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W. R. Berkley Corporation produced outstanding results in 2006 — from all perspectives.




        RETURN ON STOCKHOLDERS...
AT A GLANCE

NET PREMIUMS WRITTEN                            INVESTMENTS                                         RESERVE F...
FIVE BUSINESS
                                                                                                            ...
RELATIVE STOCK PRICE PERFORMANCE
W. R. Berkley vs. S&P 500                                                                ...
These results would be exciting and worthy of recognition
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                                               27% AFTER-TAX
                                               RETURN O...
LONG-TERM PERFORMANCE LONG-TERM PERSPECTIVE LONG-TERM PERFORMANCE LONG-TERM PERSPECTIVE




we expect. We need to constant...
5




The economics that drive this model result     to tailor products to specific local needs.          pricing and risk...
LONG-TERM PERFORMANCE LONG-TERM PERSPECTIVE LONG-TERM PERFORMANCE LONG-TERM PERSPECTIVE




Long-term perspective        m...
7




the holding company are advisors, leaders,     perseverance when things did not go well.          Our Company is sti...
IRA S. LEDERMAN                 PAUL J. HANCOCK




We have positioned ourselves to maintain our opportunistic
stance whil...
9




At December 31, 2006 the average                                                                                    ...
spreads are the narrowest in decades.               cash and cash equivalents allocation with the            While 2006 wa...
11




structure we have significantly lowered the         Our portfolio is not just U.S. fixed income secu-             s...
Each of our five business segments –              Our growth is based on meeting the needs
Specialty, Regional, Alternativ...
13




2006 REVENUES VS. PROFITS

2006 Revenues                     2006 Profits                 2006 Revenues
(By percent...
These are the complex and sophisticated risks that require
a specialized expertise and depth of experience that are
often ...
15




Our newest Specialty operating unit,
                                                                              ...
As in all cases, we took
advantage of opportunities
when we found exceedingly
JAMES S. CAREY              STEVEN S. ZEITMA...
17




OPERATING UNITS                                Each of our Specialty com-            Insurance Company, Clermont Sp...
JASON R. NIEMELA                       JOHN S. DIEM                           WILLIAM F. MURRAY                        ALF...
19




$52 million in gross written premium. Its         We believe this is directly           this new operation in 2006,...
underwriters, claims and loss prevention      with top line growth. Carolina Casualty               the city of Chicago wi...
Long-term performance
means ensuring that our
customer knows that we
will meet our obligations
in a predictable, and
ROBER...
Gross Written Premium By Line
      (By percentage)                                                                       ...
BILL THORNTON                KEVIN W. NATTRASS            BRADLEY S. KUSTER                          CRAIG W. SPARKS




T...
OPERATING UNITS                                laboration with the client, not only                in integrated technolog...
25




Union Standar dInsurance Group, through             Berkley Surety Group,Inc., formerly known            Berkley Re...
We have built a solid
market position by developing
long-term, collaborative
relationships with clients that
ROBERT D. STO...
27




New operating units made modest                                                                                    ...
DONATO J. GASPARRO                     J. MICHAEL FOLEY                        JOHN K. GOLDWATER                         K...
W. R. berkley annual reports 2006
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W. R. berkley annual reports 2006

  1. 1. W. R. Berkley Corporation produced outstanding results in 2006 — from all perspectives. RETURN ON STOCKHOLDERS’ EQUITY NET INCOME PER SHARE NET PREMIUMS WRITTEN CASH FLOW 27.2% 3.46 4.8 Return on stockholders’ equity $ Net income reached a new high of $ billion Net premiums written increased $ 1.6 billion Cash flows before transfers to trading exceeded 25% for the fourth year $3.46 per share, advancing 27% 5% to $4.8 billion. account totaled $5.3 billion over the in a row. over 2005. past 3 years. COMPOUND ANNUAL GROWTH RATE Contents 1 YEAR 5 YEARS 10 YEARS 20 YEARS IFC Five Business Segments 31 Reinsurance Segment Book Value Per Share 28.9% 25.6% 13.3% 13.1% 02 Chairman’s Letter 36 International Segment Shareholder Return, 08 Investments 41 Financial Data Including Dividends 9.2% 27.6% 19.2% 15.8% 12 Segment Overview 104 Operating Units 14 Specialty Segment 114 Board of Directors and Officers 21 Regional Segment 116 Corporate Information 26 Alternative Markets Segment Cover art: 'Sunrise, Hoboken Meadows' by Martin Johnson Heade
  2. 2. AT A GLANCE NET PREMIUMS WRITTEN INVESTMENTS RESERVE FOR LOSSES AND LOSS EXPENSE STOCKHOLDERS’ EQUITY (Dollars in billions) (Market value - Dollars in billions) (Dollars in billions) (Dollars in billions) 4.8 11.1 7.8 3.3 4.6 4.3 9.8 6.7 3.7 2.6 7.3 5.4 2.1 2.7 4.2 1.7 5.1 4.5 3.2 1.3 02 03 04 05 06 02 03 04 05 06 02 03 04 05 06 02 03 04 05 06 W. R. Berkley Corporation, founded in 1967, is one of the nation’s premier commercial lines How we are different: Accountability The business is operated with an ownership perspective property casualty insurance providers. Each of the operating units in the Berkley group and a clear sense of fiduciary responsibility to shareholders. People-oriented strategy participates in a niche market requiring specialized knowledge about a territory or product. New businesses are started when opportunities are identified and, most importantly, when Our competitive advantage lies in our long-term strategy of decentralized operations, the right talent is found to lead a business. Of the Company’s 31 units, 25 were developed allowing each of our units to identify and respond quickly and effectively to changing internally and six were acquired. Responsible financial practices Risk exposures are market conditions and local customer needs. This decentralized structure provides financial managed proactively. A strong balance sheet, including a high-quality investment portfolio, accountability and incentives to local management and enables us to attract and retain the ensures ample resources to grow the business profitably whenever there are opportunities highest caliber professionals. We have the expertise and resources to utilize our strengths to do so. Risk-adjusted returns Management company-wide is focused on obtaining the in the present environment, and the flexibility to anticipate, innovate and respond to best potential returns with a real understanding of the amount of risk being assumed. Superior whatever opportunities and challenges the future may hold. risk-adjusted returns are generated over the insurance cycle. Transparency Consistent and objective standards are used to measure performance – and, the same standards are used regardless of the environment.
  3. 3. FIVE BUSINESS SEGMENTS SPECIALTY REINSURANCE The Specialty units underwrite complex and sophisticated risks, including general, The Reinsurance units write reinsurance on both a facultative and treaty basis. In addition, professional and product liability coverages as well as commercial transportation the Company participates in business written through Lloyd’s and in several specialty niches. business, on both an excess and surplus lines and admitted basis. 2006 results: Total revenues were $993 million and pre-tax income was $135 million, 2006 results: Total revenues increased 8% to $2.0 billion. Pre-tax income rose 38% to up 111%. $479 million. INTERNATIONAL REGIONAL The Company’s International business operates in selected regions throughout the world, The Regional units, which are leaders in their local markets, write commercial lines including Europe, South America and Asia. coverages for small and mid-sized business firms and governmental entities. This 2006 results: Total revenues increased 19% to $249 million. Pre-tax income rose 62% segment also writes surety coverages. to $34 million. 2006 results: Total revenues advanced 5% to $1.3 billion. Pre-tax income was $201 million. ALTERNATIVE MARKETS The Alternative Markets units offer insurance products and develop and administer self-insurance programs and other alternative risk transfer mechanisms. Workers’ compensation is the predominant line of business in this segment. 2006 results: Total revenues advanced 3% to $879 million. Pre-tax income was $291 million, up 22%.
  4. 4. RELATIVE STOCK PRICE PERFORMANCE W. R. Berkley vs. S&P 500 FINANCIAL W. R. Berkley Corporation Growth: +3,913% HIGHLIGHTS S&P 500 748% 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Dollars in thousands, except per share data YEARS ENDED DECEMBER 31 2006 2005 2004 2003 2002 Total revenues $ 5,394,831 $ 4,996,839 $ 4,512,235 $3,630,108 $2,566,084 Net premiums written 4,818,993 4,604,574 4,266,361 3,670,515 2,710,490 Net investment income 586,175 403,962 291,295 210,056 187,875 Service fees 104,812 110,697 109,344 101,715 86,095 Net income 699,518 544,892 438,105 337,220 175,045 Net income per common share: Basic 3.65 2.86 2.32 1.81 1.02 Diluted 3.46 2.72 2.21 1.72 .98 Return on common stockholders’ equity 27.2% 25.8% 26.0% 25.3% 18.4% AT YEAR END Total assets $15,656,489 $13,896,287 $11,451,033 $9,334,685 $7,031,323 Total investments 11,114,364 9,810,225 7,303,889 5,068,670 4,521,906 Reserve for losses and loss expense 7,784,269 6,711,760 5,449,611 4,192,091 3,167,925 Stockholders’ equity 3,335,159 2,567,077 2,109,702 1,682,562 1,335,199 Common shares outstanding (in thousands) 192,772 191,264 189,613 187,961 186,380 Common stockholders’ equity per share 17.30 13.42 11.13 8.95 7.17
  5. 5. These results would be exciting and worthy of recognition if they were a singular event, but given this is our fifth consecutive year of achieving extraordinary results, we believe it is important to put the numbers in context. WILLIAM R. BERKLEY TO OUR SHAREHOLDERS This was an outstanding year by almost development and implementation of our by accident. Nor was it good luck that Chairman of the Board and any measure. We had record earnings and strategy that has created the Company’s allowed us to avoid the extreme volatility Chief Executive Officer earnings per share; our after-tax return on competitive advantage. It is our strategy that many of our competitors experienced. equity was in excess of 27%; and our that will enable us to continue to deliver Our results reflect strategic decisions made balance sheet has never been stronger. We superior risk-adjusted returns in the during the past decade to optimize our improved our market position and continue years to come. Now, as in the past, we are risk-adjusted returns. We made many hard to attract outstanding people to join our committed to achieving after-tax returns decisions to build a better business model. enterprise. These results would be exciting in excess of 15% for our shareholders. We and worthy of recognition if they were a have done this on a compound basis for the The challenge we face each day is singular event, but given this is our fifth past 33 years. to ensure that we continue to make consecutive year of achieving extraordi- good decisions that are reflective of the nary results, we believe it is important The outstanding results we have achieved ever-changing environment. We must extrap- to put the numbers in context. It is the over the past several years did not happen olate risk and return characteristics within 2
  6. 6. 3 27% AFTER-TAX RETURN ON EQUITY the constantly changing economic and social deliver outstanding long-term performance. It is our strategy that will financial transaction achieves finality. The climate as we build our future strategy. This year we will focus our presentation on true costs are not known until long after the long-term perspective which we use to enable us to continue to the prices are established, therefore the Our financial performance reflects the create our strategic direction. deliver superior risk-adjusted inherent challenge of the business begins commitment of our people and their efforts with a less certain foundation. every day. They create the value that is the The mechanics of managing a property returns in the years to come. cornerstone of our success. For the past casualty business are simple in concept, Now, as in the past, we The critical nature of these estimates has three decades, we have said that outstanding complex in implementation, and require a enormous impacts on both the income implementation is the key to great constant blend of discipline and flexibility. are committed to achieving statement and the balance sheet of our performance for a property casualty Unlike most businesses, an insurance after-tax returns in excess Company. We spend a lot of time and effort company. This is just as true today as when company can only estimate the correct making sure we get these numbers right. we started our Company. It was the theme price for its product when it sells the policy. of 15% for our shareholders. Our goal is to reserve the proper amount to of last year’s annual report. The best This estimate is even more tenuous We have done this on a pay claims, not too much or too little. implementation is most effective when because the true extent of the loss can only Getting reserves right also gives us the built around an effective strategy. We work be estimated for some extended period of compound basis for the data we need to price our business appro- on both strategy and implementation to time, until the claim is settled and the past 33 years. priately in order to earn the profit margin LONG-TERM PERFORMANCE LONG-TERM PERSPECTIVE LONG-TERM PERFORMANCE LONG-TERM PERSPECTIVE
  7. 7. LONG-TERM PERFORMANCE LONG-TERM PERSPECTIVE LONG-TERM PERFORMANCE LONG-TERM PERSPECTIVE we expect. We need to constantly refine The outstanding results we that purchase insurance as a risk arbitrage, Our business model went a step further. our estimates to achieve greater precision buying only when the premiums are less than When we examined both property and as quickly as possible. Our people in the have achieved over the past the value of the protection being provided. casualty businesses over the long run, the field work diligently to get these numbers several years did not happen cumulative returns were somewhat better right, because they understand that they We also concluded that social and regula- in the casualty business than in the prop- are important in achieving our financial by accident. Nor was it tory pressure would exert substantial erty business. The difference in aggregate success. Well-managed insurance compa- good luck that allowed us to impacts on personal lines insurance. We returns was small. The biggest difference nies must be structured to absorb the felt that rate adequacy and underwriting between the property and casualty unanticipated volatility that may come avoid the extreme volatility flexibility would prove to be substantial business was that property business had about from so many estimates being used that many of our competitors political temptations and no matter how much more volatility and thus much less in their financial model. important the laws of economics might be, predictability year to year. It also relied experienced. Our results at least in the short run, politics would heavily on reinsurance. In an industry The process of building our strategy begins reflect strategic decisions likely be a major driver in personal lines. where capital is essential, volatility by its with an examination of the economic, very nature requires a higher return. In the social and regulatory environment, as well made during the past Thus, our fundamental strategy became case of the property insurance business, as directional trends. We started with the decade to optimize our serving the mid-sized risks in the commer- this is often not available. We therefore proposition that we wanted to sell insur- cial insurance market. While some of the created a business model in the United ance to those who need to buy it. When we risk-adjusted return. underlying assumptions do not apply States to focus on commercial casualty defined those who need to buy insurance, outside the United States, domestically, insurance business, doing some property we particularly meant to eliminate those commercial lines are driven primarily by business, but with the focus of over 80% of large, financially well-established enterprises economic reality. our business being casualty oriented. 4
  8. 8. 5 The economics that drive this model result to tailor products to specific local needs. pricing and risk selection that give us an The mechanics of managing in more investment income and a more We do this by selling insurance through advantage. We spend substantial time and predictable, less volatile return. our subsidiary companies that have effort focusing on claims handling. We try a property casualty business special expertise in products or focus on to treat claimants fairly, with a desire to are simple in concept, The historic risk in the casualty business geographic territories, and thus, have a com- pay neither too much nor too has been one we referred to earlier, that of petitive advantage over others who offer a little, and we combine this with care in complex in implementation, being able to establish the right level more homogenous, by-the-book view to risk selecting our distribution partners. These and require a constant blend of reserves to pay future losses and selection and pricing. are the basics. But our strategy is somewhat concomitantly establish the right pricing more complex. of discipline and flexibility. levels for future business. Thus, a part of We focus on delivering our expertise our long-term success is derived from our through brokers and agents who have We choose to do business in places where obsession with having adequate levels of client relationships that are based on service we believe we have a reasonable opportunity reserves. It is axiomatic for an insurance and added value, not just selling the lowest to make an acceptable return. We do not company to get its numbers right if long- price. As an insurer, our job is to provide write all lines of business in all states. We term survival is an important concern. We financial security for the unanticipated or do not have the intention of doing think we do well in this area. unpredictable event. We have built our business in every country in the world. business model this way and continue to When we select lines of business to write Having defined our marketplace as do so. The first step in our process is risk and locations to do business, we make mid-sized commercial business, we then selection. We have people with expertise these decisions independently, after careful focused on the areas where we believed in each line of business and each territory analysis and close examination of the characteristics existed that would allow us where we operate. It is this knowledge-based facts. We look at each part of our business, LONG-TERM PERFORMANCE LONG-TERM PERSPECTIVE LONG-TERM PERFORMANCE LONG-TERM PERSPECTIVE
  9. 9. LONG-TERM PERFORMANCE LONG-TERM PERSPECTIVE LONG-TERM PERFORMANCE LONG-TERM PERSPECTIVE Long-term perspective measuring risk in terms of exposure, defense costs included within that limit. success. It is their decisions and sense of volatility and predictability. Exclusions of unforeseen or unimagined their individual marketplace that allow our in this business means events should be clear. This is a business enterprise to constantly adjust to the a recognition that the After considering the risk part of the where included, rather than excluded, changing environment. It is this decentralized decision, we then try to understand how we coverage should be defined. structure, one of our strategic cornerstones, unanticipated, unforeseen, make money. Can we maintain a long-term that helps us continue to change and even unimagined event competitive advantage? Will the returns be In building our business strategy, we have maintain our flexibility. enough to warrant the exposures being attempted to keep the management of each will happen sometime, assumed? There are times we might look at of our enterprises as close to the customer At the parent Company we spend our time and you need to build several lines of business together, and as possible. We have 31 operating units, on strategy and Company-wide concerns. times when we might examine each line 25 of which we started, the balance were We help ensure our continued strategic your business model in individually. But we never feel compelled acquired. From a management perspective, focus on risk-adjusted return. We buy a manner that reflects to move forward if the absolute risk-adjusted the primary responsibility of the President reinsurance for the group to adjust our return is unacceptable. of each of these 31 operating units is to be aggregate risk profile and ensure that the that possibility. in touch with their customers and group as a whole is well protected from the Long-term perspective in this business understand that they are responsible for unforeseen event. We manage the $12 means a recognition that the unanticipated, the profitability of their enterprise. Along billion portfolio of cash and invested unforeseen, even unimagined event will with the 31 Presidents of the operating assets. Historically, this has been managed happen sometime, and you need to build companies, the key leadership in our in a very cautious fashion because we have your business model in a manner that Company is the senior officers at the parent always chosen to take our risk on the reflects that possibility. When possible, all Company. This group and all our dedicated underwriting side of the business rather policies should have policy limits and operating people make our Company a than the investment side. The people at 6
  10. 10. 7 the holding company are advisors, leaders, perseverance when things did not go well. Our Company is still small and we are only and consultants to all our operating units. One can never say enough about these beginning to achieve our potential. The Holding company employees represent people. There are some that stand out over opportunities have never been greater. less than 1.5% of our total workforce. We the many years that I cannot fail to The people within the Company have more examine our capital structure, deciding mention, either because of their impact on capacity to achieve great things. Our how much equity we need, the amount and me or merely the length of their commitment: agents and brokers are incredible partners. maturities of debt, and the type of other Ned Johnson at Fidelity, a man who taught The employees who make all the pieces equity and debt-like securities that are me lawyers are not an excuse to break your work are the best. We look forward to many appropriate. We have always had a capital word; and John Gutfreund, who believed if more successful years, one day at a time. structure that could withstand difficult you gave your word you were supposed to times and short-term unpredictable live by your commitment. There are several volatility. Our balance sheet reflects that other people who were around at the start: today and we expect it to continue. Bob Hodes, H. R. Shepherd, and Duncan Miller, whose advice helped us get WILLIAM R. BERKLEY In April our business will be 40 years old. through many challenging times. Scott Chairman of the Board and Chief Executive Officer It is a long way from our start when I was Cunningham, my professor at business at Harvard Business School. The success school and former Director and consultant of the enterprise is a reflection of the at W. R. Berkley Corporation, has been efforts of many people. Some made great with me for most of these years. I have contributions, others seemingly small. been fortunate to have two Directors for The list would be too long to try to include over 30 years, who have been the best everybody. From secretaries, to file clerks, advisors anyone could ask for: Jack to people who cared that the offices were Nusbaum and Mark Shapiro. clean, people showed commitment and had LONG-TERM PERFORMANCE LONG-TERM PERSPECTIVE LONG-TERM PERFORMANCE LONG-TERM PERSPECTIVE
  11. 11. IRA S. LEDERMAN PAUL J. HANCOCK We have positioned ourselves to maintain our opportunistic stance while still producing strong investment income. We continue to be confident that we can provide competitive investment returns for our shareholders. JAMES W. McCLEARY ROBERT W. GOSSELINK EUGENE G. BALLARD JAMES G. SHIEL INVESTMENTS Senior Vice President Senior Vice President General Counsel and Secretary Chief Corporate Actuary Senior Vice President Senior Vice President Senior Vice President Senior Vice President Underwriting Insurance Risk Management Chief Financial Officer and Treasurer Investments 2006 was a year with little overall change in the under control without inducing a recession. The economic and investment climates, despite several result has been a period of unusual equilibrium significant developments. Volatile oil prices, a in the financial markets, with both bond and stock dramatic weakening of the housing market, market volatility measures near historic lows. unprecedented private equity and merger activity, Even the usually turbulent currency markets are and a tightening policy by the Federal Reserve operating in relatively tight trading bands. all exerted their influence on the markets at various times during the year. Contributing to this placid environment has been the high level of global liquidity; when Yet despite these events, there was very little liquidity is plentiful, risk premiums tend to impact on the overall economy, which appears to dissipate as investors place less emphasis on have achieved the elusive soft landing where exit strategies. The surge in liquidity has kept growth moderates enough to bring inflation interest rates low and fixed income quality 8
  12. 12. 9 At December 31, 2006 the average INVESTMENT DATA 2006 VS. 2005 (Dollars in millions) duration of the bond portfolio was 2006 2005 $12 3.3 years. Cash and invested assets: Invested assets $11,114 $ 9,810 Cash $ 754 $ 673 Breakdown of Assets (By percentage) Total $11,868 $10,483 4 billion Investment income $ 586 $ 404 8 8 46 CASH and INVESTED ASSETS Realized gains $ 10 $ 17 14 20 State and Municipal Bonds 46% Mortgage-backed Securities 20% U.S. Government and The application of our investment Net investment income grew 45% in 2006 to a record Government Agency Bonds 14% strategy to the current environment has Corporate Bonds 8% Cash and Cash Equivalents 8% given us the rare opportunity to lower $586 million. Foreign Bonds 4% risk while increasing return. The book yield of the portfolio has increased 150 The average rating in the bond portfolio basis points over the last 3 years. was AA at December 31, 2006.
  13. 13. spreads are the narrowest in decades. cash and cash equivalents allocation with the While 2006 was marked the use of municipal bonds for the longer piece Although the Federal Reserve raised the belief that longer term investments did not of the barbell. More recently, tax-exempts have Federal Funds rate four times during the year to provide appropriate returns given the risks and by strong returns in the become substantially less attractive due to pent 5.25%, the benchmark ten year Treasury ended uncertainty. We were rewarded by this decision up demand from other property casualty insurers the year at 4.70%, only modestly higher than it as the Federal Reserve raised short-term rates, asset classes that have and structured derivative investors, making was at the prior year end. This extraordinary thereby directly benefitting investment income. it even more attractive for us to sell our level of liquidity is the key driver in our It also enhances our flexibility to take generally been considered longer assets. financial markets. advantage of future opportunities, especially as they relate to any opportunities in the the most risky and volatile, We are redeploying these assets in the interme- We believe that effective investment management insurance markets. diate area of the yield curve, which is long during such paradoxical, difficult times requires we continued to stick to enough to benefit from the eventual re-steepening both patience and a long-term perspective. During 2006, we began to unwind a significant of the yield curve but short enough to weather Patience to not feel the pressure to chase portion of the duration barbell we had initiated our time-tested investment higher interest rates in the interim. We are investment returns that have a low probability several years ago when the yield curve exhibited investing in a combination of high-quality of being repeated over the long-term, and the its usual upward sloping shape. As the yield discipline which focuses mortgage-backed securities, agency debentures long-term perspective to realize that when curve continued to flatten over the last four and floating rate preferred stock. We continue to someone says, “It’s different this time”, it years, the barbell structure, with a large on predictable, risk-adjusted shy away from the credit markets due to usually isn’t. percentage of invested assets on the short end concerns over fundamentals; most corporate bonds of the yield curve balanced against higher- returns for our shareholders. have benefitted so dramatically from structured So while 2006 was marked by strong returns in yielding, longer duration assets, has worked derivative demand amid benign credit conditions the asset classes that have generally been extremely well. However, with the yield curve that historical risk reward relationships no considered the most risky and volatile, we now inverted, it is an opportune time to sell the longer seem to be in balance. continued to stick to our time-tested investment longer assets. When we initiated many of these discipline which focuses on predictable, risk- trades between 2004 and 2006, the municipal We feel that these decisions have given us the adjusted returns for our shareholders. Thus, bond market was at historically attractive levels rare opportunity to lower risk while increasing during 2006 we maintained our above average compared to its taxable counterparts resulting in return. By unwinding and redeploying our barbell 10
  14. 14. 11 structure we have significantly lowered the Our portfolio is not just U.S. fixed income secu- stocks, all of which had outstanding returns in curve begins to return to its more traditional overall duration of the portfolio and therefore rities. We also manage a growing international 2006. Merger arbitrage benefitted from the shape and risk premiums resume their made it more defensive to unexpected shocks. fixed income portfolio by virtue of our expanding dramatic increase in the number of transactions historical relationship. At December 31, 2006 the duration was 3.3 insurance operations in Europe, Asia and South as well as the increase in short-term rates. These years compared to 3.8 years the prior year end America. As in the United States, interest rates factors tend to increase the spreads available in We have positioned ourselves to maintain our and 4.8 years as recently as December 31, 2002. and quality spreads in those regions are also the discipline. Our real estate allocation, which opportunistic stance while still producing strong approaching historic lows. Consequently we are is comprised of publicly traded REITs, real investment income. We continue to be confident However, despite our increased caution we maintaining a defensive posture in those portfolios estate funds, mezzanine investments and that we can provide competitive investment have been able to dramatically boost invest- as well by staying relatively short and maintaining directly owned real estate, also produced returns for our shareholders despite the fact ment income. Over the last three years we have high quality. It is also our philosophy to attempt outstanding returns for our shareholders due to a that our current risk tolerance is out of step been able to increase investment income by an to limit currency risk in those countries by investing combination of overall appreciation and strong with the general market. We believe the oppor- average of 40%. While much of this increase is in the currency in which the policies are written. dividend and interest income. tunities that we will see in the next twelve explained by increased cash flow from opera- This is critical since we incur liabilities in local months will reward our discipline. tions, during that period the book yield of the currency which must be met in those same As we look at the rest of 2007, we see a strong portfolio has also increased by 150 basis points, currencies. Excess funds may be invested in economy in little danger of a recession. The one despite the continued low levels of long-term local currencies or dollars. area of concern in the growth picture is the interest rates. housing market and sub-prime mortgage lending Although the overall portfolio is primarily fixed sector. We believe that we have seen the bottom Our asset duration is now over one year shorter income, we also maintain a portfolio of alternative in these areas and that by late summer an than our projected liability duration. This is an investments, which offers opportunities for improvement in the entire housing sector will unusual occurrence for us, but we feel it is a more favorable returns while diversifying risk. become visible. We expect the overall economy moderate risk given the environment. We believe The alternative sector comprises approximately will slow down somewhat but then resume its the economy will continue to perform well and 13% of the overall portfolio and is concentrated positive momentum. It is likely, however, that that more attractive investment opportunities in merger arbitrage, real estate, and common short-term volatility will increase as the yield will come our way in 2007. 13% ALTERNATIVE INVESTMENTS which offer opportunity for favorable returns while diversifying risks
  15. 15. Each of our five business segments – Our growth is based on meeting the needs Specialty, Regional, Alternative Markets, of customers, maintaining a high-quality Reinsurance, International – is comprised balance sheet, and allocating capital to our of individual operating units that serve a best opportunities. market defined by geography, products, services, or types of customers. W. ROBERT BERKLEY, JR. SEGMENT OVERVIEW Executive Vice President 12
  16. 16. 13 2006 REVENUES VS. PROFITS 2006 Revenues 2006 Profits 2006 Revenues (By percentage) (By percentage) (Dollars in millions) 3 5 Specialty $1,953 12 36 42 Regional $1,290 19 Alternative $879 25 16 $993 Reinsurance 24 18 International $249 Specialty 36% Specialty 42% Regional 24% Regional 18% Alternative 16% Alternative 25% Reinsurance 19% Reinsurance 12% 2006 Profits International 5% International 3% (Dollars in millions) Specialty $479 Regional $201 The specialized expertise of our individual operating Alternative $291 units has enabled each of our segments to produce Reinsurance $135 International $34 superior risk-adjusted returns on allocated capital.
  17. 17. These are the complex and sophisticated risks that require a specialized expertise and depth of experience that are often unavailable in the traditional insurance marketplace. ROBERT C. HEWITT PETER L. KAMFORD Our Specialty business is based on people with the technical skill and long-term experience that are critical to meeting those needs. SPECIALTY SEGMENT Senior Vice President Senior Vice President Excess and Surplus Lines Admitted Specialty Lines Insurance is about the assessment of risk. Our Specialty business is based on people It is about segmenting risks into like cate- with the technical skill and long-term gories and pricing those exposures to allow experience that are critical to meeting the insurer to meet its obligations. The those needs. We have the specialized Specialty lines deal with those risks that knowledge to determine the right under- fall outside the standard underwriting writing criteria and price each risk guidelines. These are the complex and accordingly, to reflect expected loss cost sophisticated risks that require a and exposure – and, we have the skill to specialized expertise and depth of experience handle the complex claim fairly when it that are often unavailable in the traditional arises. We have the judgment of people insurance marketplace. They are the with years of experience, and we have built unique and sometimes one-of-a-kind the relationships with our distribution chan- exposures that our agents and brokers may nels to support those strengths long-term. seldom see. And, they rely on us to provide the knowledge and skill to assess and appropriately price those risks. 14
  18. 18. 15 Our newest Specialty operating unit, SEGMENT DATA 2006 VS. 2005 Berkley Aviation, added $52 million to (Dollars in millions) 2006 2005 the segment’s gross premium volume in $479 2006, and is well positioned for growth Total assets $5,388 $4,731 in 2007. Total revenues $1,953 $1,816 Pre-tax income $ 479 $ 346 GAAP combined ratio 84% 88% Gross Written Premium By Line million Return on equity 25% 21% (By percentage) SPECIALTY2006 Pre-tax Inc ome 9 9 42 12 13 15 Despite an increasingly competitive Growth in the Specialty segment has to a large degree Premises Operations 42% environment, the Specialty segment Commercial Auto 15% continued to grow, reaching nearly $2 varied with market conditions, making it a consistent high Products Liability 13% Property 12% billion in revenue and producing 38% Professional Liability 9% growth in pre-tax income. performer, with return on equity in excess of 20% for 5 years. Other 9%
  19. 19. As in all cases, we took advantage of opportunities when we found exceedingly JAMES S. CAREY STEVEN S. ZEITMAN THOMAS M. KUZMA RICHARD P. SHEMITIS talented people with whom we could entrust our shareholders’ capital. Admiral Insurance Company Berkley Specialty Underwriting Nautilus Insurance Company Vela Insurance Services, Inc. Managers LLC Each of our Specialty companies has built Berkley Aviation, LLC, and the environ- contract. There is, as well, increased proficiencies in specific market niches. mental market with Berkley Specialty competition for those opportunities that do At Carolina Casualty, it is commercial Underwriting Managers’ new underwriting enter the specialty market. Despite this transportation; at Clermont, high-end facility. Both units have performed excep- trend, our Specialty companies have been apartment buildings; at Admiral, we are tionally well in their first year of operation. able to preserve, and in some cases grow, skilled in the intricate and multi-faceted As in all cases, we took advantage of their positions during this transition. We risk. Each unit determines whether it has opportunities when we found exceedingly believe this is directly attributable to the the underwriting skill and claims expertise talented people with whom we could stability, knowledge, expertise and skill we to understand new exposures and the talent entrust our shareholders’ capital. bring to each of our markets - a competitive to price the business adequately. And each advantage that is recognized and appreciated management team will then decide to In 2006, the specialty market was affected by our distribution channels as well as our expand into a new class or line of business industry-wide by the cyclical transition to insureds. We are also confident that the when it believes the opportunity can meet a more competitive price environment. As specialty market still provides reasonably our targets for profitability. the appetite of the standard market good opportunities, and that this trend will expands, the opportunities that exist in the continue as such for the foreseeable future. In late 2005, we seized two such opportuni- specialty market, particularly the excess and ties. We entered the aviation market with surplus lines market, consequently 16
  20. 20. 17 OPERATING UNITS Each of our Specialty com- Insurance Company, Clermont Specialty umbrella liability. Over the years, it has Our Specialty companies fall into two Managers, Ltd., and Monitor Liability built a solid industry reputation for its distinct areas of operation, Excess and panies has built proficiencies Managers, Inc. ability to manage the unique risks that fall SurplusLines and AdmittedSpecialtyLines . outside standard industry guidelines, with in specific market niches. At Excess and Surplus Lines both flexibility and the highest standards The Excess and Surplus Lines companies Carolina Casualty, it is Since its purchase by W. R. Berkley of service. In response to customer needs, are Admiral Insurance Company, Berkley Corporation in 1979, Admiral Insurance this year it launched Admiral Excess Specialty Underwriting Managers LLC, commercial transportation; Company has remained a leading provider Express, a state-of-the-art internet umbrella Nautilus Insurance Company, and Vela of commercial insurance products and facility. In 2006, Admiral was able to grow Insurance Services, Inc. Their products at Clermont, high-end packages tailored to meet the demands of its business in the face of an increasingly are distributed through the wholesale an evolving marketplace. It specializes in competitive environment, ending the year apartment buildings; at distribution network. excess and surplus lines coverage for com- with $547 million in gross written premium. Admiral, we are skilled mercial risks that generally involve moderate The Admitted Specialty Lines companies to high degrees of hazard. Each of its product Berkley SpecialtyUnder writing Managers offer a breadth of products that require in the intricate and segments is supported by highly skilled LLC consists of three underwriting facilities. multiple distribution systems comprising underwriters who understand industry Its Specialty Casualty division provides retail agents or brokers, wholesale brokers, multi-faceted risk. needs, its products, and the appropriate excess and surplus lines coverage, including and managing general underwriters or underwriting disciplines. Lines of busi- commercial general liability and products agents. These companies are Berkley ness written include commercial general liability to manufacturers and specialty Aviation, LLC, Berkley Underwriting liability, professional liability, commercial contractors, through wholesale brokers. Partners, LLC, Carolina Casualty property, and commercial excess and The Entertainment and Sports division
  21. 21. JASON R. NIEMELA JOHN S. DIEM WILLIAM F. MURRAY ALFRED SCHONBERGER DOUGLAS J. POWERS Berkley Aviation, LLC Berkley Underwriting Partners, LLC Carolina Casualty Insurance Company Clermont Specialty Managers, Ltd. Monitor Liability Managers, Inc. offers a complete portfolio of commercial Nautilus Insurance Company provides that complement its personalized service. expanded its traditional business model by property casualty insurance products, both excess and surplus lines products in all Innovative technology and cutting edge offering wrap-up policies, which on an admitted and non-admitted basis, states for small to medium-sized commercial e-initiatives are creating a seamless provide general liability coverage for to a customer base that ranges from the risks with low to moderate susceptibility to workflow process, reducing costs and enrolled contractors and subcontractors for television and music industry to profes- loss. Admitted business is also written in a transaction time for customers and the specific residential projects. 2006 was a sional sports teams. Business is produced limited number of states through Great company alike. challenging year for Vela in terms of volume, through retail and brokerage distribution Divide Insurance Company, its wholly with the overall slowdown in the housing sources. In late 2006, a new Environmental owned subsidiary. Over the years, Nautilus Created as an underwriting manager in market affecting demand for both its core division was launched to provide a full has built a solid reputation as a strong 1996, Vela Insurance Services, Inc. under- and wrap product. However, Vela showed spectrum of specialty insurance products underwriting company and a respected writes excess and surplus lines casualty an increase in both underwriting income tailored to the needs of environmental industry leader that has forged longstand- business on behalf of W. R. Berkley as well as pre-tax operating income. At customers such as contractors, consultants ing relationships with its select network of Corporation subsidiaries with a primary year end Vela reported $228 million in and sites/facilities. These lines are written general agents. In 2006, it achieved mod- focus on contractor and product gross written premium. on an admitted and non-admitted basis est growth, closing the year with $332 mil- liability coverages. With offices in through select producers. Berkley lion in gross written premium. During the Chicago, IL and Solvang, CA, it writes a Admitted Specialty Lines Specialty reported strong growth in 2006, year, Nautilus also launched new online variety of classes nationwide through an Created in December 2005, Berkley ending the year with $172 million in gross projects in its ongoing efforts to improve exclusive network of appointed excess and Aviation, LLC enjoyed a successful and written premium. business efficiencies for its general agents surplus lines brokers. Vela has also profitable start-up year in 2006, reaching 18
  22. 22. 19 $52 million in gross written premium. Its We believe this is directly this new operation in 2006, and the company programs. The selective nature of its busi- mix of general aviation and airline business looks forward to continued growth in 2007. ness requires discipline both in the initial provides the necessary diversification for attributable to the stability, choice of new programs as well as the long-term profits, with a wide range of Berkley Under writing Par tners, LCis a active management of existing facilities; coverage options to insureds both domesti- knowledge, expertise, and leading program management company profitability guides management’s decision cally and internationally. Its array of skill we bring to each of our which offers both admitted and non-admitted either way. This discipline, while translating programs includes coverage for airlines, insurance support to commercial casualty into a lower gross written premium in helicopters, miscellaneous general aviation markets – a competitive program administrators with specialized 2006, did result in Berkley Underwriting operations, non-owned aircraft, fixed-base insurance expertise nationwide. It has Partners’ strongest return on equity to date operations, control towers, airports, financial advantage that is recognized built its expertise around specific industries, on a gross written premium of $119 million. institutions, and other specialized niche such as livestock mortality or elevator and appreciated by our programs. Despite industry-wide reductions maintenance contractors, rather than a C olina Casualty Insurance Company , r a in rate and premium levels, Berkley distribution channels as particular insurance product. This exclusive which provides commercial insurance Aviation has exercised discipline in focus on homogeneous blocks of business products and services to the transportation providing capacity to only those risks that well as our insureds. allows for more efficient processes and industry, specializes in writing intermedi- meet its stringent underwriting guidelines. oversight of existing programs, as well as ate and long-haul trucking and various Producers have shown strong support for the effective implementation of new classes of business and public auto. Its
  23. 23. underwriters, claims and loss prevention with top line growth. Carolina Casualty the city of Chicago with its residential and lawyers’ professional liability. Well specialists are transportation experts finished the year with a gross written restaurant core products, those same classes positioned to serve the small to located throughout the United States, with premium of $274 million. of risk that have made it so successful in middle-sized market, Monitor is committed long-term multi-coverage, multi-state the New York City area. Clermont enjoyed to helping its clients resolve risk experience. In 2006, Carolina Casualty For over 20 years, Cler ont Specialty m an outstanding year in 2006, showing management issues without disrupting the enjoyed improved profitability and looks Managers, Ltd. has been a leading under- continued top line growth with exceptional flow of business. Despite continued price forward to maintaining this momentum in writer of insurance for high-rise cooperative, underwriting results, resulting in an competition in the directors’ and officers’ 2007 and beyond with new claims, under- condominium, and quality rental buildings improved return on equity. Its gross written marketplace, Monitor continued to deliver writing, and production professionals in and the finer restaurants in the New York premium was $57 million. profitable results in 2006, with increased place. A new office in Greenville, SC was City metropolitan area. Its discipline and earnings on a gross written premium of also opened in 2006 to take advantage of skill in risk selection, pricing and claims Monitor Liability Managers, Inc.under- $136 million. regional expertise and opportunities that handling are respected industry-wide, writes professional liability insurance on a became available during the year. Its providing a stability and longevity in a nationwide basis. Its product lines include continued focus on overall execution, safe- sometimes volatile marketplace that is directors’ and officers’ liability for the ty and loss control in 2006 resulted in greatly appreciated by the city’s producers. public, private and non-profit sectors; improved performance that was coupled This year it expanded geographically into employment practices liability; and 20
  24. 24. Long-term performance means ensuring that our customer knows that we will meet our obligations in a predictable, and ROBERT P. COLE straightforward, way. At each of our Berkley Regional companies we forge long-term relationships 21 with agents who work with us to deliver on that promise. REGIONAL SEGMENT Senior Vice President Regional Operations For the insured, the cornerstone of the understand that our promise is not just Our autonomous structure allows each insurance experience is the prompt and about paying the claim – it is about prompt company to set its own strategic direction fair payment of their claim. Long-term and efficient response time, loss control, in carefully selected markets, close to the performance means ensuring that our education, and personalized handling of customer, and without the bureaucratic customer knows that we will meet our the many other day-to-day pieces that layers that inhibit efficient transactions. obligations in a predictable, and make up the insurance transaction. And, And, to each of these markets we bring the straightforward, way. It means serving the we have invested in the people and the highest standards in transaction execution customer who understands what insurance skills to provide a value to our customers and personalized service. is about – and selecting agents who are that exceeds the price they pay. dedicated to meeting the many, and varied, Throughout our Regional segment, our needs of that customer. Our Regional companies focus their skills customers choose to do business with us on those lines and markets where our because they know they can rely on a level At each of our Berkley Regional companies history and structure have given us a of service that goes beyond paying the we forge long-term relationships with specialized knowledge of local needs. In claim. In each and every transaction, over agents who work with us to deliver on that Maine, we have a unique expertise in the time, our customers know what to expect – promise. We choose agents who build their lumber and fishing industries; in Iowa, and, they understand that the transaction business around customer service, and grain elevators; in Texas, farm and ranch; is not just about price, it is about getting who are aligned with our culture and share and in the metropolitan District of the coverage they want and the service our commitment to the insured. We Columbia area, office building services. they need. This is what has differentiated us in
  25. 25. Gross Written Premium By Line (By percentage) SEGMENT DATA 2006 VS. 2005 (Dollars in millions) 2006 2005 $201 Total assets $2,796 $2,653 14 36 Total revenues $1,290 $1,231 7 Pre-tax income $ 201 $ 216 18 GAAP combined ratio 90% 86% 25 million Return on equity 21% 28% Commercial Multiple Peril 36% Automobile Workers Compensation 25% 18% REGIONAL 2006 Pre-tax Inc ome Assigned Risk Plans 7% Other 14% The Regional segment continued REGIONAL Operating in 42 states and the District of Columbia to grow in 2006, as agency and service initiatives, combined with the value added by our long-term Our Regional segment had a return on equity in excess of 20% for the fourth year in a row. relationships and specialized expertise, helped to combat growing competition. 22
  26. 26. BILL THORNTON KEVIN W. NATTRASS BRADLEY S. KUSTER CRAIG W. SPARKS Throughout our Regional segment, our customers choose to do business with us because they know they can rely on a level of service that goes beyond paying the claim . . . and, they understand that the transaction is not just about price. STEVEN F. COWARD WALTER E. STRADLEY 23 Acadia Insurance Company Berkley Mid-Atlantic Group Continental Western Group Union Standard Insurance Group Berkley Surety Group, Inc. Berkley Regional Specialty Insurance Company the eyes of our distribution system and our expand its agency force, and develop new, insureds. It is our long-term value proposition. specialized products and services to meet the needs of its clients. The introduction of In 2006, we saw increased competition the specialty and surety units into the from both regional and national compa- Regional group has enabled us to respond nies. While our growth rate was lower than even more effectively to those needs. In in previous years, we continue to retain the ever changing market in which we customers at the same high rate, and our operate, our businesses are structured in new business growth is still very attractive. such a way as to compete and prosper in Each of our units has implemented initia- all market cycles. tives to increase agency penetration,
  27. 27. OPERATING UNITS laboration with the client, not only in integrated technology and improved loss This year it continued its focus on serving AcadiaInsurance Company is a Northeast improved retention but increased the control were also launched this year to customers, with improved processing for regional property casualty insurance acquisition of new customers. The company improve service to agents and policyholders, small commercial lines products, and by company that provides a complete portfolio enjoyed excellent profits in 2006, finishing and reduce costs for the insured. In 2006, extending its underwriting expertise of commercial products exclusively the year with $355 million in gross Berkley Mid-Atlantic Group also expanded further into the field for middle and larger through local independent insurance written premium. its Charlotte, NC and Harrisburg, PA accounts. Continental Western is also agents. In 2006, new agency development offices to better serve the broadening successfully adapting to changing opportu- and service strategies were implemented Through its member companies, Berkley business needs in these regions. These nities in local industries, such as its grain across the company, resulting in greater Mid-Atlantic Group offers commercial actions had significant results in 2006, elevator specialty, by introducing field market penetration and increased submission property and casualty coverages to middle with gross written premium growing to underwriting into those states. By leveraging activity from each of its branches. An market accounts in eight jurisdictions from $219 million. its specialty programs, and by introducing increased emphasis on specialty marine Pennsylvania to South Carolina. In 2006, its existing lines of business further into its also had a positive impact on results in it saw growth in several specialty areas, Continental W nG oup ester r ’s business in Midwest and Pacific Northwest markets, 2006, as Acadia maximized the opportunities including wood products, colleges and 2006 continued to be driven by its ability Continental Western is more effectively across this broad and profitable market universities, and commercial inland to produce consistent, profitable results. addressing the needs of existing segment. This year, Syner g Risk y marine, as a result of ongoing efforts to Its member companies are building on customers while attracting new business. Managementsm, Acadia’s large account, better define and develop niche business these strengths into 2007 by forging even It closed a very profitable 2006 with $469 comprehensive service program that tailored to opportunities in specific areas closer agency relationships and enhancing million in gross written premium. assesses risk and lowers total costs in col- and with selected agents. New initiatives the group’s high level of customer service. 24
  28. 28. 25 Union Standar dInsurance Group, through Berkley Surety Group,Inc., formerly known Berkley Regional Specialty Insurance its member companies, provides commercial as Monitor Surety Managers, Inc., this year Company, which began operations in insurance products to customers across expanded its previously exclusive focus September 2005, was formed to provide nine Southern states. It enjoyed an excep- on contract surety by opening a new direct access to specialty insurance tional year in 2006 with record profitability commercial surety division in June. It also products for a select group of independent and growth, due to strong underwriting, significantly realigned its twelve branches agencies within the Regional companies’ improved systems to manage growth, and in 2006, relocating some to serve Berkley operating territories. Working in conjunction excellent claims handling following the Regional companies’ customers more with the respective Regional company, hurricanes of 2005. The group is now directly and effectively, while strengthening Berkley Regional Specialty offers an alter- building on these strengths by leveraging existing relationships. A new portfolio native for the placement of small to its underwriting expertise, and expanding management strategy has allowed Berkley medium-sized accounts which are outside its SELECT program, which consists of Surety to identify lower risk businesses the underwriting scope of the standard blocks of homogeneous business in targeted and move into those underwriting classes, market. This streamlined business process areas with agents who have a particular thereby better serving its core customers. helps provide value and service to the expertise in that class. It is also strategically The company had a profitable year, under- insured and enhances the relationship expanding its portfolio with the launch of a writing $28 million in gross written premium with W. R. Berkley Corporation’s new FireKPA program in Texas, which through its member companies, and distribution channels and improves overall provides protection for volunteer fire anticipates strong growth from new business retention. departments, and the development of a business in 2007 as it moves forward with new transportation unit. Union Standard an exceptionally talented team. closed the year with the best profits in its history, and gross written premium of $234 million.
  29. 29. We have built a solid market position by developing long-term, collaborative relationships with clients that ROBERT D. STONE help them reduce their exposures to risk and the ultimate cost of managing those risks. This is the long-term advantage that enables us to compete effectively in this large, ALTERNATIVE growing marketplace. MARKETS SEGMENT Senior Vice President Alternative Markets Operations Insurance is about the amelioration of enterprise is protected in the manner in Today, our seven operating units offer a one’s exposure to risk. Frequently, which the client deems necessary. Our blend of expertise in lines of business and businesses are large enough and diverse companies provide the knowledge-based services. We have specific areas of enough that they benefit from retaining expertise, the capital, the services, and the specialization, such as workers’ compensa- more of the risk they face – either because managerial resources to help companies tion for small, owner-managed businesses they have the financial resources, the risk tailor their risk retention to their evolving in California; specialized areas of knowl- management techniques, or the confidence long-term needs. edge, such as healthcare self-insurance; that the likelihood and frequency of events and particular niches in types of business, will not be too severe for them to absorb. Our Alternative Markets segment was orig- such as excess workers’ compensation As the size of our economy has grown, the inally created to provide services to the insurance for our self-insured clients and scale of enterprises, and the capital they growing market for workers’ compensation excess medical malpractice insurance for require to operate, has also expanded. solutions. Over time, we expanded this hospitals. And, in every line and in every Correspondingly, the market for alternative segment to include risk-bearing products service area, we have built a solid market forms of risk management has also grown. for our existing clients, as well as for new position by developing long-term, collabo- markets. Our Alternative Markets business rative relationships with clients that help For over two decades, our Alternative has grown opportunistically, expanding them reduce their exposures to risk and Markets segment has helped businesses when market conditions are appropriate, the ultimate cost of managing those risks. select their risk tolerance, manage it and when promising markets and talented This is the long-term advantage that appropriately, and ensure that their people are identified. enables us to compete effectively in this large, growing marketplace. 26
  30. 30. 27 New operating units made modest SEGMENT DATA 2006 VS. 2005 contributions to the Alternative Markets (Dollars in millions) 2006 2005 segment’s revenues in their start-up year. $291 Total assets $2,701 $2,375 The time invested in building the Total revenues $ 879 $ 857 appropriate infrastructure has positioned them well for growth in 2007. Pre-tax income $ 291 $ 238 GAAP combined ratio 76% 80% million Return on equity 29% 29% Gross Written Premium By Operating Unit* (By percentage) ALTERNATIVE 4.4 .5 .2 MARKETS 2006 Pre-tax Inc ome 16.6 43.2 16.8 Our knowledge-based underwriting The Alternative Markets segment reported an outstanding 18.3 expertise in the markets this segment serves, combined with specialized risk 29% return on equity for the second year in a row. Midwest Employers Casualty 43.2% management services, has enabled Preferred Employers 18.3% Key Risk 16.8% the segment to produce consistently Berkley Risk Administrators 16.6% attractive GAAP combined ratios. Berkley Medical Excess 4.4% Berkley Accident and Health .5% Berkley Net Underwriters .2% * Excludes assigned risk plans
  31. 31. DONATO J. GASPARRO J. MICHAEL FOLEY JOHN K. GOLDWATER KENNETH R. HOPKINS JOE W. SYKES MELODEE J. SAUNDERS LINDA R. SMITH OPERATING UNITS Berkley Accident and Health, LLC Berkley Medical Excess Berkley Net Underwriters, LLC Berkley Risk Administrators Underwriters, LLC Company, LLC Key Risk Insurance Company Midwest Employers Casualty Company Preferred Employers Insurance Company The Alternative Markets segment reported alternative market insurance generally, we operation as an underwriting manager for building the necessary infrastructure for excellent results in 2006. While our will continue to find opportunities to assist W. R. Berkley Corporation member growth for Berkley Accident and Health, California workers’ compensation business existing and new clients more effectively companies in 2006. Its Healthcare with modest premiums written in both the experienced a significant decline in assess their exposures to risk and offer division will focus on managing and insuring medical and accident lines of business. premium as a result of that state’s recent insurance products and services to help medical costs for a broad range of clients, legislative reforms, the rest of the segment achieve the risk management outcomes including Fortune 500 companies, hospitals, As a leading underwriter of medical showed an overall growth in premium and they desire. medical professionals, managed care malpractice excess and reinsurance revenue. Importantly, our two new units, organizations, small to mid-sized employers, coverage and services, Berkley Medical Berkley Accident and Health and Berkley self-funded plan sponsors and government Excess Underwriters, LLC provides Net Underwriters, are now well positioned Berkley Accident and Health, LLC, which programs. Its Specialty Accident division insurance coverage on behalf of to grow their premium and market position provides an innovative portfolio of acci- will provide insurance to both employer W. R. Berkley Corporation member in 2007 and beyond. While more competitive dent and health insurance and reinsurance and non-traditional groups, offering a companies to healthcare organizations that market conditions may slow the growth of products, completed its first full year of broad array of products. 2006 was a year of retain a predictable layer of risk and seek 28

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