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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______.
Commission file number 0-7849
W. R. BERKLEY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-1867895
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
165 Mason Street, Greenwich, CT 06830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 629-3000
Securities registered pursuant to Section 12(b) of the Act:
Common stock, par value $.20 per share
Rights to purchase Series A Junior Participating Preferred Stock
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
Aggregate market value of voting stock held by non-affiliates of the registrant
based on the closing price of such stock on the New York Stock Exchange as of
March 20, 2002: $1,638,934,635.
Number of shares of common stock, $.20 par value, outstanding as of March 20,
2002: 33,328,607.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 2001 Annual Report to Stockholders for the year ended
December 31, 2001 are incorporated herein by reference in Part II, and portions
of the registrant's definitive proxy statement, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 2001, are
incorporated herein by reference in Part III.
W. R. BERKLEY CORPORATION
ANNUAL REPORT ON FORM 10-K
December 31, 2001
Page
----
SAFE HARBOR STATEMENT 3
PART I
ITEM 1. BUSINESS 4
ITEM 2. PROPERTIES 24
ITEM 3. LEGAL PROCEEDINGS 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 26
ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS
ENDED DECEMBER 31, 2001 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 28
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 29
ITEM 11. EXECUTIVE COMPENSATION 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 32
2
SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K may contain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Any
forward-looking statements contained herein, including statements related to our
outlook for the industry and for the Company's performance for the year 2002 and
beyond, are based upon the Company's historical performance and on current
plans, estimates and expectations. The inclusion of this forward-looking
information should not be regarded as a representation by us or any other person
that the future plans, estimates or expectations contemplated by us will be
achieved. They are subject to various risks and uncertainties, including but not
limited to, the cyclical nature of the property casualty industry, the long-tail
and potentially volatile nature of the reinsurance business, product demand and
pricing, claims development and the process of estimating reserves, the
uncertain nature of damage theories and loss amounts, the increased level of our
retention, natural and man-made catastrophic losses, including as a result of
terrorist activities, the impact of competition, the availability of
reinsurance, the ability of our reinsurers to pay reinsurance recoverables owed
to us, investment results, exchange rate and political risks, legislative and
regulatory developments, changes in the ratings assigned to us by rating
agencies, uncertainty as to reinsurance coverage for terrorist acts,
availability of dividends from our insurance company subsidiaries, our
successful integration of acquired companies or investment in new insurance
ventures, our ability to attract and retain qualified employees and other risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission. These risks could cause actual results of the industry or
the Company's actual results for the year 2002 and beyond to differ materially
from those expressed in any forward-looking statement made by or on behalf of
the Company. Forward-looking statements speak only as of the date on which they
are made.
3
PART I
ITEM 1. BUSINESS
W. R. Berkley Corporation, a Delaware corporation, is an insurance holding
company which, through its subsidiaries, operates in five segments of the
property casualty insurance business: specialty lines of insurance (including
excess and surplus lines and commercial transportation); alternative markets
(including the management of alternative insurance market mechanisms);
reinsurance; regional property casualty insurance; and international. This
structure provides us with the flexibility to respond to local or specific
market conditions and to pursue specialty business niches. It also allows us to
be closer to our customers in order to better understand their individual needs
and risk characteristics. The holding company structure allows us to capitalize
on the benefits of economies of scale through centralized capital, investment
and reinsurance management and actuarial, financial and legal staff support.
Unless otherwise indicated, all references in this Form 10-K to "W. R.
Berkley," "we," "us," "our," the "Company" or similar terms refer to W. R.
Berkley Corporation together with its subsidiaries.
Our specialty insurance, alternative markets and reinsurance operations
are conducted nationwide. Regional insurance operations are conducted primarily
in the Midwest, New England, Southern (excluding Florida) and Mid Atlantic
regions of the United States. International operations are conducted in
Argentina and the Philippines.
During 2001, the Company discontinued its regional personal lines and
alternative markets reinsurance business. These discontinued businesses, which
were previously reported in the regional and reinsurance segments, are now
reported collectively as a separate Discontinued Business segment. Segment
information for the prior period has been restated to reflect these changes.
Net premiums written as reported, based on accounting principles generally
accepted in the United States of America ("GAAP"), for each of the past five
years were as follows:
Year Ended December 31,
---------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Amounts in thousands)
Net premiums written:
Specialty insurance operations $ 527,502 $ 285,525 $ 260,380 $ 253,472 $ 219,272
Alternative markets operations 151,942 98,001 73,089 66,418 57,848
Reinsurance operations 236,784 276,640 309,180 269,635 206,652
Regional insurance operations 598,149 499,526 497,041 486,213 467,793
International operations 150,090 118,981 86,172 75,106 42,079
Discontinued business 193,629 227,571 201,857 195,410 183,997
---------- ---------- ---------- ---------- ----------
Total $1,858,096 $1,506,244 $1,427,719 $1,346,254 $1,177,641
========== ========== ========== ========== ==========
Percentage of net premiums written:
Specialty insurance operations 28.4% 19.0% 18.2% 18.8% 18.6%
Alternative markets operations 8.2 6.5 5.1 4.9 4.9
Reinsurance operations 12.7 18.4 21.7 20.0 17.6
Regional insurance operations 32.2 33.1 34.9 36.2 39.7
International operations 8.1 7.9 6.0 5.6 3.6
Discontinued business 10.4 15.1 14.1 14.5 15.6
---------- ---------- ---------- ---------- ----------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ==========
The following sections briefly describe our insurance segments. All of the
domestic insurance subsidiaries have an A.M. Best Company, Inc. ("A.M. Best")
rating of "A (Excellent)", other than Admiral Insurance Company, which has a
rating of "A+ (Superior)." A.M. Best's ratings are based upon factors of concern
to policyholders, insurance agents and brokers and are not directed toward the
protection of investors. A.M. Best states: "Best's Ratings reflect [its] opinion
as to the relative financial strength and performance of each insurer in
comparison with others, based on [its] analysis of the information provided to
[it]. These ratings are not a warranty of an insurer's current or future ability
to meet its
4
contractual obligations." A.M. Best reviews its ratings on a periodic basis, and
ratings of the Company's subsidiaries are therefore subject to change.
SPECIALTY INSURANCE OPERATIONS
Our specialty segment underwrites complex and sophisticated third-party
liability risks, principally within the excess and surplus ("E&S") lines,
professional liability, commercial transportation and surety markets. The
specialty business is conducted through six operating units. The different
companies within the segment are divided along the different customer bases and
product lines which they serve. The specialty units deliver their products
through a variety of distribution channels depending on the customer base and
particular risks insured. The customers in this segment are highly diverse.
Admiral Insurance Company ("Admiral") specializes in E&S coverages,
including general liability, professional liability and property. Admiral
insures risks requiring specialized treatment not available in the conventional
market, with coverage designed to meet the specific needs of the insured.
Business is received from wholesale brokers via retail agents, whose clients are
the insureds. Admiral operates primarily on a non-admitted basis. Admiral's
business is obtained on a nationwide basis from non-exclusive brokers and
coverages are provided to a wide variety of customers.
Nautilus Insurance Company ("Nautilus") insures E&S risks which involve a
lower degree of expected severity than those covered by Admiral. Nautilus
obtains its business nationwide from non-exclusive general agents, some of which
also provide business to Admiral. A substantial portion of Nautilus' business is
written on a binding authority basis, subject to certain contractual
limitations. Nautilus operates primarily on a non-admitted basis.
Monitor Liability Managers ("Monitor") is our professional liability
underwriting unit. Monitor writes primarily directors' and officers' and
lawyers' professional coverages. Monitor also writes management liability and
employment practices liability insurance. Its business is developed nationally
through a combination of wholesale and retail sources.
Carolina Casualty Insurance Company ("Carolina") writes liability,
physical damage and cargo insurance for the transportation industry,
concentrating on long-haul trucking companies. It also writes public
transportation insurance for various for-hire risks. Carolina's business is
obtained nationwide from agents and brokers.
Clermont Specialty Managers ("Clermont") writes specialty commercial lines
in the New York City metropolitan area. These include package insurance programs
for luxury condominium, cooperative and rental apartment buildings and
restaurants. It also writes motorcycle coverages in upstate New York. Product
distribution is through retail agents and wholesale brokers.
Monitor Surety Managers ("Surety") writes surety bonds, primarily serving
the bonding needs of mid-sized contractors. It operates five regional offices
producing business mostly from retail agents specializing in surety.
The following table sets forth the percentage of direct premiums written
by each specialty unit:
Year Ended December 31,
------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Admiral 40.7% 39.5% 36.6% 37.7% 37.9%
Carolina 19.5 10.9 18.1 20.5 18.7
Nautilus 17.9 24.8 24.7 23.0 24.7
Monitor 16.4 17.8 14.2 12.9 12.8
Clermont 3.7 4.5 4.2 4.0 4.1
Surety 1.8 2.5 2.2 1.9 1.8
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
5
The following table sets forth the percentages of direct premiums written,
by line, by our specialty insurance operations:
Year Ended December 31,
------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
General Liability 42.4% 40.5% 30.5% 28.2% 34.1%
Automobile Liability 15.2 10.6 18.3 19.0 17.7
Professional Liability 11.3 14.5 16.5 16.9 14.7
Fire and Allied Lines 9.1 9.2 7.7 7.1 7.5
Directors' and Officers' Liability 6.6 7.0 6.6 7.7 8.1
Commercial Multi-Peril 4.4 4.6 3.3 3.1 3.0
Automobile Physical Damage 3.8 4.3 6.4 6.1 4.9
Medical Malpractice 2.9 3.7 6.0 6.1 4.0
Surety 1.6 2.5 2.1 2.0 1.9
Inland Marine 2.0 1.6 1.9 1.8 1.5
Workers' Compensation 0.5 0.7 0.6 1.9 2.5
Other 0.2 0.8 0.1 0.1 0.1
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
ALTERNATIVE MARKETS
Our alternative markets operations specialize in developing, insuring,
reinsuring and administering self-insurance programs and other alternative risk
transfer mechanisms. Our clients include employers, employer groups, insurers,
and alternative markets funds seeking less costly, more efficient ways to manage
exposure to risks. In addition to providing insurance, the alternative markets
segment also provides a wide variety of fee-based services, including consulting
and administrative services.
Each of our alternative markets operating units is involved in risk
management and is organized according to one of the following product areas:
insuring excess workers' compensation, or EWC, risks; insuring primary workers'
compensation risks; and providing non-risk bearing administrative services
nationwide.
Excess workers' compensation. We market and underwrite EWC insurance and
related risk management services, including a full range of consulting services.
EWC insurance provides coverage to self-insured employers and employer groups
once their losses exceed a specified retention amount. We offer a complete line
of products, including specific and aggregate insurance policies, and surety
bonds.
Insurance services. Our alternative markets insurance service operations
offer a full range of alternative solutions customized to meet risk financing
needs for various structures, such as assigned risk plans, captive insurance
companies, government pools, risk retention groups, self-funded plans and
specialty insurance company programs.
Interaction with clients through consulting and other advisory services is
central to marketing efforts in the alternative markets. Our services include
property casualty and workers' compensation third-party administration, claims
adjustment and management, employee benefit consulting, accounting services,
insurance and reinsurance risk transfer, loss control and safety consulting,
management information systems, regulatory compliance and relations, risk
management consulting, alternative markets plan management, statistical
analysis, underwriting and rating, and policy issuance.
Primary workers'compensation. Primary workers' compensation insurance is
provided in California and North Carolina. In California, insurance coverage is
provided to owner-managed small employers. In North Carolina, coverage is
offered primarily to employers moving out of association or individual
self-insurance programs.
6
The following table sets forth the percentages of revenues, by major source of
business, of our alternative markets operations:
Year Ended December 31,
------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Excess Workers' Compensation 36.5% 41.3% 41.8% 50.0% 56.3%
Insurance Services 32.3 35.1 39.1 41.5 43.7
Primary Workers' Compensation 31.2 23.6 19.1 8.5 --
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
REINSURANCE OPERATIONS
Our reinsurance operations consist of four operating units, which
specialize in underwriting property casualty reinsurance on both a treaty and a
facultative basis.
Treaty. Our Property Casualty Treaty Division is our largest reinsurance
unit in terms of personnel and premiums written. This division is committed
exclusively to the broker market segment of the treaty reinsurance industry. It
functions as a traditional reinsurer in specialty and standard reinsurance
lines.
In 2001, we continued to focus on reinsurance lines of business which are
more specialty focused and where knowledge and expertise in a specific area is
valued over the capital scale of the reinsurance provider. It is in those
situations where we can best utilize our intellectual capital to drive the
underwriting process. We also continued redirecting our treaty business toward
casualty excess of loss treaties. These changes have allowed and will continue
to allow us to have more significant participations and greater influence over
the terms and conditions of coverage.
Facultative. Our Facultative Division specializes in individual
certificate and program facultative business. Its highly experienced
underwriters seek to offset the underwriting and pricing cycles in the
underlying insurance business by developing risk management solutions and
through superior risk selection. We develop this business through brokers and on
a direct basis where the client does not choose to use an intermediary. The
Facultative Division also writes excess and surplus lines through its affiliate,
Vela Insurance Services, Inc.
Fidelity and Surety. Our Fidelity and Surety Division operates as a lead
reinsurer in a niche market of the property casualty industry where its highly
specialized knowledge and expertise are essential to assess the needs of
fidelity and surety primary writers. Business is marketed principally through
brokers as well as directly to clients not served by intermediaries. Commencing
January 1, 2002, we ceased writing business with exposures to large national
risks and will focus primarily on our regional surety reinsurance business.
Program Business. Our Program Business Division oversees managing general
underwriting (MGU) program business, most recently through Berkley Underwriting
Partners, LLC.
The following table sets forth the percentages of gross premiums written,
by line, by our reinsurance operations:
Year Ended December 31,
------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Treaty:
Casualty and other 33.8% 41.3% 41.8% 39.7% 38.7%
Property and related lines 4.3 11.4 15.1 19.1 16.1
Professional and specialty 7.9 9.1 10.1 8.4 5.5
Latin American and Caribbean 0.5 2.0 6.2 11.2 13.8
----- ----- ----- ----- -----
Total Treaty 46.5 63.8 73.2 78.4 74.1
----- ----- ----- ----- -----
Facultative:
Facultative reinsurance 23.9 14.4 12.4 12.8 13.5
Excess and surplus lines 14.6 5.1 2.5 2.0 1.9
Fidelity and Surety 5.9 7.5 7.7 6.8 10.5
Program Business 9.1 9.2 4.2 -- --
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
7
The following table sets forth the percentage of gross premiums written,
by property versus casualty business, by our reinsurance operations:
Year Ended December 31,
------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Property 8.4% 14.4% 20.6% 31.4% 32.7%
Casualty 91.6 85.6 79.4 68.6 67.3
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
REGIONAL INSURANCE OPERATIONS
Our regional subsidiaries provide commercial insurance products to
customers primarily in 23 states. Key clients of this segment are
small-to-mid-sized businesses and governmental entities. The regional
subsidiaries are organized geographically, which provides them with the
flexibility to adapt to local market conditions, while enjoying the superior
administrative capabilities and financial strength of W. R. Berkley. Our
regional insurance operations are conducted through four geographic regions
based on markets served: Midwest, New England, Southern and Mid Atlantic.
Our regional insurance subsidiaries primarily sell our insurance products
through a network of non-exclusive independent agents who are compensated on a
commission basis. Our regional companies underwrite all major commercial lines.
The following table sets forth the direct premiums written by each region:
Year Ended December 31,
------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Midwest 42.3% 42.9% 45.1% 45.9% 46.3%
New England 26.7 24.7 21.5 20.3 20.5
Southern 15.8 16.4 14.4 14.3 14.8
Mid Atlantic 15.2 16.0 19.0 19.5 18.4
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
The following table sets forth the percentages of direct premiums written,
by line, by our regional insurance operations:
Year Ended December 31,
------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Commercial Multi-Peril 29.9% 28.9% 28.1% 26.9% 27.0%
Workers' Compensation 24.3 22.7 22.8 24.2 25.4
Auto Liability 17.9 18.9 18.7 18.6 17.8
Auto Physical Damage 8.3 9.0 9.0 8.5 8.0
General Liability 8.3 8.7 8.7 8.8 8.7
Fire and Allied Lines 4.3 4.3 4.9 5.2 5.6
Inland Marine 3.9 4.1 4.4 4.2 3.9
Surety 1.0 1.0 0.9 0.9 0.5
Ocean Marine 0.9 1.0 0.9 0.8 0.7
Other 1.2 1.4 1.6 1.9 2.4
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
8
The following table sets forth the percentages of direct premiums written,
by state, by our regional insurance operations:
Year Ended December 31,
-----------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
State
Kansas 7.9% 5.0% 4.8% 5.0% 5.1%
Maine 7.9 8.0 6.8 8.0 9.2
New Hampshire 7.8 7.2 6.5 6.3 6.6
Massachusetts 7.2 5.8 4.6 2.9 0.3
Texas 6.3 6.0 5.3 5.3 5.6
Iowa 5.5 6.5 6.4 6.8 7.4
Nebraska 5.4 5.3 5.1 4.8 5.3
North Carolina 4.9 5.4 6.0 6.1 5.6
Minnesota 3.7 4.1 5.5 6.2 5.9
Vermont 3.7 3.2 3.0 3.2 3.6
Colorado 3.6 4.4 3.7 3.5 3.5
Missouri 3.5 3.7 4.4 4.4 4.7
South Dakota 3.4 2.9 3.0 3.1 3.6
Virginia 3.4 3.5 3.6 4.1 4.1
Wisconsin 2.9 2.7 3.0 3.0 3.0
Mississippi 2.5 3.1 3.1 4.0 4.3
Pennsylvania 2.4 2.1 3.7 3.3 3.9
Arkansas 2.3 2.7 2.2 2.3 2.4
Illinois 2.3 2.7 3.0 3.4 3.6
South Carolina 1.6 2.0 1.9 2.0 1.4
Tennessee 1.6 2.0 2.0 1.7 1.2
Oklahoma 1.5 1.3 1.0 0.8 0.8
Idaho 1.3 1.2 1.5 1.9 1.4
Other 7.4 9.2 9.9 7.9 7.5
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
INTERNATIONAL OPERATIONS
In 1995, the Company and Northwestern Mutual Life International, Inc.
("NML"), a wholly-owned subsidiary of The Northwestern Mutual Life Insurance
Company, entered into a joint venture to form Berkley International, LLC
("Berkley International"), a limited liability company. We agreed to contribute
up to $65 million to Berkley International in exchange for a 65% membership
interest and NML agreed to contribute up to $35 million to Berkley International
in exchange for a 35% membership interest.
Applying the same approach that we take for our domestic businesses, we
believe that decentralized control is key to the success of our international
effort. For example, we hire local insurance executives who have specialized
knowledge of their customers, markets and products, and we link their
compensation to meeting performance objectives.
International operations are conducted in Argentina and the Philippines.
In Argentina, we offer commercial and personal property casualty insurance. Our
Argentine business has also issued both universal life insurance and long
duration contracts that, because of recent economic developments in Argentina,
are subject to greater investment, political and economic risks (See "Certain
Factors That May Affect Future Results.") In the Philippines, we provide savings
and life products to customers, including endowment policies to pre-fund
education costs and retirement income.
9
The following table set forth the percentages of direct premiums for our
international operations:
Year Ended December 31,
------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Property casualty 77.9% 72.3% 72.3% 85.5% 96.3%
Life 12.4 14.7 16.5 10.9 3.7
----- ----- ----- ----- -----
Total Argentina 90.3 87.0 88.8 96.4 100.0
Philippines - Life 9.7 13.0 11.2 3.6 --
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
DISCONTINUED BUSINESS
In the third quarter of 2001, the Company discontinued its personal lines
business, both homeowners and private passenger automobile, and the alternative
markets division of its reinsurance segment, by not renewing existing policies
or treaties and ceasing to write new business.
The following table set forth the percentages of premiums for our inactive
business:
Year Ended December 31,
------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Personal lines 61.8% 61.8% 74.3% 77.7% 82.6%
Alternative markets
reinsurance 38.2 38.2 25.7 22.3 17.4
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
RECENT DEVELOPMENTS
Effective January 1, 2002, the Company entered into quota share
reinsurance contracts with MAP Capital Limited, a Lloyd's corporate member, and
two Lloyd's syndicates managed by Kiln plc. MAP Capital Limited and the Lloyd's
syndicates are expected to underwrite, on a worldwide basis, a broad range of
mainly short-tail classes of business.
The Company recently announced the formation of Berkley Medical Excess
Underwriters, LLC and Berkley Capital Underwriters, LLC. Berkley Medical Excess
Underwriters will offer excess coverage for healthcare providers that are either
self-insured or maintain their own captive facilities and reinsurance coverage
for primary insurance companies that provide medical malpractice coverage to
physicians and other commercial healthcare providers. Berkley Capital
Underwriters will offer a proportional form of reinsurance for both domestic and
international insurance operations with a strong emphasis on commercial and
specialty casualty lines of insurance. Berkley Capital Underwriters will
complement the Company's existing treaty operation, Signet Star Re, LLC, which
primarily offers excess of loss treaty protection.
10
Results by Industry Segment
Summary financial information about our operating segments is presented on
a GAAP basis in the following table (all amounts include realized capital gains
and losses):
Year Ended December 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Amounts in thousands)
Specialty Insurance
Total revenues $ 440,650 $ 324,859 $ 309,068 $ 311,955 $ 284,321
Income before income taxes 28,806 31,836 39,261 85,889 68,088
Alternative Markets
Total revenues 234,121 189,795 169,221 162,682 151,848
Income before income taxes 32,971 35,315 20,593 34,241 31,969
Reinsurance
Total revenues 281,490 349,164 341,940 297,144 242,086
Income (loss) before income taxes (54,502) 27,760 14,091 33,858 42,193
Regional Insurance
Total revenues 614,924 565,327 541,368 526,099 487,098
Income (loss) before income taxes 44,403 8,761 (78,895) (3,736) 57,995
International
Total revenues 137,683 118,234 93,878 80,287 45,360
Income (loss) before income taxes (6,082) 6,853 3,535 (7,017) (3,566)
Discontinued business
Total revenues 232,403 232,392 213,816 199,673 180,929
Loss before income taxes (133,480) (9,936) (14,141) (18,528) (7,607)
11
The table below represents summary underwriting ratios, on a GAAP
accounting basis for our insurance companies and the insurance industry. The
combined ratio represents a measure of underwriting profitability, excluding
investment income. A number in excess of 100 indicates an underwriting loss; a
number below 100 indicates an underwriting profit:
Year Ended December 31,
-------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Specialty Insurance Operations
Loss ratio 71.4% 73.2% 68.0% 61.9% 62.8%
Expense ratio 31.1 33.6 35.2 31.5 35.8
----- ----- ----- ----- -----
Combined ratio 102.5% 106.8% 103.2% 93.4% 98.6%
===== ===== ===== ===== =====
Alternative Markets Operations
Loss ratio 76.5% 70.2% 65.8% 61.4% 61.4%
Expense ratio 32.9 38.7 41.5 43.4 39.2
----- ----- ----- ----- -----
Combined ratio 109.4% 108.9% 107.3% 104.8% 100.6%
===== ===== ===== ===== =====
Reinsurance Operations
Loss ratio 104.4% 73.2% 76.0% 74.3% 69.2%
Expense ratio 36.8 33.2 33.4 31.6 31.7
----- ----- ----- ----- -----
Combined ratio 141.2% 106.4% 109.4% 105.9% 100.9%
===== ===== ===== ===== =====
Regional Insurance Operations
Loss ratio 67.2% 75.5% 87.1% 76.4% 64.5%
Expense ratio 35.0 35.1 37.5 36.7 35.1
----- ----- ----- ----- -----
Combined ratio 102.2% 110.6% 124.6% 113.1% 99.6%
===== ===== ===== ===== =====
International Operations
Loss ratio 61.4% 62.1% 55.4% 59.7% 59.8%
Expense ratio 40.6 41.7 47.5 59.9 62.6
----- ----- ----- ----- -----
Combined ratio 102.0% 103.8% 102.9% 119.6% 122.4%
===== ===== ===== ===== =====
Discontinued Business
Loss ratio 131.4% 75.9% 77.0% 76.0% 73.3%
Expense ratio 33.0 32.8 34.0 37.4 35.2
----- ----- ----- ----- -----
Combined ratio 164.4% 108.7% 111.0% 113.4% 108.5%
===== ===== ===== ===== =====
Total
Loss ratio 82.1% 73.4% 76.8% 71.6% 66.1%
Expense ratio 34.4 34.8 36.5 36.5 35.8
----- ----- ----- ----- -----
Combined ratio 116.5% 108.2% 113.3% 108.1% 101.9%
===== ===== ===== ===== =====
12
Investments
Investment results before income tax effects were as follows:
Year Ended December 31,
------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Amounts in thousands)
Average investments, at cost $ 3,271,583 $3,032,281 $ 3,045,391 $2,996,707 $2,873,730
=========== ========== =========== ========== ==========
Investment income,
before expenses $ 206,656 $ 219,955 $ 198,556 $ 206,065 $ 205,812
=========== ========== =========== ========== ==========
Percent earned on
average investments 6.3% 7.3% 6.5% 6.9% 7.2%
=========== ========== =========== ========== ==========
Realized gains (losses) $ (11,494) $ 8,364 $ (6,064) $ 25,400 $ 13,186
=========== ========== =========== ========== ==========
Change in unrealized investment
gains (losses) (1) $ 19,783 $ 117,637 $ (173,084) $ 22,147 $ 66,306
=========== ========== =========== ========== ==========
(1) The change in unrealized investment gains (losses) represents the
difference between fair value and cost of investments at the beginning and
end of the calendar year, including investments carried at cost.
The percentages of the fixed maturity portfolio categorized by contractual
maturity, based on fair value, on the dates indicated, are set forth below.
Actual maturities may differ from contractual maturities because certain issuers
have the right to call or prepay obligations.
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
1 year or less 3.2% 3.5% 3.0% 1.7% 4.4%
Over 1 year through 5 years 20.5 22.1 16.4 16.0 26.4
Over 5 years through 10 years 23.2 21.8 26.0 24.4 19.1
Over 10 years 26.2 27.7 34.6 37.2 29.2
Mortgage-backed securities 26.9 24.9 20.0 20.7 20.9
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Loss and Loss Adjustment Expense Reserves
In the property casualty insurance industry, it is not unusual for
significant periods of time to 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, 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 current estimates of the ultimate cost of closing
outstanding claims. Other than our excess workers' compensation business and the
workers' compensation portion of our reinsurance business, as discussed below,
we do not discount our reserves for financial reporting purposes.
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 ("LAE"), and a provision for
potentially uncollectible reinsurance.
In examining reserve adequacy, several factors are considered, including
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 events. 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
13
events of prior years. The reserving process implicitly recognizes the impact of
inflation and other factors affecting loss costs by taking into account changes
in historical claim patterns and perceived trends. There is no precise method to
evaluate the impact of any specific factor on the adequacy of reserves, because
the ultimate cost of closing claims is influenced by numerous factors.
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 fluctuation. In particular, high levels of jury verdicts against
insurers, as well as judicial decisions which "re-formulate" policies to expand
coverage to include previously unforeseen theories of liability, e.g., those
regarding pollution, other environmental exposures or man-made catastrophes,
have produced unanticipated claims and increased the difficulty of estimating
the loss and loss adjustment expense reserves.
We discount our liabilities for excess workers' compensation business and
the workers' compensation portion of our reinsurance business because of the
long period of time over which losses are paid. Discounting is intended to
appropriately match losses and loss expenses to income earned on investment
securities supporting the liabilities. The expected losses and loss expense
payout pattern subject to discounting was derived from the Company's loss payout
experience and is supplemented with data compiled from insurance companies
writing similar business. The liabilities for losses and loss expenses have been
discounted using risk-free discount rates determined by reference to the U.S.
Treasury yield curve for non-proportional business, and at the statutory rate
for proportional business. The discount rates range from 4.3% to 6.5% with a
weighted average rate of 5.5%. The aggregate net discount, after reflecting the
effects of ceded reinsurance, is $243,000,000, $223,000,000 and $196,000,000 at
December 31, 2001, 2000 and 1999, respectively.
To date, known asbestos and environmental claims at our insurance company
subsidiaries have not had a material impact on our operations. Environmental
claims have not materially impacted us because these subsidiaries generally did
not insure the larger industrial companies which are subject to significant
environmental exposures.
Our net reserves for losses and loss adjustment expenses relating to
asbestos and environmental claims were $24,794,000 and $29,422,000 at December
31, 2001 and 2000, respectively. The Company's gross reserves for losses and
loss adjustment expenses relating to asbestos and environmental claims were
$43,405,000 and $57,167,000 at December 31, 2001 and 2000, respectively. Net
incurred losses and loss expenses (recoveries) for reported asbestos and
environmental claims were approximately ($4,503,000), $1,602,000 and $1,371,000
in 2001, 2000 and 1999, respectively. Net paid losses and loss expenses
(receivables) for reported asbestos and environmental claims were approximately
$125,000, $3,123,000 and $3,819,000 in 2001, 2000 and 1999, respectively. The
estimation of these liabilities is subject to significantly greater than normal
variation and uncertainty because it is difficult to make a reasonable actuarial
estimate of these liabilities due to the absence of a generally accepted
actuarial methodology for these exposures and the potential affect of
significant unresolved legal matters, including coverage issues as well as the
cost of litigating the legal issues. Additionally, the determination of ultimate
damages and the final allocation of such damages to financially responsible
parties are highly uncertain.
The following table sets forth the components of our gross loss reserves
and net provision for losses and loss expense (amounts in thousands):
2001 2000 1999
---- ---- ----
Gross Reserves:
Property casualty $2,763,850 $2,475,805 $2,340,890
Life 53,832 58,112 20,348
---------- ---------- ----------
Total $2,817,682 $2,533,917 $2,361,238
========== ========== ==========
Net provision for losses and loss expense:
Property casualty $1,360,683 $1,072,632 $1,070,913
Life 19,817 21,779 14,913
---------- ---------- ----------
Total $1,380,500 $1,094,411 $1,085,826
========== ========== ==========
14
The table below provides a reconciliation of the beginning and ending
property casualty reserves, on a gross of reinsurance basis (amounts in
thousands)(1):
2001 2000 1999
---- ---- ----
Net reserves at beginning of year $1,818,049 $1,723,865 $1,583,304
---------- ---------- ----------
Net provision for losses and loss expenses:
Claims occurring during the current year 1,140,622 1,047,060 1,032,089
Increase in estimates for claims occurring
in prior years 211,344 14,042 28,351
Net decrease in discount for prior years 8,717 11,530 10,473
---------- ---------- ----------
1,360,683 1,072,632 1,070,913
---------- ---------- ----------
Net payments for claims:
Current year 443,802 394,401 433,942
Prior years 701,637 584,047 496,410
---------- ---------- ----------
1,145,439 978,448 930,352
---------- ---------- ----------
Net reserves at end of year 2,033,293 1,818,049 1,723,865
Ceded reserves at end of year 730,557 657,756 617,025
---------- ---------- ----------
Gross reserves at end of year $2,763,850 $2,475,805 $2,340,890
========== ========== ==========
A reconciliation, as of December 31, 2001, between the reserves reported
in the accompanying consolidated financial statements which have been prepared
in accordance with GAAP and those reported on the basis of statutory accounting
principles ("SAP") is as follows (amounts in thousands):
Net reserves reported on a SAP basis $ 2,031,705
Additions (deductions) to statutory reserves:
International property & casualty reserves 30,753
Loss reserve discounting (2) (32,561)
Outstanding drafts reclassified as reserves 3,396
-----------
Net reserves reported on a GAAP basis 2,033,293
Ceded reserves reclassified as assets 730,557
-----------
Gross reserves reported on a GAAP basis $ 2,763,850
===========
(1) Claims occurring during the current year is net of discount of
$24,781,000, $39,990,000 and $22,923,754 for the years ended December 31,
2001, 2000 and 1999, respectively.
(2) For statutory purposes, we use a discount rate of 4.3% as permitted by the
Department of Insurance of the State of Delaware.
The following table presents the development of net reserves for 1991
through 2001. The top line of the table shows the estimated reserves for unpaid
losses and loss expenses recorded at the balance sheet date for each of the
indicated years. This represents the estimated amount of losses and loss
expenses for claims arising in all prior years that are unpaid at the balance
sheet date, including losses that had been incurred but not yet reported to us.
The upper portion of the table shows the re-estimated amount of the previously
recorded reserves based on experience as of the end of each succeeding year. The
estimate changes as more information becomes known about the frequency and
severity of claims for individual years.
The "cumulative redundancy (deficiency)" represents the aggregate change
in the estimates over all prior years. For example, the 1991 reserves have
developed a $140 million redundancy over ten years. That amount has been
reflected in income over the ten years. The impact on the results of operations
of the past three years of changes in reserve estimates is shown in the
reconciliation tables above. It should be noted that the table presents a "run
off" of balance sheet reserves, rather than accident or policy year loss
development. Therefore, each amount in the table includes the effects of changes
in reserves for all prior years. For example, assume a claim that occurred in
1991 is reserved for $2,000 as of December 31, 1991. Assuming this claim was
settled for $2,300 in 2001, the $300 deficiency would appear as a deficiency in
each year from 1991 through 2000.
15
(Amounts in millions)
Year Ended December 31, 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
- ----------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Discounted net reserves for
losses and loss expenses $680 $710 $ 783 $ 895 $1,209 $1,333 $1,433 $ 1,583 $1,724 $1,818 $2,033
Reserve discounting -- -- -- -- 152 172 190 187 196 223 243
---- ---- ------ ------ ------ ------ ------ ------- ------ ------ ------
Undiscounted net reserve 680 710 783 895 1,361 1,505 1,623 1,770 1,920 2,041 2,276
Net Re-estimated as of:
One year later 676 704 776 885 1,346 1,481 1,580 1,798 1,934 2,252
Two years later 659 694 755 872 1,305 1,406 1,566 1,735 2,082
Three years later 650 665 744 833 1,236 1,356 1,446 1,805
Four years later 637 655 708 789 1,195 1,239 1,463
Five years later 631 630 672 764 1,112 1,248
Six years later 609 600 649 706 1,118
Seven years later 585 579 599 712
Eight years later 568 541 605
Nine years later 534 547
Ten years later 540
Cumulative redundancy
(deficiency) undiscounted $140 $163 $ 178 $ 183 $ 243 $ 257 $ 160 $ (35) $ (162) $ (211) --
==== ==== ====== ====== ====== ====== ====== ======= ====== ====== ======
Cumulative amount of
net liability paid
through:
One year later $160 $169 $ 186 $ 221 $ 265 $ 332 $ 365 496 584 702
Two years later 264 275 221 355 434 523 574 795 1,011
Three years later 332 306 291 445 550 635 737 1,032
Four years later 346 344 334 501 616 714 852
Five years later 371 362 363 528 655 782
Six years later 384 375 373 543 701
Seven years later 394 376 373 577
Eight years later 392 370 393
Nine years later 383 384
Ten years later 395
Discounted net reserves 783 895 1,209 1,333 1,433 1,583 1,724 1,818 2,033
Ceded Reserves 1,233 1,176 451 450 477 538 617 658 731
------ ------ ------ ------ ------ ------- ------ ------ ------
Discounted gross reserves 2,016 2,071 1,660 1,783 1,910 2,121 2,341 2,476 2,764
Reserve discounting -- -- 192 216 241 248 250 286 324
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross reserve $2,016 $2,071 $1,852 $1,999 $2,151 $2,369 $2,591 $2,762 $3,088
====== ====== ====== ====== ====== ====== ====== ====== ======
Gross Re-estimated as of:
One year later 2,010 2,043 1,827 1,965 2,132 2,390 2,653 2,827
Two years later 1,966 2,026 1,789 1,959 2,096 2,389 2,556
Three years later 1,955 1,983 1,754 1,909 2,010 2,218
Four years later 1,913 1,951 1,733 1,823 1,871
Five years later 1,855 1,928 1,681 1,739
Six years later 1,815 1,899 1,630
Seven years later 1,788 1,858
Eight years later 1,757
Gross cumulative redundancy
(deficiency) undiscounted $ 259 $ 213 $ 222 $ 260 $ 280 $ 151 $ 35 $ (65)
====== ====== ====== ====== ====== ====== ====== ======
16
Reinsurance
We follow the customary industry practice of reinsuring a portion of our
exposures and paying to reinsurers a part of the premiums received on the
policies that we write. Reinsurance is purchased principally to reduce net
liability on individual risks and to protect against catastrophic losses.
Although reinsurance does not legally discharge an insurer from its primary
liability for the full amount of the policies, it does make the assuming
reinsurer liable to the insurer to the extent of the reinsurance coverage. We
monitor the financial condition of our reinsurers and attempt to place our
coverages only with substantial, financially sound carriers. As a result,
generally the reinsurers who reinsure our casualty insurance must have an A.M.
Best rating of "A (Excellent)" or better with $250 million in policyholder
surplus and the reinsurers who cover our property insurance must have an A.M.
Best rating of "A-(Excellent)" or better with $150 million in policyholder
surplus. As a result of the attacks of September 11, many reinsurers have
significantly changed their underwriting guidelines, and limit or no longer
provide terrorism coverage. See "Management's Discussion and Analysis of
Financial Condition and Result of Operations" and Note 9 of "Notes to
Consolidated Financial Statements."
Regulation
Our insurance subsidiaries are subject to varying degrees of regulation
and supervision in the jurisdictions in which they do business. They are subject
to statutes which delegate regulatory, supervisory and administrative powers to
state insurance commissioners. This regulation relates to such matters as the
standards of solvency which must be met and maintained; the licensing of
insurers and their agents; the nature of and limitations on investments;
deposits of securities for the benefit of policyholders; approval of policy
forms and premium rates; periodic examination of the affairs of insurance
companies; annual and other reports required to be filed on the financial
condition of insurers or for other purposes; establishment and maintenance of
reserves for unearned premiums and losses; and requirements regarding numerous
other matters. Our property casualty subsidiaries, other than E&S and
reinsurance subsidiaries, must file all rates for personal and commercial
insurance with the insurance department of each state in which they operate. Our
E&S and reinsurance subsidiaries generally operate free of rate and form
regulation.
In addition to regulatory supervision of our insurance subsidiaries, we
are subject to state statutes governing insurance holding company systems.
Typically, such statutes require that we periodically file information with the
state insurance commissioner, including information concerning our capital
structure, ownership, financial condition and general business operations. Under
the terms of applicable state statutes, any person or entity desiring to
purchase more than a specified percentage (commonly 10%) of our outstanding
voting securities would be required to obtain regulatory approval of the
purchase. Under Florida law, which is applicable to us due to our ownership of
Carolina Casualty Insurance Company, a Florida domiciled insurer, the
acquisition of more than 5% of our capital stock must receive regulatory
approval. Further, state insurance statutes typically place limitations on the
amount of dividends or other distributions payable by insurance companies in
order to protect their solvency. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital Resources."
Various state and federal organizations, including Congressional
committees and the National Association of Insurance Commissioners ("NAIC"),
have been conducting reviews into various aspects of the insurance business. The
NAIC codified statutory accounting practices for certain insurance enterprises
effective January 1, 2001. No assurance can be given that future legislative or
regulatory changes resulting from such activity will not adversely affect our
insurance subsidiaries.
The NAIC utilizes a Risk Based Capital (RBC) formula which is designed to
measure the adequacy of an insurer's statutory surplus in relation to the risks
inherent in its business. The RBC formula develops a risk adjusted target level
of adjusted statutory capital by applying certain factors to various asset,
premium and reserve items. The RBC Model Law provides for four incremental
levels of regulatory attention for insurers whose surplus is below the
calculated RBC target. These levels of attention range in severity from
requiring the insurer to submit a plan for corrective action to actually placing
the insurer under regulatory control. The RBC of each of our domestic insurance
subsidiaries was above the authorized control level RBC as of December 31, 2001.
The Gramm-Leach-Bliley Act, or Financial Services Modernization Act of
1999 (the "Act"), was enacted in 1999 and significantly affects the financial
services industry, including insurance companies, banks and securities firms.
The Act modifies federal law to permit the creation of financial holding
companies ("FHCs"), which, as regulated by the Act, can maintain
17
cross-holdings in insurance companies, banks and securities firms to an extent
not previously allowed. The Act also permits or facilitates certain types of
combinations or affiliations for FHCs. The Act establishes a functional
regulatory scheme under which state insurance departments will maintain primary
regulation over insurance activities, subject to provisions for certain federal
preemptions.
Important provisions of the Act involve requirements for adoption of (i)
multi-state agents' licensing reforms and uniformity requirements and (ii)
privacy protections, giving the states the ability to enact these laws in the
first instance or be preempted. The NAIC adopted a model regulation on privacy,
and a model law on agents' licensing, which have been enacted or are currently
being considered by various state legislatures and insurance departments. It is
not anticipated that the insurance regulatory aspects of the Act will have a
material effect on our operations.
Our insurance subsidiaries are also subject to assessment by state
guaranty funds when an insurer in that jurisdiction has been judicially declared
insolvent and insufficient funds are available from the liquidated company to
pay policyholders and claimants. The protection afforded under a state's
guaranty fund to policyholders of the insolvent insurer varies from state to
state. Generally, all licensed property casualty insurers are considered to be
members of the fund, and assessments are based upon their pro rata share of
direct written premiums. The NAIC Model Post-Assessment Guaranty Fund Act, which
many states have adopted, limits assessments to an insurer to 2% of its subject
premium and permits recoupment of assessments through rate setting. Likewise,
several states (or underwriting organizations of which our insurance
subsidiaries are required to be members) have limited assessment authority with
regard to deficits in certain lines of business.
We receive funds from our insurance subsidiaries in the form of dividends
and fees for certain management services. Annual dividends in excess of maximum
amounts prescribed by state statutes may not be paid without the approval of the
insurance commissioner of the state in which an insurance subsidiary is
domiciled.
Competition
The property casualty insurance and reinsurance businesses are
competitive, with over 2,000 insurance companies transacting business in the
United States. We compete directly with a large number of these companies. Our
strategy in this highly fragmented industry is to seek specialized areas or
geographic regions where our insurance subsidiaries can gain a competitive
advantage by responding quickly to changing market conditions. Each of our
subsidiaries establishes its own pricing practices. Such practices are based
upon a Company-wide philosophy to price products with the general intent of
making an underwriting profit. Competition in the industry generally changes
with profitability.
Competition for specialty and alternative markets business comes from
other specialty insurers, regional carriers, large national multi-line companies
and reinsurers. Under certain market conditions, standard carriers also compete
for E&S business.
Competition for the reinsurance business comes from domestic and foreign
reinsurers, which produce their business either on a direct basis or through the
broker market. These competitors include Employers Reinsurance, Berkshire
Hathaway, and American Reinsurance, which collectively comprise a majority of
the property casualty reinsurance market in the United States.
The regional property casualty subsidiaries compete with mutual and other
regional stock companies as well as national carriers. Direct writers of
property casualty insurance compete with the regional subsidiaries by writing
insurance through their salaried employees, generally at a lower cost than
through independent agents such as those used by the Company.
The international operations compete with native insurance operations both
large and small, which may be related to government entities, as well as with
branch or local subsidiaries of multinational companies.
Employees
As of March 8, 2002, we employed 4,244 persons. Of this number, our
subsidiaries employed 4,194 persons, of whom 2,175 were executive and
administrative personnel and 2,069 were clerical personnel. We employed the
remaining 50 persons at the parent company and in investment operations, of whom
38 were executive and administrative personnel and 12 were clerical personnel.
18
Other Information about the Company's business
We maintain an interest in the acquisition or start up of complementary
businesses and continue to evaluate possible acquisitions and new ventures on an
ongoing basis. In addition, the insurance subsidiaries develop new coverages or
lines of business to meet the needs of insureds.
Seasonal weather variations and other events affect the severity and
frequency of losses sustained by the insurance and reinsurance subsidiaries.
Although the effect on our business of such catastrophes as tornadoes,
hurricanes, hailstorms, earthquakes and terrorist acts may be mitigated by
reinsurance, they nevertheless can have a significant impact on the results of
any one or more reporting periods.
We have no customer which accounts for 10 percent or more of our
consolidated revenues.
Compliance by W. R. Berkley and its subsidiaries with federal, state and
local provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to protection of the
environment has not had a material effect upon our capital expenditures,
earnings or competitive position.
19
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Our business faces significant risks. The risks described below may not be
the only risks we face. Additional risks that we do not yet know of or that we
currently think are immaterial may also impair our business operations. If any
of the events or circumstances described as risks below actually occurs, our
business, results of operations or financial condition could be materially and
adversely affected.
OUR RESULTS MAY FLUCTUATE AS A RESULT OF MANY FACTORS, INCLUDING CYCLICAL
CHANGES IN THE INSURANCE AND REINSURANCE INDUSTRY.
The results of companies in the property casualty insurance industry
historically have been subject to significant fluctuations and uncertainties.
The demand for insurance is influenced primarily by general economic conditions,
while the supply of insurance is directly related to available capacity. The
adequacy of premium rates is affected mainly by the severity and frequency of
claims, which are influenced by many factors, including natural disasters,
regulatory measures and court decisions that define and expand the extent of
coverage and the effects of economic inflation on the amount of compensation due
for injuries or losses. In addition, investment rates of return may impact
policy rates. These factors can have a significant impact on ultimate
profitability because a property casualty insurance policy is priced before its
costs are known, as premiums usually are determined long before claims are
reported. These factors could produce results that would have a negative impact
on our results of operations and financial condition.
OUR ACTUAL CLAIMS LOSSES MAY EXCEED OUR RESERVES FOR CLAIMS, WHICH MAY REQUIRE
US TO ESTABLISH ADDITIONAL RESERVES.
We maintain loss reserves to cover our estimated liability for unpaid
losses and loss adjustment expenses, including legal and other fees as well as a
portion of our 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 we
expect the ultimate settlement and administration of claims will cost. These
estimates, which generally involve actuarial projections, are based on our
assessment of facts and circumstances then known, as well as estimates of future
trends in claims severity, frequency, judicial theories of liability and other
factors. In some cases, long-tail lines of business such as excess workers'
compensation and the workers' compensation portion of our reinsurance business
are reserved on a discounted basis. 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.
The risk of the occurrence of such events is especially present in our
specialty and reinsurance businesses as well as our discontinued alternative
markets reinsurance business. Many of these items are not directly quantifiable
in advance. In some areas of our business, the level of reserves we establish is
dependent in part upon the actions of third parties that are beyond our control.
In our reinsurance and excess workers' compensation businesses, we may not
establish sufficient reserves if third parties do not give us advance notice or
provide us with appropriate information regarding certain matters. Additionally,
there may be a significant delay between the occurrence of the insured event and
the time it is reported to us.
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. For example, there are greater
uncertainties involved with establishing reserves relating to the World Trade
Center attack, the Enron bankruptcy and asbestos and environmental claims.
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, we cannot assure you that our
current reserves will prove adequate in light of subsequent events. Should we
need to increase our reserves, our net income for the period will decrease by a
corresponding amount.
OUR EARNINGS COULD BE MORE VOLATILE, ESPECIALLY SINCE WE HAVE INCREASED AND MAY
FURTHER INCREASE OUR LEVEL OF RETENTION IN OUR BUSINESS.
We increased our retention levels in 2000 and 2001 due to changes in
market conditions and the pricing environment. We purchased less reinsurance,
the process by which we transfer, or cede, part of the risk we have assumed to a
reinsurance company, thereby retaining more risk. We may further increase our
retention levels in the future. As a result, our earnings
20
could be more volatile and increased severities are more likely to have a
material adverse effect on our results of operations and financial condition. A
significant change in our retention levels could also cause our historical
financial results, including compound annual growth rates, to be inaccurate
indicators of our future performance on a segment or consolidated basis.
AS A PROPERTY CASUALTY INSURER, WE FACE LOSSES FROM NATURAL AND MAN-MADE
CATASTROPHES.
Property casualty insurers are subject to claims arising out of
catastrophes that may have a significant effect on their results of operations,
liquidity and financial condition. Catastrophe losses have had a significant
impact on our results. Catastrophes can be caused by various events, including
hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter
weather and fires, as well as terrorist activities. The incidence and severity
of catastrophes are inherently unpredictable. For example, during the five years
ended December 31, 2001, our losses from natural and man-made catastrophes
ranged from $33 million to $96 million. The extent of losses from a catastrophe
is a function of both the total amount of insured exposure in the area affected
by the event and the severity of the event. Most catastrophes are restricted to
small geographic areas; however, hurricanes and earthquakes may produce
significant damage in large, heavily populated areas. Catastrophes can cause
losses in a variety of our property casualty lines, and most of our past
catastrophe-related claims have resulted from severe storms. Seasonal weather
variations may affect the severity and frequency of our losses. Insurance
companies are not permitted to reserve for a catastrophe until it has occurred.
It is therefore possible that a catastrophic event or multiple catastrophic
events could produce unforeseen losses and have a material adverse effect on our
results of operations and financial condition.
WE FACE SIGNIFICANT COMPETITIVE PRESSURES IN OUR BUSINESSES, WHICH MAY REDUCE
PREMIUM RATES AND PREVENT US FROM PRICING OUR PRODUCTS AT ATTRACTIVE RATES.
We compete with a large number of other companies in our selected lines of
business. We compete, and will continue to compete, with major U.S. and non-U.S.
insurers and reinsurers, other regional companies, as well as mutual companies,
specialty insurance companies, underwriting agencies and diversified financial
services companies. Competition in our businesses is based on many factors,
including the perceived financial strength of the company, premium charges,
other terms and conditions offered, services provided, ratings assigned by
independent rating agencies, speed of claims payment and reputation and
experience in the lines to be written.
Some of our competitors, particularly in the reinsurance business, have
greater financial and marketing resources than we do. These competitors within
the reinsurance segment include Employers Reinsurance, Berkshire Hathaway and
American Reinsurance, which collectively comprise a majority of the property
casualty reinsurance market. We expect that perceived financial strength, in
particular, will become more important as customers seek high quality
reinsurers.
A number of new, proposed or potential legislative or industry
developments could further increase competition in our industry. These
developments include:
- an increase in capital-raising by companies in our lines of
business, which could result in new entrants to our markets
and an excess of capital in the industry;
- the enactment of the Gramm-Leach-Bliley Act of 1999, which
could result in increased competition from new entrants to our
markets;
- the implementation of commercial lines deregulation in several
states, which could increase competition from standard
carriers for our excess and surplus lines of insurance
business;
- programs in which state-sponsored entities provide property
insurance in catastrophe prone areas or other alternative
markets types of coverage; and
- changing practices caused by the Internet, which may lead to
greater competition in the insurance business.
New competition from these developments could cause the supply and/or
demand for insurance or reinsurance to change, which could affect our ability to
price our products at attractive rates and thereby adversely affect our
underwriting results.
21
IF MARKET CONDITIONS CAUSE REINSURANCE TO BE MORE COSTLY OR UNAVAILABLE, WE MAY
BE REQUIRED TO BEAR INCREASED RISKS OR REDUCE THE LEVEL OF OUR UNDERWRITING
COMMITMENTS.
As part of our overall risk and capacity management strategy, we purchase
reinsurance for significant amounts of risk underwritten by our insurance
company subsidiaries, especially catastrophe risks. We also purchase reinsurance
on risks underwritten by others which we reinsure. Market conditions beyond our
control determine the availability and cost of the reinsurance protection we
purchase, which may affect the level of our business and profitability. Our
reinsurance facilities are generally subject to annual renewal. We may be unable
to maintain our current reinsurance facilities or to obtain other reinsurance
facilities in adequate amounts and at favorable rates. If we are unable to renew
our expiring facilities or to obtain new reinsurance facilities, either our net
exposures would increase or, if we are unwilling to bear an increase in net
exposures, we would have to reduce the level of our underwriting commitments,
especially catastrophe exposed risks. As a result of the attacks of September
11, 2001 and reinsurance market conditions, we anticipate further price
increases for reinsurance we purchase beginning in 2002.
WE, AS A PRIMARY INSURER, MAY NOT BE ABLE TO OBTAIN REINSURANCE COVERAGE FOR
TERRORIST ACTS.
It is difficult to determine the full impact of the attacks of September
11, 2001 on coverage terms with respect to future acts of terrorism both on the
primary and reinsurance levels. To the extent that reinsurers are able to and do
exclude coverage for terrorist acts or price such coverage at a rate at which it
is not practical for primary insurers to obtain such coverage, primary insurers
might not be able to likewise exclude terrorist acts because of regulatory
constraints. If this does occur, we, in our capacity as a primary insurer, would
not have certain reinsurance protection and would be exposed for potential
losses as a result of any terrorist acts.
WE CANNOT GUARANTEE THAT OUR REINSURERS WILL PAY IN A TIMELY FASHION, IF AT ALL,
AND, AS A RESULT, WE COULD EXPERIENCE LOSSES.
We purchase reinsurance by transferring part of the risk that we have
assumed, known as ceding, to a reinsurance company in exchange for part of the
premium we receive in connection with the risk. Although reinsurance makes the
reinsurer liable to us to the extent the risk is transferred or ceded to the
reinsurer, it does not relieve us, the reinsured, of our liability to our
policyholders or, in cases where we are a reinsurer, to our reinsureds. Our
reinsurers may not pay the reinsurance recoverables that they owe to us or they
may not pay such recoverables on a timely basis. Accordingly, we bear credit
risk with respect to our reinsurers, and if our reinsurers fail to pay us, our
financial results would be adversely affected. The attacks of September 11, 2001
may affect the financial resources of some of our reinsurers.
WE INVEST SOME OF OUR ASSETS IN ALTERNATIVE INVESTMENTS, WHICH IS SUBJECT TO
CERTAIN RISKS.
We invest a portion of our investment portfolio in alternative investments
which is primarily merger arbitrage. As of December 31, 2001, our investment in
merger arbitrage securities represented approximately 13% of our total
investment portfolio. Merger arbitrage is the business of investing in the
securities of publicly held companies which are the targets in announced tender
offers and mergers. Merger arbitrage differs from other types of investments in
its focus on transactions and events believed likely to bring about a change in
value over a relatively short time period, usually four months or less. While
our merger arbitrage positions are generally hedged against market declines,
these equity investments are exposed primarily to the risk associated with the
completion of announced deals, which are subject to regulatory as well as
political and other risks. As a result of the reduced activity in the merger and
acquisitions area, we may not be able achieve the returns that we have enjoyed
in the past. Alternative investments also include investments in high-yield
bonds and real estate investment trusts.
A SIGNIFICANT AMOUNT OF OUR ASSETS IS INVESTED IN FIXED INCOME SECURITIES AND IS
SUBJECT TO MARKET FLUCTUATIONS.
Our investment portfolio consists substantially of fixed income
securities. The fair market value of these assets and the investment income from
these assets fluctuate depending on general economic and market conditions. With
respect to our investments in fixed income securities, the fair market value of
these investments generally increases or decreases in an inverse relationship
with fluctuations in interest rates, while net investment income realized by us
from future investments in fixed income securities will generally increase or
decrease with interest rates. In addition, actual net investment income and/or
cash flows from
22
investments that carry prepayment risk, such as mortgage-backed and other
asset-backed securities, may differ from those anticipated at the time of
investment as a result of interest rate fluctuations. Because substantially all
of our fixed income securities are classified as available for sale, changes in
the market value of our securities are reflected in our balance sheet. Similar
treatment is not available for liabilities. Therefore, interest rate
fluctuations affect the value of our investments and could adversely affect our
results of operations and financial condition.
OUR OPERATIONS IN ARGENTINA AND THE PHILIPPINES EXPOSE US TO INVESTMENT,
POLITICAL AND ECONOMIC RISKS.
Our operations in Argentina and the Philippines expose us to investment,
political and economic risks, including foreign currency and credit risk.
Changes in the exchange rate between the U.S. dollar and either the Argentine or
Philippine peso could have an adverse effect on our results of operations and
financial condition. During 2001, Argentina experienced substantial political
and economic problems, including high unemployment, increasing fiscal deficits
and declining central bank reserves. The government responded to these problems
by converting certain public bonds into guaranteed loans with longer maturities
and lower interest rates, abandoning the fixed dollar-to-peso exchange rate and
imposing various currency restrictions. It is likely that there will be further
changes to Argentine economic and monetary policies in 2002. These changes may
result in further impairment in value of Argentine bonds, a decline in
investment income as a result of lower interest on bonds, and the surrender of
all or substantially all life insurance policies-in-force.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION, WHICH INCREASES OUR COSTS
AND COULD RESTRICT THE CONDUCT OF OUR BUSINESS.
We are subject to extensive governmental regulation and supervision. Most
insurance regulations are designed to protect the interests of policyholders
rather than stockholders and other investors. This system of regulation,
generally administered by a department of insurance in each state in which we do
business, relates to, among other things:
- standards of solvency, including risk-based capital
measurements;
- restrictions on the nature, quality and concentration of
investments;
- requiring certain methods of accounting;
- requiring reserves for unearned premium, losses and other
purposes; and
- potential assessments for the provision of funds necessary for
the settlement of covered claims under certain policies
provided by impaired, insolvent or failed insurance companies.
State insurance departments conduct periodic examinations of the affairs
of insurance companies and require the filing of annual and other reports
relating to the financial condition of insurance companies, holding company
issues and other matters. Recently adopted federal financial services
modernization legislation is expected to lead to additional federal regulation
of the insurance industry in the coming years. Also, foreign governments
regulate our international operations.
We may be unable to maintain all required licenses and approvals and our
business may not fully comply with the wide variety of applicable laws and
regulations or the relevant authority's interpretation of the laws and
regulations. Also, some regulatory authorities have relatively broad discretion
to grant, renew or revoke licenses and approvals. If we do not have the
requisite licenses and approvals or do not comply with applicable regulatory
requirements, the insurance regulatory authorities could preclude or temporarily
suspend us from carrying on some or all of our activities or monetarily penalize
us. Also, changes in the level of regulation of the insurance industry, whether
federal, state or foreign, or changes in laws or regulations themselves or
interpretations by regulatory authorities, restrict the conduct of our business.
The growing number of insolvencies in the insurance industry increases the
possibility that we will be assessed pursuant to various state guaranty fund
requirements. We cannot predict the outcome of proposed federal legislation on
insurance coverage for terrorism, including the possibility that we may be
required to contribute to a pool based on certain criteria, and the legal and
financial effects that such legislation might have on us and the property
casualty industry.
23
WE ARE RATED BY A.M. BEST AND STANDARD & POOR'S, AND A DECLINE IN THESE RATINGS
COULD AFFECT OUR STANDING IN THE INSURANCE INDUSTRY AND CAUSE OUR SALES AND
EARNINGS TO DECREASE.
Ratings have become an increasingly important factor in establishing the
competitive position of insurance companies. Our insurance company subsidiaries
are rated by A.M. Best, and certain of our insurance company subsidiaries are
rated for their claims-paying ability by Standard & Poor's Corporation, or
Standard & Poor's. A.M. Best and Standard & Poor's ratings reflect their
opinions of an insurance company's financial strength, operating performance,
strategic position and ability to meet its obligations to policyholders, are not
evaluations directed to investors and are not recommendations to buy, sell or
hold our securities. Our ratings are subject to periodic review by A.M. Best and
Standard & Poor's, and we cannot assure you that we will be able to retain those
ratings. Our A.M. Best rating is A+ (Superior) for Admiral Insurance Company and
A (Excellent) for our other insurance companies rated by A. M. Best. The
Standard & Poor's financial strengthen rating for our insurance subsidiaries is
A+/negative. If our ratings are reduced from their current levels by A.M. Best
and/or Standard & Poor's, our competitive position in the insurance industry
could suffer and it would be more difficult for us to market our products. A
significant downgrade could result in a substantial loss of business as
policyholders move to other companies with higher claims-paying and financial
strength ratings.
WE ARE AN INSURANCE HOLDING COMPANY AND, THEREFORE, MAY NOT BE ABLE TO RECEIVE
DIVIDENDS IN NEEDED AMOUNTS.
Our principal assets are the shares of capital stock of our insurance
company subsidiaries. We have to rely on dividends from our insurance company
subsidiaries to meet our obligations for paying principal and interest on
outstanding debt obligations and for paying dividends to stockholders and
corporate expenses. The payment of dividends by our insurance company
subsidiaries is subject to regulatory restrictions and will depend on the
surplus and future earnings of these subsidiaries, as well as the regulatory
restrictions. As a result, we may not be able to receive dividends from these
subsidiaries at times and in amounts necessary to meet our obligations or pay
dividends.
WE MAY NOT FIND SUITABLE ACQUISITION CANDIDATES OR NEW INSURANCE VENTURES AND
EVEN IF WE DO, WE MAY NOT SUCCESSFULLY INTEGRATE ANY SUCH ACQUIRED COMPANIES OR
SUCCESSFULLY INVEST IN SUCH VENTURES.
As part of our present strategy, we continue to evaluate possible
acquisition transactions and the start-up of complementary businesses on an
ongoing basis, and at any given time, we may be engaged in discussions with
respect to possible acquisitions and new ventures. We cannot assure you that we
will be able to identify suitable acquisition transactions or insurance
ventures, that such transactions will be financed and completed on acceptable
terms or that our future acquisitions or ventures will be successful. The
process of integrating any companies we do acquire or investing in new ventures
may have a material adverse effect on our results of operations and financial
condition.
WE MAY BE UNABLE TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES.
We depend on our ability to attract and retain experienced underwriting
talent and other skilled employees who are knowledgeable about our business. If
the quality of our underwriting team and other personnel decreases, we may be
unable to maintain our current competitive position in the specialized markets
in which we operate, and be unable to expand our operations into new markets.
ITEM 2. PROPERTIES
W. R. Berkley and its subsidiaries own or lease office buildings or office
space suitable to conduct their operations. At December 31, 2001, the Company
had aggregate office space of 1,157,569 square feet, of which 843,149 was owned
and 314,420 was leased.
Rental expense was approximately $18,021,000, $16,580,000 and $16,109,000
for 2001, 2000 and 1999, respectively. Future minimum lease payments (without
provision for sublease income) are $14,979,000 in 2001; $11,569,000 in 2003;
$7,953,000 in 2004; $5,962,000 in 2005; and $16,324,000 thereafter.
ITEM 3. LEGAL PROCEEDINGS
Claims under insurance policies written by our insurance subsidiaries are
investigated and settled either by claims adjusters employed by them, by their
independent agents or by
24
independent adjusters. Generally, the insurance subsidiary employs a staff of
claims adjusters at its home office and at some regional offices. Some
independent agents may have the authority to settle small claims. Independent
claims adjusting firms are used to assist in handling various claims in areas
where insurance volume does not warrant the maintenance of a staff adjuster. If
a claim or loss cannot be settled and results in litigation, the subsidiary
generally retains outside counsel.
At present, neither W. R. Berkley nor any of its subsidiaries is engaged
in litigation known to us which is expected to have a material adverse effect
upon our business. As is common with property casualty insurance companies, our
subsidiaries are regularly engaged in the defense of claims arising out of the
conduct of the insurance and reinsurance business. The Company has arbitration
pending pertaining to a surety reinsurance contract coverage issue where it is
the reinsurer. The proceeding is in the initial stages, and the Company believes
it has meritorious defenses with respect to this issue.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 2001 to a vote of
holders of the Company's Common Stock.
25
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Common Stock is traded on the New York Stock Exchange under the symbol
"BER". The following table sets forth the high and low sale prices for the
indicated periods, as reported on the Nasdaq Stock Market's National Market
through May 8, 2001 and the New York Stock Exchange from May 9, 2001, and the
quarterly cash dividends paid per share of our common stock during the periods
indicated.
Common
Price Range Dividends Paid
----------- --------------
High Low Per Share
---- --- ---------
2001:
Fourth Quarter $58.40 $46.53 $.13 cash
Third Quarter 49.60 38.10 $.13 cash
Second Quarter 45.38 36.90 $.13 cash
First Quarter 48.75 34.94 $.13 cash
2000:
Fourth Quarter $47.63 $30.75 $.13 cash
Third Quarter 35.23 18.38 $.13 cash
Second Quarter 23.19 18.13 $.13 cash
First Quarter 23.48 14.00 $.13 cash
The closing price of the Common Stock on March 20, 2002, as reported on
the New York Stock Exchange, was $56.08 per share. The approximate number of
record holders of the Common Stock on March 20, 2002 was 624.
26
ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 2001
Year Ended December 31,
-------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Amounts in thousands, except per share data)
Net premiums written $ 1,858,096 $ 1,506,244 $ 1,427,719 $ 1,346,254 $ 1,177,641
Net premiums earned 1,680,469 1,491,014 1,414,384 1,278,399 1,111,747
Net investment income 195,021 210,448 190,316 202,420 199,588
Service fees 75,771 68,049 72,344 70,727 71,456
Realized investment gains (losses) (11,494) 8,364 (6,064) 25,400 13,186
Total revenues 1,941,797 1,781,287 1,673,668 1,582,517 1,400,310
Interest expense 45,719 47,596 50,801 48,819 48,869
Income (loss) before federal and foreign
income taxes (151,394) 40,851 (79,248) 62,781 129,241
Federal and foreign income tax (expense)
Benefit 56,661 (2,451) 45,766 (5,465) (30,668)
Minority interest 3,187 (2,162) (566) 1,444 474
Preferred dividends -- -- (497) (7,548) (7,828)
Net income (loss) before change in
accounting and extraordinary
gain(loss) (91,546) 36,238 (34,545) 51,212 91,219
Cumulative effect of change in accounting -- -- (3,250) -- --
Extraordinary gain (loss) -- -- 735 (5,017) --
Net income (loss) attributable to
common stockholders (91,546) 36,238 (37,060) 46,195 91,219
Data per common share:
Basic:
Net income (loss) before change in
accounting and extraordinary item (3.14) 1.41 (1.35) 1.82 3.09
Net income (loss) (3.14) 1.41 (1.44) 1.64 3.09
Diluted:
Net income (loss) before change in
accounting and extraordinary income (3.14) 1.39 (1.35) 1.76 3.02
Net income (loss) (3.14) 1.39 (1.44) 1.59 3.02
Stockholders' equity 28.03 26.54 23.10 28.80 28.72
Cash dividends declared $ .52 $ .52 $ .52 $ .48 $ .42
Weighted average shares outstanding:
Basic 29,139 25,632 25,823 28,194 29,503
Diluted 30,555 25,991 25,927 29,115 30,185
Investments (1) $ 3,598,053 $ 3,111,602 $ 2,975,929 $ 3,233,458 $ 3,106,900
Total assets 5,633,509 5,022,070 4,784,791 4,983,431 4,544,318
Reserves for losses
and loss expenses 2,817,682 2,533,917 2,361,238 2,126,566 1,909,688
Long-term debt 370,554 370,158 394,792 394,444 390,415
Trust preferred securities 198,210 198,169 198,126 207,988 207,944
Stockholders' equity 931,595 680,896 591,778 861,281 947,292
(1) Including trading account receivable from brokers and clearing
organizations and trading account securities sold but not yet purchased.
27
(2) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to the information under the caption "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" contained on pages 22 through 29 of the registrant's
2001 Annual Report to Stockholders, which information is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the information under "Market Risk" under the
caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained on pages 27 and 28 of the
registrant's 2001 Annual Report to Stockholders, which information
is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the registrant are
contained on pages 30 through 46 of registrant's 2001 Annual Report
to Stockholders and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is provided as to the directors and executive
officers of the Company as of March 20, 2002:
Name Age Position
---- --- --------
William R. Berkley 56 Chairman of the Board, Chief Executive Officer, President
and Chief Operating Officer
Eugene G. Ballard 49 Senior Vice President - Chief Financial Officer and Treasurer
William R. Berkley, Jr. 29 Senior Vice President, Director
Robert P. Cole 51 Senior Vice President - Regional Operations
Paul J. Hancock 40 Senior Vice President - Chief Corporate Actuary
Robert C. Hewitt 41 Senior Vice President - Risk Management
H. Raymond Lankford 59 Senior Vice President - Alternative Markets Operations
Ira S. Lederman 48 Senior Vice President - General Counsel and Corporate
Secretary
Michael E. Lombardozzi 40 Senior Vice President - Planning and Operations
James W. McCleary 55 Senior Vice President - Reinsurance Operations
James G. Shiel 42 Senior Vice President - Investments
Edward A. Thomas 53 Senior Vice President - Specialty Operations
Clement P. Patafio 37 Vice President - Corporate Controller
Ronald E. Blaylock 42 Director
Mark E. Brockbank 49 Director
George G. Daly 61 Director
Robert B. Hodes 76 Director
Richard G. Merrill 71 Director
Jack H. Nusbaum 61 Director
Mark L. Shapiro 57 Director
As permitted by Delaware law, the Board of Directors of the Company is
divided into three classes, the classes being divided as equally as possible and
each class having a term of three years. Directors generally serve until their
respective successors are elected at the annual meeting of stockholders which
ends their term. None of the Company's directors has any family relationship
with any other director or executive officer, except William R. Berkley, Jr. is
the son of William R. Berkley. Each year the term of office of one class
expires. In May 2001, the term of a class consisting of three directors expired.
William R. Berkley, Jr., Ronald E. Blaylock and Mark E. Brockbank were elected
as directors to hold office for a term of three years until the Annual Meeting
of Stockholders in 2004 and until their successors are duly elected and qualify.
Henry Kaufman and Martin Stone, directors whose terms expired in 2001, did not
stand for re-election.
William R. Berkley has been Chairman of the Board and Chief Executive
Officer of the Company since its formation in 1967. He also currently serves as
President and Chief Operating Officer, a position which he has held since March
1, 2000 and has held at various times from 1967 to 1995. He also serves as
Chairman of the Board or director of a number of public and private companies.
These include Associated Community Bancorp, Inc. and its subsidiaries; The
Greenwich Bank & Trust Company and Westport National Bank; Strategic
Distribution, Inc.; and Interlaken Capital, Inc. His current term as a director
expires in 2003.
Eugene G. Ballard has been Senior Vice President - Chief Financial Officer
and Treasurer of the Company since June 1, 1999. Before joining the Company, Mr.
Ballard was Executive Vice President and Chief Financial Officer of GRE
Insurance Group, New York, New York since 1995.
William R. Berkley, Jr. has been a Director of the Company since 2001, a
Senior Vice President since January 2002, and additionally serves as President
of Berkley International, LLC since January 2001. He served previously as
Executive Vice President of Berkley International, LLC from March 2000 and as
Vice President of the Company since May 2000. Mr. Berkley joined the Company in
September 1997. From July 1995 to August 1997, Mr. Berkley served in the
Corporate Finance Department of Merrill Lynch Investment Company. Mr. Berkley is
also a director of Associated Community Bancorp, Inc. and its subsidiary
Westport National Bank; Middlesex Bank and Trust Company; GiftCertificates.com,
Inc.; and Interlaken Capital, Inc.
29
Robert P. Cole has been Senior Vice President of the Company since January
1998. Prior thereto, he was Vice President since October 1996. Before joining
the Company, Mr. Cole was, since 1992, a senior Officer of Christania General
Insurance Corp. of New York, which was purchased by Folksamerica Reinsurance
Company in 1996. He has been in the insurance/reinsurance business for more than
25 years.
Paul J. Hancock has been Senior Vice President - Chief Corporate Actuary
of the Company since January 2002. He joined the Company in 1997 and most
recently served as a Vice President in the actuarial department. He came to the
Company from Berkley Insurance Company, a subsidiary of the Company, where he
was Vice President - Actuarial Manager.
Robert C. Hewitt has been Senior Vice President - Risk Management of the
Company since January 2002. He was most recently a Senior Vice President for
Benfield Blanch Inc. (and its predecessor, E. W. Blanch Co., Inc.), where he
served from 1986 - 2002 and managed its New York City office since 1995. Mr.
Hewitt has over 20 years of experience in the reinsurance and insurance
industries.
H. Raymond Lankford has been Senior Vice President - Alternative Markets
Operations of the Company since May 1996. Prior thereto, he was President of All
American Agency Facilities, Inc., a subsidiary of the Company, from October
1991, having joined All American in 1990. He has been in the insurance business
in various capacities for more than 30 years.
Ira S. Lederman has been Senior Vice President since January 1997 and
General Counsel and Corporate Secretary of the Company since November 2001.
Additionally, he has been General Counsel of Berkley International, LLC since
January 1998. Previously, he was General Counsel - Insurance Operations from
August 2000, Assistant Secretary from May 1986, Assistant General Counsel from
July 1989 until August 2000 and Vice President from May 1986 until January 1997.
Prior thereto, he was Insurance Counsel of the Company since May 1986 and
Associate Counsel from April 1983.
Michael E. Lombardozzi has been Senior Vice President - Planning and
Operations of the Company since December 2001. He most recently was Senior Vice
President, General Counsel and Secretary of Orius Corp. Prior thereto, he served
as Senior Vice President, General Counsel and Corporate Secretary of Berkley
Insurance Company, a subsidiary of the Company, from 1994 to January 2001.
James W. McCleary has been Senior Vice President - Reinsurance Operations
of the Company since August 2001. Mr. McCleary has served as President of
Facultative ReSources, Inc., a Berkley subsidiary, since 1990 and chief
underwriting officer since its inception. Mr. McCleary has over 28 years of
experience in the reinsurance sector.
James G. Shiel has been Senior Vice President - Investments of the Company
since January 1997. Prior thereto, he was Vice President - Investments of the
Company since January 1992. Since February 1994, he has been President of
Berkley Dean & Company, Inc., a subsidiary of the Company, which he joined in
1987.
Edward A. Thomas has been Senior Vice President - Specialty Operations of
the Company since April 1991. Prior thereto, he was President of Berkley
Insurance Company, a subsidiary of the Company, for more than five years.
Clement P. Patafio has been Vice President - Corporate Controller of the
Company since January 1997. Prior thereto, he was Assistant Vice President -
Corporate Controller since July 1994 and Assistant Controller since May 1993.
Before joining the Company, Mr. Patafio was with KPMG LLP from 1986 to 1993.
Ronald E. Blaylock has been a director of the Company since 2001. Mr.
Blaylock is the Founder, Chairman and Chief Executive Officer of Blaylock &
Partners, L.P., an investment banking firm. Mr. Blaylock held senior management
positions with PaineWebber Group and Citicorp before launching Blaylock &
Partners in 1993. Mr. Blaylock is also a director of the American General Life
Insurance Company of New York.
Mark E. Brockbank has been a director of the Company since 2001. Mr.
Brockbank has been a self-employed insurance consultant since November 2000.
Prior thereto, Mr. Brockbank served from 1995 to 2000 as Chief Executive of XL
Brockbank LTD, an underwriting management agency at Lloyd's of London. Mr.
Brockbank was a founder of the predecessor firm of XL Brockbank LTD and was a
director of XL Brockbank LTD from 1983 to 2000.
30
George G. Daly has been a director of the Company since 1998. Dr. Daly is
Dean of Stern School of Business, and Dean Richard R. West Professor of
Business, New York University for more than the past nine years. In addition to
his academic career, Dr. Daly served as Chief Economist at the U.S. Office of
Energy Research and Development in 1974. Mr. Daly's term as a director expires
in 2003.
Robert B. Hodes has been a director of the Company since 1970. Mr. Hodes
is Counsel to the New York law firm of Willkie Farr & Gallagher, where prior
thereto he had been a partner for more than five years. He is also a director of
K&F Industries, Inc.; Loral Space & Communications, Ltd.; Mueller Industries,
Inc.; Leveraged Capital Holdings, N.V. and R.V.I. Guaranty, Ltd. Mr. Hodes'
current term as a director expires in 2003.
Richard G. Merrill has been a director of the Company since 1994. Mr.
Merrill was Executive Vice President of Prudential Insurance Company of America
from August 1987 to March 1991 when he retired. Prior thereto, Mr. Merrill
served as Chairman and President of Prudential Asset Management Company since
1985. Mr. Merrill is also a director of Sysco Corporation. Mr. Merrill's current
term as a director expires in 2002.
Jack H. Nusbaum has been a director of the Company since 1967. Mr. Nusbaum
is the Chairman of the New York law firm of Willkie Farr & Gallagher where he
has been a partner for more than the last five years. He is a director of
Associated Community Bankcorp, Inc., Neuberger Berman Inc., Prime Hospitality
Corp., Strategic Distribution, Inc. and The Topps Company, Inc. Mr. Nusbaum's
current term as a director expires in 2002.
Mark L. Shapiro has been a director of the Company since 1974. Since
September 1998, Mr. Shapiro has been a private investor. From July 1997 through
August 1998, Mr. Shapiro was a Senior Consultant to the Export-Import Bank of
the United States. Previously, he was a Managing Director in the investment
banking firm of Schroder & Co. Inc. for more than the past five years. Mr.
Shapiro's current term as a director expires in 2002.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 2001, and which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security ownership of certain beneficial owners
Reference is made to the registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 2001, and which is incorporated herein by reference.
(b) Security ownership of management
Reference is made to the registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 2001, and which is incorporated herein by reference.
(c) Changes in control
Reference is made to the registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 2001, and which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 2001, and which is incorporated herein by reference.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Financial Statements
The Management's Discussion and Analysis of Financial Condition and
Results of Operations, and the Company's financial statements, together with the
report thereon of KPMG LLP, appearing on pages 22 through 46 of the Company's
2001 Annual Report to Stockholders, are incorporated by reference in this Annual
Report on Form 10-K. With the exception of the aforementioned information, the
2001 Annual Report to Stockholders is not deemed to be filed as part of this
report. The schedules to the financial statements listed below should be read in
conjunction with the financial statements in such 2001 Annual Report to
Stockholders. Financial statement schedules not included in this Annual Report
on Form 10-K have been omitted because they are not applicable or required
information is shown in the financial statements or notes thereto.
Index to Financial Statement Schedules Page
Independent Auditors' Report on Schedules and Consent 38
Schedule II - Condensed Financial Information of Registrant 39
Schedule III - Supplementary Insurance Information 43
Schedule IV - Reinsurance 44
Schedule VI - Supplementary Information concerning
Property & Casualty Insurance Operations 45
(b) Reports on Form 8-K
During the quarter ended December 31, 2001, the registrant filed the
following Reports on Form 8-K:
Report dated October 26, 2001 with respect to a press release relating to
the earnings of the Company for the third quarter of 2001 (under Item 5 of
Form 8-K).
Report dated October 29, 2001 with respect to a press release relating to
the announcement of a public offering of the Company's common stock (under
Item 5 of Form 8-K).
Report dated November 2, 2001 with respect to the pricing of the public
offering of the Company's common stock and the Company's entering into an
underwriting agreement (under Item 5 of Form 8-K).
Report dated November 8, 2001 amending a Report filed February 6, 2001
with respect to risk factors faced by the Company (under Item 5 of Form
8-K).
Report dated December 18, 2001 with respect to a press release relating to
the Company's establishment of a reserve for Enron-related losses and its
expected refocusing of its surety reinsurance business (under Item 5 of
Form 8-K).
Report dated December 19, 2001 with respect to a press release relating to
the Company's entrance into the excess medical malpractice market and the
formation of Berkley Medical Excess Underwriters, LLC (under Item 5 of
Form 8-K).
(c) Exhibits
The exhibits filed as part of this report are listed on pages 35 and 36
hereof.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ William R. Berkley
-------------------------------------
William R. Berkley, Chairman of the
Board and President
March 25, 2002
33
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ William R. Berkley Chairman of the Board and
- -------------------------------- President March 25, 2002
William R. Berkley
Principal executive officer
/s/ William R. Berkley, Jr. Director March 25, 2002
- --------------------------------
William R. Berkley, Jr.
/s/ Ronald E. Blaylock Director March 25, 2002
- --------------------------------
Ronald E. Blaylock
/s/ Mark E. Brockbank Director March 25, 2002
- --------------------------------
Mark E. Brockbank
/s/ George G. Daly Director March 25, 2002
- --------------------------------
George G. Daly
/s/ Robert B. Hodes Director March 25, 2002
- --------------------------------
Robert B. Hodes
/s/ Richard G. Merrill Director March 25, 2002
- --------------------------------
Richard G. Merrill
/s/ Jack H. Nusbaum Director March 25, 2002
- --------------------------------
Jack H. Nusbaum
/s/ Mark L. Shapiro Director March 25, 2002
- --------------------------------
Mark L. Shapiro
/s/ Eugene G. Ballard Senior Vice President, March 25, 2002
- -------------------------------- Chief Financial Officer and
Eugene G. Ballard Treasurer
Principal accounting officer
/s/ Clement P. Patafio Vice President, March 25, 2002
- -------------------------------- Corporate Controller
Clement P. Patafio
34
ITEM 14. (c) EXHIBITS
Number
(2.1) Agreement and Plan of Merger between the Company, Berkley Newco
Corp. and MECC, Inc. (incorporated by reference to Exhibit 2.1 of
the Company's Current Report on Form 8-K (File No. 0-7849) filed
with the Commission on September 28, 1995).
(2.2) Agreement and Plan of Restructuring, dated July 20, 1995, by and
among the Company, Signet Star Holdings, Inc., Signet Star
Reinsurance Company, Signet Reinsurance Company and General Re
Corporation (incorporated by reference to Exhibit 2.2 of the
Company's Current Report on Form 8-K (File No. 0-7849) filed with
the Commission on September 28, 1995).
(3.1) Restated Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K
(File No. 0-7849) filed with the Commission on March 30, 1994).
(3.2) Amendment, dated May 12, 1998, to the Company's Restated Certificate
of Incorporation, as amended (incorporated by reference to Exhibit
3.2 of the Company's Annual Report on Form 10-K (File No. 0-7849)
filed with the Commission on March 23, 1999).
(3.3) Certificate of Designation, Preferences and Rights of Series A
Junior Participating Preferred Stock (incorporated by reference to
Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q (File No.
0-7849) filed with the Commission on August 11, 1999).
(3.4) Amended and Restated By-Laws (incorporated by reference to Exhibit
3(ii) of the Company's Current Report on Form 8-K (File No. 0-7849)
filed with the Commission on May 11, 1999).
(4) The instruments defining the rights of holders of the long-term debt
securities of the Company are omitted pursuant to Section
(b)(4)(iii)(A) of Item 601 of Regulation S-K. The Company agrees to
furnish supplementally copies of these instruments to the Commission
upon request.
(10.1) Loan Agreement, dated as of January 5, 2001, between the Company and
William R. Berkley (incorporated by reference to Exhibit 10.1 of the
Company's Annual Report on Form 10-K (File No. 0-7849) filed with
the Commission on March 22, 2001).
(10.2) First Amendment to the Credit Agreement, dated as of December 8,
2000, between the Company and Bank of America, NA (incorporated by
reference as Exhibit 10.1 of the Company's Current Report on Form
8-K (File No. 0-7849) filed with the Commission on January 24,
2001).
(10.3) Augmenting Agreement, dated as of December 14, 2000, among the
Company, Bank of America, NA, as Administrative Agent, and Wells
Fargo Bank, NA (incorporated by reference as Exhibit 10.2 of the
Company's Current Report on Form 8-K (File No. 0-7849) filed with
the Commission on January 24, 2001).
(10.4) Amendment dated March 9, 2000 to the First Amended and Restated W.
R. Berkley Corporation 1992 Stock Option Plan (incorporated by
reference to Exhibit 4.1 of the Company's Quarterly Report on Form
10-Q (File No. 0-7849) filed with the Commission on May 12, 2000).
(10.5) Credit Agreement dated as of December 10, 1999 among the Company,
Bank of America, National Association, as Administrative Agent, and
the other financial institutions party thereto (incorporated by
reference to Exhibit 10.2 of the Company's Annual Report on Form
10-K (File No. 0-7849) filed with the Commission on March 27, 2000).
(10.6) Rights Agreement, dated as of May 11, 1999, between the Company and
ChaseMellon Shareholder Services, LLC, as Rights Agent (incorporated
by reference to Exhibit 99.1 of the Company's Current Report on Form
8-K (File No. 0-7849) filed with the Commission on May 11, 1999).
(10.7) The Company's 1982 Stock Option Plan (incorporated by reference to
Exhibit 10.1 of the Company's Registration Statement on Form S-1
(File No. 2-98396) filed with the Commission on June 14, 1985).
35
(10.8) First Amended and Restated W. R. Berkley Corporation 1992 Stock
Option Plan (incorporated by reference to Exhibit 10.2 of the
Company's Annual Report on Form 10-K (File No. 0-7849) filed with
the Commission on March 23, 1999).
(10.9) The Company's lease dated June 3, 1983 with the Ahneman, Devaul and
Devaul Partnership, incorporated by reference to Exhibit 10.3 of the
Company's Registration Statement on Form S-1 (File No. 2-98396)
filed with the Commission on June 14, 1985.
(10.10) W.R. Berkley Corporation Deferred Compensation Plan for Officers as
amended January 1, 1991 (incorporated by reference to Exhibit 10.4
of the Company's Annual Report on Form 10-K (File No. 0-7849) filed
with the Commission on March 26, 1996).
(10.11) W. R. Berkley Corporation Deferred Compensation Plan for Directors
as adopted March 7, 1996 (incorporated by reference to Exhibit 10.5
of the Company's Annual Report on Form 10-K (File No. 0-7849) filed
with the Commission on March 26, 1996).
(10.12) W. R. Berkley Corporation Annual Incentive Compensation Plan
(incorporated by reference to Exhibit 10.7 of the Company's Annual
Report on Form 10-K (File No. 0-7849) filed with the Commission on
March 27, 1998).
(10.13) W. R. Berkley Corporation Long Term Incentive Plan (incorporated by
reference to Exhibit 10.8 of the Company's Annual Report on Form
10-K (File No. 0-7849) filed with the Commission on March 27, 1998).
(10.14) 1997 Directors Stock Plan, as Amended and Restated as of May 11,
1999 (incorporated by reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q (File No. 0-7849) filed with the
Commission on August 11, 1999).
(10.15) Separation Agreement dated January 24, 2000 between John D. Vollaro
and the Company (incorporated by reference to Exhibit 10.12 of the
Company's Annual Report on Form 10-K (File No. 0-7849) filed with
the Commission on March 27, 2000).
(13) 2001 Annual Report to Stockholders of W. R. Berkley Corporation
(only those portions of such Annual Report that are incorporated by
reference in this Report on Form 10-K are deemed filed) (filed
herewith).
36
(21) Following is a list of the Company's significant subsidiaries and
other operating entities. Subsidiaries of subsidiaries are indented
and the parent of each such corporation owns 100% of the outstanding
voting securities of such corporation except as noted below.
Jurisdiction of Percentage
Incorporation owned
--------------- ----------
Berkley International, LLC New York 65%
Carolina Casualty Insurance Company Florida 100%
Clermont Specialty Managers, Ltd. New Jersey 100%
J/I Holding Corporation: Delaware 100%
Admiral Insurance Company: Delaware 100%
Admiral Indemnity Company Delaware 100%
Berkley Risk Administrators Company, LLC Minnesota 100%
Nautilus Insurance Company: Arizona 100%
Great Divide Insurance Company North Dakota 100%
Key Risk Management Services, Inc. North Carolina 100%
Monitor Liability Managers, Inc. Delaware 100%
Monitor Surety Managers, Inc. Delaware 100%
Signet Star Holdings, Inc.: Delaware 100%
Berkley Insurance Company Delaware 100%
Berkley Regional Insurance Company Delaware 100%
Acadia Insurance Company Maine 100%
Chesapeake Bay Property and Casualty
Insurance Company Maine 100%
Berkley Insurance Company of the Carolinas North Carolina 100%
Continental Western Insurance Company Iowa 100%
Firemen's Insurance Company of Washington, D.C. Delaware 100%
Great River Insurance Company Mississippi 100%
Tri-State Insurance Company of Minnesota: Minnesota 100%
Union Insurance Company Nebraska 100%
Union Standard Insurance Company Oklahoma 100%
Key Risk Insurance Company North Carolina 100%
Midwest Employers Casualty Company: Delaware 100%
Preferred Employers Insurance Company California 100%
Riverport Insurance Company of California California 100%
Facultative ReSources, Inc. Connecticut 100%
Gemini Insurance Company Delaware 100%
StarNet Insurance Company Delaware 100%
(23) See Independent Auditors' report on schedules and consent.
(27) Financial Data Schedule.
37
INDEPENDENT AUDITORS' REPORT ON SCHEDULES AND CONSENT
Board of Directors and Stockholders
W. R. Berkley Corporation
The audits referred to in our report dated February 14, 2002, incorporated by
reference in the Form 10-K, included the related financial statement schedules
as of December 31, 2001, and for each of the years in the three-year period
ended December 31, 2001. These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits. In our
opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for insurance-related assessments in 1999.
We consent to the use of our reports incorporated by reference in the
Registration Statements, (No. 333-00459) and (No. 333-57546) on Form S-3 and
(No. 333-33935) and (No. 33-55726) on Form S-8 of W. R. Berkley Corporation.
KPMG LLP
New York, New York
March 25, 2002
38
Schedule II
W. R. Berkley Corporation
Condensed Financial Information of Registrant
Balance Sheets (Parent Company)
(Amounts in thousands)
December 31,
----------------------------
2001 2000
----------- -----------
Assets
Cash (including invested cash) $ 109,950 $ 16,619
Fixed maturity securities:
Held to maturity, at cost
(fair value $4,935 and $4,960) 4,935 4,960
Available for sale at fair value (cost $27,492 and $406) 27,585 396
Equity securities, at fair value:
Available for sale (cost $698 and $698) 235 590
Trading account (cost $903 and $864) 903 864
Investments in subsidiaries 1,268,553 1,173,775
Due from subsidiaries 57,455 47,287
Current Federal income taxes receivable 17,126 6,482
Deferred Federal income taxes 101,088 50,080
Real estate, furniture & equipment at cost, less accumulated
depreciation 2,592 18,390
Other assets 15,165 4,762
----------- -----------
$ 1,605,587 $ 1,324,205
=========== ===========
Liabilities, Debt and Stockholders' Equity
Liabilities:
Due to subsidiaries (principally deferred income taxes) $ 123,572 $ 82,304
Short-term debt -- 10,000
Other liabilities 25,449 26,471
----------- -----------
149,021 118,775
----------- -----------
Long-term debt 326,802 326,365
Subsidiary trust junior subordinated debt 198,169 198,169
Stockholders' equity:
Preferred stock -- --
Common stock 8,661 7,281
Additional paid-in capital 659,266 334,061
Retained earnings (including accumulated
undistributed net income of
subsidiaries of $352,011 and $410,794
in 2001 and 2000, respectively) 467,185 574,345
Accumulated other comprehensive income (loss) 37,340 19,371
Treasury stock, at cost (240,857) (254,162)
----------- -----------
931,595 680,896
----------- -----------
$ 1,605,587 $ 1,324,205
=========== ===========
See note to condensed financial statements.
39
Schedule II, Continued
W. R. Berkley Corporation
Condensed Financial Information of Registrant, Continued
Statements of Operations (Parent Company)
(Amounts in thousands)
Years ended December 31,
-------------------------------------
2001 2000 1999
---- ---- ----
Management fees and investment income
from affiliates, including dividends of
$7,210, $44,533 and $96,817 for 2001, 2000
1999, respectively $ 12,550 $ 49,585 $ 102,963
Realized investment gains (losses) (221) (558) 321
Other income 4,678 4,051 3,975
-------- -------- ---------
Total revenues 17,007 53,078 107,259
Expenses, other than interest expense 21,607 18,871 20,978
Restructuring charge -- -- 1,502
Interest expense 44,690 46,521 49,207
-------- -------- ---------
Income (loss) before Federal
income taxes (49,290) (12,314) 35,572
-------- -------- ---------
Federal income taxes:
Federal income taxes provided by
Subsidiaries on a separate return
Basis (42,357) 24,858 8,474
Federal income tax benefit (provision) on a
Consolidated return basis 58,884 (630) 48,958
-------- -------- ---------
Net benefit 16,527 24,228 57,432
-------- -------- ---------
Income (loss) before undistributed equity
in net income of subsidiaries and preferred
Dividends (32,763) 11,914 93,004
Equity in undistributed net income (loss)
of subsidiaries (58,783) 24,324 (130,232)
Preferred dividends -- -- (567)
-------- -------- ---------
Net income (loss) before extraordinary gain (91,546) 36,238 (37,795)
Extraordinary gain on early extinguishment of long
term debt (net of taxes) -- -- 735
-------- -------- ---------
Net income (loss) attributable to
common stockholders $(91,546) $ 36,238 $ (37,060)
======== ======== =========
See note to condensed financial statements.
40
Schedule II, Continued
W. R. Berkley Corporation
Condensed Financial Information of Registrant, Continued
Statement of Cash Flows (Parent Company)
(Amounts in thousands)
Years ended December 31,
---------------------------------------
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) before preferred dividends and
extraordinary items $ (91,546) $ 36,238 $ (37,298)
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Equity in undistributed net
income of subsidiaries 58,783 (24,324) 130,232
Tax payments received from (paid) to subsidiaries (9,668) 28,389 24,105
Federal income taxes provided by subsidiaries
on a separate return basis 42,357 (24,859) (8,473)
Change in Federal income taxes (71,459) 1,411 (35,415)
Realized investment losses 221 558 (321)
Other, net (9,960) 643 3,273
--------- --------- ---------
Net cash provided (used) by operating activities
before increase trading account securities (81,272) 18,056 76,103
Increase in trading account securities (39) (91) (75)
--------- --------- ---------
Net cash provided (used) by
operating activities (81,311) 17,965 76,028
--------- --------- ---------
Cash flow used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 11,221 -- 23,973
Equity securities -- -- --
Proceeds from maturities and prepayments of
fixed maturity securities 4,114 365 222
Cost of purchases, excluding trading account:
Fixed maturity securities (42,744) (558) (23,648)
Equity securities -- -- --
Cost of companies acquired -- -- --
Proceeds from sale of assets to subsidiaries -- 107,391 33,566
Investments in and advances to
subsidiaries, net (112,805) (70,049) (83,035)
Net additions to real estate, furniture &
equipment (1,469) (290) (357)
Other, net (1) 500 --
--------- --------- ---------
Net cash provided (used) in investing activities (141,684) 37,359 (49,279)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from stock offering 315,840 -- --
Net change in short-term debt (10,000) (25,000) (20,500)
Purchase of treasury shares (1,002) (7,020) (4,895)
Cash dividends to common stockholders (14,707) (12,701) (13,888)
Cash dividends to preferred shareholders -- -- (2,001)
Purchase of preferred stock -- -- (98,092)
Retirement of long-term debt -- (25,000) (9,171)
Other, net 26,195 8,935 6,457
--------- --------- ---------
Net cash provided (used) by financing activities 316,326 (60,786) (142,090)
--------- --------- ---------
Net increase in cash and invested cash 93,331 (5,462) (115,341)
Cash and invested cash at beginning of year 16,619 22,081 137,422
--------- --------- ---------
Cash and invested cash at end of year $ 109,950 $ 16,619 $ 22,081
========= ========= =========
See note to condensed financial statements.
41
Schedule II, Continued
W. R. Berkley Corporation
Condensed Financial Information of Registrant, Continued
December 31, 2001, 2000 and 1999
Note to Condensed Financial Statements (Parent Company)
The accompanying condensed financial statements should be read in
conjunction with the notes to consolidated financial statements included
elsewhere herein. Reclassifications have been made in the 2000 and 1999
financial statements as originally reported to conform them to the presentation
of the 2001 financial statements.
The Company files a consolidated federal tax return with the results of
its domestic insurance subsidiaries included on a statutory basis. Under present
Company policy, Federal income taxes payable by (or refundable to) subsidiary
companies on a separate-return basis are paid to (or refunded by) W. R. Berkley
Corporation, and the Company pays the tax due on a consolidated return basis.
42
Schedule III
W. R. Berkley Corporation and Subsidiaries
Supplementary Insurance Information
December 31, 2001, 2000 and 1999
(Amounts in thousands)
Reserve for
Deferred policy losses and Net
acquisition loss Unearned Premiums investment
cost expenses premiums earned income
---------------- -------- -------- ------ ------
December 31, 2001
Specialty $ 69,558 $ 776,483 $289,557 $ 401,611 $ 39,390
Alternative markets 9,763 448,762 61,146 123,173 37,765
Reinsurance 21,552 659,363 116,376 236,385 42,536
Regional 78,708 613,805 327,006 555,750 51,640
International 29,477 89,499 23,765 140,909 13,993
Discontinued 15,052 229,770 61,790 222,641 9,762
Corporate and adjustments -- -- -- -- (65)
-------- ---------- -------- ---------- ---------
Total $224,110 $2,817,682 $879,640 $1,680,469 $ 195,021
======== ========== ======== ========== =========
December 31, 2000
Specialty $ 40,060 $ 753,238 $184,160 $ 270,896 $ 48,706
Alternative markets 3,976 393,282 28,730 88,872 37,722
Reinsurance 27,761 518,554 109,824 298,102 50,471
Regional 68,398 591,417 263,693 503,029 56,955
International 30,867 106,878 30,956 107,285 9,636
Discontinued 25,169 170,548 95,876 222,830 9,562
Corporate and adjustments -- -- -- -- (2,604)
-------- ---------- -------- ---------- ---------
Total $196,231 $2,533,917 $713,239 $1,491,014 $ 210,448
======== ========== ======== ========== =========
December 31, 1999
Specialty $ 37,298 $ 722,689 $178,357 $ 256,155 $ 50,231
Alternative markets 2,765 364,907 19,832 75,979 30,827
Reinsurance 34,911 500,808 119,376 297,649 47,288
Regional 66,248 556,920 262,112 492,304 49,705
International 18,583 60,493 19,010 86,943 6,469
Discontinued 22,543 155,421 91,139 205,354 8,462
Corporate and adjustments -- -- -- -- (2,666)
-------- ---------- -------- ---------- ---------
Total $182,348 $2,361,238 $689,826 $1,414,384 $ 190,316
======== ========== ======== ========== =========
Amortization of
Loss and deferred policy Other
Loss acquisition operating cost Net premiums
expenses costs and expenses written
-------- ----- ------------ -------
December 31, 2001
Specialty $ 286,865 $ 89,232 $ 35,747 $ 527,502
Alternative markets 94,258 30,653 74,785 151,942
Reinsurance 246,706 84,036 2,894 236,784
Regional 373,647 167,681 26,955 598,149
International 86,582 52,853 4,328 150,090
Discontinued 292,442 67,610 5,831 193,629
Corporate and adjustments -- -- 21,171 --
---------- -------- -------- ----------
Total $1,380,500 $492,065 $171,711 $1,858,096
========== ======== ======== ==========
December 31, 2000
Specialty $ 198,237 $ 79,101 $ 15,685 $ 285,525
Alternative markets 62,416 26,808 65,257 98,001
Reinsurance 218,116 95,146 3,964 276,640
Regional 379,789 150,884 25,893 499,526
International 66,643 37,533 7,204 118,981
Discontinued 169,210 65,257 7,861 227,571
Corporate and adjustments -- -- 15,986 --
---------- -------- -------- ----------
Total $1,094,411 $454,729 $141,850 $1,506,244
========== ======== ======== ==========
December 31, 1999
Specialty $ 174,251 $ 77,950 $ 17,606 $ 260,380
Alternative markets 49,963 24,623 73,982 73,089
Reinsurance 226,229 92,503 6,790 309,180
Regional 428,989 159,750 24,648 497,041
International 48,195 32,812 8,527 86,172
Discontinued 158,199 56,651 13,106 201,857
Corporate and adjustments -- -- 15,836 --
---------- -------- -------- ----------
Total $1,085,826 $444,289 $160,495 $1,427,719
========== ======== ======== ==========
43
Schedule IV
W. R. Berkley Corporation and Subsidiaries
Reinsurance
Years ended December 31, 2001, 2000 and 1999
(Amounts in thousands)
Assumed Percentage
Ceded from of amount
Direct to other other Net assumed to
amount companies companies amount net
------ --------- --------- ------ ----------
Premiums written:
Year ended December 31, 2001:
Specialty $ 598,225 $ 83,862 $ 13,139 $ 527,502 2.5
Alternative markets 144,687 17,497 24,752 151,942 16.3
Reinsurance 88,183 95,598 244,199 236,784 103.1
Regional 698,114 106,852 6,887 598,149 1.2
International 170,600 20,510 -- 150,090 --
Discontinued 135,702 26,051 83,978 193,629 43.4
---------- -------- -------- ----------
Total $1,835,511 $350,370 $372,955 $1,858,096 20.1%
========== ======== ======== ========== =====
Year ended December 31, 2000:
Specialty $ 403,149 $122,020 $ 4,396 $ 285,525 1.5
Alternative markets 84,917 10,801 23,885 98,001 24.4
Reinsurance 57,210 47,206 266,636 276,640 96.4
Regional 574,079 80,364 5,811 499,526 1.2
International 143,523 24,542 -- 118,981 --
Discontinued 156,467 25,578 96,682 227,571 42.5
---------- -------- -------- ----------
Total $1,419,345 $310,511 $397,410 $1,506,244 26.4%
========== ======== ======== ========== =====
Year ended December 31, 1999:
Specialty $ 376,112 $126,069 $ 10,337 $ 260,380 4.0
Alternative markets 69,671 10,078 13,496 73,089 18.5
Reinsurance 9,096 32,101 332,185 309,180 107.4
Regional 591,318 98,355 4,078 497,041 0.8
International 107,254 21,082 -- 86,172 --
Discontinued 164,434 19,485 56,908 201,857 28.2
---------- -------- -------- ----------
Total $1,317,885 $307,170 $417,004 $1,427,719 29.2%
========== ======== ======== ========== =====
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Schedule VI
W. R. Berkley Corporation and Subsidiaries
Supplementary Information Concerning Property-Casualty Insurance Operations
December 31, 2001, 2000 and 1999
(Amounts in thousands)
2001 2000 1999
Deferred policy acquisition costs $ 224,110 $ 196,231 $ 182,348
Reserves for losses and loss expenses 2,817,682 2,533,917 2,361,238
Unearned premium 879,640 713,239 689,826
Premiums earned 1,680,469 1,491,014 1,414,384
Net investment income 195,021 210,448 190,316
Losses and loss expenses incurred:
Current Year 1,140,622 1,047,060 1,032,089
Prior Years 211,344 14,042 28,351
Net decrease in discount from prior
years 8,717 11,530 10,473
Amortization of deferred policy
acquisition costs 492,065 454,729 444,289
Paid losses and loss expenses 1,145,439 978,448 930,352
Net premiums written 1,858,096 1,506,244 1,427,719
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