<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended. . . . . . . . September 30, 1995
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
165 Mason Street, Greenwich, Connecticut 06836-2518
(Address of principal executive offices) (Zip Code)
(203) 629-3000
(Registrant's telephone number, including area code)
None
Former name, former address and former fiscal year, if
changed since last report.
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
---- ----
Number of shares of common stock, $.20 par value, outstanding as of November 1,
1995: 20,148,349.
<PAGE> 2
W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Invested cash $ 161,403 $ 214,116
Fixed maturity securities:
Held to maturity, at cost (fair value
$167,067 and $195,983) 160,701 192,827
Available for sale, at fair value
(cost $1,536,345 and $1,408,063) 1,568,446 1,353,891
Equity securities, at fair value
Available for sale (cost $81,648 and $68,787) 90,805 69,338
Trading Account (cost $163,849 and $71,211) 169,449 71,543
Cash 10,500 5,513
Premiums and fees receivable 236,688 191,418
Due from reinsurers 1,108,736 1,127,416
Accrued investment income 26,775 30,118
Prepaid reinsurance premiums 74,819 69,169
Deferred policy acquisition costs 90,341 72,026
Excess of cost over net assets acquired 55,556 55,319
Deferred Federal income taxes 16,937 42,217
Other assets 96,569 87,380
----------- -----------
$ 3,867,725 $ 3,582,291
=========== ===========
LIABILITIES, RESERVES, DEBT AND
STOCKHOLDERS' EQUITY
Liabilities and reserves:
Reserves for losses and loss expenses $ 2,148,449 $ 2,070,886
Unearned premiums 425,833 350,263
Due to reinsurers 59,256 54,845
Other liabilities 153,982 116,983
----------- -----------
2,787,520 2,592,977
----------- -----------
Corporate debt 255,141 255,006
Subsidiary debt 67,076 75,996
Minority interest 75,069 60,711
Stockholders' equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares, issued and
outstanding 1,000,000 shares 100 100
Common stock, par value $.20 per share:
Authorized 40,000,000 shares, issued and
outstanding, net of treasury shares,
16,684,041 and 16,777,718 shares 4,166 4,165
Additional paid-in capital 336,656 336,659
Retained earnings 412,299 382,859
Net unrealized investment gains (losses) 25,514 (33,973)
Treasury stock, at cost, 4,135,337 and
4,041,660 shares (95,816) (92,209)
----------- -----------
682,919 597,601
----------- -----------
$ 3,867,725 $ 3,582,291
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 3
W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Net premiums written $ 235,055 $ 184,813 $ 642,206 $ 538,108
Increase in unearned premiums (27,674) (19,712) (64,046) (56,677)
--------- --------- --------- ---------
Premiums earned 207,381 165,101 578,160 481,431
Net investment income 32,927 28,213 96,332 80,149
Management fees and commissions 17,625 18,699 51,854 48,792
Realized gains (losses) on investments 2,568 (1,687) 9,341 429
Other income 392 464 1,580 1,523
--------- --------- --------- ---------
Total revenues 260,893 210,790 737,267 612,324
Operating costs and expenses:
Losses and loss expenses (151,705) (126,958) (415,435) (366,594)
Other operating costs and expenses (82,929) (74,135) (241,962) (208,720)
Interest expense (7,071) (6,918) (21,216) (20,717)
--------- --------- --------- ---------
Income before income taxes and
minority interest 19,188 2,779 58,654 16,293
Federal income tax (expense) benefit (3,152) 1,864 (11,291) 3,714
--------- --------- --------- ---------
Income before minority interest 16,036 4,643 47,363 20,007
Minority interest (1,242) 1,493 (3,627) 3,503
--------- --------- --------- ---------
Net income before preferred dividends 14,794 6,136 43,736 23,510
Preferred dividends (2,766) (2,766) (8,297) (7,590)
--------- --------- --------- ---------
Net income attributable to
common stockholders $ 12,028 $ 3,370 $ 35,439 $ 15,920
========= ========= ========= =========
Net income per share $ .72 $ .19 $ 2.12 $ .92
========= ========= ========= =========
Average shares outstanding 16,668 17,336 16,693 17,318
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends $ 43,736 $ 23,510
Adjustments to reconcile net income to cash
flows from operating activities:
Minority interest 3,627 (3,503)
Increase in reserves for losses and loss expenses
net of due from/to reinsurers 87,647 100,290
Depreciation and amortization 10,869 10,602
Change in unearned premiums and prepaid
reinsurance premiums 64,043 56,677
Increase in premiums and fees receivable (35,444) (37,471)
Change in Federal income taxes (1,077) (10,548)
Change in deferred acquisition cost (16,659) (12,621)
Realized gains on investments (9,341) (429)
Other 6,930 16,438
--------- ---------
Net cash flows from operating activities
before trading account sales 154,331 142,945
Trading account sales (56,851) (51,961)
--------- ---------
Net cash flows from operating activities 97,480 90,984
--------- ---------
Cash flows from investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 320,718 318,967
Equity securities 41,353 175,640
Proceeds from maturities and prepayments of
fixed maturity securities 100,300 103,845
Cost of purchases, excluding trading account:
Fixed maturity securities (504,948) (586,612)
Equity securities (51,832) (203,316)
Change in balances due to/from security brokers (9,923) (22,055)
Cost of acquired companies, net of acquired cash
and invested cash (3,575) --
Other (10,633) (30,046)
--------- ---------
Net cash flows from investing activities (118,540) (243,577)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance preferred stock -- 145,275
Cash dividends to common stockholders (5,842) (5,548)
Cash dividends to preferred stockholders (8,297) (5,285)
Repayment of acquired debt (8,918) (4,527)
Purchase of treasury shares (4,095) (17,908)
Other 486 61
--------- ---------
Net cash flows from financing activities (26,666) 112,068
--------- ---------
Net increase (decrease) in cash and invested cash (47,726) (40,525)
Cash and invested cash at beginning of year 219,629 225,540
--------- ---------
Cash and invested cash at end of period $ 171,903 $ 185,015
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 17,812 $ 17,330
========= =========
Federal income taxes paid, net $ 12,369 $ 6,835
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
W. R. Berkley Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1995
(Unaudited)
The accompanying consolidated financial statements should be read in
conjunction with the following notes and with the Notes to Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
A. FEDERAL INCOME TAXES
The Federal income tax provision has been computed based on the
Company's estimated annual effective tax rate which differs from the Federal
income tax rate of 35% principally because of tax-exempt investment income.
B. REINSURANCE CEDED
The amounts of ceded reinsurance included in the statements of
operations are as follows (amounts in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1995 1994 1995 1994
------- ------- -------- --------
<S> <C> <C> <C> <C>
Ceded premiums written $52,982 $57,262 $155,292 $157,470
======= ======= ======== ========
Ceded premiums earned $49,306 $54,807 $149,288 $143,543
======= ======= ======== ========
Ceded losses and loss expenses $40,865 $41,383 $115,857 $118,399
======= ======= ======== ========
</TABLE>
C. PER SHARE DATA
Per share amounts have been computed based on net income less preferred
dividends divided by the weighted average number of common shares outstanding.
Incremental shares arising from the assumed issuance of employee stock options,
which are considered common stock equivalents, were not included in the
computations because the assumed dilutive effect was not material.
D. OTHER MATTERS
Net unrealized investment gains (losses) changed by $59,487,000 (net of
Federal income taxes of $27,169,000 and minority interest of $8,223,000) during
the nine months ended September 30, 1995. Of this amount, $5,565,000 was
attributable to an increase in unrealized gains on equity securities and
$53,922,000 was attributable to an increase in unrealized gains on fixed
maturities available for sale.
4
<PAGE> 6
Reclassifications have been made in the 1994 financial statements as
originally reported to conform them to the presentation of the 1995 financial
statements.
In the opinion of management, the summarized financial information
reflects all adjustments which are necessary for a fair presentation of
financial position and results of operations for the interim periods. The
Company's results of operations are affected by seasonal weather variations.
Accordingly, results reflected for any interim period are not necessarily
indicative of those to be expected for the entire year.
E. EVENTS SUBSEQUENT TO DECEMBER 31, 1994
On October 19, 1995 the Company issued 3,450,000 shares of its Common
Stock at a price of $43.75 per share.
On September 14, 1995, the Company entered into an Agreement and Plan
of Merger to acquire MECC, inc. ("MECC"). MECC is an insurance holding company,
which through its sole, wholly-owned subsidiary, Midwest Employers Casualty
Company, markets and underwrites excess workers' compensation ("EWC") insurance.
The Company will pay approximately $138 million in cash in connection with the
acquisition and will prepay or assume approximately $20 million of MECC's
outstanding indebtedness. The merger, is scheduled to be completed during the
fourth quarter of 1995.
On September 11, 1995, the Company and Northwestern Mutual Life
International, Inc. ("NML"), a wholly-owned subsidiary of Northwestern Mutual
Life Insurance Company, entered into a Subscription Agreement, Operating
Agreement and Management Agreement with respect to Berkley International, LLC
("Berkley International"), a limited liability company. Berkley International
was established as the exclusive vehicle of the Company and NML to acquire
interests outside of the United States in existing and start-up property and
casualty, life insurance and reinsurance businesses, including insurance-related
financial services businesses, located in emerging markets including Asia and
Latin America. 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. Monies will be contributed as required to fund future
investments. During 1995, the Company purchased majority interest in two small
property and casualty companies in Argentina, which constituted a portion of the
Company's initial contribution to Berkley International.
On July 20, 1995, the Company entered into an Agreement and Plan of
Restructuring with General Re Corporation ("General Re") pursuant to which the
Company would purchase from General Re all of the capital stock of Signet Star
Holdings, Inc. ("Signet Star Holdings") owned by General Re. As a result of a
1993 venture between the two companies, the Company currently owns 60% and
General Re currently owns 40% of Signet Star Holdings. Pursuant to the Agreement
and Plan of Restructuring, the Company will purchase General Re's interest in
Signet Star Holdings by issuing to General Re approximately 450,000 shares of
Series B Cumulative Redeemable Preferred Stock of the Company having an
aggregate liquidation preference of $68,800,000. The transaction, which is
subject to various closing conditions, is anticipated to be completed during the
fourth quarter of 1995.
5
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net income attributable to common stockholders (net income) for the
first nine months of 1995 was $35,439,000 ($2.12 per share). The comparable 1994
amount was $15,920,000 ($.92 per share). For the quarter ended September 30,
1995, net income was $12,028,000 ($.72 per share) in comparison with $3,370,000
($.19 per share) recorded in the comparable prior year period.
Operating income, which we define as net income before realized
investment gains or losses, was $29,744,000 ($1.78 per share) and $10,445,000
($.63 per share) for the 1995 year-to-date and quarterly periods, respectively.
The corresponding 1994 amounts were $15,608,000 ($.90 per share) and $4,309,000
($.24 per share), respectively.
The 1994 results were adversely affected by the Company's share of
losses incurred by Signet Star Holdings, Inc. due to the Northridge earthquake
in California. The Northridge earthquake amounted to $2,902,000 ($.17 per share)
and $7,435,000 ($.43 per share) for the third quarter and first nine months of
1994, respectively.
Operating Results for the Nine Months ended September 30, 1995 as Compared to
the Nine Months ended September 30, 1994
Net premiums written during the first nine months of 1995 increased by
19% to $642,206,000 from $538,108,000 written in the comparable 1994 period.
Premiums written by the Regional insurance group increased 25%, of which over
half was due to three new units which were added in the latter half of 1992 and
1993. The balance of the Regional group growth results from additional volume in
the remaining Regional operations. Reinsurance premiums written for the first
nine months increased by 10% over 1994 and specialty premiums written grew 18%
primarily due to increases in the amount of business retained by Admiral and
Nautilus.
For the nine months ended September 30, 1995, net investment income, on
a pre-tax basis, increased 20% to $96,332,000. The higher level of investment
earnings reflects the increase in average investable assets due to cash flow
from operations and an increase in investment yields available in the financial
markets (see "Liquidity and Capital Resources").
Management fees and commission income consist primarily of revenues
earned by the insurance services segment. During the first nine months of 1995
the revenues of this segment increased 11% while their pre-tax earnings
decreased 14% to $4,598,000. The increase in revenues was due to the acquisition
of Key Risk; excluding the Key Risk acquisition, revenues were basically
unchanged. The lower level of earnings resulted principally from losses at one
operating unit, which has since undergone a restructuring.
The combined ratio (on a statutory basis) of the Company's insurance
operations decreased to 102.3% for the nine months ended September 30, 1995 from
106.3% in the comparable 1994 period due to a decrease in the consolidated loss
ratio which was offset by a slightly higher expense ratio. The consolidated loss
ratio (losses and loss expenses incurred expressed as a percentage of premiums
earned) decreased to 71.4% in 1995 from 75.6% in 1994; (71.3% excluding the
Northridge earthquake).
6
<PAGE> 8
Other operating costs and expenses, which increased 16% to $241,962,000
for the nine months ended September 30, 1995, consists of the expenses of the
Company's insurance and insurance services segments, as well as the Company's
corporate and investment expenses. The increase in other operating costs and
expenses is due primarily to the substantial growth in premium volume 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 slightly to 30.4% for the 1995
period from 30.2% for the comparable 1994 period.
The Federal income tax provision was $11,291,000 (19% effective rate)
for the nine months ended September 30, 1995 as compared to a benefit of
$3,714,000 for the comparable 1994 period. The 1994 tax benefit is due to the
fact that tax-exempt investment income exceeded total pre-tax income. The 1995
effective tax rate is lower than the statutory tax rate of 35% because a
substantial portion of investment income is tax-exempt. The Company's effective
tax rate varies from period to period due primarily to fluctuations in the
percentage of pretax income that is tax-exempt.
Operating Results for the Third Quarter of
1995 as Compared to the Third Quarter of 1994
For the third quarter of 1995 as compared to the corresponding 1994
period, net premiums written, increased 27%, and net investment income increased
17%, for the reasons discussed above. The revenues of the insurance services
segment decreased 4% due to the restructuring previously discussed.
The combined ratio (on a statutory basis) of the Company's insurance
operations decreased to 103.3% for the three months ended September 30, 1995
from 107.6% in the comparable 1994 period due to decreases in the consolidated
loss and expense ratios. The consolidated loss ratio (losses and loss expenses
incurred expressed as a percentage of premiums earned) improved to 73.0% in 1995
from 76.4% (71.6% excluding the Northridge earthquake) in 1994. The increase in
the loss ratio, excluding the Northridge earthquake, is attributable to an
increase in the frequency and severity of losses incurred by the Company's
commercial transportation subsidiary.
Other operating costs and expenses increased 12% to $82,929,000 for the
three months ended September 30, 1995 as a result of the reasons discussed
above. The consolidated expense ratio of the Company's insurance operations
(underwriting expenses expressed as a percentage of premiums written) improved
to 29.8% for the 1995 period from 30.6% for the comparable 1994 period due
mainly to growth recorded by the new business units noted above.
Liquidity and Capital Resources
Cash flow from operating activities increased to $154.3 million for the
nine months ended September 30, 1995 from $142.9 million in the same period in
1994 due primarily to cash flow generated by the Company's reinsurance and
regional operations. The investment portfolio, on a cost basis, increased by
$149 million to $2,104 million at September 30, 1995 from $1,955 million at
December 31, 1994.
7
<PAGE> 9
At September 30, 1995 the portion of the portfolio invested in
tax-exempt securities was 32% while U.S. Government securities and cash and cash
equivalents comprised approximately 21% of the portfolio. The percentage
invested in corporate bonds was approximately 14%, the percentage invested in
mortgage-backed securities was 21% and equity securities represented the balance
of the portfolio.
Subsequent to September 30, 1995, stockholders' equity will increase by
approximately $145 million due to the issuance of 3,450,000 shares of Common
Stock at a price of $43.75 per share. In addition, stockholders' equity will
increase by approximately $66 million due to the issuance of 450,000 shares of
Series B Cumulative Redeemable Preferred Stock ("Preferred Stock"). The
Preferred Stock will be issued in connection with the Company's acquisition of
the minority interest in Signet Star Holdings, Inc.
For the first nine months of 1995, the Company generated an increase of
approximately $85 million in stockholders' equity generated by the net effects
of earnings, an increase in unrealized investment gains of $59 million and the
purchase of treasury stock. The Company's total capitalization, excluding
subsidiary debt, grew to $938 million at September 30, 1995 and the percentage
of the Company's capital attributable to corporate debt decreased to 27% from
30% at December 31, 1994. On a proforma basis, giving effect to the issuance of
3,450,000 shares of Common Stock in October, 1995, the Company's total
capitalization, excluding subsidiary debt, would have been approximately $1,083
at September 30, 1995 and the percentage of the Company's capital attributable
to corporate debt would have been approximately 24% at that date.
For background information concerning a further discussion of the
Company's Liquidity and Capital Resources, see the Company's Annual Report on
Form 10-K.
8
<PAGE> 10
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27, Financial Data Schedule.
(b) Reports on Form 8-K
On July 20, 1995, the Company filed a current report on Form 8-K
announcing that it had executed a definitive agreement with
General Re Corporation ("General Re") pursuant to which the
Company would purchase from General Re all of the Capital stock of
Signet Star Holdings, Inc. owned by General Re.
On September 14, 1995, the Company filed a current report on Form
8-K announcing that it had entered into an Agreement and Plan of
Merger to acquire MECC, Inc. ("MECC"). In addition, the Company
reported that it and Northwestern Mutual Life International, Inc.,
a wholly owned subsidiary of Northwestern Mutual Life Insurance
Company entered into a Subscription Agreement, Operating Agreement
and Management Agreement with respect to Berkley International,
LLC.
On September 14, 1995, the Company filed a current report on Form
8-K announcing that it proposes to offer approximately 3,000,000
shares of its common stock in an underwritten public offering.
9
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
W. R. BERKLEY CORPORATION
By /s/ William R. Berkley
---------------------------
William R. Berkley
Chairman of the Board,
Chief Executive Officer
and President
By /s/ Anthony J. DelTufo
---------------------------
Anthony J. Del Tufo
Senior Vice President,
Chief Financial Officer
and Treasurer
10
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 1,568,446
<DEBT-CARRYING-VALUE> 160,701
<DEBT-MARKET-VALUE> 167,067
<EQUITIES> 260,254
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,150,804
<CASH> 171,903
<RECOVER-REINSURE> 1
<DEFERRED-ACQUISITION> 90,341
<TOTAL-ASSETS> 3,867,725
<POLICY-LOSSES> 2,148,449
<UNEARNED-PREMIUMS> 425,833
<POLICY-OTHER> 1
<POLICY-HOLDER-FUNDS> 1
<NOTES-PAYABLE> 322,217
<COMMON> 4,166
0
100
<OTHER-SE> 678,653
<TOTAL-LIABILITY-AND-EQUITY> 3,867,725
578,160
<INVESTMENT-INCOME> 96,332
<INVESTMENT-GAINS> 9,341
<OTHER-INCOME> 1,580
<BENEFITS> 415,435
<UNDERWRITING-AMORTIZATION> 1
<UNDERWRITING-OTHER> 1
<INCOME-PRETAX> 58,654
<INCOME-TAX> 11,291
<INCOME-CONTINUING> 47,363
<DISCONTINUED> 1
<EXTRAORDINARY> 1
<CHANGES> 1
<NET-INCOME> 35,439
<EPS-PRIMARY> 2.12
<EPS-DILUTED> 1
<RESERVE-OPEN> 1
<PROVISION-CURRENT> 1
<PROVISION-PRIOR> 1
<PAYMENTS-CURRENT> 1
<PAYMENTS-PRIOR> 1
<RESERVE-CLOSE> 1
<CUMULATIVE-DEFICIENCY> 1
</TABLE>
