<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. . . . . . . . March 31, 1997
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 May 2, 1997:
19,648,061.
<PAGE> 2
W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- -----------
(Unaudited)
<S> <C> <C>
Assets
Investments:
Invested cash $ 314,904 $ 327,193
Fixed maturity securities:
Held to maturity, at cost (fair value
$199,804 and $208,232) 200,553 204,234
Available for sale at fair value (cost $2,101,754
and $2,012,911) 2,098,848 2,045,254
Equity securities, at fair value:
Available for sale (cost $85,226 and $78,435) 93,666 93,900
Trading account (cost $194,265 and $260,167) 191,908 267,609
Cash 26,064 19,292
Premiums and fees receivable 274,986 256,441
Due from reinsurers 444,550 427,419
Accrued investment income 33,910 34,577
Prepaid reinsurance premiums 69,754 70,057
Deferred policy acquisition costs 128,071 119,157
Real estate, furniture & equipment at cost, less accumulated depreciation 116,613 116,303
Excess of cost over net assets acquired 72,680 73,404
Other assets 24,243 18,424
----------- -----------
$ 4,090,750 $ 4,073,264
=========== ===========
Liabilities, Reserves, Debt and
Stockholders' Equity
Liabilities and reserves:
Reserves for losses and loss expenses $ 1,809,662 $ 1,782,703
Unearned premiums 540,636 514,213
Due to reinsurers 73,500 71,352
Deferred Federal income taxes -- 4,013
Other liabilities 204,751 210,916
----------- -----------
2,628,549 2,583,197
----------- -----------
Long-term debt 390,183 390,104
----------- -----------
Company-obligated mandatorily redeemable capital securities of a
subsidiary trust holding solely 8.197% junior subordinated debentures
of the Corporation due December 15, 2045 207,911 207,901
Minority interest 15,489 12,330
----------- -----------
Stockholders' equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares:
7 3/8% Series A Cumulative Redeemable Preferred
Stock 747,727 and 930,807 shares issued and outstanding 75 93
Common stock, par value $.20 per share:
Authorized 40,000,000 shares, issued and
outstanding, net of treasury shares,
19,648,061 and 19,635,976 shares 4,854 4,854
Additional paid-in capital 444,113 471,492
Retained earnings 513,816 490,338
Net unrealized investment gains,
net of taxes 3,597 31,075
Treasury stock, at cost, 4,621,317 and
4,633,402 shares (117,837) (118,120)
----------- -----------
848,618 879,732
----------- -----------
$ 4,090,750 $ 4,073,264
=========== ===========
</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
Ended March 31,
---------------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues:
Net premiums written $ 284,010 $ 249,208
Increase in unearned premiums (26,726) (20,069)
--------- ---------
Premiums earned 257,284 229,139
Net investment income 44,831 39,619
Management fees and commissions 17,530 18,562
Realized gains on investments 9,340 311
Other income 837 643
--------- ---------
Total revenues 329,822 288,274
Operating costs and expenses:
Losses and loss expenses (169,593) (160,763)
Other operating costs and expenses (110,013) (95,393)
Interest expense (12,218) (7,787)
--------- ---------
Income before income taxes and
minority interest 37,998 24,331
Federal income tax expense (9,795) (4,809)
--------- ---------
Income before minority interest 28,203 19,522
Minority interest 341 --
--------- ---------
Net income before preferred dividends 28,544 19,522
Preferred dividends (2,117) (3,838)
--------- ---------
Net income attributable to common stockholders $ 26,427 $ 15,684
========= =========
Net income per share $ 1.35 $ .78
========= =========
Average shares outstanding 19,641 20,178
========= =========
</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 Three Months
Ended March 31,
--------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends $ 28,544 $ 19,522
Adjustments to reconcile net income to cash
flows from operating activities:
Minority interest (341) --
Increase in reserves for losses
and loss expenses, net 11,976 32,351
Depreciation and amortization 642 2,889
Change in unearned premiums and
prepaid reinsurance premiums 26,726 20,069
Increase in premiums and fees receivable (18,545) (17,435)
Change in Federal income taxes 6,119 4,400
Change in deferred acquisition cost (8,914) (7,448)
Realized gains on investments (9,340) (311)
Other 1,088 (13,231)
--------- ---------
Net cash flows from operating activities
before trading account sales 37,955 40,806
Trading account sales 58,708 13,335
--------- ---------
Net cash flows from operating activities 96,663 54,141
--------- ---------
Cash flows from investing activities:
Proceeds from sales, excluding trading
account:
Fixed maturity securities available for sale 153,346 96,627
Equity securities 16,485 2,197
Proceeds from maturities and prepayments of
fixed maturity securities 39,040 52,087
Cost of purchases, excluding trading account:
Fixed maturity securities available for sale (273,971) (191,618)
Fixed maturity securities held to maturity -- (28,448)
Equity securities (13,914) (2,080)
Change in balances due to/from security brokers 17,552 946
Net additions to real estate, furniture and equipment (3,398) (8,607)
Other (8,820) (874)
--------- ---------
Net cash flows from investing activities (73,680) (79,770)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of long-term debt -- 98,850
Repayment of preferred stock (27,462) (27,351)
Repayment of subsidiary debt -- (27,225)
Cash dividends to common stockholders (2,554) (2,419)
Cash dividends to preferred stockholders (2,307) (2,856)
Purchase of treasury shares -- --
Other 3,823 416
--------- ---------
Net cash flows from financing activities (28,500) 39,415
--------- ---------
Net increase (decrease) in cash and invested cash (5,517) 13,786
Cash and invested cash at beginning of year 346,485 206,917
--------- ---------
Cash and invested cash at end of period $ 340,968 $ 220,703
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 7,475 $ 4,531
========= =========
Federal income taxes paid, net $ 3,675 $ 408
========= =========
</TABLE>
3
<PAGE> 5
W. R. Berkley Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1997
(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, 1996.
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
Ended March 31,
---------------
1997 1996
---- ----
<S> <C> <C>
Ceded premiums written $ 55,079 $ 50,874
======= =======
Ceded premiums earned $ 54,678 $ 52,760
======= =======
Ceded losses and loss expenses $ 25,245 $ 31,066
======= =======
</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.
4
<PAGE> 6
D. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), entitled
"Earnings Per Share." SFAS 128 will replace the presentation of primary and
fully diluted earnings per share with basic earnings per share and diluted
earnings per share, respectively. Basic earnings per share excludes dilution and
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding during the period, whereas primary
earnings per share includes the dilutive effect of common stock equivalents.
Diluted earnings per share is generally similar to fully diluted earnings per
share under current accounting standards. For calendar year enterprises, SFAS
128 is effective commencing with year end 1997 financial statements and will
then apply retroactively to both annual and interim periods, requiring the
restatement of previously presented earnings per share data. Earlier application
is not permitted. Based on preliminary calculations, the Company does not
believe that earnings per share computed under SFAS 128 would be materially
different from the earnings per share data presented herein.
E. OTHER MATTERS
Net unrealized investment gains decreased by $27,478,000 (net of
Federal income taxes of $14,795,000) during the three months ended March 31,
1997. Of this amount, $4,566,000 was attributable to a decrease in unrealized
gains on equity securities and $22,912,000 was attributable to a decrease in
unrealized gains on fixed maturities available for sale.
Reclassifications have been made in the 1996 financial statements as
originally reported to conform them to the presentation of the 1997 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.
5
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net income attributable to common stockholders ("net income") was $26.4
million, ($1.35 per share) for the first quarter of 1997, in comparison with
$15.7 million, ($.78 per share), for the 1996 period. Operating income, which is
net income before realized investment gains, was $20.4 million, ($1.04 per
share), in the first quarter of 1997 in comparison with $15.5 million, ($.77 per
share), earned in the corresponding 1996 period.
Net premiums written during the first quarter of 1997 increased by 14%
to $284.0 million from $249.2 million written in the comparable 1996 period. Net
premiums written by the regional segment increased by $27.6 million or 24%; 60%
of this increase is due to business units which were added in the past four
years. Specialty net premiums written decreased by $2.3 million or 5% due to a
decrease in premiums written by Carolina Casualty which was partially offset by
increases recorded by other specialty operations. Net premiums written by our
reinsurance operations decreased by $1.5 million or 3% due to a decline in
treaty business which was partially offset by premiums generated by the Latin
American and Caribbean division which commenced operations in February 1996.
Alternative markets net premiums written increased $8.0 million or 32% as both
Midwest Employers Casualty Company and Signet Star's Alternative Markets
division increased their market penetration. International net premiums written
increased $3.1 million or 57% due to the July 1996 start up of a workers
compensation unit in Argentina.
For the three months ended March 31, 1997, pre-tax investment income
increased by 13% to $44.8 million. This increase was primarily due to an
increase in average investable assets due to the December 1996 issuance of $210
million Capital Securities, discussed below, and cash flow from operations. In
addition, an increase in investment yields available in the financial markets
contributed to the growth in investment income (See "Liquidity and Capital
Resources").
Management fees and commission income ("Management fees") consist
primarily of revenues earned by the Alternative Markets segment. During the
first quarter of 1997, management fees decreased 6% from the comparable 1996
amount, principally due to the effects of intense competition in the workers
compensation market.
Realized gains increased to $9.3 million from $.3 million earned in the
comparable 1996 period. 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 1997 and 1996 realized gains resulted from the sale of
equity securities.
The combined ratio (on a statutory basis) of the Company's insurance
operations decreased to 100.1% for the quarter ended March 31, 1997 from 103.0%
in the comparable 1996 period due to decrease in the consolidated loss ratio
which was partially offset by an increase in the expense ratio. The consolidated
loss ratio (losses and loss expenses incurred expressed as a percentage of
premiums earned) decreased to 66.2% in 1997 from 70.4% in 1996 due partially to
a decrease in weather related losses.
Other operating costs and expenses, which consists of the expenses of
the Company's insurance and alternative markets operations as well as the
Company's corporate and investment expenses, increased by 15% to $110.0 million.
The increase in other operating costs and expenses is primarily due to
substantial growth in premium volume which in turn results in an increase in
underwriting expenses. The consolidated expense ratio (underwriting expenses
expressed as a percentage of premiums written) increased to 33.5% from 32.2%
primarily due to higher commission expenses in the Specialty operations.
Interest expense increased due to the December 1996 issuance of $210
million Company-obligated mandatory redeemable capital securities of a
subsidiary trust holding solely 8.197% Junior Subordinated Debentures of the
Corporation. Preferred dividends decreased due to the retirement of the series B
Preferred stock, in 1996 and
6
<PAGE> 8
the retirement of 252,273 shares of the Series A Preferred Stock during December
1996 and January 1997.
Federal income tax expense in 1997 was $9.8 million (26% effective
rate) as compared to a $4.8 million (20% effective rate) for the comparable 1996
period. The increase in the effective tax rate in 1997 is due primarily to a
decrease in the percentage of pre-tax income that is tax-exempt. (See "Liquidity
and Capital Resources").
Liquidity and Capital Resources
Cash flow from operating activities before trading account sales, was
$38.0 million in the first quarter of 1997 compared with $40.8 million for the
same period in 1996. The investment portfolio, on a cost basis, increased by
$13.8 million to $2,896.7 million at March 31, 1997 from $2,882.9 million at
December 31, 1996 due to cash flow from operations and the net financing
activities discussed below.
The change in the Company's investment portfolio distribution at March
31, 1997 as compared with December 31, 1996 was: tax-exempt securities increased
to 31% from 29%; U.S. Government securities and cash equivalents remained at
27%; corporate bonds remained at 14%; mortgage-backed securities remained at 19%
and equity securities represented the balance.
In January 1997 the Company purchased and retired 183,080 shares of the
Series A Preferred Stock for $27.5 million.
For the first quarter of 1997, Stockholders' equity decreased by
approximately $31.1 million. The decrease in stockholders' equity is primarily
attributable to the repurchase of the Series A Preferred stock. In addition, the
decrease in unrealized gains in marketable securities, which was substantially
offset by retained earnings in the period, also contributed to a decline in
stockholders' equity. Accordingly, the Company's total capitalization, declined
to $1,446.7 million at March 31, 1997 and the percentage of the Company's
capital attributable to long-term debt increased to 27% from 26% at December 31,
1996.
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> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 2,098,848
<DEBT-CARRYING-VALUE> 200,553
<DEBT-MARKET-VALUE> 199,804
<EQUITIES> 285,574
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,584,975
<CASH> 340,968
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 128,071
<TOTAL-ASSETS> 4,090,750
<POLICY-LOSSES> 1,809,662
<UNEARNED-PREMIUMS> 540,636
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 598,094
0
75
<COMMON> 4,854
<OTHER-SE> 843,689
<TOTAL-LIABILITY-AND-EQUITY> 4,090,750
257,284
<INVESTMENT-INCOME> 44,831
<INVESTMENT-GAINS> 9,340
<OTHER-INCOME> 837
<BENEFITS> 169,593
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 37,998
<INCOME-TAX> 9,795
<INCOME-CONTINUING> 28,203
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,427
<EPS-PRIMARY> 1.35
<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>
