W. R. Berkley (WRB) 10-Q 2009 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)

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

For the Quarterly Period Ended June 30, 2009

or

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

For the Transition Period from                    to                     .

Commission File Number 1-15202

W. R. BERKLEY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	22-1867895
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
475 Steamboat Road, Greenwich, Connecticut	06830
(Address of principal executive offices)	(Zip Code)

(203) 629-3000

(Registrant’s telephone number, including area code)

None

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ   Noo

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). Yeso   Noo

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. (Check one):

Large accelerated filerþ	Accelerated filero	Non-accelerated filero	Smaller reporting companyo
		(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). Yeso   Noþ

Number of shares of common stock, $.20 par value, outstanding as of July 30, 2009: 160,078,818.

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 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits
SIGNATURES
EX-31.1
EX-31.2
EX-32.1

Part I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

W. R. Berkley Corporation and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands)

	June 30,			December 31,
	2009			2008
	(Unaudited)
Assets
Investments:
Fixed maturity securities	$	10,390,857		$	9,689,896
Equity securities available for sale		299,460			383,750
Arbitrage trading account		544,812			119,485
Investment in arbitrage funds		82,011			73,435
Investment funds		378,164			495,533
Loans receivable		388,783			381,182
Total investments		12,084,087			11,143,281
Cash and cash equivalents		771,511			1,134,835
Premiums and fees receivable		1,114,219			1,056,096
Due from reinsurers		943,829			931,115
Accrued investment income		124,602			122,461
Prepaid reinsurance premiums		222,367			181,462
Deferred policy acquisition costs		401,755			394,807
Real estate, furniture and equipment		250,063			260,522
Deferred Federal and foreign income taxes		263,178			329,417
Goodwill		107,992			107,564
Trading account receivable from brokers and clearing organizations		131,977			128,883
Due from broker		—			138,411
Current federal and foreign income taxes		84,879			76,491
Other assets		156,036			115,813
Total assets	$	16,656,495		$	16,121,158
Liabilities and Equity
Liabilities:
Reserves for losses and loss expenses	$	9,084,003		$	8,999,596
Unearned premiums		2,015,712			1,966,150
Due to reinsurers		158,159			114,974
Trading account securities sold but not yet purchased		156,500			23,050
Other liabilities		673,999			694,255
Junior subordinated debentures		249,691			249,584
Senior notes and other debt		1,022,732			1,021,869
Total liabilities		13,360,796			13,069,478
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, 160,036,950 and 161,467,131 shares		47,024			47,024
Additional paid-in capital		930,668			920,241
Retained earnings		3,572,372			3,514,531
Accumulated other comprehensive loss		(25,325	)		(228,959	)
Treasury stock, at cost, 75,080,968 and 73,650,787 shares		(1,234,467	)		(1,206,518	)
Total common stockholders’ equity		3,290,272			3,046,319
Noncontrolling interest		5,427			5,361
Total equity		3,295,699			3,051,680
Total liabilities and equity	$	16,656,495		$	16,121,158

See accompanying notes to interim consolidated financial statements.

2

W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
(amounts in thousands, except per share data)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2009			2008			2009			2008
Revenues:
Net premiums written	$	908,912		$	991,549		$	1,932,384		$	2,149,114
Change in unearned premiums		42,260			83,162			(2,004	)		49,906
Net premiums earned		951,172			1,074,711			1,930,380			2,199,020
Net investment income		132,135			162,333			270,351			301,104
Losses from investment funds		(37,821	)		(8,394	)		(152,895	)		(2,668	)
Insurance service fees		25,257			24,761			51,840			51,873
Net investment gains (losses):
Net realized gains on sales of investments		49,224			161			62,616			72,866
Other-than-temporary investment impairments		(23,932	)		(82,324	)		(134,132	)		(101,003	)
Less investment impairments recognized in other comprehensive income		8,604			—			8,604			—
Net investment gains (losses)		33,896			(82,163	)		(62,912	)		(28,137	)
Revenues from wholly-owned investees		49,942			27,131			80,845			52,019
Other income		517			760			1,110			1,132
Total revenues		1,155,098			1,199,139			2,118,719			2,574,343
Expenses:
Losses and loss expenses		597,267			679,703			1,207,712			1,362,744
Other operating costs and expenses		365,514			376,249			722,861			756,422
Expenses from wholly-owned investees		46,791			26,343			76,745			51,278
Interest expense		20,213			21,396			40,437			44,140
Total expenses		1,029,785			1,103,691			2,047,755			2,214,584
Income before income taxes		125,313			95,448			70,964			359,759
Income tax (expense) benefit		(27,881	)		(15,173	)		6,184			(90,879	)
Net income before noncontrolling interests		97,432			80,275			77,148			268,880
Noncontrolling interests		(45	)		(18	)		(107	)		(185	)
Net income to common shareholders	$	97,387		$	80,257		$	77,041		$	268,695
Earnings per share:
Basic	$	0.61		$	0.48		$	0.48		$	1.56
Diluted	$	0.59		$	0.46		$	0.46		$	1.50

See accompanying notes to interim consolidated financial statements.

3

W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Equity (Unaudited)
(dollars in thousands)

	For the Six Months
	Ended June 30,
	2009			2008
Common stock:
Beginning and end of period	$	47,024		$	47,024
Additional paid-in capital:
Beginning of period	$	920,241		$	907,016
Stock options exercised, including tax benefits		(1,692	)		(7,045	)
Restricted stock units expensed		12,038			12,662
Stock options expensed		6			121
Stock issued to directors		75			170
End of period	$	930,668		$	912,924
Retained earnings:
Beginning of period	$	3,514,531		$	3,248,762
Net income		77,041			268,695
Dividends		(19,200	)		(18,556	)
End of period	$	3,572,372		$	3,498,901
Accumulated other comprehensive loss, net of tax:
Unrealized investment gains (losses):
Beginning of period	$	(142,216	)	$	52,497
Unrealized gain (losses) on securities not other-than temporarily impaired		182,200			(88,365	)
Unrealized losses on other-than temporarily impaired securities		(8,604	)		—
End of period		31,380			(35,868	)
Currency translation adjustments:
Beginning of period		(72,475	)		18,060
Net change in period		29,055			4,956
End of period		(43,420	)		23,016
Net pension asset:
Beginning of period		(14,268	)		(17,356	)
Net change in period		983			988
End of period		(13,285	)		(16,368	)
Total accumulated other comprehensive loss	$	(25,325	)	$	(29,220	)
Treasury stock:
Beginning of period	$	(1,206,518	)	$	(686,228	)
Stock repurchased		(31,842	)		(489,999	)
Stock options exercised		3,551			22,968
Stock issued to directors		342			368
End of period	$	(1,234,467	)	$	(1,152,891	)
Noncontrolling interest:
Beginning of period	$	5,361		$	35,496
Purchase of subsidiary shares from noncontrolling interest		—			(30,444	)
Net income		107			185
Other comprehensive loss, net of tax		(41	)		(59	)
End of period	$	5,427		$	5,178

See accompanying notes to interim consolidated financial statements.

4

W. R. Berkley Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)

	For the Six Months
	Ended June 30,
	2009			2008
Cash (used in) from operating activities:
Net income	$	77,041		$	268,695
Adjustments to reconcile net income to net cash flows (used in) from operating activities:
Realized investment losses		62,912			28,137
Depreciation and amortization		47,827			41,474
Noncontrolling interest		107			185
Equity in undistributed losses of investment funds		153,506			4,097
Stock incentive plans		12,664			13,396
Change in:
Arbitrage trading account		(425,327	)		48,805
Investment in arbitrage funds		(8,576	)		(7,937	)
Trading account receivable from brokers and clearing organizations		(3,094	)		7,527
Trading account securities sold but not yet purchased		133,450			(10,694	)
Premiums and fees receivable		(53,417	)		(42,801	)
Due from reinsurers		(9,104	)		25,158
Accrued investment income		(1,797	)		(2,390	)
Prepaid reinsurance premiums		(39,186	)		(12,162	)
Deferred policy acquisition costs		(4,717	)		2,188
Deferred income taxes		(25,901	)		(27,332	)
Other assets		1,096			(5,320	)
Reserves for losses and loss expenses		53,958			227,737
Unearned premiums		37,547			(36,861	)
Due to reinsurers		38,571			3,993
Other liabilities		(56,792	)		(118,044	)
Net cash (used in) from operating activities		(9,232	)		407,851
Cash used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities		1,230,406			1,708,012
Equity securities		119,589			61,989
Distributions from partnerships and affiliates		2,876			177,790
Proceeds from maturities and prepayments of fixed maturity securities		640,685			810,372
Cost of purchases, excluding trading account:
Fixed maturity securities and loans receivable		(2,389,311	)		(2,671,996	)
Equity securities		(17,506	)		(112,706	)
Investments in partnerships and affiliates		(38,355	)		(85,729	)
Change in loans receivable		(6,589	)		(2,567	)
Change in balances due to/from security brokers		145,065			18,139
Net additions to real estate, furniture and equipment		(11,857	)		(20,829	)
Payment for business purchased, net of cash acquired		(33,162	)		(46,330	)
Net cash used in investing activities		(358,159	)		(163,855	)
Cash used in financing activities:
Purchase of common shares		(31,842	)		(489,999	)
Repayment of senior notes		(340	)		(102,298	)
Bank deposits received		15,352			13,137
Advances from (repayments to) Federal Home Loan Bank		(3,035	)		1,650
Net proceeds from stock options exercised		1,446			11,292
Cash dividends to common stockholders		(19,200	)		(17,647	)
Other, net		(90	)		434
Net cash used in financing activities		(37,709	)		(583,431	)
Net impact on cash due to foreign exchange rates		41,776			2,272
Net decrease in cash and cash equivalents		(363,324	)		(337,163	)
Cash and cash equivalents at beginning of year		1,134,835			951,863
Cash and cash equivalents at end of period	$	771,511		$	614,700
Supplemental disclosure of cash flow information:
Interest paid	$	39,778		$	44,445
Federal income taxes paid, net	$	26,747		$	155,624

See accompanying notes to interim consolidated financial statements.

5

W. R. Berkley Corporation and Subsidiaries
Notes to Interim Consolidated Financial Statements (Unaudited)

1.GENERAL

     The accompanying consolidated financial statements should be read in conjunction with the following notes and with the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. Reclassifications have been made in the 2008 financial statements as originally reported to conform to the presentation of the 2009 financial statements.

     In the opinion of management, the financial information reflects all adjustments that are necessary for a fair presentation of financial position and results of operations for the interim periods. Seasonal weather variations and natural and man-made catastrophes can have a significant impact on the results of any one or more reporting periods.

     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.

     The Company presents both basic and diluted earnings per share amounts. Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share 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 earnings per share and, accordingly, are excluded from the calculation.

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

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2009		2008		2009		2008
Basic		160,008		167,172		160,546		171,935
Diluted		166,226		173,684		166,716		178,723

2RECENT ACCOUNTING PRONOUNCEMENTS

     The Company adopted Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”) on April 1, 2009. FSP FAS 107-1 and APB 28-1 require disclosures about the fair value of financial instruments in interim and annual financial statements. The adoption of FSP FAS 107-1 and APB 28-1 expanded the disclosures relating to fair value of financial instruments in the notes to the Company’s consolidated financial statements.

6

     The Company adopted FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2/124-2”) on April 1, 2009. This FSP requires that an entity evaluate for and record an other-than-temporary impairment when it concludes that it does not intend to sell an impaired security and does not believe it is likely that it will be required to sell the security before recovery of the amortized cost basis. Once an entity has determined that an other-than-temporary impairment has occurred, it is required to record the credit loss component of the difference between the security’s amortized cost basis and the estimated fair value in earnings, whereas the remaining difference is to be recognized as a component of other comprehensive income and amortized over the remaining life of the security. The adoption of this FSP on April 1, 2009 expanded the disclosures relating to available for sale securities in the notes to the Company’s consolidated financial statements.

     The Company adopted FSP FAS 157-2,Effective Date of FASB Statement No. 157(“FSP FAS 157-2”). FSP FAS 157-2 delayed the application of FASB Statement No. 157Fair Value Measurement (“FAS 157”) until January 1, 2009 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. The adoption of FSP FAS 157-2 did not have an impact on our results of operations or financial condition.

     The Company adopted FSP FAS 157-4, “Determining Fair Value When Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly” (“FSP FAS 157-4”) on April 1, 2009. Under FSP FAS 157-4, if an entity determines that there has been a significant decrease in the volume and level of activity for the asset or the liability in relation to the normal market activity for the asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value. In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any weight on that transaction price as an indicator of fair value. The adoption of FSP FAS 157-4 did not have an impact on our results of operations or financial condition.

     The Company adopted FASB Statement 160 (“FAS 160”), “Non-controlling Interests in Consolidated Financial Statements,” effective January 1, 2009. FAS 160 requires that non-controlling (minority) interests in a subsidiary be reported as equity in the consolidated financial statements. The presentation requirements of FAS 160 were applied retrospectively to the 2008 financial statements. The effect of the adoption of FAS 160 was to increase total equity as of December 31, 2008 by $5 million.

     The Company adopted Statement of Financial Accounting Standards No. 165,Subsequent Events (“FAS 165”) on June 30, 2009. Requirements concerning the accounting and disclosure of subsequent events under FAS 165 are not significantly different from those contained in previously existing auditing standards and, as a result, our adoption of FAS 165 did not have a material impact on our financial condition or results of operations. Under FAS 165, we are required to disclose that we have analyzed subsequent events through August 7, 2009, the date on which these financial statements are issued. The adoption of FAS No. 165 did not have a material impact on the Company’s consolidated financial statements.

     In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167,Amendments to FASB Interpretation No. (46) (“FAS 167”). FAS 167 amends FASB Interpretation No. 46(R),Consolidation of Variable Interest Entitiesby requiring the reporting entity to perform a qualitative analysis that results in a variable interest entity (“VIE”) being consolidated if the reporting entity: (i) has the power to direct activities of the VIE that significantly impact the VIE’s financial performance; and (ii) has an obligation to absorb losses or receive benefits that may be significant to the VIE. FAS 167 further requires enhanced disclosures, including disclosure of significant judgments and assumptions as to whether a VIE must be consolidated, and how involvement with a VIE affects the company’s financial statements. FAS 167 is effective for fiscal years beginning after November 15, 2009. The Company is currently evaluating the impact that the adoption of SFAS No. 167 may have on the Company’s consolidated financial statements.

7

     In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — A Replacement of FASB Statement No. 162(“FAS 168”). FAS 168 establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative GAAP for nongovernmental entities. When effective, the Codification will supersede all existing non-SEC accounting and reporting standards. Rules and interpretive releases of the SEC under authority of federal securities laws will remain authoritative GAAP for SEC registrants. FAS 168 and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009. As the Codification will not change existing GAAP, the adoption of FAS 168 will not have an impact on our financial condition or results of operations.

3.ACQUISITION

     On June 10, 2009, the Company acquired the assets of Banner Aerospace Holding Company I, Inc. and its aviation subsidiaries (“Banner Aerospace”). The aggregate purchase price was approximately $35 million. Banner Aerospace’s products and services are provided to worldwide customers including original equipment manufacturers, commercial and regional airlines, air cargo carriers, corporate and general aviation, and fixed base operators.

4.COMPREHENSIVE INCOME

     The following is a reconciliation of comprehensive income (dollars in thousands):

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2009			2008			2009			2008
Net income before noncontrolling interest	$	97,432		$	80,275		$	77,148		$	268,880
Other comprehensive income (loss):
Change in unrealized foreign exchange gains		36,927			5,908			29,055			4,956
Unrealized holding gains (losses) on investment securities arising during the period, net of income taxes		105,475			(124,374	)		132,752			(106,732	)
Reclassification adjustment for realized gains (losses) included in net income, net of taxes		(22,041	)		53,420			40,803			18,308
Change in unrecognized pension obligation, net of income taxes		492			495			983			988
Other comprehensive income (loss)		120,853			(64,551	)		203,593			(82,480	)
Comprehensive income		218,285			15,724			280,741			186,400
Comprehensive loss attributable to the non-controlling interest		(75	)		(8	)		(66	)		(126	)
Comprehensive income attributable to common shareholders	$	218,210		$	15,716		$	280,675		$	186,274

8

5.INVESTMENTS AND OTHER FINANCIAL INSTRUMENTS

     At June 30, 2009 and December 31, 2008, investments in fixed maturity securities were as follows (dollars in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Carrying
	Cost		Gains		Losses			Value		Value
June 30, 2009
Held to maturity:
State and municipal	$	69,835	$	3,408	$	(844	)	$	72,399	$	69,835
Mortgage-backed securities - Residential		47,144		2,958		—			50,102		47,144
Corporate		4,993		—		(58	)		4,935		4,993
Total held to maturity		121,972		6,366		(902	)		127,436		121,972
Available for sale
United states government and government agency		1,198,579		45,581		(2,073	)		1,242,087		1,242,087
State and municipal		5,411,731		176,967		(72,496	)		5,516,202		5,516,202
Mortgage-backed securities
Residential (1)		1,563,779		32,833		(67,534	)		1,529,078		1,529,078
Commercial		71,528		—		(18,071	)		53,457		53,457
Corporate		1,688,316		27,709		(56,714	)		1,659,311		1,659,311
Foreign		256,167		13,269		(686	)		268,750		268,750
Total available for sale		10,190,100		296,359		(217,574	)		10,268,885		10,268,885
Total investment in fixed income securities	$	10,312,072	$	302,725	$	(218,476	)	$	10,396,321	$	10,390,857
December 31, 2008
Held to maturity:
State and municipal	$	68,876	$	742	$	(3,693	)	$	65,925	$	68,876
Mortgage-backed securities - Residential		50,039		4,390		—			54,429		50,039
Corporate		4,993		301		—			5,294		4,993
Total held to maturity		123,908		5,433		(3,693	)		125,648		123,908
Available for sale
United states government and government agency		1,083,677		46,713		(3,706	)		1,126,684		1,126,684
State and municipal		5,591,712		136,804		(136,751	)		5,591,765		5,591,765
Mortgage-backed securities
Residential		1,632,954		27,747		(81,142	)		1,579,559		1,579,559
Commercial		74,517		—		(22,656	)		51,861		51,861
Corporate		1,095,414		9,398		(136,332	)		968,480		968,480
Foreign		238,877		12,283		(3,521	)		247,639		247,639
Total available for sale		9,717,151		232,945		(384,108	)		9,565,988		9,565,988
Total investment in fixed income securities	$	9,841,059	$	238,378	$	(387,801	)	$	9,691,636	$	9,689,896

(1) Gross unrealized losses for residential mortgage-backed securities includes $8,604 related to the non-credit portion of other than temporary impairments recognized in other comprehensive impairments.

9

     The amortized cost and fair value of fixed maturity securities at June 30, 2009, 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		Fair
	Cost		Value
Due in one year or less	$	323,694	$	335,116
Due after one year through five years		2,659,249		2,738,917
Due after five years through ten years		3,115,628		3,191,880
Due after ten years		2,531,050		2,497,771
Mortgage-backed securities		1,682,451		1,632,637
Total	$	10,312,072	$	10,396,321

     At June 30, 2009 and December 31, 2008, investments in equity securities were as follows (dollars in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Carrying
	Cost		Gains		Losses			Value		Value
June 30, 2009
Equity securities
Common stocks	$	27,362	$	45,247	$	(5,867	)	$	66,742	$	66,742
Preferred stocks		289,730		524		(57,536	)		232,718		232,718
Total	$	317,092	$	45,771	$	(63,403	)	$	299,460	$	299,460
December 31, 2008
Equity securities
Common stocks	$	39,343	$	49,333	$	(7,833	)	$	80,843	$	80,843
Preferred stocks		399,451		95		(96,639	)		302,907		302,907
Total	$	438,794	$	49,428	$	(104,472	)	$	383,750	$	383,750

     Loans receivable, which are carried at amortized cost, had an aggregate cost of $389 million and an aggregate fair value of $289 million at June 30, 2009, compared with an aggregate cost of $381 million and an aggregate fair vale of $323 million at December 31, 2008. This includes loans with an aggregate amortized cost of $310 million and an aggregate fair value of $209 million secured by commercial real estate. These loans earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) between August 2011 and January 2013. The loans are secured by office buildings (60%), hotels (27%) and senior living facilities (13%) located primarily in New York City, California, Hawaii, Boston and Philadelphia.

10

     At June 30, 2009 and December 31, 2008, the carrying amounts and estimated fair values of other financial instruments were as follows (dollars in thousands):

	June 30,				December 31,
	2009				2008
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets:
Arbitrage trading account	$	544,812	$	544,812	$	119,485	$	119,485
Cash and cash equivalents	$	771,511	$	771,511	$	1,134,835	$	1,134,835
Trading account receivable from brokers and clearing organizations	$	131,977	$	131,977	$	128,883	$	128,883
Due from broker	$	—	$	—	$	138,411	$	138,411
Liabilities:
Trading account securities sold but not yet purchased	$	156,500	$	156,500	$	23,050	$	23,050
Junior subordinated debentures	$	249,691	$	239,717	$	249,584	$	188,717
Senior notes and other debt	$	1,022,732	$	921,313	$	1,021,869	$	836,914

     The estimated fair value of the Company’s fixed income, equity securities available for sale and trading account securities is based on various valuation techniques. For 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 the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available. The fair value of loans receivable are estimated by using current institutional purchaser yield requirements for loans with similar credit characteristics. The fair value of the senior notes and other debt and the junior subordinated debentures is based on spreads for similar securities.

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6.REALIZED AND UNREALIZED INVESTMENT GAINS AND LOSSES

     Realized and unrealized gains and losses are as follows (dollars in thousands):

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2009			2008			2009			2008
Realized investment gains (losses):
Fixed maturity securities:
Gains	$	11,920		$	2,111		$	26,621		$	6,727
Losses		(527	)		(954	)		(1,578	)		(1,521	)
Equity securities available for sale		37,143			(996	)		36,024			(1,941	)
Investment funds		688			—			1,549			69,601
Other-than-temporary investment impairments		(23,932	)		(82,324	)		(134,132	)		(101,003	)
Less investment impairments recognized in other comprehensive income		8,604			—			8,604			—
Net investment gains (losses)		33,896			(82,163	)		(62,912	)		(28,137	)
Income taxes		(11,855	)		28,743			22,109			9,829
Total	$	22,041		$	(53,420	)	$	(40,803	)	$	(18,308	)
Change in unrealized investment gains and losses of available for sale securities:
Fixed maturity securities	$	82,311		$	(145,227	)	$	238,552		$	(130,884	)
Less investment impairments recognized in other comprehensive income		(8,604	)		—			(8,604	)		—
Equity securities available for sale		51,806			35,678			37,412			10,648
Investment funds		6,403			306			4,232			(16,134	)
Cash and cash equivalents		(42	)		—			(76	)		—
Total change in unrealized gains and losses		131,874			(109,243	)		271,516			(136,370	)
Income taxes		(48,449	)		38,247			(97,879	)		47,771
Non controlling interest		(21	)		52			(41	)		234
Total	$	83,404		$	(70,944	)	$	173,596		$	(88,365	)

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7.SECURITIES IN AN UNREALIZED LOSS POSITION

     The following table summarizes all securities in an unrealized loss position at June 30, 2009 and December 31, 2008 by the length of time those securities have been continuously in an unrealized loss position (dollars in thousands):

	Less Than 12 Months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
June 30, 2009
U.S. government and agency	$	73,846	$	1,235	$	17,298	$	838	$	91,144	$	2,073
State and municipal		612,386		17,892		785,554		55,448		1,397,940		73,340
Mortgage-backed securities		185,208		9,224		392,911		76,381		578,119		85,605
Corporate		278,715		15,970		298,809		40,802		577,524		56,772
Foreign		50,848		686		—		—		50,848		686
Fixed maturity securities		1,201,003		45,007		1,494,572		173,469		2,695,575		218,476
Common stocks		14,170		5,867		—		—		14,170		5,867
Preferred Stocks		83,614		9,803		139,378		47,733		222,992		57,536
Total	$	1,298,787	$	60,677	$	1,633,950	$	221,202	$	2,932,737	$	281,879
December 31, 2008
U.S. government and agency	$	25,031	$	3,494	$	8,197	$	212	$	33,228	$	3,706
State and municipal		1,081,558		65,944		485,805		74,500		1,567,363		140,444
Mortgage-backed securities		327,563		57,032		211,762		46,766		539,325		103,798
Corporate		377,313		83,277		228,738		53,055		606,051		136,332
Foreign		17,519		3,521		—		—		17,519		3,521
Fixed maturity securities		1,828,984		213,268		934,502		174,533		2,763,486		387,801
Common Stocks		5,952		7,833		—		—		5,952		7,833
Preferred stocks		123,930		44,062		109,103		52,577		233,033		96,639
Total	$	1,958,866	$	265,163	$	1,043,605	$	227,110	$	3,002,471	$	492,273

     Fixed income securities — Following is a description of non-investment-grade fixed income securities with an unrealized loss position greater than $5 million at June 30, 2009:

Commercial mortgage security — This security has a fair value of $23 million and an unrealized loss of $14 million. The investment is secured by mortgages and cash flow pledges on 99 properties comprising 30 million square feet of office space located primarily in Boston, Northern California and Los Angeles. The current debt maturity of February 2010 can be extended at the borrower’s option through February 2012 provided that there is no continuing default and that the borrower provides interest protection for LIBOR above 6¹/2%. The Company believes the amount of outstanding debt for the Company’s debt layer and all debt layers senior to the Company’s debt layer to be below the current market values for the underlying properties. Based on the portfolio’s stable performance (e.g., occupancy rates, lease terms and debt service coverage) and on there being substantial subordinate capital, the Company does not consider the investment to be other than temporarily impaired.

Residential mortgage security — This security has a fair value of $14 million and an unrealized loss of $9 million. This investment is a structured security that was evaluated based on the performance of the underlying collateral under various economic and default scenarios. Based on that evaluation, the security was determined to be other-than-temporarily impaired. The portion of the impairment considered to be credit related ($3 million) was recognized in earnings, and the remaining decline in value ($9 million) was recognized in other comprehensive income.

Residential mortgage security — This security has a fair value of $15 million and an unrealized loss of $9 million. This investment is a structured security that was evaluated based on the performance of the underlying collateral under various economic and default

13

scenarios. Based on that evaluation, the security was determined not to be other-than-temporarily impaired.

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

     Equity securities — At June 30, 2009, the Company owned five equity securities (including one non-investment grade perpetual preferred stock) with an aggregate fair value of $70 million and an aggregate unrealized loss of $13 million. The Company does not consider any of these investments to be other than temporarily impaired.

     The table below summarizes credit-related impairment losses on fixed maturity securities for which other-than-temporary losses were recognized and only the amount related to credit loss was recognized in earnings during the three and six months ended June 30, 2009 (dollars in thousands):

	For the Three		For the Six
	Months Ended		Months Ended
	June 30, 2009		June 30, 2009
Beginning balance of credit-related impairments	$	—	$	—
Credit losses for which an other-than temporary impairment was not previously recognized		2,610		2,610
Ending balance of credit-related impairments	$	2,610	$	2,610

8.FAIR VALUE MEASUREMENTS

     The Company’s fixed income and equity securities available for sale and its trading account securities are carried at fair value following the guidance in Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”). The statement defines fair value 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.” FAS 157 establishes 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 the asset or liability, either directly or indirectly. 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 income securities do not trade on a daily basis, the Company utilizes pricing models and processes which may include benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Market inputs used to evaluate securities include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Quoted prices are often unavailable for recently issued securities, securities that are infrequently traded or securities that are only traded in private transactions. For publicly traded securities for which quoted prices are unavailable, the Company determines fair value based on independent broker quotations and other observable market data. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial data, projections, credit quality and business developments of the issuer and other relevant information.

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     The following table presents the assets and liabilities measured at fair value on a recurring basis as of June 30, 2009 and December 31, 2008 by level (dollars in thousands):

	Total		Level 1		Level 2		Level 3
June 30, 2009
Assets:
Fixed maturity securities available for sale:
U.S. government and agency	$	1,242,087	$	—	$	1,242,087	$	—
State and municipal		5,516,205		—		5,516,205		—
Mortgage-backed securities		1,582,534		—		1,559,180		23,354
Corporate		1,659,311		—		1,584,043		75,268
Foreign		268,748		—		268,748		—
Total fixed maturity securities available for sale		10,268,885		—		10,170,263		98,622
Equity securities available for sale:
Common stocks		66,742		12,582		7,398		46,762
Preferred stocks		232,718		—		183,803		48,915
Total equity securities available for sale		299,460		12,582		191,201		95,677
Arbitrage trading account		544,812		544,459		—		353
Total assets	$	11,113,157	$	557,041	$	10,361,464	$	194,652
Liabilities:
Securities sold but not yet purchased	$	156,500	$	156,500	$	—	$	—

	Total		Level 1		Level 2		Level 3
December 31, 2008
Assets:
Fixed maturity securities available for sale:
U.S. government and agency	$	1,126,684	$	—	$	1,126,684	$	—
State and municipal		5,591,765		—		5,550,093		41,672
Mortgage-backed securities		1,631,420		—		1,608,958		22,462
Corporate		968,480		—		883,975		84,505
Foreign		247,639		—		247,639		—
Total fixed maturity securities available for sale		9,565,988		—		9,417,349		148,639
Equity securities available for sale:
Common stocks		80,843		19,829		2,280		58,734
Preferred stocks		302,907		—		252,421		50,486
Total equity securities available for sale		383,750		19,829		254,701		109,220
Arbitrage trading account		119,485		115,723		3,409		353
Total assets	$	10,069,223	$	135,552	$	9,675,459	$	258,212
Liabilities:
Securities sold but not yet purchased	$	23,050	$	23,050	$	—	$	—

15

     The following table summarizes changes in Level 3 assets for the three and six months ended June 30, 2009 (dollars in thousands):

			Gains (Losses) Included in:
						Other			Purchases
	Beginning					Comprehensive			(Sales)			Transfers			Ending
	Balance		Earnings			Income			Maturities			In/(Out)			Balance
For the Three Months Ended June 30, 2009
Fixed maturity securities available for sale:
State and municipal	$	39,000	$	—		$	2,672		$	—		$	(41,672	)	$	—
Mortgage-backed securities		17,020		—			6,334			—			—			23,354
Corporate		82,528		(30	)		3,422			(1,388	)		(9,264	)		75,268
Total		138,548		(30	)		12,428			(1,388	)		(50,936	)		98,622
Equity securities available available for sale:
Common stocks		51,732		—			7,714			—			(12,684	)		46,762
Preferred stocks		55,304		—			(6,389	)		—			—			48,915
Total		107,036		—			1,325			—			(12,684	)		95,677
Arbitrage trading account		353		—			—			—			—			353
Total assets	$	245,937	$	(30	)	$	13,753		$	(1,388	)	$	(63,620	)	$	194,652
For the Six Months Ended June 30, 2009
Fixed maturity securities available for sale:
State and municipal	$	41,672	$	—		$	—		$	—		$	(41,672	)	$	—
Mortgage-backed securities		22,462		—			892			—			—			23,354
Corporate		84,505		(43	)		3,501			(3,431	)		(9,264	)		75,268
Total		148,639		(43	)		4,393			(3,431	)		(50,936	)		98,622
Equity securities available available for sale:
Common stocks		58,734		—			712			—			(12,684	)		46,762
Preferred stocks		50,486		—			(4,830	)		3,259			—			48,915
Total		109,220		—			(4,118	)		3,259			(12,684	)		95,677
Arbitrage trading account		353		—			—			—			—			353
Total assets	$	258,212	$	(43	)	$	275		$	(172	)	$	(63,620	)	$	194,652

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9.REINSURANCE CEDED

          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 $5.1 million and $4.9 million as of June 30, 2009 and December 31, 2008, respectively. The following amounts arising under reinsurance ceded contracts have been deducted in arriving at the amounts reflected in the statements of operations (dollars in thousands):

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2009		2008		2009		2008
Ceded premiums earned	$	118,741	$	132,356	$	234,047	$	240,751
Ceded losses incurred	$	43,319	$	35,532	$	120,603	$	88,923

10.INDUSTRY SEGMENTS

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

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

          Our regional segment provides commercial insurance products to customers primarily in 44 states. Key clients of this segment are small-to-mid-sized businesses and state and local governmental entities. The regional subsidiaries are organized geographically, which provides them with the flexibility to adapt to local market conditions, while enjoying the superior administrative capabilities and financial strength of the Company.

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

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

          Our international segment offers personal and commercial property casualty insurance in South America and commercial insurance and reinsurance in the United Kingdom, Continental Europe, Canada, Australia and Hong Kong as well as on a worldwide basis through a Lloyd’s syndicate.

          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.

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

	Revenues
			Investment
	Earned		Income and								Pre-tax			Net
(dollars in thousands)	Premiums		Funds		Other			Total			Income			Income
For the three months ended June 30, 2009:
Specialty	$	346,052	$	30,691	$	879		$	377,622		$	65,920		$	50,475
Regional		281,903		14,113		172			296,188			11,677			11,163
Alternative markets		151,309		20,305		24,209			195,823			36,961			27,315
Reinsurance		94,257		20,573		—			114,830			21,228			19,134
International		77,651		6,736		—			84,387			720			2,324
Corporate and eliminations (1)		—		1,896		50,456			52,352			(45,089	)		(35,065	)
Realized investment gains		—		—		33,896			33,896			33,896			22,041
Consolidated	$	951,172	$	94,314	$	109,612		$	1,155,098		$	125,313		$	97,387
For the three months ended June 30, 2008:
Specialty	$	409,417	$	55,347	$	1,010		$	465,774		$	108,729		$	78,432
Regional		309,424		23,752		—			333,176			25,275			19,754
Alternative markets		155,885		30,279		23,754			209,918			52,698			38,498
Reinsurance		131,767		34,160		—			165,927			33,644			26,654
International		68,218		8,939		—			77,157			7,279			4,578
Corporate and eliminations (1)		—		1,462		27,888			29,350			(50,014	)		(34,239	)
Realized investment losses		—		—		(82,163	)		(82,163	)		(82,163	)		(53,420	)
Consolidated	$	1,074,711	$	153,939	$	(29,511	)	$	1,199,139		$	95,448		$	80,257

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

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	Revenues
			Investment
	Earned		Income and								Pre-tax			Net
(dollars in thousands)	Premiums		Funds		Other			Total			Income			Income
For the six months ended June 30, 2009:
Specialty	$	703,980	$	34,676	$	1,773		$	740,429		$	93,664		$	72,606
Regional		567,519		15,850		1,253			584,622			30,042			24,886
Alternative markets		303,302		25,485		48,820			377,607			67,395			52,423
Reinsurance		199,880		22,919		—			222,799			24,227			23,496
International		155,699		14,737		—			170,436			6,888			5,903
Corporate and eliminations (1)		—		3,789		81,949			85,738			(88,340	)		(61,470	)
Realized investment losses		—		—		(62,912	)		(62,912	)		(62,912	)		(40,803	)
Consolidated	$	1,930,380	$	117,456	$	70,883		$	2,118,719		$	70,964		$	77,041
For the six months ended June 30, 2008:
Specialty	$	838,753	$	106,340	$	2,020		$	947,113		$	221,515		$	157,607
Regional		620,693		45,315		—			666,008			63,079			46,806
Alternative markets		311,094		58,204		49,859			419,157			113,680			81,348
Reinsurance		284,201		65,457		—			349,658			66,933			51,891
International		144,279		18,350		—			162,629			17,925			10,713
Corporate and eliminations (1)		—		4,770		53,145			57,915			(95,236	)		(61,362	)
Realized investment losses		—		—		(28,137	)		(28,137	)		(28,137	)		(18,308	)
Consolidated	$	2,199,020	$	298,436	$	76,887		$	2,574,343		$	359,759		$	268,695

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

     Identifiable assets by segment are as follows (dollars in thousands):

	June 30,			December 31,
	2009			2008
Specialty	$	5,843,657		$	5,594,747
Regional		2,722,757			2,652,459
Alternative markets		3,577,803			3,463,508
Reinsurance		4,399,929			4,231,514
International		1,042,089			879,271
Corporate and eliminations		(929,740	)		(700,341	)
Consolidated	$	16,656,495		$	16,121,158

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Net premiums earned by major line of business are as follows (dollars in thousands):

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2009		2008		2009		2008
Premises operations	$	114,649	$	152,295	$	239,749	$	318,675
Commercial automobile		49,031		68,109		103,423		135,232
Property		52,481		54,062		100,763		109,539
Products liability		34,683		46,696		73,764		98,875
Professional liability		42,011		39,326		82,437		78,197
Other		53,197		48,929		103,844		98,235
Specialty		346,052		409,417		703,980		838,753
Commercial multiple peril		101,704		113,684		206,880		229,536
Commercial automobile		79,971		90,879		163,307		181,836
Workers’ compensation		60,865		62,868		118,811		126,798
Other		39,363		41,993		78,521		82,523
Regional		281,903		309,424		567,519		620,693
Excess workers’ compensation		63,766		71,513		130,214		141,267
Primary workers’ compensation		61,725		60,331		122,061		122,582
Other		25,818		24,041		51,027		47,245
Alternative markets		151,309		155,885		303,302		311,094
Casualty		77,207		112,994		168,369		240,851
Property		17,050		18,773		31,511		43,350
Reinsurance		94,257		131,767		199,880		284,201
International		77,651		68,218		155,699		144,279
Total	$	951,172	$	1,074,711	$	1,930,380	$	2,199,020

11.COMMITMENTS, LITIGATION AND CONTINGENT LIABILITIES

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

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SAFE HARBOR STATEMENT

          This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. This document may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of the forward-looking statements can be identified by the use of forward-looking words such as ‘believes,” “expects,” “potential,” “continued,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” or the negative version of those words or other comparable words. Any forward-looking statements contained herein, including statements related to our outlook for the industry and for our performance for the year 2009 and beyond, are based upon the Company’s historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. They are subject to various risks and uncertainties, including but not limited to: the cyclical nature of the property casualty industry; the long-tail and potentially volatile nature of the insurance and reinsurance business; product demand and pricing; claims development and the process of estimating reserves; the potential impact of the current conditions in the financial markets and the ongoing economic downturn on our results and financial condition, particularly if such conditions continue; the potential impact of current legislative, regulatory, accounting and other initiatives taken or which may be taken in response to the current conditions in the financial markets and the ongoing economic downturn; investment risks, including investments in financial institutions, municipal bonds, mortgage-backed securities and loans, investment funds, merger arbitrage and private equity investments; the uncertain nature of damage theories and loss amounts; natural and man-made catastrophic losses, including as a result of terrorist activities; the impact of significant and increasing competition; the success of our new ventures or acquisitions and the availability of other opportunities; the availability of reinsurance; exposure as to coverage for terrorist acts; our retention under the Terrorism Risk Insurance Program Reauthorization Act of 2007; the ability of our reinsurers to pay reinsurance recoverables owed to us; the impact of current conditions in the financial markets and the ongoing economic downturn on our ability to raise debt or equity capital if needed; foreign currency and political risks relating to our international operations; other legislative and regulatory developments, including those related to alleged anti-competitive or other improper business practices in the insurance industry; changes in the ratings assigned to us or our insurance company subsidiaries by rating agencies; the availability of dividends from our insurance company subsidiaries; our ability to attract and retain qualified employees; and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”). These risks and uncertainties could cause our actual results for the year 2009 and beyond to differ materially from those expressed in any forward-looking statement we make. Any projections of growth in our net premiums written and management fees would not necessarily result in commensurate levels of underwriting and operating profits. Our future financial performance is dependent upon factors discussed in our Annual Report on Form 10-K, elsewhere in this Form 10-Q and our other SEC filings. Forward-looking statements speak only as of the date on which they are made.

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

Overview

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

          The profitability of the Company’s insurance business is affected primarily by the adequacy of premium rates. The ultimate adequacy of premium rates is not known with certainty at the time a property casualty insurance policy is issued because premiums are determined before claims are reported. The ultimate adequacy of premium rates is affected mainly by the severity and frequency of claims, which are influenced by many factors, including natural and other disasters, regulatory measures and court decisions that define and change the extent of coverage and the effects of economic inflation on the amount of compensation due 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.

          Available insurance capacity has increased in recent years, increasing competition in the industry and putting downward pressure on pricing and terms and conditions. In 2007, we saw increased competition and decreased prices across most of our business segments. This trend of increased competition and decreased prices continued in 2008. These trends moderated somewhat in the first six months of 2009, and we expect continued improvement over the balance of the year. Price changes are reflected in our results over time as premiums are earned.

          As a result of the current conditions in the financial markets, certain of the largest U.S. insurers have been significantly impacted by, among other things, investment losses, lower credit ratings and reduced policyholders’ surplus. This may lead to an increased emphasis on stability and credit ratings of insurers, reduced insurance capacity and less competition in the industry, putting upward pressure on pricing and terms and conditions.

          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 and the credit quality and duration of the securities. The Company also invests in equity securities, including those of financial institutions, merger arbitrage, private equity investments and real estate securities.

Critical Accounting Estimates

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

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

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

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

          The risk and complexity of estimating loss reserves have increased under the current financial market conditions. It is especially difficult to estimate the impact of inflation on loss reserves given the current economic environment and related government actions. Whereas a slowing economy would generally lead to lower inflation or even deflation, increased government spending would generally lead to higher inflation. A change in our assumptions regarding inflation would result in reserve increases or decreases that would be reflected in our operations in periods in which such assumptions are changed.

          Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what management expects the ultimate settlement and claim administration will cost. While the methods for establishing reserves are well tested over time, some of the major assumptions about anticipated loss emergence patterns are subject to unanticipated fluctuation. These estimates, which generally involve actuarial projections, are based on management’s assessment of facts and circumstances then known, as well as estimates of future trends in claims severity and frequency, judicial theories of liability and other factors, including the actions of third parties which are beyond the Company’s control. These variables are affected by external and internal events, such as inflation and economic volatility, judicial and litigation trends, reinsurance coverage, legislative changes and claim handling and reserving practices, which make it more difficult to accurately predict claim costs. The inherent uncertainties of estimating reserves are greater for certain types of liabilities where long periods of time elapse before a definitive determination of liability is made. Because setting reserves is inherently uncertain, the Company cannot assure that its current reserves will prove adequate in light of subsequent events.

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

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Company’s own data in selecting “tail factors” and in areas where the Company’s own data is limited. The actuarial data is analyzed by line of business, coverage and accident or policy year, as appropriate, for each operating unit.

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

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

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

          Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to the Company. The length of the loss reporting lag affects our ability to accurately predict loss frequency (loss frequencies are more predictable for lines with short reporting lags) as well as the amount of reserves needed for incurred but not reported losses (less IBNR is required for lines with short reporting lags). As a result, loss reserves for lines with short reporting lags are likely to have less variation from initial loss estimates. For lines with short reporting lags, which include commercial automobile, primary workers’ compensation, commercial multi-peril business, 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.

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          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. For example, as of December 31, 2008, initial loss estimates for accident years 1999 through 2007 were decreased by an average of 3% for lines with short reporting lags and by an average of 12% for lines with long reporting lags. For the latest accident year ended December 31, 2008, initial loss estimates were $1.7 billion for lines with short reporting lags and $1.1 billion for lines with long reporting lags.

          The key assumptions used in calculating the most recent estimate of the loss reserves are reviewed each quarter and adjusted, to the extent necessary, to reflect historical changes, current trends and other factors observed. If the actual level of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s estimate. The following table reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity on our loss estimate for claims occurring in 2008 (dollars in thousands):

	Frequency (+/-)
Severity (+/-)	1%		5%		10%
1%		56,881		171,208		314,116
5%		171,208		290,062		438,631
10%		314,116		438,631		594,274

          Our net reserves for losses and loss expenses of $8 billion as of June 30, 2009 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 $2 billion, or 22%, of the Company’s net loss reserves as of June 30, 2009 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.

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          Following is a summary of the Company’s reserves for losses and loss expenses by business segment as of June 30, 2009 and December 31, 2008 (dollars in thousands):

	June 30,		December 31,
	2009		2008
Specialty	$	2,991,182	$	2,973,824
Regional		1,351,931		1,329,697
Alternative markets		1,731,149		1,691,678
Reinsurance		1,762,257		1,842,848
International		344,225		284,539
Net reserves for losses and loss expenses		8,180,744		8,122,586
Ceded reserves for losses and loss expenses		903,259		877,010
Gross reserves for losses and loss expenses	$	9,084,003	$	8,999,596

          Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of June 30, 2009 and December 31, 2008 (dollars in thousands):

	Reported Case		Incurred But Not
	Reserves		Reported		Total
June 30, 2009
General liability	$	846,003	$	2,218,514	$	3,064,517
Workers’ compensation		1,034,437		1,016,124		2,050,561
Commercial automobile		375,439		208,854		584,293
International		135,788		208,437		344,225
Other		138,126		236,765		374,891
Total primary		2,529,793		3,888,694		6,418,487
Reinsurance		732,173		1,030,084		1,762,257
Total	$	3,261,966	$	4,918,778	$	8,180,744
December 31, 2008
General liability	$	800,059	$	2,227,257	$	3,027,316
Workers’ compensation		988,714		1,014,524		2,003,238
Commercial automobile		393,035		210,562		603,597
International		129,351		155,188		284,539
Other		145,010		216,038		361,048
Total primary		2,456,169		3,823,569		6,279,738
Reinsurance		770,247		1,072,601		1,842,848
Total	$	3,226,416	$	4,896,170	$	8,122,586

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          The following table presents favorable (unfavorable) development in our estimate of claims occurring in prior years (dollars in thousands):

	For the Six Months
	Ended June 30,
	2009			2008
Specialty	$	39,319	(1)	$	60,530	(2)
Regional		14,440			22,144
Alternative markets		24,281			24,854
Reinsurance		22,606			(5,914	)
International		3,630			4,159
Total	$	104,276		$	105,773

(1)	Includes favorable reserve development of $9 million, $10 million, $13 million, $21 million and $6 million for accident years 2003 through 2007, respectively, partially offset by unfavorable reserve development of $20 million in prior years.
(2)	Includes favorable reserve development of $8 million, $17 million, $18 million, $21 million and $11 million for accident years 2003 through 2007, respectively, partially offset by unfavorable reserve development of $14 million in prior years.

          Estimates for claims occurring in prior years decreased by $104 million and $106 million for the six months ended June 30, 2009 and 2008, respectively. On an accident year basis, the change in prior year reserves for 2009 is comprised of an increase in estimates for claims occurring in accident years 2002 and prior of $33 million and a decrease in estimates for claims occurring in accident years 2003 through 2008 of $137 million. The changes in prior year loss reserve estimates are generally the result of ongoing analysis of recent loss development trends. Original estimates are increased or decreased as additional information becomes known regarding individual claims and aggregate claim trends.

          The majority of the favorable reserve development for the specialty segment during 2009 and 2008 was associated with excess and surplus (“E&S”) business. E&S insurers are free from rate and form regulation and generally charge higher rates for business than that in the “standard” market. The favorable development for the E&S business was primarily caused by lower claim frequency trends. Claim frequency (i.e., the number of reported claims per unit of exposure) declined 7.5% in 2003, 10.5% in 2004, 5.1% in 2005, 5.5% in 2006 and 1.3% in 2007. These trends were significantly lower than the trends that were expected when initial reserves for those years were established. One reason for the lower than expected 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 greater than expected at the time reserves were initially established.

          The favorable reserve development for the alternative markets segment during 2009 and 2008 was primarily related to workers’ compensation business written in California. From 2003 to 2005, the State of California enacted various legislative reforms, whose impact on workers’ compensation costs was uncertain at the time. As actual claims data have emerged, and interpretation of the reforms through case law has evolved, it has become clear that the impact of the reforms was greater than initially expected, resulting in favorable reserve development.

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          The favorable reserve development for the reinsurance segment during 2009 includes a $17 million decrease in loss reserves related to a retrospectively-rated reinsurance agreement. The decrease in loss reserves for this contract resulted in a return premium of $17 million, and had no impact on earnings for the period.

          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. As of June 30, 2009, these discount rates ranged from 2.5% to 6.5%, with a weighted average discount rate of 4.4%. For proportional business, reserves for losses and loss expenses have been discounted at the statutory rate permitted by the Department of Insurance of the State of Delaware of 2.5%. The aggregate net discount, after reflecting the effects of ceded reinsurance, was $862 million and $847 million as of June 30, 2009 and December 31, 2008, respectively.

          Assumed Reinsurance Premiums. The Company estimates the amount of assumed reinsurance premiums that it will receive under treaty reinsurance agreements at the inception of the contracts. These premium estimates are revised as the actual amount of assumed premiums is reported to the Company by the ceding companies. As estimates of assumed premiums are made or revised, the related amount of earned premium, commissions and incurred losses associated with those premiums are recorded. Estimated assumed premiums receivable were approximately $53 million and $49 million at June 30, 2009 and December 31, 2008, respectively. The assumed premium estimates are based upon terms set forth in the reinsurance agreement, information received from ceding companies during the underwriting and negotiation of the agreement, reports received from ceding companies and discussions and correspondence with reinsurance intermediaries. The Company also considers its own view of market conditions, economic trends and experience with similar lines of business. These premium estimates represent management’s best estimate of the ultimate amount of premiums to be received under its assumed reinsurance agreements.

          Other Than Temporary Declines in the Value 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. Management regularly reviews securities that have a fair value less than cost to determine whether an other than temporary impairment (“OTTI”) has occurred. If a decline in value is considered other than temporary, the Company reports a realized loss on its statement of operations.

          Fixed Maturity Securities Unrealized Losses— 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 an other-than-temporary impairment. The amount of other-than-temporary impairment 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 would be required to sell, a decline in value below amortized cost is considered to be an other-than-temporary impairment 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.

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          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, the ability of the security to make scheduled payments, historical performance and other relevant economic and performance factors. If an OTTI determination is made, a discounted cash flow analysis is used to ascertain the amount of the credit impairment.

          The following table provides a summary of all fixed maturity securities as of June 30, 2009, by the length of time those securities have been continuously in an unrealized loss position (dollars in thousands):

					Gross
	Number of		Aggregate		Unrealized
Fixed maturity securities (1) (2)	Securities		Fair Value		Losses (1)
Unrealized loss less than 20% of amortized cost		289	$	2,549,652	$	122,631
Unrealized loss of 20% or greater:
Less than six months		—		—		—
Six months to less than nine months		1		2,071		518
Nine months to less than twelve months		3		35,525		13,475
Twelve months or greater		44		275,764		132,333
Total		337	$	2,863,012	$	268,957

(1)	Fixed maturity securities classified as available for sale are carried at estimated fair value and unrealized losses, net of income taxes, are reported as a component of stockholders’ equity.
(2)	Includes investment-grade perpetual preferred stocks.

          The Company classifies its fixed maturity securities and perpetual preferred stock by credit rating, primarily based on ratings assigned by credit rating agencies. For purposes of classifying securities with different ratings, the Company uses the lower rating if two ratings were assigned and the middle rating if three ratings were assigned, unless the Company’s own analysis indicates that the lower rating is more appropriate. Securities that are not rated by a rating agency are evaluated and classified by the Company on a case-by-case basis. Unrated securities with an aggregate fair value of $10 million were classified as investment grade at June 30, 2009.

          A summary of the Company’s non-investment grade fixed maturity securities at June 30, 2009 is presented in the table below (dollars in thousands):

	Number of		Aggregate		Unrealized
	Securities		Fair Value		Loss
Mortgage-backed securities		9	$	60,038	$	34,021
Corporate bonds		13		69,274		9,952
State and municipal bonds		5		29,646		8,351
Foreign bonds		3		8,142		447
Total		30	$	167,100	$	52,771

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          Following is a description of non-investment-grade fixed income securities with an unrealized loss position greater than $5 million at June 30, 2009:

Commercial mortgage security — This security has a fair value of $23 million and an unrealized loss of $14 million. The investment is secured by mortgages and cash flow pledges on 99 properties comprising 30 million square feet of office space located primarily in Boston, Northern California and Los Angeles. The current debt maturity of February 2010 can be extended at the borrower’s option through February 2012 provided that there is no continuing default and that the borrower provides interest protection for LIBOR above 6¹/2%. The Company believes the amount of outstanding debt for the Company’s debt layer and all debt layers senior to the Company’s debt layer to be well below the current market values for the underlying properties. Based on the portfolio’s stable performance (e.g., occupancy rates, lease terms and debt service coverage) and on there being substantial subordinate capital, the Company does not consider the investment to be other than temporarily impaired.

Residential mortgage security — This security has a fair value of $14 million and an unrealized loss of $9 million. This investment is a structured security that was evaluated based on the performance of the underlying collateral under various economic and default scenarios. Based on that evaluation, the security was determined to be other-than-temporarily impaired. The portion of the impairment considered to be credit related ($3 million) was recognized in earnings, and the remaining decline in value ($9 million) was recognized in other comprehensive income.

Residential mortgage security — This security has a fair value of $15 million and an unrealized loss of $9 million. This investment is a structured security that was evaluated based on the performance of the underlying collateral under various economic and default scenarios. Based on that evaluation, the security was determined not to be other-than-temporarily impaired.

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

          Equity securities— In determining whether declines in fair values of equity securities are other than temporary, management assesses (1) the severity and duration of the impairment, (2) the historic and implied volatility of the security, (3) recoveries or additional declines in fair value subsequent to the balance sheet date, (4) the financial condition and near-term prospects of the issuer, (5) whether the market decline was affected by macroeconomic conditions or by specific information pertaining to an individual security and (6) the length of the forecasted recovery period.

          At June 30, 2009, the Company owned five equity securities (including one non-investment grade perpetual preferred stock) with an aggregate fair value of $70 million and an aggregate unrealized loss of $13 million. The Company does not consider any of these investments to be other than temporarily impaired.

          Because of changing economic and market conditions affecting issuers of debt and equity securities and the performance of the underlying collateral affecting certain classes of assets, it is reasonably possible that we will recognize other-than-temporary impairments in the future.

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Fair Value Measurements

          The Company’s fixed income and equity securities available for sale and its trading account securities are carried at fair value following the guidance in Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”). The statement defines fair value 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.” FAS 157 establishes 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 the asset or liability, either directly or indirectly. 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 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.

          Equity securities are generally priced based on observable market data, including closing prices in active markets, and are classified as Level 1. However, as of June 30, 2009, prices for equity securities with an aggregate carrying value of $96 million were determined based on other methods and were classified as Level 3 securities. Two of those securities, with an aggregate carrying value of $94 million, were priced based on an independent valuation and recent sales in a private transaction.

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

31

The following table summarizes pricing methods for fixed income securities available for sale as of June 30, 2009 (dollars in thousands):

	Carrying		Percent
	Value		of Total
Pricing source
Independent pricing services	$	9,706,730		94.5	%
Syndicate manager		113,024		1.1	%
Directly by the Company based on:
Observable data		350,508		3.4	%
Cash flow		98,623		1.0	%
Total	$	10,268,885		100.0	%

          Independent pricing services — The vast majority of the Company’s fixed income securities available for sale were priced by independent pricing services (generally one U.S. pricing service plus additional pricing services with respect to a limited number of foreign securities held by the Company). The prices provided by the independent pricing services are generally based on observable market data in active markets (e.g., broker quotes and prices observed for comparable securities). The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company conducts interviews with the pricing services to gain an understanding of how different types of securities are priced. The Company reviews the prices provided by pricing services for reasonableness based upon current trading levels for similar securities. If the prices appear unusual to the Company, they are re-examined and the value is either confirmed or revised. In addition, the Company periodically performs independent price tests of a sample of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of June 30, 2009, the Company did not make any adjustments to the prices provided by the pricing services. Based upon the Company’s review of the methodologies used by the independent pricing services, these securities were classified as Level 2.

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

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

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

32

Results of Operations for the Six Months Ended June 30, 2009 and 2008

          Following is a summary of gross and net premiums written, premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the six months ended June 30, 2009 and 2008. The combined ratio represents a measure of underwriting profitability, excluding investment income. A combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.

	For the Six Months
	Ended June 30,
(dollars in thousands)	2009			2008
Specialty
Gross premiums written	$	759,783		$	834,722
Net premiums written		661,240			773,726
Premiums earned		703,980			838,753
Loss ratio		61.4	%		58.4	%
Expense ratio		30.3	%		27.9	%
Combined ratio		91.7	%		86.3	%
Regional
Gross premiums written	$	640,246		$	734,628
Net premiums written		559,765			638,864
Premiums earned		567,519			620,693
Loss ratio		63.8	%		65.6	%
Expense ratio		33.6	%		31.5	%
Combined ratio		97.4	%		97.1	%
Alternative Markets
Gross premiums written	$	362,834		$	389,245
Net premiums written		325,201			338,813
Premiums earned		303,302			311,094
Loss ratio		64.3	%		60.8	%
Expense ratio		24.9	%		23.5	%
Combined ratio		89.2	%		84.3	%
Reinsurance
Gross premiums written	$	224,073		$	263,048
Net premiums written		207,888			248,592
Premiums earned		199,880			284,201
Loss ratio		60.1	%		64.8	%
Expense ratio		39.1	%		34.6	%
Combined ratio		99.2	%		99.4	%
International
Gross premiums written	$	215,883		$	178,340
Net premiums written		178,290			149,119
Premiums earned		155,699			144,279
Loss ratio		63.0	%		63.8	%
Expense ratio		38.2	%		38.3	%
Combined ratio		101.2	%		102.1	%
Consolidated
Gross premiums written	$	2,202,819		$	2,399,983
Net premiums written		1,932,384			2,149,114
Premiums earned		1,930,380			2,199,020
Loss ratio		62.6	%		62.0	%
Expense ratio		32.0	%		29.9	%
Combined ratio		94.6	%		91.9	%

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          Net Income to Common Shareholders . The following table presents the Company’s net income to common shareholders and net income per diluted share for the six months ended June 30, 2009 and 2008 (amounts in thousands, except per share data):

	2009		2008
Net income attributable to common shareholders	$	77,041	$	268,695
Weighted average diluted shares		166,716		178,723
Net income per diluted share	$	0.46	$	1.50

          The Company reported net income of $77 million in 2009 compared to $269 million in 2008. The decrease in net income is primarily a result of higher losses from investment funds ($153 million in 2009 compared with $3 million in 2008) and higher realized investment losses ($63 million in 2009 compared with $28 million in 2008). The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2008 and 2009.

          Gross Premiums Written. Gross premiums written were $2.2 billion in 2009, down 8% from 2008. The decrease in gross premiums is the result of lower economic activity and less new business production, partially offset by higher premiums written by companies that began operations in 2007 and 2008. The average price of policies renewed in 2009 decreased 1%. The Company has experienced increased competition and downward pressure on pricing since 2004, although the pressure has recently moderated somewhat.

     A summary of gross premiums written in 2009 compared with 2008 by business segment follows:

• Specialty gross premiums decreased by 9% to $760 million in 2009 from $835 million. Gross premiums written decreased 40% for commercial automobile, 32% for products liability and 20% for premises operations. Gross premiums written increased 34% for professional liability and 21% for property lines. The number of new and renewal policies issued in 2009 was unchanged.

• Regional gross premiums decreased by 13% to $640 million in 2009 from $735 million in 2008. Gross premiums written decreased 13% for workers’ compensation, 14% for commercial automobile and 10% for commercial multiple peril. Gross premiums include assigned risk premiums, which are fully reinsured, of $40 million in 2009 and $51 million in 2008. The number of new and renewal policies issued in 2009 decreased 7%.

• Alternative markets gross premiums decreased by 7% to $363 million in 2009 from $389 million in 2008. Gross premiums written decreased 11% for excess workers’ compensation and increased 5% for primary workers’ compensation. Gross premiums include assigned risk premiums, which are fully reinsured, of $10 million in 2009 and $25 million in 2008. The number of new and renewal policies issued in 2009 increased 4%.

• Reinsurance gross premiums decreased by 15% to $224 million in 2009 from $263 million in 2008. The decline was due to non-renewals and lower new business volume as a result of business lost to competitors or retained by ceding companies. Casualty gross premiums written decreased 17% to $178 million, and property gross premiums written decreased 4% to $46 million.

• International gross premiums increased by 21% to $216 million in 2009 from $178 million in 2008. The increase was due primarily to the issuance of a large quota share reinsurance agreement through the Company’s branch in Hong Kong.

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          Premiums Earned. Premiums earned decreased 12% to $1,930 million in 2009 from $2,199 million in 2008. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in 2009 are related to business written during both 2009 and 2008. The 12% decrease for 2009 earned premiums reflects the underlying decline in net premiums written in 2008 and 2009.

          Net Investment Income. Following is a summary of net investment income for the six months ended June 30, 2009 and 2008 (dollars in thousands):

							Average Annualized
	Amount						Yield
	2009			2008			2009			2008
Fixed maturity securities, including cash	$	242,598		$	259,525			4.2	%		4.8	%
Arbitrage trading account and funds		17,599			19,353			8.5			4.6
Equity securities available for sale		12,074			23,909			6.8			5.9
Gross investment income		272,271			302,787			4.5			4.8
Investment expenses		(1,920	)		(1,683	)
Total	$	270,351		$	301,104			4.4	%		4.8	%

          Net investment income decreased 10% to $270 million in 2009 from $301 million in 2008 primarily due to lower short-term interest rates and to sales and impairments of securities, including higher dividend paying preferred stocks, over the past 18 months. Average invested assets, at cost (including cash and cash equivalents) decreased to $12.2 billion in 2009 from $12.5 billion in 2008 as a result of other than temporary impairments over the past 18 months.

          Losses from Investment Funds. Following is a summary of losses from investment funds (which are recorded on a one-quarter lag) for the six months ended June 30, 2009 and 2008 (dollars in thousands):

	2009			2008
Real estate funds	$	(132,828	)	$	(13,115	)
Energy funds		(18,417	)		(1,299	)
Other funds		(1,650	)		1,049
Kiln Ltd		—			10,697
Total	$	(152,895	)	$	(2,668	)

          Losses from investment funds were $153 million in 2009 compared to $3 million in 2008, primarily as a result of losses from real estate funds. The real estate funds, which had an aggregate carrying value of $186 million at June 30, 2009, invest in commercial loans and securities as well as direct property ownership. Asset values were impacted by general deterioration of real estate fundamentals coupled with the absence of a refinancing market and an increase in non-performing assets. In addition, in an environment of falling values and stricter underwriting standards, a large number of real estate projects are over-leveraged and facing near-term refinancing pressure. The energy funds reported a loss of $18 million in 2009 due to a decrease in the fair value of energy related investments held by the funds. The Company sold its interest in Kiln Ltd in March 2008.

          Insurance Service Fees. Insurance service fees consists of fee-based services to help clients develop and administer self-insurance programs, primarily for workers’ compensation coverage as well as brokerage services. Service fees were $52 million in both 2009 and 2008.

          Realized Investment Gains (Losses). Realized investment gains (losses) result primarily from sales of securities, as well as from provisions for other than temporary impairments in securities. 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.

35

          Realized investment losses were $63 million in 2009 and were the result of other-than-temporary impairments of $126 million, partially offset by realized gains from the sale of securities of $63 million. The impairment charges were primarily related to debt and preferred stock of major financial institutions that experienced adverse credit events and ratings downgrades during the period, including write-downs of debt issued by Thornburg Mortgage, Inc. and preferred stock issued by Citibank and Bank of America.

          Realized investment losses were $28 million in 2008 and were the result of other-than-temporary impairments of financial sector equity securities of $101 million partially offset by net realized gains from the sale of securities of $73 million. Net realized investment gains from the sale of securities included a gain of $70 million from the sale of the Company’s interest in Kiln Ltd in 2008.

          Revenues from Wholly-owned Investees. Revenues from wholly-owned investees were $81 million in 2009 compared with $52 million in 2008. These revenues were derived from fixed base operators that were separately purchased in 2007, 2008 and 2009. These companies provide services to the general aviation market, including fuel and line service, aircraft sales and maintenance, avionics and engineering services and parts fabrication. The 2009 and 2008 revenues are not comparable since all of the companies were not owned for the six months ended June 30, 2008.

          Losses and Loss Expenses. Losses and loss expenses decreased to $1,208 million in 2009 from $1,363 million in 2008 due to lower earned premium. The consolidated loss ratio was 62.6% in 2009 compared with 62.0% in 2008. Weather-related losses were $36 million in 2009 compared with $45 million in 2008. Favorable prior year reserve development was $104 million in 2009 and $106 million in 2008. The favorable reserve development during 2009 includes a $17 million decrease in loss reserves related to a retrospectively-rated reinsurance agreement. The decrease in loss reserves for this contract resulted in a return premium of $17 million, and had no impact on earnings for the period. A summary of loss ratios in 2009 compared with 2008 by business segment follows:

• Specialty’s loss ratio increased to 61.4% in 2009 from 58.4% in 2008 due to a decline in price levels and the impact of anticipated loss cost trends. Net favorable prior year development was $39 million in 2009 compared with $61 million in 2008.

• The regional loss ratio decreased to 63.8% in 2009 from 65.6% in 2008. Weather-related losses were $36 million in 2009 compared with $45 million in 2008. Net favorable prior year development was $14 million in 2009 compared with $22 million in 2008.

• Alternative markets’ loss ratio increased to 64.3% in 2009 from 60.8% in 2008. In addition to pricing and loss cost trends, the 2009 loss ratio was impacted by the use of lower discount rates used to discount excess workers’ compensation reserves. Net favorable prior year development was $24 million in 2009 compared with $25 million in 2008.

• The reinsurance loss ratio decreased to 60.1% in 2009 from 64.8% in 2008. Net favorable prior year development was $23 million in 2009 compared with net unfavorable prior year development of $6 million in 2008. The favorable reserve development during 2009 includes a $17 million decrease in loss reserves related to a retrospectively-rated reinsurance agreement. The decrease in loss reserves for this contract resulted in a return premium of $17 million, and had no impact on earnings for the period.

• The international loss ratio decreased to 63.0% in 2009 from 63.8% in 2008. Net favorable prior year development was $4 million in both 2009 and 2008.

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Other Operating Costs and Expenses.Following is a summary of other operating costs and expenses for the six months ended June 30, 2009 and 2008 (dollars in thousands):

	2009		2008
Underwriting expenses	$	616,926	$	656,414
Service expenses		42,560		44,496
Other costs and expenses		63,375		55,512
Total	$	722,861	$	756,422

          Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. The consolidated expense ratio (underwriting expenses expressed as a percentage of premiums earned) increased to 32.0% in 2009 from 29.9% in 2008 primarily due to the decline in earned premiums.

          Service expenses, which represent the costs associated with the fee-based businesses, decreased 4% to $43 million due to lower employment costs.

          Other costs and expenses, which represent corporate expenses and foreign currency transaction gains and losses, increased 14% to $63 million. Foreign currency transaction losses were $6 million in 2009 compared with gains of $3 million in 2008.

          Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees were $77 million in 2009 compared to $51 million in 2008. These expenses represent costs associated with fixed base operators that were separately purchased in 2007, 2008 and 2009. These include cost of goods sold related to aircraft and other sales, labor and equipment costs related to repairs and other services and general and administrative expenses. The 2009 and 2008 expenses are not comparative since the companies were not all owned for the six months ended June 30, 2008.

          Interest Expense. Interest expense decreased 8% to $40 million primarily due to the repayment of $89 million of 9.875% senior notes in May 2008.

          Income Taxes. The effective income tax rate for the first six months was a benefit of 9% in 2009 as compared to an expense of 25% in 2008. The effective income tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income, which exceeded the pre-tax income in 2009, resulting in a tax benefit.

37

Results of Operations for the Three Months Ended June 30, 2009 and 2008

          Following is a summary of gross and net premiums written, premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the three months ended June 30, 2009 and 2008. The combined ratio represents a measure of underwriting profitability, excluding investment income. A combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.

	For the Three Months
	Ended June 30,
(dollars in thousands)	2009			2008
Specialty
Gross premiums written	$	394,889		$	406,580
Net premiums written		338,683			375,939
Premiums earned		346,052			409,417
Loss ratio		60.0	%		58.8	%
Expense ratio		29.8	%		28.3	%
Combined ratio		89.8	%		87.1	%
Regional
Gross premiums written	$	317,445		$	361,633
Net premiums written		277,730			315,288
Premiums earned		281,903			309,424
Loss ratio		66.6	%		67.6	%
Expense ratio		34.2	%		31.9	%
Combined ratio		100.8	%		99.5	%
Alternative Markets
Gross premiums written	$	113,960		$	121,161
Net premiums written		99,486			100,776
Premiums earned		151,309			155,885
Loss ratio		66.4	%		64.1	%
Expense ratio		25.7	%		23.3	%
Combined ratio		92.1	%		87.4	%
Reinsurance
Gross premiums written	$	116,217		$	126,583
Net premiums written		107,055			118,946
Premiums earned		94,257			131,767
Loss ratio		56.4	%		65.7	%
Expense ratio		42.9	%		34.5	%
Combined ratio		99.3	%		100.2	%
International
Gross premiums written	$	112,066		$	98,853
Net premiums written		85,958			80,600
Premiums earned		77,651			68,218
Loss ratio		61.9	%		63.5	%
Expense ratio		38.8	%		40.3	%
Combined ratio		100.7	%		103.8	%
Consolidated
Gross premiums written	$	1,054,577		$	1,114,810
Net premiums written		908,912			991,549
Premiums earned		951,172			1,074,711
Loss ratio		62.8	%		63.2	%
Expense ratio		32.5	%		30.1	%
Combined ratio		95.3	%		93.3	%

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          Net Income to Common Shareholders. The following table presents the Company’s net income to common shareholders and net income per diluted share for the three months ended June 30, 2009 and 2008 (amounts in thousands, except per share data):

	2009		2008
Net income attributable to common shareholders	$	97,387	$	80,257
Weighted average diluted shares		166,226		173,684
Net income per diluted share	$	0.59	$	0.46

          The Company reported net income of $97 million in 2009 compared to $80 million in 2008. The increase in net income is primarily a result of realized investment gains (realized gains were $34 million in 2009 compared with realized investment losses of $82 million in 2008), partially offset by losses from investment funds, lower investment income and a decline in underwriting profits. The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2008 and 2009.

          Gross Premiums Written. Gross premiums written were $1 billion in 2009, down 5% from 2008. The decrease in gross premiums is the result of lower economic activity and less new business production, partially offset by higher premiums written by companies that began operations in 2007 and 2008. The average price of policies renewed in 2009 decreased 1%. The Company has experienced increased competition and downward pressure on pricing since 2004, although the pressure has recently moderated somewhat.

     A summary of gross premiums written in 2009 compared with 2008 by business segment follows:

• Specialty gross premiums decreased by 3% to $395 million in 2009 from $407 million. Gross premiums written decreased 30% for commercial automobile, 34% for products liability and 17% for premises operations. Gross premiums written increased 40% for professional liability and 27% for property lines. The number of new and renewal policies issued in 2009 decreased 1%.

• Regional gross premiums decreased by 12% to $317 million in 2009 from $362 million in 2008. Gross premiums written decreased 11% for workers’ compensation, 15% for commercial automobile and 10% for commercial multiple peril. Gross premiums include assigned risk premiums, which are fully reinsured, of $19 million in 2009 and $24 million in 2008. The number of new and renewal policies issued in 2009 decreased 3%.

• Alternative markets gross premiums decreased by 6% to $114 million in 2009 from $121 million in 2008. Gross premiums written decreased 18% for excess workers’ compensation and increased 9% for primary workers’ compensation. Gross premiums include assigned risk premiums, which are fully reinsured, of $4 million in 2009 and $10 million in 2008. The number of new and renewal policies issued in 2009 increased 12%.

• Reinsurance gross premiums decreased by 8% to $116 million in 2009 from $127 million in 2008. The decline was due to non-renewals and lower new business volume as a result of business lost to competitors or retained by ceding companies. Casualty gross premiums written decreased 13% to $91 million, and property gross premiums written increased 13% to $25 million.

• International gross premiums increased by 13% to $112 million in 2009 from $99 million in 2008. The increase was due primarily to the issuance of a large quota share reinsurance agreement through the Company’s branch in Hong Kong.

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          Premiums Earned. Premiums earned decreased 12% to $951 million in 2009 from $1,075 million in 2008. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in 2009 are related to business written during both 2009 and 2008. The 12% decrease for 2009 earned premiums reflects the underlying decline in net premiums written in 2008 and 2009.

          Net Investment Income. Following is a summary of net investment income for the three months ended June 30, 2009 and 2008 (dollars in thousands):

							Average Annualized
	Amount						Yield
	2009			2008			2009			2008
Fixed maturity securities, including cash	$	120,211		$	136,757			4.2	%		5.0	%
Arbitrage trading account and funds		6,938			15,338			5.7			7.3
Equity securities available for sale		6,010			11,184			7.5			5.6
Gross investment income		133,159			163,279			4.4			5.2
Investment expenses		(1,024	)		(946	)
Total	$	132,135		$	162,333			4.3	%		5.2	%

          Net investment income decreased 19% to $132 million in 2009 from $162 million in 2008 primarily due to lower short-term interest rates and to sales and impairments of securities, including higher dividend paying preferred stocks, over the past 18 months. Average invested assets, at cost (including cash and cash equivalents) decreased to $12.2 billion in 2009 from $12.5 billion in 2008 as a result of other than temporary impairments over the past 18 months.

          Losses from Investment Funds. Following is a summary of losses from investment funds (which are recorded on a one-quarter lag) for the three months ended June 30, 2009 and 2008 (dollars in thousands):

	2009			2008
Real estate funds	$	(34,320	)	$	(7,618	)
Energy funds		(3,726	)		254
Other funds		225			(1,030	)
Total	$	(37,821	)	$	(8,394	)

          Losses from investment funds were $38 million in 2009 compared to $8 million in 2008, primarily as a result of losses from real estate funds. The real estate funds, which had an aggregate carrying value of $186 million at June 30, 2009, invest in commercial loans and securities as well as direct property ownership. Asset values were impacted by general deterioration of real estate fundamentals coupled with the absence of a refinancing market and an increase in non-performing assets. In addition, in an environment of falling values and stricter underwriting standards, a large number of real estate projects are over-leveraged and facing near-term refinancing pressure. The energy funds reported a loss of $4 million in 2009 due to a decrease in the fair value of energy related investments held by the funds.

          Insurance Service Fees. Insurance service fees consist of fee-based services to help clients develop and administer self-insurance programs, primarily for workers’ compensation coverage as well as brokerage services. Service fees were $25 million in both 2009 and 2008.

          Realized Investment Gains (Losses). Realized investment gains (losses) result primarily from sales of securities, as well as from provisions for other than temporary impairment in securities. 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.

          Realized investment gains were $34 million in 2009 and were the result of write-downs for other-than-temporary impairments of $15 million, offset by realized gains from the sale of securities of $49 million. Approximately half the other-than-temporary impairment was related

40

to a further price decline of a common stock that had previously been written-down to fair value.

          Realized investment losses were $82 million in 2008 and were the result of other-than-temporary impairments of financial sector equity securities.

          Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were $50 million in 2009 compared with $27 million in 2008. These revenues were derived from three fixed base operators that were separately purchased in 2007, 2008 and 2009. These companies provide services to the general aviation market, including fuel and line service, aircraft sales and maintenance, avionics and engineering services and parts fabrication. The 2009 and 2008 revenues are not comparable since all of the companies were not owned for the three months ended June 30, 2008.

          Losses and Loss Expenses. Losses and loss expenses decreased to $597 million in 2009 from $680 million in 2008 due to lower earned premium. The consolidated loss ratio was 62.8% in 2009 compared with 63.2% in 2008. Weather-related losses were $28 million in 2009 compared with $31 million in 2008. Favorable prior year reserve development was $33 million in 2009 and $52 million in 2008. The favorable reserve development during 2009 includes a $17 million decrease in loss reserves related to a retrospectively-rated reinsurance agreement. The decrease in loss reserves for this contract resulted in a return premium of $17 million, and had no impact on earnings for the period. A summary of loss ratios in 2009 compared with 2008 by business segment follows:

• Specialty’s loss ratio increased to 60.0% in 2009 from 58.8% in 2008. Net favorable prior year development was $22 million in 2009 compared with $36 million in 2008.

• The regional loss ratio decreased to 66.6% in 2009 from 67.6% in 2008. Weather-related losses were $28 million in 2009 compared with $31 million in 2008. Net favorable prior year development was $4 million in 2009 compared with $16 million in 2008.

• Alternative markets’ loss ratio increased to 66.4% in 2009 from 64.1% in 2008. In addition to pricing and loss cost trends, the 2009 loss ratio was impacted by the use of lower discount rates used to discount excess workers’ compensation reserves. Net favorable prior year development was $8 million in 2009 compared with $5 million in 2008.

• The reinsurance loss ratio decreased to 56.4% in 2009 from 65.7% in 2008. Net favorable prior year development was $16 million in 2009 compared with net unfavorable prior year development of $5 million in 2008. The favorable reserve development during 2009 includes a $17 million decrease in loss reserves related to a retrospectively-rated reinsurance agreement. The decrease in loss reserves for this contract resulted in a return premium of $17 million, and had no impact on earnings for the period.

• The international loss ratio decreased to 61.9% in 2009 from 63.5% in 2008.

Other Operating Costs and Expenses.Following is a summary of other operating costs and expenses for the three months ended June 30, 2009 and 2008 (dollars in thousands):

	2009		2008
Underwriting expenses	$	308,970	$	323,742
Service expenses		20,503		21,631
Other costs and expenses		36,041		30,876
Total	$	365,514	$	376,249

          Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. The consolidated expense ratio (underwriting expenses expressed as a percentage of premiums earned) increased to 32.5% in 2009 from 30.1% in 2008 primarily due to the decline in earned premiums.

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          Service expenses, which represent the costs associated with the fee-based businesses, decreased 5% to $21 million due to lower employment costs.

          Other costs and expenses, which represent corporate expenses and foreign currency transaction gains and losses, increased 17% to $36 million. The increase was due primarily to foreign currency transaction losses of $5 million in 2009 compared with gains of $2 million in 2008.

          Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees were $47 million in 2009 compared to $26 million in 2008. These expenses represent costs associated with fixed base operators that were separately purchased in 2007, 2008 and 2009. These include cost of goods sold related to aircraft and other sales, labor and equipment costs related to repairs and other services and general and administrative expenses. The 2009 and 2008 expenses are not comparative since the companies were not all owned for the three months ended June 30, 2008.

          Interest Expense. Interest expense decreased 6% to $20 million primarily due to the repayment of $89 million of 9.875% senior notes in May 2008.

          Income Taxes. The effective income tax rate reported for the three months ended June 30, 2009 was 22% as compared to 16% for the same period in 2008. The effective income tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income.

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Investments

          As part of its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities that, combined with expected cash flow, it believes adequate to meet 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. Over the balance of the year, we expect to increase the average duration of our portfolio to more closely match the duration of our liabilities.

          The Company’s investment portfolio and investment-related assets as of June 30, 2009 were as follows (in thousands):

	Cost		Carrying Value
Fixed maturity securities:
United States government and government agencies	$	1,198,579	$	1,242,087
State and municipal		5,481,566		5,586,037
Mortgage-backed securities:
Agency		935,257		966,627
Residential-Prime		581,865		525,257
Residential-Alt A		93,801		84,338
Commercial		71,528		53,457
Total mortgage-backed securities		1,682,451		1,629,679
Corporate:
Financial		752,820		746,650
Industrial		500,307		505,999
Asset-backed		186,124		158,450
Utilities		158,155		158,348
Other		95,903		94,857
Total corporate		1,693,309		1,664,304
Foreign government and foreign government agencies		256,167		268,750
Total fixed maturity securities		10,312,072		10,390,857
Equity securities available for sale:
Preferred stock
Financial		113,490		81,074
Real estate		119,834		105,271
Utilities		56,406		46,373
Total preferred stock		289,730		232,718
Common stock		27,362		66,742
Total equity securities available for sale		317,092		299,460
Arbitrage trading account		544,812		544,812
Investment in arbitrage funds		82,011		82,011
Investment funds		388,327		378,164
Loans receivable		388,783		388,783
Total investments	$	12,033,097	$	12,084,087

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          Fixed Maturity Securities. The Company’s investment policy with respect to fixed maturity securities is generally to purchase instruments with the expectation of holding them to their maturity. However, management of the available for sale portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as a result of changes in financial market conditions and tax considerations. At June 30, 2009 (as compared to December 31, 2008), the fixed maturity securities portfolio mix was as follows: U.S. government securities were 12% (12% in 2008); state and municipal securities were 54% (58% in 2008); corporate securities were 16% (10% in 2008); mortgage-backed securities were 16% (17% in 2008); and foreign government bonds were 2% (3% in 2008).

          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 market value of the portfolio. Similarly, in a period in which management expects credit spreads to widen, the Company may sell lower quality securities, and in a period in which management expects certain foreign currencies to decline in value, the Company may sell securities denominated in those foreign currencies. The sale of fixed maturity securities in order to achieve the objective of maximizing total return may result in realized gains; however, there is no reason to expect these gains to continue in future periods.

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

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

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

          Investment Funds. At June 30, 2009 and December 31, 2008, the Company’s investment in investment funds was $378 million and $496 million, respectively, and included investments in real estate funds of $186 million and $292 million, respectively.

          Loans Receivable. Loans receivable, which are carried at amortized cost, have an aggregate cost of $389 million and an aggregate fair value of $289 million at June 30, 2009. This includes loans with an aggregate amortized cost of $310 million and an aggregate fair value of $209 million secured by commercial real estate. These loans earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) between August 2011 and January 2013. The loans are secured by office buildings (60%), hotels (27%) and senior living facilities (13%) located primarily in New York City, California, Hawaii, Boston and Philadelphia.

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Liquidity and Capital Resources

          Cash Flow. Cash used for operating activities was $9 million in 2009 compared with cash provided from operating activities of $408 million in 2008. The decline is primarily due to cash transfers to the trading account of $290 million in 2009 compared with cash transfers from the trading account of $50 million in 2008.

          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 87% invested in cash, cash equivalents and marketable fixed maturity securities as of June 30, 2009. If the sale of fixed maturity securities were to become necessary, a realized gain or loss equal to the difference between the cost and sales price of securities sold would be recognized.

          Financing Activity

          During the first six months of 2009, the Company repurchased 1,636,200 shares of its common stock for $32 million.

          At June 30, 2009, the Company had senior notes, junior subordinated debentures and other debt outstanding with a carrying value of $1,272 million and a face amount of $1,288 million. The maturities of the outstanding debt are $150 million in 2010, $1 million in 2011, $3 million in 2012, $200 million in 2013, $200 million in 2015, $150 million in 2019, $77 million in 2022, $7 million in 2035 (prepayable in 2010), $250 million in 2037 and $250 million in 2045 (prepayable in 2010).

          At June 30, 2009, equity was $3.3 billion and total capitalization (equity, senior notes and other debt and junior subordinated debentures) was $4.6 billion. The percentage of the Company’s capital attributable to senior notes, junior subordinated debentures and other debt was 28% at June 30, 2009 and 29% at December 31, 2008.

Item 3.Quantitative and Qualitative Disclosure About Market Risk

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

          The duration of the investment portfolio was 3.3 years at June 30, 2009 and 3.1 years at December 31, 2008. The overall market risk relating to the Company’s portfolio has remained similar to the risk at December 31, 2008.

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Item 4.Controls and Procedures

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

          Changes in Internal Control over Financial Reporting. During the quarter ended June 30, 2009, 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, 2008.

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

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

							Maximum number of
	Total				Total number of shares		shares that may
	number of		Average price		purchased as part of		yet be purchased
	shares		paid per		publicly announced plans		under the plans
	purchased		share		or programs		or programs (1)
April 2009		—		—		—		6,473,700
May 2009		—		—		—		6,473,700
June 2009		—		—		—		6,473,700

(1) Remaining shares available for repurchase under the Company’s repurchase authorization of 10,000,000 shares approved by the Board of Directors on July 29, 2008. On August 4, 2009, the Board of Directors increased the Company’s repurchase authorization to 10,000,000 shares.

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Item 4.Submission of Matters to a Vote of Security Holders

          The Company held its Annual Meeting of Stockholders on May 19, 2009. The meeting involved the election of two directors for a term to expire at the Annual Meeting of Stockholders to be held in the year 2012, the approval of the W. R. Berkley Corporation 2009 Long-Term Incentive Plan, the approval of the W. R. Berkley Corporation 2009 Directors Stock Plan and the ratification of the appointment of KPMG LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2009. The directors elected and the results of the voting are as follows:

(i) Election of Directors:

Nominee	Votes For	Votes Withheld	Votes Abstained
William R. Berkley	143,076,125	2,055,446	3,021,167
George G. Daly	144,222,765	908,806	3,021,167

(ii) Approval of the W. R. Berkley Corporation 2009 Long-Term Incentive Plan:

Votes For	Votes Against	Votes Abstained
142,142,181	4,887,560	1,122,997

(iii) Approval of the W. R. Berkley Corporation 2009 Directors Stock Plan:

Votes For	Votes Against	Votes Abstained	Broker Non Vote
76,192,614	57,080,718	919,066	13,960,340

(iv) Ratification of Accounting Firm:

Votes For	Votes Against	Votes Abstained	Broker Non Vote
147,283,305	783,758	44,986	40,689

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.

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SIGNATURES

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

	W. R. BERKLEY CORPORATION
Date: August 7, 2009	/s/ William R. Berkley
	William R. Berkley
	Chairman of the Board and Chief Executive Officer
Date: August 7, 2009	/s/ Eugene G. Ballard
	Eugene G. Ballard
	Senior Vice President — Chief Financial Officer

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