BERKLEY W R CORP - Quarter Report: 2012 June (Form 10-Q)

(dollars in thousands)

Fair Value

Six months ended June 30:

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)



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

For the Quarterly Period Ended June 30, 2012



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 July 31, 2012: 137,135,952

Table of Contents

TABLE OF CONTENTS



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

Table of Contents

Part I — FINANCIAL INFORMATION


Item 1.	Financial Statements

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)



	June 30, 2012			December 31, 2011
Assets
Investments:
Fixed maturity securities	$	11,826,928		$	11,312,037
Equity securities available for sale	561,785			443,439
Arbitrage trading account	419,249			397,312
Investment funds	728,505			680,638
Loans receivable	325,073			263,187
Real estate	360,787			342,905
Total investments	14,222,327			13,439,518
Cash and cash equivalents	1,012,220			911,742
Premiums and fees receivable	1,347,305			1,206,204
Due from reinsurers	1,270,036			1,215,679
Accrued investment income	135,702			133,776
Prepaid reinsurance premiums	305,689			258,271
Deferred policy acquisition costs	386,783			364,937
Real estate, furniture and equipment	264,413			262,275
Goodwill	87,865			87,865
Trading account receivables from brokers and clearing organizations	275,844			318,240
Current federal and foreign income taxes	—			9,670
Other assets	153,922			195,696
Total assets	$	19,462,106		$	18,403,873
Liabilities and Equity
Liabilities:
Reserves for losses and loss expenses	$	9,488,668		$	9,337,134
Unearned premiums	2,380,002			2,189,575
Due to reinsurers	299,220			241,204
Trading account securities sold but not yet purchased	40,520			62,514
Current federal and foreign income taxes	15,537			—
Deferred federal and foreign income taxes	31,665			2,835
Other liabilities	881,170			866,229
Junior subordinated debentures	243,102			242,997
Senior notes and other debt	1,865,380			1,500,503
Total liabilities	15,245,264			14,442,991
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, 137,167,115 and 137,520,019 shares, respectively	47,024			47,024
Additional paid-in capital	944,263			941,109
Retained earnings	4,711,836			4,491,162
Accumulated other comprehensive income	416,355			354,851
Treasury stock, at cost, 97,950,803 and 97,597,899 shares, respectively	(1,911,694		)	(1,880,790		)
Total stockholders’ equity	4,207,784			3,953,356
Noncontrolling interests	9,058			7,526
Total equity	4,216,842			3,960,882
Total liabilities and equity	$	19,462,106		$	18,403,873

See accompanying notes to interim consolidated financial statements.

Table of Contents

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Dollars in thousands, except per share data)



	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
REVENUES:
Net premiums written	$	1,190,991		$	1,057,415		$	2,394,517		$	2,140,718
Change in net unearned premiums	(43,634		)	(40,171		)	(147,509		)	(140,977		)
Net premiums earned	1,147,357			1,017,244			2,247,008			1,999,741
Net investment income	161,250			149,072			318,869			295,198
Insurance service fees	27,036			25,035			50,913			47,208
Net investment gains:
Net realized gains on investment sales	24,286			23,290			67,763			52,574
Change in valuation allowance, net of other-than-temporary impairments	—			(400		)	4,014			(400		)
Net investment gains	24,286			22,890			71,777			52,174
Revenues from wholly-owned investees	55,434			56,134			105,109			110,021
Other income	384			574			776			958
Total revenues	1,415,747			1,270,949			2,794,452			2,505,300
OPERATING COSTS AND EXPENSES:
Losses and loss expenses	731,202			674,276			1,410,674			1,281,371
Other operating costs and expenses	448,758			403,658			880,537			789,787
Expenses from wholly-owned investees	54,931			55,855			106,261			109,671
Interest expense	32,417			28,132			61,238			56,249
Total operating costs and expenses	1,267,308			1,161,921			2,458,710			2,237,078
Income before income taxes	148,439			109,028			335,742			268,222
Income tax expense	(39,535		)	(26,908		)	(91,606		)	(70,507		)
Net income before noncontrolling interests	108,904			82,120			244,136			197,715
Noncontrolling interests	(66		)	64			20			59
Net income to common stockholders	$	108,838		$	82,184		$	244,156		$	197,774
NET INCOME PER SHARE:
Basic	$	0.79		$	0.58		$	1.77		$	1.40
Diluted	0.76			0.56			1.70			1.34

See accompanying notes to interim consolidated financial statements.

Table of Contents

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands)



	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Net income before noncontrolling interests	$	108,904		$	82,120		$	244,136		$	197,715
Other comprehensive income (loss):
Change in unrealized foreign exchange gains (losses)	(17,257		)	(1,007		)	(1,674		)	9,853
Unrealized holding gains on investment securities arising during the period, net of taxes	55,385			92,271			108,491			86,054
Reclassification adjustment for net investment gains included in net income, net of taxes	(15,850		)	(14,336		)	(46,932		)	(33,126		)
Change in unrecognized pension obligation, net of taxes	823			707			1,647			1,411
Other comprehensive income	23,101			77,635			61,532			64,192
Comprehensive income	132,005			159,755			305,668			261,907
Comprehensive (income) loss to the noncontrolling interest	(71		)	(4		)	(8		)	47
Comprehensive income to common stockholders	$	131,934		$	159,751		$	305,660		$	261,954

See accompanying notes to interim consolidated financial statements.

Table of Contents

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands)



	For the Six Months Ended
	June 30,
	2012			2011
COMMON STOCK:
Beginning and end of period	$	47,024		$	47,024
ADDITIONAL PAID-IN CAPITAL:
Beginning of period	$	941,109		$	935,099
Stock options exercised and restricted stock units issued, net of tax	(12,092		)	(23,936		)
Restricted stock units expensed	14,792			12,524
Stock issued to directors	454			308
End of period	$	944,263		$	923,995
RETAINED EARNINGS:
Beginning of period	$	4,491,162		$	4,143,207
Net income to common stockholders	244,156			197,774
Dividends	(23,482		)	(21,275		)
End of period	$	4,711,836		$	4,319,706
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Unrealized investment gains (losses):
Beginning of period	$	430,419		$	334,747
Unrealized gains on securities not other-than-temporarily impaired	60,275			53,342
Unrealized gains (losses) on other-than-temporarily impaired securities	1,256			(426		)
End of period	491,950			387,663
Currency translation adjustments:
Beginning of period	(61,239		)	(42,488		)
Net change in period	(1,674		)	9,853
End of period	(62,913		)	(32,635		)
Net pension asset:
Beginning of period	(14,329		)	(15,696		)
Net change in period	1,647			1,411
End of period	(12,682		)	(14,285		)
Total accumulated other comprehensive income	$	416,355		$	340,743
TREASURY STOCK:
Beginning of period	$	(1,880,790	)	$	(1,750,494	)
Stock exercised/vested	23,393			37,156
Stock repurchased	(54,878		)	(59,159		)
Stock issued to directors	581			564
End of period	$	(1,911,694	)	$	(1,771,933	)
NONCONTROLLING INTERESTS:
Beginning of period	$	7,526		$	6,980
Contributions	1,524			332
Net loss	(20		)	(59		)
Other comprehensive income, net of tax	28			12
End of period	$	9,058		$	7,265

See accompanying notes to interim consolidated financial statements.

Table of Contents

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)



	For the Six Months Ended
	June 30,
	2012			2011
CASH FROM (USED IN) OPERATING ACTIVITIES:
Net income to common stockholders	$	244,156		$	197,774
Adjustments to reconcile net income to net cash from operating activities:
Net investment gains	(71,777		)	(52,174		)
Depreciation and amortization	47,147			33,179
Noncontrolling interests	(20		)	(59		)
Investment funds	(63,243		)	(25,218		)
Stock incentive plans	15,827			13,026
Change in:
Arbitrage trading account	(1,535		)	(4,319		)
Premiums and fees receivable	(139,183		)	(148,144		)
Reinsurance accounts	(46,182		)	(71,887		)
Deferred policy acquisition costs	(21,637		)	(30,255		)
Deferred income taxes	(4,244		)	21,037
Reserves for losses and loss expenses	151,975			163,604
Unearned premiums	188,902			203,515
Other	12,225			(83,687		)
Net cash from (used in) operating activities	312,411			216,392
CASH FROM (USED IN) INVESTING ACTIVITIES:
Proceeds from sale of fixed maturity securities	370,902			707,598
Proceeds from sale of equity securities	70,274			100,837
Distributions from (contributions to) investment funds	23,090			(124,201		)
Proceeds from maturities and prepayments of fixed maturity securities	922,961			774,127
Purchase of fixed maturity securities	(1,658,418		)	(1,419,857		)
Purchase of equity securities	(184,751		)	(44,736		)
Real estate purchased	(15,475		)	(117,893		)
Change in loans receivable	(61,886		)	43,700
Net additions to real estate, furniture and equipment	(20,376		)	(18,679		)
Change in balances due to security brokers	38,700			73,311
Payment for business purchased, net of cash acquired	—			(8,579		)
Net cash from (used in) investing activities	(514,979		)	(34,372		)
CASH FROM (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of debt	364,044			—
Net proceeds from stock options exercised	4,776			13,217
Repayment of debt	—			624
Cash dividends to common stockholders	(11,042		)	(21,273		)
Purchase of common treasury shares	(48,346		)	(59,159		)
Other, net	19,500			22,635
Net cash from (used in) financing activities	328,932			(43,956		)
Net impact on cash due to change in foreign exchange rates	(25,886		)	13,865
Net change in cash and cash equivalents	100,478			151,929
Cash and cash equivalents at beginning of year	911,742			642,952
Cash and cash equivalents at end of period	$	1,012,220		$	794,881

See accompanying notes to interim consolidated financial statements.

Table of Contents

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 interim periods are not necessarily indicative of the results that may be expected for the year. 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, 2011. Reclassifications have been made in the 2011 financial statements as originally reported to conform to the presentation of the 2012 financial statements.

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

(2) Per Share Data

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

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



	For the Three Months Ended		For the Six Months Ended
	June 30,		June 30,
	2012	2011	2012	2011
Basic	138,181	141,637	137,997	141,408
Diluted	143,528	147,677	143,506	147,614

(3) Recent Accounting Pronouncements

In October 2010, the Financial Accounting Standards Board ("FASB") issued guidance regarding the treatment of costs associated with acquiring or renewing insurance contracts. This guidance modified 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. The Company adopted this guidance effective January 1, 2012 and retrospectively adjusted its previously issued financial statements.

Table of Contents

A summary of the impact of the adoption of this new guidance is shown below (dollars in thousands except per share amounts):



	Previously Reported			As Adjusted
At December 31, 2011:
Deferred policy acquisition costs	$	448,795		$	364,937
Deferred tax liability	31,623			2,835
Stockholders' equity	4,008,426			3,953,356

For the Six Months Ended June 30, 2011:
Other operating costs and expenses	$	787,190		$	789,787
Income before income taxes	270,819			268,222
Federal and foreign income taxes	(71,309		)	(70,507		)
Net income	199,569			197,774

Basic net income per share	$	1.41		$	1.40
Diluted net income per share	1.35			1.34

For the Three Months Ended June 30, 2011:
Other operating costs and expenses	$	402,359		$	403,658
Income before income taxes	110,327			109,028
Federal and foreign income taxes	(27,309		)	(26,908		)
Net income	83,082			82,184

Basic net income per share	$	0.59		$	0.58
Diluted net income per share	0.56			0.56

The impact of applying this guidance retrospectively was a reduction in stockholders' equity of $51 million as of December 31, 2010.

In May 2011, the FASB issued guidance related to measuring and disclosing fair values. The Company's adoption of the updated guidance effective January 1, 2012 resulted in a change in the presentation of the Company's consolidated financial statements but did not have any impact on the Company's results of operations, financial position or liquidity.

In June 2011, the FASB issued guidance relating to the presentation of the components of net income and other comprehensive income. The Company's adoption of the updated guidance effective January 1, 2012 resulted in a change in the presentation of the Company's consolidated financial statements but did not have any impact on the Company's results of operations, financial position or liquidity.

All recently issued but not yet effective accounting and reporting guidance is either not applicable to the Company or is not expected to have a material impact on the Company.

(4) Statements of Cash Flow

Interest payments were $55,616,000 and $56,171,000 and income taxes paid were $68,118,000 and $37,516,000 in the six months ended June 30, 2012 and 2011, respectively.

Table of Contents

(5) Investments in Fixed Maturity Securities

At June 30, 2012 and December 31, 2011, investments in fixed maturity securities were as follows:



(Dollars in thousands)	Amortized Cost		Gross Unrealized					Fair Value		Carrying Value
			Gains		Losses
June 30, 2012
Held to maturity:
State and municipal	$	76,626	$	15,570	$	—		$	92,196	$	76,626
Residential mortgage-backed	34,626		5,667		—			40,293		34,626
Corporate	4,996		685		—			5,681		4,996
Total held to maturity	116,248		21,922		—			138,170		116,248
Available for sale:
U.S. government and government agency	905,046		80,624		(126		)	985,544		985,544
State and municipal	4,841,035		329,947		(16,273		)	5,154,709		5,154,709
Mortgage-backed securities:
Residential (1)	1,408,119		55,356		(11,226		)	1,452,249		1,452,249
Commercial	172,404		6,420		(105		)	178,719		178,719
Corporate	2,763,032		169,660		(19,904		)	2,912,788		2,912,788
Foreign	969,400		61,654		(4,383		)	1,026,671		1,026,671
Total available for sale	11,059,036		703,661		(52,017		)	11,710,680		11,710,680
Total investments in fixed maturity securities	$	11,175,284	$	725,583	$	(52,017	)	$	11,848,850	$	11,826,928
December 31, 2011
Held to maturity:
State and municipal	$	74,354	$	12,546	$	—		$	86,900	$	74,354
Residential mortgage-backed	35,759		5,610		—			41,369		35,759
Corporate	4,996		717		—			5,713		4,996
Total held to maturity	115,109		18,873		—			133,982		115,109
Available for sale:
U.S. government and government agency	906,924		69,920		(351		)	976,493		976,493
State and municipal	5,031,275		308,345		(16,550		)	5,323,070		5,323,070
Mortgage-backed securities:
Residential (1)	1,416,427		75,635		(15,894		)	1,476,168		1,476,168
Commercial	105,383		4,054		(1,018		)	108,419		108,419
Corporate	2,328,200		132,311		(36,087		)	2,424,424		2,424,424
Foreign	850,838		42,165		(4,649		)	888,354		888,354
Total available for sale	10,639,047		632,430		(74,549		)	11,196,928		11,196,928
Total investments in fixed maturity securities	$	10,754,156	$	651,303	$	(74,549	)	$	11,330,910	$	11,312,037

___________


(1)	Gross unrealized losses for residential mortgage-backed securities include $5,735,000 and $7,668,000 as of June 30, 2012 and December 31, 2011, respectively, related to the non-credit portion of other-than-temporary impairments (“OTTI”) recognized in other comprehensive income.

Table of Contents

The amortized cost and fair value of fixed maturity securities at June 30, 2012, 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.



(Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	865,253	$	882,883
Due after one year through five years	3,287,781		3,463,096
Due after five years through ten years	2,494,584		2,719,280
Due after ten years	2,912,517		3,112,330
Mortgage-backed securities	1,615,149		1,671,261
Total	$	11,175,284	$	11,848,850

At June 30, 2012, there were no investments, other than investments in United States government and government agency securities, which exceeded 10% of common stockholders’ equity.

(6) Investments in Equity Securities Available for Sale

At June 30, 2012 and December 31, 2011, investments in equity securities available for sale were as follows:



(Dollars in thousands)	Cost		Gross Unrealized					Fair Value		Carrying Value
(Dollars in thousands)	Cost		Gains		Losses			Fair Value		Carrying Value
June 30, 2012
Common stocks	$	337,557	$	104,104	$	(2,415	)	$	439,246	$	439,246
Preferred stocks	120,105		11,391		(8,957		)	122,539		122,539
Total	$	457,662	$	115,495	$	(11,372	)	$	561,785	$	561,785
December 31, 2011
Common stocks	$	209,210	$	113,660	$	(2,888	)	$	319,982	$	319,982
Preferred stocks	133,183		5,139		(14,865		)	123,457		123,457
Total	$	342,393	$	118,799	$	(17,753	)	$	443,439	$	443,439

(7) Arbitrage Trading Account

At June 30, 2012 and December 31, 2011, the fair value and carrying value of the arbitrage trading account were $419 million and $397 million, respectively. The primary focus of the trading account is merger arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Arbitrage investing differs from other types of investing in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less). The Company believes that this makes arbitrage investments less vulnerable to changes in general financial market conditions.

Table of Contents

(8) Net Investment Income

Net investment income consists of the following:



	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2012			2011			2012			2011
Investment income earned on:
Fixed maturity securities, including cash and cash equivalents and loans receivable	$	119,835		$	124,172		$	239,123		$	245,113
Investment funds	35,619			15,502			63,242			31,889
Arbitrage trading account	60			5,827			6,541			11,042
Equity securities available for sale	3,829			3,485			6,979			6,749
Real estate	3,348			1,172			5,524			2,344
Gross investment income	162,691			150,158			321,409			297,137

Investment expense	(1,441		)	(1,086		)	(2,540		)	(1,939		)
Net investment income	$	161,250		$	149,072		$	318,869		$	295,198

(9) Investment Funds

Investment funds consist of the following:



	Carrying Value as of				Income (Losses) from Investment Funds
	June 30,		December 31,		For the Six Months Ended June 30,
(Dollars in thousands)	2012		2011		2012			2011
Real estate	$	381,907	$	373,413	$	11,290		$	10,647
Energy	140,802		98,974		49,780			23,133
Arbitrage	57,346		58,008		(662		)	354
Other	148,450		150,243		2,834			(2,245		)
Total	$	728,505	$	680,638	$	63,242		$	31,889

The Company's share of the earnings or losses of investment funds is generally reported on a one-quarter lag in order to facilitate the timely completion of the Company's financial statements. Subsequent to June 30, 2012, the Company received financial information for its investments in energy funds. The Company's share of net losses reported by energy funds for their second quarter of 2012 is estimated to be $20 million pre-tax, or $13 million after-tax. The Company will report this loss, together with the results for other investment funds, in the third quarter of 2012.

(10) Real Estate

Real estate is directly owned property held for investment. At June 30, 2012, real estate consists of two office buildings in London, including one in operation and one under development, and a long-term ground lease in Washington D.C. Future minimum rental income expected on operating leases relating to real estate held for investment is $1,418,000 in 2012, $1,460,000 in 2013, $1,504,000 in 2014, $1,549,000 in 2015, $1,596,000 in 2016 and $330,657,000 thereafter.

Table of Contents

(11) Loans Receivable

Loans receivable are as follows:




(Dollars in thousands)	June 30, 2012		December 31, 2011
Total loans receivable	$	325,073	$	263,187

Valuation allowance:
Specific	$	10,465	$	19,041
General	2,567		764
Total	$	13,032	$	19,805

Impaired loans:
With a specific valuation allowance	$	12,820	$	29,702
Without a valuation allowance	30,431		30,357
Unpaid principal balance	53,250		93,922

For the Six Months Ended June 30,	2012		2011
Decrease in valuation allowance	$	6,773	$	—
Loans receivable charged off	85		—

For the Three Months Ended June 30,
Increase in valuation allowance	123		—
Loans receivable charged off	—		—

Loans receivable in non-accrual status were $13 million and $30 million at June 30, 2012 and December 31, 2011, respectively. If these loans had been current, additional interest income of $0.2 million and $0.2 million would have been recognized in accordance with their original terms for the six months ended June 30, 2012 and 2011, respectively.

The Company monitors the performance of its loans receivable and assesses the ability of the borrower to pay principal and interest based upon loan structure, underlying property values, cash flow and related financial and operating performance of the property 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.

The Company's six largest loans receivable, which have an aggregate amortized cost of $181 million and an aggregate fair value of $172 million at June 30, 2012, are secured by commercial real estate located primarily in New York City, California, Hawaii and Boston. These loans earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through March 2016. As part of the evaluation process, the Company reviews certain credit quality indicators for these loans. The Company utilizes an internal risk rating system to assign a risk to each of its commercial loans. The loan rating system takes into consideration credit quality indicators including loan to value ratios, which compare the outstanding loan amount to the estimated value of the property, the borrower's financial condition and performance with respect to loan terms, the Company's position in the capital structure, and the overall leverage in the capital structure. Based on this rating system, two loans with an aggregate cost basis of $41 million were considered to be impaired at June 30, 2012. For each of these loans, a determination was made as to the amount of loss in the event of a default and whether the loss is probable. The results of the determination were considered in connection with the valuation allowance noted above. An additional credit quality indicator is the debt service coverage ratio, which compares a property's net operating income to the borrower's principal and interest payments. At June 30, 2012, each of the six largest loans referred to above had a debt service coverage ratio greater than 3.0, except one that is lower due to a recent and temporary rate abatement.

Table of Contents

(12) Realized and Unrealized Investment Gains

Realized and unrealized investment gains are as follows:



	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2012			2011			2012			2011
Realized investment gains:
Fixed maturity securities:
Gains	$	5,652		$	8,957		$	20,607		$	14,837
Losses	(1,763		)	(1,016		)	(2,306		)	(2,509		)
Equity securities available for sale	18,188			14,289			44,426			38,221
Other	18			—			1,535			—
Sales of investment funds	2,191			1,060			3,501			2,025
Change in valuation allowance, net of other-than -temporary impairments (1)	—			(400		)	4,014			(400		)
Total net investment gains before income taxes	24,286			22,890			71,777			52,174
Income tax expense	(8,436		)	(8,554		)	(24,845		)	(19,048		)
Total net investment gains	$	15,850		$	14,336		$	46,932		$	33,126



Change in unrealized gains of available for sale securities:
Fixed maturity securities	$	71,138		$	101,205		$	90,560		$	71,918
Less non-credit portion of OTTI recognized in other comprehensive income	190			(900		)	1,933			(656		)
Equity securities available for sale	(8,518		)	18,486			3,077			6,101
Investment funds	(2,651		)	816			(974		)	4,190
Total change in unrealized gains (losses) before income taxes and noncontrolling interests	60,159			119,607			94,596			81,553
Income tax expense (benefit)	(20,624		)	(41,672		)	(33,037		)	(28,625		)
Noncontrolling interests	(5		)	(68		)	(28		)	(12		)
Total change in net unrealized gains	$	39,530		$	77,867		$	61,531		$	52,916

_________

(1) For the six months ended June 30, 2012, this represents a valuation allowance reduction of $7 million, partially offset by an other-than-temporary impairment of $3 million.

Table of Contents

(13) Securities in an Unrealized Loss Position

The following table summarizes all securities in an unrealized loss position at June 30, 2012 and December 31, 2011 by the length of time those securities have been continuously in an unrealized loss position:



	Less Than 12 Months				12 Months or Greater				Total
(Dollars in thousands)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
June 30, 2012
U.S. government and agency	$	18,412	$	126	$	—	$	—	$	18,412	$	126
State and municipal	118,623		977		206,125		15,296		324,748		16,273
Mortgage-backed securities	281,422		2,358		62,418		8,973		343,840		11,331
Corporate	215,838		1,997		84,614		17,907		300,452		19,904
Foreign	103,524		4,112		7,959		271		111,483		4,383
Fixed maturity securities	737,819		9,570		361,116		42,447		1,098,935		52,017
Common stocks	62,293		2,415		—		—		62,293		2,415
Preferred stocks	23,302		1,485		38,567		7,472		61,869		8,957
Equity securities	85,595		3,900		38,567		7,472		124,162		11,372
Total	$	823,414	$	13,470	$	399,683	$	49,919	$	1,223,097	$	63,389

December 31, 2011
U.S. government and agency	$	24,668	$	169	$	4,800	$	182	$	29,468	$	351
State and municipal	131,417		827		183,205		15,723		314,622		16,550
Mortgage-backed securities	172,729		2,439		94,243		14,473		266,972		16,912
Corporate	341,764		8,327		125,654		27,760		467,418		36,087
Foreign	197,560		4,078		7,159		571		204,719		4,649
Fixed maturity securities	868,138		15,840		415,061		58,709		1,283,199		74,549
Common stocks	47,098		2,888		—		—		47,098		2,888
Preferred stocks	23,782		125		45,314		14,740		69,096		14,865
Equity securities	70,880		3,013		45,314		14,740		116,194		17,753
Total	$	939,018	$	18,853	$	460,375	$	73,449	$	1,399,393	$	92,302

Fixed Maturity Securities – A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at June 30, 2012 is presented in the table below.



(Dollars in thousands)	Number of Securities	Aggregate Fair Value		Gross Unrealized Loss
Unrealized loss less than $5 million:
Mortgage-backed securities	10	$	36,128	$	2,362
Corporate	11	21,363		1,914
State and municipal	4	32,400		2,407
Foreign	5	9,339		2,092
Unrealized loss $5 million or more:
Mortgage-backed security (1)	1	17,058		5,359
Total	31	$	116,288	$	14,134

_______________

(1) This investment is a residential mortgage-backed security that was evaluated based on the performance of the underlying collateral under various economic and default scenarios. The security has met its contractual obligations and the Company expects that it will continue to meet those contractual payment obligations as they become due. Based on this evaluation, the Company does not consider the investment to be OTTI.

Table of Contents

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. For the six months ended June 30, 2012 and 2011, there were no changes in the portion of impairments recognized in earnings for those securities that have been impaired due to both credit factors and non-credit factors.

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 under financial covenants. Based on its assessment of these issuers, the Company expects them to continue to meet their contractual payment obligations as they become due and does not consider any of these securities to be OTTI.

Preferred Stocks – At June 30, 2012, there were five preferred stocks in an unrealized loss position, with an aggregate fair value of $62 million and a gross unrealized loss of $9 million. Three of those preferred stocks with an aggregate fair value of $26 million and a gross unrealized loss of $6 million were rated non-investment grade. Based upon management’s view of the underlying value of these securities, the Company does not consider these preferred stocks to be OTTI.

Common Stocks – At June 30, 2012, the Company owned five common stocks in an unrealized loss position with an aggregate fair value of $62 million and an aggregate unrealized loss of $2 million. The Company does not consider these common stocks to be OTTI.

(14) 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.

Table of Contents

The following tables present the assets and liabilities measured at fair value, on a recurring basis, as of June 30, 2012 and December 31, 2011 by Level:



(Dollars in thousands)	Total		Level 1		Level 2		Level 3
June 30, 2012
Assets:
Fixed maturity securities available for sale:
U.S. government and agency	$	985,544	$	—	$	985,544	$	—
State and municipal	5,154,709		—		5,154,709		—
Mortgage-backed securities	1,630,968		—		1,630,968		—
Corporate	2,912,788		—		2,846,495		66,293
Foreign	1,026,671		—		1,026,671		—
Total fixed maturity securities available for sale	11,710,680		—		11,644,387		66,293
Equity securities available for sale:
Common stocks	439,246		437,837		—		1,409
Preferred stocks	122,539		—		119,695		2,844
Total equity securities available for sale	561,785		437,837		119,695		4,253
Arbitrage trading account	419,249		300,580		117,884		785
Total	$	12,691,714	$	738,417	$	11,881,966	$	71,331
Liabilities:
Securities sold but not yet purchased	$	40,520	$	39,411	$	1,089	$	20
December 31, 2011
Assets:
Fixed maturity securities available for sale:
U.S. government and agency	$	976,493	$	—	$	976,493	$	—
State and municipal	5,323,070		—		5,323,070		—
Mortgage-backed securities	1,584,587		—		1,584,587		—
Corporate	2,424,424		—		2,356,596		67,828
Foreign	888,354		—		888,354		—
Total fixed maturity securities available for sale	11,196,928		—		11,129,100		67,828
Equity securities available for sale:
Common stocks	319,982		318,423		—		1,559
Preferred stocks	123,457		—		111,154		12,303
Total equity securities available for sale	443,439		318,423		111,154		13,862
Arbitrage trading account	397,312		208,516		187,945		851
Total	$	12,037,679	$	526,939	$	11,428,199	$	82,541
Liabilities:
Securities sold but not yet purchased	$	62,514	$	62,493	$	—	$	21

There were no significant transfers between Levels 1 and 2 during the six months ended June 30, 2012 or during the year ended December 31, 2011.

Table of Contents

The following tables summarize changes in Level 3 assets and liabilities for the six months ended June 30, 2012 and for the year ended December 31, 2011:



			Gains (Losses) Included in
(Dollars in thousands)	Beginning Balance		Earnings			Other Comprehensive Income				Purchases			(Sales)			Maturities			Transfer in		Ending Balance
For the six months ended June 30, 2012:
Assets:
Fixed maturity securities available for sale:
Corporate	$	67,828	$	156		$	4,244			$	148		$	—		$	(6,083	)	$	—	$	66,293
Total	67,828		156			4,244				148			—			(6,083		)	—		66,293
Equity securities available for sale:
Common stocks	1,559		—			—				—			(150		)	—			—		1,409
Preferred stocks	12,303		2,095			(2,088		)		—			(9,466		)	—			—		2,844
Total	13,862		2,095			(2,088		)		—			(9,616		)	—			—		4,253
Arbitrage trading account	851		(81		)	—			—	—		—	—			—			15		785
Total	$	82,541	$	2,170		$	2,156			$	148		$	(9,616	)	$	(6,083	)	$	15	$	71,331
Liabilities:
Securities sold but not yet purchased	$	21	$	(1	)	$	—			$	—		$	—		$	—		$	—	$	20

For the year ended December 31, 2011
Assets:
Fixed maturity securities available for sale:
Corporate	$	88,063	$	(454	)	$	(870	)		$	15,271		$	(11,864	)	$	(22,318	)	$	—	$	67,828
Total	88,063		(454		)	(870		)		15,271			(11,864		)	(22,318		)	—		67,828
Equity securities available for sale:
Common stocks	1,559		—			—				—			—			—			—		1,559
Preferred stocks	89,446		28,947			(30,865		)		—			(75,225		)	—			—		12,303
Total	91,005		28,947			(30,865		)		—			(75,225		)	—			—		13,862
Arbitrage trading account	3,187		572			—				269			(3,266		)	—			89		851
Total	$	182,255	$	29,065		$	(31,735	)		$	15,540		$	(90,355	)	$	(22,318	)	$	89	$	82,541
Liabilities:
Securities sold but not yet purchased	$	—	$	40		$	—			$	67		$	(86	)	$	—		$	—	$	21

There were no significant transfers in or out of Level 3 during the six months ended June 30, 2012 or during the year ended December 31, 2011.

Table of Contents

(15) Reinsurance

The following is a summary of reinsurance financial information:



	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2012			2011			2012			2011
Written premiums:
Direct	$	1,249,576		$	1,094,879		$	2,450,595		$	2,171,726
Assumed	181,344			150,397			381,851			343,408
Ceded	(239,929		)	(187,861		)	(437,929		)	(374,416		)
Total net premiums written	$	1,190,991		$	1,057,415		$	2,394,517		$	2,140,718

Earned premiums:
Direct	$	1,163,162		$	1,020,606		$	2,267,118		$	1,993,131
Assumed	186,762			161,942			366,280			323,812
Ceded	(202,567		)	(165,304		)	(386,390		)	(317,202		)
Total net premiums earned	$	1,147,357		$	1,017,244		$	2,247,008		$	1,999,741

Ceded losses incurred	$	109,142		$	80,287		$	194,419		$	195,112

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 $2 million as of June 30, 2012 and December 31, 2011.

(16) Fair Value of Financial Instruments

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



	June 30, 2012				December 31, 2011
(Dollars in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Fixed maturity securities	$	11,826,928	$	11,848,850	$	11,312,037	$	11,330,910
Equity securities available for sale	561,785		561,785		443,439		443,439
Arbitrage trading account	419,249		419,249		397,312		397,312
Loans receivable	325,073		316,204		263,187		245,169
Cash and cash equivalents	1,012,220		1,012,220		911,742		911,742
Trading account receivables from brokers and clearing organizations	275,844		275,844		318,240		318,240
Due from broker	—		—		10,875		10,875
Liabilities:
Trading account securities sold but not yet purchased	40,520		40,520		62,514		62,514
Due to broker	38,213		38,213		—		—
Junior subordinated debentures	243,102		244,400		242,997		258,400
Senior notes and other debt	1,865,380		2,040,509		1,500,503		1,587,473

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 14 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, which is considered a Level 2 input. The fair value of the senior notes and other debt and the junior subordinated debentures is based on spreads for similar securities, which is considered a Level 2 input.

Table of Contents

(17) 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 every other year. A summary of RSUs issued in the six months ended June 30, 2012 and 2011 follows:

(18) 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 lines companies underwrite risks within the excess and surplus lines market and on an admitted basis. The risks are highly complex, often unique exposures that typically fall outside the underwriting guidelines of the standard insurance market or are best served by specialized knowledge of a particular industry. The Specialty lines of business include premises operations, commercial automobile, property, products liability and professional liability lines. The customers in this segment are highly diverse. Operating units deliver their products through a variety of distribution channels, depending on the customer base and particular risks insured.

Our Regional companies provide insurance products and services that meet the specific needs of each regionally differentiated customer base by developing expertise in the niches that drive local communities. They provide commercial insurance products to customers primarily in 45 states and the District of Columbia. Key clients of this segment are small-to-mid-sized businesses and state and local governmental entities. The Regional business is sold through a network of non-exclusive independent agents who are compensated on a commission basis. Our Regional operating units are organized geographically in order to provide them with the flexibility to adapt quickly to local market conditions and customer needs.

Our Alternative Markets operating units offer insurance products, analytical tools and risk management services such as loss control and claims management that enable clients to select their risk tolerance and manage it appropriately. These units specialize in insuring, reinsuring and administering self-insurance programs and other alternative risk transfer mechanisms for clients such as commercial and governmental entity employers, employer groups, insurers, and other groups or entities seeking alternative ways to manage their exposure to risks. In addition to providing insurance products, the Alternative Markets segment also provides a wide variety of fee-based services, including claims, administrative and consulting services.

Our Reinsurance companies provide other insurance companies and self-insureds with assistance in managing their net risk through reinsurance on either a portfolio basis, through treaty reinsurance, or on an individual basis, through facultative reinsurance.

Our International operating units write business in almost 40 countries worldwide, with branches or offices in 15 locations outside the United States, including the United Kingdom, Continental Europe, South America, Australia, the Asia Pacific region, Scandinavia and Canada. In each of our international operating territories, we have built decentralized structures that allow products and services to be tailored to each regional customer base. Our International businesses are managed by teams of professionals with expertise in local markets and knowledge of regional environments.

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 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.

Table of Contents



	Revenues
(Dollars in thousands)	Earned Premiums		Investment Income		Other		Total		Pre-Tax Income (Loss)			Net Income (Loss)
For the three months ended June 30, 2012
Specialty	$	408,142	$	52,940	$	593	$	461,675	$	76,466		$	53,835
Regional	268,177		23,209		1,790		293,176		14,205			11,046
Alternative Markets	170,415		44,507		24,653		239,575		53,969			38,554
Reinsurance	109,515		25,439		—		134,954		25,927			18,827
International	191,108		14,206		—		205,314		15,309			6,088
Corporate and eliminations (1)	—		949		55,818		56,767		(61,723		)	(35,362		)
Net investment gains	—		—		24,286		24,286		24,286			15,850
Consolidated	$	1,147,357	$	161,250	$	107,140	$	1,415,747	$	148,439		$	108,838

For the three months ended June 30, 2011
Specialty	$	349,943	$	51,144	$	691	$	401,778	$	77,109		$	55,717
Regional	266,764		21,853		1,149		289,766		(16,042		)	(8,037		)
Alternative Markets	148,999		35,386		23,196		207,581		41,486			30,838
Reinsurance	105,836		26,311		—		132,147		25,336			19,346
International	145,702		11,393		—		157,095		11,248			6,742
Corporate and eliminations (1)	—		2,985		56,707		59,692		(52,999		)	(36,758		)
Net investment gains	—		—		22,890		22,890		22,890			14,336
Consolidated	$	1,017,244	$	149,072	$	104,633	$	1,270,949	$	109,028		$	82,184

For the six months ended June 30, 2012:
Specialty	$	795,252	$	102,246	$	1,211	$	898,709	$	144,727		$	102,539
Regional	532,443		44,606		3,075		580,124		45,992			33,588
Alternative Markets	329,108		85,890		46,627		461,625		101,656			73,188
Reinsurance	215,853		51,323		—		267,176		53,624			39,105
International	374,352		27,340		—		401,692		34,949			15,412
Corporate and eliminations (1)	—		7,464		105,885		113,349		(116,983		)	(66,608		)
Net investment gains	—		—		71,777		71,777		71,777			46,932
Consolidated	$	2,247,008	$	318,869	$	228,575	$	2,794,452	$	335,742		$	244,156
For the six months ended June 30, 2011:
Specialty	$	680,150	$	101,430	$	1,401	$	782,981	$	167,023		$	119,712
Regional	528,281		43,360		2,170		573,811		8,393			10,220
Alternative Markets	297,336		70,141		43,641		411,118		83,023			61,674
Reinsurance	211,314		53,589		—		264,903		50,673			38,827
International	282,660		21,951		—		304,611		13,501			8,603
Corporate and eliminations (1)	—		4,727		110,975		115,702		(106,565		)	(74,388		)
Net investment gains	—		—		52,174		52,174		52,174			33,126
Consolidated	$	1,999,741	$	295,198	$	210,361	$	2,505,300	$	268,222		$	197,774

Table of Contents

Identifiable assets by segment are as follows:



(Dollars in thousands)	June 30, 2012		December 31, 2011
Specialty	$	6,384,209	$	6,157,853
Regional	2,536,206		2,488,940
Alternative Markets	4,220,272		4,044,915
Reinsurance	2,745,633		2,732,489
International	1,763,691		1,569,749
Corporate and eliminations	1,812,095		1,409,927
Consolidated	$	19,462,106	$	18,403,873

___________

(1) Corporate and eliminations represent corporate revenues and expenses that are not allocated to business segments.

Table of Contents

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



	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
(Dollars in thousands)	2012		2011		2012		2011
Specialty
Premises operations	$	128,590	$	110,651	$	250,829	$	211,961
Property	70,818		60,718		133,835		115,112
Professional liability	62,469		55,497		125,161		109,009
Workers’ compensation	41,915		29,596		78,780		57,517
Commercial automobile	40,359		34,168		78,692		65,615
Products liability	25,854		23,500		51,287		46,902
Other	38,137		35,813		76,668		74,034
Total specialty	408,142		349,943		795,252		680,150
Regional
Commercial multiple peril	101,282		97,123		201,647		193,830
Commercial automobile	70,501		72,355		140,912		144,484
Workers’ compensation	55,882		54,902		109,615		108,469
Other	40,512		42,384		80,269		81,498
Total regional	268,177		266,764		532,443		528,281
Alternative Markets
Primary workers’ compensation	79,754		65,421		154,839		129,596
Excess workers’ compensation	35,279		43,169		70,872		86,902
Accident and health	36,593		23,060		67,240		47,108
Other liability	8,766		6,146		16,279		12,663
Other	10,023		11,203		19,878		21,067
Total alternative markets	170,415		148,999		329,108		297,336
Reinsurance
Casualty	75,178		75,926		152,055		152,612
Property	34,337		29,910		63,798		58,702
Total reinsurance	109,515		105,836		215,853		211,314
International
Automobile	29,606		26,097		60,274		54,251
Casualty reinsurance	28,095		16,294		56,308		33,067
Property	26,727		20,568		51,621		37,103
Professional liability	23,421		21,591		50,008		44,893
Primary workers’ compensation	19,898		18,258		38,516		35,596
Marine	21,225		11,895		37,384		21,563
Accident and health	16,235		10,857		28,062		20,521
Property reinsurance	8,721		5,328		20,031		9,382
Other liability	9,857		7,799		17,611		14,432
Fidelity and surety	7,323		7,015		14,537		11,852
Total international	191,108		145,702		374,352		282,660
Total	$	1,147,357	$	1,017,244	$	2,247,008	$	1,999,741

(19) 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.

Table of Contents

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 2012 and beyond, are based upon the Company’s historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information is not and 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 impact of significant competition; 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; effects of emerging claim and coverage issues; the uncertain nature of damage theories and loss amounts; natural and man-made catastrophic losses, including as a result of terrorist activities; general economic and market activities, including inflation, interest rates and volatility in the credit and capital markets; the impact of the conditions in the financial markets and the global economy, and the potential effect of any legislative, regulatory, accounting or other initiatives taken in response to it, on our results and financial condition; continued availability of capital and financing; the success of our new ventures or acquisitions and the availability of other opportunities; the availability of reinsurance; our retention under the Terrorism Risk Act of 2002, as amended; 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; credit risk relating to our policyholders, independent agents and brokers; 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 personnel and qualified employees; potential difficulties with technology and/or data security; the effectiveness of our controls to ensure compliance with guidelines, policies and legal and regulatory standards; 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 2012 and beyond to differ materially from those expressed in any forward-looking statement we make. Any projections of growth in our revenues would not necessarily result in commensurate levels of earnings. 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. Except to the extent required by applicable laws, the Company does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

Table of Contents


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 quickly and efficiently 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.

An important part of our strategy is to form new operating units to capitalize on various business opportunities, with 22 of our 48 units formed since 2006. 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 Norway, Australia, the Asia-Pacific region and South America. As a result, our international operations have become an increasingly important part of our business.

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 market 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. While prices began to increase in 2011, loss costs are also increasing and current market price levels for certain lines of business remain below the prices required for the Company to achieve its return objectives. With its investments in new businesses, the Company believes it is well-positioned to take advantage of new opportunities. 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, investment funds and real estate.

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 based upon known information about the claim at that time. 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 estimating the ultimate economic value of losses.

Table of Contents

These factors include, among other things, 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.

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 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.

Table of Contents

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, relative to our assumptions, on our loss estimate for claims occurring in 2011 (dollars in thousands):



	Frequency (+/-)
Severity (+/-)	1%		5%		10%
1%	$	56,116	$	168,908	$	309,896
5%	168,908		286,166		432,738
10%	309,896		432,738		586,291

Our net reserves for losses and loss expenses of approximately $8.3 billion as of June 30, 2012 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 $1.4 billion, or 17%, of the Company’s net loss reserves as of June 30, 2012 relate to assumed 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.

Table of Contents

Following is a summary of the Company’s reserves for losses and loss expenses by business segment as of June 30, 2012 and December 31, 2011:



(Dollars in thousands)	June 30,		December 31,
	2012		2011
Specialty	$	2,934,786	$	2,905,759
Regional	1,287,975		1,283,764
Alternative Markets	2,028,677		1,986,111
Reinsurance	1,404,262		1,439,136
International	623,073		557,342
Net reserves for losses and loss expenses	8,278,773		8,172,112
Ceded reserves for losses and loss expenses	1,209,895		1,165,022
Gross reserves for losses and loss expenses	$	9,488,668	$	9,337,134

Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of June 30, 2012 and December 31, 2011:



(Dollars in thousands)	Reported Case Reserves		Incurred But Not Reported		Total
June 30, 2012
General liability	$	951,025	$	1,923,829	$	2,874,854
Workers’ compensation	1,368,846		1,028,890		2,397,736
Commercial automobile	258,584		195,618		454,202
International	330,468		292,604		623,072
Other	203,879		320,768		524,647
Total primary	3,112,802		3,761,709		6,874,511
Reinsurance	587,613		816,649		1,404,262
Total	$	3,700,415	$	4,578,358	$	8,278,773
December 31, 2011
General liability	$	890,238	$	1,974,361	$	2,864,599
Workers’ compensation	1,353,328		992,775		2,346,103
Commercial automobile	275,198		195,323		470,521
International	277,857		279,485		557,342
Other	200,969		293,442		494,411
Total primary	2,997,590		3,735,386		6,732,976
Reinsurance	584,909		854,227		1,439,136
Total	$	3,582,499	$	4,589,613	$	8,172,112

Reserves for excess and assumed workers’ compensation business are net of an aggregate net discount of $872 million and $892 million as of June 30, 2012 and December 31, 2011, respectively.

Table of Contents

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



	For the Six Months Ended
	June 30,
(Dollars in thousands)	2012			2011
Favorable (unfavorable) reserve development:
Specialty	$	25,072		$	61,136
Regional	8,937			15,009
Alternative markets	874			(7,145		)
Reinsurance	18,001			14,362
International	(1,351		)	2,902
Total favorable reserve development	51,533			86,264
Premium offsets(1):
Specialty	—			245
Alternative markets	—			(156		)
International	3,228			—
Net development	$	54,761		$	86,353

_____________

(1) Represents portion of reserve development offset by additional or return premiums on retrospectively rated insurance policies and reinsurance agreements.

For the six months ended June 30, 2012, estimates for claims occurring in prior years decreased by $52 million. The favorable reserve development in 2012 was primarily attributable to accident years 2008 through 2010. 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 2012 and 2011 was associated with excess and surplus (“E&S”) casualty 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 2002, 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. In addition, loss severity trends for E&S casualty business have been lower than we had initially expected for the 2005 to 2009 period. We began to recognize these 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 2012 was primarily attributable to accident years 2006 through 2011.

Regional - Favorable reserve development for the regional segment related to commercial multi-peril business, partially offset by modest adverse development on workers' compensation business. The favorable development for commercial multi-peril business was for the 2007 and 2008 accident years and resulted mainly from lower loss emergence on known case reserves relative to historical levels.

Reinsurance - The favorable development for the reinsurance segment was related to facultative program business and to business written through Lloyd’s of London. The favorable development was concentrated in underwriting years 2008 through 2011 and resulted from lower than expected reported losses.

Table of Contents

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 2.3%. As of June 30, 2012, the aggregate blended discount rates ranged from 2.2% to 6.5%, with a weighted average discount rate of 4.3%. The aggregate net discount, after reflecting the effects of ceded reinsurance, was $872 million and $892 million as of June 30, 2012 and December 31, 2011, 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 premiums, commissions and incurred losses associated with those premiums are recorded. Estimated assumed premiums receivable were approximately $58 million and $64 million at June 30, 2012 and December 31, 2011, respectively. The assumed premium estimates are based upon terms set forth in reinsurance agreements, information received from ceding companies during the underwriting and negotiation of agreements, 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.

Table of Contents

The following table provides a summary of fixed maturity securities in an unrealized loss position as of June 30, 2012:



(Dollars in thousands)	Number of Securities	Aggregate Fair Value		Unrealized Loss
Unrealized loss less than 20% of amortized cost	193	$	1,034,179	$	30,542
Unrealized loss of 20% or greater of amortized cost:
Less than six months	3	7,111		2,099
Twelve months and longer	10	57,645		19,376
Total	206	$	1,098,935	$	52,017

A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at June 30, 2012 is presented in the table below.



(Dollars in thousands)	Number of Securities	Aggregate Fair Value		Gross Unrealized Loss
Unrealized loss less than $5 million:
Mortgage-backed securities	10	$	36,128	$	2,362
Corporate	11	21,363		1,914
State and municipal	4	32,400		2,407
Foreign	5	9,339		2,092
Unrealized loss $5 million or more
Mortgage-backed security (1)	1	17,058		5,359
Total	31	$	116,288	$	14,134

_______________

Preferred Stocks – At June 30, 2012, there were five preferred stocks in an unrealized loss position, with an aggregate fair value of $62 million and a gross unrealized loss of $9 million. Three of those preferred stocks with an aggregate fair value of $26 million and a gross unrealized loss of $6 million were rated non-investment grade. Based upon managements' view of the underlying value of their securities, the Company does not consider these 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, an analysis is performed and a valuation reserve is established, if necessary, with a charge to earnings. Loans receivable are reported net of a valuation reserve of $13 million and $20 million at June 30, 2012 and December 31, 2011, respectively.

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

Table of Contents

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 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 is a summary of pricing sources for the Company's fixed maturity securities available for sale as of June 30, 2012:



(Dollars in thousands)	Carrying Value		Percent of Total
Pricing source:
Independent pricing services	$	10,950,870	93.5	%
Syndicate manager	112,992		1.0	%
Directly by the Company based on:
Observable data	580,525		5.0	%
Cash flow model	66,293		0.5	%
Total	$	11,710,680	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 June 30, 2012, 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.

Table of Contents

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.

Table of Contents

Results of Operations for the Six Months Ended June 30, 2012 and 2011

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 six months ended June 30, 2012 and 2011. 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)	2012			2011
Specialty
Gross premiums written	$	992,673		$	889,579
Net premiums written	843,556			763,550
Premiums earned	795,252			680,150
Loss ratio	61.5		%	57.5		%
Expense ratio	33.1		%	32.9		%
GAAP combined ratio	94.6		%	90.4		%
Regional
Gross premiums written	$	604,583		$	579,682
Net premiums written	557,849			540,203
Premiums earned	532,443			528,281
Loss ratio	62.7		%	70.1		%
Expense ratio	36.8		%	36.4		%
GAAP combined ratio	99.5		%	106.5		%
Alternative Markets
Gross premiums written	$	492,316		$	433,639
Net premiums written	350,857			322,373
Premiums earned	329,108			297,336
Loss ratio	72.1		%	72.4		%
Expense ratio	26.3		%	26.8		%
GAAP combined ratio	98.4		%	99.2		%
Reinsurance
Gross premiums written	$	241,665		$	219,430
Net premiums written	226,263			205,904
Premiums earned	215,853			211,314
Loss ratio	57.6		%	60.7		%
Expense ratio	41.2		%	40.6		%
GAAP combined ratio	98.8		%	101.3		%
International
Gross premiums written	$	501,209		$	392,804
Net premiums written	415,992			308,688
Premiums earned	374,352			282,660
Loss ratio	60.4		%	62.5		%
Expense ratio	38.2		%	40.3		%
GAAP combined ratio	98.6		%	102.8		%
Consolidated
Gross premiums written	$	2,832,446		$	2,515,134
Net premiums written	2,394,517			2,140,718
Premiums earned	2,247,008			1,999,741
Loss ratio	62.8		%	64.1		%
Expense ratio	34.6		%	34.8		%
GAAP combined ratio	97.4		%	98.9		%

Table of Contents

Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the six months ended June 30, 2012 and 2011 (amounts in thousands, except per share data):



	2012		2011
Net income to common stockholders	$	244,156	$	197,774
Weighted average diluted shares	143,506		147,614
Net income per diluted share	$	1.70	$	1.34

The Company reported net income of $244 million in 2012 compared to $198 million in 2011. The increase in net income was primarily due to an increase in underwriting income of $36 million, an increase in net investment income of $24 million and an increase in net investment gains of $20 million. The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2012 and 2011.

Premiums. Gross premiums written were $2,832 million in 2012, an increase of 12.6% from $2,515 million in 2011. The increase in gross premiums written was primarily due to growth in our international and specialty business segments as a result of expansion into new geographic and product markets. Approximately 77.3% of policies expiring in 2012 were renewed, compared with a 80.3% renewal retention rate for policies expiring in 2011. The average rate (i.e., average premium adjusted for change in exposures) for policies that renewed in 2012 increased by approximately 6.2%. Audit premiums were $45 million in 2012 compared with $23 million in 2011.

From 2005 through 2010, the property casualty insurance market was highly competitive and insurance rates decreased across most business lines. Prices began to increase in 2011, and the rate of increase accelerated in the first six months of 2012. However, overall loss costs are also generally increasing, and 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 2012 compared with 2011 by line of business within each business segment follows:

•

Specialty premiums increased 11.6% to $993 million in 2012 from $890 million in 2011 primarily due to increased business in the energy and environmental markets. Gross premiums increased $31 million (47%) for workers' compensation, $31 million (11%) for other liability, $31 million (17%) for property lines, $10 million (14%) for commercial automobile, $3 million (6%) for products liability, $1 million (1%) for professional liability and decreased $4 million (5%) for other lines.


•	Regional gross premiums increased 4.3% to $605 million in 2012 from $580 million in 2011. Gross premiums increased $17 million (8%) for commercial multiple peril, $4 million (3%) for workers’ compensation, $1 million (1%) for commercial automobile and $3 million (3%) for other lines.

•

Alternative markets gross premiums increased 13.5% to $492 million in 2012 from $434 million in 2011. Excluding assigned risk plans, which are fully reinsured, gross premiums increased 10% to $385 million in 2012 from $351 million in 2011. Gross premiums increased $42 million (28%) for primary workers’ compensation, $18 million (34%) for accident and health products and $6 million (34%) for other liability. Gross premiums decreased $27 million (25%) for excess workers' compensation and $5 million (19%) for other lines.


•	Reinsurance gross premiums increased 10.1% to $242 million in 2012 from $219 million in 2011. Gross premiums increased $5 million (3%) for casualty business and $18 million (25%) for property business.

•

International gross premiums increased 27.6% to $501 million in 2012 from $393 million in 2011. The increase was primarily due to an increase in business written by our Lloyd’s operation, our companies in Australia, and new insurance branches in Germany and Norway. Gross premiums increased $41 million (97%) for marine, $22 million (67%) for casualty reinsurance, $14 million (23%) for property, $13 million ((76%) for property reinsurance, $12 million (48%) for accident and health, $4 million (7%) for automobile, $3 million (8%) for workers' compensation and decreased $1 million (5%) for other liability. When normalized to exclude the effect of changes in foreign exchange rates, international gross premiums increased 34%.

Net premiums written were $2,395 million in 2012, an increase of 11.9% from $2,141 million in 2011. Ceded reinsurance premiums as a percentage of gross written premiums were 15% in 2012 and in 2011.

Premiums earned increased 12.4% to $2,247 million in 2012 from $2,000 million in 2011. Insurance premiums (including the impact of rate changes) are generally earned evenly over the policy term. Premiums earned in 2012 are related to business written during both 2012 and 2011.

Table of Contents

Net Investment Income. Following is a summary of net investment income for the six months ended June 30, 2012 and 2011:



	Amount						Average Annualized Yield
(Dollars in thousands)	2012			2011			2012		2011
Fixed maturity securities, including cash and cash equivalents and loans receivable	$	239,123		$	245,113		3.8	%	4.0	%
Arbitrage trading account	6,541			11,042			4.2		6.1
Investment funds	63,242			31,889			19.8		11.2
Equity securities available for sale	6,979			6,749			3.6		3.6
Real estate	5,524			2,344			3.1		8.0
Gross investment income	321,409			297,137			4.5	%	4.4	%
Investment expenses	(2,540		)	(1,939		)
Total	$	318,869		$	295,198		4.4	%	4.4	%

Net investment income increased 8.0% to $319 million in 2012 from $295 million in 2011. The increase in investment income was due to an increase in income from investment funds (which are reported on a one quarter lag). Based on information the Company has received for its investments in energy funds, the Company estimates that its share of net losses reported by these funds for their second quarter of 2012 will be approximately $20 million pre-tax, or $13 million after-tax. The Company will report this loss, together with the results for its other investment funds, in the third quarter of 2012.

The average annualized yield for fixed maturity securities declined from 4.0% to 3.8% due to lower long-term reinvestment yields available in the market. Average invested assets, at cost (including cash and cash equivalents) were $14.3 billion in 2012 and $13.5 billion in 2011.

Insurance Service Fees. The Company is a servicing carrier of worker's compensation assigned risk plans for 20 states and provides insurance program management services to self-insureds, captives, governmental entities, risk retention groups, and insurance companies. Service fees were $51 million in 2012, up from $47 million in 2011, primarily as a result of an increase in fees from assigned risk plans.

Net Realized Gains on Investment Sales. The Company buys and sells securities on a regular basis in order to maximize its total return on investments. Decisions to sell securities are based on management’s view of the underlying fundamentals of specific securities as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net realized gains on investment sales were $68 million in 2012 compared with $53 million in 2011.

Change in Valuation Allowance, Net of 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. In 2012, the valuation allowance for mortgage loans decreased by $7.0 million. Other-than-temporary impairments were $3.0 million in 2012 compared with $0.4 million in 2011.

Revenues from Wholly-Owned Investees. 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. Revenues from wholly-owned investees decreased to $105 million in 2012 from $110 million in 2011, primarily as a result of lower aircraft sales.

Losses and Loss Expenses. Losses and loss expenses increased to $1,411 million in 2012 from $1,281 million in 2011. The consolidated loss ratio was 62.8% in 2012 and 64.1% in 2011. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $31 million in 2012 compared with $88 million in 2011, a decrease of 3.0 loss ratio points. Favorable prior year reserve development was $55 million in 2012 compared with $86 million in 2011, a difference of 1.8 loss ratio points. The loss ratio excluding catastrophe losses and favorable prior year reserve development decreased 0.1 points to 63.9% in 2012 from 64.0% in 2011. A summary of loss ratios in 2012 compared with 2011 by business segment follows:

•

Specialty - The loss ratio of 61.5% in 2012 was 4.0 points higher than the loss ratio of 57.5% in 2011. Catastrophe losses were $7 million in 2012 compared with $9 million in 2011. Favorable prior year reserve development was $25 million in 2012 compared with $61 million in 2011, a difference of 5.9 loss ratio points. The loss ratio excluding favorable prior year reserve development decreased 1.4 points to 63.8% in 2012 from 65.2% in 2011.


•	Regional - The loss ratio of 62.7% in 2012 was 7.4 points lower than the loss ratio of 70.1% in 2011. Catastrophe losses were $23 million in 2012 compared with $53 million in 2011, an decrease of 5.8 loss ratio points. Favorable

Table of Contents

prior year reserve development was $9 million in 2012 compared with $15 million in 2011, a difference of 1.2 loss ratio points. The loss ratio excluding catastrophe losses and favorable prior year reserve development decreased 2.8 points to 60.1% in 2012 from 62.9% in 2011 due to favorable pricing and loss cost trends.


•	Alternative Markets - The loss ratio was 72.1% in 2012 and 72.4% in 2011. Favorable prior year reserve development was $1 million in 2012 compared with unfavorable development of $7 million in 2011, a difference of 2.8 loss ratio points. The loss ratio excluding unfavorable prior year reserve development increased 2.5 points to 72.3% in 2012 from 69.8% in 2011.

•

Reinsurance - The loss ratio of 57.6% in 2012 was 3.1 points lower than the loss ratio of 60.7% in 2011. Catastrophe losses were $1 million in 2012 compared to $12 million in 2011, a decrease of 5.1 loss ratio points. Favorable prior year reserve development was $18 million in 2012 compared with $14 million in 2011, a difference of 1.5 loss ratio points. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 3.5 points to 65.7% in 2012 from 62.2% in 2011.

•

International - The loss ratio of 60.4% in 2012 was 2.1 points lower than the loss ratio of 62.5% in 2011. There were no catastrophe losses in 2012 compared with $14 million in 2011, a decrease of 4.8 loss ratio points. Favorable prior year reserve development was $2 million in 2012 and $3 million in 2011, a difference of 0.5 loss ratio points. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 2.2 points to 60.9% in 2012 from 58.7% in 2011.

Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses for 2012 and 2011:



(Dollars in thousands)	2012			2011
Underwriting expenses	$	777,943		$	695,596
Service expenses	41,227			36,891
Net foreign currency (gains) losses	(1,297		)	529
Other costs and expenses	62,664			56,771
Total	$	880,537		$	789,787

Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Underwriting expenses increased 11.8% compared with an increase in net premiums written of 12.6%. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 34.6% in 2012 and 34.8% in 2011.

Service expenses, which represent the costs associated with the fee-based businesses, increased 12% to $41 million. The increase was due to an increase in general and administrative expenses related to fee-based business.

Net foreign currency gains and losses result from transactions denominated in a currency other than the operating unit’s functional currency.

Other costs and expenses, which represent general and administrative expenses that are not allocated to business segments, increased to $63 million in 2012 from $57 million in 2011.

Expenses from Wholly-Owned Investees. 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. Expenses from wholly-owned investees were $106 million in 2012 compared to $110 million in 2011 due to lower cost of aircraft sold as a result of lower sales volume.

Interest Expense. Interest expense was $61 million in 2012 compared with $56 million in 2011 due to the issuance of $350 million of 4.625% senior notes in March 2012.

Income Taxes. The effective income tax rate was 27% in 2012 compared to 26% in 2011. 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 lower portion of the 2012 pre-tax income and as such had a lesser impact on the effective tax rate for 2012 compared with 2011.

The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $73.1 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. However, in the future, if such earnings were distributed to the Company, taxes of approximately $5.4 million, assuming all tax credits are realized, would be payable on such undistributed earnings and would be reflected in the tax provision for the year in

Table of Contents

which these earnings are no longer intended to be permanently reinvested in the foreign subsidiary.

Results of Operations for the Three Months Ended June 30, 2012 and 2011

Business Segment Results

Following is a summary of gross and net premiums written, premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and GAAP combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the three months ended June 30, 2012 and 2011. 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)	2012			2011
Specialty
Gross premiums written	$	542,052		$	473,849
Net premiums written	454,028			405,433
Premiums earned	408,142			349,943
Loss ratio	61.6		%	60.6		%
Expense ratio	32.7		%	32.1		%
GAAP combined ratio	94.3		%	92.7		%
Regional
Gross premiums written	$	290,999		$	280,841
Net premiums written	267,650			260,579
Premiums earned	268,177			266,764
Loss ratio	66.3		%	77.6		%
Expense ratio	37.0		%	36.5		%
GAAP combined ratio	103.3		%	114.1		%
Alternative Markets
Gross premiums written	$	218,087		$	178,792
Net premiums written	147,641			121,819
Premiums earned	170,415			148,999
Loss ratio	71.7		%	72.2		%
Expense ratio	26.0		%	27.4		%
GAAP combined ratio	97.7		%	99.6		%
Reinsurance
Gross premiums written	$	121,665		$	106,866
Net premiums written	113,383			99,550
Premiums earned	109,515			105,836
Loss ratio	58.3		%	58.8		%
Expense ratio	41.1		%	42.0		%
GAAP combined ratio	99.4		%	100.8		%
International
Gross premiums written	$	258,117		$	204,928
Net premiums written	208,289			170,034
Premiums earned	191,108			145,702
Loss ratio	60.8		%	58.7		%
Expense ratio	38.7		%	41.3		%
GAAP combined ratio	99.5		%	100.0		%
Consolidated
Gross premiums written	$	1,430,920		$	1,245,276
Net premiums written	1,190,991			1,057,415
Premiums earned	1,147,357			1,017,244
Loss ratio	63.7		%	66.3		%
Expense ratio	34.5		%	34.9		%
GAAP combined ratio	98.2		%	101.2		%

Table of Contents

Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the three months ended June 30, 2012 and 2011 (amounts in thousands, except per share data):



	2012		2011
Net income to common stockholders	$	108,838	$	82,184
Weighted average diluted shares	143,528		147,677
Net income per diluted share	$	0.76	$	0.56

The Company reported net income of $109 million in 2012 compared to $82 million in 2011. The increase in net income was primarily due to a $32 million increase in underwriting income and a $12 million increase in net investment income. The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2012 and 2011.

Premiums. Gross premiums written were $1,431 million in 2012, an increase of 14.9% from $1,245 million in 2011. The increase in gross premiums written was primarily due to growth in our international and specialty business segments as a result of expansion into new geographic and product markets. Approximately 76.7% of policies expiring in 2012 were renewed, compared with a 80.8% renewal retention rate for policies expiring in 2011. The average rate (i.e., average premium adjusted for change in exposures) for policies that renewed in 2012 increased by approximately 5.9%. Audit premiums were $24 million in 2012 compared with $12 million in 2011.

•

Specialty premiums increased 14.4% to $542 million in 2012 from $474 million in 2011 primarily due to increased business in the energy and environmental markets. Gross premiums increased $19 million (54%) for workers compensation, $16 million (11%) for other liability, $24 million (23%) for property lines, $5 million (13%) for commercial automobile, $2 million (8%) for products liability, $4 million (6%) for professional liability and decreased $2 million (4%) for other lines.


•	Regional gross premiums increased 3.6% to $291 million in 2012 from $281 million in 2011. Gross premiums increased $9 million (8%) for commercial multiple peril, $3 million (6%) for workers’ compensation. Gross premiums written decreased by $1 million (1%) for commercial automobile and $1 million (2%) for other lines.

•

Alternative markets gross premiums increased 22.0% to $218 million in 2012 from $179 million in 2011. Excluding assigned risk plans, which are fully reinsured, gross premiums increased 20% to $162 million in 2012 from $135 million in 2011. Gross premiums increased $20 million (31%) for primary workers’ compensation, $10 million (38%) for accident and health products, and $4 million (43%) for other liability. Gross premiums decreased $5 million (20%) for excess workers' compensation and $2 million (24%) for other lines.


•	Reinsurance gross premiums increased 13.8% to $122 million in 2012 from $107 million in 2011. Gross premiums for casualty business were $74 million in 2012 compared to $69 million in 2011. Gross premiums for property business were $47 million, an increase of $10 million (28%) from 2011.

•

International gross premiums increased 26.0% to $258 million in 2012 from $205 million in 2011. The increase was primarily due to an increase in business written by our Lloyd’s operation, our companies in Australia, and new insurance branches in Germany and Norway. Gross premiums increased $12 million (34% for property, $10 million (51%) for marine, $9 million for accident and health (59%), $8 million for property reinsurance (68%), $7 million for casualty reinsurance (46%), $3 million automobile (10%), $2 million for other liability (16%), $2 million for professional liability (6%), $1 million for workers' compensation (9%), and a decrease of $1 million for fidelity and surety. When normalized to exclude the effect of changes in foreign exchange rates, international gross premiums increased 33%.

Net premiums written were $1,191 million in 2012, an increase of 12.6% from $1,057 million in 2011. Ceded reinsurance premiums as a percentage of gross written premiums increased to 17% in 2012 from 15% in 2011. The increase in the percentage of business ceded was due to changes in the reinsurance terms and costs.

Premiums earned increased 12.8% to $1,147 million in 2012 from $1,017 million in 2011. Insurance premiums (including the impact of rate changes) are generally earned evenly over the policy term. Premiums earned in 2012 are related to business written during both 2012 and 2011.

Table of Contents

Net Investment Income. Following is a summary of net investment income for the three months ended June 30, 2012 and 2011:



	Amount						Average Annualized Yield
(Dollars in thousands)	2012			2011			2012		2011
Fixed maturity securities, including cash and cash equivalents and loans receivable	$	119,835		$	124,172		3.8	%	4.1	%
Arbitrage trading account	60			5,827			0.1	%	6.0
Investment funds	35,619			15,502			21.8	%	10.5
Equity securities available for sale	3,829			3,485			3.7	%	3.9
Real estate	3,348			1,172			3.7	%	5.3
Gross investment income	162,691			150,158			4.5	%	4.4	%
Investment expenses	(1,441		)	(1,086		)
Total	$	161,250		$	149,072		4.4	%	4.4	%

Net investment income increased 8.2% to $161 million in 2012 from $149 million in 2011. The increase in investment income was due to an increase in income from investment funds (which are reported on a one quarter lag). Based on information the Company has received for its investments in energy funds, the Company estimates that its share of net losses reported by these funds for their second quarter of 2012 will be approximately $20 million pre-tax, or $13 million after-tax. The Company will report this loss, together with the results for its other investment funds, in the third quarter of 2012.

The average annualized yield for fixed maturity securities declined from 4.1% to 3.8% due to lower long-term reinvestment yields available in the market. Average invested assets, at cost (including cash and cash equivalents) were $14.5 billion in 2012 and $13.6 billion in 2011.

Insurance Service Fees. The Company is a servicing carrier of worker's compensation assigned risk plans for 20 states and provides insurance program management services to self-insureds, captives, governmental entities, risk retention groups, and insurance companies. Service fees were $27 million in 2012, up from $25 million in 2011, primarily as a result of an increase in fees from assigned risk plans.

Net Realized Gains on Investment Sales. The Company buys and sells securities on a regular basis in order to maximize its total return on investments. Decisions to sell securities are based on management’s view of the underlying fundamentals of specific securities as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net realized gains on investment sales were $24 million in 2012 compared with $23 million in 2011.

Change in Valuation Allowance, Net of 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 2012 compared with $0.4 million in 2011.

Revenues from Wholly-Owned Investees. 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. Revenues from wholly-owned investees decreased to $55 million in 2012 from $56 million in 2011, primarily as a result of lower aircraft sales.

Losses and Loss Expenses. Losses and loss expenses increased to $731 million in 2012 from $674 million in 2011. The consolidated loss ratio was 63.7% in 2012 and 66.3% in 2011. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $27 million in 2012 compared with $64 million in 2011, a decrease of 3.9 loss ratio points. Favorable prior year reserve development was $30 million in 2012 compared with $35 million in 2011, a difference of 0.9 loss ratio points. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 0.4 points to 64.0% in 2012 from 63.6% in 2011. A summary of loss ratios in 2012 compared with 2011 by business segment follows:


•	Specialty - The loss ratio of 61.6% in 2012 was 1.0 points higher than the loss ratio of 60.6% in 2011. Favorable prior year reserve development was $14 million in 2012 compared with $22 million in 2011, a difference of 3.0 loss ratio points. The loss ratio excluding favorable prior year reserve development decreased 0.9 points to 63.6% in 2012 from 64.5% in 2011.


•	Regional - The loss ratio of 66.3% in 2012 was 11.3 points lower than the loss ratio of 77.6% in 2011. Catastrophe losses were $19 million in 2012 compared with $44 million in 2011, an decrease of 9.5 loss ratio points. Favorable prior year reserve development was $5 million in 2012 compared with $6 million in 2011, a difference of 0.5 loss ratio

Table of Contents

points. The loss ratio excluding catastrophe losses and favorable prior year reserve development decreased 2.3 points to 60.9% in 2012 from 63.2% in 2011 due to favorable pricing and loss cost trends.

•

Alternative Markets - The loss ratio of 71.7% in 2012 was 0.5 points lower than the loss ratio of 72.2% in 2011). Favorable prior year reserve development was $2 million in 2012 compared with unfavorable development of $3 million in 2011, a difference of 3.0 loss ratio points. The loss ratio excluding unfavorable prior year reserve development increased 2.5 points to 72.4% in 2012 from 69.9% in 2011.

•

Reinsurance - The loss ratio of 58.3% in 2012 was 0.5 points lower than the loss ratio of 58.8% in 2011. Catastrophe losses were $1 million in 2012 compared to $8 million in 2011, a decrease of 6.0 loss ratio points. Favorable prior year reserve development was $9 million in 2012, substantially the same as in 2011. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 4.7 points to 65.9% in 2012 from 61.2% in 2011.

•

International - The loss ratio of 60.8% in 2012 was 2.1 points lower than the loss ratio of 58.7% in 2011. There were no catastrophe losses in 2012 compared with $3 million in 2011, a decrease of 1.8 loss ratio points. Favorable prior year reserve development was $1 million in 2011. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 3.6 points to 60.8% in 2012 from 57.2% in 2011.

Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses for 2012 and 2011:



(Dollars in thousands)	2012		2011
Underwriting expenses	$	395,920	$	355,113
Service expenses	21,635		19,562
Net foreign currency losses	137		9
Other costs and expenses	31,066		28,974
Total	$	448,758	$	403,658

Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Underwriting expenses increased 11.5% compared to an increase in net written premiums of 12.6%. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 34.5% in 2012 and 34.9% in 2011.

Service expenses, which represent the costs associated with the fee-based businesses, increased 10.6% to $22 million. The increase was due to an increase in general and administrative expenses related to fee-based business.

Net foreign currency gains and losses result from transactions denominated in a currency other than the operating unit’s functional currency.

Other costs and expenses, which represent general and administrative expenses that are not allocated to business segments, increased to $31 million in 2012 from $29 million in 2011.

Expenses from Wholly-Owned Investees. 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. Expenses from wholly-owned investees were $55 million in 2012 compared to $56 million in 2011 due to lower cost of aircraft sold as a result of lower sales volume.

Interest Expense. Interest expense was $32 million in 2012 compared with $28 million in 2011 due to the issuance of $350 million of 4.625% senior notes in March 2012.

Income Taxes. The effective income tax rate was 27% in 2012 compared to 25% in 2011. 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 lower portion of the 2012 pre-tax income and as such had a lesser impact on the effective tax rate for 2012 compared with 2011.

Table of Contents

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 the fixed maturity portfolio was 3.4 years at June 30, 2012 and 3.6 years at December 31, 2011. The Company’s fixed maturity investment portfolio and investment-related assets as of June 30, 2012 were as follows:



(Dollars in thousands)	Carrying Value		Percent of Total
Fixed maturity securities:
U.S. government and government agencies	$	985,544	6.9	%
State and municipal:
Special revenue	2,232,298		15.7	%
Pre-refunded (1)	1,145,838		8.1	%
State general obligation	930,140		6.5	%
Local general obligation	454,977		3.2	%
Corporate backed	468,082		3.3	%
Total state and municipal	5,231,335		36.8	%
Mortgage-backed securities:
Agency	1,119,253		7.9	%
Residential-Prime	238,175		1.7	%
Residential-Alt A	129,447		0.9	%
Commercial	178,719		1.3	%
Total mortgage-backed securities	1,665,594		11.8	%
Corporate:
Industrial	1,434,608		10.1	%
Financial	663,598		4.7	%
Asset-backed	486,623		3.4	%
Utilities	222,999		1.6	%
Other	109,956		0.8	%
Total corporate	2,917,784		20.6	%
Foreign government and foreign government agencies	1,026,671		7.2	%
Total fixed maturity securities	11,826,928		83.3	%
Equity securities available for sale:
Common stocks	439,246		3.1	%
Preferred stocks	122,539		0.9	%
Total equity securities available for sale	561,785		4.0	%

Investment funds	728,505		5.1	%
Real estate	360,787		2.5	%
Arbitrage trading account	419,249		2.9	%
Loans receivable	325,073		2.2	%
Total investments	$	14,222,327	100.0	%

______________


(1)	Pre-refunded securities are securities for which an escrow account has been established to fund the remaining payments of principal and interest through maturity. Such escrow accounts are funded almost exclusively with U.S. Treasury and U.S. government agency securities.

Table of Contents

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.

At June 30, 2012, investments in foreign fixed maturity securities were as follows:



(Dollars in thousands)	Government		Corporate		Total
Australia	$	181,857	$	111,278	$	293,135
United Kingdom	123,948		41,882		165,830
Canada	101,176		48,834		150,010
Germany	91,594		27,532		119,126
Argentina	115,728		—		115,728
Brazil	46,695		—		46,695
Supranational (1)	38,185		—		38,185
Norway	36,891		—		36,891
Switzerland	—		31,507		31,507
Netherlands	—		11,144		11,144
Singapore	8,394		—		8,394
Finland	—		6,694		6,694
Uruguay	2,917		—		2,917
New Zealand	415		—		415
Total	$	747,800	$	278,871	$	1,026,671

_______________

(1) Supranational represents investments in the North American Development Bank, European Investment Bank and Inter-American Development Bank.

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.

Investment Funds. At June 30, 2012, the carrying value of investment funds was $729 million, including investments in real estate funds of $382 million and investments in energy funds of $141 million.

Real Estate. Real estate is directly owned property held for investment. At June 30, 2012, real estate consists of two office buildings in London, including one in operation and one under development, and a long-term ground lease in Washington D. C.

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.

Loans Receivable. Loans receivable, which are carried at amortized cost, have an aggregate cost of $325 million and an aggregate fair value of $316 million at June 30, 2012. Amortized cost of these loans is net of a valuation allowance of $13 million as of June 30, 2012. The six largest loans have an aggregate amortized cost of $181 million and an aggregate fair value of $172 million as of such date and are secured by commercial real estate. These loans earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through March 2016. The loans are secured by office

Table of Contents

buildings (68%) and hotels (32%) located primarily in New York City, California, Hawaii and Boston.

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. 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 3.4 years at June 30, 2012 and 3.6 years at December 31, 2011. 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 increased to $312 million in 2012 from $216 million in 2011. The increase in cash flow was due primarily to an increase in premium collections and a decrease in income taxes paid, partially offset by an increase in underwriting expenses paid. Paid losses as a percent of earned premiums were 57.8% in 2012 compared with 59.3% in 2011.

As a holding company, the Company derives cash from its subsidiaries in the form of dividends, tax payments and management fees. Maximum amounts of dividends that can be paid without regulatory approval are prescribed by statute. During 2012, the maximum amount of dividends which can be paid without regulatory approval is approximately $417 million. The ability of the holding company to service its debt obligations is limited by the ability of its insurance subsidiaries to pay dividends. In the event dividends, tax payments and management fees available to the holding company were inadequate to service its debt obligations, the Company would need to raise capital, sell assets or restructure its debt obligations.

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 84% invested in cash, cash equivalents and marketable fixed maturity securities as of June 30, 2012. 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 June 30, 2012, the Company had senior notes, junior subordinated debentures and other debt outstanding with a carrying value of $2,108 million and a face amount of $2,129 million. The maturities of the outstanding debt are $11 million in 2012, $201 million in 2013, $38 million in 2014, $200 million in 2015, $2 million in 2016, $450 million in 2019, $300 million in 2020, $426 million in 2022, $1 million in 2023, $250 million in 2037 and $250 million in 2045.

Equity. At June 30, 2012, total common stockholders’ equity was $4.2 billion, common shares outstanding were approximately 137 million and stockholders’ equity per outstanding share was $30.68.

As further described in note 3 to the consolidated financial statements for the three months ended June 30, 2012, the Company adopted FASB guidance regarding deferred acquisition costs effective January 1, 2012. The impact of adopting this guidance was a reduction in common stockholders' equity of $55 million as of January 1, 2012.

Total Capital. Total capitalization (equity, senior notes and other debt and junior subordinated debentures) was $6.3 billion at June 30, 2012. The percentage of the Company’s capital attributable to senior notes, junior subordinated debentures and other debt was 33% at June 30, 2012 and 30% at December 31, 2011.


Item 3.	Quantitative and Qualitative Disclosure About Market Risk

Reference is made to the information under “Investments - Market Risk” under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q.


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

Table of Contents

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 of 1934 and the rules thereunder, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Control over Financial Reporting. During the quarter ended June 30, 2012, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011.

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 three months ended June 30, 2012 and the number of shares remaining authorized for purchase by the Company.



	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may yet be purchased under the plans or programs (1)
April 2012	—	$	—	—	10,000,000
May 2012	—	—		—	10,000,000
June 2012	1,287,203	$	37.56	1,287,203	8,712,797

(1) The Company's repurchase authorization was increased to 10,000,000 shares on August 7, 2012.

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.

Table of Contents

SIGNATURES

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



		W. R. BERKLEY CORPORATION
Date:	August 8, 2012	/s/ William R. Berkley
		William R. Berkley
		Chairman of the Board and Chief Executive Officer

Date:	August 8, 2012	/s/ Eugene G. Ballard
		Eugene G. Ballard
		Senior Vice President - Chief Financial Officer