SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
(Mark One)
For the fiscal year ended December 31, 2004OR
For the transition period from to .
Commission file number 1-15202
W. R. BERKLEY CORPORATION
Registrant’s telephone number, including area code: (203) 629-3000
Securities registered pursuant to Section 12(b) of the Act:Common stock, par value $.20 per shareRights to purchase Series A Junior Participating Preferred Stock
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
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. o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities and Exchange Act of 1934). Yes þ No o
The aggregate market value of the voting and non-voting common stock held by non-affiliates (computed by reference to the price at which the common stock was last sold) as of the last business day of the Registrant’s most recently completed second fiscal quarter was $3,156,900,592.
Number of shares of common stock, $.20 par value, outstanding as of March 3, 2005: 84,272,875.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s 2004 Annual Report to Stockholders for the year ended December 31, 2004 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, 2004, are incorporated herein by reference in Part III.
ANNUAL REPORT ON FORM 10-K
December 31, 2004
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SAFE HARBOR STATEMENTUNDER THE PRIVATE SECURITIESLITIGATION REFORM ACT OF 1995
This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. This document may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of the forward-looking statements can be identified by the use of forward-looking words such as “believes”, “expects”, “potential”, “continued”, “may”, “will”, “should”, “seeks”, “approximately”, “predicts”, “intends”, “plans”, “estimates”, “anticipates” or the negative version of those words or other comparable words. Any forward-looking statements contained herein including statements related to our outlook for the industry and for our performance for the year 2005 and beyond, are based upon our historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us that the future plans, estimates or expectations contemplated by us will be achieved. They are subject to various risks and uncertainties, including but not limited to:
We describe these risks and uncertainties in greater detail below under the caption “Certain factors that may affect future results.” These risks and uncertainties could cause our actual results for the year 2005 and beyond to differ materially from those expressed in any forward-looking statement we make. Any projections of growth in our net premiums written and management fees would not necessarily result in commensurate levels of underwriting and operating profits. Our future financial performance is dependent upon factors discussed elsewhere in this Form 10-K and our other SEC filings. Forward-looking statements speak only as of the date on which they are made.
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PART I
ITEM 1. BUSINESS
W. R. Berkley Corporation, a Delaware corporation, is an insurance holding company which, through its subsidiaries, operates in five segments of the property casualty insurance business:
Our holding company structure provides us with the flexibility to respond to local or specific market conditions and to pursue specialty business niches. It also allows us to be closer to our customers in order to better understand their individual needs and risk characteristics. Our structure allows us to capitalize on the benefits of economies of scale through centralized capital, investment and reinsurance management and actuarial, financial and corporate legal staff support.
Unless otherwise indicated, all references in this Form 10-K to “W. R. Berkley,” “we,” “us,” “our,” the “Company” or similar terms refer to W. R. Berkley Corporation together with its subsidiaries.
Our specialty insurance and reinsurance operations are conducted nationwide, as well as in the United Kingdom. Regional insurance operations are conducted primarily in the Midwest, New England, Southern (excluding Florida) and Mid Atlantic regions of the United States. Alternative markets operations are conducted throughout the U.S. International operations are conducted in Argentina and the Philippines.
Net premiums written, as reported based on United States generally accepted accounting principles (“GAAP”), for each of the past five years were as follows:
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The following sections briefly describe our insurance segments. All of the domestic insurance subsidiaries except Admiral Insurance Company have an A.M. Best Company, Inc. (“A.M. Best”) rating of “A (Excellent)” which is the third highest rating out of 15 possible ratings by A. M. Best. Admiral Insurance Company has a rating of “A+ (Superior)” which is A.M. Best’s second highest rating. W. R. Berkley Insurance (Europe), Limited has a rating of “A- (Excellent)” which is A.M. Best’s fourth highest rating. A.M. Best’s ratings are based upon factors of concern to policyholders, insurance agents and brokers and are not directed toward the protection of investors. A.M. Best states: “While Best’s ratings reflect [its] opinion of a company’s financial strength and ability to meet its ongoing obligations to policyholders, they are not a warranty, nor are they a recommendation of specific policy form, contract, rate or claim practice.” A.M. Best reviews its ratings on a periodic basis, and ratings of the Company’s subsidiaries are therefore subject to change.
SPECIALTY INSURANCE
Our specialty segment underwrites complex and sophisticated third-party liability risks, principally within excess and surplus lines. Excess and surplus lines differ from standard market lines in that excess and surplus lines are generally free of rate and form regulation and provide coverage for more complex and hard-to-place risks. The primary specialty lines of business are premises operations, professional liability, commercial automobile, products liability and property lines. The specialty business is conducted through nine operating units. The companies within the segment are divided along the different customer bases and product lines that they serve. The specialty units deliver their products through a variety of distribution channels depending on the customer base and particular risks insured. The customers in this segment are highly diverse.
Admiral Insurance Company (“Admiral”) provides excess and surplus lines coverage that generally involves a moderate to high degrees of risk due to the nature of the class of coverage (e.g., products liability) or insured entity (e.g., fireworks distributors). Admiral concentrates on commercial casualty, professional liability, umbrella and commercial property lines of business produced by wholesale brokers. Admiral’s average annual premiums per policy were approximately $45,000 in 2004.
Nautilus Insurance Company (“Nautilus”) insures excess and surplus risks that are less complex and involve a lower degree of expected severity than those covered by Admiral. A substantial portion of Nautilus’ business is written on a binding authority basis, subject to certain contractual limitations. Nautilus’ average annual premiums per policy were approximately $4,000 in 2004.
Carolina Casualty Insurance Company (“Carolina”) specializes in transportation insurance for long-haul trucking and public automobile risks, operating as an admitted carrier in all states.
Monitor Liability Managers, Inc. (“Monitor”) specializes in professional liability insurance, including directors’ and officers’ liability, employment practices liability, lawyers’ professional liability, management liability and non-profit directors’ and officers’ liability.
Vela Insurance Services, LLC (“Vela”) provides excess and surplus lines coverage to small and medium size accounts with a primary focus on contractors and products liability. Vela’s average annual premiums per policy were approximately $52,000 in 2004.
W. R. Berkley Insurance (Europe), Limited (“Berkley UK”) is a United Kingdom authorized insurance company that began operations in July 2003. Berkley UK writes professional indemnity, directors & officers and general liability business.
Berkley Specialty Underwriting Managers, LLC (“Berkley Specialty”) is an underwriting company formed in 2004 to provide excess and surplus lines general liability coverage to the wholesale market. It also plans to offer commercial property and casualty insurance products to the entertainment and sports industry.
Clermont Specialty Managers, Ltd. (“Clermont”) writes package insurance programs, including workers’ compensation, for luxury condominium, cooperative and rental apartment buildings and restaurants in the New York City metropolitan area.
Berkley Medical Excess Underwriters, LLC (“Medical Excess”) provides medical malpractice excess insurance and reinsurance coverage and services to hospitals and hospital associations.
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The following table sets forth the percentage of gross premiums written by specialty unit:
The following table sets forth the percentages of gross premiums written, by line, by our specialty insurance operations:
REGIONAL
Our regional subsidiaries provide commercial insurance products to customers primarily in 27 states. Key clients of this segment are small-to-mid-sized businesses and state and local governmental entities. The regional subsidiaries are organized geographically, which provides them with the flexibility to adapt to local market conditions, while enjoying the superior administrative capabilities and financial strength of W. R. Berkley. The regional operations are conducted through four geographic regions based on markets served: Continental Western Insurance Group (“Continental Western Group”) in the Midwest, Acadia Insurance Company (“Acadia”) in New England, Union Standard Insurance Group (“Union Standard”) in the South (excluding Florida), and Berkley Mid Atlantic Group in the Mid Atlantic region. In addition, surety bonds are offered nationwide through a separate regional company, Monitor Surety Managers, Inc. (“Monitor Surety”).
The regional subsidiaries primarily sell insurance products through a network of non-exclusive independent agents who are compensated on a commission basis. Our regional companies underwrite all major commercial lines.
The following table sets forth the percentage of gross premiums written by each region:
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The following table sets forth the percentages of gross premiums written, by line, by our regional insurance operations:
The following table sets forth the percentages of direct premiums written, by state, by our regional insurance operations:
ALTERNATIVE MARKETS
Our alternative markets operations specialize in developing, insuring, reinsuring and administering self-insurance programs and other alternative risk transfer mechanisms. Our clients include employers, employer groups, insurers, and alternative market funds seeking less costly, more efficient ways to manage exposure to risks. In addition to providing insurance, the alternative markets segment also provides a wide variety of fee-based services, including consulting and administrative services.
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Each of our alternative markets operating units is involved in risk management and is organized according to one of the following product areas: insuring excess workers’ compensation risks; insuring primary workers’ compensation risks; and providing non-risk bearing services.
Midwest Employers Casualty Company (“MECC”) operates on a nationwide basis and provides excess workers’ compensation coverage and risk management services to self-insured employers and groups above their self-insured or retained limits.
Preferred Employers Insurance Company (“Preferred Employers”) offers primary workers’ compensation insurance in California. Insurance coverage is provided primarily to owner-managed small employers.
Key Risk Insurance Company (“Key Risk”) offers primary workers’ compensation insurance principally in North Carolina. Insurance services are also provided through its affiliate, Key Risk Management Services.
Berkley Risk Administrators Company, LLC (“BRAC”) implements and manages alternative risk management programs and self-insurance pools for business, governmental entities, assigned risk plans, tribal nations and non-profit entities. BRAC also provides administrative and claims services to insurance companies. BRAC’s services include third-party administration, claims adjustment and management, employee benefit consulting, accounting services, insurance and reinsurance risk transfer, loss control and safety consulting, management information systems, regulatory compliance and relations, risk management consulting, alternative markets plan management, statistical analysis, underwriting and rating, and policy issuance. BRAC also underwrites property casualty insurance for self-insured entities.
The following table sets forth the percentages of gross premiums written by each alternative markets unit:
The following table sets forth services fees for insurance services business conducted by BRAC and Key Risk (amounts in thousands):
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REINSURANCE
Our reinsurance operations consist of seven operating units, which specialize in underwriting property casualty reinsurance on both a treaty and a facultative basis on behalf of Berkley Insurance Company. Treaty reinsurance is the reinsurance of all or a specified portion or category of risks underwritten by the ceding company during the term of the agreement. Facultative reinsurance is the reinsurance of individual risks whereby a reinsurer generally has the opportunity to analyze and separately underwrite a risk prior to agreeing to be bound.
Signet Star Re, LLC (“Signet Star”) focuses on specialty lines of business, including professional liability, umbrella, workers’ compensation, commercial automobile and trucking, where knowledge and expertise in a specific area is valued over the capital scale of the reinsurance provider. Signet Star emphasizes casualty excess of loss treaties and seeks significant participations in order to have greater influence over the terms and conditions of coverage. Signet Star business is produced through reinsurance brokers or intermediaries as opposed to direct relationships with the ceding companies.
Facultative ReSources, Inc. (“Fac Re”) specializes in individual certificate and program facultative business developed through brokers. Its experienced underwriters seek to offset the underwriting and pricing cycles in the underlying insurance business by working closely with ceding company clients to develop appropriate underwriting criteria and through superior risk selection.
Lloyd’s of London Reinsurance (“Lloyd’s”) represents quota share reinsurance contracts with MAP Capital Limited and Kiln plc. Map Capital Limited and Kiln PLC underwrite a broad range of mainly short-tail classes of business on a worldwide basis.
Berkley Underwriting Partners, LLC (“Berkley Underwriting Partners”) writes specialty insurance products through program administrators and managing general underwriters.
B F Re Underwriting, LLC. (“BF Re”), which commenced operations in 2002, writes facultative reinsurance on a direct basis.
Fidelity & Surety Reinsurance Managers, LLC (“Fidelity and Surety”) offers reinsurance coverage to a limited number of regional fidelity and surety accounts.
Berkley Risk Solutions (“Berkley Risk Solutions”) was formed in 2003, and in 2004 began to provide insurance and reinsurance-based financial solutions to insurance companies and self-insured entities.
The following table sets forth the percentages of gross premiums written by each reinsurance unit:
The following table sets forth the percentages of gross premiums written, by property versus casualty business, by our reinsurance operations:
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INTERNATIONAL
The Company and Northwestern Mutual Life International, Inc. (“NML”), a wholly-owned subsidiary of The Northwestern Mutual Life Insurance Company, jointly own Berkley International, LLC (“Berkley International”).
Applying the same approach that we take for our domestic businesses, we believe that decentralized control is key to the success of our international efforts. For example, we hire local insurance executives who have specialized knowledge of their customers, markets and products, and we link their compensation to meeting performance objectives.
International operations are conducted in Argentina and the Philippines. In Argentina, we offer commercial and personal property casualty insurance. Our Argentina subsidiary ceased writing new life insurance business in 2002. In the Philippines, we provide savings and life products to customers.
The following table set forth the percentages of direct premiums for our international operations:
DISCONTINUED BUSINESS
In 2001, the Company discontinued its domestic personal lines business, both homeowners and private passenger automobile, and the alternative markets division of its reinsurance segment, by not renewing existing policies or treaties and ceasing to write new business. Although the Company discontinued the alternative market division of its reinsurance segment, it continues to write insurance and reinsurance covering workers’ compensation for self-insured entities within the alternative markets segment .
The following table set forth the percentages of net premiums written for our discontinued business:
OTHER BUSINESS
The Company owns a majority interest in Peyton Street Independent Financial Services (“Peyton Street”), a unitary thrift holding company that owns the common stock of InsurBanc. InsurBanc provides banking services principally to independent insurance agencies and their employees.
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Results by Industry Segment
Summary financial information about our operating segments is presented on a GAAP basis in the following table:
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The table below represents summary underwriting ratios, on a GAAP accounting basis for our insurance segments. The combined ratio represents a measure of underwriting profitability, excluding investment income. A number in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit:
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Investments
Investment results before income tax effects were as follows:
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.
Loss and Loss Adjustment Expense Reserves
To recognize liabilities for unpaid losses, either known or unknown, insurers establish reserves, which is a balance sheet account representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. Estimates and assumptions relating to reserves for losses and loss expenses are based on complex and subjective judgments, often including the interplay of specific uncertainties with related accounting and actuarial measurements. Such estimates are also susceptible to change as significant periods of time may elapse between the occurrence of an insured loss, the report of the loss to the insurer, the ultimate determination of the cost of the loss and the insurer’s payment of that loss.
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 to provide for losses incurred but not yet reported to the insurer, potential inadequacy of case reserves and the estimated expenses of settling claims, including legal and other fees and general expenses of administrating the claims adjustment process. Reserves are established based upon the then current legal interpretation of coverage provided.
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In examining reserve adequacy, several factors are considered in addition to the economic value of losses. These factors include historical data, legal developments, changes in social attitudes and economic conditions, including the effects of inflation. The actuarial process relies on the basic assumption that past experience, adjusted judgmentally for the effects of current developments and anticipated trends, is an appropriate basis for predicting future outcomes. Reserve amounts are necessarily based on management’s informed estimates and judgments using currently available data. As additional experience and other data become available and are reviewed, these estimates and judgments may be revised. This may result in reserve increases or decreases that would be reflected in our results in periods in which such estimates and assumptions are changed.
Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what management expects the ultimate settlement and claim administration will cost. While the methods for establishing the reserves are well tested over time, some of the major assumptions about anticipated loss emergence patterns are subject to unanticipated fluctuation. These estimates, which generally involve actuarial projections, are based on management’s assessment of facts and circumstances then known, as well as estimates of future trends in claims severity and frequency, judicial theories of liability and other factors, including the actions of third parties which are beyond the Company’s control. These variables are affected by internal and external events, such as inflation and economic volatility, judicial and litigation trends, reinsurance coverage and legislative changes, which make it more difficult to accurately predict claim costs. The inherent uncertainties of estimating reserves are greater for certain types of liabilities where long periods of time elapse before a definitive determination of liability is made. Because setting reserves is inherently uncertain, the Company cannot assure that its current reserves will prove adequate in light of subsequent events.
We discount our liabilities for excess workers’ compensation business and the workers’ compensation portion of our reinsurance business because of the long period of time over which losses are paid. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from the Company’s loss payout experience and is supplemented with data compiled from insurance companies writing similar business. The liabilities for losses and loss expenses have been discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve for non-proportional business, and at the statutory rate for proportional business. The discount rates range from 3.5% to 6.5% with a weighted average rate of 4.8%. The aggregate net discount, after reflecting the effects of ceded reinsurance, is $502,874,000, $393,152,000 and $292,697,000 at December 31, 2004, 2003 and 2002, respectively. The increase in the aggregate discount from 2003 to 2004 and from 2002 to 2003 resulted from the increase in workers’ compensation reserves.
To date, known asbestos and environmental claims at our insurance company subsidiaries have not had a material impact on our operations. Environmental claims have not materially impacted us because these subsidiaries generally did not insure the larger industrial companies which are subject to significant environmental exposures.
Our net reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $38,258,000 and $31,866,000 at December 31, 2004 and 2003, respectively. The Company’s gross reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $54,971,000 and $49,283,000 at December 31, 2004 and 2003, respectively. Net incurred losses and loss expenses for reported asbestos and environmental claims were approximately $9,194,000, $4,749,000 and $6,652,000 in 2004, 2003 and 2002, respectively. Net paid losses and loss expenses for reported asbestos and environmental claims were approximately $2,802,000, $1,391,000 and $2,938,000 in 2004, 2003 and 2002, 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.
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The table below provides a reconciliation of the beginning and ending property casualty reserves (amounts in thousands):
Also, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information regarding the increase in estimates for claims occurring in prior years.
A reconciliation between the reserves as of December 31, 2004 as reported in the accompanying consolidated GAAP financial statements and those reported on the basis of statutory accounting principles (“SAP”) is as follows (amounts in thousands):
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The following table presents the development of net reserves for 1994 through 2004. The top line of the table shows the estimated reserves for unpaid losses and loss expenses recorded at the balance sheet date for each of the indicated years. This represents the estimated amount of losses and loss expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to us. The upper portion of the table shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years.
The “cumulative redundancy (deficiency)” represents the aggregate change in the estimates over all prior years. For example, the 1994 reserves have developed a $170 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 1994 is reserved for $2,000 as of December 31, 1994. Assuming this claim estimate was changed in 2004 to $2,300, and was settled for $2,300 in 2004, the $300 deficiency would appear as a deficiency in each year from 1994 through 2003.
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The following table presents the development of gross reserves for 1994 through 2004.
Reinsurance
We follow the customary industry practice of reinsuring a portion of our exposures and paying to reinsurers a part of the premiums received on the policies that we write. Reinsurance is purchased principally to reduce net liability on individual risks and to protect against catastrophic losses. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policies, it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance coverage. We monitor the financial condition of our reinsurers and attempt to place our coverages only with substantial, financially sound carriers. As a result, generally the reinsurers who reinsure our casualty insurance must have an A.M. Best rating of “A (Excellent)” or better with $500 million in policyholder surplus and the reinsurers who cover our property insurance must have an A.M. Best rating of “A-(Excellent)” or better with $250 million in policyholder surplus. As a result of the attacks of September 11, 2001, many reinsurers have significantly changed their underwriting guidelines, and limit or no longer provide terrorism coverage. See “Management’s Discussion and Analysis of Financial Condition and Result of Operations” and Note 9 of “Notes to Consolidated Financial Statements.”
Regulation
Our insurance subsidiaries are subject to varying degrees of regulation and supervision in the jurisdictions in which they do business, and the Company believes that it is in compliance in all material respects with such regulations. They are subject to statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. This regulation relates to such matters as the standards of solvency which must be met and maintained; the licensing of insurers and their agents; the nature of and limitations on investments; deposits of securities for the benefit of policyholders; approval of policy forms and premium rates; periodic examination of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; establishment and maintenance of reserves for unearned premiums and losses; and requirements regarding numerous other matters. Our property casualty subsidiaries, other than excess and surplus and reinsurance subsidiaries, must generally file all rates with the insurance department of each state in which they operate. Our excess and surplus and reinsurance subsidiaries generally operate free of rate and form regulation.
In addition to regulatory supervision of our insurance subsidiaries, we are subject to state statutes governing insurance holding company systems. Typically, such statutes require that we periodically file information with the state insurance commissioner, including information concerning our capital structure, ownership, financial condition and general business operations. Under the terms of applicable state statutes, any person or entity desiring to purchase more than a specified percentage (commonly 10%) of our outstanding voting securities would be required to obtain regulatory approval of the purchase. Under Florida law, which is applicable to us due to
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our ownership of Carolina Casualty Insurance Company, a Florida domiciled insurer, the acquisition of more than 5% of our capital stock must receive regulatory approval. Further, state insurance statutes typically place limitations on the amount of dividends or other distributions payable by insurance companies in order to protect their solvency. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”
Various state and federal organizations, including Congressional committees and the National Association of Insurance Commissioners (“NAIC”), have been conducting reviews into various aspects of the insurance business. No assurance can be given that future legislative or regulatory changes resulting from such activity will not adversely affect our insurance subsidiaries.
The NAIC utilizes a Risk Based Capital (RBC) formula that is designed to measure the adequacy of an insurer’s statutory surplus in relation to the risks inherent in its business. The RBC formula develops a risk adjusted target level of adjusted statutory capital by applying certain factors to various asset, premium and reserve items. The RBC Model Law provides for four incremental levels of regulatory attention for insurers whose surplus is below the calculated RBC target. These levels of attention range in severity from requiring the insurer to submit a plan for corrective action to actually placing the insurer under regulatory control. The RBC of each of our domestic insurance subsidiaries was above the authorized RBC control level as of December 31, 2004.
The Gramm-Leach-Bliley Act, or Financial Services Modernization Act of 1999 (the “Act”), was enacted in 1999 and significantly affects the financial services industry, including insurance companies, banks and securities firms. The Act modifies federal law to permit the creation of financial holding companies, which, as regulated by the Act, can maintain cross-holdings in insurance companies, banks and securities firms to an extent not previously allowed. The Act also permits or facilitates certain types of combinations or affiliations for financial holding companies. The Act establishes a functional regulatory scheme under which state insurance departments will maintain primary regulation over insurance activities, subject to provisions for certain federal preemptions.
Our insurance subsidiaries are also subject to assessment by state guaranty funds when an insurer in that jurisdiction has been judicially declared insolvent and insufficient funds are available from the liquidated company to pay policyholders and claimants. The protection afforded under a state’s guaranty fund to policyholders of the insolvent insurer varies from state to state. Generally, all licensed property casualty insurers are considered to be members of the fund, and assessments are based upon their pro rata share of direct written premiums. The NAIC Model Post-Assessment Guaranty Fund Act, which many states have adopted, limits assessments to an insurer to 2% of its subject premium and permits recoupment of assessments through rate setting. Likewise, several states (or underwriting organizations of which our insurance subsidiaries are required to be members) have limited assessment authority with regard to deficits in certain lines of business.
We receive funds from our insurance subsidiaries in the form of dividends and management fees for certain management services. Annual dividends in excess of maximum amounts prescribed by state statutes may not be paid without the approval of the insurance commissioner of the state in which an insurance subsidiary is domiciled.
The Terrorism Risk Insurance Act of 2002 (“TRIA”) became effective November 26, 2002. TRIA establishes a temporary Federal program that provides for a system of shared public and private compensation for insured losses resulting from acts of terrorism. The program is scheduled to terminate on December 31, 2005. TRIA is applicable to almost all commercial lines of property and casualty insurance. Insurers with direct commercial property and casualty insurance exposure in the United States are required to participate in the program and make available coverage for certified acts of terrorism. Federal participation will be triggered under TRIA when the Secretary of Treasury certifies an act of terrorism. Under the program the federal government will pay 90% of an insurer’s losses in excess of the insurer’s applicable deductible. The insurer’s deductible is based on a percent of earned premium for covered lines of commercial property and casualty insurance: for 2004 it was 10% of 2003 premium and for 2005 it is 15% of 2004 premium. Based on our 2004 earned premiums, our deductible under TRIA during 2005 will increase to approximately $517 million. TRIA limits the federal governments share of losses at $100 billion for a program year. In addition, an insurer that has satisfied its deductible is not liable for the payment of losses in excess of the $100 billion cap. After December 31, 2005, there will not be a Federal program available for terrorism losses, unless TRIA is extended or replaced. At such time, the Company will have the option to exclude terrorism losses from coverage, except for any lines of insurance or jurisdictions where exclusions were not permitted before TRIA was enacted.
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The insurance industry recently has become the subject of increasing scrutiny with respect to insurance broker and agent compensation arrangements and sales practices. The New York State Attorney General and other state and federal regulators have commenced investigations and other proceedings relating to compensation and bidding arrangements between producers and issuers of insurance products, and unsuitable sales practices by producers on behalf of either the issuer or the purchaser. The practices currently under investigation include, among other things, allegations that so-called contingent commission arrangements may conflict with a broker’s duties to its customers and that certain brokers and insurers may have engaged in anti-competitive practices in connection with insurance premium quotes. The New York State Attorney General has recently entered into settlement agreements with two large insurance brokers against whom civil complaints had been filed. These investigations and proceedings are expected to continue, and new investigative proceedings may be commenced, in the future. These investigations and proceedings could result in legal precedents and new industry-wide practices or legislation, rules or regulations that could significantly affect the insurance industry.
Competition
The property casualty insurance and reinsurance businesses are competitive, with over 2,000 insurance companies transacting business in the United States. We compete directly with a large number of these companies. Our strategy in this highly fragmented industry is to seek specialized areas or geographic regions where our insurance subsidiaries can gain a competitive advantage by responding quickly to changing market conditions. Our subsidiaries establish their own pricing practices. Such practices are based upon a Company-wide philosophy to price products with the general intent of making an underwriting profit. Competition in the industry generally changes with profitability.
Competition for specialty and alternative markets business comes from other specialty insurers, regional carriers, large national multi-line companies and reinsurers. Under certain market conditions, standard carriers also compete for excess and surplus business.
Competition for the reinsurance business comes from domestic and foreign reinsurers, which produce their business either on a direct basis or through the broker market. These competitors include Berkshire Hathaway, GE Insurance Solutions, Transatlantic Reinsurance and Everest Reinsurance, which collectively comprise a majority of the property casualty reinsurance market in the United States.
The regional property casualty subsidiaries compete with mutual and other regional stock companies as well as national carriers. Direct writers of property casualty insurance compete with the regional subsidiaries by writing insurance through their salaried employees, generally at a lower cost than through independent agents such as those used by the Company.
The international operations compete with native insurance operations both large and small, which may be related to government entities, as well as with branch or local subsidiaries of multinational companies.
Employees
As of February 28, 2005, we employed 4,736 persons. Of this number, our subsidiaries employed 4,671 persons, of whom 2,709 were executive and administrative personnel and 1,962 were clerical personnel. We employed the remaining 65 persons at the parent company and in investment operations, of whom 49 were executive and administrative personnel and 16 were clerical personnel.
Other Information about the Company’s business
We maintain an interest in the acquisition or start up of complementary businesses and continue to evaluate possible acquisitions and new ventures on an ongoing basis. In addition, the insurance subsidiaries develop new coverages or lines of business to meet the needs of insureds.
Seasonal weather variations and other events affect the severity and frequency of losses sustained by the insurance and reinsurance subsidiaries. Although the effect on our business of such catastrophes as tornadoes, hurricanes, hailstorms, earthquakes and terrorist acts may be mitigated by reinsurance, they nevertheless can have a significant impact on the results of any one or more reporting periods.
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We have no customer which accounts for 10 percent or more of our consolidated revenues.
Compliance by W. R. Berkley and its subsidiaries with federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to protection of the environment has not had a material effect upon our capital expenditures, earnings or competitive position.
The Company’s internet address is www.wrberkley.com. The information on our website is not incorporated by reference in this annual report on Form 10-K. The Corporation’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are accessible free of charge through this website as soon as reasonably practicable after they have been electronically filed with or furnished to the Securities and Exchange Commission.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Our business faces significant risks. If any of the events or circumstances described as risks below actually occurs, our business, results of operations or financial condition could be materially and adversely affected.
Risks Relating to Our Industry
Our results may fluctuate as a result of many factors, including cyclical changes in the insurance and reinsurance industry.
The results of companies in the property casualty insurance industry historically have been subject to significant fluctuations and uncertainties. The demand for insurance is influenced primarily by general economic conditions, while the supply of insurance is directly related to available capacity. The adequacy of premium rates is affected mainly by the severity and frequency of claims, which are influenced by many factors, including natural disasters, regulatory measures and court decisions that define and expand the extent of coverage and the effects of economic inflation on the amount of compensation due for injuries or losses. In addition, investment rates of return may impact policy rates. These factors can have a significant impact on ultimate profitability because a property casualty insurance policy is priced before its costs are known, as premiums usually are determined long before claims are reported. These factors could produce results that would have a negative impact on our results of operations and financial condition.
Our actual claims losses may exceed our reserves for claims, which may require us to establish additional reserves.
Our gross reserves for losses and loss expenses were approximately $5.4 billion as of December 31, 2004. Our loss reserves reflect our best estimates of the cost of settling all claims and related expenses with respect to insured events that have occurred.
Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what management expects the ultimate settlement and claims administration will cost for claims that have occurred, whether known or unknown. The major assumptions about anticipated loss emergence patterns are subject to unanticipated fluctuation. These estimates, which generally involve actuarial projections, are based on management’s assessment of facts and circumstances then known, as well as estimates of future trends in claims severity and frequency, inflation, judicial theories of liability, reinsurance coverage, legislative changes and other factors, including the actions of third parties which are beyond our control.
The inherent uncertainties of estimating reserves are greater for certain types of liabilities, where long periods of time elapse before a definitive determination of liability is made and settlement is reached. In periods with increased economic volatility, it becomes more difficult to accurately predict claim costs. Reserve estimates are continually refined in an ongoing process as experience develops and further claims are reported and settled. Adjustments to reserves are reflected in the results of the periods in which such estimates are changed. Because setting reserves is inherently uncertain, we cannot assure you that our current reserves will prove adequate in light of subsequent events. Should we need to increase our reserves, our pre-tax income for the period would decrease by a corresponding amount.
We increased our estimates for claims occurring in prior years by $295 million in 2004, $245 million in 2003 and $156 million in 2002. We, along with the property casualty insurance industry in general, have experienced higher than expected losses for certain types of business written from 1998 to 2001. Although our reserves reflect our best estimate of the costs of settling claims, we cannot assure you that our claim estimates will not need to be increased in the future.
We discount our reserves for excess and assumed workers’ compensation business because of the long period of time over which losses are paid. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting liabilities. The expected loss and loss expense payout pattern subject to discounting is derived from our loss payout experience and is supplemented with data compiled from insurance companies writing similar business. Changes in the loss and loss expense payout pattern are recorded in the period they are determined. If the actual loss payout pattern is shorter than anticipated, the discount will be reduced and pre-tax income will decrease by a corresponding amount.
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As a property casualty insurer, we face losses from natural and man-made catastrophes.
Property casualty insurers are subject to claims arising out of catastrophes that may have a significant effect on their results of operations, liquidity and financial condition. Catastrophe losses have had a significant impact on our results. In addition, through our recent quota share arrangements with certain Lloyd’s syndicates, we have additional exposure to catastrophic losses. For example, weather-related losses were $29 million in 2002, $38 million in 2003 and $60 million in 2004.
Catastrophes can be caused by various events, including hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter weather and fires, as well as terrorist activities. The incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Some catastrophes are restricted to small geographic areas; however, hurricanes and earthquakes may produce significant damage in large, heavily populated areas. Catastrophes can cause losses in a variety of our property casualty lines, and most of our past catastrophe-related claims have resulted from severe storms. Seasonal weather variations may affect the severity and frequency of our losses. Insurance companies are not permitted to reserve for a catastrophe until it has occurred. It is therefore possible that a catastrophic event or multiple catastrophic events could produce significant losses and have a material adverse effect on our results of operations and financial condition.
We face significant competitive pressures in our businesses, which may reduce premium rates and prevent us from pricing our products at attractive rates.
We compete with a large number of other companies in our selected lines of business. We compete, and will continue to compete, with major U.S. and non-U.S. insurers and reinsurers, other regional companies, as well as mutual companies, specialty insurance companies, underwriting agencies and diversified financial services companies. Competition in our businesses is based on many factors, including the perceived financial strength of the company, premium charges, other terms and conditions offered, services provided, commissions paid to producers, ratings assigned by independent rating agencies, speed of claims payment and reputation and experience in the lines to be written.
Some of our competitors, particularly in the reinsurance business, have greater financial and marketing resources than we do. These competitors within the reinsurance segment include Berkshire Hathaway, GE Insurance Solutions, Transatlantic Reinsurance and Everest Reinsurance Company, which collectively comprise a majority of the U.S. property casualty reinsurance market. We expect that perceived financial strength, in particular, will become more important as customers seek high quality reinsurers. Certain of our competitors operate from tax advantaged jurisdictions and have the ability to offer lower rates due to such tax advantages.
New competition could cause the supply and/or demand for insurance or reinsurance to change, which could affect our ability to price our products at attractive rates.
We, as a primary insurer, may have significant exposure for terrorist acts.
To the extent that reinsurers have excluded coverage for terrorist acts or have priced such coverage at rates that we believe are not practical, we, in our capacity as a primary insurer, do not have reinsurance protection and are exposed for potential losses as a result of any terrorist acts. For example, our losses from the World Trade Center attack in 2001 were $35 million. We have particular exposure to terrorist acts as a provider of insurance for habitational risks in the New York metropolitan area and as a workers’ compensation insurer.
To the extent an act of terrorism is certified by the Secretary of Treasury, we may be covered under The Terrorism Risk Insurance Act of 2002 (“TRIA”) for up to 90% of our losses. However, any such coverage would be subject to a mandatory deductible based on a percent of earned premium for the covered lines of commercial property and casualty insurance. Based on our 2004 earned premiums, our deductible under TRIA during 2005 will increase to approximately $517 million. If TRIA is not extended beyond its stated termination date of December 31, 2005 or replaced by a similar program, our liability for terrorist acts could be a material amount. In addition, even this coverage provided under TRIA does not apply to reinsurance that we write.
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We are subject to extensive governmental regulation, which increases our costs and could restrict the conduct of our business.
We are subject to extensive governmental regulation and supervision. Most insurance regulations are designed to protect the interests of policyholders rather than stockholders and other investors. This system of regulation, generally administered by a department of insurance in each state in which we do business, relates to, among other things:
State insurance departments conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies, holding company issues and other matters. Recently adopted federal financial services modernization legislation may lead to additional federal regulation of the insurance industry in the coming years. Also, foreign governments regulate our international operations.
We may be unable to maintain all required licenses and approvals and our business may not fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of the laws and regulations. Also, some regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or monetarily penalize us. Also, changes in the level of regulation of the insurance industry, whether federal, state or foreign, or changes in laws or regulations themselves or interpretations by regulatory authorities, restrict the conduct of our business.
In certain of our insurance businesses, the rates we charge our policyholders are subject to regulatory approval. Certain lines of business are subject to a greater degree of regulatory scrutiny then others. For example, the workers’ compensation business is highly regulated. During 2004, approximately 13% of our net premiums written represented primary workers’ compensation business. Of our net premiums written, approximately 5% represented primary workers’ compensation business written in the State of California, which is undergoing workers’ compensation reform that may adversely affect our ability to adjust rates.
Risks Relating to Our Business
We cannot guarantee that our reinsurers will pay in a timely fashion, if at all, and, as a result, we could experience losses.
We purchase reinsurance by transferring part of the risk that we have assumed, known as ceding, to a reinsurance company in exchange for part of the premium we receive in connection with the risk. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, it does not relieve us, the reinsured, of our liability to
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our policyholders. Our reinsurers may not pay the reinsurance recoverables that they owe to us or they may not pay such recoverables on a timely basis. Accordingly, we bear credit risk with respect to our reinsurers, and if our reinsurers fail to pay us, our financial results would be adversely affected. Underwriting results and investment returns of some of our reinsurers may affect their future ability to pay claims. As of December 31, 2004, the amount due from our reinsurers was $851 million, including amounts due from state funds and industry pools. Certain of these amounts due from reinsurers are secured by letters of credit or held in trust on our behalf.
We are rated by A.M. Best and Standard & Poor’s, and a decline in these ratings could affect our standing in the insurance industry and cause our sales and earnings to decrease.
Ratings have become an increasingly important factor in establishing the competitive position of insurance companies. Certain of our insurance company subsidiaries are rated by A.M. Best, Standard & Poor’s and Moody’s Investors Services. A.M. Best, Standard & Poor’s and Moody’s ratings reflect their opinions of an insurance company’s financial strength, operating performance, strategic position and ability to meet its obligations to policyholders, are not evaluations directed to investors and are not recommendations to buy, sell or hold our securities. Our ratings are subject to periodic review, and we cannot assure you that we will be able to retain those ratings. All of the domestic insurance subsidiaries except Admiral Insurance Company have an A.M. Best Company, Inc. (“A.M. Best”) rating of “A (Excellent)” which is the third highest rating out of 15 possible ratings by A. M. Best. Admiral Insurance Company has a rating of “A+ (Superior)” which is A.M. Best’s second highest rating. W. R. Berkley Insurance (Europe), Limited has a rating of “A- (Excellent)” which is A.M. Best’s fourth highest rating. The Standard & Poor’s financial strength rating for our insurance subsidiaries is A+/negative (the seventh highest rating out of twenty-seven possible ratings). Our Moody’s rating is A2 for Berkley Insurance Company (the sixth highest rating out of twenty-one possible ratings).
If our ratings are reduced from their current levels by A.M. Best, Standard & Poor’s or Moody’s, our competitive position in the insurance industry could suffer and it would be more difficult for us to market our products. A significant downgrade could result in a substantial loss of business as policyholders move to other companies with higher claims-paying and financial strength ratings.
If market conditions cause reinsurance to be more costly or unavailable, we may be required to bear increased risks or reduce the level of our underwriting commitments.
As part of our overall risk and capacity management strategy, we purchase reinsurance for certain amounts of risk underwritten by our insurance company subsidiaries, especially catastrophe risks. We also purchase reinsurance on risks underwritten by others which we reinsure. Market conditions beyond our control determine the availability and cost of the reinsurance protection we purchase, which may affect the level of our business and profitability. Our reinsurance facilities are generally subject to annual renewal. We may be unable to maintain our current reinsurance facilities or to obtain other reinsurance facilities in adequate amounts and at favorable rates. If we are unable to renew our expiring facilities or to obtain new reinsurance facilities, either our net exposures would increase or, if we are unwilling to bear an increase in net exposures, we would have to reduce the level of our underwriting commitments, especially catastrophe exposed risks.
Our international operations expose us to investment, political and economic risks.
Our international operations, including our recent UK-based operations, expose us to investment, political and economic risks, including foreign currency and credit risk. Changes in the value of the U.S. dollar relative to other currencies could have an adverse effect on our results of operations and financial condition. For example, Argentina has recently experienced substantial political and economic problems, including debt restructuring and the devaluation of the Argentinean peso. As a result, we recorded a charge of $18 million in 2001 and $10 million in 2002 to recognize other than temporary impairment of our investment in Argentine bonds.
We may not find suitable acquisition candidates or new insurance ventures and even if we do, we may not successfully integrate any such acquired companies or successfully invest in such ventures.
As part of our present strategy, we continue to evaluate possible acquisition transactions and the start-up of complementary businesses on an ongoing basis, and at any given time, we may be engaged in discussions with respect to possible acquisitions and new ventures. We cannot assure you that we will be able to identify suitable acquisition transactions or insurance ventures, that such transactions will be financed and completed on acceptable terms or that our
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future acquisitions or ventures will be successful. The process of integrating any companies we do acquire or investing in new ventures may have a material adverse effect on our results of operations and financial condition.
We may be unable to attract and retain qualified employees.
We depend on our ability to attract and retain experienced underwriting talent and other skilled employees who are knowledgeable about our business. If the quality of our underwriting team and other personnel decreases, we may be unable to maintain our current competitive position in the specialized markets in which we operate, and be unable to expand our operations into new markets.
Risks Relating to Our Investments
A significant amount of our assets is invested in fixed income securities and is subject to market fluctuations.
Our investment portfolio consists substantially of fixed income securities. As of December 31, 2004, our investment in fixed income securities was approximately $6.4 billion, or 76% of our total investment portfolio.
The fair market value of these assets and the investment income from these assets fluctuate depending on general economic and market conditions. The fair market value of fixed income securities generally decreases as interest rates rise. Conversely, if interest rates decline, investment income earned from future investments in fixed income securities will be lower. In addition, some fixed income securities, such as mortgage-backed and other asset-backed securities, carry prepayment risk as a result of interest rate fluctuations. Based upon the composition and duration of our investment portfolio at December 31, 2004, a 100 basis point increase in interest rates would result in a decrease in the fair value of our investments of approximately $258 million.
The value of investments in fixed income securities, and particularly our investments in high-yield securities, is subject to impairment as a result of deterioration in the credit worthiness of the issuer. Although we attempt to manage this risk by diversifying our portfolio and emphasizing preservation of principal, our investments are subject to losses as a result of a general decrease in commercial and economic activity for an industry sector in which we invest, as well as risks inherent in particular securities. For example, we reported provisions for other than temporary impairments in the value of our fixed income investments of $16 million in 2002 and $430,000 in 2003.
We invest some of our assets in equity securities, including merger arbitrage investments and real estate securities, which may decline in value.
We invest a portion of our investment portfolio in equity securities, including merger arbitrage investments and investments in affiliates. At December 31, 2004, our investments in equity securities were approximately $934 million, or 11% of our investment portfolio. Although we did not report any provisions for “other than temporary impairments” in the value of our equity securities in 2003, we reported such provisions in the amounts of $2.7 million in 2002 and $2.8 million in 2004.
Merger and convertible arbitrage trading represented 38% of our equity securities at December 31, 2004. Merger arbitrage is the business of investing in the securities of publicly held companies that are the targets in announced tender offers and mergers. Merger arbitrage differs from other types of investments in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period, usually four months or less. Our merger arbitrage positions are exposed to the risk associated with the completion of announced deals, which are subject to regulatory as well as political and other risks. As a result of the reduced activity in the merger and acquisitions area, we may not be able achieve the returns that we have enjoyed in the past.
Included in our equity security portfolio are investments in publicly traded real estate investment trusts (“REITs”) and private real estate investment funds, real estate limited partnerships and venture capital investments. At December 31, 2004, our investments in these securities were approximately $311 million, or 30% of our equity portfolio. The values of our real estate investments are subject to fluctuations based on changes in the economy in general and real estate valuations in particular. In addition, the real estate investment funds, limited partnerships, and venture capital investments in which we invest are less liquid than our other investments.
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Risks Relating to Purchasing Our Securities
We are an insurance holding company and may not be able to receive dividends in needed amounts.
As an insurance holding company, our principal assets are the shares of capital stock of our insurance company subsidiaries. We have to rely on dividends from our insurance company subsidiaries to meet our obligations for paying principal and interest on outstanding debt obligations and for paying dividends to stockholders and corporate expenses. The payment of dividends by our insurance company subsidiaries is subject to regulatory restrictions and will depend on the surplus and future earnings of these subsidiaries, as well as the regulatory restrictions. During 2005, the maximum amount of dividends that can be paid without regulatory approval is approximately $270 million. As a result, in the future we may not be able to receive dividends from these subsidiaries at times and in amounts necessary to meet our obligations or pay dividends.
We are subject to certain provisions that may have the effect of hindering, delaying or preventing third party takeovers, which may prevent our shareholders from receiving premium prices for their shares in an unsolicited takeover and make it more difficult for third parties to replace our current management.
Provisions of our certificate of incorporation and by-laws, as well as our rights agreement and state insurance statutes, may hinder, delay or prevent unsolicited acquisitions or changes of our control. These provisions may also have the effect of making it more difficult for third parties to cause the replacement of our current management without the concurrence of our board of directors.
These provisions include:
ITEM 2. PROPERTIES
W. R. Berkley and its subsidiaries own or lease office buildings or office space suitable to conduct their operations. At December 31, 2004, the Company had aggregate office space of 1,450,722 square feet, of which 549,638 were owned and 901,084 were leased.
Rental expense was approximately $16,783,000, $18,773,000 and $17,586,000 for 2004, 2003 and 2002, respectively. Future minimum lease payments (without provision for sublease income) are $15,889,000 in 2005; $13,747,000 in 2006; and $41,783,000 thereafter.
ITEM 3. LEGAL PROCEEDINGS
The Company’s subsidiaries are subject to disputes, including litigation and arbitration, arising in the ordinary course of their insurance and reinsurance businesses. The Company’s estimates of the costs of settling such matters are reflected in its aggregate reserves for losses and loss expenses, and the Company does not believe that the ultimate outcome of such matters will have a material adverse effect on its financial condition or results of operations.
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The New York State Attorney General and other regulators have commenced investigations, legal actions and general inquiries concerning producer compensation and alleged anti-competitive activities in the insurance industry. Certain allegations include improper sales practices by insurance producers as well as other non-competitive behaviors. The Company and certain of its operating units, like many others in the insurance industry, have received information requests from various state insurance regulators and other state authorities. These requests, for the most part, relate to inquiries into inappropriate solicitation activities, producer compensation practices and the underwriting of legal malpractice insurance. The Company is responding to each of these inquiries and is cooperating with the applicable regulatory authorities. In this regard, the Company commenced an internal review with the assistance of outside counsel. The internal review, which is substantially complete, focused on the Company’s relationships with its distribution channels. As a result of the investigation, a single insurance operating unit reported certain limited instances of conduct that could be characterized as involving inappropriate solicitation practices. To address these limited instances, the Company has implemented certain additional internal procedures and is taking other corrective action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 2004 to a vote of holders of the Company’s Common Stock.
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PART II
The closing price of the Common Stock on March 3, 2005, as reported on the New York Stock Exchange, was $51.67 per share. The approximate number of record holders of the Common Stock on March 3, 2005 was 561.
Set forth below is a summary of the shares repurchased by the Company during the fourth quarter of 2004 and the remaining number of shares authorized for purchase by the Company.
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ITEM 6. SELECTED FINANCIAL DATA
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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, 2004, and which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
(a) Security ownership of certain beneficial owners
(b) Security ownership of management
(c) Changes in control
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Company’s financial statements, together with the reports on the financial statements, and management’s assessment of the effectiveness of the Company’s internal control over financial reporting and the effectiveness of internal control over financial reporting of KPMG LLP, appear in the Company’s 2004 Annual Report to Stockholders and are incorporated by reference in this Annual Report on Form 10-K. With the exception of the aforementioned information, the 2004 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 2004 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.
The exhibits filed as part of this report are listed on pages 35, 36 and 37 hereof.
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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.
March 11, 2005
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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.
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ITEM 15. (b) EXHIBITS
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36
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Report of Independent Registered Public Accounting Firm on Schedules
The Board of Directors and StockholdersW. R. Berkley Corporation:
Under date of March 11, 2005, we reported on the consolidated balance sheets of W.R. Berkley Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2004, as contained in the 2004 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 2004. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules. 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.
KPMG LLP
New York, New YorkMarch 11, 2005
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Schedule II
W. R. Berkley CorporationCondensed Financial Information of RegistrantBalance Sheets (Parent Company)(Amounts in thousands)
See note to condensed financial statements.
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Schedule II, Continued
W. R. Berkley CorporationCondensed Financial Information of Registrant, ContinuedStatements of Income (Parent Company)(Amounts in thousands)
40
W. R. Berkley CorporationCondensed Financial Information of Registrant, ContinuedStatements of Cash Flows (Parent Company)(Amounts in thousands)
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W. R. Berkley Corporation
Condensed Financial Information of Registrant, Continued
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 2003 and 2002 financial statements as originally reported to conform them to the presentation of the 2004 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 subsidiary companies on a separate-return basis are paid to W. R. Berkley Corporation, and the Company pays the tax due on a consolidated return basis.
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Schedule III
W. R. Berkley Corporation and SubsidiariesSupplementary Insurance InformationDecember 31, 2004, 2003 and 2002 (Amounts in thousands)
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Schedule IV
W. R. Berkley Corporation and SubsidiariesReinsuranceYears ended December 31, 2004, 2003 and 2002 (Amounts in thousands)
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Schedule V
W. R. Berkley Corporation and SubsidiariesValuation and Qualifying AccountsYears ended December 31, 2004, 2003 and 2002 (Amounts in thousands)
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Schedule VI
W. R. Berkley Corporation and SubsidiariesSupplementary Information Concerning Property-Casualty Insurance OperationsDecember 31, 2004, 2003 and 2002 (Amounts in thousands)
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