BERKLEY W R CORP - Quarter Report: 2011 March (Form 10-Q)

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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 March 31, 2011


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 April 29, 2011: 141,639,204

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

Part I — FINANCIAL INFORMATION


Item 1.		Financial Statements

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


	March 31, 2011			December 31,
	(Unaudited)			2010

Assets
Investments:
Fixed maturity securities	$	11,251,618		$	11,209,154
Equity securities available for sale		510,130			561,053
Arbitrage trading account		488,202			359,192
Investment in arbitrage funds		62,541			60,660
Investment funds		548,327			451,751
Loans receivable		348,773			353,583
Real estate		32,775			—

Total investments		13,242,366			12,995,393

Cash and cash equivalents		630,151			642,952
Premiums and fees receivable		1,179,495			1,087,208
Due from reinsurers		1,173,581			1,070,256
Accrued investment income		135,832			138,384
Prepaid reinsurance premiums		265,683			215,816
Deferred policy acquisition costs		429,933			405,942
Real estate, furniture and equipment		256,973			254,720
Deferred federal and foreign income taxes		76,167			65,492
Goodwill		90,581			90,581
Trading account receivables from brokers and clearing organizations		286,735			339,235
Current federal and foreign income taxes		—			23,605
Other assets		216,014			198,963

Total assets	$	17,983,511		$	17,528,547

Liabilities and Equity
Liabilities:
Reserves for losses and loss expenses	$	9,172,680		$	9,016,549
Unearned premiums		2,112,709			1,953,721
Due to reinsurers		227,017			215,723
Trading account securities sold but not yet purchased		123,474			53,494
Other liabilities		808,718			836,001
Junior subordinated debentures		242,841			242,784
Senior notes and other debt		1,497,095			1,500,419

Total liabilities		14,184,534			13,818,691


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, 141,599,454 and 141,009,834 shares		47,024			47,024
Additional paid-in capital		925,590			935,099
Retained earnings		4,301,258			4,194,684
Accumulated other comprehensive income		263,176			276,563
Treasury stock, at cost, 93,518,464 and 94,108,084 shares		(1,745,264	)		(1,750,494	)

Total stockholders’ equity		3,791,784			3,702,876
Noncontrolling interests		7,193			6,980

Total equity		3,798,977			3,709,856

Total liabilities and equity	$	17,983,511		$	17,528,547

See accompanying notes to interim consolidated financial statements.

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


	For the Three Months
	Ended March 31,
	2011			2010

REVENUES:
Net premiums written	$	1,083,303		$	983,950
Change in net unearned premiums		(100,806	)		(53,389	)

Net premiums earned		982,497			930,561
Net investment income		146,126			143,561
Insurance service fees		22,173			21,485
Net investment gains (losses):
Net realized gains on investment sales		29,284			8,494
Other-than-temporary impairments		—			(2,582	)

Net investment gains		29,284			5,912

Revenues from wholly-owned investees		53,887			51,576
Other income		384			452

Total revenues		1,234,351			1,153,547


OPERATING COSTS AND EXPENSES:
Losses and loss expenses		607,095			549,973
Other operating costs and expenses		384,831			367,967
Expenses from wholly-owned investees		53,816			48,974
Interest expense		28,117			26,041

Total operating costs and expenses		1,073,859			992,955


Income before income taxes		160,492			160,592
Income tax expense		(44,000	)		(41,811	)

Net income before noncontrolling interests		116,492			118,781
Noncontrolling interests		(5	)		(171	)


Net income to common stockholders	$	116,487		$	118,610


NET INCOME PER SHARE:
Basic	$	0.83		$	0.77
Diluted	$	0.79		$	0.74

See accompanying notes to interim consolidated financial statements.

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


	For the Three Months Ended March 31,
	2011			2010

COMMON STOCK:

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


ADDITIONAL PAID-IN CAPITAL:
Beginning of period	$	935,099		$	926,359
Stock options exercised and restricted units issued, net of tax		(15,977	)		(7,283	)
Restricted stock units expensed		6,468			5,369

End of period	$	925,590		$	924,445


RETAINED EARNINGS:
Beginning of period	$	4,194,684		$	3,785,187
Net income to common stockholders		116,487			118,610
Dividends		(9,913	)		(9,189	)

End of period	$	4,301,258		$	3,894,608


ACCUMULATED OTHER COMPREHENSIVE INCOME:
Unrealized investment gains (losses):
Beginning of period	$	334,747		$	219,394
Unrealized gains (losses) on securities not other-than-temporarily impaired		(25,110	)		39,601
Unrealized gains on other-than-temporarily impaired securities		159			462

End of period		309,796			259,457

Currency translation adjustments:
Beginning of period		(42,488	)		(40,371	)
Net change in period		10,860			(12,279	)

End of period		(31,628	)		(52,650	)

Net pension asset:
Beginning of period		(15,696	)		(15,816	)
Net change in period		704			559

End of period		(14,992	)		(15,257	)

Total accumulated other comprehensive income	$	263,176		$	191,550


TREASURY STOCK:
Beginning of period	$	(1,750,494	)	$	(1,325,710	)
Stock exercised/vested		28,533			9,806
Stock repurchased		(23,303	)		(95,739	)

End of period	$	(1,745,264	)	$	(1,411,643	)


NONCONTROLLING INTERESTS:
Beginning of period	$	6,980		$	5,879
Contributions (distributions)		264			(224	)
Net income		5			171
Other comprehensive income, net of tax		(56	)		6

End of period	$	7,193		$	5,832

See accompanying notes to interim consolidated financial statements.

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


	For the Three Months
	Ended March 31,
	2011			2010

Net income before noncontrolling interests	$	116,492		$	118,781

Other comprehensive income (loss):

Change in unrealized foreign exchange gains (losses)		10,860			(12,279	)

Unrealized holding gains (losses) on investment securities arising during the period, net of taxes		(6,217	)		43,912
Reclassification adjustment for net investment losses included in net income, net of taxes		(18,790	)		(3,843	)
Change in unrecognized pension obligation, net of taxes		704			559

Other comprehensive income (loss)		(13,443	)		28,349

Comprehensive income		103,049			147,130

Comprehensive income (loss) to the noncontrolling interests		51			(177	)

Comprehensive income to common stockholders	$	103,100		$	146,953

See accompanying notes to interim consolidated financial statements.

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


	For the Three Months
	Ended March 31,
	2011			2010

CASH FROM OPERATING ACTIVITIES:
Net income to common stockholders	$	116,487		$	118,610
Adjustments to reconcile net income to net cash from operating activities:
Net investment gains		(29,284	)		(5,912	)
Depreciation and amortization		22,079			20,528
Noncontrolling interests		5			171
Investment funds		(13,931	)		3,185
Stock incentive plans		6,468			5,379
Change in:
Securities trading account		(129,010	)		(6,342	)
Investment in arbitrage funds		(1,881	)		(664	)
Trading account receivables from brokers and clearing organizations		52,499			65,137
Trading account securities sold but not yet purchased		69,979			(61,059	)
Premiums and fees receivable		(88,106	)		(35,977	)
Due from reinsurers		(102,953	)		41,380
Accrued investment income		2,777			(974	)
Prepaid reinsurance premiums		(49,867	)		20,414
Deferred policy acquisition costs		(22,631	)		(13,112	)
Deferred income taxes		392			39,902
Other assets		13,259			(8,298	)
Reserves for losses and loss expenses		143,704			(33,601	)
Unearned premiums		152,731			36,950
Due to reinsurers		9,972			(242	)
Other liabilities		(97,246	)		(128,316	)

Net cash from operating activities		55,443			57,159

CASH USED IN INVESTING ACTIVITIES:
Proceeds from sales, excluding trading account:
Fixed maturity securities		395,115			420,272
Equity securities		63,232			3,109
Return of capital from investment funds		20,601			8,368
Proceeds from maturities and prepayments of fixed maturity securities		407,780			312,811
Cost of purchases, excluding trading account:
Fixed maturity securities		(835,804	)		(704,775	)
Equity securities		(24,694	)		(10,381	)
Real estate		(58,098	)		—
Contributions to investment funds		(100,011	)		(18,890	)
Change in loans receivable		4,809			2,380
Net additions to real estate, furniture and equipment		(11,884	)		(10,864	)
Change in balances due to security brokers		74,986			(12,154	)
Payment for business purchased, net of cash acquired		(11,060	)		—

Net cash used in investing activities		(75,028	)		(10,124	)

CASH FROM (USED IN) FINANCING ACTIVITIES:
Purchase of common treasury shares		(23,303	)		(95,739	)
Cash dividends to common stockholders		(9,911	)		(18,747	)
Bank deposits received		15,988			10,333
Repayments to federal home loan bank		(500	)		(7,500	)
Net proceeds from stock options exercised		34,140			2,504
Repayment of debt		(3,672	)		(7,572	)
Other, net		215			(28	)

Net cash from (used in) financing activities		12,957			(116,749	)

Net impact on cash due to change in foreign exchange rates		(6,173	)		(4,669	)

Net decrease in cash and cash equivalents		(12,801	)		(74,383	)
Cash and cash equivalents at beginning of year		642,952			515,430

Cash and cash equivalents at end of period	$	630,151		$	441,047

See accompanying notes to interim consolidated financial statements.

W. R. Berkley Corporation and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) General

The accompanying unaudited consolidated financial statements of W. R. Berkley Corporation and its subsidiaries (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all the information and notes required by GAAP for annual 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 three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. 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, 2010. Reclassifications have been made in the 2010 financial statements as originally reported to conform to the presentation of the 2011 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.

Real estate held for investment purposes is initially recorded at the purchase price, which is generally fair value, and is subsequently reported at cost less accumulated depreciation. Buildings are depreciated on a straight-line basis over the estimated useful lives of the building. Rental income is recognized on a straight-line basis over the lease term and is reported, net of rental expenses, as net investment income.

In the first quarter of 2011, the Company acquired an inactive insurance company for $23 million in cash. The acquired company had cash and investments of $21 million and no net loss reserves. Approximately $2 million of the purchase price was allocated to intangible assets.

(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
	Ended March 31,
	2011		2010
Basic		141,177		153,445
Diluted		147,425		159,771

(3) Recent Accounting Pronouncements

In October 2010, the FASB issued guidance regarding the treatment of costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of the types of costs that can be capitalized and specifies that the costs must be directly related to the successful acquisition of a new or renewed insurance contract. This guidance is effective for periods beginning 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.

In April 2011, the FASB issued updated guidance to clarify whether a modification or restructuring of a receivable is considered a troubled debt restructuring. A modification or restructuring that is considered a troubled debt restructuring will result in the creditor having to account for the receivable as being impaired and will also result in additional disclosure of the creditors’ troubled debt restructuring activities. The updated guidance is effective for the three months ended September 30, 2011 and is to be applied on a retrospective basis to the beginning of the year. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations or financial position.

(4) Investments in Fixed Maturity Securities

At March 31, 2011 and December 31, 2010, investments in fixed maturity securities were as follows:


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

March 31, 2011
Held to maturity:
State and municipal	$	73,002	$	4,298	$	(380	)	$	76,920	$	73,002
Residential mortgage-backed		38,002		3,229		—			41,231		38,002
Corporate		4,995		653		—			5,648		4,995

Total held to maturity		115,999		8,180		(380	)		123,799		115,999

Available for sale:
U.S. government and government agency		1,243,654		52,917		(1,012	)		1,295,559		1,295,559
State and municipal		5,257,464		192,042		(42,959	)		5,406,547		5,406,547
Mortgage-backed securities:
Residential (1)		1,301,911		45,373		(11,043	)		1,336,241		1,336,241
Commercial		55,976		2,393		(370	)		57,999		57,999
Corporate		2,436,948		94,037		(27,055	)		2,503,930		2,503,930
Foreign		511,780		23,916		(353	)		535,343		535,343

Total available for sale		10,807,733		410,678		(82,792	)		11,135,619		11,135,619

Total investments in fixed maturity securities	$	10,923,732	$	418,858	$	(83,172	)	$	11,259,418	$	11,251,618


December 31, 2010
Held to maturity:
State and municipal	$	71,998	$	3,440	$	(1,129	)	$	74,309	$	71,998
Residential mortgage-backed		39,002		3,667		—			42,669		39,002
Corporate		4,995		185		—			5,180		4,995

Total held to maturity		115,995		7,292		(1,129	)		122,158		115,995

Available for sale:
U.S. government and government agency		1,289,669		58,658		(452	)		1,347,875		1,347,875
State and municipal		5,302,513		203,221		(44,288	)		5,461,446		5,461,446
Mortgage-backed securities:
Residential (1)		1,319,289		52,165		(13,278	)		1,358,176		1,358,176
Commercial		57,057		2,207		(5,594	)		53,670		53,670
Corporate		2,307,987		102,306		(30,031	)		2,380,262		2,380,262
Foreign		460,683		31,283		(236	)		491,730		491,730

Total available for sale		10,737,198		449,840		(93,879	)		11,093,159		11,093,159

Total investments in fixed maturity securities	$	10,853,193	$	457,132	$	(95,008	)	$	11,215,317	$	11,209,154


(1)		Gross unrealized losses for residential mortgage-backed securities include $3,820,000 and $4,064,000 as of March 31, 2011 and December 31, 2010, respectively, related to the non-credit portion of other-than-temporary impairments (“OTTI”) recognized in other comprehensive income.

The amortized cost and fair value of fixed maturity securities at March 31, 2011, 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	$	752,362	$	763,221
Due after one year through five years		3,004,385		3,134,084
Due after five years through ten years		2,860,071		2,992,646
Due after ten years		2,911,025		2,933,996
Mortgage-backed securities		1,395,889		1,435,471

Total	$	10,923,732	$	11,259,418

At March 31, 2011, 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 $44,927,000 and $41,007,000 in the three months ended March 31, 2011 and 2010, respectively. Income taxes paid were $7,330,000 and $31,856,000 in the three months ended March 31, 2011 and 2010, respectively.

(6) Investments in Equity Securities Available for Sale

At March 31, 2011 and December 31, 2010, investments in equity securities available for sale were as follows:


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

March 31, 2011
Common stocks	$	194,946	$	124,301	$	(3,950	)	$	315,297	$	315,297
Preferred stocks		170,751		30,820		(6,738	)		194,833		194,833

Total	$	365,697	$	155,121	$	(10,688	)	$	510,130	$	510,130


December 31, 2010
Common stocks	$	188,949	$	128,096	$	(989	)	$	316,056	$	316,056
Preferred stocks		215,286		40,386		(10,675	)		244,997		244,997

Total	$	404,235	$	168,482	$	(11,664	)	$	561,053	$	561,053

(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:


	March 31,			December 31,
(Dollars in thousands)	2011			2010

Arbitrage trading account	$	488,202		$	359,192
Investment in arbitrage funds		62,541			60,660

Related assets and liabilities:
Receivables from brokers		286,735			339,235
Securities sold but not yet purchased		(123,474	)		(53,494	)

(8) Net Investment Income

Net investment income consists of the following:


	For the Three Months
	Ended March 31,
(Dollars in thousands)	2011			2010

Investment income earned on:
Fixed maturity securities, including cash	$	122,113		$	125,068
Investment funds		14,507			4,718
Equity securities available for sale		3,264			3,365
Arbritage trading account (1)		7,095			11,223

Gross investment income		146,979			144,374
Investment expense		(853	)		(813	)

Net investment income	$	146,126		$	143,561


(1)		Investment income earned from arbitrage trading account activity includes net unrealized trading gains of $1,723,000 and $2,207,000 in the three months ended March 31, 2011 and 2010, respectively.

(9) Loans Receivable

The amortized cost of loans receivable was $349 million and $354 million at March 31, 2011 and December 31, 2010, respectively. Amortized cost is net of a valuation allowance of $20 million for the stated periods. The nine largest loans have an aggregate amortized cost of $271 million and an aggregate fair value of $233 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 (64%), hotels (23%) and senior living facilities (13%), with properties located primarily in New York City, California, Hawaii, Boston and Philadelphia.

The Company monitors the performance of its loans receivable, including current market conditions for each loan and the ability to collect principal and interest. A risk rating is assigned to each loan receivable based upon the Company’s assessment of loan to value, cash flow stability, financial and operating performance, loan structure and market conditions. Loans receivable with a potential for default are further assessed using discounted cash flow analysis and comparable cost and sales methodologies, if appropriate. For loans where the Company determines it is probable that the contractual terms will not be met, a valuation reserve is established with a corresponding charge to earnings. Loans receivable are reported net of a valuation reserve of $20 million at March 31, 2011 and December 31, 2010.

(10) Realized and Unrealized Investment Gains (Losses)

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


	For the Three Months
	Ended March 31,
(Dollars in thousands)	2011			2010

Realized investment gains (losses):
Fixed maturity securities:
Gains	$	5,880		$	9,508
Losses		(1,493	)		(1,093	)
Equity securities available for sale		23,932			154
Sales of investment funds		965			(75	)
Provision for OTTI		—			(2,582	)
Less investment impairments recognized in other comprehensive income		—			—

Total net investment gains before income taxes		29,284			5,912
Income tax expense		(10,494	)		(2,069	)

Total net investment gains	$	18,790		$	3,843

Change in unrealized gains (losses) of available for sale securities:
Fixed maturity securities	$	(29,287	)	$	54,035
Less non-credit portion of OTTI recognized in other comprehensive income		244			710
Equity securities available for sale		(12,385	)		3,268
Investment funds		3,374			3,657

Total change in unrealized gains (losses) before income taxes and noncontrolling interests		(38,054	)		61,670
Income tax (expense) benefit		13,047			(21,601	)
Noncontrolling interests		56			(6	)

Total change in unrealized gains (losses)	$	(24,951	)	$	40,063

(11) Securities in an Unrealized Loss Position

The following table summarizes all securities in an unrealized loss position at March 31, 2011 and December 31, 2010 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

March 31, 2011
U.S. government and agency	$	72,616	$	992	$	6,888	$	20	$	79,504	$	1,012
State and municipal		915,230		24,586		154,739		18,753		1,069,969		43,339
Mortgage-backed securities		181,633		3,255		116,352		8,158		297,985		11,413
Corporate		438,130		6,823		134,174		20,232		572,304		27,055
Foreign		62,055		353		—		—		62,055		353

Fixed maturity securities		1,669,664		36,009		412,153		47,163		2,081,817		83,172
Common stocks		71,040		3,950		—		—		71,040		3,950
Preferred stocks		23,615		143		62,680		6,595		86,295		6,738

Equity securities		94,655		4,093		62,680		6,595		157,335		10,688

Total	$	1,764,319	$	40,102	$	474,833	$	53,758	$	2,239,152	$	93,860


December 31, 2010
U.S. government and agency	$	60,228	$	420	$	6,973	$	32	$	67,201	$	452
State and municipal		951,119		26,577		156,617		18,840		1,107,736		45,417
Mortgage-backed securities		116,194		2,809		174,163		16,063		290,357		18,872
Corporate		409,604		7,233		155,259		22,798		564,863		30,031
Foreign		43,514		236		—		—		43,514		236

Fixed maturity securities		1,580,659		37,275		493,012		57,733		2,073,671		95,008
Common stocks		58,979		989		—		—		58,979		989
Preferred stocks		27,010		2,368		76,890		8,307		103,900		10,675

Equity securities		85,989		3,357		76,890		8,307		162,879		11,664

Total	$	1,666,648	$	40,632	$	569,902	$	66,040	$	2,236,550	$	106,672

Fixed Maturity Securities — A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at March 31, 2011 is presented in the table below. There were no securities with an unrealized loss greater than $5 million at that date.


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

Mortgage-backed securities		14	$	136,652	$	7,668
Corporate		10		49,796		3,629
State and municipal		6		44,721		6,906

Total		30	$	231,169	$	18,203

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
	Ended March 31,
(Dollars in thousands)	2011		2010

Beginning balance of amounts related to credit losses	$	4,261	$	5,661
Additions for amounts related to credit losses		—		—

Ending balance of amounts related to credit losses	$	4,261	$	5,661

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 March 31, 2011, there were six preferred stocks in an unrealized loss position, with an aggregate fair value of $86 million and a gross unrealized loss of $7 million. One of those preferred stocks with an aggregate fair value of $12 million and a gross unrealized loss of $2 million is rated non-investment grade. Based upon managements’ view of the underlying value of these securities, the Company does not consider any of the preferred stocks to be OTTI.

Common Stocks — At March 31, 2011, the Company owned six common stocks in an unrealized loss position with an aggregate fair value of $71 million and an aggregate unrealized loss of $4 million. The Company does not consider these common stocks to be OTTI.

(12) 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.

The following tables present the assets and liabilities measured at fair value, on a recurring basis, as of March 31, 2011 and December 31, 2010 by level:


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

March 31, 2011
Assets:
Fixed maturity securities available for sale:
U.S. government and agency	$	1,295,559	$	—	$	1,295,559	$	—
State and municipal		5,406,547		—		5,406,547		—
Mortgage-backed securities		1,394,240		—		1,394,240		—
Corporate		2,503,930		—		2,425,776		78,154
Foreign		535,343		—		535,343		—

Total fixed maturity securities available for sale		11,135,619		—		11,057,465		78,154

Equity securities available for sale:
Common stocks		315,297		208,241		105,497		1,559
Preferred stocks		194,833		—		146,229		48,604

Total equity securities available for sale		510,130		208,241		251,726		50,163

Arbitrage trading account		488,202		308,967		175,437		3,798

Total	$	12,133,951	$	517,208	$	11,484,628	$	132,115

Liabilities:
Securities sold but not yet purchased	$	123,474	$	123,474	$	—	$	—


December 31, 2010
Assets:
Fixed maturity securities available for sale:
U.S. government and agency	$	1,347,875	$	—	$	1,347,875	$	—
State and municipal		5,461,446		—		5,461,446		—
Mortgage-backed securities		1,411,846		—		1,411,846		0
Corporate		2,380,262		—		2,292,199		88,063
Foreign		491,730		—		491,730		—

Total fixed maturity securities available for sale		11,093,159		—		11,005,096		88,063


Equity securities available for sale:
Common stocks		316,056		204,749		109,748		1,559
Preferred stocks		244,997		—		155,551		89,446

Total equity securities available for sale		561,053		204,749		265,299		91,005

Arbitrage trading account		359,192		162,292		193,713		3,187

Total	$	12,013,404	$	367,041	$	11,464,108	$	182,255


Liabilities:
Securities sold but not yet purchased	$	53,494	$	51,672	$	1,822	$	—

There were no significant transfers between Levels 1 and 2 during the three months ended March 31, 2011 or during the year ended December 31, 2010.

The following tables summarize changes in Level 3 assets:


			Gains (Losses) Included in:
						Other
	Beginning					Comprehensive														Ending
(Dollars in thousands)	Balance		Earnings			Income			Purchases		(Sales)			Maturities			Transfer out			Balance

For the three months ended March 31, 2011
Fixed maturity securities available for sale:
Corporate	$	88,063	$	(250	)	$	988			88	$	(952	)		(9,783	)		—		$	78,154

Total		88,063		(250	)		988			88		(952	)		(9,783	)		—			78,154

Equity securities available for sale:
Common stocks		1,559		—			—			—		—			—			—			1,559
Preferred stocks		89,446		16,069			(16,069	)		—		(40,842	)		—			—			48,604

Total		91,005		16,069			(16,069	)		—		(40,842	)		—			—			50,163

Arbitrage trading account		3,187		—			343			268		—			—			—			3,798

Total	$	182,255	$	15,819		$	(14,738	)	$	356	$	(41,794	)	$	(9,783	)	$	—		$	132,115


For the twelve months ended December 31, 2010
Fixed maturity securities available for sale:
Mortgage-backed securities	$	25,900	$	—		$	—		$	—	$	—		$	—		$	(25,900	)	$	—
Corporate		90,160		(850	)		1,558			19,632		(5,324	)		(17,113	)		0			88,063

Total		116,060		(850	)		1,558			19,632		(5,324	)		(17,113	)		(25,900	)		88,063

Equity securities available for sale:
Common stocks		1,559		—			—					—									1,559
Preferred stocks		54,713		23,535			31,633			19,542		(39,977	)								89,446

Total		56,272		23,535			31,633			19,542		(39,977	)		—			—			91,005

Arbitrage trading account		353		(353	)		—			3,187		—			—			—			3,187

Total	$	172,685	$	22,332		$	33,191		$	42,361	$	(45,301	)	$	(17,113	)	$	(25,900	)	$	182,255

During the twelve months ended December 31, 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.

(13) Reinsurance

The following is a summary of reinsurance financial information:


	For the Three
	Months Ended
	March 31,
(Dollars in thousands)	2011			2010

Written premiums:
Direct	$	1,076,847		$	938,324
Assumed		193,011			187,796
Ceded		(186,555	)		(142,170	)

Total net premiums written	$	1,083,303		$	983,950


Earned premiums:
Direct	$	972,525		$	905,343
Assumed		161,870			159,386
Ceded		(151,898	)		(134,168	)

Total net premiums earned	$	982,497		$	930,561



Ceded losses incurred	$	114,825		$	91,407

The Company reinsures a portion of its exposures principally to reduce its net liability on individual risks and to protect against catastrophic losses. Estimated amounts due from reinsurers are reported net of reserves for uncollectible reinsurance of $3 million as of March 31, 2011 and December 31, 2010.

(14) Fair Value of Financial Instruments

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


	March 31, 2011				December 31, 2010
(Dollars in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value

Assets:
Fixed maturity securities	$	11,251,618	$	11,259,418	$	11,209,154	$	11,215,317
Equity securities available for sale		510,130		510,130		561,053		561,053
Arbitrage trading account		488,202		488,202		359,192		359,192
Investment in arbitrage funds		62,541		62,541		60,660		60,660
Loans receivable		348,773		312,056		353,583		312,515
Cash and cash equivalents		630,151		630,151		642,952		642,952
Trading account receivables from brokers and clearing organizations		286,735		286,735		339,235		339,235
Liabilities:
Trading account securities sold but not yet purchased		123,474		123,474		53,494		53,494
Due to broker		56,368		56,368		5,318		5,318
Junior subordinated debentures		242,841		249,900		242,784		249,900
Senior notes and other debt		1,497,095		1,602,744		1,500,419		1,570,057

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 12 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.

(15) 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 2011 and 2010 follows (dollars in thousands):


	Units		Fair Value

Three months ended March 31:
2011		13,000	$	387
2010		686,500	$	17,833

(16) 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 and commercial property casualty insurance in the United Kingdom and Continental Europe and reinsurance in Australia, Southeast Asia and Canada.

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.


	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 March 31, 2011:
Specialty	$	330,207	$	50,286	$	710	$	381,203	$	90,369		$	64,291
Regional		261,517		21,507		1,021		284,045		24,898			18,558
Alternative markets		148,337		34,755		20,445		203,537		41,630			30,896
Reinsurance		105,478		27,278		—		132,756		25,362			19,497
International		136,958		10,558		—		147,516		2,515			2,085
Corporate, other and eliminations (1)		—		1,742		54,268		56,010		(53,566	)		(37,630	)
Net investment gains		—		—		29,284		29,284		29,284			18,790

Consolidated	$	982,497	$	146,126	$	105,728	$	1,234,351	$	160,492		$	116,487

For the the three months ended March 31, 2010:
Specialty	$	312,953	$	49,234	$	798	$	362,985	$	75,670		$	55,153
Regional		263,669		22,941		927		287,537		41,964			30,057
Alternative markets		154,785		32,847		19,763		207,395		50,985			37,121
Reinsurance		99,558		28,593		—		128,151		34,420			25,838
International		99,596		7,097		—		106,693		373			3,653
Corporate, other and eliminations (1)		—		2,849		52,025		54,874		(48,732	)		(37,055	)
Net investment gains		—		—		5,912		5,912		5,912			3,843

Consolidated	$	930,561	$	143,561	$	79,425	$	1,153,547	$	160,592		$	118,610


	Identifiable Assets
	March 31,		December 31,
	2011		2010

Specialty	$	6,004,016	$	5,854,256
Regional		2,649,605		2,616,238
Alternative markets		3,980,369		3,801,597
Reinsurance		3,069,037		2,972,988
International		1,438,572		1,391,604
Corporate, other and eliminations (1)		841,912		891,864

Consolidated	$	17,983,511	$	17,528,547


(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.

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


	For the Three Months
	Ended March 31,
(Dollars in thousands)	2011		2010

Specialty
Premises operations	$	101,310	$	87,940
Property		54,394		50,779
Professional liability		53,512		46,595
Commercial automobile		31,447		35,981
Products liability		23,402		38,787
Other		66,142		52,871

Total specialty		330,207		312,953


Regional
Commercial multiple peril		96,707		96,070
Commercial automobile		72,129		75,965
Workers’ compensation		53,567		52,971
Other		39,114		38,663

Total regional		261,517		263,669


Alternative Markets
Primary workers’ compensation		64,175		62,918
Excess workers’ compensation		43,733		58,328
Other		40,429		33,539

Total alternative markets		148,337		154,785


Reinsurance
Casualty		76,686		71,923
Property		28,792		27,635

Total reinsurance		105,478		99,558


International
Professional liability		23,302		24,147
Property		31,643		11,726
Reinsurance		20,827		14,880
Automobile		17,969		17,390
Workers’ compensation		17,338		13,569
Other liability		11,306		9,057
Other		14,573		8,827

Total international		136,958		99,596

Total	$	982,497	$	930,561

(17) Commitments, Litigation and Contingent Liabilities

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

SAFE HARBOR STATEMENT

This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. This document may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of the forward-looking statements can be identified by the use of forward-looking words such as ‘believes,” “expects,” “potential,” “continued,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” or the negative version of those words or other comparable words. Any forward-looking statements contained herein, including statements related to our outlook for the industry and for our performance for the year 2011 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, real estate, merger arbitrage and private equity investments; the impact of significant competition; the uncertain nature of damage theories and loss amounts; natural and man-made catastrophic losses, including as a result of terrorist activities; the impact of the economic downturn, and the potential effect of any legislative, regulatory, accounting or other initiatives taken in response to it, on our results and financial condition; 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 key personal and 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 2011 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.

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. Our decentralized structure provides us with the flexibility to respond to local or specific market conditions and to pursue specialty business niches. It also allows us to be closer to our customers in order to better understand their individual needs and risk characteristics. While providing our business units with certain operating autonomy, our structure allows us to capitalize on the benefits of economies of scale through centralized capital, investment and reinsurance management, and actuarial, financial and corporate legal staff support. The Company’s primary sources of revenues and earnings are its insurance operations and its investments.

Nineteen of our operating units have been formed since 2006 to capitalize on various business opportunities. These newer units are focused on important parts of the economy in the U.S., including healthcare, energy and agriculture, and on growing international markets, including Australia, Southeast Asia and South America.

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.

Beginning in 2005, the property casualty insurance industry became more competitive and insurance rates decreased across most business lines. Increased competition and the impact of the economic downturn also put pressure on policy terms and conditions. Although price levels are generally stable, 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 other-than-temporary impairments of 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 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.

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 provide assurance 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.

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 2010, the most recent full year of loss data (dollars in thousands):


	Frequency (+/-)
Severity (+/-)	1%		5%		10%

1%		50,450		151,851		278,603
5%		151,851		257,268		389,040
10%		278,603		389,040		527,086

Our net reserves for losses and loss expenses of approximately $8.0 billion as of March 31, 2011 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 $1.5 billion, or 19%, of the Company’s net loss reserves as of March 31, 2011 relate to our 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.

Following is a summary of the Company’s reserves for losses and loss expenses by business segment as of March 31, 2011 and December 31, 2010:


	March 31,		December 31,
(Dollars in thousands)	2011		2010

Specialty	$	2,876,508	$	2,883,823
Regional		1,280,240		1,285,004
Alternative markets		1,895,921		1,867,470
Reinsurance		1,488,729		1,507,353
International		500,244		455,871

Net reserves for losses and loss expenses		8,041,642		7,999,521
Ceded reserves for losses and loss expenses		1,131,038		1,017,028

Gross reserves for losses and loss expenses	$	9,172,680	$	9,016,549

Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of March 31, 2011 and December 31, 2010:


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

March 31, 2011
General liability	$	864,547	$	2,018,301	$	2,882,848
Workers’ compensation		1,225,951		1,009,997		2,235,948
Commercial automobile		305,811		185,804		491,615
International		237,131		263,113		500,244
Other		168,637		273,621		442,258

Total primary		2,802,077		3,750,836		6,552,913
Reinsurance		626,480		862,249		1,488,729

Total	$	3,428,557	$	4,613,085	$	8,041,642


December 31, 2010
General liability	$	873,553	$	2,038,814	$	2,912,367
Workers’ compensation		1,188,117		1,022,331		2,210,448
Commercial automobile		325,686		173,247		498,933
International		195,981		259,890		455,871
Other		158,794		255,755		414,549

Total primary		2,742,131		3,750,037		6,492,168
Reinsurance		639,997		867,356		1,507,353

Total	$	3,382,128	$	4,617,393	$	7,999,521

Reserves for primary and excess workers’ compensation business are net of an aggregate net discount of $911 million and $898 million as of March 31, 2011 and December 31, 2010, respectively.

The following table presents development in our estimate of claims occurring in prior years:


	For the Three Months
	Ended March 31,
(Dollars in thousands)	2011			2010

Favorable (adverse) reserve development:
Specialty	$	38,344		$	25,223
Regional		9,061			20,068
Alternative markets		(3,608	)		5,073
Reinsurance		5,073			21,515
International		2,442			2,623

Total favorable reserve development		51,312			74,502


Premium offsets (1):
Specialty		131			(109	)
Alternative markets		(615	)		(703	)
Reinsurance		—			(11,722	)

Net development	$	50,828		$	61,968

(1)

Represents portion of reserve development offset by premium adjustments

For the three months ended March 31, 2011, estimates for claims occurring in prior years decreased by $51 million. The favorable reserve development in 2011 was primarily attributable to accident years 2005 through 2009, partially offset by unfavorable reserve development in earlier years. 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 2011 and 2010 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 2011 was primarily attributable to accident years 2004 through 2009.

Regional — The favorable reserve development for the regional segment during 2011 was primarily related to the general liability portion of commercial multi-peril business. The favorable reserve development resulted mainly from lower loss emergence on known case reserves relative to historical levels. The favorable reserve development was primarily attributable to accident years 2005 through 2009.

Alternative Markets — The unfavorable reserve development for the alternative markets segment during 2011 was related to an increase in prior year reserves for excess workers compensation business, partially offset by a decrease in prior year reserves for primary workers’ compensation business and for medical excess business. The increase in loss reserves for excess workers’ compensation business was related primarily to increased medical and pharmaceutical costs associated with certain long-term disability claims. The majority of favorable reserve development for primary workers’ compensation was related to California business, where the impact of legislative reforms continues to be reflected in improved loss trends.

Reinsurance — The majority of the favorable development for the reinsurance segment during 2011 was related to the Company’s participation in a Lloyd’s of London syndicate. The favorable development was related to underwriting years 2008 through 2010 and resulted from a re-evaluation of the syndicate’s year-end loss reserves.

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 2.5%. As of March 31, 2011, the aggregate blended discount rates ranged from 2.5% to 6.5%, with a weighted average discount rate of 4.3%. The aggregate net discount, after reflecting the effects of ceded reinsurance, was $911 million and $898 million as of March 31, 2011 and December 31, 2010, 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 $66 million and $58 million at March 31, 2011 and December 31, 2010, 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 fair value and where the Company does not expect the fair value to recover prior to the time of sale or maturity. Since equity securities do not have a contractual cash flow or maturity, the Company considers whether the price of an equity security is expected to recover within a reasonable period of time.

The Company classifies its fixed maturity securities and preferred stocks by credit rating, primarily based on ratings assigned by credit rating agencies. For purposes of classifying securities with different ratings, the Company uses the lower rating if two ratings were assigned and the middle rating if three ratings were assigned, unless the Company’s own analysis indicates that the lower rating is more appropriate. Securities that are not rated by a rating agency are evaluated and classified by the Company on a case-by-case basis.

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.

The following table provides a summary of all fixed maturity securities in an unrealized loss position as of March 31, 2011:


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

Unrealized loss less than 20% of amortized cost		237	$	2,040,382	$	67,135
Unrealized loss of 20% or greater:
Six to nine months		1		3,857		1,225
Twelve months and longer		8		37,578		14,812

Total		246	$	2,081,817	$	83,172

A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at March 31, 2011 is presented in the table below. There were no securities with an unrealized loss greater than $5 million at that date.


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

Mortgage-backed securities		14	$	136,652	$	7,668
Corporate		10		49,796		3,629
State and municipal		6		44,721		6,906

Total		30	$	231,169	$	18,203

Preferred Stocks — At March 31, 2011, there were six preferred stocks in an unrealized loss position, with an aggregate fair value of $86 million and a gross unrealized loss of $7 million. One of those preferred stocks with an aggregate fair value of $12 million and a gross unrealized loss of $2 million is rated non-investment grade. Based upon management’s view of the underlying value of these securities, the Company does not consider any of the preferred stocks 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 corresponding charge to earnings. Loans receivable are reported net of a valuation reserve of $20 million at March 31, 2011 and December 31, 2010.

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 March 31, 2011 (dollars in thousands):


	Carrying		Percent
	Value		of Total
Pricing source:
Independent pricing services	$	10,582,588		95.0	%
Syndicate manager		112,860		1.0	%
Directly by the Company based on:
Observable data		362,417		3.3	%
Cash flow model		77,754		0.7	%

Total	$	11,135,619		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 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 March 31, 2011, 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.

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.

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.

Results of Operations for the Three Months Ended March 31, 2011 and 2010

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 United States Generally Accepted Accounting Principles (“GAAP”) combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the three months ended March 31, 2011 and 2010. 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.


(Dollars in thousands)	2011			2010

Specialty
Gross premiums written	$	415,730		$	342,932
Net premiums written		358,117			301,928
Premiums earned		330,207			312,953
Loss ratio		54.2	%		57.9	%
Expense ratio		33.6	%		33.6	%
GAAP combined ratio		87.8	%		91.5	%

Regional
Gross premiums written	$	298,841		$	302,641
Net premiums written		279,624			272,032
Premiums earned		261,517			263,669
Loss ratio		62.4	%		57.2	%
Expense ratio		36.1	%		35.5	%
GAAP combined ratio		98.5	%		92.7	%

Alternative Markets
Gross premiums written	$	254,847		$	241,351
Net premiums written		200,554			210,405
Premiums earned		148,337			154,785
Loss ratio		72.6	%		64.6	%
Expense ratio		26.1	%		25.5	%
GAAP combined ratio		98.7	%		90.1	%

Reinsurance
Gross premiums written	$	112,564		$	106,369
Net premiums written		106,354			98,771
Premiums earned		105,478			99,558
Loss ratio		62.6	%		50.4	%
Expense ratio		39.2	%		43.8	%
GAAP combined ratio		101.8	%		94.2	%

International
Gross premiums written	$	187,876		$	132,827
Net premiums written		138,654			100,814
Premiums earned		136,958			99,596
Loss ratio		66.5	%		67.9	%
Expense ratio		39.1	%		43.6	%
GAAP combined ratio		105.6	%		111.5	%

Consolidated
Gross premiums written	$	1,269,858		$	1,126,120
Net premiums written		1,083,303			983,950
Premiums earned		982,497			930,561
Loss ratio		61.8	%		59.1	%
Expense ratio		34.5	%		35.0	%
GAAP combined ratio		96.3	%		94.1	%

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 March 31, 2011 and 2010 (amounts in thousands, except per share data):


	2011		2010

Net income to common stockholders	$	116,487	$	118,610
Weighted average diluted shares		147,425		159,771
Net income per diluted share	$	0.79	$	0.74

The Company reported net income of $116 million in 2011 compared to $119 million in 2010. The decrease in net income was primarily due to a decline in underwriting income, partially offset by an increase in net investment gains. The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2010.

Premiums. Gross premiums written were $1,270 million in 2011, an increase of 13% from $1,126 million in 2010. The increase in gross premiums written was primarily due to growth in our specialty and international business segments as a result of expansion into new markets. Approximately 79% of policies expiring in the first quarter of 2011 were renewed, compared with a 78% renewal retention rate for policies expiring in full year 2010. The average rate (i.e. average premium adjusted for change in exposures) for policies that renewed in 2011 increased by 0.7%.

Beginning in 2005, the property casualty insurance market became more competitive and insurance rates decreased across most business lines. Although price levels are generally stable, current market price levels for certain lines of business remain below the prices required for the Company to achieve its return objectives. A summary of gross premiums written in 2011 compared with 2010 by line of business within each business segment follows:

	•		Specialty gross premiums increased by 21% to $416 million in 2011 from $343 million in 2010 primarily due to increased business in the energy and environmental markets. Gross premiums written increased 42% for commercial automobile, 28% for other liability, 27% for property lines, 10% for professional liability and 3% for products liability.

	•		Regional gross premiums decreased by 1% to $299 million in 2011 from $303 million in 2010. Gross premiums written decreased 1% for commercial automobile and increased 7% for workers’ compensation and 2% for commercial multiple peril. Gross premiums written in 2010 include $10 million of assigned risk premiums that were transferred to the alternative markets segment in 2011.

	•		Alternative markets gross premiums increased by 6% to $255 million in 2011 from $241 million in 2010. Gross premiums written decreased 22% for excess workers’ compensation and increased by 8% for primary workers’ compensation. Gross premiums include fully reinsured assigned risk premiums of $38 million in 2011 and $17 million in 2010. The increase is due, in part, to the transfer from the regional segment described above.

	•		Reinsurance gross premiums increased by 6% to $113 million in 2011 from $106 million in 2010. Gross premiums written increased 6% to $80 million for casualty business and increased 5% to $33 million for property business.

	•		International gross premiums increased by 41% to $188 million in 2011 from $133 million in 2010. The increase is primarily due to an increase in business written by our Lloyd’s operation and to new insurance branches in Germany and Norway. Gross premiums written increased 65% for property lines, 115% for liability lines, 27% for workers’ compensation, 15% for reinsurance assumed, 5% for auto and 46% for professional liability.

Net premiums written were $1,083 million in 2011, an increase of 10% from $984 million in 2010. Ceded reinsurance premiums as a percentage of gross written premiums increased to 15% in 2011 from 13% in 2010. The increase inceded reinsurance premiums was primarily related to recently started operating units, which have a higher ceded premium percentage than mature operating units due to differences in the limits and risk profiles of their business, and to an increase in premiums ceded to assigned risk pools, as described above.

Premiums earned increased 6% to $982 million in 2011 from $931 million in 2010. Insurance premiums are primarily earned on a pro rata basis ratably over the policy term, and premiums earned in 2011 are related to business written during both 2011 and 2010.

Net Investment Income. Following is a summary of net investment income for 2011 and 2010:


							Average Annualized
	Amount						Yield
(Dollars in thousands)	2011			2010			2011			2010

Fixed maturity securities, including cash	$	122,113		$	125,068			4.0	%		4.2	%
Investment funds	$	14,507		$	4,718			11.7	%		4.5	%
Arbitrage trading account and funds		7,095			11,223			7.2	%		6.3	%
Equity securities available for sale		3,264			3,365			3.4	%		4.3	%

Gross investment income		146,979			144,374			4.3	%		4.3	%
Investment expenses		(853	)		(813	)

Total	$	146,126		$	143,561			4.3	%		4.3	%

Net investment income increased 2% to $146 million in 2011 from $144 million in 2010. The increase in investment income is due to an increase in income from investment funds (which are reported on a one-quarter lag), partially offset by a decline in investment income from arbitrage investments. The increase in investment income from investment funds is primarily due to higher income from real estate funds. Investment income from merger arbitrage is a function of the number and value of announced merger transactions and the amount invested in and potential spreads available for those transactions. Average invested assets, at cost (including cash and cash equivalents) were $13 billion in 2011 and in 2010.

Insurance Service Fees. Insurance service fees consist of fee-based services to help clients develop and administer self-insurance programs, primarily for workers’ compensation coverage. Service fees increased to $22 million in 2011 from $21 million in 2010 due to an increase in fees received for claims administration services.

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 $29 million in 2011 compared with $8 million in 2010.

Other-Than-Temporary Impairments. The cost of securities is adjusted where appropriate to include a provision for decline in value which is considered to be other-than-temporary. There were no other-than-temporary impairments in 2011 compared with $3 million in 2010.

Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were $54 million in 2011 compared with $52 million in 2010. 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.

Losses and Loss Expenses. Losses and loss expenses increased to $607 million in 2011 from $550 million in 2010. The consolidated loss ratio increased 2.7 percentage points to 61.8% in 2011 from 59.1% in 2010. The increase is due to a decrease of 1.4 points in favorable reserve development and an increase of 1.3 points in the loss ratio before catastrophes and prior year reserve changes. Favorable prior year reserve development was $51 million, or 6.7 loss ratio points, in 2011 compared with $62 million, or 5.2 loss ratio points, in 2010. Catastrophe losses were $24 million in 2011 compared with $23 million in 2010. Catastrophe losses in 2011 included regional storm losses of $9 million and an estimate of $15 million for potential losses from earthquakes in Japan and New Zealand and floods in Australia. Catastrophe losses in 2010 included losses of $8 million for the earthquake in Chile. A summary of loss ratios in 2011 compared with 2010 by business segment follows:

	•		Specialty’s loss ratio decreased 3.7 points to 54.2% in 2011 from 57.9% in 2010 due to an increase of 3.6 points in favorable reserve development. Favorable prior year reserve development was $39 million in 2011 compared with $25 million in 2010.

	•		Regional’s loss ratio increased 5.2 percentage points to 62.4% in 2011 from 57.2% in 2010. The increase is due to a decrease of 4.1 points in favorable reserve development and an increase of 3.6 points in the loss ratio before castrophes and prior year reserve changes, partially offset by a decrease of 2.5 points in catastrophe losses. Prior year reserves decreased by $9 million in 2011 compared with $20 million in 2010. Catastrophe losses were $9 million in 2011 compared with $15 million in 2010.

	•		Alternative markets’ loss ratio increased 8.0 points to 72.6% in 2011 from 64.6% in 2010. The increase is due to a 5.0 point change in the impact of prior year reserve development and an increase of 3.0 points in the loss ratio before catastrophes and prior year reserve changes. Prior year reserves increased by $4 million in 2011 compared with a decrease of $4 million in 2010.

	•		Reinsurance’s loss ratio increased 12.2 percentage points to 62.6% in 2011 from 50.4% in 2010. The increase was due primarily to a decrease of 5.2 points in favorable reserve development and an increase of 6.7 points in the loss ratio before catastrophes and prior year reserve changes. Prior year reserves decreased by $5 million in 2011 compared with $10 million in 2010. The increase in the loss ratio before catastrophes and prior year reserve changes is due, in part, to changes in contract structures and was partially offset by a related decrease of 4.5 points due to a lower average commission rate.

	•		International’s loss ratio decreased 1.4 percentage points to 66.5% in 2011 from 67.9% in 2010. The decrease was due to a decrease of 6.7 points in the loss ratio before catastrophes and prior year reserve changes, partially offset by a 4.0 point increase in catastrophe losses. The decrease in the loss ratio before catastrophes and reserve changes was due to growth in earned premiums and improving profitability of our new Lloyd’s syndicate as well as our business in Australia. Catastrophe losses were $11 million in 2011 compared with $4 million in 2010. Prior year reserves decreased by $2 million in 2011 compared with $3 million in 2010.

Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses for 2011 and 2010:


(Dollars in thousands)	2011		2010

Underwriting expenses	$	339,185	$	325,603
Service expenses		17,329		18,544
Net foreign currency (gains) losses		520		(5,027	)
Other costs and expenses		27,797		28,847

Total	$	384,831	$	367,967

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) decreased to 34.5% in 2011 from 35.0% in 2010. By business segment, the expense ratio was unchanged for specialty, up 0.6 percentage points for regional and alternative markets and down 4.6 points and 4.5 points, respectively, for reinsurance and international. The decrease in the reinsurance expense ratio was due to a lower average commission rate (See discussion of loss and loss expenses above). The international expense ratio decreased by 4.5 points because earned premiums grew at a higher rate (38%) than the growth in the non-variable portion of underwriting expenses.

Service expenses, which represent the costs associated with the fee-based businesses, decreased 7% to $17 million. The decrease was due to lower general and administrative expenses.

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

Other costs and expenses, which represent corporate expenses, decreased 4% to $28 million due to a decrease in general and administrative costs.

Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees were $54 million in 2011 compared to $49 million in 2010. These expenses represent costs associated with aviation-related businesses that 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.

Interest Expense. Interest expense increased 8% to $28 million primarily due to the issuance of $300 million of 5.375% senior notes in September 2010, partially offset by the repayment of $150 million of 5.125% senior notes in September 2010.

Income Taxes. The effective income tax rate was 27% in 2011 as compared to 26% in 2010. The effective income tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income. Tax exempt investment income comprised a smaller portion of the 2011 pre-tax income and as such had a lower impact on the effective tax rate for 2011 compared with 2010.

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 is 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 3.6 years at March 31, 2011 and December 31, 2010. The Company’s investment portfolio and investment-related assets as of March 31, 2011 were as follows:


	Carrying		Percent
(Dollars in thousands)	Value		of Total

Fixed maturity securities:
U.S. government and government agencies	$	1,295,559		9.8	%
State and municipal:
Special revenue		2,129,061		16.1	%
State general obligation		1,012,535		7.6	%
Local general obligation		427,260		3.2	%
Pre-refunded (1)		1,461,295		11.0	%
Corporate backed		449,398		3.4	%

Total state and municipal		5,479,549		41.4	%

Mortgage-backed securities:
Agency		1,052,388		7.9	%
Residential-Prime		267,365		2.0	%
Residential-Alt A		54,490		0.4	%
Commercial		57,999		0.4	%

Total mortgage-backed securities		1,432,242		10.8	%


Corporate:
Industrial		1,192,670		9.0	%
Financial		722,808		5.5	%
Utilities		197,053		1.5	%
Asset-backed		273,692		2.1	%
Other		122,702		1.0	%

Total corporate		2,508,925		19.0	%


Foreign government and foreign government agencies		535,343		4.0	%

Total fixed maturity securities		11,251,618		85.0	%


Equity securities available for sale:
Preferred stocks:
Financial		96,981		0.7	%
Real estate		48,604		0.4	%
Utilities		49,248		0.4	%

Total preferred stocks		194,833		1.5	%


Common stocks		315,297		2.4	%

Total equity securities available for sale		510,130		3.9	%


Arbitrage trading account		488,202		3.7	%
Investment in arbitrage funds		62,541		0.5	%
Investment funds		548,327		4.1	%
Loans receivable		348,773		2.6	%
Real estate		32,775		0.2	%

Total investments	$	13,242,366		100.0	%

(1)

Bonds that have been pre-refunded with U.S. government securities.

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.

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 high-dividend yielding common and preferred stocks issued by large market capitalization companies.

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 and relative value arbitrage. 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 March 31, 2011 and December 31, 2010, the Company’s carrying value in investment funds was $548 million and $452 million, respectively, including investments in real estate funds of $294 million and $226 million, respectively, and investments in energy funds of $114 million and $97 million, respectively.

Loans Receivable. Loans receivable, which are carried at amortized cost, have an aggregate cost of $349 million and an aggregate fair value of $312 million at March 31, 2011. Amortized cost of these loans is net of a valuation allowance of $20 million as of March 31, 2011. The nine largest loans have an aggregate amortized cost of $271 million and an aggregate fair value of $233 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 (64%), hotels (23%) and senior living facilities (13%) located primarily in New York City, California, Hawaii, Boston and Philadelphia.

Market Risk. The fair value of the Company’s investments is subject to risks of fluctuations in credit quality and interest rates. The Company uses various models and stress test scenarios to monitor and manage interest rate risk. As noted above, the Company attempts to manage its interest rate risk by maintaining 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 for the fixed maturity portfolio was 3.6 years at March 31, 2011 and December 31, 2010. In addition, the fair value of the Company’s international investments is subject to currency risk. The Company attempts to manage its currency risk by matching its foreign currency assets and liabilities where considered appropriate.

Liquidity and Capital Resources

Cash Flow. Cash flow provided from operating activities was $55 million in 2011 and $57 million in 2010.

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 income 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 85% invested in cash, cash equivalents and marketable fixed maturity securities as of March 31, 2011. 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.

Debt. At March 31, 2011, the Company had senior notes, junior subordinated debentures and other debt outstanding with a carrying value of $1,740 million and a face amount of $1,758 million. The maturities of the outstanding debt are $7 million in 2011, $22 million in 2012, $201 million in 2013, $200 million in 2015, $2 million in 2016, $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.

Equity. At March 31, 2011, total common stockholders’ equity was $3.8 billion, common shares outstanding were 141,599,454, and stockholders’ equity per outstanding share was $26.78.

Total Capital. Total capitalization (equity, senior notes and other debt and junior subordinated debentures) was $5.5 billion at March 31, 2011. The percentage of the Company’s capital attributable to senior notes, junior subordinated debentures and other debt was 31% at March 31, 2011 and 32% at December 31, 2010.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Reference is made to the information under “Market Risk” under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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 March 31, 2011, 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

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, 2010.

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

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


					Total number of shares purchased		Maximum number of
	Total number				as part of publicly announced		shares that may yet be
	of shares		Average price		plans		purchased under the
	purchased		paid per share		or programs		plans or programs
January 2011		600	$	27.42		600		5,841,594
February 2011		—		—		—		10,000,000	(1)
March 2011		778,552	$	29.91		—		10,000,000


(1)		The Company’s repurchase authorization was increased to 10,000,000 shares by its board of directors on February 25, 2011.

Item 6. Exhibits


	Number

	(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.

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: May 6, 2011	/s/ William R. Berkley
	William R. Berkley
	Chairman of the Board and Chief Executive Officer


Date: May 6, 2011	/s/ Eugene G. Ballard
	Eugene G. Ballard
	Senior Vice President - Chief Financial Officer

BERKLEY W R CORP - Quarter Report: 2011 March (Form 10-Q)

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