EX-13:

Exhibit 13

FINANCIAL DATA
(Amounts in thousands, except per share data)


Years ended December 31,	2005			2004			2003			2002			2001

Net premiums written	$	4,604,574		$	4,266,361		$	3,670,515		$	2,710,490		$	1,858,096
Net premiums earned		4,460,935			4,061,092			3,234,610			2,252,527			1,680,469
Net investment income		403,962			291,295			210,056			187,875			195,021
Service fees		110,697			109,344			101,715			86,095			75,771
Realized investment gains (losses)		17,209			48,268			81,692			37,070			(11,494	)
Total revenues		4,996,839			4,512,235			3,630,108			2,566,084			1,941,797
Interest expense		85,926			66,423			54,733			45,475			45,719
Income (loss) before income taxes		770,537			638,513			489,304			259,433			(151,394	)
Income tax (expense) benefit		(222,521	)		(196,235	)		(150,626	)		(84,139	)		56,661
Minority interest		(3,124	)		(3,446	)		(1,458	)		(249	)		3,187
Income (loss) before change in accounting		544,892			438,832			337,220			175,045			(91,546	)
Cumulative effect of change in accounting		—			(727	)		—			—			—
Net income (loss)		544,892			438,105			337,220			175,045			(91,546	)
Data per common share:
Income (loss) per basic share		4.29			3.48			2.71			1.53			(0.93	)
Income (loss) per diluted share		4.08			3.31			2.58			1.47			(0.93	)
Stockholders’ equity		20.13			16.69			13.43			10.75			8.30
Cash dividends declared		.20			.20			.19			.16			.16
Weighted average shares outstanding:
Basic		127,022			125,941			124,686			114,492			98,343
Diluted		133,617			132,272			130,595			119,078			103,125
Investments⁽¹⁾	$	10,378,250		$	8,341,944		$	6,480,713		$	4,663,100		$	3,607,586
Total assets		13,896,287			11,451,033			9,334,685			7,031,323			5,633,509
Reserves for losses and loss expenses		6,711,760			5,449,611			4,192,091			3,167,925			2,763,850
Junior subordinated debentures		450,634			208,286			193,336			198,251			198,210
Senior notes and other debt		967,818			808,264			659,208			362,985			370,554
Stockholders’ equity		2,567,077			2,109,702			1,682,562			1,335,199			931,595


(1)		Including cash and cash equivalents, trading account receivable from brokers and clearing organizations, trading account securities sold but not yet purchased and unsettled purchases.

PAST PRICES OF COMMON STOCK

The common stock of the Company is traded on the New York Stock Exchange under the symbol “BER”. All amounts have been adjusted to reflect the 3-for-2 common stock split effected on April 8, 2005.


	Price Range				Common Dividends
	High		Low		Paid Per Share

2005
Fourth Quarter	$	48.18	$	38.50	$	0.05
Third Quarter		39.67		34.77		0.05
Second Quarter		36.75		31.46		0.05
First Quarter		35.87		30.87		0.05

2004
Fourth Quarter	$	31.60	$	25.93	$	0.05
Third Quarter		29.43		25.93		0.05
Second Quarter		29.20		25.50		0.05
First Quarter		28.59		23.30		0.05

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

Overview

W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in the United States and operates in five business segments: specialty insurance, regional property casualty insurance, alternative markets, reinsurance and international. The Company’s primary sources of revenues and earnings are insurance and investments.

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

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

Critical Accounting Estimates

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

Reserves for Losses and Loss Expenses. To recognize liabilities for unpaid losses, either known or unknown, insurers establish reserves, which is a balance sheet account representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. Estimates and assumptions relating to reserves for losses and loss expenses are based on complex and subjective judgments, often including the interplay of specific uncertainties with related accounting and actuarial measurements. Such estimates are also susceptible to change as significant periods of time may elapse between the occurrence of an insured loss, the report of the loss to the insurer, the ultimate determination of the cost of the loss and the insurer’s payment of that loss.

In general, when a claim is reported, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment. The estimate represents an informed judgment based on general reserving practices and reflects the experience and knowledge of the claims personnel regarding the nature and value of the specific type of claim. Reserves are also established on an aggregate basis to provide for losses incurred but not yet reported to the insurer, potential inadequacy of case reserves and the estimated expenses of settling claims, including legal and other fees and general expenses of administrating the claims adjustment process. Reserves are established based upon the then current legal interpretation of coverage provided.

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

Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what management expects the ultimate settlement and claim administration will cost. While the methods for establishing the reserves are well tested over time, some of the major assumptions about anticipated loss emergence patterns are subject to unanticipated fluctuation. These estimates, which generally involve actuarial projections, are based on management’s assessment of facts and circumstances then known, as well as estimates of future trends in claims severity and frequency, judicial theories of liability and other factors, including the actions of third parties which are beyond the Company’s control. These variables are affected by internal and external events, such as inflation and economic volatility, judicial and litigation trends, reinsurance coverage and legislative changes, which make it more difficult to

accurately predict claim costs. The inherent uncertainties of estimating reserves are greater for certain types of liabilities where long periods of time elapse before a definitive determination of liability is made. Because setting reserves is inherently uncertain, the Company cannot assure that its current reserves will prove adequate in light of subsequent events.

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

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

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

While management has used its best judgment in establishing its estimate of required reserves, different assumptions and variables could lead to significantly different reserve estimates. Two key measures of loss activity are loss frequency, which is a measure of the number of claims per unit of insured exposure, and loss severity, which is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations. If the actual level of loss frequency and severity are higher or lower than expected, the ultimate reserves will be different than management’s estimate. For example, if loss frequency and severity for a given year are each 1% higher than expected for all lines of business, ultimate loss costs for that year would be 2.01% higher than expected. The effect of higher and lower levels of loss frequency and severity levels on our ultimate costs for claims occurring in 2005 would be as follows (dollars in thousands):


Change in both loss	Ultimate costs of claims		Change in cost of claims
frequency and severity for all	occurring in		occurring in
lines of business	2005		2005
3% higher	$	2,687,403	$	155,748
2% higher		2,634,450		102,795
1% higher		2,582,541		50,886
Base scenario		2,531,655		—
1% lower		2,480,769		(50,886	)
2% lower		2,428,860		(102,795	)
3% lower		2,375,907		(155,748	)

Our net reserves for losses and loss expenses of $5.9 billion as of December 31, 2005 relate to multiple accident years. Therefore, a change in frequency or severity for more than one accident year would be higher or lower than the amounts reflected above.

Approximately $1.5 billion, or 26%, of the Company’s net loss reserves relate to assumed reinsurance business. There is a higher degree of uncertainty and greater variability regarding estimates of assumed loss reserves because those estimates are based, in part, upon information received from ceding companies. If information received from ceding companies is not timely or correct, the Company’s estimate of ultimate losses may not be accurate. Furthermore, due to delayed reporting of claim information by ceding companies, the claim settlement tail for assumed reinsurance is extended. Management considers the impact of delayed reporting in its selection of assumed loss development factors.

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

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


	2005		2004

Specialty	$	2,103,542	$	1,585,732
Regional		913,768		760,440
Alternative Markets		1,198,389		973,837
Reinsurance		1,496,455		1,308,559
International		155,136		94,274

Net reserves for losses and loss expenses		5,867,290		4,722,842
Ceded reserves for losses and loss expenses		844,470		726,769

Gross reserves for losses and loss expenses	$	6,711,760	$	5,449,611

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


	Reported Case		Incurred but
	Reserves		not Reported		Total

December 31, 2005
General liability	$	644,278	$	1,410,008	$	2,054,286
Workers’ compensation		602,855		808,207		1,411,062
Automobile		326,827		175,320		502,147
International		52,144		102,992		155,136
Other		104,803		143,401		248,204

Total primary		1,730,907		2,639,928		4,370,835
Reinsurance		686,551		809,904		1,496,455

Total	$	2,417,458	$	3,449,832	$	5,867,290


December 31, 2004
General liability	$	533,841	$	994,704	$	1,528,545
Workers’ compensation		556,250		605,906		1,162,156
Automobile		235,735		150,848		386,583
International		27,555		66,719		94,274
Other		95,468		147,257		242,725

Total primary		1,448,849		1,965,434		3,414,283
Reinsurance		564,111		744,448		1,308,559

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

For the year ended December 31, 2005, the Company reported losses and loss expenses of $2.8 billion, of which $187 million represented an increase in estimates for claims occurring in prior years. The increases in estimates for claims occurring in prior years were $106 million for primary business and $81 million for assumed reinsurance. On an accident year basis, the change in prior year reserves is comprised of an increase in estimates for claims occurring in accident years prior to 2003 that was partially offset by a decrease in estimates for claims occurring in accident years 2003 and 2004.

Case reserves for primary business increased 19% to $1.7 billion as a result of a 1% increase in the number of outstanding claims and an 18% increase in the average case reserve per claim. Reserves for incurred but not reported losses for primary business increased 34% to $2.6 billion at December 31, 2005 from $2.0 billion at December 31, 2004. Prior year reserves increases of $91 million for specialty, $17 million for regional and $7 million for international were partially offset by a prior year reserve decrease of $9 million for the alternative markets segment. By line of business, prior year reserve increases of $65 million for general liability, $63 million for commercial automobile and $2 million for worker’s compensation were partially offset by a prior year decrease of $24 million for property. The increases in prior year reserves reflects upward adjustments in prior year loss ratios to recognize that claim costs for certain classes of business are emerging over a longer period of time and at a higher level than expected. The increases also reflect higher than expected legal expenses for certain classes of business as well as higher than expected medical costs, including prescription drugs and rehabilitation expenses, for workers’ compensation claims.

Case reserves for reinsurance business increased 22% to $687 million at December 31, 2005 from $564 million at December 31, 2004. Reserves for incurred but not reported losses for reinsurance business increased 9% to $810 million at December 31, 2005 from $744 million at December 31, 2004. The increase in prior year reserves for reinsurance business was primarily a result of higher than expected claims reported by ceding companies. The Company sets its initial loss estimates based principally upon information obtained during the underwriting process and adjusts these estimates as additional information becomes available. As certain reinsurance contracts have matured, the Company has adjusted its estimates of ultimate losses to reflect a higher level of known losses as well as a pattern of delayed loss reporting by some ceding companies. Most of the increase in prior year reserves for reinsurance relates to business written from 1998 through 2001.

Premium Estimates. The Company estimates the amount of assumed reinsurance premiums that it will receive under treaty reinsurance agreements at the inception of the contracts. These premium estimates are revised as the actual amount of assumed premiums is reported to the Company by the ceding companies. As estimates of assumed premiums are made or revised, the related amount of earned premium, commissions and incurred losses associated with those premiums are recorded. Estimated assumed premiums receivable were approximately $90 million and $136 million at December 31, 2005 and 2004, respectively. The assumed premium estimates are based upon terms set forth in the reinsurance agreement, information received from ceding companies during the underwriting and negotiation of the agreement, reports received from ceding companies and discussions and correspondence with reinsurance intermediaries. The Company’s also considers its own view of market conditions, economic trends and experience with similar lines of business. These premium estimates represent management’s best estimate of the ultimate premiums to be received under its assumed reinsurance agreements.

The Company’s policy is to recognize earned but unbilled audit premiums when they are reliably determinable. As of December 31, 2005, the Company reported an accrual for earned but unbilled audit premiums of $57 million. In prior periods, audit premiums were not considered to be reliably determinable until such audits were completed and billed. In 2005, the Company developed sufficient information to begin recognizing unbilled audit premiums as such premiums are earned. The estimate of audit premiums represents management’s best estimate of ultimate audit premiums and is based historical audit premium development patterns and collection trends.

Business Segment Results

Following is a summary of gross and net premiums written, premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the years ended December 31, 2005, 2004 and 2003. The combined ratio represents a measure of underwriting profitability, excluding investment income. A combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.


(Dollars in thousands)	2005			2004			2003

Specialty
Gross premiums written	$	1,932,821		$	1,607,974		$	1,411,848
Net premiums written		1,827,865			1,497,567			1,258,273
Premiums earned		1,682,193			1,391,652			1,136,519
Loss ratio		62.4	%		61.7	%		63.3	%
Expense ratio		25.1	%		25.6	%		25.1	%
Combined ratio		87.5	%		87.3	%		88.4	%

Regional
Gross premiums written	$	1,384,574		$	1,295,659		$	1,154,772
Net premiums written		1,196,487			1,128,800			963,988
Premiums earned		1,173,174			1,068,552			880,597
Loss ratio		55.8	%		55.7	%		56.3	%
Expense ratio		30.6	%		31.2	%		31.2	%
Combined ratio		86.4	%		86.9	%		87.5	%

Alternative Markets
Gross premiums written	$	781,411		$	756,349		$	605,667
Net premiums written		669,774			640,491			505,830
Premiums earned		663,478			605,996			428,120
Loss ratio		59.4	%		70.6	%		68.7	%
Expense ratio		20.1	%		21.2	%		24.2	%
Combined ratio		79.5	%		91.8	%		92.9	%

Reinsurance
Gross premiums written	$	770,781		$	868,208		$	949,404
Net premiums written		719,540			823,772			832,634
Premiums earned		754,097			841,451			713,154
Loss ratio		74.1	%		69.5	%		69.6	%
Expense ratio		30.1	%		29.1	%		29.4	%
Combined ratio		104.2	%		98.6	%		99.0	%

International
Gross premiums written	$	218,396		$	195,938		$	121,724
Net premiums written		190,908			175,731			109,790
Premiums earned		187,993			153,441			76,220
Loss ratio		66.5	%		61.0	%		58.7	%
Expense ratio		29.6	%		30.0	%		38.8	%
Combined ratio		96.1	%		91.0	%		97.5	%

Consolidated
Gross premiums written	$	5,087,983		$	4,724,128		$	4,243,415
Net premiums written		4,604,574			4,266,361			3,670,515
Premiums earned		4,460,935			4,061,092			3,234,610
Loss ratio		62.4	%		63.0	%		63.4	%
Expense ratio		26.9	%		27.4	%		28.0	%
Combined ratio		89.3	%		90.4	%		91.4	%

During 2005, the Company changed the segment designation for the following companies: Berkley Underwriting Partners, LLC from reinsurance to specialty; W. R. Berkley Insurance (Europe), Limited from specialty to international; and Berkley Medical Excess Underwriters, LLC from specialty to alternative markets. Segment information for the prior periods has been restated to reflect these changes.

Results of Operations for the Years Ended December 31, 2005 and 2004

The following table presents the Company’s net income and net income per share for the years ended December 31, 2005 and 2004 (amounts in thousands, except per share data):


	2005		2004

Net income	$	544,892	$	438,105
Weighted average diluted shares		133,617		132,272
Net income per diluted share	$	4.08	$	3.31

The increase in net income in 2005 compared with 2004 reflects higher investment income and higher profits from underwriting activity. The increase in investment income was primarily the result of a 28% increase in average invested assets arising from cash flow provided by operating and financing activity. The improvement in underwriting results is attributable to a 10% increase in earned premiums, a 0.6 percentage point decrease in the loss ratio (losses and loss expenses incurred expressed as percentage of earned premiums), and a 0.5 percentage point decrease in the expense ratio (underwriting expenses experienced as a percentage of premiums earned). Weather-related losses were $99 million in 2005 and $60 million in 2004, and included hurricane losses of $74 million and $34 million, respectively.

Gross Premiums Written. Gross premiums written were $5.1 billion in 2005, up 8% from 2004. While prices increased significantly in 2002 and 2003, the Company experienced an increased level of price competition beginning in 2004. This trend became more pronounced in 2005 with price levels for renewal business declining approximately 1%, as compared with the prior year period.

As of December 31, 2005, the Company reported an accrual for earned but unbilled audit premiums. The Company’s policy is to recognize audit premiums when they are reliably determinable. In prior periods, audit premiums were not considered to be reliably determinable until such audits were completed and billed. In 2005, the Company developed sufficient information to begin recognizing unbilled audit premiums as such premiums are earned. The accrual for earned but unbilled audit premiums increased premiums written and earned by $57 million and income before income taxes by $11 million in 2005.

Gross premiums for the regional and alternative markets segments include premiums written on behalf of assigned risk plans managed by the Company. The assigned risk premiums are fully reinsured by the respective state-sponsored assigned risk plans. A summary of gross premiums written in 2005 compared with 2004 by business segment follows:

	•		Specialty gross premiums increased by 20% to $1.9 billion in 2005 from $1.6 billion in 2004. Gross premiums for Berkley Specialty Underwriting Managers LLC, which began operations in July 2004, were $166 million in 2005 compared to $52 million in 2004. The number of specialty policies issued in 2005 increased 13%, and the average premium per policy increased 7%. Average prices for renewal policies, adjusted for changes in exposure, decreased 2%. Gross premiums written increased 31% for premises operations, 18% for products liability, 15% for property lines and 6% for automobile. Gross premiums written decreased 8% for professional liability lines.

	•		Regional gross premiums increased by 7% to $1.4 billion in 2005 from $1.3 billion in 2004. The number of policies issued in 2005 decreased 5%, and the average premium per policy increased 12%. Average prices for renewal policies, adjusted for changes in exposure, decreased 1%. Gross premiums written increased by 10% for workers’ compensation, 4% for commercial multiple peril and 4% for commercial automobile. Gross premiums include assigned risk premiums of $114 million in 2005 and $95 million in 2004.

	•		Alternative markets gross premiums increased by 3% to $781 million in 2005 from $756 million in 2004. The number of policies issued in 2005 decreased 1%, and the average premium per policy increased 4%. Average prices for renewal policies, adjusted for changes in exposure, decreased 2%. Gross premiums written increased by 15% for excess workers’ compensation and decreased 1% for primary workers’ compensation. Gross premiums include assigned risk premiums of $65 million in 2005 and $73 million in 2004.

	•		Reinsurance gross premiums decreased by 11% to $771 million in 2005 from $868 million in 2004. The decrease in business written includes a planned decline of $93 million in reinsurance written through Lloyd’s and a decrease of $56 million as a result of the discontinuance of a facultative relationship with a particular ceding company. Casualty gross premiums written decreased 9% to $626 million, and property gross premiums written decreased 19% to $145 million.

	•		International gross premiums increased by 12% to $218 million in 2005 from $196 million in 2004.

Net Premiums Earned. Net premiums earned increased 10% to $4.5 billion from $4.1 billion in 2004. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in 2005 are related to premiums written during both 2005 and 2004. The 10% growth rate for 2005 earned premiums reflects the underlying growth in net premiums written of 8% in 2005 and 16% in 2004. The increase in earned premiums in 2005 also reflects the accrual for earned but unbilled audit premiums of $57 million referred to above.

Net Investment Income. Following is a summary of net investment income for the years ended December 31, 2005 and 2004 (dollars in thousands):


	Amount						Average Yield
	2005			2004			2005			2004
Fixed maturity securities, including cash	$	336,126		$	242,270			4.2	%		3.9	%
Equity securities available for sale		25,529			21,005			6.3	%		5.8	%
Arbitrage trading account		28,095			13,743			6.2	%		3.7	%
Investments in partnerships and affiliates		18,545			16,906			6.8	%		9.1	%
Other expense		(1,360	)		(58	)

Gross investment income		406,935			293,866			4.4	%		4.1	%
Investment expenses and interest on funds held		(2,973	)		(2,571	)

Total	$	403,962		$	291,295

Net investment income increased 39% to $404 million in 2005 from $291 million in 2004. Average invested assets (including cash and cash equivalents) increased 28% to $9.2 billion in 2005 compared with $7.2 billion in 2004. The increase was a result of cash flow from operations and the net proceeds from borrowings during 2004 and 2005. The average annualized gross yield on investments increased to 4.4% in 2005 from 4.1% in 2004 due primarily to higher short-term interest rates and higher returns on the arbitrage trading account.

Service Fees. The alternative markets segment offers fee-based services to help clients develop and administer self-insurance programs, primarily for workers’ compensation coverage. Service fees were $111 million in 2005 and $109 million in 2004.

Realized Investment Gains. Realized investment gains result primarily from sales of securities, as well as from provisions for other than temporary impairment in securities. Realized investment gains of $17 million in 2005 and $48 million in 2004 were attributable to the sale of fixed maturity and equity securities. The Company buys and sells securities on a regular basis in order to maximize the total return on investments. Decisions to sell securities are based on management’s view of the underlying fundamentals of specific securities as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions.

Losses and Loss Expenses. Losses and loss expenses increased 9% to $2.8 billion in 2005 from $2.6 billion in 2004 as a result of increased premium volume. The consolidated loss ratio decreased to 62.4% in 2005 from 63.0% in 2004 primarily as a result of a decrease in additions to prior year loss reserves ($187 million in 2005 compared with $295 million in 2004). Weather-related losses, including losses attributable to Hurricanes Katrina, Rita and Wilma, were $99 million in 2005 compared with $60 million in 2004. A summary of loss ratios in 2005 compared with 2004 by business segment follows:

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

	•		The regional loss ratio was 55.8% in 2005 compared with 55.7% in 2004. Weather-related losses were $35 million in 2005 compared with $28 million in 2004.

	•		Alternative market’s loss ratio decreased to 59.4% from 70.6% primarily as a result of the Company’s reassessment of the favorable impact of workers’ compensation reforms in California.

	•		The reinsurance loss ratio was 74.1% in 2005 compared with 69.5% in 2004 primarily as a result of higher weather-related losses ($49 million in 2005 compared with $27 million in 2004).

	•		The international loss ratio was 66.5% in 2005 compared with 61.0% in 2004 primarily as a result of an increase in estimated losses for business written in Argentina and Europe.

Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses for the years ended December 31, 2005 and 2004 (dollars in thousands):


	2005		2004

Underwriting expenses	$	1,202,043	$	1,114,750
Service company expenses		91,134		84,404
Other costs and expenses		65,397		48,835

Total	$	1,358,574	$	1,247,989

Underwriting expenses increased 8% in 2005 compared with 2004 primarily as a result of higher premium volume. Underwriting expenses are primarily comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. The consolidated expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 26.9% in 2005 and 27.4% in 2004.

Service company expenses, which represent the costs associated with the alternative market’s fee-based business, increased 8% to $91 million primarily as a result of an increase in costs associated with the servicing assigned risk plan business as well as higher compensation costs.

Other costs and expenses, which represent primarily general and administrative expenses for the parent company, increased 34% to $65 million primarily as a result of higher compensation costs.

Interest Expense. Interest expense increased 29% to $86 million as a result of the issuance of $150 million of 6.15% senior notes in August 2004, $200 million of 5.6% senior notes in May 2005 and $250 million of 6.75% junior subordinated debentures in July 2005, which were partially offset by repayment of $40 million 6.375% senior notes in April 2005.

Income taxes. The effective income tax rate was 29% in 2005 and 31% in 2004. The effective tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income.

Results of Operations for the Years Ended December 31, 2004 and 2003

The following table presents the Company’s net income and net income per share for the years ended December 31, 2004 and 2003 (amounts in thousands, except per share data).


	2004		2003

Net income	$	438,105	$	337,220
Weighted average diluted shares		132,272		130,595
Net income per diluted share	$	3.31	$	2.58

The increase in net income in 2004 compared with 2003 reflects higher profits from underwriting activity and investment income. The improvement in underwriting results is attributable to a 26% increase in earned premiums, a 0.4 percentage point decrease in the loss ratio and a 0.6 percentage point decrease in the expense ratio. The increase in investment income is the result of a 35% increase in average invested assets arising primarily from cash flow provided by operating and financing activity.

Gross Premiums Written. Gross premiums written were $4.7 billion in 2004, up 11% from 2003. The increase in gross premiums written in 2004 was a result of higher prices as well as new business. Although prices generally increased during 2004, the Company experienced an increased level of price competition. A summary of gross premiums written in 2004 compared with 2003 by business segment follows:

•

Specialty gross premiums increased by 14% to $1.6 billion in 2004 from $1.4 billion in 2003 due to higher prices and new business. The number of policies issued in 2004 decreased 10%, and the average premium per policy increased by 27%. The estimated price increase for renewal policies, adjusted for changes in coverage, was 5% in 2004. The increases in specialty gross premiums by major business line were 13% for premises operations, 13% for automobile, 7% for property and 75% for products liability. The increase in products liability included approximately $52 million related to a renewal rights transaction completed in July 2004. Specialty gross premiums decreased by 2% for professional liability.

	•		Regional gross premiums increased by 12% to $1.3 billion in 2004 from $1.2 billion in 2003. The increase generally reflects higher prices and new business. The number of policies issued in 2004 increased 2%, and the average premium per policy increased by 12%. The estimated price increase for renewal policies, adjusted for changes in coverage, was 4% in 2004. The increases in regional gross premiums by major business line were 12% for commercial multiple peril, 13% for automobile and 10% for workers’ compensation. Gross premiums from assigned risk plans decreased by 5%.

	•		Alternative markets gross premiums increased by 25% to $756 million in 2004 from $606 million in 2003 due to higher prices and new business. The number of policies issued in 2004 increased 10%, and the average premium per policy increased by 8%. The estimated price increase for renewal policies, adjusted for changes in coverage, was 14% in 2004. The increases in alternative markets gross premiums by major business line were 22% for excess workers’ compensation, 24% for primary workers’ compensation and 109% for assigned risk plans. Assigned risk premiums are written on behalf of assigned risk plans managed by the Company and are 100% reinsured by the respective state-sponsored assigned risk pools.

	•		Reinsurance gross premiums decreased by 9% to $868 million in 2004 from $949 million in 2003. Reinsurance written through Lloyd’s decreased 14% to $212 million due to a planned reduction in that business. Reinsurance business written in the U.S. decreased 7% to $657 million. The decrease in business written in the U.S includes a decline of $59 million as a result of the discontinuance of a facultative reinsurance relationship with a particular ceding company.

	•		International gross premiums increased by 61% to $196 million in 2004 from $122 million in 2003 due to an increase of $64 million from the Company’s London based unit, W. R. Berkley Insurance (Europe), Limited.

Net Premiums Earned. Net premiums earned increased 26% to $4.1 billion from $3.2 billion in 2003. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in 2004 are related to premiums written during both 2003 and 2004. The 26% growth rate for 2004 earned premiums reflects the underlying growth in net premiums written of 35% in 2003 and 16% in 2004.

Net Investment Income. Following is a summary of net investment income for the years ended December 31, 2004 and 2003 (dollars in thousands):


	Amount						Average Yield
	2004			2003			2004			2003

Fixed maturity securities, including cash	$	242,270		$	209,479			3.9	%		4.5	%
Equity securities available for sale		21,005			18,906			5.8	%		6.9	%
Arbitrage trading account		13,743			8,110			3.7	%		2.7	%
Investments in partnerships and affiliates		16,906			7,025			9.1	%		7.7	%
Other expense		(58	)		827

Gross investment income		293,866			244,347			4.1	%		4.6	%
Investment expenses and interest on funds held		(2,571	)		(34,291	)

Total	$	291,295		$	210,056

Net investment income increased 39% to $291 million in 2004 from $210 million in 2003. Average invested assets (including cash and cash equivalents) increased 35% to $7.2 billion in 2004 compared with $5.3 billion in 2003. The increase was a result of cash flow from operations and the proceeds from senior notes issued during 2004 and 2003. The average annualized gross yield on investments was 4.1% in 2004 compared with 4.6% in 2003. The lower yield on fixed maturity securities 2004 reflects the decrease in general interest rate levels, an increase in the portion of the portfolio invested in tax-exempt securities and a planned reduction in the portfolio duration. Interest on funds held under reinsurance treaties decreased by $32 million due to the termination of an aggregate reinsurance agreement on December 31, 2003.

Service Fees. The alternative markets segment offers fee-based services to help clients develop and administer self-insurance programs, primarily for workers’ compensation coverages. Service fees increased 8% in 2004 compared with 2003 primarily as a result of an increase in service fees for managing assigned risk plans in twelve states.

Realized Investment Gains. Realized investment gains result from sales of securities and from provisions for other than temporary impairment in securities. Realized investment gains of $48 million in 2004 and $82 million in 2003 resulted primarily from the sale of fixed income and equity securities. Charges for the permanent impairment of investments were $2.8 million and $0.4 million in 2004 and 2003, respectively.

Losses and Loss Expenses. Losses and loss expenses increased 25% to $2.6 billion in 2004 from $2.1 billion in 2003 primarily as a result of the increased premium volume. The consolidated loss ratio decreased to 63.0% in 2004 from 63.4% in 2003 primarily as a result of the impact of increased pricing as well as improved terms and conditions. The underwriting improvements were partially offset by an increase in weather-related losses ($60 million in 2004 compared with $38 million in 2003) and by an increase in additions to prior year loss reserves ($295 million in 2004 compared with $245 million in 2003). Weather-related losses in 2004 included losses of approximately $34 million from four hurricanes during the third quarter. A summary of loss ratios in 2004 compared with 2003 by business segment follows:

	•		Specialty’s loss ratio was 61.7% in 2004 compared with 63.3% in 2003 principally due to increased pricing levels, lower reinsurance costs and a decrease of $7 million in additions to prior year reserves.

	•		The regional loss ratio decreased to 55.7% in 2004 from 56.3% in 2003 primarily as a result of increased pricing levels, lower reinsurance costs and lower weather-related losses ($28 million in 2004 compared with $38 million in 2003).

	•		Alternative market’s loss ratio was 70.6% in 2004 compared with 68.7% in 2003. The higher loss ratio in 2004 reflects an increase of $28 million in additions to prior year reserves and an increase of $10 million in loss reserve discount amortization.

	•		The reinsurance loss ratio was 69.5% in 2004 compared with 69.6% in 2003. The decrease reflects increased pricing levels for both treaty and facultative risks, partially offset by hurricane losses of $27 million and by a $31 million increase in additions to prior year reserves.

	•		The international loss ratio was 61.0% in 2004 compared with 58.7% in 2003.

Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses for the years ended December 31, 2004 and 2003 (dollars in thousands):


	2004		2003

Underwriting expenses	$	1,114,750	$	905,349
Service company expenses		84,404		82,821
Other costs and expenses		48,835		47,724

Total	$	1,247,989	$	1,035,894

Underwriting expenses increased 23% in 2004 compared with 2003 primarily as a result of higher premium volume. Underwriting expenses are primarily comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Commissions and assessments generally increased at rates commensurate with the increase in premiums, while internal underwriting costs generally increased at rates lower than the increase in earned premiums. As a result, the consolidated expense ratio decreased to 27.4% in 2004 from 28.0% in 2003.

Service company expenses, which represent the costs associated with the alternative market’s fee-based business, increased 2% to $84 million. Other costs and expenses, which represent primarily general and administrative expenses for the parent company, increased 2% to $49 million.

Interest Expense. Interest expense increased 21% to $66 million as a result of the issuance of $200 million of 5.875% senior notes in February 2003, $150 million of 5.125% senior notes in September 2003 and $150 million of 6.15% senior notes in August 2004.

Income taxes. The effective income tax rate was 31% in 2004 and 2003. The effective tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income.

Investments

As part of its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities that, combined with expected cash flow, it believes adequate to meet payment obligations. The Company also attempts to maintain an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities, i.e., policy claims and debt obligations.

The carrying value of the Company’s investment portfolio and investment-related assets as of December 31, 2005 and 2004 were as follows (dollars in thousands):


	2005			2004

Fixed maturity securities	$	8,485,104		$	6,369,421
Equity securities available for sale		435,699			413,263
Equity securities trading account		567,760			280,340
Investments in partnerships and affiliates		321,662			240,865

Total investments		9,810,225			7,303,889


Cash and cash equivalents		672,941			932,079
Trading account receivable from brokers and clearing organization		98,229			186,479
Trading account securities sold but not yet purchased		(198,426	)		(70,667	)
Unsettled purchases		(4,719	)		(9,836	)

Total	$	10,378,250		$	8,341,944

Fixed Maturities. The Company’s investment policy with respect to fixed maturity securities is generally to purchase instruments with the expectation of holding them to their maturity. However, active management of the available for sale portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as a result of changes in financial market conditions and tax considerations. At December 31, 2005 (as compared to December 31, 2004), the fixed maturities portfolio mix was as follows: U.S. Government securities were 15% (15% in 2004); state and municipal securities were 55% (54% in 2004); corporate securities were 9% (10% in 2004); mortgage-backed securities were 18% (18% in 2004); and foreign bonds were 3% (3% in 2004).

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

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

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

Investments in Partnerships and Affiliates. At December 31, 2005 (as compared to December 31, 2004), investments in partnerships and affiliates were as follows: equity in Kiln plc was $74 million ($51 million in 2004); real estate funds were $160 million ($133 million in 2004); fixed income relative value funds were $52 million ($40 million in 2004); and other investments were $36 million ($17 million in 2004).

Securities in an Unrealized Loss Position. The following table summarizes of all securities in an unrealized loss position at December 31, 2005 and 2004 by the length of time those securities have been continuously in an unrealized loss position:


	Number of		Aggregate		Gross
(Dollars in thousands)	Securities		Fair Value		Unrealized Loss

December 31, 2005
Fixed maturities:
0– 6 months		237	$	2,921,830	$	29,928
7- 12 months		65		878,549		12,124
Over 12 months		96		847,400		17,410

Total		398	$	4,647,779	$	59,462

Equity securities available for sale:
0– 6 months		38	$	45,443	$	1,221
7- 12 months		15		106,979		2,571
Over 12 months		4		11,364		609

Total		57	$	163,786	$	4,401

December 31, 2004
Fixed maturities:
0– 6 months		109	$	1,005,675	$	4,932
7- 12 months		101		798,721		9,190
Over 12 months		65		189,239		4,245

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

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

Total		10	$	29,513	$	761

At December 31, 2005, gross unrealized gains were $143 million, or 1% of total investments, and gross unrealized losses were $64 million, or 0.6% of total investments. There were 180 securities that have been continuously in an unrealized loss position for more than six months. Those securities had an aggregate fair value of $1.8 billion and an aggregate unrealized loss of $33 million. The decline in market value for these securities is primarily due to an increase in market interest rates. Management regularly reviews its investment portfolio to determine whether a decline in value as a result of deterioration in the financial position or future prospects of the issuer is considered to be other than temporary. A decline is value is considered to be other than temporary where there has been a sustained reduction in market value and there are no mitigating circumstances. If a decline in value is considered other than temporary, the Company reduces the carrying value of the security and reports a realized loss on its statement of income. Provisions for other than temporary impairments were $1.6 million, $2.8 million, and $0.4 million in 2005, 2004 and 2003, respectively

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 credit quality and interest rates. The Company uses various models and stress test scenarios to monitor and manage interest rate risk. 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. In response to interest rate changes and management’s expectations regarding future interest rates, the Company shortened the duration of the fixed income portfolio from 4.1 years to 3.2 years during 2004 and lengthened the duration for the fixed income portfolio from 3.2 years to 3.8 years during 2005.

The following table outlines the groups of fixed maturity securities and the components of the interest rate risk at December 31, 2005:


	Market			Effective		Fair Value
	Yield			Duration		(000s)

Cash and cash equivalents		3.87	%		0.03	$	672,941
U. S. Government securities		3.94	%		2.35		1,249,661
State and municipal		3.79	%		5.29		4,643,138
Corporate		3.90	%		3.04		814,331
Foreign		6.17	%		2.54		298,143
Mortgage-backed securities		5.28	%		2.31		1,496,310

Total		4.15	%		3.84	$	9,174,524

Duration is a common gauge of the price sensitivity of a fixed income portfolio to a change in interest rates. The Company determines the estimated change in fair value of the 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, 2005 would be as follows:


	Estimated Fair Value
	of Fixed Maturity		Estimated Change in Fair
	Securities		Value
Change in interest rates	(000s)		(000s)

300 basis point rise	$	8,117,619	$	(1,056,905	)
200 basis point rise		8,469,921		(704,603	)
100 basis point rise		8,822,222		(352,302	)
Base scenario		9,174,524		—
100 basis point decline		9,519,486		344,962
200 basis point decline		9,864,448		689,924
300 basis point decline		10,209,410		1,034,886

Arbitrage investing differs from other types of investments in that its focus is 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 risk of completion of announced deals, which are subject to regulatory as well as transactional and other risks.

Liquidity and Capital Resources

Cash Flow. Cash flow provided from operating activities was $1.7 billion in 2005, $1.6 billion in 2004 and $1.4 billion in 2003. The levels of cash flow provided by operating activities over these years, which are high by historical measures in relation to both earned premiums and net income, are a result of strong growth in premiums and investment income and relatively low paid losses. The increase in operating cash flow in 2005 compared with 2004 was primarily due to higher investment income. Cash flow provided by operating activities in 2005 and 2004 is net of transfers to the arbitrage trading account of $80 million and $73 million, respectively.

As a holding company, the Company derives cash from its subsidiaries in the form of dividends, tax payments and management fees. Maximum amounts of dividends that can be paid without regulatory approval are prescribed by statute. During 2006, the maximum amount of dividends which can be paid without regulatory approval is approximately $311 million. The ability of the holding company to service its debt obligations is limited by the ability of the insurance subsidiaries to pay dividends. In the event dividends, tax payments and management fees available to the holding company were inadequate to service its debt obligations, the Company would need to raise capital, sell assets or restructure its debt obligations.

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. As of December 31, 2005, the insurance subsidiaries’ undiscounted reserves for loss and loss expenses were $7.4 billion. The Company estimates that approximately $1.6 billion of those reserves will be paid in 2006 and that approximately $3.5 billion will be paid from 2007 through 2010. The Company expects its insurance subsidiaries to fund the payment of losses with cash received from premiums, investment income and fees. In addition, the insurance subsidiaries have cash and investments of $10.4 billion as of December 31, 2005 that are available to pay claims and other obligations as they become due. The investment portfolio is highly liquid, with approximately 88% invested in marketable fixed maturity securities and cash and cash equivalents with an average duration of 3.8 years.

Financing Activity. The Company issued $150 million of 6.15% senior notes in August 2004 and $200 million of 5.6% senior notes in May 2005. The Company repaid $40 million of 6.375% senior notes in April 2005 and $100 million of 6.25% senior notes in January 2006.

At December 31, 2005, the Company had senior notes, junior subordinated debentures and other debt outstanding with a carrying value of $1,418 million and a face amount of $1,437 million. The maturities of the outstanding debt are $100 million in 2006, $89 million in 2008, $150 million in 2010, $200 million in 2013, $200 million in 2015, $150 million in 2019, $76 million in 2022, $12 million in 2023 and $460 million in 2045 (of which $210 million is prepayable in 2006 and $250 million is prepayable in 2010).

As of December 31, 2005, the Company has repurchased preferred securities of the W. R. Berkley Capital Trust with an aggregate principal amount of $82 million and a carrying value of $83 million. The preferred securities, which are secured by the Company’s junior subordinated debentures, are reported as investments in fixed income securities on the accompanying balance sheet and have not been deducted from the outstanding debt amounts referred to in the preceding paragraph.

At December 31, 2005, stockholders’ equity was $2,567 million and total capitalization (stockholders’ equity, senior notes and other debt and junior subordinated debentures) was $3,986 million. The percentage of the Company’s capital attributable to senior notes and other debt and junior subordinated debentures was 36% at December 31, 2005, compared with 33% at December 31, 2004.

Federal and Foreign Income Taxes

The Company files a consolidated income tax return in the U. S. and foreign tax returns in each of the countries in which it has overseas operations. At December 31, 2005, the Company had a deferred tax asset, net of valuation allowance, of $345 million (which primarily relates to loss and loss expense reserves and unearned premium reserves) and a deferred tax liability of $213 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 customary industry practice of reinsuring a portion of its exposures, paying reinsurers a part of the premiums received on the policies it writes. Reinsurance is purchased by the Company principally to reduce its net liability on individual risks and to protect it 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 and financially sound carriers.

After giving effect to treaty and facultative reinsurance in place as of January 1, 2006, the largest initial amount retained by the Company on any one risk is generally $5 million, except for workers’ compensation risks and risks underwritten by Berkley Medical Excess Underwriters, LLC. Workers’ compensation risks are only limited by statutory limits. For risks underwritten by Berkley Medical Excess Underwriters, LLC, the Company retains up to $10 million. For catastrophe losses in the U.S., the Company’s property reinsurance provides protection for 79% of the net loss above $7.5 million up to $60 million, and its casualty contingency agreement provides protection for 100% of the net loss in excess of $2 million up to $25 million. For business written through Lloyd’s, the Company has separate catastrophe excess of loss and quota share agreements secured through its Lloyd’s general agents.

Contractual Obligations

Following is a summary of the Company’s contractual obligations as of December 31, 2005 (amounts in thousands):


Estimated Payments By Periods	2006		2007		2008		2009		2010		Thereafter

Gross reserves for losses	$	1,559,884	$	1,222,765	$	966,730	$	739,002	$	616,565	$	2,260,913
Policyholders account balances		24,721		16,511		12,786		10,352		8,643		10,880
Operating lease obligations		15,956		15,308		13,213		11,374		8,514		12,903
Purchase obligation		3,707		20,728		19,615		435		435		260
Junior subordinated debentures		—		—		—		—		—		460,000
Senior notes		100,000		—		88,800		—		150,000		638,250
Other long-term liabilities		33,422		12,923		7,832		2,418		4,128		4,821

Total	$	1,737,690	$	1,288,235	$	1,108,976	$	763,581	$	788,285	$	3,388,027

The estimated payments for reserves for losses and loss expenses in the above table represent the projected payments for gross loss and loss expense reserves related to losses incurred as of December 31, 2005. The estimated payments in the above table do not consider payments for losses to be incurred in futures periods. These amounts include reserves for reported losses and reserves for incurred but not reported losses. Estimated amounts recoverable from reinsurers are not reflected. The estimated payments by year are based on historical loss payment patterns. The actual payments may differ from the estimated amounts due to changes in ultimate loss reserves and in the timing of the settlement of those reserves.

The Company utilizes letters of credit to back certain reinsurance payments and obligations. Outstanding letters of credit were $48 million as of December 31, 2005. The Company has made certain guarantees to state regulators that the statutory capital of certain subsidiaries will be maintained above certain minimum levels. In addition, the Company has commitments to invest up to $285 million in certain investment funds.

Off-Balance Sheet Arrangements

An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or that engages in leasing, hedging or research and development arrangements with the Company. The Company has no arrangements of these types that management believes may have a material current or future effect on our financial condition, liquidity or results of operations.

Report of Management on Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2005.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
W. R. Berkley Corporation:

We have audited management’s assessment, included in the accompanying Report of Management on Internal Control Over Financial Reporting, that W. R. Berkley Corporation (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders’ equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated March 10, 2006 expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP

New York, New York
March 10, 2006

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
W. R. Berkley Corporation:

We have audited the accompanying consolidated balance sheets of W. R. Berkley Corporation and subsidiaries as of December 31, 2005 and 2004 and the related consolidated statements of income, stockholders’ equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 the Company and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on the criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 10, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

KPMG LLP

New York, New York
March 10, 2006

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)


Years Ended December 31,	2005			2004			2003

Revenues:
Net premiums written	$	4,604,574		$	4,266,361		$	3,670,515
Change in net unearned premiums		(143,639	)		(205,269	)		(435,905	)

Premiums earned		4,460,935			4,061,092			3,234,610
Net investment income		403,962			291,295			210,056
Service fees		110,697			109,344			101,715
Realized investment gains		17,209			48,268			81,692
Other income		4,036			2,236			2,035

Total revenues		4,996,839			4,512,235			3,630,108


Operating costs and expenses:
Losses and loss expenses		2,781,802			2,559,310			2,050,177
Other operating costs and expenses		1,358,574			1,247,989			1,035,894
Interest expense		85,926			66,423			54,733

Total expenses		4,226,302			3,873,722			3,140,804


Income before income taxes and minority interest		770,537			638,513			489,304
Income tax expense		(222,521	)		(196,235	)		(150,626	)
Minority interest		(3,124	)		(3,446	)		(1,458	)


Income before change in accounting principle		544,892			438,832			337,220
Cumulative effect of change in accounting principle, net of taxes	—				(727	)		—

Net income	$	544,892		$	438,105		$	337,220


Earnings per share:
Basic:
Income before change in accounting principle	$	4.29		$	3.49		$	2.71
Cumulative effect of change in accounting principle, net of taxes	—				(.01	)		—

Net Income	$	4.29		$	3.48		$	2.71


Diluted:
Income before change in accounting principle	$	4.08		$	3.32		$	2.58
Cumulative effect of change in accounting principle, net of taxes	—				(.01	)		—

Net Income	$	4.08		$	3.31		$	2.58

See accompanying notes to consolidated financial statements.

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


Years Ended December 31,	2005			2004

Assets
Investments:
Fixed maturity securities	$	8,485,104		$	6,369,421
Equity securities available for sale		435,699			413,263
Equity securities trading account		567,760			280,340
Investments in partnerships and affiliates		321,662			240,865

Total Investments		9,810,225			7,303,889


Cash and cash equivalents		672,941			932,079
Premiums and fees receivable		1,106,677			1,032,624
Due from reinsurers		954,066			851,019
Accrued investment income		101,751			69,575
Prepaid reinsurance premiums		178,621			191,381
Deferred policy acquisition costs		459,773			442,484
Real estate, furniture and equipment		169,472			162,941
Deferred Federal and foreign income taxes		132,059			90,810
Goodwill		65,759			59,021
Trading account receivable from brokers and clearing organizations		98,229			186,479
Other assets		146,714			128,731

Total Assets	$	13,896,287		$	11,451,033


Liabilities and Stockholders’ Equity

Liabilities:
Reserves for losses and loss expenses	$	6,711,760		$	5,449,611
Unearned premiums		2,189,001			2,064,519
Due to reinsurers		87,652			119,901
Trading account securities sold but not yet purchased		198,426			70,667
Policyholders’ account balances		83,893			65,982
Other liabilities		618,712			507,950
Junior subordinated debentures		450,634			208,286
Senior notes and other debt		967,818			808,264

Total Liabilities		11,307,896			9,295,180


Minority interest		21,314			46,151


Stockholders’ equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares, issued and outstanding — none		—			—
Common stock, par value $.20 per share:
Authorized 300,000,000 shares, issued and outstanding, net of treasury shares, 127,509,564 and 126,409,313 shares		31,351			31,351
Additional paid-in capital		836,723			820,913
Retained earnings		1,873,953			1,354,489
Accumulated other comprehensive income		24,903			112,055
Treasury stock, at cost, 29,238,704 and 30,344,077 shares		(199,853	)		(209,106	)

Total Stockholders’ Equity		2,567,077			2,109,702



Total Liabilities and Stockholders’ Equity	$	13,896,287		$	11,451,033

See accompanying notes to consolidated financial statements.

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


	Years ended December 31,
	2005			2004			2003

Common Stock:
Beginning of period	$	31,351		$	31,351		$	31,351
Stock issued		—			—			—

End of period	$	31,351		$	31,351		$	31,351


Additional paid in capital:
Beginning of period	$	820,913		$	809,938		$	805,773
Stock options exercised, including tax benefits		7,038			5,656			2,015
Restricted stock units expensed		8,413			5,152			1,927
Stock options expensed		134			122			75
Stock issued		225			45			148

End of period	$	836,723		$	820,913		$	809,938


Retained earnings:
Beginning of period	$	1,354,489		$	939,911		$	623,651
Net income		544,892			438,105			337,220
Eliminations of international reporting lag		—			—			1,776
Dividends		(25,428	)		(23,527	)		(22,736	)

End of period	$	1,873,953		$	1,354,489		$	939,911


Accumulated other comprehensive income:
Unrealized investment gains:
Beginning of period	$	109,699		$	120,807		$	114,664
Net change in period		(68,953	)		(11,108	)		6,143

End of period		40,746			109,699			120,807


Currency translation adjustments:
Beginning of period		2,356			(830	)		(10,061	)
Net change in period		(18,199	)		3,186			9,231

End of period		(15,843	)		2,356			(830	)


Total accumulated other comprehensive income	$	24,903		$	112,055		$	119,977


Treasury Stock:
Beginning of period	$	(209,106	)	$	(218,615	)	$	(230,179	)
Stock options exercised		9,343			9,823			11,386
Stock issued to directors		80			23			178
Stock purchased		(170	)		(337	)		—

End of period	$	(199,853	)	$	(209,106	)	$	(218,615	)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)


	Years ended December 31,
	2005			2004			2003

Net income	$	544,892		$	438,105		$	337,220

Unrealized holding gains (losses) on investment securities arising during the period, net of income taxes		(57,950	)		20,198			59,477
Reclassification adjustment for realized gains included in net income, net of income taxes		(11,003	)		(31,306	)		(53,334	)
Change in unrealized foreign exchange gains (losses)		(18,199	)		3,186			9,231

Other comprehensive income (loss)		(87,152	)		(7,922	)		15,374

Comprehensive income	$	457,740		$	430,183		$	352,594

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)


Years Ended December 31,	2005			2004			2003

Cash flows provided by operating activities:
Net income	$	544,892		$	438,105		$	337,220
Adjustments to reconcile net income to net cash flows provided by operating activities:
Cumulative effect of change in accounting principle		—			727			—
Realized investment gains		(17,209	)		(48,268	)		(81,692	)
Depreciation and amortization		63,854			55,034			20,324
Minority interest		3,124			3,446			1,458
Equity in undistributed earnings of affiliates		(13,288	)		(14,951	)		(6,508	)
Stock incentive plans		8,852			5,342			2,328
Change in:
Fixed and equity securities trading account		(307,390	)		44,873			(166,326	)
Premiums and fees receivable		(74,053	)		(82,073	)		(128,491	)
Trading account receivable from brokers and clearing organizations		88,250			(84,222	)		75,052
Trading account securities sold but not yet purchased		127,759			(48,433	)		82,985
Due from reinsurers		(103,047	)		(46,057	)		(70,275	)
Accrued investment income		(32,176	)		(15,262	)		(7,979	)
Prepaid reinsurance premiums		12,760			2,312			(29,409	)
Deferred policy acquisition cost		(17,289	)		(37,160	)		(97,124	)
Deferred income taxes		(91	)		(48,059	)		(38,769	)
Other assets		(18,583	)		(44,508	)		(41,804	)
Reserves for losses and loss expenses		1,262,149			1,257,520			1,024,166
Unearned premiums		124,482			206,624			467,649
Due to reinsurers		(32,249	)		(3,325	)		(61,686	)
Policyholders’ account balances		3,221			(1,020	)		1,785
Other liabilities		95,783			79,044			117,064

Net cash flows provided by operating activities		1,719,751			1,619,689			1,399,968

Cash flows used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities		1,171,953			1,181,719			1,084,957
Equity securities		196,196			108,241			117,006
Investments in partnerships and affiliates		15,307			20,212			—
Proceeds from maturities and prepayments of fixed maturity securities		1,303,342			560,652			696,176
Cost of purchases, excluding trading account:
Fixed maturity securities		(4,674,879	)		(3,807,609	)		(2,495,088	)
Equity securities		(241,879	)		(193,183	)		(195,857	)
Investments in partnerships and affiliates		(88,436	)		(116,914	)		(69,138	)
Net additions to real estate, furniture and equipment		(32,276	)		(41,871	)		(28,315	)
Other, net		(5,119	)		6,144			(96	)

Net cash used in investing activities		(2,355,791	)		(2,282,609	)		(890,355	)

Cash flows provided by financing activities:
Net proceeds from issuance of junior subordinated debenture		241,655			—			—
Net proceeds from issuance of senior notes		198,142			147,864			356,181
Receipts credited to policyholders’ account balances		15,490			14,043			16,899
Return of policyholders’ account balances		(800	)		(446	)		(7,986	)
Bank deposits received		9,577			11,352			12,051
Advances from federal home loan bank		6,875			1,265			14,650
Net proceeds from stock options exercised		11,250			11,129			13,401
Purchase of junior subordinated debentures		—			—			(5,000	)
Repayment of senior notes		(40,000	)		—			(60,750	)
Cash dividends to common stockholders		(19,055	)		(23,527	)		(27,681	)
Purchase of common treasury shares		(636	)		(337	)		—
Proceeds from (purchase of) minority shareholders		(30,520	)		(1,004	)		15,337
Other, net		(15,076	)		3,194			568

Net cash provided by financing activities		376,902			163,533			327,670

Net increase (decrease) in cash and cash equivalents		(259,138	)		(499,387	)		837,283
Cash and cash equivalents at beginning of year		932,079			1,431,466			594,183

Cash and cash equivalents at end of year	$	672,941		$	932,079		$	1,431,466

Supplemental disclosure of cash flow information:
Interest paid on debt	$	78,363		$	61,260		$	47,714

Federal income taxes paid	$	201,703		$	254,640		$	170,418

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2005, 2004 and 2003

(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 2004 and 2003 financial statements to conform them to the presentation of the 2005 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.

(B) Revenue recognition

Premiums written are recorded at the inception of the policy. Reinsurance premiums written are estimated based upon information received from ceding companies and subsequent differences arising on such estimates are recorded in the period they are determined. Insurance premiums are earned ratably over the policy term. Fees for services are earned over the period that services are provided.

As of December 31, 2005, the Company reported an accrual for earned but unbilled audit premiums. The Company’s policy is to recognize audit premiums when they are reliably determinable. In prior periods, audit premiums were not considered to be reliably determinable until such audits were completed and billed. In 2005, the Company developed sufficient information to begin recognizing unbilled audit premiums as such premiums are earned. The accrual for earned but unbilled audit premiums increased net premiums written and premiums earned by $57 million and income before income taxes by $11 million in 2005.

For investment contracts, premiums collected from policyholders are not reported as revenues but are included in the liability for policyholders’ account balances. Policy charges for policy administration, cost of insurance and surrender charges are assessed against policyholders’ account balances and are recognized as premium income in the period in which services are provided.

(C) Cash and cash equivalents

Cash equivalents consist of funds invested in money market accounts and investments with an effective maturity of three months or less when purchased.

(D) Investments

The Company classifies its investments into four 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 that 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 net investment income on the statement of income. Investments in partnerships and affiliates are carried under the “equity method of accounting”, whereby the Company reports its share of the income or loss from such investments as net investment income. The Company’s share of the earnings of affiliates is generally reported on a one-quarter lag in order to facilitate the timely completion of the Company’s financial statements. 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 and a separate component of stockholders’ equity. Fair value is generally determined based on either quoted market prices or values obtained from independent pricing services.

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. An other than temporary decline is considered to occur in investments where there has been a sustained reduction in market value and there are no mitigating circumstances. 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 income.

(E) Trading account

Assets and liabilities related to direct investments in arbitrage securities and investments in arbitrage-related limited partnerships are classified as trading account securities. Long portfolio positions and partnership interests are presented in the balance sheet as equity securities trading account. 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.

(F) Per share data

The Company presents both basic and diluted earnings per share (EPS) amounts. Basic EPS is calculated by dividing net income by weighted average number of common shares outstanding during the year. Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the year and is calculated using the treasury stock method for stock incentive plans. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation. All share data has been retroactively adjusted to reflect the three-for-two common stock split that was effected on April 8, 2005. On March 7, 2006, The Company’s Board of Directors approved a 3-for-2 common stock split to holders of record on March 20, 2006, with the additional shares expected to be issued on April 4, 2006. That Stock split has not been reflected in the share data presented in these financial statements.

(G) 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 after giving effect to anticipated losses, loss adjustment expenses and expenses necessary to maintain the contracts in force.

(H) 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 by the Company; 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 the statement of income 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 8 of Notes to Consolidated Financial Statements.)

(I) Reinsurance ceded

The unearned portion of premiums ceded to reinsurers is reported as prepaid reinsurance premiums. The estimated amounts of reinsurance recoverable on unpaid losses are reported as due from reinsurers. To the extent any reinsurer does not meet its obligations under reinsurance agreements, the Company must discharge its liability. Amounts due from reinsurers are reflected net of funds held where the right of offset is present. The Company has provided reserves for estimated uncollectible reinsurance.

(J) Deposit Accounting

Contracts that do not meet the risk transfer provisions of FAS 113, “Accounting and Reporting for Reinsurance of Short Duration and Long Duration Contracts”, are accounted for using the deposit accounting method. Under this method, an asset or liability is recognized at the inception of the contract based on consideration paid or received. The amount of the deposit asset or liability is adjusted at subsequent reporting dates using the interest method with a corresponding credit or charge to interest income or expense.

(K) Federal and foreign income taxes

The Company files a consolidated income tax return in the U.S. and foreign tax returns in each of the countries in which it has 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.

(L) Foreign currency

Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity’s functional currency) are included in the statement of income. Unrealized gains or losses resulting from translating the results of non-U.S. dollar denominated operations are reported as accumulated other comprehensive income. Revenues and expenses denominated in currencies other than U.S. dollars 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 balance sheet date.

(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 $26,346,000, $22,722,000 and $20,160,000 for 2005, 2004 and 2003, respectively.

(N) Comprehensive income

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

(O) Goodwill and other intangible assets

Goodwill and other intangibles assets are tested for impairment on an annual basis. The Company’s impairment test as of December 31, 2005 indicated that there were no impairment losses related to goodwill and other intangible assets.

In June 2005, the Company purchased all the minority interest in its subsidiary, Berkley International, LLC. The purchase price was $28,000,000, of which approximately $6,738,000 represents goodwill.

(P) Stock options

Effective January 1, 2003, the Company adopted the fair value recognition provisions of FAS 123, “Accounting for Stock-Based Compensation”. The fair value provisions of FAS 123 were applied prospectively to all employee awards granted, modified, or settled on or after January 1, 2003. The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period (dollars in thousands, except per share data).


	2005			2004			2003

Net income as reported	$	544,892		$	438,105		$	337,220
Add: Stock-based employee compensation expense included in reported net income, net of tax		87			80			48
Deduct: Total stock-based employee compensation expense under fair value based method for all awards, net of tax		(1,994	)		(2,902	)		(4,803	)

Pro forma net income	$	542,985		$	435,283		$	332,465


Earnings per share:
Basic—as reported	$	4.29		$	3.48		$	2.71
Basic—pro forma		4.27			3.46			2.67
Diluted—as reported		4.08			3.31			2.58
Diluted—pro forma		4.06			3.29			2.55

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 2004 and 2003 respectively. (No options were granted in 2005):


	2004			2003

Average risk free interest rate		4.6	%		3.9	%
Expected years until exercise		6			6
Expected stock volatility		23	%		23	%
Dividend yield		0.6	%		1.0	%

In December 2004, the FASB issued FAS 123R, “Share-Based Payment”, which replaces FAS 123 and is effective on January 1, 2006. FAS 123R requires that the cost resulting from all share-based payment transactions with employees, including those awarded prior to January 1, 2003, be recognized in the financial statements using a fair-value-based measurement method. The Company estimates that the after-tax stock-based employee compensation expense for options outstanding at December 31, 2005, including the expense resulting from the adoption of FAS 123R on January 1, 2006, will not have a material impact on the Company’s financial condition or results of operations.

(Q) Change in Accounting

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which was replaced in December 2003 by FIN 46R. FIN 46R addresses consolidation issues surrounding special purpose entities and certain other entities, collectively termed variable interest entities (“VIE”). A VIE is an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46R requires VIEs to be consolidated by their primary beneficiaries. As a result of adopting the consolidated provisions of FIN 46R, the Company de-consolidated the W. R. Berkley Capital Trust, effective January 1, 2004 (See Note 11 of these notes to Consolidated Financial Statements).

(R)International Operations

From its inception in 1995 and through the fourth quarter of 2002, the international segment’s results were reported on a one-quarter lag to facilitate the timely completion of the consolidated financial statements. Improvements in reporting procedures have since allowed this segment to be reported without a one-quarter lag. Beginning in the first quarter of 2003, the international segment’s results were reported in the consolidated statement of income without a one-quarter lag. In order to eliminate the one-quarter lag, net income of the international segment for the fourth quarter of 2002 was reported as a direct credit to consolidated retained earnings in 2003.

(S)Recent Accounting Pronouncements

In May 2005, the FASB issued Statement No. FAS 154, “Accounting Changes and Error Corrections ,“ which provides guidance on the accounting for and reporting of accounting changes and error corrections and is effective for years beginning after December 31, 2005. The Company does not expect the adoption of the statement to have any impact on the Company’s financial condition or results of operations.

In November 2005, the FASB issued Staff Position FAS 115-1/124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” which is effective for years beginning after December 15, 2005. The Staff Position addresses the determination of when an investment is considered impaired, whether the impairment is other than temporary and the measurement of an impairment loss. The Company does not expect the adoption of the statement to have a material impact on the Company’s financial condition or results of operations.

(2) Investments in Fixed Maturity Securities

At December 31, 2005 and 2004, investments in fixed maturity securities were as follows:


(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Carrying
Type of Investment	Cost		Gains		Losses			Value		Value

December 31, 2005
Held to maturity:
State and municipal	$	89,044	$	1,932	$	—		$	90,976	$	89,044
Mortgage backed securities		74,335		4,518		(86	)		78,767		74,335
Corporate		84,943		10,175		(60	)		95,058		84,943

Total held to maturity		248,322		16,625		(146	)		264,801		248,322


Available for sale:
United States Government and government agency		1,253,203		8,238		(11,780	)		1,249,661		1,249,661
State and municipal		4,530,766		45,065		(23,669	)		4,552,162		4,552,162
Corporate		716,437		9,199		(6,363	)		719,273		719,273
Mortgage-backed securities		1,426,515		6,178		(15,150	)		1,417,543		1,417,543
Foreign		276,118		24,379		(2,354	)		298,143		298,143

Total available for sale		8,203,039		93,059		(59,316	)		8,236,782		8,236,782


Total investment in fixed maturity securities	$	8,451,361	$	109,684	$	(59,462	)	$	8,501,583	$	8,485,104


December 31, 2004
Held to maturity:
State and municipal	$	83,108	$	9,581	$	(70	)	$	92,619	$	83,108
Corporate		20,147		721		—			20,868		20,147
Mortgage-backed securities		87,826		7,501		(83	)		95,244		87,826

Total held to maturity		191,081		17,803		(153	)		208,731		191,081


Available for sale:
United States Government and government agency		933,608		20,311		(4,173	)		949,746		949,746
State and municipal		3,256,662		72,112		(4,580	)		3,324,194		3,324,194
Corporate		657,512		15,000		(1,990	)		670,522		670,522
Mortgage-backed securities		1,044,585		12,823		(5,193	)		1,052,215		1,052,215
Foreign		161,145		22,796		(2,278	)		181,663		181,663

Total available for sale		6,053,512		143,042		(18,214	)		6,178,340		6,178,340


Total investment in fixed maturity securities	$	6,244,593	$	160,845	$	(18,367	)	$	6,387,071	$	6,369,421

The amortized cost and fair value of fixed maturity securities at December 31, 2005, 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:


	2005
	Amortized
(Dollars in thousands)	Cost		Fair Value

Due in one year or less	$	900,715	$	897,451
Due after one year through five years		1,103,342		1,111,273
Due after five years through ten years		2,252,094		2,263,100
Due after ten years		2,694,360		2,733,449
Mortgage-backed securities		1,500,850		1,496,310

Total	$	8,451,361	$	8,501,583

At December 31, 2005 and 2004, there were no investments, other than investments in United States government and government agency securities, which exceeded 10% of stockholders’ equity. At December 31, 2005, investments with a carrying value of $217 million were on deposit with state insurance departments as required by state laws.

(3) Investments in Equity Securities Available for Sale

At December 31, 2005 and 2004, investments in equity securities were as follows:


(Dollars in thousands)			Gross		Gross
			Unrealized		Unrealized			Fair		Carrying
Type of Investment	Cost		Gains		Losses			Value		Value

December 31, 2005
Common stocks	$	112,654	$	24,699	$	(560	)	$	136,793	$	136,793
Preferred stocks		297,337		5,410		(3,841	)		298,906		298,906

Total	$	409,991	$	30,109	$	(4,401	)	$	435,699	$	435,699


December 31, 2004
Common stocks	$	169,800	$	38,060	$	(566	)	$	207,294	$	207,294
Preferred stocks		195,804		10,360		(195	)		205,969		205,969

Total	$	365,604	$	48,420	$	(761	)	$	413,263	$	413,263

(4) Trading Account

At December 31, 2005 and 2004, the arbitrage trading account was as follows:


(Dollars in thousands)
				Fair			Carrying
Type of Investment	Cost			Value			Value

December 31, 2005
Direct equity securities	$	424,093		$	431,456		$	431,456
Arbitrage-related partnerships		136,304			136,304			136,304

Total equity securities trading account		560,397			567,760			567,760

Receivables from brokers		98,229			98,229			98,229
Securities sold but not yet purchased		(194,765	)		(198,426	)		(198,426	)

Total trading account	$	463,861		$	467,563		$	467,563


December 31, 2004
Direct equity securities	$	169,607		$	175,441		$	175,441
Arbitrage-related partnerships		104,899			104,899			104,899

Total equity securities trading account		274,506			280,340			280,340

Receivables from brokers		186,479			186,479			186,479
Securities sold but not yet purchased		(66,658	)		(70,667	)		(70,667	)

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

The primary focus of the trading account is merger and convertible arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Convertible arbitrage is the business of investing in convertible securities with the goal of capitalizing on price differences between these securities and their underlying equities. Arbitrage investing differs from other types of investing 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 mitigated by the use of put options, call options and swap contracts, all of which are reported at fair value. As of December 31, 2005, the fair value of long option contracts outstanding was $398,000 (notional amount of $10,678,000) and the fair value of short option contracts outstanding was $812,000 (notional amount of $31,804,000). Other than with respect to the use of these trading account securities, the Company does not make use of derivatives.

(5) Investments in Partnerships and Affiliates

Investments in partnerships and affiliates include the following:


	Carrying Value						Earnings (loss) in Affiliates
(Dollars in thousands)	2005		2004		2003		2005			2004			2003

Kiln plc	$	73,723	$	51,137	$	40,488	$	3,853		$	9,009		$	4,565
Real estate funds		160,154		132,609		75,406		15,299			10,227			6,000
Fixed income relative value funds		51,506		40,374		—		1,132			371			—
Other		36,279		16,745		10,878		(1,739	)		(2,701	)		(3,540	)

Total	$	321,662	$	240,865	$	126,772	$	18,545		$	16,906		$	7,025

The Company’s investments in partnerships and affiliates are reported under the equity method of accounting. The Company’s share of the earnings of affiliates is generally reported on a one-quarter lag in order to facilitate the timely completion of the Company’s financial statements.

The Company’s has a 20.1% interest in Kiln plc, which is based in the U.K. and conducts international insurance and reinsurance underwriting through Lloyd’s. The Company also participates directly in Lloyd’s business managed by Kiln plc. Net premiums of $41 million, $96 million and $122 million in 2005, 2004 and 2003, respectively, were written under agreements with Kiln plc.

(6) Investment Income

Investment income consists of the following:


(Dollars in thousands)	2005			2004			2003

Investment income earned on:
Fixed maturity securities	$	305,739		$	225,564		$	197,963
Equity securities available for sale		25,529			21,005			18,906
Equity securities trading account (a)		28,095			13,743			8,110
Investment in partnerships and affiliates		18,545			16,906			7,025
Cash and cash equivalents		30,387			16,706			11,516
Other		(1,360	)		(58	)		827

Gross investment income		406,935			293,866			244,347
Interest on funds held under reinsurance treaties and investment expense		(2,973	)		(2,571	)		(34,291	)

Net investment income	$	403,962		$	291,295		$	210,056


(a)		Investment income earned from net trading account activity includes unrealized trading gains of $3,816,000 in 2005, $1,790,000 in 2004 and $2,174,000 in 2003.

(7) Realized and Unrealized Investment Gains and Losses

Realized and unrealized investment gains and losses before applicable income taxes are as follows:


(Dollars in thousands)	2005			2004			2003

Realized investment gains:
Fixed maturity securities(a)		10,565			25,940			72,161
Equity securities available for sale		8,414			25,129			10,506
Provision for other than temporary impairment
Fixed maturity securities		—			—			(430	)
Equity securities available for sale		(1,645	)		(2,777	)		—
Other		(125	)		(24	)		(545	)

Realized investment gains		17,209			48,268			81,692


Change in unrealized gains and losses of available for sales securities
Fixed maturity securities		(91,316	)		(25,008	)		(27,533	)
Equity securities available for sale		(21,951	)		11,691			33,984
Investment in partnerships and affiliates		(5,711	)		8,893			1,042
Short-term		44			—			—

Total change in unrealized gains and losses		(118,934	)		(4,424	)		7,493
Income taxes		41,304			1,931			(1,801	)
Minority interest		8,677			(8,615	)		451

Change in unrealized gains and losses, net of taxes and minority interest		(68,953	)		(11,108	)	$	6,143


(a)		During 2005, 2004 and 2003, gross gains of $13,591, $31,752 and, $76,019, respectively, and gross losses of $3,026, $5,812 and $3,858, respectively, were realized.

The following table summarizes, for all securities in an unrealized loss position at December 31, 2005 and 2004, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position:


	2005						2004
					Gross						Gross
	Number of				Unrealized		Number of				Unrealized
(Dollars in thousands)	Securities		Fair value		Loss		Securities		Fair Value		Loss

Fixed maturities:
0 – 6 months		237	$	2,921,830	$	29,928		109	$	1,005,675	$	4,932
7- 12 months		65		878,549		12,124		101		798,721		9,190
Over 12 months		96		847,400		17,410		65		189,239		4,245

Total		398	$	4,647,779	$	59,462		275	$	1,993,635	$	18,367


Equities securities available for sale:
0 – 6 months		38	$	45,443	$	1,221		4	$	1,448	$	82
7- 12 months		15		106,979		2,571		2		26,319		667
Over 12 months		4		11,364		609		4		1,746		12

Total		57	$	163,786	$	4,401		10	$	29,513	$	761

At December 31, 2005, gross unrealized gains were $143 million, or 1% of total investments, and gross unrealized losses were $64 million, or 0.6% of total investments. There were 180 securities, with an aggregate fair value of $1.8 billion and an aggregate unrealized loss of $33 million that have been continuously in an unrealized loss position for more than six months. The decline in market value for these securities is primarily due to an increase in market interest rates. Management regularly reviews its investment portfolio to determine whether a decline in value as a result of deterioration in the financial position or future prospects of the issuer is considered to be other than temporary. A decline in value is considered to be other than temporary where there has been a sustained reduction in market value and there are no mitigating circumstances. If a decline in value is considered other than temporary, the Company reduces the carrying value of the security and reports a realized loss on its statement of income. Provisions for other than temporary impairments were $1,645,000, $2,777,000, and $430,000 in 2005, 2004 and 2003, respectively.

(8) Reserves for Losses and Loss Expenses

The table below provides a reconciliation of the beginning and ending reserve balances:


(Dollars in thousands)	2005		2004		2003

Net reserves at beginning of year	$	4,722,842	$	3,505,295	$	2,323,241

Net provision for losses and loss expenses (a):
Claims occurring during the current year (b)		2,531,655		2,236,860		1,780,905
Increase in estimates for claims occurring in prior years (c)		186,728		294,931		244,636
Decrease in discount for prior years		57,790		24,220		24,115

		2,776,173		2,556,011		2,049,656

Net payments for claims (d):
Current year		447,018		409,776		268,170
Prior years		1,184,707		928,688		599,432

		1,631,725		1,338,464		867,602

Net reserves at end of year		5,867,290		4,722,842		3,505,295
Ceded reserves at end of year		844,470		726,769		686,796

Gross reserves at end of year	$	6,711,760	$	5,449,611	$	4,192,091

(a)		Net provision for loss and loss expenses excludes $5,629, $3,299 and $521 in 2005, 2004 and 2003, respectively, relating to the policyholder benefits incurred on life insurance that are included in the statement of income.

(b)		Claims occurring during the current year are net of discount of $103,558, $107,282 and $96,365 in 2005, 2004 and 2003, respectively.

(c)		The increase in estimates for claims occurring in prior years is net of discount of $26,845, $26,658 and $28,214 in 2005, 2004 and 2003, respectively. The increase in estimates for claims occurring in prior years before discount is $213,573, $321,589 and $272,850 in 2005, 2004 and 2003, respectively.

(d)		Net payments in 2003 are net of $331,000 of cash received upon the commutation of the aggregate reinsurance agreement (see Note 9 of Notes to Consolidated Financial Statements).

For the year ended December 31, 2005, the Company reported losses and loss expenses of $2.8 billion, of which $187 million represented an increase in estimates for claims occurring in prior years. The increases in estimates for claims occurring in prior years were $106 million for primary business and $81 million for assumed reinsurance. On an accident year basis, the change in prior year reserves is comprised of an increase in estimates for claims occurring in accident years prior to accident year 2003 that was partially offset by a decrease in estimates for claims occurring in accident years 2003 and 2004.

Case reserves for assumed reinsurance increased 22% to $687 million at December 31, 2005 from $564 million at December 31, 2004. Reserves for incurred but not reported losses for reinsurance business increased 9% to $810 million at December 31, 2005 from $744 million at December 31, 2004. The increase in prior year reserves for reinsurance business was primarily a result of higher than expected claims reported by ceding companies. The Company sets its initial loss estimates based principally upon information obtained during the underwriting process and adjusts these estimates as additional information becomes available. As certain reinsurance contracts have matured, the Company has adjusted its estimates of ultimate losses to reflect a higher level of known losses as well as a pattern of delayed loss reporting by some ceding companies. Most of the increase in prior year reserves for reinsurance relates to business written from 1998 through 2001.

Environmental and asbestos — To date, known environmental and asbestos claims have not had a material impact on the Company’s operations. These claims have not materially impacted the Company because its subsidiaries generally did not insure large industrial companies that are subject to significant environmental and asbestos exposures.

The Company’s net reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $37,453,000 and $38,258,000 at December 31, 2005 and 2004, respectively. The Company’s gross reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $53,731,000 and $54,971,000 at December 31, 2005 and 2004, respectively. Net incurred losses and loss expenses for reported asbestos and environmental claims were approximately $1,853,000, $9,194,000 and $4,749,000 in 2005, 2004 and 2003, respectively. Net paid losses and loss expenses for asbestos and environmental claims were approximately $2,658,000, $2,802,000 and $1,391,000 in 2005, 2004 and 2003, respectively. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make an 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.

Discounting — 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 2.7% to 6.5% with a weighted average discount rate of 4.8%. The aggregate net discount, after reflecting the effects of ceded reinsurance, is $575,485,000, $502,874,000 and $393,152,000 at December 31, 2005, 2004 and 2003, respectively. For statutory reporting purposes, the Company uses a discount rate of 2.7% as permitted by the Department of Insurance of the State of Delaware. The increase in the aggregate discount from 2004 to 2005 and from 2003 to 2004 resulted from the increase in workers’ compensation reserves.

(9) Reinsurance Ceded

The Company reinsures a portion of its exposures principally to reduce net liability on individual risks and to protect against catastrophic losses. Estimated amounts due from reinsurers are reported net of reserves for uncollectible reinsurance of $2,402,000, $2,457,000 and $1,920,000 as of December 31, 2005, 2004 and 2003, respectively. The following amounts arising under reinsurance ceded contracts have been deducted in arriving at the amounts reflected in the statement of income:


(Dollars in thousands)	2005		2004		2003

Ceded premiums earned	$	495,931	$	461,005	$	556,624
Ceded losses incurred	$	404,793	$	317,367	$	447,533

From January 1, 2001 through December 31, 2003, the Company had a multi-year aggregate reinsurance agreement that provided two types of reinsurance coverage. The first type of coverage provided 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 provided aggregate accident year protection for our reinsurance segment for loss and loss adjustment expenses incurred above a certain level. Loss recoveries were subject to annual limits and an aggregate limit over the contract period. Over the three-year term of this agreement, the Company ceded premiums of $314 million and credited interest on funds held of $37 million to the reinsurer and recovered losses of $310 million and commissions of $35 million from the reinsurer. Ceded earned premiums were net of return premiums accrued under certain profit sharing provisions contained in the agreement. As of December 31, 2003, the Company commuted the aggregate reinsurance agreement. Upon commutation, the reinsurer released funds held in an amount equal to the commuted loss reserves and unearned premium reserves and, accordingly there was no gain or loss as a result of the commutation.

Certain of the Company’s ceded 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 $1 million in 2005, $2 million in 2004 and $32 million in 2003.

(10) Senior Notes and Other Debt

Debt consists of the following (the difference between the face value and the carrying value is unamortized discount):


(Dollars in thousands)					2005				2004
Description	Rate			Maturity	Face Value		Carrying Value		Carrying Value

Senior Notes		6.375	%	April 15, 2005		—		—		39,987
Senior Notes		6.25	%	January 15, 2006		100,000		99,987		99,840
Senior Notes		9.875	%	May 15, 2008		88,800		87,885		87,563
Senior Notes		5.125	%	September 30, 2010		150,000		148,488		148,167
Senior Notes		5.875	%	February 15, 2013		200,000		197,637		197,306
Senior Notes		5.60	%	May 15, 2015		200,000		198,257		—
Senior Notes		6.15	%	August 15, 2019		150,000		148,060		147,918
Senior Debentures		8.70	%	January 1, 2022		76,503		75,757		75,736
Subsidiary Debt		7.65	%	June 30, 2023		11,747		11,747		11,747

Total debt					$	977,050	$	967,818	$	808,264

The Company issued $150 million of 6.15% senior notes in August 2004 and $200 million of 5.6% senior notes in May 2005. The Company repaid $40 million of 6.375% senior notes in April 2005 and $100 million of 6.25% senior notes in January 2006.

(11) Junior Subordinated Debentures

In 1996, the Company issued $210,000,000 aggregate principal amount of 8.197% Junior Subordinated Debentures due December 15, 2045 (the “8.197% Junior Subordinated Debentures”) to W. R. Berkley Capital Trust (the “Trust”). The Trust simultaneously issued an equal amount of 8.197% mandatorily redeemable preferred securities (the “8.197% Trust Preferred Securities”), which are fully and unconditionally guaranteed by the Company to the extent the Trust has funds available for repayment of distributions. The 8.197% 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 8.197% Junior Subordinated Debentures, (ii) in whole but not in part, at any time contemporaneously with the optional prepayment of the 8.197% 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 8.197% Junior Subordinated Debentures.

Upon adoption FIN 46R (see Note (1) (Q) of these Notes to the Consolidated Financial Statements), the Company deconsolidated the Trust effective January 1, 2004. As a result of the de-consolidation, certain 8.197% Trust Preferred Securities owned by the Company, which were previously eliminated in consolidation, were reinstated on the Company’s balance sheet. The impact of the reinstatement was to increase fixed maturity securities by $13,787,000 and to increase junior subordinated debentures by $14,906,000, as of January 1, 2004. The difference between these two amounts, which was $727,000 after income taxes, was reported on the Company’s 2004 consolidated statement of income as a cumulative effect of change in accounting principle.

As of December 31, 2005, the Company has repurchased 8.197% Trust Preferred Securities with an aggregate principal amount of $82 million and a carrying value of $83 million. These securities are reported as investments in fixed income securities on the accompanying balance sheet.

In 2005, the Company issued $250,000,000 aggregate principal amount of 6.75% Junior Subordinated Debentures due July 26, 2045 (the “6.75% Junior Subordinated Debentures”) to W. R. Berkley Capital Trust II (the “Trust II”). The Trust II simultaneously issued an equal amount of 6.75% mandatorily redeemable preferred securities (the “6.75% Trust Preferred Securities”), which are fully and unconditionally guaranteed by the Company to the extent the Trust II has funds available for repayment of distributions. The 6.75% Trust Preferred Securities are subject to mandatory redemption in a like amount (i) in whole but not in part upon repayment of the 6.75% Junior Subordinated Debentures at maturity, (ii) in whole but not in part, at any time contemporaneously with the optional prepayment of the 6.75% Junior Subordinated Debentures by the Company upon the occurrence and continuation of certain events and (iii) in whole or in part, on or after July 26, 2010, contemporaneously with the optional prepayment by the Company of the 6.75% Junior Subordinated Debentures.

(12) Income Taxes

Income tax expense consists of:


(Dollars in thousands)	2005			2004			2003

Current expense	$	222,612		$	244,294		$	173,613
Deferred expense (benefit)		(91	)		(48,059	)		(22,987	)

Total expense	$	222,521		$	196,235		$	150,626

A reconciliation of the income tax expense 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)	2005			2004			2003

Computed “expected” tax expense	$	268,767		$	223,604		$	171,975
Tax-exempt investment income		(49,546	)		(30,945	)		(21,838	)
Change in valuation allowance		1,762			590			(980	)
Other, net		1,538			2,986			1,469

Total expense	$	222,521		$	196,235		$	150,626

At December 31, 2005 and 2004, the tax effects of differences that give rise to significant portions of the deferred tax asset and deferred tax liability are as follows:


(Dollars in thousands)	2005			2004

Deferred Tax Asset
Loss reserve discounting	$	169,624		$	173,891
Life reserve		8,906			8,077
Unearned premiums		136,360			126,515
Net operating loss carry forward		5,437			3,070
Other		31,128			26,623

Gross deferred tax asset		351,455			338,176
Less valuation allowance		(6,575	)		(4,813	)

Deferred tax asset		344,880			333,363



Deferred Tax Liability
Amortization of intangibles		7,966			7,612
Deferred policy acquisition costs		154,755			148,451
Deferred taxes on unrealized investment gains		22,486			65,952
Other		27,614			20,538

Deferred tax liability		212,821			242,553

Net deferred tax asset	$	132,059		$	90,810

Federal income tax expense applicable to realized investment gains was $6,165,000, $16,835,000 and $28,090,000 in 2005, 2004 and 2003, respectively. The Company had a current income tax payable of $5,230,000 at December 31, 2005 and a receivable at December 31, 2004 of $8,896,000. At December 31, 2005, the Company had foreign net operating loss carryforwards of $16,852,000, which expire from 2006 to 2011. The net change in the valuation allowance is primarily related to foreign net operating loss carry forwards and to certain foreign subsidiaries net deferred tax assets. The statute of limitations for the Company’s tax returns through December 31, 2001 has closed.

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 asset.

(13) Dividends from Subsidiaries and Statutory Financial Information

The Company’s insurance subsidiaries are restricted by law as to the amount of dividends they may pay without the approval of regulatory authorities. During 2006, the maximum amount of dividends which can be paid without such approval is approximately $311 million. Combined net income and policyholders’ surplus of the Company’s consolidated insurance subsidiaries, as determined in accordance with statutory accounting practices, are as follows:


(Dollars in thousands)	2005		2004		2003

Net income	$	463,067	$	394,300	$	293,455
Policyholders’ surplus	$	2,939,503	$	2,424,364	$	1,886,013

The significant variances between statutory accounting practices and GAAP are that for statutory purposes bonds are carried at amortized cost, acquisition costs are charged to income as incurred, deferred Federal income taxes are subject to limitations, excess and assumed workers’ compensation reserves are discounted at different discount rates 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. The Company has certain guarantees that provide that RBC levels of certain subsidiaries will remain above their authorized control levels.

(14) Stockholders’ Equity

Common equity The weighted average number of shares used in the computation of basic earnings per share was 127,022,000, 125,941,000 and 124,686,000 for 2005, 2004 and 2003, respectively. The weighted average number of shares used in the computations of diluted earnings per share was 133,617,000, 132,272,000 and 130,595,000, for 2005, 2004 and 2003, 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:


(Amounts in thousands)	2005			2004			2003

Balance, beginning of year		126,409			125,308			124,253
Shares issued		1,114			1,113			1,058
Shares repurchased		(13	)		(12	)		(3	)

Balance, end of year		127,510			126,409			125,308

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) 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, 2005 and 2004:


	2005				2004
	Carrying				Carrying
(Dollars in thousands)	Amount		Fair value		Amount		Fair Value

Investments (1)	$	10,378,250	$	10,394,729	$	8,341,944	$	8,359,594
Junior subordinated debentures		450,634		462,130		208,286		222,266
Senior notes and other debt		967,818		1,016,671		808,264		859,052


(1)		Including cash and cash equivalents, trading account receivable from brokers and clearing organizations, trading account securities sold but not yet purchased and unsettled purchases.

The estimated fair value of investments is generally based on quoted market prices as of the respective reporting dates. The fair value of the senior notes and other debt and the junior subordinated debentures are based on rates available for borrowings similar to the Company’s outstanding debt as of the respective reporting dates.

(16) Lease Obligations

The Company and its subsidiaries use office space and equipment under leases expiring at various dates. 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 $17,429,000, $16,783,000, and $18,773,000 for 2005, 2004, and 2003, respectively. Future minimum lease payments (without provision for sublease income) are: $15,956,000 in 2006; $15,308,000 in 2007; $13,213,000 in 2008; $11,374,000 in 2009; $8,514,000 in 2010 and $12,903,000 thereafter.

(17) Commitments, Litigation and Contingent Liabilities

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

The Company has a $155 million secured and unsecured letter of credit facility that expires on December 31, 2006. At December 31, 2005, letters of credit for $48 million were issued and outstanding in support of the Company’s reinsurance operations.

At December 31, 2005, the Company has commitments to invest up to $285 million in certain investment funds and a subsidiary of the Company has commitments to extend credit under future loan agreements and unused lines of credit up to $11 million.

At December 31, 2005, investments with a carrying value of $84 million were on deposit in trust accounts established as security for certain policyholders and reinsurance clients and investments with a carrying value of $38 million were on deposit with Lloyd’s in support of the Company’s underwriting activities at Lloyd’s.

(18) Stock Incentive Plan

The Company has a stock incentive plan (the “Stock Incentive Plan”) under which 24,046,875 shares of Common Stock were reserved for issuance. Pursuant to the Stock Incentive Plan, stock options may be granted at prices determined by the Board of Directors but not less than fair market value on the date of grant. Stock options vest according to a graded schedule of 25%, 50% 75% and 100% on the third, fourth, fifth and sixth year anniversary of grant date. Stock options expire on the tenth year anniversary of the grant date.

The following table summarizes stock option information:


	2005				2004				2003
	Shares		Price ^(a)		Shares		Price ^(a)		Shares		Price ^(a)

Outstanding at beginning of year		11,361,023	$	11.82		12,707,731	$	11.68		13,809,702	$	11.43
Granted		—		—		2,250		26.43		109,500		20.64
Exercised		1,108,894		10.14		1,112,370		10.01		1,042,484		9.55
Canceled		145,341		12.45		236,588		13.28		168,987		10.44

Outstanding at end of year		10,106,788	$	11.99		11,361,023	$	11.82		12,707,731	$	11.68

Options exercisable at year end		6,650,106	$	10.92		6,068,780	$	10.49		5,591,062	$	10.37

Stock available for future grant (b)		4,192,898				4,674,257				5,417,919


(a)		Weighted average exercise price.

(b)		Includes restricted stock units outstanding.

The following table summarizes information about stock options outstanding at December 31, 2005:


	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, 2005
$0 to $8		1,578,435		4.24	$	5.57		1,030,917	$	5.57
$8 to $14		3,289,064		1.36		9.95		3,234,215		9.92
$14 to $26.50		5,239,289		5.28		15.21		2,384,974		14.57

Total		10,106,788		3.84	$	11.99		6,650,106	$	10.92

Pursuant to the Stock Incentive Plan, the Company may also issue Restricted Stock Units (RSUs) to officers of the Company and its subsidiaries. The RSUs vest five years from the award date and are subject to other vesting and forfeiture provisions contained in the award agreement. The market value of the awards at the date of grant are recorded as unearned compensation, a component of stockholders’ equity, and charged to expense over the vesting period. At December 31, 2005, there were 2,288,700 RSUs outstanding with an aggregate market value at grant date of $69,354,000, of which $15,492,000 has been expensed through that date and $53,862,000 will be expensed over the remaining vesting periods.

The following table summarizes information about RSUs outstanding at December 31, 2005:


(Dollars in thousands)	2005		2004		2003

RSUs granted:
Units		643,500		981,750		684,000
Market value at grant date	$	30,094	$	26,851	$	12,987
RSUs cancelled:
Units		16,800		3,750		—
Market value at grant date	$	465	$	113		—
RSUs expensed	$	8,413	$	5,152	$	1,927

(19) Compensation Plans

The Company and its subsidiaries have profit sharing 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 profit sharing plans on the first day of the month following the first full three months in which they are employed. The plans provide that 40% of the contributions vest immediately and that the remaining 60% vest at varying percentages based upon years of service. Profit sharing expense amounted to $21,955,000, $20,663,000 and $17,135,000 for 2005, 2004 and 2003, respectively.

The Company has a Long-Term Incentive Compensation Plan (“LTIP”) that provides for incentive compensation to key executives based on the growth in the Company’s book value per share. Key employees are awarded participation units (“Units”) that vest five

years from the award date or upon achievement of the maximum value of the award, whichever occurs first. In 2001, the Company granted 178,875 Units that achieved their maximum value of $19,875,000 in 2003. Compensation expense related to the 2001 grant was $11,475,000 in 2003 and $8,400,000 in 2002. In 2004, the Company awarded 100,000 Units with a maximum value of $25,000,000. Compensation expense related to the 2004 grant was $6,587,000 in 2005 and $5,325,000 in 2004. .

(20) Retirement Benefits

Effective August 19, 2004, the Company entered into an agreement to provide retirement benefits to the Company’s chief executive officer and chairman of the board. Retirement benefits, which are unfunded, are reported in accordance with FASB Statement No. 87, “Employers’ Accounting for Pensions”. As of December 31, 2005 and 2004, respectively, the accrued benefit liability of $18,968,000 and $14,564,000 was recorded as a liability with a corresponding intangible asset of $15,378,000 and $13,716,000 that will be amortized as a prior service cost over the estimated remaining service period. The retirement benefit expense was $2,742,000 and $848,000 in 2005 and 2004, respectively. The key actuarial assumptions used to derive the projected benefit obligation and related expense are a discount rate of 5.50% in 2005 and 5.75% in 2004, a rate of compensation increase of 5.0% per year for both 2005 and 2004 and a retirement age of 72.

(21) Supplemental Financial Statement Data

Other operating costs and expenses consist of the following:


(Dollars in thousands)	2005		2004		2003

Amortization of deferred policy acquisition costs	$	959,580	$	909,412	$	787,167
Other underwriting expenses		242,463		205,338		118,182
Service company expenses		91,134		84,404		82,821
Other costs and expenses		65,397		48,835		47,724

Total	$	1,358,574	$	1,247,989	$	1,035,894

(22) Industry Segments

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

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

Our regional segments provides commercial insurance products to customers primarily in 38 states. Key clients of this segment are small-to-mid-sized businesses and state and local governmental entities. The regional subsidiaries are organized geographically, which provides them with the flexibility to adapt to local market conditions, while enjoying the superior administrative capabilities and financial strength of the Company. The regional operations are conducted through four geographic regions based on markets served: Midwest, New England, Southern (excluding Florida) and Mid Atlantic.

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

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

Our international segment offers professional indemnity and other lines in the U.K. and Spain, commercial and personal property casualty insurance in Argentina and Brazil and savings and endowment policies to pre-fund education costs in the Philippines.

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 based upon the Company’s overall effective tax rate. In 2005, the Company changed the segment designation of three of its operating companies. The prior period segment information has been reclassified to conform to the 2005 presentation.

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, including allocated investment income. Identifiable assets by segment are those assets used in or allocated to the operation of each segment.


	Revenues									Pre-tax			Net
	Earned		Investment							Income			Income
(Dollars in thousands)	Premiums		Income			Other		Total		(loss)			(loss)

December 31, 2005:
12 Months
Specialty	$	1,682,193	$	134,290		$	—	$	1,816,483	$	345,896		$	241,619
Regional		1,173,174		57,619			—		1,230,793		216,495			147,924
Alternative Markets		663,478		82,617			110,697		856,792		238,462			165,327
Reinsurance		754,097		95,110			—		849,207		63,606			53,233
International		187,993		20,749			94		208,836		20,890			13,782
Corporate, other and eliminations (1)		—		13,577			3,942		17,519		(132,021	)		(87,996	)
Realized investment gains		—		—			17,209		17,209		17,209			11,003

Consolidated	$	4,460,935	$	403,962		$	131,942	$	4,996,839	$	770,537		$	544,892

December 31, 2004:
12 Months
Specialty	$	1,391,652	$	99,452		$	—	$	1,491,104	$	275,689		$	188,646
Regional		1,068,552		44,249			—		1,112,801		184,152			123,902
Alternative Markets		605,996		59,057			109,344		774,397		133,438			92,345
Reinsurance		841,451		73,825			—		915,276		85,995			62,910
International		153,441		14,201			207		167,849		18,790			10,036
Corporate, other and eliminations (1)		—		511			2,029		2,540		(107,819	)		(70,313	)
Realized investment gains		—		—			48,268		48,268		48,268			31,306
Cumulative effect of change in accounting principle		—		—			—		—		—			(727	)

Consolidated	$	4,061,092	$	291,295		$	159,848	$	4,512,235	$	638,513		$	438,105

December 31, 2003:
12 Months
Specialty	$	1,136,519	$	68,227		$	—	$	1,204,746	$	200,428		$	135,905
Regional		880,597		43,368			—		923,965		153,292			105,468
Alternative Markets		428,120		39,628			101,715		569,463		88,742			61,335
Reinsurance		713,154		50,707			—		763,861		58,201			42,295
International		76,220		8,915			10		85,145		3,242			3,582
Corporate, other and eliminations (1)		—		(789	)		2,025		1,236		(96,293	)		(64,699	)
Realized investment gains		—		—			81,692		81,692		81,692			53,334

Consolidated	$	3,234,610	$	210,056		$	185,442	$	3,630,108	$	489,304		$	337,220

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


Years Ended December 31,	2005			2004

Specialty	$	4,731,062		$	3,776,069
Regional		2,652,556			2,360,149
Alternative Markets		2,374,967			1,955,134
Reinsurance		4,506,796			3,798,307
International		613,634			513,005
Corporate, other and eliminations (1)		(982,728	)		(951,631	)

Consolidated	$	13,896,287		$	11,451,033


(1)		Corporate and other eliminations represent corporate revenues and expenses, realized investment gains and losses and other items that are not allocated to business segments.

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


	2005		2004		2003

Specialty
Premises operations	$	701,456	$	586,476	$	451,901
Professional liability		183,220		196,710		168,823
Automobile		265,227		232,820		195,274
Products liability		258,163		172,848		108,339
Property		137,643		124,610		118,159
Other		136,484		78,188		94,023

Total specialty	$	1,682,193	$	1,391,652	$	1,136,519

Regional
Commercial multiple peril		469,033		430,762		352,555
Automobile		339,832		310,872		271,614
Workers’ compensation		235,748		213,538		179,336
Other		128,561		113,380		77,092

Total regional	$	1,173,174	$	1,068,552	$	880,597

Alternative Markets
Primary workers’ compensation		301,619		283,546		187,935
Excess workers’ compensation		291,852		256,095		185,816
Other		70,007		66,355		54,369

Total alternative markets	$	663,478	$	605,996	$	428,120

Reinsurance
Property		132,210		216,792		147,090
Casualty		621,887		624,659		566,064

Total reinsurance	$	754,097	$	841,451	$	713,154


International	$	187,993	$	153,441	$	76,220

Total	$	4,460,935	$	4,061,092	$	3,234,610

(23) 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,
	2005		2004		2005		2004		2005		2004		2005		2004

Revenues	$	1,159,988	$	1,078,705	$	1,220,784	$	1,110,754	$	1,272,177	$	1,139,536	$	1,343,890	$	1,183,240
Net income		120,871		115,428		134,079		109,484		122,518		97,072		167,424		116,121
Net income per share (a):
Basic		0.96		0.92		1.06		0.87		0.96		0.77		1.31		0.92
Diluted		0.91		0.88		1.01		0.83		0.92		0.73		1.25		0.88


(a)		Earnings per share (EPS) in each quarter is computed using the weighted-average number of shares outstanding during that quarter while EPS for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters EPS does not necessarily equal the full-year EPS.