10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)

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

For the Quarterly Period Ended March 31, 2007

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the Transition Period from                      to                     .

Commission File Number 1-15202

W. R. BERKLEY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	22-1867895
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
475 Steamboat Road, Greenwich, Connecticut	06830
(Address of principal executive offices)	(Zip Code)

(203) 629-3000

(Registrant’s telephone number, including area code)

None

Former name, former address and former fiscal year,

if changed since last report.

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

Yes þ       No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one)

Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No þ

Number of shares of common stock, $.20 par value, outstanding as of May 1, 2007: 194,119,099.

TABLE OF CONTENTS

Part I – FINANCIAL INFORMATION
	ITEM 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosure About Market Risk
	Item 4.Controls and Procedures
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 1A. Risk Factors
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
	Item 6. Exhibits
SIGNATURES
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION

Part I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands)

	March 31,			December 31,
	2007			2006
	(Unaudited)
Assets
Investments:
Fixed maturity securities	$	9,808,131		$	9,158,607
Equity securities available for sale		951,230			866,422
Equity securities trading account		756,913			639,481
Partnerships and affiliates		476,086			449,854
Total investments		11,992,360			11,114,364
Cash and cash equivalents		713,489			754,247
Premiums and fees receivable		1,309,407			1,245,661
Due from reinsurers		954,998			928,258
Accrued investment income		118,927			118,045
Prepaid reinsurance premiums		180,487			169,965
Deferred policy acquisition costs		478,531			489,243
Real estate, furniture and equipment		191,676			183,249
Deferred Federal and foreign income taxes		124,252			142,634
Goodwill		74,881			67,962
Trading account receivable from brokers and clearing organizations		253,683			312,220
Other assets		145,503			130,641
Total assets	$	16,538,194		$	15,656,489
Liabilities and Stockholders’ Equity
Liabilities:
Reserves for losses and loss expenses	$	8,002,547		$	7,784,269
Unearned premiums		2,424,720			2,314,282
Due to reinsurers		159,310			149,427
Trading account securities sold but not yet purchased		220,308			170,075
Policyholders’ account balances		- -			106,926
Other liabilities		799,710			654,596
Junior subordinated debentures		242,005			241,953
Senior notes and other debt		1,121,523			869,187
Total liabilities		12,970,123			12,290,715
Minority interest		31,043			30,615
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 500,000,000 shares, issued and outstanding, net of treasury shares, 194,011,729 and 192,771,889 shares		47,024			47,024
Additional paid-in capital		873,342			859,787
Retained earnings		2,721,474			2,542,744
Accumulated other comprehensive income		112,528			111,613
Treasury stock, at cost, 41,106,189 and 42,346,029 shares		(217,340	)		(226,009	)
Total stockholders’ equity		3,537,028			3,335,159
Total liabilities and stockholders’ equity	$	16,538,194		$	15,656,489

See accompanying notes to interim consolidated financial statements.

1

W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
(amounts in thousands, except per share data)

	For the Three Months
	Ended March 31,
	2007			2006
Revenues:
Net premiums written	$	1,254,772		$	1,278,531
Change in unearned premiums		(99,839	)		(132,154	)
Premiums earned		1,154,933			1,146,377
Net investment income		165,421			131,497
Insurance service fees		25,993			26,594
Realized investment gains		7,390			2,675
Other income		5,284			391
Total revenues		1,359,021			1,307,534
Expenses:
Losses and loss expenses		685,147			701,198
Other operating expenses		385,231			355,654
Interest expense		20,700			23,469
Total expenses		1,091,078			1,080,321
Income before income taxes and minority interest		267,943			227,213
Income tax expense		(79,135	)		(64,923	)
Minority interest		(382	)		(588	)
Net income	$	188,426		$	161,702
Earnings per share:
Basic	$	.98		$	.84
Diluted	$	.93		$	.80
Average shares outstanding
Basic		193,199			191,741
Diluted		202,076			202,331

See accompanying notes to interim consolidated financial statements.

2

W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity (Unaudited)
(dollars in thousands)

	For The Three Months
	Ended March 31,
	2007			2006
Common Stock:
Beginning and end of period	$	47,024		$	47,024
Additional paid in capital:
Beginning of period	$	859,787		$	821,050
Stock options exercised, including tax benefits		8,829			5,258
Restricted stock units expensed		4,527			3,294
Stock options expensed		199			439
End of period	$	873,342		$	830,041
Retained earnings:
Beginning of period	$	2,542,744		$	1,873,953
Net income		188,426			161,702
Dividends		(9,696	)		(7,689	)
End of period	$	2,721,474		$	2,027,966
Accumulated other comprehensive income (loss):
Unrealized investment gains:
Beginning of period	$	121,961		$	40,746
Net change in period		(5,476	)		(28,329	)
End of period		116,485			12,417
Currency translation adjustments:
Beginning of period	$	3,748		$	(15,843	)
Net change in period		6,083			505
End of period		9,831			(15,338	)
Net pension asset:
Beginning of period	$	(14,096	)	$	—
Net change in period		308			—
End of period		(13,788	)		—
Total accumulated other comprehensive income (loss):	$	112,528		$	(2,921	)
Treasury Stock:
Beginning of period	$	(226,009	)	$	(199,853	)
Stock options exercised		8,669			6,106
End of period	$	(217,340	)	$	(193,747	)

See accompanying notes to interim consolidated financial statements.

3

W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)

	For the Three Months
	Ended March 31,
	2007			2006
Cash flows provided by operating activities:
Net income	$	188,426		$	161,702
Adjustments to reconcile net income to net cash flows provided by operating activities:
Realized investment gains		(7,390	)		(2,675	)
Depreciation and amortization		20,766			18,055
Minority interest		382			588
Equity in undistributed earnings of partnerships and affiliates		(12,065	)		(3,919	)
Stock incentive plans		4,753			3,985
Change in:
Trading account securities and related accounts		(17,299	)		(215,545	)
Premiums and fees receivable		(64,250	)		(82,240	)
Due from reinsurers		(26,747	)		(35,159	)
Accrued investment income		(3,011	)		(823	)
Prepaid reinsurance premiums		(10,477	)		(16,311	)
Deferred policy acquisition costs		(15,882	)		(23,876	)
Deferred income taxes		13,985			(18,746	)
Other assets		(1,341	)		(269	)
Reserves for losses and loss expenses		218,417			291,433
Unearned premiums		110,373			148,401
Due to reinsurers		9,826			33,831
Policyholders’ account balances		(248	)		(355	)
Other liabilities		(50,997	)		(21,911	)
Net cash flows provided by operating activities		357,221			236,166
Cash flows used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities		545,817			528,434
Equity securities		54,073			46,496
Maturities and prepayments of fixed maturities securities		392,593			208,681
Cash received from partnerships and affiliates		4,159			1,064
Cost of purchases, excluding trading account:
Fixed maturity securities		(1,657,829)			(792,116	)
Equity securities		(143,073	)		(80,955	)
Partnerships and affiliates		(17,627	)		(84,372	)
Change in balances due to/from security brokers		197,441			14,450
Net additions to real estate, furniture and equipment		(6,247	)		(24,613	)
Payment for business purchased, net of cash acquired		(20,173	)		—
Proceeds from sale of business, net of cash divested		(2,061	)		—
Net cash flows used in investing activities		(652,927	)		(182,931	)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of debt		246,657			—
Repayment of debt		(101	)		(100,000	)
Deposits and policyholders’ account balances received		9,037			16,712
Advances repaid		(2,000	)		(8,000	)
Proceeds from stock options exercised		8,433			6,605
Cash dividends		(7,669	)		(6,372	)
Other, net		(27	)		26
Net cash flows provided by (used in) financing activities		254,330			(91,029	)
Change in cash due to foreign exchange rates		618			1,702
Net decrease in cash and cash equivalents		(40,758	)		(36,092	)
Cash and cash equivalents at beginning of year		754,247			672,941
Cash and cash equivalents at end of period	$	713,489		$	636,849
Supplemental disclosure of cash flow information:
Interest paid	$	21,878		$	25,003
Federal income taxes paid, net	$	3,615		$	15,667

See accompanying notes to consolidated financial statements.

4

W. R. Berkley Corporation and Subsidiaries
Notes to Interim Consolidated Financial Statements (unaudited)

1. GENERAL

          The accompanying consolidated financial statements should be read in conjunction with the following notes and with the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. Reclassifications have been made in the 2006 financial statements as originally reported to conform them to the presentation of the 2007 financial statements.

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

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

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

          The Company adopted FASB Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes” effective January 1, 2007. The adoption of FIN 48 did not have an impact on the Company’s financial condition or results of operations. The Company believes there are no tax positions that would require disclosure under the FIN 48. The federal tax returns for 2003 through 2006 are currently open and subject to examination. Statue of limitations have not been extended in any significant tax jurisdiction. Tax years remain open in accordance with federal, foreign and local tax statutes.

2. COMPREHENSIVE INCOME

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

	For the Three Months
	Ended March 31,
	2007			2006
Net income	$	188,426		$	161,702
Other comprehensive income (loss):
Change in unrealized foreign exchange gains		6,083			505
Unrealized holding losses on investment securities arising during the period, net of taxes		(680	)		(26,576	)
Reclassification adjustment for realized gains included in net income, net of taxes		(4,796	)		(1,753	)
Other comprehensive income (loss)		607			(27,824	)
Comprehensive income	$	189,033		$	133,878

5

3. INVESTMENTS

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

	Amortized		Fair		Carrying
	Cost		Value		Value
March 31, 2007
Fixed maturity securities:
Held to maturity	$	145,961	$	159,620	$	145,961
Available for sale		9,619,037		9,662,170		9,662,170
Total	$	9,764,998	$	9,821,790	$	9,808,131
Equity securities available for sale	$	834,857	$	951,230	$	951,230
Equity securities trading account	$	756,913	$	756,913	$	756,913
December 31, 2006
Fixed maturity securities:
Held to maturity	$	147,028	$	160,875	$	147,028
Available for sale		8,967,036		9,011,579		9,011,579
Total	$	9,114,064	$	9,172,454	$	9,158,607
Equity securities available for sale	$	747,584	$	866,422	$	866,422
Equity securities trading account	$	639,481	$	639,481	$	639,481

4. REINSURANCE CEDED

          The Company reinsures a portion of its exposures principally to reduce its net liability on individual risks and to protect against catastrophic losses. Estimated amounts recoverable from reinsurers are net of reserves for uncollectible reinsurance of $2.4 million and $2.5 million as of March 31, 2007 and December 31, 2006, respectively. The following amounts arising under reinsurance ceded contracts have been deducted in arriving at the amounts reflected in the statements of income (dollars in thousands):

	For the Three Months
	Ended March 31,
	2007		2006
Ceded premiums earned	$	118,181	$	115,611
Ceded losses incurred	$	71,893	$	86,991

6

5. 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 segment provides commercial insurance products to customers primarily in 42 states and the District of Columbia. 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 quickly to local market conditions. 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 alternative ways to manage their exposure to risks. In addition to providing insurance, the alternative markets segment also provides a wide variety of fee-based services, including, claims, 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.

          The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. Income tax expense and benefits are calculated based upon the Company’s overall effective tax rate.

7

5. INDUSTRY SEGMENTS (continued)

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

	Revenues
	Earned		Investment						Pre-Tax			Net
(dollars in thousands)	Premiums		Income		Other		Total		Income			Income
For the three months ended March 31, 2007:
Specialty	$	443,455	$	56,747	$	—	$	500,202	$	127,712		$	89,539
Regional		304,367		23,625		—		327,992		55,321			38,676
Alternative Markets		162,664		30,885		25,993		219,542		67,718			47,568
Reinsurance		185,278		40,476		—		225,754		46,407			34,819
International		59,169		8,924		—		68,093		7,371			4,891
Corporate and eliminations		—		4,764		5,284		10,048		(43,976	)		(31,863	)
Realized investment gains		—		—		7,390		7,390		7,390			4,796
Consolidated	$	1,154,933	$	165,421	$	38,667	$	1,359,021	$	267,943		$	188,426
For the three months ended March 31, 2006:
Specialty	$	418,245	$	44,433	$	—	$	462,678	$	106,486		$	75,437
Regional		289,962		18,768		—		308,730		54,630			38,137
Alternative Markets		162,741		25,741		26,594		215,076		67,122			47,233
Reinsurance		225,242		30,105				255,347		30,059			23,753
International		50,187		6,901				57,088		5,912			4,659
Corporate and eliminations		—		5,549		391		5,940		(39,671	)		(29,270	)
Realized investment gains		—		—		2,675		2,675		2,675			1,753
Consolidated	$	1,146,377	$	131,497	$	29,660	$	1,307,534	$	227,213		$	161,702

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

	March 31,			December 31,
	2007			2006
Specialty	$	5,647,514		$	5,387,934
Regional		2,883,550			2,796,225
Alternative Markets		2,891,962			2,700,782
Reinsurance		5,334,605			5,231,317
International		698,509			811,662
Corporate, other and eliminations		(917,946	)		(1,271,431	)
Consolidated	$	16,538,194		$	15,656,489

8

5. INDUSTRY SEGMENTS (continued)

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

	For the Three Months
	Ended March 31,
	2007		2006
Premises operations	$	188,143	$	174,805
Commercial automobile		68,362		64,466
Products liability		59,491		62,649
Property		48,833		37,348
Professional liability		39,015		39,394
Other		39,611		39,583
Specialty		443,455		418,245
Commercial multiple peril		116,945		114,831
Commercial automobile		87,879		84,001
Workers’ compensation		62,654		58,394
Other		36,889		32,736
Regional		304,367		289,962
Excess workers’ compensation		78,968		74,662
Primary workers’ compensation		62,492		69,348
Other		21,204		18,731
Alternative Markets		162,664		162,741
Casualty		156,032		201,793
Property		29,246		23,449
Reinsurance		185,278		225,242
International		59,169		50,187
Total	$	1,154,933	$	1,146,377

6. 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.

7. ACQUISITIONS AND DISPOSITIONS

          In January 2007, the Company acquired all the shares of outstanding common stock of Atlantic Aero Holdings, Inc. for $21 million. Atlantic Aero is a fixed based operator located in Greensboro, North Carolina and provides a full range of services to the general aviation market, including fuel and line service, aircraft sales and maintenance, avionics and engineering services and parts fabrication.

          In March 2007, the Company sold is interest in Berkley International Philippines, Inc. and its subsidiaries (BIPI) for $25 million. The Company reported a pre-tax realized gain of $2 million from the sale of BIPI. For the year ended December 31, 2006, the Company reported revenues of $21.0 million and pre-tax earnings of $4.5 million from the operations of BIPI.

9

SAFE HARBOR STATEMENT

This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein, including statements related to our outlook for the industry and for our performance for the year 2007 and beyond, are based upon the Company’s historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. They are subject to various risks and uncertainties, including but not limited to, the cyclical nature of the property casualty industry, the long-tail and potentially volatile nature of the insurance and reinsurance business, product demand and pricing, claims development and the process of estimating reserves, the uncertain nature of damage theories and loss amounts, natural and man-made catastrophic losses, including as a result of terrorist activities, the impact of competition, the success of our new ventures or acquisitions and the availability of other opportunities, the availability of reinsurance, exposure as to coverage for terrorist acts, our retention under The Terrorism Risk Insurance Act of 2002, as amended (“TRIA”), and the potential expiration of TRIA, the ability of our reinsurers to pay reinsurance recoverables owed to us, investment risks, including those of our portfolio of fixed maturity securities and investments in equity securities, including merger arbitrage investments, exchange rate and political risks relating to our international operations, legislative and regulatory developments, including those related to alleged anti-competitive or other improper business practices in the insurance industry, changes in the ratings assigned to us by ratings agencies, the availability of dividends from our insurance company subsidiaries, our ability to attract and retain qualified employees, and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission. These risks could cause actual results of the industry or our actual results for the year 2007 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company. Any projections of growth in the Company’s net premiums written and service fees would not necessarily result in commensurate levels of underwriting and operating profits. Forward-looking statements speak only as of the date on which they are made.

10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

          W. R. Berkley Corporation is an insurance holding company that 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.

          The Company’s profitability is also affected by its investment income. The Company’s invested assets, which are derived from its own capital and cash flow from its insurance business, are invested principally in fixed maturity securities. The return on fixed maturity 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.

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 reported (“IBNR”) 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.

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          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 based upon an actuarially derived point estimate and other considerations. The Company uses a variety of actuarial techniques and methods to derive an actuarial point estimate for each operating unit. 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. For example, the paid loss and incurred loss development methods rely on historical paid and incurred loss data. For new lines of business, where there is insufficient history of paid and incurred claims data, or in circumstances where there have been significant changes in claim practices, the paid and incurred loss development methods would be less credible than other actuarial methods. The actuarial point estimate may also be 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. This expectation is a significant determinant of the estimate of loss reserves for recently written business where

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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; however, different assumptions and variables could lead to significantly different reserve estimates.

          Loss frequency and severity are measures of loss activity that are considered in determining the key assumptions described in our discussion of loss and loss expense reserves, including expected loss ratios, rate of loss cost inflation and reported and paid loss emergence patterns. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity 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.

          Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to the Company. The length of the loss reporting lag affects our ability to accurately predict loss frequency (loss frequencies are more predictable for lines with short reporting lags) as well as the amount of reserves needed for incurred but not reported losses (less IBNR is required for lines with short reporting lags). As a result, loss reserves for lines with short reporting lags are likely to have less variation from initial loss estimates. For lines with short reporting lags, which include commercial automobile, primary workers’ compensation, commercial multi-peril business, other liability (claims-made) and property business, the key assumption is the loss emergence pattern used to project ultimate loss estimates from known losses paid or reported to date. For lines of business with long reporting lags, which include other liability (occurrence), products liability, excess workers’ compensation and liability reinsurance, the key assumption is the expected loss ratio since there is little paid or incurred loss data to consider.

          Historically, the Company has experienced less variation from its initial loss estimates for lines of businesses with short reporting lags than for lines of business with long reporting lags. For example, as of December 31, 2006, initial loss estimates for accident years 1997 through 2005 were increased by an average of 5% for lines with short reporting lags and by an average of 20% for lines with long reporting lags. For the latest accident year ended December 31, 2006, initial loss estimates were $1.6 billion for lines with short reporting lags and $1.3 billion for lines with long reporting lags.

          The key assumptions used in calculating the most recent estimate of the loss reserves are reviewed each quarter and adjusted, to the extent necessary, to reflect historical changes, current trends and other factors observed. For example, in 2006 loss reserves for our commercial automobile business were increased to reflect an observed trend of higher severity losses, and in 2006 loss reserves for our California workers’ compensation business were decreased to reflect an observed trend of lower severity losses following the enactment of legislative reforms.

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          If the actual level of loss frequency or severity are higher or lower than expected, the ultimate losses will be different than management’s estimate. The following table reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity on our loss estimate for claims occurring in 2006 (dollars in thousands):

	Frequency (+/-)
Severity (+/-)	1%		5%		10%
1%	$	56,109	$	168,886	$	309,857
5%		168,886		286,129		432,683
10%		309,857		432,683		586,215

          Our net reserves for losses and loss expenses of $7.2 billion as of March 31, 2007 relate to multiple accident years. Therefore, the impact of changes in frequency or severity for more than one accident year could be higher or lower than the amounts reflected above.

          Approximately $1.8 billion, or 25%, 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 on assumed reinsurance business. 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.

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          Following is a summary of the Company’s reserves for losses and loss expenses by business segment as of March 31, 2007 and December 31, 2006 (dollars in thousands):

	March 31,		December 31,
	2007		2006
Specialty	$	2,592,987	$	2,498,030
Regional		1,101,846		1,071,607
Alternative Markets		1,419,564		1,372,517
Reinsurance		1,782,855		1,764,767
International		253,582		240,676
Net reserves for losses and loss expenses		7,150,834		6,947,597
Ceded reserves for losses and loss expenses		851,713		836,672
Gross reserves for losses and loss expenses	$	8,002,547	$	7,784,269

          Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of March 31, 2007 and December 31, 2006 (dollars in thousands):

	Reported Case		Incurred but not
	Reserves		Reported		Total
March 31, 2007
General liability	$	726,688	$	1,900,922	$	2,627,610
Workers’ compensation		693,849		947,571		1,641,420
Commercial automobile		364,779		203,783		568,562
International		82,616		170,966		253,582
Other		105,974		170,831		276,805
Total primary		1,973,906		3,394,073		5,367,979
Reinsurance		674,871		1,107,984		1,782,855
Total	$	2,648,777	$	4,502,057	$	7,150,834
December 31, 2006
General liability	$	696,074	$	1,824,395	$	2,520,469
Workers’ compensation		687,127		909,076		1,596,203
Commercial automobile		354,841		193,995		548,836
International		78,489		162,187		240,676
Other		98,368		178,278		276,646
Total primary		1,914,899		3,267,931		5,182,830
Reinsurance		680,272		1,084,495		1,764,767
Total	$	2,595,171	$	4,352,426	$	6,947,597

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          For the three months ended March 31, 2007, the Company reported losses and loss expenses of $685 million. This amount is net of a decrease in estimates for claims occurring in prior years of $22 million. Estimates for prior year claims decreased by $31 million for primary business and increased by $9 million for reinsurance business. On an accident year basis, estimates for prior year claims decreased by $59 million for accident years 2004 through 2006 and increased by $37 million for earlier accident years.

          Case reserves for primary business increased by $59 million to $2.0 billion as of March 31, 2007 as a result of a 4% increase in the average case reserve per claim. Reserves for incurred but not reported losses for primary business increased $126 million to $3.4 billion at March 31, 2007 from $3.3 billion at December 31, 2006. Estimates for prior year claims decreased by $14 million for specialty, $12 million for alternative markets, $4 million for regional and $1 million for international. By line of business, estimates for prior year claims decreased by $17 million for general liability, $16 million for workers’ compensation, and $3 million for other lines and increased by $5 million for commercial auto liability.

          Case reserves for reinsurance business decreased by $5 million to $675 million at March 31, 2007 from $680 million at December 31, 2006. Reserves for incurred but not reported losses for reinsurance business increased $23 million to $1,108 million at March 31, 2007 from $1,084 million at December 31, 2006. Estimates for prior year claims increased by $9 million as losses reported by ceding companies for those years were higher than expected. The Company sets its initial loss estimates based principally upon information obtained during the underwriting process and adjusts these estimates as losses are reported by ceding companies and additional information becomes available.

          Assumed Reinsurance Premiums. The Company estimates the amount of assumed reinsurance premiums that it will receive under treaty reinsurance agreements at the inception of the contracts. These premium estimates are revised as the actual amount of assumed premiums is reported to the Company by the ceding companies. As estimates of assumed premiums are made or revised, the related amount of earned premium, commissions and incurred losses associated with those premiums are recorded. Estimated assumed premiums receivable were approximately $139 million and $131 million at December 31, 2006 and March 31, 2007, respectively. The assumed premium estimates are based upon terms set forth in the reinsurance agreement, information received from ceding companies during the underwriting and negotiation of the agreement, reports received from ceding companies and discussions and correspondence with reinsurance intermediaries. The Company also considers its own view of market conditions, economic trends and experience with similar lines of business. These premium estimates represent management’s best estimate of the ultimate premiums to be received under its assumed reinsurance agreements.

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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 three months ended March 31, 2007 and 2006. 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.

	For the Three Months
	Ended March 31,
(Dollars in thousands)	2007			2006
Specialty
Gross premiums written	$	457,852		$	474,301
Net premiums written		433,975			447,563
Premiums earned		443,455			418,245
Loss ratio		58.0	%		59.9	%
Expense ratio		26.0	%		25.3	%
Combined ratio		84.0	%		85.2	%
Regional
Gross premiums written	$	377,418		$	364,666
Net premiums written		325,373			311,381
Premiums earned		304,367			289,962
Loss ratio		58.6	%		56.6	%
Expense ratio		31.0	%		31.0	%
Combined ratio		89.6	%		87.6	%
Alternative Markets
Gross premiums written	$	280,428		$	273,448
Net premiums written		250,523			238,422
Premiums earned		162,664			162,741
Loss ratio		56.2	%		55.4	%
Expense ratio		22.6	%		21.2	%
Combined ratio		78.8	%		76.6	%
Reinsurance
Gross premiums written	$	205,182		$	247,033
Net premiums written		190,861			235,809
Premiums earned		185,278			225,242
Loss ratio		64.6	%		72.6	%
Expense ratio		32.2	%		27.4	%
Combined ratio		96.8	%		100.0	%
International
Gross premiums written	$	62,482		$	51,387
Net premiums written		54,040			45,356
Premiums earned		59,169			50,187
Loss ratio		65.2	%		65.7	%
Expense ratio		31.9	%		33.5	%
Combined ratio		97.1	%		99.2	%
Consolidated
Gross premiums written	$	1,383,362		$	1,410,835
Net premiums written		1,254,772			1,278,531
Premiums earned		1,154,933			1,146,377
Loss ratio		59.3	%		61.2	%
Expense ratio		28.2	%		27.0	%
Combined ratio		87.5	%		88.2	%

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Results of Operations for the Three Months Ended March 31, 2007 and 2006.

          The following table presents the Company’s net income and net income per share for the three months ended March 31, 2007 and 2006 (amounts in thousands, except per share data):

	2007		2006
Net income	$	188,426	$	161,702
Weighted average diluted shares		202,076		202,331
Net income per diluted share	$	0.93	$	0.80

          The increase in net income in 2007 compared with 2006 is primarily attributable to higher investment income as a result of an increase in average invested assets and the average investment yield. Underwriting results also improved slightly due to a 0.7% increase in earned premiums and a 1.9 percentage point decrease in the loss ratio (losses and loss expenses incurred expressed as percentage of earned premiums), which were partially offset by a 1.2 percentage point increase in the expense ratio (underwriting expenses experienced as a percentage of premiums earned).

          Gross Premiums Written. Gross premiums written were $1.4 billion in 2007, down 2% from 2006. The Company has experienced an increased level of price competition that began in 2004. This trend continued in 2007 with price levels for renewal business declining approximately 3% from the prior year period. A summary of gross premiums written in 2007 compared with 2006 by business segment follows:

• Specialty gross premiums decreased 3% to $458 million in 2007 from $474 million in 2006. The number of specialty policies issued in 2007 decreased 2%, and the average premium per policy decreased 2%. Average prices for renewal policies, adjusted for changes in exposure, decreased 4%. Gross premiums written decreased 16% for premises operations lines and 5% for products liability. Gross premiums written increased 15% for commercial automobile and 12% for property lines. Gross premiums for professional liability were unchanged.

• Regional gross premiums increased 3% to $377 million in 2007 from $365 million in 2006. The number of policies issued in 2007 increased 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 5% for workers’ compensation, 4% for commercial multiple peril and 4% for commercial automobile. Gross premiums also included assigned risk plan premiums, which are fully reinsured, of $28 million in 2007 and $34 million in 2006.

• Alternative markets gross premiums increased 3% to $280 million in 2007 from $273 million in 2006. The number of policies issued in 2007 increased 14%, and the average premium per policy decreased 8%. Average prices for renewal policies, adjusted for changes in exposure, decreased 5%. Gross premiums written increased by 4% for excess workers’ compensation and 1% for primary workers’ compensation. Gross premiums also included assigned risk plan premiums, which are fully reinsured, of $19 million in 2007 and $24 million in 2006.

• Reinsurance gross premiums decreased 17% to $205 million in 2007 from $247 million in 2006. Casualty gross premiums written decreased 24% to $154 million, and property gross premiums written increased 14% to $51 million. The 2006 premiums included $48 million related to a reinsurance agreement that was not renewed in 2007.

• International gross premiums increased 22% to $62 million in 2007 from $51 million in 2006.

          Premiums Earned. Premiums earned increased 0.7% to $1.2 billion from $1.1 billion in 2006. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in 2007 are related to premiums written during both 2007 and 2006. The 0.7% growth rate for 2007 earned premiums reflects the underlying growth in net premiums written in those periods.

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          Net Investment Income. Following is a summary of net investment income for the three months ended March 31, 2007 and 2006 (dollars in thousands):

							Average Annualized
	Amount						Yield
	2007			2006			2007			2006
Fixed maturity securities, including cash	$	119,277		$	100,491			4.7	%		4.4	%
Equity securities available for sale		9,988			6,901			5.0	%		6.5	%
Equity securities trading account		22,200			19,592			11.2	%		13.0	%
Partnerships and affiliates		13,421			4,976			11.9	%		5.5	%
Other		2,941			911
Gross investment income		167,827			132,871			5.5	%		5.0	%
Investment expenses		(2,406	)		(1,374	)
Total	$	165,421		$	131,497

          Net investment income increased 26% to $165 million in 2007 from $131 million in 2006. Average invested assets (including cash and cash equivalents) increased 15% to $12.1 billion in 2007 compared with $10.5 billion in 2006. The increase was primarily a result of cash flow from operations. The average annualized gross yield on investments increased to 5.5% in 2007 from 5.0% in 2006 due primarily to higher short-term interest rates and higher returns on partnerships and affiliates.

          Insurance 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 $26 million in 2007, down from $27 million in 2006, primarily as a result of a decline in fees for managing assigned risk plans.

          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 were $7 million in 2007 compared with $3 million in 2006. Realized gains in 2007 include a gain of $2 million from the sale of the Company’s business in the Philippines.

          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.

          Other Income. Other income increased to $5.3 million in 2007 from $0.4 million in 2006. Most of the other income in 2007 was derived from an aviation business that the Company acquired in January 2007. The aviation business is located in Greensboro, North Carolina and provides a full range of services to the general aviation market, including fuel and line service, aircraft sales and maintenance, avionics and engineering services and parts fabrication.

          Losses and Loss Expenses. Losses and loss expenses decreased 2% to $685 million in 2007 from $701 million in 2006 due to decreased premium volume. The consolidated loss ratio decreased to 59.3% in 2007 from 61.2% in 2006 primarily as a result of favorable loss reserve development of $22 million in 2007 compared with unfavorable loss reserve development of $6 million in 2006. A summary of loss ratios in 2007 compared with 2006 by business segment follows:

• Specialty’s loss ratio was 58.0% in 2007 compared with 59.9% in 2006 principally due to favorable prior year loss reserve development.

• The regional loss ratio was 58.6% in 2007 compared with 56.6% in 2006. The increase reflects a decline in premium rates as well as the impact of loss cost inflation. Weather-related losses were $6.3 million in 2007 compared with $4.6 million in 2006.

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• Alternative market’s loss ratio was 56.2% in 2007 compared with 55.4% in 2006. Both periods reflect favorable loss reserve development resulting from the impact of workers’ compensation reforms in California.

• The reinsurance loss ratio was 64.6% in 2007 compared with 72.6% in 2006. The loss ratio improvement of 8 percentage points was due to the non-renewal of a reinsurance treaty with a higher than average loss ratio and to a decrease in unfavorable prior year loss reserve development.

• The international loss ratio was 65.2% in 2007 compared with 65.7% in 2006.

          Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses for the three months ended March 31, 2007 and 2006 (dollars in thousands):

	2007		2006
Underwriting expenses	$	325,917	$	310,090
Insurance service expenses		23,596		23,185
Aviation company expenses		4,610		—
Other costs and expenses		31,108		22,379
Total	$	385,231	$	355,654

          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) increased to 28.2% in 2007 from 27.0% in 2006. The increase was primarily a result of the non-renewal of a reinsurance treaty with a lower than average expense ratio and to higher profit commissions payable on certain accounts with favorable loss experience.

          Service company expenses, which represent the costs associated with the alternative market’s fee-based business, increased 2% to $24 million primarily as a result of a increase in costs associated with the servicing of assigned risk plan business.

          Aviation company expenses are the operating expenses related to an aviation business that was acquired in January 2007.

          Other costs and expenses, which represent primarily general and administrative expenses for the parent company, increased 39% to $31 million primarily as a result of higher incentive compensation costs, including costs for restricted stock units and other long-term incentive plans.

          Interest Expense. Interest expense decreased 12% to $21 million as a result of the redemption of $210 million 8.197% junior subordinated debentures in December 2006, which was partially offset by the issuance of $250 million 6.25% senior notes in February 2007.

          Income taxes. The effective income tax rate was 30% in 2007 and 29% in 2006. 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.

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          The carrying value of the Company’s investment portfolio and investment-related assets as of March 31, 2007 and December 31, 2006 were as follows (dollars in thousands):

	2007			2006
Fixed maturity securities	$	9,808,131		$	9,158,607
Equity securities available for sale		951,230			866,422
Equity securities trading account		756,913			639,481
Partnerships and affiliates		476,086			449,854
Total investments		11,992,360			11,114,364
Cash and cash equivalents		713,489			754,247
Trading account receivable from brokers and Clearing organizations		253,683			312,220
Trading account securities sold but not yet purchased		(220,308	)		(170,075	)
Unsettled sales (purchases)		(195,899	)		1,542
Total	$	12,543,325		$	12,012,298

          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, 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 March 31, 2007 (as compared to December 31, 2006), the fixed maturities portfolio mix was as follows: U.S. Government securities were 13% (15% in 2006); state and municipal securities were 52% (50% in 2006); corporate securities were 7% (9% in 2006); mortgage-backed securities were 24% (22% in 2006); and foreign bonds were 4% (4% in 2006).

          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 view of the underlying fundamentals of specific securities as well as 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.

          Partnerships and Affiliates. At March 31, 2007 (as compared to December 31, 2006), investments in partnerships and affiliates were as follows: equity in Kiln plc was $102 million ($96 million in 2006); real estate funds were $292 million ($275 million in 2006); and other investments were $82 million ($79 million in 2006).

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          Securities in an Unrealized Loss Position. The following table summarizes all securities in an unrealized loss position at March 31, 2007 and December 31, 2006 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
March 31, 2007
Fixed maturities:
0 — 6 months		113	$	1,397,690	$	4,267
7 — 12 months		23		175,458		2,575
Over 12 months		263		2,452,186		37,180
Total		399	$	4,025,334	$	44,022
Equity securities available for sale:
0 — 6 months		19	$	64,552	$	359
7 — 12 months		1		257		4
Over 12 months		13		87,874		796
Total		33	$	152,683	$	1,159
December 31, 2006
Fixed maturities:
0 — 6 months		100	$	802,595	$	2,309
7 — 12 months		62		645,331		4,445
Over 12 months		269		2,843,721		44,389
Total		431	$	4,291,647	$	51,143
Equity securities available for sale:
0 — 6 months		8	$	75,568	$	320
7 — 12 months		9		60,853		250
Over 12 months		16		105,085		1,583
Total		33	$	241,506	$	2,153

          At March 31, 2007, gross unrealized gains were $232 million, or 2% of total investments, and gross unrealized losses were $45 million, or 0.4% of total investments. There were 300 securities that have been continuously in an unrealized loss position for more than six months. Those securities had an aggregate fair value of $2.7 billion and an aggregate unrealized loss of $41 million. The decline in market value for these securities is primarily due to an increase in market interest rates.

          Management regularly reviews all securities that have a fair value less than cost to determine whether an other than temporary impairment has occurred. In determining whether a decline in fair value is other than temporary, management assesses whether the fair value is expected to recover and whether the Company has the intent to hold the investment until it recovers. The Company’s assessment of its intent to hold an investment until it recovers is based on conditions at the time the assessment is made, including general market conditions, the Company’s overall investment strategy and management’s view of the underlying value of an investment relative to its current price. 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.

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          The following table shows the composition by Standard & Poor’s (“S&P”) and Moody’s ratings of the fixed maturity securities in our portfolio with gross unrealized losses at March 31, 2007. Not all of the securities are rated by S&P and/or Moody’s (dollars in thousands).

		Unrealized Loss					Fair Value
									Percent to
S&P Rating	Moody’s Rating	Amount		Percent to Total			Amount		Total
AAA/AA/A	Aaa/Aa/A	$	41,174		93.5	%	$	3,831,415		95.2	%
BBB	Baa		2,822		6.4			192,507		4.8
BB	Ba		—		—			—		—
B	B		26		0.1			1,412		—
CCC or Lower	Caa or Lower		—		—			—		—
N/A	N/A		—		—			—		—
	Total	$	44,022		100.0	%	$	4,025,334		100.0	%

          The scheduled maturity dates for fixed maturity securities in an unrealized loss position at March 31, 2007 are shown in the following table (dollars in thousands):

	Unrealized Loss					Fair Value
			Percent to					Percent to
Maturity	Amount		Total			Amount		Total
Less than one year	$	4,065		9.2	%	$	526,980		13.1	%
One year through five years		11,467		26.1			776,814		19.3
Five years through ten years		10,169		23.1			1,169,441		29.0
After ten years		8,322		18.9			603,498		15.0
Mortgage and asset-backed securities		9,999		22.7			948,601		23.6
Total fixed income securities	$	44,022		100.0	%	$	4,025,334		100.0	%

          Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Due to the periodic repayment of principal, the mortgage and asset-backed securities are estimated to have an effective maturity of approximately 2 years.

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Liquidity and Capital Resources

          Cash Flow. Cash flow provided from operating activities was $357 million in 2007 and $236 million in 2006. The levels of cash flow provided by operating activities in these periods, which are high by historical measures in relation to both earned premiums and net income, are a result of an increasing investment income and relatively low paid losses. Cash flow provided by operating activities in 2006 is net of cash transfers to the arbitrage trading account of $200 million.

          The Company’s insurance subsidiaries’ principal sources of cash are premiums, investment income, service fees and proceeds from sales and maturities of portfolio investments. The principal uses of cash are payments for claims, taxes, operating expenses and dividends. The Company expects its insurance subsidiaries to fund the payment of losses with cash received from premiums, investment income and fees. The Company targets an average duration for its investment portfolio that is within one year of the average duration of its liabilities so that portions of its investment portfolio mature throughout the claim cycle and are available for the payment of claims if necessary. In the event operating cash flow and proceeds from maturities and prepayments of fixed income securities are not sufficient to fund claim payments and other cash requirements, the remainder of the Company’s cash and investments is available to pay claims and other obligations as they become due. The Company’s investment portfolio is highly liquid, with approximately 84% invested in cash, cash equivalents and marketable fixed income securities as of March 31, 2007. If the sale of fixed income securities were to become necessary, a realized gain or loss equal to the difference between the cost and sales price of securities sold would be recognized.

          In February 2007, the Company issued $250 million of 6.25% senior notes due on February 15, 2037.

          At March 31, 2007, the Company had senior notes, junior subordinated debentures and other debt outstanding with a carrying value of $1,364 million and a face amount of $1,132 million. The maturities of the outstanding debt are $5 million in 2007 to 2009, $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 $250 million in 2045 (prepayable in 2010).

24

          At March 31, 2007, stockholders’ equity was $3.5 billion and total capitalization (stockholders’ equity, senior notes, junior subordinated debentures and other debt) was $4.9 billion. The percentage of the Company’s capital attributable to senior notes and other debt and junior subordinated debentures was 28% at March 31, 2007, compared with 25% at December 31, 2006.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

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

          The duration of the investment portfolio was 3.3 years at March 31, 2007 and at December 31, 2006. The overall market risk relating to the Company’s portfolio has remained similar to the risk at December 31, 2006.

Item 4. Controls and Procedures

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

          Changes in Internal Control over Financial Reporting. During the quarter ended March 31, 2007, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

          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.

Item 1A. Risk Factors

          There have been no material changes from the risk factors previously disclosed in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2006.

25

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

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

						Maximum number of
	Total				Total number of shares	shares that may
	number of		Average price		purchased as part of	yet be purchased
	shares		paid per		publicly announced plans	under the plans or
	purchased		share		or programs	programs (1)
January 2007					None		22,624,688
February 2007		—		—	None		22,624,688
March 2007		—		—	None		22,624,688

(1) Remaining shares available for repurchase under the Company’s repurchase authorizations of 22,000,000 shares and 10,125,000 shares that were approved by the Board of Directors on November 1, 2006 and November 10, 1998, respectively.

26

Item 6. Exhibits

Number
(31.1)	(Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a).
(31.2)	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/ 15d-14(a).
(32.1)	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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

	W. R. BERKLEY CORPORATION
Date: May 8, 2007		/s/ William R. Berkley
		William R. Berkley
		Chairman of the Board and Chief Executive Officer

Date: May 8, 2007	/s/ Eugene G. Ballard
	Eugene G. Ballard
	Senior Vice President, Chief Financial Officer and Treasurer

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, William R. Berkley, Chairman of the Board and Chief Executive Officer of W. R. Berkley Corporation (the “registrant”), certify that:

1. I have reviewed this quarterly report on Form 10-Q of the registrant;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 8, 2007

/s/ William R. Berkley  

William R. Berkley 

Chairman of the Board and
Chief Executive Officer 

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Eugene G. Ballard, Senior Vice President, Chief Financial Officer and Treasurer of W. R. Berkley Corporation (the “registrant”), certify that:

1. I have reviewed this quarterly report on Form 10-Q of the registrant;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 8, 2007

/s/ Eugene G. Ballard  

Eugene G. Ballard 

Senior Vice President,
Chief Financial Officer
and Treasurer 

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of W. R. Berkley Corporation (the “Company”) on Form 10-Q for the period ended March 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, William R. Berkley, Chairman of the Board and Chief Executive Officer of the Company, and Eugene G. Ballard, Senior Vice President, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ William R. Berkley

William R. Berkley

Chairman of the Board and Chief Executive Officer

/s/ Eugene G. Ballard

Eugene G. Ballard

Senior Vice President — Chief Financial Officer and Treasurer

May 8, 2007

A signed original of this written statement required by Section 906 has been provided to W. R. Berkley Corporation (the “Company”) and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.