SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)

For the Quarterly Period Ended March 31, 2005

or

(203) 629-3000

None

Indicate by check mark whether the registrant (1) 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 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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

Yes þ No o

Number of shares of common stock, $.20 par value, outstanding as of April 29, 2005: 126,781,839.

Table of Contents

See accompanying notes to interim consolidated financial statements.

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See accompanying notes to interim consolidated financial statements.

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See accompanying notes to consolidated financial statements.

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

1. GENERAL

     The accompanying consolidated financial statements should be read in conjunction with the following notes and with the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Reclassifications have been made in the 2004 financial statements as originally reported to conform them to the presentation of the 2005 financial statements.

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

     The Company presents both basic and diluted earnings per share (EPS) amounts. Basic EPS is calculated by dividing net income by weighted average number of common shares outstanding during the year. Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the year and is calculated using the treasury stock method for stock incentive plans. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation. Per share amounts have been adjusted to reflect the 3-for-2 common stock split effected April 8, 2005.

     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

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

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Notes to Interim Consolidated Financial Statements (unaudited)
(continued)

3. STOCK-BASED COMPENSATION

     The Company adopted FASB Statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123”, effective as of January 1, 2003. Under the prospective method of adoption selected by the Company, the fair value recognition provisions of FASB 148 are applied to all employee awards granted, modified or settled after January 1, 2003. The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period (dollars in thousands, except per share data).

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

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Notes to Interim Consolidated Financial Statements (unaudited)
(continued)

6. INDUSTRY SEGMENTS

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

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

     Our regional segments provides commercial insurance products to customers primarily in 27 states. Key clients of this segment are small-to-mid-sized businesses and governmental entities. The regional subsidiaries are organized geographically, which provides them with the flexibility to adapt to local market conditions, while enjoying the superior administrative capabilities and financial strength of the Company. The regional operations are conducted through four geographic regions based on markets served: Midwest, New England, Southern (excluding Florida) and Mid Atlantic.

     Our alternative markets operations specialize in developing, insuring, reinsuring and administering self-insurance programs and other alternative risk transfer mechanisms. Our clients include employers, employer groups, insurers, and alternative market funds seeking less costly, more efficient ways to manage exposure to risks. In addition to providing primary and excess workers’ compensation insurance, the alternative markets segment also provides a wide variety of fee-based third-party 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 quota share reinsurance with certain Lloyd’s syndicates.

     Our international segment includes our operations in Argentina and the Philippines. In Argentina, we offer commercial and personal property casualty insurance. In the Philippines, we provide savings and life products to customers, including endowment policies to pre-fund education costs and retirement income. Our operations in the U.K. are reported in our specialty segment.

     The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Income tax expense and benefits are calculated based upon the Company’s overall effective tax rate.

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Notes to Interim Consolidated Financial Statements (unaudited)
(continued)

6. INDUSTRY SEGMENTS (continued)

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

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

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7. COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES

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

     The New York State Attorney General and other regulators have commenced investigations, legal actions and general inquiries concerning producer compensation and alleged anti-competitive activities in the insurance industry. Certain allegations include improper sales practices by insurance producers as well as other non-competitive behaviors. The Company and certain of its operating units, like many others in the insurance industry, have received information requests from various state insurance regulators and other state authorities. These requests, for the most part, relate to inquiries into inappropriate solicitation activities, producer compensation practices and the underwriting of legal malpractice insurance. The Company has responded to each of these inquiries and is cooperating with the applicable regulatory authorities. In this regard, the Company commenced an internal

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Notes to Interim Consolidated Financial Statements (unaudited)
(continued)

review with the assistance of outside counsel. The internal review, which is complete, focused on the Company’s relationships with its distribution channels. As a result of the investigation, a single insurance operating unit reported certain limited instances of conduct that could be characterized as involving inappropriate solicitation practices. To address these limited instances, the Company has implemented certain additional internal procedures and has taken other corrective action.

SAFE HARBOR STATEMENT

     This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein, including statements related to our outlook for the industry and for our performance for the year 2005 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 reinsurance business, product demand and pricing, claims development and the process of estimating reserves, the uncertain nature of damage theories and loss amounts, natural and man-made catastrophic losses, including as a result of terrorist activities, the impact of competition, the impact of competition, the availability of reinsurance, exposure as to coverage for terrorist acts, our retention under The Terrorism Risk Insurance Act of 2002 (“TRIA”) and potential expiration of TRIA, the ability of our reinsurers to pay reinsurance recoverables owed to us, investment risks, including those of our portfolio of fixed income securities and investments in equity securities, including merger arbitrage investments, exchange rate and political risks relating to our international operations, legislative and regulatory developments, including those related to alleged anti-competitive or other improper sales practices in the insurance industry, changes in the ratings assigned to us by ratings agencies, the availability of dividends from our insurance company subsidiaries, our ability to successfully acquire and integrate companies and invest in new insurance ventures, our ability to attract and retain qualified employees, and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission. These risks could cause actual results of the industry or our actual results for the year 2005 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. Forward-looking statements speak only as of the date on which they are made.

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Item 2.

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

Overview

     W. R. Berkley Corporation is an insurance holding company that provides, through its subsidiaries, commercial property casualty insurance products and services. The Company’s principal focus is casualty business. The Company’s primary sources of revenues and earnings are insurance and investments.

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

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

Critical Accounting Estimates

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

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

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

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

     Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what management expects the ultimate settlement and claim administration will cost. While the methods for establishing the reserves are well tested over time, some of the major assumptions about anticipated loss emergence patterns are subject to unanticipated fluctuation. These estimates, which generally involve actuarial projections, are based on management’s assessment of facts and circumstances then known, as well as estimates of future trends in claims severity and frequency, judicial theories of liability and other factors, including the actions of third parties which are beyond the Company’s control. These variables are affected by internal and external events, such as inflation and economic volatility, judicial and litigation trends, reinsurance coverage and legislative changes, which make it more difficult to accurately predict claim costs. The inherent uncertainties of estimating reserves are greater for certain types of liabilities where long periods of time elapse before a definitive determination of liability is made. Because setting reserves is inherently uncertain, the Company cannot assure that its current reserves will prove adequate in light of subsequent events.

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

     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 policy terms and conditions that can have a significant impact on reserve levels are the use of aggregate policy limits, the expansion of coverage exclusions, whether or not defense costs are within policy limits, and changes in deductibles and attachment points.

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

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

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     Our net reserves for losses and loss expenses of $5.0 billion as of March 31, 2005 relate to multiple accident years. Therefore, a change in frequency or severity for more than one accident year would be higher or lower than the amounts reflected above.

     Approximately $1.4 billion, or 28%, of the Company’s net loss reserves relate to its assumed reinsurance business. There is a higher degree of uncertainty and greater variability regarding estimates of assumed loss reserves because those estimates are based, in part, upon information received from ceding companies. If information received from ceding companies is not timely or correct, the Company’s estimate of ultimate losses may not be accurate. Furthermore, due to delayed reporting of claim information by ceding companies, the claim settlement tail for assumed reinsurance is extended. Management considers the impact of delayed reporting in its selection of assumed loss development factors.

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

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

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     For the three months ended March 31, 2005, the Company reported losses and loss expenses of $641 million, of which $27 million represented an increase in estimates for claims occurring in prior years. The increases in estimates for claims occurring in prior years were $14 million for primary business ($5 million for specialty, $5 million for alternative markets, $2 million for regional and $2 million for international) and $13 million for assumed reinsurance. For both primary and reinsurance business, increases in estimates for accident years 2001 and prior were partially offset by decreases in estimates for accident years 2002 through 2004.

     Case reserves, net of reinsurance, for primary business increased 4% to $1.5 billion at March 31, 2005 from $1.4 billion, at December 31, 2004 as a result of a 1% decrease in the number of outstanding claims and a 6% increase in the average case reserve per claim. Reserves for incurred but not reported losses, net of reinsurance, for primary business increased 8% to $2.1 billion at March 31, 2005 from $1.9 billion at December 31, 2004. The increase in prior year reserves for direct business of $14 million was primarily related to the general liability, automobile and workers’ compensation lines of business, which increased $6 million, $5 million and $3 million, respectively. The increases in prior year reserves reflects upward adjustments in loss ratios for accident years 2001 and prior to recognize that claim costs, including legal expenses and medical costs, for certain classes of business are emerging over a longer period of time and at a higher level than expected.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

     Case reserves for reinsurance business increased 3% to $592 million at March 31, 2005 from $575 million at December 31, 2004. Reserves for incurred but not reported losses for reinsurance business increased 3% to $798 million at March 31, 2005 from $776 million at December 31, 2004. The increase in prior year reserves for reinsurance business was primarily a result of higher than expected claims reported by ceding companies. The Company sets its initial loss estimates based principally upon information obtained during the underwriting process and adjusts these estimates as additional information becomes available. As certain reinsurance contracts have matured, the Company has adjusted its estimates of ultimate losses to reflect a higher level of known losses as well as a pattern of delayed loss reporting by some ceding companies. Most of the increase in prior year reserves for reinsurance relates to business written from 1998 through 2001.

      Assumed 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 $86 million and $103 million at March 31, 2005 and December 31, 2004 respectively. The assumed premium estimates are based upon terms set forth in the reinsurance agreement, information received from ceding companies during the underwriting and negotiation of the agreement, reports received from ceding companies and discussions and correspondence with reinsurance intermediaries. The Company also considers its own view of market conditions, economic trends and experience with similar lines of business. These premium estimates represent management’s best estimate of the ultimate premiums to be received under its assumed reinsurance agreements.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

Business Segment Results

     Following is a summary of net premiums written, premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the three months ended March 31, 2005 and 2004. 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.

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         The increase in net income in 2005 compared with 2004 reflects higher profits from underwriting activity and investment income. The improvement in underwriting results is attributable to a 9% increase in earned premiums and a 1.4 percentage point decrease in the loss ratio (losses and loss expenses incurred expressed as percentage of earned premiums), partially offset by a 0.4 percentage point increase in the expense ratio (underwriting expenses expressed as a percentage of premiums earned). The increase in investment income is the result of a 29% increase in average invested assets arising primarily from cash flow provided by operating and financing activity.

      Gross Premiums Written. Gross premiums written were $1.3 billion in 2005, up 10% from 2004. The increase in gross premiums written in 2005 was primarily a result of new business. Although prices generally increased during 2004, the Company is experiencing an increased level of price competition. Price levels in the first quarter of 2005, as compared with the prior year quarter, were generally unchanged. A summary of gross premiums written in 2005 compared with 2004 by business segment follows:

	•	Specialty gross premiums increased by 20% to $441 million in 2005 from $367 million in 2004 due to new business. The number of policies issued in 2005 increased 10%, and the average premium per policy increased 9%. Average prices for renewal policies, adjusted for changes in exposure, decreased 1%. Gross premiums written increased by 32% for premises operations, 21% for automobile and 46% for products liability. Gross premiums written decreased by 1% for professional liability lines and 2% for property lines.
	•	Regional gross premiums increased by 9% to $367 million in 2005 from $337 million in 2004 due to new business. The number of policies issued in 2005 decreased 6%, and the average premium per policy increased 14%. Average prices for renewal policies, adjusted for changes in exposure, were unchanged. Gross premiums written increased by 7% for commercial multiple peril, 8% for automobile and 4% for workers’ compensation. Gross premiums from assigned risk plans increased by 35%.
	•	Alternative markets gross premiums increased by 11% to $274 million in 2005 from $246 million in 2004 due to higher prices and new business. The number of policies issued in 2005 decreased 5%, and the average premium per policy increased 12%. Average prices for renewal policies, adjusted for changes in exposure, were unchanged. Gross premiums written increased by 8% for excess workers’ compensation, 12% for primary workers’ compensation and 53% for assigned risk plans. Assigned risk premiums are written on behalf of assigned

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

		risk plans managed by the Company and are 100% reinsured by the respective state-sponsored assigned risk pools.
	•	Reinsurance gross premiums decreased by 3% to $239 million in 2005 from $247 million in 2004. The decrease in business written includes a decline of $48 million as a result of the discontinuance of a facultative relationship with a particular ceding company. Property gross premiums written increased 30% to $48 million and casualty gross premiums written decreased 9% to $191 million.
	•	International gross premiums increased by 7% to $22 million in 2005 from $21 million in 2004.

                Net Premiums Earned. Net premiums earned increased 9% to $1,040 million from $952 million in 2004. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in 2005 are related to premiums written during both 2004 and 2005.

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

               Net investment income increased 31% to $90 million in 2005 from $68 million in 2004. Average invested assets (including cash and cash equivalents) increased 29% to $8.4 billion in 2005 compared with $6.5 billion in 2004. The increase was a result of cash flow from operations and the net proceeds from senior notes issued during 2004. The average annualized gross yield on investments was 4.3% in 2005 compared with 4.2% in 2004. The yield on fixed maturity securities 2005 reflects general interest rate levels and an increase in the portion of the portfolio invested in tax-exempt securities.

                Realized Investment Gains (Losses). Realized investment gains (losses) result from sales of securities and from provisions for other than temporary impairment in securities. Realized investment losses were $361,000 in 2005, compared to realized investment gains of $30 million in 2004. Realized investment gains in 2004 resulted primarily from the sale of fixed income securities in order to decrease the duration of the portfolio and to increase the portion of the portfolio invested in municipal securities. Realized investment losses in 2005 include a charge for other than temporary impairment of a certain equity investment of $1.6 million.

                Service Fees. The alternative markets segment offers fee-based services to help clients develop and administer self-insurance programs, primarily for workers’ compensation coverages. Service fees increased 7% in 2005 compared with 2004 primarily as a result of an increase in service fees for managing assigned risk plans in fourteen states.

            Losses and Loss Expenses. Losses and loss expenses increased 7% to $641 million in 2005 from $601 million in 2004 primarily as a result of increased premium volume. The consolidated loss ratio decreased to 61.7% in 2005 from 63.1% in 2004 primarily as a result of the impact of increased pricing as well a decrease in additions to prior

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

year loss reserves ($27 million in 2005 compared with $45 million in 2004). A summary of loss ratios in 2005 compared with 2004 by business segment follows:

	•	Specialty’s loss ratio was 61.9% in 2005 compared with 62.9% in 2004 principally due to a decrease of $10 million in additions to prior year reserves.
	•	The regional loss ratio decreased to 53.1% in 2005 from 55.0% in 2004 primarily as a result of increased pricing levels, lower reinsurance costs and lower weather-related losses ($2 million in 2005 compared with $4 million in 2004).
	•	Alternative market’s loss ratio decreased to 67.9% from 71.2%. The Company discounts its liabilities for excess workers’ compensation business because of the long period of time over which losses are paid. The decrease in the loss ratio in 2005 reflects a higher discount rate for current year business.
	•	The reinsurance loss ratio was 68.5% in 2005 compared with 69.0% in 2004. The decrease reflects increased pricing levels for both treaty and facultative risks and a $9 million decrease in additions to prior year reserves.
	•	The international loss ratio was 59.4% in 2005 compared with 51.4% in 2004.

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

               Underwriting expenses increased 11% in 2005 compared with 2004 primarily as a result of higher premium volume. Underwriting expenses are primarily comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. The consolidated expense ratio was 27.5% in 2005 compared with 27.1% in 2004.

               Service company expenses, which represent the costs associated with the alternative market’s fee-based business, increased 8% to $24 million.

               Other costs and expenses, which represent primarily general and administrative expenses for the parent company, increased 51% to $17 million primarily as a result of higher compensation costs.

                Interest Expense. Interest expense increased 15% to $18 million as a result of the issuance of $150 million of 6.15% senior notes in August 2004.

                Income taxes. The effective income tax rate was 30% in 2005 and 32% in 2004. 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, is believed adequate to meet foreseeable payment obligations. The Company also attempts to maintain an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities, i.e., policy claims and debt obligations.

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      Fixed Maturities. The Company’s investment policy with respect to fixed maturity securities is generally to purchase instruments with the expectation of holding them to their maturity. However, active management of the available for sale portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as a result of changes in financial market conditions and tax considerations. At March 31, 2005 (as compared to December 31, 2004), the fixed maturities portfolio mix was as follows: U.S. Government securities were 16% (15% in 2004); state and municipal securities were 53% (54% in 2004); corporate securities were 8% (10% in 2004); mortgage-backed securities were 19% (18% in 2004); and foreign bonds were 4% in 2005 (3% in 2004).

     The Company’s philosophy related to holding or selling fixed maturity securities is based on its objective of maximizing total return. The key factors that management considers in its decisions as to whether to hold or sell fixed maturity securities are its expectations regarding interest rates, credit spreads and currency values. In a period in which management expects interest rates to rise, the Company may sell longer duration securities in order to mitigate the impact of an interest rate rise on the market value of the portfolio. Similarly, in a period in which management expects credit spreads to widen, the Company may sell lower quality securities, and in a period in which management expects certain foreign currencies to decline in value, the Company may sell securities denominated in those foreign currencies. The sale of fixed maturity securities in order to achieve the objective of maximizing total return may result in realized gains; however, there is no reason to expect these gains to continue in future periods. During 2005 and 2004, management’s decisions to sell fixed maturity securities were based primarily on its belief that interest rates were likely to rise and to a lesser extent on its expectations regarding credit spreads and currency values.

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

      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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

arbitrage is the business of investing in convertible securities with the goal of capitalizing on price differentials between these securities and their underlying equities.

      Investments in Affiliates. At March 31, 2005 (as compared to December 31, 2004), investments in affiliates were as follows: equity in Kiln plc was $54 million ($51 million in 2004); real estate partnerships were $109 million ($112 million in 2004); structured finance partnerships were $66 million ($61 million in 2004); and other investments were $20 million ($17 million in 2004).

      Securities in an Unrealized Loss Position. The following table summarizes, for all securities in an unrealized loss position at March 31, 2005 and December 31, 2004, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position (dollars in thousands):

23

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)

     At March 31, 2005, gross unrealized gains were $158 million, or 2% of total investments, and gross unrealized losses were $52 million, or 0.6% of total investments. There were 150 securities, with an aggregate fair value of $1.1 billion and an aggregate unrealized loss of $17.1 million, that have been continuously in an unrealized loss position for more than six months. The decline in market value for these securities is primarily due to an increase in market interest rates. Management regularly reviews its investment portfolio to determine whether a decline in value as a result of deterioration in the financial position or future prospects of the issuer is considered to be other than temporary. A decline is value is considered to be other than temporary where there has been a sustained reduction in market value and there are no mitigating circumstances. If a decline in value is considered other than temporary, the Company reduces the carrying value of the security and reports a realized loss on its statement of income. Charges for permanent impairment of investments were $1.6 million in 2005.

Liquidity and Capital Resources

      Cash Flow. Cash flow provided from operating activities was $424 million in 2005 and $278 million in 2004. The increase in operating cash flow in 2005 was primarily due to a higher level of cash flow from underwriting activities (premium collections less paid losses and underwriting expenses) and to a decrease in cash transfers to the arbitrage account ($25 million in 2005 compared with $100 million in 2004).

      Financing Activity. At March 31, 2005, the Company’s had senior notes, junior subordinated debentures and other debt outstanding with a carrying value of $1,017 million and a face amount of $1,027 million. The maturities of the outstanding debt are $40 million in 2005, $100 million in 2006, $89 million in 2008, $150 million in 2010, $200 million in 2013, $150 million in 2019, $76 million in 2022, $12 million in 2023 and $210 million in 2045.

     At March 31, 2005, stockholders’ equity was $2,167 million and total capitalization (stockholders’ equity, senior notes and other debt and junior subordinated debentures) was $3,184 million. The percentage of the Company’s capital attributable to senior notes and other debt and junior subordinated debentures was 32% at March 31, 2005, compared with 33% at December 31, 2004.

24

PART II – OTHER INFORMATION

Item 6. Exhibits

27

SIGNATURES

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