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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______.
Commission file number 0-7849
W. R. BERKLEY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-1867895
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
165 Mason Street, 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: 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of the registrant
based on the closing price of such stock on the Nasdaq National Market as of
February 26, 1999: $ 635,570,178.
Number of shares of common stock, $.20 par value, outstanding as of February 26,
1999: 26,231,753
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 1998 Annual Report to Stockholders for the year ended
December 31, 1998 are incorporated herein by reference in Part II, and portions
of the registrant's definitive proxy statement, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1998, are
incorporated herein by reference in Part III.
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W. R. BERKLEY CORPORATION
ANNUAL REPORT ON FORM 10-K
December 31, 1998
Page
SAFE HARBOR STATEMENT 3
PART I
ITEM 1. BUSINESS 4
ITEM 2. PROPERTIES 23
ITEM 3. LEGAL PROCEEDINGS 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 24
ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS
ENDED DECEMBER 31, 1998 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 26
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 27
ITEM 11. EXECUTIVE COMPENSATION 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 30
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SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This Annual Report on Form 10-K contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Generally, forward-looking statements are statements other than historical
information or statements of current condition. Forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected or otherwise reflected in forward-looking
statements, including pricing competition and other initiatives by competitors,
product demand, catastrophe and storm losses, legislative and regulatory
developments, interest rate levels, investment results and other conditions in
the financial and securities markets, unforeseen technological or other issues
associated with Year 2000 compliance efforts and the extent to which vendors,
public utilities, financial institutions, governmental entities and other third
parties that interface with the Company may fail to achieve Year 2000 compliance
and other risks referred to from time to time in the Company's reports filed
with the Securities and Exchange Commission. The inclusion of forward-looking
statements in this report shall not be considered a representation by the
Company that the objectives or plans of the Company, or other matters addressed
by forward-looking statements, will be achieved.
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PART I
ITEM 1. BUSINESS
General Description of the Company's Business
W. R. Berkley Corporation (the "Company"), a Delaware corporation, is
an insurance holding company which, through its subsidiaries, presently operates
in all segments of the property casualty insurance business: regional property
casualty insurance; reinsurance (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 or regional group to respond to local or specialty market
conditions while capitalizing on the effectiveness of centralized investment and
reinsurance management and actuarial, financial and legal staff support.
The Company's regional insurance operations are conducted primarily in
the New England, Mid Atlantic, Midwest and Southern regions of the United
States. Reinsurance, specialty insurance and alternative markets operations are
conducted nationwide. Presently, international operations are conducted
primarily in Argentina and the Philippines with Signet Star Reinsurance Company
conducting business in Latin America and the Caribbean as well.
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, 1998 were as follows:
Year Ended December 31,
------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
(Amounts in thousands)
Net premiums written (1):
Regional insurance operations $ 641,316 $ 618,768 $ 517,515 $ 460,732 $ 378,701
Reinsurance operations 269,634 206,652 218,200 196,299 176,130
Specialty insurance operations 254,003 219,272 214,738 171,520 143,113
Alternative markets operations 106,195 90,870 76,876 25,998 19,989
International operations 75,106 42,079 25,182 5,872 --
------------ ------------ ------------ ------------ ------------
Total net premiums written $ 1,346,254 $ 1,177,641 $ 1,052,511 $ 860,421 $ 717,933
============ ============ ============ ============ ============
Percentage of net premiums written:
Regional insurance operations 47.6% 52.6% 49.2% 53.6% 52.7%
Reinsurance operations 20.0 17.5 20.7 22.8 24.6
Specialty insurance operations 18.9 18.6 20.4 19.9 19.9
Alternative markets operations 7.9 7.7 7.3 3.0 2.8
International operations 5.6 3.6 2.4 .7 --
------------ ------------ ------------ ------------ ------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
============ ============ ============ ============ ============
(1) Results for the regional, alternative markets and specialty insurance
operations have been restated to reflect changes in the composition of
the segments.
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The following sections briefly describe the Company's insurance
segments and subsidiaries. The statutory information contained herein is derived
from that reported to state regulatory authorities in accordance with statutory
accounting practices ("SAP"). The amounts of statutory net premiums shown for
the subsidiaries exclude the effects of intercompany reinsurance. 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. The Company's regional insurance operations have historically been
conducted through ten principal operating subsidiaries. On January 20, 1999, the
Company announced that it would restructure the management and back-office
operations of these ten companies into four geographic segments based on markets
served. The restructuring, which is in process and subject to varying regulatory
and operational requirements, is expected to be completed before the end of
1999. It is intended that as part of the restructuring certain back office
functions and operating redundancies will be minimized or eliminated.
The new regional groups, and the primary regional company for each
group, are as follows:
- New England - Acadia Insurance Company
- Mid Atlantic - Firemen's Insurance Company of Washington, D.C.
- Midwest - Continental Western Insurance Company
- Southern Tier - Union Standard Insurance Company
In 1996, the Company acquired Berkley Regional Insurance Company
("BRIC") to act as an intermediate holding company. The Company contributed to
BRIC all of the capital stock of the regional insurance companies. In 1997 and
1998 BRIC reinsured 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, 1998 was $292,130,000. BRIC is rated
A+ by A.M. Best. This A+ is a group rating which applies to each of the regional
insurance companies and certain other subsidiaries as noted herein. A.M. Best
has indicated that this rating is under review as a result of matters affecting
the regional business.
NEW ENGLAND REGIONAL INSURANCE GROUP
The New England regional insurance operations are conducted by Acadia
Insurance Company ("Acadia"). 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, Vermont and Massachusetts and
sells its personal and commercial coverages through independent agencies.
Acadia's statutory surplus and statutory net premiums written as of December 31,
1998 and for the year then ended were $43,855,000 and $133,954,000,
respectively. Acadia additionally utilizes its subsidiary, Cadillac Mountain
Insurance Company, as a companion writer.
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MID ATLANTIC REGIONAL INSURANCE GROUP
The Mid Atlantic regional insurance group will consist of Firemen's
Insurance Company of Washington, D.C. ("Firemen's), Berkley Insurance Company of
the Carolinas ("BICC"), Chesapeake Bay Property and Casualty Insurance Company
("Chesapeake") and The Presque Isle Insurance Division of Firemen's. Firemen's
will be the primary company in the Mid Atlantic group and it is anticipated that
it will manage affairs of the group from a new office in Richmond, Virginia.
Firemen's, Chesapeake and BICC sell their policies primarily through agents in
the District of Columbia and the States of Maryland, North Carolina,
Pennsylvania and Virginia.
Firemen's Insurance Company of Washington, D.C. was originally
incorporated by an Act of Congress in 1836 and re-domiciled to Maryland in 1994.
Firemen's writes homeowners, other personal lines and commercial risks in the
District of Columbia and in the States of Maryland, North Carolina and Virginia.
In March 1995, Firemen's established The Presque Isle Insurance Division in
order to expand its operations into the State of Pennsylvania. Firemen's
statutory surplus and statutory net premiums written as of December 31, 1998 and
for the year then ended were $39,159,000 and $56,863,000, respectively.
Berkley Insurance Company of the Carolinas, a North Carolina domiciled
company, was organized by the Company in December 1995. It writes personal and
commercial lines in North Carolina and is expanding to surrounding states. Its
statutory surplus and statutory net premiums written as of December 31, 1998 and
for the year then ended were $12,465,000 and $36,229,000, respectively.
Chesapeake Bay Property and Casualty Insurance Company, a Maine domiciled
company owned by Acadia, was formed in 1993. In 1997 Firemen's spun off
Chesapeake Insurance Division into the operations of Chesapeake. Chesapeake
writes personal and commercial lines in Virginia and is expanding to surrounding
states. Chesapeake's statutory surplus and statutory net premiums written as of
December 31, 1998 and for the year then ended were $9,021,000 and $31,001,000,
respectively.
MIDWEST REGIONAL INSURANCE GROUP
The Midwest regional insurance group will consist of Continental
Western Insurance Company ("Continental Western"), American West Insurance
Company ("American West"), Tri-State Insurance Company of Minnesota
("Tri-State") and Union Insurance Company ("Union"). Continental Western will be
the primary company in the group and will manage group affairs from its office
in Urbandale, Iowa. Continental Western, Tri-State and Union obtain their
business primarily in the smaller communities of the Midwest through independent
insurance agencies, which represent them on a non-exclusive basis and are
compensated on a commission basis. The following are brief descriptions of the
companies in the Midwest regional group:
Continental Western Insurance Company 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's statutory surplus and statutory net
premiums written as of December 31, 1998 and for the year then ended were
$76,899,000 and $165,467,000, respectively.
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American West Insurance Company 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's statutory
surplus and statutory net premiums written as of December 31, 1998 and for the
year then ended were $9,190,000 and $8,227,000, respectively.
Tri-State Insurance Company of Minnesota was originally organized as a
mutual insurance company. It writes commercial lines (specializing in grain
elevator coverages), as well as personal lines, primarily in the States of
Minnesota, Iowa, North and South Dakota, Nebraska, Wisconsin and Illinois.
Tri-State's statutory surplus and statutory net premiums written as of December
31, 1998 and for the year then ended were $35,820,000 and $47,634,000,
respectively.
Union Insurance Company 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's statutory surplus and statutory net premiums
written as of December 31,1998 and for the year then ended were $28,583,000 and
$55,779,000, respectively.
SOUTHERN TIER REGIONAL INSURANCE GROUP
The Southern Tier regional insurance group will consist of Union
Standard Insurance Company ("Union Standard") and Great River Insurance Company
("Great River"). Union Standard will be the primary company in the group and
will manage group affairs from its office in Irving, Texas. Union Standard and
Great River obtain their business primarily in the smaller communities of the
Southwest through independent insurance agencies, which represent them on a
non-exclusive basis and are compensated on a commission basis. The following are
brief descriptions of the companies in the Southern Tier regional group:
Union Standard Insurance Company 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's statutory surplus and statutory net premiums written
as of December 31, 1998 and for the year then ended were $29,156,000 and
$64,393,000, respectively.
Great River Insurance Company, a Mississippi domiciled company, was
organized by the Company in December 1993. It writes personal and commercial
lines in Mississippi and Tennessee and is expanding to surrounding states. Great
River's statutory surplus and statutory net premiums written as of December 31,
1998 and for the year then ended were $11,547,000 and $41,770,000, respectively.
Each of the ten regional operating subsidiaries described above is
rated A+ by A.M. Best as a result of the group rating obtained by BRIC.
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Regional operations: Business
The following table sets forth the percentages of direct premiums
written, by line, by the Company's regional insurance operations:
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
Commercial Multi-Peril 20.7% 20.5% 20.8% 21.5% 22.0%
Workers' Compensation 18.6 19.3 20.1 20.8 18.7
Automobile:
Personal 14.8 15.2 16.4 17.4 17.6
Commercial 20.8 19.6 17.4 15.6 16.4
General Liability 6.9 6.8 6.5 6.1 6.6
Homeowners 6.3 7.1 7.9 8.7 9.2
Fire and Allied Lines 4.7 5.0 4.7 4.6 4.8
Inland Marine 3.4 2.0 2.8 2.6 2.6
Other 3.8 4.5 3.4 2.7 2.1
----- ----- ----- ----- -----
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:
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
Maine 9.4% 10.2% 10.8% 10.8% 10.5%
Iowa 7.5 7.7 8.4 9.4 11.1
Nebraska 7.0 7.5 8.2 9.1 11.0
Texas 6.3 6.8 7.5 8.0 9.2
New Hampshire 5.8 5.8 6.0 6.0 4.7
Minnesota 5.4 5.3 5.4 5.6 6.0
South Dakota 5.2 4.2 5.4 6.8 4.9
Mississippi 5.0 5.7 6.1 5.5 2.9
Pennsylvania 5.0 4.8 2.2 -- --
North Carolina 4.8 4.2 1.5 .1 --
Kansas 4.5 4.6 4.8 4.9 5.2
Virginia 4.1 4.2 3.7 2.9 2.1
Colorado 3.5 3.5 3.8 4.1 4.5
Missouri 3.4 3.6 3.6 3.8 3.8
Vermont 3.0 3.2 3.1 2.4 1.1
Illinois 2.6 2.8 3.1 3.5 3.8
Wisconsin 2.5 2.6 2.9 3.6 3.6
Massachusetts 2.2 0.2 0.7 -- --
Arkansas 1.7 1.8 1.8 2.1 2.8
Idaho 1.4 1.1 0.6 0.2 0.2
Oklahoma 1.3 1.3 1.3 1.4 1.5
Tennessee 1.3 1.0 0.4 -- --
Montana 1.2 1.3 1.4 1.4 1.4
North Dakota 1.0 1.2 1.6 2.6 3.2
District of Columbia 0.8 1.2 1.6 1.6 2.3
Other 4.1 4.2 4.2 4.2 4.2
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
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REINSURANCE OPERATIONS
The Company's reinsurance operations consist of six operating units,
which specialize in underwriting property, casualty and surety reinsurance on
both a treaty and a facultative basis. The Company's reinsurance operations are
conducted by Signet Star Holdings, Inc. through its subsidiary Signet Star
Reinsurance Company ("Signet Star"). For financial segment reporting purposes,
the results of the alternative market division of Signet Star are included in
the Company's alternative markets segment. Signet Star is rated A by A.M. Best.
Signet Star's statutory surplus and statutory net premiums written as of
December 31, 1998 and for the year then ended were $257,022,000 and
$309,942,000, respectively.
The Property Casualty Treaty Division
The Property Casualty Treaty Division is the largest business unit in
terms of personnel and premiums written. This division of Signet Star is
committed exclusively to the broker market segment of the treaty reinsurance
industry. It functions as a traditional reinsurer in specialty and standard
reinsurance lines and has formed a professional liability division to target
this market segment.
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 reinsurer
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
fidelity and surety primary writers. Business is marketed principally through
brokers as well as directly to clients not served by intermediaries.
The Latin American and Caribbean Division
This 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
for this international operating region.
Gemini Insurance Company
Gemini is an excess and surplus line insurance company created to
provide Signet Star with primary issuing carrier capability and thereby generate
"reverse flow" business. Under the reverse flow concept, a reinsurer writes
primary business through a subsidiary or affiliated carrier that is then ceded
back to the reinsurer. Gemini provides Signet Star with a controlled source of
new business. It operates as an authorized insurance company in the State of
Delaware and will operate nationwide, as necessary legal and regulatory
requirements are met, as an approved excess and surplus line carrier. Gemini is
rated A by A.M. Best. Gemini had statutory surplus of $23,528,000 as of December
31, 1998.
StarNet Insurance Company
In 1998 Signet Star acquired a corporate insurance vehicle to write
reverse flow business on an admitted basis. This company was re-domesticated to
Delaware effective February 28, 1999. Signet Star will seek to license StarNet
broadly to serve as an adjunct to Gemini to write primary business on an
admitted basis nationwide. StarNet is rated A by A.M. Best. StarNet had
statutory surplus of $10,157,000 at December 31, 1998 and has not commenced
operations.
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Reinsurance Operations: Business
The following table sets forth the percentages of gross premiums
written, by line, by the Company's reinsurance operations:
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
Treaty:
Casualty and other 39.7% 38.7% 45.1% 46.6% 43.3%
Property and related lines 19.1 16.1 23.3 26.8 36.0
Professional and specialty 8.4 5.5 4.7 4.8 4.2
----- ----- ----- ----- -----
Total Treaty 67.2 60.3 73.1 78.2 83.5
Facultative 14.8 15.4 11.7 14.2 10.9
Fidelity and Surety 6.8 10.5 9.5 7.6 5.6
Latin American and Caribbean 11.2 13.8 5.7 -- --
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
The following table sets forth the percentage of gross premiums
written, by property versus casualty business, by the Company's reinsurance
operations:
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
Property 31.4% 32.7% 35.2% 33.4% 40.2%
Casualty 68.6 67.3 64.8 66.6 59.8
----- ----- ----- ----- -----
Total 100.0% 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.
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 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, 1998 and
for the year then ended were $220,792,000 and $100,511,000, respectively.
Admiral is in the process of establishing an admitted company to compete for
certain risks that might be subject to the commercial lines regulation
enactments (see "Regulation") as well as other risks which prefer an admitted
carrier. Admiral incorporated Admiral Indemnity Company ("Admiral Indemnity") in
January 1999 for this purpose and capitalized it with $25,000,000. Admiral
Indemnity is in the process of licensure and expects to be operational in 1999.
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. Public
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transportation insurance for such risks as charter buses and school buses also
makes up a substantial part of Carolina's book of business. Carolina's business
is obtained nationwide from approximately 120 agents and brokers who are
compensated on a commission basis. 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 1998, Carolina
began writing directors and officers liability insurance through operations
conducted by Monitor Liability Managers, Inc., an underwriting manager
established by the Company. Carolina is rated A by A.M. Best. Carolina's
statutory surplus and statutory net premiums written as of December 31, 1998 and
for the year then ended were $60,520,000 and $88,715,000, respectively.
FICO Insurance Company
FICO was established in 1988 and is presently owned by Firemen's. FICO
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.
FICO is rated A+ by A.M. Best (BRIC group rating). FICO's statutory surplus and
net premiums written as of December 31, 1998 and for the year then ended were
$11,492,000 and $11,640,000, respectively. In 1999 as part of the regional
restructuring FICO will become part of the specialty insurance operations.
Nautilus Insurance Company
Nautilus Insurance Company ("Nautilus") was established in 1985 as a
subsidiary of Admiral 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' statutory surplus and
statutory net premiums written as of December 31, 1998 and for the year then
ended were $66,557,000 and $52,606,000, respectively. Great Divide Insurance
Company ("Great Divide"), a subsidiary of Nautilus, writes transportation risks,
as well as other specialty lines, on an admitted basis.
Preferred Employers Insurance Company
Preferred Employers Insurance Company ("Preferred") was established in
1998 to insure workers' compensation in California, focusing on the small
employer market. Preferred is rated A+ by A.M. Best (BRIC group rating).
Preferred's statutory surplus and statutory net premiums written as of December
31, 1998 and for the year then ended were $9,739,000 and $531,000, respectively.
Specialty Operations: Business
The following table sets forth the percentages of gross premiums
written, by line, by the Company's specialty insurance operations:
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
General Liability 28.2% 34.1% 35.3% 37.6% 42.0%
Automobile Liability 19.0 17.7 20.9 27.5 28.5
Professional Liability 16.9 14.7 12.1 7.0 6.3
Directors and Officers Liability 7.7 8.1 10.0 9.0 5.7
Fire and Allied Lines 7.1 7.5 7.1 4.9 4.6
Automobile Physical Damage 6.1 4.9 5.3 6.8 6.0
Medical Malpractice 6.1 4.0 3.3 2.3 2.6
Inland Marine 1.8 1.5 1.6 2.1 1.8
Workers Compensation 1.9 2.5 1.7 0.7 0.7
Commercial Multi-Peril 3.1 3.0 1.0 0.7 0.7
Surety 2.0 1.9 1.3 0.8 --
Other 0.1 0.1 0.4 0.6 1.1
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
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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; 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 and related risk management services. 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 employer's 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, 1998 and for the year then ended were $127,854,000 and $42,597,000,
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 has enabled it to concentrate and coordinate
the Company's focus on this growing sector of the reinsurance market.
Insurance Services Operations
The Company's insurance service operations offer a variety of products,
which include underwriting and claims administration and alternative insurance
market mechanisms. In addition, the insurance services operations subsidiaries
of the Company provide agency and brokerage services to both affiliated and
unaffiliated entities.
Berkley Risk Administrators Company, LLC
The Company acquired Berkley Risk Administrators Company, LLC (formerly
known as Berkley Risk Services, LLC) and its subsidiaries ("Berkley Risk")
operations beginning in 1988. In 1997 Berkley Risk Services, Inc. was
restructured into a limited liability company. 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. Berkley Risk also manages entities
which provide liability insurance and claim adjusting services to public
entities and not-for-profit organizations.
12
13
The operations of Berkley Risk and Berkley Administrators are being
functionally merged. During 1999 it is anticipated that the operations of
Berkley Administrators will be fully incorporated into Berkley Risk. This
consolidation was implemented in order to enhance the expertise and geographic
scale of the two units, while taking advantage of economies of scale and
eliminating redundant operational and administrative expenses.
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.
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 business was the
administration of the North Carolina Associated Industries Workers' Compensation
Fund, which ceded a portfolio of loss reserves to a subsidiary of the Company.
In 1998 the Company organized Key Risk Insurance Company as a North Carolina
insurance company to be used by Key Risk to target businesses having
self-insured funds. Key Risk Insurance has an A.M. Best rating of A+ (BRIC group
rate). Its statutory surplus and statutory net premiums written as of December
31, 1998 and for the year then ended were $4,492,000 and $18,226,000,
respectively.
Berkley Risk Managers
Berkley Risk Managers is a successor to a company acquired in 1990
(Rasmussen Agency, Inc.). 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. In 1997, the Company acquired
Berkley Care Network, Northeast to provide managed care services in the State of
Connecticut, in 1998 it acquired a managed care operation and in 1999 acquired a
vocational evaluation, assessment and rehabilitation facility, each located in
Florida.
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14
Alternative Markets Operations: Business
The following table sets forth the percentages of revenues, by major
source of business, of the alternative markets operations:
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
Midwest Employers Casualty Company 38.3% 46.1% 48.8% 14.8% --%
Insurance Service Operations 31.7 35.8 37.5 63.1 78.6
Signet Star - Alternative Markets
Division 21.6 18.0 13.7 22.1 21.4
Other Insurance Operations 8.4 .1 -- -- --
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
International Operations
In 1995, the Company and Northwestern Mutual Life International, Inc.
("NML"), a wholly-owned subsidiary of The Northwestern Mutual Life Insurance
Company, entered into a joint venture to form Berkley International LLC
("Berkley International"), a limited liability company. The Company agreed to
contribute up to $65 million to Berkley International in exchange for a 65%
membership interest and NML agreed to contribute up to $35 million to Berkley
International in exchange for a 35% membership interest.
Berkley International owns 99.9% of Berkley International Argentina
S.A. ("Berkley S.A."), an Argentine holding company. Berkley S.A. owns the
following property casualty insurance companies: 79% of Union Berkley, Compania
de Seguros, S.A.; 99.9% of Berkley, Compania Metropalitana de Seguros, which is
the successor to Independencia, Compania Argentina de Seguros, S.A., and Oceano,
Compania Argentina de Seguros, which have combined their operations; and 99.9%
of Berkley International Aseguradora de Riesgos de Trabajo S.A. Berkley S.A.
also owns 99.9% of Risk Management Services S.A., which is a third-party
administrator, and 90% of Jackson Berkley Life. In addition, Berkley
International directly owns 59% of Philippine Insurance Holdings, Inc., a
Philippine holding company, as well as 64% of Family First, Inc., the direct
sales and marketing operation. Philippine Insurance Holdings, Inc. owns 100% of
the following companies: Berkley International Life Insurance Company, Inc.,
Berkley International Plans, Inc., and Berkley Insurance Company of the
Philippines, Inc. Berkley International also owns 80% of Global Direct, LLC.
14
15
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)(1):
Year Ended December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(Amounts in thousands)
Regional Insurance Operations
Total revenues $ 682,519 $ 635,142 $ 529,479 $ 467,009 $ 367,418
Income (loss) before income taxes (24,524) 47,624 35,169 38,171 24,587
Reinsurance Operations
Total revenues 297,144 242,086 244,066 221,241 193,658
Income (loss) before income taxes 33,858 42,193 32,756 19,661 (8,954)
Specialty Insurance Operations
Total revenues 311,955 284,321 247,131 212,484 187,703
Income before income taxes 85,889 68,088 52,113 37,640 33,511
Alternative Markets Operations
Total revenues 205,935 184,733 172,027 103,656 75,798
Income before income taxes 36,501 34,733 32,278 10,254 7,068
International Operations
Total Revenues 80,287 45,360 26,435 7,313 --
Loss Before Income Taxes (7,017) (3,566) (1,283) (259) --
(1) Results for the regional, alternative markets and specialty operations
have been restated to reflect changes in the composition of the
segments.
15
16
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), (2):
Year Ended December 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
Regional Insurance Operations
Loss ratio 76.0% 66.6% 66.8% 65.1% 65.3%
Expense ratio 35.8 34.0 34.1 34.1 34.4
Policyholders' dividend ratio .9 .5 .6 .9 .9
----- ----- ----- ----- -----
Combined ratio 112.7% 101.1% 101.5% 100.1% 100.6%
===== ===== ===== ===== =====
Reinsurance Operations
Loss ratio 74.3% 69.2% 73.3% 78.1% 87.4%
Expense ratio 31.5 32.1 30.1 26.4 27.7
----- ----- ----- ----- -----
Combined ratio 105.8% 101.3% 103.4% 104.5% 115.1%
===== ===== ===== ===== =====
Specialty Insurance Operations
Loss ratio 61.8% 61.9% 68.4% 77.9% 77.7%
Expense ratio 31.7 33.3 30.9 28.2 25.4
Policyholders' dividend ratio .3 .5 .3 .3 .1
----- ----- ----- ----- -----
Combined ratio 93.8% 95.7% 99.6% 106.4% 103.2%
===== ===== ===== ===== =====
Alternative Markets Operations
Loss ratio 63.7% 73.1% 74.8% 72.3% 72.5%
Expense ratio 36.0 35.8 34.9 31.9 27.7
----- ----- ----- ----- -----
Combined ratio 99.7% 108.9% 109.7% 104.2% 100.2%
===== ===== ===== ===== =====
International Operations
Loss ratio 59.7% 59.8% 49.7% 50.0% --%
Expense ratio 48.5 54.6 49.9 58.3 --
----- ----- ----- ----- -----
Combined ratio 108.2% 114.4% 99.6% 108.3% --%
===== ===== ===== ===== =====
Combined Insurance Operations
Loss ratio 71.2% 66.4% 68.7% 70.7% 73.7%
Expense ratio 34.9 34.4 33.1 31.3 30.8
Policyholders' dividend ratio .5 .4 .4 .5 .5
----- ----- ----- ----- -----
Combined ratio 106.6% 101.2% 102.2% 102.5% 105.0%
===== ===== ===== ===== =====
Combined Insurance Operations
Premiums to surplus ratio (3) 1.4 1.2 1.2 1.0 1.1
===== ===== ===== ===== =====
Industry Ratios
Combined ratio 105.0(4) 101.6%(5) 107.0%(5) 107.2%(5) 108.9%(5)
Premiums to surplus ratio .8(4) .9%(6) 1.0%(6) 1.2%(6) 1.3%(6)
(1) Based on U.S. statutory accounting practices.
(2) Results for the regional, alternative markets and specialty insurance
operations have been restated to reflect changes in the composition of
the segments.
(3) Based on the Company's consolidated net premiums written to statutory
surplus.
(4) Estimated by A.M. Best
(5) Source: A.M. Best Aggregates & Averages, for stock companies.
(6) Source: A.M. Best Aggregates & Averages, for total industry.
16
17
Investments
Investment results before income tax effects were as follows:
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- -----------
(Amounts in thousands)
Average investments, at cost $2,996,707 $2,873,730 $2,538,806 $2,081,547 $ 1,853,030
========== ========== ========== ========== ===========
Investment income,
before expenses $ 206,065 $ 205,812 $ 171,047 $ 143,527 $ 115,619
========== ========== ========== ========== ===========
Percent earned on
average investments 6.9% 7.2% 6.7% 6.9% 6.2%
========== ========== ========== ========== ===========
Realized gains (losses) $ 25,400 $ 13,186 $ 7,437 $ 10,357 $ (170)
========== ========== ========== ========== ===========
Change in unrealized investment gains
(losses) (1) $ 22,147 $ 66,306 $ (22,409) $ 142,475 $ (124,756)
========== ========== ========== ========== ===========
(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,
---------------------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
1 year or less 1.7% 4.4% 3.1% 4.2% 4.0%
Over 1 year through 5 years 16.0 26.4 20.7 17.9 27.6
Over 5 years through 10 years 24.4 19.1 25.0 29.4 21.4
Over 10 years 37.2 29.2 27.1 26.2 27.0
Mortgage-backed securities 20.7 20.9 24.1 22.3 20.0
----- ----- ----- ----- -----
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 for its excess workers' compensation ("EWC") 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.
17
18
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 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 1998, 1997, 1996 and 1995 and prior was
approximately 5.90%, 5.98%, 5.90% and 5.80%, respectively. The aggregate net
discount, after reflecting the effects of ceded reinsurance, is $186,964,000,
$189,600,000 and $172,415,000 at December 31, 1998, 1997 and 1996, respectively.
To date, known pollution and environmental claims at the Company's
insurance company subsidiaries have not had a material impact on the Company's
operations. Environmental claims have not materially impacted the Company
because these subsidiaries generally did not insure the larger industrial
companies which are subject to significant environmental exposures.
The Company's net reserves for losses and loss adjustment expenses
relating to pollution and environmental claims were $33.4 million and $33.1
million at December 31, 1998 and 1997, respectively. The Company's gross
reserves for losses and loss adjustment expenses relating to pollution and
environmental claims were $69.3 million and $68.4 million at December 31, 1998
and 1997, respectively. Net incurred losses and loss expenses for reported
pollution and environmental claims were approximately $2.2 million, $0.1 million
and $6.9 million in 1998, 1997 and 1996, 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 are highly uncertain.
18
19
The table below provides a reconciliation of the beginning and ending
reserve balances, on a gross of reinsurance basis (dollars in thousands):
1998 1997 1996
----------- ----------- -----------
Net reserves at beginning of year $ 1,433,011 $ 1,333,122 $ 1,209,250
----------- ----------- -----------
Net reserves of acquired companies 2,189 4,984 --
Net provision for losses and loss expenses:
Claims occurring during the current year (1) 948,580 747,977 675,674
Decrease in estimates for claims occurring
in prior years (42,929) (21,313) (15,219)
Amortization of discount 9,111 7,760 8,705
----------- ----------- -----------
914,762 734,424 669,160
----------- ----------- -----------
Net payments for claims
Current year 395,437 315,370 280,565
Prior years 365,178 324,149 264,723
----------- ----------- -----------
760,615 639,519 545,288
----------- ----------- -----------
Net reserves at end of year 1,589,347 1,433,011 1,333,122
Ceded reserves at end of year 537,219 476,677 449,581
----------- ----------- -----------
Gross reserves at end of year $ 2,126,566 $ 1,909,688 $ 1,782,703
=========== =========== ===========
A reconciliation, as of December 31, 1998, 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
Additions (deductions) to statutory reserves: $ 1,644,044
Loss reserve discounting (2) (70,669)
Outstanding drafts reclassified as reserves 15,972
-----------
Net reserves reported on a GAAP basis 1,589,347
Ceded reserves reclassified as assets 537,219
-----------
Gross reserves reported on a GAAP basis $ 2,126,566
===========
(1) Claims occurring during the current year is net of discount of
$20,354,000, $29,783,000 and $28,885,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
(2) For statutory purposes, Midwest uses a discount rate of 3% 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 following table presents the development of net reserves for 1986
through 1998. 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 1988 reserves
have developed a $47 million redundancy over ten years. That amount has been
reflected in income over the ten years. The impact on the results of operations
of the past three years of changes in reserve estimates is shown in the
reconciliation tables above.
It should be noted that the table presents a "run off" of balance sheet
reserves, rather than accident or policy year loss development. Therefore, each
amount in the table includes the effects of changes in reserves for all prior
years. For example, assume a claim that occurred in 1988 is reserved for $2,000
as of December 31, 1988. Assuming this claim was settled for $2,300 in 1998, the
$300 deficiency would appear as a deficiency in each year from 1988 through
1997.
19
20
Year Ended December 31,
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(Amounts in millions)
Discounted net reserves for losses
and loss expenses $ 531 $ 611 $ 643 $ 680 $ 710 $ 783 $ 895 $1,209 $1,333 $1,433 $1,589
Reserve discounting -- -- -- -- -- -- -- 152 172 190 187
Undiscounted net reserve
Net Re-estimated as of:
One year later 524 605 635 676 704 776 885 1,346 1,481 1,580
Two years later 518 599 632 659 694 775 872 1,305 1,406
Three years later 513 596 620 650 665 744 833 1,236
Four years later 511 587 612 637 655 708 789
Five years later 505 581 603 631 630 672
Six years later 510 585 588 609 600
Seven years later 514 574 569 585
Eight years later 507 557 550
Nine years later 495 541
Ten years later 484
Cumulative redundancy
(deficiency) undiscounted $ 47 $ 70 $ 93 $ 95 $ 110 $ 111 $ 106 $ 125 $ 99 $ 43 --
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Cumulative amount of
net liability paid
through:
One year later $ 114 $ 158 $ 139 $ 160 $ 169 $ 186 $ 221 $ 265 $ 332 $ 365
Two years later 217 234 235 264 275 221 355 434 523
Three years later 262 294 304 332 306 291 445 550
Four years later 295 334 345 346 344 334 501
Five years later 315 358 377 371 362 363
Six years later 331 380 395 384 375
Seven years later 348 392 402 394
Eight years later 357 396 409
Nine years later 359 400
Ten years later 363
Discounted net Reserves $ 783 $ 895 $1,209 $1,333 $1,433 $1,589
Ceded Reserves 1,233 1,176 451 450 477 535
------ ------ ------ ------ ------ ------
Discounted gross Reserves 2,016 2,071 1,660 1,783 1,910 2,124
Reserve discounting -- -- 192 216 241 248
------ ------ ------ ------ ------ ------
Gross reserve $2,016 $2,071 $1,852 $1,999 $2,151 $2,372
====== ====== ====== ====== ====== ======
Gross Re-estimated as of
One year later 2,010 2,043 1,827 1,965 2,132
Two years later 1,966 2,026 1,789 1,959
Three years later 1,955 1,983 1,754
Four years later 1,913 1,951
Five years later 1,855
Gross cumulative redundancy $ 161 $ 120 $ 98 $ 40 $ 19
====== ====== ====== ====== ======
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21
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, FICO, Great Divide, Preferred, Key Risk Insurance 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 operated in that State primarily on a non-admitted basis. The
non-admitted market in California, however, has been subjected to increased
levels of regulation. Admiral and Nautilus, both of which derive significant
premiums from California, may be adversely impacted by increased regulation
which causes business to remain in the admitted market. Additionally, a number
of states have adopted and others are considering adopting forms of commercial
lines deregulation laws which depending upon factors such as the relatively high
amount of premium or revenue of an insured, would permit an insurer to write the
insured without being subject to rate and/or form filing requirements.
Various state and federal organizations, including Congressional
committees and the National Association of Insurance Commissioners ("NAIC"),
have been conducting reviews into various aspects of the insurance business. The
NAIC has adopted risk based capital ("RBC") requirements that require insurance
companies to calculate and report information under a risk-based formula which
measures statutory capital and surplus needs based on a regulatory definition of
risk in a company's mix of products and its balance sheet. The implementation of
RBC did not affect the operations of the Company's insurance subsidiaries since
all of its subsidiaries have a RBC amount above the authorized control level
RBC, as defined by the NAIC. The NAIC is considering model laws on commercial
lines deregulation. Federal legislation is being considered which would either
abolish or limit the current exemption of the insurance industry from portions
of the antitrust laws, impose direct federal oversight or federal solvency
standards. No
21
22
assurance can be given that future legislative or regulatory 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. Similarly, the NAIC
has adopted a new model investment law that may affect the statutory carrying
values of certain investments; however, it is not possible to predict what
impact the model law will have on the Company, as aspects of it have been
adopted by only a few states at this time.
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 and which place
their business either on a direct basis or through the broker market.
The E & S area is a highly specialized segment of the insurance
industry. Admiral and Nautilus compete with other E & S carriers, some of which
are larger and have greater resources than Admiral and Nautilus. Under certain
market conditions, standard carriers may compete for the types of business
written by Admiral and Nautilus. With the implementation of commercial lines
deregulation (see "Regulation") in several states and with many other states in
the process of considering or adopting such laws, competition for "E & S type
risks" might increase significantly. Such standard carriers would under such
deregulation be free to compete with more liberal rate and form requirements. In
addition, there are regional and specialty carriers competing with Admiral and
Nautilus when they underwrite business in their regions or specialties.
Carolina and Great Divide's competition comes mainly from other
specialty transportation insurers, regional carriers and large national
multi-line companies. Each of FICO, Preferred and Key Risk compete with local
regional companies as well as national carriers.
Midwest's competition comes from insurance and reinsurance companies,
some of which have greater financial resources than Midwest. Most of theses
carriers write specific EWC coverage,
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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. The
International Operations compete with native insurance operations both large and
small, which may be related to government entities, as well as with branch or
local subsidiaries of multi-national companies.
Employees
As of February 21, 1999, the Company employed 4,218 persons. Of this
number, the Company's subsidiaries employed 4,166 persons, of whom 2,085 were
executive and administrative personnel and 2,081 were clerical personnel. The
Company employed the remaining 52 persons in its parent company and investment
operations, of whom 37 were executive and administrative personnel and 15 were
clerical personnel. The restructuring of the management and back office
operations of the regional insurance subsidiaries will result in reductions in
employee levels at certain of those companies.
Other information about the Company's business
The Company maintains an ongoing interest in acquiring additional
companies and developing new insurance entities, products and packages as
opportunities arise. In addition, the insurance subsidiaries develop new
coverages or lines of business to meet the needs of insureds.
Seasonal weather variations affect the severity and frequency of losses
sustained by the insurance and reinsurance subsidiaries. Although the effect on
the Company's business of such natural catastrophes as tornadoes, hurricanes,
hailstorms and earthquakes is mitigated by reinsurance, they nevertheless can
have a significant impact on the results of any one or more reporting periods.
The Company has no customer which accounts for 10 percent or more of
its consolidated revenues.
Compliance by the Company and its subsidiaries with federal, state and
local provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to protection of the
environment, has not had a material effect upon the capital expenditures,
earnings or competitive position of the Company.
ITEM 2. PROPERTIES
The Company and its subsidiaries own or lease office buildings or office space
suitable to conduct their operations. Such owned property is as follows:
Location Company Size (sq. ft.)
- -------- ------- --------------
Cherry Hill, New Jersey Admiral 42,000
Lincoln, Nebraska Union 43,000
Lincoln, Nebraska Continental Western 20,000
Luverne, Minnesota Tri-State 33,000
Meridian, Mississippi Great River 30,000
Scottsdale, Arizona Nautilus 34,000
Urbandale, Iowa Continental Western 80,000
Westbrook, Maine Acadia 54,000
In addition, the Company and its subsidiaries lease office facilities
in various other cities under leases with varying terms and expiration dates.
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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 insurance
subsidiary employs a staff of claims adjusters at its home office and at some
regional offices. Some independent agents may have the authority to settle small
claims. Independent claims adjusting firms are used to assist in handling
various claims in areas where insurance volume does not warrant the maintenance
of a staff adjuster. If a claim or loss cannot be settled and results in
litigation, the subsidiary generally retains outside counsel.
At present, neither the Company nor any of its subsidiaries is engaged
in any litigation known to the Company which is expected to have a material
adverse effect upon the Company's business. As is common with property casualty
insurance companies, the Company's subsidiaries are regularly engaged in the
defense of claims arising out of the conduct of the insurance business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1998 to a vote
of holders of the Company's Common Stock.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "BKLY". The following table sets forth the high and low sale
prices for the indicated periods, all as reported on such market.
Common
Price Range Dividends Paid
High Low Per Share
---------- ---------- -----------
1998:
Fourth Quarter $ 35 3/4 $ 27 1/2 $ .12 cash
Third Quarter 40 15/16 29 13/16 $ .12 cash
Second Quarter 49 40 1/16 $ .12 cash
First Quarter 47 3/8 41 $ .11 cash
1997:
Fourth Quarter $ 45 $ 39 $ .11 cash
Third Quarter 43 1/16 36 $ .10 cash
Second Quarter 39 1/4 31 5/16 $ .10 cash
First Quarter 36 5/16 29 13/16 $ .09 cash
The closing price of the Common Stock on February 26, 1999, as reported
on the Nasdaq National Market, was $28 5/8 per share. The approximate number of
record holders of the Common Stock on February 26, 1999 was 783.
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ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 1998
Year Ended December 31,
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Amounts in thousands, except per share data)
Net premiums written $ 1,346,254 $ 1,177,641 $ 1,052,511 $ 860,421 $ 717,933
Net premiums earned 1,278,399 1,111,747 981,221 803,336 655,038
Net investment income 202,420 199,588 164,490 137,332 109,683
Management fees and commissions 70,727 71,456 69,246 68,457 64,536
Realized investment gains (losses) 25,400 13,186 7,437 10,357 (170)
Total revenues 1,582,517 1,400,310 1,225,166 1,021,943 830,790
Interest expense 48,819 48,869 31,963 28,209 27,601
Income before Federal
income taxes 62,781 129,241 115,049 82,747 30,774
Federal income tax (expense)
Benefit (5,465) (30,668) (25,102) (17,554) 1,552
Income before minority interest 57,316 98,573 89,947 65,193 32,326
Net income before preferred
Dividends 58,760 99,047 90,263 60,882 35,094
Preferred dividends 7,548 7,828 13,909 11,062 10,356
Extraordinary loss 5,017 -- -- -- --
Net income attributable to
common stockholders 46,195 91,219 76,354 49,820 24,738
Data per common share:
Basic:
Before extraordinary item 1.82 3.09 2.56 1.91 .96
Net income 1.64 3.09 2.56 1.91 .96
Diluted:
Before extraordinary income 1.76 3.02 2.53 1.90 .95
Net income 1.59 3.02 2.53 1.90 .95
Stockholders' equity 28.80 28.72 25.13 23.59 17.79
Cash dividends declared $ .48 $ .42 $ .35 $ .32 $ .29
Weighted average shares outstanding:
Basic 28,194 29,503 29,792 26,121 25,773
Diluted 29,115 30,185 30,130 26,262 25,951
Investments $ 3,302,103 $ 3,162,533 $ 2,991,606 $ 2,588,346 $ 1,901,715
Total assets 4,983,431 4,544,318 4,136,973 3,618,684 3,582,291
Reserves for losses
and loss expenses 2,126,566 1,909,688 1,782,703 1,660,020 2,070,886
Long-term Debt 394,444 390,415 390,104 319,287 331,002
Company-obligated manditorily
redeemable capital securities
of a subsidiary trust holding
solely 8.197% junior subordinated
debentures 207,988 207,944 207,901 -- --
Stockholders' equity 861,281 947,292 879,732 929,815 597,601
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Reference is made to the information under the caption "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" contained on pages 17 through 23 of the registrant's 1998
Annual Report to Stockholders, which information is incorporated herein
by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the information under "Market Risk" under the
caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained on pages 20 through 21 of the
registrant's 1998 Annual Report to Stockholders, which information is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the registrant are contained
on pages 24 through 40 of registrant's 1998 Annual Report to
Stockholders and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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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 February 26, 1999:
Name Age Position
---- --- --------
William R. Berkley 53 Chairman of the Board and Chief Executive Officer
John D. Vollaro 54 President, Chief Operating Officer and a Director
Robert P. Cole 48 Senior Vice President
Anthony J. Del Tufo 54 Senior Vice President, Chief Financial Officer and Treasurer
Cornelius T. Finnegan, III 54 Senior Vice President, General Counsel and Secretary
E. LeRoy Heer 60 Senior Vice President, Chief Corporate Actuary
H. Raymond Lankford, Jr. 56 Senior Vice President, Alternative Markets Operations
Ira S. Lederman 45 Senior Vice President, Assistant General Counsel and Assistant Secretary
James G. Shiel 39 Senior Vice President - Investments
Edward A. Thomas 50 Senior Vice President, Specialty Operations
Donald J. Veldkamp 60 Senior Vice President, Technology and Distribution Systems
Paul J. Hancock 37 Vice President - Actuary
Edward F. Linekin 35 Vice President - Investments
Clement P. Patafio 34 Vice President - Corporate Controller
Scott A. Siegel 40 Vice President - Taxes
George G. Daly 58 Director
Robert B. Hodes 73 Director
Henry Kaufman 71 Director
Richard G. Merrill 68 Director
Jack H. Nusbaum 58 Director
Mark L. Shapiro 54 Director
Martin Stone 70 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 1998, the term of a class consisting of three
Directors expired. Henry Kaufman, Martin Stone and John D. Vollaro were elected
as Directors to hold office for a term of three years until the Annual Meeting
of Stockholders in 2001 and until their successors are duly elected and qualify.
George G. Daly was elected as Director to hold office for a term of two years
until the Annual Meeting of Stockholders in 2000 and until his successor is duly
elected and qualifies.
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 The
Greenwich Bank & Trust Company, a newly formed Connecticut chartered commercial
bank; Westport National Bank, a newly formed federally chartered commercial
bank; Pioneer Companies, Inc., a chemical manufacturing and marketing company;
Strategic Distribution, Inc., an industrial products distribution and services
company; and Interlaken Capital, Inc., a private investment firm with interests
in various businesses. His current term as a Director expires in 2000.
John D. Vollaro has been President and Chief Operating Officer of the
Company since January 1996 and Director since September 1995. He was Chief
Executive Officer of Signet Star Holdings, Inc., a subsidiary of the Company
(formerly a joint venture between the
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Company and General Re Corporation), from July 1993 to December 1995. He served
as Executive Vice President of the Company from 1991 until 1993, as Chief
Financial Officer and Treasurer of the Company from 1983 through 1993 and as
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 2001.
Robert P. Cole has been Senior Vice President since January 1998. Prior
thereto, he was Vice President since October 1996. Before joining the Company,
Mr. Cole was, since 1992, a senior Officer of Christania General Insurance Corp.
of N.Y., which was purchased by Folksamerica Reinsurance Company in 1996, and
prior to that was associated with reinsurers for twenty years.
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 LLP from 1975 to 1993.
Cornelius T. Finnegan, III was named Senior Vice President - General
Counsel and Secretary on February 1, 1999. Before joining the Company, Mr.
Finnegan was a partner at the New York law firm of Willkie Farr & Gallagher for
more than the last five years.
E. LeRoy Heer has been Senior Vice President - Chief Corporate Actuary
since January 1991. Prior thereto, he had been Vice President - Corporate
Actuary since May 1978.
H. Raymond Lankford, Jr. has been Senior Vice President - Alternative
Markets Operations since May 1996. Prior thereto, he was President of All
American Agency Facilities, Inc., a subsidiary of the Company, from October
1991, having joined All American in 1990. He has been in the insurance business
in various capacities for more than 30 years.
Ira S. Lederman has been Senior Vice President since January 1997.
Additionally, he was named General Counsel of Berkley International in January
1998. He is also Assistant General Counsel, a position he has held since July
1989, and Assistant Secretary since May 1986. Previously, he was Vice President
from May 1986 until January 1997. Prior thereto, he was Insurance Counsel of the
Company since May 1986 and Associate Counsel from April 1983.
James G. Shiel has been Senior Vice President - Investments of the
Company since January 1997. Prior thereto, he was Vice President - Investments
of the Company since January 1992. Since February 1994, he has been President of
Berkley Dean & Company, Inc., a subsidiary of the Company, which he joined in
1987.
Edward A. Thomas has been Senior Vice President - Specialty Operations
of the Company since April 1991. Prior thereto, he was President of Signet
Reinsurance Company, a subsidiary of the Company, for more than five years.
Donald J. Veldkamp was named Senior Vice President, Technology and
Distribution Systems in January 1998. He most recently served as Chairman of
Union Insurance Company, a subsidiary of the Company, since July 1997. Prior to
that, he was President of Union Insurance Company from May 1990 to July 1997 and
President of Tri-State Insurance Company of Minnesota, also a subsidiary of the
Company, from February 1980 to May 1990.
Paul J. Hancock was elected Vice President - Actuary in May 1998.
Previously, he was Assistant Vice President - Actuary since June 1997. Prior
thereto, he was employed since July 1991 by Signet Star Reinsurance Company, a
subsidiary of the Company, serving as Vice President and Corporate Actuarial
Manager from August 1996 to June 1997 and Assistant Vice President from October
1995 to August 1996. Signet Star Reinsurance Company (formerly known as North
Star Reinsurance Company) was purchased by the Company in July 1993.
Edward F. Linekin was elected Vice President - Investments in May 1998.
Mr. Linekin has been an employee of the Company since April 1995. He has been a
Vice President of the Company's investment subsidiary, Berkley Dean & Company,
Inc., since April 1995. Prior thereto, he was Assistant Portfolio Manager -
Senior Investment Officer of Home Insurance Company from April 1993.
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Clement P. Patafio has been Vice President - Corporate Controller since
January 1997. Prior thereto, he was Assistant Vice President - Corporate
Controller since July 1994 and Assistant Controller since May 1993. Before
joining the Company, Mr. Patafio was with KPMG LLP from 1986 to 1993.
Scott A. Siegel has been Vice President - Taxes since January 1997.
Prior thereto, he was Director of Taxes since September 1991. Before joining the
Company, Mr. Siegel was with KPMG LLP from 1981 to 1991.
George G. Daly has been a Director of the Company since 1998. Dr. Daly
is Dean of Stern School of Business, and Dean Richard R. West Professor of
Business, New York University for more than the past five years. In addition to
his academic career, Dr. Daly served as Chief Economist at the U.S. Office of
Energy Research and Development in 1974.
Robert B. Hodes has been a Director of the Company since 1970. Mr.
Hodes is Counsel to the New York law firm of Willkie Farr & Gallagher, where
prior thereto he had been a partner for more than five years. He is also a
director of Crystal Oil Company; Globalstar Telecommunications, Limited; K&F
Industries Inc.; Loral Space & Communications Ltd.; Mueller Industries, Inc.;
R.V.I. Guaranty, Ltd.; LCH Investments N.V.; Restructured Capital Holdings,
Ltd.; and Space Systems/Loral, Inc. Mr. Hodes' current term as a Director
expires in 2000.
Henry Kaufman has been a Director of the Company since 1994. Dr.
Kaufman is President of Henry Kaufman & 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 School of Business of New York
University; Chairman of the Board of Trustees, Institute of International
Education; Member of the Board of Directors, Federal Home Loan Mortgage
Corporation; Member of the Board of Directors, Lehman Brothers Holdings Inc.;
Member of the Board of Trustees, New York University; Member of the
International Capital Markets Advisory Committee of the Federal Reserve Bank of
New York; Member of the Board of Trustees, Whitney Museum of American Art;
Member of the Advisory Committee to the Investment Committee, International
Monetary Fund Staff Retirement Plan; and Member of the Board of Governors,
Tel-Aviv University. Dr. Kaufman's current term as a Director expires in 2001.
Richard G. Merrill has been a Director of the Company since 1994. Mr.
Merrill was Executive Vice President of Prudential Insurance Company of America
from August 1987 to March 1991 when he retired. Prior thereto, Mr. Merrill
served as Chairman and President of Prudential Asset Management Company since
1985. Mr. Merrill is a Director of Sysco 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 of the New York law firm of Willkie Farr & Gallagher
where he has been a partner for more than the last five years. He is a director
of Fine Host Corporation; Pioneer Companies, Inc.; Prime Hospitality Corp.;
Strategic Distribution Inc.; 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. Since
September 1998, Mr. Shaprio has been a private investor. From July 1997 through
August 1998, Mr. Shapiro was a Senior Consultant to the Export-Import Bank of
the United States. Previously, he was a Managing Director in the investment
banking firm of Schroder & Co. Inc. for more than the past five years. Mr.
Shapiro's current term as a Director expires in 1999.
Martin Stone has been a Director of the Company since 1990. Mr. Stone
is Chairman of Professional Sports, Inc. (the Tucson Sidewinders AAA baseball
team) and Chairman of Adirondack Corporation, all for more than the past five
years. Mr. Stone is also a director of Canyon Ranch, Inc. and a member of the
Advisory Board of Yosemite National Park. Mr. Stone's current term as a Director
expires in 2001.
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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, 1998, 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, 1998, 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, 1998, and which is incorporated herein by reference.
(c) Changes in control
Reference is made to the registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1998, 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, 1998, and which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Financial Statements
The Management's Discussion and Analysis and the Company's financial
statements, together with the report thereon of KPMG LLP, appearing on pages 17
through 40 of the Company's 1998 Annual Report to Stockholders, are incorporated
by reference in this Annual Report on Form 10-K. With the exception of the
aforementioned information, the 1998 Annual Report to Shareholders is not deemed
to be filed as part of this report. The schedules to the financial statements
listed below should be read in conjunction with the financial statements in such
1998 Annual Report to Stockholders. Financial statement schedules not included
in this Annual Report on Form 10-K have been omitted because they are not
applicable or required information is shown in the financial statements or notes
thereto.
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31
Index to Financial Statement Schedules Page
Independent Auditors' Report on Schedules and Consent 36
Schedule II - Condensed Financial Information of Registrant 37
Schedule III - Supplementary Insurance Information 41
Schedule IV - Reinsurance 42
Schedule VI - Supplementary Information concerning
Property & Casualty Insurance Operations 43
(b) Reports on Form 8-K
During the quarter ended December 31, 1998, the registrant
filed the following Reports on Form 8-K:
1. Report dated October 23, 1998 with respect to a press release
relating to earnings of the Company for the third quarter of
1998 (under Item 5 of Form 8-K).
2. Report dated November 16, 1998 with respect to a press release
relating to the Company's retention of Morgan Stanley &
Company to explore strategic opportunities for the Company's
group of regional insurance companies (under Item 5 of Form
8-K).
(c) Exhibits
The exhibits filed as part of this report are listed on pages 34 and 35
hereof.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
W. R. BERKLEY CORPORATION
By /s/ William R. Berkley
---------------------------------------------
William R. Berkley, Chairman of the Board and
Chief Executive Officer
March 22, 1999
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33
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ William R. Berkley Chairman of the Board and
William R. Berkley Chief Executive Officer March 22, 1999
Principal executive officer
/s/ John D. Vollaro President, Chief Operating March 22, 1999
John D. Vollaro Officer and Director
/s/ George G. Daly Director March 22, 1999
George G. Daly
/s/ Robert B. Hodes Director March 22, 1999
Robert B. Hodes
/s/ Henry Kaufman Director March 22, 1999
Henry Kaufman
/s/ Richard G. Merrill Director March 22, 1999
Richard G. Merrill
/s/ Jack H. Nusbaum Director March 22, 1999
Jack H. Nusbaum
/s/ Mark L. Shapiro Director March 22, 1999
Mark L. Shapiro
/s/ Martin Stone Director March 22, 1999
Martin Stone
/s/ Anthony J. Del Tufo Senior Vice President, March 22, 1999
Anthony J. Del Tufo Chief Financial Officer and
Principal financial officer Treasurer
/s/ Clement P. Patafio Vice President, March 22, 1999
Clement P. Patafio Corporate Controller
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ITEM 14. (c) EXHIBITS
Number
(2.1) Agreement and Plan of Merger between the Company, Berkley Newco Corp.
and MECC, Inc. (incorporated by reference to Exhibit 2.1 of the
Company's current Report on Form 8-K (File No. 0-7849) filed with the
Commission September 28, 1995).
(2.2) Agreement and Plan of Restructuring, dated July 20, 1995, by and among
the Company, Signet Star Holdings, Inc., Signet Star Reinsurance
Company, Signet Reinsurance Company and General Re Corporation
(incorporated by reference to Exhibit 2.2 of the Company's Current
Report on Form 8-K (File No. 0-7849) filed with the Commission on
September 28, 1995).
(3.1) Restated Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 of the Company's Annual Report on Form 10-K
(File No. 0-7849) filed with the Commission on March 30, 1994).
(3.2) Amendment, dated May 12, 1998, to the Company's Restated Certificate of
Incorporation, as amended (filed herewith).
(3.3) By-laws (incorporated by reference to Exhibit 3.2 of the Company's
Annual Report on Form 10-K (File No. 0-7849) filed with the Commission
on March 22, 1993).
(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) First Amended and Restated W. R. Berkley Corporation 1992 Stock Option
Plan (filed herewith).
(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 (incorporated by reference to Exhibit 10.4 of
the Company's Annual Report on Form 10-K (File No. 0-7849) filed with
the Commission on March 26, 1996).
(10.5) W. R. Berkley Corporation Deferred Compensation Plan for Directors as
adopted March 7, 1996 (incorporated by reference to Exhibit 10.5 of the
Company's Annual Report on Form 10-K (File No. 0-7849) filed with the
Commission on March 26, 1996).
(10.6) W. R. Berkley Corporation Annual Incentive Compensation Plan
(incorporated by reference to Exhibit 10.7 of the Company's Annual
Report on Form 10-K (File No. 0-7849) filed with the Commission on
March 27, 1998).
(10.7) W. R. Berkley Corporation Long Term Incentive Plan (incorporated by
reference to Exhibit 10.8 of the Company's Annual Report on Form 10-K
(File No. 0-7849) filed with the Commission on March 27, 1998).
(13) 1998 Annual Report to Stockholders of W.R. Berkley Corporation (only
those portions of such Annual Report that are incorporated by reference
in this Report on Form 10-K are deemed filed) (filed herewith).
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(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 of Percentage
Incorporation owned
------------- -----
All American Agency Facilities, Inc. Delaware 100%
Berkley Care Network, Inc. North Carolina 100%
Berkley Regional Insurance Company: Missouri 100%
Acadia Insurance Company: Maine 100%
Chesapeake Bay Property and Casualty
Insurance Company Maine 100%
Berkley Insurance Company of the Carolinas North Carolina 100%
Continental Western Insurance Company Iowa 100%
Firemen's Insurance Company of Washington, D.C.: Maryland 100%
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%
Carolina Casualty Insurance Company Florida 100%
Clermont Specialty Managers, Ltd. New Jersey 100%
J/I Holding Corporation: Delaware 100%
Admiral Insurance Company: Delaware 100%
Berkley Risk Services, LLC. Minnesota 100%
Nautilus Insurance Company: Arizona 100%
Great Divide Insurance Company North Dakota 100%
Key Risk Management Services, Inc. North Carolina 100%
Key Risk Insurance Company North Carolina 100%
MECC, Inc.: Delaware 100%
Midwest Employers Casualty Company: Ohio 100%
Preferred Employers Insurance Company California 100%
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.
(27) Financial Data Schedule.
35
36
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 25, 1999 included the related
financial statement schedules as of December 31, 1998 and 1997 and for each of
the years in the three-year period ended December 31, 1998 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. 33-30684), (No. 33-95552) and (No. 333-00459) on
Form S-3 and (No. 33-7488), (No. 33-88640), (No. 333-33935) and (No. 33-55726)
on Form S-8 of W. R. Berkley Corporation.
KPMG LLP
New York, New York
March 22, 1999
36
37
Schedule II
W. R. Berkley Corporation
Condensed Financial Information of Registrant
Balance Sheets (Parent Company)
(Amounts in thousands)
December 31,
1998 1997
----------- -----------
Assets
Cash (including invested cash) $ 137,422 $ 18,018
Fixed maturity securities:
Held to maturity, at cost
(fair value $5,563 and $5,600) 5,563 5,600
Available for sale at fair value (cost $898 and $116,622) 894 116,839
Equity securities, at fair value:
Available for sale (cost $698 and $698) 755 690
Trading account (cost $698 and $619) 698 619
Investments in subsidiaries 1,353,201 1,389,085
Due from subsidiaries (principally deferred income taxes) 54,753 64,641
Current Federal income taxes receivable 11,620 6,783
Real estate, furniture & equipment at cost, less accumulated
depreciation 19,514 20,673
Other assets 5,571 4,147
----------- -----------
$ 1,589,991 $ 1,627,095
=========== ===========
Liabilities, Debt and Stockholders' Equity
Liabilities:
Due to subsidiaries (principally deferred income taxes) $ 77,951 $ 58,830
Short-term debt 55,500 --
Deferred Federal income taxes 7,198 32,887
Other liabilities 29,421 25,520
----------- -----------
170,070 117,237
----------- -----------
Long-term debt 350,651 354,622
Subsidiary trust junior subordinated debt 207,988 207,944
Stockholders' equity:
Preferred stock 65 65
Common stock 7,281 7,281
Additional paid-in capital 429,612 428,760
Retained earnings (including accumulated
Undistributed net income of
Subsidiaries of $517,649 and $510,814
in 1998 and 1997, respectively) 601,908 569,160
Accumulated other comprehensive income 54,672 58,206
Treasury stock, at cost (232,256) (116,180)
----------- -----------
861,282 947,292
----------- -----------
$ 1,589,991 $ 1,627,095
=========== ===========
See note to condensed financial statements.
37
38
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,
----------------------------------
1998 1997 1996
-------- -------- --------
Management fees and investment income
from affiliates, including dividends of
$65,836, $33,911, and $60,264 for 1998,
1997 and 1996, respectively $ 72,812 $ 40,058 $ 72,377
Realized investment gains (losses) -- 2,739 486
Other income 10,506 10,972 4,058
-------- -------- --------
Total revenues 83,318 53,769 76,921
Expenses, other than interest expense (22,201) (23,801) (16,121)
Interest expense (47,571) (47,645) (30,014)
-------- -------- --------
Income (loss) before Federal
income taxes 13,546 (17,677) 30,786
-------- -------- --------
Federal income taxes:
Federal income taxes provided by
Subsidiaries on a separate return
Basis 44,370 54,884 41,002
Federal income tax provision on a
Consolidated return basis (5,115) (30,849) (25,102)
-------- -------- --------
Net benefit 39,255 24,035 15,900
-------- -------- --------
Income before undistributed equity
in net income of subsidiaries 52,801 6,358 46,686
Equity in undistributed net income
of subsidiaries 6,835 93,210 43,577
-------- -------- --------
Income before preferred dividends 59,636 99,568 90,263
Preferred dividends (8,424) (8,349) (13,909)
-------- -------- --------
Net income before extraordinary loss 51,212 91,219 76,354
Extraordinary loss (5,017) -- --
-------- -------- --------
Net income attributable to
common stockholders $ 46,195 $ 91,219 $ 76,354
======== ======== ========
See note to condensed financial statements.
38
39
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,
-------------------------------------
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net income before preferred dividends and
extraordinary items $ 59,636 $ 99,568 $ 90,263
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Equity in undistributed net
income of subsidiaries (6,835) (93,210) (43,577)
Tax payments received from subsidiaries 63,199 45,999 35,613
Federal income taxes provided by subsidiaries
on a separate return basis (44,370) (54,884) (40,848)
Change in Federal income taxes (29,342) (1,409) 4,840
Realized investment losses -- (2,739) (486)
Other, net (1,790) 4,114 6,050
--------- --------- ---------
Net cash provided by operating activities
before trading account sales (purchases) 40,498 (2,561) 51,855
Trading account sales (purchases), net (79) 32,712 1,722
--------- --------- ---------
Net cash provided by
operating activities 40,419 30,151 53,577
--------- --------- ---------
Cash flow used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 3,167 19,954 13,121
Equity securities -- 1,432 786
Proceeds from maturities and prepayments of
fixed maturity securities 112,643 -- --
Cost of purchases, excluding trading account:
Fixed maturity securities -- (9,305) (130,003)
Equity securities -- (2,098) --
Cost of companies acquired -- (7,238) (15,955)
Investments in and advances to
subsidiaries, net (5,775) (14,986) (38,936)
Net additions to real estate, furniture &
equipment 201 444 (21,270)
Other, net -- 5,539 --
--------- --------- ---------
Net cash used in investing activities 110,236 (6,258) (192,257)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- -- --
Net proceeds from issuance of long-term debt 39,882 -- 98,850
Net proceeds from issuance of short-term debt 55,500 -- --
Net proceeds from issuance of a subsidiary
trust junior subordinated debt -- -- 207,900
Purchase of treasury shares (59,240) -- (24,152)
Cash dividends to common stockholders (13,518) (11,695) (10,143)
Cash dividends to preferred shareholders (7,356) (8,717) (12,824)
Purchase of Preferred Stock -- (41,523) (77,572)
Retirement of long-term debt (49,104) -- --
Other, net 2,585 755 1,257
--------- --------- ---------
Net cash provided by financing activities (31,251) (61,180) 183,316
--------- --------- ---------
Net increase in cash and invested cash 119,404 (37,287) 44,636
Cash and invested cash at beginning of year 18,018 55,305 10,669
--------- --------- ---------
Cash and invested cash at end of year $ 137,422 $ 18,018 $ 55,305
========= ========= =========
See note to condensed financial statements
39
40
Schedule II, Continued
W. R. Berkley Corporation
Condensed Financial Information of Registrant, Continued
December 31, 1998, 1997 and 1996
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 1997 and 1996
financial statements as originally reported to conform them to the presentation
of the 1998 financial statements.
The Company files a consolidated federal tax return with the results of
its domestic insurance subsidiaries included on a statutory basis. Under present
Company policy, Federal income taxes payable by (or refundable to) subsidiary
companies on a separate-return basis are paid to (or refunded by) W. R. Berkley
Corporation, and the Company pays the tax due on a consolidated return basis.
Included in invested cash is $114,520,667 placed in a trust which will
be used to service the remaining outstanding shares of the Series A Preferred
Stock. The Company redeemed the Series A Preferred Stock on January 25, 1999.
40
41
Schedule III
W. R. Berkley Corporation and Subsidiaries
Supplementary Insurance Information
December 31, 1998, 1997 and 1996
(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, 1998
Regional $ 83,613 $ 495,164 $ 337,414 $ 622,280 $ 53,942 $ 476,920
Reinsurance 29,906 435,920 102,566 246,277 47,643 183,020
Specialty 37,148 745,790 167,648 235,055 59,345 145,624
Alternative markets 7,531 399,560 37,061 101,755 34,667 65,634
International 10,696 50,132 20,172 73,032 5,469 43,564
Corporate and adjustments -- -- -- -- 1,354 --
---------- ---------- ---------- ---------- ---------- ----------
Total $ 168,894 $2,126,566 $ 664,861 $1,278,399 $ 202,420 $ 914,762
========== ========== ========== ========== ========== ==========
December 31, 1997
Regional $ 79,726 $ 396,648 $ 315,978 $ 575,911 $ 51,920 $ 385,285
Reinsurance 22,620 389,285 77,159 195,825 45,520 135,530
Specialty 29,949 751,068 147,443 213,794 60,162 134,313
Alternative markets 7,618 344,302 31,018 86,229 34,390 55,386
International 5,824 28,385 17,786 39,988 3,623 23,910
Corporate and adjustments -- -- -- -- 3,973 --
---------- ---------- ---------- ---------- ---------- ----------
Total $ 145,737 $1,909,688 $ 589,384 $1,111,747 $ 199,588 $ 734,424
========== ========== ========== ========== ========== ==========
December 31, 1996
Regional $ 66,755 $ 365,981 $ 274,559 $ 482,419 $ 43,125 $ 324,425
Reinsurance 16,947 366,947 65,388 206,297 37,542 151,254
Specialty 27,436 731,468 140,206 187,795 50,130 130,134
Alternative markets 5,695 302,877 25,808 79,717 29,122 50,916
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
========== ========== ========== ========== ========== ==========
Amortization of
deferred policy Other operating
acquisition cost and Net premiums
Costs expenses written
---------- ---------- ----------
December 31, 1998
Regional $ 196,391 $ 33,732 $ 641,316
Reinsurance 62,855 15,084 269,634
Specialty 75,968 4,474 254,003
Alternative markets 30,903 72,897 106,195
International 28,495 15,244 75,106
Corporate and adjustments -- 20,112 --
---------- ---------- ----------
Total $ 394,612 $ 161,543 $1,346,254
========== ========== ==========
December 31, 1997
Regional $ 168,474 $ 33,759 $ 618,768
Reinsurance 58,200 3,836 206,652
Specialty 73,056 8,865 219,272
Alternative markets 26,002 69,044 90,870
International 12,139 12,874 42,079
Corporate and adjustments -- 21,527 --
---------- ---------- ----------
Total $ 337,871 $ 149,905 $1,177,641
========== ========== ==========
December 31, 1996
Regional $ 140,505 $ 29,380 $ 517,515
Reinsurance 52,925 4,529 218,200
Specialty 52,679 12,205 214,738
Alternative markets 25,679 67,604 76,876
International 11,854 3,433 25,182
Corporate and adjustments -- 8,201 --
---------- ---------- ----------
Total $ 283,642 $ 125,352 $1,052,511
========== ========== ==========
41
42
Schedule IV
W. R. Berkley Corporation and Subsidiaries
Reinsurance
Years ended December 31, 1998, 1997 and 1996
(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, 1998:
Regional insurance $ 744,560 $ 108,741 $ 5,497 $ 641,316 .9%
Reinsurance 1,240 27,544 295,938 269,634 109.8%
Specialty insurance 364,564 120,111 9,550 254,003 3.8%
Alternative Markets 62,942 15,078 58,331 106,195 54.9%
International 95,870 20,764 -- 75,106 --
---------- ---------- ---------- ----------
Total $1,269,176 $ 292,238 $ 369,316 $1,346,254 27.4%
========== ========== ========== ==========
Year ended December 31, 1997:
Regional insurance $ 691,431 $ 82,598 $ 9,935 $ 618,768 1.6%
Reinsurance -- 17,059 223,711 206,652 108.3%
Specialty insurance 329,266 118,868 8,874 219,272 4.0%
Alternative Markets 56,759 7,384 41,495 90,870 45.7%
International 56,924 14,845 -- 42,079 --
---------- ---------- ---------- ----------
Total $1,134,380 $ 240,754 $ 284,015 $1,177,641 24.1%
========== ========== ========== ==========
Year ended December 31, 1996:
Regional insurance $ 587,565 $ 74,296 $ 4,246 $ 517,515 0.8%
Reinsurance -- 10,708 228,908 218,200 104.9%
Specialty insurance 318,977 115,571 11,332 214,738 5.3%
Alternative Markets 59,297 5,353 22,932 76,876 29.8%
International 29,263 4,081 -- 25,182 --
---------- ---------- ---------- ----------
Total $ 995,102 $ 210,009 $ 267,418 $1,052,511 25.4%
========== ========== ========== ==========
42
43
Schedule VI
W. R. Berkley Corporation and Subsidiaries
Supplementary Information Concerning Property-Casualty Insurance Operations
December 31, 1998, 1997 and 1996
(Amounts in thousands)
1998 1997 1996
----------- ----------- -----------
Deferred policy acquisition costs $ 168,894 $ 145,737 $ 119,157
Reserves for losses and loss expenses 2,126,566 1,909,688 1,782,703
Unearned premium 664,861 589,384 514,213
Premiums earned 1,278,399 1,111,747 981,221
Net investment income 202,420 199,588 164,490
Losses and loss expenses incurred:
Current Year 948,580 747,977 675,674
Prior Years (42,929) (21,313) (15,219)
Amortization of discount 9,111 7,760 8,705
Amortization of deferred policy
Acquisition costs 394,612 337,871 283,642
Paid losses and loss expenses 760,615 639,519 545,288
Net premiums written 1,346,254 1,177,641 1,052,511
43
44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INDUSTRY OVERVIEW
- --------------------------------------------------------------------------------
The demand for insurance is influenced primarily by general economic conditions,
while the supply of insurance is directly related to available capacity, i.e.,
the level of policyholders' surplus employed in the industry and the willingness
of insurance management to risk that capital. The adequacy of premium rates is
affected mainly by the severity and frequency of claims, which are influenced by
many factors, including natural disasters, regulatory measures and court
decisions that define and expand the extent of coverage and the effects of
economic inflation on the amount of compensation due for injuries or losses. In
addition, investment rates of return may impact policy rates. These factors can
have a significant impact on 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 significant increase in capacity has produced a trend of
increasing price competition. This trend of increasing competition has
intensified in 1998.
OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO THE YEAR
ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
Net income attributable to common stockholders ("Net Income") for 1998 declined
to $46 million, or $1.59 per share diluted, from $91 million, or $3.02 diluted
in 1997. The decline in earnings was due primarily to a deterioration in
underwriting results, attributable to an increase in weather-related losses and
the effects of competition on rate adequacy. The 1998 results include after-tax
realized investment gains of $17 million, or $.57 diluted, compared with $9
million, or $.28 diluted, for 1997.
Net premiums written in 1998 rose 14% to $1,346 million from $1,178 million
written during 1997 due to growth recorded by all segments of the company. Net
premiums written by the regional operations grew by 4% to $641 million from $619
million written in 1997. The growth was generated by the issuance of additional
policies. Net premiums written by the reinsurance segment increased by 30% to
$270 million from $207 million in 1997. This increase was substantially due to
an increase in prorata treaty business. Net premiums written by the specialty
operations grew by 16% to $254 million from $219 million in 1997, due to
increases in all sectors of this business. This growth was due to an increase in
units insured. Net premiums written by the alternative markets operations grew
by 16% to $106 million from $91 million in 1997 due to the commencement of
operations of Key Risk Insurance Company (which underwrote business previously
managed on behalf of a self-insurance association). This increase more than
offset a decline in premiums written by Midwest Employers Casualty Company. Net
premiums written by the international operations grew by 79% to $75 million from
$42 million. This increase was due to 1997 acquisitions in Argentina and the
start-up of a life insurance and endowment insurance company in the Philippines.
Pre-tax net investment income increased to $202 million from $200 million earned
in 1997. This growth was due to an increase in investable assets produced by
cash flow from operations, which was partially offset by the effects of the
repurchase of Common Stock, and a decrease in pre-tax investment yield. The
decline in pre-tax investment yield was due to an increase in the percentage of
the portfolio invested in municipal bonds and lower yields earned on the trading
portfolio, (see "Liquidity and Capital Resources").
Management fees and commissions consist primarily of fees earned by the
alternative markets segment. Management fees and commissions remained at $71
million as intense competition inhibited growth.
Realized investment gains increased to $25 million from $13 million in 1997.
Realized gains on fixed income securities resulted primarily from the Company's
strategy of maintaining an appropriate balance between the duration of its fixed
income portfolio and the duration of its liabilities; realized gains on equity
securities arise primarily as a result of a variety of factors which influence
the Company's valuation criteria for such securities. The majority of the 1998
realized gains resulted from the sale of fixed maturity securities while the
majority of 1997 realized gains resulted from the sale of equity securities.
The combined ratio represents a measure of underwriting profitability, generally
excluding investment income. A number in excess of 100 generally indicates an
underwriting loss; a number below 100 generally indicates an underwriting gain.
The consolidated combined ratio (on a statutory basis) of the Company's
insurance operations
17
45
increased to 106.6% in 1998 from 101.2% in 1997 mainly due to an increase in the
consolidated loss ratio. The consolidated loss ratio (losses and loss expenses
incurred expressed as a percentage of premiums earned) increased to 71.2% from
66.4% due to a number of factors. weather-related losses for 1998 were $58.8
million compared with $32.8 million in 1997, which accounted for an increase of
1.6% of the loss ratio. The regional operations were adversely impacted by a
rise in the frequency and severity of commercial property and liability claims,
especially in the fourth quarter. The increase in severity resulted in an
accrual for additional ceded premiums due under certain sliding scale
reinsurance treaties. These factors were somewhat offset by favorable loss
development on business written in prior years.
Other operating costs and expenses, which consist of the expenses of the
Company's insurance and alternative markets operations, as well as the Company's
corporate and investment expenses, increased by 14% to $556 million from $488
million in 1997. The increase in other operating costs is primarily due to the
substantial premium growth discussed above, which in turn results in an increase
in underwriting expenses. The consolidated expense ratio of the Company's
insurance operations (underwriting expenses expressed as a percentage of
premiums written) increased to 34.9% for the 1998 period from 34.4% for the
comparable 1997 period. This increase resulted primarily from the cost of
expansion incurred by several regional companies and higher growth rate in
international operations, which operate at a higher expense ratio than domestic
operations.
The Federal income tax provision resulted in an effective tax rate of 9% in 1998
(24% in 1997). The tax rate is lower than the statutory tax rate of 35% because
a substantial portion of investment income is tax-exempt. The decrease in the
effective tax rate in 1998 is due primarily to an increase in the percentage of
pre-tax income that is tax-exempt.
OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE YEAR
ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
Net income attributable to common stockholders ("Net Income") for 1997 was $91
million, or $3.02 per share diluted, compared with 1996 earnings of $76 million,
or $2.53 diluted. The 1997 results include after-tax realized investment gains
of $9 million, or $.28 diluted, compared with $5 million, or $.16 diluted, for
1996.
Net premiums written in 1997 rose 12% to $1,178 million from $1,053 million
written during 1996 due to growth recorded by the regional, specialty,
alternative markets, and international operations. Net premiums written by the
regional operations grew by 20% to $619 million from $518 million written in
1996. The majority of this increase was due to operating units which were
started during the past several years. Net premiums written by the reinsurance
segment decreased by 5% to $207 million from $218 million in 1996. This decrease
was substantially due to a decrease in treaty business which more than offset
premiums generated by the Latin American and Caribbean division that commenced
operations in February 1996. Net premiums written by the specialty operations
grew by 2% to $220 million from $215 million in 1996. This increase was due to
an increase in premiums written by the excess and surplus operations, which more
than offset a decline in premiums written by the transportation unit. Net
premiums written by the alternative markets operations grew by 18% to $91
million from $77 million in 1996. This increase was due primarily to increased
market penetration by Signet Star's alternative markets division. Net premiums
written by the international operations grew by 67% to $42 million from $25
million. This increase was due to the July 1996 start-up of a workers'
compensation company in Argentina.
Pre-tax net investment income increased to $200 million from $164 million earned
in 1996. This increase was partially due to an increase in average investable
assets produced by the issuance of $210 million of capital trust securities
issued in December 1996. Excluding the effects of the issuance of these
securities, pre-tax net investment income was $193 million, an increase of $29
million over the comparable 1996 amount. This growth was mainly due to an
increase in investable assets produced by cash flow from operations. In
addition, an increase in investment income earned in the Company's trading
activities contributed to the growth in investment income, (see "Liquidity and
Capital Resources").
Management fees and commissions consist primarily of fees earned by the
alternative markets segment. Management fees and commissions increased 3% to $71
million from $69 million in 1996. The increase in management fees and
commissions is due primarily to a 1997 acquisition, as intense competition in
the workers' compensation market continued to inhibit growth.
Realized investment gains increased to $13 million from $7 million in 1996.
Realized gains on fixed income securities resulted primarily from the Company's
strategy of maintaining an appropriate balance between the dura-
18
46
tion of its fixed income portfolio and the duration of its liabilities; realized
gains on equity securities arise primarily as a result of a variety of factors
which influence the Company's valuation criteria for such securities. The
majority of the 1997 and 1996 realized gains resulted from the sale of equity
securities.
The consolidated combined ratio (on a statutory basis) of the Company's
insurance operations decreased to 101.2% in 1997 from 102.2% in 1996 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 66.4% from 68.7%. This improvement was primarily due to a decrease
in weather related losses incurred by the regional operations and better than
expected experience on business written in prior years recorded by the specialty
operations.
Other operating costs and expenses, which consist of the expenses of the
Company's insurance and alternative markets operations, as well as the Company's
corporate and investment expenses, increased by 19% to $488 million from $409
million in 1996. The increase in other operating costs is primarily due to the
substantial premium growth discussed above, which in turn results in an increase
in underwriting expenses. The consolidated expense ratio of the Company's
insurance operations (underwriting expenses expressed as a percentage of
premiums written) increased to 34.4% for the 1997 period from 33.1% for the
comparable 1996 period. This increase resulted primarily from higher commission
expenses incurred to generate premium growth.
The increase in interest expense is due to the issuance in December 1996 of $210
million Company-obligated mandatorily redeemable capital securities of a
subsidiary trust holding solely junior subordinated debentures, (see "Liquidity
and Capital Resources").
The Federal income tax provision resulted in an effective tax rate of 24% in
1997 (22% in 1996). 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 rate in 1997 is due primarily to the increase in realized gains
on investments which are taxed at the full corporate rate.
Preferred dividends decreased as a result of the 1997 repurchase of 276,855
shares of the Series A Preferred Stock, (see "Liquidity and Capital Resources").
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 $224 million in
1998, $229 million in 1997 and $244 million in 1996. The 1998 cash flow was
impacted favorably by the assumption of a portfolio of loss reserves for which
the Company received proceeds of approximately $60 million.
As a holding company, the Company derives cash from its subsidiaries in the form
of dividends, tax payments and management fees. The Company is obligated to
service its debt, pay consolidated Federal income taxes and pay its expenses.
The Company also provides capital to its subsidiaries as required. Tax payments
and management fees from the insurance subsidiaries are made under agreements
which generally are subject to approval by state insurance departments. Maximum
amounts of dividends that can be taken without regulatory approval are
prescribed by statute, (see Note 17 of "Notes to Consolidated Financial
Statements").
FINANCING ACTIVITY 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 was used to retire $28 million of Series B Preferred
Stock.
On December 19, 1996, the Company issued $210 million of Company-obligated
mandatorily redeemable capital securities of a subsidiary trust holding solely
8.197% junior subordinated debentures of the Company due December 15, 2045
("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 the proceeds to retire 252,273 shares of the Series A Preferred Stock
and placed $115.8 million in a trust to service the remaining outstanding Series
A Preferred Stock. In the second and third quarters of 1997, 93,775 shares of
the Series A Preferred Stock were purchased by subsidiaries of the Company. The
Company utilized the balance of the proceeds in the trust to redeem the
remaining Series A Preferred Stock on January 25, 1999.
19
47
In February 1998, the Company repurchased $16.3 million face value of its 9.875%
and 8.7% senior notes and debentures for $19.7 million and issued $20.2 of
short-term debt to finance these purchases. In April 1998, the Company
repurchased an additional $18.4 million of its 9.875% and 8.7% senior debentures
for $22.1 million. In April 1998, the Company issued $40 million face value of
its 6.375% medium-term notes due April 15, 2005. A portion of the proceeds from
the issuance of the medium-term notes was used to repay the short-term debt
issued in connection with the repurchased debentures and to retire $10 million
face value of its 8.95% senior notes, which matured on May 20, 1998. In
addition, in December 1998, one of the Company's subsidiaries issued an $8
million five-year note.
During 1996, the Company purchased 862,500 shares of Common Stock for
approximately $24.2 million. During 1998, the Company purchased 3,172,222 shares
of common stock for approximately $117.9 million, leaving a balance of 2,000,000
shares as of December 31, 1998, available for repurchase under its current
authorization.
As of December 31, 1998, the Company had $55.5 million of outstanding short-term
debt under its unsecured line-of-credit . As of December 31, 1998, the Company
had an additional $19.5 million of short-term debt available under its
line-of-credit.
The Company has on file two "shelf" registration statements with the Securities
and Exchange Commission with a combined remaining balance of $150 million in
additional equity and/or debt securities. The securities may be offered from
time to time as determined by funding requirements and market conditions.
INVESTMENTS In its investment strategy, the Company establishes a level of cash
and highly liquid short-term and intermediate-term securities which, combined
with expected cash flow, is believed adequate to meet foreseeable payment
obligations. As part of this strategy, the Company attempts to maintain an
appropriate relationship between the average duration of the investment
portfolio and the approximate duration of its liabilities, i.e., policy claims
and debt obligations.
The Company's investment policy with respect to fixed maturity securities is
generally to purchase instruments with the expectation of holding them to their
maturity. However, active management of the portfolio is considered necessary to
maintain an approximate matching of assets and liabilities as well as to adjust
the portfolio as changes in financial market conditions alter the assumptions
underlying the purchase of certain securities.
The investment portfolio, valued on a cost basis, grew in 1998 by $138 million
to approximately $3,197 million primarily due to the combined effects of net
cash flow from operations and the financing activities discussed above.
The Company's investments are currently comprised of fixed income securities and
trading securities. At December 31, 1998, the portfolio mix of the fixed income
was as follows: tax-exempt securities were 42% (38% in 1997); U.S. Government
securities and cash equivalents were 23% (24% in 1997); mortgage-backed
securities remained at 18%; corporate fixed maturity securities were 15% (17% in
1997); and the balance of 2% (3% in 1997) was invested in other fixed income
securities.
The Company had net trading account assets (trading account equity securities
plus trading account receivables from brokers and clearing organizations less
trading account securities sold but not yet purchased) of $320.7 million as of
December 31, 1998, as compared to $256.3 million as of December 31, 1997. The
net trading account represented approximately 10% and 8% of the Company's net
invested assets as of December 31, 1998 and 1997, respectively.
MARKET RISK The Company's market risk generally represents the risk of gain or
loss that may result from the potential change in the fair value of the
Company's investment portfolio as a result of fluctuations in prices, interest
rates and currency exchange rates. As discussed above, the Company attempts to
manage its interest rate risk by maintaining an appropriate relationship between
the average duration of the investment portfolio and the approximate duration of
its liabilities, i.e., policy claims and debt obligations.
The Company's investments are categorized as either non-trading securities or
trading securities. The principal market risk for the Company's non-trading
securities is interest rate risk. The Company uses various models and stress
test scenarios to monitor and manage interest rate risk. The following table
outlines the groups of non-trading fixed maturity securities, and the components
of the interest rate risk:
Market Effective Fair Value
Group Yield Duration (000's)
- --------------------------------------------------------------------------------
U. S. Government securities 4.95 5.55 303,388
- --------------------------------------------------------------------------------
State and municipal 4.48 6.42 1,237,067
- --------------------------------------------------------------------------------
Corporate 6.56 5.64 434,300
- --------------------------------------------------------------------------------
Mortgage-backed securities 6.74 6.62 515,333
- --------------------------------------------------------------------------------
Total 5.36 6.22 2,490,088
- --------------------------------------------------------------------------------
20
48
As a general rule, a porfolio's duration measures the expected change in
porfolio value due to a change in interest rates. The porfolio's duration is
further modified to accurately reflect a porfolio's expected price movement as
interest rates change. Based upon a pricing model, the Company determines the
estimated change in fair value of the non-trading securities, assuming immediate
parallel shifts in the treasury yield curve while keeping spreads between
individual securities and treasury securities static. The fair value at
specified levels at December 31, 1998 is as follows:
Estimated Fair Estimated
Value of Financial Change in
Instruments Fair Value
Change in interest rates $(000's) $(000's)
- --------------------------------------------------------------------------------
300 basis point rise $2,059,015 $ (431,073)
- --------------------------------------------------------------------------------
200 basis point rise 2,192,513 (297,575)
- --------------------------------------------------------------------------------
100 basis point rise 2,338,061 (152,027)
- --------------------------------------------------------------------------------
Base scenario 2,490,088 --
- --------------------------------------------------------------------------------
100 basis point decline 2,651,272 161,184
- --------------------------------------------------------------------------------
200 basis point decline 2,831,218 341,130
- --------------------------------------------------------------------------------
300 basis point decline 3,033,714 543,626
- --------------------------------------------------------------------------------
The estimated changes in fair value, based upon the above table, would be offset
by the Company's liabilities if they were discounted and marked to market. The
Company does, however, discount its excess workers' compensation (EWC) reserves
and if interest rates were to rise 300 basis points, the reserves would be
decreased by $6 million, while a 300 basis point decline, would cause an
increase in EWC reserves of $10 million. These fluctuations would partially
offset the change in the investment portfolio.
The Company's trading securities are used for merger arbitrage. Merger arbitrage
is the business of investing in the securities of publicly held companies, which
are the targets in announced tender offers and mergers. Merger arbitrage differs
from other types of investments in its focus on transactions and events believed
likely to bring about a change in value over a relatively short time period
(usually four months or less). The Company believes that this makes merger
arbitrage investments less vulnerable to changes in general stock market
conditions. Potential changes in market conditions are also mitigated by the
implementation of hedging strategies, including short sales. Additionally, the
merger arbitrage positions are generally hedged against market declines by
purchasing put options, selling call options or entering into swap contracts.
Based upon these characteristics, the Company's trading securities are primarily
exposed to the completion of announced deals, which are subject to regulatory as
well as political and other risks.
The Company also has net assets held by its foreign subsidiaries that are
subject to foreign currency risk. As of December 31, 1998, the Company had $19.7
million (net of minority interest) invested in subsidiaries in Argentina, as
well as $5.6 million (net of minority interest) invested in subsidiaries in the
Philippines. As of December 31, 1998, approximately 70% and 60% of the invested
assets in Argentina and the Philippines were denominated in US Dollars,
respectively. The effect of foreign subsidiaries maintaining US Dollar
denominated assets is a hedge against fluctuations in foreign currency.
Argentina has established a currency board exchange rate mechanism that creates
a dollar for dollar relationship between the US Dollar and the Argentine Peso.
Because of this dollar for dollar relationship, devaluation risk is viewed to be
low. In addition, the investments in Argentina are hedged, in that the assets
and liabilities are matched for both duration and denomination, based on the
currencies of their contracts.
The Company's investment in the Philippines is affected by fluctuations in the
exchange rate between the US Dollar and the Philippine Peso. For every one
percent change in the exchange rate, the Company's unrealized foreign currency
gain/(loss) would change approximately $56,000, net of minority interest.
FEDERAL INCOME TAXES The Company files a consolidated Federal income tax return.
At December 31, 1998, the Company had a deferred tax liability of $74 million,
which primarily relates to unrealized investment gains and intangible assets,
and a deferred tax asset of $67 million, which primarily relates to 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.
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
21
49
reinsurer liable to the insurer to the extent of the reinsurance coverage. The
Company monitors the financial condition of its reinsurers and attempts to place
its coverages only with substantial, financially sound carriers.
REGIONAL OPERATIONS In 1998, all regional subsidiaries generally retained
$300,000 on individual property casualty risks. Acadia Insurance Company
retained up to $1.5 million per bond for surety business. Other regional
companies writing surety business retained up to $450,000 ($325,000 prior to
October 1, 1997). The regional group also maintained catastrophe reinsurance
protection for approximately 95% of weather-related losses above $6 million per
occurrence up to a maximum of $34 million. In addition, certain of the regional
operating units carried additional aggregate catastrophe protection of $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 four layers as follows: (i) 100% of $7.5 million
in excess of $6.0 million per occurrence; (ii) 95% of $6.5 million in excess of
$13.5 million per occurrence; (iii) 95% of $10.0 million in excess of $20.0
million per occurrence; and (iv) 95% of $5.0 million in excess of $30 million
and 100% of $15 million (for California only and only under certain conditions)
and 100% of $15 million or $10 million (for Florida only and only under certain
conditions). In 1998, Signet Star had a variable quota share program on its
casualty facultative business with retentions varying from $425,000 up to $2.5
million depending on the certificate limit. Property facultative business is
covered on a per risk basis for $700,000 in excess of $300,000 and 95% of $4
million in excess of $1 million. These coverages apply to Signet Star's
individual certificate and master certificate business. During 1998, Signet Star
had retrocession coverage for its fidelity and surety business for 100% of each
loss up to $2.5 million in excess of $750,000 per occurrence and 100% of each
loss up to $2.5 million in excess of $3.25 million per occurrence and 86.5% of
each surety loss up to $13 million in excess of $5.75 million per occurrence.
During 1998, the Latin American and Caribbean division retained $250,000 per
risk for property, marine, energy and aviation business and $500,000 per risk
for casualty.
SPECIALTY OPERATIONS Admiral's retention in 1998 was $183,750 per risk for most
classes of business and varied between $2.0 million and $5.0 million based upon
policy size, per insured, for business written by Monitor Liability Managers. In
addition, in 1998, Admiral had additional protection on an aggregate basis for
its directors and officers liability business. Nautilus generally retained
$140,000 per risk in 1998 and Carolina maintained its retention at $300,000 on
property liability exposures. In 1998, Carolina (on business underwritten by
Monitor Surety Managers) retained up to $1.5 million on a per principal per bond
basis. Great Divide retained $187,500 per risk in 1998. The specialty group
(except Carolina) is also covered under the regional group's property
catastrophe protection for 95% of $34 million in excess of $6 million. Preferred
Employer's retention in 1998 was $300,000 per risk.
ALTERNATIVE MARKETS OPERATIONS Midwest's retention is generally $1 million per
occurrence above the self-insured's underlying retention. Key Risk Insurance
Company's retention in 1998 was $300,000 per risk. Signet Star's alternative
market division maintains specific retrocessional coverage on certain treaties
and is also covered under the reinsurance group's catastrophe retrocessional
program.
INTERNATIONAL OPERATIONS The international operations generally retained between
$50,000 and $250,000 per occurrence or individual risk.
YEAR 2000
- --------------------------------------------------------------------------------
The Company continues to address system requirements with regard to Year 2000
compliance issues and believes that the majority of the systems have been tested
and determined by the Company to be Year 2000 compliant. The project of Year
2000 readiness is broken down into the following phases: (1) inventorying Year
2000 items, (2) prioritizing the identified items, (3) evaluating Year 2000
compliance and alternative solutions for items determined to be material to the
Company, (4) replacing or repairing material items that are determined not to be
Year 2000 compliant and (5) testing and changing items which are material. The
process, which began in 1996, is substantially complete, and it is expected that
all critical primary systems will be tested and substantially functional by
April 1999. This includes both operational and financial systems upon which the
Company is dependent. As to embedded chips, the Company expects to be compliant
by April 1999 with respect to those chips which are integral to its operating
systems. Compliance with respect to the remainder of the Company's embedded
chips is expected to be achieved by the third quarter of 1999. Additionally, the
Company is communicating with third parties with which it has a material
relation-
22
50
ship, e.g. independent insurance agents, and financial institutions, to identify
Year 2000 issues with respect to those third parties. Due to these
communications, the Company has no reason to believe that those third parties
will not be in general compliance with Year 2000 readiness; the Company is
unable to determine whether all such third parties will achieve Year 2000
readiness in such manner as not to result in any material adverse effect on the
company.
It is the Company's practice in the normal course of business to upgrade
technology, including hardware and software, as appropriate. As a result of this
practice, much of its Year 2000 readiness has been accomplished in the ordinary
course. Through December 31, 1998, the Company has incurred approximately $6
million of costs which have been expensed as incurred, and estimates an
additional $2 million to be incurred in 1999 to complete Year 2000 compliance.
The total cost associated with Year 2000 compliance is not expected to be
material to the Company's financial position.
Notwithstanding the above, a failure by the Company or a third party to correct
a material Year 2000 problem could result in an interruption in, or a failure
of, certain normal business activities or operations. Such failures could
materially and adversely affect the Company's results of operations, liquidity
and financial condition. Due to the general uncertainty inherent in the Year
2000 problem, including the uncertainty of the Year 2000 readiness of third
parties with whom the Company deals, the Company is unable to determine at this
time whether the consequences of Year 2000 failures will have a material impact
on the Company's results of operations, liquidity or financial condition.
The Company has not implemented a formal contingency plan with respect to Year
2000 compliance issues; however, the Company and its various operating units are
considering the necessity for and feasibility of contingency alternatives.
The Year 2000 issue is also a concern from an underwriting standpoint to the
extent of possible liability for coverage under general liability, property,
directors and officers liability and other policies. Through December 31, 1998,
no significant losses have arisen or come to light with respect to Year 2000
claims exposure for the Company's insurance and reinsurance subsidiaries.
Additionally, certain of the Company's insurance subsidiaries may either include
or exclude insurance coverage for Year 2000 exposures. However, due in part to
the potential for judicial decisions which reformulate policies to expand their
coverage for previously unforeseen theories of liability which may produce
unanticipated claims, proposed legislative reform and because there is no prior
history of such claims, the amount of any potential Year 2000 coverage
liabilities is not determinable.
The discussion herein with regard to Year 2000 compliance contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in such forward-looking statements. These risks could include
unforeseen technological or other issues associated with Year 2000 compliance
efforts and the extent to which vendors, public utilities, insurance agents,
financial institutions, governmental entities and other third parties that
interface with the Company may fail to achieve Year 2000 compliance. The
inclusion of such forward-looking statements herein shall not be considered a
representation by the Company that the objectives or plans of the Company, or
other matters addressed by the forward-looking statements, will be achieved.
CAPITALIZATION
- --------------------------------------------------------------------------------
For the year ended December 31, 1998, stockholders' equity decreased by
approximately $86 million. The decrease in stockholders' equity is attributable
to the Company's repurchase of shares of its Common Stock, which was partially
offset by an increase in retained earnings. Accordingly, the Company's total
capitalization decreased to $1,464 million at December 31, 1998 and the
percentage of the Company's capital attributable to long-term debt increased to
27% at December 31, 1998 from 25% at December 31, 1997.
OTHER ITEMS
- --------------------------------------------------------------------------------
The Company is in the process of restructuring the management and back-office
operations of its group of 10 regional insurance companies into four geographic
segments based on markets served. The consolidation of management and
administrative functions, which should be completed before the end of 1999, is
expected to decrease costs of operations beginning in late 1999. The Company
expects to take a one-time after-tax charge of between $9 million and $13
million in the first quarter of 1999 to cover costs directly related to the
restructuring.
23
51
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Years ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Revenues:
Net premiums written $ 1,346,254 $ 1,177,641 $ 1,052,511
Change in net unearned premiums (67,855) (65,894) (71,290)
- ----------------------------------------------------------------------------------------------------------------
Premiums earned 1,278,399 1,111,747 981,221
Net investment income 202,420 199,588 164,490
Management fees and commissions 70,727 71,456 69,246
Realized investment gains 25,400 13,186 7,437
Other income 5,571 4,333 2,772
- ----------------------------------------------------------------------------------------------------------------
Total revenues 1,582,517 1,400,310 1,225,166
Operating costs and expenses:
Losses and loss expenses (914,762) (734,424) (669,160)
Other operating costs and expenses (556,155) (487,776) (408,994)
Interest expense (48,819) (48,869) (31,963)
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 62,781 129,241 115,049
Federal income tax expense (5,465) (30,668) (25,102)
- ----------------------------------------------------------------------------------------------------------------
Income before minority interest 57,316 98,573 89,947
Minority interest 1,444 474 316
- ----------------------------------------------------------------------------------------------------------------
Net income before preferred dividends 58,760 99,047 90,263
Preferred dividends (7,548) (7,828) (13,909)
- ----------------------------------------------------------------------------------------------------------------
Net income before extraordinary loss 51,212 91,219 76,354
Extraordinary loss on early extinguishment
of long-term debt (net of taxes of $2,701) (5,017) -- --
- ----------------------------------------------------------------------------------------------------------------
Net income attributable to common stockholders $ 46,195 $ 91,219 $76,354
- ----------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic
Net income before extraordinary loss $ 1.82) $ 3.09 $ 2.56
Extraordinary loss on early extinguishment of long-term debt (.18) -- --
- ----------------------------------------------------------------------------------------------------------------
Net income attributable to common stockholders $ 1.64 $ 3.09 $ 2.56
- ----------------------------------------------------------------------------------------------------------------
Diluted
Net income before extraordinary loss $ 1.76) $ 3.02 $ 2.53
Extraordinary loss on early extinguishment of long-term debt (.17) -- --
- ----------------------------------------------------------------------------------------------------------------
Net income attributable to common stockholders $ 1.59 $ 3.02 $ 2.53
- ----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
24
52
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------
ASSETS
Investments:
Invested cash $ 370,155 $ 259,178
Fixed maturity securities:
Held to maturity, at cost (fair value $183,469 and $194,919) 170,150 182,172
Available for sale, at fair value (cost $2,224,244 and $2,240,901) 2,306,619 2,322,971
Equity securities, at fair value:
Available for sale (cost $59,890 and $76,134) 65,869 86,243
Trading account (cost $373,164 and $301,136) 389,310 311,969
Cash 16,123 21,669
Premiums and fees receivable 377,501 331,774
Due from reinsurers 513,297 432,516
Accrued investment income 37,842 36,930
Prepaid reinsurance premiums 79,530 72,148
Deferred policy acquisition costs 168,894 145,737
Real estate, furniture and equipment at cost, less accumulated depreciation 136,884 126,831
Excess of cost over net assets acquired 76,645 73,142
Trading account receivable from broker and clearing organizations 229,520 103,823
Other assets 45,092 37,215
- ----------------------------------------------------------------------------------------------------------
$ 4,983,431 $ 4,544,318
- ----------------------------------------------------------------------------------------------------------
LIABILITIES, RESERVES, DEBT AND STOCKHOLDERS' EQUITY
Liabilities and reserves:
Reserves for losses and loss expenses $ 2,126,566 $ 1,909,688
Unearned premiums 664,861 589,384
Due to reinsurers 130,517 95,140
Deferred Federal income taxes 6,877 32,887
Trading securities sold but not yet purchased, at fair value
(proceeds $283,310 and $162,360) 298,165 159,456
Short-term debt 55,500 --
Other liabilities 213,453 187,755
- ----------------------------------------------------------------------------------------------------------
3,495,939 2,974,310
- ----------------------------------------------------------------------------------------------------------
Long-term debt 394,444 390,415
- ----------------------------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable capital securities of a subsidiary
trust holding solely 8.197% Junior Subordinated
debentures of the corporation due December 15, 2045 207,988 207,944
- ----------------------------------------------------------------------------------------------------------
Minority interest 23,779 24,357
- ----------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares:
7 3/8% Series A Cumulative Redeemable Preferred Stock
653,952 shares issued and outstanding 65 65
Common stock, par value $.20 per share:
Authorized 80,000,000 shares, issued and outstanding,
net of treasury shares, 26,504,404 and 29,568,335 shares 7,281 7,281
Additional paid-in capital 429,611 428,760
Retained earnings 601,908 569,160
Accumulated other comprehensive income 54,672 58,206
Treasury stock, at cost, 9,899,663 and 6,835,510 shares (232,256) (116,180)
- ----------------------------------------------------------------------------------------------------------
861,281 947,292
- ----------------------------------------------------------------------------------------------------------
$ 4,983,431 $ 4,544,318
- ----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES 25
53
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Years ended December 31, 1998, 1997 and 1996
Preferred
and common
stock and Accumulated
Total additional other
stockholders' paid-in Retained comprehensive Treasury
equity capital earnings income stock
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 929,815 $ 552,068 $ 424,261 $ 48,450 $ (94,964)
Net income attributable to common stockholders 76,354 -- 76,354 -- --
Change in other comprehensive income (17,375) -- -- (17,375) --
Issuance of common shares 1,746 750 -- -- 996
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 ($.35 per share) (10,277) -- (10,277) -- --
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 879,732 476,439 490,338 31,075 (118,120)
Net income attributable to common stockholders 91,219 -- 91,219 -- --
Change in other comprehensive income 27,131 -- -- 27,131 --
Issuance of common shares 3,130 1,190 -- -- 1,940
Repurchase of preferred stock (41,523) (41,523) -- -- --
Dividends to common stockholders ($.42 per share) (12,397) -- (12,397) -- --
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 947,292 436,106 569,160 58,206 (116,180)
Net income attributable to common stockholders 46,195 -- 46,195 -- --
Change in other comprehensive income (3,534) -- -- (3,534) --
Issuance of common shares 2,719 851 -- -- 1,868
Purchase of treasury stock (117,944) -- -- -- (117,944)
Dividends to common stockholders ($.48 per share) (13,447) -- (13,447) -- --
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 861,281 $ 436,957 $ 601,908 $ 54,672 $(232,256)
==========================================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
Net income attributable to common stockholders $46,195 $ 91,219 $76,354
- --------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income
Unrealized holding gain (losses) on investment securities arising
during the period (net of taxes of ($9,941), $10,915, and ($11,915)) (18,462) 20,271 (22,209)
Less: Reclassification adjustment for net change in unrealized gains
during the period (net of taxes of $8,890, $4,615 and $2,603) 16,510 8,571 4,834
- --------------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) (1,952) 28,842 (17,375)
Change in unrealized foreign exchange (losses) (1,582) (1,711) --
- --------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (3,534) 27,131 (17,375)
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive income $42,661 $118,350 $58,979
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
26
54
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income before minority interest, preferred dividends
and extraordinary items $ 57,316 $ 98,573 $ 89,947
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 169,285 137,312 126,006
Depreciation and amortization 22,658 11,852 8,590
Change in unearned premiums and prepaid reinsurance premiums 68,095 67,023 71,290
Change in premiums and fees receivable (45,727) (64,858) (25,348)
Change in Federal income taxes (26,923) (1,408) 5,719
Change in deferred policy acquisition costs (22,057) (24,465) (29,640)
Realized investment gains (25,400) (13,186) (7,437)
Other, net 27,023 18,601 4,690
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities before
trading account sales (purchases) 224,270 229,444 243,817
Trading account sales (purchases), net (4,567) (89,245) (79,906)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 219,703 140,199 163,911
- ----------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 715,459 718,789 471,057
Equity securities 52,727 43,204 46,698
Proceeds from maturities and prepayments of fixed maturity securities 297,303 120,944 219,673
Cost of purchases, excluding trading account:
Fixed maturity securities available for sale (1,033,190) (984,961) (723,159)
Fixed maturity securities held to maturity (3,034) -- (105,675)
Equity securities (33,217) (28,028) (26,988)
Cost of acquired companies, net of acquired cash and invested cash (3,304) 585 (11,739)
Net additions to real estate, furniture and equipment (27,167) (17,898) (46,983)
Other, net 3,956 (9,904) (5,083)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (30,467) (157,269) (182,199)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of short-term debt 55,500 -- --
Net proceeds from issuance of long-term debt 47,882 -- 98,850
Purchase of common treasury shares (117,944) -- (24,152)
Repurchase of long-term debt (49,104) -- --
Cash dividends to common stockholders (13,518) (11,695) (10,143)
Cash dividends to preferred stockholders (7,356) (8,717) (12,824)
Net proceeds from issuance of Company-obligated mandatorily
redeemable capital securities of a subsidiary trust holding
solely 8.197% junior subordinated debentures -- -- 207,900
Repurchase of preferred stock -- (41,523) (77,572)
Payment of subsidiary debt -- -- (28,306)
Other, net 735 13,367 4,103
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (83,805) (48,568) 157,856
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and invested cash 105,431 (65,638) 139,568
Cash and invested cash at beginning of year 280,847 346,485 206,917
- ----------------------------------------------------------------------------------------------------------------------
Cash and invested cash at end of year $ 386,278 $ 280,847 $ 346,485
======================================================================================================================
Supplemental disclosure of cash flow information:
Interest paid on debt $ 48,976 $ 45,950 $ 28,296
======================================================================================================================
Federal income taxes paid $ 31,755 $ 32,258 $ 19,171
======================================================================================================================
See accompanying notes to consolidated financial statements.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES 27
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1998, 1997, and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
(A) Principles of consolidation and basis of presentation
The consolidated financial statements, which include the accounts of W. R.
Berkley Corporation and its subsidiaries ("the Company"), have been prepared on
the basis of generally accepted accounting principles ("GAAP"). All significant
intercompany transactions and balances have been eliminated. Reclassifications
have been made in the 1997 and 1996 financial statements to conform them to the
presentation of the 1998 financial statements. The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the revenues and expenses reflected during the reporting period.
Actual results could differ from those estimates.
(B) Revenue recognition
Insurance premiums written are recognized as earned generally on a pro-rata
basis over the contract period. Management fees on insurance service contracts
are recorded as earned primarily on a pro-rata basis over the policy period.
Commission income is recognized as earned on the effective date of the
applicable insurance policies.
(C) Investments
The Company has classified its investments into three categories. Securities
that the Company has the positive intent and ability to hold to maturity are
classified as "held to maturity" and reported at amortized cost. Securities
which the Company purchased with the intent to sell in the near-term are
classified as "trading" and are reported at estimated fair value, with
unrealized gains and losses reflected in the statement of operations. The
remaining securities are classified as "available for sale" and carried at
estimated fair value, with unrealized gains and losses, net of applicable income
taxes, excluded from earnings and reported as comprehensive income and 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 a provision for significant decline in value which
is considered to be other than temporary. The Company uses the specific
identification method where possible and the first-in, first-out method in other
instances, to determine the cost of securities sold. Realized gains or losses,
including any provision for decline in value, are included in the statement of
operations.
(D) Trading account
The long portfolio positions are presented in the balance sheet as trading
account assets. The short sales and short call options used in trading account
activities are presented as trading securities sold but not yet purchased. The
trading account receivable from broker and clearing organizations is comprised
of unsettled trades within the trading account and the net margin balances held
by the clearing broker.
(E) Per share data
Basic per share data is based upon the weighted average number of shares
outstanding during the year. Diluted per share data reflects the potential
dilution that would occur if employee stock-based compensation plans were
exercised. Shares issued in connection with loans to shareholders are not
considered to be outstanding for the purposes of calculating basic per share
amounts and have been excluded from stockholders' equity.
(F) Deferred policy acquisition costs
Acquisition costs (primarily commissions and premium taxes) incurred in writing
insurance and reinsurance business are deferred and amortized ratably over the
terms of the related contracts. Deferred policy acquisition costs are limited to
the amounts estimated to be recoverable from the applicable unearned premiums
and the related anticipated investment income by giving effect to anticipated
losses, loss adjustment expenses and expenses necessary to maintain the
contracts in force.
(G) Reserves for losses and loss expenses
Reserves for losses and loss expenses are an accumulation of amounts determined
on the basis of (1) evaluation of claims for business written directly by the
Company; (2) estimates received from other companies for reinsurance assumed;
and (3) estimates for losses incurred but not reported (based on Company and
industry experience). These estimates are 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.
28
56
A subsidiary of the Company discounts its liabilities for excess workers'
compensation ("EWC") losses and loss expenses using a "risk-free" rate. EWC
liabilities are discounted because of the long period of time over which it pays
losses. The Company believes that utilizing a "risk-free" rate to discount these
reserves more closely reflects the economics associated with the EWC line of
business (see Note 14 of notes to consolidated financial statements).
Loss reserve porfolio assumed transactions are accounted for in accordance with
FAS 113. At December 31, 1998, $62,380,000 of these transactions were reflected
as other liabilities.
(H) Reinsurance ceded
Ceded unearned premiums are reported as prepaid reinsurance premiums and
estimated amounts of reinsurance recoverable on unpaid losses are included in
due from reinsurers. To the extent any reinsurer does not meet its obligations
under reinsurance agreements, the Company must discharge the liability. Amounts
due from reinsurers are reflected net of funds held where the right of offset is
present. The Company has provided reserves for uncollectible reinsurance.
(I) Excess of cost over net assets acquired
Costs in excess of the net assets of subsidiaries acquired are being amortized
on a straight-line basis over 25 to 40 years. The Company continually evaluates
the amortization period of its intangible assets. Estimates of useful lives are
revised when circumstances or events indicate that the original estimate is no
longer appropriate. Amortization (including adjustments) of the excess of cost
over net assets acquired was $3,178,000, $2,950,000 and $3,334,000 for 1998,
1997 and 1996, respectively.
(J) Federal income taxes
The Company files a 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 using tax rates currently in effect or expected to
apply in the years in which those temporary differences are expected to reverse.
(K) Stock options
The Company accounts for its stock options in accordance with Financial
Accounting Standards Board ("FASB") Statement No. 123, "Accounting for
Stock-Based Compensation" (FAS 123), which provides that stock-based
compensation may be disclosed in the footnotes to financial statements.
(L) Foreign currency
Revenues and expenses in foreign currencies are translated at the weighted
average exchange rate during the year. Assets and liabilities are translated at
the rate of exchange in effect at the close of the period. Gains or losses
(losses of $3,293,000 and $1,711,000 as of December 31, 1998 and 1997,
respectively) resulting from translating foreign currency financial statements
are reported as a component of common stockholders' equity. Gains or losses
(gains of $1,543,000 and $1,408,000 for 1998 and 1997, respectively) resulting
from foreign currency transactions (transactions denominated in a currency other
than the entity's functional currency) are included in other income in the
statement of operations.
(M) Real estate, furniture and equipment
Real estate, furniture and equipment are carried at cost less accumulated
depreciation. Depreciation is calculated using the estimated useful lives of the
respective assets. Included in the statement of operations is depreciation
expense of $17,114,000, $12,799,000 and $12,234,000 for 1998, 1997 and 1996,
respectively.
(N) Segment disclosure
The Company presents its segment disclosure in accordance with FAS 131
"Disclosures About Segments of an Enterprise and Related Information." FAS 131
redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a company's operating
segments.
(O) Other Comprehensive Income
As of January 1, 1998, the Company adopted FAS No. 130 "Reporting Comprehensive
Income." This statement establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income encompasses all changes in stockholder's equity (except
those arising from transactions with shareholders) and includes net income, net
unrealized capital gains or losses on available-for-sale securities and foreign
currency
W. R. BERKLEY CORPORATION AND SUBSIDIARIES 29
57
translation adjustments. As this new standard only requires additional
information in the financial statements, it does not affect the Company's
financial position. The Company has presented the disclosures required under FAS
130 in its consolidated statements of Comprehensive Income.
(P) Recent accounting pronouncements
The American Institute of Certified Public Accountants (AICPA) issued Statement
of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance Related Assessments," which will be effective for fiscal periods
beginning in 1999. SOP 97-3 provides guidance on accounting and disclosure of
insurance-related assessments. The Company does not expect this statement to
have a material impact on the Company's financial position or results of
operation.
In March 1998, the AICPA issued SOP 98-1, effective January 1, 1999, "Accounting
for the cost of computer software developed or obtained for internal use." The
SOP requires that certain internal and external costs be expensed or capitalized
when incurred to develop or obtain software for internal use. The Company does
not expect this statement to have a material impact on the Company's financial
position or results of operations.
In April 1998, the AICPA issued SOP 98-5, effective January 1, 1999, "Reporting
on the costs of start-up activities." The SOP requires that costs incurred in
start-up activities must be expensed as incurred. As of December 31, 1998, the
Company had recorded an immaterial amount of unamortized start-up costs which
will be expensed in 1999.
In June 1998, the FASB issued SFAS 133, effective January 1, 2000, "Accounting
for Derivative Instruments and Hedging Activities," which establishes accounting
and reporting standards for derivative instruments. This statement relates to
the presentation of information and would have no impact on the Company's
results of operations or financial condition.
(2) ACQUISITIONS
- --------------------------------------------------------------------------------
During 1998, 1997 and 1996, several international and other acquisitions were
completed for an aggregate consideration of approximately $13,389,000,
$7,238,000 and $15,955,000, respectively. The acquisitions were accounted for as
purchases and, accordingly, the results of operations of the companies have been
included from the respective dates of acquisition. Proforma results of
operations have been omitted as such effects are not significant.
Net assets of the acquired companies for 1998, 1997 and 1996 were as
follows: Investments in fixed maturity and equity securities of $1,786,000,
$2,192,000 and $6,434,000; cash and invested cash of $10,085,000, $7,823,000 and
$4,216,000; excess of cost over net assets acquired of $6,847,000, $2,688,000
and $7,138,000; and other liabilities, net of other assets of $5,329,000,
$5,465,000 and $1,833,000.
(3) COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES
- --------------------------------------------------------------------------------
Neither the Company nor any of its subsidiaries is engaged in any litigation
known to the Company which management believes will have a material adverse
effect upon the Company's business. As is common with other insurance companies,
the Company's subsidiaries are regularly engaged in the defense of claims
arising out of the conduct of the insurance business.
(4) LEASE OBLIGATIONS
- --------------------------------------------------------------------------------
The Company and several of its subsidiaries use office space and equipment under
leases expiring at various dates through September 1, 2004. These leases are
considered operating leases for financial reporting purposes. Some of these
leases have options to extend the length of the leases and contain clauses for
cost of living, operating expense and real estate tax adjustments. Rental
expense was approximately: $14,095,000, $12,564,000, and $11,098,000 for 1998,
1997 and 1996, respectively. Future minimum lease payments (without provision
for sublease income) are $14,134,000 in 1999; $12,401,000 in 2000; $8,980,000 in
2001; $7,101,000 in 2002; $5,434,000 in 2003; and $7,147,000 thereafter.
30
58
(5) DEBT
- ----------------------------------------------------------------------------------------
Long-term debt consists of the following:
Description Rate Maturity Face Value Carrying Value
- ----------------------------------------------------------------------------------------
Senior Notes 6.31% March 6, 2000 $ 25,000,000 $ 24,970,000
Senior Notes 6.71% March 4, 2003 25,000,000 24,922,000
Notes Payable (a) December 31, 2003 8,000,000 8,000,000
Senior Subordinated Notes 6.50% July 1, 2003 35,793,000 35,793,000
Senior Notes 6.375% April 15, 2005 40,000,000 39,797,000
Senior Notes 6.25% January 15, 2006 100,000,000 99,112,000
Senior Notes 9.875% May 15, 2008 88,800,000 86,203,000
Senior Debentures 8.70% January 1, 2022 76,503,000 75,647,000
- ----------------------------------------------------------------------------------------
$399,096,000 $394,444,000
- ----------------------------------------------------------------------------------------
(a) Libor plus 50 basis points
The difference between the face value of long-term debt and the carrying value
is unamortized discount. All outstanding long-term debt is not redeemable until
maturity and ranks on a parity with all other outstanding indebtedness of the
Company.
The Company has on file two "shelf" registration statements with the
Securities and Exchange Commission with a combined remaining balance of $150
million in additional equity and/or debt securities. The securities may be
offered from time to time as determined by funding requirements and market
conditions.
SHORT-TERM DEBT As of December 31, 1998, the Company had $55.5 million
of outstanding short-term debt under its unsecured line-of-credit. During 1998,
the average interest rate of the Company's short-term debt was 5.59%. The
Company had an additional $19.5 million of short-term debt available under its
line-of-credit.
(6) COMPANY-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF A SUBSIDIARY
TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE CORPORATION DUE
DECEMBER 15, 2045
- --------------------------------------------------------------------------------
The Company-obligated mandatorily redeemable preferred securities of a
subsidiary trust holding solely junior subordinated debentures ("Capital Trust
Securities") were issued by the W.R. Berkley Capital Trust, ("the Trust"), in
1996. All of the common securities of the Trust are owned by the Company. The
sole assets of the Trust are $210,000,000 aggregate principal amount of 8.197%
Junior Subordinated Debentures due December 15, 2045, issued by the Company (the
"Junior Subordinated Debentures"). The Company's guarantee of payments of cash
distributions and payments on liquidation of the Trust and redemption of the
Capital Trust Securities, when taken together with the Company's obligations
under the Trust Agreement under which the Capital Trust Securities were issued,
the Junior Subordinated Debentures and the Indenture under which the Junior
Subordinated Debentures were issued, including its obligations to pay costs,
expenses, debts and liabilities of the Trust (other than with respect to the
Capital Trust Securities), provide a full and unconditional guarantee of the
Trust's obligations under the Capital Trust Securities. The Company records the
preferential cumulative cash dividends arising from the payments of interest on
the Junior Subordinated Debentures as interest expense in its consolidated
statement of operations.
The Capital Trust Securities are subject to mandatory redemption in a
like amount (i) in whole but not in part, on the stated maturity date, upon
repayment of the Junior Subordinated Debentures, (ii) in whole but not in part,
at any time contemporaneously with the optional prepayment of the Junior
Subordinated Debentures by the Company upon the occurrence and continuation of a
certain event and (iii) in whole or in part, on or after December 15, 2006,
contemporaneously with the optional prepayment by the Company of Junior
Subordinated Debentures.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES 31
59
(7) 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) 1998 1997 1996
- --------------------------------------------------------------------------------
Premiums written $292,238 $240,754 $210,009
- --------------------------------------------------------------------------------
Premiums earned $286,170 $239,233 $216,127
- --------------------------------------------------------------------------------
Losses and loss expenses $211,389 $129,405 $120,784
- --------------------------------------------------------------------------------
(8) SUPPLEMENTAL FINANCIAL STATEMENT DATA
- --------------------------------------------------------------------------------
Other operating costs and expenses consist of the following:
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Amortization of
deferred policy
acquisition costs $394,612 $337,871 $283,642
Other operating costs
and expenses of
insurance operations 77,596 65,993 50,288
Other costs and expenses 83,947 83,912 75,064
- --------------------------------------------------------------------------------
Total $556,155 $487,776 $408,994
- --------------------------------------------------------------------------------
(9) STOCK OPTION PLAN
- --------------------------------------------------------------------------------
The Company has a stock option plan ("the Stock Option Plan") under which
2,625,000 shares of Common Stock were reserved for issuance. In May 1997, the
Corporation restated the Stock Option Plan to increase the number of shares of
Common Stock authorized for issuance under the Stock Option Plan from 2,625,000
to 7,125,000. Pursuant to the Stock Option Plan, options may be granted at
prices determined by the Board of Directors but not less than fair market value
on the date of grant.
The following table summarizes option information, including options
granted under both the 1992 and prior plans:
1998 1997 1996
-----------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 3,218,762 $ 29.52 2,491,222 $ 26.03 1,521,339 $ 23.62
Granted 1,036,975 47.08 1,154,354 34.68 1,100,813 29.02
Exercised 106,938 23.57 280,498 20.87 64,216 19.71
Canceled 219,466 30.56 146,316 27.42 66,714 26.65
- -------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 3,929,333 $ 34.25 3,218,762 $ 29.52 2,491,222 $ 26.03
- -------------------------------------------------------------------------------------------------------------------
Options exercisable at year end 640,161 $ 23.72 558,210 $ 22.66 527,832 $ 20.31
- -------------------------------------------------------------------------------------------------------------------
Options available for future grant 3,073,916 3,892,439 401,208
- -------------------------------------------------------------------------------------------------------------------
The fair value of the options granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for 1998 and 1997, respectively: (a) dividend yield of 1%, (b)
expected volatility of 20%, (c) risk free interest rate of 5.79% and 6.70%, and
(d) expected life of 7.5 years. The following table summarizes information about
stock options outstanding at December 31, 1998 and 1997:
32
60
Options Outstanding Options Exercisable
---------------------------------------------------
Weighted Weighted
Range of Remaining Weighted Average
Exercise Number Contractual Average Number Exercise
Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------------------
December 31, 1998
$14 to $27 731,983 4.4 $23.25 554,759 $22.67
27 to 32 1,034,346 7.1 29.12 84,502 30.35
32 to 48 2,163,004 8.8 40.43 900 47.38
- --------------------------------------------------------------------------------------------
Total 3,929,333 7.6 $34.25 640,161 $23.72
- --------------------------------------------------------------------------------------------
December 31, 1997
$14 to $27 917,795 5.4 $23.42 523,214 $22.14
27 to 32 1,129,363 8.2 29.11 34,996 30.48
32 to 42 1,171,604 9.3 34.68 0 0
- --------------------------------------------------------------------------------------------
Total 3,218,762 7.8 $29.52 558,210 $22.66
- --------------------------------------------------------------------------------------------
Had compensation costs for the Company's 1998 and 1997 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:
Net Income Basic Earnings per Share Diluted Earnings per Share
---------------------- ------------------------ --------------------------
As Reported Proforma As Reported Proforma As Reported Proforma
- -----------------------------------------------------------------------------------------------------------------------
1998
Before Extraordinary Item $51,212 $48,078 $1.82 $1.71 $1.76 $1.65
Attributable to Common Shareholders $46,195 $43,061 $1.64 $1.53 $1.59 $1.48
- -----------------------------------------------------------------------------------------------------------------------
1997
Attributable to Common Shareholders $91,219 $88,966 $3.09 $3.02 $3.02 $2.95
- -----------------------------------------------------------------------------------------------------------------------
(10) COMPENSATION PLAN
- --------------------------------------------------------------------------------
The Company and its subsidiaries have profit sharing retirement plans in which
substantially all employees participate. The plans provide for minimum annual
contributions of 5% of eligible compensation; contributions above the minimum
are discretionary and vary with each participating subsidiary's profitability.
Employees become eligible to participate in the Retirement Plans on the first
day of the month following the first full three months in which they are
employed. Profit sharing expense amounted to $8,524,000, $8,402,000 and
$7,370,000 for 1998, 1997 and 1996, respectively.
In May 1997, the Common Stockholders approved the Long-Term Incentive
Compensation Plan ("LTIP"). The LTIP provides for incentive compensation to key
executives, is based on long-term corporate performance, and is based upon
criteria established by the Compensation and Stock Option Committee of the Board
of Directors (the Committee). Key employees are awarded participation units
("units") as determined by such Committee. The Units vest and become exercisable
over a maximum term of five years from the date of their award. The units are
payable in cash or up to 50% in shares of Common Stock. In 1997, 266,250 units
were awarded which amounted to an expense of $1,705,000. There was no LTIP
expense in 1998.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES 33
61
(11) INVESTMENTS
- --------------------------------------------------------------------------------
At December 31, 1998 and 1997, there were no investments, other than investments
in United States government securities, which exceeded 10% of stockholders'
equity. At December 31, 1998 and 1997, investments were as follows:
(Dollars in thousands)
Gross Gross
unrealized unrealized Fair Carrying
Type of investment Cost(a) gains losses value value
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 1998
Fixed maturity securities held to maturity:
State and municipal $ 60,492 $ 6,528 $ (72) $ 66,948 $ 60,492
Corporate 13,353 772 -- 14,125 13,353
Mortgage-backed securities 96,305 6,091 -- 102,396 96,305
- -----------------------------------------------------------------------------------------------------------------------------
Total fixed maturity securities held to maturity 170,150 13,391 (72) 183,469 170,150
- -----------------------------------------------------------------------------------------------------------------------------
Fixed maturity securities available for sale:
United States Government(b) 293,761 9,797 (170) 303,388 303,388
State and municipal 1,117,691 53,387 (959) 1,170,119 1,170,119
Corporate 411,234 15,047 (6,106) 420,175 420,175
Mortgage-backed securities 401,558 12,278 (899) 412,937 412,937
- -----------------------------------------------------------------------------------------------------------------------------
Total fixed maturity securities available for sale 2,224,244 90,509 (8,134) 2,306,619 2,306,619
- -----------------------------------------------------------------------------------------------------------------------------
Common stocks 8,150 4,712 (341) 12,521 12,521
Preferred stocks 51,740 1,750 (142) 53,348 53,348
- -----------------------------------------------------------------------------------------------------------------------------
Total equity securities available for sale 59,890 6,462 (483) 65,869 65,869
- -----------------------------------------------------------------------------------------------------------------------------
Trading account 373,164 23,371 (7,225) 389,310 389,310
- -----------------------------------------------------------------------------------------------------------------------------
Invested cash(c) 370,155 -- -- 370,155 370,155
- -----------------------------------------------------------------------------------------------------------------------------
Total investments $3,197,603 $ 133,733 $ (15,914) $3,315,422 $3,302,103
=============================================================================================================================
December 31, 1997
Fixed maturity securities held to maturity:
State and municipal $ 78,879 $ 5,735 $ (48) $ 84,566 $ 78,879
Corporate 13,831 476 -- 14,307 13,831
Mortgage-backed securities 89,462 6,584 -- 96,046 89,462
- -----------------------------------------------------------------------------------------------------------------------------
Total fixed maturity securities held to maturity 182,172 12,795 (48) 194,919 182,172
- -----------------------------------------------------------------------------------------------------------------------------
Fixed maturity securities available for sale:
United States Government(b) 413,722 10,224 (53) 423,893 423,893
State and municipal 957,329 43,891 (405) 1,000,815 1,000,815
Corporate 450,986 16,521 (601) 466,906 466,906
Mortgage-backed securities 418,864 12,960 (467) 431,357 431,357
- -----------------------------------------------------------------------------------------------------------------------------
Total fixed maturity securities available for sale 2,240,901 83,596 (1,526) 2,322,971 2,322,971
- -----------------------------------------------------------------------------------------------------------------------------
Common stocks 16,512 8,524 (8) 25,028 25,028
Preferred stocks 59,622 1,639 (46) 61,215 61,215
- -----------------------------------------------------------------------------------------------------------------------------
Total equity securities available for sale 76,134 10,163 (54) 86,243 86,243
- -----------------------------------------------------------------------------------------------------------------------------
Trading account 301,136 15,922 (5,089) 311,969 311,969
Invested cash(c) 259,178 -- -- 259,178 259,178
- -----------------------------------------------------------------------------------------------------------------------------
Total investments $3,059,521 $ 122,476 $ (6,717) $3,175,280 $3,162,533
=============================================================================================================================
(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.
34
62
The amortized cost and fair value of fixed maturity securities at December 31,
1998, 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) 1998
- ---------------------------------------------------------------------------------------------------------
Cost Fair value
- ---------------------------------------------------------------------------------------------------------
Due in one year or less $ 42,862 $ 43,213
Due after one year through five years 389,555 397,394
Due after five years through ten years 576,917 608,750
Due after ten years 887,197 925,398
Mortgage-backed securities 497,863 515,333
- ---------------------------------------------------------------------------------------------------------
Total $2,394,394 $2,490,088
=========================================================================================================
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) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
Realized gains (losses):
Fixed maturity securities(a) $ 23,004 $ (3,308) $ 1,850
Equity securities 3,506 16,537 5,285
Net change in provision for decline in value(b):
Fixed maturity securities -- 103 (152)
Equity securities -- 581 --
Other (1,110) (727) 454
- ---------------------------------------------------------------------------------------------------------
25,400 13,186 7,437
- ---------------------------------------------------------------------------------------------------------
Change in difference between fair value and cost of investments:
Fixed maturity securities 877 58,476 (36,232)
Equity securities (4,130) (5,356) 6,386
- ---------------------------------------------------------------------------------------------------------
(3,253) 53,120 (29,846)
- ---------------------------------------------------------------------------------------------------------
Total $ 22,147 $ 66,306 $ (22,409)
=========================================================================================================
(a) During 1998, 1997 and 1996, gross gains of $26,054,000, $7,988,000 and
$5,904,000, respectively, and gross losses of $3,050,000, $11,296,000
and $4,054,000, respectively, were realized.
(b) The provision for decline in value of investments is $2,800,000,
$2,800,000 and $3,485,000 as of December 31, 1998, 1997 and 1996,
respectively.
Investment income consists of the following:
(Dollars in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
Investment income earned on:
Fixed maturity securities $ 156,961 $ 159,199 $ 146,431
Invested cash 9,771 10,829 6,698
Equity securities 4,670 5,139 4,039
Trading account(a) 32,997 28,831 12,331
Other 1,666 1,814 1,548
- ---------------------------------------------------------------------------------------------------------
Gross investment income 206,065 205,812 171,047
Interest on funds held under reinsurance treaties (3,645) (6,224) (6,557)
- ---------------------------------------------------------------------------------------------------------
Net investment income $ 202,420 $ 199,588 $ 164,490
=========================================================================================================
(a) The primary focus of the trading account is merger arbitrage. Merger
arbitrage is the business of investing in the securities of publicly
held companies which are the targets in announced tender offers and
mergers. Merger arbitrage differs from other types of investments in
its focus on transactions and events believed likely to bring about a
change in value over a relatively short time period (usually four
months or less). The Company believes that this makes merger arbitrage
investments less vulnerable to changes in general financial market
conditions. Potential changes in market conditions are also mitigated
by the implementation of hedging strategies, including short sales.
The arbitrage positions are generally hedged against market
declines by purchasing put options, selling call options or entering
into swap contracts. Therefore, just as long portfolio positions may
incur losses during market declines, hedge positions may also incur
losses during market advances. As of December 31, 1998, the notional
amount of long option contracts outstanding is $19,918,000 and short
option contracts outstanding is $35,434,000.
Investment income earned from net trading account activity
includes unrealized trading gains of $1,291,000, $13,737,000, and
$2,013,000 for 1998, 1997 and 1996, respectively.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES 35
63
(12) STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
COMMON EQUITY The Company has calculated per share data in accordance with FAS
128. Treasury shares have been excluded from average outstanding shares from the
date of acquisition. The weighted average number of shares used in the
computation of basic earnings per share was 28,194,000, 29,503,000 and
29,792,000 for 1998, 1997 and 1996, respectively. The weighted average number of
shares used in the computations of diluted earnings per share was 29,115,000,
30,185,000 and 30,130,000 for 1998, 1997 and 1996, respectively. The difference
in calculating basic and diluted earnings per share is attributable entirely to
the dilutive effect of stock-based compensation plans.
Changes in shares of Common Stock outstanding, net of treasury shares,
are as follows:
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Balance, beginning of year 29,568 29,454 30,252
Shares issued 108 114 65
Shares repurchased (3,172) -- (863)
- --------------------------------------------------------------------------------
Balance, end of year 26,504 29,568 29,454
================================================================================
PREFERRED EQUITY As of December 31, 1996, 930,807 shares of 7 3/8% Series A
Cumulative Redeemable Preferred Stock were issued and outstanding. During
January 1997, the Company purchased 183,080 shares of Series A Preferred Stock
for an aggregate cost of $28,506,000. In the second and third quarters of 1997,
93,775 shares of the Series A Preferred Stock were purchased by subsidiaries of
the Company. On January 25, 1999, all remaining outstanding shares of the Series
A Preferred Stock were retired for $150 per share.
(13) FEDERAL INCOME TAXES
- --------------------------------------------------------------------------------
Federal income tax expense (before the extraordinary item) consists of:
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Current expense $ 30,283 $ 21,999 $ 26,096
Deferred expense (benefit) (24,818) 8,669 (994)
- --------------------------------------------------------------------------------
Total expense $ 5,465 $ 30,668 $ 25,102
- --------------------------------------------------------------------------------
A reconciliation of Federal income tax expense and the amounts computed by
applying the Federal income tax rate of 35% to pre-tax income is as follows:
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Computed "expected" tax
expense $ 21,973 $ 45,234 $ 40,267
Tax-exempt investment
income (18,412) (15,432) (15,471)
Other, net 1,904 866 306
- --------------------------------------------------------------------------------
Total expense $ 5,465 $ 30,668 $ 25,102
================================================================================
At December 31, 1998 and 1997, 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) 1998 1997
- --------------------------------------------------------------------------------
DEFERRED TAX ASSET
Loss reserve discounting $ 62,288 $ 49,638
Other 11,389 3,912
- --------------------------------------------------------------------------------
Gross deferred tax asset 73,677 53,550
Less: valuation allowance (7,000) (7,000)
- --------------------------------------------------------------------------------
Deferred tax asset 66,677 46,550
================================================================================
DEFERRED TAX LIABILITY
Amortization of intangibles 11,460 12,025
Expense recognition differences 19,872 17,044
Realized investment gains 2,960 6,163
Deferred taxes on unrealized
investment gains 31,070 32,261
Depreciation 5,900 5,437
Other 2,292 6,507
- --------------------------------------------------------------------------------
Deferred tax liability 73,554 79,437
- --------------------------------------------------------------------------------
Net deferred tax liability $ 6,877 $ 32,887
================================================================================
Federal income tax expense applicable to realized investment gains was
$8,890,000, $4,615,000 and $2,603,000 in 1998, 1997 and 1996, respectively. The
Company had a current income tax receivable of $10,532,000 and $5,869,000 at
December 31, 1998 and 1997, respectively. The Company's tax returns through
December 31, 1994 have been examined by the Internal Revenue Service.
The realization of the deferred tax asset is dependent upon the
Company's ability to generate sufficient taxable income in future periods. Based
on historical results and the prospects for current operations, management
anticipates that it is more likely than not that future taxable income will be
sufficient for the realization of this net asset.
36
64
(14) 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) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
Net reserves at beginning of year $ 1,433,011 $ 1,333,122 $ 1,209,250
- ----------------------------------------------------------------------------------------------------------
Net reserves of companies acquired 2,189 4,984 --
Net provision for losses and loss expenses:
Claims occurring during the current year 948,580 747,977 675,674
Decrease in estimates for claims occurring in prior years (42,929) (21,313) (15,219)
Amortization of discount 9,111 7,760 8,705
- ----------------------------------------------------------------------------------------------------------
914,762 734,424 669,160
- ----------------------------------------------------------------------------------------------------------
Net payments for claims
Current year 395,437 315,370 280,565
Prior years 365,178 324,149 264,723
- ----------------------------------------------------------------------------------------------------------
760,615 639,519 545,288
- ----------------------------------------------------------------------------------------------------------
Net reserves at end of year 1,589,347 1,433,011 1,333,122
Ceded reserves at the end of year 537,219 476,677 449,581
- ----------------------------------------------------------------------------------------------------------
Gross reserves at the end of year $ 2,126,566 $ 1,909,688 $ 1,782,703
==========================================================================================================
Due to the nature of Excess Workers Compensation ("EWC") business and the long
period of time over which losses are paid in this line of business, the Company
discounts the liability for losses and loss expenses established for the EWC
line of business. Discounting liabilities for losses and loss expenses gives
recognition to the time value of money. Discounting is intended to appropriately
match losses and loss expenses to income earned on investment securities
supporting the liabilities. The expected losses and loss expense payout pattern
subject to discounting was derived from the Company's loss payout experience and
is supplemented with data compiled from insurance companies writing workers'
compensation on an excess-of-loss basis. The expected payout pattern has a very
long duration because it reflects the nature of losses generally which penetrate
self-insured retention limits contained in EWC policies. The Company has limited
the estimated payout duration to 30 years in order to introduce an additional
level of conservatism into the discounting process. The liabilities for losses
and loss expenses have been discounted using "risk-free" discount rates
determined by reference to the U.S. Treasury yield curve weighted for the EWC
premium volume to reflect the seasonality of the anticipated duration of losses
associated with such coverages. The weighted average discount rate for accident
years 1998, 1997, 1996 and 1995 and prior is 5.90%, 5.98%, 5.90% and 5.80%,
respectively. The aggregate net discount, after reflecting the effects of ceded
reinsurance, is $186,964,000, $189,600,000, and $172,415,000 at December 31,
1998, 1997 and 1996, respectively. For statutory purposes, the Company uses a
discount rate of 3.0% as permitted by the Department of Insurance of the State
of Ohio.
To date, known pollution and environmental claims at the insurance company
subsidiaries have not had a material impact on the Company's operations.
Environmental claims have not materially impacted the Company because its
subsidiaries generally did not insure larger industrial companies which are
subject to significant environmental exposures.
The Company's net reserves for losses and loss adjustment expenses relating
to pollution and environmental claims were $33.4 million and $33.1 million at
December 31, 1998 and 1997, respectively. The Company's gross reserves for
losses and loss adjustment expenses relating to pollution and environmental
claims were $69.3 million and $68.4 million at December 31, 1998 and 1997,
respectively. Net incurred losses and loss expenses for reported pollution and
environmental claims were approximately $2.2 million, $.1 million and $6.9
million in 1998, 1997 and 1996, respectively. Net paid losses and loss expenses
have 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 effect of
significant unresolved legal matters, including coverage issues as well as the
cost of litigating the legal issues. Additionally, the determination of ultimate
damages and the final allocation of such damages to financially responsible
parties are highly uncertain.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES 37
65
(15) INDUSTRY SEGMENTS
- --------------------------------------------------------------------------------
The Company's operations are presently conducted through five basic segments:
regional property casualty insurance; reinsurance; specialty lines of insurance;
alternative markets operations; and international. The regional property
casualty insurance segment writes standard commercial and personal lines
insurance for such risks as automobiles, homes and business. The Company's
reinsurance segment specializes in underwriting property, casualty and surety
reinsurance on both a treaty and facultative basis. The specialty lines of
insurance consist primarily of excess and surplus lines, commercial
transportation, professional liability, directors and officers liability and
surety. The company's alternative markets segment specializes in insuring,
reinsuring, and administering self-insurance programs and other alternative risk
transfer mechanisms for public entities, private employers and associations.
Finally, the international operations represent the Company's joint venture with
Northwestern Mutual Life International, (65% owned by the Company), which writes
property and casualty, as well as life insurance, internationally. For the years
ended December 31, 1998 and 1997, the joint venture wrote life premiums of $8.0
million and $.6 million, respectively.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. Income tax expense (benefits)
were calculated in accordance with the Company's tax sharing agreements, which
provide for the recognition of tax loss carryforwards only to the extent of
taxes previously paid. summary financial information about the Company's
operating segments is presented in the following table. Income before income
taxes by segment consists of revenues less expenses related to the respective
segment's operations. These amounts include realized gains (losses) where
applicable. Intersegment revenues consist primarily of dividends, interest on
intercompany debt and fees paid by subsidiaries for portfolio management and
other services to the Company. Identifiable assets by segment are those assets
used in the operation of each segment.
Income
Revenues (Loss)
------------------------------------------------------------ before Income Tax
Investment Unaffiliated Inter- income Expense
(Dollars in thousands) Income Customers Segment Total taxes (Benefits)
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1998:
Regional $ 53,942 $ 680,505 $ 2,014 $ 682,519 $ (24,524) $ 3,323
Reinsurance 47,643 296,100 1,044 297,144 33,858 6,911
Specialty 59,345 309,047 2,908 311,955 85,889 24,349
Alternative Markets 34,667 205,024 911 205,935 36,501 9,505
International 5,469 80,287 -- 80,287 (7,017) 349
Corporate and other 7,927 11,554 81,983 93,537 9,288 5,465
Adjustments and eliminations (6,573) -- (88,860) (88,860) (71,214) (44,437)
- ----------------------------------------------------------------------------------------------------------------------------------
Consolidated $ 202,420 $ 1,582,517 -- $ 1,582,517 $ 62,781 $ 5,465
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1997:
Regional $ 51,920 $ 634,468 $ 674 $ 635,142 $ 47,624 $ 14,833
Reinsurance 45,520 241,204 882 242,086 42,193 10,641
Specialty 60,162 281,630 2,691 284,321 68,088 18,529
Alternative Markets 34,390 183,904 829 184,733 34,733 10,257
International 3,623 45,360 -- 45,360 (3,566) (181)
Corporate and other 10,565 13,744 48,351 62,095 (19,815) 30,849
Adjustments and eliminations (6,592) -- (53,427) (53,427) (40,016) (54,260)
- ----------------------------------------------------------------------------------------------------------------------------------
Consolidated $ 199,588 $ 1,400,310 -- $ 1,400,310 $ 129,241 $ 30,668
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1996:
Regional $ 43,125 $ 528,369 $ 1,110 $ 529,479 $ 35,169 $ 9,960
Reinsurance 37,542 243,848 218 244,066 32,756 7,798
Specialty 50,130 245,545 1,586 247,131 52,113 13,551
Alternative Markets 29,122 171,809 218 172,027 32,278 11,427
International 1,426 26,435 -- 26,435 (1,283) --
Corporate and other 6,922 9,160 78,179 87,339 25,311 25,102
Adjustments and eliminations (3,777) -- (81,311) (81,311) (61,295) (42,736)
- ----------------------------------------------------------------------------------------------------------------------------------
Consolidated $ 164,490 $ 1,225,166 $ -- $ 1,225,166 $ 115,049 $ 25,102
- ----------------------------------------------------------------------------------------------------------------------------------
38
66
Interest expense for the reinsurance segment was $2,327,000, $2,327,000 and
$2,602,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Additionally, corporate interest expense (net of intercompany amounts) was
$46,492,000, $46,542,000 and $29,361,000 for the corresponding periods.
Identifiable assets by segment are as follows:
December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
Regional $ 1,370,849 $ 1,264,962 $ 1,099,602
Reinsurance 996,186 863,784 737,160
Specialty 1,502,366 1,403,068 1,229,968
Alternative Markets 863,578 749,724 660,283
International 151,832 119,792 60,452
Corporate and other 1,545,744 1,602,907 1,599,177
Elimination (1,447,124) (1,459,919) (1,249,669)
- --------------------------------------------------------------------------------
Consolidated $ 4,983,431 $ 4,544,318 $ 4,136,973
================================================================================
(16) 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, 1998 and 1997:
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Carrying Carrying
Amount Fair value Amount Fair value
- --------------------------------------------------------------------------------
Investments $3,302,103 $3,315,422 $3,162,533 $3,175,280
Long-term debt 394,444 435,702 390,415 434,035
Capital Trust Securities 207,988 206,464 207,944 213,217
- --------------------------------------------------------------------------------
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.
(17) 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
1999, the maximum amount of dividends which can be paid without such approval is
approximately $117,174,000.
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) 1998 1997 1996
- --------------------------------------------------------------------------------
Net income $ 67,014 $121,300 $ 84,249
- --------------------------------------------------------------------------------
Policyholders' surplus $941,853 $971,749 $881,380
- --------------------------------------------------------------------------------
The significant variances between statutory accounting practices and GAAP are:
For statutory purposes, bonds are carried at amortized cost, acquisition costs
are charged to operations as incurred, deferred federal income taxes are not
provided for temporary differences between book and tax assets and liabilities,
EWC reserves are discounted at a 3.0% rate, and certain assets designated as
"non-admitted assets" are charged against surplus.
At December 31, 1998 and 1997, bonds with a fair value of $185,206,000
and $160,369,000 were on deposit with various state insurance departments as
required by state laws.
The National Association of Insurance Commissioners ("NAIC") has
risk-based capital ("RBC") requirements that require insurance companies to
calculate and report information under a risk-based formula which measures
statutory capital and surplus needs based on a regulatory definition of risk in
a company's mix of products and its balance sheet. RBC did not affect the
operations of the Company's insurance subsidiaries since all of its subsidiaries
have an RBC amount above the authorized control level RBC, as defined by the
NAIC.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES 39
67
(18) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
The following is a summary of quarterly financial data:
(Dollars in thousands except per share data)
Three months ended
-------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1997 1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues $ 383,275 $ 329,822 $ 396,910 $ 335,926 $ 394,425 $ 355,650 $ 407,907 $ 378,912
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before
preferred dividends $ 25,673 $ 28,544 $ 22,743 $ 20,633 $ 12,261 $ 25,573 $ (1,917) $ 24,297
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before
extraordinary loss $ 23,786 $ 26,427 $ 20,856 $ 18,625 $ 10,374 $ 23,721 $ (3,804) $ 22,446
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable
to common stockholders $ 21,351 $ 26,427 $ 18,274 $ 18,625 $ 10,374 $ 23,721 $ (3,804) $ 22,446
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic
Before extraordinary (loss) $ .81 $ .90 $ .73 $ .63 $ .37 $ .80 $ (.14) .76
Net Income (loss) $ .73 $ .90 $ .64 $ .63 $ .37 $ .80 $ (.14) .76
Diluted
Before extraordinary (loss $ .78 $ .88 $ .70 $ .62 $ .36 $ .78 $ (.14) .74
Net Income (loss) $ .71 $ .88 $ .61 $ .62 $ .36 $ .78 $ (.14) .74
- ------------------------------------------------------------------------------------------------------------------------------------
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, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, comprehensive income and cash
flows for each of the years in the three-year period ended December 31, 1998.
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, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
New York, New York KPMG LLP
February 25, 1999
40