<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, 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 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,
1996: 19,623,803
<PAGE> 2
W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -------------
(Unaudited)
<S> <C> <C>
Assets
Investments:
Invested cash $ 278,236 $ 196,732
Fixed maturity securities:
Held to maturity, at cost (fair value
$195,399 and $176,193) 194,659 169,078
Available for sale at fair value (cost $1,926,682
and $1,894,451) 1,936,274 1,959,910
Equity securities, at fair value:
Available for sale (cost $68,843 and $92,472) 81,970 101,551
Trading account (cost $172,694 and $155,301) 177,876 161,075
Cash 10,424 10,185
Premiums and fees receivable 262,140 231,093
Due from reinsurers 441,191 423,626
Accrued investment income 31,438 34,373
Prepaid reinsurance premiums 71,285 77,656
Deferred policy acquisition costs 114,004 89,517
Excess of cost over net assets acquired 74,246 69,600
Deferred Federal income taxes 1,084 --
Other assets 139,214 94,288
----------- -----------
$ 3,814,041 $ 3,618,684
=========== ===========
Liabilities, Reserves, Debt and
Stockholders' Equity
Liabilities and reserves:
Reserves for losses and loss expenses $ 1,761,949 $ 1,660,020
Unearned premiums 511,848 450,522
Due to reinsurers 68,913 65,798
Deferred Federal income taxes -- 14,363
Other liabilities 177,886 169,080
----------- -----------
2,520,596 2,359,783
----------- -----------
Long-term debt 390,035 290,981
Notes payable to Banks -- 28,306
Minority interest 10,066 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 1,000,000 shares issued and outstanding 100 100
Series B Cumulative Redeemable Preferred Stock
266,667 and 458,667 shares issued and outstanding 27 46
Common stock, par value $.20 per share:
Authorized 40,000,000 shares, issued and
outstanding, net of treasury shares,
19,612,184 and 20,168,167 shares 4,854 4,854
Additional paid-in capital 521,361 547,068
Retained earnings 470,910 424,261
Net unrealized investment gains,
net of taxes 14,768 48,450
Treasury stock, at cost, 4,657,194 and
4,101,211 shares (118,676) (94,964)
----------- -----------
893,344 929,815
----------- -----------
$ 3,814,041 $ 3,618,684
=========== ===========
</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,
-------------------------- --------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Net premiums written $ 269,646 $ 235,055 $ 788,329 $ 642,206
Increase in unearned premiums (21,068) (27,674) (67,594) (64,046)
--------- --------- --------- ---------
Premiums earned 248,578 207,381 720,735 578,160
Net investment income 41,483 32,927 120,592 96,332
Management fees and commissions 16,945 17,625 53,231 51,854
Realized gains on investments 3,581 2,568 4,104 9,341
Other income 947 392 2,090 1,580
--------- --------- --------- ---------
Total revenues 311,534 260,893 900,752 737,267
Operating costs and expenses:
Losses and loss expenses (170,164) (151,705) (495,206) (415,435)
Other operating costs and expenses (101,757) (82,929) (298,279) (241,962)
Interest expense (7,967) (7,071) (23,655) (21,216)
--------- --------- --------- ---------
Income before income taxes and
minority interest 31,646 19,188 83,612 58,654
Federal income tax expense (7,554) (3,152) (18,637) (11,291)
--------- --------- --------- ---------
Income before minority interest 24,092 16,036 64,975 47,363
Minority interest -- (1,242) -- (3,627)
--------- --------- --------- ---------
Net income before preferred dividends 24,092 14,794 64,975 43,736
Preferred dividends (3,380) (2,766) (10,598) (8,297)
--------- --------- --------- ---------
Net income attributable to
common stockholders $ 20,712 $ 12,028 $ 54,377 $ 35,439
========= ========= ========= =========
Net income per share $ 1.06 $ .72 $ 2.74 $ 2.12
========= ========= ========= =========
Average shares outstanding 19,625 16,668 19,861 16,693
========= ========= ========= =========
</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,
--------------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends $ 64,975 $ 43,736
Adjustments to reconcile net income to cash
flows from operating activities:
Minority interest -- 3,627
Increase in reserves for losses and loss expenses
net of due from/to reinsurers 89,041 87,647
Depreciation and amortization 9,187 10,869
Change in unearned premiums and prepaid
reinsurance premiums 67,594 64,043
Increase in premiums and fees receivable (31,047) (35,444)
Change in Federal income taxes 3,816 (1,077)
Change in deferred acquisition cost (24,487) (16,659)
Realized gains on investments (4,104) (9,341)
Other (7,312) 6,930
--------- ---------
Net cash flows from operating activities
before trading account sales 167,663 154,331
Trading account sales (15,168) (56,851)
--------- ---------
Net cash flows from operating activities 152,495 97,480
--------- ---------
Cash flows from investing activities:
Proceeds from sales, excluding trading
account:
Fixed maturity securities available for sale 281,604 320,718
Equity securities 40,689 41,353
Proceeds from maturities and prepayments of
fixed maturity securities 164,681 100,300
Cost of purchases, excluding trading account:
Fixed maturity securities available for sale (441,108) (504,948)
Fixed maturity securities held to maturity (55,592) --
Equity securities (12,825) (51,832)
Change in balances due to/from security brokers 1,414 (9,923)
Cost of acquired companies, net of acquired cash
and invested cash (11,739) (3,575)
Other (41,110) (10,633)
--------- ---------
Net cash flows from investing activities (73,986) (118,540)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of long-term 98,850 --
Repayment of preferred stock (27,216) --
Cash dividends to common stockholders (7,598) (5,842)
Cash dividends to preferred stockholders (8,924) (8,297)
Repayment of acquired debt (28,306) (8,918)
Purchase of treasury shares (24,152) (4,095)
Other 580 486
--------- ---------
Net cash flows from financing activities 3,234 (26,666)
--------- ---------
Net increase (decrease) in cash and invested cash 81,743 (47,726)
Cash and invested cash at beginning of year 206,917 219,629
--------- ---------
Cash and invested cash at end of period $ 288,660 $ 171,903
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 20,251 $ 17,812
========= =========
Federal income taxes paid, net $ 14,819 $ 12,369
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 5
W. R. Berkley Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1996
(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, 1995.
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,
-------------------- ---------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Ceded premiums written $52,953 $52,982 $155,500 $155,292
======= ======= ======== ========
Ceded premiums earned $54,200 $49,306 $161,223 $149,288
======= ======= ======== ========
Ceded losses and loss expenses $37,010 $40,865 $ 99,692 $115,857
======= ======= ======== ========
</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 declined by $33,682,000 (net of Federal
income taxes of $18,137,000) during the nine months ended September 30, 1996. Of
this amount, $2,631,000 was attributable to an increase in unrealized gains on
equity securities and $36,313,000 was attributable to a decrease in unrealized
gains on fixed maturities available for sale.
Reclassifications have been made in the 1995 financial statements as
originally reported to conform them to the presentation of the 1996 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.
4
<PAGE> 6
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 1996 was $54,377,000 ($2.74 per share). The comparable 1995
amount was $35,439,000 ($2.12 per share). For the quarter ended September 30,
1996, net income was $20,712,000 ($1.06 per share) in comparison with
$12,028,000 ($.72 per share) recorded in the comparable prior year period.
Operating income, which we define as net income before realized
investment gains, for the first nine months of 1996 was $51,709,000 ($2.60 per
share). The comparable 1995 amount, was $29,744,000 ($1.78 per share). For the
quarter ended September 30, 1996, operating income was $18,384,000 ($.94 per
share) in comparison with $10,445,000 ($.63 per share) recorded in the
comparable prior year period.
Operating Results for the Nine Months ended September 30, 1996 as Compared to
the Nine Months ended September 30, 1995
Net premiums written during the first nine months of 1996 increased 23%
to $788,329,000 from $642,206,000. Regional net premiums written increased 11%
to $394,265,000; three-fourths of this increase was due to business units which
were started during the past four years. Reinsurance net premiums written
increased 10% to $162,849,000; this increase was substantially due to an
increase in treaty business and the start-up of the Latin American and Caribbean
division. Specialty net premiums written increased 24% to $152,322,000; this
increase 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 which more than offset a decline in premiums written by Carolina
Casualty. Alternative markets net premiums written increased $46,627,000 to
$61,769,000 primarily due to the inclusion of the results of MECC, Inc.
("MECC"), acquired in November 1995. International operations, which commenced
during the 2nd quarter of 1995, contributed $17,124,000 to net premiums written.
For the nine months ended September 30, 1996, pre-tax net investment
income increased $24,260,000 to $120,592,000. Three-fourths of this increase was
due to the inclusion of the results of MECC. Excluding effects of the
acquisition of MECC, pre-tax net investment income increased 6.6%; this increase
was due to the increase in average investable assets generated by cash flow from
operations (see "Liquidity and Capital Resources"), which more than offset a
decline in yields available in the financial markets.
Management fees and commissions consist primarily of fees earned by the
alternative markets segment. Management fees and commissions during the first
nine months of 1996 increased 3% to $53,231,000 as market conditions,
particularly in workers' compensation insurance, inhibited growth.
Realized gains on 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 from the sale of equity securities, whereas in 1995
the majority of realized gains were from the sale of fixed income securities.
The combined ratio (on a statutory basis) of the Company's insurance
operations decreased to 102.2% for the nine months ended September 30, 1996 from
102.3% in the comparable 1995 period due to a decrease in the consolidated loss
ratio which was partially offset by a higher expense ratio. The consolidated
loss ratio (losses and loss expenses incurred expressed as a percentage of
premiums earned) decreased to 69.2% in 1996 from 71.4% in 1995, due to improved
results recorded by our specialty operations which more than offset the impact
of an increase in weather related losses incurred by our regional operations.
5
<PAGE> 7
Other operating costs and expenses, which consists of the expenses of
the Company's insurance and insurance services segments, as well as the
Company's corporate and investment expenses increased 23% to $298,279,000 for
the nine months ended September 30, 1996. 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. In addition the acquisition of MECC contributed to this increase. The
consolidated expense ratio of the Company's insurance operations (underwriting
expenses expressed as a percentage of premiums written) increased to 32.6% for
the 1996 period from 30.4% for the comparable 1995 period. The underwriting
expense ratio increased primarily as a result of an increase in commission
expense.
Interest expense increased due to the January 1996 issuance of $100
million of long-term debt. Preferred dividends increased as a result of the
December 1995 issuance of $68.8 million Series B Cumulative Redeemable Preferred
Stock. (see "Liquidity and Capital Resources").
The Federal income tax provision resulted in an effective tax rate of
22% in 1996 and 19% in 1995. The 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.
Operating Results for the Third Quarter of
1996 as Compared to the Third Quarter of 1995
For the third quarter of 1996 as compared to the corresponding 1995
period, net premiums written increased 15%; net investment income increased 26%
and management fees and commission income decreased 4%, all for the reasons
discussed above.
The combined ratio (on a statutory basis) of the Company's insurance
operations decreased to 102.1% for the three months ended September 30, 1996
from 103.3% in the comparable 1995 period.
Other operating costs and expenses, increased 23% to $101,757,000 for
the three months ended September 30, 1996. The consolidated expense ratio of the
Company's insurance operations (underwriting expenses expressed as a percentage
of premiums written) increased to 32.6% for the 1996 period from 29.8% for the
comparable 1995 as discussed above.
6
<PAGE> 8
Liquidity and Capital Resources
Cash flow from operating activities before trading account sales,
increased to $167.7 million during the first nine months of 1996 from $154.3
million in the same period in 1995 due to an increase in premium volume and the
inclusion of the results of MECC. The investment portfolio, on a cost basis,
increased $133.1 million to $2,641.1 million at September 30, 1996 from $2,508.0
million at December 31, 1995 due to cash flow from operations and the net
effects of financing activities discussed below.
Changes in the distribution of the Company's investment portfolio at
September 30, 1996 in comparison with December 31, 1995 were as follows:
tax-exempt securities decreased to 32% from 33%; U.S. Government securities
increased to 13% from 12%; corporate bonds decreased to 16% from 19%;
mortgage-backed securities increased to 19% from 18%; cash equivalents increased
to 10% from 8%; and equity securities remained at 10%.
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 subsidiary bank debt. On March 29, 1996 the
Company repurchased 192,000 shares ($28.8 million redemption value) of the
Series B Cumulative Redeemable Preferred Stock for $27.2 million.
For the first nine months of 1996, Stockholders' equity decreased by
approximately $36.5 million. The decrease in stockholders' equity is
attributable to the repurchase of the Series B Cumulative Redeemable Preferred
Stock, the purchase of treasury stock and a decrease in unrealized investment
gains which more than offset an increase in retained earnings. As a result of
the net effect of the financing transactions and change in stockholders' equity
discussed above, the Company's total capitalization grew to $1,283.4 million at
September 30, 1996 and the percentage of the Company's capital attributable to
debt increased to 30% from 26% at December 31, 1995.
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.
7
<PAGE> 9
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
None
8
<PAGE> 10
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 and
Chief Executive Officer
By /s/ Anthony J. DelTufo
-------------------------
Anthony J. Del Tufo
Senior Vice President,
Chief Financial Officer
and Treasurer
9
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 1,936,274
<DEBT-CARRYING-VALUE> 194,659
<DEBT-MARKET-VALUE> 195,399
<EQUITIES> 259,846
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,669,015
<CASH> 10,424
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 114,004
<TOTAL-ASSETS> 3,814,041
<POLICY-LOSSES> 1,761,949
<UNEARNED-PREMIUMS> 511,848
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 390,035
0
127
<COMMON> 4,854
<OTHER-SE> 888,363
<TOTAL-LIABILITY-AND-EQUITY> 3,814,041
720,735
<INVESTMENT-INCOME> 120,592
<INVESTMENT-GAINS> 4,104
<OTHER-INCOME> 2,090
<BENEFITS> 495,206
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 83,612
<INCOME-TAX> 18,637
<INCOME-CONTINUING> 64,975
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,377
<EPS-PRIMARY> 2.74
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>