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 ended September 30, 2001 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ____ to ____. Commission File Number 0-7849 W. R. BERKLEY CORPORATION ------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 22-1867895 --------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 165 Mason Street, Greenwich, Connecticut 06830 --------------------------------------------------------------------- (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 November 6, 2001: 32,955,927
Part I - FINANCIAL INFORMATION ITEM 1. Financial Statements W. R. Berkley Corporation and Subsidiaries Consolidated Balance Sheets Amounts in thousands <TABLE> <CAPTION> September 30, December 31, 2001 2000 ---------- ---------- <S> <C> <C> Assets (Unaudited) Investments: Invested cash $439,824 $308,193 Fixed maturity securities: Held to maturity, at cost (fair value $170,346 and $164,229) 156,595 156,067 Available for sale, at fair value (cost $2,198,417 and $2,087,338) 2,288,810 2,115,824 Equity securities, at fair value: Available for sale (cost $92,626 and $76,545) 96,070 83,823 Trading account (cost $253,758 and $340,617) 240,634 347,271 Cash 3,515 938 Premiums and fees receivable 520,216 416,243 Due from reinsurers 758,654 713,392 Accrued investment income 32,731 36,578 Prepaid reinsurance premiums 100,746 99,444 Deferred policy acquisition costs 224,399 196,231 Real estate, furniture & equipment at cost, less accumulated depreciation 118,497 118,282 Excess of cost over net assets acquired 66,519 71,496 Trading account receivable from brokers and clearing organizations 338,932 269,444 Deferred federal and foreign income taxes 34,705 47,567 Other assets 60,465 41,277 ----------- ----------- Total assets $5,481,312 $5,022,070 =========== =========== Liabilities and Stockholders' Equity Liabilities: Reserves for losses and loss expenses $2,701,487 $2,533,917 Unearned premiums 846,288 713,239 Due to reinsurers 194,739 132,521 Short-term debt -- 10,000 Trading securities sold but not yet purchased, at fair value (proceeds $130,431 and $164,312) 119,447 169,020 Long-term debt 370,456 370,158 Other liabilities 212,915 182,273 ----------- ----------- Total liabilities 4,445,332 4,111,128 ----------- ----------- Trust preferred securities 198,199 198,169 Minority interest 28,246 31,877 Stockholders' equity: Preferred stock, par value $.10 per share: Authorized 5,000,000 shares; issued and outstanding - none -- -- Common stock, par value $.20 per share: Authorized 80,000,000 shares, issued and outstanding, net of treasury shares, 29,069,664 and 25,656,362 shares 7,902 7,281 Additional paid-in capital 456,652 334,061 Retained earnings 535,651 574,345 Accumulated other comprehensive income 57,390 19,371 Treasury stock, at cost, 10,439,180 and 10,747,482 shares (248,060) (254,162) ----------- ----------- Total stockholders' equity 809,535 680,896 ----------- ----------- Total liabilities and stockholders' equity $5,481,312 $5,022,070 =========== =========== </TABLE> See accompanying notes to consolidated financial statements. 1
W. R. Berkley Corporation and Subsidiaries Consolidated Statements of Operations (Unaudited) (Amounts in thousands except per share data) <TABLE> <CAPTION> For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------------- ------------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Revenues: Net premiums written $469,227 $376,084 $1,355,026 $1,111,926 Change in unearned premiums (43,832) (5,252) (132,636) (20,243) ----------- ----------- ----------- ----------- Premiums earned 425,395 370,832 1,222,390 1,091,683 Net investment income 46,802 56,513 147,600 153,025 Service fees 19,849 15,818 56,552 51,535 Realized investment gains 7,385 1,092 11,782 1,885 Other income 641 1,702 1,898 3,086 ----------- ----------- ----------- ----------- Total revenues 500,072 445,957 1,440,222 1,301,214 Expenses: Losses and loss expenses 391,477 276,344 959,598 803,596 Other operating expenses 170,864 150,829 492,806 444,406 Interest expense 11,570 11,670 34,432 35,954 Restructuring charge -- -- -- 1,850 ----------- ----------- ----------- ----------- Total expenses 573,911 438,843 1,486,836 1,285,806 Income (loss) before income tax and minority interest (73,839) 7,114 (46,614) 15,408 Income tax benefit 27,117 869 21,559 4,085 Minority interest (524) (891) (2,327) (1,419) ----------- ----------- ----------- ----------- Net income (loss) $(47,246) $7,092 $(27,382) $18,074 =========== =========== =========== =========== Net income (loss) per share: Basic $(1.63) $.28 $(.97) $.71 =========== =========== =========== =========== Diluted $(1.63) $.27 $(.97) $.70 =========== =========== =========== =========== Average shares outstanding: Basic 29,049 25,476 28,337 25,571 =========== =========== =========== =========== Diluted 30,053 25,807 29,603 25,769 =========== =========== =========== =========== </TABLE> See accompanying notes to consolidated financial statements. 2
W. R. Berkley Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) (Amounts in thousands) <TABLE> <CAPTION> For the Nine Months Ended September 30, 2001 2000 --------- --------- <S> <C> <C> Cash flows from (used in) operating activities: Net income (loss) $(27,382) $18,074 Adjustments to reconcile net income (loss) to cash flows from (used in) operating activities: Minority interest 2,327 1,419 Change in reserves for losses and loss expenses, net of due to/from reinsurers 184,526 61,872 Depreciation and amortization 13,474 15,594 Change in unearned premiums and prepaid reinsurance premiums 131,747 20,304 Change in premiums and fees receivable (104,911) (29,594) Change in federal and foreign income taxes (22,978) 5,338 Change in deferred policy acquisition costs (28,168) (13,029) Realized gains on investments (11,782) (1,885) Other, net (7,949) 1,336 --------- --------- Net cash flows from operating activities before trading account sales 128,904 79,429 Trading account purchases, net (9,547) (83,013) --------- --------- Net cash flows from (used in) operating activities 119,357 (3,584) --------- --------- Cash flows from (used in) investing activities: Proceeds from sales, excluding trading account: Fixed maturity securities available for sale 428,592 616,430 Equity securities 57,869 19,847 Proceeds from maturities and prepayments of fixed maturity securities 128,601 117,320 Cost of purchases, excluding trading account: Fixed maturity securities available for sale (668,565) (649,662) Equity securities (65,577) (59,212) Change in balances due to/from security brokers 33,191 (636) Net additions to real estate, furniture & equipment (12,857) (7,514) Net proceeds from sale of subsidiaries 3,027 2,532 Other, net 725 1,000 --------- --------- Net cash flows from (used in) investing activities (94,994) 40,105 --------- --------- Cash flows from (used in) financing activities: Net proceeds from stock offering 121,400 -- Net repayment of short-term debt (10,000) (25,000) Cash dividends to common stockholders (10,866) (9,399) Purchase of treasury shares -- (7,020) Retirement of long-term debt -- (25,000) Other, net 9,311 1,688 --------- --------- Net cash flows from (used in) financing activities 109,845 (64,731) --------- --------- Net increase (decrease) in cash and invested cash 134,208 (28,210) Cash and invested cash at beginning of year 309,131 315,474 --------- --------- Cash and invested cash at end of period $443,339 $287,264 ========= ========= Supplemental disclosure of cash flow information: Interest paid $29,308 $31,351 ========= ========= Federal and foreign income taxes paid (received), net $752 $(9,806) ========= ========= </TABLE> See accompanying notes to consolidated financial statements. 3
W. R. Berkley Corporation and Subsidiaries Notes to Consolidated Financial Statements September 30, 2001 (Unaudited) The accompanying interim consolidated financial statements should be read in conjunction with the following notes and with the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. 1. FEDERAL AND FOREIGN INCOME TAXES The federal and foreign 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. PER SHARE DATA Basic per share data is based upon the weighted average number of shares outstanding during the year. Shares issued in connection with loans to shareholders are not considered to be outstanding for the purpose of calculating basic per share amounts unless and until the loan is fully satisfied. The related amounts due from shareholders are excluded from stockholders' equity. Diluted per share data reflects the dilution that would occur if dilutive employee stock options were exercised. On March 6, 2001 the Company issued 3,105,000 shares of its common stock in a public offering. The Company received net proceeds of $121 million from such offering. 3. REINSURANCE CEDED The amounts of reinsurance ceded included in the statements of operations are as follows (amounts in thousands): <TABLE> <CAPTION> For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------- ------------------------- 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> Ceded premiums written $90,877 $77,606 $259,512 $238,432 ======== ======== ======== ======== Ceded premiums earned $90,145 $79,618 $258,356 $225,962 ======== ======== ======== ======== Ceded losses and loss expenses $101,618 $76,458 $232,108 $178,253 ======== ======== ======== ======== </TABLE> Ceded premiums earned were $258 million in the first nine months of 2001 and included ceded earned premiums of $31 million under the aggregate reinsurance agreement described below. In 2001, the Company implemented a series of changes to its ceded reinsurance program. These changes included increasing the catastrophe reinsurance protection for weather-related losses to a maximum of $48.5 million (from $34 million in 2000) above our retention of $6 million, increasing retention levels for individual property casualty risks (generally to $1 million in 2001 from $300,000 to $500,000 in 2000) and replacing various individual reinsurance contracts with a multi-year aggregate reinsurance agreement. The aggregate reinsurance agreement provides protection for individual losses on an excess of loss or quota share basis, as specified for each class of business covered by the agreement, and also provides protection for our reinsurance segment for loss and loss adjustment expenses incurred above a certain level beginning for the 2001 accident year. Coverage begins as the various predecessor treaties expire through April 1, 2002 and is subject to annual limits and an aggregate limit over the contract period. 4
W. R. Berkley Corporation and Subsidiaries Notes to Consolidated Financial Statements, Continued 4. COMPREHENSIVE INCOME (LOSS) The differences between comprehensive income (loss) and net income (loss) are unrealized foreign exchange gains (losses) as well as unrealized gains (losses) on securities. The following is a reconciliation of comprehensive income (loss)(amounts in thousands): <TABLE> <CAPTION> For the Three Months For the Nine Months Ended September 30, Ended September 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net income (loss) $(47,246) $7,092 $(27,382) $18,074 Other comprehensive income (loss): Change in unrealized foreign exchange gains (losses) 15 (357) (368) (400) Unrealized holding gains on investment securities arising during the period 26,669 17,526 30,729 25,426 Reclassification adjustment for gains included in net income, net of tax 4,800 709 7,658 1,224 -------- -------- -------- -------- Other comprehensive income 31,484 17,878 38,019 26,250 -------- -------- -------- -------- Comprehensive income (loss) $(15,762) $24,970 $10,637 $44,324 ======== ======== ======== ======== </TABLE> 5. INDUSTRY SEGMENTS In the third quarter of 2001, the Company announced its plans to discontinue its personal lines business and the alternative markets division of its reinsurance segment. These discontinued businesses are now being managed and reported collectively as a separate business segment ("inactive business"). Segment information for the prior period has been restated to reflect these changes. The Company's operations are now conducted through six segments of the property casualty insurance business: specialty lines of insurance (including excess and surplus lines and commercial transportation); alternative markets (including the management of alternative insurance market mechanisms); reinsurance; regional property casualty insurance; international; and inactive business. The specialty segment's business is principally within the excess and surplus lines, professional liability, commercial transportation and surety markets. The Company's alternative markets segment specializes in developing, insuring and administering self-insurance programs and various alternative risk transfer mechanisms for employers, employer groups, insurers and alternative markets funds. The Company's reinsurance segment specializes in underwriting property, casualty and surety reinsurance on both a treaty and facultative basis. The regional property casualty insurance segment principally provides commercial property casualty insurance products. The international segment writes property and casualty insurance, as well as life insurance, and has business in Argentina and the Philippines. For the nine months ended September 30, 2001 and 2000, the international segment wrote life insurance premiums of $23.6 million and $24.7 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 fiscal year ended December 31, 2000. Income tax expense (benefits) are 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 (loss) 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 and interest on inter-company debt. Identifiable assets by segment are those assets used in the operation of each segment. 5
W. R. Berkley Corporation and Subsidiaries Notes to Consolidated Financial Statements, Continued <TABLE> <CAPTION> Income Revenues (Loss) --------------------------------------- Before Income Tax (Amounts in thousands) Investment Unaffiliated Inter- Income (Expense) For the three months ended Income Customers Segment Total Taxes Benefits --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> September 30, 2001: Specialty $9,218 $118,287 $191 $118,478 $(767) $(376) Alternative Markets 9,389 60,170 108 60,278 8,061 (2,242) Reinsurance 10,223 63,267 1,105 64,372 (19,403) 24,388 Regional 12,428 156,275 301 156,576 11,840 (19,430) International 3,339 39,933 -- 39,933 2,851 (1,427) Inactive Business 2,441 60,258 -- 60,258 (61,358) 21,475 Corporate other and Eliminations (236) 1,882 (1,705) 177 (15,063) 4,729 --------- --------- --------- --------- --------- --------- Consolidated $46,802 $500,072 $-- $500,072 $(73,839) $27,117 ========= ========= ========= ========= ========= ========= For the three months ended September 30, 2000: Specialty $12,892 $79,851 $402 $80,253 $6,193 $(2,209) Alternative Markets 10,740 49,156 149 49,305 10,275 (3,137) Reinsurance 13,163 85,044 627 85,671 6,539 (1,888) Regional 15,247 145,269 134 145,403 902 259 International 2,719 30,748 -- 30,748 1,600 216 Inactive Business 2,566 55,506 -- 55,506 (3,530) 1,347 Corporate other and Eliminations (814) 383 (1,312) (929) (14,865) 6,281 --------- --------- --------- --------- --------- --------- Consolidated $56,513 $445,957 $-- $445,957 $7,114 $869 ========= ========= ========= ========= ========= ========= </TABLE> Interest expense for the reinsurance and alternative market segments was $666,000 and $726,000 for the three months ended September 30, 2001 and 2000, respectively. Corporate interest expense (net of intercompany amounts) was $10,904,000 and $10,944,000 for the corresponding periods. <TABLE> <CAPTION> Income Revenues (Loss) ----------------------------------------- Before Income Tax (Amounts in thousands) Investment Unaffiliated Inter- Income (Expense) Income Customers Segment Total Taxes Benefits ---------- ------------ ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> For the nine months ended September 30, 2001: Specialty $29,732 $306,489 $1,445 $307,934 $20,440 $(5,041) Alternative Markets 28,717 167,670 993 168,663 27,919 (8,023) Reinsurance 32,879 201,219 2,161 203,380 (9,433) 21,954 Regional 38,995 447,733 982 448,715 29,435 (23,216) International 9,875 112,566 -- 112,566 8,977 (3,623) Inactive Business 7,518 198,706 -- 198,706 (77,789) 27,226 Corporate other and Eliminations (116) 5,839 (5,581) 258 (46,163) 12,182 ---------- ---------- ---------- ---------- ---------- ---------- Consolidated $147,600 $1,440,222 $-- $1,440,222 $(46,614) $21,559 ========== ========== ========== ========== ========== ========== For the nine months ended September 30, 2000: Specialty $35,844 $236,347 $1,724 $238,071 $16,860 $(4,656) Alternative Markets 26,763 138,444 171 138,615 26,588 (7,069) Reinsurance 36,643 251,371 1,026 252,397 17,253 (4,312) Regional 41,658 425,095 1,015 426,110 6,335 (1,000) International 6,882 84,319 -- 84,319 3,707 (396) Inactive Business 6,993 160,980 -- 160,980 (11,407) 4,344 Corporate other and Eliminations (1,758) 4,658 (3,936) 722 (43,928) 17,174 ---------- ---------- ---------- ---------- ---------- ---------- Consolidated $153,025 $1,301,214 $-- $1,301,214 $15,408 $4,085 ========== ========== ========== ========== ========== ========== </TABLE> Interest expense for the reinsurance and alternative market segments was $2,203,000 and $2,186,000 for the nine months ended September 30, 2001 and 2000, respectively. Corporate interest expense (net of intercompany amounts) was $32,229,000 and $33,768,000 for the corresponding periods. Identifiable assets by segment are as follows (amounts in thousands): <TABLE> <CAPTION> September 30, December 31, 2001 2000 ---- ---- <S> <C> <C> Specialty $ 1,479,078 $ 1,425,123 Alternative Markets 843,064 759,935 Reinsurance 1,737,058 1,637,756 Regional 1,451,936 1,315,850 International 279,290 248,243 Inactive Business 275,498 332,513 Corporate other and eliminations (584,612) (697,350) ---------- ---------- Consolidated $ 5,481,312 $ 5,022,070 ========== ========== </TABLE> 6
W. R. Berkley Corporation and Subsidiaries Notes to Consolidated Financial Statements, Continued 6. OTHER MATTERS Reclassifications have been made in the 2000 financial statements as originally reported to conform them to the presentation of the 2001 financial statements. In the opinion of management, the summarized financial information reflects all adjustments (consisting of normal recurring accrual or adjustments) which are necessary for a fair presentation of financial position and results of operations for the interim periods. The consolidated results of operations for the interim periods are not necessarily indicative of the results to be anticipated for the entire year. Seasonal weather variations and other catastrophes 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 and man made catastrophes as tornadoes, hurricanes, hailstorms, earthquakes and terrorist acts is mitigated by reinsurance, they nevertheless can have a significant impact on the results of any one or more reporting periods. 7. RECENT ACCOUNTING PRONOUNCEMENTS In the first quarter 2001 the Company adopted FAS 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments. The adoption of this statement did not have a material impact on the Company's results of operations or financial condition. In July 2001, the FASB issued Statement No. 141, "Business Combinations", and Statement No. 142, "Goodwill and Other Intangible Assets". Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Amortization of goodwill was $3,031,000 and $2,932,000 for the nine months ended September 30, 2001 and 2000, respectively. Statement 142 is effective in fiscal years beginning after December 15, 2001. The Company has not yet determined the impact of Statement 142 to its consolidated financial statements. In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The adoption of this Statement will not have a material impact on the Company's results of operations or financial condition. 8. SUBSEQUENT EVENT On November 6, 2001 the Company issued 3,795,000 shares of its common stock in a public offering and received net proceeds of $194.4 million. Proceeds of the offering will be used to provide additional capital for the Company's insurance subsidiaries and for general corporate purposes. 7
W. R. Berkley Corporation and Subsidiaries Notes to Consolidated Financial Statements, Continued 9. SAFE HARBOR STATEMENT This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein, including those related to the Company's performance for the year 2001 and beyond, 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 cyclical nature of the property casualty industry, the long-tail and potential volatile nature of the reinsurance business, product demand and pricing, claims development and the process of estimating reserves, the uncertain nature of damage theories and loss amounts and the development of additional facts related to the attacks of September 11, 2001, the increased level of our retention, natural and man-made catastrophic losses, including as a result of terrorist activities, the impact of competition, availability of reinsurance, the ability of our reinsurers to pay reinsurance recoverables owed to us, investment results, exchange rate and political risks, legislative and regulatory developments, changes in the ratings assigned to us by rating agencies, the effects of the refocusing of our business, including our withdrawal from the personal lines business, uncertainty as to reinsurance coverage for terrorist acts, availability of dividends from our insurance company subsidiaries, our successful integration of acquired companies or investment in new insurance ventures, our ability to attract and retain qualified employees and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. These risks could cause the Company's actual results for the year 2001 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. 8
W. R. Berkley Corporation and Subsidiaries MD&A Financial Condition and Results of Operations Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Operating Results for the First Nine Months of 2001 as Compared to the First Nine Months of 2000 The Company reported a net loss of $27 million, or 97 cents per diluted share, in the first nine months of 2001, compared with net income of $18 million, or 70 cents per diluted share, in the earlier-year period. Following are the components of net income (loss) for the nine months ended September 30, 2001 and 2000 (amounts in thousands). <TABLE> <CAPTION> 2001 2000 --------- --------- <S> <C> <C> Underwriting loss $(165,342) $(97,258) Insurance services 6,329 5,222 Net investment income 147,600 153,025 Interest expense and other (46,983) (45,616) Restructuring charge -- (1,850) --------- --------- Pretax income (loss) before realized investment gains (58,396) 13,523 Realized investment gains 11,782 1,885 Income tax benefit and minority interest 19,232 2,666 --------- --------- Net income (loss) $(27,382) $18,074 ========= ========= </TABLE> In the third quarter of 2001, the Company prepared a plan to discontinue its personal lines business and the alternative markets division of its reinsurance segment. The Company is withdrawing from the personal lines business, both homeowners and private passenger automobile, by not renewing existing policies and ceasing to write new personal lines business. The after-tax loss related to the discontinued businesses was $51 million, or $1.78 per diluted share, for the first nine months of 2001. The Company also expects to incur an after-tax charge of approximately $2 million for severance and related costs in the fourth quarter of 2001. Underwriting - Gross and net premiums written increased by 19.6% and 21.9%, respectively, in the first nine months of 2001, compared with the earlier-year period. Following is a summary of gross and net premiums written by business segment for the nine months ended September 30, 2001 and 2000 (amounts in thousands). <TABLE> <CAPTION> Gross Premiums Written Net Premiums Written 2001 2000 % Change 2001 2000 % Change -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Specialty $427,357 $302,990 41.0% $366,632 $207,930 76.3% Alternative Markets 127,365 86,601 47.1% 113,275 77,987 45.2% Reinsurance 234,295 236,613 -1.0% 167,174 200,606 -16.7% Regional 511,168 447,033 14.3% 432,878 382,231 13.3% International 123,181 102,038 20.7% 107,536 82,557 30.3% Inactive Business 191,172 175,083 9.2% 167,531 160,615 4.3% ------- ------- ------- ------- Total $1,614,538 $1,350,358 19.6% $1,355,026 $1,111,926 21.9% ========= ========= ========== ========= </TABLE> The increase in gross premiums written reflects higher prices and an increase in new business. Gross premiums written for the reinsurance segment also reflect a planned reduction in pro rata treaty business. Ceded premiums written, expressed as a percentage of gross premiums written, decreased to 16.1% from 17.7% in the prior year. The decrease reflects higher net retentions for the specialty segment, which was partially offset by additional premiums ceded by the reinsurance segment under the aggregate reinsurance agreement (see Note 3 of "Notes to Consolidated Financial Statements"). 9
W. R. Berkley Corporation and Subsidiaries MD&A Financial Condition and Results of Operations, Continued Underwriting results represent net premiums earned less net loss and loss adjustment expenses incurred and underwriting expenses incurred. Underwriting losses increased to $165 million in the nine months ended September 30, 2001 compared with $97 million in the earlier-year period. The increase in underwriting losses reflects higher underwriting losses for the inactive business segment and higher catastrophe losses. Underwriting losses for the inactive business segment increased to $85 million in 2001 from $17 million in 2000 as a result of prior year loss development for the alternative markets reinsurance division. Catastrophe losses were $92 million in 2001 compared with $43 million in 2000. Catastrophe losses related to the September 11, 2001 events were $35 million, including $26 million for the reinsurance segment and $9 million for the specialty segment. This represents our maximum retention for property and business interruption coverages and our estimated policy limits on risks exposed to casualty losses. These estimates are based on our analysis to date and our examination of known exposures and may need to be increased as more information becomes available. Ceded losses and loss expenses were $232 million in the first nine months 2001 and included loss recoveries of $42 million under the aggregate reinsurance agreement. Following is a summary of earned premiums and combined ratios (losses, loss expenses and underwriting expenses expressed as a percentage of premiums earned) by business segment for the nine months ended September 30, 2001 and 2000 (amounts in thousands). <TABLE> <CAPTION> Net Premiums Earned GAAP Combined Ratio ---------------------------- ---------------------- 2001 2000 %Change 2001 2000 ---------- ----------- ------- --------- -------- <S> <C> <C> <C> <C> <C> Specialty $275,895 $198,887 38.7% 104.3% 109.4% Alternative Markets 84,851 62,656 35.4% 106.8% 109.9% Reinsurance 167,243 216,190 -22.6% 126.2% 107.1% Regional 401,177 382,666 4.8% 104.5% 109.7% International 102,036 76,355 33.6% 100.8% 105.6% Inactive Business 191,188 154,929 23.4% 144.6% 111.2% ------- ------- Total $1,222,390 $1,091,683 12.0% 113.5% 109.1% ========= ========= </TABLE> The decrease in the specialty combined ratio reflects the impact of pricing actions and other underwriting initiatives, which were offset by losses related to the September 11, 2001 events. The decrease in the alternative markets combined ratio reflects a lower expense ratio as a result of higher premium volume. The increase in the reinsurance combined ratio reflects losses related to the September 11, 2001 events and unfavorable prior year loss development, which were offset by loss recoveries under the aggregate reinsurance agreement. The decrease in the regional combined ratio reflects the impact of pricing actions and other underwriting initiatives. The decrease in the international combined ratio reflects lower losses and expenses for automobile business in Argentina. Insurance Services - Insurance services income represents service fees less related costs and expenses for the insurance services business. Insurance service fees increased 17% to $55 million as a result of new accounts and higher revenues on existing accounts, and insurance services income increased 21% to $6 million. Investments - The decrease in net investment income of 4% reflects a decrease in the yield on the merger arbitrage account to 4.9% in 2001 from 10.5% in 2000. This was somewhat offset by a higher yield on the fixed income portfolio as a result of changes in asset allocations and an increase in average invested assets. Other Items - Interest and other represents interest expense, corporate expenses, and other miscellaneous income and expenses. The restructuring charge in 2000 related to the reorganization of the reinsurance operations. Realized investment gains and losses result from security sales and from changes in provisions for other than temporary impairment of securities. The effective income tax rate differs from the federal income tax rate of 35% principally because of tax-exempt investment income. Operating Results for the Third Quarter of 2001 as Compared to the Third Quarter of 2000 Net loss was $47 million, or $1.63 cents per diluted share, for the third quarter of 2001 compared with net income of $7 million, or 27 cents per diluted share, for the corresponding 2000 period. Following are the components of net income for the third quarters of 2001 and 2000 (amounts in thousands). 10
W. R. Berkley Corporation and Subsidiaries MD&A Financial Condition and Results of Operations, Continued <TABLE> <CAPTION> 2001 2000 --------- --------- <S> <C> <C> Underwriting loss $(113,795) $(39,559) Insurance services 1,741 2,100 Net investment income 46,802 56,513 Interest expense & other (15,972) (13,032) --------- --------- Pretax income (loss) before realized investment gains (81,224) 6,022 Realized investment gains 7,385 1,092 Income tax (expense) benefit and Minority interest 26,593 (22) --------- --------- Net income (loss) $(47,246) $7,092 ========= ========= </TABLE> Gross and net premiums increased by 23.5% and 24.8%, respectively, reflecting price increases and changes in reinsurance costs as discussed above. Underwriting losses increased by $74 million and the combined ratio deteriorated to 126.7% from 110.6% in the earlier-year period, generally for the reasons discussed above. Net investment income decreased by 17%, generally for the reasons discussed above. Liquidity and Capital Resources Cash flow from operating activities (before trading account purchases) increased to $129 million for the first nine months of 2001 from $79 million for the same period in 2000. The increase in cash flow reflects higher collected premiums, which more than offset an increase in paid losses. The cost basis of the investment portfolio (including account receivable from brokers and clearing organizations and securities sold but not yet purchased) was $3,350 million at September 30, 2001 compared with $3,074 million at December 31, 2000. The increase reflects cash flow from operations and the proceeds from the common stock public offering completed in the first quarter of 2001. At September 30, 2001, as compared with December 31, 2000, the fixed maturity investment portfolio was as follows: U.S. Government and cash equivalent were 33.1% (31.1% in 2000); state and municipal securities were 19.5% (23.7% in 2000); mortgage-backed securities were 22.5% (21.8% in 2000); corporate securities were 19.7% (18.0% in 2000) and foreign bonds were 5.2% (5.4% in 2000). The Company's equity portfolio is comprised of merger arbitrage securities, which are classified as trading account assets, and other equity investments, which are classified as available for sale. Net trading account assets (trading account equity securities plus trading account receivable from brokers and clearing organizations less trading account equity securities sold but not yet purchased) were $460 million as of September 30, 2001 compared with $448 million as of December 31, 2000. On March 6, 2001, the Company issued 3,105,000 shares of its common stock in a public offering and received net proceeds of $121 million. In March 2001, the Company repaid $10 million short-term debt that was outstanding since December 31, 2000. For the first nine months of 2001, stockholders' equity increased by approximately $129 million to $810 million as a result of the common stock public offering of $121 million and comprehensive income of $11 million. At September 30, 2001 the Company's total capitalization was $1,378 million and the percentage of the Company's capital attributable to long-term debt was 27%, compared with 30% at December 31, 2000. On November 6, 2001, the Company issued 3,795,000 shares of its common stock in a public offering and received net proceeds of $194.4 million. Proceeds of the offering will be used to provide additional capital for the Company's insurance subsidiaries and for general corporate purposes. 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 fiscal year ended December 31, 2000. 11
W. R. Berkley Corporation and Subsidiaries Part II - Other Information 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 cost of the Company's investments in Argentine bonds and bank deposits was $129 million at September 30, 2001. The Company seeks to mitigate foreign currency exchange rate risk associated with these investments by maintaining its capital in US dollar denominated securities. Investments in Argentine bonds and bank deposits, including those denominated in US dollars, are subject to risks of changes in general political and economic conditions in Argentina and to possible impairment in value as a result of further deterioration in credit quality of such investments. 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, 2000 to September 30, 2001, and the overall market risk relating to the Company's portfolio has remained similar to the risk at December 31, 2000. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Number None (b) Reports on Form 8-K During the quarter ended September 30, 2001, the Company filed the following Reports on Form 8-K: 1. Report filed on July 30, 2001 with respect to a press release announcing results of operations of the company for the second quarter of 2001. 2. Report filed on September 17, 2001 with respect to a press release announcing the company's estimated losses resulting from the September 11, 2001 events. 12
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: November 14, 2001 /s/ WILLIAM R. BERKLEY ------------------------------ William R. Berkley Chairman of the Board and Chief Executive Officer Date: November 14, 2001 /s/ EUGENE G. BALLARD ------------------------------ Eugene G. Ballard Senior Vice President, Chief Financial Officer and Treasurer 14