<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. . . . . . . . June 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 August 3,
1999: 25,785,503.
<PAGE> 2
Part I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
Assets (Unaudited)
<S> <C> <C>
Investments:
Invested cash $ 230,102 $ 370,155
Fixed maturity securities:
Held to maturity, at cost (fair value $168,585 and $183,469) 162,160 170,150
Available for sale at fair value (cost $2,254,392
and $2,224,244) 2,240,087 2,306,619
Equity securities, at fair value:
Available for sale (cost $61,506 and $59,890) 67,151 65,869
Trading account (cost $327,518 and $373,164) 332,736 389,310
Cash 21,919 16,123
Premiums and fees receivable 419,107 377,501
Due from reinsurers 533,103 513,297
Accrued investment income 38,523 37,842
Prepaid reinsurance premiums 87,531 79,530
Deferred policy acquisition costs 184,289 168,894
Real estate, furniture & equipment at cost, less accumulated depreciation 130,775 136,884
Excess of cost over net assets acquired 78,419 76,645
Trading account receivable from broker and clearing organizations 191,252 229,520
Deferred Federal income taxes 43,000 --
Other assets 38,449 45,092
----------- -----------
$ 4,798,603 $ 4,983,431
=========== ===========
Liabilities, Reserves, Debt and Stockholders' Equity
Liabilities and reserves:
Reserves for losses and loss expenses $ 2,174,680 $ 2,126,566
Unearned premiums 709,781 664,297
Due to reinsurers 156,254 131,081
Deferred Federal income taxes -- 6,877
Short-term debt 75,000 55,500
Trading securities sold but not yet purchased at market value
(proceeds $179,017 and $283,310) 181,182 298,165
Other liabilities 187,080 213,453
----------- -----------
3,483,977 3,495,939
----------- -----------
Long-term debt 394,618 394,444
----------- -----------
Company-obligated manditorily redeemable capital securities of a
subsidiary trust holding solely 8.197% junior subordinated
debentures of the Corporation due December 15, 2045 208,010 207,988
Minority interest 31,823 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, 25,785,503 and 26,504,404 shares 7,281 7,281
Additional paid-in capital 331,631 429,611
Retained earnings 599,470 601,908
Accumulated other comprehensive income (8,067) 54,672
Treasury stock, at cost, 10,618,564 and
9,899,663 shares (250,140) (232,256)
----------- -----------
680,175 861,281
----------- -----------
$ 4,798,603 $ 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 Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
Revenues: 1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net premiums written $ 345,187 $ 339,826 $ 725,771 $ 673,658
Change in net unearned premiums 1,195 (20,838) (37,417) (52,037)
--------- --------- --------- ---------
Premiums earned 346,382 318,988 688,354 621,621
Net investment income 51,181 52,384 97,175 108,778
Management fees and commission income 17,852 17,775 36,248 36,363
Realized gains on investments 285 7,090 1,013 10,507
Other income 550 673 1,173 2,916
--------- --------- --------- ---------
Total revenues 416,250 396,910 823,963 780,185
Operating costs and expenses:
Losses and loss expenses (249,258) (217,578) (492,097) (422,780)
Other operating costs and expenses (152,133) (139,043) (296,358) (272,223)
Interest expense (13,017) (12,158) (25,822) (24,331)
Restructuring Charge -- -- (11,505) --
--------- --------- --------- ---------
Income before income taxes and
minority interest 1,842 28,131 (1,819) 60,851
Federal income tax (expense) benefit 4,450 (6,503) 9,623 (13,700)
--------- --------- --------- ---------
Income before minority interest 6,292 21,628 7,804 47,151
Minority interest (668) 1,115 292 1,265
--------- --------- --------- ---------
Net income before preferred dividends 5,624 22,743 8,096 48,416
Preferred dividends -- (1,887) (497) (3,774)
--------- --------- --------- ---------
Net income before change in accounting principle
and extraordinary loss 5,624 20,856 7,599 44,642
Cumulative effect of change in accounting
principle (net of taxes of $1,750) -- -- (3,250) --
Extraordinary loss on early extinguishment of
long-term debt (net of taxes of $1,390 and $2,701) -- (2,582) -- (5,017)
--------- --------- --------- ---------
Net income attributable to common stockholders $ 5,624 $ 18,274 $ 4,349 $ 39,625
========= ========= ========= =========
Earning per share:
Basic:
Net income before change in accounting principle
and extraordinary loss $ .22 $ .73 $ .29 $ 1.54
Cumulative effect of change in accounting
principle -- -- (.12) --
Extraordinary loss on early extinguishment of
long-term debt -- (.09) -- (.17)
--------- --------- --------- ---------
Net income attributable to common stockholders $ .22 $ .64 $ .17 $ 1.37
========= ========= ========= =========
Diluted:
Net income before change in accounting principle
and extraordinary loss $ .22 $ .70 $ .29 $ 1.48
Cumulative effect of change in accounting principle -- -- (.12) --
Extraordinary loss on early extinguishment of
long-term debt -- (.09) -- (.17)
--------- --------- --------- ---------
Net income attributable to common stockholders $ .22 $ .61 $ .17 $ 1.31
========= ========= ========= =========
Average shares outstanding:
Basic 25,955 28,469 26,139 29,024
========= ========= ========= =========
Diluted 26,095 29,734 26,304 30,271
========= ========= ========= =========
</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 Six Months
Ended June 30,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends and extraordinary items $ 4,846 $ 48,416
Adjustments to reconcile net income to cash
flows from operating activities:
Minority interest (292) (1,264)
Change in reserves for losses
and loss expenses, net of due to/from reinsurers 53,481 76,269
Depreciation and amortization 11,483 12,423
Change in unearned premiums and
prepaid reinsurance premiums 37,483 52,040
Change in premiums and fees receivable (41,606) (77,376)
Change in Federal income taxes (11,364) (2,132)
Change in deferred acquisition cost (15,395) (16,235)
Realized gains on investments (1,013) (10,507)
Other, net (31,707) (25,815)
--------- ---------
Net cash flows from operating activities
before trading account sales 5,916 55,819
Trading account sales, net (1,758) (28,519)
--------- ---------
Net cash flows from operating activities 4,158 27,300
--------- ---------
Cash flows from (used in) investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 300,540 384,936
Equity securities 433 23,538
Proceeds from maturities and prepayments of
fixed maturity securities 82,814 86,456
Cost of purchases, excluding trading account:
Fixed maturity securities available for sale (407,546) (418,935)
Equity securities (3,841) (13,871)
Change in balances due to/from security brokers (15,287) 6,128
Net additions to real estate, furniture & equipment (1,494) (15,623)
Other, net 2,668 (290)
--------- ---------
Net cash flows from (used in) investing activities (41,713) 52,339
--------- ---------
Cash flows used in financing activities:
Net proceeds from issuance of short-term debt 19,500 --
Purchase of treasury shares (18,072) (66,044)
Cash dividends to common stockholders (6,590) (6,803)
Cash dividends to preferred stockholders (2,001) (3,658)
Repurchase of preferred stock (98,092) --
Retirement of long-term debt -- (49,104)
Net proceeds from issuance of long-term debt -- 39,834
Other, net 8,553 (226)
--------- ---------
Net cash flows used in financing activities (96,702) (86,001)
--------- ---------
Net decrease in cash and invested cash (134,257) (6,362)
Cash and invested cash at beginning of year 386,278 280,847
--------- ---------
Cash and invested cash at end of period $ 252,021 $ 274,485
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 25,661 $ 23,855
========= =========
Federal income taxes paid, net $ -- $ 15,825
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
W. R. Berkley Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 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 Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Ceded premiums written $ 83,422 $ 67,616 $156,905 $132,998
======== ======== ======== ========
Ceded premiums earned $ 82,101 $ 63,965 $151,024 $125,870
======== ======== ======== ========
Ceded losses and loss expenses $ 81,685 $ 41,620 $125,261 $ 94,825
======== ======== ======== ========
</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 $12.8 million and losses of $22.2 million
were ceded to the reinsurer in the second quarter and first six months of 1999.
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 For the Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) attributable to common stockholders $ 5,624 $ 18,274 $ 4,349 $ 39,625
-------- -------- -------- --------
Other comprehensive income:
Change in unrealized foreign exchange gains (losses) 2 225 711 (766)
Unrealized holding gains(losses)on investment
securities arising during the period (40,708) (4,344) (64,108) (7,991)
Less: Reclassification adjustment for gains
included in net income, net of tax 185 4,609 658 6,830
-------- -------- -------- --------
Net change in unrealized gains during the period (40,523) 265 (63,450) (1,161)
Other comprehensive income (loss) (40,521) 490 (62,739) (1,927)
-------- -------- -------- --------
Comprehensive income (loss) $(34,897) $ 18,764 $(58,390) $ 37,698
======== ======== ======== ========
</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,
internationally. For the six months ended June 30, 1999 and 1998, the joint
venture wrote life insurance premiums of $9.3 million and $2.7 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 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 six months
ended June 30, 1999:
Regional $ 27,084 $ 345,527 $ 948 $ 346,475 $ (14,798) $ (6,850)
Reinsurance 23,778 165,631 338 165,969 8,033 1,060
Specialty 26,324 155,766 (1,211) 154,555 21,374 5,010
Alternative Markets 17,993 110,046 204 110,250 15,462 2,560
International 3,341 44,034 -- 44,034 560 879
Corporate and other 721 2,959 37,754 40,713 (3,853) (10,503)
Adjustments and
eliminations (2,066) -- (38,033) (38,033) (28,597) (1,779)
- --------------------------------------------------------------------------------------------------------------
Consolidated $ 97,175 $ 823,963 $ -- $ 823,963 $ (1,819) $ (9,623)
- --------------------------------------------------------------------------------------------------------------
For the six months
ended June 30, 1998:
Regional $ 28,293 $ 343,830 $ 1,079 $ 344,909 $ 8,288 $ (3,132)
Reinsurance 25,307 142,178 433 142,611 23,654 (6,209)
Specialty 32,295 149,942 1,484 151,426 45,958 (13,286)
Alternative Markets 18,658 99,983 453 100,436 19,178 (5,883)
International 3,572 38,471 -- 38,471 (3,750) (5)
Corporate and other 4,215 5,781 43,886 49,667 5,865 (13,695)
Adjustments and
eliminations (3,562) -- (47,335) (47,335) (38,342) 28,510
- --------------------------------------------------------------------------------------------------------------
Consolidated $ 108,778 $ 780,185 $ -- $ 780,185 $ 60,851 $ (13,700)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Interest expense for the reinsurance and alternative market segments
was $1,460,000 and $1,163,000 for the six months ended June 30, 1999 and 1998,
respectively. Additionally, corporate interest expense (net of intercompany
amounts) was $24,362,000 and $23,168,000 for the corresponding periods.
5
<PAGE> 7
Identifiable assets by segment are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------------------------
<S> <C> <C>
Regional $ 1,429,717 $ 1,370,849
Reinsurance 961,082 996,186
Specialty 1,450,842 1,502,366
Alternative Markets 876,995 863,578
International 163,882 151,832
Corporate and other 1,462,427 1,545,744
Elimination (1,546,342) (1,447,124)
- --------------------------------------------------------------------------------
Consolidated $ 4,798,603 $ 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 $2,668,000 related to the restructuring charge, and the remaining
restructuring accrual is $8,837,000 at June 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.
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
6
<PAGE> 8
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 attributable to common stockholders ("net income") was $5.6
million ($.22 diluted per share) for the second quarter of 1999, in comparison
with net income of $18.3 million ($.61 diluted per share) for the 1998 period.
Net income was $4.3 million ($.17 diluted per share) for the first six months of
1999, in comparison with $39.6 million ($1.31 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 loss
on early extinguishment of long-term debt, was $5.4 million ($.21 diluted per
share) for the second quarter of 1999 in comparison with $16.2 million ($.55
diluted per share) earned in the corresponding 1998 quarter. Operating income
was $6.9 million ($.26 diluted per share) for the first six months of 1999, in
comparison with $37.8 million ($1.25 diluted per share) for the corresponding
1998 period. Adjusting for the restructuring charge, operating income was $14.2
million ($.54 diluted per share) for the first six months of 1999. The decline
in earnings was primarily due to the effects of competition on rate adequacy,
higher catastrophe losses and lower investment earnings.
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 $1.6 million, on an after-tax
basis, in the first six months of 1999 and estimates that such additional costs
of approximately $2.4 million, on an after-tax basis, will be incurred over the
next 18 months.
As previously disclosed in the Company's 1998 Annual Report and Form
10-K, during the six months, 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.
Second quarter net income included capital gains, net of taxes, of
$200,000, or $.01 per share diluted, compared with $4.6 million, or $.15 per
share diluted, for the same period last year. For the first six months of 1999
capital gains were $700,000, or $.02 per diluted share, compared with $6.8
million, or $.23 per diluted share, recorded during the corresponding 1998
period.
The Company also reported an extraordinary loss of $2.6 million and
$5.0 million for the second quarter and first six months of 1998, respectively,
related to the repurchase and retirement of $34.7 million (face amount) of
long-term debt. There were no comparable extraordinary items in 1999.
Operating Results for the First Six Months of 1999
as Compared to the First Six Months of 1998
Net premiums written during the six months of 1999 increased by 8% to
$725.8 million from $673.7 million written in the comparable 1998 period. Net
premiums written by the regional segment increased by $4.6 million, or 1%, as
the effects of geographic expansion and increased rates were partially offset by
the purchase of additional reinsurance protection (see Note 2 of the Notes to
Consolidated Financial Statements included herein). Specialty net premiums
written
7
<PAGE> 9
increased by $8.8 million, or 7%, 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 $27.4 million, or 22%, primarily due to an increase in pro-rata
treaty volume. Alternative markets net premiums written increased $9.3 million,
or 17%, 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 $2.1 million, or 6%, primarily due to growth in the
Philippines.
Pre-tax investment income decreased by 11% to $97.2 million. Investment
income declined for several reasons, including a lower yield earned on the
Company's merger arbitrage investments (from 14.9% annualized to 10.8%
annualized); an increase in the portion of the portfolio invested in municipal
securities (from 38% at June 30, 1998 to 43% at June 30, 1999); and 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
decreased $0.2 million from the comparable 1998 amount, principally due to a
decline in fees earned by Key Risk Service Company (see the discussion above
regarding increased net premiums written by Key Risk Insurance Company).
Realized gains decreased to $1.0 million from $10.5 million earned in
the comparable 1998 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 1999 and 1998 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 106.8% from 102.5% 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 71.2% in 1999 from 67.8% in 1998 due to an increase in
current year loss ratios at the regional, reinsurance and specialty units. The
increase in the regional loss ratio is primarily due to the continued severity
of competitive pressures. The increase in the reinsurance loss ratio is
primarily due the effects of competition on rate adequacy and to losses incurred
as a result of the earthquake in Columbia in January 1999. The increase in the
specialty loss ratio is due to an increase in loss activity at the
transportation unit. Catastrophe losses, were $35.8 million for the first six
months of 1999, compared with $31.4 million for the same period last year. The
increase in incurred losses in the first six months was partially offset by
recoveries under the aggregate reinsurance cover (see Note 2 of the Notes to
Consolidated Financial Statements included herein).
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 9% to $296.4 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 35.2% from 34.3%, mainly due to higher
commissions and the effects of ceding additional reinsurance premiums.
The Federal income tax benefit in 1999 was $9.6 million as compared to
a $13.7 million expense for the comparable 1998 period. The benefit in 1999 is
due primarily to an increase in the percentage of pre-tax income that is
tax-exempt. In addition, the 1999 Federal income tax benefit was adjusted to
reflect the closing with the Internal Revenue Service of tax years 1992 through
1994. (See "Liquidity and Capital Resources.")
8
<PAGE> 10
Operating Results for the Second Quarter of
1999 as Compared to the Second Quarter of 1998
For the second quarter of 1999 as compared to the corresponding 1998
period, net premiums written increased 2%; net investment income decreased 2%,
generally all for the reasons discussed above.
The combined ratio (on a statutory basis) of the Company's insurance
operations increased to 108.6% from 102.6% 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 71.5% in 1999 from
67.8% in 1998 for the reasons discussed above.
Other operating costs and expenses increased 9% to $152.1 million and
the consolidated expense ratio of the Company's insurance operations
(underwriting expenses expressed as a percentage of premiums written) increased
to 36.7% for the 1999 period from 34.3% for the comparable 1998, for the reasons
discussed above.
Liquidity and Capital Resources
Cash flow from operating activities before trading account activities
was $5.9 million in the six months of 1999 compared with $55.8 million for the
same period in 1998. The decrease in cash flow was primarily due to a higher
level of claim activity and to the decrease in investment income discussed
above. The investment portfolio, excluding trading account securities, on a cost
basis, decreased by $116.2 million to $2,708.2 million at June 30, 1999 from
$2,824.4 million at December 31, 1998. This decrease was primarily due to the
repurchase of the remaining shares of Series A preferred stock in January 1999.
The Company's investments are currently comprised of fixed income
securities and trading securities. At June 30, 1999, as compared to December 31,
1998, the portfolio mix of the fixed income securities was as follows:
tax-exempt securities were 43% (42% in 1998); 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 16% (15% in 1998); and
the balance of 2% was invested in other fixed income 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 $342.8 million as of
June 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 June 30, 1999 and December 31, 1998, respectively.
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 six months of 1999 the Company also purchased 730,000
shares of its common stock for $18.1 million.
For the six months of 1999, stockholders' equity decreased by
approximately $181.1 million primarily due to the repurchase of the Company's
preferred and common stock and to the change in unrealized holding gains and
losses on investment securities. Accordingly, the Company's total capitalization
decreased to $1,283.0 million at June 30, 1999 and the percentage of the
Company's capital attributable to long-term debt increased to 31% 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
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which the Company is dependent. Testing has been completed for those systems,
and changes are expected to be finalized by the end of August 1999. Testing for
secondary systems, such as telephone, building systems and small computer items,
is expected to be completed by the end of the third quarter.
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 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 June 30, 1999, the Company has incurred approximately
$6.7 million of costs which have been expensed as incurred, and estimates an
additional $0.6 million 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.
Subsidiaries of the Company are in the process of developing
contingency plans to address incidents that are outside their direct control,
such as a failure by an unrelated third-party. The contingency plans, which are
expected to be completed by the end of the third quarter, 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.
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 June 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.
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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 June 30, 1999. In
addition, the Company has maintained approximately the same investment mix
during this period. Therefore, while the Company's change in other comprehensive
income may be significant, the overall market risk of the Company has remained
similar to the market risk at December 31, 1998.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number
(3.1) Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock.
(10.1) Letter agreement between the Company and its Senior Vice
President-General Counsel.
(10.2) 1997 Directors Stock Plan, as Amended and Restated as of May 11, 1999.
(b) Reports on Form 8-K
On May 11, 1999 the Company filed a Current Report on Form 8-K
with respect to amendments to the by-laws of the Company and the adoption of a
shareholder rights plan (under Item 5 of Form 8-K).
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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: August 10, 1999 /s/ WILLIAM R. BERKLEY
------------------------------
William R. Berkley
Chairman of the Board and
Chief Executive Officer
Date: August 10, 1999 /s/ EUGENE G. BALLARD
------------------------------
Eugene G. Ballard
Senior Vice President,
Chief Financial Officer
and Treasurer
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Exhibit 3.1
CERTIFICATE OF DESIGNATION, PREFERENCES AND
RIGHTS OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
W. R. BERKLEY CORPORATION
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
We, William R. Berkley, Chairman of the Board, and Cornelius T.
Finnegan, III, Secretary, of W. R. Berkley Corporation, a corporation organized
and existing under the General Corporation Law of the State of Delaware, in
accordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by
the Restated Certificate of Incorporation, as amended, of the said Corporation,
the said Board of Directors on May 11, 1999, adopted the following resolution
creating a series of 40,000 shares of Preferred Stock designated as Series A
Junior Participating Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of its Restated
Certificate of Incorporation, as amended, a series of Preferred Stock of the
Corporation be and it hereby is created, and that the designation and amount
thereof and the voting powers, preferences and relative, participating, optional
and other special rights of the shares of such series, and the qualifications,
limitations and restrictions thereof are as follows:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A Junior Participating Preferred Stock" and the number of
shares constituting such series shall be 40,000.
Section 2. Dividends and Distributions.
<PAGE> 2
(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series A Junior Participating Preferred Stock with respect to dividends, the
holders of shares of Series A Junior Participating Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, quarterly dividends payable in cash on
the first day of January, April, July and October in each year (each such date
being referred to herein as a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Junior Participating Preferred Stock, in an
amount per share (rounded to the nearest cent) equal to the greater of (a) $10
or (b) subject to the provision for adjustment hereinafter set forth, 1000 times
the aggregate per share amount of all cash dividends, and 1000 times the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock, par value $.20 per share, of the
Corporation (the "Common Stock") since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of Series A
Junior Participating Preferred Stock. In the event the Corporation shall at any
time after May 11, 1999 (the "Rights Declaration Date") (i) declare any dividend
on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the amount to which holders of
shares of Series A Junior Participating Preferred Stock were entitled
immediately prior to such event under clause (b) of the preceding sentence shall
be adjusted by multiplying such amount by a fraction the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Junior Participating Preferred
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<PAGE> 3
Stock as provided in paragraph (A) above immediately after it declares a
dividend or distribution on the Common Stock (other than a dividend payable in
shares of Common Stock); provided, however, that, in the event no dividend or
distribution shall have been declared on the Common Stock during the period
between any Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $10 per share on the Series A Junior
Participating Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Junior Participating Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of Series
A Junior Participating Preferred Stock, unless the date of issue of such shares
is prior to the record date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares shall begin to accrue from the date of issue
of such shares, or unless the date of issue is a Quarterly Dividend Payment Date
or is a date after the record date for the determination of holders of shares of
Series A Junior Participating Preferred Stock entitled to receive a quarterly
dividend and before such Quarterly Dividend Payment Date, in either of which
events such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the shares of Series A Junior Participating
Preferred Stock in an amount less than the total amount of such dividends at the
time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Series A Junior Participating Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be no more
than thirty (30) days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Junior
Participating Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Junior
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<PAGE> 4
Participating Preferred Stock shall entitle the holder thereof to 1000 votes on
all matters submitted to a vote of the stockholders of the Corporation. In the
event the Corporation shall at any time after the Rights Declaration Date (i)
declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding Common Stock, or (iii) combine the outstanding Common
Stock into a smaller number of shares, then in each such case the number of
votes per share to which holders of shares of Series A Junior Participating
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of
shares of Series A Junior Participating Preferred Stock and the holders of
shares of Common Stock shall vote together as one class on all matters submitted
to a vote of stockholders of the Corporation.
(C) (i) If at any time dividends on any Series A Junior Participating
Preferred Stock shall be in arrears in an amount equal to six (6) quarterly
dividends thereon, the occurrence of such contingency shall mark the beginning
of a period (herein called a "default period") which shall extend until such
time when all accrued and unpaid dividends for all previous quarterly dividend
periods and for the current quarterly dividend period on all shares of Series A
Junior Participating Preferred Stock then outstanding shall have been declared
and paid or set apart for payment. During each default period, all holders of
Preferred Stock (including holders of the Series A Junior Participating
Preferred Stock) with dividends in arrears in an amount equal to six (6)
quarterly dividends thereon, voting as a class, irrespective of series, shall
have the right to elect two (2) Directors.
(ii) During any default period, such voting right of the holders of
Series A Junior Participating Preferred Stock may be exercised initially at a
special meeting called pursuant to subparagraph (iii) of this Section 3(C) or at
any annual meeting of stockholders, and thereafter at annual
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<PAGE> 5
meetings of stockholders, provided that neither such voting right nor the right
of the holders of any other series of Preferred Stock, if any, to increase, in
certain cases, the authorized number of Directors shall be exercised unless the
holders of ten percent (10%) in number of shares of Preferred Stock outstanding
shall be present in person or by proxy. The absence of a quorum of the holders
of Common Stock shall not affect the exercise by the holders of Preferred Stock
of such voting right. At any meeting at which the holders of Preferred Stock
shall exercise such voting right initially during an existing default period,
they shall have the right, voting as a class, to elect Directors to fill such
vacancies, if any, in the Board of Directors as may then exist up to two (2)
Directors or, if such right is exercised at an annual meeting, to elect two (2)
Directors. If the number which may be so elected at any special meeting does not
amount to the required number, the holders of the Preferred Stock shall have the
right to make such increase in the number of Directors as shall be necessary to
permit the election by them of the required number. After the holders of the
Preferred Stock shall have exercised their right to elect Directors in any
default period and during the continuance of such period, the number of
Directors shall not be increased or decreased except by vote of the holders of
Preferred Stock as herein provided or pursuant to the rights of any equity
securities ranking senior to or pari passu with the Series A Junior
Participating Preferred Stock.
(iii) Unless the holders of Preferred Stock shall, during an existing
default period, have previously exercised their right to elect Directors, the
Board of Directors may order, or any stockholder or stockholders owning in the
aggregate not less than ten percent (10%) of the total number of shares of
Preferred Stock outstanding, irrespective of series, may request, the calling of
a special meeting of the holders of Preferred Stock, which meeting shall
thereupon be called by the President, a Vice-President or the Secretary of the
Corporation. Notice of such meeting and of any annual meeting at which holders
of Preferred Stock are entitled to vote pursuant to this paragraph (C)(iii)
shall be given to each holder of record of Preferred Stock by mailing a copy of
such notice to him at his last address as the same appears on the books of the
Corporation. Such meeting shall be called for a time not
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<PAGE> 6
earlier than twenty (20) days and not later than sixty (60) days after such
order or request or in default of the calling of such meeting within sixty (60)
days after such order or request, such meeting may be called on similar notice
by any stockholder or stockholders owning in the aggregate not less than ten
percent (10%) of the total number of shares of Preferred Stock outstanding.
Notwithstanding the provisions of this paragraph (C)(iii), no such special
meeting shall be called during the period within sixty (60) days immediately
preceding the date fixed for the next annual meeting of the stockholders.
(iv) In any default period, the holders of Common Stock, and other
classes of stock of the Corporation if applicable, shall continue to be entitled
to elect the whole number of Directors until the holders of Preferred Stock
shall have exercised their right to elect two (2) Directors voting as a class,
after the exercise of which right (x) the Directors so elected by the holders of
Preferred Stock shall continue in office until their successors shall have been
elected by such holders or until the expiration of the default period, and (y)
any vacancy in the Board of Directors may (except as provided in paragraph
(C)(ii) of this Section 3) be filled by vote of a majority of the remaining
Directors theretofore elected by the holders of the class of stock which elected
the Director whose office shall have become vacant. References in this paragraph
(C) to Directors elected by the holders of a particular class of stock shall
include Directors elected by such Directors to fill vacancies as provided in
clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the right
of the holders of Preferred Stock as a class to elect Directors shall cease, (y)
the term of any Directors elected by the holders of Preferred Stock as a class
shall terminate, and (z) the number of Directors shall be such number as may be
provided for in the certificate of incorporation or by-laws irrespective of any
increase made pursuant to the provisions of paragraph (C)(ii) of this Section 3
(such number being subject, however, to change thereafter in any manner provided
by law or in the certificate of incorporation or by-laws). Any vacancies in the
Board of Directors effected by the provisions of clauses
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<PAGE> 7
(y) and (z) in the preceding sentence may be filled by a majority of the
remaining Directors.
(D) Except as set forth herein, holders of Series A Junior Participating
Preferred Stock shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Participating Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Series A Junior
Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends on, make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Junior Participating Preferred
Stock;
(ii) declare or pay dividends on or make any other distributions
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior
Participating Preferred Stock, except dividends paid ratably on the Series
A Junior Participating Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior
Participating Preferred Stock, provided that the Corporation may at any
time redeem, purchase or otherwise acquire shares of any such parity stock
in exchange for shares of any stock of the Corporation ranking junior
(either as to
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<PAGE> 8
dividends or upon dissolution, liquidation or winding up) to the Series A
Junior Participating Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares
of Series A Junior Participating Preferred Stock, or any shares of stock
ranking on a parity with the Series A Junior Participating Preferred
Stock, except in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all holders of
such shares upon such terms as the Board of Directors, after consideration
of the respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective
series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Junior Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
Section 6. Liquidation, Dissolution or Winding Up. (A) Upon any
liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Participating Preferred Stock unless, prior
thereto, the holders of shares of Series A Junior Participating Preferred Stock
shall have received $10 per share, plus an amount
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<PAGE> 9
equal to accrued and unpaid dividends and distributions thereon, whether or not
declared, to the date of such payment (the "Series A Liquidation Preference").
Following the payment of the full amount of the Series A Liquidation Preference,
no additional distributions shall be made to the holders of shares of Series A
Junior Participating Preferred Stock unless, prior thereto, the holders of
shares of Common Stock shall have received an amount per share (the "Common
Adjustment") equal to the quotient obtained by dividing (i) the Series A
Liquidation Preference by (ii) 1000 (as appropriately adjusted as set forth in
subparagraph C below to reflect such events as stock splits, stock dividends and
recapitalizations with respect to the Common Stock) (such number in clause (ii),
the "Adjustment Number"). Following the payment of the full amount of the Series
A Liquidation Preference and the Common Adjustment in respect of all outstanding
shares of Series A Junior Participating Preferred Stock and Common Stock,
respectively, holders of Series A Junior Participating Preferred Stock and
holders of shares of Common Stock shall receive their ratable and proportionate
share of the remaining assets to be distributed in the ratio of 1000 (as
appropriately adjusted as set forth in subparagraph C below to reflect such
events as stock splits, stock dividends and recapitalizations with respect to
the Common Stock) to 1 with respect to such Preferred Stock and Common Stock, on
a per share basis, respectively.
(B) In the event, however, that there are not sufficient assets available
to permit payment in full of the Series A Liquidation Preference and the
liquidation preferences of all other series of preferred stock, if any, which
rank on a parity with the Series A Junior Participating Preferred Stock, then
such remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences. In the event,
however, that there are not sufficient assets available to permit payment in
full of the Common Adjustment, then such remaining assets shall be distributed
ratably to the holders of Common Stock.
(C) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
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<PAGE> 10
outstanding Common Stock into a smaller number of shares, then in each such case
the Adjustment Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share (subject to the provision
for adjustment hereinafter set forth) equal to 1000 times the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Junior Participating Preferred Stock shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Junior Participating
Preferred Stock shall not be redeemable.
Section 9. Ranking. The Series A Junior Participating Preferred Stock
shall rank junior to all other series of the Corporation's Preferred Stock as to
the payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise.
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<PAGE> 11
Section 10. Amendment. The Restated Certificate of Incorporation, as
amended, of the Corporation shall not be further amended in any manner which
would materially alter or change the powers, preferences or special rights of
the Series A Junior Participating Preferred Stock so as to affect them adversely
without the affirmative vote of the holders of a majority or more of the
outstanding shares of Series A Junior Participating Preferred Stock, voting
separately as a class.
Section 11. Fractional Shares. Series A Junior Participating Preferred
Stock may be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Junior Participating Preferred Stock.
IN WITNESS WHEREOF, we have executed and subscribed the Certificate and do
affirm the foregoing as true under the penalties of perjury this 11th day of
May, 1999.
s/William R. Berkley
---------------------------
William R. Berkley
Chairman of the Board
s/Cornelius T. Finnegan III
---------------------------
Cornelius T. Finnegan III
Secretary
Exhibit 3.1
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<PAGE> 1
Exhibit 10.1
W.R. Berkley Corporation
165 Mason Street, P.O. Box 2518
Greenwich, Connecticut 06836-2518
(203) 629-2880
January 4, 1999
Mr. Cornelius T. Finnegan, III
Willkie Farr & Gallagher
787 Seventh Avenue
New York, NY 10019-6099
Dear Connie:
This letter confirms our prior discussions regarding your becoming an employee
of W.R. Berkley Corporation. You will be Senior Vice President and General
Counsel. Your start date will be sometime prior to February 1, 1999. Your base
pay will be $365,000 per year with a minimum bonus guaranteed for each of the
first 2 years of $100,000. You will receive options on 17,500 shares of stock.
You will be provided with our normal fringe benefits.
You will be provided with 2 times your minimum annual compensation (including
bonus) as severance in the event there is a change in control at W.R. Berkley
Corporation. The definition of this change in control being that a third party
acquires a majority of the voting stock or assets, I am no longer Chief
Executive or more than half the directors are no longer serving in their current
capacity (other than as a result of changes in the normal course). In such
event, your medical coverage and life insurance benefits would also be continued
for two years on the same cost basis. We may enter into an agreement,
satisfactory to you, that sets forth these matters in greater detail.
Assuming this is satisfactory, please initial this letter or note any
adjustments and return it to me.
Thank you very much.
Sincerely,
/s/ Bill
William R. Berkley
Chairman & Chief Executive Officer Agreed: CTF
<PAGE> 1
Exhibit 10.2
W. R. BERKLEY CORPORATION
1997 DIRECTORS STOCK PLAN
As Amended and Restated
As of May 11, 1999
Effective as of May 13, 1997
Amended as of May 11, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. PURPOSE............................................................. 1
SECTION 2. ELIGIBILITY......................................................... 1
SECTION 3. ADMINISTRATION...................................................... 1
3.1. The Board.................................................... 1
3.2. Board Authority.............................................. 1
3.3. Binding Determinations....................................... 2
3.4. No Liability................................................. 2
SECTION 4. SHARES SUBJECT TO PLAN.............................................. 2
4.1. Shares....................................................... 2
4.2. Shares Available for Awards.................................. 2
4.3. Adjustments upon Certain Changes............................. 2
SECTION 5. AWARDS UNDER THE PLAN............................................... 3
SECTION 6. DIRECTORS SHARES.................................................... 3
6.1. In General................................................... 3
6.2. Initial Awards............................................... 3
6.3. Additional Awards............................................ 3
6.4. Vesting...................................................... 4
6.5. Stockholder Rights........................................... 4
SECTION 7. WITHHOLDING TAXES................................................... 4
SECTION 8. PLAN AMENDMENTS AND TERMINATION..................................... 4
SECTION 9. MISCELLANEOUS....................................................... 4
9.1. Listing, Registration and Legal Compliance................... 4
9.2. Right of Discharge Reserved.................................. 5
SECTION 10. GOVERNING LAW...................................................... 5
SECTION 11. NOTICES............................................................ 5
SECTION 12. SECTION HEADINGS................................................... 6
SECTION 13. EFFECTIVE DATE..................................................... 6
</TABLE>
<PAGE> 3
W. R. BERKLEY CORPORATION
1997 DIRECTORS STOCK PLAN
As Amended and Restated
As of May 11, 1999
SECTION 1. PURPOSE. W. R. Berkley Corporation, a Delaware corporation,
(the "Company"), hereby adopts the W. R. Berkley Corporation 1997 Directors
Stock Plan (the "Plan"). The purpose of the Plan is to provide an incentive to
the Participants (i) to join and remain in the service of the Company, (ii) to
maintain and enhance the long-term performance and profitability of the Company
and (iii) to acquire a financial interest in the success of the Company.
SECTION 2. ELIGIBILITY. Directors on the Company's Board of Directors
(the "Board") will be granted awards pursuant to the provisions of the Plan (a
"Participant or Participants"). Any Participant who terminates service as a
director of the Company shall automatically cease participation in the Plan as
of the date of his or her termination (a "Former Participant"). A Former
Participant shall automatically resume participation in the Plan if, and as of
the date when, he or she resumes service as a director of the Company.
SECTION 3. ADMINISTRATION.
3.1. The Board. The Plan shall be administered by the Board.
3.2. Board Authority. The Board shall have the authority to: (i)
exercise all of the powers granted to it under the Plan, (ii) construe,
interpret and implement the Plan, (iii) prescribe, amend and rescind rules and
regulations relating to the Plan, (iv) make all
<PAGE> 4
determinations necessary in administering the Plan, and (v) correct any defect,
supply any omission, and reconcile any inconsistency in the Plan.
3.3. Binding Determinations. The determination of the Board on all
matters within its authority relating to the Plan shall be conclusive.
3.4. No Liability. No member of the Board shall be liable for any
action or determination made in good faith with respect to the Plan or any award
hereunder.
SECTION 4. SHARES SUBJECT TO PLAN.
4.1. Shares. Awards under the Plan shall be for shares of Common Stock,
par value $.20 per share, of the Company and any other shares into which such
shares shall thereafter be changed by reason of merger, reorganization,
recapitalization, consolidation, split-up, combination of shares, or similar
event as set forth in and in accordance with this Section 4 ("Directors
Shares").
4.2. Shares Available for Awards. Subject to Section 4.3 (relating to
adjustments upon changes in capitalization), the total number of Directors
Shares with respect to which awards may be granted under the Plan shall not
exceed 37,500.* Directors Shares granted under the Plan shall be authorized and
unissued shares or treasury shares.
4.3. Adjustments upon Certain Changes. In the event of any merger
reorganization, recapitalization, consolidation, sale or other distribution of
substantially all of the assets of the Company, any stock dividend, stock split,
spin-off, split-up, distribution of cash, securities or other property by the
Company, or other change in the
- --------
*All share numbers herein (except in Section 6.2) have been adjusted to give
effect to a 3 for 2 stock split paid on September 18, 1997.
2
<PAGE> 5
Company's corporate structure affecting the Directors Shares, the Board shall
substitute or adjust the aggregate number of Directors Shares reserved for
issuance under the Plan in such manner as it determines to be equitable in order
to prevent dilution or enlargement of the benefits or potential benefits
intended to be awarded under the Plan.
SECTION 5. AWARDS UNDER THE PLAN. The Board shall automatically grant
non-discretionary awards under the Plan in the form of Directors Shares.
SECTION 6. DIRECTORS SHARES.
6.1. In General. Each Participant will receive a portion of his or her
annual fee for service as a director of the Company in the form of an award of
Directors Shares.
6.2. Initial Awards. Each Participant as of the Effective Date (as
defined in Section 13) shall automatically be granted an award of 100 Directors
Shares.
6.3. Additional Awards. Each Participant as of the date of each annual
meeting of the Company's stockholders after the Effective Date who shall
continue to serve as a director of the Company after the date of such annual
meeting shall automatically be granted an award of Directors Shares as follows:
(i) for such annual meeting held on May 12, 1998, 150
Directors Shares;
(ii) for such annual meeting held on May 11, 1999, 250
Directors Shares; and
(iii) for each such annual meeting held after May 11, 1999,
the number of Directors Shares determined by dividing $7,500
by the closing sale price
3
<PAGE> 6
of the Common Stock on the trading day next preceding the date
of such annual meeting.
6.4. Vesting. All awards of Directors Shares shall be fully (100%)
vested on the grant date of such awards.
6.5. Stockholder Rights. A Participant shall have the right to receive
dividends and other rights of a stockholder with respect to awards of Directors
Shares.
SECTION 7. WITHHOLDING TAX. The Company shall be entitled to require as
a condition of delivery of any Directors Shares that the Participant remit an
amount sufficient to satisfy all federal, state, local and other governmental
withholding tax requirements related thereto (if any).
SECTION 8. PLAN AMENDMENTS AND TERMINATION. The Board may suspend or
terminate the Plan at any time and may amend it at any time and from time to
time, in whole or in part, provided, that any amendment for which stockholder
approval is required by law shall not be effective until such approval has been
obtained. Unless terminated earlier, the Plan will terminate on the tenth
anniversary of the Effective Date and no additional awards may be granted under
the Plan after such tenth anniversary.
SECTION 9. MISCELLANEOUS.
9.1. Listing, Registration and Legal Compliance. If the Board shall at
any time determine that any Consent (as hereinafter defined) is necessary or
desirable as a condition of, or in connection with, the granting of any award
under the Plan, the
4
<PAGE> 7
issuance or purchase of Directors Shares or other rights hereunder or the taking
of any other action hereunder (each such action being hereinafter referred to as
a "Plan Action"), then such Plan Action shall not be taken, in whole or in part,
unless and until such Consent shall have been effected or obtained to the full
satisfaction of the Board. The term "Consent" as used herein with respect to any
Plan Action means (i) the listings, registrations or qualifications in respect
thereof upon any securities exchange or under any federal, state or local law,
rule or regulation, (ii) any and all consents, clearances and approvals in
respect of a Plan Action by any governmental or other regulatory bodies, or
(iii) any and all written agreements and representations by the recipient of an
award with respect to the disposition of Directors Shares or with respect to any
other matter, which the Board shall deem necessary or desirable to comply with
the terms of any such listing, registration or qualification or to obtain an
exemption from the requirement that any such listing, qualification or
registration be made.
9.2. Right of Discharge Reserved. Nothing in the Plan shall confer upon
any Participant the right to serve as a director of the Company or affect any
right that the Company or any Participant may have to terminate the service of
such Participant.
SECTION 10. GOVERNING LAW. The Plan shall be governed by the laws of
the State of Delaware without reference to principles of conflicts of laws.
SECTION 11. NOTICES. All notices and other communications hereunder
shall be given in writing, shall be personally delivered against receipt or sent
by registered or certified mail, return receipt requested, shall be deemed given
on the date of delivery or
5
<PAGE> 8
of mailing, and if mailed, shall be addressed (a) to the Company, at its
principal corporate headquarters, Attention: General Counsel, with a copy to the
attention of the Secretary of the Company at the same address and (b) to a
Participant, at the Participant's principal residential address last furnished
to the Company. Either party may, by notice, change the address to which notice
to such party is to be given.
SECTION 12. SECTION HEADINGS. The Section headings contained herein are
for the purpose of convenience only and are not intended to define or limit the
contents of said Sections.
SECTION 13. EFFECTIVE DATE. The effective date of the Plan (the
"Effective Date") shall be May 13, 1997.
6
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