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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] 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
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W.R. BERKLEY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 22-1867895
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
165 MASON STREET, P.O. BOX 2518, GREENWICH, CT 06836-2518
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 629-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.20 per share
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market of voting stock held by non-affiliates of the registrant
based on the closing price of such stock on the Nasdaq National Market as of
March 3, 2000: $327,382,427.
Number of shares of common stock, $.20 par value, outstanding as of March
3, 2000: 25,616,578.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 1999 Annual Report to Stockholders for the year
ended December 31, 1999 are incorporated herein by reference in Part II, and
portions of the registrant's definitive proxy statement, which will be filed
with the Securities and Exchange Commission within 120 days after December 31,
1999, are incorporated herein by reference in Part III.
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W. R. BERKLEY CORPORATION
ANNUAL REPORT ON FORM 10-K
December 31, 1999
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Page
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SAFE HARBOR STATEMENT 3
PART I
ITEM 1. BUSINESS 4
ITEM 2. PROPERTIES 22
ITEM 3. LEGAL PROCEEDINGS 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 23
ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS
ENDED DECEMBER 31, 1999 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 25
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 26
ITEM 11. EXECUTIVE COMPENSATION 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 29
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2
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SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K may contain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Any
forward-looking statements contained herein, including those related to the
Company's performance for the year 2000, are based upon the Company's historical
performance and on current plans, estimates and expectations. They are subject
to various risks and uncertainties, including but not limited to, the impact of
competition, product demand and pricing, claims development, catastrophe and
storm losses, investment results, legislative and regulatory developments and
other risks detailed from time to time in the Company's filings with the
Securities and Exchange Commission. These risks could cause the Company's actual
results for the 2000 fiscal year and beyond to differ materially from those
expressed in any forward-looking statement made by or on behalf of the Company.
Forward-looking statements speak only as of the date on which they are made, and
the Company undertakes no obligation to update publicly or revise any
forward-looking statement, whether as a result of new information, future
developments or otherwise.
3
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PART I
ITEM 1. BUSINESS
General Description of the Company's Business
W. R. Berkley Corporation (the "Company"), a Delaware corporation, is
an insurance holding company which, through its subsidiaries, presently operates
in all segments of the property casualty insurance business: regional property
casualty insurance; reinsurance; specialty lines of insurance (including excess
and surplus lines and commercial transportation); alternative markets (including
the management of alternative insurance market mechanisms); and international.
The Company was founded on the concept that a group of autonomous regional and
specialty insurance entities could compete effectively in selected markets
within a very large industry. Decentralized control allows each subsidiary or
regional group to respond to local or specialty market conditions while
capitalizing on the effectiveness of centralized investment and reinsurance
management and actuarial, financial and legal staff support.
The Company's regional insurance operations are conducted primarily in
the New England, Mid Atlantic, Midwest and Southern regions of the United
States. Reinsurance, specialty insurance and alternative markets operations are
conducted nationwide. Presently, international operations are conducted
primarily in Argentina and the Philippines.
Net premiums written, as reported on a generally accepted accounting
principles ("GAAP") basis, by the Company's five major insurance industry
segments for the five years ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Net premiums written:
Regional insurance operations $ 649,849 $ 641,316 $ 618,768 $ 517,515 $ 460,732
Reinsurance operations 309,181 269,634 206,652 218,200 196,299
Specialty insurance operations 260,380 254,003 219,272 214,738 171,520
Alternative markets operations 122,137 106,195 90,870 76,876 25,998
International operations 86,172 75,106 42,079 25,182 5,872
------------ ------------ ------------ ------------ ----------
Total $ 1,427,719 $ 1,346,254 $ 1,177,641 $ 1,052,511 $ 860,421
============ ============ ============ ============ ==========
Percentage of net premiums written:
Regional insurance operations 45.5% 47.6% 52.6% 49.2% 53.6%
Reinsurance operations 21.7 20.0 17.5 20.7 22.8
Specialty insurance operations 18.2 18.9 18.6 20.4 19.9
Alternative markets operations 8.6 7.9 7.7 7.3 3.0
International operations 6.0 5.6 3.6 2.4 .7
------------ ------------ ------------ ------------ ----------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
============ ============ ============ ============ ==========
</TABLE>
4
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The following sections briefly describe the Company's insurance
segments and subsidiaries. The statutory information contained herein is derived
from that reported to state regulatory authorities in accordance with statutory
accounting practices ("SAP"). The descriptions contain each significant
insurance subsidiary's rating by A.M. Best and Company, Inc. ("A.M. Best"). A.M.
Best's ratings are based upon factors of concern to policyholders, insurance
agents and brokers and are not directed toward the protection of investors. A.M.
Best states: "Best's Ratings reflect [its] opinion as to the relative financial
strength and performance of each insurer in comparison with others, based on
[its] analysis of the information provided to [it]. These ratings are not a
warranty of an insurer's current or future ability to meet its contractual
obligations." A.M. Best reviews its ratings on a periodic basis, and ratings of
the Company's subsidiaries are therefore subject to change.
REGIONAL INSURANCE OPERATIONS
The Company's regional property casualty subsidiaries write standard commercial
and personal lines insurance for such risks as automobiles, homes and
businesses. The Company's regional insurance operations have historically been
conducted through ten principal operating subsidiaries. In 1999, the Company
restructured the management and back-office operations of these ten companies
into four geographic units based on markets served. As part of the
restructuring, certain back office functions and operating redundancies were
minimized or eliminated.
The regional groups, and the primary regional company for each group,
are as follows:
- New England - Acadia Insurance Company
- Mid Atlantic - Firemen's Insurance Company of Washington, D.C.
- Midwest - Continental Western Insurance Company
- Southern Tier - Union Standard Insurance Company
Berkley Regional Insurance Company ("BRIC"), an intermediate holding
company, owns all of the capital stock of the regional insurance companies and
reinsures varying portions of the business written by the regional operations.
BRIC is currently rated A by A.M. Best. This is a group rating which applies
to each of the regional insurance companies and certain other subsidiaries as
noted herein.
NEW ENGLAND REGIONAL INSURANCE GROUP
Acadia Insurance Company ("Acadia") writes multiple line property and
casualty coverages principally in the States of Maine, New Hampshire, Vermont
and Massachusetts and sells its personal and commercial coverages through
independent agencies. Acadia's net premiums written for the year ended December
31, 1999 were $133,168,000. Acadia utilizes its subsidiary, Cadillac Mountain
Insurance Company, as a companion writer.
MID ATLANTIC REGIONAL INSURANCE GROUP
The Mid Atlantic regional insurance group consists of Firemen's
Insurance Company of Washington, D.C. ("Firemen's), Berkley Insurance Company of
the Carolinas ("BICC"), Chesapeake Bay Property and Casualty Insurance Company
("Chesapeake") and The Presque Isle Insurance Division of Firemen's. Firemen's
is the lead company in the Mid Atlantic group and manages the affairs of the
group from its headquarters in Richmond, Virginia. Firemen's, Chesapeake and
BICC sell their policies primarily through agents in the District of Columbia
and the States of Maryland, North Carolina, Pennsylvania and Virginia.
Firemen's Insurance Company of Washington, D.C. writes homeowners,
other personal lines and commercial risks in the District of Columbia and in the
States of Maryland, North Carolina and Virginia. In March 1995, Firemen's
established The Presque Isle Insurance Division in order to expand its
operations into the Commonwealth of Pennsylvania. Firemen's net premiums written
for the year ended December 31, 1999 were $60,231,000.
5
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Berkley Insurance Company of the Carolinas writes personal and
commercial lines in North Carolina and is expanding to surrounding states. Its
net premiums written for the year ended December 31, 1999 were $33,805,000.
Chesapeake Bay Property and Casualty Insurance Company writes personal
and commercial lines in the State of Virginia. Chesapeake's net premiums written
for the year ended December 31, 1999 were $28,573,000.
MIDWEST REGIONAL INSURANCE GROUP
The Midwest regional insurance group consists of Continental Western
Insurance Company ("Continental Western"), American West Insurance Company
("American West"), Tri-State Insurance Company of Minnesota ("Tri-State") and
Union Insurance Company ("Union"). Continental Western is the lead company in
the group and manages group affairs from its office in Urbandale, Iowa.
Continental Western, Tri-State and Union obtain their business primarily in the
smaller communities of the Midwest through independent insurance agencies, which
represent them on a non-exclusive basis and are compensated on a commission
basis. The following are brief descriptions of the companies in the Midwest
regional group:
Continental Western Insurance Company writes a diverse commercial lines
book of business as well as personal lines principally in the States of Iowa,
Nebraska, Kansas, Illinois, Missouri, Wisconsin and Montana. Continental
Western's net premiums written for the year ended December 31, 1999 were
$167,395,000.
American West Insurance Company's business consists primarily of
personal lines in the States of Minnesota, Montana, Wisconsin and South Dakota.
American West's net premiums written for the year ended December 31, 1999 were
$8,871,000.
Tri-State Insurance Company of Minnesota writes commercial lines
(specializing in grain elevator coverages), as well as personal lines, primarily
in the States of Minnesota, Iowa, North and South Dakota, Nebraska, Wisconsin
and Illinois. Tri-State's net premiums written for the year ended December 31,
1999 were $52,782,000.
Union Insurance Company's business consists of personal lines as well
as commercial lines insurance concentrated in the States of Nebraska, Kansas,
Colorado and South Dakota. Union's net premiums written for the year ended
December 31, 1999 were $56,468,000.
SOUTHERN TIER REGIONAL INSURANCE GROUP
The Southern Tier regional insurance group consists of Union Standard
Insurance Company ("Union Standard") and Great River Insurance Company ("Great
River"). Union Standard is the lead company in the group and manages group
affairs from its office in Irving, Texas. Union Standard and Great River obtain
their business primarily in the smaller communities of the Southwest through
independent insurance agencies, which represent them on a non-exclusive basis
and are compensated on a commission basis. The following are brief descriptions
of the companies in the Southern Tier regional group:
Union Standard Insurance Company writes personal lines and commercial
lines of insurance for small businesses in the States of Texas, Oklahoma,
Arkansas, Colorado and Arizona. Union Standard's net premiums written for the
year ended December 31, 1999 were $69,715,000.
Great River Insurance Company writes personal and commercial lines in
Mississippi, Tennessee, Alabama and Louisiana and is expanding to surrounding
states. Great River's net premiums written for the year ended December 31, 1999
were $38,841,000.
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Regional Operations: Business
The following table sets forth the percentages of direct premiums
written, by line, by the Company's regional insurance operations:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial Multi-Peril 21.9% 20.7% 20.5% 20.8% 21.5%
Workers' Compensation 17.8 18.6 19.3 20.1 20.8
Automobile:
Personal 14.3 14.8 15.2 16.4 17.4
Commercial 21.7 20.8 19.6 17.4 15.6
General Liability 7.0 6.9 6.8 6.5 6.1
Homeowners 5.8 6.3 7.1 7.9 8.7
Fire and Allied Lines 4.5 4.7 5.0 4.7 4.6
Inland Marine 3.6 3.4 2.0 2.8 2.6
Other 3.4 3.8 4.5 3.4 2.7
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
The following table sets forth the percentages of direct premiums
written, by state, by the Company's regional insurance operations:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Maine 8.2% 9.4% 10.2% 10.8% 10.8%
Iowa 7.2 7.5 7.7 8.4 9.4
Nebraska 7.1 7.0 7.5 8.2 9.1
Texas 6.3 6.3 6.8 7.5 8.0
New Hampshire 6.0 5.8 5.8 6.0 6.0
Pennsylvania 5.4 5.0 4.8 2.2 --
Minnesota 5.0 5.4 5.3 5.4 5.6
North Carolina 4.8 4.8 4.2 1.5 0.1
Kansas 4.3 4.5 4.6 4.8 4.9
Mississippi 3.9 5.0 5.7 6.1 5.5
Virginia 3.7 4.1 4.2 3.7 2.9
Colorado 3.7 3.5 3.5 3.8 4.1
Massachusetts 3.6 2.2 0.2 0.1 --
Missouri 3.5 3.4 3.6 3.6 3.8
South Dakota 3.5 3.7 4.2 5.4 6.8
Vermont 3.0 3.0 3.2 3.1 2.4
Wisconsin 2.5 2.5 2.6 2.9 3.6
Illinois 2.4 2.6 2.8 3.1 3.5
Arkansas 1.7 1.7 1.8 1.8 2.1
Tennessee 1.6 1.3 1.0 0.4 --
South Carolina 1.4 1.5 1.0 --
Oklahoma 1.3 1.3 1.3 1.3 1.4
Idaho 1.2 1.4 1.1 0.6 0.2
Montana 1.1 1.2 1.3 1.4 1.4
North Dakota 0.9 1.0 1.2 1.6 2.6
Ohio 0.8 0.6 0.5 0.5 0.1
Arizona 0.7 -- -- -- --
Maryland 0.7 0.6 0.7 0.7 0.7
Oregon 0.7 0.6 0.6 0.5 0.3
Other 3.8 3.1 2.6 4.6 4.7
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
7
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REINSURANCE OPERATIONS
The Company's reinsurance operations consist of six operating units,
which specialize in underwriting property, casualty and surety reinsurance on
both a treaty and a facultative basis. The Company's reinsurance operations are
conducted by Signet Star Holdings, Inc. through its subsidiary Signet Star
Reinsurance Company ("Signet Star"). For financial segment reporting purposes,
the results of the alternative market division of Signet Star are included in
the Company's alternative markets segment. Signet Star is rated A by A.M. Best.
The Property Casualty Treaty Division is the largest business unit in
terms of personnel and premiums written. This division of Signet Star is
committed exclusively to the broker market segment of the treaty reinsurance
industry. It functions as a traditional reinsurer in specialty and standard
reinsurance lines. This unit is de-emphasizing commodity lines of business,
which are experiencing intense competition brought on, in part, by excess
capacity.
Facultative ReSources, Inc. ("Fac Re"), an underwriting manager,
specializes in individual certificate and program facultative business. Fac Re's
highly experienced underwriters seek to offset the underwriting and pricing
cycles in the underlying insurance business by developing risk management
solutions and through superior risk selection. Fac Re develops its business
through brokers and on a direct basis where the client does not choose to use an
intermediary.
The Fidelity and Surety Division ("F&S") operates as a lead reinsurer
in a niche market of the property casualty industry where its highly specialized
knowledge and expertise are essential to meet the needs of fidelity and surety
primary writers. Business is marketed principally through brokers as well as
directly to clients not served by intermediaries.
Gemini Insurance Company is an excess and surplus line insurance
company which commenced business in 1997 to provide Signet Star with primary
issuing carrier capability and thereby generate "reverse flow" business. Under
the reverse flow concept, a reinsurer writes primary business through a
subsidiary or affiliated carrier that is then ceded back to the reinsurer. It
operates as an authorized insurance company in the State of Delaware and will
operate nationwide, as necessary legal and regulatory requirements are met, as
an approved excess and surplus line carrier. Gemini is rated A by A.M. Best.
StarNet Insurance Company ("StarNet") was acquired by Signet Star in
1998 to write reverse flow business on an admitted basis. Signet Star will seek
to license StarNet broadly to serve as an adjunct to Gemini to write primary
business on an admitted basis nationwide. StarNet is rated A by A.M. Best.
The Latin American and Caribbean Division was established in 1996 to
write business exclusively in Latin America and the Caribbean. In January 2000,
Signet Star decided to withdraw from this market place, with no new business
being written after February 1, 2000. The Division's net premiums written for
the year ended December 31, 1999 were $21,088,000.
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Reinsurance Operations: Business
The following table sets forth the percentages of gross premiums
written, by line, by the Company's reinsurance operations:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Treaty:
Casualty and other 46.0% 39.7% 38.7% 45.1% 46.6%
Property and related lines 15.1 19.1 16.1 23.3 26.8
Professional and specialty 10.1 8.4 5.5 4.7 4.8
---- ---- ---- ---- ----
Total Treaty 71.2 67.2 60.3 73.1 78.2
Facultative: 14.9 14.8 15.4 11.7 14.2
Fidelity and Surety 7.7 6.8 10.5 9.5 7.6
Latin American and Caribbean 6.2 11.2 13.8 5.7 --
----- ---- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
The following table sets forth the percentage of gross premiums
written, by property versus casualty business, by the Company's reinsurance
operations:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Property 20.6% 31.4% 32.7 35.2% 33.4%
Casualty 79.4% 68.6% 67.3 64.8 66.6
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
====== ===== ===== ===== =====
</TABLE>
SPECIALTY INSURANCE OPERATIONS
The Company's specialty lines of insurance consist primarily of excess
and surplus lines ("E & S"), commercial transportation, professional liability,
directors and officers liability and surety.
Admiral Insurance Company ("Admiral") specializes in E & S general
liability coverages, including products liability and professional liability.
Admiral insures risks requiring specialized treatment not available in the
conventional market, with coverage designed to meet the specific needs of the
insured. Business is received from wholesale brokers via retail agents, whose
clients are the insureds. E & S carriers operate on a non-admitted basis in the
states where they write business. They are generally free from rate regulation
and policy form requirements. Admiral's business is obtained on a nationwide
basis from approximately 190 non-exclusive brokers, who are compensated on a
commission basis. Admiral also writes directors and officers liability insurance
through operations conducted by Monitor Liability Managers, Inc., an
underwriting manager established by the Company. Admiral is rated A++ by A.M.
Best. Admiral's net premiums written for the year ended December 31, 1999 were
$103,738,000.
In 1999, Admiral purchased FICO Insurance Company from Firemen's and
changed its name to Admiral Indemnity Insurance Company ("Admiral Indemnity").
As an admitted company, Admiral Indemnity will compete for certain risks that
might be subject to the commercial lines deregulation enactments (see
"Regulation") as well as other risks which prefer an admitted carrier. Admiral
Indemnity will also continue to write commercial business consisting primarily
of multiple dwelling and restaurant coverages principally in the State of New
York through operations conducted by Clermont Specialty Managers, Ltd., an
underwriting manager which is owned by the Company. Admiral Indemnity is rated A
by A.M. Best (BRIC group rating). Admiral Indemnity's net premiums written for
the year ended December 31, 1999 were $13,320,000.
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Carolina Casualty Insurance Company ("Carolina") writes liability,
physical damage and cargo insurance for the transportation industry,
concentrating on long-haul trucking companies. Public transportation insurance
for such risks as charter buses and school buses also makes up a substantial
part of Carolina's book of business. Carolina's business is obtained nationwide
from approximately 120 agents and brokers who are compensated on a commission
basis. Carolina also writes surety bonds through operations conducted by Monitor
Surety Managers, Inc., an underwriting manager established by the Company. In
December 1998, Carolina began writing directors and officers liability insurance
through operations conducted by Monitor Liability Managers, Inc., an
underwriting manager established by the Company. Carolina is rated A by A.M.
Best. Carolina's net premiums written for the year ended December 31, 1999 were
$82,673,000.
Nautilus Insurance Company ("Nautilus") insures E & S risks which
involve a lower degree of expected severity than those covered by Admiral.
Nautilus obtains its business nationwide from approximately 135 non-exclusive
general agents, some of which also provide business to Admiral. A substantial
portion of Nautilus' business is written on a binding authority basis, subject
to certain contractual limitations. Nautilus is rated A by A.M. Best. Nautilus'
net premiums written for the year ended December 31, 1999 were $60,649,000.
Great Divide Insurance Company ("Great Divide"), a subsidiary of Nautilus also
rated A by A.M. Best, writes transportation risks, as well as other specialty
lines, on an admitted basis.
Specialty Operations: Business
The following table sets forth the percentages of gross premiums
written, by line, by the Company's specialty insurance operations:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
General Liability 30.5% 28.2% 34.1% 35.3% 37.6%
Automobile Liability 18.3 19.0 17.7 20.9 27.5
Professional Liability 16.5 16.9 14.7 12.1 7.0
Directors and Officers Liability 6.6 7.7 8.1 10.0 9.0
Fire and Allied Lines 7.7 7.1 7.5 7.1 4.9
Automobile Physical Damage 6.4 6.1 4.9 5.3 6.8
Medical Malpractice 6.0 6.1 4.0 3.3 2.3
Inland Marine 1.9 1.8 1.5 1.6 2.1
Commercial Multi-Peril 3.3 3.1 3.0 1.0 0.7
Surety 2.1 2.0 1.9 1.3 0.8
Workers' Compensation 0.6 1.9 2.5 1.7 0.7
Other 0.1 0.1 0.1 0.4 0.6
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
ALTERNATIVE MARKETS
The Company's alternative markets operations specialize in insuring,
reinsuring and administering self-insurance programs and other alternative risk
transfer mechanisms for public entities, private employers and associations.
Typical clients are those who are driven by various factors to seek less costly
and more efficient techniques to manage their exposure to claims. The Company's
alternative markets segment consists of both excess and primary workers'
compensation insurance; insurance services operations which manage alternative
market mechanisms; and reinsurance of alternative risk business.
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WORKERS' COMPENSATION INSURANCE
Midwest Employers Casualty Company ("Midwest Employers") markets and
underwrites excess workers' compensation ("EWC") insurance and related risk
management services, including a full range of consulting services. EWC
insurance is marketed primarily to employers and employer groups which have
elected and have qualified or been approved by state regulatory authorities to
self-insure their workers' compensation programs. EWC insurance provides
coverage to a self-insured employer once the employer's losses exceed the
employer's retention amount. Midwest Employers offers a complete line of EWC
products, including specific and aggregate EWC insurance policies and surety
bonds. Midwest Employers is rated A- by A.M.Best. Midwest Employers net premiums
written for the year ended December 31, 1999 were $41,287,000.
Preferred Employers Insurance Company ("Preferred Employers") was
established in 1998 to insure workers' compensation risks in California,
focusing on the small employer market. Preferred Employers is rated A by A.M.
Best (BRIC group rating). Preferred Employers net premiums written for the year
ended December 31, 1999 were $4,073,000.
Key Risk Insurance Company (Key Risk), a North Carolina insurance
company, was organized in 1998 to target the business of funds or other entities
moving out of self-insurance. Key Risk has an A.M. Best rating of A (BRIC group
rating). Its net premiums written for the year ended December 31, 1999 were
$28,103,000.
INSURANCE SERVICES OPERATIONS
The alternative markets insurance service operations are conducted by
Berkley Risk Administrators Company, LLC. This business offer a variety of
products, which include underwriting and claims administration and management of
alternative insurance market mechanisms. In addition, the insurance services
operations provide agency and brokerage services to both affiliated and
unaffiliated entities.
Berkley Risk Administrators Company, LLC ("BRAC") offers a full range
of alternative solutions customized to meet risk financing needs for various
structures, such as assigned risk plans, captive insurance companies, retention
pools, risk retention groups, self-funded plans and specialty insurance company
programs. Program management services include property casualty and workers'
compensation third-party administration, claims adjustment and management,
employee benefit consulting, employee benefit third-party administration,
financial accounting, insurance and reinsurance risk transfer, loss control and
safety consulting, management information systems, regulatory compliance and
relations, risk management consulting, assigned risk plan management,
statistical analysis, underwriting, rating and policy issuance and managed care.
Through its 42 offices in 18 states, BRAC serves a national customer base that
includes businesses, governments, educational institutions, tribal nations,
non-profit entities and insurers.
REINSURANCE
Signet Star - Alternative Markets Division specializes in providing
custom designed reinsurance products and services to alternative markets ("ARM")
clients, such as captive insurance companies, risk retention groups, public
entity insurance trusts and governmental pools. ARM clients are generally
self-insured vehicles which provide insurance buyers with a mechanism for
assuming part of their own risk, managing their exposures, modifying their loss
costs and, ultimately, participating in the underwriting results. Signet Star
has been an active reinsurer of ARM clients for over ten years and is considered
to be one of the leading broker market reinsurers of ARM business. The
Alternative Markets operation is expanding its efforts in single-parent captives
by leveraging its resources and its relationships with affiliates and
establishing strategic alliances with nonaffiliated captive managers. Its net
premiums written for the year ended December 31, 1999 were $49,048,000.
11
<PAGE> 12
Alternative Markets Operations: Business
The following table sets forth the percentages of revenues, by major
source of business, of the alternative markets operations:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Workers' Compensation Insurance 49.9% 48.8% 52.7% 56.9% 28.4%
Insurance Service Operations 27.6 29.6 29.3 29.4 49.5
Reinsurance 22.5 21.6 18.0 13.7 22.1
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
INTERNATIONAL OPERATIONS
In 1995, the Company and Northwestern Mutual Life International, Inc.
("NML"), a wholly-owned subsidiary of The Northwestern Mutual Life Insurance
Company, entered into a joint venture to form Berkley International LLC
("Berkley International"), a limited liability company. The Company agreed to
contribute up to $65 million to Berkley International in exchange for a 65%
membership interest and NML agreed to contribute up to $35 million to Berkley
International in exchange for a 35% membership interest.
Berkley International owns 99.9% of Berkley International Argentina
S.A. ("Berkley S.A."), an Argentine holding company. It also owns 59% of
Philippine Insurance Holdings, Inc., a Philippine holding company, as well as
67% of Family First, Inc., a direct sales and marketing operation. Berkley S.A.
offers property casualty insurance and life insurance in Argentina. Philippine
Insurance Holdings, Inc. provides endowment policies to fund educational and
retirement needs and diversified life products in the Philippines.
International Operations: Business
The following table set forth the percentages of gross premiums for the
Company's international operations:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Property and Casualty 72.3% 85.5% 96.3% 100.0 100.0%
Life 16.5 10.9 3.7 -- --
---- ---- ----- ----- -----
Total Argentina 88.8 96.4 100.0 100.0 100.0
Philippines 11.2 3.6 -- -- --
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
12
<PAGE> 13
Results by Industry Segment
Summary financial information about the Company's operating segments is
presented on a GAAP basis in the following table (all amounts include realized
capital gains and losses):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Regional Insurance Operations
Total revenues $ 702,129 $ 682,519 $ 635,142 $ 529,479 $ 467,009
Income (loss) before income taxes (97,362) (24,524) 47,624 35,169 38,171
Reinsurance Operations
Total revenues 341,940 297,144 242,086 244,066 221,241
Income before income taxes 14,091 33,858 42,193 32,756 19,661
Specialty Insurance Operations
Total revenues 309,068 311,955 284,321 247,131 212,484
Income before income taxes 39,261 85,889 68,088 52,113 37,640
Alternative Markets Operations
Total revenues 222,276 205,935 184,733 172,027 103,656
Income before income taxes 24,919 36,501 34,733 32,278 10,254
International Operations
Total revenues 93,878 80,287 45,360 26,435 7,313
Income (loss) before income taxes 3,535 (7,017) (3,566) (1,283) (259)
</TABLE>
13
<PAGE> 14
The combined ratio represents a measure of underwriting profitability,
excluding investment income. A number in excess of 100 indicates an underwriting
loss; a number below 100 indicates an underwriting profit. Summary information
for the Company's insurance companies and the insurance industry is presented in
the following table (1):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Regional Insurance Operations
Loss ratio 84.7% 76.0% 66.6% 66.8% 65.1%
Expense ratio 36.1 35.8 34.0 34.1 34.1
Policyholders' dividend ratio .7 .9 .5 .6 .9
----- ----- ----- ----- -----
Combined ratio 121.5% 112.7% 101.1% 101.5% 100.1%
===== ===== ===== ===== =====
Reinsurance Operations
Loss ratio 76.0% 74.3% 69.2% 73.3% 78.1%
Expense ratio 33.2 31.5 32.1 30.1 26.4
----- ----- ----- ----- -----
Combined ratio 109.2% 105.8% 101.3% 103.4% 104.5%
===== ===== ===== ===== =====
Specialty Insurance Operations
Loss ratio 66.0% 61.8% 61.9% 68.4% 77.9%
Expense ratio 32.9 31.7 33.3 30.9 28.2
Policyholders' dividend ratio .2 .3 .5 .3 .3
----- ----- ----- ----- -----
Combined ratio 99.1% 93.8% 95.7% 99.6% 106.4%
===== ===== ===== ===== =====
Alternative Markets Operations
Loss ratio 67.4% 63.7% 73.1% 74.8% 72.3%
Expense ratio 37.3 36.0 35.8 34.9 31.9
----- ----- ----- ----- -----
Combined ratio 104.7% 99.7% 108.9% 109.7% 104.2%
===== ===== ===== ===== =====
International Operations
Loss ratio 53.3% 59.7% 59.8% 49.7% 50.0%
Expense ratio 46.4 48.5 54.6 49.9 58.3
----- ----- ----- ----- -----
Combined ratio 99.7% 108.2% 114.4% 99.6% 108.3%
===== ===== ===== ===== =====
Combined Insurance Operations
Loss ratio 76.5% 71.2% 66.4% 68.7% 70.7%
Expense ratio 35.4 34.9 34.4 33.1 31.3
Policyholders' dividend ratio .3 .5 .4 .4 .5
----- ----- ----- ----- -----
Combined ratio 112.2% 106.6% 101.2% 102.2% 102.5%
===== ===== ===== ===== =====
Combined Insurance Operations
Premiums to surplus ratio (2) 1.6 1.4 1.2 1.2 1.0
===== ===== ===== ===== =====
Industry Ratios
Combined ratio 107.5% (3) 105.0%(4) 101.6%(4) 107.0%(4) 107.2%(5)
Premiums to surplus ratio .9% (3) .8%(5) .9%(5) 1.0%(5) 1.2%(5)
</TABLE>
(1) Based on U.S. statutory accounting practices.
(2) Based on the Company's consolidated net premiums written to statutory
surplus.
(3) Estimated by A.M. Best.
(4) Source: A.M. Best Aggregates & Averages, for stock companies.
(5) Source: A.M. Best Aggregates & Averages, for total industry.
14
<PAGE> 15
Investments
Investment results before income tax effects were as follows:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Average investments, at cost $3,045,391 $2,996,707 $2,873,730 $2,538,806 $2,081,547
========== ========== ========== ========== ==========
Investment income,
before expenses $ 198,556 $ 206,065 $ 205,812 $ 171,047 $ 143,527
========== ========== ========== ========== ==========
Percent earned on
average investments 6.5% 6.9% 7.2% 6.7% 6.9%
========== ========== ========== ========== ==========
Realized gains (losses) $ (6,064) $ 25,400 $ 13,186 $ 7,437 $ 10,357
========== ========== ========== ========== ==========
Change in unrealized investment
gains (losses) (1) $ (173,084) $ 22,147 $ 66,306 $ (22,409) $ 142,475
========== ========== ========== ========== ==========
</TABLE>
(1) The change in unrealized investment gains (losses) represents the
difference between fair value and cost of investments at the beginning
and end of the calendar year, including investments carried at cost.
The percentages of the fixed maturity portfolio categorized by
contractual maturity, based on fair value, on the dates indicated, are set forth
below. Actual maturities may differ from contractual maturities because certain
issuers have the right to call or prepay obligations.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
1 year or less 3.0% 1.7% 4.4% 3.1% 4.2%
Over 1 year through 5 years 16.4 16.0 26.4 20.7 17.9
Over 5 years through 10 years 26.0 24.4 19.1 25.0 29.4
Over 10 years 34.6 37.2 29.2 27.1 26.2
Mortgage-backed securities 20.0 20.7 20.9 24.1 22.3
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
Loss and Loss Adjustment Expense Reserves
In the property casualty industry, it is not unusual for significant
periods of time to elapse between the occurrence of an insured loss, the report
of the loss to the insurer and the insurer's payment of that loss. To recognize
liabilities for unpaid losses, insurers establish reserves, which is a balance
sheet account representing estimates of future amounts needed to pay claims and
related expenses with respect to insured events which have occurred. The
Company's loss reserves reflect current estimates of the ultimate cost of
closing outstanding claims; other than its excess workers' compensation ("EWC")
business, as discussed below, the Company does not discount its reserves to
estimated present value for financial reporting purposes.
15
<PAGE> 16
In general, when a claim is reported, claims personnel establish a
"case reserve" for the estimated amount of the ultimate payment. The estimate
represents an informed judgment based on general reserving practices and
reflects the experience and knowledge of the claims personnel regarding the
nature and value of the specific type of claim. Reserves are also established on
an aggregate basis which provide for losses incurred but not yet reported to the
insurer, potential inadequacy of case reserves, the estimated expenses of
settling claims, including legal and other fees and general expenses of
administering the claims adjustment process ("LAE"), and a provision for
potentially uncollectible reinsurance. Each insurance subsidiary's net retention
for each line of insurance is taken into consideration in computation of
ultimate losses.
In examining reserve adequacy, several factors are considered,
including historical data, legal developments, changes in social attitudes and
economic conditions, including the effects of inflation. The actuarial process
relies on the basic assumption that past experience, adjusted judgmentally for
the effects of current developments and anticipated trends, is an appropriate
basis for predicting future events. Reserve amounts are necessarily based on
management's informed estimates and judgments using data currently available. As
additional experience and other data become available and are reviewed, these
estimates and judgments are revised. This may result in increases or decreases
to reserves for insured events of prior years. The reserving process implicitly
recognizes the impact of inflation and other factors affecting loss costs by
taking into account changes in historical claim patterns and perceived trends.
There is no precise method to evaluate the impact of any specific factor on the
adequacy of reserves, because the ultimate cost of closing claims is influenced
by numerous factors.
While the methods for establishing the reserves are well tested over
time, some of the major assumptions about anticipated loss emergence patterns
are subject to fluctuation. In particular, high levels of jury verdicts against
insurers, as well as judicial decisions which "re-formulate" policies to expand
coverage to include previously unforeseen theories of liability, e.g., those
regarding pollution and other environmental exposures, have produced
unanticipated claims and increased the difficulty of estimating the loss and
loss adjustment expense reserves provided by the Company.
Due to the nature of EWC business and the long period of time over
which losses are paid in this line of business, the Company discounts its
liabilities for EWC losses and loss expenses. Discounting liabilities for losses
and loss expenses gives recognition to the time value of money set aside to pay
claims in the future and is intended to appropriately match losses and loss
expenses to income earned on investment securities supporting the liabilities.
The expected losses and loss expense payout pattern subject to discounting was
derived from loss payout experience and is supplemented with data compiled by
insurance companies writing workers' compensation on an excess-of-loss basis.
The expected payout pattern has a very long duration because it reflects the
nature of losses which generally penetrate self-insured retention limits
contained in EWC policies. The Company has limited the expected payout duration
to 30 years in order to introduce an additional level of conservatism into the
discounting process. These liabilities have been discounted using "risk-free"
discount rates determined by reference to the U.S. Treasury yield curve weighted
for EWC premium volume to reflect the seasonality of the anticipated duration of
losses associated with such coverages. The average discount rate for accident
years 1999, 1998, 1997, 1996 and 1995 and prior was approximately 5.90% 5.90%,
5.98%, 5.90% and 5.80%, respectively. The aggregate net discount, after
reflecting the effects of ceded reinsurance, is $186,981,000, $186,964,000,
$189,600,000 and $172,415,000 at December 31, 1999, 1998, 1997 and 1996,
respectively.
To date, known pollution and environmental claims at the Company's
insurance company subsidiaries have not had a material impact on the Company's
operations. Environmental claims have not materially impacted the Company
because these subsidiaries generally did not insure the larger industrial
companies which are subject to significant environmental exposures.
16
<PAGE> 17
The Company's net reserves for losses and loss adjustment expenses
relating to pollution and environmental claims were $30,944,000 and $33,391,000
at December 31, 1999 and 1998, respectively. The Company's gross reserves for
losses and loss adjustment expenses relating to pollution and environmental
claims were $65,966,000 and $69,283,000 at December 31, 1999 and 1998,
respectively. Net incurred losses and loss expenses for reported pollution and
environmental claims were approximately $1,371,000, $2,227,000 and $79,000 in
1999, 1998 and 1997, respectively. Net paid losses and loss expenses were
approximately $3,819,000, $2,614,000 and $2,175,000 in 1999, 1998 and 1997,
respectively. The estimation of these liabilities is subject to significantly
greater than normal variation and uncertainty because it is difficult to make a
reasonable actuarial estimate of these liabilities due to the absence of a
generally accepted actuarial methodology for these exposures and the potential
affect of significant unresolved legal matters, including coverage issues as
well as the cost of litigating the legal issues. Additionally, the determination
of ultimate damages and the final allocation of such damages to financially
responsible parties are highly uncertain.
The table below provides a reconciliation of the beginning and ending
reserve balances, on a gross of reinsurance basis (dollars in thousands)(1):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net reserves at beginning of year $ 1,583,304 $ 1,433,011 $ 1,333,122
----------- ----------- -----------
Net reserves of acquired companies -- 2,189 4,984
Net provision for losses and loss expenses:
Claims occurring during the current year (2) 1,032,089 944,887 747,977
Increase (decrease) in estimates for
claims occurring in prior years 28,351 (42,929) (21,313)
Amortization of discount 10,473 9,111 7,760
----------- ----------- -----------
1,070,913 911,069 734,424
----------- ----------- -----------
Net payments for claims
Current year 433,942 397,787 315,370
Prior years 496,410 365,178 324,149
----------- ----------- -----------
930,352 762,965 639,519
----------- ----------- -----------
Net reserves at end of year 1,723,865 1,583,304 1,433,011
Ceded reserves at end of year 617,025 537,219 476,677
----------- ----------- -----------
Gross reserves at end of year $ 2,340,890 $ 2,120,523 $ 1,909,688
=========== =========== ===========
</TABLE>
A reconciliation, as of December 31, 1999, between the reserves reported
in the accompanying consolidated financial statements which have been prepared
in accordance with GAAP and those reported on a SAP basis is as follows (in
thousands):
<TABLE>
<S> <C>
Net reserves reported on a SAP basis $1,780,069
Additions (deductions) to statutory reserves:
Loss reserve discounting (3) (70,810)
Outstanding drafts reclassified as reserves 14,606
----------
Net reserves reported on a GAAP basis 1,723,865
Ceded reserves reclassified as assets 617,025
----------
Gross reserves reported on a GAAP basis $2,340,890
==========
</TABLE>
(1) The balance sheet includes $20,348,000 and $6,043,000 as of December 31,
1999 and 1998, respectively, relating to reserves for life insurance
which are not included in the table above, and the statement of
operations includes $14,913,000 and $3,693,000 for the year ended
December 31, 1999 and 1998, respectively, relating to policyholder
benefits incurred on life insurance which are not included in the above
table.
(2) Claims occurring during the current year is net of discount of
$22,923,754, $20,354,000 and $29,783,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
(3) For statutory purposes, Midwest Employers uses a discount rate of 3% as
permitted by the Department of Insurance of the State of Ohio. For GAAP
purposes, Midwest Employers uses a discount rate based on the U. S.
Treasury yield curve weighted for the expected payout period, as
described above.
17
<PAGE> 18
The following table presents the development of net reserves for 1989
through 1999. The top line of the table shows the estimated reserves for unpaid
losses and loss expenses recorded at the balance sheet date for each of the
indicated years. This represents the estimated amount of losses and loss
expenses for claims arising in all prior years that are unpaid at the balance
sheet date, including losses that had been incurred but not yet reported to the
Company. The upper portion of the table shows the re-estimated amount of the
previously recorded reserves based on experience as of the end of each
succeeding year. The estimate changes as more information becomes known about
the frequency and severity of claims for individual years.
The "cumulative redundancy (deficiency)" represents the aggregate
change in the estimates over all prior years. For example, the 1989 reserves
have developed a $84 million redundancy over ten years. That amount has been
reflected in income over the ten years. The impact on the results of operations
of the past three years of changes in reserve estimates is shown in the
reconciliation tables above.
It should be noted that the table presents a "run off" of balance sheet
reserves, rather than accident or policy year loss development. Therefore, each
amount in the table includes the effects of changes in reserves for all prior
years. For example, assume a claim that occurred in 1989 is reserved for $2,000
as of December 31, 1989. Assuming this claim was settled for $2,300 in 1999, the
$300 deficiency would appear as a deficiency in each year from 1989 through
1998.
18
<PAGE> 19
<TABLE>
<CAPTION>
Year Ended December 31,
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Amounts in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Discounted net reserves for
losses and loss expenses $ 611 $ 643 $ 680 $ 710 $ 783 $ 895 $ 1,209 $ 1,333 $ 1,433 $ 1,583 $ 1,724
Reserve discounting -- -- -- -- -- -- 152 172 190 187 187
Undiscounted net reserve
for loss and loss
expenses 611 643 680 710 783 895 1,361 1,505
Net Re-estimated as of:
One year later 605 635 676 704 776 885 1,346 1,481 1,580 1,798
Two years later 599 632 659 694 775 872 1,305 1,406 1,566
Three years later 596 620 650 665 744 833 1,236 1,356
Four years later 587 612 637 655 708 789 1,195
Five years later 581 603 631 630 672 764
Six years later 585 588 609 600 649
Seven years later 574 569 585 579
Eight years later 557 550 568
Nine years later 541 534
Ten years later 527
Cumulative redundancy
(deficiency) undiscounted 84 109 112 131 134 131 166 149 57 (28)
===== ===== ===== ===== ======= ======= ======= ======= ======= =======
Cumulative amount of
net liability paid
through:
One year later $ 158 $ 139 $ 160 $ 169 $ 186 $ 221 $ 265 $ 332 $ 365 496
Two years later 234 235 264 275 221 355 434 523 574
Three years later 294 304 332 306 291 445 550 635
Four years later 334 345 346 344 334 501 616
Five years later 358 377 371 362 363 528
Six years later 380 395 384 375 373
Seven years later 392 402 394 376
Eight years later 396 409 392
Nine years later 400 405
Ten years later 394
Discounted net Reserves 783 895 1,209 1,333 1,433 1,583 1,724
Ceded Reserves 1,233 1,176 451 450 477 537 617
------- ------- ------- ------ ------- ------- -------
Discounted gross Reserves 2,016 2,071 1,660 1,783 1,910 2,121 2,341
Reserve discounting -- -- 192 216 241 248 250
------- ------- ------- ------ ------- ------- -------
Gross reserve $ 2,016 $ 2,071 1,852 1,999 2,151 2,369 2,591
======= ======= ======= ======= ======= ======= =======
Gross Re-estimated as of
One year later 2,010 2,043 1,827 1,965 2,132 2,390
Two years later 1,966 2,026 1,789 1,959 2,096
Three years later 1,955 1,983 1,754 1,909
Four years later 1,913 1,951 1,733
Five years later 1,855 1,928
Six years later 1,815
Gross cumulative redundancy
(deficiency) undiscounted $ 201 $ 143 $ 119 $ 90 $ 55 $ (21)
======= ======= ======= ======= ======= =======
</TABLE>
19
<PAGE> 20
Regulation
The Company's insurance subsidiaries are subject to varying degrees of
regulation and supervision in the jurisdictions in which they do business, under
statutes which delegate regulatory, supervisory and administrative powers to
state insurance commissioners. This regulation relates to such matters as the
standards of solvency which must be met and maintained; the licensing of
insurers and their agents; the nature of and limitations on investments;
deposits of securities for the benefit of policyholders; approval of policy
forms and premium rates; periodic examination of the affairs of insurance
companies; annual and other reports required to be filed on the financial
condition of insurers or for other purposes; establishment and maintenance of
reserves for unearned premiums and losses; and requirements regarding numerous
other matters. The Company's property casualty subsidiaries, other than E & S
and reinsurance subsidiaries, must file all rates for personal and commercial
insurance with the insurance department of each state in which they operate. The
Company's E & S and reinsurance subsidiaries generally operate free of rate and
form regulation.
In addition to regulatory supervision of its insurance subsidiaries,
the Company is subject to state statutes governing insurance holding company
systems. Typically, such statutes require the Company periodically to file
information with the state insurance commissioner, including information
concerning its capital structure, ownership, financial condition and general
business operations. Under the terms of applicable state statutes, any person or
entity desiring to purchase more than a specified percentage (commonly 10%) of
the Company's outstanding voting securities would be required to obtain
regulatory approval of the purchase. Under Florida law, which is applicable to
the Company due to its ownership of Carolina, a Florida domiciled insurer, the
acquisition of more than 5% of the Company's capital stock must receive
regulatory approval. Further, state insurance statutes typically place
limitations on the amount of dividends or other distributions payable by
insurance companies in order to protect their solvency. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
During the past several years, various regulatory and legislative
bodies adopted or proposed new laws or regulations to deal with the cyclical
nature of the insurance industry, catastrophic events and their effects on
shortage of capacity and pricing. These regulations, which have not had a
material impact on the Company's operations, include (i) the creation of "market
assistance plans" under which insurers are induced to provide certain coverages,
(ii) restrictions on the ability of insurers to cancel certain policies in
mid-term, (iii) advance notice requirements or limitations imposed for certain
policy non-renewals and (iv) limitations upon or decreases in rates permitted to
be charged. The passage of Proposition 103 in the State of California did not
have a material adverse impact on the Company's operations because the Company's
subsidiaries operated in that State primarily on a non-admitted basis. The
non-admitted market in California, however, has been subjected to increased
levels of regulation. Admiral and Nautilus, both of which derive significant
premiums from California, may be adversely impacted by increased regulation
which causes business to remain in the admitted market. Additionally, a number
of states have adopted and others are considering adopting forms of commercial
lines deregulation laws which, depending upon factors such as the relatively
high amount of premium or revenue of an insured, would permit an insurer to
provide insurance without being subject to rate and/or form filing requirements.
Various state and federal organizations, including Congressional
committees and the National Association of Insurance Commissioners ("NAIC"),
have been conducting reviews into various aspects of the insurance business. The
NAIC has adopted risk based capital ("RBC") requirements that require insurance
companies to calculate and report information under a risk-based formula which
measures statutory capital and surplus needs based on a regulatory definition of
risk in a company's mix of products and its balance sheet. The implementation of
RBC did not affect the operations of the Company's insurance subsidiaries since
all of its subsidiaries have a RBC amount above the authorized control level
RBC, as defined by the NAIC. The NAIC recently completed a process intended to
codify statutory accounting practices for certain insurance enterprises. As a
result of this process, the NAIC will issue a revised statutory accounting
practices and procedures manual, which will be effective January 1, 2001. The
Company has not yet determined the impact that this change will have on the
statutory capital and surplus of its insurance subsidiaries. The NAIC is
considering model laws on commercial lines deregulation. Federal legislation is
being considered which would either abolish or limit the current exemption of
the insurance industry from portions of the antitrust laws, impose direct
federal oversight or federal solvency standards. No assurance can be given that
future legislative or regulatory changes resulting from such activity will not
adversely affect the Company's insurance subsidiaries.
20
<PAGE> 21
The Gramm-Leach-Bliley Act, or Financial Services Modernization Act of
1999 (the "Act"), was enacted in 1999, significantly affecting the financial
services industry, including insurance companies, banks and securities firms.
The Act modifies federal law to permit the creation of financial holding
companies ("FHCs"), which, as regulated by the Act, can maintain cross-holdings
in insurance companies, banks and securities firms to an extent not previously
allowed. The Act also permits or facilitates certain types of combinations or
affiliations for FHCs. The Act establishes a functional regulatory scheme under
which state insurance departments will maintain primary regulation over
insurance activities, subject to provisions for certain federal preemptions.
Important provisions of the Act involve requirements for adoption of
(i) multi-state agents' licensing reforms and uniformity requirements and (ii)
privacy protections, giving the states the ability to enact these laws in the
first instance or be preempted. The NAIC is considering adoption of a model law
on privacy. It has also adopted a model law on agents' licensing which has been
enacted or is currently being considered by various state legislatures. It is
not anticipated that the insurance regulatory aspects of the Act will have a
material effect on the operations of the Company.
The Company's insurance subsidiaries are also subject to assessment by
state guaranty funds when an insurer in that jurisdiction has been judicially
declared insolvent and insufficient funds are available from the liquidated
company to pay policyholders and claimants. The protection afforded under a
state's guaranty fund to policyholders of the insolvent insurer varies from
state to state. Generally, all licensed property casualty insurers are
considered to be members of the fund, and assessments are based upon their pro
rata share of direct written premiums. The NAIC Model Post-Assessment Guaranty
Fund Act, which many states have adopted, limits assessments to an insurer to 2%
of its subject premium and permits recoupment of assessments through rate
setting. Likewise, several states (or underwriting organizations of which the
Company's insurance subsidiaries are required to be members) have limited
assessment authority with regard to deficits in certain lines of business. To
date, assessments have not had a material adverse impact on operations.
The Company receives funds from its insurance subsidiaries in the form
of dividends and fees for certain management services. Annual dividends in
excess of maximum amounts prescribed by state statutes ("extraordinary
dividends") may not be paid without the approval of the insurance commissioner
of the state in which an insurance subsidiary is domiciled.
Competition
The property casualty insurance and reinsurance business is
competitive, with over 2,000 insurance companies transacting business in the
United States. The Company competes directly with a large number of these
companies. The Company's strategy in this highly fragmented industry is to seek
specialized areas or geographic regions where its insurance subsidiaries can
gain a competitive advantage by responding quickly to changing market
conditions. Each of the Company's subsidiaries establishes its own pricing
practices. Such practices are based upon a Company-wide philosophy to price
products with the general intent of making an underwriting profit. Competition
in the industry generally changes with profitability.
The regional property casualty subsidiaries compete with mutual and
other regional stock companies as well as national carriers. Direct writers of
property casualty insurance compete with the regional subsidiaries by writing
insurance through their salaried employees, generally at a lower cost than
through independent agents such as those used by the Company. Also, certain
personal lines have become more competitive due to Internet-based competition.
Signet Star's competition comes from domestic and foreign reinsurers,
many of which have greater financial resources than Signet Star and which place
their business either on a direct basis or through the broker market.
The E & S area is a highly specialized segment of the insurance
industry. Admiral and Nautilus compete with other E & S carriers, some of which
are larger and have greater resources than Admiral and Nautilus. Under certain
market conditions, standard carriers may compete for the types of business
written by Admiral and Nautilus. With the implementation of commercial lines
deregulation (see "Regulation") in several states and with many other states in
the process of considering or adopting such laws, competition for "E & S type
risks" might increase significantly. Such standard carriers would under such
deregulation be free to compete with more liberal rate and form requirements. In
addition, there are regional and
21
<PAGE> 22
specialty carriers competing with Admiral and Nautilus when they underwrite
business in their regions or specialties.
Carolina and Great Divide's competition comes mainly from other
specialty transportation insurers, regional carriers and large national
multi-line companies. Each of Admiral Indemnity, Preferred and Key Risk
Insurance compete with local regional companies as well as national carriers.
Midwest Employers' competition comes from insurance and reinsurance
companies, some of which have greater financial resources than Midwest
Employers. Most of theses carriers write specific EWC coverage, do not offer
aggregate EWC coverage and tend to focus on risks larger than those targeted by
Midwest Employers. In addition, Midwest Employers competes with other specialty
EWC insurers.
The Insurance Services Operations face competition from several large
nationally known service organizations as well as local competitors. The
International Operations compete with native insurance operations both large and
small, which may be related to government entities, as well as with branch or
local subsidiaries of multi-national companies.
Employees
As of March 3, 2000, the Company employed 4,181 persons. Of this
number, the Company's subsidiaries employed 4,131 persons, of whom 2,690 were
executive and administrative personnel and 1,441 were clerical personnel. The
Company employed the remaining 50 persons in its parent company and investment
operations, of whom 36 were executive and administrative personnel and 14 were
clerical personnel.
Other information about the Company's business
The Company maintains an ongoing interest in acquiring additional
companies and developing new insurance entities, products and packages as
opportunities arise. In addition, the insurance subsidiaries develop new
coverages or lines of business to meet the needs of insureds.
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.
The Company has no customer which accounts for 10 percent or more of
its consolidated revenues.
Compliance by the Company and its subsidiaries with federal, state and
local provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to protection of the
environment has not had a material effect upon the capital expenditures,
earnings or competitive position of the Company.
ITEM 2. PROPERTIES
The Company and its subsidiaries own or lease office buildings or office space
suitable to conduct their operations. Such owned property is as follows:
<TABLE>
<CAPTION>
Location Company Size (sq. ft.)
-------- ------- --------------
<S> <C> <C>
Cherry Hill, New Jersey Admiral 42,000
Lincoln, Nebraska Union 43,000
Lincoln, Nebraska Continental Western 20,000
Luverne, Minnesota Tri-State 33,000
Meridian, Mississippi Great River 30,000
Scottsdale, Arizona Nautilus 34,000
Urbandale, Iowa Continental Western 80,000
Westbrook, Maine Acadia 54,000
</TABLE>
In addition, the Company and its subsidiaries lease office facilities
in various other cities under leases with varying terms and expiration dates.
22
<PAGE> 23
ITEM 3. LEGAL PROCEEDINGS
Claims under insurance policies written by the Company's insurance
subsidiaries are investigated and settled either by claims adjusters employed by
them, by their independent agents or by independent adjusters. Generally, the
insurance subsidiary employs a staff of claims adjusters at its home office and
at some regional offices. Some independent agents may have the authority to
settle small claims. Independent claims adjusting firms are used to assist in
handling various claims in areas where insurance volume does not warrant the
maintenance of a staff adjuster. If a claim or loss cannot be settled and
results in litigation, the subsidiary generally retains outside counsel.
At present, neither the Company nor any of its subsidiaries is engaged
in any litigation known to the Company which is expected to have a material
adverse effect upon the Company's business. As is common with property casualty
insurance companies, the Company's subsidiaries are regularly engaged in the
defense of claims arising out of the conduct of the insurance business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1999 to a vote
of holders of the Company's Common Stock.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "BKLY". The following table sets forth the high and low sale
prices for the indicated periods, all as reported on such market.
<TABLE>
<CAPTION>
Common
Price Range Dividends Paid
----------- --------------
High Low Per Share
---- --- ---------
<S> <C> <C> <C>
1999:
Fourth Quarter $ 23 3/4 $ 19 13/16 $ .13 cash
Third Quarter 27 15/16 21 5/8 $ .13 cash
Second Quarter 29 1/8 24 3/8 $ .13 cash
First Quarter 36 1/4 23 3/4 $ .12 cash
1998:
Fourth Quarter $ 35 3/4 $ 27 1/2 $ .12 cash
Third Quarter 40 15/16 29 13/16 $ .12 cash
Second Quarter 49 40 1/16 $ .12 cash
First Quarter 47 3/8 41 $ .11 cash
</TABLE>
The closing price of the Common Stock on March 3, 2000, as reported on
the Nasdaq National Market, was $15 3/8 per share. The approximate number of
record holders of the Common Stock on March 3, 2000 was 724.
On May 11, 1999 the Company issued 250 shares of its Common Stock to
each of its nine directors (2,250 share in the aggregate). The shares were
issued as payment of a portion of annual directors' fees pursuant to the
Company's 1997 Directors Stock Plan. The shares were not registered under the
Securities Act of 1933 in reliance on the exemption provided in Section 4(2)
thereof for transactions not involving a public offering.
23
<PAGE> 24
ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net premiums written $ 1,427,719 $ 1,346,254 $ 1,177,641 $ 1,052,511 $ 860,421
Net premiums earned 1,414,384 1,278,399 1,111,747 981,221 803,336
Net investment income 190,316 202,420 199,588 164,490 137,332
Management fees and commissions 72,344 70,727 71,456 69,246 68,457
Realized investment gains (losses) (6,064) 25,400 13,186 7,437 10,357
Total revenues 1,673,668 1,582,517 1,400,310 1,225,166 1,021,943
Interest expense 50,801 48,819 48,869 31,963 28,209
Income (loss) before Federal and foreign
income taxes (79,248) 62,781 129,241 115,049 82,747
Federal and foreign income tax (expense)
benefit 45,766 (5,465) (30,668) (25,102) (17,554)
Income (loss) before minority interest (33,482) 57,316 98,573 89,947 65,193
Net income (loss) before preferred
dividends (34,048) 58,760 99,047 90,263 60,882
Preferred dividends (497) (7,548) (7,828) (13,909) (11,062)
Cumulative effect of change in accounting
principle (net of taxes) (3,250) -- -- -- --
Extraordinary gain (loss) 735 (5,017) -- -- --
Net income (loss) attributable to
common stockholders (37,060) 46,195 91,219 76,354 49,820
Data per common share:
Basic:
Net income (loss) before change in
accounting and extraordinary item (1.35) 1.82 3.09 2.56 1.91
Net income (loss) (1.44) 1.64 3.09 2.56 1.91
Diluted:
Net income (loss) before change in (1.34) 1.76 3.02 2.53 1.90
accounting and extraordinary income
Net income (loss) (1.43) 1.59 3.02 2.53 1.90
Stockholders' equity 23.10 28.80 28.72 25.13 23.59
Cash dividends declared $ .52 $ .48 $ .42 $ .35 $ .32
Weighted average shares
outstanding:
Basic 25,823 28,194 29,503 29,792 26,121
Diluted 25,927 29,115 30,185 30,130 26,262
Investments (1) $ 2,975,929 $ 3,233,458 $ 3,106,900 $ 2,991,606 $ 2,588,346
Total assets 4,784,791 4,983,431 4,544,318 4,136,973 3,618,684
Reserves for losses
and loss expenses 2,361,238 2,126,566 1,909,688 1,782,703 1,660,020
Long-term debt 394,792 394,444 390,415 390,104 319,287
Company-obligated mandatorily
redeemable capital securities
of a subsidiary trust holding
solely 8.197% junior subordinated
debentures 198,126 207,988 207,944 207,901 --
Stockholders' equity 591,778 861,281 947,292 879,732 929,815
</TABLE>
(1) Including trading account receivable from brokers and clearing
organizations and trading account securities sold but not yet purchased.
24
<PAGE> 25
(2)ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to the information under the caption
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained on pages 18 through 25 of the
registrant's 1999 Annual Report to Stockholders, which information
is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the information under "Market Risk" under the
caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained on pages 22 and 23
of the registrant's 1999 Annual Report to Stockholders, which
information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the registrant are
contained on pages 26 through 42 of registrant's 1999 Annual Report
to Stockholders and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
<PAGE> 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is provided as to the directors and executive
officers of the Company as of March 3, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
William R. Berkley 54 Chairman of the Board and President
Eugene G. Ballard 47 Senior Vice President - Chief Financial Officer and Treasurer
Robert P. Cole 49 Senior Vice President - Regional Operations
Cornelius T. Finnegan, III 55 Senior Vice President - General Counsel and Secretary
E. LeRoy Heer 61 Senior Vice President - Chief Corporate Actuary
H. Raymond Lankford, Jr. 57 Senior Vice President - Alternative Markets Operations
Ira S. Lederman 46 Senior Vice President - Assistant General Counsel and
Assistant Secretary
James G. Shiel 40 Senior Vice President - Investments
Edward A. Thomas 51 Senior Vice President - Specialty Operations
Donald J. Veldkamp 61 Senior Vice President - Technology and Distribution Systems
Paul J. Hancock 38 Vice President - Actuary
Edward F. Linekin 36 Vice President - Investments
Clement P. Patafio 35 Vice President - Corporate Controller
Joseph M. Pennachio 52 Vice President - Human Resources
Scott A. Siegel 41 Vice President - Taxes
George G. Daly 59 Director
Robert B. Hodes 74 Director
Henry Kaufman 72 Director
Richard G. Merrill 69 Director
Jack H. Nusbaum 59 Director
Mark L. Shapiro 55 Director
Martin Stone 71 Director
</TABLE>
As permitted by Delaware law, the Board of Directors of the Company is
divided into three classes, the classes being divided as equally as possible and
each class having a term of three years. Directors generally serve until their
respective successors are elected at the annual meeting of stockholders which
ends their term. None of the Company's directors has any family relationship
with any other director or executive officer. Each year the term of office of
one class expires. In May 1999, the term of a class consisting of three
directors expired. Richard G. Merrill, Jack H. Nusbaum and Mark L. Shapiro were
elected as directors to hold office for a term of three years until the Annual
Meeting of Stockholders in 2002 and until their successors are duly elected and
qualify. As a result of the resignation of John D. Vollaro as a director
effective March 1, 2000, the Board presently has one vacancy in the class of
directors with a term expiring in 2001.
William R. Berkley has been Chairman of the Board and Chief Executive
Officer of the Company since its formation in 1967. He also currently serves as
President, a position which he has held since March 1, 2000 and has held at
various times from 1967 to 1995. He also serves as Chairman of the Board or
Director of a number of public and private companies. These include Associated
Community Corp., a bank holding company that owns all of the issued and
outstanding capital stock of The Greenwich Bank & Trust Company, a Connecticut
chartered bank; Westport National Bank, a national bank; Pioneer companies,
Inc., a chemical manufacturing and marketing company; Strategic Distribution,
Inc., an industrial products distribution and services company; and Interlaken
Capital, Inc., a private investment firm with interests in various businesses.
His current term as a director expires in 2000.
Eugene G. Ballard has been Senior Vice President - Chief Financial
Officer and Treasurer of the Company since June 1, 1999. Before joining the
Company, Mr. Ballard was Executive Vice President and Chief Financial Officer of
GRE Insurance Group, New York, New York since 1995.
26
<PAGE> 27
Robert P. Cole has been Senior Vice President since January 1998. Prior
thereto, he was Vice President since October 1996. Before joining the Company,
Mr. Cole was, since 1992, a senior Officer of Christania General Insurance Corp.
of N.Y., which was purchased by Folksamerica Reinsurance Company in 1996, and
prior to that was associated with reinsurers for twenty years.
Cornelius T. Finnegan, III has been Senior Vice President - General
Counsel and Secretary since February 1, 1999. Before joining the Company, Mr.
Finnegan was a partner at the New York law firm of Willkie Farr & Gallagher for
more than the last five years.
E. LeRoy Heer has been Senior Vice President - Chief Corporate Actuary
since January 1991. Prior thereto, he had been Vice President - Corporate
Actuary since May 1978.
H. Raymond Lankford, Jr. has been Senior Vice President - Alternative
Markets Operations since May 1996. Prior thereto, he was President of All
American Agency Facilities, Inc., a subsidiary of the Company, from October
1991, having joined All American in 1990. He has been in the insurance business
in various capacities for more than 30 years.
Ira S. Lederman has been Senior Vice President since January 1997.
Additionally, he has been General Counsel of Berkley International since January
1998. He is also Assistant General Counsel, a position he has held since July
1989, and Assistant Secretary since May 1986. Previously, he was Vice President
from May 1986 until January 1997. Prior thereto, he was Insurance Counsel of the
Company since May 1986 and Associate Counsel from April 1983.
James G. Shiel has been Senior Vice President - Investments of the
Company since January 1997. Prior thereto, he was Vice President - Investments
of the Company since January 1992. Since February 1994, he has been President of
Berkley Dean & Company, Inc., a subsidiary of the Company, which he joined in
1987.
Edward A. Thomas has been Senior Vice President - Specialty Operations
of the Company since April 1991. Prior thereto, he was President of Signet
Reinsurance Company, a subsidiary of the Company, for more than five years.
Donald J. Veldkamp has been Senior Vice President, Technology and
Distribution Systems since January 1998. He most recently served as Chairman of
Union Insurance Company, a subsidiary of the Company, since July 1997. Prior to
that, he was President of Union Insurance Company from May 1990 to July 1997 and
President of Tri-State Insurance Company of Minnesota, also a subsidiary of the
Company, from February 1980 to May 1990.
Paul J. Hancock has been Vice President - Actuary since May 1998.
Previously, he was Assistant Vice President - Actuary since June 1997. Prior
thereto, he was employed since July 1991 by Signet Star Reinsurance Company, a
subsidiary of the Company, serving as Vice President and Corporate Actuarial
Manager from August 1996 to June 1997 and Assistant Vice President from October
1995 to August 1996. Signet Star Reinsurance Company (formerly known as North
Star Reinsurance Company) was purchased by the Company in July 1993.
Edward F. Linekin has been Vice President - Investments since May 1998.
Mr. Linekin has been an employee of the Company since April 1995. He has been a
Vice President of the Company's investment subsidiary, Berkley Dean & Company,
Inc., since April 1995. Prior thereto, he was Assistant Portfolio Manager -
Senior Investment Officer of Home Insurance Company from April 1993.
Clement P. Patafio has been Vice President - Corporate Controller since
January 1997. Prior thereto, he was Assistant Vice President - Corporate
Controller since July 1994 and Assistant Controller since May 1993. Before
joining the Company, Mr. Patafio was with KPMG LLP from 1986 to 1993.
Joseph M. Pennachio has been Vice President - Human Resources of the
Company since May 1999. Prior thereto, he was Assistant Vice President - Human
Resources of the Company since April 1986. Before joining the Company, Mr.
Pennachio was with AMF Incorporated from 1975 to 1986, where he held a variety
of managerial positions in the benefits area.
Scott A. Siegel has been Vice President - Taxes since January 1997.
Prior thereto, he was Director of Taxes since September 1991. Before joining the
Company, Mr. Siegel was with KPMG LLP from 1981 to 1991.
27
<PAGE> 28
George G. Daly has been a director of the Company since 1998. Dr. Daly
is Dean of Stern School of Business, and Dean Richard R. West Professor of
Business, New York University for more than the past five years. In addition to
his academic career, Dr. Daly served as Chief Economist at the U.S. Office of
Energy Research and Development in 1974. Mr. Daly's term as a director expires
in 2000.
Robert B. Hodes has been a director of the Company since 1970. Mr.
Hodes is Counsel to the New York law firm of Willkie Farr & Gallagher, where
prior thereto he had been a partner for more than five years. He is also a
director of Globalstar Telecommunications, Limited; K&F Industries, Inc.; Loral
Space & Communications, Ltd.; Mueller Industries, Inc.; and Restructured Capital
Holdings, Ltd. Mr. Hodes' current term as a director expires in 2000.
Henry Kaufman has been a director of the Company since 1994. Dr.
Kaufman is President of Henry Kaufman & Company, Inc., an investment, economic
and financial consulting company since its establishment in 1988. Dr. Kaufman
serves as Chairman of the Board of Overseers, Stern School of Business of New
York University; Chairman of the Board of Trustees, Institute of International
Education; Member of the Board of Directors, Federal Home Loan Mortgage
Corporation; Member of the Board of Directors, Lehman Brothers Holdings Inc.;
Member of the Board of Directors, The Statute of Liberty-Ellis Island
Foundation, Inc.; Member of the Board of Trustees, New York University; Member
of the Board of Trustees, The Animal Medical Center; Treasurer (and former
trustee), The Economic Club of New York; Member of the International Capital
Markets Advisory Committee of the Federal Reserve Bank of New York; Member of
the Board of Trustees, Whitney Museum of American Art; Member of the Advisory
Committee to the Investment Committee, International Monetary Fund Staff
Retirement Plan; and Member of the Board of Governors, Tel-Aviv University. Dr.
Kaufman's current term as a director expires in 2001.
Richard G. Merrill has been a director of the Company since 1994. Mr.
Merrill was Executive Vice President of Prudential Insurance Company of America
from August 1987 to March 1991 when he retired. Prior thereto, Mr. Merrill
served as Chairman and President of Prudential Asset Management Company since
1985. Mr. Merrill is a director of Sysco Corporation. Mr. Merrill's current term
as a director expires in 2002.
Jack H. Nusbaum has been a director of the Company since 1967. Mr.
Nusbaum is the Chairman of the New York law firm of Willkie Farr & Gallagher
where he has been a partner for more than the last five years. He is a director
of Neuberger Berman Inc., Pioneer Companies, Inc., Prime Hospitality Corp.,
Strategic Distribution, Inc. and The Topps Company, Inc. Mr. Nusbaum's current
term as a director expires in 2002.
Mark L. Shapiro has been a director of the Company since 1974. Since
September 1998, Mr. Shapiro has been a private investor. From July 1997 through
August 1998, Mr. Shapiro was a Senior Consultant to the Export-Import Bank of
the United States. Previously, he was a Managing Director in the investment
banking firm of Schroder & Co. Inc. for more than the past five years. Mr.
Shapiro's current term as a director expires in 2002.
Martin Stone has been a director of the Company since 1990. Mr. Stone
is Chairman of Professional Sports, Inc. (the Tucson Sidewinders AAA baseball
team) and Chairman of Adirondack Corporation, all for more than the past five
years. Mr. Stone is also a director of Canyon Ranch, Inc. and a member of the
Advisory Board of Yosemite National Park. Mr. Stone's current term as a director
expires in 2001.
28
<PAGE> 29
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1999, and which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security ownership of certain beneficial owners
Reference is made to the registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1999, and which is incorporated herein by reference.
(b) Security ownership of management
Reference is made to the registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1999, and which is incorporated herein by reference.
(c) Changes in control
Reference is made to the registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1999, and which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1999, and which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Financial Statements
The Management's Discussion and Analysis of Financial Condition and
Results of Operations, and the Company's financial statements, together with the
report thereon of KPMG LLP, appearing on pages 18 through 42 of the Company's
1999 Annual Report to Stockholders, are incorporated by reference in this Annual
Report on Form 10-K. With the exception of the aforementioned information, the
1999 Annual Report to Stockholders is not deemed to be filed as part of this
report. The schedules to the financial statements listed below should be read in
conjunction with the financial statements in such 1999 Annual Report to
Stockholders. Financial statement schedules not included in this Annual Report
on Form 10-K have been omitted because they are not applicable or required
information is shown in the financial statements or notes thereto.
<TABLE>
<CAPTION>
Index to Financial Statement Schedules Page
<S> <C>
Independent Auditors' Report on Schedules and Consent 35
Schedule II - Condensed Financial Information of Registrant 36
Schedule III - Supplementary Insurance Information 40
Schedule IV - Reinsurance 41
Schedule VI - Supplementary Information concerning
Property & Casualty Insurance Operations 42
</TABLE>
29
<PAGE> 30
(b) Reports on Form 8-K
During the quarter ended December 31, 1999, the registrant filed the
following Reports on Form 8-K:
Report dated October 22, 1999 with respect to a press release relating
to earnings of the Company for the third quarter of 1999 (under Item 5
of Form 8-K).
(c) Exhibits
The exhibits filed as part of this report are listed on pages 33 and 34
hereof.
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ William R. Berkley
----------------------------------------------
William R. Berkley, Chairman of the Board and
President
March 24, 2000
31
<PAGE> 32
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William R. Berkley Chairman of the Board and March 24, 2000
- ----------------------------------------- President
William R. Berkley
Principal executive officer
/s/ George G. Daly Director March 24, 2000
- -----------------------------------------
George G. Daly
/s/ Robert B. Hodes Director March 24, 2000
- -----------------------------------------
Robert B. Hodes
/s/ Henry Kaufman Director March 24, 2000
- -----------------------------------------
Henry Kaufman
/s/ Richard G. Merrill Director March 24, 2000
- -----------------------------------------
Richard G. Merrill
/s/ Jack H. Nusbaum Director March 24, 2000
- -----------------------------------------
Jack H. Nusbaum
/s/ Mark L. Shapiro Director March 24, 2000
- -----------------------------------------
Mark L. Shapiro
/s/ Martin Stone Director March 24, 2000
- -----------------------------------------
Martin Stone
/s/ Eugene G. Ballard Senior Vice President, March 24, 2000
- ----------------------------------------- Chief Financial Officer and
Eugene G. Ballard Treasurer
Principal financial officer
/s/ Clement P. Patafio Vice President, March 24, 2000
- ----------------------------------------- Corporate Controller
Clement P. Patafio
</TABLE>
32
<PAGE> 33
ITEM 14. (c) EXHIBITS
Number
(2.1) Agreement and Plan of Merger between the Company, Berkley Newco Corp.
and MECC, Inc. (incorporated by reference to Exhibit 2.1 of the
Company's Current Report on Form 8-K (File No. 0-7849) filed with the
Commission on September 28, 1995).
(2.2) Agreement and Plan of Restructuring, dated July 20, 1995, by and
among the Company, Signet Star Holdings, Inc., Signet Star
Reinsurance Company, Signet Reinsurance Company and General Re
Corporation (incorporated by reference to Exhibit 2.2 of the
Company's Current Report on Form 8-K (File No. 0-7849) filed with the
Commission on September 28, 1995).
(3.1) Restated Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K
(File No. 0-7849) filed with the Commission on March 30, 1994).
(3.2) Amendment, dated May 12, 1998, to the Company's Restated Certificate
of Incorporation, as amended (incorporated by reference to Exhibit
3.2 of the Company's Annual Report on Form 10-K (File No. 0-7849)
filed with the Commission on March 23, 1999).
(3.3) Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock (incorporated by reference to Exhibit
3.1 of the Company's Quarterly Report on Form 10-Q (File No. 0-7849)
filed with the Commission on August 11, 1999).
(3.4) Amended and Restated By-Laws (incorporated by reference to Exhibit
3(ii) of the Company's Current Report on Form 8-K (File No. 0-7849)
filed with the Commission on May 11, 1999).
(4) The instruments defining the rights of holders of the long-term debt
securities of the Company are omitted pursuant to Section
(b)(4)(iii)(A) of Item 601 of Regulation S-K. The Company agrees to
furnish supplementally copies of these instruments to the Commission
upon request.
(10.1) Credit Agreement dated as of December 10, 1999 among the Company,
Bank of America, National Association, as Administrative Agent, and
the other financial institutions party thereto (filed herewith).
(10.2) Rights Agreement, dated as of May 11, 1999, between the Company and
ChaseMellon Shareholder Services, LLC, as Rights Agent (incorporated
by reference to Exhibit 99.1 of the Company's Current Report on Form
8-K (File No. 0-7849) filed with the Commission on May 11, 1999).
(10.3) The Company's 1982 Stock Option Plan (incorporated by reference to
Exhibit 10.1 of the Company's Registration Statement on Form S-1
(File No. 2-98396) filed with the Commission on June 14, 1985).
(10.4) First Amended and Restated W. R. Berkley Corporation 1992 Stock
Option Plan (incorporated by reference to Exhibit 10.2 of the
Company's Annual Report on Form 10-K (File No. 0-7849) filed with the
Commission on March 23, 1999).
(10.5) The Company's lease dated June 3, 1983 with the Ahneman, Devaul and
Devaul Partnership, incorporated by reference to Exhibit 10.3 of the
Company's Registration Statement on Form S-1 (File No. 2-98396) filed
with the Commission on June 14, 1985.
(10.6) W.R. Berkley Corporation Deferred Compensation Plan for Officers as
amended January 1, 1991 (incorporated by reference to Exhibit 10.4 of
the Company's Annual Report on Form 10-K (File No. 0-7849) filed with
the Commission on March 26, 1996).
(10.7) W. R. Berkley Corporation Deferred Compensation Plan for Directors as
adopted March 7, 1996 (incorporated by reference to Exhibit 10.5 of
the Company's Annual Report on Form 10-K (File No. 0-7849) filed with
the Commission on March 26, 1996).
(10.8) W. R. Berkley Corporation Annual Incentive Compensation Plan
(incorporated by reference to Exhibit 10.7 of the Company's Annual
Report on Form 10-K (File No. 0-7849) filed with the Commission on
March 27, 1998).
33
<PAGE> 34
(10.9) W. R. Berkley Corporation Long Term Incentive Plan (incorporated by
reference to Exhibit 10.8 of the Company's Annual Report on Form 10-K
(File No. 0-7849) filed with the Commission on March 27, 1998).
(10.10) 1997 Directors Stock Plan, as Amended and Restated as of May 11, 1999
(incorporated by reference to Exhibit 10.2 of the Company's Quarterly
Report on Form 10-Q (File No. 0-7849) filed with the Commission on
August 11, 1999).
(10.11) Letter agreement between the Company and its Senior Vice
President-General Counsel (incorporated by reference to Exhibit 10.1
of the Company's Quarterly Report on Form 10-Q (File No. 0-7849)
filed with the Commission on August 11, 1999).
(10.12) Separation Agreement dated January 24, 2000 between John D. Vollaro
and the Company (filed herewith).
(13) 1999 Annual Report to Stockholders of W.R. Berkley Corporation (only
those portions of such Annual Report that are incorporated by
reference in this Report on Form 10-K are deemed filed) (filed
herewith).
(21) Following is a list of the Company's significant subsidiaries.
Subsidiaries of subsidiaries are indented and the parent of each such
corporation owns 100% of the outstanding voting securities of such
corporation except as noted below.
<TABLE>
<CAPTION>
Jurisdiction of Percentage
Incorporation owned
------------- -----
<S> <C> <C>
All American Agency Facilities, Inc. Delaware 100%
Berkley Regional Insurance Company: Missouri 100%
Acadia Insurance Company: Maine 100%
Chesapeake Bay Property and Casualty
Insurance Company Maine 100%
Berkley Insurance Company of the Carolinas North Carolina 100%
Continental Western Insurance Company Iowa 100%
Firemen's Insurance Company of Washington, D.C.: Maryland 100%
Great River Insurance Company Mississippi 100%
Tri-State Insurance Company of Minnesota: Minnesota 100%
American West Insurance Company North Dakota 100%
Union Insurance Company Nebraska 100%
Union Standard Insurance Company Oklahoma 100%
Berkley International, LLC New York 65%
Carolina Casualty Insurance Company Florida 100%
Clermont Specialty Managers, Ltd. New Jersey 100%
J/I Holding Corporation: Delaware 100%
Admiral Insurance Company: Delaware 100%
Admiral Indemnity Insurance Company Delaware 100%
Berkley Risk Services, LLC. Minnesota 100%
Nautilus Insurance Company: Arizona 100%
Great Divide Insurance Company North Dakota 100%
Key Risk Management Services, Inc. North Carolina 100%
Key Risk Insurance Company North Carolina 100%
MECC, Inc.: Delaware 100%
Midwest Employers Casualty Company: Ohio 100%
Preferred Employers Insurance Company California 100%
Riverport Insurance Company of California California 100%
Monitor Liability Managers, Inc. Delaware 100%
Monitor Surety Managers, Inc. Delaware 100%
Queen's Island Insurance Company, Ltd. Bermuda 100%
Signet Star Holdings, Inc.: Delaware 100%
Signet Star Reinsurance Company Delaware 100%
Facultative ReSources, Inc. Connecticut 100%
Gemini Insurance Company Delaware 100%
Starnet Insurance Company Delaware 100%
</TABLE>
(23) See Independent Auditors' report on schedules and consent.
(27) Financial Data Schedule.
34
<PAGE> 35
INDEPENDENT AUDITORS' REPORT ON SCHEDULES AND CONSENT
Board of Directors and Stockholders
W. R. Berkley Corporation
The audits referred to in our report dated February 24, 2000, included the
related financial statement schedules as of December 31, 1999 and 1998
incorporated by reference in the Form 10-K, and for each of the years in the
three-year period ended December 31, 1999. These financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company has
changed its method of accounting for insurance-related assessments in 1999.
We consent to the use of our reports incorporated by reference in the
Registration Statements, (No. 33-95552) and (No. 333-00459) on Form S-3 and (No.
33-7488), (No. 33-88640), (No. 333-33935) and (No. 33-55726) on Form S-8 of W.
R. Berkley Corporation.
KPMG LLP
New York, New York
March 24, 2000
35
<PAGE> 36
Schedule II
W. R. Berkley Corporation
Condensed Financial Information of Registrant
Balance Sheets (Parent Company)
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Assets
Cash (including invested cash) $ 22,081 $ 137,422
Fixed maturity securities:
Held to maturity, at cost
(fair value $5,523 and $5,563) 5,523 5,563
Available for sale at fair value (cost $714 and $898) 705 894
Equity securities, at fair value:
Available for sale (cost $698 and $698) 1,110 755
Trading account (cost $773 and $698) 773 698
Investments in subsidiaries 1,091,312 1,353,201
Due from subsidiaries 52,124 54,753
Current Federal income taxes receivable 9,911 11,620
Deferred Federal income taxes 82,896 --
Real estate, furniture & equipment at cost, less accumulated
depreciation 18,962 19,514
Other assets 4,654 5,571
----------- -----------
$ 1,290,051 $ 1,589,991
=========== ===========
Liabilities, Debt and Stockholders' Equity
Liabilities:
Due to subsidiaries (principally deferred income taxes) $ 86,680 $ 77,951
Short-term debt 35,000 55,500
Deferred Federal income taxes -- 7,198
Other liabilities 27,468 29,421
----------- -----------
149,148 170,070
----------- -----------
Long-term debt 350,999 350,651
Subsidiary trust junior subordinated debt 198,126 207,988
Stockholders' equity:
Preferred stock -- 65
Common stock 7,281 7,281
Additional paid-in capital 331,640 429,612
Retained earnings (including accumulated
undistributed net income of
subsidiaries of $386,470 and $517,649
in 1999 and 1998, respectively) 551,401 601,908
Accumulated other comprehensive income (loss) (44,500) 54,672
Treasury stock, at cost (254,044) (232,256)
----------- -----------
591,778 861,282
----------- -----------
$ 1,290,051 $ 1,589,991
=========== ===========
</TABLE>
See note to condensed financial statements.
36
<PAGE> 37
Schedule II, Continued
W. R. Berkley Corporation
Condensed Financial Information of Registrant, Continued
Statements of Operations (Parent Company)
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Management fees and investment income from affiliates, including dividends of
$96,817, $65,836 and $33,911 for 1999,
1998 and 1997, respectively $ 102,963 $ 72,812 $ 40,058
Realized investment gains (losses) 321 -- 2,739
Other income 3,975 10,506 10,972
--------- --------- ---------
Total revenues 107,259 83,318 53,769
Expenses, other than interest expense 20,978 22,201 23,801
Restructuring charge 1,502 -- --
Interest expense 49,207 47,571 47,645
--------- --------- ---------
Income (loss) before Federal
income taxes 35,572 13,546 (17,677)
--------- --------- ---------
Federal income taxes:
Federal income taxes provided by
Subsidiaries on a separate return
Basis 8,474 44,370 54,884
Federal income tax benefit (provision) on a
Consolidated return basis 48,958 (5,115) (30,849)
--------- --------- ---------
Net benefit 57,432 39,255 24,035
--------- --------- ---------
Income (loss) before undistributed equity
in net income of subsidiaries 93,004 52,801 6,358
Equity in undistributed net income (loss)
of subsidiaries (130,232) 6,835 93,210
--------- --------- ---------
Income (loss) before preferred dividends (37,228) 59,636 99,568
Preferred dividends (567) (8,424) (8,349)
--------- --------- ---------
Net income (loss) before extraordinary gain (loss) 37,795 51,212 91,219
Extraordinary gain (loss) 735 (5,017) --
--------- --------- ---------
Net income (loss) attributable to
common stockholders $ (37,060) $ 46,195 $ 91,219
========= ========= =========
</TABLE>
See note to condensed financial statements.
37
<PAGE> 38
Schedule II, Continued
W. R. Berkley Corporation
Condensed Financial Information of Registrant, Continued
Statement of Cash Flows (Parent Company)
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) before preferred dividends and
extraordinary items $ (37,298) $ 59,636 $ 99,568
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Equity in undistributed net
income of subsidiaries 130,232 (6,835) (93,210)
Tax payments received from subsidiaries 24,105 63,199 45,999
Federal income taxes provided by subsidiaries
on a separate return basis (8,473) (44,370) (54,884)
Change in Federal income taxes (35,018) (29,342) (1,409)
Realized investment losses (321) -- (2,739)
Other, net 3,274 (1,790) 4,114
--------- --------- ---------
Net cash provided by operating activities
before trading account sales (purchases) 76,501 40,498 (2,561)
Trading account sales (purchases), net (75) (79) 32,712
--------- --------- ---------
Net cash provided by
operating activities 76,426 40,419 30,151
--------- --------- ---------
Cash flow used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 23,973 3,167 19,954
Equity securities -- -- 1,432
Proceeds from maturities and prepayments of
fixed maturity securities 222 112,643 --
Cost of purchases, excluding trading account:
Fixed maturity securities (23,648) -- (9,305)
Equity securities -- -- (2,098)
Cost of companies acquired -- -- (7,238)
Proceeds from sale of membership interest
to subsidiaries 33,566 -- --
Investments in and advances to
subsidiaries, net (77,362) (5,775) (14,986)
Net additions to real estate, furniture &
equipment (357) 201 444
Other, net -- -- 5,539
--------- --------- ---------
Net cash used in investing activities (43,606) 110,236 (6,258)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of long-term debt -- 39,882 --
Net proceeds from issuance of short-term debt (20,500) 55,500 --
Purchase of treasury shares (4,895) (59,240) --
Cash dividends to common stockholders (13,888) (13,518) (11,695)
Cash dividends to preferred shareholders (2,001) (7,356) (8,717)
Purchase of preferred stock (98,092) -- (41,523)
Retirement of long-term debt (9,171) (49,104) --
Other, net 386 2,585 755
--------- --------- ---------
Net cash provided by financing activities (148,161) (31,251) (61,180)
--------- --------- ---------
Net increase in cash and invested cash (115,341) 119,404 (37,287)
Cash and invested cash at beginning of year 137,422 18,018 55,305
--------- --------- ---------
Cash and invested cash at end of year $ 22,081 $ 137,422 $ 18,018
========= ========= =========
</TABLE>
See note to condensed financial statements.
38
<PAGE> 39
Schedule II, Continued
W. R. Berkley Corporation
Condensed Financial Information of Registrant, Continued
December 31, 1999, 1998 and 1997
Note to Condensed Financial Statements (Parent Company)
The accompanying condensed financial statements should be read in
conjunction with the notes to consolidated financial statements included
elsewhere herein. Reclassifications have been made in the 1998 and 1997
financial statements as originally reported to conform them to the presentation
of the 1999 financial statements.
The Company files a consolidated federal tax return with the results of
its domestic insurance subsidiaries included on a statutory basis. Under present
Company policy, Federal income taxes payable by (or refundable to) subsidiary
companies on a separate-return basis are paid to (or refunded by) W. R. Berkley
Corporation, and the Company pays the tax due on a consolidated return basis.
Included in invested cash at December 31, 1998 is $114,520,667 placed
in a trust to service the remaining outstanding shares of the Series A Preferred
Stock. The Company redeemed the Series A Preferred Stock on January 25, 1999.
39
<PAGE> 40
Schedule III
W. R. Berkley Corporation and Subsidiaries
Supplementary Insurance Information
December 31, 1999, 1998 and 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
Reserve for
Deferred policy losses and Net
acquisition loss Unearned Premiums investment
cost expenses premiums earned income
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
December 31, 1999
Regional $ 84,046 $ 635,115 $ 338,237 $ 650,131 $ 52,639
Reinsurance 34,911 500,808 119,376 297,650 47,288
Specialty 37,298 722,689 178,357 256,156 50,231
Alternative markets 7,510 442,133 34,846 123,504 36,355
International 18,583 60,493 19,010 86,943 6,469
Corporate and adjustments -- -- -- -- (2,666)
---------- ---------- ---------- ---------- ----------
Total $ 182,348 $2,361,238 $ 689,826 $1,414,384 $ 190,316
========== ========== ========== ========== ==========
December 31, 1998
Regional $ 83,613 $ 495,164 $ 337,414 $ 622,280 $ 53,942
Reinsurance 29,906 435,920 102,566 246,277 47,643
Specialty 37,148 745,790 167,648 235,055 59,345
Alternative markets 7,531 399,560 37,061 101,755 34,667
International 10,696 50,132 20,172 73,032 5,469
Corporate and adjustments -- -- -- -- 1,354
---------- ---------- ---------- ---------- ----------
Total $ 168,894 $2,126,566 $ 664,861 $1,278,399 $ 202,420
========== ========== ========== ========== ==========
December 31, 1997
Regional $ 79,726 $ 396,648 $ 315,978 $ 575,911 $ 51,920
Reinsurance 22,620 389,285 77,159 195,825 45,520
Specialty 29,949 751,068 147,443 213,794 60,162
Alternative markets 7,618 344,302 31,018 86,229 34,390
International 5,824 28,385 17,786 39,988 3,623
Corporate and adjustments -- -- -- -- 3,973
---------- ---------- ---------- ---------- ----------
Total $ 145,737 $1,909,688 $ 589,384 $1,111,747 $ 199,588
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Amortization of
Loss and deferred policy Other operating
Loss acquisition cost and Net premiums
expenses costs expenses written
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1999
Regional $ 554,394 $ 204,961 $ 33,261 $ 649,849
Reinsurance 226,229 92,503 6,790 309,181
Specialty 174,251 77,950 17,606 260,380
Alternative markets 82,757 36,063 78,476 122,137
International 48,195 32,812 8,526 86,172
Corporate and adjustments -- -- 15,836 --
---------- ---------- ---------- ----------
Total $1,085,826 $ 444,289 $ 160,495 $1,427,719
========== ========== ========== ==========
December 31, 1998
Regional $ 476,920 $ 196,391 $ 33,732 $ 641,316
Reinsurance 183,020 62,855 15,084 269,634
Specialty 145,624 75,968 4,474 254,003
Alternative markets 65,634 30,903 72,897 106,195
International 43,564 28,495 15,244 75,106
Corporate and adjustments -- -- 20,112 --
---------- ---------- ---------- ----------
Total $ 914,762 $ 394,612 $ 161,543 $1,346,254
========== ========== ========== ==========
December 31, 1997
Regional $ 385,285 $ 168,474 $ 33,759 $ 618,768
Reinsurance 135,530 58,200 3,836 206,652
Specialty 134,313 73,056 8,865 219,272
Alternative markets 55,386 26,002 69,044 90,870
International 23,910 12,139 12,874 42,079
Corporate and adjustments -- -- 21,527 --
---------- ---------- ---------- ----------
Total $ 734,424 $ 337,871 $ 149,905 $1,177,641
========== ========== ========== ==========
</TABLE>
40
<PAGE> 41
Schedule IV
W. R. Berkley Corporation and Subsidiaries
Reinsurance
Years ended December 31, 1999, 1998 and 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
Assumed Percentage
Ceded from of amount
Direct to other other Net assumed to
amount companies companies amount net
---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Premiums written:
Year ended December 31, 1999:
Regional insurance $ 755,752 $ 109,981 $ 4,078 $ 649,849 .6%
Reinsurance 9,094 29,703 329,790 309,181 106.7%
Specialty insurance 376,111 126,068 10,337 260,380 4.0%
Alternative markets 69,671 20,333 72,799 122,137 59.6%
International 107,257 21,085 -- 86,172 --
---------- ---------- ---------- ---------- -------
Total $1,317,885 $ 307,170 $ 417,004 $1,427,719 29.2%
========== ========== ========== ========== =======
Year ended December 31, 1998:
Regional insurance $ 744,560 $ 108,741 $ 5,497 $ 641,316 .9%
Reinsurance 1,240 27,544 295,938 269,634 109.8%
Specialty insurance 364,564 120,111 9,550 254,003 3.8%
Alternative markets 62,942 15,078 58,331 106,195 54.9%
International 95,870 20,764 -- 75,106 --
---------- ---------- ---------- ---------- -------
Total $1,269,176 $ 292,238 $ 369,316 $1,346,254 27.4%
========== ========== ========== ========== =======
Year ended December 31, 1997:
Regional insurance $ 691,431 $ 82,598 $ 9,935 $ 618,768 1.6%
Reinsurance -- 17,059 223,711 206,652 108.3%
Specialty insurance 329,266 118,868 8,874 219,272 4.0%
Alternative markets 56,759 7,384 41,495 90,870 45.7%
International 56,924 14,845 -- 42,079 --
---------- ---------- ---------- ---------- -------
Total $1,134,380 $ 240,754 $ 284,015 $1,177,641 24.1%
========== ========== ========== ========== =======
</TABLE>
41
<PAGE> 42
Schedule VI
W. R. Berkley Corporation and Subsidiaries
Supplementary Information Concerning Property-Casualty Insurance Operations
December 31, 1999, 1998 and 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Deferred policy acquisition costs $ 182,348 $ 168,894 $ 145,737
Reserves for losses and loss expenses 2,361,238 2,126,566 1,909,688
Unearned premium 689,826 664,861 589,384
Premiums earned 1,414,384 1,278,399 1,111,747
Net investment income 190,316 202,420 199,588
Losses and loss expenses incurred:
Current Year 1,032,089 944,887 747,977
Prior Years 28,351 (42,929) (21,313)
Amortization of discount 10,473 9,111 7,760
Amortization of deferred policy
acquisition costs 444,289 394,612 337,871
Paid losses and loss expenses 930,352 762,965 639,519
Net premiums written 1,427,719 1,346,254 1,177,641
</TABLE>
42
<PAGE> 1
Exhibit 10.1
CREDIT AGREEMENT
DATED AS OF DECEMBER 10, 1999
AMONG
W.R. BERKLEY CORPORATION,
BANK OF AMERICA, NATIONAL ASSOCIATION,
AS ADMINISTRATIVE AGENT,
AND
THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO
ARRANGED BY
BANC OF AMERICA SECURITIES LLC,
AS SOLE BOOK MANAGER AND SOLE LEAD ARRANGER
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
<S> <C>
ARTICLE I
DEFINITIONS 1
1.1 Certain Defined Terms 1
1.2 Other Interpretive Provisions 19
1.3 Accounting Principles 21
ARTICLE II
THE CREDITS 21
2.1 Amounts and Terms of Commitments 21
2.2 Loan Accounts 21
2.3 Procedure for Borrowing 22
2.4 Conversion and Continuation Elections 23
2.5 Voluntary Termination or Reduction of Commitments 25
2.6 Optional Prepayments 25
2.7 Repayment 25
2.8 Interest 25
2.9 Fees 26
(a) Arrangement, Agency Fees 26
(b) Facility Fees 27
(c) Utilization Fees 27
2.10 Computation of Fees and Interest 27
2.11 Payments by the Company 28
2.12 Payments by the Banks to the Agent 29
2.13 Sharing of Payments, Etc. 29
2.14 Termination Date 30
2.15 Increase of Commitments 31
ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY 31
3.1 Taxes 32
3.2 Illegality 33
3.3 Increased Costs and Reduction of Return 34
3.4 Funding Losses 34
3.5 Inability to Determine Rates 35
3.6 Certificates of Banks 36
3.7 Survival 36
ARTICLE IV
CONDITIONS PRECEDENT 36
4.1 Conditions of Initial Loans 36
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
(a) Credit Agreement and Notes 36
(b) Resolutions; Incumbency 36
(c) Organization Documents; Good Standing 37
(d) Legal Opinions 37
(e) Payment of Fees 37
(f) Certificate 37
(g) Other Documents 38
4.2 Conditions to All Borrowings 38
(a) Notice of Borrowing 38
(b) Continuation of Representations and Warranties 38
(c) No Existing Default 38
ARTICLE V
REPRESENTATIONS AND WARRANTIES 38
5.1 Corporate Existence and Power 38
5.2 Corporate Authorization; No Contravention 39
5.3 Governmental Authorization 39
5.4 Binding Effect 40
5.5 Litigation 40
5.6 No Default 40
5.7 ERISA Compliance 40
5.8 Use of Proceeds; Margin Regulations 41
5.9 Title to Properties 41
5.10 Taxes 42
5.11 Financial Condition 42
5.12 Environmental Matters 42
5.13 Regulated Entities 42
5.14 No Burdensome Restrictions 43
5.15 Copyrights, Patents, Trademarks and Licenses, etc. 43
5.16 Subsidiaries 43
5.17 Insurance 43
5.18 Full Disclosure 43
5.19 Solvency 44
5.20 Insurance Subsidiaries 44
5.21 Year 2000 44
ARTICLE VI
AFFIRMATIVE COVENANTS 44
6.1 Financial Statements 45
6.2 Certificates; Other Information 47
6.3 Notices 48
6.4 Preservation of Corporate Existence, Etc. 49
6.5 Maintenance of Property 50
6.6 Insurance 50
6.7 Payment of Obligations 50
6.8 Compliance with Laws 51
</TABLE>
-iii-
<PAGE> 4
<TABLE>
<S> <C>
6.9 Compliance with ERISA 51
6.10 Inspection of Property and Books and Records 51
6.11 Environmental Laws 52
6.12 Use of Proceeds 52
ARTICLE VII
NEGATIVE COVENANTS 52
7.1 Limitation on Liens 52
7.2 Disposition of Assets 54
7.3 Consolidations and Mergers 55
7.4 Transactions with Affiliates 55
7.5 Use of Proceeds 55
7.6 ERISA 56
7.7 Change in Business 56
7.8 Accounting Changes 56
7.9 Financial Covenants 56
7.10 Deferrable Interest Debentures 57
ARTICLE VIII
EVENTS OF DEFAULT 57
8.1 Event of Default 57
(a) Non-Payment 57
(b) Representation or Warranty 57
(c) Specific Defaults 57
(d) Other Defaults 57
(e) Cross-Default 57
(f) Insolvency; Voluntary Proceedings 58
(g) Involuntary Proceedings 58
(h) Employee Benefit Plans 59
(i) Monetary Judgments 59
(j) Non-Monetary Judgments 59
(k) Change of Control 59
(l) Loss of Licenses 59
(m) Adverse Change 60
(n) Change in Regulation 60
8.2 Remedies 60
8.3 Rights Not Exclusive 61
ARTICLE IX
THE AGENT 61
9.1 Appointment and Authorization 61
9.2 Delegation of Duties 61
9.3 Liability of Agent 61
9.4 Reliance by Agent 62
9.5 Notice of Default 63
</TABLE>
-iv-
<PAGE> 5
<TABLE>
<S> <C>
9.6 Credit Decision 63
9.7 Indemnification 64
9.8 Agent in Individual Capacity 64
9.9 Successor Agent 65
9.10 Withholding Tax 65
ARTICLE X
MISCELLANEOUS 67
10.1 Amendments and Waivers 67
10.2 Notices 68
10.3 No Waiver; Cumulative Remedies 69
10.4 Costs and Expenses 69
10.5 Indemnity 70
10.6 Payments Set Aside 71
10.7 Successors and Assigns 71
10.8 Assignments, Participations, etc. 71
10.9 Confidentiality 73
10.10 Set-off 74
10.11 Notification of Addresses, Lending Offices, Etc. 75
10.12 Counterparts 75
10.13 Severability 75
10.14 No Third Parties Benefited 75
10.15 Governing Law and Jurisdiction 75
10.16 Waiver of Jury Trial 76
10.17 Entire Agreement 76
</TABLE>
SCHEDULES
Schedule 2.1 Commitments
Schedule 5.7 ERISA
Schedule 5.16 Subsidiaries and Minority Interests
Schedule 7.1 Permitted Liens
Schedule 7.1(k) Purchase Money Security Interests
Schedule 10.2 Lending Offices; Addresses for Notices
EXHIBITS
Exhibit A Form of Notice of Borrowing
Exhibit B Form of Notice of Conversion/Continuation
Exhibit C Form of Compliance Certificate
Exhibit D Form of Legal Opinion of Company's Counsel
Exhibit E Form of Assignment and Acceptance
Exhibit F Form of Promissory Note
-v-
<PAGE> 6
CREDIT AGREEMENT
This CREDIT AGREEMENT is entered into as of December 10, 1999, among
W.R. Berkley Corporation, a Delaware corporation (the "Company"), the several
financial institutions from time to time party to this Agreement (collectively,
the "Banks"; individually, a "Bank"), and Bank of America, National Association,
as administrative agent for the Banks.
WHEREAS, the Banks have agreed to make available to the Company a
revolving credit facility upon the terms and conditions set forth in this
Agreement;
NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained herein, the parties agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Certain Defined Terms. The following terms have the following
meanings:
"Acquisition" means any transaction or series of related
transactions for the purpose of or resulting, directly or indirectly,
in (a) the acquisition of all or substantially all of the assets of a
Person, or of any business or division of a Person, (b) the acquisition
of in excess of 50% of the capital stock, partnership interests or
equity of any Person, or otherwise causing any Person to become a
Subsidiary, or (c) a merger or consolidation or any other combination
with another Person (other than a Person that is a Subsidiary) provided
that the Company or the Subsidiary is the surviving entity.
"Affiliate" means, as to any Person, any other Person which,
directly or indirectly, is in control of, is controlled by, or is under
common control with, such Person. A Person shall be deemed to control
another Person if the controlling Person possesses, directly or
indirectly, the power to direct or cause the direction of the
management and policies of the other Person, whether through the
ownership of voting securities, by contract, or otherwise.
"Agent" means BofA in its capacity as administrative agent for
the Banks hereunder, and any successor agent arising under Section 9.9.
<PAGE> 7
"Agent-Related Persons" means BofA and any successor
administrative agent arising under Section 9.9, together with their
respective Affiliates (including, in the case of BofA, the Arranger),
and the officers, directors, employees, agents and attorneys-in-fact of
such Persons and Affiliates.
"Agent's Payment Office" means the address for payments set
forth on the signature page hereto in relation to the Agent, or such
other address as the Agent may from time to time specify.
"Agreement" means this Credit Agreement.
"Annual Statement" means the annual financial statement of any
insurance company as required to be filed with the Department, together
with all exhibits or schedules filed therewith, prepared in conformity
with SAP.
"Applicable Facility Fee Rate", "Applicable Margin" and
"Applicable Utilization Fee Rate" means the following percentages
(expressed in basis points) from time to time based upon the then
applicable senior unsecured, unsupported debt rating of the Company
assigned by S&P and Moody's:
<TABLE>
<CAPTION>
LEVEL I LEVEL II LEVEL III LEVEL IV
> or = > or = > or = < or =
SENIOR UNSECURED DEBT RATING A+/A1 OR A-/A3 BBB+/Baa1 BBB/Baa2
A/A2
<S> <C> <C> <C> <C>
Applicable Facility Fee Rate 7.50 bps 8.50 bps 10.00 bps 15.00 bps
Applicable Margin for Offshore Rate Loans 37.50 bps 46.50 bps 55.00 bps 70.00 bps
Application Margin for Base Rate Loans 0 bps 0 bps 0 bps 0 bps
Applicable Utilization Fee Rate 5.0 bps 5.0 bps 10.0 bps 10.0 bps
</TABLE>
Notwithstanding the foregoing, the Applicable Margin during
the period from the date hereof to and including January 31, 2000 shall
be increased by 150 basis points with respect to all Loans made on the
date hereof in excess of $35,000,000 (or for an Interest Period of one
month) and all Loans made after the date hereof.
The Applicable Facility Fee Rate, Applicable Margin and
Applicable Utilization Fee Rate shall be determined based upon the
higher of the Company's senior debt rating from S&P or Moody's except
that if the Company's senior debt rating differs by more than one level
between such ratings from S&P and Moody's, the Applicable Facility Fee
Rate, Applicable
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<PAGE> 8
Margin and Applicable Utilization Fee Rate shall be one level higher
than the lower such rating. In the event the Company's senior debt is
unrated by both S&P and Moody's, the Applicable Facility Fee Rate, the
Applicable Margin and the Applicable Utilization Fee Rate shall be
determined as if Level IV were applicable until the senior debt shall
be rated.
"Arranger" means Banc of America Securities LLC, a Delaware
limited liability company, as sole lead arranger hereunder.
"Assignee" has the meaning specified in subsection 10.8(a).
"Attorney Costs" means and includes all fees and disbursements
of any law firm or other external counsel, the allocated cost of
internal legal services and all disbursements of internal counsel.
"Bank" has the meaning specified in the introductory clause
hereto.
"Bankruptcy Code" means the Federal Bankruptcy Reform Act of
1978 (11 U.S.C. Section 101, et seq.).
"Base Rate" means, for any day, the higher of: (a) 0.50% per
annum above the latest Federal Funds Rate; and (b) the rate of interest
in effect for such day as publicly announced from time to time by BofA
in Charlotte, North Carolina as its "prime rate" (the "prime rate"
being a rate set by BofA based upon various factors including BofA's
costs and desired return, general economic conditions and other
factors, and is used as a reference point for pricing some loans, which
may be priced at, above, or below such announced rate). Any change in
the prime rate announced by BofA shall take effect at the opening of
business on the day specified in the public announcement of such
change. Each interest rate based upon the Base Rate shall be adjusted
simultaneously with any change in the Base Rate.
"Base Rate Loan" means a Loan that bears interest based on the
Base Rate.
"BofA" means Bank of America, National Association, a national
banking association.
"Borrowing" means a borrowing hereunder consisting of Loans of
the same Type made to the Company on the same day by the Banks under
Article II, and having the same Interest Period.
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<PAGE> 9
"Borrowing Date" means any date on which a Borrowing occurs
under Section 2.3.
"Business Day" means any day other than a Saturday, Sunday or
other day on which commercial banks in San Francisco, California are
authorized or required by law to close and, if the applicable Business
Day relates to any Offshore Rate Loan, means such a day on which
dealings are carried on in the applicable offshore dollar interbank
market.
"Capital Adequacy Regulation" means any guideline, request or
directive of any central bank or other Governmental Authority, or any
other law, rule or regulation, whether or not having the force of law,
in each case, regarding capital adequacy of any bank or of any
corporation controlling a bank.
"Change of Control" means (a) any sale, lease, exchange or
other transfer (in one transaction or a series of related transactions)
of all, or substantially all, of the assets of the Company; (b) any
"person" as such term is used in Sections 13(d) and 14(d) of the
Exchange Act is or becomes, directly or indirectly, the "beneficial
owner," as defined in Rule 13d-3 under the Exchange Act, of securities
of the Company that represent 51% or more of the combined voting power
of the Company's then outstanding securities (other than William R.
Berkley or any Affiliate of William R. Berkley); or (c) individuals who
are Continuing Directors shall cease for any reason to constitute at
least a majority of the Board of Directors of the Company.
"Closing Date" means the date on which all conditions
precedent set forth in Section 4.1 are satisfied or waived by all Banks
(or, in the case of subsection 4.1(e), waived by the Person entitled to
receive such payment).
"Code" means the Internal Revenue Code of 1986, and
regulations promulgated thereunder.
"Commitment", as to each Bank, has the meaning specified in
Section 2.1.
"Common Stockholder's Equity" means, as of a particular date,
the common stockholder's equity (including common stock, additional
paid-in capital and retained earnings after deducting treasury stock)
which would appear on a consolidated balance sheet of the Company and
its consolidated Subsidiaries prepared as of such date in accordance
with GAAP but without giving effect to Statement of Financial
Accounting Standards No. 115.
-4-
<PAGE> 10
"Compliance Certificate" means a certificate substantially in
the form of Exhibit C.
"Contingent Obligation" means, as to any Person, without
duplication, any direct or indirect liability of that Person, whether
or not contingent, with or without recourse, (a) with respect to any
Indebtedness, lease, dividend, letter of credit or other obligation
(the "primary obligations") of another Person (the "primary obligor"),
including any obligation of that Person (i) to purchase, repurchase or
otherwise acquire such primary obligations or any security therefor,
(ii) to advance or provide funds for the payment or discharge of any
such primary obligation, or to maintain working capital or equity
capital of the primary obligor or otherwise to maintain the net worth
or solvency or any balance sheet item, level of income or financial
condition of the primary obligor, (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner
of any such primary obligation of the ability of the primary obligor to
make payment of such primary obligation, or (iv) otherwise to assure or
hold harmless the holder of any such primary obligation against loss in
respect thereof (each, a "Guaranty Obligation"); (b) with respect to
any Surety Instrument issued for the account of that Person or as to
which that Person is otherwise liable for reimbursement of drawings or
payments; or (c) to purchase any materials, supplies or other property
from, or to obtain the services of, another Person if the relevant
contract or other related document or obligation requires that payment
for such materials, supplies or other property, or for such services,
shall be made regardless of whether delivery of such materials,
supplies or other property is ever made or tendered, or such services
are ever performed or tendered, or (d) in respect of any Swap Contract;
provided, however, that Contingent Obligations shall not include
liabilities under policies or agreements of insurance or reinsurance
entered into by the Company or its Subsidiaries in the ordinary course
of business.
"Continuing Director" means (i) any Person who on the date of
this Agreement was a member of the Board of Directors of the Company,
while such Person is a member of the Board, or (ii) any Person who
subsequently becomes a member of the Board, while such Person is a
member of the Board, if such Person's nomination for election or
election to the Board is recommended or approved by a majority of the
Continuing Directors.
"Contractual Obligation" means, as to any Person, any
provision of any security issued by such Person or of any agreement,
undertaking, contract, indenture, mortgage, deed of
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<PAGE> 11
trust or other instrument, document or agreement to which such Person
is a party or by which it or any of its property is bound.
"Controlled Group" means the Company and any corporation,
trade or business that is, along with the Company, a member of a
controlled group of corporations or a controlled group of trades or
businesses as described in sections 414(b) and 414(c), respectively, of
the Code or in section 4001 of ERISA.
"Conversion/Continuation Date" means any date on which, under
Section 2.4, the Company (a) converts Loans of one Type to another
Type, or (b) continues as Loans of the same Type, but with a new
Interest Period, Loans having Interest Periods expiring on such date.
"Debt Ratio" shall mean the ratio of (i) all Indebtedness of
the Company (other than obligations under Swap Contracts consisting
only of options with respect to equity investments held in a merger
arbitrage portfolio of the Company or any Subsidiary which obligations
were entered into for the purpose of hedging risk with respect to such
portfolio) to (ii) Total Capital of the Company.
"Default" means any event or circumstance which, with the
giving of notice, the lapse of time, or both, would (if not cured or
otherwise remedied during such time) constitute an Event of Default.
"Deferrable Interest Debentures" means the 8.197% Junior
Subordinated Deferrable Interest Debentures due December 15, 2045
issued pursuant to an Indenture dated as of December 20, 1996, as
amended and supplemented from time to time, between the Company and The
Bank of New York.
"Department" means the applicable Governmental Authority of
the state of domicile of an insurance company responsible for the
regulation of said insurance company.
"Dollars", "dollars" and "$" each mean lawful money of the
United States.
"Eligible Assignee" means (i) a commercial bank organized
under the laws of the United States, or any state thereof, and having a
combined capital and surplus of at least $100,000,000; (ii) a
commercial bank organized under the laws of any other country which is
a member of the Organization for Economic Cooperation and Development,
or a political subdivision of any such country, and having a combined
capital and surplus of at least $100,000,000, provided that such bank
-6-
<PAGE> 12
is acting through a branch or agency located in United States; (iii) a
Person that is primarily engaged in the business of commercial banking
and that is (A) a Subsidiary of a Bank, (B) a Subsidiary of a Person of
which a Bank is a Subsidiary, or (C) a Person of which a Bank is a
Subsidiary; and (iv) a Person to which the Company and the Agent shall
agree.
"Environmental Claims" means all claims, however asserted, by
any Governmental Authority or other Person alleging potential liability
or responsibility for violation of any Environmental Law, or for
release or injury to the environment.
"Environmental Laws" means all federal, state or local laws,
statutes, common law duties, rules, regulations, ordinances and codes,
together with all administrative orders, directed duties, requests,
licenses, authorizations and permits of, and agreements with, any
Governmental Authorities, in each case relating to environmental,
health and safety matters.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and any successor statute of similar import, together
with the regulations promulgated thereunder and under the Code, in each
case as in effect from time to time. References to sections of ERISA
also refer to successor sections.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) under common control with the Company within the meaning
of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of
the Code for purposes of provisions relating to Section 412 of the
Code).
"Eurodollar Reserve Percentage" has the meaning specified in
the definition of "Offshore Rate".
"Event of Default" means any of the events or circumstances
specified in Section 8.1.
"Exchange Act" means the Securities Exchange Act of 1934, and
regulations promulgated thereunder.
"Federal Funds Rate" means, for any day, the rate set forth in
the weekly statistical release designated as H.15(519), or any
successor publication, published by the Federal Reserve Bank of New
York (including any such successor, "H.15(519)") on the preceding
Business Day opposite the caption "Federal Funds (Effective)"; or, if
for any relevant day such rate is not so published on any such
preceding Business Day, the rate for such day will be the
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<PAGE> 13
arithmetic mean as determined by the Agent of the rates for the last
transaction in overnight Federal funds arranged prior to 9:00 a.m. (New
York City time) on that day by each of three leading brokers of Federal
funds transactions in New York City selected by the Agent.
"Fee Letter" has the meaning specified in subsection 2.9(a).
"FRB" means the Board of Governors of the Federal Reserve
System, and any Governmental Authority succeeding to any of its
principal functions.
"GAAP" means generally accepted accounting principles set
forth from time to time in the opinions and pronouncements of the
Accounting Principles Board and the American Institute of Certified
Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board (or agencies with similar functions of
comparable stature and authority within the U.S. accounting
profession), which are applicable to the circumstances as of the date
of determination.
"Governmental Authority" means any nation or government, any
state or other political subdivision thereof, any central bank (or
similar monetary or regulatory authority) thereof, any entity
exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, and any
corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing.
"Guaranty Obligation" has the meaning specified in the
definition of "Contingent Obligation."
"Indebtedness" of any Person means, without duplication, (a)
all indebtedness for borrowed money; (b) all obligations issued,
undertaken or assumed as the deferred purchase price of property or
services (other than trade payables entered into in the ordinary course
of business on ordinary terms); (c) all non-contingent reimbursement or
payment obligations with respect to Surety Instruments (other than
obligations with respect to insurance products issued in the normal
course of business by Subsidiaries that are insurance companies); (d)
all obligations evidenced by notes, bonds, debentures or similar
instruments, including obligations so evidenced incurred in connection
with the acquisition of property, assets or businesses; (e) all
indebtedness created or arising under any conditional sale or other
title retention agreement, or incurred as financing, in either case
with respect to property acquired by the Person
-8-
<PAGE> 14
(even though the rights and remedies of the seller or bank under such
agreement in the event of default are limited to repossession or sale
of such property); (f) all obligations with respect to the principal
portion of capital leases; (g) all net obligations with respect to Swap
Contracts; (h) all indebtedness referred to in clauses (a) through (g)
above secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien
upon or in property (including accounts and contracts rights) owned by
such Person, even though such Person has not assumed or become liable
for the payment of such Indebtedness; and (i) all Guaranty Obligations
in respect of indebtedness or obligations of others of the kinds
referred to in clauses (a) through (g) above. For all purposes of this
Agreement, the Indebtedness of any Person shall include all recourse
Indebtedness of any partnership or joint venture or limited liability
company in which such Person is a general partner or a joint venturer
or a member. For purposes of this definition, Indebtedness shall not
include the Deferrable Interest Debentures to the extent such
Deferrable Interest Debentures constitute less than 15% of Total
Capital. If the Deferrable Interest Debentures constitute more than 15%
of Total Capital, then the portion of the Deferrable Interest
Debentures exceeding 15% of Total Capital will be included in
Indebtedness. Notwithstanding the foregoing, the Deferrable Interest
Debentures shall constitute Indebtedness for the purpose of Section
8.1(e).
"Indemnified Liabilities" has the meaning specified in Section
10.5.
"Indemnified Person" has the meaning specified in Section
10.5.
"Independent Auditor" has the meaning specified in subsection
6.1(a).
"Insolvency Proceeding" means (a) any case, action or
proceeding before any court or other Governmental Authority relating to
bankruptcy, reorganization, insolvency, liquidation, receivership,
dissolution, winding-up or relief of debtors, or (b) any general
assignment for the benefit of creditors, composition, marshalling of
assets for creditors, or other similar arrangement in respect of its
creditors generally or any substantial portion of its creditors
undertaken under U.S. Federal, state or foreign law, including the
Bankruptcy Code.
"Insurance Code" means, with respect to any insurance company,
the insurance code of its state of domicile and any successor statute
of similar import, together with the
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<PAGE> 15
regulations thereunder, as amended or otherwise modified and in effect
from time to time. References to sections of the Insurance Code shall
be construed also to refer to successor sections.
"Insurance Subsidiary" means Berkley Regional Insurance
Company, Continental Western Insurance Company, Signet Star Reinsurance
Company, Midwest Employers Casualty Company, Admiral Insurance Company
and any other Subsidiary of the Company, including Subsidiaries of
Subsidiaries, which is engaged in the insurance business and which
shall have assets in excess of $250,000,000 on a SAP basis.
"Interest Payment Date" means, as to any Offshore Rate Loan,
the last day of each Interest Period applicable to such Loan and, as to
any Base Rate Loan, the last Business Day of each calendar quarter,
provided, however, that if any Interest Period for an Offshore Rate
Loan exceeds three months, the date that falls three months after the
beginning of such Interest Period and after each Interest Payment Date
thereafter is also an Interest Payment Date.
"Interest Period" means, as to any Offshore Rate Loan, the
period commencing on the Borrowing Date of such Loan or on the
Conversion/Continuation Date on which the Loan is converted into or
continued as an Offshore Rate Loan, and ending on the date one, two,
three or six months thereafter as selected by the Company in its Notice
of Borrowing or Notice of Conversion/Continuation;
provided that:
(i) if any Interest Period would otherwise end on a
day that is not a Business Day, that Interest Period shall be
extended to the following Business Day unless the result of
such extension would be to carry such Interest Period into
another calendar month, in which event such Interest Period
shall end on the preceding Business Day;
(ii) any Interest Period that begins on the last
Business Day of a calendar month (or on a day for which there
is no numerically corresponding day in the calendar month at
the end of such Interest Period) shall end on the last
Business Day of the calendar month at the end of such Interest
Period; and
(iii) no Interest Period for any Loan shall extend
beyond the Revolving Termination Date.
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<PAGE> 16
"IRS" means the Internal Revenue Service, and any Governmental
Authority succeeding to any of its principal functions under the Code.
"Lending Office" means, as to any Bank, the office or offices
of such Bank specified as its "Lending Office" or "Domestic Lending
Office" or "Offshore Lending Office", as the case may be, on Schedule
10.2, or such other office or offices as such Bank may from time to
time notify the Company and the Agent.
"Lien" means any security interest, mortgage, deed of trust,
pledge, hypothecation, assignment, charge or deposit arrangement,
encumbrance, lien (statutory or other) or preferential arrangement of
any kind or nature whatsoever in respect of any property (including
those created by, arising under or evidenced by any conditional sale or
other title retention agreement, the interest of a lessor under a
capital lease, any financing lease having substantially the same
economic effect as any of the foregoing, or the filing of any financing
statement naming the owner of the asset to which such lien relates as
debtor, under the Uniform Commercial Code or any comparable law) and
any contingent or other agreement to provide any of the foregoing, but
not including the interest of a lessor under an operating lease.
"Loan" means an extension of credit by a Bank to the Company
under Article II, and may be a Base Rate Loan or an Offshore Rate Loan
(each, a "Type" of Loan).
"Loan Documents" means this Agreement, any Notes, the Fee
Letter and all other documents delivered to the Agent or any Bank in
connection herewith.
"Margin Stock" means "margin stock" as such term is defined in
Regulation T, U or X of the FRB.
"Material Adverse Effect" means (a) a material adverse change
in, or a material adverse effect upon, the operations, business,
properties or condition (financial or otherwise) of the Company and its
Subsidiaries taken as a whole; (b) a material impairment of the ability
of the Company to perform under any Loan Document and to avoid any
Event of Default; or (c) a material adverse effect upon the legality,
validity, binding effect or enforceability against the Company of any
Loan Document.
"Moody's" means Moody's Investor Service, Inc.
"Multiemployer Plan" means a "multiemployer plan", within the
meaning of Section 4001(a)(3) of ERISA, to which the Company or any
ERISA Affiliate makes, is making, or is obligated
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<PAGE> 17
to make contributions or, during the preceding three calendar years,
has made, or been obligated to make, contributions.
"NAIC" means the National Association of Insurance
Commissioners or any successor thereto.
"Note" means a promissory note executed by the Company in
favor of a Bank pursuant to subsection 2.2(b), in substantially the
form of Exhibit F.
"Notice of Borrowing" means a notice in substantially the form
of Exhibit A.
"Notice of Conversion/Continuation" means a notice in
substantially the form of Exhibit B.
"Obligations" means all advances, debts, liabilities,
obligations, covenants and duties arising under any Loan Document owing
by the Company to any Bank, the Agent, or any Indemnified Person,
whether direct or indirect (including those acquired by assignment),
absolute or contingent, due or to become due, now existing or hereafter
arising.
"Offshore Rate" means, for any Interest Period, with respect
to Offshore Rate Loans comprising part of the same Borrowing, the rate
of interest per annum (rounded upward to the next 1/100th of 1%)
determined by the Agent as follows:
Offshore Rate = LIBOR
------------------------------------
1.00 - Eurodollar Reserve Percentage
Where,
"Eurodollar Reserve Percentage" means for any day for
any Interest Period the maximum reserve percentage (expressed
as a decimal, rounded upward to the next 1/100th of 1%) in
effect on such day (whether or not applicable to any Bank)
under regulations issued from time to time by the FRB for
determining the maximum reserve requirement (including any
emergency, supplemental or other marginal reserve requirement)
with respect to Eurocurrency funding (currently referred to as
"Eurocurrency liabilities");
"LIBOR" means the rate per annum appearing on
Telerate Page 3750 (or any successor page) as the London
interbank offered rate for deposits in Dollars at
approximately 11:00 a.m. (London time) two Business Days prior
to the first day of such Interest Period for a term comparable
to such Interest Period. If for any reason such rate is not
available, LIBOR shall be, for
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<PAGE> 18
any Interest Period, the rate per annum appearing on Reuters
Screen LIBO Page as the London interbank offered rate for
deposits in Dollars at approximately 11:00 a.m. (London time)
two Business Days prior to the first day of such Interest
Period for a term comparable to such Interest Period;
provided, however, if more than one rate is specified on
Reuters Screen LIBO Page, the applicable rate shall be the
arithmetic mean of all such rates. If for any reason none of
the foregoing rates is available, LIBOR shall be, for any
Interest Period, the rate per annum determined by Agent as the
rate of interest at which dollar deposits in the approximate
amount of the Offshore Rate Loan comprising part of such
Borrowing would be offered by the BofA's London Branch to
major banks in the offshore dollar market at their request at
or about 11:00 a.m. (London time) two Business Days prior to
the first day of such Interest Period for a term comparable to
such Interest Period.
The Offshore Rate shall be adjusted automatically as to all
Offshore Rate Loans then outstanding as of the effective date
of any change in the Eurodollar Reserve Percentage.
"Offshore Rate Loan" means a Loan that bears interest based on
the Offshore Rate.
"Organization Documents" means, for any corporation, the
certificate or articles of incorporation, the bylaws, any certificate
of determination or instrument relating to the rights of preferred
shareholders of such corporation, any shareholder rights agreement, and
all applicable resolutions of the board of directors (or any committee
thereof) of such corporation.
"Other Taxes" means any present or future stamp or documentary
taxes or any other excise or property taxes, charges or similar levies
which arise from any payment made hereunder or from the execution,
delivery or registration of, or otherwise with respect to, this
Agreement or any other Loan Documents.
"Participant" has the meaning specified in subsection 10.8(d).
"PBGC" means the Pension Benefit Guaranty Corporation, or any
Governmental Authority succeeding to any of its principal functions
under ERISA.
"Permitted Liens" has the meaning specified in Section 7.1.
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<PAGE> 19
"Person" means an individual, partnership, corporation,
limited liability company, business trust, joint stock company, trust,
unincorporated association, joint venture or Governmental Authority.
"Plan" means any "employee pension benefit plan," as such term
is defined in ERISA, which is subject to Title IV of ERISA (other than
a "Multiemployer Plan"), and as to which any entity in the Controlled
Group has or may have any liability, including any liability by reason
of having been a substantial employer within the meaning of section
4063 of ERISA for any time within the preceding five years or by reason
of being deemed to be a contributing sponsor under section 4069 of
ERISA.
"Pro Rata Share" means, as to any Bank at any time, the
percentage equivalent (expressed as a decimal, rounded to the ninth
decimal place) at such time of such Bank's Commitment divided by the
combined Commitments of all Banks.
"Reportable Event" means any of the events set forth in
Section 4043(b) of ERISA or the regulations thereunder, other than any
such event for which the 30-day notice requirement under ERISA has been
waived in regulations issued by the PBGC.
"Required Banks" means at any time Banks then holding at least
75% of the then aggregate unpaid principal amount of the Loans, or, if
no amounts are outstanding, Banks then having at least 75% of the
aggregate amount of the Commitments.
"Requirement of Law" means, as to any Person, any law
(statutory or common), treaty, rule or regulation or determination of
an arbitrator or of a Governmental Authority, in each case applicable
to or binding upon the Person or any of its property or to which the
Person or any of its property is subject.
"Responsible Officer" means the chief executive officer or the
president of the Company, or any other officer having substantially the
same authority and responsibility; or, with respect to compliance with
financial covenants, the chief financial officer or the treasurer of
the Company, or any other officer having substantially the same
authority and responsibility.
"Revolving Termination Date" means the earlier to occur of:
(a) December 8, 2000 (the "Scheduled Termination
Date) as such date may be extended pursuant to Section 2.14;
and
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<PAGE> 20
(b) the date on which the Commitments terminate in
accordance with the provisions of this Agreement.
"S&P" means Standard & Poor's Ratings Group.
"SAP" shall mean, as to each Insurance Subsidiary, the
statutory accounting practices prescribed or permitted by the
Department for the preparation of annual financial statements and other
financial reports by insurance corporations, or in the event the
Department fails to prescribe or address such practices, the NAIC
guidelines.
"Scheduled Termination Date" has the meaning specified in the
definition of Revolving Termination Date.
"SEC" means the Securities and Exchange Commission, or any
Governmental Authority succeeding to any of its principal functions.
"Stockholder's Equity" means, as of a particular date, total
stockholder's equity (including capital stock, additional paid-in
capital and retained earnings after deducting treasury stock) which
would appear on a consolidated balance sheet of the Company and its
consolidated Subsidiaries prepared as of such date in accordance with
GAAP without giving effect to Statement of Financial Accounting
Standards No. 115.
"Subsidiary" of a Person means any corporation, association,
partnership, limited liability company, joint venture or other business
entity of which more than 50% of the voting stock or other equity
interests (in the case of Persons other than corporations), is owned or
controlled directly or indirectly by the Person, or one or more of the
Subsidiaries of the Person, or a combination thereof. Unless the
context otherwise clearly requires, references herein to a "Subsidiary"
refer to a Subsidiary of the Company.
"Surety Instruments" means all letters of credit (including
standby and commercial), banker's acceptances, bank guaranties,
shipside bonds, surety bonds and similar instruments.
"Swap Contract" means any agreement (including any master
agreement and any agreement, whether or not in writing, relating to any
single transaction) that is an interest rate swap agreement, basis
swap, forward rate agreement, commodity swap, commodity option, equity
or equity index swap or option, bond option, interest rate option,
forward foreign exchange agreement, rate cap, collar or floor
agreement, currency swap agreement, cross-currency rate swap agreement,
swaption, currency option or any other, similar agreement (including
any option to enter into any of the foregoing).
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"Taxes" means any and all present or future taxes, levies,
imposts, deductions, charges or withholdings, and all liabilities with
respect thereto, excluding, in the case of each Bank and the Agent, such
taxes (including income taxes or franchise taxes) as are imposed on or
measured by each Bank's net income by the jurisdiction (or any political
subdivision thereof) under the laws of which such Bank or the Agent, as the
case may be, is organized or maintains a lending office.
"Total Capital" means Stockholder's Equity plus
Indebtedness plus the principal amount of Deferrable Interest Debentures.
"Type" has the meaning specified in the definition of
"Loan."
"United States" and "U.S." each means the United States
of America.
"Welfare Plan" means any "employee welfare benefit plan,"
as such term is defined in ERISA, as to which the Company has any liability.
1.2 Other Interpretive Provisions. (a) The meanings of
defined terms are equally applicable to the singular and plural
forms of the defined terms.
(b) The words "hereof", "herein", "hereunder" and
similar words refer to this Agreement as a whole and not to any particular
provision of this Agreement; and subsection, Section, Schedule and Exhibit
references are to this Agreement unless otherwise specified.
(c) (i) The term "documents" includes any and all
instruments, documents, agreements, certificates, indentures, notices
and other writings, however evidenced.
(ii) The term "including" is not limiting and
means "including without limitation."
(iii) In the computation of periods of time from
a specified date to a later specified date, the word "from" means "from
and including"; the words "to" and "until" each mean "to but
excluding", and the word "through" means "to and including."
(d) Unless otherwise expressly provided herein, (i)
references to agreements (including this Agreement) and other contractual
instruments shall be deemed to include all subsequent amendments and other
modifications thereto, but only to the extent such amendments and other
modifications are not prohibited by the
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terms of any Loan Document, and (ii) references to any statute or regulation are
to be construed as including all statutory and regulatory provisions
consolidating, amending, replacing, supplementing or interpreting the statute or
regulation.
(e) The captions and headings of this Agreement are
for convenience of reference only and shall not affect the
interpretation of this Agreement.
(f) This Agreement and the other Loan Documents may
use several different limitations, tests or measurements to regulate the same or
similar matters. All such limitations, tests and measurements are cumulative and
shall each be performed in accordance with their terms. Unless otherwise
expressly provided, any reference to any action of any Bank by way of consent,
approval or waiver shall be deemed modified by the phrase "in its sole
discretion."
(g) This Agreement and the other Loan Documents are
the result of negotiations among and have been reviewed by counsel to the Agent,
the Company and the other parties, and are the products of all parties.
Accordingly, they shall not be construed against the Banks or the Agent merely
because of the Agent's or Banks' involvement in their preparation.
1.3 Accounting Principles. (a) Unless the context otherwise clearly
requires, all accounting terms not expressly defined herein shall be construed,
and all financial computations required under this Agreement shall be made, in
accordance with GAAP, consistently applied (except for changes in which the
Independent Auditor concurs).
(b) References herein to "fiscal year" and "fiscal
quarter" refer to such fiscal periods of the Company.
ARTICLE II
THE CREDITS
2.1 Amounts and Terms of Commitments. Each Bank severally agrees, on
the terms and conditions set forth herein, to make loans to the Company from
time to time on any Business Day during the period from the Closing Date to the
Revolving Termination Date, in an aggregate amount not to exceed at any time
outstanding the amount set forth on Schedule 2.1 (such amount as the same may be
reduced under Section 2.5, reduced or increased as a result of one or more
assignments under Section 10.8 or increased under Section 2.15, the Bank's
"Commitment"); provided, however, that, after giving effect to any Borrowing,
the aggregate principal amount of all outstanding Loans shall not at any time
exceed the
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combined Commitments. Within the limits of each Bank's Commitment, and subject
to the other terms and conditions hereof, the Company may borrow under this
Section 2.1, prepay under Section 2.6 and reborrow under this Section 2.1.
2.2 Loan Accounts. (a) The Loans made by each Bank shall be evidenced
by one or more loan accounts or records maintained by such Bank in the ordinary
course of business. The loan accounts or records maintained by the Agent and
each Bank shall be conclusive absent manifest error of the amount of the Loans
made by the Banks to the Company and the interest and payments thereon. Any
failure so to record or any error in doing so shall not, however, limit or
otherwise affect the obligation of the Company hereunder to pay any amount owing
with respect to the Loans.
(b) Upon the request of any Bank made through the
Agent, the Loans made by such Bank may be evidenced by one or more Notes,
instead of loan accounts. Each such Bank shall endorse on the schedules annexed
to its Note(s) the date, amount and maturity of each Loan made by it and the
amount of each payment of principal made by the Company with respect thereto.
Each such Bank is irrevocably authorized by the Company to endorse its Note(s)
and each Bank's record shall be conclusive absent manifest error; provided,
however, that the failure of a Bank to make, or an error in making, a notation
thereon with respect to any Loan shall not limit or otherwise affect the
obligations of the Company hereunder or under any such Note to such Bank.
2.3 Procedure for Borrowing. (a) Each Borrowing shall be made upon the
Company's irrevocable written notice delivered to the Agent in the form of a
Notice of Borrowing (which notice must be received by the Agent prior to 9:00
a.m. (San Francisco time) (i) three Business Days prior to the requested
Borrowing Date, in the case of Offshore Rate Loans; and (ii) on the requested
Borrowing Date, in the case of Base Rate Loans, specifying:
(A) the amount of the Borrowing, which
shall be in an aggregate minimum amount of $5,000,000 or
any multiple of $1,000,000 in excess thereof;
(B) the requested Borrowing Date, which
shall be a Business Day;
(C) the Type of Loans comprising the
Borrowing; and
(D) if applicable, the duration of the
Interest Period applicable to such Loans included in such
notice. If the Notice of Borrowing fails to specify the
duration of the Interest Period for any
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Borrowing comprised of Offshore Rate Loans, such Interest
Period shall be three months.
(b) The Agent will promptly notify each Bank of its
receipt of any Notice of Borrowing and of the amount of such Bank's Pro Rata
Share of that Borrowing.
(c) Each Bank will make the amount of its Pro Rata
Share of each Borrowing available to the Agent for the account of the Company at
the Agent's Payment Office by 11:00 a.m. (San Francisco time) on the Borrowing
Date requested by the Company in funds immediately available to the Agent. The
proceeds of all such Loans will then be made available to the Company by the
Agent at such office by crediting the account of the Company on the books of
BofA with the aggregate of the amounts made available to the Agent by the Banks
or by wire transfer in accordance with written instructions provided to the
Agent by the Company, of like funds as received by the Agent.
(d) After giving effect to any Borrowing, there may
not be more than five different Interest Periods in effect.
2.4 Conversion and Continuation Elections. (a) The Company
may, upon irrevocable written notice to the Agent in accordance
with subsection 2.4(b):
(i) elect, as of any Business Day, in the case of
Base Rate Loans, or as of the last day of the applicable Interest
Period, in the case of Offshore Rate Loans, to convert any such Loans
(or any part thereof in an amount not less than $5,000,000, or that is
in an integral multiple of $1,000,000 in excess thereof) into Loans of
the other Type; or
(ii) elect, as of the last day of the applicable
Interest Period, to continue any Loans having Interest Periods expiring
on such day (or any part thereof in an amount not less than $5,000,000,
or that is in an integral multiple of $1,000,000 in excess thereof);
provided, that if at any time the aggregate amount of Offshore Rate Loans in
respect of any Borrowing is reduced, by payment, prepayment, or conversion of
part thereof to be less than $1,000,000, such Offshore Rate Loans shall
automatically convert into Base Rate Loans, and on and after such date the right
of the Company to continue such Loans as, and convert such Loans into, Offshore
Rate Loans shall terminate.
(b) The Company shall deliver a Notice of Conversion/
Continuation to be received by the Agent not later than 9:00 a.m. (San Francisco
time) at least (i) three Business Days in advance of the Conversion/Continuation
Date, if the Loans are to be converted
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into or continued as Offshore Rate Loans; and (ii) on the Conversion/
Continuation Date, if the Loans are to be converted into Base Rate
Loans, specifying:
(A) the proposed Conversion/Continuation
Date;
(B) the aggregate amount of Loans to be
converted or renewed;
(C) the Type of Loans resulting from the
proposed conversion or continuation; and
(D) if applicable, the duration of the
requested Interest Period.
(c) If upon the expiration of any Interest Period
applicable to Offshore Rate Loans, the Company has failed to select timely a new
Interest Period to be applicable to such Offshore Rate Loans, or if any Default
or Event of Default then exists, the Company shall be deemed to have elected to
convert such Offshore Rate Loans into Base Rate Loans effective as of the
expiration date of such Interest Period.
(d) The Agent will promptly notify each Bank of its
receipt of a Notice of Conversion/Continuation, or, if no timely notice is
provided by the Company, the Agent will promptly notify each Bank of the details
of any automatic conversion. All conversions and continuations shall be made
ratably according to the respective outstanding principal amounts of the Loans
with respect to which the notice was given held by each Bank.
(e) Unless the Required Banks otherwise agree, during
the existence of a Default or Event of Default, the Company may not elect to
have a Loan converted into or continued as an Offshore Rate Loan.
(f) After giving effect to any conversion or
continuation of Loans, there may not be more than five different Interest
Periods in effect.
2.5 Voluntary Termination or Reduction of Commitments. The Company may,
upon not less than five Business Days' prior notice to the Agent, terminate the
Commitments, or permanently reduce the Commitments by an aggregate minimum
amount of $5,000,000 or any multiple of $1,000,000 in excess thereof; unless,
after giving effect thereto and to any prepayments of Loans made on the
effective date thereof, the then-outstanding principal amount of the Loans would
exceed the amount of the combined Commitments then in effect. Once reduced in
accordance with this Section, the Commitments may not be increased. Any
reduction of the Commitments
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shall be applied to each Bank according to its Pro Rata Share. All accrued
commitment fees to, but not including the effective date of any reduction or
termination of Commitments, shall be paid on the effective date of such
reduction or termination.
2.6 Optional Prepayments. Subject to Section 3.4, the Company may, at
any time or from time to time, upon not less than three Business Days'
irrevocable notice to the Agent, ratably prepay Loans in whole or in part, in
minimum aggregate amounts of $5,000,000 or any multiple of $1,000,000 in excess
thereof. Such notice of prepayment shall specify the date and amount of such
prepayment and the Type(s) of Loans to be prepaid. The Agent will promptly
notify each Bank of its receipt of any such notice, and of such Bank's Pro Rata
Share of such prepayment. If such notice is given by the Company, the Company
shall make such prepayment and the payment amount specified in such notice shall
be due and payable on the date specified therein, together with accrued interest
to each such date on the amount prepaid and any amounts required pursuant to
Section 3.4.
2.7 Repayment. The Company shall repay to the Banks on the Revolving
Termination Date the aggregate principal amount of Loans outstanding on such
date.
2.8 Interest. (a) Each Loan shall bear interest on the outstanding
principal amount thereof from the applicable Borrowing Date at a rate per annum
equal to the Offshore Rate plus the Applicable Margin or the Base Rate, plus the
Applicable Margin, as the case may be (and subject to the Company's right to
convert to other Types of Loans under Section 2.4).
(b) Interest on each Loan shall be paid in arrears on
each Interest Payment Date. Interest shall also be paid on the date of any
prepayment of Offshore Rate Loans under Section 2.6 for the portion of the Loans
so prepaid and upon payment (including prepayment) in full thereof and, during
the existence of any Event of Default, interest shall be paid on demand of the
Agent at the request or with the consent of the Required Banks.
(c) Notwithstanding subsection (a) of this Section,
while any Event of Default exists or after acceleration, the Company shall pay
interest (after as well as before entry of judgment thereon to the extent
permitted by law) on the principal amount of all outstanding Loans, at a rate
per annum which is determined by adding 2% per annum to the interest rate
calculated pursuant to subsection (a) above for such Loans; provided, however,
that, on and after the expiration of any Interest Period applicable to any
Offshore Rate Loan outstanding on the date of occurrence of such Event of
Default or acceleration, the principal amount of such Loan shall, during the
continuation of such Event of Default or
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after acceleration, bear interest at a rate per annum equal to the Base Rate
plus the Applicable Margin for Base Rate Loans plus 2%.
(d) Anything herein to the contrary notwithstanding,
the obligations of the Company to any Bank hereunder shall be subject to the
limitation that payments of interest shall not be required for any period for
which interest is computed hereunder, to the extent (but only to the extent)
that contracting for or receiving such payment by such Bank would be contrary to
the provisions of any law applicable to such Bank limiting the highest rate of
interest that may be lawfully contracted for, charged or received by such Bank,
and in such event the Company shall pay such Bank interest at the highest rate
permitted by applicable law.
2.9 Fees. (a) Arrangement, Agency Fees. The Company shall pay an
arrangement fee to the Arranger for the Arranger's own account, and shall pay an
agency fee to the Agent for the Agent's own account, as required by the letter
agreement ("Fee Letter") between the Company and the Arranger and Agent dated
May 26, 1999.
(b) Facility Fees. The Company shall pay to the Agent
for the account of each Bank a facility fee on the average daily amount of such
Bank's Commitment (whether or not used), computed on a quarterly basis in
arrears on the last Business Day of each calendar quarter based upon the daily
amount of the Commitments for that quarter as calculated by the Agent, equal to
the Applicable Facility Fee Rate per annum. Such facility fee shall accrue from
the date hereof to the Revolving Termination Date and shall be due and payable
quarterly in arrears on the last Business Day of each calendar quarter
commencing on the first such date after the date hereof through the Revolving
Termination Date, with the final payment to be made on the Revolving Termination
Date; provided that, in connection with any reduction or termination of
Commitments under Section 2.5, the accrued facility fee calculated for the
period ending on such date shall also be paid on the date of such reduction or
termination, with the following quarterly payment being calculated on the basis
of the period from such reduction or termination date to such quarterly payment
date. The facility fees provided in this subsection shall accrue at all times
after the above-mentioned commencement date, including at any time during which
one or more conditions in Article IV are not met.
(c) Utilization Fees. The Company shall pay to the
Agent for the account of each Bank a utilization fee on the actual daily
outstanding principal amount of the Loans for any day on which the outstanding
principal amount of the Loans exceeds one-half (1/2) of the aggregate
Commitments computed on a quarterly basis in arrears on the last Business Day of
each calendar quarter based upon the daily amount of the Commitments and
outstanding Loans for that quarter as calculated by the Agent, equal to the
Applicable Utilization Fee Rate per annum. Such utilization fee
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shall be due and payable quarterly in arrears on the last Business Day of each
calendar quarter in which such fee shall accrue commencing on the first such
date after the date hereof through the Revolving Termination Date, with the
final payment to be made on the Revolving Termination Date.
2.10 Computation of Fees and Interest. (a) All computations of interest
for Base Rate Loans when the Base Rate is determined by BofA's "prime rate"
shall be made on the basis of a year of 365 or 366 days, as the case may be, and
actual days elapsed. All other computations of fees and interest shall be made
on the basis of a 360-day year and actual days elapsed (which results in more
interest being paid than if computed on the basis of a 365-day year). Interest
and fees shall accrue during each period during which interest or such fees are
computed from the first day thereof to the last day thereof.
(b) Each determination of an interest rate by the
Agent shall be conclusive and binding on the Company and the Banks in the
absence of manifest error.
2.11 Payments by the Company. (a) All payments to be made by the
Company shall be made without set-off, recoupment or counterclaim. Except as
otherwise expressly provided herein, all payments by the Company shall be made
to the Agent for the account of the Banks at the Agent's Payment Office, and
shall be made in dollars and in immediately available funds, no later than 11:00
a.m. (San Francisco time) on the date specified herein. The Agent will promptly
distribute to each Bank its Pro Rata Share (or other applicable share as
expressly provided herein) of such payment in like funds as received. Any
payment received by the Agent later than 11:00 a.m. (San Francisco time) shall
be deemed to have been received on the following Business Day and any applicable
interest or fee shall continue to accrue.
(b) Subject to the provisions set forth in the
definition of "Interest Period" herein, whenever any payment is due on a day
other than a Business Day, such payment shall be made on the following Business
Day, and such extension of time shall in such case be included in the
computation of interest or fees, as the case may be.
(c) Unless the Agent receives notice from the Company
prior to the date on which any payment is due to the Banks that the Company will
not make such payment in full as and when required, the Agent may assume that
the Company has made such payment in full to the Agent on such date in
immediately available funds and the Agent may (but shall not be so required), in
reliance upon such assumption, distribute to each Bank on such due date an
amount equal to the amount then due such Bank. If and to the extent the Company
has not made such payment in full to the Agent, each Bank
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shall repay to the Agent on demand such amount distributed to such Bank,
together with interest thereon at the Federal Funds Rate for each day from the
date such amount is distributed to such Bank until the date repaid.
2.12 Payments by the Banks to the Agent. (a) Unless the Agent receives
notice from a Bank on or prior to the Closing Date or, with respect to any
Borrowing after the Closing Date, at least one Business Day prior to the date of
such Borrowing, that such Bank will not make available as and when required
hereunder to the Agent for the account of the Company the amount of that Bank's
Pro Rata Share of the Borrowing, the Agent may assume that each Bank has made
such amount available to the Agent in immediately available funds on the
Borrowing Date and the Agent may (but shall not be so required), in reliance
upon such assumption, make available to the Company on such date a corresponding
amount. If and to the extent any Bank shall not have made its full amount
available to the Agent in immediately available funds and the Agent in such
circumstances has made available to the Company such amount, that Bank shall on
the Business Day following such Borrowing Date make such amount available to the
Agent, together with interest at the Federal Funds Rate for each day during such
period. A notice of the Agent submitted to any Bank with respect to amounts
owing under this subsection (a) shall be conclusive, absent manifest error. If
such amount is so made available, the principal portion of such payment to the
Agent shall constitute such Bank's Loan on the date of Borrowing for all
purposes of this Agreement. If such amount is not made available to the Agent on
the Business Day following the Borrowing Date, the Agent will notify the Company
of such failure to fund and, upon demand by the Agent, the Company shall pay
such principal portion of such payment to the Agent for the Agent's account,
together with interest thereon for each day elapsed since the date of such
Borrowing, at a rate per annum equal to the interest rate applicable at the time
to the Loans comprising such Borrowing.
(b) The failure of any Bank to make any Loan on any
Borrowing Date shall not relieve any other Bank of any obligation hereunder to
make a Loan on such Borrowing Date, but no Bank shall be responsible for the
failure of any other Bank to make the Loan to be made by such other Bank on any
Borrowing Date.
2.13 Sharing of Payments, Etc. If, other than as expressly provided
elsewhere herein, any Bank shall obtain on account of the Loans made by it any
payment (whether voluntary, involuntary, through the exercise of any right of
set-off, or otherwise) in excess of its Pro Rata Share, such Bank shall
immediately (a) notify the Agent of such fact, and (b) purchase from the other
Banks such participations in the Loans made by them as shall be necessary to
cause such purchasing Bank to share the excess payment pro rata with each of
them; provided, however, that if all or any
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portion of such excess payment is thereafter recovered from the purchasing Bank,
such purchase shall to that extent be rescinded and each other Bank shall repay
to the purchasing Bank the purchase price paid therefor, together with an amount
equal to such paying Bank's ratable share (according to the proportion of (i)
the amount of such paying Bank's required repayment to (ii) the total amount so
recovered from the purchasing Bank) of any interest or other amount paid or
payable by the purchasing Bank in respect of the total amount so recovered. The
Company agrees that any Bank so purchasing a participation from another Bank
may, to the fullest extent permitted by law, exercise all its rights of payment
(including the right of set-off, but subject to Section 10.10) with respect to
such participation as fully as if such Bank were the direct creditor of the
Company in the amount of such participation. The Agent will keep records (which
shall be conclusive and binding in the absence of manifest error) of
participations purchased under this Section and will in each case notify the
Banks following any such purchases or repayments.
2.14 Termination Date. The Company may request an extension of the
Scheduled Termination Date by submitting a request for an extension to the Agent
(an "Extension Request") no more than 60 days or less than 45 days prior to the
then effective Scheduled Termination Date. The Extension Request must specify
the new Scheduled Termination Date requested by the Company and the date (which
must be at least 30 days after the Extension Request is delivered to the Agent)
as of which the Banks must respond to the Extension Request (the "Response
Date"). The new Scheduled Termination Date shall be no more than 364 days after
the Scheduled Termination Date in effect at the time the Extension Request is
received, including the Scheduled Termination Date as one of the days in the
calculation of the days elapsed. Promptly upon receipt of an Extension Request,
the Agent shall notify each Bank of the contents thereof and shall request each
Bank to approve the Extension Request. Each Bank approving the Extension Request
shall deliver its written consent no later than the Response Date. If the
consent of each of the Banks is received by the Agent, the Scheduled Termination
Date specified in the Extension Request shall become effective on the existing
Scheduled Termination Date and the Agent shall promptly notify the Company and
each Bank of the new Scheduled Termination Date. If any Bank shall not so
consent, the Scheduled Termination Date shall not be extended.
2.15 Increase of Commitments. The Company may from time to time, by
notice to the Agent, request that the total aggregate Commitments (the "Total
Aggregate Commitment") be increased to an amount not exceeding $100,000,000.
Each such notice shall set forth the requested amount of the increase in the
Total Aggregate Commitment and the date on which such increase is to become
effective. The increase in the Total Aggregate Commitment may be assumed by any
Bank or any other financial institution agreed to by
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the Company and the Agent (any such Bank or other financial institution being
called an "Augmenting Bank") and shall be effective upon the consent of the
Company and the Augmenting Bank.
Upon the effectiveness of any increase pursuant to this Section 2.15 of
the Total Aggregate Commitment and any resulting adjustment in the Pro Rata
Shares, the Banks and the Augmenting Banks will purchase from each other and
sell to each other outstanding Loans sufficient to cause the outstanding Loans
of each Bank and Augmenting Bank to equal its Pro Rata Share (as so adjusted) of
the aggregate principal amount of the Total Aggregate Commitment. Such purchase
and sale shall be made pursuant to Section 10.8 except that no minimum amount
shall be required, no processing fee shall be charged and, if any Bank shall
suffer a loss or incur an expense as a result of the effectiveness of such
purchase or sale the Company shall pay such Bank the amount of such loss or
expense. Each such Bank shall furnish the Company with a certificate setting
forth the basis for determining the amount to be paid to it hereunder.
ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY
3.1 Taxes. (a) Any and all payments by the Company to each Bank or the
Agent under this Agreement and any other Loan Document shall be made free and
clear of, and without deduction or withholding for any Taxes. In addition, the
Company shall pay all Other Taxes.
(b) The Company agrees to indemnify and hold harmless
each Bank and the Agent for the full amount of Taxes or Other Taxes (including
any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under
this Section) paid by the Bank or the Agent and any liability (including
penalties, interest, additions to tax and expenses) arising therefrom or with
respect thereto, whether or not such Taxes or Other Taxes were correctly or
legally asserted. Payment under this indemnification shall be made within 30
days after the date the Bank or the Agent makes written demand therefor.
(c) If the Company shall be required by law to deduct
or withhold any Taxes or Other Taxes from or in respect of any sum payable
hereunder to any Bank or the Agent, then:
(i) the sum payable shall be increased as
necessary so that after making all required deductions and withholdings
(including deductions and withholdings applicable to additional sums
payable under this Section) such Bank or the Agent, as the case may be,
receives an amount equal to the
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sum it would have received had no such deductions or withholdings been
made;
(ii) the Company shall make such deductions and
withholdings;
(iii) the Company shall pay the full amount
deducted or withheld to the relevant taxing authority or other
authority in accordance with applicable law; and
(iv) the Company shall also pay to each Bank or
the Agent for the account of such Bank, at the time interest is paid,
all additional amounts which the respective Bank specifies as necessary
to preserve the after-tax yield the Bank would have received if such
Taxes or Other Taxes had not been imposed.
(d) Within 30 days after the date of any payment by
the Company of Taxes or Other Taxes, the Company shall furnish the Agent the
original or a certified copy of a receipt evidencing payment thereof, or other
evidence of payment satisfactory to the Agent.
(e) If the Company is required to pay additional
amounts to any Bank or the Agent pursuant to subsection (c) of this Section,
then such Bank shall use reasonable efforts (consistent with legal and
regulatory restrictions) to change the jurisdiction of its Lending Office so as
to eliminate any such additional payment by the Company which may thereafter
accrue, if such change in the judgment of such Bank is not otherwise
disadvantageous to such Bank.
3.2 Illegality. (a) If any Bank determines that the introduction of any
Requirement of Law, or any change in any Requirement of Law, or in the
interpretation or administration of any Requirement of Law, has made it
unlawful, or that any central bank or other Governmental Authority has asserted
that it is unlawful, for any Bank or its applicable Lending Office to make
Offshore Rate Loans, then, on notice thereof by the Bank to the Company through
the Agent, any obligation of that Bank to make Offshore Rate Loans shall be
suspended until the Bank notifies the Agent and the Company that the
circumstances giving rise to such determination no longer exist.
(b) If a Bank determines that it is unlawful to
maintain any Offshore Rate Loan, the Company shall, upon its receipt of notice
of such fact and demand from such Bank (with a copy to the Agent), prepay in
full such Offshore Rate Loans of that Bank then outstanding, together with
interest accrued thereon and amounts required under Section 3.4, either on the
last day of the Interest Period thereof, if the Bank may lawfully continue to
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maintain such Offshore Rate Loans to such day, or immediately, if the Bank may
not lawfully continue to maintain such Offshore Rate Loan. If the Company is
required to so prepay any Offshore Rate Loan, then concurrently with such
prepayment, the Company shall borrow from the affected Bank, in the amount of
such repayment, a Base Rate Loan.
3.3 Increased Costs and Reduction of Return. (a) If any Bank determines
that, due to either (i) the introduction of or any change (other than any change
by way of imposition of or increase in reserve requirements included in the
calculation of the Offshore Rate) in or in the interpretation of any law or
regulation or (ii) the compliance by that Bank with any guideline or request
from any central bank or other Governmental Authority (whether or not having the
force of law), there shall be any increase in the cost to such Bank of agreeing
to make or making, funding or maintaining any Offshore Rate Loans, then the
Company shall be liable for, and shall from time to time, upon demand (with a
copy of such demand to be sent to the Agent), pay to the Agent for the account
of such Bank, additional amounts as are sufficient to compensate such Bank for
such increased costs.
(b) If any Bank shall have determined that (i) the
introduction of any Capital Adequacy Regulation, (ii) any change in any Capital
Adequacy Regulation, (iii) any change in the interpretation or administration of
any Capital Adequacy Regulation by any central bank or other Governmental
Authority charged with the interpretation or administration thereof, or (iv)
compliance by the Bank (or its Lending Office) or any corporation controlling
the Bank with any Capital Adequacy Regulation, affects or would affect the
amount of capital required or expected to be maintained by the Bank or any
corporation controlling the Bank and (taking into consideration such Bank's or
such corporation's policies with respect to capital adequacy and such Bank's
desired return on capital) determines that the amount of such capital is
increased as a consequence of its Commitment, loans, credits or obligations
under this Agreement, then, upon demand of such Bank to the Company through the
Agent, the Company shall pay to the Bank, from time to time as specified by the
Bank, additional amounts sufficient to compensate the Bank for such increase.
3.4 Funding Losses. The Company shall reimburse each Bank and hold each
Bank harmless from any loss or expense which the Bank may sustain or incur as a
consequence of:
(a) the failure of the Company to make on a timely
basis any payment of principal of any Offshore Rate Loan;
(b) the failure of the Company to borrow, continue or
convert a Loan after the Company has given (or is deemed to have
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given) a Notice of Borrowing or a Notice of Conversion/Continuation;
(c) the failure of the Company to make any prepayment
in accordance with any notice delivered under Section 2.6;
(d) the prepayment or other payment (including after
acceleration thereof) of an Offshore Rate Loan on a day that is not
the last day of the relevant Interest Period; or
(e) the automatic conversion under Section 2.4 of any
Offshore Rate Loan to a Base Rate Loan on a day that is not the
last day of the relevant Interest Period;
including any such loss or expense arising from the liquidation or reemployment
of funds obtained by it to maintain its Offshore Rate Loans or from fees payable
to terminate the deposits from which such funds were obtained. For purposes of
calculating amounts payable by the Company to the Banks under this Section and
under subsection 3.3(a), each Offshore Rate Loan made by a Bank (and each
related reserve, special deposit or similar requirement) shall be conclusively
deemed to have been funded at the LIBOR used in determining the Offshore Rate
for such Offshore Rate Loan by a matching deposit or other borrowing in the
interbank eurodollar market for a comparable amount and for a comparable period,
whether or not such Offshore Rate Loan is in fact so funded.
3.5 Inability to Determine Rates. If the Required Banks determine that
for any reason adequate and reasonable means do not exist for determining the
Offshore Rate for any requested Interest Period with respect to a proposed
Offshore Rate Loan, or that the Offshore Rate applicable pursuant to subsection
2.8(a) for any requested Interest Period with respect to a proposed Offshore
Rate Loan does not adequately and fairly reflect the cost to such Banks of
funding such Loan, the Agent will promptly so notify the Company and each Bank.
Thereafter, the obligation of the Banks to make or maintain Offshore Rate Loans
hereunder shall be suspended until the Agent upon the instruction of the
Required Banks revokes such notice in writing. Upon receipt of such notice, the
Company may revoke any Notice of Borrowing or Notice of Conversion/Continuation
then submitted by it. If the Company does not revoke such Notice, the Banks
shall make, convert or continue the Loans, as proposed by the Company, in the
amount specified in the applicable notice submitted by the Company, but such
Loans shall be made, converted or continued as Base Rate Loans instead of
Offshore Rate Loans.
3.6 Certificates of Banks. Any Bank claiming reimbursement or
compensation under this Article III shall deliver to the Company (with a copy to
the Agent) a certificate setting forth in reasonable detail the amount payable
to the Bank hereunder and such
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certificate shall be conclusive and binding on the Company in the absence of
manifest error.
3.7 Survival. The agreements and obligations of the Company in this
Article III shall survive the payment of all other Obligations.
ARTICLE IV
CONDITIONS PRECEDENT
4.1 Conditions of Initial Loans. The obligation of each Bank to make
its initial Loan hereunder is subject to the condition that the Agent have
received on or before the Closing Date all of the following, in form and
substance satisfactory to the Agent and each Bank, and in sufficient copies for
each Bank:
(a) Credit Agreement and Notes. This Agreement and the Notes
executed by each party thereto;
(b) Resolutions; Incumbency.
(i) Copies of the resolutions of the board of
directors of the Company authorizing the transactions
contemplated hereby, certified as of the Closing Date by the
Secretary or an Assistant Secretary of the Company; and
(ii) A certificate of the Secretary or Assistant
Secretary of the Company certifying the names and true signatures of
the officers of the Company authorized to execute, deliver and perform,
as applicable, this Agreement, and all other Loan Documents to be
delivered by it hereunder;
(c) Organization Documents; Good Standing. Each of the following
documents:
(i) the articles or certificate of incorporation
and the bylaws of the Company as in effect on the Closing
Date, certified by the Secretary or Assistant Secretary of the
Company as of the Closing Date; and
(ii) a good standing certificate for the Company
from the Secretary of State (or similar, applicable
Governmental Authority) of its state of incorporation;
(d) Legal Opinion. Opinion of Willkie Farr & Gallagher, special
counsel to the Company and addressed to the Agent and the Banks, substantially
in the form of Exhibits D.
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(e) Payment of Fees. Evidence of payment by the Company of all
accrued and unpaid fees, costs and expenses to the extent then due and payable
on the Closing Date, together with Attorney Costs of BofA to the extent invoiced
prior to or on the Closing Date, plus such additional amounts of Attorney Costs
as shall constitute BofA's reasonable estimate of Attorney Costs incurred or to
be incurred by it through the closing proceedings (provided that such estimate
shall not thereafter preclude final settling of accounts between the Company and
BofA); including any such costs, fees and expenses arising under or referenced
in Sections 2.9 and 10.4;
(f) Certificate. A certificate signed by a Responsible Officer,
dated as of the Closing Date, stating that:
(i) the representations and warranties contained in Article
V are true and correct on and as of such date, as though made on and as
of such date; and
(ii) there has occurred since December 31, 1998, no event
or circumstance that has resulted or could reasonably be expected to
result in a Material Adverse Effect except for those, if any, as may be
set forth in reports filed by the Company with the SEC after December
31, 1998 and prior to the date of this Agreement; and
(g) Other Documents. Such other approvals, opinions, documents
or materials as the Agent or any Bank may request.
4.2 Conditions to All Borrowings. The obligation of each Bank to make
any Loan to be made by it (including its initial Loan) is subject to the
satisfaction of the following conditions precedent on the relevant Borrowing
Date:
(a) Notice of Borrowing. The Agent shall have received (with a
copy for each Bank) a Notice of Borrowing;
(b) Continuation of Representations and Warranties. The
representations and warranties in Article V shall be true and correct in all
material respects on and as of such Borrowing Date with the same effect as if
made on and as of such Borrowing Date (except to the extent such representations
and warranties expressly refer to an earlier date, in which case they shall be
true and correct in all material respects as of such earlier date); and
(c) No Existing Default. No Default or Event of Default shall
exist or shall result from such Borrowing.
Each Notice of Borrowing submitted by the Company hereunder shall constitute a
representation and warranty by the Company hereunder,
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as of the date of each such notice and as of each Borrowing Date, that the
conditions in Section 4.2 are satisfied.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to the Agent and each Bank that:
5.1 Corporate Existence and Power. The Company and each of its
Insurance Subsidiaries:
(a) is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
domicile;
(b) has the power and authority and all governmental licenses,
authorizations, consents, certificates of authority and approvals (i) to own its
assets and carry on its business, and (ii) in the case of the Company, to
execute, deliver, and perform its obligations under the Loan Documents;
(c) is duly qualified or, in the case of any Insurance
Subsidiary, licensed as a foreign corporation or as a foreign insurance
corporation, as the case may be, and is in good standing under the laws of each
jurisdiction where its ownership, lease or operation of property or the conduct
of its business requires such qualification or license; and
(d) is in compliance with all Requirements of Law; except, in
each case referred to in clause (b) (i), clause(c) or clause (d), to the extent
that the failure to do so could not reasonably be expected to have a Material
Adverse Effect.
5.2 Corporate Authorization; No Contravention. The execution, delivery
and performance by the Company of this Agreement and each other Loan Document to
which the Company is party, have been duly authorized by all necessary corporate
action, and do not:
(a) contravene the terms of any of the Company's
Organization Documents;
(b) conflict with or result in any breach or
contravention of, or the creation of any Lien under, any document evidencing any
Contractual Obligation to which the Company is a party or any order, injunction,
writ or decree of any Governmental Authority to which the Company or its
property is subject; or
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(c) violate any Requirement of Law.
5.3 Governmental Authorization. No approval, consent, exemption,
authorization, or other action by, or notice to, or filing with, any
Governmental Authority is necessary or required in connection with the
execution, delivery or performance by, or enforcement against, the Company of
this Agreement or any other Loan Document.
5.4 Binding Effect. This Agreement and each other Loan Document to
which the Company is a party constitute the legal, valid and binding obligations
of the Company, enforceable against the Company in accordance with their
respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the enforcement of creditors'
rights generally or by equitable principles relating to enforceability.
5.5 Litigation. There are no actions, suits, proceedings, claims or
disputes pending, or to the best knowledge of the Company, threatened or
contemplated, at law, in equity, in arbitration or before any Governmental
Authority, against the Company, or its Subsidiaries or any of their respective
properties which:
(a) purport to affect or pertain to this Agreement or
any other Loan Document, or any of the transactions contemplated
hereby or thereby; or
(b) would reasonably be expected to have a Material
Adverse Effect. No injunction, writ, temporary restraining order or any order of
any nature has been issued by any court or other Governmental Authority
purporting to enjoin or restrain the execution, delivery or performance of this
Agreement or any other Loan Document, or directing that the transactions
provided for herein or therein not be consummated as herein or therein provided.
5.6 No Default. No Default or Event of Default exists or would result
from the incurring of any Obligations by the Company. As of the Closing Date,
neither the Company nor any Subsidiary is in default under or with respect to
any Contractual Obligation in any respect which, individually or together with
all such defaults, could reasonably be expected to have a Material Adverse
Effect, or that would, if such default had occurred after the Closing Date,
create an Event of Default under subsection 8.1(e).
5.7 ERISA Compliance. Set forth on Schedule 5.7 is a list of all
welfare plans and all pension plans, within the meaning of sections 3(1) and (2)
of ERISA, respectively, which, to the knowledge of the Company, are maintained
with respect to employees of the Company or its Subsidiaries. Also set forth in
Schedule 5.7 is a list of all Multiemployer Plans, all Welfare Plans and all
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Plans which the Company has adopted or expects to adopt. All required
contributions to such Multiemployer Plans, Welfare Plans and Plans have been
made, and no event has occurred with respect to any of the foregoing that would
reasonably be expected to result in the incurrence by the Company or any of its
Subsidiaries of any material liability, fine or penalty. No entity in the
Controlled Group has initiated any steps to withdraw from any Plan, or terminate
any Plan under a distress termination.
5.8 Use of Proceeds; Margin Regulations. The proceeds of the Loans are
to be used solely for the purposes set forth in and permitted by Section 6.12
and Section 7.5. Neither the Company nor any Subsidiary is generally engaged in
the business of purchasing or selling Margin Stock or extending credit for the
purpose of purchasing or carrying Margin Stock in any manner that would result
in a violation by the Company or any Subsidiary of Regulation T, U or X of the
FRB.
5.9 Title to Properties. The Company and each of the Insurance
Subsidiaries have good and marketable title to all material properties and
assets owned by them free and clear of all Liens except for such Liens that
could not, individually or in the aggregate, have a Material Adverse Effect. All
of the leases and subleases material to the business of the Company and the
Insurance Subsidiaries, under which either the Company or any of the Insurance
Subsidiaries holds properties, are in full force and effect, and neither the
Company nor any of the Insurance Subsidiaries is in default in respect of any of
the terms or provisions of any of such leases or subleases, the effect of which
would reasonably be expected to have a Material Adverse Effect. The Company has
no notice of any material claim of any kind which has been asserted by anyone
adverse either to the Company's or any of its Insurance Subsidiaries' rights as
lessee or sublessee under any of the leases or subleases mentioned above, or
affecting or questioning the Company's or any of its Insurance Subsidiaries'
rights to the continued possession of the leased or subleased premises under any
such lease or sublease, which if determined adversely, would reasonably be
expected to have a Material Adverse Effect.
5.10 Taxes. The Company and its Subsidiaries have filed all Federal and
other material tax returns and reports required to be filed, and have paid all
Federal and other material taxes, assessments, fees and other governmental
charges levied or imposed upon them or their properties, income or assets
otherwise due and payable, except those which are being contested in good faith
by appropriate proceedings and for which adequate reserves have been provided in
accordance with GAAP. There is no proposed tax assessment against the Company or
any Subsidiary that would, if made, have a Material Adverse Effect.
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5.11 Financial Condition. The audited consolidated balance sheet of the
Company and its Subsidiaries dated December 31, 1998, and the unaudited
consolidated balance sheet of the Company and its Subsidiaries dated September
30, 1999, and the related consolidated statements of income or operations and
cash flows for the fiscal year and quarter, respectively, ended on such dates:
(i) were prepared in accordance with GAAP consistently applied throughout the
period covered thereby, except as otherwise expressly noted therein, subject to
ordinary, good faith year end audit adjustments; and (ii) fairly present the
consolidated financial condition of the Company and its Subsidiaries as of the
date thereof and results of operations for the period covered thereby. Since
December 31, 1998, there has been no Material Adverse Effect except as may be
set forth in reports filed by the Company with the SEC after December 31, 1998
and prior to the date of this Agreement.
5.12 Environmental Matters. The Company's and its Subsidiaries'
business, operations and properties are conducted and maintained in all material
respects in compliance with Environmental Laws.
5.13 Regulated Entities. None of the Company, any Person controlling
the Company, or any Subsidiary, is an "Investment Company" within the meaning of
the Investment Company Act of 1940. The Company is not subject to regulation
under the Public Utility Holding Company Act of 1935, the Federal Power Act, the
Interstate Commerce Act, any state public utilities code, or any other Federal
or state statute or regulation limiting its ability to incur Indebtedness.
5.14 No Burdensome Restrictions. Neither the Company nor any Subsidiary
is a party to or bound by any Contractual Obligation, or subject to any
restriction in any Organization Document, or any Requirement of Law, which could
reasonably be expected to have a Material Adverse Effect.
5.15 Copyrights, Patents, Trademarks and Licenses, etc. The Company and
the Insurance Subsidiaries own or possess, or can acquire on reasonable terms,
adequate trademarks, service marks and trade names necessary to conduct the
business now operated by them, and neither the Company nor any of the Insurance
Subsidiaries has received any notice of infringement of or conflict with
asserted rights of others with respect to any trademarks, service marks or trade
names which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would reasonably be expected to have a Material
Adverse Effect.
5.16 Subsidiaries. As of the Closing Date, the Company has no
Significant Subsidiaries, as defined in Rule 12b-2 under the Exchange Act, other
than as set forth in Exhibit 21 of the
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Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1998
and has no equity investments in any other corporation or entity other than
wholly owned Subsidiaries and other than those specifically disclosed in
Schedule 5.16.
5.17 Insurance. The properties of the Company and its Insurance
Subsidiaries are insured with financially sound and reputable insurance
companies not Affiliates of the Company, in such amounts, with such deductibles
and covering such risks as are customarily carried by companies engaged in
similar businesses and owning similar properties in localities where the Company
or such Insurance Subsidiary operates.
5.18 Full Disclosure. None of the representations or warranties made by
the Company in the Loan Documents as of the date such representations and
warranties are made or deemed made, and none of the statements contained in any
exhibit, report, statement or certificate furnished by or on behalf of the
Company in connection with the Loan Documents, contains any untrue statement of
a material fact or omits any material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances
under which they are made, not misleading as of the time when made or delivered.
5.19 Solvency. After giving effect to the funding of the initial Loans,
the application of proceeds thereof as contemplated by this Agreement and the
payment of all estimated legal, accounting and other fees related hereto, the
Company will be solvent as of and on the Closing Date.
5.20 Insurance Subsidiaries. All of the Annual Statements or any other
financial or similar statement of the Insurance Subsidiaries provided to the
Agent, or which shall hereafter be provided to the Agent pursuant to the terms
of this Agreement and any other Loan Document, are, in all material respects,
true and complete statements of all of the assets and liabilities and of the
condition and affairs of the said insurer prepared in accordance with SAP.
5.21 Year 2000. The Company reasonably believes that (a) it and its
Subsidiaries are taking all necessary and appropriate steps to ascertain the
extent of, and to address appropriately, business and financial risks facing the
Company and its Subsidiaries as a result of what is commonly referred to as the
"Year 2000 problem" (i.e., the inability of certain computer applications to
recognize correctly and perform date-sensitive functions involving certain dates
prior to and after December 31, 1999), including risks resulting from the
failure of key vendors and customers of the Company and its Subsidiaries to
successfully address the Year 2000 problem, and (b) its and its Subsidiaries'
material computer
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applications will, on a timely basis, adequately address the Year 2000 problem
in all material respects.
ARTICLE VI
AFFIRMATIVE COVENANTS
So long as any Bank shall have any Commitment hereunder, or any Loan or
other Obligation shall remain unpaid or unsatisfied, unless the Required Banks
waive compliance in writing:
6.1 Financial Statements. The Company shall deliver to the Agent, in
form and detail satisfactory to the Agent and the Required Banks (it being
agreed that the delivery to the Agent of the Annual Report on Form 10-K and
Quarterly Reports on Form 10-Q for the Company shall satisfy the requirements
for the delivery of financial statements set forth in subparagraphs (a) and (b)
below), with sufficient copies for each Bank:
(a) as soon as available, but not later than 90 days after the
end of each fiscal year (commencing with the fiscal year ended December 31,
1999), a copy of the audited consolidated balance sheet of the Company and its
Subsidiaries as at the end of such year and the related consolidated statements
of income or operations, stockholders' equity and cash flows for such year,
setting forth in each case in comparative form the figures for the previous
fiscal year, and accompanied by the opinion of KPMG LLP or another
nationally-recognized independent public accounting firm ("Independent Auditor")
which report shall state that such consolidated financial statements present
fairly, in all material respects, the financial position for the periods
indicated in conformity with GAAP applied on a basis consistent with prior years
(except for changes in which the Independent Auditor concurs). Such opinion
shall not be qualified or limited because of a restricted or limited examination
by the Independent Auditor of any material portion of the Company's or any
Subsidiary's records and shall be delivered to the Agent pursuant to a reliance
agreement between the Agent and Banks and such Independent Auditor in form and
substance satisfactory to the Agent;
(b) as soon as available, but not later than 60 days after the
end of each of the first three fiscal quarters of each fiscal year (commencing
with the fiscal quarter ended March 30, 2000), a copy of the unaudited
consolidated balance sheet of the Company and its Subsidiaries as of the end of
such quarter and the related consolidated statements of income, stockholders'
equity and cash flows for the period commencing on the first day and ending on
the last day of such quarter, and certified by a Responsible Officer as fairly
presenting, in accordance with GAAP (subject to ordinary, good faith year-end
audit adjustments), the financial
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position and the results of operations of the Company and its Subsidiaries;
(c) as soon as available, but not later than 90 days after the
end of each fiscal year (commencing with the fiscal year ended December 31,
1999), a copy of an unaudited consolidating balance sheet of the Company and its
Subsidiaries as at the end of such year and the related consolidating statements
of income, stockholders' equity and cash flows for such year, certified by a
Responsible Officer as having been developed and used in connection with the
preparation of the financial statements referred to in subsection 6.1(a);
(d) as soon as available, but not later than 60 days after the
end of each of the first three fiscal quarters of each fiscal year (commencing
with the fiscal quarter ended March 30, 2000), a copy of the unaudited
consolidating balance sheets of the Company and its Subsidiaries, and the
related consolidating statements of income, stockholders' equity and cash flows
for such quarter, all certified by a Responsible Officer as having been
developed and used in connection with the preparation of the financial
statements referred to in subsection 6.1(b).
(e) as soon as available, but not later than 90 days after the
end of each fiscal year, a copy of the Annual Statement of each Insurance
Subsidiary for such fiscal year prepared in accordance with SAP and accompanied
by the certification of the chief executive officer or the chief financial
officer of such Insurance Subsidiary that such Annual Statement is complete and
correct in all material respects and presents fairly in accordance with SAP the
financial position of such Insurance Subsidiary for the period then ended; and
(f) as soon as possible, but not later than 60 days after the
end of each of the first three fiscal quarters of each fiscal year, a copy of
the quarterly statement of each Insurance Subsidiary for each such fiscal
quarter, all prepared in accordance with SAP and accompanied by the
certification of the chief executive officer or the chief financial officer of
such Insurance Subsidiary that such quarterly statements are complete and
correct in all material respects and present fairly in accordance with SAP the
financial position of such Insurance Subsidiary for the period then ended.
6.2 Certificates; Other Information. The Company shall furnish to the
Agent, with sufficient copies for each Bank:
(a) concurrently with the delivery of the financial statements
referred to in subsection 6.1(a), a letter of the Independent Auditor stating
that in making the examination necessary therefor no knowledge was obtained by
such Independent
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Auditor of any Default or Event of Default, except as specified in such letter;
(b) concurrently with the delivery of the financial statements
referred to in subsections 6.1(a), (b), (e) and (f), a Compliance Certificate
executed by a Responsible Officer;
(c) promptly, copies of all financial statements and regular,
periodic or special reports (including Form 10-K, 10-Q and 8-K) that the Company
makes to, or files with, the SEC and copies of any other communications made to
its stockholders that would be of material interest to the Banks;
(d) the following certificates and other information:
(i) upon request of the Agent, a copy of any
financial examination report or market conduct examination report by a
Governmental Authority with respect to any Insurance Subsidiary (or with respect
to the Company if it at any time becomes involved in the business of insurance),
relating to the insurance business of such Insurance Subsidiary or, if
applicable, the Company (when, and if, prepared); provided, that such Insurance
Subsidiary or, if applicable, the Company, shall not have to deliver any interim
report hereunder so long as, if requested by the Agent, a final report is issued
and delivered to the Agent within 60 days of such interim report;
(ii) within two Business Days of the receipt of
such notice, notice of the actual suspension, termination or revocation of any
material license of the Company or any Insurance Subsidiary by any Governmental
Authority, the loss of which is reasonably likely to have a Material Adverse
Effect, or notice from any Governmental Authority notifying the Company or any
Insurance Subsidiary of a hearing relating to such a suspension, termination or
revocation, including any request by a Governmental Authority which commits the
Company or any Insurance Subsidiary to take, or refrain from taking, any action
which is reasonably likely to have a Material Adverse Effect;
(iii) within two Business Days of the receipt by
the Company or an Insurance Subsidiary of such notice, notice of any material
pending or threatened investigation or regulatory proceeding (other than routine
periodic investigations or reviews) by any Governmental Authority concerning the
business, practices or operations of the Company or any Insurance Subsidiary,
including any agent or managing general agent thereof;
(iv) promptly upon the receipt by the Company or
any Insurance Subsidiary of such notice, notice of any actual material changes
in the Insurance Code governing the investment or dividend practices of
insurance companies domiciled in any of the
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states in which any Insurance Subsidiary is domiciled, which could reasonably be
expected to have a Material Adverse Effect; and
(e) promptly, such additional information regarding the
business, financial or corporate affairs of the Company or any Subsidiary as the
Agent, at the request of any Bank, may from time to time request.
6.3 Notices. The Company shall promptly notify the Agent and each Bank:
(a) of the occurrence of any Default or Event of Default, and of
the occurrence or existence of any event or circumstance that would reasonably
be expected to become a Default or Event of Default;
(b) of any matter known to the Company that has resulted or
could reasonably be expected to result in a Material Adverse Effect, including
(i) breach or non-performance of, or any default under, a Contractual Obligation
of the Company or any Insurance Subsidiary; (ii) any dispute, litigation,
investigation, proceeding or suspension between the Company or any Insurance
Subsidiary and any Governmental Authority (including any Internal Revenue
Service or Department of Labor proceeding with respect to any Plan or Welfare
Plan); or (iii) the commencement of, or any material development in, any
litigation or proceeding affecting the Company or any Insurance Subsidiary;
including pursuant to any applicable Environmental Laws;
(c) of the failure of any Person in the Controlled Group to make
a required contribution to any Plan if such failure is sufficient to give rise
to a Lien under section 302(f)(1) of ERISA;
(d) of the institution of any steps by any entity in the
Controlled Group to withdraw from, or the institution of any steps by the
Company or any other Person to terminate under a distress termination, any Plan,
or the occurrence of any event with respect to any Plan, in each case, which
would reasonably be expected to result in the incurrence by the Company or any
of its Subsidiaries of any material liability (other than a liability for
contributions or premiums), fine or penalty; and
(e) of any material change in accounting policies or financial
reporting practices by the Company or any of the Insurance Subsidiaries.
Each notice under this Section shall be accompanied by a written
statement by a Responsible Officer setting forth in reasonable detail the
occurrence referred to therein, and stating
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what action the Company or any affected Subsidiary proposes to take with respect
thereto and at what time.
6.4 Preservation of Corporate Existence, Etc. The Company shall, and
shall cause each Insurance Subsidiary to:
(a) except as otherwise may be permitted pursuant to Section 7.3
hereof, preserve and maintain in full force and effect its corporate existence
and good standing under the laws of its state or jurisdiction of incorporation
where the failure so to preserve and maintain its corporate existence and good
standing would reasonably be expected to have a Material Adverse Effect;
(b) preserve and maintain in full force and effect all
governmental rights, privileges, qualifications, permits, licenses and
franchises necessary or desirable in the normal conduct of its business except
in connection with transactions permitted by Section 7.3 and sales of assets
permitted by Section 7.2, the failure of which to preserve or maintain would
reasonably be expected to have a Material Adverse Effect;
(c) use reasonable efforts, in the ordinary course of business,
to preserve its business organization and goodwill, the failure of which to
preserve or maintain would reasonably be expected to have a Material Adverse
Effect; and
(d) preserve or renew all of its registered patents, trademarks,
trade names and service marks, the non-preservation of which would reasonably be
expected to have a Material Adverse Effect.
6.5 Maintenance of Property. The Company shall maintain, and shall
cause each Insurance Subsidiary to maintain, and preserve all its property which
is used or useful in its business in good working order and condition, ordinary
wear and tear excepted, the failure of which to preserve or maintain would
reasonably be expected to have a Material Adverse Effect.
6.6 Insurance. The Company shall maintain, and shall cause each
Insurance Subsidiary to maintain, with financially sound and reputable insurers,
insurance with respect to its properties and business against loss or damage of
the kinds customarily insured against by Persons engaged in the same or similar
business, of such types and in such amounts as are customarily carried under
similar circumstances by such other Persons.
6.7 Payment of Obligations. The Company shall, and shall cause each
Insurance Subsidiary to, pay and discharge as the same shall become due and
payable, all their respective obligations and liabilities, including:
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(a) all tax liabilities, assessments and governmental charges or
levies upon it or its properties or assets, unless the same are being contested
in good faith by appropriate proceedings and adequate reserves in accordance
with GAAP are being maintained by the Company or such Subsidiary;
(b) all lawful claims which, if unpaid, would by law become a
Lien upon its property; and
(c) all indebtedness, as and when due and payable, but subject
to any subordination provisions contained in any instrument or agreement
evidencing such Indebtedness.
6.8 Compliance with Laws. The Company shall comply, and shall cause
each Insurance Subsidiary to comply, in all material respects with all
Requirements of Law of any Governmental Authority having jurisdiction over it or
its business (including the Federal Fair Labor Standards Act), except such as
may be contested in good faith or as to which a bona fide dispute may exist, and
except where the failure so to comply would not be reasonably likely to have a
Material Adverse Effect.
6.9 Compliance with ERISA. The Company shall, and shall cause each of
its ERISA Affiliates to: (a) maintain each Plan in compliance in all material
respects with the applicable provisions of ERISA, the Code and other federal or
state law; (b) cause each Plan which is qualified under Section 401(a) of the
Code to maintain such qualification; and (c) make all required contributions to
any Plan subject to Section 412 of the Code.
6.10 Inspection of Property and Books and Records. The Company shall
maintain and shall cause each consolidated Subsidiary to maintain proper books
of record and account, in which full, true and correct entries in conformity
with GAAP or SAP, as applicable, consistently applied (except for changes in
which the Independent Auditor concurs) shall be made of all financial
transactions and matters involving the assets and business of the Company and
such consolidated Subsidiary. The Company shall permit, and shall cause each
Insurance Subsidiary to permit, representatives and independent contractors of
the Agent or any Bank to visit and inspect any of their respective properties,
to examine their respective corporate, financial and operating records, and make
copies thereof or abstracts therefrom, and to discuss their respective affairs,
finances and accounts with their respective directors, officers, and independent
public accountants, all at the expense of the Company and at such reasonable
times during normal business hours and as often as may be reasonably desired,
upon reasonable advance notice to the Company; provided, however, when an Event
of Default exists the Agent or any Bank may do any of the foregoing at the
expense of the Company at any time during normal business hours and without
advance notice.
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6.11 Environmental Laws. The Company shall, and shall cause each
Insurance Subsidiary to, conduct its operations and keep and maintain its
property in compliance in all material respects with all Environmental Laws.
6.12 Use of Proceeds. The Company shall use the proceeds of the Loans
for working capital and other general corporate purposes, including the
refinancing of the Company's existing debt and acquisition of common stock of
the Company but not for purposes of undertaking an Acquisition.
ARTICLE VII
NEGATIVE COVENANTS
So long as any Bank shall have any Commitment hereunder, or any Loan or
other Obligation shall remain unpaid or unsatisfied, unless the Required Banks
waive compliance in writing:
7.1 Limitation on Liens. The Company shall not, and shall not suffer or
permit any Insurance Subsidiary to, directly or indirectly, make, create, incur,
assume or suffer to exist any Lien upon or with respect to any part of its
property, whether now owned or hereafter acquired, other than the following
("Permitted Liens"):
(a) any Lien existing on property of the Company or any
Subsidiary on the Closing Date and set forth in Schedule 7.1 securing
Indebtedness outstanding on such date;
(b) any Lien created under any Loan Document;
(c) Liens for taxes, fees, assessments or other governmental
charges which are not delinquent or remain payable without penalty, or to the
extent that non-payment thereof is permitted by Section 6.7, provided that no
notice of Lien has been filed or recorded under the Code;
(d) carriers', warehousemen's, mechanics', landlords',
materialmen's, repairmen's or other similar Liens arising in the ordinary course
of business which are not delinquent or remain payable without penalty or which
are being contested in good faith and by appropriate proceedings, which
proceedings have the effect of preventing the forfeiture or sale of the property
subject thereto;
(e) Liens (other than any Lien imposed by ERISA) consisting of
pledges or deposits required in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other social security
legislation;
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(f) Liens on the property of the Company or any Subsidiary
securing (i) the non-delinquent performance of bids, trade contracts (other than
for borrowed money), leases or statutory obligations, (ii) contingent
obligations on surety and appeal bonds, and (iii) other non-delinquent
obligations of a like nature; in each case, incurred in the ordinary course of
business provided all such Liens in the aggregate would not (even if enforced)
cause a Material Adverse Effect;
(g) Liens consisting of judgment or judicial attachment liens,
provided that the enforcement of such Liens is effectively stayed and all such
Liens in the aggregate at any time outstanding for the Company and the Insurance
Subsidiaries do not exceed $10,000,000;
(h) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount, and which do not in any case
materially detract from the value of the property subject thereto or interfere
with the ordinary conduct of the businesses of the Company and the Insurance
Subsidiaries;
(i) deposits made by an Insurance Subsidiary, or other statutory
Liens against the assets of any Insurance Subsidiary, in each case made or
incurred in favor of policyholders of such Insurance Subsidiary in the ordinary
course of business pursuant to insurance regulatory requirements;
(j) Liens on assets of corporations which become Insurance
Subsidiaries after the date of this Agreement, provided, however, that such
Liens existed at the time the respective corporations became Subsidiaries and
were not created in anticipation thereof;
(k) purchase money security interests on any property acquired
or held by the Company or its Insurance Subsidiaries in the ordinary course of
business, securing Indebtedness incurred or assumed for the purpose of financing
all or any part of the cost of acquiring such property (which property shall
include the property set forth on Schedule 7.1(k) hereto); provided that (i) any
such Lien attaches to such property concurrently with or within 20 days after
the acquisition thereof, (ii) such Lien attaches solely to the property so
acquired in such transaction and (iii) the principal amount of the debt secured
thereby does not exceed 100% of the cost of such property;
(l) Liens securing obligations in respect of capital leases on
assets subject to such leases, provided that such capital leases are otherwise
permitted hereunder;
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(m) Liens in favor of securities brokers or other securities
intermediaries arising in the ordinary course of the merger arbitage investment
activities of the Company or any Insurance Subsidiary which activities do not
involve leverage in excess of 50%, and which activities are conducted in
accordance with applicable margin rules; and
(n) Liens arising solely by virtue of any statutory or common
law provision relating to banker's liens, rights of set-off or similar rights
and remedies as to deposit accounts or other funds maintained with a creditor
depository institution; provided that (i) such deposit account is not a
dedicated cash collateral account and is not subject to restrictions against
access by the Company in excess of those set forth by regulations promulgated by
the FRB, and (ii) such deposit account is not intended by the Company or any
Subsidiary to provide collateral to the depository institution.
7.2 Disposition of Assets. The Company: (i) shall not, and shall not
suffer or permit any Subsidiary to, directly or indirectly, sell, assign, lease,
convey, transfer or otherwise dispose of (whether in one transaction or in a
series of related transactions) any property (including accounts and notes
receivable, with or without recourse) or enter into any agreement to do any of
the foregoing, except in the ordinary course of business consistent with past
practices; and (ii) shall not, and shall not permit any Subsidiary to, directly
or indirectly, sell, assign, lease, convey, transfer or otherwise dispose of
(whether in one transaction or in a series of related transactions) shares of
stock held by it in any of the Subsidiaries, or enter into any agreement to do
any of the foregoing; provided, however, that notwithstanding the foregoing, the
Company and such Subsidiaries may engage in the transactions described in
subsections (i) and (ii) above, if the fair value of such transactions does not
exceed $50,000,000, and if fair value shall have been determined in good faith
by the Board of Directors of the Company, in the case of transactions in excess
of $10,000,000, or if such transaction is otherwise permitted by Section 7.3
and, provided, further that sales, assignments, leases, conveyances, transfers
or dispositions may be made to the Company or wholly owned Subsidiaries.
7.3 Consolidations and Mergers. The Company shall not, and shall not
suffer or permit any Insurance Subsidiary to, merge, consolidate with or into
any Person, except:
(a) any merger or consolidation in which the Company or an
Insurance Subsidiary is the continuing or surviving corporation; and
(b) any Insurance Subsidiary may merge with the Company,
provided that the Company shall be the continuing or
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surviving corporation, or may merge with any one or more Insurance Subsidiaries.
7.4 Transactions with Affiliates. The Company shall not suffer or
permit any Subsidiary to, enter into any transaction with any Affiliate of the
Company (other than a wholly owned Subsidiary), except upon fair and reasonable
terms no less favorable to the Company or such Subsidiary than would obtain in a
comparable arm's-length transaction with a Person not an Affiliate of the
Company or such Subsidiary.
7.5 Use of Proceeds. The Company shall not, and shall not suffer or
permit any Subsidiary to, use any portion of the Loan proceeds, directly or
indirectly, (i) to purchase or carry Margin Stock, (ii) to repay or otherwise
refinance indebtedness of the Company or others incurred to purchase or carry
Margin Stock, (iii) to extend credit for the purpose of purchasing or carrying
any Margin Stock, or (iv) to acquire any security in any transaction that is
subject to Section 13 or 14 of the Exchange Act; provided, however, that the
Company may purchase its own stock with the proceeds of the Loans.
7.6 ERISA. The Company shall not, and shall not suffer or permit any of
its ERISA Affiliates to: (a) engage in a prohibited transaction or violation of
the fiduciary responsibility rules with respect to any Plan which has resulted
or could reasonably expected to result in liability of the Company in an
aggregate amount in excess of $10,000,000; or (b) engage in a transaction that
could be subject to Section 4069 or 4212(c) of ERISA.
7.7 Change in Business. The Company shall not, and shall not suffer or
permit any Subsidiary to, engage in any material line of business substantially
different from the types of lines of business carried on by the Company and its
Subsidiaries on the date hereof and that would result in the Company and its
Subsidiaries, taken as a whole, no longer remaining primarily engaged in the
property and casualty insurance and reinsurance business and businesses directly
related thereto.
7.8 Accounting Changes. The Company shall not, and shall not suffer or
permit any Insurance Subsidiary to, make any significant change in accounting
treatment or reporting practices, except as required by GAAP or SAP, or change
the fiscal year of the Company or of any Insurance Subsidiary.
7.9 Financial Covenants.
(a) Minimum Common Stockholder's Equity. The Company shall not
at any time permit Common Stockholder's Equity to be less than $625,000,000 plus
25% of net income (if positive) determined on a cumulative basis for the period
commencing October 1, 1999.
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(b) Debt Ratio. The Company shall not permit the Debt Ratio to
be greater than 0.40:1 at the end of any fiscal quarter.
7.10 Deferrable Interest Debentures. The Company shall not
permit any prepayment of the Deferrable Interest Debentures.
ARTICLE VIII
EVENTS OF DEFAULT
8.1 Event of Default. Any of the following shall constitute an "Event
of Default":
(a) Non-Payment. The Company fails to pay, (i) when and as
required to be paid herein, any amount of principal of any Loan, or (ii) within
four days after the same becomes due, any interest, fee or any other amount
payable hereunder or under any other Loan Document; or
(b) Representation or Warranty. Any representation or warranty
by the Company made or deemed made herein, in any other Loan Document, or which
is contained in any certificate, document or financial or other statement by the
Company or any Responsible Officer, furnished at any time under this Agreement,
or in or under any other Loan Document, is incorrect in any material respect on
or as of the date made or deemed made; or
(c) Specific Defaults. The Company fails to perform or observe
any term, covenant or agreement contained in any of Sections 6.2(d)(ii)-(iv),
6.3 or 6.4 or in Article VII; or
(d) Other Defaults. The Company fails to perform or observe any
other term or covenant contained in this Agreement or any other Loan Document,
and such default shall continue unremedied for a period of 30 days after the
earlier of (i) the date upon which a Responsible Officer knew or reasonably
should have known of such failure or (ii) the date upon which written notice
thereof is given to the Company by the Agent or any Bank; or
(e) Cross-Default. The Company or any Subsidiary (i) fails to
make any payment in respect of any Indebtedness or Contingent Obligation in
excess of $10,000,000 when due (whether by scheduled maturity, required
prepayment, acceleration, demand, or otherwise) and such failure continues after
the applicable grace or notice period, if any, specified in the relevant
document on the date of such failure; or (ii) fails to perform or observe any
other condition or covenant, or any other event shall occur or condition exist,
under any agreement or instrument relating to any such Indebtedness or
Contingent Obligation, and such failure continues
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after the applicable grace or notice period, if any, specified in the relevant
document on the date of such failure if the effect of such failure, event or
condition is to cause, or to permit the holder or holders of such Indebtedness
or beneficiary or beneficiaries of such Indebtedness (or a trustee or agent on
behalf of such holder or holders or beneficiary or beneficiaries) to cause such
Indebtedness to be declared to be due and payable prior to its stated maturity,
or such Contingent Obligation to become payable or cash collateral in respect
thereof to be demanded; or
(f) Insolvency; Voluntary Proceedings. The Company or any
Insurance Subsidiary (i) ceases or fails to be solvent, or generally fails to
pay, or admits in writing its inability to pay, its debts as they become due,
subject to applicable grace periods, if any, whether at stated maturity or
otherwise; (ii) voluntarily ceases to conduct its business in the ordinary
course; (iii) commences any Insolvency Proceeding with respect to itself; or
(iv) takes any action to effectuate or authorize any of the foregoing; or
(g) Involuntary Proceedings. (i) Any involuntary Insolvency
Proceeding is commenced or filed against the Company or any Insurance
Subsidiary, or any writ, judgment, warrant of attachment, execution or similar
process, is issued or levied against a substantial part of the Company's or any
Insurance Subsidiary's properties, and any such proceeding or petition shall not
be dismissed, or such writ, judgment, warrant of attachment, execution or
similar process shall not be released, vacated or fully bonded within 60 days
after commencement, filing or levy; (ii) the Company or any Insurance Subsidiary
admits the material allegations of a petition against it in any Insolvency
Proceeding, or an order for relief (or similar order under non-U.S. law) is
ordered in any Insolvency Proceeding; or (iii) the Company or any Insurance
Subsidiary acquiesces in the appointment of a receiver, trustee, custodian,
conservator, liquidator, mortgagee in possession (or agent therefor), or other
similar Person for itself or a substantial portion of its property or business;
or
(h) Employee Benefit Plans. A contribution failure occurs with
respect to any Plan sufficient to give rise to a Lien against the Company or any
of its Subsidiaries under section 302(f)(1) of ERISA (as in effect on the
Closing Date); or withdrawal by one or more companies in the Controlled Group
from one or more Multiemployer Plans to which it or they have an obligation to
contribute and the withdrawal liability (without unaccrued interest) to
Multiemployer Plans as a result of such withdrawal or withdrawals (including any
outstanding withdrawal liability that the Controlled Group has incurred on the
date of such liability) is $10,000,000 or more; or the occurrence of any other
event with respect to a Plan which would reasonably be expected to result in the
incurrence by the Company or any of its
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Subsidiaries of a liability, fine or penalty of $10,000,000 or more; or
(i) Monetary Judgments. One or more non-interlocutory judgments,
non-interlocutory orders, decrees or arbitration awards is entered against the
Company or any Insurance Subsidiary involving in the aggregate a liability (to
the extent not covered by independent third-party insurance as to which the
insurer does not dispute coverage) as to any single or related series of
transactions, incidents or conditions, of $10,000,000 or more, and the same
shall remain unsatisfied, unvacated and unstayed pending appeal for a period of
30 days after the entry thereof; or
(j) Non-Monetary Judgments. Any non-monetary judgment, order or
decree is entered against the Company or any Subsidiary which does or would
reasonably be expected to have a Material Adverse Effect, and there shall be any
period of 30 consecutive days during which a stay of enforcement of such
judgment or order, by reason of a pending appeal or otherwise, shall not be in
effect; or
(k) Change of Control. There occurs any Change of Control; or
(l) Loss of Licenses. The insurance department of any state in
which any of the Insurance Subsidiaries is licensed or any other Governmental
Authority revokes or fails to renew any material license, permit or franchise of
the Company or any Insurance Subsidiary, or the Company or any Insurance
Subsidiary for any reason loses any material license, permit or franchise, or
the Company or any Insurance Subsidiary suffers the imposition of any
restraining order, escrow, suspension or impound of funds in connection with any
proceeding (judicial or administrative) with respect to any material license,
permit or franchise, and any of the foregoing results or is reasonably likely to
result in a Material Adverse Effect; or
(m) Adverse Change. There occurs a Material Adverse Effect; or
(n) Change in Regulation. Any change is made in the laws or
regulations of the states of organization or domicile of any Insurance
Subsidiary affecting the investment or dividend practices of any Insurance
Subsidiary and which would reasonably be expected to result in a Material
Adverse Effect.
8.2 Remedies. If any Event of Default occurs, the Agent shall, at the
request of, or may, with the consent of, the Required Banks,
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(a) declare the commitment of each Bank to make Loans to be
terminated, whereupon such commitments shall be terminated;
(b) declare the unpaid principal amount of all outstanding
Loans, all interest accrued and unpaid thereon, and all other amounts owing or
payable hereunder or under any other Loan Document to be immediately due and
payable, without presentment, demand, protest or other notice of any kind, all
of which are hereby expressly waived by the Company; and
(c) exercise on behalf of itself and the Banks all rights and
remedies available to it and the Banks under the Loan Documents or applicable
law;
provided, however, that upon the occurrence of any event specified in subsection
(f) or (g) of Section 8.1 (in the case of clause (i) of subsection (g) upon the
expiration of the 60-day period mentioned therein), the obligation of each Bank
to make Loans shall automatically terminate and the unpaid principal amount of
all outstanding Loans and all interest and other amounts as aforesaid shall
automatically become due and payable without further act of the Agent or any
Bank.
8.3 Rights Not Exclusive. The rights provided for in this Agreement and
the other Loan Documents are cumulative and are not exclusive of any other
rights, powers, privileges or remedies provided by law or in equity, or under
any other instrument, document or agreement now existing or hereafter arising.
ARTICLE IX
THE AGENT
9.1 Appointment and Authorization. Each Bank hereby irrevocably
(subject to Section 9.9) appoints, designates and authorizes the Agent to take
such action on its behalf under the provisions of this Agreement and each other
Loan Document and to exercise such powers and perform such duties as are
expressly delegated to it by the terms of this Agreement or any other Loan
Document, together with such powers as are reasonably incidental thereto.
Notwithstanding any provision to the contrary contained elsewhere in this
Agreement or in any other Loan Document, the Agent shall not have any duties or
responsibilities, except those expressly set forth herein, nor shall the Agent
have or be deemed to have any fiduciary relationship with any Bank, and no
implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or any other Loan Document or
otherwise exist against the Agent.
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9.2 Delegation of Duties. The Agent may execute any of its duties under
this Agreement or any other Loan Document by or through agents, employees or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agent shall not be responsible for the
negligence or misconduct of any agent or attorney-in-fact that it selects with
reasonable care.
9.3 Liability of Agent. None of the Agent-Related Persons shall (i) be
liable for any action taken or omitted to be taken by any of them under or in
connection with this Agreement or any other Loan Document or the transactions
contemplated hereby (except for its own gross negligence or willful misconduct),
or (ii) be responsible in any manner to any of the Banks for any recital,
statement, representation or warranty made by the Company or any Subsidiary or
Affiliate of the Company, or any officer thereof, contained in this Agreement or
in any other Loan Document, or in any certificate, report, statement or other
document referred to or provided for in, or received by the Agent under or in
connection with, this Agreement or any other Loan Document, or the validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement or
any other Loan Document, or for any failure of the Company or any other party to
any Loan Document to perform its obligations hereunder or thereunder. No
Agent-Related Person shall be under any obligation to any Bank to ascertain or
to inquire as to the observance or performance of any of the agreements
contained in, or conditions of, this Agreement or any other Loan Document, or to
inspect the properties, books or records of the Company or any of the Company's
Subsidiaries or Affiliates.
9.4 Reliance by Agent. The Agent shall be entitled to rely, and shall
be fully protected in relying, upon any writing, resolution, notice, consent,
certificate, affidavit, letter, telegram, facsimile, telex or telephone message,
statement or other document or conversation believed by it to be genuine and
correct and to have been signed, sent or made by the proper Person or Persons,
and upon advice and statements of legal counsel (including counsel to the
Company), independent accountants and other experts selected by the Agent. The
Agent shall be fully justified in failing or refusing to take any action under
this Agreement or any other Loan Document unless it shall first receive such
advice or concurrence of the Required Banks as it deems appropriate and, if it
so requests, it shall first be indemnified to its satisfaction by the Banks
against any and all liability and expense which may be incurred by it by reason
of taking or continuing to take any such action. The Agent shall in all cases be
fully protected in acting, or in refraining from acting, under this Agreement or
any other Loan Document in accordance with a request or consent of the Required
Banks and such request and any action taken or failure to act pursuant thereto
shall be binding upon all of the Banks.
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9.5 Notice of Default. The Agent shall not be deemed to have knowledge
or notice of the occurrence of any Default or Event of Default, except with
respect to defaults in the payment of principal, interest and fees required to
be paid to the Agent for the account of the Banks, unless the Agent shall have
received written notice from a Bank or the Company referring to this Agreement,
describing such Default or Event of Default and stating that such notice is a
"notice of default". The Agent will notify the Banks of its receipt of any such
notice. The Agent shall take such action with respect to such Default or Event
of Default as may be requested by the Required Banks in accordance with Article
VIII; provided, however, that unless and until the Agent has received any such
request, the Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Default or Event of
Default as it shall deem advisable or in the best interest of the Banks.
9.6 Credit Decision. Each Bank acknowledges that none of the
Agent-Related Persons has made any representation or warranty to it, and that no
act by the Agent hereinafter taken, including any review of the affairs of the
Company and its Subsidiaries, shall be deemed to constitute any representation
or warranty by any Agent-Related Person to any Bank. Each Bank represents to the
Agent that it has, independently and without reliance upon any Agent-Related
Person and based on such documents and information as it has deemed appropriate,
made its own appraisal of and investigation into the business, prospects,
operations, property, financial and other condition and creditworthiness of the
Company and its Subsidiaries, and all applicable bank regulatory laws relating
to the transactions contemplated hereby, and made its own decision to enter into
this Agreement and to extend credit to the Company hereunder. Each Bank also
represents that it will, independently and without reliance upon any
Agent-Related Person and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit analysis,
appraisals and decisions in taking or not taking action under this Agreement and
the other Loan Documents, and to make such investigations as it deems necessary
to inform itself as to the business, prospects, operations, property, financial
and other condition and creditworthiness of the Company. Except for notices,
reports and other documents expressly herein required to be furnished to the
Banks by the Agent, the Agent shall not have any duty or responsibility to
provide any Bank with any credit or other information concerning the business,
prospects, operations, property, financial and other condition or
creditworthiness of the Company which may come into the possession of any of the
Agent-Related Persons.
9.7 Indemnification. Whether or not the transactions contemplated
hereby are consummated, the Banks shall indemnify upon demand the Agent-Related
Persons (to the extent not reimbursed by
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or on behalf of the Company and without limiting the obligation of the Company
to do so), pro rata, from and against any and all Indemnified Liabilities;
provided, however, that no Bank shall be liable for the payment to the
Agent-Related Persons of any portion of such Indemnified Liabilities resulting
solely from such Person's gross negligence or willful misconduct. Without
limitation of the foregoing, each Bank shall reimburse the Agent upon demand for
its ratable share of any costs or out-of-pocket expenses (including Attorney
Costs) incurred by the Agent in connection with the preparation, execution,
delivery, administration, modification, amendment or enforcement (whether
through negotiations, legal proceedings or otherwise) of, or legal advice in
respect of rights or responsibilities under, this Agreement, any other Loan
Document, or any document contemplated by or referred to herein, to the extent
that the Agent is not reimbursed for such expenses by or on behalf of the
Company. The undertaking in this Section shall survive the payment of all
Obligations hereunder and the resignation or replacement of the Agent.
9.8 Agent in Individual Capacity. BofA and its Affiliates may make
loans to, issue letters of credit for the account of, accept deposits from,
acquire equity interests in and generally engage in any kind of banking, trust,
financial advisory, underwriting or other business with the Company and its
Subsidiaries and Affiliates as though BofA were not the Agent hereunder and
without notice to or consent of the Banks. The Banks acknowledge that, pursuant
to such activities, BofA or its Affiliates may receive information regarding the
Company or its Affiliates (including information that may be subject to
confidentiality obligations in favor of the Company or such Subsidiary) and
acknowledge that the Agent shall be under no obligation to provide such
information to them. With respect to its Loans, BofA shall have the same rights
and powers under this Agreement as any other Bank and may exercise the same as
though it were not the Agent, and the terms "Bank" and "Banks" include BofA in
its individual capacity.
9.9 Successor Agent. The Agent may, and at the request of the Required
Banks shall, resign as Agent upon 30 days' notice to the Banks. If the Agent
resigns under this Agreement, the Required Banks shall appoint from among the
Banks a successor agent for the Banks which successor agent shall be approved by
the Company. If no successor agent is appointed prior to the effective date of
the resignation of the Agent, the Agent may appoint, after consulting with the
Banks and the Company, a successor agent from among the Banks. Upon the
acceptance of its appointment as successor agent hereunder, such successor agent
shall succeed to all the rights, powers and duties of the retiring Agent and the
term "Agent" shall mean such successor agent and the retiring Agent's
appointment, powers and duties as Agent shall be terminated. After any retiring
Agent's resignation hereunder as Agent, the provisions of this
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Article IX and Sections 10.4 and 10.5 shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was Agent under this
Agreement. If no successor agent has accepted appointment as Agent by the date
which is 30 days following a retiring Agent's notice of resignation, the
retiring Agent's resignation shall nevertheless thereupon become effective and
the Banks shall perform all of the duties of the Agent hereunder until such
time, if any, as the Required Banks appoint a successor agent as provided for
above.
9.10 Withholding Tax. (a) If any Bank is a "foreign corporation,
partnership or trust" within the meaning of the Code and such Bank claims
exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or
1442 of the Code, such Bank agrees with and in favor of the Agent, to deliver to
the Agent:
(i) if such Bank claims an exemption from, or a
reduction of, withholding tax under a United States tax treaty,
properly completed IRS Forms 1001 and W-8 before the payment of any
interest in the first calendar year and before the payment of any
interest in each third succeeding calendar year during which interest
may be paid under this Agreement;
(ii) if such Bank claims that interest paid under
this Agreement is exempt from United States withholding tax because it
is effectively connected with a United States trade or business of such
Bank, two properly completed and executed copies of IRS Form 4224
before the payment of any interest is due in the first taxable year of
such Bank and in each succeeding taxable year of such Bank during which
interest may be paid under this Agreement, and IRS Form W-9; and
(iii) such other form or forms as may be required
under the Code or other laws of the United States as a condition to
exemption from, or reduction of, United States withholding tax.
Such Bank agrees to promptly notify the Agent of any change in circumstances
which would modify or render invalid any claimed exemption or reduction.
(b) If any Bank claims exemption from, or reduction of,
withholding tax under a United States tax treaty by providing IRS Form 1001 and
such Bank sells, assigns, grants a participation in, or otherwise transfers all
or part of the Obligations of the Company to such Bank, such Bank agrees to
notify the Agent of the percentage amount in which it is no longer the
beneficial owner of Obligations of the Company to such Bank. To the extent of
such percentage amount, the Agent will treat such Bank's IRS Form 1001 as no
longer valid.
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(c) If any Bank claiming exemption from United States
withholding tax by filing IRS Form 4224 with the Agent sells, assigns, grants a
participation in, or otherwise transfers all or part of the Obligations of the
Company to such Bank, such Bank agrees to undertake sole responsibility for
complying with the withholding tax requirements imposed by Sections 1441 and
1442 of the Code.
(d) If any Bank is entitled to a reduction in the applicable
withholding tax, the Agent may withhold from any interest payment to such Bank
an amount equivalent to the applicable withholding tax after taking into account
such reduction. If the forms or other documentation required by subsection (a)
of this Section are not delivered to the Agent, then the Agent may withhold from
any interest payment to such Bank not providing such forms or other
documentation an amount equivalent to the applicable withholding tax.
(e) If the IRS or any other Governmental Authority of the United
States or other jurisdiction asserts a claim that the Agent did not properly
withhold tax from amounts paid to or for the account of any Bank (because the
appropriate form was not delivered, was not properly executed, or because such
Bank failed to notify the Agent of a change in circumstances which rendered the
exemption from, or reduction of, withholding tax ineffective, or for any other
reason) such Bank shall indemnify the Agent fully for all amounts paid, directly
or indirectly, by the Agent as tax or otherwise, including penalties and
interest, and including any taxes imposed by any jurisdiction on the amounts
payable to the Agent under this Section, together with all costs and expenses
(including Attorney Costs). The obligation of the Banks under this subsection
shall survive the payment of all Obligations and the resignation or replacement
of the Agent.
ARTICLE X
MISCELLANEOUS
10.1 Amendments and Waivers. No amendment or waiver of any provision of
this Agreement or any other Loan Document, and no consent with respect to any
departure by the Company therefrom, shall be effective unless the same shall be
in writing and signed by the Required Banks (or by the Agent at the written
request of the Required Banks) and the Company and acknowledged by the Agent,
and then any such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given; provided, however, that
no such waiver, amendment, or consent shall, unless in writing and signed by all
the Banks and the Company and acknowledged by the Agent, do any of the
following:
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(a) increase or extend the Commitment of any Bank (or reinstate
any Commitment terminated pursuant to Section 8.2);
(b) postpone or delay any date fixed by this Agreement or any
other Loan Document for any payment of principal, interest, fees or other
amounts due to the Banks (or any of them) hereunder or under any other Loan
Document;
(c) reduce the principal of, or the rate of interest specified
herein on any Loan, or (subject to clause (ii) below) any fees or other amounts
payable hereunder or under any other Loan Document;
(d) change the percentage of the Commitments or of the aggregate
unpaid principal amount of the Loans which is required for the Banks or any of
them to take any action hereunder; or
(e) amend this Section, or Section 2.14, or any provision herein
providing for consent or other action by all Banks;
and, provided further, that (i) no amendment, waiver or consent shall, unless in
writing and signed by the Agent in addition to the Required Banks or all the
Banks, as the case may be, affect the rights or duties of the Agent under this
Agreement or any other Loan Document, and (ii) the Fee Letter may be amended, or
rights or privileges thereunder waived, in a writing executed by the parties
thereto.
10.2 Notices. (a) All notices, requests and other communications shall
be in writing (including, unless the context expressly otherwise provides, by
facsimile transmission, provided that any matter transmitted by the Company by
facsimile (i) shall be immediately confirmed by a telephone call to the
recipient at the number specified on Schedule 10.2, and (ii) shall be followed
promptly by delivery of a hard copy original thereof) and mailed, faxed or
delivered, to the address or facsimile number specified for notices on Schedule
10.2; or, as directed to the Company or the Agent, to such other address as
shall be designated by such party in a written notice to the other parties, and
as directed to any other party, at such other address as shall be designated by
such party in a written notice to the Company and the Agent.
(b) All such notices, requests and communications shall, when
transmitted by overnight delivery, or faxed, be effective when delivered for
overnight (next-day) delivery, or transmitted in legible form by facsimile
machine, respectively, or if mailed, upon the third Business Day after the date
deposited into the U.S. mail, or if delivered, upon delivery; except that
notices pursuant to Article II or IX shall not be effective until actually
received by the Agent.
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(c) Any agreement of the Agent and the Banks herein to receive certain
notices by telephone or facsimile is solely for the convenience and at the
request of the Company. The Agent and the Banks shall be entitled to rely on the
authority of any Person purporting to be a Person authorized by the Company to
give such notice and the Agent and the Banks shall not have any liability to the
Company or other Person on account of any action taken or not taken by the Agent
or the Banks in reliance upon such telephonic or facsimile notice. The
obligation of the Company to repay the Loans shall not be affected in any way or
to any extent by any failure by the Agent and the Banks to receive written
confirmation of any telephonic or facsimile notice or the receipt by the Agent
and the Banks of a confirmation which is at variance with the terms understood
by the Agent and the Banks to be contained in the telephonic or facsimile
notice.
10.3 No Waiver; Cumulative Remedies. No failure to exercise and no
delay in exercising, on the part of the Agent or any Bank, any right, remedy,
power or privilege hereunder, shall operate as a waiver thereof; nor shall any
single or partial exercise of any right, remedy, power or privilege hereunder
preclude any other or further exercise thereof or the exercise of any other
right, remedy, power or privilege.
10.4 Costs and Expenses. The Company shall:
(a) whether or not the transactions contemplated hereby are
consummated, pay or reimburse BofA (including in its capacity as Agent) within
five Business Days after demand (subject to subsection 4.1(e)) for all costs and
expenses incurred by BofA (including in its capacity as Agent) in connection
with the development, preparation, delivery, administration and execution of,
and any amendment, supplement, waiver or modification to (in each case, whether
or not consummated), this Agreement, any Loan Document and any other documents
prepared in connection herewith or therewith, and the consummation of the
transactions contemplated hereby and thereby, including reasonable Attorney
Costs incurred by BofA (including in its capacity as Agent) with respect
thereto; and
(b) pay or reimburse the Agent, the Arranger and each Bank
within five Business Days after demand (subject to subsection 4.1(e)) for all
costs and expenses (including Attorney Costs) incurred by them in connection
with the enforcement, attempted enforcement, or preservation of any rights or
remedies under this Agreement or any other Loan Document during the existence of
an Event of Default or after acceleration of the Loans (including in connection
with any "workout" or restructuring regarding the Loans, and including in any
Insolvency Proceeding or appellate proceeding).
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10.5 Indemnity. Whether or not the transactions contemplated hereby are
consummated, the Company shall indemnify and hold the Agent-Related Persons, and
each Bank and each of its respective officers, directors, employees, counsel,
agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, charges, expenses and disbursements (including
Attorney Costs) of any kind or nature whatsoever which may at any time
(including at any time following repayment of the Loans and the termination,
resignation or replacement of the Agent or replacement of any Bank) be imposed
on, incurred by or asserted against any such Person in any way relating to or
arising out of this Agreement or any document contemplated by or referred to
herein, or the transactions contemplated hereby, or any action taken or omitted
by any such Person under or in connection with any of the foregoing, including
with respect to any investigation, litigation or proceeding (including any
Insolvency Proceeding or appellate proceeding) related to or arising out of this
Agreement or the Loans or the use of the proceeds thereof, whether or not any
Indemnified Person is a party thereto (all the foregoing, collectively, the
"Indemnified Liabilities"); provided, that the Company shall have no obligation
hereunder to any Indemnified Person with respect to Indemnified Liabilities
resulting solely from the gross negligence or willful misconduct of such
Indemnified Person or to any Bank on account of interest required to be paid by
such Bank to the Agent pursuant to Section 2.12. The agreements in this Section
shall survive payment of all other Obligations.
10.6 Payments Set Aside. To the extent that the Company makes a payment
to the Agent or the Banks, or the Agent or the Banks exercise their right of
set-off, and such payment or the proceeds of such set-off or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential, set
aside or required (including pursuant to any settlement entered into by the
Agent or such Bank in its discretion) to be repaid to a trustee, receiver or any
other party, in connection with any Insolvency Proceeding or otherwise, then (a)
to the extent of such recovery the obligation or part thereof originally
intended to be satisfied shall be revived and continued in full force and effect
as if such payment had not been made or such set-off had not occurred, and (b)
each Bank severally agrees to pay to the Agent upon demand its pro rata share of
any amount so recovered from or repaid by the Agent.
10.7 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, except that the Company may not assign or transfer any
of its rights or obligations under this Agreement without the prior written
consent of the Agent and each Bank.
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10.8 Assignments, Participations, etc. (a) Any Bank may, with the
written consent of the Company at all times other than during the existence of
an Event of Default and the Agent, which consents shall not be unreasonably
withheld, at any time assign and delegate to one or more Eligible Assignees
(provided that no written consent of the Company or the Agent shall be required
in connection with any assignment and delegation by a Bank to an Eligible
Assignee that is an Affiliate of such Bank) (each an "Assignee") all, or any
ratable part of all, of the Loans, the Commitments and the other rights and
obligations of such Bank hereunder, in a minimum amount of $10,000,000;
provided, however, that the Company and the Agent may continue to deal solely
and directly with such Bank in connection with the interest so assigned to an
Assignee until (i) written notice of such assignment, together with payment
instructions, addresses and related information with respect to the Assignee,
shall have been given to the Company and the Agent by such Bank and the
Assignee; (ii) such Bank and its Assignee shall have delivered to the Company
and the Agent an Assignment and Acceptance in the form of Exhibit E ("Assignment
and Acceptance") together with any Note or Notes subject to such assignment and
(iii) the assignor Bank has paid to the Agent a processing fee in the amount of
$3,500.
(b) From and after the date that the Agent notifies the assignor
Bank that it has received (and provided its consent with respect to) an executed
Assignment and Acceptance and payment of the above-referenced processing fee,
and provided that the consent of the Company, if required pursuant to subsection
10.8(a), shall have been obtained, (i) the Assignee thereunder shall be a party
hereto and, to the extent that rights and obligations hereunder have been
assigned to it pursuant to such Assignment and Acceptance, shall have the rights
and obligations of a Bank under the Loan Documents, and (ii) the assignor Bank
shall, to the extent that rights and obligations hereunder and under the other
Loan Documents have been assigned by it pursuant to such Assignment and
Acceptance, relinquish its rights and be released from its obligations under the
Loan Documents.
(c) Within five Business Days after its receipt of notice by the
Agent that it has received an executed Assignment and Acceptance and payment of
the processing fee, (and provided that it consents to such assignment in
accordance with subsection 10.8(a), the Company shall execute and deliver to the
Agent, new Notes evidencing such Assignee's assigned Loans and Commitment and,
if the assignor Bank has retained a portion of its Loans and its Commitment,
replacement Notes in the principal amount of the Loans retained by the assignor
Bank (such Notes to be in exchange for, but not in payment of, the Notes held by
such Bank). Immediately upon each Assignee's making its processing fee payment
under the Assignment and Acceptance, this Agreement shall be deemed to be
amended to the extent, but only to the extent, necessary to reflect
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the addition of the Assignee and the resulting adjustment of the Commitments
arising therefrom. The Commitment allocated to each Assignee shall reduce such
Commitments of the assigning Bank pro tanto.
(d) Any Bank may at any time sell to one or more commercial
banks or other Persons not Affiliates of the Company (a "Participant")
participating interests in any Loans, the Commitment of that Bank and the other
interests of that Bank (the "originating Bank") hereunder and under the other
Loan Documents; provided, however, that (i) the originating Bank's obligations
under this Agreement shall remain unchanged, (ii) the originating Bank shall
remain solely responsible for the performance of such obligations, (iii) the
Company and the Agent shall continue to deal solely and directly with the
originating Bank in connection with the originating Bank's rights and
obligations under this Agreement and the other Loan Documents, and (iv) no Bank
shall transfer or grant any participating interest under which the Participant
has rights to approve any amendment to, or any consent or waiver with respect
to, this Agreement or any other Loan Document, except to the extent such
amendment, consent or waiver would require unanimous consent of the Banks as
described in the first proviso to Section 10.1. In the case of any such
participation, the Participant shall be entitled to the benefit of Sections 3.1,
3.3 and 10.5 as though it were also a Bank hereunder, and not have any rights
under this Agreement, or any of the other Loan Documents, and all amounts
payable by the Company hereunder shall be determined as if such Bank had not
sold such participation; except that, if amounts outstanding under this
Agreement are due and unpaid, or shall have been declared or shall have become
due and payable upon the occurrence of an Event of Default, each Participant
shall be deemed to have the right of set-off in respect of its participating
interest in amounts owing under this Agreement to the same extent as if the
amount of its participating interest were owing directly to it as a Bank under
this Agreement.
(e) Notwithstanding any other provision in this Agreement, any
Bank may at any time create a security interest in, or pledge, all or any
portion of its rights under and interest in this Agreement and the Note held by
it in favor of any Federal Reserve Bank in accordance with Regulation A of the
FRB or U.S. Treasury Regulation 31 CAR Section203.14, and such Federal Reserve
Bank may enforce such pledge or security interest in any manner permitted under
applicable law.
10.9 Confidentiality. Each Bank agrees to take and to cause its
Affiliates to take normal and reasonable precautions and exercise due care to
maintain the confidentiality of all information identified as "confidential" or
"secret" by the Company and provided to it by the Company or any Subsidiary, or
by the Agent on such Company's or Subsidiary's behalf, under this
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Agreement or any other Loan Document, and neither it nor any of its Affiliates
shall use any such information other than in connection with or in enforcement
of this Agreement and the other Loan Documents or in connection with other
business now or hereafter existing or contemplated with the Company or any
Subsidiary; except to the extent such information (i) was or becomes generally
available to the public other than as a result of disclosure by the Bank, or
(ii) was or becomes available on a non-confidential basis from a source other
than the Company, provided that such source is not bound by a confidentiality
agreement with the Company known to the Bank; provided, however, that any Bank
may disclose such information (A) at the request or pursuant to any requirement
of any Governmental Authority to which the Bank is subject or in connection with
an examination of such Bank by any such authority; (B) pursuant to subpoena or
other court process; (C) when required to do so in accordance with the
provisions of any applicable Requirement of Law; (D) to the extent reasonably
required in connection with any litigation or proceeding to which the Agent, any
Bank or their respective Affiliates may be party; (E) to the extent reasonably
required in connection with the exercise of any remedy hereunder or under any
other Loan Document; (F) to such Bank's independent auditors and other
professional advisors; (G) to any Participant or Assignee, actual or potential,
provided that such Person agrees in writing to keep such information
confidential to the same extent required of the Banks hereunder; (H) as to any
Bank or its Affiliate, as expressly permitted under the terms of any other
document or agreement regarding confidentiality to which the Company or any
Subsidiary is party or is deemed party with such Bank or such Affiliate; and (I)
to its Affiliates.
10.10 Set-off. In addition to any rights and remedies of the Banks
provided by law, if an Event of Default exists or the Loans have been
accelerated, each Bank is authorized at any time and from time to time, without
prior notice to the Company, any such notice being waived by the Company to the
fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held by,
and other indebtedness at any time owing by, such Bank to or for the credit or
the account of the Company against any and all Obligations owing to such Bank,
now or hereafter existing, irrespective of whether or not the Agent or such Bank
shall have made demand under this Agreement or any Loan Document and although
such Obligations may be contingent or unmatured. Each Bank agrees promptly to
notify the Company and the Agent after any such set-off and application made by
such Bank; provided, however, that the failure to give such notice shall not
affect the validity of such set-off and application.
10.11 Notification of Addresses, Lending Offices, Etc. Each Bank
shall notify the Agent in writing of any changes in the address to which notices
to the Bank should be directed, of
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addresses of any Lending Office, of payment instructions in respect of all
payments to be made to it hereunder and of such other administrative information
as the Agent shall reasonably request.
10.12 Counterparts. This Agreement may be executed in any number of
separate counterparts, each of which, when so executed, shall be deemed an
original, and all of said counterparts taken together shall be deemed to
constitute but one and the same instrument.
10.13 Severability. The illegality or unenforceability of any provision
of this Agreement or any instrument or agreement required hereunder shall not in
any way affect or impair the legality or enforceability of the remaining
provisions of this Agreement or any instrument or agreement required hereunder.
10.14 No Third Parties Benefited. This Agreement is made and entered
into for the sole protection and legal benefit of the Company, the Banks, the
Agent and the Agent-Related Persons, and their permitted successors and assigns,
and no other Person shall be a direct or indirect legal beneficiary of, or have
any direct or indirect cause of action or claim in connection with, this
Agreement or any of the other Loan Documents.
10.15 Governing Law and Jurisdiction. (a) THIS AGREEMENT AND THE NOTES
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF
ILLINOIS; PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING
UNDER FEDERAL LAW.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE
OF ILLINOIS OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS, AND
BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY, THE AGENT AND
THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE
NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE COMPANY, THE AGENT AND
THE BANKS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE
LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY
NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH
JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE
COMPANY, THE AGENT AND THE BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS,
COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY
ILLINOIS LAW.
10.16 Waiver of Jury Trial. THE COMPANY, THE BANKS AND THE AGENT EACH
WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN
DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION,
PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST
ANY
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OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH
RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, THE BANKS
AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED
BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES
FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY
OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING
WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF
THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF.
THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR
MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.
10.17 Entire Agreement. This Agreement, together with the other Loan
Documents, embodies the entire agreement and understanding among the Company,
the Banks and the Agent, and supersedes all prior or contemporaneous agreements
and understandings of such Persons, verbal or written, relating to the subject
matter hereof and thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered in by their proper and duly authorized officers as
of the day and year first above written.
W.R. BERKLEY CORPORATION
By:
-----------------------------------
Title:
--------------------------------
BANK OF AMERICA, NATIONAL ASSOCIATION,
as Administrative Agent
By:
-----------------------------------
Title:
--------------------------------
BANK OF AMERICA, NATIONAL ASSOCIATION,
as a Bank
By:
-----------------------------------
Title:
--------------------------------
WELLS FARGO BANK, N. A.
By:
-----------------------------------
Title:
--------------------------------
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SCHEDULE 2.1
COMMITMENTS
AND PRO RATA SHARES
<TABLE>
<CAPTION>
Pro Rata
Bank Commitment Share
---- ---------- -----
<S> <C> <C>
Bank of America,
National Association $50,000,000 66 2/3%
Wells Fargo Bank, N.A. $25,000,000 33 1/3%
TOTAL $75,000,000 100%
</TABLE>
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SCHEDULE 10.2
OFFSHORE AND DOMESTIC LENDING OFFICES,
ADDRESSES FOR NOTICES
BANK OF AMERICA, NATIONAL ASSOCIATION,
as Agent
Bank of America, National Association
1850 Gateway Boulevard,
Fifth Floor
Concord, California 94521
Attention: Clayton Choo/Corwin Lewis
Telephone: 925-675-8368/925-675-8357
Facsimile: 925-969-2804
BANK OF AMERICA, NATIONAL ASSOCIATION,
as a Bank
Domestic and Offshore Lending Office:
1850 Gateway Boulevard, Fourth Floor
Concord, California 94520
Notices (other than Notices of Borrowing and Notices of
Conversion/Continuation):
Bank of America, National Association
231 South LaSalle Street
10th Floor
Chicago, Illinois 60697
Attention: Elizabeth Bishop
Telephone: 312-828-6550
Facsimile: 312-987-0889
WELLS FARGO BANK, N.A.
Domestic and Offshore Lending Office:
201 Third Street, MAC 0187-081
San Francisco, California 94103
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Notices (other than Notices of Borrowing and Notices of
Conversion/Continuation):
Wells Fargo Bank, N.A.
230 West Monroe Street
Suite 2900
Chicago, Illinois 60606
Attention: Robert Meyer
Telephone: 312-345-8623
Facsimile: 312-553-4783
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EXHIBIT A
NOTICE OF BORROWING
Date: _________________________
To: Bank of America, National Association as Administrative Agent for
the Banks parties to the Credit Agreement dated as of December 10,
1999 (as extended, renewed, amended or restated from time to time,
the "Credit Agreement") among W.R. Berkley Corporation, certain
Banks which are signatories thereto and Bank of America, National
Association, as administrative agent
Ladies and Gentlemen:
The undersigned, W.R. Berkley Corporation (the "Company"), refers
to the Credit Agreement, the terms defined therein being used herein as therein
defined, and hereby gives you notice irrevocably, pursuant to Section 2.3 of the
Credit Agreement, of the Borrowing specified below:
1. The Business Day of the proposed Borrowing is __________.
2. The aggregate amount of the proposed Borrowing is $_____.
3. The Borrowing is to be comprised of $__________ of [Base
Rate] [Offshore Rate] Loans.
4. [The duration of the Interest Period for the Offshore
Rate Loans included in the Borrowing shall be _____ months.]
The undersigned hereby certifies that the following statements are
true on the date hereof, and will be true on the date of the proposed Borrowing,
before and after giving effect thereto and to the application of the proceeds
therefrom:
(a) the representations and warranties of the Company
contained in Article V of the Credit Agreement are true and correct
in all material respects as though made on and as of such date
(except to the extent such representations and warranties relate to
an earlier date, in which case they are true and correct in all
material respects as of such date);
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(b) no Default or Event of Default has occurred and is
continuing, or would result from such proposed Borrowing; and
(c) The proposed Borrowing will not cause the aggregate
principal amount of all outstanding Loans to exceed the combined
Commitments of the Banks.
W.R. BERKLEY CORPORATION
By:______________________________________
Title:___________________________________
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EXHIBIT B
NOTICE OF CONVERSION/CONTINUATION
Date:____________________
To: Bank of America ,National Association, as Administrative Agent for the
Banks parties to the Credit Agreement dated as of December 10, 1999 (as
extended, renewed, amended or restated from time to time, the "Credit
Agreement") among W.R. Berkley Corporation, certain Banks which are
signatories thereto and Bank of America, National Association, as
administrative agent
Ladies and Gentlemen:
The undersigned, W.R. Berkley Corporation (the "Company"), refers to
the Credit Agreement, the terms defined therein being used herein as therein
defined, and hereby gives you notice irrevocably, pursuant to Section 2.4 of the
Credit Agreement, of the [conversion] [continuation] of the Loans specified
herein, that:
1. The Conversion/Continuation Date is ___________________,
__________________.
2. The aggregate amount of the Loans to be [converted]
[continued] is $_______________.
3. The Loans are to be [converted into] [continued as]
[Offshore Rate] [Base Rate] Loans.
4. [If applicable:] The duration of the Interest Period for
the Offshore Rate Loans included in the [conversion] [continuation]
shall be _____ months.
W.R. BERKLEY CORPORATION
By:______________________________________
Title:___________________________________
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EXHIBIT C
W.R. BERKLEY CORPORATION
COMPLIANCE CERTIFICATE
Financial
Statement Date:____________________________,
Reference is made to that certain Credit Agreement dated as of December
10, 1999 (as extended, renewed, amended or restated from time to time, the
"Credit Agreement") among W.R. Berkley (the "Company"), the several financial
institutions from time to time parties thereto (the "Banks") and Bank of
America, National Association, as administrative agent for the Banks (in such
capacity, the "Agent"). Unless otherwise defined herein, capitalized terms used
herein have the respective meanings assigned to them in the Credit Agreement.
The undersigned Responsible Officer of the Company, hereby
certifies as of the date hereof that he/she is the _____________________________
of the Company, and that, as such, he/she is authorized to execute and deliver
this Certificate to the Banks and the Agent on the behalf of the Company and its
consolidated Subsidiaries, and that:
1. Enclosed herewith is a copy of the [annual audit/quarterly] report
of the Company as at consolidated (the "Computation Date") which report fairly
presents the financial condition and results of operation of the Company and its
Subsidiaries, as of the Computation Date.
2. The undersigned has reviewed and is familiar with the terms of the
Credit Agreement and has made, or has caused to be made under his/her
supervision, a detailed review of the transactions and conditions (financial or
otherwise) of the Company during the accounting period covered by the attached
financial statements.
3. To the best of the undersigned's knowledge, the Company, during such
period, has observed, performed or satisfied all of its covenants and other
agreements, and satisfied every condition in the Credit Agreement to be
observed, performed or satisfied by the Company, and the undersigned has no
knowledge of any Default or Event of Default.
4. The following financial covenant analyses and information set forth
on Schedule 2 attached hereto are true and accurate on and as of the date of
this Certificate.
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IN WITNESS WHEREOF, the undersigned has executed this
Certificate as of __________________________, ____________.
W.R. BERKLEY CORPORATION
By:______________________________________
Title:___________________________________
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Date: ______________, ____
For the fiscal quarter/year
ended ______________, ____
SCHEDULE 2
to the Compliance Certificate
<TABLE>
<CAPTION>
Actual Required/Permitted
------ ------------------
<S> <C> <C>
1. Section 7.9(a)
a. Common Stockholders' a. $625,000,000 $______
Equity
b. 25% of net income $______
(if positive) for
period since
October 1, 1999
c. Required (a) plus $______
(b)
Actual $______
</TABLE>
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[SAMPLE]
<TABLE>
<CAPTION>
2. Section 7.9(b) Maximum Permitted
-------------- -----------------
<S> <C> <C>
a. Indebtedness (excluding $______
Deferrable Interest
Debentures)
b. Portion of Deferrable $______
Interest Debentures
treated as Indebtedness
c. Total Indebtedness (a) $______
plus (b)
d. Common Stockholders' $______
Equity
e. Deferrable Interest $______
Debenture treated as
Common Stockholders'
Equity
f. Total Capital $______
(c) plus (d) plus (e) ____to 0.40 to 1.0
1.0
e. Indebtedness to Total
Capital (c) to (f)
</TABLE>
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EXHIBIT D
_______________________, 1999
Bank of America, National Association,
as Administrative Agent
231 South LaSalle Street
Chicago, Illinois 60697
Ladies and Gentlemen:
We have acted as counsel to W.R. Berkley Corporation ("Company") in
connection with the preparation, execution and delivery of the Credit Agreement,
dated as of December 10, 1999 (the "Credit Agreement") (together with the
documents referred to therein, the "Loan Documents"), among the Company, certain
banks and Bank of America, National Association, as administrative agent. This
opinion is rendered to you pursuant to Section 4.1(d) of the Credit Agreement.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings ascribed to them in the Credit Agreement.
In so acting, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of such documents as we have deemed
necessary or appropriate as a basis for the opinions hereinafter set forth. In
examining such documents, we have assumed the genuineness of the signatures of
all parties, the authenticity of all documents purporting to be originals and
the conformity to originals of all documents purporting to be copied.
As to various questions of fact material to such opinions, we have
relied upon certificates of responsible officers of the Company and public
officials.
Based upon the foregoing, and subject to the qualifications set forth
below, we are of the opinion that:
1. The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware.
2. The Company is duly qualified as a foreign corporation to do or
transact business in, and is in good standing under the laws of, each
jurisdiction in which the ownership or lease of its property or the conduct of
its business requires such qualification, except for jurisdictions in which
failure by it so to qualify would not have a Material Adverse Effect.
3. The Company has the requisite corporate power and
authority and all governmental licenses, authorizations,
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consents, certificates of authority and approvals to own or lease its assets or
properties and to conduct its business as currently conducted. The Company has
the requisite corporate power and authority to execute, deliver and enter into,
and to incur and perform its obligations under, the Loan Documents.
4. The execution, delivery and performance by the Company of its
obligations under the Loan Documents: (a) have been duly and validly authorized
by all necessary corporate action; (b) do not violate, conflict with or result
in a violation or breach of, accelerate any performance required by the Company
under, or create or impose any Lien on, any of the Company's properties or
assess (except as may be provided in and pursuant to the Loan Documents) by
reason of the terms of (i) the Certificate of Incorporation or by laws of the
Company, (ii) any law, rule or regulation of any Governmental Authority
applicable to the Company or by or to which the Company or its properties are
bound or subject; or (iii) to our knowledge, any order, writ, judgment,
injunction or decree of any court or other Governmental Authority, or, to our
knowledge, any indenture, mortgage, deed of trust, lease, security agreement or
any other instrument or agreement to which the Company is a party or subject or
by which the Company or its properties are bound; and (c) do not require any
consent or approval of, or registration or filing with, any court, Governmental
Authority or other Person which has not been obtained or filed as of the date
hereof.
5. The Loan Documents have been duly executed and delivered by the
Company and constitute the legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their terms, subject only to
(i) bankruptcy, insolvency, reorganization, moratorium, arrangement or similar
laws relating to or affecting the rights of creditors generally and (ii) general
principles of equity with respect to availability of equitable remedies,
regardless of whether enforcement is sought in proceedings at law or in equity.
6. To our knowledge, there are no actions, suits, investigations or
proceedings (whether or not purportedly on behalf of the Company) pending or
threatened against the Company before or by any governmental agency, or court,
arbitrator or grand jury that, if adversely determined, could reasonably be
expected to have a Material Adverse Effect. To our knowledge, the Company is not
in default with respect to any judgment, order, writ, injunction, decree,
demand, rule or regulation of any court, arbitrator, grand jury, or of any
governmental agency, which default could reasonably be expected to have a
Material Adverse Effect.
We are members only of the Bar of the Sate of New York and do not
purport to be experts in the laws of jurisdictions other than the State of New
York, except for The General Corporation Law of the State of Delaware and
federal laws of the United States of America, and the opinions set forth herein
are accordingly limited to said laws of those jurisdictions. To the
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extent the opinions expressed herein involve the laws of the State of Illinois,
we have assumed that the laws of the State of Illinois are the same as those of
the State of New York.
The opinions hereinbefore expressed are limited by principles of equity
which may limit the availability of certain rights and remedies, and do not
reflect the effect of bankruptcy, insolvency, reorganization, moratorium and
other laws applicable to creditors' rights and debtors' obligations generally.
This opinion is being provided to the Banks in connection with the
transactions contemplated by the Loan Documents and may not be relied upon by
the Banks for any other purpose and may not be relied upon by any other person,
firm, corporation or entity, except for successors to the Banks and Assignees
and Participants.
Very truly yours,
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<PAGE> 82
EXHIBIT E
[FORM OF] ASSIGNMENT AND ACCEPTANCE AGREEMENT
This ASSIGNMENT AND ACCEPTANCE AGREEMENT (this "Assignment and
Acceptance") dated as of __________, ____ is made between
______________________________ (the "Assignor") and __________________________
(the "Assignee").
RECITALS
WHEREAS, the Assignor is party to that certain Credit
Agreement dated as of December 10, 1999 (as amended, amended and restated,
modified, supplemented or renewed, the "Credit Agreement") among W.R. Berkley
Corporation (the "Company"), the financial institutions from time to time party
thereto (including the Assignor, the "Banks"), and Bank of America, National
Association, as administrative agent for the Banks (the "Agent"). Any terms
defined in the Credit Agreement and not defined in this Assignment and
Acceptance are used herein as defined in the Credit Agreement;
WHEREAS, as provided under the Credit Agreement, the Assignor
has committed to making Loans (the "Loans") to the Company in an aggregate
amount not to exceed $__________ (the "Commitment");
WHEREAS, [the Assignor has made Loans in the aggregate
principal amount of $__________ to the Company] [no Loans are outstanding under
the Credit Agreement]; and
WHEREAS, the Assignor wishes to assign to the Assignee [part
of the] [all] rights and obligations of the Assignor under the Credit Agreement
in respect of its Commitment, [together with a corresponding portion of each of
its outstanding Loans] in an amount equal to $__________ (the "Assigned Amount")
on the terms and subject to the conditions set forth herein and the Assignee
wishes to accept assignment of such rights and to assume such obligations from
the Assignor on such terms and subject to such conditions;
NOW, THEREFORE, in consideration of the foregoing and the
mutual agreements contained herein, the parties hereto agree as follows:
1. Assignment and Acceptance.
(a) Subject to the terms and conditions of this
Assignment and Acceptance, (i) the Assignor hereby sells, transfers and assigns
to the Assignee, and (ii) the Assignee
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hereby purchases, assumes and undertakes from the Assignor, without recourse and
without representation or warranty (except as provided in this Assignment and
Acceptance) __% (the "Assignee's Percentage Share") of (A) the Commitment [and
the Loans] of the Assignor and (B) all related rights, benefits, obligations,
liabilities and indemnities of the Assignor under and in connection with the
Credit Agreement and the Loan Documents.
[If appropriate, add paragraph specifying payment to Assignor
by Assignee of outstanding principal of, accrued interest on, and fees with
respect to, Loans assigned.]
(b) With effect on and after the Effective Date (as defined in
Section 5 hereof), the Assignee shall be a party to the Credit Agreement and
succeed to all of the rights and be obligated to perform all of the obligations
of a Bank under the Credit Agreement, including the requirements concerning
confidentiality and the payment of indemnification, with a Commitment in an
amount equal to the Assigned Amount. The Assignee agrees that it will perform in
accordance with their terms all of the obligations which by the terms of the
Credit Agreement are required to be performed by it as a Bank. It is the intent
of the parties hereto that the Commitment of the Assignor shall, as of the
Effective Date, be reduced by an amount equal to the Assigned Amount and the
Assignor shall relinquish its rights and be released from its obligations under
the Credit Agreement to the extent such obligations have been assumed by the
Assignee; provided, however, the Assignor shall not relinquish its rights under
Sections 10.4 and 10.5 of the Credit Agreement to the extent such rights relate
to the time prior to the Effective Date.
(c) After giving effect to the assignment and assumption set
forth herein, on the Effective Date the Assignee's Commitment will be
$__________.
(d) After giving effect to the assignment and assumption set
forth herein, on the Effective Date the Assignor's Commitment will be
$__________.
2. Payments.
(a) As consideration for the sale, assignment and transfer
contemplated in Section 1 hereof, the Assignee shall pay to the Assignor on the
Effective Date in immediately available funds an amount equal to $__________,
representing the Assignee's Pro Rata Share of the principal amount of all Loans.
(b) The Assignor further agrees to pay to the Agent a
processing fee in the amount specified in Section 10.8 of the Credit Agreement.
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3. Reallocation of Payments.
Any interest, fees and other payments accrued to the Effective Date
with respect to the Commitment and Loans shall be for the account of the
Assignor. Any interest, fees and other payments accrued on and after the
Effective Date with respect to the Assigned Amount shall be for the account of
the Assignee. Each of the Assignor and the Assignee agrees that it will hold in
trust for the other party any interest, fees and other amounts which it may
receive to which the other party is entitled pursuant to the preceding sentence
and pay to the other party any such amounts which it may receive promptly upon
receipt.
4. Independent Credit Decision.
The Assignee (a) acknowledges that it has received a copy of the Credit
Agreement and the Schedules and Exhibits thereto, together with copies of the
most recent financial statements referred to in Section 6.1 of the Credit
Agreement, and such other documents and information as it has deemed appropriate
to make its own credit and legal analysis and decision to enter into this
Assignment and Acceptance; and (b) agrees that it will, independently and
without reliance upon the Assignor, the Agent or any other Bank and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit and legal decisions in taking or not taking
action under the Credit Agreement.
5. Effective Date; Notices.
(a) As between the Assignor and the Assignee, the effective
date for this Assignment and Acceptance shall be __________, (the "Effective
Date"); provided that the following conditions precedent have been satisfied on
or before the Effective Date:
(i) this Assignment and Acceptance shall be
executed and delivered by the Assignor and the Assignee;
(ii) the consent of the Company and the Agent
required for an effective assignment of the Assigned Amount by the Assignor to
the Assignee under Section 10.8 of the Credit Agreement shall have been duly
obtained and shall be in full force and effect as of the Effective Date;
(iii) the Assignee shall pay to the Assignor
all amounts due to the Assignor under this Assignment and
Acceptance;
(v) the processing fee referred to in
Section 2(b) hereof and in Section 10.8(a) of the Credit
Agreement shall have been paid to the Agent; and
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(vi) the Assignor shall have assigned and the
Assignee shall have assumed a percentage equal to the Assignee's Percentage
Share of the rights and obligations of the Assignor under the Credit Agreement
(if such agreement exists).
(b) Promptly following the execution of this Assignment and
Acceptance, the Assignor shall deliver to the Company and the Agent for
acknowledgment by the Agent, a Notice of Assignment substantially in the form
attached hereto as Schedule 1.
[6. Agent. [INCLUDE ONLY IF ASSIGNOR IS AGENT]
(a) The Assignee hereby appoints and authorizes the Assignor
to take such action as agent on its behalf and to exercise such powers under the
Credit Agreement as are delegated to the Agent by the Banks pursuant to the
terms of the Credit Agreement.
(b) The Assignee shall assume no duties or obligations held by
the Assignor in its capacity as Agent under the Credit Agreement.]
7. Withholding Tax.
The Assignee (a) represents and warrants to the Bank, the Agent and the
Company that under applicable law and treaties no tax will be required to be
withheld by the Bank with respect to any payments to be made to the Assignee
hereunder, (b) agrees to furnish (if it is organized under the laws of any
jurisdiction other than the United States or any State thereof) to the Agent and
the Company prior to the time that the Agent or Company is required to make any
payment of principal, interest or fees hereunder, duplicate executed originals
of either U.S. Internal Revenue Service Form 4224 or U.S. Internal Revenue
Service Form 1001 (wherein the Assignee claims entitlement to the benefits of a
tax treaty that provides for a complete exemption from U.S. federal income
withholding tax on all payments hereunder) and agrees to provide new Forms 4224
or 1001 upon the expiration of any previously delivered form or comparable
statements in accordance with applicable U.S. law and regulations and amendments
thereto, duly executed and completed by the Assignee, and (c) agrees to comply
with all applicable U.S. laws and regulations with regard to such withholding
tax exemption.
8. Representations and Warranties.
(a) The Assignor represents and warrants that (i) it is the
legal and beneficial owner of the interest being assigned by it hereunder and
that such interest is free and clear of any Lien or other adverse claim; (ii) it
is duly organized and existing and it has the full power and
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authority to take, and has taken, all action necessary to execute and deliver
this Assignment and Acceptance and any other documents required or permitted to
be executed or delivered by it in connection with this Assignment and Acceptance
and to fulfill its obligations hereunder; (iii) no notices to, or consents,
authorizations or approvals of, any Person are required (other than any already
given or obtained) for its due execution, delivery and performance of this
Assignment and Acceptance, and apart from any agreements or undertakings or
filings required by the Credit Agreement, no further action by, or notice to, or
filing with, any Person is required of it for such execution, delivery or
performance; and (iv) this Assignment and Acceptance has been duly executed and
delivered by it and constitutes the legal, valid and binding obligation of the
Assignor, enforceable against the Assignor in accordance with the terms hereof,
subject, as to enforcement, to bankruptcy, insolvency, moratorium,
reorganization and other laws of general application relating to or affecting
creditors' rights and to general equitable principles.
(b) The Assignor makes no representation or warranty and
assumes no responsibility with respect to any statements, warranties or
representations made in or in connection with the Credit Agreement or the
execution, legality, validity, enforceability, genuineness, sufficiency or value
of the Credit Agreement or any other instrument or document furnished pursuant
thereto. The Assignor makes no representation or warranty in connection with,
and assumes no responsibility with respect to, the solvency, financial condition
or statements of the Company, or the performance or observance by the Company,
of any of its respective obligations under the Credit Agreement or any other
instrument or document furnished in connection therewith.
(c) The Assignee represents and warrants that (i) it is duly
organized and existing and it has full power and authority to take, and has
taken, all action necessary to execute and deliver this Assignment and
Acceptance and any other documents required or permitted to be executed or
delivered by it in connection with this Assignment and Acceptance, and to
fulfill its obligations hereunder; (ii) no notices to, or consents,
authorizations or approvals of, any Person are required (other than any already
given or obtained) for its due execution, delivery and performance of this
Assignment and Acceptance; and apart from any agreements or undertakings or
filings required by the Credit Agreement, no further action by, or notice to, or
filing with, any Person is required of it for such execution, delivery or
performance; (iii) this Assignment and Acceptance has been duly executed and
delivered by it and constitutes the legal, valid and binding obligation of the
Assignee, enforceable against the Assignee in accordance with the terms hereof,
subject, as to enforcement, to bankruptcy, insolvency, moratorium,
reorganization and other
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laws of general application relating to or affecting creditors' rights and to
general equitable principles; and (iv) it is an Eligible Assignee.
9. Further Assurances.
The Assignor and the Assignee each hereby agree to execute and deliver
such other instruments, and take such other action, as either party may
reasonably request in connection with the transactions contemplated by this
Assignment and Acceptance, including the delivery of any notices or other
documents or instruments to the Company or the Agent, which may be required in
connection with the assignment and assumption contemplated hereby.
10. Miscellaneous.
(a) Any amendment or waiver of any provision of this
Assignment and Acceptance shall be in writing and signed by the parties hereto.
No failure or delay by either party hereto in exercising any right, power or
privilege hereunder shall operate as a waiver thereof and any waiver of any
breach of the provisions of this Assignment and Acceptance shall be without
prejudice to any rights with respect to any other or further breach thereof.
(b) All payments made hereunder shall be made without any
set-off or counterclaim.
(c) The Assignor and the Assignee shall each pay its own costs
and expenses incurred in connection with the negotiation, preparation, execution
and performance of this Assignment and Acceptance.
(d) This Assignment and Acceptance may be executed in any
number of counterparts and all of such counterparts taken together shall be
deemed to constitute one and the same instrument.
(e) THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF ILLINOIS. The Assignor and
the Assignee each irrevocably submits to the non-exclusive jurisdiction of any
State or Federal court sitting in Illinois over any suit, action or proceeding
arising out of or relating to this Assignment and Acceptance and irrevocably
agrees that all claims in respect of such action or proceeding may be heard and
determined in such Illinois State or Federal court. Each party to this
Assignment and Acceptance hereby irrevocably waives, to the fullest extent it
may effectively do so, the defense of an inconvenient forum to the maintenance
of such action or proceeding.
(f) THE ASSIGNOR AND THE ASSIGNEE EACH HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS
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THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR
ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS ASSIGNMENT AND ACCEPTANCE, THE
CREDIT AGREEMENT, ANY RELATED DOCUMENTS AND AGREEMENTS OR ANY COURSE OF CONDUCT,
COURSE OF DEALING, OR STATEMENTS (WHETHER ORAL OR WRITTEN).
[Other provisions to be added as may be negotiated between the
Assignor and the Assignee, provided that such provisions are not inconsistent
with the Credit Agreement.]
IN WITNESS WHEREOF, the Assignor and the Assignee have caused this
Assignment and Acceptance to be executed and delivered by their duly authorized
officers as of the date first above written.
[ASSIGNOR]
By:___________________________________
Title:________________________________
Address:______________________________
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[ASSIGNEE]
By:___________________________________
Title:________________________________
Address:______________________________
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SCHEDULE 1
NOTICE OF ASSIGNMENT AND ACCEPTANCE
_______________, _____
Bank of America, National Association,
as Administrative Agent
1850 Gateway Boulevard
Fifth Floor
Concord, California 94521
W.R. Berkley Corporation
165 Mason Street
P.O. Box 2518
Greenwich, CT 06836-2518
Ladies and Gentlemen:
We refer to the Credit Agreement dated as of December 10, 1999(as
amended, amended and restated, modified, supplemented or renewed from time to
time the "Credit Agreement") among W.R. Berkley Corporation (the "Company"), the
Banks referred to therein and Bank of America, National Association, as
administrative agent for the Banks (the "Agent"). Terms defined in the Credit
Agreement are used herein as therein defined.
1. We hereby give you notice of, and request your consent to, the
assignment by __________________ (the "Assignor") to _______________ (the
"Assignee") of _____% of the right, title and interest of the Assignor in and to
the Credit Agreement (including, without limitation, the right, title and
interest of the Assignor in and to the Commitments of the Assignor and all
outstanding Loans made by the Assignor) pursuant to the Assignment and
Acceptance Agreement attached hereto (the "Assignment and Acceptance"). Before
giving effect to such assignment the Assignor's Commitment is $ ___________[,]
[and] the aggregate amount of its outstanding Loans is $_____________.
2. The Assignee agrees that, upon receiving the consent of the Agent
and, if applicable, the Company to such assignment, the Assignee will be bound
by the terms of the Credit Agreement as fully and to the same extent as if the
Assignee were the Bank originally holding such interest in the Credit Agreement.
3. The following administrative details apply to the Assignee:
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(A) Notice Address:
Assignee name: __________________________
Address: _______________________________
_______________________________
_______________________________
Attention: _____________________________
Telephone: (___) _______________________
Telecopier: (___) ______________________
(B) Payment Instructions:
Account No.: ___________________________
At: ___________________________
___________________________
___________________________
Reference: ___________________________
Attention: ___________________________
4. You are entitled to rely upon the representations, warranties and
covenants of each of the Assignor and Assignee contained in the Assignment and
Acceptance.
IN WITNESS WHEREOF, the Assignor and the Assignee have caused this
Notice of Assignment and Acceptance to be executed by their respective duly
authorized officials, officers or agents as of the date first above mentioned.
Very truly yours,
[NAME OF ASSIGNOR]
By:_________________________________________
Title:______________________________________
[NAME OF ASSIGNEE]
By:_________________________________________
Title:______________________________________
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<PAGE> 92
ACKNOWLEDGED AND ASSIGNMENT
CONSENTED TO:
W.R. BERKLEY CORPORATION
By:_______________________________
Title: __________________________
BANK OF AMERICA, NATIONAL ASSOCIATION,
as Administrative Agent
By: ______________________________
Its: _____________________________
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EXHIBIT F
[FORM OF] PROMISSORY NOTE
$____________________ _____________, 199_
FOR VALUE RECEIVED, the undersigned, W.R. Berkley Corporation, a
Delaware corporation (the "Company"), hereby promises to pay to the order
of the "Bank") the principal sum of Dollars ($ ) or, if
less, the aggregate unpaid principal amount of all Loans made by the Bank to the
Company pursuant to the Credit Agreement, dated as of December 10, 1999 (such
Credit Agreement, as it may be amended, restated, supplemented or otherwise
modified from time to time, being hereinafter called the "Credit Agreement"),
among the Company, the Bank, the other banks parties thereto, and Bank of
America, National Association, as Administrative Agent for the Banks, on the
dates and in the amounts provided in the Credit Agreement. The Company further
promises to pay interest on the unpaid principal amount of the Loans evidenced
hereby from time to time at the rates, on the dates, and otherwise as provided
in the Credit Agreement.
The Bank is authorized to endorse the amount and the date on
which each Loan is made, the maturity date therefor and each payment of
principal with respect thereto on the schedules annexed hereto and made a part
hereof, or on continuations thereof which shall be attached hereto and made a
part hereof; provided, that any failure to endorse such information on such
schedule or continuation thereof shall not in any manner affect any obligation
of the Company under the Credit Agreement and this Promissory Note (the "Note").
This Note is one of the Notes referred to in, and is entitled to
the benefits of, the Credit Agreement, which Credit Agreement, among other
things, contains provisions for acceleration of the maturity hereof upon the
happening of certain stated events and also for prepayments on account of
principal hereof prior to the maturity hereof upon the terms and conditions
therein specified.
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Terms defined in the Credit Agreement are used herein with their
defined meanings therein unless otherwise defined herein. This Note shall be
governed by, and construed and interpreted in accordance with, the laws of the
State of Illinois applicable to contracts made and to be performed entirely
within such State.
W.R. BERKLEY CORPORATION
By:_______________________________________
Title:_____________________________________
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<PAGE> 95
Schedule A to Note
BASE RATE LOANS AND REPAYMENT OF BASE RATE LOANS
(2) (3) (4)
Amount Maturity Amount of
of Date of Base (5)
(1) Base Base Rate Loan Notation
Date Rate Loan Rate Loan Repaid Made By
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
__________ __________ __________ __________ __________
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Schedule B to Note
OFFSHORE RATE LOANS AND REPAYMENT OF OFFSHORE RATE LOANS
(2) (3) (4)
Amount Maturity Amount of
of Date of Offshore (5)
(1) Offshore Offshore Rate Notation
Date Rate Loan Rate Loan Loan Repaid Made By
__________ __________ __________ ___________ __________
__________ __________ __________ ___________ __________
__________ __________ __________ ___________ __________
__________ __________ __________ ___________ __________
__________ __________ __________ ___________ __________
__________ __________ __________ ___________ __________
__________ __________ __________ ___________ __________
__________ __________ __________ ___________ __________
__________ __________ __________ ___________ __________
__________ __________ __________ ___________ __________
__________ __________ __________ ___________ __________
__________ __________ __________ ___________ __________
__________ __________ __________ ___________ __________
__________ __________ __________ ___________ __________
__________ __________ __________ ___________ __________
__________ __________ __________ ___________ __________
__________ __________ __________ ___________ __________
__________ __________ __________ ___________ __________
__________ __________ __________ ___________ __________
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(Exhibit 10.12)
January 24, 2000
John D. Vollaro
26 Old Orchard Hill Lane
Greenwich, Connecticut 06831
Dear John:
In recognition of your many years of service and highly valued contributions, I
am pleased to set forth our mutual agreement regarding your resignation as
President and Chief Operating Officer of W.R. Berkley Corporation (the
"Company").
1. Your resignation from the Company as President and Chief Operating
Officer will be effective as of the close of business on March 1,
2000.
2. You will continue to have the use of your current office and
secretarial arrangements through March 1, 2000. Thereafter, at your
request, the Company will provide a temporary office for your use
until the earlier of one year from the date hereof or the date on
which you commence other employment.
3. The Company will pay you annual compensation at the rate of $620,000
per year for the period commencing on March 1, 2000 and terminating on
February 28, 2001 and at the rate of $650,000 per year for the period
commencing on March 1, 2001 and terminating on February 28, 2003. Such
payments will be made on a biweekly basis on the Company's regular
payroll cycle.
4. The Company will make additional payments to you of $300,000 on January
1, 2001 and $300,000 on January 1, 2002; provided, however, that you
will not be entitled to the payment of $300,000 on January 1, 2002 (the
"Second Installment Payment") if, prior to such date, you have
commenced other employment, whether or not you continue to be employed
on January 1, 2002. For purposes of this letter agreement, "other
employment" shall include any services as an employee, independent
contractor, consultant or advisor other than Limited Consulting
Services. Limited Consulting Services means services provided by you to
any one or more unrelated
<PAGE> 2
January 24, 2000
Page 2
employers or businesses (other than the Company) prior to or as of
January 1, 2002 which (i) consist solely of consultation and advice
directed to specific aspects of the business or affairs of such
employer or business (each, with its affiliates, an "Employer") and not
to the business or affairs of the Employer, or of an operating unit or
segment thereof, as a whole; (ii) do not extend, for any Employer, for
a period of more than 120 days, whether or not consecutive; (iii) do
not involve or result in your employment by an Employer, or the
provision by you of consulting or advisory services (other than Limited
Consulting Services) to such Employer, or your becoming an officer or
director of such Employer, in each such case at any time prior to March
1, 2003; (iv) do not involve or result in an agreement or arrangement
(whether or not in writing), at any time prior to March 1, 2003, for
your employment by, or your provision of consulting or advisory
services to, or your becoming an officer or director of, an Employer;
(v) do not result in your being eligible for benefits from the Employer
of a kind referred to in the second sentence of paragraph 8 hereof; and
(vi) do not preclude you from performing your obligations under
paragraph 7 hereof. You will, prior to performing Limited Consulting
Services for any Employer, advise the Company in writing of the name of
such Employer (except that you need not advise the Company of the name
of an Employer that does not engage in any business that is competitive
with any business of the Company) and the nature and principal terms of
such Limited Consulting Services and shall certify in writing that such
services will constitute Limited Consulting Services hereunder. In the
event that the Chairman of the Board of the Company believes that any
services so to be provided by you should not be deemed to be Limited
Consulting Services, such matter shall be referred for resolution to
Jack H. Nusbaum, whose determination with respect thereto shall be
final and binding upon you and the Company, and each of you and the
Company agrees not to challenge such determination in any action or
proceeding. In the event of a breach by you of any of the provisions of
this paragraph 4, or if you should receive any payment or benefits
under this letter agreement to which you are not entitled because you
commenced other employment, and without limiting any other rights or
remedies available to the Company with respect to such breach, the
Company shall be entitled to (i) recover the Second Installment
Payment, if already made, together with the costs of any such benefits,
and/or (ii) without duplication of any recovery under clause (i), cease
making payments under this letter agreement provided that the amount of
payments ceased being made shall
<PAGE> 3
January 24, 2000
Page 3
not exceed the amount of the Second Installment Payment plus the amount
of any such costs.
5. Options to purchase shares of the Company's common stock granted to
you under the W.R. Berkley Corporation First Amended and Restated 1992
Stock Option Plan which shall have vested as of the earlier of the
dates hereinafter referred to shall be canceled and of no force or
effect from and after the earlier of March 1, 2003 or the date on
which you commence other employment, and, except as otherwise provided
herein, prior to such cancellation shall continue to be subject to the
terms and conditions of the option agreements between you and the
Company pursuant to which such options were granted. You will not be
granted any options after the date of this letter agreement.
6. Your active responsibilities as an officer of the Company will
terminate immediately and your regular employment with the Company
will terminate effective as of the close of business on March 1, 2000.
To the extent otherwise eligible, you will continue to participate in
all Company benefit plans through that date.
7. The Company will distribute your accumulated benefits under the
Company's Profit Sharing Plan, Deferred Compensation Plan and Benefit
Replacement Plan in accordance with each Plan's provisions and, to the
extent consistent therewith, per your written direction. Anything
herein to the contrary notwithstanding, to the extent that a
distribution of your accumulated benefits under the terms any of the
foregoing plans is conditioned on your termination of employment with
the Company, you will not be allowed to receive a distribution from
such plan until your employment has terminated as provided in paragraph
8 hereof. You acknowledge and agree that you will not be entitled to
any distribution of benefits accrued as of the date of this letter
agreement under the Company's Annual Incentive Compensation Plan and
hereby waive any right to any such benefits. You further acknowledge
and agree that all outstanding Units (as therein defined) awarded to
you under the Company's Long-Term Incentive Compensation Plan shall be
canceled and all of your rights with respect thereto and under such
plan shall expire upon the date of this letter agreement.
8. From March 1, 2000 until the earlier of March 1, 2003 or the date on
which you commence other employment, you will have the status of
standby employee but you hereby waive any right you have to participate
during such period in the Company's Profit
<PAGE> 4
January 24, 2000
Page 4
Sharing Plan, Deferred Compensation Plan, Benefit Replacement Plan,
Annual Incentive Compensation Plan and Long-Term Incentive Compensation
Plan, and in all of the Company's other executive compensation or
benefit plans, other than the Company's Flexible Compensation Plan, in
which you will have the right to continue to participate during such
period. During such period, the Company will provide you with continued
medical, term life insurance and long-term disability benefits
equivalent to that (and at the same cost basis to you) provided for
other employees or will reimburse you for the cost of comparable
coverage. Thereafter, you will be able to elect continuation coverage
for yourself and your covered dependents under the Company's medical
plan in accordance with the Consolidated Omnibus Budget Reconciliation
Act of 1986, as amended ("COBRA"). The foregoing provisions are not
intended to affect your rights, if any, under the Company's group term
life insurance plan to convert such coverage to individual coverage at
your expense upon termination of employment. At the time your status as
a standby employee terminates as provided herein, you shall not be
entitled to any form of termination pay or other benefit under any
severance benefit plan or similar arrangement for former employees of
the Company. You acknowledge and agree that as of March 1, 2000, you
will not, except as otherwise expressly provided in this letter
agreement, be entitled to any bonus, commission, fees, vacation pay or
other payment (other than any accrued salary) from the Company or any
of its subsidiaries or affiliates for any period. As a standby
employee, you agree to furnish to the Company your best advice,
information, judgment and knowledge with respect to the operations of
the Company's businesses. You shall furnish such advice at the request
of the Company's Chairman of the Board at mutually agreeable times. You
may furnish your services in person, by telephone or other means of
electronic communication during normal business hours.
9. Simultaneously herewith, you will execute the General Release in the
form annexed hereto as Attachment 1 and made a part hereof.
10. Simultaneously herewith, you will deliver your resignation from
various boards and committees in the form annexed hereto as Attachment
2 to be effective as of the date set forth therein.
11. This letter agreement and the annexed General Release and resignation,
and all of our respective rights thereunder, shall be binding upon,
inure to the benefit of, and be
<PAGE> 5
January 24, 2000
Page 5
enforceable by, the parties hereto and their respective successors,
assigns, personal or legal representatives, executors, administrators,
heirs, distributees, devisees and legatees. If you should die while any
amounts would still be payable to you hereunder, all such amounts shall
be payable in accordance with the terms of this letter agreement to
your estate, but your rights under this letter agreement are otherwise
non-transferable.
12. You agree that, without the prior written consent of the Company, you
will not disclose or use any non-public confidential information of
the Company disclosed to or learned by you during the course of your
employment so long as such information is not publicly known or
available, except for such disclosures as are otherwise required by
law. You further agree that you will not make any statements at any
time that disparage the reputation of the Company or its officers. The
Company, on behalf of itself and its executive officers, agrees that
it will not make any statements at any time that disparage your
reputation.
13. Unless the Company has specifically consented thereto in writing, you
agree not to solicit, induce or knowingly hire, or to cause, or
recommend to, any entity with which you are affiliated to solicit,
induce or hire, or to make any such entity aware of the qualifications
of, any key employee employed (or formerly employed within six months
prior to the date of solicitation, inducement or hiring) by the
Company, during the period beginning on the date hereof and ending six
months from the date the final payment is made to you pursuant to
paragraph 3 of this letter agreement. For purposes of this letter
agreement, a key employee means any officer of the Company and any
other person employed by the Company who was a participant in any stock
option, stock bonus, stock loan, stock purchase or similar stock plan
of the Company during the one year period prior to the date of
solicitation, inducement or hire.
14. At all times, you agree, for so long as this letter agreement is
otherwise confidential, to keep confidential both the fact of and the
terms of this letter agreement, and you agree not to disclose, display,
discuss or make public in any way its terms with anyone except members
of your immediate family and except as may be required to your
certified public accountant, tax preparer, attorney or where compelled
by law. Before disclosing this letter agreement to any person at any
time when this letter agreement is otherwise confidential, you agree to
advise the party to whom disclosure is made that such
<PAGE> 6
January 24, 2000
Page 6
information is confidential and such party is not to the disclose same.
You and the Company will consult and cooperate with each other,
consistent with applicable law, with a view to agreeing in a timely
manner on the contents of any press release or other public
announcement to be made by the Company with respect to this letter
agreement.
15. You acknowledge that the payments and benefits provided under this
Agreement are in consideration for the obligations you have undertaken
in paragraphs 12, 13 and 14 hereof and your execution of the General
Release annexed hereto. You agree that the Company will suffer
irreparable damage if the provisions of any of such paragraphs are
breached and that in such event, and in the event you revoke the
General Release in accordance with the terms thereof, the Company shall
be entitled as a matter of right to terminate all remaining payments
and benefits provided under this Agreement, and you shall have no
further right thereto. Upon demand by the Company, you shall
immediately repay to the Company the gross, pre-tax amount of all
payments made to you hereunder prior to such time. You agree that the
amount of such prior and future payments shall constitute liquidated
damages for the breach of this letter agreement.
16. Should any provision of this letter agreement or of the annexed General
Release be held invalid or illegal, such illegality shall not
invalidate the whole of this letter agreement, or General Release, but
rather such letter agreement and General Release shall be construed as
if it did not contain the illegal part, and the rights and obligations
of the parties shall be construed and enforced accordingly. If any of
the restrictions contained herein shall be deemed to be unenforceable
by reason of the extent, duration or geographical scope thereof, or
otherwise, then the court making such determination shall have the
right to reduce such extent, duration, geographical scope or other
provisions hereof, and in its reduced form this letter agreement shall
then be enforceable in the manner contemplated hereby.
17. The payments due to you hereunder shall be subject to reduction to
satisfy all applicable Federal, state and local withholding tax
obligations. The Company makes no representation regarding the
taxation of any payments or benefits to be provided to you under, or
the tax ramifications of any of the matters contemplated by, this
letter agreement. It is your obligation and responsibility to
determine whether any such payment or benefit is includible in gross
income for Federal, state and local income tax purposes.
<PAGE> 7
January 24, 2000
Page 7
18. Reference in this letter agreement to the Company shall include all
subsidiaries and affiliates of the Company and for purposes of this
letter agreement and the General Release, the term "affiliate" shall
be limited to entities that are engaged in the business of insurance
or insurance services and are directly or indirectly controlled by or
under common control with the Company.
19. You will promptly provide the Company with a notice of your acceptance
of other employment and the commencement date thereof.
YOU EXPRESSLY ACKNOWLEDGE, REPRESENT AND WARRANT THAT YOU HAVE READ THIS LETTER
AGREEMENT AND THE GENERAL RELEASE CAREFULLY; THAT YOU FULLY UNDERSTAND THE
TERMS, CONDITIONS AND SIGNIFICANCE OF THIS LETTER AGREEMENT AND THE GENERAL
RELEASE; THAT THE COMPANY HAS ADVISED AND URGED YOU TO CONSULT WITH YOUR
ATTORNEY CONCERNING THIS LETTER AGREEMENT AND THE GENERAL RELEASE; THAT YOU HAVE
BEEN REPRESENTED BY COUNSEL AND HAVE HAD A FULL OPPORTUNITY TO REVIEW THIS
LETTER AGREEMENT AND THE GENERAL RELEASE WITH YOUR ATTORNEY AND HAVE DONE SO;
THAT YOU HAVE HAD AMPLE OPPORTUNITY TO NEGOTIATE THROUGH YOUR ATTORNEY; AND THAT
YOU HAVE EXECUTED THIS LETTER AGREEMENT VOLUNTARILY, KNOWINGLY AND WITH SUCH
ADVICE FROM YOUR ATTORNEY AS YOU HAVE DEEMED APPROPRIATE.
You acknowledge that you have 21 days to review and consider the terms described
above and the financial consequences to you and your family. With the advice of
the Company, you have had a reasonable opportunity to consider advice from your
legal counsel before signing this letter. Fully understanding the above terms,
you are entering into this letter agreement knowingly and voluntarily.
If the foregoing is acceptable to you, please sign, date and return the attached
copy of this letter to me no later than February 14, 2000. Once you have signed
the letter, our agreement will not take effect or be enforceable until seven
days after your signing this letter and you may revoke it at any time prior to
the end of the
<PAGE> 8
January 24, 2000
Page 8
seventh day after your signing by delivering a written revocation to the
undersigned.
Sincerely,
W.R. BERKLEY CORPORATION
By: ____________________________
William R. Berkley
Chairman of the Board and
Chief Executive Officer
AGREED: _______________________________ _______________
John D. Vollaro Date
<PAGE> 9
ATTACHMENT 1
GENERAL RELEASE
In consideration of the payments, benefits, agreements, and other
consideration to be provided to John D. Vollaro by W.R. Berkley Corporation as
described in the letter agreement between W.R. Berkley Corporation and John D.
Vollaro dated January 24, 2000 (the "Agreement") to which this Release is
annexed, John D. Vollaro for himself and for his heirs, executors,
administrators, and their respective successors and assigns (collectively
"Vollaro") hereby releases and forever discharges W.R. Berkley Corporation, and
all of its subsidiaries, affiliates, divisions, officers, directors, employees,
agents, successors and assigns (hereinafter collectively referred to as
"Berkley"), and all plan administrators and trustees of employee benefit plans
maintained by Berkley, of and from all or any manner of actions, causes and
causes of actions, suits, debts, obligations, damages, complaints, liabilities,
losses, covenants, contracts, controversies, agreements, promises, variances,
trespasses, judgments and expenses (including attorneys' fees and costs),
executions, claims and demands whatsoever at law or in equity (such actions,
etc., being referred to herein as "Actions"), specifically including by way of
example but not limitation, Title VII of the Civil Rights Act of 1964, as
amended, the Civil Rights Act of 1866, the Age Discrimination in Employment Act
(ADEA), the Employee Retirement Income Security Act of 1974, as amended (ERISA),
the Americans with Disabilities Act, any and all
<PAGE> 10
Connecticut fair employment, employment discrimination and human rights laws,
claims for wrongful discharge, personal injury, defamation, mental anguish,
injury to health and reputation and any and all claims and rights under all
foreign and United States federal, state, local and decisional law and
ordinances, including all those concerning equal employment, which Vollaro ever
had, now has, or which Vollaro hereafter can, shall or may have for, upon or by
reason of any matter, cause or thing whatsoever, arising on or prior to the
effective date hereof, in the course of, or in any way related to, his
employment by or termination of employment from Berkley. Vollaro takes this
action fully aware of his rights under the laws of the United States (and any
state thereof) and voluntarily waives such rights. The provisions of any laws
providing in substance that releases shall not extend to claims which are
unknown or unsuspected at the time, to the person executing such release, are
hereby waived. Vollaro hereby agrees never individually or with any person to
file, commence or aid in any fashion the filing of, any charges, lawsuits or
complaints with any governmental agency or against Berkley or any of the parties
released by him in this General Release with respect to any of the matters
covered by this Release.
Notwithstanding the foregoing, by signing this Release, Vollaro shall
not have relinquished (i) his right to indemnification for acts occurring or
liabilities arising on or prior to March 1, 2000, including any right for
reimbursement of expenses (including, without limitation, attorneys' fees and
-2-
<PAGE> 11
costs) from Berkley under charter provision, by law or insurance arrangement or
under applicable law with respect to the conduct of Vollaro, or any claim
asserted against Vollaro, in his capacity as a director, officer or employee of
Berkley or as a trustee of any Berkley employee benefit plan, or as a member of
any Berkley company committee or Berkley employee benefit plan committee, which
right shall be no greater nor less than the indemnification rights of other
Berkley officers and directors, (ii) Vollaro's right to payments or benefits
under, or to enforce the provisions of, this Release or the Agreement to which
it is annexed or (iii) any rights or claims Vollaro may have under ADEA that
arise after the date on which he executes this Release.
Berkley hereby releases and forever discharges Vollaro from all or any
manner of Actions which Berkley ever had, now has, or which Berkley hereafter
can, shall or may have for, upon or by reason of any activities undertaken
within the scope of Vollaro's employment with the Company and in compliance with
applicable laws, regulations and written Company policies, on or prior to the
effective date hereof; provided, however, that Berkley shall not thereby release
Berkley's right to enforce the provisions of this Release or the Agreement to
which it is annexed.
VOLLARO EXPRESSLY ACKNOWLEDGES, REPRESENTS AND WARRANTS THAT HE HAS READ THIS
RELEASE CAREFULLY; THAT HE FULLY UNDERSTANDS THE TERMS, CONDITIONS AND
SIGNIFICANCE OF THIS RELEASE; THAT THE COMPANY HAS ADVISED AND URGED HIM TO
CONSULT WITH HIS ATTORNEY CONCERNING THIS RELEASE; THAT HE HAS BEEN REPRESENTED
BY COUNSEL AND HAS HAD A FULL OPPORTUNITY TO REVIEW THIS RELEASE WITH HIS
ATTORNEY AND HAS DONE SO; THAT HE HAS HAD AMPLE OPPORTUNITY TO NEGOTIATE THROUGH
HIS ATTORNEY; THAT THE PAYMENTS AND BENEFITS THAT ARE TO BE PROVIDED TO HIM
UNDER THE AGREEMENT TO WHICH THIS RELEASE IS ANNEXED ARE IN ADDITION TO ANYTHING
OF VALUE TO WHICH HE IS ALREADY ENTITLED; AND THAT HE HAS EXECUTED THIS RELEASE
-3-
<PAGE> 12
VOLUNTARILY, KNOWINGLY AND WITH SUCH ADVICE FROM HIS ATTORNEY AS HE DEEMED
APPROPRIATE.
-4-
<PAGE> 13
IN WITNESS WHEREOF, John D. Vollaro and W.R. Berkley Corporation have
executed this General Release this 24th day of January, 2000, John D. Vollaro
having had the opportunity to review it with counsel of his choice and having
had the right to consider it for twenty-one (21) days and seven (7) days after
execution to revoke it.
AGREED: ________________________________ ________________
John D. Vollaro Date
W.R. BERKLEY CORPORATION
By: _____________________________ ________________
William R. Berkley Date
Chairman of the Board and
Chief Executive Officer
-5-
<PAGE> 14
ATTACHMENT 2
John D. Vollaro
26 Old Orchard Hill Lane
Greenwich, Connecticut 06831
January 24, 2000
William R. Berkley
Chairman and Chief Executive officer
W.R. Berkley Corporation
165 Mason Street
P.O. Box 2518
Greenwich, CT 06836-2518
Dear Bill:
In connection with my resignation as President and Chief Operating Officer of
W.R. Berkley Corporation (the "Company") this will confirm my irrevocable
resignation, effective March 1, 2000, from the Board of Directors of the
Company, all committees thereof, all boards of directors of the Company's
subsidiaries and affiliates, and all company committees, trusteeships and
employee benefit plan committees on which I am currently serving with respect to
the Company, all of its subsidiaries and affiliates, and their related employee
benefit plans.
Very truly yours,
<PAGE> 1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INDUSTRY OVERVIEW
The demand for insurance is influenced primarily by general economic conditions,
while the supply of insurance is directly related to available capacity, i.e.,
the level of policyholders' surplus employed in the industry and the willingness
of insurance management to risk that capital. The adequacy of premium rates is
affected mainly by the severity and frequency of claims, which are influenced by
many factors, including natural disasters, regulatory measures and court
decisions that define and expand the extent of coverage and the effects of
economic inflation on the amount of compensation due for injuries or losses. In
addition, investment rates of return may impact policy rates. These factors can
have a significant impact on ultimate profitability because a property casualty
insurance policy is priced before its costs are known, as premiums usually are
determined long before claims are reported. Over the past several years a
significant increase in capacity has produced a trend of increasing price
competition, which continued in 1999.
OPERATING RESULTS FOR THE YEAR ENDED
DECEMBER 31, 1999 AS COMPARED TO THE YEAR
ENDED DECEMBER 31, 1998
The net loss attributable to common stockholders for 1999 was $37 million, or
$1.43 per diluted share, compared to net income of $46 million, or $1.59 per
diluted share, in 1998. The operating loss, which is defined as net loss before
realized gains and losses, changes in accounting principle and extraordinary
gains and losses on early extinguishments of long-term debt, was $31 million in
1999, or $1.19 per diluted share, compared with operating income of $35 million,
or $1.19 per diluted share, in 1998. Adjusting for the restructuring charge (see
page 19), the operating loss was $23 million, or $.91 per diluted share, in
1999. The deterioration in operating results in 1999 was primarily due to an
increase in loss reserves and to the effects of competition on rate adequacy.
Net premiums written increased 6% to $1,428 million from $1,346 million written
during 1998. Regional net premiums written grew 1% to $650 million as growth
opportunities were impeded by inadequate rates and competitive market
conditions. Reinsurance net premiums written increased 15% to $309 million due
primarily to growth in pro-rata treaty business. Specialty net premiums written
were $260 million, an increase of 3% over 1998, as new business growth was
partially offset by the non-renewal of loss-producing business, primarily in the
commercial transportation unit. Alternative markets net premiums written
increased 15% to $122 million due primarily to growth in businesses that began
operations in 1998. International net premiums written increased 15% to $86
million, reflecting the first full year of operations in the Philippines.
Net investment income decreased 6% to $190 million in 1999 due to a reduction in
invested assets, which resulted from the repurchase of common and preferred
shares during 1998 and 1999, and to a lower average pre-tax return on
investments. (See "Liquidity and Capital Resources.") The portfolio yield
decreased to approximately 6.5% in 1999 from approximately 6.9% in 1998 as a
result of a higher concentration in municipal bonds on average during 1999 and a
lower yield on the trading portfolio.
Management fees and commissions consist primarily of fees earned by the
alternative markets segment. Management fees and commissions increased 2% to $72
million in 1999 as market conditions continued to restrain the growth of the
alternative risk market.
Realized investment losses were $6 million in 1999 compared to realized
investment gains of $25 million in 1998. Realized gains and losses on fixed
income securities resulted primarily from the Company's strategy of maintaining
an appropriate balance between the duration of its fixed income portfolio and
the duration of its liabilities and from provisions for other than temporary
impairment of securities; realized gains and losses on equity securities arise
primarily as a result of a vari-
18
<PAGE> 2
ety of factors which influence the Company's valuation criteria for such
securities. The majority of the 1999 and 1998 realized gains and losses resulted
from fixed maturity securities.
The combined ratio represents a measure of underwriting profitability, excluding
investment income. A number in excess of 100 generally indicates an underwriting
loss; a number below 100 generally indicates an underwriting gain. The
consolidated combined ratio (on a statutory basis) of the Company's insurance
operations increased to 112.2% in 1999 from 106.6% in 1998 mainly 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 76.5% from 71.2% primarily as a result of increased losses in the regional
segment and commercial transportation unit. The regional segment loss ratio
increased to 84.7% from 76.0% in 1998 due to a loss reserve adjustment of $55
million in the fourth quarter of 1999 and to the continued effects of
competition on rate adequacy. Approximately $40 million of the loss reserve
adjustment related to losses incurred in 1998 and prior years, with the balance
relating to losses incurred in 1999. In 1998, the Company reported a pre-tax
charge of $31 million for additional reinsurance premiums and loss reserves for
the regional segment. The increased losses in the commercial transportation unit
were the result of a rise in claim frequency and severity and of intense price
competition. Weather-related losses for the Company were $60 million in 1999
compared with $59 million in 1998. The overall increase in incurred losses in
1999 was partially offset by recoveries under the aggregate reinsurance cover
(see "Reinsurance") and by favorable reserve development on business written in
prior years by the specialty and alternative markets segments.
Other operating costs and expenses, which consist of the expenses of the
Company's insurance and alternative markets operations, as well as the Company's
corporate and investment expenses, increased by 9% to $605 million from $556
million in 1998. The increase in other operating costs is primarily due to a 10%
growth in premiums earned, which in turn results in an increase in underwriting
expenses. The consolidated expense ratio of the Company's insurance operations
(underwriting expenses expressed as a percentage of premiums written) increased
to 35.4% for the 1999 period from 34.9% for the comparable 1998 period due
primarily to higher reinsurance commissions rates for the specialty and
reinsurance segments. The regional expense ratio increased to 36.1% from 35.8%
due to the impact of additional reinsurance premiums and to certain costs
directly attributable to the restructuring. Adjusting for these items, the
regional expense ratio would have been 34.1% in 1999.
The Federal and foreign income tax benefit in 1999 was $46 million compared with
an expense of $5 million in 1998. The tax benefit in 1999, as compared to a tax
expense in 1998, was due to a loss before income taxes in 1999 and to an
increase in the percentage of revenues that are tax-exempt. In addition, the
1999 Federal income tax benefit reflects the closing with the Internal Revenue
Service of tax years 1992 through 1994. (See "Liquidity and Capital Resources.")
The 1999 results include an after-tax restructuring charge of $7 million, or
$.28 per diluted share, primarily related to the Company's restructuring of
certain of its operating units. The restructuring, which was substantially
completed in 1999, is expected to result in annual after-tax savings of
approximately $12 million. Under generally accepted accounting principles, the
restructuring charge does not include additional costs related to system
changes, financial incentives and other activities, although they are directly
related to the restructuring plan. The Company incurred such additional costs of
approximately $3 million, on an after-tax basis, in 1999.
As previously disclosed, during 1999 the Company adopted AICPA Statement of
Position 97-3, "Accounting By Insurance and Other Enterprises for
Insurance-Related Assessments." The adoption of this statement resulted in a
non-cash, after-tax charge of $3 million, or $.12 per diluted share, which is
reflected as a cumulative effect of a change in accounting principle.
19
<PAGE> 3
The Company reported an after-tax extraordinary gain of $735,000 in 1999,
related to the repurchase and retirement of $10 million (face amount) of capital
trust securities. In 1998, the Company reported an after-tax extraordinary loss
of $5 million, related to the repurchase and retirement of $34.7 million (face
amount) of long-term debt.
OPERATING RESULTS FOR THE YEAR ENDED
DECEMBER 31, 1998 AS COMPARED TO THE YEAR
ENDED DECEMBER 31, 1997
Net income attributable to common stockholders for 1998 declined to $46 million,
or $1.59 per share diluted, from $91 million, or $3.02 diluted, in 1997.
Operating income in 1998 was $35 million or $1.19 per diluted share compared to
$83 million or $2.74 per diluted share in 1997. The decline in earnings was due
primarily to deterioration in underwriting results, attributable to an increase
in weather-related losses and the effects of competition on rate adequacy.
Net premiums written in 1998 rose 14% to $1,346 million from $1,178 million
written during 1997 due to growth recorded by all segments of the Company. Net
premiums written by the regional operations grew by 4% to $641 million from $619
million written in 1997. The growth was generated by the issuance of additional
policies. Net premiums written by the reinsurance segment increased by 30% to
$270 million from $207 million in 1997. This increase was substantially due to
an increase in pro rata treaty business. Net premiums written by the specialty
operations grew by 16% to $254 million from $219 million in 1997, due to
increases in all sectors of this business. This growth was due to an increase in
units insured. Net premiums written by the alternative markets operations grew
by 16% to $106 million from $91 million in 1997 due to the commencement of
operations of Key Risk Insurance Company (which underwrote business previously
managed on behalf of a self-insurance association). This increase more than
offset a decline in premiums written by Midwest Employers Casualty Company. Net
premiums written by the international operations grew by 79% to $75 million from
$42 million. This increase was due to 1997 acquisitions in Argentina and the
start-up of a life insurance and endowment insurance company in the Philippines.
Pre-tax net investment income increased to $202 million from $200 million earned
in 1997. This growth was due to an increase in investable assets produced by
cash flow from operations, which was partially offset by the effects of the
repurchase of common stock, and a decrease in pre-tax investment yield. The
decline in pre-tax investment yield was due to an increase in the percentage of
the portfolio invested in municipal bonds and lower yields earned on the trading
portfolio. (See "Liquidity and Capital Resources.")
Management fees and commissions consist primarily of fees earned by the
alternative markets segment. Management fees and commissions remained at $71
million as intense competition inhibited growth.
Realized investment gains increased to $25 million from $13 million in 1997.
Realized gains on fixed income securities resulted 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 for such securities. The majority of the 1998
realized gains resulted from the sale of fixed maturity securities while the
majority of 1997 realized gains resulted from the sale of equity securities.
The consolidated combined ratio (on a statutory basis) of the Company's
insurance operations increased to 106.6% in 1998 from 101.2% in 1997 mainly 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 71.2% from 66.4% due to a number of factors. Weather-related losses
for 1998 were $59 million compared with $33 million in 1997, which accounted for
an increase of 1.6% of the loss ratio. The regional operations were adversely
impacted by a rise in the frequency and sever-
20
<PAGE> 4
ity of commercial property and liability claims, especially in the fourth
quarter. The increase in severity resulted in an accrual for additional ceded
premiums due under certain sliding scale reinsurance treaties. These factors
were somewhat offset by favorable loss development on business written in prior
years.
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 14% to $556 million from $488
million in 1997. The increase in other operating costs is primarily due to the
substantial premium growth discussed above, which in turn results in an increase
in underwriting expenses. The consolidated expense ratio of the Company's
insurance operations increased to 34.9% for the 1998 period from 34.4% for the
comparable 1997 period. This increase resulted primarily from the cost of
expansion incurred by several regional companies and higher growth rate in
international operations, which operate at a higher expense ratio than domestic
operations.
The Federal income tax provision resulted in an effective tax rate of 9% in 1998
(24% in 1997). The tax rate is lower than the statutory tax rate of 35% because
a substantial portion of investment income is tax-exempt. The decrease in the
effective tax rate in 1998 is due primarily to an increase in the percentage of
pre-tax income that is tax-exempt.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL The Company's subsidiaries are highly liquid, receiving substantial cash
from premiums, investment income, management fees and proceeds from sales and
maturities of portfolio investments. The principal outflows of cash are payments
of claims, taxes, interest and operating expenses. The net cash provided from
operating activities (before trading account transactions) was $49 million in
1999, $224 million in 1998 and $229 million in 1997. The decrease in cash flow
in 1999 was primarily due to a higher level of claims activity. The 1998 cash
flow was impacted favorably by the assumption of a portfolio of loss reserves
for which the Company received proceeds of approximately $60 million.
As a holding company, the Company derives cash from its subsidiaries in the form
of dividends, tax payments and management fees. The Company is obligated to
service its debt, pay consolidated Federal income taxes and pay its expenses.
The Company also provides capital to its subsidiaries, including amounts
required under agreements with state insurance departments. Tax payments and
management fees from the insurance subsidiaries are made under agreements which
generally are subject to approval by state insurance departments. Maximum
amounts of dividends that can be taken without regulatory approval are
prescribed by statute. (See Note 18 of "Notes to Consolidated Financial
Statements.")
In addition to its other cash requirements in 2000, the Company is required to
repay $25 million of senior notes that mature on March 6, 2000 and to contribute
approximately $28 million to an insurance subsidiary during the first quarter of
2000. The Company anticipates receiving additional distributions from insurance
subsidiaries and borrowing under its credit facility to satisfy these
requirements.
FINANCING ACTIVITY During 1998, the Company issued $40 million face value of
6.375% medium term notes due April 15, 2005. Also in 1998, the Company
repurchased $34.7 million face amount of 9.875% and 8.7% senior notes and
debentures for $41.8 million and retired $10 million face value of 8.95% senior
notes upon maturity. In December 1998, one of the Company's subsidiaries issued
an $8 million five-year note. In 1999, the Company redeemed all outstanding
Series A Preferred Stock for $98 million and repurchased $10 million (face
value) of capital trust securities for $8.8 million.
During 1998, the Company purchased 3,172,222 shares of its common stock for
approximately $118 million. During 1999, the Company purchased 905,000 shares of
its common stock for approximately $22 million, leaving a balance as of December
31, 1999 of 1,095,000 shares available for repurchase under its current
authorization.
21
<PAGE> 5
As of December 31, 1999 and 1998, the Company had $35 million and $55.5 million,
respectively, of outstanding short-term debt under its unsecured bank credit
facility. As of December 31, 1999, the Company had an additional $40 million of
short-term debt available under this facility. The credit facility expires on
and must be extended by December 8, 2000.
The Company has on file a "shelf" registration statement with the Securities and
Exchange Commission with a remaining balance of $150 million in additional
equity and/or debt securities. The securities may be offered from time to time
as determined by funding requirements and market conditions.
INVESTMENTS In its investment strategy, the Company establishes a level of cash
and highly liquid short-term and intermediate-term securities which, combined
with expected cash flow, is believed adequate to meet foreseeable payment
obligations. As part of this strategy, the Company attempts to maintain 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's investment policy with respect to fixed maturity securities is
generally to purchase instruments with the expectation of holding them to their
maturity. However, active management of the portfolio is considered necessary to
maintain an approximate matching of assets and liabilities as well as to adjust
the portfolio as changes in financial market conditions alter the assumptions
underlying the purchase of certain securities.
The investment portfolio (including the trading account receivable from brokers
and clearing organizations and trading securities sold but not yet purchased),
on a cost basis, decreased in 1999 by $104 million to approximately $3,040
million primarily due to the repurchases of common and preferred stock discussed
above.
The Company's investments are currently comprised of fixed income securities and
trading account equity securities. At December 31, 1999, the portfolio mix of
the fixed income securities was as follows: tax-exempt securities were 40% (42%
in 1998); U.S. Government securities and cash equivalents were 24% (23% in
1998); mortgage-backed securities were 17% (18% in 1998); corporate fixed
maturity securities were 17% (15% in 1998); and the balance of 2% was invested
in other fixed income securities.
The Company had net trading account assets (trading account equity securities
plus trading account receivables from brokers and clearing organizations less
trading account equity securities sold but not yet purchased) of $356 million as
of December 31, 1999, as compared to $321 million as of December 31, 1998. The
net trading account assets represented approximately 12% and 10% of the
Company's net invested assets as of December 31, 1999 and 1998, respectively.
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. As discussed above, 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's investments are categorized as either fixed maturity securities or
equity securities. The principal market risk for the Company's fixed maturity
securities is interest rate risk. The Company uses various models and stress
test scenarios to monitor and manage interest rate risk. The following table
outlines the groups of fixed maturity securities and the components of the
interest rate risk:
<TABLE>
<CAPTION>
Market Effective Fair Value
Group Yield Duration (000's)
- ------------------------------------------------------------------
<S> <C> <C> <C>
U. S. Government securities 6.48% 4.56 $ 319,168
State and municipal 5.58 6.24 1,057,142
Corporate 7.99 4.42 432,283
Mortgage-backed securities 7.51 7.10 452,283
- ------------------------------------------------------------------
Total 6.49% 5.80 $2,260,876
==================================================================
</TABLE>
As a general rule, a portfolio's duration measures the expected change in
portfolio value due to a change in interest rates. The portfolio's duration is
further modified to accurately
22
<PAGE> 6
reflect a portfolio's expected price movement as interest rates change. Based
upon a pricing model, the Company determines the estimated change in fair value
of the fixed maturity securities, assuming immediate parallel shifts in the
treasury yield curve while keeping spreads between individual securities and
treasury securities static. The fair value at specified levels at December 31,
1999 would be as follows:
<TABLE>
<CAPTION>
Estimated Fair Estimated
Value of Financial Change in
Instruments Fair Value
Change in interest rates $(000's) $(000's)
- --------------------------------------------------------------
<S> <C> <C>
300 basis point rise $1,902,197 $(358,679)
200 basis point rise 2,012,189 (248,687)
100 basis point rise 2,131,397 (129,479)
base scenario 2,260,876 --
100 basis point decline 2,396,814 135,938
200 basis point decline 2,536,639 275,763
300 basis point decline 2,687,992 427,116
==============================================================
</TABLE>
The estimated changes in fair value, based upon the above table, would be offset
by the Company's liabilities if they were marked to market.
The Company's equity securities are used primarily for merger arbitrage. Merger
arbitrage is the business of investing in the securities of publicly held
companies which are the targets in announced tender offers and mergers. Merger
arbitrage differs from other types of investments in its focus on transactions
and events believed likely to bring about a change in value over a relatively
short time period (usually four months or less). The Company believes that this
makes merger arbitrage investments less vulnerable to changes in general stock
market conditions. Potential changes in market conditions are also mitigated by
the implementation of hedging strategies, including short sales. Additionally,
the merger arbitrage positions are generally hedged against market declines by
purchasing put options, selling call options or entering into swap contracts.
Based upon these characteristics, the Company's equity securities are primarily
exposed to the completion of announced deals, which are subject to regulatory as
well as political and other risks.
The Company also has net assets held by its foreign subsidiaries that are
subject to foreign currency risk. As of December 31, 1999, the Company had $28
million (net of minority interest) invested in subsidiaries in Argentina, as
well as $7 million (net of minority interest) invested in subsidiaries in the
Philippines. As of December 31, 1999, approximately 81% and 49% of the invested
assets in Argentina and the Philippines, respectively, were denominated in US
Dollars. The effect of foreign subsidiaries maintaining US Dollar denominated
assets is an offset against fluctuations in foreign currency.
Argentina has established a currency board exchange rate mechanism that creates
a dollar for dollar relationship between the US Dollar and the Argentine Peso.
Because of this dollar for dollar relationship, devaluation risk is viewed to be
low.
The Company's investment in the Philippines is affected by fluctuations in the
exchange rate between the US Dollar and the Philippine Peso. For every one
percent change in the exchange rate, the Company's unrealized foreign currency
gain/(loss) would change approximately $73,000, net of minority interest.
FEDERAL AND FOREIGN INCOME TAXES The Company files a consolidated income tax
return in the U.S. and foreign tax returns in the countries of its overseas
operations. At December 31, 1999, the Company had a deferred tax liability of
$82 million, which primarily relates to deferred policy acquisition costs and
intangible assets, and a deferred tax asset of $164 million, which primarily
relates to the discounting of loss reserves for Federal income tax purposes,
unearned premiums, unrealized investment losses and an alternative minimum tax
credit carry forward.
The realization of the deferred tax asset is dependent upon the Company's
ability to generate sufficient taxable income in future periods. Based on
historical results and the prospects for current operations, management
anticipates that it is more likely than not that future taxable income will be
sufficient for the realization of this asset.
23
<PAGE> 7
REINSURANCE
The Company follows the customary industry practice of reinsuring a portion of
its exposures, paying to reinsurers a part of the premiums received on the
policies it writes. Reinsurance is purchased principally to reduce net liability
on individual risks and to protect against catastrophic losses. Although
reinsurance does not legally discharge an insurer from its primary liability for
the full amount of the policies, it does make the assuming reinsurer liable to
the insurer to the extent of the reinsurance coverage. The Company monitors the
financial condition of its reinsurers and attempts to place its coverages only
with substantial, financially sound carriers.
REGIONAL OPERATIONS In 1999, the Mid-Atlantic and Southern regional companies
generally retained $300,000 on individual property casualty risks while the
Midwest and New England companies generally retained $500,000 on individual
property casualty risks. The New England company retained up to $2.1 million per
bond for surety business. The other regional companies writing surety business
retained up to $450,000. The regional group also maintained catastrophe
reinsurance protection for approximately 100% of weather-related losses above $6
million per occurrence up to a maximum of $34 million. In addition, the regional
operating units carried additional aggregate catastrophe protection of 74% of
$4.5 million in excess of $7 million for storms exceeding $1.5 million.
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 million. Premiums of $21 million and losses of $35 million were
ceded to the reinsurer in 1999.
REINSURANCE OPERATIONS Signet Star's catastrophe retrocession program provides
coverage for property losses in five layers as follows: (i) 100% of $7.5 million
in excess of $6 million per occurrence; (ii) 95% of $6.5 million in excess of
$13.5 million per occurrence; (iii) 95% of $10 million in excess of $20 million
per occurrence; (iv) 95% of $10 million in excess of $30 million per occurrence;
and (v) 100% of $25 million (for California only and only under certain
conditions) and 100% of $10 million (for Florida only and only under certain
conditions). In 1999, Signet Star had a variable quota share program on its
casualty facultative business with retentions varying from $425,000 up to $2.5
million depending on the certificate limit. Property facultative business is
covered on a per risk basis for $700,000 in excess of $300,000 and 98.5% of $4
million in excess of $1 million. These coverages apply to Signet Star's
individual certificate and master certificate business. During 1999, Signet Star
had retrocession coverage for its fidelity and surety business for 100% of each
loss up to $2.5 million in excess of $750,000 per occurrence and 100% of each
loss up to $2.5 million in excess of $3.25 million per occurrence and 86.5% of
each surety loss up to $13 million in excess of $5.75 million per occurrence.
During 1999, the Latin American and Caribbean division retained $250,000 per
risk for property, marine, energy and aviation business and $500,000 per risk
for casualty.
SPECIALTY OPERATIONS Admiral's retention in 1999 was $183,750 from January 1 to
June 30 and $173,750 from July 1 to December 31 per risk for most classes of
business. Retentions varied between $2 million and $5 million based upon policy
size, per insured, for business written by Monitor Liability Managers. Nautilus
generally retained $140,000 per risk in 1999 and Carolina maintained its
retention at $300,000 on property liability exposures. In 1999, Carolina (on
business underwritten by Monitor Surety Managers) retained up to $500,000 on a
per principal basis. Great Divide retained $140,000 per risk in 1999. The
specialty group (except Carolina) is also covered under the regional group's
property catastrophe protection for 100% of $34 million in excess of $6 million.
24
<PAGE> 8
ALTERNATIVE MARKETS OPERATIONS Midwest Employers' retention is generally $1
million per occurrence above the self-insured's underlying retention. Key Risk
Insurance Company's retention in 1999 was $300,000 per risk. Signet Star's
alternative markets operation maintains specific retrocessional coverage on
certain treaties and is also covered under the reinsurance group's catastrophe
retrocessional program. Preferred Employers' retention in 1999 was $250,000 per
risk.
INTERNATIONAL OPERATIONS The international operations generally retained between
$50,000 and $250,000 per occurrence or individual risk.
Year 2000
the Company's critical primary operating software was modified or replaced as
necessary for Year 2000 compliance, and the Company did not experience any
significant disruption or other adverse impact on its business at January 1,
2000 or thereafter as a result of the Year 2000 date change.
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 the Company's Year 2000 readiness was accomplished in the
ordinary course. Through December 31, 1999, the Company incurred approximately
$7 million of costs for Year 2000 compliance.
The Year 2000 issue may be 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 December 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, claims have been made against other insurers seeking
recovery of costs incurred to achieve Year 2000 compliance. While these or other
kinds of Year 2000 claims against insurers may not prove successful, there
exists a potential for judicial decisions which reformulate policies to expand
their coverage for previously unforeseen theories of liability which may produce
unanticipated claims. As a result, and because there is no prior history of such
claims, the amount of any such potential Year 2000 coverage liabilities is not
determinable.
The discussion herein with regard to Year 2000 matters 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. The inclusion of such forward-looking statements
herein shall not be considered a representation by the Company that the
objectives, plans or expectations of the Company, or other matters addressed by
the forward-looking statements, will be achieved.
CAPITALIZATION
For the year ended December 31, 1999, stockholders' equity decreased by
approximately $270 million. The decrease in stockholders' equity is primarily
attributable to the Company's repurchase of shares of its common and preferred
stock for approximately $120 million; to an after-tax decline in unrealized
investment gains (losses) of approximately $99 million; and to a net loss of $37
million. Accordingly, the Company's total capitalization decreased to $1,185
million at December 31, 1999 and the percentage of the Company's capital
attributable to long-term debt increased to 33% at December 31, 1999 from 27% at
December 31, 1998.
25
<PAGE> 9
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net premiums written $1,427,719 $1,346,254 $1,177,641
Change in net unearned premiums (13,335) (67,855) (65,894)
- -----------------------------------------------------------------------------------------------------------------------------------
Premiums earned 1,414,384 1,278,399 1,111,747
Net investment income 190,316 202,420 199,588
Management fees and commissions 72,344 70,727 71,456
Realized investment gains (losses) (6,064) 25,400 13,186
Other income 2,688 5,571 4,333
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues 1,673,668 1,582,517 1,400,310
Operating costs and expenses:
Losses and loss expenses 1,085,826 914,762 734,424
Other operating costs and expenses 604,784 556,155 487,776
Interest expense 50,801 48,819 48,869
Restructuring charge 11,505 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and minority interest (79,248) 62,781 129,241
Federal and foreign income tax benefit (expense) 45,766 (5,465) (30,668)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest (33,482) 57,316 98,573
Minority interest (566) 1,444 474
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before preferred dividends (34,048) 58,760 99,047
Preferred dividends (497) (7,548) (7,828)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before change in accounting and extraordinary gain (loss) (34,545) 51,212 91,219
Cumulative effect of change in accounting principle (net of taxes) (3,250) -- --
Extraordinary gain (loss) on early extinguishment
of long-term debt (net of taxes) 735 (5,017) --
===================================================================================================================================
Net income (loss) attributable to common stockholders $ (37,060) $ 46,195 $ 91,219
===================================================================================================================================
Earnings (loss) per share:
Basic
Net income (loss) before change in accounting and extraordinary gain (loss) $ (1.35) $ 1.82 $ 3.09
Cumulative effect of change in accounting principle (net of taxes) (.12) -- --
Extraordinary gain (loss) on early extinguishment of long-term debt .03 (.18) --
===================================================================================================================================
Net income (loss) attributable to common stockholders $ (1.44) $ 1.64 $ 3.09
===================================================================================================================================
Diluted
Net income (loss) before change in accounting and extraordinary gain (loss) $ (1.34) $ 1.76 $ 3.02
Cumulative effect of change in accounting principle (net of taxes) (.12) -- --
Extraordinary gain (loss) on early extinguishment of long-term debt .03 (.17) --
===================================================================================================================================
Net income (loss) attributable to common stockholders $ (1.43) $ 1.59 $ 3.02
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 10
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Invested cash $ 295,423 $ 370,155
Fixed maturity securities:
Held to maturity, at cost (fair value $150,465 and $183,469) 152,657 170,150
Available for sale, at fair value (cost $2,180,509 and $2,224,244) 2,110,411 2,306,619
Equity securities, at fair value:
Available for sale (cost $54,437 and $59,890) 61,380 65,869
Trading account (cost $236,453 and $373,164) 253,430 389,310
Cash 20,051 16,123
Premiums and fees receivable 380,887 377,501
Due from reinsurers 620,446 513,297
Accrued investment income 36,925 37,842
Prepaid reinsurance premiums 91,005 79,530
Deferred policy acquisition costs 182,348 168,894
Real estate, furniture and equipment at cost, less accumulated depreciation 128,735 136,884
Deferred Federal and foreign income taxes 81,976 --
Excess of cost over net assets acquired 76,523 76,645
Trading account receivable from brokers and clearing organizations 258,454 229,520
Other assets 34,140 45,092
- ----------------------------------------------------------------------------------------------------------------------------------
$4,784,791 $4,983,431
==================================================================================================================================
LIABILITIES, RESERVES, DEBT AND STOCKHOLDERS' EQUITY
Liabilities and reserves:
Reserves for losses and loss expenses $2,361,238 $2,126,566
Unearned premiums 689,826 664,861
Due to reinsurers 144,712 130,517
Deferred Federal and foreign income taxes -- 6,877
Trading securities sold but not yet purchased, at fair value (proceeds $137,801 and $283,310) 155,826 298,165
Short-term debt 35,000 55,500
Other liabilities 183,218 213,453
- ----------------------------------------------------------------------------------------------------------------------------------
3,569,820 3,495,939
- ----------------------------------------------------------------------------------------------------------------------------------
Long-term debt 394,792 394,444
- ----------------------------------------------------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable capital securities of a subsidiary trust holding
solely 8.197% junior subordinated debentures of the corporation due December 15, 2045 198,126 207,988
Minority interest 30,275 23,779
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares:
7 3/8% Series A Cumulative Redeemable Preferred Stock
653,952 shares issued and outstanding -- 65
Common stock, par value $.20 per share:
Authorized 80,000,000 shares, issued and outstanding,
net of treasury shares, 25,616,578 and 26,504,404 shares 7,281 7,281
Additional paid-in capital 331,640 429,611
Retained earnings 551,401 601,908
Accumulated other comprehensive income (loss) (44,500) 54,672
Treasury stock, at cost, 10,787,489 and 9,899,663 shares (254,044) (232,256)
- ----------------------------------------------------------------------------------------------------------------------------------
591,778 861,281
- ----------------------------------------------------------------------------------------------------------------------------------
$4,784,791 $4,983,431
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 11
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Preferred
and common
stock and Accumulated
Total additional other
stockholders' paid-in Retained comprehensive Treasury
equity capital earnings income (loss) stock
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $879,732 $476,439 $490,338 $ 31,075 $(118,120)
Net income attributable to common stockholders 91,219 -- 91,219 -- --
Change in other comprehensive income 27,131 -- -- 27,131 --
Issuance of common shares 3,130 1,190 -- -- 1,940
Repurchase of preferred stock (41,523) (41,523) -- -- --
Dividends to common stockholders ($.42 per share) (12,397) -- (12,397) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 947,292 436,106 569,160 58,206 (116,180)
Net income attributable to common stockholders 46,195 -- 46,195 -- --
Change in other comprehensive income (loss) (3,534) -- -- (3,534) --
Issuance of common shares 2,719 851 -- -- 1,868
Purchase of treasury stock (117,944) -- -- -- (117,944)
Dividends to common stockholders ($.48 per share) (13,447) -- (13,447) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 861,281 436,957 601,908 54,672 (232,256)
Net (loss) attributable to common stockholders (37,060) -- (37,060) -- --
Change in other comprehensive income (loss) (99,172) -- -- (99,172) --
Issuance of common shares 387 56 -- -- 331
Purchase of treasury stock (22,119) -- -- -- (22,119)
Repurchase of preferred stock (98,092) (98,092) -- -- --
Dividends to common stockholders ($.52 per share) (13,447) -- (13,447) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $591,778 $338,921 $551,401 $(44,500) $(254,044)
===================================================================================================================================
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) attributable to common stockholders $ (37,060) $46,195 $ 91,219
- -----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss)
Unrealized holding gain (losses) on investment securities arising
during the period (net of taxes of ($51,246), ($9,941) and $10,915) ( 95,171) (18,462) 20,271
Less: Reclassification adjustment for net change in unrealized gains (losses)
during the period (net of taxes of ($2,122), $8,890 and $4,615) (3,942) 16,510 8,571
- -----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) (99,113) (1,952) 28,842
Change in unrealized foreign exchange (losses) (59) (1,582) (1,711)
- -----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (99,172) (3,534) 27,131
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $(136,232) $42,661 $118,350
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 12
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) before minority interest, preferred dividends and extraordinary items $ (36,732) $ 57,316 $ 98,573
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Increase in reserves for losses and loss expenses, net of due to/from reinsurers 141,718 169,285 137,312
Depreciation and amortization 23,598 22,658 11,852
Change in unearned premiums and prepaid reinsurance premiums 13,490 68,095 67,023
Change in premiums and fees receivable (3,386) (45,727) (64,858)
Change in Federal income taxes (34,289) (26,923) (1,408)
Change in deferred policy acquisition costs (12,457) (22,057) (24,465)
Realized investment (gains) losses 6,064) (25,400) (13,186)
Other, net (49,491) 27,023 18,601
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities before
trading account sales (purchases) 48,515 224,270 229,444
Trading account sales (purchases), net 554 (4,567) (89,245)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 49,069 219,703 140,199
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows provided by (used in) investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 594,993 715,459 718,789
Equity securities 17,200 52,727 43,204
Proceeds from maturities and prepayments of fixed maturity securities 147,668 297,303 120,944
Cost of purchases, excluding trading account:
Fixed maturity securities available for sale (695,928) (1,033,190) (984,961)
Fixed maturity securities held to maturity -- (3,034) --
Equity securities (14,397) (33,217) (28,028)
Cost of acquired companies, net of acquired cash and invested cash (1,533) (3,304) 585
Net additions to real estate, furniture and equipment (8,127) (27,167) (17,898)
Other, net (435) 3,956) (9,904)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 39,441 (30,467) (157,269)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repurchase of preferred stock (98,092) -- (41,523)
purchase of common treasury shares (22,119) (117,944) --
Net change in short-term debt (20,500) 55,500 --
Repurchase of Company-obligated mandatorily redeemable capital securities
of a subsidiary trust holding solely 8.197% junior subordinated debentures (8,774) -- --
Cash dividends to common stockholders (13,888) (13,518) (11,695)
Cash dividends to preferred stockholders (2,001) (7,356) (8,717)
Other, net (6,060) 735 13,367
Net proceeds from issuance of long-term debt -- 47,882 --
Repurchase of long-term debt -- (49,104) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (159,314) (83,805) (48,568)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and invested cash (70,804) 105,431 (65,638)
Cash and invested cash at beginning of year 386,278 280,847 346,485
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and invested cash at end of year $315,474 $386,278 $280,847
====================================================================================================================================
Supplemental disclosure of cash flow information:
Interest paid on debt $ 50,801 $ 48,976 $ 45,950
====================================================================================================================================
Federal income taxes (received) paid $(12,973) $ 32,090 $ 32,258
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1999, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Principles of consolidation and basis of presentation
The consolidated financial statements, which include the accounts of W. R.
Berkley Corporation and its subsidiaries ("the Company"), have been prepared on
the basis of generally accepted accounting principles ("GAAP"). All significant
intercompany transactions and balances have been eliminated. Reclassifications
have been made in the 1998 and 1997 financial statements to conform them to the
presentation of the 1999 financial statements. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the revenues and expenses reflected during the reporting period.
Actual results could differ from those estimates.
(B) Revenue recognition
Insurance premiums written are recognized as earned generally on a pro-rata
basis over the contract period. Management fees on insurance service contracts
are recorded as earned primarily on a pro-rata basis over the policy period.
Commission income is recognized as earned on the effective date of the
applicable insurance policies.
(C) Investments
The Company has classified its investments into three categories. Securities
that the Company has the positive intent and ability to hold to maturity are
classified as "held to maturity" and reported at amortized cost. Securities
which the Company purchased with the intent to sell in the near-term are
classified as "trading" and are reported at estimated fair value, with
unrealized gains and losses reflected in the statement of operations. The
remaining securities are classified as "available for sale" and carried at
estimated fair value, with unrealized gains and losses, net of applicable income
taxes, excluded from earnings and reported as comprehensive income (loss) and a
separate component of stockholders' equity. Fair value is generally determined
using published market values.
Realized gains or losses represent the difference between the cost of securities
sold and the proceeds realized upon sale. The cost of securities is adjusted
where appropriate to include a provision for significant decline in value which
is considered to be other than temporary. The Company uses the specific
identification method where possible, and the first-in, first-out method in
other instances, to determine the cost of securities sold. Realized gains or
losses, including any provision for decline in value, are included in the
statement of operations.
(D) Trading account
The long portfolio positions are presented in the balance sheet as trading
account assets. The short sales and short call options used in trading account
activities are presented as trading securities sold but not yet purchased. The
trading account receivable from brokers and clearing organizations is comprised
of unsettled trades within the trading account and the net margin balances held
by the clearing broker.
(E) Per share data
Basic per share data is based upon the weighted average number of shares
outstanding during the year. Diluted per share data reflects the potential
dilution that would occur if employee stock-based compensation plans were
exercised. Shares issued in connection with loans to shareholders are not
considered to be outstanding for the purposes of calculating basic per share
amounts and have been excluded from stockholders' equity.
(F) Deferred policy acquisition costs
Acquisition costs (primarily commissions and premium taxes) incurred in writing
insurance and reinsurance business are deferred and amortized ratably over the
terms of the related contracts. Deferred policy acquisition costs are limited to
the amounts estimated to be recoverable from the applicable unearned premiums
and the related anticipated investment income by giving effect to anticipated
losses, loss adjustment expenses and expenses necessary to maintain the
contracts in force.
(G) Reserves for losses and loss expenses
Reserves for losses and loss expenses are an accumulation of amounts determined
on the basis of (1) evaluation of claims for business written directly by the
Company; (2) estimates received from other companies for reinsurance assumed;
and (3) estimates for losses incurred but not reported (based on Company and
industry experience). These estimates are
30
<PAGE> 14
periodically reviewed and, as experience develops and new information becomes
known, the reserves are adjusted as necessary. Such adjustments are reflected in
results of operations in the period in which they are determined.
The Company discounts its liabilities for excess workers' compensation ("EWC")
losses and loss expenses using a "risk-free" rate. EWC liabilities are
discounted because of the long period of time over which it pays losses. The
Company believes that utilizing a "risk-free" rate to discount these reserves
more closely reflects the economics associated with the EWC line of business
(see Note 15 of notes to consolidated financial statements).
(H) Reinsurance ceded
Ceded unearned premiums are reported as prepaid reinsurance premiums and
estimated amounts of reinsurance recoverable on unpaid losses are included in
due from reinsurers. To the extent any reinsurer does not meet its obligations
under reinsurance agreements, the Company must discharge the liability. Amounts
due from reinsurers are reflected net of funds held where the right of offset is
present. The Company has provided reserves for uncollectible reinsurance.
(I) Excess of cost over net assets acquired
Costs in excess of the net assets of subsidiaries acquired are being amortized
on a straight-line basis over 25 to 40 years. The Company continually evaluates
the amortization period of its intangible assets. Estimates of useful lives are
revised when circumstances or events indicate that the original estimate is no
longer appropriate. Amortization (including adjustments) of the excess of cost
over net assets acquired was $3,866,000, $3,178,000 and $2,950,000 for 1999,
1998 and 1997, respectively.
(J) Federal and foreign income taxes
The Company files a consolidated income tax return in the U.S. and foreign tax
returns in the countries of its overseas operations.
The Company's method of accounting for income taxes is the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are measured using tax rates currently in effect or expected to
apply in the years in which those temporary differences are expected to reverse.
(K) Stock options
The Company accounts for its stock options in accordance with Financial
Accounting Standards Board ("FASB") Statement No. 123, "Accounting for
Stock-Based Compensation" (FAS 123), which provides that stock-based
compensation may be disclosed in the footnotes to financial statements.
(L) Foreign currency
Revenues and expenses in foreign currencies are translated at the weighted
average exchange rate during the year. Assets and liabilities are translated at
the rate of exchange in effect at the close of the period. Unrealized gains or
losses (losses of $3,352,000 and $3,293,000 as of December 31, 1999 and 1998,
respectively) resulting from translating foreign currency financial statements
are reported as a component of common stockholders' equity. Gains or losses
(losses of $381,000 for 1999 and gains of $1,543,000 and $1,408,000 for 1998 and
1997, respectively) resulting from foreign currency transactions (transactions
denominated in a currency other than the entity's functional currency) are
included in other income (gains) or other operating costs and expenses (losses)
in the statement of operations.
(M) Real estate, furniture and equipment
Real estate, furniture and equipment are carried at cost less accumulated
depreciation. Depreciation is calculated using the estimated useful lives of the
respective assets. Depreciation expense was $16,291,000, $17,114,000 and
$12,799,000 for 1999, 1998 and 1997, respectively.
(N) Other Comprehensive Income (loss)
Comprehensive income (loss) encompasses all changes in stockholder's equity
(except those arising from transactions with shareholders) and includes net
income, net unrealized capital gains or losses on available-for-sale securities
and unrealized foreign currency translation adjustments.
(O) Insurance Related Assessments
As of January 1, 1999, the Company adopted the American Institute of Certified
Public Accountants (AICPA) Statement of Position ("SOP") 97-3, "Accounting by
Insurance and Other Enterprises for Insurance Related Assessments." This
statement provides guidance for determining when an entity should recog-
31
<PAGE> 15
nize liabilities for guarantee fund and other insurance related assessments, how
to measure those liabilities and when an asset may be recognized for the
recovery of such assessments through premium tax offsets or policy surcharges.
The adoption of this statement resulted in an after tax charge of $3,250,000 for
the year ended December 31, 1999, which is reflected as a cumulative effect of a
change in accounting principle.
(P) RECENT ACCOUNTING PRONOUNCEMENTS
During 1999, the FASB issued FAS 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB 133, and Amendment
of FASB 133" which extended the effective date of FAS 133 to January 1, 2001.
FAS 133, "Accounting for Derivative Instruments and Hedging Activities,"
establishes accounting and reporting standards for derivative instruments. This
statement will not have a material impact on the Company's results of operations
or financial condition.
(2) ACQUISITIONS
During 1999, 1998 and 1997, several international and other acquisitions were
completed for an aggregate consideration of approximately $1,533,000,
$13,389,000 and $7,238,000, respectively. The acquisitions were accounted for as
purchases and, accordingly, the results of operations of the companies have been
included from the respective dates of acquisition. Proforma results of
operations have been omitted as such effects are not significant.
Net assets of the acquired companies for 1999, 1998 and 1997 were as
follows: Investments in fixed maturity and equity securities of $0, $1,786,000
and $2,192,000; cash and invested cash of $0, $10,085,000 and $7,823,000; excess
of cost over net assets acquired of $3,744,000, $6,847,000 and $2,688,000; and
other liabilities, net of other assets of $5,277,000, $5,329,000 and $5,465,000.
(3) COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES
Neither the Company nor any of its subsidiaries is engaged in any litigation
known to the Company which management believes will have a material adverse
effect upon the Company's business. As is common with other insurance companies,
the Company's subsidiaries are regularly engaged in the defense of claims
arising out of the conduct of the insurance business.
(4) LEASE OBLIGATIONS
The Company and several of its subsidiaries use office space and equipment under
leases expiring at various dates through September 1, 2004. These leases are
considered operating leases for financial reporting purposes. Some of these
leases have options to extend the length of the leases and contain clauses for
cost of living, operating expense and real estate tax adjustments. Rental
expense was approximately: $16,109,000, $14,095,000 and $12,564,000 for 1999,
1998 and 1997, respectively. Future minimum lease payments (without provision
for sublease income) are $13,059,000 in 2000; $9,887,000 in 2001; $7,611,000 in
2002; $5,653,000 in 2003; and $4,368,000 thereafter.
(5) RESTRUCTURING PLAN
In the first quarter of 1999, the Company implemented a plan to restructure
certain of its operating units. Under the plan, the Company consolidated ten of
its regional units into four; merged two of its alternative market units; and
combined 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 of $7,562,000, contractual lease payments
related to abandoned facilities and abandoned equipment and property owned. The
activities under the plan were substantially completed in 1999. The Company has
paid $6,916,000 related to the restructuring charge of which $4,221,000 relates
to severance payments. The remaining restructuring accrual is $4,589,000 at
December 31, 1999.
32
<PAGE> 16
(6) DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
Description Rate Maturity Face Value Carrying Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Senior Notes 6.31% March 6, 2000 $ 25,000,000 $ 24,995,000
Senior Notes 6.71% March 4, 2003 25,000,000 24,939,000
Note Payable (1) December 30, 2003 8,000,000 8,000,000
Senior Subordinated Notes 6.50% July 1, 2003 35,793,000 35,793,000
Senior Notes 6.375% April 15, 2005 40,000,000 39,825,000
Senior Notes 6.25% January 15, 2006 100,000,000 99,215,000
Senior Notes 9.875% May 15, 2008 88,800,000 86,368,000
Senior Debentures 8.70% January 1, 2022 76,503,000 75,657,000
- -----------------------------------------------------------------------------------------------------------------------------
$399,096,000 $394,792,000
=============================================================================================================================
</TABLE>
(1)Floating rate equal to Libor plus 50 basis points.
The difference between the face value of long-term debt and the carrying value
is unamortized discount. All outstanding long-term debt is not redeemable until
maturity and ranks on a parity with all other outstanding indebtedness of the
Company.
The Company has on file a "shelf" registration statement with the Securities
and Exchange Commission with a remaining balance of $150,000,000 in additional
equity and/or debt securities. The securities may be offered from time to time
as determined by funding requirements and market conditions.
SHORT-TERM DEBT As of December 31, 1999 and 1998, the Company had $35,000,000
and $55,500,000, respectively, of outstanding short-term debt under its
unsecured line-of-credit. During 1999 and 1998, the average interest rate of the
Company's short-term debt was 5.36% and 5.59%. As of December 31, 1999, the
Company had an additional $40,000,000 of short-term debt available under its
line-of-credit.
(7) COMPANY-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF A SUBSIDIARY
TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE CORPORATION DUE
DECEMBER 15, 2045
The Company-obligated mandatorily redeemable preferred securities of a
subsidiary trust holding solely junior subordinated debentures ("Capital Trust
Securities") were issued by the W.R. Berkley Capital Trust ("the Trust") in
1996. All of the common securities of the Trust are owned by the Company. The
sole assets of the Trust are $210,000,000 aggregate principal amount of 8.197%
Junior Subordinated Debentures due December 15, 2045, issued by the Company (the
"Junior Subordinated Debentures"). The Company's guarantee of payments of cash
distributions and payments on liquidation of the Trust and redemption of the
Capital Trust Securities, when taken together with the Company's obligations
under the Trust Agreement under which the Capital Trust Securities were issued,
the Junior Subordinated Debentures and the Indenture under which the Junior
Subordinated Debentures were issued, including its obligations to pay costs,
expenses, debts and liabilities of the Trust (other than with respect to the
Capital Trust Securities), provide a full and unconditional guarantee of the
Trust's obligations under the Capital Trust Securities. The Company records the
preferential cumulative cash dividends arising from the payments of interest on
the Junior Subordinated Debentures as interest expense in its consolidated
statement of operations.
The Capital Trust Securities are subject to mandatory redemption in a like
amount (i) in whole but not in part, on the stated maturity date, upon repayment
of the Junior subordinated Debentures, (ii) in whole but not in part, at any
time contemporaneously with the optional prepayment of the Junior Subordinated
Debentures by the Company upon the occurrence and continuation of a certain
event and (iii) in whole or in part, on or after December 15, 2006,
contemporaneously with the optional prepayment by the Company of Junior
Subordinated Debentures. In September 1999, a subsidiary of the Company
purchased $10 million (face amount) of the Capital Trust Securities for
$8,774,000.
33
<PAGE> 17
(8) REINSURANCE CEDED
The Company follows the customary industry practice of reinsuring a portion of
its exposures principally to reduce net liability on individual risks and to
protect against catastrophic losses. The following amounts arising under
reinsurance ceded contracts have been deducted in arriving at the amounts
reflected in the statement of operations:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Premiums written $307,170 $292,238 $240,754
Premiums earned $294,823 $286,170 $239,233
Losses and loss expenses $248,767 $211,389 $129,405
</TABLE>
Effective January 1, 1999, the Company purchased additional aggregate
reinsurance protection for its regional segment. Pursuant to the contract, the
reinsurer will indemnify the regional companies for losses occuring during 1999
in excess of 71% of earned premiums, up to a limit of $35,000,000. Premiums of
$21,000,000 and losses of $35,000,000 were ceded to the reinsurer in 1999.
(9) SUPPLEMENTAL FINANCIAL STATEMENT DATA
Other operating costs and expenses consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Amortization of
deferred policy
acquisition costs $444,289 $394,612 $337,871
Other operating costs
and expenses of
insurance operations 77,617 77,596 65,993
Other costs and expenses 82,878 83,947 83,912
- ---------------------------------------------------------------------
Total $604,784 $556,155 $487,776
=====================================================================
</TABLE>
(10) STOCK OPTION PLAN
The Company has a stock option plan (the "Stock Option Plan") under which
7,125,000 shares of Common Stock were reserved for issuance. Pursuant to the
Stock Option Plan, options may be granted at prices determined by the Board of
Directors but not less than fair market value on the date of grant.
The following table summarizes option information, including options
granted under both the 1992 and prior plans:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,929,333 $34.25 3,218,762 $29.52 2,491,222 $26.03
Granted 68,600 25.73 1,036,975 47.08 1,154,354 34.68
Exercised 14,925 21.91 106,938 23.57 280,498 20.87
Canceled 320,223 34.39 219,466 30.56 146,316 27.42
- ----------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 3,662,785 $34.12 3,929,333 $34.25 3,218,762 $29.52
- ----------------------------------------------------------------------------------------------------------------------------
Options exercisable at year end 998,450 $25.28 640,161 $23.72 558,210 $22.66
- ----------------------------------------------------------------------------------------------------------------------------
Options available for future grant 3,326,102 3,073,916 3,892,439
============================================================================================================================
</TABLE>
The fair value of the options granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for 1999 and 1998, respectively: (a) dividend yield of 1%, (b)
expected volatility of 20%, (c) risk free interest rate of 5.61% and 5.79% and
(d) expected life of 7.5 years. The following table summarizes information about
stock options outstanding at December 31, 1999 and 1998:
34
<PAGE> 18
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------------
Weighted Weighted
Range of Remaining Weighted Average
Exercise Number Contractual Average Number Exercise
Prices Outstanding Life Price Exercisable Price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1999
$14 to $27 736,415 3.9 $23.40 654,815 $23.14
27 to 32 875,144 6.2 29.06 337,210 29.17
32 to 48 2,051,226 7.8 40.13 6,425 38.29
- ----------------------------------------------------------------------------------------------------------------------------
Total 3,662,785 6.6 $34.12 998,450 $25.28
============================================================================================================================
December 31, 1998
$14 to $27 731,983 4.4 $23.25 554,759 $22.67
27 to 32 1,034,346 7.1 29.12 84,502 30.35
32 to 48 2,163,004 8.8 40.43 900 47.38
- ----------------------------------------------------------------------------------------------------------------------------
Total 3,929,333 7.6 $34.25 640,161 $23.72
============================================================================================================================
</TABLE>
The Company applies APB Opinion 25 and related interpretations in accounting for
these plans. Accordingly, no compensation cost has been recognized for the stock
option plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below (000's omitted except per share data):
<TABLE>
<CAPTION>
Net Income Basic Earnings per Share Diluted Earnings per Share
---------------------- ------------------------ --------------------------
As Reported Proforma As Reported Proforma As Reported Proforma
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Before change in accounting and extraordinary item $(34,545) $(37,644) $(1.35) $(1.46) $(1.34) $(1.45)
Attributable to Common Stockholders $(37,060) $(40,159) $(1.44) $(1.56) $(1.43) $(1.55)
- -----------------------------------------------------------------------------------------------------------------------------------
1998
Before change in accounting and extraordinary item $ 51,212 $ 48,078 $ 1.82 $ 1.71 $ 1.76 $ 1.65
Attributable to Common Stockholders $ 46,195 $ 43,061 $ 1.64 $ 1.53 $ 1.59 $ 1.48
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(11) COMPENSATION PLAN
The Company and its subsidiaries have profit sharing retirement plans in which
substantially all employees participate. The plans provide for minimum annual
contributions of 5% of eligible compensation; contributions above the minimum
are discretionary and vary with each participating subsidiary's profitability.
Employees become eligible to participate in the Retirement Plans on the first
day of the month following the first full three months in which they are
employed. Profit sharing expense amounted to $7,768,000, $8,524,000 and
$8,402,000 for 1999, 1998 and 1997, respectively.
In May 1997, the Common Stockholders approved the Long-Term Incentive
Compensation Plan ("LTIP"). The LTIP provides for incentive compensation to key
executives, is based on long-term corporate performance and is based upon
criteria established by the Compensation and Stock Option Committee of the Board
of Directors (the "Committee"). Key employees are awarded participation units
("units") as determined by the Committee. The Units vest and become exercisable
over a maximum term of five years from the date of their award. The units are
payable in cash or up to 50% in shares of Common Stock. In 1997, 266,250 units
were awarded which amounted to an expense of $1,705,000. There was no LTIP
expense in 1998 or 1999.
35
<PAGE> 19
(12) INVESTMENTS
At December 31, 1999 and 1998, there were no investments, other than investments
in United States government securities, which exceeded 10% of stockholders'
equity. At December 31, 1999 and 1998, investments were as follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized Fair Carrying
Type of investment Cost(a) gains losses value value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1999
Fixed maturity securities held to maturity:
State and municipal $ 56,172 $ 2,268 $ (951) $ 57,489 $ 56,172
Corporate 12,839 78 (248) 12,669 12,839
Mortgage-backed securities 83,646 135 (3,474) 80,307 83,646
- ----------------------------------------------------------------------------------------------------------------------------------
Total fixed maturity securities held to maturity 152,657 2,481 (4,673) 150,465 152,657
- ----------------------------------------------------------------------------------------------------------------------------------
Fixed maturity securities available for sale:
United States Government(b) 334,114 473 (15,419) 319,168 319,168
State and municipal 1,020,716 9,905 (30,968) 999,653 999,653
Corporate 437,501 1,332 (19,219) 419,614 419,614
Mortgage-backed securities 388,178 1,657 (17,859) 371,976 371,976
- ----------------------------------------------------------------------------------------------------------------------------------
Total fixed maturity securities available for sale 2,180,509 13,367 (83,465) 2,110,411 2,110,411
- ----------------------------------------------------------------------------------------------------------------------------------
Common stocks 8,676 7,613 (80) 16,209 16,209
Preferred stocks 45,761 206 (796) 45,171 45,171
- ----------------------------------------------------------------------------------------------------------------------------------
Total equity securities available for sale 54,437 7,819 (876) 61,380 61,380
- ----------------------------------------------------------------------------------------------------------------------------------
Trading account 236,453 24,241 (7,264) 253,430 253,430
- ----------------------------------------------------------------------------------------------------------------------------------
Invested cash(c) 295,423 -- -- 295,423 295,423
- ----------------------------------------------------------------------------------------------------------------------------------
Total investments $2,919,479 $47,908 $(96,278) $2,871,109 $2,873,301
==================================================================================================================================
December 31, 1998
Fixed maturity securities held to maturity:
State and municipal $ 60,492 $6,528 $ (72) $ 66,948 $ 60,492
Corporate 13,353 772 -- 14,125 13,353
Mortgage-backed securities 96,305 6,091 -- 102,396 96,305
- ----------------------------------------------------------------------------------------------------------------------------------
Total fixed maturity securities held to maturity 170,150 13,391 (72) 183,469 170,150
- ----------------------------------------------------------------------------------------------------------------------------------
Fixed maturity securities available for sale:
United States Government(b) 293,761 9,797 (170) 303,388 303,388
State and municipal 1,117,691 53,387 (959) 1,170,119 1,170,119
Corporate 411,234 15,047 (6,106) 420,175 420,175
Mortgage-backed securities 401,558 12,278 (899) 412,937 412,937
- ----------------------------------------------------------------------------------------------------------------------------------
Total fixed maturity securities available for sale 2,224,244 90,509 (8,134) 2,306,619 2,306,619
- ----------------------------------------------------------------------------------------------------------------------------------
Common stocks 8,150 4,712 (341) 12,521 12,521
Preferred stocks 51,740 1,750 (142) 53,348 53,348
- ----------------------------------------------------------------------------------------------------------------------------------
Total equity securities available for sale 59,890 6,462 (483) 65,869 65,869
- ----------------------------------------------------------------------------------------------------------------------------------
Trading account 373,164 23,371 (7,225) 389,310 389,310
- ----------------------------------------------------------------------------------------------------------------------------------
Invested cash(c) 370,155 -- -- 370,155 370,155
- ----------------------------------------------------------------------------------------------------------------------------------
Total investments $3,197,603 $133,733 $(15,914) $3,315,422 $3,302,103
==================================================================================================================================
</TABLE>
(a) Adjusted as necessary for amortization of premium or discount.
(b) Includes United States government agencies and authorities.
(c) Short-term investments which mature within three months of the date of
purchase.
36
<PAGE> 20
The amortized cost and fair value of fixed maturity securities at December 31,
1999, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities because certain issuers may have the right to call
or prepay obligations:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999
- -----------------------------------------------------------------------------------------------
Cost Fair value
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 68,307 $ 68,329
Due after one year through five years 372,376 371,743
Due after five years through ten years 600,055 586,027
Due after ten years 820,604 782,494
Mortgage-backed securities 471,824 452,283
- -----------------------------------------------------------------------------------------------
Total $2,333,166 $2,260,876
===============================================================================================
</TABLE>
Realized gains (losses) and the change in difference between fair value and cost
of investments, before applicable income taxes, are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized gains (losses):
Fixed maturity securities(a) $ 2,792 $23,004 $ (3,308)
Equity securities (76) 3,506 16,537
Net change in provision for decline in value(b):
Fixed maturity securities (8,300) -- 103
Equity securities -- -- 581
Other (480) (1,110) (727)
- -----------------------------------------------------------------------------------------------------------------------------
(6,064) 25,400 13,186
- -----------------------------------------------------------------------------------------------------------------------------
Change in difference between fair value and cost of investments:
Fixed maturity securities (167,984) 877 58,476
Equity securities 964 (4,130) (5,356)
- -----------------------------------------------------------------------------------------------------------------------------
(167,020) (3,253) 53,120
- -----------------------------------------------------------------------------------------------------------------------------
Total $(173,084) $22,147 $66,306
=============================================================================================================================
</TABLE>
(a) During 1999, 1998 and 1997, gross gains of $15,022,000, $26,054,000, and
$7,988,000, respectively, and gross losses of $12,230,000, $3,050,000, and
$11,296,000, respectively, were realized.
(b) The provision for decline in value of investments is $11,100,000,
$2,800,000, and $2,800,000 as of December 31, 1999, 1998 and 1997,
respectively.
Investment income consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income earned on:
Fixed maturity securities $148,081 $156,961 $159,199
Invested cash 12,804 9,771 10,829
Equity securities 3,306 4,670 5,139
Trading account(a) 33,532 32,997 28,831
Other 833 1,666 1,814
- -----------------------------------------------------------------------------------------------------------------------------
Gross investment income 198,556 206,065 205,812
Interest on funds held under reinsurance treaties (8,240) (3,645) (6,224)
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income $190,316 $202,420 $199,588
=============================================================================================================================
</TABLE>
(a) The primary focus of the trading account is merger arbitrage. Merger
arbitrage is the business of investing in the securities of publicly held
companies which are the targets in announced tender offers and mergers.
Merger arbitrage differs from other types of investments in its focus on
transactions and events believed likely to bring about a change in value
over a relatively short time period (usually four months or less). The
Company believes that this makes merger arbitrage investments less
vulnerable to changes in general financial market conditions. Potential
changes in market conditions are also mitigated by the implementation of
hedging strategies, including short sales.
The arbitrage positions are generally hedged against market declines by
purchasing put options, selling call options or entering into swap
contracts. Therefore, just as long portfolio positions may incur losses
during market declines, hedge positions may also incur losses during market
advances. As of December 31, 1999, the notional amount of long option
contracts outstanding is $36,331,000 and short option contracts outstanding
is $50,797,000.
Investment income earned from net trading account activity includes
unrealized trading losses of $4,897,000 for 1999 and unrealized trading
gains of $1,291,000 and $13,737,000 for 1998 and 1997, respectively.
37
<PAGE> 21
(13) STOCKHOLDERS' EQUITY
COMMON EQUITY The Company has calculated per share data in accordance with FAS
128. Treasury shares have been excluded from average outstanding shares from the
date of acquisition. The weighted average number of shares used in the
computation of basic earnings per share was 25,823,000, 28,194,000 and
29,503,000 for 1999, 1998 and 1997, respectively. The weighted average number of
shares used in the computations of diluted earnings per share was 25,927,000,
29,115,000 and 30,185,000 for 1999, 1998 and 1997, respectively. The difference
in calculating basic and diluted earnings per share is attributable entirely to
the dilutive effect of stock-based compensation plans.
Changes in shares of Common Stock outstanding, net of treasury shares, are
as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year 26,504 29,568 29,454
Shares issued 18 108 114
Shares repurchased (905) (3,172) --
- ------------------------------------------------------------------
Balance, end of year 25,617 26,504 29,568
==================================================================
</TABLE>
PREFERRED EQUITY During 1997, the Company purchased 276,855 shares of Series A
Preferred Stock for an aggregate cost of $41,523,000. On January 25, 1999, all
remaining outstanding shares of the Series A Preferred Stock were redeemed for
$98,092,000.
On May 11, 1999, the Company declared a dividend distribution of one Right
for each outstanding share of Common Stock. Each Right entitles the holder to
purchase a unit consisting of one one-thousandth of a share of Series A Junior
Participating Preferred Stock at a purchase price of $120 per unit (subject to
adjustment) upon the occurrence of certain events relating to potential changes
in control of the Company. The Rights expire on May 11, 2009, unless earlier
redeemed by the Company as provided in the Rights Agreement.
(14) FEDERAL AND FOREIGN INCOME TAXES
Federal and foreign income tax expense (before the cumulative effect of change
in accounting and extraordinary items) consists of:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------
<S> <C> <C> <C>
Current (expense) benefit $11,785 $(30,283) $(21,999)
Deferred (expense) benefit 33,981 (24,818) (8,669)
- -------------------------------------------------------------------
Total (expense) benefit $45,766 $ (5,465) $(30,668)
===================================================================
</TABLE>
A reconciliation of Federal and foreign income tax (expense) benefit and the
amounts computed by applying the Federal and foreign income tax rate of 35% to
pre-tax income are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax
(expense) benefit $27,737 $(21,973) $(45,234)
Tax-exempt investment income 17,853 18,412 15,432
Other, net 176 (1,904) (866)
- --------------------------------------------------------------------
Total (expense) benefit $45,766 $ (5,465) $(30,668)
====================================================================
</TABLE>
At December 31, 1999 and 1998, the tax effects of differences that give rise to
significant portions of the deferred tax asset and deferred tax liability are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
- ----------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSET
Loss reserve discounting $64,946 $62,288
Unearned premiums 40,663 39,652
Deferred taxes on unrealized investment losses 22,297 --
Alternative minimum tax credit carry forward 20,656 --
Other 22,097 11,389
- ----------------------------------------------------------------------
Gross deferred tax asset 170,659 113,329
Less: valuation allowance (7,000) (7,000)
- ----------------------------------------------------------------------
Deferred tax asset 163,659 106,329
======================================================================
DEFERRED TAX LIABILITY
Amortization of intangibles 9,625 11,460
Deferred policy acquisition costs 57,317 55,370
Realized investment gains -- 2,960
Deferred taxes on unrealized
investment gains -- 31,070
Depreciation 8,985 5,900
Other 5,756 6,446
- ----------------------------------------------------------------------
Deferred tax liability 81,683 113,206
- ----------------------------------------------------------------------
Net deferred tax asset (liability) $81,976 $(6,877)
======================================================================
</TABLE>
Federal income tax expense (benefit) applicable to realized investment gains
(losses) was ($2,122,000), $8,890,000 and $4,615,000 in 1999, 1998 and 1997,
respectively. The Company had a current income tax receivable of $8,939,000 and
$10,532,000 at December 31, 1999 and 1998, respectively. The Company's tax
returns through December 31, 1994 have been examined by the Internal Revenue
Service.
The realization of the deferred tax asset is dependent upon the Company's
ability to generate sufficient taxable income in future periods. Based on
historical results and the prospects for current operations, management
anticipates that it is more likely than not that future taxable income will be
sufficient for the realization of this net asset.
38
<PAGE> 22
(15) RESERVES FOR LOSSES AND LOSS EXPENSES
The table below provides a reconciliation of the beginning and ending reserve
balances, on a gross of reinsurance basis:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net reserves at beginning of year $1,583,304 $1,433,011 $1,333,122
- -----------------------------------------------------------------------------------------------------------------------------
Net reserves of companies acquired 2,189 4,984
Net provision for losses and loss expenses:
Claims occurring during the current year 1,032,089 944,887 747,977
Increase (decrease) in estimates for claims occurring in prior years 28,351 (42,929) (21,313)
Amortization of discount 10,473 9,111 7,760
- -----------------------------------------------------------------------------------------------------------------------------
1,070,913 911,069 734,424
=============================================================================================================================
Net payments for claims
Current year 433,942 397,787 315,370
Prior years 496,410 365,178 324,149
- -----------------------------------------------------------------------------------------------------------------------------
930,352 762,965 639,519
- -----------------------------------------------------------------------------------------------------------------------------
Net reserves at end of year 1,723,865 1,583,304 1,433,011
Ceded reserves at end of year 617,025 537,219 476,677
- -----------------------------------------------------------------------------------------------------------------------------
Gross reserves at end of year $2,340,890 $2,120,523 $1,909,688
=============================================================================================================================
</TABLE>
The balance sheet includes $20,348,000 and $6,043,000 as of december 31, 1999
and 1998, respectively, relating to reserves for life insurance which are not
included in the table above, and the statement of operations includes
$14,913,000 and $3,693,000 for the years ended december 31, 1999 and 1998,
respectively, relating to the policyholder benefits incurred on life insurance
which are not included in the above table. The 1999 increase in reserves related
to prior years is due to reserve strengthening in the regional segment partially
offset by favorable reserve development in the specialty and alternative markets
segments.
Due to the nature of Excess Workers Compensation ("EWC") business and the
long period of time over which losses are paid in this line of business, the
Company discounts the liability for losses and loss expenses established for the
EWC line of business. Discounting liabilities for losses and loss expenses gives
recognition to the time value of money. Discounting is intended to appropriately
match losses and loss expenses to income earned on investment securities
supporting the liabilities. The expected losses and loss expense payout pattern
subject to discounting was derived from the Company's loss payout experience and
is supplemented with data compiled from insurance companies writing workers'
compensation on an excess-of-loss basis. The expected payout pattern has a very
long duration because it reflects the nature of losses generally which penetrate
self-insured retention limits contained in EWC policies. The Company has limited
the estimated payout duration to 30 years in order to introduce an additional
level of conservatism into the discounting process. The liabilities for losses
and loss expenses have been discounted using "risk-free" discount rates
determined by reference to the U.S. Treasury yield curve weighted for the EWC
premium volume to reflect the seasonality of the anticipated duration of losses
associated with such coverages. The weighted average discount rate for accident
years 1999, 1998, 1997, 1996 and 1995 and prior is 5.90%, 5.90%, 5.98%, 5.90%
and 5.80%, respectively. The aggregate net discount, after reflecting the
effects of ceded reinsurance, is $186,981,000, $186,964,000 and $189,600,000 at
December 31, 1999, 1998 and 1997, respectively. For statutory purposes, the
Company uses a discount rate of 3.0% as permitted by the Department of Insurance
of the State of Ohio.
To date, known pollution and environmental claims at the insurance company
subsidiaries have not had a material impact on the Company's operations.
Environmental claims have not materially impacted the Company because its
subsidiaries generally did not insure larger industrial companies which are
subject to significant environmental exposures.
The Company's net reserves for losses and loss adjustment expenses relating
to pollution and environmental claims were $30,944,000 and $33,391,000 at
December 31, 1999 and 1998, respectively. The Company's gross reserves for
losses and loss adjustment expenses relating to pollution and environmental
claims were $65,966,000 and $69,283,000 at December 31, 1999 and 1998,
respectively. Net incurred losses and loss expenses for reported pollution and
environmental claims were approximately $1,371,000, $2,227,000 and $79,000 in
1999, 1998 and 1997, respectively. Net paid losses and loss expenses were
approximately $3,819,000, $2,614,000 and $2,175,000 in 1999, 1998 and 1997,
respectively. The estimation of these liabilities is subject to significantly
greater than normal variation and uncertainty because it is difficult to make a
reasonable actuarial estimate of these liabilities due to the absence of a
generally accepted actuarial methodology for these exposures and the potential
effect of significant unresolved legal matters, including coverage issues as
well as the cost of litigating the legal issues. Additionally, the determination
of ultimate damages and the final allocation of such damages to financially
responsible parties are highly uncertain.
39
<PAGE> 23
(16) INDUSTRY SEGMENTS
The Company's operations are presently conducted through five basic segments:
specialty; alternative markets; reinsurance; regional; and international. 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. The Company's reinsurance segment specializes in underwriting
property, casualty and surety reinsurance on both a treaty and facultative
basis. The regional property casualty insurance segment writes standard
commercial and personal lines insurance for such risks as automobiles, homes and
businesses. Finally, the international operations represent the Company's joint
venture with Northwestern Mutual Life International (65% owned by the Company),
which writes property and casualty, as well as life insurance, internationally.
For the years ended December 31, 1999, 1998 and 1997, the joint venture wrote
life premiums of $24,548,000, $7,994,000 and $639,000, respectively.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Income tax expense (benefits)
were calculated in accordance with the Company's tax sharing agreements, which
provide for the recognition of tax loss carryforwards 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
intercompany 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>
Revenues
--------------------------------------------------------- Income Income Tax
Investment Unaffiliated Inter- (loss) before Expense
(Dollars in thousands) Income Customers Segment Total income taxes (Benefits)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999:
Regional $ 52,639 $ 700,667 $ 1,462 $ 702,129 $(97,362) $ (7,589)
Reinsurance 47,288 341,201 739 341,940 14,091 1,992
Specialty 50,231 310,373 (1,305) 309,068 39,261 8,692
Alternative Markets 36,355 221,690 586 222,276 24,919 4,653
International 6,469 93,878 -- 93,878 3,535 1,443
Corporate and other 1,011 5,859 114,398 120,257 32,612 (47,210)
Adjustments and eliminations (3,677) -- (115,880) (115,880) (96,304) (7,747)
- ----------------------------------------------------------------------------------------------------------------------------
Consolidated $ 190,316 $ 1,673,668 -- $1,673,668 $(79,248) $ (45,766)
============================================================================================================================
December 31, 1998:
Regional $ 53,942 $ 680,505 $ 2,014 $ 682,519 $(24,524) $ 3,323
Reinsurance 47,643 296,100 1,044 297,144 33,858 6,911
Specialty 59,345 309,047 2,908 311,955 85,889 24,349
Alternative Markets 34,667 205,024 911 205,935 36,501 9,505
International 5,469 80,287 -- 80,287 (7,017) 349
Corporate and other 7,927 11,554 81,983 93,537 9,288 5,465
Adjustments and eliminations (6,573) -- (88,860) (88,860) (71,214) (44,437)
- ----------------------------------------------------------------------------------------------------------------------------
Consolidated $ 202,420 $ 1,582,517 -- $ 1,582,517 $ 62,781 $ 5,465
============================================================================================================================
December 31, 1997:
Regional $ 51,920 $ 634,468 $ 674 $ 635,142 $ 47,624 $ 14,833
Reinsurance 45,520 241,204 882 242,086 42,193 10,641
Specialty 60,162 281,630 2,691 284,321 68,088 18,529
Alternative Markets 34,390 183,904 829 184,733 34,733 10,257
International 3,623 45,360 -- 45,360 (3,566) (181)
Corporate and other 10,565 13,744 48,351 62,095 (19,815) 30,849
Adjustments and eliminations (6,592) -- (53,427) (53,427) (40,016) (54,260)
- ----------------------------------------------------------------------------------------------------------------------------
Consolidated $ 199,588 $1,400,310 -- $ 1,400,310 $129,241 $ 30,668
============================================================================================================================
</TABLE>
40
<PAGE> 24
W.R. BERKLEY CORPORATION AND SUBSIDIARIES
Interest expense for the alternative markets and reinsurance segments was
$2,870,000, $2,327,000 and $2,327,000 for the years ended December 31, 1999,
1998 and 1997, respectively. Additionally, corporate interest expense (net of
intercompany amounts) was $47,931,000, $46,492,000 and $46,542,000 for the
corresponding periods. Identifiable assets by segment are as follows:
<TABLE>
<CAPTION>
December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Regional $1,436,575 $1,370,849 $1,264,962
Reinsurance 1,022,776 996,186 863,784
Specialty 1,370,837 1,502,366 1,403,068
Alternative Markets 878,125 863,578 749,724
International 177,675 151,832 119,792
Corporate and other 1,362,345 1,545,744 1,602,907
Elimination (1,463,542) (1,447,124) (1,459,919)
- ---------------------------------------------------------------------------------------------------------------
Consolidated $4,784,791 $4,983,431 $4,544,318
===============================================================================================================
</TABLE>
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Carrying Carrying
Amount Fair value Amount Fair value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments $2,873,301 $2,871,109 $3,302,103 $3,315,422
Long-term debt 394,792 383,901 394,444 435,702
Capital Trust Securities 198,126 172,547 207,988 206,464
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The estimated fair value of investments is based on quoted market prices as of
the respective reporting dates. The fair value of the long-term debt is based on
rates available for borrowings similar to the Company's outstanding debt as of
the respective reporting dates.
(18) DIVIDENDS FROM SUBSIDIARIES AND STATUTORY FINANCIAL INFORMATION
The Company's insurance subsidiaries are restricted by law as to the amount of
dividends they may pay without the approval of regulatory authorities. During
2000, the maximum amount of dividends which can be paid without such approval is
approximately $77,264,000.
Combined net income and policyholders' surplus of the Company's consolidated
insurance subsidiaries, as determined in accordance with statutory accounting
practices, are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ (34,598) $ 67,014 $121,300
============================================================
Policyholders' surplus $865,672 $941,853 $971,749
============================================================
</TABLE>
The significant variances between statutory accounting practices and GAAP are:
For statutory purposes, bonds are carried at amortized cost, acquisition costs
are charged to operations as incurred, deferred federal income taxes are not
provided for temporary differences between book and tax assets and liabilities,
EWC reserves are discounted at a 3.0% rate and certain assets designated as
"non-admitted assets" are charged against surplus.
At December 31, 1999 and 1998, bonds with a fair value of $209,485,000 and
$185,206,000 were on deposit with various state insurance departments as
required by state laws.
The National Association of Insurance Commissioners ("NAIC") has risk-based
capital ("RBC") requirements that require insurance companies to calculate and
report information under a risk-based formula which measures statutory capital
and surplus needs based on a regulatory definition of risk in a company's mix of
products and its balance sheet. RBC did not affect the operations of the
Company's insurance subsidiaries since all of its subsidiaries have an RBC
amount above the authorized control level RBC, as defined by the NAIC.
The NAIC recently completed a process intended to codify statutory
accounting practices for certain insurance enterprises. As a result of this
process, the NAIC will issue a revised statutory accounting practices and
procedures manual, which will be effective January 1, 2001. The Company has not
yet determined the impact that this change will have on the statutory capital
and surplus of its insurance subsidiaries.
41
<PAGE> 25
(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly financial data:
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Three months ended
----------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1998 1999 1998 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $407,713 $383,275 $416,250 $396,910 $427,823 $394,425 $421,882 $407,907
===================================================================================================================================
Net income (loss) before
preferred dividends $ 2,472 $ 25,673 $ 5,624 $ 22,743 $ (1,356) $ 12,261 $(40,788) $ (1,917)
====================================================================================================================================
Net income (loss) before
change in accounting and
extraordinary gain (loss) $ 1,975 $ 23,786 $ 5,624 $ 20,856 $ (1,356) $ 10,374 $(40,788) $ (3,804)
===================================================================================================================================
Net income (loss) attributable
to common stockholders $ (1,275) $ 21,351 $ 5,624 $ 18,274 $ (621) $ 10,374 $(40,788) $ (3,804)
===================================================================================================================================
Earnings (loss) per share:
Basic
Before change in accounting
and extraordinary gain (loss) $ .07 $ .81 $ .22 $ .73 $ (.06) $ .37 $ (1.59) $ (.14)
Net income (loss) $ (.05) $ .73 $ .22 $ .64 $ (.02) $ .37 $ (1.59) $ (.14)
Diluted
Before change in accounting
and extraordinary gain (loss) $ .07) $ .78 $ .22 $ .70 $ (.05) $ .36 $ (1.59) $ (.14)
Net income (loss) $ (.05) $ .71 $ .22 $ .61 $ (.02) $ .36 $ (1.59) $ (.14)
===================================================================================================================================
</TABLE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
W.R. Berkley Corporation
We have audited the consolidated balance sheets of W. R. Berkley Corporation and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, comprehensive income and cash
flows for each of the years in the three-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of W. R. Berkley
Corporation and subsidiaries at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Company has
changed its method of accounting for insurance-related assessments in 1999.
New York, New York KPMG LLP
February 24, 2000
42
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 2,110,411
<DEBT-CARRYING-VALUE> 152,657
<DEBT-MARKET-VALUE> 150,465
<EQUITIES> 314,810
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,577,878
<CASH> 315,474
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 182,348
<TOTAL-ASSETS> 4,784,791
<POLICY-LOSSES> 2,361,238
<UNEARNED-PREMIUMS> 689,826
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 627,918
0
0
<COMMON> 7,281
<OTHER-SE> 584,497
<TOTAL-LIABILITY-AND-EQUITY> 4,784,791
1,414,384
<INVESTMENT-INCOME> 190,316
<INVESTMENT-GAINS> (6,064)
<OTHER-INCOME> 2,688
<BENEFITS> 1,085,826
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (79,248)
<INCOME-TAX> (45,766)
<INCOME-CONTINUING> (34,545)
<DISCONTINUED> 0
<EXTRAORDINARY> 735
<CHANGES> (3,250)
<NET-INCOME> (37,060)
<EPS-BASIC> (1.44)
<EPS-DILUTED> (1.43)
<RESERVE-OPEN> 1,583,304
<PROVISION-CURRENT> 1,032,089
<PROVISION-PRIOR> 28,351
<PAYMENTS-CURRENT> 433,942
<PAYMENTS-PRIOR> 496,410
<RESERVE-CLOSE> 1,723,865
<CUMULATIVE-DEFICIENCY> 28,351
</TABLE>
