W. R. Berkley (WRB) 10-Q 2010 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)

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

For the Quarterly Period Ended September 30, 2010

or

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

For the Transition Period from                    to                    .

Commission File Number 1-15202

W. R. BERKLEY CORPORATION

(Exact name of registrant as specified in its charter)

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

(203) 629-3000

(Registrant’s telephone number, including area code)

None

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

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

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 October 29, 2010: 145,040,084

TABLE OF CONTENTS

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

Part I — FINANCIAL INFORMATION

Item 1. Financial Statements

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

	September 30,			December 31,
	2010			2009
	(Unaudited)
Assets
Investments:
Fixed maturity securities	$	11,386,757		$	11,299,197
Equity securities available for sale		461,791			401,367
Arbitrage trading account		472,209			465,783
Investment in arbitrage funds		60,127			83,420
Investment funds		409,004			418,880
Loans receivable		357,805			381,591
Total investments		13,147,693			13,050,238
Cash and cash equivalents		922,198			515,430
Premiums and fees receivable		1,069,757			1,047,976
Due from reinsurers		1,076,907			972,820
Accrued investment income		142,944			130,524
Prepaid reinsurance premiums		226,050			211,054
Deferred policy acquisition costs		412,024			391,360
Real estate, furniture and equipment		251,612			246,605
Deferred federal and foreign income taxes		46,246			190,450
Goodwill		107,131			107,131
Trading account receivables from brokers and clearing organizations		239,006			310,042
Other assets		171,283			154,966
Total assets	$	17,812,851		$	17,328,596
Liabilities and Equity
Liabilities:
Reserves for losses and loss expenses	$	9,135,156		$	9,071,671
Unearned premiums		2,033,921			1,928,428
Due to reinsurers		211,743			208,045
Trading account securities sold but not yet purchased		65,876			143,885
Other liabilities		795,114			779,347
Junior subordinated debentures		242,733			249,793
Senior notes and other debt		1,494,207			1,345,481
Total liabilities		13,978,750			13,726,650
Equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares; issued and outstanding — none		—			—
Common stock, par value $.20 per share:
Authorized 500,000,000 shares, issued and outstanding, net of treasury shares, 145,203,276 and 156,552,355 shares		47,024			47,024
Additional paid-in capital		933,090			926,359
Retained earnings		4,077,797			3,785,187
Accumulated other comprehensive income		396,894			163,207
Treasury stock, at cost, 89,914,642 and 78,565,563 shares		(1,627,413	)		(1,325,710	)
Total stockholders’ equity		3,827,392			3,596,067
Noncontrolling interests		6,709			5,879
Total equity		3,834,101			3,601,946
Total liabilities and equity	$	17,812,851		$	17,328,596

See accompanying notes to interim consolidated financial statements.

1

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

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

See accompanying notes to interim consolidated financial statements.

2

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

	For the Nine Months Ended September 30,
	2010			2009
COMMON STOCK:
Beginning and end of period	$	47,024		$	47,024
ADDITIONAL PAID-IN CAPITAL:
Beginning of period	$	926,359		$	920,241
Stock options exercised and restricted units issued including tax benefit		(12,239	)		(12,706	)
Restricted stock units expensed		18,772			18,080
Stock options expensed		—			9
Stock issued to directors		198			122
End of period	$	933,090		$	925,746
RETAINED EARNINGS:
Beginning of period	$	3,785,187		$	3,514,531
Net income to common stockholders		322,436			174,763
Dividends		(29,826	)		(28,843	)
End of period	$	4,077,797		$	3,660,451
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Unrealized investment gains (losses):
Beginning of period	$	219,394		$	(142,216	)
Unrealized gains on securities not other-than-temporarily impaired		230,804			399,510
Unrealized gains (losses) on other-than-temporarily impaired securities		437			(8,221	)
End of period		450,635			249,073
Currency translation adjustments:
Beginning of period		(40,371	)		(72,475	)
Net change in period		765			27,255
End of period		(39,606	)		(45,220	)
Net pension asset:
Beginning of period		(15,816	)		(14,268	)
Net change in period		1,681			1,475
End of period		(14,135	)		(12,793	)
Total accumulated other comprehensive income	$	396,894		$	191,060
TREASURY STOCK:
Beginning of period	$	(1,325,710	)	$	(1,206,518	)
Stock exercised/vested		17,054			16,494
Stock repurchased		(319,293	)		(31,842	)
Stock issued to directors		536			630
End of period	$	(1,627,413	)	$	(1,221,236	)
NONCONTROLLING INTERESTS:
Beginning of period	$	5,879		$	5,361
Contributions/(distributions)		581			(94	)
Net income		238			173
Other comprehensive income, net of tax		11			60
End of period	$	6,709		$	5,500

See accompanying notes to interim consolidated financial statements.

3

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

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

See accompanying notes to interim consolidated financial statements.

4

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

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

See accompanying notes to interim consolidated financial statements.

5

W. R. Berkley Corporation and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) General

The accompanying unaudited consolidated financial statements of W. R. Berkley Corporation and subsidiaries (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. The unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring items, which are necessary to present fairly the Company’s financial position and results of operations on a basis consistent with the prior audited consolidated financial statements. Operating results for the nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements requires the use of management estimates. For further information related to a description of areas of judgment and estimates and other information necessary to understand the Company’s financial position and results of operations, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Reclassifications have been made in the 2009 financial statements as originally reported to conform to the presentation of the 2010 financial statements.

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

(2) Per Share Data

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

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

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2010		2009		2010		2009
Basic		147,079		160,468		150,556		160,520
Diluted		154,160		166,736		157,054		166,765

(3) Recent Accounting Pronouncements

In December 2009, the Financial Accounting Standards Board (“FASB”) issued guidance that: (i) eliminates the concept of qualifying “special-purpose entity” (“SPE”); (ii) alters the requirement for transferring assets off of the reporting company’s balance sheet; (iii) requires additional disclosure about a transferor’s involvement in transferred assets; and (iv) eliminates special treatment of guaranteed mortgage securitizations. This guidance was effective as of January 1, 2010. The adoption of this guidance did not have a material impact our financial condition or results of operations.

In December 2009, the FASB issued guidance requiring the reporting entity to perform a qualitative analysis that results in a variable interest entity (“VIE”) being consolidated if the reporting entity: (i) has the power to direct activities of the VIE that significantly impact the VIE’s financial performance; and (ii) has an obligation to absorb losses or receive benefits that may be significant to the VIE. This guidance further requires enhanced disclosures, including disclosure of significant judgments and assumptions as to whether a VIE must be consolidated, and how involvement with a VIE affects the company’s financial statements. This guidance was effective January 1, 2010. The adoption of this guidance did not have a material impact on our financial condition or results of operations.

6

In January 2010, the FASB issued guidance that requires additional disclosures regarding fair value measurements. The guidance requires entities to disclose the amounts and reasons for significant transfers between Level 1 and Level 2 of the fair value hierarchy, the reasons for any transfers in or out of Level 3 and separate information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements. Portions of the guidance are effective for interim and annual reporting periods beginning after December 15, 2009, which we adopted effective January 1, 2010, and the remaining guidance is effective for interim and annual reporting periods beginning after December 15, 2010. The adoption of this remaining guidance will expand the disclosures related to fair value measurements in the notes to the Company’s consolidated financial statements.

In October 2010, the FASB issued changes to existing accounting guidance regarding the treatment of costs associated with acquiring or renewing insurance contracts. We currently defer these expenses, which include commissions, premium taxes, fees, and certain other costs of underwriting policies, and amortize them over the periods in which the related premiums are earned. This updated guidance is effective for periods ending after December 15, 2011. The adoption of this guidance is not expected to have a material impact on our financial condition or results of operations.

(4) Investments in Fixed Maturity Securities

At September 30, 2010 and December 31, 2009, investments in fixed maturity securities were as follows:

	Amortized		Gross Unrealized					Fair		Carrying
(Dollars in thousands)	Cost		Gains		Losses			Value		Value
September 30, 2010
Held to maturity:
State and municipal	$	70,973	$	9,992	$	—		$	80,965	$	70,973
Residential mortgage-backed		40,052		4,979		—			45,031		40,052
Corporate		4,995		332		—			5,327		4,995
Total held to maturity		116,020		15,303		—			131,323		116,020
Available for sale:
U.S. government and government agency		1,365,193		82,308		(584	)		1,446,917		1,446,917
State and municipal (1)		5,445,152		334,604		(19,769	)		5,759,987		5,759,987
Mortgage-backed securities:
Residential (2)		1,335,603		65,396		(11,798	)		1,389,201		1,389,201
Commercial		43,341		317		(6,994	)		36,664		36,664
Corporate		2,038,034		145,506		(20,602	)		2,162,938		2,162,938
Foreign		449,659		25,518		(147	)		475,030		475,030
Total available for sale		10,676,982		653,649		(59,894	)		11,270,737		11,270,737
Total investment in fixed maturity securities	$	10,793,002	$	668,952	$	(59,894	)	$	11,402,060	$	11,386,757
December 31, 2009
Held to maturity:
State and municipal	$	70,847	$	6,778	$	(739	)	$	76,886	$	70,847
Residential mortgage-backed		44,318		2,984		—			47,302		44,318
Corporate		4,994		—		(13	)		4,981		4,994
Total held to maturity		120,159		9,762		(752	)		129,169		120,159
Available for sale:
U.S. government and government agency		1,677,579		40,358		(3,784	)		1,714,153		1,714,153
State and municipal (1)		5,551,632		238,271		(41,048	)		5,748,855		5,748,855
Mortgage-backed securities:
Residential (2)		1,537,331		38,229		(44,343	)		1,531,217		1,531,217
Commercial		47,292		—		(12,069	)		35,223		35,223
Corporate		1,719,874		59,082		(35,574	)		1,743,382		1,743,382
Foreign		394,711		12,323		(826	)		406,208		406,208
Total available for sale		10,928,419		388,263		(137,644	)		11,179,038		11,179,038
Total investment in fixed maturity securities	$	11,048,578	$	398,025	$	(138,396	)	$	11,308,207	$	11,299,197

(1)	Gross unrealized losses for state and municipal securities include $1,120,000 and $340,000 as of September 30, 2010 and December 31, 2009, respectively, related to the non-credit portion of other than temporary impairments (“OTTI”) recognized in other comprehensive income.
(2)	Gross unrealized losses for residential mortgage-backed securities include $3,633,000 and $5,085,000 as of September 30, 2010 and December 31, 2009, respectively, related to the non-credit portion of OTTI recognized in other comprehensive income.

7

The amortized cost and fair value of fixed maturity securities at September 30, 2010, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay obligations:

	Amortized
(Dollars in thousands)	Cost		Fair Value
Due in one year or less	$	622,449	$	633,658
Due after one year through five years		2,856,080		3,025,539
Due after five years through ten years		2,807,836		3,038,194
Due after ten years		3,087,641		3,233,773
Mortgage-backed securities		1,418,996		1,470,896
Total	$	10,793,002	$	11,402,060

At September 30, 2010, there were no investments, other than investments in United States government and government agency securities, which exceeded 10% of common stockholders’ equity.

(5) Statements of Cash Flow

Interest payments were $92,531,000 and $69,827,000 in the nine months ended September 30, 2010 and 2009, respectively. Income taxes paid (refunded) were $80,113,000 and ($451,000) in the nine months ended September 30, 2010 and 2009, respectively.

(6) Investments in Equity Securities Available for Sale

At September 30, 2010 and December 31, 2009, investments in equity securities available for sale were as follows:

	Amortized		Gross Unrealized					Fair		Carrying
(Dollars in thousands)	Cost		Gains		Losses			Value		Value
September 30, 2010
Common stocks	$	125,513	$	103,032	$	(910	)	$	227,635	$	227,635
Preferred stocks		236,338		11,178		(13,360	)		234,156		234,156
Total	$	361,851	$	114,210	$	(14,270	)	$	461,791	$	461,791
December 31, 2009
Common stocks	$	27,237	$	97,554	$	(5,731	)	$	119,060	$	119,060
Preferred stocks		285,490		9,745		(12,928	)		282,307		282,307
Total	$	312,727	$	107,299	$	(18,659	)	$	401,367	$	401,367

(7) Arbitrage Trading Account and Arbitrage Funds

The fair value and carrying value of the arbitrage trading account and arbitrage funds and related assets and liabilities were as follows:

	September 30,			December 31,
(Dollars in thousands)	2010			2009
Arbitrage trading account	$	472,209		$	465,783
Investment in arbitrage funds		60,127			83,420
Related assets and liabilities:
Receivables from brokers		239,006			310,042
Securities sold but not yet purchased		(65,876	)		(143,885	)

8

(8) Net Investment Income

Net investment income consists of the following:

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
(Dollars in thousands)	2010			2009			2010			2009
Investment income earned on:
Fixed maturity securities, including cash	$	122,617		$	125,745		$	373,375		$	368,343
Equity securities available for sale		2,723			3,650			8,716			15,724
Arbritage trading account (1)		13,651			12,242			26,005			29,841
Gross investment income		138,991			141,637			408,096			413,908
Investment expense		(804	)		(608	)		(2,875	)		(2,528	)
Net investment income	$	138,187		$	141,029		$	405,221		$	411,380

(1) Investment income earned from arbitrage trading account activity includes net unrealized trading losses of $2,228,000 and gains of $3,424,000 in the three months ended September 30, 2010 and 2009, respectively, and net unrealized trading losses of $1,990,000 and gains of $4,922,000 in the nine months ended September 30, 2010 and 2009, respectively.

(9) Investment Funds

The carrying value of investment funds (which are recorded on a one-quarter lag) include the following:

	Carrying Value
	as of
	September 30,		December 31,
(Dollars in thousands)	2010		2009
Real estate	$	196,446	$	193,178
Energy		88,813		106,213
Other		123,745		119,489
Total	$	409,004	$	418,880

Income (losses) from investment funds (which are recorded on a one-quarter lag) include the following:

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2010			2009			2010			2009
Real estate	$	(3,353	)	$	(22,652	)	$	(7,259	)	$	(153,525	)
Energy		(14,293	)		(3,343	)		(344	)		(21,760	)
Other		(1,398	)		338			(5,183	)		(3,267	)
Total	$	(19,044	)	$	(25,657	)	$	(12,786	)	$	(178,552	)

(10) Loans Receivable

The amortized cost of loans receivable was $358 million and $382 million at September 30, 2010 and December 31, 2009, respectively. Amortized cost is net of a valuation allowance of $16.4 million and $13.8 million, respectively, for the stated periods. For the nine months ended September 30, 2010, the Company increased its valuation allowance by $2.6 million. The nine largest loans have an aggregate amortized cost of $280 million and an aggregate fair value of $221 million and are secured by commercial real estate. These loans earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) between August 2011 and June 2014. The loans are secured by office buildings (60%), hotels (27%) and senior living facilities (13%), with properties located primarily in New York City, California, Hawaii, Boston and Philadelphia.

9

(11) Realized and Unrealized Investment Gains (Losses)

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

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

(1) Includes change in valuation allowance for loans receivable of $2.6 million and $3.3 million for the nine months ended September 30, 2010 and 2009, respectively.

10

(12) Securities in an Unrealized Loss Position

The following table summarizes all securities in an unrealized loss position at September 30, 2010 and December 31, 2009 by the length of time those securities have been continuously in an unrealized loss position.

	Less Than 12 Months				12 Months or Greater				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
(Dollars in thousands)	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
September 30, 2010
U.S. government and agency	$	38,232	$	564	$	7,081	$	20	$	45,313	$	584
State and municipal		180,928		1,201		168,911		18,568		349,839		19,769
Mortgage-backed securities		107,822		1,122		188,497		17,670		296,319		18,792
Corporate		141,538		4,736		127,728		15,866		269,266		20,602
Foreign		27,546		147		—		—		27,546		147
Fixed maturity securities		496,066		7,770		492,217		52,124		988,283		59,894
Common stocks		14,076		910		—		—		14,076		910
Preferred stocks		16,970		3,648		78,037		9,712		95,007		13,360
Equity securities		31,046		4,558		78,037		9,712		109,083		14,270
Total	$	527,112	$	12,328	$	570,254	$	61,836	$	1,097,366	$	74,164
December 31, 2009
U.S. government and agency	$	389,745	$	3,653	$	7,361	$	131	$	397,106	$	3,784
State and municipal		376,914		12,971		443,666		28,816		820,580		41,787
Mortgage-backed securities		306,840		12,719		260,519		43,693		567,359		56,412
Corporate		194,690		13,958		172,656		21,629		367,346		35,587
Foreign		81,368		826		—		—		81,368		826
Fixed maturity securities		1,349,557		44,127		884,202		94,269		2,233,759		138,396
Common stocks		19,948		5,731		—		—		19,948		5,731
Preferred stocks		9,951		76		163,985		12,852		173,936		12,928
Equity securities		29,899		5,807		163,985		12,852		193,884		18,659
Total	$	1,379,456	$	49,934	$	1,048,187	$	107,121	$	2,427,643	$	157,055

          Fixed Maturity Securities — A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at September 30, 2010 is presented in the table below:

					Gross
	Number of		Aggregate		Unrealized
(Dollars in thousands)	Securities		Fair Value		Loss
Unrealized loss less than $5 million:
Mortgage-backed securities		9	$	73,859	$	7,053
Corporate		9		59,432		4,430
State and municipal		5		34,576		5,417
Unrealized loss $5 million or more
Mortgage-backed security (1)		1		30,155		6,845
Total		24	$	198,022	$	23,745

(1) This investment is secured by 99 properties comprising approximately 30 million square feet of office space located primarily in Boston, Northern California and Los Angeles. The current debt maturity of February 2011 can be extended at the borrower’s option through February 2012 provided that there is no continuing default. The Company believes the amount of outstanding debt for the Company’s debt layer and all debt layers senior to the Company’s debt layer to be below the current fair values for the underlying properties. Based on the portfolio’s stable performance (e.g., occupancy rates, lease terms and debt service coverage) and on there being substantial subordinate capital, the Company does not consider the investment to be OTTI.

11

For OTTI of fixed maturity securities that management does not intend to sell or, more likely than not, would not be required to sell, the portion of the decline in value considered to be due to credit factors is recognized in earnings and the portion of the decline in value considered to be due to non-credit factors is recognized in other comprehensive income. The table below provides a roll-forward of the portion of impairments recognized in earnings for those securities that have been impaired due to both credit factors and non-credit factors.

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
(Dollars in thousands)	2010		2009		2010		2009
Beginning balance of amounts related to credit losses	$	5,661	$	2,610	$	5,661	$	—
Additions for amounts related to credit losses		—		2,200		—		4,810
Ending balance of amounts related to credit losses	$	5,661	$	4,810	$	5,661	$	4,810

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

Preferred Stocks — At September 30, 2010, there were seven preferred stocks in an unrealized loss position, with an aggregate fair value of $95 million and a gross unrealized loss of $13 million. This includes investments in Fannie Mae and Freddie Mac securities that were written-down to fair value, which was approximately 4% of original cost, in 2008. Since that time, the trading volume for these stocks has been low and the stock price has been volatile. These two securities had a fair value of $2 million and an unrealized loss of $4 million at September 30, 2010. The Company does not consider any of the preferred stocks to be OTTI.

Common Stocks—At September 30, 2010, the Company owned one common stock in an unrealized loss position with an aggregate fair value of $14 million and an aggregate unrealized loss of $1 million. The Company does not consider this security to be OTTI.

Loans Receivable—The Company monitors the performance of its loans receivable, including current market conditions for each loan and the ability to collect principal and interest. For loans where the Company determines it is probable that the contractual terms will not be met, a valuation reserve is established with a charge to net investment losses. Loans receivable are reported net of a valuation reserve of $16.4 million and $13.8 million at September 30, 2010 and December 31, 2009, respectively.

(13)Fair Value Measurements

The Company’s fixed maturity and equity securities available for sale and its trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available.

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

12

The following tables present the assets and liabilities measured at fair value, on a recurring basis, as of September 30, 2010 and December 31, 2009 by level:

(Dollars in thousands)	Total		Level 1		Level 2		Level 3
September 30, 2010
Assets:
Fixed maturity securities available for sale:
U.S. government and agency	$	1,446,917	$	—	$	1,446,917	$	—
State and municipal		5,759,987		—		5,759,987		—
Mortgage-backed securities		1,425,865		—		1,425,865		—
Corporate		2,162,938		—		2,069,233		93,705
Foreign		475,030		—		475,030		—
Total fixed maturity securities available for sale		11,270,737		—		11,177,032		93,705
Equity securities available for sale:
Common stocks		227,635		135,875		90,201		1,559
Preferred stocks		234,156		—		157,833		76,323
Total equity securities available for sale		461,791		135,875		248,034		77,882
Arbitrage trading account		472,209		471,730		479		0
Total	$	12,204,737	$	607,605	$	11,425,545	$	171,587
Liabilities:
Securities sold but not yet purchased	$	65,876	$	65,876	$	—	$	—
December 31, 2009
Assets:
Fixed maturity securities available for sale:
U.S. government and agency	$	1,714,153	$	—	$	1,714,153	$	—
State and municipal		5,748,855		—		5,748,855		—
Mortgage-backed securities		1,566,440		—		1,540,540		25,900
Corporate		1,743,382		—		1,653,222		90,160
Foreign		406,208		—		406,208		—
Total fixed maturity securities available for sale		11,179,038		—		11,062,978		116,060
Equity securities available for sale:
Common stocks		119,060		11,295		106,206		1,559
Preferred stocks		282,307		—		227,594		54,713
Total equity securities available for sale		401,367		11,295		333,800		56,272
Arbitrage trading account		465,783		465,430		—		353
Total	$	12,046,188	$	476,725	$	11,396,778	$	172,685
Liabilities:
Securities sold but not yet purchased	$	143,885	$	143,885	$	—	$	—

There were no transfers between Levels 1 and 2 during the three and nine months ended September 30, 2010.

13

The following tables summarize changes in Level 3 assets for the three and nine months ended September 30, 2010:

			Gains (Losses) Included in:
						Other		Purchases
	Beginning					Comprehensive		(Sales)			Transfers			Ending
(Dollars in thousands)	Balance		Earnings			Income		(Maturities)			In/(Out)			Balance
For the three months ended September 30, 2010
Fixed maturity securities available for sale:
Corporate	$	78,522	$	(149	)	$	2,334	$	10,598		$	2,400		$	93,705
Total		78,522		(149	)		2,334		10,598			2,400			93,705
Equity securities available for sale:
Common stocks		1,559		—			—		—			—			1,559
Preferred stocks		63,432		—			3,727		9,164			—			76,323
Total		64,991		—			3,727		9,164			—			77,882
Arbitrage trading account		353		(353	)		—		—			—			—
Total	$	143,866	$	(502	)	$	6,061	$	19,762		$	2,400		$	171,587
For the nine months ended September 30, 2010
Fixed maturity securities available for sale:
Mortgage-backed securities	$	25,900	$	—		$	—	$	—		$	(25,900	)	$	—
Corporate		90,160		74			2,094		(1,023	)		2,400			93,705
Total		116,060		74			2,094		(1,023	)		(23,500	)		93,705
Equity securities available for sale:
Common stocks		1,559		—			—		—			—			1,559
Preferred stocks		54,713		—			2,068		19,542			—			76,323
Total		56,272		—			2,068		19,542			—			77,882
Arbitrage trading account		353		(353	)		—		—			—			—
Total	$	172,685	$	(279	)	$	4,162	$	18,519		$	(23,500	)	$	171,587

For the nine months ended September 30, 2010, a mortgage-backed security was transferred from Level 3 to Level 2 as the Company was able to obtain a quotation from a third party broker dealer. In addition, the Company received a Level 3 corporate security in exchange for a private equity investment fund previously accounted for as an equity investment.

14

(14) Reinsurance

The following is a summary of reinsurance financial information:

	For the Three						For the Nine
	Months Ended						Months Ended
	September 30,						September 30,
(Dollars in thousands)	2010			2009			2010			2009
Written premiums:
Direct	$	962,872		$	913,602		$	2,854,951		$	2,760,505
Assumed		158,523			183,138			506,033			539,054
Ceded		(134,689	)		(127,411	)		(428,974	)		(397,846	)
Total net premiums written	$	986,706		$	969,329		$	2,932,010		$	2,901,713
Earned premiums:
Direct	$	947,314		$	912,462		$	2,779,044		$	2,765,446
Assumed		162,783			163,414			482,628			474,858
Ceded		(142,800	)		(132,736	)		(415,686	)		(366,784	)
Total net premiums earned	$	967,297		$	943,140		$	2,845,986		$	2,873,520
Ceded losses incurred	$	88,928		$	78,889		$	315,580		$	199,492

The Company reinsures a portion of its exposures principally to reduce its net liability on individual risks and to protect against catastrophic losses. Estimated amounts due from reinsurers are reported net of reserves for uncollectible reinsurance of $4 million as of September 30, 2010 and December 31, 2009, respectively.

(15) Fair Value of Financial Instruments

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

	September 30, 2010				December 31, 2009
(Dollars in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Fixed maturity securities	$	11,386,757	$	11,402,060	$	11,299,197	$	11,308,207
Equity securities available for sale		461,791		461,791		401,367		401,367
Arbitrage trading account		472,209		472,209		465,783		465,783
Investment in arbitrage funds		60,127		60,127		83,420		83,420
Loans receivable		357,805		303,247		381,591		285,122
Cash and cash equivalents		922,198		922,198		515,430		515,430
Trading account receivables from brokers and clearing organizations		239,006		239,006		310,042		310,042
Liabilities:
Trading account securities sold but not yet purchased		65,876		65,876		143,885		143,885
Due to broker		61,741		61,741		5,612		5,612
Junior subordinated debentures		242,733		251,500		249,793		242,217
Senior notes and other debt		1,494,207		1,618,894		1,345,481		1,386,802

The estimated fair values of the Company’s fixed maturity securities, equity securities available for sale and arbitrage trading account securities are based on various valuation techniques, as described in note 13 above. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available. The fair value of loans receivable are estimated by using current institutional purchaser yield requirements for loans with similar credit characteristics. The fair value of the senior notes and other debt and the junior subordinated debentures is based on spreads for similar securities.

15

(16) Restricted Stock Units

Pursuant to its stock incentive plan, the Company may issue restricted stock units (RSUs) to officers of the Company and its subsidiaries. The RSUs generally vest five years from the award date and are subject to other vesting and forfeiture provisions contained in the award agreement. Grants of RSUs are made periodically, generally twice within a five-year period. A summary of RSUs issued in 2010 and 2009 follows (dollars in thousands):

	Units		Fair Value
Three months ended September 30:
2010		1,472,150	$	38,763
2009		50,500	$	1,253
Nine months ended September 30:
2010		2,226,650	$	58,456
2009		105,500	$	2,546

(17) Industry Segments

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

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

Our regional segment provides commercial insurance products to customers primarily in 45 states. Key clients of this segment are small-to-mid-sized businesses and state and local governmental entities. The regional subsidiaries are organized geographically, which provides them with the flexibility to adapt to local market conditions, while enjoying the superior administrative capabilities and financial strength of the Company. The regional operations are organized geographically based on markets served.

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

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

Our international segment offers personal and commercial property casualty insurance in South America, commercial insurance in the United Kingdom, Continental Europe and Canada and reinsurance in Australia and Southeast Asia.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Income tax expense and benefits are calculated based upon the Company’s overall effective tax rate.

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

16

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

Identifiable assets by segment are as follows:

	September 30,		December 31,
(Dollars in thousands)	2010		2009
Specialty	$	5,897,874	$	5,589,666
Regional		2,738,462		2,741,269
Alternative markets		3,826,759		3,643,214
Reinsurance		3,062,702		3,142,017
International		1,305,084		1,118,994
Corporate, other and eliminations (1)		981,970		1,093,436
Consolidated	$	17,812,851	$	17,328,596

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

17

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

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

(18) Commitments, Litigation and Contingent Liabilities

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

18

SAFE HARBOR STATEMENT

          This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. This document may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of the forward-looking statements can be identified by the use of forward-looking words such as ‘believes,” “expects,” “potential,” “continued,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” or the negative version of those words or other comparable words. Any forward-looking statements contained herein, including statements related to our outlook for the industry and for our performance for the year 2010 and beyond, are based upon the Company’s historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. They are subject to various risks and uncertainties, including but not limited to: the cyclical nature of the property casualty industry; the long-tail and potentially volatile nature of the insurance and reinsurance business; product demand and pricing; claims development and the process of estimating reserves; investment risks, including those of our portfolio of fixed maturity securities and investments in equity securities, including investments in financial institutions, municipal bonds, mortgage-backed securities, loans receivable, investment funds, merger arbitrage and private equity investments; the impact of significant competition; the impact of the economic downturn, and any legislative, regulatory, accounting or other initiatives taken in response to it, on our results and financial condition; the uncertain nature of damage theories and loss amounts; natural and man-made catastrophic losses, including as a result of terrorist activities; the success of our new ventures or acquisitions and the availability of other opportunities; the availability of reinsurance; our retention under the Terrorism Risk Insurance Program Reauthorization Act of 2007; the ability of our reinsurers to pay reinsurance recoverables owed to us; foreign currency and political risks relating to our international operations; other legislative and regulatory developments, including those related to business practices in the insurance industry; changes in the ratings assigned to us or our insurance company subsidiaries by rating agencies; the availability of dividends from our insurance company subsidiaries; our ability to attract and retain qualified employees; and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”). These risks and uncertainties could cause our actual results for the year 2010 and beyond to differ materially from those expressed in any forward-looking statement we make. Any projections of growth in our net premiums written and management fees would not necessarily result in commensurate levels of underwriting and operating profits. Our future financial performance is dependent upon factors discussed in our Annual Report on Form 10-K, elsewhere in this Form 10-Q and our other SEC filings. Forward-looking statements speak only as of the date on which they are made.

19

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

Overview

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

          The profitability of the Company’s insurance business is affected primarily by the adequacy of premium rates. The ultimate adequacy of premium rates is not known with certainty at the time a property casualty insurance policy is issued because premiums are determined before claims are reported. The ultimate adequacy of premium rates is affected mainly by the severity and frequency of claims, which are influenced by many factors, including natural and other disasters, regulatory measures and court decisions that define and change the extent of coverage and the effects of economic inflation on the amount of compensation for injuries or losses. General insurance prices are also influenced by available insurance capacity, i.e., the level of policyholders’ surplus employed in the industry, and the industry’s willingness to deploy that capital.

          Increased competition in the industry in recent years and the impact of the economic downturn have put pressure on pricing and terms and conditions. As property casualty insurance became more competitive, insurance rates decreased across most business lines from 2005 through 2008. Although this trend began to moderate in 2009 and pricing has stabilized in most areas, current market price levels for certain lines of business remain below the prices required for the Company to achieve its return objectives. Price changes are reflected in the Company’s results over time as premiums are earned.

          The Company’s profitability is also affected by its investment income. The Company’s invested assets, which are derived from its own capital and cash flow from its insurance business, are invested principally in fixed maturity securities. The return on fixed maturity securities is affected primarily by general interest rates, which are at historically low levels, as well as the credit quality and duration of the securities. The Company also invests in equity securities, merger arbitrage, private equity investments and real estate related investments.

Critical Accounting Estimates

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

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

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

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

20

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

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

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

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

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

21

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

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

          The key assumptions used in calculating the most recent estimate of the loss reserves are reviewed each quarter and adjusted, to the extent necessary, to reflect historical changes, current trends and other factors observed. If the actual level of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s estimate. The following table reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity on our loss estimate for claims occurring in 2009 (dollars in thousands):

	Frequency (+/-)
Severity (+/-)	1%		5%		10%
1%		50,629		152,390		279,592
5%		152,390		258,182		390,422
10%		279,592		390,422		528,958

          Our net reserves for losses and loss expenses of $8.1 billion as of September 30, 2010 relate to multiple accident years. Therefore, the impact of changes in frequency or severity for more than one accident year could be higher or lower than the amounts reflected above.

          Approximately $1.6 billion, or 20%, of the Company’s net loss reserves as of September 30, 2010 relate to the reinsurance segment. There is a higher degree of uncertainty and greater variability regarding estimates of assumed loss reserves because those estimates are based, in part, upon information received from ceding companies. If information received from ceding companies is not timely or correct, the Company’s estimate of ultimate losses may not be accurate. Furthermore, due to delayed reporting of claim information by ceding companies, the claim settlement tail for assumed reinsurance is extended. Management considers the impact of delayed reporting in its selection of assumed loss development factors.

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

22

          Following is a summary of the Company’s reserves for losses and loss expenses by business segment as of September 30, 2010 and December 31, 2009:

(Dollars in thousands)	2010		2009
Specialty	$	2,928,173	$	2,972,562
Regional		1,305,395		1,341,451
Alternative markets		1,849,654		1,771,114
Reinsurance		1,589,971		1,699,052
International		426,601		363,603
Net reserves for losses and loss expenses		8,099,794		8,147,782
Ceded reserves for losses and loss expenses		1,035,362		923,889
Gross reserves for losses and loss expenses	$	9,135,156	$	9,071,671

          Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of September 30, 2010 and December 31, 2009:

	Reported Case		Incurred But
(Dollars in thousands)	Reserves		Not Reported		Total
September 30, 2010
General liability	$	886,587	$	2,061,808	$	2,948,395
Workers’ compensation (1)		1,147,407		1,037,264		2,184,671
Commercial automobile		342,011		187,708		529,719
International		176,446		250,155		426,601
Other		166,649		253,788		420,437
Total primary		2,719,100		3,790,723		6,509,823
Reinsurance (1)		644,209		945,762		1,589,971
Total	$	3,363,309	$	4,736,485	$	8,099,794
December 31, 2009
General liability	$	845,889	$	2,159,611	$	3,005,500
Workers’ compensation (1)		1,094,800		1,019,552		2,114,352
Commercial automobile		393,534		196,060		589,594
International		145,807		217,796		363,603
Other		143,336		232,345		375,681
Total primary		2,623,366		3,825,364		6,448,730
Reinsurance (1)		688,593		1,010,459		1,699,052
Total	$	3,311,959	$	4,835,823	$	8,147,782

(1) Workers’ compensation and reinsurance reserves are net of an aggregate net discount of $898 million and $877 million as of September 30, 2010 and December 31, 2009, respectively.

23

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

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
(Dollars in thousands)	2010			2009			2010			2009
Favorable (unfavorable) reserve development:
Specialty	$	13,461		$	18,707		$	70,511		$	58,026
Regional		19,264			13,936			68,892			28,376
Alternative markets		6,931			11,071			17,485			35,352
Reinsurance		8,852			11,174			39,247			33,780
International		(661	)		4,962			2,826			8,592
Total favorable (unfavorable) reserve development		47,847			59,850			198,961			164,126
Premium offsets (1):
Specialty		2,525			(5,285	)		211			(5,285	)
Alternative markets		499			(2,287	)		75			(2,287	)
Reinsurance		(330	)		(5,269	)		(19,363	)		(22,103	)
Net development	$	50,541		$	47,009		$	179,884		$	134,451

(1) Represents portion of reserve development that was offset by an increase (decrease) in earned premiums.

          For the nine months ended September 30, 2010, estimates for claims occurring in prior years decreased by $199 million, before premium offsets, and by $180 million, net of premium offsets. The favorable reserve development in 2010 was primarily attributable to accident years 2006 through 2009. The changes in prior year loss reserve estimates are generally the result of ongoing analysis of recent loss development trends. Original estimates are increased or decreased as additional information becomes known regarding individual claims and aggregate claim trends.

          Specialty — The majority of the favorable reserve development for the specialty segment during 2010 and 2009 was associated with excess and surplus (“E&S”) business. E&S insurers are free from rate and form regulation and generally charge higher rates for business than those that are charged in the “standard” market. Beginning in 2003, the E&S business began to experience improved claim frequency (i.e., a lower number of reported claims per unit of exposure). One reason for the lower number of claims was the Company’s introduction of more restrictive policy language which included additional exclusions that eliminated claims that would have previously been covered, particularly for the Company’s building contractor business. In addition, as standard carriers tightened their underwriting criteria, the Company benefited from an influx of accounts from the standard market to the E&S market during these years. The more restrictive policy language and the influx of standard market business resulted in an improved risk profile within the E&S business and a reduction in loss costs that was not expected at the time loss reserves were initially established. We began to recognize those trends in 2007 and have continued to reduce our estimates of ultimate claim costs since then as the magnitude of the frequency trends has become more evident. The favorable reserve development in 2010 was primarily attributable to accident years 2006 through 2009. The favorable reserve development in 2009 was primarily attributable to accident years 2004 through 2007.

          Regional — The favorable reserve development for the regional segment during 2010 was primarily related to commercial multi-peril, commercial automobile and workers’ compensation business. The favorable reserve development resulted mainly from lower loss emergence on known case reserves relative to historical levels. The favorable reserve development also reflects lower than anticipated claim frequency on commercial automobile business, which the Company believes is due, in part, to a reduction in miles driven by insured vehicles as a result of the economic downturn. The favorable reserve development in 2010 was primarily attributable to accident years 2005 through 2009.

          Reinsurance — Estimates for claims occurring in prior years decreased by $20 million, net of premium offsets, for the nine months ended September 30, 2010. The majority of the favorable development for the reinsurance segment during 2010 was related to the Company’s participation in a Lloyd’s of London syndicate. The favorable development resulted from a re-evaluation of the syndicate’s loss reserves for underwriting years 2008 through 2009 in connection with its annual year-end review of loss reserves that was completed in the first quarter of 2010.

24

          Loss Reserve Discount — The Company discounts its liabilities for excess and assumed workers’ compensation business because of the long period of time over which losses are paid. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from the Company’s loss payout experience. For non-proportional business, reserves for losses and loss expenses have been discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. For proportional business, reserves for losses and loss expenses have been discounted at the statutory rate permitted by the Department of Insurance of the State of Delaware of 2.7%. As of September 30, 2010, the aggregate blended discount rates ranged from 2.7% to 6.5%, with a weighted average discount rate of 4.4%. The aggregate net discount, after reflecting the effects of ceded reinsurance, was $898 million and $877 million as of September 30, 2010 and December 31, 2009, respectively.

          Assumed Reinsurance Premiums.The Company estimates the amount of assumed reinsurance premiums that it will receive under treaty reinsurance agreements at the inception of the contracts. These premium estimates are revised as the actual amount of assumed premiums is reported to the Company by the ceding companies. As estimates of assumed premiums are made or revised, the related amount of earned premium, commissions and incurred losses associated with those premiums are recorded. Estimated assumed premiums receivable were approximately $67 million and $58 million at September 30, 2010 and December 31, 2009, respectively. The assumed premium estimates are based upon terms set forth in the reinsurance agreement, information received from ceding companies during the underwriting and negotiation of the agreement, reports received from ceding companies and discussions and correspondence with reinsurance intermediaries. The Company also considers its own view of market conditions, economic trends and experience with similar lines of business. These premium estimates represent management’s best estimate of the ultimate amount of premiums to be received under its assumed reinsurance agreements.

          Other-Than-Temporary Impairments (OTTI) of Investments. The cost of securities is adjusted where appropriate to include a provision for decline in value which is considered to be other-than-temporary. An other-than-temporary decline is considered to occur in investments where there has been a sustained reduction in market value and where the Company does not expect to recover the cost basis of the investment prior to the time of sale or maturity. Since equity securities do not have a contractual cash flow or maturity, the Company considers whether the fair value of an equity security is expected to recover within a reasonable period of time.

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

          Fixed Maturity Securities — For securities that we intend to sell or, more likely than not, would be required to sell, a decline in value below amortized cost is considered to be OTTI. The amount of OTTI is equal to the difference between amortized cost and fair value at the balance sheet date. For securities that we do not intend to sell or expect to be required to sell, a decline in value below amortized cost is considered to be an OTTI if we do not expect to recover the entire amortized cost basis of a security (i.e., the present value of cash flows expected to be collected is less than the amortized cost basis of the security).

          The portion of the decline in value considered to be a credit loss (i.e., the difference between the present value of cash flows expected to be collected and the amortized cost basis of the security) is recognized in earnings. The portion of the decline in value not considered to be a credit loss (i.e., the difference in the present value of cash flows expected to be collected and the fair value of the security) is recognized in other comprehensive income.

          Impairment assessments for structured securities, including mortgage-backed securities and asset-backed securities, collateralized debt obligations and corporate debt, are generally evaluated based on the performance of the underlying collateral under various economic and default scenarios that may involve subjective judgments and estimates by management. Modeling these securities involves various factors, such as projected default rates, the nature and realizable value of the collateral, if any, the ability of the issuer to make scheduled payments, historical performance and other relevant economic and performance factors. If an OTTI determination is made, a discounted cash flow analysis is used to ascertain the amount of the credit impairment.

25

          The following table provides a summary of all fixed maturity securities in an unrealized loss position as of September 30, 2010:

	Number of		Aggregate		Unrealized
(Dollars in thousands)	Securities		Fair Value		Loss
Unrealized loss less than 20% of amortized cost		117	$	949,691	$	44,416
Unrealized loss of 20% or greater:
Twelve months and longer		9		38,592		15,478
Total		126	$	988,283	$	59,894

                    A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at September 30, 2010 is presented in the table below:

					Gross
	Number of		Aggregate		Unrealized
(Dollars in thousands)	Securities		Fair Value		Loss
Unrealized loss less than $5 million:
Mortgage-backed securities		9	$	73,859	$	7,053
Corporate		9		59,432		4,430
State and municipal		5		34,576		5,417
Unrealized loss $5 million or more
Mortgage-backed security (1)		1		30,155		6,845
Total		24	$	198,022	$	23,745

(1) This investment is secured by 99 properties comprising approximately 30 million square feet of office space located primarily in Boston, Northern California and Los Angeles. The current debt maturity of February 2011 can be extended at the borrower’s option through February 2012 provided that there is no continuing default. The Company believes the amount of outstanding debt for the Company’s debt layer and all debt layers senior to the Company’s debt layer to be below the current fair values for the underlying properties. Based on the portfolio’s stable performance (e.g., occupancy rates, lease terms and debt service coverage) and on there being substantial subordinate capital, the Company does not consider the investment to be OTTI.

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

          Preferred Stocks — At September 30, 2010, there were seven preferred stocks in an unrealized loss position, with an aggregate fair value of $95 million and a gross unrealized loss of $13 million. This includes investments in Fannie Mae and Freddie Mac securities that were written-down to fair value, which was approximately 4% of original cost, in 2008. Since that time, the trading volume for these stocks has been low and the stock price has been volatile. These two securities had a fair value of $2 million and an unrealized loss of $4 million at September 30, 2010. The Company does not consider any of the preferred stocks to be OTTI.

          Common Stocks—At September 30, 2010, the Company owned one common stock in an unrealized loss position with an aggregate fair value of $14 million and an aggregate unrealized loss of $1 million. The Company does not consider these securities to be OTTI.

          Loans Receivable—The Company monitors the performance of its loans receivable, including current market conditions for each loan and the ability to collect principal and interest. For loans where the Company determines it is probable that the contractual terms will not be met, a valuation reserve is established with a charge to net realized capital losses. Loans receivable are reported net of a valuation reserve of $16.4 million and $13.8 million at September 30, 2010 and December 31, 2009, respectively.

26

          Fair Value Measurements. The Company’s fixed maturity and equity securities available for sale and its trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available. The fair value of the vast majority of the Company’s portfolio is based on observable data (other than quoted prices) and, accordingly, is classified as Level 2.

          In classifying particular financial securities in the fair value hierarchy, the Company uses its judgment to determine whether the market for a security is active and whether significant pricing inputs are observable. The Company determines the existence of an active market by assessing whether transactions occur with sufficient frequency and volume to provide reliable pricing information. The Company determines whether inputs are observable based on the use of such information by pricing services and external investment managers, the uninterrupted availability of such inputs, the need to make significant adjustments to such inputs and the volatility of such inputs over time. If the market for a security is determined to be inactive or if significant inputs used to price a security are determined to be unobservable, the security is categorized in Level 3 of the fair value hierarchy.

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

          The following table summarizes pricing methods for fixed maturity securities available for sale as of September 30, 2010 (dollars in thousands):

	Carrying		Percent
	Value		of Total
Pricing source:
Independent pricing services	$	10,485,361		93.0	%
Syndicate manager		99,080		0.9	%
Directly by the Company based on:
Observable data		594,991		5.3	%
Par value		1,250		0.0	%
Cash flow model		90,055		0.8	%
Total	$	11,270,737		100.0	%

          Independent pricing services — The vast majority of the Company’s fixed maturity securities available for sale were priced by independent pricing services (generally one U.S. pricing service plus additional pricing services with respect to a limited number of foreign securities held by the Company). The prices provided by the independent pricing services are generally based on observable market data in active markets (e.g., broker quotes and prices observed for comparable securities). The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company conducts interviews with the pricing services to gain an understanding of how different types of securities are priced. The Company reviews the prices provided by pricing services for reasonableness based upon current trading levels for similar securities. If the prices appear unusual to the Company, they are re-examined and the value is either confirmed or revised. In addition, the Company periodically performs independent price tests of a sample of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of September 30, 2010, the Company did not make any adjustments to the prices provided by the pricing services. Based upon the Company’s review of the methodologies used by the independent pricing services, these securities were classified as Level 2.

27

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

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

          Par value — Bonds that can be put to the issuer at par in the near-term are priced at par provided there are no significant concerns with the issuer’s ability to repay. These securities were classified as Level 2.

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

28

Results of Operations for the Nine Months Ended September 30, 2010 and 2009

Business Segment Results

          Following is a summary of gross and net premiums written, premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and GAAP combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the nine months ended September 30, 2010 and 2009. The GAAP combined ratio represents a measure of underwriting profitability, excluding investment income. A GAAP combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.

	For the Nine Months
	Ended September 30,
(Dollars in thousands)	2010			2009
Specialty
Gross premiums written	$	1,131,216		$	1,112,155
Net premiums written		975,188			961,752
Premiums earned		955,705			1,030,625
Loss ratio		59.0	%		62.2	%
Expense ratio		32.7	%		30.6	%
GAAP combined ratio		91.7	%		92.8	%
Regional
Gross premiums written	$	889,362		$	951,676
Net premiums written		802,691			836,862
Premiums earned		798,387			843,888
Loss ratio		60.7	%		63.4	%
Expense ratio		35.5	%		33.5	%
GAAP combined ratio		96.2	%		96.9	%
Alternative Markets
Gross premiums written	$	572,518		$	554,327
Net premiums written		479,565			494,415
Premiums earned		458,842			452,908
Loss ratio		65.9	%		64.1	%
Expense ratio		25.8	%		25.4	%
GAAP combined ratio		91.7	%		89.5	%
Reinsurance
Gross premiums written	$	323,800		$	355,852
Net premiums written		304,832			330,851
Premiums earned		308,316			306,925
Loss ratio		53.5	%		59.1	%
Expense ratio		41.4	%		39.3	%
GAAP combined ratio		94.9	%		98.4	%
International
Gross premiums written	$	444,088		$	325,549
Net premiums written		369,734			277,833
Premiums earned		324,736			239,174
Loss ratio		62.8	%		61.1	%
Expense ratio		40.9	%		39.1	%
GAAP combined ratio		103.7	%		100.2	%
Consolidated
Gross premiums written	$	3,360,984		$	3,299,559
Net premiums written		2,932,010			2,901,713
Premiums earned		2,845,986			2,873,520
Loss ratio		60.4	%		62.4	%
Expense ratio		34.3	%		32.3	%
GAAP combined ratio		94.7	%		94.7	%

29

          Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the nine months ended September 30, 2010 and 2009 (amounts in thousands, except per share data):

	2010		2009
Net income to common stockholders	$	322,436	$	174,763
Weighted average diluted shares		157,054		166,765
Net income per diluted share	$	2.05	$	1.05

          The Company reported net income of $322 million in 2010 compared to $175 million in 2009. The increase in net income is primarily due to improved investment results. Losses from investment funds (which are recorded on a one quarter lag) were $13 million in 2010 compared with $179 million in 2009. Other-than-temporary investment impairments were $4 million in 2010 compared with $139 million in 2009. The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2010 and 2009.

          Premiums Written. Gross premiums written were $3,361 million in 2010, an increase of 2% from 2009. Gross premiums for recently started operating units (companies that began operations since 2006) were up 46% to $592 million in 2010 from $404 million in 2009. Approximately 77.2% of policies expiring in the first nine months of 2010 were renewed, compared with 77.4% of policies expiring in the first nine months of 2009 that were renewed. The average price of policies renewed in the first nine months of 2010 declined 0.3% from the same period in 2009.

          Increased competition in the industry in recent years and the impact of the economic downturn have put pressure on pricing and terms and conditions. As property casualty insurance became more competitive, insurance rates decreased across most business lines beginning in 2005. Although this trend began to moderate in 2009 and pricing has stabilized in most areas, current market price levels for certain lines of business remain below the prices required for the Company to achieve its return objectives. In particular, commercial automobile and products liability in the specialty segment experienced significant declines in gross written premiums in the nine months ended September 30, 2010. A summary of gross premiums written in 2010 compared with 2009 by line of business within each business segment follows:

• Specialty gross premiums increased by 2% to $1,131 million in 2010 from $1,112 million in 2009. Gross premiums written decreased 28% for commercial automobile and 20% for products liability and increased 12% for property lines, 7% for professional liability and 1% for premises operations.

• Regional gross premiums decreased by 7% to $889 million in 2010 from $952 million in 2009. Gross premiums written decreased 7% for workers’ compensation, 6% for commercial automobile and 4% for commercial multiple perils. Gross premiums include assigned risk premiums, which are fully reinsured, of $27 million in 2010, down from $54 million in 2009 due to the transfer of certain assigned risk premiums from the regional segment to the alternative markets segment in 2010.

• Alternative markets gross premiums increased by 3% to $573 million in 2010 from $554 million in 2009. Gross premiums written decreased 17% for excess workers’ compensation and 1% for primary workers’ compensation. Gross premiums include assigned risk premiums, which are fully reinsured, of $51 million in 2010, up from $15 million in 2009, reflecting the above transfer from the regional segment in 2010.

• Reinsurance gross premiums decreased by 9% to $324 million in 2010 from $356 million in 2009. Gross premiums written decreased 10% to $235 million for casualty business and 5% to $89 million for property business.

• International gross premiums increased by 36% to $444 million in 2010 from $326 million in 2009. The increase is primarily due to an increase in business written by our new operating units in Canada, Norway and Brazil and our new Lloyd’s syndicate. These increases were partially offset by a decline in premiums written in Korea.

          Ceded reinsurance premiums as a percentage of gross written premiums increased to 13% in 2010 from 12% in 2009. The increase was primarily due to ceded premiums for recently started operating units, which have a higher ceded premium percentage than mature operating units. Net premiums written were $2,932 million in 2010, an increase of 1% from 2009.

30

          Net Premiums Earned. Premiums earned decreased 1% to $2,846 million in 2010 from $2,874 million in 2009. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in 2010 are related to business written during both 2010 and 2009. The 1% decrease in 2010 earned premiums reflects the underlying decline in net premiums written in 2009.

          Net Investment Income. Following is a summary of net investment income for the nine months ended September 30, 2010 and 2009:

							Average Annualized
	Amount						Yield
(Dollars in thousands)	2010			2009			2010			2009
Fixed maturity securities, including cash	$	373,375		$	368,343			4.1	%		4.2	%
Arbitrage trading account and funds		26,005			29,841			7.3	%		11.3	%
Equity securities available for sale		8,716			15,724			3.7	%		6.2	%
Gross investment income		408,096			413,908			4.2	%		4.5	%
Investment expenses		(2,875	)		(2,528	)
Total	$	405,221		$	411,380			4.2	%		4.4	%

          Net investment income decreased 2% to $405 million in 2010 from $411 million in 2009. The decrease in investment income is due to a decline in the average yield, partially offset by an increase in average invested assets. Average invested assets, at cost (including cash and cash equivalents) were $12.9 billion in 2010 and $12.4 billion in 2009.

          Losses from Investment Funds. Following is a summary of losses from investment funds (which are recorded on a one-quarter lag) for the nine months ended September 30, 2010 and 2009:

(Dollars in thousands)	2010			2009
Real estate funds	$	(7,259	)	$	(153,525	)
Energy funds		(344	)		(21,760	)
Other funds		(5,183	)		(3,267	)
Total	$	(12,786	)	$	(178,552	)

          Losses from investment funds were $13 million in 2010 compared to $179 million in 2009, primarily as a result of lower losses from real estate funds. The real estate funds, which had an aggregate carrying value of $196 million at September 30, 2010, invest in commercial loans and securities as well as direct property ownership. In 2009, asset values were impacted by general deterioration of real estate fundamentals coupled with the absence of a refinancing market and an increase in non-performing assets. Although these market conditions have moderated, a large number of real estate projects remain over-leveraged and face near-term refinancing pressure.

          Insurance Service Fees. Insurance service fees consists of fee-based services to help clients develop and administer self-insurance programs, primarily for workers’ compensation coverage as well as brokerage services. Service fees decreased to $64 million in 2010 from $74 million in 2009 due to a decline in fees received for administering assigned risk plans as a result of a decrease in workers’ compensation premiums written by those plans.

          Net Realized Gains on Investment Sales. The Company buys and sells securities on a regular basis in order to maximize its total return on investments. Decisions to sell securities are based on management’s view of the underlying fundamentals of specific securities as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net realized gains on investment sales were $26 million in 2010 compared with $72 million in 2009.

          Other-Than-Temporary Impairments. Other-than-temporary impairments were $4 million in 2010 compared with $139 million in 2009. The impairment charge in 2009 was primarily related to debt and preferred stock of major financial institutions that experienced adverse credit events and ratings downgrades during the period, including write-downs of debt issued by Thornburg Mortgage, Inc. and preferred stock issued by Citibank and Bank of America.

          Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were $166 million in 2010 compared with $132 million in 2009. These revenues were derived from aviation-related businesses that were separately purchased in 2007, 2008 and 2009. These companies provide services to the general aviation market, including fuel and line

31

service, aircraft sales and maintenance, avionics and engineering services and parts fabrication. The 2010 and 2009 revenues are not comparable since the Company acquired one of its aviation companies in June 2009.

          Losses and Loss Expenses. Losses and loss expenses decreased to $1,718 million in 2010 from $1,794 million in 2009 due to an increase in favorable reserve development. The consolidated loss ratio was 60.4% in 2010 compared with 62.4% in 2009. Weather-related losses were $75 million in 2010 (including $8 million from the earthquake in Chile) compared with $59 million in 2009. Favorable prior year reserve development, net of related premium adjustments, was $180 million in 2010 and $134 million in 2009. A summary of loss ratios in 2010 compared with 2009 by business segment follows:

• Specialty’s loss ratio decreased to 59.0% in 2010 from 62.2% in 2009 due to an increase in favorable reserve development. Net favorable prior year reserve development, net of related premium adjustments, was $71 million in 2010 compared with $53 million in 2009.

• Regional’s loss ratio decreased to 60.7% in 2010 from 63.4% in 2009 due to an increase in favorable reserve development, partially offset by storm losses. Weather-related losses were $67 million in 2010 compared with $59 million in 2009. Net favorable prior year reserve development was $69 million in 2010 compared with $28 million in 2009.

• Alternative markets’ loss ratio increased to 65.9% in 2010 from 64.1% in 2009 due to a decrease in favorable reserve development, partially offset by the use of higher discount rates used to discount excess workers’ compensation reserves. Favorable prior year reserve development, net of related premium adjustments, was $17 million in 2010 compared with $33 million in 2009.

• Reinsurance’s loss ratio decreased to 53.5% in 2010 from 59.1% in 2009 due to lower loss ratios for several large property treaties and to an increase in favorable reserve development. Favorable prior year reserve development, net of related premium adjustments, was $20 million in 2010 compared with $11 million in 2009.

• International’s loss ratio increased to 62.8% in 2010 from 61.1% in 2009 due primarily to losses from the Chilean earthquake of $4 million and to a decrease in favorable reserve development. Net favorable prior year reserve development was $3 million in 2010 compared with $9 million in 2009.

          Other Operating Costs and Expenses.Following is a summary of other operating costs and expenses for the nine months ended September 30, 2010 and 2009:

(Dollars in thousands)	2010			2009
Underwriting expenses	$	975,542		$	927,544
Service expenses		54,442			62,330
Net foreign currency (gains) losses		(5,627	)		1,328
Other costs and expenses		83,650			84,781
Total	$	1,108,007		$	1,075,983

          Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) increased to 34.3% in 2010 from 32.3% in 2009 primarily due to the decline in earned premiums and expenses related to recently started business operations. Recently started business operations have a relatively higher expense ratio due to their early stage of development, particularly in our international segment.

          Service expenses, which represent the costs associated with the fee-based businesses, decreased 13% to $54 million due to lower employment costs and lower direct cost associated with the lower assigned risk business revenues.

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

          Other costs and expenses, which represent corporate expenses, decreased 1% to $84 million due to a decrease in general and administrative costs, including employment costs.

32

          Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees were $160 million in 2010 compared to $127 million in 2009. These expenses represent costs associated with aviation-related businesses that were separately purchased in 2007, 2008 and 2009. These include cost of goods sold related to aircraft and other sales, labor and equipment costs related to repairs and other services and general and administrative expenses. The 2010 and 2009 expenses are not comparable since the Company acquired one of its aviation companies in June 2009.

          Interest Expense. Interest expense increased 27% to $79 million primarily due to the issuance of $300 million of 7.375% senior notes in September 2009.

          Income Taxes. The effective income tax rate was 25% in 2010 as compared to 11% in 2009. The effective income tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income. The tax exempt investment income was a greater portion of the 2009 pre-tax income and as such had a larger impact on the effective tax rate for 2009.

33

Results of Operations for the Three Months Ended September 30, 2010 and 2009

Business Segment Results

          Following is a summary of gross and net premiums written, premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and GAAP combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the three months ended September 30, 2010 and 2009. The GAAP combined ratio represents a measure of underwriting profitability, excluding investment income. A GAAP combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.

	For the Three Months
	Ended September 30,
(Dollars in thousands)	2010			2009
Specialty
Gross premiums written	$	383,877		$	352,372
Net premiums written		330,985			300,512
Premiums earned		326,239			326,645
Loss ratio		61.6	%		63.8	%
Expense ratio		32.0	%		31.5	%
GAAP combined ratio		93.6	%		95.3	%
Regional
Gross premiums written	$	300,010		$	311,430
Net premiums written		272,116			277,097
Premiums earned		268,089			276,369
Loss ratio		62.6	%		62.6	%
Expense ratio		35.6	%		33.1	%
GAAP combined ratio		98.2	%		95.7	%
Alternative Markets
Gross premiums written	$	184,568		$	191,493
Net premiums written		152,068			169,214
Premiums earned		148,830			149,606
Loss ratio		68.0	%		63.9	%
Expense ratio		26.0	%		26.6	%
GAAP combined ratio		94.0	%		90.5	%
Reinsurance
Gross premiums written	$	102,785		$	131,779
Net premiums written		98,428			122,963
Premiums earned		103,126			107,045
Loss ratio		53.7	%		57.1	%
Expense ratio		39.5	%		39.7	%
GAAP combined ratio		93.2	%		96.8	%
International
Gross premiums written	$	150,155		$	109,666
Net premiums written		133,109			99,543
Premiums earned		121,013			83,475
Loss ratio		60.1	%		57.4	%
Expense ratio		38.3	%		41.0	%
GAAP combined ratio		98.4	%		98.4	%
Consolidated
Gross premiums written	$	1,121,395		$	1,096,740
Net premiums written		986,706			969,329
Premiums earned		967,297			943,140
Loss ratio		61.8	%		62.1	%
Expense ratio		33.6	%		32.9	%
GAAP combined ratio		95.4	%		95.0	%

34

          Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the three months ended September 30, 2010 and 2009 (amounts in thousands, except per share data):

	2010		2009
Net income to common stockholders	$	93,619	$	97,722
Weighted average diluted shares		154,160		166,736
Net income per diluted share	$	0.61	$	0.59

          The Company reported net income of $94 million in 2010 compared to $98 million in 2009. The decrease in net income is due primarily to higher interest expense and lower investment income. The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2010 and 2009.

          Premiums Written. Gross premiums written were $1,121 million in 2010, an increase of 2% from 2009. Gross premiums for recently started operating units (companies that began operations since 2006) were up 41% to $214 million in 2010 from $152 million in 2009. Approximately 76.6% of business expiring in 2010 was renewed, and the average price of policies renewed in 2010 declined 0.1% from the same period in 2009.

          Increased competition in the industry in recent years and the impact of the economic downturn have put pressure on pricing and terms and conditions. As property casualty insurance became more competitive, insurance rates decreased across most business lines beginning in 2005. Although this trend began to moderate in 2009 and pricing has stabilized in most areas, current market price levels for certain lines of business remain below the prices required for the Company to achieve its return objectives. In particular, commercial automobile and products liability in the specialty segment experienced significant declines in gross written premiums in the three months ended September 30, 2010. A summary of gross premiums written in 2010 compared with 2009 by line of business within each business segment follows:

• Specialty gross premiums increased by 9% to $384 million in 2010 from $352 million in 2009. Gross premiums written decreased 12% for commercial automobile and 9% for products liability and increased 16% for professional liability, 15% for property lines and 4% for premises operations.

• Regional gross premiums decreased by 4% to $300 million in 2010 from $311 million in 2009. Gross premiums written decreased 5% for commercial automobile, 3% for workers’ compensation and 2% for commercial multiple perils. Gross premiums include assigned risk premiums, which are fully reinsured, of $8 million in 2010 and $13 million in 2009.

• Alternative markets gross premiums decreased by 4% to $185 million in 2010 from $191 million in 2009. Gross premiums written decreased 27% for excess workers’ compensation and 8% for primary workers’ compensation. Gross premiums include assigned risk premiums, which are fully reinsured, of $15 million in 2010 and $5 million in 2009.

• Reinsurance gross premiums decreased by 22% to $103 million in 2010 from $132 million in 2009. Gross premiums written increased 2% for casualty business and decreased 64% for property business. Most of the decrease in reinsurance premiums was related to our minority participation in a Lloyd’s syndicate.

• International gross premiums increased by 37% to $150 million in 2010 from $110 million in 2009. The increase is primarily due to an increase in business written by our new operating units in Canada, Norway, Brazil and Australia.

          Ceded reinsurance premiums as a percentage of gross written premiums were 12% in 2010 and 2009. Net premiums written were $987 million in 2010, an increase of 2% from 2009.

35

          Net Premiums Earned. Premiums earned increased 3% to $967 million in 2010 from $943 million in 2009. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in 2010 are related to business written during both 2010 and 2009. The increase in 2010 earned premiums reflects the underlying decline in net premiums written in 2009.

          Net Investment Income. Following is a summary of net investment income for the three months ended September 30, 2010 and 2009:

							Average Annualized
	Amount						Yield
(Dollars in thousands)	2010			2009			2010			2009
Fixed maturity securities, including cash	$	122,617		$	125,745			4.0	%		4.2	%
Arbitrage trading account and funds		13,651			12,242			11.2	%		10.1	%
Equity securities available for sale		2,723			3,650			3.4	%		4.6	%
Gross investment income		138,991			141,637			4.3	%		4.5	%
Investment expenses		(804	)		(608	)
Total	$	138,187		$	141,029			4.3	%		4.5	%

          Net investment income decreased 2% to $138 million in 2010 from $141 million in 2009. The decrease in investment income is due primarily to a decline in the yield for the fixed maturity securities. Average invested assets, at cost (including cash and cash equivalents) were $13.0 billion in 2010 and $12.7 billion in 2009.

          Losses from Investment Funds. Following is a summary of losses from investment funds (which are recorded on a one-quarter lag) for the three months ended September 30, 2010 and 2009:

(Dollars in thousands)	2010			2009
Real estate funds	$	(3,353	)	$	(22,652	)
Energy funds		(14,293	)		(3,343	)
Other funds		(1,398	)		338
Total	$	(19,044	)	$	(25,657	)

          Losses from investment funds were $19 million in 2010 compared to $26 million in 2009. Losses from energy funds in 2010 were primarily due to a decline in the estimated fair value of energy related investments following the oil spill in the Gulf and the ensuing offshore drilling moratorium.

          Insurance Service Fees. Insurance service fees consists of fee-based services to help clients develop and administer self-insurance programs, primarily for workers’ compensation coverage as well as brokerage services. Service fees were $22 million in 2010 and 2009.

          Net Realized Gains on Investment Sales. The Company buys and sells securities on a regular basis in order to maximize its total return on investments. Decisions to sell securities are based on management’s view of the underlying fundamentals of specific securities as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net realized gains on investment sales were $6 million in 2010 compared with $10 million in 2009.

          Other-Than-Temporary Impairments. Other-than-temporary impairments were $1 million in 2010 compared with $5 million in 2009. The impairment charge in 2009 was primarily related to a further decline of a common stock that had been previously written down to fair value.

          Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were $62 million in 2010 compared with $51 million in 2009. These revenues were derived from aviation-related businesses that provide services to the general aviation market, including fuel and line service, aircraft sales and maintenance, avionics and engineering services and parts fabrication. The increase in the revenues is due to an increase in aircraft sales during the quarter.

36

          Losses and Loss Expenses. Losses and loss expenses increased to $598 million in 2010 from $586 million in 2009 due to higher earned premiums. The consolidated loss ratio was 61.8% in 2010 compared with 62.1% in 2009. Weather-related losses were $22 million in 2010 compared with $23 million in 2009. Favorable prior year reserve development, net of related premium adjustments, was $51 million in 2010 and $47 million in 2009. A summary of loss ratios in 2010 compared with 2009 by business segment follows:

• Specialty’s loss ratio decreased to 61.6% in 2010 from 63.8% in 2009 due to changes in the mix of business. Favorable prior year development, net of related premium adjustments, was $16 million in 2010 compared with $13 million in 2009.

• Regional’s loss ratio was 62.6% in 2010 and 2009. Weather-related losses were $22 million in 2010 compared with $23 million in 2009. Favorable prior year development was $19 million in 2010 compared with $14 million in 2009.

• Alternative markets’ loss ratio increased to 68.0% in 2010 from 63.9% in 2009 due to increasing loss cost trends. Favorable prior year reserve development, net of related premium adjustments, was $8 million in 2010 compared with $9 million in 2009.

• Reinsurance’s loss ratio decreased to 53.7% in 2010 from 57.1% in 2009. Favorable prior year development, net of related premium adjustments, was $9 million in 2010 compared with $6 million in 2009.

• International’s loss ratio increased to 60.1% in 2010 from 57.4% in 2009. Unfavorable prior year development was $1 million in 2010 compared with favorable development of $5 million in 2009.

          Other Operating Costs and Expenses.Following is a summary of other operating costs and expenses for the three months ended September 30, 2010 and 2009:

(Dollars in thousands)	2010			2009
Underwriting expenses	$	325,340		$	310,618
Service expenses		17,487			19,770
Net foreign currency gains		(1,916	)		(4,631	)
Other costs and expenses		28,306			27,365
Total	$	369,217		$	353,122

          Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) increased to 33.6% in 2010 from 32.9% in 2009. The higher expense ratio in 2010 is the result of an increase in salary and related compensation costs at a greater rate than the increase in earned premiums.

          Service expenses, which represent the costs associated with the fee-based businesses, decreased 12% to $17 million due to lower employment costs.

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

          Other costs and expenses, which represent corporate expenses, increased 3% to $28 million due to an increase in general and administrative costs, including employment costs.

          Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees were $61 million in 2010 compared to $50 million in 2009. These expenses represent costs associated with aviation-related businesses and include cost of goods sold related to aircraft and other sales, labor and equipment costs related to repairs and other services and general and administrative expenses. The 2010 expenses increased due to an increase in aircraft sales and related costs of aircraft sold.

          Interest Expense. Interest expense increased 24% to $27 million primarily due to the issuance of $300 million of 7.375% senior notes in September 2009.

          Income Taxes. The effective income tax rate was an expense of 23% in 2010 as compared to 22% in 2009. The effective income tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income. The tax exempt investment income was a greater portion of the 2009 pre-tax income and as such had a larger impact on the effective tax rate for 2009.

37

Investments

          As part of its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities that, combined with expected cash flow, it believes are adequate to meet its payment obligations. The Company also attempts to maintain an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities, i.e., policy claims and debt obligations. The average duration of its portfolio was 3.5 years at September 30, 2010 and 3.6 years at December 31, 2009. The Company’s investment portfolio and investment-related assets as of September 30, 2010 were as follows (dollars in thousands):

	Cost		Carrying Value
Fixed maturity securities:
U.S. government and government agencies	$	1,365,193	$	1,446,917
State and municipal		5,516,125		5,830,960
Mortgage-backed securities:
Agency		1,023,612		1,081,663
Residential-Prime		270,893		267,492
Residential-Alt A		81,150		80,098
Commercial		43,341		36,664
Total mortgage-backed securities		1,418,996		1,465,917
Corporate:
Industrial		883,951		974,331
Financial		606,501		631,629
Utilities		177,124		193,121
Asset-backed		240,211		231,704
Other		135,242		137,148
Total corporate		2,043,029		2,167,933
Foreign government and foreign government agencies		449,659		475,030
Total fixed maturity securities		10,793,002		11,386,757
Equity securities available for sale:
Preferred stocks:
Financial		110,163		103,902
Real estate		73,287		76,323
Utilities		52,888		53,931
Total preferred stocks		236,338		234,156
Common stocks		125,513		227,635
Total equity securities available for sale		361,851		461,791
Arbitrage trading account		472,209		472,209
Investment in arbitrage funds		60,127		60,127
Investment funds		408,158		409,004
Loans receivable		357,805		357,805
Total investments	$	12,453,152	$	13,147,693

          Fixed Maturity Securities. The Company’s investment policy with respect to fixed maturity securities is generally to purchase instruments with the expectation of holding them to their maturity. However, management of the available for sale portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as a result of changes in financial market conditions and tax considerations. At September 30, 2010 (as compared to December 31, 2009), the fixed maturity securities portfolio mix was as follows: state and municipal securities were 51% (52% in 2009); corporate securities were 18% (15% in 2009); U.S. government securities were 14% (15% in 2009); mortgage-backed securities were 13% (14% in 2009); and foreign government bonds were 4% (4% in 2009).

38

          The Company’s philosophy related to holding or selling fixed maturity securities is based on its objective of maximizing total return. The key factors that management considers in its investment decisions as to whether to hold or sell fixed maturity securities are its view of the underlying fundamentals of specific securities as well as its expectations regarding interest rates, credit spreads and currency values. In a period in which management expects interest rates to rise, the Company may sell longer duration securities in order to mitigate the impact of an interest rate rise on the fair value of the portfolio. Similarly, in a period in which management expects credit spreads to widen, the Company may sell lower quality securities, and in a period in which management expects certain foreign currencies to decline in value, the Company may sell securities denominated in those foreign currencies. The sale of fixed maturity securities in order to achieve the objective of maximizing total return may result in realized gains; however, there is no reason to expect these gains to continue in future periods.

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

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

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

          Investment Funds. At September 30, 2010 and December 31, 2009, the Company’s carrying value in investment funds was $409 million and $419 million, respectively, including investments in real estate funds of $196 million and $193 million, respectively, and investments in energy funds of $89 million and $106 million, respectively.

          Loans Receivable. Loans receivable, which are carried at amortized cost, have an aggregate cost of $358 million and an aggregate fair value of $303 million at September 30, 2010. Amortized cost of these loans is net of a valuation allowance of $16.4 million as of September 30, 2010. The nine largest loans have an aggregate amortized cost of $280 million and an aggregate fair value of $221 million and are secured by commercial real estate. These loans earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) between August 2011 and June 2014. The loans are secured by office buildings (60%), hotels (27%) and senior living facilities (13%) located primarily in New York City, California, Hawaii, Boston and Philadelphia.

Liquidity and Capital Resources

          Cash Flow.Cash flow provided from operating activities was $391 million in 2010 compared to $165 million in 2009. The increase in cash flow from operating activities in 2010 was primarily due to cash transfers to the arbitrage trading accounts of $383 million in 2009. Cash transfers to the arbitrage trading account are included in cash flow from operations under U. S. generally accepted accounting principles.

          The Company’s insurance subsidiaries’ principal sources of cash are premiums, investment income, service fees and proceeds from sales and maturities of portfolio investments. The principal uses of cash are payments for claims, taxes, operating expenses and dividends. The Company expects its insurance subsidiaries to fund the payment of losses with cash received from premiums, investment income and fees. The Company targets an average duration for its investment portfolio that is within one year of the average duration of its liabilities so that portions of its investment portfolio mature throughout the claim cycle and are available for the payment of claims if necessary. In the event operating cash flow and proceeds from maturities and prepayments of fixed maturity securities are not sufficient to fund claim payments and other cash requirements, the remainder of the Company’s cash and investments is available to pay claims and other obligations as they become due. The Company’s investment portfolio is highly liquid, with approximately 86% invested in cash, cash equivalents and marketable fixed maturity securities as of September 30, 2010. If the sale of fixed maturity securities were to become necessary, a realized gain or loss equal to the difference between the cost and sales price of securities sold would be recognized.

          Financing Activity. During the first nine months of 2010, the Company repurchased 12,223,375 shares of its common stock for $319 million. In September 2010, the Company issued $300 million of 5.375% senior notes and repaid $150 million of its 5.125% senior notes upon maturity.

39

          At September 30, 2010, the Company had senior notes, junior subordinated debentures and other debt outstanding with a carrying value of $1,737 million and a face amount of $1,756 million. The maturities of the outstanding debt are $10 million in 2011, $18 million in 2012, $201 million in 2013, $200 million in 2015, $450 million in 2019, $300 million in 2020, $76 million in 2022, $1 million in 2023, $250 million in 2037 and $250 million in 2045.

          At September 30, 2010, equity was $3.8 billion and total capitalization (equity, senior notes and other debt and junior subordinated debentures) was $5.6 billion. The percentage of the Company’s capital attributable to senior notes, junior subordinated debentures and other debt was 31% at September 30, 2010 and December 31, 2009.

Item 3.Quantitative and Qualitative Disclosure About Market Risk

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

          The duration of the investment portfolio was 3.5 years at September 30, 2010 and 3.6 years at December 31, 2009. The overall market risk relating to the Company’s portfolio has remained similar to the risk at December 31, 2009.

Item 4.Controls and Procedures

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

          Changes in Internal Control over Financial Reporting. During the quarter ended September 30, 2010, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1.Legal Proceedings

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

Item 1A.Risk Factors

          There have been no material changes from the risk factors previously disclosed in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2009.

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

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

40

					Total number of shares
					purchased		Maximum number of
	Total number				as part of publicly announced		shares that may yet be
	of shares		Average price		plans		purchased under the
	purchased		paid per share		or programs		plans or programs
July 2010		—		—		—		6,480,511
August 2010		2,691,048		26.41		2,691,048		7,308,952	(1)
September 2010		625,856		26.38		625,856		6,683,096

(1) The Company’s repurchase authorization was increased to 10,000,000 shares by its board of directors on August 3, 2010.

Item 6.Exhibits

Number

(4.1)	Seventh Supplemental Indenture, dated as of September 16, 2010, between W. R. Berkley Corporation and The Bank of New York Mellon, as trustee, including the form of 5.375% Senior Notes due 2020 attached as Exhibit A thereto (incorporated by reference to Exhibit 4.2 of the Company’s current report on Form 8-K filed September 16, 2010).
(31.1)	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a).
(31.2)	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/ 15d-14(a).
(32.1)	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

41

SIGNATURES

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

	W. R. BERKLEY CORPORATION
Date: November 8, 2010	/s/ William R. Berkley
	William R. Berkley
	Chairman of the Board and Chief Executive Officer
Date: November 8, 2010	/s/ Eugene G. Ballard
	Eugene G. Ballard
	Senior Vice President - Chief Financial Officer

42