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

Industry Overview

The demand for insurance 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. 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 ultimate profitability because a property casualty insurance policy is priced before its costs are known, as premiums usually are determined long before claims are reported.

Critical Accounting Policies

The notes to the Company’s financial statements discuss its significant accounting policies. Management considers certain of these policies to be critical to the portrayal of the Company’s financial condition and results since they require management to establish estimates based on complex and subjective judgments, often including the interplay of specific uncertainties with related accounting measurements. The Company’s critical accounting policies include assumptions and estimates relating to loss reserves and foreign investments and operations, as further described below.

Reserves for losses and loss expenses We maintain reserves for losses and loss expenses to cover our estimated liability for unpaid claims, including legal and other fees as well as a portion of our general expenses, for reported and unreported claims incurred as of the end of each accounting period. Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what we expect the ultimate settlement and administration of claims will cost. These estimates, which generally involve actuarial projections, are based on our 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 our control. The variables described above are affected by both internal and external events, such as changes in claims handling procedures, inflation, judicial and litigation trends and legislative changes. Additionally, there may be a significant delay between the occurrence of the insured event and the time it is reported to us.

The inherent uncertainties of estimating reserves are greater for certain types of liabilities, where the various considerations affecting these types of claims are subject to change and long periods of time may elapse before a definitive determination of liability is made. Reserve estimates are continually refined in an ongoing process as experience develops and further claims are reported and settled. Adjustments to reserves are reflected in the results of the periods in which such estimates are changed. Because setting reserves is inherently uncertain, we cannot assure that our current reserves will prove adequate in light of subsequent events. Should we need to increase our reserves, our net income for the period will decrease by a corresponding amount.

Foreign investments and operations The Company has made certain assumptions and estimates with respect to its investments and operations in Argentina. These include assumptions regarding foreign currency exchange rates and recoverability of assets, including impairment of investments deemed other than temporary, following the recent economic and political changes in Argentina. Given the inherent uncertainty and complexity of the situation, considerable judgement was used by management to establish its estimates using all the information available. These estimates may change as more information becomes available. (See Note 20 of “Notes to Consolidated Financial Statements.”)

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Operating Results for the Year Ended
December 31, 2001 as Compared to the Year
Ended December 31, 2000

The Company reported a net loss of $92 million, or $3.14 per share, for 2001 compared with net income of $36 million, or $1.39 per share, for 2000. Following are the components of net income (loss) for the years ended December 31, 2001 and 2000 (amounts in thousands):

		2001			2000
Underwriting loss		$	(277,687	)	$	(122,585	)
Insurance services			9,964			6,326
Net investment income			195,021			210,448
Interest expense and other			(64,002	)		(59,852	)
Restructuring charge			(3,196	)		(1,850	)
	Pretax income (loss) before realized investment gains (losses)		(139,900	)		32,487
Realized investment gains (losses)			(11,494	)		8,364
Income tax benefit (expense) and minority interest			59,848			(4,613	)
	Net income (loss)	$	(91,546	)	$	36,238

During 2001, the Company discontinued its regional personal lines business and the alternative markets division of its reinsurance segment. The after-tax loss related to the discontinued businesses was $87 million, or $2.98 per share, for the year ended 2001 compared with $6 million, or 25 cents per share, for 2000. These discontinued businesses are now being managed and reported collectively as a separate Discontinued Business Segment. Segment information for the prior period has been restated to reflect these changes. The Company expects the Discontinued Business Segment to report a significant reduction in premiums and underwriting losses in 2002.

Underwriting Gross and net premiums written increased by 22% and 23%, respectively, in 2001 compared with the earlier-year period. Following is a summary of gross and net premiums written by business segment for the years ended December 31, 2001 and 2000 (amounts in thousands):

Gross Premiums Written		2001		2000		% Change
Specialty		$	611,364	$	407,545		50	%
Alternative Markets			169,439		108,802		56	%
Reinsurance			332,382		323,846		3	%
Regional			705,001		579,890		22	%
International			170,600		143,523		19	%
Discontinued Business			219,680		253,149		(13	%)
	Total	$	2,208,466	$	1,816,755		22	%

Net Premiums Written		2001		2000		% Change
Specialty		$	527,502	$	285,525		85	%
Alternative Markets			151,942		98,001		55	%
Reinsurance			236,784		276,640		(14	%)
Regional			598,149		499,526		20	%
International			150,090		118,981		26	%
Discontinued Business			193,629		227,571		(15	%)
	Total	$	1,858,096	$	1,506,244		23	%

The increase in gross premiums written reflects primarily higher prices as well as an increase in new business. The increase was partially offset by a planned reduction in pro rata treaty reinsurance business. Ceded premiums written, expressed as a percentage of gross premiums written, decreased to 16% from 17% in the prior year. The decrease reflects higher net retentions for the specialty segment, partially offset by additional premiums ceded by the reinsurance segment under the Company’s aggregate reinsurance agreement. (See Note 9 of “Notes to Consolidated Financial Statements.”)

Underwriting results represent net premiums earned less net loss and loss adjustment expenses incurred and underwriting expenses incurred. Underwriting losses increased to $278 million for the year ended December 31, 2001 compared with $123 million for the earlier-year period. Following is a summary of earned premiums and underwriting losses by business segment for the years ended December 31, 2001 and 2000 (amounts in thousands):

Net Premiums Earned		2001		2000
Specialty		$	401,611		270,896
Alternative Markets			123,173		88,872
Reinsurance			236,385		298,102
Regional			555,750		503,029
International			140,909		107,285
Discontinued Business			222,641		222,830
	Total	$	1,680,469	$	1,491,014

Underwriting Loss		2001			2000
Specialty		$	(10,233	)		(18,425	)
Alternative Markets			(11,574	)		(7,907	)
Reinsurance			(97,251	)		(19,123	)
Regional			(12,533	)		(53,537	)
International			(2,854	)		(4,095	)
Discontinued Business			(143,242	)		(19,498	)
	Total	$	(277,687	)	$	(122,585	)

W. R. BERKLEY CORPORATION AND SUBSIDIARIES     23

The 2001 underwriting loss reflects the following items:

• During 2001, we strengthened loss reserves by $135 million, including $103 million for the discontinued alternative markets reinsurance business and $32 million for the treaty reinsurance business. The increase relates primarily to underwriting years 1998 and 1999 and follows a significant increase in losses reported by ceding companies in the third and fourth quarter.

• Estimated losses related to the World Trade Center attack were $35 million, including $26 million for the reinsurance segment and $9 million for the specialty segment. This represents our estimated maximum retention for property and business interruption coverage and our estimated policy limits on risks exposed to casualty losses.

• The reinsurance segment recorded a reserve of $18 million for potential surety losses related to the Enron bankruptcy.

• The specialty and regional underwriting results reflect improvements from pricing actions and other underwriting initiatives.

• Weather-related losses for active business segments (primarily regional business) were $37 million for 2001 compared with $31 million for 2000. For the discontinued personal lines business, weather-related losses were $24 million for 2001 compared with $18 million for 2000.

• The reinsurance underwriting results reflect loss recoveries under the Company’s aggregate reinsurance agreement. (See Note 9 of “Notes to Consolidated Financial Statements.”)

Insurance services Insurance services income represents service fees less related costs and expenses for the insurance services business. Insurance fees increased 11% to $76 million in 2001 as a result of new accounts and higher revenues on existing accounts, and service fee income increased 58% to $10 million.

Net investment income Net investment income decreased to $195 million in 2001 from $210 million in 2000. Average invested assets were $3,272 million in 2001 compared with $3,032 million in 2000. The increase in invested assets reflects proceeds received from stock issuance and cash flow from operations. (See “Liquidity and Capital Resources.”) The average yield on investments decreased 100 basis points in 2001 to 6.3%. The lower yield in 2001 reflects a decrease in the average yield on the merger arbitrage securities (which represents approximately 13% of the investment portfolio) to 4.2% in 2001 from 11.1% in 2000. Among other factors, merger arbitrage yields in 2001 were impacted by the recession, lower interest rates and fewer merger transactions. The average yield on the portfolio excluding the merger arbitrage portfolio was 6.7% in 2001 and 2000.

Interest expense and other Interest expense and other represents interest expense, corporate expenses and other miscellaneous income and expenses. Interest expense decreased $2 million in 2001 due to a reduction in long-term and short-term debt. Other expenses increased $6 million in 2001 due to an increase in corporate general and administrative expenses, including costs associated with InsurBanc, the Company’s joint venture with the Independent Insurance Agents of America.

Restructuring charge The restructuring charge of $3 million for 2001 was related to severance and other costs incurred in connection with the withdrawal from the regional personal lines business and the reorganization of certain other operations. The restructuring charge of $2 million for 2000 was related to severance and other costs incurred in connection with the reorganization of the reinsurance business.

Realized investment gains (losses) Realized investment gains and losses result from sales of securities and for provisions for other than temporary impairment in securities. In the fourth quarter 2001, the Company reduced the carrying value of certain bond holdings by $27 million, including those held directly by our by a subsidiary in Argentina by $18 million ($7 million net of income taxes and minority interest). (See Note 20 of “Notes to Consolidated Financial Statements.”)

Income tax benefit (expense) and minority interest The effective income tax rate was 37% in 2001 and 6% in 2000. The effective tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income. Tax-exempt investment income increased the tax benefit in 2001 and decreased the tax expense in 2000. Minority interest represents the portion of the Company’s international operations held by outside investors.

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Operating Results for the Year Ended
December 31, 2000 as Compared to the Year
Ended December 31, 1999

The Company reported net income of $36 million, or $1.39 per share, for 2000 compared with a net loss of $37 million, or $1.44 per share, for 1999. Following are the components of net income (loss) for the years ended December 31, 2000 and 1999 (amounts in thousands):

		2000			1999
Underwriting loss		$	(122,585	)	$	(187,863	)
Insurance services			6,326			1,161
Net investment income			210,448			190,316
Interest expense and other			(59,852	)		(65,293	)
Restructuring charge			(1,850	)		(11,505	)
	Pretax income (loss) before realized investment gains (losses)		32,487			(73,184	)
Realized investment gains (losses)			8,364			(6,064	)
Income tax benefit (expense), minority interest and other			(4,613	)		42,188
	Net income (loss)	$	36,238		$	(37,060	)

Underwriting Gross and net premiums written increased by 5% and 6%, respectively, for 2000, compared with the earlier-year period. Following is a summary of gross and net premiums written by business segment for the years ended December 31, 2000 and 1999 (amounts in thousands):

Gross Premiums Written		2000		1999		% Change
Specialty		$	407,545	$	386,449		5	%
Alternative Markets			108,802		83,167		31	%
Reinsurance			323,846		341,281		(5	%)
Regional			579,890		595,396		(3	%)
International			143,523		107,254		34	%
Discontinued Business			253,149		221,342		14	%
	Total	$	1,816,755	$	1,734,889		5	%

Net Premiums Written		2000		1999		% Change
Specialty		$	285,525	$	260,380		10	%
Alternative Markets			98,001		73,089		34	%
Reinsurance			276,640		309,180		(11	%)
Regional			499,526		497,041		1	%
International			118,981		86,172		38	%
Discontinued Business			227,571		201,857		13	%
	Total	$	1,506,244	$	1,427,719		6	%

The increase in gross premiums written reflects an increase in new business, partially offset by a decrease in reinsurance premiums as a result of the business restructuring implemented in the first quarter of 2000. Ceded premiums written, expressed as a percentage of gross premiums written, decreased to 17% from 18% in the prior year.

Underwriting losses decreased to $123 million in the year ended December 31, 2000 compared with $188 million in the earlier-year period. Following is a summary of earned premiums and underwriting results by business segment for the years ended December 31, 2000 and 1999 (amounts in thousands):

Net Premiums Earned		2000		1999
Specialty		$	270,896	$	256,155
Alternative Markets			88,872		75,979
Reinsurance			298,102		297,649
Regional			503,029		492,304
International			107,285		86,943
Discontinued Business			222,830		205,354
	Total	$	1,491,014	$	1,414,384

Underwriting Loss		2000			1999
Specialty		$	(18,425	)	$	(8,162	)
Alternative Markets			(7,907	)		(5,553	)
Reinsurance			(19,123	)		(27,872	)
Regional			(53,537	)		(121,083	)
International			(4,095	)		(2,591	)
Discontinued Business			(19,498	)		(22,602	)
	Total	$	(122,585	)	$	(187,863	)

The increase in specialty and alternative markets underwriting losses reflects a decline in favorable prior year reserve development. The decrease in regional underwriting losses reflects the impact of pricing actions and other underwriting initiatives. Also, during 1999, the regional segment established additional loss reserves of $55 million. Weather-related losses were $49 million in 2000 compared with $60 million in 1999, including $18 million and $22 million, repectively, for the Discontinued Business Segment.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES     25

Insurance services Insurance services income represents service fees less related costs and expenses for the insurance services business. Insurance service fees decreased 6% to $68 million in 2000 principally due to the sale of All American Agency Facilities, Inc. (See Note 3 of “Notes to Consolidated Financial Statements.”)

Net investment income The increase in net investment income of 11% reflects an increase in the gross pre-tax yield to 7.3% in 2000 from 6.5% in 1999, primarily as a result of changes in asset allocations.

Interest expense and other Interest expense and other represents interest expense, corporate expenses, and other miscellaneous income and expenses. Interest expense decreased $3 million in 2000 due to a reduction in outstanding long-term and short-term debt.

Restructuring charge The restructuring charge in 2000 related to the reorganization of the reinsurance operations. The restructuring charge in 1999 related primarily to the reorganization of regional operations.

Realized investment gains (losses) Realized investment gains and losses result from sales of securities and provisions for other than temporary impairment of securities. The Company reported higher gains on equity sales and lower impairment charges in 2000 compared with 1999.

Income tax benefit (expense), minority interest and other The effective income tax rate differs from the federal income tax rate of 35% principally because of tax-exempt investment income. Minority interest represents the portion of the Company’s international operations held by outside investors. Other items in 1999 include preferred dividends of $0.5 million, an expense of $3.3 million for the cumulative effect of a change in accounting principle and an extraordinary gain on early extinguishments of long-term debt of $0.7 million.

Liquidity and Capital Resources

Cash Flow Cash flow provided from operating activities (before increase in trading account securities) was $210 million in 2001, $76 million in 2000 and $82 million in 1999. The increase in cash flow in 2001 was primarily due to a higher level of premium collections.

As a holding company, the Company derives cash from its subsidiaries in the form of dividends, tax payments and management fees. The Company uses cash to pay debt service, Federal income taxes, operating expenses and dividends. The Company also provides capital to its subsidiaries. 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 paid without regulatory approval are prescribed by statute. (See Note 18 of “Notes to Consolidated Financial Statements.”)

The Company’s subsidiaries are highly liquid, receiving substantial cash from premiums, investment income, service fees and proceeds from sales and maturities of portfolio investments. The principal outflows of cash are payments of claims, taxes, operating expenses and dividends.

Financing Activity During 2001, the Company issued 7.6 million shares of its common stock and received net proceeds of $341 million in connection with two public stock offerings and the exercise of stock options. The Company purchased 300,000 shares of its common stock in 2000 for approximately $7 million and 905,000 shares of its common stock in 1999 for approximately $22 million. At December 31, 2001, 795,000 shares were available for repurchase under the Company’s repurchase authorization.

The Company repaid $25 million (face value) of senior notes upon maturity in 2000. In 1999, the Company redeemed all outstanding Series A Preferred Stock for $98 million and repurchased $10 million (face value) of trust preferred securities for $8.8 million.

In February 2002, the Company entered into a one year unsecured bank credit facility which provides for borrowing up to $25 million. The facility replaces a previous bank facility that expired in December 2001.

At December 31, 2001, the Company’s outstanding long-term debt was $374 million (face amount), of which $8 million was repaid in January 2002. The maturities of the remaining debt are $61 million in 2003, $40 million in 2005, $100 million in 2006, $89 million in 2008 and $76 million in 2022. The Company also has $200 million (face amount) of trust preferred securities that mature in 2045.

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At December 31, 2001, stockholders’ equity was $932 million and total capitalization (stockholders’ equity, long-term debt and trust preferred securities) was $1,500 million. The percentage of the Company’s capital attributable to long-term debt decreased to 25% at December 31, 2001 from 30% at December 31, 2000.

Investments As part of 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. 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 as of December 31, 2001 and 2000 is as follows (amounts in millions):

		2001		2000
Fixed maturities and invested cash		$	2,980	$	2,580
Equity securities available for sale			109		84
Equity securities trading account(a)			509		448
	Total	$	3,598	$	3,112

(a) Represents trading account equity securities plus trading account receivables from brokers and clearing organizations less trading account equity securities sold but not yet purchased.

Fixed maturities and invested cash 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 a result of changes in financial market conditions and tax considerations. At December 31, 2001, the fixed maturities portfolio mix was as follows: U.S. Government securities and cash equivalents were 35% (31% in 2000); state and municipal securities were 20% (24% in 2000); corporate securities were 19% (18% in 2000); mortgage- backed securities were 22% (22% in 2000); and foreign bonds were 4% (5% in 2000).

Equity securities available for sale Equity securities available for sale represent primarily investments in common and preferred stocks of publicly traded real estate investment trusts (REITs).

Equity securities trading account The equity securities trading account is comprised of merger arbitrage securities, which represent 92% of the trading account securities, and convertible arbitrage securities. Merger arbitrage is the business of investing in the securities of publicly held companies which 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.

Market Risk The Company’s market risk generally represents the risk of gain or 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 and interest rates. In addition, the Company’s international businesses and securities are subject to currency exchange rate risk. As discussed above, the Company attempts to manage its interest rate risk by maintaining 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 principal market risk for the Company’s fixed maturity securities is interest rate risk. The Company uses various models and stress test scenarios to monitor and manage interest rate risk. The following table outlines the groups of fixed maturity securities and the components of the interest rate risk:

		Market			Effective		Fair Value
Group		Yield			Duration		(000's)
Invested cash			1.83	%		.15	$	524,554
U. S. Government securities			4.31	%		4.75		526,623
State and municipal			4.85	%		6.60		600,560
Corporate			6.42	%		5.30		563,933
Foreign			10.88	%		4.94		111,547
Mortgage-backed securities			6.14	%		5.41		664,222
	Total		5.03	%		4.76	$	2,991,439

Duration is a common gauge of the price sensitivity of a fixed income portfolio to a change in interest rates. Based upon a pricing model, the Company determines the estimated change in fair value of the

W. R. BERKLEY CORPORATION AND SUBSIDIARIES     27

fixed maturity securities, assuming immediate parallel shifts in the treasury yield curve while keeping spreads between individual securities and treasury securities static. The fair value at specified levels at December 31, 2001 would be as follows:

	Estimated Fair		Estimated
	Value of Financial		Change in
	Instruments		Fair Value
Change in interest rates	(000's)		(000's)
300 basis point rise	$	2,613,663	$	(377,776	)
200 basis point rise		2,733,327		(258,112	)
100 basis point rise		2,861,934		(129,505	)
Base scenario		2,991,439		—
100 basis point decline		3,112,840		121,401
200 basis point decline		3,239,301		247,862
300 basis point decline		3,384,976		393,537

The estimated changes in fair value, based upon the above table, would be partially offset by the Company’s liabilities if they were marked to market.

Arbitrage investing 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 arbitrage investments less vulnerable to changes in general stock market conditions. Potential changes in market conditions are also mitigated by the implementation of hedging strategies, including short sales. Additionally, the arbitrage positions are generally hedged against market declines by purchasing put options, selling call options or entering into swap contracts. The Company’s merger arbitrage securities are primarily exposed to the completion of announced deals, which are subject to regulatory as well as political and other risks.

The Company’s international businesses and securities are subject to foreign currency risk. In order to mitigate foreign currency risks, the foreign subsidiaries maintain investments in U. S. Dollar-denominated securities in an amount that approximates the Company’s investment in such subsidiaries. (See “International Operations.”)

Federal and Foreign Income Taxes

The Company files a consolidated income tax return in the U.S. and foreign tax returns in the countries of its overseas operations. At December 31, 2001, the Company had a deferred tax asset, net of valuation allowance, of $217 million (which primarily relates to loss reserves, unearned premium reserves, a net operating loss carryforward and an alternative minimum tax credit carryforward) and a deferred tax liability of $118 million (which primarily relates to deferred policy acquisition costs, unrealized investment gains and intangible assets). 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 future operations, management anticipates that it is more likely than not that future taxable income will be sufficient for the realization of this asset.

Reinsurance

The Company follows the customary industry practice of reinsuring a portion of its exposures, paying to reinsurers a part of the premiums received on the policies it writes. Reinsurance is purchased principally to reduce net liability on individual risks and to protect against catastrophic losses. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policies, it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance coverage. The Company monitors the financial condition of its reinsurers and attempts to place its coverages only with substantial, financially sound carriers.

During 2001, the Company entered into a multi-year aggregate reinsurance agreement that provides two types of reinsurance coverage. The first type of coverage provides protection for individual losses on an excess of loss or quota share basis, as specified for each class of business covered by the agreement. The second type of coverage provides aggregate accident year protection for our reinsurance segment for loss and loss adjustment expenses incurred above a certain level. Loss recoveries are subject to annual limits and an aggregate limit over the contract period. Under the aggregate reinsurance agreement, the largest net amount retained on any one risk is $5 million for professional liability risks, $2 million for excess workers’ compensation risks, up to $1 million for all other primary property casualty risks and $3 million for facultative reinsurance risks.

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For its primary business, the Company also maintains group catastrophe reinsurance that provides protection for losses up to $49 million in excess of $6 million and contingency clash reinsurance that provides protection for losses up to $17.2 million in excess of $2 million. For its assumed reinsurance business, the Company’s property catastrophe losses are reinsured for losses up to $3 million above $7 million. Additional catastrophe coverage is maintained for losses above $10,000 up to $5 million in the event industry catastrophe losses exceed $17.25 billion in California or $10 billion in states other than California. Retrocessional and whole account proportional reinsurance is written net of common account reinsurance protection.

International Operations

The Company owns 65% of Berkley International, LLC, which conducts insurance operations in Argentina and the Philippines. The international activities are reported in the Company’s financial statements on a one quarter lag to facilitate the timely completion of the consolidated financial statements. During 2001, Argentina experienced substantial political and economic problems, including high unemployment, increasing fiscal deficits and declining central bank reserves. The government responded to these problems by converting certain public bonds into guaranteed loans with longer maturities and lower interest rates, abandoning the fixed dollar-to-peso exchange rate and imposing various currency restrictions. It is likely that there will be further changes to Argentine economic and monetary policies in 2002.

Following an analysis of the impact of these changes on its operations and financial statements, the Company reduced the carrying value of its Argentine public bonds from $58 million to $40 million, resulting in a realized investment loss of $18 million, or $7 million net of income taxes and minority interest. In addition, under recent government rulings, it is likely that dollar denominated commercial transactions in Argentina will be converted to pesos at exchange rates that are based on market rates at the time of settlement or on government rulings that may require the use of mandated exchange rates for certain transactions. The Company’s assets held in Argentina were approximately equal to its Argentine liabilities. As of December 31, 2001, the Argentine subsidiaries held investments of approximately $44 million that are held outside of Argentina and not exposed to Argentine credit or currency risk.

As of December 31, 2001, after the reduction in the carrying value of Argentine bonds in the fourth quarter of 2001, the Company’s capital investment in Argentina was $46 million ($30 million net of minority interest), of which approximately $33 million is invested in the non-life insurance business and approximately $13 million is invested in the life insurance business. Income before income taxes, realized losses and minority interest for the Company’s operations in Argentina was $10 million for the year ended December 31, 2001. As a result of the recent developments, management expects the Argentine operations to undergo substantial changes. This is likely to include a decline in investment income as a result of lower interest on bonds and the surrender of all or substantially all life insurance policies-in-force.

Recent Developments

Effective January 1, 2002, the Company entered into quota share reinsurance contracts with MAP Capital Limited, a Lloyd’s corporate member, and two Lloyd’s syndicates managed by Kiln plc. MAP Capital Limited and the Lloyd’s syndicates are expected to underwrite, on a worldwide basis, a broad range of mainly short-tail classes of business.

The Company recently announced the formation of Berkley Medical Excess Underwriters, LLC and Berkley Capital Underwriters, LLC. Berkley Medical Excess Underwriters will offer excess coverage for healthcare providers that are either self-insured or maintain their own captive facilities and reinsurance coverage for primary insurance companies that provide medical malpractice coverage to physicians and other commercial healthcare providers. Berkley Capital Underwriters will offer a proportional form of reinsurance for both domestic and international insurance operations with a strong emphasis on commercial and specialty casualty lines of insurance. Berkley Capital Underwriters will complement the Company’s existing treaty operation, Signet Star Re, LLC, which primarily offers excess of loss treaty protection.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES     29

CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)

Years ended December 31,				2001			2000			1999
Revenues:
	Net premiums written			$	1,858,096		$	1,506,244		$	1,427,719
	Change in net unearned premiums				(177,627	)		(15,230	)		(13,335	)
			Premiums earned		1,680,469			1,491,014			1,414,384
	Net investment income				195,021			210,448			190,316
	Service fees				75,771			68,049			72,344
	Realized investment gains (losses)				(11,494	)		8,364			(6,064	)
	Other income				2,030			3,412			2,688
			Total revenues		1,941,797			1,781,287			1,673,668
Operating costs and expenses:
	Losses and loss expenses				1,380,500			1,094,411			1,085,826
	Other operating costs and expenses				663,776			596,579			604,784
	Interest expense				45,719			47,596			50,801
	Restructuring charges				3,196			1,850			11,505
			Total expenses		2,093,191			1,740,436			1,752,916
			Income (loss) before income taxes		(151,394	)		40,851			(79,248	)
Income tax benefit (expense)					56,661			(2,451	)		45,766
	Income (loss) before minority interest and preferred dividends				(94,733	)		38,400			(33,482	)
Minority interest					3,187			(2,162	)		(566	)
Preferred dividends					—			—			(497	)
	Net income (loss) before change in accounting and extraordinary gain				(91,546	)		36,238			(34,545	)
Cumulative effect of change in accounting principle (net of taxes)					—			—			(3,250	)
Extraordinary gain on early extinguishment of long-term debt (net of taxes)					—			—			735
			Net income (loss) attributable to common stockholders	$	(91,546	)	$	36,238		$	(37,060	)
Earnings (loss) per share:
	Basic
		Net income (loss) before change in accounting and extraordinary gain		$	(3.14	)	$	1.41		$	(1.35	)
		Cumulative effect of change in accounting principle (net of taxes)			—			—			(.12	)
		Extraordinary gain on early extinguishment of long-term debt			—			—			.03
			Net income (loss) attributable to common stockholders	$	(3.14	)	$	1.41		$	(1.44	)
	Diluted
		Net income (loss) before change in accounting and extraordinary gain		$	(3.14	)	$	1.39		$	(1.35	)
		Cumulative effect of change in accounting principle (net of taxes)			—			—			(.12	)
		Extraordinary gain on early extinguishment of long-term debt			—			—			.03
			Net income (loss) attributable to common stockholders	$	(3.14	)	$	1.39		$	(1.44	)

See accompanying notes to consolidated financial statements.

30

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)

December 31,			2001			2000
Assets
Investments:
	Invested cash		$	524,554		$	308,193
	Fixed maturity securities:
		Held to maturity, at cost (fair value $167,559 and $164,229)		156,464			156,067
		Available for sale, at fair value (cost $2,241,321 and $2,087,338)		2,299,326			2,115,824
	Equity securities, at fair value:
		Available for sale (cost $103,011 and $76,545)		109,114			83,823
		Trading account (cost $215,808 and $340,617)		213,878			347,271
Cash				9,533			938
Premiums and fees receivable				537,814			416,243
Due from reinsurers, net of funds withheld				716,398			713,392
Accrued investment income				35,926			36,578
Prepaid reinsurance premiums				103,667			99,444
Deferred policy acquisition costs				224,110			196,231
Real estate, furniture and equipment at cost, less accumulated depreciation				118,344			118,282
Deferred Federal and foreign income taxes				99,921			47,567
Excess of cost over net assets acquired				64,513			71,496
Trading account receivable from brokers and clearing organizations				351,707			269,444
Other assets				68,240			41,277
Total Assets			$	5,633,509		$	5,022,070
Liabilities and Stockholders’ Equity
Liabilities:
	Reserves for losses and loss expenses		$	2,817,682		$	2,533,917
	Unearned premiums			879,640			713,239
	Due to reinsurers			139,322			132,521
	Trading securities sold but not yet purchased, at fair value (proceeds $58,331 and $164,312)			56,990			169,020
	Short-term debt			—			10,000
	Other liabilities			215,220			182,273
	Long-term debt			370,554			370,158
Total Liabilities				4,479,408			4,111,128
Trust preferred securities				198,210			198,169
Minority interest				24,296			31,877
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 80,000,000 shares, issued and outstanding, net of treasury shares, 33,240,516 and 25,656,362 shares		8,661			7,281
	Additional paid-in capital			659,266			334,061
	Retained earnings			467,185			574,345
	Accumulated other comprehensive income			37,340			19,371
	Treasury stock, at cost, 10,063,328 and 10,747,482 shares			(240,857	)		(254,162	)
Total Stockholders’ Equity				931,595			680,896
Total Liabilities and Stockholders’ Equity			$	5,633,509		$	5,022,070

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES     31

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands, except per share data)

Years ended December 31, 2001, 2000 and 1999
					Preferred
					and common
					stock and						Accumulated
		Total			additional						other
		stockholders'			paid-in			Retained			comprehensive			Treasury
		equity			capital			earnings			income (loss)			stock
Balance, December 31, 1998		$	861,281		$	436,957		$	601,908		$	54,672		$	(232,256	)
	Net loss attributable to common stockholders		(37,060	)		—			(37,060	)		—			—
	Change in other comprehensive income (loss)		(99,172	)		—			—			(99,172	)		—
	Issuance of common shares		387			56			—			—			331
	Purchase of treasury stock		(22,119	)		—			—			—			(22,119	)
	Repurchase of preferred stock		(98,092	)		(98,092	)		—			—			—
	Dividends to common stockholders ($.52 per share)		(13,447	)		—			(13,447	)		—			—
Balance, December 31, 1999			591,778			338,921			551,401			(44,500	)		(254,044	)
	Net income attributable to common stockholders		36,238			—			36,238			—			—
	Change in other comprehensive income (loss)		63,871			—			—			63,871			—
	Issuance of common shares		9,323			2,421			—			—			6,902
	Purchase of treasury stock		(7,020	)		—			—			—			(7,020	)
	Dividends to common stockholders ($.52 per share)		(13,294	)		—			(13,294	)		—			—
Balance, December 31, 2000			680,896			341,342			574,345			19,371			(254,162	)
	Net loss attributable to common stockholders		(91,546	)		—			(91,546	)		—			—
	Change in other comprehensive income (loss)		17,969			—			—			17,969			—
	Issuance of common shares		340,892			326,585			—			—			14,307
	Purchase of treasury stock		(1,002	)		—			—			—			(1,002	)
	Dividends to common stockholders ($.52 per share)		(15,614	)		—			(15,614	)		—			—
Balance, December 31, 2001		$	931,595		$	667,927		$	467,185		$	37,340		$	(240,857	)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)

		2001			2000			1999
Net income (loss) attributable to common stockholders		$	(91,546	)	$	36,238		$	(37,060	)
Other comprehensive income (loss)
	Unrealized holding gains (losses) on investment securities arising during the period, net of taxes of ($7,328), ($37,762) and $55,491		15,299			70,129			(103,055	)
	Less: Reclassification adjustment for realized (gains) losses included in net income (loss)		2,887			(5,436	)		3,942
Net change in unrealized gains (losses) during the period			18,186			64,693			(99,113	)
	Change in unrealized foreign exchange (losses)		(217	)		(822	)		(59	)
	Other comprehensive income (loss)		17,969			63,871			(99,172	)
	Comprehensive income (loss)	$	(73,577	)	$	100,109		$	(136,232	)

See accompanying notes to consolidated financial statements.

32

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

Years ended December 31,				2001			2000			1999
Cash flows (used in) provided by operating activities:
	Net income (loss) before minority interest, preferred dividends and extraordinary items			$	(94,733	)	$	38,400		$	(36,732	)
	Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
		Increase in reserves for losses and loss expenses, net of due to/from reinsurers			336,141			69,417			141,718
		Depreciation and amortization			17,625			21,700			23,598
		Change in unearned premiums and prepaid reinsurance premiums			178,505			14,974			13,490
		Change in premiums and fees receivable			(153,175	)		(35,356	)		(3,386	)
		Change in Federal and foreign income taxes			(71,142	)		2,138			(34,289	)
		Change in deferred policy acquisition costs			(40,882	)		(13,883	)		(12,457	)
		Realized investment (gains) losses			11,494			(8,364	)		6,064
		Other, net			26,084			(12,692	)		(15,959	)
			Net cash provided by operating activities before increase in trading account securities		209,917			76,334			82,047
	Increase in trading account securities				(57,973	)		(89,609	)		(32,978	)
			Net cash (used in) provided by operating activities		151,944			(13,275	)		49,069
Cash flows provided by (used in) investing activities:
	Proceeds from sales, excluding trading account:
		Fixed maturity securities available for sale			532,861			725,961			594,993
		Equity securities			64,038			48,079			17,200
	Proceeds from maturities and prepayments of fixed maturity securities				189,961			142,636			147,668
	Cost of purchases, excluding trading account:
		Fixed maturity securities available for sale			(933,084	)		(773,804	)		(695,928	)
		Equity securities			(82,509	)		(70,988	)		(14,397	)
	Proceeds (cost) of acquired/sold companies, net of acquired cash and invested cash				3,215			2,187			(1,533	)
	Net additions to real estate, furniture and equipment				(22,076	)		(7,529	)		(8,127	)
	Other, net				11,303			1,176			(435	)
			Net cash provided by (used in) investing activities		(236,291	)		67,718			39,441
Cash flows provided by (used in) financing activities:
	Net proceeds from stock offering				315,840			—			—
	Net proceeds from stock options exercised				25,052			9,324			783
	Repurchase of long-term debt				—			(25,000	)		—
	Net change in short-term debt				(10,000	)		(25,000	)		(20,500	)
	Cash dividends to common stockholders				(14,707	)		(12,701	)		(13,888	)
	Purchase of common treasury shares				(1,002	)		(7,020	)		(22,119	)
	Other, net				(5,880	)		(389	)		5,277
	Repurchase of preferred stock				—			—			(98,092	)
	Repurchase of trust preferred securities				—			—			(8,774	)
	Cash dividends to preferred stockholders				—			—			(2,001	)
			Net cash provided by (used in) financing activities		309,303			(60,786	)		(159,314	)
Net increase (decrease) in cash and invested cash					224,956			(6,343	)		(70,804	)
Cash and invested cash at beginning of year					309,131			315,474			386,278
Cash and invested cash at end of year				$	534,087		$	309,131		$	315,474
Supplemental disclosure of cash flow information:
	Interest paid on debt			$	45,241		$	48,053		$	50,801
	Federal income taxes (received) paid			$	10,644		$	(1,079	)	$	(12,973	)

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES     33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2001, 2000 and 1999

(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 accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany transactions and balances have been eliminated. Reclassifications have been made in the 2000 and 1999 financial statements to conform them to the presentation of the 2001 financial statements. 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. The international segment’s activities are reported in the Company’s financial statements on a one quarter lag to facilitate the timely completion of the consolidated financial statements.

(B)  Revenue recognition

Insurance premiums written are recognized as earned generally on a pro-rata basis over the policy period. Service fees on insurance service contracts are recorded as earned primarily on a pro-rata basis over the contract period.

(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 component of comprehensive income (loss) and a separate component of stockholders’ equity. Fair value is generally determined using published market values.

Realized gains or losses represent the difference between the cost of securities sold and the proceeds realized upon sale. The cost of securities is adjusted where appropriate to include a provision for significant decline in value which is considered to be other than temporary. The Company uses the specific identification method where possible, and the first-in, first-out method in other instances, to determine the cost of securities sold. Realized gains or losses, including any provision for decline in value, are included in the statement of operations.

(D)  Trading account

Equity securities purchased (long portfolio positions and investment funds) are presented in the balance sheet as trading account assets. Equity securities sold but not yet purchased (short sales and short call options) are presented as trading securities sold but not yet purchased. Unsettled trades and the net margin balances held by the clearing broker are presented as trading account receivable from brokers and clearing organizations. The Company’s trading account portfolio is recorded at fair value. Realized and unrealized gains and losses from trading activity are reported as net investment income.

(E)  Per share data

Basic per share data is based upon the weighted average number of shares outstanding during the year. Diluted per share data reflects the potential dilution that would occur if employee stock-based compensation plans were exercised. Shares issued in connection with loans to shareholders are not considered to be outstanding for the purposes of calculating basic per share amounts. The related amounts due from shareholders are excluded from stockholders’ equity.

(F)  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.

(G)  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 opera-

34

tions in the period in which they are determined. The Company discounts its reserves for excess and assumed workers’ compensation claims using a risk-free or statutory rate. (See Note 16 of Notes to Consolidated Financial Statements.)

(H)  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 Company must discharge the liability. Amounts due from reinsurers are reflected net of funds held where the right of offset is present. The Company has provided reserves for uncollectible reinsurance.

(I)  Excess of cost over net assets acquired

Costs in excess of the net assets of subsidiaries acquired are being amortized on a straight-line basis over 25 to 40 years. The Company continually evaluates the amortization period of its intangible assets. Estimates of useful lives are revised when circumstances or events indicate that the original estimate is no longer appropriate. Amortization and adjustments of the excess of cost over net assets acquired were $4,906,000, $4,036,000 and $3,866,000 for 2001, 2000 and 1999, respectively.

(J)  Federal and foreign income taxes

The Company files a consolidated income tax return in the U.S. and foreign tax returns in the countries of its overseas operations.

The Company’s method of accounting for income taxes is the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are measured using tax rates currently in effect or expected to apply in the years in which those temporary differences are expected to reverse.

(K)  Stock options

The Company uses the intrinsic-value method of accounting for stock-based awards granted to employees and, accordingly, does not recognize compensation expense for its stock-based awards to employees. (See Note 10 of Notes to Consolidated Financial Statements.)

(L)  Foreign currency

Revenues and expenses in foreign currencies are translated at the weighted average exchange rate during the year. Assets and liabilities are translated at the rate of exchange in effect at the close of the period. Unrealized gains or losses (losses of $4,391,000 and $4,174,000 as of December 31, 2001 and 2000, respectively) resulting from translating foreign currency financial statements are reported as a component of common stockholders’ equity. Gains ($88,000, $775,000 and $1,543,000 for 2001, 2000 and 1999, respectively) resulting from foreign currency transactions (transactions denominated in a currency other than the entity’s functional currency) are included in the statement of operations.

(M)  Real estate, furniture and equipment

Real estate, furniture and equipment are carried at cost less accumulated depreciation. Depreciation is calculated using the estimated useful lives of the respective assets. Depreciation expense was $16,349,000, $17,704,000 and $16,291,000 for 2001, 2000 and 1999, respectively.

(N)  Comprehensive Income (loss)

Comprehensive income (loss) encompasses all changes in stockholders’ equity (except those arising from transactions with stockholders) and includes net income, net unrealized capital gains or losses on available-for-sale securities and unrealized foreign currency translation adjustments.

(O)  Insurance Related Assessments

As of January 1, 1999, the Company adopted the American Institute of Certified Public Accountants (AICPA) Statement of Position (“SOP”) 97-3, “Accounting by Insurance and Other Enterprises for Insurance Related Assessments.” This statement provides guidance for determining when an entity should recognize liabilities for guarantee fund and other insurance related assessments, how to measure those liabilities and when an asset may be recognized for the recovery of such assessments through premium tax offsets or policy surcharges. The adoption of this statement resulted in an after tax charge of $3,250,000 for the year ended December 31, 1999, which was reflected as a cumulative effect of a change in accounting principle.

(P)  Recent accounting pronouncements

During 2001, the Company adopted FAS 133, “Accounting for Derivative Instruments and Hedging Activities,” which establishes accounting and reporting standards for derivative instruments. The adoption of this statement did not have a material impact on the Company’s results of operations or financial condition.

In July 2001, the FASB issued Statement No. 141, “Business Combinations,” and Statement No. 142, “Goodwill and Other Intangible Assets.” Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June

W. R. BERKLEY CORPORATION AND SUBSIDIARIES      35

30, 2001. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 is effective in fiscal years beginning after December 15, 2001. The Company expects its operating costs and expenses to decrease by approximately $4 million in 2002, as goodwill will no longer be amortized under Statement 142.

         In August 2001, the FASB issued Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The adoption of this Statement will not have a material impact on the Company’s results of operations or financial condition.

(2)  Lease Obligations

The Company and its subsidiaries use office space and equipment under leases expiring at various dates through September 1, 2004. These leases are considered operating leases for financial reporting purposes. Some of these leases have options to extend the length of the leases and contain clauses for cost of living, operating expense and real estate tax adjustments. Rental expense was approximately: $18,021,000, $16,580,000 and $16,109,000 for 2001, 2000 and 1999, respectively. Future minimum lease payments (without provision for sublease income) are $14,979,000 in 2002; $11,569,000 in 2003; $7,953,000 in 2004; $5,962,000 in 2005; and $16,324,000 thereafter.

(3)  Acquisitions and Asset Sales

During 2001, 2000 and 1999, several international and other acquisitions were completed for an aggregate consideration of approximately $3,780,000, $338,000 and $1,533,000, respectively. The acquisitions were accounted for as purchases and, accordingly, the results of operations of the companies have been included from the respective dates of acquisition. Proforma results of operations have been omitted as such effects are not significant.

         Net assets of the acquired companies for 2001, 2000 and 1999 were as follows: excess of cost over net assets acquired of $1,151,000, $47,000 and $3,744,000; and other liabilities, net of other assets, of $4,931,000, $385,000 and $5,277,000, respectively.

         During 2001, the Company sold several dormant operations, and reported a realized gain of $554,000. During 2000, the Company sold the assets of All American Agency Facilities Inc. (“All American”), a managing general agency, and reported a realized gain of $3,179,000. All American’s revenues and operating profits (losses) were $1,819,000 and ($638,000) in 2000, and $7,480,000 and $381,000 in 1999.

(4)  Restructuring Plan

In the fourth quarter of 2001, the Company reported a restructuring charge of $3,196,000 in connection with its withdrawal from regional personal lines business and the reorganization of certain other operations. The Company reduced its permanent workforce by approximately 304 employees in connection with the plan. The charge consisted mainly of severance payments of $2,462,000 and contractual lease payments related to abandoned facilities. The activities under the plan were substantially completed in 2001.

         In the first quarter of 2000, the Company implemented a plan to reorganize its reinsurance business. Under the plan, the reinsurance segment has withdrawn from the Latin American and Caribbean market, and the domestic reinsurance operations have focused on specialty reinsurance lines while de-emphasizing certain commodity-type lines. The Company reduced its permanent workforce by approximately 37 employees in connection with the plan. The Company reported a restructuring charge of $1,850,000 to reflect costs related to the plan. This charge consisted mainly of severance payments of $1,439,000 and contractual lease payments related to abandoned facilities. The activities under the plan were substantially completed in 2000.

         In the first quarter of 1999, the Company implemented a plan to restructure certain of its operating units. Under the plan, the Company consolidated ten of its regional units into four; merged two of its alternative market units; combined two of its international units; and reduced its workforce by approximately 386 employees. The Company reported a restructuring charge of $11,505,000 in the first quarter of 1999 to reflect the estimated costs of the plan. This charge consists mainly of severance payments of $7,562,000, contractual lease payments related to abandoned facilities and abandoned equipment and property owned.

         The Company has paid $11,955,000 related to the restructuring charges, of which $8,865,000 relates to severance payments. The remaining restructuring accrual is $4,596,000 at December 31, 2001, of which certain payments extend through 2003.

36

(5)  Debt

Long-term debt consists of the following:

					2001				2000
Description	Rate			Maturity	Face Value		Carrying Value		Carrying Value
Senior Notes		6.71	%	March 4, 2003	$	25,000,000	$	24,976,000	$	24,957,000
Senior Subordinated Notes		6.50	%	July 1, 2003		35,793,000		35,793,000		35,793,000
Note Payable		(1	)	December 30, 2003		8,000,000		8,000,000		8,000,000
Senior Notes		6.375	%	April 15, 2005		40,000,000		39,885,000		39,854,000
Senior Notes		6.25	%	January 15, 2006		100,000,000		99,442,000		99,323,000
Senior Notes		9.875	%	May 15, 2008		88,800,000		86,774,000		86,561,000
Senior Debentures		8.70	%	January 1, 2022		76,503,000		75,684,000		75,670,000
					$	374,096,000	$	370,554,000	$	370,158,000

(1) Floating rate equal to Libor plus 50 basis points.

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.

Short-Term Debt During 2001 and 2000, the average interest rate of the Company’s short-term debt was 6.75% and 6.87%, respectively. In February 2002, the Company entered into a one-year unsecured bank credit facility which provides for borrowing up to $25 million.

(6)  Trust Preferred Securities

The Company-obligated mandatorily redeemable preferred securities of a subsidiary trust holding solely junior subordinated debentures (“Trust Preferred Securities”) were issued by the W.R. Berkley Capital Trust (“the Trust”) in 1996. All of the common securities of the Trust are owned by the Company. The sole assets of the Trust are $210,000,000 aggregate principal amount of 8.197% Junior Subordinated Debentures due December 15, 2045, issued by the Company (the “Junior Subordinated Debentures”). The Company’s guarantee of payments of cash distributions and payments on liquidation of the Trust and redemption of the Trust Preferred Securities, when taken together with the Company’s obligations under the Trust Agreement under which the Trust Preferred Securities were issued, the Junior Subordinated Debentures and the Indenture under which the Junior Subordinated Debentures were issued, including its obligations to pay costs, expenses, debts and liabilities of the Trust (other than with respect to the Trust Preferred Securities), provide a full and unconditional guarantee of the Trust’s obligations under the Trust Preferred Securities. The Company records the preferential cumulative cash dividends arising from the payments of interest on the Junior Subordinated Debentures as interest expense in its consolidated statement of operations.

         The Trust Preferred Securities are subject to mandatory redemption in a like amount (i) in whole but not in part, on the stated maturity date, upon repayment of the Junior Subordinated Debentures, (ii) in whole but not in part, at any time contemporaneously with the optional prepayment of the Junior Subordinated Debentures by the Company upon the occurrence and continuation of a certain event and (iii) in whole or in part, on or after December 15, 2006, contemporaneously with the optional prepayment by the Company of Junior Subordinated Debentures. In September 1999, a subsidiary of the Company purchased $10 million (face amount) of the Trust Preferred Securities for $8,774,000.

(7) Commitments, Litigation and Contingent Liabilities

         Neither the Company nor any of its subsidiaries is engaged in any litigation 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. The Company has an arbitration pending pertaining to a surety reinsurance contract coverage issue where it is the reinsurer. The proceeding is in the initial stages, and the Company believes it has meritorious defenses with respect to this issue.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES      37

(8) Supplemental Financial Statement Data

Other operating costs and expenses consist of the following:

(Dollars in thousands)	2001		2000		1999
Amortization of deferred policy acquisition costs	$	492,065	$	454,729	$	444,289
Other operating costs and expenses of insurance operations		85,593		68,756		79,879
Other operating costs and expenses of service companies		64,947		57,108		64,780
Other costs and expenses		21,171		15,986		15,836
Total	$	663,776	$	596,579	$	604,784

(9) 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)	2001		2000		1999
Premiums written	$	350,370	$	310,511	$	307,170
Premiums earned	$	346,159	$	301,835	$	294,823
Losses and loss expenses	$	333,911	$	267,804	$	248,767

During 2001, the Company entered into a multi-year aggregate reinsurance agreement that provides two types of reinsurance coverage. The first type of coverage provides protection for individual losses on an excess of loss or quota share basis, as specified for each class of business covered by the agreement. The second type of coverage provides aggregate accident year protection for our reinsurance segment for loss and loss adjustment expenses incurred above a certain level. Loss recoveries are subject to annual limits and an aggregate limit over the contract period. For the year ended December 31, 2001, earned premiums and losses and loss expenses ceded under the aggregate reinsurance agreement were $15 million and $5 million, respectively, for the individual loss protection and $30 million and $54 million, respectively, for the aggregate accident year protection.

         In 1999, the Company purchased aggregate reinsurance protection for its regional segment. Pursuant to the contract, the reinsurer will indemnify the regional companies for losses occurring during 1999 in excess of 71% of earned premiums, up to a limit of $35 million. Premiums of $21 million and losses of $35 million were ceded to the reinsurer in 1999.

         Certain of the Company’s reinsurance agreements are structured on a funds held basis, whereby the Company retains some or all of the ceded premiums in a separate account that is used to fund ceded losses as they become due from the reinsurance company. Interest is credited to reinsurers for funds held on their behalf at rates ranging from 7.0% to 8.9% of the account balances, as defined under the agreements. Interest credited to reinsurers, which is reported as a reduction of net investment income, was $12 million in 2001, $10 million in 2000 and $8 million in 1999.

(10)  Stock Option Plan

The Company has a stock option plan (the “Stock Option Plan”) under which 7,125,000 shares of Common Stock were reserved for issuance. Pursuant to the Stock Option Plan, options may be granted at prices determined by the Board of Directors but not less than fair market value on the date of grant.

The following table summarizes option information:

	2001				2000				1999
	Shares		Price(a)		Shares		Price(a)		Shares		Price(a)
Outstanding at beginning of year		3,986,079	$	31.57		3,662,785	$	34.12		3,929,333	$	34.25
Granted		540,950		47.07		872,000		19.34		68,600		25.73
Exercised		692,900		29.77		342,266		24.36		14,925		21.91
Canceled		195,050		32.73		206,440		37.07		320,223		34.39
Outstanding at end of year		3,639,079	$	34.23		3,986,079	$	31.57		3,662,785	$	34.12
Options exercisable at year end		1,652,919	$	33.13		952,726	$	27.43		998,450	$	25.28
Options available for future grant		2,302,191				2,647,916				3,326,102

(a) Weighted average exercise price.

38

The fair value of the options granted is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 2001 and 2000, respectively: (a) dividend yield of 1%, (b) expected volatility of 20%, (c) risk-free interest rates of 5.01% and 6.63% and (d) expected life of 7.5 years. The following table summarizes information about stock options outstanding at December 31, 2001 and 2000:

				Options Outstanding				Options Exercisable
				Weighted						Weighted
Range of				Remaining		Weighted				Average
Exercise		Number		Contractual		Average		Number		Exercise
Prices		Outstanding		Life		Price		Exercisable		Price
December 31, 2001
$14 to $27			1,038,048		7.0	$	20.34		207,098	$	24.83
27 to 32			426,663		4.3		28.91		426,663		28.91
32 to 58			2,174,368		6.7		41.90		1,019,158		36.59
	Total		3,639,079		6.5	$	34.23		1,652,919	$	33.13
December 31, 2000
$14 to $27			1,363,366		7.0	$	21.05		456,666	$	24.39
27 to 32			661,812		5.1		28.99		433,927		29.01
32 to 48			1,960,901		6.8		39.76		62,133		38.71
	Total		3,986,079		6.6	$	31.57		952,726	$	27.43

The Company uses the intrinsic-value method of accounting for stock-based awards granted to employees and, accordingly, does not recognize compensation expense for its stock-based awards to employees. Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant dates for awards under those plans, the Company’s net income (loss) and earnings per share would have been reduced to the pro forma amounts indicated below (000’s omitted except per share data):

	Net Income (loss)						Basic Earnings (loss) per Share						Diluted Earnings (loss) per Share
	As reported			Pro forma			As reported			Pro forma			As reported			Pro forma
2001
Attributable to common stockholders	$	(91,546	)	$	(94,554	)	$	(3.14	)	$	(3.24	)	$	(3.14	)	$	(3.24	)
2000
Attributable to common stockholders	$	36,238		$	33,331		$	1.41		$	1.30		$	1.39		$	1.28

(11)  Compensation Plan

The Company and its subsidiaries have profit sharing retirement plans in which substantially all employees participate. The plans provide for minimum annual contributions of 5% of eligible compensation; contributions above the minimum are discretionary and vary with each participating subsidiary’s profitability. Employees become eligible to participate in the Retirement Plans on the first day of the month following the first full three months in which they are employed. Profit sharing expense amounted to $9,287,000, $7,672,000 and $7,768,000 for 2001, 2000 and 1999, respectively.

         The Company has a Long-Term Incentive Compensation Plan (“LTIP”) that provides for incentive compensation to key executives based on the Company’s earnings, as defined under the LTIP, for each year from 2001 through 2005. Key employees are awarded participation units (“Units”) which vest and become exercisable over a maximum term of five years from the date of their award. The units are payable in cash or up to 50% in shares of common stock. At December 31, 2001, there were 79,500 units outstanding and the maximum value that can be earned for those units over the five-year period ending on December 31, 2005 is $19,875,000. There was no LTIP expense in 2001, 2000 or 1999.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES      39

(12)  Investments

At December 31, 2001 and 2000, there were no investments, other than investments in United States government securities, which exceeded 10% of stockholders’ equity. At December 31, 2001 and 2000, investments were as follows:

(Dollars in thousands)
						Gross		Gross
						unrealized		unrealized			Fair			Carrying
Type of investment			Cost(a)			gains		losses			value			value
December 31, 2001
Fixed maturity securities held to maturity:
	State and municipal		$	48,618		$	4,438	$	(155	)	$	52,901		$	48,618
	Corporate			11,331			790		—			12,121			11,331
	Mortgage-backed securities			96,515			6,022		—			102,537			96,515
		Total fixed maturity securities held to maturity		156,464			11,250		(155	)		167,559			156,464
Fixed maturity securities available for sale:
	United States Government(b)			506,067			22,282		(1,726	)		526,623			526,623
	State and municipal			540,081			12,936		(5,358	)		547,659			547,659
	Corporate			537,680			18,604		(4,472	)		551,812			551,812
	Mortgage-backed securities			551,082			13,843		(3,240	)		561,685			561,685
	Foreign			106,411			5,617		(481	)		111,547			111,547
		Total fixed maturity securities available for sale		2,241,321			73,282		(15,277	)		2,299,326			2,299,326
Equity securities available for sale:
	Common stocks			25,819			3,587		(502	)		28,904			28,904
	Preferred stocks			77,192			3,485		(467	)		80,210			80,210
		Total equity securities available for sale		103,011			7,072		(969	)		109,114			109,114
Equity securities trading:
	Long positions(c)			215,808			2,951		(4,881	)		213,878			213,878
	Receivable from brokers			351,707			—		—			351,707			351,707
	Securities sold but not yet purchased			(58,331	)		3,482		(2,141	)		(56,990	)		(56,990	)
		Total equity securities trading		509,184			6,433		(7,022	)		508,595			508,595
Invested cash(d)				524,554			—		—			524,554			524,554
Total investments			$	3,534,534		$	98,037	$	(23,423	)	$	3,609,148		$	3,598,053
December 31, 2000
Fixed maturity securities held to maturity:
	State and municipal		$	54,659		$	4,122	$	(115	)	$	58,666		$	54,659
	Corporate			11,592			654		(85	)		12,161			11,592
	Mortgage-backed securities			89,816			3,586		—			93,402			89,816
		Total fixed maturity securities held to maturity		156,067			8,362		(200	)		164,229			156,067
Fixed maturity securities available for sale:
	United States Government(b)			480,871			14,327		(1,574	)		493,624			493,624
	State and municipal			544,015			14,169		(1,681	)		556,503			556,503
	Corporate			454,844			7,727		(8,695	)		453,876			453,876
	Mortgage-backed securities			469,144			9,144		(5,376	)		472,912			472,912
	Foreign			138,464			2,976		(2,531	)		138,909			138,909
		Total fixed maturity securities available for sale		2,087,338			48,343		(19,857	)		2,115,824			2,115,824
Equity securities available for sale:
	Common stocks			49,976			7,830		(1,161	)		56,645			56,645
	Preferred stocks			26,569			770		(161	)		27,178			27,178
		Total equity securities available for sale		76,545			8,600		(1,322	)		83,823			83,823
Equity securities trading:
	Long positions(c)			340,617			16,159		(9,505	)		347,271			347,271
	Receivable from brokers			269,444			—		—			269,444			269,444
	Securities sold but not yet purchased			(164,312	)		8,286		(12,994	)		(169,020	)		(169,020	)
		Total equity securities trading		445,749			24,445		(22,499	)		447,695			447,695
Invested cash(d)				308,193			—		—			308,193			308,193
Total investments			$	3,073,892		$	89,750	$	(43,878	)	$	3,119,764		$	3,111,602

(a)	Adjusted as necessary for amortization of premium or discount.
(b)	Includes United States government agencies and authorities.
(c)	Includes investments of $97,917,000 and $52,610,000 as of December 31, 2001 and 2000, respectively, in managed investment funds.
(d)	Short-term investments which mature within three months of the date of purchase.

40

The amortized cost and fair value of fixed maturity securities at December 31, 2001, 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)	2001
	Cost		Fair value
Due in one year or less	$	76,652	$	78,376
Due after one year through five years		480,636		505,115
Due after five years through ten years		559,480		572,013
Due after ten years		633,420		647,159
Mortgage-backed securities		647,597		664,222
Total	$	2,397,785	$	2,466,885

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)			2001			2000			1999
Realized gains (losses):
	Fixed maturity securities(a)		$	6,706		$	(2,573	)	$	2,792
	Equity securities			7,755			9,420			(76	)
	Provision for other than temporary impairment:
		Fixed maturity securities		(26,511	)		(3,299	)		(8,300	)
		Equity securities		(109	)		—			—
	Other			665			4,816			(480	)
				(11,494	)		8,364			(6,064	)
Change in difference between fair value and cost of investments, not including trading securities:
		Fixed maturity securities		32,452			108,938			(167,984	)
		Equity securities		(1,175	)		335			964
				31,277			109,273			(167,020	)
Total			$	19,783		$	117,637		$	(173,084	)

(a) During 2001, 2000 and 1999, gross gains of $13,033,000, $11,586,000 and $15,022,000, respectively, and gross losses of $6,327,000, $14,159,000 and $12,230,000, respectively, were realized.

Investment income consists of the following:

(Dollars in thousands)			2001			2000			1999
Investment income earned on:
	Fixed maturity securities		$	162,986		$	152,806		$	148,081
	Trading account(a)			19,321			42,741			33,532
	Invested cash			14,715			14,771			12,804
	Equity securities			6,754			6,448			3,306
	Other			2,880			3,189			833
		Gross investment income		206,656			219,955			198,556
	Interest on funds held under reinsurance treaties			(11,635	)		(9,507	)		(8,240	)
	Net investment income		$	195,021		$	210,448		$	190,316

(a) The primary focus of the trading account is merger and convertible arbitrage. Merger arbitrage is the business of convertible investing in the securities of publicly held companies which 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 differences between their securities and their underlying equities. Arbitrage investing 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 arbitrage investments less vulnerable to changes in general financial market conditions. Potential changes in market conditions are also mitigated by the implementation of hedging strategies, including short sales.

         The arbitrage positions are generally hedged against market declines by purchasing put options, selling call options or entering into swap contracts. Therefore, just as long portfolio positions may incur losses during market declines, hedge positions may also incur losses during market advances. As of December 31, 2001, the notional amount of long option contracts outstanding is $16,391,000 and short option contracts outstanding is $10,985,000.

         Investment income earned from net trading account activity includes unrealized trading losses of $2,519,000 and $4,897,000 for 2001 and 1999, respectively, and unrealized trading gains of $1,899,000 for 2000.

         At December 31, 2001, investments with a carrying value of $154 million were on deposit with state insurance departments as required by state laws; investments with a carrying value of $26 were held in trust for other companies; and investments with a carrying value of $22 million were deposited at Lloyd’s in support of 2002 underwriting activities.

         The Company had contingent liabilities regarding irrevocable undrawn letters of credit supporting reinsurance business of $16 million at December 31, 2001. The Company has pledged investments with a carrying value of $23 million as collateral to support this commitment.

(13)  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, 2001 and 2000:

(Dollars in thousands)	2001				2000
	Carrying amount		Fair value		Carrying amount		Fair value
Investments	$	3,598,053	$	3,609,148	$	3,111,602	$	3,119,764
Long-term debt		370,554		384,431		370,158		362,375
Trust preferred securities		198,210		180,146		198,169		136,800

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 and the trust preferred securities are based on rates available for borrowings similar to the Company’s outstanding debt as of the respective reporting dates.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES      41

(14)  Stockholders’ Equity

Common equity The weighted average number of shares used in the computation of basic earnings per share was 29,139,000, 25,632,000 and 25,823,000 for 2001, 2000 and 1999, respectively. The weighted average number of shares used in the computations of diluted earnings per share was 30,555,000, 25,991,000 and 25,927,000 for 2001, 2000 and 1999, respectively. Treasury shares have been excluded from average outstanding shares from the date of acquisition. The difference in calculating basic and diluted earnings per share is attributable entirely to the dilutive effect of stock-based compensation plans.

         Changes in shares of common stock outstanding, net of treasury shares, are as follows:

(in thousands)	2001			2000			1999
Balance, beginning of year		25,656			25,617			26,504
Shares issued		7,603			339			18
Shares repurchased		(18	)		(300	)		(905	)
Balance, end of year		33,241			25,656			25,617

On January 25, 1999, all remaining outstanding shares of the Series A Preferred Stock were redeemed for $98,092,000.

         On May 11, 1999, the Company declared a dividend distribution of one Right for each outstanding share of common stock. Each Right entitles the holder to purchase a unit consisting of one one-thousandth of a share of Series A Junior Participating Preferred Stock at a purchase price of $120 per unit (subject to adjustment) upon the occurrence of certain events relating to potential changes in control of the Company. The Rights expire on May 11, 2009, unless earlier redeemed by the Company as provided in the Rights Agreement.

(15)  Federal and Foreign Income Taxes

Federal and foreign income tax expense (before the cumulative effect of change in accounting and extraordinary items) consists of:

(Dollars in thousands)		2001			2000			1999
Current (expense) benefit		$	(2,068	)	$	(2,574	)	$	11,785
Deferred benefit			58,729			123			33,981
	Total (expense) benefit	$	56,661		$	(2,451	)	$	45,766

A reconciliation of Federal and foreign income tax (expense) benefit and the amounts computed by applying the Federal and foreign income tax rate of 35% to pre-tax income are as follows:

(Dollars in thousands)		2001			2000			1999
Computed “expected” tax (expense) benefit		$	52,988		$	(14,298	)	$	27,737
Tax-exempt investment income			8,045			13,543			17,853
Increase in valuation allowance			(3,100	)		—			—
Other, net			(1,272	)		(1,696	)		176
	Total (expense) benefit	$	56,661		$	(2,451	)	$	45,766

At December 31, 2001 and 2000 , the tax effects of differ- ences that give rise to significant portions of the deferred tax asset and deferred tax liability are as follows:

(Dollars in thousands)		2001			2000
Deferred Tax Asset
Loss reserve discounting		$	74,952		$	60,737
Unearned premiums			52,844			40,885
Net operating loss carry forward			53,005			8,379
Alternative minimum tax credit carryforward			28,420			29,610
Other			18,362			8,171
	Gross deferred tax asset		227,583			147,782
Less valuation allowance			(10,100	)		(7,000	)
	Deferred tax asset		217,483			140,782
Deferred Tax Liability
Amortization of intangibles			7,766			7,995
Deferred policy acquisition costs			76,090			57,877
Deferred taxes on unrealized investment gains			18,238			12,678
Depreciation			7,790			8,088
Other			7,678			6,577
	Deferred tax liability		117,562			93,215
	Net deferred tax asset	$	99,921		$	47,567

Federal income tax expense (benefit) applicable to real- ized investment gains (losses) was $(2,478,000), $2,928,000 ($2,122,000) in 2001, 2000 and 1999, respectively. The Com- pany had a current income tax receivable of $16,179,000 and $6,376,000 at December 31, 2001 and 2000, respective- ly. At December 31, 2001, the Company had foreign net operating loss carryforwards of $23,453,000, which expire from 2002 and 2006, and a Federal net operating loss carryforward of $128,977,000, which expires in 2021. The net change in the valuation allowance is primarily related to the foreign net operating loss carryforwards. The Company’s tax returns through December 31, 1997 have been examined by the Internal Revenue Service.

         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 future current operations, management anticipates that it is more likely than not that future taxable income will be sufficient for the realization of this net asset.

42

(16)  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)		2001		2000		1999
Net reserves at beginning of year		$	1,818,049	$	1,723,865	$	1,583,304
Net provision for losses and loss expenses:
	Claims occurring during the current year		1,140,622		1,047,060		1,032,089
	Increase (decrease) in estimates for claims occurring in prior years		211,344		14,042		28,351
	Net decrease in discount for prior years		8,717		11,530		10,473
			1,360,683		1,072,632		1,070,913
Net payments for claims
	Current year		443,802		394,401		433,942
	Prior years		701,637		584,047		496,410
			1,145,439		978,448		930,352
Net reserves at end of year			2,033,293		1,818,049		1,723,865
Ceded reserves at end of year			730,557		657,756		617,025
Gross reserves at end of year		$	2,763,850	$	2,475,805	$	2,340,890

The balance sheets include $53,832,000 and $58,112,000 as of December 31, 2001 and 2000, respectively, relating to reserves for life insurance which are not included in the table above, and the statement of operations includes $19,817,000, $21,779,000 and $14,913,000 for the years ended December 31, 2001, 2000 and 1999, respectively, relating to the policy-holder benefits incurred on life insurance which are not included in the above table. The increase in estimates for claims occurring in prior years for the year ended December 31, 2001 reflects primarily reserve increases for the discontinued alternative markets reinsurance division and the treaty reinsurance business. For the years ended December 31, 2000 and 1999, the increase in estimates for claims occurring in prior years was due to reserve strengthening in the regional segment partially offset by favorable reserve development in the specialty and alternative markets segments.

         The Company discounts its liabilities for excess and assumed workers’ compensation business because of the long period of time over which losses are paid. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from the Company’s loss payout experience and is supplemented with data compiled from insurance companies writing similar business. 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 for non-proportional business, and at the statutory rate for proportional business. The discount rates range from 4.3% to 6.49% with a weighted average discount rate of 5.5%. The aggregate net discount, after reflecting the effects of ceded reinsurance, is $243,000,000, $223,000,000 and $196,000,000 at December 31, 2001, 2000 and 1999, respectively. For statutory purposes, the Company uses a discount rate of 4.3% as permitted by the Department of Insurance of the State of Delaware.

         To date, known asbestos 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 its subsidiaries generally did not insure larger industrial companies which are subject to significant environmental exposures.

         The Company’s net reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $24,794,000 and $29,422,000 at December 31, 2001 and 2000, respectively. The Company’s gross reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $43,405,000 and $57,167,000 at December 31, 2001 and 2000, respectively. Net incurred losses and loss expenses (recoveries) for reported asbestos and environmental claims were approximately $(4,503,000), $1,602,000 and $1,371,000 in 2001, 2000 and 1999, respectively. Net paid losses and loss expenses were approximately $125,000, $3,123,000 and $3,819,000 in 2001, 2000 and 1999, respectively. 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 effect of significant unresolved legal matters, including coverage issues as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties are highly uncertain.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES      43

(17)  Industry Segments

The Company’s operations are presently conducted through five segments of the insurance business: specialty lines of insurance (including excess and surplus lines and commercial transportation); alternative markets (including the management of alternative insurance market mechanisms); reinsurance; regional property casualty insurance; and international. The specialty segment’s business is principally within the excess and surplus lines, professional liability, commercial transportation and surety markets. The Company’s alternative markets segment specializes in developing, insuring and administering self-insurance programs and various alternative risk transfer mechanisms for employers, employer groups, insurers and alternative markets funds. The Company’s reinsurance segment specializes in underwriting property, casualty and surety reinsurance on both a treaty and facultative basis. The regional property casualty insurance segment principally provides commercial property casualty insurance products. The international segment writes property and casualty insurance, as well as life insurance, in Argentina and the Philippines. For the years ended December 31, 2001, 2000 and 1999, the international segment wrote life insurance premiums of $31,490,000, $33,183,000 and $24,548,000, respectively. During 2001, the Company discontinued its regional personal lines business and the alternative markets division of its reinsurance segment. These discontinued businesses are now being managed and reported collectively as a separate Discontinued Business Segment. Prior period segment information has been restated to reflect these changes.

         The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Income tax expense and benefits are calculated in accordance with the Company’s tax sharing agreements, which provide for the recognition of tax loss carry-forwards only to the extent of taxes previously paid. Summary financial information about the Company’s operating segments is presented in the following table. Income (loss) 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 and interest on inter-company debt. Identifiable assets by segment are those assets used in the operation of each segment.

		Revenues
												Income			Income Tax
		Investment			Unaffiliated		Inter-					(loss) before			Expense
(Dollars in thousands)		Income			Customers		Segment			Total		income taxes			(Benefit)
December 31, 2001:
	Specialty	$	39,390		$	438,534	$	2,116		$	440,650	$	28,806		$	7,760
	Alternative Markets		37,765			232,671		1,450			234,121		32,971			9,271
	Reinsurance		42,536			278,831		2,659			281,490		(54,502	)		(20,907	)
	Regional		51,640			601,202		13,722			614,924		44,403			7,647
	International		13,993			137,676		7			137,683		(6,082	)		2,224
	Discontinued Business		9,762			232,403		—			232,403		(133,480	)		(46,718	)
	Corporate, other and eliminations		(65	)		20,480		(19,954	)		526		(63,510	)		(15,938	)
	Consolidated	$	195,021		$	1,941,797		—		$	1,941,797	$	(151,394	)	$	(56,661	)
December 31, 2000:
	Specialty	$	48,706		$	322,618	$	2,241		$	324,859	$	31,836		$	9,058
	Alternative Markets		37,722			189,658		137			189,795		35,315			9,978
	Reinsurance		50,471			348,707		457			349,164		27,760			7,387
	Regional		56,955			564,125		1,202			565,327		8,761			2,483
	International		9,636			118,234		—			118,234		6,853			1,820
	Discontinued Business		9,562			232,392		—			232,392		(9,936	)		(3,478	)
	Corporate, other and eliminations		(2,604	)		5,553		(4,037	)		1,516		(59,738	)		(24,797	)
	Consolidated	$	210,448		$	1,781,287		—		$	1,781,287	$	40,851		$	2,451
December 31, 1999:
	Specialty	$	50,231		$	310,373	$	(1,305	)	$	309,068	$	39,261		$	8,692
	Alternative Markets		30,827			168,635		586			169,221		20,593			6,167
	Reinsurance		47,288			341,201		739			341,940		14,091			1,992
	Regional		49,705			539,906		1,462			541,368		(78,895	)		(4,154	)
	International		6,469			93,878		—			93,878		3,535			1,443
	Discontinued Business		8,462			213,816		—			213,816		(14,141	)		(4,949	)
	Corporate, other and eliminations		(2,666	)		5,859		(1,482	)		4,377		(63,692	)		(54,957	)
	Consolidated	$	190,316		$	1,673,668		—		$	1,673,668	$	(79,248	)	$	(45,766	)

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Interest expense for the alternative markets and reinsurance segments was $2,806,000, $2,921,000 and $2,870,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Additionally, corporate interest expense (net of intercompany amounts) was $42,913,000, $44,675,000 and $47,931,000 for the corresponding periods. Identifiable assets by segment are as follows (Dollars in thousands):

December 31,	2001			2000			1999
Specialty	$	1,580,155		$	1,425,123		$	1,370,837
Alternative Markets		859,502			755,248			754,199
Reinsurance		1,751,428			1,258,155			1,022,776
Regional		1,462,861			1,289,823			1,203,295
International		209,473			248,243			177,675
Discontinued Business		289,313			377,893			357,206
Corporate, other and eliminations		(519,223	)		(332,415	)		(101,197	)
Consolidated	$	5,663,509		$	5,022,070		$	4,784,791

(18)  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 2002, the maximum amount of dividends which can be paid without such approval is approximately $68 million.

         Combined net income (loss) and policyholders’ surplus of the Company’s consolidated insurance subsidiaries, as determined in accordance with statutory accounting practices, are as follows:

(Dollars in thousands)	2001			2000		1999
Net income (loss)	$	(116,307	)	$	56,694	$	(34,598	)
Policyholders’ surplus	$	928,908		$	862,994	$	851,449

In 2001, the The National Association of Insurance Commissioners (“NAIC”) codified statutory accounting practices. The impact of these changes was an increase of $58 million to our policyholders’ surplus. The significant variances between statutory accounting practices and GAAP are: For statutory purposes, bonds are carried at amortized cost, acquisition costs are charged to operations as incurred, deferred Federal income taxes are subject to limitations, excess and assumed workers compensation reserves are discounted at a 4.3% rate and certain assets designated as “non-admitted assets” are charged against surplus.

         The NAIC has risk-based capital (“RBC”) requirements that require insurance companies to calculate and report information under a risk-based formula which measures statutory capital and surplus needs based on a regulatory definition of risk in a company’s mix of products and its balance sheet. All of the Company’s insurance subsidiaries have an RBC amount above the authorized control level RBC, as defined by the NAIC.

(19) Quarterly Financial Information (unaudited)
	The following is a summary of quarterly financial data (In thousands except per share data):

		Three months ended
		March 31,				June 30,				September 30,					December 31,
		2001		2000		2001		2000		2001			2000		2001			2000
Revenues		$	449,153	$	423,324	$	490,997	$	431,933	$	500,072		$	445,957	$	501,575		$	480,073
Net income (loss) attributable to common stockholders			10,266		4,346		9,598		6,636		(47,246	)		7,092		(64,164	)		18,164
Net income (loss) per share:
	Basic		.38		.17		.33		.26		(1.63	)		.28		(2.04	)		.71
	Diluted(a)		.36		.17		.32		.26		(1.63	)		.27		(2.04	)		.68

(a) For periods with a net loss, diluted per share amounts are equal to basic per share amounts so as not to be anti-dilutive.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES      45

(20)  International Operations

The Company owns 65% of Berkley International, LLC, which conducts insurance operations in Argentina and the Philippines. The international activities are reported in the Company’s financial statements on a one quarter lag to facilitate the timely completion of the consolidated financial statements. During 2001, Argentina experienced substantial political and economic problems, including high unemployment, increasing fiscal deficits and declining central bank reserves. The government responded to these problems by converting certain public bonds into guaranteed loans with longer maturities and lower interest rates, abandoning the fixed dollar-to-peso exchange rate and imposing various currency restrictions. It is likely that there will be further changes to Argentine economic and monetary policies in 2002.

         Following an analysis of the impact of these changes on its operations and financial statements, the Company reduced the carrying value of Argentine public bonds held by Berkley International, LLC from $58 million to $40 million, resulting in a charge of $18 million, or $7 million net of income taxes and minority interest. In addition, under recent government rulings, it is likely that dollar denominated commercial transactions in Argentina will be converted to pesos at exchange rates that are based on market rates at the time of settlement or on government rulings that may require the use of mandated exchange rates for certain transactions. The Company’s assets held in Argentina were approximately equal to its Argentine liabilities. As of December 31, 2001, the Argentine subsidiaries held investments of approximately $44 million, that are held outside of Argentina and not exposed to Argentine credit or currency risk.

         As of December 31, 2001, the Company’s capital investment in Argentina was $46 million ($30 million net of minority interest), of which approximately $33 million is invested in the non-life insurance business and approximately $13 million is invested in the life insurance business. Income before income taxes, realized gains and minority interest for the Company’s operations in Argentina was $10 million for the year ended December 31, 2001. As a result of the recent developments, management expects the Argentine operations to undergo substantial changes. This is likely to include a decline in investment income as a result of lower interest on bonds and the surrender of all or substantially all life insurance policies-in-force.

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, 2001 and 2000, and the related consolidated statements of operations, stockholders’ equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. 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 as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for insurance related assessments in 1999.

New York, New York	KPMG LLP
February 14, 2002

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