SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
(Amendment No. 1)
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 1-15202
W. R. BERKLEY CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-1867895
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
475 Steamboat Road, Greenwich, Connecticut 06830
- ------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(203) 629-3000
----------------------------------------------------
(Registrant's telephone number, including area code)
None
---------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
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 December 15,
2003: 83,474,178
Part I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands)
September 30, December 31,
2003 2002
------------- ------------
(Unaudited)
Assets
Investments:
Cash and cash equivalents $ 1,196,215 $ 594,183
Fixed maturity securities 4,092,337 3,511,522
Equity securities available for sale 323,988 204,372
Equity securities trading account 230,843 165,642
Other investments 103,909 46,187
------------- ------------
Total investments 5,947,292 4,521,906
------------- ------------
Premiums and fees receivable 986,679 822,060
Due from reinsurers 774,843 734,687
Accrued investment income 48,958 46,334
Prepaid reinsurance premiums 257,127 164,284
Deferred policy acquisition costs 396,311 308,200
Real estate, furniture & equipment at cost, less accumulated depreciation 141,198 135,488
Deferred federal and foreign income taxes 34,933 20,585
Goodwill 59,021 59,021
Account receivable from brokers and clearing organizations 163,727 177,309
Other assets 65,247 41,449
------------- ------------
Total assets $ 8,875,336 $ 7,031,323
============= ============
Liabilities and Stockholders' Equity
Liabilities:
Reserves for losses and loss expenses $ 3,863,152 $ 3,167,925
Unearned premiums 1,848,818 1,390,246
Due to reinsurers 178,559 184,912
Securities sold but not yet purchased 80,028 36,115
Policyholders' account balances 50,548 42,707
Other liabilities 386,083 294,334
Debt 658,933 362,985
Trust preferred securities 193,325 198,251
------------- ------------
Total liabilities 7,259,446 5,677,475
------------- ------------
Minority interest 37,444 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, 83,255,014 and 82,835,172 shares 20,901 20,901
Additional paid-in capital 817,964 816,223
Retained earnings 852,548 623,651
Accumulated other comprehensive income 111,316 104,603
Treasury stock, at cost, 21,247,246 and 21,669,153 shares (224,283) (230,179)
------------- ------------
Total stockholders' equity 1,578,446 1,335,199
------------- ------------
Total liabilities and stockholders' equity $ 8,875,336 $ 7,031,323
============= ============
See accompanying notes to the unaudited 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 Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Net premiums written $ 939,677 $ 687,990 $ 2,707,193 $ 1,923,078
Change in unearned premiums, net (104,097) (119,519) (365,019) (363,453)
----------- ----------- ----------- -----------
Premiums earned 835,580 568,471 2,342,174 1,559,625
Net investment income 51,678 48,316 153,859 137,032
Service fees 25,475 21,650 76,854 62,767
Realized investment gains (losses) 3,383 1,612 61,660 (1,812)
Foreign currency gains (losses) 40 (984) (1,154) (1,046)
Other income 226 1,006 1,359 1,326
----------- ----------- ----------- -----------
Total revenues 916,382 640,071 2,634,752 1,757,892
----------- ----------- ----------- -----------
Expenses:
Losses and loss expenses 533,201 368,763 1,491,244 1,015,879
Other operating expenses 261,281 200,182 750,294 560,508
Interest expense 13,825 11,593 39,193 34,058
----------- ----------- ----------- -----------
Total expenses 808,307 580,538 2,280,731 1,610,445
----------- ----------- ----------- -----------
Income before income taxes
and minority interest 108,075 59,533 354,021 147,447
Income tax expense (30,744) (19,470) (107,960) (51,255)
Minority interest (862) 481 (2,049) 6,122
----------- ----------- ----------- -----------
Net income $ 76,469 $ 40,544 $ 244,012 $ 102,314
=========== =========== =========== ===========
Net income per share:
Basic $ 0.92 $ 0.54 $ 2.94 $ 1.36
Diluted $ 0.87 $ 0.52 $ 2.79 $ 1.30
Average shares outstanding:
Basic 83,183 75,294 83,025 75,120
Diluted 87,923 77,985 87,468 78,492
See accompanying notes to the unaudited consolidated financial statements.
3
W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
(dollars in thousands)
Nine Months Ended Year Ended
September 30, 2003 December 31, 2002
------------------ -----------------
(Unaudited)
Common stock:
Beginning of period $ 20,901 $ 19,487
Issuance of common stock -- 1,414
--------- ---------
End of period $ 20,901 $ 20,901
========= =========
Additional paid in capital:
Beginning of period $ 816,223 $ 648,440
Issuance of common stock 463 167,783
Restricted stock units earned 1,278 --
--------- ---------
End of period $ 817,964 $ 816,223
========= =========
Retained earnings:
Beginning of period $ 623,651 $ 467,185
Net income 244,012 175,045
Elimination of international reporting lag 1,776 --
Dividends to stockholders (16,891) (18,579)
--------- ---------
End of period $ 852,548 $ 623,651
========= =========
Accumulated other comprehensive income:
Unrealized investment gains:
Beginning of period $ 114,664 $ 41,731
Net change in period 9,434 72,933
--------- ---------
End of period 124,098 114,664
--------- ---------
Currency translation adjustments:
Beginning of period (10,061) (4,391)
Net change in period (2,721) (5,670)
--------- ---------
End of period (12,782) (10,061)
--------- ---------
Total accumulated other comprehensive income $ 111,316 $ 104,603
========= =========
Treasury stock:
Beginning of period $(230,179) $(240,857)
Issuance under stock incentive plan 5,968 10,749
Purchase of common stock (72) (71)
--------- ---------
End of period $(224,283) $(230,179)
========= =========
See accompanying notes to the unaudited consolidated financial statements.
4
W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)
For the Nine Months
Ended September 30,
--------------------
2003 2002
----------- -----------
Cash flows provided by operating activities:
Net income $ 244,012 $ 102,314
Adjustments to reconcile net income to cash
provided by operating activities:
Realized investment and foreign currency gains (losses) (60,506) 2,858
Depreciation and amortization 13,681 13,680
Minority interest 2,049 (6,122)
Equity in undistributed earnings of affiliates (4,597) 75
Equity securities trading account (65,201) 26,889
Change in: Premiums and fees receivable (164,619) (206,140)
Due from reinsurers (40,156) 62,282
Accrued investment income (2,624) (2,732)
Prepaid reinsurance premiums (92,843) (57,656)
Deferred policy acquisition cost (88,111) (63,798)
Deferred federal and foreign income taxes (21,790) 31,532
Account receivable from brokers and clearing organizations 13,582 171,685
Other assets (22,083) 5,180
Reserves for losses and loss expense 695,227 149,520
Unearned premiums 458,572 405,415
Due to reinsurers (6,353) 48,734
Securities sold but not yet purchased 43,913 (25,858)
Policyholders' account balances 7,841 27,390
Other liabilities 98,422 30,410
----------- -----------
Net cash flows provided by operating activities 1,008,416 715,658
----------- -----------
Cash flows used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities 746,213 460,332
Equity securities 45,039 27,014
Maturities and prepayments of fixed maturity securities 565,158 204,767
Cost of purchases, excluding trading account:
Fixed maturity securities (1,841,372) (1,366,262)
Equity securities (144,325) (187,034)
Other invested securities (50,752) --
Change in balances due to/from security brokers (4,110) 62,482
Net additions to real estate, furniture and equipment (18,368) (30,854)
Purchase of subsidiary -- (2,053)
Other, net 430 (16,034)
----------- -----------
Net cash flows used in investing activities (702,087) (847,642)
----------- -----------
Cash flows provided by (used in) financing activities:
Net proceeds from issuance of debt 356,182 --
Repayment and repurchase of debt and trust preferred securities (65,750) (8,000)
Cash dividends (21,836) (12,982)
Net proceeds from stock options exercised 7,709 7,037
Proceeds from minority shareholder 15,337 --
Other, net 4,061 (1,838)
----------- -----------
Net cash flows provided by (used in) financing activities 295,703 (15,783)
----------- -----------
Net increase (decrease) in cash and cash equivalents 602,032 (147,767)
Cash and cash equivalents at beginning of year 594,183 534,087
----------- -----------
Cash and cash equivalents at end of period $ 1,196,215 $ 386,320
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 33,493 $ 29,178
=========== ===========
Federal income taxes paid, net $ 99,932 $ 2,647
=========== ===========
See accompanying notes to the unaudited consolidated financial statements.
5
W. R. Berkley Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
September 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. Per share amounts have been adjusted to reflect the
3-for-2 common stock split effected August 27, 2003.
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 Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 76,469 $ 40,544 $ 244,012 $ 102,314
Other comprehensive income:
Unrealized holding gains (losses) on investments, net of taxes
(26,872) 70,041 (30,152) 87,318
Reclassification for realized gains (losses) included in net income, net
of taxes 2,432 733 39,586 (144)
--------- --------- --------- ---------
Unrealized investment gains (losses), net of taxes (24,440) 70,774 9,434 87,174
--------- --------- --------- ---------
Currency translation adjustments, net of
taxes 4,032 (9,094) (2,721) (4,093)
--------- --------- --------- ---------
Other comprehensive income (loss) (20,408) 61,680 6,713 83,081
--------- --------- --------- ---------
Comprehensive income $ 56,061 $ 102,224 $ 250,725 $ 185,395
========= ========= ========= =========
6
W. R. Berkley Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
September 30, 2003
3. STOCK-BASED COMPENSATION
During the first quarter of 2003, the Company adopted SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of SFAS No. 123" ("SFAS No. 148"). This statement amends SFAS No. 123,
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The adoption of SFAS No. 148 did not have any
impact to our consolidated financial position, results of operations or cash
flows as our adoption of this standard involved disclosures only. Under the
prospective method of adoption selected by the Company, the fair value
recognition provisions 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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported $ 76,469 $ 40,544 $ 244,012 $ 102,314
Add: Stock-based compensation expense included
in reported net income, net of tax 7 -- 19 --
Deduct: Total stock-based employee compensation
expense under fair value based method for all
awards, net of tax (1,171) (1,133) (3,561) (3,400)
----------- ----------- ----------- -----------
Pro forma net income $ 75,305 $ 39,411 $ 240,470 $ 98,914
=========== =========== =========== ===========
Earnings per share:
Basic - as reported $ .92 $ .54 $ 2.94 $ 1.36
Basic - pro forma $ .91 $ .52 $ 2.90 $ 1.32
Diluted - as reported $ .87 $ .52 $ 2.79 $ 1.30
Diluted - pro forma $ .86 $ .51 $ 2.75 $ 1.26
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 RSUs vest after five
years of continuous employment. The Company determines the cost of the RSUs
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. Compensation expense related to RSUs was $639,000 and $1,278,000
for the third quarter and first nine months of 2003, respectively. The remaining
unearned compensation for outstanding RSUs was $11,502,000 as of September 30,
2003.
7
W. R. Berkley Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
September 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
-------- ---- ---- ----- -----
September 30, 2003
Fixed maturity securities:
Held to maturity $ 211,830 $ 19,771 $ (82) $ 231,519 $ 211,830
Available for sale 3,711,401 177,503 (8,397) 3,880,507 3,880,507
---------- ---------- ---------- ---------- ----------
Total $3,923,231 $ 197,274 $ (8,479) $4,112,026 $4,092,337
Equity securities available
for sale $ 301,091 $ 25,073 $ (2,176) $ 323,988 $ 323,988
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 $ 202,388 $ 8,232 $ (6,248) $ 204,372 $ 204,372
(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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Ceded premiums earned:
Aggregate reinsurance agreement:
Individual losses $ 35,151 $ 32,612 $ 94,920 $ 71,784
Aggregate losses 5,000 6,250 15,000 18,750
-------- -------- -------- --------
Total 40,151 38,862 109,920 90,534
-------- -------- -------- --------
Other reinsurance contracts 104,722 71,864 286,482 221,841
-------- -------- -------- --------
Total $144,873 $110,726 $396,402 $312,375
======== ======== ======== ========
Ceded losses incurred:
Aggregate reinsurance agreement:
Individual losses $ 33,215 $ 10,093 $ 80,144 $ 32,070
Aggregate losses 9,000 11,250 27,000 33,750
-------- -------- -------- --------
Total 42,215 21,343 107,144 65,820
-------- -------- -------- --------
Other reinsurance contracts 70,156 50,241 173,311 130,605
-------- -------- -------- --------
Total $112,371 $ 71,584 $280,455 $196,425
======== ======== ======== ========
8
W. R. Berkley Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
September 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 $14 million and $37 million for the third quarter and
first nine months of 2003, respectively. No accrued return premiums were
recorded during the first nine months of 2002.
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 $25 million for the third quarter and
first nine months of 2003, respectively, and $5 million and $14 million for the
corresponding 2002 periods. As of September 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 the
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)
September 30, 2003
6. INDUSTRY SEGMENTS (continued)
Revenues
------------------------------------------------------------- Pre-Tax Net
Earned Investment Income Income
(dollars in thousands) Premiums Income Other Total (Loss) (Loss)
-------- ------ ----- ----- ------ ------
For the three months
ended September 30, 2003:
Specialty $ 297,574 $ 18,237 $ -- $ 315,811 $ 47,410 $ 31,092
Alternative Markets 101,660 9,675 25,475 136,810 18,689 12,364
Reinsurance 198,145 12,678 -- 210,823 17,154 11,780
Regional 222,389 10,788 -- 233,177 40,905 27,377
International 15,812 1,711 -- 17,523 1,887 1,917
Discontinued Business -- -- -- -- -- --
Corporate and
eliminations -- (1,411) 226 (1,185) (21,393) (10,493)
Realized gains -- -- 3,423 3,423 3,423 2,432
----------- ----------- ----------- ----------- ----------- -----------
Consolidated $ 835,580 $ 51,678 $ 29,124 $ 916,382 $ 108,075 $ 76,469
=========== =========== =========== =========== =========== ===========
For the three months
ended September 30, 2002:
Specialty (1) $ 200,699 $ 14,126 $ -- $ 214,825 $ 34,097 $ 22,179
Alternative Markets 61,077 9,759 22,040 92,876 16,880 11,232
Reinsurance (1) 99,167 10,883 (4) 110,046 6,729 189
Regional 183,424 11,723 -- 195,147 26,736 15,947
International 14,967 1,502 -- 16,469 (2,241) (1,102)
Discontinued Business 9,137 801 -- 9,938 (3,282) (2,133)
Corporate and
eliminations -- (478) 620 142 (20,014) (6,501)
Realized gains -- -- 628 628 628 733
----------- ----------- ----------- ----------- ----------- -----------
Consolidated $ 568,471 $ 48,316 $ 23,284 $ 640,071 $ 59,533 $ 40,544
=========== =========== =========== =========== =========== ===========
Revenues
------------------------------------------------------------- Pre-Tax Net
Earned Investment Income Income
(dollars in thousands) Premiums Income Other Total (Loss) (Loss)
-------- ------ ----- ----- ------ ------
For the nine months
ended September 30, 2003:
Specialty $ 810,534 $ 50,366 $ -- $ 860,900 $ 150,707 $ 99,444
Alternative Markets 290,916 28,738 76,854 396,508 63,053 41,844
Reinsurance 557,254 38,896 -- 596,150 37,283 25,741
Regional 634,683 32,940 -- 667,623 107,171 71,220
International 48,787 4,792 -- 53,579 4,889 3,487
Discontinued Business -- -- -- -- -- --
Corporate and
eliminations -- (1,873) 1,359 (514) (69,588) (37,310)
Realized gains -- -- 60,506 60,506 60,506 39,586
----------- ----------- ----------- ----------- ----------- -----------
Consolidated $ 2,342,174 $ 153,859 $ 138,719 $ 2,634,752 $ 354,021 $ 244,012
=========== =========== =========== =========== =========== ===========
For the nine months
ended September 30, 2002:
Specialty (1) $ 525,174 $ 38,552 $ -- $ 563,726 $ 89,972 $ 58,424
Alternative Markets 157,901 27,720 62,882 248,503 44,861 30,097
Reinsurance (1) 246,005 31,567 (6) 277,566 17,555 10,546
Regional 512,067 32,930 -- 544,997 67,736 40,437
International 74,357 3,665 (2) 78,020 (2,775) (2,442)
Discontinued Business 44,121 3,817 -- 47,938 (7,936) (5,158)
Corporate and
eliminations -- (1,219) 1,219 -- (59,108) (29,446)
Realized losses -- -- (2,858) (2,858) (2,858) (144)
----------- ----------- ----------- ----------- ----------- -----------
Consolidated $ 1,559,625 $ 137,032 $ 61,235 $ 1,757,892 $ 147,447 $ 102,314
=========== =========== =========== =========== =========== ===========
(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)
September 30, 2003
6. INDUSTRY SEGMENTS (continued)
Identifiable assets by segment are as follows (dollars in thousands):
September 30, December 31,
2003 2002
---- ----
Specialty $ 3,051,890 $ 2,271,105
Alternative Markets 1,451,954 1,197,977
Reinsurance 3,161,981 2,431,429
Regional 1,932,837 1,590,913
International 149,849 126,528
Discontinued Business 142,795 162,754
Corporate other and eliminations (1,015,970) (749,383)
------------- ------------
Consolidated $ 8,875,336 $ 7,031,323
============= ============
7. W. R. BERKLEY INSURANCE (EUROPE), LIMITED
In July 2003, the Company formed a new consolidated subsidiary, W. R.
Berkley Insurance (Europe), Limited ("WRBIEL"), a United Kingdom authorized
insurance company. WRBIEL was initially capitalized through a holding company
structure with $76 million of equity and $59 million of 7.65% notes due June
2023. The Company and Kiln plc own 80% and 20%, respectively, of the equity and
debt of WRBIEL. Kiln plc's share of equity and debt of WRBIEL are reported as
minority interest and debt, respectively, on the Company's consolidated balance
sheet. At September 30, 2003, the minority interest and debt related to WRBIEL
were $15,346,000 and $11,747,000, respectively. The Company acquired a 20.1%
interest in Kiln plc, a U.K. insurance and reinsurance business, in 2002.
8. DEBT
In September 2003, the Company issued $150 million aggregate principal
amount of 5.125% senior notes due September 2010. The notes were issued at
99.216% of their face value amount and the net proceeds to the Company after
expenses were $147,752,000.
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 to the Company after expenses
were $196,683,000.
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.
9. COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES
The Company's subsidiaries are subject to 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.
During the third quarter of 2003, two arbitration hearings in which
subsidiaries of the Company were involved were completed. The Company recorded
an increase in reserves for loss and loss expenses during the third quarter of
2003 of $15 million, which represents the excess of the Company's estimate of
the ultimate cost of the disposition of these matters over amounts previously
accrued.
11
W. R. Berkley Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements (Continued)
September 30, 2003
10. ACCOUNTING CHANGES
In the second quarter of 2003, the Company adopted Financial Accounting
Standards Board Interpretation No. 46, Consolidation of Variable Interest
Entities ("FIN 46"). FIN 46 provides accounting and disclosure rules for
variable interest entities. A variable interest entity is an entity in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 requires variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risk among the parties
involved. FIN 46 requires disclosures for entities that have either a primary or
significant variable interest in a variable interest entity, 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
are 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.
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 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. In the property casualty insurance
industry, significant periods of time may elapse between the occurrence of an
insured loss, the report of the loss to the insurer and the insurer's payment of
that loss. To recognize liabilities for unpaid losses, either known or unknown,
insurers establish reserves, which is a balance sheet account representing
estimates of future amounts needed to pay claims and related expenses with
respect to insured events which have occurred. Our loss reserves reflect our
best estimates of the cost of settling all such claims.
In general, when a claim is reported, claims personnel establish a
"case reserve" for the estimated amount of the ultimate payment. The estimate
represents an informed judgment based on general reserving practices and
reflects the experience and knowledge of the claims personnel regarding the
nature and value of the specific type of claim. Reserves are also established on
an aggregate basis which provide for losses incurred but not yet reported to the
insurer, potential inadequacy of case reserves, the estimated expenses of
settling claims, including legal and other fees and general expenses of
administering the claims adjustment process, and a provision for potentially
uncollectible reinsurance. Reserves are established based upon the then current
legal interpretation of coverage provided.
In examining reserve adequacy, several factors are considered in
addition to the economic value of losses. These factors include historical data,
legal developments, changes in social attitudes and economic conditions,
including the effects of inflation. The actuarial process relies on the basic
assumption that past experience, adjusted judgmentally for the effects of
current developments and anticipated trends, is an appropriate basis for
predicting future outcomes. Reserve amounts are necessarily based on
management's informed estimates and judgments using data currently available. As
additional experience and other data become available and are reviewed, these
estimates and judgments are revised. This may result in increases or decreases
to reserves for insured events of prior years. The reserving process implicitly
recognizes the impact of inflation and other factors affecting loss costs by
taking into account historical claim patterns and perceived trends.
Reserves do not represent an exact calculation of liability. Rather,
reserves represent an estimate of what management expects the ultimate
settlement and claim administration will cost. While the methods for
establishing the reserves are well tested over time, some of the major
assumptions about anticipated loss emergence patterns are subject to
unanticipated fluctuation. 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
inflation, judicial and litigation trends, reinsurance coverage and legislative
changes.
13
The inherent uncertainties of estimating reserves are greater for
certain types of liabilities, where long periods of time elapse before a
definitive determination of liability is made. In periods with increased
economic volatility, it becomes more difficult to accurately predict claim
costs. 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 pre-tax income for
the period would decrease by a corresponding amount.
Each of the Company's major operating units has an actuarial staff that
has primary responsibility for assessing loss reserves. The Company's corporate
actuaries review the analyses prepared by its subsidiaries' actuaries and also
perform their own loss reserve reviews for most units. In addition, for certain
operating units, the Company engages independent actuaries to perform an annual
review and evaluation of loss reserves.
On a regular basis, the actuaries use a variety of actuarial techniques
and methods in estimating its ultimate liability for losses and loss expenses.
These methods include paid loss development, incurred loss development, paid and
incurred Bornhuetter-Ferguson methods and frequency and severity methods. This
actuarial data is analyzed by line of business, coverage, and accident or policy
year, as appropriate, for each operating unit. Industry loss experience is also
used to supplement the Company's own data in selecting "tail factors" and in
areas where the Company's own data is limited.
For those operating units where the actuarial analysis has been
substantially completed at the time the financial statements are prepared, the
loss reserves included in the financial statements are based upon that analysis.
For those operating units where the actuarial analysis requires additional time
to complete, the Company accrues loss reserves based upon the most recent
actuarially indicated loss ratios, adjusted as necessary to reflect known events
or unusual claim activity since those indications were made.
Management determines the loss reserves included in the Company's
financial statements based on the actuarial estimates contained in the actuarial
analyses. However, to the extent not already reflected in the actuarial
analyses, management also considers qualitative factors that may affect the
ultimate loss reserves, to determine its best estimate of the loss reserves.
These qualitative considerations include, among others, the impact of
re-underwriting initiatives, changes in the mix of business, changes in
distribution sources and changes in terms and conditions. Examples of changes in
terms and conditions that can have a significant impact on reserve levels are
the use of aggregate policy limits, the expansion of coverage exclusions,
whether or not defense costs are within policy limits and changes in deductibles
and attachment points.
14
Net losses and loss expenses for the nine months ended September 30,
2003 and the year ended December 31, 2002 included increases in estimates for
claims occurring in prior years of $175,000,000 and $174,000,000, respectively.
The Company, along with the property casualty insurance industry in general, has
experienced higher than expected loss costs for certain business written from
1998 to 2001. Following is a summary of the increases in estimates for claims
occurring in prior years for the indicated periods (dollars in thousands):
Nine Months
Ended Year Ended
September 30, December 31,
2003 2002
---- ----
Reserves for losses and loss expenses at beginning of
2003 and 2002, respectively $ 3,168,000 $ 2,764,000
Increase in estimates for claims occurring
in prior years, net of reinsurance:
Casualty reinsurance $ 47,000 $ 47,000
Excess and surplus lines 48,000 30,000
Workers' compensation 22,000 40,000
Professional liability 28,000 31,000
Fidelity and surety reinsurance 14,000 14,000
Other 16,000 12,000
------------- ------------
Total $ 175,000 $ 174,000
============= ============
In 2002 and 2003, the Company increased its estimates of the ultimate
loss costs for casualty reinsurance risks written between 1998 and 2001
primarily as a result of higher than expected claims reported by ceding
companies. Approximately half the increase in estimates for claims occurring in
prior years that was recognized in 2003 related to several large accounts. The
Company sets its initial loss estimates based principally upon information
obtained during the underwriting process and adjusts these estimates as
additional information becomes available. As certain large contracts have
matured, the Company has adjusted its loss estimates upward to reflect the known
loss experience and has revised its expectations regarding the level of ultimate
losses to reflect a higher level of known losses as well as a pattern of delayed
loss reporting by some ceding companies. The Company analyzes its treaty
reinsurance business and sets reinsurance reserves each quarter on a
treaty-by-treaty basis, rather than in the aggregate for the entire reinsurance
business. The Company believes this method provides a better estimate of
required reserves, as the Company is able to promptly identify changes in
underlying trends experienced by individual ceding companies and adjust its
reserves as necessary.
The Company increased its estimates of ultimate costs for excess and
surplus lines casualty business written in prior years to recognize certain
recently identified trends in the development of losses and loss expenses. These
trends include a substantial increase in legal expenses incurred in the defense
of claims, in particular for claims with multiple claimants in multiple states.
For some policies, the obligation to defend has caused the Company to incur
aggregate legal expenses in excess of policy limits, which was unanticipated in
both pricing and reserving these exposures. In addition, the Company identified
certain recent changes in the claims reporting pattern that suggest that claim
costs are emerging over a longer period of time and at a higher level than in
the past. Prior year ultimate loss ratios were adjusted upwards to recognize the
estimated impact of such trends.
Ultimate loss costs for workers' compensation business written in prior
years were impacted by a substantial increase in medical cost inflation. This
resulted principally from increased utilization of the health care system by
injured workers and more expensive and higher usage of prescription drugs. The
impact of the increased medical cost trends is especially significant to the
excess workers' compensation business because of the higher severity of claims
and longer time period over which claims are paid.
15
The increase in estimated ultimate loss costs for professional
liability business written in prior years relates primarily to lawyers
professional liability, liability coverage for senior living centers and
employment practices liability. These lines have experienced a higher level of
claim frequency and severity and a longer reporting pattern than anticipated
when initial loss reserves were established. These lines also have a high
incidence of litigated claims, and the reporting patterns have lengthened due to
a more protracted and complex litigation environment.
The increase in estimated ultimate loss costs for fidelity and surety
reinsurance reflects the settlement of several large surety claims during 2002
and 2003, including arbitration resolutions. In addition, the Company has
reserved for certain claims relating to financial guarantee exposures that were
not intended to be covered under the Company's reinsurance policies.
To date, known environmental and asbestos claims have not had a
material impact on the Company's operations. These claims have not materially
impacted the Company because its subsidiaries generally did not insure large
industrial companies that are subject to significant environmental and asbestos
exposures.
RESULTS OF OPERATIONS FOR THE FIRST NINE MONTHS OF 2003 COMPARED TO THE FIRST
NINE MONTHS OF 2002
The Company reported net income of $244 million, or $2.79 per share,
for the nine months ended September 30, 2003 compared with $102 million, or
$1.30 per share, for the corresponding 2002 period. The increase reflects
improved underwriting results and higher investment income and realized
investment gains.
The standard measures of underwriting performance are the loss ratio,
expense ratio and combined ratio. The consolidated loss ratio (losses and loss
expenses incurred expressed as a percentage of premiums earned) decreased to
63.7% from 65.1% in the earlier year period due to higher insurance prices and
improved terms and conditions. The consolidated expense ratio (underwriting
expenses expressed as a percentage of premiums earned) decreased to 28.0% from
30.9% due to a 50% increase in earned premiums with no significant increase in
underwriting expenses other than commissions and premium taxes. The consolidated
combined ratio (sum of loss ratio and expense ratio) decreased to 91.7% from
96.0% in the prior year period.
The Company analyzes the results of its operations by business segment.
Realized gains and losses, corporate interest expenses and the majority of other
corporate expenses are not allocated to the business segments. Following is a
summary of income before income taxes by business segment for the nine months
ended September 30, 2003 and 2002:
2003 2002
---- ----
Specialty $ 150,707 $ 89,972
Alternative Markets 63,053 44,861
Reinsurance 37,283 17,555
Regional 107,171 67,736
International 4,889 (2,775)
Discontinued - (7,936)
Corporate and unallocated:
Realized investment gains (losses) 61,660 (1,812)
Foreign exchange losses (1,154) (1,046)
Corporate interest expense (38,963) (32,309)
Other corporate expenses (30,625) (26,799)
------------ ----------
Income before income taxes $ 354,021 $ 147,447
============ ==========
16
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 income before
income taxes for the specialty segment for the nine months ended September 30,
2003 and 2002 (dollars in thousands):
2003 2002 % Change
---- ---- --------
Gross premiums written $ 1,057,027 $ 744,325 42%
Net premiums written 958,062 654,751 46%
Premiums earned 810,534 525,174 54%
Net investment income 50,366 38,552 31%
Loss and loss expenses 511,804 331,240 55%
Underwriting expenses 198,204 142,514 39%
Interest expense 185 --
------------ ----------
Income before income taxes $ 150,707 $ 89,972
============ ==========
Loss ratio 63.1% 63.1%
Expense ratio 24.5% 27.1%
Combined ratio 87.6% 90.2%
Net premiums written in 2003 increased by 46% compared with 2002 as a
result of higher prices as well as new business. Net premiums written increased
43% for the Company's three excess and surplus lines companies, 33% for
commercial transportation business and 40% for Monitor Liability Managers, Inc.,
which specializes in directors' and officers' and lawyers professional liability
business. Net premiums written in 2003 also include $19 million from the
Company's new medical excess underwriting unit, Berkley Medical Excess
Underwriters, LLC and $21 million from the Company's new London based unit
concentrating on professional liability, W. R. Berkley Insurance (Europe),
Limited.
The 2003 loss ratio was unchanged as higher prices, more favorable
terms and conditions and lower reinsurance costs were offset by an increase in
prior year reserves, including the estimated ultimate cost of the disposition of
an arbitration matter. The 2003 expense ratio decreased by 2.6 percentage points
to 24.5% as a result of a 54% increase in earned premiums with no significant
increase in expenses other than commissions and premium taxes.
ALTERNATIVE MARKETS The alternative markets segment offers workers' compensation
insurance on an excess and primary basis. The Company also provides fee-based
services to help clients develop and administer self-insurance programs (see
Insurance Services). Following is a summary of income before income taxes for
the alternative markets segment for the nine months ended September 30, 2003 and
2002 (dollars in thousands):
2003 2002 % Change
---- ---- --------
Gross premiums written $ 429,077 $ 248,803 72%
Net premiums written 355,593 215,771 65%
Premiums earned 290,916 157,901 84%
Net investment income 28,738 27,720 4%
Services fees 76,854 62,882 22%
Loss and loss expenses 199,849 105,796 89%
Underwriting expenses 72,280 47,899 51%
Service expenses 61,326 49,943 23%
Interest expense -- 4
------------ ---------
Income before income taxes $ 63,053 $ 44,861
============ ==========
Loss ratio 68.7% 67.0%
Expense ratio 24.8% 30.3%
Combined ratio 93.5% 97.3%
Net premiums written in 2003 increased by 65% 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.
17
The 2003 loss ratio increased 1.7 percentage points to 68.7% primarily
as a result of an increase in loss costs. The Company discounts its liabilities
for excess workers' compensation business because of the long period of time
over which losses are paid. The increase in the loss ratio in 2003 reflects a
lower discount rate for current year business. The expense ratio decreased by
5.5 percentage points to 24.8% due to an 84% increase in premiums earned with no
significant increase in expenses other than commissions and premium taxes.
Service fees in 2003 increased 22% compared with 2002 primarily as a
result of an increase in service fees for managing assigned risk plans in ten
states. The increase in service expenses of 23% compared with 2002 was
commensurate with the increase in service revenues.
REINSURANCE. The Company's reinsurance segment specializes in underwriting
property casualty reinsurance on both a treaty and facultative basis. Following
is a summary of income before income taxes for the reinsurance segment for the
nine months ended September 30, 2003 and 2002 (dollars in thousands):
2003 2002 % Change
---- ---- --------
Gross premiums written $ 768,165 $ 526,757 46%
Net premiums written 635,065 408,521 55%
Premiums earned 557,254 246,005 127%
Net investment income 38,896 31,567 23%
Loss and loss expenses 394,360 178,789 121%
Underwriting expenses 164,462 79,477 107%
Interest expense and other 45 1,751
------------ ----------
Income before income taxes $ 37,283 $ 17,555
============ ==========
Loss ratio 70.8% 72.7%
Expense ratio 29.5% 32.3%
Combined ratio 100.3% 105.0%
Net premiums written in 2003 increased by 55% compared with 2002 as a
result of higher prices and new business. Net premiums written increased 109% to
$193 million for facultative reinsurance, 27% to $166 million for reinsurance of
certain Lloyd's syndicates, 77% to $250 million for standard treaty business and
decreased 32% to $23 million for Berkley Underwriting Partners, LLC. The
increase in facultative net premiums written in 2003 includes $40 million from
the Company's new direct facultative underwriting unit, B F Re Underwriters,
LLC. Premiums earned in 2003 increased 127% compared with 2002, as a result of
substantial growth in net written premiums during 2002 and 2003.
The 2003 loss ratio decreased 1.9 percentage points to 70.8%. 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 partially
offset by the impact of adverse reserve development on prior years. The 2003 and
2002 underwriting results also reflect loss recoveries under the Company's
aggregate reinsurance agreement. (See Note 5 of "Notes to Consolidated Financial
Statements".) The 2003 expense ratio decreased 2.8 percentage points to 29.5%
primarily as a result of a shift in the mix of business and increased volume.
18
REGIONAL. The regional property casualty insurance segment principally provides
commercial property casualty insurance products. Following is a summary of
income before income taxes for the regional segment for the nine months ended
September 30, 2003 and 2002 (dollars in thousands):
2003 2002 % Change
---- ---- --------
Gross premiums written $ 871,962 $ 711,217 23%
Net premiums written 707,930 575,716 23%
Premiums earned 634,683 512,067 24%
Net investment income 32,940 32,930 --
Loss and loss expenses 359,782 313,172 15%
Underwriting expenses 200,670 164,089 22%
------------ ----------
Income before income taxes $ 107,171 $ 67,736
============ ==========
Loss ratio 56.7% 61.2%
Expense ratio 31.6% 32.0%
Combined ratio 88.3% 93.2%
Net premiums written in 2003 increased by 23% compared with 2002. The
increase generally reflects higher prices across all four regional units. The
2003 loss ratio decreased by 4.5 percentage points to 56.7% primarily as a
result of higher prices in 2002 and 2003. Weather-related losses for the
regional segment were $35 million in 2003 compared with $34 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 income before income taxes for the
international segment for the nine months ended September 30, 2003 and 2002
(dollars in thousands):
2003 2002 % Change
---- ---- --------
Gross premiums written $ 54,017 $ 73,236 (26)%
Net premiums written 50,543 65,359 (23)%
Premiums earned 48,787 74,357 (34)%
Net investment income 4,792 3,665 31 %
Loss and loss expenses 25,449 44,154 (42)%
Underwriting expenses 20,563 35,263 (42)%
Other expenses 2,678 1,380
------------ ----------
Income (loss) before income taxes $ 4,889 $ (2,775)
============ ==========
Loss ratio 52.2% 59.4%
Expense ratio 42.1% 47.4%
Combined ratio 94.3% 106.8%
Net premiums written in 2003 decreased by 23% 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 12.5 percentage points to 94.3% 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.
19
DISCONTINUED. The discontinued segment consists of regional personal lines and
alternative markets assumed reinsurance, both of which were discontinued in 2001
in order to focus on lines of business in which we expect to be able to achieve
higher returns. Following is a summary of income before income taxes for the
discontinued segment for the nine months ended September 30, 2003 and 2002
(dollars in thousands):
2003 2002
---- ----
Gross premiums written $ -- $ 22,485
Net premiums written -- 2,960
Premiums earned -- 44,121
Net investment income 3,817
Loss and loss expenses -- 42,728
Underwriting expenses -- 13,146
------------ ----------
Loss before income taxes -- $ ( 7,936)
============ ==========
The personal lines and alternative markets assumed reinsurance business
were discontinued in 2001.
CORPORATE INTEREST AND OTHER EXPENSES. Corporate interest expense increased 21%
to $39 million as a result of the issuance of $200 million 5.875% corporate
senior notes in February 2003 and $150 million 5.125% senior notes in September
2003. Other corporate expenses increased 14% to $31 million due to higher
compensation costs including accruals for incentive compensation.
INVESTMENTS. Following is a summary of investing activity for the nine months
ended September 30, 2003 and 2002 (dollars in thousands):
2003 2002 % Change
---- ---- --------
Net investment income $ 153,859 $ 137,032 12%
Average invested assets 5,087,001 3,754,511 35%
Annualized effective yield (1) 4.7% 5.4%
Realized investment gains (losses) 61,660 (1,812)
Change in unrealized gains 12,281 149,157
(1) Represents net investment income (before interest in funds held) expressed
as a percentage of average invested assets.
Net investment income in 2003 increased 12% 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 debt
offerings 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 tax-exempt securities.
Realized investment and foreign currency gains of $61 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.
20
The carrying value of the Company's investment portfolio as of
September 30, 2003 and September 30, 2002 is as follows (dollars in thousands):
September 30, December 31,
2003 2002
---- ----
Cash and cash equivalents $ 1,196,215 $ 594,183
Fixed maturities 4,092,337 3,511,522
Equity securities available for sale 323,988 204,372
Trading account (1) 314,542 306,836
Other investments 103,909 46,187
Due to brokers and clearing organizations (4,253) --
------------- ------------
Total $ 6,026,738 $ 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 September 30, 2003, as compared with December 31, 2002, the fixed
maturity portfolio mix was as follows: U.S. Government securities were 14% (20%
in 2002); state and municipal securities were 44% (29% in 2002); corporate
securities were 13% (19% in 2002); mortgage-backed securities were 24% (27% in
2002); and foreign bonds were 5% in 2003 and 2002.
INCOME TAXES. The effective income tax rate was 30% in 2003 and 35% in 2002. The
effective tax rate in 2003 differs from the federal income tax rate of 35%
primarily because of tax-exempt investment income.
OPERATING RESULTS FOR THE THIRD QUARTER OF 2003 COMPARED TO THE THIRD QUARTER OF
2002
The Company reported net income of $76 million, or $.87 per share, for
the three months ended September 30, 2003 compared with $41 million, or $.52 per
share, for the corresponding 2002 period. Following is a summary of income
before income taxes by business segment for the three months ended September 30,
2003 and 2002 (dollars in thousands):
2003 2002
---- ----
Specialty $ 47,410 $ 34,097
Alternative Markets 18,689 16,880
Reinsurance 17,154 6,729
Regional 40,905 26,736
International 1,887 (2,241)
Discontinued - (3,282)
Corporate and unallocated:
Realized investment gains (losses) 3,383 1,612
Foreign exchange gains (losses) 40 (984)
Corporate interest expense (13,640) (11,011)
Other corporate expenses (7,753) (9,003)
------------- ------------
Income before income taxes $ 108,075 $ 59,533
============= ============
21
Additional information for each business segment is presented below.
SPECIALTY
Gross premiums written $ 386,785 $ 273,394 41%
Net premiums written 350,278 242,558 44%
Premiums earned 297,574 200,699 48%
Net investment income 18,237 14,126 29%
Loss and loss expenses 195,745 129,063 52%
Underwriting expenses 72,471 51,665 40%
Interest expense 185 --
------------- ------------
Income before income taxes $ 47,410 $ 34,097
============= ============
Loss ratio 65.8% 64.3%
Expense ratio 24.4% 25.7%
Combined ratio 90.2% 90.0%
ALTERNATIVE MARKETS
Gross premiums written $ 157,400 $ 102,763 53%
Net premiums written 127,688 89,134 43%
Premiums earned 101,660 61,077 66%
Net investment income 9,675 9,759 (1)%
Service fees 25,475 22,040 16%
Loss and loss expenses 71,672 40,447 77%
Underwriting expenses 25,851 19,464 33%
Service expenses 20,598 16,085 28%
------------- ------------
Income before income taxes $ 18,689 $ 16,880
============= ============
Loss ratio 70.5% 66.2%
Expense ratio 25.4% 31.9%
Combined ratio 95.9% 98.1%
REINSURANCE
Gross premiums written $ 262,411 $ 184,025 43%
Net premiums written 213,189 143,822 48%
Premiums earned 198,145 99,167 100%
Net investment income 12,678 10,883 16%
Loss and loss expenses 137,190 72,348 90%
Underwriting expenses 56,479 30,389 86%
Interest expense -- 584
------------- ------------
Income before income taxes $ 17,154 $ 6,729
============= ============
Loss ratio 69.2% 73.0%
Expense ratio 28.5% 30.6%
Combined ratio 97.7% 103.6%
REGIONAL
Gross premiums written $ 282,133 $ 236,212 19%
Net premiums written 231,951 199,358 16%
Premiums earned 222,389 183,424 21%
Net investment income 10,788 11,723 (8)%
Loss and loss expenses 120,430 107,793 12%
Underwriting expenses 71,842 60,618 19%
------------- ------------
Income before income taxes $ 40,905 $ 26,736
============= ============
Loss ratio 54.2% 58.8%
Expense ratio 32.3% 33.0%
Combined ratio 86.5% 91.8%
22
INTERNATIONAL 2003 2002 % Change
---- ---- --------
Gross premiums written $ 17,551 $ 13,045 35%
Net premiums written 16,571 13,103 26%
Premiums earned 15,812 14,967 6%
Net investment income 1,711 1,502 14%
Loss and loss expenses 8,164 9,290 (12)%
Underwriting expenses 6,196 8,888 (30)%
Other expenses 1,276 532
------------- ------------
Income (loss) before income taxes $ 1,887 $ (2,241)
============= ============
Loss ratio 51.6% 62.1%
Expense ratio 39.2% 59.4%
Combined ratio 90.8% 121.5%
DISCONTINUED 2003 2002
---- ----
Gross premiums written $ -- $ 12,173
Net premiums written -- 15
Premiums earned -- 9,137
Net investment income 801
Loss and loss expenses -- 9,822
Underwriting expenses -- 3,398
------------- ------------
Loss before income taxes $ -- $ (3,282)
============= ============
Net premiums written in 2003 increased 37% as a result of price
increases and new business as discussed above. The 2003 loss ratio decreased by
1.1 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 2.8 percentage points to 27.9% as a result of a 47% increase in
earned premiums compared with a 33% increase in underwriting expenses. Service
revenues in 2003 increased 16% compared with 2002 primarily as a result of an
increase in service fees for managing assigned risk plans in ten states. The
increase in corporate interest expense was a result of the issuance of $200
million 5.875% senior notes in February 2003 and $150 million 5.125% senior
notes in September 2003. The decrease in other corporate expenses reflects lower
compensation costs including a reduction of $2.2 million in the accrual for
deferred compensation cost recorded in prior years.
INVESTMENTS. Following is a summary of investing for the three months ended
September 30, 2003 and 2002 (dollars in thousands):
2003 2002 % Change
---- ---- --------
Net investment income $ 51,678 $ 48,316 7%
Average invested assets 5,526,246 3,934,023 40%
Annualized effective yield 4.4% 5.5%
Realized investment gains 3,383 1,612
Change in unrealized gains (39,218) 134,149
Net investment income in 2003 increased 7% compared with 2002. Average
invested assets increased 40% compared with 2002 as a result of cash flow from
operations and of the proceeds from a secondary stock offering in 2002 and debt
offerings in 2003. The average yield on investments was 4.4% in 2003 compared
with 5.5% 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.
Realized investment and foreign currency gains of $3 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.
23
INCOME TAXES. The effective income tax rate was 28% in 2003 and 33% in 2002. The
effective tax rate differs from the federal income tax rate of 35% primarily
because of tax-exempt investment income.
FINANCING ACTIVITY
In February 2003, the Company issued $200 million aggregate principal
amount of 5.875% senior notes due February 2013. In September 2003, the Company
issued $150 million aggregate principal amount of 5.125% Senior Notes due
September 2010. In July 2003, a subsidiary of the Company issued $12 million
aggregate principal amount of 7.65% notes due June 2023.
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 September 30, 2003, the Company's outstanding debt was $667 million
(face amount). The maturities of the debt are $40 million in 2005, $100 million
in 2006, $89 million in 2008, $150 million in 2010, $200 million in 2013, $76
million in 2022 and $12 million in 2023. The Company also has $195 million (face
amount) of trust preferred securities that mature in 2045.
At September 30, 2003, stockholders' equity was $1,578 million and
total capitalization (stockholders' equity, debt and trust preferred securities)
was $2,431 million. The percentage of the Company's capital attributable to debt
and trust preferred securities was 35% at September 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.
24
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 4.6 years at September 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
The Company's subsidiaries are subject to 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.
During the third quarter of 2003, two arbitration hearings in which
subsidiaries of the Company were involved and each of which concerned coverage
issues were completed. One such matter, involving Firemen's Fund Insurance
Company and Berkley Insurance Company, was decided by a final award dated August
13, 2003. The other arbitration was between Everest Reinsurance Company and
Admiral Insurance Company and a final decision dated October 1, 2003 and a final
award dated November 5, 2003 have been rendered. As a result of these decisions,
the Company recorded an increase in reserves for loss and loss expenses during
the third quarter of 2003 of $15 million, which represents the excess of the
Company's estimate of the ultimate cost of the disposition of these matters over
amounts previously accrued.
25
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number
(4.1) Senior Indenture, dated as of February 14, 2003, between the
Company and The Bank of New York, as Trustee, relating to
$150,000,000 principal amount of the Company's 5.125% Senior
Notes due 2010 (incorporated by reference to Exhibit 4.1 of
the Company's Annual Report on Form 10-K (File No. 1-15202)
filed with the Commission on March 31, 2003).
(4.2) Previously filed with initial filing of this Quarterly Report
on Form 10-Q for the quarterly period ended September 30,
2003. Second Supplemental Indenture, dated as of September 12,
2003, between the Company and The Bank of New York, as
Trustee, relating to $150,000,000 principal amount of the
Company's 5.125% Senior Notes due 2010, including form of the
Notes as Exhibit A. (Incorporated by reference to Exhibit 4.2
of the Company's quarterly report for the period ended
September 30, 2003 on Form 10-Q (File No. 1-15202) filed with
the Commission on November 14, 2003.)
(31.1) Certification of the Chief Executive Officer pursuant to Rule
13a-14(a)/ 15d-14(a).
(31.2) Certification of the Chief Financial Officer pursuant to Rule
13a-14(a)/ 15d-14(a).
(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 September 30, 2003, the Company filed the
following Reports on Form 8-K:
Report dated July 25, 2003 with respect to the press release of the
Company relating to the announcement of the Company's results of operations for
the second quarter of 2003 (under Item 9, for information required by Item 12,
of Form 8-K).
Report dated August 5, 2003 with respect to the press release of the
Company relating to the announcement of a 3-for-2 common stock split to be paid
in the form of a stock dividend on August 27, 2003 to holders of record on
August 18, 2003, as well as the payment of a regular quarterly cash dividend in
the amount of $.07 per share on October 1, 2003 to holders of record on
September 19, 2003 (under Item 5 of Form 8-K).
Report dated September 9, 2003 with respect certain exhibits filed in
connection with the Prospectus Supplement dated September 9, 2003 to the
Prospectus dated June 7, 2002, filed as part of the Registration Statement on
Form S-3 (Registration No. 333-88920; declared effective on June 7, 2002) filed
by the Company with the Securities and Exchange Commission covering Debt
Securities issuable under an Indenture relating Senior Debt Securities, to be
dated as of September 12, 2003, between the Company and The Bank of New York, as
trustee (the "Trustee") (under Item 5 of Form 8-K).
26
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: December 23, 2003 /s/ WILLIAM R. BERKLEY
------------------------------
William R. Berkley
Chairman of the Board and
Chief Executive Officer
Date: December 23, 2003 /s/ EUGENE G. BALLARD
------------------------------
Eugene G. Ballard
Senior Vice President,
Chief Financial Officer
and Treasurer
27