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BERKLEY W R CORP - Quarter Report: 2010 September (Form 10-Q)

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Table of Contents

 
 
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 September 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   (I.R.S. Employer
incorporation or organization)   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  Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Number of shares of common stock, $.20 par value, outstanding as of October 29, 2010: 145,040,084
 
 

 


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-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


Table of Contents

Part I — FINANCIAL INFORMATION
Item 1. Financial Statements
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)
                 
    September 30,   December 31,
    2010   2009
 
    (Unaudited)        
Assets
               
Investments:
               
Fixed maturity securities
  $ 11,386,757     $ 11,299,197  
Equity securities available for sale
    461,791       401,367  
Arbitrage trading account
    472,209       465,783  
Investment in arbitrage funds
    60,127       83,420  
Investment funds
    409,004       418,880  
Loans receivable
    357,805       381,591  
 
Total investments
    13,147,693       13,050,238  
 
Cash and cash equivalents
    922,198       515,430  
Premiums and fees receivable
    1,069,757       1,047,976  
Due from reinsurers
    1,076,907       972,820  
Accrued investment income
    142,944       130,524  
Prepaid reinsurance premiums
    226,050       211,054  
Deferred policy acquisition costs
    412,024       391,360  
Real estate, furniture and equipment
    251,612       246,605  
Deferred federal and foreign income taxes
    46,246       190,450  
Goodwill
    107,131       107,131  
Trading account receivables from brokers and clearing organizations
    239,006       310,042  
Other assets
    171,283       154,966  
 
Total assets
  $ 17,812,851     $ 17,328,596  
 
Liabilities and Equity
               
Liabilities:
               
Reserves for losses and loss expenses
  $ 9,135,156     $ 9,071,671  
Unearned premiums
    2,033,921       1,928,428  
Due to reinsurers
    211,743       208,045  
Trading account securities sold but not yet purchased
    65,876       143,885  
Other liabilities
    795,114       779,347  
Junior subordinated debentures
    242,733       249,793  
Senior notes and other debt
    1,494,207       1,345,481  
 
Total liabilities
    13,978,750       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, 145,203,276 and 156,552,355 shares
    47,024       47,024  
Additional paid-in capital
    933,090       926,359  
Retained earnings
    4,077,797       3,785,187  
Accumulated other comprehensive income
    396,894       163,207  
Treasury stock, at cost, 89,914,642 and 78,565,563 shares
    (1,627,413 )     (1,325,710 )
 
Total stockholders’ equity
    3,827,392       3,596,067  
Noncontrolling interests
    6,709       5,879  
 
Total equity
    3,834,101       3,601,946  
 
Total liabilities and equity
  $ 17,812,851     $ 17,328,596  
 
See accompanying notes to interim consolidated financial statements.

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W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Dollars in thousands, except per share data)
                                 
    For the Three Months   For the Nine Months
    Ended September 30,   Ended September 30,
    2010   2009   2010   2009
 
REVENUES:
                               
Net premiums written
  $ 986,706     $ 969,329     $ 2,932,010     $ 2,901,713  
Change in net unearned premiums
    (19,409 )     (26,189 )     (86,024 )     (28,193 )
 
Net premiums earned
    967,297       943,140       2,845,986       2,873,520  
Net investment income
    138,187       141,029       405,221       411,380  
Losses from investment funds
    (19,044 )     (25,657 )     (12,786 )     (178,552 )
Insurance service fees
    22,175       22,039       64,050       73,879  
Net investment gains (losses):
                               
Net realized gains on investment sales
    6,327       9,594       26,355       72,210  
Other-than-temporary impairments
    (1,123 )     (5,316 )     (3,705 )     (139,448 )
Less investment impairments recognized in other comprehensive income
          (195 )           8,409  
 
Net investment gains (losses)
    5,204       4,083       22,650       (58,829 )
 
Revenues from wholly-owned investees
    61,983       51,201       166,488       132,046  
Other income
    310       474       1,118       1,584  
 
Total revenues
    1,176,112       1,136,309       3,492,727       3,255,028  
 
 
                               
OPERATING COSTS AND EXPENSES:
                               
Losses and loss expenses
    597,907       585,964       1,718,355       1,793,676  
Other operating costs and expenses
    369,217       353,122       1,108,007       1,075,983  
Expenses from wholly-owned investees
    60,963       49,849       159,871       126,594  
Interest expense
    26,725       21,599       78,780       62,036  
 
Total operating costs and expenses
    1,054,812       1,010,534       3,065,013       3,058,289  
 
 
Income before income taxes
    121,300       125,775       427,714       196,739  
Income tax expense
    (27,631 )     (27,987 )     (105,040 )     (21,803 )
 
Net income before noncontrolling interests
    93,669       97,788       322,674       174,936  
Noncontrolling interests
    (50 )     (66 )     (238 )     (173 )
 
 
                               
Net income to common stockholders
  $ 93,619     $ 97,722     $ 322,436     $ 174,763  
 
NET INCOME PER SHARE:
                               
Basic
  $ 0.64     $ 0.61     $ 2.14     $ 1.09  
Diluted
  $ 0.61     $ 0.59     $ 2.05     $ 1.05  
 
See accompanying notes to interim consolidated financial statements.

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

(Dollars in thousands)
                 
    For the Nine Months Ended September 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
    (12,239 )     (12,706 )
Restricted stock units expensed
    18,772       18,080  
Stock options expensed
          9  
Stock issued to directors
    198       122  
 
End of period
  $ 933,090     $ 925,746  
 
 
               
RETAINED EARNINGS:
               
Beginning of period
  $ 3,785,187     $ 3,514,531  
Net income to common stockholders
    322,436       174,763  
Dividends
    (29,826 )     (28,843 )
 
End of period
  $ 4,077,797     $ 3,660,451  
 
 
               
ACCUMULATED OTHER COMPREHENSIVE INCOME:
               
Unrealized investment gains (losses):
               
Beginning of period
  $ 219,394     $ (142,216 )
Unrealized gains on securities not other-than-temporarily impaired
    230,804       399,510  
Unrealized gains (losses) on other-than-temporarily impaired securities
    437       (8,221 )
 
End of period
    450,635       249,073  
 
Currency translation adjustments:
               
Beginning of period
    (40,371 )     (72,475 )
Net change in period
    765       27,255  
 
End of period
    (39,606 )     (45,220 )
 
Net pension asset:
               
Beginning of period
    (15,816 )     (14,268 )
Net change in period
    1,681       1,475  
End of period
    (14,135 )     (12,793 )
 
Total accumulated other comprehensive income
  $ 396,894     $ 191,060  
 
 
               
TREASURY STOCK:
               
Beginning of period
  $ (1,325,710 )   $ (1,206,518 )
Stock exercised/vested
    17,054       16,494  
Stock repurchased
    (319,293 )     (31,842 )
Stock issued to directors
    536       630  
 
End of period
  $ (1,627,413 )   $ (1,221,236 )
 
 
               
NONCONTROLLING INTERESTS:
               
Beginning of period
  $ 5,879     $ 5,361  
Contributions/(distributions)
    581       (94 )
Net income
    238       173  
Other comprehensive income, net of tax
    11       60  
 
End of period
  $ 6,709     $ 5,500  
 
See accompanying notes to interim consolidated financial statements.

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

(Dollars in thousands)
                                 
    For the Three Months   For the Nine Months
    Ended September 30,   Ended September 30,
    2010   2009   2010   2009
 
Net income before noncontrolling interests
  $ 93,669     $ 97,788     $ 322,674     $ 174,936  
 
Other comprehensive income:
                               
 
Change in unrealized foreign exchange gains (losses)
    17,985       (1,800 )     765       27,255  
 
Unrealized holding gains on investment securities arising during the period, net of taxes
    125,329       220,365       245,908       353,199  
Reclassification adjustment for net investment gains (losses) included in net income, net of taxes
    (3,364 )     (2,653 )     (14,656 )     38,150  
Change in unrecognized pension obligation, net of taxes
    561       492       1,681       1,475  
 
Other comprehensive income
    140,511       216,404       233,698       420,079  
 
Comprehensive income
    234,180       314,192       556,372       595,015  
 
                               
Comprehensive income to the noncontrolling interests
    (53 )     (85 )     (249 )     (233 )
 
Comprehensive income to common stockholders
  $ 234,127     $ 314,107     $ 556,123     $ 594,782  
 
See accompanying notes to interim consolidated financial statements.

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

(Dollars in thousands)
                 
    For the Nine Months
    Ended September 30,
    2010   2009
 
CASH FROM OPERATING ACTIVITIES:
               
Net income to common stockholders
  $ 322,436     $ 174,763  
Adjustments to reconcile net income to net cash from operating activities:
               
Net investment (gains) losses
    (22,650 )     58,829  
Depreciation and amortization
    64,063       56,167  
Noncontrolling interests
    238       173  
Investment funds
    30,879       179,761  
Stock incentive plans
    20,357       18,709  
Change in:
               
Securities trading account
    (6,426 )     (417,236 )
Investment in arbitrage funds
    23,293       (8,790 )
Trading account receivables from brokers and clearing organizations
    71,036       (72,756 )
Trading account securities sold but not yet purchased
    (78,009 )     92,339  
Premiums and fees receivable
    (21,559 )     (17,380 )
Due from reinsurers
    (44,694 )     (36,996 )
Accrued investment income
    (12,303 )     (2,730 )
Prepaid reinsurance premiums
    16,780       (33,097 )
Deferred policy acquisition costs
    (20,819 )     (12,882 )
Deferred income taxes
    19,655       (35,973 )
Other assets
    (19,716 )     7,472  
Reserves for losses and loss expenses
    7,371       88,199  
Unearned premiums
    72,580       57,168  
Due to reinsurers
    2,630       39,331  
Other liabilities
    (34,425 )     30,226  
 
Net cash from operating activities
    390,717       165,297  
 
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
               
Proceeds from sales, excluding trading account:
               
Fixed maturity securities
    1,264,497       1,907,866  
Equity securities
    79,344       123,693  
Return of capital from investment funds
    26,643       4,239  
Proceeds from maturities and prepayments of fixed maturity securities
    922,453       932,945  
Cost of purchases, excluding trading account:
               
Fixed maturity securities
    (1,944,374 )     (3,889,392 )
Equity securities
    (123,623 )     (21,158 )
Contributions to investment funds
    (45,151 )     (50,372 )
Change in loans receivable
    22,251       (11,994 )
Net additions to real estate, furniture and equipment
    (36,688 )     (17,107 )
Change in balances due to security brokers
    56,129       201,119  
Payment for business purchased, net of cash acquired
          (33,812 )
 
Net cash from (used in) investing activities
    221,481       (853,973 )
 
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES:
               
Purchase of common treasury shares
    (319,293 )     (31,842 )
Net proceeds from issuance of debt
    305,637       321,171  
Cash dividends to common stockholders
    (30,947 )     (28,843 )
Bank deposits received
    8,649       18,497  
(Repayments to) advances from federal home loan bank
    (8,300 )     1,515  
Net proceeds from stock options exercised
    4,720       2,640  
Repayment of debt
    (165,160 )     (3,590 )
Other, net
    (236 )     (76 )
 
Net cash (used in) from financing activities
    (204,930 )     279,472  
 
Net impact on cash due to change in foreign exchange rates
    (500 )     10,761  
 
Net increase (decrease) in cash and cash equivalents
    406,768       (398,443 )
Cash and cash equivalents at beginning of year
    515,430       1,134,835  
 
Cash and cash equivalents at end of period
  $ 922,198     $ 736,392  
 
See accompanying notes to interim consolidated financial statements.

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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 nine months ended September 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 Nine Months
    Ended September 30,   Ended September 30,
    2010   2009   2010   2009
Basic
    147,079       160,468       150,556       160,520  
Diluted
    154,160       166,736       157,054       166,765  
(3) 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 have a material 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 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.

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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, the 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 effective January 1, 2010, and the remaining guidance is effective for interim and annual reporting periods beginning after December 15, 2010. The adoption of this remaining guidance will expand the disclosures related to fair value measurements in the notes to the Company’s consolidated financial statements.
In October 2010, the FASB issued changes to existing accounting guidance regarding the treatment of costs associated with acquiring or renewing insurance contracts. We currently defer these expenses, which include commissions, premium taxes, fees, and certain other costs of underwriting policies, and amortize them over the periods in which the related premiums are earned. This updated guidance is effective for periods ending after December 15, 2011. The adoption of this guidance is not expected to have a material impact on our financial condition or results of operations.
(4) Investments in Fixed Maturity Securities
At September 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
 
September 30, 2010
                                       
Held to maturity:
                                       
State and municipal
  $ 70,973     $ 9,992     $     $ 80,965     $ 70,973  
Residential mortgage-backed
    40,052       4,979             45,031       40,052  
Corporate
    4,995       332             5,327       4,995  
 
Total held to maturity
    116,020       15,303             131,323       116,020  
 
Available for sale:
                                       
U.S. government and government agency
    1,365,193       82,308       (584 )     1,446,917       1,446,917  
State and municipal (1)
    5,445,152       334,604       (19,769 )     5,759,987       5,759,987  
Mortgage-backed securities:
                                       
Residential (2)
    1,335,603       65,396       (11,798 )     1,389,201       1,389,201  
Commercial
    43,341       317       (6,994 )     36,664       36,664  
Corporate
    2,038,034       145,506       (20,602 )     2,162,938       2,162,938  
Foreign
    449,659       25,518       (147 )     475,030       475,030  
 
Total available for sale
    10,676,982       653,649       (59,894 )     11,270,737       11,270,737  
 
Total investment in fixed maturity securities
  $ 10,793,002     $ 668,952     $ (59,894 )   $ 11,402,060     $ 11,386,757  
 
 
                                       
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 $1,120,000 and $340,000 as of September 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 $3,633,000 and $5,085,000 as of September 30, 2010 and December 31, 2009, respectively, related to the non-credit portion of OTTI recognized in other comprehensive income.

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    The amortized cost and fair value of fixed maturity securities at September 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
  $ 622,449     $ 633,658  
Due after one year through five years
    2,856,080       3,025,539  
Due after five years through ten years
    2,807,836       3,038,194  
Due after ten years
    3,087,641       3,233,773  
Mortgage-backed securities
    1,418,996       1,470,896  
 
Total
  $ 10,793,002     $ 11,402,060  
 
    At September 30, 2010, there were no investments, other than investments in United States government and government agency securities, which exceeded 10% of common stockholders’ equity.
(5) Statements of Cash Flow
    Interest payments were $92,531,000 and $69,827,000 in the nine months ended September 30, 2010 and 2009, respectively. Income taxes paid (refunded) were $80,113,000 and ($451,000) in the nine months ended September 30, 2010 and 2009, respectively.
(6) Investments in Equity Securities Available for Sale
    At September 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
 
September 30, 2010
                                       
Common stocks
  $ 125,513     $ 103,032     $ (910 )   $ 227,635     $ 227,635  
Preferred stocks
    236,338       11,178       (13,360 )     234,156       234,156  
 
Total
  $ 361,851     $ 114,210     $ (14,270 )   $ 461,791     $ 461,791  
 
 
                                       
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:
                 
    September 30,   December 31,
(Dollars in thousands)   2010   2009
 
Arbitrage trading account
  $ 472,209     $ 465,783  
Investment in arbitrage funds
    60,127       83,420  
 
               
Related assets and liabilities:
               
Receivables from brokers
    239,006       310,042  
Securities sold but not yet purchased
    (65,876 )     (143,885 )

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(8) Net Investment Income
Net investment income consists of the following:
                                 
    For the Three Months   For the Nine Months
    Ended September 30,   Ended September 30,
(Dollars in thousands)   2010   2009   2010   2009
 
Investment income earned on:
                               
Fixed maturity securities, including cash
  $ 122,617     $ 125,745     $ 373,375     $ 368,343  
Equity securities available for sale
    2,723       3,650       8,716       15,724  
Arbritage trading account (1)
    13,651       12,242       26,005       29,841  
 
Gross investment income
    138,991       141,637       408,096       413,908  
Investment expense
    (804 )     (608 )     (2,875 )     (2,528 )
 
Net investment income
  $ 138,187     $ 141,029     $ 405,221     $ 411,380  
 
 
(1)   Investment income earned from arbitrage trading account activity includes net unrealized trading losses of $2,228,000 and gains of $3,424,000 in the three months ended September 30, 2010 and 2009, respectively, and net unrealized trading losses of $1,990,000 and gains of $4,922,000 in the nine months ended September 30, 2010 and 2009, respectively.
(9) Investment Funds
The carrying value of investment funds (which are recorded on a one-quarter lag) include the following:
                 
    Carrying Value
    as of
    September 30,   December 31,
(Dollars in thousands)   2010   2009
 
Real estate
  $ 196,446     $ 193,178  
Energy
    88,813       106,213  
Other
    123,745       119,489  
 
Total
  $ 409,004     $ 418,880  
 
Income (losses) from investment funds (which are recorded on a one-quarter lag) include the following:
                                 
    For the Three Months Ended   For the Nine Months Ended
    September 30,   September 30,
(Dollars in thousands)   2010   2009   2010   2009
 
Real estate
  $ (3,353 )   $ (22,652 )   $ (7,259 )   $ (153,525 )
Energy
    (14,293 )     (3,343 )     (344 )     (21,760 )
Other
    (1,398 )     338       (5,183 )     (3,267 )
 
Total
  $ (19,044 )   $ (25,657 )   $ (12,786 )   $ (178,552 )
 
(10) Loans Receivable
The amortized cost of loans receivable was $358 million and $382 million at September 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 stated periods. For the nine months ended September 30, 2010, the Company increased its valuation allowance by $2.6 million. The nine largest loans have an aggregate amortized cost of $280 million and an aggregate fair value of $221 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 June 2014. 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.

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(11) Realized and Unrealized Investment Gains (Losses)
     Realized and unrealized investment gains (losses) are as follows:
                                 
    For the Three Months   For the Nine Months
    Ended September 30,   Ended September 30,
(Dollars in thousands)   2010   2009   2010   2009
 
Realized investment gains (losses):
                               
Fixed maturity securities:
                               
Gains
  $ 5,669     $ 9,847     $ 27,519     $ 36,468  
Losses
    (2,956 )     (1,173 )     (6,214 )     (2,751 )
Equity securities available for sale
    2,974       156       3,765       36,180  
Other
                224        
Sales of investment funds
    640       764       1,061       2,313  
Provision for OTTI (1)
    (1,123 )     (5,316 )     (3,705 )     (139,448 )
Less investment impairments recognized in other comprehensive income
          (195 )           8,409  
 
Total net investment gains (losses) before income taxes
    5,204       4,083       22,650       (58,829 )
Income taxes
    (1,840 )     (1,430 )     (7,994 )     20,679  
 
Total net investment gains (losses)
  $ 3,364     $ 2,653     $ 14,656     $ (38,150 )
 
 
                               
Change in unrealized gains (losses) of available for sales securities:
                               
Fixed maturity securities
  $ 163,180     $ 226,656     $ 341,503     $ 465,208  
Less non-credit portion of OTTI recognized in other comprehensive income
    (826 )     195       673       (8,409 )
Equity securities available for sale
    23,570       99,090       11,300       136,502  
Investment funds
    1,707       5,416       2,006       9,648  
Cash and cash equivalents
                (1 )     (76 )
 
Total change in unrealized gains before income taxes and noncontrolling interests
    187,631       331,357       355,481       602,873  
Income taxes
    (65,666 )     (113,645 )     (124,229 )     (211,524 )
Noncontrolling interests
    (3 )     (19 )     (11 )     (60 )
 
Total change in unrealized gains
  $ 121,962     $ 217,693     $ 231,241     $ 391,289  
 
 
(1)   Includes change in valuation allowance for loans receivable of $2.6 million and $3.3 million for the nine months ended September 30, 2010 and 2009, respectively.

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(12) Securities in an Unrealized Loss Position
    The following table summarizes all securities in an unrealized loss position at September 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
 
September 30, 2010
                                               
U.S. government and agency
  $ 38,232     $ 564     $ 7,081     $ 20     $ 45,313     $ 584  
State and municipal
    180,928       1,201       168,911       18,568       349,839       19,769  
Mortgage-backed securities
    107,822       1,122       188,497       17,670       296,319       18,792  
Corporate
    141,538       4,736       127,728       15,866       269,266       20,602  
Foreign
    27,546       147                   27,546       147  
 
Fixed maturity securities
    496,066       7,770       492,217       52,124       988,283       59,894  
Common stocks
    14,076       910                   14,076       910  
Preferred stocks
    16,970       3,648       78,037       9,712       95,007       13,360  
 
Equity securities
    31,046       4,558       78,037       9,712       109,083       14,270  
 
Total
  $ 527,112     $ 12,328     $ 570,254     $ 61,836     $ 1,097,366     $ 74,164  
 
 
                                               
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 September 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
    9     $ 73,859     $ 7,053  
Corporate
    9       59,432       4,430  
State and municipal
    5       34,576       5,417  
Unrealized loss $5 million or more
                       
Mortgage-backed security (1)
    1       30,155       6,845  
 
Total
    24     $ 198,022     $ 23,745  
 
 
(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.

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    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 Nine Months
    Ended September 30,   Ended September 30,
(Dollars in thousands)   2010   2009   2010   2009
 
Beginning balance of amounts related to credit losses
  $ 5,661     $ 2,610     $ 5,661     $  
Additions for amounts related to credit losses
          2,200             4,810  
 
Ending balance of amounts related to credit losses
  $ 5,661     $ 4,810     $ 5,661     $ 4,810  
 
    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 September 30, 2010, there were seven preferred stocks in an unrealized loss position, with an aggregate fair value of $95 million and a gross unrealized loss of $13 million. This includes investments in Fannie Mae and Freddie Mac securities that were written-down to fair value, which was approximately 4% of original cost, in 2008. Since that time, the trading volume for these stocks has been low and the stock price has been volatile. These two securities had a fair value of $2 million and an unrealized loss of $4 million at September 30, 2010. The Company does not consider any of the preferred stocks to be OTTI.
 
    Common Stocks At September 30, 2010, the Company owned one common stock in an unrealized loss position with an aggregate fair value of $14 million and an aggregate unrealized loss of $1 million. The Company does not consider this security 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 September 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.

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The following tables present the assets and liabilities measured at fair value, on a recurring basis, as of September 30, 2010 and December 31, 2009 by level:
                                 
(Dollars in thousands)   Total     Level 1     Level 2     Level 3  
 
September 30, 2010
                               
Assets:
                               
Fixed maturity securities available for sale:
                               
U.S. government and agency
  $ 1,446,917     $     $ 1,446,917     $  
State and municipal
    5,759,987             5,759,987        
Mortgage-backed securities
    1,425,865             1,425,865        
Corporate
    2,162,938             2,069,233       93,705  
Foreign
    475,030             475,030        
 
Total fixed maturity securities available for sale
    11,270,737             11,177,032       93,705  
 
Equity securities available for sale:
                               
Common stocks
    227,635       135,875       90,201       1,559  
Preferred stocks
    234,156             157,833       76,323  
 
Total equity securities available for sale
    461,791       135,875       248,034       77,882  
 
Arbitrage trading account
    472,209       471,730       479       0  
 
Total
  $ 12,204,737     $ 607,605     $ 11,425,545     $ 171,587  
 
Liabilities:
                               
Securities sold but not yet purchased
  $ 65,876     $ 65,876     $     $  
 
 
                               
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 and 2 during the three and nine months ended September 30, 2010.

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The following tables summarize changes in Level 3 assets for the three and nine months ended September 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 September 30, 2010
                                               
Fixed maturity securities available for sale:
                                               
Corporate
  $ 78,522     $ (149 )   $ 2,334     $ 10,598     $ 2,400     $ 93,705  
 
Total
    78,522       (149 )     2,334       10,598       2,400       93,705  
 
Equity securities available for sale:
                                               
Common stocks
    1,559                               1,559  
Preferred stocks
    63,432             3,727       9,164             76,323  
 
Total
    64,991             3,727       9,164             77,882  
 
Arbitrage trading account
    353       (353 )                        
 
Total
  $ 143,866     $ (502 )   $ 6,061     $ 19,762     $ 2,400     $ 171,587  
 
 
                                               
For the nine months ended September 30, 2010
                                               
Fixed maturity securities available for sale:
                                               
Mortgage-backed securities
  $ 25,900     $     $     $     $ (25,900 )   $  
Corporate
    90,160       74       2,094       (1,023 )     2,400       93,705  
 
Total
    116,060       74       2,094       (1,023 )     (23,500 )     93,705  
 
Equity securities available for sale:
                                               
Common stocks
    1,559                               1,559  
Preferred stocks
    54,713             2,068       19,542             76,323  
 
Total
    56,272             2,068       19,542             77,882  
 
Arbitrage trading account
    353       (353 )                        
 
Total
  $ 172,685     $ (279 )   $ 4,162     $ 18,519     $ (23,500 )   $ 171,587  
 
  For the nine months ended September 30, 2010, a mortgage-backed security was transferred from Level 3 to Level 2 as the Company was able to obtain a quotation from a third party broker dealer. In addition, the Company received a Level 3 corporate security in exchange for a private equity investment fund previously accounted for as an equity investment.

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(14) Reinsurance
    The following is a summary of reinsurance financial information:
                                 
    For the Three   For the Nine
    Months Ended   Months Ended
    September 30,   September 30,
(Dollars in thousands)   2010   2009   2010   2009
 
Written premiums:
                               
Direct
  $ 962,872     $ 913,602     $ 2,854,951     $ 2,760,505  
Assumed
    158,523       183,138       506,033       539,054  
Ceded
    (134,689 )     (127,411 )     (428,974 )     (397,846 )
 
Total net premiums written
  $ 986,706     $ 969,329     $ 2,932,010     $ 2,901,713  
 
 
                               
Earned premiums:
                               
Direct
  $ 947,314     $ 912,462     $ 2,779,044     $ 2,765,446  
Assumed
    162,783       163,414       482,628       474,858  
Ceded
    (142,800 )     (132,736 )     (415,686 )     (366,784 )
 
Total net premiums earned
  $ 967,297     $ 943,140     $ 2,845,986     $ 2,873,520  
 
 
                               
 
Ceded losses incurred
  $ 88,928     $ 78,889     $ 315,580     $ 199,492  
 
    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 September 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:
                                 
    September 30, 2010   December 31, 2009
(Dollars in thousands)   Carrying Value   Fair Value   Carrying Value   Fair Value
 
Assets:
                               
Fixed maturity securities
  $ 11,386,757     $ 11,402,060     $ 11,299,197     $ 11,308,207  
Equity securities available for sale
    461,791       461,791       401,367       401,367  
Arbitrage trading account
    472,209       472,209       465,783       465,783  
Investment in arbitrage funds
    60,127       60,127       83,420       83,420  
Loans receivable
    357,805       303,247       381,591       285,122  
Cash and cash equivalents
    922,198       922,198       515,430       515,430  
Trading account receivables from brokers and clearing organizations
    239,006       239,006       310,042       310,042  
Liabilities:
                               
Trading account securities sold but not yet purchased
    65,876       65,876       143,885       143,885  
Due to broker
    61,741       61,741       5,612       5,612  
Junior subordinated debentures
    242,733       251,500       249,793       242,217  
Senior notes and other debt
    1,494,207       1,618,894       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 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.

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(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. Grants of RSUs are made periodically, generally twice within a five-year period. A summary of RSUs issued in 2010 and 2009 follows (dollars in thousands):
                 
    Units   Fair Value
 
               
Three months ended September 30:
               
2010
    1,472,150     $ 38,763  
2009
    50,500     $ 1,253  
 
               
Nine months ended September 30:
               
2010
    2,226,650     $ 58,456  
2009
    105,500     $ 2,546  
(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.

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    Revenues        
            Investment                   Pre-Tax   Net
    Earned   Income and                   Income   Income
(Dollars in thousands)   Premiums   Funds   Other   Total   (Loss)   (Loss)
 
For the the three months ended September 30, 2010:
                                               
Specialty
  $ 326,239     $ 40,814     $ 765     $ 367,818     $ 61,989     $ 45,268  
Regional
    268,089       18,413       782       287,284       22,946       17,159  
Alternative markets
    148,830       28,136       20,631       197,597       42,007       30,734  
Reinsurance
    103,126       19,779             122,905       26,508       19,641  
International
    121,013       8,722             129,735       12,712       8,217  
Corporate, other and eliminations (1)
          3,279       62,290       65,569       (50,066 )     (30,764 )
Net investment gains
                5,204       5,204       5,204       3,364  
 
Consolidated
  $ 967,297     $ 119,143     $ 89,672     $ 1,176,112     $ 121,300     $ 93,619  
 
For the the three months ended September 30, 2009:
                                               
Specialty
  $ 326,645     $ 40,439     $ 964     $ 368,048     $ 56,211     $ 42,953  
Regional
    276,369       18,505       804       295,678       30,287       22,625  
Alternative markets
    149,606       26,221       20,334       196,161       42,713       31,634  
Reinsurance
    107,045       22,742             129,787       26,261       20,348  
International
    83,475       4,069             87,544       9,496       4,147  
Corporate, other and eliminations (1)
          3,396       51,612       55,008       (43,276 )     (26,638 )
Net investment gains
                4,083       4,083       4,083       2,653  
 
Consolidated
  $ 943,140     $ 115,372     $ 77,797     $ 1,136,309     $ 125,775     $ 97,722  
 
For the the nine months ended September 30, 2010:
                                               
Specialty
  $ 955,705     $ 133,027     $ 2,383     $ 1,091,115     $ 212,836     $ 154,559  
Regional
    798,387       60,995       2,448       861,830       90,415       66,205  
Alternative markets
    458,842       90,658       59,228       608,728       138,563       101,117  
Reinsurance
    308,316       75,210             383,526       91,085       68,373  
International
    324,736       25,105             349,841       19,671       13,631  
Corporate, other and eliminations (1)
          7,440       167,597       175,037       (147,506 )     (96,105 )
Net investment gains
                22,650       22,650       22,650       14,656  
 
Consolidated
  $ 2,845,986     $ 392,435     $ 254,306     $ 3,492,727     $ 427,714     $ 322,436  
 
For the the nine months ended September 30, 2009:
                                               
Specialty
  $ 1,030,625     $ 75,115     $ 2,737     $ 1,108,477     $ 149,875     $ 115,559  
Regional
    843,888       34,355       2,057       880,300       60,329       47,511  
Alternative markets
    452,908       51,706       69,154       573,768       110,108       84,057  
Reinsurance
    306,925       45,661             352,586       50,488       43,844  
International
    239,174       18,806             257,980       16,384       10,050  
Corporate, other and eliminations (1)
          7,185       133,561       140,746       (131,616 )     (88,108 )
Net investment losses
                (58,829 )     (58,829 )     (58,829 )     (38,150 )
 
Consolidated
  $ 2,873,520     $ 232,828     $ 148,680     $ 3,255,028     $ 196,739     $ 174,763  
 
    Identifiable assets by segment are as follows:
                 
    September 30,   December 31,
(Dollars in thousands)   2010   2009
 
Specialty
  $ 5,897,874     $ 5,589,666  
Regional
    2,738,462       2,741,269  
Alternative markets
    3,826,759       3,643,214  
Reinsurance
    3,062,702       3,142,017  
International
    1,305,084       1,118,994  
Corporate, other and eliminations (1)
    981,970       1,093,436  
 
Consolidated
  $ 17,812,851     $ 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.

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Net premiums earned by major line of business are as follows:
                                 
    For the Three Months   For the Nine Months
    Ended September 30,   Ended September 30,
(Dollars in thousands)   2010   2009   2010   2009
 
Specialty
                               
Premises operations
  $ 98,699     $ 104,313     $ 286,458     $ 344,062  
Property
    56,525       48,811       156,447       149,574  
Professional liability
    52,092       44,020       147,129       126,457  
Commercial automobile
    23,870       30,065       87,106       103,829  
Products liability
    30,056       45,046       98,684       148,469  
Other
    64,997       54,390       179,881       158,234  
 
Total specialty
    326,239       326,645       955,705       1,030,625  
 
Regional
                               
Commercial multiple peril
    97,642       100,691       290,755       307,571  
Commercial automobile
    75,082       80,014       226,719       243,321  
Workers’ compensation
    53,788       55,850       160,466       174,661  
Other
    41,577       39,814       120,447       118,335  
 
Total regional
    268,089       276,369       798,387       843,888  
 
Alternative Markets
                               
Primary workers’ compensation
    64,421       59,204       192,393       181,265  
Excess workers’ compensation
    53,485       63,965       169,536       194,179  
Other
    30,924       26,437       96,913       77,464  
 
Total alternative markets
    148,830       149,606       458,842       452,908  
 
Reinsurance
                               
Casualty
    82,273       79,018       230,418       247,387  
Property
    20,853       28,027       77,898       59,538  
 
Total reinsurance
    103,126       107,045       308,316       306,925  
 
International
    121,013       83,475       324,736       239,174  
 
Total
  $ 967,297     $ 943,140     $ 2,845,986     $ 2,873,520  
 
(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.

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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 and pricing has stabilized in most areas, current market price levels for certain lines of business remain 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, 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.

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          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 September 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 September 30, 2010 relate to the reinsurance segment. 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.

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          Following is a summary of the Company’s reserves for losses and loss expenses by business segment as of September 30, 2010 and December 31, 2009:
                 
(Dollars in thousands)   2010   2009
 
Specialty
  $ 2,928,173     $ 2,972,562  
Regional
    1,305,395       1,341,451  
Alternative markets
    1,849,654       1,771,114  
Reinsurance
    1,589,971       1,699,052  
International
    426,601       363,603  
 
Net reserves for losses and loss expenses
    8,099,794       8,147,782  
Ceded reserves for losses and loss expenses
    1,035,362       923,889  
 
Gross reserves for losses and loss expenses
  $ 9,135,156     $ 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 September 30, 2010 and December 31, 2009:
                         
    Reported Case   Incurred But    
(Dollars in thousands)   Reserves   Not Reported   Total
 
September 30, 2010
                       
General liability
  $ 886,587     $ 2,061,808     $ 2,948,395  
Workers’ compensation (1)
    1,147,407       1,037,264       2,184,671  
Commercial automobile
    342,011       187,708       529,719  
International
    176,446       250,155       426,601  
Other
    166,649       253,788       420,437  
 
Total primary
    2,719,100       3,790,723       6,509,823  
Reinsurance (1)
    644,209       945,762       1,589,971  
 
Total
  $ 3,363,309     $ 4,736,485     $ 8,099,794  
 
 
                       
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 $898 million and $877 million as of September 30, 2010 and December 31, 2009, respectively.

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          The following table presents development in our estimate of claims occurring in prior years:
                                 
    For the Three Months   For the Nine Months
    Ended September 30,   Ended September 30,
(Dollars in thousands)   2010   2009   2010   2009
 
Favorable (unfavorable) reserve development:
                               
Specialty
  $ 13,461     $ 18,707     $ 70,511     $ 58,026  
Regional
    19,264       13,936       68,892       28,376  
Alternative markets
    6,931       11,071       17,485       35,352  
Reinsurance
    8,852       11,174       39,247       33,780  
International
    (661 )     4,962       2,826       8,592  
     
Total favorable (unfavorable) reserve development
    47,847       59,850       198,961       164,126  
 
                               
Premium offsets (1):
                               
Specialty
    2,525       (5,285 )     211       (5,285 )
Alternative markets
    499       (2,287 )     75       (2,287 )
Reinsurance
    (330 )     (5,269 )     (19,363 )     (22,103 )
 
Net development
  $ 50,541     $ 47,009     $ 179,884     $ 134,451  
 
(1)   Represents portion of reserve development that was offset by an increase (decrease) in earned premiums.
          For the nine months ended September 30, 2010, estimates for claims occurring in prior years decreased by $199 million, before premium offsets, and by $180 million, net of premium offsets. The favorable reserve development in 2010 was primarily attributable to accident years 2006 through 2009. 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 2005 through 2009.
          Reinsurance — Estimates for claims occurring in prior years decreased by $20 million, net of premium offsets, for the nine months ended September 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.

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          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 September 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 $898 million and $877 million as of September 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 $67 million and $58 million at September 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 to recover the cost basis of the investment 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 fair value 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.
          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.

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          The following table provides a summary of all fixed maturity securities in an unrealized loss position as of September 30, 2010:
                         
    Number of   Aggregate   Unrealized
(Dollars in thousands)   Securities   Fair Value   Loss
 
Unrealized loss less than 20% of amortized cost
    117     $ 949,691     $ 44,416  
Unrealized loss of 20% or greater:
                       
Twelve months and longer
    9       38,592       15,478  
 
Total
    126     $ 988,283     $ 59,894  
 
                    A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at September 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
    9     $ 73,859     $ 7,053  
Corporate
    9       59,432       4,430  
State and municipal
    5       34,576       5,417  
Unrealized loss $5 million or more
                       
Mortgage-backed security (1)
    1       30,155       6,845  
 
Total
    24     $ 198,022     $ 23,745  
 
(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 September 30, 2010, there were seven preferred stocks in an unrealized loss position, with an aggregate fair value of $95 million and a gross unrealized loss of $13 million. This includes investments in Fannie Mae and Freddie Mac securities that were written-down to fair value, which was approximately 4% of original cost, in 2008. Since that time, the trading volume for these stocks has been low and the stock price has been volatile. These two securities had a fair value of $2 million and an unrealized loss of $4 million at September 30, 2010. The Company does not consider any of the preferred stocks to be OTTI.
          Common Stocks At September 30, 2010, the Company owned one common stock in an unrealized loss position with an aggregate fair value of $14 million and an aggregate unrealized loss of $1 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 September 30, 2010 and December 31, 2009, respectively.

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          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 September 30, 2010 (dollars in thousands):
                 
    Carrying     Percent  
    Value     of Total  
Pricing source:
               
Independent pricing services
  $ 10,485,361       93.0 %
Syndicate manager
    99,080       0.9 %
Directly by the Company based on:
               
Observable data
    594,991       5.3 %
Par value
    1,250       0.0 %
Cash flow model
    90,055       0.8 %
 
Total
  $ 11,270,737       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 September 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 Nine Months Ended September 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 GAAP combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the nine months ended September 30, 2010 and 2009. The GAAP combined ratio represents a measure of underwriting profitability, excluding investment income. A GAAP combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.
                 
    For the Nine Months
    Ended September 30,
(Dollars in thousands)   2010   2009
 
Specialty
               
Gross premiums written
  $ 1,131,216     $ 1,112,155  
Net premiums written
    975,188       961,752  
Premiums earned
    955,705       1,030,625  
Loss ratio
    59.0 %     62.2 %
Expense ratio
    32.7 %     30.6 %
GAAP combined ratio
    91.7 %     92.8 %
 
Regional
               
Gross premiums written
  $ 889,362     $ 951,676  
Net premiums written
    802,691       836,862  
Premiums earned
    798,387       843,888  
Loss ratio
    60.7 %     63.4 %
Expense ratio
    35.5 %     33.5 %
GAAP combined ratio
    96.2 %     96.9 %
 
Alternative Markets
               
Gross premiums written
  $ 572,518     $ 554,327  
Net premiums written
    479,565       494,415  
Premiums earned
    458,842       452,908  
Loss ratio
    65.9 %     64.1 %
Expense ratio
    25.8 %     25.4 %
GAAP combined ratio
    91.7 %     89.5 %
 
Reinsurance
               
Gross premiums written
  $ 323,800     $ 355,852  
Net premiums written
    304,832       330,851  
Premiums earned
    308,316       306,925  
Loss ratio
    53.5 %     59.1 %
Expense ratio
    41.4 %     39.3 %
GAAP combined ratio
    94.9 %     98.4 %
 
International
               
Gross premiums written
  $ 444,088     $ 325,549  
Net premiums written
    369,734       277,833  
Premiums earned
    324,736       239,174  
Loss ratio
    62.8 %     61.1 %
Expense ratio
    40.9 %     39.1 %
GAAP combined ratio
    103.7 %     100.2 %
 
Consolidated
               
Gross premiums written
  $ 3,360,984     $ 3,299,559  
Net premiums written
    2,932,010       2,901,713  
Premiums earned
    2,845,986       2,873,520  
Loss ratio
    60.4 %     62.4 %
Expense ratio
    34.3 %     32.3 %
GAAP combined ratio
    94.7 %     94.7 %
 

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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 nine months ended September 30, 2010 and 2009 (amounts in thousands, except per share data):
                 
    2010     2009  
 
Net income to common stockholders
  $ 322,436     $ 174,763  
Weighted average diluted shares
    157,054       166,765  
Net income per diluted share
  $ 2.05     $ 1.05  
 
          The Company reported net income of $322 million in 2010 compared to $175 million in 2009. The increase in net income is primarily due to improved investment results. Losses from investment funds (which are recorded on a one quarter lag) were $13 million in 2010 compared with $179 million in 2009. Other-than-temporary investment impairments were $4 million in 2010 compared with $139 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 $3,361 million in 2010, an increase of 2% from 2009. Gross premiums for recently started operating units (companies that began operations since 2006) were up 46% to $592 million in 2010 from $404 million in 2009. Approximately 77.2% of policies expiring in the first nine months of 2010 were renewed, compared with 77.4% of policies expiring in the first nine months of 2009 that were renewed. The average price of policies renewed in the first nine months of 2010 declined 0.3% 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 and pricing has stabilized in most areas, current market price levels for certain lines of business remain 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 nine months ended September 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 $1,131 million in 2010 from $1,112 million in 2009. Gross premiums written decreased 28% for commercial automobile and 20% for products liability and increased 12% for property lines, 7% for professional liability and 1% for premises operations.
 
    Regional gross premiums decreased by 7% to $889 million in 2010 from $952 million in 2009. Gross premiums written decreased 7% for workers’ compensation, 6% for commercial automobile and 4% for commercial multiple perils. Gross premiums include assigned risk premiums, which are fully reinsured, of $27 million in 2010, down from $54 million in 2009 due to the transfer of certain assigned risk premiums from the regional segment to the alternative markets segment in 2010.
 
    Alternative markets gross premiums increased by 3% to $573 million in 2010 from $554 million in 2009. Gross premiums written decreased 17% for excess workers’ compensation and 1% for primary workers’ compensation. Gross premiums include assigned risk premiums, which are fully reinsured, of $51 million in 2010, up from $15 million in 2009, reflecting the above transfer from the regional segment in 2010.
 
    Reinsurance gross premiums decreased by 9% to $324 million in 2010 from $356 million in 2009. Gross premiums written decreased 10% to $235 million for casualty business and 5% to $89 million for property business.
 
    International gross premiums increased by 36% to $444 million in 2010 from $326 million in 2009. The increase is primarily due to an increase in business written by our new operating units in Canada, Norway and Brazil and our new Lloyd’s syndicate. 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 $2,932 million in 2010, an increase of 1% from 2009.

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          Net Premiums Earned. Premiums earned decreased 1% to $2,846 million in 2010 from $2,874 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 1% 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 nine months ended September 30, 2010 and 2009:
                                 
                    Average Annualized  
    Amount     Yield  
(Dollars in thousands)   2010     2009     2010     2009  
 
Fixed maturity securities, including cash
  $ 373,375     $ 368,343       4.1 %     4.2 %
Arbitrage trading account and funds
    26,005       29,841       7.3 %     11.3 %
Equity securities available for sale
    8,716       15,724       3.7 %     6.2 %
 
Gross investment income
    408,096       413,908       4.2 %     4.5 %
Investment expenses
    (2,875 )     (2,528 )                
 
Total
  $ 405,221     $ 411,380       4.2 %     4.4 %
 
          Net investment income decreased 2% to $405 million in 2010 from $411 million in 2009. The decrease in investment income is due to a decline in the average yield, 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 $12.4 billion in 2009.
          Losses from Investment Funds. Following is a summary of losses from investment funds (which are recorded on a one-quarter lag) for the nine months ended September 30, 2010 and 2009:
                 
(Dollars in thousands)   2010     2009  
 
Real estate funds
  $ (7,259 )   $ (153,525 )
Energy funds
    (344 )     (21,760 )
Other funds
    (5,183 )     (3,267 )
 
Total
  $ (12,786 )   $ (178,552 )
 
          Losses from investment funds were $13 million in 2010 compared to $179 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 $196 million at September 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.
          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 $64 million in 2010 from $74 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 $26 million in 2010 compared with $72 million in 2009.
          Other-Than-Temporary Impairments. Other-than-temporary impairments were $4 million in 2010 compared with $139 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 $166 million in 2010 compared with $132 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

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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 $1,718 million in 2010 from $1,794 million in 2009 due to an increase in favorable reserve development. The consolidated loss ratio was 60.4% in 2010 compared with 62.4% in 2009. Weather-related losses were $75 million in 2010 (including $8 million from the earthquake in Chile) compared with $59 million in 2009. Favorable prior year reserve development, net of related premium adjustments, was $180 million in 2010 and $134 million in 2009. A summary of loss ratios in 2010 compared with 2009 by business segment follows:
    Specialty’s loss ratio decreased to 59.0% in 2010 from 62.2% in 2009 due to an increase in favorable reserve development. Net favorable prior year reserve development, net of related premium adjustments, was $71 million in 2010 compared with $53 million in 2009.
 
    Regional’s loss ratio decreased to 60.7% in 2010 from 63.4% in 2009 due to an increase in favorable reserve development, partially offset by storm losses. Weather-related losses were $67 million in 2010 compared with $59 million in 2009. Net favorable prior year reserve development was $69 million in 2010 compared with $28 million in 2009.
 
    Alternative markets’ loss ratio increased to 65.9% in 2010 from 64.1% 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. Favorable prior year reserve development, net of related premium adjustments, was $17 million in 2010 compared with $33 million in 2009.
 
    Reinsurance’s loss ratio decreased to 53.5% in 2010 from 59.1% in 2009 due to lower loss ratios for several large property treaties and to an increase in favorable reserve development. Favorable prior year reserve development, net of related premium adjustments, was $20 million in 2010 compared with $11 million in 2009.
 
    International’s loss ratio increased to 62.8% in 2010 from 61.1% in 2009 due primarily to losses from the Chilean earthquake of $4 million and to a decrease in favorable reserve development. Net favorable prior year reserve development was $3 million in 2010 compared with $9 million in 2009.
          Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses for the nine months ended September 30, 2010 and 2009:
                 
(Dollars in thousands)   2010     2009  
 
Underwriting expenses
  $ 975,542     $ 927,544  
Service expenses
    54,442       62,330  
Net foreign currency (gains) losses
    (5,627 )     1,328  
Other costs and expenses
    83,650       84,781  
 
Total
  $ 1,108,007     $ 1,075,983  
 
          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 34.3% in 2010 from 32.3% in 2009 primarily due to the decline in earned premiums and 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 $54 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 Australian, Norwegian and U.S. dollars.
          Other costs and expenses, which represent corporate expenses, decreased 1% to $84 million due to a decrease in general and administrative costs, including employment costs.

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          Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees were $160 million in 2010 compared to $127 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 27% to $79 million primarily due to the issuance of $300 million of 7.375% senior notes in September 2009.
          Income Taxes. The effective income tax rate was 25% in 2010 as compared to 11% 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 on the effective tax rate for 2009.

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Results of Operations for the Three Months Ended September 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 GAAP combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the three months ended September 30, 2010 and 2009. The GAAP combined ratio represents a measure of underwriting profitability, excluding investment income. A GAAP combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.
                 
    For the Three Months
    Ended September 30,
(Dollars in thousands)   2010   2009
 
Specialty
               
Gross premiums written
  $ 383,877     $ 352,372  
Net premiums written
    330,985       300,512  
Premiums earned
    326,239       326,645  
Loss ratio
    61.6 %     63.8 %
Expense ratio
    32.0 %     31.5 %
GAAP combined ratio
    93.6 %     95.3 %
 
Regional
               
Gross premiums written
  $ 300,010     $ 311,430  
Net premiums written
    272,116       277,097  
Premiums earned
    268,089       276,369  
Loss ratio
    62.6 %     62.6 %
Expense ratio
    35.6 %     33.1 %
GAAP combined ratio
    98.2 %     95.7 %
 
Alternative Markets
               
Gross premiums written
  $ 184,568     $ 191,493  
Net premiums written
    152,068       169,214  
Premiums earned
    148,830       149,606  
Loss ratio
    68.0 %     63.9 %
Expense ratio
    26.0 %     26.6 %
GAAP combined ratio
    94.0 %     90.5 %
 
Reinsurance
               
Gross premiums written
  $ 102,785     $ 131,779  
Net premiums written
    98,428       122,963  
Premiums earned
    103,126       107,045  
Loss ratio
    53.7 %     57.1 %
Expense ratio
    39.5 %     39.7 %
GAAP combined ratio
    93.2 %     96.8 %
 
International
               
Gross premiums written
  $ 150,155     $ 109,666  
Net premiums written
    133,109       99,543  
Premiums earned
    121,013       83,475  
Loss ratio
    60.1 %     57.4 %
Expense ratio
    38.3 %     41.0 %
GAAP combined ratio
    98.4 %     98.4 %
 
Consolidated
               
Gross premiums written
  $ 1,121,395     $ 1,096,740  
Net premiums written
    986,706       969,329  
Premiums earned
    967,297       943,140  
Loss ratio
    61.8 %     62.1 %
Expense ratio
    33.6 %     32.9 %
GAAP combined ratio
    95.4 %     95.0 %
 

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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 September 30, 2010 and 2009 (amounts in thousands, except per share data):
                 
    2010     2009  
 
Net income to common stockholders
  $ 93,619     $ 97,722  
Weighted average diluted shares
    154,160       166,736  
Net income per diluted share
  $ 0.61     $ 0.59  
 
          The Company reported net income of $94 million in 2010 compared to $98 million in 2009. The decrease in net income is due primarily to higher interest expense and lower investment income. 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 $1,121 million in 2010, an increase of 2% from 2009. Gross premiums for recently started operating units (companies that began operations since 2006) were up 41% to $214 million in 2010 from $152 million in 2009. Approximately 76.6% of business expiring in 2010 was renewed, and the average price of policies renewed in 2010 declined 0.1% 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 and pricing has stabilized in most areas, current market price levels for certain lines of business remain 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 September 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 9% to $384 million in 2010 from $352 million in 2009. Gross premiums written decreased 12% for commercial automobile and 9% for products liability and increased 16% for professional liability, 15% for property lines and 4% for premises operations.
 
    Regional gross premiums decreased by 4% to $300 million in 2010 from $311 million in 2009. Gross premiums written decreased 5% for commercial automobile, 3% for workers’ compensation and 2% for commercial multiple perils. Gross premiums include assigned risk premiums, which are fully reinsured, of $8 million in 2010 and $13 million in 2009.
 
    Alternative markets gross premiums decreased by 4% to $185 million in 2010 from $191 million in 2009. Gross premiums written decreased 27% for excess workers’ compensation and 8% for primary workers’ compensation. Gross premiums include assigned risk premiums, which are fully reinsured, of $15 million in 2010 and $5 million in 2009.
 
    Reinsurance gross premiums decreased by 22% to $103 million in 2010 from $132 million in 2009. Gross premiums written increased 2% for casualty business and decreased 64% for property business. Most of the decrease in reinsurance premiums was related to our minority participation in a Lloyd’s syndicate.
 
    International gross premiums increased by 37% to $150 million in 2010 from $110 million in 2009. The increase is primarily due to an increase in business written by our new operating units in Canada, Norway, Brazil and Australia.
          Ceded reinsurance premiums as a percentage of gross written premiums were 12% in 2010 and 2009. Net premiums written were $987 million in 2010, an increase of 2% from 2009.

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          Net Premiums Earned. Premiums earned increased 3% to $967 million in 2010 from $943 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 increase 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 September 30, 2010 and 2009:
                                 
                    Average Annualized  
    Amount     Yield  
(Dollars in thousands)   2010     2009     2010     2009  
 
Fixed maturity securities, including cash
  $ 122,617     $ 125,745       4.0 %     4.2 %
Arbitrage trading account and funds
    13,651       12,242       11.2 %     10.1 %
Equity securities available for sale
    2,723       3,650       3.4 %     4.6 %
 
Gross investment income
    138,991       141,637       4.3 %     4.5 %
Investment expenses
    (804 )     (608 )                
 
Total
  $ 138,187     $ 141,029       4.3 %     4.5 %
 
          Net investment income decreased 2% to $138 million in 2010 from $141 million in 2009. The decrease in investment income is due primarily to a decline in the yield for the fixed maturity securities. Average invested assets, at cost (including cash and cash equivalents) were $13.0 billion in 2010 and $12.7 billion in 2009.
          Losses from Investment Funds. Following is a summary of losses from investment funds (which are recorded on a one-quarter lag) for the three months ended September 30, 2010 and 2009:
                 
(Dollars in thousands)   2010     2009  
 
Real estate funds
  $ (3,353 )   $ (22,652 )
Energy funds
    (14,293 )     (3,343 )
Other funds
    (1,398 )     338  
 
Total
  $ (19,044 )   $ (25,657 )
 
          Losses from investment funds were $19 million in 2010 compared to $26 million in 2009. Losses from energy funds in 2010 were primarily due to a decline in the estimated fair value of energy related investments following the oil spill in the Gulf and the ensuing offshore drilling moratorium.
          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 were $22 million in 2010 and 2009.
          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 $6 million in 2010 compared with $10 million in 2009.
          Other-Than-Temporary Impairments. Other-than-temporary impairments were $1 million in 2010 compared with $5 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 $62 million in 2010 compared with $51 million in 2009. These revenues were derived from aviation-related businesses that provide services to the general aviation market, including fuel and line service, aircraft sales and maintenance, avionics and engineering services and parts fabrication. The increase in the revenues is due to an increase in aircraft sales during the quarter.

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          Losses and Loss Expenses. Losses and loss expenses increased to $598 million in 2010 from $586 million in 2009 due to higher earned premiums. The consolidated loss ratio was 61.8% in 2010 compared with 62.1% in 2009. Weather-related losses were $22 million in 2010 compared with $23 million in 2009. Favorable prior year reserve development, net of related premium adjustments, was $51 million in 2010 and $47 million in 2009. A summary of loss ratios in 2010 compared with 2009 by business segment follows:
    Specialty’s loss ratio decreased to 61.6% in 2010 from 63.8% in 2009 due to changes in the mix of business. Favorable prior year development, net of related premium adjustments, was $16 million in 2010 compared with $13 million in 2009.
 
    Regional’s loss ratio was 62.6% in 2010 and 2009. Weather-related losses were $22 million in 2010 compared with $23 million in 2009. Favorable prior year development was $19 million in 2010 compared with $14 million in 2009.
 
    Alternative markets’ loss ratio increased to 68.0% in 2010 from 63.9% in 2009 due to increasing loss cost trends. Favorable prior year reserve development, net of related premium adjustments, was $8 million in 2010 compared with $9 million in 2009.
 
    Reinsurance’s loss ratio decreased to 53.7% in 2010 from 57.1% in 2009. Favorable prior year development, net of related premium adjustments, was $9 million in 2010 compared with $6 million in 2009.
 
    International’s loss ratio increased to 60.1% in 2010 from 57.4% in 2009. Unfavorable prior year development was $1 million in 2010 compared with favorable development of $5 million in 2009.
          Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses for the three months ended September 30, 2010 and 2009:
                 
(Dollars in thousands)   2010     2009  
 
Underwriting expenses
  $ 325,340     $ 310,618  
Service expenses
    17,487       19,770  
Net foreign currency gains
    (1,916 )     (4,631 )
Other costs and expenses
    28,306       27,365  
 
Total
  $ 369,217     $ 353,122  
 
          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 33.6% in 2010 from 32.9% in 2009. The higher expense ratio in 2010 is the result of an increase in salary and related compensation costs at a greater rate than the increase in earned premiums.
          Service expenses, which represent the costs associated with the fee-based businesses, decreased 12% to $17 million due to lower employment costs.
          Net foreign currency gains 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 Australian, Norwegian and U.S. dollars.
          Other costs and expenses, which represent corporate expenses, increased 3% to $28 million due to an increase in general and administrative costs, including employment costs.
          Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees were $61 million in 2010 compared to $50 million in 2009. These expenses represent costs associated with aviation-related businesses and 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 expenses increased due to an increase in aircraft sales and related costs of aircraft sold.
          Interest Expense. Interest expense increased 24% to $27 million primarily 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 23% 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 on the effective tax rate for 2009.

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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 was 3.5 years at September 30, 2010 and 3.6 years at December 31, 2009. The Company’s investment portfolio and investment-related assets as of September 30, 2010 were as follows (dollars in thousands):
                 
    Cost     Carrying Value  
 
Fixed maturity securities:
               
U.S. government and government agencies
  $ 1,365,193     $ 1,446,917  
State and municipal
    5,516,125       5,830,960  
Mortgage-backed securities:
               
Agency
    1,023,612       1,081,663  
Residential-Prime
    270,893       267,492  
Residential-Alt A
    81,150       80,098  
Commercial
    43,341       36,664  
 
Total mortgage-backed securities
    1,418,996       1,465,917  
 
 
               
Corporate:
               
Industrial
    883,951       974,331  
Financial
    606,501       631,629  
Utilities
    177,124       193,121  
Asset-backed
    240,211       231,704  
Other
    135,242       137,148  
 
Total corporate
    2,043,029       2,167,933  
 
 
               
Foreign government and foreign government agencies
    449,659       475,030  
 
Total fixed maturity securities
    10,793,002       11,386,757  
 
 
               
Equity securities available for sale:
               
Preferred stocks:
               
Financial
    110,163       103,902  
Real estate
    73,287       76,323  
Utilities
    52,888       53,931  
 
Total preferred stocks
    236,338       234,156  
 
 
               
Common stocks
    125,513       227,635  
 
Total equity securities available for sale
    361,851       461,791  
 
 
               
Arbitrage trading account
    472,209       472,209  
Investment in arbitrage funds
    60,127       60,127  
Investment funds
    408,158       409,004  
Loans receivable
    357,805       357,805  
 
Total investments
  $ 12,453,152     $ 13,147,693  
 
          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 September 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 financial services 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 September 30, 2010 and December 31, 2009, the Company’s carrying value in investment funds was $409 million and $419 million, respectively, including investments in real estate funds of $196 million and $193 million, respectively, and investments in energy funds of $89 million and $106 million, respectively.
          Loans Receivable. Loans receivable, which are carried at amortized cost, have an aggregate cost of $358 million and an aggregate fair value of $303 million at September 30, 2010. Amortized cost of these loans is net of a valuation allowance of $16.4 million as of September 30, 2010. The nine largest loans have an aggregate amortized cost of $280 million and an aggregate fair value of $221 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 June 2014. 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 $391 million in 2010 compared to $165 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 $383 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 86% invested in cash, cash equivalents and marketable fixed maturity securities as of September 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 nine months of 2010, the Company repurchased 12,223,375 shares of its common stock for $319 million. In September 2010, the Company issued $300 million of 5.375% senior notes and repaid $150 million of its 5.125% senior notes upon maturity.

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          At September 30, 2010, the Company had senior notes, junior subordinated debentures and other debt outstanding with a carrying value of $1,737 million and a face amount of $1,756 million. The maturities of the outstanding debt are $10 million in 2011, $18 million in 2012, $201 million in 2013, $200 million in 2015, $450 million in 2019, $300 million in 2020, $76 million in 2022, $1 million in 2023, $250 million in 2037 and $250 million in 2045.
          At September 30, 2010, equity was $3.8 billion and total capitalization (equity, senior notes and other debt and junior subordinated debentures) was $5.6 billion. The percentage of the Company’s capital attributable to senior notes, junior subordinated debentures and other debt was 31% at September 30, 2010 and 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 3.5 years at September 30, 2010 and 3.6 years at December 31, 2009. The overall market risk relating to the Company’s portfolio has remained similar to the risk at December 31, 2009.
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 September 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.

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                    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
July 2010
                      6,480,511  
August 2010
    2,691,048       26.41       2,691,048       7,308,952 (1)
September 2010
    625,856       26.38       625,856       6,683,096  
 
(1)   The Company’s repurchase authorization was increased to 10,000,000 shares by its board of directors on August 3, 2010.
Item 6. Exhibits
    Number
     
(4.1)
  Seventh Supplemental Indenture, dated as of September 16, 2010, between W. R. Berkley Corporation and The Bank of New York Mellon, as trustee, including the form of 5.375% Senior Notes due 2020 attached as Exhibit A thereto (incorporated by reference to Exhibit 4.2 of the Company’s current report on Form 8-K filed September 16, 2010).
 
   
(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: November 8, 2010  /s/ William R. Berkley    
  William R. Berkley   
  Chairman of the Board and
Chief Executive Officer 
 
 
     
Date: November 8, 2010  /s/ Eugene G. Ballard    
  Eugene G. Ballard   
  Senior Vice President -
Chief Financial Officer 
 
 

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