<PAGE> 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. . . . . . . . September 30, 1999
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 November 3,
1999: 25,616,128.
<PAGE> 2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Assets
Investments:
Invested cash $ 223,401 $ 370,155
Fixed maturity securities:
Held to maturity, at cost (fair value $161,524 and $183,469) 158,105 170,150
Available for sale at fair value (cost $2,250,461
and $2,224,244) 2,212,220 2,306,619
Equity securities, at fair value:
Available for sale (cost $53,946 and $59,890) 60,675 65,869
Trading account (cost $324,089 and $373,164) 320,692 389,310
Cash 26,787 16,123
Premiums and fees receivable 404,877 377,501
Due from reinsurers 574,610 513,297
Accrued investment income 32,763 37,842
Prepaid reinsurance premiums 92,174 79,530
Deferred policy acquisition costs 185,259 168,894
Real estate, furniture & equipment at cost, less accumulated depreciation 129,192 136,884
Excess of cost over net assets acquired 77,467 76,645
Trading account receivable from broker and clearing organizations 224,665 229,520
Deferred Federal income taxes 50,955 --
Other assets 44,268 45,092
----------- -----------
$ 4,818,110 $ 4,983,431
=========== ===========
Liabilities, Reserves, Debt and Stockholders' Equity
Liabilities and reserves:
Reserves for losses and loss expenses $ 2,236,514 $ 2,126,566
Unearned premiums 710,766 664,297
Due to reinsurers 144,564 131,081
Deferred Federal income taxes -- 6,877
Short-term debt 35,000 55,500
Trading securities sold but not yet purchased at market value
(proceeds $205,325 and $283,310) 199,331 298,165
Other liabilities 209,927 213,453
----------- -----------
3,536,102 3,495,939
----------- -----------
Long-term debt 394,705 394,444
----------- -----------
Company-obligated mandatorily redeemable capital securities of a
subsidiary trust holding solely 8.197% junior subordinated
debentures of the Corporation due December 15, 2045 198,114 207,988
Minority interest 31,490 23,779
----------- -----------
Stockholders' equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares:
7 3/8% Series A Cumulative Redeemable Preferred
Stock 653,952 shares issued and outstanding -- 65
Common stock, par value $.20 per share:
Authorized 80,000,000 shares, issued and outstanding,
net of treasury shares, 25,616,128 and 26,504,404 shares 7,281 7,281
Additional paid-in capital 331,641 429,611
Retained earnings 595,519 601,908
Accumulated other comprehensive income (loss) (22,691) 54,672
Treasury stock, at cost, 10,787,939 and 9,899,663 shares (254,051) (232,256)
----------- -----------
657,699 861,281
----------- -----------
$ 4,818,110 $ 4,983,431
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 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 For the Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net premiums written $ 359,881 $ 366,625 $ 1,085,652 $ 1,040,283
Change in net unearned premiums 3,657 (36,073) (33,760) (88,110)
----------- ----------- ----------- -----------
Premiums earned 363,538 330,552 1,051,892 952,173
Net investment income 48,090 42,727 145,265 151,505
Management fees and commission income 19,099 17,330 55,347 53,693
Realized gains (losses) on investments (3,417) 2,879 (2,404) 13,386
Other income 513 937 1,686 3,853
----------- ----------- ----------- -----------
Total revenues 427,823 394,425 1,251,786 1,174,610
Operating costs and expenses:
Losses and loss expenses (272,819) (229,526) (764,916) (652,306)
Other operating costs and expenses (151,792) (141,561) (448,150) (413,784)
Interest expense (12,246) (11,960) (38,068) (36,291)
Restructuring Charge -- -- (11,505) --
----------- ----------- ----------- -----------
Income (loss) before income taxes and
minority interest (9,034) 11,378 (10,853) 72,229
Federal income tax (expense) benefit 8,145 482 17,768 (13,218)
----------- ----------- ----------- -----------
Income (loss) before minority interest (889) 11,860 6,915 59,011
Minority interest (467) 401 (175) 1,666
----------- ----------- ----------- -----------
Net income (loss) before preferred dividends, change
in accounting principle and extraordinary items (1,356) 12,261 6,740 60,677
Preferred dividends -- (1,887) (497) (5,661)
----------- ----------- ----------- -----------
Net income (loss) before change in accounting
principle and extraordinary loss (1,356) 10,374 6,243 55,016
Cumulative effect of change in accounting
principle (net of taxes of $1,750) -- -- (3,250) --
Extraordinary gain (loss) on early extinguishment
of long-term debt and capital securities (net of
taxes of $396 in 1999 and $2,701 in 1998) 735 -- 735 (5,017)
----------- ----------- ----------- -----------
Net income (loss) attributable to common stockholders $ (621) $ 10,374 $ 3,728 $ 49,999
=========== =========== =========== ===========
Earning per share:
Basic:
Net income (loss) before change in accounting
principle and extraordinary gain (loss) $ (.05) $ .37 $ .23 $ 1.91
Cumulative effect of change in accounting principle -- -- (.12) --
Extraordinary gain (loss) on early extinguishment of
long-term debt and capital securities .03 -- .03 (.17)
----------- ----------- ----------- -----------
Net income (loss) attributable to common stockholders $ (.02) $ .37 $ .14 $ 1.74
=========== =========== =========== ===========
Diluted:
Net income loss before change in accounting principle
and extraordinary gain (loss) $ (.05) $ .36 .23 $ 1.85
Cumulative effect of change in accounting principle -- -- (.12) --
Extraordinary gain (loss) on early extinguishment of
long-term debt and capital securities .03 -- .03 (.17)
----------- ----------- ----------- -----------
Net income (loss) attributable to common stockholders $ (.02) $ .36 $ .14 $ 1.68
=========== =========== =========== ===========
Average shares outstanding:
Basic 25,723 28,024 25,999 28,687
=========== =========== =========== ===========
Diluted 25,822 28,672 26,133 29,805
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends and extraordinary items $ 3,490 $ 60,677
Adjustments to reconcile net income to cash
flows from operating activities:
Minority interest 175 (1,666)
Increase in reserves for losses
and loss expenses, net of due to/from reinsurers 62,118 112,978
Depreciation and amortization 17,344 16,383
Change in unearned premiums and
prepaid reinsurance premiums 33,825 88,110
Increase in premiums and fees receivable (27,376) (59,229)
Change in Federal income taxes (5,875) (15,241)
Change in deferred acquisition cost (16,365) (24,615)
Realized gains on investments 2,404 (13,386)
Other, net (42,675) (52,213)
--------- ---------
Net cash flows from operating activities
before trading account sales 27,065 111,798
Trading account purchase (sales), net 950 (27,331)
--------- ---------
Net cash flows from operating activities 28,015 84,467
--------- ---------
Cash flows used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 432,791 484,020
Equity securities 9,533 34,363
Proceeds from maturities and prepayments of
fixed maturity securities 117,726 143,556
Cost of purchases, excluding trading account:
Fixed maturity securities available for sale (574,047) (649,159)
Fixed maturity securities held to maturity -- (3,034)
Equity securities (5,457) (31,642)
Change in balances due to/from security brokers 6,609 16,971
Cost of acquired companies, net of acquired
cash and invested cash -- (3,520)
Other, net 2,006 (23,914)
--------- ---------
Net cash flows used in investing activities (10,839) (32,359)
--------- ---------
Cash flows used in financing activities:
Net proceeds from issuance of long-term debt -- 39,858
Repurchase of preferred stock (98,092) --
Net proceeds (repayment) from issuance of short-term debt (20,500) 17,500
Purchase of treasury shares (22,119) (81,213)
Retirement of long-term debt and capital securities (9,171) (49,104)
Cash dividends to common stockholders (9,968) (10,189)
Cash dividends to preferred stockholders (2,001) (5,507)
Other, net 8,585 296
--------- ---------
Net cash flows used in financing activities (153,266) (88,359)
--------- ---------
Net decrease in cash and invested cash (136,090) (36,251)
Cash and invested cash at beginning of year 386,278 280,847
--------- ---------
Cash and invested cash at end of period $ 250,188 $ 244,596
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 33,247 $ 30,470
========= =========
Federal income taxes paid (received), net $ (13,544) $ 28,425
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
W. R. Berkley Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
(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, 1998.
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 For the Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Ceded premiums written $ 77,575 $ 73,601 $234,480 $206,599
======== ======== ======== ========
Ceded premiums earned $ 72,416 $ 68,909 $223,440 $194,799
======== ======== ======== ========
Ceded losses and loss expenses $ 73,474 $ 53,989 $198,735 $148,814
======== ======== ======== ========
</TABLE>
Effective, January 1, 1999 the Company purchased additional aggregate
reinsurance protection for the regional property casualty insurance segment.
Pursuant to the contract, the reinsurer will indemnify the regional companies
for losses occurring during 1999 in excess of 71% of earned premiums, up to a
limit of $35.0 million. Premiums of $8.1 million and $20.9 million and losses of
$12.8 million and $35.0 million were ceded to the reinsurer in the third quarter
and first nine months of 1999.
3. COMPREHENSIVE INCOME
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 (amounts in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) attributable to common stockholders $ (621) $ 10,374 $ 3,728 $ 49,999
Other comprehensive income:
Change in unrealized foreign exchange gains (losses) 124 (448) 835 (2,925)
-------- -------- -------- --------
Unrealized holding gains(losses)on investment
securities arising during the period, net of tax (12,527) 19,186 (76,630) 12,885
Less: Reclassification adjustment for gains (losses)
included in net income (loss), net of tax (2,221) 1,871 (1,563) 8,701
-------- -------- -------- --------
Net change in unrealized gains (losses) during
the period (14,748) 21,057 (78,198) 21,586
Other comprehensive income (loss) (14,624) 20,609 (77,363) 18,661
-------- -------- -------- --------
Comprehensive income (loss) $(15,245) $ 30,983 $(73,635) $ 68,660
======== ======== ======== ========
</TABLE>
4
<PAGE> 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 and related
products, internationally. For the nine months ended September 30, 1999 and
1998, the joint venture wrote life insurance premiums of $16.7 million and $4.9
million, respectively.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies; see the Company's Annual
Report on Form 10-K for the year ended December 31, 1998 for a complete
description. 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 (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, 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 nine months ended September
30, 1999:
Regional $ 39,167 $ 518,714 $ (1,266) $ 517,448 $(32,210) $ 9,169
Reinsurance 36,608 256,700 (520) 256,180 13,596 (2,737)
Specialty 39,317 237,964 887 238,851 34,220 (8,252)
Alternative Markets 27,165 165,189 (351) 164,838 20,121 (3,553)
International 4,935 68,556 -- 68,556 1,569 (956)
Corporate and other 846 4,663 (45,851) (41,188) (15,409) 18,725
Adjustments and
eliminations (2,773) -- 47,101 47,101 (32,740) 5,372
- ---------------------------------------------------------------------------------------------------------------------------------
Consolidated $145,265 $1,251,786 $ -- $1,251,786 $(10,853) $ 17,768
- ---------------------------------------------------------------------------------------------------------------------------------
For the nine months ended September
30, 1998:
Regional $ 40,952 $ 516,710 $ (1,652) $ 515,058 $ 8,003 $ (4,666)
Reinsurance 35,139 212,196 (885) 211,311 26,555 (6,275)
Specialty 43,665 226,362 (2,257) 224,105 62,108 (17,452)
Alternative Markets 26,878 151,722 (683) 151,039 27,686 (6,304)
International 4,062 58,921 -- 58,921 (4,765) (34)
Corporate and other 6,060 8,699 (54,250) (45,551) (1,198) (13,185)
Adjustments and
eliminations (5,251) -- 59,727 59,727 (46,160) 34,698
- ---------------------------------------------------------------------------------------------------------------------------------
Consolidated $151,505 $1,174,610 $ -- $1,174,610 $ 72,229 $(13,218)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 7
Interest expense for the reinsurance and alternative market segments
was $1.7 million for the nine months ended September 30, 1999 and 1998.
Additionally, corporate interest expense (net of intercompany amounts) was $36.3
million and $34.5 million for the corresponding periods.
Identifiable assets by segment are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Regional $ 1,425,826 $ 1,370,849
Reinsurance 996,731 996,186
Specialty 1,459,107 1,502,366
Alternative Markets 899,296 863,578
International 178,593 151,832
Corporate and other 1,415,865 1,545,744
Elimination (1,557,308) (1,447,124)
=============== ==================
Consolidated $ 4,818,110 $ 4,983,431
=============== ==================
</TABLE>
5. RESTRUCTURING CHARGE
In the first quarter of 1999, the Company implemented a plan to
restructure certain of its operating units. Under the plan, the Company will
consolidate ten of its regional units into four; merge two of its alternative
market units; and combine two of its international units. In connection with the
restructuring plan, the Company expects to reduce its workforce by approximately
386 employees. The Company reported a restructuring charge of $11,505,000 in the
first quarter of 1999 to reflect the estimated costs of the plan. These charges
consist mainly of severance payments, contractual lease payments related to
abandoned facilities, and abandoned equipment and property owned. The activities
under the plan are expected to be substantially completed in 1999. The Company
has paid $4.7 million related to the restructuring charge, and the remaining
restructuring accrual is $6.8 million at September 30, 1999.
6. CHANGE IN ACCOUNTING
As previously disclosed in the Company's 1998 Annual Report and Form
10-K, in the first quarter the Company adopted AICPA Statement of Position 97-3,
"Accounting By Insurance and Other Enterprises for Insurance-Related
Assessments." The adoption of this statement resulted in a non-cash, after-tax
charge of $3.3 million, or 12 cents per diluted share, which is reflected as a
cumulative effect of a change in accounting principle.
7. OTHER MATTERS
Reclassifications have been made in the 1998 financial statements as
originally reported to conform them to the presentation of the 1999 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.
6
<PAGE> 8
8. SAFE HARBOR STATEMENT
This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Generally, forward-looking statements are statements other than historical
information or statements of current condition. Forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected or otherwise reflected in forward-looking
statements, including pricing competition and other initiatives by competitors,
product demand, catastrophe and storm losses, legislative and regulatory
developments, interest rate levels, investment results and other conditions in
the financial and securities markets, unforeseen technological or other issues
associated with Year 2000 compliance efforts and the extent to which vendors,
public utilities, financial institutions, governmental entities and other third
parties that interface with the Company may fail to achieve Year 2000 compliance
and other risks referred to from time to time in the Company's reports filed
with the Securities and Exchange Commission. The inclusion of forward-looking
statements in this report shall not be considered a representation by the
Company that the objectives or plans of the Company, or other matters addressed
by forward-looking statements, will be achieved.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Net income (loss) attributable to common stockholders ("net income
(loss)") was a net loss of $621,000 ($.02 diluted per share) for the third
quarter of 1999, in comparison with net income of $10.4 million ($.36 diluted
per share) for the 1998 period. Net income was $3.7 million ($.14 diluted per
share) for the first nine months of 1999, in comparison with $50.0 million
($1.68 diluted per share) for the 1998 period.
Operating income, which is defined as net income before realized
investment gains, the change in accounting principle, and the extraordinary gain
(loss) on early extinguishment of long-term debt, was $865,000 ($.03 diluted per
share) for the third quarter of 1999 in comparison with $8.5 million ($.30
diluted per share) earned in the corresponding 1998 quarter. Operating income
was $7.8 million ($.29 diluted per share) for the first nine months of 1999, in
comparison with $46.3 million ($1.55 diluted per share) for the corresponding
1998 period. Adjusting for the restructuring charge, operating income was $15.1
million ($.57 diluted per share) for the first nine months of 1999. The decline
in earnings was primarily due to the effects of price competition on the
regional and reinsurance segments and to an increase in loss activity in
commercial transportation.
The year-to-date 1999 results include an after-tax restructuring charge
of $7.3 million, or $.28 per diluted share, primarily related to the Company's
previously announced restructuring. The restructuring, which should be
substantially completed by the end of 1999, is expected to result in annual
after-tax savings of approximately $12.4 million. Under generally accepted
accounting principles, the restructuring charge does not include additional
costs related to systems changes, financial incentives and other activities,
although they are directly related to the restructuring plan. The Company
incurred such additional costs of approximately $2.8 million, on an after-tax
basis, in the first nine months of 1999.
As previously disclosed, during 1999 the Company adopted AICPA
Statement of Position 97-3, "Accounting By Insurance and Other Enterprises for
Insurance-Related Assessments." The adoption of this statement resulted in a
non-cash, after-tax charge of $3.3 million, or $.12 per diluted share, which is
reflected as a cumulative effect of a change in accounting principle.
Third quarter net income included capital losses, net of taxes, of $2.2
million, or $.08 per share diluted, compared with capital gains of $1.9 million,
or $.06 per share diluted, for the same period last year. For the first nine
months of 1999 capital losses were $1.6 million, or $.06 per diluted share,
compared with capital gains of $8.7 million, or $.30 per diluted share, recorded
during the corresponding 1998 period.
7
<PAGE> 9
The Company reported an extraordinary gain of $735,000 in the third
quarter of 1999, related to the repurchase and retirement of $10.0 million (face
amount) of capital trust securities. In 1998 the Company reported an
extraordinary loss of $5.0 million, related to the repurchase and retirement of
$34.7 million (face amount) of long-term debt.
As part of its ongoing review of its business segments, the Company is
considering possible courses of actions for its reinsurance business that would
seek to address developing changes in industry perceptions of required capital
levels for reinsurers. These changes have resulted, in part, from the
consolidation taking place in the reinsurance business. While the Company
expects to determine a course of action in the near future, there can be no
assurance that any strategic or other transaction will be effected.
Operating Results for the First Nine Months of 1999
as Compared to the First Nine Months of 1998
Net premiums written during the nine months of 1999 increased by 4% to
$1,085.7 million from $1,040.3 million written in the comparable 1998 period.
Net premiums written by the regional segment decreased by $8.6 million, or 2%,
due to the purchase of additional reinsurance protection (see Note 2 of the
Notes to Consolidated Financial Statements included herein). Specialty net
premiums written increased by $9.3 million, or 5%, as business relating to new
products was partially offset by the non-renewal of certain business based on
underwriting and pricing criteria. Net premiums written by the reinsurance
operations increased by $32.2 million, or 16%, primarily due to an increase in
pro-rata treaty volume. Alternative markets net premiums written increased $9.7
million, or 11%, due to an increase in business written by Key Risk Insurance
Company, which commenced operations in January 1998 to underwrite business
previously managed on behalf of a self-insurance association. International net
premiums written increased $2.9 million, or 5%, primarily due to growth of the
life insurance business in the Philippines.
Pre-tax investment income decreased by 4% to $145.3 million due to an
increase in the portion of the portfolio invested in municipal securities and to
a reduction in invested assets resulting from the repurchase of common and
preferred shares in 1998 and 1999. (See "Liquidity and Capital Resources.")
Management fees and commission income ("Management fees") consist
primarily of revenues earned by the alternative markets segment. Management fees
increased $1.7 million from the comparable 1998 amount, as increased fees from
new business of approximately 7% were offset by a decline in fees earned by Key
Risk Management Services, Inc. (see the discussion above regarding increased net
premiums written by Key Risk Insurance Company).
Realized losses were $2.4 million in 1999 compared with realized gains
of $13.4 million in 1998. Realized gains (losses) 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 and from provisions for permanent impairment of securities;
realized gains (losses) on equity securities arise primarily as a result of a
variety of factors which influence the Company's valuation criteria. The
majority of the 1999 and 1998 realized gains (losses) relate to fixed income
securities.
The combined ratio (on a statutory basis) of the Company's insurance
operations increased to 107.7% from 102.6% in the comparable 1998 period due to
an increases in the consolidated loss and expense ratios. The consolidated loss
ratio (losses and loss expenses incurred expressed as a percentage of premiums
earned) increased to 72.4% in 1999 from 68.1% in 1998 due to an increase in the
frequency and severity of claims activity which more than offset better than
expected experience on business written in prior years. Catastrophe losses were
$54.7 million for the first nine months of 1999, compared with $48.7 million for
the same period last year. The increase in incurred losses in the first nine
months was partially offset by recoveries under the aggregate reinsurance cover
(see Note 2 of the Notes to Consolidated Financial Statements included herein).
The Company will continue to monitor the effect of price competition, as well
8
<PAGE> 10
as the effect of increased levels of claims activity, as they relate to the
Company's anticipated loss ratios.
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 8% to $448.2 million.
The increase in other operating costs and expenses is primarily due to growth in
premium volume which in turn results in an increase in underwriting expenses.
The consolidated expense ratio (underwriting expenses expressed as a percentage
of premiums written) increased to 34.9% from 34.0%, mainly due to a reduction of
net premiums resulting from the purchase of additional reinsurance protection
and to certain costs directly attributable to the restructuring (see discussion
above).
The Federal income tax benefit in 1999 was $17.8 million compared with
an expense of $13.2 million in 1998. The tax benefit in 1999, as compared to a
tax expense in 1998, was due to a loss before income taxes in 1999 and to an
increase in the percentage of revenues that are tax-exempt. In addition, the
1999 Federal income tax benefit reflects the closing with the Internal Revenue
Service of tax years 1992 through 1994. (See "Liquidity and Capital Resources.")
Operating Results for the Third Quarter of
1999 as Compared to the Third Quarter of 1998
For the third quarter of 1999 as compared to the corresponding 1998
period, net premiums written decreased 2% due to a decline in regional business.
Net investment income increased 13% due to higher earnings in the trading
portfolio.
The combined ratio (on a statutory basis) of the Company's insurance
operations increased to 109.4% from 102.7% for the comparable 1998 period due to
an increase in the consolidated loss ratio and an increase in the consolidated
expense ratio. The consolidated loss ratio (losses and loss expense incurred
expressed as a percentage of premiums earned) increased to 74.0% in 1999 from
68.7% in 1998 for the reasons discussed above.
Other operating costs and expenses increased 7% to $151.8 million and
the consolidated expense ratio of the Company's insurance operations
(underwriting expenses expressed as a percentage of premiums written) increased
to 35.0% for the 1999 period from 33.5% for the comparable 1998 period, for the
reasons discussed above.
Liquidity and Capital Resources
Cash flow from operating activities before trading account activities
was $27.1 million in the nine months of 1999 compared with $111.8 million for
the same period in 1998. The decrease in cash flow was primarily due to a higher
level of claims activity.
The investment portfolio, excluding trading account securities, on a
cost basis, decreased by $138.5 million to $2,685.9 million at September 30,
1999 from $2,824.4 million at December 31, 1998. This decrease was primarily due
to the repurchase of preferred and common stock. On January 25, 1999, the
Company repurchased all outstanding Series A preferred shares for $98.1 million
using funds previously escrowed for this purpose. During the first nine months
of 1999 the Company also purchased 905,000 shares of its common stock for $22.1
million.
The Company's investments are currently comprised of fixed income
securities and trading securities. At September 30, 1999, as compared to
December 31, 1998, the portfolio mix of the fixed income securities was as
follows: tax-exempt securities remained at 42%; U.S. Government securities and
cash equivalents were 24% (23% in 1998); mortgage-backed securities were 15%
(18% in 1998); corporate fixed maturity securities were 17% (15% in 1998); and
the balance of 2% was invested in other fixed income securities.
9
<PAGE> 11
The Company had net trading securities (trading account equity
securities plus trading account receivables from brokers and clearing
organizations less trading account securities sold but not yet purchased) of
$346.0 million as of September 30, 1999, as compared to $320.7 million as of
December 31, 1998. The net trading account represented approximately 11% and 10%
of the Company's net invested assets as of September 30, 1999 and December 31,
1998, respectively.
For the nine months of 1999, stockholders' equity decreased by
approximately $203.6 million primarily due to the repurchase of the Company's
preferred and common stock for $120.2 million and to the change in unrealized
holding gains and losses on investment securities of $78.2 million, net of tax.
Accordingly, the Company's total capitalization decreased to $1,250.5 million at
September 30, 1999 and the percentage of the Company's capital attributable to
long-term debt increased to 32% from 27% at December 31, 1998.
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, 1998.
Year 2000
The Company continues to address system requirements with regard to
Year 2000 compliance issues and believes that all of the critical, primary
operating software has been modified or replaced as necessary for compliance.
This includes both operational and financial systems upon which the Company is
dependent. Testing has been completed for those systems, and changes have been
substantially finalized. Testing for secondary systems, such as telephone,
building systems and small computer items, was substantially complete by the end
of October 1999.
The Company continues to communicate with third parties with which it
has a material operating relationship, e.g. independent insurance agents and
financial institutions, to identify Year 2000 system issues with respect to
those third parties. Due to these communications, the Company has no reason to
believe that those third parties will not be in general compliance with Year
2000 readiness; however, the Company is unable to determine whether all such
third parties, particularly those located outside the United States, will
achieve Year 2000 readiness in such manner as not to result in any material
adverse effect on the Company.
It is the Company's practice in the normal course of business to
upgrade technology, including hardware and software, as appropriate. As a result
of this practice, much of its Year 2000 readiness has been accomplished in the
ordinary course. Through September 30, 1999, the Company has incurred
approximately $6.8 million of costs which have been expensed as incurred, and
estimates an additional $500,000 to be incurred in 1999 to complete Year 2000
compliance. The total cost associated with Year 2000 compliance is not expected
to be material to the Company's financial position.
Notwithstanding the above, a failure by the Company or a third party to
correct a material Year 2000 problem could result in an interruption in, or a
failure of, certain normal business activities or operations. Such failures
could materially and adversely affect the Company's results of operations,
liquidity and financial condition. Due to the general uncertainty inherent in
the Year 2000 problem, including the uncertainty of the Year 2000 system
readiness of third parties with whom the Company deals, the Company is unable to
determine at this time whether the consequences of Year 2000 failures will have
a material impact on the Company's results of operations, liquidity or financial
condition.
Substantially all of the Company's subsidiaries have adopted
contingency plans to address incidents that are outside their direct control,
such as a failure by an unrelated third-party. The contingency plans are
intended to allow the companies to mitigate such risks whenever feasible to do
so at a reasonable expense, but there can be no assurance that contingency plans
will be effective to deal with all such issues that may arise.
10
<PAGE> 12
The Year 2000 issue is also a concern for the Company from an
underwriting standpoint to the extent of possible liability for coverage under
general liability, property, directors and officers liability and other
policies. Through September 30, 1999, no significant losses have arisen or come
to light with respect to Year 2000 claims exposure for the Company's insurance
and reinsurance subsidiaries. Additionally, certain of the Company's insurance
subsidiaries may either include or exclude insurance coverage for Year 2000
exposures. However, due in part to the potential for judicial decisions which
reformulate policies to expand their coverage for previously unforeseen theories
of liability which may produce unanticipated claims, proposed legislative reform
and because there is no prior history of such claims, the amount of any
potential Year 2000 coverage liabilities is not determinable.
The discussion herein with regard to Year 2000 compliance contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in such forward-looking statements. These risks could include
unforeseen technological or other issues associated with Year 2000 compliance
efforts and the extent to which vendors, public utilities, insurance agents,
financial institutions, governmental entities and other third parties that
interface with the Company may fail to achieve Year 2000 compliance. The
inclusion of such forward-looking statements herein shall not be considered a
representation by the Company that the objectives or plans of the Company, or
other matters addressed by the forward-looking statements, will be achieved.
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, 1998 to September 30,
1999. In addition, the Company has maintained approximately the same investment
mix during this period.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
On August 2, 1999 the Company filed a Current Report on Form 8-K with
respect to its press release announcing results of operations for the second
quarter of 1999.
11
<PAGE> 13
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 9, 1999 By: /s/ WILLIAM R. BERKLEY
-------------------------------------
William R. Berkley
Chairman of the Board and
Chief Executive Officer
Date: November 9, 1999 By: /s/ EUGENE G. BALLARD
-------------------------------------
Eugene G. Ballard
Senior Vice President,
Chief Financial Officer
and Treasurer
12
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