1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1995 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:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None 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
--- ---
Aggregate market value of voting stock held by non-affiliates of the registrant
based on the closing price of such stock as of March 4, 1996: $792,852,943.
Number of shares of common stock, $.20 par value, outstanding as of March 4,
1996: 20,179,939
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1995
(incorporated by reference under Part III).
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.
--------
2
W. R. BERKLEY CORPORATION
ANNUAL REPORT ON FORM 10-K
December 31, 1995
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 THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 22
ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS
ENDED DECEMBER 31, 1995 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 52
ITEM 11. EXECUTIVE COMPENSATION 54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 54
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 55
2
3
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 four segments of the 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); and alternative markets (including the management of
alternative insurance market mechanisms). 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 midwest, southern and northeast sections of the United States. The
reinsurance operations, specialty insurance and alternative markets are
conducted nationwide.
In 1995 the Company established Berkley International, LLC ("Berkley
International"). Berkley International, which is 65% owned by the Company, was
established to acquire interests outside the United States in existing and
start-up property casualty, life insurance and reinsurance businesses, including
insurance-related financial services businesses, located in emerging markets
including Asia and Latin America (see: Other information about the Company's
business, for a further explanation).
Net premiums written, as reported on a generally accepted accounting
principles ("GAAP") basis, by the Company's four major insurance industry
segments for the five years ended December 31, 1995 were as follows:
Year Ended December 31,
------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Amounts in thousands)
Net premiums written:
Regional insurance operations (1) $477,588 $386,530 $301,890 $257,625 $242,067
Reinsurance operations (2) 195,988 176,699 84,726 -- --
Specialty insurance operations (2) 160,847 134,715 146,101 160,053 169,593
Alternative markets operations (2) 25,998 19,989 4,929 -- --
-------- -------- -------- -------- --------
Total net premiums written $860,421 $717,933 $537,646 $417,678 $411,660
======== ======== ======== ======== ========
Percentage of net premiums written:
Regional insurance operations (1) 55.5% 53.8% 56.2% 61.7% 58.8%
Reinsurance operations (2) 22.8 24.6 15.7 -- --
Specialty insurance operations (2) 18.7 18.8 27.2 38.3 41.2
Alternative markets operations (2) 3.0 2.8 .9 -- --
-------- -------- -------- -------- --------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== =========
(1) Berkley International's results, which to date are immaterial, are included
in Regional insurance operations.
(2) Premiums written by the Company's Reinsurance operations prior to July 1,
1993, including the alternative markets operation, are included in Specialty
insurance operations (see other information about the Company's business).
3
4
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 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 ("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 ("Firemen's") primarily sells its policies through agents in
the District of Columbia, and the States of Maryland, North Carolina,
Pennsylvania and Virginia. Certain of Firemen'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 coverages through
independent agencies. Berkley Insurance Company of the Carolinas, formed in
December 1995 and domiciled in North Carolina, will write standard commercial
and personal lines insurance.
Acadia Insurance Company
Acadia was organized by the Company and incorporated in April 1992. It
writes multiple line property and casualty coverages in the States of Maine, New
Hampshire and Vermont. Acadia is rated A+ by A.M. Best. Acadia's statutory
surplus and statutory net premiums written as of December 31, 1995 and for the
year then ended were $29,304,000 and $97,547,000, 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, 1995 and for the year then ended were $8,358,000 and $19,003,000,
respectively.
Berkley Insurance Company of the Carolinas
In December 1995, the Company organized Berkley Insurance Company of
the Carolinas, a North Carolina domiciled company. It will write personal and
commercial lines in North Carolina. Berkley Insurance Company of the Carolinas
has not been rated by A.M. Best. Berkley Insurance Company of the Carolinas
statutory surplus as of December 31, 1995 was $4,500,000.
4
5
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, 1995 and for the
year then ended were $81,095,000 and $138,498,000, respectively.
Firemen's Insurance Company of Washington, D.C.
Firemen's was incorporated by an act of Congress in 1836. Firemen's,
through its Habitational Insurance Division, writes commercial business
consisting primarily of multiple dwelling coverages principally in the State of
New York. In addition, it insures homeowners, other personal lines and
commercial risks in the District of Columbia, and in the States of Maryland,
North Carolina and Virginia. In September 1993, Firemen's established Chesapeake
Insurance Division in order to expand its operations in the State of Virginia.
In March 1995, Firemen's established a new division, 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, 1995 and for the year then ended were
$27,346,000 and $39,736,000, respectively.
Great River Insurance Company
In December 1993, the Company organized Great River Insurance Company,
a Mississippi domiciled company. It writes personal and commercial lines in
Mississippi 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, 1995 and for the year then ended were $12,731,000 and
$25,673,000, respectively.
Tri-State Insurance Company of Minnesota
Tri-State was 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, 1995 and for the year then ended were $44,067,000 and $47,909,000,
respectively.
Union Insurance Company
Union was organized 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, 1995 and for the year then ended were $30,701,000 and
$46,743,000, respectively.
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 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, 1995 and for the year then
ended were $28,415,000 and $56,674,000, respectively.
5
6
Regional operations: Business
The following table sets forth the percentages of direct premiums
written, by line, by the Company's regional insurance operations:
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Commercial Multi-Peril 21.1% 22.0% 19.6% 19.0% 18.3%
Workers' Compensation 20.5 18.7 16.9 13.7 12.2
Automobile:
Personal 17.3 17.6 19.4 21.8 22.9
Commercial 15.3 16.4 17.4 17.1 16.7
Homeowners 8.8 9.2 9.8 10.7 11.2
General Liability 6.4 6.6 6.9 7.1 7.8
Fire and Allied Lines 4.5 4.8 5.5 5.9 6.4
Inland Marine 2.5 2.6 2.6 2.8 2.7
Other (1) 3.6 2.1 1.9 1.9 1.8
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
The following table sets forth the percentages of direct premiums
written, by state, by the Company's regional insurance operations:
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Maine 10.6% 10.5% 8.3% .9% --%
Iowa 9.2 11.1 13.8 15.7 16.7
Nebraska 8.9 11.0 13.6 16.1 16.3
Texas 7.8 9.2 10.0 9.7 8.7
South Dakota 6.6 4.9 5.7 6.3 6.8
New Hampshire 5.9 4.7 .9 -- --
Minnesota 5.4 6.0 6.6 7.6 8.1
Mississippi 5.3 2.9 -- -- --
Kansas 4.8 5.2 5.7 6.4 6.3
Colorado 4.0 4.5 5.1 5.5 5.1
Missouri 3.7 3.8 3.7 4.0 4.3
Wisconsin 3.5 3.6 4.4 5.0 5.7
Illinois 3.4 3.8 4.2 5.0 4.4
Virginia 3.0 2.1 .6 .3 .4
New York 2.8 2.6 3.0 3.4 3.5
North Dakota 2.5 3.2 3.9 4.3 4.3
Vermont 2.4 1.1 -- -- --
Arkansas 2.1 2.8 3.1 3.1 2.8
District of Columbia 1.8 2.3 2.4 2.4 2.6
Other (1) 6.3 4.7 5.0 4.3 4.0
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
(1) Other includes the direct premiums written by Berkley International.
6
7
REINSURANCE OPERATIONS
Signet Star, through its broker market reinsurance subsidiary Signet
Star Reinsurance Company, specializes in underwriting property, casualty and
fidelity reinsurance on a treaty basis and casualty reinsurance on a facultative
basis. Signet Star has significant expertise in alternative risk transfer
business and, accordingly, the results of this section are included in the
alternative markets segment. Signet Star's facultative underwriting manager,
Facultative ReSources, Inc., underwrites reinsurance primarily on a risk-by-risk
basis. The Fidelity and Surety Division of Signet Star combines extensive
underwriting and claims expertise with professional treaty design capabilities
to provide customized reinsurance products to fidelity and surety companies.
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, 1995 and for the year then ended were $243,729,000 and $217,018,000,
respectively.
Reinsurance Operations: Business
The following table sets forth the percentages of gross premiums
written, by line, by the Company's reinsurance operations:
1995 1994 1993
---- ---- ----
Treaty:
Specialty and other 46.8% 49.1% 56.4%
Regional 21.0 24.9 22.9
Nonstandard Automobile 10.4 9.5 9.3
----- ----- -----
Total Treaty 78.2 83.5 88.6
Casualty Facultative 14.2 10.9 6.4
Fidelity and Surety 7.6 5.6 5.0
----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
SPECIALTY INSURANCE OPERATIONS
The Company's specialty lines of insurance consists 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 and general agents 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. In November 1992, Admiral began writing 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, 1995 and for the year then ended were $175,596,000 and $57,796,000,
respectively.
7
8
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 underwriting manager established by the Company.
Carolina is rated A by A.M. Best. Carolina's statutory surplus and statutory net
premiums written as of December 31, 1995 and for the year then ended were
$59,327,000 and $70,586,000, 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 brokers, 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, 1995 and for the year then ended were $50,446,000 at $27,843,000,
respectively. Great Divide Insurance Company ("Great Divide"), a subsidiary of
Nautilus, writes transportation risks, as well as other specialty lines written
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:
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
General Liability 38.2% 42.2% 37.6% 39.3% 39.9%
Automobile Liability 27.4 28.1 27.9 30.2 32.9
Directors and Officers Liability 9.2 5.8 4.0 -- --
Professional Liability 7.1 6.3 6.3 4.9 4.7
Automobile Physical Damage 6.8 5.9 4.6 4.0 4.6
Fire and Allied Lines 5.0 4.6 3.2 2.5 1.9
Inland Marine 2.1 1.8 1.7 2.0 2.2
Other 4.2 5.3 14.7 17.1 13.8
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
8
9
ALTERNATIVE MARKETS
The Company's alternative markets operations specializes 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 entities which manage
alternative market mechanisms.
Midwest Employers Casualty Company
In November 1995, the Company acquired Midwest (see other information
about the Company's business). 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. Midwest is rated A- by A.M. Best. Midwest's statutory surplus and
statutory net premiums written as of December 31, 1995 and for the year then
ended were $97,676,000 and $67,513,000, respectively.
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 will have access to substantial
additional resources within the Company, which will enable it to concentrate and
coordinate the Company's focus on this growing sector of the reinsurance market.
Insurance Services Entities
The Company's insurance service operations offer a variety of products,
which includes underwriting and claims administration and alternative insurance
market mechanisms. In addition, subsidiaries of the Company provide agency and
brokerage services to both affiliated and unaffiliated entities.
Berkley Administrators
Berkley Administrators, 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.
9
10
Berkley Risk Services, Inc.
The Company acquired Berkley Risk Services, Inc. and its affiliated
companies in 1988. 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. Subsidiaries of Berkley Risk also manage entities which provide
liability insurance and claim adjusting services to public entities and not for
profit organizations.
Key Risk Services, Inc.
The Company acquired Key Risk Services, Inc. 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.
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 Redmond, Washington,
provides insurance agency and brokerage services on a nationwide basis for
unaffiliated insurance carriers as well as certain of the Company's insurance
subsidiaries.
Berkley Care Network
The Company established Berkley Care Network in 1995. Berkley Care
Network, based in Greensboro, North Carolina, is a managed health care company
offering a preferred provider network, utilization review and case management
services for workers' compensation carriers on a nationwide basis.
Alternative Markets Operations: Business
The following table sets forth the percentages of revenues, by major
source of business, of the alternative markets operations:
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Insurance Service operations 63.1% 78.6% 91.6% 100.0% 100.0%
Signet Star - Alternative Markets
division 22.1 21.4 8.4 -- --
Midwest 14.8 -- -- -- --
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
10
11
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):
Year Ended December 31,
----------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Amounts in thousands)
Regional Insurance Operations (1)
Total revenues $485,860 $376,576 $316,448 $277,112 $261,621
Income before income taxes 40,227 26,669 29,993 26,605 15,681
Reinsurance Operations (2)
Total revenues 212,876 187,304 86,962 -- --
Income (loss) before income taxes 11,205 (14,977) 194 -- --
Specialty Insurance Operations (2)
Total revenues 209,311 184,899 211,129 233,477 229,888
Income before income taxes 43,781 37,452 52,651 38,953 49,569
Alternative Markets Operations (2)
Total revenues 103,656 75,798 53,531 50,553 46,699
Income before income taxes 10,254 7,068 8,058 11,101 9,571
(1) Berkley International's results, which to date are immaterial, are included
in Regional insurance operations.
(2) Prior to July 1, 1993 the Reinsurance operations, including the alternative
markets operation, are included in Specialty insurance operations (see other
information about the Company's business).
11
12
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):
Year Ended December 31,
------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Regional Insurance Operations
Loss ratio 64.9% 65.3% 67.1% 66.5% 69.0%
Expense ratio 34.2 34.3 34.2 33.5 33.0
Policyholders' dividend ratio .9 .9 .9 1.0 1.0
----- ----- ----- ----- -----
Combined ratio 100.0% 100.5% 102.2% 101.0% 103.0%
===== ===== ===== ===== =====
Reinsurance Operations (2)
Loss ratio 78.3% 87.9% 74.1% --% --%
Expense ratio 26.4 27.1 31.4 -- --
Policyholders' dividend ratio -- -- -- -- --
----- ----- ----- ----- -----
Combined ratio 104.7% 115.0% 105.5% --% --%
===== ===== ===== ===== =====
Specialty Insurance Operations (2)
Loss ratio 78.6% 77.6% 77.3% 84.3% 75.6%
Expense ratio 28.3 26.0 26.8 25.9 25.7
Policyholders' dividend ratio -- -- -- -- --
----- ----- ----- ----- -----
Combined ratio 106.9% 103.6% 104.1% 110.2% 101.3%
===== ===== ===== ===== =====
Alternative Markets Operations(2)(3)
Loss ratio 72.3% 72.5% 72.5% --% --%
Expense ratio 31.9 27.7 21.0 -- --
Policyholders' dividend ratio -- -- -- -- --
----- ----- ----- ----- -----
Combined ratio 104.2% 100.2% 93.5% --% --%
===== ===== ===== ===== =====
Combined Insurance Operations
Loss ratio 70.7% 73.7% 71.1% 73.7% 71.7%
Expense ratio 31.3 30.8 31.7 30.6 30.0
Policyholders' dividend ratio .5 .5 .5 .6 .6
----- ----- ----- ----- -----
Combined ratio 102.5% 105.0% 103.3% 104.9% 102.3%
===== ===== ===== ===== =====
Combined Insurance Operations
Premiums to surplus ratio (4) 1.0 1.1 .8 1.0 1.2
===== ===== ===== ===== =====
Industry Ratios
Combined ratio 107.2%(5) 108.9%(6) 107.9%(6) 119.1%(6) 109.5%(6)
Premiums to surplus ratio 1.2 (5) 1.3 (7) 1.3 (7) 1.4 (7) 1.4 (7)
(1) Based on statutory accounting practices.
(2) Results of the Company's Reinsurance operations prior to July 1, 1993,
including the alternative markets operation, are included in Specialty
insurance operations. (see other information about the Company's business).
(3) The Alternative Markets segments combined ratio reflects the underwriting
results of Midwest, since November 1995, the date it was acquired, and the
Signet Star Alternative Markets division from July 1, 1993. Midwest
discounts its reserves for Losses and loss expenses, and accordingly, the
annual change in the discount is reflected in the loss ratio.
(4) Based on the Company's consolidated net premiums written to statutory
surplus.
(5) Estimated by A.M. Best
(6) Source: A.M. Best Aggregates & Averages, for stock companies.
(7) Source: A.M. Best Aggregates & Averages, for total industry.
12
13
Investments
Investment results before income tax effects were as follows:
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Amounts in thousands)
Average investments, at cost $2,102,647 $1,855,826 $1,547,635 $1,358,366 $1,174,864
========== ========== ========== ========== ==========
Investment income,
before expenses $ 143,527 $ 115,619 $ 98,368 $ 96,960 $ 90,237
========== ========== ========== ========== ==========
Percent earned on
average investments 6.8% 6.2% 6.4% 7.1% 7.7%
========= ========= ========== ========= ==========
Realized gains (losses) $ 10,357 $ (170) $ 23,523 $ 3,356 $ (4,823)
========== ========= ========== ========= ==========
Change in unrealized
investment gains (losses) (1) $ 137,560 $(119,686) $ 13,556 $ 7,743 $ 74,161
========== ========== ========== ====== =======
(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.
December 31,
-------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
1 year or less 4.2% 4.0% 3.5% 3.1% 1.6%
Over 1 year through 5 years 17.9 27.6 34.0 32.5 33.3
Over 5 years through 10 years 29.4 21.4 22.8 19.2 25.5
Over 10 years 26.2 27.0 27.5 27.3 18.8
Mortgage-backed securities 22.3 20.0 12.2 17.9 20.8
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
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.
13
14
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 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, however, for
subsequently evaluating 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.
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 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 excess workers' compensation
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
1995 and prior was approximately 5.80%.
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 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 $30.8 million and $22.8
million at December 31, 1995 and 1994, respectively. The Company's gross
reserves for losses and loss adjustment expenses relating to pollution and
environmental claims were $59.4 million and $50.6 million at December 31, 1995
and 1994, respectively. Net incurred losses and loss expenses for reported
pollution and environmental claims were approximately $8.0 million, $5.6 million
and $3.5 million in 1995, 1994 and 1993, 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.
14
15
The table below provides a reconciliation of the beginning and ending
reserve balances, on a gross of reinsurance basis (dollars in thousands):
1995 1994 1993
---- ---- ----
Net reserves at beginning of year $ 895,440 $ 783,218 $ 709,665
---------- ---------- ----------
Net reserves of acquired companies 191,963 -- 20,810
Net provision for losses and loss expenses:
Claims occurring during the current year 580,594 493,418 367,106
Decrease in estimates for claims occurring
in prior years (9,596) (7,269) (5,861)
---------- ---------- ----------
570,998 486,149 361,245
---------- ---------- ----------
Net payments for claims
Current year 228,100 187,295 139,292
Prior years 221,051 186,632 169,210
---------- ---------- ----------
449,151 373,927 308,502
---------- ---------- ----------
Net reserves at end of year 1,209,250 895,440 783,218
Ceded reserves at end of year (1) 450,770 1,175,446 1,233,130
Gross reserves at end of year $1,660,020 $2,070,886 $2,016,348
========== ========== ==========
A reconciliation, as of December 31, 1995, 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):
Net reserves reported on a SAP basis $1,248,606
Additions (deductions) to statutory reserves:
Loss reserve discounting (2) (55,438)
Outstanding drafts reclassified as reserves 15,817
Other 265
----------
Net reserves reported on a GAAP basis 1,209,250
Ceded reserves reclassified as assets 450,770
----------
Gross reserves reported on a GAAP basis $1,660,020
==========
(1) The 1995 decline in ceded reserves is due to the sale of North Star
Reinsurance Company (see: Other information about the Company's business,
for a further explanation).
(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 table on page 16 presents the development of net reserves for 1985
through 1995. 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 1985 reserves
have developed a $92 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 1985 is reserved for $2,000
as of December 31, 1985. Assuming this claim was settled for $2,300 in 1995, the
$300 deficiency would appear as a deficiency in each year from 1985 through
1994.
15
16
Year Ended December 31,
-----------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Amounts in millions)
Net reserves for losses
and loss expenses $171 $303 $423 $531 $611 $643 $680 $710 $783 $895 $1,209
Re-estimated as of:
One year later 188 300 419 524 605 635 676 704 776 885 --
Two years later 196 309 413 518 599 632 659 694 755
Three years later 205 309 405 513 596 620 650 665
Four years later 210 311 402 511 587 612 637
Five years later 213 311 402 505 581 603
Six years later 215 312 401 510 585
Seven years later 217 324 405 514
Eight years later 237 330 418
Nine years later 245 349
Ten years later 263
Cumulative redundancy
(deficiency) $(92) $(46) $ 5 $ 17 $ 26 $ 40 $ 43 $ 45 $ 28 $ 10 $ --
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ======
Cumulative amount of
net liability paid
through:
One year later $ 75 $ 90 $ 91 $114 $158 $139 $160 $169 $186 221 $ --
Two years later 113 138 152 217 234 235 264 275 221
Three years later 144 176 201 262 294 304 332 306
Four years later 164 188 225 295 334 345 346
Five years later 168 203 244 315 358 377
Six years later 176 213 256 331 380
Seven years later 182 221 268 348
Eight years later 187 231 282
Nine years later 196 244
Ten years later 208
Net Reserves $ 783 $ 895 $1,209
Ceded Reserves 1,233 1,176 451
------ ------ ------
Gross Reserves $2,016 $2,071 $1,660
====== ====== ======
Net Re-estimated 776 885 --
Ceded Re-estimated 1,234 1,158
------ ------
Gross Re-estimated as of
One year later 2,010 2,043
Two years later 1,966
Gross cumulative redundancy $ 50 $ 28 $ --
====== ====== ======
16
17
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 E & S and reinsurance subsidiaries of the Company 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
17
18
changes resulting from such activity will not adversely affect the Company's
insurance subsidiaries.
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 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
For a review of Federal income tax changes and their impact on the
Company see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
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, who place their business either
on a direct basis or through the broker market.
18
19
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. 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 resources. Most of theses carriers write
specific EWC 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.
Employees
As of February 29, 1996, the Company employed 2,982 persons. Of this
number, the Company's subsidiaries employed 2,948 persons, of whom 1,691 were
executive and administrative personnel and 1,257 were clerical personnel. The
Company employed the remaining 34 persons in its parent company and investment
operations, of whom 27 were executive and administrative personnel and 7 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 derived from customers in
foreign countries. 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.
During the last two years the Company has been actively exploring
emerging insurance markets in Latin America and South East Asia. On September
11, 1995, the Company and Northwestern Mutual Life International, Inc. ("NML"),
a wholly-owned subsidiary of Northwestern Mutual Life Insurance Company, entered
into a Subscription
19
20
Agreement, Operating Agreement and Management Agreement with respect to Berkley
International, a limited liability company. Berkley International was
established as the exclusive vehicle of the Company and NML to acquire interests
outside the United States in existing and start-up property and casualty, life
insurance and reinsurance businesses, including insurance-related financial
services businesses, located in emerging markets including Asia and Latin
America ("Portfolio Companies").
The Company and NML agreed, subject to certain limitations set forth in
the Operating Agreement, that Berkley International would be their exclusive
vehicle for investments in Portfolio Companies of which they from time to time
become aware; provided, however, that as of the end of any fiscal year, the
Company and NML may terminate this exclusivity provision. 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. Subsequent to the third
anniversary of the Company's and NML's subscription for interests in Berkley
International, either party upon not less than six months' prior written notice
may terminate its obligation to make any remaining portion of its capital
contribution, such termination to be effective on December 31 of the year in
which the notice is give. The Company and NML may also terminate their
obligations to make any remaining portion of their capital contributions in the
event either party terminates the exclusivity provision referred to above.
During 1995, the Company purchased majority interests in La Union Gremial
Compania de Seguros, S. A. and Independencia Compania Argentina de Seguros, S.
A., two property and casualty companies in Argentina, for approximately $9.2
million, which constituted a portion of the Company's initial contribution to
Berkley International. The Company will act as manager of Berkley International
for a fee based on a percentage of the aggregate commitments of the members. To
date, Berkley International's results have not been material to the Company.
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. The
Company also retired approximately $19,590,000 million of MECC, Inc.'s debt. The
purchase was substantially funded by the issuance of 3,450,000 shares of Common
Stock at $43.75 per share.
On July 1, 1993, the Company exchanged all of the outstanding capital
stock of Signet Reinsurance Company (Signet) for 60% of the common stock of
Signet Star Holdings, Inc. ("Signet Star"). Signet Star simultaneously acquired
all of the outstanding capital stock of Signet Star Reinsurance Company ("Signet
Star Reinsurance") from General Re Corporation ("General Re") in exchange for
40% of the common stock of Signet Star and other consideration. Signet Star is
reported as a separate industry segment. Signet's operations through June 30,
1993 are included in the specialty segment.
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. 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 of this
transaction, Signet Star sold to General Re Signet Star Reinsurance Company and
renamed Signet Reinsurance Company, Signet Star Reinsurance Company.
In February 1996, Signet Star Reinsurance Company established a Latin
American and Caribbean division. The new division, which is located in Coral
Gables Florida, will specialize in providing treaty reinsurance services to a
wide variety of clients in Latin America and the Caribbean.
20
21
ITEM 2. PROPERTIES
The Company and its subsidiaries own or lease office buildings or
office space suitable to conduct their operations. Owned property is as follows:
Location Company Size (sq. ft.)
-------- ------- --------------
Austin, Texas J/I Holding Corporation (1) 7,000
Cherry Hill, New Jersey Admiral 30,000
Grand Forks, North Dakota American West 12,000
Jacksonville, Florida Carolina (2) 35,000
Lincoln, Nebraska Union 43,000
Lincoln, Nebraska Continental Western 20,000
Luverne, Minnesota Tri-State 25,000
Meridian, Mississippi Great River 30,000
Scottsdale, Arizona Nautilus 34,000
Urbandale, Iowa Continental Western 80,000
Westbrook, Maine Acadia 54,000
(1) Occupied by Admiral's branch office.
(2) 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.
The Company has executed an agreement for the acquisition of a building
to be used as the Company's headquarters, which is expected to close by June 1,
1996.
ITEM 3. LEGAL PROCEEDINGS
Claims under insurance policies written by the Company's 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 1995 to a vote
of holders of the Company's Common Stock.
21
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.
Common
Price Range Dividends Paid
----------- --------------
High Low Per Share
---- --- ---------
1995:
Fourth Quarter $ 55 1/2 $ 43 $ .12 cash
Third Quarter 47 35 1/2 $ .12 cash
Second Quarter 39 35 $ .12 cash
First Quarter 39 5/8 34 1/2 $ .11 cash
1994:
Fourth Quarter $ 38 1/4 $ 32 1/2 $ .11 cash
Third Quarter 39 35 1/4 $ .11 cash
Second Quarter 42 34 3/4 $ .11 cash
First Quarter 38 32 1/2 $ .10 cash
The closing price on March 4, 1996, as reported on the NASDAQ National
Market System, was $45 1/4 per share. The approximate number of record holders
of the Common Stock on March 4, 1996 was 915.
22
23
ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 1995
Year Ended December 31,
---------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Amounts in thousands except per share data)
Net premiums written $ 860,421 $ 717,933 $ 537,646 $ 417,678 $ 411,660
Net premiums earned 803,336 655,038 501,433 416,003 408,133
Net investment income 137,332 109,683 92,773 91,629 85,103
Management fees and commissions 68,457 64,536 54,027 54,734 50,148
Realized investment gains (losses) 10,357 (170) 23,523 3,356 (4,823)
Other income 2,461 1,703 1,550 1,478 2,690
Total revenues 1,021,943 830,790 673,306 567,200 541,251
Interest expense 28,209 27,601 25,275 19,266 10,618
Income before Federal
income taxes 82,747 30,774 61,364 54,521 60,084
Federal income tax (expense)
benefit (17,554) 1,552 (9,181) (8,041) (13,500)
Income before minority interest
and change in accounting 65,193 32,326 52,183 46,480 46,584
Minority interest (4,311) 2,768 (596) -- --
Cumulative effect of change
in accounting principle -- -- -- 5,902 --
Net income before preferred
dividends 60,882 35,094 51,587 52,382 46,584
Preferred dividends 11,062 10,356 -- -- --
Net income attributable to
common stockholders 49,820 24,738 51,587 52,382 46,584
Data per common share:
Income before change
in accounting 2.86 1.44 2.87 2.59 2.61
Net income 2.86 1.44 2.87 2.92 2.61
Stockholders' equity (1) 35.39 26.68 30.36 26.33 23.56
Cash dividends declared $ .48 $ .44 $ .40 $ .36 $ .32
Weighted average shares
outstanding 17,414 17,182 17,946 17,942 17,862
Investments (1) $2,588,346 $1,901,715 $1,748,702 $1,396,082 $1,238,645
Total assets (2) 3,618,684 3,582,291 3,337,705 1,953,294 1,525,975
Reserves for losses
and loss expenses (2) 1,660,020 2,070,886 2,016,348 995,247 680,109
Long-term Debt 290,981 290,798 290,633 205,001 106,090
Stockholders' equity (1) 929,815 597,601 526,281 474,396 421,736
(1) Investments and stockholders' equity reflect the adoption of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," as of
December 31, 1993. Included in the calculation of common stockholders'
equity per share are unrealized investments gains (losses), net of federal
income taxes, of $48,450,000, ($33,973,000) and $36,450,000 as of December
31, 1995, 1994 and 1993, respectively.
(2) Total assets and reserves for losses and loss expenses reflect the adoption
of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short Duration
and Long-Duration Contracts," as of December 31, 1992.
23
24
ITEM 7. 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 trend of increasing
price competition, combined with an increase in the number and size of
catastrophic losses, has produced a significant reduction in underwriting
profitability for the Company and the industry.
Operating Results for the Year Ended December 31, 1995
as Compared to the Year Ended December 31, 1994
Net income attributable to common shareholders ("Net Income") for 1995
was $50 million, or $2.86 per share, compared with 1994 earnings of $25 million,
or $1.44 per share. The 1995 results include after-tax realized investment gains
of $6 million or $.36 per share, compared with after-tax realized investment
losses of $86,000 or $.01 per share recorded in 1994.
Net premiums written in 1995 grew by 20% to $860 million from $718
million written during 1994 due to increases recorded by all four segments of
our operations. Premiums written by the regional segment grew by 24% in 1995 to
$478 million compared to $387 million written during 1994. Approximately 60% of
the growth was from three operations which the Company established in 1992 and
1993. The balance of this increase primarily results from the expansion by the
regional operations into new markets. Premiums written by the reinsurance
segment grew by 11% to $196 million from $177 million written during 1994. The
growth in reinsurance premiums written was mainly due to growth in facultative
and fidelity and surety premiums written. Premiums written by the specialty
segment grew by 19% in 1995 to $161 million from $135 million in 1994. The
growth in the specialty premiums written is due mainly to decreases in the
amounts of business ceded to unaffiliated reinsurers. Premiums written by the
alternative markets segment grew by 30% in 1995, to $26 million from $20 million
in 1994. The growth in this segment's premiums written is due to the inclusion
of Midwest, which was acquired in November 1995, and modest premium growth
recorded by Signet Star's alternative markets division.
Net investment income increased, on a pre-tax basis, to $137 million
from $110 million earned in 1994. The higher level of investment earnings is due
primarily to growth in investable assets generated by an increase in cash flow
from operations and increased portfolio yields. The pretax yield of the
portfolio increased as a result of a change in the mix of fixed maturity
investments, an increase in the duration of the portfolio and an increase in
trading account profits (see "Liquidity and Capital Resources").
24
25
Management fees and commissions consists primarily of fees and
commissions earned by the alternative markets operating units. These fees and
commissions grew by 6% to $68 million in 1995 from $65 million earned in 1994.
This increase was due mainly to the inclusion of a full year's results for Key
Risk Services, Inc. which was acquired in May 1994 as well as fees earned by
Berkley Care Network which the Company established in June 1995. These increases
were partially offset by a restructuring of one alternative markets operating
unit.
The combined ratio (on a statutory basis) of the Company's insurance
operations decreased to 102.5% in 1995 from 105.0% (101.9% before the Northridge
Earthquake) in 1994 due to an improvement in the consolidated loss ratio which
was partially offset by a slight increase in the expense ratio. The consolidated
loss ratio (losses and loss expenses incurred expressed as a percentage of
premiums earned) decreased to 70.7% from 73.7% primarily due to the effect of
the Northridge Earthquake, which significantly impacted 1994 results. This
improvement was partially offset by an increase in the frequency and severity of
losses incurred by our commercial transportation unit.
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 19% to $340 million
from $286 million recorded in 1994. This increase was due primarily to the
substantial growth in premium volume which in turn results in an increase in
variable underwriting expenses. The consolidated expense ratio (underwriting
expenses expressed as a percentage of premiums written) of the Company's
insurance operations increased to 31.3% from 30.8% in 1994. The expense ratio
increased due to the effects of start-up operations which generally incur a
higher expense ratio in the early stages of their development.
Minority interest for 1995 was an expense of $4 million as compared to
income of $3 million reported in 1994. The change in minority interest was due
to earnings generated by Signet Star in 1995 versus a loss in 1994.
Operating Results for the Year Ended December 31, 1994
as Compared to the Year Ended December 31, 1993
Net income for 1994 was $25 million, or $1.44 per share, compared with
1993 earnings of $52 million, or $2.87 per share. The 1994 results include
after-tax realized investment losses of $86,000, or $.01 per share, compared
with after-tax realized investment gains of $15 million, or $.82 per share,
realized in 1993. In addition, the 1994 results were adversely impacted by a
higher level of catastrophes losses including the Company's share of losses
incurred by Signet Star due to the Northridge earthquake in California.
Furthermore, in January 1994 the Company issued $150 million of 7.375% Series A
Cumulative Redeemable Preferred Stock which resulted in preferred dividends of
$10 million and had a negative impact on the comparative results.
Net premiums written in 1994 grew by 33.5% to $718 million from $538
million written during 1993, primarily due to growth in reinsurance premium
volume as a result of the inclusion of Signet Star's results for the entire
year. In addition, premiums written by the Company's regional insurance
operations increased by $85 million. Approximately two thirds of this increase
was due to the three new operations referred to above. The balance of this
increase resulted primarily from the expansion into new markets by the remainder
of the regional group. Premium volume for the alternative markets segment was
$20 million in 1994, compared with $5 million in 1993. The increase is due
primarily to the inclusion of the results of Signet Star's alternative markets
division for the entire year.
25
26
Net investment income increased, on a pre-tax basis, to $110 million
from $93 million earned in 1993. The higher level of investment earnings is due
to a full year of earnings of Signet Star and growth in investable assets,
generated by cash flow from operations and the issuance of 7.375% Series A
Cumulative Redeemable Preferred Stock. The higher level of interest expense
resulted from the issuance of subsidiary debt in connection with the formation
of Signet Star (see "Liquidity and Capital Resources").
Management fees and commissions increased by 20% to $65 million from
$54 million recorded in 1993 due primarily to a full year's earnings of Signet
Star's alternative markets division and the acquisition of Key Risk in April
1994. The pre-tax earnings of this segment decreased to $7 million from $8
million earned in 1993 due to the affects of the restructuring referred to
above.
The combined ratio (on a statutory basis) of the Company's insurance
operations increased to 105.0% (101.9% before the Northridge Earthquake) in 1994
from 103.3% in 1993 due to an increase in the consolidated loss ratio. The
consolidated loss ratio (losses and loss expenses incurred expressed as a
percentage of premiums earned) increased to 73.7% from 71.1% in 1993. The
increase in the loss ratio was due to a higher level of catastrophes including
after-tax catastrophe losses of $7.5 million resulting from the Northridge
Earthquake.
Other operating costs and expenses increased by 27% to $286 million.
This increase is due to the inclusion of a full year of operating results of
Signet Star, a higher level of costs associated with the three new insurance
operations and increased expenses in the alternative markets segment as a result
of the acquisition of Key Risk Services, Inc. The consolidated expense ratio
(underwriting expenses expressed as a percentage of premiums written) of the
Company's insurance operations decreased to 30.8% in 1994 from 31.7% in 1993 due
primarily to significant increases in the premium volume of Signet Star which
has a lower expense ratio than our other insurance operations.
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
$206.6 million in 1995 and $170.3 million in 1994. The increase in cash flow in
1995 was due primarily to additional cash flow generated by the Company's
regional operations due to a significant increase in the premium volume.
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; to date, cash dividends have not required
regulatory approval (See Note 13 of "Notes to Consolidated Financial
Statements").
Financing Activity
In January 1994, the Company issued 6 million depositary shares each
representing a one-sixth interest in a share of 7.375% Series A Cumulative
Redeemable Preferred Stock and received net proceeds of approximately $145
million. A portion of the proceeds of this offering were contributed to the
start up insurance subsidiaries to support their growth.
26
27
In March 1995, the Company purchased 117,000 shares of its Common Stock
for approximately $4.1 million. Pursuant to an authorization of the Board of
Directors, up to 334,000 additional shares may be purchased from time to time.
In October 1995, the Company issued 3,450,000 shares of common stock,
and received net proceeds of approximately $145 million which was used to
finance the acquisition of Midwest.
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. The
Series B Preferred Stock has a dividend rate increasing up to 6% during the
first twelve months. The rate is subject to readjustment based on certain
predetermined conditions. 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. The balance of the
proceeds from all of the above-mentioned offerings of securities is available
for acquisitions, working capital and other general corporate purposes.
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.
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.
Sales of fixed income securities in 1995 were the result of financial
market conditions and the Company's strategy of maintaining an appropriate
balance between the duration of its assets and liabilities.
The investment portfolio, valued on a cost basis, grew in 1995 by
$553.0 million to approximately $2,508 million primarily due to the combined
effects of the acquisition of Midwest and net cash flow from operations.
27
28
During 1995, the Company invested approximately $66 million of its
available cash inflow in equity securities and $127 million in corporate bonds
(principally mortgage-backed securities). At December 31, 1995, the portion of
the portfolio invested in tax-exempt securities was 32% (36% in 1994) and U.S.
Government securities and cash equivalents comprised 30% (33% in 1994) of
invested assets. Investments in corporate fixed maturity securities (including
mortgage-backed securities) were 28% (24% in 1994) of the portfolio at December
31, 1995, and equity securities represented the balance.
Federal Income Taxes
The Company files a consolidated Federal income tax return with all its
subsidiaries except Signet Star. Federal income tax expense in 1995 was $17.6
million (21% effective rate) as compared to a benefit of $1.6 million recorded
in 1994. The 1995 effective tax rate is lower than the statutory tax rate of 35%
because a substantial portion of investment income is tax-exempt. The 1994 tax
benefit is due to the fact that tax-exempt investment income exceeded total
pre-tax income. At December 1995, the Company had a deferred tax liability of
$57.7 million, which results primarily from unrealized investment gains and
intangible assets, and a deferred tax asset of $43.3 million, which results
primarily from 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. In establishing the amount of the
deferred tax asset, management has included a valuation allowance for the future
uncertainty associated with the extended time period required for the complete
reversal of the effects of loss reserve discounting.
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 ceded. The
Company monitors the financial condition of its reinsurers and attempts to place
its coverages only with substantial, financially sound carriers. The Company has
established reserves for potentially uncollectible reinsurance.
Regional Operations
In 1995, Continental Western and the Habitational Division of Firemen's
generally retained $475,000 on individual risks while the Company's other
regional subsidiaries generally retained $400,000 on individual risks. The
regional group also maintained catastrophe reinsurance protection for
approximately 95% of weather-related losses above $3 million per occurrence up
to a maximum of $35 million and carried additional catastrophe protection on an
aggregate basis for storms resulting in loss events between $500,000 and $6
million ($8 million in 1996).
28
29
Reinsurance Operations
Signet Star's retrocessional program provides coverage for property
losses in three layers as follows: (i) 100% of $6.5 million in excess of $7
million per occurrence; (ii) 95% of $9 million in excess of $13.5 million per
occurrence; and (iii) 90% of $7.5 million in excess of $22.5 million per
occurrence. In 1995, Signet Star had retrocessional coverage for its casualty
facultative business which provides coverage for 40% (20% in 1996) of $5 million
per certificate on a pro-rata basis; this coverage applies to Signet Star's
individual certificate business only. During 1995, Signet Star had
retrocessional coverage for its fidelity and surety business for approximately
60% (80% in 1996) of each loss up to $2,250,000 in excess of $750,000 per
occurrence.
Specialty Operations
Admiral's retention in 1995 was $170,000 ($175,000 in 1996) per risk
for most classes of business and $2.1 million ($5.0 million in 1996), per
insured, for business written by Monitor Liability Managers. In addition, in
1996 Admiral's Directors and Officer coverage will also include additional
protection on an aggregate basis. Nautilus generally retained $97,500 per risk
in 1995 ($140,000 in 1996) and Carolina maintained its retention at $300,000 on
liability exposures.
Alternative Markets Operations
Midwest's retention is generally $1 million per occurrence above the
self insured's underlying retention.
Capitalization
For the year ended December 31, 1995 as a result of retained earnings
and the transactions discussed above under "Financing Activity", stockholders'
equity increased by approximately $332.2 million and the total amount of capital
employed in the business grew to $1,249.1 million. Accordingly, the percentage
of the Company's capital attributable to debt decreased to 26% at December 31,
1995 from 36% at December 31, 1994. In January 1996 the Company issued $100
million of 6.25% ten-year notes. On a proforma basis, assuming the issuance of
these notes occurred on December 31, 1995, the percentage of the Company's
capital attributable to debt would have been 31%.
29
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements Page
----------------------------- ----
W. R. Berkley Corporation and Subsidiaries:
Independent auditors' report 31
Consolidated balance sheets, December 31, 1995 and 1994 32
Consolidated statements of operations, years ended
December 31, 1995, 1994, and 1993 33
Consolidated statements of stockholders' equity, years
ended December 31, 1995, 1994, and 1993 34
Consolidated statements of cash flows, years ended
December 31, 1995, 1994, and 1993 35
Notes to consolidated financial statements 36
30
31
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, 1995 and 1994, 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, 1995. 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, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in note 1 to the consolidated financial statements, W. R. Berkley
Corporation adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" on December 31, 1993.
We have also previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of W. R. Berkley Corporation and
subsidiaries as of December 31, 1993, 1992 and 1991, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1992 and 1991 (none of which are presented herein);
and we expressed unqualified opinions on those consolidated financial
statements. In 1992, W. R. Berkley Corporation adopted the provisions of the
Financial Accounting Standards Board's statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
In our opinion, the information set forth in the selected financial data for
each of the years in the five-year period ended December 31, 1995, appearing on
page 23, is fairly presented, in all material respects, in relation to the
consolidated financial statements from which it has been derived.
KPMG Peat Marwick LLP
New York, New York
February 22, 1996
31
32
W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 1995 and 1994
(Dollars in thousands, except share data)
1995 1994
---------- ----------
Assets
Investments:
Invested cash $ 196,732 $ 214,116
Fixed maturity securities:
Held to maturity, at cost (fair value
$176,193 and $195,983) 169,078 192,827
Available for sale at fair value (cost $1,894,451
and $1,408,063) 1,959,910 1,353,891
Equity securities, at fair value:
Available for sale (cost $92,472 and $68,787) 101,551 69,338
Trading account (cost $155,301 and $71,211) 161,075 71,543
Cash 10,185 5,513
Premiums and fees receivable 231,093 191,418
Due from reinsurers 423,626 1,127,416
Accrued investment income 34,373 27,853
Prepaid reinsurance premiums 77,656 69,169
Deferred policy acquisition costs 89,517 72,026
Excess of cost over net assets acquired 69,600 55,319
Deferred Federal income taxes -- 42,217
Other assets 94,288 89,645
---------- ----------
$3,618,684 $3,582,291
========== ==========
Liabilities, Reserves, Debt and
Stockholders' Equity
Liabilities and reserves:
Reserves for losses and loss expenses $1,660,020 $2,070,886
Unearned premiums 450,522 350,263
Due to reinsurers 65,798 54,845
Deferred Federal income taxes 14,363 --
Other liabilities 169,080 116,983
---------- ----------
2,359,783 2,592,977
---------- ----------
Long-term debt 290,981 290,798
Notes payable to Banks 28,306 40,204
Minority interest 9,799 60,711
Stockholders' equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares:
7 3/8% Series A Cumulative Redeemable Preferred
Stock 1,000,000 shares issued and outstanding 100 100
Series B Cumulative Redeemable Preferred Stock
458,667 shares issued and outstanding 46 --
Common stock, par value $.20 per share:
Authorized 40,000,000 shares, issued and
outstanding, net of treasury shares,
20,168,167 and 16,777,718 shares 4,854 4,165
Additional paid-in capital 547,068 336,659
Retained earnings 424,261 382,859
Net unrealized investment gains (losses),
net of taxes 48,450 (33,973)
Treasury stock, at cost, 4,101,211 and
4,041,660 shares (94,964) (92,209)
---------- ----------
929,815 597,601
---------- ----------
$3,618,684 $3,582,291
========== ==========
See accompanying notes to consolidated financial statements.
32
33
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1995, 1994 and 1993
(Dollars in thousands, except per share data)
1995 1994 1993
---- ---- ----
Revenues:
Net premiums written $ 860,421 $ 717,933 $ 537,646
Increase in net unearned premiums (57,085) (62,895) (36,213)
---------- --------- ---------
Premiums earned 803,336 655,038 501,433
Net investment income 137,332 109,683 92,773
Management fees and commissions 68,457 64,536 54,027
Realized investment gains (losses) 10,357 (170) 23,523
Other income 2,461 1,703 1,550
---------- --------- ---------
Total revenues 1,021,943 830,790 673,306
Operating costs and expenses:
Losses and loss expenses (570,998) (486,149) (361,245)
Other operating costs and expenses (339,989) (286,266) (225,422)
Interest expense (28,209) (27,601) (25,275)
---------- --------- ---------
Income before income taxes and
minority interest 82,747 30,774 61,364
Federal income tax (expense) benefit (17,554) 1,552 (9,181)
---------- --------- ---------
Income before minority interest 65,193 32,326 52,183
Minority interest (4,311) 2,768 (596)
---------- --------- ---------
Net income before preferred dividends 60,882 35,094 51,587
Preferred dividends (11,062) (10,356) --
---------- --------- ---------
Net income attributable to
common stockholders $ 49,820 $ 24,738 $ 51,587
========== ========= =========
Net income per share $ 2.86 $ 1.44 $ 2.87
========== ========= =========
See accompanying notes to consolidated financial statements.
33
34
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1995, 1994 and 1993
(Dollars in thousands, except per share data)
Preferred
and Common Net
stock and unrealized
Total additional investment
stockholders' paid-in Retained gains Treasury
equity capital earnings (losses) stock
------------- ---------- -------- ---------- --------
Balance, December 31, 1992 $474,396 $192,943 $321,252 $ 4,904 $(44,703)
Net income attributable to
common stockholders 51,587 -- 51,587 -- --
Issuance of common shares 1,588 668 -- -- 920
Net change in unrealized
investment gains:
Change in accounting for
investment gains 32,714 -- -- 32,714 --
Other (1,168) -- -- (1,168) --
Purchase of treasury stock (25,688) -- -- -- (25,688)
Dividends to common
stockholders ($.40 per share) (7,148) -- (7,148) -- --
-------- -------- -------- -------- --------
Balance, December 31, 1993 526,281 193,611 365,691 36,450 (69,471)
Net income attributable to
common stockholders 24,738 -- 24,738 -- --
Issuance of common shares 5,657 2,038 -- -- 3,619
Issuance of preferred stock 145,275 145,275 -- -- --
Net change in unrealized
investment (losses) (70,423) -- -- (70,423) --
Purchase of treasury stock (26,357) -- -- -- (26,357)
Dividends to common
stockholders ($.44 per share) (7,570) -- (7,570) -- --
-------- -------- -------- -------- --------
Balance, December 31, 1994 597,601 340,924 382,859 (33,973) (92,209)
Net income attributable to
common stockholders 49,820 -- 49,820 -- --
Issuance of common shares 146,484 145,144 -- -- 1,340
Issuance of preferred stock 66,000 66,000 -- -- --
Net change in unrealized
investment gains 82,423 -- -- 82,423 --
Purchase of treasury stock (4,095) -- -- -- (4,095)
Dividends to common
stockholders ($.48 per share) (8,418) -- (8,418) -- --
-------- -------- -------- -------- --------
Balance, December 31, 1995 $929,815 $552,068 $424,261 $ 48,450 $(94,964)
======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
34
35
W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1995, 1994 and 1993
(Dollars in thousands)
1995 1994 1993
---- ---- ----
Cash flows from operating activities:
Net income before preferred dividends $ 60,882 $ 35,094 $ 51,587
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Minority interest 4,311 (2,768) 596
Increase in reserves for losses and loss expenses,
net of due to/from reinsurers 106,333 117,371 60,111
Depreciation and amortization 14,286 14,989 12,788
Change in unearned premiums and prepaid reinsurance premiums 57,085 62,895 36,213
Change in premiums and fees receivable (20,551) (45,181) (708)
Change in Federal income taxes 491 (9,687) (1,959)
Change in deferred policy acquisition costs (15,607) (13,941) (9,893)
Realized investment (gains) losses (10,357) 170 (23,523)
Other, net 9,722 11,375 19,386
--------- --------- ---------
Net cash provided by operating activities
before trading account sales (purchases) 206,595 170,317 144,598
Trading account sales (purchases), net (47,314) (53,041) 74,846
--------- --------- ---------
Net cash provided by operating activities 159,281 117,276 219,444
--------- --------- ---------
Cash flows used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 452,460 415,871 412,866
Equity securities 63,863 181,594 98,289
Proceeds from maturities and prepayments of
fixed maturity securities 159,731 114,200 135,648
Cost of purchases, excluding trading account:
Fixed maturity securities available for sale (690,650) (703,215) (700,243)
Fixed maturity securities held to maturity (30,568) -- --
Equity securities (64,187) (208,257) (102,342)
Cost of acquired companies, net of acquired
cash and invested cash (197,404) -- (112,787)
Change in balances due to/from security brokers (8,098) 12,048 2,481
Other, net (14,472) (34,465) (18,503)
--------- --------- ---------
Net cash used in investing activities (329,325) (222,224) (284,591)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock 144,739 -- --
Net proceeds from issuance of preferred stock 66,000 145,275 --
Net proceeds from issuance of long-term debt -- -- 49,694
Cash dividends to common stockholders (7,844) (7,459) (7,035)
Cash dividends to preferred stockholders (11,062) (8,051) --
Purchase of treasury shares (4,095) (26,357) (25,688)
Issuance of subsidiary common stock in acquisition -- -- 69,931
Issuance of debt in acquisition -- -- 76,180
Proceeds from subsidiary debt -- -- 40,089
Payment of subsidiary debt (31,847) (4,527) (40,387)
Other, net 1,441 156 1,588
--------- --------- ---------
Net cash provided by financing activities 157,332 99,037 164,372
--------- --------- ---------
Net increase (decrease) in cash and invested cash (12,712) (5,911) 99,225
Cash and invested cash at beginning of year 219,629 225,540 126,315
--------- --------- ---------
Cash and invested cash at end of year $ 206,917 $ 219,629 $ 225,540
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid on debt $ 32,839 $ 24,897 $ 25,463
========= ========= =========
Federal income taxes paid $ 17,064 $ 8,135 $ 10,455
========= ========= =========
Reclassifications from held to maturity to available for sale $ 14,100 $ -- $ --
========= ========= =========
See accompanying notes to consolidated financial statements.
35
36
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1995, 1994 and 1993
(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 1993 and 1994
financial statements to conform them to the presentation of the 1995
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.
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 provision for
declines 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.
36
37
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
(D) 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.
(E) 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.
A subsidiary of the Company, Midwest Employers Casualty
Company ("Midwest") which was acquired in November 1995, 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 11 of
notes to consolidated financial statements).
(F) 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. The Company has provided
reserves for this potential uncollectability.
(G) 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.
37
38
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, continued
(H) Federal income taxes
The Company and its 80% or more owned subsidiaries file a
consolidated Federal income tax return. In 1995 and prior years, Signet
Star 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 annually using tax
rates currently in effect or expected to apply in the years in which
those temporary differences are expected to reverse.
(I) Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board
("FASB") issued statements of financial accounting standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation. This statement
addressed the accounting for the cost of stock-based compensation, such
as stock options. SFAS No. 123 permits either expensing the cost of
stock-based compensation over the vesting period or disclosing in the
financial statement footnotes what this expense would have been. This
cost would be measured at the grant date based upon estimated fair
values, using option pricing models. The Company expects to adopt the
disclosure alternative of this statement in 1996.
(2) Acquisitions
On September 11, 1995, the Company formed 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. 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. 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 Employer's Casualty Company, for
$141,908,000. In connection with this acquisition, the Company also
retired approximately $19,590,000 million of MECC, Inc.'s debt. The
purchase was funded by the issuance of 3,450,000 shares of Common Stock
issued at $43.75 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. The only
significant effect on the Company's financial statements from this
acquisition is an increase in preferred stock outstanding and the
elimination of the related minority interest because Signet Star's
results of operations were previously consolidated.
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.
38
39
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Acquisitions, continued
The net assets acquired in 1995 were as follows (dollars
in thousands):
Berkley MECC, Signet
International Inc. Star Total
------------- ---- ---- -----
Total investments and cash $19,986 $362,120 $ -- $ 382,106
Due from reinsurers 8,338 48,474 (735,144) (678,332)
Deferred policy acquisition costs 2,519 5,606 (6,241) 1,884
Excess of cost over net assets acquired 505 16,541 -- 17,046
Other assets 17,489 18,688 (2,283) 33,894
------- -------- --------- ---------
Total assets $48,837 $451,429 $(743,668) $(243,402)
======= ======== ========= =========
Reserves for losses and loss expenses $14,849 232,985 $(735,144) $(487,310)
Deferred federal income taxes -- 21,599 (5,066) 16,533
Other liabilities 14,841 34,987 6,444 56,272
------- -------- --------- ---------
Total liabilities 29,690 289,571 (733,766) (414,505)
------- -------- --------- ---------
Debt -- 19,950 -- 19,950
Minority interest 9,960 -- (75,902) (65,942)
Net assets acquired $ 9,187 $141,908 $ 66,000 $ 217,095
======= ======== ========= =========
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.
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.
39
40
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Acquisitions, continued
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 and 1994, respectively,
are as follows (dollars in thousands):
1995 1994
---- ----
Total revenues $1,100,195 $929,405
========== ========
Net income attributable to common shareholders $ 70,102 $ 46,469
========== ========
Net income per share of common stock $ 3.48 $ 2.30
========== ========
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 adjustments for the
effects of the revaluation of assets and liabilities of the purchased
companies and the financing of such acquisitions on the results of
operations.
(3) Federal Income Taxes
The Federal income tax expense (benefit) consists of (in
thousands):
1995 1994 1993
---- ---- ----
Current expense $17,879 $ 8,020 $8,734
Deferred expense (benefit) (325) (9,572) 447
------- ------- ------
Total expense (benefit) $17,554 $(1,552) $9,181
======= ======= ======
A reconciliation of the Federal income tax expense (benefit)
and the amounts computed by applying the Federal income tax rate of 35%
to pre-tax income is as follows (in thousands):
1995 1994 1993
---- ---- ----
Computed "expected" tax expense $ 28,961 $ 10,771 $ 21,478
Tax-exempt investment income (12,938) (12,964) (11,972)
Other, net 1,531 641 (325)
-------- -------- --------
Total expense (benefit) $ 17,554 $ (1,552) $ 9,181
======== ======== ========
40
41
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Federal Income Taxes, continued
At December 31, 1995, 1994 and 1993, the tax effects of
differences that give rise to significant portions of the deferred tax
asset and deferred tax liability are as follows (dollars in thousands):
1995 1994 1993
---- ---- ----
Deferred Tax Asset
Loss reserve discounting $ 46,922 $58,080 $51,904
Realized investment losses -- -- 901
Alternative minimum tax 3,330 6,293 2,760
Deferred taxes on unrealized
investment losses -- 16,783 --
Other 95 1,840 601
-------- ------- -------
Gross deferred tax asset 50,347 82,996 56,166
Less: valuation allowance 7,000 11,179 7,000
-------- ------- -------
Deferred tax asset 43,347 71,817 49,166
======== ======= =======
Deferred Tax Liability
Amortization of intangibles 13,119 13,197 13,493
Expense recognition differences 8,210 8,631 7,250
Realized investment gains 6,511 -- --
Deferred taxes on unrealized
investment gains 26,088 -- 20,898
Other 3,782 7,772 7,185
-------- ------- -------
Deferred tax liability 57,710 29,600 48,826
-------- ------- -------
Net deferred tax asset(liability) $(14,363) $42,217 $ 340
======== ======= =======
The Federal income tax expense (benefit) applicable to
realized investment gains (losses) was $3,664,000, ($61,000) and
$8,233,000 in 1995, 1994 and 1993, respectively. The Company had a
current income tax receivable of $210,000 and $1,073,000 at December
31, 1995 and 1994, respectively.
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. In establishing the amount of the deferred tax asset, management
has included a valuation allowance for the future uncertainty
associated with the extended time period required for the complete
reversal of the effects of loss reserve discounting. At December 31,
1994, the Company recorded an additional valuation allowance of $4.2
million, which represented the tax benefit the Company would have had
on its share of Signet Star's unrealized investment losses. This
additional valuation allowance was established because Signet Star
filed a separate consolidated return, and no capital loss carryback
benefit was available. At December 31, 1995, Signet Star had an
unrealized investment gain; therefore, the valuation allowance was not
required. The change in the valuation allowance did not affect the
Company's results of operations.
41
42
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Debt
Long-term debt consists of the following:
Carrying
Description Rate Maturity Face Value Value
----------- ---- -------- ---------- -----
Senior Notes 8.95% May 20, 1998 $ 10,000,000 $ 9,975,000
Senior Notes 6.31% March 6, 2000 25,000,000 24,903,000
Senior Notes 6.71% March 4, 2003 25,000,000 24,878,000
Senior Subordinated Notes 6.5 % July 1, 2003 35,793,000 35,793,000
Senior Notes 9 7/8% May 15, 2008 100,000,000 96,592,000
Senior Debentures 8.7% January 1, 2022 100,000,000 98,840,000
------------ ------------
$295,793,000 $290,981,000
============ ============
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 a parity with all
other outstanding indebtedness of the Company.
Notes Payable to Banks
Notes payable to banks represents debt outstanding pursuant to
a revolving credit facility entered into by Signet Star. The face value
of the debt at December 31, 1995 was $28,400,000 and the carrying value
was $28,306,000. The interest rate was based on the London Interbank
offered rate plus .75% to 1.50% and was 5.75% at December 31, 1995. The
debt was retired in January 1996.
(5) 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. In the aggregate, the
Company's commitments for future buildings, land and equipment is
approximately $50 million as of December 31, 1995.
(6) 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 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;
$9,437,000, $8,000,000 and $6,029,000 for 1995, 1994 and 1993
respectively. Future minimum lease payments (without provision for
sublease income) are: $8,755,000 in 1996; $7,404,000 in 1997;
$6,520,000 in 1998; $5,074,000 in 1999; $3,899,000 in 2000; and
$9,474,000 thereafter.
42
43
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Stockholders' Equity
Per share data have been computed based on the weighted
average number of common shares outstanding. The assumed dilutive
effect of employee stock options was not material. Treasury shares have
been excluded from average outstanding shares from the date of
acquisition. The number of shares used in the computations was
17,414,000, 17,182,000, and 17,946,000 for 1995, 1994 and 1993,
respectively.
Changes in shares of common stock outstanding, net of treasury
shares, are as follows (in thousands):
1995 1994 1993
---- ---- ----
Balance, beginning of year 16,778 17,337 18,020
Shares issued 3,507 179 58
Shares repurchased (117) (738) (741)
------ ------ ------
Balance, end of year 20,168 16,778 17,337
====== ====== ======
Preferred stock consists of 1,000,000 shares of 7 3/8% Series
A Cumulative Redeemable Preferred Stock and 458,667 shares of Variable
Rate Series B Cumulative Redeemable Preferred Stock.
The Company has the option of redeeming the Series A preferred
stock after January 23, 1999 at the liquidation value of $150 per
share. The Series B preferred stock has a dividend rate increasing up
to 6% during the first twelve months after issuance. The rate is
thereafter subject to readjustment, based on certain predetermined
conditions. The Series B preferred stock is reflected at its estimated
fair value of $66,000,000, based upon the current estimate of the
ultimate effective dividend rate, and will be accreted to its stated
value of $68,800,000 over eighteen months.
(8) Stock Option Plan
The Company adopted the W. R. Berkley Corporation 1992 Stock
Option Plan under which 1,750,000 shares of common stock were reserved
for issuance. Pursuant to the Plan, options may be granted at prices
determined by the Board of Directors but not less than 85% of the fair
market value on the date of grant.
The following table summarizes option information, including
options granted under both the 1992 and prior Plans:
Number of Shares Option Prices
------------------------ ------------------------
1995 1994 1995 1994
---- ---- ---- ----
Shares under option 997,637 1,054,952 $22.67-46.88 $22.67-46.88
Options exercisable 267,967 148,191 22.67-44.00 22.67-29.17
Options granted 90,500 435,775 35.18-45.75 33.50-37.94
Options exercised 57,449 28,562 22.67-36.00 20.48-30.50
Options canceled
or expired 90,365 43,074 22.67-46.88 18.00-46.88
Shares available
for future grant 969,192 991,995
43
44
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Profit Sharing Retirement 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 $6,344,000, $5,625,000 and
$4,605,000 for 1995, 1994 and 1993, respectively.
(10) Investments
At December 31, 1995 and 1994, there were no investments,
other than investments in United States government securities, which
exceeded 10% of stockholders' equity. At December 31, 1995 and 1994,
investments were as follows:
December 31, 1995
------------------------------------------------------------
Amount
Gross Gross at which
unrealized unrealized Fair shown in the
Type of Investment Cost (a) gains losses value balance sheet
------------------ -------- ---------- ---------- ----- -------------
(Dollars in thousands)
Fixed maturity securities held to maturity:
State and municipal $ 155,518 $ 7,269 $ (154) $ 162,633 $ 155,518
Corporate 13,560 -- -- 13,560 13,560
---------- ------- ------- ---------- ----------
Total fixed maturities
held to maturity 169,078 7,269 (154) 176,193 169,078
---------- ------- ------- ---------- ----------
Fixed maturity securities available for sale:
United States government (b) 552,478 20,617 (307) 572,788 572,788
State and municipal 658,159 26,951 (570) 684,540 684,540
Corporate 683,814 20,635 (1,867) 702,582 702,582
---------- ------- ------- ---------- ----------
Total fixed maturities
available for sale 1,894,451 68,203 (2,744) 1,959,910 1,959,910
---------- ------- ------- ---------- ----------
Common stocks 24,042 9,438 -- 33,480 33,480
Preferred stocks 68,430 669 (1,028) 68,071 68,071
---------- ------- ------- ---------- ----------
Total equity securities
available for sale 92,472 10,107 (1,028) 101,551 101,551
---------- ------- ------- ---------- ----------
Trading account 155,301 6,723 (949) 161,075 161,075
Invested cash (c) 196,732 -- -- 196,732 196,732
---------- ------- ------- ---------- ----------
Total investments $2,508,034 $92,302 $(4,875) $2,595,461 $2,588,346
========== ======= ======= ========== ==========
(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.
44
45
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Investments, continued
December 31, 1994
------------------------------------------------------------
Amount
Gross Gross at which
unrealized unrealized Fair shown in the
Type of Investment Cost (a) gains losses value balance sheet
------------------ -------- ---------- ---------- ----- -------------
(Dollars in thousands)
Fixed maturity securities held
to maturity
State and municipal $ 175,987 $ 4,948 $ (1,792) $ 179,143 $ 175,987
Corporate 16,840 -- -- 16,840 16,840
---------- ------- -------- ---------- ----------
Total fixed maturities
held to maturity 192,827 4,948 (1,792) 195,983 192,827
---------- ------- -------- ---------- ----------
Fixed maturity securities available for sale:
United States government (b) 422,075 1,135 (14,354) 408,856 408,856
State and municipal 528,228 3,619 (16,225) 515,622 515,622
Corporate 457,760 811 (29,158) 429,413 429,413
---------- ------- -------- ---------- ----------
Total fixed maturities
available for sale 1,408,063 5,565 (59,737) 1,353,891 1,353,891
---------- ------- -------- ---------- ----------
Common stocks 13,717 2,887 (134) 16,470 16,470
Preferred stocks 55,070 26 (2,228) 52,868 52,868
---------- ------- -------- ---------- ----------
Total equity securities
available for sale 68,787 2,913 (2,362) 69,338 69,338
---------- ------- -------- ---------- ----------
Trading account 71,211 1,386 (1,054) 71,543 71,543
Invested cash (c) 214,116 -- -- 214,116 214,116
---------- ------- -------- ---------- ----------
Total investments $1,955,004 $14,812 $(64,945) $1,904,871 $1,901,715
========== ======= ======== ========== ==========
(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.
45
46
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Investments, continued
The amortized cost and fair value of fixed maturity securities
at December 31, 1995, by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because certain
issuers may have the right to call or prepay obligations (dollars in
thousands):
1995
---------------------------
Fair
Cost value
---- -----
Due in one year or less $ 89,209 $89,167
Due after one year through
five years 371,666 382,596
Due after five years
through ten years 608,955 627,437
Due after ten years 532,672 560,290
---------- ----------
1,602,502 1,659,490
Mortgaged-backed securities 461,027 476,613
---------- ----------
Total $2,063,529 $2,136,103
========== ==========
Realized gains (losses) and the change in difference between
fair value and cost of investments, before applicable income taxes, are
as follows (dollars in thousands):
1995 1994 1993
---- ---- ----
Realized gains (losses):
Fixed maturity securities sold (a) $ 7,819 $ (6,141) $ 21,014
Equity securities sold (976) 1,632 7,041
Net change in provision for
decline in value (b):
Fixed maturity securities (352) 4,697 (3,177)
Equity securities 4,191 -- 354
Other (325) (358) (1,709)
-------- --------- --------
10,357 (170) 23,523
-------- --------- --------
Change in difference between fair value and cost of
investments (c):
Fixed maturity securities 123,590 (122,136) 13,993
Equity securities 13,970 2,450 (437)
-------- --------- --------
137,560 (119,686) 13,556
-------- --------- --------
Total realized gains (losses) and
change in difference between cost
and fair value of investments $147,917 $(119,856) $ 37,079
======== ========= ========
(a) During 1995, 1994 and 1993, gross gains of $11,570,000, $5,601,000 and
$22,893,000, respectively, and gross losses of $3,751,000, $8,177,000 and
$1,879,000, respectively, were realized.
(b) The provision for decline in value of investments is $3,333,000,
$7,172,000 and $11,869,000 as of December 31, 1995, 1994 and 1993,
respectively. The reductions resulted from the sale of securities.
(c) Parentheses indicate a net unrealized decline in fair value.
46
47
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Investments, continued
Investment income consists of the following (dollars in
thousands):
1995 1994 1993
---- ---- ----
Investment income earned on:
Fixed maturity securities $115,668 $102,826 $92,254
Invested cash 13,000 5,898 4,389
Equity securities 4,418 3,616 1,377
Trading account (a) 9,030 2,058 --
Other 1,411 1,221 348
-------- -------- -------
Gross investment income 143,527 115,619 98,368
Interest on funds held
under reinsurance treaties (6,195) (5,936) (5,595)
-------- -------- -------
Net investment income $137,332 $109,683 $92,773
======== ======== =======
(a) The primary focus of the trading account activities is merger
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 short sales.
Short sales of $60,720,000 and $18,500,000 have been included in other
liabilities as of December 31, 1995 and 1994, respectively. Investment
income earned from trading account activity includes unrealized trading
gains of $352,000 and $1,271,000 for 1995 and 1994, respectively.
(11) 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, (dollars in
thousands):
1995 1994 1993
---- ---- ----
Net reserves at beginning of year $ 895,440 $ 783,218 $ 709,665
---------- ---------- ----------
Net reserves of companies acquired 191,963 -- 20,810
Net provision for losses and loss expenses:
Claims occurring during the current year 580,594 493,418 367,106
Decrease in estimates for claims occurring
in prior years (9,596) (7,269) (5,861)
---------- ---------- ----------
570,998 486,149 361,245
---------- ---------- ----------
Net payments for claims
Current year 228,100 187,295 139,292
Prior years 221,051 186,632 169,210
---------- ---------- ----------
449,151 373,927 308,502
---------- ---------- ----------
Net reserves at end of year 1,209,250 895,440 783,218
Ceded reserves at the end of year 450,770 1,175,446 1,233,130
---------- ---------- ----------
Gross reserves at the end of year $1,660,020 $2,070,886 $2,016,348
========== ========== ==========
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 set aside to pay claims in the
future and is intended to appropriately match losses and loss expense
to income earned
47
48
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Reserves for losses and loss expenses, continued
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 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 which generally
penetrate self-insured retention limits contained in excess workers'
compensation policies. The Company has limited the 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 1995 and prior is 5.80%. The aggregate net discount, after
reflecting the effects of ceded reinsurance, is $152,235,000 at
December 31, 1995. For Statutory purposes, Midwest 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 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 $30.8
million and $22.8 million at December 31, 1995 and 1994, respectively.
The Company's gross reserves for losses and loss adjustment expenses
relating to pollution and environmental claims were $59.4 million and
$50.6 million at December 31, 1995 and 1994, respectively. Net incurred
losses and loss expenses for reported pollution and environmental
claims were approximately $8.0 million, $5.6 million and $3.5 million
in 1995, 1994 and 1993, 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.
(12) 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. The following amounts arising under reinsurance ceded contracts
have been deducted in arriving at the amounts reflected in the
statement of operations (dollars in thousands):
1995 1994 1993
---- ---- ----
Premiums written $212,169 $210,237 $173,470
======== ======== ========
Premiums earned $207,375 $195,313 $162,320
======== ======== ========
Losses and loss expenses $134,120 $149,415 $143,376
======== ======== ========
48
49
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) 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 1996, the maximum amount of dividends
which can be paid without such approval is approximately $93,361,000.
Combined net income and policyholders' surplus of the
Company's consolidated insurance subsidiaries, as determined in
accordance with statutory accounting practices, are as follows (dollars
in thousands):
1995 1994 1993
---- ---- ----
Net income $ 75,587 $ 40,411 $ 58,870
======== ======== ========
Policyholders' surplus $839,890 $669,552 $661,822
======== ======== ========
The National Association of Insurance Commissioners ("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.
(14) Supplemental Financial Statement Data
Other operating costs and expenses consist of the following
(dollars in thousands):
1995 1994 1993
---- ---- ----
Amortization of deferred
policy acquisition costs $228,610 $187,468 $141,880
Other operating costs and
expenses of insurance operations 38,773 35,900 29,333
Other costs and expenses 72,606 62,898 54,209
-------- -------- --------
Total $339,989 $286,266 $225,422
======== ======== ========
(15) Industry Segments
The Company's operations are presently conducted through four
basic segments: regional property casualty insurance; reinsurance;
specialty lines of insurance; and alternative markets operations. The
Company established an international segment in 1995; the results of
this segment have been included as part of the regional segment, due to
immateriality. 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.
49
50
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Industry Segments, continued
Industry Segments
-------------------------------------------------------------------------
Adjust-
Regional Specialty Alternative Corporate ments and
Insurance Insurance Markets and elimina- Consoli-
Operations Reinsurance Operations Operations other tions dated
---------- ----------- ---------- ---------- --------- --------- --------
(Dollars in thousands)
December 31, 1995:
Revenues:
Unaffiliated customers $ 485,981 $ 212,876 $ 209,153 $103,656 $ 10,277 $ -- $1,021,943
Intersegment revenues (121) -- 158 -- 53,694 (53,731) --
---------- ---------- ---------- -------- -------- -------- ----------
Total revenues $ 485,860 $ 212,876 $ 209,311 $103,656 $ 63,971 $(53,731) $1,021,943
========== ========== ========== ======== ======== ======== ==========
Income (loss) before
income taxes $ 40,227 $ 11,205 $ 43,781 $ 10,254 $ 16,414 $(39,134) $ 82,747
========== ========== ========== ======== ======== ======== ==========
Identifiable assets $1,051,835 $ 560,817 $1,278,883 $579,964 $147,185 $ -- $3,618,684
========== ========== ========== ======== ======== ======== ==========
December 31, 1994:
Revenues:
Unaffiliated customers $ 376,478 $ 187,304 $ 184,911 $ 75,798 $ 6,299 $ -- $ 830,790
Intersegment revenues 98 -- (12) -- 29,960 (30,046) --
---------- ---------- ---------- -------- -------- -------- ----------
Total revenues $ 376,576 $ 187,304 $ 184,899 $ 75,798 $ 36,259 $(30,046) $ 830,790
========== ========== ========== ======== ======== ======== ==========
Income (loss) before
income taxes $ 26,669 $ (14,977) $ 37,452 $ 7,068 $ (5,068) $(20,370) $ 30,774
========== ========== ========== ======== ======== ======== ==========
Identifiable assets $ 809,853 $1,242,202 $1,223,179 $ 87,023 $220,034 $ -- $3,582,291
========== ========== ========== ======== ======== ======== ==========
December 31, 1993:
Revenues:
Unaffiliated customers $ 316,671 $ 86,962 $ 211,530 $ 53,531 $ 4,612 $ -- $ 673,306
Intersegment revenues (223) -- (401) -- 21,354 (20,730) --
---------- ---------- ---------- -------- -------- -------- ----------
Total revenues $ 316,448 $ 86,962 $ 211,129 $ 53,531 $ 25,966 $(20,730) $ 673,306
========== ========== ========== ======== ======== ======== ==========
Income (loss) before
income taxes $ 29,993 $ 194 $ 52,651 $ 8,058 $(13,902) $(15,630) $ 61,364
========== ========== ========== ======== ======== ======== ==========
Identifiable assets $ 704,169 $1,156,372 $1,221,571 $ 77,309 $178,284 $ -- $3,337,705
========== ========== ========== ======== ======== ======== ==========
50
51
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) 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, 1995 and 1994 (dollars in thousands):
1995 1994
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount value Amount value
-------- ----- -------- -----
Investments $2,588,346 $2,595,461 $1,901,715 $1,904,871
Long-term debt 290,981 343,244 290,798 296,762
Notes payable to Banks 28,306 28,306 40,204 40,204
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.
(17) Quarterly Financial Information (unaudited)
The following is a summary of quarterly financial data:
Three Months Ended
--------------------------------------------------------------------
March 31, June 30,
---------------------------- ---------------------------
1995 1994 1995 1994
---- ---- ---- ----
(Dollars in thousands except per share data)
Revenues $228,932 $186,326 $247,442 $215,208
======== ======== ======== ========
Net income before preferred
dividends $ 13,573 $ 6,260 $ 15,369 $ 11,114
======== ======== ======== ========
Net income attributable to
common stockholders $ 10,807 $ 4,201 $ 12,604 $ 8,349
======== ======== ======== ========
Net income per share $ .65 $ .24 $ .76 $ .48
======== ======== ======== ========
September 30, December 31,
---------------------------- ----------------------------
1995 1994 1995 1994
---- ---- ---- ----
Revenues $260,893 $210,199 $284,676 $219,057
======== ======== ======== ========
Net income before preferred
dividends $ 14,794 $ 6,136 $ 17,146 $ 11,584
======== ======== ======== ========
Net income attributable to
common stockholders $ 12,028 $ 3,370 $ 14,381 $ 8,818
======== ======== ======== ========
Net income per share $ .72 $ .19 $ .73 $ .53
======== ======== ======== ========
(18) Subsequent Events
On January 19, 1996 the Company issued $100 million of 6.25% ten-year
notes which are not redeemable until maturity and subsequently retired $28.4
million of outstanding bank debt
51
52
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, 1996:
Name Age Position
---- --- --------
William R. Berkley 50 Chairman of the Board and Chief Executive Officer
John D. Vollaro 51 President, Chief Operating Officer and a Director
Sam Daniel, Jr. 57 Senior Vice President, Regional Operations
Anthony J. Del Tufo 51 Senior Vice President, Chief Financial Officer and Treasurer
Robert S. Gorin 60 Senior Vice President, General Counsel and Secretary
E. LeRoy Heer 57 Senior Vice President, Chief Corporate Actuary
Edward A. Thomas 47 Senior Vice President, Specialty Operations
Ira S. Lederman 42 Vice President - Assistant General Counsel and Assistant
Secretary
James G. Shiel 36 Vice President - Investments
Scott M. Cunningham 61 Director
Robert B. Hodes 70 Director
Henry Kaufman 68 Director
Richard G. Merrill 65 Director
Jack H. Nusbaum 55 Director
Mark L. Shapiro 51 Director
Martin Stone 67 Director
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 1995, the term of a class consisting of three
Directors expired. Henry Kaufman and Martin Stone were elected as Directors to
hold office for a term of three years until the Annual Meeting of Stockholders
in 1998 and until their successors are duly chosen. At a meeting of the Board of
Directors held on September 13, 1995 John D. Vollaro was elected a Director to
the class of Directors which expires at the Annual Meeting of Stockholders in
1998. Officers of the Company are elected annually and serve at the pleasure of
the Board of Directors.
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 Signet Star
Holdings, Inc., a reinsurance holding company owned by the Company; 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 1997.
John D. Vollaro was elected President and Chief Operating Officer of
the Company effective January 2, 1996 and Director effective September 13, 1995.
He has been Chief Executive Officer of Signet Star Holdings, Inc., an affiliate
of the Company, since July 1993 and President and a Director of Signet Star
Holdings, Inc. since February 1993. 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.
52
53
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.
Robert S. Gorin has been Senior Vice President, General Counsel and
Secretary since July 1989. Prior to joining the Company, Mr. Gorin was Assistant
Secretary and Assistant General Counsel of J.C. Penney Co., Inc., where he had
been employed since 1971.
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.
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.
Ira S. Lederman has been Vice President and Assistant Secretary since
May 1986. He has also been Assistant General Counsel since July 1989. Prior
thereto he was Insurance Counsel of the Company since May 1986 and Associate
Counsel from April 1983.
James G. Shiel has been 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.
Scott M. Cunningham has been a Director of the Company since 1986. Mr.
Cunningham is a Managing Director of Interlaken Capital, Inc., which he joined
in January 1987. Mr. Cunningham's current term as a director expires in 1997.
Robert B. Hodes has been a Director of the Company since 1970. Mr.
Hodes is Counsel to the New York law firm of Willkie Farr & Gallagher. He is a
director of Aerointernational, Crystal Oil Company; Global Telecommunications,
Limited.; Loral Corporation; 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 1997.
Henry Kaufman has been a Director of the Company since 1994. Dr.
Kaufman is President of Henry Kaufman & Co., Inc., an investment management and
economic and financial consulting company since its establishment in 1988. Dr.
Kaufman serves as Chairman of the Board of Overseers, Stern Schools of Business
of NYU; Member of the Board of Directors, Federal Home Loan Mortgage Corp.;
Member of the Board of Directors, Lehman Brothers Holdings Inc.; Member of the
Board of Trustees, New York University; and Member of the International Capital
Markets Advisory Committee of the Federal Reserve Bank of New York. 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 1996.
53
54
Jack H. Nusbaum has been a Director of the Company since 1967. Mr.
Nusbaum is the Chairman in 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 Pioneer Companies, Inc.; Prime Hospitality Corp. and The Topps Company, Inc.
Mr. Nusbaum's current term as a Director expires in 1996.
Mark L. Shapiro has been a Director of the Company since 1974. Mr.
Shapiro is a Managing Director in the investment banking firm of Schroder
Wertheim & Co. Incorporated for more than the past five years. Mr. Shapiro's
current term as a Director expires in 1996.
Martin Stone has been a Director of Berkley since 1990. Mr. Stone is
Chairman of Professional Sports, Inc. (the Phoenix Firebirds AAA baseball team)
and Chairman of Adirondack Corporation, for more than 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, 1995, 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, 1995, and which is incorporated herein by reference.
(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, 1995, 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, 1995, 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, 1995, and which is incorporated herein by reference.
54
55
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Financial Statements
The financial statements filed as part of this report are listed on the
Index to Financial Statements on page 30 hereof.
Index to Financial Statement Schedules Page
- -------------------------------------- ----
Independent Auditors' Report on Schedules and Consent 60
Schedule II - Condensed Financial Information of Registrant 61
Schedule III - Supplementary Insurance Information 65
Schedule IV - Reinsurance 66
Schedule VI - Supplementary Information concerning
Property & Casualty Insurance Operations 67
(b) Reports on Form 8-K
On November 8, 1995 the Company filed a current report on Form 8-K
announcing that it had completed its acquisition of MECC, Inc.
On December 28, 1995 the Company filed a current report on Form 8-k
announcing that it had completed its acquisition of the remaining 40%
interest in Signet Star Holdings, Inc. from General Re Corporation.
(c) Exhibits
The exhibits filed as part of this report are listed on pages 58 and 59
hereof.
55
56
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 WILLIAM R. BERKLEY
-------------------------------------------------
William R. Berkley, Chairman of the Board and
Chief Executive Officer
March 7, 1996
56
57
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.
Signature Title Date
--------- ----- ----
WILLIAM R. BERKLEY Chairman of the Board and
- ----------------------------------------- Chief Executive Officer March 7, 1996
William R. Berkley
Principal executive officer
SCOTT M. CUNNINGHAM Director March 7, 1996
- -----------------------------------------
Scott M. Cunningham
ROBERT B. HODES Director March 7, 1996
- -----------------------------------------
Robert B. Hodes
HENRY KAUFMAN Director March 7, 1996
- -----------------------------------------
Henry Kaufman
RICHARD G. MERRILL Director March 7, 1996
- -----------------------------------------
Richard G. Merrill
JACK H. NUSBAUM Director March 7, 1996
- -----------------------------------------
Jack H. Nusbaum
MARK L. SHAPIRO Director March 7, 1996
- -----------------------------------------
Mark L. Shapiro
MARTIN STONE Director March 7, 1996
- -----------------------------------------
Martin Stone
ANTHONY J. DEL TUFO Senior Vice President, March 7, 1996
- ----------------------------------------- Chief Financial Officer and
Anthony J. Del Tufo Treasurer
Principal financial officer
JOHN D. VOLLARO President, Chief Operating March 7, 1996
- ----------------------------------------- Officer and a Director
John D. Vollaro
57
58
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).
(10.3) 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.
(23) See Independent Auditors' report on schedules and consent.
58
59
(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.
Jurisdiction Percentage
of owned by
incorporation Company
------------- ----------
Acadia Insurance Company: Maine 100%
Acadia Compensation Insurance
Company Maine 100%
All American Agency Facilities, Inc. Delaware 100%
Berkley International, LLC New York 65%
Berkley Insurance Company of the Carolinas North Carolina 100%
Berkley Risk Services, Inc. Minnesota 100%
Carolina Casualty Insurance Company Florida 100%
Continental Western Insurance Company: Iowa 100%
Continental Western Casualty Company Iowa 100%
Firemen's Insurance Company of Maryland 100%
Washington, D.C.:
FICO Insurance Company Maryland 100%
Great River Insurance Company Mississippi 100%
J/I Holding Corporation: Delaware 100%
Admiral Insurance Company: Delaware 100%
Nautilus Insurance Company: Arizona 100%
Great Divide Insurance Company North Dakota 100%
Key Risk 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%
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%
(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 1995 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.)
59
60
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 22, 1996 included the related
financial statement schedules as of December 31, 1995 and 1994 and for each of
the years in the three-year period ended December 31, 1995 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.
As discussed in note 1 to the consolidated financial statements, W. R. Berkley
Corporation adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" on December 31, 1993.
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) on Form S-8 of W. R. Berkley Corporation.
KPMG Peat Marwick LLP
New York, New York
March 22, 1996
60
61
Schedule II
W. R. Berkley Corporation
Condensed Financial Information of Registrant
Balance Sheets (Parent Company)
(Amounts in thousands)
December 31,
---------------------
1995 1994
---------- --------
Assets
Cash (including invested cash) $ 10,669 $ 72,089
Fixed maturity securities:
Held to maturity, at cost
(fair value $10,176 and $10,684) 10,176 10,684
Available for sale at fair value (cost $5,807 and $40,785) 5,807 39,301
Equity securities, at fair value:
Available for sale (cost $1,733 and $22) 2,146 22
Trading account (cost $ 35,053 and $8,988) 35,053 8,988
Investments in subsidiaries 1,136,518 714,523
Due from subsidiaries 42,703 17,542
Current Federal income taxes receivable 35 931
Deferred Federal income taxes -- 31,988
Other assets 4,774 6,024
---------- --------
$1,247,881 $902,092
========== ========
Liabilities, Debt and Stockholders' Equity
Liabilities:
Due to subsidiaries (principally
deferred income taxes) $ 32,590 $ 36,426
Deferred Federal income taxes 14,363 --
Other liabilities 15,925 13,059
---------- --------
62,878 49,485
---------- --------
Long-term debt 255,188 255,006
Stockholders' equity:
Preferred stock 146 100
Common stock 4,854 4,165
Additional paid-in capital 547,068 336,659
Retained earnings (including accumulated
undistributed net income of
subsidiaries of $374,027 and $341,157
in 1995 and 1994, respectively) 424,261 382,859
Equity in net unrealized investment gains
(losses), net of taxes 48,450 (33,973)
Treasury stock, at cost (94,964) (92,209)
---------- --------
929,815 597,601
---------- --------
$1,247,881 $902,092
========== ========
See note to condensed financial statements.
61
62
Schedule II, Continued
W. R. Berkley Corporation
Condensed Financial Information of Registrant, Continued
Statements of Operations (Parent Company)
(Amounts in thousands)
Years ended December 31,
------------------------------
1995 1994 1993
-------- -------- --------
Management fees and investment income
from affiliates, including dividends of
$38,091, $19,520 and $15,020 for 1995,
1994 and 1993, respectively $ 50,839 $ 28,328 $ 22,873
Realized investment losses (306) (1,700) (376)
Other income 5,615 6,190 4,359
-------- -------- --------
Total revenues 56,148 32,818 26,856
Expenses, other than interest expense (12,256) (10,772) (13,637)
Interest expense (22,907) (22,892) (22,300)
-------- -------- --------
Income (loss) before Federal
income taxes 20,985 (846) (9,081)
-------- -------- --------
Federal income taxes:
Federal income taxes provided by
subsidiaries on a separate return
basis 22,481 13,513 23,215
Federal income tax provision on a
consolidated return basis (15,454) (5,370) (9,590)
-------- -------- --------
Net benefit 7,027 8,143 13,625
-------- -------- --------
Income before undistributed equity
in net income of subsidiaries 28,012 7,297 4,544
Equity in undistributed net income
of subsidiaries 32,870 27,797 47,043
-------- -------- --------
Income before preferred dividends 60,882 35,094 51,587
Preferred dividends (11,062) (10,356) --
-------- -------- --------
Net income attributable to
common stockholders $ 49,820 $ 24,738 $ 51,587
======== ======== ========
See note to condensed financial statements.
62
63
Schedule II, Continued
W. R. Berkley Corporation
Condensed Financial Information of Registrant, Continued
Statement of Cash Flows (Parent Company)
(Amounts in thousands)
Years ended December 31,
--------------------------------
1995 1994 1993
--------- --------- --------
Cash flows from operating activities:
Net income before preferred dividends $ 60,882 $ 35,094 $ 51,587
Adjustments to reconcile net income to net
cash flows provided by used in
operating activities:
Equity in undistributed net
income of subsidiaries (32,870) (27,797) (47,043)
Tax payments from subsidiaries 17,104 14,614 15,883
Federal income taxes provided by subsidiaries (22,481) (13,513) (23,215)
Change in Federal income taxes 3,654 (2,765) 705
Realized investment losses 306 1,700 376
Other, net 4,087 (404) 9,832
--------- --------- --------
Net cash provided by operating activities
before trading account sales (purchases) 30,682 6,929 8,125
Trading account sales (purchases), net (26,065) -- 8,208
--------- --------- --------
Net cash provided by (used in)
operating activities 4,617 6,929 16,333
--------- --------- --------
Cash flow used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 23,158 77,613 81,022
Equity securities 1 832 --
Proceeds from maturities and prepayments of
fixed maturity securities 15,206 521 114
Cost of purchases, excluding trading account:
Fixed maturity securities (3,452) (106,600) (52,979)
Equity securities (1,733) (425) --
Cost of companies acquired (217,096) -- --
Investments in and advances to
subsidiaries, net (70,972) (31,242) (57,424)
Other, net (328) (596) (661)
--------- --------- --------
Net cash used in investing activities (255,216) (59,897) (29,928)
--------- --------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock 144,739 -- --
Net proceeds from issuance of preferred stock 66,000 145,275 --
Net proceeds from issuance of
long-term debt -- 49,694
Purchase of treasury shares (4,095) (26,357) (25,688)
Cash dividends to common stockholders (7,844) (7,459) (7,035)
Cash dividends to preferred shareholders (11,062) (8,051) --
Payment of subsidiary debt -- (4,527) --
Other, net 1,441 156 1,588
--------- --------- --------
Net cash provided by financing activities 189,179 99,037 18,559
--------- --------- --------
Net increase in cash and invested cash (61,420) 46,069 4,964
Cash and invested cash at beginning of year 72,089 26,020 21,056
--------- --------- --------
Cash and invested cash at end of year $ 10,669 $ 72,089 $ 26,020
========= ========= ========
See note to condensed financial statements.
63
64
Schedule II, Continued
W. R. Berkley Corporation
Condensed Financial Information of Registrant, Continued
December 31, 1995, 1994 and 1993
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 1994 and 1993
financial statements as originally reported to conform them to the presentation
of the 1995 financial statements.
The Company and its 80% or more owned subsidiaries file 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.
64
65
Schedule III
W. R. Berkley Corporation and Subsidiaries
Supplementary Insurance Information
December 31, 1995, 1994 and 1993
(Amounts in thousands)
Regional Specialty Alternative Corporate and
Insurance Reinsurance Insurance Markets adjustments Total
--------- ----------- --------- ----------- ------------- -----
December 31, 1995:
Deferred policy acquisition costs $ 60,680 $ 8,388 $ 15,265 $ 5,184 $ -- $ 89,517
Reserves for losses and loss 357,265 234,811 805,072 262,872 -- 1,660,020
expenses
Unearned premiums 256,343 55,539 109,089 29,551 -- 450,522
Premiums earned 441,182 185,244 145,322 31,588 -- 803,336
Net investment income 41,204 26,186 54,118 6,978 8,846 137,332
Losses and loss expenses 288,597 145,094 116,211 21,096 -- 570,998
Amortization of deferred policy
acquisition costs 134,884 48,239 39,105 6,382 -- 228,610
Other operating costs and expenses 22,152 3,036 10,214 70,373 5,604 111,379
Net premiums written 477,588 195,988 160,847 25,998 -- 860,421
December 31, 1994:
Deferred policy acquisition costs $ 48,709 $ 10,482 $ 11,138 $ 1,697 $ -- $ 72,026
Reserves for losses and loss 285,024 962,663 810,526 12,267 406 2,070,886
expenses
Unearned premiums 205,130 43,725 94,963 6,445 -- 350,263
Premiums earned 343,123 168,239 128,939 14,737 -- 655,038
Net investment income 32,897 19,034 49,949 1,795 6,008 109,683
Losses and loss expenses 225,650 147,894 101,921 10,684 -- 486,149
Amortization of deferred policy
acquisition costs 105,539 43,698 36,534 1,697 -- 187,468
Other operating costs and expenses 18,519 7,845 8,992 58,370 5,072 98,798
Net premiums written 386,530 176,699 134,715 19,989 -- 717,933
December 31, 1993:
Deferred policy acquisition costs $ 37,920 $ 9,072 $ 10,853 $ 240 $ -- $ 58,085
Reserves for losses and loss 250,860 972,142 789,850 3,090 406 2,016,348
expenses
Unearned premiums 157,687 33,752 82,401 1,192 -- 275,032
Premiums earned 279,102 77,148 141,192 3,991 -- 501,433
Net investment income 30,170 8,022 49,919 715 3,947 92,773
Losses and loss expenses 189,520 57,145 111,686 2,894 -- 361,245
Amortization of deferred policy
acquisition costs 81,479 22,021 37,661 719 -- 141,880
Other operating costs and expenses 15,456 4,626 9,131 41,861 12,468 83,542
Net premiums written 301,890 84,726 146,101 4,929 -- 537,646
(1) Net investment income and other operating expenses, as presented above,
are based on actual amounts recorded by each operating unit.
65
66
Schedule IV
W. R. Berkley Corporation and Subsidiaries
Reinsurance
Years ended December 31, 1995, 1994 and 1993
(Amounts in thousands)
Assumed Percentage
Ceded from of amount
Direct to other other Net assumed to
Amount Companies Companies Amount net
------ --------- --------- ------ ----------
Premiums written:
Year ended December 31, 1995:
Regional insurance $536,424 $ 74,052 $ 15,216 $477,588 3.2%
Reinsurance -- 12,464 208,452 195,988 106.4%
Specialty insurance 277,752 123,585 6,680 160,847 4.2%
Alternative Markets 4,980 2,068 23,086 25,998 88.8%
-------- -------- -------- --------
Total $819,156 $212,169 $253,434 $860,421 29.5%
======== ======== ======== ========
Year ended December 31, 1994:
Regional insurance $431,103 $ 53,458 $ 8,885 $386,530 2.3%
Reinsurance -- 17,834 194,533 176,699 110.1%
Specialty insurance 264,747 138,759 8,727 134,715 6.5%
Alternative Markets -- 186 20,175 19,989 100.9%
-------- -------- -------- --------
Total $695,850 $210,237 $232,320 $717,933 32.4%
======== ======== ======== ========
Year ended December 31, 1993:
Regional insurance $333,972 $ 38,886 $ 6,804 $301,890 2.3%
Reinsurance -- 9,547 94,273 84,726 111.3%
Specialty insurance 235,974 124,987 35,114 146,101 24.0%
Alternative Markets -- 50 4,979 4,929 101.0%
-------- -------- -------- --------
Total $569,946 $173,470 $141,170 $537,646 26.3%
======== ======== ======== ========
66
67
Schedule VI
W. R. Berkley Corporation and Subsidiaries
Supplementary Information Concerning Property-Casualty Insurance Operations
December 31, 1995, 1994 and 1993
(Amounts in thousands)
1995 1994 1993
---- ---- ----
Deferred policy acquisition costs $ 89,517 $ 72,026 $ 58,085
Reserves for losses and loss expenses 1,660,020 2,070,886 2,016,348
Unearned premium 450,522 350,263 275,032
Premiums earned 803,336 655,038 501,433
Net investment income 137,332 109,683 92,773
Losses and loss expenses incurred:
Current Year 580,594 493,418 367,106
Prior Years (9,596) (7,269) (5,861)
Amortization of deferred policy
acquisition costs 228,610 187,468 141,880
Paid losses and loss expenses 449,151 373,927 308,502
Net premiums written 860,421 717,933 537,646
67