W. R. Berkley 10Q 2005 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2005


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the Transition Period from ____ to ____.

Commission File Number 1-15202

W. R. BERKLEY CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		22-1867895

(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

475 Steamboat Road, Greenwich, Connecticut		06830

(Address of principal executive offices)	(Zip Code)

(203) 629-3000

(Registrant’s telephone number, including area code)

None

Former name, former address and former fiscal year,

if changed since last report.

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
Yesþ Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)
Yesþ Noo

Number of shares of common stock, $.20 par value, outstanding as of July 29, 2005: 127,000,622.

TABLE OF CONTENTS


Part I — FINANCIAL INFORMATION
	ITEM 1. Financial Statements
	Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. Quantitative and Qualitative Disclosure About Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits
SIGNATURES
EX-4.2: FOURTH SUPPLEMENTAL INDENTURE
EX-4.3: AMENDED AND RESTATED TRUST AGREEMENT
EX-4.4: SUBORDINATED INDENTURE
EX-4.5: SUPPLEMENTAL INDENTURE
EX-4.6: PREFERRED SECURITIES GUARANTEE AGREEMENT
EX-10.1: DIRECTORS STOCK PLAN
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION

Part I – FINANCIAL INFORMATION

ITEM 1. Financial Statements

W. R. Berkley Corporation and Subsidiaries

Consolidated Balance Sheets
(dollars in thousands)


	June 30,			December 31,
	2005			2004
	(Unaudited)
Assets
Investments:
Fixed maturity securities	$	7,550,002		$	6,369,421
Equity securities available for sale		414,889			413,263
Equity securities trading account		528,481			280,340
Investments in affiliates		264,049			240,865

Total investments		8,757,421			7,303,889
Cash and cash equivalents		707,955			932,079
Premiums and fees receivable		1,116,871			1,032,624
Due from reinsurers		884,155			851,019
Accrued investment income		83,336			69,575
Prepaid reinsurance premiums		210,636			191,381
Deferred policy acquisition costs		470,244			442,484
Real estate, furniture and equipment		165,802			162,941
Deferred Federal and foreign income taxes		97,977			90,810
Goodwill		65,759			59,021
Trading account receivable from brokers and clearing organizations		135,313			186,479
Other assets		146,267			128,731

Total assets	$	12,841,736		$	11,451,033


Liabilities and Stockholders’ Equity
Liabilities:
Reserves for losses and loss expenses	$	6,045,690		$	5,449,611
Unearned premiums		2,272,354			2,064,519
Due to reinsurers		105,826			119,901
Trading account securities sold but not yet purchased		200,099			70,667
Policyholders’ account balances		73,112			65,982
Other liabilities		464,723			498,114
Due to broker		116,667			9,836
Junior subordinated debentures		208,308			208,286
Senior notes and other debt		967,090			808,264

Total liabilities		10,453,869			9,295,180


Minority interest		26,601			46,151

Stockholders’ equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares; issued and outstanding — none		—			—
Common stock, par value $.20 per share:
Authorized 300,000,000 shares, issued and outstanding, net of treasury shares, 126,987,179 and 126,409,313 shares		31,351			31,351
Additional paid-in capital		827,768			820,913
Retained earnings		1,596,753			1,354,489
Accumulated other comprehensive income		109,502			112,055
Treasury stock, at cost, 29,766,211 and 30,344,078 shares		(204,108	)		(209,106	)

Total stockholders’ equity		2,361,266			2,109,702

Total liabilities and stockholders’ equity	$	12,841,736		$	11,451,033

See accompanying notes to interim consolidated financial statements.

W. R. Berkley Corporation and Subsidiaries

Consolidated Statements of Income
(unaudited)
(dollars in thousands, except per share data)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2005			2004			2005			2004
Revenues:
Net premiums written	$	1,135,011		$	1,016,177		$	2,323,179		$	2,102,879
Change in unearned premiums		(43,138	)		(11,794	)		(191,331	)		(146,964	)

Premiums earned		1,091,873			1,004,383			2,131,848			1,955,915
Net investment income		93,622			68,798			183,180			137,287
Service fees		28,662			27,707			58,961			55,946
Realized investment gains		6,126			9,860			5,765			39,767
Other income		501			6			1,018			544

Total revenues		1,220,784			1,110,754			2,380,772			2,189,459


Expenses:
Losses and loss expenses		675,326			626,578			1,316,472			1,227,083
Other operating expenses		334,600			310,476			661,405			602,254
Interest expense		19,217			15,754			37,342			31,525

Total expenses		1,029,143			952,808			2,015,219			1,860,862


Income before income taxes and minority interest		191,641			157,946			365,553			328,597

Income tax expense		(56,095	)		(48,166	)		(108,824	)		(102,192	)
Minority interest		(1,467	)		(296	)		(1,779	)		(766	)


Income before change in accounting principle		134,079			109,484			254,950			225,639

Cumulative effect of change in accounting principle, net of taxes		—			—			—			(727	)


Net income	$	134,079		$	109,484		$	254,950		$	224,912


Earnings per share:
Basic:

Income before change in accounting principle	$	1.06		$	.87		$	2.01		$	1.80
Cumulative effect of change in accounting principle, net of taxes	$	—		$	—		$	—		$	(.01	)

Net income	$	1.06		$	.87		$	2.01		$	1.79


Diluted:

Income before change in accounting principle	$	1.01		$	.83		$	1.91		$	1.72
Cumulative effect of change in accounting principle, net of taxes	$	—		$	—		$	—		$	(.01	)

Net income	$	1.01		$	.83		$	1.91		$	1.71

See accompanying notes to interim consolidated financial statements.

W. R. Berkley Corporation and Subsidiaries

Consolidated Statements of Stockholders’ Equity
(dollars in thousands)


	Six Months Ended			Year Ended
	June 30,			December 31,
	2005			2004
	(Unaudited)
Common Stock:
Beginning and end of period	$	31,351		$	31,351

Additional paid in capital:
Beginning of period	$	820,913		$	809,938
Stock options issued		172			1,306
Tax benefit related to stock options exercised		2,449			4,350
Restricted stock units earned		3,942			5,152
Stock options earned		67			122
Stock issued to Directors		225			45

End of period	$	827,768		$	820,913


Retained earnings:
Beginning of period	$	1,354,489		$	939,911
Net income		254,950			438,105
Dividends to stockholders		(12,686	)		(23,527	)

End of period	$	1,596,753		$	1,354,489


Accumulated other comprehensive income:
Unrealized investment gains:
Beginning of period	$	109,699		$	120,807
Net change in period		7,718			(11,108	)

End of period		117,417			109,699


Currency translation adjustments:
Beginning of period	$	2,356		$	(830	)
Net change in period		(10,271	)		3,186

End of period		(7,915	)		2,356


Total accumulated other comprehensive income	$	109,502		$	112,055


Treasury Stock:
Beginning of period	$	(209,106	)	$	(218,615	)
Stock options issued		5,088			9,823
Stock issued to Directors		80			23
Purchase of common stock		(170	)		(337	)

End of period	$	(204,108	)	$	(209,106	)

See accompanying notes to interim consolidated financial statements.

W. R. Berkley Corporation and Subsidiaries

Consolidated Statements of Cash Flows
(dollars in thousands)


	For the Six Months
	Ended June 30,
	2005			2004
	(Unaudited)			(Unaudited)
Cash flows provided by operating activities:
Net income before change in accounting principle	$	254,950		$	225,639
Adjustments to reconcile net income to net cash flows provided by operating activities:
Realized investment gains		(5,765	)		(39,767	)
Depreciation and amortization		30,832			29,110
Minority interest		1,779			766
Equity in undistributed earnings of affiliates		(13,781	)		(9,118	)
Stock incentive plans		4,314			1,667
Change in:
Equity securities trading account		(251,691	)		(83,519	)
Premiums and fees receivable		(84,247	)		(91,407	)
Due from reinsurers		(33,136	)		(68,542	)
Accrued investment income		(13,761	)		(5,098	)
Prepaid reinsurance premiums		(19,255	)		(9,662	)
Deferred policy acquisition cost		(27,760	)		(27,904	)
Deferred income taxes		(9,452	)		(25,966	)
Trading account receivable from brokers and clearing organizations		51,166			(6,272	)
Other assets		(9,158	)		(18,774	)
Reserves for losses and loss expenses		596,079			630,484
Unearned premiums		207,835			157,074
Due to reinsurers		(14,075	)		7,398
Trading account securities sold but not yet purchased		129,432			38,936
Policyholders’ account balances		249			(941	)
Other liabilities		(52,561	)		(34,468	)

Net cash flows provided by operating activities		741,994			669,636

Cash flows used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities		940,540			626,122
Equity securities		162,153			74,325
Maturities and prepayments of fixed maturities securities		632,442			270,829
Investment in affiliates		11,011			1,507
Cost of purchases, excluding trading account:
Fixed maturity securities		(2,742,096	)		(1,692,552	)
Equity securities		(172,635	)		(132,725	)
Investment in affiliates		(23,936	)		(38,763	)
Change in balances due to/from security brokers		106,831			25,526
Net additions to real estate, furniture and equipment		(15,460	)		(16,639	)
Cost of minority interest acquired		(28,000	)		—

Net cash flows used in investing activities		(1,129,150	)		(882,370	)

Cash flows provided by financing activities:
Net proceeds from issuance of senior notes		198,149			—
Receipts credited to policyholders’ account balances		7,256			6,991
Return of policyholders’ account balances		(375	)		(438	)
Bank deposits received		7,416			22,587
Advances from (repayments to) federal home loan bank		5,525			(16,460	)
Net proceeds from stock options exercised		5,260			7,466
Repayment of senior notes		(40,000	)		—
Cash dividends		(12,686	)		(5,864	)
Stock repurchases		(170	)		(337	)
Other, net		(7,343	)		(12,514	)

Net cash flows provided by financing activities		163,032			1,431

Net decrease in cash and cash equivalents		(224,124	)		(211,303	)
Cash and cash equivalents at beginning of year	$	932,079		$	1,431,466

Cash and cash equivalents at end of period	$	707,955		$	1,220,163

Supplemental disclosure of cash flow information:
Interest paid	$	34,395		$	30,822

Federal income taxes paid	$	114,395		$	138,677

See accompanying notes to consolidated financial statements.

W. R. Berkley Corporation and Subsidiaries

Notes to Interim Consolidated Financial Statements (unaudited)

1.GENERAL

The accompanying consolidated financial statements should be read in conjunction with the following notes and with the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Reclassifications have been made in the 2004 financial statements as originally reported to conform them to the presentation of the 2005 financial statements.

The income tax provision has been computed based on the Company’s estimated annual effective tax rate, which differs from the federal income tax rate of 35% principally because of tax-exempt investment income.

The Company presents both basic and diluted earnings per share (EPS) amounts. Basic EPS is calculated by dividing net income by weighted average number of common shares outstanding during the period. Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the period and is calculated using the treasury stock method for stock incentive plans. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation. Per share amounts have been adjusted to reflect the 3-for-2 common stock split effected April 8, 2005.

In the opinion of management, the financial information reflects all adjustments that are necessary for a fair presentation of financial position and results of operations for the interim periods. Seasonal weather variations and natural and man-made catastrophes can have a significant impact on the results of any one or more reporting periods.

2.COMPREHENSIVE INCOME

The following is a reconciliation of comprehensive income (dollars in thousands):


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2005			2004			2005			2004
Net income	$	134,079		$	109,484		$	254,950		$	224,912

Other comprehensive income:
Change in unrealized foreign exchange gains (losses)		(2,568	)		(13,467	)		(10,271	)		(9,545	)
Unrealized holding gains (losses) on investment securities arising during the period, net of taxes		66,115			(85,927	)		11,394			(55,495	)
Reclassification adjustment for realized (gains) losses included in net income, net of taxes		(3,769	)		(6,400	)		(3,676	)		(25,748	)


Other comprehensive income (loss)		59,778			(105,794	)		(2,553	)		(90,788	)


Comprehensive income	$	193,857		$	3,690		$	252,397		$	134,124

3.STOCK-BASED COMPENSATION

The Company adopted FASB Statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123”, effective as of January 1, 2003. Under the prospective method of adoption selected by the Company, the fair value recognition provisions of FASB 148 are applied to all employee awards granted, modified or settled after January 1, 2003. The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period (dollars in thousands, except per share data).


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2005			2004			2005			2004
Net income, as reported	$	134,079		$	109,484		$	254,950		$	224,912

Add: Stock-based compensation expense included in reported net income, net of tax		22			28			44			53

Deduct: Total stock-based employee compensation expense under fair value based method for all awards, net of tax		(502	)		(1,005	)		(1,000	)		(1,986	)


Pro forma net income	$	133,599		$	108,507		$	253,994		$	222,979


Earnings per share:
Basic — as reported	$	1.06		$	.87		$	2.01		$	1.79
Basic — pro forma	$	1.05		$	.86		$	2.00		$	1.77

Diluted — as reported	$	1.01		$	.83		$	1.91		$	1.71
Diluted — pro forma	$	1.00		$	.82		$	1.91		$	1.69

In December 2004, the FASB issued FAS 123R, “Share-Based Payment,” which replaces FAS 123 and is effective on January 1, 2006. FAS 123R requires that the cost resulting from all share-based payment transactions with employees, including those awarded prior to January 1, 2003, be recognized in the financial statements using a fair-value-based measurement method. The adoption of FAS 123R will not have a material impact on the Company’s financial condition or results of operations.

4.INVESTMENTS

The amortized cost, fair value and carrying value of fixed maturity securities and equity securities are as follows (dollars in thousands):


	Amortized			Fair			Carrying
	Cost			Value			Value
June 30, 2005
Fixed maturity:
Held to maturity	$	186,375		$	204,683		$	186,375
Available for sale		7,220,644			7,363,627			7,363,627

Total	$	7,407,019		$	7,568,310		$	7,550,002


Equity securities available for sale	$	376,086		$	414,889		$	414,889

Trading Account:
Equity securities	$	516,984		$	528,481		$	528,481
Receivable from broker		135,313			135,313			135,313
Securities sold but not yet purchased		(190,801	)		(200,099	)		(200,099	)

Total trading account	$	461,496		$	463,695		$	463,695


December 31, 2004
Fixed maturity:
Held to maturity	$	191,081		$	208,731		$	191,081
Available for sale		6,053,512			6,178,340			6,178,340

Total	$	6,244,593		$	6,387,071		$	6,369,421


Equity securities available for sale	$	365,604		$	413,263		$	413,263

Trading Account:
Equity securities	$	274,506		$	280,340		$	280,340
Receivable from broker		186,479			186,479			186,479
Securities sold but not yet purchased		(66,658	)		(70,667	)		(70,667	)

Total trading account	$	394,327		$	396,152		$	396,152

5.REINSURANCE CEDED

The Company reinsures a portion of its exposures principally to reduce its net liability on individual risks and to protect against catastrophic losses. Estimated amounts recoverable from reinsurers as of June 30, 2005 are net of reserves for uncollectible reinsurance of $2,499,000. The following amounts arising under reinsurance ceded contracts have been deducted in arriving at the amounts reflected in the statement of income (dollars in thousands):


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2005		2004		2005		2004
Ceded premiums earned	$	124,418	$	120,591	$	249,218	$	234,389
Ceded losses incurred	$	82,706	$	99,885	$	157,710	$	165,445

6.INDUSTRY SEGMENTS

The Company’s operations are presently conducted in five segments of the insurance business: specialty lines of insurance, regional property casualty insurance, alternative markets, reinsurance and international.

Our specialty segment underwrites complex and sophisticated third-party liability risks, principally within the excess and surplus lines. The primary lines of business are premises operations, professional liability, automobile, products liability and property lines. The specialty business is conducted through nine operating units. The companies within the segment are divided along the different customer bases and product lines that they serve. The specialty units deliver their products through a variety of distribution channels depending on the customer base and particular risks insured. The customers in this segment are highly diverse.

Our regional segment provides commercial insurance products to customers primarily in 27 states. Key clients of this segment are small-to-mid-sized businesses and governmental entities. The regional subsidiaries are organized geographically, which provides them with the flexibility to adapt to local market conditions, while enjoying the superior administrative capabilities and financial strength of the Company. The regional operations are conducted through four geographic regions based on markets served: Midwest, New England, Southern (excluding Florida) and Mid Atlantic.

Our alternative markets operations specialize in developing, insuring, reinsuring and administering self-insurance programs and other alternative risk transfer mechanisms. Our clients include employers, employer groups, insurers, and alternative market funds seeking less costly, more efficient ways to manage exposure to risks. In addition to providing primary and excess workers’ compensation insurance, the alternative markets segment also provides a wide variety of fee-based third-party administrative services.

Our reinsurance operations specialize in underwriting property casualty reinsurance on both a treaty and a facultative basis. The principal reinsurance units are facultative reinsurance, which writes individual certificates and program facultative business, treaty reinsurance, which functions as a traditional reinsurer in specialty and standard reinsurance lines, and Lloyd’s reinsurance, which writes quota share reinsurance with certain Lloyd’s syndicates.

Our international segment includes our operations in Argentina and the Philippines. In Argentina, we offer commercial and personal property casualty insurance. In the Philippines, we provide savings and life products to customers, including endowment policies to pre-fund education costs and retirement income. Our operations in the U.K. are reported in our specialty segment.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Income tax expense and benefits are calculated based upon the Company’s overall effective tax rate.

6.INDUSTRY SEGMENTS (continued)

Summary financial information about the Company’s operating segments is presented in the following table. Net income by segment consists of revenues less expenses related to the respective segment’s operations, including allocated investment income. Identifiable assets by segment are those assets used in or allocated to the operation of each segment.


	Revenues
	Earned		Investment									Net
(dollars in thousands)	Premiums		Income			Other			Total			Income
For the three months ended June 30, 2005:
Specialty	$	414,573	$	33,201		$	—		$	447,774		$	58,285
Regional		292,037		13,611			—			305,648			33,425
Alternative Markets		155,408		18,927			28,662			202,997			36,719
Reinsurance		210,571		23,202			—			233,773			22,128
International		19,284		2,769			42			22,095			1,113
Corporate and eliminations		—		1,912			459			2,371			(21,360	)
Realized gains		—		—			6,126			6,126			3,769

Consolidated	$	1,091,873	$	93,622		$	35,289		$	1,220,784		$	134,079


For the three months ended June 30, 2004:
Specialty	$	357,184	$	24,364		$	—		$	381,548		$	50,914
Regional		263,996		10,613			—			274,609			25,321
Alternative Markets		143,641		14,047			27,707			185,395			22,668
Reinsurance		221,869		18,713			—			240,582			21,357
International		17,693		1,607			10			19,310			(130	)
Corporate and eliminations		—		(546	)		(4	)		(550	)		(17,046	)
Realized gains		—		—			9,860			9,860			6,400

Consolidated	$	1,004,383	$	68,798		$	37,573		$	1,110,754		$	109,484


	Revenues
	Earned		Investment								Net
(dollars in thousands)	Premiums		Income			Other		Total			Income
For the six months ended June 30, 2005:
Specialty	$	803,972	$	64,079		$	—	$	868,051		$	114,735
Regional		572,336		26,594			—		598,930			73,167
Alternative Markets		304,908		36,932			58,961		400,801			65,100
Reinsurance		411,584		45,629			—		457,213			38,781
International		39,048		6,371			52		45,471			1,577
Corporate and eliminations		—		3,575			966		4,541			(42,086	)
Realized gains		—		—			5,765		5,765			3,676

Consolidated	$	2,131,848	$	183,180		$	65,744	$	2,380,772		$	254,950


For the six months ended June 30, 2004:
Specialty	$	700,289	$	48,707		$	—	$	748,996		$	95,596
Regional		511,967		21,490			—		533,457			56,120
Alternative Markets		275,775		27,276			55,946		358,997			44,522
Reinsurance		432,515		37,412			—		469,927			36,988
International		35,369		3,285			125		38,779			(16	)
Corporate and eliminations		—		(883	)		419		(464	)		(33,319	)
Realized gains		—		—			39,767		39,767			25,748
Change in accounting		—		—			—		—			(727	)

Consolidated	$	1,955,915	$	137,287		$	96,257	$	2,189,459		$	224,912

6.INDUSTRY SEGMENTS (continued)

Identifiable assets by segment are as follows (dollars in thousands):


	June 30,			December 31,
	2005			2004
Specialty	$	4,549,353		$	3,930,054
Regional		2,442,399			2,360,149
Alternative Markets		2,084,316			1,864,544
Reinsurance		4,370,898			3,922,023
International		224,061			196,355
Corporate, other and eliminations		(829,291	)		(822,092	)

Consolidated	$	12,841,736		$	11,451,033

Net premiums earned by major line of business are as follows (dollars in thousands):


	For the three months ended				For the six months ended
	June 30,				June 30,
	2005		2004		2005		2004
Premises and operations	$	161,394	$	149,401	$	312,432	$	285,428
Professional liability		75,669		63,686		147,289		131,626
Automobile		62,137		54,435		119,609		104,666
Products liability		58,934		39,624		113,708		76,897
Property		29,425		29,114		58,788		59,266
Other		27,014		20,924		52,146		42,406

Specialty		414,573		357,184		803,972		700,289


Commercial multiple peril		116,664		105,958		231,584		206,370
Automobile		84,371		76,149		165,661		149,039
Workers’ compensation		60,709		53,133		114,843		102,921
Other		30,293		28,756		60,248		53,637

Regional		292,037		263,996		572,336		511,967


Primary workers’ compensation		76,983		70,577		151,901		132,792
Excess workers’ compensation		67,314		62,166		130,817		121,400
Other		11,111		10,898		22,190		21,583

Alternative Markets		155,408		143,641		304,908		275,775


Property		35,729		46,534		69,039		89,398
Casualty		174,842		175,335		342,545		343,117

Reinsurance		210,571		221,869		411,584		432,515


International		19,284		17,693		39,048		35,369


Total	$	1,091,873	$	1,004,383	$	2,131,848	$	1,955,915

7.COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES(continued)

The Company’s subsidiaries are subject to disputes, including litigation and arbitration, arising in the ordinary course of their insurance and reinsurance businesses. The Company’s estimates of the costs of settling such matters are reflected in its aggregate reserves for losses and loss expenses, and the Company does not believe that the ultimate outcome of such matters will have a material adverse effect on its financial condition or results of operations.

The New York State Attorney General and other regulators have commenced investigations, legal actions and general inquiries concerning producer compensation and alleged anti-competitive activities in the insurance industry. Certain allegations include improper sales practices by insurance producers as well as other non-competitive behaviors. The Company and certain of its operating units, like many others in the insurance industry, have received information requests from various state insurance regulators and other state authorities. These requests, for the most part, relate to inquiries into inappropriate solicitation activities, producer compensation practices and the underwriting of legal malpractice insurance, as well as more recently finite reinsurance. The Company has responded to each of these inquiries and is cooperating with the applicable regulatory authorities.

In this regard, the Company commenced an internal review with the assistance of outside counsel that focused on the Company’s relationships with its distribution channels. As a result of the investigation, a single insurance operating unit reported certain limited instances of conduct that could be characterized as involving inappropriate solicitation practices. That operating unit has reached an agreement with its domiciliary insurance regulator resolving all issues pertaining to its inquiry without penalty. As part of the agreement, the Company has implemented certain additional internal procedures and has taken other corrective action.

8.ACQUISITIONS

On June 30, 2005, the Company purchased all of the minority interest in its subsidiary, Berkley International, LLC from a subsidiary of The Northwestern Mutual Life Insurance Company. The purchase price was $28 million, of which approximately $7 million represents goodwill.

9.SUBSEQUENT EVENT

On July 26, 2005, the Company issued $250 million aggregate principal amount of 6.75% Junior Subordinated Debentures due July 26, 2045 (the “Junior Subordinated Debentures”) to W. R. Berkley Capital Trust II (the “Trust”). The Trust simultaneously issued an equal amount of 6.75% mandatorily redeemable preferred securities (“Trust Preferred Securities”), which are fully and unconditionally guaranteed by the Company to the extent the Trust has funds available for repayment of distributions. The Trust Preferred Securities are subject to mandatory redemption in a like amount (i) in whole but not in part upon repayment of the Junior Subordinated Debentures at maturity at maturity, (ii) in whole but not in part, at any time contemporaneously with the optional prepayment of the Junior Subordinated Debentures by the Company upon the occurrence and continuation of certain events and (iii) in whole or in part, on or after July 26, 2010, contemporaneously with the optional prepayment by the Company of the Junior Subordinated Debentures.

SAFE HARBOR STATEMENT

This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein, including statements related to our outlook for the industry and for our performance for the year 2005 and beyond, are based upon the Company’s historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. They are subject to various risks and uncertainties, including but not limited to, the cyclical nature of the property casualty industry, the long-tail and potentially volatile nature of the reinsurance business, product demand and pricing, claims development and the process of estimating reserves, the uncertain nature of damage theories and loss amounts, natural and man-made catastrophic losses, including as a result of terrorist activities, the impact of competition, the impact of competition, the availability of reinsurance, exposure as to coverage for terrorist acts, our retention under The Terrorism Risk Insurance Act of 2002 (“TRIA”) and the expected expiration of TRIA on December 31, 2005, the ability of our reinsurers to pay reinsurance recoverables owed to us, investment risks, including those of our portfolio of fixed income securities and investments in equity securities, including merger arbitrage investments, exchange rate and political risks relating to our international operations, legislative and regulatory developments, including those related to alleged anti-competitive or other improper business practices in the insurance industry, changes in the ratings assigned to us by ratings agencies, the availability of dividends from our insurance company subsidiaries, our ability to successfully acquire and integrate companies and invest in new insurance ventures, our ability to attract and retain qualified employees, and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission. These risks could cause actual results of the industry or our actual results for the year 2005 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company. Any projections of growth in the Company’s net premiums written and management fees would not necessarily result in commensurate levels of underwriting and operating profits. Forward-looking statements speak only as of the date on which they are made.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

W. R. Berkley Corporation is an insurance holding company that provides, through its subsidiaries, commercial property casualty insurance products and services. The Company’s principal focus is casualty business. The Company’s primary sources of revenues and earnings are insurance premiums and investment income.

The profitability of the Company’s insurance business is affected primarily by the adequacy of premium rates. The ultimate adequacy of premium rates is not known with certainty at the time a property casualty insurance policy is issued because premiums are determined before claims are reported. The ultimate adequacy of premium rates is affected mainly by the severity and frequency of claims, which are influenced by many factors, including natural and other disasters, regulatory measures and court decisions that define and change the extent of coverage and the effects of economic inflation on the amount of compensation due for injuries or losses. General insurance prices are also influenced by available insurance capacity, i.e., the level of policyholders’ surplus employed in the industry, and the industry’s willingness to deploy that capital.

The Company’s profitability is also affected by its investment income. The Company’s invested assets, which are derived from its own capital and cash flow from its insurance business, are invested principally in fixed income securities. The return on fixed income securities is affected primarily by general interest rates and the credit quality and duration of the securities. The Company also invests in equity securities, including equity securities related to merger arbitrage and convertible arbitrage strategies. Investment returns are impacted by government policies and overall economic activity.

Critical Accounting Estimates

The following presents a discussion of accounting policies and estimates relating to reserves for losses and loss expenses and assumed premiums. Management believes these policies and estimates are the most critical to its operations and require the most difficult, subjective and complex judgments.

Reserves for Losses and Loss Expenses. To recognize liabilities for unpaid losses, either known or unknown, 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. Estimates and assumptions relating to reserves for losses and loss expenses are based on complex and subjective judgments, often including the interplay of specific uncertainties with related accounting and actuarial measurements. Such estimates are also susceptible to change as significant periods of time may elapse between the occurrence of an insured loss, the report of the loss to the insurer, the ultimate determination of the cost of the loss and the insurer’s payment of that loss.

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 to provide for losses incurred but not yet reported to the insurer, potential inadequacy of case reserves and the estimated expenses of settling claims, including legal and other fees and general expenses of administrating the claims adjustment process. Reserves are established based upon the then current legal interpretation of coverage provided.

In examining reserve adequacy, several factors are considered in addition to the economic value of losses. These factors include historical data, 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, adjusted judgmentally for the effects of current developments and anticipated trends, is an appropriate basis for predicting future outcomes. Reserve amounts are necessarily based on management’s informed estimates and judgments using currently available data. As additional experience and other data become available and are reviewed, these estimates and judgments may be revised. This may result in reserve increases or decreases that would be reflected in our results in periods in which such estimates and assumptions are changed.

Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what management expects the ultimate settlement and claim administration will cost. 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 unanticipated fluctuation. These estimates, which generally involve actuarial projections, are based on management’s assessment of facts and circumstances then known, as well as estimates of future trends in claims severity and frequency, judicial theories of liability and other factors, including the actions of third parties which are beyond the Company’s control. These variables are affected by internal and external events, such as inflation and economic volatility, judicial and litigation trends, reinsurance coverage and legislative changes, which make it more difficult to accurately predict claim costs. The inherent uncertainties of estimating reserves are greater for certain types of liabilities where long periods of time elapse before a definitive determination of liability is made. Because setting reserves is inherently uncertain, the Company cannot assure that its current reserves will prove adequate in light of subsequent events.

Loss reserves included in the Company’s financial statements represent management’s best estimates and are based upon an actuarially derived point estimate. The Company uses a variety of actuarial techniques and methods to derive the actuarial point estimate. These methods include paid loss development, incurred loss development, paid and incurred Bornhuetter-Ferguson methods and frequency and severity methods. In circumstances where one actuarial method is considered more credible than the others, that method is used to set the point estimate. Otherwise, the actuarial point estimate is based on a judgmental weighting of estimates produced from each of the methods considered. Industry loss experience is used to supplement the Company’s own data in selecting “tail factors” and in areas where the Company’s own data is limited. The actuarial data is analyzed by line of business, coverage and accident or policy year, as appropriate, for each operating unit.

The establishment of the actuarially derived loss reserve point estimate also includes consideration of qualitative factors that may affect the ultimate losses. These qualitative considerations include, among others, the impact of re-underwriting initiatives, changes in the mix of business, changes in distribution sources and changes in policy terms and conditions. Examples of changes in policy terms and conditions that can have a significant impact on reserve levels are the use of aggregate policy limits, the expansion of coverage exclusions, whether or not defense costs are within policy limits, and changes in deductibles and attachment points.

The key assumptions used to arrive at the best estimate of loss reserves are the expected loss ratios, rate of loss cost inflation, and reported and paid loss emergence patterns. Expected loss ratios represent management’s expectation of losses at the time the business is written, before any actual claims experience has emerged. The expectation is a significant determinant of ultimate losses and reserves for recently written business where there is little paid or incurred loss data to consider. Expected loss ratios are generally derived from historical loss ratios adjusted for the impact of rate increases, loss cost trends and known changes in the type of risks underwritten. Expected loss ratios are estimated for each key line of business within each operating unit. Expected loss cost inflation is particularly important for the long-tail lines, such as excess casualty, and claims with a high medical component, such as workers’ compensation. Reported and paid loss emergence patterns are used to project current reported or paid loss amounts to their ultimate settlement value. Loss development factors are based on the historical emergence patterns of paid and incurred losses, and are derived from the Company’s own experience and industry data. The paid loss emergence pattern is also significant to excess and assumed workers’ compensation reserves because those reserves are discounted to their estimated present value based upon such estimated payout patterns. Management believes the estimates and assumptions it makes in the reserving process provide the best estimate of the ultimate cost of settling claims and related expenses with respect to insured events which have occurred.

While management has used its best judgment in establishing its estimate of required reserves, different assumptions and variables could lead to significantly different reserve estimates. Two key measures of loss activity are loss frequency, which is a measure of the number of claims per unit of insured exposure, and loss severity, which is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations. If the actual level of loss frequency and severity are higher or lower than expected, the ultimate reserves will be different than management’s estimate. For example, if loss frequency and severity for a given year are each 1% higher than expected for all lines of business, ultimate loss costs for that year would be 2.01% higher than expected.

For example, the effect of higher and lower levels of loss frequency and severity levels on our estimated ultimate costs for claims occurring in 2004 would be as follows (dollars in thousands):


	Ultimate costs of		Change in cost of
Change in both loss frequency and	claims occurring		claims occurring
severity for all lines of business	in 2004		in 2004
3% higher	$	2,373,085	$	136,225
2% higher		2,327,229		90,369
1% higher		2,281,821		44,961
Base scenario		2,236,860		—
1% lower		2,191,899		(44,961	)
2% lower		2,146,491		(90,369	)
3% lower		2,100,635		(136,225	)

Our net reserves for losses and loss expenses of $5.3 billion as of June 30, 2005 relate to multiple accident years. Therefore, a change in frequency or severity for more than one accident year would be higher or lower than the amounts reflected above.

Approximately $1.4 billion, or 27%, of the Company’s net loss reserves relate to its assumed reinsurance business. There is a higher degree of uncertainty and greater variability regarding estimates of assumed loss reserves because those estimates are based, in part, upon information received from ceding companies. If information received from ceding companies is not timely or correct, the Company’s estimate of ultimate losses may not be accurate. Furthermore, due to delayed reporting of claim information by ceding companies, the claim settlement tail for assumed reinsurance is extended. Management considers the impact of delayed reporting in its selection of assumed loss development factors.

Information received from ceding companies is used to set initial expected loss ratios, to establish case reserves and to estimate reserves for incurred but not reported losses. This information, which is generally provided through reinsurance intermediaries, is gathered through the underwriting process and from periodic claim reports and other correspondence with ceding companies. The Company performs underwriting and claim audits of selected ceding companies to determine the accuracy and completeness of information provided to the Company. The information received from the ceding companies is supplemented by the Company’s own loss development experience with similar lines of business as well as industry loss trends and loss development benchmarks.

Following is a summary of the Company’s reserves for losses and loss expenses by business segment as of June 30, 2005 and December 31, 2004 (dollars in thousands):


	June 30,		December 31,
	2005		2004
Specialty	$	1,896,718	$	1,637,204
Regional		843,623		760,440
Alternative Markets		1,055,034		944,546
Reinsurance		1,443,242		1,350,531
International		33,866		30,121

Net reserves for losses and loss expenses		5,272,483		4,722,842
Ceded reserves for losses and loss expenses		773,207		726,769

Gross reserves for losses and loss expenses	$	6,045,690	$	5,449,611

Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of June 30, 2005 and December 31, 2004 (dollars in thousands):


			Incurred
	Reported Case		but not
	Reserves		Reported		Total
June 30, 2005:
General liability	$	634,523	$	1,193,031	$	1,827,554
Workers’ compensation		590,786		698,362		1,289,148
Automobile		256,263		175,681		431,944
Other		100,825		179,770		280,595

Total primary		1,582,397		2,246,844		3,829,241
Reinsurance		636,965		806,277		1,443,242

Total	$	2,219,362	$	3,053,121	$	5,272,483


December 31, 2004:
General liability	$	538,042	$	1,025,677	$	1,563,719
Workers’ compensation		556,250		605,906		1,162,156
Automobile		231,435		144,009		375,444
Other		112,481		158,511		270,992

Total primary		1,438,208		1,934,103		3,372,311
Reinsurance		574,752		775,779		1,350,531

Total	$	2,012,960	$	2,709,882	$	4,722,842

For the six months ended June 30, 2005, the Company reported losses and loss expenses of $1,316 million, of which $70 million represented an increase in estimates for claims occurring in prior years. The increases in estimates for claims occurring in prior years were $31 million for primary business ($19 million for specialty, $8 million for regional and $4 million for international) and $39 million for assumed reinsurance. For both primary and reinsurance business, increases in estimates for earlier accident years were partially offset by decreases in estimates for accident year 2004.

Case reserves, net of reinsurance, for primary business increased 10% to $1.6 billion at June 30, 2005 from $1.4 billion at December 31, 2004 as a result of a 1% increase in the number of outstanding claims and a 9% increase in the average case reserve per claim. Reserves for incurred but not reported losses, net of reinsurance, for primary business increased 16% to $2.2 billion at June 30, 2005 from $1.9 billion at December 31, 2004. The increase in prior year reserves for direct business of $31 million was primarily related to increased estimates for general liability and commercial automobile business, which were partially offset by decreased estimates for property lines. The increases in prior year reserves reflects upward adjustments in loss ratios for prior accident years to recognize that claim costs, including legal expenses and medical costs, for certain classes of business are emerging over a longer period of time and at a higher level than expected.

Case reserves for reinsurance business increased 11% to $637 million at June 30, 2005 from $575 million at December 31, 2004. Reserves for incurred but not reported losses for reinsurance business increased 4% to $806 million at June 30, 2005 from $776 million at December 31, 2004. The increase in prior year reserves for reinsurance business was primarily a result of higher than expected claims reported by ceding companies. The Company sets its initial loss estimates based principally upon information obtained during the underwriting process and adjusts these estimates as additional information becomes available. As certain reinsurance contracts have

matured, the Company has adjusted its estimates of ultimate losses to reflect a higher level of known losses as well as a pattern of delayed loss reporting by some ceding companies. Most of the increase in prior year reserves for reinsurance relates to business written from 1998 through 2001.

Assumed Premiums. The Company estimates the amount of assumed reinsurance premiums that it will receive under treaty reinsurance agreements at the inception of the contracts. These premium estimates are revised as the actual amount of assumed premiums is reported to the Company by the ceding companies. As estimates of assumed premiums are made or revised, the related amount of earned premium, commissions and incurred losses associated with those premiums are recorded. Estimated assumed premiums receivable were approximately $129 million and $136 million at June 30, 2005 and December 31, 2004 respectively. The assumed premium estimates are based upon terms set forth in the reinsurance agreement, information received from ceding companies during the underwriting and negotiation of the agreement, reports received from ceding companies and discussions and correspondence with reinsurance intermediaries. The Company also considers its own view of market conditions, economic trends and experience with similar lines of business. These premium estimates represent management’s best estimate of the ultimate premiums to be received under its assumed reinsurance agreements.

Results of Operations For The Six Months Ended June 30, 2005 and 2004

Following is a summary of net premiums written, premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and combined ratios (sum of loss ratio and expense ratio) for each of our business segments. The combined ratio represents a measure of underwriting profitability, excluding investment income. A combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.


	Six months ended June 30,
(Dollars in thousands)	2005			2004
Specialty
Gross premiums written	$	940,331		$	777,664
Net premiums written		890,856			734,669
Premiums earned		803,972			700,289
Loss ratio		62.4	%		61.7	%
Expense ratio		25.0	%		25.3	%
Combined ratio		87.4	%		87.0	%
Regional
Gross premiums written	$	723,864		$	668,017
Net premiums written		618,830			578,544
Premiums earned		572,336			511,967
Loss ratio		55.4	%		56.9	%
Expense ratio		30.4	%		31.0	%
Combined ratio		85.8	%		87.9	%
Alternative Markets
Gross premiums written	$	408,605		$	379,740
Net premiums written		340,725			324,967
Premiums earned		304,908			275,775
Loss ratio		64.2	%		69.7	%
Expense ratio		21.0	%		21.1	%
Combined ratio		85.2	%		90.8	%
Reinsurance
Gross premiums written	$	475,888		$	481,821
Net premiums written		432,777			428,383
Premiums earned		411,584			432,515
Loss ratio		67.7	%		67.8	%
Expense ratio		31.0	%		29.0	%
Combined ratio		98.7	%		96.8	%
International (1)
Gross premiums written	$	44,214		$	40,178
Net premiums written		39,991			36,316
Premiums earned		39,048			35,369
Loss ratio		58.2	%		51.6	%
Expense ratio		35.5	%		35.8	%
Combined ratio		93.7	%		87.4	%
Consolidated
Gross premiums written	$	2,592,902		$	2,347,420
Net premiums written		2,323,179			2,102,879
Premiums earned		2,131,848			1,955,915
Loss ratio		61.8	%		62.7	%
Expense ratio		27.4	%		27.3	%
Combined ratio		89.2	%		90.0	%


(1)		The ratios for international do not include Philippine life operations.

The following table presents the Company’s net income and net income per share for the six months ended June 30, 2005 and 2004 (amounts in thousands, except per share data):


	2005		2004
Net income	$	254,950	$	224,912
Weighted average diluted shares		133,277		131,888
Net income per diluted share	$	1.91	$	1.71

The increase in net income in 2005 compared with 2004 reflects higher investment income and higher profits from underwriting activity. The increase in investment income is the result of a 29% increase in average invested assets arising primarily from cash flow provided by operating and financing activity. The improvement in underwriting results is attributable to a 9% increase in earned premiums and a 0.9 percentage point decrease in the loss ratio (losses and loss expenses incurred expressed as percentage of earned premiums), partially offset by a 0.1 percentage point increase in the expense ratio (underwriting expenses expressed as a percentage of premiums earned).

Gross Premiums Written.Gross premiums written were $2.6 billion in 2005, up 10% from 2004. Although prices generally increased during 2004, the Company is experiencing an increased level of price competition in 2005. Price levels for renewal business fell approximately 1% in the first six months of 2005, as compared with the prior year period.

Gross premiums for the regional and alternative markets segments include premiums written on behalf of assigned risk plans managed by the Company. The assigned risk premiums are fully reinsured by the respective state-sponsored assigned risk plans.

A summary of gross premiums written in 2005 compared with 2004 by business segment follows:

	•		Specialty gross premiums increased by 21% to $940 million in 2005 from $778 million in 2004. The increase in gross premiums includes approximately $82 million from Berkley Specialty Underwriting Managers LLC, which began operations in July, 2004. The number of policies issued in 2005 increased 19%, and the average premium per policy increased 1%. Average prices for renewal policies, adjusted for changes in exposure, decreased 1%. Gross premiums written increased 30% for premises and operations, 19% for automobile, 41% for products liability and 6% for property lines. Gross premiums written decreased 5% for professional liability lines.

	•		Regional gross premiums increased by 8% to $724 million in 2005 from $668 million in 2004. The number of policies issued in 2005 decreased 6%, and the average premium per policy increased 14%. Average prices for renewal policies, adjusted for changes in exposure, were unchanged. Gross premiums written increased by 6% for commercial multiple peril, 6% for automobile and 7% for workers’ compensation. Gross premiums include assigned risk premiums of $67 million in 2005 and $54 million in 2004.

	•		Alternative markets gross premiums increased by 8% to $409 million in 2005 from $380 million in 2004. The number of policies issued in 2005 decreased 1%, and the average premium per policy increased 5%. Average prices for renewal policies, adjusted for changes in exposure, decreased 1%. Gross premiums

			written increased by 8% for excess workers’ compensation, and 5% for primary workers’ compensation. Gross premiums include assigned risk premiums of $57 million in 2005 and $43 million in 2004.

	•		Reinsurance gross premiums decreased by 1% to $476 million in 2005 from $482 million in 2004. The decrease in business written includes a decline of $54 million as a result of the discontinuance of a facultative relationship with a particular ceding company and a decrease of $14 million in reinsurance written through Lloyd’s. The decrease was partially offset by new business production, including an increase of $45 million in program business. Property gross premiums written increased 1% to $96 million and casualty gross premiums written decreased 2% to $380 million.

	•		International gross premiums increased by 10% to $44 million in 2005 from $40 million in 2004.

Net Premiums Earned.Net premiums earned increased 9% to $2,132 million from $1,956 million in 2004. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in 2005 are related to premiums written during both 2004 and 2005.

Net Investment Income.Following is a summary of net investment income for the six months ended June 30, 2005 and 2004 (dollars in thousands):

					��
	Amount						Average Yield
	2005			2004			2005			2004
Fixed maturity securities, including cash	$	150,405		$	113,742			4.0	%		3.9	%
Arbitrage trading account		8,042			6,339			3.8	%		3.4	%
Other equity securities and investments in affiliates		27,076			18,685			8.2	%		7.8	%
Other expense		(102	)		(104	)

Gross investment income		185,421			138,662			4.3	%		4.1	%
Investment expenses		(2,241	)		(1,375	)

Total	$	183,180		$	137,287

Net investment income increased 33% to $183 million in 2005 from $137 million in 2004. Average invested assets (including cash and cash equivalents) increased 29% to $8.6 billion in 2005 compared with $6.7 billion in 2004. The increase was a result of cash flow from operations and the net proceeds from senior notes issued during 2004 and 2005. The average annualized gross yield on investments was 4.3% in 2005 compared with 4.1% in 2004.

Service Fees.The alternative markets segment offers fee-based services to help clients develop and administer self-insurance programs, primarily for workers’ compensation coverage. Service fees increased 5% in 2005 compared with 2004 primarily as a result of an increase in service fees for managing assigned risk plans in fourteen states.

Realized Investment Gains.Realized investment gains result from sales of securities and from provisions for other than temporary impairment in securities. Realized investment gains were $6 million in 2005, compared to $40 million in 2004. In 2005, realized gains were attributable primarily to the sale of equity securities. In 2004, realized gains resulted primarily from the sale of fixed income securities in order to decrease the duration of the portfolio and to increase the portion of the portfolio invested in municipal securities.

Losses and Loss Expenses.Losses and loss expenses increased 7% to $1,316 million in 2005 from $1,227 million in 2004 primarily as a result of increased premium volume. The consolidated loss ratio decreased to 61.8% in 2005 from 62.7% in 2004 primarily as a result of a decrease in additions to prior year loss reserves ($70 million in 2005 compared with $92 million in 2004). A summary of loss ratios in 2005 compared with 2004 by business segment follows:

	•		Specialty’s loss ratio was 62.4% in 2005 compared with 61.7% in 2004 principally due to an increase in loss cost estimates for commercial transportation business.

	•		The regional loss ratio decreased to 55.4% in 2005 from 56.9% in 2004 primarily as a result of increased pricing levels. Weather-related losses were $15 million in 2005 compared with $19 million in 2004.

	•		Alternative market’s loss ratio decreased to 64.2% from 69.7% primarily as a result of the Company’s reassessment of the favorable impact of workers’ compensation reforms in California.

	•		The reinsurance loss ratio was 67.7% in 2005 compared with 67.8% in 2004.

	•		The international loss ratio was 58.2% in 2005 compared with 51.6% in 2004.

Other Operating Costs and Expenses.Following is a summary of other operating costs and expenses for the six months ended June 30, 2005 and 2004 (dollars in thousands):


	2005		2004
Underwriting expenses	$	583,289	$	533,718
Service company expenses		47,754		43,969
Other costs and expenses		30,362		24,567

Total	$	661,405	$	602,254

Underwriting expenses increased 9% in 2005 compared with 2004 primarily as a result of higher premium volume. Underwriting expenses are primarily comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. The consolidated expense ratio was 27.4% in 2005 compared with 27.3% in 2004.

Service company expenses, which represent the costs associated with the alternative market’s fee-based business, increased 9% to $48 million.

Other costs and expenses, which represent primarily general and administrative expenses for the parent company, increased 24% to $30 million primarily as a result of higher compensation costs.

Interest Expense.Interest expense increased 18% to $37 million as a result of the issuance of $150 million of 6.15% senior notes in August 2004 and $200 million of 5.6% senior notes in May 2005.

Income taxes.The effective income tax rate was 30% in 2005 and 31% in 2004. The effective tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income.

Results of Operations For The Three Months Ended June 30, 2005 and 2004


		Following is a summary of net premiums written, premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and combined ratios (sum of loss ratio and expense ratio) for each of our business segments. The combined ratio represents a measure of underwriting profitability, excluding investment income. A combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.


	Three months ended
	June 30,
(Dollars in thousands)	2005			2004
Specialty
Gross premiums written	$	499,125		$	411,111
Net premiums written		477,441			389,914
Premiums earned		414,573			357,184
Loss ratio		62.9	%		60.5	%
Expense ratio		25.1	%		25.4	%
Combined ratio		88.0	%		85.9	%
Regional
Gross premiums written	$	356,491		$	331,474
Net premiums written		305,005			287,906
Premiums earned		292,037			263,996
Loss ratio		57.6	%		58.7	%
Expense ratio		30.4	%		31.1	%
Combined ratio		88.0	%		89.8	%
Alternative Markets
Gross premiums written	$	135,081		$	133,279
Net premiums written		112,705			111,816
Premiums earned		155,408			143,641
Loss ratio		60.7	%		68.4	%
Expense ratio		21.0	%		22.8	%
Combined ratio		81.7	%		91.2	%
Reinsurance
Gross premiums written	$	236,907		$	235,184
Net premiums written		219,660			208,700
Premiums earned		210,571			221,869
Loss ratio		66.8	%		66.6	%
Expense ratio		30.3	%		28.3	%
Combined ratio		97.1	%		94.9	%
International (1)
Gross premiums written	$	22,208		$	19,648
Net premiums written		20,200			17,841
Premiums earned		19,284			17,693
Loss ratio		56.9	%		51.9	%
Expense ratio		35.6	%		36.2	%
Combined ratio		92.5	%		88.1	%
Consolidated
Gross premiums written	$	1,249,812		$	1,130,696
Net premiums written		1,135,011			1,016,177
Premiums earned		1,091,873			1,004,383
Loss ratio		61.9	%		62.4	%
Expense ratio		27.3	%		27.4	%
Combined ratio		89.2	%		89.8	%


(1)		The ratios for international do not include Philippine life operations.

The following table presents the Company’s net income and net income per share for the three months ended June 30, 2005 and 2004 (amounts in thousands, except per share data):


	2005		2004
Net income	$	134,079	$	109,484
Weighted average diluted shares		133,368		131,820
Net income per diluted share	$	1.01	$	.83

The increase in net income in 2005 compared with 2004 reflects higher investment income and higher profits from underwriting activity. The increase in investment income is principally the result of a 28% increase in average invested assets arising primarily from cash flow provided by operating and financing activity. The improvement in underwriting results is attributable to a 9% increase in earned premiums and a 0.5 percentage point decrease in the loss ratio (losses and loss expenses incurred expressed as percentage of earned premiums), and a 0.1 percentage point decrease in the expense ratio (underwriting expenses expressed as a percentage of premiums earned).

Gross Premiums Written.Gross premiums written were $1.2 billion in 2005, up 11% from 2004. Although prices generally increased during 2004, the Company is experiencing an increased level of price competition. Price levels for renewal business fell approximately 1% in the first six months of 2005, as compared with the prior year period. A summary of gross premiums written in 2005 compared with 2004 by business segment follows:

	•		Specialty gross premiums increased by 21% to $499 million in 2005 from $411 million in 2004. Gross premiums written increased 28% for premises and operations, 17% for automobile, 37% for products liability and 57% for property lines. Gross premiums written decreased 8% for professional liability lines.

	•		Regional gross premiums increased by 8% to $356 million in 2005 from $331 million in 2004. Gross premiums written increased by 6% for commercial multiple peril, 5% for automobile and 11% for workers’ compensation and 14% for assigned risk plans.

	•		Alternative markets gross premiums increased by 1% to $135 million in 2005 from $133 million in 2004. Gross premiums written increased 7% for excess workers’ compensation and 6% for assigned risk plans. Gross premiums written decreased 1% for primary worker’s compensation.

	•		Reinsurance gross premiums increased by 1% to $237 million in 2005 from $235 million in 2004. Property gross premiums written decreased 17% to $48 million and casualty gross premiums written increased 7% to $189 million.

	•		International gross premiums increased by 13% to $22 million in 2005 from $20 million in 2004.

Net Premiums Earned.Net premiums earned increased 9% to $1,092 million from $1,004 million in 2004. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in 2005 are related to premiums written during both 2004 and 2005.

Net Investment Income.Following is a summary of net investment income for the three months ended June 30, 2005 and 2004 (dollars in thousands):


	Amount						Average Yield
	2005			2004			2005			2004
Fixed maturity securities, including cash	$	79,766		$	57,277			4.1	%		3.8	%
Arbitrage trading account		2,772			2,913			2.5	%		3.0	%
Other equity securities and investments in affiliates		12,878			9,554			7.7	%		7.2	%
Other income (expense)		(102	)		4

Gross investment income		95,314			69,748			4.3	%		4.0	%
Investment expenses		(1,692	)		(950	)

Total	$	93,622		$	68,798

Net investment income increased 36% to $94 million in 2005 from $69 million in 2004. Average invested assets (including cash and cash equivalents) increased 28% to $8.9 billion in 2005 compared with $6.9 billion in 2004. The increase was a result of cash flow from operations and the net proceeds from senior notes issued during 2004 and 2005. The average annualized gross yield on investments was 4.3% in 2005 compared with 4.0% in 2004.

Service Fees.The alternative markets segment offers fee-based services to help clients develop and administer self-insurance programs, primarily for workers’ compensation coverage. Service fees increased 3% in 2005 compared with 2004 primarily as a result of an increase in service fees for managing assigned risk plans in fourteen states.

Losses and Loss Expenses.Losses and loss expenses increased 8% to $675 million in 2005 from $627 million in 2004 primarily as a result of increased premium volume. The consolidated loss ratio decreased to 61.9% in 2005 from 62.4% in 2004. A summary of loss ratios in 2005 compared with 2004 by business segment follows:

	•		Specialty’s loss ratio was 62.9% in 2005 compared with 60.5% in 2004 principally due to an increase in loss cost estimates for commercial transportation business.

	•		The regional loss ratio decreased to 57.6% in 2005 from 58.7% in 2004 primarily as a result of increased pricing levels and lower weather-related losses ($12 million in 2005 compared with $15 million in 2004).

	•		Alternative market’s loss ratio decreased to 60.7% from 68.4% primarily as a result of the Company’s reassessment of the favorable impact of workers’ compensation reforms in California.

	•		The reinsurance loss ratio was 66.8% in 2005 compared with 66.6% in 2004.

	•		The international loss ratio was 56.9% in 2005 compared with 51.9% in 2004.

Other Operating Costs and Expenses.Following is a summary of other operating costs and expenses for the three months ended June 30, 2005 and 2004 (dollars in thousands):


	2005		2004
Underwriting expenses	$	297,538	$	275,529
Service company expenses		23,527		21,530
Other costs and expenses		13,535		13,417

Total	$	334,600	$	310,476

Underwriting expenses increased 8% in 2005 compared with 2004 primarily as a result of higher premium volume. Underwriting expenses are primarily comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. The consolidated expense ratio was 27.3% in 2005 compared with 27.4% in 2004.

Service company expenses, which represent the costs associated with the alternative market segment’s fee-based business, increased 9% to $24 million.

Other costs and expenses, which represent primarily general and administrative expenses for the parent company, increased 1% to $14 million.

Interest Expense.Interest expense increased 22% to $19 million as a result of the issuance of $150 million of 6.15% senior notes in August 2004 and $200 million of 5.6% senior notes in May 2005.

Income taxes.The effective income tax rate was 29% in 2005 and 30% in 2004. The effective tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income.

Investments

As part of its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities that, combined with expected cash flow, is believed adequate to meet payment obligations. The Company also 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 carrying value of the Company’s investment portfolio and investment-related assets as of June 30, 2005 and December 31, 2004 were as follows (dollars in thousands):


	June 30,			December 31,
	2005			2004
Fixed maturity securities	$	7,550,002		$	6,369,421
Equity securities available for sale		414,889			413,263
Equity securities trading account		528,481			280,340
Investments in affiliates		264,049			240,865

Total investments		8,757,421			7,303,889


Cash and cash equivalents		707,955			932,079
Trading account receivable from brokers and clearing organization		135,313			186,479
Trading account securities sold but not yet purchased		(200,099	)		(70,667	)
Unsettled purchases		(116,667	)		(9,836	)

Total	$	9,283,923		$	8,341,944

Fixed Maturities.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 available for sale portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as a result of changes in financial market conditions and tax considerations. At June 30, 2005 (as compared to December 31, 2004), the fixed maturities portfolio mix was as follows: U.S. Government securities were 14% (15% in 2004); state and municipal securities were 55% (54% in 2004); corporate securities were 10% (10% in 2004); mortgage-backed securities were 19% (18% in 2004); and foreign bonds were 2% in 2005 (3% in 2004).

The Company’s philosophy related to holding or selling fixed maturity securities is based on its objective of maximizing total return. The key factors that management considers in its investment decisions as to whether to hold or sell fixed maturity securities are its expectations regarding interest rates, credit spreads and currency values. In a period in which management expects interest rates to rise, the Company may sell longer duration securities in order to mitigate the impact of an interest rate rise on the market value of the portfolio. Similarly, in a period in which management expects credit spreads to widen, the Company may sell lower quality securities, and in a period in which management expects certain foreign currencies to decline in value, the Company may sell securities denominated in those foreign currencies. The sale of fixed maturity securities in order to achieve the objective of maximizing total return may result in realized gains; however, there is no reason to expect these gains to continue in future periods. During 2005 and 2004, management’s decisions to sell fixed maturity securities were based primarily on its belief that interest rates were likely to rise and to a lesser extent on its expectations regarding credit spreads and currency values.

Equity Securities Available for Sale.Equity securities available for sale primarily represent investments in common and preferred stocks of publicly traded banks, utilities and real estate investment trusts.

Equity Securities Trading Account.The trading account is comprised of direct investments in arbitrage securities and investments in arbitrage-related limited partnerships that specialize in merger arbitrage and convertible arbitrage strategies. Merger arbitrage is the business of investing in the securities of publicly held companies that are the targets in announced tender offers and mergers. Convertible arbitrage is the business of investing in convertible securities with the goal of

capitalizing on price differentials between these securities and their underlying equities.

Investments in Affiliates.At June 30, 2005 (as compared to December 31, 2004), investments in affiliates were as follows: equity in Kiln plc was $54 million ($51 million in 2004); real estate $136 million ($132 million in 2004); fixed income relative value funds were $45 million ($41 million in 2004); and other investments were $29 million ($17 million in 2004).

Securities in an Unrealized Loss Position.The following table summarizes, for all securities in an unrealized loss position at June 30, 2005 and December 31, 2004, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position (dollars in thousands):


					Gross
	Number of				unrealized
	securities		Fair value		loss
June 30, 2005
Fixed maturities:
0 — 6 months		85	$	1,075,160	$	4,967
7 — 12 months		45		609,123		5,456
Over 12 months		87		670,655		12,796

Total		217	$	2,354,938	$	23,219


Equity securities available for sale:
0 — 6 months		19	$	104,492	$	1,767
7 — 12 months		2		596		114
Over 12 months		3		11,424		75

Total		24	$	116,512	$	1,956


December 31, 2004

Fixed maturities:
0 — 6 months		109	$	1,005,675	$	4,932
7 — 12 months		101		798,721		9,190
Over 12 months		65		189,239		4,245

Total		275	$	1,993,635	$	18,367


Equity securities available for sale:
0 — 6 months		4	$	1,448	$	82
7 — 12 months		2		26,319		667
Over 12 months		4		1,746		12

Total		10	$	29,513	$	761

At June 30, 2005, gross unrealized gains were $231 million, or 2% of total investments, and gross unrealized losses were $25 million, or less then one quarter percent of total investments. There were 137 securities, with an aggregate fair value of $1.3 billion and an aggregate unrealized loss of $18 million, that have been continuously in an unrealized loss position for more than six months. The decline in market value for these securities is primarily due to an increase in market interest rates. Management regularly reviews its investment portfolio to determine whether a decline in value as a result of deterioration in the financial position or future prospects of the issuer is considered to be other than temporary. A decline is value is considered to be other than temporary where there has been a sustained reduction in market value and there are no mitigating circumstances. If a decline in value is considered other than temporary, the Company reduces the carrying value of the security and reports a realized loss on its statement of income.

Liquidity and Capital Resources

Cash Flow.Cash flow provided from operating activities was $742 million in 2005 and $670 million in 2004. The increase in operating cash flow in 2005 was primarily due to a higher level of cash flow from investment income and underwriting activities (premium collections less paid losses and underwriting expenses) which was partially reduced by an increase in cash transfers to the arbitrage account ($75 million in 2005 compared with $50 million in 2004).

Financing Activity.At June 30, 2005, the Company’s had senior notes, junior subordinated debentures and other debt outstanding with a carrying value of $1,175 million and a face amount of $1,187 million. The maturities of the outstanding debt are $100 million in 2006, $89 million in 2008, $150 million in 2010, $200 million in 2013, $200 million in 2015, $150 million in 2019, $76 million in 2022, $12 million in 2023 and $210 million in 2045.

At June 30, 2005, stockholders’ equity was $2,361 million and total capitalization (stockholders’ equity, senior notes and other debt and junior subordinated debentures) was $3,537 million. The percentage of the Company’s capital attributable to senior notes and other debt and junior subordinated debentures was 33% at June 30, 2005, and 33% at December 31, 2004.

Acquisitions.On June 30, 2005, the Company purchased all of the minority interest in its subsidiary, Berkley International, LLC, from a subsidiary of The Northwestern Mutual Life Insurance Company. The purchase price was $28 million, of which approximately $7 million represents goodwill.

Item 3.Quantitative and Qualitative Disclosure About Market Risk

The Company’s market risk generally represents the risk of loss that may result from the potential change in the fair value of the Company’s investment portfolio as a result of fluctuations in prices, interest rates and currency exchange rates. The Company attempts to manage its interest rate risk by maintaining an appropriate relationship between the average duration of its investment portfolio and the approximate duration of its liabilities, i.e., policy claims and debt obligations.

The duration of the investment portfolio increased to 3.7 years at June 30, 2005 from 3.2 years at December 31, 2004. The overall market risk relating to the Company’s portfolio has remained similar to the risk at December 31, 2004.

Item 4.Controls and Procedures

Disclosure Controls and Procedures . The Company’s management, including its Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14 as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company has in place effective controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act and the rules there under, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

Changes in Internal Control over Financial Reporting. During the quarter ended June 30, 2005, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1.Legal Proceedings

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

On May 10, 2005, the Company issued 1,000 shares of its common stock to each of its nine continuing directors (9,000 shares in the aggregate). The shares were issued as a portion of annual director’s fees pursuant to the terms of the Company’s 1997 Director Stock Plan, as amended and restated as of May 3, 2005. The shares were not registered under the Securities Act of 1933 in reliance on the exemption provided in Section 4(2) thereof for transactions not involving a public offering.

Set forth below is a summary of the shares repurchased by the Company during the quarter and the number of shares remaining authorized for purchase by the Company.

Maximum number of

Total

Total number of shares

shares that may

number of

Average price

purchased as part of

yet be purchased

paid per

publicly announced plans

under the plans or

purchased

or programs

programs (1)

April 2005

—

2,683,125

May 2005

—

2,683,125

June 2005

—

2,683,125


(1)		Remaining shares available for repurchase under the Company’s repurchase authorization that was approved by the Board of Directors on November 10, 1998.

Item 4.Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting of Stockholders on May 10, 2005. The meeting involved the election of three directors for a term to expire at the Annual Meeting of Stockholders to be held in the year 2008; and the ratification of the appointment of KPMG LLP as the Company’s independent registered public accounting firm for the year 2005. The directors elected and the results of the voting are as follows:

(i) Election of Directors:


Nominee	Votes For		Votes Withheld

Rodney A. Hawes, Jr.		77,623,283		950,822

Jack H. Nusbaum		51,101,046		27,473,059

Mark L. Shapiro		75,720,530		2,853,575

(ii) Ratification of Auditors:


Votes For	Votes Against		Votes Abstained
78,105,273		444,001		24,831

Item 6.Exhibits

Number

(4.1)		Indenture, dated as of February 14, 2003, between the Company and The Bank of New York, as Trustee, relating to $200,000,000 principal amount of the Company’s 5.60% Senior Notes due 2015 (incorporated by reference to Exhibit 4.1 of the Company’s Annual Report on Form 10-K (File No. 1-15202) filed with the Commission on March 31, 2003)

(4.2)		Fourth Supplemental Indenture, dated as of May 9, 2005, between the Company and The Bank of New York, as Trustee, relating to $200,000,000 principal amount of the Company’s 5.60% Senior Notes due 2015, including form of the Notes as Exhibit A.

(4.3)		Amended and Restated Trust Agreement of W. R. Berkley Capital Trust II, dated as of July 26, 2005

(4.4)		Subordinated Indenture between W. R. Berkley Corporation and The Bank of New York, as Trustee, dated as of July 26, 2005.

(4.5)		Supplemental Indenture No. 1 to the Subordinated Indenture between W. R. Berkley Corporation and The Bank of New York, as Trustee, dated as of July 26, 2005, relating to 6.750% Subordinated Debentures Due 2045.

(4.6)		Preferred Securities Guarantee Agreement between W. R. Berkley Corporation, as Guarantor, and The Bank of New York, as Preferred Guarantee Trustee, dated as of July 26, 2005, relating to W. R. Berkley Capital Trust II.

(10.1)		W. R. Berkley Corporation 1997 Directors Stock Plan, effective as of May 13, 1997, amended as of May 11, 1999, and amended and restated as of May 3, 2005.

(31.1)		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).

(31.2)		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).

(32.1)		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.


	W. R. BERKLEY CORPORATION
Date: August 2, 2005	/s/ William R. Berkley
	William R. Berkley
	Chairman of the Board and Chief Executive Officer


Date: August 2, 2005	/s/ Eugene G. Ballard
	Eugene G. Ballard
	Senior Vice President, Chief Financial Officer and Treasurer

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

W. R. Berkley (WRB) 10-Q2005 Q2 Quarterly report

Content analysis

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents