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

Fair Value

Three months ended March 31:

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)



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

For the Quarterly Period Ended March 31, 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 April 30, 2012: 138,325,721

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)



	March 31, 2012			December 31, 2011
Assets
Investments:
Fixed maturity securities	$	11,554,209		$	11,312,037
Equity securities available for sale	489,220			443,439
Arbitrage trading account	344,892			397,312
Investment funds	679,689			680,638
Loans receivable	357,121			263,187
Real estate	355,254			342,905
Total investments	13,780,385			13,439,518
Cash and cash equivalents	1,082,407			911,742
Premiums and fees receivable	1,307,237			1,206,204
Due from reinsurers	1,242,270			1,215,679
Accrued investment income	132,745			133,776
Prepaid reinsurance premiums	274,706			258,271
Deferred policy acquisition costs	377,600			364,937
Real estate, furniture and equipment	268,229			262,275
Goodwill	90,172			90,172
Trading account receivables from brokers and clearing organizations	382,479			318,240
Current federal and foreign income taxes	—			9,670
Other assets	195,402			193,389
Total assets	$	19,133,632		$	18,403,873
Liabilities and Equity
Liabilities:
Reserves for losses and loss expenses	$	9,394,152		$	9,337,134
Unearned premiums	2,311,187			2,189,575
Due to reinsurers	268,288			241,204
Trading account securities sold but not yet purchased	71,386			62,514
Current federal and foreign income taxes	53,046			—
Deferred federal and foreign income taxes	1,701			2,835
Other liabilities	801,855			866,229
Junior subordinated debentures	243,050			242,997
Senior notes and other debt	1,853,512			1,500,503
Total liabilities	14,998,177			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, 138,274,272 and 137,520,019 shares, respectively	47,024			47,024
Additional paid-in capital	938,417			941,109
Retained earnings	4,615,439			4,491,162
Accumulated other comprehensive income	393,259			354,851
Treasury stock, at cost, 96,843,646 and 97,597,899 shares, respectively	(1,867,223		)	(1,880,790		)
Total stockholders’ equity	4,126,916			3,953,356
Noncontrolling interests	8,539			7,526
Total equity	4,135,455			3,960,882
Total liabilities and equity	$	19,133,632		$	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
	March 31,
	2012			2011
REVENUES:
Net premiums written	$	1,203,526		$	1,083,303
Change in net unearned premiums	(103,875		)	(100,806		)
Net premiums earned	1,099,651			982,497
Net investment income	157,619			146,126
Insurance service fees	23,877			22,173
Net investment gains:
Net realized gains on investment sales	43,477			29,284
Change in valuation allowance, net of other-than-temporary impairments	4,014			—
Net investment gains	47,491			29,284
Revenues from wholly-owned investees	49,675			53,887
Other income	392			384
Total revenues	1,378,705			1,234,351
OPERATING COSTS AND EXPENSES:
Losses and loss expenses	679,472			607,095
Other operating costs and expenses	431,779			386,129
Expenses from wholly-owned investees	51,330			53,816
Interest expense	28,821			28,117
Total operating costs and expenses	1,191,402			1,075,157
Income before income taxes	187,303			159,194
Income tax expense	(52,071		)	(43,599		)
Net income before noncontrolling interests	135,232			115,595
Noncontrolling interests	86			(5		)
Net income to common stockholders	$	135,318		$	115,590
NET INCOME PER SHARE:
Basic	$	0.98		$	0.82
Diluted	0.94			0.78

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
	March 31,
	2012			2011
Net income before noncontrolling interests	$	135,232		$	115,595
Other comprehensive income (loss):
Change in unrealized foreign exchange gains	15,583			10,860
Unrealized holding gains (losses) on investment securities arising during the period, net of taxes	53,106			(6,217		)
Reclassification adjustment for net investment losses included in net income, net of taxes	(31,082		)	(18,790		)
Change in unrecognized pension obligation, net of taxes	824			704
Other comprehensive income (loss)	38,431			(13,443		)
Comprehensive income	173,663			102,152
Comprehensive income to the noncontrolling interest	63			51
Comprehensive income to common stockholders	$	173,726		$	102,203

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 Three Months Ended
	March 31,
	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	(10,139		)	(15,977		)
Restricted stock units expensed	7,447			6,468
End of period	$	938,417		$	925,590
RETAINED EARNINGS:
Beginning of period	$	4,491,162		$	4,143,207
Net income to common stockholders	135,318			115,590
Dividends	(11,041		)	(9,913		)
End of period	$	4,615,439		$	4,248,884
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Unrealized investment gains (losses):
Beginning of period	$	430,419		$	334,747
Unrealized gains (losses) on securities not other-than-temporarily impaired	20,868			(25,110		)
Unrealized gains on other-than-temporarily impaired securities	1,133			159
End of period	452,420			309,796
Currency translation adjustments:
Beginning of period	(61,239		)	(42,488		)
Net change in period	15,583			10,860
End of period	(45,656		)	(31,628		)
Net pension asset:
Beginning of period	(14,329		)	(15,696		)
Net change in period	824			704
End of period	(13,505		)	(14,992		)
Total accumulated other comprehensive income	$	393,259		$	263,176
TREASURY STOCK:
Beginning of period	$	(1,880,790	)	$	(1,750,494	)
Stock exercised/vested	20,099			28,533
Stock repurchased	(6,532		)	(23,303		)
End of period	$	(1,867,223	)	$	(1,745,264	)
NONCONTROLLING INTERESTS:
Beginning of period	$	7,526		$	6,980
Contributions	1,076			264
Net income (loss)	(86		)	5
Other comprehensive income (loss), net of tax	23			(56		)
End of period	$	8,539		$	7,193

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 Three Months Ended
	March 31,
	2012			2011
CASH FROM (USED IN) OPERATING ACTIVITIES:
Net income to common stockholders	$	135,318		$	115,590
Adjustments to reconcile net income to net cash from operating activities:
Net investment gains	(47,491		)	(29,284		)
Depreciation and amortization	22,212			22,079
Noncontrolling interests	(86		)	5
Investment funds	(27,624		)	(15,812		)
Stock incentive plans	7,447			6,468
Change in:
Arbitrage trading account	(2,946		)	(6,532		)
Premiums and fees receivable	(97,077		)	(88,106		)
Reinsurance accounts	(16,857		)	(142,848		)
Deferred policy acquisition costs	(11,483		)	(21,333		)
Deferred income taxes	(13,600		)	(9		)
Reserves for losses and loss expenses	47,443			143,704
Unearned premiums	115,434			152,731
Other liabilities	(36,928		)	(81,210		)
Net cash from (used in) operating activities	73,762			55,443
CASH FROM (USED IN) INVESTING ACTIVITIES:
Proceeds from sale of fixed maturity securities	295,134			395,115
Proceeds from sale of equity securities	32,575			63,232
Distributions from (contributions to) investment funds	24,744			(79,410		)
Proceeds from maturities and prepayments of fixed maturity securities	408,647			407,780
Purchase of fixed maturity securities	(872,588		)	(835,804		)
Purchase of equity securities	(68,652		)	(24,694		)
Real estate purchased	(5,611		)	(58,098		)
Change in loans receivable	(93,934		)	4,809
Net additions to real estate, furniture and equipment	(15,055		)	(11,884		)
Change in balances due to security brokers	16,146			74,986
Payment for business purchased, net of cash acquired	—			(11,060		)
Net cash from (used in) investing activities	(278,594		)	(75,028		)
CASH FROM (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of debt	354,315			—
Net proceeds from stock options exercised	3,428			13,217
Repayment of debt	(1,684		)	(3,672		)
Cash dividends to common stockholders	—			(9,911		)
Purchase of common treasury shares	—			(23,303		)
Other, net	10,446			15,703
Net cash from (used in) financing activities	366,505			(7,966		)
Net impact on cash due to change in foreign exchange rates	8,992			14,750
Net change in cash and cash equivalents	170,665			(12,801		)
Cash and cash equivalents at beginning of year	911,742			642,952
Cash and cash equivalents at end of period	$	1,082,407		$	630,151

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
	March 31,
	2012	2011
Basic	137,814	141,177
Diluted	143,411	147,425

(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 three months ended March 31, 2011:
Other operating costs and expenses	$	384,831		$	386,129
Income before income taxes	160,492			159,194
Federal and foreign income taxes	(44,000		)	(43,599		)
Net income	116,487			115,590

Basic net income per share	$	0.83		$	0.82
Diluted net income per share	0.79			0.78

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 $45,358,000 and $44,927,000 and income taxes paid were $3,249,000 and $7,330,000 in the three months ended March 31, 2012 and 2011, respectively.

Table of Contents

(5) Investments in Fixed Maturity Securities

At March 31, 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
March 31, 2012
Held to maturity:
State and municipal	$	75,473	$	12,129	$	—		$	87,602	$	75,473
Residential mortgage-backed	35,223		5,757		—			40,980		35,223
Corporate	4,996		645		—			5,641		4,996
Total held to maturity	115,692		18,531		—			134,223		115,692
Available for sale:
U.S. government and government agency	951,785		74,897		(420		)	1,026,262		1,026,262
State and municipal	4,971,415		308,993		(18,600		)	5,261,808		5,261,808
Mortgage-backed securities:
Residential (1)	1,380,703		55,984		(11,365		)	1,425,322		1,425,322
Commercial	103,852		6,185		(1,185		)	108,852		108,852
Corporate	2,487,439		146,865		(24,024		)	2,610,280		2,610,280
Foreign	963,007		44,260		(1,274		)	1,005,993		1,005,993
Total available for sale	10,858,201		637,184		(56,868		)	11,438,517		11,438,517
Total investments in fixed maturity securities	$	10,973,893	$	655,715	$	(56,868	)	$	11,572,740	$	11,554,209
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 $5,926,000 and $7,668,000 as of March 31, 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 March 31, 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	$	746,923	$	757,854
Due after one year through five years	3,193,375		3,352,319
Due after five years through ten years	2,586,044		2,798,238
Due after ten years	2,927,773		3,089,175
Mortgage-backed securities	1,519,778		1,575,154
Total	$	10,973,893	$	11,572,740

At March 31, 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 March 31, 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
March 31, 2012
Common stocks	$	253,900	$	112,072	$	(735	)	$	365,237	$	365,237
Preferred stocks	122,679		8,027		(6,723		)	123,983		123,983
Total	$	376,579	$	120,099	$	(7,458	)	$	489,220	$	489,220
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 March 31, 2012 and December 31, 2011, the fair value and carrying value of the arbitrage trading account were $345 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
	March 31,
(Dollars in thousands)	2012			2011
Investment income earned on:
Fixed maturity securities, including cash and cash equivalents, loans receivable and real estate	$	119,288		$	120,941
Investment funds	27,623			16,387
Arbitrage trading account and funds	6,481			5,215
Equity securities available for sale	3,150			3,264
Real estate	2,176			1,172
Gross investment income	158,718			146,979

Investment expense	(1,099		)	(853		)
Net investment income	$	157,619		$	146,126

(9) Investment Funds

Investment funds consist of the following:



	Carrying Value as of				Income (Losses) from Investment Funds
	March 31,		December 31		For the Three Months Ended March 31,
(Dollars in thousands)	2012		2011		2012			2011
Real estate	$	377,854	$	373,413	$	8,655		$	3,492
Energy	110,330		98,974		17,938			13,359
Arbitrage	59,778		58,008		1,770			1,880
Other	131,727		150,243		(740		)	(2,344		)
Total	$	679,689	$	680,638	$	27,623		$	16,387

(10) Real Estate

Real estate is directly owned property held for investment. At March 31, 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 $1,421,000 in 2012, $1,464,000 in 2013, $1,508,000 in 2014, $1,553,000 in 2015, $1,600,000 in 2016 and $331,476,000 thereafter.

Table of Contents

(11) Loans Receivable

Loans receivable are as follows (dollars in thousands):




	March 31, 2012		December 31, 2011
Total loans receivable, at cost	$	357,121	$	263,187

Valuation allowance:
Specific	$	10,465	$	19,041
General	2,444		764
Total	$	10,465	$	19,805

Impaired loans:
With a specific valuation allowance, at cost	$	12,693	$	29,702
Without a valuation allowance, at cost	30,357		30,357
Unpaid principal balance	53,048		93,922

For the Three Months Ended March 31,	2012		2011
Decrease in valuation allowance	$	6,896	$	—
Loans receivable charged off	85		—

Loans receivable in non-accrual status were $13 million and $30 million at March 31, 2012 and December 31, 2011, respectively. If these loans had been current, additional interest income of $0.2 million and $0.1 million would have been recognized in accordance with their original terms for the three months ended March 31, 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 seven largest loans receivable, which have an aggregate amortized cost of $225 million and an aggregate fair value of $208 million at March 31, 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 March 31, 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 March 31, 2012, each of the seven 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 (Losses)

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



	For the Three Months Ended
	March 31,
(Dollars in thousands)	2012			2011
Realized investment gains:
Fixed maturity securities:
Gains	$	14,955		$	5,880
Losses	(543		)	(1,493		)
Equity securities available for sale	26,238			23,932
Other	1,517			—
Sales of investment funds	1,310			965
Change in valuation allowance, net of other-than -temporary impairments (1)	4,014			—
Total net investment gains before income taxes	47,491			29,284
Income tax expense	(16,409		)	(10,494		)
Total net investment gains	$	31,082		$	18,790



Change in unrealized gains (losses) of available for sale securities:
Fixed maturity securities	$	19,422		$	(29,287	)
Less non-credit portion of OTTI recognized in other comprehensive income	1,743			244
Equity securities available for sale	11,595			(12,385		)
Investment funds	1,677			3,374
Total change in unrealized gains (losses) before income taxes and noncontrolling interests	34,437			(38,054		)
Income tax expense (benefit)	(12,413		)	13,047
Noncontrolling interests	(23		)	56
Total change in net unrealized gains	$	22,001		$	(24,951	)

____________

(1) Represents reduction of valuation allowance of $7 million, net of 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 March 31, 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
March 31, 2012
U.S. government and agency	$	37,262	$	420	$	—	$	—	$	37,262	$	420
State and municipal	157,870		4,768		163,499		13,832		321,369		18,600
Mortgage-backed securities	211,782		1,736		90,061		10,814		301,843		12,550
Corporate	294,902		2,138		110,709		21,886		405,611		24,024
Foreign	186,669		1,230		8,336		44		195,005		1,274
Fixed maturity securities	888,485		10,292		372,605		46,576		1,261,090		56,868
Common stocks	47,310		735		—		—		47,310		735
Preferred stocks	26,116		79		39,395		6,644		65,511		6,723
Equity securities	73,426		814		39,395		6,644		112,821		7,458
Total	$	961,911	$	11,106	$	412,000	$	53,220	$	1,373,911	$	64,326

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 March 31, 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	14	$	84,813	$	4,241
Corporate	6	11,763		2,619
State and municipal	4	32,835		3,667
Foreign	1	1,219		22
Unrealized loss $5 million or more:
Mortgage-backed securitiy (1)	1	17,251		5,571
Total	26	$	147,881	$	16,120

_______________

(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 three months ended March 31, 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.

(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.

Preferred Stocks – At March 31, 2012, there were five preferred stocks in an unrealized loss position, with an aggregate fair value of $66 million and a gross unrealized loss of $7 million. Two of those preferred stocks with an aggregate fair value of $17 million and a gross unrealized loss of $4 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 March 31, 2012, the Company owned five common stocks in an unrealized loss position with an aggregate fair value of $47 million and an aggregate unrealized loss of $0.7 million. The Company does not consider these common stocks to be OTTI.

Table of Contents

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



(Dollars in thousands)	Total		Level 1		Level 2		Level 3
March 31, 2012
Assets:
Fixed maturity securities available for sale:
U.S. government and agency	$	1,026,262	$	—	$	1,026,262	$	—
State and municipal	5,261,808		—		5,261,808		—
Mortgage-backed securities	1,534,174		—		1,534,174		—
Corporate	2,610,280		—		2,544,459		65,821
Foreign	1,005,993		—		1,005,993		—
Total fixed maturity securities available for sale	11,438,517		—		11,372,696		65,821
Equity securities available for sale:
Common stocks	365,237		363,828		—		1,409
Preferred stocks	123,983		—		120,802		3,181
Total equity securities available for sale	489,220		363,828		120,802		4,590
Arbitrage trading account	344,892		179,400		164,818		674
Total	$	12,272,629	$	543,228	$	11,658,316	$	71,085
Liabilities:
Securities sold but not yet purchased	$	71,386	$	62,924	$	8,421	$	41
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 three months ended March 31, 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 three months ended March 31, 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 three months ended March 31, 2012:
Assets:
Fixed maturity securities available for sale:
Corporate	$	67,828	$	113		$	1,294			$	74		$	—		$	(3,488	)	$	—	$	65,821
Total	67,828		113			1,294				74			—			(3,488		)	—		65,821
Equity securities available for sale:
Common stocks	1,559		—			—				—			(150		)	—			—		1,409
Preferred stocks	12,303		1,962			(1,751		)		—			(9,333		)	—			—		3,181
Total	13,862		1,962			(1,751		)		—			(9,483		)	—			—		4,590
Arbitrage trading account	851		(192		)	—			—	—		—	—			—			15		674
Total	$	82,541	$	1,883		$	(457	)		$	74		$	(9,483	)	$	(3,488	)	$	15	$	71,085
Liabilities:
Securities sold but not yet purchased	$	21	$	20		$	—			$	—		$	—		$	—		$	—	$	41

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 three months ended March 31, 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
	March 31,
(Dollars in thousands)	2012			2011
Written premiums:
Direct	$	1,201,019		$	1,076,847
Assumed	200,507			193,011
Ceded	(198,000		)	(186,555		)
Total net premiums written	$	1,203,526		$	1,083,303

Earned premiums:
Direct	$	1,103,956		$	972,525
Assumed	179,518			161,870
Ceded	(183,823		)	(151,898		)
Total net premiums earned	$	1,099,651		$	982,497

Ceded losses incurred	$	85,277		$	114,825

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



	March 31, 2012				December 31, 2011
(Dollars in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Fixed maturity securities	$	11,554,209	$	11,572,740	$	11,312,037	$	11,330,910
Equity securities available for sale	489,220		489,220		443,439		443,439
Arbitrage trading account	344,892		344,892		397,312		397,312
Loans receivable	357,121		339,365		263,187		245,169
Cash and cash equivalents	1,082,407		1,082,407		911,742		911,742
Trading account receivables from brokers and clearing organizations	382,479		382,479		318,240		318,240
Due from broker	—		—		10,875		10,875
Liabilities:
Trading account securities sold but not yet purchased	71,386		71,386		62,514		62,514
Due to broker	5,524		5,524		—		—
Junior subordinated debentures	243,050		252,000		242,997		258,400
Senior notes and other debt	1,853,512		1,992,665		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 twice within a five-year period. A summary of RSUs issued in the three months ended March 31, 2012 and 2011 follows (dollars in thousands):

(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. Business is conducted through 20 operating units, each delivering 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.

Table of Contents

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.



	Revenues
(Dollars in thousands)	Earned Premiums		Investment Income		Other		Total		Pre-Tax Income (Loss)			Net Income (Loss)
For the three months ended March 31, 2012:
Specialty	$	387,110	$	49,306	$	618	$	437,034	$	68,261		$	48,704
Regional	264,266		21,397		1,285		286,948		31,787			22,542
Alternative Markets	158,693		41,383		21,974		222,050		47,687			34,634
Reinsurance	106,338		25,884		—		132,222		27,697			20,278
International	183,244		13,134		—		196,378		19,640			9,324
Corporate and eliminations (1)	—		6,515		50,067		56,582		(55,260		)	(31,246		)
Net investment gains	—		—		47,491		47,491		47,491			31,082
Consolidated	$	1,099,651	$	157,619	$	121,435	$	1,378,705	$	187,303		$	135,318
For the three months ended March 31, 2011:
Specialty	$	330,207	$	50,286	$	710	$	381,203	$	89,914		$	63,995
Regional	261,517		21,507		1,021		284,045		24,435			18,257
Alternative Markets	148,337		34,755		20,445		203,537		41,537			30,836
Reinsurance	105,478		27,278		—		132,756		25,337			19,481
International	136,958		10,558		—		147,516		2,253			1,861
Corporate and eliminations (1)	—		1,742		54,268		56,010		(53,566		)	(37,630		)
Net investment gains	—		—		29,284		29,284		29,284			18,790
Consolidated	$	982,497	$	146,126	$	105,728	$	1,234,351	$	159,194		$	115,590

Identifiable assets by segment are as follows:



(Dollars in thousands)	March 31, 2012		December 31, 2011
Specialty	$	6,223,195	$	6,157,853
Regional	2,520,652		2,488,940
Alternative Markets	4,166,892		4,044,915
Reinsurance	2,761,580		2,732,489
International	1,700,414		1,569,749
Corporate and eliminations	1,760,899		1,409,927
Consolidated	$	19,133,632	$	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
	March 31,
(Dollars in thousands)	2012		2011
Specialty
Premises operations	$	122,239	$	101,310
Property	63,017		54,394
Professional liability	62,692		53,512
Commercial automobile	38,333		31,447
Products liability	25,433		23,402
Other	75,396		66,142
Total specialty	387,110		330,207
Regional
Commercial multiple peril	100,365		96,707
Commercial automobile	70,411		72,129
Workers’ compensation	53,733		53,567
Other	39,757		39,114
Total regional	264,266		261,517
Alternative Markets
Primary workers’ compensation	75,085		64,175
Excess workers’ compensation	35,593		43,733
Accident and health	30,647		24,048
Other liability	7,513		6,517
Other	9,855		9,864
Total alternative markets	158,693		148,337
Reinsurance
Casualty	76,877		76,686
Property	29,461		28,792
Total reinsurance	106,338		105,478
International
Professional liability	28,624		23,302
Property	37,590		31,643
Reinsurance	17,330		20,827
Automobile	30,735		17,969
Workers’ compensation	18,632		17,338
Other liability	21,591		11,306
Other	28,742		14,573
Total international	183,244		136,958
Total	$	1,099,651	$	982,497

(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 21 of our 47 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. Recently, there have been increased signs of a hardening market, with the rate of price increases accelerating. 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.

Table of Contents

In examining reserve adequacy, several factors are considered in estimating the ultimate economic value of losses. 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

Table of Contents

changes in policy limits, retentions, rate of inflation and judicial interpretations.

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

The key assumptions used in calculating the most recent estimate of the loss reserves are reviewed each quarter and adjusted, to the extent necessary, to reflect historical changes, current trends and other factors observed. If the actual level of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s estimate. The following table reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity, 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 $8.2 billion as of March 31, 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 March 31, 2012 relate to assumed reinsurance business. There is a higher degree of uncertainty and greater variability regarding estimates of assumed loss reserves because those estimates are based, in part, upon information received from ceding companies. If information received from ceding companies is not timely or correct, the Company’s estimate of ultimate losses may not be accurate. Furthermore, due to delayed reporting of claim information by ceding companies, the claim settlement tail for assumed reinsurance is extended. Management considers the impact of delayed reporting in its selection of assumed loss development factors.

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

Table of Contents

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



(Dollars in thousands)	March 31,		December 31,
	2012		2011
Specialty	$	2,924,899	$	2,905,759
Regional	1,274,092		1,283,764
Alternative Markets	2,002,967		1,986,111
Reinsurance	1,415,288		1,439,136
International	597,196		557,342
Net reserves for losses and loss expenses	8,214,442		8,172,112
Ceded reserves for losses and loss expenses	1,179,710		1,165,022
Gross reserves for losses and loss expenses	$	9,394,152	$	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 March 31, 2012 and December 31, 2011:



(Dollars in thousands)	Reported Case Reserves		Incurred But Not Reported		Total
March 31, 2012
General liability	$	929,216	$	1,944,427	$	2,873,643
Workers’ compensation	1,362,928		1,009,908		2,372,836
Commercial automobile	263,032		196,614		459,646
International	288,211		308,985		597,196
Other	193,932		301,901		495,833
Total primary	3,037,319		3,761,835		6,799,154
Reinsurance	586,679		828,609		1,415,288
Total	$	3,623,998	$	4,590,444	$	8,214,442
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 $879 million and $892 million as of March 31, 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 Three Months
	Ended March 31,
(Dollars in thousands)	2012			2011
Favorable (unfavorable) reserve development:
Specialty	$	10,518		$	38,344
Regional	4,214			9,061
Alternative markets	(662		)	(3,608		)
Reinsurance	9,211			5,073
International	1,893			2,442
Total favorable reserve development	25,174			51,312
Premium offsets(1):
Specialty	—			131
Alternative markets	—			(615		)
Reinsurance	—			—
Net development	$	25,174		$	50,828

_____________

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

For the three months ended March 31, 2012, estimates for claims occurring in prior years decreased by $25 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 2007 through 2010.

Regional - Favorable reserve development for the regional segment related to the casualty portion of 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.

Alternative Markets - The reserve development in the alternative markets segment reflected modest adverse reserve development for accident and health business, partially offset by a decrease in prior year losses for medical excess business.

Reinsurance - The favorable development for the reinsurance segment was related to umbrella and professional liability treaty business, facultative business and to business written through Lloyd’s of London. The favorable development for the segment was spread across underwriting years 2003 through 2011 and resulted from lower than expected reported losses. The favorable development on the earlier years (2003-2005) was related to facultative workers compensation business, while the development on the more recent years (2009-2011) was driven by Lloyd's of London business.

International - The favorable reserve development for the international segment was primarily related to property business written in 2010 by our Lloyd's syndicate and U. K. professional liability business written during 2008-2010.

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 March 31, 2012, the aggregate blended discount rates ranged from 2.3% to 6.5%, with a weighted average discount rate of 4.3%. The aggregate net discount, after reflecting the effects of ceded reinsurance, was $879 million and $892 million as of March 31, 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 $59 million and $64 million at March 31, 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 March 31, 2012:



(Dollars in thousands)	Number of Securities	Aggregate Fair Value		Unrealized Loss
Unrealized loss less than 20% of amortized cost	193	$	1,200,670	$	33,712
Unrealized loss of 20% or greater of amortized cost:
Less than twelve months	4	186		119
Twelve months and longer	9	60,234		23,037
Total	206	$	1,261,090	$	56,868

A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at March 31, 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	14	$	84,813	$	4,241
Corporate	6	11,763		2,619
State and municipal	4	32,835		3,667
Foreign	1	1,219		22
Unrealized loss $5 million or more
Mortgage-backed security (1)	1	17,251		5,571
Total	26	$	147,881	$	16,120

_______________

Preferred Stocks – At March 31, 2012, there were five preferred stocks in an unrealized loss position, with an aggregate fair value of $66 million and a gross unrealized loss of $7 million. Two of those preferred stocks with an aggregate fair value of $17 million and a gross unrealized loss of $4 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 March 31, 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 March 31, 2012:



(Dollars in thousands)	Carrying Value		Percent of Total
Pricing source:
Independent pricing services	$	10,691,790	93.5	%
Syndicate manager	114,102		1.0	%
Directly by the Company based on:
Observable data	566,804		5.0	%
Cash flow model	65,821		0.5	%
Total	$	11,438,517	100.0	%

Independent pricing services - The vast majority of the Company’s fixed maturity securities available for sale were priced by independent pricing services (generally one U.S. pricing service plus additional pricing services with respect to a limited number of foreign securities held by the Company). The prices provided by the independent pricing services are generally based on observable market data in active markets (e.g., broker quotes and prices observed for comparable securities). The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company reviews the prices provided by pricing services for reasonableness based upon current trading levels for similar securities. If the prices appear unusual to the Company, they are re-examined and the value is either confirmed or revised. In addition, the Company periodically performs independent price tests of a sample of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of March 31, 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 Three Months Ended March 31, 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 three months ended March 31, 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	$	450,621		$	415,730
Net premiums written	389,528			358,117
Premiums earned	387,110			330,207
Loss ratio	61.5		%	54.2		%
Expense ratio	33.6		%	33.8		%
GAAP combined ratio	95.1		%	88.0		%
Regional
Gross premiums written	$	313,584		$	298,841
Net premiums written	290,199			279,624
Premiums earned	264,266			261,517
Loss ratio	59.0		%	62.4		%
Expense ratio	36.7		%	36.3		%
GAAP combined ratio	95.7		%	98.7		%
Alternative Markets
Gross premiums written	$	274,229		$	254,847
Net premiums written	203,216			200,554
Premiums earned	158,693			148,337
Loss ratio	72.6		%	72.6		%
Expense ratio	26.5		%	26.2		%
GAAP combined ratio	99.1		%	98.8		%
Reinsurance
Gross premiums written	$	120,000		$	112,564
Net premiums written	112,880			106,354
Premiums earned	106,338			105,478
Loss ratio	56.9		%	62.6		%
Expense ratio	41.3		%	39.2		%
GAAP combined ratio	98.2		%	101.8		%
International
Gross premiums written	$	243,092		$	187,876
Net premiums written	207,703			138,654
Premiums earned	183,244			136,958
Loss ratio	59.9		%	66.5		%
Expense ratio	37.7		%	39.3		%
GAAP combined ratio	97.6		%	105.8		%
Consolidated
Gross premiums written	$	1,401,526		$	1,269,858
Net premiums written	1,203,526			1,083,303
Premiums earned	1,099,651			982,497
Loss ratio	61.8		%	61.8		%
Expense ratio	34.7		%	34.7		%
GAAP combined ratio	96.5		%	96.5		%

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 March 31, 2012 and 2011 (amounts in thousands, except per share data):



	2012		2011
Net income to common stockholders	$	135,318	$	115,590
Weighted average diluted shares	143,411		147,425
Net income per diluted share	$	0.94	$	0.78

The Company reported net income of $135 million in 2012 compared to $116 million in 2011. The increase in net income was primarily due to a increase in net investment gains of $14 million and in net investment income of $11 million. The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2011.

Premiums. Gross premiums written were $1,402 million in 2012, an increase of 10% from $1,270 million in 2011. The majority of the increase was due to rate increases, with the balance from higher volumes. 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 78% of policies expiring in 2012 were renewed, compared with a 79% 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 6.5%. Audit premiums were $22 million in 2012 compared with $11 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 quarter 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 8% to $451 million in 2012 from $416 million in 2011 primarily due to increased business in the energy and environmental markets. Gross premiums increased $14 million (11%) for other liability, $7 million (9%) for property lines, $6 million (14%) for commercial automobile, $1 million (4%) for products liability and $10 million (14%) for other lines. Gross premiums decreased $3 million (5%) for professional liability.


•	Regional gross premiums increased 5% to $314 million in 2012 from $299 million in 2011. Gross premiums increased $8 million (8%) for commercial multiple peril, $2 million (2%) for commercial automobile, $1 million (1%) for workers’ compensation and $4 million (8%) for other lines.

•

Alternative markets gross premiums increased 8% to $274 million in 2012 from $255 million in 2011. Excluding assigned risk plans, which are fully reinsured, gross premiums increased 3% to $223 million in 2012 from $216 million in 2011. Gross premiums increased $22 million (27%) for primary workers’ compensation, $7 million (30%) for accident and health products, and $2 million (24%) for other liability. Gross premiums decreased $21 million (26%) for excess workers' compensation and $3 million (17%) for other lines.


•	Reinsurance gross premiums increased 7% to $120 million in 2012 from $113 million in 2011. Gross premiums for casualty business were $80 million in 2012, unchanged from 2011. Gross premiums for property business were $40 million, an increase of $7 million (22%) from 2011.

•

International gross premiums increased 29% to $243 million in 2012 from $188 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 $23 million (42%) for property lines, $14 million (72%) for automobile, $1 million (5%) for liability lines, $1 million (7%) for workers’ compensation and $24 million (112%) for other lines. Gross premium written declined $7 million (31%) for assumed reinsurance and $1 million (3%) for professional liability. When normalized to exclude the effect of changes in foreign rates, international gross premiums increased 36%.

Net premiums written were $1,204 million in 2012, an increase of 11% from $1,083 million in 2011. Ceded reinsurance premiums as a percentage of gross written premiums decreased to 14% in 2012 from 15% in 2011. The decrease in the percentage of business ceded was due to changes in the reinsurance terms and costs.

Premiums earned increased 12% to $1,100 million in 2012 from $982 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 March 31, 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	$	119,288		$	120,941		3.8	%	4.0	%
Arbitrage trading account	6,481			5,215			8.5		6.2
Investment funds	27,623			16,387			17.8		12.0
Equity securities available for sale	3,150			3,264			3.5		3.4
Real estate	2,176			1,172			2.5		16.1
Gross investment income	158,718			146,979			4.5	%	4.4	%
Investment expenses	(1,099		)	(853		)
Total	$	157,619		$	146,126		4.5	%	4.3	%

Net investment income increased 8% to $158 million in 2012 from $146 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). Average invested assets, at cost (including cash and cash equivalents) were $14.2 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 $24 million in 2012, up from $22 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 $43 million in 2012 compared with $29 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 none 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 $50 million in 2012 from $54 million in 2011, primarily as a result of lower aircraft sales.

Losses and Loss Expenses. Losses and loss expenses increased to $679 million in 2012 from $607 million in 2011. The consolidated loss ratio was 61.8% in 2012 and in 2011. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $4 million in 2012 compared with $24 million in 2011, a decrease of 2.1 loss ratio points. Favorable prior year reserve development was $25 million in 2012 compared with $51 million in 2011, a difference of 2.9 loss ratio points. The loss ratio excluding catastrophe losses and favorable prior year reserve development decreased 0.8 points to 63.7% in 2012 from 64.5% 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 7.3 points higher than the loss ratio of 54.2% in 2011. Favorable prior year reserve development was $11 million in 2012 compared with $39 million in 2011, a difference of 8.9 loss ratio points. The loss ratio excluding favorable prior year reserve development decreased 1.7 points to 64.2% in 2012 from 65.9% in 2011.

•

Regional - The loss ratio of 59.0% in 2012 was 3.4 points lower than the loss ratio of 62.4% in 2011. Catastrophe losses were $4 million in 2012 compared with $9 million in 2011, an decrease of 1.9 loss ratio points. Favorable prior year reserve development was $4 million in 2012 compared with $9 million in 2011, a difference of 1.9 loss ratio points. The loss ratio excluding catastrophe losses and favorable prior year reserve development decreased 3.4 points to 59.1% in 2012 from 62.5% in 2011 due to favorable pricing and loss cost trends.


•	Alternative Markets - The loss ratio was 72.6% in 2012 and in 2011. Unfavorable prior year reserve development was $1 million in 2012 compared with $4 million in 2011, a difference of 2.4 loss ratio points. The loss ratio excluding

Table of Contents

unfavorable prior year reserve development increased 2.4 points to 72.2% in 2012 from 69.8% in 2011.

•

Reinsurance - The loss ratio of 56.9% in 2012 was 5.7 points lower than the loss ratio of 62.6% in 2011. There were no catastrophe losses in 2012 compared to $4 million in 2011, a decrease of 4.2 loss ratio points. Favorable prior year reserve development was $9 million in 2012 compared with $5 million in 2011, a difference of 3.9 loss ratio points. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 2.4 points to 65.5% in 2012 from 63.1% in 2011.

•

International - The loss ratio of 59.9% in 2012 was 6.6 points lower than the loss ratio of 66.5% in 2011. There were no catastrophe losses in 2012 compared with $11 million in 2011, a decrease of 8.1 loss ratio points. Favorable prior year reserve development was $1.9 million in 2012 and $2.4 million in 2011, a difference of 0.8 loss ratio points. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 0.7 points to 60.9% in 2012 from 60.2% 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	$	382,023		$	340,483
Service expenses	19,592			17,329
Net foreign currency (gains) losses	(1,434		)	520
Other costs and expenses	31,598			27,797
Total	$	431,779		$	386,129

Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 34.7% in 2012 and 2011.

Service expenses, which represent the costs associated with the fee-based businesses, increased 13% to $20 million. The increase was due to an increase in general and administrative expenses.

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 $32 million in 2012 from $28 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 $51 million in 2012 compared to $54 million in 2011 due to lower cost of aircraft sold as a result of lower sales volume.

Interest Expense. Interest expense was $29 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 28% in 2012 compared to 27% 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 which these earnings are no longer intended to be permanently reinvested in the foreign subsidiary.

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



(Dollars in thousands)	Carrying Value		Percent of Total
Fixed maturity securities:
U.S. government and government agencies	$	1,026,262	7.4	%
State and municipal:
Special revenue	2,175,615		15.8	%
Pre-refunded (1)	1,277,913		9.3	%
State general obligation	946,343		6.9	%
Local general obligation	476,284		3.4	%
Corporate backed	461,126		3.3	%
Total state and municipal	5,337,281		38.7	%
Mortgage-backed securities:
Agency	1,113,765		8.1	%
Residential-Prime	224,559		1.6	%
Residential-Alt A	122,221		0.9	%
Commercial	108,852		0.8	%
Total mortgage-backed securities	1,569,397		11.4	%
Corporate:
Industrial	1,304,343		9.5	%
Financial	620,007		4.5	%
Asset-backed	394,934		2.9	%
Utilities	186,362		1.4	%
Other	109,630		0.8	%
Total corporate	2,615,276		19.0	%
Foreign government and foreign government agencies	1,005,993		7.3	%
Total fixed maturity securities	11,554,209		83.8	%
Equity securities available for sale:
Common stocks	365,237		2.7	%
Preferred stocks	123,983		0.9	%
Total equity securities available for sale	489,220		3.6	%

Investment funds	679,689		4.9	%
Real estate	355,254		2.6	%
Arbitrage trading account	344,892		2.5	%
Loans receivable	357,121		2.6	%
Total investments	$	13,780,385	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 March 31, 2012, investments in foreign fixed maturity securities were as follows:



(Dollars in thousands)	Government		Corporate		Total
Australia	$	168,538	$	103,027	$	271,565
United Kingdom	150,605		42,504		193,109
Canada	91,179		47,790		138,969
Germany	93,932		27,692		121,624
Argentina	93,411		—		93,411
Brazil	49,430		—		49,430
Supranational (1)	37,796		—		37,796
Norway	36,980		—		36,980
Switzerland	—		30,983		30,983
Finland	—		11,370		11,370
Netherlands	—		11,331		11,331
Singapore	4,736		—		4,736
Uruguay	3,261		—		3,261
New Zealand	1,428		—		1,428
Total	$	731,296	$	274,697	$	1,005,993

_______________

(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 March 31, 2012, the carrying value of investment funds was $680 million, including investments in real estate funds of $378 million and investments in energy funds of $110 million.

Real Estate. Real estate is directly owned property held for investment. At March 31, 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 $357 million and an aggregate fair value of $339 million at March 31, 2012. Amortized cost of these loans is net of a valuation allowance of $13 million as of March 31, 2012. The seven largest loans have an aggregate amortized cost of $225 million and an aggregate fair value of $208 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 (74%) and hotels (26%) 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 March 31, 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 $74 million in 2012 from $55 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 58.5% in 2012 compared with 59.1% 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 March 31, 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 March 31, 2012, the Company had senior notes, junior subordinated debentures and other debt outstanding with a carrying value of $2,097 million and a face amount of $2,118 million. The maturities of the outstanding debt are $9 million in 2012, $201 million in 2013, $28 million in 2014, $200 million in 2015, $2 million in 2016, $450 million in 2019, $300 million in 2020, $427 million in 2022, $1 million in 2023, $250 million in 2037 and $250 million in 2045.

Equity. At March 31, 2012, total common stockholders’ equity was $4.1 billion, common shares outstanding were approximately 138 million and stockholders’ equity per outstanding share was $29.85.

As further described in note 3 to the consolidated financial statements for the three months ended March 31, 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 $6.2 billion at March 31, 2012. The percentage of the Company’s capital attributable to senior notes, junior subordinated debentures and other debt was 34% at March 31, 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.

Table of Contents


Item 4.	Controls and Procedures

Disclosure Controls and Procedures. The Company’s management, including its Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14 as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company has in place effective controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act 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 March 31, 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 March 31, 2012 and the number of shares remaining authorized for purchase by the Company.



	Total number of shares purchased (1)	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
January 2012	—	$	—	—	10,000,000
February 2012	169,080	36.11		—	10,000,000
March 2012	11,930	$	35.69	—	10,000,000

(1) Represents shares withheld in connection with exercises of employee stock options.

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:	May 7, 2012	/s/ William R. Berkley
		William R. Berkley
		Chairman of the Board and Chief Executive Officer

Date:	May 7, 2012	/s/ Eugene G. Ballard
		Eugene G. Ballard
		Senior Vice President - Chief Financial Officer