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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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______.
Commission file number 1-15202
W. R. BERKLEY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-1867895
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
475 Steamboat Road, 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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities and Exchange Act of 1934). Yes [X]
No [ ]
The aggregate market value of the voting and non-voting common stock held by
non-affiliates (computed by reference to the price at which the common stock was
last sold) as of the last business day of the Registrant's most recently
completed second fiscal quarter was $2,575,558,247.
Number of shares of common stock, $.20 par value, outstanding as of March 5,
2004: 83,737,664.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 2003 Annual Report to Stockholders for the year ended
December 31, 2003 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, 2003, are
incorporated herein by reference in Part III.
W. R. BERKLEY CORPORATION
ANNUAL REPORT ON FORM 10-K
December 31, 2003
Page
----
SAFE HARBOR STATEMENT 3
PART I
ITEM 1. BUSINESS 4
ITEM 2. PROPERTIES 25
ITEM 3. LEGAL PROCEEDINGS 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 27
ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS
ENDED DECEMBER 31, 2003 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 29
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 29
ITEM 9A. CONTROLS AND PROCEDURES 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 30
ITEM 11. EXECUTIVE COMPENSATION 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 32
PART IV
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 32
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 33
2
SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This is a "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995. This document may contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Some of the forward-looking statements can be identified by the use of
forward-looking words such as "believes", "expects", "potential", "continued",
"may", "will", "should", "seeks", "approximately", "predicts", "intends",
"plans", "estimates", "anticipates" or the negative version of those words or
other comparable words. Any forward-looking statements contained herein
including statements related to our outlook for the industry and for our
performance for the year 2004 and beyond, are based upon our 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 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;
- increases in the 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;
- exposure as to coverage for terrorist acts;
- the ability of our reinsurers to pay reinsurance recoverables
owed to us;
- investment results, including those of our portfolio of fixed
income securities and investments in equity securities,
including merger arbitrage investments;
- exchange rate and political risks relating to our
international operations;
- legislative and regulatory developments;
- changes in the ratings assigned to us by rating agencies;
- availability of dividends from our insurance company
subsidiaries;
- our ability to successfully acquire and integrate companies
and invest in new insurance ventures;
- our ability to attract and retain qualified employees; and
- other risks detailed from time to time in our filings with the
Securities and Exchange Commission.
We describe these risks and uncertainties in greater detail below under the
caption "Certain Factors That May Affect Future Results." These risks and
uncertainties could cause our actual results for the year 2004 and beyond to
differ materially from those expressed in any forward-looking statement we make.
Any projections of growth in our net premiums written and management fees would
not necessarily result in commensurate levels of underwriting and operating
profits. Our future financial performance is dependent upon factors discussed
elsewhere in this Form 10-K and our other SEC filings. 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 workers compensation and the
management of self-insurance programs
- Reinsurance
- Regional commercial property casualty insurance
- International
Our holding company 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. Our 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 and reinsurance operations are conducted
nationwide, as well as in the United Kingdom. Alternative markets operations are
conducted throughout the U.S. 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 Asia.
The Company discontinued its regional personal lines and alternative
markets reinsurance business in 2001 in order to focus on lines of business with
higher expected returns. These discontinued businesses, which were previously
reported in the regional and reinsurance segments, are now reported as a
separate discontinued business segment. Although the Company discontinued the
alternative market division of its reinsurance segment, it continues to write
insurance and reinsurance covering workers' compensation for self-insured
entities within the alternative markets segment. Segment information for prior
periods has been restated to reflect these changes and to conform to the
presentations of the 2003 segment information.
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,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Amounts in thousands)
Net premiums written:
Specialty insurance $ 1,295,570 $ 939,929 $ 567,714 $ 300,885 $ 268,889
Alternative markets 482,389 305,357 151,942 98,001 73,089
Reinsurance 861,457 601,969 196,572 261,280 300,671
Regional 963,988 776,577 598,149 499,526 497,041
International 67,111 79,313 150,090 118,981 86,172
Discontinued business -- 7,345 193,629 227,571 201,857
------------ ---------- ---------- ---------- ----------
Total $ 3,670,515 $2,710,490 $1,858,096 $1,506,244 $1,427,719
============ ========== ========== ========== ==========
Percentage of net premiums written:
Specialty insurance 35.3% 34.6% 30.5% 20.1% 18.8%
Alternative markets 13.1 11.3 8.2 6.5 5.1
Reinsurance 23.5 22.2 10.6 17.3 21.1
Regional 26.3 28.7 32.2 33.1 34.9
International 1.8 2.9 8.1 7.9 6.0
Discontinued business -- 0.3 10.4 15.1 14.1
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
4
The following sections briefly describe our insurance segments. All of
the domestic insurance subsidiaries except Admiral Insurance Company have an
A.M. Best Company, Inc. ("A.M. Best") rating of "A (Excellent)" which is the
third highest rating out of 15 possible ratings by A. M. Best. Admiral Insurance
Company has a rating of "A+ (Superior)" which is A.M. Best's second highest
rating. W. R. Berkley Insurance (Europe), Limited has a rating of "A-
(Excellent)" which is A.M. Best's fourth highest rating. 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 based on a comprehensive quantitative and
qualitative evaluation of a company's balance sheet strength, operating
performance and business profile. Ratings may be changed, suspended or withdrawn
at any time for any reason at the discretion of A.M. Best Company. These ratings
are not a warranty of an insurer's current or future ability to meet its
contractual obligations, nor are they a recommendation to buy, sell or hold any
security." A.M. Best reviews its ratings on a periodic basis, and ratings of the
Company's subsidiaries are therefore subject to change.
SPECIALTY INSURANCE
Our specialty segment underwrites complex and sophisticated third-party
liability risks, principally within the excess and surplus lines, professional
liability, commercial transportation, medical excess and surety markets. The
specialty business is conducted through ten operating units. The 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") provides excess and surplus lines
coverages, with average annual premium per policy of approximately $43,000, that
generally involve moderate to high degrees of risk due to the nature of the
class of coverage (e.g., products liability) or insured entity (e.g., fireworks
distributors). Admiral concentrates on commercial casualty, professional
liability and commercial property lines of business produced by wholesale
brokers.
Admiral Excess Underwriters ("Admiral Excess"), a division of Admiral,
writes commercial general liability and products liability coverage in excess of
primary insurance or self-insured retentions.
Nautilus Insurance Company ("Nautilus") insures excess and surplus
risks, with average annual premium per policy of approximately $3,300, which are
less complex and involve a lower degree of expected severity than those covered
by Admiral. A substantial portion of Nautilus' business is written on a binding
authority basis, subject to certain contractual limitations.
Carolina Casualty Insurance Company ("Carolina") specializes in
transportation insurance for long-haul trucking and public automobile risks,
operating as an admitted carrier in all states.
Monitor Liability Managers, Inc. ("Monitor") specializes in
professional liability insurance, including directors' and officers' liability,
employment practices liability, lawyers' professional liability, management
liability, and non-profit directors' and officers' liability coverages.
Vela Insurance Services, LLC ("Vela") is an excess and surplus lines
underwriting manager that specializes in providing general liability and product
liability coverages to small and medium size accounts having an average annual
premium per policy of approximately $32,800.
W. R. Berkley Insurance (Europe), Limited ("Berkley U.K.") is a United
Kingdom authorized insurance company that began operations in July 2003. Berkley
U.K. writes primarily professional indemnity business in the U.K.
Berkley Medical Excess Underwriters, LLC ("Medical Excess") was
established at the end of 2001 to provide medical malpractice excess insurance
and reinsurance coverage and services to hospitals and hospital associations.
Clermont Specialty Managers, Ltd. ("Clermont") writes package insurance
programs for luxury condominium, cooperative and rental apartment buildings and
restaurants in the New York City metropolitan area.
5
Monitor Surety Managers, Inc. ("Surety") writes contract bonds, court
and fiduciary bonds, license and permit bonds, and public official bonds, with a
primary focus on providing surety bonds to mid-sized contractors.
The following table sets forth the percentage of direct premiums
written by each specialty unit:
Year Ended December 31,
--------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Admiral 32.3% 36.3% 37.9% 38.0% 35.8%
Nautilus 17.8 17.1 16.6 23.8 24.1
Carolina 14.3 17.3 18.1 10.4 17.7
Monitor 12.7 14.8 15.2 17.1 13.9
Vela 9.7 8.6 7.1 3.9 2.2
Berkley UK 3.4 -- -- -- --
Medical Excess 3.3 0.8 -- -- --
Clermont 3.3 4.0 3.4 4.4 4.1
Admiral Excess 2.0 -- -- -- --
Surety 1.2 1.1 1.7 2.4 2.2
----- ----- ----- ----- -----
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 specialty insurance operations:
Year Ended December 31,
----------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
General Liability 51.6% 44.8% 43.8% 42.8% 32.0%
Automobile Liability 11.0 12.4 14.8 10.2 17.9
Professional Liability 12.2 14.6 11.1 14.0 16.2
Fire and Allied Lines 7.2 9.2 8.9 8.8 7.5
Directors' and Officers' Liability 5.8 6.4 6.4 6.8 6.3
Commercial Multi-Peril 1.9 3.1 4.3 4.4 3.3
Automobile Physical Damage 1.9 2.6 3.7 4.1 6.3
Medical Malpractice 5.3 3.6 2.9 3.6 5.9
Surety 1.2 1.1 1.6 2.4 2.1
Inland Marine 1.2 1.6 2.0 1.5 1.9
Workers' Compensation 0.5 0.5 0.5 0.7 0.6
Other 0.2 0.1 -- 0.7 --
----- ----- ----- ----- -----
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 market 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 risks; insuring primary workers'
compensation risks; and providing non-risk bearing services.
Midwest Employers Casualty Company ("MECC") provides excess workers'
compensation coverage to self-insured employers and groups above their
self-insured or retained limits.
Preferred Employers Insurance Company ("Preferred Employers") offers
primary workers' compensation insurance in California. Insurance coverage is
provided primarily to owner-managed small employers.
6
Key Risk Insurance Company ("Key Risk") offers primary workers'
compensation insurance principally in North Carolina. Insurance services are
also provided through its affiliate, Key Risk Management Services.
Berkley Risk Administrators Company, LLC ("BRAC") implements and
manages alternative risk management programs and self-insurance pools for
business, governments, educational institutions, tribal nations and non-profit
entities. BRAC also provides administrative and claims services to insurance
companies. BRAC's services include 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. BRAC also writes property casualty
insurance for self-insured entities.
The following table sets forth the percentage gross premiums written by
each alternative markets unit:
Year Ended December 31,
---------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
MECC 41.1% 51.6% 53.6% 63.4% 68.7%
Preferred Employers 29.8 24.3 20.6 9.7 3.9
BRAC 15.1 4.5 1.5 0.5 --
Key Risk 14.0 19.6 24.3 26.4 27.4
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
The following table sets forth services fees for insurance services
business conducted by BRAC and Key Risk (amounts in thousands):
Year Ended December 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Services fees $101,715 $ 86,095 $ 74,913 $ 63,434 $ 65,941
REINSURANCE
Our reinsurance operations consist of seven operating units, which
specialize in underwriting property casualty reinsurance on both a treaty and a
facultative basis on behalf of Berkley Insurance Company. Treaty reinsurance is
the reinsurance of all or a specified portion or category of risks underwritten
by the ceding company during the term of the agreement. Facultative reinsurance
is the reinsurance of individual risks whereby a reinsurer has the opportunity
to analyze and separately underwrite a risk prior to agreeing to be bound.
Signet Star Re, LLC ("Signet Star") focuses on specialty lines of
business, including professional liability, umbrella, workers' compensation,
commercial automobile and trucking, where knowledge and expertise in a specific
area is valued over the capital scale of the reinsurance provider. Signet Star
emphasizes casualty excess of loss treaties and seeks significant participations
in order to have greater influence over the terms and conditions of coverage.
Signet Star is committed exclusively to the broker market segment of the treaty
reinsurance industry; accordingly, its business is produced through reinsurance
brokers or intermediaries as opposed to direct relationships with the ceding
companies. This permits Signet Star to have wider market access.
Facultative ReSources, Inc. ("Fac Re") specializes in individual
certificate and program facultative business developed through brokers. Its
experienced underwriters seek to offset the underwriting and pricing cycles in
the underlying insurance business by working closely with ceding company clients
to develop appropriate underwriting criteria and through superior risk
selection.
B F Re Underwriting, LLC. ("BF Re"), which commenced operations in
2002, writes facultative reinsurance on a direct basis.
7
Lloyd's reinsurance represents 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 underwrite a
broad range of mainly short-tail classes of business on a worldwide basis.
Berkley Underwriting Partners, LLC ("Berkley Underwriting Partners")
writes specialty insurance products through program administrators and managing
general underwriters.
Fidelity & Surety Reinsurance Managers, LLC ("Fidelity and Surety")
offers reinsurance coverage to a limited number of regional fidelity and surety
accounts.
Berkley Risk Solutions ("Berkley Risk Solutions") was formed in 2003,
and in 2004 began to provide insurance and reinsurance based financial solutions
to insurance companies and self insured entities.
The following table sets forth the percentages of gross premiums
written by each reinsurance unit:
Year Ended December 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Signet Star 34.0% 35.4% 56.3% 76.8% 79.6%
Fac Re 28.0 24.3 26.9 15.2 12.6
Lloyds 23.9 27.8 -- -- --
Berkley Underwriting Partners 7.9 11.0 10.2 -- --
B F Re 5.7 -- -- -- --
Fidelity and Surety 0.5 1.5 6.6 8.0 7.8
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
The following table sets forth the percentage of gross premiums
written, by property versus casualty business, by our reinsurance operations:
Year Ended December 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Property 23.4% 24.8% 8.4% 14.4% 20.6%
Casualty 76.6 75.2 91.6 85.6 79.4
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
REGIONAL
Our regional subsidiaries provide commercial insurance products to
customers primarily in 32 states. Key clients of this segment are
small-to-mid-sized businesses and state and local 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. The
regional operations are conducted through four geographic regions based on
markets served: Continental Western Insurance Group ("Continental Western") in
the Midwest, Acadia Insurance Company ("Acadia") in New England, Union Standard
Insurance Group ("Union Standard") in the South (excluding Florida) and Berkley
Mid Atlantic Group in the Mid Atlantic region.
The regional subsidiaries primarily sell 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 percentage of direct premiums
written by each region:
Year Ended December 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Continental Western 39.7% 39.8% 42.3% 42.9% 45.1%
Acadia 29.6 28.7 26.7 24.7 21.5
Union Standard 16.6 16.7 15.8 16.4 14.4
Berkley Mid Atlantic 14.1 14.8 15.2 16.0 19.0
----- ----- ---- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
8
The following table sets forth the percentages of direct premiums
written, by line, by our regional insurance operations:
Year Ended December 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Commercial Multi-Peril 37.6% 36.2% 29.9% 28.9% 28.1%
Workers' Compensation 24.8 24.9 24.3 22.7 22.8
Auto Liability 17.8 17.4 17.9 18.9 18.7
Auto Physical Damage 8.1 7.9 8.3 9.0 9.0
General Liability 5.7 6.1 8.3 8.7 8.7
Fire and Allied Lines 1.3 2.2 4.3 4.3 4.9
Inland Marine 1.9 2.6 3.9 4.1 4.4
Surety 0.7 0.8 1.0 1.0 0.9
Ocean Marine 0.7 0.7 0.9 1.0 0.9
Other 1.4 1.2 1.2 1.4 1.6
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
The following table sets forth the percentages of direct premiums
written, by state, by our regional insurance operations:
Year Ended December 31,
------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
State
Kansas 7.9% 8.3% 7.9% 5.0% 4.8%
Massachusetts 7.7 7.2 7.2 5.8 4.6
Texas 6.4 6.2 6.3 6.0 5.3
Maine 6.2 7.5 7.9 8.0 6.8
New Hampshire 6.2 6.9 7.8 7.2 6.5
Iowa 4.7 4.6 5.5 6.5 6.4
Nebraska 4.5 4.8 5.4 5.3 5.1
Pennsylvania 4.2 3.9 2.4 2.1 3.7
Tennessee 4.1 1.8 1.6 2.0 2.0
Minnesota 3.8 3.5 3.7 4.1 5.5
Vermont 3.8 4.1 3.7 3.2 3.0
South Dakota 3.6 3.6 3.4 2.9 3.0
Missouri 3.5 3.2 3.5 3.7 4.4
North Carolina 3.2 4.0 4.9 5.4 6.0
Colorado 3.0 3.3 3.6 4.4 3.7
Wisconsin 2.8 2.7 2.9 2.7 3.0
Virginia 2.7 2.7 3.4 3.5 3.6
Mississippi 2.1 2.1 2.5 3.1 3.1
Illinois 2.0 2.2 2.3 2.7 3.0
Arkansas 1.9 1.9 2.3 2.7 2.2
Oklahoma 1.5 1.5 1.5 1.3 1.0
Idaho 1.5 1.5 1.3 1.2 1.5
South Carolina 1.1 1.3 1.6 2.0 1.9
Other 11.6 11.2 7.4 9.2 9.9
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
International
The Company and Northwestern Mutual Life International, Inc. ("NML"), a
wholly-owned subsidiary of The Northwestern Mutual Life Insurance Company,
jointly own Berkley International, LLC ("Berkley International").
9
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 Asia. In
Argentina, we offer commercial and personal property casualty insurance. Our
Argentina subsidiary ceased writing life insurance business in 2002. In the
Philippines, we provide savings and life products to customers, and in Hong Kong
we provide marketing and agency services to life insurers.
The following table set forth the percentages of direct premiums for
our international operations:
Year Ended December 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Property casualty 91.7% 72.3% 77.9% 72.3% 72.3%
Life 0.6 10.0 12.4 14.7 16.5
----- ---- ----- ----- -----
Total Argentina 92.3 82.3 90.3 87.0 88.8
Asia - Life 7.7 17.7 9.7 13.0 11.2
----- ---- ----- ----- -----
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
discontinued business:
Year Ended December 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Personal lines -- 68.3% 61.8% 61.8% 74.3%
Alternative markets reinsurance
-- 31.7 38.2 38.2 25.7
---- ----- ----- ----- -----
Total -- 100.0% 100.0% 100.0% 100.0%
==== ===== ===== ===== =====
OTHER BUSINESS
The Company owns a majority interest in Peyton Street Independent
Financial Services ("Peyton Street"), a unitary thrift holding company that owns
the common stock of InsurBanc. InsurBanc provides banking services principally
to independent insurance agencies and their employees.
10
Results by Industry Segment
Summary financial information about our operating segments is presented
on a GAAP basis in the following table:
Year Ended December 31,
-----------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Amounts in thousands)
Specialty Insurance
Revenues $ 1,188,013 $ 826,558 $ 470,107 $ 336,621 $ 320,046
Income before income taxes 201,885 136,112 34,554 32,104 43,331
Alternative Markets
Revenues 551,091 359,230 234,430 189,425 172,119
Income before income taxes 85,397 62,703 34,255 34,944 25,807
Reinsurance
Revenues 813,180 442,199 250,850 335,935 337,401
Income (loss) before income taxes 59,984 14,981 (61,403) 26,026 16,461
Regional
Revenues 923,965 749,750 608,682 560,748 542,422
Income (loss) before income taxes 153,292 104,085 37,203 4,182 (70,964)
International
Revenues 70,931 94,609 155,913 117,971 93,734
Income (loss) before income taxes 3,347 (1,757) 12,149 6,591 4,200
Discontinued business
Revenues -- 55,774 232,403 232,392 213,816
Loss before income taxes -- (10,682) (133,480) (9,936) (25,646)
Other (1)
Revenues 82,928 37,964 (10,588) 8,195 (5,870)
Loss before income taxes (14,601) (46,009) (74,672) (53,060) (72,437)
Total
Revenues $3,630,108 $2,566,084 $1,941,797 $1,781,287 $1,673,668
Income (loss) before income tax 489,304 259,433 (151,394) 40,851 (79,248)
(1) Represents corporate revenues and expenses, realized investment gains
and losses, and foreign exchange gains and losses, which are not
allocated to business segments. Also includes the operating results of
Peyton Street.
11
The table below represents summary underwriting ratios, on a GAAP
accounting basis for our insurance segments. 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,
---------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Specialty Insurance
Loss ratio 63.3% 63.7% 71.0% 73.1% 68.1%
Expense ratio 24.9 25.7 30.7 33.5 35.2
---- ----- ----- ----- -----
Combined ratio 88.2% 89.4% 101.7% 106.6% 103.3%
==== ===== ===== ===== =====
Alternative Markets
Loss ratio 68.6% 66.7% 76.5% 70.2% 65.8%
Expense ratio 24.6 29.6 32.9 38.7 41.5
---- ----- ----- ----- -----
Combined ratio 93.2% 96.3% 109.4% 108.9% 107.3%
==== ===== ===== ===== =====
Reinsurance
Loss ratio 69.6% 75.0% 109.3% 73.3% 76.1%
Expense ratio 29.5 31.7 38.3 33.3 33.3
---- ----- ----- ----- -----
Combined ratio 99.1% 106.7% 147.6% 106.6% 109.4%
==== ===== ===== ===== =====
Regional
Loss ratio 56.3% 59.1% 67.2% 75.5% 87.1%
Expense ratio 31.2 32.4 35.0 35.1 37.5
---- ----- ----- ----- -----
Combined ratio 87.5% 91.5% 102.2% 110.6% 124.6%
==== ===== ===== ===== =====
International
Loss ratio 54.4% 54.2% 61.4% 62.1% 55.4%
Expense ratio 42.3 51.3 40.6 41.7 47.5
---- ----- ----- ----- -----
Combined ratio 96.7% 105.5% 102.0% 103.8% 102.9%
==== ===== ===== ===== =====
Discontinued Business
Loss ratio -- 98.7% 131.4% 75.9% 77.0%
Expense ratio -- 30.8 33.0 32.8 34.0
---- ----- ----- ----- -----
Combined ratio -- 129.5% 164.4% 108.7% 111.0%
==== ===== ===== ===== =====
Total
Loss ratio 63.4% 65.0% 82.1% 73.4% 76.8%
Expense ratio 28.0 30.4 34.4 34.8 36.5
---- ----- ----- ----- -----
Combined ratio 91.4% 95.4% 116.5% 108.2% 113.3%
==== ===== ===== ===== =====
12
Investments
Investment results before income tax effects were as follows:
Year Ended December 31,
-----------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Amounts in thousands)
Average investments, at cost $5,326,621 $3,881,121 $3,279,830 $3,046,364 $3,068,324
========== ========== ========== ========== ==========
Investment income,
before expenses $ 244,347 $ 210,900 $ 206,656 $ 219,955 $ 198,556
========== ========== ========== ========== ==========
Percent earned on
average investments 4.6% 5.4% 6.3% 7.2% 6.5%
========== ========== ========== ========== ==========
Realized gains (losses) $ 82,531 $ 15,214 $ (12,252) $ 7,535 $ (5,683)
========== ========== ========== ========== ==========
Change in unrealized investment
gains (losses) (1) $ 21,613 $ 124,188 $ 31,277 $ 109,273 $ (167,020)
========== ========== ========== ========== ==========
(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.
For comparison, following are the yield components of selected bond and
stock indices:
Year Ended December 31,
--------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Lehman Brothers U.S. Aggregate
Bond Index 5.3% 6.0% 6.5% 6.9% 6.3%
=== === === === ===
Lehman Brothers Municipal Bond Index 4.8% 5.1% 5.2% 5.5% 5.1%
=== === === === ===
S&P 500 Index 2.3% 1.3% 1.1% 1.0% 1.5%
=== === === === ===
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.
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
1 year or less 1.6% 3.1% 3.2% 3.5% 3.0%
Over 1 year through 5 years 21.1 16.9 20.5 22.1 16.4
Over 5 years through 10 years 19.0 25.4 23.2 21.8 26.0
Over 10 years 36.8 27.8 26.2 27.7 34.6
Mortgage-backed securities 21.5 26.8 26.9 24.9 20.0
----- ----- ----- ----- -----
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.
13
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 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
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 3.9% to 6.5% with a
weighted average rate of 5.0%. The aggregate net discount, after reflecting the
effects of ceded reinsurance, is $393,000,000, $293,000,000 and $243,000,000 at
December 31, 2003, 2002 and 2001, respectively. The increase in the aggregate
discount from 2002 to 2003 and from 2001 to 2002 resulted from the increase in
workers' compensation reserves.
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 $31,866,000 and $28,509,000 at December
31, 2003 and 2002, respectively. The Company's gross reserves for losses and
loss adjustment expenses relating to asbestos and environmental claims were
$49,283,000 and $47,637,000 at December 31, 2003 and 2002, respectively. Net
incurred losses and loss expenses (recoveries) for reported asbestos and
environmental claims were approximately $4,749,000, $6,652,000 and ($4,503,000)
in 2003, 2002 and 2001, respectively. Net paid losses and loss expenses
(receivables) for reported asbestos and environmental claims were approximately
$1,391,000, $2,938,000 and $125,000 in 2003, 2002 and 2001, 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 net provision for
losses and loss expense (amounts in thousands):
2003 2002 2001
---- ---- ----
Net provision for losses and loss expense:
Property casualty $ 2,049,656 $ 1,457,254 $ 1,360,683
Life 521 6,717 19,817
----------- ----------- ---------------
Total $ 2,050,177 $ 1,463,971 $ 1,380,500
=========== =========== ===============
14
The table below provides a reconciliation of the beginning and ending
property casualty reserves, on a gross of reinsurance basis (amounts in
thousands):
2003 2002 2001
---- ---- ----
Net reserves at beginning of year $2,323,241 $2,033,293 $1,818,049
---------- ---------- ----------
Net provision for losses and loss expenses:
Claims occurring during the current year 1,780,905 1,288,071 1,140,622
Increase in estimates for claims occurring
in prior years 272,850 173,732 211,344
Net decrease (increase) in discount for prior years (4,099) (4,549) 8,717
---------- ---------- ----------
2,049,656 1,457,254 1,360,683
---------- ---------- ----------
Net payments for claims:
Current year 268,170 373,541 443,802
Prior years 599,432 793,765 701,637
---------- ---------- ----------
867,602 1,167,306 1,145,439
---------- ---------- ----------
Net reserves at end of year 3,505,295 2,323,241 2,033,293
Ceded reserves at end of year 686,796 844,684 730,557
---------- ---------- ----------
Gross reserves at end of year $4,192,091 $3,167,925 $2,763,850
========== ========== ==========
In the above table, claims occurring during the current year are net of
discount of $96,356,000, $38,939,000 and $24,781,000 for the years ended
December 31, 2003, 2002 and 2001, respectively. Net payments in 2003 are net of
$331 million of cash received upon the commutation of the aggregate reinsurance
agreement (see Note 10 of Notes to Consolidated Financial Statements). Also, see
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" for further information regarding the increase in estimates for
claims occurring in prior years.
A reconciliation between the reserves as of December 31, 2003 as
reported in the accompanying consolidated GAAP financial statements and those
reported on the basis of statutory accounting principles ("SAP") is as follows
(amounts in thousands):
Net reserves reported on a SAP basis $ 3,495,274
Additions (deductions) to statutory reserves:
International property & casualty reserves 26,735
Loss reserve discounting (1) (16,714)
-----------
Net reserves reported on a GAAP basis 3,505,295
Ceded reserves reclassified as assets 686,796
-----------
Gross reserves reported on a GAAP basis $ 4,192,091
===========
(1) For statutory purposes, we use a discount rate of 4.2% as permitted by
the Department of Insurance of the State of Delaware.
The following table presents the development of net reserves for 1993
through 2003. 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 1993 reserves
have developed a $161 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
1993 is reserved for $2,000 as of December 31, 1993. Assuming this claim
estimate was changed in 2003 to $2,300, and was settled for $2,300 in 2003, the
$300 deficiency would appear as a deficiency in each year from 1993 through
2002.
15
(Amounts in millions)
Year Ended December 31, 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
- --------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Discounted net reserves for
losses and loss expenses $ 783 $ 895 $1,209 $1,333 $1,433 $1,583 $1,724 $1,818 $2,033 $2,323 $3,505
Reserve discounting -- -- 152 172 190 187 196 223 243 293 393
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Undiscounted net reserve 783 895 1,361 1,505 1,623 1,770 1,920 2,041 2,276 2,616 3,898
for loss and loss
expenses 710 783 895 1,361 1,505
Net Re-estimated as of:
One year later 776 885 1,346 1,481 1,580 1,798 1,934 2,252 2,450 2,889
Two years later 755 872 1,305 1,406 1,566 1,735 2,082 2,397 2,671
Three years later 744 833 1,236 1,356 1,446 1,805 2,203 2,520
Four years later 708 789 1,195 1,239 1,463 1,856 2,260
Five years later 672 764 1,112 1,248 1,494 1,859
Six years later 649 706 1,118 1,271 1,488
Seven years later 599 712 1,135 1,265
Eight years later 605 723 1,132
Nine years later 610 725
Ten years later 622
Cumulative redundancy
(deficiency) undiscounted $ 161 $ 170 $ 229 $ 240 $ 135 $ (89) $ (340) $ (479) $ (395) $ (273)
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Cumulative amount of
net liability paid
through:
One year later 186 221 265 332 365 496 584 702 794 599
Two years later 221 355 434 523 574 795 1,011 1,255 1,191
Three years later 291 445 550 635 737 1,032 1,426 1,501
Four years later 334 501 616 714 852 1,306 1,567
Five years later 363 528 655 782 1,033 1,387
Six years later 373 543 701 903 1,068
Seven years later 373 577 785 935
Eight years later 393 634 809
Nine years later 421 654
Ten years later 436
Discounted net reserves 783 895 1,209 1,333 1,433 1,583 1,724 1,818 2,033 2,323 3,505
Ceded Reserves 1,233 1,176 451 450 477 538 617 658 731 845 687
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Discounted gross reserves 2,016 2,071 1,660 1,783 1,910 2,121 2,341 2,476 2,764 3,168 4,192
Reserve discounting -- -- 192 216 241 248 250 286 324 384 462
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Gross reserve $2,016 $2,071 $1,852 $1,999 $2,151 $2,369 $2,591 $2,762 $3,088 $3,552 $4,654
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Gross Re-estimated as of:
One year later 2,010 2,043 1,827 1,965 2,132 2,390 2,653 2,827 3,153 3,957
Two years later 1,966 2,026 1,789 1,959 2,096 2,389 2,556 2,730 3,461
Three years later 1,955 1,983 1,754 1,909 2,010 2,218 2,385 2,900
Four years later 1,913 1,951 1,733 1,823 1,871 2,079 2,465
Five years later 1,855 1,928 1,681 1,739 1,787 2,102
Six years later 1,815 1,899 1,630 1,688 1,795
Seven years later 1,788 1,858 1,589 1,692
Eight years later 1,757 1,827 1,593
Nine years later 1,737 1,834
Ten Years later 1,754
Gross cumulative redundancy
(deficiency) $ 262 $ 237 $ 259 $ 307 $ 356 $ 267 $ 126 $ (138) $ (373) $ (405)
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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 $500 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 $250 million in policyholder
surplus. As a result of the attacks of September 11, 2001, 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 10 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, and the Company
believes that it is in compliance in all material respects with such
regulations. 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 generally file
all rates with the insurance department of each state in which they operate. Our
excess and surplus 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 RBC control level as of December 31, 2003.
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, which, as regulated by the Act, can maintain 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 financial
17
holding companies. 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.
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 management 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.
The Terrorism Risk Insurance Act of 2002 ("TRIA") became effective
November 26, 2002. TRIA establishes a temporary Federal program that provides
for a system of shared public and private compensation for insured losses
resulting from acts of terrorism. The program terminates on December 31, 2005.
TRIA is applicable to almost all commercial lines of property and casualty
insurance. Insurers with direct commercial property and casualty insurance
exposure in the United States are required to participate in the program and
make available coverage for certified acts of terrorism. Federal participation
will be triggered under TRIA when the Secretary of Treasury certifies an act of
terrorism. Under the program the federal government will pay 90% of an insurer's
losses in excess of the insurer's applicable deductible. The insurer's
deductible is based on a percent of earned premium for covered lines of
commercial property and casualty insurance: for 2003 the deductible is 7% of
2002 premium, for 2004 it is 10% of 2003 premium and for 2005 it is 15% of 2004
premium. Based on our 2003 earned premiums, our deductible under TRIA during
2004 will be $277 million. Based on our estimated earned premiums for 2004, our
deductible under TRIA during 2005 will increase to approximately $500 million.
TRIA limits the federal governments share of losses at $100 billion for a
program year. In addition, an insurer that has satisfied its deductible is not
liable for the payment of losses in excess of the $100 billion cap.
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 excess and surplus 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 Berkshire Hathaway,
Employers Reinsurance, Transatlantic Reinsurance and Everest 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.
18
Employees
As of March 5, 2004, we employed 4,669 persons. Of this number, our
subsidiaries employed 4,611 persons, of whom 2,459 were executive and
administrative personnel and 2,152 were clerical personnel. We employed the
remaining 58 persons at the parent company and in investment operations, of whom
43 were executive and administrative personnel and 15 were clerical personnel.
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.
The Company's internet address is www.wrberkley.com. The information on
our website is not incorporated by reference in this annual report on Form 10-K.
The Corporation's annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are accessible
free of charge through this website as soon as reasonably practicable after they
have been electronically filed with or furnished to the Securities and Exchange
Commission.
19
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Our business faces significant risks. 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.
RISKS RELATING TO OUR INDUSTRY
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.
Our gross reserves for losses and loss expenses were approximately $4.2
billion as of December 31, 2003. Our loss reserves reflect our best estimates of
the cost of settling all claims and related expenses with respect to insured
events that have occurred.
Reserves do not represent an exact calculation of liability. Rather,
reserves represent an estimate of what management expects the ultimate
settlement and claims administration will cost for claims that have occurred,
whether known or unknown. The major assumptions about anticipated loss emergence
patterns are subject to unanticipated fluctuation. These estimates, which
generally involve actuarial projections, are based on management's assessment of
facts and circumstances then known, as well as estimates of future trends in
claims severity and frequency, inflation, judicial theories of liability,
reinsurance coverage, legislative changes and other factors, including the
actions of third parties which are beyond our control.
The inherent uncertainties of estimating reserves are greater for
certain types of liabilities, where long periods of time elapse before a
definitive determination of liability is made and settlement is reached. In
periods with increased economic volatility, it becomes more difficult to
accurately predict claim costs. Reserve estimates are continually refined in an
ongoing process as experience develops and further claims are reported and
settled. Adjustments to reserves are reflected in the results of the periods in
which such estimates are changed. Because setting reserves is inherently
uncertain, we cannot assure you that our current reserves will prove adequate in
light of subsequent events. Should we need to increase our reserves, our pre-tax
income for the period would decrease by a corresponding amount.
We increased our estimates for claims occurring in prior years by $273
million 2003, $174 million in 2002 and $211 million in 2001. We, along with the
property casualty insurance industry in general, have experienced higher than
expected losses for certain types of business written from 1998 to 2001.
Although our reserves reflect our best estimate of the costs of settling claims,
we cannot assure you that our claim estimates will not need to be increased in
the future.
We discount our reserves for excess and assumed workers' compensation
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 liabilities. The expected loss
and loss expense payout pattern subject to discounting is derived from our loss
payout experience and is supplemented with data compiled from insurance
companies writing similar business. Changes in the loss and loss expense payout
pattern are recorded in the period they are determined. If the actual loss
payout pattern is shorter than anticipated, the discount will be reduced and
pre-tax income will decrease by a corresponding amount.
20
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. For example, weather-related losses for our regional
business were $55 million in 2001, $29 million in 2002 and $38 million in 2003.
In addition, through our recent quota share arrangements with certain Lloyd's
syndicates, we have additional exposure to catastrophic losses.
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. 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. Some 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 significant 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 Berkshire Hathaway, Employers Reinsurance,
Transatlantic Reinsurance and Everest Reinsurance Company, which collectively
comprise a majority of the U.S. property casualty reinsurance market. We expect
that perceived financial strength, in particular, will become more important as
customers seek high quality reinsurers.
New competition 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.
WE, AS A PRIMARY INSURER, MAY HAVE SIGNIFICANT EXPOSURE FOR TERRORIST ACTS.
To the extent that reinsurers have excluded coverage for terrorist acts
or have priced such coverage at rates that we believe are not practical, we, in
our capacity as a primary insurer, do not have reinsurance protection and are
exposed for potential losses as a result of any terrorist acts. For example, our
losses from the World Trade Center attack in 2001 were $35 million.
To the extent an act of terrorism is certified by the Secretary of
Treasury, we may be covered under The Terrorism Risk Insurance Act of 2002
("TRIA") for up to 90% of our losses. However, any such coverage would be
subject to a mandatory deductible based on a percent of earned premium for the
covered lines of commercial property and casualty insurance. Based on our 2003
earned premiums, our deductible under TRIA during 2004 will be $277 million.
Based on our estimated earned premiums for 2004, our deductible under TRIA
during 2005 will increase to approximately $500 million. If TRIA is not extended
beyond its stated termination date of December 31, 2005 or replaced by a similar
program, our liability for terrorist acts could be a material amount. In
addition, even this coverage provided under TRIA does not apply to reinsurance
that we write.
21
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;
- rate and form regulation pertaining to certain of our
insurance businesses; 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 may 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.
In certain of our insurance businesses, the rates we charge our
policyholders are subject to regulatory approval. Certain lines of business are
subject to a greater degree of regulatory scrutiny then others. For example, the
workers' compensation business is highly regulated. During 2003, approximately
12% of our net premiums written represented primary workers' compensation
business. Of our net premiums written, approximately 4% represented primary
workers' compensation business written in the State of California, which is
undergoing workers' compensation reform that may adversely affect our ability to
adjust rates.
RISKS RELATING TO OUR BUSINESS
OUR EARNINGS COULD BE MORE VOLATILE, ESPECIALLY SINCE WE HAVE INCREASED, AND
EXPECT TO FURTHER SUBSTANTIALLY INCREASE, OUR LEVEL OF RETENTION IN OUR
BUSINESS.
We have increased our retention levels due to changes in market
conditions and the pricing environment. We plan to purchase 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. As a result, our earnings
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.
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. As of December 31, 2003, the
amount due from our reinsurers was $805 million,
22
including amounts due from state funds and industry pools. Certain of these
amounts due from reinsurers are secured by letters of credit or held in trust on
our behalf. 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. Underwriting results and investment returns of some of our reinsurers
may affect their future ability to pay claims.
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. Certain of our insurance
company subsidiaries are rated by A.M. Best, Standard & Poor's and Moody's
Investors Services. A.M. Best, Standard & Poor's and Moody'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, and we cannot assure you that we will be able to retain those
ratings. All of the domestic insurance subsidiaries except Admiral Insurance
Company have an A.M. Best Company, Inc. ("A.M. Best") rating of "A (Excellent)"
which is the third highest rating out of 15 possible ratings by A. M. Best.
Admiral Insurance Company has a rating of "A+ (Superior)" which is A.M. Best's
second highest rating. W. R. Berkley Insurance (Europe), Limited has a rating of
"A- (Excellent)" which is A.M. Best's fourth highest rating. The Standard &
Poor's financial strength rating for our insurance subsidiaries is A+/negative
(the seventh highest rating out of twenty-seven possible ratings). Our Moody's
rating is A2 for Berkley Insurance Company (the sixth highest rating out of
twenty-one possible ratings).
If our ratings are reduced from their current levels by A.M. Best,
Standard & Poor's and/or Moody'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.
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 certain 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.
OUR INTERNATIONAL OPERATIONS EXPOSE US TO INVESTMENT, POLITICAL AND ECONOMIC
RISKS.
Our international operations, including our recent UK-based operations,
expose us to investment, political and economic risks, including foreign
currency and credit risk. Changes in the value of the U.S. dollar relative to
other currencies could have an adverse effect on our results of operations and
financial condition. For example, Argentina has recently experienced substantial
political and economic problems, including the devaluation of the Argentinean
peso. As a result, we recorded a charge of $18 million in 2001 and $10 million
in 2002 to recognize other than temporary impairment of our investment in
Argentine bonds.
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.
23
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.
RISKS RELATING TO OUR INVESTMENTS
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. As of December 31, 2003, our investment in fixed income securities
was approximately $4.3 billion, or 66% of our total investment portfolio.
The fair market value of these assets and the investment income from
these assets fluctuate depending on general economic and market conditions. The
fair market value of fixed income securities generally decreases as interest
rates rise. Conversely, if interest rates decline, investment income earned from
future investments in fixed income securities will be lower. In addition, some
fixed income securities, such as mortgage-backed and other asset-backed
securities, carry prepayment risk as a result of interest rate fluctuations.
Based upon the composition and duration of our investment portfolio at December
31, 2003, a 100 basis point increase in interest rates would result in a
decrease in the fair value of our investments of approximately $203 million.
The value of investments in fixed income securities, and particularly
our investments in high-yield securities, is subject to impairment as a result
of deterioration in the credit worthiness of the issuer. Although we attempt to
manage this risk by diversifying our portfolio and emphasizing preservation of
principal, our investments are subject to losses as a result of a general
decrease in commercial and economic activity for an industry sector in which we
invest, as well as risks inherent in particular securities. For example, we
reported provisions for other than temporary impairments in the value of our
fixed income investments of $27 million in 2001, $16 million in 2002 and
$430,000 in 2003.
WE INVEST SOME OF OUR ASSETS IN EQUITY SECURITIES, INCLUDING MERGER ARBITRAGE
INVESTMENTS AND REAL ESTATE SECURITIES, WHICH MAY DECLINE IN VALUE.
We invest a portion of our investment portfolio in equity securities,
including merger arbitrage investments. At December 31, 2003, our investments in
equity securities was approximately $759 million, or 12% of our investment
portfolio. Although we did not report any provisions for "other than temporary
impairments" in the value of our equity securities in 2000 or in 2003, we
reported such provisions in the amounts of $0.1 million in 2001 and $2.7 million
in 2002.
Nearly half our equity securities are invested in merger and
convertible arbitrage trading. Merger arbitrage is the business of investing in
the securities of publicly held companies that 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.
Included in our equity security portfolio are investments in publicly
traded real estate investment trusts ("REITs") and private real estate
investment funds and limited partnerships. At December 31, 2003, our investments
in these securities was approximately $254 million, or 4% of our investment
portfolio. The values of our real estate investments are subject to fluctuations
based on changes in the economy in general and real estate valuations in
particular. In addition, the real estate investment funds and limited
partnerships in which we invest are less liquid than our other investments.
24
RISKS RELATING TO PURCHASING OUR SECURITIES
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. For example, during 2000 and 2001, we received approximately
$44.5 million and $7.2 million of dividends, respectively, from our insurance
subsidiaries. We elected not to take any dividends from our insurance
subsidiaries in 2002 and 2003.
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. During
2004, the maximum amount of dividends which can be paid without regulatory
approval is approximately $197 million. As a result, in the future 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 ARE SUBJECT TO CERTAIN PROVISIONS THAT MAY HAVE THE EFFECT OF HINDERING,
DELAYING OR PREVENTING THIRD PARTY TAKEOVERS, WHICH MAY PREVENT OUR SHAREHOLDERS
FROM RECEIVING PREMIUM PRICES FOR THEIR SHARES IN AN UNSOLICITED TAKEOVER AND
MAKE IT MORE DIFFICULT FOR THIRD PARTIES TO REPLACE OUR CURRENT MANAGEMENT.
Provisions of our certificate of incorporation and by-laws, as well as
our rights agreement and state insurance statutes, may hinder, delay or prevent
unsolicited acquisitions or changes of our control. These provisions may also
have the effect of making it more difficult for third parties to cause the
replacement of our current management without the concurrence of our board of
directors.
These provisions include:
- our classified board of directors and the ability of our board
to increase its size and to appoint directors to fill newly
created directorships;
- the requirement that 80% of our stockholders must approve
mergers and other transactions between us and the holder of 5%
or more of our shares, unless the transaction was approved by
our board of directors prior to such holder's acquisition of
5% of our shares;
- the need for advance notice in order to raise business or make
nominations at stockholders' meetings;
- our rights agreement which subject persons (other than William
R. Berkley) who acquire beneficial ownership of 15% or more of
our common stock without board approval to substantial
dilution; and
- state insurance statutes that restrict the acquisition of
control (generally defined as 5 - 10% of the outstanding
shares) of an insurance company without regulatory approval.
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, 2003, the
Company had aggregate office space of 1,155,539 square feet, of which 350,589
were owned and 804,950 were leased.
Rental expense was approximately $18,773,000, $17,586,000 and
$18,021,000 for 2003, 2002 and 2001, respectively. Future minimum lease payments
(without provision for sublease income) are $14,583,000 in 2004; $12,503,000 in
2005; $10,103,000 in 2006; and $26,525,000 thereafter.
ITEM 3. LEGAL PROCEEDINGS
The Company's subsidiaries are subject to disputes, including
litigation and arbitration, arising in the ordinary course of their insurance
and reinsurance businesses. The Company's estimates of the costs of settling
such matters are reflected in its aggregate reserves for losses and loss
expenses, and the Company does not believe that the ultimate outcome of such
matters, individually or in the aggregate, will have a material adverse effect
on its financial condition or results of operations.
25
During 2003, two arbitration hearings in which subsidiaries of the
Company were involved were completed. The Company recorded an increase in
reserves for loss and loss expenses during the third quarter of 2003 of $15
million, which represents the excess of the Company's estimate of the ultimate
cost of the disposition of these matters over amounts that were previously
accrued.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 2003 to a vote
of holders of the Company's Common Stock.
26
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". All amounts have been adjusted to reflect the 3-for-2 common stock
splits effected on August 27, 2003 and July 2, 2002.
Common
Price Range Dividends Paid
------------------- --------------
High Low Per Share
-------- -------- --------------
2003:
Fourth Quarter $ 36.93 $ 31.55 $ .07 cash
Third Quarter 36.01 31.27 $ .07 cash
Second Quarter 35.73 27.83 $ .07 cash
First Quarter 28.80 24.39 $ .07 cash
2002:
Fourth Quarter $ 26.85 $ 20.76 $ .06 cash
Third Quarter 24.93 19.93 $ .06 cash
Second Quarter 27.20 23.98 $ .06 cash
First Quarter 25.80 21.36 $ .06 cash
The closing price of the Common Stock on March 5, 2004, as reported on
the New York Stock Exchange, was $42.46 per share. The approximate number of
record holders of the Common Stock on March 5, 2004 was 585.
27
ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 2003
Year Ended December 31,
----------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
(Amounts in thousands, except per share data)
Net premiums written $ 3,670,515 $ 2,710,490 $ 1,858,096 $ 1,506,244 $ 1,427,719
Premiums earned 3,234,610 2,252,527 1,680,469 1,491,014 1,414,384
Net investment income 210,056 187,875 195,021 210,448 190,316
Service fees 101,715 86,095 75,771 68,049 72,344
Realized investment gains (losses) 82,531 15,214 (12,252) 7,535 (5,683)
Foreign currency gains (losses) (839) 21,856 758 829 (381)
Total revenues 3,630,108 2,566,084 1,941,797 1,781,287 1,673,668
Interest expense 54,733 45,475 45,719 47,596 50,801
Income (loss) before income taxes 489,304 259,433 (151,394) 40,851 (79,248)
Income tax (expense) benefit (150,626) (84,139) 56,661 (2,451) 45,766
Minority interest (1,458) (249) 3,187 (2,162) (566)
Preferred dividends -- -- -- -- (497)
Net income (loss) before change in
accounting and extraordinary gain 337,220 175,045 (91,546) 36,238 (34,545)
Cumulative effect of change in accounting -- -- -- -- (3,250)
Extraordinary gain -- -- -- -- 735
Net income (loss) attributable to
common stockholders 337,220 175,045 (91,546) 36,238 (37,060)
Data per common share (1):
Net income (loss) per basic share 4.06 2.29 (1.39) .63 (.64)
Net income (loss) per diluted share 3.87 2.21 (1.39) .62 (.64)
Stockholders' equity 20.14 16.12 12.45 11.79 10.27
Cash dividends declared $ .28 $ .24 $ .24 $ .24 $ .24
Weighted average shares outstanding:
Basic 83,124 76,328 65,562 57,672 58,103
Diluted 87,063 79,385 68,750 58,481 58,337
Investments (2) $ 6,480,713 $ 4,663,100 $ 3,607,586 $ 3,112,540 $ 2,995,980
Total assets 9,334,685 7,031,323 5,633,509 5,022,070 4,784,791
Reserves for losses
and loss expenses 4,192,091 3,167,925 2,763,850 2,475,805 2,340,890
Debt 659,208 362,985 370,554 370,158 394,792
Trust preferred securities 193,336 198,251 198,210 198,169 198,126
Stockholders' equity $ 1,682,562 $ 1,335,199 $ 931,595 $ 680,896 $ 591,778
(1) Adjusted to reflect the 3-for-2 common stock splits effected on August 27,
2003 and July 2, 2002.
(2) Including trading account receivable from brokers and clearing
organizations and trading account securities sold but not yet purchased.
28
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 in the registrant's 2003 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 in the registrant's 2003 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
in the registrant's 2003 Annual Report to Stockholders and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management, including its Chief Executive Officer and
Chief Financial Officer, have conducted an evaluation of the
effectiveness of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14 as of the end of the period
covered by this annual report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the
Company has in place appropriate controls and procedures designed to
ensure that information required to be disclosed by the Company in the
reports it files or submits under the Exchange Act and the rules
thereunder, is recorded, processed, summarized and reported within the
time periods specified in the Commission's rules and forms. There have
been no significant changes in internal controls, or in factors that
could significantly affect internal controls, subsequent to the date
the Chief Executive Officer and Chief Financial Officer completed their
evaluation.
29
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 10, 2004:
Name Age Position
---- --- --------
William R. Berkley 58 Chairman of the Board, Chief Executive Officer, President
and Chief Operating Officer
Eugene G. Ballard 51 Senior Vice President - Chief Financial Officer and Treasurer
William R. Berkley, Jr. 31 Senior Vice President - Specialty Operations, Director
Robert P. Cole 53 Senior Vice President - Regional Operations
Paul J. Hancock 42 Senior Vice President - Chief Corporate Actuary
Robert C. Hewitt 43 Senior Vice President - Alternative Markets Operations
Robert W. Gosselink 50 Senior Vice President - Insurance Risk Management
Ira S. Lederman 50 Senior Vice President - General Counsel and Secretary
James W. McCleary 57 Senior Vice President - Reinsurance Operations
James G. Shiel 44 Senior Vice President - Investments
Clement P. Patafio 39 Vice President - Corporate Controller
Philip J. Ablove 63 Director
Ronald E. Blaylock 44 Director
Mark E. Brockbank 51 Director
George G. Daly 63 Director
Richard G. Merrill 73 Director
Jack H. Nusbaum 63 Director
Mark L. Shapiro 59 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 2003, the term of a class consisting of three directors expired.
William R. Berkley, George G. Daly and Philip J. Ablove were elected as
directors to hold office for a term of three years until the Annual Meeting of
Stockholders in 2006 and until their successors are duly elected and qualify.
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. Mr. Berkley 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 Connecticut
Community Bank, N.A. subsidiary, FLOORgraphics, Inc.; Interlaken Capital, Inc.;
Strategic Distribution, Inc.; The First Marblehead Corporation and W. R. Berkley
Corporation Charitable Foundation. Mr. Berkley's current term as a director
expires in 2006.
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,
Senior Vice President - Specialty Operations since January 2003 and Vice
Chairman of Berkley International, LLC since May 2002. He was Senior Vice
President of the Company from January 2002 to January 2003 and Vice President
from May 2000 to January 2002. Mr. Berkley joined the Company in September 1997.
Mr. Berkley was President of Berkley International, LLC from January 2001 to May
2002, and was its Executive Vice President from March 2000 to January 2001. From
July 1995 to August 1997, he served in the Corporate Finance Department of
Merrill Lynch Investment Company. Mr. Berkley is also a director of Associated
Community Bancorp, Inc. and its Connecticut Community Bank, N.A. subsidiary;
Interlaken Capital, Inc.; LD Realty Advisors LLC; Strategic Distribution, Inc.;
and W. R. Berkley Corporation Charitable Foundation. Mr. Berkley's current term
as director expires in 2004.
30
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. Mr.
Hancock 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 - Alternative Markets
of the Company since January 2004. Prior thereto, Mr. Hewitt was Senior Vice
President-Risk Management from January 2002. Before joining the Company, Mr.
Hewitt was 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.
Robert W. Gosselink has been Senior Vice President - Insurance Risk
Management of the Company since October 2003. Before joining the Company, Mr.
Gosselink was Senior Vice President and Manager, Ceded Reinsurance and Portfolio
Management for XL Global Services since 2001; and Senior Vice President XL
America from 1999 to 2001, both subsidiaries of XL Capital Ltd. Mr. Gosselink
held various positions in treaty underwriting and risk management since 1990
when he joined NAC Reinsurance Corporation, which was acquired by XL Capital
Ltd. in 1999.
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, Mr. Lederman 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, Mr. Lederman was Insurance Counsel of
the Company since May 1986 and Associate Counsel from April 1983.
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 30 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, Mr. Shiel has been
President of Berkley Dean & Company, Inc., a subsidiary of the Company, which he
joined in 1987.
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.
Philip J. Ablove has been a director of the Company since August 2002.
Mr. Ablove was Executive Vice President and Chief Financial Officer of Pioneer
Companies, Inc. from March 1996 to December 2002 when he retired. He was Senior
Vice President and Chief Financial Officer of W. R. Berkley Corporation from
July 1973 until April 1983. Mr. Ablove's current term as a director expires in
2006.
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. He held senior management positions
with PaineWebber Group and Citicorp before launching Blaylock & Partners in
1993. Mr. Blaylock is also a director of Radio One, Inc. Mr. Blaylock's current
term as director expires in 2004.
Mark E. Brockbank retired, has been a director of the Company since
2001. Mr. Brockbank served from 1995 to 2000 as Chief Executive of XL Brockbank
LTD, an underwriting management agency at Lloyd's of London. He was a founder of
the predecessor firm of XL Brockbank LTD and was a director of XL Brockbank LTD
from 1983 to 2000. Mr. Brockbank's current term as a director expires in 2004.
George G. Daly has been a director of the Company since 1998. Dr. Daly
is Fingerhut Professor and Dean Emeritus Stern School of Business, New York
University since August 2002. Previously, he was Dean of Stern School of
Business, and Dean Richard R. West Professor of Business, New York University
for more than five 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.
Dr. Daly also serves as a director of The First Marblehead Corporation. Dr.
Daly's current term as a director expires in 2006.
31
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, he 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 2005.
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 LLP
where he has been a partner for more than the last five years. He is also a
director of Strategic Distribution, Inc. and The Topps Company, Inc. Mr.
Nusbaum's current term as a director expires in 2005.
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 2005.
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, 2003, 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, 2003, 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, 2003, 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, 2003, 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, 2003, and which is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
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, 2003, and which is incorporated herein by reference.
32
PART IV
ITEM 15. 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, appear in the Company's 2003 Annual Report to
Stockholders and are incorporated by reference in this Annual Report on Form
10-K. With the exception of the aforementioned information, the 2003 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 2003 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.
Page
Index to Financial Statement Schedules
Independent Auditors' Report on Schedules and Consent 39
Schedule II - Condensed Financial Information of Registrant 40
Schedule III - Supplementary Insurance Information 44
Schedule IV - Reinsurance 45
Schedule VI - Supplementary Information concerning
Property & Casualty Insurance Operations 46
(b) Reports on Form 8-K
None
(c) Exhibits
The exhibits filed as part of this report are listed on pages 36 and 37
hereof.
33
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
/s/ William R. Berkley
By _______________________________
William R. Berkley, Chairman of
the Board and Chief Executive
Officer
March 12, 2004
34
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
- ----------------------------------------- Chief Executive Officer March 12, 2004
William R. Berkley
Principal executive officer
/s/ William R. Berkley, Jr. Director March 12, 2004
- -----------------------------------------
William R. Berkley, Jr.
/s/ Philip J. Ablove Director March 12, 2004
- -----------------------------------------
Philip J. Ablove
/s/ Ronald E. Blaylock Director March 12, 2004
- -----------------------------------------
Ronald E. Blaylock
/s/ Mark E. Brockbank Director March 12, 2004
- -----------------------------------------
Mark E. Brockbank
/s/ George G. Daly Director March 12, 2004
- -----------------------------------------
George G. Daly
/s/ Richard G. Merrill Director March 12, 2004
- -----------------------------------------
Richard G. Merrill
/s/ Jack H. Nusbaum Director March 12, 2004
- -----------------------------------------
Jack H. Nusbaum
/s/ Mark L. Shapiro Director March 12, 2004
- -----------------------------------------
Mark L. Shapiro
/s/ Eugene G. Ballard Senior Vice President, March 12, 2004
- ----------------------------------------- Chief Financial Officer and
Eugene G. Ballard Treasurer
Principal accounting officer
/s/ Clement P. Patafio Vice President, March 12, 2004
- ----------------------------------------- Corporate Controller
Clement P. Patafio
35
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 through May 19, 2003
(incorporated by reference to Exhibit 3.1 of the Company's Quarterly
Report on Form 10-Q (File No. 1-15202) filed with the Commission on
August 6, 2003).
(3.2) Amendment, dated May 20, 2003, to the Company's Restated Certificate of
Incorporation, as amended (incorporated by reference to Exhibit 3.2 of
the Company's Quarterly Report on Form 10-K (File No. 1-15202) filed
with the Commission on August 6, 2003).
(3.3) 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).
(4.1) Indenture, dated as of February 14, 2003, between the Company and The
Bank of New York, as trustee, relating to $200,000,000 principal amount
of the Company's 5.875% Senior Notes due 2013 (incorporated by
reference to Exhibit 4.1 of the Company's Annual Report on Form 10-K
(File No. 1-15202) filed with the Commission of March 31, 2003).
(4.2) First Supplemental Indenture, dated February 14, 2003, between the
Company and The Bank of New York, as trustees, relating to $200,000,000
principal amount of the Company's 5.875% Senior Notes due 2013,
including form of the Notes as Exhibit A (incorporated by reference to
Exhibit 4.1 of the Company's Annual Report on Form 10-K (File No.
1-15202) filed with the Commission of March 31, 2003).
(4.3) Second Supplemental Indenture, dated as of September 12, 2003, between
the Company and The Bank of New York, as Trustee, relating to
$150,000,000 principal amount of the Company's 5.125% Senior Notes due
2010, including form of the Notes as Exhibit A. (incorporated by
reference to Exhibit 4.2 of the Company's Quarterly Report on Form 10-Q
(File No. 1-15202) filed with the Commission on November 14, 2003).
(4.4) The instruments defining the rights of holders of the other 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) W. R. Berkley Corporation 2003 Stock Incentive Plan (incorporated by
reference to Annex A of the Company's 2003 Proxy Statement (File No.
1-15202) filed with the Commission on April 14, 2003).
(10.2) Form of Restricted Stock Unit Agreement (incorporated by reference to
Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q (File No.
1-15202) filed with the Commission on August 6, 2003).
(10.3) 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).
(10.4) 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).
36
(10.5) 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).
(10.6) W. R. Berkley Corporation Annual Incentive Compensation Plan
(incorporated by reference to Annex A of the Company's 2002 Proxy
Statement (File No. 1-15202) filed with the Commission on April 5,
2002).
(10.7) W. R. Berkley Corporation Long Term Incentive Compensation 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).
(10.8) 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).
(13) Portions of the 2003 Annual Report to Stockholders of W. R. Berkley
Corporation that are incorporated by reference in this Report on Form
10-K (filed herewith).
37
(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.
Percentage
Jurisdiction of owned
Incorporation by the Company(1)
---------------- -----------------
Berkley International, LLC(2) 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 London Holdings, Inc.(3) Delaware 100%
W. R. Berkley London Finance, Limited United Kingdom 80%
W. R. Berkley London Holdings, Limited United Kingdom 80%
W. R. Berkley Insurance (Europe), Limited United Kingdom 80%
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%
Facultative ReSources, Inc. Connecticut 100%
Gemini Insurance Company Delaware 100%
Nonprofits Insurance Company Minnesota 100%
Riverport Insurance Company of California California 100%
StarNet Insurance Company Delaware 100%
1) W. R. Berkley Corporation is the ultimate parent. The subsidiary of a
direct parent in indicated by an indentation, and its percentage ownership
is as indicated in this column.
2) Owned by W. R. Berkley Corporation and its subsidiaries as follows: W. R.
Berkley Corporation (1%), Admiral Insurance Company (25%), Berkley Regional
Insurance Company (10%), Nautilus Insurance Company (5%) and Berkley
Insurance Company (24%).
3) Owned by Admiral Insurance Company (66.67%) and Berkley Insurance Company
(33.33%)
(23) Independent Auditors' Report on Schedules and Consent
(31.1) Certification of the Chief Executive Officer pursuant to Rule
13a-14(a)/ 15d-14(a).
(31.2) Certification of the Chief Financial Officer pursuant to Rule
13a-14(a)/ 15d-14(a).
(32.1)Certification of the Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
38
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 11, 2004, incorporated by
reference in the Form 10-K, included the related financial statement schedules
as of December 31, 2003, and for each of the years in the three-year period
ended December 31, 2003. 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 has
changed its method of accounting for goodwill in 2002.
We consent to the use of our reports incorporated by reference in the
Registration Statements, (No. 333-109621) and (No. 333-00459)on Form S-3 and
(No. 333-33935), (No. 33-88640) and (No. 33-55726) on Form S-8 of W. R. Berkley
Corporation.
KPMG LLP
New York, New York
March 12, 2004
39
Schedule II
W. R. Berkley Corporation
Condensed Financial Information of Registrant
Balance Sheets (Parent Company)
(Amounts in thousands)
December 31,
---------------------------
2003 2002
------------ ------------
Assets
Cash and cash equivalents $ 69,864 $ 30,349
Fixed maturity securities:
Available for sale at fair value (cost $64 and $24,232) 64 26,016
Equity securities, at fair value:
Available for sale (cost $493 and $691) 513 763
Trading account (cost $920 and $909) 920 909
Investments in subsidiaries 2,420,911 1,810,572
Due from subsidiaries 43,203 690
Deferred Federal income taxes 39,278 28,557
Real estate, furniture & equipment at cost, less accumulated
depreciation 8,466 7,979
Other assets 2,586 2,080
------------ ------------
$ 2,585,805 $ 1,907,915
============ ============
Liabilities, Debt and Stockholders' Equity
Liabilities:
Other liabilities 62,446 47,273
Debt 647,461 327,192
Trust preferred securities 193,336 198,251
------------ ------------
903,243 572,716
------------ ------------
Stockholders' equity:
Preferred stock -- --
Common stock 20,901 20,901
Additional paid-in capital 820,388 816,223
Retained earnings (including accumulated
undistributed net income of
subsidiaries of $968,965 and $574,717
in 2003 and 2002, respectively) 939,911 623,651
Accumulated other comprehensive income 119,977 104,603
Treasury stock, at cost (218,615) (230,179)
------------ ------------
1,682,562 1,335,199
------------ ------------
$ 2,585,805 $ 1,907,915
============ ============
See note to condensed financial statements.
40
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,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Management fees and investment income
from affiliates, including dividends of
$7,210, for 2001 $ 5,885 $ 5,470 $ 12,550
Realized investment gains (losses) 1,540 (867) (221)
Other income 2,359 2,924 4,678
---------- ---------- ----------
Total revenues 9,784 7,527 17,007
Expenses, other than interest expense 44,476 39,349 21,607
Interest expense 56,009 44,546 44,690
---------- ---------- ----------
Loss before Federal
income taxes (90,701) (76,368) (49,290)
---------- ---------- ----------
Federal income taxes:
Federal income taxes (benefit) expense by
subsidiaries on a separate return
basis 185,342 106,145 (42,357)
Federal income tax benefit (expense) on a
consolidated return basis (151,669) (77,438) 58,884
---------- ---------- ----------
Net benefit 33,673 28,707 16,527
---------- ---------- ----------
Loss before undistributed equity
in net income (loss) of subsidiaries (57,028) (47,661) (32,763)
Equity in undistributed net income (loss)
of subsidiaries 394,248 222,706 (58,783)
---------- ---------- ----------
Net income (loss) attributable to
common stockholders $ 337,220 $ 175,045 $ (91,546)
========== ========== ==========
See note to condensed financial statements.
41
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,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Cash flows from operating activities:
Net income (loss) $ 337,220 $ 175,045 $ (91,546)
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Equity in undistributed net
income of subsidiaries (394,248) (222,706) 58,783
Tax payments received from (paid) to subsidiaries 204,768 33,085 (9,668)
Federal income taxes provided by subsidiaries
on a separate return basis (185,341) (106,145) 42,357
Change in Federal income taxes (15,709) 59,082 (71,459)
Realized investment losses (gains) (1,540) 867 221
Employee stock benefit plan 2,328 -- --
Other, net 20,391 28,415 (9,960)
Increase in trading account securities (11) (6) (39)
---------- ---------- ----------
Net cash used in operating activities (32,142) (32,363) (81,311)
---------- ---------- ----------
Cash flow used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 26,246 32,695 11,221
Equity securities 198 -- --
Proceeds from maturities and prepayments of
fixed maturity securities -- 3,473 4,114
Cost of purchases, excluding trading account:
Fixed maturity securities (544) (28,811) (42,744)
Equity securities -- (621) --
Cost of companies acquired -- (3,730) --
Investments in and advances to
subsidiaries, net (251,255) (206,277) (112,805)
Net additions to real estate, furniture &
equipment (1,446) (6,597) (1,469)
Other, net -- 628 (1)
---------- ---------- ----------
Net cash used in investing activities (226,801) (209,240) (141,684)
---------- ---------- ----------
Cash flows provided by financing activities:
Net proceeds from stock offering -- 166,960 315,840
Net change in short-term debt -- -- (10,000)
Purchase of treasury shares -- (72) (1,002)
Cash dividends to common stockholders (27,681) (17,872) (14,707)
Net proceeds from issuance of long-term debt 344,435 -- --
Retirement of debt (29,957) -- --
Net proceeds from stock options exercised 13,401 12,986 25,052
Other, net (1,740) -- 1,143
---------- ---------- ----------
Net cash provided by financing activities 298,458 162,002 316,326
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 39,515 (79,601) 93,331
Cash and cash equivalents at beginning of year 30,349 109,950 16,619
---------- ---------- ----------
Cash and cash equivalents at end of year $ 69,864 $ 30,349 $ 109,950
========== ========== ==========
See note to condensed financial statements.
42
Schedule II, Continued
W. R. Berkley Corporation
Condensed Financial Information of Registrant, Continued
December 31, 2003
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 2002 and 2001
financial statements as originally reported to conform them to the presentation
of the 2003 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.
43
Schedule III
W. R. Berkley Corporation and Subsidiaries
Supplementary Insurance Information
December 31, 2003, 2002 and 2001
(Amounts in thousands)
Reserve for
Deferred policy losses and Net
acquisition loss Unearned Premiums investment
cost expenses premiums earned income
--------------- ------------ ------------ ------------ ------------
December 31, 2003
Specialty $ 141,442 $ 1,372,110 $ 667,106 $ 1,117,781 $ 70,232
Alternative markets 31,843 808,886 225,051 410,926 38,450
Reinsurance 87,602 1,112,276 440,759 760,558 52,622
Regional 119,961 775,166 517,451 880,597 43,368
International 24,476 29,544 7,528 64,748 6,173
Discontinued -- 94,109 -- -- --
Corporate and adjustments -- -- -- -- (789)
------------ ------------ ------------ ------------ ------------
Total $ 405,324 $ 4,192,091 $ 1,857,895 $ 3,234,610 $ 210,056
============ ============ ============ ============ ============
December 31, 2002
Specialty $ 104,676 $ 988,761 $ 486,363 $ 772,696 $ 53,862
Alternative markets 24,720 634,620 184,800 235,558 37,641
Reinsurance 63,470 766,740 312,764 398,287 43,912
Regional 100,422 610,329 401,703 705,385 44,365
International 14,912 21,907 4,359 89,284 5,325
Discontinued -- 145,568 257 51,317 4,457
Corporate and adjustments -- -- -- -- (1,687)
------------ ------------ ------------ ------------ ------------
Total $ 308,200 $ 3,167,925 $ 1,390,246 $ 2,252,527 $ 187,875
============ ============ ============ ============ ============
December 31, 2001
Specialty $ 73,731 $ 810,865 $ 312,242 $ 428,058 $ 41,021
Alternative markets 9,763 448,762 61,146 123,173 37,765
Reinsurance 17,379 624,981 93,691 209,938 40,905
Regional 78,708 613,805 327,006 555,750 51,640
International 29,477 35,667 23,765 140,909 13,993
Discontinued 15,052 229,770 61,790 222,641 9,762
Corporate and adjustments -- -- -- -- (65)
------------ ------------ ------------ ------------ ------------
Total $ 224,110 $ 2,763,850 $ 879,640 $ 1,680,469 $ 195,021
============ ============ ============ ============ ============
Amortization of
Loss and deferred policy Other
Loss acquisition operating cost Net premiums
expenses costs and expenses written
------------ --------------- --------------- ------------
December 31, 2003
Specialty $ 707,711 $ 236,654 $ 41,763 $ 1,295,570
Alternative markets 281,967 90,815 92,912 482,389
Reinsurance 529,092 201,694 22,410 861,457
Regional 496,156 233,339 41,177 963,988
International 35,251 24,665 7,668 67,111
Discontinued -- -- -- --
Corporate and adjustments -- -- 42,797 --
------------ ------------ ------------ ------------
Total $ 2,050,177 $ 787,167 $ 248,727 $ 3,670,515
============ ============ ============ ============
December 31, 2002
Specialty $ 492,160 $ 156,441 $ 41,845 $ 939,929
Alternative markets 157,186 57,668 81,737 305,357
Reinsurance 298,719 125,549 623 601,969
Regional 416,815 201,382 27,469 776,577
International 48,419 41,220 6,727 79,313
Discontinued 50,672 7,733 8,051 7,345
Corporate and adjustments -- -- 40,760 --
------------ ------------ ------------ ------------
Total $ 1,463,971 $ 589,993 $ 207,212 $ 2,710,490
============ ============ ============ ============
December 31, 2001
Specialty $ 304,056 $ 93,372 $ 38,125 $ 567,714
Alternative markets 94,258 30,653 74,785 151,942
Reinsurance 229,515 79,896 516 196,572
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
============ ============ ============ ============
44
Schedule IV
W. R. Berkley Corporation and Subsidiaries
Reinsurance
Years ended December 31, 2003, 2002 and 2001
(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, 2003:
Specialty $1,396,825 $ 132,647 $ 31,392 $1,295,570 2.4%
Alternative markets 517,095 74,649 39,943 482,389 8.3
Reinsurance 86,629 169,697 944,525 861,457 109.6
Regional 1,122,630 190,785 32,143 963,988 3.3
International 72,232 5,121 -- 67,111 --
Discontinued -- -- -- -- --
---------- ---------- ---------- ----------
Total $3,195,411 $ 572,899 $1,048,003 $3,670,515 28.6%
========== ========== ========== ==========
Year ended December 31, 2002:
Specialty $1,003,739 $ 87,747 $ 23,937 $ 939,929 2.5
Alternative markets 309,437 43,597 39,517 305,357 12.9
Reinsurance 97,040 167,859 672,788 601,969 111.8
Regional 939,927 178,573 15,223 776,577 2.0
International 87,265 7,952 -- 79,313 --
Discontinued 13,229 12,010 6,126 7,345 83.4
---------- ---------- ---------- ----------
Total $2,450,637 $ 497,738 $ 757,591 $2,710,490 28.0%
========== ========== ========== ==========
Year ended December 31, 2001:
Specialty $ 645,060 $ 90,485 $ 13,139 $ 567,714 2.3
Alternative markets 144,687 17,497 24,752 151,942 16.3
Reinsurance 41,348 88,975 244,199 196,572 124.2
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%
========== ========== ========== ==========
45
Schedule VI
W. R. Berkley Corporation and Subsidiaries
Supplementary Information Concerning Property-Casualty Insurance Operations
December 31, 2003, 2002 and 2001
(Amounts in thousands)
2003 2002 2001
Deferred policy acquisition costs $ 405,324 $ 308,200 $ 224,110
Reserves for losses and loss expenses 4,192,091 3,167,925 2,763,850
Unearned premium 1,857,895 1,390,246 879,640
Premiums earned 3,234,610 2,252,527 1,680,469
Net investment income 210,056 187,875 195,021
Losses and loss expenses incurred:
Current Year 1,780,905 1,288,071 1,140,622
Prior Years 272,850 173,732 211,344
Net decrease (increase) in discount
from prior years (4,099) (4,549) 8,717
Amortization of deferred policy
acquisition costs 787,167 589,993 492,065
Paid losses and loss expenses 867,602 1,167,306 1,145,439
Net premiums written 3,670,515 2,710,490 1,858,096
46