<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, 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 November 3,
1997: 29,547,822
<PAGE> 2
W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
Assets
Investments:
<S> <C> <C>
Invested cash $ 316,114 $ 327,193
Fixed maturity securities:
Held to maturity, at cost (fair value
$193,348 and $208,232) 185,750 204,234
Available for sale at fair value (cost $2,169,280
and $2,012,911) 2,228,824 2,045,254
Equity securities, at fair value:
Available for sale (cost $84,561 and $78,435) 96,886 93,900
Trading account (cost $338,136 and $260,167) 354,226 267,609
Cash 10,444 19,292
Premiums and fees receivable 334,552 256,441
Due from reinsurers 435,933 427,419
Accrued investment income 34,839 34,577
Prepaid reinsurance premiums 74,043 70,057
Deferred policy acquisition costs 144,536 119,157
Real Estate, furniture & equipment at cost, less accumulated 126,257 116,303
depreciation
Excess of cost over net assets acquired 72,171 73,404
Other assets 23,567 18,424
----------- -----------
$ 4,438,142 $ 4,073,264
=========== ===========
Liabilities, Reserves, Debt and
Stockholders' Equity
Liabilities and reserves:
Reserves for losses and loss expenses $ 1,869,456 $ 1,782,703
Unearned premiums 591,951 514,213
Due to reinsurers 83,685 71,352
Deferred Federal income taxes 19,563 4,013
Other liabilities 333,245 210,916
----------- -----------
2,897,900 2,583,197
----------- -----------
Long-term debt 390,337 390,104
----------- -----------
Company-obligated manditorily redeemable capital
securities of a subsidiary trust holding solely
8.197% junior subordinated debentures of the 207,933 207,901
Corporation due December 15, 2045
Minority interest 26,787 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 653,952 and 930,807 shares issued and
outstanding 65 93
Common stock, par value $.20 per share:
Authorized 40,000,000 shares, issued and
outstanding, net of treasury shares,
29,534,268 and 29,453,964 shares 7,281 7,281
Additional paid-in capital 427,938 469,065
Retained earnings 549,965 490,338
Net unrealized investment gains,
net of taxes 46,712 31,075
Treasury stock, at cost, 6,869,577 and
6,950,103 shares (116,776) (118,120)
----------- -----------
915,185 879,732
----------- -----------
$ 4,438,142 $ 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 For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1997 1996 1997 1996
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Net premiums written $ 302,106 $ 269,646 $ 886,875 $ 788,329
Increase in unearned premiums (18,183) (21,068) (73,752) (67,594)
--------- --------- ----------- ---------
Premiums earned 283,923 248,578 813,123 720,735
Net investment income 48,257 41,483 140,675 120,592
Management fees and commission income 17,413 16,945 52,833 53,231
Realized gains on investments 5,127 3,581 12,321 4,104
Other income 930 947 2,446 2,090
--------- --------- ----------- ---------
Total revenues 355,650 311,534 1,021,398 900,752
Operating costs and expenses:
Losses and loss expenses (189,569) (170,164) (540,429) (495,206)
Other operating costs and expenses (120,503) (101,935) (347,014) (298,296)
Interest expense (12,197) (7,967) (36,652) (23,655)
--------- --------- ----------- ---------
Income before income taxes and
minority interest 33,381 31,468 97,303 83,595
Federal income tax expense (7,932) (7,554) (23,291) (18,637)
--------- --------- ----------- ---------
Income before minority interest 25,449 23,914 74,012 64,958
Minority interest 124 178 738 17
--------- --------- ----------- ---------
Net income before preferred dividends 25,573 24,092 74,750 64,975
Preferred dividends (1,852) (3,380) (5,977) (10,598)
--------- --------- ----------- ---------
Net income attributable to common stockholders $ 23,721 $ 20,712 $ 68,773 $ 54,377
========= ========= =========== =========
Net income per share $ .80 $ .70 $ 2.34 $ 1.83
========= ========= =========== =========
Average shares outstanding 29,517 29,438 29,379 29,792
========= ========= =========== =========
</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,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends $ 74,750 $ 64,975
Adjustments to reconcile net income to cash
flows from operating activities:
Minority interest (738) (17)
Increase in reserves for losses
and loss expenses, net of due to/from reinsurers 90,193 89,041
Depreciation and amortization 4,775 9,187
Change in unearned premiums and
prepaid reinsurance premiums 73,752 67,594
Increase in premiums and fees receivable (77,383) (31,047)
Change in Federal income taxes (246) 3,816
Change in deferred acquisition cost (25,379) (24,487)
Realized gains on investments (12,321) (4,104)
Other, net 20,196 (7,295)
--------- ---------
Net cash flows from operating activities
before trading account sales (purchases) 147,599 167,663
Trading account sales (purchases), net (16,365) (15,168)
--------- ---------
Net cash flows from operating activities 131,234 152,495
--------- ---------
Cash flows from investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 422,566 281,604
Equity securities 25,306 40,689
Proceeds from maturities and prepayments of
fixed maturity securities 99,117 164,681
Cost of purchases, excluding trading account:
Fixed maturity securities available for sale (654,260) (441,108)
Fixed maturity securities held to maturity -- (55,592)
Equity securities (19,136) (12,825)
Change in balances due to/from security brokers 40,207 1,414
Cost of acquired companies, net of acquired
cash and invested cash (1,439) (11,739)
Other, net (23,463) (41,110)
--------- ---------
Net cash flows from investing activities (111,102) (73,986)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of long-term debt -- 98,850
Repurchase of preferred stock (41,523) (27,216)
Repayment of subsidiary debt -- (28,306)
Cash dividends to common stockholders (8,451) (7,598)
Cash dividends to preferred stockholders (6,992) (8,924)
Purchase of treasury shares -- (24,152)
Other, net 16,907 580
--------- ---------
Net cash flows from financing activities (40,059) 3,234
--------- ---------
Net increase (decrease) in cash and invested cash (19,927) 81,743
Cash and invested cash at beginning of year 346,485 206,917
--------- ---------
Cash and invested cash at end of period $ 326,558 $ 288,660
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 30,330 $ 20,251
========= =========
Federal income taxes paid, net $ 23,508 $ 14,819
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
W. R. Berkley Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 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 For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
1997 1996 1997 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
Ceded premiums written $59,221 $52,953 $179,741 $155,500
======= ======= ======== ========
Ceded premiums earned $60,920 $54,200 $174,884 $161,223
======= ======= ======== ========
Ceded losses and loss expenses $26,973 $37,010 $ 90,986 $ 99,692
======= ======= ======== ========
</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. 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.
4
<PAGE> 6
E. OTHER MATTERS
Net unrealized investment gains increased by $15,637,000 (net of Federal
income taxes of $8,422,000) during the nine months ended September 30, 1997. Of
this amount, $2,040,000 was attributable to a decrease in unrealized gains on
equity securities and $17,677,000 was attributable to an increase in unrealized
gains on fixed maturities available for sale.
F. 3 FOR 2 STOCK SPLIT
On August 12 the Company announced that its Board of Directors had
approved a 3 for 2 stock split of the Company's common stock in the form of a
stock dividend. Stockholders of record on August 27, 1997 received additional
shares on September 18, 1997. The share information provided on the Statement of
Operations gives effect to the split as if the split occurred on January 1 of
the respective periods.
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) for the first
nine months of 1997 was $68,773,000 ($2.34 per share). The comparable 1996
amount was $54,377,000 ($1.83 per share). For the quarter ended September 30,
1997, net income was $23,721,000 ($.80 per share) in comparison with $20,712,000
($.70 per share) recorded in the comparable prior year period.
Operating income, which we define as net income before realized investment
gains or losses, for the first nine months of 1997 was $60,764,000 ($2.07 per
share). The comparable 1996 amount, was $51,709,000 ($1.74 per share). For the
quarter ended September 30, 1997, operating income was $20,388,000 ($.69 per
share) in comparison with $18,384,000 ($.62 per share) recorded in the
comparable prior year period.
Operating Results for the Nine Months ended September 30, 1997
as Compared to the Nine Months ended September 30, 1996
Net premiums written during the first nine months of 1997 increased 13% to
$886,875,000 from $788,329,000. Regional net premiums written increased 20% to
$472,556,000; 40% of this increase was due to business units which were started
during the past five years. Reinsurance net premiums written decreased 3% to
$157,297,000. This decrease was substantially due to a decrease in treaty
business offset by premiums generated by the Latin American and Caribbean
division which commenced operations in February 1996. Specialty net premiums
written increased 2% to $155,928,000 due to an increase in business written by
Excess and Surplus operations which more than offset a decline in premiums
written by our transportation unit. Alternative markets net premiums written
increased 17% to $72,234,000 as Signet Star's alternative markets division
increased its market penetration. International net premiums written increased
$11.7 million or 69% primarily due to the July 1996 start-up of a Worker's
Compensation unit in Argentina.
For the nine months ended September 30, 1997, pre-tax net investment
income increased $20,083,000 to $140,675,000. This increase was primarily due to
the increase in average investable assets due to cash flow from operations and
the December 1996 issuance of $210 million capital securities discussed below.
In addition, an increase in investment income earned by our trading portfolio
contributed to the growth in investment income (see "Liquidity and Capital
Resources").
Management fees and commission income consist primarily of fees earned by
the insurance services sector of the alternative markets segment. Management
fees and commissions earned during the first nine months of 1997 decreased 1% to
$52,833,000 principally due to the effects of intense competition in the
workers' compensation market.
Realized investment gains increased to $12,321,000 million from $4,104,000
earned during 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 100.7% for the nine months ended September 30, 1997 from
102.2% in the comparable 1996 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 66.8% in 1997 from 69.2% in 1996. This improvement was due
to a decrease in weather related losses incurred by our regional operations and
better then expected experience on business written in prior years recorded by
our specialty operations.
6
<PAGE> 8
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 16% to $347,014,000 for the nine
months ended September 30, 1997. The increase in other operating costs is
primarily due to substantial growth in premium, 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 33.5% for the 1997 period from 32.6% for the
comparable 1996 period. The underwriting expense ratio increased primarily as a
result of an increase in commission expense.
The Federal income tax provision resulted in an effective tax rate of 24%
in 1997 (22% in 1996). The increase in the effective tax rate in 1997 is due
primarily to the increase in realized gains on investments which are taxed at
the full Corporate rate.
Operating Results for the Third Quarter of
1997 as Compared to the Third Quarter of 1996
For the third quarter of 1997 as compared to the corresponding 1996
period, net premiums written increased 12% and net investment income increased
16% for the reasons discussed above. Management fees and commission income
increased 3% for the third quarter of 1997 as compared to the corresponding 1996
period due to the inclusion of the results of Berkley Care Network, Northeast,
which was acquired in May.
The combined ratio (on a statutory basis) of the Company's insurance
operations decreased to 101.2% for the three months ended September 30, 1997
from 101.9% in the comparable 1996 period due to a decrease in the consolidated
loss ratio which more than offset a higher expense ratio. The consolidated loss
ratio (losses and loss expenses incurred expressed as a percentage of premiums
earned) improved to 67.0% in 1997 from 69.3% in 1996 for the reasons discussed
above.
Other operating costs and expenses, increased 18% to $120,503,000 for the
three months ended September 30, 1997 and the consolidated expense ratio of the
Company's insurance operations (underwriting expenses expressed as a percentage
of premiums written) increased to 33.7% for the 1997 period from 32.6% for the
comparable 1996, for the reasons discussed above.
7
<PAGE> 9
Liquidity and Capital Resources
Cash flow from operating activities before trading account purchases was
$147.6 million during the first nine months of 1997 in comparison with $167.7
million recorded for the same period in 1996. The decrease resulted primarily
from an increase in paid losses due to a reduction in the rate of premium
growth. The investment portfolio, on a cost basis, rose by $210.9 million to
$3,093.8 million at September 30, 1997 from $2,882.9 million at December 31,
1996 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, 1997 in comparison with December 31, 1996 were as follows:
tax-exempt securities increased to 31% from 29%; U.S. Government securities and
cash equivalents decreased to 23% from 27%; corporate bonds increased to 15%
from 14%; mortgage-backed securities decreased to 18% from 19%; and equity
securities increased to 13% from 11%.
In January 1997, the Company repurchased 183,080 shares of its Series A
Preferred stock for $27.5 million. In the second and third quarters 93,775
shares of its Series A Preferred stock were purchased for $14.8 million.
For the first nine months of 1997, Stockholders' equity increased by
approximately $35.5 million. The increase in stockholders' equity is
attributable to an increase in retained earnings and an increase in unrealized
gains in marketable securities which was partially offset by the repurchase of
the Series A Preferred stock discussed above. Accordingly, the Company's total
capitalization increased to $1,513.5 million at September 30, 1997 and the
percentage of the Company's capital attributable to long-term debt remained at
26%.
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.
Other information
The Company continues to address system programming issues with regards to
system requirements for the year 2000 and expects to be completed by the end of
1998. Costs associated with the year 2000 projects, which will not be
significant, are expensed as incurred. Since the year 2000 issue will be
resolved it is not expected to have any impact on the Company's operations.
8
<PAGE> 10
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
None
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 and
Chief Executive Officer
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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 2,228,824
<DEBT-CARRYING-VALUE> 185,750
<DEBT-MARKET-VALUE> 193,348
<EQUITIES> 451,112
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,865,686
<CASH> 326,558
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 144,536
<TOTAL-ASSETS> 4,438,142
<POLICY-LOSSES> 1,869,456
<UNEARNED-PREMIUMS> 591,951
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 598,270
0
65
<COMMON> 7,281
<OTHER-SE> 907,839
<TOTAL-LIABILITY-AND-EQUITY> 4,438,142
813,123
<INVESTMENT-INCOME> 140,675
<INVESTMENT-GAINS> 12,321
<OTHER-INCOME> 2,446
<BENEFITS> 540,429
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 97,303
<INCOME-TAX> 23,291
<INCOME-CONTINUING> 74,012
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,773
<EPS-PRIMARY> 2.34
<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>
