-----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, LiGi5ffPcNZKOlBKzkZXSJtUl7wWQfw5RZ4K5HHuZrM6+GE2MyGyOm22pP4JeGqq P9HXQr92EKkOLyuKiGmRtg== 0000914039-96-000065.txt : 19960327 0000914039-96-000065.hdr.sgml : 19960327 ACCESSION NUMBER: 0000914039-96-000065 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960326 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-07849 FILM NUMBER: 96538408 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-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number December 31, 1995 0-7849 - ------------------------- ---------------------- W. R. BERKLEY CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 22-1867895 - --------------------------------- ---------------------- (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification number) 165 Mason Street, P.O. Box 2518, Greenwich, CT 06836-2518 - ---------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 629-3000 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $.20 per share Series A Cumulative Redeemable Preferred Stock, par value $.10 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Aggregate market value of voting stock held by non-affiliates of the registrant based on the closing price of such stock as of March 4, 1996: $792,852,943. Number of shares of common stock, $.20 par value, outstanding as of March 4, 1996: 20,179,939 DOCUMENTS INCORPORATED BY REFERENCE The registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1995 (incorporated by reference under Part III). Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. -------- 2 W. R. BERKLEY CORPORATION ANNUAL REPORT ON FORM 10-K December 31, 1995 PART I Page ITEM 1. BUSINESS 3 ITEM 2. PROPERTIES 21 ITEM 3. LEGAL PROCEEDINGS 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 22 ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 1995 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 30 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 52 ITEM 11. EXECUTIVE COMPENSATION 54 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 54 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 54 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 55 2 3 PART I ITEM 1. BUSINESS General Description of the Company's Business W. R. Berkley Corporation (the "Company"), a Delaware corporation, is an insurance holding company which through its subsidiaries, presently operates in four segments of the insurance business: regional property casualty insurance; reinsurance (conducted through Signet Star Holdings, Inc.); specialty lines of insurance (including excess and surplus lines and commercial transportation); and alternative markets (including the management of alternative insurance market mechanisms). The Company was founded on the concept that a group of autonomous regional and specialty insurance entities could compete effectively in selected markets within a very large industry. Decentralized control allows each subsidiary to respond to local or specialty market conditions while capitalizing on the effectiveness of centralized investment and reinsurance management, and actuarial, financial and legal staff support. The Company's regional insurance operations are conducted primarily in the midwest, southern and northeast sections of the United States. The reinsurance operations, specialty insurance and alternative markets are conducted nationwide. In 1995 the Company established Berkley International, LLC ("Berkley International"). Berkley International, which is 65% owned by the Company, was established to acquire interests outside the United States in existing and start-up property casualty, life insurance and reinsurance businesses, including insurance-related financial services businesses, located in emerging markets including Asia and Latin America (see: Other information about the Company's business, for a further explanation). Net premiums written, as reported on a generally accepted accounting principles ("GAAP") basis, by the Company's four major insurance industry segments for the five years ended December 31, 1995 were as follows:
Year Ended December 31, ------------------------------------------------ 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (Amounts in thousands) Net premiums written: Regional insurance operations (1) $477,588 $386,530 $301,890 $257,625 $242,067 Reinsurance operations (2) 195,988 176,699 84,726 -- -- Specialty insurance operations (2) 160,847 134,715 146,101 160,053 169,593 Alternative markets operations (2) 25,998 19,989 4,929 -- -- -------- -------- -------- -------- -------- Total net premiums written $860,421 $717,933 $537,646 $417,678 $411,660 ======== ======== ======== ======== ======== Percentage of net premiums written: Regional insurance operations (1) 55.5% 53.8% 56.2% 61.7% 58.8% Reinsurance operations (2) 22.8 24.6 15.7 -- -- Specialty insurance operations (2) 18.7 18.8 27.2 38.3 41.2 Alternative markets operations (2) 3.0 2.8 .9 -- -- -------- -------- -------- -------- -------- Total 100.0% 100.0% 100.0% 100.0% 100.0% ======== ======== ======== ======== =========
(1) Berkley International's results, which to date are immaterial, are included in Regional insurance operations. (2) Premiums written by the Company's Reinsurance operations prior to July 1, 1993, including the alternative markets operation, are included in Specialty insurance operations (see other information about the Company's business). 3 4 The following sections briefly describe the Company's insurance segments and subsidiaries. The statutory information contained herein is derived from that reported to state regulatory authorities in accordance with statutory accounting practices ("SAP"). The amount of statutory net premiums shown for the subsidiaries exclude the effects of intercompany reinsurance. In connection with the acquisition of Midwest Employers Casualty Company ("Midwest") in November 1995, the Company established the alternative markets segment to reflect the markets served by each of its business segments. The alternative markets segment consists of Midwest, Signet Star Holding's alternative markets division and the Company's insurance services units which manage alternative market mechanisms. The descriptions contain each significant insurance subsidiary's rating by A.M. Best and Company, Inc. ("A.M. Best"). A.M. Best's Ratings are based upon factors of concern to policyholders, insurance agents and brokers and are not directed toward the protection of investors. A.M. Best states: "Best's Ratings reflect [its] opinion as to the relative financial strength and performance of each insurer in comparison with others, based on [its] analysis of the information provided to [it]. These Ratings are not a warranty of an insurer's current or future ability to meet its contractual obligations." REGIONAL INSURANCE OPERATIONS The Company's regional property casualty subsidiaries write standard commercial and personal lines insurance for such risks as automobiles, homes and businesses. American West Insurance Company ("American West"), Continental Western Insurance Company ("Continental Western"), Great River Insurance Company ("Great River"), Tri-State Insurance Company ("Tri-State"), Union Insurance Company ("Union") and Union Standard Insurance Company ("Union Standard") obtain their business primarily in the smaller communities of the midwest and southwest through over 2,000 independent insurance agencies, which represent them on a non-exclusive basis and are compensated on a commission basis. Firemen's Insurance Company ("Firemen's") primarily sells its policies through agents in the District of Columbia, and the States of Maryland, North Carolina, Pennsylvania and Virginia. Certain of Firemen's commercial lines of business are marketed principally through brokers in the New York metropolitan area. Acadia Insurance Company ("Acadia") currently operates in the States of Maine, New Hampshire and Vermont, and sells its personal and commercial coverages through independent agencies. Berkley Insurance Company of the Carolinas, formed in December 1995 and domiciled in North Carolina, will write standard commercial and personal lines insurance. Acadia Insurance Company Acadia was organized by the Company and incorporated in April 1992. It writes multiple line property and casualty coverages in the States of Maine, New Hampshire and Vermont. Acadia is rated A+ by A.M. Best. Acadia's statutory surplus and statutory net premiums written as of December 31, 1995 and for the year then ended were $29,304,000 and $97,547,000, respectively. American West Insurance Company American West is a successor to a company that was organized in 1903 as a mutual insurance company and converted to a stock company in June 1986. Its business consists primarily of personal lines in the States of Minnesota, Montana, Wisconsin and South Dakota. American West is rated A- by A.M. Best. American West's statutory surplus and statutory net premiums written as of December 31, 1995 and for the year then ended were $8,358,000 and $19,003,000, respectively. Berkley Insurance Company of the Carolinas In December 1995, the Company organized Berkley Insurance Company of the Carolinas, a North Carolina domiciled company. It will write personal and commercial lines in North Carolina. Berkley Insurance Company of the Carolinas has not been rated by A.M. Best. Berkley Insurance Company of the Carolinas statutory surplus as of December 31, 1995 was $4,500,000. 4 5 Continental Western Insurance Company Continental Western was organized in 1907. It writes a diverse commercial lines book of business as well as personal lines principally in the States of Iowa, Nebraska, Kansas, Illinois, Missouri, Wisconsin and Montana. Continental Western is rated A+ by A.M. Best. Continental Western's statutory surplus and statutory net premiums written as of December 31, 1995 and for the year then ended were $81,095,000 and $138,498,000, respectively. Firemen's Insurance Company of Washington, D.C. Firemen's was incorporated by an act of Congress in 1836. Firemen's, through its Habitational Insurance Division, writes commercial business consisting primarily of multiple dwelling coverages principally in the State of New York. In addition, it insures homeowners, other personal lines and commercial risks in the District of Columbia, and in the States of Maryland, North Carolina and Virginia. In September 1993, Firemen's established Chesapeake Insurance Division in order to expand its operations in the State of Virginia. In March 1995, Firemen's established a new division, Presque Isle Insurance Division, in order to expand its operations into the State of Pennsylvania. Firemen's is rated A+ by A.M. Best. Firemen's statutory surplus and statutory net premiums written as of December 31, 1995 and for the year then ended were $27,346,000 and $39,736,000, respectively. Great River Insurance Company In December 1993, the Company organized Great River Insurance Company, a Mississippi domiciled company. It writes personal and commercial lines in Mississippi and is expanding to surrounding states. Great River is rated A+ by A.M. Best. Great River's statutory surplus and statutory net premiums written as of December 31, 1995 and for the year then ended were $12,731,000 and $25,673,000, respectively. Tri-State Insurance Company of Minnesota Tri-State was organized in 1902 as a mutual insurance company. It writes various commercial lines (specializing in grain elevator coverages), as well as personal lines primarily in the States of Minnesota, Iowa, North and South Dakota, Nebraska, Wisconsin and Illinois. Tri-State is rated A+ by A.M. Best. Tri-State's statutory surplus and statutory net premiums written as of December 31, 1995 and for the year then ended were $44,067,000 and $47,909,000, respectively. Union Insurance Company Union was organized in 1886 as a mutual insurance company. Union's business consists of personal lines as well as commercial lines insurance concentrated in the States of Nebraska, Kansas, Colorado and South Dakota. Union is rated A by A.M. Best. Union's statutory surplus and statutory net premiums written as of December 31, 1995 and for the year then ended were $30,701,000 and $46,743,000, respectively. Union Standard Insurance Company Union Standard is a successor to a company that was organized in 1970. Union Standard writes personal lines and commercial lines insurance for small businesses in the States of Texas, Oklahoma, Arkansas and Colorado. Union Standard is rated A by A.M. Best. Union Standard's statutory surplus and statutory net premiums written as of December 31, 1995 and for the year then ended were $28,415,000 and $56,674,000, respectively. 5 6 Regional operations: Business The following table sets forth the percentages of direct premiums written, by line, by the Company's regional insurance operations:
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Commercial Multi-Peril 21.1% 22.0% 19.6% 19.0% 18.3% Workers' Compensation 20.5 18.7 16.9 13.7 12.2 Automobile: Personal 17.3 17.6 19.4 21.8 22.9 Commercial 15.3 16.4 17.4 17.1 16.7 Homeowners 8.8 9.2 9.8 10.7 11.2 General Liability 6.4 6.6 6.9 7.1 7.8 Fire and Allied Lines 4.5 4.8 5.5 5.9 6.4 Inland Marine 2.5 2.6 2.6 2.8 2.7 Other (1) 3.6 2.1 1.9 1.9 1.8 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
The following table sets forth the percentages of direct premiums written, by state, by the Company's regional insurance operations:
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Maine 10.6% 10.5% 8.3% .9% --% Iowa 9.2 11.1 13.8 15.7 16.7 Nebraska 8.9 11.0 13.6 16.1 16.3 Texas 7.8 9.2 10.0 9.7 8.7 South Dakota 6.6 4.9 5.7 6.3 6.8 New Hampshire 5.9 4.7 .9 -- -- Minnesota 5.4 6.0 6.6 7.6 8.1 Mississippi 5.3 2.9 -- -- -- Kansas 4.8 5.2 5.7 6.4 6.3 Colorado 4.0 4.5 5.1 5.5 5.1 Missouri 3.7 3.8 3.7 4.0 4.3 Wisconsin 3.5 3.6 4.4 5.0 5.7 Illinois 3.4 3.8 4.2 5.0 4.4 Virginia 3.0 2.1 .6 .3 .4 New York 2.8 2.6 3.0 3.4 3.5 North Dakota 2.5 3.2 3.9 4.3 4.3 Vermont 2.4 1.1 -- -- -- Arkansas 2.1 2.8 3.1 3.1 2.8 District of Columbia 1.8 2.3 2.4 2.4 2.6 Other (1) 6.3 4.7 5.0 4.3 4.0 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
(1) Other includes the direct premiums written by Berkley International. 6 7 REINSURANCE OPERATIONS Signet Star, through its broker market reinsurance subsidiary Signet Star Reinsurance Company, specializes in underwriting property, casualty and fidelity reinsurance on a treaty basis and casualty reinsurance on a facultative basis. Signet Star has significant expertise in alternative risk transfer business and, accordingly, the results of this section are included in the alternative markets segment. Signet Star's facultative underwriting manager, Facultative ReSources, Inc., underwrites reinsurance primarily on a risk-by-risk basis. The Fidelity and Surety Division of Signet Star combines extensive underwriting and claims expertise with professional treaty design capabilities to provide customized reinsurance products to fidelity and surety companies. Signet Star Reinsurance Company is rated A by A.M. Best. Signet Star Reinsurance Company's statutory surplus and statutory net premiums written as of December 31, 1995 and for the year then ended were $243,729,000 and $217,018,000, respectively. Reinsurance Operations: Business The following table sets forth the percentages of gross premiums written, by line, by the Company's reinsurance operations:
1995 1994 1993 ---- ---- ---- Treaty: Specialty and other 46.8% 49.1% 56.4% Regional 21.0 24.9 22.9 Nonstandard Automobile 10.4 9.5 9.3 ----- ----- ----- Total Treaty 78.2 83.5 88.6 Casualty Facultative 14.2 10.9 6.4 Fidelity and Surety 7.6 5.6 5.0 ----- ----- ----- Total 100.0% 100.0% 100.0% ===== ===== =====
SPECIALTY INSURANCE OPERATIONS The Company's specialty lines of insurance consists primarily of excess and surplus lines ("E & S"), commercial transportation, professional liability, directors and officers liability and surety. Specialty lines also included the results of the Company's Reinsurance Operations through June 30, 1993 (see: "Other information about the Company's business") Admiral Insurance Company The majority of the Company's E & S insurance business is conducted by Admiral Insurance Company ("Admiral"). Admiral specializes in general liability coverages, including products liability and professional liability. Admiral insures risks requiring specialized treatment not available in the conventional market, with coverage designed to meet the specific needs of the insured. Business is received from wholesale brokers and general agents via retail agents, whose clients are the insureds. E & S carriers operate on a non-admitted basis in the states where they write business. They are generally free from rate regulation and policy form requirements. Admiral's business is obtained on a nationwide basis from approximately 190 non-exclusive brokers, who do not have the authority to commit the Company, and who are compensated on a commission basis. In November 1992, Admiral began writing directors and officers liability insurance through operations conducted by Monitor Liability Managers, Inc., an underwriting manager established by the Company. Admiral is rated A++ by A.M. Best. Admiral's statutory surplus and statutory net premiums written as of December 31, 1995 and for the year then ended were $175,596,000 and $57,796,000, respectively. 7 8 Carolina Casualty Insurance Company The Company's commercial transportation operations are primarily conducted by Carolina Casualty Insurance Company ("Carolina"). Carolina writes liability, physical damage and cargo insurance for the transportation industry, concentrating on long-haul trucking companies. Municipal bus lines, charter buses and school buses also make up a substantial part of Carolina's book of business. Carolina's business is obtained nationwide from approximately 120 agents and brokers who are compensated on a commission basis. In June 1995, Carolina began writing surety bonds through operations conducted by Monitor Surety Managers, Inc., an underwriting manager established by the Company. Carolina is rated A by A.M. Best. Carolina's statutory surplus and statutory net premiums written as of December 31, 1995 and for the year then ended were $59,327,000 and $70,586,000, respectively. Nautilus Insurance Company Nautilus Insurance Company ("Nautilus") was established in 1985 to insure E & S risks which involve a lower degree of expected severity than those covered by Admiral. Nautilus obtains its business nationwide from approximately 135 non-exclusive brokers, some of which also provide business to Admiral. A substantial portion of Nautilus' business is written on a binding authority basis, subject to certain contractual limitations. Nautilus is rated A by A.M. Best. Nautilus's statutory surplus and statutory net premiums written as of December 31, 1995 and for the year then ended were $50,446,000 at $27,843,000, respectively. Great Divide Insurance Company ("Great Divide"), a subsidiary of Nautilus, writes transportation risks, as well as other specialty lines written on an admitted basis. Specialty Operations: Business The following table sets forth the percentages of gross premiums written, by line, by the Company's specialty insurance operations:
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- General Liability 38.2% 42.2% 37.6% 39.3% 39.9% Automobile Liability 27.4 28.1 27.9 30.2 32.9 Directors and Officers Liability 9.2 5.8 4.0 -- -- Professional Liability 7.1 6.3 6.3 4.9 4.7 Automobile Physical Damage 6.8 5.9 4.6 4.0 4.6 Fire and Allied Lines 5.0 4.6 3.2 2.5 1.9 Inland Marine 2.1 1.8 1.7 2.0 2.2 Other 4.2 5.3 14.7 17.1 13.8 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
8 9 ALTERNATIVE MARKETS The Company's alternative markets operations specializes in insuring, reinsuring and administering self-insurance programs and other alternative risk transfer mechanisms for public entities, private employers and associations. Typical clients are those who are driven by various factors to seek less costly and more efficient techniques to manage their exposure to claims. The Company's alternative markets segment consists of: Excess Workers' Compensation insurance written by Midwest Employers Casualty Company ("Midwest"); reinsurance of alternative risk business; and insurance services entities which manage alternative market mechanisms. Midwest Employers Casualty Company In November 1995, the Company acquired Midwest (see other information about the Company's business). Midwest markets and underwrites excess workers' compensation ("EWC") insurance. EWC insurance is marketed to employers and employer groups which have elected and have qualified or been approved by state regulatory authorities to self-insure their workers' compensation programs. EWC insurance provides coverage to a self-insured employer once the employers' losses exceed the employer's retention amount. Midwest offers a complete line of EWC products, including specific and aggregate EWC insurance policies and surety bonds. Midwest is rated A- by A.M. Best. Midwest's statutory surplus and statutory net premiums written as of December 31, 1995 and for the year then ended were $97,676,000 and $67,513,000, respectively. Signet Star - Alternative Markets Division Signet Star Reinsurance Company's Alternative Markets Division specializes in providing custom designed reinsurance products and services to alternative markets ("ARM") clients, such as captive insurance companies, risk retention groups, public entity insurance trusts and governmental pools. ARM clients are generally self insured vehicles which provide insurance buyers with a mechanism for assuming part of their own risk, managing their exposures, modifying their loss costs and, ultimately, participating in the underwriting results. Signet Star has been an active reinsurer of ARM clients for over ten years and is considered to be one of the leading broker market reinsurers of ARM business. The Alternative Markets Division will have access to substantial additional resources within the Company, which will enable it to concentrate and coordinate the Company's focus on this growing sector of the reinsurance market. Insurance Services Entities The Company's insurance service operations offer a variety of products, which includes underwriting and claims administration and alternative insurance market mechanisms. In addition, subsidiaries of the Company provide agency and brokerage services to both affiliated and unaffiliated entities. Berkley Administrators Berkley Administrators, headquartered in Minneapolis, Minnesota, provides risk management and administration services to its clients, including underwriting, loss control, policy issuance and claims handling. A significant portion of Berkley Administrators' present business is the administration of the Minnesota Workers' Compensation Assigned Risk Plan. 9 10 Berkley Risk Services, Inc. The Company acquired Berkley Risk Services, Inc. and its affiliated companies in 1988. Berkley Risk, based in Minneapolis, Minnesota, is a property casualty risk management firm which specializes in the development and administration of group and single-employer alternative insurance funding techniques. Subsidiaries of Berkley Risk also manage entities which provide liability insurance and claim adjusting services to public entities and not for profit organizations. Key Risk Services, Inc. The Company acquired Key Risk Services, Inc. in 1994. Key Risk, based in Greensboro, North Carolina is a property casualty risk management firm which specializes in management and administration of group self insured funds. A significant portion of Key Risk's present business is the administration of the North Carolina Associated Industries Workers' Compensation Fund. Berkley Risk Managers Berkley Risk Managers is a successor to a Company acquired in 1990. Berkley Risk Managers, based in Somerset, New Jersey, is primarily involved in the development and administration of self-funded property casualty and health insurance programs primarily for municipalities and other governmental entities. All American Agency Facilities, Inc. All American Agency Facilities, Inc., based in Redmond, Washington, provides insurance agency and brokerage services on a nationwide basis for unaffiliated insurance carriers as well as certain of the Company's insurance subsidiaries. Berkley Care Network The Company established Berkley Care Network in 1995. Berkley Care Network, based in Greensboro, North Carolina, is a managed health care company offering a preferred provider network, utilization review and case management services for workers' compensation carriers on a nationwide basis. Alternative Markets Operations: Business The following table sets forth the percentages of revenues, by major source of business, of the alternative markets operations:
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Insurance Service operations 63.1% 78.6% 91.6% 100.0% 100.0% Signet Star - Alternative Markets division 22.1 21.4 8.4 -- -- Midwest 14.8 -- -- -- -- ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
10 11 Results by Industry Segment Summary financial information about the Company's operating segments is presented on a GAAP basis in the following table (all amounts include realized capital gains and losses):
Year Ended December 31, ---------------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (Amounts in thousands) Regional Insurance Operations (1) Total revenues $485,860 $376,576 $316,448 $277,112 $261,621 Income before income taxes 40,227 26,669 29,993 26,605 15,681 Reinsurance Operations (2) Total revenues 212,876 187,304 86,962 -- -- Income (loss) before income taxes 11,205 (14,977) 194 -- -- Specialty Insurance Operations (2) Total revenues 209,311 184,899 211,129 233,477 229,888 Income before income taxes 43,781 37,452 52,651 38,953 49,569 Alternative Markets Operations (2) Total revenues 103,656 75,798 53,531 50,553 46,699 Income before income taxes 10,254 7,068 8,058 11,101 9,571
(1) Berkley International's results, which to date are immaterial, are included in Regional insurance operations. (2) Prior to July 1, 1993 the Reinsurance operations, including the alternative markets operation, are included in Specialty insurance operations (see other information about the Company's business). 11 12 The combined ratio represents a measure of underwriting profitability, excluding investment income. A number in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit. Summary information for the Company's insurance companies and the insurance industry is presented in the following table (1):
Year Ended December 31, ------------------------------------------------ 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Regional Insurance Operations Loss ratio 64.9% 65.3% 67.1% 66.5% 69.0% Expense ratio 34.2 34.3 34.2 33.5 33.0 Policyholders' dividend ratio .9 .9 .9 1.0 1.0 ----- ----- ----- ----- ----- Combined ratio 100.0% 100.5% 102.2% 101.0% 103.0% ===== ===== ===== ===== ===== Reinsurance Operations (2) Loss ratio 78.3% 87.9% 74.1% --% --% Expense ratio 26.4 27.1 31.4 -- -- Policyholders' dividend ratio -- -- -- -- -- ----- ----- ----- ----- ----- Combined ratio 104.7% 115.0% 105.5% --% --% ===== ===== ===== ===== ===== Specialty Insurance Operations (2) Loss ratio 78.6% 77.6% 77.3% 84.3% 75.6% Expense ratio 28.3 26.0 26.8 25.9 25.7 Policyholders' dividend ratio -- -- -- -- -- ----- ----- ----- ----- ----- Combined ratio 106.9% 103.6% 104.1% 110.2% 101.3% ===== ===== ===== ===== ===== Alternative Markets Operations(2)(3) Loss ratio 72.3% 72.5% 72.5% --% --% Expense ratio 31.9 27.7 21.0 -- -- Policyholders' dividend ratio -- -- -- -- -- ----- ----- ----- ----- ----- Combined ratio 104.2% 100.2% 93.5% --% --% ===== ===== ===== ===== ===== Combined Insurance Operations Loss ratio 70.7% 73.7% 71.1% 73.7% 71.7% Expense ratio 31.3 30.8 31.7 30.6 30.0 Policyholders' dividend ratio .5 .5 .5 .6 .6 ----- ----- ----- ----- ----- Combined ratio 102.5% 105.0% 103.3% 104.9% 102.3% ===== ===== ===== ===== ===== Combined Insurance Operations Premiums to surplus ratio (4) 1.0 1.1 .8 1.0 1.2 ===== ===== ===== ===== ===== Industry Ratios Combined ratio 107.2%(5) 108.9%(6) 107.9%(6) 119.1%(6) 109.5%(6) Premiums to surplus ratio 1.2 (5) 1.3 (7) 1.3 (7) 1.4 (7) 1.4 (7)
(1) Based on statutory accounting practices. (2) Results of the Company's Reinsurance operations prior to July 1, 1993, including the alternative markets operation, are included in Specialty insurance operations. (see other information about the Company's business). (3) The Alternative Markets segments combined ratio reflects the underwriting results of Midwest, since November 1995, the date it was acquired, and the Signet Star Alternative Markets division from July 1, 1993. Midwest discounts its reserves for Losses and loss expenses, and accordingly, the annual change in the discount is reflected in the loss ratio. (4) Based on the Company's consolidated net premiums written to statutory surplus. (5) Estimated by A.M. Best (6) Source: A.M. Best Aggregates & Averages, for stock companies. (7) Source: A.M. Best Aggregates & Averages, for total industry. 12 13 Investments Investment results before income tax effects were as follows:
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (Amounts in thousands) Average investments, at cost $2,102,647 $1,855,826 $1,547,635 $1,358,366 $1,174,864 ========== ========== ========== ========== ========== Investment income, before expenses $ 143,527 $ 115,619 $ 98,368 $ 96,960 $ 90,237 ========== ========== ========== ========== ========== Percent earned on average investments 6.8% 6.2% 6.4% 7.1% 7.7% ========= ========= ========== ========= ========== Realized gains (losses) $ 10,357 $ (170) $ 23,523 $ 3,356 $ (4,823) ========== ========= ========== ========= ========== Change in unrealized investment gains (losses) (1) $ 137,560 $(119,686) $ 13,556 $ 7,743 $ 74,161 ========== ========== ========== ====== =======
(1) The change in unrealized investment gains (losses) represents the difference between fair value and cost of investments at the beginning and end of the calendar year, including investments carried at cost. The percentages of the fixed maturity portfolio categorized by contractual maturity, based on fair value, on the dates indicated, are set forth below. Actual maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations.
December 31, ------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- 1 year or less 4.2% 4.0% 3.5% 3.1% 1.6% Over 1 year through 5 years 17.9 27.6 34.0 32.5 33.3 Over 5 years through 10 years 29.4 21.4 22.8 19.2 25.5 Over 10 years 26.2 27.0 27.5 27.3 18.8 Mortgage-backed securities 22.3 20.0 12.2 17.9 20.8 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
Loss and Loss Adjustment Expense Reserves In the property casualty industry, it is not unusual for significant periods of time, ranging up to several years or more, to elapse between the occurrence of an insured loss, the report of the loss to the insurer and the insurer's payment of that loss. To recognize liabilities for unpaid losses, insurers establish reserves, which is a balance sheet account representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. The Company's loss reserves reflect current estimates of the ultimate cost of closing outstanding claims; other than its Excess Workers Compensation business, as discussed below, the Company does not discount its reserves to estimated present value for financial reporting purposes. In general, when a claim is reported, claims personnel establish a "case reserve" for the estimated amount of the ultimate payment. The estimate represents an informed judgment based on general reserving practices and reflects the experience and knowledge of the claims personnel regarding the nature and value of the specific type of claim. Reserves are also established on an aggregate basis which provide for losses incurred but not yet reported to the insurer, potential inadequacy of case reserves, the estimated expenses of settling claims, including legal and other fees and general expenses of administering the claims adjustment process ("LAE"), and a provision for potentially uncollectible reinsurance. Each insurance subsidiary's net retention for each line of insurance is taken into consideration in the computation of ultimate losses. 13 14 In examining reserve adequacy, historical data is reviewed and consideration is given to such factors as legal developments, changes in social attitudes and economic conditions, including the effects of inflation. The actuarial process relies on the basic assumption that past experience, judgmentally adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. Reserve amounts are necessarily based on management's informed estimates and judgments using data currently available. As additional experience and other data become available and are reviewed, these estimates and judgments are revised, resulting in increases or decreases to reserves for insured events of prior years. The reserving process implicitly recognizes the impact of inflation and other factors affecting loss costs by taking into account changes in historic claim patterns and perceived trends. There is no precise method, however, for subsequently evaluating the impact of any specific factor on the adequacy of reserves, because the ultimate cost of closing claims is influenced by numerous factors. While the methods for establishing the reserves are well tested over time, some of the major assumptions about anticipated loss emergence patterns are subject to fluctuation. In particular, high levels of jury verdicts against insurers, as well as judicial decisions which "re-formulate" policies to expand their coverage to previously unforeseen theories of liability, including those regarding pollution and other environmental exposures, have produced unanticipated claims and increased the difficulty of estimating the loss and loss adjustment expense reserves provided by the Company. Due to the nature of Excess Workers Compensation ("EWC") business and the long period of time over which losses are paid in this line of business, the Company discounts its liabilities for EWC losses and loss expenses. Discounting liabilities for losses and loss expenses gives recognition to the time value of money set aside to pay claims in the future and is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from Midwest's loss payout experience and is supplemented with data compiled by insurance companies writing workers' compensation on an excess-of-loss basis. The expected payout pattern has a very long duration because it reflects the nature of losses which generally penetrate self-insured retention limits contained in excess workers' compensation policies. The Company has limited the expected payout duration to 30 years in order to introduce an additional level of conservatism into the discounting process. These liabilities have been discounted using "risk-free" discount rates determined by reference to the U.S. Treasury yield curve weighted for EWC premium volume to reflect the seasonality of the anticipated duration of losses associated with such coverages. The average discount rate for accident years 1995 and prior was approximately 5.80%. To date, known pollution and environmental claims at the insurance company subsidiaries have not had a material impact on the Company's operations. Environmental claims have not materially impacted the Company because our subsidiaries generally did not insure the larger industrial companies which are subject to significant environmental exposures. The Company's net reserves for losses and loss adjustment expenses relating to pollution and environmental claims were $30.8 million and $22.8 million at December 31, 1995 and 1994, respectively. The Company's gross reserves for losses and loss adjustment expenses relating to pollution and environmental claims were $59.4 million and $50.6 million at December 31, 1995 and 1994, respectively. Net incurred losses and loss expenses for reported pollution and environmental claims were approximately $8.0 million, $5.6 million and $3.5 million in 1995, 1994 and 1993, respectively. Net paid losses and loss expenses has averaged approximately $3 million for each of the last three years. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make a reasonable actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential affect of significant unresolved legal matters, including coverage issues as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties is highly uncertain. 14 15 The table below provides a reconciliation of the beginning and ending reserve balances, on a gross of reinsurance basis (dollars in thousands):
1995 1994 1993 ---- ---- ---- Net reserves at beginning of year $ 895,440 $ 783,218 $ 709,665 ---------- ---------- ---------- Net reserves of acquired companies 191,963 -- 20,810 Net provision for losses and loss expenses: Claims occurring during the current year 580,594 493,418 367,106 Decrease in estimates for claims occurring in prior years (9,596) (7,269) (5,861) ---------- ---------- ---------- 570,998 486,149 361,245 ---------- ---------- ---------- Net payments for claims Current year 228,100 187,295 139,292 Prior years 221,051 186,632 169,210 ---------- ---------- ---------- 449,151 373,927 308,502 ---------- ---------- ---------- Net reserves at end of year 1,209,250 895,440 783,218 Ceded reserves at end of year (1) 450,770 1,175,446 1,233,130 Gross reserves at end of year $1,660,020 $2,070,886 $2,016,348 ========== ========== ==========
A reconciliation, as of December 31, 1995, between the reserves reported in the accompanying consolidated financial statements which have been prepared in accordance with GAAP and those reported on a SAP basis is as follows (in thousands): Net reserves reported on a SAP basis $1,248,606 Additions (deductions) to statutory reserves: Loss reserve discounting (2) (55,438) Outstanding drafts reclassified as reserves 15,817 Other 265 ---------- Net reserves reported on a GAAP basis 1,209,250 Ceded reserves reclassified as assets 450,770 ---------- Gross reserves reported on a GAAP basis $1,660,020 ==========
(1) The 1995 decline in ceded reserves is due to the sale of North Star Reinsurance Company (see: Other information about the Company's business, for a further explanation). (2) For statutory purposes, Midwest uses a discount rate of 3.0% as permitted by the Department of Insurance of the State of Ohio. For GAAP purposes, Midwest uses a discount rate based on the U. S. Treasury yield curve weighted for the expected payout period, as described above. The table on page 16 presents the development of net reserves for 1985 through 1995. The top line of the table shows the estimated reserves for unpaid losses and loss expenses recorded at the balance sheet date for each of the indicated years. This represents the estimated amount of losses and loss expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Company. The upper portion of the table shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The "cumulative redundancy (deficiency)" represents the aggregate change in the estimates over all prior years. For example, the 1985 reserves have developed a $92 million deficiency over ten years. That amount has been reflected in income over the ten years. The impact on the results of operations of the past three years of changes in reserve estimates is shown in the reconciliation tables above. It should be noted that the table presents a "run off" of balance sheet reserves, rather than accident or policy year loss development. Therefore, each amount in the table includes the effects of changes in reserves for all prior years. For example, assume a claim that occurred in 1985 is reserved for $2,000 as of December 31, 1985. Assuming this claim was settled for $2,300 in 1995, the $300 deficiency would appear as a deficiency in each year from 1985 through 1994. 15 16
Year Ended December 31, ----------------------------------------------------------------------------------------- 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (Amounts in millions) Net reserves for losses and loss expenses $171 $303 $423 $531 $611 $643 $680 $710 $783 $895 $1,209 Re-estimated as of: One year later 188 300 419 524 605 635 676 704 776 885 -- Two years later 196 309 413 518 599 632 659 694 755 Three years later 205 309 405 513 596 620 650 665 Four years later 210 311 402 511 587 612 637 Five years later 213 311 402 505 581 603 Six years later 215 312 401 510 585 Seven years later 217 324 405 514 Eight years later 237 330 418 Nine years later 245 349 Ten years later 263 Cumulative redundancy (deficiency) $(92) $(46) $ 5 $ 17 $ 26 $ 40 $ 43 $ 45 $ 28 $ 10 $ -- ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====== Cumulative amount of net liability paid through: One year later $ 75 $ 90 $ 91 $114 $158 $139 $160 $169 $186 221 $ -- Two years later 113 138 152 217 234 235 264 275 221 Three years later 144 176 201 262 294 304 332 306 Four years later 164 188 225 295 334 345 346 Five years later 168 203 244 315 358 377 Six years later 176 213 256 331 380 Seven years later 182 221 268 348 Eight years later 187 231 282 Nine years later 196 244 Ten years later 208 Net Reserves $ 783 $ 895 $1,209 Ceded Reserves 1,233 1,176 451 ------ ------ ------ Gross Reserves $2,016 $2,071 $1,660 ====== ====== ====== Net Re-estimated 776 885 -- Ceded Re-estimated 1,234 1,158 ------ ------ Gross Re-estimated as of One year later 2,010 2,043 Two years later 1,966 Gross cumulative redundancy $ 50 $ 28 $ -- ====== ====== ======
16 17 Regulation The Company's insurance subsidiaries are subject to varying degrees of regulation and supervision in the jurisdictions in which they do business, under statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. This regulation relates to such matters as the standards of solvency which must be met and maintained; the licensing of insurers and their agents; the nature of and limitations on investments; deposits of securities for the benefit of policyholders; approval of policy forms and premium rates; periodic examination of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; establishment and maintenance of reserves for unearned premiums and losses; and requirements regarding numerous other matters. In general, the Company's regional property casualty subsidiaries as well as Carolina, Great Divide and Midwest must file all rates for personal and commercial insurance with the insurance department of each state in which they operate. The E & S and reinsurance subsidiaries of the Company generally operate free of rate and form regulation. In addition to regulatory supervision of its insurance subsidiaries, the Company is subject to state statutes governing insurance holding company systems. Typically, such statutes require the Company periodically to file information with the state insurance commissioner, including information concerning its capital structure, ownership, financial condition and general business operations. Under the terms of applicable state statutes, any person or entity desiring to purchase more than a specified percentage (commonly 10%) of the Company's outstanding voting securities would be required to obtain regulatory approval of the purchase. Under Florida law, which is applicable to the Company due to its ownership of Carolina, a Florida domiciled insurer, the acquisition of more than 5% of the Company's capital stock must receive regulatory approval. Further, state insurance statutes typically place limitations on the amount of dividends or other distributions payable by insurance companies in order to protect their solvency. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." During the past several years, various regulatory and legislative bodies adopted or proposed new laws or regulations to deal with the cyclical nature of the insurance industry, catastrophic events and their effects on shortage of capacity and pricing. These regulations, which have not had a material impact on the Company's operations, include (i) the creation of "market assistance plans" under which insurers are induced to provide certain coverages, (ii) restrictions on the ability of insurers to cancel certain policies in mid-term, (iii) advance notice requirements or limitations imposed for certain policy non-renewals and (iv) limitations upon or decreases in rates permitted to be charged. The passage of Proposition 103 in the State of California did not have a material adverse impact on the Company's operations because the Company's subsidiaries operate in that state primarily on a non-admitted basis. The non-admitted market in California, however, has been subjected to increased levels of regulation. Admiral and Nautilus, both of which derive significant premiums from California, may be adversely impacted by increased regulation which causes business to remain in the admitted market. Various state and federal organizations, including Congressional committees and the National Association of Insurance Commissioners ("NAIC"), have been conducting investigations into various aspects of the insurance business. The NAIC has adopted risk based capital ("RBC") requirements that require insurance companies to calculate and report information under a risk-based formula which measures statutory capital and surplus needs based on a regulatory definition of risk in a company's mix of products and its balance sheet. The implementation of RBC did not effect the operations of the Company's insurance subsidiaries since all of its subsidiaries have an RBC amount above the authorized control level RBC, as defined by the NAIC. Federal legislation is being considered which would either abolish or limit the current exemption of the insurance industry from portions of the antitrust laws, impose direct federal oversight or federal solvency standards. No assurance can be given that future legislative or regulatory 17 18 changes resulting from such activity will not adversely affect the Company's insurance subsidiaries. The Company's insurance subsidiaries are also subject to assessment by state guaranty funds when an insurer in that jurisdiction has been judicially declared insolvent and insufficient funds are available from the liquidated company to pay policyholders and claimants. The protection afforded under a state's guaranty fund to policyholders of the insolvent insurer varies from state to state. Generally, all licensed property casualty insurers are considered to be members of the fund, and assessments are based upon their pro rata share of direct written premiums. The NAIC Model Post-Assessment Guaranty Fund Act, which many states have adopted, limits assessments to an insurer to 2% of its subject premium and permits recoupment of assessments through rate setting. Likewise, several states (or underwriting organizations of which the Company's insurance subsidiaries are required to be members) have limited assessment authority with regard to deficits in certain lines of business. To date, assessments have not had a material adverse impact on operations. The Company receives funds from its insurance subsidiaries in the form of dividends and fees for management services. Annual dividends in excess of maximum amounts prescribed by state statutes ("extraordinary dividends") may not be paid without the approval of the insurance commissioner of the state in which an insurance subsidiary is domiciled. The NAIC has proposed and certain states have adopted, legislation that lowers the threshold amount for determining what constitutes an extraordinary dividend. Such legislative changes could make it more difficult for insurance subsidiaries to pay dividends to their parents. Similarly, the NAIC has proposed a new model investment law that may affect the statutory carrying values of certain investments; however, the final outcome of that proposal is not certain, nor is it possible to predict what impact the proposal will have on the Company or whether the proposal will be adopted in the foreseeable future. Tax Law Changes For a review of Federal income tax changes and their impact on the Company see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Competition The property casualty insurance and reinsurance business is competitive, with over 2,000 insurance companies transacting business in the United States. The Company competes directly with a large number of these companies. The Company's strategy in this highly fragmented industry is to seek specialized areas or geographic regions where its insurance subsidiaries can gain a competitive advantage by responding quickly to changing market conditions. Each of the Company's subsidiaries establishes its own pricing practices. Such practices are based upon a Company-wide philosophy to price products with the general intent of making an underwriting profit. Competition in the industry generally changes with profitability. The regional property casualty subsidiaries compete with mutual and other regional stock companies as well as national carriers. Direct writers of property casualty insurance compete with the regional subsidiaries by writing insurance through their salaried employees, generally at a lower cost than through independent agents such as those used by the Company. Signet Star's competition comes from domestic and foreign reinsurers, some of which have greater financial resources, who place their business either on a direct basis or through the broker market. 18 19 The E & S area is a highly specialized segment of the insurance industry. Admiral and Nautilus compete with other E & S carriers, some of which are larger and have greater resources. Under certain market conditions, standard carriers may compete for the types of business written by Admiral and Nautilus. In addition, there are regional and specialty carriers competing with Admiral and Nautilus when they underwrite business in their regions or specialties. Carolina and Great Divide's competition comes mainly from other specialty transportation insurers and large national multi-line companies. Midwest's competition comes from insurance and reinsurance companies, some of which have greater financial resources. Most of theses carriers write specific EWC coverage, do not offer aggregate EWC coverage and tend to focus on risks larger than those targeted by Midwest. In addition, Midwest competes with other specialty EWC insurers. The insurance services operations face competition from several large nationally known service organizations as well as local competitors. Employees As of February 29, 1996, the Company employed 2,982 persons. Of this number, the Company's subsidiaries employed 2,948 persons, of whom 1,691 were executive and administrative personnel and 1,257 were clerical personnel. The Company employed the remaining 34 persons in its parent company and investment operations, of whom 27 were executive and administrative personnel and 7 were clerical personnel. Other information about the Company's business: The Company maintains an ongoing interest in acquiring additional companies and developing new insurance entities, products and packages as opportunities arise. In addition, the insurance subsidiaries develop new coverages or lines of business to meet the needs of insureds. Seasonal weather variations affect the severity and frequency of losses sustained by the insurance and reinsurance subsidiaries. Although the effect on the Company's business of such natural catastrophes as tornadoes, hurricanes, hailstorms and earthquakes is mitigated by reinsurance, they nevertheless can have a significant impact on the results of any one reporting period. The Company has no customer which accounts for 10 percent or more of its consolidated revenues. Compliance by the Company and its subsidiaries with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to protection of the environment, has not had a material effect upon the capital expenditures, earnings or competitive position of the Company. The Company currently does not engage in material operations in foreign countries nor is a material portion of its revenues derived from customers in foreign countries. However, the Company's insurance subsidiaries regularly purchase a portion of their catastrophe reinsurance coverage from foreign reinsurers, including syndicate members of Lloyd's of London. While Queen's Island is domiciled in Bermuda, to date its business has exclusively been reinsurance of its domestic affiliates. During the last two years the Company has been actively exploring emerging insurance markets in Latin America and South East Asia. On September 11, 1995, the Company and Northwestern Mutual Life International, Inc. ("NML"), a wholly-owned subsidiary of Northwestern Mutual Life Insurance Company, entered into a Subscription 19 20 Agreement, Operating Agreement and Management Agreement with respect to Berkley International, a limited liability company. Berkley International was established as the exclusive vehicle of the Company and NML to acquire interests outside the United States in existing and start-up property and casualty, life insurance and reinsurance businesses, including insurance-related financial services businesses, located in emerging markets including Asia and Latin America ("Portfolio Companies"). The Company and NML agreed, subject to certain limitations set forth in the Operating Agreement, that Berkley International would be their exclusive vehicle for investments in Portfolio Companies of which they from time to time become aware; provided, however, that as of the end of any fiscal year, the Company and NML may terminate this exclusivity provision. The Company agreed to contribute up to $65 million to Berkley International in exchange for a 65% membership interest and NML agreed to contribute up to $35 million to Berkley International in exchange for a 35% membership interest. Subsequent to the third anniversary of the Company's and NML's subscription for interests in Berkley International, either party upon not less than six months' prior written notice may terminate its obligation to make any remaining portion of its capital contribution, such termination to be effective on December 31 of the year in which the notice is give. The Company and NML may also terminate their obligations to make any remaining portion of their capital contributions in the event either party terminates the exclusivity provision referred to above. During 1995, the Company purchased majority interests in La Union Gremial Compania de Seguros, S. A. and Independencia Compania Argentina de Seguros, S. A., two property and casualty companies in Argentina, for approximately $9.2 million, which constituted a portion of the Company's initial contribution to Berkley International. The Company will act as manager of Berkley International for a fee based on a percentage of the aggregate commitments of the members. To date, Berkley International's results have not been material to the Company. On November 8, 1995 the Company acquired 100% of the stock of MECC, Inc. the Parent of Midwest Employers Casualty Company for $141,908,000. The Company also retired approximately $19,590,000 million of MECC, Inc.'s debt. The purchase was substantially funded by the issuance of 3,450,000 shares of Common Stock at $43.75 per share. On July 1, 1993, the Company exchanged all of the outstanding capital stock of Signet Reinsurance Company (Signet) for 60% of the common stock of Signet Star Holdings, Inc. ("Signet Star"). Signet Star simultaneously acquired all of the outstanding capital stock of Signet Star Reinsurance Company ("Signet Star Reinsurance") from General Re Corporation ("General Re") in exchange for 40% of the common stock of Signet Star and other consideration. Signet Star is reported as a separate industry segment. Signet's operations through June 30, 1993 are included in the specialty segment. On December 31, 1995, the Company purchased General Re's interest in Signet Star by issuing to General Re 458,667 shares of Series B Cumulative Redeemable Preferred Stock of the Company having an aggregate liquidation preference of $68,800,000. In addition, the Company guaranteed a senior subordinated promissory note of Signet Star which was issued to General Re in exchange for the convertible note which General Re held. As part of this transaction, Signet Star sold to General Re Signet Star Reinsurance Company and renamed Signet Reinsurance Company, Signet Star Reinsurance Company. In February 1996, Signet Star Reinsurance Company established a Latin American and Caribbean division. The new division, which is located in Coral Gables Florida, will specialize in providing treaty reinsurance services to a wide variety of clients in Latin America and the Caribbean. 20 21 ITEM 2. PROPERTIES The Company and its subsidiaries own or lease office buildings or office space suitable to conduct their operations. Owned property is as follows:
Location Company Size (sq. ft.) -------- ------- -------------- Austin, Texas J/I Holding Corporation (1) 7,000 Cherry Hill, New Jersey Admiral 30,000 Grand Forks, North Dakota American West 12,000 Jacksonville, Florida Carolina (2) 35,000 Lincoln, Nebraska Union 43,000 Lincoln, Nebraska Continental Western 20,000 Luverne, Minnesota Tri-State 25,000 Meridian, Mississippi Great River 30,000 Scottsdale, Arizona Nautilus 34,000 Urbandale, Iowa Continental Western 80,000 Westbrook, Maine Acadia 54,000
(1) Occupied by Admiral's branch office. (2) Presently leased to a third party. In addition, the Company and its subsidiaries lease office facilities in various other cities under leases with varying terms and expiration dates. The Company has executed an agreement for the acquisition of a building to be used as the Company's headquarters, which is expected to close by June 1, 1996. ITEM 3. LEGAL PROCEEDINGS Claims under insurance policies written by the Company's subsidiaries are investigated and settled either by claims adjusters employed by them, by their independent agents or by independent adjusters. Each subsidiary employs a staff of claims adjusters at its home office and at some regional offices. Some independent agents may have the authority to settle small claims. Independent claims adjusting firms are used to assist in handling various claims in areas where insurance volume does not warrant the maintenance of a staff adjuster. If a claim or loss cannot be settled and results in litigation, the subsidiary generally retains outside counsel. At present, neither the Company nor any of its subsidiaries is engaged in any litigation known to the Company which is expected to have a material adverse effect upon the Company's business. As is common with property casualty insurance companies, the Company's subsidiaries are regularly engaged in the defense of claims arising out of the conduct of the insurance business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1995 to a vote of holders of the Company's Common Stock. 21 22 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock of the Company is traded in the over-the-counter market and is quoted on the National Association of Securities Dealers Automated Quotation ("NASDAQ") National Market System under the symbol "BKLY". The following table sets forth the high and low sale prices for the indicated periods, all as reported by NASDAQ.
Common Price Range Dividends Paid ----------- -------------- High Low Per Share ---- --- --------- 1995: Fourth Quarter $ 55 1/2 $ 43 $ .12 cash Third Quarter 47 35 1/2 $ .12 cash Second Quarter 39 35 $ .12 cash First Quarter 39 5/8 34 1/2 $ .11 cash 1994: Fourth Quarter $ 38 1/4 $ 32 1/2 $ .11 cash Third Quarter 39 35 1/4 $ .11 cash Second Quarter 42 34 3/4 $ .11 cash First Quarter 38 32 1/2 $ .10 cash
The closing price on March 4, 1996, as reported on the NASDAQ National Market System, was $45 1/4 per share. The approximate number of record holders of the Common Stock on March 4, 1996 was 915. 22 23 ITEM 6. SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 1995
Year Ended December 31, --------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (Amounts in thousands except per share data) Net premiums written $ 860,421 $ 717,933 $ 537,646 $ 417,678 $ 411,660 Net premiums earned 803,336 655,038 501,433 416,003 408,133 Net investment income 137,332 109,683 92,773 91,629 85,103 Management fees and commissions 68,457 64,536 54,027 54,734 50,148 Realized investment gains (losses) 10,357 (170) 23,523 3,356 (4,823) Other income 2,461 1,703 1,550 1,478 2,690 Total revenues 1,021,943 830,790 673,306 567,200 541,251 Interest expense 28,209 27,601 25,275 19,266 10,618 Income before Federal income taxes 82,747 30,774 61,364 54,521 60,084 Federal income tax (expense) benefit (17,554) 1,552 (9,181) (8,041) (13,500) Income before minority interest and change in accounting 65,193 32,326 52,183 46,480 46,584 Minority interest (4,311) 2,768 (596) -- -- Cumulative effect of change in accounting principle -- -- -- 5,902 -- Net income before preferred dividends 60,882 35,094 51,587 52,382 46,584 Preferred dividends 11,062 10,356 -- -- -- Net income attributable to common stockholders 49,820 24,738 51,587 52,382 46,584 Data per common share: Income before change in accounting 2.86 1.44 2.87 2.59 2.61 Net income 2.86 1.44 2.87 2.92 2.61 Stockholders' equity (1) 35.39 26.68 30.36 26.33 23.56 Cash dividends declared $ .48 $ .44 $ .40 $ .36 $ .32 Weighted average shares outstanding 17,414 17,182 17,946 17,942 17,862 Investments (1) $2,588,346 $1,901,715 $1,748,702 $1,396,082 $1,238,645 Total assets (2) 3,618,684 3,582,291 3,337,705 1,953,294 1,525,975 Reserves for losses and loss expenses (2) 1,660,020 2,070,886 2,016,348 995,247 680,109 Long-term Debt 290,981 290,798 290,633 205,001 106,090 Stockholders' equity (1) 929,815 597,601 526,281 474,396 421,736
(1) Investments and stockholders' equity reflect the adoption of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," as of December 31, 1993. Included in the calculation of common stockholders' equity per share are unrealized investments gains (losses), net of federal income taxes, of $48,450,000, ($33,973,000) and $36,450,000 as of December 31, 1995, 1994 and 1993, respectively. (2) Total assets and reserves for losses and loss expenses reflect the adoption of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short Duration and Long-Duration Contracts," as of December 31, 1992. 23 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Industry Overview The demand for insurance can be characterized as fairly stable and is influenced primarily by general economic conditions, while the supply of insurance is directly related to available capacity, i.e., the level of policyholders' surplus employed in the industry and the willingness of insurance management to risk that capital. In general, it is believed that the amount of available capacity changes as the perceived rate of return on capital employed fluctuates based on the adequacy of premium rates and available investment returns. The adequacy of premium rates is affected mainly by the severity and frequency of claims which are influenced by many factors including natural disasters, regulatory measures and court decisions that define and expand the extent of coverage and the effects of economic inflation on the amount of compensation due for injuries or losses. In addition, investment rates of return may impact policy rates. These factors can have a significant impact on the ultimate adequacy of premium rates because a property casualty insurance policy is priced before its costs are known, as premiums usually are determined long before claims are reported. Over the past several years a trend of increasing price competition, combined with an increase in the number and size of catastrophic losses, has produced a significant reduction in underwriting profitability for the Company and the industry. Operating Results for the Year Ended December 31, 1995 as Compared to the Year Ended December 31, 1994 Net income attributable to common shareholders ("Net Income") for 1995 was $50 million, or $2.86 per share, compared with 1994 earnings of $25 million, or $1.44 per share. The 1995 results include after-tax realized investment gains of $6 million or $.36 per share, compared with after-tax realized investment losses of $86,000 or $.01 per share recorded in 1994. Net premiums written in 1995 grew by 20% to $860 million from $718 million written during 1994 due to increases recorded by all four segments of our operations. Premiums written by the regional segment grew by 24% in 1995 to $478 million compared to $387 million written during 1994. Approximately 60% of the growth was from three operations which the Company established in 1992 and 1993. The balance of this increase primarily results from the expansion by the regional operations into new markets. Premiums written by the reinsurance segment grew by 11% to $196 million from $177 million written during 1994. The growth in reinsurance premiums written was mainly due to growth in facultative and fidelity and surety premiums written. Premiums written by the specialty segment grew by 19% in 1995 to $161 million from $135 million in 1994. The growth in the specialty premiums written is due mainly to decreases in the amounts of business ceded to unaffiliated reinsurers. Premiums written by the alternative markets segment grew by 30% in 1995, to $26 million from $20 million in 1994. The growth in this segment's premiums written is due to the inclusion of Midwest, which was acquired in November 1995, and modest premium growth recorded by Signet Star's alternative markets division. Net investment income increased, on a pre-tax basis, to $137 million from $110 million earned in 1994. The higher level of investment earnings is due primarily to growth in investable assets generated by an increase in cash flow from operations and increased portfolio yields. The pretax yield of the portfolio increased as a result of a change in the mix of fixed maturity investments, an increase in the duration of the portfolio and an increase in trading account profits (see "Liquidity and Capital Resources"). 24 25 Management fees and commissions consists primarily of fees and commissions earned by the alternative markets operating units. These fees and commissions grew by 6% to $68 million in 1995 from $65 million earned in 1994. This increase was due mainly to the inclusion of a full year's results for Key Risk Services, Inc. which was acquired in May 1994 as well as fees earned by Berkley Care Network which the Company established in June 1995. These increases were partially offset by a restructuring of one alternative markets operating unit. The combined ratio (on a statutory basis) of the Company's insurance operations decreased to 102.5% in 1995 from 105.0% (101.9% before the Northridge Earthquake) in 1994 due to an improvement in the consolidated loss ratio which was partially offset by a slight increase in the expense ratio. The consolidated loss ratio (losses and loss expenses incurred expressed as a percentage of premiums earned) decreased to 70.7% from 73.7% primarily due to the effect of the Northridge Earthquake, which significantly impacted 1994 results. This improvement was partially offset by an increase in the frequency and severity of losses incurred by our commercial transportation unit. Other operating costs and expenses, which consists of the expenses of the Company's insurance and alternative markets segments as well as the Company's corporate and investment expenses, increased by 19% to $340 million from $286 million recorded in 1994. This increase was due primarily to the substantial growth in premium volume which in turn results in an increase in variable underwriting expenses. The consolidated expense ratio (underwriting expenses expressed as a percentage of premiums written) of the Company's insurance operations increased to 31.3% from 30.8% in 1994. The expense ratio increased due to the effects of start-up operations which generally incur a higher expense ratio in the early stages of their development. Minority interest for 1995 was an expense of $4 million as compared to income of $3 million reported in 1994. The change in minority interest was due to earnings generated by Signet Star in 1995 versus a loss in 1994. Operating Results for the Year Ended December 31, 1994 as Compared to the Year Ended December 31, 1993 Net income for 1994 was $25 million, or $1.44 per share, compared with 1993 earnings of $52 million, or $2.87 per share. The 1994 results include after-tax realized investment losses of $86,000, or $.01 per share, compared with after-tax realized investment gains of $15 million, or $.82 per share, realized in 1993. In addition, the 1994 results were adversely impacted by a higher level of catastrophes losses including the Company's share of losses incurred by Signet Star due to the Northridge earthquake in California. Furthermore, in January 1994 the Company issued $150 million of 7.375% Series A Cumulative Redeemable Preferred Stock which resulted in preferred dividends of $10 million and had a negative impact on the comparative results. Net premiums written in 1994 grew by 33.5% to $718 million from $538 million written during 1993, primarily due to growth in reinsurance premium volume as a result of the inclusion of Signet Star's results for the entire year. In addition, premiums written by the Company's regional insurance operations increased by $85 million. Approximately two thirds of this increase was due to the three new operations referred to above. The balance of this increase resulted primarily from the expansion into new markets by the remainder of the regional group. Premium volume for the alternative markets segment was $20 million in 1994, compared with $5 million in 1993. The increase is due primarily to the inclusion of the results of Signet Star's alternative markets division for the entire year. 25 26 Net investment income increased, on a pre-tax basis, to $110 million from $93 million earned in 1993. The higher level of investment earnings is due to a full year of earnings of Signet Star and growth in investable assets, generated by cash flow from operations and the issuance of 7.375% Series A Cumulative Redeemable Preferred Stock. The higher level of interest expense resulted from the issuance of subsidiary debt in connection with the formation of Signet Star (see "Liquidity and Capital Resources"). Management fees and commissions increased by 20% to $65 million from $54 million recorded in 1993 due primarily to a full year's earnings of Signet Star's alternative markets division and the acquisition of Key Risk in April 1994. The pre-tax earnings of this segment decreased to $7 million from $8 million earned in 1993 due to the affects of the restructuring referred to above. The combined ratio (on a statutory basis) of the Company's insurance operations increased to 105.0% (101.9% before the Northridge Earthquake) in 1994 from 103.3% in 1993 due to an increase in the consolidated loss ratio. The consolidated loss ratio (losses and loss expenses incurred expressed as a percentage of premiums earned) increased to 73.7% from 71.1% in 1993. The increase in the loss ratio was due to a higher level of catastrophes including after-tax catastrophe losses of $7.5 million resulting from the Northridge Earthquake. Other operating costs and expenses increased by 27% to $286 million. This increase is due to the inclusion of a full year of operating results of Signet Star, a higher level of costs associated with the three new insurance operations and increased expenses in the alternative markets segment as a result of the acquisition of Key Risk Services, Inc. The consolidated expense ratio (underwriting expenses expressed as a percentage of premiums written) of the Company's insurance operations decreased to 30.8% in 1994 from 31.7% in 1993 due primarily to significant increases in the premium volume of Signet Star which has a lower expense ratio than our other insurance operations. Liquidity and Capital Resources General The Company's subsidiaries are highly liquid, receiving substantial cash from premiums, investment income, management fees and proceeds from sales and maturities of portfolio investments. The principal outflows of cash are payments of claims, taxes, interest and operating expenses. The net cash provided from operating activities (before trading account transactions) was $206.6 million in 1995 and $170.3 million in 1994. The increase in cash flow in 1995 was due primarily to additional cash flow generated by the Company's regional operations due to a significant increase in the premium volume. As a holding company, the Company derives cash from its subsidiaries in the form of dividends, tax payments and management fees. The Company is obligated to service its debt, pay consolidated Federal income taxes and pay its expenses. Tax payments and management fees from the insurance subsidiaries are made under agreements which generally are subject to approval by state insurance departments. Maximum amounts of dividends that can be taken without regulatory approval are prescribed by statute; to date, cash dividends have not required regulatory approval (See Note 13 of "Notes to Consolidated Financial Statements"). Financing Activity In January 1994, the Company issued 6 million depositary shares each representing a one-sixth interest in a share of 7.375% Series A Cumulative Redeemable Preferred Stock and received net proceeds of approximately $145 million. A portion of the proceeds of this offering were contributed to the start up insurance subsidiaries to support their growth. 26 27 In March 1995, the Company purchased 117,000 shares of its Common Stock for approximately $4.1 million. Pursuant to an authorization of the Board of Directors, up to 334,000 additional shares may be purchased from time to time. In October 1995, the Company issued 3,450,000 shares of common stock, and received net proceeds of approximately $145 million which was used to finance the acquisition of Midwest. On December 31, 1995, in connection with the acquisition of the remaining 40% of Signet Star, the Company issued to General Reinsurance Corporation (General Re), 458,667 shares of Series B Cumulative Redeemable Preferred Stock having an aggregate liquidation preference of $68,800,000. The Series B Preferred Stock has a dividend rate increasing up to 6% during the first twelve months. The rate is subject to readjustment based on certain predetermined conditions. In addition, the Company guaranteed a senior subordinated promissory note of Signet Star in the principal amount of $35,793,085, which matures July 1, 2003 and bears interest at the rate of 6.5%. This note was issued to General Re in exchange for the convertible note previously held by General Re. In November 1993, Signet Star borrowed the maximum amount available under its revolving credit facility and used the proceeds to redeem senior notes issued in connection with the July 1, 1993 acquisition. The revolving credit facility was repaid on January 19, 1996 as discussed below. On January 19, 1996 the Company issued $100 million of 6.25%, ten-year notes which are not redeemable until maturity and utilized a portion of the proceeds to retire $28.4 million of Signet Star's bank debt. The balance of the proceeds from all of the above-mentioned offerings of securities is available for acquisitions, working capital and other general corporate purposes. The Company has on file two "shelf" Registration Statements with the Securities and Exchange Commission with a combined remaining balance of $190 million in additional equity and/or debt securities. The securities may be offered from time-to-time as determined by funding requirements and market conditions. Investments In its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities which, combined with expected cash flow, is believed adequate to meet foreseeable payment obligations. As part of this strategy, the Company attempts to maintain an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities, i.e., policy claims and debt obligations. The Company's investment policy with respect to fixed maturity securities is generally to purchase instruments with the expectation of holding them to their maturity. However, active management of the portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as changes in financial market conditions alter the assumptions underlying the purchase of certain securities. Sales of fixed income securities in 1995 were the result of financial market conditions and the Company's strategy of maintaining an appropriate balance between the duration of its assets and liabilities. The investment portfolio, valued on a cost basis, grew in 1995 by $553.0 million to approximately $2,508 million primarily due to the combined effects of the acquisition of Midwest and net cash flow from operations. 27 28 During 1995, the Company invested approximately $66 million of its available cash inflow in equity securities and $127 million in corporate bonds (principally mortgage-backed securities). At December 31, 1995, the portion of the portfolio invested in tax-exempt securities was 32% (36% in 1994) and U.S. Government securities and cash equivalents comprised 30% (33% in 1994) of invested assets. Investments in corporate fixed maturity securities (including mortgage-backed securities) were 28% (24% in 1994) of the portfolio at December 31, 1995, and equity securities represented the balance. Federal Income Taxes The Company files a consolidated Federal income tax return with all its subsidiaries except Signet Star. Federal income tax expense in 1995 was $17.6 million (21% effective rate) as compared to a benefit of $1.6 million recorded in 1994. The 1995 effective tax rate is lower than the statutory tax rate of 35% because a substantial portion of investment income is tax-exempt. The 1994 tax benefit is due to the fact that tax-exempt investment income exceeded total pre-tax income. At December 1995, the Company had a deferred tax liability of $57.7 million, which results primarily from unrealized investment gains and intangible assets, and a deferred tax asset of $43.3 million, which results primarily from the discounting of loss reserves for Federal income tax purposes. The realization of the deferred tax asset is dependent upon the Company's ability to generate sufficient taxable income in future periods. Based on historical results and the prospects for current operations, management anticipates that it is more likely than not that future taxable income will be sufficient for the realization of this asset. In establishing the amount of the deferred tax asset, management has included a valuation allowance for the future uncertainty associated with the extended time period required for the complete reversal of the effects of loss reserve discounting. Reinsurance The Company follows the customary industry practice of reinsuring a portion of its exposures, paying to reinsurers a part of the premiums received on the policies it writes. Reinsurance is purchased principally to reduce net liability on individual risks and to protect against catastrophic losses. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policies, it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded. The Company monitors the financial condition of its reinsurers and attempts to place its coverages only with substantial, financially sound carriers. The Company has established reserves for potentially uncollectible reinsurance. Regional Operations In 1995, Continental Western and the Habitational Division of Firemen's generally retained $475,000 on individual risks while the Company's other regional subsidiaries generally retained $400,000 on individual risks. The regional group also maintained catastrophe reinsurance protection for approximately 95% of weather-related losses above $3 million per occurrence up to a maximum of $35 million and carried additional catastrophe protection on an aggregate basis for storms resulting in loss events between $500,000 and $6 million ($8 million in 1996). 28 29 Reinsurance Operations Signet Star's retrocessional program provides coverage for property losses in three layers as follows: (i) 100% of $6.5 million in excess of $7 million per occurrence; (ii) 95% of $9 million in excess of $13.5 million per occurrence; and (iii) 90% of $7.5 million in excess of $22.5 million per occurrence. In 1995, Signet Star had retrocessional coverage for its casualty facultative business which provides coverage for 40% (20% in 1996) of $5 million per certificate on a pro-rata basis; this coverage applies to Signet Star's individual certificate business only. During 1995, Signet Star had retrocessional coverage for its fidelity and surety business for approximately 60% (80% in 1996) of each loss up to $2,250,000 in excess of $750,000 per occurrence. Specialty Operations Admiral's retention in 1995 was $170,000 ($175,000 in 1996) per risk for most classes of business and $2.1 million ($5.0 million in 1996), per insured, for business written by Monitor Liability Managers. In addition, in 1996 Admiral's Directors and Officer coverage will also include additional protection on an aggregate basis. Nautilus generally retained $97,500 per risk in 1995 ($140,000 in 1996) and Carolina maintained its retention at $300,000 on liability exposures. Alternative Markets Operations Midwest's retention is generally $1 million per occurrence above the self insured's underlying retention. Capitalization For the year ended December 31, 1995 as a result of retained earnings and the transactions discussed above under "Financing Activity", stockholders' equity increased by approximately $332.2 million and the total amount of capital employed in the business grew to $1,249.1 million. Accordingly, the percentage of the Company's capital attributable to debt decreased to 26% at December 31, 1995 from 36% at December 31, 1994. In January 1996 the Company issued $100 million of 6.25% ten-year notes. On a proforma basis, assuming the issuance of these notes occurred on December 31, 1995, the percentage of the Company's capital attributable to debt would have been 31%. 29 30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements Page ----------------------------- ---- W. R. Berkley Corporation and Subsidiaries: Independent auditors' report 31 Consolidated balance sheets, December 31, 1995 and 1994 32 Consolidated statements of operations, years ended December 31, 1995, 1994, and 1993 33 Consolidated statements of stockholders' equity, years ended December 31, 1995, 1994, and 1993 34 Consolidated statements of cash flows, years ended December 31, 1995, 1994, and 1993 35 Notes to consolidated financial statements 36
30 31 Independent Auditors' Report Board of Directors and Stockholders W. R. Berkley Corporation We have audited the consolidated balance sheets of W. R. Berkley Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of W. R. Berkley Corporation and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, W. R. Berkley Corporation adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" on December 31, 1993. We have also previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheets of W. R. Berkley Corporation and subsidiaries as of December 31, 1993, 1992 and 1991, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1992 and 1991 (none of which are presented herein); and we expressed unqualified opinions on those consolidated financial statements. In 1992, W. R. Berkley Corporation adopted the provisions of the Financial Accounting Standards Board's statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." In our opinion, the information set forth in the selected financial data for each of the years in the five-year period ended December 31, 1995, appearing on page 23, is fairly presented, in all material respects, in relation to the consolidated financial statements from which it has been derived. KPMG Peat Marwick LLP New York, New York February 22, 1996 31 32 W. R. Berkley Corporation and Subsidiaries Consolidated Balance Sheets December 31, 1995 and 1994 (Dollars in thousands, except share data)
1995 1994 ---------- ---------- Assets Investments: Invested cash $ 196,732 $ 214,116 Fixed maturity securities: Held to maturity, at cost (fair value $176,193 and $195,983) 169,078 192,827 Available for sale at fair value (cost $1,894,451 and $1,408,063) 1,959,910 1,353,891 Equity securities, at fair value: Available for sale (cost $92,472 and $68,787) 101,551 69,338 Trading account (cost $155,301 and $71,211) 161,075 71,543 Cash 10,185 5,513 Premiums and fees receivable 231,093 191,418 Due from reinsurers 423,626 1,127,416 Accrued investment income 34,373 27,853 Prepaid reinsurance premiums 77,656 69,169 Deferred policy acquisition costs 89,517 72,026 Excess of cost over net assets acquired 69,600 55,319 Deferred Federal income taxes -- 42,217 Other assets 94,288 89,645 ---------- ---------- $3,618,684 $3,582,291 ========== ========== Liabilities, Reserves, Debt and Stockholders' Equity Liabilities and reserves: Reserves for losses and loss expenses $1,660,020 $2,070,886 Unearned premiums 450,522 350,263 Due to reinsurers 65,798 54,845 Deferred Federal income taxes 14,363 -- Other liabilities 169,080 116,983 ---------- ---------- 2,359,783 2,592,977 ---------- ---------- Long-term debt 290,981 290,798 Notes payable to Banks 28,306 40,204 Minority interest 9,799 60,711 Stockholders' equity: Preferred stock, par value $.10 per share: Authorized 5,000,000 shares: 7 3/8% Series A Cumulative Redeemable Preferred Stock 1,000,000 shares issued and outstanding 100 100 Series B Cumulative Redeemable Preferred Stock 458,667 shares issued and outstanding 46 -- Common stock, par value $.20 per share: Authorized 40,000,000 shares, issued and outstanding, net of treasury shares, 20,168,167 and 16,777,718 shares 4,854 4,165 Additional paid-in capital 547,068 336,659 Retained earnings 424,261 382,859 Net unrealized investment gains (losses), net of taxes 48,450 (33,973) Treasury stock, at cost, 4,101,211 and 4,041,660 shares (94,964) (92,209) ---------- ---------- 929,815 597,601 ---------- ---------- $3,618,684 $3,582,291 ========== ==========
See accompanying notes to consolidated financial statements. 32 33 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, 1995, 1994 and 1993 (Dollars in thousands, except per share data)
1995 1994 1993 ---- ---- ---- Revenues: Net premiums written $ 860,421 $ 717,933 $ 537,646 Increase in net unearned premiums (57,085) (62,895) (36,213) ---------- --------- --------- Premiums earned 803,336 655,038 501,433 Net investment income 137,332 109,683 92,773 Management fees and commissions 68,457 64,536 54,027 Realized investment gains (losses) 10,357 (170) 23,523 Other income 2,461 1,703 1,550 ---------- --------- --------- Total revenues 1,021,943 830,790 673,306 Operating costs and expenses: Losses and loss expenses (570,998) (486,149) (361,245) Other operating costs and expenses (339,989) (286,266) (225,422) Interest expense (28,209) (27,601) (25,275) ---------- --------- --------- Income before income taxes and minority interest 82,747 30,774 61,364 Federal income tax (expense) benefit (17,554) 1,552 (9,181) ---------- --------- --------- Income before minority interest 65,193 32,326 52,183 Minority interest (4,311) 2,768 (596) ---------- --------- --------- Net income before preferred dividends 60,882 35,094 51,587 Preferred dividends (11,062) (10,356) -- ---------- --------- --------- Net income attributable to common stockholders $ 49,820 $ 24,738 $ 51,587 ========== ========= ========= Net income per share $ 2.86 $ 1.44 $ 2.87 ========== ========= =========
See accompanying notes to consolidated financial statements. 33 34 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended December 31, 1995, 1994 and 1993 (Dollars in thousands, except per share data)
Preferred and Common Net stock and unrealized Total additional investment stockholders' paid-in Retained gains Treasury equity capital earnings (losses) stock ------------- ---------- -------- ---------- -------- Balance, December 31, 1992 $474,396 $192,943 $321,252 $ 4,904 $(44,703) Net income attributable to common stockholders 51,587 -- 51,587 -- -- Issuance of common shares 1,588 668 -- -- 920 Net change in unrealized investment gains: Change in accounting for investment gains 32,714 -- -- 32,714 -- Other (1,168) -- -- (1,168) -- Purchase of treasury stock (25,688) -- -- -- (25,688) Dividends to common stockholders ($.40 per share) (7,148) -- (7,148) -- -- -------- -------- -------- -------- -------- Balance, December 31, 1993 526,281 193,611 365,691 36,450 (69,471) Net income attributable to common stockholders 24,738 -- 24,738 -- -- Issuance of common shares 5,657 2,038 -- -- 3,619 Issuance of preferred stock 145,275 145,275 -- -- -- Net change in unrealized investment (losses) (70,423) -- -- (70,423) -- Purchase of treasury stock (26,357) -- -- -- (26,357) Dividends to common stockholders ($.44 per share) (7,570) -- (7,570) -- -- -------- -------- -------- -------- -------- Balance, December 31, 1994 597,601 340,924 382,859 (33,973) (92,209) Net income attributable to common stockholders 49,820 -- 49,820 -- -- Issuance of common shares 146,484 145,144 -- -- 1,340 Issuance of preferred stock 66,000 66,000 -- -- -- Net change in unrealized investment gains 82,423 -- -- 82,423 -- Purchase of treasury stock (4,095) -- -- -- (4,095) Dividends to common stockholders ($.48 per share) (8,418) -- (8,418) -- -- -------- -------- -------- -------- -------- Balance, December 31, 1995 $929,815 $552,068 $424,261 $ 48,450 $(94,964) ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 34 35 W. R. Berkley Corporation and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 1995, 1994 and 1993 (Dollars in thousands)
1995 1994 1993 ---- ---- ---- Cash flows from operating activities: Net income before preferred dividends $ 60,882 $ 35,094 $ 51,587 Adjustments to reconcile net income to net cash flows provided by operating activities: Minority interest 4,311 (2,768) 596 Increase in reserves for losses and loss expenses, net of due to/from reinsurers 106,333 117,371 60,111 Depreciation and amortization 14,286 14,989 12,788 Change in unearned premiums and prepaid reinsurance premiums 57,085 62,895 36,213 Change in premiums and fees receivable (20,551) (45,181) (708) Change in Federal income taxes 491 (9,687) (1,959) Change in deferred policy acquisition costs (15,607) (13,941) (9,893) Realized investment (gains) losses (10,357) 170 (23,523) Other, net 9,722 11,375 19,386 --------- --------- --------- Net cash provided by operating activities before trading account sales (purchases) 206,595 170,317 144,598 Trading account sales (purchases), net (47,314) (53,041) 74,846 --------- --------- --------- Net cash provided by operating activities 159,281 117,276 219,444 --------- --------- --------- Cash flows used in investing activities: Proceeds from sales, excluding trading account: Fixed maturity securities available for sale 452,460 415,871 412,866 Equity securities 63,863 181,594 98,289 Proceeds from maturities and prepayments of fixed maturity securities 159,731 114,200 135,648 Cost of purchases, excluding trading account: Fixed maturity securities available for sale (690,650) (703,215) (700,243) Fixed maturity securities held to maturity (30,568) -- -- Equity securities (64,187) (208,257) (102,342) Cost of acquired companies, net of acquired cash and invested cash (197,404) -- (112,787) Change in balances due to/from security brokers (8,098) 12,048 2,481 Other, net (14,472) (34,465) (18,503) --------- --------- --------- Net cash used in investing activities (329,325) (222,224) (284,591) --------- --------- --------- Cash flows from financing activities: Net proceeds from issuance of common stock 144,739 -- -- Net proceeds from issuance of preferred stock 66,000 145,275 -- Net proceeds from issuance of long-term debt -- -- 49,694 Cash dividends to common stockholders (7,844) (7,459) (7,035) Cash dividends to preferred stockholders (11,062) (8,051) -- Purchase of treasury shares (4,095) (26,357) (25,688) Issuance of subsidiary common stock in acquisition -- -- 69,931 Issuance of debt in acquisition -- -- 76,180 Proceeds from subsidiary debt -- -- 40,089 Payment of subsidiary debt (31,847) (4,527) (40,387) Other, net 1,441 156 1,588 --------- --------- --------- Net cash provided by financing activities 157,332 99,037 164,372 --------- --------- --------- Net increase (decrease) in cash and invested cash (12,712) (5,911) 99,225 Cash and invested cash at beginning of year 219,629 225,540 126,315 --------- --------- --------- Cash and invested cash at end of year $ 206,917 $ 219,629 $ 225,540 ========= ========= ========= Supplemental disclosure of cash flow information: Interest paid on debt $ 32,839 $ 24,897 $ 25,463 ========= ========= ========= Federal income taxes paid $ 17,064 $ 8,135 $ 10,455 ========= ========= ========= Reclassifications from held to maturity to available for sale $ 14,100 $ -- $ -- ========= ========= =========
See accompanying notes to consolidated financial statements. 35 36 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 1995, 1994 and 1993 (1) Summary of Significant Accounting Policies (A) Principles of consolidation and basis of presentation The consolidated financial statements, which include the accounts of W. R. Berkley Corporation and its subsidiaries ("the Company"), have been prepared on the basis of generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the revenues and expenses reflected during the reporting period. Actual results could differ from those estimates. All significant intercompany transactions and balances have been eliminated. Reclassifications have been made in the 1993 and 1994 financial statements to conform them to the presentation of the 1995 financial statements. (B) Revenue recognition Insurance premiums written are recognized as earned generally on a pro-rata basis over the contract period. Management fees on insurance services contracts are recorded as earned primarily on a pro-rata basis over the policy period. Commission income is recognized as earned on the effective date of the applicable insurance policies. (C) Investments The Company has classified its investments into three categories. Securities that the Company has the positive intent and ability to hold to maturity are classified as "held to maturity" and reported at amortized cost. Securities which the Company purchased with the intent to sell in the near term are classified as "trading" and are reported at estimated fair value, with unrealized gains and losses reflected in the statement of operations. The remaining securities are classified as "available for sale" and carried at estimated fair value, with unrealized gains and losses, net of applicable income taxes, excluded from earnings and reported as a separate component of stockholders' equity. Realized gains or losses represent the difference between the cost of securities sold and the proceeds realized upon sale. The cost of securities is adjusted where appropriate to include provision for declines in value which are considered to be other than temporary. The Company uses the specific identification method where possible and the first-in, first-out method in other instances, to determine the cost of securities sold. Realized gains or losses, including any provision for decline in value, are included in the statement of operations. 36 37 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, continued (D) Deferred policy acquisition costs Acquisition costs (primarily commissions and premium taxes) incurred in writing insurance and reinsurance business are deferred and amortized ratably over the terms of the related contracts. Deferred policy acquisition costs are limited to the amounts estimated to be recoverable from the applicable unearned premiums and the related anticipated investment income by giving effect to anticipated losses, loss adjustment expenses and expenses necessary to maintain the contracts in force. (E) Reserves for losses and loss expenses Reserves for losses and loss expenses are an accumulation of amounts determined on the basis of (1) evaluation of claims for business written directly by the Company; (2) estimates received from other companies for reinsurance assumed; and (3) estimates for losses incurred but not reported (based on Company and industry experience). These estimates are periodically reviewed and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments are reflected in results of operations in the period in which they are determined. A subsidiary of the Company, Midwest Employers Casualty Company ("Midwest") which was acquired in November 1995, discounts its liabilities for excess workers' compensation ("EWC") losses and loss expenses using a "risk-free" rate. Midwest discounts its EWC liabilities because of the long period of time over which it pays losses. The Company believes that utilizing a "risk-free" rate to discount these reserves more closely reflects the economics associated with the excess workers' compensation line of business (see Note 11 of notes to consolidated financial statements). (F) Reinsurance ceded Ceded unearned premiums are reported as prepaid reinsurance premiums and estimated amounts of reinsurance recoverable on unpaid losses are included in due from reinsurers. To the extent any reinsurer does not meet its obligations under reinsurance agreements, the liability must be discharged by the Company. The Company has provided reserves for this potential uncollectability. (G) Excess of cost over net assets acquired Costs in excess of the net assets of subsidiaries acquired are being amortized on a straight-line basis over 25 to 40 years. The Company continually evaluates the amortization period of its intangible assets. Estimates of useful lives are revised when circumstances or events indicate that the original estimate is no longer appropriate. 37 38 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, continued (H) Federal income taxes The Company and its 80% or more owned subsidiaries file a consolidated Federal income tax return. In 1995 and prior years, Signet Star filed its own consolidated Federal income tax return. The Company's method of accounting for income taxes is the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are measured annually using tax rates currently in effect or expected to apply in the years in which those temporary differences are expected to reverse. (I) Recent Accounting Pronouncements In October 1995, the Financial Accounting Standards Board ("FASB") issued statements of financial accounting standards ("SFAS") No. 123, Accounting for Stock-Based Compensation. This statement addressed the accounting for the cost of stock-based compensation, such as stock options. SFAS No. 123 permits either expensing the cost of stock-based compensation over the vesting period or disclosing in the financial statement footnotes what this expense would have been. This cost would be measured at the grant date based upon estimated fair values, using option pricing models. The Company expects to adopt the disclosure alternative of this statement in 1996. (2) Acquisitions On September 11, 1995, the Company formed Berkley International, LLC ("Berkley International"), a limited liability company. The Company agreed to contribute up to $65 million to Berkley International in exchange for a 65% membership interest. During 1995, the Company purchased majority interests in two property and casualty companies in Argentina for consideration of approximately $9.2 million, which constituted a portion of the Company's initial contribution to Berkley International. The proforma effect of these transactions on the Company's results of operations is not significant. On November 8, 1995, the Company acquired 100% of the stock of MECC, Inc., the Parent of Midwest Employer's Casualty Company, for $141,908,000. In connection with this acquisition, the Company also retired approximately $19,590,000 million of MECC, Inc.'s debt. The purchase was funded by the issuance of 3,450,000 shares of Common Stock issued at $43.75 per share. On December 31, 1995, the Company acquired General Re Corporation's ("General Re") 40% interest in Signet Star Holdings, Inc. ("Signet Star") by issuing to General Re 458,667 shares of Series B Cumulative Redeemable Preferred Stock of the Company having an aggregate liquidation preference of $68,800,000. The only significant effect on the Company's financial statements from this acquisition is an increase in preferred stock outstanding and the elimination of the related minority interest because Signet Star's results of operations were previously consolidated. All of the acquisitions were accounted for as purchases and, accordingly, the results of operations of the acquired companies have been included from the dates of acquisition. 38 39 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (2) Acquisitions, continued The net assets acquired in 1995 were as follows (dollars in thousands):
Berkley MECC, Signet International Inc. Star Total ------------- ---- ---- ----- Total investments and cash $19,986 $362,120 $ -- $ 382,106 Due from reinsurers 8,338 48,474 (735,144) (678,332) Deferred policy acquisition costs 2,519 5,606 (6,241) 1,884 Excess of cost over net assets acquired 505 16,541 -- 17,046 Other assets 17,489 18,688 (2,283) 33,894 ------- -------- --------- --------- Total assets $48,837 $451,429 $(743,668) $(243,402) ======= ======== ========= ========= Reserves for losses and loss expenses $14,849 232,985 $(735,144) $(487,310) Deferred federal income taxes -- 21,599 (5,066) 16,533 Other liabilities 14,841 34,987 6,444 56,272 ------- -------- --------- --------- Total liabilities 29,690 289,571 (733,766) (414,505) ------- -------- --------- --------- Debt -- 19,950 -- 19,950 Minority interest 9,960 -- (75,902) (65,942) Net assets acquired $ 9,187 $141,908 $ 66,000 $ 217,095 ======= ======== ========= =========
On July 1, 1993, the Company exchanged all the stock of Signet Reinsurance Company ("Signet") for 60% of the stock of Signet Star, a newly formed holding company. Signet Star simultaneously acquired all the stock of North Star Reinsurance Company ("North Star Reinsurance") from General Re in exchange for 40% of the stock of Signet Star and senior and convertible notes. In connection with the formation of Signet Star, North Star Reinsurance entered into a Retrocessional Agreement (the "Retrocessional Agreement") with General Reinsurance Corporation ("GRC"), pursuant to which North Star Reinsurance reinsured its respective liabilities and assigned its respective rights and obligations arising from any insurance or reinsurance contracts written prior to January 1, 1993 with and to GRC. In connection with the 1995 acquisition of the remaining 40% interest in Signet Star, North Star Reinsurance was sold to General Re and all business written subsequent to July 1, 1993 was novated to Signet Star. As a result, business written by North Star Reinsurance prior to January 1, 1993, which had been retroceded to General Re, is no longer reflected in the Company's financial statements. The only effect on the Company's financial statements resulting from this aspect of the transaction is that the Company's reserves for losses and loss expenses is reduced by $735,144,000 and "due from reinsurers" is reduced by the same amount. This aspect of the transaction does not effect the Company's cash flow, equity or statements of operations. 39 40 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (2) Acquisitions, continued The Company's consolidated Proforma results of operations assuming the acquisitions of MECC, Inc. and the remaining 40% interest in Signet Star occurred as of January 1, 1995 and 1994, respectively, are as follows (dollars in thousands):
1995 1994 ---- ---- Total revenues $1,100,195 $929,405 ========== ======== Net income attributable to common shareholders $ 70,102 $ 46,469 ========== ======== Net income per share of common stock $ 3.48 $ 2.30 ========== ========
The Proforma consolidated financial data do not purport to represent what the Company's results of operations actually would have been had the acquisitions and related financings occurred on the dates indicated, or to project the Company's results of operations for any future period. The above amounts primarily reflect adjustments for the effects of the revaluation of assets and liabilities of the purchased companies and the financing of such acquisitions on the results of operations. (3) Federal Income Taxes The Federal income tax expense (benefit) consists of (in thousands):
1995 1994 1993 ---- ---- ---- Current expense $17,879 $ 8,020 $8,734 Deferred expense (benefit) (325) (9,572) 447 ------- ------- ------ Total expense (benefit) $17,554 $(1,552) $9,181 ======= ======= ======
A reconciliation of the Federal income tax expense (benefit) and the amounts computed by applying the Federal income tax rate of 35% to pre-tax income is as follows (in thousands):
1995 1994 1993 ---- ---- ---- Computed "expected" tax expense $ 28,961 $ 10,771 $ 21,478 Tax-exempt investment income (12,938) (12,964) (11,972) Other, net 1,531 641 (325) -------- -------- -------- Total expense (benefit) $ 17,554 $ (1,552) $ 9,181 ======== ======== ========
40 41 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (3) Federal Income Taxes, continued At December 31, 1995, 1994 and 1993, the tax effects of differences that give rise to significant portions of the deferred tax asset and deferred tax liability are as follows (dollars in thousands):
1995 1994 1993 ---- ---- ---- Deferred Tax Asset Loss reserve discounting $ 46,922 $58,080 $51,904 Realized investment losses -- -- 901 Alternative minimum tax 3,330 6,293 2,760 Deferred taxes on unrealized investment losses -- 16,783 -- Other 95 1,840 601 -------- ------- ------- Gross deferred tax asset 50,347 82,996 56,166 Less: valuation allowance 7,000 11,179 7,000 -------- ------- ------- Deferred tax asset 43,347 71,817 49,166 ======== ======= ======= Deferred Tax Liability Amortization of intangibles 13,119 13,197 13,493 Expense recognition differences 8,210 8,631 7,250 Realized investment gains 6,511 -- -- Deferred taxes on unrealized investment gains 26,088 -- 20,898 Other 3,782 7,772 7,185 -------- ------- ------- Deferred tax liability 57,710 29,600 48,826 -------- ------- ------- Net deferred tax asset(liability) $(14,363) $42,217 $ 340 ======== ======= =======
The Federal income tax expense (benefit) applicable to realized investment gains (losses) was $3,664,000, ($61,000) and $8,233,000 in 1995, 1994 and 1993, respectively. The Company had a current income tax receivable of $210,000 and $1,073,000 at December 31, 1995 and 1994, respectively. The realization of the deferred tax asset is dependent upon the Company's ability to generate sufficient taxable income in future periods. Based on historical results and the prospects for current operations, management anticipates that it is more likely than not that future taxable income will be sufficient for the realization of this asset. In establishing the amount of the deferred tax asset, management has included a valuation allowance for the future uncertainty associated with the extended time period required for the complete reversal of the effects of loss reserve discounting. At December 31, 1994, the Company recorded an additional valuation allowance of $4.2 million, which represented the tax benefit the Company would have had on its share of Signet Star's unrealized investment losses. This additional valuation allowance was established because Signet Star filed a separate consolidated return, and no capital loss carryback benefit was available. At December 31, 1995, Signet Star had an unrealized investment gain; therefore, the valuation allowance was not required. The change in the valuation allowance did not affect the Company's results of operations. 41 42 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (4) Debt Long-term debt consists of the following:
Carrying Description Rate Maturity Face Value Value ----------- ---- -------- ---------- ----- Senior Notes 8.95% May 20, 1998 $ 10,000,000 $ 9,975,000 Senior Notes 6.31% March 6, 2000 25,000,000 24,903,000 Senior Notes 6.71% March 4, 2003 25,000,000 24,878,000 Senior Subordinated Notes 6.5 % July 1, 2003 35,793,000 35,793,000 Senior Notes 9 7/8% May 15, 2008 100,000,000 96,592,000 Senior Debentures 8.7% January 1, 2022 100,000,000 98,840,000 ------------ ------------ $295,793,000 $290,981,000 ============ ============
The difference between the face value of long-term debt and the carrying value is unamortized discount. All outstanding long-term debt is not redeemable until maturity and ranks on a parity with all other outstanding indebtedness of the Company. Notes Payable to Banks Notes payable to banks represents debt outstanding pursuant to a revolving credit facility entered into by Signet Star. The face value of the debt at December 31, 1995 was $28,400,000 and the carrying value was $28,306,000. The interest rate was based on the London Interbank offered rate plus .75% to 1.50% and was 5.75% at December 31, 1995. The debt was retired in January 1996. (5) Commitments, Litigation and Contingent Liabilities At present, neither the Company nor any of its subsidiaries are engaged in any litigation known to the Company which management believes will have a material adverse effect upon the Company's business. As is common with other insurance companies, the Company's subsidiaries are regularly engaged in the defense of claims arising out of the conduct of the insurance business. In the aggregate, the Company's commitments for future buildings, land and equipment is approximately $50 million as of December 31, 1995. (6) Lease Obligations The Company and several of its subsidiaries use office space and equipment under leases expiring at various dates through September 1, 2004. These leases are operating leases for financial reporting purposes. Some of these leases have options to extend the length of the leases and contain clauses for cost of living, operating expense and real estate tax adjustments. Rental expense was approximately; $9,437,000, $8,000,000 and $6,029,000 for 1995, 1994 and 1993 respectively. Future minimum lease payments (without provision for sublease income) are: $8,755,000 in 1996; $7,404,000 in 1997; $6,520,000 in 1998; $5,074,000 in 1999; $3,899,000 in 2000; and $9,474,000 thereafter. 42 43 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (7) Stockholders' Equity Per share data have been computed based on the weighted average number of common shares outstanding. The assumed dilutive effect of employee stock options was not material. Treasury shares have been excluded from average outstanding shares from the date of acquisition. The number of shares used in the computations was 17,414,000, 17,182,000, and 17,946,000 for 1995, 1994 and 1993, respectively. Changes in shares of common stock outstanding, net of treasury shares, are as follows (in thousands):
1995 1994 1993 ---- ---- ---- Balance, beginning of year 16,778 17,337 18,020 Shares issued 3,507 179 58 Shares repurchased (117) (738) (741) ------ ------ ------ Balance, end of year 20,168 16,778 17,337 ====== ====== ======
Preferred stock consists of 1,000,000 shares of 7 3/8% Series A Cumulative Redeemable Preferred Stock and 458,667 shares of Variable Rate Series B Cumulative Redeemable Preferred Stock. The Company has the option of redeeming the Series A preferred stock after January 23, 1999 at the liquidation value of $150 per share. The Series B preferred stock has a dividend rate increasing up to 6% during the first twelve months after issuance. The rate is thereafter subject to readjustment, based on certain predetermined conditions. The Series B preferred stock is reflected at its estimated fair value of $66,000,000, based upon the current estimate of the ultimate effective dividend rate, and will be accreted to its stated value of $68,800,000 over eighteen months. (8) Stock Option Plan The Company adopted the W. R. Berkley Corporation 1992 Stock Option Plan under which 1,750,000 shares of common stock were reserved for issuance. Pursuant to the Plan, options may be granted at prices determined by the Board of Directors but not less than 85% of the fair market value on the date of grant. The following table summarizes option information, including options granted under both the 1992 and prior Plans:
Number of Shares Option Prices ------------------------ ------------------------ 1995 1994 1995 1994 ---- ---- ---- ---- Shares under option 997,637 1,054,952 $22.67-46.88 $22.67-46.88 Options exercisable 267,967 148,191 22.67-44.00 22.67-29.17 Options granted 90,500 435,775 35.18-45.75 33.50-37.94 Options exercised 57,449 28,562 22.67-36.00 20.48-30.50 Options canceled or expired 90,365 43,074 22.67-46.88 18.00-46.88 Shares available for future grant 969,192 991,995
43 44 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (9) Profit Sharing Retirement Plan The Company and its subsidiaries have profit sharing retirement plans in which substantially all employees participate. The plans provide for minimum annual contributions of 5% of eligible compensation; contributions above the minimum are discretionary and vary with each participating subsidiary's profitability. Employees become eligible to participate in the Retirement Plans on the first day of the month following the first full three months in which they are employed. Profit sharing expense amounted to $6,344,000, $5,625,000 and $4,605,000 for 1995, 1994 and 1993, respectively. (10) Investments At December 31, 1995 and 1994, there were no investments, other than investments in United States government securities, which exceeded 10% of stockholders' equity. At December 31, 1995 and 1994, investments were as follows:
December 31, 1995 ------------------------------------------------------------ Amount Gross Gross at which unrealized unrealized Fair shown in the Type of Investment Cost (a) gains losses value balance sheet ------------------ -------- ---------- ---------- ----- ------------- (Dollars in thousands) Fixed maturity securities held to maturity: State and municipal $ 155,518 $ 7,269 $ (154) $ 162,633 $ 155,518 Corporate 13,560 -- -- 13,560 13,560 ---------- ------- ------- ---------- ---------- Total fixed maturities held to maturity 169,078 7,269 (154) 176,193 169,078 ---------- ------- ------- ---------- ---------- Fixed maturity securities available for sale: United States government (b) 552,478 20,617 (307) 572,788 572,788 State and municipal 658,159 26,951 (570) 684,540 684,540 Corporate 683,814 20,635 (1,867) 702,582 702,582 ---------- ------- ------- ---------- ---------- Total fixed maturities available for sale 1,894,451 68,203 (2,744) 1,959,910 1,959,910 ---------- ------- ------- ---------- ---------- Common stocks 24,042 9,438 -- 33,480 33,480 Preferred stocks 68,430 669 (1,028) 68,071 68,071 ---------- ------- ------- ---------- ---------- Total equity securities available for sale 92,472 10,107 (1,028) 101,551 101,551 ---------- ------- ------- ---------- ---------- Trading account 155,301 6,723 (949) 161,075 161,075 Invested cash (c) 196,732 -- -- 196,732 196,732 ---------- ------- ------- ---------- ---------- Total investments $2,508,034 $92,302 $(4,875) $2,595,461 $2,588,346 ========== ======= ======= ========== ==========
(a) Adjusted as necessary for amortization of premium or discount. (b) Includes United States government agencies and authorities. (c) Short-term investments which mature within three months of the date of purchase. 44 45 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (10) Investments, continued
December 31, 1994 ------------------------------------------------------------ Amount Gross Gross at which unrealized unrealized Fair shown in the Type of Investment Cost (a) gains losses value balance sheet ------------------ -------- ---------- ---------- ----- ------------- (Dollars in thousands) Fixed maturity securities held to maturity State and municipal $ 175,987 $ 4,948 $ (1,792) $ 179,143 $ 175,987 Corporate 16,840 -- -- 16,840 16,840 ---------- ------- -------- ---------- ---------- Total fixed maturities held to maturity 192,827 4,948 (1,792) 195,983 192,827 ---------- ------- -------- ---------- ---------- Fixed maturity securities available for sale: United States government (b) 422,075 1,135 (14,354) 408,856 408,856 State and municipal 528,228 3,619 (16,225) 515,622 515,622 Corporate 457,760 811 (29,158) 429,413 429,413 ---------- ------- -------- ---------- ---------- Total fixed maturities available for sale 1,408,063 5,565 (59,737) 1,353,891 1,353,891 ---------- ------- -------- ---------- ---------- Common stocks 13,717 2,887 (134) 16,470 16,470 Preferred stocks 55,070 26 (2,228) 52,868 52,868 ---------- ------- -------- ---------- ---------- Total equity securities available for sale 68,787 2,913 (2,362) 69,338 69,338 ---------- ------- -------- ---------- ---------- Trading account 71,211 1,386 (1,054) 71,543 71,543 Invested cash (c) 214,116 -- -- 214,116 214,116 ---------- ------- -------- ---------- ---------- Total investments $1,955,004 $14,812 $(64,945) $1,904,871 $1,901,715 ========== ======= ======== ========== ==========
(a) Adjusted as necessary for amortization of premium or discount. (b) Includes United States government agencies and authorities. (c) Short-term investments which mature within three months of the date of purchase. 45 46 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (10) Investments, continued The amortized cost and fair value of fixed maturity securities at December 31, 1995, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay obligations (dollars in thousands):
1995 --------------------------- Fair Cost value ---- ----- Due in one year or less $ 89,209 $89,167 Due after one year through five years 371,666 382,596 Due after five years through ten years 608,955 627,437 Due after ten years 532,672 560,290 ---------- ---------- 1,602,502 1,659,490 Mortgaged-backed securities 461,027 476,613 ---------- ---------- Total $2,063,529 $2,136,103 ========== ==========
Realized gains (losses) and the change in difference between fair value and cost of investments, before applicable income taxes, are as follows (dollars in thousands):
1995 1994 1993 ---- ---- ---- Realized gains (losses): Fixed maturity securities sold (a) $ 7,819 $ (6,141) $ 21,014 Equity securities sold (976) 1,632 7,041 Net change in provision for decline in value (b): Fixed maturity securities (352) 4,697 (3,177) Equity securities 4,191 -- 354 Other (325) (358) (1,709) -------- --------- -------- 10,357 (170) 23,523 -------- --------- -------- Change in difference between fair value and cost of investments (c): Fixed maturity securities 123,590 (122,136) 13,993 Equity securities 13,970 2,450 (437) -------- --------- -------- 137,560 (119,686) 13,556 -------- --------- -------- Total realized gains (losses) and change in difference between cost and fair value of investments $147,917 $(119,856) $ 37,079 ======== ========= ========
(a) During 1995, 1994 and 1993, gross gains of $11,570,000, $5,601,000 and $22,893,000, respectively, and gross losses of $3,751,000, $8,177,000 and $1,879,000, respectively, were realized. (b) The provision for decline in value of investments is $3,333,000, $7,172,000 and $11,869,000 as of December 31, 1995, 1994 and 1993, respectively. The reductions resulted from the sale of securities. (c) Parentheses indicate a net unrealized decline in fair value. 46 47 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (10) Investments, continued Investment income consists of the following (dollars in thousands):
1995 1994 1993 ---- ---- ---- Investment income earned on: Fixed maturity securities $115,668 $102,826 $92,254 Invested cash 13,000 5,898 4,389 Equity securities 4,418 3,616 1,377 Trading account (a) 9,030 2,058 -- Other 1,411 1,221 348 -------- -------- ------- Gross investment income 143,527 115,619 98,368 Interest on funds held under reinsurance treaties (6,195) (5,936) (5,595) -------- -------- ------- Net investment income $137,332 $109,683 $92,773 ======== ======== =======
(a) The primary focus of the trading account activities is merger arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Merger arbitrage differs from other types of investments in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less). The Company believes that this makes merger arbitrage investments less vulnerable to changes in general financial market conditions. Potential changes in market conditions are also mitigated by the implementation of short sales. Short sales of $60,720,000 and $18,500,000 have been included in other liabilities as of December 31, 1995 and 1994, respectively. Investment income earned from trading account activity includes unrealized trading gains of $352,000 and $1,271,000 for 1995 and 1994, respectively. (11) Reserves for losses and loss expenses The table below provides a reconciliation of the beginning and ending reserve balances, on a gross of reinsurance basis, (dollars in thousands):
1995 1994 1993 ---- ---- ---- Net reserves at beginning of year $ 895,440 $ 783,218 $ 709,665 ---------- ---------- ---------- Net reserves of companies acquired 191,963 -- 20,810 Net provision for losses and loss expenses: Claims occurring during the current year 580,594 493,418 367,106 Decrease in estimates for claims occurring in prior years (9,596) (7,269) (5,861) ---------- ---------- ---------- 570,998 486,149 361,245 ---------- ---------- ---------- Net payments for claims Current year 228,100 187,295 139,292 Prior years 221,051 186,632 169,210 ---------- ---------- ---------- 449,151 373,927 308,502 ---------- ---------- ---------- Net reserves at end of year 1,209,250 895,440 783,218 Ceded reserves at the end of year 450,770 1,175,446 1,233,130 ---------- ---------- ---------- Gross reserves at the end of year $1,660,020 $2,070,886 $2,016,348 ========== ========== ==========
Due to the nature of Excess Workers Compensation ("EWC") business and the long period of time over which losses are paid in this line of business, the Company discounts the liability for losses and loss expenses established for the excess workers' compensation line of business. Discounting liabilities for losses and loss expenses gives recognition to the time value of money set aside to pay claims in the future and is intended to appropriately match losses and loss expense to income earned 47 48 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (11) Reserves for losses and loss expenses, continued on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from Midwest's loss payout experience and is supplemented with data compiled from insurance companies writing workers' compensation on an excess-of-loss basis. The expected payout pattern has a very long duration because it reflects the nature of losses which generally penetrate self-insured retention limits contained in excess workers' compensation policies. The Company has limited the payout duration to 30 years in order to introduce an additional level of conservatism into the discounting process. The liabilities for losses and loss expenses have been discounted using "risk-free" discount rates determined by reference to the U.S. Treasury yield curve weighted for the EWC premium volume to reflect the seasonality of the anticipated duration of losses associated with such coverages. The average discount rate for accident years 1995 and prior is 5.80%. The aggregate net discount, after reflecting the effects of ceded reinsurance, is $152,235,000 at December 31, 1995. For Statutory purposes, Midwest uses a discount rate of 3.0% as permitted by the Department of Insurance of the State of Ohio. To date, known pollution and environmental claims at the insurance company subsidiaries have not had a material impact on the Company's operations. Environmental claims have not materially impacted the Company because our subsidiaries generally did not insure the larger industrial companies which are subject to significant environmental exposures. The Company's net reserves for losses and loss adjustment expenses relating to pollution and environmental claims were $30.8 million and $22.8 million at December 31, 1995 and 1994, respectively. The Company's gross reserves for losses and loss adjustment expenses relating to pollution and environmental claims were $59.4 million and $50.6 million at December 31, 1995 and 1994, respectively. Net incurred losses and loss expenses for reported pollution and environmental claims were approximately $8.0 million, $5.6 million and $3.5 million in 1995, 1994 and 1993, respectively. Net paid losses and loss expenses has averaged approximately $3 million for each of the last three years. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make a reasonable actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential affect of significant unresolved legal matters, including coverage issues as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties is highly uncertain. (12) Reinsurance Ceded The Company follows the customary industry practice of reinsuring a portion of its exposures principally to reduce net liability on individual risks and to protect against catastrophic losses. The following amounts arising under reinsurance ceded contracts have been deducted in arriving at the amounts reflected in the statement of operations (dollars in thousands):
1995 1994 1993 ---- ---- ---- Premiums written $212,169 $210,237 $173,470 ======== ======== ======== Premiums earned $207,375 $195,313 $162,320 ======== ======== ======== Losses and loss expenses $134,120 $149,415 $143,376 ======== ======== ========
48 49 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (13) Dividends From Subsidiaries and Statutory Financial Information The Company's insurance subsidiaries are restricted by law as to the amount of dividends they may pay without the approval of regulatory authorities. During 1996, the maximum amount of dividends which can be paid without such approval is approximately $93,361,000. Combined net income and policyholders' surplus of the Company's consolidated insurance subsidiaries, as determined in accordance with statutory accounting practices, are as follows (dollars in thousands):
1995 1994 1993 ---- ---- ---- Net income $ 75,587 $ 40,411 $ 58,870 ======== ======== ======== Policyholders' surplus $839,890 $669,552 $661,822 ======== ======== ========
The National Association of Insurance Commissioners ("NAIC") has adopted risk based capital ("RBC") requirements that require insurance companies to calculate and report information under a risk-based formula which measures statutory capital and surplus needs based on a regulatory definition of risk in a company's mix of products and its balance sheet. The implementation of RBC did not effect the operations of the Company's insurance subsidiaries since all of its subsidiaries have an RBC amount above the authorized control level RBC, as defined by the NAIC. (14) Supplemental Financial Statement Data Other operating costs and expenses consist of the following (dollars in thousands):
1995 1994 1993 ---- ---- ---- Amortization of deferred policy acquisition costs $228,610 $187,468 $141,880 Other operating costs and expenses of insurance operations 38,773 35,900 29,333 Other costs and expenses 72,606 62,898 54,209 -------- -------- -------- Total $339,989 $286,266 $225,422 ======== ======== ========
(15) Industry Segments The Company's operations are presently conducted through four basic segments: regional property casualty insurance; reinsurance; specialty lines of insurance; and alternative markets operations. The Company established an international segment in 1995; the results of this segment have been included as part of the regional segment, due to immateriality. Summary financial information about the Company's operating segments is presented in the following table. Income before income taxes by segment consists of revenues less expenses related to the respective segment's operations. These amounts include realized gains (losses) where applicable. Intersegment revenues consist primarily of dividends, interest on intercompany debt and fees paid by subsidiaries for portfolio management and other services to the Company. Identifiable assets by segment are those assets used in the operation of each segment. 49 50 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (15) Industry Segments, continued
Industry Segments ------------------------------------------------------------------------- Adjust- Regional Specialty Alternative Corporate ments and Insurance Insurance Markets and elimina- Consoli- Operations Reinsurance Operations Operations other tions dated ---------- ----------- ---------- ---------- --------- --------- -------- (Dollars in thousands) December 31, 1995: Revenues: Unaffiliated customers $ 485,981 $ 212,876 $ 209,153 $103,656 $ 10,277 $ -- $1,021,943 Intersegment revenues (121) -- 158 -- 53,694 (53,731) -- ---------- ---------- ---------- -------- -------- -------- ---------- Total revenues $ 485,860 $ 212,876 $ 209,311 $103,656 $ 63,971 $(53,731) $1,021,943 ========== ========== ========== ======== ======== ======== ========== Income (loss) before income taxes $ 40,227 $ 11,205 $ 43,781 $ 10,254 $ 16,414 $(39,134) $ 82,747 ========== ========== ========== ======== ======== ======== ========== Identifiable assets $1,051,835 $ 560,817 $1,278,883 $579,964 $147,185 $ -- $3,618,684 ========== ========== ========== ======== ======== ======== ========== December 31, 1994: Revenues: Unaffiliated customers $ 376,478 $ 187,304 $ 184,911 $ 75,798 $ 6,299 $ -- $ 830,790 Intersegment revenues 98 -- (12) -- 29,960 (30,046) -- ---------- ---------- ---------- -------- -------- -------- ---------- Total revenues $ 376,576 $ 187,304 $ 184,899 $ 75,798 $ 36,259 $(30,046) $ 830,790 ========== ========== ========== ======== ======== ======== ========== Income (loss) before income taxes $ 26,669 $ (14,977) $ 37,452 $ 7,068 $ (5,068) $(20,370) $ 30,774 ========== ========== ========== ======== ======== ======== ========== Identifiable assets $ 809,853 $1,242,202 $1,223,179 $ 87,023 $220,034 $ -- $3,582,291 ========== ========== ========== ======== ======== ======== ========== December 31, 1993: Revenues: Unaffiliated customers $ 316,671 $ 86,962 $ 211,530 $ 53,531 $ 4,612 $ -- $ 673,306 Intersegment revenues (223) -- (401) -- 21,354 (20,730) -- ---------- ---------- ---------- -------- -------- -------- ---------- Total revenues $ 316,448 $ 86,962 $ 211,129 $ 53,531 $ 25,966 $(20,730) $ 673,306 ========== ========== ========== ======== ======== ======== ========== Income (loss) before income taxes $ 29,993 $ 194 $ 52,651 $ 8,058 $(13,902) $(15,630) $ 61,364 ========== ========== ========== ======== ======== ======== ========== Identifiable assets $ 704,169 $1,156,372 $1,221,571 $ 77,309 $178,284 $ -- $3,337,705 ========== ========== ========== ======== ======== ======== ==========
50 51 W. R. BERKLEY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (16) Fair value of Financial Instruments The following table presents the carrying amounts and estimated fair values of the Company's financial instruments as of December 31, 1995 and 1994 (dollars in thousands):
1995 1994 --------------------------- --------------------------- Carrying Fair Carrying Fair Amount value Amount value -------- ----- -------- ----- Investments $2,588,346 $2,595,461 $1,901,715 $1,904,871 Long-term debt 290,981 343,244 290,798 296,762 Notes payable to Banks 28,306 28,306 40,204 40,204
The estimated fair value of investments is based on quoted market prices as of the respective reporting dates. The fair value of the long-term debt is based on rates available for borrowings similar to the Company's outstanding debt as of the respective reporting dates. (17) Quarterly Financial Information (unaudited) The following is a summary of quarterly financial data:
Three Months Ended -------------------------------------------------------------------- March 31, June 30, ---------------------------- --------------------------- 1995 1994 1995 1994 ---- ---- ---- ---- (Dollars in thousands except per share data) Revenues $228,932 $186,326 $247,442 $215,208 ======== ======== ======== ======== Net income before preferred dividends $ 13,573 $ 6,260 $ 15,369 $ 11,114 ======== ======== ======== ======== Net income attributable to common stockholders $ 10,807 $ 4,201 $ 12,604 $ 8,349 ======== ======== ======== ======== Net income per share $ .65 $ .24 $ .76 $ .48 ======== ======== ======== ======== September 30, December 31, ---------------------------- ---------------------------- 1995 1994 1995 1994 ---- ---- ---- ---- Revenues $260,893 $210,199 $284,676 $219,057 ======== ======== ======== ======== Net income before preferred dividends $ 14,794 $ 6,136 $ 17,146 $ 11,584 ======== ======== ======== ======== Net income attributable to common stockholders $ 12,028 $ 3,370 $ 14,381 $ 8,818 ======== ======== ======== ======== Net income per share $ .72 $ .19 $ .73 $ .53 ======== ======== ======== ========
(18) Subsequent Events On January 19, 1996 the Company issued $100 million of 6.25% ten-year notes which are not redeemable until maturity and subsequently retired $28.4 million of outstanding bank debt 51 52 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following information is provided as to the Directors and executive officers of the Company as of March 4, 1996:
Name Age Position ---- --- -------- William R. Berkley 50 Chairman of the Board and Chief Executive Officer John D. Vollaro 51 President, Chief Operating Officer and a Director Sam Daniel, Jr. 57 Senior Vice President, Regional Operations Anthony J. Del Tufo 51 Senior Vice President, Chief Financial Officer and Treasurer Robert S. Gorin 60 Senior Vice President, General Counsel and Secretary E. LeRoy Heer 57 Senior Vice President, Chief Corporate Actuary Edward A. Thomas 47 Senior Vice President, Specialty Operations Ira S. Lederman 42 Vice President - Assistant General Counsel and Assistant Secretary James G. Shiel 36 Vice President - Investments Scott M. Cunningham 61 Director Robert B. Hodes 70 Director Henry Kaufman 68 Director Richard G. Merrill 65 Director Jack H. Nusbaum 55 Director Mark L. Shapiro 51 Director Martin Stone 67 Director
As permitted by Delaware law, the Board of Directors of the Company is divided into three classes, the classes being divided as equally as possible and each class having a term of three years. Directors generally serve until their respective successors are elected at the annual meeting of stockholders which ends their term. None of the Company's Directors has any family relationship with any other Director or executive officer. Each year the term of office of one class expires. In May 1995, the term of a class consisting of three Directors expired. Henry Kaufman and Martin Stone were elected as Directors to hold office for a term of three years until the Annual Meeting of Stockholders in 1998 and until their successors are duly chosen. At a meeting of the Board of Directors held on September 13, 1995 John D. Vollaro was elected a Director to the class of Directors which expires at the Annual Meeting of Stockholders in 1998. Officers of the Company are elected annually and serve at the pleasure of the Board of Directors. William R. Berkley has been Chairman of the Board and Chief Executive Officer of the Company since its formation in 1967. He also served as President at various times from 1967 to 1995. He also serves as Chairman of the Board or Director of a number of public and private companies. These include Signet Star Holdings, Inc., a reinsurance holding company owned by the Company; Pioneer Companies, Inc., a chemical manufacturing and marketing company; Strategic Distribution, Inc., an industrial products distribution and services company, and Interlaken Capital, Inc., a private investment firm with interests in various businesses. His current term as a Director expires in 1997. John D. Vollaro was elected President and Chief Operating Officer of the Company effective January 2, 1996 and Director effective September 13, 1995. He has been Chief Executive Officer of Signet Star Holdings, Inc., an affiliate of the Company, since July 1993 and President and a Director of Signet Star Holdings, Inc. since February 1993. He served as Executive Vice President of the Company from 1991 until 1993 and was, Chief Financial Officer and Treasurer of the Company from 1983 through 1993; and Senior Vice President, Chief Financial Officer and Treasurer of the Company from 1983 to 1991. Mr. Vollaro's current term as a Director expires in 1998. 52 53 Sam Daniel, Jr. has been Senior Vice President - Regional Operations since April 1990. Prior thereto, he was employed by Hanover Insurance Company for more than five years as Vice President. Anthony J. Del Tufo has been Senior Vice President, Chief Financial Officer and Treasurer of the Company since September 1993. Before joining the Company Mr. Del Tufo was a partner with KPMG Peat Marwick from 1975 to 1993. Robert S. Gorin has been Senior Vice President, General Counsel and Secretary since July 1989. Prior to joining the Company, Mr. Gorin was Assistant Secretary and Assistant General Counsel of J.C. Penney Co., Inc., where he had been employed since 1971. E. LeRoy Heer has been Senior Vice President - Chief Corporate Actuary since January 1991. Prior thereto, he had been Vice President - Corporate Actuary since May 1978. Edward A. Thomas has been Senior Vice President - Specialty Operations of the Company since April 1991. Prior thereto, he was President of Signet Reinsurance Company, a subsidiary of the Company, for more than five years. Ira S. Lederman has been Vice President and Assistant Secretary since May 1986. He has also been Assistant General Counsel since July 1989. Prior thereto he was Insurance Counsel of the Company since May 1986 and Associate Counsel from April 1983. James G. Shiel has been Vice President - Investments of the Company since January 1992. Since February 1994, he has been President of Berkley Dean & Company, Inc., a subsidiary of the Company, which he joined in 1987. Scott M. Cunningham has been a Director of the Company since 1986. Mr. Cunningham is a Managing Director of Interlaken Capital, Inc., which he joined in January 1987. Mr. Cunningham's current term as a director expires in 1997. Robert B. Hodes has been a Director of the Company since 1970. Mr. Hodes is Counsel to the New York law firm of Willkie Farr & Gallagher. He is a director of Aerointernational, Crystal Oil Company; Global Telecommunications, Limited.; Loral Corporation; Loral Space & Communications Ltd.; Mueller Industries, Inc.; R.V.I. Guaranty, Ltd.; LCH Investments N.V. and Restructured Capital Holdings, Ltd. Mr. Hodes' current term as a Director expires in 1997. Henry Kaufman has been a Director of the Company since 1994. Dr. Kaufman is President of Henry Kaufman & Co., Inc., an investment management and economic and financial consulting company since its establishment in 1988. Dr. Kaufman serves as Chairman of the Board of Overseers, Stern Schools of Business of NYU; Member of the Board of Directors, Federal Home Loan Mortgage Corp.; Member of the Board of Directors, Lehman Brothers Holdings Inc.; Member of the Board of Trustees, New York University; and Member of the International Capital Markets Advisory Committee of the Federal Reserve Bank of New York. Dr. Kaufman's current term as a Director expires in 1998. Richard G. Merrill has been a Director of the Company since 1994. Mr. Merrill was Executive Vice President of Prudential Insurance Company of America from August 1987 to March 1991 when he retired. Prior thereto, Mr. Merrill served as Chairman and President of Prudential Asset Management Company since 1985. Mr. Merrill is a Director of Sysco Corp. Mr. Merrill's current term as a Director expires in 1996. 53 54 Jack H. Nusbaum has been a Director of the Company since 1967. Mr. Nusbaum is the Chairman in the New York law firm of Willkie Farr & Gallagher where he has been a partner for more than the last five years. He is a director of Pioneer Companies, Inc.; Prime Hospitality Corp. and The Topps Company, Inc. Mr. Nusbaum's current term as a Director expires in 1996. Mark L. Shapiro has been a Director of the Company since 1974. Mr. Shapiro is a Managing Director in the investment banking firm of Schroder Wertheim & Co. Incorporated for more than the past five years. Mr. Shapiro's current term as a Director expires in 1996. Martin Stone has been a Director of Berkley since 1990. Mr. Stone is Chairman of Professional Sports, Inc. (the Phoenix Firebirds AAA baseball team) and Chairman of Adirondack Corporation, for more than five years. Mr. Stone is also a director of Canyon Ranch, Inc. and a member of the Advisory Board of Yosemite National Park. Mr. Stone's current term as a Director expires in 1998. ITEM 11. EXECUTIVE COMPENSATION Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1995, and which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) Security ownership of certain beneficial owners Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1995, and which is incorporated herein by reference. (b) Security ownership of management Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1995, and which is incorporated herein by reference. (c) Changes in control Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1995, and which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1995, and which is incorporated herein by reference. 54 55 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Index to Financial Statements The financial statements filed as part of this report are listed on the Index to Financial Statements on page 30 hereof.
Index to Financial Statement Schedules Page - -------------------------------------- ---- Independent Auditors' Report on Schedules and Consent 60 Schedule II - Condensed Financial Information of Registrant 61 Schedule III - Supplementary Insurance Information 65 Schedule IV - Reinsurance 66 Schedule VI - Supplementary Information concerning Property & Casualty Insurance Operations 67
(b) Reports on Form 8-K On November 8, 1995 the Company filed a current report on Form 8-K announcing that it had completed its acquisition of MECC, Inc. On December 28, 1995 the Company filed a current report on Form 8-k announcing that it had completed its acquisition of the remaining 40% interest in Signet Star Holdings, Inc. from General Re Corporation. (c) Exhibits The exhibits filed as part of this report are listed on pages 58 and 59 hereof. 55 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. W. R. BERKLEY CORPORATION By WILLIAM R. BERKLEY ------------------------------------------------- William R. Berkley, Chairman of the Board and Chief Executive Officer March 7, 1996 56 57 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- WILLIAM R. BERKLEY Chairman of the Board and - ----------------------------------------- Chief Executive Officer March 7, 1996 William R. Berkley Principal executive officer SCOTT M. CUNNINGHAM Director March 7, 1996 - ----------------------------------------- Scott M. Cunningham ROBERT B. HODES Director March 7, 1996 - ----------------------------------------- Robert B. Hodes HENRY KAUFMAN Director March 7, 1996 - ----------------------------------------- Henry Kaufman RICHARD G. MERRILL Director March 7, 1996 - ----------------------------------------- Richard G. Merrill JACK H. NUSBAUM Director March 7, 1996 - ----------------------------------------- Jack H. Nusbaum MARK L. SHAPIRO Director March 7, 1996 - ----------------------------------------- Mark L. Shapiro MARTIN STONE Director March 7, 1996 - ----------------------------------------- Martin Stone ANTHONY J. DEL TUFO Senior Vice President, March 7, 1996 - ----------------------------------------- Chief Financial Officer and Anthony J. Del Tufo Treasurer Principal financial officer JOHN D. VOLLARO President, Chief Operating March 7, 1996 - ----------------------------------------- Officer and a Director John D. Vollaro
57 58 ITEM 14. (c) EXHIBITS Number (2.1) Agreement and Plan of Merger between the Company, Berkley Newco Corp. and MECC, Inc. (incorporated by reference to Exhibit 2.1 of the current reports on Form 8-K (file No. 0-7849) filed with the Commission September 28, 1995). (2.2) Agreement and Plan of Restructuring, dated July 20, 1995, by and among the Company, Signet Star Holdings, Inc., Signet Star Reinsurance Company, Signet Reinsurance Company and General Re Corporation (incorporated by reference to Exhibit 2.2 of the Company's current Report on Form 8-K (file No. 0-7849) filed with the Commission on September 28, 1995). (3.1) Restated Certificate of Incorporation, as amended (3.2) By-laws (4) The instruments defining the rights of holders of the long-term debt securities of the Company are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Company agrees to furnish supplementally copies of these instruments to the Commission upon request. (10.1) The Company's 1982 Stock Option Plan, (incorporated by reference to Exhibit 10.1 of the Company's Registration Statement on Form S-1 (File No. 2-98396) filed with the Commission on June 14, 1985). (10.2) The Company's 1992 Stock Option Plan, (incorporated by reference to Exhibit 28.1 of the Company's Registration Statement on Form S-8 (File No. 33-55726) filed with the Commission on December 15, 1992). (10.2a) Signet Star Holdings, Inc. 1993 Stock Option Plan, (incorporated by reference to Exhibit 10.14 of Signet Star Holdings, Inc. Registration Statement on Form S-1 (File No. 33-69964) filed with the Commission on October 4, 1993). (10.3) The Company's lease dated June 3, 1983 with the Ahneman, Devaul and Devaul Partnership, incorporated by reference to Exhibit 10.3 of the Company's Registration Statement on Form S-1 (File No. 2-98396) filed with the Commission on June 14, 1985. (10.4) W.R. Berkley Corporation Deferred Compensation Plan for officers as amended January 1, 1991. (10.5) W. R. Berkley Corporation Deferred Compensation Plan for Directors as adopted March 7, 1996. (10.6) Sale Agreement by and between the Company and Lembo-Feinerman Fleming Morell Trust for the acquisition of real property. (23) See Independent Auditors' report on schedules and consent. 58 59 (21) Following is a list of the Company's significant subsidiaries. Subsidiaries of subsidiaries are indented and the parent of each such corporation owns 100% of the outstanding voting securities of such corporation except as noted below.
Jurisdiction Percentage of owned by incorporation Company ------------- ---------- Acadia Insurance Company: Maine 100% Acadia Compensation Insurance Company Maine 100% All American Agency Facilities, Inc. Delaware 100% Berkley International, LLC New York 65% Berkley Insurance Company of the Carolinas North Carolina 100% Berkley Risk Services, Inc. Minnesota 100% Carolina Casualty Insurance Company Florida 100% Continental Western Insurance Company: Iowa 100% Continental Western Casualty Company Iowa 100% Firemen's Insurance Company of Maryland 100% Washington, D.C.: FICO Insurance Company Maryland 100% Great River Insurance Company Mississippi 100% J/I Holding Corporation: Delaware 100% Admiral Insurance Company: Delaware 100% Nautilus Insurance Company: Arizona 100% Great Divide Insurance Company North Dakota 100% Key Risk Services, Inc. North Carolina 100% MECC, Inc.: Delaware 100% Midwest Employers Casualty Company Ohio 100% Monitor Liability Managers, Inc. Delaware 100% Monitor Surety Managers, Inc. Delaware 100% Queen's Island Insurance Company, Ltd. Bermuda 100% Rasmussen Agency, Inc. New Jersey 100% Signet Star Holdings, Inc.: Delaware 100% Signet Star Reinsurance Company Delaware 100% Facultative ReSources, Inc. Connecticut 100% Tri-State Insurance Company of Minnesota: Minnesota 100% American West Insurance Company North Dakota 100% Union Insurance Company Nebraska 100% Union Standard Insurance Company Oklahoma 100%
(28) Information from reports furnished to state insurance regulatory authorities. This exhibit which will be filed supplementally includes the Company's combined Schedule P as prepared for its 1995 combined Annual Statement which will be provided to state regulatory authorities. The schedule has been prepared on a statutory basis. The combined schedule includes the historical results of the Company's insurance subsidiaries as if they had been owned from their inception date. It should be noted that the combined schedule includes data of seventeen operating companies and, as a result, any statistical extrapolation from the schedule may not be meaningful. (The combined Schedule P as filed with the Securities and Exchange Commission, has been omitted from this copy. It is available upon request from Mr. Anthony J. Del Tufo, Senior Vice President, Chief Financial Officer and Treasurer of the Company, at the address shown on page 1.) 59 60 INDEPENDENT AUDITORS' REPORT ON SCHEDULES AND CONSENT Board of Directors and Stockholders W. R. Berkley Corporation The audit referred to in our report dated February 22, 1996 included the related financial statement schedules as of December 31, 1995 and 1994 and for each of the years in the three-year period ended December 31, 1995 included in the Form 10-K. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in note 1 to the consolidated financial statements, W. R. Berkley Corporation adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" on December 31, 1993. We consent to the use of our reports incorporated by reference in the Registration Statements (No. 2-98396) on Form S-1 and (No. 33-55726) on Form S-8 and (No. 33-30684) and (No. 33-95552) and (No. 333-00459) on Forms S-3 and (No. 33-88640) on Form S-8 of W. R. Berkley Corporation. KPMG Peat Marwick LLP New York, New York March 22, 1996 60 61 Schedule II W. R. Berkley Corporation Condensed Financial Information of Registrant Balance Sheets (Parent Company) (Amounts in thousands)
December 31, --------------------- 1995 1994 ---------- -------- Assets Cash (including invested cash) $ 10,669 $ 72,089 Fixed maturity securities: Held to maturity, at cost (fair value $10,176 and $10,684) 10,176 10,684 Available for sale at fair value (cost $5,807 and $40,785) 5,807 39,301 Equity securities, at fair value: Available for sale (cost $1,733 and $22) 2,146 22 Trading account (cost $ 35,053 and $8,988) 35,053 8,988 Investments in subsidiaries 1,136,518 714,523 Due from subsidiaries 42,703 17,542 Current Federal income taxes receivable 35 931 Deferred Federal income taxes -- 31,988 Other assets 4,774 6,024 ---------- -------- $1,247,881 $902,092 ========== ======== Liabilities, Debt and Stockholders' Equity Liabilities: Due to subsidiaries (principally deferred income taxes) $ 32,590 $ 36,426 Deferred Federal income taxes 14,363 -- Other liabilities 15,925 13,059 ---------- -------- 62,878 49,485 ---------- -------- Long-term debt 255,188 255,006 Stockholders' equity: Preferred stock 146 100 Common stock 4,854 4,165 Additional paid-in capital 547,068 336,659 Retained earnings (including accumulated undistributed net income of subsidiaries of $374,027 and $341,157 in 1995 and 1994, respectively) 424,261 382,859 Equity in net unrealized investment gains (losses), net of taxes 48,450 (33,973) Treasury stock, at cost (94,964) (92,209) ---------- -------- 929,815 597,601 ---------- -------- $1,247,881 $902,092 ========== ========
See note to condensed financial statements. 61 62 Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued Statements of Operations (Parent Company) (Amounts in thousands)
Years ended December 31, ------------------------------ 1995 1994 1993 -------- -------- -------- Management fees and investment income from affiliates, including dividends of $38,091, $19,520 and $15,020 for 1995, 1994 and 1993, respectively $ 50,839 $ 28,328 $ 22,873 Realized investment losses (306) (1,700) (376) Other income 5,615 6,190 4,359 -------- -------- -------- Total revenues 56,148 32,818 26,856 Expenses, other than interest expense (12,256) (10,772) (13,637) Interest expense (22,907) (22,892) (22,300) -------- -------- -------- Income (loss) before Federal income taxes 20,985 (846) (9,081) -------- -------- -------- Federal income taxes: Federal income taxes provided by subsidiaries on a separate return basis 22,481 13,513 23,215 Federal income tax provision on a consolidated return basis (15,454) (5,370) (9,590) -------- -------- -------- Net benefit 7,027 8,143 13,625 -------- -------- -------- Income before undistributed equity in net income of subsidiaries 28,012 7,297 4,544 Equity in undistributed net income of subsidiaries 32,870 27,797 47,043 -------- -------- -------- Income before preferred dividends 60,882 35,094 51,587 Preferred dividends (11,062) (10,356) -- -------- -------- -------- Net income attributable to common stockholders $ 49,820 $ 24,738 $ 51,587 ======== ======== ========
See note to condensed financial statements. 62 63 Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued Statement of Cash Flows (Parent Company) (Amounts in thousands)
Years ended December 31, -------------------------------- 1995 1994 1993 --------- --------- -------- Cash flows from operating activities: Net income before preferred dividends $ 60,882 $ 35,094 $ 51,587 Adjustments to reconcile net income to net cash flows provided by used in operating activities: Equity in undistributed net income of subsidiaries (32,870) (27,797) (47,043) Tax payments from subsidiaries 17,104 14,614 15,883 Federal income taxes provided by subsidiaries (22,481) (13,513) (23,215) Change in Federal income taxes 3,654 (2,765) 705 Realized investment losses 306 1,700 376 Other, net 4,087 (404) 9,832 --------- --------- -------- Net cash provided by operating activities before trading account sales (purchases) 30,682 6,929 8,125 Trading account sales (purchases), net (26,065) -- 8,208 --------- --------- -------- Net cash provided by (used in) operating activities 4,617 6,929 16,333 --------- --------- -------- Cash flow used in investing activities: Proceeds from sales, excluding trading account: Fixed maturity securities available for sale 23,158 77,613 81,022 Equity securities 1 832 -- Proceeds from maturities and prepayments of fixed maturity securities 15,206 521 114 Cost of purchases, excluding trading account: Fixed maturity securities (3,452) (106,600) (52,979) Equity securities (1,733) (425) -- Cost of companies acquired (217,096) -- -- Investments in and advances to subsidiaries, net (70,972) (31,242) (57,424) Other, net (328) (596) (661) --------- --------- -------- Net cash used in investing activities (255,216) (59,897) (29,928) --------- --------- -------- Cash flows from financing activities: Net proceeds from issuance of common stock 144,739 -- -- Net proceeds from issuance of preferred stock 66,000 145,275 -- Net proceeds from issuance of long-term debt -- 49,694 Purchase of treasury shares (4,095) (26,357) (25,688) Cash dividends to common stockholders (7,844) (7,459) (7,035) Cash dividends to preferred shareholders (11,062) (8,051) -- Payment of subsidiary debt -- (4,527) -- Other, net 1,441 156 1,588 --------- --------- -------- Net cash provided by financing activities 189,179 99,037 18,559 --------- --------- -------- Net increase in cash and invested cash (61,420) 46,069 4,964 Cash and invested cash at beginning of year 72,089 26,020 21,056 --------- --------- -------- Cash and invested cash at end of year $ 10,669 $ 72,089 $ 26,020 ========= ========= ========
See note to condensed financial statements. 63 64 Schedule II, Continued W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued December 31, 1995, 1994 and 1993 Note to Condensed Financial Statements (Parent Company) The accompanying condensed financial statements should be read in conjunction with the notes to consolidated financial statements included elsewhere herein. Reclassifications have been made in the 1994 and 1993 financial statements as originally reported to conform them to the presentation of the 1995 financial statements. The Company and its 80% or more owned subsidiaries file a consolidated federal tax return with the results of its domestic insurance subsidiaries included on a statutory basis. Under present Company policy, Federal income taxes payable by (or refundable to) subsidiary companies on a separate-return basis are paid to (or refunded by) W. R. Berkley Corporation, and the Company pays the tax due on a consolidated return basis. 64 65 Schedule III W. R. Berkley Corporation and Subsidiaries Supplementary Insurance Information December 31, 1995, 1994 and 1993 (Amounts in thousands)
Regional Specialty Alternative Corporate and Insurance Reinsurance Insurance Markets adjustments Total --------- ----------- --------- ----------- ------------- ----- December 31, 1995: Deferred policy acquisition costs $ 60,680 $ 8,388 $ 15,265 $ 5,184 $ -- $ 89,517 Reserves for losses and loss 357,265 234,811 805,072 262,872 -- 1,660,020 expenses Unearned premiums 256,343 55,539 109,089 29,551 -- 450,522 Premiums earned 441,182 185,244 145,322 31,588 -- 803,336 Net investment income 41,204 26,186 54,118 6,978 8,846 137,332 Losses and loss expenses 288,597 145,094 116,211 21,096 -- 570,998 Amortization of deferred policy acquisition costs 134,884 48,239 39,105 6,382 -- 228,610 Other operating costs and expenses 22,152 3,036 10,214 70,373 5,604 111,379 Net premiums written 477,588 195,988 160,847 25,998 -- 860,421 December 31, 1994: Deferred policy acquisition costs $ 48,709 $ 10,482 $ 11,138 $ 1,697 $ -- $ 72,026 Reserves for losses and loss 285,024 962,663 810,526 12,267 406 2,070,886 expenses Unearned premiums 205,130 43,725 94,963 6,445 -- 350,263 Premiums earned 343,123 168,239 128,939 14,737 -- 655,038 Net investment income 32,897 19,034 49,949 1,795 6,008 109,683 Losses and loss expenses 225,650 147,894 101,921 10,684 -- 486,149 Amortization of deferred policy acquisition costs 105,539 43,698 36,534 1,697 -- 187,468 Other operating costs and expenses 18,519 7,845 8,992 58,370 5,072 98,798 Net premiums written 386,530 176,699 134,715 19,989 -- 717,933 December 31, 1993: Deferred policy acquisition costs $ 37,920 $ 9,072 $ 10,853 $ 240 $ -- $ 58,085 Reserves for losses and loss 250,860 972,142 789,850 3,090 406 2,016,348 expenses Unearned premiums 157,687 33,752 82,401 1,192 -- 275,032 Premiums earned 279,102 77,148 141,192 3,991 -- 501,433 Net investment income 30,170 8,022 49,919 715 3,947 92,773 Losses and loss expenses 189,520 57,145 111,686 2,894 -- 361,245 Amortization of deferred policy acquisition costs 81,479 22,021 37,661 719 -- 141,880 Other operating costs and expenses 15,456 4,626 9,131 41,861 12,468 83,542 Net premiums written 301,890 84,726 146,101 4,929 -- 537,646
(1) Net investment income and other operating expenses, as presented above, are based on actual amounts recorded by each operating unit. 65 66 Schedule IV W. R. Berkley Corporation and Subsidiaries Reinsurance Years ended December 31, 1995, 1994 and 1993 (Amounts in thousands)
Assumed Percentage Ceded from of amount Direct to other other Net assumed to Amount Companies Companies Amount net ------ --------- --------- ------ ---------- Premiums written: Year ended December 31, 1995: Regional insurance $536,424 $ 74,052 $ 15,216 $477,588 3.2% Reinsurance -- 12,464 208,452 195,988 106.4% Specialty insurance 277,752 123,585 6,680 160,847 4.2% Alternative Markets 4,980 2,068 23,086 25,998 88.8% -------- -------- -------- -------- Total $819,156 $212,169 $253,434 $860,421 29.5% ======== ======== ======== ======== Year ended December 31, 1994: Regional insurance $431,103 $ 53,458 $ 8,885 $386,530 2.3% Reinsurance -- 17,834 194,533 176,699 110.1% Specialty insurance 264,747 138,759 8,727 134,715 6.5% Alternative Markets -- 186 20,175 19,989 100.9% -------- -------- -------- -------- Total $695,850 $210,237 $232,320 $717,933 32.4% ======== ======== ======== ======== Year ended December 31, 1993: Regional insurance $333,972 $ 38,886 $ 6,804 $301,890 2.3% Reinsurance -- 9,547 94,273 84,726 111.3% Specialty insurance 235,974 124,987 35,114 146,101 24.0% Alternative Markets -- 50 4,979 4,929 101.0% -------- -------- -------- -------- Total $569,946 $173,470 $141,170 $537,646 26.3% ======== ======== ======== ========
66 67 Schedule VI W. R. Berkley Corporation and Subsidiaries Supplementary Information Concerning Property-Casualty Insurance Operations December 31, 1995, 1994 and 1993 (Amounts in thousands)
1995 1994 1993 ---- ---- ---- Deferred policy acquisition costs $ 89,517 $ 72,026 $ 58,085 Reserves for losses and loss expenses 1,660,020 2,070,886 2,016,348 Unearned premium 450,522 350,263 275,032 Premiums earned 803,336 655,038 501,433 Net investment income 137,332 109,683 92,773 Losses and loss expenses incurred: Current Year 580,594 493,418 367,106 Prior Years (9,596) (7,269) (5,861) Amortization of deferred policy acquisition costs 228,610 187,468 141,880 Paid losses and loss expenses 449,151 373,927 308,502 Net premiums written 860,421 717,933 537,646
67 EX-10.4 2 EX-10.4 1 EXHIBIT 10.4 2 W. R. BERKLEY CORPORATION DEFERRED COMPENSATION PLAN FOR OFFICERS AS AMENDED JANUARY 1, 1991 Section 1. Effective Date The effective date of this Plan is September 1, 1986. The Plan was subsequently amended on January 1, 1989 and January 1, 1991. Section 2. Eligibility Any officer of W. R. Berkley Corporation (the "Company"), or any President or Executive Vice President of any subsidiary or any officer of any subsidiary whose base salary is greater than or equal to $65,000, is eligible to participate in the Plan. Section 3. Amount of Deferral Prior to the beginning of each calendar year, a Participant may elect to defer receipt of: (a) all or a portion of the Bonus Pay Compensation payable to the Participant for that year; and/or (b) all or a portion of the Base Salary of the Participant for that year; and/or (c) all or part of the Profit Sharing Excess Contributions (as defined below). For the purposes hereof, a Participant's "Profit Sharing Excess Contributions" for any year means the excess of (a) the contributions that would be made by the Company to the W. R. Berkley Corporation Profit Sharing Plan (the "Profit Plan") on behalf of the Participant for such year (exclusive of any pre-tax (401(k)) contributions), without taking into account the Profit Plan's limitations on a participant's earnings and maximum annual additions under Sections 401(a) (17) and 415 of the Internal Revenue Code, over (b) the actual amount of Company contributions (exclusive of pre-tax (401(k))contributions) allocated to the Participant under the Profit Plan for such year. All amounts deferred will be classified as "Deferred Compensation." Section 4. Type of Plan The Plan is a non-qualified voluntary deferred compensation type of plan. Section 5. Funding The Company will not fund the amount of any Participant's Deferred Compensation. The amount of Deferred Compensation is secured only by the Company's promise to pay it from the assets of the Company Section 6. Investment Income A reasonable rate of interest will be credited to a Participant's account, from the first of the month following the date of the deferral, and will be compounded quarterly. The interest rate will be established by the Compensation Committee of the Board of Directors prior to the beginning of each year. 3 Section 7. Deferral Period A Participant may elect to defer his/her Bonus Pay Compensation and/or his/her Base Salary and/or his/her Excess Profit Sharing Contribution either (a) until a specified year in the future (but not later than his/her termination of employment) or (b) until his/her termination of service or retirement. The actual payment will be made or will commence within sixty days after the date specified or the actual date of termination of service or retirement. Section 8. Form of Payment A Participant may elect to receive his/her Deferred Compensation under the Plan in either a lump sum or in annual installments (not to exceed five), as specified by the Participant at the time the election to defer is made. Section 9. Death Prior to Receipt In the event that a Participant dies prior to receipt of any or all of the amounts payable to him/her pursuant to this Plan, any amounts that are then credited as Deferred Compensation will be paid to his/her designated beneficiary in a lump sum within sixty days following the Company's notification of the Participant's death. At the time the election to defer is made, a Participant may designate a beneficiary under this Plan. The Participant may change the beneficiary by writing to the General Counsel of the Company. If a beneficiary is not named, the value of the Participant's Deferred Compensation Account will be paid to his/her estate. Section 10. Effect of Election An election to defer Compensation for any year will be irrevocable once the term to which it applies has commenced, and can be revoked or modified only on a showing of severe financial hardship as a result of an unanticipated emergency, as determined by the Compensation Committee of the Board of Directors of the Company. Section 11. Participant's Rights Unsecured The right of any Participant to receive future payments under the provisions of the Plan will be an unsecured contractual claim against the general assets of the Company. The Plan will not be funded. The Company will not be required to establish any special or separate fund or to make any segregation of assets to assure the payment of any amounts under the Plan. Section 12. Statement of Account Statements will be sent to each Participant by February 15th each year as to the value of his/her Deferred Compensation Account as of the end of the preceding December. Section 13. Assignability No right to receive payments hereunder will be transferable or assignable by a Participant, except by will or by the laws of descent and distribution. Section 14. Administration This Plan will be administered on a day-to-day basis on behalf of the Compensation Committee of the Board of Directors of the Company by the General Counsel of the Company, who will have the authority to adopt rules and regulations for carrying out the Plan. The Compensation Committee of the Board of Directors of the Company will have the authority to interpret, construe and implement the provisions of the Plan and to prescribe the form of the request for deferral of compensation under the Plan. 4 Section 15. Amendment/Termination This Plan may at any time or from time to time be amended, modified or terminated by the Board of Directors of the Company. No amendment, modification or termination will, without the consent of the Participant, adversely affect any amounts credited to such Participant's Deferred Compensation Account. Section 16. Tax Treatment Deferred Compensation and credited interest are taxed as ordinary income when payment is actually received. Distributions received from the Plan are not eligible for favorable tax treatment or rollovers as permitted under qualified plans. Section 17. Other Benefits The computation and basis for other Company provided benefits may be affected if a Participant elects to defer a portion of his/her Base Salary. 5 W. R. BERKLEY CORPORATION DEFERRED COMPENSATION PLAN FOR OFFICERS ELECTION FORM In accordance with and subject to the W. R. Berkley Corporation Deferred Compensation Plan for Officers (the "Plan"), I hereby request to defer the receipt of compensation for the year ending December 31, , as follows: Amount of Bonus Pay to be Deferred: _____ (a) ALL (100%) OR _____ (b) ___ % (multiples of 10%) OR _____ (c) $__ (multiples of $1,000) Amount of Base Salary to be Deferred: _____ (a) 25% (maximum) OR _____ (b) ___ % (multiples of 10%) OR _____ (c) $__ (multiples of $1,000) Amount of Excess Profit Sharing Contribution to be Deferred: _____ (a) ALL (100%) OR _____ (b) ___ % (multiples of 10%) OR _____ (c) $__ (multiples of $1,000) Period of Deferral: _____ (a) Year in which payments should be made or commence (not later than termination of service) _____ OR _____ (b) Until termination of service or retirement Form of Distribution: _____ Lump sum OR _____ Annual installments ____________ (not to exceed 5) A Participant should contact his/her Tax Advisor prior to making an election to defer compensation. I have received a copy of the Plan. I understand that, in the event of my death prior to receipt of all amounts payable to me pursuant to the Plan, the amount credited to my Deferred Compensation Account will be paid to my designated beneficiary in the form of a lump sum. Beneficiary Name __________________________ Officer Name ______________________ Address ___________________________________ Address ___________________________ Beneficiary Officer Social Security No. _______________________ Social Security No.________________ _____________________________________ Date ____________________________________ Signature of Officer EX-10.5 3 EX-10.5 1 EXHIBIT 10.5 2 W. R. BERKLEY CORPORATION DEFERRED COMPENSATION PLAN FOR DIRECTORS AS ADOPTED MARCH 7, 1996 Section 1. Effective Date The effective date of this Plan is March 7, 1996. Section 2. Eligibility Any member of the Board of Directors of W. R. Berkley Corporation (the "Company"), including any person otherwise participating in the W. R. Berkley Corporation Deferred Compensation Plan for Officers, is eligible to participate in the Plan. Section 3. Amount of Deferral Prior to the beginning of each calendar year, a member of the Board of Directors may elect to defer receipt of all of a portion of the retainer and/or meeting fees otherwise payable to such person for that year on account of serving on the Board of Directors. Notwithstanding the foregoing, for the 1996 calendar year only, a member of the Board of Directors may elect, not later than thirty days after the Effective Date, to defer the receipt of all or a portion of the retainer and/or meeting fees otherwise payable to such person for serving on the Board of Directors subsequent to the date of making such election through December 31, 1996. Notwithstanding the foregoing, for the calendar year in which a person first becomes a member of the Board of Directors, such person may elect, not later than thirty days after the date such person first becomes a member of the Board of Directors to defer the receipt of all or a portion of the retainer and/or meeting fees otherwise payable to such person for serving on the Board of Directors subsequent to the date of making such election through December 31st of such year. Members of the Board of Directors who choose to defer amounts pursuant to this Section 3 will be "Participants." All amounts deferred, and interest credited thereon, will be classified as "Deferred Compensation." Section 4. Type of Plan The Plan is a non-qualified voluntary deferred compensation type of plan. The Plan is not intended to be subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). To the extent the Plan is determined to be so subject, it is intended, to the extent that any Participant is otherwise an employee of the Company or of any subsidiary to constitute a "plan which is unfunded and is maintained by the employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees," as such phrase is used in ERISA, and the terms of the Plan shall be interpreted consistent with such intent. Section 5. Funding; Participant's Rights Unsecured The Company will not fund the amount of any Participant's Deferred Compensation. The amount of each Participant's Deferred Compensation will be separately accounted for in the bookkeeping records of the Company by setting up for each Participant a Deferred Compensation account ("Deferred Compensation Account"). 3 The amount of Deferred Compensation is secured only by the Company's promise to pay it from the assets of the Company and Participants will have the status of general unsecured creditors of the Company with respect to their Deferred Compensation. The Company will not be required to establish any special or separate fund or to make any segregation of assets to assure the payment of any amounts under the Plan. Section 6. Investment Income A reasonable rate of interest will be credited to a Participant's Deferred Compensation Account, from the first of the month following the date of the deferral, and will be compounded quarterly. The interest rate which shall apply with respect to each year shall be such rate of interest which is in effect for such year under Section 6 of the W. R. Berkley Corporation Deferred Compensation Plan for Officers. Section 7. Deferral Period A Participant who is not otherwise an employee of the Company or of any subsidiary may elect to defer the receipt of his/her Deferred Compensation until a specified date in the future, but not later than such person's termination as a member of the Board of Directors. A Participant who is otherwise an employee of the Company or of any subsidiary may elect to defer the receipt of his/her Deferred Compensation until a specified date in the future, but no later than his/her termination as an employee. A separate such election will be made with respect to that portion of his/her Deferred Compensation attributable to retainer and/or meeting fees otherwise deferred with respect to each separate year. The actual payment will be made or will commence within sixty days after the earlier of (i) the date specified or (ii) the date of termination as a member of the Board of Directors or termination of employment, as the case may be. Section 8. Form of Payment A Participant may elect to receive his/her Deferral Compensation under the Plan attributable to his/her retainer and/or meeting fees otherwise deferred with respect to each separate year in either a lump sum or in annual installments (not to exceed five), as specified by the Participant at the time the election to defer is made. Section 9. Death Prior to Receipt In the event that a Participant dies prior to receipt of any or all of the amounts payable to him/her pursuant to this Plan, any amounts that are then credited as Deferred Compensation will be paid to his/her designated beneficiary in a lump sum within sixty days following the Company's notification of the Participant's death. At the time the election to defer is made, a Participant may designate a beneficiary under this Plan. The Participant may change the beneficiary by writing to the General Counsel of the Company. If a beneficiary is not named, the value of the Participant's Deferred Compensation Account will be paid to his/her estate. Section 10. Effect of Election An election to defer retainer and/or meeting fees for any year will be irrevocable once the term to which it applies has commenced, and can be revoked or modified only on a showing of severe financial hardship as a result of an unanticipated emergency, as determined by the Compensation Committee of the Board of Directors of the Company; provided, however, that a Participant who is also a member of the Compensation Committee shall not participate in any determination by the Compensation Committee as to whether such Participant in fact has such a severe financial hardship. Section 11. Statement of Account Statements will be sent to each Participant by February 15th each year as to the value of his/her Deferred Compensation Account as of the end of the preceding December. 4 Section 12. Assignability No right to receive payments hereunder will be transferable or assignable by a Participant, except by will or by the laws of descent and distribution. Section 13. Administration This Plan will be administered on a day-to-day basis on behalf of the Compensation Committee of the Board of Directors of the Company by the General Counsel of the Company, who will have the authority to adopt rules and regulations for carrying out the Plan. The Compensation Committee of the Board of Directors of the Company will have the authority to interpret, construe and implement the provisions of the Plan and to prescribe the form of the request for deferral of compensation under the Plan. Notwithstanding the foregoing, in the case of any Participant who is also a member of the Compensation Committee, such person shall not participate in any action by the Compensation Committee which affects only such individual Participant's rights under the Plan. Section 14. Amendment/Termination This Plan may at any time or from time to time be amended, modified or terminated by the Board of Directors of the Company. No amendment, modification or termination will, without the consent of the Participant, adversely affect any amounts credited to such Participant's Deferred Compensation Account. Section 15. Tax Treatment Deferred Compensation and credited interest are taxed as ordinary income when payment is actually received. Distributions received from the Plan are not eligible for favorable tax treatment or rollovers as permitted under qualified plans. Section 16. Other Benefits The compensation and basis for other Company provided benefits in the case of any member of the Board of Directors who is also an employee of the Company or of any affiliate may be affected if a Participant elects to defer a portion of his/her retainer and/or meeting fees. 5 W. R. BERKLEY CORPORATION DEFERRED COMPENSATION PLAN FOR DIRECTORS ELECTION FORM In accordance with and subject to the W. R. Berkley Corporation Deferred Compensation Plan for Directors (the "Plan"), I hereby request to defer the receipt of my annual retainer and/or meeting fees for the year ending December 31, ____, as follows: Amount to be Deferred: I. Annual Retainer: __ (a) ALL (100%), OR __ (b) $___ (multiples of $1,000) II. Meeting Fees: __ (a) ALL (100%), OR __ (b) $___ (multiples of $1,000) Period of Deferral: __ (a) Year in which payments should be made or commence (not later than the date of termination as a member of the Board of Directors (if I am not otherwise an employee of W. R. Berkley Corporation or any affiliate) or termination of employment (if I am otherwise an employee of W. R. Berkley Corporation or any affiliate)) _______, OR __ (b) Until termination as a member of the Board of Directors (if I am not otherwise an employee of W. R. Berkley Corporation or any affiliate) or termination of employment (if I am otherwise an employee of W. R. Berkley Corporation or any affiliate) Form of Distribution: __ Lump sum, OR __ Annual installments __________________ (not to exceed 5) A Participant should contact his/her Tax Advisor prior to making an election to defer his/her annual retainer and/or meeting fees. I have received a copy of the Plan. I understand that, in the event of my death prior to receipt of all amounts payable to me pursuant to the Plan, the amount credited to my Deferred Compensation Account will be paid to my designated beneficiary in the form of a lump sum. Beneficiary Name ________________________ Participant Name __________________ Address _________________________________ Address ___________________________ Beneficiary Participant Social Security No. _____________________ Social Security No. _______________ _________________________________________ Date ______________________________ Signature of Participant EX-10.6 4 EX-10.6 1 EXHIBIT 10.6 2 SALE AGREEMENT 475 STEAMBOAT ROAD GREENWICH, CONNECTICUT BY AND BETWEEN LEMBO-FEINERMAN FLEMING MORELL TRUST AND W. R. BERKLEY CORPORATION 3 AGREEMENT THIS SALE AGREEMENT (THE "AGREEMENT") IS made as of the 15th day of March, 1996, by and between LEMBO-FEINERMAN FLEMING MORELL TRUST, a Florida Trust ("Seller"), with an address at c/o Ackerman, Levine & Cullen, 175 Great Neck Road, Great Neck, NY 11021, and W. R. BERKLEY CORPORATION, a Delaware corporation ("Buyer") with an address at 165 Mason Street, Greenwich, Connecticut 06830. W I T N E S S E T H : THAT, WHEREAS, Seller desires to sell and the Buyer desires to purchase the property described in Section 1.01 below and the Buyer desires to purchase said property on the terms and subject to the conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the respective undertakings of the parties hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is hereby agreed: ARTICLE I AGREEMENT TO SELL SECTION 1.01. SALE OF BUSINESS PROPERTY. On the terms and conditions hereinafter set forth, Seller agrees to sell and convey to Buyer and Buyer agrees to purchase and accept from Seller, subject only to the "Permitted Title Exceptions", the "Business Property" consisting of: 4 A. (a) the land situated in the Town of Greenwich, County of Fairfield and State of Connecticut, more particularly described in Schedule A attached hereto and incorporated herein by reference, together with all and singular the appurtenances, tenaments, hereditaments, rights-of-way, littoral and riparian rights, privileges, benefits and easements belonging to or in anywise appertaining to the same (all of the foregoing being hereinafter referred to as the "Land"), and the office building and all buildings, structures, improvements, fixtures and other items of real property situated on the Land (collectively, the "Improvements") (the "Land" and the "Improvements" are hereinafter collectively referred to as the "Premises"); (b) all of Seller's right, title and interest into and under the agreement of lease described in Schedule B attached hereto (the "Existing Lease") and all security deposits, advance rentals and other payments made or to be made under the Existing Lease, together with the right to receive and collect the same; (c) all of Seller's right, title and interest in and to the subleases described in Schedule C attached hereto (collectively, the "Existing Subleases"); (d) all of Seller's right, title and interest in and to all tangible personal property and equipment now located on or about the Land or Improvements or attached or appurtenant thereto or used in connection with the operation thereof, including, but not limited to, the items described in Schedule D attached hereto and incorporated herein by reference (all such tangible personal property and equipment are hereinafter referred to as the "Personal Property"); 5 (e) any and all transferable governmental licenses, certificates, permits and approvals relating to the construction, occupancy, use or operation of the Premises (collectively, the "Permits"). (f) all of Seller's right, title and interest in and to all intangible property now or on the Closing Date (as hereinafter defined) owned, or used in connection with, the Land, the Improvements and the Personal Property, or any business or businesses now or hereafter conducted thereon or with the use thereof (other than those businesses conducted by tenants of the Building and/or the Land under Tenant Leases in their capacity as tenants), including all contract rights and agreements, business licenses, warranties, guaranties, telephone exchange numbers, advertising materials, books and records (or photocopies thereof), plans, specifications and surveys, related to the Land, the Improvements or the Personal Property or any part thereof. ARTICLE II PURCHASE PRICE SECTION 2.01. AMOUNT. Subject to the prorations, apportionments, credits and adjustments to be made in accordance with the provisions of this Agreement, the purchase price (the "Purchase_Price") to be paid by the Buyer to the Seller for the Business Property shall be EIGHTEEN MILLION TWO HUNDRED THOUSAND DOLLARS ($18,200,000.00). SECTION 2.02. MANNER OF PAYMENT. The Purchase Price shall be paid as follows: 6 A. Deposit. Upon the execution of this Agreement by both Seller and Buyer, Buyer shall deliver to Chicago Title Insurance Company, Stamford, Connecticut (the "Escrow Agent") the sum of TWO HUNDRED THOUSAND DOLLARS ($200,000.00) (the "Deposit") by wire transfer or certified funds, as determined by Buyer. The Deposit shall be held in escrow by the Escrow Agent in accordance with the provisions of Section 2.03 hereof, and upon the Closing (as herein defined), the Deposit shall be applied against the payment of the Purchase Price. All sums paid on account hereof are hereby made liens upon the Seller's interest in the Premises. B. Purchase Price Balance. The balance of the Purchase Price, $18,000,000.00, plus or minus the net amount of all prorations, apportionments, credits and adjustments to be made in accordance with the provisions of this Agreement (the "Purchase Price Balance") shall be paid (at the option of the Buyer) by cashier's or certified check or wire transfer upon the Closing. SECTION 2.03. RECEIPT, MAINTENANCE AND DISPOSITION OF DEPOSIT; ESCROW. A. Receipt of Deposit. By the execution of this Agreement, the Escrow Agent acknowledges receipt of the Deposit and its agreement to maintain and dispose of the Deposit in accordance with the provisions of this Agreement. B. Maintenance of Deposit. The Escrow Agent shall hold the Deposit at all times in a separate, interest-bearing account at Fleet Bank, N.A., 1 Atlantic Street, Stamford, Connecticut. All interest and income accruing on the Deposit prior to the Closing Date shall belong to Buyer and shall be paid periodically or upon demand to Buyer. 7 C. Disposition of Deposit. (a) In the event the purchase of the Business Property by Buyer is consummated, then, at the Closing, the Deposit shall constitute a part of and be applied against the Purchase Price and shall be paid over to the Seller. (b) In the event Buyer elects to terminate this Agreement pursuant to any provision of this Agreement giving Buyer such a right or option, or in the event the purchase of the Business Property by Buyer hereunder is not consummated for any reason except as provided in subparagraph (c) of this subsection (C), then the Deposit shall be returned to Buyer. (c) In the event the sale of the Business Property provided in this Agreement shall not take place by reason of the default by Buyer under this Agreement, then, in such event, Seller shall be entitled to recover the Deposit as full compensation and liquidated damages under and in connection with this Agreement. The parties recognize that it is extremely difficult and impracticable to ascertain the extent of detriment to Seller caused by the default by Buyer under this Agreement and the failure of the consummation of the transaction contemplated by this Agreement or the amount of compensation Seller should receive as a result of Buyer's default. In the event the sale of the Business Property herein provided shall not be consummated by reason of the default by Buyer under this Agreement, then such recovery of the Deposit shall be the sole and exclusive remedy of Seller by reason of such default by Buyer, under this Agreement or, without limitation, by reason of any matter and shall be in lieu of any other monetary relief or, without limitation, any other relief to which Seller may otherwise be entitled by virtue of this Agreement or under law or at equity and in all events the liability of Buyer or loss or 8 damage resulting from or in any way connected with this Agreement or any default or defaults by Buyer hereunder in the event such sale shall not be consummated shall be limited to the sum of the Deposit. (d) If for any reason the Closing does not occur, the Escrow Agent shall deliver the Deposit to Seller or Buyer, as provided herein, only upon receipt of a written demand therefor from such party, subject to the following provisions: If for any reason the Closing does not occur and either party makes a written demand upon the Escrow Agent for payment of the Deposit, the Escrow Agent shall give written notice to the other party of such demand. If the Escrow Agent does not receive a written objection from the other party to the proposed payment within fifteen (15) days after the giving of such notice, the Escrow Agent is hereby authorized to make such payment. If the Escrow Agent does receive such written objection within such period, the Escrow Agent, at Escrow Agent's election, shall (1) continue to hold such amount until otherwise directed by written instructions signed by Seller and Purchaser or a final judgment of a court, or (2) pay the Deposit into a Connecticut court of competent jurisdiction, and thereafter the Escrow Agent shall be deemed discharged from any further obligation under this Agreement. (e) The parties acknowledge that the Escrow Agent is acting solely as a stakeholder, at their request and for their convenience, and without compensation, and that the Escrow Agent shall not be deemed to be the agent of either of the parties, and that the Escrow Agent shall not be liable to either of the parties for any action or omission on its part taken or made in good faith, and not in disregard of this Agreement, but shall be liable for its negligent acts or omissions and for any loss, cost or expense incurred by Seller or Buyer resulting from actions taken by the Escrow Agent in 9 bad faith, in disregard of this Agreement or involving negligence on the part of the Escrow Agent. Seller and Buyer shall jointly and severally indemnify and hold the Escrow Agent harmless from and against all costs, claims and expenses, including reasonable attorneys' fees, incurred in connection with the performance of the Escrow Agent's duties hereunder, except with respect to actions taken by the Escrow Agent in bad faith, in disregard of this Agreement or involving negligence on the part of the Escrow Agent. Buyer and Seller shall share equally in the payment of any out-of-pocket expenses of the Escrow Agent. Seller and Buyer agree that, except as otherwise expressly provided in this Agreement, the Escrow Agent shall hold, maintain and dispose of the Deposit in accordance with the Escrow Receipt and Instructions attached hereto as Exhibit 1. ARTICLE III DELIVERIES BY SELLER SECTION 3.01. DOCUMENTS. At or before the Closing, Seller shall deliver to Buyer the following items: A. Certificates of Occupancy. Final, unqualified and unconditional certificates of occupancy relating to the Premises which, to the best of Seller's knowledge, information and belief, represent all of the certificates of occupancy issued with respect to all construction and tenant work upon the Premises. B. Permits and Authorizations. Copies of all Permits and authorizations of which Seller has knowledge and which are required in connection with the construction, occupancy, use or operation of the Business Property. 10 C. Plans. Current, updated copies of the As-Built plans and specifications ("Plans") for the Land and Improvements showing all the utilities and the Building. D. Asbestos Report. The 475 Steamboat Road Record of Encapsulation & Removal of Asbestos as of 1995, a copy of which has been delivered to Buyer (the "Asbestos Report"). E. Existing Lease; Existing Subleases and Other Documents. Copies of the Existing Lease, Existing Subleases, and any other contracts, agreements and documents affecting the Business Property. F. (Intentionally omitted). G. Rent Roll. A complete rent roll pertaining to the Premises. The Seller represents that the information contained in the Rent Roll is the same as that set forth in Paragraph B of Section 5.01 hereof. H. [This paragraph intentionally left blank] ARTICLE IV CLOSING SECTION 4.01. CLOSING. Except as otherwise provided in this Agreement, the delivery of the deed or deeds to be delivered as hereinafter provided, the payment of the Purchase Price Balance and the consummation of the transactions contemplated in this Agreement (the "Closing") shall take place on June 3, 1996 (as such date may be extended 11 pursuant to the terms of this Agreement), or on such other date as Buyer and Seller may agree upon (the "Closing Date"). The Closing shall be held at 10:00 a.m. (Eastern Standard Time) on the Closing Date, at the offices of Cummings & Lockwood, Two Greenwich Plaza, Greenwich, Connecticut 06830, or such other place as Buyer and Seller may agree upon. SECTION 4.02. CLOSING STATEMENTS. Prior to the Closing, Seller and Buyer shall each submit tentative closing statements to the other party reflecting proposed prorations, apportionments, credits and adjustments to be made at the Closing, and Seller and Purchaser shall mutually agree upon the appropriate total amount to be credited to Seller or to Buyer at the Closing pursuant to Section 4.07 hereof. SECTION 4.03. DELIVERY AT CLOSING. At the Closing: A. Seller shall deliver or cause to be delivered to Buyer and Chicago Title Insurance Company (the "Title Company"), the Assignment and Assumption Agreement, duly executed, witnessed and acknowledged by Seller and the deed or deeds described in Section 5.01 hereof, each duly executed, witnessed and acknowledged by the grantor therein, together with releases (the "Releases") duly executed, witnessed and acknowledged by the holders of any encumbrances, which are not Permitted Title Exceptions, all in form and content acceptable to Buyer and the Title Company. B. Buyer shall deliver to Seller the Purchase Price Balance. SECTION 4.04. CONVEYANCE TAXES. A. Seller shall pay all conveyance taxes payable in connection with this transaction, including any conveyance taxes which may be 12 payable in connection with the conveyance of title to the Seller as provided in Section 5.01 hereof, and at the Closing, Seller shall deliver to Buyer or the Title Company: (a) All necessary state and local conveyance tax forms and statements signed by or on behalf of the Seller; and (b) All necessary state and local conveyance tax forms and statements signed by or on behalf of the Fee Owner in connection with the conveyance of title to the Seller pursuant to the provisions of Section 5.01 hereof; and (c) Certified or bank checks(s) payable to the order of (i) the Connecticut Department of Revenue Services, in the amount of all applicable Connecticut conveyance taxes payable in connection with this transaction including any conveyance taxes which may be payable in connection with the conveyance of title to the Seller as provided in Section 5.01 hereof; and (ii) the Town Clerk, Town of Greenwich, in the amount of all applicable local conveyance taxes payable in connection with this transaction, including any conveyance taxes which may be payable in connection with the conveyance of title to the Seller as provided in Section 5.01 hereof. SECTION 4.05. ADDITIONAL ITEMS TO BE DELIVERED BY SELLER. At the Closing, Seller shall deliver to Buyer: A. An assignment and assumption of the Existing Lease (the "Assignment and Assumption of Lease"), substantially in the form of Exhibit 2 attached hereto and incorporated herein by reference, executed, witnessed and acknowledged by Seller. 13 B. If requested by the Buyer, an assignment of Seller's interest in and to the Existing Subleases duly executed, witnessed and acknowledged by Seller. C. The landlord's fully executed counterparts (or, where originals are unavailable, copies thereof) of the Existing Lease and any amendments, guarantees and other documents relating thereto, a Rent Roll, updated as of the Closing Date, together with a schedule of any security deposits and/or prepaid rentals paid by the tenant thereunder, and a separate certified or official bank check payable to the order of Buyer, in the aggregate amount of the security deposits and/or prepaid rentals under the Existing Lease. In the event any security deposits and/or prepaid rentals are held by a bank, savings bank, trust company or savings and loan association, at Buyer's option, Seller shall deliver to Buyer, in lieu of such check, an assignment to Buyer of such deposits and all interest thereon and written instructions to the holder thereof to transfer such deposits and interest to Buyer. With respect to any security deposits which are letters of credit, Seller shall deliver to Buyer at the Closing such letters of credit and shall execute and deliver such other instruments as the issuers of such letters of credit shall reasonably require and shall cooperate with Buyer to change the named beneficiary under such letters of credit to Buyer, which obligations of Seller shall survive the Closing. D. A bill of sale (the "Bill of Sale") substantially in the form of Exhibit 4 attached hereto and incorporated herein be reference, executed by Seller, conveying to Buyer any Personal Property to be conveyed pursuant to this Agreement.. E. Notices to the tenants under the Existing Leases ("Notice to Tenants"), substantially in the form of Exhibit 5 attached hereto and incorporated herein by reference, executed by Seller. 14 F. All keys in the possession of Seller and its building manager to all entrance doors to, and equipment and utility rooms (and other secured areas) located in, the Premises, which keys shall be properly tagged for identification. G. A FIRPTA Certificate substantially in the form attached hereto as Exhibit 6 and incorporated herein by reference, executed by Seller. H. The Certificate of Seller substantially in the form attached hereto as Exhibit 7 and incorporated herein by reference, executed by Seller. I. An estoppel certificate from Pechiney Packaging Corporation ("Pechiney"), duly executed by Pechiney, in the form attached hereto and incorporated herein by reference as Exhibit 9 (the "Pechiney Estoppel Certificate"), which shall, inter alia, confirm that all of the Seller's representations contained in subsection 5.01(c) of this Agreement are true and correct as of the Closing. J. Executed counterparts (or, where unavailable, copies thereof certified by Seller) of all Service Contracts affecting the Premises. K. An Affidavit executed by the Trustee or Trustees of the Seller in the form attached hereto as Exhibit 10, and such other documents executed by said Trustee or Trustees as may be required by the Title Company (as herein defined). L. A certificate of the Corporate Clerk or Secretary of the Fee Owner evidencing (a) resolutions of the Fee Owner's Board of Directors authorizing the conveyance of the Fee Owner's interest in the Business Property and the transactions contemplated in this Agreement and (b) the incumbency of the Fee Owner's Officers 15 executing any documents in connection with said conveyance and the transactions contemplated in this Agreement, and such other documents executed by the Fee Owner regarding the Fee Owner and said conveyance by the Fee Owner and the transactions contemplated in this Agreement as may be required by the Title Company. M. Authorization Documents. Corporate and/or trust resolutions, partnership and/or trust certificates, good standing certificates, certified entity formation documents and any other documentation, reasonably requested by the Title Company or Buyer, relating to Seller and the Fee Owner and any entities which own or control Seller or the Fee Owner, as the case may be, which evidence the right, power and authority of Seller and the Fee Owner to consummate the transactions contemplated by this Agreement. N. Title Affidavits. Separate affidavits by the Trustee or Trustees of the Seller and by a duly authorized Office of the Fee Owner (i) to the extent required by the Title Company (as hereinafter defined) in order to insure title to the Premises without exception for (a) mechanic's and materialmen's liens; (b) tenants' rights except those under the Existing Leases; (c) any security interest in any Personal Property and fixtures being sold with the Premises; and (ii) to verify that the party signing each such affidavit has no notice of any facts or circumstances not of record which could give rise to the claim of any third party to rights of adverse possession or use over the Premises or any part thereof in derogation of the rights of the owner of the Premises; (d) updating any available survey; and (iii) to confirm such additional facts regarding the Premises as may be required by the Title Company. 16 O Other Documents. All documents listed in Article III of this Agreement, which were not previously delivered to Buyer prior to Closing. P. Seller will use its best efforts to obtain duly executed estoppel certificates in form and substance satisfactory to Buyer from all tenants under the Existing Subleases. SECTION 4.06. ADDITIONAL ITEMS TO BE DELIVERED BY BUYER. A. At the Closing, Buyer shall deliver to Seller: (a) The Assignment and Assumption Agreement, executed by Buyer. (b) Any conveyance tax forms required to be signed by or on behalf of Buyer. (c) The Certificate of Buyer ("Certificate of Buyer") in the form of Exhibit 11 attached hereto. (d) Documentation to establish to Seller's reasonable satisfaction the due authorization of Buyer's acquisition of the Business Property and delivery of the documents required to be delivered by Buyer pursuant to this Agreement. The documents referred to in subsections (a) through (d) hereof shall be signed by Buyer or Buyer's assignee as permitted under the provisions of this Agreement. 17 SECTION 4.07. CLOSING COSTS. A. Shared Costs. Seller and Buyer shall share and split equally any costs and expenses for the services of the Escrow Agent. B. Buyer's Costs. Buyer shall pay Buyer's legal fees and expenses, all premiums for the issuance of any policy or policies of title insurance, the cost of the survey, and the costs of all opinions, certificates, instruments, documents and papers required to be delivered, or to cause to be delivered, by Buyer hereunder, and, without limitation, the cost of all performance by Buyer of its obligations hereunder. Buyer shall pay the recording fees in connection with the recording of the Assignment of Leasehold Interest (as hereinafter defined) and the Deeds from the Seller to the Buyer. C. Seller's Costs. Seller shall pay Seller's legal fees and expenses and the cost of all opinions, certificates, instruments, documents and paper required to be delivered, or to cause to be delivered, by Seller hereunder, and, without limitation, the cost of all performances by Seller of its obligations hereunder. Seller shall pay at the Closing all Connecticut conveyance tax and local conveyance tax imposed as a direct result of the sale of the Business Property and all recording fees for any deeds or other documents from the Fee Owner and for any other documents (other than the Assignment of Leasehold Interest and the Deed from Seller to Buyer) recorded to render and convey title to the Business Property in compliance with the provisions of this Agreement. SECTION 4.08. PRORATIONS AND ADJUSTMENTS. A. The only items to be prorated and adjusted are as follows, with such prorations made between Seller and Buyer 18 at the Closing, computed as of the Closing Date, with income and expenses for the Closing Date itself being allocated to Buyer: (1) Income. Rentals and, without limitation, other payments (other than percentage rent) payable by tenants, licensees, concessionaires and other persons using or occupying the Business Property or any part thereof, for or in connection with such use or occupancy; provided, however, Buyer shall not be obligated to make any payment or give any credit to Seller on account of or by reason of any rental or other payments which are unpaid as of the Closing Date, but shall be required merely to turn over to Seller its share of the same if, as and when received by Buyer. All payments received by Buyer from a tenant, licensee, concessionaire or other person shall be applied first to Buyer's collection costs (if any) with respect thereto and then against the most recently accrued obligation or obligations of the payor. In addition, in the event that as of the Closing Date there shall exist any rebate, rental concession, free-rent period, credit, set-off or rent reduction under or with respect to any Existing Lease which extends to or beyond the Closing Date, then Seller shall pay Buyer as of the Closing Date (and the prorations in favor of Buyer hereunder shall include an amount equal to) the aggregate amount of all such rebates, rental concessions, free-rent periods, credits, setoffs or rent reductions applicable to any period or periods on or after the Closing Date. In the event that Buyer receives checks payable to Seller with respect to the Business Property, Seller hereby authorizes Buyer to endorse Seller's name on the checks without recourse and apply the proceeds in accordance with the foregoing; similarly, any checks received by Seller with respect to the Business Property shall be endorsed by Seller without recourse and promptly forwarded to Buyer, who shall apply the proceeds thereof in accordance with the foregoing. 19 (2) Ground Rent. Any rents, charges and obligations payable under the Ground Lease. B. There shall be no other prorations or adjustments between Seller and Buyer. Seller represents that all real and personal property taxes and assessments, sewer charges, sewer taxes and other applicable municipal taxes imposed with respect to the Business Property are payable by Pechiney directly to the appropriate taxing authorities pursuant to the Pechiney Sublease, and accordingly these items will not be adjusted by Seller and Buyer. C. Certain Expenses not to be Prorated. Seller and Buyer agree that none of the insurance policies relating to the Business Property will be assigned to Buyer (and Seller shall pay any cancellation fees resulting from the termination of such policies). D. Prepaid Rent and Deposits. All prepaid rentals, prepaid payments and security deposits (including all accrued interest on the foregoing) made under Existing Lease, license agreements or concession agreements relating to the Business Property or any part thereof shall belong to Buyer and shall be delivered to Buyer at the Closing. SECTION 4.09. IRS COMPLIANCE. The parties agree to cooperate in requiring their respective attorneys to comply with Internal Revenue Service requirements as to filing 1099-S forms. The provisions of this paragraph shall survive the Closing. 20 ARTICLE V TITLE SECTION 5.01. TITLE TO THE PREMISES. A. Ground Lease. Seller represents (a) that Seller is the owner of the Improvements and is the sole ground lessee and sole owner of a leasehold estate in the Business Property pursuant to a certain Agreement of Lease between the Mutual Life Insurance Company of New York, as ground lessor, and The Fleming-Morell Corporation, as ground lessee, dated March 26, 1970, (the "Ground Lease"); (b) that Pacific Beach Company, Inc., a Delaware corporation, (the "Fee Owner") is the owner of a fee simple interest in the Business Property, subject to the Ground Lease; (c) the Ground Lease has not been modified or amended and is in good standing and is in full force and effect; a true, correct and complete copy of the Ground Lease has been delivered to Buyer; (d) there are no other agreements or other arrangements with respect to the Premises or the ownership thereof between the Lessor and Lessee under the Ground Lease, or with respect to the Ground Lease or the leasing of the Premises; (e) the current term of the Ground Lease commenced on March 26, 1970, and will terminate on March 25, 2020, and none of the options to renew or extend the term of the Ground Lease has been exercised; (f) no security deposit has been paid under the Ground Lease and no security deposit is being held by the Lessor under the Ground Lease; (g) the "Stated Annual Rent" as defined in and payable under the Ground Lease is currently $72,000.00 per year, payable at the rate of $6,000.00 per month, in advance, and has been timely paid in full for all months of the term through and including February 29, 1996); (h) the amount of "Percentage Rent" as defined in and payable under the Ground Lease is currently $20,125.00 per year, payable at the rate of 21 $1,677.08 per month, in advance, and there currently exists no overpayment or underpayment of the Percentage Rent (which has been timely paid in full for all months of the term through and including February 29, 1996); (i) all other obligations of the Lessee under the Ground Lease have been paid or performed by the Lessee as of the date hereof; (j) to the best of Seller's knowledge, information and belief, there are no defaults of the Lessor under the Ground Lease nor any existing conditions which upon the giving of notice or lapse of time or both would constitute a default by the Lessor under the Ground Lease; and (k) there are no defaults of the Lessee under the Ground Lease nor any existing conditions upon which the giving of notice or lapse of time or both would constitute a default by the Lessee under the Ground Lease, and there are no set-offs, defenses or counterclaims against the enforcement of Lessee's obligations under the Ground Lease. Simultaneously with the execution and delivery of this Agreement, Seller will enter into a duly executed, valid and enforceable Contract with the Fee Owner for the purchase of the Fee Owner's fee interest in the Premises which will have been approved in writing by Buyer (the "Contract"), a true and complete copy of which has been delivered to Buyer. At the request of Buyer, at, or at any time prior to, the Closing, Seller shall assign all of Seller's right, title and interest in and to the Contract to Buyer pursuant to assignment documentation which is satisfactory to Buyer. At or prior to the Closing, Seller shall acquire from the Fee Owner the fee simple interest in the Premises, and at the Closing Seller shall convey title to the Business Property to Buyer by a Bargain and Sale Deed with covenants against Grantor's Acts substantially in the form attached hereto as Exhibit 13 (the "Seller's Deed") and an Assignment and Assumption Agreement substantially in the form attached hereto as Exhibit 14 (the "Assignment and Assumption Agreement"); provided, however, that if, with the advance consent of the Buyer (the granting of which such consent 22 shall be in the sole discretion of the Buyer) the Seller, pursuant to the Contract directs the Fee Owner to convey the Fee Owner's fee title to the Premises to Buyer at the Closing by a special or limited warranty deed, as provided in the Contract, which shall be acceptable to Buyer and the Title Company (the "Fee Owner's Deed to Buyer") and the Seller shall thereupon convey and transfer Seller's leasehold interest in the Premises by the Assignment of Leasehold Interest and by a QuitClaim Deed from the Seller to the Buyer which shall be acceptable to the Buyer and the Title Company (the "Seller's QuitClaim Deed"). Notwithstanding anything contained herein to the contrary, the Seller confirms and agrees that the Contract and any deed from the Fee Owner to the Seller, any deed from the Fee Owner to the Buyer, any deed from the Seller to the Buyer, and the Assignment and Assumption Agreement shall each specifically provide that there shall be no merger of the leasehold interest in the Premises under the Ground Lease or the ownership interest in the Improvements with the fee estate interest in the Premises for any reason, including, but not limited to by reason of the same; corporation, partnership, or other entity acquiring or holding, directly or indirectly, the Ground Lease and the leasehold estate created thereby or any interest in the Ground Lease or in such leasehold estate as well as the fee estate in the Premises, and shall further provide that the foregoing conveyance or conveyances of the Premises and the interests therein shall not extinguish said leasehold interest in the Premises or any subordinate leases or subleases affecting the Premises (including, without limitation, the Pechiney Sublease, as hereinafter defined, and any sub-subleases subordinate thereto). The obligations of the Buyer under this Agreement are conditioned upon and subject to the conveyance to Buyer of the Fee Owner's fee interest in the Premises as herein provided. B. Pechiney Sublease. Seller represents that the Premises are currently subject to a valid and enforceable sublease from Fleming-Morell Associates to 23 Pechiney Ugine Kuhlman Corporation dated November 6, 1981, described in Schedule B attached hereto (the "Pechiney Sublease"); and that a true, correct and complete copy of the Pechiney Sublease has been delivered to Buyer. On or before the Closing, Seller shall (i) enter into an agreement with the current tenant under the Pechiney Sublease, Pechiney Packaging Corporation ("Pechiney") to amend the Pechiney Sublease, effective as of the closing of this transaction, which such agreement shall be acceptable to, and shall have been approved in advance in writing by, Buyer; and (ii) shall deliver a fully executed copy of such agreement to Buyer. If, on or before the Closing, Seller and Pechiney have not entered into such an agreement which shall be acceptable to, and shall have been approved in advance in writing by, Buyer, and Seller has not delivered a fully executed copy of such agreement to Buyer, then Buyer may elect to terminate this Agreement, in which case the Seller shall (i) cause the Escrow Agent to refund the Deposit to Buyer with all accrued interest thereon, and (ii) reimburse Buyer for any expenses incurred by Buyer for the examination of title to the Premises, for Buyer's legal fees and survey costs, and for Buyer's due diligence inspection of the Premises as provided in Section 10.01 hereof (provided, that the amount of such reimbursement shall not exceed $35,000.00) and upon Buyer's receipt of said Deposit and said reimbursement all rights and liabilities of the parties hereto shall be terminated. At the request of Buyer, at or at any time prior to the Closing, Seller shall assign to Buyer (in assignment documentation satisfactory to Buyer) all of Seller's rights under such agreement with Pechiney. The obligations of the Buyer under this Agreement are conditioned upon and subject to the amendment of the Pechiney Sublease pursuant to such agreement with Pechiney. Seller further represents as follows regarding the Pechiney Sublease: 24 (a) The Pechiney Sublease has not been modified or amended (other than as provided in the above-referred-to agreement to be entered into with Pechiney) and is in good standing and in full force and effect, and there are no other agreements or other arrangements between the Seller and Pechiney with respect to the Premises, or with respect to the Pechiney Sublease or the subleasing of the Premises. (b) The current term of the Pechiney Sublease commenced on November 6, 1981, and will terminate on December 31, 2000. No options which the Lessee has under the Pechiney Sublease to extend or renew the Pechiney Sublease have been exercised and no option to purchase the Premises under the Pechiney Sublease has been exercised: (c) No security deposit has been paid under the Pechiney Sublease and no security deposit is held by the Seller. (d) The amount of the basic rent payable under the Pechiney Sublease (which has been timely paid in full for all months of the Pechiney Sublease term through and including February 29, 1996) is currently $1,200,000.00 per year, ($100,000.00 per month), payable in advance. (e) The amount of additional rent currently payable under the Pechiney Sublease through and including February 29, 1996) is $0 per month. (f) Pursuant to the Pechiney Sublease, Pechiney has paid all real estate taxes and assessments upon the Premises and all "Impositions" as defined in the Pechiney Sublease for the period ending December 31, 1995. 25 (g) All other obligations, conditions and requirements of Pechiney under the Pechiney Sublease (including, but not limited to, all expenses and charges for utilities, and fuel, building security and maintenance) have been paid or performed by or complied with by Pechiney and by Seller as of the date hereof. (h) All obligations, conditions and requirements of the Seller under the Pechiney Sublease have been performed by the Seller as of the date hereof, and will be performed by the Seller through and including the date of the Closing. The Seller has complied with and is in compliance with all "Requirements" as defined in the Pechiney Sublease. (i) There are no defaults of the Seller or Pechiney under the Pechiney Sublease and no existing conditions which upon the giving of notice or lapse of time or both would constitute a default under the Pechiney Sublease. There are no set-offs, defenses or counterclaims against enforcement of Pechiney's obligations under the Pechiney Sublease. (j) Pechiney has not entered into any currently effective subleases, assignments, mortgages or other agreements transferring Pechiney's interest in the Pechiney Sublease or the Premises, other than the sublease agreements which are described in Schedule G attached hereto and copies of which have been delivered to Buyer. C. Permitted Title Exceptions. At the Closing, Seller shall convey the Business Property, or cause the Business Property, to be conveyed to Buyer, subject only to the following Permitted Title Exceptions: (1) any regulations, ordinances, rules and statutes governing or affecting the Premises imposed or to be imposed by any governmental 26 authority, including the wetlands, zoning & planning rules and regulations of the Town of Greenwich, Connecticut, provided the same are not violated and do not prohibit the present use of the Premises. (2) taxes of the Town of Greenwich and/or any region or district in which the Premises are situated which become due and payable after the Closing Date. (3) municipal assessments and public improvement assessments, and/or unpaid installments thereof, which assessments and/or installments thereof become due and payable after the date of the delivery of the Deed or Deeds. (4) any effect on the Premises of the fact that the same are or may be located in an area which qualifies the Premises for government subsidized insurance under the National Flood Insurance Act of 1968, as amended, and the maps promulgated or to be promulgated pursuant thereto. (5) the rights of the Lessor, and the obligations of the Seller, under the Ground Lease (which is to be transferred and assigned to Buyer as a part of this transaction pursuant to this Section 5.01). (6) the rights of the tenant (as tenant only) under the Existing Lease (sometimes also referred to herein as the "Pechiney Sublease", as same shall be amended pursuant to the terms hereof). (7) such exceptions to title and the matters set forth in Schedule F attached hereto and made a part hereof. 27 D. Title Documents. Title to the Premises shall be conveyed by Seller to Buyer at the Closing, pursuant to the provisions of Section 5.01 hereof, by (a) the Assignment and Assumption Agreement and (b) either (i) the Seller's Deed; or (ii) the Fee Owner's Deed to Buyer and Seller's QuitClaim Deed from Seller to the Buyer, all of which documents are to be in form acceptable to Buyer and the Title Company and properly executed, witnessed and acknowledged. E. Violations. Violations at the time of the Closing of any governmental (including zoning and planning) rules and regulations shall constitute exceptions to title for the purposes of subsection H hereof. F. New Leases. During the period from the date hereof until the Closing, Seller shall not, without Buyer's prior consent in each instance, which consent may be withheld or granted in Buyer's sole discretion, enter into any new leases or subleases, or consent to any subleases or assignments, for space in the Building, or terminate, amend, renew or extend the Existing Lease, with the exception of the amendment of the Existing Lease (the Pechiney Sublease), which may be amended only as specifically provided in the Pechiney Agreement. G. Title Insurance Policy. It shall be a condition of Buyer's obligations to close and consummate the purchase herein contemplated that Seller shall receive good and marketable title to the Premises, subject only to the Permitted Title Exceptions and that, Buyer shall receive at the Closing a title insurance policy or policies in the current ALTA form (or an equivalent form acceptable to Buyer) issued by Chicago Title Insurance Company (the "Title Company") at standard rates, in the amount of the Purchase Price, and complying with the requirements of the paragraph, insuring to Buyer both the fee 28 simple title to the Premises and the leasehold interest under the Ground Lease, free from all exceptions, other than the Permitted Title Exceptions. An agreement by the Title Company to provide affirmative insurance against forfeiture or loss by reason of a title defect shall not be deemed in compliance with this subsection or a cure of such title defect, unless Buyer accepts such agreement in writing. Said title insurance policy or policies (a) shall delete the standard printed exceptions for (1) rights or claims of parties in possession not shown by the public records; (2) encroachments, overlaps, boundary line disputes, and any matters which would be disclosed by an accurate survey and inspection of the premises; (3) easements, or claims of easements, not shown by the public records; (4) any lien, or right to a lien, for services, labor, or material heretofore or hereafter furnished, imposed by law and not shown by the public records; (5) taxes or special assessments which are not shown as existing liens by the public records, and shall contain the following endorsements: (a) an endorsement insuring contiguity between any parcels constituting the Premises and between the Land and the easement area described in the Grant recorded in Book 794 at Page 625 of the Greenwich Land Records, without any strips, gores or like intrusions; (b) an endorsement insuring access and contiguity to all adjacent highways, roads, streets and alleys which are necessary for access to the Premises for their intended purposes without any strips, gores, or like intrusions; (c) an endorsement insuring Buyer's rights to use all of the easements and grants appurtenant to the Premises and structures thereon; 29 (d) an endorsement insuring that no utility or other lines, pipes or conduits necessary for the use or operation of the Premises are situated over, under or in any property other than the Premises, any adjoining public way or a recorded utility easement benefiting the Premises; H. Title Defects. In the event that on the Closing Date Seller is unable to convey title to the Premises to Buyer in accordance with the terms of this Agreement, Seller shall (i) have a further period of sixty (60) days within which to perfect title. Seller agrees to use its best efforts to remove any defects or exceptions to title. If, at the end of said period, Seller is still unable to convey title to the Premises in accordance with the terms of this Agreement, Buyer can elect to either accept such title as Seller can convey, upon the payment of the Purchase Price, or Buyer shall reject such title, and upon such rejection, Seller shall cause the Escrow Agent to refund to Buyer the Deposit, and (ii) reimburse Buyer for any expenses incurred by Buyer for the examination of title to the Premises, for survey costs, and for Buyer's due diligence inspection of the Premises as provided in Section 10.01 hereof (provided, that the amount of such reimbursement shall not exceed $35,000.00) and upon Buyer's receipt of said Deposit, with all accrued interest thereon, and said reimbursement, all rights and liabilities of the parties hereto shall be terminated. I. Curing Title Defects. Notwithstanding anything contained herein to the contrary, the Seller (a) shall pay off and satisfy and obtain the release of any liens, 30 judgments, attachments, mortgages or other financial encumbrances upon the Premises which may be removed, satisfied or released by the payment of money, and (b) shall undertake to remove, discharge or otherwise cure any other exceptions to title that are not Permitted Title Exceptions provided, however, that the Seller shall not be required to expend more than $100,000 for the removal or satisfaction of such other exceptions to title, and shall be entitled to a reasonable adjournment of the Closing (not to exceed 60 days) for the purpose thereof. If, on the Closing Date, there may be any liens, judgments, attachments, mortgages or other financial encumbrances upon the Premises which may be removed, satisfied or released by the payment of money, Seller may use any portion of the Purchase Price Balance to satisfy the same, provided Seller shall deliver to Buyer at Closing, instruments in recordable form sufficient to release, satisfy and discharge such other liens, together with the cost of recording and filing said instruments which are acceptable to Buyer and the Title Company. Seller shall not be excused from performing its obligations under the Agreement by reason of the existence of any exception to title or encumbrance of the type described in this paragraph 5.01(I). ARTICLE VI REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents, warrants and covenants as follows: SECTION 6.01. TITLE. Buyer will acquire hereunder good, marketable and insurable fee simple title to the Business Property, free and clear or all liens, judgments, encumbrances, liabilities, agreements, leases, claims, rights, easements, restrictions or other matters affecting title, except the Permitted Title Exceptions. 31 SECTION 6.02. CONSENTS. Seller has obtained all consents, approvals and permissions related to the transactions hereby contemplated and required under any covenant, agreement, encumbrance, law or regulation. SECTION 6.03. ENVIRONMENTAL MATTERS. A. As used in this Article VI, the term "Leasehold Owner" shall mean any owner of the leasehold interest in the Premises under the Ground Lease (as herein defined). No notice, demand, request for information, citation, summons or other communication has been received by the Leasehold Owner, no penalty has been assessed, and the Leasehold Owner has received no notice of any pending investigation or review by any governmental or other entity (a) with respect to any alleged violation of any Environmental Laws (as hereinafter defined) in connection with the Business Property, (b) with respect to any alleged failure by the Leasehold Owner to have any environmental permit required in connection with the Business Property or (c) with respect to any Release (as hereinafter defined) in, upon or under the Business Property. For the purpose of this Agreement, "Environmental Laws" means all Laws relating to the environment or to emissions, discharges or releases of asbestos, pollutants, contaminants, petroleum or petroleum products, chemicals or industrial, toxic, radioactive or hazardous materials, substances or wastes into the environment, including without limitation ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, contaminants, petroleum or petroleum products, chemicals or industrial, toxic radioactive or hazardous materials, substances or wastes or the clean-up or other remediation thereof, and "Release" means the treatment, storage, recycling, transportation, disposal or release of Hazardous Substances. 32 B. Negative Declaration. The Premises are not an "Establishment," as defined by Connecticut General Statutes Section 22a-134, requiring the filing of a negative declaration or other form, or, if the Premises are an Establishment, Seller will execute the applicable certification as the Certifying Party, pay all filing fees, and timely file the required forms in connection with the transfer of such Establishment. C. Hazardous Materials. There has been no storage, use, discharge or release of hazardous materials on, in or under the Premises. As used in this Agreement, the term "hazardous materials" means any hazardous, regulated or toxic chemical, agent, sub stance, material or waste, including any petroleum based substance, which is regulated by any local governmental authority, the State of Connecticut, the United States or any agency thereof, including, but not limited to substances defined by the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the Resource Conservation and Recovery Act, or under Connecticut General Statutes Title 22a, or any regulations promulgated under any of the foregoing statutes. The Premises (i) are currently in compliance with (and there is no condition existing which, with the passage of time, will cause the Premises not to comply with) all applicable health, safety, ecological, environmental, inland wetland, flood control, pollution control and other similar laws, codes, regulations, standards, and orders applicable to the Premises and (ii) are free from asbestos (except as provided in subparagraph D hereof), PCBs and all hazardous materials and all other effluent and debris of any type which would constitute a health hazard or risk or would otherwise interfere with the current or intended use of the Premises. No portion of the Premises have ever been used in the past for activities which, either directly or indirectly, involved the generation, use, storage, transportation or disposal of any hazardous 33 materials and the Premises do not contain, nor are they emitting any hazardous materials. There are no and have been no underground storage tanks located on the Premises. D. Asbestos Removal. Prior to the Closing Seller shall, in accordance with all applicable laws, codes, regulations and guidelines, remove all asbestos and asbestos containing material from the Premises, other than such asbestos and asbestos containing material which is shown to be located upon the Premises in the Asbestos Report; or, at Seller's election, or at the Closing, Seller shall give to Buyer a credit against the Purchase Price in an amount equal to the cost of the removal of such asbestos and asbestos containing material shown to be located upon the Premises in the Asbestos Report in accordance with Buyer's cost estimate. E. Representations to Survive Closing. The representations and warranties by Seller contained in this Section 6.03 are true, accurate and complete, as of the day Seller executes this Agreement, shall be deemed made as of the date of the Closing, shall be deemed continuing until the date of the Closing and shall survive the Closing and the passage of title. SECTION 6.04. UTILITIES; ACCESS. To the best of Seller's knowledge, the Business Property has adequate water supply, storm and sanitary sewage facilities, telephone, gas, electricity, fire protection, means of ingress and egress to and from public highways and, without limitation, other required public utilities. All streets and roads necessary for access to or full utilization of the Business Property or any part thereof have been completed, dedicated and accepted for maintenance and public use by the appropriate governmental authorities or are otherwise owned and maintained by local governments for 34 public use. No easements are required by the owner of the Business Property for such access and full utilization or in connection with any utilities. SECTION 6.05. SOIL CONDITIONS; ENCROACHMENTS; FLOOD AND MUDSLIDE HAZARDS. To the best of Seller's knowledge, there are no soil conditions adversely affecting the Business Property. The Improvements do not encroach onto adjoining land or onto any easements, and there are no encroachments of improvements from adjoining land onto the Business Property. The location or configuration of the Improvements does not violate any applicable setback requirements or restrictive or leasehold covenants or applicable laws or codes. The Land is not in an area identified by an agency or department of the federal government as having special flood or mudslide hazards. SECTION 6.06. PECHINEY SUBLEASE. Between the date hereof and the Closing Seller shall comply with and enforce all provisions of the Pechiney Sublease, and if Pechiney shall fail to perform any of its obligations under the Pechiney Sublease, Seller shall perform such obligations. SECTION 6.07. DUE AUTHORIZATION, EXECUTION. ORGANIZATION, ETC. (SELLER) This Agreement and all agreements, instruments and documents herein provided to be executed or to be caused to be executed by Seller are and on the Closing Date will be duly authorized, executed and delivered by and are binding upon the same. Seller is a trust established under a Trust Agreement dated June 3, 1986 and is duly organized, validly existing and in good standing under the laws of the State of Florida, and is duly authorized and qualified to do all things required of it under this Agreement. Seller has the capacity and authority to enter into this Agreement and consummate the transactions herein provided and 35 nothing prohibits or restricts the right or ability of Seller to close the transactions contemplated hereunder and carry out the terms hereof. Samuel Feinerman is the sole trustee of Seller. Neither this Agreement nor any agreement, document or instrument executed or to be executed in connection with the same, nor anything provided in or contemplated by this Agreement or any such other agreement, document or instrument, does now or shall hereafter breach, invalidate, cancel, make inoperative or interfere with, or result in the acceleration of maturity of, any contract, agreement, lease, easement, right or interest, affecting or relating to Seller, any of the trustees of Seller or the Business Property. SECTION 6.08. FINANCIAL INFORMATION. Attached hereto as Exhibit 17 are financial statements with respect to the Business Property for the period from January 1, 1992 through December 31, 1995, which financial statements are prepared by an independent certified public accountant. All financial statements and information delivered to Buyer at any time or times heretofore or hereafter or concurrently herewith are and shall be full, true and correct in all material respects and have been and will be prepared in accordance with generally accepted accounting principles and practices. All such financial statements have fairly presented and will fairly present the respective financial conditions of the subjects thereof as of the respective dates thereof, and no material adverse change has occurred or shall have occurred from the respective dates thereof to the date hereof or, if later, the dates of delivery of the same to Buyer except as noted therein. No material adverse change has occurred in the condition (financial or otherwise) of the Business Property, or of Seller since the dates of the statements annexed as Exhibit 17. SECTION 6.09. EXISTING AGREEMENTS. There are no agreements or understandings relating to the Business Property, except for this Agreement, the Contract, 36 the Permitted Title Exceptions, and the Existing Lease (and, without limitation on the foregoing, there are no existing management agreements affecting the Business Property). No alterations, amendments or waivers pertaining to the foregoing will be made prior to the Closing Date. SECTION 6.10. DEFAULT. Seller is not in default in respect of any of its obligations or liabilities pertaining to the Business Property. Without limitation on the foregoing, the Service Contracts, the Permitted Title Exceptions, the Ground Lease and the Existing Lease are free from default by Seller and, to the best knowledge of Seller, by any other party thereto; and there does not exist any state of facts or circumstances or conditions or event which, after notice or lapse of time or both, would constitute or result in any such default by Seller or, to the best knowledge of Seller, by any other party. SECTION 6.11. LITIGATION; CONDEMNATION. There are no actions, suits or proceedings pending or, to the best knowledge of Seller, threatened, before or by any judicial, administrative or union body, any arbiter or any governmental agency or authority, against or affecting Seller or the Business Property. There is no existing, proposed or contemplated eminent domain or similar proceeding which would affect the Land or Improvements in any way whatsoever. SECTION 6.12. ADVERSE INFORMATION. Seller has no information or knowledge of any change contemplated in any applicable laws, codes, ordinances or restrictions, or any judicial or administrative action, or any action by adjacent landowners, or natural or artificial conditions upon the Business Property, or any other fact, circumstance or condition, financial or otherwise, which would prevent, limit, impede or render more costly Buyer's contemplated use of the Business Property. 37 ARTICLE VII CLOSING CONDITIONS SECTION 7.01. CONDITIONS TO BUYER'S OBLIGATIONS. Buyer's obligations to perform its undertakings provided in this Agreement (including its obligation to purchase the Business Property) and to close the transactions contemplated herein are conditioned upon and subject to the fulfillment and satisfaction of all conditions provided in other provisions of this Agreement and the following conditions: A. Operation of Business Property. (i) That the Premises shall be managed and operated in the ordinary course of business and shall be maintained in no less satisfactory condition than the same exists as of the signing of this Agreement, normal wear and tear and damage by casualty excepted, and (ii) That Pechiney is not in default under the Pechiney Lease and has not breached any of its obligations under the Pechiney Lease. B. Use, Occupancy, Licenses, Permits, CO's, Zoning. (i) that all building permits, certificates of occupancy, business licenses and, without limitation, all other notices, licenses, permits, certificates and authority required in connection with the construction, use or occupancy of the Business Property have been obtained and are in effect and in good standing; (ii) that valid and final certificates of occupancy have been issued for the Improvements and each part and portion thereof and no space has been leased in violation of any such certificates; and (iii) that the Land is zoned for the buildings and businesses included and to be included in the Business Property. 38 Seller represents (i) that the Leasehold Owner has received no notice and that the Seller has no other knowledge that any government agency or any employee or official thereof considers the construction of the Business Property or the operation or use of the same to have failed to comply with any law, ordinance, regulation or order or that any investigation has been commenced or is contemplated respecting any such possible failure of compliance; and (ii) that there are no unsatisfied requests for repairs, restorations or improvements to the Premises from any person, entity or authority, including any tenant, lender, insurance carrier or government authority. C. Performance by Seller and Truth of Seller's Representations and Warranties. The due performance by Seller of each and every undertaking and agreement to be performed by it hereunder and the truth of each representation and warranty made by Seller in this Agreement at the time as of which the same is made and as of the Closing Date as if made on and as of the Closing Date. Without limitation on the foregoing, there shall be no defaults or exceptions noted in the Certificate of Seller (Exhibit 7). D. No Bankruptcy or Dissolution. That at no time on or before the Closing Date shall any of the following ("Bankruptcy/Dissolution Event") have been done by, against or with respect to Seller: (a) the commencement of a case under Title 11 of the U.S. Code, as now constituted or hereafter amended, or under any other applicable federal or state bankruptcy law or other similar law; (b) the appointment of a trustee or receiver of any property interest; (c) an assignment for the benefit of creditors; (d) an attachment, execution or other judicial seizure of a substantial property interest; (e) the taking of, failure to take, or submission to any action indicating an inability to meet its 39 financial obligations as they accrue; or (f) a dissolution or liquidation of the Seller, or the death or incapacity of any trustees of the Seller. E. No Damage. That there shall not have occurred between the date hereof and the Closing Date, inclusive, destruction of or damage or loss to the Business Property from any cause whatsoever, according to Buyer's best estimate, which would cost more than $100,000 or take longer than thirty (30) days to fully repair, restore and replace. F. No Taking. That there shall not have occurred at any time or times on or before the Closing Date any taking of the Business Property or any part thereof by eminent domain, and there shall have been no notice of such taking given by any governmental authority . G. Survey. That Buyer shall have obtained an update of the survey of the Premises by S. E. Minor & Co., Inc. entitled "Property To Be Conveyed To Pacific Beach Company, Inc. A Delaware Corporation Greenwich, Conn." dated Feb. 23, 1984 and last revised Sept. 8, 1992 (as so updated, the "Survey") of the Land and Building, certified to Buyer and the Title Company, qualifying as an ALTA certified completion survey (with all matters shown thereon or omitted therefrom being reasonably satisfactory to Buyer and the Title Company), which such Survey shall confirm the following: (a) that all buildings and improvements on the Land, (including without limitations, the Improvements, and any driveways and other means of access), shall be completely within the boundary lines of the Premises and shall not encroach upon or under the property of any other person or entity; 40 (b) that no building or structure or other improvement belonging to any other person or entity shall encroach upon or under the Premises; (c) that the Premises shall abut a public street or highway; and (d) that no facts are disclosed by the Survey for which the Title Company will take exception in the title insurance policy to be issued to Buyer. H. Pechiney Sublease Status. That (i) the Pechiney Sublease shall be in full force and effect and all obligations and requirements of Pechiney under the Pechiney Sublease to be paid and performed as of the date of the Closing shall have been paid or performed or complied with by Pechiney, and all taxes and assessments, sewer charges, sewer taxes and other municipal taxes, imposed with respect to the Business Property shall have been paid by Pechiney as required pursuant to the Pechiney Sublease, and (ii) Seller shall have entered into an agreement with Pechiney to amend the Pechiney Sublease, effective as of the closing of this transaction, which such agreement shall be acceptable to, and shall have been approved in advance in writing by, Buyer, and Seller shall have delivered a fully executed copy of such agreement to Buyer. I. The conveyance to Buyer of the Fee Owner's fee interest in the Premises as provided in Section 5.01 of this Agreement. SECTION 7.02. BUYER'S WAIVER OF CONDITIONS. At any time or times on or before the Closing, Buyer may elect to waive in writing the benefit of any condition to its obligations hereunder. In the event that any of such conditions are neither waived nor fulfilled or satisfied, Buyer may terminate this Agreement and upon such termination, the 41 Deposit and all interest accrued thereon shall be refunded to Buyer, and Seller shall have the obligation to reimburse Buyer for any expenses incurred by Buyer in accordance with any specific provisions contained herein which require such reimbursement. ARTICLE VIII INDEMNIFICATION SECTION 8.01. INDEMNIFICATION BY SELLER. A. Seller shall hold harmless, indemnify and defend Buyer and the Business Property from and against: (a) any and all "Claims" (as hereinafter defined) whether direct, contingent or consequential and no matter how arising, in any way related to the Business Property and arising or accruing on or before the Closing, including any Claim arising or accruing under any Existing Lease, the Contract or any other agreement on or before the Closing, and (b) any Claim that (i) is inconsistent with (or results from any actual or alleged fact that is inconsistent with) any representation or warranty of Seller or (ii) results from any breach or default by Seller under this Agreement or under the Contract. SECTION 8.02. INDEMNIFICATION BY BUYER. Buyer shall hold harmless, indemnify and defend Seller from and against any Claim that results from any breach or default by Buyer under this Agreement. SECTION 8.03. GENERAL INDEMNITY PROVISIONS. Each indemnity provided for under this Agreement shall be subject to the following provisions: 42 A. The indemnity shall cover the costs and expenses of the indemnity, including reasonable attorneys' fees, related to any actions, suits or judgments incident to any of the matters covered by such indemnity. B. The indemnitee shall notify the indemnitor of any Claim against the indemnitee covered by the indemnity within ten (10) days after it has notice of such Claim, but failure to notify the indemnitor shall in no case prejudice the rights of the indemnitee under this Agreement unless the indemnitor shall be prejudiced by such failure and then only to the extent the indemnitor shall be prejudiced by such failure. Should the indemnitor fail to discharge or undertake to defend the indemnitee against such liability upon learning of the same, then the indemnitee may settle such liability, and the liability of the indemnitor hereunder shall be conclusively established by such settlement, the amount of such liability to include both the settlement consideration and the reasonable costs and expenses, including attorneys' fees, incurred by the indemnitee in effecting such settlement. C. Each party's indemnification obligations under this Agreement shall also extend to any present or future advisor, trustee, director, officer, partner, employee, beneficiary, shareholder, participant or agent of or in the indemnitee or any entity now or hereafter having a direct or indirect ownership interest in the indemnitee. SECTION 8.04. DEFINITION. "Claim" means any obligation, liability, claim (including any claim for damage to property or injury to or death of any persons), lien or encumbrance, loss, damage, cost or expense. 43 ARTICLE IX CONDEMNATION AND DESTRUCTION OR DAMAGE SECTION 9.01. CONDEMNATION. A. If, prior to the Closing, any portion of the Business Property is taken by eminent domain (or is the subject of a pending taking which has not yet been consummated), Seller shall notify Buyer of such fact promptly after obtaining knowledge thereof, and Buyer shall have the right to terminate this Agreement by giving notice to the Seller not later than ten (10) business days after the receipt of Seller's notice. If Buyer elects to terminate this Agreement as aforesaid, the provisions of Section 9.04 shall apply. B. If Buyer does not exercise its right to terminate this Agreement under subsection 9.01A, there shall be no abatement of the Purchase Price and Seller shall assign to Buyer at the Closing all rights of Seller to, and Buyer shall be entitled to receive and keep, all compensation, damages or awards for the taking of the Property or such portion thereof. Seller shall not settle any proceedings relating to such taking without Buyer's prior written consent which shall not be unreasonably withheld. SECTION 9.02. DESTRUCTION OR DAMAGE. A. In the event that the Improvements, or any part thereof, shall be damaged or destroyed by fire or any other casualty ("Casualty") prior to the Closing, Seller shall promptly give Buyer written notice of such event. In the event that the Improvements shall suffer a Casualty, Buyer shall have the option (a) to proceed with the Closing and acquire the Business Property as affected by such Casualty, in which event 44 Buyer shall proceed to accept title to the Business Property and Seller shall, on the Closing transfer and/or assign to Buyer any and all compensation, damages and insurance proceeds or the rights to receive such compensation, damages and proceeds (including proceeds covering loss of rents for the period after the Closing) received by or accrued to Seller on account of such Casualty, less such sums, if any, as shall have been expended by Seller prior to Closing in connection with the repair or restoration of the Building or controlling the damage or in making claim for, or collecting, any of said monies, or (b) to terminate this Agreement by delivery written notice to Seller within ten (10) business days of Buyer's receipt of Seller's written notice concerning the Casualty. Seller shall not settle any proceedings relating to such Casualty without Buyer's prior written consent. SECTION 9.03. INSURANCE. Seller, at Seller's cost and expense, shall maintain until Closing, the fire, casualty, environmental, liability and rental loss insurance coverages which Seller presently maintains with respect to Business Property. Seller shall not assign to Buyer any insurance policies in connection with the Business Property. SECTION 9.04. TERMINATION UNDER THIS ARTICLE. If this Agreement is terminated pursuant to Section 9.01 or 9.02, Seller shall within five (5) business days cause the Deposit to be refunded to Buyer, with all interest earned thereon. Upon such refund, this Agreement shall terminate and neither party to this Agreement shall have any further rights or obligations hereunder. 45 ARTICLE X BUYER'S DUE DILIGENCE; CONDITION OF PROPERTY SECTION 10.01. BUYER'S DUE DILIGENCE; INSPECTION OF PROPERTY; INSPECTION PERIOD. During the period commencing upon the date hereof until 5 p.m. Eastern Standard Time on May 3, 1996 (the "Inspection Period"), Seller shall permit Buyer to complete Buyer's due diligence relating to the Business Property, at Buyer's sole cost and expense, and shall allow Buyer or Buyer's counsel, engineers, consultants, agents, accountants and architects or representatives, as a part of such due diligence, to have reasonable access to and review and inspect the Business Property, to review applicable land use and zoning laws and other governmental laws, rules and regulations, and to review all leases and contracts affecting the Business Property and such other matters related to the Business Property as Buyer deems relevant. Seller shall make available to Buyer, its agents and representatives, any environmental reports, asbestos reports, ADA reports and studies regarding the Business Property, all assessments and tax bills, notices or correspondence from governmental agencies pertaining to the Business Property, and any books, records, files, plans, and related items pertaining to the Business Property, if any. All such inspections shall be performed at Buyer's sole cost and expense, and Buyer agrees to keep the Business Property free and clear of any liens which may arise as a result of such inspections. Buyer agrees to restore and repair promptly any physical damage caused by any inspection or testing of the Business Property. Buyer agrees to keep confidential any information Buyer and/or its agents or representatives have obtained or developed during or as a result of its inspection; provided, however, it is hereby agreed and understood by and between Seller and Buyer that Buyer may, without the prior approval of 46 Seller, reveal the results of its inspections to its attorneys and potential financial advisors, lenders, investors, joint venturers, partners and/or persons or entities that Buyer's financial advisors or attorneys deem reasonably necessary. SECTION 10.02. BUYER'S RIGHT OF TERMINATION. If, during the Inspection Period, Buyer shall, for any reason, in Buyer's sole discretion, judgment and opinion, be dissatisfied with any aspect of the Business Property or any documents examined by Buyer during Buyer's inspection of the Business Property, Buyer may elect to terminate this Agreement by giving written notice to Seller that Buyer elects to terminate this Agreement, on or before the expiration of the Inspection Period, whereupon, notwithstanding anything contained herein to the contrary, the Deposit and all interest accrued thereon shall be promptly returned to Buyer, and thereupon neither party have any liability, right or obligation hereunder, except for any of the same which expressly survive the termination of this Agreement. ARTICLE XI MISCELLANEOUS SECTION 11.01. BROKERS. Seller represents and warrants to Buyer that no broker or finder has been engaged by Seller in connection with any of the transactions contemplated by this Agreement. Buyer represents and warrants to Seller that no broker or finder has been engaged by Buyer in connection with any of the transactions contemplated in this Agreement, other than Albert B. Ashforth, Inc. (Belinda Scanlon) and Buyer agrees to pay said Albert B. Ashforth, Inc. for its services to Buyer an amount mutually agreeable to Buyer and said broker pursuant to their separate agreement. 47 SECTION 11.02. FURTHER INSTRUMENTS. Each party will, whenever and as often as it shall be requested so to do by the other, cause to be executed, acknowledged and delivered any and all such further reasonable instruments and documents as may be necessary or proper, in the reasonable opinion of the requesting party, in order to carry out the intent and purpose of this Agreement, provided that the obligations of any such party are not increased thereby (or the rights of such party decreased thereby). SECTION 11.03. MATTERS OF CONSTRUCTION. A. Incorporation of Exhibits. All Exhibits and Schedules attached and referred to in this Agreement are hereby incorporated herein as fully set forth in and shall be deemed to be a part of this Agreement. B. Entire Agreement. This Agreement contains the entire agreement between the parties respecting the matters herein set forth and supersedes all prior agreements between the parties hereto respecting such matters. C. Non-Business Days. Whenever action must be taken (including the giving of notice or the delivery of documents) under this Agreement during a certain period of time (or by a particular date) that ends (or occurs) on a non-business day, then such period (or date) shall be extended until the immediately following business day. As used herein, "business day" means any day other than a Saturday, Sunday or federal or Connecticut or New York State holiday. D. Severability. If any term or provision of this Agreement or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term or 48 provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each such term and provision of this Agreement shall be valid and be enforced to the fullest extent permitted by law. E. Certain Terminology. (a) Whenever the words "including," "include" or "includes" are used in this Agreement, they shall be interpreted in a non-exclusive manner as though the words, "without limitation," immediately followed the same. (b) Except as otherwise indicated, all Exhibit, Schedule, Article and Section references in this Agreement shall be deemed to refer to the Exhibits, Schedules, Articles and Sections in this Agreement. F. Captions. Article and section headings shall not be used in construing this Agreement. G. Cumulative Remedies. No remedy conferred upon a party in this Agreement is intended to be exclusive of any other remedy herein or by law provided or permitted, but each shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law, in equity or by statute (except as otherwise expressly herein provided). H. No Waiver. No waiver by a party of any breach of this Agreement or of any warranty or representation hereunder by the other party shall be deemed to be a waiver of any other breach by such other party (whether preceding or succeeding and whether or not of the same or similar nature), and no acceptance of 49 payment or performance by a party after any breach by the other party shall be deemed to be a waiver of any breach of this Agreement or of any representation or warranty hereunder by such other party, whether or not the first party knows of such breach at the time it accepts such payment or performance. No failure or delay by a party to exercise any right it may have by reason of the default of the other party shall operate as a waiver of default or modification of this Agreement or shall prevent the exercise of any right by the first party while the other party continues to be so in default. I. Consents and Approvals. Except as otherwise expressly provided herein, any approval or consent provided to be given by a party hereunder may be given or withheld in the absolute discretion of such party. J. Governing Law. This Agreement shall be construed and enforced in accordance with the internal laws of the State of Connecticut (without regard to conflicts of law). K. No Third Party Beneficiaries. Nothing in this Agreement, expressed or implied, is intended to confer any rights or remedies upon any person, other than the parties hereto and, subject to the other restrictions on assignment herein contained, their respective successors and assigns. L. Amendments. This Agreement may be amended by written agreement or amendment executed by Seller and Buyer, but not otherwise. SECTION 11.04. ATTORNEYS' FEES. If any party obtains a judgment against any other party by reason of any breach or default of this Agreement, reasonable attorneys' fees (and costs) as fixed by the court shall be included in such judgment. 50 SECTION 11.05. SUCCESSORS AND ASSIGNS. Seller may not assign or transfer its rights or obligations under this Agreement or the Contract without the prior written consent of Buyer in each instance (in which event such assignee or transferee shall assume in writing all of the assignor's or transferor's obligations hereunder, but such assignor or transferor shall not be released from its obligations hereunder). No consent given by Buyer to any transfer or assignment of Seller's rights or obligations hereunder or under the Contract shall be construed as a consent to any other transfer or assignment of Seller's rights or obligations hereunder. No transfer or assignment in violation of the provisions hereof shall be valid or enforceable. Except for any assignment by Buyer (or any assignee of Buyer) to any subsidiary, affiliated company or any entity controlling controlled by or under common control with Buyer, which assignments are not restricted under this Agreement, Buyer may not assign or transfer its rights or obligations under this Agreement prior to the Closing Date without the prior written consent of Seller (which Seller agrees not to unreasonably withhold), and in the event of such transfer or assignment such transferee or assignee shall assume in writing all of the transferor's or assignor's obligations hereunder, but such transferor or assignor shall not be released from its obligations hereunder. SECTION 11.06. NOTICES. Any notice, consent or request which a party is required or may desire to give the other shall be in writing and may be sent by (i) personal delivery, (ii) United States certified mail, return receipt requested, postage prepaid, 51 (iii) Federal Express or similar generally recognized overnight carrier regularly providing proof of delivery, or (iv) telecopy, provided that the party giving such telecopy notice also sends confirmed written notice by next business day courier (such as Federal Express or the like), to the respective addresses and telecopy numbers (as applicable) of the parties set forth below: to Seller: Lembo-Feinerman Fleming Morell Trust Summit Realty & Development 200 West Palmetto Park Road Boca Raton, Florida 33432 Attention: Samuel Feinerman Telecopy No. 407-392-2551 Confirmation No. 407-368-2043 with a copy to: Ackerman, Levine & Cullen, L.L.P. 175 Great Neck Road Great Neck, New York 11021 Attention: William Ackerman, Esq. Telecopy No. 516-829-6966 Confirmation No. 516-829-6900 to Buyer: W. R. Berkley Corporation 165 Mason Street P.O. Box 2518 Greenwich, CT 06836-2518 Attention: Robert Gorin, Esq. Telecopy No. 203-629-8336 Confirmation No. 203-629-3026 52 with a copy to: Robert F. Grele, Esq. Cummings & Lockwood Two Greenwich Plaza P.O. Box 2505 Greenwich, CT 06836 Telecopy No. 203-869-3120 Confirmation No. 203-863-6518 Any notice so given by mail shall be deemed to have been given as of the date of delivery (whether accepted or refused) established by U.S. Post Office return receipt or the overnight carrier's proof of delivery, as the case may be. Any such notice not so given shall be deemed given upon receipt of the same by the party to whom the same is to be given. SECTION 11.07. COUNTERPARTS. This Agreement may be executed in any number of counterparts, provided each of the parties hereto executes at least one counterpart; each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. SECTION 11.08. RIGHT OF WAIVER. Each and every condition of the Closing other than the tender of the payments by Buyer is intended for and is for the sole and exclusive benefit of Buyer. Accordingly, Buyer may at any time and from time to time waive each and any condition of Closing, without waiver of any other condition or other prejudice of its rights hereunder. Such waiver by Buyer shall be in writing signed by Buyer and delivered to Seller. SECTION 11.09. DISCUSSIONS WITH TENANTS. Seller acknowledges and agrees that Buyer may contact any and all tenants and/or subtenants under the Existing Lease and the Existing Subleases to discuss (and possibly agree on) any such tenant's/subtenant's lease 53 and/or a potential termination and/or modification of such tenant's/subtenant's lease in the event Buyer closes on the acquisition contemplated under this Agreement. In no event shall any such discussions (and/or agreements) be binding on Seller. 54 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. BUYER: W. R. BERKLEY CORPORATION DATE OF EXECUTION BY BUYER: By: /s/ W. R. Berkley --------------------------- Its 3/15/96 - -------------- SELLER: LEMBO-FEINERMAN FLEMING MORELL TRUST DATE OF EXECUTION BY SELLER: By /s/ Samuel Feinerman --------------------------- Samuel Feinerman, Trustee 2/15/96 - -------------- ESCROW AGENT: CHICAGO TITLE INSURANCE COMPANY By: /s/ Thomas M. Ferraro --------------------------- Its 55 CHICAGO TITLE INSURANCE COMPANY COMMITMENT FOR TITLE INSURANCE SCHEDULE A (LEGAL DESCRIPTION) Title Number: 954202337 Those certain pieces or parcels of land, together with the buildings and improvements located thereon, situated in the town of Greenwich, County of Fairfield and State of Connecticut and more particularly described as follows: FIRST TRACT: Beginning at a point on the easterly line of Steamboat Road formed by the intersection of the division line between the premises herein described and land now or formerly of Mary W. Knapp with said easterly line of Steamboat Road; thence along said easterly line of Steamboat Road N 0 degrees 26' E. 101.4 feet to land of the Town of Greenwich; thence along land of said Town of Greenwich S 89 degrees 03' E. 177.9 feet and S 89 degrees 58' E. 358.1 feet to land now or formerly of Tunick; thence along said land now or formerly of Tunick S 37 degrees 05' W. 90.3 feet; S 20 degrees 43' W. 118.4 feet; S 16 degrees 10' E. 54.1 feet; S 13 degrees 55' E. 35.5 feet to land now or formerly of Stempien; thence along said land now or formerly of Stempien to and along the northerly line of Davenport Avenue N 89 degrees 37' W. 315.7 feet to the Second Tract herein described; thence along said Second Tract to and along land now or formerly of Mary W. Knapp N 0 degrees 8' E. 166.9 feet; thence still along said land now or formerly of Mary W. Knapp N 89 degrees 39' W. 148.9 feet to point or place of beginning. NORTHERLY: by land of the Town of Greenwich; EASTERLY: by land now or formerly of Tunick; SOUTHERLY: by land now or formerly of Stempien and Davenport Avenue and in part by land now or formerly of Mary W. Knapp; WESTERLY: by the Second Tract herein described, land now or formerly of Mary W. Knapp and Steamboat Road. 56 CHICAGO TITLE INSURANCE COMPANY COMMITMENT FOR TITLE INSURANCE SCHEDULE A (LEGAL DESCRIPTION) Title Number: 954202337 SECOND TRACT Beginning at a point formed by the intersection of the northerly line of Davenport Avenue with the easterly line of Steamboat Road and running thence along Steamboat Road N 0 degrees 55' E. 66.74 feet to land now or formerly of Mary W. Knapp; thence along said land now or formerly of Mary W. Knapp S 89 degrees 02' E. 150.7 feet to the First Tract herein described; thence along said First Tract S 0 degrees 08' W. 64.15 feet to the northerly line of Davenport Avenue thence along said northerly line of Davenport Avenue S 89 degrees 59' W. 151.6 feet to the point or place of beginning bounded: NORTHERLY: by land now or formerly of Mary W. Knapp; EASTERLY: by the First Tract herein described; SOUTHERLY: by Davenport Avenue; WESTERLY: by Steamboat Road. Together with all of the right, title and interest in and to a certain right of way as set forth in an instrument from the Town of Greenwich to the Fleming-Morell Corporation dated November 17, 1969 and recorded in Volume 794 at Page 625 of the Greenwich Land Records. 57 SCHEDULE B EXISTING LEASE AGREEMENT OF LEASE between FLEMING-MORELL ASSOCIATES, Landlord, and PECHINEY UGINE KUHLMANN CORPORATION dated November 6, 1981 (the "Pechiney Sublease"), as evidenced by a Notice of Lease between Felming-Morell Associates and Pechiney Ugine Kuhlmann Corporation dated November 6, 1981 and recorded on November 9, 1981 in Volume 1240 at Page 213 of the Greenwich Land Records. FLEMING-MORELL ASSOCIATES assigned its rights and interest under the Pechiney Sublease to the Lembo-Feinerman Fleming Morell Trust by an instrument of assignment dated May 10, 1989, recorded in Volume 1973 at Page 61 of the Greenwich Land Records. PECHINEY UGINE KUHLMANNN CORPORATION assigned its rights and interest under the Pechiney Sublease to Howmet Turbine Components Corporation by an instrument of assignment and assumption dated August 29, 1983 recorded on September 1, 1983 in Volume 1335 at Page 141 of the Greenwich Land Records; Howmet Turbine Components Corporation assigned its rights and interest under the Pechiney Sublease to Pechiney Corporation by an instrument dated June 1, 1994 recorded on ______________ _______, 19___ in Volume ________ at Page ______ of the Greenwich Land Records; and Pechiney Corporation assigned its rights and interest under the Pechiney Sublease to Pechiney Packaging Corp. by an instrument dated _____________ _______, 19___ recorded on ________________ ______, 19____ in Volume ____________ at Page _________ of the Greenwich Land Records. 58 SCHEDULE C EXISTING SUBLEASES Sublease dated December 7, 1995 by and between Pechiney Packaging Corporation ("Landlord") and Howmet Corporation ("Tenant"). Sublease dated December 15, 1993 by and between Pechiney Corporation ("Landlord") and T.M.G. Financial Products, Inc. ("Tenant"). Sublease dated August 24, 1984 by and between Pechiney Corporation ("Landlord") and Dynamics Corporation of America ("Tenant"), as amended by Letter Agreement dated December 15, 1993. Sublease dated March 11, 1985 by and between Pechiney Corporation ("Landlord") and First Reserve Capital Management Corp. ("Tenant"), as amended by an Amendment to Sublease dated March 27, 1995. 59 SCHEDULE D PERSONAL PROPERTY All tangible personal property located upon the Premises owned by the Seller 60 SCHEDULE E [Intentionally Left Blank] 61 SCHEDULE F TITLE EXCEPTIONS 1. Taxes of the Town of Greenwich on the List of October 1, 1995, not yet due and payable as of the date of the Closing. 2. Terms and Provisions of a Ground Lease by and between The Mutual Life Insurance Company of New York (Landlord) and the Fleming-Morell Corporation (Tenant) dated March 26, 1970, a notice of which is dated March 26, 1970 and is recorded in Volume 797 at Page 500 and re-recorded in Volume 809 at Page 75 of the Greenwich Land Records. Said Lease was assigned to Lembo-Feinerman Fleming-Morell Trust by Assignment of Lease and Consent of Lessor dated May 10, 1989 and recorded on September 18, 1989 in Volume 1973 at Page 61 of said Land Records, and now in favor of Pacific Beach Company, Inc. as per Assignment and Assumption of Ground Lease Agreement dated November 17, 1992 and recorded on November 20, 1992 in Volume 2319 at Page 252 of said Land Records. 3. Provisions set forth in a Warranty Deed from The Fleming-Morell Corporation to The Mutual Life Insurance Company of New York dated March 26, 1970 and recorded in Volume 797 at Page 491 of said Land Records. 4. Provisions contained in the Warranty Deed from Fleming-Morell Corporation to Fleming-Morell Associates dated April 6, 1981 and recorded November 9, 1981 in Volume 1240 at Page 208 of said Land Records. 5. Conditions of grant from the Town of Greenwich to The Fleming-Morell Corporation dated November 17, 1969 and recorded on November 17, 1969 in Volume 794 at Page 625 of the Greenwich Land Records. 6. Lease by and between Fleming-Morell Association and Pechiney Ugine Kuhlmann Corporation dated November 6, 1981, a Notice of which is dated November 6, 1981 and is recorded on November 9, 1981 in Book 1240 at Page 213 of the Greenwich Land Records; Assignment of Lease and Assumption Agreement from Pechiney Ugine Kuhlmann Corporation to Howmet Turbine Components Corporation dated August 29, 1983 and recorded in the Greenwich Land Records on September 1, 1983 in Book 1335 at Page 141. 7. Terms and Provisions of a Sublease, as evidenced by a Notice of Sublease by and between Pechiney Corporation and TMG Financial Products, Inc. (as subtenant) dated December 15, 1993 and recorded January 11, 1994 in Volume 2493 at Page 295 of said Land Records. 62 EXHIBIT 1 ESCROW RECEIPT AND INSTRUCTIONS 63 EXHIBIT 2 ASSIGNMENT AND ASSUMPTION OF LEASE THIS ASSIGNMENT AND ASSUMPTION AGREEMENT, made this _________ day of ________________, 1996, by and between LEMBO-FEINERMAN FLEMING MORELL TRUST, a Florida Trust established under a Trust Agreement dated ______________ between _______________ and _________________, and having an address at ____________________________, ___________________________, ("Seller"), and W. R. BERKLEY CORPORATION, a Delaware corporation, having an address at 165 Mason Street, Greenwich, Connecticut ("Buyer"). WHEREAS, by Sale Agreement dated as of January _______, 1996, Seller agreed to sell to Buyer and Buyer agreed to buy from Seller, certain real property, together with the building and other improvements thereon located at 475 Steamboat Road, Greenwich, Connecticut, all as more fully described in said Sale Agreement (the "Premises"); and WHEREAS, said Sale Agreement provides, inter alia, that Seller shall assign to Buyer a certain lease and Buyer shall assume all of the obligations of Seller under said lease, all as more fully provided in said Sale Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows: 1. Seller hereby assigns, sets over and transfers to Buyer all of Seller's right, title and interest as landlord in, to and under the lease listed on Schedule B annexed hereto and made a part hereof (the "Lease"), and Buyer hereby accepts such assignment and assumes all of the landlord's liabilities and obligations under the Lease accruing or to be performed from and after the date hereof. 2. This Assignment and Assumption Agreement and the obligations of the parties hereunder shall survive the closing of the transaction referred to in said Sale Agreement, shall be binding upon and inure to the benefit of the parties hereto, their respective successors and assigns, shall be governed by and construed in accordance with the laws of the State of Connecticut and may not be modified or amended in any manner other than by a written agreement signed by the party to be charged therewith. 64 3. Seller agrees to indemnify and hold Buyer harmless from and against any and all claims, debts and liabilities including, without limitation, reasonable attorneys' fees, arising out of any claims made by the tenant under the Lease hereby assigned for any breach or default by Seller in the performance of, or the failure of Seller to perform, its obligations under the Lease prior to the date hereof. 4. Buyer agrees to indemnify and hold Seller harmless from and against any and all claims, debts and liabilities including, without limitation, reasonable attorneys' fees, arising out of any claims made by the tenant under the Lease hereby assigned for any breach or default by Buyer in the performance of, or the failure of the Buyer to perform, its obligations under the Lease after the date hereof. IN WITNESS WHEREOF, the parties hereto have duly executed this Assignment and Assumption Agreement as of the day and year first above written. Signed, Sealed and Delivered in the presence of: LEMBO-FEINERMAN FLEMING MORELL TRUST - ---------------------------- By: ---------------------------- Samuel Feinerman, Trustee - ---------------------------- W. R. BERKLEY CORPORATION - ---------------------------- By: ---------------------------- - ---------------------------- Its 65 STATE OF CONNECTICUT ) ) ss: , 1996 COUNTY OF FAIRFIELD ) On this __________ day of ________________________, 1996, before me, the undersigned officer, personally appeared Samuel Feinerman, Trustee of the Lembo- Feinerman Fleming Morell Trust, signer of the foregoing instrument, who acknowledged the same to be his free act and deed and the free act and deed of said trust. __________________________ Notary Public STATE OF CONNECTICUT ) ) ss: , 1996 COUNTY OF FAIRFIELD ) On this __________ day of _______________________, 1996, before me, the undersigned officer, personally appeared ___________________________________ of W. R. Berkley Corporation, signer of the foregoing instrument, who acknowledged the same to be his free act and deed and the free act and deed of said corporation. __________________________ Notary Public 66 EXHIBIT 3 [Intentionally Left Blank] 67 EXHIBIT 4 BILL OF SALE KNOW ALL THESE MEN BY THESE PRESENTS THAT: LEMBO-FEINERMAN FLEMING MORELL TRUST, a Florida Trust established under a Trust Agreement dated ______________ between _______________ and _________________, and having an address at ____________________________, ___________________________,("Seller"), for the consideration of One Dollar ($1.00) and other good and valuable consideration received to Seller's full satisfaction from W. R. BERKLEY CORPORATION, a Delaware corporation, having an address at 165 Mason Street, Greenwich, Connecticut ("Buyer") does hereby sell, transfer, and convey unto the Buyer all of the Seller's interest in the tangible personal property and equipment identified in Schedule C attached hereto and made a part hereof. TO HAVE AND TO HOLD the same to the Buyer and Buyer's successors and assigns forever, to the Buyer and their proper use and behoof. IN WITNESS WHEREOF, the Seller has signed this instrument as of this ___________day of ____________________________, 1996. LEMBO-FEINERMAN FLEMING MORELL TRUST By: _______________________________ Samuel Feinerman, Trustee 68 EXHIBIT 4 BILL OF SALE KNOW ALL THESE MEN BY THESE PRESENTS THAT: LEMBO-FEINERMAN FLEMING MORELL TRUST, a Florida Trust established under a Trust Agreement dated ______________ between _______________ and _________________, and having an address at ____________________________, ___________________________,("Seller"), for the consideration of One Dollar ($1.00) and other good and valuable consideration received to Seller's full satisfaction from W. R. BERKLEY CORPORATION, a Delaware corporation, having an address at 165 Mason Street, Greenwich, Connecticut ("Buyer") does hereby sell, transfer, and convey unto the Buyer all of the Seller's interest in the tangible personal property and equipment identified in Schedule C attached hereto and made a part hereof. TO HAVE AND TO HOLD the same to the Buyer and Buyer's successors and assigns forever, to the Buyer and their proper use and behoof. IN WITNESS WHEREOF, the Seller has signed this instrument as of this ___________day of ____________________________, 1996. LEMBO-FEINERMAN FLEMING MORELL TRUST By: _______________________________ Samuel Feinerman, Trustee 69 EXHIBIT 5 NOTICE TO TENANTS LEMBO-FEINERMAN FLEMING MORELL TRUST W. R. BERKLEY CORPORATION _____________________, 1996 [Tenant's Name and Address] Re: 475 Steamboat Road Greenwich, Connecticut (the "Building") Gentlemen: With reference to your lease of space in the Building, please be advised that LEMBO-FEINERMAN FLEMING MORELL TRUST has this day sold, transferred and assigned the Building and your lease to W. R. BERKLEY CORPORATION ("Buyer"). Until you receive further notice from Buyer, all rent checks and other payments under your lease should henceforth be made payable to W. R. Berkley Corporation and mailed or delivered to their office at 165 Mason Street, Greenwich, Connecticut, and all notices to the landlord under your lease should also be addressed to the Buyer at the foregoing address. Very truly yours, LEMBO-FEINERMAN FLEMING MORELL TRUST By: __________________________ Samuel Feinerman, Trustee W. R. BERKLEY CORPORATION By: _________________________ Its 70 EXHIBIT 6 FIRPTA CERTIFICATE Section 1145 of the Internal Revenue Code (the "Code") provides that a transferee of a U.S. real property interest must withhold tax if the transferor is a foreign person. To inform the transferee that the withholding of tax is not required upon the disposition of a U.S. real property interest, the undersigned, LEMBO-FEINERMAN FLEMING MORELL TRUST, a Florida Trust established under a Trust Agreement dated ______________ between _______________ and _________________ ("Seller"), hereby certifies to W. R. BERKLEY CORPORATION (the "Buyer") the following: 1. Neither the Seller nor any Trustee or beneficiary of the Seller is a foreign corporation, foreign partnership, foreign trust, or foreign estate (as those terms are defined in Internal Revenue Code and Income Tax Regulations). 2. Seller's U.S. tax identification number is ____________. 3. Seller's office address is: Seller understands that this certification may be disclosed to the Internal Revenue Service by the Buyer and that any false statements contained herein could be punished by fine, imprisonment or both. Under penalty of perjury, the undersigned declares that it has examined this certificate and to the best of its knowledge and belief, it is true, correct and complete, and the undersigned further declares that the person signing below has the authority to sign this document on behalf of Seller. LEMBO-FEINERMAN FLEMING MORELL TRUST By: __________________________ Samuel Feinerman, Trustee 71 EXHIBIT 7 CERTIFICATE OF SELLER THIS CERTIFICATE, made this ____ day of _________________, 1996, by LEMBO-FEINERMAN FLEMING MORELL TRUST, a Florida Trust established under a Trust Agreement dated ______________ between _______________ and _________________, and having an address at ____________________________, ___________________________, ("Seller"), and W. R. BERKLEY CORPORATION, a Delaware corporation, having an address at 165 Mason Street, Greenwich, Connecticut ("Buyer"). W I T N E S S E T H WHEREAS, by Sale Agreement, dated as of __________________, 1996, Seller agreed to sell to Buyer, and Buyer agreed to purchase from Seller certain real property, together with the building and other improvements thereon, known as and located at 475 Steamboat Road, Greenwich, Connecticut, as more fully described in said Sale Agreement; and WHEREAS, said Sale Agreement requires that Seller deliver this Certificate as a condition to Closing (as defined in said Sale Agreement). NOW, THEREFORE, in consideration of the premises and the mutual covenants contained in said Sale Agreement, Seller hereby certifies that the warranties and representations of Seller set forth in said Sale Agreement are true, accurate and complete on and as of the day and year first above written. LEMBO-FEINERMAN FLEMING MORELL TRUST By: ___________________________ Samuel Feinerman, Trustee 72 EXHIBIT 8 [Intentionally Omitted] 73 EXHIBIT 9 PECHINEY ESTOPPEL CERTIFICATE W.R. Berkley Corporation 165 Mason Street Greenwich, CT 06830 Re: Property located at 475 Steamboat Road Greenwich, Connecticut Gentlemen: We understand that you, W. R. Berkley Corporation ("Berkley") have contracted to purchase the above-referred-to property which is more specifically described in Schedule A attached hereto (the "Property"). With respect to that certain Agreement of Lease dated November 6, 1981, between Fleming-Morell Associates, as landlord, and Pechiney Ugine Kuhlmann Corporation, as tenant, as amended by an Amendment of Lease Agreement dated _____________ ______, 1996, between Tenant, Lembo-Feinerman Fleming Morell Trust and Berkley (the "Amendment of Lease Agreement"), (as so amended, herein referred to as the "Lease") the undersigned, Pechiney Packaging Corp., the current Tenant under the Lease (the "Tenant"), hereby certifies as follows: (a) the Lease has not been modified or amended, except as provided in the Amendment of Lease Agreement, and is in full force and effect, and a true, correct and complete copy of the Lease is attached hereto; (b) there are no other agreements or other arrangements with respect to the Property between the Lessor under the Lease and the Tenant, or with respect to the Lease or the leasing of the Property; (c) the current term of the Lease will terminate on December 31, 2000; no options under the Lease to extend or renew the Lease have been assigned, transferred or exercised; the option under the Lease to purchase the Property has not been assigned, transferred or exercised; the Tenant has, pursuant to the Amendment of Lease Agreement waived, released and terminated all of said options; and the Tenant has waived its right of first refusal under Section 27 of the Lease with respect to the sale of the Property by Lembo-Feinerman Morell Trust to Berkley; 74 (d) the Tenant has not delivered any security deposit to the Landlord under the Lease and no security deposit under the Lease is being held by the Landlord; (e) the amount of the basic rent currently payable under the Lease (which has been paid for all months of the term of the Lease through and including _______________, 1996) is $________________ per month, payable in advance; (f) pursuant to the Lease, the Tenant has paid all real estate taxes and assessments upon the Property and all "Impositions" as defined in the Lease for the period ending ____________________________________; (g) all obligations, conditions and requirements of the Tenant under the Lease have been paid or performed or complied with by the Tenant as of the date hereof; (h) all obligations, conditions and requirements of the Landlord under the Lease have been performed by the Landlord as of the date hereof and the Landlord has complied with and is in compliance with all "Requirements" as defined in the Lease; (i) there are no defaults of the Tenant or the Landlord under the Lease and no existing conditions which, upon the giving of notice or lapse of time or both, would constitute a default under the Lease, and there are no set-offs, defenses or counterclaims against the enforcement of the Tenant's obligation under the Lease; (j) the Tenant has not entered into any currently effective subleases, assignments, mortgages or other agreements transferring or encumbering the Tenant's interest in the Lease or the Property, other than the sublease agreements which are described in Schedule G attached hereto; (k) all representations of the Tenant made in the Amendment of Lease Agreement are true as of the date hereof. Very truly yours, TENANT: PECHINEY PACKAGING CORP. By: ______________________ Its___________________ 75 EXHIBIT 10 AFFIDAVIT SAMUEL FEINERMAN, being duly sworn, deposes and says: 1. I reside at 4580 Bocaire Boulevard, Boca Raton, Florida 33487. 2. Pursuant to Trust Agreement dated June 3, 1986, (a copy of which is annexed hereto), I was appointed as Co-Trustee of the Lembo-Feinerman Fleming Morrell Trust (the "Trust") which was formed on that date. Michael J. Lembo was appointed as Co-Trustee pursuant to that instrument. 3. By instrument dated April 4, 1990, (a copy of which is annexed hereto) Michael J. Lembo resigned as Co-Trustee. I became the remaining and sole Trustee of the Trust. In that instrument the beneficiaries of the Trust consented to the resignation of Michael J. Lembo, as Co-Trustee and further agreed that Samuel Feinerman was to continue to serve as the remaining and sole Trustee of the Trust. Other than said instrument dated April 4, 1990, there have been no further amendments to the Trust Agreement dated June 3, 1986. 4. I presently serve as Trustee of the Lembo-Feinerman Fleming Morrell Trust, which trust was organized pursuant to the laws of the State of Florida. The Trust conducts its business and maintains its offices in the State of Florida. 5. The Trust is in full force and effect and is in good standing in the State of Florida and is the owner of certain premises located at 475 Steamboat Road, Greenwich, Connecticut, and has all necessary power and authority to sell and convey said property pursuant to the Sale Agreement referred to in paragraph 6 hereof and to perform all of the obligations of the Trust under said Sale Agreement without the necessity of obtaining any government or court approval of any kind. 76 6. I have full authority to execute and deliver on behalf of the Trust a certain Sale Agreement dated February _____, 1996 by and between the Trust, as Seller, and W. R. Berkley Corporation Purchaser, and all of the documents discussed in said Sale Agreement, and to undertake and perform all of the obligations of the Trust under said Sale Agreement without the necessity of obtaining the authorization or direction of any beneficiaries of the Trust and without the necessity of obtaining any governmental or court approval of any kind. ___________________________ SAMUEL FEINERMAN Sworn to before me this ________ day of February, 1996. ___________________________ Notary Public 77 EXHIBIT 11 CERTIFICATE OF BUYER THIS CERTIFICATE, made this ________ day of ____________, 1996, by LEMBO-FEINERMAN FLEMING MORELL TRUST, a Florida Trust established under a Trust Agreement dated ______________ between _______________ and _________________, and having an address at ____________________________, ___________________________, ("Seller"), and W. R. BERKLEY CORPORATION, a Delaware corporation, having an address at 165 Mason Street, Greenwich, Connecticut ("Buyer"). W I T N E S S E T H WHEREAS, by Sale Agreement, dated as of __________________, 1996, Seller agreed to sell to Buyer, and Buyer agreed to purchase from Seller, certain real property, together with the building and other improvements, thereon known as and located at 475 Steamboat Road, Greenwich, Connecticut, as more fully described in said Sale Agreement; and WHEREAS, said Sale Agreement requires that Buyer deliver this Certificate as a condition to Closing (as defined in said Sale Agreement). NOW, THEREFORE, in consideration of the premises and the mutual covenants contained in said Sale Agreement, Buyer hereby certifies that the warranties and representations of Buyer set forth in said Sale Agreement are, subject to their terms and conditions, true, accurate and complete on and as of the day and year first above written. W. R. BERKLEY CORPORATION By: __________________________ Its 78 EXHIBIT 12 [Intentionally Left Blank] 79 EXHIBIT 13 TO ALL PEOPLE TO WHOM THESE PRESENTS SHALL COME, GREETING: KNOW YE, that ____________________________, a _______________ corporation, having its principal place of business at ______________________________, acting herein by ______________________, its _______________________, hereunto duly authorized, hereinafter referred to as the Grantor, for the consideration of ONE DOLLAR ($1.00) and other good and valuable considerations, received to its full satisfaction of _______________________________, a ___________________ corporation, having its principal place of business at _______________________________, hereinafter referred to as the Grantee, does give, grant, bargain, sell and confirm unto the said Grantee the following described premises: SAID premises are conveyed subject to the following: TO HAVE AND TO HOLD the above granted and bargained premises, with the appurtenances thereof, unto the said Grantee, its successors and assigns forever, to it and their own and proper use and behoof. THE GRANTOR covenants and agrees with the Grantee, its successors and assigns, that it has not done or suffered any thing whereby the title to the premises has or might become encumbered or defective in any manner whatsoever except as aforesaid. IN WITNESS WHEREOF the Grantor has hereunto set its corporate hand and seal as of the ____ day of _____________, 1996. Signed, Sealed and Delivered in the Presence of: ______________________________ By:_________________________________L.S. Its Hereunto Duly Authorized ______________________________ 80 STATE OF } } ss.: , 1996 COUNTY OF } Before me personally appeared _________________________, a _________________ of _______________________________, signer and sealer of the foregoing instrument, who acknowledged the same to be his free act and deed, and the free act and deed of said corporation. ___________________________________ Notary Public My Commission Expires: 81 EXHIBIT 14 ASSIGNMENT AND ASSUMPTION AGREEMENT KNOW ALL MEN BY THESE PRESENTS, that for and in consideration of the mutual covenants and conditions hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, SAMUEL FEINERMAN, Trustee of the LEMBO-FEINERMAN FLEMING MORELL TRUST, a Florida Trust, having an address c/o Ackerman, Levine & Cullen, 175 Great Neck Road, Great Neck, New York 11021 ("Assignor") hereby bargains, sells, assigns, transfers and conveys to W. R. BERKLEY CORPORATION, a Delaware corporation having an address at 165 Mason Street, Greenwich, Connecticut 06830 ("Assignee"), all of Assignor's right, title and interest in and to the Ground Lease, as hereinafter defined, the Property, as hereinafter defined, and the Lease, as hereinafter defined, subject to the Exceptions, as hereinafter defined. IN CONSIDERATION of the assignment herein made by Assignor, Assignee hereby accepts said assignment and assumes all of Assignor's obligations arising or accruing from and after the date hereof under the Ground Lease. ASSIGNOR agrees to indemnify and hold Assignee harmless from and against any and all claims, debts and liabilities, including, without limitation, reasonable attorneys fees, arising or accruing prior to the date hereof for any breach or default by Assignor under the Ground Lease. ASSIGNEE agrees to indemnify and hold Assignor harmless from and against any and all claims, debts and liabilities, including, without limitation, reasonable attorneys' fees, arising or accruing after the date hereof for any breach or default by Assignee under the Ground Lease. FOR PURPOSES of this Agreement, the following terms shall have the meanings ascribed thereto: "Exceptions" shall mean all those agreement, covenants, restrictions or encumbrances which are specifically set forth in Schedule B attached hereto and made a part hereof. "Ground Lease" shall mean that certain Agreement of Lease between Mutual Life Insurance Company of New York, as ground lessor, and The Fleming-Morell Corporation, as ground lessee, dated March 26, 1970, for which a Notice of Lease was recorded in the Greenwich Land Records in Book _______ at Page _______, as the same 82 may have been modified or affected by an Assignment by The Fleming Corporation to [insert assignment information, etc.] "Property" shall mean those two certain pieces or parcels of land located in the Town of Greenwich, County of Fairfield and State of Connecticut described in Schedule A attached hereto and made a part hereof (the "Land"), together with the buildings and improvements thereon. This Agreement and the assignment of the Ground Lease hereunder to the Assignee, who has acquired or may acquire fee title to the Land and/or the Property, shall not result in or cause a merger of the leashhold interest in the Land created under the Ground Lease and being transferred to Assignee, or of the interest in the buildings and improvements upon the Land, with such fee title in the Land and/or the Property. IN WITNESS WHEREOF, Assignor and Assignee have executed this Agreement as of the ____ day of , 1996. Signed, Sealed and delivered in the presence of: LEMBO-FEINERMAN FLEMING MORELL TRUST __________________________ By:__________________________ Samuel Feinerman, Trustee __________________________ __________________________ W. R. BERKLEY CORPORATION __________________________ By:__________________________ Its 83 STATE OF CONNECTICUT ) ) ss: , 1996 COUNTY OF FAIRFIELD ) On this __________ day of ________________________, 1996, before me, the undersigned officer, personally appeared Samuel Feinerman, Trustee of the Lembo- Feinerman Fleming Morell Trust, signer of the foregoing instrument, who acknowledged the same to be his free act and deed and the free act and deed of said trust. ________________________ Notary Public STATE OF CONNECTICUT ) ) ss: , 1996 COUNTY OF FAIRFIELD ) On this __________ day of _______________________, 1996, before me, the undersigned officer, personally appeared ___________________________________ of W. R. Berkley Corporation, signer of the foregoing instrument, who acknowledged the same to be his free act and deed and the free act and deed of said corporation. ________________________ Notary Public 84 EXHIBIT 15 [Intentionally Left Blank] 85 EXHIBIT 16 KNOW ALL MEN BY THESE PRESENTS, that _______________________, a ____________________________, having its principal place of business at ______________________________________, acting herein by ______________________, its _______________________, hereunto duly authorized, hereinafter referred to as the Releasor, for the consideration of One Dollar ($1.00) and other good and valuable consideration, received to its full satisfaction of __________________________________, a ___________________ corporation, having its principal place of business at _______________________________________________, hereinafter referred to as the Releasee, does by these presents remise, release and forever QUITCLAIM unto the said Releasee all right, title, interest, claim and demand whatsoever which the said Releasor has or ought to have in and to: TO HAVE AND TO HOLD the premises, with all the appurtenances, unto the said Releasee, its successors and assigns forever, so that neither the said Releasor, nor its successors and assigns, nor any person under it or them, shall hereafter have claim, right or title in or to the premises, or any part thereof, but therefrom the said Releasor is and they are by these presents forever barred and excluded. IN WITNESS WHEREOF the Releasor has hereunto set its corporate hand and seal as of the ____ day of ___________________________, 1996. Signed, Sealed and Delivered in the Presence of: ______________________________ By:_________________________________L.S. Its Hereunto Duly Authorized ______________________________ 86 STATE OF } } ss.: , 1996 COUNTY OF } Before me personally appeared _________________________, a _________________ of _______________________________, signer and sealer of the foregoing instrument, who acknowledged the same to be his free act and deed, and the free act and deed of said _____________________________. ____________________________________ Notary Public My Commission Expires: 87 EXHIBIT 17 FINANCIAL STATEMENTS EX-27 5 EX-27
7 1000 U.S. DOLLARS 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 1 1959910 169078 176193 262626 0 0 2391614 206917 0 89517 3618684 1660020 450522 0 0 319287 0 146 4854 924815 3618684 803336 137332 10357 2461 570998 228610 38773 82747 17554 65193 0 0 0 49820 2.86 0 895440 580594 (9596) 228100 221051 1209250 9596
-----END PRIVACY-ENHANCED MESSAGE-----