W. R. Berkley - 10-Q quarterly report FY2010 Q2

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)


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

For the Quarterly Period Ended June 30, 2010

or


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

For the Transition Period from to .

Commission File Number 1-15202

W. R. BERKLEY CORPORATION

(Exact name of registrant as specified in its charter)


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


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

(203) 629-3000

(Registrant’s telephone number, including area code)

None

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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


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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Number of shares of common stock, $.20 par value, outstanding as of July 30, 2010: 148,431,958

TABLE OF CONTENTS


Part I — FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosure About Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 1A. Risk Factors
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
	Item 6. Exhibits
SIGNATURES
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)


	June 30, 2010			December 31,
	(Unaudited)			2009

Assets
Investments:
Fixed maturity securities	$	11,147,752		$	11,299,197
Equity securities available for sale		357,229			401,367
Arbitrage trading account		498,368			465,783
Investment in arbitrage funds		58,564			83,420
Investment funds		421,394			418,880
Loans receivable		373,605			381,591

Total investments		12,856,912			13,050,238

Cash and cash equivalents		781,463			515,430
Premiums and fees receivable		1,112,760			1,047,976
Due from reinsurers		1,062,726			972,820
Accrued investment income		134,745			130,524
Prepaid reinsurance premiums		235,736			211,054
Deferred policy acquisition costs		409,837			391,360
Real estate, furniture and equipment		245,003			246,605
Deferred federal and foreign income taxes		117,228			190,450
Goodwill		107,132			107,131
Trading account receivables from brokers and clearing organizations		183,175			310,042
Current federal and foreign income taxes		6,068			—
Other assets		164,141			154,966

Total assets	$	17,416,926		$	17,328,596

Liabilities and Equity
Liabilities:
Reserves for losses and loss expenses	$	9,109,638		$	9,071,671
Unearned premiums		2,009,298			1,928,428
Due to reinsurers		220,086			208,045
Trading account securities sold but not yet purchased		48,836			143,885
Other liabilities		754,975			779,347
Junior subordinated debentures		242,682			249,793
Senior notes and other debt		1,342,601			1,345,481

Total liabilities		13,728,116			13,726,650

Equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares; issued and outstanding — none		—			—
Common stock, par value $.20 per share:
Authorized 500,000,000 shares, issued and outstanding, net of treasury shares, 148,421,425 and 156,552,355 shares		47,024			47,024
Additional paid-in capital		926,406			926,359
Retained earnings		3,994,366			3,785,187
Accumulated other comprehensive income		256,386			163,207
Treasury stock, at cost, 86,696,493 and 78,565,563 shares		(1,541,820	)		(1,325,710	)

Total stockholders’ equity		3,682,362			3,596,067
Noncontrolling interests		6,448			5,879

Total equity		3,688,810			3,601,946

Total liabilities and equity	$	17,416,926		$	17,328,596

See accompanying notes to interim consolidated financial statements.

1

W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)
(Dollars in thousands, except per share data)


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2010			2009			2010			2009

REVENUES:
Net premiums written	$	961,354		$	908,912		$	1,945,304		$	1,932,384
Change in net unearned premiums		(13,226	)		42,260			(66,615	)		(2,004	)

Net premiums earned		948,128			951,172			1,878,689			1,930,380
Net investment income		128,191			132,135			267,034			270,351
Income (losses) from investment funds		1,540			(37,821	)		6,258			(152,895	)
Insurance service fees		20,390			25,257			41,875			51,840
Net investment gains (losses):
Net realized gains on investment sales		11,534			49,224			20,028			62,616
Other-than-temporary impairments		—			(23,932	)		(2,582	)		(134,132	)
Less investment impairments recognized in other comprehensive income		—			8,604			—			8,604

Net investment gains (losses)		11,534			33,896			17,446			(62,912	)

Revenues from wholly-owned investees		52,929			49,942			104,505			80,845
Other income		356			517			808			1,110

Total revenues		1,163,068			1,155,098			2,316,615			2,118,719


OPERATING COSTS AND EXPENSES:
Losses and loss expenses		570,475			597,267			1,120,448			1,207,712
Other operating costs and expenses		370,823			365,514			738,790			722,861
Expenses from wholly-owned investees		49,934			46,791			98,908			76,745
Interest expense		26,014			20,213			52,055			40,437

Total operating costs and expenses		1,017,246			1,029,785			2,010,201			2,047,755


Income before income taxes		145,822			125,313			306,414			70,964
Income tax (expense) benefit		(35,598	)		(27,881	)		(77,409	)		6,184

Net income before noncontrolling interests		110,224			97,432			229,005			77,148
Noncontrolling interests		(17	)		(45	)		(188	)		(107	)


Net income to common stockholders	$	110,207		$	97,387		$	228,817		$	77,041

NET INCOME PER SHARE:
Basic	$	0.73		$	0.61		$	1.50		$	0.48
Diluted	$	0.70		$	0.59		$	1.44		$	0.46

See accompanying notes to interim consolidated financial statements.

2

W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(UNAUDITED)
(Dollars in thousands)


	For the Six Months Ended June 30,
	2010			2009

COMMON STOCK:

Beginning and end of period	$	47,024		$	47,024


ADDITIONAL PAID-IN CAPITAL:
Beginning of period	$	926,359		$	920,241
Stock options exercised and restricted units issued including tax benefit		(11,168	)		(1,692	)
Restricted stock units expensed		11,017			12,038
Stock options expensed		—			6
Stock issued to directors		198			75

End of period	$	926,406		$	930,668


RETAINED EARNINGS:
Beginning of period	$	3,785,187		$	3,514,531
Net income to common stockholders		228,817			77,041
Dividends		(19,638	)		(19,200	)

End of period	$	3,994,366		$	3,572,372


ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized investment gains (losses):
Beginning of period	$	219,394		$	(142,216	)
Unrealized gains on securities not other-than-temporarily impaired		108,305			179,189
Unrealized gains on other-than-temporarily impaired securities		974			(5,593	)

End of period		328,673			31,380

Currency translation adjustments:
Beginning of period		(40,371	)		(72,475	)
Net change in period		(17,220	)		29,055

End of period		(57,591	)		(43,420	)

Net pension asset:
Beginning of period		(15,816	)		(14,268	)
Net change in period		1,120			983

End of period		(14,696	)		(13,285	)

Total accumulated other comprehensive income (loss)	$	256,386		$	(25,325	)


TREASURY STOCK:
Beginning of period	$	(1,325,710	)	$	(1,206,518	)
Stock exercised/vested		15,058			3,551
Stock repurchased		(231,704	)		(31,842	)
Stock issued to directors		536			342

End of period	$	(1,541,820	)	$	(1,234,467	)


NONCONTROLLING INTERESTS:
Beginning of period	$	5,879		$	5,361
Contribution/(distributions)		373			(82	)
Net income		188			107
Other comprehensive income, net of tax		8			41

End of period	$	6,448		$	5,427

See accompanying notes to interim consolidated financial statements.

3

W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(UNAUDITED)
(Dollars in thousands)


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2010			2009			2010			2009

Net income before noncontrolling interests	$	110,224		$	97,432		$	229,005		$	77,148
Other comprehensive income:
Change in unrealized foreign exchange gains (losses)		(4,941	)		36,927			(17,220	)		29,055
Unrealized holding gains on investment securities arising during the period, net of taxes		76,667			105,467			120,579			132,834
Reclassification adjustment for net investment gains (losses) included in net income, net of taxes		(7,449	)		(22,041	)		(11,292	)		40,803
Change in unrecognized pension obligation, net of taxes		561			492			1,120			983

Other comprehensive income		64,838			120,845			93,187			203,675

Comprehensive income		175,062			218,277			322,192			280,823

Comprehensive income to the noncontrolling interests		(19	)		(67	)		(196	)		(148	)

Comprehensive income to common stockholders	$	175,043		$	218,210		$	321,996		$	280,675

See accompanying notes to interim consolidated financial statements.

4

W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)
(Dollars in thousands)


	For the Six Months Ended June 30,
	2010			2009

CASH FROM (USED IN) OPERATING ACTIVITIES:
Net income to common stockholders	$	228,817		$	77,041
Adjustments to reconcile net income to net cash from (used in) operating activities:
Net investment (gains) losses		(17,446	)		62,912
Depreciation and amortization		42,468			47,827
Noncontrolling interests		188			107
Undistributed income and losses from investment funds		22,197			153,506
Stock incentive plans		12,367			12,664
Change in:
Securities trading account		(32,585	)		(425,327	)
Investment in arbitrage funds		24,856			(8,576	)
Trading account receivables from brokers and clearing organizations		126,867			(3,094	)
Trading account securities sold but not yet purchased		(95,049	)		133,450
Premiums and fees receivable		(69,028	)		(53,417	)
Due from reinsurers		(41,365	)		(9,104	)
Accrued investment income		(4,531	)		(1,797	)
Prepaid reinsurance premiums		10,697			(39,186	)
Deferred policy acquisition costs		(19,793	)		(4,717	)
Deferred income taxes		14,195			(25,901	)
Other assets		(12,191	)		1,096
Reserves for losses and loss expenses		5,748			53,958
Unearned premiums		53,049			37,547
Due to reinsurers		13,845			38,571
Other liabilities		(76,636	)		(56,792	)

Net cash from (used in) operating activities		186,670			(9,232	)

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Proceeds from sales, excluding trading account:
Fixed maturity securities		1,016,514			1,230,406
Equity securities		64,962			119,589
Distributions from investment funds		37,235			2,876
Proceeds from maturities and prepayments of fixed maturity securities		628,898			640,685
Cost of purchases, excluding trading account:
Fixed maturity securities		(1,341,503	)		(2,389,311	)
Equity securities		(31,262	)		(17,506	)
Contributions to investment funds		(60,675	)		(38,355	)
Change in loans receivable		6,161			(6,589	)
Net additions to real estate, furniture and equipment		(20,307	)		(11,857	)
Change in balances due to security brokers		55,446			145,065
Payment for business purchased, net of cash acquired		—			(33,162	)

Net cash from (used in) investing activities		355,469			(358,159	)

CASH FLOWS USED IN FINANCING ACTIVITIES:
Purchase of common treasury shares		(231,704	)		(31,842	)
Cash dividends to common stockholders		(29,196	)		(19,200	)
Bank deposits received		9,715			15,352
Repayments to federal home loan bank		(7,500	)		(3,035	)
Net proceeds from stock options exercised		3,821			1,446
Repayment of debt		(10,775	)		(340	)
Other, net		(232	)		(90	)

Net cash used in financing activities		(265,871	)		(37,709	)

Net impact on cash due to change in foreign exchange rates		(10,235	)		41,776

Net increase (decrease) in cash and cash equivalents		266,033			(363,324	)
Cash and cash equivalents at beginning of year		515,430			1,134,835

Cash and cash equivalents at end of period	$	781,463		$	771,511

See accompanying notes to interim consolidated financial statements.

5

W. R. Berkley Corporation and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) General

The accompanying unaudited consolidated financial statements of W. R. Berkley Corporation and subsidiaries (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. The unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring items, which are necessary to present fairly the Company’s financial position and results of operations on a basis consistent with the prior audited consolidated financial statements. Operating results for the six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements requires the use of management estimates. For further information related to a description of areas of judgment and estimates and other information necessary to understand the Company’s financial position and results of operations, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Reclassifications have been made in the 2009 financial statements as originally reported to conform to the presentation of the 2010 financial statements.

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

(2) Per share data

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

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


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2010		2009		2010		2009
Basic		151,215		160,008		152,324		160,546
Diluted		157,461		166,226		158,539		166,716

(3) Statements of Cash Flow

Interest payments were $51,347,000 and $39,778,000 in the six months ended June 30, 2010 and 2009, respectively. Income taxes paid were $94,389,000 and $26,747,000 in the six months ended June 30, 2010 and 2009, respectively.

(4) Recent Accounting Pronouncements

In December 2009, the Financial Accounting Standards Board (“FASB”) issued guidance that: (i) eliminates the concept of qualifying “special-purpose entity” (“SPE”); (ii) alters the requirement for transferring assets off of the reporting company’s balance sheet; (iii) requires additional disclosure about a transferor’s involvement in transferred assets; and (iv) eliminates special treatment of guaranteed mortgage securitizations. This guidance was effective as of January 1, 2010. The adoption of this guidance did not impact our financial condition or results of operations.

In December 2009, the FASB issued guidance requiring the reporting entity to perform a qualitative analysis that results in a variable interest entity (“VIE”) being consolidated if the reporting entity: (i) has the power to direct activities of the VIE that significantly impact the VIE’s financial performance; and (ii) has an obligation to absorb losses or receive benefits that may be significant to the VIE. This guidance further requires enhanced disclosures, including disclosure of significant judgments and assumptions as to whether a VIE must be consolidated, and how involvement with a VIE affects the company’s financial

6

statements. This guidance was effective January 1, 2010. The adoption of this guidance did not have a material impact on our financial condition or results of operations.

In January 2010, the FASB issued guidance that requires additional disclosures regarding fair value measurements. The guidance requires entities to disclose the amounts and reasons for significant transfers between Level 1 and Level 2 of the fair value hierarchy, reasons for any transfers in or out of Level 3 and separate information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements. Portions of the guidance are effective for interim and annual reporting periods beginning after December 15, 2009, which we adopted January 1, 2010, and the remaining guidance is effective for interim and annual reporting periods beginning after December 15, 2010. The adoption of this guidance will expand the disclosures related to fair value measurements in the notes to the Company’s consolidated financial statements.

(5) Investments in Fixed Maturity Securities

At June 30, 2010 and December 31, 2009, investments in fixed maturity securities were as follows:


	Amortized		Gross Unrealized					Fair		Carrying
(Dollars in thousands)	Cost		Gains		Losses			Value		Value

June 30, 2010
Held to maturity:
State and municipal	$	72,131	$	6,008	$	(11	)	$	78,128	$	72,131
Residential mortgage-backed		41,114		3,715		—			44,829		41,114
Corporate		4,995		192		—			5,187		4,995

Total held to maturity		118,240		9,915		(11	)		128,144		118,240

Available for sale:
U.S. government and government agency		1,519,879		67,022		(675	)		1,586,226		1,586,226
State and municipal (1)		5,379,187		267,629		(24,262	)		5,622,554		5,622,554
Mortgage-backed securities:
Residential (2)		1,337,909		57,729		(15,255	)		1,380,383		1,380,383
Commercial		44,876		—		(7,549	)		37,327		37,327
Corporate		1,894,541		102,511		(30,930	)		1,966,122		1,966,122
Foreign		423,381		15,233		(1,714	)		436,900		436,900

Total available for sale		10,599,773		510,124		(80,385	)		11,029,512		11,029,512

Total investment in fixed maturity securities	$	10,718,013	$	520,039	$	(80,396	)	$	11,157,656	$	11,147,752


December 31, 2009
Held to maturity:
State and municipal	$	70,847	$	6,778	$	(739	)	$	76,886	$	70,847
Residential mortgage-backed		44,318		2,984		—			47,302		44,318
Corporate		4,994		—		(13	)		4,981		4,994

Total held to maturity		120,159		9,762		(752	)		129,169		120,159

Available for sale:
U.S. government and government agency		1,677,579		40,358		(3,784	)		1,714,153		1,714,153
State and municipal (1)		5,551,632		238,271		(41,048	)		5,748,855		5,748,855
Mortgage-backed securities:
Residential (2)		1,537,331		38,229		(44,343	)		1,531,217		1,531,217
Commercial		47,292		—		(12,069	)		35,223		35,223
Corporate		1,719,874		59,082		(35,574	)		1,743,382		1,743,382
Foreign		394,711		12,323		(826	)		406,208		406,208

Total available for sale		10,928,419		388,263		(137,644	)		11,179,038		11,179,038

Total investment in fixed maturity securities	$	11,048,578	$	398,025	$	(138,396	)	$	11,308,207	$	11,299,197


(1)		Gross unrealized losses for state and municipal securities include $659,000 and $340,000 as of June 30, 2010 and December 31, 2009, respectively, related to the non-credit portion of other than temporary impairments (“OTTI”) recognized in other comprehensive income.

(2)		Gross unrealized losses for residential mortgage-backed securities include $3,268,000 and $5,085,000 as of June 30, 2010 and December 31, 2009, respectively, related to the non-credit portion of OTTI recognized in other comprehensive income.

7

The amortized cost and fair value of fixed maturity securities at June 30, 2010, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay obligations:


	Amortized
(Dollars in thousands)	Cost		Fair Value

Due in one year or less	$	598,992	$	604,725
Due after one year through five years		2,845,018		2,980,626
Due after five years through ten years		2,839,195		3,016,292
Due after ten years		3,010,909		3,093,474
Mortgage-backed securities		1,423,899		1,462,539

Total	$	10,718,013	$	11,157,656

At June 30, 2010, there were no investments, other than investments in United States government and government agency securities, which exceeded 10% of common stockholders’ equity.

(6) Investments in Equity Securities Available for Sale

At June 30, 2010 and December 31, 2009, investments in equity securities available for sale were as follows:


	Amortized		Gross Unrealized					Fair		Carrying
(Dollars in thousands)	Cost		Gains		Losses			Value		Value

June 30, 2010
Common stocks	$	48,120	$	97,096	$	(3,739	)	$	141,477	$	141,477
Preferred stocks		232,739		4,841		(21,828	)		215,752		215,752

Total	$	280,859	$	101,937	$	(25,567	)	$	357,229	$	357,229


December 31, 2009
Common stocks	$	27,237	$	97,554	$	(5,731	)	$	119,060	$	119,060
Preferred stocks		285,490		9,745		(12,928	)		282,307		282,307

Total	$	312,727	$	107,299	$	(18,659	)	$	401,367	$	401,367

(7) Arbitrage Trading Account and Arbitrage Funds

The fair value and carrying value of the arbitrage trading account and arbitrage funds and related assets and liabilities were as follows:


	June 30,			December 31,
(Dollars in thousands)	2010			2009

Arbitrage trading account	$	498,368		$	465,783
Investment in arbitrage funds		58,564			83,420

Related assets and liabilities:
Receivables from brokers		183,175			310,042
Securities sold but not yet purchased		(48,836	)		(143,885	)

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(8) Net Investment Income

Net investment income consists of the following:


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
(Dollars in thousands)	2010			2009			2010			2009

Investment income earned on:
Fixed maturity securities, including cash	$	125,649		$	120,211		$	250,758		$	242,598
Equity securities available for sale		2,628			6,010			5,993			12,074
Arbritage trading account (1)		1,131			6,938			12,354			17,599

Gross investment income		129,408			133,159			269,105			272,271
Investment expense		(1,217	)		(1,024	)		(2,071	)		(1,920	)

Net investment income	$	128,191		$	132,135		$	267,034		$	270,351


(1)		Investment income earned from trading account activity includes net unrealized trading losses of $1,909,000 and $174,000 in the three months ended June 30, 2010 and 2009, respectively, and net unrealized trading gains of $298,000 and $1,498,000 in the six months ended June 30, 2010 and 2009, respectively.

(9) Investment Funds

Investment funds include the following:


	Carrying Value				Income (Losses)
	as of				from Investment Funds
	June 30,		December 31,		For the Six Months Ended June 30,
(Dollars in thousands)	2010		2009		2010			2009

Real estate	$	198,791	$	193,178	$	(3,906	)	$	(132,828	)
Energy		97,459		106,213		13,949			(18,417	)
Other		125,144		119,489		(3,785	)		(1,650	)

Total	$	421,394	$	418,880	$	6,258		$	(152,895	)

(10) Loans Receivable

The amortized cost of loans receivable was $374 million and $382 million at June 30, 2010 and December 31, 2009, respectively. Amortized cost is net of a valuation allowance of $16.4 million and $13.8 million, respectively. For the six months ended June 30, 2010, the Company increased its valuation allowance by $2.6 million. The ten largest loans have an aggregate amortized cost of $296 million and an aggregate fair value of $230 million and are secured by commercial real estate. These loans earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) between August 2011 and January 2013. The loans are secured by office buildings (60%), hotels (27%) and senior living facilities (13%), with properties located primarily in New York City, California, Hawaii, Boston and Philadelphia.

9

(11) Realized and Unrealized Investment Gains (Losses)

Realized and unrealized investment gains (losses) are as follows:


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
(Dollars in thousands)	2010			2009			2010			2009

Realized investment gains (losses):
Fixed maturity securities:
Gains	$	12,342		$	11,920		$	21,850		$	26,621
Losses		(2,165	)		(527	)		(3,258	)		(1,578	)
Equity securities available for sale		637			37,143			791			36,024
Other		224			—			224			—
Sales of investment funds		496			688			421			1,549
Provision for OTTI (1)		—			(23,932	)		(2,582	)		(134,132	)
Less investment impairments recognized in other comprehensive income		—			8,604			—			8,604

Total net investment gains (losses) before income taxes		11,534			33,896			17,446			(62,912	)
Income taxes		(4,085	)		(11,855	)		(6,154	)		22,109

Total net investment gains (losses)	$	7,449		$	22,041		$	11,292		$	(40,803	)


Change in unrealized gains (losses) of available for sales securities:
Fixed maturity securities	$	124,287		$	82,311		$	178,323		$	238,552
Less non-credit portion of OTTI recognized in other comprehensive income		789			(8,604	)		1,499			(8,604	)
Equity securities available for sale		(15,538	)		51,806			(12,270	)		37,412
Investment funds		(3,358	)		6,403			299			4,232
Cash and cash equivalents		—			(42	)		(1	)		(76	)

Total change in unrealized gains before income taxes and noncontrolling interests		106,180			131,874			167,850			271,516
Income taxes		(36,962	)		(48,449	)		(58,563	)		(97,879	)
Noncontrolling interests		(2	)		(21	)		(8	)		(41	)

Total change in unrealized gains	$	69,216		$	83,404		$	109,279		$	173,596


(1)		Includes change in valuation allowance for loans receivable of $2.6 million for the six months ended June 30, 2010.

10

(12) Securities in an Unrealized Loss Position

The following table summarizes all securities in an unrealized loss position at June 30, 2010 and December 31, 2009 by the length of time those securities have been continuously in an unrealized loss position.


	Less Than 12 Months				12 Months or Greater				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
(Dollars in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

June 30, 2010
U.S. government and agency	$	33,300	$	597	$	7,120	$	78	$	40,420	$	675
State and municipal		197,771		1,805		198,434		22,468		396,205		24,273
Mortgage-backed securities		61,371		2,251		208,860		20,553		270,231		22,804
Corporate		202,260		12,818		117,973		18,112		320,233		30,930
Foreign		69,402		1,714		—		—		69,402		1,714

Fixed maturity securities		564,104		19,185		532,387		61,211		1,096,491		80,396
Common stocks		23,253		1,854		8,153		1,885		31,406		3,739
Preferred stocks		66,002		3,739		94,159		18,089		160,161		21,828

Equity securities		89,255		5,593		102,312		19,974		191,567		25,567

Total	$	653,359	$	24,778	$	634,699	$	81,185	$	1,288,058	$	105,963


December 31, 2009
U.S. government and agency	$	389,745	$	3,653	$	7,361	$	131	$	397,106	$	3,784
State and municipal		376,914		12,971		443,666		28,816		820,580		41,787
Mortgage-backed securities		306,840		12,719		260,519		43,693		567,359		56,412
Corporate		194,690		13,958		172,656		21,629		367,346		35,587
Foreign		81,368		826		—		—		81,368		826

Fixed maturity securities		1,349,557		44,127		884,202		94,269		2,233,759		138,396
Common stocks		19,948		5,731		—		—		19,948		5,731
Preferred stocks		9,951		76		163,985		12,852		173,936		12,928

Equity securities		29,899		5,807		163,985		12,852		193,884		18,659

Total	$	1,379,456	$	49,934	$	1,048,187	$	107,121	$	2,427,643	$	157,055

Fixed Maturity Securities — A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at June 30, 2010 is presented in the table below:


					Gross
	Number of		Aggregate		Unrealized
(Dollars in thousands)	Securities		Fair Value		Loss

Unrealized loss less than $5 million:
Mortgage-backed securities		8	$	76,949	$	7,687
Corporate		8		34,286		5,321
State and municipal		5		38,823		5,244
Foreign		10		19,833		975
Unrealized loss $5 million or more
Mortgage-backed security (1)		1		29,970		7,030

Total		32	$	199,861	$	26,257


(1)		This investment is secured by 99 properties comprising approximately 30 million square feet of office space located primarily in Boston, Northern California and Los Angeles. The current debt maturity of February 2011 can be extended at the borrower’s option through February 2012 provided that there is no continuing default. The Company believes the amount of outstanding debt for the Company’s debt layer and all debt layers senior to the Company’s debt layer to be below the current fair values for the underlying properties. Based on the portfolio’s stable performance (e.g., occupancy rates, lease terms and debt service coverage) and on there being substantial subordinate capital, the Company does not consider the investment to be OTTI.

11

For OTTI of fixed maturity securities that management does not intend to sell or, more likely than not, would not be required to sell, the portion of the decline in value considered to be due to credit factors is recognized in earnings and the portion of the decline in value considered to be due to non-credit factors is recognized in other comprehensive income. The table below provides a roll-forward of the portion of impairments recognized in earnings for those securities that have been impaired due to both credit factors and non-credit factors.


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
(Dollars in thousands)	2010		2009		2010		2009

Beginning balance of amounts related to credit losses	$	5,661	$	—	$	5,661	$	—
Additions for amounts related to credit losses		—		2,610		—		2,610

Ending balance of amounts related to credit losses	$	5,661	$	2,610	$	5,661	$	2,610

The Company has evaluated its fixed maturity securities in an unrealized loss position and believes the unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors. None of these securities are delinquent or in default on financial covenants. Based on its assessment of these issuers, the Company expects them to continue to meet their contractual payment obligations as they become due and does not consider any of these securities to be OTTI.

Preferred Stocks — At June 30, 2010, there were ten preferred stocks in an unrealized loss position, with an aggregate fair value of $160 million and a gross unrealized loss of $22 million. Four of these securities, with an aggregate fair value of $27 million and a gross unrealized loss of $12 million had an unrealized loss of greater than 20%. Two of these securities (with an aggregate fair value of $3 million and an aggregate unrealized loss of $3 million) are rated non-investment grade. The Company does not consider any of these securities to be OTTI.

Common Stocks - At June 30, 2010, the Company owned four common stocks in an unrealized loss position with an aggregate fair value of $31 million and an aggregate unrealized loss of $4 million. The Company does not consider these securities to be OTTI.

Loans Receivable - The Company monitors the performance of its loans receivable, including current market conditions for each loan and the ability to collect principal and interest. For loans where the Company determines it is probable that the contractual terms will not be met, a valuation reserve is established with a charge to net investment losses. Loans receivable are reported net of a valuation reserve of $16.4 million and $13.8 million at June 30, 2010 and December 31, 2009, respectively.

(13) Fair Value Measurements

The Company’s fixed maturity and equity securities available for sale and its trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available.

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

12

The following tables present the assets and liabilities measured at fair value, on a recurring basis, as of June 30, 2010 and December 31, 2009 by level:


(Dollars in thousands)	Total		Level 1		Level 2		Level 3

June 30, 2010
Assets:
Fixed maturity securities available for sale:
U.S. government and agency	$	1,586,226	$	—	$	1,586,226	$	—
State and municipal		5,622,554		—		5,622,554		—
Mortgage-backed securities		1,417,710		—		1,417,710		—
Corporate		1,966,122		—		1,887,600		78,522
Foreign		436,900		—		436,900		—

Total fixed maturity securities available for sale		11,029,512		—		10,950,990		78,522

Equity securities available for sale:
Common stocks		141,477		35,461		104,457		1,559
Preferred stocks		215,752		—		152,320		63,432

Total equity securities available for sale		357,229		35,461		256,777		64,991

Arbitrage trading account		498,368		498,015		—		353

Total	$	11,885,109	$	533,476	$	11,207,767	$	143,866

Liabilities:
Securities sold but not yet purchased	$	48,836	$	48,836	$	—	$	—


December 31, 2009
Assets:
Fixed maturity securities available for sale:
U.S. government and agency	$	1,714,153	$	—	$	1,714,153	$	—
State and municipal		5,748,855		—		5,748,855		—
Mortgage-backed securities		1,566,440		—		1,540,540		25,900
Corporate		1,743,382		—		1,653,222		90,160
Foreign		406,208		—		406,208		—

Total fixed maturity securities available for sale		11,179,038		—		11,062,978		116,060


Equity securities available for sale:
Common stocks		119,060		11,295		106,206		1,559
Preferred stocks		282,307		—		227,594		54,713

Total equity securities available for sale		401,367		11,295		333,800		56,272

Arbitrage trading account		465,783		465,430		—		353

Total	$	12,046,188	$	476,725	$	11,396,778	$	172,685


Liabilities:
Securities sold but not yet purchased	$	143,885	$	143,885	$	—	$	—

There were no transfers between Levels 1 or 2 during the three and six months ended June 30, 2010.

13

The following tables summarize changes in Level 3 assets for the three and six months ended June 30, 2010:


			Gains (Losses) Included in:
					Other			Purchases
	Beginning				Comprehensive			(Sales)			Transfers			Ending
(Dollars in thousands)	Balance		Earnings		Income			(Maturities)			In/(Out)			Balance

For the three months ended June 30, 2010
Fixed maturity securities available for sale:
Corporate	$	85,438	$	49	$	(119	)	$	(6,846	)	$	—		$	78,522

Total		85,438		49		(119	)		(6,846	)		—			78,522

Equity securities available for sale:
Common stocks		1,559		—		—			—			—			1,559
Preferred stocks		63,110		—		322			—			—			63,432

Total		64,669		—		322			—			—			64,991

Arbitrage trading account		353		—		—			—			—			353

Total	$	150,460	$	49	$	203		$	(6,846	)	$	—		$	143,866


For the six months ended June 30, 2010
Fixed maturity securities available for sale:
Mortgage-backed securities	$	25,900	$	—	$	—		$	—		$	(25,900	)	$	—
Corporate		90,160		223		(240	)		(11,621	)		—			78,522

Total		116,060		223		(240	)		(11,621	)		(25,900	)		78,522

Equity securities available for sale:
Common stocks		1,559		—		—			—			—			1,559
Preferred stocks		54,713		—		(1,659	)		10,378			—			63,432

Total		56,272		—		(1,659	)		10,378			—			64,991

Arbitrage trading account		353		—		—			—			—			353

Total	$	172,685	$	223	$	(1,899	)	$	(1,243	)	$	(25,900	)	$	143,866

The transfer of a mortgage-backed security from Level 3 in the six months ended June 30, 2010 was based upon the availability of broker dealer quotations, as the Company was able to obtain quotations from third party broker dealers as of June 30, 2010.

14

(14) Reinsurance

The following is a summary of reinsurance financial information:


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
(Dollars in thousands)	2010			2009			2010			2009

Written premiums:
Direct	$	953,755		$	905,177		$	1,892,079		$	1,846,903
Assumed		159,714			149,400			347,510			355,916
Ceded		(152,115	)		(145,665	)		(294,285	)		(270,435	)

Total net written premiums	$	961,354		$	908,912		$	1,945,304		$	1,932,384


Earned premiums:
Direct	$	926,387		$	920,784		$	1,831,730		$	1,852,984
Assumed		160,459			149,129			319,845			311,443
Ceded		(138,718	)		(118,741	)		(272,886	)		(234,047	)

Total net earned premiums	$	948,128		$	951,172		$	1,878,689		$	1,930,380



Ceded losses incurred	$	135,245		$	43,320		$	226,652		$	120,603

The Company reinsures a portion of its exposures principally to reduce its net liability on individual risks and to protect against catastrophic losses. Estimated amounts due from reinsurers are reported net of reserves for uncollectible reinsurance of $4 million as of June 30, 2010 and December 31, 2009, respectively.

(15) Fair Value of Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:


	June 30, 2010				December 31, 2009
(Dollars in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value

Assets:
Fixed maturity securities	$	11,147,752	$	11,157,656	$	11,299,197	$	11,308,207
Equity securities available for sale		357,229		357,229		401,367		401,367
Arbitrage trading account		498,368		498,368		465,783		465,783
Investment in arbitrage funds		58,564		58,564		83,420		83,420
Loans receivable		373,605		312,804		381,591		285,122
Cash and cash equivalents		781,463		781,463		515,430		515,430
Trading account receivables from brokers and clearing organizations		183,175		183,175		310,042		310,042
Liabilities:
Trading account securities sold but not yet purchased		48,836		48,836		143,885		143,885
Due to broker		61,058		61,058		5,612		5,612
Junior subordinated debentures		242,682		242,200		249,793		242,217
Senior notes and other debt		1,342,601		1,413,572		1,345,481		1,386,802

The estimated fair values of the Company’s fixed maturity securities, equity securities available for sale and arbitrage trading account securities are based on various valuation techniques, as described in note 13 above. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available. The fair value of loans receivable are

15

estimated by using current institutional purchaser yield requirements for loans with similar credit characteristics. The fair value of the senior notes and other debt and the junior subordinated debentures is based on spreads for similar securities.

(16) Restricted Stock Units

Pursuant to its stock incentive plan, the Company may issue restricted stock units (RSUs) to officers of the Company and its subsidiaries. The RSUs generally vest five years from the award date and are subject to other vesting and forfeiture provisions contained in the award agreement. During the six months ended June 30, 2010, the Company issued 754,500 RSUs at a fair value of $20 million as compared to 55,000 RSUs at a fair value of $1 million, during the six months ended June 30, 2009.

(17) Industry Segments

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

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

Our regional segment provides commercial insurance products to customers primarily in 45 states. Key clients of this segment are small-to-mid-sized businesses and state and local governmental entities. The regional subsidiaries are organized geographically, which provides them with the flexibility to adapt to local market conditions, while enjoying the superior administrative capabilities and financial strength of the Company. The regional operations are organized geographically based on markets served.

Our alternative markets operations specialize in developing, insuring, reinsuring and administering self-insurance programs and other alternative risk transfer mechanisms. Our clients include employers, employer groups, insurers, and alternative market funds seeking less costly, more efficient ways to manage exposure to risks. In addition to providing insurance, the alternative markets segment also provides a wide variety of fee-based services, including consulting and administrative services.

Our reinsurance operations specialize in underwriting property casualty reinsurance on both a treaty and a facultative basis. The principal reinsurance units are facultative reinsurance, which writes individual certificates and program facultative business, treaty reinsurance, which functions as a traditional reinsurer in specialty and standard reinsurance lines, and Lloyd’s reinsurance, which writes property and casualty reinsurance through Lloyd’s.

Our international segment offers personal and commercial property casualty insurance in South America, commercial insurance in the United Kingdom, Continental Europe and Canada and reinsurance in Australia and Southeast Asia.

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

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

16


	Revenues
			Investment								Pre-Tax			Net
	Earned		Income and								Income			Income
(Dollars in thousands)	Premiums		Funds		Other			Total			(Loss)			(Loss)

For the three months ended June 30, 2010:
Specialty	$	316,513	$	42,979	$	820		$	360,312		$	75,177		$	54,138
Regional		266,629		19,641		739			287,009			25,505			18,989
Alternative markets		155,227		29,675		18,834			203,736			45,571			33,262
Reinsurance		105,632		26,838		—			132,470			30,157			22,894
International		104,127		9,286		—			113,413			6,586			1,761
Corporate, other and eliminations (1)		—		1,312		53,282			54,594			(48,708	)		(28,286	)
Net investment gains		—		—		11,534			11,534			11,534			7,449

Consolidated	$	948,128	$	129,731	$	85,209		$	1,163,068		$	145,822		$	110,207

For the three months ended June 30, 2009:
Specialty	$	346,052	$	30,691	$	879		$	377,622		$	65,920		$	50,475
Regional		281,903		14,113		172			296,188			11,677			11,163
Alternative markets		151,309		20,305		24,209			195,823			36,961			27,315
Reinsurance		94,257		20,573		—			114,830			21,228			19,134
International		77,651		6,736		—			84,387			720			2,324
Corporate, other and eliminations (1)		—		1,896		50,456			52,352			(45,089	)		(35,065	)
Net investment gains		—		—		33,896			33,896			33,896			22,041

Consolidated	$	951,172	$	94,314	$	109,612		$	1,155,098		$	125,313		$	97,387


For the six months ended June 30, 2010:
Specialty	$	629,466	$	92,213	$	1,618		$	723,297		$	150,847		$	109,291
Regional		530,298		42,582		1,666			574,546			67,469			49,046
Alternative markets		310,012		62,522		38,597			411,131			96,556			70,383
Reinsurance		205,190		55,431		—			260,621			64,577			48,732
International		203,723		16,383		—			220,106			6,959			5,414
Corporate, other and eliminations (1)		—		4,161		105,307			109,468			(97,440	)		(65,341	)
Net investment gains		—		—		17,446			17,446			17,446			11,292

Consolidated	$	1,878,689	$	273,292	$	164,634		$	2,316,615		$	306,414		$	228,817

For the six months ended June 30, 2009
Specialty	$	703,980	$	34,676	$	1,773		$	740,429		$	93,664		$	72,606
Regional		567,519		15,850		1,253			584,622			30,042			24,886
Alternative markets		303,302		25,485		48,820			377,607			67,395			52,423
Reinsurance		199,880		22,919		—			222,799			24,227			23,496
International		155,699		14,737		—			170,436			6,888			5,903
Corporate, other and eliminations (1)		—		3,789		81,949			85,738			(88,340	)		(61,470	)
Net investment losses		—		—		(62,912	)		(62,912	)		(62,912	)		(40,803	)

Consolidated	$	1,930,380	$	117,456	$	70,883		$	2,118,719		$	70,964		$	77,041

Identifiable assets by segment are as follows:


	June 30,		December 31,
(Dollars in thousands)	2010		2009
\| \|
Specialty	$	5,852,289	$	5,589,666
Regional		2,725,909		2,741,269
Alternative markets		3,777,956		3,643,214
Reinsurance		2,974,253		3,142,017
International		1,200,661		1,118,994
Corporate, other and eliminations (1)		885,858		1,093,436

Consolidated	$	17,416,926	$	17,328,596


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

17

Net premiums earned by major line of business are as follows:


	For the Three Month				For the Six Months
	Ended June 30,				Ended June 30,
(Dollars in thousands)	2010		2009		2010		2009

Specialty
Premises operations	$	99,819	$	114,649	$	187,759	$	239,749
Property		49,143		52,481		99,922		100,763
Professional liability		48,442		42,011		95,037		82,437
Products liability		24,449		34,683		63,236		73,764
Commercial automobile		32,647		49,031		68,628		103,423
Other		62,013		53,197		114,884		103,844

Total specialty		316,513		346,052		629,466		703,980

Regional
Commercial multiple peril		97,043		101,704		193,113		206,880
Commercial automobile		75,672		79,971		151,637		163,307
Workers’ compensation		53,707		60,865		106,678		118,811
Other		40,207		39,363		78,870		78,521

Total regional		266,629		281,903		530,298		567,519

Alternative Markets
Primary workers’ compensation		65,054		61,725		127,972		122,061
Excess workers’ compensation		57,723		63,766		116,051		130,214
Other		32,450		25,818		65,989		51,027

Total alternative markets		155,227		151,309		310,012		303,302

Reinsurance
Casualty		76,222		77,207		148,145		168,369
Property		29,410		17,050		57,045		31,511

Total reinsurance		105,632		94,257		205,190		199,880

International		104,127		77,651		203,723		155,699

Total	$	948,128	$	951,172	$	1,878,689	$	1,930,380

(18) Commitments, Litigation and Contingent Liabilities

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

18

SAFE HARBOR STATEMENT

This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. This document may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of the forward-looking statements can be identified by the use of forward-looking words such as ‘believes,” “expects,” “potential,” “continued,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” or the negative version of those words or other comparable words. Any forward-looking statements contained herein, including statements related to our outlook for the industry and for our performance for the year 2010 and beyond, are based upon the Company’s historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. They are subject to various risks and uncertainties, including but not limited to: the cyclical nature of the property casualty industry; the long-tail and potentially volatile nature of the insurance and reinsurance business; product demand and pricing; claims development and the process of estimating reserves; investment risks, including those of our portfolio of fixed maturity securities and investments in equity securities, including investments in financial institutions, municipal bonds, mortgage-backed securities, loans receivable, investment funds, merger arbitrage and private equity investments; the impact of significant competition; the impact of the economic downturn, and any legislative, regulatory, accounting or other initiatives taken in response to it, on our results and financial condition; the uncertain nature of damage theories and loss amounts; natural and man-made catastrophic losses, including as a result of terrorist activities; the success of our new ventures or acquisitions and the availability of other opportunities; the availability of reinsurance; our retention under the Terrorism Risk Insurance Program Reauthorization Act of 2007; the ability of our reinsurers to pay reinsurance recoverables owed to us; foreign currency and political risks relating to our international operations; other legislative and regulatory developments, including those related to business practices in the insurance industry; changes in the ratings assigned to us or our insurance company subsidiaries by rating agencies; the availability of dividends from our insurance company subsidiaries; our ability to attract and retain qualified employees; and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”). These risks and uncertainties could cause our actual results for the year 2010 and beyond to differ materially from those expressed in any forward-looking statement we make. Any projections of growth in our net premiums written and management fees would not necessarily result in commensurate levels of underwriting and operating profits. Our future financial performance is dependent upon factors discussed in our Annual Report on Form 10-K, elsewhere in this Form 10-Q and our other SEC filings. Forward-looking statements speak only as of the date on which they are made.

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

Overview

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

Increased competition in the industry in recent years and the impact of the economic downturn have put pressure on pricing and terms and conditions. As property casualty insurance became more competitive, insurance rates decreased across most business lines from 2005 through 2008. Although this trend began to moderate in 2009, current market price levels for certain lines of business are below the prices required for the Company to achieve its return objectives. Price changes are reflected in the Company’s results over time as premiums are earned.

The Company’s profitability is also affected by its investment income. The Company’s invested assets, which are derived from its own capital and cash flow from its insurance business, are invested principally in fixed maturity securities. The return on fixed maturity securities is affected primarily by general interest rates, which are at historically low levels, as well as the credit quality and duration of the securities. The Company also invests in equity securities, including those of financial institutions, merger arbitrage, private equity investments and real estate related investments.

Critical Accounting Estimates

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

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

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

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

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The risk and complexity of estimating loss reserves have increased under the current financial market conditions. It is especially difficult to estimate the impact of inflation on loss reserves given the current economic environment and related government actions. Whereas a slowing economy would generally lead to lower inflation or even deflation, increased government spending would generally lead to higher inflation. A change in our assumptions regarding inflation would result in reserve increases or decreases that would be reflected in our operations in periods in which such 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 reserves are well tested over time, some of the major assumptions about anticipated loss emergence patterns are subject to unanticipated fluctuation. These estimates, which generally involve actuarial projections, are based on management’s assessment of facts and circumstances then known, as well as estimates of future trends in claims severity and frequency, judicial theories of liability and other factors, including the actions of third parties which are beyond the Company’s control. These variables are affected by external and internal events, such as inflation and economic volatility, judicial and litigation trends, reinsurance coverage, legislative changes and claim handling and reserving practices, which make it more difficult to accurately predict claim costs. The inherent uncertainties of estimating reserves are greater for certain types of liabilities where long periods of time elapse before a definitive determination of liability is made. Because setting reserves is inherently uncertain, the Company cannot assure that its current reserves will prove adequate in light of subsequent events.

Loss reserves included in the Company’s financial statements represent management’s best estimates based upon an actuarially derived point estimate and other considerations. The Company uses a variety of actuarial techniques and methods to derive an actuarial point estimate for each operating unit. These methods include paid loss development, incurred loss development, paid and incurred Bornhuetter-Ferguson methods and frequency and severity methods. In circumstances where one actuarial method is considered more credible than the others, that method is used to set the point estimate. For example, the paid loss and incurred loss development methods rely on historical paid and incurred loss data. For new lines of business, where there is insufficient history of paid and incurred claims data, or in circumstances where there have been significant changes in claim practices, the paid and incurred loss development methods would be less credible than other actuarial methods. The actuarial point estimate may also be based on a judgmental weighting of estimates produced from each of the methods considered. Industry loss experience is used to supplement the Company’s own data in selecting “tail factors” and in areas where the Company’s own data is limited. The actuarial data is analyzed by line of business, coverage and accident or policy year, as appropriate, for each operating unit.

The establishment of the actuarially derived loss reserve point estimate also includes consideration of qualitative factors that may affect the ultimate losses. These qualitative considerations include, among others, the impact of re-underwriting initiatives, changes in the mix of business, changes in distribution sources and changes in policy terms and conditions. Examples of changes in terms and conditions that can have a significant impact on reserve levels are the use of aggregate policy limits, the expansion of coverage exclusions, whether or not defense costs are within policy limits, and changes in deductibles and attachment points.

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

21

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

Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to the Company. The length of the loss reporting lag affects our ability to accurately predict loss frequency (loss frequencies are more predictable for lines with short reporting lags) as well as the amount of reserves needed for incurred but not reported losses (less IBNR is required for lines with short reporting lags). As a result, loss reserves for lines with short reporting lags are likely to have less variation from initial loss estimates. For lines with short reporting lags, which include commercial automobile, primary workers’ compensation, other liability (claims-made) and property business, the key assumption is the loss emergence pattern used to project ultimate loss estimates from known losses paid or reported to date. For lines of business with long reporting lags, which include other liability (occurrence), products liability, excess workers’ compensation and liability reinsurance, the key assumption is the expected loss ratio since there is often little paid or incurred loss data to consider. Historically, the Company has experienced less variation from its initial loss estimates for lines of businesses with short reporting lags than for lines of business with long reporting lags.

The key assumptions used in calculating the most recent estimate of the loss reserves are reviewed each quarter and adjusted, to the extent necessary, to reflect historical changes, current trends and other factors observed. If the actual level of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s estimate. The following table reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity on our loss estimate for claims occurring in 2009 (dollars in thousands):


	Frequency (+/-)
Severity (+/-)	1%		5%		10%
1%		50,629		152,390		279,592
5%		152,390		258,182		390,422
10%		279,592		390,422		528,958

Our net reserves for losses and loss expenses of $8.1 billion as of June 30, 2010 relate to multiple accident years. Therefore, the impact of changes in frequency or severity for more than one accident year could be higher or lower than the amounts reflected above.

Approximately $1.6 billion, or 20%, of the Company’s net loss reserves as of June 30, 2010 relate to assumed reinsurance business. There is a higher degree of uncertainty and greater variability regarding estimates of assumed loss reserves because those estimates are based, in part, upon information received from ceding companies. If information received from ceding companies is not timely or correct, the Company’s estimate of ultimate losses may not be accurate. Furthermore, due to delayed reporting of claim information by ceding companies, the claim settlement tail for assumed reinsurance is extended. Management considers the impact of delayed reporting in its selection of assumed loss development factors.

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

22

Following is a summary of the Company’s reserves for losses and loss expenses by business segment as of June 30, 2010 and December 31, 2009:


(Dollars in thousands)	2010		2009

Specialty	$	2,918,548	$	2,972,562
Regional		1,313,743		1,341,451
Alternative markets		1,819,608		1,771,114
Reinsurance		1,641,617		1,699,052
International		385,776		363,603

Net reserves for losses and loss expenses		8,079,292		8,147,782
Ceded reserves for losses and loss expenses		1,030,346		923,889

Gross reserves for losses and loss expenses	$	9,109,638	$	9,071,671

Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of June 30, 2010 and December 31, 2009:


	Reported Case		Incurred But
(Dollars in thousands)	Reserves		Not Reported		Total

June 30, 2010
General liability	$	846,616	$	2,094,183	$	2,940,799
Workers’ compensation (1)		1,127,420		1,029,275		2,156,695
Commercial automobile		359,013		188,099		547,112
International		167,856		217,920		385,776
Other		159,380		247,913		407,293

Total primary		2,660,285		3,777,390		6,437,675
Reinsurance (1)		663,456		978,161		1,641,617

Total	$	3,323,741	$	4,755,551	$	8,079,292


December 31, 2009
General liability	$	845,889	$	2,159,611	$	3,005,500
Workers’ compensation (1)		1,094,800		1,019,552		2,114,352
Commercial automobile		393,534		196,060		589,594
International		145,807		217,796		363,603
Other		143,336		232,345		375,681

Total primary		2,623,366		3,825,364		6,448,730
Reinsurance (1)		688,593		1,010,459		1,699,052

Total	$	3,311,959	$	4,835,823	$	8,147,782


(1)		Workers’ compensation and reinsurance reserves are net of an aggregate net discount of $894 million and $877 million as of June 30, 2010 and December 31, 2009, respectively.

23

The following table presents development in our estimate of claims occurring in prior years for the three and six months ended June 30:


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
(Dollars in thousands)	2010			2009			2010			2009

Favorable (unfavorable) reserve development:

Specialty	$	31,827		$	21,774		$	57,050		$	39,319
Regional		29,560			4,466			49,628			14,440
Alternative markets		5,481			8,001			10,554			24,281
Reinsurance		8,880			15,798			30,395			22,606
International		864			(47	)		3,487			3,630

Total favorable (unfavorable) reserve development		76,612			49,992			151,114			104,276

Premium offsets (1):
Specialty		(2,205	)		—			(2,314	)		—
Alternative markets		279			—			(424	)		—
Reinsurance		(7,311	)		(16,834	)		(19,033	)		(16,834	)

Net development	$	67,375		$	33,158		$	129,343		$	87,442


(1)		Represents portion of favorable reserve development that was offset by a reduction in earned premiums.

For the six months ended June 30, 2010, estimates for claims occurring in prior years decreased by $151 million, before premium offsets, and by $129 million, net of premium offsets. On an accident year basis, the change in prior year reserves for 2010 is comprised of an increase in estimates for claims occurring in accident years 2002 and prior of $23 million and a decrease in estimates for claims occurring in accident years 2003 through 2009 of $174 million. The changes in prior year loss reserve estimates are generally the result of ongoing analysis of recent loss development trends. Original estimates are increased or decreased as additional information becomes known regarding individual claims and aggregate claim trends.

Specialty — The majority of the favorable reserve development for the specialty segment during 2010 and 2009 was associated with excess and surplus (“E&S”) business. E&S insurers are free from rate and form regulation and generally charge higher rates for business than those that are charged in the “standard” market. Beginning in 2003, the E&S business began to experience improved claim frequency (i.e., a lower number of reported claims per unit of exposure). One reason for the lower number of claims was the Company’s introduction of more restrictive policy language which included additional exclusions that eliminated claims that would have previously been covered, particularly for the Company’s building contractor business. In addition, as standard carriers tightened their underwriting criteria, the Company benefited from an influx of accounts from the standard market to the E&S market during these years. The more restrictive policy language and the influx of standard market business resulted in an improved risk profile within the E&S business and a reduction in loss costs that was not expected at the time loss reserves were initially established. We began to recognize those trends in 2007 and have continued to reduce our estimates of ultimate claim costs since then as the magnitude of the frequency trends has become more evident. The favorable reserve development in 2010 was primarily attributable to accident years 2006 through 2009. The favorable reserve development in 2009 was primarily attributable to accident years 2004 through 2007.

Regional — The favorable reserve development for the regional segment during 2010 was primarily related to commercial multi-peril, commercial automobile and workers’ compensation business. The favorable reserve development resulted mainly from lower loss emergence on known case reserves relative to historical levels. The favorable reserve development also reflects lower than anticipated claim frequency on commercial automobile business, which the Company believes is due, in part, to a reduction in miles driven by insured vehicles as a result of the economic downturn. The favorable reserve development in 2010 was primarily attributable to accident years 2006 through 2009.

Reinsurance — Estimates for claims occurring in prior years decreased by $11 million, net of premium offsets, for the six months ended June 30, 2010. The majority of the favorable development for the reinsurance segment during 2010 was related to the Company’s participation in a Lloyd’s of London syndicate. The favorable development resulted from a re-evaluation of the syndicate’s loss reserves for underwriting years 2008 through 2009 in connection with its annual year-end review of loss reserves that was completed in the first quarter of 2010.

24

Loss Reserve Discount — The Company discounts its liabilities for excess and assumed workers’ compensation business because of the long period of time over which losses are paid. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from the Company’s loss payout experience. For non-proportional business, reserves for losses and loss expenses have been discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. For proportional business, reserves for losses and loss expenses have been discounted at the statutory rate permitted by the Department of Insurance of the State of Delaware of 2.7%. As of June 30, 2010, the aggregate blended discount rates ranged from 2.7% to 6.5%, with a weighted average discount rate of 4.4%. The aggregate net discount, after reflecting the effects of ceded reinsurance, was $894 million and $877 million as of June 30, 2010 and December 31, 2009, respectively.

Assumed Reinsurance Premiums. The Company estimates the amount of assumed reinsurance premiums that it will receive under treaty reinsurance agreements at the inception of the contracts. These premium estimates are revised as the actual amount of assumed premiums is reported to the Company by the ceding companies. As estimates of assumed premiums are made or revised, the related amount of earned premium, commissions and incurred losses associated with those premiums are recorded. Estimated assumed premiums receivable were approximately $102 million and $71 million at June 30, 2010 and December 31, 2009, 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 amount of premiums to be received under its assumed reinsurance agreements.

Other-Than-Temporary Impairments (OTTI) of Investments. The cost of securities is adjusted where appropriate to include a provision for decline in value which is considered to be other-than-temporary. An other-than- temporary decline is considered to occur in investments where there has been a sustained reduction in market value and where the Company does not expect the fair value to recover prior to the time of sale or maturity. Since equity securities do not have a contractual cash flow or maturity, the Company considers whether the price of an equity security is expected to recover within a reasonable period of time.

The Company classifies its fixed maturity securities and preferred stocks by credit rating, primarily based on ratings assigned by credit rating agencies. For purposes of classifying securities with different ratings, the Company uses the lower rating if two ratings were assigned and the middle rating if three ratings were assigned, unless the Company’s own analysis indicates that the lower rating is more appropriate. Securities that are not rated by a rating agency are evaluated and classified by the Company on a case-by-case basis. Unrated securities with an aggregate fair value of $6 million were classified as investment grade at June 30, 2010.

Fixed Maturity Securities — For securities that we intend to sell or, more likely than not, would be required to sell, a decline in value below amortized cost is considered to be OTTI. The amount of OTTI is equal to the difference between amortized cost and fair value at the balance sheet date. For securities that we do not intend to sell or expect to be required to sell, a decline in value below amortized cost is considered to be an OTTI if we do not expect to recover the entire amortized cost basis of a security (i.e., the present value of cash flows expected to be collected is less than the amortized cost basis of the security).

The portion of the decline in value considered to be a credit loss (i.e., the difference between the present value of cash flows expected to be collected and the amortized cost basis of the security) is recognized in earnings. The portion of the decline in value not considered to be a credit loss (i.e., the difference in the present value of cash flows expected to be collected and the fair value of the security) is recognized in other comprehensive income.

Impairment assessments for structured securities, including mortgage-backed securities and asset-backed securities, collateralized debt obligations and corporate debt, are generally evaluated based on the performance of the underlying collateral under various economic and default scenarios that may involve subjective judgments and estimates by management. Modeling these securities involves various factors, such as projected default rates, the nature and realizable value of the collateral, if any, the ability of the issuer to make scheduled payments, historical performance and other relevant economic and performance factors. If an OTTI determination is made, a discounted cash flow analysis is used to ascertain the amount of the credit impairment.

25

The following table provides a summary of all fixed maturity securities as of June 30, 2010 by the length of time those securities have been continuously in an unrealized loss position:


	Number of		Aggregate		Unrealize
(Dollars in thousands)	Securities		Fair Value		Loss

Unrealized loss less than 20% of amortized cost		138	$	1,033,120	$	54,954

Unrealized loss of 20% or greater:
Less than twelve months		3		5,270		1,842
Twelve months and longer		8		58,101		23,600

Total		149	$	1,096,491	$	80,396

A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at June 30, 2010 is presented in the table below:


					Gross
	Number of		Aggregate		Unrealized
(Dollars in thousands)	Securities		Fair Value		Loss

Unrealized loss less than $5 million:
Mortgage-backed securities		8	$	76,949	$	7,687
Corporate		8		34,286		5,321
State and municipal		5		38,823		5,244
Foreign		10		19,833		975
Unrealized loss $5 million or more
Mortgage-backed security (1)		1		29,970		7,030

Total		32	$	199,861	$	26,257


(1)		This investment is secured by 99 properties comprising approximately 30 million square feet of office space located primarily in Boston, Northern California and Los Angeles. The current debt maturity of February 2011 can be extended at the borrower’s option through February 2012 provided that there is no continuing default. The Company believes the amount of outstanding debt for the Company’s debt layer and all debt layers senior to the Company’s debt layer to be below the current fair values for the underlying properties. Based on the portfolio’s stable performance (e.g., occupancy rates, lease terms and debt service coverage) and on there being substantial subordinate capital, the Company does not consider the investment to be OTTI.

The Company has evaluated its fixed maturity securities in an unrealized loss position and believes the unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors. None of these securities are delinquent or in default on financial covenants. Based on its assessment of these issuers, the Company expects them to continue to meet their contractual payment obligations as they become due and does not consider any of these securities to be OTTI.

Preferred Stocks — At June 30, 2010, there were ten preferred stocks in an unrealized loss position, with an aggregate fair value of $160 million and a gross unrealized loss of $22 million. Four of the securities (with an aggregate fair value of $27 million and a gross unrealized loss of $12 million) had an unrealized loss of greater than 20%. Two of these securities (with an aggregate fair value of $3 million and an aggregate unrealized loss of $3 million) are rated non-investment grade. The Company does not consider any of these securities to be OTTI.

Common Stocks - At June 30, 2010, the Company owned four common stocks in an unrealized loss position with an aggregate fair value of $31 million and an aggregate unrealized loss of $4 million. The Company does not consider these securities to be OTTI.

Loans Receivable - The Company monitors the performance of its loans receivable, including current market conditions for each loan and the ability to collect principal and interest. For loans where the Company determines it is probable that the contractual terms will not be met, a valuation reserve is established with a charge to net realized capital losses. Loans receivable are reported net of a valuation reserve of $16.4 million and $13.8 million at June 30, 2010 and December 31, 2009, respectively.

26

Fair Value Measurements. The Company’s fixed maturity and equity securities available for sale and its trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available. The fair value of the vast majority of the Company’s portfolio is based on observable data (other than quoted prices) and, accordingly, is classified as Level 2.

In classifying particular financial securities in the fair value hierarchy, the Company uses its judgment to determine whether the market for a security is active and whether significant pricing inputs are observable. The Company determines the existence of an active market by assessing whether transactions occur with sufficient frequency and volume to provide reliable pricing information. The Company determines whether inputs are observable based on the use of such information by pricing services and external investment managers, the uninterrupted availability of such inputs, the need to make significant adjustments to such inputs and the volatility of such inputs over time. If the market for a security is determined to be inactive or if significant inputs used to price a security are determined to be unobservable, the security is categorized in Level 3 of the fair value hierarchy.

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

The following table summarizes pricing methods for fixed maturity securities available for sale as of June 30, 2010 (dollars in thousands):


	Carrying		Percent
	Value		of Total
Pricing source:
Independent pricing services	$	10,379,239		94.1	%
Syndicate manager		119,408		1.1	%
Directly by the Company based on:
Observable data		452,343		4.1	%
Par value		1,250		0.0	%
Cash flow model		77,272		0.7	%

Total	$	11,029,512		100.0	%

Independent pricing services — The vast majority of the Company’s fixed maturity securities available for sale were priced by independent pricing services (generally one U.S. pricing service plus additional pricing services with respect to a limited number of foreign securities held by the Company). The prices provided by the independent pricing services are generally based on observable market data in active markets (e.g., broker quotes and prices observed for comparable securities). The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company conducts interviews with the pricing services to gain an understanding of how different types of securities are priced. The Company reviews the prices provided by pricing services for reasonableness based upon current trading levels for similar securities. If the prices appear unusual to the Company, they are re-examined and the value is either confirmed or revised. In addition, the Company periodically performs independent price tests of a sample of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of June 30, 2010, the Company did not make any adjustments to the prices provided by the pricing services. Based upon the Company’s review of the methodologies used by the independent pricing services, these securities were classified as Level 2.

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Syndicate manager — The Company has a 15% participation in a Lloyd’s syndicate, and the Company’s share of the securities owned by the syndicate is priced by the syndicate’s manager. The majority of the securities are liquid, short duration fixed maturity securities. The Company reviews the syndicate manager’s pricing methodology and audited financial statements and holds discussions with the syndicate manager as necessary to confirm its understanding and agreement with security prices. Based upon the Company’s review of the methodologies used by the syndicate manager, these securities were classified as Level 2.

Observable data — If independent pricing is not available, the Company prices the securities directly. Prices are based on observable market data where available, including current trading levels for similar securities and non-binding quotations from brokers. The Company generally requests two or more quotes. If more than one quote is received, the Company sets a price within the range of quotes received based on its assessment of the credibility of the quote and its own evaluation of the security. The Company generally does not adjust quotes obtained from brokers. Since these securities were priced based on observable data, they were classified as Level 2.

Par value — Bonds that can be put to the issuer at par in the near-term are priced at par provided there are no significant concerns with the issuer’s ability to repay. These securities were classified as Level 2.

Cash flow model — If the above methodologies are not available, the Company prices securities using a discounted cash flow model based upon assumptions as to prevailing credit spreads, interest rates and interest rate volatility, time to maturity and subordination levels. Discount rates are adjusted to reflect illiquidity where appropriate. These securities were classified as Level 3.

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Results of Operations for the Six Months Ended June 30, 2010 and 2009

Business Segment Results

Following is a summary of gross and net premiums written, premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and combined GAAP ratios (sum of loss ratio and expense ratio) for each of our business segments for the six months ended June 30, 2010 and 2009. The combined ratio represents a measure of underwriting profitability, excluding investment income. A combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.


	For the Six Months
	Ended June 30,
(Dollars in thousands)	2010			2009

Specialty
Gross premiums written	$	747,339		$	759,783
Net premiums written		644,203			661,240
Premiums earned		629,466			703,980
Loss ratio		57.6	%		61.4	%
Expense ratio		33.2	%		30.3	%
GAAP combined ratio		90.8	%		91.7	%

Regional
Gross premiums written	$	589,352		$	640,246
Net premiums written		530,575			559,765
Premiums earned		530,298			567,519
Loss ratio		59.7	%		63.8	%
Expense ratio		35.5	%		33.6	%
GAAP combined ratio		95.2	%		97.4	%

Alternative Markets
Gross premiums written	$	387,950		$	362,834
Net premiums written		327,497			325,201
Premiums earned		310,012			303,302
Loss ratio		64.9	%		64.3	%
Expense ratio		25.8	%		24.9	%
GAAP combined ratio		90.7	%		89.2	%

Reinsurance
Gross premiums written	$	221,015		$	224,073
Net premiums written		206,404			207,888
Premiums earned		205,190			199,880
Loss ratio		53.1	%		60.1	%
Expense ratio		42.4	%		39.1	%
GAAP combined ratio		95.5	%		99.2	%

International
Gross premiums written	$	293,933		$	215,883
Net premiums written		236,625			178,290
Premiums earned		203,723			155,699
Loss ratio		64.4	%		63.0	%
Expense ratio		42.4	%		38.2	%
GAAP combined ratio		106.8	%		101.2	%

Consolidated
Gross premiums written	$	2,239,589		$	2,202,819
Net premiums written		1,945,304			1,932,384
Premiums earned		1,878,689			1,930,380
Loss ratio		59.6	%		62.6	%
Expense ratio		34.6	%		32.0	%
GAAP combined ratio		94.2	%		94.6	%

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Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the six months ended June 30, 2010 and 2009 (amounts in thousands, except per share data):


	2010		2009
Net income to common stockholders	$	228,817	$	77,041
Weighted average diluted shares		158,539		166,716
Net income per diluted share	$	1.44	$	0.46

The Company reported net income of $229 million in 2010 compared to $77 million in 2009. The increase in net income is primarily due to improved investment results. Income from investment funds (which is recorded on a one quarter lag) was $6 million in 2010 compared with a loss of $153 million in 2009. Other-than-temporary investment impairments were $3 million in 2010 compared with $134 million in 2009. The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2010 and 2009.

Premiums Written. Gross premiums written were $2,240 million in 2010, an increase of 2% from 2009. Gross premiums for recently started operating units (companies that began operations since 2006) were up 49% to $378 million in 2010 from $253 million in 2009, and comprised 17% of our gross premiums written for the six months. Approximately 79% of policies expiring in 2010 were renewed, compared with 76% of policies expiring in the first six months of 2009 that were renewed. The average price of policies renewed in 2010 declined 0.5% from the same period in 2009.

Increased competition in the industry in recent years and the impact of the economic downturn have put pressure on pricing and terms and conditions. As property casualty insurance became more competitive, insurance rates decreased across most business lines beginning in 2005. Although this trend began to moderate in 2009, current market price levels for certain lines of business are below the prices required for the Company to achieve its return objectives. In particular, commercial automobile and products liability in the specialty segment experienced significant declines in gross written premiums in the six months ended June 30, 2010. A summary of gross premiums written in 2010 compared with 2009 by line of business within each business segment follows:

	•		Specialty gross premiums decreased by 2% to $747 million in 2010 from $760 million in 2009. Gross premiums written decreased 36% for commercial automobile and 24% for products liability, increased 11% for property lines and 3% for professional liability, and were unchanged for premises operations.

	•		Regional gross premiums decreased by 8% to $589 million in 2010 from $640 million in 2009. Gross premiums written decreased 9% for workers’ compensation, 6% for commercial automobile and 5% for commercial multiple perils. Gross premiums include assigned risk premiums, which are fully reinsured, of $19 million in 2010 and $40 million in 2009.

	•		Alternative markets gross premiums increased by 7% to $388 million in 2010 from $363 million in 2009. Gross premiums written increased 4% for primary workers’ compensation and decreased 13% for excess workers’ compensation. Gross premiums include assigned risk premiums, which are fully reinsured, of $36 million in 2010 and $10 million in 2009.

	•		Reinsurance gross premiums decreased by 1% to $221 million in 2010 from $224 million in 2009. Casualty gross premiums written decreased 16% to $149 million due to return premiums on experience rated reinsurance contracts (where premiums are adjusted over time based on the level of loss activity). Property gross premiums written increased 56% to $72 million due to two new non-catastrophe exposed property treaties.

	•		International gross premiums increased by 36% to $294 million in 2010 from $216 million in 2009. The increase is primarily due to an increase in business written by our new operating units in Lloyd’s, Canada and Norway. These increases were partially offset by a decline in premiums written in Korea.

Ceded reinsurance premiums as a percentage of gross written premiums increased to 13% in 2010 from 12% in 2009. The increase was primarily due to ceded premiums for recently started operating units, which have a higher ceded premium percentage than mature operating units. Net premiums written were $1,945 million in 2010, an increase of 1% from 2009.

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Net Premiums Earned. Premiums earned decreased 3% to $1,879 million in 2010 from $1,930 million in 2009. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in 2010 are related to business written during both 2010 and 2009. The 3% decrease in 2010 earned premiums reflects the underlying decline in net premiums written in 2009.

Net Investment Income. Following is a summary of net investment income for the six months ended June 30, 2010 and 2009:


							Average Annualized
	Amount						Yield
(Dollars in thousands)	2010			2009			2010			2009

Fixed maturity securities, including cash	$	250,758		$	242,598			4.2	%		4.2	%
Arbitrage trading account and funds		12,354			17,599			3.5	%		8.5	%
Equity securities available for sale		5,993			12,074			3.9	%		6.8	%

Gross investment income		269,105			272,271			4.2	%		4.5	%
Investment expenses		(2,071	)		(1,920	)

Total	$	267,034		$	270,351			4.1	%		4.4	%

Net investment income decreased 1% to $267 million in 2010 from $270 million in 2009. The decrease in investment income is due to a decline in the yield for the arbitrage account and equity securities, partially offset by an increase in average invested assets. Average invested assets, at cost (including cash and cash equivalents) were $12.9 billion in 2010 and $12.2 billion in 2009.

Income (Losses) from Investment Funds. Following is a summary of income (losses) from investment funds (which is recorded on a one-quarter lag) for the six months ended June 30, 2010 and 2009:


(Dollars in thousands)	2010			2009

Real estate funds	$	(3,906	)	$	(132,828	)
Energy funds		13,949			(18,417	)
Other funds		(3,785	)		(1,650	)

Total	$	6,258		$	(152,895	)

Income from investment funds was $6 million in 2010 compared to a loss of $153 million in 2009, primarily as a result of lower losses from real estate funds. The real estate funds, which had an aggregate carrying value of $199 million at June 30, 2010, invest in commercial loans and securities as well as direct property ownership. In 2009, asset values were impacted by general deterioration of real estate fundamentals coupled with the absence of a refinancing market and an increase in non-performing assets. Although these market conditions have moderated, a large number of real estate projects remain over-leveraged and face near-term refinancing pressure. The energy funds reported income of $14 million in 2010 due to an increase in the fair value of energy related investments held by the funds.

Insurance Service Fees. Insurance service fees consists of fee-based services to help clients develop and administer self-insurance programs, primarily for workers’ compensation coverage as well as brokerage services. Service fees decreased to $42 million in 2010 from $52 million in 2009 due to a decline in fees received for administering assigned risk plans as a result of a decrease in workers’ compensation premiums written by those plans.

Net Realized Gains on Investment Sales. The Company buys and sells securities on a regular basis in order to maximize its total return on investments. Decisions to sell securities are based on management’s view of the underlying fundamentals of specific securities as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net realized gains on investment sales were $20 million in 2010 compared with $63 million in 2009.

Other-Than-Temporary Impairments. Other-than-temporary impairments were $3 million in 2010 compared with $134 million in 2009. The impairment charge in 2009 was primarily related to debt and preferred stock of major financial institutions that experienced adverse credit events and ratings downgrades during the period, including write-downs of debt issued by Thornburg Mortgage, Inc. and preferred stock issued by Citibank and Bank of America.

Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were $105 million in 2010 compared with $81 million in 2009. These revenues were derived from aviation-related businesses that were separately purchased in 2007, 2008 and 2009. These companies provide services to the general aviation market, including fuel and line

31

service, aircraft sales and maintenance, avionics and engineering services and parts fabrication. The 2010 and 2009 revenues are not comparable since the Company acquired one of its aviation companies in June 2009.

Losses and Loss Expenses. Losses and loss expenses decreased to $1,120 million in 2010 from $1,208 million in 2009 due to lower earned premiums. The consolidated loss ratio was 59.6% in 2010 compared with 62.6% in 2009. Weather-related losses were $53 million in 2010 (including $8 million from the earthquake in Chile) compared with $36 million in 2009. Favorable prior year reserve development, net of related premium adjustments, was $129 million in 2010 and $87 million in 2009. A summary of loss ratios in 2010 compared with 2009 by business segment follows:

	•		Specialty’s loss ratio decreased to 57.6% in 2010 from 61.4% in 2009 due to an increase in favorable reserve development. Net favorable prior year development, net of related premium adjustments, was $55 million in 2010 compared with $39 million in 2009.

	•		Regional’s loss ratio decreased to 59.7% in 2010 from 63.8% in 2009 due to an increase in favorable reserve development, partially offset by storm losses. Weather-related losses were $45 million in 2010 compared with $36 million in 2009. Net favorable prior year development was $50 million in 2010 compared with $14 million in 2009.

	•		Alternative markets’ loss ratio increased to 64.9% in 2010 from 64.3% in 2009 due to a decrease in favorable reserve development, partially offset by the use of higher discount rates used to discount excess workers’ compensation reserves. Net favorable prior year reserve development, net of related premium adjustments, was $10 million in 2010 compared with $24 million in 2009.

	•		Reinsurance’s loss ratio decreased to 53.1% in 2010 from 60.1% in 2009 due to lower loss ratios for several large property treaties and to an increase in favorable reserve development. Net favorable prior year development, net of related premium adjustments, was $11 million in 2010 compared with $6 million in 2009. Losses from the earthquake in Chile in 2010 were $4 million.

	•		International’s loss ratio increased to 64.4% in 2010 from 63.0% in 2009 due primarily to losses from the Chilean earthquake of $4 million. Net favorable prior year development was $3 million in 2010 compared with $4 million in 2009.

Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses for the six months ended June 30, 2010 and 2009:


(Dollars in thousands)	2010			2009

Underwriting expenses	$	650,202		$	616,926
Service expenses		36,955			42,560
Net foreign currency (gains) losses		(3,711	)		5,959
Other costs and expenses		55,344			57,416

Total	$	738,790		$	722,861

Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) increased to 34.6% in 2010 from 32.0% in 2009 primarily due to the decline in earned premiums, higher commission rates for certain reinsurance contracts and higher expenses related to recently started business operations. Recently started business operations have a relatively higher expense ratio due to their early stage of development, particularly in our international segment.

Service expenses, which represent the costs associated with the fee-based businesses, decreased 13% to $37 million due to lower employment costs and lower direct cost associated with the lower assigned risk business revenues.

Net foreign currency (gains) losses result from transactions denominated in a currency other than the operating unit’s functional currency. The gain in 2010 was primarily attributable to foreign operating units holding assets denominated in U.S. dollars.

Other costs and expenses, which represent corporate expenses, decreased 4% to $55 million due to an decrease in general and administrative costs, including employment costs.

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Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees were $99 million in 2010 compared to $77 million in 2009. These expenses represent costs associated with aviation-related businesses that were separately purchased in 2007, 2008 and 2009. These include cost of goods sold related to aircraft and other sales, labor and equipment costs related to repairs and other services and general and administrative expenses. The 2010 and 2009 expenses are not comparable since the Company acquired one of its aviation companies in June 2009.

Interest Expense. Interest expense increased 29% to $52 million due to the issuance of $300 million of 7.375% senior notes in September 2009.

Income Taxes. The effective income tax rate was an expense of 25% in 2010 as compared to a benefit of 9% in 2009. The effective income tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income. The tax exempt investment income is a greater portion of the 2009 pre-tax income and as such had a larger impact to the effective tax rate for 2009.

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Results of Operations for the Three Months Ended June 30, 2010 and 2009

Business Segment Results

Following is a summary of gross and net premiums written, premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and combined GAAP ratios (sum of loss ratio and expense ratio) for each of our business segments for the three months ended June 30, 2010 and 2009. The combined ratio represents a measure of underwriting profitability, excluding investment income. A combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.


	For the Three Months
	Ended June 30,
(Dollars in thousands)	2010			2009

Specialty
Gross premiums written	$	404,407		$	394,889
Net premiums written		342,275			338,683
Premiums earned		316,513			346,052
Loss ratio		57.2	%		60.0	%
Expense ratio		32.7	%		29.8	%
GAAP combined ratio		89.9	%		89.8	%

Regional
Gross premiums written	$	286,711		$	317,445
Net premiums written		258,543			277,730
Premiums earned		266,629			281,903
Loss ratio		62.2	%		66.6	%
Expense ratio		35.5	%		34.2	%
GAAP combined ratio		97.7	%		100.8	%

Alternative Markets
Gross premiums written	$	146,599		$	113,960
Net premiums written		117,092			99,486
Premiums earned		155,227			151,309
Loss ratio		65.2	%		66.4	%
Expense ratio		26.0	%		25.7	%
GAAP combined ratio		91.2	%		92.1	%

Reinsurance
Gross premiums written	$	114,646		$	116,217
Net premiums written		107,633			107,055
Premiums earned		105,632			94,257
Loss ratio		55.7	%		56.4	%
Expense ratio		41.0	%		42.9	%
GAAP combined ratio		96.7	%		99.3	%

International
Gross premiums written	$	161,106		$	112,066
Net premiums written		135,811			85,958
Premiums earned		104,127			77,651
Loss ratio		61.1	%		61.9	%
Expense ratio		41.2	%		38.8	%
GAAP combined ratio		102.3	%		100.7	%

Consolidated
Gross premiums written	$	1,113,469		$	1,054,577
Net premiums written		961,354			908,912
Premiums earned		948,128			951,172
Loss ratio		60.2	%		62.8	%
Expense ratio		34.2	%		32.5	%
GAAP combined ratio		94.4	%		95.3	%

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Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the three months ended June 30, 2010 and 2009 (amounts in thousands, except per share data):


	2010		2009
Net income to common stockholders	$	110,207	$	97,387
Weighted average diluted shares		157,461		166,226
Net income per diluted share	$	0.70	$	0.59

The Company reported net income of $110 million in 2010 compared to $97 million in 2009. The increase in net income is primarily due to improved investment results. Income from investment funds (which is recorded on a one quarter lag) was $2 million in 2010 compared with a loss of $38 million in 2009. There were no other than temporary investment impairments in 2010 compared with $24 million in 2009. The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2010 and 2009.

Premiums Written. Gross premiums written were $1,113 million in 2010, an increase of 6% from 2009. Gross premiums for recently started operating units (companies that began operations since 2006) were up 60% to $212 million in 2010 from $133 million in 2009, and comprised 19% of our gross premiums written in the quarter. Approximately 77% of business expiring in 2010 was renewed, and the average price of policies renewed in 2010 declined 1% from the same period in 2009.

Increased competition in the industry in recent years and the impact of the economic downturn have put pressure on pricing and terms and conditions. As property casualty insurance became more competitive, insurance rates decreased across most business lines beginning in 2005. Although this trend began to moderate in 2009, current market price levels for certain lines of business are below the prices required for the Company to achieve its return objectives. In particular, commercial automobile and products liability in the specialty segment experienced significant declines in gross written premiums in the three months ended June 30, 2010. A summary of gross premiums written in 2010 compared with 2009 by line of business within each business segment follows:

	•		Specialty gross premiums increased by 2% to $404 million in 2010 from $395 million in 2009. Gross premiums written decreased 36% for commercial automobile and 18% for products liability, and increased 14% for property lines, 5% for premises operations and 3% for professional liability.

	•		Regional gross premiums decreased by 10% to $287 million in 2010 from $317 million in 2009. Gross premiums written decreased 15% for workers’ compensation, 7% for commercial automobile and 5% for commercial multiple perils. Gross premiums include assigned risk premiums, which are fully reinsured, of $9 million in 2010 and $19 million in 2009.

	•		Alternative markets gross premiums increased by 29% to $147 million in 2010 from $114 million in 2009. Gross premiums written increased 20% for excess workers’ compensation and 12% for primary workers’ compensation. Gross premiums include assigned risk premiums, which are fully reinsured, of $20 million in 2010 and $4 million in 2009.

	•		Reinsurance gross premiums decreased by 1% to $115 million in 2010 from $116 million in 2009. Casualty gross premiums written decreased 18% to $75 million due to return premiums on experience rated reinsurance contracts (where premiums are adjusted over time based on the level of loss activity). Property gross premiums written increased 60% to $40 million due to two new non-catastrophe exposed property treaties.

	•		International gross premiums increased by 44% to $161 million in 2010 from $112 million in 2009. The increase is primarily due to an increase in business written by our new operating units in Lloyd’s, Canada and Norway.

Ceded reinsurance premiums as a percentage of gross written premiums were 14% in 2010 and 2009. Net premiums written were $961 million in 2010, an increase of 6% from 2009.

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Net Premiums Earned. Premiums earned decreased to $948 million in 2010 from $951 million in 2009. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in 2010 are related to business written during both 2010 and 2009. The slight decrease in 2010 earned premiums reflects the underlying decline in net premiums written in 2009.

Net Investment Income. Following is a summary of net investment income for the three months ended June 30, 2010 and 2009:


							Average Annualized
	Amount						Yield
(Dollars in thousands)	2010			2009			2010			2009

Fixed maturity securities, including cash	$	125,649		$	120,211			4.2	%		4.2	%
Arbitrage trading account and funds		1,131			6,938			0.6	%		5.7	%
Equity securities available for sale		2,628			6,010			3.5	%		7.5	%

Gross investment income		129,408			133,159			4.0	%		4.4	%
Investment expenses		(1,217	)		(1,024	)

Total	$	128,191		$	132,135			4.0	%		4.3	%

Net investment income decreased 3% to $128 million in 2010 from $132 million in 2009. The decrease in investment income is due primarily to a decline in the yield for the arbitrage account. Average invested assets, at cost (including cash and cash equivalents) were $12.8 billion in 2010 and $12.2 billion in 2009.

Income (Losses) from Investment Funds. Following is a summary of income (losses) from investment funds (which is recorded on a one-quarter lag) for the three months ended June 30, 2010 and 2009:


(Dollars in thousands)	2010			2009

Real estate funds	$	2,440		$	(34,320	)
Energy funds		232			(3,726	)
Other funds		(1,132	)		225

Total	$	1,540		$	(37,821	)

Income from investment funds was $2 million in 2010 compared to a loss of $38 million in 2009, primarily as a result of income from real estate funds in 2010 as compared to losses from real estate funds in 2009. The real estate funds, which had an aggregate carrying value of $199 million at June 30, 2010, invest in commercial loans and securities as well as direct property ownership. In 2009, asset values were impacted by general deterioration of real estate fundamentals coupled with the absence of a refinancing market and an increase in non-performing assets. Although these conditions have moderated, a large number of real estate projects remain over-leveraged and face near-term refinancing pressure.

Insurance Service Fees. Insurance service fees consists of fee-based services to help clients develop and administer self-insurance programs, primarily for workers’ compensation coverage as well as brokerage services. Service fees decreased to $20 million in 2010 from $25 million in 2009 due to a decline in fees received for administering assigned risk plans as a result of a decrease in workers’ compensation premiums by those plans.

Net Realized Gains on Investment Sales. The Company buys and sells securities on a regular basis in order to maximize its total return on investments. Decisions to sell securities are based on management’s view of the underlying fundamentals of specific securities as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net realized gains on investment sales were $12 million in 2010 compared with $49 million in 2009.

Other-Than-Temporary Impairments. There were no other-than-temporary impairments in 2010 compared with $24 million in 2009. The impairment charge in 2009 was primarily related to a further decline of a common stock that had been previously written down to fair value.

Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were $53 million in 2010 compared with $50 million in 2009. These revenues were derived from aviation-related businesses that were separately purchased in 2007, 2008 and 2009. These companies provide services to the general aviation market, including fuel and line service, aircraft sales and maintenance, avionics and engineering services and parts fabrication. The 2010 and 2009 revenues are not comparable since the Company acquired one of its aviation companies in June 2009.

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Losses and Loss Expenses. Losses and loss expenses decreased to $570 million in 2010 from $597 million in 2009 due to lower earned premiums. The consolidated loss ratio was 60.2% in 2010 compared with 62.8% in 2009. Weather-related losses were $30 million in 2010 compared with $28 million in 2009. Favorable prior year reserve development, net of related premium adjustments, was $67 million in 2010 and $33 million in 2009. A summary of loss ratios in 2010 compared with 2009 by business segment follows:

	•		Specialty’s loss ratio decreased to 57.2% in 2010 from 60.0% in 2009 due to an increase in favorable reserve development. Net favorable prior year development, net of related premium adjustments, was $30 million in 2010 compared with $22 million in 2009.

	•		Regional’s loss ratio decreased to 62.2% in 2010 from 66.6% in 2009 due to an increase in favorable reserve development. Weather-related losses were $30 million in 2010 compared with $28 million in 2009. Net favorable prior year development was $29 million in 2010 compared with $4 million in 2009.

	•		Alternative markets’ loss ratio decreased to 65.2% in 2010 from 66.4% in 2009 due to the use of higher discount rates used to discount excess workers’ compensation reserves, partially offset by a decrease in favorable reserve development. Net favorable prior year reserve development, net of related premium adjustments, was $6 million in 2010 compared with $8 million in 2009.

	•		Reinsurance’s loss ratio decreased to 55.7% in 2010 from 56.4% in 2009. Net favorable prior year development, net of related premium adjustments, was $1 million in 2010 compared with unfavorable prior year development of $1 million in 2009.

	•		International’s loss ratio decreased to 61.1% in 2010 from 61.9% in 2009. Net favorable prior year development was $1 million in 2010 compared with none in 2009.

Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses for the three months ended June 30, 2010 and 2009:


(Dollars in thousands)	2010		2009

Underwriting expenses	$	324,599	$	308,970
Service expenses		18,411		20,503
Net foreign currency losses		1,316		5,427
Other costs and expenses		26,497		30,614

Total	$	370,823	$	365,514

Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) increased to 34.2% in 2010 from 32.5% in 2009 primarily due to the decline in earned premiums, higher commission rates for certain reinsurance contracts and higher expenses related to recently started business operations. Recently started business operations have a relatively higher expense ratio due to their early stage of development, particularly in our international segment.

Service expenses, which represent the costs associated with the fee-based businesses, decreased 10% to $18 million due to lower employment costs and lower direct cost associated with the lower assigned risk business revenues.

Net foreign currency losses result from transactions denominated in a currency other than the operating unit’s functional currency. The loss in 2010 was primarily attributable to foreign operating units holding assets denominated in U.S. dollars.

Other costs and expenses, which represent corporate expenses, decreased 13% to $26 million due to a decrease in general and administrative costs, including employment costs.

Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees were $50 million in 2010 compared to $47 million in 2009. These expenses represent costs associated with aviation-related businesses that were separately purchased in 2007, 2008 and 2009. These include cost of goods sold related to aircraft and other sales, labor and equipment costs related to repairs and other services and general and administrative expenses. The 2010 and 2009 expenses are not comparable since the Company acquired one of its aviation companies in June 2009.

Interest Expense. Interest expense increased 29% to $26 million due to the issuance of $300 million of 7.375% senior notes in September 2009.

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Income Taxes. The effective income tax rate was an expense of 24% in 2010 as compared to 22% in 2009. The effective income tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income. The tax exempt investment income was a greater portion of the 2009 pre-tax income and as such had a larger impact to the effective tax rate for 2009.

Investments

As part of its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities that, combined with expected cash flow, it believes are adequate to meet its payment obligations. The Company also attempts to maintain an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities, i.e., policy claims and debt obligations. The average duration of its portfolio remained at 3.6 years at June 30, 2010 and December 31, 2009. The Company’s investment portfolio and investment-related assets as of June 30, 2010 were as follows (dollars in thousands):


	Cost		Carrying Value
Fixed maturity securities:
U.S. government and government agencies	$	1,519,879	$	1,586,226
State and municipal		5,451,318		5,694,685
Mortgage-backed securities:
Agency		1,027,851		1,078,235
Residential-Prime		282,954		277,443
Residential-Alt A		68,218		65,819
Commercial		44,876		37,327

Total mortgage-backed securities		1,423,899		1,458,824

Corporate:
Industrial		820,182		886,960
Financial		544,061		552,700
Utilities		183,998		195,928
Asset-backed		226,186		209,633
Other		125,109		125,896

Total corporate		1,899,536		1,971,117


Foreign government and foreign government agencies		423,381		436,900

Total fixed maturity securities		10,718,013		11,147,752


Equity securities available for sale:
Preferred stocks:
Financial		110,102		93,994
Real estate		69,743		69,822
Utilities		52,894		51,936

Total preferred stocks		232,739		215,752


Common stocks		48,120		141,477

Total equity securities available for sale		280,859		357,229


Arbitrage trading account		498,368		498,368
Investment in arbitrage funds		58,564		58,564
Investment funds		422,255		421,394
Loans receivable		373,605		373,605

Total investments	$	12,351,664	$	12,856,912

Fixed Maturity Securities. The Company’s investment policy with respect to fixed maturity securities is generally to purchase instruments with the expectation of holding them to their maturity. However, management of the available for sale portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as a result of changes in financial market conditions and tax considerations. At June 30, 2010 (as compared to December 31, 2009), the fixed maturity securities portfolio mix was as follows: state and municipal securities were 51% (52% in 2009); corporate securities were 18% (15% in 2009); U.S. government securities were 14% (15% in 2009); mortgage-backed securities were 13% (14% in 2009); and foreign government bonds were 4% (4% in 2009).

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

Equity Securities Available for Sale. Equity securities available for sale primarily represent investments in common and preferred stocks of publicly traded REITs, financial companies and utilities.

Arbitrage Trading Account. The arbitrage trading account is comprised of direct investments in arbitrage securities. Merger arbitrage is the business of investing in the securities of publicly held companies that are the targets in announced tender offers and mergers.

Investment in Arbitrage Funds. Investment in arbitrage funds represents investments in limited partnerships that specialize in merger arbitrage, convertible arbitrage and relative value arbitrage. Convertible arbitrage is the business of investing in convertible securities with the goal of capitalizing on price differentials between these securities and their underlying equities. Relative value arbitrage is the business of investing primarily in equity securities with the goal of capitalizing on perceived differences in fundamental values between pairs of companies in similar industries.

Investment Funds. At June 30, 2010 and December 31, 2009, the Company’s carrying value in investment funds was $421 million and $419 million, respectively, including investments in real estate funds of $199 million and $193 million, respectively, and investments in energy funds of $97 million and $106 million, respectively.

Loans Receivable. Loans receivable, which are carried at amortized cost, have an aggregate cost of $374 million and an aggregate fair value of $313 million at June 30, 2010. Amortized cost of these loans is net of a valuation allowance of $16.4 million as of June 30, 2010. The ten largest loans have an aggregate amortized cost of $296 million and an aggregate fair value of $230 million and are secured by commercial real estate. These loans earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) between August 2011 and January 2013. The loans are secured by office buildings (60%), hotels (27%) and senior living facilities (13%) located primarily in New York City, California, Hawaii, Boston and Philadelphia.

Liquidity and Capital Resources

Cash Flow. Cash flow provided from operating activities was $187 million in 2010 compared to cash flow used in operating activities of $9 million in 2009. The increase in cash flow from operating activities in 2010 was primarily due to cash transfers to the arbitrage trading accounts of $290 million in 2009. Cash transfers to the arbitrage trading account are included in cash flow from operations under U. S. generally accepted accounting principles.

The Company’s insurance subsidiaries’ principal sources of cash are premiums, investment income, service fees and proceeds from sales and maturities of portfolio investments. The principal uses of cash are payments for claims, taxes, operating expenses and dividends. The Company expects its insurance subsidiaries to fund the payment of losses with cash received from premiums, investment income and fees. The Company targets an average duration for its investment portfolio that is within one year of the average duration of its liabilities so that portions of its investment portfolio mature throughout the claim cycle and are available for the payment of claims if necessary. In the event operating cash flow and proceeds from maturities and prepayments of fixed maturity securities are not sufficient to fund claim payments and other cash requirements, the remainder of the Company’s cash and investments is available to pay claims and other obligations as they become due. The Company’s investment portfolio is highly liquid, with approximately 87% invested in cash, cash equivalents and marketable fixed maturity securities as of June 30, 2010. If the sale of fixed maturity securities were to become necessary, a realized gain or loss equal to the difference between the cost and sales price of securities sold would be recognized.

Financing Activity. During the first six months of 2010, the Company repurchased 8,906,471 shares of its common stock for $231 million. In March 2010, the Company repaid $7.2 million of its junior subordinated debentures.

At June 30, 2010, the Company had senior notes, junior subordinated debentures and other debt outstanding with a carrying value of $1,585 million and a face amount of $1,602 million. The maturities of the outstanding debt are $152 million

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in 2010, $5 million in 2011, $16 million in 2012, $201 million in 2013, $200 million in 2015, $450 million in 2019, $77 million in 2022, $1 million in 2023, $250 million in 2037 and $250 million in 2045.

At June 30, 2010, equity was $3.7 billion and total capitalization (equity, senior notes and other debt and junior subordinated debentures) was $5.3 billion. The percentage of the Company’s capital attributable to senior notes, junior subordinated debentures and other debt was 30% at June 30, 2010 and 31% at December 31, 2009.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

The Company’s market risk generally represents the risk of loss that may result from the potential change in the fair value of the Company’s investment portfolio as a result of fluctuations in prices, interest rates and currency exchange rates. The Company attempts to manage its interest rate risk by maintaining an appropriate relationship between the average duration of its investment portfolio and the approximate duration of its liabilities, i.e., policy claims and debt obligations.

The duration of the investment portfolio was 3.6 years at June 30, 2010 and December 31, 2009. The overall market risk relating to the Company’s portfolio has remained similar to the risk at December 31, 2009.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures. The Company’s management, including its Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14 as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company has in place effective controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act and the rules thereunder, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

Changes in Internal Control over Financial Reporting. During the quarter ended June 30, 2010, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2009.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Set forth below is a summary of the shares repurchased by the Company during the quarter and the number of shares remaining authorized for purchase by the Company.


					Total number of shares purchased		Maximum number of
	Total number				as part of publicly announced		shares that may yet be
	of shares		Average price		plans		purchased under the
	purchased		paid per share		or programs		plans or programs (1)
April 2010		391,842	$	27.15		391,842		11,149,020
May 2010		3,153,705	$	26.82		3,153,705		7,995,315
June 2010		1,514,804	$	26.90		1,514,804		6,480,511


(1)		Remaining shares available for repurchase under the Company’s repurchase authorization approved by the board of directors on February 8, 2010. The Company’s repurchase authorization was increased to 10,000,000 shares by its Board of Directors on August 3, 2010.

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Item 6. Exhibits


Number

(10.1)		Form of Restricted Stock Unit Agreement under the W. R. Berkley Corporation 2003 Stock Incentive Plan.

(31.1)		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a).

(31.2)		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/ 15d-14(a).

(32.1)		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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


				W. R. BERKLEY CORPORATION

Date: August 6, 2010				/s/ William R. Berkley William R. Berkley
				Chairman of the Board and
				Chief Executive Officer

Date: August 6, 2010				/s/ Eugene G. Ballard Eugene G. Ballard
				Senior Vice President -
				Chief Financial Officer

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W. R. Berkley - 10-Q quarterly report FY2010 Q2

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