<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period. . . . . . . . March 31, 1998
or
/ / 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
165 Mason Street, Greenwich, Connecticut 06836-2518
(Address of principal executive offices) (Zip Code)
(203) 629-3000
(Registrant's telephone number, including area code)
None
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Number of shares of common stock, $.20 par value, outstanding as of May 1,
1998: 28,423,929.
<PAGE> 2
W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited)
----------- -----------
<S> <C> <C>
Assets
Investments:
Invested cash $ 491,857 $ 417,967
Fixed maturity securities:
Held to maturity, at cost (fair value
$190,509 and $194,919) 177,563 182,172
Available for sale at fair value (cost $2,235,778
and $2,240,901) 2,312,989 2,322,971
Equity securities, at fair value:
Available for sale (cost $78,154 and $76,134) 90,490 86,243
Trading account (cost $436,886 and $301,136) 471,907 311,969
Cash 11,966 21,669
Premiums and fees receivable 372,730 331,774
Due from reinsurers 449,281 432,516
Accrued investment income 35,859 36,930
Prepaid reinsurance premiums 74,107 72,148
Deferred policy acquisition costs 154,542 145,737
Real estate, furniture & equipment at cost, less accumulated depreciation 133,529 126,831
Excess of cost over net assets acquired 72,386 73,142
Other assets 59,833 37,215
----------- -----------
$ 4,909,039 $ 4,599,284
=========== ===========
Liabilities, Reserves, Debt and
Stockholders' Equity
Liabilities and reserves:
Reserves for losses and loss expenses $ 1,953,835 $ 1,909,688
Unearned premiums 622,277 589,384
Due to reinsurers 106,430 95,140
Deferred Federal income taxes 30,637 32,887
Short-term debt 20,164 --
Trading securities sold but not yet purchased at market value
(proceeds $297,992 and $162,360) 310,229 159,456
Other liabilities 296,537 242,721
----------- -----------
3,340,109 3,029,276
----------- -----------
Long-term debt 374,523 390,415
----------- -----------
Company-obligated manditorily redeemable capital securities of a
subsidiary trust holding solely 8.197% junior subordinated debentures
of the Corporation due December 15, 2045 207,955 207,944
Minority interest 22,991 24,357
----------- -----------
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 shares issued and outstanding 65 65
Common stock, par value $.20 per share:
Authorized 40,000,000 shares, issued and
outstanding, net of treasury shares,
29,603,129 and 29,568,335 shares 7,281 7,281
Additional paid-in capital 428,955 428,760
Retained earnings 586,960 569,160
Accumulated other comprehensive income 55,789 58,206
Treasury stock, at cost, 6,800,939 and
6,835,510 shares (115,589) (116,180)
----------- -----------
963,461 947,292
----------- -----------
$ 4,909,039 $ 4,599,284
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 3
W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands except per share data)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues:
Net premiums written $ 333,832 $ 284,010
Change in unearned premiums (31,199) (26,726)
--------- ---------
Premiums earned 302,633 257,284
Net investment income 56,394 44,831
Management fees and commissions 19,919 17,530
Realized gains on investments 3,417 9,340
Other income 2,243 837
--------- ---------
Total revenues 384,606 329,822
Operating costs and expenses:
Losses and loss expenses (205,202) (169,593)
Other operating costs and expenses (134,511) (110,013)
Interest expense (12,173) (12,218)
--------- ---------
Income before income taxes and
minority interest 32,720 37,998
Federal income tax expense (7,197) (9,795)
--------- ---------
Income before minority interest 25,523 28,203
Minority interest 150 341
--------- ---------
Net income before preferred dividends 25,673 28,544
Preferred dividends (1,887) (2,117)
--------- ---------
Net income before extraordinary loss 23,786 26,427
Extraordinary loss on early extinguishment
of long-term debt (net of taxes of $1,311) (2,435) --
--------- ---------
Net income attributable to common stockholders $ 21,351 $ 26,427
========= =========
Earnings per share:
Basic $ .72 $ .90
========= =========
Diluted $ .69 $ .88
========= =========
Average shares outstanding
Basic 29,585 29,462
========= =========
Diluted 30,755 29,949
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income before preferred dividends and extraordinary loss $ 25,673 $ 28,544
Adjustments to reconcile net income to cash
flows from operating activities:
Minority interest (150) (341)
Increase in reserves for losses
and loss expenses, net 38,672 11,976
Depreciation and amortization 3,669 642
Change in unearned premiums and
prepaid reinsurance premiums 30,934 26,726
Increase in premiums and fees receivable (40,956) (18,545)
Change in Federal income taxes 5,971 6,119
Change in deferred acquisition cost (8,805) (8,914)
Realized gains on investments (3,417) (9,340)
Other (26,250) 1,088
--------- ---------
Net cash flows from operating activities
before trading account sales 25,341 37,955
Trading account sales 68,657 58,708
--------- ---------
Net cash flows from operating activities 93,998 96,663
--------- ---------
Cash flows from investing activities:
Proceeds from sales, excluding trading
account:
Fixed maturity securities available for sale 205,985 153,346
Equity securities 648 16,485
Proceeds from maturities and prepayments of
fixed maturity securities 49,452 39,040
Cost of purchases, excluding trading account:
Fixed maturity securities available for sale (241,578) (273,971)
Fixed maturity securities held to maturity -- --
Equity securities (2,706) (13,914)
Change in balances due to/from security brokers (25,906) 17,552
Net additions to real estate, furniture and equipment (10,165) (3,398)
Other -- (8,820)
--------- ---------
Net cash flows from investing activities (24,270) (73,680)
--------- ---------
Cash flows from financing activities:
Net proceeds from issuance of Short-term debt 20,164 --
Repayment of preferred stock -- (27,462)
Repayment of long-term debt (18,408) --
Cash dividends to common stockholders (3,251) (2,554)
Cash dividends to preferred stockholders (1,809) (2,307)
Other (2,237) 3,823
--------- ---------
Net cash flows from financing activities (5,541) (28,500)
--------- ---------
Net increase (decrease) in cash and invested cash 64,187 (5,517)
Cash and invested cash at beginning of year 439,636 346,485
--------- ---------
Cash and invested cash at end of period $ 503,823 $ 340,968
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 7,475 $ 7,475
========= =========
Federal income taxes paid, net $ 1,175 $ 3,675
========= =========
</TABLE>
3
<PAGE> 5
W. R. Berkley Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1998
(Unaudited)
The accompanying consolidated financial statements should be read in
conjunction with the following notes and with the Notes to Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
A. FEDERAL INCOME TAXES
The Federal income tax provision has been computed based on the
Company's estimated annual effective tax rate which differs from the Federal
income tax rate of 35% principally because of tax-exempt investment income.
B. REINSURANCE CEDED
The amounts of ceded reinsurance included in the statements of
operations are as follows (amounts in thousands):
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
---------------
1998 1997
---- ----
<S> <C> <C>
Ceded premiums written $ 65,382 $ 55,079
======= =======
Ceded premiums earned $ 61,905 $ 54,678
======= =======
Ceded losses and loss expenses $ 25,169 $ 25,245
======= =======
</TABLE>
C. PER SHARE DATA
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. During the quarter, the Company realized an extraordinary loss
of $2,435,000 related to the repurchase and retirement of $16,300,000 (face
amount) of long-term debt. The Basic and Diluted earnings per share data
follows (amounts in thousands):
<TABLE>
<CAPTION>
For the three months
Ended March 31,
1998 1997
---- ----
<S> <C> <C>
Net income before extraordinary loss $ 23,786 $ 26,427
26,427 Extraordinary loss on early retirement of
long-term debt (net of taxes of $1,311) (2,435) --
---------- ----------
Net income attributable to common stockholders $ 21,351 $ 26,427
========== ==========
Earnings per share - Basic:
Net income before extraordinary loss 0.80 0.90
Extraordinary loss on early retirement of
long-term debt (0.08) --
---------- ----------
Net income attributable to common stockholders 0.72 0.90
========== ==========
Earnings per share - Diluted:
Net income before extraordinary loss 0.77 0.88
Extraordinary loss on early retirement of
long-term debt (0.08) --
---------- ----------
Net income attributable to common stockholders 0.69 0.88
========== ==========
</TABLE>
4
<PAGE> 6
D. Comprehensive Income
In June 1997, the Financial Accounting Standard Board issued statement
No. 130, "Reporting Comprehensive Income", which requires enterprises to
disclose comprehensive income and its components. The differences between
comprehensive income and net income are unrealized foreign exchange gains
(losses) as well as unrealized gains (losses) on securities. The following is
a reconciliation of comprehensive income (amounts in thousands):
<TABLE>
<CAPTION>
For the three months
Ended March 31,
1998 1997
-------- --------
<S> <C> <C>
Net income $ 21,351 $ 26,427
Other comprehensive income:
Change in unrealized foreign exchange gains (losses) (996) --
Unrealized holding gains(losses)on investment securities
arising during the period (3,642) (33,549)
Less: Reclassification adjustment for gains included
in net income, net of tax 2,221 6,071
-------- --------
Net change in unrealized gains during the period (1,421) (27,478)
Other comprehensive income (2,417) (27,478)
-------- --------
Comprehensive income $ 18,934 $ (1,051)
======== ========
</TABLE>
E. OTHER MATTERS
Reclassifications have been made in the 1997 financial statements as
originally reported to conform them to the presentation of the 1998 financial
statements.
In the opinion of management, the summarized financial information
reflects all adjustments which are necessary for a fair presentation of
financial position and results of operations for the interim periods. The
Company's results of operations are affected by seasonal weather variations.
Accordingly, results reflected for any interim period are not necessarily
indicative of those to be expected for the entire year.
5
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net income attributable to common stockholders ("net income") was $21.4
million, ($.69 diluted per share) for the first quarter of 1998, in comparison
with $26.4 million, ($.88 diluted per share), for the 1997 period. Operating
income, which we define as net income before realized investment gains and
extraordinary loss on early extinguishment of long-term debt, was $21.6 million,
($.70 diluted per share), in the first quarter of 1998 in comparison with $20.4
million, ($.68 diluted per share), earned in the corresponding 1997 period.
Net premiums written during the first quarter of 1998 increased by 18%
to $333.8 million from $284.0 million written in the comparable 1997 period. Net
premiums written by the regional segment increased by $17.5 million or 12% as
the majority of the regional units recorded growth. Specialty net premiums
written increased by $11.2 million or 24% due to an increases in transportation
and excess and surplus lines of business. Net premiums written by our
reinsurance operations increased by $10.0 million or 20% due mainly to an
increase in treaty volume. Alternative markets net premiums written increased
$3.2 million or 10% due to the commencement of operations of Key Risk Insurance
Company (which underwrote business previously managed on behalf of a
self-insurance association). This increase more than offset a decline in
premiums written by Midwest Employers Casualty Company. International net
premiums written increased $7.9 million or 93%, primarily due to a 1997
acquisition.
For the three months ended March 31, 1998, pre-tax investment income
increased by 26% to $56.4 million. This increase was primarily due to an
increase in average investable assets due to cash flow from operations. In
addition, higher earnings in our trading portfolio contributed to the growth in
investment income (See "Liquidity and Capital Resources").
Management fees and commission income ("Management fees") consist
primarily of revenues earned by the Alternative Markets segment. During the
first quarter of 1998, management fees increased 14% from the comparable 1997
amount, principally due to the addition of a significant new account.
Realized gains decreased to $3.4 million from $9.3 million earned in
the comparable 1997 period. Realized gains on fixed income securities result
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. The
majority of the 1998 realized gains resulted from the sale of fixed income
securities whereas in 1997 realized gains resulted primarily from the sale of
equity securities.
The combined ratio (on a statutory basis) of the Company's insurance
operations increased to 102.0% for the quarter ended March 31, 1998 from 100.1%
in the comparable 1997 period due to an increase in the consolidated loss ratio
and an increase in the expense ratio. The consolidated loss ratio (losses and
loss expenses incurred expressed as a percentage of premiums earned) increased
to 67.7% in 1998 from 66.2% in 1997 due to an increase in weather related losses
which was partially offset by better than expected experience in business
written in prior years recorded by 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 22% to $134.5 million.
The increase in other operating costs and expenses is primarily due to
substantial growth in premium volume which in turn results in an increase in
underwriting expenses. The consolidated expense ratio (underwriting expenses
expressed as a percentage of premiums written) increased slightly to 34.0% from
33.5% primarily due to higher commission expense in reinsurance operations which
resulted primarily from a change in business mix.
Federal income tax expense in 1998 was $7.2 million (22% effective
rate) as compared to a $9.8 million (26% effective rate) for the comparable 1997
period. The decrease in the effective tax rate in 1998 is due primarily to an
increase in the percentage of pre-tax income that is tax-exempt. (See "Liquidity
and Capital Resources").
6
<PAGE> 8
Liquidity and Capital Resources
Cash flow from operating activities before trading account sales, was
$25.3 million in the first quarter of 1998 compared with $38.0 million for the
same period in 1997. The investment portfolio, net of trading account
securities, on a cost basis, increased by $.8 million to $3,009.4 million at
March 31, 1998 from $3,008.6 million at December 31, 1997.
The change in the Company's investment portfolio distribution,
excluding trading account securities, at March 31, 1998 as compared with
December 31, 1997 was: tax-exempt securities increased to 38% from 35%; U.S.
Government securities and cash equivalents decreased to 24% from 30%; corporate
bonds increased to 17% from 16%; mortgage-backed securities increased to 18%
from 17%; and equity securities represented the balance.
In February 1998 the Company repurchased $16.3 million face value of
its 9.875% and 8.7% senior notes and debentures for $19.7 million and issued
$20.2 of short-term debt to finance these purchases. In April 1998 the Company
repurchased an additional $18.4 million of its 9.875% and 8.7% senior debentures
for $22.1 million. In April 1998 the Company issued $40 million face value
6.375% medium-term notes due April 15, 2005. The proceeds from the issuance of
the medium-term notes will be used to repay the short-term debt issued in
connection with the repurchased debentures. In addition, a portion of the
proceeds from the medium-term notes will be used to retire $10 million face
value of its 8.95% senior notes, which are due May 20, 1998.
During 1998 the Company purchased 1,433,300 shares of its Common Stock.
On May 12, 1998, the Board of Directors authorized the Company to repurchase up
to 2,000,000 shares of Common Stock.
For the first quarter of 1998, Stockholders' equity increased by
approximately $16.2 million primarily from the increase in retained earnings.
Accordingly, the Company's total capitalization, increased to $1,566 million at
March 31, 1998 and the percentage of the Company's capital attributable to debt
decreased to 25% from 26% at December 31, 1997.
For background information concerning a further discussion of the
Company's Liquidity and Capital Resources, see the Company's Annual Report on
Form 10-K.
7
<PAGE> 9
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
None
8
<PAGE> 10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
W. R. BERKLEY CORPORATION
/s/ WILLIAM R. BERKLEY
-------------------------
William R. Berkley
Chairman of the Board and
Chief Executive Officer
/s/ ANTHONY J. DEL TUFO
-------------------------
Anthony J. Del Tufo
Senior Vice President,
Chief Financial Officer
and Treasurer
9
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 2,312,989
<DEBT-CARRYING-VALUE> 177,563
<DEBT-MARKET-VALUE> 190,509
<EQUITIES> 562,397
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,052,949
<CASH> 503,823
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 154,542
<TOTAL-ASSETS> 4,909,039
<POLICY-LOSSES> 1,953,835
<UNEARNED-PREMIUMS> 622,277
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 602,642
0
65
<COMMON> 7,281
<OTHER-SE> 956,115
<TOTAL-LIABILITY-AND-EQUITY> 4,909,039
302,633
<INVESTMENT-INCOME> 56,394
<INVESTMENT-GAINS> 3,417
<OTHER-INCOME> 2,243
<BENEFITS> 205,202
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 32,720
<INCOME-TAX> 7,197
<INCOME-CONTINUING> 23,786
<DISCONTINUED> 0
<EXTRAORDINARY> (2,435)
<CHANGES> 0
<NET-INCOME> 21,351
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.69
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
