BERKLEY W R CORP - Quarter Report: 2008 September (Form 10-Q)

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)

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

or

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

W. R. BERKLEY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		22-1867895
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

475 Steamboat Road, Greenwich, Connecticut		06830
(Address of principal executive offices)		(Zip Code)

(203) 629-3000

(Registrant’s telephone number, including area code)

None

Former name, former address and former fiscal year, if changed since last report.

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

Yes þ     No o

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

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

Yes o      No þ

Number of shares of common stock, $.20 par value, outstanding as of November 3, 2008: 161,244,824.

 

 

Part I — FINANCIAL INFORMATION

Item 1. Financial Statements

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

		September 30,				December 31,
		2008				2007
		(Unaudited)
Assets
Investments:
Fixed maturity securities		$	9,414,529			$	9,840,291
Equity securities available for sale			469,719				726,562
Arbitrage trading account			263,387				301,786
Investment in arbitrage funds			212,218				210,740
Partnerships and affiliates			550,292				545,937
Loans receivable			308,181				268,206
Total investments			11,218,326				11,893,522
Cash and cash equivalents			1,003,875				951,863
Premiums and fees receivable			1,155,685				1,199,002
Due from reinsurers			945,015				904,509
Accrued investment income			114,296				134,872
Prepaid reinsurance premiums			188,061				179,495
Deferred policy acquisition costs			434,928				455,244
Real estate, furniture and equipment			218,608				204,252
Deferred Federal and foreign income taxes			337,362				186,669
Goodwill			106,591				102,462
Trading account receivable from brokers and clearing organizations			395,391				409,926
Other assets			299,572				210,354
Total assets		$	16,417,710			$	16,832,170
Liabilities and Stockholders’ Equity
Liabilities:
Reserves for losses and loss expenses		$	9,076,876			$	8,678,034
Unearned premiums			2,132,638				2,240,690
Due to reinsurers			108,767				108,178
Trading account securities sold but not yet purchased			57,020				67,139
Other liabilities			713,429				761,690
Junior subordinated debentures			249,533				249,375
Senior notes and other debt			1,024,758				1,121,793
Total liabilities			13,363,021				13,226,899
Minority interest			5,248				35,496
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, 162,149,253 and 180,320,775 shares			47,024				47,024
Additional paid-in capital			915,756				907,016
Retained earnings			3,461,294				3,248,762
Accumulated other comprehensive income (loss)			(180,766	)			53,201
Treasury stock, at cost, 72,968,665 and 54,797,143 shares			(1,193,867	)			(686,228	)
Total stockholders’ equity			3,049,441				3,569,775
Total liabilities and stockholders’ equity		$	16,417,710			$	16,832,170

See accompanying notes to interim consolidated financial statements.

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

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Revenues:
Net premiums written		$	996,333			$	1,132,489			$	3,145,447			$	3,524,025
Change in unearned premiums			58,908				43,075				108,814				(21,888	)
Net premiums earned			1,055,241				1,175,564				3,254,261				3,502,137
Net investment income			153,402				165,790				451,838				500,154
Insurance service fees			25,628				23,690				77,501				75,026
Realized investment gains (losses)			(220,030	)			812				(248,167	)			13,482
Revenues from wholly-owned investees			40,496				41,739				92,515				61,227
Other income			893				437				2,025				1,610
Total revenues			1,055,630				1,408,032				3,629,973				4,153,636
Expenses:
Losses and loss expenses			694,254				706,374				2,056,998				2,095,190
Other operating expenses			358,580				382,530				1,115,002				1,139,755
Expenses from wholly-owned investees			39,337				38,718				90,615				56,515
Interest expense			20,251				22,707				64,391				66,107
Total expenses			1,112,422				1,150,329				3,327,006				3,357,567
Income (loss) before income taxes and minority interest			(56,792	)			257,703				302,967				796,069
Income tax benefit (expense)			28,964				(76,344	)			(61,915	)			(234,855	)
Minority interest			(52	)			(896	)			(237	)			(1,692	)
Net income (loss)		$	(27,880	)		$	180,463			$	240,815			$	559,522
Earnings (loss) per share:
Basic		$	(.17	)		$	.97			$	1.43			$	2.93
Diluted		$	(.17	)		$	.93			$	1.37			$	2.81

See accompanying notes to interim consolidated financial statements.

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

		For The Nine Months
		Ended September 30,
		2008				2007
Common stock:
Beginning and end of period		$	47,024			$	47,024
Additional paid in capital:
Beginning of period		$	907,016			$	859,787
Stock options exercised, including tax benefits			(9,093	)			26,929
Restricted stock units expensed			17,381				14,092
Stock options expensed			160				596
Stock issued to directors and others			292				384
End of period		$	915,756			$	901,788
Retained earnings:
Beginning of period		$	3,248,762			$	2,542,744
Net income			240,815				559,522
Dividends			(28,283	)			(28,614	)
End of period		$	3,461,294			$	3,073,652
Accumulated other comprehensive income (loss), net of tax:
Unrealized investment gains (losses):
Beginning of period		$	52,497			$	121,961
Net change in period			(206,973	)			(38,845	)
End of period			(154,476	)			83,116
Currency translation adjustments:
Beginning of period		$	18,060			$	3,748
Net change in period			(28,477	)			17,787
End of period			(10,417	)			21,535
Net pension asset:
Beginning of period		$	(17,356	)		$	(14,096	)
Net change in period			1,483				926
End of period			(15,873	)			(13,170	)
Total accumulated other comprehensive income (loss)		$	(180,766	)		$	91,481
Treasury stock:
Beginning of period		$	(686,228	)		$	(226,009	)
Stock repurchases			(534,584	)			(395,977	)
Stock options exercised			26,146				24,654
Stock issued to directors and others			799				117
End of period		$	(1,193,867	)		$	(597,215	)

See accompanying notes to interim consolidated financial statements.

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

		For the Nine Months
		Ended September 30,
		2008				2007
Cash from operating activities:
Net income		$	240,815			$	559,522
Adjustments to reconcile net income to net cash flows from operating activities:
Realized investment (gains) losses			248,167				(13,482	)
Depreciation and amortization			60,359				61,848
Minority interest			237				1,692
Equity in undistributed earnings of partnerships and affiliates			(26,327	)			(23,043	)
Stock incentive plans			18,190				15,421
Change in:
Trading account securities and related accounts			38,399				(51,694	)
Investment in arbitrage funds			(1,478	)			(19,497	)
Trading account receivables from broker and clearing organization			14,535				36,306
Trading account securities sold but not yet purchased			(10,119	)			(23,924	)
Premiums and fees receivable			35,832				(47,158	)
Due from reinsurers			(42,939	)			23,472
Accrued investment income			20,239				(12,468	)
Prepaid reinsurance premiums			(10,495	)			(13,837	)
Deferred policy acquisition costs			18,157				(12,070	)
Deferred income taxes			(40,794	)			9,040
Other assets			2,024				(22,670	)
Reserves for losses and loss expenses			428,373				648,043
Unearned premiums			(97,987	)			36,375
Due to reinsurers			5,556				(25,352	)
Other liabilities			(120,892	)			3,525
Net cash from operating activities			779,852				1,130,049
Cash flows used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities			765,460				1,372,540
Equity securities			132,731				321,257
Maturities and prepayments of fixed maturity securities			1,005,827				984,504
Distributions from partnerships and affiliates			191,082				81,437
Cost of purchases, excluding trading account:
Fixed maturity securities and loans receivable			(1,752,366	)			(3,299,106	)
Equity securities			(185,561	)			(469,428	)
Investments in partnerships and affiliates			(119,460	)			(92,649	)
Change in balances due to/from brokers			(25,006	)			24,979
Net additions to real estate, furniture and equipment			(29,098	)			(21,388	)
Payment for business purchased, net of cash acquired			(47,622	)			(61,851	)
Proceeds from sale of business, net of cash divested			—				(2,061	)
Net cash used in investing activities			(64,013	)			(1,161,766	)
Cash flows used in financing activities:
Stock repurchases			(534,584	)			(395,977	)
Net proceeds from issuance of senior notes and other debt			3,000				246,644
Repayment of senior notes and other debt			(103,484	)			(704	)
Cash dividends			(37,897	)			(27,104	)
Bank deposits received			15,657				10,215
Advances from (repayments to) Federal Home Loan Bank			7,450				(2,075	)
Net proceeds from stock options exercised			12,629				23,702
Proceeds from (purchase of) minority shares			77				(33	)
Other			—				3,431
Net cash used in financing activities			(637,152	)			(141,901	)
Changes in cash due to foreign exchange rates			(26,675	)			10,650
Net increase (decrease) in cash and cash equivalents			52,012				(162,968	)
Cash and cash equivalents at beginning of year			951,863				754,247
Cash and cash equivalents at end of period		$	1,003,875			$	591,279
Supplemental disclosure of cash flow information:
Interest paid		$	74,300			$	62,530
Federal income taxes paid, net		$	171,693			$	202,933

See accompanying notes to interim consolidated financial statements.

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

1. GENERAL

     The accompanying interim consolidated financial statements should be read in conjunction with the following notes and with the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Reclassifications have been made in the 2007 financial statements as originally reported to conform them to the presentation of the 2008 financial statements.

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

     The weighted average number of common shares used in the computation of basic and diluted earnings (loss) per share was as follows (amounts in thousands):

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Average shares outstanding:
Basic			162,675				186,601				168,826				190,659
Diluted (1)			162,675				193,719				175,369				199,247

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

2. COMPREHENSIVE INCOME (LOSS)

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

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Net income (loss)		$	(27,880	)		$	180,463			$	240,815			$	559,522
Other comprehensive income (loss):
Change in unrealized foreign exchange gains (losses)			(33,433	)			5,244				(28,477	)			17,787
Unrealized holding gains (losses) on investment securities arising during the period, net of taxes			(261,628	)			53,501				(368,301	)			(30,115	)
Reclassification adjustment for realized (gains) losses included in net income, net of taxes			143,020				(517	)			161,328				(8,730	)
Change in unrecognized pension obligation, net of income taxes			495				309				1,483				926
Other comprehensive income (loss)			(151,546	)			58,537				(233,967	)			(20,132	)
Comprehensive income (loss)		$	(179,426	)		$	239,000			$	6,848			$	539,390

3. INVESTMENTS

     At September 30, 2008 and December 31, 2007, investments in fixed maturity securities and equity securities available for sale were as follows (dollars in thousands):

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
September 30, 2008
Fixed maturity securities
Held to maturity		$	126,092			$	6,162			$	(2,692	)		$	129,562
Available for sale			9,454,791				77,549				(243,903	)			9,288,437
Equity securities
Common stocks			129,217				53,173				(44,591	)			137,799
Preferred stocks			414,814				456				(83,350	)			331,920
Total		$	10,124,914			$	137,340			$	(374,536	)		$	9,887,718
December 31, 2007
Fixed maturity securities
Held to maturity		$	130,111			$	12,179			$	(64	)		$	142,226
Available for sale			9,602,984				140,419				(33,223	)			9,710,180
Equity securities
Common stocks			93,425				54,079				—				147,504
Preferred stocks			677,848				2,571				(101,361	)			579,058
Total		$	10,504,368			$	209,248			$	(134,648	)		$	10,578,968

3. INVESTMENTS CONTINUED

     The following table summarizes all securities in an unrealized loss position at September 30, 2008 and December 31, 2007 by the length of time those securities have been continuously in an unrealized loss position (dollars in thousands):

		Less Than 12 Months								12 Months or Greater								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
September 30, 2008
U.S. government and agency		$	341,770			$	3,254			$	29,903			$	610			$	371,673			$	3,864
State and municipal			2,803,960				71,012				441,685				36,773				3,245,645				107,785
Mortgage-backed securities			598,048				27,708				231,350				25,071				829,398				52,779
Corporate			498,199				42,456				261,765				37,793				759,964				80,249
Foreign			42,005				1,918				—				—				42,005				1,918
Fixed maturity securities			4,283,982				146,348				964,703				100,247				5,248,685				246,595
Common stocks			59,573				44,591				—				—				59,573				44,591
Preferred stocks			158,221				54,475				59,846				28,875				218,067				83,350
Total		$	4,501,776			$	245,414			$	1,024,549			$	129,122			$	5,526,325			$	374,536
December 31, 2007
U.S. government and agency		$	28,059			$	160			$	16,770			$	989			$	44,829			$	1,149
State and municipal			439,307				6,711				517,768				5,808				957,075				12,519
Mortgage-backed securities			212,769				3,040				488,392				6,242				701,161				9,282
Corporate			169,732				4,940				262,731				4,406				432,463				9,346
Foreign			57,129				985				14,807				6				71,936				991
Fixed maturity securities			906,996				15,836				1,300,468				17,451				2,207,464				33,287
Preferred stocks			465,933				94,188				39,600				7,173				505,533				101,361
Total		$	1,372,929			$	110,024			$	1,340,068			$	24,624			$	2,712,997			$	134,648

     At September 30, 2008, gross unrealized losses for fixed maturity securities were $247 million. All of these securities are classified as available for sale. In assessing other than temporary impairments of fixed maturity securities, the Company assesses the issuer’s ability to continue to meet its contractual payment obligations as they become due and the Company’s ability and intent to hold the investment until it recovers or matures. Management believes these unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors.

     At September 30, 2008, gross unrealized losses for preferred stocks were $83 million. All of these securities are classified as available for sale. The Company has the ability and intent to hold these securities at least until the investment impairment is recovered. In assessing other than temporary impairments of perpetual preferred stocks, the Company applies an impairment model similar to that used for a fixed maturity security provided there has been no evidence of deterioration in the credit of the issuer. The preferred securities in an unrealized loss position are investment grade securities issued by banks, insurers and real estate investment trusts (“REITs”). Management believes these unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors.

     At September 30, 2008, the Company owned one common stock in an unrealized loss position. The stock, which was issued by a REIT, had a fair value of $60 million and an unrealized loss of $45 million. The stock has been in an unrealized loss position for less than six months. Management believes this unrealized loss is due primarily to temporary market and sector-related factors rather than to issuer-specific factors.

     Write downs for other-than-temporary impairments were $329 million in the first nine months of 2008. These impairment charges included $263 million from the write down of preferred stocks issued by Fannie Mae and Freddie Mac, which were placed into conservatorship in September 2008. Impairment losses also included $58 million for preferred stocks issued by banks, insurers and REITs and $8 million for a private equity investment.

4. FAIR VALUE MEASUREMENTS

     On January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”), which was issued by the Financial Accounting Standards Board in September 2006. FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The adoption of FAS 157 did not have a material impact on the Company’s financial condition or results of operations.

     FAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available.

     Because many fixed income securities do not trade on a daily basis, the Company utilizes pricing models and processes which may include benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Market inputs used to evaluate securities include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Quoted prices are often unavailable for recently issued securities, securities that are infrequently traded or securities that are only traded in private transactions. For publicly traded securities for which quoted prices are unavailable, the Company determines fair value based on independent broker quotations and other observable market data. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial data, projections and business developments of the issuer and other relevant information.

     The following table presents the assets and liabilities measured at fair value on a recurring basis as of September 30, 2008 by level (dollars in thousands):

		Total				Level 1				Level 2				Level 3
Assets:
Fixed maturity securities available for sale		$	9,288,437			$	—			$	9,083,656			$	204,781
Equity securities available for sale			469,719				76,975				280,210				112,534
Arbitrage trading account			263,387				201,630				61,404				353
Total assets		$	10,021,543			$	278,605			$	9,425,270			$	317,668
Liabilities:
Securities sold but not yet purchased		$	57,020			$	57,020			$	—			$	—

4. FAIR VALUE MEASURES — CONTINUED

     The following table summarizes changes in Level 3 assets (dollars in thousands):

										Equity
										Securities				Arbitrage
						Fixed				Available				Trading
		Total				Maturities				for Sale				Account
Balance as of January 1, 2008		$	90,918			$	23,725			$	62,911			$	4,282
Realized and unrealized gains and losses:
Included in earnings			(4,589	)			(4,589	)			—				—
Included in other comprehensive loss			(3,160	)			(11,458	)			8,298				—
Purchases, sales and maturities, net			105,786				68,743				41,325				(4,282	)
Transfer in of securities for which observable inputs are no longer available			128,713				128,360				—				353
Balance as of September 30, 2008		$	317,668			$	204,781			$	112,534			$	353

5. REINSURANCE CEDED

     The Company reinsures a portion of its exposures principally to reduce its net liability on individual risks and to protect against catastrophic losses. Estimated amounts due from reinsurers are reported net of reserves for uncollectible reinsurance of $3.6 million and $2.9 million as of September 30, 2008 and December 31, 2007, respectively. The following amounts arising under reinsurance ceded contracts have been deducted in arriving at the amounts reflected in the statements of income (dollars in thousands):

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Ceded premiums earned		$	131,491			$	123,597			$	372,243			$	355,654
Ceded losses incurred		$	151,578			$	71,631			$	240,501			$	207,755

6. INCOME TAXES

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

     As of September 30, 2008, the deferred tax asset includes amounts related to unrealized investment losses and impaired securities of $87 million and $82 million, respectively. Realization of the deferred tax asset is dependent upon the Company’s prior period capital gains available for carryback and its ability to generate sufficient taxable capital gains in future carryforward periods. Management anticipates that future taxable capital gains will be sufficient for the realization of this asset.

7. 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, commercial automobile, property lines, product liability and professional liability. The companies within the segment are divided along the different customer bases and product lines that they serve. The specialty units deliver their products through a variety of distribution channels depending on the customer base and particular risks insured. The customers in this segment are highly diverse.

     Our regional segment provides commercial insurance products to customers primarily in 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 segment specializes in developing, insuring, reinsuring and administering self-insurance programs and other alternative risk transfer mechanisms. Its 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 segment specializes 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 the United Kingdom, Continental Europe, Australia and Hong Kong.

     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 on investment income plus the statutory rate on non-investment income.

7. INDUSTRY SEGMENTS (continued)

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

		Revenues
																		Pre-tax				Net
		Earned				Investment												Income				Income
(dollars in thousands)		Premiums				Income				Other				Total				(Loss)				(Loss)
For the three months ended September 30, 2008:
Specialty		$	389,967			$	54,512			$	901			$	445,380			$	87,147			$	63,886
Regional			306,892				23,594				—				330,486				17,894				14,764
Alternative markets			157,149				30,526				24,730				212,405				51,800				37,722
Reinsurance			124,710				33,675				—				158,385				29,540				23,674
International			76,523				9,657				—				86,180				13,440				8,221
Corporate and eliminations and other (1)			—				1,438				(178,644	)			(177,206	)			(256,613	)			(176,147	)
Consolidated		$	1,055,241			$	153,402			$	(153,013	)		$	1,055,630			$	(56,792	)		$	(27,880	)
For the three months ended September 30, 2007
Specialty		$	441,944			$	56,392			$	—			$	498,336			$	124,391			$	86,620
Regional			315,358				23,939				—				339,297				53,507				37,226
Alternative markets			165,686				31,096				23,690				220,472				60,006				42,182
Reinsurance			190,559				36,067				—				226,626				44,894				32,876
International			62,017				9,445				—				71,462				11,306				7,868
Corporate and eliminations and other (1)			—				8,851				42,988				51,839				(36,401	)			(26,309	)
Consolidated		$	1,175,564			$	165,790			$	66,678			$	1,408,032			$	257,703			$	180,463

7. INDUSTRY SEGMENTS (continued)

		Revenues
																		Pre-tax				Net
		Earned				Investment												Income				Income
(dollars in thousands)		Premiums				Income				Other				Total				(Loss)				(Loss)
For the nine months ended September 30, 2008:
Specialty		$	1,228,720			$	160,852			$	2,921			$	1,392,493			$	308,662			$	221,493
Regional			927,585				68,909				—				996,494				80,973				61,570
Alternative markets			468,243				88,730				74,589				631,562				165,480				119,070
Reinsurance			408,911				99,132				—				508,043				96,473				75,565
International			220,802				28,007				—				248,809				31,365				18,934
Corporate and eliminations and other (1)			—				6,208				(153,636	)			(147,428	)			(379,986	)			(255,817	)
Consolidated		$	3,254,261			$	451,838			$	(76,126	)		$	3,629,973			$	302,967			$	240,815
For the nine months ended September 30, 2007:
Specialty		$	1,327,509			$	170,868			$	—			$	1,498,377			$	388,946			$	269,902
Regional			929,537				71,849				—				1,001,386				160,731				111,660
Alternative markets			487,616				93,624				75,026				656,266				191,316				133,718
Reinsurance			572,823				116,625				—				689,448				137,193				100,838
International			184,652				26,045				—				210,697				26,577				18,170
Corporate and eliminations and other (1)			—				21,143				76,319				97,462				(108,694	)			(74,766	)
Consolidated		$	3,502,137			$	500,154			$	151,345			$	4,153,636			$	796,069			$	559,522

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

		September 30,				December 31,
		2008				2007
Specialty		$	5,643,839			$	5,887,363
Regional			2,709,379				2,717,199
Alternative markets			3,490,353				3,261,318
Reinsurance			4,419,004				4,912,732
International			956,534				870,404
Corporate and eliminations			(801,399	)			(816,846	)
Consolidated		$	16,417,710			$	16,832,170

7. INDUSTRY SEGMENTS (continued)

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

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2008				2007				2008				2007
Premises operations		$	139,579			$	180,607			$	458,254			$	550,431
Automobile			67,785				70,608				203,017				208,672
Property			47,295				54,875				156,834				155,263
Products liability			43,172				55,471				142,047				173,603
Professional liability			38,221				38,812				116,418				116,311
Other			53,915				41,571				152,150				123,229
Specialty			389,967				441,944				1,228,720				1,327,509
Commercial multiple peril			111,492				118,576				341,028				353,669
Automobile			91,153				93,323				272,989				271,132
Workers’ compensation			61,795				62,552				188,593				187,724
Other			42,452				40,907				124,975				117,012
Regional			306,892				315,358				927,585				929,537
Excess workers’ compensation			73,327				79,838				214,594				233,390
Primary workers’ compensation			60,473				62,647				183,055				188,311
Other			23,349				23,201				70,594				65,915
Alternative markets			157,149				165,686				468,243				487,616
Casualty			109,294				155,599				350,145				479,946
Property			15,416				34,960				58,766				92,877
Reinsurance			124,710				190,559				408,911				572,823
International			76,523				62,017				220,802				184,652
Total		$	1,055,241			$	1,175,564			$	3,254,261			$	3,502,137

8. COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES

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

SAFE HARBOR STATEMENT

     This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. This document may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of the forward-looking statements can be identified by the use of forward-looking words such as ‘believes,” “expects,” “potential,” “continued,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” or the negative version of those words or other comparable words. Any forward-looking statements contained herein, including statements related to our outlook for the industry and for our performance for the year 2008 and beyond, are based upon the Company’s historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. They are subject to various risks and uncertainties, including but not limited to, the cyclical nature of the property casualty industry, the long-tail and potentially volatile nature of the insurance and reinsurance business, product demand and pricing, claims development and the process of estimating reserves, the uncertain nature of damage theories and loss amounts, natural and man-made catastrophic losses, including as a result of terrorist activities, the impact of significant and increasing competition, the success of our new ventures or acquisitions and the availability of other opportunities, the availability of reinsurance, exposure as to coverage for terrorist acts, our retention under the Terrorism Risk Insurance Program Reauthorization Act of 2007, the ability of our reinsurers to pay reinsurance recoverables owed to us, the potential impact of the current conditions in the financial markets on our results and financial condition, particularly if such conditions continue, the potential impact of current legislative, regulatory, accounting and other initiatives taken or which may be taken in response to the current conditions in the financial markets, investment risks, including those of our portfolio of fixed income securities and investments in equity securities, including investments in financial institutions, merger arbitrage and private equity investments, exchange rate and political risks relating to our international operations, other legislative and regulatory developments, including those related to alleged anti-competitive or other improper business practices in the insurance or reinsurance industry, changes in the ratings assigned to us or our insurance company subsidiaries by ratings agencies, the availability of dividends from our insurance company subsidiaries, our ability to attract and retain qualified employees, and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”). These risks and uncertainties could cause actual results of the industry or our actual results for the year 2008 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company. Any projections of growth in the Company’s net premiums written and management fees would not necessarily result in commensurate levels of underwriting and operating profits. Our future financial performance is dependent upon factors discussed elsewhere in this Form 10-Q and our other SEC filings. Forward-looking statements speak only as of the date on which they are made.

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

Overview

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

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

     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. This trend of increased competition and decreased prices has continued in 2008 and, although there are signs of it beginning to ease, we expect it to continue in 2009.

     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 those of financial institutions, merger arbitrage, private equity investments 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.

     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 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 often 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 $8.2 billion as of September 30, 2008 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 23%, of the Company’s net loss reserves as of September 30, 2008 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 September 30, 2008 and December 31, 2007 (dollars in thousands):

		September 30,				December 31,
		2008				2007
Specialty		$	2,960,105			$	2,853,479
Regional			1,323,744				1,218,703
Alternative Markets			1,668,405				1,558,643
Reinsurance			1,888,430				1,884,051
International			335,547				308,021
Net reserves for losses and loss expenses			8,176,231				7,822,897
Ceded reserves for losses and loss expenses			900,645				855,137
Gross reserves for losses and loss expenses		$	9,076,876			$	8,678,034

     Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of September 30, 2008 and December 31, 2007 (dollars in thousands):

		Reported Case				Incurred But
		Reserves				Not Reported				Total
September 30, 2008
General liability		$	802,899			$	2,190,039			$	2,992,938
Workers’ compensation			975,716				996,235				1,971,951
Commercial automobile			390,080				224,714				614,794
International			158,373				177,174				335,547
Other			154,527				218,044				372,571
Total primary			2,481,595				3,806,206				6,287,801
Reinsurance			808,964				1,079,466				1,888,430
Total		$	3,290,559			$	4,885,672			$	8,176,231
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