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Financial Statements
[DOLLAR SYMBOL GRAPHIC]
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
INDUSTRY OVERVIEW
The demand for insurance can be characterized as fairly stable and is influenced
primarily by general economic conditions, while the supply of insurance is
directly related to available capacity, i.e., the level of policyholders'
surplus employed in the industry and the willingness of insurance management to
risk that capital. In general, it is believed that the amount of available
capacity changes as the perceived rate of return on capital employed fluctuates
based on the adequacy of premium rates and available investment returns. The
adequacy of premium rates is affected mainly by the severity and frequency of
claims which are influenced by many factors including natural disasters,
regulatory measures and court decisions that define and expand the extent of
coverage and the effects of economic inflation on the amount of compensation due
for injuries or losses. In addition, investment rates of return may impact
policy rates. These factors can have a significant impact on the ultimate
adequacy of premium rates because a property casualty insurance policy is priced
before its costs are known, as premiums usually are determined long before
claims are reported. Over the past several years a significant increase in
capacity has produced a trend of increasing price competition.
OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE YEAR
ENDED DECEMBER 31, 1996
The Company has adopted SFAS No. 128, which establishes new standards for
computing and reporting earnings per share and all income per share amounts have
been adjusted to reflect the prescribed changes (see notes to consolidated
financial statements). Accordingly, per share results are reported as "basic"
and "diluted."
Net income attributable to common stockholders ("Net Income") for 1997 was $91
million, or $3.09 of basic earnings per share, ($3.02 per share diluted),
compared with 1996 earnings of $76 million, or $2.56 basic, ($2.53 diluted). The
1997 results include after-tax realized investment gains of $9 million, or $ .29
basic, ($ .28 diluted) compared with $5 million, or $ .16 basic, ($ .16 diluted)
for 1996.
Net premiums written in 1997 rose 12% to $1,178 million from $1,053 million
written during 1996 due to growth recorded by the regional, specialty,
alternative markets, and international operations. Premiums written by the
regional operations grew by 19% to $632 million from $531 million written in
1996. The majority of this growth was due to business units which were started
during the past several years. Premiums written by the reinsurance segment
decreased by 5% to $207 million from $218 million in 1996. This decrease was
substantially due to a decrease in treaty business which more than offset
premiums generated by the Latin American and Caribbean division that commenced
operations in February 1996. Premiums written by the specialty operations grew
by 3% to $209 million from $202 million in 1996. This increase was due to an
increase in premiums written by the Excess and Surplus operations which more
than offset a decline in premiums written by our transportation unit. Premiums
written by the alternative markets operations grew by 16% to $88 million from
$76 million in 1996. This increase was due primarily to increased market
penetration by Signet Star's alternative markets division. Premiums written by
the international operations grew by 67% to $42 million from $25 million. This
increase was due to the July 1996 start-up of a workers' compensation company in
Argentina.
In 1998, the Company expects to start a new operation in the specialty segment
as well as a number of units in the Philippines. It is anticipated that the
start-up operations will incur operating losses during the first years of
operation and that international operations will continue to incur operating
losses in 1998. Such losses are not expected to have a material adverse impact
on the Company's results of operations.
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Pre-tax net investment income increased to $200 million from $164 million earned
in 1996. This increase was partially due to an increase in average investable
assets produced by the issuance of $210 million of capital trust securities
issued in December 1996. Excluding the effects of the issuance of these
securities, pre-tax net investment income was $193 million, an increase of $29
million over the comparable 1996 amount. This growth was mainly due to an
increase in average investable assets produced in cash flow from operations. In
addition, an increase in investment income earned in our trading portfolio
contributed to the growth in investment income (see "Liquidity and Capital
Resources").
Management fees and commissions consist primarily of fees earned by the
alternative markets segment. Management fees and commissions increased 3% to $71
million from $69 million in 1996. The increase in management fees and
commissions is due primarily to a 1997 acquisition, as intense competition in
the workers' compensation market continued to inhibit growth.
Realized investment gains increased to $13 million from $7 million in 1996.
Realized gains on fixed income securities resulted primarily from the Company's
strategy of maintaining an appropriate balance between the duration of its fixed
income portfolio and the duration of its liabilities; realized gains on equity
securities arise primarily as a result of a variety of factors which influence
the Company's valuation criteria for such securities. The majority of the 1997
and 1996 realized gains resulted from the sale of equity securities.
The consolidated combined ratio (on a statutory basis) of the Company's
insurance operations decreased to 101.2% in 1997 from 102.2% in 1996 due to an
improvement in the consolidated loss ratio which was partially offset by an
increase in the consolidated expense ratio. The consolidated loss ratio (losses
and loss expenses incurred expressed as a percentage of premiums earned)
decreased to 66.4% from 68.7%. This improvement was primarily due to a decrease
in weather related losses incurred by our regional operations and better than
expected experience on business written in prior years recorded by our specialty
operations.
Other operating costs and expenses, which consist of the expenses of the
Company's insurance and alternative markets operations, as well as the Company's
corporate and investment expenses, increased by 19% to $488 million from $409
million in 1996. The increase in other operating costs is primarily due to the
substantial premium growth discussed above, which in turn results in an increase
in underwriting expenses. The consolidated expense ratio of the Company's
insurance operations (underwriting expenses expressed as a percentage of
premiums written) increased to 34.4% for the 1997 period from 33.1% for the
comparable 1996 period. This increase resulted primarily from higher commission
expenses incurred to generate premium growth.
The increase in interest expense is due to the issuance in December 1996 of $210
million Company-obligated mandatorily redeemable capital securities of a
subsidiary trust holding solely junior subordinate debentures (see "Liquidity
and Capital Resources").
The Federal income tax provision resulted in an effective tax rate of 24% in
1997 (22% in 1996). The tax rate is lower than the statutory tax rate of 35%
because a substantial portion of investment income is tax-exempt. The increase
in the effective rate in 1997 is due primarily to the increase in realized gains
on investments which are taxed at the full corporate rate.
Preferred dividends decreased as a result of the 1997 repurchase of 276,855
shares of the Series A Preferred Stock, (see "Liquidity and Capital Resources").
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
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OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO THE YEAR
ENDED DECEMBER 31, 1995
Net income attributable to common stockholders ("Net Income") for 1996 was $76
million, or $2.56 basic ($2.53 diluted), compared with 1995 earnings of $50
million, or $1.91 basic ($1.90 diluted). The 1996 results include after-tax
realized investment gains of $5 million, or $ .16 basic ($ .16 diluted),
compared with $6 million, or $ .26 basic ($ .26 diluted) for 1995.
Net premiums written in 1996 grew 22% to $1,053 million from $860 million
written during 1995 due to increases recorded by all segments of our operations.
Premiums written by the regional operations grew by 13% to $531 million from
$471 million written during 1995. Regional net premiums written grew by 16%
excluding business assumed from national workers' compensation pools. The
majority of this growth was due to new operations which the Company has
established during the past five years. Premiums written by the reinsurance
operations grew by 11% to $218 million from $196 million written during 1995.
The growth in reinsurance premiums written was substantially due to the start-up
of a Latin American and Caribbean division and an increase in business written
by the Fidelity and Surety division. Premiums written by the specialty
operations grew by 26% to $202 million from $161 million. The growth in
specialty premiums written is due to an increase in business written by Admiral
and Monitor as well as increases in the amount of business retained by Admiral,
Monitor and Nautilus. These increases more than offset a decline in premiums
written by Carolina Casualty. Premiums written by the alternative markets
operations grew by $50 million, to $76 million. This increase is due to the
inclusion of results of Midwest Employers Casualty Company ("MECC"), which was
acquired in November, 1995. Premiums written by the international segment grew
by $19 million to $25 million. The increase in premiums written is due to the
inclusion of our primary insurance operations in Argentina, which were acquired
in 1995, for a full year and the start up of an Argentine operation in 1996.
Pre-tax net investment income increased to $164 million from $137 million earned
in 1995. Approximately three-fourths of this increase was due to the inclusion
of the results of MECC. The remainder of this increase was due to the increase
in average investable assets generated by cash flow from operations which more
than offset the effects of lower yields available in the financial markets (see
"Liquidity and Capital Resources").
Management fees and commissions consist primarily of fees earned by the
alternative markets segment. Management fees and commissions were basically
unchanged for 1996 as market conditions, particularly in workers' compensation
insurance, inhibited growth.
Realized gains from the sale of fixed income securities result primarily from
the Company's strategy of maintaining an approximate balance between the
duration of its fixed income portfolio and the duration of its liabilities;
realized gains on equity securities arise primarily as a result of a variety of
factors which influence the Company's valuation criteria for such securities.
The majority of the 1996 realized gains were from the sale of equity securities.
The consolidated combined ratio (on a statutory basis) of the Company's
insurance operations decreased to 102.2% in 1996 from 102.5% in 1995 due to an
improvement in the consolidated loss ratio which was partially offset by an
increase in the consolidated expense ratio. The consolidated loss ratio (losses
and loss expenses incurred expressed as a percentage of premiums earned)
decreased to 68.7% from 70.7% primarily due to improved losses at certain
specialty companies resulting from a change in the mix of business partially
offset by greater catastrophe losses impacting regional operations.
Other operating costs and expenses, which consists of the expenses of the
Company's insurance and alternative markets segments as well as the Company's
corporate and investment expenses increased by 20% to $409 million from $340
million recorded in 1995. The increase in other operating costs is primarily due
to the substantial premium growth volume in all segments of the Company's
business, which in turn results in an increase in underwriting expenses. The
consolidated expense ratio of the Company's insurance operations
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(underwriting expenses expressed as a percentage of premiums written) increased
to 33.1% for the 1996 period from 31.3% for the comparable 1995 period. This
increase resulted from the higher commission expenses incurred to generate
premium growth.
Interest expense increased due to the January 1996 issuance of $100 million of
long-term debt. In addition, in December 1996, the Company issued $210 million
of Company-obligated mandatorily redeemable capital securities of a subsidiary
trust holding solely junior subordinated debentures (see "Liquidity and Capital
Resources").
The Federal income tax provision resulted in an effective tax rate of 22% in
1996 and 21% in 1995. The tax rate is lower than the statutory tax rate of 35%
because a substantial portion of investment income is tax-exempt. The increase
in the effective tax rate in 1996 is due primarily to a decrease in the
percentage of pre-tax income that is tax-exempt.
In December 1995, the Company purchased all the remaining outstanding common
stock of Signet Star Holdings. As a result of this acquisition, the minority
interest in 1996 was solely related to international operations.
Preferred dividends increased as a result of the December 1995 issuance of
Series B Cumulative Redeemable Preferred Stock (see "Liquidity and Capital
Resources").
LIQUIDITY AND CAPITAL RESOURCES
GENERAL The Company's subsidiaries are highly liquid, receiving substantial cash
from premiums, investment income, management fees and proceeds from sales and
maturities of portfolio investments. The principal outflows of cash are payments
of claims, taxes, interest and operating expenses. The net cash provided from
operating activities (before trading account transactions) was $229 million in
1997, $244 million in 1996 and $207 million in 1995.
As a holding company, the Company derives cash from its subsidiaries in the form
of dividends, tax payments and management fees. The Company is obligated to
service its debt, pay consolidated Federal income taxes and pay its expenses.
Tax payments and management fees from the insurance subsidiaries are made under
agreements which generally are subject to approval by state insurance
departments. Maximum amounts of dividends that can be taken without regulatory
approval are prescribed by statute (see Note 3 of "Notes to Consolidated
Financial Statements").
FINANCING ACTIVITY In October 1995, the Company issued 5,175,000 shares of
common stock, par value $.20 per share and received net proceeds of
approximately $145 million which was used to finance the acquisition of MECC.
On December 31, 1995, in connection with the acquisition of the remaining 40% of
Signet Star, the Company issued to General Reinsurance Corporation ("General
Re"), 458,667 shares of Series B Cumulative Redeemable Preferred Stock having an
aggregate liquidation preference of $68,800,000. In addition, the Company
guaranteed a senior subordinated promissory note of Signet Star in the principal
amount of $35,793,085, which matures July 1, 2003 and bears interest at the rate
of 6.5%. This note was issued to General Re in exchange for the convertible note
previously held by General Re. In November 1993, Signet Star borrowed the
maximum amount available under its revolving credit facility and used the
proceeds to redeem senior notes issued in connection with the July 1, 1993
acquisition. The revolving credit facility was repaid on January 19, 1996 as
discussed below.
On January 19, 1996, the Company issued $100 million of 6.25%, ten-year notes
which are not redeemable until maturity and utilized a portion of the proceeds
to retire $28.4 million of Signet Star's bank debt. In addition, a portion of
the proceeds were used to retire $28 million of Series B Preferred Stock.
On December 19, 1996, the Company issued $210 million of Company-obligated
manditorily redeemable capital securities of a subsidiary trust holding solely
junior subordinated debentures of the Corporation due December 15, 2045
("Capital Trust Securities") and utilized $38.4 million of the proceeds to
retire the remaining outstanding shares of the Series B Preferred Stock. In
addition, during December 1996 and January 1997, the Company utilized $39.2
million of the proceeds to retire 252,273
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
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shares of the Series A Preferred Stock and placed $115.8 million in a trust
which will be used to service the remaining outstanding Series A Preferred
Stock. In the second and third quarters of 1997, 93,775 shares of the Series A
Preferred Stock were purchased by subsidiaries of the Company. The Company
expects that the balance of the proceeds of the trust will be utilized to redeem
the Series A Preferred Stock on January 25, 1999. The balance of the proceeds is
available for acquisitions, working capital and other general corporate
purposes.
In March 1995, the Company purchased 175,500 shares of Common Stock for
approximately $4.1 million. During 1996, the Company purchased 862,500 shares of
Common Stock for approximately $24.2 million. On November 11, 1997, the Board of
Directors authorized the Company to repurchase up to 2,000,000 shares of Common
Stock.
The Company has on file two "shelf" Registration Statements with the Securities
and Exchange Commission with a combined remaining balance of $190 million in
additional equity and/or debt securities. The securities may be offered from
time-to-time as determined by funding requirements and market conditions. In
addition, the Company has a $50 million line-of-credit available.
INVESTMENTS In its investment strategy, the Company establishes a level of cash
and highly liquid short-term and intermediate-term securities which, combined
with expected cash flow, is believed adequate to meet foreseeable payment
obligations. As part of this strategy, the Company attempts to maintain an
appropriate relationship between the average duration of the investment
portfolio and the approximate duration of its liabilities, i.e., policy claims
and debt obligations.
The Company's investment policy with respect to fixed maturity securities is
generally to purchase instruments with the expectation of holding them to their
maturity. However, active management of the portfolio is considered necessary to
maintain an approximate matching of assets and liabilities as well as to adjust
the portfolio as changes in financial market conditions alter the assumptions
underlying the purchase of certain securities.
The investment portfolio, valued on a cost basis, grew in 1997 by $282 million
to approximately $3,218 million primarily due to the combined effects of net
cash flow from operations and the financing activities discussed above.
During 1997, the Company invested approximately $243 million of its available
cash inflow in invested cash and fixed income securities. At December 31, 1997,
the portion of the portfolio invested in tax-exempt securities was 32% (30% in
1996); U.S. Government securities and cash equivalents remained at 26%;
mortgage-backed securities were 16% (18% in 1996); corporate fixed maturity
securities remained at 14%; trading account securities remained at 9%; and other
equity securities represented the balance.
FEDERAL INCOME TAXES The Company files a consolidated Federal income tax return.
At December 1997, the Company had a deferred tax liability of $79 million, which
primarily relates to unrealized investment gains and intangible assets, and a
deferred tax asset of $47 million, which primarily relates to the discounting of
loss reserves for Federal income tax purposes.
The realization of the deferred tax asset is dependent upon the Company's
ability to generate sufficient taxable income in future periods. Based on
historical results and the prospects for current operations, management
anticipates that it is more likely than not that future taxable income will be
sufficient for the realization of this asset.
REINSURANCE
The Company follows the customary industry practice of reinsuring a portion of
its exposures, paying to reinsurers a part of the premiums received on the
policies it writes. Reinsurance is purchased principally to reduce net liability
on individual risks and to protect against catastrophic losses. Although
reinsurance does not legally discharge an insurer from its primary liability for
the full amount of the policies, it does make the assuming reinsurer liable to
the insurer to the extent of the reinsurance coverage. The Company monitors the
financial condition of its reinsurers and attempts to place its coverages only
with substantial, financially sound carriers.
REGIONAL OPERATIONS In 1997, all regional subsidiaries generally retained
$300,000 on individual property casualty risks. Acadia Insurance Company
retained up to $1.3 million per bond for surety business. Other regional
companies writing surety business retained up
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to $450,000 ($325,000 prior to October 1, 1997). The regional group also
maintained catastrophe reinsurance protection for approximately 95% of
weather-related losses above $6 million per occurrence up to a maximum of $34
million. In addition, certain of the regional operating units carried additional
aggregate catastrophe protection of $13.5 million in excess of $4 million for
storms exceeding $500,000; $5 million in excess of $6.5 million for storms
exceeding $1.0 million; and $4.5 million in excess of $7 million for storms
exceeding $1.5 million.
REINSURANCE OPERATIONS Signet Star's catastrophe retrocession program provides
coverage for property losses in four layers as follows: (i) 100% of $7.5 million
in excess of $6.0 million per occurrence; (ii) 95% of $7.5 million in excess of
$13.5 million per occurrence; and (iii) 95% of $9.0 million in excess of $21.0
million per occurrence, and 100% of $15 million in excess of $30 million, (for
California only and only under certain conditions). In 1997, Signet Star has a
variable quota share program on its casualty facultative business with
retentions varying from $425,000 up to $2.5 million depending on the certificate
limit. Property facultative business is covered on a per risk basis for $4.7
million in excess of $300,000. These coverages apply to Signet Star's individual
certificate and master certificate business. During 1997, Signet Star had
retrocession coverage for its fidelity and surety business for 100% of each loss
up to $2.5 million in excess of $750,000 per occurrence and 79.5% of each loss
up to $2.5 million in excess of $3.25 million per occurrence for its fidelity
and surety business. During 1997, the Latin American and Carribean division
retained $250,000 for property business and $500,000 for Marine, Energy and
Aviation business.
SPECIALTY OPERATIONS Admiral's retention in 1997 was $175,000 per risk for most
classes of business and $5.0 million, per insured, for business written by
Monitor Liability Managers. In addition, in 1997 Admiral's Directors' and
Officers' coverage also included additional protection on an aggregate basis.
Nautilus generally retained $140,000 per risk in 1997 and Carolina maintained
its retention at $300,000 on property and liability exposures. In 1997, Carolina
Casualty (on business underwritten by Monitor Surety Managers), retained up to
$1.5 million on a per principal per bond basis. Great Divide retained $120,000
per risk in 1997 ($187,500 in 1998). The Specialty Group (except Carolina) is
also covered under the regional group's property catastrophe protection for 95%
of $34 million in excess of $6 million.
ALTERNATIVE MARKETS OPERATIONS Midwest's retention is generally $1 million per
occurrence above the self insured's underlying retention.
INTERNATIONAL OPERATIONS The international operations generally retained between
$50,000 and $250,000 per occurrence or individual risk.
YEAR 2000
The Company continues to address system programming issues with regards to
system requirements for the year 2000. Costs associated with the year 2000
projects, which to date have not been significant, are expensed as incurred. The
Company has examined the year 2000 issues and does not expect it to have a
material impact on the Company's operations. With respect to year 2000 claims
exposure for our insurance and reinsurance subsidiaries, to date, no significant
losses have arisen. However, due to the potential for judicial decisions which
re-formulate policies to expand their coverage to previously unforeseen theories
of liabilities which may produce unanticipated claims, at this point in time,
the estimation of any potential year 2000 liabilities is not determinable.
CAPITALIZATION
For the year ended December 31, 1997, Stockholders' equity increased by
approximately $68 million. The increase in stockholders' equity is attributable
to an increase in retained earnings and an increase in unrealized gains in
marketable securities which was partially offset by the repurchase of the Series
A Preferred stock discussed above. Accordingly, the Company's total
capitalization increased to $1,546 million at December 31, 1997 and the
percentage of the Company's capital attributable to long-term debt decreased to
25% at December 31, 1997 from 26% at December 31, 1996.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Years ended December 31, 1997 1996 1995
----------- ----------- -----------
Revenues:
Net premiums written $ 1,177,641 $ 1,052,511 $ 860,421
Change in net unearned premiums (65,894) (71,290) (57,085)
----------- ----------- -----------
Premiums earned 1,111,747 981,221 803,336
Net investment income 199,588 164,490 137,332
Management fees and commissions 71,456 69,246 68,457
Realized investment gains 13,186 7,437 10,357
Other income 4,333 2,772 2,461
----------- ----------- -----------
Total revenues 1,400,310 1,225,166 1,021,943
Operating costs and expenses:
Losses and loss expenses (734,424) (669,160) (570,998)
Other operating costs and expenses (487,776) (408,994) (339,989)
Interest expense (48,869) (31,963) (28,209)
----------- ----------- -----------
Income before income taxes and minority interest 129,241 115,049 82,747
Federal income tax expense (30,668) (25,102) (17,554)
----------- ----------- -----------
Income before minority interest 98,573 89,947 65,193
Minority interest 474 316 (4,311)
----------- ----------- -----------
Net income before preferred dividends 99,047 90,263 60,882
Preferred dividends (7,828) (13,909) (11,062)
----------- ----------- -----------
Net income attributable to common stockholders $ 91,219 $ 76,354 $ 49,820
=========== =========== ===========
Earnings per share:
Basic $ 3.09 $ 2.56 $ 1.91
Diluted $ 3.02 $ 2.53 $ 1.90
----------- ----------- -----------
See accompanying notes to consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
December 31, 1997 1996
----------- -----------
ASSETS
Investments:
Invested cash $ 417,967 $ 327,193
Fixed maturity securities:
Held to maturity, at cost (fair value $194,919 and $208,232) 182,172 204,234
Available for sale, at fair value (cost $2,240,901 and $2,066,327) 2,322,971 2,098,670
Equity securities, at fair value:
Available for sale (cost $76,134 and $78,435) 86,243 93,900
Trading account (cost $301,136 and $260,167) 311,969 267,609
Cash 21,669 19,292
Premiums and fees receivable 331,774 256,441
Due from reinsurers 432,516 427,419
Accrued investment income 36,930 34,577
Prepaid reinsurance premiums 72,148 70,057
Deferred policy acquisition costs 145,737 119,157
Real estate, furniture and equipment at cost, less accumulated depreciation 126,831 116,303
Excess of cost over net assets acquired 73,142 73,404
Other assets 37,215 28,717
----------- -----------
$ 4,599,284 $ 4,136,973
=========== ===========
LIABILITIES, RESERVES, DEBT AND STOCKHOLDERS' EQUITY
Liabilities and reserves:
Reserves for losses and loss expenses $ 1,909,688 $ 1,782,703
Unearned premiums 589,384 514,213
Due to reinsurers 95,140 71,352
Deferred Federal income taxes 32,887 4,013
Other liabilities 402,177 274,625
----------- -----------
3,029,276 2,646,906
----------- -----------
Long-term debt 390,415 390,104
Company-obligated mandatorily redeemable capital securities
of a subsidiary trust holding solely 8.197% Junior Subordinated
debentures of the corporation due December 15, 2045 207,944 207,901
Minority interest 24,357 12,330
Stockholders' equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares:
7 3/8% Series A Cumulative Redeemable Preferred Stock
653,952 and 930,807 shares issued and outstanding 65 93
Common stock, par value $.20 per share:
Authorized 40,000,000 shares, issued and outstanding,
net of treasury shares, 29,568,335 and 29,453,964 shares 7,281 7,281
Additional paid-in capital 428,760 469,065
Retained earnings 569,160 490,338
Net unrealized investment gains, net of taxes 58,206 31,075
Treasury stock, at cost, 6,835,510 and 6,950,103 shares (116,180) (118,120)
----------- -----------
947,292 879,732
----------- -----------
$ 4,599,284 $ 4,136,973
=========== ===========
See accompanying notes to consolidated financial statements.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Years ended December 31, 1997, 1996 and 1995
Preferred
and common Net
stock and unrealized
Total additional investment
stockholders' paid-in Retained gains Treasury
equity capital earnings (losses) stock
--------- --------- --------- --------- ---------
Balance, December 31, 1994 $ 597,601 $ 340,924 $ 382,859 $ (33,973) $ (92,209)
Net income attributable to common stockholders 49,820 -- 49,820 -- --
Issuance of common shares 146,484 145,144 -- -- 1,340
Issuance of preferred stock 66,000 66,000 -- -- --
Net change in unrealized investment gains 82,423 -- -- 82,423 --
Purchase of treasury stock (4,095) -- -- -- (4,095)
Dividends to common stockholders ($.32 per share) (8,418) -- (8,418) -- --
--------- --------- --------- --------- ---------
Balance, December 31, 1995 929,815 552,068 424,261 48,450 (94,964)
Net income attributable to common stockholders 76,354 -- 76,354 -- --
Issuance of common shares 1,746 750 -- -- 996
Net change in unrealized investment gains (17,375) -- -- (17,375) --
Purchase of treasury stock (24,152) -- -- -- (24,152)
Repurchase of preferred stock (77,572) (77,572) -- -- --
Accretion of Series B Preferred Stock 1,193 1,193 -- -- --
Dividends to common stockholders ($.35 per share) (10,277) -- (10,277) -- --
--------- --------- --------- --------- ---------
Balance, December 31, 1996 879,732 476,439 490,338 31,075 (118,120)
Net income attributable to common stockholders 91,219 -- 91,219 -- --
Issuance of common shares 3,130 1,190 -- -- 1,940
Net change in unrealized investment gains 27,131 -- -- 27,131 --
Repurchase of preferred stock (41,523) (41,523) -- -- --
Dividends to common stockholders ($.42 per share) (12,397) -- (12,397) -- --
--------- --------- --------- --------- ---------
Balance, December 31, 1997 $ 947,292 $ 436,106 $ 569,160 $ 58,206 $(116,180)
========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended December 31, 1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net income before preferred dividends $ 99,047 $ 90,263 $ 60,882
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Increase in reserves for losses and loss expenses,
net of due to/from reinsurers 137,312 126,006 106,333
Depreciation and amortization 11,852 8,590 14,286
Change in unearned premiums and prepaid reinsurance premiums 67,023 71,290 57,085
Change in premiums and fees receivable (64,858) (25,348) (20,551)
Change in Federal income taxes (1,408) 5,719 491
Change in deferred policy acquisition costs (24,465) (29,640) (15,607)
Realized investment gains (13,186) (7,437) (10,357)
Other, net 18,127 4,374 14,033
--------- --------- ---------
Net cash provided by operating activities before
trading account sales (purchases) 229,444 243,817 206,595
Trading account sales (purchases), net 69,544 (79,906) (47,314)
--------- --------- ---------
Net cash provided by operating activities 298,988 163,911 159,281
--------- --------- ---------
Cash flows used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities available for sale 718,789 534,529 452,460
Equity securities 43,204 46,698 63,863
Proceeds from maturities and prepayments of fixed maturity securities 120,944 219,673 159,731
Cost of purchases, excluding trading account:
Fixed maturity securities available for sale (984,961) (786,631) (690,650)
Fixed maturity securities held to maturity -- (105,675) (30,568)
Equity securities (28,028) (26,988) (64,187)
Cost of acquired companies, net of acquired cash and invested cash 585 (11,739) (197,404)
Net additions to real estate, furniture and equipment (17,898) (46,983) (14,472)
Other, net (9,904) (5,083) (8,098)
--------- --------- ---------
Net cash used in investing activities (157,269) (182,199) (329,325)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- -- 144,739
Net proceeds from issuance of preferred stock -- -- 66,000
Net proceeds from issuance of long-term debt -- 98,850 --
Net proceeds from issuance of Company-obligated mandatorily
redeemable capital securities of a subsidiary trust holding
solely 8.197% junior subordinated debentures -- 207,900 --
Cash dividends to common stockholders (11,695) (10,143) (7,844)
Cash dividends to preferred stockholders (8,717) (12,824) (11,062)
Repurchase of common treasury shares -- (24,152) (4,095)
Repurchase of preferred stock (41,523) (77,572) --
Payment of subsidiary debt -- (28,306) (31,847)
Other, net 13,367 4,103 1,441
--------- --------- ---------
Net cash provided by (used in) financing activities (48,568) 157,856 157,332
--------- --------- ---------
Net increase (decrease) in cash and invested cash 93,151 139,568 (12,712)
Cash and invested cash at beginning of year 346,485 206,917 219,629
--------- --------- ---------
Cash and invested cash at end of year $ 439,636 $ 346,485 $ 206,917
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid on debt $ 45,950 $ 28,296 $ 32,839
========= ========= =========
Federal income taxes paid $ 32,258 $ 19,171 $ 17,064
========= ========= =========
See accompanying notes to consolidated financial statements.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
27
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1997, 1996, and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Principles of consolidation and basis of presentation
The consolidated financial statements, which include the accounts of W. R.
Berkley Corporation and its subsidiaries ("the Company"), have been prepared on
the basis of generally accepted accounting principles ("GAAP"). The preparation
of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the revenues and expenses reflected during the
reporting period. Actual results could differ from those estimates. All
significant intercompany transactions and balances have been eliminated.
Reclassifications have been made in the 1996 and 1995 financial statements to
conform them to the presentation of the 1997 financial statements.
(B) Revenue recognition
Insurance premiums written are recognized as earned generally on a pro-rata
basis over the contract period. Management fees on insurance services contracts
are recorded as earned primarily on a pro-rata basis over the policy period.
Commission income is recognized as earned on the effective date of the
applicable insurance policies.
(C) Investments
The Company has classified its investments into three categories. Securities
that the Company has the positive intent and ability to hold to maturity are
classified as "held to maturity" and reported at amortized cost. Securities
which the Company purchased with the intent to sell in the near term are
classified as "trading" and are reported at estimated fair value, with
unrealized gains and losses reflected in the statement of operations. The
remaining securities are classified as "available for sale" and carried at
estimated fair value, with unrealized gains and losses, net of applicable income
taxes, excluded from earnings and reported as a separate component of
stockholders' equity.
Short sales and short call options used in trading account activities, as
part of a hedging strategy, are included in other liabilities. Short sales and
short call options are reported at fair value, with unrealized gains and losses
reflected in net investment income.
Realized gains or losses represent the difference between the cost of
securities sold and the proceeds realized upon sale. The cost of securities is
adjusted where appropriate to include a provision for significant decline in
value which are considered to be other than temporary. The Company uses the
specific identification method where possible and the first-in, first-out method
in other instances, to determine the cost of securities sold. Realized gains or
losses, including any provision for decline in value, are included in the
statement of operations.
(D) Per Share Data
All share data have been retroactively adjusted to reflect a three-for-two stock
split which was affected in 1997. The Company implemented Statement of Financial
Accounting Standards Number 128 in 1997. All prior period amounts have been
restated. Basic per share data is based upon the weighted average number of
shares outstanding during the year. Diluted per share data reflects the
potential dilution that would occur if employee stock based compensation plans
were exercised. Shares issued in connection with loans from shareholders are not
considered to be outstanding for the purposes of calculating per share amounts
and, accordingly, have been excluded from stockholders' equity.
(E) Deferred policy acquisition costs
Acquisition costs (primarily commissions and premium taxes) incurred in writing
insurance and reinsurance business are deferred and amortized ratably over the
terms of the related contracts. Deferred policy acquisition costs are limited to
the amounts estimated to be recoverable from the applicable unearned premiums
and the related anticipated investment income by giving effect to anticipated
losses, loss adjustment expenses and expenses necessary to maintain the
contracts in force.
(F) Reserves for losses and loss expenses
Reserves for losses and loss expenses are an accumulation of amounts determined
on the basis of (1) evaluation of claims for business written directly by the
Company; (2) estimates received from other companies for reinsurance assumed;
and (3) estimates for losses incurred but not reported (based on Company and
industry experience). These estimates are periodically reviewed and, as
experience develops and new information becomes known, the reserves are adjusted
as necessary. Such adjustments are reflected in results of operations in the
period in which they are determined.
One subsidiary of the Company, Midwest Employers Casualty Company
("Midwest"), discounts its liabilities for excess workers' compensation ("EWC")
losses and loss expenses using a "risk-free" rate. Midwest discounts its EWC
liabilities because of the long period of time over which it pays losses. The
Company believes that utilizing a "risk-free" rate to discount these reserves
more closely reflects the economics associated with the excess workers'
compensation line of business (see Note 10 of notes to consolidated financial
statements).
28
13
(G) Reinsurance ceded
Ceded unearned premiums are reported as prepaid reinsurance premiums and
estimated amounts of reinsurance recoverable on unpaid losses are included in
due from reinsurers. To the extent any reinsurer does not meet its obligations
under reinsurance agreements, the liability must be discharged by the Company.
Amounts due from reinsurers are reflected net of funds held where the right of
offset is present. The Company has provided reserves for uncollectible
reinsurance.
(H) Excess of cost over net assets acquired
Costs in excess of the net assets of subsidiaries acquired are being amortized
on a straight-line basis over 25 to 40 years. The Company continually evaluates
the amortization period of its intangible assets. Estimates of useful lives are
revised when circumstances or events indicate that the original estimate is no
longer appropriate. Amortization (including adjustments) of the excess of cost
over net assets acquired was $2,950,000, $3,334,000 and $2,465,000 for 1997,
1996 and 1995, respectively.
(I) Federal income taxes
The Company files a consolidated Federal income tax return. In 1995 and prior
years, Signet Star Holdings, Inc. filed its own consolidated Federal income tax
return.
The Company's method of accounting for income taxes is the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are measured using tax rates currently in effect or expected to
apply in the years in which those temporary differences are expected to reverse.
(J) Stock Options
The Company accounts for its stock options in accordance with Financial
Accounting Standards Board ("FASB") Statement No. 123 "Accounting for
Stock-Based Compensation" (FAS 123) which provides that stock based compensation
may be disclosed in the footnotes to financial statements.
(K) Foreign currency
Revenues and expenses in foreign currencies are translated at the weighted
average exchange rate during the year. Assets and liabilities are translated at
the rate of exchange in effect at the close of the period. Gains or losses
(losses of $1,711,000 in 1997) resulting from translating foreign currency
financial statements are reported as a component of stockholders' equity. Gains
or losses (gains of $1,408,000 in 1997) resulting from foreign currency
transactions (transactions denominated in a currency other than the entity's
functional currency) are included in other income in the statement of
operations.
(L) Real estate, furniture and equipment
Real estate, furniture and equipment are carried at cost less accumulated
depreciation. Depreciation is calculated using the estimated useful lives of the
respective assets. Included in the statement of operations is depreciation
expense of $12,799,000, $12,234,000 and $10,133,000 for 1997, 1996 and 1995,
respectively.
(M) Segment Disclosure
In June 1997, the FASB issued SFAS 131 "Disclosures About Segments of an
Enterprise and Related Information." SFAS 131 redefines how operating segments
are determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The Company adopted provisions
of this statement in 1997 and all prior periods have been restated. This
statement relates to presentation of information and had no impact on the
Company's results of operations or financial condition.
(N) Recent accounting pronouncements
The American Institute of Certified Public Accountants issued Statement of
Position 97-3 "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments," which will be effective for fiscal periods
beginning in 1999. SOP 97-3 provides guidance on accounting and disclosure of
insurance related assessments. The Company does not expect this statement to
have a material impact on the Company's financial position or results of
operation.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income,"
which requires enterprises to disclose comprehensive income and its components
in a prominent position on the face of the financial statements. The Company
will implement this statement in 1998. This statement relates to presentation of
information and will have no impact on the Company's results of operations or
financial condition.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES 29
14
(2) REINSURANCE CEDED
The Company follows the customary industry practice of reinsuring a portion of
its exposures principally to reduce net liability on individual risks and to
protect against catastrophic losses. Due from reinsurer has been reduced by an
offsetting funds held balance. The following amounts arising under reinsurance
ceded contracts have been deducted in arriving at the amounts reflected in the
statement of operations:
(Dollars in thousands) 1997 1996 1995
-------- -------- --------
Premiums written $240,754 $210,009 $212,169
-------- -------- --------
Premiums earned $239,233 $216,127 $207,375
-------- -------- --------
Losses and loss expenses $129,405 $120,784 $134,120
-------- -------- --------
(3) DIVIDENDS FROM SUBSIDIARIES AND STATUTORY FINANCIAL INFORMATION
The Company's insurance subsidiaries are restricted by law as to the amount of
dividends they may pay without the approval of regulatory authorities. During
1998, the maximum amount of dividends which can be paid without such approval is
approximately $98,713,000.
Combined net income and policyholders' surplus of the Company's consolidated
insurance subsidiaries, as determined in accordance with statutory accounting
practices, are as follows:
(Dollars in thousands) 1997 1996 1995
-------- -------- --------
Net income $ 121,300 $ 84,249 $ 75,587
-------- -------- --------
Policyholders' surplus $ 971,749 $881,380 $839,890
-------- -------- --------
The significant variances between statutory accounting practices and GAAP
are: For statutory purposes, bonds are carried at amortized cost, acquisition
costs are charged to operations as incurred, deferred federal income taxes are
not provided for temporary differences between book and tax assets and
liabilities, EWC reserves are discounted at a 3.0% rate, loss reserves and
unearned premiums are reflected net of applicable reinsurance and certain assets
designated as "non admitted assets" are charged directly to surplus.
At December 31, 1997 and 1996, bonds with a fair value of $160,369,000 and
$139,497,000 were on deposit with various state Insurance Departments as
required by state laws.
The National Association of Insurance Commissioners ("NAIC") has risk-based
capital ("RBC") requirements that require insurance companies to calculate and
report information under a risk-based formula which measures statutory capital
and surplus needs based on a regulatory definition of risk in a company's mix of
products and its balance sheet. RBC did not affect the operations of the
Company's insurance subsidiaries since all of its subsidiaries have an RBC
amount above the authorized control level RBC, as defined by the NAIC.
(4) ACQUISITIONS
During 1997 and 1996, several acquisitions were completed for an aggregate
consideration of approximately $7,238,000 and $15,955,000, respectively. The
acquisitions were accounted for as purchases and, accordingly, the results of
operations of the acquired companies have been included from the respective
dates of acquisition. Proforma results of operations have been omitted as such
effects are not significant.
Net assets of the acquired companies for 1997 and 1996 were as follows:
Investments in fixed maturity and equity securities of $2,192,000 and
$6,434,000; cash and invested cash of $7,823,000 and $4,216,000; excess of cost
over net assets acquired of $2,688,000 and $7,138,000; and other liabilities,
net of other assets of $5,465,000 and $1,833,000.
During 1995, the Company purchased majority interests in two property and
casualty companies in Argentina for consideration of approximately $9.2 million,
which constituted a portion of the Company's initial contribution to Berkley
International, LLC.
The proforma effect of these transactions on the Company's results of
operations is not significant.
On November 8, 1995, the Company acquired 100% of the stock of MECC, Inc.,
the Parent of Midwest Employers Casualty Company, for $141,908,000. In
connection with this acquisition, the Company also retired approximately
$19,590,000 of MECC, Inc.'s debt. The purchase was funded by the issuance of
5,175,000 shares of Common Stock issued at $29.17 per share. On December 31,
1995, the Company acquired General Re Corporation's ("General Re") 40% interest
in Signet Star Holdings, Inc. ("Signet Star") by issuing to General Re 458,667
shares of Series B Cumulative Redeemable Preferred Stock of the Company having
an aggregate liquidation preference of $68,800,000. During 1996 the Company
purchased all outstanding shares of the Series B Preferred Stock for $66
million. The only significant effect on the Company's financial statements from
this acquisition was an increase in preferred stock outstanding and the
elimination of the related minority interest because Signet Star's results of
operations were previously consolidated.
30
15
All of the acquisitions were accounted for as purchases and, accordingly, the
results of operations of the acquired companies have been included from the
dates of acquisition.
The Company's consolidated Proforma results of operations assuming the
acquisitions of MECC, Inc. and the remaining 40% interest in Signet Star
occurred as of January 1, 1995 are as follows:
(Dollars in thousands, except per share data) 1995
----------
Total revenues $1,100,195
----------
Net income attributable to
common shareholders $ 70,102
----------
Earnings per common share:
Basic $ 2.32
Diluted $ 2.31
----------
The Proforma consolidated financial data do not purport to represent what the
Company's results of operations actually would have been had the acquisitions
and related financings occurred on the dates indicated, or to project the
Company's results of operations for any future period. The above amounts
primarily reflect the effects on results of operations of certain adjustments
resulting from the revaluation of assets and liabilities of the purchased
companies and from the financing of such acquisitions.
(5) FEDERAL INCOME TAXES
Federal income tax expense consists of:
(Dollars in thousands) 1997 1996 1995
------- ------- -------
Current expense $21,999 $26,096 $17,879
Deferred expense (benefit) 8,669 (994) (325)
------- ------- -------
Total expense $30,668 $25,102 $17,554
======= ======= =======
A reconciliation of Federal income tax expense and the amounts computed by
applying the Federal income tax rate of 35% to pre-tax income is as follows:
(Dollars in thousands) 1997 1996 1995
------- ------- -------
Computed "expected" tax
expense $45,234 $40,267 $28,961
Tax-exempt investment
income (15,432) (15,471) (12,938)
Other, net 866 306 1,531
------- ------- -------
Total expense $30,668 $25,102 $17,554
======= ======= =======
At December 31, 1997 and 1996, the tax effects of differences that give rise
to significant portions of the deferred tax asset and deferred tax liability are
as follows:
(Dollars in thousands) 1997 1996
------- ------
DEFERRED TAX ASSET
Loss reserve discounting $49,638 $50,481
Other 3,912 5,122
------- ------
Gross deferred tax asset 53,550 55,603
Less: valuation allowance (7,000) (7,000)
------- ------
Deferred tax asset 46,550 48,603
======= ======
DEFERRED TAX LIABILITY
Amortization of intangibles 12,025 12,407
Expense recognition differences 17,044 13,434
Realized investment gains 6,163 5,676
Deferred taxes on unrealized
investment gains 32,261 16,733
Depreciation 5,437 2,115
Unrealized gains on trading
account activity 3,792 705
Other 2,715 1,546
------- ------
Deferred tax liability 79,437 52,616
------- ------
Net deferred tax
liability $32,887 $4,013
======= ======
Federal income tax expense applicable to realized investment gains was
$4,615,000, $2,603,000 and $3,664,000 in 1997, 1996 and 1995, respectively. The
Company had a current tax receivable of $5,869,000 at December 31, 1997 and a
current income tax payable of $6,224,000 at December 31, 1996. The Company's tax
returns through December 31, 1991 have been examined by the Internal Revenue
Service and additional income taxes have been paid.
The realization of the deferred tax asset is dependent upon the Company's
ability to generate sufficient taxable income in future periods. Based on
historical results and the prospects for current operations, management
anticipates that it is more likely than not that future taxable income will be
sufficient for the realization of this net asset.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES 31
16
(6) LONG-TERM DEBT
Long-term debt consists of the following:
Description Rate Maturity Face Value Carrying Value
- ----------- ---- -------- ---------- --------------
Senior Notes 8.95% May 20, 1998 $ 10,000,000 $ 9,996,000
Senior Notes 6.31% March 6, 2000 25,000,000 24,946,000
Senior Notes 6.71% March 4, 2003 25,000,000 24,906,000
Senior Subordinated Notes 6.50% July 1, 2003 35,793,000 35,793,000
Senior Notes 6.25% January 15, 2006 100,000,000 99,015,000
Senior Notes 9.875% May 15, 2008 100,000,000 96,894,000
Senior Debentures 8.70% January 1, 2022 100,000,000 98,865,000
------------ ------------
$395,793,000 $390,415,000
============ ============
The difference between the face value of long-term debt and the carrying
value is unamortized discount. All outstanding long-term debt is not redeemable
until maturity and ranks on parity with all other outstanding indebtedness of
the Company.
The Company has on file two "shelf" registration statements with the
Securities and Exchange Commission with a combined remaining balance of $190
million in additional equity and/or debt securities. The securities may be
offered from time-to-time as determined by funding requirements at market
conditions. In addition, the Company has a $50 million line-of-credit available.
(7) STOCK OPTION PLAN
The Company adopted the W. R. Berkley Corporation 1992 Stock Option Plan ("the
Stock Option Plan") under which 2,625,000 shares of Common Stock were reserved
for issuance. In May 1997, the Corporation restated the Stock Option Plan to
increase the number of shares of Common Stock authorized for issuance under the
Stock Option Plan from 2,625,000 to 7,125,000. Pursuant to the Plan, options may
be granted at prices determined by the Board of Directors but not less than fair
market value on the date of grant. To date, options have been granted with an
exercise price equal to the average of the high and low market price on the date
of grant.
The following table summarizes option information, including options granted
under both the 1992 and prior plans:
1997 1996 1995
----------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ------ --------- ------ --------- ------
Outstanding at beginning of year 2,491,222 $26.03 1,521,339 $23.62 1,529,732 $22.82
Granted 1,154,354 34.68 1,100,813 29.02 151,501 28.34
Exercised 280,498 20.87 64,216 19.71 86,178 16.56
Canceled 146,316 27.42 66,714 26.65 73,716 24.85
--------- ------ --------- ------ --------- ------
Outstanding at end of year 3,218,762 $29.52 2,491,222 $26.03 1,521,339 $23.61
--------- ------ --------- ------ --------- ------
Options exercisable at year end 558,210 $22.66 527,832 $20.31 395,827 $18.81
--------- ------ --------- ------ --------- ------
Options available for future grant 3,892,439 401,208 935,672
--------- ------ --------- ------ --------- ------
In accordance with FAS 123 the fair value of the options granted is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions for 1997 and 1996, respectively: (a)
dividend yield of 1%, (b) expected volatility of 20%,(c) risk free interest rate
of 6.70% and 6.65%, and (d) expected life of 7.5 years. The weighted average
fair value of options granted during the year were $12.97 and $10.77 for the
year ended December 31, 1997 and 1996, respectively.
The following table summarizes information about stock options outstanding at
December 31, 1997 and 1996:
32
17
Options Outstanding Options Exercisable
Weighted Weighted
Range of Remaining Weighted Average Average
Exercise Number Contractual Average Number Exercise
Prices Outstanding Life Price Exercisable Price
--------- --- ------ ------- ------
December 31, 1997
$14 to $27 917,795 5.4 $23.42 523,214 $22.14
27 to 32 1,129,363 8.2 29.11 34,996 30.48
32 to 42 1,171,604 9.3 34.68 0 0
--------- --- ------ ------- ------
Total 3,218,762 7.8 $29.52 558,210 $22.66
========= === ====== ======= ======
December 31, 1996
$14 to $27 1,250,720 6.2 $22.91 508,581 $19.93
27 to 32 1,223,252 9.2 29.09 19,251 30.35
32 to 42 17,250 9.9 35.08 0 0
--------- --- ------ ------- ------
Total 2,491,222 7.7 $26.03 527,832 $20.31
========= === ====== ======= ======
Had compensation costs for the Company's 1997 and 1996 grants been determined
under the cost recognition alternative of FAS 123, the effect on the Company's
net income and net income attributable to common shareholders would have been:
For the Year Ended December 31, 1997 1996
------- -------
Net income attributable to Common Shareholders:
------- -------
As reported $91,219 $76,354
Proforma $89,645 $75,592
======= =======
For the Year Ended December 31, 1997 1996
------- -------
Basic earnings per share:
------- -------
As reported $ 3.09 $ 2.56
Proforma $ 3.04 $ 2.54
======= =======
Diluted earnings per share:
------- -------
As reported $ 3.02 $ 2.53
Proforma $ 2.97 $ 2.51
======= =======
(8) COMPANY-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF A SUBSIDIARY
TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE CORPORATION DUE
DECEMBER 15, 2045
The Company obligated mandatorily redeemable preferred securities of a
subsidiary trust holding solely junior subordinated debentures ("Capital Trust
Securities") were issued by the W.R. Berkley Capital Trust ("the Trust"). All of
the common securities of the Trust are owned by the Company. The sole assets of
the Trust are $210,000,000 aggregate principal amount of 8.197% Junior
Subordinated Debentures due December 15, 2045, issued by the Company (the
"Junior Subordinated Debentures"). The Company's guarantee of payments of cash
distributions and payments on liquidation of the Trust or redemption of the
Capital Trust Securities, when taken together with the Company's obligations
under the Trust Agreement under which the Capital Trust Securities were issued,
the Junior Subordinated Debentures and the Indenture, under which the Junior
Subordinated Debentures were issued, including its obligations to pay costs,
expenses, debts and liabilities of the Trust (other than with respect to the
Capital Trust Securities), provide a full and unconditional guarantee of the
Trust's obligations under the Capital Trust Securities. The Company records the
preferential cumulative cash dividends arising from the payments of interest on
the Junior Subordinated Debentures as an expense in its consolidated statement
of operations.
The Capital Trust Securities are subject to mandatory redemption in a like
amount, (i) in whole but not in part, on the stated maturity date, upon
repayment of the Junior Subordinated Debentures, (ii) in whole but not in part,
at any time contemporaneously with the optional prepayment of the Junior
Subordinated Debentures by the Company upon the occurrence and continuation of a
certain event and (iii) in whole or in part, on or after, December 15, 2006,
contemporaneously with the optional prepayment by the Company of Junior
Subordinated Debentures.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES 33
18
(9) INVESTMENTS
At December 31, 1997 and 1996, there were no investments, other than investments
in United States government securities, which exceeded 10% of stockholders'
equity. At December 31, 1997 and 1996, investments were as follows:
(Dollars in thousands)
Gross Gross Amount at which
unrealized unrealized Fair shown in the
Type of investment Cost(a) gains losses value balance sheet
- ------------------ ------- ----- ------ ----- -------------
December 31, 1997
Fixed maturity securities held to maturity:
State and municipal $ 78,879 $ 5,735 $ (48) $ 84,566 $ 78,879
Corporate 13,831 476 -- 14,307 13,831
Mortgage backed securities 89,462 6,584 -- 96,046 89,462
---------- ----------- ---------- ---------- ----------
Total fixed maturities held to maturity 182,172 12,795 (48) 194,919 182,172
---------- ----------- ---------- ---------- ----------
Fixed maturity securities available for sale:
United States Government(b) 413,722 10,224 (53) 423,893 423,893
State and municipal 957,329 43,891 (405) 1,000,815 1,000,815
Corporate 450,986 16,521 (601) 466,906 466,906
Mortgage backed securities 418,864 12,960 (467) 431,357 431,357
---------- ----------- ---------- ---------- ----------
Total fixed maturities available for sale 2,240,901 83,596 (1,526) 2,322,971 2,322,971
---------- ----------- ---------- ---------- ----------
Common stocks 16,512 8,524 (8) 25,028 25,028
Preferred stocks 59,622 1,639 (46) 61,215 61,215
---------- ----------- ---------- ---------- ----------
Total equity securities available for sale 76,134 10,163 (54) 86,243 86,243
---------- ----------- ---------- ---------- ----------
Trading account 301,136 15,922 (5,089) 311,969 311,969
Invested cash(c) 417,967 -- -- 417,967 417,967
---------- ----------- ---------- ---------- ----------
Total investments $3,218,310 $ 122,476 $ (6,717) $3,334,069 $3,321,322
========== ========== =========== ========== ==========
December 31, 1996
Fixed maturity securities held to maturity:
State and municipal $ 80,943 $ 4,542 $ (127) $ 85,358 $ 80,943
Corporate 39,478 626 (649) 39,455 39,478
Mortgage backed securities 83,813 1,057 (1,451) 83,419 83,813
---------- ----------- ---------- ---------- ----------
Total fixed maturities held to maturity 204,234 6,225 (2,227) 208,232 204,234
---------- ----------- ---------- ---------- ----------
Fixed maturity securities available for sale:
United States Government(b) 442,816 6,908 (6,326) 443,398 443,398
State and municipal 811,871 21,004 (2,334) 830,541 830,541
Corporate 359,928 9,007 (4,082) 364,853 364,853
Mortgage backed securities 451,712 10,363 (2,197) 459,878 459,878
---------- ----------- ---------- ---------- ----------
Total fixed maturities available for sale 2,066,327 47,282 (14,939) 2,098,670 2,098,670
---------- ----------- ---------- ---------- ----------
Common stocks 18,661 15,591 -- 34,252 34,252
Preferred stocks 59,774 439 (565) 59,648 59,648
---------- ----------- ---------- ---------- ----------
Total equity securities available for sale 78,435 16,030 (565) 93,900 93,900
---------- ----------- ---------- ---------- ----------
Trading account 260,167 9,184 (1,742) 267,609 267,609
Invested cash(c) 327,193 -- -- 327,193 327,193
---------- ----------- ---------- ---------- ----------
Total investments $2,936,356 $ 78,721 $ (19,473) $2,995,604 $2,991,606
========== =========== ========== ========== ==========
(a)Adjusted as necessary for amortization of premium or discount.
(b)Includes United States government agencies and authorities.
(c)Short-term investments which mature within three months of the date of
purchase.
The amortized cost and fair value of fixed maturity securities, at December 31,
1997, by contractual maturity, are shown on next page. Actual maturities may
differ from contractual maturities because certain issuers may have the right to
call or prepay obligations:
34
19
(Dollars in thousands) 1997
Cost Fair value
---------- ----------
Due in one year or less $ 109,268 $9,9109,746
Due after one year through five years 643,696 664,668
Due after five years through ten years 462,608 481,413
Due after ten years 699,175 734,660
Mortgage-backed securities 508,326 527,403
---------- ----------
Total $2,423,073 $2,517,890
========== ==========
Realized gains (losses) and the change in difference between fair value and cost
of investments, before applicable income taxes, are as follows:
(Dollars in thousands) 1997 1996 1995
-------- --------- ---------
Realized gains (losses):
Fixed maturity securities sold(a) $ (3,308) $ 1,850 $ 17,819
Equity securities sold 16,537 5,285 (976)
Net change in provision for decline in value(b):
Fixed maturity securities 103 (152) (352)
Equity securities 581 -- 4,191
Other (727) 454 (325)
-------- --------- ---------
13,186 7,437 10,357
-------- --------- ---------
Change in difference between fair value and cost of investments:
Fixed maturity securities 58,476 (36,232) 123,590
Equity securities (5,356) 6,386 8,528
-------- --------- ---------
53,120 (29,846) 132,118
-------- --------- ---------
Total $ 66,306 $ (22,409) $ 142,475
======== ========= =========
(a) During 1997, 1996 and 1995, gross gains of $7,988,000, $5,904,000 and
$11,570,000, respectively, and gross losses of $11,296,000, $4,054,000 and
$3,751,000, respectively, were realized. Included in fixed maturity
securities sold are losses arising from the Company's investments in a
municipal security trading partnership. The primary focus of the partnership
is municipal arbitrage. Municipal arbitrage is an investment strategy which
attempts to capitalize on certain anomalies which tend to occur in the
municipal bond market.
(b) The provision for decline in value of investments is $2,800,000, $3,485,000
and $3,333,000 as of December 31, 1997, 1996 and 1995, respectively.
Investment income consists of the following:
(Dollars in thousands) 1997 1996 1995
--------- --------- ---------
Fixed maturity securities $ 159,199 $ 146,431 $ 115,668
Invested cash 10,829 6,698 13,000
Equity securities 5,139 4,039 4,418
Trading account(a) 28,831 12,331 9,030
Other 1,814 1,548 1,411
--------- --------- ---------
Gross investment income 205,812 171,047 143,527
Interest on funds held under reinsurance treaties (6,224) (6,557) (6,195)
--------- --------- ---------
Net investment income $ 199,588 $ 164,490 $ 137,332
========= ========= =========
(a) The primary focus of the trading account is merger and municipal fixed
income arbitrage. Merger arbitrage is the business of investing in the
securities of publicly held companies which are the targets in announced
tender offers and mergers. Merger arbitrage differs from other types of
investments in its focus on transactions and events believed likely to bring
about a change in value over a relatively short time period (usually four
months or less). The Company believes that this makes merger arbitrage
investments less vulnerable to changes in general financial market
conditions. Potential changes in market conditions are also mitigated by the
implementation of hedging strategies, including short sales.
The arbitrage positions are generally hedged against market declines by
purchasing put options, selling call options or entering into swap contracts.
Therefore, just as long portfolio positions may also incur losses during
market declines, hedge positions may incur losses during market advances. As
of December 31, 1997, the notional amount of option and swap contracts
outstanding are $32,524,000 and $10,000,000, respectively.
Investment income earned from trading account activity includes unrealized
trading gains of $10,833,000, $2,013,000, and $352,000 for 1997, 1996 and
1995, respectively. Included in other liabilities at their fair value are
short sales and short call options $159,456,000 and $87,080,000 as of
December 31, 1997 and 1996, respectively. The corresponding proceeds of the
short securities are $162,360,000 and $83,172,000 as of December 31, 1997 and
1996, respectively.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES 35
20
(10) RESERVES FOR LOSSES AND LOSS EXPENSES
The table below provides a reconciliation of the beginning and ending reserve
balances, on a gross of reinsurance basis:
(Dollars in thousands) 1997 1996 1995
----------- ----------- -----------
Net reserves at beginning of year $ 1,333,122 $ 1,209,250 $ 895,440
----------- ----------- -----------
Net reserves of companies acquired 4,984 -- 191,963
Net provision for losses and loss expenses:
Claims occurring during the current year 747,977 675,674 580,594
Decrease in estimates for claims occurring in prior years (21,313) (15,219) (9,596)
Amortization of discount 7,760 8,705 --
----------- ----------- -----------
734,424 669,160 570,998
----------- ----------- -----------
Net payments for claims
Current year 315,370 280,565 228,100
Prior years 324,149 264,723 221,051
----------- ----------- -----------
639,519 545,288 449,151
----------- ----------- -----------
Net reserves at end of year 1,433,011 1,333,122 1,209,250
Ceded reserves at the end of year 476,677 449,581 450,770
----------- ----------- -----------
Gross reserves at the end of year $ 1,909,688 $ 1,782,703 $ 1,660,020
=========== =========== ===========
Due to the nature of Excess Workers Compensation ("EWC") business and the long
period of time over which losses are paid in this line of business, the Company
discounts the liability for losses and loss expenses established for the excess
workers' compensation line of business. Discounting liabilities for losses and
loss expenses gives recognition to the time value of money. Discounting is
intended to appropriately match losses and loss expenses to income earned on
investment securities supporting the liabilities. The expected losses and loss
expense payout pattern subject to discounting was derived from the Company's
loss payout experience and is supplemented with data compiled from insurance
companies writing workers' compensation on an excess-of-loss basis. The expected
payout pattern has a very long duration because it reflects the nature of losses
generally which penetrate self-insured retention limits contained in excess
workers' compensation policies. The Company has limited the estimated payout
duration to 30 years in order to introduce an additional level of conservatism
into the discounting process. The liabilities for losses and loss expenses have
been discounted using "risk-free" discount rates determined by reference to the
U.S. Treasury yield curve weighted for the EWC premium volume to reflect the
seasonality of the anticipated duration of losses associated with such
coverages. The average discount rate for accident years 1997, 1996 and 1995 and
prior is 5.98%, 5.90% and 5.80%, respectively. The aggregate net discount, after
reflecting the effects of ceded reinsurance, is $189,600,000, $172,415,000 and
$152,235,000 at December 31, 1997, 1996 and 1995, respectively. For Statutory
purposes, the Company uses a discount rate of 3.0% as permitted by the
Department of Insurance of the State of Ohio.
To date, known pollution and environmental claims at the insurance company
subsidiaries have not had a material impact on the Company's operations.
Environmental claims have not materially impacted the Company because our
subsidiaries generally did not insure larger industrial companies which are
subject to significant environmental exposures.
The Company's net reserves for losses and loss adjustment expenses relating
to pollution and environmental claims were $33.1 million and $35.2 million at
December 31, 1997 and 1996, respectively. The Company's gross reserves for
losses and loss adjustment expenses relating to pollution and environmental
claims were $68.4 million and $71.9 million at December 31, 1997 and 1996,
respectively. Net incurred losses and loss expenses for reported pollution and
environmental claims were approximately $ .1 million, $6.9 million and $8.0
million in 1997, 1996 and 1995, respectively. Net paid losses and loss expenses
has averaged approximately $3 million for each of the last three years. The
estimation of these liabilities is subject to significantly
36
21
greater than normal variation and uncertainty because of the difficulty of
making a reasonable actuarial estimate of these liabilities due to the absence
of a generally accepted actuarial methodology for these exposures and the
potential effect of significant unresolved legal matters, including coverage
issues as well as the cost of litigating the legal issues. Additionally, the
determination of ultimate damages and the final allocation of such damages to
financially responsible parties is highly uncertain.
(11) STOCKHOLDERS' EQUITY
The Company has calculated per share data in accordance with FAS 128. Treasury
shares have been excluded from average outstanding shares from the date of
acquisition. The number of shares used in the computation of basic earnings per
share was 29,503,000, 29,792,000 and 26,121,000 for 1997, 1996 and 1995,
respectively. The number of shares used in the computations of diluted earnings
per share was 30,185,000, 30,130,000 and 26,262,000 for 1997, 1996 and 1995,
respectively. The difference in calculating basic and diluted earnings per share
is attributable entirely to the dilutive effect of stock based employee
compensation plans.
Changes in shares of Common Stock outstanding, net of treasury shares,
are as follows:
(in thousands) 1997 1996 1995
------- ------- -------
Balance, beginning of year 29,454 30,252 25,167
Shares issued 114 65 5,261
Shares repurchased -- (863) (176)
------- ------- -------
Balance, end of year 29,568 29,454 30,252
======= ======= =======
As of December 31, 1996, 930,807 shares of 7 3/8% Series A Cumulative
Redeemable Preferred Stock were issued and outstanding. During January 1997, the
Company purchased an additional 183,080 shares of Series A Preferred Stock for
an aggregate cost of $28,506,000. In the second and third quarters of 1997,
93,775 shares of the Series A Preferred Stock were purchased by subsidiaries of
the Company. In addition, $115,800,000 was placed in a trust which will be used
to service and redeem the remaining outstanding shares of Series A Preferred
Stock.
(12) SUPPLEMENTAL FINANCIAL
STATEMENT DATA
Other operating costs and expenses consist of the following:
(Dollars in thousands) 1997 1996 1995
-------- -------- --------
Amortization of
deferred policy
acquisition costs $337,871 $283,642 $228,610
Other operating costs
and expenses of
insurance operations 65,993 50,288 38,773
Other costs and expenses 83,912 75,064 72,606
-------- -------- --------
Total $487,776 $408,994 $339,989
======== ======== ========
(13) COMMITMENTS, LITIGATION AND
CONTINGENT LIABILITIES
At present, neither the Company nor any of its subsidiaries are engaged in any
litigation known to the Company which management believes will have a material
adverse effect upon the Company's business. As is common with other insurance
companies, the Company's subsidiaries are regularly engaged in the defense of
claims arising out of the conduct of the insurance business.
On September 11, 1995, the Company formed Berkley International, LLC
("Berkley International"), a limited liability company. The Company is obligated
to contribute $31.2 million to Berkley International over the next six years, as
required.
(14) LEASE OBLIGATIONS
The Company and several of its subsidiaries use office space and equipment under
leases expiring at various dates through September 1, 2004. These leases are
considered operating leases for financial reporting purposes. Some of these
leases have options to extend the length of the leases and contain clauses for
cost of living, operating expense and real estate tax adjustments. Rental
expense was approximately; $12,564,000, $11,098,000 and $9,437,000 for 1997,
1996 and 1995 respectively. Future minimum lease payments (without provision for
sublease income) are: $12,594,000 in 1998; $11,237,000 in 1999; $8,669,000 in
2000; $5,603,000 in 2001; $4,161,000 in 2002; and $7,998,000 thereafter.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
37
22
(15) INDUSTRY SEGMENTS
The Company's operations are presently conducted through five basic segments:
regional property casualty insurance; reinsurance; specialty lines of insurance;
alternative markets operations; and international. The regional property
casualty insurance segment writes standard commercial and personal lines
insurance for such risks as automobiles, homes and business. The Company's
reinsurance segment specializes in underwriting property, casualty and surety
reinsurance on both a treaty and facultative basis. The specialty lines of
insurance consist primarily of excess and surplus lines, commercial
transportation, professional liability, directors and officers liability and
surety. The Company's alternative markets segment specializes in insuring,
reinsuring, and administering self-insurance programs and other alternative risk
transfer mechanisms for public entities, private employers and associations.
Finally, the international operations represent the Company's joint venture with
Northwestern Mutual Life, to write property and casualty, as well as life
insurance, internationally.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. Summary financial information
about the Company's operating segments is presented in the following table.
Income before income taxes by segment consists of revenues less expenses related
to the respective segment's operations. These amounts include realized gains
(losses) where applicable. Intersegment revenues consist primarily of
dividends, interest on intercompany debt and fees paid by subsidiaries for
portfolio management and other services to the Company. Identifiable assets by
segment are those assets used in the operation of each segment.
Income
Revenues (Loss)
------------------------------------------------------------- before Income Tax
Investment Unaffiliated Inter- income Expense
(Dollars in thousands) Income Customers Segment Total taxes (Benefits)
--------- ---------- -------- ----------- --------- --------
December 31, 1997:
Regional $ 54,069 $ 648,986 $ 674 $ 649,660 $ 49,180 $ 15,082
Reinsurance 45,520 241,204 882 242,086 42,193 10,641
Specialty 58,064 268,158 2,691 270,849 66,042 18,114
Alternative Markets 34,339 181,783 829 182,612 35,223 10,423
International 3,623 45,360 -- 45,360 (3,566) (181)
Corporate and other 10,565 14,819 48,351 63,170 (19,815) 30,849
Adjustments and eliminations (6,592) -- (53,427) (53,427) (40,016) (54,260)
--------- ---------- -------- ----------- --------- --------
Consolidated $ 199,588 $1,400,310 $ -- $ 1,400,310 $ 129,241 $ 30,668
========= ========== ======== =========== ========= ========
December 31, 1996:
Regional $ 45,554 $ 543,290 $ 1,110 $ 544,400 $ 37,745 $ 10,679
Reinsurance 37,532 243,848 218 244,066 32,756 7,798
Specialty 47,715 231,334 1,586 232,920 49,274 12,743
Alternative Markets 29,118 171,099 218 171,317 32,541 11,516
International 1,426 26,435 -- 26,435 (1,283) --
Corporate and other 6,922 9,160 78,179 87,339 25,311 25,102
Adjustments and eliminations (3,777) -- (81,311) (81,311) (61,295) (42,736)
--------- ---------- -------- ----------- --------- --------
Consolidated $ 164,490 $1,225,166 $ -- $ 1,225,166 $ 115,049 $ 25,102
========= ========== ======== =========== ========= ========
December 31, 1995:
Regional $ 40,827 $ 478,668 $ (121) $ 478,547 $ 40,486 $ 9,827
Reinsurance 33,512 221,241 -- 221,241 19,661 3,661
Specialty 46,792 200,788 158 200,946 35,325 7,705
Alternative Markets 6,978 103,656 -- 103,656 10,254 4,933
International 377 7,313 -- 7,313 (259) --
Corporate and other 10,456 10,277 53,694 63,971 16,414 15,454
Adjustments and eliminations (1,610) -- (53,731) (53,731) (39,134) (24,026)
--------- ---------- -------- ----------- --------- --------
Consolidated $ 137,332 $1,021,943 $ -- $ 1,021,943 $ 82,747 $ 17,554
========= ========== ======== =========== ========= ========
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23
Interest expense for the reinsurance segment was $2,327,000, $2,602,000 and
$5,302,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Additionally, corporate interest expense (net of intercompany amounts) was
$46,542,000, $29,361,000 and $22,907,000 for the corresponding periods.
Identifiable assets by segment are as follows:
December 31, 1997 1996 1995
---------- ---------- ----------
Regional $1,262,339 $1,103,767 $1,001,549
Reinsurance 864,282 713,127 667,652
Specialty 1,308,084 1,142,205 1,172,048
Alternative Markets 705,169 596,054 579,964
International 119,791 60,450 50,286
Corporate and other 299,619 521,370 147,185
---------- ---------- ----------
Consolidated $4,559,284 $4,136,973 $3,618,684
========== ========== ==========
(16) COMPENSATION PLAN
The Company and its subsidiaries have profit sharing retirement plans in which
substantially all employees participate. The plans provide for minimum annual
contributions of 5% of eligible compensation; contributions above the minimum
are discretionary and vary with each participating subsidiary's profitability.
Employees become eligible to participate in the Retirement Plans on the first
day of the month following the first full three months in which they are
employed. Profit sharing expense amounted to $8,402,000, $7,370,000 and
$6,344,000 for 1997, 1996 and 1995, respectively.
In May 1997, the common stockholders approved the Long-Term Incentive
Compensation Plan ("LTIP"). The LTIP provides for incentive compensation to key
executives, is based on long-term corporate performance, and is based upon
criteria established by the Compensation Committee of the Board of Directors.
Key employees are awarded participation units ("units") as determined by the
Compensation and Stock Option Committee of the Board of Directors. The units
vest and become exercisable over a maximum term of five years from the date of
their award. The units are payable in cash or up to 50% in shares of Common
Stock. In 1997, 266,250 units were awarded which amounted to an expense of
$1,705,000.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments as of December 31, 1997 and 1996:
(Dollars in thousands) 1997 1996
--------------------------- ---------------------------
Carrying Carrying
Amount Fair value Amount Fair value
---------- ---------- ---------- ----------
Investments $3,321,322 $3,334,069 $2,991,606 $2,995,604
Long-term debt 390,415 434,035 390,104 421,359
Capital Trust Securities 207,944 213,217 207,901 206,197
---------- ---------- ---------- ----------
The estimated fair value of investments is based on quoted market
prices as of the respective reporting dates. The fair value of the long-term
debt is based on rates available for borrowings similar to the Company's
outstanding debt as of the respective reporting dates.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
39
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(18) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly financial data:
(Dollars in thousands except per share data)
Three months ended
----------------------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
---------------------- ---------------------- ---------------------- ----------------------
1997 1996 1997 1996 1997 1996 1997 1996
--------- --------- --------- --------- --------- --------- --------- ---------
Revenues $ 329,822 $ 287,925 $ 335,926 $ 301,293 $ 355,650 $ 311,534 $ 378,912 $ 324,414
========= ========= ========= ========= ========= ========= ========= =========
Net income before
preferred dividends $ 28,544 $ 19,522 $ 20,633 $ 21,361 $ 25,573 $ 24,092 $ 24,297 $ 25,288
========= ========= ========= ========= ========= ========= ========= =========
Net income attributable to
common stockholders $ 26,427 $ 15,684 $ 18,625 $ 17,981 $ 23,721 $ 20,712 $ 22,446 $ 21,977
========= ========= ========= ========= ========= ========= ========= =========
Earnings per share:
Basic $ .90 $ .51 $ .63 $ .61 $ .80 $ .69 $ .76 $ .75
Diluted $ .88 $ .50 $ .62 $ .61 $ .78 $ .69 $ .74 $ .73
========= ========= ========= ========= ========= ========= ========= =========
Quarterly per share data has been restated to reflect the 3-for-2 stock split
effected in 1997 and SFAS 128.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
W.R. Berkley Corporation
We have audited the consolidated balance sheets of W. R. Berkley Corporation and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of W. R. Berkley
Corporation and subsidiaries at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
New York, New York KPMG PEAT MARWICK LLP
February 25, 1998
40