1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________. COMMISSION FILE NUMBER 0-7849 ------------------------ W.R. BERKLEY CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) <TABLE> <S> <C> DELAWARE 22-1867895 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 165 MASON STREET, P.O. BOX 2518, GREENWICH, CT 06836-2518 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) </TABLE> ------------------------ REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 629-3000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $.20 per share ------------------------ 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. [X] Aggregate market of voting stock held by non-affiliates of the registrant based on the closing price of such stock on the Nasdaq National Market as of March 3, 2000: $327,382,427. Number of shares of common stock, $.20 par value, outstanding as of March 3, 2000: 25,616,578. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's 1999 Annual Report to Stockholders for the year ended December 31, 1999 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, 1999, are incorporated herein by reference in Part III. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
2 W. R. BERKLEY CORPORATION ANNUAL REPORT ON FORM 10-K December 31, 1999 <TABLE> <CAPTION> Page <S> <C> SAFE HARBOR STATEMENT 3 PART I ITEM 1. BUSINESS 4 ITEM 2. PROPERTIES 22 ITEM 3. LEGAL PROCEEDINGS 23 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 23 ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 1999 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 25 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 25 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 25 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 26 ITEM 11. EXECUTIVE COMPENSATION 29 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 29 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 29 </TABLE> 2
3 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein, including those related to the Company's performance for the year 2000, are based upon the Company's historical performance and on current plans, estimates and expectations. They are subject to various risks and uncertainties, including but not limited to, the impact of competition, product demand and pricing, claims development, catastrophe and storm losses, investment results, legislative and regulatory developments and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. These risks could cause the Company's actual results for the 2000 fiscal year and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company. Forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. 3
4 PART I ITEM 1. BUSINESS General Description of the Company's Business W. R. Berkley Corporation (the "Company"), a Delaware corporation, is an insurance holding company which, through its subsidiaries, presently operates in all segments of the property casualty insurance business: regional property casualty insurance; reinsurance; specialty lines of insurance (including excess and surplus lines and commercial transportation); alternative markets (including the management of alternative insurance market mechanisms); and international. The Company was founded on the concept that a group of autonomous regional and specialty insurance entities could compete effectively in selected markets within a very large industry. Decentralized control allows each subsidiary or regional group to respond to local or specialty market conditions while capitalizing on the effectiveness of centralized investment and reinsurance management and actuarial, financial and legal staff support. The Company's regional insurance operations are conducted primarily in the New England, Mid Atlantic, Midwest and Southern regions of the United States. Reinsurance, specialty insurance and alternative markets operations are conducted nationwide. Presently, international operations are conducted primarily in Argentina and the Philippines. Net premiums written, as reported on a generally accepted accounting principles ("GAAP") basis, by the Company's five major insurance industry segments for the five years ended December 31, 1999 were as follows: <TABLE> <CAPTION> Year Ended December 31, -------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Amounts in thousands) <S> <C> <C> <C> <C> <C> Net premiums written: Regional insurance operations $ 649,849 $ 641,316 $ 618,768 $ 517,515 $ 460,732 Reinsurance operations 309,181 269,634 206,652 218,200 196,299 Specialty insurance operations 260,380 254,003 219,272 214,738 171,520 Alternative markets operations 122,137 106,195 90,870 76,876 25,998 International operations 86,172 75,106 42,079 25,182 5,872 ------------ ------------ ------------ ------------ ---------- Total $ 1,427,719 $ 1,346,254 $ 1,177,641 $ 1,052,511 $ 860,421 ============ ============ ============ ============ ========== Percentage of net premiums written: Regional insurance operations 45.5% 47.6% 52.6% 49.2% 53.6% Reinsurance operations 21.7 20.0 17.5 20.7 22.8 Specialty insurance operations 18.2 18.9 18.6 20.4 19.9 Alternative markets operations 8.6 7.9 7.7 7.3 3.0 International operations 6.0 5.6 3.6 2.4 .7 ------------ ------------ ------------ ------------ ---------- Total 100.0% 100.0% 100.0% 100.0% 100.0% ============ ============ ============ ============ ========== </TABLE> 4
5 The following sections briefly describe the Company's insurance segments and subsidiaries. The statutory information contained herein is derived from that reported to state regulatory authorities in accordance with statutory accounting practices ("SAP"). The descriptions contain each significant insurance subsidiary's rating by A.M. Best and Company, Inc. ("A.M. Best"). A.M. Best's ratings are based upon factors of concern to policyholders, insurance agents and brokers and are not directed toward the protection of investors. A.M. Best states: "Best's Ratings reflect [its] opinion as to the relative financial strength and performance of each insurer in comparison with others, based on [its] analysis of the information provided to [it]. These ratings are not a warranty of an insurer's current or future ability to meet its contractual obligations." A.M. Best reviews its ratings on a periodic basis, and ratings of the Company's subsidiaries are therefore subject to change. REGIONAL INSURANCE OPERATIONS The Company's regional property casualty subsidiaries write standard commercial and personal lines insurance for such risks as automobiles, homes and businesses. The Company's regional insurance operations have historically been conducted through ten principal operating subsidiaries. In 1999, the Company restructured the management and back-office operations of these ten companies into four geographic units based on markets served. As part of the restructuring, certain back office functions and operating redundancies were minimized or eliminated. The regional groups, and the primary regional company for each group, are as follows: - New England - Acadia Insurance Company - Mid Atlantic - Firemen's Insurance Company of Washington, D.C. - Midwest - Continental Western Insurance Company - Southern Tier - Union Standard Insurance Company Berkley Regional Insurance Company ("BRIC"), an intermediate holding company, owns all of the capital stock of the regional insurance companies and reinsures varying portions of the business written by the regional operations. BRIC is currently rated A by A.M. Best. This is a group rating which applies to each of the regional insurance companies and certain other subsidiaries as noted herein. NEW ENGLAND REGIONAL INSURANCE GROUP Acadia Insurance Company ("Acadia") writes multiple line property and casualty coverages principally in the States of Maine, New Hampshire, Vermont and Massachusetts and sells its personal and commercial coverages through independent agencies. Acadia's net premiums written for the year ended December 31, 1999 were $133,168,000. Acadia utilizes its subsidiary, Cadillac Mountain Insurance Company, as a companion writer. MID ATLANTIC REGIONAL INSURANCE GROUP The Mid Atlantic regional insurance group consists of Firemen's Insurance Company of Washington, D.C. ("Firemen's), Berkley Insurance Company of the Carolinas ("BICC"), Chesapeake Bay Property and Casualty Insurance Company ("Chesapeake") and The Presque Isle Insurance Division of Firemen's. Firemen's is the lead company in the Mid Atlantic group and manages the affairs of the group from its headquarters in Richmond, Virginia. Firemen's, Chesapeake and BICC sell their policies primarily through agents in the District of Columbia and the States of Maryland, North Carolina, Pennsylvania and Virginia. Firemen's Insurance Company of Washington, D.C. writes homeowners, other personal lines and commercial risks in the District of Columbia and in the States of Maryland, North Carolina and Virginia. In March 1995, Firemen's established The Presque Isle Insurance Division in order to expand its operations into the Commonwealth of Pennsylvania. Firemen's net premiums written for the year ended December 31, 1999 were $60,231,000. 5
6 Berkley Insurance Company of the Carolinas writes personal and commercial lines in North Carolina and is expanding to surrounding states. Its net premiums written for the year ended December 31, 1999 were $33,805,000. Chesapeake Bay Property and Casualty Insurance Company writes personal and commercial lines in the State of Virginia. Chesapeake's net premiums written for the year ended December 31, 1999 were $28,573,000. MIDWEST REGIONAL INSURANCE GROUP The Midwest regional insurance group consists of Continental Western Insurance Company ("Continental Western"), American West Insurance Company ("American West"), Tri-State Insurance Company of Minnesota ("Tri-State") and Union Insurance Company ("Union"). Continental Western is the lead company in the group and manages group affairs from its office in Urbandale, Iowa. Continental Western, Tri-State and Union obtain their business primarily in the smaller communities of the Midwest through independent insurance agencies, which represent them on a non-exclusive basis and are compensated on a commission basis. The following are brief descriptions of the companies in the Midwest regional group: Continental Western Insurance Company writes a diverse commercial lines book of business as well as personal lines principally in the States of Iowa, Nebraska, Kansas, Illinois, Missouri, Wisconsin and Montana. Continental Western's net premiums written for the year ended December 31, 1999 were $167,395,000. American West Insurance Company's business consists primarily of personal lines in the States of Minnesota, Montana, Wisconsin and South Dakota. American West's net premiums written for the year ended December 31, 1999 were $8,871,000. Tri-State Insurance Company of Minnesota writes commercial lines (specializing in grain elevator coverages), as well as personal lines, primarily in the States of Minnesota, Iowa, North and South Dakota, Nebraska, Wisconsin and Illinois. Tri-State's net premiums written for the year ended December 31, 1999 were $52,782,000. Union Insurance Company's business consists of personal lines as well as commercial lines insurance concentrated in the States of Nebraska, Kansas, Colorado and South Dakota. Union's net premiums written for the year ended December 31, 1999 were $56,468,000. SOUTHERN TIER REGIONAL INSURANCE GROUP The Southern Tier regional insurance group consists of Union Standard Insurance Company ("Union Standard") and Great River Insurance Company ("Great River"). Union Standard is the lead company in the group and manages group affairs from its office in Irving, Texas. Union Standard and Great River obtain their business primarily in the smaller communities of the Southwest through independent insurance agencies, which represent them on a non-exclusive basis and are compensated on a commission basis. The following are brief descriptions of the companies in the Southern Tier regional group: Union Standard Insurance Company writes personal lines and commercial lines of insurance for small businesses in the States of Texas, Oklahoma, Arkansas, Colorado and Arizona. Union Standard's net premiums written for the year ended December 31, 1999 were $69,715,000. Great River Insurance Company writes personal and commercial lines in Mississippi, Tennessee, Alabama and Louisiana and is expanding to surrounding states. Great River's net premiums written for the year ended December 31, 1999 were $38,841,000. 6
7 Regional Operations: Business The following table sets forth the percentages of direct premiums written, by line, by the Company's regional insurance operations: <TABLE> <CAPTION> 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Commercial Multi-Peril 21.9% 20.7% 20.5% 20.8% 21.5% Workers' Compensation 17.8 18.6 19.3 20.1 20.8 Automobile: Personal 14.3 14.8 15.2 16.4 17.4 Commercial 21.7 20.8 19.6 17.4 15.6 General Liability 7.0 6.9 6.8 6.5 6.1 Homeowners 5.8 6.3 7.1 7.9 8.7 Fire and Allied Lines 4.5 4.7 5.0 4.7 4.6 Inland Marine 3.6 3.4 2.0 2.8 2.6 Other 3.4 3.8 4.5 3.4 2.7 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== </TABLE> The following table sets forth the percentages of direct premiums written, by state, by the Company's regional insurance operations: <TABLE> <CAPTION> 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Maine 8.2% 9.4% 10.2% 10.8% 10.8% Iowa 7.2 7.5 7.7 8.4 9.4 Nebraska 7.1 7.0 7.5 8.2 9.1 Texas 6.3 6.3 6.8 7.5 8.0 New Hampshire 6.0 5.8 5.8 6.0 6.0 Pennsylvania 5.4 5.0 4.8 2.2 -- Minnesota 5.0 5.4 5.3 5.4 5.6 North Carolina 4.8 4.8 4.2 1.5 0.1 Kansas 4.3 4.5 4.6 4.8 4.9 Mississippi 3.9 5.0 5.7 6.1 5.5 Virginia 3.7 4.1 4.2 3.7 2.9 Colorado 3.7 3.5 3.5 3.8 4.1 Massachusetts 3.6 2.2 0.2 0.1 -- Missouri 3.5 3.4 3.6 3.6 3.8 South Dakota 3.5 3.7 4.2 5.4 6.8 Vermont 3.0 3.0 3.2 3.1 2.4 Wisconsin 2.5 2.5 2.6 2.9 3.6 Illinois 2.4 2.6 2.8 3.1 3.5 Arkansas 1.7 1.7 1.8 1.8 2.1 Tennessee 1.6 1.3 1.0 0.4 -- South Carolina 1.4 1.5 1.0 -- Oklahoma 1.3 1.3 1.3 1.3 1.4 Idaho 1.2 1.4 1.1 0.6 0.2 Montana 1.1 1.2 1.3 1.4 1.4 North Dakota 0.9 1.0 1.2 1.6 2.6 Ohio 0.8 0.6 0.5 0.5 0.1 Arizona 0.7 -- -- -- -- Maryland 0.7 0.6 0.7 0.7 0.7 Oregon 0.7 0.6 0.6 0.5 0.3 Other 3.8 3.1 2.6 4.6 4.7 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== </TABLE> 7
8 REINSURANCE OPERATIONS The Company's reinsurance operations consist of six operating units, which specialize in underwriting property, casualty and surety reinsurance on both a treaty and a facultative basis. The Company's reinsurance operations are conducted by Signet Star Holdings, Inc. through its subsidiary Signet Star Reinsurance Company ("Signet Star"). For financial segment reporting purposes, the results of the alternative market division of Signet Star are included in the Company's alternative markets segment. Signet Star is rated A by A.M. Best. The Property Casualty Treaty Division is the largest business unit in terms of personnel and premiums written. This division of Signet Star is committed exclusively to the broker market segment of the treaty reinsurance industry. It functions as a traditional reinsurer in specialty and standard reinsurance lines. This unit is de-emphasizing commodity lines of business, which are experiencing intense competition brought on, in part, by excess capacity. Facultative ReSources, Inc. ("Fac Re"), an underwriting manager, specializes in individual certificate and program facultative business. Fac Re's highly experienced underwriters seek to offset the underwriting and pricing cycles in the underlying insurance business by developing risk management solutions and through superior risk selection. Fac Re develops its business through brokers and on a direct basis where the client does not choose to use an intermediary. The Fidelity and Surety Division ("F&S") operates as a lead reinsurer in a niche market of the property casualty industry where its highly specialized knowledge and expertise are essential to meet the needs of fidelity and surety primary writers. Business is marketed principally through brokers as well as directly to clients not served by intermediaries. Gemini Insurance Company is an excess and surplus line insurance company which commenced business in 1997 to provide Signet Star with primary issuing carrier capability and thereby generate "reverse flow" business. Under the reverse flow concept, a reinsurer writes primary business through a subsidiary or affiliated carrier that is then ceded back to the reinsurer. It operates as an authorized insurance company in the State of Delaware and will operate nationwide, as necessary legal and regulatory requirements are met, as an approved excess and surplus line carrier. Gemini is rated A by A.M. Best. StarNet Insurance Company ("StarNet") was acquired by Signet Star in 1998 to write reverse flow business on an admitted basis. Signet Star will seek to license StarNet broadly to serve as an adjunct to Gemini to write primary business on an admitted basis nationwide. StarNet is rated A by A.M. Best. The Latin American and Caribbean Division was established in 1996 to write business exclusively in Latin America and the Caribbean. In January 2000, Signet Star decided to withdraw from this market place, with no new business being written after February 1, 2000. The Division's net premiums written for the year ended December 31, 1999 were $21,088,000. 8
9 Reinsurance Operations: Business The following table sets forth the percentages of gross premiums written, by line, by the Company's reinsurance operations: <TABLE> <CAPTION> 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Treaty: Casualty and other 46.0% 39.7% 38.7% 45.1% 46.6% Property and related lines 15.1 19.1 16.1 23.3 26.8 Professional and specialty 10.1 8.4 5.5 4.7 4.8 ---- ---- ---- ---- ---- Total Treaty 71.2 67.2 60.3 73.1 78.2 Facultative: 14.9 14.8 15.4 11.7 14.2 Fidelity and Surety 7.7 6.8 10.5 9.5 7.6 Latin American and Caribbean 6.2 11.2 13.8 5.7 -- ----- ---- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== </TABLE> The following table sets forth the percentage of gross premiums written, by property versus casualty business, by the Company's reinsurance operations: <TABLE> <CAPTION> 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Property 20.6% 31.4% 32.7 35.2% 33.4% Casualty 79.4% 68.6% 67.3 64.8 66.6 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ====== ===== ===== ===== ===== </TABLE> SPECIALTY INSURANCE OPERATIONS The Company's specialty lines of insurance consist primarily of excess and surplus lines ("E & S"), commercial transportation, professional liability, directors and officers liability and surety. Admiral Insurance Company ("Admiral") specializes in E & S general liability coverages, including products liability and professional liability. Admiral insures risks requiring specialized treatment not available in the conventional market, with coverage designed to meet the specific needs of the insured. Business is received from wholesale brokers via retail agents, whose clients are the insureds. E & S carriers operate on a non-admitted basis in the states where they write business. They are generally free from rate regulation and policy form requirements. Admiral's business is obtained on a nationwide basis from approximately 190 non-exclusive brokers, who are compensated on a commission basis. Admiral also writes directors and officers liability insurance through operations conducted by Monitor Liability Managers, Inc., an underwriting manager established by the Company. Admiral is rated A++ by A.M. Best. Admiral's net premiums written for the year ended December 31, 1999 were $103,738,000. In 1999, Admiral purchased FICO Insurance Company from Firemen's and changed its name to Admiral Indemnity Insurance Company ("Admiral Indemnity"). As an admitted company, Admiral Indemnity will compete for certain risks that might be subject to the commercial lines deregulation enactments (see "Regulation") as well as other risks which prefer an admitted carrier. Admiral Indemnity will also continue to write commercial business consisting primarily of multiple dwelling and restaurant coverages principally in the State of New York through operations conducted by Clermont Specialty Managers, Ltd., an underwriting manager which is owned by the Company. Admiral Indemnity is rated A by A.M. Best (BRIC group rating). Admiral Indemnity's net premiums written for the year ended December 31, 1999 were $13,320,000. 9
10 Carolina Casualty Insurance Company ("Carolina") writes liability, physical damage and cargo insurance for the transportation industry, concentrating on long-haul trucking companies. Public transportation insurance for such risks as charter buses and school buses also makes up a substantial part of Carolina's book of business. Carolina's business is obtained nationwide from approximately 120 agents and brokers who are compensated on a commission basis. Carolina also writes surety bonds through operations conducted by Monitor Surety Managers, Inc., an underwriting manager established by the Company. In December 1998, Carolina began writing directors and officers liability insurance through operations conducted by Monitor Liability Managers, Inc., an underwriting manager established by the Company. Carolina is rated A by A.M. Best. Carolina's net premiums written for the year ended December 31, 1999 were $82,673,000. Nautilus Insurance Company ("Nautilus") insures E & S risks which involve a lower degree of expected severity than those covered by Admiral. Nautilus obtains its business nationwide from approximately 135 non-exclusive general agents, some of which also provide business to Admiral. A substantial portion of Nautilus' business is written on a binding authority basis, subject to certain contractual limitations. Nautilus is rated A by A.M. Best. Nautilus' net premiums written for the year ended December 31, 1999 were $60,649,000. Great Divide Insurance Company ("Great Divide"), a subsidiary of Nautilus also rated A by A.M. Best, writes transportation risks, as well as other specialty lines, on an admitted basis. Specialty Operations: Business The following table sets forth the percentages of gross premiums written, by line, by the Company's specialty insurance operations: <TABLE> <CAPTION> 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> General Liability 30.5% 28.2% 34.1% 35.3% 37.6% Automobile Liability 18.3 19.0 17.7 20.9 27.5 Professional Liability 16.5 16.9 14.7 12.1 7.0 Directors and Officers Liability 6.6 7.7 8.1 10.0 9.0 Fire and Allied Lines 7.7 7.1 7.5 7.1 4.9 Automobile Physical Damage 6.4 6.1 4.9 5.3 6.8 Medical Malpractice 6.0 6.1 4.0 3.3 2.3 Inland Marine 1.9 1.8 1.5 1.6 2.1 Commercial Multi-Peril 3.3 3.1 3.0 1.0 0.7 Surety 2.1 2.0 1.9 1.3 0.8 Workers' Compensation 0.6 1.9 2.5 1.7 0.7 Other 0.1 0.1 0.1 0.4 0.6 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== </TABLE> ALTERNATIVE MARKETS The Company's alternative markets operations specialize in insuring, reinsuring and administering self-insurance programs and other alternative risk transfer mechanisms for public entities, private employers and associations. Typical clients are those who are driven by various factors to seek less costly and more efficient techniques to manage their exposure to claims. The Company's alternative markets segment consists of both excess and primary workers' compensation insurance; insurance services operations which manage alternative market mechanisms; and reinsurance of alternative risk business. 10
11 WORKERS' COMPENSATION INSURANCE Midwest Employers Casualty Company ("Midwest Employers") markets and underwrites excess workers' compensation ("EWC") insurance and related risk management services, including a full range of consulting services. EWC insurance is marketed primarily to employers and employer groups which have elected and have qualified or been approved by state regulatory authorities to self-insure their workers' compensation programs. EWC insurance provides coverage to a self-insured employer once the employer's losses exceed the employer's retention amount. Midwest Employers offers a complete line of EWC products, including specific and aggregate EWC insurance policies and surety bonds. Midwest Employers is rated A- by A.M.Best. Midwest Employers net premiums written for the year ended December 31, 1999 were $41,287,000. Preferred Employers Insurance Company ("Preferred Employers") was established in 1998 to insure workers' compensation risks in California, focusing on the small employer market. Preferred Employers is rated A by A.M. Best (BRIC group rating). Preferred Employers net premiums written for the year ended December 31, 1999 were $4,073,000. Key Risk Insurance Company (Key Risk), a North Carolina insurance company, was organized in 1998 to target the business of funds or other entities moving out of self-insurance. Key Risk has an A.M. Best rating of A (BRIC group rating). Its net premiums written for the year ended December 31, 1999 were $28,103,000. INSURANCE SERVICES OPERATIONS The alternative markets insurance service operations are conducted by Berkley Risk Administrators Company, LLC. This business offer a variety of products, which include underwriting and claims administration and management of alternative insurance market mechanisms. In addition, the insurance services operations provide agency and brokerage services to both affiliated and unaffiliated entities. Berkley Risk Administrators Company, LLC ("BRAC") offers a full range of alternative solutions customized to meet risk financing needs for various structures, such as assigned risk plans, captive insurance companies, retention pools, risk retention groups, self-funded plans and specialty insurance company programs. Program management services include property casualty and workers' compensation third-party administration, claims adjustment and management, employee benefit consulting, employee benefit third-party administration, financial accounting, insurance and reinsurance risk transfer, loss control and safety consulting, management information systems, regulatory compliance and relations, risk management consulting, assigned risk plan management, statistical analysis, underwriting, rating and policy issuance and managed care. Through its 42 offices in 18 states, BRAC serves a national customer base that includes businesses, governments, educational institutions, tribal nations, non-profit entities and insurers. REINSURANCE Signet Star - Alternative Markets Division specializes in providing custom designed reinsurance products and services to alternative markets ("ARM") clients, such as captive insurance companies, risk retention groups, public entity insurance trusts and governmental pools. ARM clients are generally self-insured vehicles which provide insurance buyers with a mechanism for assuming part of their own risk, managing their exposures, modifying their loss costs and, ultimately, participating in the underwriting results. Signet Star has been an active reinsurer of ARM clients for over ten years and is considered to be one of the leading broker market reinsurers of ARM business. The Alternative Markets operation is expanding its efforts in single-parent captives by leveraging its resources and its relationships with affiliates and establishing strategic alliances with nonaffiliated captive managers. Its net premiums written for the year ended December 31, 1999 were $49,048,000. 11
12 Alternative Markets Operations: Business The following table sets forth the percentages of revenues, by major source of business, of the alternative markets operations: <TABLE> <CAPTION> 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Workers' Compensation Insurance 49.9% 48.8% 52.7% 56.9% 28.4% Insurance Service Operations 27.6 29.6 29.3 29.4 49.5 Reinsurance 22.5 21.6 18.0 13.7 22.1 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== </TABLE> INTERNATIONAL OPERATIONS In 1995, the Company and Northwestern Mutual Life International, Inc. ("NML"), a wholly-owned subsidiary of The Northwestern Mutual Life Insurance Company, entered into a joint venture to form Berkley International LLC ("Berkley International"), a limited liability company. The Company agreed to contribute up to $65 million to Berkley International in exchange for a 65% membership interest and NML agreed to contribute up to $35 million to Berkley International in exchange for a 35% membership interest. Berkley International owns 99.9% of Berkley International Argentina S.A. ("Berkley S.A."), an Argentine holding company. It also owns 59% of Philippine Insurance Holdings, Inc., a Philippine holding company, as well as 67% of Family First, Inc., a direct sales and marketing operation. Berkley S.A. offers property casualty insurance and life insurance in Argentina. Philippine Insurance Holdings, Inc. provides endowment policies to fund educational and retirement needs and diversified life products in the Philippines. International Operations: Business The following table set forth the percentages of gross premiums for the Company's international operations: <TABLE> <CAPTION> 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Property and Casualty 72.3% 85.5% 96.3% 100.0 100.0% Life 16.5 10.9 3.7 -- -- ---- ---- ----- ----- ----- Total Argentina 88.8 96.4 100.0 100.0 100.0 Philippines 11.2 3.6 -- -- -- ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== </TABLE> 12
13 Results by Industry Segment Summary financial information about the Company's operating segments is presented on a GAAP basis in the following table (all amounts include realized capital gains and losses): <TABLE> <CAPTION> Year Ended December 31, ------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Amounts in thousands) <S> <C> <C> <C> <C> <C> Regional Insurance Operations Total revenues $ 702,129 $ 682,519 $ 635,142 $ 529,479 $ 467,009 Income (loss) before income taxes (97,362) (24,524) 47,624 35,169 38,171 Reinsurance Operations Total revenues 341,940 297,144 242,086 244,066 221,241 Income before income taxes 14,091 33,858 42,193 32,756 19,661 Specialty Insurance Operations Total revenues 309,068 311,955 284,321 247,131 212,484 Income before income taxes 39,261 85,889 68,088 52,113 37,640 Alternative Markets Operations Total revenues 222,276 205,935 184,733 172,027 103,656 Income before income taxes 24,919 36,501 34,733 32,278 10,254 International Operations Total revenues 93,878 80,287 45,360 26,435 7,313 Income (loss) before income taxes 3,535 (7,017) (3,566) (1,283) (259) </TABLE> 13
14 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. Summary information for the Company's insurance companies and the insurance industry is presented in the following table (1): <TABLE> <CAPTION> Year Ended December 31, ------------------------------------------------------------------ 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Regional Insurance Operations Loss ratio 84.7% 76.0% 66.6% 66.8% 65.1% Expense ratio 36.1 35.8 34.0 34.1 34.1 Policyholders' dividend ratio .7 .9 .5 .6 .9 ----- ----- ----- ----- ----- Combined ratio 121.5% 112.7% 101.1% 101.5% 100.1% ===== ===== ===== ===== ===== Reinsurance Operations Loss ratio 76.0% 74.3% 69.2% 73.3% 78.1% Expense ratio 33.2 31.5 32.1 30.1 26.4 ----- ----- ----- ----- ----- Combined ratio 109.2% 105.8% 101.3% 103.4% 104.5% ===== ===== ===== ===== ===== Specialty Insurance Operations Loss ratio 66.0% 61.8% 61.9% 68.4% 77.9% Expense ratio 32.9 31.7 33.3 30.9 28.2 Policyholders' dividend ratio .2 .3 .5 .3 .3 ----- ----- ----- ----- ----- Combined ratio 99.1% 93.8% 95.7% 99.6% 106.4% ===== ===== ===== ===== ===== Alternative Markets Operations Loss ratio 67.4% 63.7% 73.1% 74.8% 72.3% Expense ratio 37.3 36.0 35.8 34.9 31.9 ----- ----- ----- ----- ----- Combined ratio 104.7% 99.7% 108.9% 109.7% 104.2% ===== ===== ===== ===== ===== International Operations Loss ratio 53.3% 59.7% 59.8% 49.7% 50.0% Expense ratio 46.4 48.5 54.6 49.9 58.3 ----- ----- ----- ----- ----- Combined ratio 99.7% 108.2% 114.4% 99.6% 108.3% ===== ===== ===== ===== ===== Combined Insurance Operations Loss ratio 76.5% 71.2% 66.4% 68.7% 70.7% Expense ratio 35.4 34.9 34.4 33.1 31.3 Policyholders' dividend ratio .3 .5 .4 .4 .5 ----- ----- ----- ----- ----- Combined ratio 112.2% 106.6% 101.2% 102.2% 102.5% ===== ===== ===== ===== ===== Combined Insurance Operations Premiums to surplus ratio (2) 1.6 1.4 1.2 1.2 1.0 ===== ===== ===== ===== ===== Industry Ratios Combined ratio 107.5% (3) 105.0%(4) 101.6%(4) 107.0%(4) 107.2%(5) Premiums to surplus ratio .9% (3) .8%(5) .9%(5) 1.0%(5) 1.2%(5) </TABLE> (1) Based on U.S. statutory accounting practices. (2) Based on the Company's consolidated net premiums written to statutory surplus. (3) Estimated by A.M. Best. (4) Source: A.M. Best Aggregates & Averages, for stock companies. (5) Source: A.M. Best Aggregates & Averages, for total industry. 14
15 Investments Investment results before income tax effects were as follows: <TABLE> <CAPTION> 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Amounts in thousands) <S> <C> <C> <C> <C> <C> Average investments, at cost $3,045,391 $2,996,707 $2,873,730 $2,538,806 $2,081,547 ========== ========== ========== ========== ========== Investment income, before expenses $ 198,556 $ 206,065 $ 205,812 $ 171,047 $ 143,527 ========== ========== ========== ========== ========== Percent earned on average investments 6.5% 6.9% 7.2% 6.7% 6.9% ========== ========== ========== ========== ========== Realized gains (losses) $ (6,064) $ 25,400 $ 13,186 $ 7,437 $ 10,357 ========== ========== ========== ========== ========== Change in unrealized investment gains (losses) (1) $ (173,084) $ 22,147 $ 66,306 $ (22,409) $ 142,475 ========== ========== ========== ========== ========== </TABLE> (1) The change in unrealized investment gains (losses) represents the difference between fair value and cost of investments at the beginning and end of the calendar year, including investments carried at cost. The percentages of the fixed maturity portfolio categorized by contractual maturity, based on fair value, on the dates indicated, are set forth below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations. <TABLE> <CAPTION> December 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> 1 year or less 3.0% 1.7% 4.4% 3.1% 4.2% Over 1 year through 5 years 16.4 16.0 26.4 20.7 17.9 Over 5 years through 10 years 26.0 24.4 19.1 25.0 29.4 Over 10 years 34.6 37.2 29.2 27.1 26.2 Mortgage-backed securities 20.0 20.7 20.9 24.1 22.3 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== </TABLE> Loss and Loss Adjustment Expense Reserves In the property casualty 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. The Company's loss reserves reflect current estimates of the ultimate cost of closing outstanding claims; other than its excess workers' compensation ("EWC") business, as discussed below, the Company does not discount its reserves to estimated present value for financial reporting purposes. 15
16 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. Each insurance subsidiary's net retention for each line of insurance is taken into consideration in computation of ultimate losses. 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 and other environmental exposures, have produced unanticipated claims and increased the difficulty of estimating the loss and loss adjustment expense reserves provided by the Company. Due to the nature of EWC business and the long period of time over which losses are paid in this line of business, the Company discounts its liabilities for EWC losses and loss expenses. Discounting liabilities for losses and loss expenses gives recognition to the time value of money set aside to pay claims in the future and 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 loss payout experience and is supplemented with data compiled by insurance companies writing workers' compensation on an excess-of-loss basis. The expected payout pattern has a very long duration because it reflects the nature of losses which generally penetrate self-insured retention limits contained in EWC policies. The Company has limited the expected payout duration to 30 years in order to introduce an additional level of conservatism into the discounting process. These liabilities have been discounted using "risk-free" discount rates determined by reference to the U.S. Treasury yield curve weighted for EWC premium volume to reflect the seasonality of the anticipated duration of losses associated with such coverages. The average discount rate for accident years 1999, 1998, 1997, 1996 and 1995 and prior was approximately 5.90% 5.90%, 5.98%, 5.90% and 5.80%, respectively. The aggregate net discount, after reflecting the effects of ceded reinsurance, is $186,981,000, $186,964,000, $189,600,000 and $172,415,000 at December 31, 1999, 1998, 1997 and 1996, respectively. To date, known pollution and environmental claims at the Company's insurance company subsidiaries have not had a material impact on the Company's operations. Environmental claims have not materially impacted the Company because these subsidiaries generally did not insure the larger industrial companies which are subject to significant environmental exposures. 16
17 The Company's net reserves for losses and loss adjustment expenses relating to pollution and environmental claims were $30,944,000 and $33,391,000 at December 31, 1999 and 1998, respectively. The Company's gross reserves for losses and loss adjustment expenses relating to pollution and environmental claims were $65,966,000 and $69,283,000 at December 31, 1999 and 1998, respectively. Net incurred losses and loss expenses for reported pollution and environmental claims were approximately $1,371,000, $2,227,000 and $79,000 in 1999, 1998 and 1997, respectively. Net paid losses and loss expenses were approximately $3,819,000, $2,614,000 and $2,175,000 in 1999, 1998 and 1997, 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 table below provides a reconciliation of the beginning and ending reserve balances, on a gross of reinsurance basis (dollars in thousands)(1): <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Net reserves at beginning of year $ 1,583,304 $ 1,433,011 $ 1,333,122 ----------- ----------- ----------- Net reserves of acquired companies -- 2,189 4,984 Net provision for losses and loss expenses: Claims occurring during the current year (2) 1,032,089 944,887 747,977 Increase (decrease) in estimates for claims occurring in prior years 28,351 (42,929) (21,313) Amortization of discount 10,473 9,111 7,760 ----------- ----------- ----------- 1,070,913 911,069 734,424 ----------- ----------- ----------- Net payments for claims Current year 433,942 397,787 315,370 Prior years 496,410 365,178 324,149 ----------- ----------- ----------- 930,352 762,965 639,519 ----------- ----------- ----------- Net reserves at end of year 1,723,865 1,583,304 1,433,011 Ceded reserves at end of year 617,025 537,219 476,677 ----------- ----------- ----------- Gross reserves at end of year $ 2,340,890 $ 2,120,523 $ 1,909,688 =========== =========== =========== </TABLE> A reconciliation, as of December 31, 1999, between the reserves reported in the accompanying consolidated financial statements which have been prepared in accordance with GAAP and those reported on a SAP basis is as follows (in thousands): <TABLE> <S> <C> Net reserves reported on a SAP basis $1,780,069 Additions (deductions) to statutory reserves: Loss reserve discounting (3) (70,810) Outstanding drafts reclassified as reserves 14,606 ---------- Net reserves reported on a GAAP basis 1,723,865 Ceded reserves reclassified as assets 617,025 ---------- Gross reserves reported on a GAAP basis $2,340,890 ========== </TABLE> (1) The balance sheet includes $20,348,000 and $6,043,000 as of December 31, 1999 and 1998, respectively, relating to reserves for life insurance which are not included in the table above, and the statement of operations includes $14,913,000 and $3,693,000 for the year ended December 31, 1999 and 1998, respectively, relating to policyholder benefits incurred on life insurance which are not included in the above table. (2) Claims occurring during the current year is net of discount of $22,923,754, $20,354,000 and $29,783,000 for the years ended December 31, 1999, 1998 and 1997, respectively. (3) For statutory purposes, Midwest Employers uses a discount rate of 3% as permitted by the Department of Insurance of the State of Ohio. For GAAP purposes, Midwest Employers uses a discount rate based on the U. S. Treasury yield curve weighted for the expected payout period, as described above. 17
18 The following table presents the development of net reserves for 1989 through 1999. 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 the Company. 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 1989 reserves have developed a $84 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 1989 is reserved for $2,000 as of December 31, 1989. Assuming this claim was settled for $2,300 in 1999, the $300 deficiency would appear as a deficiency in each year from 1989 through 1998. 18
19 <TABLE> <CAPTION> Year Ended December 31, 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (Amounts in millions) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Discounted net reserves for losses and loss expenses $ 611 $ 643 $ 680 $ 710 $ 783 $ 895 $ 1,209 $ 1,333 $ 1,433 $ 1,583 $ 1,724 Reserve discounting -- -- -- -- -- -- 152 172 190 187 187 Undiscounted net reserve for loss and loss expenses 611 643 680 710 783 895 1,361 1,505 Net Re-estimated as of: One year later 605 635 676 704 776 885 1,346 1,481 1,580 1,798 Two years later 599 632 659 694 775 872 1,305 1,406 1,566 Three years later 596 620 650 665 744 833 1,236 1,356 Four years later 587 612 637 655 708 789 1,195 Five years later 581 603 631 630 672 764 Six years later 585 588 609 600 649 Seven years later 574 569 585 579 Eight years later 557 550 568 Nine years later 541 534 Ten years later 527 Cumulative redundancy (deficiency) undiscounted 84 109 112 131 134 131 166 149 57 (28) ===== ===== ===== ===== ======= ======= ======= ======= ======= ======= Cumulative amount of net liability paid through: One year later $ 158 $ 139 $ 160 $ 169 $ 186 $ 221 $ 265 $ 332 $ 365 496 Two years later 234 235 264 275 221 355 434 523 574 Three years later 294 304 332 306 291 445 550 635 Four years later 334 345 346 344 334 501 616 Five years later 358 377 371 362 363 528 Six years later 380 395 384 375 373 Seven years later 392 402 394 376 Eight years later 396 409 392 Nine years later 400 405 Ten years later 394 Discounted net Reserves 783 895 1,209 1,333 1,433 1,583 1,724 Ceded Reserves 1,233 1,176 451 450 477 537 617 ------- ------- ------- ------ ------- ------- ------- Discounted gross Reserves 2,016 2,071 1,660 1,783 1,910 2,121 2,341 Reserve discounting -- -- 192 216 241 248 250 ------- ------- ------- ------ ------- ------- ------- Gross reserve $ 2,016 $ 2,071 1,852 1,999 2,151 2,369 2,591 ======= ======= ======= ======= ======= ======= ======= Gross Re-estimated as of One year later 2,010 2,043 1,827 1,965 2,132 2,390 Two years later 1,966 2,026 1,789 1,959 2,096 Three years later 1,955 1,983 1,754 1,909 Four years later 1,913 1,951 1,733 Five years later 1,855 1,928 Six years later 1,815 Gross cumulative redundancy (deficiency) undiscounted $ 201 $ 143 $ 119 $ 90 $ 55 $ (21) ======= ======= ======= ======= ======= ======= </TABLE> 19
20 Regulation The Company's insurance subsidiaries are subject to varying degrees of regulation and supervision in the jurisdictions in which they do business, under 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. The Company's property casualty subsidiaries, other than E & S and reinsurance subsidiaries, must file all rates for personal and commercial insurance with the insurance department of each state in which they operate. The Company's E & S and reinsurance subsidiaries generally operate free of rate and form regulation. In addition to regulatory supervision of its insurance subsidiaries, the Company is subject to state statutes governing insurance holding company systems. Typically, such statutes require the Company periodically to file information with the state insurance commissioner, including information concerning its 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 the Company's outstanding voting securities would be required to obtain regulatory approval of the purchase. Under Florida law, which is applicable to the Company due to its ownership of Carolina, a Florida domiciled insurer, the acquisition of more than 5% of the Company's 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." During the past several years, various regulatory and legislative bodies adopted or proposed new laws or regulations to deal with the cyclical nature of the insurance industry, catastrophic events and their effects on shortage of capacity and pricing. These regulations, which have not had a material impact on the Company's operations, include (i) the creation of "market assistance plans" under which insurers are induced to provide certain coverages, (ii) restrictions on the ability of insurers to cancel certain policies in mid-term, (iii) advance notice requirements or limitations imposed for certain policy non-renewals and (iv) limitations upon or decreases in rates permitted to be charged. The passage of Proposition 103 in the State of California did not have a material adverse impact on the Company's operations because the Company's subsidiaries operated in that State primarily on a non-admitted basis. The non-admitted market in California, however, has been subjected to increased levels of regulation. Admiral and Nautilus, both of which derive significant premiums from California, may be adversely impacted by increased regulation which causes business to remain in the admitted market. Additionally, a number of states have adopted and others are considering adopting forms of commercial lines deregulation laws which, depending upon factors such as the relatively high amount of premium or revenue of an insured, would permit an insurer to provide insurance without being subject to rate and/or form filing requirements. 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 has adopted risk based capital ("RBC") requirements that require insurance companies to calculate and report information under a risk-based formula which measures statutory capital and surplus needs based on a regulatory definition of risk in a company's mix of products and its balance sheet. The implementation of RBC did not affect the operations of the Company's insurance subsidiaries since all of its subsidiaries have a RBC amount above the authorized control level RBC, as defined by the NAIC. The NAIC recently completed a process intended to codify statutory accounting practices for certain insurance enterprises. As a result of this process, the NAIC will issue a revised statutory accounting practices and procedures manual, which will be effective January 1, 2001. The Company has not yet determined the impact that this change will have on the statutory capital and surplus of its insurance subsidiaries. The NAIC is considering model laws on commercial lines deregulation. Federal legislation is being considered which would either abolish or limit the current exemption of the insurance industry from portions of the antitrust laws, impose direct federal oversight or federal solvency standards. No assurance can be given that future legislative or regulatory changes resulting from such activity will not adversely affect the Company's insurance subsidiaries. 20
21 The Gramm-Leach-Bliley Act, or Financial Services Modernization Act of 1999 (the "Act"), was enacted in 1999, significantly affecting the financial services industry, including insurance companies, banks and securities firms. The Act modifies federal law to permit the creation of financial holding companies ("FHCs"), which, as regulated by the Act, can maintain cross-holdings in insurance companies, banks and securities firms to an extent not previously allowed. The Act also permits or facilitates certain types of combinations or affiliations for FHCs. The Act establishes a functional regulatory scheme under which state insurance departments will maintain primary regulation over insurance activities, subject to provisions for certain federal preemptions. Important provisions of the Act involve requirements for adoption of (i) multi-state agents' licensing reforms and uniformity requirements and (ii) privacy protections, giving the states the ability to enact these laws in the first instance or be preempted. The NAIC is considering adoption of a model law on privacy. It has also adopted a model law on agents' licensing which has been enacted or is currently being considered by various state legislatures. It is not anticipated that the insurance regulatory aspects of the Act will have a material effect on the operations of the Company. The Company's 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 the Company's insurance subsidiaries are required to be members) have limited assessment authority with regard to deficits in certain lines of business. To date, assessments have not had a material adverse impact on operations. The Company receives funds from its insurance subsidiaries in the form of dividends and fees for certain management services. Annual dividends in excess of maximum amounts prescribed by state statutes ("extraordinary dividends") may not be paid without the approval of the insurance commissioner of the state in which an insurance subsidiary is domiciled. Competition The property casualty insurance and reinsurance business is competitive, with over 2,000 insurance companies transacting business in the United States. The Company competes directly with a large number of these companies. The Company's strategy in this highly fragmented industry is to seek specialized areas or geographic regions where its insurance subsidiaries can gain a competitive advantage by responding quickly to changing market conditions. Each of the Company's 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. 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. Also, certain personal lines have become more competitive due to Internet-based competition. Signet Star's competition comes from domestic and foreign reinsurers, many of which have greater financial resources than Signet Star and which place their business either on a direct basis or through the broker market. The E & S area is a highly specialized segment of the insurance industry. Admiral and Nautilus compete with other E & S carriers, some of which are larger and have greater resources than Admiral and Nautilus. Under certain market conditions, standard carriers may compete for the types of business written by Admiral and Nautilus. With the implementation of commercial lines deregulation (see "Regulation") in several states and with many other states in the process of considering or adopting such laws, competition for "E & S type risks" might increase significantly. Such standard carriers would under such deregulation be free to compete with more liberal rate and form requirements. In addition, there are regional and 21
22 specialty carriers competing with Admiral and Nautilus when they underwrite business in their regions or specialties. Carolina and Great Divide's competition comes mainly from other specialty transportation insurers, regional carriers and large national multi-line companies. Each of Admiral Indemnity, Preferred and Key Risk Insurance compete with local regional companies as well as national carriers. Midwest Employers' competition comes from insurance and reinsurance companies, some of which have greater financial resources than Midwest Employers. Most of theses carriers write specific EWC coverage, do not offer aggregate EWC coverage and tend to focus on risks larger than those targeted by Midwest Employers. In addition, Midwest Employers competes with other specialty EWC insurers. The Insurance Services Operations face competition from several large nationally known service organizations as well as local competitors. 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 multi-national companies. Employees As of March 3, 2000, the Company employed 4,181 persons. Of this number, the Company's subsidiaries employed 4,131 persons, of whom 2,690 were executive and administrative personnel and 1,441 were clerical personnel. The Company employed the remaining 50 persons in its parent company and investment operations, of whom 36 were executive and administrative personnel and 14 were clerical personnel. Other information about the Company's business The Company maintains an ongoing interest in acquiring additional companies and developing new insurance entities, products and packages as opportunities arise. In addition, the insurance subsidiaries develop new coverages or lines of business to meet the needs of insureds. Seasonal weather variations affect the severity and frequency of losses sustained by the insurance and reinsurance subsidiaries. Although the effect on the Company's business of such natural catastrophes as tornadoes, hurricanes, hailstorms and earthquakes is mitigated by reinsurance, they nevertheless can have a significant impact on the results of any one or more reporting periods. The Company has no customer which accounts for 10 percent or more of its consolidated revenues. Compliance by the Company 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 the capital expenditures, earnings or competitive position of the Company. ITEM 2. PROPERTIES The Company and its subsidiaries own or lease office buildings or office space suitable to conduct their operations. Such owned property is as follows: <TABLE> <CAPTION> Location Company Size (sq. ft.) -------- ------- -------------- <S> <C> <C> Cherry Hill, New Jersey Admiral 42,000 Lincoln, Nebraska Union 43,000 Lincoln, Nebraska Continental Western 20,000 Luverne, Minnesota Tri-State 33,000 Meridian, Mississippi Great River 30,000 Scottsdale, Arizona Nautilus 34,000 Urbandale, Iowa Continental Western 80,000 Westbrook, Maine Acadia 54,000 </TABLE> In addition, the Company and its subsidiaries lease office facilities in various other cities under leases with varying terms and expiration dates. 22
23 ITEM 3. LEGAL PROCEEDINGS Claims under insurance policies written by the Company's insurance subsidiaries are investigated and settled either by claims adjusters employed by them, by their independent agents or by independent adjusters. Generally, the insurance subsidiary employs a staff of claims adjusters at its home office and at some regional offices. Some independent agents may have the authority to settle small claims. Independent claims adjusting firms are used to assist in handling various claims in areas where insurance volume does not warrant the maintenance of a staff adjuster. If a claim or loss cannot be settled and results in litigation, the subsidiary generally retains outside counsel. At present, neither the Company nor any of its subsidiaries is engaged in any litigation known to the Company which is expected to have a material adverse effect upon the Company's business. As is common with property casualty insurance companies, the Company's subsidiaries are regularly engaged in the defense of claims arising out of the conduct of the insurance business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1999 to a vote of holders of the Company's Common Stock. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock of the Company is traded on the Nasdaq National Market under the symbol "BKLY". The following table sets forth the high and low sale prices for the indicated periods, all as reported on such market. <TABLE> <CAPTION> Common Price Range Dividends Paid ----------- -------------- High Low Per Share ---- --- --------- <S> <C> <C> <C> 1999: Fourth Quarter $ 23 3/4 $ 19 13/16 $ .13 cash Third Quarter 27 15/16 21 5/8 $ .13 cash Second Quarter 29 1/8 24 3/8 $ .13 cash First Quarter 36 1/4 23 3/4 $ .12 cash 1998: Fourth Quarter $ 35 3/4 $ 27 1/2 $ .12 cash Third Quarter 40 15/16 29 13/16 $ .12 cash Second Quarter 49 40 1/16 $ .12 cash First Quarter 47 3/8 41 $ .11 cash </TABLE> The closing price of the Common Stock on March 3, 2000, as reported on the Nasdaq National Market, was $15 3/8 per share. The approximate number of record holders of the Common Stock on March 3, 2000 was 724. On May 11, 1999 the Company issued 250 shares of its Common Stock to each of its nine directors (2,250 share in the aggregate). The shares were issued as payment of a portion of annual directors' fees pursuant to the Company's 1997 Directors Stock Plan. The shares were not registered under the Securities Act of 1933 in reliance on the exemption provided in Section 4(2) thereof for transactions not involving a public offering. 23
24 ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 1999 <TABLE> <CAPTION> Year Ended December 31, ----------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (Amounts in thousands, except per share data) <S> <C> <C> <C> <C> <C> Net premiums written $ 1,427,719 $ 1,346,254 $ 1,177,641 $ 1,052,511 $ 860,421 Net premiums earned 1,414,384 1,278,399 1,111,747 981,221 803,336 Net investment income 190,316 202,420 199,588 164,490 137,332 Management fees and commissions 72,344 70,727 71,456 69,246 68,457 Realized investment gains (losses) (6,064) 25,400 13,186 7,437 10,357 Total revenues 1,673,668 1,582,517 1,400,310 1,225,166 1,021,943 Interest expense 50,801 48,819 48,869 31,963 28,209 Income (loss) before Federal and foreign income taxes (79,248) 62,781 129,241 115,049 82,747 Federal and foreign income tax (expense) benefit 45,766 (5,465) (30,668) (25,102) (17,554) Income (loss) before minority interest (33,482) 57,316 98,573 89,947 65,193 Net income (loss) before preferred dividends (34,048) 58,760 99,047 90,263 60,882 Preferred dividends (497) (7,548) (7,828) (13,909) (11,062) Cumulative effect of change in accounting principle (net of taxes) (3,250) -- -- -- -- Extraordinary gain (loss) 735 (5,017) -- -- -- Net income (loss) attributable to common stockholders (37,060) 46,195 91,219 76,354 49,820 Data per common share: Basic: Net income (loss) before change in accounting and extraordinary item (1.35) 1.82 3.09 2.56 1.91 Net income (loss) (1.44) 1.64 3.09 2.56 1.91 Diluted: Net income (loss) before change in (1.34) 1.76 3.02 2.53 1.90 accounting and extraordinary income Net income (loss) (1.43) 1.59 3.02 2.53 1.90 Stockholders' equity 23.10 28.80 28.72 25.13 23.59 Cash dividends declared $ .52 $ .48 $ .42 $ .35 $ .32 Weighted average shares outstanding: Basic 25,823 28,194 29,503 29,792 26,121 Diluted 25,927 29,115 30,185 30,130 26,262 Investments (1) $ 2,975,929 $ 3,233,458 $ 3,106,900 $ 2,991,606 $ 2,588,346 Total assets 4,784,791 4,983,431 4,544,318 4,136,973 3,618,684 Reserves for losses and loss expenses 2,361,238 2,126,566 1,909,688 1,782,703 1,660,020 Long-term debt 394,792 394,444 390,415 390,104 319,287 Company-obligated mandatorily redeemable capital securities of a subsidiary trust holding solely 8.197% junior subordinated debentures 198,126 207,988 207,944 207,901 -- Stockholders' equity 591,778 861,281 947,292 879,732 929,815 </TABLE> (1) Including trading account receivable from brokers and clearing organizations and trading account securities sold but not yet purchased. 24
25 (2)ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained on pages 18 through 25 of the registrant's 1999 Annual Report to Stockholders, which information is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to the information under "Market Risk" under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained on pages 22 and 23 of the registrant's 1999 Annual Report to Stockholders, which information is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the registrant are contained on pages 26 through 42 of registrant's 1999 Annual Report to Stockholders and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 25
26 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 3, 2000: <TABLE> <CAPTION> Name Age Position ---- --- -------- <S> <C> <C> William R. Berkley 54 Chairman of the Board and President Eugene G. Ballard 47 Senior Vice President - Chief Financial Officer and Treasurer Robert P. Cole 49 Senior Vice President - Regional Operations Cornelius T. Finnegan, III 55 Senior Vice President - General Counsel and Secretary E. LeRoy Heer 61 Senior Vice President - Chief Corporate Actuary H. Raymond Lankford, Jr. 57 Senior Vice President - Alternative Markets Operations Ira S. Lederman 46 Senior Vice President - Assistant General Counsel and Assistant Secretary James G. Shiel 40 Senior Vice President - Investments Edward A. Thomas 51 Senior Vice President - Specialty Operations Donald J. Veldkamp 61 Senior Vice President - Technology and Distribution Systems Paul J. Hancock 38 Vice President - Actuary Edward F. Linekin 36 Vice President - Investments Clement P. Patafio 35 Vice President - Corporate Controller Joseph M. Pennachio 52 Vice President - Human Resources Scott A. Siegel 41 Vice President - Taxes George G. Daly 59 Director Robert B. Hodes 74 Director Henry Kaufman 72 Director Richard G. Merrill 69 Director Jack H. Nusbaum 59 Director Mark L. Shapiro 55 Director Martin Stone 71 Director </TABLE> 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. Each year the term of office of one class expires. In May 1999, the term of a class consisting of three directors expired. Richard G. Merrill, Jack H. Nusbaum and Mark L. Shapiro were elected as directors to hold office for a term of three years until the Annual Meeting of Stockholders in 2002 and until their successors are duly elected and qualify. As a result of the resignation of John D. Vollaro as a director effective March 1, 2000, the Board presently has one vacancy in the class of directors with a term expiring in 2001. 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, a position which he has held since March 1, 2000 and has held at various times from 1967 to 1995. He also serves as Chairman of the Board or Director of a number of public and private companies. These include Associated Community Corp., a bank holding company that owns all of the issued and outstanding capital stock of The Greenwich Bank & Trust Company, a Connecticut chartered bank; Westport National Bank, a national bank; Pioneer companies, Inc., a chemical manufacturing and marketing company; Strategic Distribution, Inc., an industrial products distribution and services company; and Interlaken Capital, Inc., a private investment firm with interests in various businesses. His current term as a director expires in 2000. 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. 26
27 Robert P. Cole has been Senior Vice President 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 N.Y., which was purchased by Folksamerica Reinsurance Company in 1996, and prior to that was associated with reinsurers for twenty years. Cornelius T. Finnegan, III has been Senior Vice President - General Counsel and Secretary since February 1, 1999. Before joining the Company, Mr. Finnegan was a partner at the New York law firm of Willkie Farr & Gallagher for more than the last five years. E. LeRoy Heer has been Senior Vice President - Chief Corporate Actuary since January 1991. Prior thereto, he had been Vice President - Corporate Actuary since May 1978. H. Raymond Lankford, Jr. has been Senior Vice President - Alternative Markets Operations since May 1996. Prior thereto, he was President of All American Agency Facilities, Inc., a subsidiary of the Company, from October 1991, having joined All American in 1990. He has been in the insurance business in various capacities for more than 30 years. Ira S. Lederman has been Senior Vice President since January 1997. Additionally, he has been General Counsel of Berkley International since January 1998. He is also Assistant General Counsel, a position he has held since July 1989, and Assistant Secretary since May 1986. Previously, he was Vice President from May 1986 until January 1997. Prior thereto, he was Insurance Counsel of the Company since May 1986 and Associate Counsel from April 1983. James G. Shiel has been Senior Vice President - Investments of the Company since January 1997. Prior thereto, he was Vice President - Investments of the Company since January 1992. Since February 1994, he has been President of Berkley Dean & Company, Inc., a subsidiary of the Company, which he joined in 1987. Edward A. Thomas has been Senior Vice President - Specialty Operations of the Company since April 1991. Prior thereto, he was President of Signet Reinsurance Company, a subsidiary of the Company, for more than five years. Donald J. Veldkamp has been Senior Vice President, Technology and Distribution Systems since January 1998. He most recently served as Chairman of Union Insurance Company, a subsidiary of the Company, since July 1997. Prior to that, he was President of Union Insurance Company from May 1990 to July 1997 and President of Tri-State Insurance Company of Minnesota, also a subsidiary of the Company, from February 1980 to May 1990. Paul J. Hancock has been Vice President - Actuary since May 1998. Previously, he was Assistant Vice President - Actuary since June 1997. Prior thereto, he was employed since July 1991 by Signet Star Reinsurance Company, a subsidiary of the Company, serving as Vice President and Corporate Actuarial Manager from August 1996 to June 1997 and Assistant Vice President from October 1995 to August 1996. Signet Star Reinsurance Company (formerly known as North Star Reinsurance Company) was purchased by the Company in July 1993. Edward F. Linekin has been Vice President - Investments since May 1998. Mr. Linekin has been an employee of the Company since April 1995. He has been a Vice President of the Company's investment subsidiary, Berkley Dean & Company, Inc., since April 1995. Prior thereto, he was Assistant Portfolio Manager - Senior Investment Officer of Home Insurance Company from April 1993. Clement P. Patafio has been Vice President - Corporate Controller 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. Joseph M. Pennachio has been Vice President - Human Resources of the Company since May 1999. Prior thereto, he was Assistant Vice President - Human Resources of the Company since April 1986. Before joining the Company, Mr. Pennachio was with AMF Incorporated from 1975 to 1986, where he held a variety of managerial positions in the benefits area. Scott A. Siegel has been Vice President - Taxes since January 1997. Prior thereto, he was Director of Taxes since September 1991. Before joining the Company, Mr. Siegel was with KPMG LLP from 1981 to 1991. 27
28 George G. Daly has been a director of the Company since 1998. Dr. Daly is Dean of Stern School of Business, and Dean Richard R. West Professor of Business, New York University for more than the past 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. Mr. Daly's term as a director expires in 2000. Robert B. Hodes has been a director of the Company since 1970. Mr. Hodes is Counsel to the New York law firm of Willkie Farr & Gallagher, where prior thereto he had been a partner for more than five years. He is also a director of Globalstar Telecommunications, Limited; K&F Industries, Inc.; Loral Space & Communications, Ltd.; Mueller Industries, Inc.; and Restructured Capital Holdings, Ltd. Mr. Hodes' current term as a director expires in 2000. Henry Kaufman has been a director of the Company since 1994. Dr. Kaufman is President of Henry Kaufman & Company, Inc., an investment, economic and financial consulting company since its establishment in 1988. Dr. Kaufman serves as Chairman of the Board of Overseers, Stern School of Business of New York University; Chairman of the Board of Trustees, Institute of International Education; Member of the Board of Directors, Federal Home Loan Mortgage Corporation; Member of the Board of Directors, Lehman Brothers Holdings Inc.; Member of the Board of Directors, The Statute of Liberty-Ellis Island Foundation, Inc.; Member of the Board of Trustees, New York University; Member of the Board of Trustees, The Animal Medical Center; Treasurer (and former trustee), The Economic Club of New York; Member of the International Capital Markets Advisory Committee of the Federal Reserve Bank of New York; Member of the Board of Trustees, Whitney Museum of American Art; Member of the Advisory Committee to the Investment Committee, International Monetary Fund Staff Retirement Plan; and Member of the Board of Governors, Tel-Aviv University. Dr. Kaufman's current term as a director expires in 2001. Richard G. Merrill has been a director of the Company since 1994. Mr. Merrill was Executive Vice President of Prudential Insurance Company of America from August 1987 to March 1991 when he retired. Prior thereto, Mr. Merrill served as Chairman and President of Prudential Asset Management Company since 1985. Mr. Merrill is a director of Sysco Corporation. Mr. Merrill's current term as a director expires in 2002. Jack H. Nusbaum has been a director of the Company since 1967. Mr. Nusbaum is the Chairman of the New York law firm of Willkie Farr & Gallagher where he has been a partner for more than the last five years. He is a director of Neuberger Berman Inc., Pioneer Companies, Inc., Prime Hospitality Corp., Strategic Distribution, Inc. and The Topps Company, Inc. Mr. Nusbaum's current term as a director expires in 2002. Mark L. Shapiro has been a director of the Company since 1974. Since September 1998, Mr. Shapiro has been a private investor. From July 1997 through August 1998, Mr. Shapiro was a Senior Consultant to the Export-Import Bank of the United States. Previously, he was a Managing Director in the investment banking firm of Schroder & Co. Inc. for more than the past five years. Mr. Shapiro's current term as a director expires in 2002. Martin Stone has been a director of the Company since 1990. Mr. Stone is Chairman of Professional Sports, Inc. (the Tucson Sidewinders AAA baseball team) and Chairman of Adirondack Corporation, all for more than the past five years. Mr. Stone is also a director of Canyon Ranch, Inc. and a member of the Advisory Board of Yosemite National Park. Mr. Stone's current term as a director expires in 2001. 28
29 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, 1999, 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, 1999, 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, 1999, 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, 1999, 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, 1999, and which is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Index to Financial Statements The Management's Discussion and Analysis of Financial Condition and Results of Operations, and the Company's financial statements, together with the report thereon of KPMG LLP, appearing on pages 18 through 42 of the Company's 1999 Annual Report to Stockholders, are incorporated by reference in this Annual Report on Form 10-K. With the exception of the aforementioned information, the 1999 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 1999 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. <TABLE> <CAPTION> Index to Financial Statement Schedules Page <S> <C> Independent Auditors' Report on Schedules and Consent 35 Schedule II - Condensed Financial Information of Registrant 36 Schedule III - Supplementary Insurance Information 40 Schedule IV - Reinsurance 41 Schedule VI - Supplementary Information concerning Property & Casualty Insurance Operations 42 </TABLE> 29
30 (b) Reports on Form 8-K During the quarter ended December 31, 1999, the registrant filed the following Reports on Form 8-K: Report dated October 22, 1999 with respect to a press release relating to earnings of the Company for the third quarter of 1999 (under Item 5 of Form 8-K). (c) Exhibits The exhibits filed as part of this report are listed on pages 33 and 34 hereof. 30
31 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. W. R. BERKLEY CORPORATION By /s/ William R. Berkley ---------------------------------------------- William R. Berkley, Chairman of the Board and President March 24, 2000 31
32 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. <TABLE> <CAPTION> Signature Title Date --------- ----- ---- <S> <C> <C> /s/ William R. Berkley Chairman of the Board and March 24, 2000 - ----------------------------------------- President William R. Berkley Principal executive officer /s/ George G. Daly Director March 24, 2000 - ----------------------------------------- George G. Daly /s/ Robert B. Hodes Director March 24, 2000 - ----------------------------------------- Robert B. Hodes /s/ Henry Kaufman Director March 24, 2000 - ----------------------------------------- Henry Kaufman /s/ Richard G. Merrill Director March 24, 2000 - ----------------------------------------- Richard G. Merrill /s/ Jack H. Nusbaum Director March 24, 2000 - ----------------------------------------- Jack H. Nusbaum /s/ Mark L. Shapiro Director March 24, 2000 - ----------------------------------------- Mark L. Shapiro /s/ Martin Stone Director March 24, 2000 - ----------------------------------------- Martin Stone /s/ Eugene G. Ballard Senior Vice President, March 24, 2000 - ----------------------------------------- Chief Financial Officer and Eugene G. Ballard Treasurer Principal financial officer /s/ Clement P. Patafio Vice President, March 24, 2000 - ----------------------------------------- Corporate Controller Clement P. Patafio </TABLE> 32
33 ITEM 14. (c) EXHIBITS Number (2.1) Agreement and Plan of Merger between the Company, Berkley Newco Corp. and MECC, Inc. (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K (File No. 0-7849) filed with the Commission on September 28, 1995). (2.2) Agreement and Plan of Restructuring, dated July 20, 1995, by and among the Company, Signet Star Holdings, Inc., Signet Star Reinsurance Company, Signet Reinsurance Company and General Re Corporation (incorporated by reference to Exhibit 2.2 of the Company's Current Report on Form 8-K (File No. 0-7849) filed with the Commission on September 28, 1995). (3.1) Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K (File No. 0-7849) filed with the Commission on March 30, 1994). (3.2) Amendment, dated May 12, 1998, to the Company's Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K (File No. 0-7849) filed with the Commission on March 23, 1999). (3.3) Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q (File No. 0-7849) filed with the Commission on August 11, 1999). (3.4) Amended and Restated By-Laws (incorporated by reference to Exhibit 3(ii) of the Company's Current Report on Form 8-K (File No. 0-7849) filed with the Commission on May 11, 1999). (4) The instruments defining the rights of holders of the long-term debt securities of the Company are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Company agrees to furnish supplementally copies of these instruments to the Commission upon request. (10.1) Credit Agreement dated as of December 10, 1999 among the Company, Bank of America, National Association, as Administrative Agent, and the other financial institutions party thereto (filed herewith). (10.2) Rights Agreement, dated as of May 11, 1999, between the Company and ChaseMellon Shareholder Services, LLC, as Rights Agent (incorporated by reference to Exhibit 99.1 of the Company's Current Report on Form 8-K (File No. 0-7849) filed with the Commission on May 11, 1999). (10.3) The Company's 1982 Stock Option Plan (incorporated by reference to Exhibit 10.1 of the Company's Registration Statement on Form S-1 (File No. 2-98396) filed with the Commission on June 14, 1985). (10.4) First Amended and Restated W. R. Berkley Corporation 1992 Stock Option Plan (incorporated by reference to Exhibit 10.2 of the Company's Annual Report on Form 10-K (File No. 0-7849) filed with the Commission on March 23, 1999). (10.5) 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. (10.6) W.R. Berkley Corporation Deferred Compensation Plan for Officers as amended January 1, 1991 (incorporated by reference to Exhibit 10.4 of the Company's Annual Report on Form 10-K (File No. 0-7849) filed with the Commission on March 26, 1996). (10.7) 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). (10.8) W. R. Berkley Corporation Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.7 of the Company's Annual Report on Form 10-K (File No. 0-7849) filed with the Commission on March 27, 1998). 33
34 (10.9) W. R. Berkley Corporation Long Term Incentive Plan (incorporated by reference to Exhibit 10.8 of the Company's Annual Report on Form 10-K (File No. 0-7849) filed with the Commission on March 27, 1998). (10.10) 1997 Directors Stock Plan, as Amended and Restated as of May 11, 1999 (incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q (File No. 0-7849) filed with the Commission on August 11, 1999). (10.11) Letter agreement between the Company and its Senior Vice President-General Counsel (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q (File No. 0-7849) filed with the Commission on August 11, 1999). (10.12) Separation Agreement dated January 24, 2000 between John D. Vollaro and the Company (filed herewith). (13) 1999 Annual Report to Stockholders of W.R. Berkley Corporation (only those portions of such Annual Report that are incorporated by reference in this Report on Form 10-K are deemed filed) (filed herewith). (21) Following is a list of the Company's significant subsidiaries. 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. <TABLE> <CAPTION> Jurisdiction of Percentage Incorporation owned ------------- ----- <S> <C> <C> All American Agency Facilities, Inc. Delaware 100% Berkley Regional Insurance Company: Missouri 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.: Maryland 100% Great River Insurance Company Mississippi 100% Tri-State Insurance Company of Minnesota: Minnesota 100% American West Insurance Company North Dakota 100% Union Insurance Company Nebraska 100% Union Standard Insurance Company Oklahoma 100% Berkley International, LLC New York 65% Carolina Casualty Insurance Company Florida 100% Clermont Specialty Managers, Ltd. New Jersey 100% J/I Holding Corporation: Delaware 100% Admiral Insurance Company: Delaware 100% Admiral Indemnity Insurance Company Delaware 100% Berkley Risk Services, LLC. Minnesota 100% Nautilus Insurance Company: Arizona 100% Great Divide Insurance Company North Dakota 100% Key Risk Management Services, Inc. North Carolina 100% Key Risk Insurance Company North Carolina 100% MECC, Inc.: Delaware 100% Midwest Employers Casualty Company: Ohio 100% Preferred Employers Insurance Company California 100% Riverport Insurance Company of California California 100% Monitor Liability Managers, Inc. Delaware 100% Monitor Surety Managers, Inc. Delaware 100% Queen's Island Insurance Company, Ltd. Bermuda 100% Signet Star Holdings, Inc.: Delaware 100% Signet Star Reinsurance Company Delaware 100% Facultative ReSources, Inc. Connecticut 100% Gemini Insurance Company Delaware 100% Starnet Insurance Company Delaware 100% </TABLE> (23) See Independent Auditors' report on schedules and consent. (27) Financial Data Schedule. 34
35 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 24, 2000, included the related financial statement schedules as of December 31, 1999 and 1998 incorporated by reference in the Form 10-K, and for each of the years in the three-year period ended December 31, 1999. 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 insurance-related assessments in 1999. We consent to the use of our reports incorporated by reference in the Registration Statements, (No. 33-95552) and (No. 333-00459) on Form S-3 and (No. 33-7488), (No. 33-88640), (No. 333-33935) and (No. 33-55726) on Form S-8 of W. R. Berkley Corporation. KPMG LLP New York, New York March 24, 2000 35
36 Schedule II W. R. Berkley Corporation Condensed Financial Information of Registrant Balance Sheets (Parent Company) (Amounts in thousands) <TABLE> <CAPTION> December 31, ------------ 1999 1998 ---- ---- <S> <C> <C> Assets Cash (including invested cash) $ 22,081 $ 137,422 Fixed maturity securities: Held to maturity, at cost (fair value $5,523 and $5,563) 5,523 5,563 Available for sale at fair value (cost $714 and $898) 705 894 Equity securities, at fair value: Available for sale (cost $698 and $698) 1,110 755 Trading account (cost $773 and $698) 773 698 Investments in subsidiaries 1,091,312 1,353,201 Due from subsidiaries 52,124 54,753 Current Federal income taxes receivable 9,911 11,620 Deferred Federal income taxes 82,896 -- Real estate, furniture & equipment at cost, less accumulated depreciation 18,962 19,514 Other assets 4,654 5,571 ----------- ----------- $ 1,290,051 $ 1,589,991 =========== =========== Liabilities, Debt and Stockholders' Equity Liabilities: Due to subsidiaries (principally deferred income taxes) $ 86,680 $ 77,951 Short-term debt 35,000 55,500 Deferred Federal income taxes -- 7,198 Other liabilities 27,468 29,421 ----------- ----------- 149,148 170,070 ----------- ----------- Long-term debt 350,999 350,651 Subsidiary trust junior subordinated debt 198,126 207,988 Stockholders' equity: Preferred stock -- 65 Common stock 7,281 7,281 Additional paid-in capital 331,640 429,612 Retained earnings (including accumulated undistributed net income of subsidiaries of $386,470 and $517,649 in 1999 and 1998, respectively) 551,401 601,908 Accumulated other comprehensive income (loss) (44,500) 54,672 Treasury stock, at cost (254,044) (232,256) ----------- ----------- 591,778 861,282 ----------- ----------- $ 1,290,051 $ 1,589,991 =========== =========== </TABLE> See note to condensed financial statements. 36
37 Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued Statements of Operations (Parent Company) (Amounts in thousands) <TABLE> <CAPTION> Years ended December 31, ------------------------ 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Management fees and investment income from affiliates, including dividends of $96,817, $65,836 and $33,911 for 1999, 1998 and 1997, respectively $ 102,963 $ 72,812 $ 40,058 Realized investment gains (losses) 321 -- 2,739 Other income 3,975 10,506 10,972 --------- --------- --------- Total revenues 107,259 83,318 53,769 Expenses, other than interest expense 20,978 22,201 23,801 Restructuring charge 1,502 -- -- Interest expense 49,207 47,571 47,645 --------- --------- --------- Income (loss) before Federal income taxes 35,572 13,546 (17,677) --------- --------- --------- Federal income taxes: Federal income taxes provided by Subsidiaries on a separate return Basis 8,474 44,370 54,884 Federal income tax benefit (provision) on a Consolidated return basis 48,958 (5,115) (30,849) --------- --------- --------- Net benefit 57,432 39,255 24,035 --------- --------- --------- Income (loss) before undistributed equity in net income of subsidiaries 93,004 52,801 6,358 Equity in undistributed net income (loss) of subsidiaries (130,232) 6,835 93,210 --------- --------- --------- Income (loss) before preferred dividends (37,228) 59,636 99,568 Preferred dividends (567) (8,424) (8,349) --------- --------- --------- Net income (loss) before extraordinary gain (loss) 37,795 51,212 91,219 Extraordinary gain (loss) 735 (5,017) -- --------- --------- --------- Net income (loss) attributable to common stockholders $ (37,060) $ 46,195 $ 91,219 ========= ========= ========= </TABLE> See note to condensed financial statements. 37
38 Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued Statement of Cash Flows (Parent Company) (Amounts in thousands) <TABLE> <CAPTION> Years ended December 31, ------------------------ 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Cash flows from operating activities: Net income (loss) before preferred dividends and extraordinary items $ (37,298) $ 59,636 $ 99,568 Adjustments to reconcile net income to net cash flows provided by operating activities: Equity in undistributed net income of subsidiaries 130,232 (6,835) (93,210) Tax payments received from subsidiaries 24,105 63,199 45,999 Federal income taxes provided by subsidiaries on a separate return basis (8,473) (44,370) (54,884) Change in Federal income taxes (35,018) (29,342) (1,409) Realized investment losses (321) -- (2,739) Other, net 3,274 (1,790) 4,114 --------- --------- --------- Net cash provided by operating activities before trading account sales (purchases) 76,501 40,498 (2,561) Trading account sales (purchases), net (75) (79) 32,712 --------- --------- --------- Net cash provided by operating activities 76,426 40,419 30,151 --------- --------- --------- Cash flow used in investing activities: Proceeds from sales, excluding trading account: Fixed maturity securities available for sale 23,973 3,167 19,954 Equity securities -- -- 1,432 Proceeds from maturities and prepayments of fixed maturity securities 222 112,643 -- Cost of purchases, excluding trading account: Fixed maturity securities (23,648) -- (9,305) Equity securities -- -- (2,098) Cost of companies acquired -- -- (7,238) Proceeds from sale of membership interest to subsidiaries 33,566 -- -- Investments in and advances to subsidiaries, net (77,362) (5,775) (14,986) Net additions to real estate, furniture & equipment (357) 201 444 Other, net -- -- 5,539 --------- --------- --------- Net cash used in investing activities (43,606) 110,236 (6,258) --------- --------- --------- Cash flows from financing activities: Net proceeds from issuance of long-term debt -- 39,882 -- Net proceeds from issuance of short-term debt (20,500) 55,500 -- Purchase of treasury shares (4,895) (59,240) -- Cash dividends to common stockholders (13,888) (13,518) (11,695) Cash dividends to preferred shareholders (2,001) (7,356) (8,717) Purchase of preferred stock (98,092) -- (41,523) Retirement of long-term debt (9,171) (49,104) -- Other, net 386 2,585 755 --------- --------- --------- Net cash provided by financing activities (148,161) (31,251) (61,180) --------- --------- --------- Net increase in cash and invested cash (115,341) 119,404 (37,287) Cash and invested cash at beginning of year 137,422 18,018 55,305 --------- --------- --------- Cash and invested cash at end of year $ 22,081 $ 137,422 $ 18,018 ========= ========= ========= </TABLE> See note to condensed financial statements. 38
39 Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued December 31, 1999, 1998 and 1997 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 1998 and 1997 financial statements as originally reported to conform them to the presentation of the 1999 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. Included in invested cash at December 31, 1998 is $114,520,667 placed in a trust to service the remaining outstanding shares of the Series A Preferred Stock. The Company redeemed the Series A Preferred Stock on January 25, 1999. 39
40 Schedule III W. R. Berkley Corporation and Subsidiaries Supplementary Insurance Information December 31, 1999, 1998 and 1997 (Amounts in thousands) <TABLE> <CAPTION> Reserve for Deferred policy losses and Net acquisition loss Unearned Premiums investment cost expenses premiums earned income ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> December 31, 1999 Regional $ 84,046 $ 635,115 $ 338,237 $ 650,131 $ 52,639 Reinsurance 34,911 500,808 119,376 297,650 47,288 Specialty 37,298 722,689 178,357 256,156 50,231 Alternative markets 7,510 442,133 34,846 123,504 36,355 International 18,583 60,493 19,010 86,943 6,469 Corporate and adjustments -- -- -- -- (2,666) ---------- ---------- ---------- ---------- ---------- Total $ 182,348 $2,361,238 $ 689,826 $1,414,384 $ 190,316 ========== ========== ========== ========== ========== December 31, 1998 Regional $ 83,613 $ 495,164 $ 337,414 $ 622,280 $ 53,942 Reinsurance 29,906 435,920 102,566 246,277 47,643 Specialty 37,148 745,790 167,648 235,055 59,345 Alternative markets 7,531 399,560 37,061 101,755 34,667 International 10,696 50,132 20,172 73,032 5,469 Corporate and adjustments -- -- -- -- 1,354 ---------- ---------- ---------- ---------- ---------- Total $ 168,894 $2,126,566 $ 664,861 $1,278,399 $ 202,420 ========== ========== ========== ========== ========== December 31, 1997 Regional $ 79,726 $ 396,648 $ 315,978 $ 575,911 $ 51,920 Reinsurance 22,620 389,285 77,159 195,825 45,520 Specialty 29,949 751,068 147,443 213,794 60,162 Alternative markets 7,618 344,302 31,018 86,229 34,390 International 5,824 28,385 17,786 39,988 3,623 Corporate and adjustments -- -- -- -- 3,973 ---------- ---------- ---------- ---------- ---------- Total $ 145,737 $1,909,688 $ 589,384 $1,111,747 $ 199,588 ========== ========== ========== ========== ========== </TABLE> <TABLE> <CAPTION> Amortization of Loss and deferred policy Other operating Loss acquisition cost and Net premiums expenses costs expenses written ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> December 31, 1999 Regional $ 554,394 $ 204,961 $ 33,261 $ 649,849 Reinsurance 226,229 92,503 6,790 309,181 Specialty 174,251 77,950 17,606 260,380 Alternative markets 82,757 36,063 78,476 122,137 International 48,195 32,812 8,526 86,172 Corporate and adjustments -- -- 15,836 -- ---------- ---------- ---------- ---------- Total $1,085,826 $ 444,289 $ 160,495 $1,427,719 ========== ========== ========== ========== December 31, 1998 Regional $ 476,920 $ 196,391 $ 33,732 $ 641,316 Reinsurance 183,020 62,855 15,084 269,634 Specialty 145,624 75,968 4,474 254,003 Alternative markets 65,634 30,903 72,897 106,195 International 43,564 28,495 15,244 75,106 Corporate and adjustments -- -- 20,112 -- ---------- ---------- ---------- ---------- Total $ 914,762 $ 394,612 $ 161,543 $1,346,254 ========== ========== ========== ========== December 31, 1997 Regional $ 385,285 $ 168,474 $ 33,759 $ 618,768 Reinsurance 135,530 58,200 3,836 206,652 Specialty 134,313 73,056 8,865 219,272 Alternative markets 55,386 26,002 69,044 90,870 International 23,910 12,139 12,874 42,079 Corporate and adjustments -- -- 21,527 -- ---------- ---------- ---------- ---------- Total $ 734,424 $ 337,871 $ 149,905 $1,177,641 ========== ========== ========== ========== </TABLE> 40
41 Schedule IV W. R. Berkley Corporation and Subsidiaries Reinsurance Years ended December 31, 1999, 1998 and 1997 (Amounts in thousands) <TABLE> <CAPTION> Assumed Percentage Ceded from of amount Direct to other other Net assumed to amount companies companies amount net ---------- ---------- ---------- ---------- ------- <S> <C> <C> <C> <C> <C> Premiums written: Year ended December 31, 1999: Regional insurance $ 755,752 $ 109,981 $ 4,078 $ 649,849 .6% Reinsurance 9,094 29,703 329,790 309,181 106.7% Specialty insurance 376,111 126,068 10,337 260,380 4.0% Alternative markets 69,671 20,333 72,799 122,137 59.6% International 107,257 21,085 -- 86,172 -- ---------- ---------- ---------- ---------- ------- Total $1,317,885 $ 307,170 $ 417,004 $1,427,719 29.2% ========== ========== ========== ========== ======= Year ended December 31, 1998: Regional insurance $ 744,560 $ 108,741 $ 5,497 $ 641,316 .9% Reinsurance 1,240 27,544 295,938 269,634 109.8% Specialty insurance 364,564 120,111 9,550 254,003 3.8% Alternative markets 62,942 15,078 58,331 106,195 54.9% International 95,870 20,764 -- 75,106 -- ---------- ---------- ---------- ---------- ------- Total $1,269,176 $ 292,238 $ 369,316 $1,346,254 27.4% ========== ========== ========== ========== ======= Year ended December 31, 1997: Regional insurance $ 691,431 $ 82,598 $ 9,935 $ 618,768 1.6% Reinsurance -- 17,059 223,711 206,652 108.3% Specialty insurance 329,266 118,868 8,874 219,272 4.0% Alternative markets 56,759 7,384 41,495 90,870 45.7% International 56,924 14,845 -- 42,079 -- ---------- ---------- ---------- ---------- ------- Total $1,134,380 $ 240,754 $ 284,015 $1,177,641 24.1% ========== ========== ========== ========== ======= </TABLE> 41
42 Schedule VI W. R. Berkley Corporation and Subsidiaries Supplementary Information Concerning Property-Casualty Insurance Operations December 31, 1999, 1998 and 1997 (Amounts in thousands) <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Deferred policy acquisition costs $ 182,348 $ 168,894 $ 145,737 Reserves for losses and loss expenses 2,361,238 2,126,566 1,909,688 Unearned premium 689,826 664,861 589,384 Premiums earned 1,414,384 1,278,399 1,111,747 Net investment income 190,316 202,420 199,588 Losses and loss expenses incurred: Current Year 1,032,089 944,887 747,977 Prior Years 28,351 (42,929) (21,313) Amortization of discount 10,473 9,111 7,760 Amortization of deferred policy acquisition costs 444,289 394,612 337,871 Paid losses and loss expenses 930,352 762,965 639,519 Net premiums written 1,427,719 1,346,254 1,177,641 </TABLE> 42