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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-7849
W. R. BERKLEY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-1867895
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
165 Mason Street, P.O. Box 2518, Greenwich, CT 06836-2518
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 629-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.20 per share
Series A Cumulative Redeemable Preferred Stock, par value $.10 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Aggregate market value of voting stock held by non-affiliates of the registrant
based on the closing price of such stock as of March 2, 1998: $1,143,221,275.
Number of shares of common stock, $.20 par value, outstanding as of March 2,
1998: 29,611,359
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's 1997 Annual Report to Stockholders for the year ended
December 31, 1997 are incorporated herein by reference in Part II, and portions
of the registrant's definitive proxy statement, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1997, are
incorporated herein by reference in Part III.
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W. R. BERKLEY CORPORATION
ANNUAL REPORT ON FORM 10-K
December 31, 1997
PART I Page
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 21
ITEM 3. LEGAL PROCEEDINGS 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 22
ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS
ENDED DECEMBER 31, 1997 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 24
ITEM 11. EXECUTIVE COMPENSATION 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 28
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PART I
ITEM 1. BUSINESS
General Description of the Company's Business
W. R. Berkley Corporation (the "Company"), a Delaware corporation, is
an insurance holding company, which through its subsidiaries, presently operates
in all segments of the property casualty insurance business: regional property
casualty insurance; reinsurance (conducted through Signet Star Holdings, Inc.);
specialty lines of insurance (including excess and surplus lines and commercial
transportation); alternative markets (including the management of alternative
insurance market mechanisms); and international (conducted through Berkley
International, LLC). The Company was founded on the concept that a group of
autonomous regional and specialty insurance entities could compete effectively
in selected markets within a very large industry. Decentralized control allows
each subsidiary to respond to local or specialty market conditions while
capitalizing on the effectiveness of centralized investment and reinsurance
management, and actuarial, financial and legal staff support.
The Company's regional insurance operations are conducted primarily in
the Midwestern, Southern and Northeastern sections of the United States.
Reinsurance, specialty insurance and alternative markets operations are
conducted nationwide. Presently, international operations are conducted
primarily in Argentina and the Philippines.
Net premiums written, as reported on a generally accepted accounting
principles ("GAAP") basis, by the Company's five major insurance industry
segments for the five years ended December 31, 1997 were as follows:
Year Ended December 31,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(Amounts in thousands)
Net premiums written:
Regional insurance operations $ 632,459 $ 531,147 $ 471,716 $ 386,530 $ 301,890
Reinsurance operations (1) 206,652 218,200 196,299 176,130 106,575
Specialty insurance operations (1) 208,570 202,338 160,536 135,284 124,252
Alternative markets operations 87,881 75,644 25,998 19,989 4,929
International Operations 42,079 25,182 5,872 -- --
------------ ------------ ------------ ------------ ------------
Total net premiums written $ 1,177,641 $ 1,052,511 $ 860,421 $ 717,933 $ 537,646
============ ============ ============ ============ ============
Percentage of net premiums written:
Regional insurance operations 53.7% 50.5% 54.8% 53.8% 56.2%
Reinsurance operations (1) 17.5 20.7 22.8 24.6 19.8
Specialty insurance operations (1) 17.7 19.2 18.7 18.8 23.1
Alternative markets operations 7.5 7.2 3.0 2.8 .9
International Operations 3.6 2.4 .7 -- --
------------ ------------ ------------ ------------ ------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
============ ============ ============ ============ ============
(1) The Reinsurance and specialty insurance operations have been restated
in accordance with FAS 131.
The following sections briefly describe the Company's insurance
segments and subsidiaries. The statutory information contained herein is derived
from that reported to state regulatory authorities in accordance with statutory
accounting practices ("SAP"). The amount of statutory net premiums shown for the
subsidiaries exclude the effects of intercompany reinsurance. In connection with
the acquisition of Midwest Employers Casualty Company ("Midwest") in November
1995, the Company established the alternative markets segment to reflect the
markets served by each of its business segments. The alternative markets segment
consists of Midwest, Signet Star Holding's alternative markets division and the
Company's insurance services units which manage alternative market mechanisms.
The descriptions contain
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each significant insurance subsidiary's rating by A.M. Best and Company, Inc.
("A.M. Best"). A.M. Best's Ratings are based upon factors of concern to
policyholders, insurance agents and brokers and are not directed toward the
protection of investors. A.M. Best states: "Best's Ratings reflect [its] opinion
as to the relative financial strength and performance of each insurer in
comparison with others, based on [its] analysis of the information provided to
[it]. These Ratings are not a warranty of an insurer's current or future ability
to meet its contractual obligations."
REGIONAL INSURANCE OPERATIONS
The Company's regional property casualty subsidiaries write standard
commercial and personal lines insurance for such risks as automobiles, homes and
businesses. American West Insurance Company ("American West"), Continental
Western Insurance Company ("Continental Western"), Great River Insurance Company
("Great River"), Tri-State Insurance Company of Minnesota ("Tri-State"), Union
Insurance Company ("Union") and Union Standard Insurance Company ("Union
Standard") obtain their business primarily in the smaller communities of the
midwest and southwest through over 2,000 independent insurance agencies, which
represent them on a non-exclusive basis and are compensated on a commission
basis. Firemen's Insurance Company of Washington D.C. ("Firemen's"), FICO
Insurance Company ("FICO"), Chesapeake Bay Property and Casualty Insurance
Company ("Chesapeake") and Berkley Insurance Company of the Carolinas ("BICC")
primarily sell their policies through agents in the District of Columbia, and
the States of Maryland, North Carolina, Pennsylvania and Virginia. FICO's
commercial lines of business are marketed principally through brokers in the New
York metropolitan area. Acadia Insurance Company ("Acadia") currently operates
in the States of Maine, New Hampshire and Vermont, and sells its personal and
commercial coverage's through independent agencies.
In 1996, the Company formed Berkley Regional Insurance Company ("BRIC")
to act as an intermediate holding Company. The Company contributed to BRIC all
of the capital stock of the regional insurance companies. In 1997 BRIC reinsured
varying portions of the business written by the regional operations. In
addition, BRIC is expanding its licenses so that it will be eligible to write
personal and commercial lines on a direct basis nationally. BRIC's statutory
surplus as of December 31, 1997 was $307,812,000. BRIC is rated A+ by A.M. Best.
Acadia Insurance Company
Acadia was organized by the Company and incorporated in April 1992. It
writes multiple line property and casualty coverage's in the States of Maine,
New Hampshire, Vermont and Massachusetts. Acadia is rated A+ by A.M. Best.
Acadia's statutory surplus and statutory net premiums written as of December 31,
1997 and for the year then ended were $44,943,000 and $127,990,000,
respectively.
American West Insurance Company
American West is a successor to a company that was organized in 1903 as
a mutual insurance company and converted to a stock company in June 1986. Its
business consists primarily of personal lines in the States of Minnesota,
Montana, Wisconsin and South Dakota. American West is rated A+ by A.M. Best.
American West's statutory surplus and statutory net premiums written as of
December 31, 1997 and for the year then ended were $9,771,000 and $12,074,000,
respectively. American West is managed by Tri-State, its immediate parent.
Berkley Insurance Company of the Carolinas
In December 1995, the Company organized BICC, a North Carolina
domiciled company. It writes personal and commercial lines in North Carolina and
is expanding to surrounding states. BICC is rated A+ by A.M. Best. BICC's
statutory surplus and statutory net premiums written as of December 31, 1997 and
for the year then ended were $9,505,000 and $30,407,000, respectively.
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Chesapeake Bay Property and Casualty Insurance Company
Chesapeake, a Maine domiciled company owned by Acadia, was formed in
1993. In 1997 Firemen's Chesapeake Insurance Division moved its operations to
Chesapeake. Chesapeake writes personal and commercial lines in Virginia and is
expanding to surrounding states. Chesapeake is rated A+ by A.M. Best.
Chesapeake's statutory surplus and statutory net premiums written as of December
31, 1997 and for the year then ended were $7,624,000 and $28,030,000,
respectively.
Continental Western Insurance Company
Continental Western was organized in 1907. It writes a diverse
commercial lines book of business as well as personal lines principally in the
States of Iowa, Nebraska, Kansas, Illinois, Missouri, Wisconsin and Montana.
Continental Western is rated A+ by A.M. Best. Continental Western's statutory
surplus and statutory net premiums written as of December 31, 1997 and for the
year then ended were $86,786,000 and $153,618,000, respectively.
Firemen's Insurance Company of Washington, D.C.
Firemen's was originally incorporated by an Act of Congress in 1836.
Firemen's writes homeowners, other personal lines and commercial risks in the
District of Columbia, and in the States of Maryland, North Carolina and
Virginia. In March 1995, Firemen's established the Presque Isle Insurance
Division in order to expand its operations into the State of Pennsylvania.
Firemen's is rated A+ by A.M. Best. Firemen's statutory surplus and statutory
net premiums written as of December 31, 1997 and for the year then ended were
$34,667,000 and $54,553,000, respectively.
FICO Insurance Company
FICO was established in 1988 and is owned by Firemen's. FICO writes
commercial business consisting primarily of multiple dwelling coverage's
principally in the state of New York through operations conducted by Clermont
Specialty Managers, Ltd., an underwriting manager which is owned by the Company.
FICO is rated A+ by A.M. Best. FICO's statutory surplus and net premiums written
as of December 31, 1997 and for the year then ended were $8,172,000 and
$10,702,000, respectively.
Great River Insurance Company
In December 1993, the Company organized Great River, a Mississippi
domiciled company. It writes personal and commercial lines in Mississippi and
Tennessee and is expanding to surrounding states. Great River is rated A+ by
A.M. Best. Great River's statutory surplus and statutory net premiums written as
of December 31, 1997 and for the year then ended were $13,030,000 and
$41,824,000, respectively.
Tri-State Insurance Company of Minnesota
Tri-State was originally organized in 1902 as a mutual insurance
company. It writes various commercial lines (specializing in grain elevator
coverages), as well as personal lines primarily, in the States of Minnesota,
Iowa, North and South Dakota, Nebraska, Wisconsin and Illinois. Tri-State is
rated A+ by A.M. Best. Tri-State's statutory surplus and statutory net premiums
written as of December 31, 1997 and for the year then ended were $38,580,000 and
$55,556,000, respectively.
Union Insurance Company
Union was organized originally in 1886 as a mutual insurance company.
Union's business consists of personal lines as well as commercial lines
insurance concentrated in the States of Nebraska, Kansas, Colorado and South
Dakota. Union is rated A+ by A.M. Best. Union's statutory surplus and statutory
net premiums written as of December 31, 1997 and for the year then ended were
$26,003,000 and $53,523,000, respectively.
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Union Standard Insurance Company
Union Standard is a successor to a company that was organized in 1970.
Union Standard writes personal lines and commercial lines of insurance for small
businesses in the States of Texas, Oklahoma, Arkansas and Colorado. Union
Standard is rated A+ by A.M. Best. Union Standard's statutory surplus and
statutory net premiums written as of December 31, 1997 and for the year then
ended were $34,434,000 and $61,192,000, respectively.
Regional operations: Business
The following table sets forth the percentages of direct premiums
written, by line, by the Company's regional insurance operations:
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
Commercial Multi-Peril 21.1 20.9% 21.4% 22.0% 19.6%
Workers' Compensation 19.4 20.1 20.8 18.7 16.9
Automobile:
Personal 15.3 16.7 17.5 17.6 19.4
Commercial 19.2 17.3 15.5 16.4 17.4
General Liability 6.6 6.4 6.5 6.6 6.9
Homeowners 6.9 7.9 8.9 9.2 9.8
Fire and Allied Lines 4.9 4.7 4.5 4.8 5.5
Inland Marine 1.9 2.8 2.6 2.6 2.6
Other 4.7 3.2 2.3 2.1 1.9
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
The following table sets forth the percentages of direct premiums
written, by state, by the Company's regional insurance operations:
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
Maine 10.0 10.7% 10.7% 10.5% 8.3%
Iowa 7.5 8.4 9.3 11.1 13.8
Nebraska 7.4 8.1 9.1 11.0 13.6
Texas 6.7 7.5 7.9 9.2 10.0
New Hampshire 5.7 5.9 6.0 4.7 .9
Mississippi 5.6 6.0 5.4 2.9 --
Minnesota 5.2 5.4 5.5 6.0 6.6
Pennsylvania 4.7 2.2 -- -- --
Kansas 4.5 4.8 4.8 5.2 5.7
Virginia 4.4 3.9 3.0 2.1 .6
North Carolina 4.2 1.5 .1 -- --
South Dakota 4.1 5.4 6.7 4.9 5.7
Colorado 3.5 3.8 4.0 4.5 5.1
Missouri 3.5 3.6 3.7 3.8 3.7
Vermont 3.1 3.0 2.4 1.1 --
Illinois 2.7 3.0 3.5 3.8 4.2
Wisconsin 2.5 2.9 3.5 3.6 4.4
New York 2.2 2.8 2.9 2.6 3.0
Arkansas 1.8 1.8 2.1 2.8 3.1
Montana 1.3 1.4 1.4 1.4 1.6
North Dakota 1.2 1.5 2.6 3.2 3.9
Oklahoma 1.2 1.3 1.4 1.5 1.5
District of Columbia 1.1 1.6 1.9 2.3 2.4
Idaho 1.1 0.6 0.2 0.2 0.3
South Carolina 1.0 -- -- -- --
Tennessee 1.0 0.4 -- -- --
Other 2.8 2.5 1.9 1.6 1.6
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
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REINSURANCE OPERATIONS
The Company's reinsurance operations consists of six operating units which
specialize in underwriting property, casualty and surety reinsurance on both a
treaty and a facultative basis. Signet Star Holdings, Inc. (Signet Star),
through its subsidiary Signet Star Reinsurance Company, includes the results of
the reinsurance operations and the results of its alternative markets divisions.
For financial segment reporting purposes the results of the alternative market
division are included in the alternative markets segment. Signet Star
Reinsurance Company is rated A by A.M. Best. Signet Star Reinsurance Company's
statutory surplus and statutory net premiums written as of December 31, 1997 and
for the year then ended were $271,127,000 and $206,652,000, respectively.
The Property Casualty Treaty Division
The largest business unit in terms of personnel and premiums written,
this division of Signet Star is committed exclusively to the broker market
segment of the treaty reinsurance industry. It functions as a traditional
reinsurer in specialty and standard reinsurance lines.
Facultative ReSources, Inc.
Facultative ReSources, Inc. ("Fac Re") specializes in individual
certificate and program facultative business. Fac Re's highly experienced
underwriters seek to offset the underwriting and pricing cycles in the
underlying insurance business by developing risk management solutions and
through superior risk selection. Fac Re develops its business through brokers
and on a direct basis where the client does not choose to use an intermediary.
The Fidelity and Surety Division
The Fidelity and Surety Division ("F&S") operates as a lead reinsurer
in a niche market of the United States property casualty industry where its
highly specialized knowledge and expertise are essential to meet the needs of
Fidelity and Surety primary writers. Business is marketed principally through
brokers as well as directly to clients not served by intermediaries.
The Latin American and Caribbean Division
Signet Star's newest business unit is devoted exclusively to Latin
American and Caribbean business ("LACD"). This division handles most traditional
lines of property and casualty treaty business and is developing a book of niche
business.
Gemini Insurance Company
Gemini is an excess and surplus lines insurance company created to
provide Signet Star with primary issuing carrier capability and thereby generate
"reverse flow" business. Under the reverse flow concept, a reinsurer writes
primary business that it then cedes back to itself. Gemini provides Signet Star
with a controlled source of new business. It operates as an authorized insurance
company in the State of Delaware and will operate nationwide, as necessary legal
and regulatory requirements are met, as an approved excess and surplus lines
carrier.
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Reinsurance Operations: Business
The following table sets forth the percentages of gross premiums
written, by line, by the Company's reinsurance operations:
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
Treaty:
Specialty and other 35.8% 31.7% 46.8% 49.1% 56.4%
Regional 12.8 24.7 21.0 24.9 22.9
Nonstandard Automobile 11.7 16.7 10.4 9.5 9.3
----- ----- ----- ----- -----
Total Treaty 60.3 73.1 78.2 83.5 88.6
Facultative 15.4 11.7 14.2 10.9 6.4
Fidelity and Surety 10.5 9.5 7.6 5.6 5.0
Latin American and Caribbean 13.8 5.7 -- -- --
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
The following table sets forth the percentage of gross premiums
written, by property versus casualty business, by the Company's reinsurance
operations:
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
Property 32.7 35.2% 33.4% 40.2% 44.0%
Casualty 67.3 64.8 66.6 59.8 56.0
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ----- ----- ----- -----
SPECIALTY INSURANCE OPERATIONS
The Company's specialty lines of insurance consist primarily of excess
and surplus lines ("E & S"), commercial transportation, professional liability,
directors and officers liability and surety. Specialty lines also included the
results of the Company's reinsurance operations through June 30, 1993 (see:
"Other information about the Company's business").
Admiral Insurance Company
The majority of the Company's E & S insurance business is conducted by
Admiral Insurance Company ("Admiral"). Admiral specializes in general liability
coverages, including products liability and professional liability. Admiral
insures risks requiring specialized treatment not available in the conventional
market, with coverage designed to meet the specific needs of the insured.
Business is received from wholesale brokers via retail agents, whose clients are
the insureds. E & S carriers operate on a non-admitted basis in the states where
they write business. They are generally free from rate regulation and policy
form requirements. Admiral's business is obtained on a nationwide basis from
approximately 190 non-exclusive brokers, who do not have the authority to commit
the Company, and who are compensated on a commission basis. Admiral also writes
directors and officers liability insurance through operations conducted by
Monitor Liability Managers, Inc., an underwriting manager established by the
Company. Admiral is rated A++ by A.M. Best. Admiral's statutory surplus and
statutory net premiums written as of December 31, 1997 and for the year then
ended were $218,917,000 and $72,103,000, respectively.
Carolina Casualty Insurance Company
The Company's commercial transportation operations are primarily
conducted by Carolina Casualty Insurance Company ("Carolina"). Carolina writes
liability, physical damage and cargo insurance for the transportation industry,
concentrating on long-haul trucking companies. Municipal bus lines, charter
buses and school buses also make up a substantial part of Carolina's book of
business. Carolina's business is obtained nationwide from approximately 120
agents and brokers who are compensated on a commission basis. In June 1995,
Carolina began writing surety bonds through operations conducted by Monitor
Surety Managers, Inc., an
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underwriting manager established by the Company. In December 1997, Carolina
began writing directors and officers liability insurance through operations
conducted by Monitor Liability Managers, Inc. Carolina is rated A by A.M. Best.
Carolina's statutory surplus and statutory net premiums written as of December
31, 1997 and for the year then ended were $66,004,000 and $50,550,000,
respectively.
Nautilus Insurance Company
Nautilus Insurance Company ("Nautilus") was established in 1985 to
insure E & S risks which involve a lower degree of expected severity than those
covered by Admiral. Nautilus obtains its business nationwide from approximately
135 non-exclusive general agents, some of which also provide business to
Admiral. A substantial portion of Nautilus' business is written on a binding
authority basis, subject to certain contractual limitations. Nautilus is rated A
by A.M. Best. Nautilus's statutory surplus and statutory net premiums written as
of December 31, 1997 and for the year then ended were $68,092,000 at
$45,494,000, respectively. Great Divide Insurance Company ("Great Divide"), a
subsidiary of Nautilus, writes transportation risks, as well as other specialty
lines, on an admitted basis.
Specialty Operations: Business
The following table sets forth the percentages of gross premiums
written, by line, by the Company's specialty insurance operations:
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
General Liability 35.5 35.9% 38.2% 42.2% 41.3%
Automobile Liability 17.7 20.5 27.4 28.1 30.7
Professional Liability 15.3 12.3 7.1 6.3 6.9
Directors and Officers Liability 8.4 10.2 9.2 5.8 4.4
Fire and Allied Lines 7.8 7.2 5.0 4.6 3.5
Automobile Physical Damage 5.0 5.3 6.8 5.9 5.0
Medical Malpractice 4.2 3.4 3.2 3.6 2.6
Inland Marine 1.5 1.7 2.1 1.8 1.9
Other 4.6 3.5 1.0 1.7 3.7
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
ALTERNATIVE MARKETS
The Company's alternative markets operations specialize in insuring,
reinsuring and administering self-insurance programs and other alternative risk
transfer mechanisms for public entities, private employers and associations.
Typical clients are those who are driven by various factors to seek less costly
and more efficient techniques to manage their exposure to claims. The Company's
alternative markets segment consists of: excess workers' compensation insurance
written by Midwest Employers Casualty Company ("Midwest"); reinsurance of
alternative risk business; and insurance services operations which manage
alternative market mechanisms.
Midwest Employers Casualty Company
In November 1995, the Company acquired Midwest Employers Casualty
Company ("Midwest"). Midwest markets and underwrites excess workers'
compensation ("EWC") insurance. EWC insurance is marketed to employers and
employer groups which have elected and have qualified or been approved by state
regulatory authorities to self-insure their workers' compensation programs. EWC
insurance provides coverage to a self-insured employer once the employers'
losses exceed the employer's retention amount. Midwest offers a complete line of
EWC products, including specific and aggregate EWC insurance policies and surety
bonds. In addition, Midwest began to offer a "large deductible" product in 1996.
Midwest is rated A- by A.M. Best. Midwest's statutory surplus and statutory net
premiums written as of December 31, 1997 and for the year then ended were
$118,070,000 and $54,859,000, respectively.
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Signet Star - Alternative Markets Division
Signet Star Reinsurance Company's Alternative Markets Division
specializes in providing custom designed reinsurance products and services to
alternative markets ("ARM") clients, such as captive insurance companies, risk
retention groups, public entity insurance trusts and governmental pools. ARM
clients are generally self-insured vehicles which provide insurance buyers with
a mechanism for assuming part of their own risk, managing their exposures,
modifying their loss costs and, ultimately, participating in the underwriting
results. Signet Star has been an active reinsurer of ARM clients for over ten
years and is considered to be one of the leading broker market reinsurers of ARM
business. The Alternative Markets Division has access to substantial additional
resources within the Company, which has enabled it to concentrate and coordinate
the Company's focus on this growing sector of the reinsurance market.
Insurance Services Operations
The Company's insurance service operations offer a variety of products,
which includes underwriting and claims administration and alternative insurance
market mechanisms. In addition, the insurance services operations subsidiaries
of the Company provide agency and brokerage services to both affiliated and
unaffiliated entities.
Berkley Administrators
Berkley Administrators, a division of Tri-State headquartered in
Minneapolis, Minnesota, provides risk management and administration services to
its clients, including underwriting, loss control, policy issuance and claims
handling. A significant portion of Berkley Administrators' present business is
the administration of the Minnesota Workers' Compensation Assigned Risk Plan.
Berkley Risk Services, LLC
The Company acquired Berkley Risk Services LLC and its subsidiaries
("Berkley Risk") operations beginning in 1988. In 1997 Berkley Risk Services,
Inc. was restructured into a limited liability company. Berkley Risk, based in
Minneapolis, Minnesota, is a property casualty risk management firm which
specializes in the development and administration of group and single-employer
alternative insurance funding techniques. Berkley Risk also manage entities
which provide liability insurance and claim adjusting services to public
entities and not-for-profit organizations.
Key Risk Management Services, Inc.
The Company acquired Key Risk Management Services, Inc. ("Key Risk") in
1994. Key Risk, based in Greensboro, North Carolina, is a property casualty risk
management firm which specializes in management and administration of group
self-insured funds. A significant portion of Key Risk's present business is the
administration of the North Carolina Associated Industries Workers' Compensation
Fund. In 1998 the Company organized Key Risk Insurance Company as of North
Carolina Insurance Company for usage by Key Risk.
Berkley Risk Managers
Berkley Risk Managers is a successor to a company acquired in 1990.
Berkley Risk Managers, based in Somerset, New Jersey, is primarily involved in
the development and administration of self-funded property casualty and health
insurance programs primarily for municipalities and other governmental entities.
All American Agency Facilities, Inc.
All American Agency Facilities, Inc., based in Denver, Colorado,
provides wholesale brokerage and general agency services on a nationwide basis
for unaffiliated insurance carriers as well as certain of the Company's
insurance subsidiaries.
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Berkley Care Network, Inc.
The Company established Berkley Care Network, Inc. ("Berkley Care") in
1995. Berkley Care, based in Greensboro, North Carolina, is a managed health
care company offering utilization review and case management services for
workers' compensation carriers in North Carolina. In 1997, the Company acquired
Berkley Care Network, Northeast to provide managed care services in the State of
Connecticut. Berkley Care expects to expand the geographic scope of its
operations over the next several years.
Alternative Markets Operations: Business
The following table sets forth the percentages of revenues, by major
source of business, of the alternative markets operations:
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
Midwest Employers Casualty Company 46.1% 48.8% 14.8% --% --%
Insurance Service Operations 35.9 37.5 63.1 78.6 91.6
Signet Star - Alternative Markets
Division 18.0 13.7 22.1 21.4 8.4
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
INTERNATIONAL OPERATIONS
In 1995, the Company and Northwestern Mutual Life International, Inc.
("NML"), a wholly-owned subsidiary of The Northwestern Mutual Life Insurance
Company, entered into a joint venture to form Berkley International LLC
("Berkley International"), a limited liability company. The Company agreed to
contribute up to $65 million to Berkley International in exchange for a 65%
membership interest and NML agreed to contribute up to $35 million to Berkley
International in exchange for a 35% membership interest.
Berkley International owns 99.9916% of Berkley International Argentina
S.A. ("Berkley S.A."), an Argentine holding company. Berkley S.A. owns the
following property casualty insurance companies: 76.66% of Union Berkley
Compania de Seguros, S.A.; 80% of Independencia Compania Argentina de Seguros,
S.A.; 99.9667% of Berkley International Aseguradora de Riesgos de Trabajo S.A.,
and 85% of Oceano Compania Argentina de Seguros. Berkley S.A. also owns 99.9167%
of Risk Management Services S.A., which is third-party administrator and 90% of
Jackson Berkley Life. In addition, Berkley International owns 59% of a
Philippine holding company, as well as Family First, Inc. Philippine Insurance
Holdings, Inc. owns 100% of the following companies: Berkley International Life
Insurance Company, Inc., Berkley International Plans, Inc., and Berkley
Insurance Company of the Philippines, Inc.
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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,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Amounts in thousands)
Regional Insurance Operations
Total revenues $ 650,735 $ 544,400 $ 478,547 $ 376,576 $316,448
Income before income taxes 49,180 37,745 40,486 26,669 29,993
Reinsurance Operations (1)
Total revenues 242,086 244,066 221,241 193,658 121,490
Income (loss) before income taxes 42,193 32,756 19,661 (8,954) 7,253
Specialty Insurance Operations (1)
Total revenues 270,849 232,920 200,946 178,545 176,601
Income before income taxes 66,042 49,274 35,325 31,429 45,592
Alternative Markets Operations
Total revenues 182,612 171,317 103,656 75,798 53,531
Income before income taxes 35,223 32,541 10,254 7,068 8,058
International Operations
Total Revenues 45,360 26,435 7,313 -- --
Loss Before Income Taxes (3,566) (1,283) (259) -- --
(1) The Reinsurance and specialty operations have been restated in
accordance with FAS 131.
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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,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Regional Insurance Operations
Loss ratio 66.4% 66.7% 65.1% 65.3% 67.1%
Expense ratio 34.0 34.1 33.9 34.3 34.2
Policyholders' dividend ratio .7 .7 .9 .9 .9
------ ------ ------ ------ ------
Combined ratio 101.1% 101.5% 99.9% 100.5% 102.2%
====== ====== ====== ====== ======
Reinsurance Operations (2)
Loss ratio 69.2% 73.3% 78.1% 87.4% 77.7%
Expense ratio 32.1 30.1 26.4 27.7 32.0
------ ------ ------ ------ ------
Combined ratio 101.3% 103.4% 104.5% 115.1% 109.7%
====== ====== ====== ====== ======
Specialty Insurance Operations (2)
Loss ratio 62.1% 68.8% 78.9% 78.3% 74.8%
Expense ratio 33.4 30.9 28.3 25.3 25.4
------ ------ ------ ------ ------
Combined ratio 95.5% 99.7% 107.2% 103.6% 100.2%
====== ====== ====== ====== ======
Alternative Markets Operations
Loss ratio 73.0% 74.8% 72.3% 72.5% 72.5%
Expense ratio 35.5 34.7 31.9 27.7 21.0
------ ------ ------ ------ ------
Combined ratio 108.5% 109.5% 104.2% 100.2% 93.5%
====== ====== ====== ====== ======
International Operations
Loss ratio 59.8% 49.7% 50.0% ---% ---%
Expense ratio 54.6 49.9 58.3 -- --
------ ------ ------ ------ ------
Combined ratio 114.4% 99.6% 108.3% ---% ---%
====== ====== ====== ====== ======
Combined Insurance Operations
Loss ratio 66.4% 68.7% 70.7% 73.7% 71.1%
Expense ratio 34.4 33.1 31.3 30.8 31.7
Policyholders' dividend ratio .4 .4 .5 .5 .5
------ ------ ------ ------ ------
Combined ratio 101.2% 102.2% 102.5% 105.0% 103.3%
====== ====== ====== ====== ======
Combined Insurance Operations
Premiums to surplus ratio (3) 1.2 1.2 1.0 1.1 .8
====== ====== ====== ====== ======
Industry Ratios
Combined ratio 101.8% (4) 107.0% (5) 107.2% (5) 108.9% (5) 107.9% (5)
Premiums to surplus ratio .9% (4) 1.0% (6) 1.2% (6) 1.3% (6) 1.3% (6)
(1) Based on U.S. statutory accounting practices.
(2) The Reinsurance and specialty insurance operations have been restated
in accordance with FAS 131.
(3) Based on the Company's consolidated net premiums written to statutory
surplus.
(4) Estimated by A.M. Best
(5) Source: A.M. Best Aggregates & Averages, for stock companies.
(6) Source: A.M. Best Aggregates & Averages, for total industry.
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Investments
Investment results before income tax effects were as follows:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Amounts in thousands)
Average investments, at cost $2,873,730 $2,538,806 $2,081,547 $1,853,030 $1,584,763
========== ========== ========== ========== ==========
Investment income,
before expenses $ 205,812 $ 171,047 $ 143,527 $ 115,619 $ 98,368
========== ========== ========== ========== ==========
Percent earned on
average investments 7.2% 6.7% 6.9% 6.2% 6.2%
========== ========== ========== ========== ==========
Realized gains (losses) $ 13,186 $ 7,437 $ 10,357 $ (170) $ 23,523
========== ========== ========== ========== ==========
Change in unrealized investment
gains (losses) (1) $ 66,306 $ (22,409) $ 142,475 $ (124,756) $ 13,556
========== ========== ========== ========== ==========
(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,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
1 year or less 4.4% 3.1% 4.2% 4.0% 3.5%
Over 1 year through 5 years 26.4 20.7 17.9 27.6 34.0
Over 5 years through 10 years 19.1 25.0 29.4 21.4 22.8
Over 10 years 29.2 27.1 26.2 27.0 27.5
Mortgage-backed securities 20.9 24.1 22.3 20.0 12.2
------ ------ ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
Loss and Loss Adjustment Expense Reserves
In the property casualty industry, it is not unusual for significant
periods of time, ranging up to several years or more, to elapse between the
occurrence of an insured loss, the report of the loss to the insurer and the
insurer's payment of that loss. To recognize liabilities for unpaid losses,
insurers establish reserves, which is a balance sheet account representing
estimates of future amounts needed to pay claims and related expenses with
respect to insured events which have occurred. The Company's loss reserves
reflect current estimates of the ultimate cost of closing outstanding claims;
other than its Excess Workers Compensation business, as discussed below, the
Company does not discount its reserves to estimated present value for financial
reporting purposes.
In general, when a claim is reported, claims personnel establish a
"case reserve" for the estimated amount of the ultimate payment. The estimate
represents an informed judgment based on general reserving practices and
reflects the experience and knowledge of the claims personnel regarding the
nature and value of the specific type of claim. Reserves are also established on
an aggregate basis which provide for losses incurred but not yet reported to the
insurer, potential inadequacy of case reserves, the estimated expenses of
settling claims, including legal and other fees and general expenses of
administering the claims adjustment process ("LAE"), and a provision for
potentially uncollectible reinsurance. Each insurance subsidiary's net retention
for each line of insurance is taken into consideration in the computation of
ultimate losses.
In examining reserve adequacy, historical data is reviewed and
consideration is given to such factors as legal developments, changes in social
attitudes and economic conditions, including the effects of inflation. The
actuarial process relies on the basic assumption that
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past experience, judgmentally adjusted for the effects of current developments
and anticipated trends, is an appropriate basis for predicting future events.
Reserve amounts are necessarily based on management's informed estimates and
judgments using data currently available. As additional experience and other
data become available and are reviewed, these estimates and judgments are
revised, resulting in increases or decreases to reserves for insured events of
prior years. The reserving process implicitly recognizes the impact of inflation
and other factors affecting loss costs by taking into account changes in
historic claim patterns and perceived trends. There is no precise method to
evaluate the impact of any specific factor on the adequacy of reserves, because
the ultimate cost of closing claims is influenced by numerous factors.
While the methods for establishing the reserves are well tested over
time, some of the major assumptions about anticipated loss emergence patterns
are subject to fluctuation. In particular, high levels of jury verdicts against
insurers, as well as judicial decisions which "re-formulate" policies to expand
their coverage to previously unforeseen theories of liability, including those
regarding pollution and other environmental exposures, have produced
unanticipated claims and increased the difficulty of estimating the loss and
loss adjustment expense reserves provided by the Company. With respect to year
2000 claims exposure for our insurance and reinsurance subsidiaries, to date,
no significant losses have arisen. However, due to the potential judicial
decisions which re-formulate policies to expand their coverage to previously
unforeseen theories of liabilities which may produce unanticipated claims, at
this point in time, the estimation of any potential year 2000 liabilities is
not determinable.
Due to the nature of EWC business and the long period of time over
which losses are paid in this line of business, the Company discounts its
liabilities for EWC losses and loss expenses. Discounting liabilities for losses
and loss expenses gives recognition to the time value of money set aside to pay
claims in the future and is intended to appropriately match losses and loss
expenses to income earned on investment securities supporting the liabilities.
The expected losses and loss expense payout pattern subject to discounting was
derived from Midwest's loss payout experience and is supplemented with data
compiled by insurance companies writing workers' compensation on an
excess-of-loss basis. The expected payout pattern has a very long duration
because it reflects the nature of losses which generally penetrate self-insured
retention limits contained in EWC policies. The Company has limited the expected
payout duration to 30 years in order to introduce an additional level of
conservatism into the discounting process. These liabilities have been
discounted using "risk-free" discount rates determined by reference to the U.S.
Treasury yield curve weighted for EWC premium volume to reflect the seasonality
of the anticipated duration of losses associated with such coverages. The
average discount rate for accident years 1997, 1996 and 1995 and prior was
approximately 5.98%, 5.90% and 5.80%, respectively. The aggregate net discount,
after reflecting the effects of ceded reinsurance, is $189,600,000, $172,415,000
and $152,235,000 at December 31, 1997, 1996 and 1995, respectively.
To date, known pollution and environmental claims at the Company's
insurance company subsidiaries have not had a material impact on the Company's
operations. Environmental claims have not materially impacted the Company
because these subsidiaries generally did not insure the larger industrial
companies which are subject to significant environmental exposures.
The Company's net reserves for losses and loss adjustment expenses
relating to pollution and environmental claims were $33.1 million and $35.2
million at December 31, 1997 and 1996, respectively. The Company's gross
reserves for losses and loss adjustment expenses relating to pollution and
environmental claims were $68.4 million and $71.9 million at December 31, 1997
and 1996, respectively. Net incurred losses and loss expenses for reported
pollution and environmental claims were approximately $0.1 million, $6.9 million
and $8.0 million in 1997, 1996 and 1995, respectively. Net paid losses and loss
expenses has averaged approximately $3 million for each of the last three years.
The estimation of these liabilities is subject to significantly greater than
normal variation and uncertainty because it is difficult to make a reasonable
actuarial estimate of these liabilities due to the absence of a generally
accepted actuarial methodology for these exposures and the potential affect of
significant unresolved legal matters, including coverage issues as well as the
cost of litigating the legal issues. Additionally, the determination of ultimate
damages and the final allocation of such damages to financially responsible
parties is highly uncertain.
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The table below provides a reconciliation of the beginning and ending
reserve balances, on a gross of reinsurance basis (dollars in thousands):
1997 1996 1995
----------- ----------- -----------
Net reserves at beginning of year $ 1,333,122 $ 1,209,250 $ 895,440
----------- ----------- -----------
Net reserves of acquired companies 4,984 -- 191,963
Net provision for losses and loss expenses:
Claims occurring during the current year (1) 747,977 675,674 580,594
Decrease in estimates for claims occurring
in prior years (21,313) (15,219) (9,596)
Amortization of discount 7,760 8,705 --
----------- ----------- -----------
734,424 669,160 570,998
----------- ----------- -----------
Net payments for claims
Current year 315,370 280,565 228,100
Prior years 324,149 264,723 221,051
----------- ----------- -----------
639,519 545,288 449,151
----------- ----------- -----------
Net reserves at end of year 1,433,011 1,333,122 1,209,250
Ceded reserves at end of year 476,677 449,581 450,770
----------- ----------- -----------
Gross reserves at end of year $ 1,909,688 $ 1,782,703 $ 1,660,020
=========== =========== ===========
A reconciliation, as of December 31, 1997, between the reserves reported
in the accompanying consolidated financial statements which have been prepared
in accordance with GAAP and those reported on a SAP basis is as follows (in
thousands):
Net reserves reported on a SAP basis
Additions (deductions) to statutory reserves: $1,492,581
Loss reserve discounting (2) (71,464)
Outstanding drafts reclassified as reserves 11,894
---------
Net reserves reported on a GAAP basis 1,433,011
Ceded reserves reclassified as assets 476,677
---------
Gross reserves reported on a GAAP basis $1,909,688
=========
(1) Claims occurring during the current year is net of discount of
$29,783,000, 28,885,000 and $708,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
(2) For statutory purposes, Midwest uses a discount rate of 3.0% as
permitted by the Department of Insurance of the State of Ohio. For GAAP
purposes, Midwest uses a discount rate based on the U. S. Treasury
yield curve weighted for the expected payout period, as described
above.
The following table presents the development of net reserves for 1986
through 1997. The top line of the table shows the estimated reserves for unpaid
losses and loss expenses recorded at the balance sheet date for each of the
indicated years. This represents the estimated amount of losses and loss
expenses for claims arising in all prior years that are unpaid at the balance
sheet date, including losses that had been incurred but not yet reported to the
Company. The upper portion of the table shows the re-estimated amount of the
previously recorded reserves based on experience as of the end of each
succeeding year. The estimate changes as more information becomes known about
the frequency and severity of claims for individual years.
The "cumulative redundancy (deficiency)" represents the aggregate
change in the estimates over all prior years. For example, the 1986 reserves
have developed a $47 million deficiency over ten years. That amount has been
reflected in income over the ten years. The impact on the results of operations
of the past three years of changes in reserve estimates is shown in the
reconciliation tables above.
It should be noted that the table presents a "run off" of balance sheet
reserves, rather than accident or policy year loss development. Therefore, each
amount in the table includes the effects of changes in reserves for all prior
years. For example, assume a claim that occurred in 1987 is reserved for $2,000
as of December 31, 1987. Assuming this claim was settled for $2,300 in 1997, the
$300 deficiency would appear as a deficiency in each year from 1987 through
1996.
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Year Ended December 31,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Amounts in millions)
Discounted net reserves for losses
and loss expenses $423 $531 $611 $643 $680 $710 $783 $895 $1,209 $1,333 $1,433
Reserve discounting -- -- -- -- -- -- -- -- 152 172 190
Undiscounted net reserve
Net Re-estimated as of:
One year later 419 524 605 635 676 704 776 885 1,346 1,481
Two years later 413 518 599 632 659 694 775 872 1,305
Three years later 405 513 596 620 650 665 744 833
Four years later 402 511 587 612 637 655 708
Five years later 402 505 581 603 631 630
Six years later 401 510 585 588 609
Seven years later 405 514 574 569
Eight years later 418 507 557
Nine years later 414 495
Ten years later 408
Cumulative redundancy
(deficiency) undiscounted 15 36 54 74 71 80 75 62 56 $ 24
==== === === === === === === === === ===
Cumulative amount of
net liability paid
through:
One year later $ 91 $114 $158 $139 $160 $169 $186 $221 $265 $332
Two years later 152 217 234 235 264 275 221 355 434
Three years later 201 262 294 304 332 306 291 445
Four years later 225 295 334 345 346 344 334
Five years later 244 315 358 377 371 362
Six years later 256 331 380 395 384
Seven years later 268 348 392 402
Eight years later 282 357 396
Nine years later 289 359
Ten years later 291
Discounted net Reserves 783 895 1,209 1,333 1,433
Ceded Reserves 1,233 1,176 451 450 477
----- ----- ----- ----- -----
Discounted gross Reserves 2,016 2,071 1,660 1,783 1,910
Reserve
discounting -- -- 192 216 241
----- ----- ----- ----- -----
Gross reserve $2,016 $2,071 1,852 1,999 2,151
===== ====== ===== ===== =====
Gross Re-estimated as of
One year later 2,010 2,043 1,827 1,965
Two years later 1,966 2,026 1,789
Three years later 1,955 1,983
Four years later 1,913
Gross cumulative redundancy $ 103 $ 88 $ 63 $ 34
===== ===== ===== ======
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Regulation
The Company's insurance subsidiaries are subject to varying degrees of
regulation and supervision in the jurisdictions in which they do business, under
statutes which delegate regulatory, supervisory and administrative powers to
state insurance commissioners. This regulation relates to such matters as the
standards of solvency which must be met and maintained; the licensing of
insurers and their agents; the nature of and limitations on investments;
deposits of securities for the benefit of policyholders; approval of policy
forms and premium rates; periodic examination of the affairs of insurance
companies; annual and other reports required to be filed on the financial
condition of insurers or for other purposes; establishment and maintenance of
reserves for unearned premiums and losses; and requirements regarding numerous
other matters. In general, the Company's regional property casualty subsidiaries
as well as Carolina, Great Divide and Midwest must file all rates for personal
and commercial insurance with the insurance department of each state in which
they operate. The Company's E&S and reinsurance subsidiaries generally operate
free of rate and form regulation.
In addition to regulatory supervision of its insurance subsidiaries,
the Company is subject to state statutes governing insurance holding company
systems. Typically, such statutes require the Company periodically to file
information with the state insurance commissioner, including information
concerning its capital structure, ownership, financial condition and general
business operations. Under the terms of applicable state statutes, any person or
entity desiring to purchase more than a specified percentage (commonly 10%) of
the Company's outstanding voting securities would be required to obtain
regulatory approval of the purchase. Under Florida law, which is applicable to
the Company due to its ownership of Carolina, a Florida domiciled insurer, the
acquisition of more than 5% of the Company's capital stock must receive
regulatory approval. Further, state insurance statutes typically place
limitations on the amount of dividends or other distributions payable by
insurance companies in order to protect their solvency. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
During the past several years, various regulatory and legislative
bodies adopted or proposed new laws or regulations to deal with the cyclical
nature of the insurance industry, catastrophic events and their effects on
shortage of capacity and pricing. These regulations, which have not had a
material impact on the Company's operations, include (i) the creation of "market
assistance plans" under which insurers are induced to provide certain coverages,
(ii) restrictions on the ability of insurers to cancel certain policies in
mid-term, (iii) advance notice requirements or limitations imposed for certain
policy non-renewals and (iv) limitations upon or decreases in rates permitted to
be charged. The passage of Proposition 103 in the State of California did not
have a material adverse impact on the Company's operations because the Company's
subsidiaries operate in that State primarily on a non-admitted basis. The
non-admitted market in California, however, has been subjected to increased
levels of regulation. Admiral and Nautilus, both of which derive significant
premiums from California, may be adversely impacted by increased regulation
which causes business to remain in the admitted market.
Various state and federal organizations, including Congressional
committees and the National Association of Insurance Commissioners ("NAIC"),
have been conducting investigations into various aspects of the insurance
business. The NAIC has adopted risk based capital ("RBC") requirements that
require insurance companies to calculate and report information under a
risk-based formula which measures statutory capital and surplus needs based on a
regulatory definition of risk in a company's mix of products and its balance
sheet. The implementation of RBC did not effect the operations of the Company's
insurance subsidiaries since all of its subsidiaries have an RBC amount above
the authorized control level RBC, as defined by the NAIC. Federal legislation is
being considered which would either abolish or limit the current exemption of
the insurance industry from portions of the antitrust laws, impose direct
federal oversight or federal solvency standards. No assurance can be given that
future legislative or regulatory changes resulting from such activity will not
adversely affect the Company's insurance subsidiaries.
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The Company's insurance subsidiaries are also subject to assessment by
state guaranty funds when an insurer in that jurisdiction has been judicially
declared insolvent and insufficient funds are available from the liquidated
company to pay policyholders and claimants. The protection afforded under a
state's guaranty fund to policyholders of the insolvent insurer varies from
state to state. Generally, all licensed property casualty insurers are
considered to be members of the fund, and assessments are based upon their pro
rata share of direct written premiums. The NAIC Model Post-Assessment Guaranty
Fund Act, which many states have adopted, limits assessments to an insurer to 2%
of its subject premium and permits recoupment of assessments through rate
setting. Likewise, several states (or underwriting organizations of which the
Company's insurance subsidiaries are required to be members) have limited
assessment authority with regard to deficits in certain lines of business. To
date, assessments have not had a material adverse impact on operations.
The Company receives funds from its insurance subsidiaries in the form
of dividends and fees for certain management services. Annual dividends in
excess of maximum amounts prescribed by state statutes ("extraordinary
dividends") may not be paid without the approval of the insurance commissioner
of the state in which an insurance subsidiary is domiciled. The NAIC has
proposed and certain states have adopted legislation that lowers the threshold
amount for determining what constitutes an extraordinary dividend. Such
legislative changes could make it more difficult for insurance subsidiaries to
pay dividends to their parents. Similarly, the NAIC has proposed a new model
investment law that may affect the statutory carrying values of certain
investments; however, the final outcome of that proposal is not certain, nor is
it possible to predict what impact the proposal will have on the Company or
whether the proposal will be adopted in the foreseeable future.
Tax Law Changes
There were no tax law changes in 1997 that significantly affected the
Company.
Competition
The property casualty insurance and reinsurance business is
competitive, with over 2,000 insurance companies transacting business in the
United States. The Company competes directly with a large number of these
companies. The Company's strategy in this highly fragmented industry is to seek
specialized areas or geographic regions where its insurance subsidiaries can
gain a competitive advantage by responding quickly to changing market
conditions. Each of the Company's subsidiaries establishes its own pricing
practices. Such practices are based upon a Company-wide philosophy to price
products with the general intent of making an underwriting profit. Competition
in the industry generally changes with profitability.
The regional property casualty subsidiaries compete with mutual and
other regional stock companies as well as national carriers. Direct writers of
property casualty insurance compete with the regional subsidiaries by writing
insurance through their salaried employees, generally at a lower cost than
through independent agents such as those used by the Company.
Signet Star's competition comes from domestic and foreign reinsurers,
some of which have greater financial resources than Signet Star who place their
business either on a direct basis or through the broker market.
The E & S area is a highly specialized segment of the insurance
industry. Admiral and Nautilus compete with other E & S carriers, some of which
are larger and have greater resources than Admiral and Nautilus. Under certain
market conditions, standard carriers may compete for the types of business
written by Admiral and Nautilus. In addition, there are regional and specialty
carriers competing with Admiral and Nautilus when they underwrite business in
their regions or specialties.
Carolina and Great Divide's competition comes mainly from other
specialty transportation insurers and large national multi-line companies.
Midwest's competition comes from insurance and reinsurance companies,
some of which have greater financial resource than Midwest. Most of theses
carriers write specific EWC
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coverage, do not offer aggregate EWC coverage and tend to focus on risks larger
than those targeted by Midwest. In addition, Midwest competes with other
specialty EWC insurers.
The Insurance Services Operations face competition from several large
nationally known service organizations as well as local competitors. The
International Operations compete with native insurance operations both large and
small, which maybe related to government entities, as well as with branch or
local subsidiaries of multi-national companies.
Employees
As of March 2, 1998, the Company employed 4,046 persons. Of this
number, the Company's subsidiaries employed 3,999 persons, of whom 2,283 were
executive and administrative personnel and 1,716 were clerical personnel. The
Company employed the remaining 47 persons in its parent company and investment
operations, of whom 38 were executive and administrative personnel and 9 were
clerical personnel.
Other information about the Company's business:
The Company maintains an ongoing interest in acquiring additional
companies and developing new insurance entities, products and packages as
opportunities arise. In addition, the insurance subsidiaries develop new
coverages or lines of business to meet the needs of insureds.
Seasonal weather variations affect the severity and frequency of losses
sustained by the insurance and reinsurance subsidiaries. Although the effect on
the Company's business of such natural catastrophes as tornadoes, hurricanes,
hailstorms and earthquakes is mitigated by reinsurance, they nevertheless can
have a significant impact on the results of any one reporting period.
The Company has no customer which accounts for 10 percent or more of
its consolidated revenues.
Compliance by the Company and its subsidiaries with federal, state and
local provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to protection of the
environment, has not had a material effect upon the capital expenditures,
earnings or competitive position of the Company.
The Company currently does not engage in material operations in foreign
countries nor is a material portion of its revenues presently derived from
customers in foreign countries. In 1995, the Company entered into a joint
venture to acquire insurance and insurance related operations outside the United
States (see "International Operations"). However, the Company's insurance
subsidiaries regularly purchase a portion of their catastrophe reinsurance
coverage from foreign reinsurers, including syndicate members of Lloyd's of
London. While Queen's Island is domiciled in Bermuda, to date its business has
exclusively been reinsurance of its domestic affiliates.
On July 1, 1993, the Company exchanged all the stock of Signet
Reinsurance Company ("Signet") for 60% of the stock of Signet Star, a newly
formed holding company. Signet Star simultaneously acquired all the stock of
North Star Reinsurance Company ("North Star Reinsurance") from General Re in
exchange for 40% of the stock of Signet Star and senior and convertible notes.
In connection with the formation of Signet Star, North Star Reinsurance entered
into a Retrocessional Agreement (the "Retrocessional Agreement") with General
Reinsurance Corporation ("GRC"), pursuant to which North Star Reinsurance
reinsured its respective liabilities and assigned its respective rights and
obligations arising from any insurance or reinsurance contracts written prior to
January 1, 1993 with and to GRC.
On December 31, 1995, the Company purchased General Re's interest in
Signet Star by issuing to General Re 458,667 shares of Series B Cumulative
Redeemable Preferred Stock of the Company having an aggregate liquidation
preference of $68,800,000, which was redeemed in 1997. In addition, the Company
guaranteed a senior subordinated promissory note of Signet Star which was issued
to General Re in exchange for the convertible note which General Re held. As
part
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of this transaction, Signet Star sold to General Re Signet Star Reinsurance
Company and renamed Signet Reinsurance Company, Signet Star Reinsurance Company.
In connection with the 1995 acquisition of the remaining 40% interest
in Signet Star, North Star Reinsurance was sold to General Re and all business
written subsequent to July 1, 1993 was novated to Signet Star. As a result,
business written by North Star Reinsurance prior to January 1, 1993, which had
been retroceded to General Re, is no longer reflected in the Company's financial
statements. The only effect on the Company's financial statements resulting from
this aspect of the transaction is that the Company's reserves for losses and
loss expenses is reduced by $735,144,000 and "due from reinsurers" is reduced by
the same amount. This aspect of the transaction does not effect the Company's
cash flow, equity or statements of operations.
ITEM 2. PROPERTIES
The Company and its subsidiaries own or lease office buildings or
office space suitable to conduct their operations. Such owned property is as
follows:
Location Company Size (sq. ft.)
-------- ------- --------------
Cherry Hill, New Jersey Admiral 42,000
Grand Forks, North Dakota American West 10,000
Jacksonville, Florida Carolina (1) 19,000
Lincoln, Nebraska Union 43,000
Lincoln, Nebraska Continental Western 20,000
Luverne, Minnesota Tri-State 33,000
Meridian, Mississippi Great River 30,000
Scottsdale, Arizona Nautilus 34,000
Urbandale, Iowa Continental Western 80,000
Westbrook, Maine Acadia 54,000
(1) Presently leased to a third party.
In addition, the Company and its subsidiaries lease office facilities
in various other cities under leases with varying terms and expiration dates.
ITEM 3. LEGAL PROCEEDINGS
Claims under insurance policies written by the Company's insurance
subsidiaries are investigated and settled either by claims adjusters employed by
them, by their independent agents or by independent adjusters. Each subsidiary
employs a staff of claims adjusters at its home office and at some regional
offices. Some independent agents may have the authority to settle small claims.
Independent claims adjusting firms are used to assist in handling various claims
in areas where insurance volume does not warrant the maintenance of a staff
adjuster. If a claim or loss cannot be settled and results in litigation, the
subsidiary generally retains outside counsel.
At present, neither the Company nor any of its subsidiaries is engaged
in any litigation known to the Company which is expected to have a material
adverse effect upon the Company's business. As is common with property casualty
insurance companies, the Company's subsidiaries are regularly engaged in the
defense of claims arising out of the conduct of the insurance business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1997 to a vote
of holders of the Company's Common Stock.
21
22
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock of the Company is traded in the over-the-counter
market and is quoted on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") National Market System under the symbol "BKLY". The
following table sets forth the high and low sale prices for the indicated
periods, all as reported by NASDAQ(1).
Common
Price Range Dividends Paid
----------- --------------
High Low Per Share
---- --- ---------
1997:
Fourth Quarter $ 45 $ 39 $ .11 cash
Third Quarter 43 1/16 36 $ .10 cash
Second Quarter 39 1/4 31 5/16 $ .10 cash
First Quarter 36 5/16 29 13/16 $ .09 cash
1996:
Fourth Quarter $ 35 5/8 $ 30 $ .09 cash
Third Quarter 31 3/8 27 $ .09 cash
Second Quarter 31 1/8 27 5/8 $ .08 cash
First Quarter 35 1/2 30 1/8 $ .08 cash
(1) Adjusted for the 3 for 2 stock split.
The closing price on March 2, 1998, as reported on the NASDAQ National
Market System, was $44.875 per share. The approximate number of record holders
of the Common Stock on March 2, 1998 was 829.
On December 20, 1996, the W.R. Berkley Capital Trust (the "Trust")
issued for cash $210,000,000 of 8.197% Company obligated mandatorily redeemable
preferred securities of a subsidiary trust holding solely junior subordinated
debentures (the "Capital Securities") representing preferred beneficial
interests in the Trust. The Company is the owner of the beneficial interests
represented by the common securities of the Trust. The Trust exists for the sole
purpose of issuing the Capital Securities and investing the proceeds in the
8.197% Junior Subordinated Deferrable Interest Debentures issued by the Company.
The Capital Securities were not registered under the Securities Act of 1933, as
amended (the "Securities Act"), and were sold to "qualified institutional
buyers" (as defined in Rule 144A under the Securities Act) in reliance upon the
exemption from the registration requirements of the Securities Act provided by
Rule 144A, or to institutional "accredited investors" (as defined in Rule 501
(a) (1), (2), (3) or (7) under the Securities Act.) See Note 8 of "Notes to
Consolidated Financial Statements."
22
23
ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 1997
Year Ended December 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Amounts in thousands, except per share data)
Net premiums written $ 1,177,641 $ 1,052,511 $ 860,421 $ 717,933 $ 537,646
Net premiums earned 1,111,747 981,221 803,336 655,038 501,433
Net investment income 199,588 164,490 137,332 109,683 92,773
Management fees and commissions 71,456 69,246 68,457 64,536 54,027
Realized investment gains (losses) 13,186 7,437 10,357 (170) 23,523
Total revenues 1,400,310 1,225,166 1,021,943 830,790 673,306
Interest expense 48,869 31,963 28,209 27,601 25,275
Income before Federal
income taxes 129,241 115,049 82,747 30,774 61,364
Federal income tax (expense)
benefit (30,668) (25,102) (17,554) 1,552 (9,181)
Income before minority interest 98,573 89,947 65,193 32,326 52,183
Net income before preferred
dividends 99,047 90,263 60,882 35,094 51,587
Preferred dividends 7,828 13,909 11,062 10,356 --
Net income attributable to
common stockholders 91,219 76,354 49,820 24,738 51,587
Data per common share (1):
Net income:
Basic 3.09 2.56 1.91 .96 1.91
Diluted 3.02 2.53 1.90 .95 1.89
Stockholders' equity 28.72 25.13 23.59 17.79 20.24
Cash dividends declared $ .42 $ .35 $ .32 $ .29 $ .27
Weighted average shares outstanding (1):
Basic 29,503 29,792 26,121 25,773 26,919
Diluted 30,185 30,130 26,262 25,951 27,270
Investments $ 3,321,322 $ 2,991,606 $ 2,588,346 $ 1,901,715 $ 1,748,702
Total assets 4,599,284 4,136,973 3,618,684 3,582,291 3,337,705
Reserves for losses
and loss expenses 1,909,688 1,782,703 1,660,020 2,070,886 2,016,348
Long-term Debt 390,415 390,104 319,287 331,002 330,722
Company-obligated manditorily
redeemable capital securities
of a subsidiary trust holding
solely 8.197% junior subordinated
debentures 207,944 207,901 -- -- --
Stockholders' equity 947,292 879,732 929,815 597,601 526,281
(1) Data per common share have been adjusted to reflect the 3 for 2 stock
split. Basic and Diluted income per share and weighted averages shares have
been calculated in accordance with FAS 128.
23
24
The information required by Items 7 and 8 of Part II is incorporated by
reference to the Company's 1997 Annual Report to Shareholders as follows:
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Pages 18 through 23 of the 1997 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 24 through 40 of the 1997 Annual Report to Shareholders.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is provided as to the Directors and executive
officers of the Company as of March 4, 1998:
Name Age Position
---- --- --------
William R. Berkley 52 Chairman of the Board and Chief Executive Officer
John D. Vollaro 53 President, Chief Operating Officer and a Director
Sam Daniel, Jr. 59 Senior Vice President, Regional Operations
Anthony J. Del Tufo 53 Senior Vice President, Chief Financial Officer and Treasurer
E. LeRoy Heer 59 Senior Vice President, Chief Corporate Actuary
H. Raymond Lankford, Jr. 55 Senior Vice President, Alternative Markets Operations
Ira S. Lederman 44 Senior Vice President, Assistant General Counsel and Assistant
Secretary
James G. Shiel 38 Senior Vice President - Investments
Edward A. Thomas 49 Senior Vice President, Specialty Operations
Donald J. Veldkamp 58 Senior Vice President, Technology and Distribution Systems
Robert P. Cole 47 Senior Vice President
Clement P. Patafio 33 Vice President - Corporate Controller
Scott A. Siegel 39 Vice President - Taxes
Robert B. Hodes 72 Director
Henry Kaufman 70 Director
Richard G. Merrill 67 Director
Jack H. Nusbaum 57 Director
Mark L. Shapiro 54 Director
Martin Stone 69 Director
As permitted by Delaware law, the Board of Directors of the Company is
divided into three classes, the classes being divided as equally as possible and
each class having a term of three years. Directors generally serve until their
respective successors are elected at the annual meeting of stockholders which
ends their term. None of the Company's Directors has any family relationship
with any other Director or executive officer. Each year the term of office of
one class expires. In May 1997, the term of a class consisting of two Directors
expired. William R. Berkley and Robert B. Hodes were elected as Directors to
hold office for a term of three years until the Annual Meeting of Stockholders
in 2000 and until their successors are duly chosen.
William R. Berkley has been Chairman of the Board and Chief Executive
Officer of the Company since its formation in 1967. He also served as President
at various times from 1967 to 1995. He also serves as Chairman of the Board or
Director of a number of public and private companies. These include The
Greenwich Bank & Trust Company, a newly formed Connecticut chartered commercial
bank; Pioneer Companies, Inc., a chemical manufacturing and marketing company;
Strategic Distribution, Inc., an industrial products distribution and services
company; and Interlaken Capital, Inc., a private investment firm with interests
in various businesses. His current term as a Director expires in 2000.
24
25
John D. Vollaro has been President and Chief Operating Officer of the
Company since January, 1996 and Director since September, 1995. He was Chief
Executive Officer of Signet Star Holdings, Inc., an affiliate of the Company,
from July, 1993 to December, 1995. He served as Executive Vice President of the
Company from 1991 until 1993 and was Chief Financial Officer and Treasurer of
the Company from 1983 through 1993; and Senior Vice President, Chief Financial
Officer and Treasurer of the Company from 1983 to 1991. Mr. Vollaro's current
term as a Director expires in 1998.
Sam Daniel, Jr. has been Senior Vice President - Regional Operations
since April 1990. Prior thereto, he was employed by Hanover Insurance Company
for more than five years as Vice President.
Anthony J. Del Tufo has been Senior Vice President, Chief Financial
Officer and Treasurer of the Company since September 1993. Before joining the
Company Mr. Del Tufo was a partner with KPMG Peat Marwick from 1975 to 1993.
E. LeRoy Heer has been Senior Vice President - Chief Corporate Actuary
since January 1991. Prior thereto, he had been Vice President - Corporate
Actuary since May 1978.
H. Raymond Lankford, Jr. has been Senior Vice President - Alternative
Markets Operations since April 1996. Prior thereto, he was President of All
American Agency Facilities, Inc., a subsidiary of the Company, from October 1991
having joined All American in 1990. He has been in the insurance business in
various capacities for more than 20 years.
Ira S. Lederman has been Senior Vice President since January 1997.
Additionally he was named General Counsel of Berkley International in January
1998. He is also Assistant General Counsel a position he has held since July
1989 and Assistant Secretary since May 1986. Previously, he was Vice President
from May 1986 until January 1997. Prior thereto he was Insurance Counsel of the
Company since May 1986 and Associate Counsel from April 1983.
James G. Shiel has been Senior Vice President - Investments of the
Company since January 1997. Prior thereto, he was Vice President - Investments
of the Company since January 1992. Since February 1994, he has been President of
Berkley Dean & Company, Inc., a subsidiary of the Company, which he joined in
1987.
Edward A. Thomas has been Senior Vice President - Specialty Operations
of the Company since April 1991. Prior thereto, he was President of Signet
Reinsurance Company, a subsidiary of the Company, for more than five years.
Robert P. Cole was named Senior Vice President in January 1998. Prior
thereto, he was Vice President since October 1996. Before joining the Company
Mr. Cole was a senior Officer of Christania Reinsurance Company of New York
which was purchased by Folksamerica Reinsurance Company in 1996 and prior to
that was associated with reinsurers for twenty years.
Donald J. Veldkamp was named Senior Vice President, Technology and
Distribution Systems in January 1998. He most recently served as Chairman of
Union Insurance Company, a subsidiary of the Company, since July 1997. Prior to
that he was President of Union Insurance Company from May 1990 to July 1997 and
President of Tri-State Insurance Company of Minnesota, also a subsidiary of the
Company, from February 1980 to May 1990.
Clement P. Patafio has been Vice President - Corporate Controller since
January 1997. Prior thereto, he was Assistant Vice President - Corporate
Controller in July 1994 and Assistant Controller since May 1993. Before joining
the Company Mr. Patafio was with KPMG Peat Marwick from 1986 to 1993.
Scott A. Siegel has been Vice President - Taxes since January 1997.
Prior thereto, he was Director of Taxes since September 1991. Before joining the
Company Mr. Siegel was with KPMG Peat Marwick from 1981 to 1991.
25
26
Robert B. Hodes has been a Director of the Company since 1970. Mr.
Hodes is Counsel to the New York law firm of Wilkie Farr & Gallagher. He is also
a director of Crystal Oil Company; Globalstar Telecommunications, Limited.; K&F
Industries Inc.; Loral Space & Communications Ltd.; Mueller Industries, Inc.;
R.V.I. Guaranty, Ltd.; LCH Investments N.V.; and Restructured Capital Holdings,
Ltd. Mr. Hodes' current term as a Director expires in 2000.
Henry Kaufman has been a Director of the Company since 1994. Dr.
Kaufman is President of Henry Kaufman & Co., Inc., an investment, economic and
financial consulting company since its establishment in 1988. Dr. Kaufman serves
as Chairman of the Board of Overseers, Stern School of Business of NYU; Chairman
of the Board of Trustees, Institute of International Education; Member of the
Board of Directors, Federal Home Loan Mortgage Corporation; Member of the Board
of Directors, Lehman Brothers Holdings Inc.; Member of the Board of Trustees,
New York University; Member of the International Capital Markets Advisory
Committee of the Federal Reserve Bank of New York; Member of the Board of
Trustees, Whitney Museum of American Art; Member of the Advisory Committee to
the Investment Committee, International Monetary Fund Staff Retirement Plan and
Member of the Board of Governors, Tel-Aviv University. Dr. Kaufman's current
term as a Director expires in 1998.
Richard G. Merrill has been a Director of the Company since 1994. Mr.
Merrill was Executive Vice President of Prudential Insurance Company of America
from August 1987 to March 1991 when he retired. Prior thereto, Mr. Merrill
served as Chairman and President of Prudential Asset Management Company since
1985. Mr. Merrill is a Director of Sysco Corp. Mr. Merrill's current term as a
Director expires in 1999.
Jack H. Nusbaum has been a Director of the Company since 1967. Mr.
Nusbaum is the Chairman of the New York law firm of Willkie Farr & Gallagher
where he has been a partner for more than the last five years. He is a director
of Fine Host Corporation; Pioneer Companies, Inc.; Prime Hospitality Corp.;
Strategic Distribution Inc.; and The Topps Company, Inc. Mr. Nusbaum's current
term as a Director expires in 1999.
Mark L. Shapiro has been a Director of the Company since 1974. Since
July 1997, Mr. Shapiro has been a Senior Consultant to the Export-Import Bank of
the United States. Previously, he was a Managing Director in the investment
banking firm of Schroder & Co. Inc. for more than the past five years. Mr.
Shapiro's current term as a Director expires in 1999.
Martin Stone has been a Director of Berkley since 1990. Mr. Stone is
Chairman of Professional Sports, Inc. (the Tucson Sidewinders AAA baseball team)
and Chairman of Adirondack Corporation, all for more than the past five years.
Mr. Stone is also a director of Canyon Ranch, Inc. and a member of the Advisory
Board of Yosemite National Park. Mr. Stone's current term as a Director expires
in 1998.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1997, and which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security ownership of certain beneficial owners
Reference is made to the registrant's definitive proxy statement,
which will be filed with the Securities and Exchange Commission within 120 days
after December 31, 1997, and which is incorporated herein by reference.
26
27
(b) Security ownership of management
Reference is made to the registrant's definitive proxy statement,
which will be filed with the Securities and Exchange Commission within 120 days
after December 31, 1997, and which is incorporated herein by reference.
(c) Changes in control
Reference is made to the registrant's definitive proxy statement,
which will be filed with the Securities and Exchange Commission within 120 days
after December 31, 1997, and which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the registrant's definitive proxy statement, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 1997, and which is incorporated herein by reference.
27
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Index to Financial Statements
The Management's Discussion and Analysis and the Company's financial
statements, together with the report thereon of KPMG Peat Marwick LLP, appearing
on pages 18 through 40 of the Company's 1997 Annual Report to Shareholders, are
incorporated by reference in this Annual Report on Form 10-K. With the exception
of the aforementioned information, the 1997 Annual Report to Shareholders is not
deemed to be filed as part of this report. The schedules to the financial
statements listed below should be read in conjunction with the financial
statements in such 1997 Annual Report to Shareholders. Financial statement
schedules not included in this Annual Report on Form 10-K have been omitted
because they are not applicable or required information as shown in the
financial statements or notes thereto.
(a) Index to Financial Statement Schedules Page
Independent Auditors' Report on Schedules and Consent 33
Schedule II - Condensed Financial Information of Registrant 34
Schedule III - Supplementary Insurance Information 38
Schedule IV - Reinsurance 39
Schedule VI - Supplementary Information concerning
Property & Casualty Insurance Operations 40
(b) Reports on Form 8-K
(c) Exhibits
The exhibits filed as part of this report are listed on pages 31 and 32
hereof.
28
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
W. R. BERKLEY CORPORATION
By /s/ William R. Berkley
_____________________________________________
William R. Berkley, Chairman of the Board and
Chief Executive Officer
March 10, 1998
29
30
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ William R. Berkley Chairman of the Board and
____________________________________ Chief Executive Officer March 10, 1998
William R. Berkley
Principal executive officer
/s/ John D. Vollaro President, Chief Operating March 10, 1998
____________________________________ Officer and Director
John D. Vollaro
/s/ Robert B. Hodes Director March 10, 1998
____________________________________
Robert B. Hodes
/s/ Henry Kaufman
____________________________________ Director March 10, 1998
Henry Kaufman
/s/ Richard G. Merrill
____________________________________ Director March 10, 1998
Richard G. Merrill
/s/ Jack H. Nusbaum
____________________________________ Director March 10, 1998
Jack H. Nusbaum
/s/ Mark L. Shapiro
____________________________________ Director March 10, 1998
Mark L. Shapiro
/s/ Martin Stone
____________________________________ Director March 10, 1998
Martin Stone
/s/ Anthony J. Del Tufo
____________________________________ Senior Vice President, March 10, 1998
Anthony J. Del Tufo Chief Financial Officer and
Principal financial officer Treasurer
/s/ Clement P. Patafio
____________________________________ Vice President, March 10, 1998
Clement P. Patafio Corporate Controller
30
31
ITEM 14. (c) EXHIBITS
Number
(2.1) Agreement and Plan of Merger between the Company, Berkley Newco Corp.
and MECC, Inc. (incorporated by reference to Exhibit 2.1 of the
current reports on Form 8-K (file No. 0-7849) filed with the
Commission September 28, 1995).
(2.2) Agreement and Plan of Restructuring, dated July 20, 1995, by and
among the Company, Signet Star Holdings, Inc., Signet Star
Reinsurance Company, Signet Reinsurance Company and General Re
Corporation (incorporated by reference to Exhibit 2.2 of the
Company's current Report on Form 8-K (file No. 0-7849) filed with the
Commission on September 28, 1995).
(3.1) Restated Certificate of Incorporation, as amended
(3.2) By-laws
(4) The instruments defining the rights of holders of the long-term debt
securities of the Company are omitted pursuant to Section
(b)(4)(iii)(A) of Item 601 of Regulation S-K. The Company agrees to
furnish supplementally copies of these instruments to the Commission
upon request.
(10.1) The Company's 1982 Stock Option Plan, (incorporated by reference to
Exhibit 10.1 of the Company's Registration Statement on Form S-1
(File No. 2-98396) filed with the Commission on June 14, 1985).
(10.2) The Company's 1992 Stock Option Plan, (incorporated by reference to
Exhibit 28.1 of the Company's Registration Statement on Form S-8
(File No. 33-55726) filed with the Commission on December 15, 1992).
(10.2a) Signet Star Holdings, Inc. 1993 Stock Option Plan, (incorporated by
reference to Exhibit 10.14 of Signet Star Holdings, Inc. Registration
Statement on Form S-1 (File No. 33-69964) filed with the Commission
on October 4, 1993).
(10.2b) First Amended and Restated W. R. Berkley Corporation 1992 Stock
Option Plan.
(10.3) The Company's lease dated June 3, 1983 with the Ahneman, Devaul and
Devaul Partnership, incorporated by reference to Exhibit 10.3 of the
Company's Registration Statement on Form S-1 (File No. 2-98396) filed
with the Commission on June 14, 1985.
(10.4) W.R. Berkley Corporation Deferred Compensation Plan for officers as
amended January 1, 1991.
(10.5) W. R. Berkley Corporation Deferred Compensation Plan for Directors as
adopted March 7, 1996.
(10.6) Sale Agreement by and between the Company and Lembo-Feinerman Fleming
Morell Trust for the acquisition of real property.
(10.7) W. R. Berkley Corporation Annual Incentive Compensation Plan.
(10.8) W. R. Berkley Corporation Long Term Incentive Plan.
31
32
(13.1) 1997 Annual Report to Shareholders of W. R. Berkley Corporation (only
those portions of such Annual Report that are incorporated by
reference in this Report on Form 10-K are deemed filed herewith).
(21) Following is a list of the Company's significant subsidiaries.
Subsidiaries of subsidiaries are indented and the parent of each such
corporation owns 100% of the outstanding voting securities of such
corporation except as noted below.
Jurisdiction Percentage
of owned by
incorporation Company
------------- -------
All American Agency Facilities, Inc. Delaware 100%
Berkley Regional Insurance Company: Missouri 100%
Acadia Insurance Company: Maine 100%
Chesapeake Bay Property and Casualty
Insurance Company Maine 100%
Berkley Insurance Company of the Carolinas North Carolina 100%
Continental Western Insurance Company: Iowa 100%
Continental Western Casualty Company Iowa 100%
Firemen's Insurance Company of
Washington, D.C.: Maryland 100%
FICO Insurance Company Maryland 100%
Great River Insurance Company Mississippi 100%
Tri-State Insurance Company of Minnesota: Minnesota 100%
American West Insurance Company North Dakota 100%
Union Insurance Company Nebraska 100%
Union Standard Insurance Company Oklahoma 100%
Berkley International, LLC New York 65%
Carolina Casualty Insurance Company Florida 100%
Clermont Specialty Managers, Ltd. New Jersey 100%
J/I Holding Corporation: Delaware 100%
Admiral Insurance Company: Delaware 100%
Berkley Risk Services, LLC. Minnesota 100%
Nautilus Insurance Company: Arizona 100%
Great Divide Insurance Company North Dakota 100%
Key Risk Management Services, Inc. North Carolina 100%
MECC, Inc.: Delaware 100%
Midwest Employers Casualty Company Ohio 100%
Monitor Liability Managers, Inc. Delaware 100%
Monitor Surety Managers, Inc. Delaware 100%
Queen's Island Insurance Company, Ltd. Bermuda 100%
Rasmussen Agency, Inc. New Jersey 100%
Signet Star Holdings, Inc.: Delaware 100%
Signet Star Reinsurance Company Delaware 100%
Facultative ReSources, Inc. Connecticut 100%
(23) See Independent Auditors' report on schedules and consent.
(28) Information from reports furnished to state insurance regulatory
authorities. This exhibit which will be filed supplementally includes
the Company's combined Schedule P as prepared for its 1997 combined
Annual Statement which will be provided to state regulatory
authorities. The schedule has been prepared on a statutory basis. The
combined schedule includes the historical results of the Company's
insurance subsidiaries as if they had been owned from their inception
date. It should be noted that the combined schedule includes data of
seventeen operating companies and, as a result, any statistical
extrapolation from the schedule may not be meaningful.
(The combined Schedule P as filed with the Securities and Exchange
Commission, has been omitted from this copy. It is available upon
request from Mr. Anthony J. Del Tufo, Senior Vice President, Chief
Financial Officer and Treasurer of the Company, at the address shown
on page 1.)
32
33
INDEPENDENT AUDITORS' REPORT ON SCHEDULES AND CONSENT
Board of Directors and Stockholders
W. R. Berkley Corporation
The audit referred to in our report dated February 25, 1998 included the related
financial statement schedules as of December 31, 1997 and 1996 and for each of
the years in the three-year period ended December 31, 1997 included in the Form
10-K. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits. In our opinion, such
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
We consent to the use of our reports incorporated by reference in the
Registration Statements (No. 2-98396) on Form S-1 and (No. 33-55726) on Form S-8
and (No. 33-30684) and (No. 33-95552) and (No. 333-00459) on Forms S-3 and (No.
33-88640) and (No. 333-33935) on Forms S-8 of W. R. Berkley Corporation.
KPMG Peat Marwick LLP
New York, New York
March 23, 1998
33
34
Schedule II
W. R. Berkley Corporation
Condensed Financial Information of Registrant
Balance Sheets (Parent Company)
(Amounts in thousands)
December 31,
-----------------------------
1997 1996
----------- -----------
Assets
Cash (including invested cash) $ 18,018 $ 55,305
Fixed maturity securities:
Held to maturity, at cost
(fair value $5,600 and $10,101) 5,600 10,101
Available for sale at fair value (cost $116,597 and $122,760) 116,839 122,592
Equity securities, at fair value:
Available for sale (cost $698 and $1,433) 690 3,733
Trading account (cost $619 and $33,331) 619 33,331
Investments in subsidiaries 1,389,085 1,212,474
Due from subsidiaries 64,641 56,334
Current Federal income taxes receivable -- --
Real estate, furniture & equipment at cost, less accumulated
depreciation 20,673 22,194
Other assets 4,147 4,316
----------- -----------
$ 1,620,312 $ 1,520,380
=========== ===========
Liabilities, Debt and Stockholders' Equity
Liabilities:
Due to subsidiaries (principally
deferred income taxes) $ 58,830 $ 47,308
Deferred Federal income taxes 32,887 4,013
Other liabilities 18,737 27,115
----------- -----------
110,454 78,436
----------- -----------
Long-term debt 354,622 354,311
Subsidiary trust junior subordinated debt 207,944 207,901
Stockholders' equity:
Preferred stock 65 93
Common stock 7,281 7,281
Additional paid-in capital 428,760 469,065
Retained earnings (including accumulated
undistributed net income of
subsidiaries of $510,814 and $417,604
in 1997 and 1996, respectively) 569,160 490,338
Equity in net unrealized investment gains
net of taxes 58,206 31,075
Treasury stock, at cost (116,180) (118,120)
----------- -----------
947,292 879,732
----------- -----------
$ 1,620,312 $ 1,520,380
=========== ===========
See note to condensed financial statements.
34
35
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,
--------------------------------------
1997 1996 1995
-------- -------- --------
Management fees and investment income
from affiliates, including dividends of
$33,911, $60,264, and $38,091 for 1997,
1996 and 1995, respectively $ 40,058 $ 72,377 $ 50,839
Realized investment gains (losses) 2,739 486 (306)
Other income 10,972 4,058 5,615
-------- -------- --------
Total revenues 53,769 76,921 56,148
Expenses, other than interest expense (23,801) (16,121) (12,256)
Interest expense (47,645) (30,014) (22,907)
-------- -------- --------
Income (loss) before Federal
income taxes (17,677) 30,786 20,985
-------- -------- --------
Federal income taxes:
Federal income taxes provided by
subsidiaries on a separate return
basis 54,884 41,002 22,481
Federal income tax provision on a
consolidated return basis (30,849) (25,102) (15,454)
-------- -------- --------
Net benefit 24,035 15,900 7,027
-------- -------- --------
Income before undistributed equity
in net income of subsidiaries 6,358 46,686 28,012
Equity in undistributed net income
of subsidiaries 93,210 43,577 32,870
-------- -------- --------
Income before preferred dividends 99,568 90,263 60,882
Preferred dividends (8,349) (13,909) (11,062)
-------- -------- --------
Net income attributable to
common stockholders $ 91,219 $ 76,354 $ 49,820
======== ======== ========
See note to condensed financial statements.
35
36
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,
----------------------------------------
1997 1996 1995
-------- --------- ---------
Cash flows from operating activities:
Net income before preferred dividends $ 99,568 $ 90,263 $ 60,882
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Equity in undistributed net
income of subsidiaries (93,210) (43,577) (32,870)
Tax payments received from subsidiaries 45,999 35,613 17,104
Federal income taxes provided by subsidiaries
on a separate return basis (54,884) (40,848) (22,481)
Change in Federal income taxes (1,409) 4,840 3,654
Realized investment losses (2,739) (486) 306
Other, net 4,114 6,050 4,087
-------- --------- ---------
Net cash provided by operating activities
before trading account sales (purchases) (2,561) 51,855 30,682
Trading account sales (purchases), net 32,712 1,722 (26,065)
-------- --------- ---------
Net cash provided by
operating activities 30,151 53,577 4,617
-------- --------- ---------
Cash flow used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 19,954 13,121 23,158
Equity securities 1,432 786 1
Proceeds from maturities and prepayments of
fixed maturity securities -- -- 15,206
Cost of purchases, excluding trading account:
Fixed maturity securities (9,305) (130,003) (3,452)
Equity securities (2,098) -- (1,733)
Cost of companies acquired (7,238) (15,955) (217,096)
Investments in and advances to
subsidiaries, net (14,986) (38,936) (70,972)
Net additions to real estate, furniture &
equipment 444 (21,270) (328)
Other, net 5,539 -- --
-------- --------- ---------
Net cash used in investing activities (6,258) (192,257) (255,216)
-------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- -- 144,739
Net proceeds from issuance of preferred stock -- -- 66,000
Net proceeds from issuance of long-term debt -- 98,850 --
Net proceeds from issuance of a subsidiary
trust junior subordinated debt -- 207,900 --
Purchase of treasury shares -- (24,152) (4,095)
Cash dividends to common stockholders (11,695) (10,143) (7,844)
Cash dividends to preferred shareholders (8,717) (12,824) (11,062)
Purchase of Preferred Stock (41,523) (77,572) --
Payment of subsidiary debt -- -- --
Other, net 755 1,258 1,441
-------- --------- ---------
Net cash provided by financing activities (61,180) 183,316 189,179
-------- --------- ---------
Net increase in cash and invested cash (37,287) 44,636 (61,420)
Cash and invested cash at beginning of year 55,305 10,669 72,089
-------- --------- ---------
Cash and invested cash at end of year $ 18,018 $ 55,305 $ 10,669
======== ========= =========
See note to condensed financial statements
36
37
Schedule II, Continued
W. R. Berkley Corporation
Condensed Financial Information of Registrant, Continued
December 31, 1997, 1996 and 1995
Note to Condensed Financial Statements (Parent Company)
The accompanying condensed financial statements should be read in
conjunction with the notes to consolidated financial statements included
elsewhere herein. Reclassifications have been made in the 1996 and 1995
financial statements as originally reported to conform them to the presentation
of the 1997 financial statements.
The Company files a consolidated federal tax return with the results of
its domestic insurance subsidiaries included on a statutory basis. Under present
Company policy, Federal income taxes payable by (or refundable to) subsidiary
companies on a separate-return basis are paid to (or refunded by) W. R. Berkley
Corporation, and the Company pays the tax due on a consolidated return basis.
Included in fixed maturities available for sale and invested cash is
$113,207,000 and 3,221,000, respectively, of securities placed in a trust which
will be used to service the remaining outstanding shares of the Series A
Preferred Stock. The Company expects that the proceeds of the trust will be
utilized to redeem the Series A Preferred Stock.
37
38
Schedule III
W. R. Berkley Corporation and Subsidiaries
Supplementary Insurance Information
December 31, 1997, 1996 and 1995
(Amounts in thousands)
Reserve for
Deferred policy losses and Net Loss and
acquisition loss Unearned Premiums investment Loss
cost expenses premiums earned income expenses
-------------- ---------- -------- ---------- -------- --------
December 31, 1997
Regional $ 81,933 $ 418,489 $324,336 $ 589,306 $ 54,069 $394,218
Reinsurance 22,620 389,285 77,159 195,825 45,520 135,530
Specialty 28,238 730,443 140,541 202,459 58,064 126,958
Alternative markets 7,122 343,086 29,562 84,169 34,339 53,808
International 5,824 28,385 17,786 39,988 3,623 23,910
Corporate and adjustments -- -- -- -- 3,973 --
-------- ---------- -------- ---------- -------- --------
Total $145,737 $1,909,688 $589,384 $1,111,747 $199,588 $734,424
======== ========== ======== ========== ======== ========
December 31, 1996
Regional $ 68,780 $ 386,123 $282,543 $ 494,819 $ 45,544 $332,535
Reinsurance 16,947 366,947 65,388 206,297 37,542 151,254
Specialty 25,588 711,597 132,749 176,100 47,715 122,568
Alternative markets 5,518 302,606 25,281 79,012 29,118 50,372
International 2,324 15,430 8,252 24,993 1,426 12,431
Corporate and adjustments -- -- -- -- 3,145 --
-------- ---------- -------- ---------- -------- --------
Total $119,157 $1,782,703 $514,213 $ 981,221 $164,490 $669,160
======== ========== ======== ========== ======== ========
December 31, 1995
Regional $ 58,469 $ 343,546 $247,633 $ 434,282 $ 40,827 $285,146
Reinsurance 8,388 319,336 55,539 185,558 33,512 144,948
Specialty 15,265 720,547 109,089 145,008 46,792 116,357
Alternative markets 5,184 262,872 29,551 31,588 6,978 21,096
International 2,211 13,719 8,710 6,900 377 3,451
Corporate and adjustments -- -- -- -- 8,846 --
-------- ---------- -------- ---------- -------- --------
Total $ 89,517 $1,660,020 $450,522 $ 803,336 $137,332 $570,998
======== ========== ======== ========== ======== ========
Amortization of Other
deferred policy operating
acquisition cost and Net premiums
Costs expenses written
--------------- --------- ------------
December 31, 1997
Regional $172,237 $ 35,100 $ 632,459
Reinsurance 58,200 3,836 206,652
Specialty 70,005 7,845 208,570
Alternative markets 25,290 68,723 87,881
International 12,139 12,874 42,079
Corporate and adjustments -- 21,527 --
-------- -------- ----------
Total $337,871 $149,905 $1,177,641
======== ======== ==========
December 31, 1996
Regional $144,342 $ 29,778 $ 531,147
Reinsurance 52,925 4,529 218,200
Specialty 49,064 12,014 202,338
Alternative markets 25,457 67,397 75,644
International 11,854 3,433 25,182
Corporate and adjustments -- 8,201 --
-------- -------- ----------
Total $283,642 $125,352 $1,052,511
======== ======== ==========
December 31, 1995
Regional $131,152 $ 21,601 $ 471,716
Reinsurance 48,280 3,050 196,299
Specialty 39,064 10,200 160,536
Alternative markets 6,382 70,373 25,998
International 3,732 551 5,872
Corporate and adjustments -- 5,604 --
-------- -------- ----------
Total $228,610 $111,379 $ 860,421
======== ======== ==========
38
39
Schedule IV
W. R. Berkley Corporation and Subsidiaries
Reinsurance
Years ended December 31, 1997, 1996 and 1995
(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, 1997:
Regional insurance $ 708,441 $ 85,917 $ 9,935 $ 632,459 1.6%
Reinsurance -- 17,059 223,711 206,652 108.3%
Specialty insurance 323,555 115,667 682 208,570 --
Alternative Markets 53,652 7,266 41,495 87,881 47.2%
International 56,924 14,845 -- 42,079 --
---------- ---------- ---------- ---------- ----------
Total $1,142,572 $ 240,754 $ 275,823 $1,177,641 23.4%
========== ========== ========== ========== ==========
Year ended December 31, 1996:
Regional insurance $ 604,942 $ 78,041 $ 4,246 $ 531,147 0.8%
Reinsurance -- 10,708 228,908 218,200 104.9%
Specialty insurance 302,832 111,826 11,332 202,338 5.7%
Alternative Markets 58,065 5,353 22,932 75,644 30.3%
International 29,263 4,081 -- 25,182 --
---------- ---------- ---------- ---------- ----------
Total $ 995,102 $ 210,009 $ 267,418 $1,052,511 25.4%
========== ========== ========== ========== ==========
Year ended December 31, 1995:
Regional insurance $ 529,004 $ 72,504 $ 15,216 $ 471,716 3.2%
Reinsurance -- 12,464 208,763 196,299 106.4%
Specialty insurance 277,752 123,585 6,369 160,536 4.2%
Alternative Markets 4,980 2,068 23,086 25,998 88.8%
International 7,420 1,548 -- 5,872 --
---------- ---------- ---------- ---------- ----------
Total $ 819,156 $ 212,169 $ 253,434 $ 860,421 29.5%
========== ========== ========== ========== ==========
39
40
Schedule VI
W. R. Berkley Corporation and Subsidiaries
Supplementary Information Concerning Property-Casualty Insurance Operations
December 31, 1997, 1996 and 1995
(Amounts in thousands)
1997 1996 1995
----------- ----------- -----------
Deferred policy acquisition costs $ 145,737 $ 119,157 $ 89,517
Reserves for losses and loss expenses 1,909,688 1,782,703 1,660,020
Unearned premium 589,384 514,213 450,522
Premiums earned 1,111,747 981,221 803,336
Net investment income 199,588 164,490 137,332
Losses and loss expenses incurred:
Current Year 747,977 675,674 580,594
Prior Years (21,313) (15,219) (9,596)
Amortization of discount 7,760 8,705 --
Amortization of deferred policy
acquisition costs 337,871 283,642 228,610
Paid losses and loss expenses 639,519 545,288 449,151
Net premiums written 1,177,641 1,052,511 860,421
40