<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. . . . . . . . March 31, 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 May 3, 1999:
25,981,753.
<PAGE> 2
Part I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
Assets (Unaudited)
Investments:
<S> <C> <C>
Invested cash $ 209,398 $ 370,155
Fixed maturity securities:
Held to maturity, at cost (fair value $181,205 and $183,469) 169,238 170,150
Available for sale at fair value (cost $2,292,126
and $2,224,244) 2,340,668 2,306,619
Equity securities, at fair value:
Available for sale (cost $61,221 and $59,890) 66,173 65,869
Trading account (cost $330,140 and $373,164) 333,313 389,310
Cash 24,940 16,123
Premiums and fees receivable 421,005 377,501
Due from reinsurers 512,932 513,297
Accrued investment income 34,915 37,842
Prepaid reinsurance premiums 85,271 79,530
Deferred policy acquisition costs 180,541 168,894
Real estate, furniture & equipment at cost, less accumulated depreciation 133,242 136,884
Excess of cost over net assets acquired 78,954 76,645
Trading account receivable from broker and clearing organizations 201,074 229,520
Deferred Federal income taxes 12,714 --
Other assets 40,070 45,092
----------- -----------
$ 4,844,448 $ 4,983,431
=========== ===========
Liabilities, Reserves, Debt and Stockholders' Equity
Liabilities and reserves:
Reserves for losses and loss expenses $ 2,156,956 $ 2,126,566
Unearned premiums 708,647 664,297
Due to reinsurers 147,505 131,081
Deferred Federal income taxes -- 6,877
Short-term debt 75,000 55,500
Trading securities sold but not yet purchased at market value
(proceeds $204,707 and $283,310) 204,150 298,165
Other liabilities 196,576 213,453
----------- -----------
3,488,834 3,495,939
----------- -----------
Long-term debt 394,531 394,444
----------- -----------
Company-obligated mandatorily redeemable capital securities of a
subsidiary trust holding solely 8.197% junior subordinated debentures
of the Corporation due December 15, 2045 207,999 207,988
Minority interest 29,776 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, 25,981,753 and 26,504,404 shares 7,281 7,281
Additional paid-in capital 331,632 429,611
Retained earnings 597,224 601,908
Accumulated other comprehensive income 32,454 54,672
Treasury stock, at cost, 10,422,314 and
9,899,663 shares (245,283) (232,256)
----------- -----------
723,308 861,281
----------- -----------
$ 4,844,448 $ 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
Ended March 31,
Revenues: 1999 1998
--------- ---------
<S> <C> <C>
Net premiums written $ 380,584 $ 333,832
Change in unearned premiums (38,612) (31,199)
--------- ---------
Premiums earned 341,972 302,633
Net investment income 45,994 56,394
Management fees and commissions 18,396 18,588
Realized gains on investments 728 3,417
Other income 623 2,243
--------- ---------
Total revenues 407,713 383,275
Operating costs and expenses:
Losses and loss expenses (242,839) (205,202)
Other operating costs and expenses (144,225) (133,180)
Interest expense (12,805) (12,173)
Restructuring charge (11,505) --
--------- ---------
Income (loss) before income taxes and
minority interest (3,661) 32,720
Federal income tax benefit (expense) 5,173 (7,197)
--------- ---------
Income before minority interest 1,512 25,523
Minority interest 960 150
--------- ---------
Net income before preferred dividends 2,472 25,673
Preferred dividends (497) (1,887)
--------- ---------
Net income before change in accounting principle and
extraordinary loss 1,975 23,786
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 $1,311) -- (2,435)
--------- ---------
Net income (loss) attributable to common stockholders $ (1,275) $ 21,351
========= =========
Earnings per share:
Basic
Net income before change in accounting principle and
extraordinary loss $ .07 $ .80
Cumulative effect of change in accounting principle (.12) --
Extraordinary loss -- (.08)
--------- ---------
Net income (loss) attributable to common stockholders $ (.05) $ .72
========= =========
Diluted
Net income before change in accounting principle and
extraordinary loss $ .07 $ .77
Cumulative effect of change in accounting principle (.12) --
Extraordinary loss -- (.08)
--------- ---------
Net income (loss) attributable to common stockholders $ (.05) $ .69
========= =========
Average shares outstanding
Basic 26,325 29,585
========= =========
Diluted 26,503 30,755
========= =========
</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 Three Months
Ended March 31,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) before preferred dividends change in
accounting principle and extraordinary loss $ (778) $ 25,673
Adjustments to reconcile net income to cash
flows from operating activities:
Minority interest (960) (150)
Increase in reserves for losses
and loss expenses, net 47,179 38,672
Depreciation and amortization 5,910 3,669
Change in unearned premiums and
prepaid reinsurance premiums 38,609 30,934
Increase in premiums and fees receivable (43,504) (40,956)
Change in Federal income taxes (6,852) 5,971
Change in deferred acquisition cost (11,647) (8,805)
Realized gains on investments (728) (3,417)
Other (7,489) (26,250)
--------- ---------
Net cash flows from operating activities
before trading account sales 19,740 25,341
Net trading account activities 2,035 (28,212)
--------- ---------
Net cash flows from (used in) operating activities 21,775 (2,871)
--------- ---------
Cash flows from investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 128,550 205,985
Equity securities -- 648
Proceeds from maturities and prepayments of
fixed maturity securities 44,564 49,452
Cost of purchases, excluding trading account:
Fixed maturity securities available for sale (238,123) (241,578)
Equity securities (3,389) (2,706)
Change in balances due to/from security brokers (8,717) (25,906)
Net additions to real estate, furniture and equipment (224) (10,165)
Other (6,878) --
--------- ---------
Net cash flows used in investing activities (84,217) (24,270)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of short-term debt 19,500 20,164
Repurchase of preferred stock (98,093) --
Purchase of common treasury shares (13,177) --
Cash dividends to common stockholders (3,180) (3,251)
Cash dividends to preferred stockholders (2,001) (1,809)
Repayment of long-term debt -- (18,408)
Other 7,453 (2,237)
--------- ---------
Net cash flows used in financing activities (89,498) (5,541)
--------- ---------
Net decrease in cash and invested cash (151,940) (32,682)
Cash and invested cash at beginning of year 386,278 280,847
--------- ---------
Cash and invested cash at end of period $ 234,338 $ 248,165
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 6,454 $ 7,475
========= =========
Federal income taxes paid, net $ -- $ 1,175
========= =========
</TABLE>
3
<PAGE> 5
W. R. Berkley Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 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
Ended March 31,
1999 1998
------- -------
<S> <C> <C>
Ceded premiums written $73,483 $65,382
======= =======
Ceded premiums earned $68,923 $61,905
======= =======
Ceded losses and loss expenses $43,576 $25,169
======= =======
</TABLE>
3. COMPREHENSIVE INCOME
The differences between comprehensive income and net income are
unrealized foreign exchange gains (losses) as well as unrealized gains (losses)
on securities. The following is a reconciliation of comprehensive income
(amounts in thousands):
<TABLE>
<CAPTION>
For the three months
Ended March 31,
1999 1998
-------- --------
<S> <C> <C>
Net income (loss) $ (1,275) $ 21,351
Other comprehensive income:
Change in unrealized foreign exchange gains (losses) 709 (996)
Unrealized holding gains(losses)on investment securities
Arising during the period (23,400) (3,642)
Less: Reclassification adjustment for gains included
in net income, net of tax 473 2,221
-------- --------
Net change in unrealized gains during the period (22,927) (1,421)
Other comprehensive income (loss) (22,218) (2,417)
-------- --------
Comprehensive income (loss) $(23,493) $ 18,934
======== ========
</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 three months ended March 31, 1999 and 1998, the joint
venture wrote life insurance premiums of $4.0 million and $1.0 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
(LOSS)
REVENUES BEFORE INCOME TAX
----------------------------------------
INVESTMENT UNAFFILIATED INTER- INCOME (EXPENSE)
(DOLLARS IN THOUSANDS) INCOME CUSTOMERS SEGMENT TOTAL TAXES BENEFITS
- ---------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
For the three months ended
March 31, 1999:
Regional $ 13,068 $ 178,379 $ 295 $ 178,674 $ (6,455) $ 1,582
Reinsurance 11,236 78,387 161 78,548 2,438 (81)
Specialty 11,671 74,110 (1,724) 72,386 10,936 (3,419)
Alternative Markets 8,877 53,802 109 53,911 5,896 (1,475)
International 1,353 21,064 -- 21,064 (1,435) (516)
Corporate and other 503 1,971 4,058 6,029 (16,674) 5,173
Adjustments and
eliminations (714) -- (2,899) (2,899) 1,633 3,909
- ---------------------------------- --------- --------- --------- --------- --------- ---------
Consolidated $ 45,994 $ 407,713 $ -- $ 407,713 $ (3,661) $ 5,173
- ---------------------------------- --------- --------- --------- --------- --------- ---------
For the three months ended
March 31, 1998:
Regional $ 15,258 $ 168,142 $ 4,850 $ 172,992 $ 6,334 $ (1,983)
Reinsurance 12,838 68,545 225 68,770 12,272 (3,257)
Specialty 16,017 73,950 (3,005) 70,945 20,990 (5,972)
Alternative Markets 9,622 50,461 (734) 49,727 9,391 (2,402)
International 1,975 19,335 -- 19,335 (1,086) (51)
Corporate and other 2,021 2,842 4,212 7,054 (14,117) (7,197)
Adjustments and
eliminations (1,337) -- (5,548) (5,548) (1,064) 13,665
- ---------------------------------- --------- --------- --------- --------- --------- ---------
Consolidated $ 56,394 $ 383,275 $ -- $ 383,275 $ 32,720 $ (7,197)
- ---------------------------------- --------- --------- --------- --------- --------- ---------
</TABLE>
5
<PAGE> 7
Interest expense for the reinsurance and alternative market segments were
$703,000 and $582,000 for the three months ended March 31, 1999 and 1998,
respectively. Additionally, corporate interest expense (net of intercompany
amounts) was $12,102,000 and $11,591,000 for the corresponding periods.
Identifiable assets by segment are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------------------------------------------
<S> <C> <C>
Regional $ 1,394,761 $ 1,370,849
Reinsurance 995,017 996,186
Specialty 1,487,140 1,502,366
Alternative Markets 878,614 863,578
International 160,452 151,832
Corporate and other 1,465,433 1,545,744
Elimination (1,536,969) (1,447,124)
- --------------------------------------------------------------------------------
Consolidated $ 4,844,448 $ 4,983,431
================================================================================
</TABLE>
5. RESTRUCTURING CHARGE
In the first quarter of 1999, the Company implemented a restructuring
plan. 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. Under the plan the Company expects to reduce its workforce
by approximately 386 employees. The Company recognized $11,505,000 in expense in
its statement of operations to reflect charges related to the plan. These
charges consisted 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,
with certain payments made until 2004.
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
6
<PAGE> 8
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 $1.3 million ($.05 diluted per share) for the first
quarter of 1999, in comparison with net income of $21.4 million ($.69 diluted
per share) for the 1998 period. Operating income, which is defined as net income
before realized investment gains, change in accounting principle, and
extraordinary loss on early extinguishment of long-term debt, was $1.5 million
($.05 diluted per share) in the first quarter of 1999 in comparison with $21.6
million ($.70 diluted per share) earned in the corresponding 1998 quarter.
Adjusting for the restructuring charge operating income was $8.8 million ($.33
diluted per share) in the first quarter of 1999. The decline in earnings was
primarily due to the effects of competition on rate adequacy and lower
investment earnings.
First quarter 1999 results include an after-tax restructuring charge of
$7.3 million, or 28 cents 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. The Company will incur
additional costs in connection with the restructuring in an amount expected to
be approximately $3.3, on an after-tax basis, over the next 24 months.
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.
Net premiums written during the first quarter of 1999 increased by 14%
to $380.6 million from $333.8 million written in the comparable 1998 period. Net
premiums written by the regional segment increased by $11.8 million or 8% mainly
due to geographic expansion. Specialty net premiums written increased by $8.6
million or 14% due to growth in all the specialty units except for Carolina
Casualty Insurance Company. Net premiums written by the reinsurance operations
increased by $17.3 million or 28% primarily due to an increase in treaty volume.
Alternative markets net premiums written increased $7.5 million or 20% 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
$1.6 million or 10%, primarily due to growth in the Philippines.
For the three months ended March 31, 1999, pre-tax investment income
decreased by 18% to $46.0 million. Investment income declined for several
reasons, including a lower yield earned on the Company's merger arbitrage
investment (from 15.9% annualized to 8.2% annualized); an increase in the
portion of the portfolio invested in municipal securities (from 38% at March 31,
1998 to 44% at March 31, 1999); the repurchase of common shares in both 1998 and
1999; and the January 1999 repurchase of all outstanding preferred shares, using
funds previously escrowed for this purpose. (See "Liquidity and Capital
Resources)".
Management fees and commission income ("Management fees") consist
primarily of revenues earned by the alternative markets segment. During the
first quarter of 1999, management fees decreased 1% from the comparable 1998
amount, principally due to a decline in fees earned by Key Risk Service Company
(see the discussion above regarding net premiums written).
Realized gains decreased to $728,000 from $3.4 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
7
<PAGE> 9
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 105.1% for the quarter ended March 31, 1999 from 102.0%
in the comparable 1998 period due to an increase in the consolidated loss ratio.
The consolidated loss ratio (losses and loss expenses incurred expressed as a
percentage of premiums earned) increased to 70.9% in 1999 from 67.7% in 1998 due
to an increase in current year loss ratios at the reinsurance and regional
units. The increase in the reinsurance loss ratio is primarily due to the
recording of higher reported expected loss ratio's resulting from the effects of
competition on rate adequacy, and losses incurred as a result of the earthquake
in Columbia. The increase in the regional loss ratio is primarily due to the
continued severity of competitive pressures. These factors were somewhat offset
for the first quarter of both 1999 and 1998 by favorable loss development on
business written in prior years. Catastrophe losses, including those related to
the earthquake in Columbia in January 1999 incurred by our reinsurance
operations, were $6.8 million for the first quarter of 1999, compared with $9.2
million for the same period last year.
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 $144.2 million.
The increase in other operating costs and expenses is primarily due to
substantial 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) decreased slightly to 33.8% from
34.0% as a result of certain improvements in reinsurance terms.
The Federal income tax benefit in 1999 was $5.2 million as compared to
a $7.2 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").
Liquidity and Capital Resources
Cash flow from operating activities before trading account activities
was $19.7 million in the first quarter of 1999 compared with $25.3 million for
the same period in 1998. The investment portfolio, excluding trading account
securities, on a cost basis, decreased by $92.5 million to $2,732.0 million at
March 31, 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.
The Company's investments are currently comprised of fixed income
securities and trading securities. At March 31, 1999, as compared to December
31, 1998 the portfolio mix of the fixed income securities was as follows:
tax-exempt securities were 44% (42% in 1998); U.S. Government securities and
cash equivalents were 19% (23% in 1998); mortgage-backed securities were 19%
(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 $330.2 million as of
March 31, 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 March 31, 1999 and December 31, 1998, respectively.
On January 25, 1999, the Company repurchased all outstanding preferred
shares for $98.1 million using funds previously escrowed for this purpose.
During 1999 the Company also purchased 530,000 shares of its common stock for
$13.2 million. The Company drew down the remaining $19.5 million of its
line-of-credit in the first quarter.
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<PAGE> 10
For the first quarter of 1999, Stockholders' equity decreased by
approximately $138.0 million primarily due to the repurchase of preferred and
common stock, and a decrease in accumulated other comprehensive income.
Accordingly, the Company's total capitalization decreased to $1,325.8 million at
March 31, 1999 and the percentage of the Company's capital attributable to
Long-term debt increased to 30% 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 the majority of the systems have
been tested and determined by the Company to be Year 2000 compliant. The project
of Year 2000 readiness is broken down into the following phases: (1)
inventorying Year 2000 items, (2) prioritizing the identified items, (3)
evaluating Year 2000 compliance and alternative solutions for items determined
to be material to the Company, (4) replacing or repairing material items that
are determined not to be Year 2000 compliant and (5) testing and changing items
which are material. The process, which began in 1996, is substantially complete,
and the Company believes that all critical primary systems have been tested and
are substantially functional. This includes both operational and financial
systems upon which the Company is dependent. As to embedded chips, the Company
believes that it is substantially compliant with respect to those chips which
are integral to its operating systems. Compliance with respect to the remainder
of the Company's embedded chips is expected to be achieved by the third quarter
of 1999. Additionally, the Company continues to communicate with third parties
with which it has a material relationship, e.g. independent insurance agents and
financial institutions, to identify Year 2000 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;
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 March 31, 1999, the Company has incurred approximately
$6.2 million of costs which have been expensed as incurred, and estimates an
additional $1.5 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 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.
The Company has not implemented a formal contingency plan with respect
to Year 2000 compliance issues; however, the Company and its various operating
units are considering the necessity for and feasibility of contingency
alternatives.
The Year 2000 issue is also a concern from an underwriting standpoint
to the extent of possible liability for coverage under general liability,
property, directors and officers liability and other policies. Through March 31,
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
9
<PAGE> 11
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 March 31, 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 December 31, 1998.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On January 20, 1999 the Company filed a Current Report on Form
8-K with respect to a press release relating to the restructuring of the
Company's regional insurance group (under Item 5 of Form 8-K).
10
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
W. R. BERKLEY CORPORATION
Date: May 11, 1999 /s/ WILLIAM R. BERKLEY
------------------------------
William R. Berkley
Chairman of the Board and
Chief Executive Officer
Date: May 11, 1999 /s/ ANTHONY J. DEL TUFO
------------------------------
Anthony J. Del Tufo
Senior Vice President,
Chief Financial Officer
and Treasurer
11
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