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-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HoqBhxqc8S+xV4TmV6QTD8th/iowwV9rTYNVAgRRPAL/LgoW5dN13GKBqJ2HR8ll KoexpJ0OddA+S4Z355cRxQ== 0000914039-02-000118.txt : 20020415 0000914039-02-000118.hdr.sgml : 20020415 ACCESSION NUMBER: 0000914039-02-000118 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BERKLEY W R CORP CENTRAL INDEX KEY: 0000011544 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 221867895 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-15202 FILM NUMBER: 02591584 BUSINESS ADDRESS: STREET 1: 165 MASON ST STREET 2: P O BOX 2518 CITY: GREENWICH STATE: CT ZIP: 06836-2518 BUSINESS PHONE: 2036293000 MAIL ADDRESS: STREET 1: 165 MASON ST STREET 2: PO BOX 2518 CITY: GREENWICH STATE: CT ZIP: 06836-2518 10-K 1 y58639e10-k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 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, 2001 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______. Commission file number 0-7849 W. R. BERKLEY CORPORATION (Exact name of registrant as specified in its charter) Delaware 22-1867895 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 165 Mason Street, Greenwich, CT 06830 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 629-3000 Securities registered pursuant to Section 12(b) of the Act: Common stock, par value $.20 per share Rights to purchase Series A Junior Participating Preferred Stock Securities registered pursuant to Section 12(g) of the Act: None 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. | | Aggregate market value of voting stock held by non-affiliates of the registrant based on the closing price of such stock on the New York Stock Exchange as of March 20, 2002: $1,638,934,635. Number of shares of common stock, $.20 par value, outstanding as of March 20, 2002: 33,328,607. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's 2001 Annual Report to Stockholders for the year ended December 31, 2001 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, 2001, are incorporated herein by reference in Part III. W. R. BERKLEY CORPORATION ANNUAL REPORT ON FORM 10-K December 31, 2001

2 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 statements related to our outlook for the industry and for the Company's performance for the year 2002 and beyond, are based upon the Company's historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. They are subject to various risks and uncertainties, including but not limited to, the cyclical nature of the property casualty industry, the long-tail and potentially volatile nature of the reinsurance business, product demand and pricing, claims development and the process of estimating reserves, the uncertain nature of damage theories and loss amounts, the increased level of our retention, natural and man-made catastrophic losses, including as a result of terrorist activities, the impact of competition, the availability of reinsurance, the ability of our reinsurers to pay reinsurance recoverables owed to us, investment results, exchange rate and political risks, legislative and regulatory developments, changes in the ratings assigned to us by rating agencies, uncertainty as to reinsurance coverage for terrorist acts, availability of dividends from our insurance company subsidiaries, our successful integration of acquired companies or investment in new insurance ventures, our ability to attract and retain qualified employees and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. These risks could cause actual results of the industry or the Company's actual results for the year 2002 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. 3 PART I ITEM 1. BUSINESS W. R. Berkley Corporation, a Delaware corporation, is an insurance holding company which, through its subsidiaries, operates in five segments of the property casualty insurance business: specialty lines of insurance (including excess and surplus lines and commercial transportation); alternative markets (including the management of alternative insurance market mechanisms); reinsurance; regional property casualty insurance; and international. This structure provides us with the flexibility to respond to local or specific market conditions and to pursue specialty business niches. It also allows us to be closer to our customers in order to better understand their individual needs and risk characteristics. The holding company structure allows us to capitalize on the benefits of economies of scale through centralized capital, investment and reinsurance management and actuarial, financial and legal staff support. Unless otherwise indicated, all references in this Form 10-K to "W. R. Berkley," "we," "us," "our," the "Company" or similar terms refer to W. R. Berkley Corporation together with its subsidiaries. Our specialty insurance, alternative markets and reinsurance operations are conducted nationwide. Regional insurance operations are conducted primarily in the Midwest, New England, Southern (excluding Florida) and Mid Atlantic regions of the United States. International operations are conducted in Argentina and the Philippines. During 2001, the Company discontinued its regional personal lines and alternative markets reinsurance business. These discontinued businesses, which were previously reported in the regional and reinsurance segments, are now reported collectively as a separate Discontinued Business segment. Segment information for the prior period has been restated to reflect these changes. Net premiums written as reported, based on accounting principles generally accepted in the United States of America ("GAAP"), for each of the past five years were as follows:

The following sections briefly describe our insurance segments. All of the domestic insurance subsidiaries have an A.M. Best Company, Inc. ("A.M. Best") rating of "A (Excellent)", other than Admiral Insurance Company, which has a rating of "A+ (Superior)." 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 4 contractual obligations." A.M. Best reviews its ratings on a periodic basis, and ratings of the Company's subsidiaries are therefore subject to change. SPECIALTY INSURANCE OPERATIONS Our specialty segment underwrites complex and sophisticated third-party liability risks, principally within the excess and surplus ("E&S") lines, professional liability, commercial transportation and surety markets. The specialty business is conducted through six operating units. The different companies within the segment are divided along the different customer bases and product lines which they serve. The specialty units deliver their products through a variety of distribution channels depending on the customer base and particular risks insured. The customers in this segment are highly diverse. Admiral Insurance Company ("Admiral") specializes in E&S coverages, including general liability, professional liability and property. 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. Admiral operates primarily on a non-admitted basis. Admiral's business is obtained on a nationwide basis from non-exclusive brokers and coverages are provided to a wide variety of customers. 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 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 operates primarily on a non-admitted basis. Monitor Liability Managers ("Monitor") is our professional liability underwriting unit. Monitor writes primarily directors' and officers' and lawyers' professional coverages. Monitor also writes management liability and employment practices liability insurance. Its business is developed nationally through a combination of wholesale and retail sources. Carolina Casualty Insurance Company ("Carolina") writes liability, physical damage and cargo insurance for the transportation industry, concentrating on long-haul trucking companies. It also writes public transportation insurance for various for-hire risks. Carolina's business is obtained nationwide from agents and brokers. Clermont Specialty Managers ("Clermont") writes specialty commercial lines in the New York City metropolitan area. These include package insurance programs for luxury condominium, cooperative and rental apartment buildings and restaurants. It also writes motorcycle coverages in upstate New York. Product distribution is through retail agents and wholesale brokers. Monitor Surety Managers ("Surety") writes surety bonds, primarily serving the bonding needs of mid-sized contractors. It operates five regional offices producing business mostly from retail agents specializing in surety. The following table sets forth the percentage of direct premiums written by each specialty unit:

5 The following table sets forth the percentages of direct premiums written, by line, by our specialty insurance operations:

ALTERNATIVE MARKETS Our alternative markets operations specialize in developing, insuring, reinsuring and administering self-insurance programs and other alternative risk transfer mechanisms. Our clients include employers, employer groups, insurers, and alternative markets funds seeking less costly, more efficient ways to manage exposure to risks. In addition to providing insurance, the alternative markets segment also provides a wide variety of fee-based services, including consulting and administrative services. Each of our alternative markets operating units is involved in risk management and is organized according to one of the following product areas: insuring excess workers' compensation, or EWC, risks; insuring primary workers' compensation risks; and providing non-risk bearing administrative services nationwide. Excess workers' compensation. We market and underwrite EWC insurance and related risk management services, including a full range of consulting services. EWC insurance provides coverage to self-insured employers and employer groups once their losses exceed a specified retention amount. We offer a complete line of products, including specific and aggregate insurance policies, and surety bonds. Insurance services. Our alternative markets insurance service operations offer a full range of alternative solutions customized to meet risk financing needs for various structures, such as assigned risk plans, captive insurance companies, government pools, risk retention groups, self-funded plans and specialty insurance company programs. Interaction with clients through consulting and other advisory services is central to marketing efforts in the alternative markets. Our services include property casualty and workers' compensation third-party administration, claims adjustment and management, employee benefit consulting, accounting services, insurance and reinsurance risk transfer, loss control and safety consulting, management information systems, regulatory compliance and relations, risk management consulting, alternative markets plan management, statistical analysis, underwriting and rating, and policy issuance. Primary workers'compensation. Primary workers' compensation insurance is provided in California and North Carolina. In California, insurance coverage is provided to owner-managed small employers. In North Carolina, coverage is offered primarily to employers moving out of association or individual self-insurance programs. 6 The following table sets forth the percentages of revenues, by major source of business, of our alternative markets operations:

REINSURANCE OPERATIONS Our reinsurance operations consist of four operating units, which specialize in underwriting property casualty reinsurance on both a treaty and a facultative basis. Treaty. Our Property Casualty Treaty Division is our largest reinsurance unit in terms of personnel and premiums written. This division 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. In 2001, we continued to focus on reinsurance lines of business which are more specialty focused and where knowledge and expertise in a specific area is valued over the capital scale of the reinsurance provider. It is in those situations where we can best utilize our intellectual capital to drive the underwriting process. We also continued redirecting our treaty business toward casualty excess of loss treaties. These changes have allowed and will continue to allow us to have more significant participations and greater influence over the terms and conditions of coverage. Facultative. Our Facultative Division specializes in individual certificate and program facultative business. Its 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. We develop this business through brokers and on a direct basis where the client does not choose to use an intermediary. The Facultative Division also writes excess and surplus lines through its affiliate, Vela Insurance Services, Inc. Fidelity and Surety. Our Fidelity and Surety Division operates as a lead reinsurer in a niche market of the property casualty industry where its highly specialized knowledge and expertise are essential to assess the needs of fidelity and surety primary writers. Business is marketed principally through brokers as well as directly to clients not served by intermediaries. Commencing January 1, 2002, we ceased writing business with exposures to large national risks and will focus primarily on our regional surety reinsurance business. Program Business. Our Program Business Division oversees managing general underwriting (MGU) program business, most recently through Berkley Underwriting Partners, LLC. The following table sets forth the percentages of gross premiums written, by line, by our reinsurance operations:

7 The following table sets forth the percentage of gross premiums written, by property versus casualty business, by our reinsurance operations:

REGIONAL INSURANCE OPERATIONS Our regional subsidiaries provide commercial insurance products to customers primarily in 23 states. Key clients of this segment are small-to-mid-sized businesses and governmental entities. The regional subsidiaries are organized geographically, which provides them with the flexibility to adapt to local market conditions, while enjoying the superior administrative capabilities and financial strength of W. R. Berkley. Our regional insurance operations are conducted through four geographic regions based on markets served: Midwest, New England, Southern and Mid Atlantic. Our regional insurance subsidiaries primarily sell our insurance products through a network of non-exclusive independent agents who are compensated on a commission basis. Our regional companies underwrite all major commercial lines. The following table sets forth the direct premiums written by each region:

The following table sets forth the percentages of direct premiums written, by line, by our regional insurance operations:

8 The following table sets forth the percentages of direct premiums written, by state, by our regional insurance operations:

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. We 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. Applying the same approach that we take for our domestic businesses, we believe that decentralized control is key to the success of our international effort. For example, we hire local insurance executives who have specialized knowledge of their customers, markets and products, and we link their compensation to meeting performance objectives. International operations are conducted in Argentina and the Philippines. In Argentina, we offer commercial and personal property casualty insurance. Our Argentine business has also issued both universal life insurance and long duration contracts that, because of recent economic developments in Argentina, are subject to greater investment, political and economic risks (See "Certain Factors That May Affect Future Results.") In the Philippines, we provide savings and life products to customers, including endowment policies to pre-fund education costs and retirement income. 9 The following table set forth the percentages of direct premiums for our international operations:

DISCONTINUED BUSINESS In the third quarter of 2001, the Company discontinued its personal lines business, both homeowners and private passenger automobile, and the alternative markets division of its reinsurance segment, by not renewing existing policies or treaties and ceasing to write new business. The following table set forth the percentages of premiums for our inactive business:

RECENT DEVELOPMENTS Effective January 1, 2002, the Company entered into quota share reinsurance contracts with MAP Capital Limited, a Lloyd's corporate member, and two Lloyd's syndicates managed by Kiln plc. MAP Capital Limited and the Lloyd's syndicates are expected to underwrite, on a worldwide basis, a broad range of mainly short-tail classes of business. The Company recently announced the formation of Berkley Medical Excess Underwriters, LLC and Berkley Capital Underwriters, LLC. Berkley Medical Excess Underwriters will offer excess coverage for healthcare providers that are either self-insured or maintain their own captive facilities and reinsurance coverage for primary insurance companies that provide medical malpractice coverage to physicians and other commercial healthcare providers. Berkley Capital Underwriters will offer a proportional form of reinsurance for both domestic and international insurance operations with a strong emphasis on commercial and specialty casualty lines of insurance. Berkley Capital Underwriters will complement the Company's existing treaty operation, Signet Star Re, LLC, which primarily offers excess of loss treaty protection. 10 Results by Industry Segment Summary financial information about our operating segments is presented on a GAAP basis in the following table (all amounts include realized capital gains and losses):

11 The table below represents summary underwriting ratios, on a GAAP accounting basis for our insurance companies and the insurance industry. 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:

12 Investments Investment results before income tax effects were as follows:

(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.

Loss and Loss Adjustment Expense Reserves In the property casualty insurance 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. Our loss reserves reflect current estimates of the ultimate cost of closing outstanding claims. Other than our excess workers' compensation business and the workers' compensation portion of our reinsurance business, as discussed below, we do not discount our reserves for financial reporting purposes. 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. 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 13 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, other environmental exposures or man-made catastrophes, have produced unanticipated claims and increased the difficulty of estimating the loss and loss adjustment expense reserves. We discount our liabilities for excess workers' compensation business and the workers' compensation portion of our reinsurance business because of the long period of time over which losses are paid. 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 similar business. 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 for non-proportional business, and at the statutory rate for proportional business. The discount rates range from 4.3% to 6.5% with a weighted average rate of 5.5%. The aggregate net discount, after reflecting the effects of ceded reinsurance, is $243,000,000, $223,000,000 and $196,000,000 at December 31, 2001, 2000 and 1999, respectively. To date, known asbestos and environmental claims at our insurance company subsidiaries have not had a material impact on our operations. Environmental claims have not materially impacted us because these subsidiaries generally did not insure the larger industrial companies which are subject to significant environmental exposures. Our net reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $24,794,000 and $29,422,000 at December 31, 2001 and 2000, respectively. The Company's gross reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $43,405,000 and $57,167,000 at December 31, 2001 and 2000, respectively. Net incurred losses and loss expenses (recoveries) for reported asbestos and environmental claims were approximately ($4,503,000), $1,602,000 and $1,371,000 in 2001, 2000 and 1999, respectively. Net paid losses and loss expenses (receivables) for reported asbestos and environmental claims were approximately $125,000, $3,123,000 and $3,819,000 in 2001, 2000 and 1999, 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 following table sets forth the components of our gross loss reserves and net provision for losses and loss expense (amounts in thousands):

14 The table below provides a reconciliation of the beginning and ending property casualty reserves, on a gross of reinsurance basis (amounts in thousands)(1):

A reconciliation, as of December 31, 2001, between the reserves reported in the accompanying consolidated financial statements which have been prepared in accordance with GAAP and those reported on the basis of statutory accounting principles ("SAP") is as follows (amounts in thousands): Net reserves reported on a SAP basis $ 2,031,705 Additions (deductions) to statutory reserves: International property & casualty reserves 30,753 Loss reserve discounting (2) (32,561) Outstanding drafts reclassified as reserves 3,396 ----------- Net reserves reported on a GAAP basis 2,033,293 Ceded reserves reclassified as assets 730,557 ----------- Gross reserves reported on a GAAP basis $ 2,763,850 ===========

(1) Claims occurring during the current year is net of discount of $24,781,000, $39,990,000 and $22,923,754 for the years ended December 31, 2001, 2000 and 1999, respectively. (2) For statutory purposes, we use a discount rate of 4.3% as permitted by the Department of Insurance of the State of Delaware. The following table presents the development of net reserves for 1991 through 2001. 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 us. 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 1991 reserves have developed a $140 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 1991 is reserved for $2,000 as of December 31, 1991. Assuming this claim was settled for $2,300 in 2001, the $300 deficiency would appear as a deficiency in each year from 1991 through 2000. 15
(Amounts in millions) Year Ended December 31, 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 - ----------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Discounted net reserves for losses and loss expenses $680 $710 $ 783 $ 895 $1,209 $1,333 $1,433 $ 1,583 $1,724 $1,818 $2,033 Reserve discounting -- -- -- -- 152 172 190 187 196 223 243 ---- ---- ------ ------ ------ ------ ------ ------- ------ ------ ------ Undiscounted net reserve 680 710 783 895 1,361 1,505 1,623 1,770 1,920 2,041 2,276 Net Re-estimated as of: One year later 676 704 776 885 1,346 1,481 1,580 1,798 1,934 2,252 Two years later 659 694 755 872 1,305 1,406 1,566 1,735 2,082 Three years later 650 665 744 833 1,236 1,356 1,446 1,805 Four years later 637 655 708 789 1,195 1,239 1,463 Five years later 631 630 672 764 1,112 1,248 Six years later 609 600 649 706 1,118 Seven years later 585 579 599 712 Eight years later 568 541 605 Nine years later 534 547 Ten years later 540 Cumulative redundancy (deficiency) undiscounted $140 $163 $ 178 $ 183 $ 243 $ 257 $ 160 $ (35) $ (162) $ (211) -- ==== ==== ====== ====== ====== ====== ====== ======= ====== ====== ====== Cumulative amount of net liability paid through: One year later $160 $169 $ 186 $ 221 $ 265 $ 332 $ 365 496 584 702 Two years later 264 275 221 355 434 523 574 795 1,011 Three years later 332 306 291 445 550 635 737 1,032 Four years later 346 344 334 501 616 714 852 Five years later 371 362 363 528 655 782 Six years later 384 375 373 543 701 Seven years later 394 376 373 577 Eight years later 392 370 393 Nine years later 383 384 Ten years later 395 Discounted net reserves 783 895 1,209 1,333 1,433 1,583 1,724 1,818 2,033 Ceded Reserves 1,233 1,176 451 450 477 538 617 658 731 ------ ------ ------ ------ ------ ------- ------ ------ ------ Discounted gross reserves 2,016 2,071 1,660 1,783 1,910 2,121 2,341 2,476 2,764 Reserve discounting -- -- 192 216 241 248 250 286 324 ------ ------ ------ ------ ------ ------ ------ ------ ------ Gross reserve $2,016 $2,071 $1,852 $1,999 $2,151 $2,369 $2,591 $2,762 $3,088 ====== ====== ====== ====== ====== ====== ====== ====== ====== Gross Re-estimated as of: One year later 2,010 2,043 1,827 1,965 2,132 2,390 2,653 2,827 Two years later 1,966 2,026 1,789 1,959 2,096 2,389 2,556 Three years later 1,955 1,983 1,754 1,909 2,010 2,218 Four years later 1,913 1,951 1,733 1,823 1,871 Five years later 1,855 1,928 1,681 1,739 Six years later 1,815 1,899 1,630 Seven years later 1,788 1,858 Eight years later 1,757 Gross cumulative redundancy (deficiency) undiscounted $ 259 $ 213 $ 222 $ 260 $ 280 $ 151 $ 35 $ (65) ====== ====== ====== ====== ====== ====== ====== ======
16 Reinsurance We follow the customary industry practice of reinsuring a portion of our exposures and paying to reinsurers a part of the premiums received on the policies that we write. 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. We monitor the financial condition of our reinsurers and attempt to place our coverages only with substantial, financially sound carriers. As a result, generally the reinsurers who reinsure our casualty insurance must have an A.M. Best rating of "A (Excellent)" or better with $250 million in policyholder surplus and the reinsurers who cover our property insurance must have an A.M. Best rating of "A-(Excellent)" or better with $150 million in policyholder surplus. As a result of the attacks of September 11, many reinsurers have significantly changed their underwriting guidelines, and limit or no longer provide terrorism coverage. See "Management's Discussion and Analysis of Financial Condition and Result of Operations" and Note 9 of "Notes to Consolidated Financial Statements." Regulation Our insurance subsidiaries are subject to varying degrees of regulation and supervision in the jurisdictions in which they do business. They are subject to 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. Our 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. Our E&S and reinsurance subsidiaries generally operate free of rate and form regulation. In addition to regulatory supervision of our insurance subsidiaries, we are subject to state statutes governing insurance holding company systems. Typically, such statutes require that we periodically file information with the state insurance commissioner, including information concerning our 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 our outstanding voting securities would be required to obtain regulatory approval of the purchase. Under Florida law, which is applicable to us due to our ownership of Carolina Casualty Insurance Company, a Florida domiciled insurer, the acquisition of more than 5% of our 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." 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 codified statutory accounting practices for certain insurance enterprises effective January 1, 2001. No assurance can be given that future legislative or regulatory changes resulting from such activity will not adversely affect our insurance subsidiaries. The NAIC utilizes a Risk Based Capital (RBC) formula which is designed to measure the adequacy of an insurer's statutory surplus in relation to the risks inherent in its business. The RBC formula develops a risk adjusted target level of adjusted statutory capital by applying certain factors to various asset, premium and reserve items. The RBC Model Law provides for four incremental levels of regulatory attention for insurers whose surplus is below the calculated RBC target. These levels of attention range in severity from requiring the insurer to submit a plan for corrective action to actually placing the insurer under regulatory control. The RBC of each of our domestic insurance subsidiaries was above the authorized control level RBC as of December 31, 2001. The Gramm-Leach-Bliley Act, or Financial Services Modernization Act of 1999 (the "Act"), was enacted in 1999 and significantly affects 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 17 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 adopted a model regulation on privacy, and a model law on agents' licensing, which have been enacted or are currently being considered by various state legislatures and insurance departments. It is not anticipated that the insurance regulatory aspects of the Act will have a material effect on our operations. Our 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 our insurance subsidiaries are required to be members) have limited assessment authority with regard to deficits in certain lines of business. We receive funds from our insurance subsidiaries in the form of dividends and fees for certain management services. Annual dividends in excess of maximum amounts prescribed by state statutes 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 businesses are competitive, with over 2,000 insurance companies transacting business in the United States. We compete directly with a large number of these companies. Our strategy in this highly fragmented industry is to seek specialized areas or geographic regions where our insurance subsidiaries can gain a competitive advantage by responding quickly to changing market conditions. Each of our 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. Competition for specialty and alternative markets business comes from other specialty insurers, regional carriers, large national multi-line companies and reinsurers. Under certain market conditions, standard carriers also compete for E&S business. Competition for the reinsurance business comes from domestic and foreign reinsurers, which produce their business either on a direct basis or through the broker market. These competitors include Employers Reinsurance, Berkshire Hathaway, and American Reinsurance, which collectively comprise a majority of the property casualty reinsurance market in the United States. 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. 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 multinational companies. Employees As of March 8, 2002, we employed 4,244 persons. Of this number, our subsidiaries employed 4,194 persons, of whom 2,175 were executive and administrative personnel and 2,069 were clerical personnel. We employed the remaining 50 persons at the parent company and in investment operations, of whom 38 were executive and administrative personnel and 12 were clerical personnel. 18 Other Information about the Company's business We maintain an interest in the acquisition or start up of complementary businesses and continue to evaluate possible acquisitions and new ventures on an ongoing basis. In addition, the insurance subsidiaries develop new coverages or lines of business to meet the needs of insureds. Seasonal weather variations and other events affect the severity and frequency of losses sustained by the insurance and reinsurance subsidiaries. Although the effect on our business of such catastrophes as tornadoes, hurricanes, hailstorms, earthquakes and terrorist acts may be mitigated by reinsurance, they nevertheless can have a significant impact on the results of any one or more reporting periods. We have no customer which accounts for 10 percent or more of our consolidated revenues. Compliance by W. R. Berkley 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 our capital expenditures, earnings or competitive position. 19 CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS Our business faces significant risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business operations. If any of the events or circumstances described as risks below actually occurs, our business, results of operations or financial condition could be materially and adversely affected. OUR RESULTS MAY FLUCTUATE AS A RESULT OF MANY FACTORS, INCLUDING CYCLICAL CHANGES IN THE INSURANCE AND REINSURANCE INDUSTRY. The results of companies in the property casualty insurance industry historically have been subject to significant fluctuations and uncertainties. The demand for insurance is influenced primarily by general economic conditions, while the supply of insurance is directly related to available capacity. 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. These factors could produce results that would have a negative impact on our results of operations and financial condition. OUR ACTUAL CLAIMS LOSSES MAY EXCEED OUR RESERVES FOR CLAIMS, WHICH MAY REQUIRE US TO ESTABLISH ADDITIONAL RESERVES. We maintain loss reserves to cover our estimated liability for unpaid losses and loss adjustment expenses, including legal and other fees as well as a portion of our general expenses, for reported and unreported claims incurred as of the end of each accounting period. Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what we expect the ultimate settlement and administration of claims will cost. These estimates, which generally involve actuarial projections, are based on our assessment of facts and circumstances then known, as well as estimates of future trends in claims severity, frequency, judicial theories of liability and other factors. In some cases, long-tail lines of business such as excess workers' compensation and the workers' compensation portion of our reinsurance business are reserved on a discounted basis. The variables described above are affected by both internal and external events, such as changes in claims handling procedures, inflation, judicial and litigation trends and legislative changes. The risk of the occurrence of such events is especially present in our specialty and reinsurance businesses as well as our discontinued alternative markets reinsurance business. Many of these items are not directly quantifiable in advance. In some areas of our business, the level of reserves we establish is dependent in part upon the actions of third parties that are beyond our control. In our reinsurance and excess workers' compensation businesses, we may not establish sufficient reserves if third parties do not give us advance notice or provide us with appropriate information regarding certain matters. Additionally, there may be a significant delay between the occurrence of the insured event and the time it is reported to us. The inherent uncertainties of estimating reserves are greater for certain types of liabilities, where the various considerations affecting these types of claims are subject to change and long periods of time may elapse before a definitive determination of liability is made. For example, there are greater uncertainties involved with establishing reserves relating to the World Trade Center attack, the Enron bankruptcy and asbestos and environmental claims. Reserve estimates are continually refined in an ongoing process as experience develops and further claims are reported and settled. Adjustments to reserves are reflected in the results of the periods in which such estimates are changed. Because setting reserves is inherently uncertain, we cannot assure you that our current reserves will prove adequate in light of subsequent events. Should we need to increase our reserves, our net income for the period will decrease by a corresponding amount. OUR EARNINGS COULD BE MORE VOLATILE, ESPECIALLY SINCE WE HAVE INCREASED AND MAY FURTHER INCREASE OUR LEVEL OF RETENTION IN OUR BUSINESS. We increased our retention levels in 2000 and 2001 due to changes in market conditions and the pricing environment. We purchased less reinsurance, the process by which we transfer, or cede, part of the risk we have assumed to a reinsurance company, thereby retaining more risk. We may further increase our retention levels in the future. As a result, our earnings 20 could be more volatile and increased severities are more likely to have a material adverse effect on our results of operations and financial condition. A significant change in our retention levels could also cause our historical financial results, including compound annual growth rates, to be inaccurate indicators of our future performance on a segment or consolidated basis. AS A PROPERTY CASUALTY INSURER, WE FACE LOSSES FROM NATURAL AND MAN-MADE CATASTROPHES. Property casualty insurers are subject to claims arising out of catastrophes that may have a significant effect on their results of operations, liquidity and financial condition. Catastrophe losses have had a significant impact on our results. Catastrophes can be caused by various events, including hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter weather and fires, as well as terrorist activities. The incidence and severity of catastrophes are inherently unpredictable. For example, during the five years ended December 31, 2001, our losses from natural and man-made catastrophes ranged from $33 million to $96 million. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Most catastrophes are restricted to small geographic areas; however, hurricanes and earthquakes may produce significant damage in large, heavily populated areas. Catastrophes can cause losses in a variety of our property casualty lines, and most of our past catastrophe-related claims have resulted from severe storms. Seasonal weather variations may affect the severity and frequency of our losses. Insurance companies are not permitted to reserve for a catastrophe until it has occurred. It is therefore possible that a catastrophic event or multiple catastrophic events could produce unforeseen losses and have a material adverse effect on our results of operations and financial condition. WE FACE SIGNIFICANT COMPETITIVE PRESSURES IN OUR BUSINESSES, WHICH MAY REDUCE PREMIUM RATES AND PREVENT US FROM PRICING OUR PRODUCTS AT ATTRACTIVE RATES. We compete with a large number of other companies in our selected lines of business. We compete, and will continue to compete, with major U.S. and non-U.S. insurers and reinsurers, other regional companies, as well as mutual companies, specialty insurance companies, underwriting agencies and diversified financial services companies. Competition in our businesses is based on many factors, including the perceived financial strength of the company, premium charges, other terms and conditions offered, services provided, ratings assigned by independent rating agencies, speed of claims payment and reputation and experience in the lines to be written. Some of our competitors, particularly in the reinsurance business, have greater financial and marketing resources than we do. These competitors within the reinsurance segment include Employers Reinsurance, Berkshire Hathaway and American Reinsurance, which collectively comprise a majority of the property casualty reinsurance market. We expect that perceived financial strength, in particular, will become more important as customers seek high quality reinsurers. A number of new, proposed or potential legislative or industry developments could further increase competition in our industry. These developments include: - an increase in capital-raising by companies in our lines of business, which could result in new entrants to our markets and an excess of capital in the industry; - the enactment of the Gramm-Leach-Bliley Act of 1999, which could result in increased competition from new entrants to our markets; - the implementation of commercial lines deregulation in several states, which could increase competition from standard carriers for our excess and surplus lines of insurance business; - programs in which state-sponsored entities provide property insurance in catastrophe prone areas or other alternative markets types of coverage; and - changing practices caused by the Internet, which may lead to greater competition in the insurance business. New competition from these developments could cause the supply and/or demand for insurance or reinsurance to change, which could affect our ability to price our products at attractive rates and thereby adversely affect our underwriting results. 21 IF MARKET CONDITIONS CAUSE REINSURANCE TO BE MORE COSTLY OR UNAVAILABLE, WE MAY BE REQUIRED TO BEAR INCREASED RISKS OR REDUCE THE LEVEL OF OUR UNDERWRITING COMMITMENTS. As part of our overall risk and capacity management strategy, we purchase reinsurance for significant amounts of risk underwritten by our insurance company subsidiaries, especially catastrophe risks. We also purchase reinsurance on risks underwritten by others which we reinsure. Market conditions beyond our control determine the availability and cost of the reinsurance protection we purchase, which may affect the level of our business and profitability. Our reinsurance facilities are generally subject to annual renewal. We may be unable to maintain our current reinsurance facilities or to obtain other reinsurance facilities in adequate amounts and at favorable rates. If we are unable to renew our expiring facilities or to obtain new reinsurance facilities, either our net exposures would increase or, if we are unwilling to bear an increase in net exposures, we would have to reduce the level of our underwriting commitments, especially catastrophe exposed risks. As a result of the attacks of September 11, 2001 and reinsurance market conditions, we anticipate further price increases for reinsurance we purchase beginning in 2002. WE, AS A PRIMARY INSURER, MAY NOT BE ABLE TO OBTAIN REINSURANCE COVERAGE FOR TERRORIST ACTS. It is difficult to determine the full impact of the attacks of September 11, 2001 on coverage terms with respect to future acts of terrorism both on the primary and reinsurance levels. To the extent that reinsurers are able to and do exclude coverage for terrorist acts or price such coverage at a rate at which it is not practical for primary insurers to obtain such coverage, primary insurers might not be able to likewise exclude terrorist acts because of regulatory constraints. If this does occur, we, in our capacity as a primary insurer, would not have certain reinsurance protection and would be exposed for potential losses as a result of any terrorist acts. WE CANNOT GUARANTEE THAT OUR REINSURERS WILL PAY IN A TIMELY FASHION, IF AT ALL, AND, AS A RESULT, WE COULD EXPERIENCE LOSSES. We purchase reinsurance by transferring part of the risk that we have assumed, known as ceding, to a reinsurance company in exchange for part of the premium we receive in connection with the risk. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred or ceded to the reinsurer, it does not relieve us, the reinsured, of our liability to our policyholders or, in cases where we are a reinsurer, to our reinsureds. Our reinsurers may not pay the reinsurance recoverables that they owe to us or they may not pay such recoverables on a timely basis. Accordingly, we bear credit risk with respect to our reinsurers, and if our reinsurers fail to pay us, our financial results would be adversely affected. The attacks of September 11, 2001 may affect the financial resources of some of our reinsurers. WE INVEST SOME OF OUR ASSETS IN ALTERNATIVE INVESTMENTS, WHICH IS SUBJECT TO CERTAIN RISKS. We invest a portion of our investment portfolio in alternative investments which is primarily merger arbitrage. As of December 31, 2001, our investment in merger arbitrage securities represented approximately 13% of our total investment portfolio. 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. While our merger arbitrage positions are generally hedged against market declines, these equity investments are exposed primarily to the risk associated with the completion of announced deals, which are subject to regulatory as well as political and other risks. As a result of the reduced activity in the merger and acquisitions area, we may not be able achieve the returns that we have enjoyed in the past. Alternative investments also include investments in high-yield bonds and real estate investment trusts. A SIGNIFICANT AMOUNT OF OUR ASSETS IS INVESTED IN FIXED INCOME SECURITIES AND IS SUBJECT TO MARKET FLUCTUATIONS. Our investment portfolio consists substantially of fixed income securities. The fair market value of these assets and the investment income from these assets fluctuate depending on general economic and market conditions. With respect to our investments in fixed income securities, the fair market value of these investments generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us from future investments in fixed income securities will generally increase or decrease with interest rates. In addition, actual net investment income and/or cash flows from 22 investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations. Because substantially all of our fixed income securities are classified as available for sale, changes in the market value of our securities are reflected in our balance sheet. Similar treatment is not available for liabilities. Therefore, interest rate fluctuations affect the value of our investments and could adversely affect our results of operations and financial condition. OUR OPERATIONS IN ARGENTINA AND THE PHILIPPINES EXPOSE US TO INVESTMENT, POLITICAL AND ECONOMIC RISKS. Our operations in Argentina and the Philippines expose us to investment, political and economic risks, including foreign currency and credit risk. Changes in the exchange rate between the U.S. dollar and either the Argentine or Philippine peso could have an adverse effect on our results of operations and financial condition. During 2001, Argentina experienced substantial political and economic problems, including high unemployment, increasing fiscal deficits and declining central bank reserves. The government responded to these problems by converting certain public bonds into guaranteed loans with longer maturities and lower interest rates, abandoning the fixed dollar-to-peso exchange rate and imposing various currency restrictions. It is likely that there will be further changes to Argentine economic and monetary policies in 2002. These changes may result in further impairment in value of Argentine bonds, a decline in investment income as a result of lower interest on bonds, and the surrender of all or substantially all life insurance policies-in-force. WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION, WHICH INCREASES OUR COSTS AND COULD RESTRICT THE CONDUCT OF OUR BUSINESS. We are subject to extensive governmental regulation and supervision. Most insurance regulations are designed to protect the interests of policyholders rather than stockholders and other investors. This system of regulation, generally administered by a department of insurance in each state in which we do business, relates to, among other things: - standards of solvency, including risk-based capital measurements; - restrictions on the nature, quality and concentration of investments; - requiring certain methods of accounting; - requiring reserves for unearned premium, losses and other purposes; and - potential assessments for the provision of funds necessary for the settlement of covered claims under certain policies provided by impaired, insolvent or failed insurance companies. State insurance departments conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies, holding company issues and other matters. Recently adopted federal financial services modernization legislation is expected to lead to additional federal regulation of the insurance industry in the coming years. Also, foreign governments regulate our international operations. We may be unable to maintain all required licenses and approvals and our business may not fully comply with the wide variety of applicable laws and regulations or the relevant authority's interpretation of the laws and regulations. Also, some regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or monetarily penalize us. Also, changes in the level of regulation of the insurance industry, whether federal, state or foreign, or changes in laws or regulations themselves or interpretations by regulatory authorities, restrict the conduct of our business. The growing number of insolvencies in the insurance industry increases the possibility that we will be assessed pursuant to various state guaranty fund requirements. We cannot predict the outcome of proposed federal legislation on insurance coverage for terrorism, including the possibility that we may be required to contribute to a pool based on certain criteria, and the legal and financial effects that such legislation might have on us and the property casualty industry. 23 WE ARE RATED BY A.M. BEST AND STANDARD & POOR'S, AND A DECLINE IN THESE RATINGS COULD AFFECT OUR STANDING IN THE INSURANCE INDUSTRY AND CAUSE OUR SALES AND EARNINGS TO DECREASE. Ratings have become an increasingly important factor in establishing the competitive position of insurance companies. Our insurance company subsidiaries are rated by A.M. Best, and certain of our insurance company subsidiaries are rated for their claims-paying ability by Standard & Poor's Corporation, or Standard & Poor's. A.M. Best and Standard & Poor's ratings reflect their opinions of an insurance company's financial strength, operating performance, strategic position and ability to meet its obligations to policyholders, are not evaluations directed to investors and are not recommendations to buy, sell or hold our securities. Our ratings are subject to periodic review by A.M. Best and Standard & Poor's, and we cannot assure you that we will be able to retain those ratings. Our A.M. Best rating is A+ (Superior) for Admiral Insurance Company and A (Excellent) for our other insurance companies rated by A. M. Best. The Standard & Poor's financial strengthen rating for our insurance subsidiaries is A+/negative. If our ratings are reduced from their current levels by A.M. Best and/or Standard & Poor's, our competitive position in the insurance industry could suffer and it would be more difficult for us to market our products. A significant downgrade could result in a substantial loss of business as policyholders move to other companies with higher claims-paying and financial strength ratings. WE ARE AN INSURANCE HOLDING COMPANY AND, THEREFORE, MAY NOT BE ABLE TO RECEIVE DIVIDENDS IN NEEDED AMOUNTS. Our principal assets are the shares of capital stock of our insurance company subsidiaries. We have to rely on dividends from our insurance company subsidiaries to meet our obligations for paying principal and interest on outstanding debt obligations and for paying dividends to stockholders and corporate expenses. The payment of dividends by our insurance company subsidiaries is subject to regulatory restrictions and will depend on the surplus and future earnings of these subsidiaries, as well as the regulatory restrictions. As a result, we may not be able to receive dividends from these subsidiaries at times and in amounts necessary to meet our obligations or pay dividends. WE MAY NOT FIND SUITABLE ACQUISITION CANDIDATES OR NEW INSURANCE VENTURES AND EVEN IF WE DO, WE MAY NOT SUCCESSFULLY INTEGRATE ANY SUCH ACQUIRED COMPANIES OR SUCCESSFULLY INVEST IN SUCH VENTURES. As part of our present strategy, we continue to evaluate possible acquisition transactions and the start-up of complementary businesses on an ongoing basis, and at any given time, we may be engaged in discussions with respect to possible acquisitions and new ventures. We cannot assure you that we will be able to identify suitable acquisition transactions or insurance ventures, that such transactions will be financed and completed on acceptable terms or that our future acquisitions or ventures will be successful. The process of integrating any companies we do acquire or investing in new ventures may have a material adverse effect on our results of operations and financial condition. WE MAY BE UNABLE TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES. We depend on our ability to attract and retain experienced underwriting talent and other skilled employees who are knowledgeable about our business. If the quality of our underwriting team and other personnel decreases, we may be unable to maintain our current competitive position in the specialized markets in which we operate, and be unable to expand our operations into new markets. ITEM 2. PROPERTIES W. R. Berkley and its subsidiaries own or lease office buildings or office space suitable to conduct their operations. At December 31, 2001, the Company had aggregate office space of 1,157,569 square feet, of which 843,149 was owned and 314,420 was leased. Rental expense was approximately $18,021,000, $16,580,000 and $16,109,000 for 2001, 2000 and 1999, respectively. Future minimum lease payments (without provision for sublease income) are $14,979,000 in 2001; $11,569,000 in 2003; $7,953,000 in 2004; $5,962,000 in 2005; and $16,324,000 thereafter. ITEM 3. LEGAL PROCEEDINGS Claims under insurance policies written by our insurance subsidiaries are investigated and settled either by claims adjusters employed by them, by their independent agents or by 24 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 W. R. Berkley nor any of its subsidiaries is engaged in litigation known to us which is expected to have a material adverse effect upon our business. As is common with property casualty insurance companies, our subsidiaries are regularly engaged in the defense of claims arising out of the conduct of the insurance and reinsurance business. The Company has arbitration pending pertaining to a surety reinsurance contract coverage issue where it is the reinsurer. The proceeding is in the initial stages, and the Company believes it has meritorious defenses with respect to this issue. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 2001 to a vote of holders of the Company's Common Stock. 25 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Common Stock is traded on the New York Stock Exchange under the symbol "BER". The following table sets forth the high and low sale prices for the indicated periods, as reported on the Nasdaq Stock Market's National Market through May 8, 2001 and the New York Stock Exchange from May 9, 2001, and the quarterly cash dividends paid per share of our common stock during the periods indicated.
Common Price Range Dividends Paid ----------- -------------- High Low Per Share ---- --- --------- 2001: Fourth Quarter $58.40 $46.53 $.13 cash Third Quarter 49.60 38.10 $.13 cash Second Quarter 45.38 36.90 $.13 cash First Quarter 48.75 34.94 $.13 cash 2000: Fourth Quarter $47.63 $30.75 $.13 cash Third Quarter 35.23 18.38 $.13 cash Second Quarter 23.19 18.13 $.13 cash First Quarter 23.48 14.00 $.13 cash
The closing price of the Common Stock on March 20, 2002, as reported on the New York Stock Exchange, was $56.08 per share. The approximate number of record holders of the Common Stock on March 20, 2002 was 624. 26 ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 2001
Year Ended December 31, ------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (Amounts in thousands, except per share data) Net premiums written $ 1,858,096 $ 1,506,244 $ 1,427,719 $ 1,346,254 $ 1,177,641 Net premiums earned 1,680,469 1,491,014 1,414,384 1,278,399 1,111,747 Net investment income 195,021 210,448 190,316 202,420 199,588 Service fees 75,771 68,049 72,344 70,727 71,456 Realized investment gains (losses) (11,494) 8,364 (6,064) 25,400 13,186 Total revenues 1,941,797 1,781,287 1,673,668 1,582,517 1,400,310 Interest expense 45,719 47,596 50,801 48,819 48,869 Income (loss) before federal and foreign income taxes (151,394) 40,851 (79,248) 62,781 129,241 Federal and foreign income tax (expense) Benefit 56,661 (2,451) 45,766 (5,465) (30,668) Minority interest 3,187 (2,162) (566) 1,444 474 Preferred dividends -- -- (497) (7,548) (7,828) Net income (loss) before change in accounting and extraordinary gain(loss) (91,546) 36,238 (34,545) 51,212 91,219 Cumulative effect of change in accounting -- -- (3,250) -- -- Extraordinary gain (loss) -- -- 735 (5,017) -- Net income (loss) attributable to common stockholders (91,546) 36,238 (37,060) 46,195 91,219 Data per common share: Basic: Net income (loss) before change in accounting and extraordinary item (3.14) 1.41 (1.35) 1.82 3.09 Net income (loss) (3.14) 1.41 (1.44) 1.64 3.09 Diluted: Net income (loss) before change in accounting and extraordinary income (3.14) 1.39 (1.35) 1.76 3.02 Net income (loss) (3.14) 1.39 (1.44) 1.59 3.02 Stockholders' equity 28.03 26.54 23.10 28.80 28.72 Cash dividends declared $ .52 $ .52 $ .52 $ .48 $ .42 Weighted average shares outstanding: Basic 29,139 25,632 25,823 28,194 29,503 Diluted 30,555 25,991 25,927 29,115 30,185 Investments (1) $ 3,598,053 $ 3,111,602 $ 2,975,929 $ 3,233,458 $ 3,106,900 Total assets 5,633,509 5,022,070 4,784,791 4,983,431 4,544,318 Reserves for losses and loss expenses 2,817,682 2,533,917 2,361,238 2,126,566 1,909,688 Long-term debt 370,554 370,158 394,792 394,444 390,415 Trust preferred securities 198,210 198,169 198,126 207,988 207,944 Stockholders' equity 931,595 680,896 591,778 861,281 947,292
(1) Including trading account receivable from brokers and clearing organizations and trading account securities sold but not yet purchased. 27 (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 22 through 29 of the registrant's 2001 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 27 and 28 of the registrant's 2001 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 30 through 46 of registrant's 2001 Annual Report to Stockholders and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 28 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 20, 2002:
Name Age Position ---- --- -------- William R. Berkley 56 Chairman of the Board, Chief Executive Officer, President and Chief Operating Officer Eugene G. Ballard 49 Senior Vice President - Chief Financial Officer and Treasurer William R. Berkley, Jr. 29 Senior Vice President, Director Robert P. Cole 51 Senior Vice President - Regional Operations Paul J. Hancock 40 Senior Vice President - Chief Corporate Actuary Robert C. Hewitt 41 Senior Vice President - Risk Management H. Raymond Lankford 59 Senior Vice President - Alternative Markets Operations Ira S. Lederman 48 Senior Vice President - General Counsel and Corporate Secretary Michael E. Lombardozzi 40 Senior Vice President - Planning and Operations James W. McCleary 55 Senior Vice President - Reinsurance Operations James G. Shiel 42 Senior Vice President - Investments Edward A. Thomas 53 Senior Vice President - Specialty Operations Clement P. Patafio 37 Vice President - Corporate Controller Ronald E. Blaylock 42 Director Mark E. Brockbank 49 Director George G. Daly 61 Director Robert B. Hodes 76 Director Richard G. Merrill 71 Director Jack H. Nusbaum 61 Director Mark L. Shapiro 57 Director
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, except William R. Berkley, Jr. is the son of William R. Berkley. Each year the term of office of one class expires. In May 2001, the term of a class consisting of three directors expired. William R. Berkley, Jr., Ronald E. Blaylock and Mark E. Brockbank were elected as directors to hold office for a term of three years until the Annual Meeting of Stockholders in 2004 and until their successors are duly elected and qualify. Henry Kaufman and Martin Stone, directors whose terms expired in 2001, did not stand for re-election. 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 and Chief Operating Officer, 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 Bancorp, Inc. and its subsidiaries; The Greenwich Bank & Trust Company and Westport National Bank; Strategic Distribution, Inc.; and Interlaken Capital, Inc. His current term as a director expires in 2003. 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. William R. Berkley, Jr. has been a Director of the Company since 2001, a Senior Vice President since January 2002, and additionally serves as President of Berkley International, LLC since January 2001. He served previously as Executive Vice President of Berkley International, LLC from March 2000 and as Vice President of the Company since May 2000. Mr. Berkley joined the Company in September 1997. From July 1995 to August 1997, Mr. Berkley served in the Corporate Finance Department of Merrill Lynch Investment Company. Mr. Berkley is also a director of Associated Community Bancorp, Inc. and its subsidiary Westport National Bank; Middlesex Bank and Trust Company; GiftCertificates.com, Inc.; and Interlaken Capital, Inc. 29 Robert P. Cole has been Senior Vice President of the Company 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 New York, which was purchased by Folksamerica Reinsurance Company in 1996. He has been in the insurance/reinsurance business for more than 25 years. Paul J. Hancock has been Senior Vice President - Chief Corporate Actuary of the Company since January 2002. He joined the Company in 1997 and most recently served as a Vice President in the actuarial department. He came to the Company from Berkley Insurance Company, a subsidiary of the Company, where he was Vice President - Actuarial Manager. Robert C. Hewitt has been Senior Vice President - Risk Management of the Company since January 2002. He was most recently a Senior Vice President for Benfield Blanch Inc. (and its predecessor, E. W. Blanch Co., Inc.), where he served from 1986 - 2002 and managed its New York City office since 1995. Mr. Hewitt has over 20 years of experience in the reinsurance and insurance industries. H. Raymond Lankford has been Senior Vice President - Alternative Markets Operations of the Company 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 and General Counsel and Corporate Secretary of the Company since November 2001. Additionally, he has been General Counsel of Berkley International, LLC since January 1998. Previously, he was General Counsel - Insurance Operations from August 2000, Assistant Secretary from May 1986, Assistant General Counsel from July 1989 until August 2000 and 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. Michael E. Lombardozzi has been Senior Vice President - Planning and Operations of the Company since December 2001. He most recently was Senior Vice President, General Counsel and Secretary of Orius Corp. Prior thereto, he served as Senior Vice President, General Counsel and Corporate Secretary of Berkley Insurance Company, a subsidiary of the Company, from 1994 to January 2001. James W. McCleary has been Senior Vice President - Reinsurance Operations of the Company since August 2001. Mr. McCleary has served as President of Facultative ReSources, Inc., a Berkley subsidiary, since 1990 and chief underwriting officer since its inception. Mr. McCleary has over 28 years of experience in the reinsurance sector. 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 Berkley Insurance Company, a subsidiary of the Company, for more than five years. Clement P. Patafio has been Vice President - Corporate Controller of the Company 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. Ronald E. Blaylock has been a director of the Company since 2001. Mr. Blaylock is the Founder, Chairman and Chief Executive Officer of Blaylock & Partners, L.P., an investment banking firm. Mr. Blaylock held senior management positions with PaineWebber Group and Citicorp before launching Blaylock & Partners in 1993. Mr. Blaylock is also a director of the American General Life Insurance Company of New York. Mark E. Brockbank has been a director of the Company since 2001. Mr. Brockbank has been a self-employed insurance consultant since November 2000. Prior thereto, Mr. Brockbank served from 1995 to 2000 as Chief Executive of XL Brockbank LTD, an underwriting management agency at Lloyd's of London. Mr. Brockbank was a founder of the predecessor firm of XL Brockbank LTD and was a director of XL Brockbank LTD from 1983 to 2000. 30 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 nine 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 2003. 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 K&F Industries, Inc.; Loral Space & Communications, Ltd.; Mueller Industries, Inc.; Leveraged Capital Holdings, N.V. and R.V.I. Guaranty, Ltd. Mr. Hodes' current term as a director expires in 2003. 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 also 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 Associated Community Bankcorp, Inc., Neuberger Berman 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. 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, 2001, 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, 2001, 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, 2001, 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, 2001, 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, 2001, and which is incorporated herein by reference. 31 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 22 through 46 of the Company's 2001 Annual Report to Stockholders, are incorporated by reference in this Annual Report on Form 10-K. With the exception of the aforementioned information, the 2001 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 2001 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.
Index to Financial Statement Schedules Page Independent Auditors' Report on Schedules and Consent 38 Schedule II - Condensed Financial Information of Registrant 39 Schedule III - Supplementary Insurance Information 43 Schedule IV - Reinsurance 44 Schedule VI - Supplementary Information concerning Property & Casualty Insurance Operations 45
(b) Reports on Form 8-K During the quarter ended December 31, 2001, the registrant filed the following Reports on Form 8-K: Report dated October 26, 2001 with respect to a press release relating to the earnings of the Company for the third quarter of 2001 (under Item 5 of Form 8-K). Report dated October 29, 2001 with respect to a press release relating to the announcement of a public offering of the Company's common stock (under Item 5 of Form 8-K). Report dated November 2, 2001 with respect to the pricing of the public offering of the Company's common stock and the Company's entering into an underwriting agreement (under Item 5 of Form 8-K). Report dated November 8, 2001 amending a Report filed February 6, 2001 with respect to risk factors faced by the Company (under Item 5 of Form 8-K). Report dated December 18, 2001 with respect to a press release relating to the Company's establishment of a reserve for Enron-related losses and its expected refocusing of its surety reinsurance business (under Item 5 of Form 8-K). Report dated December 19, 2001 with respect to a press release relating to the Company's entrance into the excess medical malpractice market and the formation of Berkley Medical Excess Underwriters, LLC (under Item 5 of Form 8-K). (c) Exhibits The exhibits filed as part of this report are listed on pages 35 and 36 hereof. 32 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 25, 2002 33 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.
Signature Title Date --------- ----- ---- /s/ William R. Berkley Chairman of the Board and - -------------------------------- President March 25, 2002 William R. Berkley Principal executive officer /s/ William R. Berkley, Jr. Director March 25, 2002 - -------------------------------- William R. Berkley, Jr. /s/ Ronald E. Blaylock Director March 25, 2002 - -------------------------------- Ronald E. Blaylock /s/ Mark E. Brockbank Director March 25, 2002 - -------------------------------- Mark E. Brockbank /s/ George G. Daly Director March 25, 2002 - -------------------------------- George G. Daly /s/ Robert B. Hodes Director March 25, 2002 - -------------------------------- Robert B. Hodes /s/ Richard G. Merrill Director March 25, 2002 - -------------------------------- Richard G. Merrill /s/ Jack H. Nusbaum Director March 25, 2002 - -------------------------------- Jack H. Nusbaum /s/ Mark L. Shapiro Director March 25, 2002 - -------------------------------- Mark L. Shapiro /s/ Eugene G. Ballard Senior Vice President, March 25, 2002 - -------------------------------- Chief Financial Officer and Eugene G. Ballard Treasurer Principal accounting officer /s/ Clement P. Patafio Vice President, March 25, 2002 - -------------------------------- Corporate Controller Clement P. Patafio
34 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) Loan Agreement, dated as of January 5, 2001, between the Company and William R. Berkley (incorporated by reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K (File No. 0-7849) filed with the Commission on March 22, 2001). (10.2) First Amendment to the Credit Agreement, dated as of December 8, 2000, between the Company and Bank of America, NA (incorporated by reference as Exhibit 10.1 of the Company's Current Report on Form 8-K (File No. 0-7849) filed with the Commission on January 24, 2001). (10.3) Augmenting Agreement, dated as of December 14, 2000, among the Company, Bank of America, NA, as Administrative Agent, and Wells Fargo Bank, NA (incorporated by reference as Exhibit 10.2 of the Company's Current Report on Form 8-K (File No. 0-7849) filed with the Commission on January 24, 2001). (10.4) Amendment dated March 9, 2000 to the First Amended and Restated W. R. Berkley Corporation 1992 Stock Option Plan (incorporated by reference to Exhibit 4.1 of the Company's Quarterly Report on Form 10-Q (File No. 0-7849) filed with the Commission on May 12, 2000). (10.5) 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 (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 27, 2000). (10.6) 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). (10.7) 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).
35 (10.8) 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). (10.9) 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. (10.10) 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). (10.11) 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). (10.12) 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). (10.13) 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). (10.14) 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). (10.15) Separation Agreement dated January 24, 2000 between John D. Vollaro and the Company (incorporated by reference to Exhibit 10.12 of the Company's Annual Report on Form 10-K (File No. 0-7849) filed with the Commission on March 27, 2000). (13) 2001 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).

36 (21) Following is a list of the Company's significant subsidiaries and other operating entities. 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.

Jurisdiction of Percentage Incorporation owned --------------- ---------- 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 Company Delaware 100% Berkley Risk Administrators Company, LLC Minnesota 100% Nautilus Insurance Company: Arizona 100% Great Divide Insurance Company North Dakota 100% Key Risk Management Services, Inc. North Carolina 100% Monitor Liability Managers, Inc. Delaware 100% Monitor Surety Managers, Inc. Delaware 100% Signet Star Holdings, Inc.: Delaware 100% Berkley Insurance Company Delaware 100% Berkley Regional Insurance Company Delaware 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. Delaware 100% Great River Insurance Company Mississippi 100% Tri-State Insurance Company of Minnesota: Minnesota 100% Union Insurance Company Nebraska 100% Union Standard Insurance Company Oklahoma 100% Key Risk Insurance Company North Carolina 100% Midwest Employers Casualty Company: Delaware 100% Preferred Employers Insurance Company California 100% Riverport Insurance Company of California California 100% Facultative ReSources, Inc. Connecticut 100% Gemini Insurance Company Delaware 100% StarNet Insurance Company Delaware 100%
~~(23) See Independent Auditors' report on schedules and consent. (27) Financial Data Schedule.~~

37 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 14, 2002, incorporated by reference in the Form 10-K, included the related financial statement schedules as of December 31, 2001, and for each of the years in the three-year period ended December 31, 2001. 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 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. 333-00459) and (No. 333-57546) on Form S-3 and (No. 333-33935) and (No. 33-55726) on Form S-8 of W. R. Berkley Corporation. KPMG LLP New York, New York March 25, 2002 38 Schedule II W. R. Berkley Corporation Condensed Financial Information of Registrant Balance Sheets (Parent Company) (Amounts in thousands)
December 31, ---------------------------- 2001 2000 ----------- ----------- Assets Cash (including invested cash) $ 109,950 $ 16,619 Fixed maturity securities: Held to maturity, at cost (fair value $4,935 and $4,960) 4,935 4,960 Available for sale at fair value (cost $27,492 and $406) 27,585 396 Equity securities, at fair value: Available for sale (cost $698 and $698) 235 590 Trading account (cost $903 and $864) 903 864 Investments in subsidiaries 1,268,553 1,173,775 Due from subsidiaries 57,455 47,287 Current Federal income taxes receivable 17,126 6,482 Deferred Federal income taxes 101,088 50,080 Real estate, furniture & equipment at cost, less accumulated depreciation 2,592 18,390 Other assets 15,165 4,762 ----------- ----------- $ 1,605,587 $ 1,324,205 =========== =========== Liabilities, Debt and Stockholders' Equity Liabilities: Due to subsidiaries (principally deferred income taxes) $ 123,572 $ 82,304 Short-term debt -- 10,000 Other liabilities 25,449 26,471 ----------- ----------- 149,021 118,775 ----------- ----------- Long-term debt 326,802 326,365 Subsidiary trust junior subordinated debt 198,169 198,169 Stockholders' equity: Preferred stock -- -- Common stock 8,661 7,281 Additional paid-in capital 659,266 334,061 Retained earnings (including accumulated undistributed net income of subsidiaries of $352,011 and $410,794 in 2001 and 2000, respectively) 467,185 574,345 Accumulated other comprehensive income (loss) 37,340 19,371 Treasury stock, at cost (240,857) (254,162) ----------- ----------- 931,595 680,896 ----------- ----------- $ 1,605,587 $ 1,324,205 =========== ===========
See note to condensed financial statements. 39 Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued Statements of Operations (Parent Company) (Amounts in thousands)
Years ended December 31, ------------------------------------- 2001 2000 1999 ---- ---- ---- Management fees and investment income from affiliates, including dividends of $7,210, $44,533 and $96,817 for 2001, 2000 1999, respectively $ 12,550 $ 49,585 $ 102,963 Realized investment gains (losses) (221) (558) 321 Other income 4,678 4,051 3,975 -------- -------- --------- Total revenues 17,007 53,078 107,259 Expenses, other than interest expense 21,607 18,871 20,978 Restructuring charge -- -- 1,502 Interest expense 44,690 46,521 49,207 -------- -------- --------- Income (loss) before Federal income taxes (49,290) (12,314) 35,572 -------- -------- --------- Federal income taxes: Federal income taxes provided by Subsidiaries on a separate return Basis (42,357) 24,858 8,474 Federal income tax benefit (provision) on a Consolidated return basis 58,884 (630) 48,958 -------- -------- --------- Net benefit 16,527 24,228 57,432 -------- -------- --------- Income (loss) before undistributed equity in net income of subsidiaries and preferred Dividends (32,763) 11,914 93,004 Equity in undistributed net income (loss) of subsidiaries (58,783) 24,324 (130,232) Preferred dividends -- -- (567) -------- -------- --------- Net income (loss) before extraordinary gain (91,546) 36,238 (37,795) Extraordinary gain on early extinguishment of long term debt (net of taxes) -- -- 735 -------- -------- --------- Net income (loss) attributable to common stockholders $(91,546) $ 36,238 $ (37,060) ======== ======== =========
See note to condensed financial statements. 40 Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued Statement of Cash Flows (Parent Company) (Amounts in thousands)
Years ended December 31, --------------------------------------- 2001 2000 1999 --------- --------- --------- Cash flows from operating activities: Net income (loss) before preferred dividends and extraordinary items $ (91,546) $ 36,238 $ (37,298) Adjustments to reconcile net income to net cash flows provided by operating activities: Equity in undistributed net income of subsidiaries 58,783 (24,324) 130,232 Tax payments received from (paid) to subsidiaries (9,668) 28,389 24,105 Federal income taxes provided by subsidiaries on a separate return basis 42,357 (24,859) (8,473) Change in Federal income taxes (71,459) 1,411 (35,415) Realized investment losses 221 558 (321) Other, net (9,960) 643 3,273 --------- --------- --------- Net cash provided (used) by operating activities before increase trading account securities (81,272) 18,056 76,103 Increase in trading account securities (39) (91) (75) --------- --------- --------- Net cash provided (used) by operating activities (81,311) 17,965 76,028 --------- --------- --------- Cash flow used in investing activities: Proceeds from sales, excluding trading account: Fixed maturity securities available for sale 11,221 -- 23,973 Equity securities -- -- -- Proceeds from maturities and prepayments of fixed maturity securities 4,114 365 222 Cost of purchases, excluding trading account: Fixed maturity securities (42,744) (558) (23,648) Equity securities -- -- -- Cost of companies acquired -- -- -- Proceeds from sale of assets to subsidiaries -- 107,391 33,566 Investments in and advances to subsidiaries, net (112,805) (70,049) (83,035) Net additions to real estate, furniture & equipment (1,469) (290) (357) Other, net (1) 500 -- --------- --------- --------- Net cash provided (used) in investing activities (141,684) 37,359 (49,279) --------- --------- --------- Cash flows from financing activities: Net proceeds from stock offering 315,840 -- -- Net change in short-term debt (10,000) (25,000) (20,500) Purchase of treasury shares (1,002) (7,020) (4,895) Cash dividends to common stockholders (14,707) (12,701) (13,888) Cash dividends to preferred shareholders -- -- (2,001) Purchase of preferred stock -- -- (98,092) Retirement of long-term debt -- (25,000) (9,171) Other, net 26,195 8,935 6,457 --------- --------- --------- Net cash provided (used) by financing activities 316,326 (60,786) (142,090) --------- --------- --------- Net increase in cash and invested cash 93,331 (5,462) (115,341) Cash and invested cash at beginning of year 16,619 22,081 137,422 --------- --------- --------- Cash and invested cash at end of year $ 109,950 $ 16,619 $ 22,081 ========= ========= =========
See note to condensed financial statements. 41 Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued December 31, 2001, 2000 and 1999 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 2000 and 1999 financial statements as originally reported to conform them to the presentation of the 2001 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. 42 Schedule III W. R. Berkley Corporation and Subsidiaries Supplementary Insurance Information December 31, 2001, 2000 and 1999 (Amounts in thousands)
Reserve for Deferred policy losses and Net acquisition loss Unearned Premiums investment cost expenses premiums earned income ---------------- -------- -------- ------ ------ December 31, 2001 Specialty $ 69,558 $ 776,483 $289,557 $ 401,611 $ 39,390 Alternative markets 9,763 448,762 61,146 123,173 37,765 Reinsurance 21,552 659,363 116,376 236,385 42,536 Regional 78,708 613,805 327,006 555,750 51,640 International 29,477 89,499 23,765 140,909 13,993 Discontinued 15,052 229,770 61,790 222,641 9,762 Corporate and adjustments -- -- -- -- (65) -------- ---------- -------- ---------- --------- Total $224,110 $2,817,682 $879,640 $1,680,469 $ 195,021 ======== ========== ======== ========== ========= December 31, 2000 Specialty $ 40,060 $ 753,238 $184,160 $ 270,896 $ 48,706 Alternative markets 3,976 393,282 28,730 88,872 37,722 Reinsurance 27,761 518,554 109,824 298,102 50,471 Regional 68,398 591,417 263,693 503,029 56,955 International 30,867 106,878 30,956 107,285 9,636 Discontinued 25,169 170,548 95,876 222,830 9,562 Corporate and adjustments -- -- -- -- (2,604) -------- ---------- -------- ---------- --------- Total $196,231 $2,533,917 $713,239 $1,491,014 $ 210,448 ======== ========== ======== ========== ========= December 31, 1999 Specialty $ 37,298 $ 722,689 $178,357 $ 256,155 $ 50,231 Alternative markets 2,765 364,907 19,832 75,979 30,827 Reinsurance 34,911 500,808 119,376 297,649 47,288 Regional 66,248 556,920 262,112 492,304 49,705 International 18,583 60,493 19,010 86,943 6,469 Discontinued 22,543 155,421 91,139 205,354 8,462 Corporate and adjustments -- -- -- -- (2,666) -------- ---------- -------- ---------- --------- Total $182,348 $2,361,238 $689,826 $1,414,384 $ 190,316 ======== ========== ======== ========== =========

Amortization of Loss and deferred policy Other Loss acquisition operating cost Net premiums expenses costs and expenses written -------- ----- ------------ ------- December 31, 2001 Specialty $ 286,865 $ 89,232 $ 35,747 $ 527,502 Alternative markets 94,258 30,653 74,785 151,942 Reinsurance 246,706 84,036 2,894 236,784 Regional 373,647 167,681 26,955 598,149 International 86,582 52,853 4,328 150,090 Discontinued 292,442 67,610 5,831 193,629 Corporate and adjustments -- -- 21,171 -- ---------- -------- -------- ---------- Total $1,380,500 $492,065 $171,711 $1,858,096 ========== ======== ======== ========== December 31, 2000 Specialty $ 198,237 $ 79,101 $ 15,685 $ 285,525 Alternative markets 62,416 26,808 65,257 98,001 Reinsurance 218,116 95,146 3,964 276,640 Regional 379,789 150,884 25,893 499,526 International 66,643 37,533 7,204 118,981 Discontinued 169,210 65,257 7,861 227,571 Corporate and adjustments -- -- 15,986 -- ---------- -------- -------- ---------- Total $1,094,411 $454,729 $141,850 $1,506,244 ========== ======== ======== ========== December 31, 1999 Specialty $ 174,251 $ 77,950 $ 17,606 $ 260,380 Alternative markets 49,963 24,623 73,982 73,089 Reinsurance 226,229 92,503 6,790 309,180 Regional 428,989 159,750 24,648 497,041 International 48,195 32,812 8,527 86,172 Discontinued 158,199 56,651 13,106 201,857 Corporate and adjustments -- -- 15,836 -- ---------- -------- -------- ---------- Total $1,085,826 $444,289 $160,495 $1,427,719 ========== ======== ======== ==========
43 Schedule IV W. R. Berkley Corporation and Subsidiaries Reinsurance Years ended December 31, 2001, 2000 and 1999 (Amounts in thousands)
Assumed Percentage Ceded from of amount Direct to other other Net assumed to amount companies companies amount net ------ --------- --------- ------ ---------- Premiums written: Year ended December 31, 2001: Specialty $ 598,225 $ 83,862 $ 13,139 $ 527,502 2.5 Alternative markets 144,687 17,497 24,752 151,942 16.3 Reinsurance 88,183 95,598 244,199 236,784 103.1 Regional 698,114 106,852 6,887 598,149 1.2 International 170,600 20,510 -- 150,090 -- Discontinued 135,702 26,051 83,978 193,629 43.4 ---------- -------- -------- ---------- Total $1,835,511 $350,370 $372,955 $1,858,096 20.1% ========== ======== ======== ========== ===== Year ended December 31, 2000: Specialty $ 403,149 $122,020 $ 4,396 $ 285,525 1.5 Alternative markets 84,917 10,801 23,885 98,001 24.4 Reinsurance 57,210 47,206 266,636 276,640 96.4 Regional 574,079 80,364 5,811 499,526 1.2 International 143,523 24,542 -- 118,981 -- Discontinued 156,467 25,578 96,682 227,571 42.5 ---------- -------- -------- ---------- Total $1,419,345 $310,511 $397,410 $1,506,244 26.4% ========== ======== ======== ========== ===== Year ended December 31, 1999: Specialty $ 376,112 $126,069 $ 10,337 $ 260,380 4.0 Alternative markets 69,671 10,078 13,496 73,089 18.5 Reinsurance 9,096 32,101 332,185 309,180 107.4 Regional 591,318 98,355 4,078 497,041 0.8 International 107,254 21,082 -- 86,172 -- Discontinued 164,434 19,485 56,908 201,857 28.2 ---------- -------- -------- ---------- Total $1,317,885 $307,170 $417,004 $1,427,719 29.2% ========== ======== ======== ========== =====
44 Schedule VI W. R. Berkley Corporation and Subsidiaries Supplementary Information Concerning Property-Casualty Insurance Operations December 31, 2001, 2000 and 1999 (Amounts in thousands)
2001 2000 1999 Deferred policy acquisition costs $ 224,110 $ 196,231 $ 182,348 Reserves for losses and loss expenses 2,817,682 2,533,917 2,361,238 Unearned premium 879,640 713,239 689,826 Premiums earned 1,680,469 1,491,014 1,414,384 Net investment income 195,021 210,448 190,316 Losses and loss expenses incurred: Current Year 1,140,622 1,047,060 1,032,089 Prior Years 211,344 14,042 28,351 Net decrease in discount from prior years 8,717 11,530 10,473 Amortization of deferred policy acquisition costs 492,065 454,729 444,289 Paid losses and loss expenses 1,145,439 978,448 930,352 Net premiums written 1,858,096 1,506,244 1,427,719
45 EX-13 3 y58639ex13.htm EXHIBIT 13 ex13

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.
Critical Accounting Policies
The notes to the Company’s financial statements discuss its significant accounting policies. Management considers certain of these policies to be critical to the portrayal of the Company’s financial condition and results since they require management to establish estimates based on complex and subjective judgments, often including the interplay of specific uncertainties with related accounting measurements. The Company’s critical accounting policies include assumptions and estimates relating to loss reserves and foreign investments and operations, as further described below.
Reserves for losses and loss expenses We maintain reserves for losses and loss expenses to cover our estimated liability for unpaid claims, including legal and other fees as well as a portion of our general expenses, for reported and unreported claims incurred as of the end of each accounting period. Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what we expect the ultimate settlement and administration of claims will cost. These estimates, which generally involve actuarial projections, are based on our assessment of facts and circumstances then known, as well as estimates of future trends in claims severity and frequency, judicial theories of liability and other factors including the actions of third parties which are beyond our control. The variables described above are affected by both internal and external events, such as changes in claims handling procedures, inflation, judicial and litigation trends and legislative changes. Additionally, there may be a significant delay between the occurrence of the insured event and the time it is reported to us.
The inherent uncertainties of estimating reserves are greater for certain types of liabilities, where the various considerations affecting these types of claims are subject to change and long periods of time may elapse before a definitive determination of liability is made. Reserve estimates are continually refined in an ongoing process as experience develops and further claims are reported and settled. Adjustments to reserves are reflected in the results of the periods in which such estimates are changed. Because setting reserves is inherently uncertain, we cannot assure that our current reserves will prove adequate in light of subsequent events. Should we need to increase our reserves, our net income for the period will decrease by a corresponding amount.
Foreign investments and operations The Company has made certain assumptions and estimates with respect to its investments and operations in Argentina. These include assumptions regarding foreign currency exchange rates and recoverability of assets, including impairment of investments deemed other than temporary, following the recent economic and political changes in Argentina. Given the inherent uncertainty and complexity of the situation, considerable judgement was used by management to establish its estimates using all the information available. These estimates may change as more information becomes available. (See Note 20 of “Notes to Consolidated Financial Statements.”)
22

Operating Results for the Year Ended
December 31, 2001 as Compared to the Year
Ended December 31, 2000
The Company reported a net loss of $92 million, or $3.14 per share, for 2001 compared with net income of $36 million, or $1.39 per share, for 2000. Following are the components of net income (loss) for the years ended December 31, 2001 and 2000 (amounts in thousands):

2001 2000

Underwriting loss
$ (277,687 ) $ (122,585 )

Insurance services
9,964 6,326

Net investment income
195,021 210,448

Interest expense and other
(64,002 ) (59,852 )

Restructuring charge
(3,196 ) (1,850 )

Pretax income (loss) before realized investment gains (losses)
(139,900 ) 32,487

Realized investment gains (losses)
(11,494 ) 8,364

Income tax benefit (expense) and minority interest
59,848 (4,613 )

Net income (loss)
$ (91,546 ) $ 36,238

During 2001, the Company discontinued its regional personal lines business and the alternative markets division of its reinsurance segment. The after-tax loss related to the discontinued businesses was $87 million, or $2.98 per share, for the year ended 2001 compared with $6 million, or 25 cents per share, for 2000. These discontinued businesses are now being managed and reported collectively as a separate Discontinued Business Segment. Segment information for the prior period has been restated to reflect these changes. The Company expects the Discontinued Business Segment to report a significant reduction in premiums and underwriting losses in 2002.
Underwriting Gross and net premiums written increased by 22% and 23%, respectively, in 2001 compared with the earlier-year period. Following is a summary of gross and net premiums written by business segment for the years ended December 31, 2001 and 2000 (amounts in thousands):

Gross Premiums Written 2001 2000 % Change

Specialty
$ 611,364 $ 407,545 50 %

Alternative Markets
169,439 108,802 56 %

Reinsurance
332,382 323,846 3 %

Regional
705,001 579,890 22 %

International
170,600 143,523 19 %

Discontinued Business
219,680 253,149 (13 %)

Total
$ 2,208,466 $ 1,816,755 22 %

Net Premiums Written 2001 2000 % Change

Specialty
$ 527,502 $ 285,525 85 %

Alternative Markets
151,942 98,001 55 %

Reinsurance
236,784 276,640 (14 %)

Regional
598,149 499,526 20 %

International
150,090 118,981 26 %

Discontinued Business
193,629 227,571 (15 %)

Total
$ 1,858,096 $ 1,506,244 23 %

The increase in gross premiums written reflects primarily higher prices as well as an increase in new business. The increase was partially offset by a planned reduction in pro rata treaty reinsurance business. Ceded premiums written, expressed as a percentage of gross premiums written, decreased to 16% from 17% in the prior year. The decrease reflects higher net retentions for the specialty segment, partially offset by additional premiums ceded by the reinsurance segment under the Company’s aggregate reinsurance agreement. (See Note 9 of “Notes to Consolidated Financial Statements.”)
Underwriting results represent net premiums earned less net loss and loss adjustment expenses incurred and underwriting expenses incurred. Underwriting losses increased to $278 million for the year ended December 31, 2001 compared with $123 million for the earlier-year period. Following is a summary of earned premiums and underwriting losses by business segment for the years ended December 31, 2001 and 2000 (amounts in thousands):

Net Premiums Earned 2001 2000

Specialty
$ 401,611 270,896

Alternative Markets
123,173 88,872

Reinsurance
236,385 298,102

Regional
555,750 503,029

International
140,909 107,285

Discontinued Business
222,641 222,830

Total
$ 1,680,469 $ 1,491,014

Underwriting Loss 2001 2000

Specialty
$ (10,233 ) (18,425 )

Alternative Markets
(11,574 ) (7,907 )

Reinsurance
(97,251 ) (19,123 )

Regional
(12,533 ) (53,537 )

International
(2,854 ) (4,095 )

Discontinued Business
(143,242 ) (19,498 )

Total
$ (277,687 ) $ (122,585 )

W. R. BERKLEY CORPORATION AND SUBSIDIARIES     23

The 2001 underwriting loss reflects the following items:

• During 2001, we strengthened loss reserves by $135 million, including $103 million for the discontinued alternative markets reinsurance business and $32 million for the treaty reinsurance business. The increase relates primarily to underwriting years 1998 and 1999 and follows a significant increase in losses reported by ceding companies in the third and fourth quarter.

• Estimated losses related to the World Trade Center attack were $35 million, including $26 million for the reinsurance segment and $9 million for the specialty segment. This represents our estimated maximum retention for property and business interruption coverage and our estimated policy limits on risks exposed to casualty losses.

• The reinsurance segment recorded a reserve of $18 million for potential surety losses related to the Enron bankruptcy.

• The specialty and regional underwriting results reflect improvements from pricing actions and other underwriting initiatives.

• Weather-related losses for active business segments (primarily regional business) were $37 million for 2001 compared with $31 million for 2000. For the discontinued personal lines business, weather-related losses were $24 million for 2001 compared with $18 million for 2000.

• The reinsurance underwriting results reflect loss recoveries under the Company’s aggregate reinsurance agreement. (See Note 9 of “Notes to Consolidated Financial Statements.”)

Insurance services Insurance services income represents service fees less related costs and expenses for the insurance services business. Insurance fees increased 11% to $76 million in 2001 as a result of new accounts and higher revenues on existing accounts, and service fee income increased 58% to $10 million.
Net investment income Net investment income decreased to $195 million in 2001 from $210 million in 2000. Average invested assets were $3,272 million in 2001 compared with $3,032 million in 2000. The increase in invested assets reflects proceeds received from stock issuance and cash flow from operations. (See “Liquidity and Capital Resources.”) The average yield on investments decreased 100 basis points in 2001 to 6.3%. The lower yield in 2001 reflects a decrease in the average yield on the merger arbitrage securities (which represents approximately 13% of the investment portfolio) to 4.2% in 2001 from 11.1% in 2000. Among other factors, merger arbitrage yields in 2001 were impacted by the recession, lower interest rates and fewer merger transactions. The average yield on the portfolio excluding the merger arbitrage portfolio was 6.7% in 2001 and 2000.
Interest expense and other Interest expense and other represents interest expense, corporate expenses and other miscellaneous income and expenses. Interest expense decreased $2 million in 2001 due to a reduction in long-term and short-term debt. Other expenses increased $6 million in 2001 due to an increase in corporate general and administrative expenses, including costs associated with InsurBanc, the Company’s joint venture with the Independent Insurance Agents of America.
Restructuring charge The restructuring charge of $3 million for 2001 was related to severance and other costs incurred in connection with the withdrawal from the regional personal lines business and the reorganization of certain other operations. The restructuring charge of $2 million for 2000 was related to severance and other costs incurred in connection with the reorganization of the reinsurance business.
Realized investment gains (losses) Realized investment gains and losses result from sales of securities and for provisions for other than temporary impairment in securities. In the fourth quarter 2001, the Company reduced the carrying value of certain bond holdings by $27 million, including those held directly by our by a subsidiary in Argentina by $18 million ($7 million net of income taxes and minority interest). (See Note 20 of “Notes to Consolidated Financial Statements.”)
Income tax benefit (expense) and minority interest The effective income tax rate was 37% in 2001 and 6% in 2000. The effective tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income. Tax-exempt investment income increased the tax benefit in 2001 and decreased the tax expense in 2000. Minority interest represents the portion of the Company’s international operations held by outside investors.
24

Operating Results for the Year Ended
December 31, 2000 as Compared to the Year
Ended December 31, 1999
The Company reported net income of $36 million, or $1.39 per share, for 2000 compared with a net loss of $37 million, or $1.44 per share, for 1999. Following are the components of net income (loss) for the years ended December 31, 2000 and 1999 (amounts in thousands):

2000 1999

Underwriting loss
$ (122,585 ) $ (187,863 )

Insurance services
6,326 1,161

Net investment income
210,448 190,316

Interest expense and other
(59,852 ) (65,293 )

Restructuring charge
(1,850 ) (11,505 )

Pretax income (loss) before realized investment gains (losses)
32,487 (73,184 )

Realized investment gains (losses)
8,364 (6,064 )

Income tax benefit (expense), minority interest and other
(4,613 ) 42,188

Net income (loss)
$ 36,238 $ (37,060 )

Underwriting Gross and net premiums written increased by 5% and 6%, respectively, for 2000, compared with the earlier-year period. Following is a summary of gross and net premiums written by business segment for the years ended December 31, 2000 and 1999 (amounts in thousands):

Gross Premiums Written 2000 1999 % Change

Specialty
$ 407,545 $ 386,449 5 %

Alternative Markets
108,802 83,167 31 %

Reinsurance
323,846 341,281 (5 %)

Regional
579,890 595,396 (3 %)

International
143,523 107,254 34 %

Discontinued Business
253,149 221,342 14 %

Total
$ 1,816,755 $ 1,734,889 5 %

Net Premiums Written 2000 1999 % Change

Specialty
$ 285,525 $ 260,380 10 %

Alternative Markets
98,001 73,089 34 %

Reinsurance
276,640 309,180 (11 %)

Regional
499,526 497,041 1 %

International
118,981 86,172 38 %

Discontinued Business
227,571 201,857 13 %

Total
$ 1,506,244 $ 1,427,719 6 %

The increase in gross premiums written reflects an increase in new business, partially offset by a decrease in reinsurance premiums as a result of the business restructuring implemented in the first quarter of 2000. Ceded premiums written, expressed as a percentage of gross premiums written, decreased to 17% from 18% in the prior year.
Underwriting losses decreased to $123 million in the year ended December 31, 2000 compared with $188 million in the earlier-year period. Following is a summary of earned premiums and underwriting results by business segment for the years ended December 31, 2000 and 1999 (amounts in thousands):

Net Premiums Earned 2000 1999

Specialty
$ 270,896 $ 256,155

Alternative Markets
88,872 75,979

Reinsurance
298,102 297,649

Regional
503,029 492,304

International
107,285 86,943

Discontinued Business
222,830 205,354

Total
$ 1,491,014 $ 1,414,384

Underwriting Loss 2000 1999

Specialty
$ (18,425 ) $ (8,162 )

Alternative Markets
(7,907 ) (5,553 )

Reinsurance
(19,123 ) (27,872 )

Regional
(53,537 ) (121,083 )

International
(4,095 ) (2,591 )

Discontinued Business
(19,498 ) (22,602 )

Total
$ (122,585 ) $ (187,863 )

The increase in specialty and alternative markets underwriting losses reflects a decline in favorable prior year reserve development. The decrease in regional underwriting losses reflects the impact of pricing actions and other underwriting initiatives. Also, during 1999, the regional segment established additional loss reserves of $55 million. Weather-related losses were $49 million in 2000 compared with $60 million in 1999, including $18 million and $22 million, repectively, for the Discontinued Business Segment.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES     25

Insurance services Insurance services income represents service fees less related costs and expenses for the insurance services business. Insurance service fees decreased 6% to $68 million in 2000 principally due to the sale of All American Agency Facilities, Inc. (See Note 3 of “Notes to Consolidated Financial Statements.”)
Net investment income The increase in net investment income of 11% reflects an increase in the gross pre-tax yield to 7.3% in 2000 from 6.5% in 1999, primarily as a result of changes in asset allocations.
Interest expense and other Interest expense and other represents interest expense, corporate expenses, and other miscellaneous income and expenses. Interest expense decreased $3 million in 2000 due to a reduction in outstanding long-term and short-term debt.
Restructuring charge The restructuring charge in 2000 related to the reorganization of the reinsurance operations. The restructuring charge in 1999 related primarily to the reorganization of regional operations.
Realized investment gains (losses) Realized investment gains and losses result from sales of securities and provisions for other than temporary impairment of securities. The Company reported higher gains on equity sales and lower impairment charges in 2000 compared with 1999.
Income tax benefit (expense), minority interest and other The effective income tax rate differs from the federal income tax rate of 35% principally because of tax-exempt investment income. Minority interest represents the portion of the Company’s international operations held by outside investors. Other items in 1999 include preferred dividends of $0.5 million, an expense of $3.3 million for the cumulative effect of a change in accounting principle and an extraordinary gain on early extinguishments of long-term debt of $0.7 million.
Liquidity and Capital Resources
Cash Flow Cash flow provided from operating activities (before increase in trading account securities) was $210 million in 2001, $76 million in 2000 and $82 million in 1999. The increase in cash flow in 2001 was primarily due to a higher level of premium collections.
As a holding company, the Company derives cash from its subsidiaries in the form of dividends, tax payments and management fees. The Company uses cash to pay debt service, Federal income taxes, operating expenses and dividends. The Company also provides capital to its subsidiaries. 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 paid without regulatory approval are prescribed by statute. (See Note 18 of “Notes to Consolidated Financial Statements.”)
The Company’s subsidiaries are highly liquid, receiving substantial cash from premiums, investment income, service fees and proceeds from sales and maturities of portfolio investments. The principal outflows of cash are payments of claims, taxes, operating expenses and dividends.
Financing Activity During 2001, the Company issued 7.6 million shares of its common stock and received net proceeds of $341 million in connection with two public stock offerings and the exercise of stock options. The Company purchased 300,000 shares of its common stock in 2000 for approximately $7 million and 905,000 shares of its common stock in 1999 for approximately $22 million. At December 31, 2001, 795,000 shares were available for repurchase under the Company’s repurchase authorization.
The Company repaid $25 million (face value) of senior notes upon maturity in 2000. In 1999, the Company redeemed all outstanding Series A Preferred Stock for $98 million and repurchased $10 million (face value) of trust preferred securities for $8.8 million.
In February 2002, the Company entered into a one year unsecured bank credit facility which provides for borrowing up to $25 million. The facility replaces a previous bank facility that expired in December 2001.
At December 31, 2001, the Company’s outstanding long-term debt was $374 million (face amount), of which $8 million was repaid in January 2002. The maturities of the remaining debt are $61 million in 2003, $40 million in 2005, $100 million in 2006, $89 million in 2008 and $76 million in 2022. The Company also has $200 million (face amount) of trust preferred securities that mature in 2045.
26

At December 31, 2001, stockholders’ equity was $932 million and total capitalization (stockholders’ equity, long-term debt and trust preferred securities) was $1,500 million. The percentage of the Company’s capital attributable to long-term debt decreased to 25% at December 31, 2001 from 30% at December 31, 2000.
Investments As part of 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. The Company also 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 carrying value of the Company’s investment portfolio as of December 31, 2001 and 2000 is as follows (amounts in millions):

2001 2000

Fixed maturities and invested cash
$ 2,980 $ 2,580

Equity securities available for sale
109 84

Equity securities trading account^(a)
509 448

Total
$ 3,598 $ 3,112

(a) Represents trading account equity securities plus trading account receivables from brokers and clearing organizations less trading account equity securities sold but not yet purchased.

Fixed maturities and invested cash 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 a result of changes in financial market conditions and tax considerations. At December 31, 2001, the fixed maturities portfolio mix was as follows: U.S. Government securities and cash equivalents were 35% (31% in 2000); state and municipal securities were 20% (24% in 2000); corporate securities were 19% (18% in 2000); mortgage- backed securities were 22% (22% in 2000); and foreign bonds were 4% (5% in 2000).
Equity securities available for sale Equity securities available for sale represent primarily investments in common and preferred stocks of publicly traded real estate investment trusts (REITs).
Equity securities trading account The equity securities trading account is comprised of merger arbitrage securities, which represent 92% of the trading account securities, and convertible arbitrage securities. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Convertible arbitrage is the business of investing in convertible securities with the goal of capitalizing on price differentials between these securities and their underlying equities.
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 and interest rates. In addition, the Company’s international businesses and securities are subject to currency exchange rate risk. 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 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:

Market Effective Fair Value

Group Yield Duration (000's)

Invested cash
1.83 % .15 $ 524,554

U. S. Government securities
4.31 % 4.75 526,623

State and municipal
4.85 % 6.60 600,560

Corporate
6.42 % 5.30 563,933

Foreign
10.88 % 4.94 111,547

Mortgage-backed securities
6.14 % 5.41 664,222

Total
5.03 % 4.76 $ 2,991,439

Duration is a common gauge of the price sensitivity of a fixed income portfolio to a change in interest rates. Based upon a pricing model, the Company determines the estimated change in fair value of the
W. R. BERKLEY CORPORATION AND SUBSIDIARIES     27

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, 2001 would be as follows:

Estimated Fair Estimated

Value of Financial Change in

Instruments Fair Value

Change in interest rates (000's) (000's)

300 basis point rise
$ 2,613,663 $ (377,776 )

200 basis point rise
2,733,327 (258,112 )

100 basis point rise
2,861,934 (129,505 )

Base scenario
2,991,439 —

100 basis point decline
3,112,840 121,401

200 basis point decline
3,239,301 247,862

300 basis point decline
3,384,976 393,537

The estimated changes in fair value, based upon the above table, would be partially offset by the Company’s liabilities if they were marked to market.
Arbitrage investing 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 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 arbitrage positions are generally hedged against market declines by purchasing put options, selling call options or entering into swap contracts. The Company’s merger arbitrage securities are primarily exposed to the completion of announced deals, which are subject to regulatory as well as political and other risks.
The Company’s international businesses and securities are subject to foreign currency risk. In order to mitigate foreign currency risks, the foreign subsidiaries maintain investments in U. S. Dollar-denominated securities in an amount that approximates the Company’s investment in such subsidiaries. (See “International Operations.”)
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, 2001, the Company had a deferred tax asset, net of valuation allowance, of $217 million (which primarily relates to loss reserves, unearned premium reserves, a net operating loss carryforward and an alternative minimum tax credit carryforward) and a deferred tax liability of $118 million (which primarily relates to deferred policy acquisition costs, unrealized investment gains and intangible assets). 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 future operations, management anticipates that it is more likely than not that future taxable income will be sufficient for the realization of this asset.
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.
During 2001, the Company entered into a multi-year aggregate reinsurance agreement that provides two types of reinsurance coverage. The first type of coverage provides protection for individual losses on an excess of loss or quota share basis, as specified for each class of business covered by the agreement. The second type of coverage provides aggregate accident year protection for our reinsurance segment for loss and loss adjustment expenses incurred above a certain level. Loss recoveries are subject to annual limits and an aggregate limit over the contract period. Under the aggregate reinsurance agreement, the largest net amount retained on any one risk is $5 million for professional liability risks, $2 million for excess workers’ compensation risks, up to $1 million for all other primary property casualty risks and $3 million for facultative reinsurance risks.
28

For its primary business, the Company also maintains group catastrophe reinsurance that provides protection for losses up to $49 million in excess of $6 million and contingency clash reinsurance that provides protection for losses up to $17.2 million in excess of $2 million. For its assumed reinsurance business, the Company’s property catastrophe losses are reinsured for losses up to $3 million above $7 million. Additional catastrophe coverage is maintained for losses above $10,000 up to $5 million in the event industry catastrophe losses exceed $17.25 billion in California or $10 billion in states other than California. Retrocessional and whole account proportional reinsurance is written net of common account reinsurance protection.
International Operations
The Company owns 65% of Berkley International, LLC, which conducts insurance operations in Argentina and the Philippines. The international activities are reported in the Company’s financial statements on a one quarter lag to facilitate the timely completion of the consolidated financial statements. During 2001, Argentina experienced substantial political and economic problems, including high unemployment, increasing fiscal deficits and declining central bank reserves. The government responded to these problems by converting certain public bonds into guaranteed loans with longer maturities and lower interest rates, abandoning the fixed dollar-to-peso exchange rate and imposing various currency restrictions. It is likely that there will be further changes to Argentine economic and monetary policies in 2002.
Following an analysis of the impact of these changes on its operations and financial statements, the Company reduced the carrying value of its Argentine public bonds from $58 million to $40 million, resulting in a realized investment loss of $18 million, or $7 million net of income taxes and minority interest. In addition, under recent government rulings, it is likely that dollar denominated commercial transactions in Argentina will be converted to pesos at exchange rates that are based on market rates at the time of settlement or on government rulings that may require the use of mandated exchange rates for certain transactions. The Company’s assets held in Argentina were approximately equal to its Argentine liabilities. As of December 31, 2001, the Argentine subsidiaries held investments of approximately $44 million that are held outside of Argentina and not exposed to Argentine credit or currency risk.
As of December 31, 2001, after the reduction in the carrying value of Argentine bonds in the fourth quarter of 2001, the Company’s capital investment in Argentina was $46 million ($30 million net of minority interest), of which approximately $33 million is invested in the non-life insurance business and approximately $13 million is invested in the life insurance business. Income before income taxes, realized losses and minority interest for the Company’s operations in Argentina was $10 million for the year ended December 31, 2001. As a result of the recent developments, management expects the Argentine operations to undergo substantial changes. This is likely to include a decline in investment income as a result of lower interest on bonds and the surrender of all or substantially all life insurance policies-in-force.
Recent Developments
Effective January 1, 2002, the Company entered into quota share reinsurance contracts with MAP Capital Limited, a Lloyd’s corporate member, and two Lloyd’s syndicates managed by Kiln plc. MAP Capital Limited and the Lloyd’s syndicates are expected to underwrite, on a worldwide basis, a broad range of mainly short-tail classes of business.
The Company recently announced the formation of Berkley Medical Excess Underwriters, LLC and Berkley Capital Underwriters, LLC. Berkley Medical Excess Underwriters will offer excess coverage for healthcare providers that are either self-insured or maintain their own captive facilities and reinsurance coverage for primary insurance companies that provide medical malpractice coverage to physicians and other commercial healthcare providers. Berkley Capital Underwriters will offer a proportional form of reinsurance for both domestic and international insurance operations with a strong emphasis on commercial and specialty casualty lines of insurance. Berkley Capital Underwriters will complement the Company’s existing treaty operation, Signet Star Re, LLC, which primarily offers excess of loss treaty protection.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES     29

CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)

Years ended December 31, 2001 2000 1999

Revenues:

Net premiums written
$ 1,858,096 $ 1,506,244 $ 1,427,719

Change in net unearned premiums
(177,627 ) (15,230 ) (13,335 )

Premiums earned
1,680,469 1,491,014 1,414,384

Net investment income
195,021 210,448 190,316

Service fees
75,771 68,049 72,344

Realized investment gains (losses)
(11,494 ) 8,364 (6,064 )

Other income
2,030 3,412 2,688

Total revenues
1,941,797 1,781,287 1,673,668

Operating costs and expenses:

Losses and loss expenses
1,380,500 1,094,411 1,085,826

Other operating costs and expenses
663,776 596,579 604,784

Interest expense
45,719 47,596 50,801

Restructuring charges
3,196 1,850 11,505

Total expenses
2,093,191 1,740,436 1,752,916

Income (loss) before income taxes
(151,394 ) 40,851 (79,248 )

Income tax benefit (expense)
56,661 (2,451 ) 45,766

Income (loss) before minority interest and preferred dividends
(94,733 ) 38,400 (33,482 )

Minority interest
3,187 (2,162 ) (566 )

Preferred dividends
— — (497 )

Net income (loss) before change in accounting and extraordinary gain
(91,546 ) 36,238 (34,545 )

Cumulative effect of change in accounting principle (net of taxes)
— — (3,250 )

Extraordinary gain on early extinguishment of long-term debt (net of taxes)
— — 735

Net income (loss) attributable to common stockholders
$ (91,546 ) $ 36,238 $ (37,060 )

Earnings (loss) per share:

Basic

Net income (loss) before change in accounting and extraordinary gain
$ (3.14 ) $ 1.41 $ (1.35 )

Cumulative effect of change in accounting principle (net of taxes)
— — (.12 )

Extraordinary gain on early extinguishment of long-term debt
— — .03

Net income (loss) attributable to common stockholders
$ (3.14 ) $ 1.41 $ (1.44 )

Diluted

Net income (loss) before change in accounting and extraordinary gain
$ (3.14 ) $ 1.39 $ (1.35 )

Cumulative effect of change in accounting principle (net of taxes)
— — (.12 )

Extraordinary gain on early extinguishment of long-term debt
— — .03

Net income (loss) attributable to common stockholders
$ (3.14 ) $ 1.39 $ (1.44 )

See accompanying notes to consolidated financial statements.
30

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)

December 31, 2001 2000

Assets

Investments:

Invested cash
$ 524,554 $ 308,193

Fixed maturity securities:

Held to maturity, at cost (fair value $167,559 and $164,229)
156,464 156,067

Available for sale, at fair value (cost $2,241,321 and $2,087,338)
2,299,326 2,115,824

Equity securities, at fair value:

Available for sale (cost $103,011 and $76,545)
109,114 83,823

Trading account (cost $215,808 and $340,617)
213,878 347,271

Cash
9,533 938

Premiums and fees receivable
537,814 416,243

Due from reinsurers, net of funds withheld
716,398 713,392

Accrued investment income
35,926 36,578

Prepaid reinsurance premiums
103,667 99,444

Deferred policy acquisition costs
224,110 196,231

Real estate, furniture and equipment at cost, less accumulated depreciation
118,344 118,282

Deferred Federal and foreign income taxes
99,921 47,567

Excess of cost over net assets acquired
64,513 71,496

Trading account receivable from brokers and clearing organizations
351,707 269,444

Other assets
68,240 41,277

Total Assets
$ 5,633,509 $ 5,022,070

Liabilities and Stockholders’ Equity

Liabilities:

Reserves for losses and loss expenses
$ 2,817,682 $ 2,533,917

Unearned premiums
879,640 713,239

Due to reinsurers
139,322 132,521

Trading securities sold but not yet purchased, at fair value (proceeds $58,331 and $164,312)
56,990 169,020

Short-term debt
— 10,000

Other liabilities
215,220 182,273

Long-term debt
370,554 370,158

Total Liabilities
4,479,408 4,111,128

Trust preferred securities
198,210 198,169

Minority interest
24,296 31,877

Stockholders’ equity:

Preferred stock, par value $.10 per share:

Authorized 5,000,000 shares, issued and outstanding – none
— —

Common stock, par value $.20 per share:

Authorized 80,000,000 shares, issued and outstanding, net of treasury shares, 33,240,516 and 25,656,362 shares
8,661 7,281

Additional paid-in capital
659,266 334,061

Retained earnings
467,185 574,345

Accumulated other comprehensive income
37,340 19,371

Treasury stock, at cost, 10,063,328 and 10,747,482 shares
(240,857 ) (254,162 )

Total Stockholders’ Equity
931,595 680,896

Total Liabilities and Stockholders’ Equity
$ 5,633,509 $ 5,022,070

See accompanying notes to consolidated financial statements.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES     31

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands, except per share data)

Years ended December 31, 2001, 2000 and 1999

Preferred

and common

stock and Accumulated

Total additional other

stockholders' paid-in Retained comprehensive Treasury

equity capital earnings income (loss) stock

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 )

Net income attributable to common stockholders
36,238 — 36,238 — —

Change in other comprehensive income (loss)
63,871 — — 63,871 —

Issuance of common shares
9,323 2,421 — — 6,902

Purchase of treasury stock
(7,020 ) — — — (7,020 )

Dividends to common stockholders ($.52 per share)
(13,294 ) — (13,294 ) — —

Balance, December 31, 2000
680,896 341,342 574,345 19,371 (254,162 )

Net loss attributable to common stockholders
(91,546 ) — (91,546 ) — —

Change in other comprehensive income (loss)
17,969 — — 17,969 —

Issuance of common shares
340,892 326,585 — — 14,307

Purchase of treasury stock
(1,002 ) — — — (1,002 )

Dividends to common stockholders ($.52 per share)
(15,614 ) — (15,614 ) — —

Balance, December 31, 2001
$ 931,595 $ 667,927 $ 467,185 $ 37,340 $ (240,857 )

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)

2001 2000 1999

Net income (loss) attributable to common stockholders
$ (91,546 ) $ 36,238 $ (37,060 )

Other comprehensive income (loss)

Unrealized holding gains (losses) on investment securities arising during the period, net of taxes of ($7,328), ($37,762) and $55,491
15,299 70,129 (103,055 )

Less: Reclassification adjustment for realized (gains) losses included in net income (loss)
2,887 (5,436 ) 3,942

Net change in unrealized gains (losses) during the period
18,186 64,693 (99,113 )

Change in unrealized foreign exchange (losses)
(217 ) (822 ) (59 )

Other comprehensive income (loss)
17,969 63,871 (99,172 )

Comprehensive income (loss)
$ (73,577 ) $ 100,109 $ (136,232 )

See accompanying notes to consolidated financial statements.
32

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

Years ended December 31, 2001 2000 1999

Cash flows (used in) provided by operating activities:

Net income (loss) before minority interest, preferred dividends and extraordinary items
$ (94,733 ) $ 38,400 $ (36,732 )

Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:

Increase in reserves for losses and loss expenses, net of due to/from reinsurers
336,141 69,417 141,718

Depreciation and amortization
17,625 21,700 23,598

Change in unearned premiums and prepaid reinsurance premiums
178,505 14,974 13,490

Change in premiums and fees receivable
(153,175 ) (35,356 ) (3,386 )

Change in Federal and foreign income taxes
(71,142 ) 2,138 (34,289 )

Change in deferred policy acquisition costs
(40,882 ) (13,883 ) (12,457 )

Realized investment (gains) losses
11,494 (8,364 ) 6,064

Other, net
26,084 (12,692 ) (15,959 )

Net cash provided by operating activities before increase in trading account securities
209,917 76,334 82,047

Increase in trading account securities
(57,973 ) (89,609 ) (32,978 )

Net cash (used in) provided by operating activities
151,944 (13,275 ) 49,069

Cash flows provided by (used in) investing activities:

Proceeds from sales, excluding trading account:

Fixed maturity securities available for sale
532,861 725,961 594,993

Equity securities
64,038 48,079 17,200

Proceeds from maturities and prepayments of fixed maturity securities
189,961 142,636 147,668

Cost of purchases, excluding trading account:

Fixed maturity securities available for sale
(933,084 ) (773,804 ) (695,928 )

Equity securities
(82,509 ) (70,988 ) (14,397 )

Proceeds (cost) of acquired/sold companies, net of acquired cash and invested cash
3,215 2,187 (1,533 )

Net additions to real estate, furniture and equipment
(22,076 ) (7,529 ) (8,127 )

Other, net
11,303 1,176 (435 )

Net cash provided by (used in) investing activities
(236,291 ) 67,718 39,441

Cash flows provided by (used in) financing activities:

Net proceeds from stock offering
315,840 — —

Net proceeds from stock options exercised
25,052 9,324 783

Repurchase of long-term debt
— (25,000 ) —

Net change in short-term debt
(10,000 ) (25,000 ) (20,500 )

Cash dividends to common stockholders
(14,707 ) (12,701 ) (13,888 )

Purchase of common treasury shares
(1,002 ) (7,020 ) (22,119 )

Other, net
(5,880 ) (389 ) 5,277

Repurchase of preferred stock
— — (98,092 )

Repurchase of trust preferred securities
— — (8,774 )

Cash dividends to preferred stockholders
— — (2,001 )

Net cash provided by (used in) financing activities
309,303 (60,786 ) (159,314 )

Net increase (decrease) in cash and invested cash
224,956 (6,343 ) (70,804 )

Cash and invested cash at beginning of year
309,131 315,474 386,278

Cash and invested cash at end of year
$ 534,087 $ 309,131 $ 315,474

Supplemental disclosure of cash flow information:

Interest paid on debt
$ 45,241 $ 48,053 $ 50,801

Federal income taxes (received) paid
$ 10,644 $ (1,079 ) $ (12,973 )

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES     33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2001, 2000 and 1999

(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 accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany transactions and balances have been eliminated. Reclassifications have been made in the 2000 and 1999 financial statements to conform them to the presentation of the 2001 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. The international segment’s activities are reported in the Company’s financial statements on a one quarter lag to facilitate the timely completion of the consolidated financial statements.
(B) Revenue recognition
Insurance premiums written are recognized as earned generally on a pro-rata basis over the policy period. Service fees on insurance service contracts are recorded as earned primarily on a pro-rata basis over the contract period.
(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 a component of 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
Equity securities purchased (long portfolio positions and investment funds) are presented in the balance sheet as trading account assets. Equity securities sold but not yet purchased (short sales and short call options) are presented as trading securities sold but not yet purchased. Unsettled trades and the net margin balances held by the clearing broker are presented as trading account receivable from brokers and clearing organizations. The Company’s trading account portfolio is recorded at fair value. Realized and unrealized gains and losses from trading activity are reported as net investment income.
(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. The related amounts due from shareholders are 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 periodically reviewed and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments are reflected in results of opera-
34

tions in the period in which they are determined. The Company discounts its reserves for excess and assumed workers’ compensation claims using a risk-free or statutory rate. (See Note 16 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 and adjustments of the excess of cost over net assets acquired were $4,906,000, $4,036,000 and $3,866,000 for 2001, 2000 and 1999, 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 uses the intrinsic-value method of accounting for stock-based awards granted to employees and, accordingly, does not recognize compensation expense for its stock-based awards to employees. (See Note 10 of Notes to Consolidated 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 $4,391,000 and $4,174,000 as of December 31, 2001 and 2000, respectively) resulting from translating foreign currency financial statements are reported as a component of common stockholders’ equity. Gains ($88,000, $775,000 and $1,543,000 for 2001, 2000 and 1999, respectively) resulting from foreign currency transactions (transactions denominated in a currency other than the entity’s functional currency) are included 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 $16,349,000, $17,704,000 and $16,291,000 for 2001, 2000 and 1999, respectively.
(N) Comprehensive Income (loss)
Comprehensive income (loss) encompasses all changes in stockholders’ equity (except those arising from transactions with stockholders) 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 recognize 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 was reflected as a cumulative effect of a change in accounting principle.
(P) Recent accounting pronouncements
During 2001, the Company adopted FAS 133, “Accounting for Derivative Instruments and Hedging Activities,” which establishes accounting and reporting standards for derivative instruments. The adoption of this statement did not have a material impact on the Company’s results of operations or financial condition.
In July 2001, the FASB issued Statement No. 141, “Business Combinations,” and Statement No. 142, “Goodwill and Other Intangible Assets.” Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June
W. R. BERKLEY CORPORATION AND SUBSIDIARIES      35

30, 2001. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 is effective in fiscal years beginning after December 15, 2001. The Company expects its operating costs and expenses to decrease by approximately $4 million in 2002, as goodwill will no longer be amortized under Statement 142.
         In August 2001, the FASB issued Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The adoption of this Statement will not have a material impact on the Company’s results of operations or financial condition.
(2) Lease Obligations
The Company and 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: $18,021,000, $16,580,000 and $16,109,000 for 2001, 2000 and 1999, respectively. Future minimum lease payments (without provision for sublease income) are $14,979,000 in 2002; $11,569,000 in 2003; $7,953,000 in 2004; $5,962,000 in 2005; and $16,324,000 thereafter.
(3) Acquisitions and Asset Sales
During 2001, 2000 and 1999, several international and other acquisitions were completed for an aggregate consideration of approximately $3,780,000, $338,000 and $1,533,000, 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 2001, 2000 and 1999 were as follows: excess of cost over net assets acquired of $1,151,000, $47,000 and $3,744,000; and other liabilities, net of other assets, of $4,931,000, $385,000 and $5,277,000, respectively.
         During 2001, the Company sold several dormant operations, and reported a realized gain of $554,000. During 2000, the Company sold the assets of All American Agency Facilities Inc. (“All American”), a managing general agency, and reported a realized gain of $3,179,000. All American’s revenues and operating profits (losses) were $1,819,000 and ($638,000) in 2000, and $7,480,000 and $381,000 in 1999.
(4) Restructuring Plan
In the fourth quarter of 2001, the Company reported a restructuring charge of $3,196,000 in connection with its withdrawal from regional personal lines business and the reorganization of certain other operations. The Company reduced its permanent workforce by approximately 304 employees in connection with the plan. The charge consisted mainly of severance payments of $2,462,000 and contractual lease payments related to abandoned facilities. The activities under the plan were substantially completed in 2001.
         In the first quarter of 2000, the Company implemented a plan to reorganize its reinsurance business. Under the plan, the reinsurance segment has withdrawn from the Latin American and Caribbean market, and the domestic reinsurance operations have focused on specialty reinsurance lines while de-emphasizing certain commodity-type lines. The Company reduced its permanent workforce by approximately 37 employees in connection with the plan. The Company reported a restructuring charge of $1,850,000 to reflect costs related to the plan. This charge consisted mainly of severance payments of $1,439,000 and contractual lease payments related to abandoned facilities. The activities under the plan were substantially completed in 2000.
         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; combined two of its international units; and reduced 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. This charge consists mainly of severance payments of $7,562,000, contractual lease payments related to abandoned facilities and abandoned equipment and property owned.
         The Company has paid $11,955,000 related to the restructuring charges, of which $8,865,000 relates to severance payments. The remaining restructuring accrual is $4,596,000 at December 31, 2001, of which certain payments extend through 2003.
36

(5) Debt
Long-term debt consists of the following:

2001 2000

Description Rate Maturity Face Value Carrying Value Carrying Value

Senior Notes
6.71 % March 4, 2003 $ 25,000,000 $ 24,976,000 $ 24,957,000

Senior Subordinated Notes
6.50 % July 1, 2003 35,793,000 35,793,000 35,793,000

Note Payable
(1 ) December 30, 2003 8,000,000 8,000,000 8,000,000

Senior Notes
6.375 % April 15, 2005 40,000,000 39,885,000 39,854,000

Senior Notes
6.25 % January 15, 2006 100,000,000 99,442,000 99,323,000

Senior Notes
9.875 % May 15, 2008 88,800,000 86,774,000 86,561,000

Senior Debentures
8.70 % January 1, 2022 76,503,000 75,684,000 75,670,000

$ 374,096,000 $ 370,554,000 $ 370,158,000

(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.
Short-Term Debt During 2001 and 2000, the average interest rate of the Company’s short-term debt was 6.75% and 6.87%, respectively. In February 2002, the Company entered into a one-year unsecured bank credit facility which provides for borrowing up to $25 million.
(6) Trust Preferred Securities
The Company-obligated mandatorily redeemable preferred securities of a subsidiary trust holding solely junior subordinated debentures (“Trust Preferred 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 Trust Preferred Securities, when taken together with the Company’s obligations under the Trust Agreement under which the Trust Preferred 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 Trust Preferred Securities), provide a full and unconditional guarantee of the Trust’s obligations under the Trust Preferred 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 Trust Preferred 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 Trust Preferred Securities for $8,774,000.
(7) Commitments, Litigation and Contingent Liabilities
         Neither the Company nor any of its subsidiaries is engaged in any litigation 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. The Company has an arbitration pending pertaining to a surety reinsurance contract coverage issue where it is the reinsurer. The proceeding is in the initial stages, and the Company believes it has meritorious defenses with respect to this issue.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES      37

(8) Supplemental Financial Statement Data
Other operating costs and expenses consist of the following:

(Dollars in thousands) 2001 2000 1999

Amortization of deferred policy acquisition costs
$ 492,065 $ 454,729 $ 444,289

Other operating costs and expenses of insurance operations
85,593 68,756 79,879

Other operating costs and expenses of service companies
64,947 57,108 64,780

Other costs and expenses
21,171 15,986 15,836

Total
$ 663,776 $ 596,579 $ 604,784

(9) 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:

(Dollars in thousands) 2001 2000 1999

Premiums written
$ 350,370 $ 310,511 $ 307,170

Premiums earned
$ 346,159 $ 301,835 $ 294,823

Losses and loss expenses
$ 333,911 $ 267,804 $ 248,767

During 2001, the Company entered into a multi-year aggregate reinsurance agreement that provides two types of reinsurance coverage. The first type of coverage provides protection for individual losses on an excess of loss or quota share basis, as specified for each class of business covered by the agreement. The second type of coverage provides aggregate accident year protection for our reinsurance segment for loss and loss adjustment expenses incurred above a certain level. Loss recoveries are subject to annual limits and an aggregate limit over the contract period. For the year ended December 31, 2001, earned premiums and losses and loss expenses ceded under the aggregate reinsurance agreement were $15 million and $5 million, respectively, for the individual loss protection and $30 million and $54 million, respectively, for the aggregate accident year protection.
         In 1999, the Company purchased aggregate reinsurance protection for its regional 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.
         Certain of the Company’s reinsurance agreements are structured on a funds held basis, whereby the Company retains some or all of the ceded premiums in a separate account that is used to fund ceded losses as they become due from the reinsurance company. Interest is credited to reinsurers for funds held on their behalf at rates ranging from 7.0% to 8.9% of the account balances, as defined under the agreements. Interest credited to reinsurers, which is reported as a reduction of net investment income, was $12 million in 2001, $10 million in 2000 and $8 million in 1999.
(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:

2001 2000 1999

Shares Price^(a) Shares Price^(a) Shares Price^(a)

Outstanding at beginning of year
3,986,079 $ 31.57 3,662,785 $ 34.12 3,929,333 $ 34.25

Granted
540,950 47.07 872,000 19.34 68,600 25.73

Exercised
692,900 29.77 342,266 24.36 14,925 21.91

Canceled
195,050 32.73 206,440 37.07 320,223 34.39

Outstanding at end of year
3,639,079 $ 34.23 3,986,079 $ 31.57 3,662,785 $ 34.12

Options exercisable at year end
1,652,919 $ 33.13 952,726 $ 27.43 998,450 $ 25.28

Options available for future grant
2,302,191 2,647,916 3,326,102

(a) Weighted average exercise price.

38

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 2001 and 2000, respectively: (a) dividend yield of 1%, (b) expected volatility of 20%, (c) risk-free interest rates of 5.01% and 6.63% and (d) expected life of 7.5 years. The following table summarizes information about stock options outstanding at December 31, 2001 and 2000:

Options Outstanding Options Exercisable

Weighted Weighted

Range of Remaining Weighted Average

Exercise Number Contractual Average Number Exercise

Prices Outstanding Life Price Exercisable Price

December 31, 2001

$14 to $27
1,038,048 7.0 $ 20.34 207,098 $ 24.83

27 to 32
426,663 4.3 28.91 426,663 28.91

32 to 58
2,174,368 6.7 41.90 1,019,158 36.59

Total
3,639,079 6.5 $ 34.23 1,652,919 $ 33.13

December 31, 2000

$14 to $27
1,363,366 7.0 $ 21.05 456,666 $ 24.39

27 to 32
661,812 5.1 28.99 433,927 29.01

32 to 48
1,960,901 6.8 39.76 62,133 38.71

Total
3,986,079 6.6 $ 31.57 952,726 $ 27.43

The Company uses the intrinsic-value method of accounting for stock-based awards granted to employees and, accordingly, does not recognize compensation expense for its stock-based awards to employees. 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, the Company’s net income (loss) and earnings per share would have been reduced to the pro forma amounts indicated below (000’s omitted except per share data):

Net Income (loss) Basic Earnings (loss) per Share Diluted Earnings (loss) per Share

As reported Pro forma As reported Pro forma As reported Pro forma

2001

Attributable to common stockholders
$ (91,546 ) $ (94,554 ) $ (3.14 ) $ (3.24 ) $ (3.14 ) $ (3.24 )

2000

Attributable to common stockholders
$ 36,238 $ 33,331 $ 1.41 $ 1.30 $ 1.39 $ 1.28

(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 $9,287,000, $7,672,000 and $7,768,000 for 2001, 2000 and 1999, respectively.
         The Company has a Long-Term Incentive Compensation Plan (“LTIP”) that provides for incentive compensation to key executives based on the Company’s earnings, as defined under the LTIP, for each year from 2001 through 2005. Key employees are awarded participation units (“Units”) which 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. At December 31, 2001, there were 79,500 units outstanding and the maximum value that can be earned for those units over the five-year period ending on December 31, 2005 is $19,875,000. There was no LTIP expense in 2001, 2000 or 1999.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES      39

(12) Investments
At December 31, 2001 and 2000, there were no investments, other than investments in United States government securities, which exceeded 10% of stockholders’ equity. At December 31, 2001 and 2000, investments were as follows:

(Dollars in thousands)

Gross Gross

unrealized unrealized Fair Carrying

Type of investment Cost^(a) gains losses value value

December 31, 2001

Fixed maturity securities held to maturity:

State and municipal
$ 48,618 $ 4,438 $ (155 ) $ 52,901 $ 48,618

Corporate
11,331 790 — 12,121 11,331

Mortgage-backed securities
96,515 6,022 — 102,537 96,515

Total fixed maturity securities held to maturity
156,464 11,250 (155 ) 167,559 156,464

Fixed maturity securities available for sale:

United States Government^(b)
506,067 22,282 (1,726 ) 526,623 526,623

State and municipal
540,081 12,936 (5,358 ) 547,659 547,659

Corporate
537,680 18,604 (4,472 ) 551,812 551,812

Mortgage-backed securities
551,082 13,843 (3,240 ) 561,685 561,685

Foreign
106,411 5,617 (481 ) 111,547 111,547

Total fixed maturity securities available for sale
2,241,321 73,282 (15,277 ) 2,299,326 2,299,326

Equity securities available for sale:

Common stocks
25,819 3,587 (502 ) 28,904 28,904

Preferred stocks
77,192 3,485 (467 ) 80,210 80,210

Total equity securities available for sale
103,011 7,072 (969 ) 109,114 109,114

Equity securities trading:

Long positions^(c)
215,808 2,951 (4,881 ) 213,878 213,878

Receivable from brokers
351,707 — — 351,707 351,707

Securities sold but not yet purchased
(58,331 ) 3,482 (2,141 ) (56,990 ) (56,990 )

Total equity securities trading
509,184 6,433 (7,022 ) 508,595 508,595

Invested cash^(d)
524,554 — — 524,554 524,554

Total investments
$ 3,534,534 $ 98,037 $ (23,423 ) $ 3,609,148 $ 3,598,053

December 31, 2000

Fixed maturity securities held to maturity:

State and municipal
$ 54,659 $ 4,122 $ (115 ) $ 58,666 $ 54,659

Corporate
11,592 654 (85 ) 12,161 11,592

Mortgage-backed securities
89,816 3,586 — 93,402 89,816

Total fixed maturity securities held to maturity
156,067 8,362 (200 ) 164,229 156,067

Fixed maturity securities available for sale:

United States Government^(b)
480,871 14,327 (1,574 ) 493,624 493,624

State and municipal
544,015 14,169 (1,681 ) 556,503 556,503

Corporate
454,844 7,727 (8,695 ) 453,876 453,876

Mortgage-backed securities
469,144 9,144 (5,376 ) 472,912 472,912

Foreign
138,464 2,976 (2,531 ) 138,909 138,909

Total fixed maturity securities available for sale
2,087,338 48,343 (19,857 ) 2,115,824 2,115,824

Equity securities available for sale:

Common stocks
49,976 7,830 (1,161 ) 56,645 56,645

Preferred stocks
26,569 770 (161 ) 27,178 27,178

Total equity securities available for sale
76,545 8,600 (1,322 ) 83,823 83,823

Equity securities trading:

Long positions^(c)
340,617 16,159 (9,505 ) 347,271 347,271

Receivable from brokers
269,444 — — 269,444 269,444

Securities sold but not yet purchased
(164,312 ) 8,286 (12,994 ) (169,020 ) (169,020 )

Total equity securities trading
445,749 24,445 (22,499 ) 447,695 447,695

Invested cash^(d)
308,193 — — 308,193 308,193

Total investments
$ 3,073,892 $ 89,750 $ (43,878 ) $ 3,119,764 $ 3,111,602

(a) Adjusted as necessary for amortization of premium or discount.

(b) Includes United States government agencies and authorities.

(c) Includes investments of $97,917,000 and $52,610,000 as of December 31, 2001 and 2000, respectively, in managed investment funds.

(d) Short-term investments which mature within three months of the date of purchase.

40

The amortized cost and fair value of fixed maturity securities at December 31, 2001, 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:

(Dollars in thousands) 2001

Cost Fair value

Due in one year or less
$ 76,652 $ 78,376

Due after one year through five years
480,636 505,115

Due after five years through ten years
559,480 572,013

Due after ten years
633,420 647,159

Mortgage-backed securities
647,597 664,222

Total
$ 2,397,785 $ 2,466,885

Realized gains (losses) and the change in difference between fair value and cost of investments, before applicable income taxes, are as follows:

(Dollars in thousands) 2001 2000 1999

Realized gains (losses):

Fixed maturity securities^(a)
$ 6,706 $ (2,573 ) $ 2,792

Equity securities
7,755 9,420 (76 )

Provision for other than temporary impairment:

Fixed maturity securities
(26,511 ) (3,299 ) (8,300 )

Equity securities
(109 ) — —

Other
665 4,816 (480 )

(11,494 ) 8,364 (6,064 )

Change in difference between fair value and cost of investments, not including trading securities:

Fixed maturity securities
32,452 108,938 (167,984 )

Equity securities
(1,175 ) 335 964

31,277 109,273 (167,020 )

Total
$ 19,783 $ 117,637 $ (173,084 )

(a) During 2001, 2000 and 1999, gross gains of $13,033,000, $11,586,000 and $15,022,000, respectively, and gross losses of $6,327,000, $14,159,000 and $12,230,000, respectively, were realized.

Investment income consists of the following:

(Dollars in thousands) 2001 2000 1999

Investment income earned on:

Fixed maturity securities
$ 162,986 $ 152,806 $ 148,081

Trading account^(a)
19,321 42,741 33,532

Invested cash
14,715 14,771 12,804

Equity securities
6,754 6,448 3,306

Other
2,880 3,189 833

Gross investment income
206,656 219,955 198,556

Interest on funds held under reinsurance treaties
(11,635 ) (9,507 ) (8,240 )

Net investment income
$ 195,021 $ 210,448 $ 190,316

(a) The primary focus of the trading account is merger and convertible arbitrage. Merger arbitrage is the business of convertible investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Convertible arbitrage is the business of investing in convertible securities with the goal of capitalizing on price differences between their securities and their underlying equities. Arbitrage investing 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 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, 2001, the notional amount of long option contracts outstanding is $16,391,000 and short option contracts outstanding is $10,985,000.

         Investment income earned from net trading account activity includes unrealized trading losses of $2,519,000 and $4,897,000 for 2001 and 1999, respectively, and unrealized trading gains of $1,899,000 for 2000.

         At December 31, 2001, investments with a carrying value of $154 million were on deposit with state insurance departments as required by state laws; investments with a carrying value of $26 were held in trust for other companies; and investments with a carrying value of $22 million were deposited at Lloyd’s in support of 2002 underwriting activities.
         The Company had contingent liabilities regarding irrevocable undrawn letters of credit supporting reinsurance business of $16 million at December 31, 2001. The Company has pledged investments with a carrying value of $23 million as collateral to support this commitment.
(13) 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, 2001 and 2000:

(Dollars in thousands) 2001 2000

Carrying amount Fair value Carrying amount Fair value

Investments
$ 3,598,053 $ 3,609,148 $ 3,111,602 $ 3,119,764

Long-term debt
370,554 384,431 370,158 362,375

Trust preferred securities
198,210 180,146 198,169 136,800

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 and the trust preferred securities are based on rates available for borrowings similar to the Company’s outstanding debt as of the respective reporting dates.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES      41

(14) Stockholders’ Equity
Common equity The weighted average number of shares used in the computation of basic earnings per share was 29,139,000, 25,632,000 and 25,823,000 for 2001, 2000 and 1999, respectively. The weighted average number of shares used in the computations of diluted earnings per share was 30,555,000, 25,991,000 and 25,927,000 for 2001, 2000 and 1999, respectively. Treasury shares have been excluded from average outstanding shares from the date of acquisition. 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:

(in thousands) 2001 2000 1999

Balance, beginning of year
25,656 25,617 26,504

Shares issued
7,603 339 18

Shares repurchased
(18 ) (300 ) (905 )

Balance, end of year
33,241 25,656 25,617

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.
(15) Federal and Foreign Income Taxes
Federal and foreign income tax expense (before the cumulative effect of change in accounting and extraordinary items) consists of:

(Dollars in thousands) 2001 2000 1999

Current (expense) benefit
$ (2,068 ) $ (2,574 ) $ 11,785

Deferred benefit
58,729 123 33,981

Total (expense) benefit
$ 56,661 $ (2,451 ) $ 45,766

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:

(Dollars in thousands) 2001 2000 1999

Computed “expected” tax (expense) benefit
$ 52,988 $ (14,298 ) $ 27,737

Tax-exempt investment income
8,045 13,543 17,853

Increase in valuation allowance
(3,100 ) — —

Other, net
(1,272 ) (1,696 ) 176

Total (expense) benefit
$ 56,661 $ (2,451 ) $ 45,766

At December 31, 2001 and 2000 , the tax effects of differ- ences that give rise to significant portions of the deferred tax asset and deferred tax liability are as follows:

(Dollars in thousands) 2001 2000

Deferred Tax Asset

Loss reserve discounting
$ 74,952 $ 60,737

Unearned premiums
52,844 40,885

Net operating loss carry forward
53,005 8,379

Alternative minimum tax credit
carryforward
28,420 29,610

Other
18,362 8,171

Gross deferred tax asset
227,583 147,782

Less valuation allowance
(10,100 ) (7,000 )

Deferred tax asset
217,483 140,782

Deferred Tax Liability

Amortization of intangibles
7,766 7,995

Deferred policy acquisition costs
76,090 57,877

Deferred taxes on unrealized investment gains
18,238 12,678

Depreciation
7,790 8,088

Other
7,678 6,577

Deferred tax liability
117,562 93,215

Net deferred tax asset
$ 99,921 $ 47,567

Federal income tax expense (benefit) applicable to real- ized investment gains (losses) was $(2,478,000), $2,928,000 ($2,122,000) in 2001, 2000 and 1999, respectively. The Com- pany had a current income tax receivable of $16,179,000 and $6,376,000 at December 31, 2001 and 2000, respective- ly. At December 31, 2001, the Company had foreign net operating loss carryforwards of $23,453,000, which expire from 2002 and 2006, and a Federal net operating loss carryforward of $128,977,000, which expires in 2021. The net change in the valuation allowance is primarily related to the foreign net operating loss carryforwards. The Company’s tax returns through December 31, 1997 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 future 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.
42

(16) 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:

(Dollars in thousands) 2001 2000 1999

Net reserves at beginning of year
$ 1,818,049 $ 1,723,865 $ 1,583,304

Net provision for losses and loss expenses:

Claims occurring during the current year
1,140,622 1,047,060 1,032,089

Increase (decrease) in estimates for claims occurring in prior years
211,344 14,042 28,351

Net decrease in discount for prior years
8,717 11,530 10,473

1,360,683 1,072,632 1,070,913

Net payments for claims

Current year
443,802 394,401 433,942

Prior years
701,637 584,047 496,410

1,145,439 978,448 930,352

Net reserves at end of year
2,033,293 1,818,049 1,723,865

Ceded reserves at end of year
730,557 657,756 617,025

Gross reserves at end of year
$ 2,763,850 $ 2,475,805 $ 2,340,890

The balance sheets include $53,832,000 and $58,112,000 as of December 31, 2001 and 2000, respectively, relating to reserves for life insurance which are not included in the table above, and the statement of operations includes $19,817,000, $21,779,000 and $14,913,000 for the years ended December 31, 2001, 2000 and 1999, respectively, relating to the policy-holder benefits incurred on life insurance which are not included in the above table. The increase in estimates for claims occurring in prior years for the year ended December 31, 2001 reflects primarily reserve increases for the discontinued alternative markets reinsurance division and the treaty reinsurance business. For the years ended December 31, 2000 and 1999, the increase in estimates for claims occurring in prior years was due to reserve strengthening in the regional segment partially offset by favorable reserve development in the specialty and alternative markets segments.
         The Company discounts its liabilities for excess and assumed workers’ compensation business because of the long period of time over which losses are paid. 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 similar business. 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 for non-proportional business, and at the statutory rate for proportional business. The discount rates range from 4.3% to 6.49% with a weighted average discount rate of 5.5%. The aggregate net discount, after reflecting the effects of ceded reinsurance, is $243,000,000, $223,000,000 and $196,000,000 at December 31, 2001, 2000 and 1999, respectively. For statutory purposes, the Company uses a discount rate of 4.3% as permitted by the Department of Insurance of the State of Delaware.
         To date, known asbestos 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 asbestos and environmental claims were $24,794,000 and $29,422,000 at December 31, 2001 and 2000, respectively. The Company’s gross reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $43,405,000 and $57,167,000 at December 31, 2001 and 2000, respectively. Net incurred losses and loss expenses (recoveries) for reported asbestos and environmental claims were approximately $(4,503,000), $1,602,000 and $1,371,000 in 2001, 2000 and 1999, respectively. Net paid losses and loss expenses were approximately $125,000, $3,123,000 and $3,819,000 in 2001, 2000 and 1999, 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.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES      43

(17) Industry Segments
The Company’s operations are presently conducted through five segments of the insurance business: specialty lines of insurance (including excess and surplus lines and commercial transportation); alternative markets (including the management of alternative insurance market mechanisms); reinsurance; regional property casualty insurance; and international. The specialty segment’s business is principally within the excess and surplus lines, professional liability, commercial transportation and surety markets. The Company’s alternative markets segment specializes in developing, insuring and administering self-insurance programs and various alternative risk transfer mechanisms for employers, employer groups, insurers and alternative markets funds. The Company’s reinsurance segment specializes in underwriting property, casualty and surety reinsurance on both a treaty and facultative basis. The regional property casualty insurance segment principally provides commercial property casualty insurance products. The international segment writes property and casualty insurance, as well as life insurance, in Argentina and the Philippines. For the years ended December 31, 2001, 2000 and 1999, the international segment wrote life insurance premiums of $31,490,000, $33,183,000 and $24,548,000, respectively. During 2001, the Company discontinued its regional personal lines business and the alternative markets division of its reinsurance segment. These discontinued businesses are now being managed and reported collectively as a separate Discontinued Business Segment. Prior period segment information has been restated to reflect these changes.
         The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Income tax expense and benefits are calculated in accordance with the Company’s tax sharing agreements, which provide for the recognition of tax loss carry-forwards only to the extent of taxes previously paid. Summary financial information about the Company’s operating segments is presented in the following table. Income (loss) before income taxes by segment consists of revenues less expenses related to the respective segment’s operations. These amounts include realized gains (losses) where applicable. Intersegment revenues consist primarily of dividends and interest on inter-company debt. Identifiable assets by segment are those assets used in the operation of each segment.

Revenues

Income Income Tax

Investment Unaffiliated Inter- (loss) before Expense

(Dollars in thousands) Income Customers Segment Total income taxes (Benefit)

December 31, 2001:

Specialty
$ 39,390 $ 438,534 $ 2,116 $ 440,650 $ 28,806 $ 7,760

Alternative Markets
37,765 232,671 1,450 234,121 32,971 9,271

Reinsurance
42,536 278,831 2,659 281,490 (54,502 ) (20,907 )

Regional
51,640 601,202 13,722 614,924 44,403 7,647

International
13,993 137,676 7 137,683 (6,082 ) 2,224

Discontinued Business
9,762 232,403 — 232,403 (133,480 ) (46,718 )

Corporate, other and eliminations
(65 ) 20,480 (19,954 ) 526 (63,510 ) (15,938 )

Consolidated
$ 195,021 $ 1,941,797 — $ 1,941,797 $ (151,394 ) $ (56,661 )

December 31, 2000:

Specialty
$ 48,706 $ 322,618 $ 2,241 $ 324,859 $ 31,836 $ 9,058

Alternative Markets
37,722 189,658 137 189,795 35,315 9,978

Reinsurance
50,471 348,707 457 349,164 27,760 7,387

Regional
56,955 564,125 1,202 565,327 8,761 2,483

International
9,636 118,234 — 118,234 6,853 1,820

Discontinued Business
9,562 232,392 — 232,392 (9,936 ) (3,478 )

Corporate, other and eliminations
(2,604 ) 5,553 (4,037 ) 1,516 (59,738 ) (24,797 )

Consolidated
$ 210,448 $ 1,781,287 — $ 1,781,287 $ 40,851 $ 2,451

December 31, 1999:

Specialty
$ 50,231 $ 310,373 $ (1,305 ) $ 309,068 $ 39,261 $ 8,692

Alternative Markets
30,827 168,635 586 169,221 20,593 6,167

Reinsurance
47,288 341,201 739 341,940 14,091 1,992

Regional
49,705 539,906 1,462 541,368 (78,895 ) (4,154 )

International
6,469 93,878 — 93,878 3,535 1,443

Discontinued Business
8,462 213,816 — 213,816 (14,141 ) (4,949 )

Corporate, other and eliminations
(2,666 ) 5,859 (1,482 ) 4,377 (63,692 ) (54,957 )

Consolidated
$ 190,316 $ 1,673,668 — $ 1,673,668 $ (79,248 ) $ (45,766 )

44

Interest expense for the alternative markets and reinsurance segments was $2,806,000, $2,921,000 and $2,870,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Additionally, corporate interest expense (net of intercompany amounts) was $42,913,000, $44,675,000 and $47,931,000 for the corresponding periods. Identifiable assets by segment are as follows (Dollars in thousands):

December 31, 2001 2000 1999

Specialty
$ 1,580,155 $ 1,425,123 $ 1,370,837

Alternative Markets
859,502 755,248 754,199

Reinsurance
1,751,428 1,258,155 1,022,776

Regional
1,462,861 1,289,823 1,203,295

International
209,473 248,243 177,675

Discontinued Business
289,313 377,893 357,206

Corporate, other and eliminations
(519,223 ) (332,415 ) (101,197 )

Consolidated
$ 5,663,509 $ 5,022,070 $ 4,784,791

(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 2002, the maximum amount of dividends which can be paid without such approval is approximately $68 million.
         Combined net income (loss) and policyholders’ surplus of the Company’s consolidated insurance subsidiaries, as determined in accordance with statutory accounting practices, are as follows:

(Dollars in thousands) 2001 2000 1999

Net income (loss)
$ (116,307 ) $ 56,694 $ (34,598 )

Policyholders’ surplus
$ 928,908 $ 862,994 $ 851,449

In 2001, the The National Association of Insurance Commissioners (“NAIC”) codified statutory accounting practices. The impact of these changes was an increase of $58 million to our policyholders’ surplus. 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 subject to limitations, excess and assumed workers compensation reserves are discounted at a 4.3% rate and certain assets designated as “non-admitted assets” are charged against surplus.
         The 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. All of the Company’s insurance subsidiaries have an RBC amount above the authorized control level RBC, as defined by the NAIC.

(19) Quarterly Financial Information (unaudited)

The following is a summary of quarterly financial data (In thousands except per share data):

Three months ended

March 31, June 30, September 30, December 31,

2001 2000 2001 2000 2001 2000 2001 2000

Revenues
$ 449,153 $ 423,324 $ 490,997 $ 431,933 $ 500,072 $ 445,957 $ 501,575 $ 480,073

Net income (loss) attributable to common stockholders
10,266 4,346 9,598 6,636 (47,246 ) 7,092 (64,164 ) 18,164

Net income (loss) per share:

Basic
.38 .17 .33 .26 (1.63 ) .28 (2.04 ) .71

Diluted^(a)
.36 .17 .32 .26 (1.63 ) .27 (2.04 ) .68

(a) For periods with a net loss, diluted per share amounts are equal to basic per share amounts so as not to be anti-dilutive.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES      45

(20) International Operations
The Company owns 65% of Berkley International, LLC, which conducts insurance operations in Argentina and the Philippines. The international activities are reported in the Company’s financial statements on a one quarter lag to facilitate the timely completion of the consolidated financial statements. During 2001, Argentina experienced substantial political and economic problems, including high unemployment, increasing fiscal deficits and declining central bank reserves. The government responded to these problems by converting certain public bonds into guaranteed loans with longer maturities and lower interest rates, abandoning the fixed dollar-to-peso exchange rate and imposing various currency restrictions. It is likely that there will be further changes to Argentine economic and monetary policies in 2002.
         Following an analysis of the impact of these changes on its operations and financial statements, the Company reduced the carrying value of Argentine public bonds held by Berkley International, LLC from $58 million to $40 million, resulting in a charge of $18 million, or $7 million net of income taxes and minority interest. In addition, under recent government rulings, it is likely that dollar denominated commercial transactions in Argentina will be converted to pesos at exchange rates that are based on market rates at the time of settlement or on government rulings that may require the use of mandated exchange rates for certain transactions. The Company’s assets held in Argentina were approximately equal to its Argentine liabilities. As of December 31, 2001, the Argentine subsidiaries held investments of approximately $44 million, that are held outside of Argentina and not exposed to Argentine credit or currency risk.
         As of December 31, 2001, the Company’s capital investment in Argentina was $46 million ($30 million net of minority interest), of which approximately $33 million is invested in the non-life insurance business and approximately $13 million is invested in the life insurance business. Income before income taxes, realized gains and minority interest for the Company’s operations in Argentina was $10 million for the year ended December 31, 2001. As a result of the recent developments, management expects the Argentine operations to undergo substantial changes. This is likely to include a decline in investment income as a result of lower interest on bonds and the surrender of all or substantially all life insurance policies-in-force.
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, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted in the United States of America. 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 as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
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 14, 2002

46 -----END PRIVACY-ENHANCED MESSAGE-----


		2001			2000

Underwriting loss		$	(277,687	)	$	(122,585	)




Insurance services			9,964			6,326




Net investment income			195,021			210,448




Interest expense and other			(64,002	)		(59,852	)




Restructuring charge			(3,196	)		(1,850	)

	Pretax income (loss) before realized investment gains (losses)		(139,900	)		32,487




Realized investment gains (losses)			(11,494	)		8,364




Income tax benefit (expense) and minority interest			59,848			(4,613	)

	Net income (loss)	$	(91,546	)	$	36,238


Gross Premiums Written		2001		2000		% Change

Specialty		$	611,364	$	407,545		50	%




Alternative Markets			169,439		108,802		56	%




Reinsurance			332,382		323,846		3	%




Regional			705,001		579,890		22	%




International			170,600		143,523		19	%




Discontinued Business			219,680		253,149		(13	%)

	Total	$	2,208,466	$	1,816,755		22	%


Net Premiums Written		2001		2000		% Change

Specialty		$	527,502	$	285,525		85	%




Alternative Markets			151,942		98,001		55	%




Reinsurance			236,784		276,640		(14	%)




Regional			598,149		499,526		20	%




International			150,090		118,981		26	%




Discontinued Business			193,629		227,571		(15	%)

	Total	$	1,858,096	$	1,506,244		23	%


Net Premiums Earned		2001		2000

Specialty		$	401,611		270,896




Alternative Markets			123,173		88,872




Reinsurance			236,385		298,102




Regional			555,750		503,029




International			140,909		107,285




Discontinued Business			222,641		222,830

	Total	$	1,680,469	$	1,491,014

•		During 2001, we strengthened loss reserves by $135 million, including $103 million for the discontinued alternative markets reinsurance business and $32 million for the treaty reinsurance business. The increase relates primarily to underwriting years 1998 and 1999 and follows a significant increase in losses reported by ceding companies in the third and fourth quarter.

•		Estimated losses related to the World Trade Center attack were $35 million, including $26 million for the reinsurance segment and $9 million for the specialty segment. This represents our estimated maximum retention for property and business interruption coverage and our estimated policy limits on risks exposed to casualty losses.

•		The reinsurance segment recorded a reserve of $18 million for potential surety losses related to the Enron bankruptcy.

•		The specialty and regional underwriting results reflect improvements from pricing actions and other underwriting initiatives.

•		Weather-related losses for active business segments (primarily regional business) were $37 million for 2001 compared with $31 million for 2000. For the discontinued personal lines business, weather-related losses were $24 million for 2001 compared with $18 million for 2000.

•		The reinsurance underwriting results reflect loss recoveries under the Company’s aggregate reinsurance agreement. (See Note 9 of “Notes to Consolidated Financial Statements.”)


		2000			1999

Underwriting loss		$	(122,585	)	$	(187,863	)




Insurance services			6,326			1,161




Net investment income			210,448			190,316




Interest expense and other			(59,852	)		(65,293	)




Restructuring charge			(1,850	)		(11,505	)

	Pretax income (loss) before realized investment gains (losses)		32,487			(73,184	)




Realized investment gains (losses)			8,364			(6,064	)




Income tax benefit (expense), minority interest and other			(4,613	)		42,188

	Net income (loss)	$	36,238		$	(37,060	)


		2001		2000

Fixed maturities and invested cash		$	2,980	$	2,580




Equity securities available for sale			109		84




Equity securities trading account^(a)			509		448

	Total	$	3,598	$	3,112


		Market			Effective		Fair Value
Group		Yield			Duration		(000's)

Invested cash			1.83	%		.15	$	524,554

U. S. Government securities			4.31	%		4.75		526,623

State and municipal			4.85	%		6.60		600,560

Corporate			6.42	%		5.30		563,933

Foreign			10.88	%		4.94		111,547

Mortgage-backed securities			6.14	%		5.41		664,222

	Total		5.03	%		4.76	$	2,991,439


	Estimated Fair		Estimated
	Value of Financial		Change in
	Instruments		Fair Value
Change in interest rates	(000's)		(000's)

300 basis point rise	$	2,613,663	$	(377,776	)

200 basis point rise		2,733,327		(258,112	)

100 basis point rise		2,861,934		(129,505	)

Base scenario		2,991,439		—

100 basis point decline		3,112,840		121,401

200 basis point decline		3,239,301		247,862

300 basis point decline		3,384,976		393,537


Years ended December 31,				2001			2000			1999

Revenues:




	Net premiums written			$	1,858,096		$	1,506,244		$	1,427,719




	Change in net unearned premiums				(177,627	)		(15,230	)		(13,335	)

			Premiums earned		1,680,469			1,491,014			1,414,384




	Net investment income				195,021			210,448			190,316




	Service fees				75,771			68,049			72,344




	Realized investment gains (losses)				(11,494	)		8,364			(6,064	)




	Other income				2,030			3,412			2,688

			Total revenues		1,941,797			1,781,287			1,673,668




Operating costs and expenses:




	Losses and loss expenses				1,380,500			1,094,411			1,085,826




	Other operating costs and expenses				663,776			596,579			604,784




	Interest expense				45,719			47,596			50,801




	Restructuring charges				3,196			1,850			11,505

			Total expenses		2,093,191			1,740,436			1,752,916




			Income (loss) before income taxes		(151,394	)		40,851			(79,248	)




Income tax benefit (expense)					56,661			(2,451	)		45,766

	Income (loss) before minority interest and preferred dividends				(94,733	)		38,400			(33,482	)




Minority interest					3,187			(2,162	)		(566	)




Preferred dividends					—			—			(497	)

	Net income (loss) before change in accounting and extraordinary gain				(91,546	)		36,238			(34,545	)




Cumulative effect of change in accounting principle (net of taxes)					—			—			(3,250	)




Extraordinary gain on early extinguishment of long-term debt (net of taxes)					—			—			735

			Net income (loss) attributable to common stockholders	$	(91,546	)	$	36,238		$	(37,060	)

Earnings (loss) per share:




	Basic




		Net income (loss) before change in accounting and extraordinary gain		$	(3.14	)	$	1.41		$	(1.35	)




		Cumulative effect of change in accounting principle (net of taxes)			—			—			(.12	)




		Extraordinary gain on early extinguishment of long-term debt			—			—			.03

			Net income (loss) attributable to common stockholders	$	(3.14	)	$	1.41		$	(1.44	)

	Diluted




		Net income (loss) before change in accounting and extraordinary gain		$	(3.14	)	$	1.39		$	(1.35	)




		Cumulative effect of change in accounting principle (net of taxes)			—			—			(.12	)




		Extraordinary gain on early extinguishment of long-term debt			—			—			.03

			Net income (loss) attributable to common stockholders	$	(3.14	)	$	1.39		$	(1.44	)


December 31,			2001			2000

Assets




Investments:




	Invested cash		$	524,554		$	308,193




	Fixed maturity securities:




		Held to maturity, at cost (fair value $167,559 and $164,229)		156,464			156,067




		Available for sale, at fair value (cost $2,241,321 and $2,087,338)		2,299,326			2,115,824




	Equity securities, at fair value:




		Available for sale (cost $103,011 and $76,545)		109,114			83,823




		Trading account (cost $215,808 and $340,617)		213,878			347,271




Cash				9,533			938




Premiums and fees receivable				537,814			416,243




Due from reinsurers, net of funds withheld				716,398			713,392




Accrued investment income				35,926			36,578




Prepaid reinsurance premiums				103,667			99,444




Deferred policy acquisition costs				224,110			196,231




Real estate, furniture and equipment at cost, less accumulated depreciation				118,344			118,282




Deferred Federal and foreign income taxes				99,921			47,567




Excess of cost over net assets acquired				64,513			71,496




Trading account receivable from brokers and clearing organizations				351,707			269,444




Other assets				68,240			41,277

Total Assets			$	5,633,509		$	5,022,070

Liabilities and Stockholders’ Equity




Liabilities:




	Reserves for losses and loss expenses		$	2,817,682		$	2,533,917




	Unearned premiums			879,640			713,239




	Due to reinsurers			139,322			132,521




	Trading securities sold but not yet purchased, at fair value (proceeds $58,331 and $164,312)			56,990			169,020




	Short-term debt			—			10,000




	Other liabilities			215,220			182,273




	Long-term debt			370,554			370,158

Total Liabilities				4,479,408			4,111,128

Trust preferred securities				198,210			198,169




Minority interest				24,296			31,877

Stockholders’ equity:




	Preferred stock, par value $.10 per share:




		Authorized 5,000,000 shares, issued and outstanding – none		—			—




	Common stock, par value $.20 per share:




		Authorized 80,000,000 shares, issued and outstanding, net of treasury shares, 33,240,516 and 25,656,362 shares		8,661			7,281




	Additional paid-in capital			659,266			334,061




	Retained earnings			467,185			574,345




	Accumulated other comprehensive income			37,340			19,371




	Treasury stock, at cost, 10,063,328 and 10,747,482 shares			(240,857	)		(254,162	)

Total Stockholders’ Equity				931,595			680,896

Total Liabilities and Stockholders’ Equity			$	5,633,509		$	5,022,070


Years ended December 31, 2001, 2000 and 1999

					Preferred
					and common
					stock and						Accumulated
		Total			additional						other
		stockholders'			paid-in			Retained			comprehensive			Treasury
		equity			capital			earnings			income (loss)			stock

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	)




	Net income attributable to common stockholders		36,238			—			36,238			—			—




	Change in other comprehensive income (loss)		63,871			—			—			63,871			—




	Issuance of common shares		9,323			2,421			—			—			6,902




	Purchase of treasury stock		(7,020	)		—			—			—			(7,020	)




	Dividends to common stockholders ($.52 per share)		(13,294	)		—			(13,294	)		—			—

Balance, December 31, 2000			680,896			341,342			574,345			19,371			(254,162	)




	Net loss attributable to common stockholders		(91,546	)		—			(91,546	)		—			—




	Change in other comprehensive income (loss)		17,969			—			—			17,969			—




	Issuance of common shares		340,892			326,585			—			—			14,307




	Purchase of treasury stock		(1,002	)		—			—			—			(1,002	)




	Dividends to common stockholders ($.52 per share)		(15,614	)		—			(15,614	)		—			—

Balance, December 31, 2001		$	931,595		$	667,927		$	467,185		$	37,340		$	(240,857	)


					2001				2000

Description	Rate			Maturity	Face Value		Carrying Value		Carrying Value

Senior Notes		6.71	%	March 4, 2003	$	25,000,000	$	24,976,000	$	24,957,000




Senior Subordinated Notes		6.50	%	July 1, 2003		35,793,000		35,793,000		35,793,000




Note Payable		(1	)	December 30, 2003		8,000,000		8,000,000		8,000,000




Senior Notes		6.375	%	April 15, 2005		40,000,000		39,885,000		39,854,000




Senior Notes		6.25	%	January 15, 2006		100,000,000		99,442,000		99,323,000




Senior Notes		9.875	%	May 15, 2008		88,800,000		86,774,000		86,561,000




Senior Debentures		8.70	%	January 1, 2022		76,503,000		75,684,000		75,670,000

					$	374,096,000	$	370,554,000	$	370,158,000


(Dollars in thousands)	2001		2000		1999

Amortization of deferred policy acquisition costs	$	492,065	$	454,729	$	444,289




Other operating costs and expenses of insurance operations		85,593		68,756		79,879




Other operating costs and expenses of service companies		64,947		57,108		64,780




Other costs and expenses		21,171		15,986		15,836

Total	$	663,776	$	596,579	$	604,784




				Options Outstanding				Options Exercisable

				Weighted						Weighted
Range of				Remaining		Weighted				Average
Exercise		Number		Contractual		Average		Number		Exercise
Prices		Outstanding		Life		Price		Exercisable		Price

December 31, 2001




$14 to $27			1,038,048		7.0	$	20.34		207,098	$	24.83




27 to 32			426,663		4.3		28.91		426,663		28.91




32 to 58			2,174,368		6.7		41.90		1,019,158		36.59

	Total		3,639,079		6.5	$	34.23		1,652,919	$	33.13

December 31, 2000




$14 to $27			1,363,366		7.0	$	21.05		456,666	$	24.39




27 to 32			661,812		5.1		28.99		433,927		29.01




32 to 48			1,960,901		6.8		39.76		62,133		38.71

	Total		3,986,079		6.6	$	31.57		952,726	$	27.43


	Net Income (loss)						Basic Earnings (loss) per Share						Diluted Earnings (loss) per Share

	As reported			Pro forma			As reported			Pro forma			As reported			Pro forma

2001




Attributable to common stockholders	$	(91,546	)	$	(94,554	)	$	(3.14	)	$	(3.24	)	$	(3.14	)	$	(3.24	)

2000




Attributable to common stockholders	$	36,238		$	33,331		$	1.41		$	1.30		$	1.39		$	1.28


(Dollars in thousands)

						Gross		Gross
						unrealized		unrealized			Fair			Carrying
Type of investment			Cost^(a)			gains		losses			value			value

December 31, 2001




Fixed maturity securities held to maturity:




	State and municipal		$	48,618		$	4,438	$	(155	)	$	52,901		$	48,618




	Corporate			11,331			790		—			12,121			11,331




	Mortgage-backed securities			96,515			6,022		—			102,537			96,515

		Total fixed maturity securities held to maturity		156,464			11,250		(155	)		167,559			156,464

Fixed maturity securities available for sale:




	United States Government^(b)			506,067			22,282		(1,726	)		526,623			526,623




	State and municipal			540,081			12,936		(5,358	)		547,659			547,659




	Corporate			537,680			18,604		(4,472	)		551,812			551,812




	Mortgage-backed securities			551,082			13,843		(3,240	)		561,685			561,685




	Foreign			106,411			5,617		(481	)		111,547			111,547

		Total fixed maturity securities available for sale		2,241,321			73,282		(15,277	)		2,299,326			2,299,326

Equity securities available for sale:




	Common stocks			25,819			3,587		(502	)		28,904			28,904




	Preferred stocks			77,192			3,485		(467	)		80,210			80,210

		Total equity securities available for sale		103,011			7,072		(969	)		109,114			109,114

Equity securities trading:




	Long positions^(c)			215,808			2,951		(4,881	)		213,878			213,878




	Receivable from brokers			351,707			—		—			351,707			351,707




	Securities sold but not yet purchased			(58,331	)		3,482		(2,141	)		(56,990	)		(56,990	)

		Total equity securities trading		509,184			6,433		(7,022	)		508,595			508,595

Invested cash^(d)				524,554			—		—			524,554			524,554

Total investments			$	3,534,534		$	98,037	$	(23,423	)	$	3,609,148		$	3,598,053

December 31, 2000




Fixed maturity securities held to maturity:




	State and municipal		$	54,659		$	4,122	$	(115	)	$	58,666		$	54,659




	Corporate			11,592			654		(85	)		12,161			11,592




	Mortgage-backed securities			89,816			3,586		—			93,402			89,816

		Total fixed maturity securities held to maturity		156,067			8,362		(200	)		164,229			156,067

Fixed maturity securities available for sale:




	United States Government^(b)			480,871			14,327		(1,574	)		493,624			493,624




	State and municipal			544,015			14,169		(1,681	)		556,503			556,503




	Corporate			454,844			7,727		(8,695	)		453,876			453,876




	Mortgage-backed securities			469,144			9,144		(5,376	)		472,912			472,912




	Foreign			138,464			2,976		(2,531	)		138,909			138,909

		Total fixed maturity securities available for sale		2,087,338			48,343		(19,857	)		2,115,824			2,115,824

Equity securities available for sale:




	Common stocks			49,976			7,830		(1,161	)		56,645			56,645




	Preferred stocks			26,569			770		(161	)		27,178			27,178

		Total equity securities available for sale		76,545			8,600		(1,322	)		83,823			83,823

Equity securities trading:




	Long positions^(c)			340,617			16,159		(9,505	)		347,271			347,271




	Receivable from brokers			269,444			—		—			269,444			269,444




	Securities sold but not yet purchased			(164,312	)		8,286		(12,994	)		(169,020	)		(169,020	)

		Total equity securities trading		445,749			24,445		(22,499	)		447,695			447,695

Invested cash^(d)				308,193			—		—			308,193			308,193

Total investments			$	3,073,892		$	89,750	$	(43,878	)	$	3,119,764		$	3,111,602

(a)		Adjusted as necessary for amortization of premium or discount.
(b)		Includes United States government agencies and authorities.
(c)		Includes investments of $97,917,000 and $52,610,000 as of December 31, 2001 and 2000, respectively, in managed investment funds.
(d)		Short-term investments which mature within three months of the date of purchase.


(Dollars in thousands)	2001

	Cost		Fair value

Due in one year or less	$	76,652	$	78,376




Due after one year through five years		480,636		505,115




Due after five years through ten years		559,480		572,013




Due after ten years		633,420		647,159




Mortgage-backed securities		647,597		664,222

Total	$	2,397,785	$	2,466,885


	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, 2001, the notional amount of long option contracts outstanding is $16,391,000 and short option contracts outstanding is $10,985,000.

	Investment income earned from net trading account activity includes unrealized trading losses of $2,519,000 and $4,897,000 for 2001 and 1999, respectively, and unrealized trading gains of $1,899,000 for 2000.


(in thousands)	2001			2000			1999

Balance, beginning of year		25,656			25,617			26,504




Shares issued		7,603			339			18




Shares repurchased		(18	)		(300	)		(905	)

Balance, end of year		33,241			25,656			25,617




		Revenues
												Income			Income Tax
		Investment			Unaffiliated		Inter-					(loss) before			Expense
(Dollars in thousands)		Income			Customers		Segment			Total		income taxes			(Benefit)

December 31, 2001:




	Specialty	$	39,390		$	438,534	$	2,116		$	440,650	$	28,806		$	7,760




	Alternative Markets		37,765			232,671		1,450			234,121		32,971			9,271




	Reinsurance		42,536			278,831		2,659			281,490		(54,502	)		(20,907	)




	Regional		51,640			601,202		13,722			614,924		44,403			7,647




	International		13,993			137,676		7			137,683		(6,082	)		2,224




	Discontinued Business		9,762			232,403		—			232,403		(133,480	)		(46,718	)




	Corporate, other and eliminations		(65	)		20,480		(19,954	)		526		(63,510	)		(15,938	)

	Consolidated	$	195,021		$	1,941,797		—		$	1,941,797	$	(151,394	)	$	(56,661	)

December 31, 2000:




	Specialty	$	48,706		$	322,618	$	2,241		$	324,859	$	31,836		$	9,058




	Alternative Markets		37,722			189,658		137			189,795		35,315			9,978




	Reinsurance		50,471			348,707		457			349,164		27,760			7,387




	Regional		56,955			564,125		1,202			565,327		8,761			2,483




	International		9,636			118,234		—			118,234		6,853			1,820




	Discontinued Business		9,562			232,392		—			232,392		(9,936	)		(3,478	)




	Corporate, other and eliminations		(2,604	)		5,553		(4,037	)		1,516		(59,738	)		(24,797	)

	Consolidated	$	210,448		$	1,781,287		—		$	1,781,287	$	40,851		$	2,451

December 31, 1999:




	Specialty	$	50,231		$	310,373	$	(1,305	)	$	309,068	$	39,261		$	8,692




	Alternative Markets		30,827			168,635		586			169,221		20,593			6,167




	Reinsurance		47,288			341,201		739			341,940		14,091			1,992




	Regional		49,705			539,906		1,462			541,368		(78,895	)		(4,154	)




	International		6,469			93,878		—			93,878		3,535			1,443




	Discontinued Business		8,462			213,816		—			213,816		(14,141	)		(4,949	)




	Corporate, other and eliminations		(2,666	)		5,859		(1,482	)		4,377		(63,692	)		(54,957	)

	Consolidated	$	190,316		$	1,673,668		—		$	1,673,668	$	(79,248	)	$	(45,766	)

(19) Quarterly Financial Information (unaudited)

		The following is a summary of quarterly financial data (In thousands except per share data):




		Three months ended

		March 31,				June 30,				September 30,					December 31,
		2001		2000		2001		2000		2001			2000		2001			2000

Revenues		$	449,153	$	423,324	$	490,997	$	431,933	$	500,072		$	445,957	$	501,575		$	480,073

Net income (loss) attributable to common stockholders			10,266		4,346		9,598		6,636		(47,246	)		7,092		(64,164	)		18,164

Net income (loss) per share:




	Basic		.38		.17		.33		.26		(1.63	)		.28		(2.04	)		.71

	Diluted^(a)		.36		.17		.32		.26		(1.63	)		.27		(2.04	)		.68