10-Q 1 y42297e10vq.htm FORM 10-Q 10-Q
Table of Contents

 
 
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 September 30, 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
incorporation or organization)
  (I.R.S. Employer
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 October 31, 2007: 183,100,069
 
 

 


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


Table of Contents

Part I – FINANCIAL INFORMATION
ITEM 1. Financial Statements
W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands)
                 
    September 30,     December 31,  
    2007        2006   
    (Unaudited)          
Assets
               
Investments:
               
Fixed maturity securities
  $ 10,024,635     $ 9,158,607  
Equity securities available for sale
    955,340       866,422  
Equity securities trading account
    714,017       639,481  
Partnerships and affiliates
    525,549       449,854  
 
           
Total investments
    12,219,541       11,114,364  
 
               
Cash and cash equivalents
    591,279       754,247  
Premiums and fees receivable
    1,295,121       1,245,661  
Due from reinsurers
    905,716       928,258  
Accrued investment income
    128,756       118,045  
Prepaid reinsurance premiums
    186,323       169,965  
Deferred policy acquisition costs
    475,414       489,243  
Real estate, furniture and equipment
    200,432       183,249  
Deferred Federal and foreign income taxes
    141,353       142,634  
Goodwill
    103,345       67,962  
Trading account receivable from brokers and clearing organizations
    275,914       312,220  
Other assets
    172,645       130,641  
 
           
Total assets
  $ 16,695,839     $ 15,656,489  
 
           
 
               
Liabilities and Stockholders’ Equity
               
Liabilities:
               
Reserves for losses and loss expenses
  $ 8,442,126     $ 7,784,269  
Unearned premiums
    2,355,935       2,314,282  
Due to reinsurers
    126,187       149,427  
Trading account securities sold but not yet purchased
    146,151       170,075  
Policyholders’ account balances
          106,926  
Other liabilities
    710,541       654,596  
Junior subordinated debentures
    242,107       241,953  
Senior notes and other debt
    1,121,678       869,187  
 
           
Total liabilities
    13,144,725       12,290,715  
 
           
 
               
Minority interest
    34,384       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, 183,274,658 and 192,771,889 shares
    47,024       47,024  
Additional paid-in capital
    901,788       859,787  
Retained earnings
    3,073,652       2,542,744  
Accumulated other comprehensive income
    91,481       111,613  
Treasury stock, at cost, 51,843,260 and 42,346,029 shares
    (597,215 )     (226,009 )
 
           
Total stockholders’ equity
    3,516,730       3,335,159  
 
           
Total liabilities and stockholders’ equity
  $ 16,695,839     $ 15,656,489  
 
           
See accompanying notes to interim consolidated financial statements.

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W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
(dollars in thousands, except per share data)
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2007         2006       2007         2006    
Revenues:
                               
Net premiums written
  $ 1,132,489     $ 1,208,906     $ 3,524,025     $ 3,705,422  
Change in unearned premiums
    43,075       (15,049 )     (21,888 )     (178,508 )
 
                       
Premiums earned
    1,175,564       1,193,857       3,502,137       3,526,914  
Net investment income
    165,790       145,784       500,154       422,348  
Insurance service fees
    23,690       26,622       75,026       80,182  
Revenues from wholly-owned investees
    41,739             61,227        
Realized investment gains
    812       1,734       13,482       3,736  
Other income
    437       511       1,610       1,208  
 
                       
Total revenues
    1,408,032       1,368,508       4,153,636       4,034,388  
 
                       
 
                               
Expenses:
                               
Losses and loss expenses
    706,374       731,941       2,095,190       2,175,249  
Other operating expenses
    382,530       368,311       1,139,755       1,082,891  
Expenses from wholly-owned investees
    38,718             56,515        
Interest expense
    22,707       23,293       66,107       70,034  
 
                       
Total expenses
    1,150,329       1,123,545       3,357,567       3,328,174  
 
                       
 
                               
Income before income taxes and minority interest
    257,703       244,963       796,069       706,214  
Income tax expense
    (76,344 )     (70,445 )     (234,855 )     (203,251 )
Minority interest
    (896 )     (210 )     (1,692 )     (1,501 )
 
                       
 
                               
Net income
  $ 180,463     $ 174,308     $ 559,522     $ 501,462  
 
                       
 
                               
Earnings per share:
                               
Basic
  $ .97     $ .91     $ 2.93     $ 2.62  
 
                       
 
                               
Diluted
  $ .93     $ .87     $ 2.81     $ 2.49  
 
                       
See accompanying notes to interim consolidated financial statements.

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W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(Unaudited)
(dollars in thousands)
                 
    For The Nine Months  
    Ended September 30,  
    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
    26,929       9,696  
Restricted stock units expensed
    14,092       10,834  
Stock options expensed
    596       1,316  
Stock issued to directors
    384       692  
 
           
End of period
  $ 901,788     $ 843,588  
 
           
 
               
Retained earnings:
               
Beginning of period
  $ 2,542,744     $ 1,873,953  
Net income
    559,522       501,462  
Dividends
    (28,614 )     (23,057 )
 
           
End of period
  $ 3,073,652     $ 2,352,358  
 
           
 
               
Accumulated other comprehensive income:
               
Unrealized investment gains (losses):
               
Beginning of period
  $ 121,961     $ 40,746  
Net change in period
    (38,845 )     52,253  
 
           
End of period
    83,116       92,999  
 
           
 
               
Currency translation adjustments:
               
Beginning of period
  $ 3,748     $ (15,843 )
Net change in period
    17,787       11,862  
 
           
End of period
    21,535       (3,981 )
 
           
 
               
Net pension asset:
               
Beginning of period
  $ (14,096 )      
Net change in period
    926        
 
           
End of period
    (13,170 )      
 
           
 
               
Total accumulated other comprehensive income:
  $ 91,481     $ 89,018  
 
           
 
               
Treasury stock:
               
Beginning of period
  $ (226,009 )   $ (199,853 )
Stock options exercised
    24,654       10,422  
Stock issued to directors
    117       89  
Purchase of common stock
    (395,977 )     (45,059 )
 
           
End of period
  $ (597,215 )   $ (234,401 )
 
           
See accompanying notes to interim consolidated financial statements.

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W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)
                 
    For the Nine Months  
    Ended September 30,  
    2007       2006  
Cash flows provided by operating activities:
               
Net income
  $ 559,522     $ 501,462  
Adjustments to reconcile net income to net cash flows provided by operating activities:
               
Realized investment gains
    (13,482 )     (3,736 )
Depreciation and amortization
    61,848       50,481  
Minority interest
    1,692       1,501  
Equity in undistributed earnings of partnerships and affiliates
    (23,043 )     (21,081 )
Stock incentive plans
    15,421       12,931  
Change in:
               
Trading account securities and related accounts
    (71,191 )     (200,128 )
Premiums and fees receivable
    (47,158 )     (122,413 )
Due from reinsurers
    23,472       13,663  
Accrued investment income
    (12,468 )     (12,970 )
Prepaid reinsurance premiums
    (13,837 )     (1,014 )
Deferred policy acquisition costs
    (12,070 )     (32,174 )
Deferred income taxes
    9,040       (39,368 )
Trading account receivables from broker and clearing organizations
    36,306       (108,276 )
Other assets
    (22,670 )     (7,698 )
Reserves for losses and loss expenses
    648,043       851,170  
Unearned premiums
    36,375       179,615  
Due to reinsurers
    (25,352 )     5,602  
Trading account securities sold but not yet purchased
    (23,924 )     38,465  
Policyholders’ account balances
    (303 )     (1,565 )
Other liabilities
    3,828       6,936  
 
           
Net cash flows provided by operating activities
    1,130,049       1,111,403  
 
           
Cash flows used in investing activities:
               
Proceeds from sales, excluding trading account:
               
Fixed maturity securities
    1,372,540       844,118  
Equity securities
    321,257       149,926  
Maturities and prepayments of fixed maturities securities
    984,504       651,489  
Distributions from partnerships and affiliates
    81,437       48,545  
Cost of purchases, excluding trading account:
               
Fixed maturity securities
    (3,299,106 )     (2,202,753 )
Equity securities
    (469,428 )     (312,842 )
Investments in partnerships and affiliates
    (92,649 )     (102,013 )
Change in balances due to/from security brokers
    24,979       (44,199 )
Net additions to real estate, furniture and equipment
    (21,388 )     (33,178 )
Payment for business purchased, net of cash acquired
    (61,851 )     (2,463 )
Proceeds from sale of business, net of cash divested
    (2,061 )     62  
Other
          618  
 
           
Net cash flows used in investing activities
    (1,161,766 )     (1,002,690 )
 
           
Cash flows used in financing activities:
               
Net proceeds from issuance of senior notes
    246,644        
Receipts credited to policyholders’ account balances
    3,489       13,106  
Return of policyholders’ account balances
    (58 )     (287 )
Bank deposits received
    10,215       10,462  
Repayments to federal home loan bank
    (2,075 )     (7,875 )
Net proceeds from stock options exercised
    23,702       11,239  
Repayment of senior notes
    (704 )     (100,000 )
Cash dividends
    (27,104 )     (21,769 )
Stock repurchases
    (395,977 )     (45,059 )
Proceeds from (purchase of) minority shares
    (33 )     2,218  
 
           
Net cash used in financing activities
    (141,901 )     (137,965 )
 
           
Change in cash due to foreign exchange rates
    10,650       15,221  
 
           
Net decrease in cash and cash equivalents
    (162,968 )     (14,031 )
Cash and cash equivalents at beginning of year
    754,247       672,941  
 
           
Cash and cash equivalents at end of period
  $ 591,279     $ 658,910  
 
           
 
               
Supplemental disclosure of cash flow information:
               
Interest paid
  $ 62,530     $ 65,847  
 
           
Federal income taxes paid, net
  $ 202,933     $ 218,616  
 
           
See accompanying notes to consolidated financial statements.

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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 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.
          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 FIN 48. The federal tax returns for 2003 through 2006 are currently open and subject to examination. Statutes 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     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2007     2006       2007     2006    
Net income
  $ 180,463     $ 174,308     $ 559,522     $ 501,462  
Other comprehensive income (loss):
                               
Change in unrealized foreign exchange gains
    5,244       5,150       17,787       11,862  
Unrealized holding gains (losses) on investment securities arising during the period, net of taxes
    53,501       118,400       (30,115 )     54,977  
Reclassification adjustment for realized gains included in net income, net of taxes
    (517 )     (1,505 )     (8,730 )     (2,724 )
 
                       
Other comprehensive income (loss)
    58,228       122,045       (21,058 )     64,115  
 
                       
Comprehensive income
  $ 238,691     $ 296,353     $ 538,464     $ 565,577  
 
                       

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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  
September 30, 2007
                       
Fixed maturity securities:
                       
Held to maturity
  $ 134,058     $ 145,249     $ 134,058  
Available for sale
    9,847,331       9,890,577       9,890,577  
 
                 
Total
  $ 9,981,389     $ 10,035,826     $ 10,024,635  
 
                 
 
                       
Equity securities available for sale
  $ 891,000     $ 955,340     $ 955,340  
Arbitrage trading account
  $ 714,017     $ 714,017     $ 714,017  
                         
    Amortized     Fair     Carrying  
    Cost     Value     Value  
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  
Arbitrage 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 $2.7 million and $2.5 million as of September 30, 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 statement of income (dollars in thousands):
                                 
    For the Three Months   For the Nine Months
    Ended September 30,   Ended September 30,
    2007   2006   2007   2006
Ceded premiums earned
  $ 123,597     $ 117,224     $ 355,654     $ 353,891  
Ceded losses incurred
  $ 71,631     $ 71,558     $ 207,755     $ 216,645  
5. ACQUISITIONS AND DISPOSITIONS
          On January 31, 2007, the Company acquired Atlantic Aero Holdings, Inc., a fixed base operator located in Greensboro, North Carolina, and on July 17, 2007, the Company acquired Western Acquisition Corp., a fixed base operator located in Boise, Idaho. The aggregate purchase price for both of the companies was approximately $58 million. The companies each provide 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 September 2007, the Company purchased all the shares of outstanding common stock of Investors Guaranty Life Insurance Company, an inactive, widely licensed life insurance company, for approximately $10 million.

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          In March 2007, the Company sold its 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 million and pre-tax earnings of $4.5 million from the operations of BIPI.
6. INDUSTRY SEGMENTS
          The Company’s operations are presently conducted in five segments of the insurance business: specialty lines of insurance, regional property casualty insurance, alternative markets, reinsurance and international.
          Our specialty segment underwrites complex and sophisticated third-party liability risks, principally within the excess and surplus lines. The primary lines of business are premises operations, products liability, commercial automobile, professional liability and property lines. 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 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 and 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 effective tax rate.

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6. INDUSTRY SEGMENTS (continued)
          Summary financial information about the Company’s operating segments is presented in the following table. Net income by segment consists of revenues less expenses related to the respective segment’s operations, including allocated investment income. Identifiable assets by segment are those assets used in or allocated to the operation of each segment.
                                                 
                                    Income        
                                    Before        
    Revenues     Taxes and        
    Earned     Investment                     Minority     Net  
(dollars in thousands)   Premiums     Income     Other     Total     Interest     Income  
For the three months ended September 30, 2007:
                                               
Specialty
  $ 441,944     $ 56,392     $     $ 498,336     $ 124,391     $ 86,620  
Regional
    315,358       23,939             339,297       53,507       37,226  
Alternative Markets
    165,686       31,096       23,690       220,472       60,006       42,182  
Reinsurance
    190,559       36,067             226,626       44,894       32,876  
International
    62,017       9,445             71,462       11,306       7,868  
Corporate and eliminations
          8,851       42,176       51,027       (37,213 )     (26,826 )
Realized investment gains
                812       812       812       517  
 
                                   
Consolidated
  $ 1,175,564     $ 165,790     $ 66,678     $ 1,408,032     $ 257,703     $ 180,463  
 
                                   
 
                                               
For the three months ended September 30, 2006:
                                               
Specialty
  $ 446,453     $ 50,272     $     $ 496,725     $ 119,498     $ 82,758  
Regional
    308,263       21,117             329,380       51,061       35,326  
Alternative Markets
    166,879       28,244       26,622       221,745       76,693       52,705  
Reinsurance
    215,028       33,194             248,222       31,191       23,630  
International
    57,234       8,474             65,708       5,039       4,077  
Corporate and eliminations
          4,483       511       4,994       (40,253 )     (25,693 )
Realized investment gains
                1,734       1,734       1,734       1,505  
 
                                   
Consolidated
  $ 1,193,857     $ 145,784     $ 28,867     $ 1,368,508     $ 244,963     $ 174,308  
 
                                   

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6. INDUSTRY SEGMENTS (continued)
                                                 
                                    Income        
                                    Before        
    Revenues     Taxes and        
    Earned     Investment                     Minority     Net  
(dollars in thousands)   Premiums     Income     Other     Total     Interest     Income  
For the nine months ended September 30, 2007:
                                               
Specialty
  $ 1,327,509     $ 170,868     $     $ 1,498,377     $ 388,946     $ 269,902  
Regional
    929,537       71,849             1,001,386       160,731       111,660  
Alternative Markets
    487,616       93,624       75,026       656,266       191,316       133,718  
Reinsurance
    572,823       116,625             689,448       137,193       100,838  
International
    184,652       26,045             210,697       26,577       18,170  
Corporate and eliminations
          21,143       62,837       83,980       (122,176 )     (83,496 )
Realized investment gains
                13,482       13,482       13,482       8,730  
 
                                   
Consolidated
  $ 3,502,137     $ 500,154     $ 151,345     $ 4,153,636     $ 796,069     $ 559,522  
 
                                   
 
                                               
For the nine months ended September 30, 2006:
                                               
Specialty
  $ 1,307,910     $ 144,260     $     $ 1,452,170     $ 338,716     $ 235,024  
Regional
    897,838       60,370             958,208       149,621       103,472  
Alternative Markets
    491,648       82,675       80,182       654,505       218,335       150,433  
Reinsurance
    666,577       96,625             763,202       95,287       71,889  
International
    162,941       23,562             186,503       21,771       15,221  
Corporate and eliminations
          14,856       1,208       16,064       (121,252 )     (77,301 )
Realized investment gains
                3,736       3,736       3,736       2,724  
 
                                   
Consolidated
  $ 3,526,914     $ 422,348     $ 85,126     $ 4,034,388     $ 706,214     $ 501,462  
 
                                   
Identifiable assets by segment are as follows (dollars in thousands):
                 
    September 30,     December 31,  
    2007        2006    
Specialty
  $ 5,644,679     $ 5,387,934  
Regional
    2,777,454       2,796,225  
Alternative Markets
    3,230,060       2,700,782  
Reinsurance
    5,153,444       5,231,317  
International
    786,166       811,662  
Corporate, other and eliminations
    (895,964 )     (1,271,431 )
 
           
Consolidated
  $ 16,695,839     $ 15,656,489  
 
           

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5. INDUSTRY SEGMENTS (continued)
Net premiums earned by major line of business are as follows (dollars in thousands):
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2007     2006     2007     2006  
Premises operations
  $ 180,607     $ 192,563     $ 550,431     $ 560,502  
Automobile
    70,608       67,752       208,672       198,226  
Products liability
    55,471       63,787       173,603       194,550  
Property
    54,875       42,706       155,263       118,212  
Professional liability
    38,812       39,748       116,311       118,410  
Other
    41,571       39,897       123,229       118,010  
 
                       
Specialty
    441,944       446,453       1,327,509       1,307,910  
 
                       
 
                               
Commercial multiple peril
    118,576       118,301       353,669       350,419  
Automobile
    93,323       88,769       271,132       259,350  
Workers’ compensation
    62,552       64,330       187,724       184,187  
Other
    40,907       36,863       117,012       103,882  
 
                       
Regional
    315,358       308,263       929,537       897,838  
 
                       
 
                               
Excess workers’ compensation
    79,838       77,890       233,390       227,604  
Primary workers’ compensation
    62,647       67,891       188,311       204,540  
Other
    23,201       21,098       65,915       59,504  
 
                       
Alternative Markets
    165,686       166,879       487,616       491,648  
 
                       
 
                               
Casualty
    155,599       185,874       479,946       592,066  
Property
    34,960       29,154       92,877       74,511  
 
                       
Reinsurance
    190,559       215,028       572,823       666,577  
 
                       
 
                               
International
    62,017       57,234       184,652       162,941  
 
                       
Total
  $ 1,175,564     $ 1,193,857     $ 3,502,137     $ 3,526,914  
 
                       
7. 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. However, adverse outcomes are possible and could negatively impact the Company’s financial condition and results of operations.
8. SUBSEQUENT EVENT
          In October 2007, the Company acquired all the shares of outstanding stock of CGH Insurance Group, Inc., the owner of American Mining Insurance Company, for approximately $30 million.
          In November 2007, the Company announced that it has agreed to repurchase the 20% minority interest in W. R. Berkley Insurance (Europe), Limited held by Kiln Ltd for approximately $50 million.

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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 increasing level of competition and pricing pressure that we are currently facing, 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 or reinsurance 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.

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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. Recently, pricing and other terms have been affected by increasing competition.
          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, as well as private equity securities.
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 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 changes, loss cost trends and known changes in the type of risks underwritten. Expected loss ratios are estimated for each key line

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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 is 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 $7.6 billion as of September 30, 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 $1.9 billion, or 25%, of the Company’s net loss reserves as of September 30, 2007 relate to assumed reinsurance business. There is a higher degree of uncertainty and greater variability regarding estimates of assumed reinsurance 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.
          The following is a summary of the Company’s reserves for losses and loss expenses by business segment as of September 30, 2007 and December 31, 2006 (dollars in thousands):
                 
    September 30,   December 31,
    2007   2006
 
Specialty
  $ 2,722,240     $ 2,498,030  
Regional
    1,178,236       1,071,607  
Alternative Markets
    1,517,155       1,372,517  
Reinsurance
    1,882,295       1,764,767  
International
    301,967       240,676  
 
Net reserves for losses and loss expenses
    7,601,893       6,947,597  
 
Ceded reserves for losses and loss expenses
    840,233       836,672  
 
Gross reserves for losses and loss expenses
  $ 8,442,126     $ 7,784,269  
 

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          The following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of September 30, 2007 and December 31, 2006 (dollars in thousands):
                         
    Reported Case   Incurred But    
    Reserves   Not Reported   Total
 
September 30, 2007
                       
General liability
  $ 750,450     $ 2,002,459     $ 2,752,909  
Workers’ compensation
    794,357       943,207       1,737,564  
Automobile
    368,621       219,209       587,830  
International
    107,371       194,596       301,967  
Other
    119,318       220,010       339,328  
 
Total primary
    2,140,117       3,579,481       5,719,598  
Reinsurance
    715,376       1,166,919       1,882,295  
 
Total
  $ 2,855,493     $ 4,746,400     $ 7,601,893  
 
 
                       
December 31, 2006
                       
General liability
  $ 696,074     $ 1,824,395     $ 2,520,469  
Workers’ compensation
    687,127       909,076       1,596,203  
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  
 
          For the nine months ended September 30, 2007, the Company reported losses and loss expenses of $2.1 billion, of which $71 million represented a decrease in estimates for claims occurring in prior years. The estimates for claims occurring in prior years were decreased by $106 million for primary business and increased by $35 million for assumed reinsurance business. On an accident year basis, the change in prior year reserves is comprised of an increase in estimates of $123 million for claims occurring in accident years 2003 and prior, and a decrease in estimates of $194 million for claims occurring in accident years 2004 through 2006.
          Case reserves for primary business increased 12% to $2.1 billion at September 30, 2007 from $1.9 billion at December 31, 2006 as a result of a 4% increase in the number of outstanding claims and a 10% increase in the average case reserve per claim. Reserves for incurred but not reported losses for primary business increased 10% to $3.6 billion at September 30, 2007 from $3.3 billion at December 31, 2006. Prior year reserves decreased by $58 million for the specialty segment, $24 million for the alternative market segment and $24 million for the regional segment. By line of business, prior year reserves decreased by $69 million, $22 million, $9 million and $6 million for general liability, workers’ compensation, property and commercial automobile, respectively.
          Case reserves for reinsurance business increased 5% to $715 million at September 30, 2007 from $680 million at December 31, 2006. Reserves for incurred but not reported losses for reinsurance business increased 8% to $1,167 million at September 30, 2007 from $1,084 million at December 31, 2006. Prior year reserves increased $35 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.

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          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 $97 million and $139 million at September 30, 2007 and December 31, 2006, respectively. The assumed premium estimates are based upon terms set forth in the reinsurance agreements, 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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Results of Operations for the Nine Months Ended September 30, 2007 and 2006
Business Segment Results
          The 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 nine months ended September 30, 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 Nine Months
    Ended September 30,
(Dollars in thousands)   2007   2006
 
Specialty
               
Gross premiums written
  $ 1,366,404     $ 1,450,961  
Net premiums written
    1,288,917       1,376,340  
Premiums earned
    1,327,509       1,307,910  
Loss ratio
    57.2 %     60.0 %
Expense ratio
    26.4 %     25.2 %
Combined ratio
    83.6 %     85.2 %
 
Regional
               
Gross premiums written
  $ 1,104,431     $ 1,086,500  
Net premiums written
    968,146       943,705  
Premiums earned
    929,537       897,838  
Loss ratio
    59.1 %     59.5 %
Expense ratio
    31.3 %     30.6 %
Combined ratio
    90.4 %     90.1 %
 
Alternative Markets
               
Gross premiums written
  $ 618,654     $ 606,965  
Net premiums written
    541,578       531,686  
Premiums earned
    487,616       491,648  
Loss ratio
    57.9 %     52.8 %
Expense ratio
    23.3 %     22.3 %
Combined ratio
    81.2 %     75.1 %
 
Reinsurance
               
Gross premiums written
  $ 592,433     $ 739,080  
Net premiums written
    548,121       699,929  
Premiums earned
    572,823       666,577  
Loss ratio
    66.8 %     73.5 %
Expense ratio
    29.6 %     26.7 %
Combined ratio
    96.4 %     100.2 %
 
International
               
Gross premiums written
  $ 211,228     $ 174,866  
Net premiums written
    177,263       153,762  
Premiums earned
    184,652       162,941  
Loss ratio
    65.9 %     66.5 %
Expense ratio
    31.6 %     31.9 %
Combined ratio
    97.5 %     98.4 %
 
Consolidated
               
Gross premiums written
  $ 3,893,150     $ 4,058,372  
Net premiums written
    3,524,025       3,705,422  
Premiums earned
    3,502,137       3,526,914  
Loss ratio
    59.8 %     61.7 %
Expense ratio
    28.1 %     26.9 %
Combined ratio
    87.9 %     88.6 %
 

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          The following table presents the Company’s net income and net income per share for the nine months ended September 30, 2007 and 2006 (amounts in thousands, except per share data):
                 
    2007   2006
 
Net income
  $ 559,522     $ 501,462  
Weighted average diluted shares
    199,247       201,276  
Net income per diluted share
  $ 2.81     $ 2.49  
 
          The increase in net income in 2007 compared with 2006 is primarily attributable to an 18% increase in investment income as a result of an increase in average invested assets. Underwriting results also improved due to a 1.9 percentage point decrease in the loss ratio (losses and loss expenses incurred expressed as percentage of premiums earned), which was 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 $3,893 million in 2007, down 4% 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 5% from the prior year period. A summary of gross premiums written in 2007 compared with 2006 by business segment follows:
    Specialty gross premiums decreased 6% to $1.4 billion in 2007 from $1.5 billion in 2006. The number of specialty policies issued in 2007 decreased 1%, and the average premium per policy decreased 5%. Average prices for renewal policies, adjusted for changes in exposure, decreased 5%. Gross premiums written decreased 17% for premises operations lines and 11% for products liability. Gross premiums written increased 16% for property lines, 3% for commercial automobile and 1% for professional liability.
 
    Regional gross premiums increased 2% to $1,104 million in 2007 from $1,087 million in 2006. The number of policies issued in 2007 increased 1%, and the average premium per policy increased 2%. Average prices for renewal policies, adjusted for changes in exposure, decreased 3%. Gross premiums written increased by 4% for commercial automobile and 1% for workers’ compensation. Gross premiums written for commercial multi-peril were unchanged. Gross premiums included assigned risk plan premiums, which are fully reinsured, of $70 million in 2007 and $84 million in 2006.
 
    Alternative markets gross premiums increased 2% to $619 million in 2007 from $607 million in 2006. The number of policies issued in 2007 increased 12%, and the average premium per policy decreased 9%. The increase in the number of policies issued and decrease in average premium per policy is primarily due to the number of smaller premium policies issued by a web-based workers’ compensation company that was formed in January 2006. Average prices for renewal policies, adjusted for changes in exposure, decreased 5%. Gross premiums written increased by 3% for excess workers’ compensation and decreased by 3% for primary workers’ compensation. Gross premiums included assigned risk plan premiums, which are fully reinsured, of $46 million in 2007 and $49 million in 2006.
 
    Reinsurance gross premiums decreased 20% to $592 million in 2007 from $739 million in 2006. Reinsurance premiums have been impacted by increasing competition and by customers retaining a greater amount of their exposure. Average prices for renewal business, adjusted for changes in exposure decreased by 4%. Casualty gross premiums written decreased 25% to $456 million, and property gross premiums written increased 7% to $136 million. The 2006 premiums included $98 million related to a reinsurance agreement that was not renewed in 2007.
 
    International gross premiums increased 21% to $211 million in 2007 from $175 million in 2006. The increase is due to growth in both Europe and South America and the effects of changes in foreign exchange rates, which were partially offset by the sale of Berkley International Philippines, Inc. in March 2007.

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          Premiums Earned. Premiums earned decreased 1% to $3,502 million from $3,527 million in 2006. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in 2007 are related to policies bound during both 2007 and 2006. The 1% decrease in 2007 earned premiums reflects the underlying change in net premiums written in those periods.
          Net Investment Income. Following is a summary of net investment income for the nine months ended September 30, 2007 and 2006 (dollars in thousands):
                                 
                    Average Annualized  
    Amount     Yield  
    2007     2006     2007     2006  
Fixed maturity securities, including cash
  $ 371,105     $ 321,339       4.8 %     4.6 %
Arbitrage trading account
    65,917       51,785       10.8       9.9  
Equity securities available for sale
    33,094       23,128       5.5       6.5  
Investments in partnerships and affiliates
    31,402       27,947       9.1       9.8  
Other
    8,510       2,962                  
 
                           
Gross investment income
    510,028       427,161       5.5       5.2  
Investment expenses and interest on funds held
    (9,874 )     (4,813 )                
 
                           
Total
  $ 500,154     $ 422,348       5.4 %     5.2 %
 
                           
          Net investment income increased 18% to $500 million in 2007 from $422 million in 2006. Average invested assets (including cash and cash equivalents) increased 15% to $12.4 billion in 2007 compared with $10.9 billion in 2006. The increase was primarily a result of cash flow from operations. The average annualized gross yield on investments increased to 5.4% in 2007 from 5.2% in 2006 due primarily to higher yields on fixed maturity securities, including cash.
          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 $75 million in 2007, down from $80 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 $13 million in 2007 compared with $4 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.
          Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were $61 million in 2007. These revenues were derived from a fixed base operator located in Greensboro, North Carolina, that the Company acquired in January 2007 and a fixed base operator located in Boise, Idaho, that the Company acquired in July 2007. These companies provide 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 4% to $2,095 million in 2007 from $2,175 million in 2006. The consolidated loss ratio decreased to 59.8% in 2007 from 61.7% in 2006 primarily as a result of favorable loss reserve development of $71 million in 2007 compared with unfavorable loss reserve development of $20 million in 2006. On an accident year basis, the estimated loss ratio for the first nine months of 2007 was approximately four points higher than the developed loss ratio for all of 2006 due to the effects of lower premium rates and estimated loss cost inflation.

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          A summary of loss ratios in 2007 compared with 2006 by business segment follows:
    Specialty’s loss ratio was 57.2% in 2007 compared with 60.0% in 2006 principally due to the impact of prior year reserve changes (favorable development was $58 million in 2007 compared to unfavorable development of $1 million in 2006).
 
    The regional loss ratio was 59.1% in 2007 compared with 59.5% in 2006. The decrease reflects the impact of prior year reserve changes (favorable development was $24 million in 2007 compared to unfavorable development of $14 million in 2006). Weather-related losses were $30 million in 2007 compared with $32 million in 2006.
 
    Alternative markets’ loss ratio was 57.9% in 2007 compared with 52.8% in 2006. The increase reflects the impact of prior year reserve changes (favorable development was $24 million in 2007 compared to $41 million in 2006) and higher costs related to the amortization of the discount on excess workers’ compensation reserves.
 
    The reinsurance loss ratio decreased to 66.8% in 2007 from 73.5% in 2006 due to improved underwriting results from the Company’s participation in business underwritten at Lloyd’s. Prior year reserves increased $35 million in 2007 compared to $46 million in 2006).
 
    The international loss ratio was 65.9% in 2007 compared with 66.5% in 2006.
          Other Operating Expenses. Following is a summary of other operating costs and expenses for the nine months ended September 30, 2007 and 2006 (dollars in thousands):
                 
    2007     2006  
Underwriting expenses
  $ 984,508     $ 948,099  
Service company
    68,656       66,818  
Other costs and expenses
    86,591       67,974  
 
           
Total
  $ 1,139,755     $ 1,082,891  
 
           
          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 28.1% in 2007 from 26.9% in 2006 as a result of a 4% increase in both commissions and internal costs.
          Service company expenses, which represent the costs associated with the alternative markets’ fee-based business, increased 3% to $69 million primarily as a result of an increase in costs associated with the servicing of assigned risk plan business.
          Other costs and expenses, which represent primarily general and administrative expenses for the parent company, increased 27% to $87 million as a result of higher compensation costs, including costs for restricted stock units and other long-term incentive plans, and other general expenses.
          Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees of $57 million in 2007 represent costs associated with revenues from wholly-owned investees described above.
          Interest Expense. Interest expense decreased 6% to $66 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 Tax Expense. 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.

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Results of Operations for The Three Months Ended September 30, 2007 and 2006
Business Segment Results
          The 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 September 30, 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 September 30,
(Dollars in thousands)   2007   2006
 
Specialty
               
Gross premiums written
  $ 427,878     $ 454,835  
Net premiums written
    402,332       432,760  
Premiums earned
    441,944       446,453  
Loss ratio
    57.8 %     59.3 %
Expense ratio
    26.8 %     25.2 %
Combined ratio
    84.6 %     84.5 %
 
Regional
               
Gross premiums written
  $ 355,134     $ 349,353  
Net premiums written
    312,716       309,414  
Premiums earned
    315,358       308,263  
Loss ratio
    58.7 %     59.7 %
Expense ratio
    31.9 %     30.6 %
Combined ratio
    90.6 %     90.3 %
 
Alternative Markets
               
Gross premiums written
  $ 214,320     $ 209,674  
Net premiums written
    190,247       190,555  
Premiums earned
    165,686       166,879  
Loss ratio
    60.3 %     51.3 %
Expense ratio
    23.2 %     22.6 %
Combined ratio
    83.5 %     73.9 %
 
Reinsurance
               
Gross premiums written
  $ 177,198     $ 233,419  
Net premiums written
    166,555       221,163  
Premiums earned
    190,559       215,028  
Loss ratio
    65.5 %     73.3 %
Expense ratio
    29.9 %     27.7 %
Combined ratio
    95.4 %     101.0 %
 
International
               
Gross premiums written
  $ 69,579     $ 58,909  
Net premiums written
    60,639       55,014  
Premiums earned
    62,017       57,234  
Loss ratio
    66.5 %     71.0 %
Expense ratio
    30.0 %     32.1 %
Combined ratio
    96.5 %     103.1 %
 
Consolidated
               
Gross premiums written
  $ 1,244,109     $ 1,306,190  
Net premiums written
    1,132,489       1,208,906  
Premiums earned
    1,175,564       1,193,857  
Loss ratio
    60.1 %     61.3 %
Expense ratio
    28.4 %     27.2 %
Combined ratio
    88.5 %     88.5 %
 

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          The following table presents the Company’s net income and net income per share for the three months ended September 30, 2007 and 2006 (amounts in thousands, except per share data):
                 
    2007   2006
 
Net income
  $ 180,463     $ 174,308  
Weighted average diluted shares
    193,719       201,295  
Net income per diluted share
  $ .93     $ .87  
 
          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.
          Gross Premiums Written. Gross premiums written were $1,244 million in 2007, down 5% 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 5% from the prior year period. A summary of gross premiums written in 2007 compared with 2006 by business segment follows:
    Specialty gross premiums decreased 6% to $428 million in 2007 from $455 million in 2006. The number of specialty policies issued in 2007 increased 2%, and the average premium per policy decreased 7%. Average prices for renewal policies, adjusted for changes in exposure, decreased 6%. Gross premiums written decreased 14% for premises operations, 10% for commercial automobile and 9% for products liability. Gross premiums written increased 11% for property and 6% for professional liability.
 
    Regional gross premiums increased 2% to $355 million in 2007 from $349 million in 2006. The number of policies issued in 2007 increased 1%, and the average premium per policy was unchanged. Average prices for renewal policies, adjusted for changes in exposure, decreased 4%. Gross premiums written increased by 6% for commercial automobile. Gross premiums written decreased 3% for commercial multiple peril and 2% for workers’ compensation. Gross premiums also included assigned risk plan premiums, which are fully reinsured, of $21 million in 2007 and $20 million in 2006.
 
    Alternative markets gross premiums increased to 2% to $214 million in 2007 from $210 million in 2006. The number of policies issued in 2007 increased 22%, and the average premium per policy decreased 16%. The increase in the number of policies issued and decrease in average premium per policy is primarily due to the number of smaller premium policies issued by a web-based workers’ compensation company that was formed in January 2006. Average prices for renewal policies, adjusted for changes in exposure, decreased 5%. Gross premiums written increased 4% for excess workers’ compensation and decreased 3% for primary workers’ compensation. Gross premiums also included assigned risk plan premiums, which are fully reinsured, of $11 million in 2007 and $10 million in 2006.
 
    Reinsurance gross premiums decreased 24% to $177 million in 2007 from $233 million in 2006. Average prices for renewal business, adjusted for changes in exposure decreased by 6%. Casualty gross premiums written decreased 26% to $143 million, and property gross premiums written decreased 15% to $34 million. The 2006 premiums included $25 million related to a reinsurance agreement that was not renewed in 2007.
 
    International gross premiums increased 18% to $70 million in 2007 from $59 million in 2006. The increase is due to growth in both Europe and South America and the effects of changes in foreign exchange rates, which were partially offset by the sale of Berkley International Philippines, Inc. in March 2007.

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          Premiums Earned. Premiums earned decreased 2% to $1,176 million from $1,194 million in 2006. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in 2007 are related to policies bound during both 2007 and 2006. The 2% decrease in 2007 earned premiums reflects the underlying change in net premiums written in those periods.
          Net Investment Income. The following is a summary of net investment income for the three months ended September 30, 2007 and 2006 (dollars in thousands):
                                 
                    Average Annualized  
    Amount     Yield  
    2007     2006     2007     2006  
Fixed maturity securities, including cash
  $ 128,197     $ 112,700       4.9 %     4.7 %
Arbitrage trading account
    21,121       14,510       10.2       7.7  
Equity securities available for sale
    12,334       10,982       5.9       11.3  
Investments in partnerships and affiliates
    6,752       8,682       5.7       6.5  
Other
    2,839       662                  
 
                           
Gross investment income
    171,243       147,536       5.4       5.2  
Investment expenses and interest on funds held
    (5,453 )     (1,752 )                
 
                           
Total
  $ 165,790     $ 145,784       5.2 %     5.2 %
 
                           
          Net investment income increased 14% to $166 million in 2007 from $146 million in 2006. Average invested assets (including cash and cash equivalents) increased 13% to $12.7 billion in 2007 compared with $11.3 billion in 2006. The increase was primarily a result of cash flow from operations. The average annualized gross yield on investments was 5.2% in 2007 and 2006 as higher yields on fixed maturity securities, including cash, was offset by an increase in interest expense on funds held under reinsurance agreements.
          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 $24 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 $1 million in 2007 compared with $2 million in 2006.
          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.
          Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were $42 million in 2007. The revenues from wholly-owned investees were derived from aviation businesses that the Company acquired in January and July 2007 as further described above.
          Losses and Loss Expenses. Losses and loss expenses decreased 3% to $706 million in 2007 from $732 million in 2006. The consolidated loss ratio decreased to 60.1% in 2007 from 61.3% in 2006 primarily as a result of favorable loss reserve development of $18 million in 2007 compared with unfavorable loss reserve development of $6 million in 2006.

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  A summary of loss ratios in 2007 compared with 2006 by business segment follows:
    Specialty’s loss ratio was 57.8% in 2007 compared with 59.3% in 2006 principally due to favorable prior year loss reserve development.
 
    The regional loss ratio was 58.7% in 2007 compared with 59.7% in 2006. Weather-related losses were $8 million in 2007 compared with $7 million in 2006.
 
    Alternative markets’ loss ratio was 60.3% in 2007 compared with 51.3% in 2006. The increase reflects the impact of prior year reserve changes (favorable development was $6 million in 2007 compared to $16 million in 2006) and higher costs related to the amortization of the discount on excess workers’ compensation reserves.
 
    The reinsurance loss ratio was 65.5% in 2007 compared with 73.3% in 2006. The decrease was primarily due to improved underwriting results from the Company’s participation in business underwritten at Lloyd’s.
 
    The international loss ratio was 66.5% in 2007 compared with 71.0% in 2006 primarily due to lower estimated loss costs for accident year 2007 in Argentina.
          Other Operating Expenses. Following is a summary of other operating costs and expenses for the three months ended September 30, 2007 and 2006 (dollars in thousands):
                 
    2007   2006
 
Underwriting expenses
  $ 333,414     $ 324,166  
Service company
    22,014       21,816  
Other costs and expenses
    27,102       22,329  
 
               
Total
  $ 382,530     $ 368,311  
 
               
          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 28.4% in 2007 from 27.2% in 2006 primarily a result of a 3% increase in commissions and internal costs.
          Service company expenses, which represent the costs associated with the alternative markets’ fee-based business, increased 1% to $22 million primarily as a result of an increase in costs associated with the servicing of assigned risk plan business.
          Other costs and expenses, which represent primarily general and administrative expenses for the parent company, increased 21% to $27 million primarily as a result of higher compensation costs, including costs for restricted stock units and other long-term incentive plans, and other general expenses.
          Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees of $39 million in 2007 represent costs associated with revenues from wholly-owned investees described above.
          Interest Expense. Interest expense decreased 3% to $23 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 Tax Expense. 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.

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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 were as follows (dollars in thousands):
                 
    September 30,     December 31,  
    2007     2006  
Fixed maturity securities
  $ 10,024,635     $ 9,158,607  
Equity securities available for sale
    955,340       866,422  
Arbitrage securities trading account
    714,017       639,481  
Partnerships and affiliates
    525,549       449,854  
 
           
Total investments
    12,219,541       11,114,364  
 
           
 
               
Cash and cash equivalents
    591,279       754,247  
 
               
Trading account receivable from brokers and clearing organization
    275,914       312,220  
 
               
Trading account securities sold but not yet purchased
    (146,151 )     (170,075 )
 
               
Unsettled purchases and sales
    (23,437 )     1,542  
 
           
Total
  $ 12,917,146     $ 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 September 30, 2007 (as compared to December 31, 2006), the fixed maturities portfolio mix was as follows: U.S. Government securities were 11% (15% in 2006); state and municipal securities were 51% (50% in 2006); corporate securities were 10% (9% in 2006); mortgage-backed securities were 26% (22% in 2006); and foreign bonds were 2% (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.
          At September 30, 2007, the carrying value of residential mortgage securities was $1,587 million, of which $1,214 million was issued by or guaranteed by the U.S. government or a government sponsored entity. The remainder of the residential mortgage securities consists of prime ($254 million) and Alt A ($119 million) securities. The Company defines Alt A securities as securities issued by dedicated Alt A shelves and backed by loans made to borrowers with credit ratings that fall below prime (the highest rated borrowers) but above sub-prime. The Company’s Alt A securities are backed by fixed rate loans that were issued in 2003 and 2004 and have demonstrated good payment history and solid credit support characteristics to date. In addition, external funds that the Company invests in contain residential mortgage-backed securities, including securities with sub-prime loans. The Company’s proportionate share of those fund’s sub-prime securities is not significant.

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          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.
          Arbitrage 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 September 30, 2007 (as compared to December 31, 2006), investments in partnerships and affiliates were as follows: equity in Kiln Ltd was $109 million ($96 million in 2006); real estate funds were $287 million ($275 million in 2006); and other investments were $130 million ($79 million in 2006).
          Securities in an Unrealized Loss Position. The following table summarizes all securities in an unrealized loss position at September 30, 2007 and December 31, 2006 by the length of time those securities have been continuously in an unrealized loss position:
                         
                    Gross  
    Number of     Aggregate     Unrealized  
(Dollars in thousands)   Securities     Fair Value     Loss  
 
September 30, 2007
                       
Fixed maturities:
                       
0– 6 months
    85     $ 1,205,794     $ 11,082  
7– 12 months
    53       555,982       6,713  
Over 12 months
    241       2,098,580       30,294  
 
                 
Total
    379     $ 3,860,356     $ 48,089  
 
                 
Equity securities available for sale:
                       
0– 6 months
    100     $ 398,693     $ 17,431  
7– 12 months
    15       45,748       1,384  
Over 12 months
    9       22,174       2,289  
 
                 
Total
    124     $ 466,615     $ 21,104  
 
                 
 
                       
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  
 
                 

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          At September 30, 2007, gross unrealized gains were $209 million, or 2% of total investments, and gross unrealized losses were $69 million, or 0.5% of total investments. There were 318 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.
          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 September 30, 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   $ 44,155       91.9 %   $ 3,589,314       93.0 %
BBB
  Baa     3,528       7.3       230,406       6.0  
BB
  Bb     406       0.8       40,636       1.0  
 
 
  Total   $ 48,089       100.0 %   $ 3,860,356       100.0 %
 
          The scheduled maturity dates for fixed maturity securities in an unrealized loss position at September 30, 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
  $ 1,459       3.0 %   $ 137,711       3.6 %
One year through five years
    10,438       21.7       799,528       20.7  
Five years through ten years
    8,480       17.6       982,883       25.5  
After ten years
    12,312       25.6       780,649       20.2  
Mortgage and asset-backed securities
    15,400       32.1       1,159,585       30.0  
 
Total fixed income securities
  $ 48,089       100.0 %   $ 3,860,356       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 two years.

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Liquidity and Capital Resources
          Cash Flow. Cash flow provided from operating activities was $1,130 million during the nine months ended September 30, 2007 and $1,111 million in the comparable period of 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 increase in 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 $225 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 82% invested in cash, cash equivalents and marketable fixed income securities as of September 30, 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. During the first nine months of 2007, the Company repurchased 12,922,387 shares of its common stock for $396 million.
          At September 30, 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 $1,382 million. The maturities of the outstanding debt are $90 million in 2008, $2 million in 2009, $150 million in 2010, $2 million in 2012, $200 million in 2013, $200 million in 2015, $150 million in 2019, $76 million in 2022, $12 million in 2023, $250 million in 2037 and $250 million in 2045 (prepayable in 2010).

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          At September 30, 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 September 30, 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 3.6 years at September 30, 2007 and 3.3 years 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 September 30, 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. However, adverse outcomes are possible and could negatively impact the Company’s financial condition and 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.

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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
    purchased   share   or programs   or programs (1)
 
July 2007
    5,620,000     $ 31.05       5,620,000       14,740,488  
August 2007
    3,740,100     $ 28.47       3,740,100       11,000,388  
September 2007
    341,000     $ 28.92       341,000       10,659,388  
 
Total
    9,701,100     $ 29.98       9,701,100          
 
 
(1)   Remaining shares available for repurchase under the Company’s repurchase authorization of 20,000,000 shares approved by the Board of Directors on November 1, 2006.
          On November 6, 2007, the Board of Directors increased the Company’s repurchase authorization to 20,000,000 shares.
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.

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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: November 9, 2007
  /s/ William R. Berkley
 
   
 
  William R. Berkley    
 
  Chairman of the Board and
Chief Executive Officer
   
 
       
Date: November 9, 2007
  /s/ Eugene G. Ballard    
 
       
 
  Eugene G. Ballard    
 
  Senior Vice President,
Chief Financial Officer and Treasurer