-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PD82w8MirA/omX4NPBJimd96d7k6cCmRgRLs5pj1ei/ItixPHh4Wvq3ahSWdqnT4 l0BkDnKNyBfNNDgiZ28m5Q== 0000914039-97-000076.txt : 19970326 0000914039-97-000076.hdr.sgml : 19970326 ACCESSION NUMBER: 0000914039-97-000076 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BERKLEY W R CORP CENTRAL INDEX KEY: 0000011544 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 221867895 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-07849 FILM NUMBER: 97561991 BUSINESS ADDRESS: STREET 1: 165 MASON ST STREET 2: P O BOX 2518 CITY: GREENWICH STATE: CT ZIP: 06836-2518 BUSINESS PHONE: 2036293000 MAIL ADDRESS: STREET 1: 165 MASON ST STREET 2: PO BOX 2518 CITY: GREENWICH STATE: CT ZIP: 06836-2518 10-K 1 FORM 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 0-7849 ------------------------ W. R. BERKLEY CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 22-1867895 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 165 MASON STREET, P.O. BOX 2518, GREENWICH, CT 06836-2518 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
------------------------ REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 629-3000 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - -------------------------------------------------------------------------------------------- None None
Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $.20 per share Series A Cumulative Redeemable Preferred Stock, par value $.10 per share ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Aggregate market value of voting stock held by non-affiliates of the registrant based on the closing price of such stock as of March 4, 1997: $921,684,118. Number of shares of common stock, $.20 par value, outstanding as of March 4, 1997: 19,641,099 DOCUMENTS INCORPORATED BY REFERENCE The registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1996 (incorporated by reference under Part III). Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _____ ================================================================================ 2 W. R. BERKLEY CORPORATION ANNUAL REPORT ON FORM 10-K December 31, 1996 PART I Page ITEM 1. BUSINESS 3 ITEM 2. PROPERTIES 20 ITEM 3. LEGAL PROCEEDINGS 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 21 ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 1996 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 30 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 55 ITEM 11. EXECUTIVE COMPENSATION 57 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 57 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 58 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 59 2 3 PART I ITEM 1. BUSINESS General Description of the Company's Business W. R. Berkley Corporation (the "Company"), a Delaware corporation, is an insurance holding company, which through its subsidiaries, presently operates in all segments of the property casualty insurance business: regional property casualty insurance; reinsurance (conducted through Signet Star Holdings, Inc.); specialty lines of insurance (including excess and surplus lines and commercial transportation); alternative markets (including the management of alternative insurance market mechanisms); and international (conducted through Berkley International, LLC). The Company was founded on the concept that a group of autonomous regional and specialty insurance entities could compete effectively in selected markets within a very large industry. Decentralized control allows each subsidiary to respond to local or specialty market conditions while capitalizing on the effectiveness of centralized investment and reinsurance management, and actuarial, financial and legal staff support. The Company's regional insurance operations are conducted primarily in the midwest, southern and northeast sections of the United States. Reinsurance, specialty insurance and alternative markets operations are conducted nationwide. Presently, international operations are conducted primarily in Argentina. Net premiums written, as reported on a generally accepted accounting principles ("GAAP") basis, by the Company's five major insurance industry segments for the five years ended December 31, 1996 were as follows:
Year Ended December 31, ---------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Amounts in thousands) Net premiums written: Regional insurance operations (1) $ 531,147 $ 471,716 $ 386,530 $ 301,890 $ 257,625 Reinsurance operations (2) 218,047 195,988 176,699 84,726 -- Specialty insurance operations (2) 202,491 160,847 134,715 146,101 160,053 Alternative markets operations (2) 75,644 25,998 19,989 4,929 -- International Operations 25,182 5,872 -- -- -- ------------ ---------- ---------- ---------- ---------- Total net premiums written $ 1,052,511 $ 860,421 $ 717,933 $ 537,646 $ 417,678 ============ ========== ========== ========== ========== Percentage of net premiums written: Regional insurance operations (1) 50.5% 54.8% 53.8% 56.2% 61.7% Reinsurance operations (2) 20.7 22.8 24.6 15.7 -- Specialty insurance operations (2) 19.2 18.7 18.8 27.2 38.3 Alternative markets operations (2) 7.2 3.0 2.8 .9 -- International Operations 2.4 .7 -- -- -- ------------ ---------- ---------- ---------- ---------- Total 100.0% 100.0% 100.0% 100.0% 100.0% ============ ========== ========== ========== ==========
(1) For the year ended December 31, 1995 the results of the Regional operations have been restated to reflect the international operations as a separate segment. (2) Premiums written by the Company's Reinsurance operations prior to July 1, 1993, including the alternative markets division, are included in Specialty insurance operations (see: "Other information about the Company's business"). 3 4 The following sections briefly describe the Company's insurance segments and subsidiaries. The statutory information contained herein is derived from that reported to state regulatory authorities in accordance with statutory accounting practices ("SAP"). The amount of statutory net premiums shown for the subsidiaries exclude the effects of intercompany reinsurance. In connection with the acquisition of Midwest Employers Casualty Company ("Midwest") in November 1995, the Company established the alternative markets segment to reflect the markets served by each of its business segments. The alternative markets segment consists of Midwest, Signet Star Holding's alternative markets division and the Company's insurance services units which manage alternative market mechanisms. The descriptions contain each significant insurance subsidiary's rating by A.M. Best and Company, Inc. ("A.M. Best"). A.M. Best's Ratings are based upon factors of concern to policyholders, insurance agents and brokers and are not directed toward the protection of investors. A.M. Best states: "Best's Ratings reflect [its] opinion as to the relative financial strength and performance of each insurer in comparison with others, based on [its] analysis of the information provided to [it]. These Ratings are not a warranty of an insurer's current or future ability to meet its contractual obligations." REGIONAL INSURANCE OPERATIONS The Company's regional property casualty subsidiaries write standard commercial and personal lines insurance for such risks as automobiles, homes and businesses. American West Insurance Company ("American West"), Continental Western Insurance Company ("Continental Western"), Great River Insurance Company ("Great River"), Tri-State Insurance Company of Minnesota ("Tri-State"), Union Insurance Company ("Union") and Union Standard Insurance Company ("Union Standard") obtain their business primarily in the smaller communities of the midwest and southwest through over 2,000 independent insurance agencies, which represent them on a non-exclusive basis and are compensated on a commission basis. Firemen's Insurance Company of Washington D.C. ("Firemen's") and Berkley Insurance Company of the Carolinas ("BICC") primarily sell their policies through agents in the District of Columbia, and the States of Maryland, North Carolina, Pennsylvania and Virginia. Certain of Firemen's commercial lines of business are marketed principally through brokers in the New York metropolitan area. Acadia Insurance Company ("Acadia") currently operates in the States of Maine, New Hampshire and Vermont, and sells its personal and commercial coverages through independent agencies. In 1996, the Company formed Berkley Regional Insurance Company ("BRIC"). The Company contributed to BRIC all of the capital stock of the regional insurance companies. In 1997 BRIC will reinsure varying portions of the business written by the regional operations. In addition, BRIC is expanding its licenses so that it will be eligible to write personal and commercial lines on a direct basis nationally. BRIC's statutory surplus as of December 31, 1996 was $281,704,000. Acadia Insurance Company Acadia was organized by the Company and incorporated in April 1992. It writes multiple line property and casualty coverages in the States of Maine, New Hampshire and Vermont. Acadia is rated A+ by A.M. Best. Acadia's statutory surplus and statutory net premiums written as of December 31, 1996 and for the year then ended were $42,782,000 and $105,239,000, respectively. American West Insurance Company American West is a successor to a company that was organized in 1903 as a mutual insurance company and converted to a stock company in June 1986. Its business consists primarily of personal lines in the States of Minnesota, Montana, Wisconsin and South Dakota. American West is rated A- by A.M. Best. American West's statutory surplus and statutory net premiums written as of December 31, 1996 and for the year then ended were $7,958,000 and $15,474,000, respectively. In 1997 American West will be managed by Tri-State, its immediate parent. 4 5 Berkley Insurance Company of the Carolinas In December 1995, the Company organized BICC, a North Carolina domiciled company. It writes personal and commercial lines in North Carolina and is expanding to surrounding states. BICC is rated A+ by A.M. Best. BICC's statutory surplus and statutory net premiums written as of December 31, 1996 and for the year then ended were $6,339,000 and $7,619,000, respectively. Continental Western Insurance Company Continental Western was organized in 1907. It writes a diverse commercial lines book of business as well as personal lines principally in the States of Iowa, Nebraska, Kansas, Illinois, Missouri, Wisconsin and Montana. Continental Western is rated A+ by A.M. Best. Continental Western's statutory surplus and statutory net premiums written as of December 31, 1996 and for the year then ended were $82,286,000 and $143,551,000, respectively. Firemen's Insurance Company of Washington, D.C. Firemen's was incorporated by an Act of Congress in 1836. Firemen's writes commercial business consisting primarily of multiple dwelling coverages principally in the State of New York through operations conducted by Clermont Specialty Managers, Ltd., an underwriting manager which is owned by the Company. In addition, it insures homeowners, other personal lines and commercial risks in the District of Columbia, and in the States of Maryland, North Carolina and Virginia. In September 1993, Firemen's established Chesapeake Insurance Division in order to expand its operations in the State of Virginia. In 1997 Firemen's spun off this division into the operations of Chesapeake Bay Property and Casualty Insurance Company, which is owned by Acadia. In March 1995, Firemen's established the Presque Isle Insurance Division in order to expand its operations into the State of Pennsylvania. Firemen's is rated A+ by A.M. Best. Firemen's statutory surplus and statutory net premiums written as of December 31, 1996 and for the year then ended were $31,516,000 and $65,590,000, respectively. Great River Insurance Company In December 1993, the Company organized Great River, a Mississippi domiciled company. It writes personal and commercial lines in Mississippi and Tennessee and is expanding to surrounding states. Great River is rated A+ by A.M. Best. Great River's statutory surplus and statutory net premiums written as of December 31, 1996 and for the year then ended were $12,675,000 and $34,331,000, respectively. Tri-State Insurance Company of Minnesota Tri-State was originally organized in 1902 as a mutual insurance company. It writes various commercial lines (specializing in grain elevator coverages), as well as personal lines primarily, in the States of Minnesota, Iowa, North and South Dakota, Nebraska, Wisconsin and Illinois. Tri-State is rated A+ by A.M. Best. Tri-State's statutory surplus and statutory net premiums written as of December 31, 1996 and for the year then ended were $36,343,000 and $53,569,000, respectively. Union Insurance Company Union was organized originally in 1886 as a mutual insurance company. Union's business consists of personal lines as well as commercial lines insurance concentrated in the States of Nebraska, Kansas, Colorado and South Dakota. Union is rated A by A.M. Best. Union's statutory surplus and statutory net premiums written as of December 31, 1996 and for the year then ended were $21,917,000 and $49,755,000, respectively. 5 6 Union Standard Insurance Company Union Standard is a successor to a company that was organized in 1970. Union Standard writes personal lines and commercial lines of insurance for small businesses in the States of Texas, Oklahoma, Arkansas and Colorado. Union Standard is rated A by A.M. Best. Union Standard's statutory surplus and statutory net premiums written as of December 31, 1996 and for the year then ended were $32,832,000 and $58,442,000, respectively. Regional operations: Business The following table sets forth the percentages of direct premiums written, by line, by the Company's regional insurance operations (1):
1996 1995 1994 1993 1992 ----- ----- ----- ----- ----- Commercial Multi-Peril 20.9% 21.4% 22.0% 19.6% 19.0% Workers' Compensation 20.1 20.8 18.7 16.9 13.7 Automobile: Commercial 17.3 15.5 16.4 17.4 17.1 Personal 16.7 17.5 17.6 19.4 21.8 Homeowners 7.9 8.9 9.2 9.8 10.7 General Liability 6.4 6.5 6.6 6.9 7.1 Fire and Allied Lines 4.7 4.5 4.8 5.5 5.9 Inland Marine 2.8 2.6 2.6 2.6 2.8 Other 3.2 2.3 2.1 1.9 1.9 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
The following table sets forth the percentages of direct premiums written, by state, by the Company's regional insurance operations (1):
1996 1995 1994 1993 1992 ----- ----- ----- ----- ----- Maine 10.7% 10.7% 10.5% 8.3% .9% Iowa 8.4 9.3 11.1 13.8 15.7 Nebraska 8.1 9.1 11.0 13.6 16.1 Texas 7.5 7.9 9.2 10.0 9.7 Mississippi 6.0 5.4 2.9 -- -- New Hampshire 5.9 6.0 4.7 .9 -- South Dakota 5.4 6.7 4.9 5.7 6.3 Minnesota 5.4 5.5 6.0 6.6 7.6 Kansas 4.8 4.8 5.2 5.7 6.4 Virginia 3.9 3.0 2.1 .6 .3 Colorado 3.8 4.0 4.5 5.1 5.5 Missouri 3.6 3.7 3.8 3.7 4.0 Illinois 3.0 3.5 3.8 4.2 5.0 Vermont 3.0 2.4 1.1 -- -- Wisconsin 2.9 3.5 3.6 4.4 5.0 New York 2.8 2.9 2.6 3.0 3.4 Pennsylvania 2.2 -- -- -- -- Arkansas 1.8 2.1 2.8 3.1 3.1 District of Columbia 1.6 1.9 2.3 2.4 2.4 North Dakota 1.5 2.6 3.2 3.9 4.3 North Carolina 1.5 .1 -- -- -- Montana 1.4 1.4 1.4 1.6 2.0 Oklahoma 1.3 1.4 1.5 1.5 1.1 Other 3.5 2.1 1.8 1.9 1.2 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
(1) For the year ended December 31, 1995 the results of the Regional operations have been restated to reflect the international operations as a separate segment. 6 7 REINSURANCE OPERATIONS The Company's reinsurance operations consists of five operating units which specialize in underwriting property, casualty and surety reinsurance on both a treaty and a facultative basis. Signet Star Holdings, Inc. (Signet Star), through its subsidiary Signet Star Reinsurance Company, includes the results of the reinsurance operations and the results of its alternative markets divisions. For financial segment reporting purposes the results of the alternative market division are included in the alternative markets segment. Signet Star Reinsurance Company is rated A by A.M. Best. Signet Star Reinsurance Company's statutory surplus and statutory net premiums written as of December 31, 1996 and for the year then ended were $257,641,000 and $264,355,000, respectively. The Property Casualty Treaty Division The largest business unit in terms of personnel and premiums written, this division of Signet Star is committed exclusively to the broker market segment of the treaty reinsurance industry. It functions as a traditional reinsurer in specialty and standard reinsurance lines. Facultative ReSources, Inc. Facultative ReSources, Inc. ("Fac Re") specializes in individual certificate and program facultative business. Fac Re's highly experienced underwriters seek to offset the underwriting and pricing cycles in the underlying insurance business by developing risk management solutions and through superior risk selection. Fac Re develops its business through brokers and on a direct basis where the client does not choose to use an intermediary. The Fidelity and Surety Division The Fidelity and Surety Division ("F&S") operates as a lead company in a niche market of the United States property casualty industry where its highly specialized knowledge and expertise are essential to meet the needs of insureds. Business is developed principally through brokers and directly to clients not served by intermediaries. The Latin American and Caribbean Division Signet Star's newest business unit is devoted exclusively to Latin American and Caribbean business ("LACD"). This division handles most traditional lines of property and casualty treaty business and is developing a book of niche business. Reinsurance Operations: Business The following table sets forth the percentages of gross premiums written, by line, by the Company's reinsurance operations:
1996 1995 1994 1993 ----- ----- ----- ----- Treaty: Specialty and other 31.7% 46.8% 49.1% 56.4% Regional 24.7 21.0 24.9 22.9 Nonstandard Automobile 16.7 10.4 9.5 9.3 ----- ----- ----- ----- Total Treaty 73.1 78.2 83.5 88.6 Casualty Facultative 11.7 14.2 10.9 6.4 Fidelity and Surety 9.5 7.6 5.6 5.0 Latin American and Caribbean 5.7 -- -- -- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% ===== ===== ===== =====
7 8 The following table sets forth the percentage of gross premiums written, by property versus casualty business, by the Company's reinsurance operations:
1996 1995 1994 1993 ----- ----- ----- ----- Property 35.2% 33.4% 40.2% 44.0% Casualty 64.8 66.6 59.8 56.0 ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% ----- ----- ----- -----
SPECIALTY INSURANCE OPERATIONS The Company's specialty lines of insurance consist primarily of excess and surplus lines ("E & S"), commercial transportation, professional liability, directors and officers liability and surety. Specialty lines also included the results of the Company's reinsurance operations through June 30, 1993 (see: "Other information about the Company's business"). Admiral Insurance Company The majority of the Company's E & S insurance business is conducted by Admiral Insurance Company ("Admiral"). Admiral specializes in general liability coverages, including products liability and professional liability. Admiral insures risks requiring specialized treatment not available in the conventional market, with coverage designed to meet the specific needs of the insured. Business is received from wholesale brokers via retail agents, whose clients are the insureds. E & S carriers operate on a non-admitted basis in the states where they write business. They are generally free from rate regulation and policy form requirements. Admiral's business is obtained on a nationwide basis from approximately 190 non-exclusive brokers, who do not have the authority to commit the Company, and who are compensated on a commission basis. Admiral also writes directors and officers liability insurance through operations conducted by Monitor Liability Managers, Inc., an underwriting manager established by the Company. Admiral is rated A++ by A.M. Best. Admiral's statutory surplus and statutory net premiums written as of December 31, 1996 and for the year then ended were $183,034,000 and $100,306,513, respectively. Carolina Casualty Insurance Company The Company's commercial transportation operations are primarily conducted by Carolina Casualty Insurance Company ("Carolina"). Carolina writes liability, physical damage and cargo insurance for the transportation industry, concentrating on long-haul trucking companies. Municipal bus lines, charter buses and school buses also make up a substantial part of Carolina's book of business. Carolina's business is obtained nationwide from approximately 120 agents and brokers who are compensated on a commission basis. In June 1995, Carolina began writing surety bonds through operations conducted by Monitor Surety Managers, Inc., an underwriting manager established by the Company. In December 1996, Carolina began writing directors and officers liability insurance through operations conducted by Monitor Liability Managers, Inc. Carolina is rated A by A.M. Best. Carolina's statutory surplus and statutory net premiums written as of December 31, 1996 and for the year then ended were $61,957,000 and $60,508,000, respectively. Nautilus Insurance Company Nautilus Insurance Company ("Nautilus") was established in 1985 to insure E & S risks which involve a lower degree of expected severity than those covered by Admiral. Nautilus obtains its business nationwide from approximately 135 non-exclusive general agents, some of which also provide business to Admiral. A substantial portion of Nautilus' business is written on a binding authority basis, subject to certain contractual limitations. Nautilus is rated A by A.M. Best. Nautilus's statutory surplus and statutory net premiums written as of December 31, 1996 and for the year then ended were $56,538,000 at $36,081,000, respectively. Great Divide Insurance Company ("Great Divide"), a subsidiary of Nautilus, writes transportation risks, as well as other specialty lines, on an admitted basis. 8 9 Specialty Operations: Business The following table sets forth the percentages of gross premiums written, by line, by the Company's specialty insurance operations:
1996 1995 1994 1993 1992 ----- ----- ----- ----- ----- General Liability 35.9% 38.2% 42.2% 37.6% 39.3% Automobile Liability 20.5 27.4 28.1 27.9 30.2 Professional Liability 12.3 7.1 6.3 6.3 4.9 Directors and Officers Liability 10.2 9.2 5.8 4.0 -- Fire and Allied Lines 7.2 5.0 4.6 3.2 2.5 Automobile Physical Damage 5.3 6.8 5.9 4.6 4.0 Inland Marine 1.7 2.1 1.8 1.7 2.0 Other 6.9 4.2 5.3 14.7 17.1 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
ALTERNATIVE MARKETS The Company's alternative markets operations specialize in insuring, reinsuring and administering self-insurance programs and other alternative risk transfer mechanisms for public entities, private employers and associations. Typical clients are those who are driven by various factors to seek less costly and more efficient techniques to manage their exposure to claims. The Company's alternative markets segment consists of: excess workers' compensation insurance written by Midwest Employers Casualty Company ("Midwest"); reinsurance of alternative risk business; and insurance services operations which manage alternative market mechanisms. Midwest Employers Casualty Company In November 1995, the Company acquired Midwest Employers Casualty Company ("Midwest"). Midwest markets and underwrites excess workers' compensation ("EWC") insurance. EWC insurance is marketed to employers and employer groups which have elected and have qualified or been approved by state regulatory authorities to self-insure their workers' compensation programs. EWC insurance provides coverage to a self-insured employer once the employers' losses exceed the employer's retention amount. Midwest offers a complete line of EWC products, including specific and aggregate EWC insurance policies and surety bonds. Midwest is rated A- by A.M. Best. Midwest's statutory surplus and statutory net premiums written as of December 31, 1996 and for the year then ended were $106,682,000 and $55,232,000, respectively. Signet Star - Alternative Markets Division Signet Star Reinsurance Company's Alternative Markets Division specializes in providing custom designed reinsurance products and services to alternative markets ("ARM") clients, such as captive insurance companies, risk retention groups, public entity insurance trusts and governmental pools. ARM clients are generally self insured vehicles which provide insurance buyers with a mechanism for assuming part of their own risk, managing their exposures, modifying their loss costs and, ultimately, participating in the underwriting results. Signet Star has been an active reinsurer of ARM clients for over ten years and is considered to be one of the leading broker market reinsurers of ARM business. The Alternative Markets Division has access to substantial additional resources within the Company, which will enable it to concentrate and coordinate the Company's focus on this growing sector of the reinsurance market. 9 10 Insurance Services Operations The Company's insurance service operations offer a variety of products, which includes underwriting and claims administration and alternative insurance market mechanisms. In addition, subsidiaries of the Company provide agency and brokerage services to both affiliated and unaffiliated entities. Berkley Administrators Berkley Administrators, a division of Tri-State headquartered in Minneapolis, Minnesota, provides risk management and administration services to its clients, including underwriting, loss control, policy issuance and claims handling. A significant portion of Berkley Administrators' present business is the administration of the Minnesota Workers' Compensation Assigned Risk Plan. Berkley Risk Services, Inc. The Company acquired Berkley Risk Services, Inc. ("Berkley Risk") and its affiliated companies in 1988. Berkley Risk, based in Minneapolis, Minnesota, is a property casualty risk management firm which specializes in the development and administration of group and single-employer alternative insurance funding techniques. Subsidiaries of Berkley Risk also manage entities which provide liability insurance and claim adjusting services to public entities and not-for-profit organizations. Key Risk Management Services, Inc. The Company acquired Key Risk Management Services, Inc. ("Key Risk") in 1994. Key Risk, based in Greensboro, North Carolina, is a property casualty risk management firm which specializes in management and administration of group self-insured funds. A significant portion of Key Risk's present business is the administration of the North Carolina Associated Industries Workers' Compensation Fund. Berkley Risk Managers Berkley Risk Managers is a successor to a company acquired in 1990. Berkley Risk Managers, based in Somerset, New Jersey, is primarily involved in the development and administration of self-funded property casualty and health insurance programs primarily for municipalities and other governmental entities. All American Agency Facilities, Inc. All American Agency Facilities, Inc., based in Denver, Colorado, provides wholesale brokerage and general agency services on a nationwide basis for unaffiliated insurance carriers as well as certain of the Company's insurance subsidiaries. Berkley Care Network, Inc. The Company established Berkley Care Network, Inc. ("Berkley Care") in 1995. Berkley Care, based in Greensboro, North Carolina, is a managed health care company offering utilization review and case management services for workers' compensation carriers in North Carolina. It expects to expand the geographic scope of its operations over the next several years. Alternative Markets Operations: Business The following table sets forth the percentages of revenues, by major source of business, of the alternative markets operations:
1996 1995 1994 1993 1992 ----- ----- ----- ----- ----- Midwest Employers Casualty Company 48.8% 14.8% --% --% --% Insurance Service operations 37.5 63.1 78.6 91.6 100.0 Signet Star - Alternative Markets division 13.7 22.1 21.4 8.4 -- ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
10 11 INTERNATIONAL OPERATIONS In 1995, the Company and Northwestern Mutual Life International, Inc. ("NML"), a wholly-owned subsidiary of The Northwestern Mutual Life Insurance Company, entered into a joint venture with respect to Berkley International LLC, a limited liability company. The Company agreed to contribute up to $65 million to Berkley International in exchange for a 65% membership interest and NML agreed to contribute up to $35 million to Berkley International in exchange for a 35% membership interest. Berkley International LLC owns 99.9916% of Berkley International Argentina S.A. ("Berkley S.A."), an Argentine holding company. Berkley S.A. owns the following property casualty insurance companies: 72.86% of La Union Gremial Compania de Seguros, S.A.; 80% of Independencia Compania Argentina de Seguros, S.A.; and 99.9667% of Berkley International Asegurdora de Riesgos de Trabajo S.A. In addition, Berkley S.A. owns 99.9167% of Risk Management Services S.A., which is third-party administrator. RESULTS BY INDUSTRY SEGMENT Summary financial information about the Company's operating segments is presented on a GAAP basis in the following table (all amounts include realized capital gains and losses):
Year Ended December 31, ------------------------------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Amounts in thousands) Regional Insurance Operations (1) Total revenues $ 544,400 $ 478,547 $ 376,576 $316,448 $277,112 Income before income taxes 37,745 40,486 26,669 29,993 26,605 Reinsurance Operations (2) Total revenues 236,967 212,876 187,304 86,962 -- Income (loss) before income taxes 24,202 11,205 (14,977) 194 -- Specialty Insurance Operations (2) Total revenues 240,019 209,311 184,899 211,129 233,477 Income before income taxes 57,828 43,781 37,452 52,651 38,953 Alternative Markets Operations (2) Total revenues 171,317 103,656 75,798 53,531 50,553 Income before income taxes 32,541 10,254 7,068 8,058 11,101 International Operations Total Revenues 26,435 7,313 -- -- -- Loss Before Income Taxes (1,283) (259) -- -- --
(1) For the year ended December 31, 1995 the results of the Regional operations have been restated to reflect the international operations as a separate segment. (2) Prior to July 1, 1993 the Reinsurance operations, including the alternative markets division, are included in Specialty insurance operations (see: "Other information about the Company's business"). 11 12 The combined ratio represents a measure of underwriting profitability, excluding investment income. A number in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit. Summary information for the Company's insurance companies and the insurance industry is presented in the following table (1):
Year Ended December 31, ------------------------------------------------------------- 1996 1995 1994 1993 1992 ----- ----- ----- ----- ----- Regional Insurance Operations Loss ratio 66.7% 65.1% 65.3% 67.1% 66.5% Expense ratio 34.1 33.9 34.3 34.2 33.5 Policyholders' dividend ratio .7 .9 .9 .9 1.0 ----- ----- ----- ----- ----- Combined ratio 101.5% 99.9% 100.5% 102.2% 101.0% ===== ===== ===== ===== ===== Reinsurance Operations (2) Loss ratio 74.3% 78.3% 87.9% 74.1% --% Expense ratio 30.0 26.4 27.1 31.4 -- ----- ----- ----- ----- ----- Combined ratio 104.3% 104.7% 115.0% 105.5% --% ===== ===== ===== ===== ===== Specialty Insurance Operations (2) Loss ratio 67.7% 78.6% 77.6% 77.3% 84.3% Expense ratio 31.0 28.3 26.0 26.8 25.9 ----- ----- ----- ----- ----- Combined ratio 98.7% 106.9% 103.6% 104.1% 110.2% ===== ===== ===== ===== ===== Alternative Markets Operations(2) (3) Loss ratio 74.8% 72.3% 72.5% 72.5% --% Expense ratio 34.7 31.9 27.7 21.0 -- ----- ----- ----- ----- ----- Combined ratio 109.5% 104.2% 100.2% 93.5% --% ===== ===== ===== ===== ===== International Operations Loss ratio 49.7% 50.0% --% --% --% Expense ratio 49.9 58.3 -- -- -- ----- ----- ----- ----- ----- Combined ratio 99.6% 108.3% --% --% --% ===== ===== ===== ===== ===== Combined Insurance Operations Loss ratio 68.7% 70.7% 73.7% 71.1% 73.7% Expense ratio 33.1 31.3 30.8 31.7 30.6 Policyholders' dividend ratio .4 .5 .5 .5 .6 ----- ----- ----- ----- ----- Combined ratio 102.2% 102.5% 105.0% 103.3% 104.9% ===== ===== ===== ===== ===== Combined Insurance Operations Premiums to surplus ratio (4) 1.2 1.0 1.1 .8 1.0 ===== ===== ===== ===== ===== Industry Ratios Combined ratio 107.0% (5) 107.2% (6) 108.9% (6) 107.9% (6) 119.1% (6) Premiums to surplus ratio 1.0 (5) 1.2 (7) 1.3 (7) 1.3 (7) 1.4 (7)
(1) Based on U.S. statutory accounting practices. (2) Results of the Company's Reinsurance operations prior to July 1, 1993, including the alternative markets division, are included in Specialty insurance operations. (see "Other information about the Company's business"). (3) The Alternative Markets segments combined ratio reflects the underwriting results of Midwest, since November 1995, the date it was acquired, and the Signet Star Alternative Markets division from July 1, 1993. Midwest discounts its reserves for losses and loss expenses, and, accordingly, the annual change in the discount is reflected in the loss ratio. (4) Based on the Company's consolidated net premiums written to statutory surplus. (5) Estimated by A.M. Best (6) Source: A.M. Best Aggregates & Averages, for stock companies. (7) Source: A.M. Best Aggregates & Averages, for total industry. 12 13 Investments Investment results before income tax effects were as follows:
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Amounts in thousands) Average investments, at cost $2,538,806 $2,081,547 $1,853,030 $1,584,763 $1,358,366 ========== ========== ========== ========== ========== Investment income, before expenses $ 171,047 $ 143,527 $ 115,619 $ 98,368 $ 96,960 ========== ========== ========== ========== ========== Percent earned on average investments 6.7% 6.9% 6.2% 6.2% 7.1% ========== ========== ========== ========== ========== Realized gains (losses) $ 7,437 $ 10,357 $ (170) $ 23,523 $ 3,356 ========== ========== ========== ========== ========== Change in unrealized investment gains (losses) (1) $ (22,409) $ 142,475 $ (124,756) $ 13,556 $ 7,743 ========== ========== ========== ========== ==========
(1) The change in unrealized investment gains (losses) represents the difference between fair value and cost of investments at the beginning and end of the calendar year, including investments carried at cost. The percentages of the fixed maturity portfolio categorized by contractual maturity, based on fair value, on the dates indicated, are set forth below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations.
December 31, ------------------------------------------------- 1996 1995 1994 1993 1992 ----- ----- ----- ----- ----- 1 year or less 3.1% 4.2% 4.0% 3.5% 3.1% Over 1 year through 5 years 20.7 17.9 27.6 34.0 32.5 Over 5 years through 10 years 25.0 29.4 21.4 22.8 19.2 Over 10 years 27.1 26.2 27.0 27.5 27.3 Mortgage-backed securities 24.1 22.3 20.0 12.2 17.9 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
Loss and Loss Adjustment Expense Reserves In the property casualty industry, it is not unusual for significant periods of time, ranging up to several years or more, to elapse between the occurrence of an insured loss, the report of the loss to the insurer and the insurer's payment of that loss. To recognize liabilities for unpaid losses, insurers establish reserves, which is a balance sheet account representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. The Company's loss reserves reflect current estimates of the ultimate cost of closing outstanding claims; other than its Excess Workers Compensation business, as discussed below, the Company does not discount its reserves to estimated present value for financial reporting purposes. In general, when a claim is reported, claims personnel establish a "case reserve" for the estimated amount of the ultimate payment. The estimate represents an informed judgment based on general reserving practices and reflects the experience and knowledge of the claims personnel regarding the nature and value of the specific type of claim. Reserves are also established on an aggregate basis which provide for losses incurred but not yet reported to the insurer, potential inadequacy of case reserves, the estimated expenses of settling claims, including legal and other fees and general expenses of administering the claims adjustment process ("LAE"), and a provision for potentially uncollectible reinsurance. Each insurance subsidiary's net retention for each line of insurance is taken into consideration in the computation of ultimate losses. In examining reserve adequacy, historical data is reviewed and consideration is given to such factors as legal developments, changes in social attitudes and economic conditions, including the effects of inflation. The actuarial process relies on the basic assumption that 13 14 past experience, judgmentally adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. Reserve amounts are necessarily based on management's informed estimates and judgments using data currently available. As additional experience and other data become available and are reviewed, these estimates and judgments are revised, resulting in increases or decreases to reserves for insured events of prior years. The reserving process implicitly recognizes the impact of inflation and other factors affecting loss costs by taking into account changes in historic claim patterns and perceived trends. There is no precise method to evaluate the impact of any specific factor on the adequacy of reserves, because the ultimate cost of closing claims is influenced by numerous factors. While the methods for establishing the reserves are well tested over time, some of the major assumptions about anticipated loss emergence patterns are subject to fluctuation. In particular, high levels of jury verdicts against insurers, as well as judicial decisions which "re-formulate" policies to expand their coverage to previously unforeseen theories of liability, including those regarding pollution and other environmental exposures, have produced unanticipated claims and increased the difficulty of estimating the loss and loss adjustment expense reserves provided by the Company. Due to the nature of EWC business and the long period of time over which losses are paid in this line of business, the Company discounts its liabilities for EWC losses and loss expenses. Discounting liabilities for losses and loss expenses gives recognition to the time value of money set aside to pay claims in the future and is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from Midwest's loss payout experience and is supplemented with data compiled by insurance companies writing workers' compensation on an excess-of-loss basis. The expected payout pattern has a very long duration because it reflects the nature of losses which generally penetrate self-insured retention limits contained in EWC policies. The Company has limited the expected payout duration to 30 years in order to introduce an additional level of conservatism into the discounting process. These liabilities have been discounted using "risk-free" discount rates determined by reference to the U.S. Treasury yield curve weighted for EWC premium volume to reflect the seasonality of the anticipated duration of losses associated with such coverages. The average discount rate for accident years 1996 and 1995 and prior was approximately 5.90% and 5.80%, respectively. The aggregate net discount, after reflecting the effects of ceded reinsurance, is $172,415,000 and $152,235,000 at December 31, 1996 and 1995, respectively. To date, known pollution and environmental claims at the Company's insurance company subsidiaries have not had a material impact on the Company's operations. Environmental claims have not materially impacted the Company because these subsidiaries generally did not insure the larger industrial companies which are subject to significant environmental exposures. The Company's net reserves for losses and loss adjustment expenses relating to pollution and environmental claims were $35.2 million and $30.8 million at December 31, 1996 and 1995, respectively. The Company's gross reserves for losses and loss adjustment expenses relating to pollution and environmental claims were $71.9 million and $59.4 million at December 31, 1996 and 1995, respectively. Net incurred losses and loss expenses for reported pollution and environmental claims were approximately $6.9 million, $8.0 million and $5.6 million in 1996, 1995 and 1994, respectively. Net paid losses and loss expenses has averaged approximately $3 million for each of the last three years. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make a reasonable actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential affect of significant unresolved legal matters, including coverage issues as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties is highly uncertain. 14 15 The table below provides a reconciliation of the beginning and ending reserve balances, on a gross of reinsurance basis (dollars in thousands):
1996 1995 1994 ---- ---- ---- Net reserves at beginning of year $ 1,209,250 $ 895,440 $ 783,218 ----------- ----------- ----------- Net reserves of acquired companies -- 191,963 -- Net provision for losses and loss expenses: Claims occurring during the current year (1) 675,674 580,594 493,418 Decrease in estimates for claims occurring in prior years (15,219) (9,596) (7,269) Amortization of discount 8,705 -- -- ----------- ----------- ----------- 669,160 570,998 486,149 ----------- ----------- ----------- Net payments for claims Current year 280,565 228,100 187,295 Prior years 264,723 221,051 186,632 ----------- ----------- ----------- 545,288 449,151 373,927 ----------- ----------- ----------- Net reserves at end of year 1,333,122 1,209,250 895,440 Ceded reserves at end of year (2) 449,581 450,770 1,175,446 ----------- ----------- ----------- Gross reserves at end of year $ 1,782,703 $ 1,660,020 $ 2,070,886 =========== =========== ===========
A reconciliation, as of December 31, 1996, between the reserves reported in the accompanying consolidated financial statements which have been prepared in accordance with GAAP and those reported on a SAP basis is as follows (in thousands): Net reserves reported on a SAP basis $ 1,380,961 Additions (deductions) to statutory reserves: Loss reserve discounting (3) (64,179) Outstanding drafts reclassified as reserves 16,340 ----------- Net reserves reported on a GAAP basis 1,333,122 Ceded reserves reclassified as assets 449,581 ----------- Gross reserves reported on a GAAP basis $ 1,782,703 ===========
(1) Claims occurring during the current year is net of discount of $28,885,000 and $708,000 for the years ended December 31, 1996 and 1995, respectively. (2) The 1995 decline in ceded reserves is due to the sale of North Star Reinsurance Company (see: "Other information about the Company's business"). (3) For statutory purposes, Midwest uses a discount rate of 3.0% as permitted by the Department of Insurance of the State of Ohio. For GAAP purposes, Midwest uses a discount rate based on the U. S. Treasury yield curve weighted for the expected payout period, as described above. The table on page 16 presents the development of net reserves for 1986 through 1996. The top line of the table shows the estimated reserves for unpaid losses and loss expenses recorded at the balance sheet date for each of the indicated years. This represents the estimated amount of losses and loss expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Company. The upper portion of the table shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The "cumulative redundancy (deficiency)" represents the aggregate change in the estimates over all prior years. For example, the 1986 reserves have developed a $47 million deficiency over ten years. That amount has been reflected in income over the ten years. The impact on the results of operations of the past three years of changes in reserve estimates is shown in the reconciliation tables above. It should be noted that the table presents a "run off" of balance sheet reserves, rather than accident or policy year loss development. Therefore, each amount in the table includes the effects of changes in reserves for all prior years. For example, assume a claim that occurred in 1986 is reserved for $2,000 as of December 31, 1986. Assuming this claim was settled for $2,300 in 1996, the $300 deficiency would appear as a deficiency in each year from 1986 through 1995. 15 16
Year Ended December 31, ----------------------- 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 ----- ---- ---- ---- ---- ---- ---- ------ ------ ------ ------ (Amounts in millions) Discounted net reserves for losses and loss expenses $ 303 $423 $531 $611 $643 $680 $710 $ 783 $ 895 $1,209 1,333 Reserve discounting -- -- -- -- -- -- -- -- -- 152 172 Undiscounted net reserve for loss and loss expenses 303 423 531 611 643 680 710 783 895 1,361 1,505 Net Re-estimated as of: One year later 300 419 524 605 635 676 704 776 885 1,346 Two years later 309 413 518 599 632 659 694 775 872 Three years later 309 405 513 596 620 650 665 744 Four years later 311 402 511 587 612 637 655 Five years later 311 402 505 581 603 631 Six years later 312 401 510 585 588 Seven years later 324 405 514 574 Eight years later 330 418 507 Nine years later 349 414 Ten years later 350 Cumulative redundancy (deficiency) undiscounted (47) 9 24 37 55 49 55 39 23 15 $ -- ===== ==== ==== ==== ==== ==== ==== ====== ====== ====== ====== Cumulative amount of net liability paid through: One year later $ 90 $ 91 $114 $158 $139 $160 $169 $ 186 $ 221 $ 265 Two years later 138 152 217 234 235 264 275 221 355 Three years later 176 201 262 294 304 332 306 291 Four years later 188 225 295 334 345 346 344 Five years later 203 244 315 358 377 371 Six years later 213 256 331 380 395 Seven years later 221 268 348 392 Eight years later 231 282 357 Nine years later 244 289 Ten years later 250 Discounted net Reserves 783 895 1,209 1,333 Ceded Reserves 1,233 1,176 451 450 ------ ------ ------ ------ Discounted gross Reserves 2,016 2,071 1,660 1,783 Reserve discounting -- -- 192 216 ------ ------ ------ ------ Gross reserve 2,016 2,071 1,852 1,999 ====== ====== ====== ====== Gross Re-estimated as of One year later 2,010 2,043 1,827 Two years later 1,966 2,026 Three years later 1,955 Gross cumulative redundancy 61 45 25 ====== ====== ======
16 17 Regulation The Company's insurance subsidiaries are subject to varying degrees of regulation and supervision in the jurisdictions in which they do business, under statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. This regulation relates to such matters as the standards of solvency which must be met and maintained; the licensing of insurers and their agents; the nature of and limitations on investments; deposits of securities for the benefit of policyholders; approval of policy forms and premium rates; periodic examination of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; establishment and maintenance of reserves for unearned premiums and losses; and requirements regarding numerous other matters. In general, the Company's regional property casualty subsidiaries as well as Carolina, Great Divide and Midwest must file all rates for personal and commercial insurance with the insurance department of each state in which they operate. The Company's E&S and reinsurance subsidiaries generally operate free of rate and form regulation. In addition to regulatory supervision of its insurance subsidiaries, the Company is subject to state statutes governing insurance holding company systems. Typically, such statutes require the Company periodically to file information with the state insurance commissioner, including information concerning its capital structure, ownership, financial condition and general business operations. Under the terms of applicable state statutes, any person or entity desiring to purchase more than a specified percentage (commonly 10%) of the Company's outstanding voting securities would be required to obtain regulatory approval of the purchase. Under Florida law, which is applicable to the Company due to its ownership of Carolina, a Florida domiciled insurer, the acquisition of more than 5% of the Company's capital stock must receive regulatory approval. Further, state insurance statutes typically place limitations on the amount of dividends or other distributions payable by insurance companies in order to protect their solvency. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." During the past several years, various regulatory and legislative bodies adopted or proposed new laws or regulations to deal with the cyclical nature of the insurance industry, catastrophic events and their effects on shortage of capacity and pricing. These regulations, which have not had a material impact on the Company's operations, include (i) the creation of "market assistance plans" under which insurers are induced to provide certain coverages, (ii) restrictions on the ability of insurers to cancel certain policies in mid-term, (iii) advance notice requirements or limitations imposed for certain policy non-renewals and (iv) limitations upon or decreases in rates permitted to be charged. The passage of Proposition 103 in the State of California did not have a material adverse impact on the Company's operations because the Company's subsidiaries operate in that State primarily on a non-admitted basis. The non-admitted market in California, however, has been subjected to increased levels of regulation. Admiral and Nautilus, both of which derive significant premiums from California, may be adversely impacted by increased regulation which causes business to remain in the admitted market. Various state and federal organizations, including Congressional committees and the National Association of Insurance Commissioners ("NAIC"), have been conducting investigations into various aspects of the insurance business. The NAIC has adopted risk based capital ("RBC") requirements that require insurance companies to calculate and report information under a risk-based formula which measures statutory capital and surplus needs based on a regulatory definition of risk in a company's mix of products and its balance sheet. The implementation of RBC did not effect the operations of the Company's insurance subsidiaries since all of its subsidiaries have an RBC amount above the authorized control level RBC, as defined by the NAIC. Federal legislation is being considered which would either abolish or limit the current exemption of the insurance industry from portions of the antitrust laws, impose direct federal oversight or federal solvency standards. No assurance can be given that future legislative or regulatory 17 18 changes resulting from such activity will not adversely affect the Company's insurance subsidiaries. The Company's insurance subsidiaries are also subject to assessment by state guaranty funds when an insurer in that jurisdiction has been judicially declared insolvent and insufficient funds are available from the liquidated company to pay policyholders and claimants. The protection afforded under a state's guaranty fund to policyholders of the insolvent insurer varies from state to state. Generally, all licensed property casualty insurers are considered to be members of the fund, and assessments are based upon their pro rata share of direct written premiums. The NAIC Model Post-Assessment Guaranty Fund Act, which many states have adopted, limits assessments to an insurer to 2% of its subject premium and permits recoupment of assessments through rate setting. Likewise, several states (or underwriting organizations of which the Company's insurance subsidiaries are required to be members) have limited assessment authority with regard to deficits in certain lines of business. To date, assessments have not had a material adverse impact on operations. The Company receives funds from its insurance subsidiaries in the form of dividends and fees for certain management services. Annual dividends in excess of maximum amounts prescribed by state statutes ("extraordinary dividends") may not be paid without the approval of the insurance commissioner of the state in which an insurance subsidiary is domiciled. The NAIC has proposed and certain states have adopted legislation that lowers the threshold amount for determining what constitutes an extraordinary dividend. Such legislative changes could make it more difficult for insurance subsidiaries to pay dividends to their parents. Similarly, the NAIC has proposed a new model investment law that may affect the statutory carrying values of certain investments; however, the final outcome of that proposal is not certain, nor is it possible to predict what impact the proposal will have on the Company or whether the proposal will be adopted in the foreseeable future. Tax Law Changes There were no tax law changes in 1996 that significantly affected the Company. Competition The property casualty insurance and reinsurance business is competitive, with over 2,000 insurance companies transacting business in the United States. The Company competes directly with a large number of these companies. The Company's strategy in this highly fragmented industry is to seek specialized areas or geographic regions where its insurance subsidiaries can gain a competitive advantage by responding quickly to changing market conditions. Each of the Company's subsidiaries establishes its own pricing practices. Such practices are based upon a Company-wide philosophy to price products with the general intent of making an underwriting profit. Competition in the industry generally changes with profitability. The regional property casualty subsidiaries compete with mutual and other regional stock companies as well as national carriers. Direct writers of property casualty insurance compete with the regional subsidiaries by writing insurance through their salaried employees, generally at a lower cost than through independent agents such as those used by the Company. Signet Star's competition comes from domestic and foreign reinsurers, some of which have greater financial resources than Signet Star who place their business either on a direct basis or through the broker market. The E & S area is a highly specialized segment of the insurance industry. Admiral and Nautilus compete with other E & S carriers, some of which are larger and have greater resources than Admiral and Nautilus. Under certain market conditions, standard carriers may compete for the types of business written by Admiral and Nautilus. In addition, there are regional and specialty carriers competing with Admiral and Nautilus when they underwrite business in their regions or specialties. 18 19 Carolina and Great Divide's competition comes mainly from other specialty transportation insurers and large national multi-line companies. Midwest's competition comes from insurance and reinsurance companies, some of which have greater financial resource than Midwest. Most of theses carriers write specific EWC coverage, do not offer aggregate EWC coverage and tend to focus on risks larger than those targeted by Midwest. In addition, Midwest competes with other specialty EWC insurers. The insurance services operations face competition from several large nationally known service organizations as well as local competitors. Employees As of February 28, 1997, the Company employed 3,473 persons. Of this number, the Company's subsidiaries employed 3,432 persons, of whom 2,086 were executive and administrative personnel and 1,346 were clerical personnel. The Company employed the remaining 41 persons in its parent company and investment operations, of whom 34 were executive and administrative personnel and 7 were clerical personnel. Other information about the Company's business: The Company maintains an ongoing interest in acquiring additional companies and developing new insurance entities, products and packages as opportunities arise. In addition, the insurance subsidiaries develop new coverages or lines of business to meet the needs of insureds. Seasonal weather variations affect the severity and frequency of losses sustained by the insurance and reinsurance subsidiaries. Although the effect on the Company's business of such natural catastrophes as tornadoes, hurricanes, hailstorms and earthquakes is mitigated by reinsurance, they nevertheless can have a significant impact on the results of any one reporting period. The Company has no customer which accounts for 10 percent or more of its consolidated revenues. Compliance by the Company and its subsidiaries with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to protection of the environment, has not had a material effect upon the capital expenditures, earnings or competitive position of the Company. The Company currently does not engage in material operations in foreign countries nor is a material portion of its revenues derived from customers in foreign countries. In 1995, the Company entered into a joint venture to acquire insurance and insurance related operations outside the United States (see "International Operations"). However, the Company's insurance subsidiaries regularly purchase a portion of their catastrophe reinsurance coverage from foreign reinsurers, including syndicate members of Lloyd's of London. While Queen's Island is domiciled in Bermuda, to date its business has exclusively been reinsurance of its domestic affiliates. In January 1997 Berkley International LLC entered into a joint venture in the Philippines. The initial contribution to this new joint venture was approximately $10 million ($6.5 million of which was contributed by the Company). On July 1, 1993, the Company exchanged all the stock of Signet Reinsurance Company ("Signet") for 60% of the stock of Signet Star, a newly formed holding company. Signet Star simultaneously acquired all the stock of North Star Reinsurance Company ("North Star Reinsurance") from General Re in exchange for 40% of the stock of Signet Star and senior and convertible notes. In connection with the formation of Signet Star, North Star Reinsurance entered into a Retrocessional Agreement (the "Retrocessional Agreement") with 19 20 General Reinsurance Corporation ("GRC"), pursuant to which North Star Reinsurance reinsured its respective liabilities and assigned its respective rights and obligations arising from any insurance or reinsurance contracts written prior to January 1, 1993 with and to GRC. On December 31, 1995, the Company purchased General Re's interest in Signet Star by issuing to General Re 458,667 shares of Series B Cumulative Redeemable Preferred Stock of the Company having an aggregate liquidation preference of $68,800,000, which was redeemed in 1996. In addition, the Company guaranteed a senior subordinated promissory note of Signet Star which was issued to General Re in exchange for the convertible note which General Re held. As part of this transaction, Signet Star sold to General Re Signet Star Reinsurance Company and renamed Signet Reinsurance Company, Signet Star Reinsurance Company. In connection with the 1995 acquisition of the remaining 40% interest in Signet Star, North Star Reinsurance was sold to General Re and all business written subsequent to July 1, 1993 was novated to Signet Star. As a result, business written by North Star Reinsurance prior to January 1, 1993, which had been retroceded to General Re, is no longer reflected in the Company's financial statements. The only effect on the Company's financial statements resulting from this aspect of the transaction is that the Company's reserves for losses and loss expenses is reduced by $735,144,000 and "due from reinsurers" is reduced by the same amount. This aspect of the transaction does not effect the Company's cash flow, equity or statements of operations. ITEM 2. PROPERTIES The Company and its subsidiaries own or lease office buildings or office space suitable to conduct their operations. Such owned property is as follows:
Location Company Size (sq. ft.) -------- ------- -------------- Cherry Hill, New Jersey Admiral 42,000 Grand Forks, North Dakota American West 10,000 Jacksonville, Florida Carolina (1) 19,000 Lincoln, Nebraska Union 43,000 Lincoln, Nebraska Continental Western 20,000 Luverne, Minnesota Tri-State 33,000 Meridian, Mississippi Great River 30,000 Scottsdale, Arizona Nautilus 34,000 Urbandale, Iowa Continental Western 80,000 Westbrook, Maine Acadia 54,000
(1) Presently leased to a third party In addition, the Company and its subsidiaries lease office facilities in various other cities under leases with varying terms and expiration dates. ITEM 3. LEGAL PROCEEDINGS Claims under insurance policies written by the Company's insurance subsidiaries are investigated and settled either by claims adjusters employed by them, by their independent agents or by independent adjusters. Each subsidiary employs a staff of claims adjusters at its home office and at some regional offices. Some independent agents may have the authority to settle small claims. Independent claims adjusting firms are used to assist in handling various claims in areas where insurance volume does not warrant the maintenance of a staff adjuster. If a claim or loss cannot be settled and results in litigation, the subsidiary generally retains outside counsel. At present, neither the Company nor any of its subsidiaries is engaged in any litigation known to the Company which is expected to have a material adverse effect upon the Company's business. As is common with property casualty insurance companies, the Company's subsidiaries are regularly engaged in the defense of claims arising out of the conduct of the insurance business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1996 to a vote of holders of the Company's Common Stock. 20 21 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock of the Company is traded in the over-the-counter market and is quoted on the National Association of Securities Dealers Automated Quotation ("NASDAQ") National Market System under the symbol "BKLY". The following table sets forth the high and low sale prices for the indicated periods, all as reported by NASDAQ.
Common Price Range Dividends Paid ----------- -------------- High Low Per Share ---- --- --------- 1996: Fourth Quarter $ 53 1/2 $ 45 $ .13 cash Third Quarter 47 40 1/2 $ .13 cash Second Quarter 46 3/4 41 1/2 $ .13 cash First Quarter 53 3/4 45 1/4 $ .12 cash 1995: Fourth Quarter $ 55 1/2 $ 43 $ .12 cash Third Quarter 47 35 1/2 $ .12 cash Second Quarter 39 35 $ .12 cash First Quarter 39 5/8 34 1/2 $ .11 cash
The closing price on March 4, 1997, as reported on the NASDAQ National Market System, was $54.25 per share. The approximate number of record holders of the Common Stock on March 4, 1997 was 881. On December 20, 1996, the W.R. Berkley Capital Trust (the "Trust") issued for cash $210,000,000 of 8.197% Company obligated mandatorily redeemable preferred securities of a subsidiary trust holding solely junior subordinated debt securities (the "Capital Securities") representing preferred beneficial interests in the Trust. The Company is the owner of the beneficial interests represented by the common securities of the Trust. The Trust exists for the sole purpose of issuing the Capital Securities and investing the proceeds in the 8.197% Junior Subordinated Deferrable Interest Debentures issued by the Company. The Capital Securities were not registered under the Securities Act of 1933, as amended (the "Securities Act"), and were sold to "qualified institutional buyers" (as defined in Rule 144A under the Securities Act) in reliance upon the exemption from the registration requirements of the Securities Act provided by Rule 144A, or to institutional "accredited investors" (as defined in Rule 501 (a) (1), (2), (3) or (7) under the Securities Act.) See Note 5 of "Notes to Consolidated Financial Statements." 21 22 ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 1996
Year Ended December 31, ----------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Amounts in thousands, except per share data) Net premiums written $ 1,052,511 $ 860,421 $ 717,933 $ 537,646 $ 417,678 Net premiums earned 981,221 803,336 655,038 501,433 416,003 Net investment income 164,490 137,332 109,683 92,773 91,629 Management fees and commissions 69,246 68,457 64,536 54,027 54,734 Realized investment gains (losses) 7,437 10,357 (170) 23,523 3,356 Other income 2,772 2,461 1,703 1,550 1,478 Total revenues 1,225,166 1,021,943 830,790 673,306 567,200 Interest expense 31,963 28,209 27,601 25,275 19,266 Income before Federal income taxes 115,049 82,747 30,774 61,364 54,521 Federal income tax (expense) benefit (25,102) (17,554) 1,552 (9,181) (8,041) Income before minority interest and change in accounting 89,947 65,193 32,326 52,183 46,480 Minority interest 316 (4,311) 2,768 (596) -- Cumulative effect of change in accounting principle -- -- -- -- 5,902 Net income before preferred dividends 90,263 60,882 35,094 51,587 52,382 Preferred dividends 13,909 11,062 10,356 -- -- Net income attributable to common stockholders 76,354 49,820 24,738 51,587 52,382 Data per common share: Income before change in accounting principle 3.84 2.86 1.44 2.87 2.59 Net income 3.84 2.86 1.44 2.87 2.92 Stockholders' equity (1) 37.69 35.39 26.68 30.36 26.33 Cash dividends declared $ .52 $ .48 $ .44 $ .40 $ .36 Weighted average shares outstanding 19,861 17,414 17,182 17,946 17,942 Investments (1) $ 2,938,190 $ 2,588,346 $ 1,901,715 $ 1,748,702 $ 1,396,082 Total assets 4,073,264 3,618,684 3,582,291 3,337,705 1,953,294 Reserves for losses and loss expenses 1,782,703 1,660,020 2,070,886 2,016,348 995,247 Long-term Debt 390,104 319,287 331,002 330,722 205,001 Company obligated mandatorily redeemable preferred securities of a subsidiary trust holding solely junior subordinated debt securities 207,901 -- -- -- -- Stockholders' equity (1) 879,732 929,815 597,601 526,281 474,396
(1) Investments and stockholders' equity reflect the adoption of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," as of December 31, 1993. Included in the calculation of common stockholders' equity per share are unrealized investments gains (losses), net of federal income taxes, of $31,075,000, $48,450,000, ($33,973,000) and $36,450,000 as of December 31, 1996, 1995, 1994 and 1993, respectively. 22 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Industry Overview The demand for insurance can be characterized as fairly stable and is influenced primarily by general economic conditions, while the supply of insurance is directly related to available capacity, i.e., the level of policyholders' surplus employed in the industry and the willingness of insurance management to risk that capital. In general, it is believed that the amount of available capacity changes as the perceived rate of return on capital employed fluctuates based on the adequacy of premium rates and available investment returns. The adequacy of premium rates is affected mainly by the severity and frequency of claims which are influenced by many factors including natural disasters, regulatory measures and court decisions that define and expand the extent of coverage and the effects of economic inflation on the amount of compensation due for injuries or losses. In addition, investment rates of return may impact policy rates. These factors can have a significant impact on the ultimate adequacy of premium rates because a property casualty insurance policy is priced before its costs are known, as premiums usually are determined long before claims are reported. Over the past several years a trend of increasing price competition, combined with an increase in the number and size of catastrophic losses, has produced a reduction in underwriting profitability for the Company and the industry. Operating Results for the Year Ended December 31, 1996 as Compared to the Year Ended December 31, 1995 Net income attributable to common stockholders ("Net Income") for 1996 was $76 million, or $3.84 per share, compared with 1995 earnings of $50 million, or $2.86 per share. The 1996 results include after-tax realized investment gains of $5 million, or $.24 per share, compared with $6 million, or $.36 per share for 1995. Net premiums written in 1996 grew 22% to $1,053 million from $860 million written during 1995 due to increases recorded by all segments of our operations. Premiums written by the regional segment grew by 13% to $531 million from $471 million written during 1995. Regional net premiums written grew by 16% excluding business assumed from national workers' compensation pools. The majority of this growth was due to new operations which the Company has established during the past five years. Premiums written by the reinsurance segment grew by 11% to $218 million from $196 million written during 1995. The growth in reinsurance premiums written was substantially due to the start-up of a Latin American and Caribbean division and increases in business written by the Fidelity and Surety division. Premiums written by the specialty segment grew by 26% to $202 million from $161 million. The growth in specialty premiums written is due to an increase in business written by Admiral and Monitor as well as increases in the amount of business retained by Admiral, Monitor and Nautilus. These increases more than offset a decline in premiums written by Carolina Casualty. Premiums written by the alternative markets segment grew by $50 million to $76 million. This increase is due to the inclusion of results of Midwest Employers Casualty Company ("MECC"), which was acquired in November 1995. Premiums written by the international segment grew by $19 million to $25 million. The increase in premiums written is due to the inclusion of our primary insurance operations in Argentina, which were acquired in 1995, for a full year and the start up of an Argentine operation in 1996. As a result of this start up operation, the Company expects the international operation to sustain a loss in 1997. Such loss is not expected to have a material adverse impact on the Company's results of operations. Pre-tax net investment income increased to $164 million from $137 million earned in 1995. Approximately three-fourths of this increase was due to the inclusion of the 23 24 results of MECC. The remainder of this increase was due to the increase in average investable assets generated by cash flow from operations which more than offset the effects of lower yields available in the financial markets (see "Liquidity and Capital Resources"). Management fees and commissions consist primarily of fees earned by the alternative markets segment. Management fees and commissions were basically unchanged for 1996 as market conditions, particularly in workers' compensation insurance, inhibited growth. Realized gains from the sale of fixed income securities result primarily from the Company's strategy of rebalancing the asset and liability duration relationship; realized gains on equity securities arise primarily as a result of a variety of factors which influence the Company's valuation criteria. The majority of the 1996 realized gains resulted form the sale of equity securities, whereas in 1995 the majority of realized gains were from the sale of fixed income securities. The consolidated combined ratio (on a statutory basis) of the Company's insurance operations decreased to 102.2% in 1996 from 102.5% in 1995 due to an improvement in the consolidated loss ratio which was partially offset by an increase in the consolidated expense ratio. The consolidated loss ratio (losses and loss expenses incurred expressed as a percentage of premiums earned) decreased to 68.7% from 70.7% primarily due to improved losses at certain specialty companies resulting from a change in mix of business partially offset by greater catastrophe losses impacting the regional companies. Other operating costs and expenses, which consists of the expenses of the Company's insurance and alternative markets segments as well as the Company's corporate and investment expenses, increased by 20% to $409 million from $340 million recorded in 1995. The increase in other operating costs is primarily due to substantial growth in premium volume in all segments of the Company's business, which in turn results in an increase in underwriting expenses. The consolidated expense ratio of the Company's insurance operations (underwriting expenses expressed as a percentage of premiums written) increased to 33.1% for the 1996 period from 31.3% for the comparable 1995 period. The underwriting expense ratio increased primarily due to increased commissions expense in certain specialty and reinsurance segments. Interest expense increased due to the January 1996 issuance of $100 million of long-term debt. In addition, in December 1996, the Company issued $210 million of Company obligated manditorily redeemable preferred securities of a subsidiary trust holding solely junior subordinated debt securities (see "Liquidity and Capital Resources"). The Federal income tax provision resulted in an effective tax rate of 22% in 1996 and 21% in 1995. The tax rate is lower than the statutory tax rate of 35% because a substantial portion of investment income is tax-exempt. The increase in the effective tax rate in 1996 is due primarily to a decrease in the percentage of pre-tax income that is tax-exempt. In December 1995, the Company purchased all the remaining outstanding common stock of Signet Star Holdings. As a result of this acquisition, the minority interest in 1996 was solely related to international operations. Preferred dividends increased as a result of the December 1995 issuance of Series B Cumulative Redeemable Preferred Stock (see "Liquidity and Capital Resources"). Operating Results for the Year Ended December 31, 1995 as Compared to the Year Ended December 31, 1994 Net Income for 1995 was $50 million, or $2.86 per share, compared with 1994 earnings of $25 million, or $1.44 per share. The 1995 results include after-tax realized 24 25 investment gains of $6 million or $.36 per share, compared with after-tax realized investment losses of $86,000 or $.01 per share recorded in 1994. Net premiums written in 1995 grew by 20% to $860 million from $718 million written during 1994 due to increases recorded by all five segments of our operations. Premiums written by the regional segment grew by 22% in 1995 to $471 million compared to $387 million written during 1994. Approximately 60% of the growth was from three operations which the Company established in 1992 and 1993. The balance of this increase primarily results from the expansion by the regional operations into new markets. Premiums written by the reinsurance segment grew by 11% to $196 million from $177 million written during 1994. The growth in reinsurance premiums written was mainly due to growth in facultative and fidelity and surety premiums written. Premiums written by the specialty segment grew by 19% in 1995 to $161 million from $135 million in 1994. The growth in the specialty premiums written is due mainly to decreases in the amounts of business ceded to unaffiliated reinsurers. Premiums written by the alternative markets segment grew by 30% in 1995, to $26 million from $20 million in 1994. The growth in this segment's premiums written is due to the inclusion of Midwest, which was acquired in November 1995, and modest premium growth recorded by Signet Star's alternative markets division. Net investment income increased, on a pre-tax basis, to $137 million from $110 million earned in 1994. The higher level of investment earnings is due primarily to growth in investable assets generated by an increase in cash flow from operations and increased portfolio yields. The pre-tax yield of the portfolio increased as a result of a change in the mix of fixed maturity investments, an increase in the duration of the portfolio and an increase in trading account profits (see "Liquidity and Capital Resources"). Management fees and commissions consists primarily of fees and commissions earned by the alternative markets operating units. These fees and commissions grew by 6% to $68 million in 1995 from $65 million earned in 1994. This increase was due mainly to the inclusion of a full year's results for Key Risk Services, Inc. which was acquired in May 1994, as well as fees earned by Berkley Care Network which the Company established in June 1995. These increases were partially offset by a restructuring of one alternative markets operating unit. The consolidated combined ratio (on a statutory basis) of the Company's insurance operations decreased to 102.5% in 1995 from 105.0% (101.9% before the Northridge Earthquake) in 1994 due to an improvement in the consolidated loss ratio which was partially offset by a slight increase in the expense ratio. The consolidated loss ratio (losses and loss expenses incurred expressed as a percentage of premiums earned) decreased to 70.7% from 73.7%, primarily due to the effect of the Northridge Earthquake, which significantly impacted 1994 results. This improvement was partially offset by an increase in the frequency and severity of losses incurred by our commercial transportation unit. Other operating costs and expenses, which consists of the expenses of the Company's insurance and alternative markets segments as well as the Company's corporate and investment expenses, increased by 19% to $340 million from $286 million recorded in 1994. This increase was due primarily to the substantial growth in premium volume which in turn results in an increase in variable underwriting expenses. The consolidated expense ratio (underwriting expenses expressed as a percentage of premiums written) of the Company's insurance operations increased to 31.3% from 30.8% in 1994. The expense ratio increased due to the effects of start-up operations which generally incur a higher expense ratio in the early stages of their development. Minority interest for 1995 was an expense of $4 million as compared to income of $3 million reported in 1994. The change in minority interest was due to earnings generated by Signet Star in 1995 versus a loss in 1994. 25 26 Liquidity and Capital Resources General The Company's subsidiaries are highly liquid, receiving substantial cash from premiums, investment income, management fees and proceeds from sales and maturities of portfolio investments. The principal outflows of cash are payments of claims, taxes, interest and operating expenses. The net cash provided from operating activities (before trading account transactions) was $243.8 million in 1996 and $206.6 million in 1995. The increase in cash flow in 1996 was due primarily to additional cash flow generated by the acquisition of MECC and the increase in premium volume previously discussed. As a holding company, the Company derives cash from its subsidiaries in the form of dividends, tax payments and management fees. The Company is obligated to service its debt, pay consolidated Federal income taxes and pay its expenses. Tax payments and management fees from the insurance subsidiaries are made under agreements which generally are subject to approval by state insurance departments. Maximum amounts of dividends that can be taken without regulatory approval are prescribed by statute; to date, cash dividends have not required regulatory approval (See Note 14 of "Notes to Consolidated Financial Statements"). Financing Activity In January 1994, the Company issued 6 million depository shares each representing a one-sixth interest in a share of 7.375% Series A Cumulative Redeemable Preferred Stock and received net proceeds of approximately $145 million. A portion of the proceeds of this offering were contributed to the start-up insurance subsidiaries to support their growth. In October 1995, the Company issued 3,450,000 shares of common stock, par value $.20 per share and received net proceeds of approximately $145 million which was used to finance the acquisition of MECC. On December 31, 1995, in connection with the acquisition of the remaining 40% of Signet Star, the Company issued to General Reinsurance Corporation (General Re), 458,667 shares of Series B Cumulative Redeemable Preferred Stock having an aggregate liquidation preference of $68,800,000. The Series B Preferred Stock had a dividend rate increasing up to 6% during the first twelve months. In addition, the Company guaranteed a senior subordinated promissory note of Signet Star in the principal amount of $35,793,085, which matures July 1, 2003 and bears interest at the rate of 6.5%. This note was issued to General Re in exchange for the convertible note previously held by General Re. In November 1993, Signet Star borrowed the maximum amount available under its revolving credit facility and used the proceeds to redeem senior notes issued in connection with the July 1, 1993 acquisition. The revolving credit facility was repaid on January 19, 1996 as discussed below. On January 19, 1996, the Company issued $100 million of 6.25%, ten-year notes which are not redeemable until maturity and utilized a portion of the proceeds to retire $28.4 million of Signet Star's bank debt. In addition, a portion of the proceeds were used to retire $28 million of Series B Preferred Stock. The balance of the proceeds from all of the above-mentioned offerings of securities is available for acquisitions, working capital and other general corporate purposes. On December 19, 1996, the Company issued $210 million of 8.197%, Company obligated manditorily redeemable preferred securities of a trust holding solely junior subordinated debt securities ("Capital Trust Securities") and utilized $38.4 million of the proceeds to retire the remaining outstanding shares of the Series B Preferred Stock. In addition, during December 1996 and January 1997 the Company utilized $39.2 million of 26 27 the proceeds to retire 252,273 shares of the Series A Preferred Stock and placed $115.8 million in a trust which will be used to service the remaining outstanding Series A Preferred Stock. The Company expects the proceeds of the trust will be utilized to redeem the Series A Preferred Stock on January 25, 1999. The balance of the proceeds is available for acquisitions, working capital and other general corporate purposes. In March 1995, the Company purchased 117,000 shares of Common Stock for approximately $4.1 million. During 1996, the Company purchased 575,000 shares of its Common Stock for approximately $24.2 million. On April 19, 1996, the Board of Directors authorized the Company to purchase an additional 1,000,000 shares of Common Stock. As a result of the above, approximately 759,000 shares remain under the current authorization. The Company has on file two "shelf" Registration Statements with the Securities and Exchange Commission with a combined remaining balance of $190 million in additional equity and/or debt securities. The securities may be offered from time-to-time as determined by funding requirements and market conditions. Investments In its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities which, combined with expected cash flow, is believed adequate to meet foreseeable payment obligations. As part of this strategy, the Company attempts to maintain an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities, i.e., policy claims and debt obligations. The Company's investment policy with respect to fixed maturity securities is generally to purchase instruments with the expectation of holding them to their maturity. However, active management of the portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as changes in financial market conditions alter the assumptions underlying the purchase of certain securities. The investment portfolio, valued on a cost basis, grew in 1996 by $374.9 million to approximately $2,882.9 million primarily due to the combined effects of net cash flow from operations and the financing activities discussed above. During 1996, the Company invested approximately $90.8 million of its available cash inflow in equity securities, $56.6 million in state and municipal bonds and $52.7 million in mortgage-backed securities. At December 31, 1996, the portion of the portfolio invested in tax-exempt securities was 29% (31% in 1995); U.S. Government securities and cash equivalents comprised 27% (24% in 1995); mortgage-backed securities were 19% (19% in 1995); corporate fixed maturity securities were 14% (15% in 1995), and equity securities represented the balance. Federal Income Taxes The Company files a consolidated Federal income tax return. At December 1996, the Company had a deferred tax liability of $48.6 million, which results primarily from unrealized investment gains and intangible assets, and a deferred tax asset of $44.6 million, which results primarily from the discounting of loss reserves for Federal income tax purposes. The realization of the deferred tax asset is dependent upon the Company's ability to generate sufficient taxable income in future periods. Based on historical results and the prospects for current operations, management anticipates that it is more likely than not that future taxable income will be sufficient for the realization of this asset. In establishing the amount of the deferred tax asset, management has included a valuation allowance for the future uncertainty associated with the extended time period required for the complete reversal of the effects of loss reserve discounting. 27 28 Reinsurance The Company follows the customary industry practice of reinsuring a portion of its exposures, paying to reinsurers a part of the premiums received on the policies it writes. Reinsurance is purchased principally to reduce net liability on individual risks and to protect against catastrophic losses. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policies, it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded. The Company monitors the financial condition of its reinsurers and attempts to place its coverages only with substantial, financially sound carriers. The Company has established reserves for uncollectible reinsurance. Regional Operations In 1996, Continental Western and Clermont Specialty Managers, Ltd., formerly Habitational Division of Firemen's generally retained $475,000 on individual risks while the Company's other regional subsidiaries generally retained $400,000 on individual risks. In 1997, all regional subsidiaries will generally retain $300,000 on individual risks. The regional group also maintained catastrophe reinsurance protection for approximately 95% of weather-related losses above $3 million per occurrence ($6 million in 1997) up to a maximum of $34 million. In addition the Company carried additional aggregate catastrophe protection of $17.5 million in excess of $8 million for storms exceeding $500,000. In 1997, the aggregate catastrophe protection is: $13.5 million in excess of $4 million for storms exceeding $500,000; $5 million in excess of $6.5 million for storms exceeding $1.0 million; and $4.5 million in excess of $7 million for storms exceeding $1.5 million. Reinsurance Operations Signet Star's catastrophe retrocession program provides coverage for property losses in three layers as follows: (i) 100% of $7.0 million in excess of $6.5 million per occurrence; (ii) 95% of $9.0 million in excess of $13.5 million per occurrence; and (iii) 90% of $7.5 million in excess of $22.5 million per occurrence. In 1996, Signet Star had retrocession coverage for its casualty facultative business for up to 20% of $5.0 million per certificate. In 1997, Signet Star has a variable quota share program on its casualty facultative business with retentions varying from a low of $425,000 up to $2.5 million depending on the certificate limit. These coverages apply to Signet Star's individual certificate business only. During 1996, Signet Star had retrocession coverage for its fidelity and surety business for approximately 86.5% (100% in 1997) of each loss up to $2.5 million in excess of $750,000 per occurrence. In 1997, Signet Star purchased an additional layer of 79.5% of each loss up to $2.5 million in excess of $3.25 million per occurrence for its fidelity and surety business. Specialty Operations Admiral's retention in 1996 was $175,000 per risk for most classes of business and $5.0 million, per insured, for business written by Monitor Liability Managers. In addition, in 1996 Admiral's Directors and Officer coverage also included additional protection on an aggregate basis. Nautilus generally retained $140,000 per risk in 1996 and Carolina maintained its retention at $300,000 on liability exposures. Alternative Markets Operations Midwest's retention is generally $1 million per occurrence above the self insured's underlying retention. International Operations The international operations generally retained $50,000 to $250,000 per occurrence. 28 29 Capitalization For the year ended December 31, 1996, the purchase of common and preferred stock discussed above under "Financing Activity", and the decline in unrealized investment gains more than offset the increase in retained earnings. This resulted in a decrease in stockholders' equity of approximately $50 million. In addition, as a result of the issuance of the Capital Trust Securities the total amount of capital employed in the business grew to $1,478 million. Accordingly, the percentage of the Company's capital attributable to long-term debt was 26% at December 31, 1996 and December 31, 1995. 29 30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements Page - ----------------------------- ---- W. R. Berkley Corporation and Subsidiaries: Independent auditors' report 31 Consolidated balance sheets, December 31, 1996 and 1995 32 Consolidated statements of operations, years ended December 31, 1996, 1995, and 1994 33 Consolidated statements of stockholders' equity, years ended December 31, 1996, 1995, and 1994 34 Consolidated statements of cash flows, years ended December 31, 1996, 1995, and 1994 35 Notes to consolidated financial statements 36 30 31 Independent Auditors' Report Board of Directors and Stockholders W. R. Berkley Corporation We have audited the consolidated balance sheets of W. R. Berkley Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of W. R. Berkley Corporation and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. We have also previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheets of W. R. Berkley Corporation and subsidiaries as of December 31, 1994, 1993 and 1992, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1993 and 1992 (none of which are presented herein); and we expressed unqualified opinions on those consolidated financial statements. W. R. Berkley Corporation adopted the provisions of the Financial Accounting Standards Board's statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" in 1992 and the provisions of SFAS No. 115 "Accounting For Certain Investments in Debt and Equity Securities" on December 31, 1993. In our opinion, the information set forth in the selected financial data for each of the years in the five-year period ended December 31, 1996, appearing on page 22, is fairly presented, in all material respects, in relation to the consolidated financial statements from which it has been derived. KPMG Peat Marwick LLP New York, New York February 21, 1997 31 32 W. R. Berkley Corporation and Subsidiaries Consolidated Balance Sheets December 31, 1996 and 1995 (Dollars in thousands, except share data)
1996 1995 ----------- ----------- Assets Investments: Invested cash $ 327,193 $ 196,732 Fixed maturity securities: Held to maturity, at cost (fair value $208,232 and $176,193) 204,234 169,078 Available for sale at fair value (cost $2,012,911 and $1,894,451) 2,045,254 1,959,910 Equity securities, at fair value: Available for sale (cost $78,435 and $92,472) 93,900 101,551 Trading account (cost $260,167 and $155,301) 267,609 161,075 Cash 19,292 10,185 Premiums and fees receivable 256,441 231,093 Due from reinsurers 427,419 423,626 Accrued investment income 34,577 34,373 Prepaid reinsurance premiums 70,057 77,656 Deferred policy acquisition costs 119,157 89,517 Real estate, furniture & equipment at cost, less accumulated depreciation 116,303 77,016 Excess of cost over net assets acquired 73,404 69,600 Other assets 18,424 17,272 ----------- ----------- $ 4,073,264 $ 3,618,684 =========== =========== Liabilities, Reserves, Debt and Stockholders' Equity Liabilities and reserves: Reserves for losses and loss expenses $ 1,782,703 $ 1,660,020 Unearned premiums 514,213 450,522 Due to reinsurers 71,352 65,798 Deferred Federal income taxes 4,013 14,363 Other liabilities 210,916 169,080 ----------- ----------- 2,583,197 2,359,783 ----------- ----------- Long-term debt 390,104 319,287 ----------- ----------- Company obligated mandatorily redeemable preferred securities of a subsidiary trust holding solely junior subordinated debt securities 207,901 -- Minority interest 12,330 9,799 ----------- ----------- Stockholders' equity: Preferred stock, par value $.10 per share: Authorized 5,000,000 shares: 7 3/8% Series A Cumulative Redeemable Preferred Stock 930,807 and 1,000,000 shares issued and outstanding 93 100 Series B Cumulative Redeemable Preferred Stock 458,667 shares issued and outstanding in 1995 -- 46 Common stock, par value $.20 per share: Authorized 40,000,000 shares, issued and outstanding, net of treasury shares, 19,635,976 and 20,168,167 shares 4,854 4,854 Additional paid-in capital 471,492 547,068 Retained earnings 490,338 424,261 Net unrealized investment gains, net of taxes 31,075 48,450 Treasury stock, at cost, 4,633,402 and 4,101,211 shares (118,120) (94,964) ----------- ----------- 879,732 929,815 ----------- ----------- $ 4,073,264 $ 3,618,684 =========== ===========
See accompanying notes to consolidated financial statements. 32 33 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 1996, 1995 and 1994 (Dollars in thousands, except per share data)
1996 1995 1994 ----------- ----------- --------- Revenues: Net premiums written $ 1,052,511 $ 860,421 $ 717,933 Increase in net unearned premiums (71,290) (57,085) (62,895) ----------- ----------- --------- Premiums earned 981,221 803,336 655,038 Net investment income 164,490 137,332 109,683 Management fees and commissions 69,246 68,457 64,536 Realized investment gains (losses) 7,437 10,357 (170) Other income 2,772 2,461 1,703 ----------- ----------- --------- Total revenues 1,225,166 1,021,943 830,790 Operating costs and expenses: Losses and loss expenses (669,160) (570,998) (486,149) Other operating costs and expenses (408,994) (339,989) (286,266) Interest expense (31,963) (28,209) (27,601) ----------- ----------- --------- Income before income taxes and minority interest 115,049 82,747 30,774 Federal income tax (expense) benefit (25,102) (17,554) 1,552 ----------- ----------- --------- Income before minority interest 89,947 65,193 32,326 Minority interest 316 (4,311) 2,768 ----------- ----------- --------- Net income before preferred dividends 90,263 60,882 35,094 Preferred dividends (13,909) (11,062) (10,356) ----------- ----------- --------- Net income attributable to common stockholders $ 76,354 $ 49,820 $ 24,738 =========== =========== ========= Net income per share $ 3.84 $ 2.86 $ 1.44 =========== =========== =========
See accompanying notes to consolidated financial statements. 33 34 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended December 31, 1996, 1995 and 1994 (Dollars in thousands, except per share data)
Preferred and Common Net stock and unrealized Total additional investment stockholders' paid-in Retained gains Treasury equity capital earnings (losses) stock --------- --------- --------- -------- --------- Balance, December 31, 1993 $ 526,281 $ 193,611 $ 365,691 $ 36,450 $ (69,471) Net income attributable to common stockholders 24,738 -- 24,738 -- -- Issuance of common shares 5,657 2,038 -- -- 3,619 Issuance of preferred stock 145,275 145,275 -- -- -- Net change in unrealized investment (losses) (70,423) -- -- (70,423) -- Purchase of treasury stock (26,357) -- -- -- (26,357) Dividends to common stockholders ($.44 per share) (7,570) -- (7,570) -- -- --------- --------- --------- -------- --------- Balance, December 31, 1994 597,601 340,924 382,859 (33,973) (92,209) Net income attributable to common stockholders 49,820 -- 49,820 -- -- Issuance of common shares 146,484 145,144 -- -- 1,340 Issuance of preferred stock 66,000 66,000 -- -- -- Net change in unrealized investment gains 82,423 -- -- 82,423 -- Purchase of treasury stock (4,095) -- -- -- (4,095) Dividends to common stockholders ($.48 per share) (8,418) -- (8,418) -- -- --------- --------- --------- -------- --------- Balance, December 31, 1995 929,815 552,068 424,261 48,450 (94,964) Net income attributable to common stockholders 76,354 -- 76,354 -- -- Issuance of common shares 1,746 750 -- -- 996 Net change in unrealized investment gains (17,375) -- -- (17,375) -- Purchase of treasury stock (24,152) -- -- -- (24,152) Repurchase of preferred stock (77,572) (77,572) -- -- -- Accretion of Series B preferred stock 1,193 1,193 -- -- -- Dividends to common stockholders ($.52 per share) (10,277) -- (10,277) -- -- --------- --------- --------- -------- --------- Balance, December 31, 1996 $ 879,732 $ 476,439 $ 490,338 $ 31,075 $(118,120) ========= ========= ========= ======== =========
See accompanying notes to consolidated financial statements. 34 35 W. R. Berkley Corporation and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 1996, 1995 and 1994 (Dollars in thousands)
1996 1995 1994 --------- --------- --------- Cash flows from operating activities: Net income before preferred dividends $ 90,263 $ 60,882 $ 35,094 Adjustments to reconcile net income to net cash flows provided by operating activities: Increase in reserves for losses and loss expenses, net of due to/from reinsurers 126,006 106,333 117,371 Depreciation and amortization 8,590 14,286 14,989 Change in unearned premiums and prepaid reinsurance premiums 71,290 57,085 62,895 Change in premiums and fees receivable (25,348) (20,551) (45,181) Change in Federal income taxes 5,719 491 (9,687) Change in deferred policy acquisition costs (29,640) (15,607) (13,941) Realized investment (gains) losses (7,437) (10,357) 170 Other, net 4,374 14,033 8,607 --------- --------- --------- Net cash provided by operating activities before trading account sales (purchases) 243,817 206,595 170,317 Trading account sales (purchases), net (89,961) (47,314) (53,041) --------- --------- --------- Net cash provided by operating activities 153,856 159,281 117,276 --------- --------- --------- Cashflows used in investing activities: Proceeds from sales, excluding trading account: Fixed maturity securities available for sale 471,057 452,460 415,871 Equity securities 46,698 63,863 181,594 Proceeds from maturities and prepayments of fixed maturity securities 219,673 159,731 114,200 Cost of purchases, excluding trading account: Fixed maturity securities available for sale (713,104) (690,650) (703,215) Fixed maturity securities held to maturity (105,675) (30,568) -- Equity securities (26,988) (64,187) (208,257) Cost of acquired companies, net of acquired cash and invested cash (11,739) (197,404) -- Net additions to real estate, furniture and equipment (46,983) (14,472) (35,298) Other, net (5,083) (8,098) 12,881 --------- --------- --------- Net cash used in investing activities (172,144) (329,325) (222,224) --------- --------- --------- Cash flows from financing activities: Net proceeds from issuance of common stock -- 144,739 -- Net proceeds from issuance of preferred stock -- 66,000 145,275 Net proceeds from issuance of long-term debt 98,850 -- -- Net proceeds from issuance of Company obligated mandatorily redeemable preferred securities of a subsidiary trust holding solely junior subordinated debt securities 207,900 -- -- Cash dividends to common stockholders (10,143) (7,844) (7,459) Cash dividends to preferred stockholders (12,824) (11,062) (8,051) Purchase of common treasury shares (24,152) (4,095) (26,357) Repurchase of Preferred Stock (77,572) -- -- Payment of subsidiary debt (28,306) (31,847) (4,527) Other, net 4,103 1,441 156 --------- --------- --------- Net cash provided by financing activities 157,856 157,332 99,037 --------- --------- --------- Net increase (decrease) in cash and invested cash 139,568 (12,712) (5,911) Cash and invested cash at beginning of year 206,917 219,629 225,540 --------- --------- --------- Cash and invested cash at end of year $ 346,485 $ 206,917 $ 219,629 ========= ========= ========= Supplemental disclosure of cash flow information: Interest paid on debt $ 28,296 $ 32,839 $ 24,897 ========= ========= ========= Federal income taxes paid $ 19,171 $ 17,064 $ 8,135 ========= ========= =========
See accompanying notes to consolidated financial statements 35 36 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 1996, 1995 and 1994 (1) Summary of Significant Accounting Policies (A) Principles of consolidation and basis of presentation The consolidated financial statements, which include the accounts of W. R. Berkley Corporation and its subsidiaries ("the Company"), have been prepared on the basis of generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the revenues and expenses reflected during the reporting period. Actual results could differ from those estimates. All significant intercompany transactions and balances have been eliminated. Reclassifications have been made in the 1995 and 1994 financial statements to conform them to the presentation of the 1996 financial statements. (B) Revenue recognition Insurance premiums written are recognized as earned generally on a pro-rata basis over the contract period. Management fees on insurance services contracts are recorded as earned primarily on a pro-rata basis over the policy period. Commission income is recognized as earned on the effective date of the applicable insurance policies. (C) Investments The Company has classified its investments into three categories. Securities that the Company has the positive intent and ability to hold to maturity are classified as "held to maturity" and reported at amortized cost. Securities which the Company purchased with the intent to sell in the near term are classified as "trading" and are reported at estimated fair value, with unrealized gains and losses reflected in the statement of operations. The remaining securities are classified as "available for sale" and carried at estimated fair value, with unrealized gains and losses, net of applicable income taxes, excluded from earnings and reported as a separate component of stockholders' equity. Realized gains or losses represent the difference between the cost of securities sold and the proceeds realized upon sale. The cost of securities is adjusted where appropriate to include provision for declines in value which are considered to be other than temporary. The Company uses the specific identification method where possible and the first-in, first-out method in other instances, to determine the cost of securities sold. Realized gains or losses, including any provision for decline in value, are included in the statement of operations. 36 37 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, continued (D) Deferred policy acquisition costs Acquisition costs (primarily commissions and premium taxes) incurred in writing insurance and reinsurance business are deferred and amortized ratably over the terms of the related contracts. Deferred policy acquisition costs are limited to the amounts estimated to be recoverable from the applicable unearned premiums and the related anticipated investment income by giving effect to anticipated losses, loss adjustment expenses and expenses necessary to maintain the contracts in force. (E) Reserves for losses and loss expenses Reserves for losses and loss expenses are an accumulation of amounts determined on the basis of (1) evaluation of claims for business written directly by the Company; (2) estimates received from other companies for reinsurance assumed; and (3) estimates for losses incurred but not reported (based on Company and industry experience). These estimates are periodically reviewed and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments are reflected in results of operations in the period in which they are determined. A subsidiary of the Company, Midwest Employers Casualty Company ("Midwest") which was acquired in November 1995, discounts its liabilities for excess workers' compensation ("EWC") losses and loss expenses using a "risk-free" rate. Midwest discounts its EWC liabilities because of the long period of time over which it pays losses. The Company believes that utilizing a "risk-free" rate to discount these reserves more closely reflects the economics associated with the excess workers' compensation line of business (see Note 12 of notes to consolidated financial statements). (F) Reinsurance ceded Ceded unearned premiums are reported as prepaid reinsurance premiums and estimated amounts of reinsurance recoverable on unpaid losses are included in due from reinsurers. To the extent any reinsurer does not meet its obligations under reinsurance agreements, the liability must be discharged by the Company. The Company has provided reserves for uncollectible reinsurance. (G) Excess of cost over net assets acquired Costs in excess of the net assets of subsidiaries acquired are being amortized on a straight-line basis over 25 to 40 years. The Company continually evaluates the amortization period of its intangible assets. Estimates of useful lives are revised when circumstances or events indicate that the original estimate is no longer appropriate. 37 38 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, continued (H) Federal income taxes The Company files a consolidated Federal income tax return. In 1995 and prior years, Signet Star Holdings, Inc. filed its own consolidated Federal income tax return. The Company's method of accounting for income taxes is the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are measured annually using tax rates currently in effect or expected to apply in the years in which those temporary differences are expected to reverse. (I) Stock Options In October 1995, FASB Statement No. 123 "Accounting for Stock-Based Compensation" (FAS 123) was issued by the FASB which is effective for fiscal year December 31, 1996. FAS 123 provides an alternative to continue the Company's current method of accounting for stock based compensation, or to adopt the fair value method of accounting which would require the Company to expense, over the service or vesting period, the fair value of employees stock based compensation at the date of the grant. The Company will continue its present method of accounting for its stock option plan under APB No. 25. (J) Recent Accounting Pronouncements In June 1996, FASB issued Statement of Financial Accounting Standards No. 125, entitled "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The Statement establishes standards for determining whether transfers of "financial assets" such as securities are to be accounted for as sales, or alternatively, as secured borrowings. The Statement, which applies to transactions beginning in 1997, is not expected to have a material impact on the Company's financial position or results of operations. (2) Acquisitions In 1996 several acquisitions were completed for an aggregate consideration of approximately $15,955,000. The acquisitions were accounted for as purchases and, accordingly, the results of operations of the acquired companies have been included from the respective dates of acquisition. Proforma results of operations have been omitted as such effects are not significant. Net assets of the acquired companies for 1996 were as follows: Investments in fixed maturity and equity securities of $6,434,000; cash and invested cash of $4,216,000; excess of cost over net assets acquired of $7,138,000; and other liabilities, net of other assets of $1,833,000. During 1995, the Company purchased majority interests in two property and casualty companies in Argentina for consideration of approximately $9.2 million, which constituted a portion of the Company's initial contribution to Berkley International, LLC. The proforma effect of these transactions on the Company's results of operations is not significant. On November 8, 1995, the Company acquired 100% of the stock of MECC, Inc., the Parent of Midwest Employers Casualty Company, for $141,908,000. In connection with this acquisition, the Company also retired approximately $19,590,000 of MECC, Inc.'s debt. The purchase was funded by the issuance of 3,450,000 shares of Common Stock issued at $43.75 per share. On December 31, 1995, the Company acquired General Re Corporation's ("General Re") 38 39 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (2) Acquisitions, continued 40% interest in Signet Star Holdings, Inc. ("Signet Star") by issuing to General Re 458,667 shares of Series B Cumulative Redeemable Preferred Stock of the Company having an aggregate liquidation preference of $68,800,000. The only significant effect on the Company's financial statements from this acquisition is an increase in preferred stock outstanding and the elimination of the related minority interest because Signet Star's results of operations were previously consolidated. All of the acquisitions were accounted for as purchases and, accordingly, the results of operations of the acquired companies have been included from the dates of acquisition. The net assets acquired in 1995 were as follows (dollars in thousands):
Berkley MECC, Signet International Inc. Star Total ------------- ---- ---- ----- Total investments and cash $19,986 $362,120 $ -- $ 382,106 Due from reinsurers 8,338 48,474 (735,144) (678,332) Deferred policy acquisition costs 2,519 5,606 (6,241) 1,884 Excess of cost over net assets acquired 505 16,541 -- 17,046 Other assets 17,489 18,688 (2,283) 33,894 ------- -------- --------- --------- Total assets $48,837 $451,429 $(743,668) $(243,402) ======= ======== ========= ========= Reserves for losses and loss expenses $14,849 232,985 $(735,144) $(487,310) Deferred federal income taxes -- 21,599 (5,066) 16,533 Other liabilities 14,841 34,987 6,444 56,272 ------- -------- --------- --------- Total liabilities 29,690 289,571 (733,766) (414,505) ------- -------- --------- --------- Debt -- 19,950 -- 19,950 ------- -------- --------- --------- Minority interest 9,960 -- (75,902) (65,942) ------- -------- --------- --------- Net assets acquired $ 9,187 $141,908 $ 66,000 $ 217,095 ======= ======== ========= =========
On July 1, 1993, the Company exchanged all the stock of Signet Reinsurance Company ("Signet") for 60% of the stock of Signet Star, a newly formed holding company. Signet Star simultaneously acquired all the stock of North Star Reinsurance Company ("North Star Reinsurance") from General Re in exchange for 40% of the stock of Signet Star and senior and convertible notes. In connection with the formation of Signet Star, North Star Reinsurance entered into a Retrocessional Agreement (the "Retrocessional Agreement") with General Reinsurance Corporation ("GRC"), pursuant to which North Star Reinsurance reinsured its respective liabilities and assigned its respective rights and obligations arising from any insurance or reinsurance contracts written prior to January 1, 1993 with and to GRC. In connection with the 1995 acquisition of the remaining 40% interest in Signet Star, North Star Reinsurance was sold to General Re and all business written subsequent to July 1, 1993 was novated to Signet Star. As a result, business written by North Star Reinsurance prior to January 1, 1993, which had been retroceded to General Re, is no longer reflected in the Company's financial statements. The only effect on the Company's financial statements resulting from this aspect of the transaction is that the Company's reserves for losses and loss expenses is reduced by $735,144,000 and "due from reinsurers" is reduced by the same amount. This aspect of the transaction does not effect the Company's cash flow, equity or statements of operations. 39 40 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (2) Acquisitions, continued The Company's consolidated Proforma results of operations assuming the acquisitions of MECC, Inc. and the remaining 40% interest in Signet Star occurred as of January 1, 1995 and 1994, respectively, are as follows (dollars in thousands):
1995 1994 ---- ---- Total revenues $1,100,195 $929,405 ========== ======== Net income attributable to common shareholders $ 70,102 $ 46,469 ========== ======== Net income per share of common stock $ 3.48 $ 2.30 ========== ========
The Proforma consolidated financial data do not purport to represent what the Company's results of operations actually would have been had the acquisitions and related financings occurred on the dates indicated, or to project the Company's results of operations for any future period. The above amounts primarily reflect the effects on results of operations of certain adjustments resulting from the revaluation of assets and liabilities of the purchased companies and from the financing of such acquisitions. (3) Federal Income Taxes The Federal income tax expense (benefit) consists of (dollars in thousands):
1996 1995 1994 ---- ---- ---- Current expense $ 26,096 $ 17,879 $ 8,020 Deferred (benefit) (994) (325) (9,572) -------- -------- ------- Total expense (benefit) $ 25,102 $ 17,554 $(1,552) ======== ======== =======
A reconciliation of the Federal income tax expense (benefit) and the amounts computed by applying the Federal income tax rate of 35% to pre-tax income is as follows (dollars in thousands):
1996 1995 1994 ---- ---- ---- Computed "expected" tax expense $ 40,267 $ 28,961 $ 10,771 Tax-exempt investment income (15,471) (12,938) (12,964) Other, net 306 1,531 641 -------- -------- -------- Total expense (benefit) $ 25,102 $ 17,554 $ (1,552) ======== ======== ========
40 41 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (3) Federal Income Taxes, continued At December 31, 1996 and 1995, the tax effects of differences that give rise to significant portions of the deferred tax asset and deferred tax liability are as follows (dollars in thousands):
1996 1995 ---- ---- Deferred Tax Asset Loss reserve discounting $ 50,481 $ 46,922 Alternative minimum tax -- 3,330 Other 1,115 95 -------- -------- Gross deferred tax asset 51,596 50,347 Less: valuation allowance 7,000 7,000 -------- -------- Deferred tax asset 44,596 43,347 ======== ======== Deferred Tax Liability Amortization of intangibles 12,407 13,119 Expense recognition differences 13,434 8,210 Realized investment gains 5,676 6,511 Deferred taxes on unrealized investment gains 16,733 26,088 Other 359 3,782 -------- -------- Deferred tax liability 48,609 57,710 -------- -------- Net deferred tax asset(liability) $ (4,013) $(14,363) ======== ========
The Federal income tax expense (benefit) applicable to realized investment gains (losses) was $2,603,000, $3,664,000 and ($61,000) in 1996, 1995 and 1994, respectively. The Company had a current income tax payable of $6,224,000 and a current income tax receivable of $210,000 at December 31, 1996 and 1995, respectively. The realization of the deferred tax asset is dependent upon the Company's ability to generate sufficient taxable income in future periods. Based on historical results and the prospects for current operations, management anticipates that it is more likely than not that future taxable income will be sufficient for the realization of this asset. In establishing the amount of the deferred tax asset, management has included a valuation allowance for the future uncertainty associated with the extended time period required for the complete reversal of the effects of loss reserve discounting. 41 42 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (4) Long-Term debt Long-term debt consists of the following:
Carrying Description Rate Maturity Face Value Value - ----------- ---- -------- ---------- -------- Senior Notes 8.95% May 20, 1998 $ 10,000,000 $ 9,985,000 Senior Notes 6.31% March 6, 2000 25,000,000 24,924,000 Senior Notes 6.71% March 4, 2003 25,000,000 24,891,000 Senior Subordinated Notes 6.50% July 1, 2003 35,793,000 35,793,000 Senior Notes 6.25% January 15, 2006 100,000,000 98,924,000 Senior Notes 9.875% May 15, 2008 100,000,000 96,735,000 Senior Debentures 8.70% January 1, 2022 100,000,000 98,852,000 ------------ ----------- $395,793,000 $390,104,000 ============ ============
The difference between the face value of long-term debt and the carrying value is unamortized discount. All outstanding long-term debt is not redeemable until maturity and ranks on a parity with all other outstanding indebtedness of the Company. In 1995 long-term debt included a note payable to banks pursuant to a revolving credit facility entered into by Signet Star. The face value of the debt at December 31, 1995 was $28,400,000 and the carrying value was $28,306,000. The interest rate was based on the London Interbank offered rate plus .75% to 1.50% and was 5.75% at December 31, 1995. The debt was retired in January 1996. (5) Company obligated mandatorily redeemable preferred securities of a subsidiary trust holding solely junior subordinated debt securities The Company obligated mandatorily redeemable preferred securities of a subsidiary trust holding solely junior subordinated debenture ("Capital Trust Securities") were issued by the W.R. Berkley Capital Trust ("the Trust"). All of the common securities of the Trust are owned by the Company. The trust exists for the exclusive purpose of issuing the Capital Trust Securities and investing the proceeds in a junior subordinated debenture of the Company with similar interest rates, principal amount and maturities. The Capital Trust Securities are guaranteed by the Company as to the payment of distributions and the payment of liquidation of the Capital Trust Securities within certain limits. The Capital Trust Securities have a face value of $210,000,000, mature on December 15, 2045 and require preferential cumulative cash distributions at an annual rate of 8.197%. The Capital Trust Securities are subject to mandatory redemption in a like amount,(i) in whole but not in part, on the stated maturity date, upon repayment of the junior subordinated debentures, (ii) in whole but not in part, at any time contemporaneously with the optional prepayment of the junior subordinated debentures by the Company upon the occurrence and continuation of a certain event and (iii) in whole or in part, on or after December 15, 2006 and contemporaneously with the optional prepayment by the Company of junior subordinated debentures. 42 43 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (6) Commitments, Litigation and Contingent Liabilities At present, neither the Company nor any of its subsidiaries are engaged in any litigation known to the Company which management believes will have a material adverse effect upon the Company's business. As is common with other insurance companies, the Company's subsidiaries are regularly engaged in the defense of claims arising out of the conduct of the insurance business. On September 11, 1995, the Company formed Berkley International, LLC ("Berkley International"), a limited liability company. The Company is obligated to contribute $45.5 million to Berkley International over the next seven years as required. (7) Lease Obligations The Company and several of its subsidiaries use office space and equipment under leases expiring at various dates through September 1, 2004. These leases are operating leases for financial reporting purposes. Some of these leases have options to extend the length of the leases and contain clauses for cost of living, operating expense and real estate tax adjustments. Rental expense was approximately; $11,098,000, $9,437,000 and $8,000,000 for 1996, 1995 and 1994 respectively. Future minimum lease payments (without provision for sublease income) are: $9,814,000 in 1997; $9,202,000 in 1998; $7,292,000 in 1999; $5,516,000 in 2000; $3,855,000 in 2001; and $11,799,000 thereafter. (8) Stockholders' Equity Per share data have been computed based on the weighted average number of common shares outstanding. The assumed dilutive effect of employee stock options was not material. Treasury shares have been excluded from average outstanding shares from the date of acquisition. The number of shares used in the computations was 19,861,000, 17,414,000, and 17,182,000 for 1996, 1995 and 1994, respectively. Changes in shares of Common Stock outstanding, net of treasury shares, are as follows (in thousands):
1996 1995 1994 ---- ---- ---- Balance, beginning of year 20,168 16,778 17,337 Shares issued 43 3,507 179 Shares repurchased (575) (117) (738) ------ ------ ------ Balance, end of year 19,636 20,168 16,778 ====== ====== ======
As of December 31, 1996 930,807 shares of the 7 3/8% Series A Cumulative Redeemable Preferred Stock were issued and outstanding. During January 1997, the Company purchased an additional 183,080 shares for an aggregate cost of $28,506,000. In addition, $115,800,000 was placed in a trust which will be used to service the remaining outstanding Series A Preferred Stock. The Company expects that the proceeds of the trust will be utilized to redeem the Series A Preferred Stock on January 25, 1999. In December 1995, the Company issued 458,667 shares of variable rate series B cumulative redeemable Preferred Stock at its fair value of $66,000,000. The Series B Preferred Stock was being accreted to its stated value of $68,800,000 over 18 months. During 1996, the Company purchased all outstanding shares of the Series B Preferred Stock for $66 million. 43 44 W.R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (9) Stock Option Plan The Company adopted the W. R. Berkley Corporation 1992 Stock Option Plan under which 1,750,000 shares of Common Stock were reserved for issuance. Pursuant to the Plan, options may be granted at prices determined by the Board of Directors but not less than 85% of the fair market value on the date of grant. To date, options have been granted with an exercise price equal to the average of the high and low market price on the date of grant. The following table summarizes option information, including options granted under both the 1992 and prior plans:
1996 1995 1994 ---------------------- ---------------------- ----------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- -------- --------- -------- --------- -------- Outstanding at beginning of year 1,012,197 $ 35.45 1,017,788 $ 34.24 730,225 $ 30.83 Granted 733,851 43.53 101,000 42.51 435,775 37.91 Exercised 42,809 29.57 57,449 24.85 28,562 22.87 Canceled 53,474 39.89 49,142 37.28 119,650 29.45 --------- ------- --------- ------- --------- ------- Outstanding at end of year 1,649,765 $ 39.05 1,012,197 $ 35.45 1,017,788 $ 34.24 --------- ------- --------- ------- ========= ------- Options exercisable at year end 348,497 262,811 142,091 --------- --------- --------- Options available for future grant 277,510 623,781 675,639 --------- --------- ---------
As discussed previously, FAS 123 provides an alternative to continue the Company's current method of accounting for stock based compensation, or to adopt the fair value method of accounting. The Company will continue its present method of accounting for its stock option plan under APB No. 25; accordingly, the adoption of the Statement will have no effect on the Company's financial statements. The fair value of the options granted under FAS 123 is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1996 and 1995 respectively: (a) dividend yield of 1%, (b) expected volatility of 20%, (c) risk free interest rate of 6.65% and 6.37%, and (d) expected life of 7.5 years. The weighted average fair value of options granted during the year were $16.15 and $15.58 for the year ended December 31, 1996 and 1995, respectively. The following table summarizes information about stock options outstanding at December 31, 1996 and 1995: 44 45 W.R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (9) Stock Option Plan, Continued
Options Outstanding Options Exercisable ------------------------ ----------------------- Weighted Weighted Range of Remaining Weighted Average Average Exercise Number Contractual Average Number Exercise Prices Outstanding Life Price Exercisable Price -------- ----------- ----------- -------- ----------- -------- December 31, 1996 $22 to $33 198,785 4.3 $ 25.67 196,867 $ 25.60 33 to 43 628,504 7.0 37.11 139,135 35.93 43 to 53 822,476 9.2 43.77 12,495 45.65 --------- --- ------- ------- ------- Total 1,649,765 7.8 $ 39.05 348,497 $ 30.45 ========= === ======= ======= ======= December 31, 1995 $22 to $33 219,797 5.5 $ 25.40 183,712 $ 24.78 33 to 43 683,900 7.9 37.09 76,767 35.97 43 to 53 108,500 8.9 45.45 2,332 43.63 --------- --- ------- ------- ------- Total 1,012,197 7.5 $ 35.45 262,811 $ 82.21 ========= === ======= ======= =======
Had compensation costs for the Company's 1996 and 1995 grants been determined under the cost recognition alternative of FAS 123, the effect on the Company's net income and net income attributable to common shareholders would have been immaterial. (10) Profit Sharing Retirement Plan The Company and its subsidiaries have profit sharing retirement plans in which substantially all employees participate. The plans provide for minimum annual contributions of 5% of eligible compensation; contributions above the minimum are discretionary and vary with each participating subsidiary's profitability. Employees become eligible to participate in the Retirement Plans on the first day of the month following the first full three months in which they are employed. Profit sharing expense amounted to $7,370,000, $6,344,000 and $5,625,000 for 1996, 1995 and 1994, respectively. 45 46 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (11) Investments At December 31, 1996 and 1995, there were no investments, other than investments in United States government securities, which exceeded 10% of stockholders' equity. At December 31, 1996 and 1995, investments were as follows:
December 31, 1996 ---------------------------------------------------------------------------- Amount Gross Gross at which unrealized unrealized Fair shown in the Type of Investment Cost (a) gains losses value balance sheet ------------------ -------- ---------- ---------- ----- ------------- (Dollars in thousands) Fixed maturity securities held to maturity: State and municipal $ 80,943 $ 4,542 $ (127) $ 85,358 $ 80,943 Corporate 39,478 626 (649) 39,455 39,478 Mortgage backed securities 83,813 1,057 (1,451) 83,419 83,813 ---------- ------- -------- ---------- ---------- Total fixed maturities held to maturity 204,234 6,225 (2,227) 208,232 204,234 ---------- ------- -------- ---------- ---------- Fixed maturity securities available for sale: United States government(b) 442,816 6,908 (6,326) 443,398 443,398 State and municipal 758,455 21,004 (2,334) 777,125 777,125 Corporate 359,928 9,007 (4,082) 364,853 364,853 Mortgage backed securities 451,712 10,363 (2,197) 459,878 459,878 ---------- ------- -------- ---------- ---------- Total fixed maturities available for sale 2,012,911 47,282 (14,939) 2,045,254 2,045,254 ---------- ------- -------- ---------- ---------- Common stocks 18,661 15,591 -- 34,252 34,252 Preferred stocks 59,774 439 (565) 59,648 59,648 ---------- ------- -------- ---------- ---------- Total equity securities available for sale 78,435 16,030 (565) 93,900 93,900 ---------- ------- -------- ---------- ---------- Trading account 260,167 9,184 (1,742) 267,609 267,609 ---------- ------- -------- ---------- ---------- Invested cash(c) 327,193 -- -- 327,193 327,193 ---------- ------- -------- ---------- ---------- Total investments $2,882,940 $78,721 $(19,473) $2,942,188 $2,938,190 ========== ======= ======== ========== ==========
(a) Adjusted as necessary for amortization of premium or discount. (b) Includes United States government agencies and authorities. (c) Short-term investments which mature within three months of the date of purchase. 46 47 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (11) Investments, continued
December 31, 1995 --------------------------------------------------------------------------- Amount Gross Gross at which unrealized unrealized Fair shown in the Type of Investment Cost (a) gains losses value balance sheet ------------------ -------- ----- ------ ----- ------------- (Dollars in thousands) Fixed maturity securities held to maturity: State and municipal $ 124,614 $ 6,820 $ (154) $ 131,280 $ 124,614 Corporate 22,709 109 -- 22,818 22,709 Mortgage backed securities 21,755 340 -- 22,095 21,755 ---------- ------- ------- ---------- ---------- Total fixed maturities held to maturity 169,078 7,269 (154) 176,193 169,078 ---------- ------- ------- ---------- ---------- Fixed maturity securities available for sale: United States government (b) 414,115 14,582 (129) 428,568 428,568 State and municipal 658,159 26,951 (570) 684,540 684,540 Corporate 361,150 10,754 (1,716) 370,188 370,188 Mortgage backed securities 461,027 15,916 (329) 476,614 476,614 ---------- ------- ------- ---------- ---------- Total fixed maturities available for sale 1,894,451 68,203 (2,744) 1,959,910 1,959,910 ---------- ------- ------- ---------- ---------- Common stocks 24,042 9,438 -- 33,480 33,480 Preferred stocks 68,430 669 (1,028) 68,071 68,071 ---------- ------- ------- ---------- ---------- Total equity securities available for sale 92,472 10,107 (1,028) 101,551 101,551 ---------- ------- ------- ---------- ---------- Trading account 155,301 6,723 (949) 161,075 161,075 ---------- ------- ------- ---------- ---------- Invested cash (c) 196,732 -- -- 196,732 196,732 ---------- ------- ------- ---------- ---------- Total investments $2,508,034 $92,302 $(4,875) $2,595,461 $2,588,346 ========== ======= ======= ========== ==========
(a) Adjusted as necessary for amortization of premium or discount. (b) Includes United States government agencies and authorities. (c) Short-term investments which mature within three months of the date of purchase. 47 48 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (11) Investments, continued The amortized cost and fair value of fixed maturity securities, at December 31, 1996, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay obligations (dollars in thousands):
1996 ------------------------------- Fair Cost value ---- ----- Due in one year or less $ 69,945 $ 70,855 Due after one year through five years 460,647 465,694 Due after five years through ten years 552,683 562,625 Due after ten years 598,345 611,015 Mortgaged-backed securities 535,525 543,297 ---------- ---------- Total $2,217,145 $2,253,486 ========== ==========
Realized gains (losses) and the change in difference between fair value and cost of investments, before applicable income taxes, are as follows (dollars in thousands):
1996 1995 1994 ---- ---- ---- Realized gains (losses): Fixed maturity securities sold (a) $ 1,850 $ 7,819 $ (6,141) Equity securities sold 5,285 (976) 1,632 Net change in provision for decline in value (b): Fixed maturity securities (152) (352) 4,697 Equity securities -- 4,191 -- Other 454 (325) (358) --------- --------- --------- 7,437 10,357 (170) --------- --------- --------- Change in difference between fair value and cost of investments: Fixed maturity securities (36,232) 123,590 (122,136) Equity securities 6,386 8,528 (2,450) --------- --------- --------- (29,846) 132,118 (124,586) --------- --------- --------- Total $ (22,409) $ 142,475 $(124,756) ========= ========= =========
(a) During 1996, 1995 and 1994, gross gains of $5,904,000, $11,570,000 and $5,601,000, respectively, and gross losses of $4,054,000, $3,751,000 and $8,177,000, respectively, were realized. (b) The provision for decline in value of investments is $3,485,000, $3,333,000 and $7,172,000 as of December 31, 1996, 1995 and 1994, respectively. The 1996 increase is due to additional writedowns, the decrease in 1995 and 1994 resulted from the sale of securities. 48 49 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (11) Investments, continued Investment income consists of the following (dollars in thousands):
1996 1995 1994 ---- ---- ---- Investment income earned on: Fixed maturity securities $ 146,431 $ 115,668 $ 102,826 Invested cash 6,698 13,000 5,898 Equity securities 4,039 4,418 3,616 Trading account (a) 12,331 9,030 2,058 Other 1,548 1,411 1,221 --------- --------- --------- Gross investment income 171,047 143,527 115,619 Interest on funds held under reinsurance treaties (6,557) (6,195) (5,936) --------- --------- --------- Net investment income $ 164,490 $ 137,332 $ 109,683 ========= ========= =========
(a) The primary focus of the trading account is merger and municipal fixed income arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Merger arbitrage differs from other types of investments in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less). The Company believes that this makes merger arbitrage investments less vulnerable to changes in general financial market conditions. Potential changes in market conditions are also mitigated by the implementation of short sales. In November 1996, the Company invested $10,000,000 in a municipal security trading partnership. The primary focus of the partnership is municipal arbitrage. Municipal arbitrage is an investment strategy which attempts to capitalize on the certain anomilies which tend to occur in the municipal bond market. Such inefficiencies are arbitraged through a disciplined use of futures, options and municipal bond positions. The arbitrage positions are generally hedged against market declines by purchasing put options, selling call options or entering into future contracts. Therefore, just as long portfolio positions may also incur losses during market declines, hedge positions may incur losses during market advances. As of December 31, 1996 the notional amount of option and future contracts outstanding are $30,242,000 and $41,100,000, respectively. As of December 31, 1996 the net short market value of option and future contracts outstanding are $948,000 and $184,000, respectively. Investment income earned from trading account activity includes unrealized trading gains of $2,013,000, $352,000 and $1,271,000 for 1996, 1995 and 1994, respectively. 49 50 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (12) Reserves for losses and loss expenses The table below provides a reconciliation of the beginning and ending reserve balances, on a gross of reinsurance basis, (dollars in thousands):
1996 1995 1994 ---- ---- ---- Net reserves at beginning of year $ 1,209,250 $ 895,440 $ 783,218 ----------- ----------- ----------- Net reserves of companies acquired -- 191,963 -- Net provision for losses and loss expenses: Claims occurring during the current year 675,674 580,594 493,418 Decrease in estimates for claims occurring in prior years (15,219) (9,596) (7,269) Amortization of discount 8,705 -- -- ----------- ----------- ----------- 669,160 570,998 486,149 ----------- ----------- ----------- Net payments for claims Current year 280,565 228,100 187,295 Prior years 264,723 221,051 186,632 ----------- ----------- ----------- 545,288 449,151 373,927 ----------- ----------- ----------- Net reserves at end of year 1,333,122 1,209,250 895,440 Ceded reserves at the end of year 449,581 450,770 1,175,446 ----------- ----------- ----------- Gross reserves at the end of year $ 1,782,703 $ 1,660,020 $ 2,070,886 =========== =========== ===========
Due to the nature of Excess Workers Compensation ("EWC") business and the long period of time over which losses are paid in this line of business, the Company discounts the liability for losses and loss expenses established for the excess workers' compensation line of business. Discounting liabilities for losses and loss expenses gives recognition to the time value of money set aside to pay claims in the future and is intended to appropriately match losses and loss expense to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from Midwest's loss payout experience and is supplemented with data compiled from insurance companies writing workers' compensation on an excess-of-loss basis. The expected payout pattern has a very long duration because it reflects the nature of losses which generally penetrate self-insured retention limits contained in excess workers' compensation policies. The Company has limited the payout duration to 30 years in order to introduce an additional level of conservatism into the discounting process. The liabilities for losses and loss expenses have been discounted using "risk-free" discount rates determined by reference to the U.S. Treasury yield curve weighted for the EWC premium volume to reflect the seasonality of the anticipated duration of losses associated with such coverages. The average discount rate for accident years 1996 and 1995 and prior is 5.90% and 5.80%, respectively. The aggregate net discount, after reflecting the effects of ceded reinsurance, is $172,415,000 and $152,235,000 at December 31, 1996 and 1995, respectively. For Statutory purposes, Midwest uses a discount rate of 3.0% as permitted by the Department of Insurance of the State of Ohio. To date, known pollution and environmental claims at the insurance company subsidiaries have not had a material impact on the Company's operations. Environmental claims have not materially impacted the Company because our subsidiaries generally did not insure the larger industrial companies which are subject to significant environmental exposures. 50 51 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (12) Reserves for losses and loss expenses, continued The Company's net reserves for losses and loss adjustment expenses relating to pollution and environmental claims were $35.2 million and $30.8 million at December 31, 1996 and 1995, respectively. The Company's gross reserves for losses and loss adjustment expenses relating to pollution and environmental claims were $71.9 million and $59.4 million at December 31, 1996 and 1995, respectively. Net incurred losses and loss expenses for reported pollution and environmental claims were approximately $6.9 million, $8.0 million and $5.6 million in 1996, 1995 and 1994, respectively. Net paid losses and loss expenses has averaged approximately $3 million for each of the last three years. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make a reasonable actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential affect of significant unresolved legal matters, including coverage issues as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties is highly uncertain. (13) Reinsurance Ceded The Company follows the customary industry practice of reinsuring a portion of its exposures principally to reduce net liability on individual risks and to protect against catastrophic losses. The following amounts arising under reinsurance ceded contracts have been deducted in arriving at the amounts reflected in the statement of operations (dollars in thousands):
1996 1995 1994 ---- ---- ---- Premiums written $210,009 $212,169 $210,237 ======== ======== ======== Premiums earned $216,127 $207,375 $195,313 ======== ======== ======== Losses and loss expenses $120,784 $134,120 $149,415 ======== ======== ========
(14) Dividends from Subsidiaries and Statutory Financial Information The Company's insurance subsidiaries are restricted by law as to the amount of dividends they may pay without the approval of regulatory authorities. During 1997, the maximum amount of dividends which can be paid without such approval is approximately $69,235,000. Combined net income and policyholders' surplus of the Company's consolidated insurance subsidiaries, as determined in accordance with statutory accounting practices, are as follows (dollars in thousands):
1996 1995 1994 ---- ---- ---- Net income $ 84,249 $ 75,587 $ 40,411 ======== ======== ======== Policyholders' surplus $881,380 $839,890 $669,552 ======== ======== ========
51 52 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements At December 31, 1996 and 1995, bonds with a market value of $139,497,000 and $137,579,000 were on deposit with various state Insurance Departments as required by state laws. The National Association of Insurance Commissioners ("NAIC") has adopted risk based capital ("RBC") requirements that require insurance companies to calculate and report information under a risk-based formula which measures statutory capital and surplus needs based on a regulatory definition of risk in a company's mix of products and its balance sheet. The implementation of RBC did not effect the operations of the Company's insurance subsidiaries since all of its subsidiaries have an RBC amount above the authorized control level RBC, as defined by the NAIC. (15) Supplemental Financial Statement Data Other operating costs and expenses consist of the following (dollars in thousands):
1996 1995 1994 ---- ---- ---- Amortization of deferred policy acquisition costs $283,642 $228,610 $187,468 Other operating costs and expenses of insurance operations 50,288 38,773 35,900 Other costs and expenses 75,064 72,606 62,898 -------- -------- -------- Total $408,994 $339,989 $286,266 ======== ======== ========
(16) Industry Segments The Company's operations are presently conducted through five basic segments: regional property casualty insurance; reinsurance; specialty lines of insurance; alternative markets operations; and international. Summary financial information about the Company's operating segments is presented in the following table. Income before income taxes by segment consists of revenues less expenses related to the respective segment's operations. These amounts include realized gains (losses) where applicable. Intersegment revenues consist primarily of dividends, interest on intercompany debt and fees paid by subsidiaries for portfolio management and other services to the Company. Identifiable assets by segment are those assets used in the operation of each segment. 52 53 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (16) Industry Segments, continued (Dollars in thousands)
Revenues --------------------------------------------- Income (Loss) Unaffiliated Inter- before income Identifiable Customers Segment Total taxes Assets ------------ ------- ----- ------------- ------------- December 31, 1996 Regional $ 543,290 $ 1,110 $ 544,400 $ 37,745 $1,103,767 Reinsurance 236,749 218 236,967 24,202 607,831 Specialty 238,433 1,586 240,019 57,828 1,247,501 Alternative Markets 171,099 218 171,317 32,541 596,054 International 26,435 -- 26,435 (1,283) 60,450 Corporate and other 9,160 78,179 87,339 25,311 457,661 Adjustments and eliminations -- (81,311) (81,311) (61,295) -- ---------- -------- ----------- --------- ---------- Consolidated $1,225,166 $ -- $ 1,225,166 $ 115,049 $4,073,264 ========== ======== =========== ========= ========== December 31, 1995 Regional (1) $ 478,668 $ (121) $ 478,547 $ 40,486 $1,001,549 Reinsurance 212,876 -- 212,876 11,205 560,817 Specialty 209,153 158 209,311 43,781 1,278,883 Alternative Markets 103,656 -- 103,656 10,254 579,964 International 7,313 -- 7,313 (259) 50,286 Corporate and other 10,277 53,694 63,971 16,414 147,185 Adjustments and eliminations -- (53,731) (53,731) (39,134) -- ---------- -------- ----------- --------- ---------- Consolidated $1,021,943 $ -- $ 1,021,943 $ 82,747 $3,618,684 ========== ======== =========== ========= ========== December 31, 1994 Regional $ 376,478 $ 98 $ 376,576 $ 26,669 $ 809,853 Reinsurance 187,304 -- 187,304 (14,977) 1,242,202 Specialty 184,911 (12) 184,899 37,452 1,223,179 Alternative Markets 75,798 -- 75,798 7,068 87,023 International -- -- -- -- -- Corporate and other 6,299 29,960 36,259 (5,068) 220,034 Adjustments and eliminations -- (30,046) (30,046) (20,370) -- ---------- -------- ----------- --------- ---------- Consolidated $ 830,790 $ -- $ 830,790 $ 30,774 $3,582,291 ========== ======== =========== ========= ==========
(1) As of and for the year ended December 31, 1995 the results of the regional segment have been restated to reflect the international segment as a separate segment. 53 54 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (17) Fair value of Financial Instruments The following table presents the carrying amounts and estimated fair values of the Company's financial instruments as of December 31, 1996 and 1995 (dollars in thousands):
1996 1995 ------------------------- ------------------------- Carrying Fair Carrying Fair Amount value Amount value ------ ----- ------ ----- Investments $2,938,190 $2,942,188 $2,588,346 $2,595,461 Long-term debt 390,104 421,359 319,287 371,550 Capital Trust Securities 207,901 206,197 -- --
The estimated fair value of investments is based on quoted market prices as of the respective reporting dates. The fair value of the long-term debt is based on rates available for borrowings similar to the Company's outstanding debt as of the respective reporting dates. (18) Quarterly Financial Information (unaudited) The following is a summary of quarterly financial data:
Three Months Ended ----------------------------------------------- March 31, June 30, --------------------- --------------------- 1996 1995 1996 1995 ---- ---- ---- ---- (Dollars in thousands except per share data) Revenues $288,274 $228,932 $301,293 $247,442 ======== ======== ======== ======== Net income before preferred dividends $ 19,522 $ 13,573 $ 21,361 $ 15,369 ======== ======== ======== ======== Net income attributable to common stockholders $ 15,684 $ 10,807 $ 17,981 $ 12,604 ======== ======== ======== ======== Net income per share $ .78 $ .65 $ .91 $ .76 ======== ======== ======== ========
September 30, December 31, --------------------- --------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Revenues $311,534 $260,893 $324,414 $284,676 ======== ======== ======== ======== Net income before preferred dividends $ 24,092 $ 14,794 $ 25,287 $ 17,146 ======== ======== ======== ======== Net income attributable to common stockholders $ 20,712 $ 12,028 $ 21,976 $ 14,381 ======== ======== ======== ======== Net income per share $ 1.06 $ .72 $ 1.12 $ .73 ======== ======== ======== ========
54 55 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following information is provided as to the Directors and executive officers of the Company as of March 4, 1997:
Name Age Position ---- --- -------- William R. Berkley 51 Chairman of the Board and Chief Executive Officer John D. Vollaro 52 President, Chief Operating Officer and a Director Sam Daniel, Jr. 58 Senior Vice President, Regional Operations Anthony J. Del Tufo 52 Senior Vice President, Chief Financial Officer and Treasurer Robert S. Gorin 61 Senior Vice President, General Counsel and Secretary E. LeRoy Heer 58 Senior Vice President, Chief Corporate Actuary H. Raymond Lankford 54 Senior Vice President, Alternative Markets Operations Ira S. Lederman 43 Senior Vice President, Assistant General Counsel and Assistant Secretary James G. Shiel 37 Senior Vice President - Investments Edward A. Thomas 48 Senior Vice President, Specialty Operations Robert P. Cole 46 Vice President Clement P. Patafio 32 Vice President - Corporate Controller Scott A. Siegel 38 Vice President - Taxes Robert B. Hodes 71 Director Henry Kaufman 69 Director Richard G. Merrill 66 Director Jack H. Nusbaum 56 Director Mark L. Shapiro 52 Director Martin Stone 68 Director
As permitted by Delaware law, the Board of Directors of the Company is divided into three classes, the classes being divided as equally as possible and each class having a term of three years. Directors generally serve until their respective successors are elected at the annual meeting of stockholders which ends their term. None of the Company's Directors has any family relationship with any other Director or executive officer. Each year the term of office of one class expires. In May 1996, the term of a class consisting of three Directors expired. Richard G. Merrill, Jack H. Nusbaum and Mark L. Shapiro were elected as Directors to hold office for a term of three years until the Annual Meeting of Stockholders in 1999 and until their successors are duly chosen. John D. Vollaro was elected a Director to hold office for a term which expires at the Annual Meeting of Stockholders in 1998. Officers of the Company are elected annually and serve at the pleasure of the Board of Directors. William R. Berkley has been Chairman of the Board and Chief Executive Officer of the Company since its formation in 1967. He also served as President at various times from 1967 to 1995. He also serves as Chairman of the Board or Director of a number of public and private companies. These include Signet Star Holdings, Inc., a reinsurance holding company owned by the Company; Pioneer Companies, Inc., a chemical manufacturing and marketing company; Fine Host Corporation, a contract food service management company; Strategic Distribution, Inc., an industrial products distribution and services company; and Interlaken Capital, Inc., a private investment firm with interests in various businesses. His current term as a Director expires in 1997. 55 56 John D. Vollaro was elected President and Chief Operating Officer of the Company effective January 2, 1996 and Director effective September 13, 1995. He has been Chief Executive Officer of Signet Star Holdings, Inc., an affiliate of the Company, since July 1993 and President and a Director of Signet Star Holdings, Inc. since February 1993. He served as Executive Vice President of the Company from 1991 until 1993 and was Chief Financial Officer and Treasurer of the Company from 1983 through 1993; and Senior Vice President, Chief Financial Officer and Treasurer of the Company from 1983 to 1991. Mr. Vollaro's current term as a Director expires in 1998. Sam Daniel, Jr. has been Senior Vice President - Regional Operations since April 1990. Prior thereto, he was employed by Hanover Insurance Company for more than five years as Vice President. Anthony J. Del Tufo has been Senior Vice President, Chief Financial Officer and Treasurer of the Company since September 1993. Before joining the Company Mr. Del Tufo was a partner with KPMG Peat Marwick from 1975 to 1993. Robert S. Gorin has been Senior Vice President, General Counsel and Secretary since July 1989. Prior to joining the Company, Mr. Gorin was Assistant Secretary and Assistant General Counsel of J.C. Penney Co., Inc., where he had been employed since 1971. E. LeRoy Heer has been Senior Vice President - Chief Corporate Actuary since January 1991. Prior thereto, he had been Vice President - Corporate Actuary since May 1978. H. Raymond Lankford was named Senior Vice President - Alternative Markets Operations in April 1996. Prior thereto, he was President of All American, a subsidiary of the Company, from October 1991 having joined All American in 1990. He has been in the insurance business in various capacities for more than 20 years. Ira S. Lederman was named Senior Vice President in January 1997. He is also Assistant General Counsel a position he has held since July 1989 and Assistant Secretary since May 1986. Previously, he was Vice President from May 1986 until January 1997. Prior thereto he was Insurance Counsel of the Company since May 1986 and Associate Counsel from April 1983. James G. Shiel was named Senior Vice President - Investments of the Company in January 1997. Prior thereto, he was Vice President - Investments of the Company since January 1992. Since February 1994, he has been President of Berkley Dean & Company, Inc., a subsidiary of the Company, which he joined in 1987. Edward A. Thomas has been Senior Vice President - Specialty Operations of the Company since April 1991. Prior thereto, he was President of Signet Reinsurance Company, a subsidiary of the Company, for more than five years. Robert P. Cole was named Vice President in October 1996. Before joining the Company Mr. Cole was a senior Officer of Christania Reinsurance Company of New York which was purchased by Folksamerica Reinsurance Company in 1996 and prior to that was associated with reinsurers for twenty years. Clement P. Patafio was named Vice President - Corporate Controller in January 1997. Prior thereto, he was Assistant Vice President - Corporate Controller in July 1994 and Assistant Controller since May 1993. Before joining the Company Mr. Patafio was with KPMG Peat Marwick from 1986 to 1993. Scott A. Siegel was named Vice President - Taxes in January 1997. Prior thereto, he was Director of Taxes since September 1991. Before joining the Company Mr. Siegel was with KPMG Peat Marwick from 1981 to 1991. Robert B. Hodes has been a Director of the Company since 1970. Mr. Hodes is Counsel to the New York law firm of Willkie Farr & Gallagher. He is also a director of Aerointernational, Inc.; Crystal Oil Company; Global Telecommunications, Limited.; Loral Corporation; Loral Space & Tele Communications Ltd.; Mueller Industries, Inc.; R.V.I. 56 57 Guaranty, Ltd.; LCH Investments N.V.; and Restructured Capital Holdings, Ltd. Mr. Hodes' current term as a Director expires in 1997. Henry Kaufman has been a Director of the Company since 1994. Dr. Kaufman is President of Henry Kaufman & Co., Inc., an investment, economic and financial consulting company since its establishment in 1988. Dr. Kaufman serves as Chairman of the Board of Overseers, Stern Schools of Business of NYU; Chairman of the Board of Trustees, Institute of International Education; Member of the Board of Directors, Federal Home Loan Mortgage Corp.; Member of the Board of Directors, Lehman Brothers Holdings Inc.; Member of the Board of Trustees, New York University; and Member of the International Capital Markets Advisory Committee of the Federal Reserve Bank of New York. Dr. Kaufman's current term as a Director expires in 1998. Richard G. Merrill has been a Director of the Company since 1994. Mr. Merrill was Executive Vice President of Prudential Insurance Company of America from August 1987 to March 1991 when he retired. Prior thereto, Mr. Merrill served as Chairman and President of Prudential Asset Management Company since 1985. Mr. Merrill is a Director of Sysco Corp. Mr. Merrill's current term as a Director expires in 1999. Jack H. Nusbaum has been a Director of the Company since 1967. Mr. Nusbaum is the Chairman in the New York law firm of Willkie Farr & Gallagher where he has been a partner for more than the last five years. He is a director of Pioneer Companies, Inc.; Fine Host Corporation; Strategic Distribution Inc.; Prime Hospitality Corp.; and The Topps Company, Inc. Mr. Nusbaum's current term as a Director expires in 1999. Mark L. Shapiro has been a Director of the Company since 1974. Mr. Shapiro is a Managing Director in the investment banking firm of Schroder Wertheim & Co. Incorporated for more than the past five years. Mr. Shapiro's current term as a Director expires in 1999. Martin Stone has been a Director of Berkley since 1990. Mr. Stone is Chairman of Professional Sports, Inc. (the Phoenix Firebirds AAA baseball team) and Chairman of Adirondack Corporation, for more than five years. Mr. Stone is also a director of Canyon Ranch, Inc. and a member of the Advisory Board of Yosemite National Park. Mr. Stone's current term as a Director expires in 1998. ITEM 11. EXECUTIVE COMPENSATION Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1996, and which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security ownership of certain beneficial owners Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1996, and which is incorporated herein by reference. (b) Security ownership of management Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1996, and which is incorporated herein by reference. 57 58 (c) Changes in control Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1996, and which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1996, and which is incorporated herein by reference. 58 59 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Index to Financial Statements The financial statements filed as part of this report are listed on the Index to Financial Statements on page 30 hereof. Index to Financial Statement Schedules Page -------------------------------------- ---- Independent Auditors' Report on Schedules and Consent 64 Schedule II - Condensed Financial Information of Registrant 65 Schedule III - Supplementary Insurance Information 69 Schedule IV - Reinsurance 70 Schedule VI - Supplementary Information concerning Property & Casualty Insurance Operations 71 (b) Reports on Form 8-K On December 13, 1996, the Company filed a current report on Form 8-K announcing the issuance of the Capital Trust Securities. (c) Exhibits The exhibits filed as part of this report are listed on pages 62 and 63 hereof. 59 60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. W. R. BERKLEY CORPORATION By WILLIAM R. BERKLEY --------------------------------------------- William R. Berkley, Chairman of the Board and Chief Executive Officer March 11, 1997 60 61 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- WILLIAM R. BERKLEY Chairman of the Board and - --------------------------------------- Chief Executive Officer March 11, 1997 William R. Berkley Principal executive officer JOHN D. VOLLARO President, Chief Operating March 11, 1997 - --------------------------------------- Officer and Director John D. Vollaro ROBERT B. HODES Director March 11, 1997 - --------------------------------------- Robert B. Hodes HENRY KAUFMAN Director March 11, 1997 - --------------------------------------- Henry Kaufman RICHARD G. MERRILL Director March 11, 1997 - --------------------------------------- Richard G. Merrill JACK H. NUSBAUM Director March 11, 1997 - --------------------------------------- Jack H. Nusbaum MARK L. SHAPIRO Director March 11, 1997 - --------------------------------------- Mark L. Shapiro MARTIN STONE Director March 11, 1997 - --------------------------------------- Martin Stone ANTHONY J. DEL TUFO Senior Vice President, March 11, 1997 - --------------------------------------- Chief Financial Officer and Anthony J. Del Tufo Treasurer Principal financial officer CLEMENT P. PATAFIO Vice President, March 11, 1997 - -------------------------------------- Corporate Controller Clement P. Patafio
61 62 ITEM 14. (c) EXHIBITS Number (2.1) Agreement and Plan of Merger between the Company, Berkley Newco Corp. and MECC, Inc. (incorporated by reference to Exhibit 2.1 of the current reports on Form 8-K (file No. 0-7849) filed with the Commission September 28, 1995). (2.2) Agreement and Plan of Restructuring, dated July 20, 1995, by and among the Company, Signet Star Holdings, Inc., Signet Star Reinsurance Company, Signet Reinsurance Company and General Re Corporation (incorporated by reference to Exhibit 2.2 of the Company's current Report on Form 8-K (file No. 0-7849) filed with the Commission on September 28, 1995). (3.1) Restated Certificate of Incorporation, as amended (3.2) By-laws (4) The instruments defining the rights of holders of the long-term debt securities of the Company are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Company agrees to furnish supplementally copies of these instruments to the Commission upon request. (10.1) The Company's 1982 Stock Option Plan, (incorporated by reference to Exhibit 10.1 of the Company's Registration Statement on Form S-1 (File No. 2-98396) filed with the Commission on June 14, 1985). (10.2) The Company's 1992 Stock Option Plan, (incorporated by reference to Exhibit 28.1 of the Company's Registration Statement on Form S-8 (File No. 33-55726) filed with the Commission on December 15, 1992). (10.2a) Signet Star Holdings, Inc. 1993 Stock Option Plan, (incorporated by reference to Exhibit 10.14 of Signet Star Holdings, Inc. Registration Statement on Form S-1 (File No. 33-69964) filed with the Commission on October 4, 1993). (10.3) The Company's lease dated June 3, 1983 with the Ahneman, Devaul and Devaul Partnership, incorporated by reference to Exhibit 10.3 of the Company's Registration Statement on Form S-1 (File No. 2-98396) filed with the Commission on June 14, 1985. (10.4) W.R. Berkley Corporation Deferred Compensation Plan for officers as amended January 1, 1991. (10.5) W. R. Berkley Corporation Deferred Compensation Plan for Directors as adopted March 7, 1996. (10.6) Sale Agreement by and between the Company and Lembo-Feinerman Fleming Morell Trust for the acquisition of real property. 62 63 (21) Following is a list of the Company's significant subsidiaries. Subsidiaries of subsidiaries are indented and the parent of each such corporation owns 100% of the outstanding voting securities of such corporation except as noted below.
Jurisdiction Percentage of owned by incorporation Company ------------- ------- All American Agency Facilities, Inc. Delaware 100% Berkley Regional Insurance Company: Missouri 100% Acadia Insurance Company: Maine 100% Chesapeake Bay Property and Casualty Insurance Company Maine 100% Berkley Insurance Company of the Carolinas North Carolina 100% Continental Western Insurance Company: Iowa 100% Continental Western Casualty Company Iowa 100% Firemen's Insurance Company of Washington, D.C.: Maryland 100% FICO Insurance Company Maryland 100% Great River Insurance Company Mississippi 100% Tri-State Insurance Company of Minnesota: Minnesota 100% American West Insurance Company North Dakota 100% Union Insurance Company Nebraska 100% Union Standard Insurance Company Oklahoma 100% Berkley International, LLC New York 65% Berkley Risk Services, Inc. Minnesota 100% Carolina Casualty Insurance Company Florida 100% Clermont Specialty Managers, Ltd. New Jersey 100% J/I Holding Corporation: Delaware 100% Admiral Insurance Company: Delaware 100% Nautilus Insurance Company: Arizona 100% Great Divide Insurance Company North Dakota 100% Key Risk Management Services, Inc. North Carolina 100% MECC, Inc.: Delaware 100% Midwest Employers Casualty Company Ohio 100% Monitor Liability Managers, Inc. Delaware 100% Monitor Surety Managers, Inc. Delaware 100% Queen's Island Insurance Company, Ltd. Bermuda 100% Rasmussen Agency, Inc. New Jersey 100% Signet Star Holdings, Inc.: Delaware 100% Signet Star Reinsurance Company Delaware 100% Facultative ReSources, Inc. Connecticut 100%
(23) See Independent Auditors' report on schedules and consent. (28) Information from reports furnished to state insurance regulatory authorities. This exhibit which will be filed supplementally includes the Company's combined Schedule P as prepared for its 1995 combined Annual Statement which will be provided to state regulatory authorities. The schedule has been prepared on a statutory basis. The combined schedule includes the historical results of the Company's insurance subsidiaries as if they had been owned from their inception date. It should be noted that the combined schedule includes data of seventeen operating companies and, as a result, any statistical extrapolation from the schedule may not be meaningful. (The combined Schedule P as filed with the Securities and Exchange Commission, has been omitted from this copy. It is available upon request from Mr. Anthony J. Del Tufo, Senior Vice President, Chief Financial Officer and Treasurer of the Company, at the address shown on page 1.) 63 64 INDEPENDENT AUDITORS' REPORT ON SCHEDULES AND CONSENT Board of Directors and Stockholders W. R. Berkley Corporation The audit referred to in our report dated February 21, 1997 included the related financial statement schedules as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996 included in the Form 10-K. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We consent to the use of our reports incorporated by reference in the Registration Statements (No. 2-98396) on Form S-1 and (No. 33-55726) on Form S-8 and (No. 33-30684) and (No. 33-95552) and (No. 333-00459) on Forms S-3 and (No. 33-88640) on Form S-8 of W. R. Berkley Corporation. KPMG Peat Marwick LLP New York, New York March 21, 1997 64 65 Schedule II W. R. Berkley Corporation Condensed Financial Information of Registrant Balance Sheets (Parent Company) (Amounts in thousands)
December 31, ---------------------------- 1996 1995 ----------- ----------- Assets Cash (including invested cash) $ 55,305 $ 10,669 Fixed maturity securities: Held to maturity, at cost (fair value $10,101 and $10,176) 10,101 10,176 Available for sale at fair value (cost $122,760 and $5,807) 122,592 5,807 Equity securities, at fair value: Available for sale (cost $1,433 and $1,733) 3,733 2,146 Trading account (cost $33,331 and $35,053) 33,331 35,053 Investments in subsidiaries 1,212,474 1,136,518 Due from subsidiaries 56,334 42,703 Current Federal income taxes receivable -- 35 Real estate, furniture & equipment at cost, less accumulated depreciation 22,194 1,741 Other assets 4,316 3,033 ----------- ----------- $ 1,520,380 $ 1,247,881 =========== =========== Liabilities, Debt and Stockholders' Equity Liabilities: Due to subsidiaries (principally deferred income taxes) $ 47,308 $ 32,590 Deferred Federal income taxes 4,013 14,363 Other liabilities 27,115 15,925 ----------- ----------- 78,436 62,878 ----------- ----------- Long-term debt 354,311 255,188 Subsidiary trust junior subordinated debt 207,901 -- Stockholders' equity: Preferred stock 93 146 Common stock 4,854 4,854 Additional paid-in capital 471,492 547,068 Retained earnings (including accumulated undistributed net income of subsidiaries of $417,604 and $374,027 in 1996 and 1995, respectively) 490,338 424,261 Equity in net unrealized investment gains net of taxes 31,075 48,450 Treasury stock, at cost (118,120) (94,964) ----------- ----------- 879,732 929,815 ----------- ----------- $ 1,520,380 $ 1,247,881 =========== ===========
See note to condensed financial statements. 65 66 Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued Statements of Operations (Parent Company) (Amounts in thousands)
Years ended December 31, ------------------------------------ 1996 1995 1994 -------- -------- -------- Management fees and investment income from affiliates, including dividends of $60,264, $38,091 and $19,520 for 1996, 1995 and 1994, respectively $ 72,377 $ 50,839 $ 28,328 Realized investment gains (losses) 486 (306) (1,700) Other income 4,058 5,615 6,190 -------- -------- -------- Total revenues 76,921 56,148 32,818 Expenses, other than interest expense (16,121) (12,256) (10,772) Interest expense (30,014) (22,907) (22,892) -------- -------- -------- Income (loss) before Federal income taxes 30,786 20,985 (846) -------- -------- -------- Federal income taxes: Federal income taxes provided by subsidiaries on a separate return basis 41,002 22,481 13,513 Federal income tax provision on a consolidated return basis (25,102) (15,454) (5,370) -------- -------- -------- Net benefit 15,900 7,027 8,143 -------- -------- -------- Income before undistributed equity in net income of subsidiaries 46,686 28,012 7,297 Equity in undistributed net income of subsidiaries 43,577 32,870 27,797 -------- -------- -------- Income before preferred dividends 90,263 60,882 35,094 Preferred dividends (13,909) (11,062) (10,356) -------- -------- -------- Net income attributable to common stockholders $ 76,354 $ 49,820 $ 24,738 ======== ======== ========
See note to condensed financial statements. 66 67 Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued Statement of Cash Flows (Parent Company) (Amounts in thousands)
Years ended December 31, --------------------------------------- 1996 1995 1994 --------- --------- --------- Cash flows from operating activities: Net income before preferred dividends $ 90,263 $ 60,882 $ 35,094 Adjustments to reconcile net income to net cash flows provided by operating activities: Equity in undistributed net income of subsidiaries (43,577) (32,870) (27,797) Tax payments from subsidiaries 35,613 17,104 14,614 Federal income taxes provided by subsidiaries (40,848) (22,481) (13,513) Change in Federal income taxes 4,840 3,654 (2,765) Realized investment losses (486) 306 1,700 Other, net 6,050 4,087 (404) --------- --------- --------- Net cash provided by operating activities before trading account sales (purchases) 51,855 30,682 6,929 Trading account sales (purchases), net 1,722 (26,065) -- --------- --------- --------- Net cash provided by operating activities 53,577 4,617 6,929 --------- --------- --------- Cash flow used in investing activities: Proceeds from sales, excluding trading account: Fixed maturity securities available for sale 13,121 23,158 77,613 Equity securities 786 1 832 Proceeds from maturities and prepayments of fixed maturity securities -- 15,206 521 Cost of purchases, excluding trading account: Fixed maturity securities (130,003) (3,452) (106,600) Equity securities -- (1,733) (425) Cost of companies acquired (15,955) (217,096) -- Investments in and advances to subsidiaries, net (38,936) (70,972) (31,242) Net additions to real estate, furniture & equipment (21,270) (328) (93) Other, net -- -- (503) --------- --------- --------- Net cash used in investing activities (192,257) (255,216) (59,897) --------- --------- --------- Cash flows from financing activities: Net proceeds from issuance of common stock -- 144,739 -- Net proceeds from issuance of preferred stock -- 66,000 145,275 Net proceeds from issuance of long-term debt 98,850 -- -- Net proceeds from issuance of a subsidiary trust junior subordinated debt 207,900 -- -- Purchase of treasury shares (24,152) (4,095) (26,357) Cash dividends to common stockholders (10,147) (7,844) (7,459) Cash dividends to preferred shareholders (12,824) (11,062) (8,051) Purchase of Preferred Stock (77,572) -- -- Payment of subsidiary debt -- -- (4,527) Other, net 1,261 1,441 156 --------- --------- --------- Net cash provided by financing activities 183,316 189,179 99,037 --------- --------- --------- Net increase in cash and invested cash 44,636 (61,420) 46,069 Cash and invested cash at beginning of year 10,669 72,089 26,020 --------- --------- --------- Cash and invested cash at end of year $ 55,305 $ 10,669 $ 72,089 ========= ========= =========
See note to condensed financial statements 67 68 Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued December 31, 1996, 1995 and 1994 Note to Condensed Financial Statements (Parent Company) The accompanying condensed financial statements should be read in conjunction with the notes to consolidated financial statements included elsewhere herein. Reclassifications have been made in the 1995 and 1994 financial statements as originally reported to conform them to the presentation of the 1996 financial statements. The Company files a consolidated federal tax return with the results of its domestic insurance subsidiaries included on a statutory basis. Under present Company policy, Federal income taxes payable by (or refundable to) subsidiary companies on a separate-return basis are paid to (or refunded by) W. R. Berkley Corporation, and the Company pays the tax due on a consolidated return basis. Included in fixed maturities available for sale is $115,800,000 of securities placed in a trust which will be used to service the remaining outstanding shares of the Series A Preferred Stock. The Company expects that the proceeds of the trust will be utilized to redeem the Series A Preferred Stock on January 25, 1999. 68 69 Schedule III W. R. Berkley Corporation and Subsidiaries Supplementary Insurance Information December 31, 1996, 1995 and 1994 (Amounts in thousands)
Reserve for Deferred policy losses and Net Loss and acquisition loss Unearned Premiums investment Loss cost expenses premiums earned income expenses --------------- ----------- -------- -------- ---------- -------- December 31, 1996 Regional $ 68,780 $ 386,123 $282,543 $494,819 $ 45,544 $332,535 Reinsurance 16,947 293,340 65,388 206,144 31,071 153,162 Specialty 25,588 785,204 132,749 176,253 54,186 120,660 Alternative markets 5,518 302,606 25,281 79,012 29,118 50,372 International 2,324 15,430 8,252 24,993 1,426 12,431 Corporate and adjustments -- -- -- -- 3,145 -- -------- ---------- -------- -------- -------- -------- Total $119,157 $1,782,703 $514,213 $981,221 $164,490 $669,160 ======== ========== ======== ======== ======== ======== December 31, 1995 Regional $ 58,469 $ 343,546 $247,633 $434,282 $ 40,827 $285,146 Reinsurance 8,388 234,811 55,539 185,244 26,186 145,094 Specialty 15,265 805,072 109,089 145,322 54,118 116,211 Alternative markets 5,184 262,872 29,551 31,588 6,978 21,096 International 2,211 13,719 8,710 6,900 377 3,451 Corporate and adjustments -- -- -- -- 8,846 -- -------- ---------- -------- -------- -------- -------- Total $ 89,517 $1,660,020 $450,522 $803,336 $137,332 $570,998 ======== ========== ======== ======== ======== ======== December 31, 1994 $ 48,709 $ 285,024 $205,130 $343,123 $ 32,897 $225,650 Regional 10,482 962,663 43,725 168,239 19,034 147,894 Specialty 11,138 810,526 94,963 128,939 49,949 101,921 Alternative markets 1,697 12,267 6,445 14,737 1,795 10,684 International -- -- -- -- -- -- Corporate and adjustments -- 406 -- -- 6,008 -- -------- ---------- -------- -------- -------- -------- Total $ 72,026 $2,070,886 $350,263 $655,038 $109,683 $486,149 ======== ========== ======== ======== ======== ========
Amortization of deferred policy Other acquisition operating cost Net premiums Costs and expenses written --------------- -------------- ------------ December 31, 1996 Regional $144,342 $ 29,778 $ 531,147 Reinsurance 52,925 4,076 218,047 Specialty 49,064 12,467 202,491 Alternative markets 25,457 67,397 75,644 International 11,854 3,433 25,182 Corporate and adjustments -- 8,201 -- -------- -------- ---------- Total $283,642 $125,352 $1,052,511 ======== ======== ========== December 31, 1995 Regional $131,152 $ 21,601 $ 471,716 Reinsurance 48,239 3,036 195,988 Specialty 39,105 10,214 160,847 Alternative markets 6,382 70,373 25,998 International 3,732 551 5,872 Corporate and adjustments -- 5,604 -- -------- -------- ---------- Total $228,610 $111,379 $ 860,421 ======== ======== ========== December 31, 1994 $105,539 $ 18,519 $ 386,530 Regional 43,698 7,845 176,699 Specialty 36,534 8,992 134,715 Alternative markets 1,697 58,370 19,989 International -- -- -- Corporate and adjustments -- 5,072 -- -------- -------- ---------- Total $187,468 $ 98,798 $ 717,933 ======== ======== ==========
69 70 Schedule IV W. R. Berkley Corporation and Subsidiaries Reinsurance Years ended December 31, 1996, 1995 and 1994 (Amounts in thousands)
Assumed Percentage Ceded from of amount Direct to other other Net assumed to amount companies companies amount net ------ --------- --------- ------ ---------- Premiums written: Year ended December 31, 1996: Regional insurance $604,942 $ 78,041 $ 4,246 $ 531,147 0.8% Reinsurance -- 10,708 228,755 218,047 104.9% Specialty insurance 302,832 111,826 11,485 202,491 5.7% Alternative Markets 58,065 5,353 22,932 75,644 30.3% International 29,263 4,081 -- 25,182 -- -------- -------- -------- ---------- ----- Total $995,102 $210,009 $267,418 $1,052,511 25.4% ======== ======== ======== ========== ===== Year ended December 31, 1995: Regional insurance $529,004 $ 72,504 $ 15,216 $ 471,716 3.2% Reinsurance -- 12,464 208,452 195,988 106.4% Specialty insurance 277,752 123,585 6,680 160,847 4.2% Alternative Markets 4,980 2,068 23,086 25,998 88.8% International 7,420 1,548 -- 5,872 -- -------- -------- ---------- ----- Total $819,156 $212,169 $253,434 $ 860,421 29.5% ======== ======== ======== ========== ===== Year ended December 31, 1994: Regional insurance $431,103 $ 53,458 $ 8,885 $ 386,530 2.3% Reinsurance -- 17,834 194,533 176,699 110.1% Specialty insurance 264,747 138,759 8,727 134,715 6.5% Alternative Markets -- 186 20,175 19,989 100.9% International -- -- -- -- -- -------- -------- ---------- ----- Total $695,850 $210,237 $232,320 $ 717,933 32.4% ======== ======== ======== ========== =====
70 71 Schedule VI W. R. Berkley Corporation and Subsidiaries Supplementary Information Concerning Property-Casualty Insurance Operations December 31, 1996, 1995 and 1994 (Amounts in thousands)
1996 1995 1994 ---- ---- ---- Deferred policy acquisition costs $ 119,157 $ 89,517 $ 72,026 Reserves for losses and loss expenses 1,782,703 1,660,020 2,070,886 Unearned premium 514,213 450,522 350,263 Premiums earned 981,221 803,336 655,038 Net investment income 164,490 137,332 109,683 Losses and loss expenses incurred: Current Year 675,674 580,594 493,418 Prior Years (15,219) (9,596) (7,269) Amortization of discount 8,705 -- -- Amortization of deferred policy acquisition costs 283,642 228,610 187,468 Paid losses and loss expenses 545,288 449,151 373,927 Net premiums written 1,052,511 860,421 717,933
71 EX-27 2 FINANCIAL DATA SCHEDULE
7 1,000 U.S. DOLLAR YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 2,045,254 204,234 208,232 361,509 0 0 2,610,997 346,485 0 119,157 4,073,264 1,782,703 514,213 0 0 610,335 0 93 4,854 874,785 4,073,264 981,221 164,490 7,437 2,772 669,160 0 0 115,049 25,102 89,947 0 0 0 76,354 3.84 0 1,209,250 675,674 (15,219) 280,565 264,723 1,333,122 15,000
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