1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark one) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period. . . . . . . . March 31, 2000 or / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the Transition Period from to . Commission File Number 0-7849 W. R. BERKLEY CORPORATION (Exact name of registrant as specified in its charter) Delaware 22-1867895 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 165 Mason Street, Greenwich, Connecticut 06836-2518 (Address of principal executive offices) (Zip Code) (203) 629-3000 (Registrant's telephone number, including area code) None Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares of common stock, $.20 par value, outstanding as of May 3, 2000: 25,616,578.
2 Part I - FINANCIAL INFORMATION ITEM 1. Financial Statements W. R. Berkley Corporation and Subsidiaries Consolidated Balance Sheets <TABLE> <CAPTION> (Dollars in thousands) March 31, December 31, ---------------------- 2000 1999 --------- ------------ <S> <C> <C> Assets (Unaudited) Investments: Invested cash $ 367,478 $ 295,423 Fixed maturity securities: Held to maturity, at cost (fair value $154,704 and $150,465) 153,778 152,657 Available for sale, at fair value (cost $2,115,824) And $2,180,509) 2,058,477 2,110,411 Equity securities, at fair value: Available for sale (cost $71,919 and $54,437) 74,974 61,380 Trading account (cost $293,316 and $236,453) 298,405 253,430 Cash 17,276 20,051 Premiums and fees receivable 406,880 380,887 Due from reinsurers 636,587 620,446 Accrued investment income 31,343 36,925 Prepaid reinsurance premiums 88,701 91,005 Deferred policy acquisition costs 191,582 182,348 Real estate, furniture & equipment at cost, less accumulated depreciation 127,823 128,735 Excess of cost over net assets acquired 75,411 76,523 Trading account receivable from brokers and clearing organizations 208,070 258,454 Deferred Federal income taxes 80,903 81,976 Other assets 39,762 34,140 ----------- ----------- $ 4,857,450 $ 4,784,791 =========== =========== Liabilities, Reserves, Debt and Stockholders' Equity Liabilities and reserves: Reserves for losses and loss expenses $ 2,398,711 $ 2,361,238 Unearned premiums 714,080 689,826 Due to reinsurers 149,340 144,712 Short-term debt 45,000 35,000 Trading securities sold but not yet purchased, at market value (proceeds $135,031 and $137,801) 143,321 155,826 Other liabilities 209,423 183,218 ----------- ----------- 3,659,875 3,569,820 ----------- ----------- Long-term debt 369,888 394,792 Company-obligated mandatorily redeemable capital securities of a Subsidiary trust holding solely 8.197% junior subordinated Debentures of the Corporation due December 15, 2045 198,137 198,126 Minority interest 31,202 30,275 Stockholders' equity: Preferred stock, par value $.10 per share: Authorized 5,000,000 shares; no shares issued Common stock, par value $.20 per share: Authorized 80,000,000 shares, issued and outstanding, net of treasury shares, 25,616,578 shares 7,281 7,281 Additional paid-in capital 331,640 331,640 Retained earnings 552,418 551,401 Accumulated other comprehensive income (38,947) (44,500) Treasury stock, at cost, 10,787,489 shares (254,044) (254,044) ----------- ----------- 598,348 591,778 ----------- ----------- $ 4,857,450 $ 4,784,791 =========== =========== </TABLE> See accompanying notes to consolidated financial statements. 1
3 W. R. Berkley Corporation and Subsidiaries Consolidated Statements of Operations (Unaudited) (Amounts in thousands except per share data) <TABLE> <CAPTION> For the Three Months Ended March 31, ---------------------- Revenues: 2000 1999 --------- --------- <S> <C> <C> Net premiums written $ 385,761 $ 380,584 Change in unearned premiums (27,017) (38,612) --------- --------- Premiums earned 358,744 341,972 Net investment income 46,928 45,994 Management fees and commissions 16,526 18,396 Realized gains on investments 468 728 Other income 658 623 --------- --------- Total revenues 423,324 407,713 Operating costs and expenses: Losses and loss expenses 261,759 242,839 Other operating costs and expenses 145,357 144,225 Interest expense 12,493 12,805 Restructuring charge 1,850 11,505 --------- --------- Income (loss) before income taxes and minority interest 1,865 (3,661) Federal income tax benefit 2,652 5,173 --------- --------- Income before minority interest 4,517 1,512 Minority interest (171) 960 --------- --------- Net income before preferred dividends 4,346 2,472 Preferred dividends -- (497) --------- --------- Net income before change in accounting principle 4,346 1,975 Cumulative effect of change in accounting principle (net of taxes of $1,750) -- (3,250) --------- --------- Net income (loss) attributable to common stockholders $ 4,346 $ (1,275) ========= ========= Earnings per share: Basic Net income before change in accounting principle $ .17 $ .07 Cumulative effect of change in accounting principle -- (.12) --------- --------- Net income (loss) attributable to common stockholders $ .17 $ (.05) ========= ========= Diluted Net income before change in accounting principle $ .17 $ .07 Cumulative effect of change in accounting principle -- (.12) --------- --------- Net income (loss) attributable to common stockholders $ .17 $ (.05) ========= ========= Average shares outstanding Basic 25,617 26,325 ========= ========= Diluted 25,679 26,503 ========= ========= </TABLE> See accompanying notes to consolidated financial statements. 2
4 W. R. Berkley Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands) <TABLE> <CAPTION> For the Three Months Ended March 31, ---------------------- 2000 1999 --------- --------- <S> <C> <C> Cash flows from operating activities: Net income (loss) before preferred dividends and change in Accounting principle $ 4,346 $ (778) Adjustments to reconcile net income to cash flows from operating activities: Minority interest 171 (960) Increase in reserves for losses and loss expenses, net 25,960 47,179 Depreciation and amortization 5,724 5,910 Change in unearned premiums and prepaid reinsurance premiums 26,558 38,609 Increase in premiums and fees receivable (25,993) (43,504) Change in Federal income taxes (2,586) (6,852) Change in deferred acquisition cost (9,234) (11,647) Realized gains on investments (468) (728) Other (14,564) (7,489) --------- --------- Net cash flows from operating activities before trading account sales 9,914 19,740 Net trading account activities 143 2,035 --------- --------- Net cash flows from operating activities 10,057 21,775 --------- --------- Cash flows from investing activities: Proceeds from sales, excluding trading account: Fixed maturity securities available for sale 638,365 128,550 Proceeds from maturities and prepayments of fixed maturity securities 51,679 44,564 Cost of purchases, excluding trading account: Fixed maturity securities available for sale (617,692) (238,123) Equity securities (26,060) (3,389) Change in balances due to/from security brokers 33,614 (8,717) Net additions to real estate, furniture and equipment (3,310) (224) Other -- (6,878) --------- --------- Net cash flows from (used in) investing activities 76,596 (84,217) --------- --------- Cash flows from financing activities: Net proceeds from issuance of short-term debt 10,000 19,500 Repurchase of preferred stock -- (98,093) Purchase of common treasury shares -- (13,177) Cash dividends to common stockholders (2,738) (3,180) Cash dividends to preferred stockholders -- (2,001) Repayment of long-term debt (25,000) -- Other 365 7,453 --------- --------- Net cash flows used in financing activities (17,373) (89,498) --------- --------- Net increase (decrease) in cash and invested cash 69,280 (151,940) Cash and invested cash at beginning of year 315,474 386,278 --------- --------- Cash and invested cash at end of period $ 384,754 $ 234,338 ========= ========= Supplemental disclosure of cash flow information: Interest paid $ 7,649 $ 6,454 ========= ========= Federal income taxes paid, net $ 167 $ -- ========= ========= </TABLE> See accompanying notes to consolidated financial statements. 3
5 W. R. Berkley Corporation and Subsidiaries Notes to Consolidated Financial Statements March 31, 2000 (Unaudited) The accompanying consolidated financial statements should be read in conjunction with the following notes and with the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 1. FEDERAL INCOME TAXES The Federal income tax provision has been computed based on the Company's estimated annual effective tax rate which differs from the Federal income tax rate of 35% principally because of tax-exempt investment income. 2. REINSURANCE CEDED The amounts of ceded reinsurance included in the statements of operations are as follows (amounts in thousands): <TABLE> <CAPTION> For the Three Months Ended March 31, ----------------------------- 2000 1999 -------- -------- <S> <C> <C> Ceded premiums written $ 76,630 $ 73,483 ======== ======== Ceded premiums earned $ 70,040 $ 68,923 ======== ======== Ceded losses and loss expenses $ 55,694 $ 43,576 ======== ======== </TABLE> 3. COMPREHENSIVE INCOME The differences between comprehensive income and net income are unrealized foreign exchange gains (losses) as well as unrealized gains (losses) on securities. The following is a reconciliation of comprehensive income (amounts in thousands): <TABLE> <CAPTION> For the three months Ended March 31, -------------------------- 2000 1999 -------- --------- <S> <C> <C> Net income (loss) $ 4,346 $ (1,275) Other comprehensive income: Change in unrealized foreign exchange gains (losses) 131 709 Unrealized holding gains (losses) on investment securities Arising during the period, net of taxes 5,118 (23,400) Less: Reclassification adjustment for gains included in net income, net of taxes 304 473 -------- -------- Net change in unrealized gains during the period 5,422 (22,927) Other comprehensive income (loss) 5,553 (22,218) -------- -------- Comprehensive income (loss) $ 9,899 $ (23,493) ======= ======== </TABLE> 4
6 4. INDUSTRY SEGMENTS The Company's operations are presently conducted through five basic segments: regional property casualty insurance; reinsurance; specialty lines of insurance; alternative markets operations and international. The regional property casualty insurance segment writes standard commercial and personal lines insurance for such risks as automobiles, homes and businesses. The Company's reinsurance segment specializes in underwriting property, casualty and surety reinsurance on both a treaty and facultative basis. The specialty lines of insurance consist primarily of excess and surplus lines, commercial transportation, professional liability, directors and officers liability and surety. The Company's alternative markets segment specializes in insuring, reinsuring, and administering self-insurance programs and other alternative risk transfer mechanisms for public entities, private employers and associations. Finally, the international operations represent the Company's joint venture (65% owned by the Company) with Northwestern Mutual Life International, Inc., which writes property and casualty insurance, as well as life insurance, in Argentina and the Philippines. For the three months ended March 31, 2000 and 1999, the joint venture wrote life insurance premiums of $8.0 million and $4.0 million, respectively. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Income tax expense (benefits) were calculated in accordance with the Company's tax sharing agreements, which provide for the recognition of tax loss carry-forwards only to the extent of taxes previously paid. Summary financial information about the Company's operating segments is presented in the following table. Income before income taxes by segment consists of revenues less expenses related to the respective segment's operations. These amounts include realized gains (losses) where applicable. Intersegment revenues consist primarily of dividends, interest on inter-company debt and fees paid by subsidiaries for portfolio management and other services to the Company. Identifiable assets by segment are those assets used in the operation of each segment. <TABLE> <CAPTION> INCOME REVENUES (LOSS) ----------------------------------------- BEFORE INCOME TAX INVESTMENT UNAFFILIATED INTER- INCOME (EXPENSE) (DOLLARS IN THOUSANDS) INCOME CUSTOMERS SEGMENT TOTAL TAXES BENEFITS - ---------------------- ---------- ------------ --------- --------- --------- ---------- <S> <C> <C> <C> <C> <C> <C> For the three months ended March 31, 2000: Regional $ 13,124 $ 179,792 $ 135 $ 179,927 $ 1,836 $ (1,636) Reinsurance 11,591 82,987 102 83,089 4,465 (721) Specialty 11,114 76,520 254 76,774 3,868 (493) Alternative Markets 9,815 56,832 367 57,199 6,948 (1,773) International 2,067 26,183 -- 26,183 929 (379) Corporate and other 62 1,010 32,256 33,266 11,876 3,032 Adjustments and Eliminations (845) -- (33,114) (33,114) (28,057) 4,622 --------- --------- --------- --------- --------- --------- Consolidated $ 46,928 $ 423,324 $ -- $ 423,324 $ 1,865 $ 2,652 --------- --------- --------- --------- --------- --------- For the three months ended March 31, 1999: Regional $ 13,068 $ 178,379 $ 295 $ 178,674 $ (6,455) $ 1,582 Reinsurance 11,236 78,387 161 78,548 2,438 (81) Specialty 11,671 74,110 (1,724) 72,386 10,936 (3,419) Alternative Markets 8,877 53,802 109 53,911 5,896 (1,475) International 1,353 21,064 -- 21,064 (1,435) (516) Corporate and other 503 1,971 4,058 6,029 (16,674) 5,173 Adjustments and Eliminations (714) -- (2,899) (2,899) 1,633 3,909 --------- --------- --------- --------- --------- --------- Consolidated $ 45,994 $ 407,713 $ -- $ 407,713 $ (3,661) $ 5,173 --------- --------- --------- --------- --------- --------- </TABLE> Interest expense for the reinsurance and alternative market segments was $717,000 and $703,000 for the three months ended March 31, 2000 and 1999, respectively. Corporate interest expense (net 5
7 of intercompany amounts) was $11,776,000 and $12,102,000 for the corresponding periods. Identifiable assets by segment are as follows: <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 2000 1999 ----------- ----------- <S> <C> <C> Regional $ 1,453,303 $ 1,436,575 Reinsurance 1,168,709 1,022,776 Specialty 1,384,063 1,370,837 Alternative Markets 891,104 878,125 International 193,619 177,675 Corporate and other 1,353,752 1,362,345 Elimination (1,587,100) (1,463,542) ----------- ----------- Consolidated $ 4,857,450 $ 4,784,791 =========== =========== </TABLE> 5. RESTRUCTURING CHARGE In the first quarter of 2000, the Company implemented a restructuring plan. Under the plan, the reinsurance segment is withdrawing from the Latin American and Caribbean market, and the domestic reinsurance operations are focusing on specialty reinsurance lines while de-emphasizing certain commodity-type lines. The Company expects to reduce its workforce by approximately 37 employees in connection with the plan. The Company recognized $1,850,000 in expense in its statement of operations to reflect charges related to the plan. These charges consisted mainly of severance payments and contractual lease payments related to abandoned facilities. The activities under the plan are expected to be substantially completed in 2000. 6. OTHER MATTERS Reclassifications have been made in the 1999 financial statements as originally reported to conform them to the presentation of the 2000 financial statements. In the opinion of management, the summarized financial information reflects all adjustments which are necessary for a fair presentation of financial position and results of operations for the interim periods. Seasonal weather variations affect the severity and frequency of losses sustained by the insurance and reinsurance subsidiaries. Although the effect on the Company's business of such natural catastrophes as tornadoes, hurricanes, hailstorms and earthquakes is mitigated by reinsurance, they nevertheless can have a significant impact on the results of any one or more reporting periods. 7. SAFE HARBOR STATEMENT This Quarterly Report on Form 10-Q contains 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 results of new information, future developments or otherwise. 6
8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Net income attributable to common stockholders was $4.3 million ($.17 per diluted share) for the first quarter of 2000, compared with a net loss of $1.3 million ($.05 per diluted share) for the 1999 period. Operating income, which is defined as net income before realized investment gains and changes in accounting principles, was $4.0 million ($.15 per diluted share) for the first quarter of 2000 compared with $1.5 million ($.05 per diluted share) in the corresponding 1999 quarter. Adjusting for the restructuring charge, operating income was $5.2 million ($.20 per diluted share) for the first quarter of 2000 compared with $8.8 million ($.33 per diluted share) for the corresponding 1999 quarter. Net premiums written during the first quarter of 2000 increased by 1% to $386 million from $381 million written in the comparable 1999 period. Net premiums written by the regional segment decreased by $3 million, or 2%, as price increases were offset by a decrease in policy count. Specialty net premiums written decreased by $1 million, or 1%, as increases in the excess and surplus, general liability and surety lines were offset by a 41% decrease in Carolina Casualty's commercial transportation business. Net premiums written by the reinsurance operations decreased by $8 million, or 10%, primarily due to a decrease in treaty property business, which was partially offset by an increase in facultative business. Alternative markets net premiums written increased $8 million, or 18%, due to an increase in business written by Signet Star's alternative markets division. International net premiums written increased $8 million, or 47%, due to growth in both Argentina and the Philippines. For the three months ended March 31, 2000, net investment income increased by 2% to $47 million. The increase in investment income was due to a higher yield on the fixed income portfolio resulting from a decrease in the portion of the portfolio invested in municipal securities (to 26% at March 31, 2000 from 39% at March 31, 1999). (See "Liquidity and Capital Resources.") Management fees and commission income ("management fees") consist primarily of revenues earned by the alternative markets segment. During the first quarter of 2000, management fees decreased 10% to $17 million due to the timing of recognition of revenues from certain programs. Realized gains decreased to $468,000 from $728,000 earned in the comparable 1999 period. Realized gains on fixed income securities result primarily from the Company's strategy of maintaining an appropriate balance between the duration of its fixed income portfolio and the duration of its liabilities; realized gains on equity securities arise primarily as a result of a variety of factors which influence the Company's valuation criteria. The majority of the 2000 and 1999 realized gains resulted from the sale of fixed income securities. The combined ratio (on a statutory basis) of the Company's insurance operations increased to 106.7% for the quarter ended March 31, 2000 from 105.1% for the comparable 1999 period due to an increase in the consolidated loss ratio. The consolidated loss ratio (losses and loss expenses incurred expressed as a percentage of premiums earned) increased to 73.4% in 2000 from 70.9% in 1999 due to increased losses of the transportation unit and to less favorable reserve development on business written in prior years by the specialty and alternative markets segments. Other operating costs and expenses, which consist of the expenses of the Company's insurance and alternative markets operations as well as the Company's corporate and investment expenses, increased by 1% to $145 million. The increase in other operating costs and expenses is primarily due to the growth in premiums earned which in turn results in an increase in underwriting expenses. The consolidated expense ratio (underwriting expenses expressed as a percentage of premiums written) decreased to 33.1% from 33.8% as expense savings from the restructuring of the regional companies were partially offset by an decrease in ceded reinsurance commissions. First quarter 2000 results include an after-tax restructuring charge of $1.2 million, or 5 cents per diluted share, related to the Company's reinsurance operations (see Notes to the 7
9 Consolidated Financial Statements). The restructuring, which should be substantially completed by the end of 2000, is expected to result in annual after-tax savings of approximately $2.5 million. The first quarter 1999 results include an after-tax restructuring charge of $7.3 million, or 28 cents per diluted share, primarily related to the restructuring of the Company's regional property casualty business. The Federal income tax benefit in 2000 was $3 million compared with $5 million for the comparable 1999 period. The effective tax rate differs from the Federal income tax rate of 35% principally because of tax-exempt investment income. Liquidity and Capital Resources Cash flow from operating activities before trading account activities was $10 million for the first quarter of 2000 compared with $20 million for the same period in 1999. The investment portfolio, excluding trading account securities, on a cost basis, increased by $26 million to $2,709 million at March 31, 2000 from $2,683 million at December 31, 1999. At March 31, 2000, as compared to December 31, 1999, the investment portfolio was as follows: state and municipal securities were 26% (36% in 1999); U.S. Government securities and cash equivalents were 25% (21% in 1999); mortgage-backed securities were 17% (15% in 1999); corporate fixed maturity securities were 17% (14% in 1999); and the balance of 15% (14% in 1999) was invested in equity securities. The Company had net trading assets (trading account equity securities plus trading account receivables from brokers and clearing organizations less trading account securities sold but not yet purchased) of $363 million as of March 31, 2000, as compared to $356 million as of December 31, 1999. The net trading account represented approximately 12% of the Company's net invested assets as of March 31, 2000 and December 31, 1999. On March 6, 2000, the Company retired $25 million (face amount) of 6.31% senior notes upon maturity. The Company increased its short-term debt borrowings to $45 million at March 31, 2000 from $35 million at December 31, 1999. For the first quarter of 2000, stockholders' equity increased by approximately $7 million to $598 million. At March 31, 2000 the Company's total capitalization was $1,166 million and the percentage of the Company's capital attributable to long-term debt was 32%, compared with 33% at December 31, 1999. For background information concerning discussion of the Company's Liquidity and Capital Resources, see the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Item 3. Quantitative and Qualitative Disclosure About Market Risk The Company's market risk generally represents the risk of gain or loss that may result from the potential change in the fair value of the Company's investment portfolio as a result of fluctuations in prices, interest rates and currency exchange rates. The Company attempts to manage its interest rate risk by maintaining an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities, i.e., policy claims and debt obligations. The Company has maintained approximately the same duration of its investment portfolio to its liabilities from December 31, 1999 to March 31, 2000, and the overall market risk relating to the Company's portfolio has remained similar to the risk at December 31, 1999. 8
10 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Number (4.1) Amendment dated March 9, 2000 to First Amended and Restated 1992 Stock Option Plan. (b) Reports on Form 8-K During the quarter ended March 31, 2000, the Company filed the following Reports on Form 8-K: 1. Report dated January 24, 2000 with respect to a press release announcing the resignation of the President of the Company (under Item 5 of Form 8-K). 2. Report dated February 11, 2000 with respect to a press release announcing certain matters relating to results of operations of the Company for the year ended December 31, 1999 (under Item 5 of Form 8-K). 3. Report dated February 24, 2000 with respect to a press release announcing results of operations of the Company for the year ended December 31, 1999 and the fourth quarter of 1999 (under Item 5 of Form 8-K). 9
11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. W. R. BERKLEY CORPORATION Date: May 9, 2000 /s/ WILLIAM R. BERKLEY ------------------------------ William R. Berkley Chairman of the Board and Chief Executive Officer Date: May 9, 2000 /s/ EUGENE G. BALLARD ------------------------------ Eugene G. Ballard Senior Vice President, Chief Financial Officer and Treasurer 10