-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Oht2sItlWpG+FdX6GEHLio+Nqi5YCxUYiE+XRKyYXPJCB45YhdABphk7j09FZynj cA+flHO4vVCAJmFN4Phypg== 0000914039-97-000285.txt : 19970815 0000914039-97-000285.hdr.sgml : 19970815 ACCESSION NUMBER: 0000914039-97-000285 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BERKLEY W R CORP CENTRAL INDEX KEY: 0000011544 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 221867895 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-07849 FILM NUMBER: 97660711 BUSINESS ADDRESS: STREET 1: 165 MASON ST STREET 2: P O BOX 2518 CITY: GREENWICH STATE: CT ZIP: 06836-2518 BUSINESS PHONE: 2036293000 MAIL ADDRESS: STREET 1: 165 MASON ST STREET 2: PO BOX 2518 CITY: GREENWICH STATE: CT ZIP: 06836-2518 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended. . . . . . . . June 30, 1997 Commission File Number 0-7849 W. R. BERKLEY CORPORATION (Exact name of registrant as specified in its charter) Delaware 22-1867895 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 165 Mason Street, Greenwich, Connecticut 06836-2518 (Address of principal executive offices) (Zip Code) (203) 629-3000 (Registrant's telephone number, including area code) None Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Number of shares of common stock, $.20 par value, outstanding as of August 1, 1997: 19,674,146 2 W. R. Berkley Corporation and Subsidiaries Consolidated Balance Sheets (Dollars in thousands)
June 30, December 31, 1997 1996 ---------- ------------ (Unaudited) Assets Investments: Invested cash $ 286,658 $ 327,193 Fixed maturity securities: Held to maturity, at cost (fair value $197,684 and $208,232) 194,006 204,234 Available for sale at fair value (cost $2,109,330 and $2,012,911) 2,143,808 2,045,254 Equity securities, at fair value: Available for sale (cost $82,871 and $78,435) 94,240 93,900 Trading account (cost $347,928 and $260,167) 360,968 267,609 Cash 19,600 19,292 Premiums and fees receivable 323,873 256,441 Due from reinsurers 443,864 427,419 Accrued investment income 35,123 34,577 Prepaid reinsurance premiums 77,377 70,057 Deferred policy acquisition costs 136,692 119,157 Real Estate, furniture & equipment at cost, less accumulated depreciation 117,504 116,303 Excess of cost over net assets acquired 72,924 73,404 Other assets 25,984 18,424 ---------- ---------- $4,332,621 $4,073,264 ========== ========== Liabilities, Reserves, Debt and Stockholders' Equity Liabilities and reserves: Reserves for losses and loss expenses $1,839,993 $1,782,703 Unearned premiums 577,102 514,213 Due to reinsurers 85,473 71,352 Deferred Federal income taxes 4,301 4,013 Other liabilities 321,042 210,916 ---------- ---------- 2,827,911 2,583,197 ---------- ---------- Long-term debt 390,259 390,104 ---------- ---------- Company-obligated mandatorily redeemable capital securities of a subsidiary trust holding solely 8.197% junior subordinated debentures of the Corporation due December 15, 2045 207,923 207,901 Minority interest 21,626 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 705,540 and 930,807 shares issued and outstanding 70 93 Common stock, par value $.20 per share: Authorized 40,000,000 shares, issued and outstanding, net of treasury shares, 19,668,586 and 19,635,976 shares 4,854 4,854 Additional paid-in capital 438,044 471,492 Retained earnings 529,491 490,338 Net unrealized investment gains, net of taxes 29,800 31,075 Treasury stock, at cost, 4,600,792 and 4,633,402 shares (117,357) (118,120) ---------- ---------- 884,902 879,732 ---------- ---------- $4,332,621 $4,073,264 ========== ==========
See accompanying notes to consolidated financial statements. 1 3 W. R. Berkley Corporation and Subsidiaries Consolidated Statements of Operations (Unaudited) (Amounts in thousands except per share data)
For the Three Months For the Six Months Ended June 30, Ended June 30, -------------------- ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- Revenues: Net premiums written $ 300,759 $ 269,477 $ 584,769 $ 518,683 Increase in unearned premiums (28,843) (26,456) (55,569) (46,526) --------- --------- --------- --------- Premiums earned 271,916 243,021 529,200 472,157 Net investment income 47,587 39,494 92,418 79,109 Management fees and commission income 17,890 18,066 35,420 36,286 Realized gains (losses) on investments (2,146) 213 7,194 523 Other income 679 499 1,516 1,143 --------- --------- --------- --------- Total revenues 335,926 301,293 665,748 589,218 Operating costs and expenses: Losses and loss expenses (181,267) (164,278) (350,860) (325,042) Other operating costs and expenses (116,498) (101,313) (226,511) (196,361) Interest expense (12,237) (7,901) (24,455) (15,688) --------- --------- --------- --------- Income before income taxes and minority interest 25,924 27,801 63,922 52,127 Federal income tax expense (5,564) (6,275) (15,359) (11,083) --------- --------- --------- --------- Income before minority interest 20,360 21,526 48,563 41,044 Minority interest 273 (165) 614 (161) --------- --------- --------- --------- Net income before preferred dividends 20,633 21,361 49,177 40,883 Preferred dividends (2,008) (3,380) (4,125) (7,218) --------- --------- --------- --------- Net income attributable to common stockholders $ 18,625 $ 17,981 $ 45,052 $ 33,665 ========= ========= ========= ========= Net income per share $ .95 $ .91 $ 2.29 $ 1.68 ========= ========= ========= ========= Average shares outstanding 19,653 19,782 19,647 19,980 ========= ========= ========= ========= Pro forma net income per share retroactively adjusted to reflect the 3 for 2 stock split $ .63 $ .61 $ 1.53 $ 1.13 ========= ========= ========= ========= Pro forma average shares outstanding adjusted to reflect the 3 for 2 stock split 29,480 29,673 29,471 29,970 ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 2 4 W. R. Berkley Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands)
For the Six Months Ended June 30, 1997 1996 --------- --------- Cash flows from operating activities: Net income before preferred dividends $ 49,177 $ 40,883 Adjustments to reconcile net income to cash flows from operating activities: Minority interest (614) 161 Increase in reserves for losses and loss expenses, net of due to/from reinsurers 54,587 87,071 Depreciation and amortization 2,396 5,583 Change in unearned premiums and prepaid reinsurance premiums 55,569 46,526 Increase in premiums and fees receivable (66,704) (31,238) Change in Federal income taxes (5,916) 199 Change in deferred acquisition cost (17,535) (17,210) Realized gains on investments (7,194) (523) Other, net 6,266 (41,662) --------- --------- Net cash flows from operating activities before trading account sales (purchases) 70,032 89,790 Trading account sales (purchases), net 2,305 53,307 --------- --------- Net cash flows from operating activities 72,337 143,097 --------- --------- Cash flows from investing activities: Proceeds from sales, excluding trading account: Fixed maturity securities available for sale 279,303 181,600 Equity securities 24,398 28,852 Proceeds from maturities and prepayments of fixed maturity securities 57,094 108,692 Cost of purchases, excluding trading account: Fixed maturity securities available for sale (419,201) (320,422) Fixed maturity securities held to maturity -- (49,451) Equity securities (20,475) (2,925) Change in balances due to/from security brokers 17,569 (11,655) Other, net (18,029) (29,107) --------- --------- Net cash flows from investing activities (79,341) (94,416) --------- --------- Cash flows from financing activities: Net proceeds from issuance of long-term debt -- 98,850 Repurchase of preferred stock (33,785) (27,216) Repayment of subsidiary debt -- (28,306) Cash dividends to common stockholders (5,502) (5,043) Cash dividends to preferred stockholders (4,923) (5,791) Purchase of treasury shares -- (22,121) Other, net 10,987 487 --------- --------- Net cash flows from financing activities (33,223) 10,860 --------- --------- Net increase (decrease) in cash and invested cash (40,227) 59,541 Cash and invested cash at beginning of year 346,485 206,917 --------- --------- Cash and invested cash at end of period $ 306,258 $ 266,458 ========= ========= Supplemental disclosure of cash flow information: Interest paid $ 22,855 $ 11,770 ========= ========= Federal income taxes paid, net $ 20,883 $ 10,883 ========= =========
See accompanying notes to consolidated financial statements. 3 5 W. R. Berkley Corporation and Subsidiaries Notes to Consolidated Financial Statements June 30, 1997 (Unaudited) The accompanying consolidated financial statements should be read in conjunction with the following notes and with the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. A. FEDERAL INCOME TAXES The Federal income tax provision has been computed based on the Company's estimated annual effective tax rate which differs from the Federal income tax rate of 35% principally because of tax-exempt investment income. B. REINSURANCE CEDED The amounts of ceded reinsurance included in the statements of operations are as follows (amounts in thousands):
For the Three Months For the Six Months Ended June 30, Ended June 30, --------------------- ----------------------- 1997 1996 1997 1996 ------- ------- -------- -------- Ceded premiums written $65,441 $51,673 $120,520 $102,547 ======= ======= ======== ======== Ceded premiums earned $59,286 $54,263 $113,964 $107,023 ======= ======= ======== ======== Ceded losses and loss expenses $38,768 $31,616 $ 64,013 $ 62,682 ======= ======= ======== ========
C. PER SHARE DATA Per share amounts have been computed based on net income less preferred dividends divided by the weighted average number of common shares outstanding. Incremental shares arising from the assumed issuance of employee stock options, which are considered common stock equivalents, were not included in the computations because the assumed dilutive effect was not material. D. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), entitled "Earnings Per Share." SFAS 128 will replace the presentation of primary and fully diluted earnings per share with basic earnings per share and diluted earnings per share, respectively. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period, whereas primary earnings per share includes the dilutive effect of common stock equivalents. Diluted earnings per share is generally similar to fully diluted earnings per share under current accounting standards. For calendar year enterprises, SFAS 128 is effective commencing with year end 1997 financial statements and will then apply retroactively to both annual and interim periods, requiring the restatement of previously presented earnings per share data. Earlier application is not permitted. Based on preliminary calculations, the Company does not believe that earnings per share computed under SFAS 128 would be materially different from the earnings per share data presented herein. 4 6 E. STOCK OPTION PLAN In May 1997, the Corporation restated the W. R. Berkley Corporation 1992 Stock Option Plan ("the Stock Option Plan") to increase the number of shares of Common Stock authorized for issuance under the Stock Option Plan from 1,750,000 to 4,750,000. In addition, in May 1997 options to purchase 650,000 shares of Common Stock were granted pursuant to the Plan. The following table summarizes option information, including options granted under both the 1992 and prior plans:
For the period from For the period from January 1, 1997 to January 1, 1996 to June 30, 1997 December 31, 1996 ----------------------- ------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------ ----- ------ ----- Outstanding at beginning of period 1,649,765 $39.05 1,012,197 $35.45 Granted 701,500 51.05 733,851 43.53 Exercised 31,810 32.58 42,809 29.57 Canceled 3,717 37.83 53,474 39.89 --------- ------ --------- ------ Outstanding at end of period 2,315,738 42.77 1,649,765 39.05 ========= ====== ========= ====== Options exercisable at end of period 446,528 348,497 ========= ======= Options available for future grant 2,580,727 277,510 ========= =======
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 Six For the Six Months Ended Months Ended June 30, 1997 June 30, 1996 ------------- ------------- As reported: Net Income $49,177 $40,883 ======= ======= Net Income attributable to Common Shareholders $45,052 $33,665 ======= ======= Pro forma: Net Income $48,337 $40,471 ======= ======= Net Income attributable to Common Shareholders $44,412 $33,253 ======= =======
F. OTHER MATTERS Net unrealized investment gains decreased by $1,275,000 (net of Federal income taxes of $686,000) during the six months ended June 30, 1997. Of this amount, $2,661,000 was attributable to a decrease in unrealized gains on equity securities and $1,386,000 was attributable to an increase in unrealized gains on fixed maturities available for sale. G. 3 FOR 2 STOCK SPLIT On August 12, 1997 the Company announced that its Board of Directors had approved a 3 for 2 stock split of the Company's common stock in the form of a stock dividend. Stockholders of record on August 27, 1997 will receive additional shares on or about September 18, 1997. The proforma information provided on the Statement of Operations gives effect to the split as if the split occurred on January 1 of the respective periods. The actual number of additional shares issued on the effective date may differ. Reclassifications have been made in the 1996 financial statements as originally reported to conform them to the presentation of the 1997 financial statements. In the opinion of management, the summarized financial information reflects all adjustments which are necessary for a fair presentation of financial position and results of operations for the interim periods. The Company's results of operations are affected by seasonal weather variations. Accordingly, results reflected for any interim period are not necessarily indicative of those to be expected for the entire year. 5 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net income attributable to common stockholders (net income) for the first six months of 1997 was $45,052,000 ($2.29 per share). The comparable 1996 amount was $33,665,000 ($1.68 per share). For the quarter ended June 30, 1997, net income was $18,625,000 ($.95 per share) in comparison with $17,981,000 ($.91 per share) recorded in the comparable prior year period. Operating income, which we define as net income before realized investment gains or losses, for the first six months of 1996 was $40,376,000 ($2.06 per share). The comparable 1996 amount, was $33,325,000 ($1.66 per share). For the quarter ended June 30, 1997, operating income was $20,020,000 ($1.02 per share) in comparison with $17,843,000 ($.90 per share) recorded in the comparable prior year period. Operating Results for the Six Months ended June 30, 1997 as Compared to the Six Months ended June 30, 1996 Net premiums written during the first six months of 1997 increased 13% to $584,769,000 from $518,683,000. Regional net premiums written increased 19% to $306,074,000; two-thirds of this increase was due to business units which were started during the past four years. Reinsurance net premiums written decreased 3% to $105,111,000; this decrease was substantially due to a decrease in treaty business offset by premiums generated by the Latin American and Caribbean division which commenced operations in February 1996. Specialty net premiums written increased 2% to $105,850,000; this increase is due to an increase in business written by Excess and Surplus operations which more than offset a decline in premiums written by our transportation unit. Alternative markets net premiums written increased 28% to $49,294,000 as Signet Star's alternative markets division increased its market penetration. International net premiums written increased $6.7 million or 57% due to the July 1996 start-up of a Worker's Compensation unit in Argentina. For the six months ended June 30, 1997, pre-tax net investment income increased $13,309,000 to $92,418,000. This increase was primarily due to the increase in average investable assets due to the December 1996 issuance of $210 million capital securities discussed below, and cash flow from operations. In addition, an increase in investment income earned by our trading portfolio contributed to the growth in investment income (see "Liquidity and Capital Resources"). Management fees and commission income consist primarily of fees earned by the insurance services sector of the alternative markets segment. Management fees and Commissions earned during the first six months of 1997 decreased 2% to $35,240,000 principally due to the effects of intense competition in the workers' compensation market. Realized investment gains increased to $7.2 million from $523,000 earned during the comparable 1996 period. Realized gains on fixed income securities result primarily from the Company's strategy of rebalancing the asset and liability duration relationship; realized gains on equity securities arise primarily as a result of a variety of factors which influence the Company's valuation criteria. The majority of the 1997 and 1996 realized gains resulted from the sale of equity securities. The combined ratio (on a statutory basis) of the Company's insurance operations decreased to 100.4% for the six months ended June 30, 1997 from 102.1% in the comparable 1996 period due to a decrease in the consolidated loss ratio which was offset by a slightly higher expense ratio. The consolidated loss ratio (losses and loss expenses incurred expressed as a percentage of premiums earned) decreased to 66.6% in 1997 from 69.1% in 1996. This improvement was due to a decrease in weather related losses 6 8 incurred by our regional operations and better then expected experience on business written in prior years recorded by our specialty operations. Other operating costs and expenses, which consists of the expenses of the Company's insurance and alternative markets operations, as well as the Company's corporate and investment expenses increased 15% to $226,511,000 for the six months ended June 30, 1997. The increase in other operating costs is primarily due to substantial growth in premium, 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 33.4% for the 1997 period from 32.6% for the comparable 1996 period. The underwriting expense ratio increased primarily as a result of an increase in commission expense. The Federal income tax provision resulted in an effective tax rate of 24% in 1997 (21% in 1996). The increase in the effective tax rate in 1997 is due primarily to a increase in the percentage of pretax income represented by realized gains. Operating Results for the Second Quarter of 1997 as Compared to the Second Quarter of 1996 For the second quarter of 1997 as compared to the corresponding 1996 period, net premiums written increased 12%; net investment income increased 21%; and management fees and commission income decreased 1%, all for the reasons discussed above. The combined ratio (on a statutory basis) of the Company's insurance operations decreased to 100.8% for the three months ended June 30, 1997 from 101.4% in the comparable 1996 period due to a decrease in the consolidated loss ratio which more than offset a higher expense ratio. The consolidated loss ratio (losses and loss expenses incurred expressed as a percentage of premiums earned) improved to 67.0% in 1997 from 67.9% in 1996 for the reasons discussed above. Other operating costs and expenses, increased 15% to $116,498,000 for the three months ended June 30, 1997 and the consolidated expense ratio of the Company's insurance operations (underwriting expenses expressed as a percentage of premiums written) increased to 33.4% for the 1997 period from 33.0% for the comparable 1996, for the reasons discussed above. 7 9 Liquidity and Capital Resources Cash flow from operating activities before trading account sales was $70.0 million during the first six months of 1997 in comparison with $89.8 million recorded for the same period in 1996. The investment portfolio, on a cost basis, rose by $137.9 million to $3,020.8 million at June 30, 1997 from $2,882.9 million at December 31, 1996 due to cash flow from operations and the net effects of financing activities discussed below. Changes in the distribution of the Company's investment portfolio at June 30, 1997 in comparison with December 31, 1996 were as follows: tax-exempt securities increased to 30% from 29%; U.S. Government securities and cash equivalents decreased to 16% from 27%; corporate bonds remained at 14%; mortgage-backed securities decreased to 17% from 19%; and equity securities represented the balance. In January 1997, the Company purchased and retired 183,080 shares of the Series A Preferred stock for $27.5 million. In the second quarter 42,187 shares of the Series A Preferred stock were purchased for $6.3 million. For the first six months of 1997, Stockholders' equity increased by approximately $5.2 million. The increase in stockholders' equity is attributable to an increase in retained earnings which was partially offset by the repurchase of the Series A Preferred stock and a slight decrease in unrealized gains in marketable securities. Accordingly, the Company's total capitalization increased to $1,483.1 million at June 30, 1997 and the percentage of the Company's capital attributable to long-term debt remained at 26%. For background information concerning a further discussion of the Company's Liquidity and Capital Resources, see the Company's Annual Report on Form 10-K. Other information The Company continues to address system programming issues with regards to system requirements for the year 2000 and expects to be in compliance by the end of 1998. Costs associated with the year 2000 compliance are expensed as incurred. 8 10 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits None (b) Reports on Form 8-K None 9 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. W. R. BERKLEY CORPORATION By /s/ William R. Berkley ------------------------------ William R. Berkley Chairman of the Board and Chief Executive Officer By /s/ Anthony J. DelTufo ------------------------------ Anthony J. Del Tufo Senior Vice President, Chief Financial Officer and Treasurer 10 EX-27 2 FINANCIAL DATA SCHEDULE
7 1,000 U.S. DOLLARS 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1 2,143,808 194,006 197,684 455,208 0 0 2,793,022 306,258 0 136,692 4,332,621 1,839,993 577,102 0 0 598,182 0 70 4,854 879,970 884,902 529,200 92,418 7,194 1,516 350,860 0 0 63,922 15,359 48,563 0 0 0 45,052 2.29 0 0 0 0 0 0 0 0
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