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

Years ended December 31,	2007			2006			2005			2004			2003
Net premiums written	$	4,575,989		$	4,818,993		$	4,604,574		$	4,266,361		$	3,670,515
Net premiums earned		4,663,701			4,692,622			4,460,935			4,061,092			3,234,610
Net investment income		672,660			586,175			403,962			291,295			210,056
Insurance service fees		97,689			104,812			110,697			109,344			101,715
Realized investment gains		14,938			9,648			17,209			48,268			81,692
Revenues from wholly-owned investees		102,846			—			—			—			—
Total revenues		5,553,639			5,394,831			4,996,839			4,512,235			3,630,108
Interest expense		88,996			92,522			85,926			66,423			54,733
Income before income taxes		1,057,634			988,645			770,537			638,513			489,304
Income tax expense		(310,905	)		(286,398	)		(222,521	)		(196,235	)		(150,626	)
Minority interest		(3,083	)		(2,729	)		(3,124	)		(3,446	)		(1,458	)
Income before change in accounting		743,646			699,518			544,892			438,832			337,220
Cumulative effect of change in accounting		—			—			—			(727	)		—
Net income		743,646			699,518			544,892			438,105			337,220
Data per common share:
Net income per basic share		3.94			3.65			2.86			2.32			1.81
Net income per diluted share		3.78			3.46			2.72			2.21			1.72
Stockholders’ equity		19.80			17.30			13.42			11.13			8.95
Cash dividends declared		.20			.16			.12			.12			.12
Weighted average shares outstanding:
Basic		188,981			191,809			190,533			188,912			187,029
Diluted		196,698			201,961			200,426			198,408			195,893
Balance sheet data (as of year end)
Investments	$	11,893,522		$	11,114,364		$	9,810,225		$	7,303,889		$	5,068,670
Total assets		16,832,170			15,656,489			13,896,287			11,451,033			9,334,685
Reserves for losses and loss expenses		8,678,034			7,784,269			6,711,760			5,449,611			4,192,091
Junior subordinated debentures		249,375			241,953			450,634			208,286			193,336
Senior notes and other debt		1,121,793			869,187			967,818			808,264			659,208
Stockholders’ equity		3,569,775			3,335,159			2,567,077			2,109,702			1,682,562

PAST PRICES OF COMMON STOCK
The common stock of the Company is traded on the New York Stock Exchange under the symbol “BER”.

	Price Range				Common Dividends
	High		Low		Declared Per Share
2007
Fourth Quarter	$	32.21	$	28.04	$	.05
Third Quarter		32.81		25.20		.05
Second Quarter		33.80		31.89		.05
First Quarter		35.10		31.30		.05
2006
Fourth Quarter	$	37.72	$	34.34	$	.04
Third Quarter		37.25		32.26		.04
Second Quarter		40.95		30.61		.04
First Quarter		40.15		31.87		.04

Item 7. 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.

Available insurance capacity has increased in recent years, increasing competition in the industry and putting downward pressure on pricing and terms and conditions. In 2007, we saw increased competition and decreased prices across most of our business segments, and we believe that this trend of increased competition and decreased prices will continue in 2008.

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 merger arbitrage, private equity and real estate securities.

Critical Accounting Estimates

The following presents a discussion of accounting policies and estimates relating to reserves for losses and loss expenses, assumed premiums and investments. 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.

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.

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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 external and internal events, such as inflation and economic volatility, judicial and litigation trends, reinsurance coverage, legislative changes and claim handling and reserving practices, 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 increases, loss cost trends and known changes in the type of risks underwritten. Expected loss ratios are estimated for each key line of business within each operating unit. Expected loss cost inflation is particularly important for the long-tail lines, such as excess casualty, and claims with a high medical component, such as workers’ compensation. Reported and paid loss emergence patterns are used to project current reported or paid loss amounts to their ultimate settlement value. Loss development factors are based on the historical emergence patterns of paid and incurred losses, and are derived from the Company’s own experience and industry data. The paid loss emergence pattern is also significant to excess and assumed workers’ compensation reserves because those reserves are discounted to their estimated present value based upon such estimated payout patterns. Management believes the estimates and assumptions it makes in the reserving process provide the best estimate of the ultimate cost of settling claims and related expenses with respect to insured events which have occurred; however, different assumptions and variables could lead to significantly different reserve estimates.

Loss frequency and severity are measures of loss activity that are considered in determining the key assumptions described in our discussion of loss and loss expense reserves, including expected loss ratios, rate of loss cost inflation and reported and paid loss emergence patterns. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations.

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

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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, 2007, initial loss estimates for accident years 1998 through 2006 were increased by an average of 2% for lines with short reporting lags and by an average of 16% for lines with long reporting lags. For the latest accident year ended December 31, 2007, initial loss estimates were $1.8 billion for lines with short reporting lags and $1.0 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. If the actual level of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s estimate. The following table reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity on our loss estimate for claims occurring in 2007 (dollars in thousands):

Frequency (+/-)
Severity (+/-)	1%		5%		10%
1%		57,037		171,678		314,979
5%		171,678		290,859		439,835
10%		314,979		439,835		595,906

Our net reserves for losses and loss expenses of $7.8 billion as of December 31, 2007 relate to multiple accident years. Therefore, the impact of changes in frequency or severity for more than one accident year could be higher or lower than the amounts reflected above.

Approximately $1.9 billion, or 24%, of the Company’s net loss reserves relate to assumed reinsurance business. There is a higher degree of uncertainty and greater variability regarding estimates of assumed loss reserves because those estimates are based, in part, upon information received from ceding companies. If information received from ceding companies is not timely or correct, the Company’s estimate of ultimate losses may not be accurate. Furthermore, due to delayed reporting of claim information by ceding companies, the claim settlement tail for assumed reinsurance is extended. Management considers the impact of delayed reporting in its selection of assumed loss development factors.

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

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

	2007		2006
Specialty	$	2,853,479	$	2,498,030
Regional		1,218,703		1,071,607
Alternative Markets		1,558,643		1,372,517
Reinsurance		1,884,051		1,764,767
International		308,021		240,676
Net reserves for losses and loss expenses		7,822,897		6,947,597
Ceded reserves for losses and loss expenses		855,137		836,672
Gross reserves for losses and loss expenses	$	8,678,034	$	7,784,269

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

	Reported Case		Incurred but not
	Reserves		Reported		Total
December 31, 2007
General liability	$	756,121	$	2,095,913	$	2,852,034
Workers’ compensation		915,588		929,875		1,845,463
Commercial automobile		377,922		223,767		601,689
International		118,807		189,214		308,021
Other		135,221		196,418		331,639
Total primary		2,303,659		3,635,187		5,938,846
Reinsurance		795,922		1,088,129		1,884,051
Total	$	3,099,581	$	4,723,316	$	7,822,897
December 31, 2006
General liability	$	696,074	$	1,824,395	$	2,520,469
Workers’ compensation		687,127		909,076		1,596,203
Commercial automobile		354,841		193,995		548,836
International		78,489		162,187		240,676
Other		98,368		178,278		276,646
Total primary		1,914,899		3,267,931		5,182,830
Reinsurance		680,272		1,084,495		1,764,767
Total	$	2,595,171	$	4,352,426	$	6,947,597

For the year ended December 31, 2007, the Company reported losses and loss expenses of $2.8 billion, of which $106 million represented a decrease in estimates for claims occurring in prior years. The estimates for claims occurring in prior years decreased by $150 million for primary business and increased by $44 million for assumed reinsurance. On an accident year basis, the change in prior year reserves is comprised of an increase in estimates for claims occurring in accident years 2003 and prior of $179 million and a decrease in estimates for claims occurring in accident years 2004 through 2006 of $285 million. The changes in prior year loss reserve estimates are generally the result of ongoing analysis of recent loss development trends. Original estimates are increased or decreased as additional information becomes known regarding individual claims and aggregate claim trends.

Case reserves for primary business increased 20% to $2.3 billion as a result of a 3% increase in the number of outstanding claims and a 21% increase in the average case reserve per claim. Reserves for incurred but not reported losses for primary business increased 11% to $3.6 billion at December 31, 2007 from $3.3 billion at December 31, 2006. By segment, prior year reserves decreased by $97 million for specialty, $24 million for alternative markets, $22 million for regional and $7 million for international. By line of business, prior year reserves decreased by $114 million for general liability, $14 million for workers’ compensation, $12 million for property and $10 million for commercial automobile. The decrease in prior year reserves for general liability reflects the favorable loss reserve trends for excess and surplus lines for accident years 2004 through 2006.

Case reserves for reinsurance business increased 17% to $796 million at December 31, 2007 from $680 million at December 31, 2006. Reserves for incurred but not reported losses for reinsurance business were $1,088 million at December 31, 2007 compared with $1,084 million at December 31, 2006. Prior year reserves increased $44 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.

Loss Reserve Discount. The Company discounts its liabilities for excess and assumed workers’ compensation business because of the long period of time over which losses are paid. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from the Company’s loss payout experience. For non-proportional business, reserves for losses and loss expenses have been discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. These discount rates range from 3.7% to 6.5% with a weighted average discount rate of 4.9%. For proportional business, reserves for losses and loss expenses have been discounted at the statutory rate permitted by the Department of Insurance of the State of Delaware of 2.6%. The aggregate net discount, after reflecting the effects of ceded reinsurance, is $787,988,000, $699,883,000 and $575,485,000 at December 31, 2007, 2006 and 2005, respectively. The increase in the aggregate discount from 2006 to 2007 and from 2005 to 2006 resulted from the increase in excess and assumed workers’ compensation gross reserves.

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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 $69 million and $139 million at December 31, 2007 and 2006, respectively. The assumed premium estimates are based upon terms set forth in the reinsurance agreement, information received from ceding companies during the underwriting and negotiation of the agreement, reports received from ceding companies and discussions and correspondence with reinsurance intermediaries. The Company also considers its own view of market conditions, economic trends and experience with similar lines of business. These premium estimates represent management’s best estimate of the ultimate premiums to be received under its assumed reinsurance agreements.

Other-Than-Temporary Declines in the Value of Investments. The cost of securities is adjusted where appropriate to include a provision for decline in value which is considered to be other than temporary. An other than temporary decline is considered to occur in investments where there has been a sustained reduction in market value and where the Company does not expect the fair value to recover prior to the time of sale or maturity. Management regularly reviews 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.

6

Business Segment Results

Following is a summary of gross and net premiums written, premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the years ended December 31, 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.

(Dollars in thousands)	2007			2006
Specialty
Gross premiums written	$	1,816,727		$	1,918,521
Net premiums written		1,704,880			1,814,479
Premiums earned		1,772,547			1,752,507
Loss ratio		57.3	%		59.1	%
Expense ratio		26.7	%		25.0	%
Combined ratio		84.0	%		84.1	%
Regional
Gross premiums written	$	1,441,077		$	1,415,311
Net premiums written		1,267,451			1,235,302
Premiums earned		1,250,914			1,205,912
Loss ratio		59.1	%		59.7	%
Expense ratio		31.4	%		30.6	%
Combined ratio		90.5	%		90.3	%
Alternative Markets
Gross premiums written	$	758,285		$	747,680
Net premiums written		656,369			651,255
Premiums earned		651,909			658,805
Loss ratio		59.2	%		53.5	%
Expense ratio		23.1	%		22.1	%
Combined ratio		82.3	%		75.6	%
Reinsurance
Gross premiums written	$	732,233		$	940,797
Net premiums written		682,241			892,769
Premiums earned		740,439			859,411
Loss ratio		65.3	%		72.0	%
Expense ratio		31.3	%		27.8	%
Combined ratio		96.6	%		99.8	%
International
Gross premiums written	$	304,908		$	254,605
Net premiums written		265,048			225,188
Premiums earned		247,892			215,987
Loss ratio		62.6	%		64.2	%
Expense ratio		32.4	%		32.0	%
Combined ratio		95.0	%		96.2	%
Consolidated
Gross premiums written	$	5,053,230		$	5,276,914
Net premiums written		4,575,989			4,818,993
Premiums earned		4,663,701			4,692,622
Loss ratio		59.6	%		61.0	%
Expense ratio		28.5	%		27.0	%
Combined ratio		88.1	%		88.0	%

7

Results of Operations for the Year Ended December 31, 2007 and 2006

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

	2007		2006
Net income	$	743,646	$	699,518
Weighted average diluted shares		196,698		201,961
Net income per diluted share	$	3.78	$	3.46

The increase in net income in 2007 compared with 2006 reflects higher investment income as a result of operating cash flow. Underwriting profits were essentially unchanged as favorable prior year loss reserve development was offset by a higher expected loss ratio for accident year 2007 and by higher underwriting expenses.

Gross Premiums Written. Gross premiums written were $5.1 billion in 2007, down 4% from 2006. The Company has experienced increased competition and downward pressure on pricing since 2004. This trend continued in 2007, with price levels for renewal business declining approximately 5% as compared with the prior year period.

A summary of gross premiums written in 2007 compared with 2006 by business segment follows:

• Specialty gross premiums decreased by 5% to $1,817 million in 2007 from $1,919 million in 2006. The number of new and renewal policies issued in 2007, net of policy cancellations, increased 3%. Average prices for renewal policies, adjusted for changes in exposure, decreased 6%. Gross premiums written decreased 15% for premises operations and 13% for products liability. Gross premiums written increased 11% for property lines and 5% for professional liability. Commercial automobile gross premiums written were essentially unchanged.

• Regional gross premiums increased by 2% to $1,441 million in 2007 from $1,415 million in 2006. The number of new and renewal policies issued in 2007, net of policy cancellations, increased 1%. Average prices for renewal policies, adjusted for changes in exposure, decreased 4%. Gross premiums written increased 4% for commercial automobile and 1% for workers’ compensation. Commercial multiple peril was virtually unchanged. Gross premiums include assigned risk premiums, which are fully reinsured, of $88 million in 2007 and $102 million in 2006.

• Alternative markets gross premiums increased by 1% to $758 million in 2007 from $748 million in 2006. The number of new and renewal policies issued, excluding personal accident business which is a new line of business, increased 3% in 2007 (net of policy cancellations). Average prices for renewal policies, adjusted for changes in exposure, decreased 6%. Gross premiums written decreased 3% for primary workers’ compensation and increased 3% for excess workers’ compensation. Gross premiums include assigned risk premiums, which are fully reinsured, of $61 million in 2007 and $67 million in 2006.

• Reinsurance gross premiums decreased by 22% to $732 million in 2007 from $941 million in 2006. Average prices for renewal business decreased 5%. Casualty gross premiums written decreased 29% to $558 million, and property gross premiums written increased 10% to $174 million. The 2006 premiums include $131 million related to two medical malpractice reinsurance agreements that expired in 2007 and were not renewed. While these agreements contained limits on the potential amount of losses to be paid by the Company, they also contained limits on the potential profits that may be earned by the Company.

• International gross premiums increased by 20% to $305 million in 2007 from $255 million in 2006. Gross premiums in the UK and Europe increased 19% as a result of expanded product offerings and from the impact of foreign exchange rates. Gross premiums in Argentina increased 32% as a result of higher price levels.

Net Premiums Earned. Net premiums earned decreased 1% to $4,664 million from $4,693 million in 2006. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in 2007 are related to business written during both 2007 and 2006. The 1% decrease for 2007 earned premiums reflects the underlying decline in net premiums written in 2007.

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Net Investment Income. Following is a summary of net investment income for the years ended December 31, 2007 and 2006.

							Average Annualized
(dollars in thousands)	Amount						Yield
		2007			2006			2007		2006
Fixed maturity securities, including cash	$	497,892		$	440,987			4.8	%	4.7	%
Arbitrage trading account		80,253			74,551			9.8	%	10.4	%
Partnerships and affiliates		38,274			37,145			8.1	%	9.5	%
Equity securities available for sale		57,502			35,662			7.0	%	6.8	%
Other		10,191			5,068
Gross investment income		684,112			593,413			5.4	%	5.4	%
Investment expenses and interest on funds held		(11,452	)		(7,238	)
Total	$	672,660		$	586,175			5.4	%	5.3	%

Net investment income increased 15% to $673 million in 2007 from $586 million in 2006. Average invested assets (including cash and cash equivalents) increased 14% to $12.6 billion in 2007 from $11.1 billion in 2006 as a result of cash flow from operations.

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 $98 million in 2007, down from $105 million in 2006, primarily as a result of a decline in fees for managing state-sponsored 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 $15 million in 2007 compared with $10 million in 2006. Charges for impairment of investments were $2.7 million in 2007 and $0.1 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 $103 million in 2007. These revenues were derived from two fixed base operators that the Company acquired in 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 3% to $2,780 million in 2007 from $2,864 million in 2006. The consolidated loss ratio was 59.6% in 2007 compared with 61.0% in 2006. The 2007 loss ratio reflects favorable prior year loss reserve development of $106 million compared with $27 million of adverse development in 2006. The favorable loss reserve development was primarily related to the specialty segment. The Company also experienced favorable development for the regional, alternative markets and international segments that was partially offset by unfavorable reserve development for the reinsurance segment. The expected loss ratio for premiums earned in 2007 is higher than the expected loss ratio for the preceding year as a result of a decline in average prices. Weather-related losses were $34 million in 2007 compared with $39 million in 2006. A summary of loss ratios in 2007 compared with 2006 by business segment follows:

• Specialty’s loss ratio decreased to 57.3% in 2007 from 59.1% in 2006. The decrease reflects the impact of prior year loss reserve changes (favorable loss reserve changes were $97 million in 2007 compared with $6 million in 2006), partially offset by a higher expected loss ratio for accident year 2007 due to a decline in price levels. The favorable loss reserve development was primarily related to general liability business for accident years 2004 through 2006.

• The regional loss ratio decreased to 59.1% in 2007 from 59.7% in 2006. The decrease reflects the impact of prior year loss reserve changes (favorable loss reserve changes were $22 million in 2007 compared with unfavorable loss reserve changes of $16 million in 2006), partially offset by a higher expected loss ratio for accident year 2007 as a result of a decline in price levels. Weather-related losses were $34 million in 2007 compared with $39 million in 2006.

• Alternative market’s loss ratio increased to 59.2% from 53.5%. The increase reflects the impact of prior year reserve changes (favorable loss reserve changes were $24 million in 2007 compared to $48 million in 2006). In 2007, favorable loss reserve changes for primary workers’ compensation and medical excess business were offset by unfavorable loss reserve development for excess workers’ compensation business. The expected loss ratio for premiums earned in 2007 is higher than the expected loss ratio for the preceding year as a result of a decline in average prices.

9

• The reinsurance loss ratio decreased to 65.3% in 2007 from 72.0% in 2006. The decrease reflects improved underwriting results from treaty reinsurance business and the Company’s participation in business underwritten at Lloyd’s. Prior year loss reserves increased by $44 million in 2007 compared with $69 million in 2006.

• The international loss ratio decreased to 62.6% in 2007 from 64.2% in 2006. The decrease reflects the impact of prior year loss reserve changes (favorable loss reserve changes were $7 million in 2007 compared with $4 million in 2006).

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

	2007		2006
Underwriting expenses	$	1,330,519	$	1,267,217
Service expenses		90,561		88,961
Other costs and expenses		109,907		92,988
Total	$	1,530,987	$	1,449,166

Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Underwriting expenses increased 5% in 2007 primarily as a result of higher compensation costs and agent commissions, including contingent commissions. The consolidated expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 28.5% in 2007 compared with 27.0% in 2006.

Service expenses, which represent the costs associated with the alternative market’s fee-based business, increased 2% to $91 million.

Other costs and expenses, which represent general and administrative expenses for the parent company, increased 18% to $110 million primarily as a result of higher costs for incentive compensation programs.

Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees of $96 million in 2007 represent costs associated with revenues from wholly-owned investees described above. These include cost of goods sold related to aircraft and other sales, labor and equipment costs related to repairs and other services and general and administrative expenses.

Interest Expense. Interest expense decreased 4% to $89 million as a result of the redemption of $210 million of 8.197% junior subordinated debentures in December 2006, partially offset by the issuance of $250 million of 6.25% senior notes in February 2007.

Income Taxes. The effective income tax rate was 29% in 2007 and 2006. The effective tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income.

10

Business Segment Results

Following is a summary of gross and net premiums written, premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the years ended December 31, 2006 and 2005. The combined ratio represents a measure of underwriting profitability, excluding investment income. A combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.

(Dollars in thousands)	2006			2005
Specialty
Gross premiums written	$	1,918,521		$	1,932,821
Net premiums written		1,814,479			1,827,865
Premiums earned		1,752,507			1,682,193
Loss ratio		59.1	%		62.4	%
Expense ratio		25.0	%		25.1	%
Combined ratio		84.1	%		87.5	%
Regional
Gross premiums written	$	1,415,311		$	1,384,574
Net premiums written		1,235,302			1,196,487
Premiums earned		1,205,912			1,173,174
Loss ratio		59.7	%		55.8	%
Expense ratio		30.6	%		30.6	%
Combined ratio		90.3	%		86.4	%
Alternative Markets
Gross premiums written	$	747,680		$	781,411
Net premiums written		651,255			669,774
Premiums earned		658,805			663,478
Loss ratio		53.5	%		59.4	%
Expense ratio		22.1	%		20.1	%
Combined ratio		75.6	%		79.5	%
Reinsurance
Gross premiums written	$	940,797		$	770,781
Net premiums written		892,769			719,540
Premiums earned		859,411			754,097
Loss ratio		72.0	%		74.1	%
Expense ratio		27.8	%		30.1	%
Combined ratio		99.8	%		104.2	%
International
Gross premiums written	$	254,605		$	218,396
Net premiums written		225,188			190,908
Premiums earned		215,987			187,993
Loss ratio		64.2	%		66.5	%
Expense ratio		32.0	%		29.6	%
Combined ratio		96.2	%		96.1	%
Consolidated
Gross premiums written	$	5,276,914		$	5,087,983
Net premiums written		4,818,993			4,604,574
Premiums earned		4,692,622			4,460,935
Loss ratio		61.0	%		62.4	%
Expense ratio		27.0	%		26.9	%
Combined ratio		88.0	%		89.3	%

11

Results of Operations for the Year Ended December 31, 2006 and 2005

The following table presents the Company’s net income and net income per share for the years ended December 31, 2006 and 2005 (amounts in thousands, except per share data):

	2006		2005
Net income	$	699,518	$	544,892
Weighted average diluted shares		201,961		200,426
Net income per diluted share	$	3.46	$	2.72

The increase in net income in 2006 compared with 2005 reflects higher investment income and higher profits from underwriting activity. The increase in investment income was the result of an increase in average invested assets as well as an increase in the average yield on investments. The improvement in underwriting results was primarily attributable to lower prior year loss reserve development and to lower weather-related losses.

Gross Premiums Written. Gross premiums written were $5.3 billion in 2006, up 4% from 2005. While prices increased significantly in 2002 and 2003, the Company experienced an increased level of price competition beginning in 2004. This trend continued in 2005 and 2006 with price levels for renewal business declining approximately 2% as compared with the prior year period.

Gross premiums include approximately $94 million of premiums written by new business units established in December 2005. In 2005, the Company developed sufficient information to begin recognizing unbilled audit premiums as such premiums are earned. The accrual for earned but unbilled audit premiums increased premiums written and earned by $22 million in 2006 and $57 million in 2005. Gross premiums for the regional and alternative markets segments include premiums written on behalf of assigned risk plans managed by the Company. The assigned risk business is fully reinsured by the respective state-sponsored assigned risk plans.

A summary of gross premiums written in 2006 compared with 2005 by business segment follows:

• Specialty gross premiums decreased by 1% to $1,919 million in 2006 from $1,933 million in 2005. The number of new and renewal policies issued in 2006, net of policy cancellations, increased 1%. Average prices for renewal policies, adjusted for changes in exposure, decreased 4%. Gross premiums written decreased 11% for professional liability, 6% for products liability, 4% for premises operations and 1% for commercial automobile. Gross premiums written increased 34% for property lines.

• Regional gross premiums increased by 2% to $1,415 million in 2006 from $1,385 million in 2005. The number of new and renewal policies issued in 2006, net of policy cancellations, decreased 1%. Average prices for renewal policies, adjusted for changes in exposure, decreased 2%. Gross premiums written increased 4% for workers’ compensation, 2% for commercial automobile and 1% for commercial multiple peril. Gross premiums include assigned risk premiums of $102 million in 2006 and $114 million in 2005.

• Alternative markets gross premiums decreased by 4% to $748 million in 2006 from $781 million in 2005. The number of new and renewal policies issued in 2006, net of policy cancellations, was essentially unchanged. Average prices for renewal policies, adjusted for changes in exposure, decreased 5%. Gross premiums written decreased 10% for primary workers’ compensation and increased 2% for excess workers’ compensation. The decline in premiums for primary workers’ compensation was primarily due to rate decreases in California. Gross premiums include assigned risk premiums of $67 million in 2006 and $76 million in 2005.

• Reinsurance gross premiums increased by 22% to $941 million in 2006 from $771 million in 2005. Average prices for renewal business increased 3%. Casualty gross premiums written increased 25% to $783 million, and property gross premiums written increased 9% to $158 million. The 2006 premiums include $131 million related to two new medical malpractice reinsurance agreements. While these agreements contain limits on the potential amount of losses to be paid by the Company, they also contain limits on the potential profits that may be earned by the Company.

• International gross premiums increased by 17% to $255 million in 2006 from $218 million in 2005 due to growth in Europe and Argentina.

Net Premiums Earned. Net premiums earned increased 5% to $4.7 billion from $4.5 billion in 2005. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in 2006 are related to business written during both 2006 and 2005. The 5% growth rate for 2006 earned premiums reflects the underlying growth in net premiums written in those years.

12

Net Investment Income. Following is a summary of net investment income for the years ended December 31, 2006 and 2005.

							Average Annualized
(dollars in thousands)	Amount						Yield
		2006			2005			2006		2005
Fixed maturity securities, including cash	$	440,987		$	336,126			4.7	%	4.2	%
Arbitrage trading account		74,551			28,095			10.4	%	6.2	%
Partnerships and affiliates		37,145			18,545			9.5	%	6.8	%
Equity securities available for sale		35,662			25,529			6.8	%	6.3	%
Other		5,068			1,620
Gross investment income		593,413			409,915			5.4	%	4.4	%
Investment expenses and interest on funds held		(7,238	)		(5,953	)
Total	$	586,175		$	403,962			5.3	%	4.4	%

Net investment income increased 45% to $586 million in 2006 from $404 million in 2005. Average invested assets (including cash and cash equivalents) increased 20% to $11.1 billion in 2006 from $9.2 billion in 2005 as a result of cash flow from operations. The average annualized gross yield on investments increased to 5.3% in 2006 from 4.4% in 2005 due to higher short-term interest rates and higher returns from the arbitrage trading account.

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 $105 million in 2006, down from $111 million in 2005, primarily as a result of a decline in fees for managing state-sponsored 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 $10 million in 2006 compared with $17 million in 2005. Charges for impairment of investments were $0.1 million in 2006 and $1.6 million in 2005. The Company buys and sells securities on a regular basis in order to maximize the total return on investments. Decisions to sell securities are based on management’s view of the underlying fundamentals of specific securities as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions.

Losses and Loss Expenses. Losses and loss expenses increased 3% to $2.9 billion in 2006 from $2.8 billion in 2005 primarily due to increased premium volume. The consolidated loss ratio was 61.0% in 2006 compared with 62.4% in 2005. The 2006 loss ratio reflects the impact of prior year loss reserve changes (unfavorable loss reserve changes were $27 million in 2006 compared with $187 million in 2005) and lower storm losses ($39 million in 2006 compared with $99 million in 2005). These improvements were partially offset by a higher expected loss ratio for accident year 2006 as a result of a decline in price levels. A summary of loss ratios in 2006 compared with 2005 by business segment follows:

• Specialty’s loss ratio decreased to 59.1% in 2006 from 62.4% in 2005 principally due to the impact of prior year loss reserve changes (favorable loss reserve changes were $6 million in 2006 compared with unfavorable loss reserve changes of $91 million in 2005).

• The regional loss ratio increased to 59.7% in 2006 from 55.8% in 2005. The 2006 loss ratio reflects a higher expected loss ratio for accident year 2006 as a result of a decline in price levels. Weather-related losses were $39 million in 2006 compared with $35 million in 2005.

• Alternative market’s loss ratio decreased to 53.5% from 59.4% primarily as a result of continued favorable reserve development related to workers’ compensation business in California.

• The reinsurance loss ratio decreased to 72.0% in 2006 from 74.1% in 2005. The decrease reflects the impact of lower weather-related losses (with no weather-related losses in 2006 compared with $49 million in 2005) and lower prior year loss reserve development. These were partially offset by relatively higher loss ratios for the new medical malpractice reinsurance agreements referred to above.

• The international loss ratio decreased to 64.2% in 2006 from 66.5% in 2005 primarily as a result of favorable reserve development related to professional indemnity business written in the United Kingdom.

13

Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses for the years ended December 31, 2006 and 2005 (dollars in thousands):

	2006		2005
Underwriting expenses	$	1,267,217	$	1,202,043
Service expenses		88,961		91,134
Other costs and expenses		92,988		65,397
Total	$	1,449,166	$	1,358,574

Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Underwriting expenses increased 5% primarily as a result of higher premium volume. The consolidated expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 27.0% in 2006 compared with 26.9% in 2005.

Service expenses, which represent the costs associated with the alternative market’s fee-based business, decreased 2% to $89 million primarily as a result of a decrease in costs associated with the servicing of assigned risk plan business.

Other costs and expenses, which represent general and administrative expenses for the parent company, increased 42% to $93 million primarily as a result of higher costs for incentive compensation programs.

Interest Expense. Interest expense increased 8% to $93 million as a result of interest expense related to $200 million of 5.6% senior notes issued in May 2005 and $250 million of 6.75% junior subordinated debentures issued in July 2005. This was partially offset by a reduction in interest expense as a result of the repayment of $100 million 6.25% senior notes in January 2006 and the repayment of $210 million 8.197% junior subordinated debentures in December 2006.

Income taxes. The effective income tax rate was 29% in 2006 and 2005. The effective tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income.

Investments

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

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

	2007			2006
Fixed maturity securities	$	9,799,044		$	9,093,674
Equity securities available for sale		767,809			866,422
Equity securities trading account		512,526			639,481
Partnerships and affiliates		545,937			449,854
Loans receivable		268,206			64,933
Total investments		11,893,522			11,114,364
Cash and cash equivalents		951,863			754,247
Trading account receivables		409,926			312,220
Trading account securities sold but not yet purchased		(67,139	)		(170,075	)
Unsettled sales		130			1,542
Total	$	13,188,302		$	12,012,298

14

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 December 31, 2007 (as compared to December 31, 2006), the fixed maturities portfolio mix was as follows: U.S. Government securities were 15% (15% in 2006); state and municipal securities were 54% (50% in 2006); corporate securities were 10% (9% in 2006); mortgage-backed securities were 18% (22% in 2006); and foreign bonds were 3% (4% in 2006).

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

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

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

Partnerships and Affiliates. At December 31, 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 $294 million ($275 million in 2006); and other investments were $143 million ($79 million in 2006).

On December 14, 2007, Kiln Ltd announced that the boards of Tokio Marine & Nichido Fire Insurance Co., Ltd. (“TMNF”) and Kiln Ltd have reached agreement on the terms of a recommended cash acquisition of Kiln Ltd by TMNF at an acquisition price of 150 pence per share. The carry value of the Company’s investment in Kiln Ltd was $109 million at December 31, 2007. The total value of the Company’s investment in Kiln Ltd at the acquisition price of 150 pence per share is approximately $174 million at exchange rates in effect on February 27, 2008.

Loans Receivable. Loans receivable represent commercial real estate mortgage loans and related instruments with maturities of five years or less and floating, LIBOR-based interest rates.

15

Securities in an Unrealized Loss Position. The following table summarizes all securities in an unrealized loss position at December 31, 2007 and 2006 by the length of time those securities have been continuously in an unrealized loss position:

	Number of		Aggregate		Gross
(Dollars in thousands)	Securities		Fair Value		Unrealized Loss
December 31, 2007
Fixed maturities:
0 – 6 months		44	$	379,515	$	5,254
7 – 12 months		43		486,233		6,999
Over 12 months		156		1,300,468		17,450
Total		243	$	2,166,216	$	29,703
Equity securities available for sale:
0 – 6 months		55	$	445,917	$	86,992
7 – 12 months		42		61,263		10,780
Over 12 months		12		39,600		7,173
Total		109	$	546,780	$	104,945
December 31, 2006
Fixed maturities:
0 – 6 months		100	$	802,595	$	2,309
7 – 12 months		62		645,331		4,445
Over 12 months		269		2,843,721		44,389
Total		431	$	4,291,647	$	51,143
Equity securities available for sale:
0 – 6 months		8	$	75,568	$	320
7 – 12 months		9		60,853		250
Over 12 months		16		105,085		1,583
Total		33	$	241,506	$	2,153

At December 31, 2007, gross unrealized gains were $233 million, or 2% of total investments, and gross unrealized losses were $139 million, or 1% of total investments. There were 154 securities that have been continuously in an unrealized loss position for more than six months. Those securities had an aggregate fair value of $1 billion and an aggregate unrealized loss of $50 million. The decline in market value for the fixed income securities was primarily due to an increase in market interest rates since the securities were purchased. The decline in market value for the equity securities was primarily due to wider spreads for preferred stocks issued by banks, real estate investment trusts, Fannie Mae and Freddie Mac following the disruption in credit markets in late 2007.

Management regularly reviews 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.

16

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 December 31, 2007. Not all of the securities are rated by S&P and/or Moody’s (dollars in thousands).

		Unrealized Loss					Fair Value
S&P Rating	Moody’s Rating	Amount		Percent to Total			Amount		Percent to Total
AAA/AA/A	Aaa/Aa/A	$	26,223		88.3	%	$	1,958,045		90.3	%
BBB	Baa		2,022		6.8			168,590		7.8
BB	Ba		1,221		4.1			35,779		1.7
B	B		—		—			—		—
CCC or lower	Caa or lower		237		0.8			3,802		0.2
N/A	N/A		—		—			—		—
	Total	$	29,703		100.0	%	$	2,166,216		100.0	%

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

	Unrealized Loss					Fair Value
	Amount		Percent to Total			Amount		Percent to Total
Due in one year or less	$	2,156		7.3	%	$	158,052		7.3	%
Due after one year through five years		3,234		10.9			358,245		16.5
Due after five years through ten years		6,118		20.6			408,700		18.9
Due after ten years		8,913		30.0			540,058		24.9
Mortgage and asset-backed securities		9,282		31.2			701,161		32.4
Total fixed income securities	$	29,703		100.0	%	$	2,166,216		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 1.9 years.

Market Risk. The Company’s market risk generally represents the risk of gain or loss that may result from the potential change in the fair value of the Company’s investment portfolio as a result of fluctuations in credit quality and interest rates. The Company uses various models and stress test scenarios to monitor and manage interest rate risk. In addition, the Company’s international businesses and securities are subject to currency exchange rate risk. As discussed above, the Company attempts to manage its interest rate risk by maintaining an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities, i.e., policy claims and debt obligations. The average duration for the fixed income portfolio was 3.3 years at December 31, 2007 and 2006.

The following table outlines the groups of fixed maturity securities and the components of the interest rate risk at December 31, 2007:

	Effective
	Duration		Fair Value
	(Years)		(000s)
Cash and cash equivalents		0.4	$	951,863
U. S. Government securities		2.4		1,473,766
State and municipal		4.8		5,244,288
Corporate		3.0		1,009,932
Foreign		0.9		327,800
Mortgage-backed securities		1.9		1,755,373
Loans receivable		1.5		268,206
Total		3.3	$	11,031,228

17

Duration is a common gauge of the price sensitivity of a fixed income portfolio to a change in interest rates. The Company determines the estimated change in fair value of the fixed maturity securities, assuming immediate parallel shifts in the treasury yield curve while keeping spreads between individual securities and treasury securities static. The fair value at specified levels at December 31, 2007 would be as follows:

	Estimated Fair Value of		Estimated Change in
	Fixed Maturity Securities		Fair Value
Change in interest rates		(000s)		(000s)
300 basis point rise	$	10,018,252	$	(1,012,976	)
200 basis point rise		10,355,911		(675,317	)
100 basis point rise		10,693,569		(337,659	)
Base scenario		11,031,228		—
100 basis point decline		11,360,823		329,595
200 basis point decline		11,690,418		659,190
300 basis point decline		12,020,014		988,786

Arbitrage investing differs from other types of investments in that its focus is on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less). The Company believes that this makes arbitrage investments less vulnerable to changes in general stock market conditions. Potential changes in market conditions are also mitigated by the implementation of hedging strategies, including short sales. Additionally, the arbitrage positions are generally hedged against market declines by purchasing put options, selling call options or entering into swap contracts. The Company’s merger arbitrage securities are primarily exposed to the risk of completion of announced deals, which are subject to regulatory as well as transactional and other risks.

Liquidity and Capital Resources

Cash Flow. Cash flow provided from operating activities was $1.5 billion in 2007, $1.6 billion in 2006 and $1.7 billion in 2005. The levels of cash flow provided by operating activities over these years, which are high by historical measures in relation to both earned premiums and net income, are a result of growth in investment income and relatively low paid losses. Cash flow provided by operating activities in 2006 and 2005 is net of cash transfers to the arbitrage trading account of $225 million and $80 million, respectively.

As a holding company, the Company derives cash from its subsidiaries in the form of dividends, tax payments and management fees. Maximum amounts of dividends that can be paid without regulatory approval are prescribed by statute. During 2008, the maximum amount of dividends which can be paid without regulatory approval is approximately $653 million. The ability of the holding company to service its debt obligations is limited by the ability of the insurance subsidiaries to pay dividends. In the event dividends, tax payments and management fees available to the holding company were inadequate to service its debt obligations, the Company would need to raise capital, sell assets or restructure its debt obligations.

The Company’s 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 December 31, 2007. If the sale of fixed income securities were to become necessary, a realized gain or loss equal to the difference between the cost and sales price of securities sold would be recognized.

Financing Activity

In February 2007, the Company issued $250 million of 6.25% senior notes due on February 15, 2037. During 2007, the Company repurchased 16,130,773 shares (including 963,773 shares purchased in connection with to the Company’s stock option program) of its common stock for $489 million.

18

During 2006, the Company repaid $100 million of 6.25% senior notes at their maturity in January 2006. The Company also repaid $210 million of junior subordinated debentures on December 15, 2006 contemporaneously with the redemption of $210 million of 8.197% trust preferred securities by the W. R. Berkley Capital Trust. This amount included preferred securities already repurchased by the Company.

At December 31, 2007, the Company had senior notes, junior subordinated debentures and other debt outstanding with a carrying value of $1,371 million and a face amount of $1,388 million. The maturities of the outstanding debt are $90 million in 2008, $1 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, $7 million in 2035 (prepayable in 2010), $250 million in 2037 and $250 million in 2045 (prepayable in 2010).

At December 31, 2007, stockholders’ equity was $3.6 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 December 31, 2007, compared with 25% at December 31, 2006.

Federal and Foreign Income Taxes

The Company files a consolidated income tax return in the U.S. and foreign tax returns in each of the countries in which it has overseas operations. At December 31, 2007, the Company had a deferred tax asset, net of valuation allowance, of $429 million (which primarily relates to loss and loss expense reserves and unearned premium reserves) and a deferred tax liability of $243 million (which primarily relates to deferred policy acquisition costs, unrealized investment gains and intangible assets). The realization of the deferred tax asset is dependent upon the Company’s ability to generate sufficient taxable income in future periods. Based on historical results and the prospects for future operations, management anticipates that it is more likely than not that future taxable income will be sufficient for the realization of this asset.

Reinsurance

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

For 2008, the Company’s property catastrophe reinsurance provides protection for 100% of the net loss between $10 million and $95 million, and its casualty contingency agreement provides protection for 100% of the net loss between $2 million and $25 million. The catastrophe and casualty contingency reinsurance agreements are subject to certain limits, exclusions and reinstatement premiums. For business written through Lloyd’s, the Company has separate catastrophe excess of loss and quota share agreements secured through its Lloyd’s general agents.

Contractual Obligations

Following is a summary of the Company’s contractual obligations as of December 31, 2007 (amounts in thousands):

Estimated Payments By Periods	2008		2009		2010		2011		2012		Thereafter
Gross reserves for losses	$	2,159,759	$	1,573,488	$	1,229,275	$	919,655	$	678,212	$	2,984,533
Operating lease obligations		20,889		18,570		16,994		13,060		9,176		26,425
Purchase obligations		30,390		29,507		715		385		—		—
Junior subordinated debentures		—		—		—		—		—		257,217
Senior notes		89,834		1,358		150,000		—		2,068		888,250
Other long-term liabilities		38,714		18,481		14,438		5,881		1,017		42,559
Total	$	2,339,586	$	1,641,404	$	1,411,422	$	938,981	$	690,473	$	4,198,984

19

The estimated payments for reserves for losses and loss expenses in the above table represent the projected (undiscounted) payments for gross loss and loss expense reserves related to losses incurred as of December 31, 2007. The estimated payments in the above table do not consider payments for losses to be incurred in futures periods. These amounts include reserves for reported losses and reserves for incurred but not reported losses. Estimated amounts recoverable from reinsurers are not reflected. The estimated payments by year are based on historical loss payment patterns. The actual payments may differ from the estimated amounts due to changes in ultimate loss reserves and in the timing of the settlement of those reserves.

The Company utilizes letters of credit to back certain reinsurance payments and obligations. Outstanding letters of credit were $66 million as of December 31, 2007. The Company has made certain guarantees to state regulators that the statutory capital of certain subsidiaries will be maintained above certain minimum levels. In addition, the Company has commitments to invest up to $252 million in certain investment funds.

Off-Balance Sheet Arrangements

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

Management’s Report on Internal Control Over Financial Reporting

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

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

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of Treadway Commission. Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2007.

20

Report of Independent Registered Public Accounting Firm

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

We have audited W.R. Berkley Corporation and subsidiaries internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). W.R. Berkley Corporation and subsidiaries management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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

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

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

In our opinion, W.R. Berkley Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of W.R. Berkley Corporation and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2007, and our report dated February 29, 2008 expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP

New York, New York
February 29, 2008

21

Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated balance sheets of W. R. Berkley Corporation and subsidiaries as of December 31, 2007 and 2006 and the related consolidated statements of income, stockholders’ equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 29, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

KPMG LLP

New York, New York
February 29, 2008

22

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

Years Ended December 31,	2007			2006			2005
Revenues:
Net premiums written	$	4,575,989		$	4,818,993		$	4,604,574
Change in net unearned premiums		87,712			(126,371	)		(143,639	)
Net premiums earned		4,663,701			4,692,622			4,460,935
Net investment income		672,660			586,175			403,962
Insurance service fees		97,689			104,812			110,697
Realized investment gains		14,938			9,648			17,209
Revenues from wholly-owned investees		102,846			—			—
Other income		1,805			1,574			4,036
Total revenues	$	5,553,639		$	5,394,831		$	4,996,839
Operating costs and expenses:
Losses and loss expenses		2,779,578			2,864,498			2,781,802
Other operating costs and expenses		1,530,987			1,449,166			1,358,574
Expenses from wholly-owned investees		96,444			—			—
Interest expense		88,996			92,522			85,926
Total expenses	$	4,496,005		$	4,406,186		$	4,226,302
Income before income taxes and minority interest		1,057,634			988,645			770,537
Income tax expense		(310,905	)		(286,398	)		(222,521	)
Minority interest		(3,083	)		(2,729	)		(3,124	)
Net income	$	743,646		$	699,518		$	544,892
Earnings per share:
Basic	$	3.94		$	3.65		$	2.86
Diluted	$	3.78		$	3.46		$	2.72

See accompanying notes to consolidated financial statements.

23

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

Years Ended December 31,	2007			2006
Assets
Investments:
Fixed maturity securities	$	9,799,044		$	9,093,674
Equity securities available for sale		767,809			866,422
Equity securities trading account		512,526			639,481
Partnerships and affiliates		545,937			449,854
Loans receivable		268,206			64,933
Total Investments		11,893,522			11,114,364
Cash and cash equivalents		951,863			754,247
Premiums and fees receivable		1,199,002			1,245,661
Due from reinsurers		904,509			928,258
Accrued investment income		134,872			118,045
Prepaid reinsurance premiums		179,495			169,965
Deferred policy acquisition costs		455,244			489,243
Real estate, furniture and equipment		204,252			183,249
Deferred Federal and foreign income taxes		186,669			142,634
Goodwill		102,462			67,962
Trading account receivable from brokers and clearing organizations		409,926			312,220
Other assets		210,354			130,641
Total Assets	$	16,832,170		$	15,656,489
Liabilities and Stockholders’ Equity
Liabilities:
Reserves for losses and loss expenses	$	8,678,034		$	7,784,269
Unearned premiums		2,240,690			2,314,282
Due to reinsurers		108,178			149,427
Trading account securities sold but not yet purchased		67,139			170,075
Policyholders’ account balances		—			106,926
Other liabilities		761,690			654,596
Junior subordinated debentures		249,375			241,953
Senior notes and other debt		1,121,793			869,187
Total Liabilities	$	13,226,899		$	12,290,715
Minority interest		35,496			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, 180,320,775 and 192,771,889 shares		47,024			47,024
Additional paid-in capital		907,016			859,787
Retained earnings		3,248,762			2,542,744
Accumulated other comprehensive income		53,201			111,613
Treasury stock, at cost, 54,797,143 and 42,346,029 shares		(686,228	)		(226,009	)
Total Stockholders’ Equity		3,569,775			3,335,159
Total Liabilities and Stockholders’ Equity	$	16,832,170		$	15,656,489

See accompanying notes to consolidated financial statements.

24

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

	Years ended December 31,
	2007			2006			2005
Common stock:
Beginning of period	$	47,024		$	47,024		$	47,024
Stock issued		—			—			—
End of period	$	47,024		$	47,024		$	47,024
Additional paid in capital:
Beginning of period	$	859,787		$	821,050		$	805,240
Stock options exercised, including tax benefits		26,510			20,965			7,038
Restricted stock units expensed		19,541			15,323			8,413
Stock options expensed		794			1,755			134
Stock issued to directors		384			694			225
End of period	$	907,016		$	859,787		$	821,050
Retained earnings:
Beginning of period	$	2,542,744		$	1,873,953		$	1,354,489
Net income		743,646			699,518			544,892
Dividends		(37,628	)		(30,727	)		(25,428	)
End of period	$	3,248,762		$	2,542,744		$	1,873,953
Accumulated other comprehensive income:
Unrealized investment gains:
Beginning of period	$	121,961		$	40,746		$	109,699
Net change in period		(69,464	)		81,215			(68,953	)
End of period		52,497			121,961			40,746
Currency translation adjustments:
Beginning of period		3,748			(15,843	)		2,356
Net change in period		14,312			19,591			(18,199	)
End of period		18,060			3,748			(15,843	)
Net pension asset:
Beginning of period		(14,096	)		—			—
Net change in period		(3,260	)		—			—
Adoption of FAS 158, net of taxes		—			(14,096	)		—
End of period		(17,356	)		(14,096	)		—
Total accumulated other comprehensive income	$	53,201		$	111,613		$	24,903
Treasury stock:
Beginning of period	$	(226,009	)	$	(199,853	)	$	(209,106	)
Stock options exercised		28,455			18,816			9,343
Stock issued to directors		117			89			80
Stock repurchased		(488,791	)		(45,061	)		(170	)
End of period	$	(686,228	)	$	(226,009	)	$	(199,853	)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)

	Years ended December 31,
	2007			2006			2005
Net income	$	743,646		$	699,518		$	544,892
Unrealized holding gains (losses) on investment securities arising during the period, net of income taxes		(59,823	)		88,329			(57,950	)
Reclassification adjustment for realized gains included in net income, net of income taxes		(9,641	)		(7,114	)		(11,003	)
Change in unrealized foreign exchange gains (losses)		14,312			19,591			(18,199	)
Change in unrecognized pension obligation, net of income taxes		(3,260	)		(14,096	)		—
Other comprehensive income (loss)		(58,412	)		86,710			(87,152	)
Comprehensive income	$	685,234		$	786,228		$	457,740

See accompanying notes to consolidated financial statements.

25

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

Years Ended December 31,	2007			2006			2005
Cash from operating activities:
Net income	$	743,646		$	699,518		$	544,892
Adjustments to reconcile net income to net cash flows from operating activities:
Realized investment gains		(14,938	)		(9,648	)		(17,209	)
Depreciation and amortization		73,697			65,674			63,052
Minority interest		3,083			2,729			3,124
Equity in undistributed earnings of partnerships and affiliates		(25,202	)		(26,986	)		(13,288	)
Stock incentive plans		21,105			17,888			8,852
Change in:
Securities trading account		130,300			(48,235	)		(307,390	)
Premiums and fees receivable		50,925			(133,504	)		(77,261	)
Trading account receivable from brokers and clearing organizations		(97,706	)		(213,991	)		88,250
Trading account securities sold but not yet purchased		(102,936	)		(28,351	)		127,759
Due from reinsurers		45,995			27,839			(104,336	)
Accrued investment income		(18,066	)		(15,383	)		(32,549	)
Prepaid reinsurance premiums		(10,242	)		9,671			11,847
Deferred policy acquisition cost		7,834			(25,848	)		(17,444	)
Deferred income taxes		(17,225	)		(35,554	)		220
Other assets		(53,258	)		4,661			(18,116	)
Reserves for losses and loss expenses		798,725			1,051,816			1,274,495
Unearned premiums		(75,044	)		117,176			131,031
Due to reinsurers		(42,212	)		60,450			(31,873	)
Policyholders’ account balances		(341	)		(1,021	)		(893	)
Other liabilities		61,627			45,113			101,196
Net cash from operating activities		1,479,767			1,564,014			1,734,359
Cash flows used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities		2,065,004			922,442			1,155,244
Equity securities		480,867			200,950			196,201
Distributions from partnerships and affiliates		97,510			52,181			15,307
Proceeds from maturities and prepayments of fixed maturity securities		984,504			1,322,277			1,303,342
Cost of purchases, excluding trading account:
Fixed maturity securities and loans receivable		(3,920,101	)		(2,927,839	)		(4,667,308	)
Equity securities		(551,253	)		(543,041	)		(241,881	)
Investments in partnerships and affiliates		(127,134	)		(143,772	)		(88,436	)
Net additions to real estate, furniture and equipment		(31,108	)		(42,593	)		(32,564	)
Change in balances due to/from security brokers		1,412			—			—
Payment for business purchased, net of cash acquired		(50,162	)		—			—
Proceeds from sale of business, net of cash divested		2,939			—			—
Other, net		—			(6,025	)		(5,119	)
Net cash used in investing activities		(1,047,522	)		(1,165,420	)		(2,365,214	)
Cash flows (used in) from financing activities:
Net proceeds from issuance of junior subordinated debentures		—			—			241,655
Net proceeds from issuance of senior notes		246,644			—			198,142
Receipts credited to policyholders’ account balances		3,489			17,613			15,671
Return of policyholders’ account balances		(58	)		(865	)		(499	)
Bank deposits received		7,572			10,211			9,577
Advances from federal home loan bank		(655	)		(7,375	)		6,875
Net proceeds from stock options exercised		25,676			19,405			11,250
Purchase of junior subordinated debentures		—			(210,000	)		—
Repayment of senior notes		(2,019	)		(100,000	)		(40,000	)
Cash dividends to common stockholders		(36,284	)		(29,430	)		(19,055	)
Purchase of common treasury shares		(488,794	)		(45,062	)		(636	)
Proceeds from (purchase of) minority shareholders		(19	)		2,762			(33,117	)
Other, net		290			—			—
Net cash (used in) from financing activities		(244,158	)		(342,741	)		389,863
Net impact on cash due to change in foreign exchange rates		9,529			25,453			(18,146	)
Net increase (decrease) in cash and cash equivalents		197,616			81,306			(259,138	)
Cash and cash equivalents at beginning of year		754,247			672,941			932,079
Cash and cash equivalents at end of year	$	951,863		$	754,247		$	672,941

See accompanying notes to consolidated financial statements.

26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2007, 2006 and 2005

(1) Summary of Significant Accounting Policies

(A) Principles of consolidation and basis of presentation

The consolidated financial statements, which include the accounts of W. R. Berkley Corporation and its subsidiaries (the “Company”), have been prepared on the basis of U.S. generally accepted accounting principles (“GAAP”). All significant intercompany transactions and balances have been eliminated. Reclassifications have been made in the 2006 and 2005 financial statements to conform them to the presentation of the 2007 financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the revenues and expenses reflected during the reporting period. Actual results could differ from those estimates.

(B) Revenue recognition

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

Audit premiums are recognized when they are reliably determinable. Prior to 2005, audit premiums were not considered to be reliably determinable until such audits were completed and billed. In 2005, the Company developed sufficient information to begin recognizing unbilled audit premiums as such premiums are earned. The accrual for earned but unbilled audit premiums increased net premiums written and premiums earned by $10 million in 2007, $22 million in 2006 and $57 million in 2005.

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

Revenues from wholly-owned investees are derived from services provided to the general aviation market, including fuel and line service, aircraft sales and maintenance, avionics and engineering services and parts fabrication. Revenue is recognized upon delivery of aircraft, delivery of fuel, shipment of parts and or upon completion of services.

(C) Cash and cash equivalents

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

(D) Investments

Fixed maturity securities classified as available for sale are carried at estimated fair value, with unrealized gains and losses, net of applicable income taxes, excluded from earnings and reported as a component of comprehensive income and a separate component of stockholders’ equity. Fixed maturity securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Premiums and discounts are amortized using the effective interest method. Premiums and discounts on mortgage-backed and asset-backed securities are adjusted for the effects of actual and anticipated prepayments on a retrospective basis.

Equity securities classified as available for sale are carried at estimated fair value, with unrealized gains and losses, net of applicable income taxes, excluded from earnings and reported as a component of comprehensive income and a separate component of stockholders’ equity.

Equity securities that the Company purchased with the intent to sell in the near-term are classified as trading account securities and are reported at estimated fair value. Realized and unrealized gains and losses from trading activity are reported as net investment income. The trading account includes direct investments in arbitrage securities and investments in arbitrage-related limited partnerships. Short sales and short call options are presented as trading securities sold but not yet purchased. Unsettled trades and the net margin balances held by the clearing broker are presented as trading account receivable from brokers and clearing organizations.

Investments in partnerships and affiliates are carried under the “equity method of accounting”, whereby the Company reports its share of the income or loss from such investments as net investment income. The Company’s share of the earnings of affiliates is generally reported on a one-quarter lag in order to facilitate the timely completion of the Company’s financial statements.

Loans receivable represent commercial real estate mortgage loans and related instruments and are carried at amortized cost.

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Fair value is generally determined based on either quoted market prices or values obtained from independent pricing services. Realized gains or losses represent the difference between the cost of securities sold and the proceeds realized upon sale. The cost of securities is adjusted where appropriate to include a provision for decline in value which is considered to be other than temporary. An other than temporary decline is considered to occur in investments where there has been a sustained reduction in market value and where the Company does not expect the fair value to recover prior to the time of sale or maturity. The Company uses the specific identification method where possible, and the first-in, first-out method in other instances, to determine the cost of securities sold. Realized gains or losses, including any provision for decline in value, are included in the statement of income.

(E) Per share data

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

(F) Deferred policy acquisition costs

Acquisition costs (primarily commissions and premium taxes) incurred in writing insurance and reinsurance business are deferred and amortized ratably over the terms of the related contracts. Deferred policy acquisition costs are limited to the amounts estimated to be recoverable from the applicable unearned premiums and the related anticipated investment income after giving effect to anticipated losses, loss adjustment expenses and expenses necessary to maintain the contracts in force.

(G) Reserves for losses and loss expenses

Reserves for losses and loss expenses are an accumulation of amounts determined on the basis of (1) evaluation of claims for business written directly by the Company; (2) estimates received from other companies for reinsurance assumed by the Company; and (3) estimates for losses incurred but not reported (based on Company and industry experience). These estimates are periodically reviewed and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments are reflected in the statement of income in the period in which they are determined. The Company discounts its reserves for excess and assumed workers’ compensation claims using a risk-free or statutory rate. (See Note 9 of Notes to Consolidated Financial Statements.)

(H) Reinsurance ceded

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

(I) Deposit accounting

Contracts that do not meet the risk transfer provisions of FAS 113, “Accounting and Reporting for Reinsurance of Short Duration and Long Duration Contracts”, are accounted for using the deposit accounting method. Under this method, an asset or liability is recognized at the inception of the contract based on consideration paid or received. The amount of the deposit asset or liability is adjusted at subsequent reporting dates using the interest method with a corresponding credit or charge to interest income or expense. Deposit liabilities for assumed reinsurance contracts were $48 million and $45 million at December 31, 2007 and 2006, respectively.

(J) Federal and foreign income taxes

The Company files a consolidated income tax return in the U.S. and foreign tax returns in each of the countries in which it has its overseas operations. The Company’s method of accounting for income taxes is the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are measured using tax rates currently in effect or expected to apply in the years in which those temporary differences are expected to reverse. Interest and penalties, if any, are reported as income tax expense.

(K) Foreign currency

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

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(L) Real estate, furniture and equipment

Real estate, furniture and equipment are carried at cost less accumulated depreciation. Depreciation is calculated using the estimated useful lives of the respective assets. Depreciation expense was $32,766,000, $29,614,000 and $26,346,000 for 2007, 2006 and 2005, respectively.

(M) Comprehensive income

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

(N) Goodwill and other intangible assets

Goodwill and other intangibles assets are tested for impairment on an annual basis. The Company’s impairment test as of December 31, 2007 indicated that there were no impairment losses related to goodwill and other intangible assets.

(O) Stock options

The Company adopted FAS 123R, “Share-Based Payment,” on January 1, 2006. Under FAS 123R, the costs resulting from all share-based payment transactions with employees are recognized in the financial statements using a fair-value-based measurement method.

The following table illustrates the pro forma effect on net income and earnings per share for the year ended December 31, 2005 as if FAS 123R had been adopted on January 1, 2005 (dollars in thousands, except per share data).

				Earnings per share
Year-ended December 31, 2005	Earnings			Basic		Diluted
Net income as reported	$	544,892		$	2.86	$	2.72
Add: Stock-based employee compensation expense included in reported net income, net of tax		5,555
Deduct: Total stock-based employee compensation expense under fair value based method for all awards, net of tax		(7,462	)
Pro forma net income	$	542,985		$	2.85	$	2.71

The fair value of the options granted in 2004 and prior years were estimated on the grant dates using the Black-Scholes option pricing model. There were no options granted after 2004.

(P) Statement of cash flows

Interest payments were $81,291,000, $93,580,000 and $78,363,000 in 2007, 2006 and 2005, respectively. Income taxes paid were $288,763,000, $295,823,000 and $201,703,000 in 2007, 2006 and 2005, respectively. Other non-cash items include acquistions and dispositions, unrealized investment gains and losses and pension expense. (See Note 2, Note 8 and Note 21 of Notes to Consolidated Financial Statements.)

(Q) Change in accounting

In September 2006, the Financial Accounting Standards Board (“FASB”) issued FAS 158, “Employers’ "Accounting for Defined Benefit Pension and Other Postretirement Plans,” which requires an employer to recognize the over-funded or under-funded status of defined benefit and other post-retirement plans as an asset or liability on its consolidated balance sheet. The Company adopted FAS 158 as of December 31, 2006. The adoption of FAS 158 resulted in a decrease in stockholders’ equity of $14 million as of that date and had no impact on the Company’s results of operations.

The Company adopted FASB Interpretation 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes” effective January 1, 2007. The adoption of FIN 48 had no an impact on the Company’s financial condition or results of operations. The Company believes there are no tax positions that would require disclosure under the FIN 48.

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(R) Recent accounting pronouncements

In September 2006, the FASB issued FAS 157, “Fair Value Measurements.” FAS 157, which is effective for 2008, defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The Company does not expect the adoption of FAS 157 to have a material impact on the Company’s financial condition or results of operations.

In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” FAS 159, which is effective for 2008, provides companies with an option to report selected financial assets and liabilities at fair value. The Company does not expect the adoption of FAS 159 to have a material impact on the Company’s financial condition or results of operations.

In December 2007, the FASB issued FAS 141 (revised 2007), “Business Combinations”, and FAS 160, “Noncontrolling Interests in Consolidated Financial Statements”. These standards, which are effective for 2009, will simplify, and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. The Company does not expect the adoption of FAS 141 and 160 to have a material impact on the Company’s financial condition or results of operations.

(2) Acquisitions and Dispositions

In 2007, the Company acquired the following companies for a total cost of $98 million, which was paid primarily in cash.

• Atlantic Aero Holdings, Inc., a fixed base operator located in Greensboro, North Carolina.

• Western Acquisition Corp., a fixed base operator located in Boise, Idaho.

• Investors Guaranty Life Insurance Company, an inactive, widely licensed life insurance company.

• CGH Insurance Group, Inc., the owner of American Mining Insurance Company.

The following table summarizes the estimated fair value of net assets acquired and liabilities assumed at the date of acquisition. The Company has not completed the purchase price allocation and the amounts presented below are subject to refinement.

(Dollars in thousands)
Investments	$	66,358
Cash and cash equivalents		48,114
Receivables and other assets		27,018
Real estate, furniture and equipment		23,387
Deferred policy acquisition costs		345
Deferred federal income taxes		677
Intangible assets		11,068
Goodwill		34,395
Other assets		20,918
Total assets acquired	$	232,280
Reserve for losses and loss expenses	$	89,906
Unearned premiums		1,977
Policyholders account balances		—
Other liabilities		28,426
Debt		13,695
Total liabilities assumed	$	134,004
Net assets acquired	$	98,276

The weighted average useful life of the intangible assets is approximately 4 years. Approximately $25 million of the goodwill is expected to be deductible for tax purposes.

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. BIPI’s revenues were $21 million and $14 million in 2006 and 2005, respectively, and its pre-tax earnings were $4.5 million and $0.5 million in 2006 and 2005, respectively.

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(3) Investments in Fixed Maturity Securities

At December 31, 2007 and 2006, investments in fixed maturity securities were as follows:

			Gross		Gross
(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair		Carrying
Type of Investment	Cost		Gains		Losses			Value		Value
December 31, 2007
Held to maturity:
State and municipal	$	68,997	$	8,814	$	(44	)	$	77,767	$	68,997
Mortgage-backed securities		56,121		2,735		(20	)		58,836		56,121
Corporate		4,993		630		—			5,623		4,993
Total held to maturity		130,111		12,179		(64	)		142,226		130,111
Available for sale:
United States government and government agency		1,449,147		25,768		(1,149	)		1,473,766		1,473,766
State and municipal		5,100,193		78,803		(12,475	)		5,166,521		5,166,521
Mortgage-backed securities		1,691,017		14,782		(9,262	)		1,696,537		1,696,537
Corporate		1,001,207		8,864		(5,762	)		1,004,309		1,004,309
Foreign		316,589		12,202		(991	)		327,800		327,800
Total available for sale		9,558,153		140,419		(29,639	)		9,668,933		9,668,933
Total investment in fixed maturity securities	$	9,688,264	$	152,598	$	(29,703	)	$	9,811,159	$	9,799,044
December 31, 2006
Held to maturity:
State and municipal	$	78,019	$	11,209	$	(53	)	$	89,175	$	78,019
Mortgage-backed securities		64,017		2,329		(60	)		66,286		64,017
Corporate		4,992		422		—			5,414		4,992
Total held to maturity		147,028		13,960		(113	)		160,875		147,028
Available for sale:
United States Government and government agency		1,390,082		9,447		(7,608	)		1,391,921		1,391,921
State and municipal		4,452,494		48,577		(19,949	)		4,481,122		4,481,122
Mortgage-backed securities		1,909,337		7,508		(13,703	)		1,903,142		1,903,142
Corporate		804,875		3,020		(6,862	)		801,033		801,033
Foreign		345,315		27,021		(2,908	)		369,428		369,428
Total available for sale		8,902,103		95,573		(51,030	)		8,946,646		8,946,646
Total investment in fixed maturity securities	$	9,049,131	$	109,533	$	(51,143	)	$	9,107,521	$	9,093,674

The amortized cost and fair value of fixed maturity securities at December 31, 2007, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay obligations:

	2007
	Amortized
(Dollars in thousands)	Cost		Fair Value
Due in one year or less	$	723,587	$	725,875
Due after one year through five years		1,870,068		1,900,496
Due after five years through ten years		2,922,947		2,968,085
Due after ten years		2,424,524		2,461,330
Mortgage backed securities		1,747,138		1,755,373
Total	$	9,688,264	$	9,811,159

At December 31, 2007 and 2006, there were no investments, other than investments in United States government and government agency securities, which exceeded 10% of stockholders’ equity. At December 31, 2007, investments with a carrying value of $85 million were on deposit in trust accounts established as security for reinsurance clients, investments with a carrying value of $68 million were on deposit with Lloyd’s in support of the Company’s underwriting activities at Lloyd’s, investments with a carrying value of $645 million were on deposit with state insurance departments and investments with a carrying value of $66 million were held on deposit in trust accounts as security for letters of credit issued in support of the Company’s reinsurance operations.

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(4) Investments in Equity Securities Available for Sale

At December 31, 2007 and 2006, investments in equity securities were as follows:

			Gross		Gross
(Dollars in thousands)			Unrealized		Unrealized			Fair		Carrying
Type of Investment	Cost		Gains		Losses			Value		Value
December 31, 2007
Common stocks	$	93,425	$	54,079	$	—		$	147,504	$	147,504
Preferred stocks		722,679		2,571		(104,945	)		620,305		620,305
Total	$	816,104	$	56,650	$	(104,945	)	$	767,809	$	767,809
December 31, 2006
Common stocks	$	200,826	$	112,302	$	(353	)	$	312,775	$	312,775
Preferred stocks		546,758		8,689		(1,800	)		553,647		553,647
Total	$	747,584	$	120,991	$	(2,153	)	$	866,422	$	866,422

(5) Trading Account

At December 31, 2007 and 2006, the fair value and carrying value of the arbitrage trading account and related assets and liabilities were as follows:

(Dollars in thousands)	2007			2006
Direct equity securities	$	301,786		$	450,629
Arbitrage-related partnerships		210,740			188,852
Total equity securities trading account	$	512,526		$	639,481
Related assets and liabilities:
Receivables from brokers	$	409,926		$	312,220
Securities sold but not yet purchased		(67,139	)		(170,075	)

The primary focus of the trading account is merger and convertible arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Convertible arbitrage is the business of investing in convertible securities with the goal of capitalizing on price differences between these securities and their underlying equities. Arbitrage investing differs from other types of investing in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less). The Company believes that this makes arbitrage investments less vulnerable to changes in general financial market conditions.

The Company uses put options, call options and swap contracts in order to mitigate the impact of potential changes in market conditions on the merger arbitrage trading account. These options and contracts are reported at fair value. As of December 31, 2007, the fair value of long option contracts outstanding was $1,106,000 (notional amount of $19,846,000) and the fair value of short option contracts outstanding was $590,000 (notional amount of $92,654,000). Other than with respect to the use of these trading account securities, the Company does not make use of derivatives.

(6) Partnerships and Affiliates

Investments in partnerships and affiliates include the following:

	Carrying Value
	as of December 31,				Investment Income
(Dollars in thousands)	2007		2006		2007			2006			2005
Real estate funds	$	294,446	$	275,188	$	25,007		$	23,421		$	15,299
Kiln Ltd		108,722		95,750		16,052			15,883			3,853
Kern Energy Partners		41,085		15,993		1,323			2,014			1,686
Other		101,684		62,923		(4,108	)		(4,173	)		(2,293	)
Total	$	545,937	$	449,854	$	38,274		$	37,145		$	18,545

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The Company’s has a 20.1% interest in Kiln Ltd, which is based in the U.K. and conducts international insurance and reinsurance underwriting through Lloyd’s. The Company also participates directly in Lloyd’s business managed by Kiln plc. Net premiums of $25 million and $41 million in 2006 and 2005, respectively, were written under agreements with Kiln plc.

On December 14, 2007, Kiln Ltd announced that the boards of Tokio Marine & Nichido Fire Insurance Co., Ltd. (“TMNF”) and Kiln Ltd have reached agreement on the terms of a recommended cash acquisition of Kiln Ltd by TMNF at an acquisition price of 150 pence per share. The carry value of the Company’s investment in Kiln Ltd was $109 million at December 31, 2007. The total value of the Company’s investment in Kiln at the acquisition price of 150 pence per share is approximately $174 million at exchange rates in effect on February 27, 2008.

(7) Investment Income

Investment income consists of the following:

(Dollars in thousands)	2007			2006			2005
Investment income earned on:
Fixed maturity securities, including cash	$	497,892		$	440,987		$	336,126
Equity securities available for sale		57,502			35,662			25,529
Arbitrage trading account (a)		80,253			74,551			28,095
Partnerships and affiliates		38,274			37,145			18,545
Other		10,191			5,068			1,620
Gross investment income		684,112			593,413			409,915
Investment expense		(11,452	)		(7,238	)		(5,953	)
Net investment income	$	672,660		$	586,175		$	403,962

(a) Investment income earned from net trading account activity includes unrealized trading gains of $2,450,000 in 2007, $250,000 in 2006 and $3,816,000 in 2005.

(8) Realized and Unrealized Investment Gains and Losses

Realized and unrealized investment gains and losses are as follows:

(Dollars in thousands)	2007			2006			2005
Realized investment gains and losses:
Fixed maturity securities:
Gains	$	4,255		$	14,562		$	13,591
Losses		(5,467	)		(10,250	)		(3,026	)
Equity securities available for sale		16,519			4,537			8,414
Sale of subsidiary		2,302			—			—
Provision for other than temporary impairments		(2,680	)		(100	)		(1,645	)
Other gains (losses)		9			899			(125	)
Total realized investment gains		14,938			9,648			17,209
Income taxes and minority interest		(5,297	)		(2,534	)		(6,206	)
	$	9,641		$	7,114		$	11,003
Change in unrealized gains and losses of available for sales securities:
Fixed maturity securities	$	66,237		$	10,800		$	(91,316	)
Equity securities available for sale		(167,133	)		93,130			(21,951	)
Investment in partnerships and affiliates		5,940			9,608			(5,711	)
Cash and cash equivalents		(1	)		1			44
Total change in unrealized gains and losses		(94,957	)		113,539			(118,934	)
Income taxes		26,155			(33,498	)		41,304
Minority interest		(662	)		1,174			8,677
	$	(69,464	)	$	81,215		$	(68,953	)

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The following table summarizes, for all securities in an unrealized loss position at December 31, 2007 and 2006, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position:

	2007						2006
					Gross						Gross
	Number of				Unrealized		Number of				Unrealized
(Dollars in thousands)	Securities		Fair Value		Loss		Securities		Fair Value		Loss
Fixed maturities:
0 — 6 months		44	$	379,515	$	5,254		100	$	802,595	$	2,309
7 — 12 months		43		486,233		6,999		62		645,331		4,445
Over 12 months		156		1,300,468		17,450		269		2,843,721		44,389
Total		243	$	2,166,216	$	29,703		431	$	4,291,647	$	51,143
Equities securities available for sale:
0 — 6 months		55	$	445,917	$	86,992		8	$	75,568	$	320
7 — 12 months		42		61,263		10,780		9		60,853		250
Over 12 months		12		39,600		7,173		16		105,085		1,583
Total		109	$	546,780	$	104,945		33	$	241,506	$	2,153

At December 31, 2007, gross unrealized gains were $233 million, or 2% of total investments, and gross unrealized losses were $139 million, or 1% of total investments. There were 154 securities that have been continuously in an unrealized loss position for more than six months. Those securities had an aggregate fair value of $1 billion and an aggregate unrealized loss of $50 million. The decline in market value for the fixed income securities was primarily due to an increase in market interest rates. The decline in market value for the equity securities was primarily due to wider spreads for preferred stocks issued by banks, real estate investment trusts, Fannie Mae and Freddie Mac following the disruption in credit markets in late 2007.

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

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(9) Reserves for Losses and Loss Expenses

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

(Dollars in thousands)	2007			2006		2005
Net reserves at beginning of year	$	6,947,597		$	5,867,290	$	4,722,842
Net reserves of company acquired		68,392			—		—
Net provision for losses and loss expenses (a):
Claims occurring during the current year (b)		2,837,647			2,791,500		2,531,655
(Decrease)/Increase in estimates for claims occurring in prior years (c)		(105,879	)		26,663		186,728
Loss reserve discount accretion		46,808			39,507		57,790
		2,778,576			2,857,670		2,776,173
Net payments for claims:
Current year		538,364			456,073		447,018
Prior years		1,433,304			1,321,290		1,184,707
		1,971,668			1,777,363		1,631,725
Net reserves at end of year		7,822,897			6,947,597		5,867,290
Ceded reserves at end of year		855,137			836,672		844,470
Gross reserves at end of year	$	8,678,034		$	7,784,269	$	6,711,760

(a)	Net provision for loss and loss expenses excludes $1,002, $6,828, and $5,629 in 2007, 2006 and 2005, respectively, relating to the policyholder benefits incurred on life insurance that are included in the statement of income.
(b)	Claims occurring during the current year are net of loss reserve discounts of $117,177, $133,965 and $103,558 in 2007, 2006 and 2005, respectively.
(c)	The increase in estimates for claims occurring in prior years is net of loss reserve discounts of $17,736, $29,940 and $26,845 in 2007, 2006 and 2005, respectively. On an undiscounted basis, the estimates for claims occurring in prior years decreased by $88,143 in 2007 and increased by $56,603 and $213,573 in 2006 and 2005, respectively.

For the year ended December 31, 2007, the Company reported losses and loss expenses of $2.8 billion, of which $106 million represented a decrease in estimates for claims occurring in prior years. The estimates for claims occurring in prior years decreased by $150 million for primary business and increased by $44 million for assumed reinsurance. On an accident year basis, the change in prior year reserves is comprised of an increase in estimates for claims occurring in accident years 2003 and prior of $179 million and a decrease in estimates for claims occurring in accident years 2004 through 2006 of $285 million. The changes in prior year loss reserve estimates are generally the result of ongoing analysis of recent loss development trends. Original estimates are increased or decreased as additional information becomes known regarding individual claims and aggregate claim trends.

Case reserves for primary business increased 20% to $2.3 billion as a result of a 3% increase in the number of outstanding claims and a 21% increase in the average case reserve per claim. Reserves for incurred but not reported losses for primary business increased 11% to $3.6 billion at December 31, 2007 from $3.3 billion at December 31, 2006. By segment, prior year reserves decreased by $97 million for specialty, $24 million for alternative markets, $22 million for regional and $7 million for international. By line of business, prior year reserves decreased by $114 million for general liability, $14 million for workers’ compensation, $12 million for property and $10 million for commercial automobile. The decrease in prior year reserves for general liability reflects the favorable loss reserve trends for excess and surplus lines for accident years 2004 through 2006.

Case reserves for reinsurance business increased 17% to $796 million at December 31, 2007 from $680 million at December 31, 2006. Reserves for incurred but not reported losses for reinsurance business were $1,088 million at December 31, 2007 from $1,084 million at December 31, 2006. Prior year reserves increased $44 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.

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

35

The Company’s net reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $41,590,000 and $37,473,000 at December 31, 2007 and 2006, respectively. The Company’s gross reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $60,836,000 and $49,937,000 at December 31, 2007 and 2006, respectively. Net incurred losses and loss expenses for reported asbestos and environmental claims were approximately $7,029,000, $3,000,000 and $1,853,000 in 2007, 2006 and 2005, respectively. Net paid losses and loss expenses for asbestos and environmental claims were approximately $2,912,000, $2,980,000 and $2,658,000 in 2007, 2006 and 2005, respectively. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make an actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential effect of significant unresolved legal matters, including coverage issues as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties are highly uncertain.

Discounting — The Company discounts its liabilities for excess and assumed workers’ compensation business because of the long period of time over which losses are paid. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from the Company’s loss payout experience. For non-proportional business, reserves for losses and loss expenses have been discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. These discount rates range from 3.7% to 6.5% with a weighted average discount rate of 4.9%. For proportional business, reserves for losses and loss expenses have been discounted at the statutory rate permitted by the Department of Insurance of the State of Delaware of 2.6%. The aggregate net discount, after reflecting the effects of ceded reinsurance, is $787,988,000, $699,883,000 and $575,485,000 at December 31, 2007, 2006 and 2005, respectively. The increase in the aggregate discount from 2006 to 2007 and from 2005 to 2006 resulted from the increase in excess and assumed workers’ compensation gross reserves.

(10) Reinsurance

The following is a summary of reinsurance financial information:

(Dollars in thousands)	2007			2006			2005
Written premium:
Direct	$	4,173,856		$	4,208,893		$	4,185,296
Assumed		879,374			1,068,021			902,687
Ceded		(477,241	)		(457,921	)		(483,409	)
Total net written premiums	$	4,575,989		$	4,818,993		$	4,604,574
Earned premium:
Direct	$	4,202,673		$	4,124,131		$	4,022,842
Assumed		933,169			1,037,806			934,024
Ceded		(472,141	)		(469,315	)		(495,931	)
Total net earned premiums	$	4,663,701		$	4,692,622		$	4,460,935
Ceded losses incurred	$	263,072		$	276,347		$	404,793

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 due from reinsurers are reported net of reserves for uncollectible reinsurance of $2,859,000, $2,531,000 and $2,402,000 as of December 31, 2007, 2006 and 2005, respectively.

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(11) Senior Notes and Other Debt

Senior notes and other debt consist of the following (the difference between the face value and the carrying value is unamortized discount):

(Dollars in thousands)					2007				2006
Description	Rate			Maturity	Face Value		Carrying Value		Carrying Value
Senior notes		9.875	%	May 15, 2008	$	88,800	$	88,638	$	88,242
Subsidiary debt	various			2008 through 2012		4,460		4,460		—
Senior notes		5.125	%	September 30, 2010		150,000		149,130		148,809
Senior notes		5.875	%	February 15, 2013		200,000		198,300		197,968
Senior notes		5.60	%	May 15, 2015		200,000		198,629		198,443
Senior notes		6.15	%	August 15, 2019		150,000		148,345		148,202
Senior notes		8.70	%	January 1, 2022		76,503		75,803		75,776
Subsidiary debt		7.65	%	June 30, 2023		11,747		11,747		11,747
Senior notes		6.25	%	February 15, 2037		250,000		246,741		—
Total debt					$	1,131,510	$	1,121,793	$	869,187

(12) Junior Subordinated Debentures

Junior subordinated debentures consist of the following (the difference between the face value and the carrying value is unamortized discount):

(Dollars in thousands)			2007				2006
Description	Rate	Maturity	Face Value		Carrying Value		Carrying Value
Company debt	6.75%	July 26, 2045	$	250,000	$	242,158	$	241,953
Subsidiary debt	LIBOR +3.75%	March 2035		7,217		7,217		—
Total			$	257,217	$	249,375	$	241,953

In 2006, the Company issued $250,000,000 aggregate principal amount of 6.75% Junior Subordinated Debentures due July 26, 2045 (the “6.75% Junior Subordinated Debentures”) to W. R. Berkley Capital Trust II (the “Trust II”). The Trust II simultaneously issued an equal amount of 6.75% mandatorily redeemable preferred securities (the “6.75% Trust Preferred Securities”), which are fully and unconditionally guaranteed by the Company to the extent the Trust II has funds available for repayment of distributions. The 6.75% Trust Preferred Securities are subject to mandatory redemption in a like amount (i) in whole but not in part upon repayment of the 6.75% Junior Subordinated Debentures at maturity, (ii) in whole but not in part, at any time contemporaneously with the optional prepayment of the 6.75% Junior Subordinated Debentures by the Company upon the occurrence and continuation of certain events and (iii) in whole or in part, on or after July 26, 2010, contemporaneously with the optional prepayment by the Company of the 6.75% Junior Subordinated Debentures.

In 1996, the Company issued $210,000,000 aggregate principal amount of 8.197% Junior Subordinated Debentures due December 15, 2045 (the “8.197% Junior Subordinated Debentures”) to W. R. Berkley Capital Trust (the “Trust”). The Trust simultaneously issued an equal amount of 8.197% mandatorily redeemable preferred securities (the “8.197% Trust Preferred Securities”), which were fully and unconditionally guaranteed by the Company to the extent the Trust has funds available for repayment of distributions. The 8.197% Trust Preferred Securities were redeemed on December 15, 2006, contemporaneously with the prepayment by the Company of the 8.197% Junior Subordinated Debentures.

In 2007, the Company acquired CGH Insurance Group, Inc., which has $7,217,000 of outstanding subordinated debentures that mature in 2035 and are pre-payable in 2010.

(13) Income Taxes

Income tax expense consists of:

(Dollars in thousands)	2007			2006			2005
Current expense	$	328,821		$	321,950		$	222,612
Deferred benefit		(17,916	)		(35,552	)		(91	)
Total expense	$	310,905		$	286,398		$	222,521

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

(Dollars in thousands)	2007			2006			2005
Computed “expected” tax expense	$	367,534		$	344,666		$	268,767
Tax-exempt investment income		(67,128	)		(63,358	)		(49,546	)
Change in valuation allowance		(7,604	)		3,046			1,762
Other, net		18,103			2,044			1,538
Total expense	$	310,905		$	286,398		$	222,521

At December 31, 2007 and 2006, the tax effects of differences that give rise to significant portions of the deferred tax asset and deferred tax liability are as follows:

(Dollars in thousands)	2007			2006
Deferred tax asset
Loss reserve discounting	$	205,967		$	188,658
Life reserve		—			10,685
Unearned premiums		137,439			144,600
Net operating loss carry forward		1,932			9,650
Other		85,986			62,098
Gross deferred tax asset		431,324			415,691
Less valuation allowance		(2,018	)		(9,621	)
Deferred tax asset		429,306			406,070
Deferred tax liability
Amortization of intangibles		7,782			8,098
Deferred policy acquisition costs		150,993			163,657
Deferred taxes on unrealized investment gains		25,624			54,059
Other		58,238			37,622
Deferred tax liability		242,637			263,436
Net deferred tax asset	$	186,669		$	142,634

The Company had a current income tax payable of $14,331,000 and $9,700,000 at December 31, 2007 and 2006, respectively. At December 31, 2007, the Company had foreign net operating loss carry forwards of $5,519,000, which expire from 2008 to 2012. The net change in the valuation allowance is primarily related to foreign net operating loss carry forwards and to certain foreign subsidiaries' net deferred tax assets. In addition, the Company has a net foreign tax credit carry forward for U.S. income tax purposes in the amount of $1,499,000, which expires in 2012. The Company has provided a valuation allowance against this amount. The statute of limitations has closed for the Company’s tax returns through December 31, 2003.

The realization of the deferred tax asset is dependent upon the Company’s ability to generate sufficient taxable income in future periods. Based on historical results and the prospects for future current operations, management anticipates that it is more likely than not that future taxable income will be sufficient for the realization of this asset.

(14) Dividends from Subsidiaries and Statutory Financial Information

The Company’s insurance subsidiaries are restricted by law as to the amount of dividends they may pay without the approval of regulatory authorities. During 2008, the maximum amount of dividends which can be paid without such approval is approximately $653 million. Combined net income and policyholders’ surplus of the Company’s consolidated insurance subsidiaries, as determined in accordance with statutory accounting practices, are as follows:

(Dollars in thousands)	2007		2006		2005
Net income	$	767,021	$	625,305	$	463,067
Policyholders’ surplus	$	3,695,106	$	3,535,398	$	2,939,503

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The significant variances between statutory accounting practices and GAAP are that for statutory purposes bonds are carried at amortized cost, acquisition costs are charged to income as incurred, deferred Federal income taxes are subject to limitations, excess and assumed workers’ compensation reserves are discounted at different discount rates and certain assets designated as “non-admitted assets” are charged against surplus.

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

(15) Stockholders’ Equity

Common equity. The weighted average number of shares used in the computation of basic earnings per share was 188,981,000, 191,809,000 and 190,533,000 for 2007, 2006 and 2005, respectively. The weighted average number of shares used in the computations of diluted earnings per share was 196,698,000, 201,961,000 and 200,426,000 for 2007, 2006 and 2005, respectively. Treasury shares have been excluded from average outstanding shares from the date of acquisition. The difference in calculating basic and diluted earnings per share is attributable entirely to the dilutive effect of stock-based compensation plans.

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

(Amounts in thousands)	2007			2006			2005
Balance, beginning of year		192,772			191,264			189,613
Shares issued		3,680			2,925			1,671
Shares repurchased		(16,131	)		(1,417	)		(20	)
Balance, end of year		180,321			192,772			191,264

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

(16) Fair Value of Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments as of December 31, 2007 and 2006:

	2007				2006
	Carrying				Carrying
(Dollars in thousands)	Amount		Fair value		Amount		Fair Value
Investments	$	11,893,522	$	11,905,637	$	11,114,364	$	11,128,211
Junior subordinated debentures		249,375		214,058		241,953		251,500
Senior notes and other debt		1,121,793		1,113,705		869,187		897,261

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

(17) Lease Obligations

The Company and its subsidiaries use office space and equipment under leases expiring at various dates. These leases are considered operating leases for financial reporting purposes. Some of these leases have options to extend the length of the leases and contain clauses for cost of living, operating expense and real estate tax adjustments. Rental expense was $21,438,000, $19,348,000 and $17,429,000 for 2007, 2006 and 2005, respectively. Future minimum lease payments (without provision for sublease income) are: $20,889,000 in 2008; $18,570,000 in 2009; $16,994,000 in 2010; $13,060,000 in 2011 and $35,600,000 thereafter.

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(18) 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.

At December 31, 2007, the Company has commitments to invest up to $252 million in certain investment funds and a subsidiary of the Company has commitments to extend credit under future loan agreements and unused lines of credit up to $3 million.

At December 31, 2007, investments with a carrying value of $85 million were on deposit in trust accounts established as security for reinsurance clients, investments with a carrying value of $68 million were on deposit with Lloyd’s in support of the Company’s underwriting activities at Lloyd’s, investments with a carrying value of $645 million were on deposit with state insurance departments and investments with a carrying value of $66 million were held on deposit in trust accounts as security for letters of credit issued in support of the Company’s reinsurance operations.

(19) Stock Incentive Plan

The Company has a stock incentive plan (the “Stock Incentive Plan”) under which 36,070,313 shares of common stock were reserved for issuance. Pursuant to the Stock Incentive Plan, stock options may be granted at prices determined by the Board of Directors but not less than fair market value on the date of grant. Stock options vest according to a graded schedule of 25%, 50%, 75% and 100% on the third, fourth, fifth and sixth year anniversary of grant date. Stock options expire on the tenth year anniversary of the grant date.

The following table summarizes stock option information:

	2007				2006				2005
	Shares		Price(a)		Shares		Price(a)		Shares		Price(a)
Outstanding at beginning of year		12,088,263	$	8.29		15,160,182	$	7.99		17,041,535	$	7.88
Granted		—		—		—		—		—		—
Exercised		3,664,659		7.01		2,909,916		6.67		1,663,341		6.76
Canceled		39,182		11.49		162,003		9.58		218,012		8.30
Outstanding at end of year		8,384,422	$	8.84		12,088,263	$	8.29		15,160,182	$	7.99
Options exercisable at year end		7,431,072	$	8.55		9,494,263	$	7.67		9,975,159	$	7.28
Stock available for future grant (b)		5,156,486				5,778,540				6,289,347

(a)	Weighted average exercise price.
(b)	Includes restricted stock units.

The following table summarizes information about stock options outstanding at December 31, 2007:

	Options Outstanding						Options Exercisable
			Weighted						Weighted
Range of			Remaining		Weighted				Average
Exercise	Number		Contractual		Average		Number		Exercise
Prices	Outstanding		Life (in years)		Price		Exercisable		Price
December 31, 2007
$0 to $5.00		1,585,023		2.27	$	3.54		1,585,023	$	3.54
$5.01 to $9.39		3,630,871		2.40		9.27		3,630,871		9.27
$9.40 to $17.62		3,168,528		4.39		10.98		2,215,178		10.95
Total		8,384,422		3.13	$	8.84		7,431,072	$	8.55

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Pursuant to the Stock Incentive Plan, the Company may also issue Restricted Stock Units (RSUs) to officers of the Company and its subsidiaries. The RSUs generally vest five years from the award date and are subject to other vesting and forfeiture provisions contained in the award agreement. The following table summarizes RSU information for the three years ended December 31, 2007:

(Dollars in thousands)	2007		2006		2005
RSUs granted:
Units		727,250		727,950		965,250
Market value at grant date	$	21,856	$	24,798	$	30,094
RSUs canceled:
Units		66,014		83,580		25,200
Market value at grant date	$	1,973	$	3,782	$	465
RSUs outstanding at end of period:
Units		4,738,656		4,077,420		3,433,050
Market value at grant date	$	110,465	$	90,370	$	69,354

The market value of RSUs at the date of grant are recorded as unearned compensation, a component of stockholders’ equity, and charged to expenses over the vesting period. Following is a summary of changes in unearned compensation for the three years ended December 31, 2007:

(Dollars in thousands)	2007			2006			2005
Unearned compensation at beginning of year	$	59,555		$	53,862		$	32,646
RSUs granted, net of cancellations		19,883			21,016			29,629
RSUs expensed		(19,330	)		(15,323	)		(8,413	)
Unearned compensation at end of year	$	60,108		$	59,555		$	53,862

(20) Compensation Plans

The Company and its subsidiaries have profit sharing plans in which substantially all employees participate. The plans provide for minimum annual contributions of 5% of eligible compensation; contributions above the minimum are discretionary and vary with each participating subsidiary’s profitability. Employees become eligible to participate in the profit sharing plans on the first day of the month following the first full three months in which they are employed. The plans provide that 40% of the contributions vest immediately and that the remaining 60% vest at varying percentages based upon years of service. Profit sharing expense amounted to $27,241,000, $24,864,000 and $21,955,000 for 2007, 2006 and 2005, respectively.

The Company has a Long-Term Incentive Compensation Plan (“LTIP”) that provides for incentive compensation to key executives based on the growth in the Company’s book value per share. Key employees are awarded participation units (“Units”) that vest five years from the award date or upon achievement of the maximum value of the award (except for certain executive officers), whichever occurs first. In 2004, the Company awarded 100,000 Units that achieved their maximum value of $250 per Unit in 2007. Compensation expense related to the 2004 grant (net of forfeitures) was $4,495,496, $8,015,000 and $6,587,000 in 2007, 2006 and 2005, respectively. In 2006, the Company awarded 131,000 Units with a maximum value of $250 per Unit. Compensation expense related to the 2006 grant was $10,282,000 and $8,599,000 in 2007 and 2006, respectively.

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(21) Retirement Benefits

The Company has an unfunded noncontributory defined benefit plan that covers its chief executive officer and chairman of the board. The plan was amended on December 17, 2007 to provide that the benefits payments shall commence on the earliest of (i) October 31, 2013, (ii) the date of death or (iii) a change in control of the Company. The Company assumed a benefit commencement date of October 31, 2013 for the 2007 valuation, whereas for the 2006 valuation, the Company assumed a benefit commencement date of October 31, 2017. The discount rate used to derive the projected benefit obligation and related retirement expense was 6.5% in 2007 and 6.0% in 2006. Following is a summary of the projected benefit obligation as of December 31, 2007 and 2006:

(Dollars in thousands)	2007			2006
Projected benefit obligation:
Beginning of year	$	28,775		$	25,021
Interest cost		1,753			1,640
Actuarial (gain) loss		(3,724	)		2,114
Plan amendment		10,361			—
End of year	$	37,165		$	28,775

The components of net periodic pension benefit cost are as follows:

(Dollars in thousands)	2007		2006		2005
Components of net periodic benefit cost:
Interest cost	$	1,753	$	1,640	$	1,311
Amortization of unrecognized:
Prior service costs		1,267		1,266		1,266
Net actuarial loss		352		593		165
Net periodic pension cost	$	3,372	$	3,499	$	2,742

Effective on December 31, 2006, the Company adopted FASB Statement No. 158 (FAS 158), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” which requires an employer to recognize the over-funded or under-funded status of defined benefit plans as an asset or liability on its consolidated balance sheet. The impact of adopting FAS 158 is presented below.

	Before					After
	Application					Application
(Dollars in thousands)	Of FAS 158		Adjustments			Of FAS 158
Other assets	$	145,669	$	(15,028	)	$	130,641
Deferred income taxes		135,044		7,590			142,634
Other liabilities		647,938		6,658			654,596
Total stockholders’ equity	$	3,349,255	$	(14,096	)	$	3,335,159

(22) Supplemental Financial Statement Data

Other operating costs and expenses consist of the following:

(Dollars in thousands)	2007		2006		2005
Amortization of deferred policy acquisition costs	$	1,002,367	$	978,029	$	959,580
Other underwriting expenses		328,152		289,188		242,463
Service company expenses		90,561		88,961		91,134
Other costs and expenses		109,907		92,988		65,397
Total	$	1,530,987	$	1,449,166	$	1,358,574

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(23) Industry Segments

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

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

Our regional segments provide commercial insurance products to customers primarily in 44 states. Key clients of this segment are small-to-mid-sized businesses and state and local governmental entities. The regional subsidiaries are organized geographically, which provides them with the flexibility to adapt to local market conditions, while enjoying the superior administrative capabilities and financial strength of the Company. The regional operations are organized geographically based on markets served.

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 personal and commercial property casualty insurance in South America and commercial insurance and reinsurance in Australia, Hong Kong, the United Kingdom and Continental Europe.

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The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Income tax expense and benefits are calculated based upon the Company’s overall effective tax rate.

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

	Revenues								Pre-tax			Net
	Earned		Investment						Income			Income
(Dollars in thousands)	Premiums		Income		Other		Total		(loss)			(loss)
December 31, 2007:
12 Months
Specialty	$	1,772,547	$	233,080	$	400	$	2,006,027	$	516,931		$	359,313
Regional		1,250,914		96,886		—		1,347,800		215,228			149,587
Alternative Markets		651,909		125,698		97,292		874,899		248,080			173,822
Reinsurance		740,439		153,416		—		893,855		178,302			131,238
International		247,892		36,666		—		284,558		44,457			29,386
Corporate, other and eliminations (1)		—		26,914		104,648		131,562		(160,302	)		(109,341	)
Realized investment gains		—		—		14,938		14,938		14,938			9,641
Consolidated	$	4,663,701	$	672,660	$	217,278	$	5,553,639	$	1,057,634		$	743,646
December 31, 2006:
12 Months
Specialty	$	1,752,507	$	200,421	$	—	$	1,952,928	$	479,105		$	332,462
Regional		1,205,912		83,957		—		1,289,869		201,417			139,737
Alternative Markets		658,805		114,914		104,812		878,531		291,416			201,486
Reinsurance		859,411		133,709		—		993,120		135,424			102,065
International		215,987		32,907		—		248,894		34,447			24,550
Corporate, other and eliminations (1)		—		20,267		1,574		21,841		(162,812	)		(107,896	)
Realized investment gains		—		—		9,648		9,648		9,648			7,114
Consolidated	$	4,692,622	$	586,175	$	116,034	$	5,394,831	$	988,645		$	699,518
December 31, 2005:
12 Months
Specialty	$	1,682,193	$	134,290	$	—	$	1,816,483	$	345,896		$	241,619
Regional		1,173,174		57,619		—		1,230,793		216,495			147,924
Alternative Markets		663,478		82,617		110,697		856,792		238,462			165,327
Reinsurance		754,097		95,110		—		849,207		63,606			53,233
International		187,993		20,749		94		208,836		20,890			13,782
Corporate, other and eliminations (1)		—		13,577		3,942		17,519		(132,021	)		(87,996	)
Realized investment gains		—		—		17,209		17,209		17,209			11,003
Consolidated	$	4,460,935	$	403,962	$	131,942	$	4,996,839	$	770,537		$	544,892

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

Years Ended December 31,	2007			2006
Specialty	$	5,887,363		$	5,387,934
Regional		2,717,199			2,796,225
Alternative Markets		3,261,318			2,700,782
Reinsurance		4,912,732			5,231,317
International		870,404			811,662
Corporate, other and eliminations (1)		(821,775	)		(1,271,431	)
Consolidated	$	16,827,241		$	15,656,489

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

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

	2007		2006		2005
Specialty
Premises operations	$	730,874	$	744,351	$	701,456
Commercial automobile		277,170		267,091		265,227
Products liability		228,749		257,992		258,163
Property		210,791		164,784		137,643
Professional liability		155,171		158,124		183,220
Other		169,792		160,165		136,484
Total specialty	$	1,772,547	$	1,752,507	$	1,682,193
Regional
Commercial multiple peril		474,574		468,978		469,033
Commercial automobile		364,467		348,126		339,832
Workers’ compensation		251,774		246,151		235,748
Other		160,099		142,657		128,561
Total regional	$	1,250,914	$	1,205,912	$	1,173,174
Alternative Markets
Excess workers’ compensation		311,786		308,290		291,852
Primary workers’ compensation		250,628		270,193		301,619
Other		89,495		80,322		70,007
Total alternative markets	$	651,909	$	658,805	$	663,478
Reinsurance
Casualty		609,398		758,635		621,887
Property		131,041		100,776		132,210
Total reinsurance	$	740,439	$	859,411	$	754,097
International	$	247,892	$	215,987	$	187,993
Total	$	4,663,701	$	4,692,622	$	4,460,935

(24) Quarterly Financial Information (unaudited)

The following is a summary of quarterly financial data (in thousands, except per share data):

	Three months ended
	March 31,				June 30,				September 30,				December 31,
	2007		2006		2007		2006		2007		2006		2007		2006
Revenues	$	1,359,021	$	1,307,534	$	1,386,583	$	1,358,346	$	1,408,032	$	1,368,508	$	1,400,003	$	1,360,443
Net income		188,426		161,702		190,633		165,452		180,463		174,308		184,124		198,056
Net income per share (a):
Basic		.98		.84		.98		.86		.97		.91		1.01		1.03
Diluted		.93		.80		.93		.82		.93		.87		.97		.98

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

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