Back to GetFilings.com
1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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, P.O. BOX 2518,
GREENWICH, CT 06836-2518
(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:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- --------------------------------------------------------------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.20 per share
Series A Cumulative Redeemable Preferred Stock, par value $.10 per share
------------------------
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 _____
Aggregate market value of voting stock held by non-affiliates of the
registrant based on the closing price of such stock as of March 4, 1997:
$921,684,118.
Number of shares of common stock, $.20 par value, outstanding as of March
4, 1997: 19,641,099
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1996
(incorporated by reference under Part III).
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. _____
================================================================================
2
W. R. BERKLEY CORPORATION
ANNUAL REPORT ON FORM 10-K
December 31, 1996
PART I Page
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 20
ITEM 3. LEGAL PROCEEDINGS 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 21
ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS
ENDED DECEMBER 31, 1996 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 55
ITEM 11. EXECUTIVE COMPENSATION 57
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 57
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 59
2
3
PART I
ITEM 1. BUSINESS
General Description of the Company's Business
W. R. Berkley Corporation (the "Company"), a Delaware corporation, is
an insurance holding company, which through its subsidiaries, presently operates
in all segments of the property casualty insurance business: regional property
casualty insurance; reinsurance (conducted through Signet Star Holdings, Inc.);
specialty lines of insurance (including excess and surplus lines and commercial
transportation); alternative markets (including the management of alternative
insurance market mechanisms); and international (conducted through Berkley
International, LLC). The Company was founded on the concept that a group of
autonomous regional and specialty insurance entities could compete effectively
in selected markets within a very large industry. Decentralized control allows
each subsidiary to respond to local or specialty market conditions while
capitalizing on the effectiveness of centralized investment and reinsurance
management, and actuarial, financial and legal staff support.
The Company's regional insurance operations are conducted primarily in
the midwest, southern and northeast sections of the United States. Reinsurance,
specialty insurance and alternative markets operations are conducted nationwide.
Presently, international operations are conducted primarily in Argentina.
Net premiums written, as reported on a generally accepted accounting
principles ("GAAP") basis, by the Company's five major insurance industry
segments for the five years ended December 31, 1996 were as follows:
Year Ended December 31,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Amounts in thousands)
Net premiums written:
Regional insurance operations (1) $ 531,147 $ 471,716 $ 386,530 $ 301,890 $ 257,625
Reinsurance operations (2) 218,047 195,988 176,699 84,726 --
Specialty insurance operations (2) 202,491 160,847 134,715 146,101 160,053
Alternative markets operations (2) 75,644 25,998 19,989 4,929 --
International Operations 25,182 5,872 -- -- --
------------ ---------- ---------- ---------- ----------
Total net premiums written $ 1,052,511 $ 860,421 $ 717,933 $ 537,646 $ 417,678
============ ========== ========== ========== ==========
Percentage of net premiums written:
Regional insurance operations (1) 50.5% 54.8% 53.8% 56.2% 61.7%
Reinsurance operations (2) 20.7 22.8 24.6 15.7 --
Specialty insurance operations (2) 19.2 18.7 18.8 27.2 38.3
Alternative markets operations (2) 7.2 3.0 2.8 .9 --
International Operations 2.4 .7 -- -- --
------------ ---------- ---------- ---------- ----------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
============ ========== ========== ========== ==========
(1) For the year ended December 31, 1995 the results of the Regional
operations have been restated to reflect the international operations as
a separate segment.
(2) Premiums written by the Company's Reinsurance operations prior to July 1,
1993, including the alternative markets division, are included in
Specialty insurance operations (see: "Other information about the
Company's business").
3
4
The following sections briefly describe the Company's insurance
segments and subsidiaries. The statutory information contained herein is derived
from that reported to state regulatory authorities in accordance with statutory
accounting practices ("SAP"). The amount of statutory net premiums shown for the
subsidiaries exclude the effects of intercompany reinsurance. In connection with
the acquisition of Midwest Employers Casualty Company ("Midwest") in November
1995, the Company established the alternative markets segment to reflect the
markets served by each of its business segments. The alternative markets segment
consists of Midwest, Signet Star Holding's alternative markets division and the
Company's insurance services units which manage alternative market mechanisms.
The descriptions contain each significant insurance subsidiary's rating by A.M.
Best and Company, Inc. ("A.M. Best"). A.M. Best's Ratings are based upon factors
of concern to policyholders, insurance agents and brokers and are not directed
toward the protection of investors. A.M. Best states: "Best's Ratings reflect
[its] opinion as to the relative financial strength and performance of each
insurer in comparison with others, based on [its] analysis of the information
provided to [it]. These Ratings are not a warranty of an insurer's current or
future ability to meet its contractual obligations."
REGIONAL INSURANCE OPERATIONS
The Company's regional property casualty subsidiaries write standard
commercial and personal lines insurance for such risks as automobiles, homes and
businesses. American West Insurance Company ("American West"), Continental
Western Insurance Company ("Continental Western"), Great River Insurance Company
("Great River"), Tri-State Insurance Company of Minnesota ("Tri-State"), Union
Insurance Company ("Union") and Union Standard Insurance Company ("Union
Standard") obtain their business primarily in the smaller communities of the
midwest and southwest through over 2,000 independent insurance agencies, which
represent them on a non-exclusive basis and are compensated on a commission
basis. Firemen's Insurance Company of Washington D.C. ("Firemen's") and Berkley
Insurance Company of the Carolinas ("BICC") primarily sell their policies
through agents in the District of Columbia, and the States of Maryland, North
Carolina, Pennsylvania and Virginia. Certain of Firemen's commercial lines of
business are marketed principally through brokers in the New York metropolitan
area. Acadia Insurance Company ("Acadia") currently operates in the States of
Maine, New Hampshire and Vermont, and sells its personal and commercial
coverages through independent agencies.
In 1996, the Company formed Berkley Regional Insurance Company
("BRIC"). The Company contributed to BRIC all of the capital stock of the
regional insurance companies. In 1997 BRIC will reinsure varying portions of the
business written by the regional operations. In addition, BRIC is expanding its
licenses so that it will be eligible to write personal and commercial lines on a
direct basis nationally. BRIC's statutory surplus as of December 31, 1996 was
$281,704,000.
Acadia Insurance Company
Acadia was organized by the Company and incorporated in April 1992. It
writes multiple line property and casualty coverages in the States of Maine, New
Hampshire and Vermont. Acadia is rated A+ by A.M. Best. Acadia's statutory
surplus and statutory net premiums written as of December 31, 1996 and for the
year then ended were $42,782,000 and $105,239,000, respectively.
American West Insurance Company
American West is a successor to a company that was organized in 1903 as
a mutual insurance company and converted to a stock company in June 1986. Its
business consists primarily of personal lines in the States of Minnesota,
Montana, Wisconsin and South Dakota. American West is rated A- by A.M. Best.
American West's statutory surplus and statutory net premiums written as of
December 31, 1996 and for the year then ended were $7,958,000 and $15,474,000,
respectively. In 1997 American West will be managed by Tri-State, its immediate
parent.
4
5
Berkley Insurance Company of the Carolinas
In December 1995, the Company organized BICC, a North Carolina
domiciled company. It writes personal and commercial lines in North Carolina and
is expanding to surrounding states. BICC is rated A+ by A.M. Best. BICC's
statutory surplus and statutory net premiums written as of December 31, 1996 and
for the year then ended were $6,339,000 and $7,619,000, respectively.
Continental Western Insurance Company
Continental Western was organized in 1907. It writes a diverse
commercial lines book of business as well as personal lines principally in the
States of Iowa, Nebraska, Kansas, Illinois, Missouri, Wisconsin and Montana.
Continental Western is rated A+ by A.M. Best. Continental Western's statutory
surplus and statutory net premiums written as of December 31, 1996 and for the
year then ended were $82,286,000 and $143,551,000, respectively.
Firemen's Insurance Company of Washington, D.C.
Firemen's was incorporated by an Act of Congress in 1836. Firemen's
writes commercial business consisting primarily of multiple dwelling coverages
principally in the State of New York through operations conducted by Clermont
Specialty Managers, Ltd., an underwriting manager which is owned by the Company.
In addition, it insures homeowners, other personal lines and commercial risks in
the District of Columbia, and in the States of Maryland, North Carolina and
Virginia. In September 1993, Firemen's established Chesapeake Insurance Division
in order to expand its operations in the State of Virginia. In 1997 Firemen's
spun off this division into the operations of Chesapeake Bay Property and
Casualty Insurance Company, which is owned by Acadia. In March 1995, Firemen's
established the Presque Isle Insurance Division in order to expand its
operations into the State of Pennsylvania. Firemen's is rated A+ by A.M. Best.
Firemen's statutory surplus and statutory net premiums written as of December
31, 1996 and for the year then ended were $31,516,000 and $65,590,000,
respectively.
Great River Insurance Company
In December 1993, the Company organized Great River, a Mississippi
domiciled company. It writes personal and commercial lines in Mississippi and
Tennessee and is expanding to surrounding states. Great River is rated A+ by
A.M. Best. Great River's statutory surplus and statutory net premiums written as
of December 31, 1996 and for the year then ended were $12,675,000 and
$34,331,000, respectively.
Tri-State Insurance Company of Minnesota
Tri-State was originally organized in 1902 as a mutual insurance
company. It writes various commercial lines (specializing in grain elevator
coverages), as well as personal lines primarily, in the States of Minnesota,
Iowa, North and South Dakota, Nebraska, Wisconsin and Illinois. Tri-State is
rated A+ by A.M. Best. Tri-State's statutory surplus and statutory net premiums
written as of December 31, 1996 and for the year then ended were $36,343,000 and
$53,569,000, respectively.
Union Insurance Company
Union was organized originally in 1886 as a mutual insurance company.
Union's business consists of personal lines as well as commercial lines
insurance concentrated in the States of Nebraska, Kansas, Colorado and South
Dakota. Union is rated A by A.M. Best. Union's statutory surplus and statutory
net premiums written as of December 31, 1996 and for the year then ended were
$21,917,000 and $49,755,000, respectively.
5
6
Union Standard Insurance Company
Union Standard is a successor to a company that was organized in 1970.
Union Standard writes personal lines and commercial lines of insurance for small
businesses in the States of Texas, Oklahoma, Arkansas and Colorado. Union
Standard is rated A by A.M. Best. Union Standard's statutory surplus and
statutory net premiums written as of December 31, 1996 and for the year then
ended were $32,832,000 and $58,442,000, respectively.
Regional operations: Business
The following table sets forth the percentages of direct premiums
written, by line, by the Company's regional insurance operations (1):
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
Commercial Multi-Peril 20.9% 21.4% 22.0% 19.6% 19.0%
Workers' Compensation 20.1 20.8 18.7 16.9 13.7
Automobile:
Commercial 17.3 15.5 16.4 17.4 17.1
Personal 16.7 17.5 17.6 19.4 21.8
Homeowners 7.9 8.9 9.2 9.8 10.7
General Liability 6.4 6.5 6.6 6.9 7.1
Fire and Allied Lines 4.7 4.5 4.8 5.5 5.9
Inland Marine 2.8 2.6 2.6 2.6 2.8
Other 3.2 2.3 2.1 1.9 1.9
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
The following table sets forth the percentages of direct premiums
written, by state, by the Company's regional insurance operations (1):
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
Maine 10.7% 10.7% 10.5% 8.3% .9%
Iowa 8.4 9.3 11.1 13.8 15.7
Nebraska 8.1 9.1 11.0 13.6 16.1
Texas 7.5 7.9 9.2 10.0 9.7
Mississippi 6.0 5.4 2.9 -- --
New Hampshire 5.9 6.0 4.7 .9 --
South Dakota 5.4 6.7 4.9 5.7 6.3
Minnesota 5.4 5.5 6.0 6.6 7.6
Kansas 4.8 4.8 5.2 5.7 6.4
Virginia 3.9 3.0 2.1 .6 .3
Colorado 3.8 4.0 4.5 5.1 5.5
Missouri 3.6 3.7 3.8 3.7 4.0
Illinois 3.0 3.5 3.8 4.2 5.0
Vermont 3.0 2.4 1.1 -- --
Wisconsin 2.9 3.5 3.6 4.4 5.0
New York 2.8 2.9 2.6 3.0 3.4
Pennsylvania 2.2 -- -- -- --
Arkansas 1.8 2.1 2.8 3.1 3.1
District of Columbia 1.6 1.9 2.3 2.4 2.4
North Dakota 1.5 2.6 3.2 3.9 4.3
North Carolina 1.5 .1 -- -- --
Montana 1.4 1.4 1.4 1.6 2.0
Oklahoma 1.3 1.4 1.5 1.5 1.1
Other 3.5 2.1 1.8 1.9 1.2
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
(1) For the year ended December 31, 1995 the results of the Regional
operations have been restated to reflect the international operations as
a separate segment.
6
7
REINSURANCE OPERATIONS
The Company's reinsurance operations consists of five operating units which
specialize in underwriting property, casualty and surety reinsurance on both a
treaty and a facultative basis. Signet Star Holdings, Inc. (Signet Star),
through its subsidiary Signet Star Reinsurance Company, includes the results of
the reinsurance operations and the results of its alternative markets divisions.
For financial segment reporting purposes the results of the alternative market
division are included in the alternative markets segment. Signet Star
Reinsurance Company is rated A by A.M. Best. Signet Star Reinsurance Company's
statutory surplus and statutory net premiums written as of December 31, 1996 and
for the year then ended were $257,641,000 and $264,355,000, respectively.
The Property Casualty Treaty Division
The largest business unit in terms of personnel and premiums written,
this division of Signet Star is committed exclusively to the broker market
segment of the treaty reinsurance industry. It functions as a traditional
reinsurer in specialty and standard reinsurance lines.
Facultative ReSources, Inc.
Facultative ReSources, Inc. ("Fac Re") specializes in individual
certificate and program facultative business. Fac Re's highly experienced
underwriters seek to offset the underwriting and pricing cycles in the
underlying insurance business by developing risk management solutions and
through superior risk selection. Fac Re develops its business through brokers
and on a direct basis where the client does not choose to use an intermediary.
The Fidelity and Surety Division
The Fidelity and Surety Division ("F&S") operates as a lead company in
a niche market of the United States property casualty industry where its highly
specialized knowledge and expertise are essential to meet the needs of insureds.
Business is developed principally through brokers and directly to clients not
served by intermediaries.
The Latin American and Caribbean Division
Signet Star's newest business unit is devoted exclusively to Latin
American and Caribbean business ("LACD"). This division handles most traditional
lines of property and casualty treaty business and is developing a book of niche
business.
Reinsurance Operations: Business
The following table sets forth the percentages of gross premiums
written, by line, by the Company's reinsurance operations:
1996 1995 1994 1993
----- ----- ----- -----
Treaty:
Specialty and other 31.7% 46.8% 49.1% 56.4%
Regional 24.7 21.0 24.9 22.9
Nonstandard Automobile 16.7 10.4 9.5 9.3
----- ----- ----- -----
Total Treaty 73.1 78.2 83.5 88.6
Casualty Facultative 11.7 14.2 10.9 6.4
Fidelity and Surety 9.5 7.6 5.6 5.0
Latin American and Caribbean 5.7 -- -- --
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
7
8
The following table sets forth the percentage of gross premiums written, by
property versus casualty business, by the Company's reinsurance operations:
1996 1995 1994 1993
----- ----- ----- -----
Property 35.2% 33.4% 40.2% 44.0%
Casualty 64.8 66.6 59.8 56.0
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
SPECIALTY INSURANCE OPERATIONS
The Company's specialty lines of insurance consist primarily of excess
and surplus lines ("E & S"), commercial transportation, professional liability,
directors and officers liability and surety. Specialty lines also included the
results of the Company's reinsurance operations through June 30, 1993 (see:
"Other information about the Company's business").
Admiral Insurance Company
The majority of the Company's E & S insurance business is conducted by
Admiral Insurance Company ("Admiral"). Admiral specializes in general liability
coverages, including products liability and professional liability. Admiral
insures risks requiring specialized treatment not available in the conventional
market, with coverage designed to meet the specific needs of the insured.
Business is received from wholesale brokers via retail agents, whose clients are
the insureds. E & S carriers operate on a non-admitted basis in the states where
they write business. They are generally free from rate regulation and policy
form requirements. Admiral's business is obtained on a nationwide basis from
approximately 190 non-exclusive brokers, who do not have the authority to commit
the Company, and who are compensated on a commission basis. Admiral also writes
directors and officers liability insurance through operations conducted by
Monitor Liability Managers, Inc., an underwriting manager established by the
Company. Admiral is rated A++ by A.M. Best. Admiral's statutory surplus and
statutory net premiums written as of December 31, 1996 and for the year then
ended were $183,034,000 and $100,306,513, respectively.
Carolina Casualty Insurance Company
The Company's commercial transportation operations are primarily
conducted by Carolina Casualty Insurance Company ("Carolina"). Carolina writes
liability, physical damage and cargo insurance for the transportation industry,
concentrating on long-haul trucking companies. Municipal bus lines, charter
buses and school buses also make up a substantial part of Carolina's book of
business. Carolina's business is obtained nationwide from approximately 120
agents and brokers who are compensated on a commission basis. In June 1995,
Carolina began writing surety bonds through operations conducted by Monitor
Surety Managers, Inc., an underwriting manager established by the Company. In
December 1996, Carolina began writing directors and officers liability insurance
through operations conducted by Monitor Liability Managers, Inc. Carolina is
rated A by A.M. Best. Carolina's statutory surplus and statutory net premiums
written as of December 31, 1996 and for the year then ended were $61,957,000 and
$60,508,000, respectively.
Nautilus Insurance Company
Nautilus Insurance Company ("Nautilus") was established in 1985 to
insure E & S risks which involve a lower degree of expected severity than those
covered by Admiral. Nautilus obtains its business nationwide from approximately
135 non-exclusive general agents, some of which also provide business to
Admiral. A substantial portion of Nautilus' business is written on a binding
authority basis, subject to certain contractual limitations. Nautilus is rated A
by A.M. Best. Nautilus's statutory surplus and statutory net premiums written as
of December 31, 1996 and for the year then ended were $56,538,000 at
$36,081,000, respectively. Great Divide Insurance Company ("Great Divide"), a
subsidiary of Nautilus, writes transportation risks, as well as other specialty
lines, on an admitted basis.
8
9
Specialty Operations: Business
The following table sets forth the percentages of gross premiums
written, by line, by the Company's specialty insurance operations:
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
General Liability 35.9% 38.2% 42.2% 37.6% 39.3%
Automobile Liability 20.5 27.4 28.1 27.9 30.2
Professional Liability 12.3 7.1 6.3 6.3 4.9
Directors and Officers Liability 10.2 9.2 5.8 4.0 --
Fire and Allied Lines 7.2 5.0 4.6 3.2 2.5
Automobile Physical Damage 5.3 6.8 5.9 4.6 4.0
Inland Marine 1.7 2.1 1.8 1.7 2.0
Other 6.9 4.2 5.3 14.7 17.1
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
ALTERNATIVE MARKETS
The Company's alternative markets operations specialize in insuring,
reinsuring and administering self-insurance programs and other alternative risk
transfer mechanisms for public entities, private employers and associations.
Typical clients are those who are driven by various factors to seek less costly
and more efficient techniques to manage their exposure to claims. The Company's
alternative markets segment consists of: excess workers' compensation insurance
written by Midwest Employers Casualty Company ("Midwest"); reinsurance of
alternative risk business; and insurance services operations which manage
alternative market mechanisms.
Midwest Employers Casualty Company
In November 1995, the Company acquired Midwest Employers Casualty
Company ("Midwest"). Midwest markets and underwrites excess workers'
compensation ("EWC") insurance. EWC insurance is marketed to employers and
employer groups which have elected and have qualified or been approved by state
regulatory authorities to self-insure their workers' compensation programs. EWC
insurance provides coverage to a self-insured employer once the employers'
losses exceed the employer's retention amount. Midwest offers a complete line of
EWC products, including specific and aggregate EWC insurance policies and surety
bonds. Midwest is rated A- by A.M. Best. Midwest's statutory surplus and
statutory net premiums written as of December 31, 1996 and for the year then
ended were $106,682,000 and $55,232,000, respectively.
Signet Star - Alternative Markets Division
Signet Star Reinsurance Company's Alternative Markets Division
specializes in providing custom designed reinsurance products and services to
alternative markets ("ARM") clients, such as captive insurance companies, risk
retention groups, public entity insurance trusts and governmental pools. ARM
clients are generally self insured vehicles which provide insurance buyers with
a mechanism for assuming part of their own risk, managing their exposures,
modifying their loss costs and, ultimately, participating in the underwriting
results. Signet Star has been an active reinsurer of ARM clients for over ten
years and is considered to be one of the leading broker market reinsurers of ARM
business. The Alternative Markets Division has access to substantial additional
resources within the Company, which will enable it to concentrate and coordinate
the Company's focus on this growing sector of the reinsurance market.
9
10
Insurance Services Operations
The Company's insurance service operations offer a variety of products,
which includes underwriting and claims administration and alternative insurance
market mechanisms. In addition, subsidiaries of the Company provide agency and
brokerage services to both affiliated and unaffiliated entities.
Berkley Administrators
Berkley Administrators, a division of Tri-State headquartered in
Minneapolis, Minnesota, provides risk management and administration services to
its clients, including underwriting, loss control, policy issuance and claims
handling. A significant portion of Berkley Administrators' present business is
the administration of the Minnesota Workers' Compensation Assigned Risk Plan.
Berkley Risk Services, Inc.
The Company acquired Berkley Risk Services, Inc. ("Berkley Risk") and
its affiliated companies in 1988. Berkley Risk, based in Minneapolis, Minnesota,
is a property casualty risk management firm which specializes in the development
and administration of group and single-employer alternative insurance funding
techniques. Subsidiaries of Berkley Risk also manage entities which provide
liability insurance and claim adjusting services to public entities and
not-for-profit organizations.
Key Risk Management Services, Inc.
The Company acquired Key Risk Management Services, Inc. ("Key Risk") in
1994. Key Risk, based in Greensboro, North Carolina, is a property casualty risk
management firm which specializes in management and administration of group
self-insured funds. A significant portion of Key Risk's present business is the
administration of the North Carolina Associated Industries Workers' Compensation
Fund.
Berkley Risk Managers
Berkley Risk Managers is a successor to a company acquired in 1990.
Berkley Risk Managers, based in Somerset, New Jersey, is primarily involved in
the development and administration of self-funded property casualty and health
insurance programs primarily for municipalities and other governmental entities.
All American Agency Facilities, Inc.
All American Agency Facilities, Inc., based in Denver, Colorado,
provides wholesale brokerage and general agency services on a nationwide basis
for unaffiliated insurance carriers as well as certain of the Company's
insurance subsidiaries.
Berkley Care Network, Inc.
The Company established Berkley Care Network, Inc. ("Berkley Care") in
1995. Berkley Care, based in Greensboro, North Carolina, is a managed health
care company offering utilization review and case management services for
workers' compensation carriers in North Carolina. It expects to expand the
geographic scope of its operations over the next several years.
Alternative Markets Operations: Business
The following table sets forth the percentages of revenues, by major
source of business, of the alternative markets operations:
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
Midwest Employers Casualty Company 48.8% 14.8% --% --% --%
Insurance Service operations 37.5 63.1 78.6 91.6 100.0
Signet Star - Alternative Markets
division 13.7 22.1 21.4 8.4 --
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
10
11
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 with respect to Berkley International LLC,
a limited liability company. The Company agreed to contribute up to $65 million
to Berkley International in exchange for a 65% membership interest and NML
agreed to contribute up to $35 million to Berkley International in exchange for
a 35% membership interest.
Berkley International LLC owns 99.9916% of Berkley International
Argentina S.A. ("Berkley S.A."), an Argentine holding company. Berkley S.A. owns
the following property casualty insurance companies: 72.86% of La Union Gremial
Compania de Seguros, S.A.; 80% of Independencia Compania Argentina de Seguros,
S.A.; and 99.9667% of Berkley International Asegurdora de Riesgos de Trabajo
S.A. In addition, Berkley S.A. owns 99.9167% of Risk Management Services S.A.,
which is third-party administrator.
RESULTS BY INDUSTRY SEGMENT
Summary financial information about the Company's operating segments is
presented on a GAAP basis in the following table (all amounts include realized
capital gains and losses):
Year Ended December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Amounts in thousands)
Regional Insurance Operations (1)
Total revenues $ 544,400 $ 478,547 $ 376,576 $316,448 $277,112
Income before income taxes 37,745 40,486 26,669 29,993 26,605
Reinsurance Operations (2)
Total revenues 236,967 212,876 187,304 86,962 --
Income (loss) before income taxes 24,202 11,205 (14,977) 194 --
Specialty Insurance Operations (2)
Total revenues 240,019 209,311 184,899 211,129 233,477
Income before income taxes 57,828 43,781 37,452 52,651 38,953
Alternative Markets Operations (2)
Total revenues 171,317 103,656 75,798 53,531 50,553
Income before income taxes 32,541 10,254 7,068 8,058 11,101
International Operations
Total Revenues 26,435 7,313 -- -- --
Loss Before Income Taxes (1,283) (259) -- -- --
(1) For the year ended December 31, 1995 the results of the Regional
operations have been restated to reflect the international operations as a
separate segment.
(2) Prior to July 1, 1993 the Reinsurance operations, including the
alternative markets division, are included in Specialty insurance
operations (see: "Other information about the Company's business").
11
12
The combined ratio represents a measure of underwriting profitability,
excluding investment income. A number in excess of 100 indicates an underwriting
loss; a number below 100 indicates an underwriting profit. Summary information
for the Company's insurance companies and the insurance industry is presented in
the following table (1):
Year Ended December 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
Regional Insurance Operations
Loss ratio 66.7% 65.1% 65.3% 67.1% 66.5%
Expense ratio 34.1 33.9 34.3 34.2 33.5
Policyholders' dividend ratio .7 .9 .9 .9 1.0
----- ----- ----- ----- -----
Combined ratio 101.5% 99.9% 100.5% 102.2% 101.0%
===== ===== ===== ===== =====
Reinsurance Operations (2)
Loss ratio 74.3% 78.3% 87.9% 74.1% --%
Expense ratio 30.0 26.4 27.1 31.4 --
----- ----- ----- ----- -----
Combined ratio 104.3% 104.7% 115.0% 105.5% --%
===== ===== ===== ===== =====
Specialty Insurance Operations (2)
Loss ratio 67.7% 78.6% 77.6% 77.3% 84.3%
Expense ratio 31.0 28.3 26.0 26.8 25.9
----- ----- ----- ----- -----
Combined ratio 98.7% 106.9% 103.6% 104.1% 110.2%
===== ===== ===== ===== =====
Alternative Markets Operations(2) (3)
Loss ratio 74.8% 72.3% 72.5% 72.5% --%
Expense ratio 34.7 31.9 27.7 21.0 --
----- ----- ----- ----- -----
Combined ratio 109.5% 104.2% 100.2% 93.5% --%
===== ===== ===== ===== =====
International Operations
Loss ratio 49.7% 50.0% --% --% --%
Expense ratio 49.9 58.3 -- -- --
----- ----- ----- ----- -----
Combined ratio 99.6% 108.3% --% --% --%
===== ===== ===== ===== =====
Combined Insurance Operations
Loss ratio 68.7% 70.7% 73.7% 71.1% 73.7%
Expense ratio 33.1 31.3 30.8 31.7 30.6
Policyholders' dividend ratio .4 .5 .5 .5 .6
----- ----- ----- ----- -----
Combined ratio 102.2% 102.5% 105.0% 103.3% 104.9%
===== ===== ===== ===== =====
Combined Insurance Operations
Premiums to surplus ratio (4) 1.2 1.0 1.1 .8 1.0
===== ===== ===== ===== =====
Industry Ratios
Combined ratio 107.0% (5) 107.2% (6) 108.9% (6) 107.9% (6) 119.1% (6)
Premiums to surplus ratio 1.0 (5) 1.2 (7) 1.3 (7) 1.3 (7) 1.4 (7)
(1) Based on U.S. statutory accounting practices.
(2) Results of the Company's Reinsurance operations prior to July
1, 1993, including the alternative markets division, are
included in Specialty insurance operations. (see "Other
information about the Company's business").
(3) The Alternative Markets segments combined ratio reflects the
underwriting results of Midwest, since November 1995, the date
it was acquired, and the Signet Star Alternative Markets
division from July 1, 1993. Midwest discounts its reserves for
losses and loss expenses, and, accordingly, the annual change
in the discount is reflected in the loss ratio.
(4) Based on the Company's consolidated net premiums written to
statutory surplus.
(5) Estimated by A.M. Best
(6) Source: A.M. Best Aggregates & Averages, for stock companies.
(7) Source: A.M. Best Aggregates & Averages, for total industry.
12
13
Investments
Investment results before income tax effects were as follows:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Amounts in thousands)
Average investments, at cost $2,538,806 $2,081,547 $1,853,030 $1,584,763 $1,358,366
========== ========== ========== ========== ==========
Investment income,
before expenses $ 171,047 $ 143,527 $ 115,619 $ 98,368 $ 96,960
========== ========== ========== ========== ==========
Percent earned on
average investments 6.7% 6.9% 6.2% 6.2% 7.1%
========== ========== ========== ========== ==========
Realized gains (losses) $ 7,437 $ 10,357 $ (170) $ 23,523 $ 3,356
========== ========== ========== ========== ==========
Change in unrealized investment
gains (losses) (1) $ (22,409) $ 142,475 $ (124,756) $ 13,556 $ 7,743
========== ========== ========== ========== ==========
(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.
December 31,
-------------------------------------------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
1 year or less 3.1% 4.2% 4.0% 3.5% 3.1%
Over 1 year through 5 years 20.7 17.9 27.6 34.0 32.5
Over 5 years through 10 years 25.0 29.4 21.4 22.8 19.2
Over 10 years 27.1 26.2 27.0 27.5 27.3
Mortgage-backed securities 24.1 22.3 20.0 12.2 17.9
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Loss and Loss Adjustment Expense Reserves
In the property casualty industry, it is not unusual for significant
periods of time, ranging up to several years or more, to elapse between the
occurrence of an insured loss, the report of the loss to the insurer and the
insurer's payment of that loss. To recognize liabilities for unpaid losses,
insurers establish reserves, which is a balance sheet account representing
estimates of future amounts needed to pay claims and related expenses with
respect to insured events which have occurred. The Company's loss reserves
reflect current estimates of the ultimate cost of closing outstanding claims;
other than its Excess Workers Compensation business, as discussed below, the
Company does not discount its reserves to estimated present value 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. Each insurance subsidiary's net retention
for each line of insurance is taken into consideration in the computation of
ultimate losses.
In examining reserve adequacy, historical data is reviewed and
consideration is given to such factors as legal developments, changes in social
attitudes and economic conditions, including the effects of inflation. The
actuarial process relies on the basic assumption that
13
14
past experience, judgmentally adjusted 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, resulting in increases or decreases to reserves for insured events of
prior years. The reserving process implicitly recognizes the impact of inflation
and other factors affecting loss costs by taking into account changes in
historic 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
their coverage to previously unforeseen theories of liability, including those
regarding pollution and other environmental exposures, have produced
unanticipated claims and increased the difficulty of estimating the loss and
loss adjustment expense reserves provided by the Company.
Due to the nature of EWC business and the long period of time over
which losses are paid in this line of business, the Company discounts its
liabilities for EWC losses and loss expenses. Discounting liabilities for losses
and loss expenses gives recognition to the time value of money set aside to pay
claims in the future and is intended to appropriately match losses and loss
expenses to income earned on investment securities supporting the liabilities.
The expected losses and loss expense payout pattern subject to discounting was
derived from Midwest's loss payout experience and is supplemented with data
compiled by insurance companies writing workers' compensation on an
excess-of-loss basis. The expected payout pattern has a very long duration
because it reflects the nature of losses which generally penetrate self-insured
retention limits contained in EWC policies. The Company has limited the expected
payout duration to 30 years in order to introduce an additional level of
conservatism into the discounting process. These liabilities have been
discounted using "risk-free" discount rates determined by reference to the U.S.
Treasury yield curve weighted for EWC premium volume to reflect the seasonality
of the anticipated duration of losses associated with such coverages. The
average discount rate for accident years 1996 and 1995 and prior was
approximately 5.90% and 5.80%, respectively. The aggregate net discount, after
reflecting the effects of ceded reinsurance, is $172,415,000 and $152,235,000 at
December 31, 1996 and 1995, respectively.
To date, known pollution and environmental claims at the Company's
insurance company subsidiaries have not had a material impact on the Company's
operations. Environmental claims have not materially impacted the Company
because these subsidiaries generally did not insure the larger industrial
companies which are subject to significant environmental exposures.
The Company's net reserves for losses and loss adjustment expenses
relating to pollution and environmental claims were $35.2 million and $30.8
million at December 31, 1996 and 1995, respectively. The Company's gross
reserves for losses and loss adjustment expenses relating to pollution and
environmental claims were $71.9 million and $59.4 million at December 31, 1996
and 1995, respectively. Net incurred losses and loss expenses for reported
pollution and environmental claims were approximately $6.9 million, $8.0 million
and $5.6 million in 1996, 1995 and 1994, respectively. Net paid losses and loss
expenses has averaged approximately $3 million for each of the last three years.
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 is highly uncertain.
14
15
The table below provides a reconciliation of the beginning and ending
reserve balances, on a gross of reinsurance basis (dollars in thousands):
1996 1995 1994
---- ---- ----
Net reserves at beginning of year $ 1,209,250 $ 895,440 $ 783,218
----------- ----------- -----------
Net reserves of acquired companies -- 191,963 --
Net provision for losses and loss expenses:
Claims occurring during the current year (1) 675,674 580,594 493,418
Decrease in estimates for claims occurring
in prior years (15,219) (9,596) (7,269)
Amortization of discount 8,705 -- --
----------- ----------- -----------
669,160 570,998 486,149
----------- ----------- -----------
Net payments for claims
Current year 280,565 228,100 187,295
Prior years 264,723 221,051 186,632
----------- ----------- -----------
545,288 449,151 373,927
----------- ----------- -----------
Net reserves at end of year 1,333,122 1,209,250 895,440
Ceded reserves at end of year (2) 449,581 450,770 1,175,446
----------- ----------- -----------
Gross reserves at end of year $ 1,782,703 $ 1,660,020 $ 2,070,886
=========== =========== ===========
A reconciliation, as of December 31, 1996, between the reserves
reported in the accompanying consolidated financial statements which have been
prepared in accordance with GAAP and those reported on a SAP basis is as follows
(in thousands):
Net reserves reported on a SAP basis $ 1,380,961
Additions (deductions) to statutory reserves:
Loss reserve discounting (3) (64,179)
Outstanding drafts reclassified as reserves 16,340
-----------
Net reserves reported on a GAAP basis 1,333,122
Ceded reserves reclassified as assets 449,581
-----------
Gross reserves reported on a GAAP basis $ 1,782,703
===========
(1) Claims occurring during the current year is net of discount of $28,885,000
and $708,000 for the years ended December 31, 1996 and 1995, respectively.
(2) The 1995 decline in ceded reserves is due to the sale of North Star
Reinsurance Company (see: "Other information about the Company's
business").
(3) For statutory purposes, Midwest uses a discount rate of 3.0% as permitted
by the Department of Insurance of the State of Ohio. For GAAP purposes,
Midwest uses a discount rate based on the U. S. Treasury yield curve
weighted for the expected payout period, as described above.
The table on page 16 presents the development of net reserves for 1986
through 1996. The top line of the table shows the estimated reserves for unpaid
losses and loss expenses recorded at the balance sheet date for each of the
indicated years. This represents the estimated amount of losses and loss
expenses for claims arising in all prior years that are unpaid at the balance
sheet date, including losses that had been incurred but not yet reported to the
Company. The upper portion of the table shows the re-estimated amount of the
previously recorded reserves based on experience as of the end of each
succeeding year. The estimate changes as more information becomes known about
the frequency and severity of claims for individual years.
The "cumulative redundancy (deficiency)" represents the aggregate
change in the estimates over all prior years. For example, the 1986 reserves
have developed a $47 million deficiency 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 1986 is reserved for $2,000
as of December 31, 1986. Assuming this claim was settled for $2,300 in 1996, the
$300 deficiency would appear as a deficiency in each year from 1986 through
1995.
15
16
Year Ended December 31,
-----------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
----- ---- ---- ---- ---- ---- ---- ------ ------ ------ ------
(Amounts in millions)
Discounted net reserves for losses
and loss expenses $ 303 $423 $531 $611 $643 $680 $710 $ 783 $ 895 $1,209 1,333
Reserve discounting -- -- -- -- -- -- -- -- -- 152 172
Undiscounted net reserve
for loss and loss
expenses 303 423 531 611 643 680 710 783 895 1,361 1,505
Net Re-estimated as of:
One year later 300 419 524 605 635 676 704 776 885 1,346
Two years later 309 413 518 599 632 659 694 775 872
Three years later 309 405 513 596 620 650 665 744
Four years later 311 402 511 587 612 637 655
Five years later 311 402 505 581 603 631
Six years later 312 401 510 585 588
Seven years later 324 405 514 574
Eight years later 330 418 507
Nine years later 349 414
Ten years later 350
Cumulative redundancy
(deficiency) undiscounted (47) 9 24 37 55 49 55 39 23 15 $ --
===== ==== ==== ==== ==== ==== ==== ====== ====== ====== ======
Cumulative amount of
net liability paid
through:
One year later $ 90 $ 91 $114 $158 $139 $160 $169 $ 186 $ 221 $ 265
Two years later 138 152 217 234 235 264 275 221 355
Three years later 176 201 262 294 304 332 306 291
Four years later 188 225 295 334 345 346 344
Five years later 203 244 315 358 377 371
Six years later 213 256 331 380 395
Seven years later 221 268 348 392
Eight years later 231 282 357
Nine years later 244 289
Ten years later 250
Discounted net Reserves 783 895 1,209 1,333
Ceded Reserves 1,233 1,176 451 450
------ ------ ------ ------
Discounted gross Reserves 2,016 2,071 1,660 1,783
Reserve discounting -- -- 192 216
------ ------ ------ ------
Gross reserve 2,016 2,071 1,852 1,999
====== ====== ====== ======
Gross Re-estimated as of
One year later 2,010 2,043 1,827
Two years later 1,966 2,026
Three years later 1,955
Gross cumulative redundancy 61 45 25
====== ====== ======
16
17
Regulation
The Company's insurance subsidiaries are subject to varying degrees of
regulation and supervision in the jurisdictions in which they do business, under
statutes which delegate regulatory, supervisory and administrative powers to
state insurance commissioners. This regulation relates to such matters as the
standards of solvency which must be met and maintained; the licensing of
insurers and their agents; the nature of and limitations on investments;
deposits of securities for the benefit of policyholders; approval of policy
forms and premium rates; periodic examination of the affairs of insurance
companies; annual and other reports required to be filed on the financial
condition of insurers or for other purposes; establishment and maintenance of
reserves for unearned premiums and losses; and requirements regarding numerous
other matters. In general, the Company's regional property casualty subsidiaries
as well as Carolina, Great Divide and Midwest must file all rates for personal
and commercial insurance with the insurance department of each state in which
they operate. The Company's E&S and reinsurance subsidiaries generally operate
free of rate and form regulation.
In addition to regulatory supervision of its insurance subsidiaries,
the Company is subject to state statutes governing insurance holding company
systems. Typically, such statutes require the Company periodically to file
information with the state insurance commissioner, including information
concerning its capital structure, ownership, financial condition and general
business operations. Under the terms of applicable state statutes, any person or
entity desiring to purchase more than a specified percentage (commonly 10%) of
the Company's outstanding voting securities would be required to obtain
regulatory approval of the purchase. Under Florida law, which is applicable to
the Company due to its ownership of Carolina, a Florida domiciled insurer, the
acquisition of more than 5% of the Company's capital stock must receive
regulatory approval. Further, state insurance statutes typically place
limitations on the amount of dividends or other distributions payable by
insurance companies in order to protect their solvency. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
During the past several years, various regulatory and legislative
bodies adopted or proposed new laws or regulations to deal with the cyclical
nature of the insurance industry, catastrophic events and their effects on
shortage of capacity and pricing. These regulations, which have not had a
material impact on the Company's operations, include (i) the creation of "market
assistance plans" under which insurers are induced to provide certain coverages,
(ii) restrictions on the ability of insurers to cancel certain policies in
mid-term, (iii) advance notice requirements or limitations imposed for certain
policy non-renewals and (iv) limitations upon or decreases in rates permitted to
be charged. The passage of Proposition 103 in the State of California did not
have a material adverse impact on the Company's operations because the Company's
subsidiaries operate in that State primarily on a non-admitted basis. The
non-admitted market in California, however, has been subjected to increased
levels of regulation. Admiral and Nautilus, both of which derive significant
premiums from California, may be adversely impacted by increased regulation
which causes business to remain in the admitted market.
Various state and federal organizations, including Congressional
committees and the National Association of Insurance Commissioners ("NAIC"),
have been conducting investigations into various aspects of the insurance
business. The NAIC has adopted risk based capital ("RBC") requirements that
require insurance companies to calculate and report information under a
risk-based formula which measures statutory capital and surplus needs based on a
regulatory definition of risk in a company's mix of products and its balance
sheet. The implementation of RBC did not effect the operations of the Company's
insurance subsidiaries since all of its subsidiaries have an RBC amount above
the authorized control level RBC, as defined by the NAIC. Federal legislation is
being considered which would either abolish or limit the current exemption of
the insurance industry from portions of the antitrust laws, impose direct
federal oversight or federal solvency standards. No assurance can be given that
future legislative or regulatory
17
18
changes resulting from such activity will not adversely affect the Company's
insurance subsidiaries.
The Company's insurance subsidiaries are also subject to assessment by
state guaranty funds when an insurer in that jurisdiction has been judicially
declared insolvent and insufficient funds are available from the liquidated
company to pay policyholders and claimants. The protection afforded under a
state's guaranty fund to policyholders of the insolvent insurer varies from
state to state. Generally, all licensed property casualty insurers are
considered to be members of the fund, and assessments are based upon their pro
rata share of direct written premiums. The NAIC Model Post-Assessment Guaranty
Fund Act, which many states have adopted, limits assessments to an insurer to 2%
of its subject premium and permits recoupment of assessments through rate
setting. Likewise, several states (or underwriting organizations of which the
Company's insurance subsidiaries are required to be members) have limited
assessment authority with regard to deficits in certain lines of business. To
date, assessments have not had a material adverse impact on operations.
The Company receives funds from its insurance subsidiaries in the form
of dividends and fees for certain management services. Annual dividends in
excess of maximum amounts prescribed by state statutes ("extraordinary
dividends") may not be paid without the approval of the insurance commissioner
of the state in which an insurance subsidiary is domiciled. The NAIC has
proposed and certain states have adopted legislation that lowers the threshold
amount for determining what constitutes an extraordinary dividend. Such
legislative changes could make it more difficult for insurance subsidiaries to
pay dividends to their parents. Similarly, the NAIC has proposed a new model
investment law that may affect the statutory carrying values of certain
investments; however, the final outcome of that proposal is not certain, nor is
it possible to predict what impact the proposal will have on the Company or
whether the proposal will be adopted in the foreseeable future.
Tax Law Changes
There were no tax law changes in 1996 that significantly affected the
Company.
Competition
The property casualty insurance and reinsurance business is
competitive, with over 2,000 insurance companies transacting business in the
United States. The Company competes directly with a large number of these
companies. The Company's strategy in this highly fragmented industry is to seek
specialized areas or geographic regions where its insurance subsidiaries can
gain a competitive advantage by responding quickly to changing market
conditions. Each of the Company's subsidiaries establishes its own pricing
practices. Such practices are based upon a Company-wide philosophy to price
products with the general intent of making an underwriting profit. Competition
in the industry generally changes with profitability.
The regional property casualty subsidiaries compete with mutual and
other regional stock companies as well as national carriers. Direct writers of
property casualty insurance compete with the regional subsidiaries by writing
insurance through their salaried employees, generally at a lower cost than
through independent agents such as those used by the Company.
Signet Star's competition comes from domestic and foreign reinsurers,
some of which have greater financial resources than Signet Star who place their
business either on a direct basis or through the broker market.
The E & S area is a highly specialized segment of the insurance
industry. Admiral and Nautilus compete with other E & S carriers, some of which
are larger and have greater resources than Admiral and Nautilus. Under certain
market conditions, standard carriers may compete for the types of business
written by Admiral and Nautilus. In addition, there are regional and specialty
carriers competing with Admiral and Nautilus when they underwrite business in
their regions or specialties.
18
19
Carolina and Great Divide's competition comes mainly from other
specialty transportation insurers and large national multi-line companies.
Midwest's competition comes from insurance and reinsurance companies,
some of which have greater financial resource than Midwest. Most of theses
carriers write specific EWC coverage, do not offer aggregate EWC coverage and
tend to focus on risks larger than those targeted by Midwest. In addition,
Midwest competes with other specialty EWC insurers.
The insurance services operations face competition from several large
nationally known service organizations as well as local competitors.
Employees
As of February 28, 1997, the Company employed 3,473 persons. Of this
number, the Company's subsidiaries employed 3,432 persons, of whom 2,086 were
executive and administrative personnel and 1,346 were clerical personnel. The
Company employed the remaining 41 persons in its parent company and investment
operations, of whom 34 were executive and administrative personnel and 7 were
clerical personnel.
Other information about the Company's business:
The Company maintains an ongoing interest in acquiring additional
companies and developing new insurance entities, products and packages as
opportunities arise. In addition, the insurance subsidiaries develop new
coverages or lines of business to meet the needs of insureds.
Seasonal weather variations affect the severity and frequency of losses
sustained by the insurance and reinsurance subsidiaries. Although the effect on
the Company's business of such natural catastrophes as tornadoes, hurricanes,
hailstorms and earthquakes is mitigated by reinsurance, they nevertheless can
have a significant impact on the results of any one reporting period.
The Company has no customer which accounts for 10 percent or more of
its consolidated revenues.
Compliance by the Company and its subsidiaries with federal, state and
local provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to protection of the
environment, has not had a material effect upon the capital expenditures,
earnings or competitive position of the Company.
The Company currently does not engage in material operations in foreign
countries nor is a material portion of its revenues derived from customers in
foreign countries. In 1995, the Company entered into a joint venture to acquire
insurance and insurance related operations outside the United States (see
"International Operations"). However, the Company's insurance subsidiaries
regularly purchase a portion of their catastrophe reinsurance coverage from
foreign reinsurers, including syndicate members of Lloyd's of London. While
Queen's Island is domiciled in Bermuda, to date its business has exclusively
been reinsurance of its domestic affiliates.
In January 1997 Berkley International LLC entered into a joint venture
in the Philippines. The initial contribution to this new joint venture was
approximately $10 million ($6.5 million of which was contributed by the
Company).
On July 1, 1993, the Company exchanged all the stock of Signet
Reinsurance Company ("Signet") for 60% of the stock of Signet Star, a newly
formed holding company. Signet Star simultaneously acquired all the stock of
North Star Reinsurance Company ("North Star Reinsurance") from General Re in
exchange for 40% of the stock of Signet Star and senior and convertible notes.
In connection with the formation of Signet Star, North Star Reinsurance entered
into a Retrocessional Agreement (the "Retrocessional Agreement") with
19
20
General Reinsurance Corporation ("GRC"), pursuant to which North Star
Reinsurance reinsured its respective liabilities and assigned its respective
rights and obligations arising from any insurance or reinsurance contracts
written prior to January 1, 1993 with and to GRC.
On December 31, 1995, the Company purchased General Re's interest in
Signet Star by issuing to General Re 458,667 shares of Series B Cumulative
Redeemable Preferred Stock of the Company having an aggregate liquidation
preference of $68,800,000, which was redeemed in 1996. In addition, the Company
guaranteed a senior subordinated promissory note of Signet Star which was issued
to General Re in exchange for the convertible note which General Re held. As
part of this transaction, Signet Star sold to General Re Signet Star Reinsurance
Company and renamed Signet Reinsurance Company, Signet Star Reinsurance Company.
In connection with the 1995 acquisition of the remaining 40% interest
in Signet Star, North Star Reinsurance was sold to General Re and all business
written subsequent to July 1, 1993 was novated to Signet Star. As a result,
business written by North Star Reinsurance prior to January 1, 1993, which had
been retroceded to General Re, is no longer reflected in the Company's financial
statements. The only effect on the Company's financial statements resulting from
this aspect of the transaction is that the Company's reserves for losses and
loss expenses is reduced by $735,144,000 and "due from reinsurers" is reduced by
the same amount. This aspect of the transaction does not effect the Company's
cash flow, equity or statements of operations.
ITEM 2. PROPERTIES
The Company and its subsidiaries own or lease office buildings or
office space suitable to conduct their operations. Such owned property is as
follows:
Location Company Size (sq. ft.)
-------- ------- --------------
Cherry Hill, New Jersey Admiral 42,000
Grand Forks, North Dakota American West 10,000
Jacksonville, Florida Carolina (1) 19,000
Lincoln, Nebraska Union 43,000
Lincoln, Nebraska Continental Western 20,000
Luverne, Minnesota Tri-State 33,000
Meridian, Mississippi Great River 30,000
Scottsdale, Arizona Nautilus 34,000
Urbandale, Iowa Continental Western 80,000
Westbrook, Maine Acadia 54,000
(1) Presently leased to a third party
In addition, the Company and its subsidiaries lease office facilities
in various other cities under leases with varying terms and expiration dates.
ITEM 3. LEGAL PROCEEDINGS
Claims under insurance policies written by the Company's insurance
subsidiaries are investigated and settled either by claims adjusters employed by
them, by their independent agents or by independent adjusters. Each subsidiary
employs a staff of claims adjusters at its home office and at some regional
offices. Some independent agents may have the authority to settle small claims.
Independent claims adjusting firms are used to assist in handling various claims
in areas where insurance volume does not warrant the maintenance of a staff
adjuster. If a claim or loss cannot be settled and results in litigation, the
subsidiary generally retains outside counsel.
At present, neither the Company nor any of its subsidiaries is engaged
in any litigation known to the Company which is expected to have a material
adverse effect upon the Company's business. As is common with property casualty
insurance companies, the Company's subsidiaries are regularly engaged in the
defense of claims arising out of the conduct of the insurance business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1996 to a vote
of holders of the Company's Common Stock.
20
21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock of the Company is traded in the over-the-counter
market and is quoted on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") National Market System under the symbol "BKLY". The
following table sets forth the high and low sale prices for the indicated
periods, all as reported by NASDAQ.
Common
Price Range Dividends Paid
----------- --------------
High Low Per Share
---- --- ---------
1996:
Fourth Quarter $ 53 1/2 $ 45 $ .13 cash
Third Quarter 47 40 1/2 $ .13 cash
Second Quarter 46 3/4 41 1/2 $ .13 cash
First Quarter 53 3/4 45 1/4 $ .12 cash
1995:
Fourth Quarter $ 55 1/2 $ 43 $ .12 cash
Third Quarter 47 35 1/2 $ .12 cash
Second Quarter 39 35 $ .12 cash
First Quarter 39 5/8 34 1/2 $ .11 cash
The closing price on March 4, 1997, as reported on the NASDAQ National
Market System, was $54.25 per share. The approximate number of record holders of
the Common Stock on March 4, 1997 was 881.
On December 20, 1996, the W.R. Berkley Capital Trust (the "Trust")
issued for cash $210,000,000 of 8.197% Company obligated mandatorily redeemable
preferred securities of a subsidiary trust holding solely junior subordinated
debt securities (the "Capital Securities") representing preferred beneficial
interests in the Trust. The Company is the owner of the beneficial interests
represented by the common securities of the Trust. The Trust exists for the sole
purpose of issuing the Capital Securities and investing the proceeds in the
8.197% Junior Subordinated Deferrable Interest Debentures issued by the Company.
The Capital Securities were not registered under the Securities Act of 1933, as
amended (the "Securities Act"), and were sold to "qualified institutional
buyers" (as defined in Rule 144A under the Securities Act) in reliance upon the
exemption from the registration requirements of the Securities Act provided by
Rule 144A, or to institutional "accredited investors" (as defined in Rule 501
(a) (1), (2), (3) or (7) under the Securities Act.) See Note 5 of "Notes to
Consolidated Financial Statements."
21
22
ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 1996
Year Ended December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Amounts in thousands, except per share data)
Net premiums written $ 1,052,511 $ 860,421 $ 717,933 $ 537,646 $ 417,678
Net premiums earned 981,221 803,336 655,038 501,433 416,003
Net investment income 164,490 137,332 109,683 92,773 91,629
Management fees and commissions 69,246 68,457 64,536 54,027 54,734
Realized investment gains (losses) 7,437 10,357 (170) 23,523 3,356
Other income 2,772 2,461 1,703 1,550 1,478
Total revenues 1,225,166 1,021,943 830,790 673,306 567,200
Interest expense 31,963 28,209 27,601 25,275 19,266
Income before Federal
income taxes 115,049 82,747 30,774 61,364 54,521
Federal income tax (expense)
benefit (25,102) (17,554) 1,552 (9,181) (8,041)
Income before minority interest
and change in accounting 89,947 65,193 32,326 52,183 46,480
Minority interest 316 (4,311) 2,768 (596) --
Cumulative effect of change
in accounting principle -- -- -- -- 5,902
Net income before preferred
dividends 90,263 60,882 35,094 51,587 52,382
Preferred dividends 13,909 11,062 10,356 -- --
Net income attributable to
common stockholders 76,354 49,820 24,738 51,587 52,382
Data per common share:
Income before change
in accounting principle 3.84 2.86 1.44 2.87 2.59
Net income 3.84 2.86 1.44 2.87 2.92
Stockholders' equity (1) 37.69 35.39 26.68 30.36 26.33
Cash dividends declared $ .52 $ .48 $ .44 $ .40 $ .36
Weighted average shares
outstanding 19,861 17,414 17,182 17,946 17,942
Investments (1) $ 2,938,190 $ 2,588,346 $ 1,901,715 $ 1,748,702 $ 1,396,082
Total assets 4,073,264 3,618,684 3,582,291 3,337,705 1,953,294
Reserves for losses
and loss expenses 1,782,703 1,660,020 2,070,886 2,016,348 995,247
Long-term Debt 390,104 319,287 331,002 330,722 205,001
Company obligated mandatorily
redeemable preferred securities
of a subsidiary trust holding
solely junior subordinated debt
securities 207,901 -- -- -- --
Stockholders' equity (1) 879,732 929,815 597,601 526,281 474,396
(1) Investments and stockholders' equity reflect the adoption of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," as of
December 31, 1993. Included in the calculation of common stockholders'
equity per share are unrealized investments gains (losses), net of federal
income taxes, of $31,075,000, $48,450,000, ($33,973,000) and $36,450,000
as of December 31, 1996, 1995, 1994 and 1993, respectively.
22
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Industry Overview
The demand for insurance can be characterized as fairly stable and 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. In general, it is believed that the amount of
available capacity changes as the perceived rate of return on capital employed
fluctuates based on the adequacy of premium rates and available investment
returns. 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 the
ultimate adequacy of premium rates because a property casualty insurance policy
is priced before its costs are known, as premiums usually are determined long
before claims are reported. Over the past several years a trend of increasing
price competition, combined with an increase in the number and size of
catastrophic losses, has produced a reduction in underwriting profitability for
the Company and the industry.
Operating Results for the Year Ended December 31, 1996
as Compared to the Year Ended December 31, 1995
Net income attributable to common stockholders ("Net Income") for 1996
was $76 million, or $3.84 per share, compared with 1995 earnings of $50 million,
or $2.86 per share. The 1996 results include after-tax realized investment gains
of $5 million, or $.24 per share, compared with $6 million, or $.36 per share
for 1995.
Net premiums written in 1996 grew 22% to $1,053 million from $860
million written during 1995 due to increases recorded by all segments of our
operations. Premiums written by the regional segment grew by 13% to $531 million
from $471 million written during 1995. Regional net premiums written grew by 16%
excluding business assumed from national workers' compensation pools. The
majority of this growth was due to new operations which the Company has
established during the past five years. Premiums written by the reinsurance
segment grew by 11% to $218 million from $196 million written during 1995. The
growth in reinsurance premiums written was substantially due to the start-up of
a Latin American and Caribbean division and increases in business written by the
Fidelity and Surety division. Premiums written by the specialty segment grew by
26% to $202 million from $161 million. The growth in specialty premiums written
is due to an increase in business written by Admiral and Monitor as well as
increases in the amount of business retained by Admiral, Monitor and Nautilus.
These increases more than offset a decline in premiums written by Carolina
Casualty. Premiums written by the alternative markets segment grew by $50
million to $76 million. This increase is due to the inclusion of results of
Midwest Employers Casualty Company ("MECC"), which was acquired in November
1995. Premiums written by the international segment grew by $19 million to $25
million. The increase in premiums written is due to the inclusion of our primary
insurance operations in Argentina, which were acquired in 1995, for a full year
and the start up of an Argentine operation in 1996. As a result of this start up
operation, the Company expects the international operation to sustain a loss in
1997. Such loss is not expected to have a material adverse impact on the
Company's results of operations.
Pre-tax net investment income increased to $164 million from $137
million earned in 1995. Approximately three-fourths of this increase was due to
the inclusion of the
23
24
results of MECC. The remainder of this increase was due to the increase in
average investable assets generated by cash flow from operations which more than
offset the effects of lower yields available in the financial markets (see
"Liquidity and Capital Resources").
Management fees and commissions consist primarily of fees earned by the
alternative markets segment. Management fees and commissions were basically
unchanged for 1996 as market conditions, particularly in workers' compensation
insurance, inhibited growth.
Realized gains from the sale of fixed income securities result
primarily from the Company's strategy of rebalancing the asset and liability
duration relationship; realized gains on equity securities arise primarily as a
result of a variety of factors which influence the Company's valuation criteria.
The majority of the 1996 realized gains resulted form the sale of equity
securities, whereas in 1995 the majority of realized gains were from the sale of
fixed income securities.
The consolidated combined ratio (on a statutory basis) of the Company's
insurance operations decreased to 102.2% in 1996 from 102.5% in 1995 due to an
improvement in the consolidated loss ratio which was partially offset by an
increase in the consolidated expense ratio. The consolidated loss ratio (losses
and loss expenses incurred expressed as a percentage of premiums earned)
decreased to 68.7% from 70.7% primarily due to improved losses at certain
specialty companies resulting from a change in mix of business partially offset
by greater catastrophe losses impacting the regional companies.
Other operating costs and expenses, which consists of the expenses of
the Company's insurance and alternative markets segments as well as the
Company's corporate and investment expenses, increased by 20% to $409 million
from $340 million recorded in 1995. The increase in other operating costs is
primarily due to substantial growth in premium volume in all segments of the
Company's business, which in turn results in an increase in underwriting
expenses. The consolidated expense ratio of the Company's insurance operations
(underwriting expenses expressed as a percentage of premiums written) increased
to 33.1% for the 1996 period from 31.3% for the comparable 1995 period. The
underwriting expense ratio increased primarily due to increased commissions
expense in certain specialty and reinsurance segments.
Interest expense increased due to the January 1996 issuance of $100
million of long-term debt. In addition, in December 1996, the Company issued
$210 million of Company obligated manditorily redeemable preferred securities of
a subsidiary trust holding solely junior subordinated debt securities (see
"Liquidity and Capital Resources").
The Federal income tax provision resulted in an effective tax rate of
22% in 1996 and 21% in 1995. The tax rate is lower than the statutory tax rate
of 35% because a substantial portion of investment income is tax-exempt. The
increase in the effective tax rate in 1996 is due primarily to a decrease in the
percentage of pre-tax income that is tax-exempt.
In December 1995, the Company purchased all the remaining outstanding
common stock of Signet Star Holdings. As a result of this acquisition, the
minority interest in 1996 was solely related to international operations.
Preferred dividends increased as a result of the December 1995 issuance
of Series B Cumulative Redeemable Preferred Stock (see "Liquidity and Capital
Resources").
Operating Results for the Year Ended December 31, 1995
as Compared to the Year Ended December 31, 1994
Net Income for 1995 was $50 million, or $2.86 per share, compared with
1994 earnings of $25 million, or $1.44 per share. The 1995 results include
after-tax realized
24
25
investment gains of $6 million or $.36 per share, compared with after-tax
realized investment losses of $86,000 or $.01 per share recorded in 1994.
Net premiums written in 1995 grew by 20% to $860 million from $718
million written during 1994 due to increases recorded by all five segments of
our operations. Premiums written by the regional segment grew by 22% in 1995 to
$471 million compared to $387 million written during 1994. Approximately 60% of
the growth was from three operations which the Company established in 1992 and
1993. The balance of this increase primarily results from the expansion by the
regional operations into new markets. Premiums written by the reinsurance
segment grew by 11% to $196 million from $177 million written during 1994. The
growth in reinsurance premiums written was mainly due to growth in facultative
and fidelity and surety premiums written. Premiums written by the specialty
segment grew by 19% in 1995 to $161 million from $135 million in 1994. The
growth in the specialty premiums written is due mainly to decreases in the
amounts of business ceded to unaffiliated reinsurers. Premiums written by the
alternative markets segment grew by 30% in 1995, to $26 million from $20 million
in 1994. The growth in this segment's premiums written is due to the inclusion
of Midwest, which was acquired in November 1995, and modest premium growth
recorded by Signet Star's alternative markets division.
Net investment income increased, on a pre-tax basis, to $137 million
from $110 million earned in 1994. The higher level of investment earnings is due
primarily to growth in investable assets generated by an increase in cash flow
from operations and increased portfolio yields. The pre-tax yield of the
portfolio increased as a result of a change in the mix of fixed maturity
investments, an increase in the duration of the portfolio and an increase in
trading account profits (see "Liquidity and Capital Resources").
Management fees and commissions consists primarily of fees and
commissions earned by the alternative markets operating units. These fees and
commissions grew by 6% to $68 million in 1995 from $65 million earned in 1994.
This increase was due mainly to the inclusion of a full year's results for Key
Risk Services, Inc. which was acquired in May 1994, as well as fees earned by
Berkley Care Network which the Company established in June 1995. These increases
were partially offset by a restructuring of one alternative markets operating
unit.
The consolidated combined ratio (on a statutory basis) of the Company's
insurance operations decreased to 102.5% in 1995 from 105.0% (101.9% before the
Northridge Earthquake) in 1994 due to an improvement in the consolidated loss
ratio which was partially offset by a slight increase in the expense ratio. The
consolidated loss ratio (losses and loss expenses incurred expressed as a
percentage of premiums earned) decreased to 70.7% from 73.7%, primarily due to
the effect of the Northridge Earthquake, which significantly impacted 1994
results. This improvement was partially offset by an increase in the frequency
and severity of losses incurred by our commercial transportation unit.
Other operating costs and expenses, which consists of the expenses of
the Company's insurance and alternative markets segments as well as the
Company's corporate and investment expenses, increased by 19% to $340 million
from $286 million recorded in 1994. This increase was due primarily to the
substantial growth in premium volume which in turn results in an increase in
variable underwriting expenses. The consolidated expense ratio (underwriting
expenses expressed as a percentage of premiums written) of the Company's
insurance operations increased to 31.3% from 30.8% in 1994. The expense ratio
increased due to the effects of start-up operations which generally incur a
higher expense ratio in the early stages of their development.
Minority interest for 1995 was an expense of $4 million as compared to
income of $3 million reported in 1994. The change in minority interest was due
to earnings generated by Signet Star in 1995 versus a loss in 1994.
25
26
Liquidity and Capital Resources
General
The Company's subsidiaries are highly liquid, receiving substantial
cash from premiums, investment income, management fees and proceeds from sales
and maturities of portfolio investments. The principal outflows of cash are
payments of claims, taxes, interest and operating expenses. The net cash
provided from operating activities (before trading account transactions) was
$243.8 million in 1996 and $206.6 million in 1995. The increase in cash flow in
1996 was due primarily to additional cash flow generated by the acquisition of
MECC and the increase in premium volume previously discussed.
As a holding company, the Company derives cash from its subsidiaries in
the form of dividends, tax payments and management fees. The Company is
obligated to service its debt, pay consolidated Federal income taxes and pay its
expenses. Tax payments and management fees from the insurance subsidiaries are
made under agreements which generally are subject to approval by state insurance
departments. Maximum amounts of dividends that can be taken without regulatory
approval are prescribed by statute; to date, cash dividends have not required
regulatory approval (See Note 14 of "Notes to Consolidated Financial
Statements").
Financing Activity
In January 1994, the Company issued 6 million depository shares each
representing a one-sixth interest in a share of 7.375% Series A Cumulative
Redeemable Preferred Stock and received net proceeds of approximately $145
million. A portion of the proceeds of this offering were contributed to the
start-up insurance subsidiaries to support their growth.
In October 1995, the Company issued 3,450,000 shares of common stock,
par value $.20 per share and received net proceeds of approximately $145 million
which was used to finance the acquisition of MECC.
On December 31, 1995, in connection with the acquisition of the
remaining 40% of Signet Star, the Company issued to General Reinsurance
Corporation (General Re), 458,667 shares of Series B Cumulative Redeemable
Preferred Stock having an aggregate liquidation preference of $68,800,000. The
Series B Preferred Stock had a dividend rate increasing up to 6% during the
first twelve months. In addition, the Company guaranteed a senior subordinated
promissory note of Signet Star in the principal amount of $35,793,085, which
matures July 1, 2003 and bears interest at the rate of 6.5%. This note was
issued to General Re in exchange for the convertible note previously held by
General Re. In November 1993, Signet Star borrowed the maximum amount available
under its revolving credit facility and used the proceeds to redeem senior notes
issued in connection with the July 1, 1993 acquisition. The revolving credit
facility was repaid on January 19, 1996 as discussed below.
On January 19, 1996, the Company issued $100 million of 6.25%, ten-year
notes which are not redeemable until maturity and utilized a portion of the
proceeds to retire $28.4 million of Signet Star's bank debt. In addition, a
portion of the proceeds were used to retire $28 million of Series B Preferred
Stock. The balance of the proceeds from all of the above-mentioned offerings of
securities is available for acquisitions, working capital and other general
corporate purposes.
On December 19, 1996, the Company issued $210 million of 8.197%,
Company obligated manditorily redeemable preferred securities of a trust holding
solely junior subordinated debt securities ("Capital Trust Securities") and
utilized $38.4 million of the proceeds to retire the remaining outstanding
shares of the Series B Preferred Stock. In addition, during December 1996 and
January 1997 the Company utilized $39.2 million of
26
27
the proceeds to retire 252,273 shares of the Series A Preferred Stock and placed
$115.8 million in a trust which will be used to service the remaining
outstanding Series A Preferred Stock. The Company expects the proceeds of the
trust will be utilized to redeem the Series A Preferred Stock on January 25,
1999. The balance of the proceeds is available for acquisitions, working capital
and other general corporate purposes.
In March 1995, the Company purchased 117,000 shares of Common Stock for
approximately $4.1 million. During 1996, the Company purchased 575,000 shares of
its Common Stock for approximately $24.2 million. On April 19, 1996, the Board
of Directors authorized the Company to purchase an additional 1,000,000 shares
of Common Stock. As a result of the above, approximately 759,000 shares remain
under the current authorization.
The Company has on file two "shelf" Registration Statements with the
Securities and Exchange Commission with a combined remaining balance of $190
million in additional equity and/or debt securities. The securities may be
offered from time-to-time as determined by funding requirements and market
conditions.
Investments
In its investment strategy, the Company establishes a level of cash and
highly liquid short-term and intermediate-term securities which, combined with
expected cash flow, is believed adequate to meet foreseeable payment
obligations. As part of this strategy, the Company attempts to maintain an
appropriate relationship between the average duration of the investment
portfolio and the approximate duration of its liabilities, i.e., policy claims
and debt obligations.
The Company's investment policy with respect to fixed maturity
securities is generally to purchase instruments with the expectation of holding
them to their maturity. However, active management of the portfolio is
considered necessary to maintain an approximate matching of assets and
liabilities as well as to adjust the portfolio as changes in financial market
conditions alter the assumptions underlying the purchase of certain securities.
The investment portfolio, valued on a cost basis, grew in 1996 by
$374.9 million to approximately $2,882.9 million primarily due to the combined
effects of net cash flow from operations and the financing activities discussed
above.
During 1996, the Company invested approximately $90.8 million of its
available cash inflow in equity securities, $56.6 million in state and municipal
bonds and $52.7 million in mortgage-backed securities. At December 31, 1996, the
portion of the portfolio invested in tax-exempt securities was 29% (31% in
1995); U.S. Government securities and cash equivalents comprised 27% (24% in
1995); mortgage-backed securities were 19% (19% in 1995); corporate fixed
maturity securities were 14% (15% in 1995), and equity securities represented
the balance.
Federal Income Taxes
The Company files a consolidated Federal income tax return. At December
1996, the Company had a deferred tax liability of $48.6 million, which results
primarily from unrealized investment gains and intangible assets, and a deferred
tax asset of $44.6 million, which results primarily from the discounting of loss
reserves for Federal income tax purposes.
The realization of the deferred tax asset is dependent upon the
Company's ability to generate sufficient taxable income in future periods. Based
on historical results and the prospects for current operations, management
anticipates that it is more likely than not that future taxable income will be
sufficient for the realization of this asset. In establishing the amount of the
deferred tax asset, management has included a valuation allowance for the future
uncertainty associated with the extended time period required for the complete
reversal of the effects of loss reserve discounting.
27
28
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 ceded. The
Company monitors the financial condition of its reinsurers and attempts to place
its coverages only with substantial, financially sound carriers. The Company has
established reserves for uncollectible reinsurance.
Regional Operations
In 1996, Continental Western and Clermont Specialty Managers, Ltd.,
formerly Habitational Division of Firemen's generally retained $475,000 on
individual risks while the Company's other regional subsidiaries generally
retained $400,000 on individual risks. In 1997, all regional subsidiaries will
generally retain $300,000 on individual risks. The regional group also
maintained catastrophe reinsurance protection for approximately 95% of
weather-related losses above $3 million per occurrence ($6 million in 1997) up
to a maximum of $34 million. In addition the Company carried additional
aggregate catastrophe protection of $17.5 million in excess of $8 million for
storms exceeding $500,000. In 1997, the aggregate catastrophe protection is:
$13.5 million in excess of $4 million for storms exceeding $500,000; $5 million
in excess of $6.5 million for storms exceeding $1.0 million; and $4.5 million in
excess of $7 million for storms exceeding $1.5 million.
Reinsurance Operations
Signet Star's catastrophe retrocession program provides coverage for
property losses in three layers as follows: (i) 100% of $7.0 million in excess
of $6.5 million per occurrence; (ii) 95% of $9.0 million in excess of $13.5
million per occurrence; and (iii) 90% of $7.5 million in excess of $22.5 million
per occurrence. In 1996, Signet Star had retrocession coverage for its casualty
facultative business for up to 20% of $5.0 million per certificate. In 1997,
Signet Star has a variable quota share program on its casualty facultative
business with retentions varying from a low of $425,000 up to $2.5 million
depending on the certificate limit. These coverages apply to Signet Star's
individual certificate business only. During 1996, Signet Star had retrocession
coverage for its fidelity and surety business for approximately 86.5% (100% in
1997) of each loss up to $2.5 million in excess of $750,000 per occurrence. In
1997, Signet Star purchased an additional layer of 79.5% of each loss up to $2.5
million in excess of $3.25 million per occurrence for its fidelity and surety
business.
Specialty Operations
Admiral's retention in 1996 was $175,000 per risk for most classes of
business and $5.0 million, per insured, for business written by Monitor
Liability Managers. In addition, in 1996 Admiral's Directors and Officer
coverage also included additional protection on an aggregate basis. Nautilus
generally retained $140,000 per risk in 1996 and Carolina maintained its
retention at $300,000 on liability exposures.
Alternative Markets Operations
Midwest's retention is generally $1 million per occurrence above the
self insured's underlying retention.
International Operations
The international operations generally retained $50,000 to $250,000 per
occurrence.
28
29
Capitalization
For the year ended December 31, 1996, the purchase of common and
preferred stock discussed above under "Financing Activity", and the decline in
unrealized investment gains more than offset the increase in retained earnings.
This resulted in a decrease in stockholders' equity of approximately $50
million. In addition, as a result of the issuance of the Capital Trust
Securities the total amount of capital employed in the business grew to $1,478
million. Accordingly, the percentage of the Company's capital attributable to
long-term debt was 26% at December 31, 1996 and December 31, 1995.
29
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements Page
- ----------------------------- ----
W. R. Berkley Corporation and Subsidiaries:
Independent auditors' report 31
Consolidated balance sheets, December 31, 1996 and 1995 32
Consolidated statements of operations, years ended
December 31, 1996, 1995, and 1994 33
Consolidated statements of stockholders' equity, years
ended December 31, 1996, 1995, and 1994 34
Consolidated statements of cash flows, years ended
December 31, 1996, 1995, and 1994 35
Notes to consolidated financial statements 36
30
31
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, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of W. R. Berkley
Corporation and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
We have also previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of W. R. Berkley Corporation and
subsidiaries as of December 31, 1994, 1993 and 1992, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1993 and 1992 (none of which are presented herein);
and we expressed unqualified opinions on those consolidated financial
statements. W. R. Berkley Corporation adopted the provisions of the Financial
Accounting Standards Board's statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes" in 1992 and the provisions of
SFAS No. 115 "Accounting For Certain Investments in Debt and Equity Securities"
on December 31, 1993.
In our opinion, the information set forth in the selected financial data for
each of the years in the five-year period ended December 31, 1996, appearing on
page 22, is fairly presented, in all material respects, in relation to the
consolidated financial statements from which it has been derived.
KPMG Peat Marwick LLP
New York, New York
February 21, 1997
31
32
W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 1996 and 1995
(Dollars in thousands, except share data)
1996 1995
----------- -----------
Assets
Investments:
Invested cash $ 327,193 $ 196,732
Fixed maturity securities:
Held to maturity, at cost (fair value
$208,232 and $176,193) 204,234 169,078
Available for sale at fair value (cost $2,012,911 and $1,894,451) 2,045,254 1,959,910
Equity securities, at fair value:
Available for sale (cost $78,435 and $92,472) 93,900 101,551
Trading account (cost $260,167 and $155,301) 267,609 161,075
Cash 19,292 10,185
Premiums and fees receivable 256,441 231,093
Due from reinsurers 427,419 423,626
Accrued investment income 34,577 34,373
Prepaid reinsurance premiums 70,057 77,656
Deferred policy acquisition costs 119,157 89,517
Real estate, furniture & equipment at cost, less accumulated depreciation 116,303 77,016
Excess of cost over net assets acquired 73,404 69,600
Other assets 18,424 17,272
----------- -----------
$ 4,073,264 $ 3,618,684
=========== ===========
Liabilities, Reserves, Debt and
Stockholders' Equity
Liabilities and reserves:
Reserves for losses and loss expenses $ 1,782,703 $ 1,660,020
Unearned premiums 514,213 450,522
Due to reinsurers 71,352 65,798
Deferred Federal income taxes 4,013 14,363
Other liabilities 210,916 169,080
----------- -----------
2,583,197 2,359,783
----------- -----------
Long-term debt 390,104 319,287
----------- -----------
Company obligated mandatorily redeemable preferred securities
of a subsidiary trust holding solely junior subordinated debt
securities 207,901 --
Minority interest 12,330 9,799
----------- -----------
Stockholders' equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares:
7 3/8% Series A Cumulative Redeemable Preferred
Stock 930,807 and 1,000,000 shares issued and outstanding 93 100
Series B Cumulative Redeemable Preferred Stock
458,667 shares issued and outstanding in 1995 -- 46
Common stock, par value $.20 per share:
Authorized 40,000,000 shares, issued and
outstanding, net of treasury shares,
19,635,976 and 20,168,167 shares 4,854 4,854
Additional paid-in capital 471,492 547,068
Retained earnings 490,338 424,261
Net unrealized investment gains, net of taxes 31,075 48,450
Treasury stock, at cost, 4,633,402 and
4,101,211 shares (118,120) (94,964)
----------- -----------
879,732 929,815
----------- -----------
$ 4,073,264 $ 3,618,684
=========== ===========
See accompanying notes to consolidated financial statements.
32
33
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994
(Dollars in thousands, except per share data)
1996 1995 1994
----------- ----------- ---------
Revenues:
Net premiums written $ 1,052,511 $ 860,421 $ 717,933
Increase in net unearned premiums (71,290) (57,085) (62,895)
----------- ----------- ---------
Premiums earned 981,221 803,336 655,038
Net investment income 164,490 137,332 109,683
Management fees and commissions 69,246 68,457 64,536
Realized investment gains (losses) 7,437 10,357 (170)
Other income 2,772 2,461 1,703
----------- ----------- ---------
Total revenues 1,225,166 1,021,943 830,790
Operating costs and expenses:
Losses and loss expenses (669,160) (570,998) (486,149)
Other operating costs and expenses (408,994) (339,989) (286,266)
Interest expense (31,963) (28,209) (27,601)
----------- ----------- ---------
Income before income taxes and
minority interest 115,049 82,747 30,774
Federal income tax (expense) benefit (25,102) (17,554) 1,552
----------- ----------- ---------
Income before minority interest 89,947 65,193 32,326
Minority interest 316 (4,311) 2,768
----------- ----------- ---------
Net income before preferred dividends 90,263 60,882 35,094
Preferred dividends (13,909) (11,062) (10,356)
----------- ----------- ---------
Net income attributable to
common stockholders $ 76,354 $ 49,820 $ 24,738
=========== =========== =========
Net income per share $ 3.84 $ 2.86 $ 1.44
=========== =========== =========
See accompanying notes to consolidated financial statements.
33
34
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995 and 1994
(Dollars in thousands, except per share data)
Preferred
and Common Net
stock and unrealized
Total additional investment
stockholders' paid-in Retained gains Treasury
equity capital earnings (losses) stock
--------- --------- --------- -------- ---------
Balance, December 31, 1993 $ 526,281 $ 193,611 $ 365,691 $ 36,450 $ (69,471)
Net income attributable to
common stockholders 24,738 -- 24,738 -- --
Issuance of common shares 5,657 2,038 -- -- 3,619
Issuance of preferred stock 145,275 145,275 -- -- --
Net change in unrealized
investment (losses) (70,423) -- -- (70,423) --
Purchase of treasury stock (26,357) -- -- -- (26,357)
Dividends to common
stockholders ($.44 per share) (7,570) -- (7,570) -- --
--------- --------- --------- -------- ---------
Balance, December 31, 1994 597,601 340,924 382,859 (33,973) (92,209)
Net income attributable to
common stockholders 49,820 -- 49,820 -- --
Issuance of common shares 146,484 145,144 -- -- 1,340
Issuance of preferred stock 66,000 66,000 -- -- --
Net change in unrealized
investment gains 82,423 -- -- 82,423 --
Purchase of treasury stock (4,095) -- -- -- (4,095)
Dividends to common
stockholders ($.48 per share) (8,418) -- (8,418) -- --
--------- --------- --------- -------- ---------
Balance, December 31, 1995 929,815 552,068 424,261 48,450 (94,964)
Net income attributable to
common stockholders 76,354 -- 76,354 -- --
Issuance of common shares 1,746 750 -- -- 996
Net change in unrealized
investment gains (17,375) -- -- (17,375) --
Purchase of treasury stock (24,152) -- -- -- (24,152)
Repurchase of preferred stock (77,572) (77,572) -- -- --
Accretion of Series B preferred
stock 1,193 1,193 -- -- --
Dividends to common
stockholders ($.52 per share) (10,277) -- (10,277) -- --
--------- --------- --------- -------- ---------
Balance, December 31, 1996 $ 879,732 $ 476,439 $ 490,338 $ 31,075 $(118,120)
========= ========= ========= ======== =========
See accompanying notes to consolidated financial statements.
34
35
W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
(Dollars in thousands)
1996 1995 1994
--------- --------- ---------
Cash flows from operating activities:
Net income before preferred dividends $ 90,263 $ 60,882 $ 35,094
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Increase in reserves for losses and loss expenses,
net of due to/from reinsurers 126,006 106,333 117,371
Depreciation and amortization 8,590 14,286 14,989
Change in unearned premiums and prepaid reinsurance premiums 71,290 57,085 62,895
Change in premiums and fees receivable (25,348) (20,551) (45,181)
Change in Federal income taxes 5,719 491 (9,687)
Change in deferred policy acquisition costs (29,640) (15,607) (13,941)
Realized investment (gains) losses (7,437) (10,357) 170
Other, net 4,374 14,033 8,607
--------- --------- ---------
Net cash provided by operating activities
before trading account sales (purchases) 243,817 206,595 170,317
Trading account sales (purchases), net (89,961) (47,314) (53,041)
--------- --------- ---------
Net cash provided by operating activities 153,856 159,281 117,276
--------- --------- ---------
Cashflows used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 471,057 452,460 415,871
Equity securities 46,698 63,863 181,594
Proceeds from maturities and prepayments of
fixed maturity securities 219,673 159,731 114,200
Cost of purchases, excluding trading account:
Fixed maturity securities available for sale (713,104) (690,650) (703,215)
Fixed maturity securities held to maturity (105,675) (30,568) --
Equity securities (26,988) (64,187) (208,257)
Cost of acquired companies, net of acquired
cash and invested cash (11,739) (197,404) --
Net additions to real estate, furniture and equipment (46,983) (14,472) (35,298)
Other, net (5,083) (8,098) 12,881
--------- --------- ---------
Net cash used in investing activities (172,144) (329,325) (222,224)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- 144,739 --
Net proceeds from issuance of preferred stock -- 66,000 145,275
Net proceeds from issuance of long-term debt 98,850 -- --
Net proceeds from issuance of Company obligated mandatorily
redeemable preferred securities of a subsidiary trust holding
solely junior subordinated debt securities 207,900 -- --
Cash dividends to common stockholders (10,143) (7,844) (7,459)
Cash dividends to preferred stockholders (12,824) (11,062) (8,051)
Purchase of common treasury shares (24,152) (4,095) (26,357)
Repurchase of Preferred Stock (77,572) -- --
Payment of subsidiary debt (28,306) (31,847) (4,527)
Other, net 4,103 1,441 156
--------- --------- ---------
Net cash provided by financing activities 157,856 157,332 99,037
--------- --------- ---------
Net increase (decrease) in cash and invested cash 139,568 (12,712) (5,911)
Cash and invested cash at beginning of year 206,917 219,629 225,540
--------- --------- ---------
Cash and invested cash at end of year $ 346,485 $ 206,917 $ 219,629
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid on debt $ 28,296 $ 32,839 $ 24,897
========= ========= =========
Federal income taxes paid $ 19,171 $ 17,064 $ 8,135
========= ========= =========
See accompanying notes to consolidated financial statements
35
36
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
(A) Principles of consolidation and basis of presentation
The consolidated financial statements, which include the
accounts of W. R. Berkley Corporation and its subsidiaries ("the
Company"), have been prepared on the basis of generally accepted
accounting principles ("GAAP"). 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. All
significant intercompany transactions and balances have been
eliminated. Reclassifications have been made in the 1995 and 1994
financial statements to conform them to the presentation of the 1996
financial statements.
(B) Revenue recognition
Insurance premiums written are recognized as earned generally
on a pro-rata basis over the contract period. Management fees on
insurance services contracts are recorded as earned primarily on a
pro-rata basis over the policy period. Commission income is recognized
as earned on the effective date of the applicable insurance policies.
(C) Investments
The Company has classified its investments into three
categories. Securities that the Company has the positive intent and
ability to hold to maturity are classified as "held to maturity" and
reported at amortized cost. Securities which the Company purchased with
the intent to sell in the near term are classified as "trading" and are
reported at estimated fair value, with unrealized gains and losses
reflected in the statement of operations. The remaining securities are
classified as "available for sale" and carried at estimated fair value,
with unrealized gains and losses, net of applicable income taxes,
excluded from earnings and reported as a separate component of
stockholders' equity.
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 provision for
declines in value which are 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.
36
37
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
(D) 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.
(E) 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 operations in
the period in which they are determined.
A subsidiary of the Company, Midwest Employers Casualty
Company ("Midwest") which was acquired in November 1995, discounts its
liabilities for excess workers' compensation ("EWC") losses and loss
expenses using a "risk-free" rate. Midwest discounts its EWC
liabilities because of the long period of time over which it pays
losses. The Company believes that utilizing a "risk-free" rate to
discount these reserves more closely reflects the economics associated
with the excess workers' compensation line of business (see Note 12 of
notes to consolidated financial statements).
(F) 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
liability must be discharged by the Company. The Company has provided
reserves for uncollectible reinsurance.
(G) 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.
37
38
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
(H) Federal income taxes
The Company files a consolidated Federal income tax return. In
1995 and prior years, Signet Star Holdings, Inc. filed its own
consolidated Federal income tax return.
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 annually using tax
rates currently in effect or expected to apply in the years in which
those temporary differences are expected to reverse.
(I) Stock Options
In October 1995, FASB Statement No. 123 "Accounting for
Stock-Based Compensation" (FAS 123) was issued by the FASB which is
effective for fiscal year December 31, 1996. FAS 123 provides an
alternative to continue the Company's current method of accounting for
stock based compensation, or to adopt the fair value method of
accounting which would require the Company to expense, over the service
or vesting period, the fair value of employees stock based compensation
at the date of the grant. The Company will continue its present method
of accounting for its stock option plan under APB No. 25.
(J) Recent Accounting Pronouncements
In June 1996, FASB issued Statement of Financial Accounting
Standards No. 125, entitled "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." The Statement
establishes standards for determining whether transfers of "financial
assets" such as securities are to be accounted for as sales, or
alternatively, as secured borrowings. The Statement, which applies to
transactions beginning in 1997, is not expected to have a material
impact on the Company's financial position or results of operations.
(2) Acquisitions
In 1996 several acquisitions were completed for an aggregate
consideration of approximately $15,955,000. The acquisitions were
accounted for as purchases and, accordingly, the results of operations
of the acquired 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 1996 were as follows:
Investments in fixed maturity and equity securities of $6,434,000; cash
and invested cash of $4,216,000; excess of cost over net assets
acquired of $7,138,000; and other liabilities, net of other assets of
$1,833,000.
During 1995, the Company purchased majority interests in two
property and casualty companies in Argentina for consideration of
approximately $9.2 million, which constituted a portion of the
Company's initial contribution to Berkley International, LLC. The
proforma effect of these transactions on the Company's results of
operations is not significant.
On November 8, 1995, the Company acquired 100% of the stock of
MECC, Inc., the Parent of Midwest Employers Casualty Company, for
$141,908,000. In connection with this acquisition, the Company also
retired approximately $19,590,000 of MECC, Inc.'s debt. The purchase
was funded by the issuance of 3,450,000 shares of Common Stock issued
at $43.75 per share. On December 31, 1995, the Company acquired General
Re Corporation's ("General Re")
38
39
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Acquisitions, continued
40% interest in Signet Star Holdings, Inc. ("Signet Star") by issuing
to General Re 458,667 shares of Series B Cumulative Redeemable
Preferred Stock of the Company having an aggregate liquidation
preference of $68,800,000. The only significant effect on the Company's
financial statements from this acquisition is an increase in preferred
stock outstanding and the elimination of the related minority interest
because Signet Star's results of operations were previously
consolidated.
All of the acquisitions were accounted for as purchases and,
accordingly, the results of operations of the acquired companies have
been included from the dates of acquisition.
The net assets acquired in 1995 were as follows (dollars in
thousands):
Berkley MECC, Signet
International Inc. Star Total
------------- ---- ---- -----
Total investments and cash $19,986 $362,120 $ -- $ 382,106
Due from reinsurers 8,338 48,474 (735,144) (678,332)
Deferred policy acquisition costs 2,519 5,606 (6,241) 1,884
Excess of cost over net assets acquired 505 16,541 -- 17,046
Other assets 17,489 18,688 (2,283) 33,894
------- -------- --------- ---------
Total assets $48,837 $451,429 $(743,668) $(243,402)
======= ======== ========= =========
Reserves for losses and loss expenses $14,849 232,985 $(735,144) $(487,310)
Deferred federal income taxes -- 21,599 (5,066) 16,533
Other liabilities 14,841 34,987 6,444 56,272
------- -------- --------- ---------
Total liabilities 29,690 289,571 (733,766) (414,505)
------- -------- --------- ---------
Debt -- 19,950 -- 19,950
------- -------- --------- ---------
Minority interest 9,960 -- (75,902) (65,942)
------- -------- --------- ---------
Net assets acquired $ 9,187 $141,908 $ 66,000 $ 217,095
======= ======== ========= =========
On July 1, 1993, the Company exchanged all the stock of Signet
Reinsurance Company ("Signet") for 60% of the stock of Signet Star, a
newly formed holding company. Signet Star simultaneously acquired all
the stock of North Star Reinsurance Company ("North Star Reinsurance")
from General Re in exchange for 40% of the stock of Signet Star and
senior and convertible notes. In connection with the formation of
Signet Star, North Star Reinsurance entered into a Retrocessional
Agreement (the "Retrocessional Agreement") with General Reinsurance
Corporation ("GRC"), pursuant to which North Star Reinsurance reinsured
its respective liabilities and assigned its respective rights and
obligations arising from any insurance or reinsurance contracts written
prior to January 1, 1993 with and to GRC.
In connection with the 1995 acquisition of the remaining 40%
interest in Signet Star, North Star Reinsurance was sold to General Re
and all business written subsequent to July 1, 1993 was novated to
Signet Star. As a result, business written by North Star Reinsurance
prior to January 1, 1993, which had been retroceded to General Re, is
no longer reflected in the Company's financial statements. The only
effect on the Company's financial statements resulting from this aspect
of the transaction is that the Company's reserves for losses and loss
expenses is reduced by $735,144,000 and "due from reinsurers" is
reduced by the same amount. This aspect of the transaction does not
effect the Company's cash flow, equity or statements of operations.
39
40
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Acquisitions, continued
The Company's consolidated Proforma results of operations
assuming the acquisitions of MECC, Inc. and the remaining 40% interest
in Signet Star occurred as of January 1, 1995 and 1994, respectively,
are as follows (dollars in thousands):
1995 1994
---- ----
Total revenues $1,100,195 $929,405
========== ========
Net income attributable to common shareholders $ 70,102 $ 46,469
========== ========
Net income per share of common stock $ 3.48 $ 2.30
========== ========
The Proforma consolidated financial data do not purport to
represent what the Company's results of operations actually would have
been had the acquisitions and related financings occurred on the dates
indicated, or to project the Company's results of operations for any
future period. The above amounts primarily reflect the effects on
results of operations of certain adjustments resulting from the
revaluation of assets and liabilities of the purchased companies and
from the financing of such acquisitions.
(3) Federal Income Taxes
The Federal income tax expense (benefit) consists of (dollars
in thousands):
1996 1995 1994
---- ---- ----
Current expense $ 26,096 $ 17,879 $ 8,020
Deferred (benefit) (994) (325) (9,572)
-------- -------- -------
Total expense (benefit) $ 25,102 $ 17,554 $(1,552)
======== ======== =======
A reconciliation of the Federal income tax expense (benefit)
and the amounts computed by applying the Federal income tax rate of 35%
to pre-tax income is as follows (dollars in thousands):
1996 1995 1994
---- ---- ----
Computed "expected" tax expense $ 40,267 $ 28,961 $ 10,771
Tax-exempt investment income (15,471) (12,938) (12,964)
Other, net 306 1,531 641
-------- -------- --------
Total expense (benefit) $ 25,102 $ 17,554 $ (1,552)
======== ======== ========
40
41
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Federal Income Taxes, continued
At December 31, 1996 and 1995, the tax effects of differences
that give rise to significant portions of the deferred tax asset and
deferred tax liability are as follows (dollars in thousands):
1996 1995
---- ----
Deferred Tax Asset
Loss reserve discounting $ 50,481 $ 46,922
Alternative minimum tax -- 3,330
Other 1,115 95
-------- --------
Gross deferred tax asset 51,596 50,347
Less: valuation allowance 7,000 7,000
-------- --------
Deferred tax asset 44,596 43,347
======== ========
Deferred Tax Liability
Amortization of intangibles 12,407 13,119
Expense recognition differences 13,434 8,210
Realized investment gains 5,676 6,511
Deferred taxes on unrealized
investment gains 16,733 26,088
Other 359 3,782
-------- --------
Deferred tax liability 48,609 57,710
-------- --------
Net deferred tax asset(liability) $ (4,013) $(14,363)
======== ========
The Federal income tax expense (benefit) applicable to
realized investment gains (losses) was $2,603,000, $3,664,000 and
($61,000) in 1996, 1995 and 1994, respectively. The Company had a
current income tax payable of $6,224,000 and a current income tax
receivable of $210,000 at December 31, 1996 and 1995, respectively.
The realization of the deferred tax asset is dependent upon
the Company's ability to generate sufficient taxable income in future
periods. Based on historical results and the prospects for current
operations, management anticipates that it is more likely than not that
future taxable income will be sufficient for the realization of this
asset. In establishing the amount of the deferred tax asset, management
has included a valuation allowance for the future uncertainty
associated with the extended time period required for the complete
reversal of the effects of loss reserve discounting.
41
42
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Long-Term debt
Long-term debt consists of the following:
Carrying
Description Rate Maturity Face Value Value
- ----------- ---- -------- ---------- --------
Senior Notes 8.95% May 20, 1998 $ 10,000,000 $ 9,985,000
Senior Notes 6.31% March 6, 2000 25,000,000 24,924,000
Senior Notes 6.71% March 4, 2003 25,000,000 24,891,000
Senior Subordinated Notes 6.50% July 1, 2003 35,793,000 35,793,000
Senior Notes 6.25% January 15, 2006 100,000,000 98,924,000
Senior Notes 9.875% May 15, 2008 100,000,000 96,735,000
Senior Debentures 8.70% January 1, 2022 100,000,000 98,852,000
------------ -----------
$395,793,000 $390,104,000
============ ============
The difference between the face value of long-term debt and
the carrying value is unamortized discount. All outstanding long-term
debt is not redeemable until maturity and ranks on a parity with all
other outstanding indebtedness of the Company. In 1995 long-term debt
included a note payable to banks pursuant to a revolving credit
facility entered into by Signet Star. The face value of the debt at
December 31, 1995 was $28,400,000 and the carrying value was
$28,306,000. The interest rate was based on the London Interbank
offered rate plus .75% to 1.50% and was 5.75% at December 31, 1995. The
debt was retired in January 1996.
(5) Company obligated mandatorily redeemable preferred securities of a
subsidiary trust holding solely junior subordinated debt securities
The Company obligated mandatorily redeemable preferred
securities of a subsidiary trust holding solely junior subordinated
debenture ("Capital Trust Securities") were issued by the W.R. Berkley
Capital Trust ("the Trust"). All of the common securities of the Trust
are owned by the Company. The trust exists for the exclusive purpose of
issuing the Capital Trust Securities and investing the proceeds in a
junior subordinated debenture of the Company with similar interest
rates, principal amount and maturities. The Capital Trust Securities
are guaranteed by the Company as to the payment of distributions and
the payment of liquidation of the Capital Trust Securities within
certain limits. The Capital Trust Securities have a face value of
$210,000,000, mature on December 15, 2045 and require preferential
cumulative cash distributions at an annual rate of 8.197%.
The Capital Trust Securities are subject to mandatory
redemption in a like amount,(i) in whole but not in part, on the stated
maturity date, upon repayment of the junior subordinated debentures,
(ii) in whole but not in part, at any time contemporaneously with the
optional prepayment of the junior subordinated debentures by the
Company upon the occurrence and continuation of a certain event and
(iii) in whole or in part, on or after December 15, 2006 and
contemporaneously with the optional prepayment by the Company of junior
subordinated debentures.
42
43
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Commitments, Litigation and Contingent Liabilities
At present, neither the Company nor any of its subsidiaries
are engaged in any litigation known to the Company which management
believes will have a material adverse effect upon the Company's
business. As is common with other insurance companies, the Company's
subsidiaries are regularly engaged in the defense of claims arising out
of the conduct of the insurance business.
On September 11, 1995, the Company formed Berkley
International, LLC ("Berkley International"), a limited liability
company. The Company is obligated to contribute $45.5 million to
Berkley International over the next seven years as required.
(7) Lease Obligations
The Company and several of its subsidiaries use office space
and equipment under leases expiring at various dates through September
1, 2004. These leases are 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;
$11,098,000, $9,437,000 and $8,000,000 for 1996, 1995 and 1994
respectively. Future minimum lease payments (without provision for
sublease income) are: $9,814,000 in 1997; $9,202,000 in 1998;
$7,292,000 in 1999; $5,516,000 in 2000; $3,855,000 in 2001; and
$11,799,000 thereafter.
(8) Stockholders' Equity
Per share data have been computed based on the weighted
average number of common shares outstanding. The assumed dilutive
effect of employee stock options was not material. Treasury shares have
been excluded from average outstanding shares from the date of
acquisition. The number of shares used in the computations was
19,861,000, 17,414,000, and 17,182,000 for 1996, 1995 and 1994,
respectively.
Changes in shares of Common Stock outstanding, net of treasury
shares, are as follows (in thousands):
1996 1995 1994
---- ---- ----
Balance, beginning of year 20,168 16,778 17,337
Shares issued 43 3,507 179
Shares repurchased (575) (117) (738)
------ ------ ------
Balance, end of year 19,636 20,168 16,778
====== ====== ======
As of December 31, 1996 930,807 shares of the 7 3/8% Series A
Cumulative Redeemable Preferred Stock were issued and outstanding.
During January 1997, the Company purchased an additional 183,080 shares
for an aggregate cost of $28,506,000. In addition, $115,800,000 was
placed in a trust which will be used to service the remaining
outstanding Series A Preferred Stock. The Company expects that the
proceeds of the trust will be utilized to redeem the Series A Preferred
Stock on January 25, 1999.
In December 1995, the Company issued 458,667 shares of
variable rate series B cumulative redeemable Preferred Stock at its
fair value of $66,000,000. The Series B Preferred Stock was being
accreted to its stated value of $68,800,000 over 18 months. During
1996, the Company purchased all outstanding shares of the Series B
Preferred Stock for $66 million.
43
44
W.R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Stock Option Plan
The Company adopted the W. R. Berkley Corporation 1992 Stock
Option Plan under which 1,750,000 shares of Common Stock were reserved
for issuance. Pursuant to the Plan, options may be granted at prices
determined by the Board of Directors but not less than 85% of the fair
market value on the date of grant. To date, options have been granted
with an exercise price equal to the average of the high and low market
price on the date of grant.
The following table summarizes option information, including options
granted under both the 1992 and prior plans:
1996 1995 1994
---------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
Outstanding at
beginning of year 1,012,197 $ 35.45 1,017,788 $ 34.24 730,225 $ 30.83
Granted 733,851 43.53 101,000 42.51 435,775 37.91
Exercised 42,809 29.57 57,449 24.85 28,562 22.87
Canceled 53,474 39.89 49,142 37.28 119,650 29.45
--------- ------- --------- ------- --------- -------
Outstanding at end
of year 1,649,765 $ 39.05 1,012,197 $ 35.45 1,017,788 $ 34.24
--------- ------- --------- ------- ========= -------
Options exercisable at
year end 348,497 262,811 142,091
--------- --------- ---------
Options available for
future grant 277,510 623,781 675,639
--------- --------- ---------
As discussed previously, FAS 123 provides an alternative to
continue the Company's current method of accounting for stock based
compensation, or to adopt the fair value method of accounting. The
Company will continue its present method of accounting for its stock
option plan under APB No. 25; accordingly, the adoption of the
Statement will have no effect on the Company's financial statements.
The fair value of the options granted under FAS 123 is
estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions for 1996 and 1995
respectively: (a) dividend yield of 1%, (b) expected volatility of 20%,
(c) risk free interest rate of 6.65% and 6.37%, and (d) expected life
of 7.5 years. The weighted average fair value of options granted during
the year were $16.15 and $15.58 for the year ended December 31, 1996
and 1995, respectively. The following table summarizes information
about stock options outstanding at December 31, 1996 and 1995:
44
45
W.R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Stock Option Plan, Continued
Options Outstanding Options Exercisable
------------------------ -----------------------
Weighted Weighted
Range of Remaining Weighted Average Average
Exercise Number Contractual Average Number Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
December 31, 1996
$22 to $33 198,785 4.3 $ 25.67 196,867 $ 25.60
33 to 43 628,504 7.0 37.11 139,135 35.93
43 to 53 822,476 9.2 43.77 12,495 45.65
--------- --- ------- ------- -------
Total 1,649,765 7.8 $ 39.05 348,497 $ 30.45
========= === ======= ======= =======
December 31, 1995
$22 to $33 219,797 5.5 $ 25.40 183,712 $ 24.78
33 to 43 683,900 7.9 37.09 76,767 35.97
43 to 53 108,500 8.9 45.45 2,332 43.63
--------- --- ------- ------- -------
Total 1,012,197 7.5 $ 35.45 262,811 $ 82.21
========= === ======= ======= =======
Had compensation costs for the Company's 1996 and 1995 grants
been determined under the cost recognition alternative of FAS 123, the
effect on the Company's net income and net income attributable to
common shareholders would have been immaterial.
(10) Profit Sharing Retirement Plan
The Company and its subsidiaries have profit sharing
retirement plans in which substantially all employees participate. The
plans provide for minimum annual contributions of 5% of eligible
compensation; contributions above the minimum are discretionary and
vary with each participating subsidiary's profitability. Employees
become eligible to participate in the Retirement Plans on the first day
of the month following the first full three months in which they are
employed. Profit sharing expense amounted to $7,370,000, $6,344,000 and
$5,625,000 for 1996, 1995 and 1994, respectively.
45
46
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Investments
At December 31, 1996 and 1995, there were no investments,
other than investments in United States government securities, which
exceeded 10% of stockholders' equity. At December 31, 1996 and 1995,
investments were as follows:
December 31, 1996
----------------------------------------------------------------------------
Amount
Gross Gross at which
unrealized unrealized Fair shown in the
Type of Investment Cost (a) gains losses value balance sheet
------------------ -------- ---------- ---------- ----- -------------
(Dollars in thousands)
Fixed maturity securities held to
maturity:
State and municipal $ 80,943 $ 4,542 $ (127) $ 85,358 $ 80,943
Corporate 39,478 626 (649) 39,455 39,478
Mortgage backed securities 83,813 1,057 (1,451) 83,419 83,813
---------- ------- -------- ---------- ----------
Total fixed maturities
held to maturity 204,234 6,225 (2,227) 208,232 204,234
---------- ------- -------- ---------- ----------
Fixed maturity securities
available for sale:
United States government(b) 442,816 6,908 (6,326) 443,398 443,398
State and municipal 758,455 21,004 (2,334) 777,125 777,125
Corporate 359,928 9,007 (4,082) 364,853 364,853
Mortgage backed securities 451,712 10,363 (2,197) 459,878 459,878
---------- ------- -------- ---------- ----------
Total fixed maturities
available for sale 2,012,911 47,282 (14,939) 2,045,254 2,045,254
---------- ------- -------- ---------- ----------
Common stocks 18,661 15,591 -- 34,252 34,252
Preferred stocks 59,774 439 (565) 59,648 59,648
---------- ------- -------- ---------- ----------
Total equity securities
available for sale 78,435 16,030 (565) 93,900 93,900
---------- ------- -------- ---------- ----------
Trading account 260,167 9,184 (1,742) 267,609 267,609
---------- ------- -------- ---------- ----------
Invested cash(c) 327,193 -- -- 327,193 327,193
---------- ------- -------- ---------- ----------
Total investments $2,882,940 $78,721 $(19,473) $2,942,188 $2,938,190
========== ======= ======== ========== ==========
(a) Adjusted as necessary for amortization of premium or discount.
(b) Includes United States government agencies and authorities.
(c) Short-term investments which mature within three months of the date of
purchase.
46
47
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Investments, continued
December 31, 1995
---------------------------------------------------------------------------
Amount
Gross Gross at which
unrealized unrealized Fair shown in the
Type of Investment Cost (a) gains losses value balance sheet
------------------ -------- ----- ------ ----- -------------
(Dollars in thousands)
Fixed maturity securities held to
maturity:
State and municipal $ 124,614 $ 6,820 $ (154) $ 131,280 $ 124,614
Corporate 22,709 109 -- 22,818 22,709
Mortgage backed securities 21,755 340 -- 22,095 21,755
---------- ------- ------- ---------- ----------
Total fixed maturities
held to maturity 169,078 7,269 (154) 176,193 169,078
---------- ------- ------- ---------- ----------
Fixed maturity securities
available for sale:
United States government (b) 414,115 14,582 (129) 428,568 428,568
State and municipal 658,159 26,951 (570) 684,540 684,540
Corporate 361,150 10,754 (1,716) 370,188 370,188
Mortgage backed securities 461,027 15,916 (329) 476,614 476,614
---------- ------- ------- ---------- ----------
Total fixed maturities
available for sale 1,894,451 68,203 (2,744) 1,959,910 1,959,910
---------- ------- ------- ---------- ----------
Common stocks 24,042 9,438 -- 33,480 33,480
Preferred stocks 68,430 669 (1,028) 68,071 68,071
---------- ------- ------- ---------- ----------
Total equity securities
available for sale 92,472 10,107 (1,028) 101,551 101,551
---------- ------- ------- ---------- ----------
Trading account 155,301 6,723 (949) 161,075 161,075
---------- ------- ------- ---------- ----------
Invested cash (c) 196,732 -- -- 196,732 196,732
---------- ------- ------- ---------- ----------
Total investments $2,508,034 $92,302 $(4,875) $2,595,461 $2,588,346
========== ======= ======= ========== ==========
(a) Adjusted as necessary for amortization of premium or discount.
(b) Includes United States government agencies and authorities.
(c) Short-term investments which mature within three months of the date of
purchase.
47
48
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Investments, continued
The amortized cost and fair value of fixed maturity
securities, at December 31, 1996, 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):
1996
-------------------------------
Fair
Cost value
---- -----
Due in one year or less $ 69,945 $ 70,855
Due after one year through
five years 460,647 465,694
Due after five years
through ten years 552,683 562,625
Due after ten years 598,345 611,015
Mortgaged-backed securities 535,525 543,297
---------- ----------
Total $2,217,145 $2,253,486
========== ==========
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):
1996 1995 1994
---- ---- ----
Realized gains (losses):
Fixed maturity securities sold (a) $ 1,850 $ 7,819 $ (6,141)
Equity securities sold 5,285 (976) 1,632
Net change in provision for
decline in value (b):
Fixed maturity securities (152) (352) 4,697
Equity securities -- 4,191 --
Other 454 (325) (358)
--------- --------- ---------
7,437 10,357 (170)
--------- --------- ---------
Change in difference between fair
value and cost of investments:
Fixed maturity securities (36,232) 123,590 (122,136)
Equity securities 6,386 8,528 (2,450)
--------- --------- ---------
(29,846) 132,118 (124,586)
--------- --------- ---------
Total $ (22,409) $ 142,475 $(124,756)
========= ========= =========
(a) During 1996, 1995 and 1994, gross gains of $5,904,000, $11,570,000 and
$5,601,000, respectively, and gross losses of $4,054,000, $3,751,000
and $8,177,000, respectively, were realized.
(b) The provision for decline in value of investments is $3,485,000,
$3,333,000 and $7,172,000 as of December 31, 1996, 1995 and 1994,
respectively. The 1996 increase is due to additional writedowns, the
decrease in 1995 and 1994 resulted from the sale of securities.
48
49
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Investments, continued
Investment income consists of the following (dollars in thousands):
1996 1995 1994
---- ---- ----
Investment income earned on:
Fixed maturity securities $ 146,431 $ 115,668 $ 102,826
Invested cash 6,698 13,000 5,898
Equity securities 4,039 4,418 3,616
Trading account (a) 12,331 9,030 2,058
Other 1,548 1,411 1,221
--------- --------- ---------
Gross investment income 171,047 143,527 115,619
Interest on funds held
under reinsurance treaties (6,557) (6,195) (5,936)
--------- --------- ---------
Net investment income $ 164,490 $ 137,332 $ 109,683
========= ========= =========
(a) The primary focus of the trading account is merger and municipal fixed
income arbitrage. Merger arbitrage is the business of investing in the
securities of publicly held companies which are the targets in
announced tender offers and mergers. Merger arbitrage differs from
other types of investments in its focus on transactions and events
believed likely to bring about a change in value over a relatively
short time period (usually four months or less). The Company believes
that this makes merger arbitrage investments less vulnerable to changes
in general financial market conditions. Potential changes in market
conditions are also mitigated by the implementation of short sales.
In November 1996, the Company invested $10,000,000 in a municipal
security trading partnership. The primary focus of the partnership is
municipal arbitrage. Municipal arbitrage is an investment strategy
which attempts to capitalize on the certain anomilies which tend to
occur in the municipal bond market. Such inefficiencies are arbitraged
through a disciplined use of futures, options and municipal bond
positions.
The arbitrage positions are generally hedged against market declines by
purchasing put options, selling call options or entering into future
contracts. Therefore, just as long portfolio positions may also incur
losses during market declines, hedge positions may incur losses during
market advances. As of December 31, 1996 the notional amount of option
and future contracts outstanding are $30,242,000 and $41,100,000,
respectively. As of December 31, 1996 the net short market value of
option and future contracts outstanding are $948,000 and $184,000,
respectively.
Investment income earned from trading account activity includes
unrealized trading gains of $2,013,000, $352,000 and $1,271,000 for
1996, 1995 and 1994, respectively.
49
50
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) 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):
1996 1995 1994
---- ---- ----
Net reserves at beginning of year $ 1,209,250 $ 895,440 $ 783,218
----------- ----------- -----------
Net reserves of companies acquired -- 191,963 --
Net provision for losses and loss expenses:
Claims occurring during the current year 675,674 580,594 493,418
Decrease in estimates for claims occurring
in prior years (15,219) (9,596) (7,269)
Amortization of discount 8,705 -- --
----------- ----------- -----------
669,160 570,998 486,149
----------- ----------- -----------
Net payments for claims
Current year 280,565 228,100 187,295
Prior years 264,723 221,051 186,632
----------- ----------- -----------
545,288 449,151 373,927
----------- ----------- -----------
Net reserves at end of year 1,333,122 1,209,250 895,440
Ceded reserves at the end of year 449,581 450,770 1,175,446
----------- ----------- -----------
Gross reserves at the end of year $ 1,782,703 $ 1,660,020 $ 2,070,886
=========== =========== ===========
Due to the nature of Excess Workers Compensation ("EWC")
business and the long period of time over which losses are paid in this
line of business, the Company discounts the liability for losses and
loss expenses established for the excess workers' compensation line of
business. Discounting liabilities for losses and loss expenses gives
recognition to the time value of money set aside to pay claims in the
future and is intended to appropriately match losses and loss expense
to income earned on investment securities supporting the liabilities.
The expected losses and loss expense payout pattern subject to
discounting was derived from Midwest's loss payout experience and is
supplemented with data compiled from insurance companies writing
workers' compensation on an excess-of-loss basis. The expected payout
pattern has a very long duration because it reflects the nature of
losses which generally penetrate self-insured retention limits
contained in excess workers' compensation policies. The Company has
limited the payout duration to 30 years in order to introduce an
additional level of conservatism into the discounting process. The
liabilities for losses and loss expenses have been discounted using
"risk-free" discount rates determined by reference to the U.S. Treasury
yield curve weighted for the EWC premium volume to reflect the
seasonality of the anticipated duration of losses associated with such
coverages. The average discount rate for accident years 1996 and 1995
and prior is 5.90% and 5.80%, respectively. The aggregate net discount,
after reflecting the effects of ceded reinsurance, is $172,415,000 and
$152,235,000 at December 31, 1996 and 1995, respectively. For Statutory
purposes, Midwest uses a discount rate of 3.0% as permitted by the
Department of Insurance of the State of Ohio.
To date, known pollution and environmental claims at the
insurance company subsidiaries have not had a material impact on the
Company's operations. Environmental claims have not materially impacted
the Company because our subsidiaries generally did not insure the
larger industrial companies which are subject to significant
environmental exposures.
50
51
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Reserves for losses and loss expenses, continued
The Company's net reserves for losses and loss adjustment
expenses relating to pollution and environmental claims were $35.2
million and $30.8 million at December 31, 1996 and 1995, respectively.
The Company's gross reserves for losses and loss adjustment expenses
relating to pollution and environmental claims were $71.9 million and
$59.4 million at December 31, 1996 and 1995, respectively. Net incurred
losses and loss expenses for reported pollution and environmental
claims were approximately $6.9 million, $8.0 million and $5.6 million
in 1996, 1995 and 1994, respectively. Net paid losses and loss expenses
has averaged approximately $3 million for each of the last three years.
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 is highly
uncertain.
(13) 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):
1996 1995 1994
---- ---- ----
Premiums written $210,009 $212,169 $210,237
======== ======== ========
Premiums earned $216,127 $207,375 $195,313
======== ======== ========
Losses and loss expenses $120,784 $134,120 $149,415
======== ======== ========
(14) 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 1997, the maximum amount of dividends
which can be paid without such approval is approximately $69,235,000.
Combined net income and policyholders' surplus of the
Company's consolidated insurance subsidiaries, as determined in
accordance with statutory accounting practices, are as follows (dollars
in thousands):
1996 1995 1994
---- ---- ----
Net income $ 84,249 $ 75,587 $ 40,411
======== ======== ========
Policyholders' surplus $881,380 $839,890 $669,552
======== ======== ========
51
52
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1996 and 1995, bonds with a market value of
$139,497,000 and $137,579,000 were on deposit with various state
Insurance Departments as required by state laws.
The National Association of Insurance Commissioners ("NAIC")
has adopted risk based capital ("RBC") requirements that require
insurance companies to calculate and report information under a
risk-based formula which measures statutory capital and surplus needs
based on a regulatory definition of risk in a company's mix of products
and its balance sheet. The implementation of RBC did not effect the
operations of the Company's insurance subsidiaries since all of its
subsidiaries have an RBC amount above the authorized control level RBC,
as defined by the NAIC.
(15) Supplemental Financial Statement Data
Other operating costs and expenses consist of the following
(dollars in thousands):
1996 1995 1994
---- ---- ----
Amortization of deferred
policy acquisition costs $283,642 $228,610 $187,468
Other operating costs and
expenses of insurance operations 50,288 38,773 35,900
Other costs and expenses 75,064 72,606 62,898
-------- -------- --------
Total $408,994 $339,989 $286,266
======== ======== ========
(16) Industry Segments
The Company's operations are presently conducted through five
basic segments: regional property casualty insurance; reinsurance;
specialty lines of insurance; alternative markets operations; and
international. Summary financial information about the Company's
operating segments is presented in the following table. Income before
income taxes by segment consists of revenues less expenses related to
the respective segment's operations. These amounts include realized
gains (losses) where applicable. Intersegment revenues consist
primarily of dividends, interest on intercompany debt and fees paid by
subsidiaries for portfolio management and other services to the
Company. Identifiable assets by segment are those assets used in the
operation of each segment.
52
53
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) Industry Segments, continued (Dollars in thousands)
Revenues
---------------------------------------------
Income (Loss)
Unaffiliated Inter- before income Identifiable
Customers Segment Total taxes Assets
------------ ------- ----- ------------- -------------
December 31, 1996
Regional $ 543,290 $ 1,110 $ 544,400 $ 37,745 $1,103,767
Reinsurance 236,749 218 236,967 24,202 607,831
Specialty 238,433 1,586 240,019 57,828 1,247,501
Alternative Markets 171,099 218 171,317 32,541 596,054
International 26,435 -- 26,435 (1,283) 60,450
Corporate and other 9,160 78,179 87,339 25,311 457,661
Adjustments and eliminations -- (81,311) (81,311) (61,295) --
---------- -------- ----------- --------- ----------
Consolidated $1,225,166 $ -- $ 1,225,166 $ 115,049 $4,073,264
========== ======== =========== ========= ==========
December 31, 1995
Regional (1) $ 478,668 $ (121) $ 478,547 $ 40,486 $1,001,549
Reinsurance 212,876 -- 212,876 11,205 560,817
Specialty 209,153 158 209,311 43,781 1,278,883
Alternative Markets 103,656 -- 103,656 10,254 579,964
International 7,313 -- 7,313 (259) 50,286
Corporate and other 10,277 53,694 63,971 16,414 147,185
Adjustments and eliminations -- (53,731) (53,731) (39,134) --
---------- -------- ----------- --------- ----------
Consolidated $1,021,943 $ -- $ 1,021,943 $ 82,747 $3,618,684
========== ======== =========== ========= ==========
December 31, 1994
Regional $ 376,478 $ 98 $ 376,576 $ 26,669 $ 809,853
Reinsurance 187,304 -- 187,304 (14,977) 1,242,202
Specialty 184,911 (12) 184,899 37,452 1,223,179
Alternative Markets 75,798 -- 75,798 7,068 87,023
International -- -- -- -- --
Corporate and other 6,299 29,960 36,259 (5,068) 220,034
Adjustments and eliminations -- (30,046) (30,046) (20,370) --
---------- -------- ----------- --------- ----------
Consolidated $ 830,790 $ -- $ 830,790 $ 30,774 $3,582,291
========== ======== =========== ========= ==========
(1) As of and for the year ended December 31, 1995 the results of the
regional segment have been restated to reflect the international segment
as a separate segment.
53
54
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17) Fair value of Financial Instruments
The following table presents the carrying amounts and
estimated fair values of the Company's financial instruments as of
December 31, 1996 and 1995 (dollars in thousands):
1996 1995
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount value Amount value
------ ----- ------ -----
Investments $2,938,190 $2,942,188 $2,588,346 $2,595,461
Long-term debt 390,104 421,359 319,287 371,550
Capital Trust Securities 207,901 206,197 -- --
The estimated fair value of investments is based on quoted
market prices as of the respective reporting dates. The fair value of
the long-term debt is based on rates available for borrowings similar
to the Company's outstanding debt as of the respective reporting dates.
(18) Quarterly Financial Information (unaudited)
The following is a summary of quarterly financial data:
Three Months Ended
-----------------------------------------------
March 31, June 30,
--------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in thousands except per share data)
Revenues $288,274 $228,932 $301,293 $247,442
======== ======== ======== ========
Net income before preferred
dividends $ 19,522 $ 13,573 $ 21,361 $ 15,369
======== ======== ======== ========
Net income attributable to
common stockholders $ 15,684 $ 10,807 $ 17,981 $ 12,604
======== ======== ======== ========
Net income per share $ .78 $ .65 $ .91 $ .76
======== ======== ======== ========
September 30, December 31,
--------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues $311,534 $260,893 $324,414 $284,676
======== ======== ======== ========
Net income before preferred
dividends $ 24,092 $ 14,794 $ 25,287 $ 17,146
======== ======== ======== ========
Net income attributable to
common stockholders $ 20,712 $ 12,028 $ 21,976 $ 14,381
======== ======== ======== ========
Net income per share $ 1.06 $ .72 $ 1.12 $ .73
======== ======== ======== ========
54
55
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 4, 1997:
Name Age Position
---- --- --------
William R. Berkley 51 Chairman of the Board and Chief Executive Officer
John D. Vollaro 52 President, Chief Operating Officer and a Director
Sam Daniel, Jr. 58 Senior Vice President, Regional Operations
Anthony J. Del Tufo 52 Senior Vice President, Chief Financial Officer and Treasurer
Robert S. Gorin 61 Senior Vice President, General Counsel and Secretary
E. LeRoy Heer 58 Senior Vice President, Chief Corporate Actuary
H. Raymond Lankford 54 Senior Vice President, Alternative Markets Operations
Ira S. Lederman 43 Senior Vice President, Assistant General Counsel and Assistant
Secretary
James G. Shiel 37 Senior Vice President - Investments
Edward A. Thomas 48 Senior Vice President, Specialty Operations
Robert P. Cole 46 Vice President
Clement P. Patafio 32 Vice President - Corporate Controller
Scott A. Siegel 38 Vice President - Taxes
Robert B. Hodes 71 Director
Henry Kaufman 69 Director
Richard G. Merrill 66 Director
Jack H. Nusbaum 56 Director
Mark L. Shapiro 52 Director
Martin Stone 68 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. Each year the term of office of
one class expires. In May 1996, the term of a class consisting of three
Directors expired. Richard G. Merrill, Jack H. Nusbaum and Mark L. Shapiro were
elected as Directors to hold office for a term of three years until the Annual
Meeting of Stockholders in 1999 and until their successors are duly chosen. John
D. Vollaro was elected a Director to hold office for a term which expires at the
Annual Meeting of Stockholders in 1998. Officers of the Company are elected
annually and serve at the pleasure of the Board of Directors.
William R. Berkley has been Chairman of the Board and Chief Executive
Officer of the Company since its formation in 1967. He also served as President
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 Signet Star
Holdings, Inc., a reinsurance holding company owned by the Company; Pioneer
Companies, Inc., a chemical manufacturing and marketing company; Fine Host
Corporation, a contract food service management company; Strategic Distribution,
Inc., an industrial products distribution and services company; and Interlaken
Capital, Inc., a private investment firm with interests in various businesses.
His current term as a Director expires in 1997.
55
56
John D. Vollaro was elected President and Chief Operating Officer of
the Company effective January 2, 1996 and Director effective September 13, 1995.
He has been Chief Executive Officer of Signet Star Holdings, Inc., an affiliate
of the Company, since July 1993 and President and a Director of Signet Star
Holdings, Inc. since February 1993. He served as Executive Vice President of the
Company from 1991 until 1993 and was Chief Financial Officer and Treasurer of
the Company from 1983 through 1993; and Senior Vice President, Chief Financial
Officer and Treasurer of the Company from 1983 to 1991. Mr. Vollaro's current
term as a Director expires in 1998.
Sam Daniel, Jr. has been Senior Vice President - Regional Operations
since April 1990. Prior thereto, he was employed by Hanover Insurance Company
for more than five years as Vice President.
Anthony J. Del Tufo has been Senior Vice President, Chief Financial
Officer and Treasurer of the Company since September 1993. Before joining the
Company Mr. Del Tufo was a partner with KPMG Peat Marwick from 1975 to 1993.
Robert S. Gorin has been Senior Vice President, General Counsel and
Secretary since July 1989. Prior to joining the Company, Mr. Gorin was Assistant
Secretary and Assistant General Counsel of J.C. Penney Co., Inc., where he had
been employed since 1971.
E. LeRoy Heer has been Senior Vice President - Chief Corporate Actuary
since January 1991. Prior thereto, he had been Vice President - Corporate
Actuary since May 1978.
H. Raymond Lankford was named Senior Vice President - Alternative
Markets Operations in April 1996. Prior thereto, he was President of All
American, 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 20 years.
Ira S. Lederman was named Senior Vice President in January 1997. He is
also Assistant General Counsel a position he has held since July 1989 and
Assistant Secretary since May 1986. Previously, he was Vice President from May
1986 until January 1997. Prior thereto he was Insurance Counsel of the Company
since May 1986 and Associate Counsel from April 1983.
James G. Shiel was named Senior Vice President - Investments of the
Company in January 1997. Prior thereto, he was Vice President - Investments of
the Company since January 1992. Since February 1994, he has been President of
Berkley Dean & Company, Inc., a subsidiary of the Company, which he joined in
1987.
Edward A. Thomas has been Senior Vice President - Specialty Operations
of the Company since April 1991. Prior thereto, he was President of Signet
Reinsurance Company, a subsidiary of the Company, for more than five years.
Robert P. Cole was named Vice President in October 1996. Before joining
the Company Mr. Cole was a senior Officer of Christania Reinsurance Company of
New York which was purchased by Folksamerica Reinsurance Company in 1996 and
prior to that was associated with reinsurers for twenty years.
Clement P. Patafio was named Vice President - Corporate Controller in
January 1997. Prior thereto, he was Assistant Vice President - Corporate
Controller in July 1994 and Assistant Controller since May 1993. Before joining
the Company Mr. Patafio was with KPMG Peat Marwick from 1986 to 1993.
Scott A. Siegel was named Vice President - Taxes in January 1997. Prior
thereto, he was Director of Taxes since September 1991. Before joining the
Company Mr. Siegel was with KPMG Peat Marwick from 1981 to 1991.
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. He is
also a director of Aerointernational, Inc.; Crystal Oil Company; Global
Telecommunications, Limited.; Loral Corporation; Loral Space & Tele
Communications Ltd.; Mueller Industries, Inc.; R.V.I.
56
57
Guaranty, Ltd.; LCH Investments N.V.; and Restructured Capital Holdings, Ltd.
Mr. Hodes' current term as a Director expires in 1997.
Henry Kaufman has been a Director of the Company since 1994. Dr.
Kaufman is President of Henry Kaufman & Co., Inc., an investment, economic and
financial consulting company since its establishment in 1988. Dr. Kaufman serves
as Chairman of the Board of Overseers, Stern Schools of Business of NYU;
Chairman of the Board of Trustees, Institute of International Education; Member
of the Board of Directors, Federal Home Loan Mortgage Corp.; Member of the Board
of Directors, Lehman Brothers Holdings Inc.; Member of the Board of Trustees,
New York University; and Member of the International Capital Markets Advisory
Committee of the Federal Reserve Bank of New York. Dr. Kaufman's current term as
a Director expires in 1998.
Richard G. Merrill has been a Director of the Company since 1994. Mr.
Merrill was Executive Vice President of Prudential Insurance Company of America
from August 1987 to March 1991 when he retired. Prior thereto, Mr. Merrill
served as Chairman and President of Prudential Asset Management Company since
1985. Mr. Merrill is a Director of Sysco Corp. Mr. Merrill's current term as a
Director expires in 1999.
Jack H. Nusbaum has been a Director of the Company since 1967. Mr.
Nusbaum is the Chairman in 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 Pioneer Companies, Inc.; Fine Host Corporation; Strategic Distribution Inc.;
Prime Hospitality Corp.; and The Topps Company, Inc. Mr. Nusbaum's current term
as a Director expires in 1999.
Mark L. Shapiro has been a Director of the Company since 1974. Mr.
Shapiro is a Managing Director in the investment banking firm of Schroder
Wertheim & Co. Incorporated for more than the past five years. Mr. Shapiro's
current term as a Director expires in 1999.
Martin Stone has been a Director of Berkley since 1990. Mr. Stone is
Chairman of Professional Sports, Inc. (the Phoenix Firebirds AAA baseball team)
and Chairman of Adirondack Corporation, for more than five years. Mr. Stone is
also a director of Canyon Ranch, Inc. and a member of the Advisory Board of
Yosemite National Park. Mr. Stone's current term as a Director expires in 1998.
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, 1996, 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, 1996, 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, 1996, and which is incorporated herein by reference.
57
58
(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, 1996, 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, 1996, and which is incorporated herein by reference.
58
59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Financial Statements
The financial statements filed as part of this report are listed on the
Index to Financial Statements on page 30 hereof.
Index to Financial Statement Schedules Page
-------------------------------------- ----
Independent Auditors' Report on Schedules and Consent 64
Schedule II - Condensed Financial Information of Registrant 65
Schedule III - Supplementary Insurance Information 69
Schedule IV - Reinsurance 70
Schedule VI - Supplementary Information concerning
Property & Casualty Insurance Operations 71
(b) Reports on Form 8-K
On December 13, 1996, the Company filed a current report on Form 8-K
announcing the issuance of the Capital Trust Securities.
(c) Exhibits
The exhibits filed as part of this report are listed on pages 62 and 63
hereof.
59
60
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 WILLIAM R. BERKLEY
---------------------------------------------
William R. Berkley, Chairman of the Board and
Chief Executive Officer
March 11, 1997
60
61
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
--------- ----- ----
WILLIAM R. BERKLEY Chairman of the Board and
- --------------------------------------- Chief Executive Officer March 11, 1997
William R. Berkley
Principal executive officer
JOHN D. VOLLARO President, Chief Operating March 11, 1997
- --------------------------------------- Officer and Director
John D. Vollaro
ROBERT B. HODES Director March 11, 1997
- ---------------------------------------
Robert B. Hodes
HENRY KAUFMAN Director March 11, 1997
- ---------------------------------------
Henry Kaufman
RICHARD G. MERRILL Director March 11, 1997
- ---------------------------------------
Richard G. Merrill
JACK H. NUSBAUM Director March 11, 1997
- ---------------------------------------
Jack H. Nusbaum
MARK L. SHAPIRO Director March 11, 1997
- ---------------------------------------
Mark L. Shapiro
MARTIN STONE Director March 11, 1997
- ---------------------------------------
Martin Stone
ANTHONY J. DEL TUFO Senior Vice President, March 11, 1997
- --------------------------------------- Chief Financial Officer and
Anthony J. Del Tufo Treasurer
Principal financial officer
CLEMENT P. PATAFIO Vice President, March 11, 1997
- -------------------------------------- Corporate Controller
Clement P. Patafio
61
62
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
current reports on Form 8-K (file No. 0-7849) filed with the
Commission 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
(3.2) By-laws
(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) The Company's 1982 Stock Option Plan, (incorporated by reference to
Exhibit 10.1 of the Company's Registration Statement on Form S-1
(File No. 2-98396) filed with the Commission on June 14, 1985).
(10.2) The Company's 1992 Stock Option Plan, (incorporated by reference to
Exhibit 28.1 of the Company's Registration Statement on Form S-8
(File No. 33-55726) filed with the Commission on December 15, 1992).
(10.2a) Signet Star Holdings, Inc. 1993 Stock Option Plan, (incorporated by
reference to Exhibit 10.14 of Signet Star Holdings, Inc. Registration
Statement on Form S-1 (File No. 33-69964) filed with the Commission
on October 4, 1993).
(10.3) 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.
(10.4) W.R. Berkley Corporation Deferred Compensation Plan for officers as
amended January 1, 1991.
(10.5) W. R. Berkley Corporation Deferred Compensation Plan for Directors as
adopted March 7, 1996.
(10.6) Sale Agreement by and between the Company and Lembo-Feinerman Fleming
Morell Trust for the acquisition of real property.
62
63
(21) Following is a list of the Company's significant subsidiaries.
Subsidiaries of subsidiaries are indented and the parent of each such
corporation owns 100% of the outstanding voting securities of such
corporation except as noted below.
Jurisdiction Percentage
of owned by
incorporation Company
------------- -------
All American Agency Facilities, Inc. Delaware 100%
Berkley Regional Insurance Company: Missouri 100%
Acadia Insurance Company: Maine 100%
Chesapeake Bay Property and Casualty
Insurance Company Maine 100%
Berkley Insurance Company of the Carolinas North Carolina 100%
Continental Western Insurance Company: Iowa 100%
Continental Western Casualty Company Iowa 100%
Firemen's Insurance Company of
Washington, D.C.: Maryland 100%
FICO Insurance Company Maryland 100%
Great River Insurance Company Mississippi 100%
Tri-State Insurance Company of Minnesota: Minnesota 100%
American West Insurance Company North Dakota 100%
Union Insurance Company Nebraska 100%
Union Standard Insurance Company Oklahoma 100%
Berkley International, LLC New York 65%
Berkley Risk Services, Inc. Minnesota 100%
Carolina Casualty Insurance Company Florida 100%
Clermont Specialty Managers, Ltd. New Jersey 100%
J/I Holding Corporation: Delaware 100%
Admiral Insurance Company: Delaware 100%
Nautilus Insurance Company: Arizona 100%
Great Divide Insurance Company North Dakota 100%
Key Risk Management Services, Inc. North Carolina 100%
MECC, Inc.: Delaware 100%
Midwest Employers Casualty Company Ohio 100%
Monitor Liability Managers, Inc. Delaware 100%
Monitor Surety Managers, Inc. Delaware 100%
Queen's Island Insurance Company, Ltd. Bermuda 100%
Rasmussen Agency, Inc. New Jersey 100%
Signet Star Holdings, Inc.: Delaware 100%
Signet Star Reinsurance Company Delaware 100%
Facultative ReSources, Inc. Connecticut 100%
(23) See Independent Auditors' report on schedules and consent.
(28) Information from reports furnished to state insurance regulatory
authorities. This exhibit which will be filed supplementally includes
the Company's combined Schedule P as prepared for its 1995 combined
Annual Statement which will be provided to state regulatory
authorities. The schedule has been prepared on a statutory basis. The
combined schedule includes the historical results of the Company's
insurance subsidiaries as if they had been owned from their inception
date. It should be noted that the combined schedule includes data of
seventeen operating companies and, as a result, any statistical
extrapolation from the schedule may not be meaningful.
(The combined Schedule P as filed with the Securities and Exchange
Commission, has been omitted from this copy. It is available upon
request from Mr. Anthony J. Del Tufo, Senior Vice President, Chief
Financial Officer and Treasurer of the Company, at the address shown
on page 1.)
63
64
INDEPENDENT AUDITORS' REPORT ON SCHEDULES AND CONSENT
Board of Directors and Stockholders
W. R. Berkley Corporation
The audit referred to in our report dated February 21, 1997 included the related
financial statement schedules as of December 31, 1996 and 1995 and for each of
the years in the three-year period ended December 31, 1996 included in the Form
10-K. 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
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
We consent to the use of our reports incorporated by reference in the
Registration Statements (No. 2-98396) on Form S-1 and (No. 33-55726) on Form S-8
and (No. 33-30684) and (No. 33-95552) and (No. 333-00459) on Forms S-3 and (No.
33-88640) on Form S-8 of W. R. Berkley Corporation.
KPMG Peat Marwick LLP
New York, New York
March 21, 1997
64
65
Schedule II
W. R. Berkley Corporation
Condensed Financial Information of Registrant
Balance Sheets (Parent Company)
(Amounts in thousands)
December 31,
----------------------------
1996 1995
----------- -----------
Assets
Cash (including invested cash) $ 55,305 $ 10,669
Fixed maturity securities:
Held to maturity, at cost
(fair value $10,101 and $10,176) 10,101 10,176
Available for sale at fair value (cost $122,760 and $5,807) 122,592 5,807
Equity securities, at fair value:
Available for sale (cost $1,433 and $1,733) 3,733 2,146
Trading account (cost $33,331 and $35,053) 33,331 35,053
Investments in subsidiaries 1,212,474 1,136,518
Due from subsidiaries 56,334 42,703
Current Federal income taxes receivable -- 35
Real estate, furniture & equipment at cost, less accumulated
depreciation 22,194 1,741
Other assets 4,316 3,033
----------- -----------
$ 1,520,380 $ 1,247,881
=========== ===========
Liabilities, Debt and Stockholders' Equity
Liabilities:
Due to subsidiaries (principally
deferred income taxes) $ 47,308 $ 32,590
Deferred Federal income taxes 4,013 14,363
Other liabilities 27,115 15,925
----------- -----------
78,436 62,878
----------- -----------
Long-term debt 354,311 255,188
Subsidiary trust junior subordinated debt 207,901 --
Stockholders' equity:
Preferred stock 93 146
Common stock 4,854 4,854
Additional paid-in capital 471,492 547,068
Retained earnings (including accumulated
undistributed net income of
subsidiaries of $417,604 and $374,027
in 1996 and 1995, respectively) 490,338 424,261
Equity in net unrealized investment gains
net of taxes 31,075 48,450
Treasury stock, at cost (118,120) (94,964)
----------- -----------
879,732 929,815
----------- -----------
$ 1,520,380 $ 1,247,881
=========== ===========
See note to condensed financial statements.
65
66
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,
------------------------------------
1996 1995 1994
-------- -------- --------
Management fees and investment income
from affiliates, including dividends of
$60,264, $38,091 and $19,520 for 1996,
1995 and 1994, respectively $ 72,377 $ 50,839 $ 28,328
Realized investment gains (losses) 486 (306) (1,700)
Other income 4,058 5,615 6,190
-------- -------- --------
Total revenues 76,921 56,148 32,818
Expenses, other than interest expense (16,121) (12,256) (10,772)
Interest expense (30,014) (22,907) (22,892)
-------- -------- --------
Income (loss) before Federal
income taxes 30,786 20,985 (846)
-------- -------- --------
Federal income taxes:
Federal income taxes provided by
subsidiaries on a separate return
basis 41,002 22,481 13,513
Federal income tax provision on a
consolidated return basis (25,102) (15,454) (5,370)
-------- -------- --------
Net benefit 15,900 7,027 8,143
-------- -------- --------
Income before undistributed equity
in net income of subsidiaries 46,686 28,012 7,297
Equity in undistributed net income
of subsidiaries 43,577 32,870 27,797
-------- -------- --------
Income before preferred dividends 90,263 60,882 35,094
Preferred dividends (13,909) (11,062) (10,356)
-------- -------- --------
Net income attributable to
common stockholders $ 76,354 $ 49,820 $ 24,738
======== ======== ========
See note to condensed financial statements.
66
67
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,
---------------------------------------
1996 1995 1994
--------- --------- ---------
Cash flows from operating activities:
Net income before preferred dividends $ 90,263 $ 60,882 $ 35,094
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Equity in undistributed net
income of subsidiaries (43,577) (32,870) (27,797)
Tax payments from subsidiaries 35,613 17,104 14,614
Federal income taxes provided by subsidiaries (40,848) (22,481) (13,513)
Change in Federal income taxes 4,840 3,654 (2,765)
Realized investment losses (486) 306 1,700
Other, net 6,050 4,087 (404)
--------- --------- ---------
Net cash provided by operating activities
before trading account sales (purchases) 51,855 30,682 6,929
Trading account sales (purchases), net 1,722 (26,065) --
--------- --------- ---------
Net cash provided by
operating activities 53,577 4,617 6,929
--------- --------- ---------
Cash flow used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 13,121 23,158 77,613
Equity securities 786 1 832
Proceeds from maturities and prepayments of
fixed maturity securities -- 15,206 521
Cost of purchases, excluding trading account:
Fixed maturity securities (130,003) (3,452) (106,600)
Equity securities -- (1,733) (425)
Cost of companies acquired (15,955) (217,096) --
Investments in and advances to
subsidiaries, net (38,936) (70,972) (31,242)
Net additions to real estate, furniture &
equipment (21,270) (328) (93)
Other, net -- -- (503)
--------- --------- ---------
Net cash used in investing activities (192,257) (255,216) (59,897)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- 144,739 --
Net proceeds from issuance of preferred stock -- 66,000 145,275
Net proceeds from issuance of
long-term debt 98,850 -- --
Net proceeds from issuance of a subsidiary
trust junior subordinated debt 207,900 -- --
Purchase of treasury shares (24,152) (4,095) (26,357)
Cash dividends to common stockholders (10,147) (7,844) (7,459)
Cash dividends to preferred shareholders (12,824) (11,062) (8,051)
Purchase of Preferred Stock (77,572) -- --
Payment of subsidiary debt -- -- (4,527)
Other, net 1,261 1,441 156
--------- --------- ---------
Net cash provided by financing activities 183,316 189,179 99,037
--------- --------- ---------
Net increase in cash and invested cash 44,636 (61,420) 46,069
Cash and invested cash at beginning of year 10,669 72,089 26,020
--------- --------- ---------
Cash and invested cash at end of year $ 55,305 $ 10,669 $ 72,089
========= ========= =========
See note to condensed financial statements
67
68
Schedule II, Continued
W. R. Berkley Corporation
Condensed Financial Information of Registrant, Continued
December 31, 1996, 1995 and 1994
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 1995 and 1994
financial statements as originally reported to conform them to the presentation
of the 1996 financial statements.
The Company files a consolidated federal tax return with the results of
its domestic insurance subsidiaries included on a statutory basis. Under present
Company policy, Federal income taxes payable by (or refundable to) subsidiary
companies on a separate-return basis are paid to (or refunded by) W. R. Berkley
Corporation, and the Company pays the tax due on a consolidated return basis.
Included in fixed maturities available for sale is $115,800,000 of
securities placed in a trust which will be used to service the remaining
outstanding shares of the Series A Preferred Stock. The Company expects that the
proceeds of the trust will be utilized to redeem the Series A Preferred Stock on
January 25, 1999.
68
69
Schedule III
W. R. Berkley Corporation and Subsidiaries
Supplementary Insurance Information
December 31, 1996, 1995 and 1994
(Amounts in thousands)
Reserve for
Deferred policy losses and Net Loss and
acquisition loss Unearned Premiums investment Loss
cost expenses premiums earned income expenses
--------------- ----------- -------- -------- ---------- --------
December 31, 1996
Regional $ 68,780 $ 386,123 $282,543 $494,819 $ 45,544 $332,535
Reinsurance 16,947 293,340 65,388 206,144 31,071 153,162
Specialty 25,588 785,204 132,749 176,253 54,186 120,660
Alternative markets 5,518 302,606 25,281 79,012 29,118 50,372
International 2,324 15,430 8,252 24,993 1,426 12,431
Corporate and adjustments -- -- -- -- 3,145 --
-------- ---------- -------- -------- -------- --------
Total $119,157 $1,782,703 $514,213 $981,221 $164,490 $669,160
======== ========== ======== ======== ======== ========
December 31, 1995
Regional $ 58,469 $ 343,546 $247,633 $434,282 $ 40,827 $285,146
Reinsurance 8,388 234,811 55,539 185,244 26,186 145,094
Specialty 15,265 805,072 109,089 145,322 54,118 116,211
Alternative markets 5,184 262,872 29,551 31,588 6,978 21,096
International 2,211 13,719 8,710 6,900 377 3,451
Corporate and adjustments -- -- -- -- 8,846 --
-------- ---------- -------- -------- -------- --------
Total $ 89,517 $1,660,020 $450,522 $803,336 $137,332 $570,998
======== ========== ======== ======== ======== ========
December 31, 1994 $ 48,709 $ 285,024 $205,130 $343,123 $ 32,897 $225,650
Regional 10,482 962,663 43,725 168,239 19,034 147,894
Specialty 11,138 810,526 94,963 128,939 49,949 101,921
Alternative markets 1,697 12,267 6,445 14,737 1,795 10,684
International -- -- -- -- -- --
Corporate and adjustments -- 406 -- -- 6,008 --
-------- ---------- -------- -------- -------- --------
Total $ 72,026 $2,070,886 $350,263 $655,038 $109,683 $486,149
======== ========== ======== ======== ======== ========
Amortization of
deferred policy Other
acquisition operating cost Net premiums
Costs and expenses written
--------------- -------------- ------------
December 31, 1996
Regional $144,342 $ 29,778 $ 531,147
Reinsurance 52,925 4,076 218,047
Specialty 49,064 12,467 202,491
Alternative markets 25,457 67,397 75,644
International 11,854 3,433 25,182
Corporate and adjustments -- 8,201 --
-------- -------- ----------
Total $283,642 $125,352 $1,052,511
======== ======== ==========
December 31, 1995
Regional $131,152 $ 21,601 $ 471,716
Reinsurance 48,239 3,036 195,988
Specialty 39,105 10,214 160,847
Alternative markets 6,382 70,373 25,998
International 3,732 551 5,872
Corporate and adjustments -- 5,604 --
-------- -------- ----------
Total $228,610 $111,379 $ 860,421
======== ======== ==========
December 31, 1994 $105,539 $ 18,519 $ 386,530
Regional 43,698 7,845 176,699
Specialty 36,534 8,992 134,715
Alternative markets 1,697 58,370 19,989
International -- -- --
Corporate and adjustments -- 5,072 --
-------- -------- ----------
Total $187,468 $ 98,798 $ 717,933
======== ======== ==========
69
70
Schedule IV
W. R. Berkley Corporation and Subsidiaries
Reinsurance
Years ended December 31, 1996, 1995 and 1994
(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, 1996:
Regional insurance $604,942 $ 78,041 $ 4,246 $ 531,147 0.8%
Reinsurance -- 10,708 228,755 218,047 104.9%
Specialty insurance 302,832 111,826 11,485 202,491 5.7%
Alternative Markets 58,065 5,353 22,932 75,644 30.3%
International 29,263 4,081 -- 25,182 --
-------- -------- -------- ---------- -----
Total $995,102 $210,009 $267,418 $1,052,511 25.4%
======== ======== ======== ========== =====
Year ended December 31, 1995:
Regional insurance $529,004 $ 72,504 $ 15,216 $ 471,716 3.2%
Reinsurance -- 12,464 208,452 195,988 106.4%
Specialty insurance 277,752 123,585 6,680 160,847 4.2%
Alternative Markets 4,980 2,068 23,086 25,998 88.8%
International 7,420 1,548 -- 5,872 --
-------- -------- ---------- -----
Total $819,156 $212,169 $253,434 $ 860,421 29.5%
======== ======== ======== ========== =====
Year ended December 31, 1994:
Regional insurance $431,103 $ 53,458 $ 8,885 $ 386,530 2.3%
Reinsurance -- 17,834 194,533 176,699 110.1%
Specialty insurance 264,747 138,759 8,727 134,715 6.5%
Alternative Markets -- 186 20,175 19,989 100.9%
International -- -- -- -- --
-------- -------- ---------- -----
Total $695,850 $210,237 $232,320 $ 717,933 32.4%
======== ======== ======== ========== =====
70
71
Schedule VI
W. R. Berkley Corporation and Subsidiaries
Supplementary Information Concerning Property-Casualty Insurance Operations
December 31, 1996, 1995 and 1994
(Amounts in thousands)
1996 1995 1994
---- ---- ----
Deferred policy acquisition costs $ 119,157 $ 89,517 $ 72,026
Reserves for losses and loss expenses 1,782,703 1,660,020 2,070,886
Unearned premium 514,213 450,522 350,263
Premiums earned 981,221 803,336 655,038
Net investment income 164,490 137,332 109,683
Losses and loss expenses incurred:
Current Year 675,674 580,594 493,418
Prior Years (15,219) (9,596) (7,269)
Amortization of discount 8,705 -- --
Amortization of deferred policy
acquisition costs 283,642 228,610 187,468
Paid losses and loss expenses 545,288 449,151 373,927
Net premiums written 1,052,511 860,421 717,933
71