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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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: 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 / /
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. / /
Aggregate market value of voting stock held by non-affiliates of the registrant
based on the closing price of such stock as of March 2, 1998: $1,143,221,275.
Number of shares of common stock, $.20 par value, outstanding as of March 2,
1998: 29,611,359
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 1997 Annual Report to Stockholders for the year ended
December 31, 1997 are incorporated herein by reference in Part II, and portions
of the registrant's definitive proxy statement, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1997, are
incorporated herein by reference in Part III.
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W. R. BERKLEY CORPORATION
ANNUAL REPORT ON FORM 10-K
December 31, 1997
PART I Page
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 21
ITEM 3. LEGAL PROCEEDINGS 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 22
ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS
ENDED DECEMBER 31, 1997 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 24
ITEM 11. EXECUTIVE COMPENSATION 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 28
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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 Midwestern, Southern and Northeastern sections of the United States.
Reinsurance, specialty insurance and alternative markets operations are
conducted nationwide. Presently, international operations are conducted
primarily in Argentina and the Philippines.
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, 1997 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Net premiums written:
Regional insurance operations $ 632,459 $ 531,147 $ 471,716 $ 386,530 $ 301,890
Reinsurance operations (1) 206,652 218,200 196,299 176,130 106,575
Specialty insurance operations (1) 208,570 202,338 160,536 135,284 124,252
Alternative markets operations 87,881 75,644 25,998 19,989 4,929
International Operations 42,079 25,182 5,872 -- --
------------ ------------ ------------ ------------ ------------
Total net premiums written $ 1,177,641 $ 1,052,511 $ 860,421 $ 717,933 $ 537,646
============ ============ ============ ============ ============
Percentage of net premiums written:
Regional insurance operations 53.7% 50.5% 54.8% 53.8% 56.2%
Reinsurance operations (1) 17.5 20.7 22.8 24.6 19.8
Specialty insurance operations (1) 17.7 19.2 18.7 18.8 23.1
Alternative markets operations 7.5 7.2 3.0 2.8 .9
International Operations 3.6 2.4 .7 -- --
------------ ------------ ------------ ------------ ------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
============ ============ ============ ============ ============
</TABLE>
(1) The Reinsurance and specialty insurance operations have been restated
in accordance with FAS 131.
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
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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"), FICO
Insurance Company ("FICO"), Chesapeake Bay Property and Casualty Insurance
Company ("Chesapeake") 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. FICO'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 coverage's through independent agencies.
In 1996, the Company formed Berkley Regional Insurance Company ("BRIC")
to act as an intermediate holding Company. The Company contributed to BRIC all
of the capital stock of the regional insurance companies. In 1997 BRIC reinsured
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, 1997 was $307,812,000. BRIC is rated A+ by A.M. Best.
Acadia Insurance Company
Acadia was organized by the Company and incorporated in April 1992. It
writes multiple line property and casualty coverage's in the States of Maine,
New Hampshire, Vermont and Massachusetts. Acadia is rated A+ by A.M. Best.
Acadia's statutory surplus and statutory net premiums written as of December 31,
1997 and for the year then ended were $44,943,000 and $127,990,000,
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, 1997 and for the year then ended were $9,771,000 and $12,074,000,
respectively. American West is managed by Tri-State, its immediate parent.
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, 1997 and
for the year then ended were $9,505,000 and $30,407,000, respectively.
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Chesapeake Bay Property and Casualty Insurance Company
Chesapeake, a Maine domiciled company owned by Acadia, was formed in
1993. In 1997 Firemen's Chesapeake Insurance Division moved its operations to
Chesapeake. Chesapeake writes personal and commercial lines in Virginia and is
expanding to surrounding states. Chesapeake is rated A+ by A.M. Best.
Chesapeake's statutory surplus and statutory net premiums written as of December
31, 1997 and for the year then ended were $7,624,000 and $28,030,000,
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, 1997 and for the
year then ended were $86,786,000 and $153,618,000, respectively.
Firemen's Insurance Company of Washington, D.C.
Firemen's was originally incorporated by an Act of Congress in 1836.
Firemen's writes homeowners, other personal lines and commercial risks in the
District of Columbia, and in the States of Maryland, North Carolina and
Virginia. 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, 1997 and for the year then ended were
$34,667,000 and $54,553,000, respectively.
FICO Insurance Company
FICO was established in 1988 and is owned by Firemen's. FICO writes
commercial business consisting primarily of multiple dwelling coverage's
principally in the state of New York through operations conducted by Clermont
Specialty Managers, Ltd., an underwriting manager which is owned by the Company.
FICO is rated A+ by A.M. Best. FICO's statutory surplus and net premiums written
as of December 31, 1997 and for the year then ended were $8,172,000 and
$10,702,000, 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, 1997 and for the year then ended were $13,030,000 and
$41,824,000, 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, 1997 and for the year then ended were $38,580,000 and
$55,556,000, 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, 1997 and for the year then ended were
$26,003,000 and $53,523,000, respectively.
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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, 1997 and for the year then
ended were $34,434,000 and $61,192,000, respectively.
Regional operations: Business
The following table sets forth the percentages of direct premiums
written, by line, by the Company's regional insurance operations:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Commercial Multi-Peril 21.1 20.9% 21.4% 22.0% 19.6%
Workers' Compensation 19.4 20.1 20.8 18.7 16.9
Automobile:
Personal 15.3 16.7 17.5 17.6 19.4
Commercial 19.2 17.3 15.5 16.4 17.4
General Liability 6.6 6.4 6.5 6.6 6.9
Homeowners 6.9 7.9 8.9 9.2 9.8
Fire and Allied Lines 4.9 4.7 4.5 4.8 5.5
Inland Marine 1.9 2.8 2.6 2.6 2.6
Other 4.7 3.2 2.3 2.1 1.9
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
The following table sets forth the percentages of direct premiums
written, by state, by the Company's regional insurance operations:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Maine 10.0 10.7% 10.7% 10.5% 8.3%
Iowa 7.5 8.4 9.3 11.1 13.8
Nebraska 7.4 8.1 9.1 11.0 13.6
Texas 6.7 7.5 7.9 9.2 10.0
New Hampshire 5.7 5.9 6.0 4.7 .9
Mississippi 5.6 6.0 5.4 2.9 --
Minnesota 5.2 5.4 5.5 6.0 6.6
Pennsylvania 4.7 2.2 -- -- --
Kansas 4.5 4.8 4.8 5.2 5.7
Virginia 4.4 3.9 3.0 2.1 .6
North Carolina 4.2 1.5 .1 -- --
South Dakota 4.1 5.4 6.7 4.9 5.7
Colorado 3.5 3.8 4.0 4.5 5.1
Missouri 3.5 3.6 3.7 3.8 3.7
Vermont 3.1 3.0 2.4 1.1 --
Illinois 2.7 3.0 3.5 3.8 4.2
Wisconsin 2.5 2.9 3.5 3.6 4.4
New York 2.2 2.8 2.9 2.6 3.0
Arkansas 1.8 1.8 2.1 2.8 3.1
Montana 1.3 1.4 1.4 1.4 1.6
North Dakota 1.2 1.5 2.6 3.2 3.9
Oklahoma 1.2 1.3 1.4 1.5 1.5
District of Columbia 1.1 1.6 1.9 2.3 2.4
Idaho 1.1 0.6 0.2 0.2 0.3
South Carolina 1.0 -- -- -- --
Tennessee 1.0 0.4 -- -- --
Other 2.8 2.5 1.9 1.6 1.6
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
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REINSURANCE OPERATIONS
The Company's reinsurance operations consists of six 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, 1997 and
for the year then ended were $271,127,000 and $206,652,000, 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 reinsurer
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
Fidelity and Surety primary writers. Business is marketed principally through
brokers as well as 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.
Gemini Insurance Company
Gemini is an excess and surplus lines insurance company created to
provide Signet Star with primary issuing carrier capability and thereby generate
"reverse flow" business. Under the reverse flow concept, a reinsurer writes
primary business that it then cedes back to itself. Gemini provides Signet Star
with a controlled source of new business. It operates as an authorized insurance
company in the State of Delaware and will operate nationwide, as necessary legal
and regulatory requirements are met, as an approved excess and surplus lines
carrier.
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Reinsurance Operations: Business
The following table sets forth the percentages of gross premiums
written, by line, by the Company's reinsurance operations:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Treaty:
Specialty and other 35.8% 31.7% 46.8% 49.1% 56.4%
Regional 12.8 24.7 21.0 24.9 22.9
Nonstandard Automobile 11.7 16.7 10.4 9.5 9.3
----- ----- ----- ----- -----
Total Treaty 60.3 73.1 78.2 83.5 88.6
Facultative 15.4 11.7 14.2 10.9 6.4
Fidelity and Surety 10.5 9.5 7.6 5.6 5.0
Latin American and Caribbean 13.8 5.7 -- -- --
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
The following table sets forth the percentage of gross premiums
written, by property versus casualty business, by the Company's reinsurance
operations:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Property 32.7 35.2% 33.4% 40.2% 44.0%
Casualty 67.3 64.8 66.6 59.8 56.0
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ----- ----- ----- -----
</TABLE>
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, 1997 and for the year then
ended were $218,917,000 and $72,103,000, 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
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underwriting manager established by the Company. In December 1997, 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, 1997 and for the year then ended were $66,004,000 and $50,550,000,
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, 1997 and for the year then ended were $68,092,000 at
$45,494,000, respectively. Great Divide Insurance Company ("Great Divide"), a
subsidiary of Nautilus, writes transportation risks, as well as other specialty
lines, on an admitted basis.
Specialty Operations: Business
The following table sets forth the percentages of gross premiums
written, by line, by the Company's specialty insurance operations:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
General Liability 35.5 35.9% 38.2% 42.2% 41.3%
Automobile Liability 17.7 20.5 27.4 28.1 30.7
Professional Liability 15.3 12.3 7.1 6.3 6.9
Directors and Officers Liability 8.4 10.2 9.2 5.8 4.4
Fire and Allied Lines 7.8 7.2 5.0 4.6 3.5
Automobile Physical Damage 5.0 5.3 6.8 5.9 5.0
Medical Malpractice 4.2 3.4 3.2 3.6 2.6
Inland Marine 1.5 1.7 2.1 1.8 1.9
Other 4.6 3.5 1.0 1.7 3.7
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
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. In addition, Midwest began to offer a "large deductible" product in 1996.
Midwest is rated A- by A.M. Best. Midwest's statutory surplus and statutory net
premiums written as of December 31, 1997 and for the year then ended were
$118,070,000 and $54,859,000, respectively.
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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 has enabled it to concentrate and coordinate
the Company's focus on this growing sector of the reinsurance market.
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, the insurance services operations 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, LLC
The Company acquired Berkley Risk Services LLC and its subsidiaries
("Berkley Risk") operations beginning in 1988. In 1997 Berkley Risk Services,
Inc. was restructured into a limited liability company. 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. 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. In 1998 the Company organized Key Risk Insurance Company as of North
Carolina Insurance Company for usage by Key Risk.
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.
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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. In 1997, the Company acquired
Berkley Care Network, Northeast to provide managed care services in the State of
Connecticut. Berkley Care 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:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Midwest Employers Casualty Company 46.1% 48.8% 14.8% --% --%
Insurance Service Operations 35.9 37.5 63.1 78.6 91.6
Signet Star - Alternative Markets
Division 18.0 13.7 22.1 21.4 8.4
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
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 to form Berkley International LLC
("Berkley International"), 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 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: 76.66% of Union Berkley
Compania de Seguros, S.A.; 80% of Independencia Compania Argentina de Seguros,
S.A.; 99.9667% of Berkley International Aseguradora de Riesgos de Trabajo S.A.,
and 85% of Oceano Compania Argentina de Seguros. Berkley S.A. also owns 99.9167%
of Risk Management Services S.A., which is third-party administrator and 90% of
Jackson Berkley Life. In addition, Berkley International owns 59% of a
Philippine holding company, as well as Family First, Inc. Philippine Insurance
Holdings, Inc. owns 100% of the following companies: Berkley International Life
Insurance Company, Inc., Berkley International Plans, Inc., and Berkley
Insurance Company of the Philippines, Inc.
11
<PAGE> 12
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):
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Regional Insurance Operations
Total revenues $ 650,735 $ 544,400 $ 478,547 $ 376,576 $316,448
Income before income taxes 49,180 37,745 40,486 26,669 29,993
Reinsurance Operations (1)
Total revenues 242,086 244,066 221,241 193,658 121,490
Income (loss) before income taxes 42,193 32,756 19,661 (8,954) 7,253
Specialty Insurance Operations (1)
Total revenues 270,849 232,920 200,946 178,545 176,601
Income before income taxes 66,042 49,274 35,325 31,429 45,592
Alternative Markets Operations
Total revenues 182,612 171,317 103,656 75,798 53,531
Income before income taxes 35,223 32,541 10,254 7,068 8,058
International Operations
Total Revenues 45,360 26,435 7,313 -- --
Loss Before Income Taxes (3,566) (1,283) (259) -- --
</TABLE>
(1) The Reinsurance and specialty operations have been restated in
accordance with FAS 131.
12
<PAGE> 13
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):
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Regional Insurance Operations
Loss ratio 66.4% 66.7% 65.1% 65.3% 67.1%
Expense ratio 34.0 34.1 33.9 34.3 34.2
Policyholders' dividend ratio .7 .7 .9 .9 .9
------ ------ ------ ------ ------
Combined ratio 101.1% 101.5% 99.9% 100.5% 102.2%
====== ====== ====== ====== ======
Reinsurance Operations (2)
Loss ratio 69.2% 73.3% 78.1% 87.4% 77.7%
Expense ratio 32.1 30.1 26.4 27.7 32.0
------ ------ ------ ------ ------
Combined ratio 101.3% 103.4% 104.5% 115.1% 109.7%
====== ====== ====== ====== ======
Specialty Insurance Operations (2)
Loss ratio 62.1% 68.8% 78.9% 78.3% 74.8%
Expense ratio 33.4 30.9 28.3 25.3 25.4
------ ------ ------ ------ ------
Combined ratio 95.5% 99.7% 107.2% 103.6% 100.2%
====== ====== ====== ====== ======
Alternative Markets Operations
Loss ratio 73.0% 74.8% 72.3% 72.5% 72.5%
Expense ratio 35.5 34.7 31.9 27.7 21.0
------ ------ ------ ------ ------
Combined ratio 108.5% 109.5% 104.2% 100.2% 93.5%
====== ====== ====== ====== ======
International Operations
Loss ratio 59.8% 49.7% 50.0% ---% ---%
Expense ratio 54.6 49.9 58.3 -- --
------ ------ ------ ------ ------
Combined ratio 114.4% 99.6% 108.3% ---% ---%
====== ====== ====== ====== ======
Combined Insurance Operations
Loss ratio 66.4% 68.7% 70.7% 73.7% 71.1%
Expense ratio 34.4 33.1 31.3 30.8 31.7
Policyholders' dividend ratio .4 .4 .5 .5 .5
------ ------ ------ ------ ------
Combined ratio 101.2% 102.2% 102.5% 105.0% 103.3%
====== ====== ====== ====== ======
Combined Insurance Operations
Premiums to surplus ratio (3) 1.2 1.2 1.0 1.1 .8
====== ====== ====== ====== ======
Industry Ratios
Combined ratio 101.8% (4) 107.0% (5) 107.2% (5) 108.9% (5) 107.9% (5)
Premiums to surplus ratio .9% (4) 1.0% (6) 1.2% (6) 1.3% (6) 1.3% (6)
</TABLE>
(1) Based on U.S. statutory accounting practices.
(2) The Reinsurance and specialty insurance operations have been restated
in accordance with FAS 131.
(3) Based on the Company's consolidated net premiums written to statutory
surplus.
(4) Estimated by A.M. Best
(5) Source: A.M. Best Aggregates & Averages, for stock companies.
(6) Source: A.M. Best Aggregates & Averages, for total industry.
13
<PAGE> 14
Investments
Investment results before income tax effects were as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Average investments, at cost $2,873,730 $2,538,806 $2,081,547 $1,853,030 $1,584,763
========== ========== ========== ========== ==========
Investment income,
before expenses $ 205,812 $ 171,047 $ 143,527 $ 115,619 $ 98,368
========== ========== ========== ========== ==========
Percent earned on
average investments 7.2% 6.7% 6.9% 6.2% 6.2%
========== ========== ========== ========== ==========
Realized gains (losses) $ 13,186 $ 7,437 $ 10,357 $ (170) $ 23,523
========== ========== ========== ========== ==========
Change in unrealized investment
gains (losses) (1) $ 66,306 $ (22,409) $ 142,475 $ (124,756) $ 13,556
========== ========== ========== ========== ==========
</TABLE>
(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.
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
1 year or less 4.4% 3.1% 4.2% 4.0% 3.5%
Over 1 year through 5 years 26.4 20.7 17.9 27.6 34.0
Over 5 years through 10 years 19.1 25.0 29.4 21.4 22.8
Over 10 years 29.2 27.1 26.2 27.0 27.5
Mortgage-backed securities 20.9 24.1 22.3 20.0 12.2
------ ------ ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
</TABLE>
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
14
<PAGE> 15
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. With respect to year
2000 claims exposure for our insurance and reinsurance subsidiaries, to date,
no significant losses have arisen. However, due to the potential judicial
decisions which re-formulate policies to expand their coverage to previously
unforeseen theories of liabilities which may produce unanticipated claims, at
this point in time, the estimation of any potential year 2000 liabilities is
not determinable.
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 1997, 1996 and 1995 and prior was
approximately 5.98%, 5.90% and 5.80%, respectively. The aggregate net discount,
after reflecting the effects of ceded reinsurance, is $189,600,000, $172,415,000
and $152,235,000 at December 31, 1997, 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 $33.1 million and $35.2
million at December 31, 1997 and 1996, respectively. The Company's gross
reserves for losses and loss adjustment expenses relating to pollution and
environmental claims were $68.4 million and $71.9 million at December 31, 1997
and 1996, respectively. Net incurred losses and loss expenses for reported
pollution and environmental claims were approximately $0.1 million, $6.9 million
and $8.0 million in 1997, 1996 and 1995, 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.
15
<PAGE> 16
The table below provides a reconciliation of the beginning and ending
reserve balances, on a gross of reinsurance basis (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net reserves at beginning of year $ 1,333,122 $ 1,209,250 $ 895,440
----------- ----------- -----------
Net reserves of acquired companies 4,984 -- 191,963
Net provision for losses and loss expenses:
Claims occurring during the current year (1) 747,977 675,674 580,594
Decrease in estimates for claims occurring
in prior years (21,313) (15,219) (9,596)
Amortization of discount 7,760 8,705 --
----------- ----------- -----------
734,424 669,160 570,998
----------- ----------- -----------
Net payments for claims
Current year 315,370 280,565 228,100
Prior years 324,149 264,723 221,051
----------- ----------- -----------
639,519 545,288 449,151
----------- ----------- -----------
Net reserves at end of year 1,433,011 1,333,122 1,209,250
Ceded reserves at end of year 476,677 449,581 450,770
----------- ----------- -----------
Gross reserves at end of year $ 1,909,688 $ 1,782,703 $ 1,660,020
=========== =========== ===========
</TABLE>
A reconciliation, as of December 31, 1997, 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):
<TABLE>
<S> <C>
Net reserves reported on a SAP basis
Additions (deductions) to statutory reserves: $1,492,581
Loss reserve discounting (2) (71,464)
Outstanding drafts reclassified as reserves 11,894
---------
Net reserves reported on a GAAP basis 1,433,011
Ceded reserves reclassified as assets 476,677
---------
Gross reserves reported on a GAAP basis $1,909,688
=========
</TABLE>
(1) Claims occurring during the current year is net of discount of
$29,783,000, 28,885,000 and $708,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
(2) 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 following table presents the development of net reserves for 1986
through 1997. 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 1987 is reserved for $2,000
as of December 31, 1987. Assuming this claim was settled for $2,300 in 1997, the
$300 deficiency would appear as a deficiency in each year from 1987 through
1996.
16
<PAGE> 17
<TABLE>
<CAPTION>
Year Ended December 31,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Amounts in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Discounted net reserves for losses
and loss expenses $423 $531 $611 $643 $680 $710 $783 $895 $1,209 $1,333 $1,433
Reserve discounting -- -- -- -- -- -- -- -- 152 172 190
Undiscounted net reserve
Net Re-estimated as of:
One year later 419 524 605 635 676 704 776 885 1,346 1,481
Two years later 413 518 599 632 659 694 775 872 1,305
Three years later 405 513 596 620 650 665 744 833
Four years later 402 511 587 612 637 655 708
Five years later 402 505 581 603 631 630
Six years later 401 510 585 588 609
Seven years later 405 514 574 569
Eight years later 418 507 557
Nine years later 414 495
Ten years later 408
Cumulative redundancy
(deficiency) undiscounted 15 36 54 74 71 80 75 62 56 $ 24
==== === === === === === === === === ===
Cumulative amount of
net liability paid
through:
One year later $ 91 $114 $158 $139 $160 $169 $186 $221 $265 $332
Two years later 152 217 234 235 264 275 221 355 434
Three years later 201 262 294 304 332 306 291 445
Four years later 225 295 334 345 346 344 334
Five years later 244 315 358 377 371 362
Six years later 256 331 380 395 384
Seven years later 268 348 392 402
Eight years later 282 357 396
Nine years later 289 359
Ten years later 291
Discounted net Reserves 783 895 1,209 1,333 1,433
Ceded Reserves 1,233 1,176 451 450 477
----- ----- ----- ----- -----
Discounted gross Reserves 2,016 2,071 1,660 1,783 1,910
Reserve
discounting -- -- 192 216 241
----- ----- ----- ----- -----
Gross reserve $2,016 $2,071 1,852 1,999 2,151
===== ====== ===== ===== =====
Gross Re-estimated as of
One year later 2,010 2,043 1,827 1,965
Two years later 1,966 2,026 1,789
Three years later 1,955 1,983
Four years later 1,913
Gross cumulative redundancy $ 103 $ 88 $ 63 $ 34
===== ===== ===== ======
</TABLE>
17
<PAGE> 18
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 changes resulting from such activity will not
adversely affect the Company's insurance subsidiaries.
18
<PAGE> 19
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 1997 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.
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
19
<PAGE> 20
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. The
International Operations compete with native insurance operations both large and
small, which maybe related to government entities, as well as with branch or
local subsidiaries of multi-national companies.
Employees
As of March 2, 1998, the Company employed 4,046 persons. Of this
number, the Company's subsidiaries employed 3,999 persons, of whom 2,283 were
executive and administrative personnel and 1,716 were clerical personnel. The
Company employed the remaining 47 persons in its parent company and investment
operations, of whom 38 were executive and administrative personnel and 9 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 presently 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.
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.
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 1997. 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
20
<PAGE> 21
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 1997 to a vote
of holders of the Company's Common Stock.
21
<PAGE> 22
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(1).
<TABLE>
<CAPTION>
Common
Price Range Dividends Paid
----------- --------------
High Low Per Share
---- --- ---------
<S> <C> <C> <C>
1997:
Fourth Quarter $ 45 $ 39 $ .11 cash
Third Quarter 43 1/16 36 $ .10 cash
Second Quarter 39 1/4 31 5/16 $ .10 cash
First Quarter 36 5/16 29 13/16 $ .09 cash
1996:
Fourth Quarter $ 35 5/8 $ 30 $ .09 cash
Third Quarter 31 3/8 27 $ .09 cash
Second Quarter 31 1/8 27 5/8 $ .08 cash
First Quarter 35 1/2 30 1/8 $ .08 cash
</TABLE>
(1) Adjusted for the 3 for 2 stock split.
The closing price on March 2, 1998, as reported on the NASDAQ National
Market System, was $44.875 per share. The approximate number of record holders
of the Common Stock on March 2, 1998 was 829.
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
debentures (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 8 of "Notes to
Consolidated Financial Statements."
22
<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net premiums written $ 1,177,641 $ 1,052,511 $ 860,421 $ 717,933 $ 537,646
Net premiums earned 1,111,747 981,221 803,336 655,038 501,433
Net investment income 199,588 164,490 137,332 109,683 92,773
Management fees and commissions 71,456 69,246 68,457 64,536 54,027
Realized investment gains (losses) 13,186 7,437 10,357 (170) 23,523
Total revenues 1,400,310 1,225,166 1,021,943 830,790 673,306
Interest expense 48,869 31,963 28,209 27,601 25,275
Income before Federal
income taxes 129,241 115,049 82,747 30,774 61,364
Federal income tax (expense)
benefit (30,668) (25,102) (17,554) 1,552 (9,181)
Income before minority interest 98,573 89,947 65,193 32,326 52,183
Net income before preferred
dividends 99,047 90,263 60,882 35,094 51,587
Preferred dividends 7,828 13,909 11,062 10,356 --
Net income attributable to
common stockholders 91,219 76,354 49,820 24,738 51,587
Data per common share (1):
Net income:
Basic 3.09 2.56 1.91 .96 1.91
Diluted 3.02 2.53 1.90 .95 1.89
Stockholders' equity 28.72 25.13 23.59 17.79 20.24
Cash dividends declared $ .42 $ .35 $ .32 $ .29 $ .27
Weighted average shares outstanding (1):
Basic 29,503 29,792 26,121 25,773 26,919
Diluted 30,185 30,130 26,262 25,951 27,270
Investments $ 3,321,322 $ 2,991,606 $ 2,588,346 $ 1,901,715 $ 1,748,702
Total assets 4,599,284 4,136,973 3,618,684 3,582,291 3,337,705
Reserves for losses
and loss expenses 1,909,688 1,782,703 1,660,020 2,070,886 2,016,348
Long-term Debt 390,415 390,104 319,287 331,002 330,722
Company-obligated manditorily
redeemable capital securities
of a subsidiary trust holding
solely 8.197% junior subordinated
debentures 207,944 207,901 -- -- --
Stockholders' equity 947,292 879,732 929,815 597,601 526,281
</TABLE>
(1) Data per common share have been adjusted to reflect the 3 for 2 stock
split. Basic and Diluted income per share and weighted averages shares have
been calculated in accordance with FAS 128.
23
<PAGE> 24
The information required by Items 7 and 8 of Part II is incorporated by
reference to the Company's 1997 Annual Report to Shareholders as follows:
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Pages 18 through 23 of the 1997 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 24 through 40 of the 1997 Annual Report to Shareholders.
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, 1998:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
William R. Berkley 52 Chairman of the Board and Chief Executive Officer
John D. Vollaro 53 President, Chief Operating Officer and a Director
Sam Daniel, Jr. 59 Senior Vice President, Regional Operations
Anthony J. Del Tufo 53 Senior Vice President, Chief Financial Officer and Treasurer
E. LeRoy Heer 59 Senior Vice President, Chief Corporate Actuary
H. Raymond Lankford, Jr. 55 Senior Vice President, Alternative Markets Operations
Ira S. Lederman 44 Senior Vice President, Assistant General Counsel and Assistant
Secretary
James G. Shiel 38 Senior Vice President - Investments
Edward A. Thomas 49 Senior Vice President, Specialty Operations
Donald J. Veldkamp 58 Senior Vice President, Technology and Distribution Systems
Robert P. Cole 47 Senior Vice President
Clement P. Patafio 33 Vice President - Corporate Controller
Scott A. Siegel 39 Vice President - Taxes
Robert B. Hodes 72 Director
Henry Kaufman 70 Director
Richard G. Merrill 67 Director
Jack H. Nusbaum 57 Director
Mark L. Shapiro 54 Director
Martin Stone 69 Director
</TABLE>
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 1997, the term of a class consisting of two Directors
expired. William R. Berkley and Robert B. Hodes were elected as Directors to
hold office for a term of three years until the Annual Meeting of Stockholders
in 2000 and until their successors are duly chosen.
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 The
Greenwich Bank & Trust Company, a newly formed Connecticut chartered commercial
bank; Pioneer Companies, Inc., a chemical manufacturing and marketing 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 2000.
24
<PAGE> 25
John D. Vollaro has been President and Chief Operating Officer of the
Company since January, 1996 and Director since September, 1995. He was Chief
Executive Officer of Signet Star Holdings, Inc., an affiliate of the Company,
from July, 1993 to December, 1995. 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.
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, Jr. has been Senior Vice President - Alternative
Markets Operations since April 1996. Prior thereto, he was President of All
American Agency Facilities, Inc., 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 has been Senior Vice President since January 1997.
Additionally he was named General Counsel of Berkley International in January
1998. 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 has been Senior Vice President - Investments of the
Company since 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 Senior Vice President in January 1998. Prior
thereto, he was Vice President since 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.
Donald J. Veldkamp was named Senior Vice President, Technology and
Distribution Systems in January 1998. He most recently served as Chairman of
Union Insurance Company, a subsidiary of the Company, since July 1997. Prior to
that he was President of Union Insurance Company from May 1990 to July 1997 and
President of Tri-State Insurance Company of Minnesota, also a subsidiary of the
Company, from February 1980 to May 1990.
Clement P. Patafio has been Vice President - Corporate Controller since
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 has been Vice President - Taxes since 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.
25
<PAGE> 26
Robert B. Hodes has been a Director of the Company since 1970. Mr.
Hodes is Counsel to the New York law firm of Wilkie Farr & Gallagher. He is also
a director of Crystal Oil Company; Globalstar Telecommunications, Limited.; K&F
Industries Inc.; Loral Space & Communications Ltd.; Mueller Industries, Inc.;
R.V.I. Guaranty, Ltd.; LCH Investments N.V.; and Restructured Capital Holdings,
Ltd. Mr. Hodes' current term as a Director expires in 2000.
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 School of Business of NYU; Chairman
of the Board of Trustees, Institute of International Education; Member of the
Board of Directors, Federal Home Loan Mortgage Corporation; Member of the Board
of Directors, Lehman Brothers Holdings Inc.; Member of the Board of Trustees,
New York University; Member of the International Capital Markets Advisory
Committee of the Federal Reserve Bank of New York; Member of the Board of
Trustees, Whitney Museum of American Art; Member of the Advisory Committee to
the Investment Committee, International Monetary Fund Staff Retirement Plan and
Member of the Board of Governors, Tel-Aviv University. 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 of 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 Fine Host Corporation; Pioneer Companies, Inc.; Prime Hospitality Corp.;
Strategic Distribution Inc.; 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. Since
July 1997, Mr. Shapiro has been a Senior Consultant to the Export-Import Bank of
the United States. Previously, he was a Managing Director in the investment
banking firm of Schroder & Co. Inc. 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 Tucson Sidewinders AAA baseball team)
and Chairman of Adirondack Corporation, all for more than the past 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, 1997, 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, 1997, and which is incorporated herein by reference.
26
<PAGE> 27
(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, 1997, and which is incorporated herein by reference.
(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, 1997, 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, 1997, and which is incorporated herein by reference.
27
<PAGE> 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Index to Financial Statements
The Management's Discussion and Analysis and the Company's financial
statements, together with the report thereon of KPMG Peat Marwick LLP, appearing
on pages 18 through 40 of the Company's 1997 Annual Report to Shareholders, are
incorporated by reference in this Annual Report on Form 10-K. With the exception
of the aforementioned information, the 1997 Annual Report to Shareholders is not
deemed to be filed as part of this report. The schedules to the financial
statements listed below should be read in conjunction with the financial
statements in such 1997 Annual Report to Shareholders. Financial statement
schedules not included in this Annual Report on Form 10-K have been omitted
because they are not applicable or required information as shown in the
financial statements or notes thereto.
(a) Index to Financial Statement Schedules Page
Independent Auditors' Report on Schedules and Consent 33
Schedule II - Condensed Financial Information of Registrant 34
Schedule III - Supplementary Insurance Information 38
Schedule IV - Reinsurance 39
Schedule VI - Supplementary Information concerning
Property & Casualty Insurance Operations 40
(b) Reports on Form 8-K
(c) Exhibits
The exhibits filed as part of this report are listed on pages 31 and 32
hereof.
28
<PAGE> 29
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 /s/ William R. Berkley
_____________________________________________
William R. Berkley, Chairman of the Board and
Chief Executive Officer
March 10, 1998
29
<PAGE> 30
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ William R. Berkley Chairman of the Board and
____________________________________ Chief Executive Officer March 10, 1998
William R. Berkley
Principal executive officer
/s/ John D. Vollaro President, Chief Operating March 10, 1998
____________________________________ Officer and Director
John D. Vollaro
/s/ Robert B. Hodes Director March 10, 1998
____________________________________
Robert B. Hodes
/s/ Henry Kaufman
____________________________________ Director March 10, 1998
Henry Kaufman
/s/ Richard G. Merrill
____________________________________ Director March 10, 1998
Richard G. Merrill
/s/ Jack H. Nusbaum
____________________________________ Director March 10, 1998
Jack H. Nusbaum
/s/ Mark L. Shapiro
____________________________________ Director March 10, 1998
Mark L. Shapiro
/s/ Martin Stone
____________________________________ Director March 10, 1998
Martin Stone
/s/ Anthony J. Del Tufo
____________________________________ Senior Vice President, March 10, 1998
Anthony J. Del Tufo Chief Financial Officer and
Principal financial officer Treasurer
/s/ Clement P. Patafio
____________________________________ Vice President, March 10, 1998
Clement P. Patafio Corporate Controller
</TABLE>
30
<PAGE> 31
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).
(10.2b) First Amended and Restated W. R. Berkley Corporation 1992 Stock
Option Plan.
(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.
(10.7) W. R. Berkley Corporation Annual Incentive Compensation Plan.
(10.8) W. R. Berkley Corporation Long Term Incentive Plan.
31
<PAGE> 32
(13.1) 1997 Annual Report to Shareholders of W. R. Berkley Corporation (only
those portions of such Annual Report that are incorporated by
reference in this Report on Form 10-K are deemed filed herewith).
(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.
<TABLE>
<CAPTION>
Jurisdiction Percentage
of owned by
incorporation Company
------------- -------
<S> <C> <C>
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%
Carolina Casualty Insurance Company Florida 100%
Clermont Specialty Managers, Ltd. New Jersey 100%
J/I Holding Corporation: Delaware 100%
Admiral Insurance Company: Delaware 100%
Berkley Risk Services, LLC. Minnesota 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%
</TABLE>
(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 1997 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.)
32
<PAGE> 33
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 25, 1998 included the related
financial statement schedules as of December 31, 1997 and 1996 and for each of
the years in the three-year period ended December 31, 1997 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) and (No. 333-33935) on Forms S-8 of W. R. Berkley Corporation.
KPMG Peat Marwick LLP
New York, New York
March 23, 1998
33
<PAGE> 34
Schedule II
W. R. Berkley Corporation
Condensed Financial Information of Registrant
Balance Sheets (Parent Company)
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Assets
Cash (including invested cash) $ 18,018 $ 55,305
Fixed maturity securities:
Held to maturity, at cost
(fair value $5,600 and $10,101) 5,600 10,101
Available for sale at fair value (cost $116,597 and $122,760) 116,839 122,592
Equity securities, at fair value:
Available for sale (cost $698 and $1,433) 690 3,733
Trading account (cost $619 and $33,331) 619 33,331
Investments in subsidiaries 1,389,085 1,212,474
Due from subsidiaries 64,641 56,334
Current Federal income taxes receivable -- --
Real estate, furniture & equipment at cost, less accumulated
depreciation 20,673 22,194
Other assets 4,147 4,316
----------- -----------
$ 1,620,312 $ 1,520,380
=========== ===========
Liabilities, Debt and Stockholders' Equity
Liabilities:
Due to subsidiaries (principally
deferred income taxes) $ 58,830 $ 47,308
Deferred Federal income taxes 32,887 4,013
Other liabilities 18,737 27,115
----------- -----------
110,454 78,436
----------- -----------
Long-term debt 354,622 354,311
Subsidiary trust junior subordinated debt 207,944 207,901
Stockholders' equity:
Preferred stock 65 93
Common stock 7,281 7,281
Additional paid-in capital 428,760 469,065
Retained earnings (including accumulated
undistributed net income of
subsidiaries of $510,814 and $417,604
in 1997 and 1996, respectively) 569,160 490,338
Equity in net unrealized investment gains
net of taxes 58,206 31,075
Treasury stock, at cost (116,180) (118,120)
----------- -----------
947,292 879,732
----------- -----------
$ 1,620,312 $ 1,520,380
=========== ===========
</TABLE>
See note to condensed financial statements.
34
<PAGE> 35
Schedule II, Continued
W. R. Berkley Corporation
Condensed Financial Information of Registrant, Continued
Statements of Operations (Parent Company)
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Management fees and investment income
from affiliates, including dividends of
$33,911, $60,264, and $38,091 for 1997,
1996 and 1995, respectively $ 40,058 $ 72,377 $ 50,839
Realized investment gains (losses) 2,739 486 (306)
Other income 10,972 4,058 5,615
-------- -------- --------
Total revenues 53,769 76,921 56,148
Expenses, other than interest expense (23,801) (16,121) (12,256)
Interest expense (47,645) (30,014) (22,907)
-------- -------- --------
Income (loss) before Federal
income taxes (17,677) 30,786 20,985
-------- -------- --------
Federal income taxes:
Federal income taxes provided by
subsidiaries on a separate return
basis 54,884 41,002 22,481
Federal income tax provision on a
consolidated return basis (30,849) (25,102) (15,454)
-------- -------- --------
Net benefit 24,035 15,900 7,027
-------- -------- --------
Income before undistributed equity
in net income of subsidiaries 6,358 46,686 28,012
Equity in undistributed net income
of subsidiaries 93,210 43,577 32,870
-------- -------- --------
Income before preferred dividends 99,568 90,263 60,882
Preferred dividends (8,349) (13,909) (11,062)
-------- -------- --------
Net income attributable to
common stockholders $ 91,219 $ 76,354 $ 49,820
======== ======== ========
</TABLE>
See note to condensed financial statements.
35
<PAGE> 36
Schedule II, Continued
W. R. Berkley Corporation
Condensed Financial Information of Registrant, Continued
Statement of Cash Flows (Parent Company)
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends $ 99,568 $ 90,263 $ 60,882
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Equity in undistributed net
income of subsidiaries (93,210) (43,577) (32,870)
Tax payments received from subsidiaries 45,999 35,613 17,104
Federal income taxes provided by subsidiaries
on a separate return basis (54,884) (40,848) (22,481)
Change in Federal income taxes (1,409) 4,840 3,654
Realized investment losses (2,739) (486) 306
Other, net 4,114 6,050 4,087
-------- --------- ---------
Net cash provided by operating activities
before trading account sales (purchases) (2,561) 51,855 30,682
Trading account sales (purchases), net 32,712 1,722 (26,065)
-------- --------- ---------
Net cash provided by
operating activities 30,151 53,577 4,617
-------- --------- ---------
Cash flow used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 19,954 13,121 23,158
Equity securities 1,432 786 1
Proceeds from maturities and prepayments of
fixed maturity securities -- -- 15,206
Cost of purchases, excluding trading account:
Fixed maturity securities (9,305) (130,003) (3,452)
Equity securities (2,098) -- (1,733)
Cost of companies acquired (7,238) (15,955) (217,096)
Investments in and advances to
subsidiaries, net (14,986) (38,936) (70,972)
Net additions to real estate, furniture &
equipment 444 (21,270) (328)
Other, net 5,539 -- --
-------- --------- ---------
Net cash used in investing activities (6,258) (192,257) (255,216)
-------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- -- 144,739
Net proceeds from issuance of preferred stock -- -- 66,000
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)
Cash dividends to common stockholders (11,695) (10,143) (7,844)
Cash dividends to preferred shareholders (8,717) (12,824) (11,062)
Purchase of Preferred Stock (41,523) (77,572) --
Payment of subsidiary debt -- -- --
Other, net 755 1,258 1,441
-------- --------- ---------
Net cash provided by financing activities (61,180) 183,316 189,179
-------- --------- ---------
Net increase in cash and invested cash (37,287) 44,636 (61,420)
Cash and invested cash at beginning of year 55,305 10,669 72,089
-------- --------- ---------
Cash and invested cash at end of year $ 18,018 $ 55,305 $ 10,669
======== ========= =========
</TABLE>
See note to condensed financial statements
36
<PAGE> 37
Schedule II, Continued
W. R. Berkley Corporation
Condensed Financial Information of Registrant, Continued
December 31, 1997, 1996 and 1995
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 1996 and 1995
financial statements as originally reported to conform them to the presentation
of the 1997 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 and invested cash is
$113,207,000 and 3,221,000, respectively, 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.
37
<PAGE> 38
Schedule III
W. R. Berkley Corporation and Subsidiaries
Supplementary Insurance Information
December 31, 1997, 1996 and 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
Reserve for
Deferred policy losses and Net Loss and
acquisition loss Unearned Premiums investment Loss
cost expenses premiums earned income expenses
-------------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
Regional $ 81,933 $ 418,489 $324,336 $ 589,306 $ 54,069 $394,218
Reinsurance 22,620 389,285 77,159 195,825 45,520 135,530
Specialty 28,238 730,443 140,541 202,459 58,064 126,958
Alternative markets 7,122 343,086 29,562 84,169 34,339 53,808
International 5,824 28,385 17,786 39,988 3,623 23,910
Corporate and adjustments -- -- -- -- 3,973 --
-------- ---------- -------- ---------- -------- --------
Total $145,737 $1,909,688 $589,384 $1,111,747 $199,588 $734,424
======== ========== ======== ========== ======== ========
December 31, 1996
Regional $ 68,780 $ 386,123 $282,543 $ 494,819 $ 45,544 $332,535
Reinsurance 16,947 366,947 65,388 206,297 37,542 151,254
Specialty 25,588 711,597 132,749 176,100 47,715 122,568
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 8,388 319,336 55,539 185,558 33,512 144,948
Specialty 15,265 720,547 109,089 145,008 46,792 116,357
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
======== ========== ======== ========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Amortization of Other
deferred policy operating
acquisition cost and Net premiums
Costs expenses written
--------------- --------- ------------
<S> <C> <C> <C>
December 31, 1997
Regional $172,237 $ 35,100 $ 632,459
Reinsurance 58,200 3,836 206,652
Specialty 70,005 7,845 208,570
Alternative markets 25,290 68,723 87,881
International 12,139 12,874 42,079
Corporate and adjustments -- 21,527 --
-------- -------- ----------
Total $337,871 $149,905 $1,177,641
======== ======== ==========
December 31, 1996
Regional $144,342 $ 29,778 $ 531,147
Reinsurance 52,925 4,529 218,200
Specialty 49,064 12,014 202,338
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 48,280 3,050 196,299
Specialty 39,064 10,200 160,536
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
======== ======== ==========
</TABLE>
38
<PAGE> 39
Schedule IV
W. R. Berkley Corporation and Subsidiaries
Reinsurance
Years ended December 31, 1997, 1996 and 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
Assumed Percentage
Ceded from of amount
Direct to other other Net assumed to
amount companies companies amount net
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Premiums written:
Year ended December 31, 1997:
Regional insurance $ 708,441 $ 85,917 $ 9,935 $ 632,459 1.6%
Reinsurance -- 17,059 223,711 206,652 108.3%
Specialty insurance 323,555 115,667 682 208,570 --
Alternative Markets 53,652 7,266 41,495 87,881 47.2%
International 56,924 14,845 -- 42,079 --
---------- ---------- ---------- ---------- ----------
Total $1,142,572 $ 240,754 $ 275,823 $1,177,641 23.4%
========== ========== ========== ========== ==========
Year ended December 31, 1996:
Regional insurance $ 604,942 $ 78,041 $ 4,246 $ 531,147 0.8%
Reinsurance -- 10,708 228,908 218,200 104.9%
Specialty insurance 302,832 111,826 11,332 202,338 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 -- 12,464 208,763 196,299 106.4%
Specialty insurance 277,752 123,585 6,369 160,536 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%
========== ========== ========== ========== ==========
</TABLE>
39
<PAGE> 40
Schedule VI
W. R. Berkley Corporation and Subsidiaries
Supplementary Information Concerning Property-Casualty Insurance Operations
December 31, 1997, 1996 and 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Deferred policy acquisition costs $ 145,737 $ 119,157 $ 89,517
Reserves for losses and loss expenses 1,909,688 1,782,703 1,660,020
Unearned premium 589,384 514,213 450,522
Premiums earned 1,111,747 981,221 803,336
Net investment income 199,588 164,490 137,332
Losses and loss expenses incurred:
Current Year 747,977 675,674 580,594
Prior Years (21,313) (15,219) (9,596)
Amortization of discount 7,760 8,705 --
Amortization of deferred policy
acquisition costs 337,871 283,642 228,610
Paid losses and loss expenses 639,519 545,288 449,151
Net premiums written 1,177,641 1,052,511 860,421
</TABLE>
40
<PAGE> 1
EXHIBIT 10.7
04/16/97
W.R. BERKLEY CORPORATION
ANNUAL INCENTIVE COMPENSATION PLAN
ARTICLE I
PURPOSE
The purpose of the Annual Incentive Compensation Plan (the "Plan") is to provide
incentive compensation to senior executives of W.R. Berkley Corporation (the
"Company") in recognition of their significant contributions to the growth,
profitability and success of the Company from year to year.
The Company intends that compensation payable under the Plan will constitute
"qualified performance-based compensation" under Section 162(m) of the Internal
Revenue Code of 1986, as amended. The Plan shall be administratively interpreted
and construed in a manner consistent with such intent.
Subject to approval by the Company's stockholders, the Plan is effective as of
January 1, 1997.
ARTICLE II
DEFINITIONS
2.1 Annual Incentive Pool: For any Year, the amount equal to the
percentage of Earnings determined by the Board at the beginning of the Year,
subject to the condition that Earnings meet the Corporate Threshold for that
Year.
2.2 Board: The Board of Directors of the Company.
2.3 Code: The Internal Revenue Code of 1986, as amended from time to
time.
2.4 Committee: The Compensation and Stock Option Committee of the
Board, which is comprised solely of two or more "outside directors" within the
meaning of Section 162(m) of the Code.
2.5 Company: W.R. Berkley Corporation, a Delaware corporation, and its
consolidated subsidiaries, or any successors thereto.
2.6 Corporate Threshold: For any Year, 85 percent of budgeted Earnings,
which is the minimum amount of Earnings that the Company must achieve in order
to establish an Annual Incentive Pool for that Year.
<PAGE> 2
2.7 Disability: Disability, as defined in a Participant's employment
agreement with the Company, or, absent an agreement, in the Company's group
disability insurance contract.
2.8 Earnings: For any Year, net income of the Company available to
common stockholders, on a consolidated basis, determined in accordance with
generally accepted accounting principles, as reported in the Company's audited
consolidated financial statements for that Year.
2.9 Incentive Allocation: For any Year, a Participant's formulated
share of the Annual Incentive Pool, determined by the Committee in accordance
with Sections 6.3 and 6.4.
2.10 Incentive Award: For any Year, the amount of compensation payable
under the Plan to a Participant, determined by the Committee in accordance with
Section 6.5.
2.11 Participant: For any Year, an executive of the Company designated
by the Committee to participate in the Plan.
2.12 Performance Goals: For any Year, the performance measures
applicable to a Participant, established by the Committee in accordance with
Article V.
2.13 Plan: The W.R. Berkley Corporation Annual Incentive Compensation
Plan, as herein set forth and as it may be amended from time to time.
2.14 Target Allocation: For any Year, a Participant's share of the
Annual Incentive Pool for achievement of his or her Performance Goals for that
Year, determined by the Committee in accordance with Section 6.1.
2.15 Termination Without Cause: Termination of a Participant's
employment by the Company without "Cause," as defined in the Participant's
employment agreement with the Company, or, absent an agreement defining "Cause,"
termination of the Participant's employment by the Company for any reason other
than (i) continuing and material failure to fulfill his or her employment
obligations or willful misconduct or gross neglect in the performance of such
duties, (ii) commission of fraud, misappropriation or embezzlement in the
performance of such duties, or (iii) conviction of a felony, which, as
determined in good faith by the Board, constitutes a crime involving moral
turpitude and may result in material harm to the Company.
2.16 Year: The calendar year, which is the fiscal year of the Company.
ARTICLE III
ADMINISTRATION
3.1 The Plan shall be administered by the Committee. For any Year, the
Committee shall (i) designate the executives of the Company who shall
participate in the Plan, (ii) establish
2
<PAGE> 3
Performance Goals for each Participant and certify the extent of their
achievement and (iii) determine each Participant's Target Allocation, Incentive
Allocation and Incentive Award.
3.2 Subject to the provisions of the Plan, the Committee shall have
full power and authority to (i) interpret the Plan, (ii) adopt rules and
regulations relating to the conduct of its business and to the Plan and (iii)
make all determinations necessary or advisable for the administration of the
Plan. Determinations of the Committee in the administration of the Plan shall be
conclusive and binding on the Participants and all other parties concerned.
ARTICLE IV
PARTICIPATION
4.1 Only executives of the Company who, in the Committee's judgment,
have contributed, or have the capacity to contribute, in a substantial measure
to the successful performance of the Company for a given Year, shall be eligible
to participate in the Plan for that Year.
4.2 In selecting Participants for any Year, the Committee shall take
into account such factors as the individual's position, experience, knowledge,
responsibilities, advancement potential and past and anticipated contribution to
Company performance.
ARTICLE V
PERFORMANCE GOALS
5.1 Not later than 90 days after the beginning of any Year, the
Committee shall establish Performance Goals for each Participant for that Year.
5.2 Performance Goals established by the Committee for any Year may
differ among Participants. The Performance Goals of individual Participants
shall be based on criteria in one or more of the following categories, as may be
applicable: (i) Earnings per share of common stock, net income and insurance
premiums written, (ii) return on common stockholders' equity, (iii) the
Company's combined ratio compared to the property and casualty industry combined
ratio as calculated by A.M. Best Company and (iv) individual performance, taking
into account individual goals and objectives.
5.3 In establishing Performance Goals for any Year, the Committee shall
determine, in its discretion, from among the categories specified in Section
5.2, the categories and criteria to be used in measuring each Participant's
performance and the percentage allocation for each of the categories and each of
the criteria, the sum of which allocations, respectively, shall equal 100
percent. The Committee shall also determine for each Participant for the same
Year a threshold level of performance below which no Incentive Award will be
payable and a maximum incentive opportunity.
3
<PAGE> 4
ARTICLE VI
TARGET ALLOCATION, INCENTIVE ALLOCATION AND INCENTIVE AWARD
6.1 Not later than 90 days after the beginning of any Year, the
Committee shall determine each Participant's Target Allocation for that Year as
a percentage of his or her salary for the Year, assuming that the Performance
Goals for the Participant are fully met. A Participant's Performance Goals and
Target Allocation shall preclude discretion on the part of the Committee to
increase the amount payable under the Plan to the Participant to the extent that
such discretion would be inconsistent with the requirements for "qualified
performance-based compensation" under Section 162(m) of the Code.
6.2 When the Committee has determined the Target Allocation for a
Participant for any Year and the performance categories and criteria that
establish his or her Performance Goals, it shall communicate this information to
the Participant.
6.3 As soon as practicable following verification by the Company's
independent public accountants of Earnings for any Year and receipt of
information regarding the actual performance of Participants against their
respective Performance Goals for the Year, the Committee shall certify (i) the
amount, if any, by which Earnings for the Year exceeded the Corporate Threshold
for the Year and (ii) the extent to which each Participant achieved his or her
Performance Goals for the Year.
6.4 Based on the information certified in accordance with Section 6.3,
the Committee shall determine each Participant's Incentive Allocation for the
Year by multiplying his or her Target Allocation for the Year by the percentage
representing the extent of achievement of his or her Performance Goals for the
Year.
6.5 Notwithstanding the provisions of Section 6.4, the Committee may,
in its discretion, reduce or eliminate a Participant's Incentive Allocation for
any Year based on such objective or subjective criteria as it deems appropriate
to take into account circumstances that could not have been anticipated when it
established the Participant's Performance Goals for the Year. The amount of a
Participant's Incentive Allocation as finally determined by the Committee shall
constitute his or her Incentive Award for the Year; provided, however, that no
Incentive Award for any Participant for any Year shall exceed 5 percent of
Earnings for that Year.
6.6 The Committee shall not be obligated to apply the entire Annual
Incentive Pool for any Year to Participants' Incentive Awards. Any amount not so
applied shall remain part of the general assets of the Company and shall not be
carried over to the Annual Incentive Pool for any subsequent Year.
4
<PAGE> 5
ARTICLE VII
PAYMENT OF INCENTIVE AWARDS
7.1 Except as provided in Section 7.2, a Participant's Incentive Award
for any Year shall be paid in a cash lump sum as soon as practicable following
the Committee's determination of the amount in accordance with Article VI.
7.2 From time to time, the Committee, in its discretion (under uniform
rules applicable to all Participants), may offer Participants the opportunity to
defer receipt of all or a portion of the Incentive Award for any Year. Any
election to defer shall be made prior to the beginning of the Year except for
the first Year that the Plan is in effect. Deferrals shall be in increments of
10 percent of the Participant's Target Allocation for the Year.
Deferred amounts are not forfeitable and shall be paid after
termination of employment with the Company. They constitute unfunded general
obligations of the Company.
Deferred amounts shall be credited with an interest equivalent
amount until the time of final payment at a rate determined by the Committee
from time to time. The sum of the amount deferred for any Year plus all interest
equivalents shall be paid in a single sum or in up to 15 installments, as
specified by the Participant when making the deferral election.
7.3 Each Participant shall designate, in a manner prescribed by the
Committee, a beneficiary to receive payments due under the Plan in the event of
his or her death. If a Participant dies prior to the date of payment of his or
her Incentive Award for any Year or to receipt of all amounts, if any, that were
deferred, and if no properly designated beneficiary survives the Participant,
the Incentive Award or any other amount due shall be paid to his or her estate
or personal representative.
ARTICLE VIII
TERMINATION OF EMPLOYMENT
8.1 If a Participant's employment with the Company terminates by reason
of retirement on or after attainment of age 65, death, Disability or Termination
Without Cause, or for any other reason specifically approved in advance by the
Committee, the Committee shall determine the Participant's Incentive Award as if
he or she were employed for the entire Year, and the Participant shall be
entitled to receive the Incentive Award prorated to the date of his or her
termination of employment.
8.2 If a Participant's employment with the Company terminates for any
reason other than as provided in Section 8.1, he or she forfeits any right to
receive an Incentive Award for the Year in which the termination occurs.
5
<PAGE> 6
ARTICLE IX
TERMINATION AND AMENDMENT OF THE PLAN
9.1 The Company reserves the right, by action of the Committee, to
terminate the Plan at any time. Subject to such earlier termination, the Plan
shall have a term of five years from its effective date.
9.2 The Plan may be amended at any time, and from time to time, by a
written document adopted by the Committee. No amendment shall be effective prior
to approval by the Company's stockholders to the extent that such approval is
required by Section 162(m) of the Code or is otherwise required by law.
ARTICLE X
GENERAL PROVISIONS
10.1 Nothing in the Plan shall confer upon any employee a right to
continue in the employment of the Company or affect any right of the Company to
terminate a Participant's employment.
10.2 A Participant may not alienate, assign, pledge, encumber,
transfer, sell or otherwise dispose of any rights or benefits awarded hereunder
prior to the actual receipt thereof; and any attempt to alienate, assign,
pledge, sell, transfer or assign prior to such receipt, or any levy, attachment,
execution or similar process upon any such rights or benefits shall be null and
void.
10.3 The Plan shall at all times be entirely unfunded, and no provision
shall at any time be made to segregate assets of the Company for payment of any
amounts hereunder. No Participant, beneficiary or other person shall have any
interest in any particular assets of the Company by reason of the right to
receive incentive compensation under the Plan. Participants and beneficiaries
shall have only the rights of a general unsecured creditor of the Company.
10.4 The Plan shall be governed by and construed in accordance with the
laws of the State of Delaware without reference to principles of conflict of
laws.
10.5 The Company shall be authorized to withhold from any award or
payment it makes under the Plan to a Participant the amount of withholding taxes
due with respect to such award or payment and to take such other action as may
be necessary in the opinion of the Company to satisfy all obligations for the
payment of such taxes.
10.6 Nothing in the Plan shall prevent the Board from adopting other or
additional compensation arrangements, subject to stockholder approval as may be
necessary, and such arrangements may be either generally applicable or
applicable only in specific cases.
10.7 Participants shall not be required to make any payment or provide
any consideration for awards under the Plan other than the rendering of
services.
6
<PAGE> 1
EXHIBIT 10.8
Amended 08/12/97
as of 01/01/97
W.R. BERKLEY CORPORATION
LONG-TERM INCENTIVE COMPENSATION PLAN
ARTICLE I
PURPOSE
The purpose of the Long-Term Incentive Compensation Plan (the "Plan") is to
promote the interests of W.R. Berkley Corporation (the "Company") and its
stockholders by (i) helping the Company to attract and retain outstanding
management, (ii) stimulating management's efforts on behalf of the Company by
giving participants a direct interest in the performance of the Company and
(iii) suitably rewarding participants' contributions to the success of the
Company.
The Company intends that compensation payable under the Plan will qualify for
deduction under Section 162(m) of the Internal Revenue Code of 1986, as amended.
ARTICLE II
DEFINITIONS
2.1 Award Certificate: A written instrument evidencing the award of
Units to a Participant.
2.2 Base Year EPS: Earnings Per Share for the Fiscal Year ended
December 31, 1996, which is $3.84, or, for Units awarded as of any date
subsequent to the Effective Date, Earnings Per Share for the Fiscal Year
immediately preceding such date.
2.3 Beneficiary: The person or persons designated by a Participant, in
accordance with Section 9.1, to receive any amount payable under the Plan upon
the Participant's death.
2.4 Board: The Board of Directors of the Company.
2.5 Code: The Internal Revenue Code of 1986, as amended from time to
time.
2.6 Committee: The Compensation and Stock Option Committee of the
Board, which is comprised solely of two or more "outside directors" within the
meaning of Section 162(m) of the Code.
2.7 Common Shares: Shares of common stock ($.20 par value) of the
Company.
<PAGE> 2
2.8 Company: W.R. Berkley Corporation, a Delaware corporation, and its
consolidated subsidiaries, or any successors thereto.
2.9 Cumulative Unit Value: The amount determined in accordance with
Section 7.2.
2.10 Disability: Disability, as defined in a Participant's employment
agreement with the Company, or, absent an agreement, in the Company's group
disability insurance contract.
2.11 Earnings: For any Fiscal Year, the consolidated net income of the
Company available to common stockholders, prepared in accordance with generally
accepted accounting principles, as reported in the Company's audited
consolidated financial statements for that Fiscal Year; adjusted on an after-tax
basis to (a) exclude (i) in its entirety any item of nonrecurring gain or loss
in excess of $5,000,000 and (ii) any accruals for this Plan and (b) to add back
write-offs required in connection with any acquisition in the year of
acquisition.
2.12 Earnings Per Share: For any Fiscal Year, Earnings divided by the
number of Common Shares used to determine the Company's basic earnings per share
for that Fiscal Year, as reported in the Company's audited consolidated
financial statements for that Fiscal Year.
2.13 Effective Date: The effective date of the Plan, which is January
1, 1997.
2.14 Fiscal Year: Any calendar year during the term of the Plan.
2.15 Incremental Unit Value: The amount determined in accordance with
Section 7.1.
2.16 Maximum Cumulative Unit Value: For all Units awarded as of the
beginning of any Fiscal Year, the amount determined by the Committee for those
Units when they are awarded.
2.17 Measuring Price: For each Unit awarded as of the Effective Date,
$50.75; for each Unit awarded thereafter, the closing price of a Common Share as
reported on the NASDAQ National Market System on the last day of the Fiscal Year
preceding the date as of which the Unit is awarded.
2.18 Participant: A key employee of the Company designated by the
Committee to participate in the Plan.
2.19 Plan: The W.R. Berkley Corporation Long-Term Incentive
Compensation Plan, as herein set forth and as it may be amended from time to
time.
2.20 Term of the Plan: The period commencing on the Effective Date and
ending five years after the final award of Units, in accordance with Section
5.1, or on such earlier date as the Maximum Cumulative Unit Value of such Units
may be achieved.
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2.21 Termination Without Cause: Termination of a Participant's
employment by the Company without "Cause," as defined in the Participant's
employment agreement with the Company, or, absent an agreement defining Cause,
termination of the Participant's employment by the Company for any reason other
than (i) continuing and material failure to fulfill his or her employment
obligations or willful misconduct or gross neglect in the performance of such
duties, (ii) commission of fraud, misappropriation or embezzlement in the
performance of such duties, or (iii) conviction of a felony, which, as
determined in good faith by the Board, constitutes a crime involving moral
turpitude and may result in material harm to the Company.
22.22 Unit: A unit of participation in the Plan awarded to a
Participant in accordance with Article V.
22.23 Valuation Date: The last day of any Fiscal Year.
ARTICLE III
ADMINISTRATION
3.1 The Plan shall be administered by the Committee. A majority of the
Committee shall constitute a quorum. Committee decisions and determinations
shall be made by a majority of its members present at a meeting at which a
quorum is present, and they shall be final. The actions of the Committee with
respect to the Plan shall be binding on all affected Participants. Any decision
or determination reduced to writing and signed by all of the members of the
Committee shall be fully effective as if it had been made by a vote at a meeting
duly called and held. The Committee shall keep minutes of its meetings and shall
make such rules and regulations for the conduct of its business as it shall deem
advisable.
3.2 The Committee shall have full authority, subject to the provisions
of the Plan (i) to select Participants and determine the extent and terms of
their participation; (ii) to adopt, amend and rescind such rules and regulations
as, in its opinion, may be advisable in the administration of the Plan, (iii) to
construe and interpret the Plan, the rules and regulations adopted thereunder
and any notice or Award Certificate given to a Participant; and (iv) to make all
other determinations that it deems necessary or advisable in the administration
of the Plan. The Committee may request advice or assistance or employ such
persons as it deems necessary for the proper administration of the Plan and may
rely on such advice or assistance; provided, however, that in making any
determinations with respect to the administration of the Plan, the Committee
shall at all times be obligated to act in good faith and in conformity with the
terms of the Plan.
3.3 In the event of any stock split, stock dividend, reclassification,
recapitalization or other change that affects the character or amount of
outstanding Common Shares and Earnings Per Share, the Committee shall make such
adjustments in the number of Units (whether authorized or outstanding and
unexercised), the Measuring Price or both as shall, in the sole judgment of the
Committee, be equitable and appropriate in order to make the value of such
Units, as nearly as may
3
<PAGE> 4
be practicable, equivalent to the value of Units outstanding and unexercised
immediately prior to such change. In no event, however, shall any such
adjustment give any Participant any additional benefits.
3.4 The Committee shall be precluded from increasing compensation
payable under the Plan to a Participant, including acceleration of payment and
increase of any amount payable, unless specifically provided for by the Plan.
ARTICLE IV
PARTICIPATION
4.1 Only key employees of the Company who, in the Committee's judgment,
will have a significant impact on the success of the business shall be eligible
to participate in the Plan. The Committee, in its sole discretion, shall select
the Participants.
4.2 In selecting Participants and in determining the number of Units to
be awarded to each Participant for any Fiscal Year, the Committee shall take
into account such factors as the individual's position, experience, knowledge,
responsibilities, advancement potential and past and anticipated contribution to
Company performance.
ARTICLE V
AWARD OF UNITS
5.1 Subject to adjustment as provided in Section 3.3, a maximum of
750,000 Units may be awarded under the Plan. A Participant who has been awarded
Units may be awarded additional Units from time to time and new Participants may
be awarded Units, both in the discretion of the Committee; provided, however,
that no Units shall be awarded after 2006.
5.2 Units shall be awarded solely by the Committee and shall be
evidenced by an Award Certificate, as provided in Article X.
5.3 Subject to adjustment as provided in Section 3.3, the maximum
number of Units awarded to any one individual shall not exceed 250,000 during
the Term of the Plan.
ARTICLE VI
TERM AND VESTING OF UNITS
6.1 Each Unit shall have a term of five years from the date of award,
subject to earlier termination (i) upon exercise by a Participant, (ii) as
provided in Article XI or (iii) upon achievement before five years of the Unit's
Maximum Cumulative Unit Value. Units shall be deemed to be
4
<PAGE> 5
awarded as of the Effective Date or the first day of any subsequent Fiscal Year
through 2006, as the case may be.
6.2 Units shall become vested on the Valuation Date immediately
preceding the fifth anniversary of the date of their award.
6.3 Notwithstanding Section 6.2, each Unit shall immediately become
vested in the event of (i) attainment of its Maximum Cumulative Unit Value, (ii)
a Participant's Termination Without Cause or (iii) termination of a
Participant's employment with the Company by reason of retirement on or after
attainment of age 65, death or Disability.
ARTICLE VII
DETERMINATION OF VALUE OF A UNIT
7.1 For any Fiscal Year, the Incremental Unit Value of a Unit shall be
equal to the product of (i) the Measuring Price, multiplied by (ii) .85 of the
percentage by which Earnings Per Share for the Fiscal Year exceeds Base Year
EPS. In the event Base Year EPS exceeds Earnings Per Share for any Fiscal Year,
the Incremental Unit Value for the Fiscal Year shall be zero. The Committee
shall notify each Participant of the Incremental Unit Value of his or her Units
for each Fiscal Year as soon as practicable after the Valuation Date for the
Fiscal Year.
7.2 The Incremental Unit Value of each Unit for any Fiscal Year shall
be cumulated with the Incremental Unit Value of the Unit for all prior Fiscal
Years from the date of the Unit's award. The cumulative amount thus determined
shall be the then Cumulative Unit Value of such Unit.
ARTICLE VIII
PAYMENT OF UNITS
8.1 Except as provided in Article XI, a Unit that is vested, in
accordance with Article VI, shall thereupon be exercised.
8.2 In order to exercise vested outstanding Units, a Participant (i)
shall give written notice of exercise, as provided in Section 8.3, and (ii)
shall deliver his or her Award Certificate to the Secretary of the Company, who
shall endorse thereon a notation of such exercise and return the same to the
Participant. The date of exercise of Units shall be the date on which the
Company receives the required documentation. Upon exercise of Units, the
Participant shall be entitled to receive their Cumulative Unit Value, determined
as of the concurrent or immediately preceding Valuation Date, but not in excess
of their Maximum Cumulative Unit Value.
8.3 Notice of exercise of vested Units shall be in writing addressed to
the Secretary of the Company. Payment of the amount due under the Plan shall be
made not later than five days
5
<PAGE> 6
following the date of exercise or the date of such other event as shall entitle
the Participant to payment; provided, however, that, before any payment may be
made, the Committee must certify in writing that all performance criteria under
the Plan have been met. Not less than 50 percent of any amount due shall be paid
in cash, and the balance shall be paid in cash or in Common Shares or both, as
determined by the Committee in its discretion.
ARTICLE IX
LIMITS ON TRANSFERABILITY OF UNITS
9.1 Each Participant shall file with the Committee a written
designation of one or more persons as the Beneficiary who shall be entitled to
receive any amount or any Common Shares payable under the Plan upon his or her
death. A Participant may, from time to time, revoke or change his or her
Beneficiary designation without the consent of any previously designated
Beneficiary by filing a new designation with the Committee. The last such
designation received by the Committee shall be controlling; provided, however,
that no designation, or change or revocation thereof, shall be effective unless
received by the Committee prior to the Participant's death, and in no event
shall it be effective as of a date prior to such receipt. If at the date of a
Participant's death, there is no designation of a Beneficiary in effect for the
Participant, or if no Beneficiary survives to receive any amount payable under
the Plan by reason of the Participant's death, the Participant's estate shall be
treated as the Beneficiary for purposes of the Plan.
9.2 A Unit may be exercised only by the Participant to whom it was
awarded, except in the event of the Participant's death, when a Unit may be
exercised by his or her Beneficiary. Except as provided in Section 9.1, a
Participant may not transfer, assign, alienate or hypothecate any benefits under
the Plan.
ARTICLE X
AWARD CERTIFICATE
Promptly following the making of an award, the Company shall deliver to
the recipient an Award Certificate, specifying the terms and conditions of the
Unit. This writing shall be in such form and contain such provisions not
inconsistent with the Plan as the Committee shall prescribe.
ARTICLE XI
TERMINATION OF UNITS
11.1 An outstanding Unit awarded to a Participant shall be canceled and
all rights with respect thereto shall expire upon the earlier to occur of (i)
its exercise as provided in Section 8.1 or (ii) termination of the Participant's
employment with the Company; provided, however, that if such termination occurs
by reason of retirement on or after attainment of age 65, death, Disability or
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<PAGE> 7
Termination Without Cause, or for any other reason specifically approved in
advance by the Committee, the term of such Unit shall continue for a period of
14 months from the date of termination (the "Extended Term"). For purposes of
this Section 11.1, the Cumulative Unit Value of such Unit shall be determined as
of the Valuation Date concurrent with or immediately preceding the end of the
Extended Term or any earlier exercise date, whichever is applicable. A Unit
whose term is continued for an Extended Term shall be deemed to be automatically
exercised as of the last Valuation Date within the Extended Term, unless sooner
exercised by the Participant or his or her legal representative.
11.2 Nothing contained in Section 11.1 shall be deemed to extend the
term of any Unit beyond the end of the Term of the Plan.
ARTICLE XII
TERMINATION AND AMENDMENT OF THE PLAN
The Company reserves the right to amend or terminate the Plan at any
time, by action of the Committee, but no such amendment or termination shall
adversely affect the rights of any Participant with respect to outstanding Units
held by the Participant without his or her written consent. No amendment shall
be effective prior to approval by the Company's stockholders to the extent that
such approval is required by Section 162(m) of the Code or is otherwise required
by law.
ARTICLE XIII
GENERAL PROVISIONS
13.1 Nothing in the Plan, nor the award of any Unit, shall confer a
right to continue in the employment of the Company or affect any right of the
Company to terminate a Participant's employment.
13.2 The Plan shall be governed by and construed in accordance with the
laws of the State of Delaware without reference to principles of conflict of
laws.
13.3 The Company shall be authorized to withhold from any award or
payment it makes under the Plan to a Participant the amount of withholding taxes
due with respect to such award or payment and to take such other action as may
be necessary in the opinion of the Company to satisfy all obligations for the
payment of such taxes.
13.4 Nothing in the Plan shall prevent the Board from adopting other or
additional compensation arrangements, subject to stockholder approval as may be
necessary, and such arrangements may be either generally applicable or
applicable only in specific cases.
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<PAGE> 8
13.5 Participants shall not be required to make any payment or provide
any consideration for awards under the Plan other than the rendering of
services.
8
<PAGE> 1
Financial Statements
[DOLLAR SYMBOL GRAPHIC]
<PAGE> 2
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 significant increase in
capacity has produced a trend of increasing price competition.
OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE YEAR
ENDED DECEMBER 31, 1996
The Company has adopted SFAS No. 128, which establishes new standards for
computing and reporting earnings per share and all income per share amounts have
been adjusted to reflect the prescribed changes (see notes to consolidated
financial statements). Accordingly, per share results are reported as "basic"
and "diluted."
Net income attributable to common stockholders ("Net Income") for 1997 was $91
million, or $3.09 of basic earnings per share, ($3.02 per share diluted),
compared with 1996 earnings of $76 million, or $2.56 basic, ($2.53 diluted). The
1997 results include after-tax realized investment gains of $9 million, or $ .29
basic, ($ .28 diluted) compared with $5 million, or $ .16 basic, ($ .16 diluted)
for 1996.
Net premiums written in 1997 rose 12% to $1,178 million from $1,053 million
written during 1996 due to growth recorded by the regional, specialty,
alternative markets, and international operations. Premiums written by the
regional operations grew by 19% to $632 million from $531 million written in
1996. The majority of this growth was due to business units which were started
during the past several years. Premiums written by the reinsurance segment
decreased by 5% to $207 million from $218 million in 1996. This decrease was
substantially due to a decrease in treaty business which more than offset
premiums generated by the Latin American and Caribbean division that commenced
operations in February 1996. Premiums written by the specialty operations grew
by 3% to $209 million from $202 million in 1996. This increase was due to an
increase in premiums written by the Excess and Surplus operations which more
than offset a decline in premiums written by our transportation unit. Premiums
written by the alternative markets operations grew by 16% to $88 million from
$76 million in 1996. This increase was due primarily to increased market
penetration by Signet Star's alternative markets division. Premiums written by
the international operations grew by 67% to $42 million from $25 million. This
increase was due to the July 1996 start-up of a workers' compensation company in
Argentina.
In 1998, the Company expects to start a new operation in the specialty segment
as well as a number of units in the Philippines. It is anticipated that the
start-up operations will incur operating losses during the first years of
operation and that international operations will continue to incur operating
losses in 1998. Such losses are not expected to have a material adverse impact
on the Company's results of operations.
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<PAGE> 3
Pre-tax net investment income increased to $200 million from $164 million earned
in 1996. This increase was partially due to an increase in average investable
assets produced by the issuance of $210 million of capital trust securities
issued in December 1996. Excluding the effects of the issuance of these
securities, pre-tax net investment income was $193 million, an increase of $29
million over the comparable 1996 amount. This growth was mainly due to an
increase in average investable assets produced in cash flow from operations. In
addition, an increase in investment income earned in our trading portfolio
contributed to the growth in investment income (see "Liquidity and Capital
Resources").
Management fees and commissions consist primarily of fees earned by the
alternative markets segment. Management fees and commissions increased 3% to $71
million from $69 million in 1996. The increase in management fees and
commissions is due primarily to a 1997 acquisition, as intense competition in
the workers' compensation market continued to inhibit growth.
Realized investment gains increased to $13 million from $7 million in 1996.
Realized gains on fixed income securities resulted primarily from the Company's
strategy of maintaining an appropriate balance between the duration of its fixed
income portfolio and the duration of its liabilities; realized gains on equity
securities arise primarily as a result of a variety of factors which influence
the Company's valuation criteria for such securities. The majority of the 1997
and 1996 realized gains resulted from the sale of equity securities.
The consolidated combined ratio (on a statutory basis) of the Company's
insurance operations decreased to 101.2% in 1997 from 102.2% in 1996 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 66.4% from 68.7%. This improvement was primarily due to a decrease
in weather related losses incurred by our regional operations and better than
expected experience on business written in prior years recorded by our specialty
operations.
Other operating costs and expenses, which consist of the expenses of the
Company's insurance and alternative markets operations, as well as the Company's
corporate and investment expenses, increased by 19% to $488 million from $409
million in 1996. The increase in other operating costs is primarily due to the
substantial premium growth discussed above, 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 34.4% for the 1997 period from 33.1% for the
comparable 1996 period. This increase resulted primarily from higher commission
expenses incurred to generate premium growth.
The increase in interest expense is due to the issuance in December 1996 of $210
million Company-obligated mandatorily redeemable capital securities of a
subsidiary trust holding solely junior subordinate debentures (see "Liquidity
and Capital Resources").
The Federal income tax provision resulted in an effective tax rate of 24% in
1997 (22% in 1996). 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 rate in 1997 is due primarily to the increase in realized gains
on investments which are taxed at the full corporate rate.
Preferred dividends decreased as a result of the 1997 repurchase of 276,855
shares of the Series A Preferred Stock, (see "Liquidity and Capital Resources").
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
19
<PAGE> 4
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 $2.56 basic ($2.53 diluted), compared with 1995 earnings of $50
million, or $1.91 basic ($1.90 diluted). The 1996 results include after-tax
realized investment gains of $5 million, or $ .16 basic ($ .16 diluted),
compared with $6 million, or $ .26 basic ($ .26 diluted) 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 operations 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
operations 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 an increase in business written
by the Fidelity and Surety division. Premiums written by the specialty
operations 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
operations 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.
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 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 maintaining an approximate balance between the
duration of its fixed income portfolio and the duration of its liabilities;
realized gains on equity securities arise primarily as a result of a variety of
factors which influence the Company's valuation criteria for such securities.
The majority of the 1996 realized gains were from the sale of equity 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 the mix of business partially
offset by greater catastrophe losses impacting regional operations.
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 the substantial premium growth 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
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<PAGE> 5
(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. This
increase resulted from the higher commission expenses incurred to generate
premium growth.
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 mandatorily redeemable capital securities of a subsidiary
trust holding solely junior subordinated debentures (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").
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 $229 million in
1997, $244 million in 1996 and $207 million in 1995.
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 (see Note 3 of "Notes to Consolidated
Financial Statements").
FINANCING ACTIVITY In October 1995, the Company issued 5,175,000 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. 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.
On December 19, 1996, the Company issued $210 million of Company-obligated
manditorily redeemable capital securities of a subsidiary trust holding solely
junior subordinated debentures of the Corporation due December 15, 2045
("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 the proceeds to retire 252,273
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
21
<PAGE> 6
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. In the second and third quarters of 1997, 93,775 shares of the Series A
Preferred Stock were purchased by subsidiaries of the Company. The Company
expects that the balance of 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 175,500 shares of Common Stock for
approximately $4.1 million. During 1996, the Company purchased 862,500 shares of
Common Stock for approximately $24.2 million. On November 11, 1997, the Board of
Directors authorized the Company to repurchase up to 2,000,000 shares of Common
Stock.
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. In
addition, the Company has a $50 million line-of-credit available.
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 1997 by $282 million
to approximately $3,218 million primarily due to the combined effects of net
cash flow from operations and the financing activities discussed above.
During 1997, the Company invested approximately $243 million of its available
cash inflow in invested cash and fixed income securities. At December 31, 1997,
the portion of the portfolio invested in tax-exempt securities was 32% (30% in
1996); U.S. Government securities and cash equivalents remained at 26%;
mortgage-backed securities were 16% (18% in 1996); corporate fixed maturity
securities remained at 14%; trading account securities remained at 9%; and other
equity securities represented the balance.
FEDERAL INCOME TAXES The Company files a consolidated Federal income tax return.
At December 1997, the Company had a deferred tax liability of $79 million, which
primarily relates to unrealized investment gains and intangible assets, and a
deferred tax asset of $47 million, which primarily relates to 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.
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 coverage. The Company monitors the
financial condition of its reinsurers and attempts to place its coverages only
with substantial, financially sound carriers.
REGIONAL OPERATIONS In 1997, all regional subsidiaries generally retained
$300,000 on individual property casualty risks. Acadia Insurance Company
retained up to $1.3 million per bond for surety business. Other regional
companies writing surety business retained up
22
<PAGE> 7
to $450,000 ($325,000 prior to October 1, 1997). The regional group also
maintained catastrophe reinsurance protection for approximately 95% of
weather-related losses above $6 million per occurrence up to a maximum of $34
million. In addition, certain of the regional operating units carried additional
aggregate catastrophe protection of $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 four layers as follows: (i) 100% of $7.5 million
in excess of $6.0 million per occurrence; (ii) 95% of $7.5 million in excess of
$13.5 million per occurrence; and (iii) 95% of $9.0 million in excess of $21.0
million per occurrence, and 100% of $15 million in excess of $30 million, (for
California only and only under certain conditions). In 1997, Signet Star has a
variable quota share program on its casualty facultative business with
retentions varying from $425,000 up to $2.5 million depending on the certificate
limit. Property facultative business is covered on a per risk basis for $4.7
million in excess of $300,000. These coverages apply to Signet Star's individual
certificate and master certificate business. During 1997, Signet Star had
retrocession coverage for its fidelity and surety business for 100% of each loss
up to $2.5 million in excess of $750,000 per occurrence and 79.5% of each loss
up to $2.5 million in excess of $3.25 million per occurrence for its fidelity
and surety business. During 1997, the Latin American and Carribean division
retained $250,000 for property business and $500,000 for Marine, Energy and
Aviation business.
SPECIALTY OPERATIONS Admiral's retention in 1997 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 1997 Admiral's Directors' and
Officers' coverage also included additional protection on an aggregate basis.
Nautilus generally retained $140,000 per risk in 1997 and Carolina maintained
its retention at $300,000 on property and liability exposures. In 1997, Carolina
Casualty (on business underwritten by Monitor Surety Managers), retained up to
$1.5 million on a per principal per bond basis. Great Divide retained $120,000
per risk in 1997 ($187,500 in 1998). The Specialty Group (except Carolina) is
also covered under the regional group's property catastrophe protection for 95%
of $34 million in excess of $6 million.
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 between
$50,000 and $250,000 per occurrence or individual risk.
YEAR 2000
The Company continues to address system programming issues with regards to
system requirements for the year 2000. Costs associated with the year 2000
projects, which to date have not been significant, are expensed as incurred. The
Company has examined the year 2000 issues and does not expect it to have a
material impact on the Company's operations. With respect to year 2000 claims
exposure for our insurance and reinsurance subsidiaries, to date, no significant
losses have arisen. However, due to the potential for judicial decisions which
re-formulate policies to expand their coverage to previously unforeseen theories
of liabilities which may produce unanticipated claims, at this point in time,
the estimation of any potential year 2000 liabilities is not determinable.
CAPITALIZATION
For the year ended December 31, 1997, Stockholders' equity increased by
approximately $68 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 $1,546 million at December 31, 1997 and the
percentage of the Company's capital attributable to long-term debt decreased to
25% at December 31, 1997 from 26% at December 31, 1996.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
23
<PAGE> 8
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Net premiums written $ 1,177,641 $ 1,052,511 $ 860,421
Change in net unearned premiums (65,894) (71,290) (57,085)
----------- ----------- -----------
Premiums earned 1,111,747 981,221 803,336
Net investment income 199,588 164,490 137,332
Management fees and commissions 71,456 69,246 68,457
Realized investment gains 13,186 7,437 10,357
Other income 4,333 2,772 2,461
----------- ----------- -----------
Total revenues 1,400,310 1,225,166 1,021,943
Operating costs and expenses:
Losses and loss expenses (734,424) (669,160) (570,998)
Other operating costs and expenses (487,776) (408,994) (339,989)
Interest expense (48,869) (31,963) (28,209)
----------- ----------- -----------
Income before income taxes and minority interest 129,241 115,049 82,747
Federal income tax expense (30,668) (25,102) (17,554)
----------- ----------- -----------
Income before minority interest 98,573 89,947 65,193
Minority interest 474 316 (4,311)
----------- ----------- -----------
Net income before preferred dividends 99,047 90,263 60,882
Preferred dividends (7,828) (13,909) (11,062)
----------- ----------- -----------
Net income attributable to common stockholders $ 91,219 $ 76,354 $ 49,820
=========== =========== ===========
Earnings per share:
Basic $ 3.09 $ 2.56 $ 1.91
Diluted $ 3.02 $ 2.53 $ 1.90
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 9
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, 1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Investments:
Invested cash $ 417,967 $ 327,193
Fixed maturity securities:
Held to maturity, at cost (fair value $194,919 and $208,232) 182,172 204,234
Available for sale, at fair value (cost $2,240,901 and $2,066,327) 2,322,971 2,098,670
Equity securities, at fair value:
Available for sale (cost $76,134 and $78,435) 86,243 93,900
Trading account (cost $301,136 and $260,167) 311,969 267,609
Cash 21,669 19,292
Premiums and fees receivable 331,774 256,441
Due from reinsurers 432,516 427,419
Accrued investment income 36,930 34,577
Prepaid reinsurance premiums 72,148 70,057
Deferred policy acquisition costs 145,737 119,157
Real estate, furniture and equipment at cost, less accumulated depreciation 126,831 116,303
Excess of cost over net assets acquired 73,142 73,404
Other assets 37,215 28,717
----------- -----------
$ 4,599,284 $ 4,136,973
=========== ===========
LIABILITIES, RESERVES, DEBT AND STOCKHOLDERS' EQUITY
Liabilities and reserves:
Reserves for losses and loss expenses $ 1,909,688 $ 1,782,703
Unearned premiums 589,384 514,213
Due to reinsurers 95,140 71,352
Deferred Federal income taxes 32,887 4,013
Other liabilities 402,177 274,625
----------- -----------
3,029,276 2,646,906
----------- -----------
Long-term debt 390,415 390,104
Company-obligated mandatorily redeemable capital securities
of a subsidiary trust holding solely 8.197% Junior Subordinated
debentures of the corporation due December 15, 2045 207,944 207,901
Minority interest 24,357 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, 29,568,335 and 29,453,964 shares 7,281 7,281
Additional paid-in capital 428,760 469,065
Retained earnings 569,160 490,338
Net unrealized investment gains, net of taxes 58,206 31,075
Treasury stock, at cost, 6,835,510 and 6,950,103 shares (116,180) (118,120)
----------- -----------
947,292 879,732
----------- -----------
$ 4,599,284 $ 4,136,973
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
25
<PAGE> 10
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Preferred
and common Net
stock and unrealized
Total additional investment
stockholders' paid-in Retained gains Treasury
equity capital earnings (losses) stock
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
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 ($.32 per share) (8,418) -- (8,418) -- --
--------- --------- --------- --------- ---------
Balance, December 31, 1995 929,815 552,068 424,261 48,450 (94,964)
Net income attributable to common stockholders 76,354 -- 76,354 -- --
Issuance of common shares 1,746 750 -- -- 996
Net change in unrealized investment gains (17,375) -- -- (17,375) --
Purchase of treasury stock (24,152) -- -- -- (24,152)
Repurchase of preferred stock (77,572) (77,572) -- -- --
Accretion of Series B Preferred Stock 1,193 1,193 -- -- --
Dividends to common stockholders ($.35 per share) (10,277) -- (10,277) -- --
--------- --------- --------- --------- ---------
Balance, December 31, 1996 879,732 476,439 490,338 31,075 (118,120)
Net income attributable to common stockholders 91,219 -- 91,219 -- --
Issuance of common shares 3,130 1,190 -- -- 1,940
Net change in unrealized investment gains 27,131 -- -- 27,131 --
Repurchase of preferred stock (41,523) (41,523) -- -- --
Dividends to common stockholders ($.42 per share) (12,397) -- (12,397) -- --
--------- --------- --------- --------- ---------
Balance, December 31, 1997 $ 947,292 $ 436,106 $ 569,160 $ 58,206 $(116,180)
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends $ 99,047 $ 90,263 $ 60,882
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 137,312 126,006 106,333
Depreciation and amortization 11,852 8,590 14,286
Change in unearned premiums and prepaid reinsurance premiums 67,023 71,290 57,085
Change in premiums and fees receivable (64,858) (25,348) (20,551)
Change in Federal income taxes (1,408) 5,719 491
Change in deferred policy acquisition costs (24,465) (29,640) (15,607)
Realized investment gains (13,186) (7,437) (10,357)
Other, net 18,127 4,374 14,033
--------- --------- ---------
Net cash provided by operating activities before
trading account sales (purchases) 229,444 243,817 206,595
Trading account sales (purchases), net 69,544 (79,906) (47,314)
--------- --------- ---------
Net cash provided by operating activities 298,988 163,911 159,281
--------- --------- ---------
Cash flows used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 718,789 534,529 452,460
Equity securities 43,204 46,698 63,863
Proceeds from maturities and prepayments of fixed maturity securities 120,944 219,673 159,731
Cost of purchases, excluding trading account:
Fixed maturity securities available for sale (984,961) (786,631) (690,650)
Fixed maturity securities held to maturity -- (105,675) (30,568)
Equity securities (28,028) (26,988) (64,187)
Cost of acquired companies, net of acquired cash and invested cash 585 (11,739) (197,404)
Net additions to real estate, furniture and equipment (17,898) (46,983) (14,472)
Other, net (9,904) (5,083) (8,098)
--------- --------- ---------
Net cash used in investing activities (157,269) (182,199) (329,325)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- -- 144,739
Net proceeds from issuance of preferred stock -- -- 66,000
Net proceeds from issuance of long-term debt -- 98,850 --
Net proceeds from issuance of Company-obligated mandatorily
redeemable capital securities of a subsidiary trust holding
solely 8.197% junior subordinated debentures -- 207,900 --
Cash dividends to common stockholders (11,695) (10,143) (7,844)
Cash dividends to preferred stockholders (8,717) (12,824) (11,062)
Repurchase of common treasury shares -- (24,152) (4,095)
Repurchase of preferred stock (41,523) (77,572) --
Payment of subsidiary debt -- (28,306) (31,847)
Other, net 13,367 4,103 1,441
--------- --------- ---------
Net cash provided by (used in) financing activities (48,568) 157,856 157,332
--------- --------- ---------
Net increase (decrease) in cash and invested cash 93,151 139,568 (12,712)
Cash and invested cash at beginning of year 346,485 206,917 219,629
--------- --------- ---------
Cash and invested cash at end of year $ 439,636 $ 346,485 $ 206,917
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid on debt $ 45,950 $ 28,296 $ 32,839
========= ========= =========
Federal income taxes paid $ 32,258 $ 19,171 $ 17,064
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
27
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1997, 1996, and 1995
(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 1996 and 1995 financial statements to
conform them to the presentation of the 1997 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.
Short sales and short call options used in trading account activities, as
part of a hedging strategy, are included in other liabilities. Short sales and
short call options are reported at fair value, with unrealized gains and losses
reflected in net investment income.
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 a provision for significant decline 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.
(D) Per Share Data
All share data have been retroactively adjusted to reflect a three-for-two stock
split which was affected in 1997. The Company implemented Statement of Financial
Accounting Standards Number 128 in 1997. All prior period amounts have been
restated. Basic per share data is based upon the weighted average number of
shares outstanding during the year. Diluted per share data reflects the
potential dilution that would occur if employee stock based compensation plans
were exercised. Shares issued in connection with loans from shareholders are not
considered to be outstanding for the purposes of calculating per share amounts
and, accordingly, have been excluded from stockholders' equity.
(E) 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.
(F) 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.
One subsidiary of the Company, Midwest Employers Casualty Company
("Midwest"), 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 10 of notes to consolidated financial
statements).
28
<PAGE> 13
(G) 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.
Amounts due from reinsurers are reflected net of funds held where the right of
offset is present. The Company has provided reserves for uncollectible
reinsurance.
(H) 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. Amortization (including adjustments) of the excess of cost
over net assets acquired was $2,950,000, $3,334,000 and $2,465,000 for 1997,
1996 and 1995, respectively.
(I) 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 using tax rates currently in effect or expected to
apply in the years in which those temporary differences are expected to reverse.
(J) Stock Options
The Company accounts for its stock options in accordance with Financial
Accounting Standards Board ("FASB") Statement No. 123 "Accounting for
Stock-Based Compensation" (FAS 123) which provides that stock based compensation
may be disclosed in the footnotes to financial statements.
(K) Foreign currency
Revenues and expenses in foreign currencies are translated at the weighted
average exchange rate during the year. Assets and liabilities are translated at
the rate of exchange in effect at the close of the period. Gains or losses
(losses of $1,711,000 in 1997) resulting from translating foreign currency
financial statements are reported as a component of stockholders' equity. Gains
or losses (gains of $1,408,000 in 1997) resulting from foreign currency
transactions (transactions denominated in a currency other than the entity's
functional currency) are included in other income in the statement of
operations.
(L) Real estate, furniture and equipment
Real estate, furniture and equipment are carried at cost less accumulated
depreciation. Depreciation is calculated using the estimated useful lives of the
respective assets. Included in the statement of operations is depreciation
expense of $12,799,000, $12,234,000 and $10,133,000 for 1997, 1996 and 1995,
respectively.
(M) Segment Disclosure
In June 1997, the FASB issued SFAS 131 "Disclosures About Segments of an
Enterprise and Related Information." SFAS 131 redefines how operating segments
are determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The Company adopted provisions
of this statement in 1997 and all prior periods have been restated. This
statement relates to presentation of information and had no impact on the
Company's results of operations or financial condition.
(N) Recent accounting pronouncements
The American Institute of Certified Public Accountants issued Statement of
Position 97-3 "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments," which will be effective for fiscal periods
beginning in 1999. SOP 97-3 provides guidance on accounting and disclosure of
insurance related assessments. The Company does not expect this statement to
have a material impact on the Company's financial position or results of
operation.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income,"
which requires enterprises to disclose comprehensive income and its components
in a prominent position on the face of the financial statements. The Company
will implement this statement in 1998. This statement relates to presentation of
information and will have no impact on the Company's results of operations or
financial condition.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES 29
<PAGE> 14
(2) 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. Due from reinsurer has been reduced by an
offsetting funds held balance. The following amounts arising under reinsurance
ceded contracts have been deducted in arriving at the amounts reflected in the
statement of operations:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Premiums written $240,754 $210,009 $212,169
-------- -------- --------
Premiums earned $239,233 $216,127 $207,375
-------- -------- --------
Losses and loss expenses $129,405 $120,784 $134,120
-------- -------- --------
</TABLE>
(3) 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
1998, the maximum amount of dividends which can be paid without such approval is
approximately $98,713,000.
Combined net income and policyholders' surplus of the Company's consolidated
insurance subsidiaries, as determined in accordance with statutory accounting
practices, are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net income $ 121,300 $ 84,249 $ 75,587
-------- -------- --------
Policyholders' surplus $ 971,749 $881,380 $839,890
-------- -------- --------
</TABLE>
The significant variances between statutory accounting practices and GAAP
are: For statutory purposes, bonds are carried at amortized cost, acquisition
costs are charged to operations as incurred, deferred federal income taxes are
not provided for temporary differences between book and tax assets and
liabilities, EWC reserves are discounted at a 3.0% rate, loss reserves and
unearned premiums are reflected net of applicable reinsurance and certain assets
designated as "non admitted assets" are charged directly to surplus.
At December 31, 1997 and 1996, bonds with a fair value of $160,369,000 and
$139,497,000 were on deposit with various state Insurance Departments as
required by state laws.
The National Association of Insurance Commissioners ("NAIC") has 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. RBC did not affect 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.
(4) ACQUISITIONS
During 1997 and 1996, several acquisitions were completed for an aggregate
consideration of approximately $7,238,000 and $15,955,000, respectively. 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 1997 and 1996 were as follows:
Investments in fixed maturity and equity securities of $2,192,000 and
$6,434,000; cash and invested cash of $7,823,000 and $4,216,000; excess of cost
over net assets acquired of $2,688,000 and $7,138,000; and other liabilities,
net of other assets of $5,465,000 and $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
5,175,000 shares of Common Stock issued at $29.17 per share. On December 31,
1995, the Company acquired General Re Corporation's ("General Re") 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. During 1996 the Company
purchased all outstanding shares of the Series B Preferred Stock for $66
million. The only significant effect on the Company's financial statements from
this acquisition was an increase in preferred stock outstanding and the
elimination of the related minority interest because Signet Star's results of
operations were previously consolidated.
30
<PAGE> 15
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 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 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1995
<S> <C>
----------
Total revenues $1,100,195
----------
Net income attributable to
common shareholders $ 70,102
----------
Earnings per common share:
Basic $ 2.32
Diluted $ 2.31
----------
</TABLE>
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.
(5) FEDERAL INCOME TAXES
Federal income tax expense consists of:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current expense $21,999 $26,096 $17,879
Deferred expense (benefit) 8,669 (994) (325)
------- ------- -------
Total expense $30,668 $25,102 $17,554
======= ======= =======
</TABLE>
A reconciliation of Federal income tax expense and the amounts computed by
applying the Federal income tax rate of 35% to pre-tax income is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax
expense $45,234 $40,267 $28,961
Tax-exempt investment
income (15,432) (15,471) (12,938)
Other, net 866 306 1,531
------- ------- -------
Total expense $30,668 $25,102 $17,554
======= ======= =======
</TABLE>
At December 31, 1997 and 1996, the tax effects of differences that give rise
to significant portions of the deferred tax asset and deferred tax liability are
as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
------- ------
<S> <C> <C>
DEFERRED TAX ASSET
Loss reserve discounting $49,638 $50,481
Other 3,912 5,122
------- ------
Gross deferred tax asset 53,550 55,603
Less: valuation allowance (7,000) (7,000)
------- ------
Deferred tax asset 46,550 48,603
======= ======
DEFERRED TAX LIABILITY
Amortization of intangibles 12,025 12,407
Expense recognition differences 17,044 13,434
Realized investment gains 6,163 5,676
Deferred taxes on unrealized
investment gains 32,261 16,733
Depreciation 5,437 2,115
Unrealized gains on trading
account activity 3,792 705
Other 2,715 1,546
------- ------
Deferred tax liability 79,437 52,616
------- ------
Net deferred tax
liability $32,887 $4,013
======= ======
</TABLE>
Federal income tax expense applicable to realized investment gains was
$4,615,000, $2,603,000 and $3,664,000 in 1997, 1996 and 1995, respectively. The
Company had a current tax receivable of $5,869,000 at December 31, 1997 and a
current income tax payable of $6,224,000 at December 31, 1996. The Company's tax
returns through December 31, 1991 have been examined by the Internal Revenue
Service and additional income taxes have been paid.
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 net asset.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES 31
<PAGE> 16
(6) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
Description Rate Maturity Face Value Carrying Value
- ----------- ---- -------- ---------- --------------
<S> <C> <C> <C> <C>
Senior Notes 8.95% May 20, 1998 $ 10,000,000 $ 9,996,000
Senior Notes 6.31% March 6, 2000 25,000,000 24,946,000
Senior Notes 6.71% March 4, 2003 25,000,000 24,906,000
Senior Subordinated Notes 6.50% July 1, 2003 35,793,000 35,793,000
Senior Notes 6.25% January 15, 2006 100,000,000 99,015,000
Senior Notes 9.875% May 15, 2008 100,000,000 96,894,000
Senior Debentures 8.70% January 1, 2022 100,000,000 98,865,000
------------ ------------
$395,793,000 $390,415,000
============ ============
</TABLE>
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 parity with all other outstanding indebtedness of
the Company.
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 at market
conditions. In addition, the Company has a $50 million line-of-credit available.
(7) STOCK OPTION PLAN
The Company adopted the W. R. Berkley Corporation 1992 Stock Option Plan ("the
Stock Option Plan") under which 2,625,000 shares of Common Stock were reserved
for issuance. In May 1997, the Corporation restated the Stock Option Plan to
increase the number of shares of Common Stock authorized for issuance under the
Stock Option Plan from 2,625,000 to 7,125,000. Pursuant to the Plan, options may
be granted at prices determined by the Board of Directors but not less than 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:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,491,222 $26.03 1,521,339 $23.62 1,529,732 $22.82
Granted 1,154,354 34.68 1,100,813 29.02 151,501 28.34
Exercised 280,498 20.87 64,216 19.71 86,178 16.56
Canceled 146,316 27.42 66,714 26.65 73,716 24.85
--------- ------ --------- ------ --------- ------
Outstanding at end of year 3,218,762 $29.52 2,491,222 $26.03 1,521,339 $23.61
--------- ------ --------- ------ --------- ------
Options exercisable at year end 558,210 $22.66 527,832 $20.31 395,827 $18.81
--------- ------ --------- ------ --------- ------
Options available for future grant 3,892,439 401,208 935,672
--------- ------ --------- ------ --------- ------
</TABLE>
In accordance with FAS 123 the fair value of the options granted is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions for 1997 and 1996, respectively: (a)
dividend yield of 1%, (b) expected volatility of 20%,(c) risk free interest rate
of 6.70% and 6.65%, and (d) expected life of 7.5 years. The weighted average
fair value of options granted during the year were $12.97 and $10.77 for the
year ended December 31, 1997 and 1996, respectively.
The following table summarizes information about stock options outstanding at
December 31, 1997 and 1996:
32
<PAGE> 17
<TABLE>
<CAPTION>
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, 1997
<S> <C> <C> <C> <C> <C>
$14 to $27 917,795 5.4 $23.42 523,214 $22.14
27 to 32 1,129,363 8.2 29.11 34,996 30.48
32 to 42 1,171,604 9.3 34.68 0 0
--------- --- ------ ------- ------
Total 3,218,762 7.8 $29.52 558,210 $22.66
========= === ====== ======= ======
December 31, 1996
$14 to $27 1,250,720 6.2 $22.91 508,581 $19.93
27 to 32 1,223,252 9.2 29.09 19,251 30.35
32 to 42 17,250 9.9 35.08 0 0
--------- --- ------ ------- ------
Total 2,491,222 7.7 $26.03 527,832 $20.31
========= === ====== ======= ======
</TABLE>
Had compensation costs for the Company's 1997 and 1996 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:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997 1996
------- -------
Net income attributable to Common Shareholders:
------- -------
<S> <C> <C>
As reported $91,219 $76,354
Proforma $89,645 $75,592
======= =======
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997 1996
------- -------
Basic earnings per share:
------- -------
<S> <C> <C>
As reported $ 3.09 $ 2.56
Proforma $ 3.04 $ 2.54
======= =======
Diluted earnings per share:
------- -------
As reported $ 3.02 $ 2.53
Proforma $ 2.97 $ 2.51
======= =======
</TABLE>
(8) COMPANY-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF A SUBSIDIARY
TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE CORPORATION DUE
DECEMBER 15, 2045
The Company obligated mandatorily redeemable preferred securities of a
subsidiary trust holding solely junior subordinated debentures ("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 sole assets of
the Trust are $210,000,000 aggregate principal amount of 8.197% Junior
Subordinated Debentures due December 15, 2045, issued by the Company (the
"Junior Subordinated Debentures"). The Company's guarantee of payments of cash
distributions and payments on liquidation of the Trust or redemption of the
Capital Trust Securities, when taken together with the Company's obligations
under the Trust Agreement under which the Capital Trust Securities were issued,
the Junior Subordinated Debentures and the Indenture, under which the Junior
Subordinated Debentures were issued, including its obligations to pay costs,
expenses, debts and liabilities of the Trust (other than with respect to the
Capital Trust Securities), provide a full and unconditional guarantee of the
Trust's obligations under the Capital Trust Securities. The Company records the
preferential cumulative cash dividends arising from the payments of interest on
the Junior Subordinated Debentures as an expense in its consolidated statement
of operations.
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,
contemporaneously with the optional prepayment by the Company of Junior
Subordinated Debentures.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES 33
<PAGE> 18
(9) INVESTMENTS
At December 31, 1997 and 1996, there were no investments, other than investments
in United States government securities, which exceeded 10% of stockholders'
equity. At December 31, 1997 and 1996, investments were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Gross Gross Amount at which
unrealized unrealized Fair shown in the
Type of investment Cost(a) gains losses value balance sheet
- ------------------ ------- ----- ------ ----- -------------
December 31, 1997
Fixed maturity securities held to maturity:
<S> <C> <C> <C> <C> <C>
State and municipal $ 78,879 $ 5,735 $ (48) $ 84,566 $ 78,879
Corporate 13,831 476 -- 14,307 13,831
Mortgage backed securities 89,462 6,584 -- 96,046 89,462
---------- ----------- ---------- ---------- ----------
Total fixed maturities held to maturity 182,172 12,795 (48) 194,919 182,172
---------- ----------- ---------- ---------- ----------
Fixed maturity securities available for sale:
United States Government(b) 413,722 10,224 (53) 423,893 423,893
State and municipal 957,329 43,891 (405) 1,000,815 1,000,815
Corporate 450,986 16,521 (601) 466,906 466,906
Mortgage backed securities 418,864 12,960 (467) 431,357 431,357
---------- ----------- ---------- ---------- ----------
Total fixed maturities available for sale 2,240,901 83,596 (1,526) 2,322,971 2,322,971
---------- ----------- ---------- ---------- ----------
Common stocks 16,512 8,524 (8) 25,028 25,028
Preferred stocks 59,622 1,639 (46) 61,215 61,215
---------- ----------- ---------- ---------- ----------
Total equity securities available for sale 76,134 10,163 (54) 86,243 86,243
---------- ----------- ---------- ---------- ----------
Trading account 301,136 15,922 (5,089) 311,969 311,969
Invested cash(c) 417,967 -- -- 417,967 417,967
---------- ----------- ---------- ---------- ----------
Total investments $3,218,310 $ 122,476 $ (6,717) $3,334,069 $3,321,322
========== ========== =========== ========== ==========
December 31, 1996
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 811,871 21,004 (2,334) 830,541 830,541
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 2,066,327 47,282 (14,939) 2,098,670 2,098,670
---------- ----------- ---------- ---------- ----------
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 $2,936,356 $ 78,721 $ (19,473) $2,995,604 $2,991,606
========== =========== ========== ========== ==========
</TABLE>
(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.
The amortized cost and fair value of fixed maturity securities, at December 31,
1997, by contractual maturity, are shown on next page. Actual maturities may
differ from contractual maturities because certain issuers may have the right to
call or prepay obligations:
34
<PAGE> 19
<TABLE>
<CAPTION>
(Dollars in thousands) 1997
Cost Fair value
---------- ----------
<S> <C> <C>
Due in one year or less $ 109,268 $9,9109,746
Due after one year through five years 643,696 664,668
Due after five years through ten years 462,608 481,413
Due after ten years 699,175 734,660
Mortgage-backed securities 508,326 527,403
---------- ----------
Total $2,423,073 $2,517,890
========== ==========
</TABLE>
Realized gains (losses) and the change in difference between fair value and cost
of investments, before applicable income taxes, are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
-------- --------- ---------
Realized gains (losses):
<S> <C> <C> <C>
Fixed maturity securities sold(a) $ (3,308) $ 1,850 $ 17,819
Equity securities sold 16,537 5,285 (976)
Net change in provision for decline in value(b):
Fixed maturity securities 103 (152) (352)
Equity securities 581 -- 4,191
Other (727) 454 (325)
-------- --------- ---------
13,186 7,437 10,357
-------- --------- ---------
Change in difference between fair value and cost of investments:
Fixed maturity securities 58,476 (36,232) 123,590
Equity securities (5,356) 6,386 8,528
-------- --------- ---------
53,120 (29,846) 132,118
-------- --------- ---------
Total $ 66,306 $ (22,409) $ 142,475
======== ========= =========
</TABLE>
(a) During 1997, 1996 and 1995, gross gains of $7,988,000, $5,904,000 and
$11,570,000, respectively, and gross losses of $11,296,000, $4,054,000 and
$3,751,000, respectively, were realized. Included in fixed maturity
securities sold are losses arising from the Company's investments 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 certain anomalies which tend to occur in the
municipal bond market.
(b) The provision for decline in value of investments is $2,800,000, $3,485,000
and $3,333,000 as of December 31, 1997, 1996 and 1995, respectively.
Investment income consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Fixed maturity securities $ 159,199 $ 146,431 $ 115,668
Invested cash 10,829 6,698 13,000
Equity securities 5,139 4,039 4,418
Trading account(a) 28,831 12,331 9,030
Other 1,814 1,548 1,411
--------- --------- ---------
Gross investment income 205,812 171,047 143,527
Interest on funds held under reinsurance treaties (6,224) (6,557) (6,195)
--------- --------- ---------
Net investment income $ 199,588 $ 164,490 $ 137,332
========= ========= =========
</TABLE>
(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 hedging strategies, including short sales.
The arbitrage positions are generally hedged against market declines by
purchasing put options, selling call options or entering into swap 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, 1997, the notional amount of option and swap contracts
outstanding are $32,524,000 and $10,000,000, respectively.
Investment income earned from trading account activity includes unrealized
trading gains of $10,833,000, $2,013,000, and $352,000 for 1997, 1996 and
1995, respectively. Included in other liabilities at their fair value are
short sales and short call options $159,456,000 and $87,080,000 as of
December 31, 1997 and 1996, respectively. The corresponding proceeds of the
short securities are $162,360,000 and $83,172,000 as of December 31, 1997 and
1996, respectively.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES 35
<PAGE> 20
(10) 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:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
<S> <C> <C> <C>
----------- ----------- -----------
Net reserves at beginning of year $ 1,333,122 $ 1,209,250 $ 895,440
----------- ----------- -----------
Net reserves of companies acquired 4,984 -- 191,963
Net provision for losses and loss expenses:
Claims occurring during the current year 747,977 675,674 580,594
Decrease in estimates for claims occurring in prior years (21,313) (15,219) (9,596)
Amortization of discount 7,760 8,705 --
----------- ----------- -----------
734,424 669,160 570,998
----------- ----------- -----------
Net payments for claims
Current year 315,370 280,565 228,100
Prior years 324,149 264,723 221,051
----------- ----------- -----------
639,519 545,288 449,151
----------- ----------- -----------
Net reserves at end of year 1,433,011 1,333,122 1,209,250
Ceded reserves at the end of year 476,677 449,581 450,770
----------- ----------- -----------
Gross reserves at the end of year $ 1,909,688 $ 1,782,703 $ 1,660,020
=========== =========== ===========
</TABLE>
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. Discounting 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 the Company'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
generally which penetrate self-insured retention limits contained in excess
workers' compensation policies. The Company has limited the estimated 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 1997, 1996 and 1995 and
prior is 5.98%, 5.90% and 5.80%, respectively. The aggregate net discount, after
reflecting the effects of ceded reinsurance, is $189,600,000, $172,415,000 and
$152,235,000 at December 31, 1997, 1996 and 1995, respectively. For Statutory
purposes, the Company 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 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 $33.1 million and $35.2 million at
December 31, 1997 and 1996, respectively. The Company's gross reserves for
losses and loss adjustment expenses relating to pollution and environmental
claims were $68.4 million and $71.9 million at December 31, 1997 and 1996,
respectively. Net incurred losses and loss expenses for reported pollution and
environmental claims were approximately $ .1 million, $6.9 million and $8.0
million in 1997, 1996 and 1995, 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
36
<PAGE> 21
greater than normal variation and uncertainty because of the difficulty of
making a reasonable actuarial estimate of these liabilities due to the absence
of a generally accepted actuarial methodology for these exposures and the
potential effect 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.
(11) STOCKHOLDERS' EQUITY
The Company has calculated per share data in accordance with FAS 128. Treasury
shares have been excluded from average outstanding shares from the date of
acquisition. The number of shares used in the computation of basic earnings per
share was 29,503,000, 29,792,000 and 26,121,000 for 1997, 1996 and 1995,
respectively. The number of shares used in the computations of diluted earnings
per share was 30,185,000, 30,130,000 and 26,262,000 for 1997, 1996 and 1995,
respectively. The difference in calculating basic and diluted earnings per share
is attributable entirely to the dilutive effect of stock based employee
compensation plans.
Changes in shares of Common Stock outstanding, net of treasury shares,
are as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year 29,454 30,252 25,167
Shares issued 114 65 5,261
Shares repurchased -- (863) (176)
------- ------- -------
Balance, end of year 29,568 29,454 30,252
======= ======= =======
</TABLE>
As of December 31, 1996, 930,807 shares of 7 3/8% Series A Cumulative
Redeemable Preferred Stock were issued and outstanding. During January 1997, the
Company purchased an additional 183,080 shares of Series A Preferred Stock for
an aggregate cost of $28,506,000. In the second and third quarters of 1997,
93,775 shares of the Series A Preferred Stock were purchased by subsidiaries of
the Company. In addition, $115,800,000 was placed in a trust which will be used
to service and redeem the remaining outstanding shares of Series A Preferred
Stock.
(12) SUPPLEMENTAL FINANCIAL
STATEMENT DATA
Other operating costs and expenses consist of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Amortization of
deferred policy
acquisition costs $337,871 $283,642 $228,610
Other operating costs
and expenses of
insurance operations 65,993 50,288 38,773
Other costs and expenses 83,912 75,064 72,606
-------- -------- --------
Total $487,776 $408,994 $339,989
======== ======== ========
</TABLE>
(13) 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 $31.2 million to Berkley International over the next six years, as
required.
(14) 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
considered 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; $12,564,000, $11,098,000 and $9,437,000 for 1997,
1996 and 1995 respectively. Future minimum lease payments (without provision for
sublease income) are: $12,594,000 in 1998; $11,237,000 in 1999; $8,669,000 in
2000; $5,603,000 in 2001; $4,161,000 in 2002; and $7,998,000 thereafter.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
37
<PAGE> 22
(15) 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. The regional property
casualty insurance segment writes standard commercial and personal lines
insurance for such risks as automobiles, homes and business. The Company's
reinsurance segment specializes in underwriting property, casualty and surety
reinsurance on both a treaty and facultative basis. The specialty lines of
insurance consist primarily of excess and surplus lines, commercial
transportation, professional liability, directors and officers liability and
surety. The Company's alternative markets segment specializes in insuring,
reinsuring, and administering self-insurance programs and other alternative risk
transfer mechanisms for public entities, private employers and associations.
Finally, the international operations represent the Company's joint venture with
Northwestern Mutual Life, to write property and casualty, as well as life
insurance, internationally.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. 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.
<TABLE>
<CAPTION>
Income
Revenues (Loss)
------------------------------------------------------------- before Income Tax
Investment Unaffiliated Inter- income Expense
(Dollars in thousands) Income Customers Segment Total taxes (Benefits)
--------- ---------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997:
Regional $ 54,069 $ 648,986 $ 674 $ 649,660 $ 49,180 $ 15,082
Reinsurance 45,520 241,204 882 242,086 42,193 10,641
Specialty 58,064 268,158 2,691 270,849 66,042 18,114
Alternative Markets 34,339 181,783 829 182,612 35,223 10,423
International 3,623 45,360 -- 45,360 (3,566) (181)
Corporate and other 10,565 14,819 48,351 63,170 (19,815) 30,849
Adjustments and eliminations (6,592) -- (53,427) (53,427) (40,016) (54,260)
--------- ---------- -------- ----------- --------- --------
Consolidated $ 199,588 $1,400,310 $ -- $ 1,400,310 $ 129,241 $ 30,668
========= ========== ======== =========== ========= ========
December 31, 1996:
Regional $ 45,554 $ 543,290 $ 1,110 $ 544,400 $ 37,745 $ 10,679
Reinsurance 37,532 243,848 218 244,066 32,756 7,798
Specialty 47,715 231,334 1,586 232,920 49,274 12,743
Alternative Markets 29,118 171,099 218 171,317 32,541 11,516
International 1,426 26,435 -- 26,435 (1,283) --
Corporate and other 6,922 9,160 78,179 87,339 25,311 25,102
Adjustments and eliminations (3,777) -- (81,311) (81,311) (61,295) (42,736)
--------- ---------- -------- ----------- --------- --------
Consolidated $ 164,490 $1,225,166 $ -- $ 1,225,166 $ 115,049 $ 25,102
========= ========== ======== =========== ========= ========
December 31, 1995:
Regional $ 40,827 $ 478,668 $ (121) $ 478,547 $ 40,486 $ 9,827
Reinsurance 33,512 221,241 -- 221,241 19,661 3,661
Specialty 46,792 200,788 158 200,946 35,325 7,705
Alternative Markets 6,978 103,656 -- 103,656 10,254 4,933
International 377 7,313 -- 7,313 (259) --
Corporate and other 10,456 10,277 53,694 63,971 16,414 15,454
Adjustments and eliminations (1,610) -- (53,731) (53,731) (39,134) (24,026)
--------- ---------- -------- ----------- --------- --------
Consolidated $ 137,332 $1,021,943 $ -- $ 1,021,943 $ 82,747 $ 17,554
========= ========== ======== =========== ========= ========
</TABLE>
38
<PAGE> 23
Interest expense for the reinsurance segment was $2,327,000, $2,602,000 and
$5,302,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Additionally, corporate interest expense (net of intercompany amounts) was
$46,542,000, $29,361,000 and $22,907,000 for the corresponding periods.
Identifiable assets by segment are as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Regional $1,262,339 $1,103,767 $1,001,549
Reinsurance 864,282 713,127 667,652
Specialty 1,308,084 1,142,205 1,172,048
Alternative Markets 705,169 596,054 579,964
International 119,791 60,450 50,286
Corporate and other 299,619 521,370 147,185
---------- ---------- ----------
Consolidated $4,559,284 $4,136,973 $3,618,684
========== ========== ==========
</TABLE>
(16) COMPENSATION 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 $8,402,000, $7,370,000 and
$6,344,000 for 1997, 1996 and 1995, respectively.
In May 1997, the common stockholders approved the Long-Term Incentive
Compensation Plan ("LTIP"). The LTIP provides for incentive compensation to key
executives, is based on long-term corporate performance, and is based upon
criteria established by the Compensation Committee of the Board of Directors.
Key employees are awarded participation units ("units") as determined by the
Compensation and Stock Option Committee of the Board of Directors. The units
vest and become exercisable over a maximum term of five years from the date of
their award. The units are payable in cash or up to 50% in shares of Common
Stock. In 1997, 266,250 units were awarded which amounted to an expense of
$1,705,000.
(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, 1997 and 1996:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
--------------------------- ---------------------------
Carrying Carrying
Amount Fair value Amount Fair value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investments $3,321,322 $3,334,069 $2,991,606 $2,995,604
Long-term debt 390,415 434,035 390,104 421,359
Capital Trust Securities 207,944 213,217 207,901 206,197
---------- ---------- ---------- ----------
</TABLE>
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.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
39
<PAGE> 24
(18) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly financial data:
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Three months ended
----------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
---------------------- ---------------------- ---------------------- ----------------------
1997 1996 1997 1996 1997 1996 1997 1996
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 329,822 $ 287,925 $ 335,926 $ 301,293 $ 355,650 $ 311,534 $ 378,912 $ 324,414
========= ========= ========= ========= ========= ========= ========= =========
Net income before
preferred dividends $ 28,544 $ 19,522 $ 20,633 $ 21,361 $ 25,573 $ 24,092 $ 24,297 $ 25,288
========= ========= ========= ========= ========= ========= ========= =========
Net income attributable to
common stockholders $ 26,427 $ 15,684 $ 18,625 $ 17,981 $ 23,721 $ 20,712 $ 22,446 $ 21,977
========= ========= ========= ========= ========= ========= ========= =========
Earnings per share:
Basic $ .90 $ .51 $ .63 $ .61 $ .80 $ .69 $ .76 $ .75
Diluted $ .88 $ .50 $ .62 $ .61 $ .78 $ .69 $ .74 $ .73
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Quarterly per share data has been restated to reflect the 3-for-2 stock split
effected in 1997 and SFAS 128.
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
New York, New York KPMG PEAT MARWICK LLP
February 25, 1998
40
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 2,322,971
<DEBT-CARRYING-VALUE> 182,172
<DEBT-MARKET-VALUE> 194,919
<EQUITIES> 398,212
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,321,322
<CASH> 21,669
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 145,737
<TOTAL-ASSETS> 4,599,284
<POLICY-LOSSES> 1,909,688
<UNEARNED-PREMIUMS> 589,384
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 598,359
0
65
<COMMON> 7,281
<OTHER-SE> 939,946
<TOTAL-LIABILITY-AND-EQUITY> 4,599,284
1,111,747
<INVESTMENT-INCOME> 199,588
<INVESTMENT-GAINS> 13,186
<OTHER-INCOME> 4,333
<BENEFITS> 734,424
<UNDERWRITING-AMORTIZATION> 337,871
<UNDERWRITING-OTHER> 149,905
<INCOME-PRETAX> 129,241
<INCOME-TAX> 30,668
<INCOME-CONTINUING> 91,219
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91,219
<EPS-PRIMARY> 3.09
<EPS-DILUTED> 3.02
<RESERVE-OPEN> 1,333,122
<PROVISION-CURRENT> 747,977
<PROVISION-PRIOR> (13,553)
<PAYMENTS-CURRENT> 315,370
<PAYMENTS-PRIOR> 324,149
<RESERVE-CLOSE> 1,433,011
<CUMULATIVE-DEFICIENCY> 13,553
</TABLE>
