -------- -------- --------
Other reinsurance contracts 84,119 76,344 181,760 149,977
--------- -------- -------- --------
Total $1120,481 $106,090 $251,529 $201,649
========= ======== ======== ========
Ceded losses incurred:
Aggregate reinsurance agreement:
Individual losses $ 26,528 $ 13,623 $ 46,929 $ 21,977
Aggregate losses 9,000 11,250 18,000 22,500
--------- -------- -------- --------
Total 35,528 24,873 64,929 44,477
--------- -------- -------- --------
Other reinsurance contracts 52,181 38,398 103,155 80,364
--------- -------- -------- --------
Total $ 87,709 $ 63,271 $168,084 $124,841
========= ======== ======== ========
8
W. R. Berkley Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
June 30, 2003
5. REINSURANCE CEDED (continued)
Effective January 1, 2001, the Company entered into 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 the Company's 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. The agreement
contains a profit sharing provision under which the Company can recover a
portion of premiums paid to the reinsurer if certain profit conditions are met.
Based on its estimate of expected profits under the contract, the Company
accrued return premiums of $18 million and $23 million for the second quarter
and first six months of 2003, respectively.
Certain of the Company's reinsurance agreements, including the
aggregate reinsurance agreement, are structured on a funds held basis, whereby
the Company retains some or all of the ceded premiums in a separate account that
is used to fund ceded losses as they become due from the reinsurance company.
Interest is credited to reinsurers for funds held on their behalf at rates
ranging from 7.0% to 8.9% of the account balances, as defined under the
agreements. Interest credited to reinsurers, which is reported as a reduction of
net investment income, was $9 million and $16 million for the second quarter and
first six months of 2003, respectively, and $5 million and $9 million for the
corresponding 2002 periods. As of June 30, 2003 and December 31, 2002, funds
held by the Company under the aggregate reinsurance agreement exceeded the
amount recoverable from the reinsurer for losses and loss adjustment expenses.
6. INDUSTRY SEGMENTS
The Company's operations are presently conducted through five segments
of the insurance business: specialty lines of insurance; alternative markets;
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 offers workers' compensation insurance on
an excess and primary basis and provides fee-based services to help clients
develop and administer self-insurance programs. The Company's reinsurance
segment specializes in underwriting property casualty reinsurance on both a
treaty and facultative basis. The regional property casualty insurance segment
provides commercial property casualty insurance products. The international
segment offers personal and commercial property casualty insurance in Argentina
and savings and life products in the Philippines. During 2001, the Company
discontinued its regional personal lines business and the alternative markets
division of its reinsurance segment. These discontinued businesses are reported
collectively as a separate business segment.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002. Realized
investment and foreign currency gains and losses are not allocated to segments.
Income tax expense and benefits are calculated based upon the Company's overall
effective tax rate. 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, including allocated investment income. Identifiable assets
by segment are those assets used in or allocated to the operation of each
segment.
9
W. R. Berkley Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
June 30, 2003
6. INDUSTRY SEGMENTS (continued)
Revenues
-----------------------------------------------
Earned Investment Pre-Tax Net
(dollars in thousands) Premiums Income Other Total Income Income
--------- ---------- --------- --------- --------- ---------
For the three months ended June 30, 2003:
Specialty $ 271,333 $ 15,935 $ -- $ 287,268 $ 54,756 $ 36,897
Alternative Markets 106,282 9,536 25,910 141,728 22,415 14,735
Reinsurance 196,632 12,744 -- 209,376 10,460 7,237
Regional 214,089 10,873 -- 224,962 34,071 22,380
International 18,132 1,662 -- 19,794 1,767 943
Discontinued Business -- -- -- -- -- --
Corporate and
eliminations -- (329) 441 112 (25,819) (14,639)
Realized gains -- -- 43,717 43,717 43,717 28,287
--------- ---------- --------- --------- --------- ---------
Consolidated $ 806,468 $ 50,421 $ 70,068 $ 926,957 $ 141,367 $ 95,840
========= ========== ========= ========= ========= =========
For the three months ended June 30, 2002:
Specialty (1) $ 174,053 $ 12,316 $ -- $ 186,369 $ 35,496 $ 22,532
Alternative Markets 51,487 9,207 20,816 81,510 13,749 9,380
Reinsurance (1) 82,259 10,502 (2) 92,759 2,635 4,115
Regional 172,062 11,186 -- 183,248 18,565 9,334
International 20,206 711 (4) 20,913 (800) (1,104)
Discontinued Business 12,621 1,147 -- 13,768 (4,600) (2,990)
Corporate and
eliminations -- (505) 322 (183) (19,389) (9,790)
Realized gains -- -- (8,449) (8,449) (8,449) (4,103)
--------- ---------- --------- --------- --------- ---------
Consolidated $ 512,688 $ 44,564 $ 12,683 $ 569,935 $ 37,207 $ 27,374
========= ========== ========= ========= ========= =========
Revenues
-------------------------------------------------------
Earned Investment Pre-Tax Net
(dollars in thousands) Premiums Income Other Total Income Income
----------- ----------- ----------- ----------- ----------- -----------
For the six months ended June 30, 2003:
Specialty $ 512,960 $ 32,129 $ -- $ 545,089 $ 103,297 $ 68,352
Alternative Markets 189,256 19,063 51,379 259,698 44,364 29,480
Reinsurance 359,109 26,218 -- 385,327 20,129 13,961
Regional 412,294 22,152 -- 434,446 66,266 43,843
International 32,975 3,081 -- 36,056 3,002 1,570
Discontinued Business -- -- -- -- -- --
Corporate and
eliminations -- (462) 1,133 671 (48,195) (26,817)
Realized gains -- -- 57,083 57,083 57,083 37,154
----------- ----------- ----------- ----------- ----------- -----------
Consolidated $ 1,506,594 $ 102,181 $ 109,595 $ 1,718,370 $ 245,946 $ 167,543
=========== =========== =========== =========== =========== ===========
For the six months ended June 30, 2002:
Specialty (1) $ 324,475 $ 24,426 $ -- $ 348,901 $ 55,875 $ 36,245
Alternative Markets 96,824 17,961 40,842 155,627 27,981 18,865
Reinsurance (1) 146,838 20,684 (4) 167,518 10,826 10,357
Regional 328,643 21,207 -- 349,850 41,000 24,490
International 59,390 2,163 -- 61,553 (534) (1,340)
Discontinued Business 34,984 3,016 -- 38,000 (4,654) (3,025)
Corporate and
eliminations -- (741) 599 (142) (39,094) (22,945)
Realized gains -- -- (3,486) (3,486) (3,486) (877)
----------- ----------- ----------- ----------- ----------- -----------
Consolidated $ 991,154 $ 88,716 $ 37,951 $ 1,117,821 $ 87,914 $ 61,770
=========== =========== =========== =========== =========== ===========
(1) During the first quarter of 2003, management responsibility and
financial reporting for Vela Insurance Services, Inc., an excess and
surplus lines underwriting manager, were transferred from the
reinsurance segment to the specialty segment. Segment results for the
prior period were restated to reflect this change.
10
W. R. Berkley Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
June 30, 2003
6. INDUSTRY SEGMENTS (continued)
Identifiable assets by segment are as follows (dollars in thousands):
June 30, December 31,
2003 2002
----------- ------------
Specialty $ 2,687,765 $ 2,271,105
Alternative Markets 1,335,346 1,197,977
Reinsurance 2,909,861 2,431,429
Regional 1,895,334 1,590,913
International 146,756 126,528
Discontinued Business 99,086 162,754
Corporate other and eliminations (769,891) (749,383)
----------- ------------
Consolidated $ 8,304,257 $ 7,031,323
=========== ============
7. DEBT
In February 2003, the Company issued $200 million aggregate principal
amount of 5.875% senior notes due February 2013. The notes were issued at 99.07%
of their face value amount and the net proceeds after expenses were
$196,840,000.
During, the first quarter of 2003, the Company repaid $35,793,000 of
6.5% senior subordinated notes and $25,000,000 of 6.71% senior notes upon their
respective maturities.
8. COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES
A subsidiary of 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 recoverable from the reinsurer by approximately $49 million as of
June 30, 2003. Although the ultimate outcome of this matter cannot be
determined, management believes that the Company's interpretation of these
agreements is correct and is vigorously pursuing this matter in arbitration.
There is a pending arbitration pertaining to reinsurance contract
coverage issues where a subsidiary of the Company is the assuming reinsurer.
Based on currently available information, the Company believes that the
resolution of this pending arbitration will not have a material effect on its
financial condition or results of operations. However, if this arbitration is
decided adversely to the Company, the Company's potential exposure, in excess of
the amount reserved, is up to $9 million, after tax.
The Company's subsidiaries are subject to other disputes, including
litigation and arbitration, arising in the ordinary course of their insurance
and reinsurance businesses. The Company's estimates of the costs of settling
such matters are reflected in its aggregate reserves for losses and loss
expenses, and the Company does not believe that the ultimate outcome of such
matters, individually or in the aggregate, will have a material adverse effect
on its financial condition or results of operations.
11
W. R. Berkley Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
June 30, 2003
9. ACCOUNTING CHANGES
The Company adopted Financial Accounting Standards Board Interpretation
No. 46, Consolidation of Variable Interest Entities, which clarifies controlling
interest. The adoption of Interpretation 46 did not have any impact on the
Company's results of operations or financial condition.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liability and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. One requirement under the Statement is that trust preferred securities
to be presented as liabilities. The Company elected to adopt Statement 150 in
the second quarter of 2003, and accordingly, trust preferred securities have
been reclassified to liabilities in the accompanying consolidated balance sheet.
There was no impact from the adoption of Statement 150 on the consolidated
statement of operations.
10. SUBSEQUENT EVENT
In August 2003, the Company's board of directors approved a 3-for-2
common stock split to be paid in the form of a common stock dividend on August
27, 2003 to holders of record on August 18, 2003. The per share information in
this 10-Q has not been adjusted to reflect this stock split.
During July 2003 the Company contributed approximately $107 million for
an 80% interest in a newly formed U.K. insurance company, W. R. Berkley
Insurance (Europe), Limited. The remaining 20% of W. R. Berkley Insurance
(Europe), Limited is owned by Kiln plc.
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 2003 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 legal and 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, our exposure 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 2003 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.
12
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
CRITICAL ACCOUNTING POLICIES
The notes to the Company's financial statements, included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002,
discuss its significant accounting policies. Management considers certain of
these 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.
RESERVES FOR LOSSES AND LOSS EXPENSES The Company maintains reserves for losses
and loss expenses to cover its estimated liability for unpaid claims, including
legal and other fees, as well as a portion of its general expenses, for reported
and unreported claims incurred as of the end of each accounting period. Reserves
do not represent an exact calculation of liability. Rather, reserves represent
an estimate of what management expects the ultimate settlement and
administration of claims will cost. These estimates, which generally involve
actuarial projections, are based on management's assessment of facts and
circumstances then known, as well as estimates of future trends in claims
severity and frequency, judicial theories of liability and other factors,
including the actions of third parties which are beyond the Company's control.
The variables described above are affected by both internal and external events,
such as changes in claims handling procedures, inflation, judicial and
litigation trends and legislative changes. Additionally, there may be a
significant delay between the occurrence of the insured event and the time it is
reported to the Company.
The inherent uncertainties of estimating reserves are greater for
certain types of liabilities, where the various considerations affecting these
types of claims are subject to change and long periods of time may elapse before
a definitive determination of liability is made. Reserve estimates are
continually refined in an ongoing process as experience develops and further
claims are reported and settled. Adjustments to reserves are reflected in the
results of the periods in which such estimates are changed. Because setting
reserves is inherently uncertain, the Company cannot assure that its current
reserves will prove adequate in light of subsequent events. Should the Company
need to increase its reserves, its net income for the period will decrease by a
corresponding amount.
RESULTS OF OPERATIONS FOR THE FIRST SIX MONTHS OF 2003 COMPARED TO THE FIRST SIX
MONTHS OF 2002
The Company reported net income of $168 million, or $2.90 per share,
for the six months ended June 30, 2003 compared with $62 million, or $1.18 per
share, for the corresponding 2002 period. Following are the components of net
income for the six months ended June 30, 2003 and 2002 (dollars in thousands):
2003 2002
--------- ---------
Underwriting income (1) $ 125,211 $ 36,072
Insurance services 10,651 6,984
Net investment income 102,181 88,716
Interest and other expenses (49,180) (40,372)
Realized investment and foreign currency gains (losses) 57,083 (3,486)
Income taxes and minority interest (78,403) (26,144)
--------- ---------
Net income $ 167,543 $ 61,770
========= =========
(1) Represents premiums earned less loss, loss expenses and underwriting
expenses incurred.
13
UNDERWRITING Following is a summary of underwriting results for the six months
ended June 30, 2003 and 2002 (dollars in thousands):
2003 2002 % Change
---------- ------------- --------
Gross premiums written $2,073,968 $ 1,505,211 38%
Net premiums written 1,767,516 1,235,088 43%
Premiums earned 1,506,594 991,154 52%
Underwriting income 125,211 36,072
Loss ratio (1) 63.6% 65.3%
Expense ratio (2) 28.1% 31.1%
Combined ratio 91.7% 96.4%
(1) Represents losses and loss expenses incurred expressed as a percentage of
premiums earned.
(2) Represents underwriting expenses expressed as a percentage of premiums
earned.
The Company's operations are presently conducted through five segments:
specialty lines of insurance, alternative markets, reinsurance, regional
property casualty insurance, and international. In addition, the Company reports
the run-off of its discontinued personal lines and alternative markets
reinsurance business as a separate business segment.
During the first quarter of 2003, management responsibility and
financial reporting for Vela Insurance Services, Inc., an excess and surplus
lines underwriting manager, were transferred from the reinsurance segment to the
specialty segment. Segment result for the prior period were restated to reflect
this change. Additional information for the business segments follows.
SPECIALTY The specialty segment provides insurance products and services
principally to the excess and surplus lines, professional liability, commercial
transportation and surety markets. Following is a summary of underwriting
results for the specialty segment for the six months ended June 30, 2003 and
2002 (dollars in thousands):
2003 2002 % Change
--------- ---------- --------
Gross premiums written $ 670,242 $ 470,931 42%
Net premiums written 607,784 412,193 47%
Premiums earned 512,960 324,475 58%
Underwriting income 71,168 31,449
Loss ratio 61.6% 62.3%
Expense ratio 24.5% 28.0%
Combined ratio 86.1% 90.3%
Net premiums written in 2003 increased by 47% compared with 2002 as a
result of higher prices as well as new business. Net premiums written increased
45% for the Company's three excess and surplus lines companies, 52% for
commercial transportation business and 39% for Monitor Liability Managers, Inc.,
which specializes in directors' and officers' and lawyers professional liability
business. Net premiums written in 2003 also include $14 million from the
Company's new underwriting unit, Berkley Medical Excess Underwriters, LLC.
The 2003 loss ratio decreased by 0.7 percentage points to 61.6%. The
improvement was primarily a result of higher prices and more favorable terms and
conditions for current business, partially offset by prior year reserve
development. The 2003 expense ratio decreased by 3.5 percentage points to 24.5%
as a result of a 58% increase in earned premiums with no significant increase in
expenses other than commissions and premium taxes.
14
ALTERNATIVE MARKETS The alternative markets segment offers workers' compensation
insurance on an excess and primary basis and provides fee-based services to help
clients develop and administer self-insurance programs. Following is a summary
of underwriting results for the alternative markets segment for the six months
ended June 30, 2003 and 2002 (dollars in thousands):
2003 2002 % Change
---- ---- --------
Gross premiums written $ 271,677 $ 146,040 86%
Net premiums written 227,905 126,637 80%
Premiums earned 189,256 96,824 95%
Underwriting income 14,650 3,040
Loss ratio 67.7% 67.5%
Expense ratio 24.5% 29.4%
Combined ratio 92.2% 96.9%
Net premiums written in 2003 increased by 80% compared with 2002. The
increase reflects higher prices as well as an increase in policies-in-force for
both primary and excess workers' compensation business. The expense ratio
decreased by 4.9 percentage points to 24.5% due to a 95% increase in premiums
earned with no significant increase in expenses other than commissions and
premium taxes.
Following is a summary of insurance services results for the
alternative markets segment for the six months ended June 30, 2003 and 2002
(dollars in thousands):
2003 2002 % Change
---- ---- --------
Service revenues $ 51,379 $ 40,842 26%
Service expenses (40,728) (33,858) 20%
-------- --------
Service income before taxes $ 10,651 $ 6,984 53%
======== ========
Service revenues in 2003 increased 26% compared with 2002 primarily as
a result of an increase in service fees for managing assigned risk plans in ten
states. Service income before taxes increased 53% compared with 2002 due to
revenues increasing at a greater rate than expenses.
REINSURANCE The Company's reinsurance segment specializes in underwriting
property, casualty and surety reinsurance on both a treaty and facultative
basis. Following is a summary of underwriting results for the reinsurance
segment for the six months ended June 30, 2003 and 2002 (dollars in thousands):
2003 2002 % Change
---- ---- --------
Gross premiums written $ 505,754 $ 342,732 48%
Net premiums written 421,876 264,699 59%
Premiums earned 359,109 146,838 145%
Underwriting loss (6,044) (8,691)
Loss ratio 71.6% 72.5%
Expense ratio 30.1% 33.4%
Combined ratio 101.7% 105.9%
Net premiums written in 2003 increased by 59% compared with 2002 as a
result of higher prices and new business. Net premiums written increased 102% to
$117 million for facultative reinsurance, 32% to $114 million for Lloyd's
reinsurance, 49% to $135 million for standard treaty business and 91% to $56
million for the other reinsurance units, Berkley Capital Underwriters, LLC and
Berkley Underwriting Partners, LLC. Net premiums written in 2003 also include
$21 million from the Company's new direct facultative underwriting unit, B F Re
Underwriters, LLC. Premiums earned in 2003 increased 145% compared with 2002,
primarily as a result of substantial growth in net written premiums during 2002.
The 2003 loss ratio decreased 0.9 percentage points to 71.6%. The
decrease reflects the improved results for the current accident year as a result
of higher prices for both treaty and facultative risks which was offset by the
impact of reserve development on prior years. The 2003 and 2002 underwriting
results also reflect loss recoveries under the Company's aggregate reinsurance
agreement. (See Note 7 of "Notes to Consolidated Financial Statements".) The
2003
15
expense ratio decreased 3.3 percentage points to 30.1% primarily as a result of
a shift in the mix of business and increased volume.
REGIONAL The regional property casualty insurance segment principally provides
commercial property casualty insurance products. Following is a summary of
underwriting results for the regional segment for the six months ended June 30,
2003 and 2002 (dollars in thousands):
2003 2002 % Change
---- ---- --------
Gross premiums written $589,829 $ 475,005 24%
Net premiums written 475,979 376,358 26%
Premiums earned 412,294 328,643 25%
Underwriting income 44,114 19,793
Loss ratio 58.1% 62.5%
Expense ratio 31.2% 31.5%
Combined ratio 89.3% 94.0%
Net premiums written in 2003 increased by 26.0% compared with 2002. The
increase reflects higher prices across all four regional units. The 2003 loss
ratio decreased by 4.4 percentage points to 58.1% primarily as a result of
higher prices in 2002 and 2003. Weather-related losses for the regional segment
were $21 million in 2003 compared with $22 million in 2002.
INTERNATIONAL The international segment offers personal and commercial property
casualty insurance in Argentina and savings and life products in the
Philippines. Following is a summary of underwriting results for the
international segment for the six months ended June 30, 2003 and 2002 (dollars
in thousands):
2003 2002 % Change
---- ---- --------
Gross premiums written $ 36,466 $ 60,191 -39%
Net premiums written 33,972 52,256 -35%
Premiums earned 32,975 59,390 -44%
Underwriting income (loss) 1,323 (1,849)
Loss ratio 52.4% 58.7%
Expense ratio 43.6% 44.4%
Combined ratio 96.0% 103.1%
Net premiums written in 2003 decreased by 35% compared with 2002. The
decrease was the result of the withdrawal from life insurance business in
Argentina and of lower exchange rates for the Argentine peso in 2003. The
combined ratio decreased 7.1 percentage points to 96.0% as a result of a
reduction in costs relating to the withdrawal from life insurance business in
Argentina and of improvement in underwriting results for the Argentine property
casualty business.
DISCONTINUED The discontinued segment consists of regional personal lines and
the alternative markets reinsurance, which were discontinued in 2001. Following
is a summary of underwriting results for the discontinued segment for the six
months ended June 30, 2003 and 2002 (dollars in thousands):
2003 2002
---- ----
Gross premiums written $ -- $ 10,312
Net premiums written -- 2,945
Premiums earned -- 34,984
Underwriting loss -- (7,670)
The personal lines and alternative markets reinsurance business were
discontinued in 2001 and there was no activity in the first six months of 2003.
16
NET INVESTMENT INCOME Following is a summary of investment activity for the six
months ended June 30, 2003 and 2002 (dollars in thousands):
2003 2002 % Change
---- ---- --------
Net investment income $ 102,181 $ 88,716 15%
Average invested assets 4,867,379 3,664,756 33%
Annualized effective yield (1) 4.9% 5.4%
Realized investment and foreign
Currency gains (losses) 57,083 (3,486)
Change in unrealized gains 51,499 15,008
(1) Represents net investment income (before interest in funds held) expressed
as a percentage of average invested assets.
Net investment income in 2003 increased 15% compared with 2002. Average
invested assets increased 33% compared with 2002 as a result of cash flow from
operations and of the proceeds from a secondary stock offering in 2002 and a
debt offering in 2003. The average yield on investments was 4.9% in 2003
compared with 5.4% in 2002. The lower yield in 2003 reflects the decrease in
general interest rate levels as well as an increase in the portion of the
portfolio invested in cash and cash equivalents and municipal securities.
The carrying value of the Company's investment portfolio as of June 30,
2003 and June 30, 2002 is as follows (dollars in thousands):
June 30, December 31,
2003 2002
----------- -----------
Cash and cash equivalents $ 1,099,232 $ 594,183
Fixed maturities 3,721,275 3,511,522
Equity securities available for sale 305,874 205,372
Trading account(1) 313,531 306,836
Other investments 89,377 45,187
Due to brokers and clearing
organizations (59,678) --
----------- -----------
Total $ 5,469,611 $ 4,663,100
=========== ===========
(1) Represents trading account equity securities plus trading account
receivables from brokers and clearing organizations less trading
account equity securities sold but not yet purchased.
At June 30, 2003, as compared with December 31, 2002, the fixed
maturity portfolio mix was as follows: U.S. Government securities were 15% (20%
in 2002); state and municipal securities were 43% (29% in 2002); corporate
securities were 11% (19% in 2002); mortgage-backed securities were 26% (27% in
2002); foreign bonds were 5% in 2003 and 2002.
INTEREST AND OTHER EXPENSES Interest and other expenses represents interest
expense, corporate expenses and other miscellaneous income and expenses.
Interest and other expenses were $49 million in 2003 compared with $40 million
in 2002. The increase reflects higher general and administrative expenses and an
increase in interest expense of $3 million as a result of a $200 million debt
offering in February 2003.
REALIZED GAINS Realized investment and foreign currency gains of $57.1 million
resulted primarily from the sale of fixed income securities in order to decrease
the duration of the portfolio and to increase the portion of the portfolio
invested in municipal securities.
INCOME TAXES AND MINORITY INTEREST The effective income tax rate was 31% in 2003
and 36% in 2002. 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.
17
OPERATING RESULTS FOR THE SECOND QUARTER OF 2003 COMPARED TO THE SECOND QUARTER
OF 2002
The Company reported net income of $96 million, or $1.65 per share, for
the three months ended June 30, 2003 compared with $27 million, or $.52 per
share, for the corresponding 2002 period. Following are the components of net
income for the three months ended June 30, 2003 and 2002 (dollars in thousands):
2003 2002
---- ----
Underwriting income $ 68,133 $ 17,431
Insurance services 4,999 3,534
Net investment income 50,421 44,564
Interest and other expenses (25,903) (19,873)
Realized investment and foreign currency gains (losses) 43,717 (8,449)
Income taxes and minority interest (45,527) (9,833)
-------- --------
Net income $ 95,840 $ 27,374
======== ========
UNDERWRITING Following is a summary of underwriting results for the three months
ended June 30, 2003 and 2002 (dollars in thousands):
2003 2002 % Change
---- ---- --------
SPECIALTY
Gross premiums written $ 348,936 $ 252,995 38%
Net premiums written 321,083 219,764 46%
Premiums earned 271,333 174,053 56%
Underwriting income 38,821 23,182
Loss ratio 61.5% 58.9%
Expense ratio 24.1% 27.8%
Combined ratio 85.6% 86.7%
ALTERNATIVE MARKETS
Gross premiums written $ 101,496 $ 47,867 112%
Net premiums written 90,723 42,057 116%
Premiums earned 106,282 51,487 106%
Underwriting income 7,880 1,008
Loss ratio 68.1% 68.1%
Expense ratio 24.5% 30.0%
Combined ratio 92.6% 98.1%
REINSURANCE
Gross premiums written $ 243,362 $ 175,789 38%
Net premiums written 207,077 135,410 53%
Premiums earned 196,632 82,259 139%
Underwriting loss (2,284) (7,284)
Loss ratio 71.3% 74.9%
Expense ratio 29.8% 34.0%
Combined ratio 101.1% 108.9%
REGIONAL
Gross premiums written $ 293,971 $ 236,686 24%
Net premiums written 238,225 192,655 24%
Premiums earned 214,089 172,062 24%
Underwriting income 23,198 7,377
Loss ratio 58.2% 64.3%
Expense ratio 31.0% 31.4%
Combined ratio 89.2% 95.7%
18
2003 2002 % Change
---------- ------------ --------
INTERNATIONAL
Gross premiums written $ 19,730 $ 13,973 41%
Net premiums written 18,349 11,706 57%
Premiums earned 18,132 20,206 -10%
Underwriting income (loss) 518 (1,105)
Loss ratio 55.1% 56.0%
Expense ratio 42.1% 49.5%
Combined ratio 97.2% 105.5%
DISCONTINUED
Gross premiums written $ -- $ 1,693
Net premiums written -- (497)
Premiums earned -- 12,621
Underwriting loss -- (5,747)
TOTAL
Gross premiums written $1,007,495 $ 729,003 38%
Net premiums written 875,457 601,095 46%
Premiums earned 806,468 512,688 57%
Underwriting income 68,133 17,431
Loss ratio 63.8% 65.6%
Expense ratio 27.8% 31.0%
Combined ratio 91.6% 96.6%
Net premiums written in 2003 increased 46% as a result of price
increases and new business as discussed above. The 2003 loss ratio decreased by
1.8 percentage points to 63.8% as a result of higher prices and more favorable
terms and conditions for current business as discussed above. The 2003 expense
ratio decreased 3.2 percentage points to 27.8% as a result of a 57% increase in
earned premiums compared with a 41% increase in underwriting expenses.
NET INVESTMENT INCOME Following is a summary of investment activity for the
three months ended June 30, 2003 and 2002 (dollars in thousands):
2003 2002 % Change
----------- ----------- ---------
Net investment income $ 50,421 $ 44,564 13%
Average invested assets 5,055,899 3,736,254 35%
Annualized effective yield 4.7% 5.4%
Realized investment and foreign
Currency gains (losses) 43,717 (8,449)
Net investment income in 2003 increased 13% compared with 2002. Average
invested assets increased 35% compared with 2002 as a result of cash flow from
operations and of the proceeds from a secondary stock offering in 2002 and a
debt offering in 2003. The average yield on investments was 4.7% in 2003
compared with 5.4% in 2002. The lower yield in 2003 reflects the decrease in
general interest rate levels as well as an increase in the portion of the
portfolio invested in cash and cash equivalents and municipal securities.
INTEREST AND OTHER EXPENSES Interest and other expenses represents interest
expense, corporate expenses and other miscellaneous income and expenses.
Interest and other expenses were $26 million in 2003 compared with $20 million
in 2002. The increase reflects higher general and administrative expenses and an
increase in interest expense as a result of a $200 million debt offering in
February 2003.
REALIZED GAINS Realized investment and foreign currency gains of $43.7 million
resulted primarily from the sale of fixed income securities in order to decrease
the duration of the portfolio and to increase the portion of the portfolio
invested in municipal securities.
19
INCOME TAXES AND MINORITY INTEREST The effective income tax rate was 31% in 2003
and 42% in 2002. 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 2003, the Company issued $200 million aggregate principal
amount of 5.875% senior notes due February 2013. The notes were issued at 99.07%
of their face value amount and the net proceeds after expenses were
$196,840,000.
During the first quarter of 2003, the Company repaid $35,793,000 of
6.5% senior subordinated notes and $25,000,000 of 6.71% senior notes upon their
respective maturities. During the second quarter of 2003, the company purchased
$4,957,000 (carrying value) of its trust preferred securities.
At June 30, 2003, the Company's outstanding debt was $505 million (face
amount). The maturities of the debt are $40 million in 2005, $100 million in
2006, $89 million in 2008, $200 million in 2013 and $76 million in 2022. The
Company also has $195 million (face amount) of trust preferred securities that
mature in 2045.
At June 30, 2003, stockholders' equity was $1,525 million and total
capitalization (stockholders' equity, debt and trust preferred securities) was
$2,218 million. The percentage of the Company's capital attributable to debt and
trust preferred securities was 31% at June 30, 2003 compared with 30% at
December 31, 2002.
For background information concerning the Company's Liquidity and
Capital Resources, see the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.
20
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 duration of the investment portfolio declined from approximately
4.8 years at December 31, 2002 to 4.5 years at June 30, 2003. The overall market
risk relating to the Company's portfolio has remained similar to the risk at
December 31, 2002.
Item 4. Controls and Procedures
The Company's management, including its Chief Executive Officer and
Chief Financial Officer, have conducted an evaluation of the effectiveness of
the Company's disclosure controls and procedures pursuant to Securities Exchange
Act Rule 13a-14 as of the end of the period covered by this quarterly report.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company has in place appropriate controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Securities Exchange Act and
the rules thereunder, is recorded, processed, summarized and reported within the
time periods specified in the Commission's rules and forms. There have been no
significant changes in internal controls, or in factors that could significantly
affect internal controls, subsequent to the date the Chief Executive Officer and
Chief Financial Officer completed their evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
A subsidiary of 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 recoverable from the reinsurer by approximately $49 million as of
June 30, 2003. Although the ultimate outcome of this matter cannot be
determined, management believes that the Company's interpretation of these
agreements is correct and is vigorously pursuing this matter in arbitration.
There is a pending arbitration pertaining to reinsurance contract
coverage issues where a subsidiary of the Company is the assuming reinsurer.
Based on currently available information, the Company believes that the
resolution of this pending arbitration will not have a material effect on its
financial condition or results of operations. However, if this arbitration is
decided adversely to the Company, the Company's potential exposure, in excess of
the amount reserved, is up to $9 million, after tax.
The Company's subsidiaries are subject to other disputes, including
litigation and arbitration, arising in the ordinary course of their insurance
and reinsurance businesses. The Company's estimates of the costs of settling
such matters are reflected in its aggregate reserves for losses and loss
expenses, and the Company does not believe that the ultimate outcome of such
matters, individually or in the aggregate, will have a material adverse effect
on its financial condition or results of operations.
21
Item 2. Changes in Securities and Use of Proceeds
On April 4, 2003, 300,000 Restricted Stock Units (RSU) were awarded to
officers of the Company and its subsidiaries. Each RSU represents the right to
receive one share of common stock, conditioned on the employee's satisfying
certain requirements outlined in the award agreement. The RSU's vest after five
years of continuous employment. 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.
On May 20, 2003, the Company issued 158 shares of its Common Stock to
each of its nine directors (1,422 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 20, 2003.
The meeting involved the election of directors for a term to expire at the
Annual Meeting of Stockholders to be held in the year 2006, the approval of an
amendment and restatement of the W. R. Berkley Corporation 1992 Stock Option
Plan in the form of the W. R. Berkley Corporation 2003 Stock Incentive Plan, the
approval of an amendment to the Company's Restated Certificate of Incorporation
to increase the authorized number of shares of common stock from 80,000,000 to
150,000,000, and the ratification of the appointment of independent auditors for
the year 2003. The directors elected and the results of the voting are as
follows:
(i) Election of Directors:
Nominee Votes For Votes Withheld
- ------------------ ---------- --------------
William R. Berkley 40,687,706 10,773,284
George G. Daly 50,618,870 842,120
Philip J. Ablove 39,734,322 11,726,668
(ii) Approval of the amendment and restatement of the W. R. Berkley
Corporation 1992 Stock Option Plan in the form of the W. R.
Berkley Corporation 2003 Stock Incentive Plan:
Votes For Votes Against Votes Abstained
- ---------- ------------- ---------------
44,374,797 7,025,148 61,045
(iii) Approval of the amendment to the Company's Restated
Certificate of Incorporation to increase the authorized number
of shares of common stock from 80,000,000 to 150,000,000:
Votes For Votes Against Votes Abstained
- ---------- ------------- ---------------
49,833,479 1,567,056 60,455
(iv) Ratification of Auditors:
Votes For Votes Against Votes Abstained
- ---------- ------------- ---------------
50,953,779 471,123 36,088
22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number
(3.1) The Company's Restated Certificate of Incorporation, as
amended through May 19, 2003.
(3.2) Amendment, dated May 20, 2003, to the Company's Restated
Certificate of Incorporation, as amended.
(10.1) W. R. Berkley 2003 Stock Incentive Plan (incorporated by
reference to Annex A from the Company's Proxy Statement for
the Annual Meeting of Stockholders held on May 20, 2003).
(10.2) Form of Restricted Stock Unit Agreement.
(31.1) Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2) Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1) Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
During the quarter ended June 30, 2003, the Company filed the following
Report on Form 8-K:
Report dated April 25, 2003 with respect to the press release relating
to the announcement of the Company's results of operations for the first quarter
of 2003 (under item 9, for information required by item 12, 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: August 6, 2003 /s/ WILLIAM R. BERKLEY
------------------------------
William R. Berkley
Chairman of the Board and
Chief Executive Officer
Date: August 6, 2003 /s/ EUGENE G. BALLARD
------------------------------
Eugene G. Ballard
Senior Vice President,
Chief Financial Officer
and Treasurer
24