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, 2009~~March 31, 2010


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 incorporation or organization)		(I.R.S. Employer Identification No.)

475 Steamboat Road, Greenwich, Connecticut		06830

(Address of principal executive offices)		(Zip Code)

(203) 629-3000

(Registrant’s telephone number, including area code)

None

Former name, former address and former fiscal year,

if changed since last report.

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filerþ	Accelerated filero	Non-accelerated filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

Number of shares of common stock, $.20 par value, outstanding as of ~~October~~April 30, ~~2009: 160,748,345~~2010: 152,937,981

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

Part I — FINANCIAL INFORMATION

Item 1. Financial Statements

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


	September 30,			December 31,			March 31,			December 31,
	2009			2008			2010			2009
	(Unaudited)						(Unaudited)
Assets
Investments:
Fixed maturity securities	$	11,189,826		$	9,689,896		$	11,296,965		$	11,299,197
Equity securities available for sale		398,295			383,750			412,305			401,367
Arbitrage trading account		536,721			119,485			472,125			465,783
Investment in arbitrage funds		82,225			73,435			84,084			83,420
Investment funds		368,733			495,533			429,591			418,880
Loans receivable		391,268			381,182			376,993			381,591

Total investments		12,967,068			11,143,281			13,072,063			13,050,238

Cash and cash equivalents		736,392			1,134,835			441,047			515,430
Premiums and fees receivable		1,082,770			1,056,096			1,080,691			1,047,976
Due from reinsurers		970,261			931,115			983,557			972,820
Accrued investment income		125,678			122,461			131,313			130,524
Prepaid reinsurance premiums		218,584			181,462			219,476			211,054
Deferred policy acquisition costs		409,749			394,807			402,680			391,360
Real estate, furniture and equipment		244,503			260,522			245,282			246,605
Deferred federal and foreign income taxes		156,249			329,417			128,659			190,450
Goodwill		109,318			107,564			109,399			107,131
Trading account receivable from brokers and clearing organizations		201,639			128,883			244,905			310,042
Due from broker		—			138,411			6,542			—
Current federal and foreign income taxes		21,302			76,491			4,799			—
Other assets		149,001			115,813			161,510			154,966

Total assets	$	17,392,514		$	16,121,158		$	17,231,923		$	17,328,596


Liabilities and Equity
Liabilities:
Reserves for losses and loss expenses	$	9,115,137		$	8,999,596		$	9,072,061		$	9,071,671
Unearned premiums		2,040,239			1,966,150			1,989,553			1,928,428
Due to reinsurers		163,531			114,974			204,576			208,045
Trading account securities sold but not yet purchased		115,389			23,050			82,826			143,885
Other liabilities		759,636			694,255			642,997			779,347
Junior subordinated debentures		249,742			249,584			242,631			249,793
Senior notes and other debt		1,340,295			1,021,869			1,345,463			1,345,481

Total liabilities		13,783,969			13,069,478			13,580,107			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, 160,734,463 and 161,467,131 shares		47,024			47,024
Authorized 500,000,000 shares, issued and outstanding, net of treasury shares, 153,188,227 and 156,552,355 shares								47,024			47,024
Additional paid-in capital		925,746			920,241			924,445			926,359
Retained earnings		3,660,451			3,514,531			3,894,608			3,785,187
Accumulated other comprehensive income (loss)		191,060			(228,959	)
Treasury stock, at cost, 74,383,455 and 73,650,787 shares		(1,221,236	)		(1,206,518	)
Accumulated other comprehensive income								191,550			163,207
Treasury stock, at cost, 81,929,691 and 78,565,563 shares								(1,411,643	)		(1,325,710	)

Total common stockholders’ equity		3,603,045			3,046,319			3,645,984			3,596,067
Noncontrolling interests		5,500			5,361			5,832			5,879

Total equity		3,608,545			3,051,680			3,651,816			3,601,946

Total liabilities and equity	$	17,392,514		$	16,121,158		$	17,231,923		$	17,328,596

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


	For the Three Months
	Ended March 31,
	2010			2009
Revenues:
Net premiums written	$	983,950		$	1,023,472
Change in net unearned premiums		(53,389	)		(44,264	)

Net premiums earned		930,561			979,208
Net investment income		138,843			138,216
Income (losses) from investment funds		4,718			(115,074	)
Insurance service fees		21,485			26,583
Net investment gains (losses):
Net realized gains on investment sales		8,494			13,392
Other-than-temporary impairments		(2,582	)		(110,200	)

Net investment gains (losses)		5,912			(96,808	)

Revenues from wholly-owned investees		51,576			30,903
Other income		452			593

Total revenues		1,153,547			963,621


Operating Costs and Expenses:
Losses and loss expenses		549,973			610,445
Other operating costs and expenses		367,967			357,347
Expenses from wholly-owned investees		48,974			29,954
Interest expense		26,041			20,224

Total operating costs and expenses		992,955			1,017,970


Income (loss) before income taxes		160,592			(54,349	)
Income tax (expense) benefit		(41,811	)		34,065

Net income (loss) before noncontrolling interests		118,781			(20,284	)
Noncontrolling interests		(171	)		(62	)

Net income (loss) to common stockholders	$	118,610		$	(20,346	)


Net Income (loss) per share:
Basic	$	0.77		$	(0.13	)

Diluted	$	0.74		$	(0.13	)

See accompanying notes to interim consolidated financial statements.

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

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2009 2008 2009 2008
Revenues:
Net premiums written $ 969,329 $ 996,333 $ 2,901,713 $ 3,145,447
Change in unearned premiums (26,189 ) 58,908 (28,193 ) 108,814

Net premiums earned 943,140 1,055,241 2,873,520 3,254,261
Net investment income 141,029 122,345 411,380 423,449
Income (losses) from investment funds (25,657 ) 31,057 (178,552 ) 28,389
Insurance service fees 22,039 25,628 73,879 77,501
Net investment gains (losses):
Net realized gains on sales of investments 9,594 8,080 72,210 80,946
Other-than-temporary investment impairments (5,316 ) (228,110 ) (139,448 ) (329,113 )
Portion of impairments reclassified to (from) other comprehensive income (195 ) — 8,409 —

Net investment gains (losses) 4,083 (220,030 ) (58,829 ) (248,167 )

Revenues from wholly-owned investees 51,201 40,496 132,046 92,515
Other income 474 893 1,584 2,025

Total revenues 1,136,309 1,055,630 3,255,028 3,629,973

Expenses:
Losses and loss expenses 585,964 694,254 1,793,676 2,056,998
Other operating costs and expenses 353,122 358,580 1,075,983 1,115,002
Expenses from wholly-owned investees 49,849 39,337 126,594 90,615
Interest expense 21,599 20,251 62,036 64,391

Total expenses 1,010,534 1,112,422 3,058,289 3,327,006

Income (loss) before income taxes 125,775 (56,792 ) 196,739 302,967
Income tax (expense) benefit (27,987 ) 28,964 (21,803 ) (61,915 )

Net income (loss) before noncontrolling interests 97,788 (27,828 ) 174,936 241,052
Noncontrolling interests (66 ) (52 ) (173 ) (237 )

Net income (loss) to common shareholders $ 97,722 $ (27,880 ) $ 174,763 $ 240,815

Earnings (loss) per share:
Basic $ 0.61 $ (0.17 ) $ 1.09 $ 1.43

Diluted $ 0.59 $ (0.17 ) $ 1.05 $ 1.37


	For the Three Months
	Ended March 31,
	2010			2009
Common stock:
Beginning and end of period	$	47,024		$	47,024
Stock issued		—			—

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		(7,283	)		(1,446	)
Restricted stock units expensed		5,369			6,117
Stock options expensed		0			3

End of period	$	924,445		$	924,915


Retained earnings:
Beginning of period	$	3,785,187		$	3,514,531
Net income (loss) to common stockholders		118,610			(20,346	)
Dividends		(9,189	)		(9,598	)

End of period		3,894,608			3,484,587


Accumulated other comprehensive income (loss):
Unrealized investment gains (losses):
Beginning of period	$	219,394		$	(142,216	)
Unrealized gains on securities not other-than-temporarily impaired		39,601			90,192
Unrealized gains on other-than-temporarily impaired securities		462			0

End of period		259,457			(52,024	)


Currency translation adjustments:
Beginning of period		(40,371	)		(72,475	)
Net change in period		(12,279	)		(7,872	)

End of period		(52,650	)		(80,347	)


Net pension asset:
Beginning of period		(15,816	)		(14,268	)
Net change in period		559			491

End of period		(15,257	)		(13,777	)


Total accumulated other comprehensive income (loss)	$	191,550		$	(146,148	)


Treasury stock:
Beginning of period	$	(1,325,710	)	$	(1,206,518	)
Stock exercised/vested		9,806			2,587
Stock repurchased		(95,739	)		(31,842	)

End of period	$	(1,411,643	)	$	(1,235,773	)


Noncontrolling interests:
Beginning of period	$	5,879		$	5,361
Distributions	$	(224	)	$	(90	)
Net income		171			62
Other comprehensive income, net of tax		6			19

End of period	$	5,832		$	5,352

See accompanying notes to interim consolidated financial statements.

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

For the Nine Months
Ended September 30,
2009 2008
Common stock:
Beginning and end of period $ 47,024 $ 47,024

Additional paid-in capital:
Beginning of period $ 920,241 $ 907,016
Stock options exercised and restricted units issued, including tax benefits (12,706 ) (9,093 )
Restricted stock units expensed 18,080 17,381
Stock options expensed 9 160
Stock issued 122 292

End of period $ 925,746 $ 915,756

Retained earnings:
Beginning of period $ 3,514,531 $ 3,248,762
Net income 174,763 240,815
Dividends (28,843 ) (28,283 )

End of period $ 3,660,451 $ 3,461,294

Accumulated other comprehensive income (loss), net of tax:
Unrealized investment gains (losses):
Beginning of period $ (142,216 ) $ 52,497
Unrealized gain (losses) on securities not other-than-temporarily impaired 399,510 (206,973 )
Unrealized losses on other-than-temporarily impaired securities (8,221 ) —

End of period 249,073 (154,476 )

Currency translation adjustments:
Beginning of period (72,475 ) 18,060
Net change in period 27,255 (28,477 )

End of period (45,220 ) (10,417 )

Net pension asset:
Beginning of period (14,268 ) (17,356 )
Net change in period 1,475 1,483

End of period (12,793 ) (15,873 )

Total accumulated other comprehensive income (loss) $ 191,060 $ (180,766 )

Treasury stock:
Beginning of period $ (1,206,518 ) $ (686,228 )
Stock repurchased (31,842 ) (534,584 )
Stock options exercised and restricted units issued 16,494 26,146
Stock issued 630 799

End of period $ (1,221,236 ) $ (1,193,867 )

Noncontrolling interests:
Beginning of period $ 5,361 $ 35,496
Purchase of subsidiary shares from noncontrolling interest — (30,444 )
Net income 173 237
Other comprehensive loss, net of tax (34 ) (41 )

End of period $ 5,500 $ 5,248


	For the Three Months
	Ended March 31,
	2010			2009
Net income (loss) before noncontrolling interests	$	118,781		$	(20,284	)
Other comprehensive income (loss):

Change in unrealized foreign exchange gains (losses)		(12,279	)		(7,872	)

Unrealized holding gains on investment securities arising during the period, net of taxes		43,912			27,367
Reclassification adjustment for net investment gains (losses) included in net income (loss), net of taxes		(3,843	)		62,844
Change in unrecognized pension obligation, net of taxes		559			491

Other comprehensive income		28,349			82,830


Comprehensive income		147,130			62,546

Comprehensive income to the noncontrolling interests		(177	)		(81	)

Comprehensive income to common stockholders	$	146,953		$	62,465

See accompanying notes to interim consolidated financial statements.

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


	For the Nine Months						For the Three Months
	Ended September 30,						Ended March 31,
	2009			2008			2010			2009
Net income	$	174,763		$	240,815
Adjustments to reconcile net income to net cash flows from operating activities:
Realized investment losses		58,829			248,167
Cash from operating activities:
Net income (loss) to common stockholders							$	118,610		$	(20,346	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Net investment (gains) losses								(5,912	)		96,808
Depreciation and amortization		56,167			60,359			20,528			23,259
Noncontrolling interests		173			237			171			62
Equity in undistributed income (losses) of investment funds		179,761			(26,327	)
Undistributed income and losses from investment funds								3,185			115,283
Stock incentive plans		18,709			18,190			5,379			6,144
Change in:
Arbitrage trading account		(417,236	)		38,399
Securities trading account								(6,342	)		(96,685	)
Investment in arbitrage funds		(8,790	)		(1,478	)		(664	)		(6,605	)
Trading account receivable from brokers and clearing organizations		(72,756	)		14,535			65,137			3,906
Trading account securities sold but not yet purchased		92,339			(10,119	)		(61,059	)		21,028
Premiums and fees receivable		(17,380	)		35,832			(35,977	)		(74,900	)
Due from reinsurers		(36,996	)		(42,939	)		41,380			(27,765	)
Accrued investment income		(2,730	)		20,239			(974	)		7,845
Prepaid reinsurance premiums		(33,097	)		(10,495	)		20,414			(10,184	)
Deferred policy acquisition costs		(12,882	)		18,157			(13,112	)		(1,747	)
Deferred income taxes		(35,973	)		(40,794	)		39,902			(66,755	)
Other assets		7,472			8,328			(8,298	)		(834	)
Reserves for losses and loss expenses		88,199			428,373			(33,601	)		49,985
Unearned premiums		57,168			(97,987	)		36,950			52,321
Due to reinsurers		39,331			5,556			(242	)		1,313
Other liabilities		30,226			(120,892	)		(128,316	)		(50,573	)

Net cash from operating activities		165,297			786,156			57,159			21,560


Cash used in investing activities:
Cash flows used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities		1,907,866			765,460			420,272			570,940
Equity securities		123,693			132,731			3,109			15,505
Distributions from partnerships and affiliates		4,239			191,082
Distributions from investment funds								8,368			1,686
Proceeds from maturities and prepayments of fixed maturity securities		932,945			1,005,827			312,811			323,879
Cost of purchases, excluding trading account:
Fixed maturity securities and loans receivable		(3,889,392	)		(1,712,391	)
Fixed maturity securities								(704,775	)		(1,228,381	)
Equity securities		(21,158	)		(185,561	)		(10,381	)		(17,506	)
Investments in partnerships and affiliates		(50,372	)		(119,460	)
Contributions to investment funds								(18,890	)		(16,030	)
Change in loans receivable		(11,994	)		(46,279	)		2,380			(3,968	)
Change in balances due to/from security brokers		201,119			(25,006	)
Net additions to real estate, furniture and equipment		(17,107	)		(29,098	)		(10,864	)		(4,236	)
Payment for business purchased, net of cash acquired		(33,812	)		(47,622	)
Change in balances due to (from) security brokers								(12,154	)		66,647
Other, net								—			(5	)

Net cash used in investing activities		(853,973	)		(70,317	)		(10,124	)		(291,469	)


Cash from (used in) financing activities:
Purchase of common shares		(31,842	)		(534,584	)
Net proceeds from issuance of debt		321,171			3,000
Repayment of senior notes		(3,590	)		(103,484	)
Cash flows used in financing activities:
Purchase of common treasury shares								(95,739	)		(31,842	)
Cash dividends to common stockholders								(18,747	)		(9,598	)
Bank deposits received		18,497			15,657			10,333			10,922
Advances from Federal Home Loan Bank		1,515			7,450
Repayments to federal home loan bank								(7,500	)		(2,785	)
Net proceeds from stock options exercised		2,640			12,629			2,504			971
Cash dividends to common stockholders		(28,843	)		(37,897	)
Repayment of debt								(7,572	)		(167	)
Other, net		(76	)		77			(28	)		(90	)

Net cash from (used in) financing activities		279,472			(637,152	)
Net cash used in financing activities								(116,749	)		(32,589	)

Net impact on cash due to change in foreign exchange rates								(4,669	)		(6,270	)

Net impact on cash due to foreign exchange rates		10,761			(26,675	)
Net change in cash and cash equivalents		(398,443	)		52,012
Net decrease in cash and cash equivalents								(74,383	)		(308,768	)
Cash and cash equivalents at beginning of year		1,134,835			951,863			515,430			1,134,835

Cash and cash equivalents at end of period	$	736,392		$	1,003,875		$	441,047		$	826,067


Supplemental disclosure of cash flow information:
Interest paid	$	69,827		$	74,300

Federal and foreign income taxes paid (received), net	$	(451	)	$	171,693

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

1.(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~~three months ended ~~September 30, 2009~~March 31, 2010 are not necessarily indicative of the results that may be expected for the year ended December 31, ~~2009.~~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, ~~2008.~~2009. Reclassifications have been made in the ~~2008~~2009 financial statements as originally reported to conform to the presentation of the ~~2009 interim~~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.

~~On June 10, 2009, the Company acquired a company in the aviation business for an aggregate purchase price of $35 million.~~

2.(2)PER SHARE DATA

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

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


	For the Three Months				For the Nine Months				For the Three Months
	Ended September 30,				Ended September 30,				Ended March 31,
	2009		2008		2009		2008		2010		2009
Basic		160,468		162,675		160,520		168,826		153,445		161,090
Diluted (1)		166,736		162,675		166,765		175,369		159,771		161,090

3.(4)RECENT ACCOUNTING PRONOUNCEMENTS

In ~~June~~December 2009, the ~~FASB issued Statement of~~ Financial Accounting Standards ~~No. 168~~~~, FASB Accounting Standards Codification (ASC) and~~Board (“FASB”) issued guidance that: (i) eliminates the ~~Hierarchy~~concept of ~~Generally Accepted Accounting Principles — A Replacement of FASB Statement No. 162.This guidance establishes~~qualifying “special-purpose entity” (“SPE”); (ii) alters the ~~FASB Accounting Standards Codification (the “Codification”) as the source of authoritative GAAP~~requirement for ~~nongovernmental entities. The Codification supersedes all existing non-SEC accounting and reporting standards. Rules and interpretive releases~~transferring assets off of the ~~SEC under authority~~reporting company’s balance sheet; (iii) requires additional disclosure about a transferor’s involvement in transferred assets; and (iv) eliminates special treatment of ~~federal securities laws will remain authoritative GAAP for SEC registrants.~~guaranteed mortgage securitizations. This guidance is effective for ~~financial statements issued for interim and annual~~fiscal periods ~~ending~~beginning after ~~September~~November 15, 2009. ~~As the Codification will not change existing GAAP, the~~The adoption of this guidance did not ~~have an~~ impact on our financial condition or results of operations.

The Company adopted FASB ASC 825-10-50, Financial Instruments (Staff Position (“FSP”) FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”)) on April 1, 2009. This guidance amends existing GAAP to require disclosures about the fair value of financial instruments in interim and annual financial statements. The adoption of this guidance expanded the disclosures relating to fair value of financial instruments in the notes to the Company’s consolidated financial statements.

The Company adopted FASB ASC 320-10, Investments — Debt and Equity Securities (FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2/124-2”)) on April 1, 2009. This guidance requires that an entity evaluate whether it intends to sell an impaired security or whether it is more likely than not that it will be required to sell a security before recovery of the amortized cost basis. If either of these criteria are met, an impairment equal to the difference between the security’s amortized cost and its fair value is recognized in earnings. For fixed income securities that do not meet these criteria, the credit loss component of the impairment (i.e., the difference between the security’s amortized cost and its projected net present value) is recognized in earnings and the remaining portion of the impairment is recognized as a component of other comprehensive income. The effect of adopting this guidance was to increase net income for the nine months ended September 30, 2009 by $5 million, or 3 cents per share.

The Company adopted FASB ASC 820, Fair Value Measurements and Disclosures (FSP FAS 157-4, “Determining Fair Value When Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly” (“FSP FAS 157-4”)) on April 1, 2009. Under this guidance, if an entity determines that there has been a significant decrease in the volume and level of activity for the asset or the liability in relation to the normal market activity for the asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value. In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any weight on that transaction price as an indicator of fair value. The adoption of this guidance did not have an impact on the Company’s results of operations or financial condition.

The Company adopted FASB ASC 810-10, Consolidations — Variable Interest Entities (FASB Statement 160 (“FAS 160”), “Non-controlling Interests in Consolidated Financial Statements”), effective January 1, 2009. This guidance requires that non-controlling (minority) interests in a subsidiary be reported as equity in the consolidated financial statements. The presentation requirements of this guidance were applied retrospectively to the 2008 financial statements. The effect of the adoption of this guidance was to increase total equity as of December ~~31, 2008 by $5 million.~~

~~The Company adopted FASB ASC 855, Subsequent Events (Statement of Financial Accounting Standards No. 165,~~~~Subsequent Events~~(“FAS 165”)) on June 30, 2009. Requirements concerning the accounting and disclosure of subsequent events under this guidance are not significantly different from those contained in previously existing auditing standards and, as a result, our adoption of this guidance did not have a material impact on our financial condition or results of operations. Under this guidance, we analyzed subsequent events through the date on which these financial statements are issued.

~~In June~~ 2009, the FASB issued ~~ASC 810 Consolidations (Statement of Financial Accounting Standards No. 167,~~~~Amendments to FASB Interpretation No~~~~. (46) (“FAS 167”)). This~~ guidance ~~requires~~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~~company’s financial statements. This guidance is effective for fiscal years beginning after November 15, 2009. The ~~Company is currently evaluating the impact that the~~ adoption of this guidance ~~may~~did not have a material impact on ~~the Company’s consolidated~~our financial ~~statements.~~

4.~~COMPREHENSIVE INCOME (LOSS)~~condition or results of operations.

In January 2010, the FASB issued guidance that requires additional disclosures regarding fair value measurements. The ~~following is a~~guidance requires entities to disclose the amounts and reasons for significant transfers between Level 1 and Level 2 of the fair value hierarchy, reasons for any transfers in or out of Level 3 and separate information in the reconciliation of ~~comprehensive income (loss) (dollars in thousands):~~

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2009 2008 2009 2008
Net income (loss) before noncontrolling interests $ 97,788 $ (27,828 ) $ 174,936 $ 241,052
Other comprehensive income (loss):

Change in unrealized foreign exchange gains (losses) (1,800 ) (33,433 ) 27,255 (28,477 )

Unrealized holding gains (losses) on investment securities arising during the period, net of taxes 220,353 (261,610 ) 353,105 (368,342 )
Reclassification adjustment for realized gains (losses) included in net income (loss), net of taxes (2,653 ) 143,020 38,150 161,328
Change in unrecognized pension obligation, net of taxes 492 495 1,475 1,483

Other comprehensive income (loss) 216,392 (151,528 ) 419,985 (234,008 )

Comprehensive income (loss) 314,180 (179,356 ) 594,921 7,044

Comprehensive loss to the noncontrolling interests (73 ) (70 ) (139 ) (196 )

Comprehensive income (loss) to common shareholders $ 314,107 $ (179,426 ) $ 594,782 $ 6,848

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, and the remaining guidance is effective for interim and annual reporting periods beginning after December 15, 2010.

5.(5)INVESTMENTS ~~AND OTHER FINANCIAL INSTRUMENTS~~IN FIXED MATURITY SECURITIES

At ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008,~~2009, investments in fixed maturity securities were as ~~follows (dollars in thousands):~~follows:


	Amortized		Gross Unrealized					Fair		Carrying		Amortized		Gross Unrealized					Fair		Carrying
	Cost		Gains		Losses			Value		Value
September 30, 2009
(Dollars in thousands)												Cost		Gains		Losses			Value		Value
March 31, 2010
Held to maturity:
State and municipal	$	69,884	$	8,959	$	(582	)	$	78,261	$	69,884	$	71,115	$	6,515	$	(378	)	$	77,252	$	71,115
Residential mortgage-backed		45,584		3,068		—			48,652		45,584		42,325		3,336		—			45,661		42,325
Corporate		4,994		40		—			5,034		4,994		4,994		20		—			5,014		4,994

Total held to maturity		120,462		12,067		(582	)		131,947		120,462		118,434		9,871		(378	)		127,927		118,434

Available for sale:
United States government and government agency		1,422,327		52,047		(681	)		1,473,693		1,473,693
U.S. government and government agency													1,636,235		47,017		(3,319	)		1,679,933		1,679,933
State and municipal (1)		5,506,815		284,155		(41,505	)		5,749,465		5,749,465		5,534,618		233,103		(27,220	)		5,740,501		5,740,501
Mortgage-backed securities:
Residential (2)		1,477,168		42,348		(50,843	)		1,468,673		1,468,673		1,400,649		42,268		(26,824	)		1,416,093		1,416,093
Commercial		69,470		—		(15,349	)		54,121		54,121		47,359		0		(8,504	)		38,855		38,855
Corporate		1,946,586		64,456		(40,875	)		1,970,167		1,970,167		1,846,200		70,634		(32,952	)		1,883,882		1,883,882
Foreign		338,474		14,885		(114	)		353,245		353,245		408,202		12,029		(964	)		419,267		419,267

Total available for sale		10,760,840		457,891		(149,367	)		11,069,364		11,069,364		10,873,263		405,051		(99,783	)		11,178,531		11,178,531

Total investment in fixed maturity securities	$	10,881,302	$	469,958	$	(149,949	)	$	11,201,311	$	11,189,826	$	10,991,697	$	414,922	$	(100,161	)	$	11,306,458	$	11,296,965


December 31, 2008
December 31, 2009
Held to maturity:
State and municipal	$	68,876	$	742	$	(3,693	)	$	65,925	$	68,876	$	70,847	$	6,778	$	(739	)	$	76,886	$	70,847
Residential mortgage-backed		50,039		4,390		—			54,429		50,039		44,318		2,984		—			47,302		44,318
Corporate		4,993		301		—			5,294		4,993		4,994		—		(13	)		4,981		4,994

Total held to maturity		123,908		5,433		(3,693	)		125,648		123,908		120,159		9,762		(752	)		129,169		120,159

Available for sale:
United States government and government agency		1,083,677		46,713		(3,706	)		1,126,684		1,126,684
State and municipal		5,591,712		136,804		(136,751	)		5,591,765		5,591,765
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		1,632,954		27,747		(81,142	)		1,579,559		1,579,559
Residential (2)													1,537,331		38,229		(44,343	)		1,531,217		1,531,217
Commercial		74,517		—		(22,656	)		51,861		51,861		47,292		—		(12,069	)		35,223		35,223
Corporate		1,095,414		9,398		(136,332	)		968,480		968,480		1,719,874		59,082		(35,574	)		1,743,382		1,743,382
Foreign		238,877		12,283		(3,521	)		247,639		247,639		394,711		12,323		(826	)		406,208		406,208

Total available for sale		9,717,151		232,945		(384,108	)		9,565,988		9,565,988		10,928,419		388,263		(137,644	)		11,179,038		11,179,038

Total investment in fixed maturity securities	$	9,841,059	$	238,378	$	(387,801	)	$	9,691,636	$	9,689,896	$	11,048,578	$	398,025	$	(138,396	)	$	11,308,207	$	11,299,197

~~Loans~~(8)NET INVESTMENT INCOME

Net investment income consists of the following:


	For the Three Months
	Ended March 31,
(Dollars in thousands)	2010			2009
Investment income earned on:
Fixed maturity securities, including cash	$	125,068		$	122,387
Equity securities available for sale		3,365			6,064
Arbritage trading account (a)		11,223			10,661

Gross investment income		139,656			139,112
Investment expense		(813	)		(896	)

Net investment income	$	138,843		$	138,216


(a)		Investment income earned from trading account activity includes net unrealized trading gains of $2,207,000 and $1,672,000 in the three months ended March 31, 2010 and 2009, respectively.

(9)INVESTMENT FUNDS

Investment funds include the following:


	Carrying Value				Income (Losses)
	as of				from Investment Funds
	March 31,		December 31,		For the three months ended March 31,
(Dollars in thousands)	2010		2009		2010			2009
Real estate	$	196,007	$	193,178	$	(6,346	)	$	(98,508	)
Energy		116,611		106,213		13,717			(14,691	)
Other		116,973		119,489		(2,653	)		(1,875	)

Total	$	429,591	$	418,880	$	4,718		$	(115,074	)

(10)LOANS RECEIVABLE

The amortized cost of loans receivable ~~include~~was $377 million and $382 million at March 31, 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 three months ended March 31, 2010, the Company increased its valuation allowance by $2.6 million. The ten largest loans ~~with~~have an aggregate amortized cost of ~~$307~~$296 million and an aggregate fair value of ~~$201~~$216 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 January 2013. 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. ~~The Company recognized an impairment of $3 million~~

(11)REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)

Realized and ~~a corresponding valuation allowance against these loans~~unrealized investment gains (losses) are as ~~of September 30, 2009.~~follows:

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. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available. The fair value of loans receivable are estimated by using current institutional purchaser yield requirements for loans with similar credit characteristics. The fair value of the senior notes and other debt and the junior subordinated debentures is based on spreads for similar securities.


	For The Three Months
	Ended March 31,
(Dollars in thousands)	2010			2009
Realized investment gains (losses):
Fixed maturity securities:
Gains	$	9,508		$	14,701
Losses		(1,093	)		(1,051	)
Equity securities available for sale		154			(1,119	)
Sale of investment funds		(75	)		861
Provision for other than temporary impairments (1)		(2,582	)		(110,200	)

Total net investment gains (losses)		5,912			(96,808	)
Income taxes		(2,069	)		33,964

	$	3,843		$	(62,844	)


Change in unrealized gains (losses) of available for sales securities:
Fixed maturity securities	$	54,036		$	156,241
Less non-credit portion of OTTI recognized in other comprehensive income		710			—
Equity securities available for sale		3,268			(14,394	)
Investment funds		3,657			(2,171	)
Cash and cash equivalents		(1	)		(34	)

Total change in unrealized gains (losses)		61,670			139,642
Income taxes		(21,601	)		(49,431	)
Noncontrolling interests		(6	)		(19	)

	$	40,063		$	90,192


(1)		Includes change in valuation allowance for loans receivable of $2.6 million for the three months ended March 31, 2010.

6.~~NET INVESTMENT GAINS (LOSSES)AND CHANGE IN UNREALIZED GAINS (LOSSES)~~

~~Net investment gains (losses) and the change in unrealized gains (losses) are as follows (dollars in thousands):~~

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2009 2008 2009 2008
Net investment gains (losses):
Fixed maturity securities:
Gains $ 9,847 $ 11,335 $ 36,468 $ 18,062
Losses (1,173 ) (1,430 ) (2,751 ) (2,951 )
Equity securities available for sale 156 (1,925 ) 36,180 (3,866 )
Investment funds 764 100 2,313 69,701
Other-than-temporary investment impairments (5,316 ) (228,110 ) (139,448 ) (329,113 )
Less investment impairments recognized in other comprehensive income (195 ) — 8,409 —

Net investment gains (losses) 4,083 (220,030 ) (58,829 ) (248,167 )

Income tax (expense) benefit (1,430 ) 69,417 20,679 79,246

Total $ 2,653 $ (150,613 ) $ (38,150 ) $ (168,921 )

Change in unrealized investment gains (losses) of available for sale securities:
Fixed maturity securities $ 229,544 $ (146,250 ) $ 468,096 $ (277,134 )
Less investment impairments recognized in other comprehensive income 195 — (8,409 ) —
Equity securities available for sale 99,090 (36,665 ) 136,502 (26,017 )
Investment funds 5,416 (1,440 ) 9,648 (17,574 )
Cash and cash equivalents — — (76 ) —

Total change in unrealized gains (losses) 334,245 (184,355 ) 605,761 (320,725 )
Income tax (expense) benefit (108,290 ) 65,746 (206,170 ) 113,517
Noncontrolling interests (8,262 ) 1 (8,302 ) 235

Total $ 217,693 $ (118,608 ) $ 391,289 $ (206,973 )

7.(12)SECURITIES IN AN UNREALIZED LOSS POSITION

The following table summarizes all securities in an unrealized loss position at ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008~~2009 by the length of time those securities have been continuously in an unrealized loss ~~position (dollars in thousands):~~position.


	Less Than 12 Months				12 Months or Greater				Total				Less Than 12 Months				12 Months or Greater				Total
			Gross				Gross				Gross				Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized				Unrealized				Unrealized				Unrealized
(Dollars in thousands)													Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
September 30, 2009
March 31, 2010
U.S. government and agency													$	222,661	$	3,211	$	7,185	$	108	$	229,846	$	3,319
State and municipal														467,379		6,070		285,951		21,528		753,330		27,598
Mortgage-backed securities														197,516		4,116		221,096		31,212		418,612		35,328
Corporate														302,731		12,117		139,641		20,835		442,372		32,952
Foreign														122,924		964		—		—		122,924		964

Fixed maturity securities														1,313,211		26,478		653,873		73,683		1,967,084		100,161
Common stocks														—		—		8,791		1,247		8,791		1,247
Preferred stocks														63,110		1,013		145,739		8,715		208,849		9,728
Equity securities														63,110		1,013		154,530		9,962		217,640		10,975

Total													$	1,376,321	$	27,491	$	808,403	$	83,645	$	2,184,724	$	111,136


December 31, 2009
U.S. government and agency	$	81,297	$	470	$	19,188	$	211	$	100,485	$	681	$	389,745	$	3,653	$	7,361	$	131	$	397,106	$	3,784
State and municipal		170,660		12,679		506,897		29,408		677,557		42,087		376,914		12,971		443,666		28,816		820,580		41,787
Mortgage-backed securities		100,398		4,018		352,289		62,174		452,687		66,192		306,840		12,719		260,519		43,693		567,359		56,412
Corporate		184,248		3,158		272,223		37,717		456,471		40,875		194,690		13,958		172,656		21,629		367,346		35,587
Foreign		41,435		114		—		—		41,435		114		81,368		826		—		—		81,368		826

Fixed maturity securities		578,038		20,439		1,150,597		129,510		1,728,635		149,949		1,349,557		44,127		884,202		94,269		2,233,759		138,396
Common stocks		7,761		2,317		—		—		7,761		2,317		19,948		5,731		—		—		19,948		5,731
Preferred stocks		64,414		828		154,222		25,726		218,636		26,554		9,951		76		163,985		12,852		173,936		12,928

Total	$	650,213	$	23,584	$	1,304,819		155,236	$	1,955,032	$	178,820


December 31, 2008
U.S. government and agency	$	25,031	$	3,494	$	8,197	$	212	$	33,228	$	3,706
State and municipal		1,081,558		65,944		485,805		74,500		1,567,363		140,444
Mortgage-backed securities		327,563		57,032		211,762		46,766		539,325		103,798
Corporate		377,313		83,277		228,738		53,055		606,051		136,332
Foreign		17,519		3,521		—		—		17,519		3,521

Fixed maturity securities		1,828,984		213,268		934,502		174,533		2,763,486		387,801
Common stocks		5,952		7,833		—		—		5,952		7,833
Preferred stocks		123,930		44,062		109,103		52,577		233,033		96,639
Equity securities														29,899		5,807		163,985		12,852		193,884		18,659

Total	$	1,958,866	$	265,163	$	1,043,605	$	227,110	$	3,002,471	$	492,273	$	1,379,456	$	49,934	$	1,048,187	$	107,121	$	2,427,643	$	157,055

~~Following is a description~~For OTTI of ~~non-investment grade~~ fixed maturity securities ~~with an unrealized loss position greater than $5 million at September 30, 2009.~~

~~Commercial mortgage security~~ (fair value of $23 million and unrealized loss of $14 million)- The investment is secured by mortgages and cash flow pledges on 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 2010 can be extended at the borrower’s option through February 2012 provided that ~~there is no continuing default and that the borrower provides interest protection for LIBOR above 6~~¹/2%. The Company believes the amount of outstanding debt for the Company’s debt layer and all debt layers senior to the Company’s debt layer to be below the current market values for the underlying properties. Based on the portfolio’s stable performance (e.g., occupancy rates, lease terms and debt service coverage) and on there being substantial subordinate capital, the Companymanagement does not ~~consider~~intend to sell or, more likely than not, would not be required to sell, the ~~investment to be other-than-temporarily impaired.~~

~~Residential mortgage security~~ (fair value of $14 million and unrealized loss of $8 million)- This investment is a structured security that was evaluated based on the performance of the underlying collateral under various economic and default scenarios. Based on that evaluation, the security was determined to be other-than-temporarily impaired. The portion of the ~~impairment~~decline in value considered to be due to credit ~~related ($3 million) was~~factors is recognized in earnings and the ~~remaining~~portion of the decline in value ~~($8 million) was~~considered to be due to non-credit factors is recognized in other comprehensive income.

~~Residential mortgage security~~ ~~(fair value of $15 million and unrealized loss of $8 million)- This investment is~~ The table below provides a ~~structured security that was evaluated based on the performance~~roll-forward of the ~~underlying collateral under various economic~~portion of impairments recognized in earnings for those securities that have been impaired due to both credit factors and ~~default scenarios. Based on that evaluation, the security was determined not to be other-than-temporarily impaired.~~non-credit factors.


	For the Three
	Months Ended
(Dollars in thousands)	March 31, 2010
Beginning balance of amounts related to credit losses	$	5,661
Additions for amounts related to credit losses		—

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

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

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

For the Three For the Nine
Months Ended Months Ended
September 30, 2009 September 30, 2009
Beginning balance of credit-related impairments $ 2,610 —
Credit losses for which an other-than-temporary impairment was not previously recognized 2,200 4,810

Ending balance of credit-related impairments $ 4,810 $ 4,810

Preferred Stocks — At ~~September 30, 2009, the Company owned two non-investment grade~~March 31, 2010, there were 28 preferred stocks in an unrealized loss position, with an aggregate fair value of ~~$55~~$209 million and a gross unrealized loss of $10 million. None of the securities had an unrealized loss of greater than 20%. Three of these securities (with an aggregate fair value of $67 million and an aggregate unrealized loss of $1 million) are rated non-investment grade. The Company does not consider any of these securities to be OTTI.

Common Stocks—At March 31, 2010, the Company owned one common stock in an unrealized loss position with an aggregate fair value of $9 million and an aggregate unrealized loss of $1 million. The Company does not consider ~~either of these investments~~this investment to be ~~other-than-temporarily impaired.~~OTTI.

Common Stocks — At September 30, 2009, the Company owned two common stocks in an unrealized loss position with an aggregate fair value of $8 million and an aggregate unrealized loss of $2 million. The Company does not consider either of these investments to be other-than-temporarily impaired.

Loans Receivable—The Company monitors the performance of its ~~commercial~~ loans receivable, including current market conditions for each loan and the ability to collect principal and interest. For loans where the Company determines it is probable that the contractual terms will not be met, ~~an impairment is recognized and~~ a valuation ~~allowance~~reserve is established with a charge to net realized capital losses. ~~For the nine months ended September 30, 2009, the Company established~~Loans receivable are reported net of a valuation ~~allowance~~reserve of ~~$3 million.~~$16 million and $14 million at March 31, 2010 and December 31, 2009, respectively.

8.(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 following the guidance in FASB ASC 820, Fair Value Measurement and Disclosures, (Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”)). The guidance defines fair valueis 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 ~~guidance establishes~~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 ~~the asset or liability, either directly or indirectly.~~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 ~~data,~~ projections, credit quality and business developments of the issuer and other relevant information.

1513

The following ~~table presents~~tables present the assets and liabilities measured at fair value, on a recurring basis, as of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008~~2009 by ~~level (dollars in thousands):~~level:


	Total		Level 1		Level 2		Level 3
September 30, 2009
(Dollars in thousands)									Total		Level 1		Level 2		Level 3
March 31, 2010
Assets:
Fixed maturity securities available for sale:
U.S. government and agency	$	1,473,693	$	—	$	1,473,693	$	—	$	1,679,933	$	—	$	1,679,933	$	—
State and municipal		5,749,465		13,546		5,735,919		—		5,740,501		—		5,740,501		—
Mortgage-backed securities		1,522,794		—		1,499,447		23,347		1,454,948		—		1,454,948		—
Corporate		1,970,167		—		1,880,622		89,545		1,883,882		—		1,798,444		85,438
Foreign		353,245		—		353,245		—		419,267		—		419,267		—

Total fixed maturity securities available for sale		11,069,364		13,546		10,942,926		112,892		11,178,531		—		11,093,093		85,438


Equity securities available for sale:
Common stocks		127,258		24,221		101,478		1,559		117,225		16,062		99,604		1,559
Preferred stocks		271,037		—		217,869		53,168		295,080		—		231,970		63,110

Total equity securities available for sale		398,295		24,221		319,347		54,727		412,305		16,062		331,574		64,669

Arbitrage trading account		536,721		536,368		—		353		472,125		471,772		—		353

Total	$	12,004,380	$	574,135	$	11,262,273	$	167,972	$	12,062,961	$	487,834	$	11,424,667	$	150,460


Liabilities:
Securities sold but not yet purchased	$	115,389	$	115,389	$	—	$	—	$	82,826	$	82,826	$	—	$	—


December 31, 2008
December 31, 2009
Assets:
Fixed maturity securities available for sale:
U.S. government and agency	$	1,126,684	$	—	$	1,126,684	$	—	$	1,714,153	$	—	$	1,714,153	$	—
State and municipal		5,591,765		—		5,550,093		41,672		5,748,855		—		5,748,855		—
Mortgage-backed securities		1,631,420		—		1,608,958		22,462		1,566,440		—		1,540,540		25,900
Corporate		968,480		—		883,975		84,505		1,743,382		—		1,653,222		90,160
Foreign		247,639		—		247,639		—		406,208		—		406,208		—

Total fixed maturity securities available for sale		9,565,988		—		9,417,349		148,639		11,179,038		—		11,062,978		116,060


Equity securities available for sale:
Common stocks		80,843		19,829		2,280		58,734		119,060		11,295		106,206		1,559
Preferred stocks		302,907		—		252,421		50,486		282,307		—		227,594		54,713

Total equity securities available for sale		383,750		19,829		254,701		109,220		401,367		11,295		333,800		56,272

Arbitrage trading account		119,485		115,723		3,409		353		465,783		465,430		—		353

Total	$	10,069,223	$	135,552	$	9,675,459	$	258,212	$	12,046,188	$	476,725	$	11,396,778	$	172,685


Liabilities:
Securities sold but not yet purchased	$	23,050	$	23,050	$	—	$	—	$	143,885	$	143,885	$	—	$	—

The following ~~table summarizes~~tables summarize changes in Level 3 assets for the three ~~and nine~~ months ended ~~September 30, 2009 (dollars~~March 31, 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 March 31, 2010
Fixed maturity securities available for sale:
Mortgage-backed securities	$	25,900	$	—	$	—		$	—		$	(25,900	)	$	—
Corporate		90,160		174		(121	)		(4,775	)		—			85,438

Total		116,060		174		(121	)		(4,775	)		(25,900	)		85,438

Equity securities available for sale:
Common stocks		1,559		—		—			—			—			1,559
Preferred stocks		54,713		—		(1,981	)		10,378			—			63,110

Total		56,272		—		(1,981	)		10,378			—			64,669

Arbitrage trading account		353		—		—			—			—			353

Total	$	172,685	$	174	$	(2,102	)	$	5,603		$	(25,900	)	$	150,460

The transfer of a mortgage-backed security from Level 3 in ~~thousands):~~the three months ended March 31, 2010 was based upon the availability of broker dealer quotations, as the Company was able to obtain quotations from third party broker dealers as of March 31, 2010.

Gains (Losses) Included in:
Other Purchases
Beginning Comprehensive (Sales) Transfers Ending
Balance Earnings Income Maturities In/ (Out) Balance
For the Three Months
Ended September 30, 2009
Fixed maturity securities available for sale:
State and municipal $ — $ — $ — $ — $ — $ —
Mortgage-backed securities 23,354 — (7 ) — — 23,347
Corporate 75,268 289 6,306 (11,644 ) 19,326 89,545

Total 98,622 289 6,299 (11,644 ) 19,326 112,892

Equity securities available for sale:
Common stocks 46,762 — — — (45,203 ) 1,559
Preferred stocks 48,915 — 4,204 — 49 53,168

Total 95,677 — 4,204 — (45,154 ) 54,727

Arbitrage trading account 353 — — — — 353

Total $ 194,652 $ 289 $ 10,503 $ (11,644 ) $ (25,828 ) $ 167,972

For the Nine Months
Ended September 30, 2009
Fixed maturity securities available for sale:
State and municipal $ 41,672 $ — $ — $ — $ (41,672 ) $ —
Mortgage-backed securities 22,462 — 885 — — 23,347
Corporate 84,505 246 9,807 (15,075 ) 10,062 89,545

Total 148,639 246 10,692 (15,075 ) (31,610 ) 112,892

Equity securities available available for sale:
Common stocks 58,734 — 712 — (57,887 ) 1,559
Preferred stocks 50,486 — (626 ) 3,259 49 53,168

Total 109,220 — 86 3,259 (57,838 ) 54,727

Arbitrage trading account 353 — — — — 353

Total $ 258,212 $ 246 $ 10,778 $ (11,816 ) $ (89,448 ) $ 167,972

(15)FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the carrying amounts ~~arising under reinsurance ceded contracts have been deducted~~and estimated fair values of the Company’s financial instruments as of March 31, 2010 and December 31, 2009:


	2010				2009
(Dollars in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Fixed maturity securities	$	11,296,965	$	11,306,458	$	11,299,197	$	13,308,207
Equity securities available for sale		412,305		412,305		401,367		401,367
Arbitrage trading account		472,125		472,125		465,783		465,783
Investment in arbitrage funds		84,084		84,084		83,420		83,420
Loans receivable		376,993		301,482		381,591		285,122
Cash and cash equivalents		441,047		441,047		515,430		515,430
Trading accounts receivable from brokers and clearing organizations		244,905		244,905		310,042		310,042
Due from broker		6,542		6,542		—		—
Liabilities:
Trading account securities sold but not yet purchased		82,826		82,826		143,885		143,885
Due to broker		—		—		5,612		5,612
Junior subordinated debentures		242,631		245,500		249,793		242,217
Senior notes and other debt		1,345,463		1,402,829		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 ~~arriving~~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 ~~amounts reflected~~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.

(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 ~~statements~~award agreement. During the three months ended March 31, 2010, the Company issued 686,500 RSUs at a fair value of ~~operations (dollars in thousands):~~$18 million.

For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2009 2008 2009 2008
Ceded premiums earned $ 132,736 $ 131,491 $ 366,784 $ 372,243
Ceded losses incurred $ 78,889 $ 151,578 $ 199,492 $ 240,501

~~10.~~(17)INDUSTRY SEGMENTS

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

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

Our regional segment provides commercial insurance products to customers primarily in 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 ~~segment specializes~~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 ~~segment specializes~~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, ~~and~~ treaty reinsurance, which functions as a traditional reinsurer in specialty and standard reinsurance ~~lines.~~lines, and Lloyd’s reinsurance, which writes property and casualty reinsurance through Lloyd’s.

Our international segment offers personal and commercial property casualty insurance in South America, ~~and~~ commercial insurance ~~and reinsurance~~ in the United Kingdom, Continental Europe and Canada and reinsurance in Australia and ~~Hong Kong as well as on a worldwide basis through a Lloyd’s syndicate.~~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. ~~Net~~Income (loss) before income taxes by segment consists of revenues less expenses related to the respective segment’s operations, including allocated ~~net~~ investment ~~income and losses from investment funds (investment income and funds).~~income. Identifiable assets by segment are those assets used in or allocated to the operation of each segment.


	Revenues															Revenues
			Investment								Pre-tax			Net					Investment								Pre-Tax			Net
	Earned		Income and					Total			Income			Income			Earned		Income and								Income			Income
(dollars in thousands)	Premiums		Funds		Other			Revenues			(Loss)			(Loss)			Premiums		Funds		Other			Total			(Loss)			(Loss)
For the three months ended September 30, 2009:
For the the three months ended March 31, 2010:
Specialty	$	326,645	$	40,439	$	964		$	368,048		$	56,211		$	42,953		$	312,953	$	49,234	$	798		$	362,985		$	75,670		$	55,153
Regional		276,369		18,505		804			295,678			30,287			22,625			263,669		22,941		927			287,537			41,964			30,057
Alternative markets		149,606		26,221		20,334			196,161			42,713			31,634			154,785		32,847		19,763			207,395			50,985			37,121
Reinsurance		107,045		22,742		—			129,787			26,261			20,348			99,558		28,593		—			128,151			34,420			25,838
International		83,475		4,069		—			87,544			9,496			4,147			99,596		7,097		—			106,693			373			3,653
Corporate and eliminations (1)		—		3,396		51,612			55,008			(43,276	)		(26,638	)
Realized investment gains		—		—		4,083			4,083			4,083			2,653
Corporate, other and eliminations																		—		2,849		52,025			54,874			(48,732	)		(37,055	)
Net investment gains																		—		—		5,912			5,912			5,912			3,843


Consolidated	$	943,140		115,372	$	77,797		$	1,136,309		$	125,775		$	97,722		$	930,561	$	143,561	$	79,425		$	1,153,547		$	160,592		$	118,610


For the three months ended September 30, 2008:
For the the three months ended March 31, 2009:
Specialty	$	389,967	$	54,512	$	901		$	445,380		$	87,147		$	63,886		$	357,928	$	3,985	$	894		$	362,807		$	27,744		$	22,131
Regional		306,892		23,594		—			330,486			17,894			14,764			285,616		1,737		1,081			288,434			18,365			13,723
Alternative markets		157,149		30,526		24,730			212,405			51,800			37,722			151,993		5,180		24,611			181,784			30,434			25,108
Reinsurance		124,710		33,675		—			158,385			29,540			23,674			105,623		2,346		—			107,969			2,999			4,362

International		76,523		9,657		—			86,180			13,440			8,221			78,048		8,001		—			86,049			6,168			3,579

Corporate and eliminations (1)		—		1,438		41,386			42,824			(36,583	)		(25,534	)
Realized investment losses		—		—		(220,030	)		(220,030	)		(220,030	)		(150,613	)
Corporate, other and eliminations																		—		1,893		31,493			33,386			(43,251	)		(26,405	)
Net investment losses																		—		—		(96,808	)		(96,808	)		(96,808	)		(62,844	)


Consolidated	$	1,055,241	$	153,402	$	(153,013	)	$	1,055,630		$	(56,792	)	$	(27,880	)	$	979,208	$	23,142	$	(38,729	)	$	963,621		$	(54,349	)	$	(20,346	)

Revenues
Investment Pre-tax Net
Earned Income and Total Income Income
(dollars in thousands) Premiums Funds Other Revenues (Loss) (Loss)
For 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 and eliminations (1) — 7,185 133,561 140,746 (131,616 ) (88,108 )
Realized 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

For the nine months ended September 30, 2008:
Specialty $ 1,228,720 $ 160,852 $ 2,921 $ 1,392,493 $ 308,662 $ 221,493
Regional 927,585 68,909 — 996,494 80,973 61,570
Alternative markets 468,243 88,730 74,589 631,562 165,480 119,070
Reinsurance 408,911 99,132 — 508,043 96,473 75,565
International 220,802 28,007 — 248,809 31,365 18,934
Corporate and eliminations (1) — 6,208 94,531 100,739 (131,819 ) (86,896 )
Realized investment losses — — (248,167 ) (248,167 ) (248,167 ) (168,921 )

Consolidated $ 3,254,261 $ 451,838 $ (76,126 ) $ 3,629,973 $ 302,967 $ 240,815


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

~~Identifiable assets by segment are as follows (the December 31, 2008 segment assets have been restated to reflect intra-segment eliminations) (dollars in thousands):~~

September 30, December 31,
2009 2008
Specialty $ 5,584,554 $ 5,391,602
Regional 2,778,894 2,615,674
Alternative markets 3,654,306 3,464,953
Reinsurance 3,166,208 2,849,119
International 1,082,816 879,271
Corporate and eliminations 1,125,736 920,539

Consolidated $ 17,392,514 $ 16,121,158

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


	For the Three Months				For the Nine Months				For the Three Months
	Ended September 30,				Ended September 30,				Ended March 31,
(Dollars in thousands)									2010		2009
Specialty
	2009		2008		2009		2008
Premises operations	$	104,313	$	139,579	$	344,062	$	458,254	$	87,940	$	125,100
Property										50,779		48,282
Professional liability										46,595		40,426
Products liability										38,787		39,081
Commercial automobile		45,046		67,785		148,469		203,017		35,981		54,392
Property		48,811		47,295		149,574		156,834
Products liability		30,065		43,172		103,829		142,047
Professional liability		44,020		38,221		126,457		116,418
Other		54,390		53,915		158,234		152,150		52,871		50,647

Specialty		326,645		389,967		1,030,625		1,228,720
Total specialty										312,953		357,928


Regional

Commercial multiple peril		100,691		111,492		307,571		341,028		96,070		105,176
Commercial automobile		80,014		91,153		243,321		272,989		75,965		83,336
Workers’ compensation		55,850		61,795		174,661		188,593		52,971		57,946
Other		39,814		42,452		118,335		124,975		38,663		39,158

Regional		276,369		306,892		843,888		927,585
Total regional										263,669		285,616


Alternative Markets

Primary workers’ compensation										62,918		60,336
Excess workers’ compensation		63,965		73,327		194,179		214,594		58,328		66,448
Primary workers’ compensation		59,204		60,473		181,265		183,055
Other		26,437		23,349		77,464		70,594		33,539		25,209

Alternative markets		149,606		157,149		452,908		468,243
Total alternative markets										154,785		151,993


Reinsurance

Casualty		79,018		109,294		247,387		350,145		71,923		91,162
Property		28,027		15,416		59,538		58,766		27,635		14,461

Reinsurance		107,045		124,710		306,925		408,911
Total reinsurance										99,558		105,623


International		83,475		76,523		239,174		220,802		99,596		78,048


Total	$	943,140	$	1,055,241	$	2,873,520	$	3,254,261	$	930,561	$	979,208

SAFE HARBOR STATEMENT

This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. This document may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of the forward-looking statements can be identified by the use of forward-looking words such as ‘believes,” “expects,” “potential,” “continued,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” or the negative version of those words or other comparable words. Any forward-looking statements contained herein, including statements related to our outlook for the industry and for our performance for the year ~~2009~~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; ~~the potential impact~~investment risks, including those of ~~the current conditions~~our portfolio of fixed maturity securities and investments in the financial markets and the ongoing economic downturn on our results and financial condition, particularly if such conditions continue; the potential impact of current legislative, regulatory, accounting and other initiatives taken or which may be taken in response to the current conditions in the financial markets and the ongoing economic downturn; investment risks,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 ~~impact of significant and increasing competition; the~~ success of our new ventures or acquisitions and the availability of other opportunities; the availability of reinsurance; ~~exposure as to coverage for terrorist acts;~~ our retention under the Terrorism Risk Insurance Program Reauthorization Act of 2007; the ability of our reinsurers to pay reinsurance recoverables owed to us; ~~the impact of current conditions in the financial markets and the ongoing economic downturn on our ability to raise debt or equity capital if needed;~~ foreign currency and political risks relating to our international operations; other legislative and regulatory developments, including those related to ~~alleged anti-competitive or other improper~~ business practices in the insurance industry; changes in the ratings assigned to us or our insurance company subsidiaries by rating agencies; the availability of dividends from our insurance company subsidiaries; our ability to attract and retain qualified employees; and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”). These risks and uncertainties could cause our actual results for the year ~~2009~~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.

2219

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

Overview

W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in the United States and operates in five business segments: specialty, ~~insurance,~~ regional, ~~property casualty insurance,~~ alternative markets, reinsurance and international. The Company’s primary sources of revenues and earnings are 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 ~~due~~ for injuries or losses. General insurance prices are also influenced by available insurance capacity, i.e., the level of policyholders’ surplus employed in the industry, and the industry’s willingness to deploy that capital.

~~Available insurance capacity has increased in recent years, increasing~~Increased competition in the industry in recent years and ~~putting downward~~the impact of the economic downturn have put pressure on pricing and terms and conditions. ~~In 2007, we saw increased competition and~~As property casualty insurance became more competitive, insurance rates decreased ~~prices~~ across most business lines from 2005 through 2008. Although this trend began to moderate in 2009, current market price levels for many lines of ~~our~~ business ~~segments. This trend of increased competition~~are well below the prices required for the Company to achieve its return objectives and ~~decreased prices continued~~accordingly the Company has experienced declines in ~~2008. These trends moderated somewhat in the first nine months of 2009, and we expect continued improvement over the balance of the year.~~written premiums. Price changes are reflected in ~~our~~the Company’s results over time as premiums are earned.

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

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

Critical Accounting ~~Policies and~~ 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~~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.

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.

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

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

Historically, the Company has experienced less variation from its initial loss estimates for lines of businesses with short reporting lags than for lines of business with long reporting lags. For example, as of December 31, 2008, initial loss estimates for accident years 1999 through 2007 were decreased by an average of 3% for lines with short reporting lags and by an average of 12% for

Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008~~2009 (dollars in thousands):


	Reported Case		Incurred But Not				Reported Case		Not Incurred But
	Reserves		Reported		Total		Reserves		Reported		Total

September 30, 2009
March 31, 2010
General liability	$	841,757	$	2,207,924	$	3,049,681	$	846,633	$	2,139,121	$	2,985,754
Workers’ compensation		1,072,502		1,011,694		2,084,196		1,103,586		1,038,034		2,141,620
Commercial automobile		375,630		210,369		585,999		374,981		194,222		569,203
International		131,665		215,697		347,362		155,898		216,682		372,580
Other		147,158		233,181		380,339		149,213		238,576		387,789

Total primary		2,568,712		3,878,865		6,447,577		2,630,311		3,826,635		6,456,946
Reinsurance		708,700		1,031,443		1,740,143		666,382		995,542		1,661,924

Total	$	3,277,412	$	4,910,308	$	8,187,720	$	3,296,693	$	4,822,177	$	8,118,870


December 31, 2008
December 31, 2009
General liability	$	800,059	$	2,227,257	$	3,027,316	$	845,889	$	2,159,611	$	3,005,500
Workers’ compensation		988,714		1,014,524		2,003,238		1,094,800		1,019,552		2,114,352
Commercial automobile		393,035		210,562		603,597		393,534		196,060		589,594
International		129,351		155,188		284,539		145,807		217,796		363,603
Other		145,010		216,038		361,048		143,336		232,345		375,681

Total primary		2,456,169		3,823,569		6,279,738		2,623,366		3,825,364		6,448,730
Reinsurance		770,247		1,072,601		1,842,848		688,593		1,010,459		1,699,052

Total	$	3,226,416	$	4,896,170	$	8,122,586	$	3,311,959	$	4,835,823	$	8,147,782

Specialty — The majority of the favorable reserve development for the specialty segment during ~~2009~~calendar years 2010 and ~~2008~~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. The favorable development for the E&S business was primarily caused by ~~lower~~ claim frequency ~~trends. Claim frequency (i.e., the number of reported claims per unit of exposure) declined 7.5% in 2003, 10.2% in 2004, 4.5% in 2005, 5.6% in 2006 and 0.9% in 2007. These~~ trends that were ~~significantly~~ lower than the trends that had been assumed in the reserve estimates made as of December 31, 2008 and 2009. This resulted in favorable reserve development in 2009 and 2010 as those assumptions were ~~expected when initial reserves for those years were established.~~revised. One reason for the lower than expected number of claims was the Company’s introduction of more restrictive policy language which included additional exclusions that eliminated claims that would have previously been covered, particularly for the Company’s building contractor business. In addition, as standard carriers tightened their underwriting criteria, the Company benefited from an influx of accounts from the standard market to the E&S market during these years. The more restrictive policy language and the influx of standard market business resulted in an improved risk profile within the E&S business and a reduction in loss costs that was greater than expected at the time reserves were initially established. The favorable E&S development was partially offset by adverse development in commercial transportation.

For ~~2009, specialty reserve development (before premium offsets) includes~~2010, favorable reserve development ~~of $6 million, $10 million, $20 million, $29 million and $13 million for~~was primarily attributable to accident years ~~2003~~2005 through ~~2007, respectively, and unfavorable reserve development of $20 million in prior years.~~2008. For ~~2008, specialty reserve development (before premium offsets) includes~~2009, favorable reserve development ~~of $8 million, $17 million, $19 million, $29 million and $32 million for~~was primarily attributable to accident years ~~2003~~2004 through ~~2007, respectively, partially offset by unfavorable reserve development~~2007.

Regional — Approximately half of ~~$13 million in prior years.~~

~~Alternative Markets — The~~the favorable reserve development for the ~~alternative markets~~regional segment during 2010 was associated with commercial automobile business. This favorable automobile reserve development resulted from lower than anticipated claim frequency in 2009 and ~~2008~~the first three months of 2010. The Company believes the lower claim frequency was ~~primarily~~related in part to a reduction in miles driven by insured vehicles as a result of the economic downturn. The remainder of the favorable reserve development in 2010 was related to ~~workers’ compensation business written~~other liability and commercial property business.

Reinsurance — Estimates for claims occurring in ~~California. From 2003 to 2005, the State~~prior years decreased by $10 million, net of ~~California enacted various legislative reforms, whose impact on workers’ compensation costs was uncertain at the time. As actual claims data have emerged, and interpretation~~premium offsets, in 2010. The majority of the ~~reforms through case law has evolved, it has become clear that~~favorable development for the ~~impact~~reinsurance segment during 2010 was related to the Company’s participation in a Lloyds of London syndicate. The favorable development resulted from a re-evaluation of the ~~reforms~~syndicate’s loss reserves for underwriting years 2008 through 2009 in connection with its annual year-end review of loss reserves that was ~~greater than initially expected, resulting~~completed in ~~favorable reserve development.~~the first quarter of 2010.

Loss Reserve Discount. — The Company discounts its liabilities for excess and assumed workers’ compensation business because of the long period of time over which losses are paid. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from the Company’s loss payout experience. For non-proportional business, reserves for losses and loss expenses have been discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. ~~As of September 30, 2009, these discount rates ranged from 2.5% to 6.5%, with a weighted average discount rate of 4.5%.~~ For proportional business, reserves for losses and loss expenses have been discounted at the statutory rate permitted by the Department of Insurance of the State of Delaware of ~~2.5%~~2.7%. As of March 31, 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 ~~$872~~$888 million and ~~$847~~$877 million as of ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008,~~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 ~~$64~~$57 million and ~~$49~~$53 million at ~~September 30, 2009~~March 31, 2010 and December 31, ~~2008,~~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 ~~Declines in the Value~~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. ~~Management regularly reviews~~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 the fair value to recover prior to the time of sale or maturity. Since equity securities ~~that~~do not have a ~~fair value less than amortized cost~~contractual cash flow or maturity, the Company considers whether the price of an equity security is expected to ~~determine whether an other-than-temporary impairment (“OTTI”) has occurred.~~recover within a reasonable period of time.

The Company ~~evaluates~~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. Unrated securities with an aggregate fair value of ~~$13~~$10 million were classified as investment grade at ~~September 30, 2009.~~March 31, 2010.

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 ~~an other-than-temporary impairment.~~OTTI. The amount of ~~other-than-temporary impairment~~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 ~~other-than-temporary impairment~~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 ~~security~~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.

2925

~~Following is a description of non-investment grade fixed maturity securities with an unrealized loss position greater than $5 million at September 30, 2009.~~

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

~~Residential mortgage security~~ (fair value of $14 million and unrealized loss of $8 million)- This investment is a structured security that was evaluated based on the performance of the underlying collateral under various economic and default scenarios. Based on that evaluation, the security was determined to be other-than-temporarily impaired. The portion of the impairment considered to be credit related ($3 million) was recognized in earnings, and the remaining decline in value ($8 million) was recognized in other comprehensive income.

~~Residential mortgage security~~ (fair value of $15 million and unrealized loss of $8 million)- This investment is a structured security that was evaluated based on the performance of the underlying collateral under various economic and default scenarios. Based on that evaluation, the security was determined not to be other-than-temporarily impaired.


(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 market values for the underlying properties. Based on the portfolio’s stable performance (e.g., occupancy rates, lease terms and debt service coverage) and on there being substantial subordinate capital, the Company does not consider the investment to be OTTI.

Preferred Stocks— The following table provides a summary of all preferred stocks as of September 30, 2009, by the length of time those securities have been continuously in an unrealized loss position (dollars in thousands):

Gross
Number of Aggregate Unrealized
Preferred Stocks (1) Securities Fair Value Losses

Unrealized loss less than 20% of amortized cost 39 $ 185,293 $ 14,543
Unrealized loss of 20% or greater in an unrealized loss position for twelve months or greater 2 33,343 12,011

Total 41 $ 218,636 $ 26,554


~~(1)~~		~~Includes two non-investment grade securities with an aggregate fair value of $55 million and an unrealized loss of $1 million.~~

~~The Company has evaluated preferred stocks in an unrealized loss position and does not consider any of these investments to be other-than-temporarily impaired.~~

~~Common Stocks~~ — At ~~September 30, 2009, the Company owned two common~~March 31, 2010, there were 28 preferred stocks in an unrealized loss position, with an aggregate fair value of $8$209 million and a gross unrealized loss of $10 million. None of the securities had an unrealized loss of greater than 20%. Three of these securities (with an aggregate fair value of $67 million and an aggregate unrealized loss of $2$1 million) are rated non-investment grade. The Company does not consider any of these securities to be OTTI.

Common Stocks — At March 31, 2010, the Company owned one common stock in an unrealized loss position with an aggregate fair value of $9 million and an aggregate unrealized loss of $1 million. The Company does not consider ~~either of these investments~~this investment to be ~~other-than-temporarily impaired.~~OTTI.

Loans Receivable — The Company monitors the performance of its ~~commercial~~ 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 con~~tractual~~contractual terms will not be met, ~~an impairment is recognized and~~ a valuation ~~allowance~~reserve is established with a charge to net realized capital losses. ~~For the nine months ended September 30, 2009, the Company established~~Loans receivable are reported net of a valuation ~~allowance~~reserve of ~~$3 million.~~$16 million and $14 million at March 31, 2010 and December 31, 2009, respectively.

Fair Value ~~Measurements~~Measurements.

The Company’s fixed maturity and equity securities available for sale and its trading account securities are carried at fair value. Fair value ~~following the guidance in ASC 820 Fair Value Measurements and Disclosures. The statement defines 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 ~~guidance establishes~~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 ~~the asset or liability, either directly or indirectly.~~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.

Equity securities are generally priced based on observable market data, including closing prices in active markets, and are classified as Level 1. However, as of September 30, 2009, the price for an equity security with an aggregate carrying value of $2 million was determined based on other methods and was classified as a Level 3 security.

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, 2009~~March 31, 2010 (dollars in thousands):


	Carrying		Percent			Carrying		Percent
	Value		of Total			Value		of Total
Pricing source
Pricing source:
Independent pricing services	$	10,491,662		94.8	%	$	10,639,358		95.2	%
Syndicate manager		109,283		1.0	%		122,488		1.1	%
Directly by the Company based on:
Observable data		391,544		3.5	%		316,247		2.8	%
Par value		1,250		0.0	%		16,250		0.1	%
Cash flow		75,625		0.7	%
Cash flow model							84,188		0.8	%

Total	$	11,069,364		100.0	%	$	11,178,531		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, 2009,~~March 31, 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.

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.

3328

Results of Operations for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2010 and 2009 ~~and 2008~~

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 combined GAAP ratios (sum of loss ratio and expense ratio) for each of our business segments for the ~~nine~~three months ended ~~September 30, 2009~~March 31, 2010 and ~~2008.~~2009. The combined ratio represents a measure of underwriting profitability, excluding investment income. A combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit. ~~See the following pages for an explanation of the data presented in the table below.~~


	For the Nine Months						For the Three Months
	Ended September 30,						Ended March 31,
(dollars in thousands)	2009			2008			2010			2009

Specialty
Gross premiums written	$	1,112,155		$	1,207,800		$	342,932		$	364,894
Net premiums written		961,752			1,109,508			301,928			322,557
Premiums earned		1,030,625			1,228,720			312,953			357,928
Loss ratio		62.2	%		59.9	%		57.9	%		62.8	%
Expense ratio		30.6	%		28.2	%		33.6	%		30.7	%
Combined ratio		92.8	%		88.1	%
GAAP combined ratio								91.5	%		93.5	%

Regional
Gross premiums written	$	951,676		$	1,077,644		$	302,641		$	322,801
Net premiums written		836,862			938,368			272,032			282,035
Premiums earned		843,888			927,585			263,669			285,616
Loss ratio		63.4	%		66.8	%		57.2	%		61.0	%
Expense ratio		33.5	%		31.9	%		35.5	%		33.1	%
Combined ratio		96.9	%		98.7	%
GAAP combined ratio								92.7	%		94.1	%

Alternative Markets
Gross premiums written	$	554,327		$	590,592		$	241,351		$	248,874
Net premiums written		494,415			517,447			210,405			225,715
Premiums earned		452,908			468,243			154,785			151,993
Loss ratio		64.1	%		62.2	%		64.6	%		62.2	%
Expense ratio		25.4	%		23.8	%		25.5	%		24.1	%
Combined ratio		89.5	%		86.0	%
GAAP combined ratio								90.1	%		86.3	%

Reinsurance
Gross premiums written	$	355,852		$	367,555		$	106,369		$	107,856
Net premiums written		330,851			347,960			98,771			100,833
Premiums earned		306,925			408,911			99,558			105,623
Loss ratio		59.1	%		66.1	%		50.4	%		63.4	%
Expense ratio		39.3	%		34.3	%		43.8	%		35.6	%
Combined ratio		98.4	%		100.4	%
GAAP combined ratio								94.2	%		99.0	%

International
Gross premiums written	$	325,549		$	276,526		$	132,827		$	103,817
Net premiums written		277,833			232,164			100,814			92,332
Premiums earned		239,174			220,802			99,596			78,048
Loss ratio		61.1	%		63.6	%		67.9	%		64.1	%
Expense ratio		39.1	%		37.7	%		43.6	%		37.6	%
Combined ratio		100.2	%		101.3	%
GAAP combined ratio								111.5	%		101.7	%

Consolidated
Gross premiums written	$	3,299,559		$	3,520,117		$	1,126,120		$	1,148,242
Net premiums written		2,901,713			3,145,447			983,950			1,023,472
Premiums earned		2,873,520			3,254,261			930,561			979,208
Loss ratio		62.4	%		63.2	%		59.1	%		62.3	%
Expense ratio		32.3	%		30.0	%		35.0	%		31.4	%
Combined ratio		94.7	%		93.2	%
GAAP combined ratio								94.1	%		93.7	%

Net Income (Loss) to Common ~~Shareholders~~Stockholders. The following table presents the Company’s net income (loss) to common ~~shareholders~~stockholders and net income (loss) per diluted share for the ~~nine~~three months ended ~~September 30,~~March 31, 2010 and 2009 ~~and 2008~~ (amounts in thousands, except per share data):

2009 2008

Net income to common shareholders $ 174,763 $ 240,815
Weighted average diluted shares 166,765 175,369
Net income per diluted share $ 1.05 $ 1.37


	2010		2009

Net income (loss) to common stockholders	$	118,610	$	(20,346	)
Weighted average diluted shares		159,771		161,090
Net income (loss) per diluted share	$	0.74	$	(0.13	)

The Company reported net income of ~~$175~~$119 million in ~~2009~~2010 compared to ~~$241~~a loss of $20 million in ~~2008.~~2009. The ~~decrease~~increase in net income is primarily ~~a result of losses~~due to improved investment results. Income from investment funds ~~(losses from investment funds were $179~~(which are recorded on a one quarter lag) was $5 million in ~~2009~~2010 compared with ~~income from investment funds~~a loss of ~~$28~~$115 million in ~~2008). This was partially offset by a reduction in other-than-temporary~~2009. Other than temporary investment impairments ~~($139~~were $3 million in ~~2009~~2010 compared with ~~$329~~$110 million in ~~2008).~~2009. The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in ~~2008~~2010 and 2009.

~~Gross~~ Premiums Written. Gross premiums written were ~~$3.3 billion~~$1,126 million in ~~2009,~~2010, down 6%2% from ~~2008.~~2009. The decrease in gross premiums is the result of lower overall economic activity and less new business production, partially offset by higher premiums ~~written by~~for recently started operating units (companies that began operations since 2006). Approximately 80% of business expiring in 2010 was renewed, and the average price of policies renewed in 2010 was unchanged from the same period in 2009. Gross premiums for companies that began operations since 2006 ~~($405~~were up 38% to $166 million in 2010 from $120 million in 2009, ~~compared to $211 million~~and comprised 15% of our gross premiums written in ~~2008). The average price~~the quarter.

Increased competition in the industry in recent years and the impact of ~~policies renewed in 2009 decreased 1%. The Company has experienced increased competition and downward~~the economic downturn have put pressure on pricing ~~since 2004, although~~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, current market price levels for many lines of business are well below the ~~pressure has recently moderated somewhat.~~

prices required for the Company to achieve its return objectives. In particular, commercial automobile and products liability in the specialty segment and excess workers compensation business in the alternative markets segment experienced significant declines in gross written premiums in the three months ended March 31, 2010. A summary of gross premiums written in ~~2009~~2010 compared with ~~2008~~2009 by line of business within each business segment follows:

	•		Specialty gross premiums decreased by 8%6% to ~~$1,112~~$343 million in ~~2009~~2010 from ~~$1,208 million.~~$365 million in 2009. Gross premiums written decreased ~~40%~~36% for commercial automobile, ~~33%~~28% for products liability and ~~18%~~7% for premises operations. Gross premiums written increased ~~32%~~6% for property lines and 4% for professional ~~liability and 20% for property lines. The number of new and renewal policies issued in 2009 increased 1%.~~liability.

	•		Regional gross premiums decreased by ~~12%~~6% to ~~$952~~$303 million in ~~2009~~2010 from ~~$1,078~~$323 million in ~~2008.~~2009. Gross premiums written decreased ~~13%~~5% for commercial automobile, ~~12%~~3% for workers’ compensation and ~~10%~~4% for commercial multiple ~~peril.~~perils. Gross premiums include assigned risk premiums, which are fully reinsured, of ~~$54~~$10 million in ~~2009~~2010 and ~~$69~~$21 million in ~~2008. The number of new and renewal policies issued in 2009 decreased 6%.~~2009.

	•		Alternative markets gross premiums decreased by 6%3% to ~~$554~~$241 million in ~~2009~~2010 from ~~$591~~$249 million in ~~2008.~~2009. Gross premiums written decreased ~~13%~~20% for excess workers’ compensation and ~~increased 1%~~2% for primary workers’ compensation. Gross premiums include assigned risk premiums, which are fully reinsured, of ~~$15~~$17 million in ~~2009~~2010 and ~~$33~~$6 million in ~~2008. The number of new and renewal policies issued in 2009 increased 5%.~~2009.

	•		Reinsurance gross premiums decreased by 3%1% to ~~$356~~$106 million in ~~2009~~2010 from ~~$368~~$108 million in ~~2008. The decline was due to non-renewals and lower new business volume as a result of business lost to competitors or retained by ceding companies partially offset by new property business.~~2009. Casualty gross premiums written decreased ~~15%~~14% to ~~$261~~$75 million ~~and property~~due to return premiums on experience rated reinsurance contracts (where premiums are adjusted over time based on the level of loss activity). Property gross premiums written increased ~~54%~~52% to ~~$94 million.~~$32 million due to two new non-catastrophe exposed property treaties.

	•		International gross premiums increased by ~~18%~~28% to ~~$326~~$133 million in ~~2009~~2010 from ~~$277~~$104 million in ~~2008.~~2009. The increase is primarily due to an increase in business written in South America and to business written by our new operating units in Lloyd’s, ~~syndicate, which began writing business on June 1, 2009,~~Canada and ~~to an~~our Norway branch of Europe. These increases were partially offset by a decline in ~~increase in business~~premiums written in ~~Australia and southeast Asia.~~Korea.

3530

Ceded reinsurance premiums as a percentage of gross written premiums increased to 12.6% in 2010 from 10.9% 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 $984 million in 2010, down 4% from 2009.

Net Premiums Earned. Premiums earned decreased ~~12%~~5% to ~~$2,874~~$931 million in ~~2009~~2010 from ~~$3,254~~$979 million in ~~2008.~~2009. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in ~~2009~~2010 are related to business written during both ~~2009~~2010 and ~~2008.~~2009. The ~~12%~~5% decrease ~~for 2009~~in 2010 earned premiums reflects the underlying decline in net premiums written in ~~2008~~2009 and ~~2009.~~2010.

Net Investment Income. Following is a summary of net investment income for the ~~nine~~three months ended ~~September 30,~~March 31, 2010 and 2009 ~~and 2008~~ (dollars in thousands):


							Average Annualized												Average Annualized
	Amount						Yield						Amount						Yield
	2009			2008			2009			2008			2010			2009			2010			2009

Fixed maturity securities, including cash	$	368,343		$	378,847			4.3	%		4.6	%	$	125,068		$	122,387			4.2	%		4.3	%
Arbitrage trading account and funds		29,841			16,782			8.1	%		2.7			11,223			10,661			6.3	%		12.6	%
Equity securities available for sale		15,724			31,296			6.2	%		5.5			3,365			6,064			4.3	%		6.3	%

Gross investment income		413,908			426,925			4.5	%		4.6			139,656			139,112			4.3	%		4.6	%
Investment expenses		(2,528	)		(3,476	)								(813	)		(896	)

Total	$	411,380		$	423,449			4.4	%		4.5	%	$	138,843		$	138,216			4.3	%		4.5	%

	•		Specialty’s loss ratio ~~increased~~decreased to ~~62.2%~~57.9% in 2010 from 62.8% in 2009 ~~from 59.9% in 2008~~ due to ~~a decline~~an increase in ~~price levels and the impact of anticipated loss cost trends.~~favorable reserve development. Net favorable prior year development, net of related premium adjustments, was ~~$53~~$25 million in ~~2009~~2010 compared with ~~$92~~$17 million in ~~2008.~~2009.

	•		~~The regional~~Regional’s loss ratio decreased to ~~63.4%~~57.2% in 2010 from 61.0% in 2009 ~~from 66.8%~~due to increase in ~~2008.~~favorable reserve development, partially offset by weather-related storm losses. Weather-related losses were ~~$59~~$15 million in ~~2009~~2010 compared with ~~$80~~$9 million in ~~2008.~~2009. Net favorable prior year development was ~~$28~~$20 million in ~~2009~~2010 compared with ~~$23~~$10 million in ~~2008.~~2009.

	•		Alternative markets’ loss ratio increased to ~~64.1%~~64.6% in ~~2009~~2010 from 62.2% in ~~2008~~2009 due to ~~pricing and loss cost trends and to~~a decrease in favorable reserve development partially offset by the use of ~~lower~~higher discount rates used to discount excess workers’ compensation reserves. Net favorable prior year reserve development, net of related premium adjustments, was ~~$33~~$4 million in ~~2009 and $30~~2010 compared with $16 million in ~~2008.~~2009.

	•		~~The reinsurance~~Reinsurance’s loss ratio decreased to ~~59.1%~~50.4% in 2010 from 63.4% in 2009 ~~from 66.1%~~due to lower loss ratios for several large property treaties and to an increase in ~~2008.~~favorable reserve development. Net favorable prior year development, net of related premium adjustments, was ~~$11~~$10 million in ~~2009~~2010 compared with $3$7 million in ~~2008.~~2009. Losses from the earthquake in Chile in 2010 were $4 million.

	•		~~The international~~International’s loss ratio ~~decreased~~increased to ~~61.1%~~67.9% in 2010 from 64.1% in 2009 ~~from 63.6% in 2008.~~due primarily to the Chilean earthquake. Net favorable prior year development was $9$3 million in ~~2009~~2010 compared with $7$4 million in ~~2008.~~2009.

Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. The ~~consolidated~~ expense ratio (underwriting expenses expressed as a percentage of premiums earned) increased to ~~32.3%~~35.0% in ~~2009~~2010 from ~~30.0%~~31.4% in ~~2008~~2009 primarily due to the decline in earned ~~premiums.~~premiums, higher commission rates for certain reinsurance contracts and higher 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 6%16% to ~~$62~~$19 million due to lower employment ~~costs.~~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 U.S. dollars.

Other costs and expenses, which represent corporate expenses, increased 6%8% to ~~$85~~$29 million due to an increase in ~~incentive compensation~~general and administrative costs, including employment costs.

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

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

For the Three Months
Ended September 30,
(dollars in thousands) 2009 2008

Specialty
Gross premiums written $ 352,372 $ 373,078
Net premiums written 300,512 335,782
Premiums earned 326,645 389,967
Loss ratio 63.8 % 62.9 %
Expense ratio 31.5 % 28.8 %
Combined ratio 95.3 % 91.7 %

Regional
Gross premiums written $ 311,430 $ 343,016
Net premiums written 277,097 299,504
Premiums earned 276,369 306,892
Loss ratio 62.6 % 69.3 %
Expense ratio 33.1 % 32.5 %
Combined ratio 95.7 % 101.8 %

Alternative Markets
Gross premiums written $ 191,493 $ 201,347
Net premiums written 169,214 178,634
Premiums earned 149,606 157,149
Loss ratio 63.9 % 64.8 %
Expense ratio 26.6 % 24.2 %
Combined ratio 90.5 % 89.0 %

Reinsurance
Gross premiums written $ 131,779 $ 104,507
Net premiums written 122,963 99,368
Premiums earned 107,045 124,710
Loss ratio 57.1 % 68.9 %
Expense ratio 39.7 % 33.7 %
Combined ratio 96.8 % 102.6 %

International
Gross premiums written $ 109,666 $ 98,186
Net premiums written 99,543 83,045
Premiums earned 83,475 76,523
Loss ratio 57.4 % 63.3 %
Expense ratio 41.0 % 36.7 %
Combined ratio 98.4 % 100.0 %

Consolidated
Gross premiums written $ 1,096,740 $ 1,120,134
Net premiums written 969,329 996,333
Premiums earned 943,140 1,055,241
Loss ratio 62.1 % 65.8 %
Expense ratio 32.9 % 30.3 %
Combined ratio 95.0 % 96.1 %

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

2009 2008

Net income (loss) to common shareholders $ 97,722 $ (27,880 )
Weighted average diluted shares 166,736 162,675
Net income (loss) per diluted share $ 0.59 $ (0.17 )

~~The~~ Company reported net income of $98 million in 2009 compared to a loss of $28 million in 2008. The increase in net income is primarily a result of a reduction in other-than-temporary impairments ($5 million in 2009 compared with $228 million in 2008). This was partially offset by losses from investment funds (losses from investment funds were $26 million in 2009 compared with income from investment funds of $31 million in 2008). The number of weighted average diluted shares decreased as a result of the Company’s repurchasesacquired one of its ~~common stock~~aviation companies in ~~2008 and~~June 2009.

~~Gross Premiums Written~~. Gross premiums written were $1.1 billion in 2009, down 2% from 2008. The decrease in gross premiums is the result of lower economic activity and less new business production, partially offset by higher premiums written by companies that began operations since 2006 ($152 million in 2009 compared to $82 million in 2008). The average price of policies renewed in 2009 decreased 0.4%. The Company has experienced increased competition and downward pressure on pricing since 2004, although the pressure has recently moderated somewhat.

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

	•		Specialty gross premiums decreased by 6% to $352 million in 2009 from $373 million. Gross premiums written decreased 38% for commercial automobile, 35% for products liability and 14% for premises operations. Gross premiums written increased 27% for professional liability and 18% for property lines. The number of new and renewal policies issued in 2009 increased 3%.

	•		Regional gross premiums decreased by 9% to $311 million in 2009 from $343 million in 2008. Gross premiums written decreased 9% for workers’ compensation, 9% for commercial automobile and 8% for commercial multiple peril. Gross premiums include assigned risk premiums, which are fully reinsured, of $13 million in 2009 and $18 million in 2008. The number of new and renewal policies issued in 2009 decreased 4%.

	•		Alternative markets gross premiums decreased by 5% to $191 million in 2009 from $201 million in 2008. Gross premiums written decreased 16% for excess workers’ compensation and 5% for primary workers’ compensation. Gross premiums include assigned risk premiums, which are fully reinsured, of $5 million in 2009 and $8 million in 2008. The number of new and renewal policies issued in 2009 increased 7%.

	•		Reinsurance gross premiums increased by 26% to $132 million in 2009 from $105 million in 2008 due primarily to an increase in property business. Casualty gross premiums written decreased 8% to $83 million, and property gross premiums written increased 253% to $49 million.

	•		International gross premiums increased by 12% to $110 million in 2009 from $98 million in 2008. The increase is primarily due to business written by our new Lloyd’s syndicate, which began writing business on June 1, 2009, and to an in increase in business written in Australia and southeast Asia.

~~Premiums Earned~~.Premiums earned decreased 11% to $943 million in 2009 from $1,055 million in 2008. Insurance premiums are earned ratably over the policy term, and therefore premiums earned in 2009 are related to business written during both 2009 and 2008. The 11% decrease for 2009 earned premiums reflects the underlying decline in net premiums written in 2008 and 2009.

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

Average Annualized
Amount Yield
2009 2008 2009 2008

Fixed maturity securities, including cash $ 125,745 $ 119,322 4.3 % 4.4 %
Arbitrage trading account and funds 12,242 (2,571 ) 7.5 (1.3 )
Equity securities available for sale 3,650 7,387 4.6 4.5

Gross investment income 141,637 124,138 4.5 4.0
Investment expenses (608 ) (1,793 )

Total $ 141,029 $ 122,345 4.5 % 4.0 %

Net investment income increased 15% to $141 million in 2009 from $122 million in 2008 primarily due to higher earnings from the merger arbitrage account. Average invested assets, at cost (including cash and cash equivalents) increased to $12.7 billion in 2009 from $12.3 billion in 2008 as a result of cash flow from operations and proceeds from the issuance of senior debt.

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

2009 2008

Real estate funds $ (20,697 ) $ (1,733 )
Energy funds (3,343 ) 34,282
Other funds (1,617 ) (1,492 )

Total $ (25,657 ) $ 31,057

Losses from investment funds were $26 million in 2009 compared to income of $31 million in 2008. The real estate funds, which had an aggregate carrying value of $167 million at September 30, 2009, invest in commercial loans and securities as well as direct property ownership. Asset values were impacted by general deterioration of real estate fundamentals coupled with the absence of a refinancing market and an increase in non-performing assets. In addition, in an environment of falling values and stricter underwriting standards, a large number of real estate projects are over-leveraged and facing near-term refinancing pressure. The energy funds reported a loss of $3 million in 2009 due to a decrease in the fair value of energy related investments held by the funds.

~~Insurance Service Fees~~. Insurance service fees consist of fee-based services to help clients develop and administer self-insurance programs, primarily for workers’ compensation coverage as well as brokerage services. Service fees were $22 million in 2009 and $26 million in 2008.

~~Net Investment Gains (Losses)~~. Net investment gains (losses) result primarily from sales of securities, as well as from provisions for other-than-temporary impairment in securities. The Company buys and sells securities on a regular basis in order to maximize its total return on investments. Decisions to sell securities are based on management’s view of the underlying fundamentals of specific securities as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions.

Net investment gains were $4 million in 2009 and were comprised of realized gains of $10 million, offset by from other-than-temporary impairments of $6 million ($3 million for fixed maturity securities and $3 million for loan loss reserves). Net investment losses were $220 million in 2008 and were primarily the result of other-than-temporary impairments of financial sector equity securities.

~~Revenues from Wholly-Owned Investees~~. Revenues from wholly-owned investees were $51 million in 2009 compared with $40 million in 2008. 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 service, aircraft sales and maintenance, avionics and engineering services and parts fabrication. The 2009 and 2008 revenues are not comparable since all of the companies were not owned for the three months ended September 30, 2008.

~~Losses and Loss Expenses~~. Losses and loss expenses decreased to $586 million in 2009 from $694 million in 2008 due to lower earned premium. The consolidated loss ratio was 62.1% in 2009 compared with 65.8% in 2008. Weather-related losses were $23 million in 2009 compared with $54 million in 2008. Favorable prior year reserve development, net of related premium adjustments, was $47 million in 2009 and $49 million in 2008. A summary of loss ratios in 2009 compared with 2008 by business segment follows:

	•		Specialty’s loss ratio increased to 63.8% in 2009 from 62.9% in 2008. Net favorable prior year development, net of related premium adjustments, was $13 million in 2009 compared with $31 million in 2008.

	•		The regional loss ratio decreased to 62.6% in 2009 from 69.3% in 2008. Weather-related losses were $23 million in 2009 compared with $34 million in 2008. Net favorable prior year development was $14 million in 2009 compared with $0.3 million in 2008.

	•		Alternative markets’ loss ratio decreased to 63.9% in 2009 from 64.8% in 2008. Net favorable prior year development, net of related premium adjustments, was $9 million in 2009 compared with $5 million in 2008.

	•		The reinsurance loss ratio decreased to 57.1% in 2009 from 68.9% in 2008. Net favorable prior year development, net of related premium adjustments, was $6 million in 2009 compared with $9 million in 2008.

	•		~~The international loss ratio decreased to 57.4% in 2009 from 63.3% in 2008. Net favorable prior year development was $5 million in 2009 compared with $3 million in 2008~~.

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

2009 2008

Underwriting expenses $ 310,618 $ 320,184
Service expenses 19,770 21,513
Net foreign currency losses (4,631 ) (4,021 )
Other costs and expenses 27,365 20,904

Total $ 353,122 $ 358,580

Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. The consolidated expense ratio (underwriting expenses expressed as a percentage of premiums earned) increased to 32.9% in 2009 from 30.3% in 2008 primarily due to the decline in earned premiums.

~~Service expenses, which represent the costs associated with the fee-based businesses, decreased 8% to $20 million due to lower employment costs.~~

~~Other costs and expenses, which represent corporate expenses increased 31% to $27 million, due mainly to an increase in incentive compensation costs.~~

~~Expenses from Wholly-Owned Investees~~. Expenses from wholly-owned investees were $50 million in 2009 compared to $39 million in 2008. 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 2009 and 2008 expenses are not comparable since the companies were not all owned for the three months ended September 30, 2008.

Investments

As part of its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities that, combined with expected cash flow, it believes adequate to meet payment obligations. The Company also attempts to maintain an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities, i.e., policy claims and debt obligations. ~~Over the balance of the year, we expect to increase the~~The average duration of ~~our~~its portfolio increased from 3.6 years at December 31, 2009 to ~~more closely match the duration of our liabilities.~~

3.7 years at March 31, 2010. The Company’s investment portfolio and investment-related assets as of ~~September 30, 2009~~March 31, 2010 were as follows ~~(in~~(dollars in thousands):


	Cost		Carrying Value		Cost		Carrying Value
Fixed maturity securities:
United States government and government agencies	$	1,422,327	$	1,473,693
U.S. government and government agencies					$	1,636,235	$	1,679,933
State and municipal		5,576,699		5,819,349		5,605,733		5,811,616
Mortgage-backed securities:
Agency		943,198		981,857		1,048,214		1,083,929
Residential-Prime		491,998		452,882		322,912		307,452
Residential-Alt A		87,556		79,518		71,848		67,037
Commercial		69,470		54,121		47,359		38,855

Total mortgage-backed securities		1,592,222		1,568,378		1,490,333		1,497,273


Corporate:
Industrial						813,788		857,250
Financial		882,435		890,086		666,854		662,738
Industrial		585,296		616,433
Utilities						186,042		192,765
Asset-backed		185,240		161,349		77,463		67,432
Utilities		184,993		192,359
Other		113,616		114,934		99,436		101,089
Government agency						7,611		7,602

Total corporate		1,951,580		1,975,161		1,851,194		1,888,876


Foreign government and foreign government agencies		338,474		353,245		408,202		419,267

Total fixed maturity securities		10,881,302		11,189,826		10,991,697		11,296,965


Equity securities available for sale:
Preferred stocks:
Financial		113,240		102,628		110,048		111,091
Real estate		119,834		118,038		130,212		131,657
Utilities		56,401		50,371		52,900		52,332

Total preferred stocks		289,475		271,037		293,160		295,080


Common stocks		27,362		127,258		27,237		117,225

Total equity securities available for sale		316,837		398,295		320,397		412,305


Arbitrage trading account		536,721		536,721		472,125		472,125
Investment in arbitrage funds		82,225		82,225		84,084		84,084
Investment funds		373,480		368,733		427,094		429,591
Loans receivable		391,268		391,268		376,993		376,993

Total investments	$	12,581,833	$	12,967,068	$	12,672,390	$	13,072,063

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, 2009~~March 31, 2010 (as compared to December 31, ~~2008)~~2009), the fixed maturity securities portfolio mix was as follows: ~~U.S. government securities were 13% (12% in 2008);~~ state and municipal securities were ~~52% (58%~~51% (52% in ~~2008)~~2009); corporate securities were ~~18% (10%~~17% (15% in ~~2008)~~2009); U.S. government securities were 15% (15% in 2009); mortgage-backed securities were ~~14% (17%~~13% (14% in ~~2008)~~2009); and foreign government bonds were ~~3% (3%~~4% (4% in ~~2008)~~2009).

The Company’s philosophy related to holding or selling fixed maturity securities is based on its objective of maximizing total return. The key factors that management considers in its investment decisions as to whether to hold or sell fixed maturity securities are its view of the underlying fundamentals of specific securities as well as its expectations regarding interest rates, credit spreads and currency values. In a period in which management expects interest rates to rise, the Company may sell longer duration securities in order to mitigate the impact of an interest rate rise on the ~~market~~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 REITs, financial companies and utilities.

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

Investment in Arbitrage Funds. Investment in 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, 2009~~March 31, 2010 and December 31, ~~2008,~~2009, the Company’s ~~investment~~carrying value in investment funds was ~~$369~~$430 million and ~~$496~~$419 million, respectively, ~~and included~~including investments in real estate funds of ~~$167~~$196 million and ~~$292~~$193 million, respectively, and investments in energy funds of $117 million and $106 million, respectively.

Loans Receivable. Loans receivable, which are carried at amortized cost, have an aggregate cost of ~~$391~~$377 million and an aggregate fair value of ~~$288~~$301 million at ~~September 30, 2009. This includes~~March 31, 2010. Amortized cost of these loans ~~with~~is net of a valuation allowance of $16 million as of March 31, 2010. The ten largest loans have an aggregate amortized cost of ~~$307~~$296 million and an aggregate fair value of ~~$201~~$216 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 January 2013. The loans are secured by office buildings (60%), hotels (27%) and senior living facilities (13%) located primarily in New York City, California, Hawaii, Boston and Philadelphia.

The Company’s insurance subsidiaries’ principal sources of cash are premiums, investment income, service fees and proceeds from sales and maturities of portfolio investments. The principal uses of cash are payments for claims, taxes, operating expenses and dividends. The Company expects its insurance subsidiaries to fund the payment of losses with cash received from premiums, investment income and fees. The Company targets an average duration for its investment portfolio that is within one year of the average duration of its liabilities so that portions of its investment portfolio mature throughout the claim cycle and are available for the payment of claims if necessary. In the event operating cash flow and proceeds from maturities and prepayments of fixed ~~income~~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, 2009.~~March 31, 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~~Activity.

During the first ~~nine~~three months of ~~2009,~~2010, the Company repurchased ~~1,636,200~~3,846,120 shares of its common stock for ~~$32~~$95 million. In ~~July 2009, a subsidiary of~~March 2010, the Company ~~entered into a $28 million line of credit, of which $18 million was outstanding as of September 30, 2009. In September 2009, the Company issued $300~~repaid $7.2 million of ~~7.375% Senior Notes due 2019.~~its junior subordinated debentures.

At ~~September 30, 2009,~~March 31, 2010, the Company had senior notes, junior subordinated debentures and other debt outstanding with a carrying value of ~~$1,590~~$1,588 million and a face amount of ~~$1,608~~$1,605 million. The maturities of the outstanding debt are ~~$170~~$150 million in 2010, $1$2 million in 2011, $3$24 million in 2012, ~~$200~~$201 million in 2013, $200 million in 2015, $450 million in 2019, $77 million in 2022, $7$1 million in ~~2035 (prepayable in 2010),~~2023, $250 million in 2037 and $250 million in ~~2045 (prepayable in 2010).~~2045.

At ~~September 30, 2009,~~March 31, 2010, equity was ~~$3.6~~$3.7 billion and total capitalization (equity, senior notes and other debt and junior subordinated debentures) was $5.2 billion. The percentage of the Company’s capital attributable to senior notes, junior subordinated debentures and other debt was ~~31%~~30% at ~~September 30, 2009~~March 31, 2010 and ~~29%~~31% at December 31, ~~2008.~~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 ~~3.4~~3.7 years at ~~September 30, 2009~~March 31, 2010 and ~~3.1~~3.6 years at December 31, ~~2008.~~2009. The overall market risk relating to the Company’s portfolio has remained similar to the risk at December 31, ~~2008.~~2009.

4635

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, 2009,~~March 31, 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, ~~2008.~~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.

~~Maximum number of~~

~~Total~~

~~Total number of shares~~

~~shares that may~~

~~number of~~

~~Average price~~

~~purchased as part of~~

~~yet be purchased~~

~~shares~~

~~paid per~~

~~publicly announced plans~~

~~under the plans or~~

~~purchased~~

~~share~~

~~or programs~~

~~programs (1)~~

~~July 2009~~

—

~~6,473,700~~

~~August 2009~~

—

~~10,000,000~~

~~September 2009~~

—

~~10,000,000~~


							Maximum number of
	Total				Total number of shares		shares that may
	number of		Average price		purchased as part of		yet be purchased
	shares		paid per		publicly announced plans		under the plans or
	purchased		share		or programs		programs (1)
January 2010		3,863,726	$	24.78		3,846,120		1,540,862
February 2010		—		—		—		11,540,862
March 2010		—		—		—		11,540,862


(1)		Remaining shares available for repurchase under the Company’s repurchase authorization ~~of 10,000,000 shares~~ approved by the ~~Board~~board of ~~Directors~~directors on ~~July 29, 2008. On August 4, 2009, the Board of Directors increased the Company’s repurchase authorization to 10,000,000 shares.~~February 8, 2010.

4736


	Amortized		Fair		Amortized		Fair
	Cost		Value
(Dollars in thousands)					Cost		Value
Due in one year or less	$	502,151	$	513,112	$	614,550	$	621,347
Due after one year through five years		2,958,810		3,072,172		2,799,561		2,916,998
Due after five years through ten years		3,132,728		3,307,840		3,061,681		3,199,209
Due after ten years		2,695,391		2,736,741		3,025,572		3,068,295
Mortgage-backed securities		1,592,222		1,571,446		1,490,333		1,500,609

Total	$	10,881,302	$	11,201,311	$	10,991,697	$	11,306,458


	For the Three Months
	Ended March 31,
(Dollars in thousands)	2010			2009
Written premiums:
Direct	$	938,324		$	941,726
Assumed		187,796			206,516
Ceded		(142,170	)		(124,770	)

Total net written premiums	$	983,950		$	1,023,472


Earned premiums:
Direct	$	905,343		$	932,200
Assumed		159,386			162,314
Ceded		(134,168	)		(115,306	)

Total net earned premiums	$	930,561		$	979,208


Ceded losses incurred	$	91,407		$	77,283


	March 31,		December 31,
	2010		2009
Specialty	$	5,598,433	$	5,589,666
Regional		2,735,731		2,741,269
Alternative markets		3,723,461		3,643,214
Reinsurance		3,165,116		3,142,017
International		1,158,260		1,118,994
Corporate, other and eliminations (1)		850,922		1,093,436

Consolidated	$	17,231,923	$	17,328,596


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

1%		56,881		171,208		314,116		50,629		152,390		279,592
5%		171,208		290,062		438,631		152,390		258,182		390,422
10%		314,116		438,631		594,274		279,592		390,422		528,958


	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2009			2008		2009			2008		2010			2009
Specialty	$	18,707		$	31,325	$	58,026		$	91,855	$	25,223		$	17,545
Regional		13,936			331		28,376			22,475		20,068			9,974
Alternative markets		11,071			4,782		35,352			29,636		5,073			16,280
Reinsurance		11,174			9,296		33,780			3,382		21,515			6,808
International		4,962			3,046		8,592			7,205		2,623			3,677

Total development		59,850			48,780		164,126			154,553		74,502			54,284


Premium offsets (1)
Specialty		(5,285	)		—		(5,285	)		—		(109	)		—
Alternative markets		(2,287	)		—		(2,287	)		—		(703	)		—
Reinsurance		(5,269	)		—		(22,103	)		—		(11,722	)		—


Net development	$	47,009		$	48,780	$	134,451		$	154,553	$	61,968		$	54,284


(1)		For the three months ended ~~September 30, 2008,~~March 31, 2009, the anti-dilutive effects of ~~6,086~~7,001 potential common shares outstanding were excluded from the outstanding diluted shares due to ~~the third quarter 2008~~a net ~~loss.~~loss for that period.


(1)		Gross unrealized losses for state and municipal securities ~~includes $605~~include $372,000 and $340,000 as of March 31, 2010 and December 31, 2009, respectively, related to the non-credit portion of ~~other-than-temporary~~other than temporary impairments (“OTTI”) recognized in other comprehensive income.

(2)		Gross unrealized losses for residential mortgage-backed securities ~~includes $7,617~~include $4,343,000 and $5,085,000 as of March 31, 2010 and December 31, 2009, respectively, related to the non-credit portion of ~~other-than-temporary impairments~~OTTI recognized in other comprehensive income.


	Number of		Aggregate		Unrealized		Number of		Aggregate		Unrealized
	Securities		Fair Value		Loss		Securities		Fair Value		Loss
Unrealized loss less than $5 million:
Mortgage-backed securities		11	$	82,327	$	31,989		6	$	69,085	$	14,164
Corporate		11		52,808		6,862		9		38,561		5,181
State and municipal		5		35,032		6,329		4		29,875		3,940
Foreign		1		484		21
Foreign bonds								7		16,779		290
Unrealized loss $5 million or more
Mortgage-backed security (1)								1		29,230		7,770

Total		28	$	170,651	$	45,201		27	$	183,530	$	31,345


	For the Three		For the Nine
	Months Ended		Months Ended
	September 30, 2009		September 30, 2009
Beginning balance of credit-related impairments	$	2,610		—
Credit losses for which an other-than-temporary impairment was not previously recognized		2,200		4,810

Ending balance of credit-related impairments	$	4,810	$	4,810


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


(1)		Represents ~~the~~ portion of favorable reserve development that was offset by a reduction in earned premiums.


	2009		2008

Net income to common shareholders	$	174,763	$	240,815
Weighted average diluted shares		166,765		175,369
Net income per diluted share	$	1.05	$	1.37


	2009		2008

Net income (loss) to common shareholders	$	97,722	$	(27,880	)
Weighted average diluted shares		166,736		162,675
Net income (loss) per diluted share	$	0.59	$	(0.17	)


	2009			2008

Real estate funds	$	(20,697	)	$	(1,733	)
Energy funds		(3,343	)		34,282
Other funds		(1,617	)		(1,492	)

Total	$	(25,657	)	$	31,057


	2009			2008

Underwriting expenses	$	310,618		$	320,184
Service expenses		19,770			21,513
Net foreign currency losses		(4,631	)		(4,021	)
Other costs and expenses		27,365			20,904

Total	$	353,122		$	358,580


	Number

	(31.1)			Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a).

	(31.2)			Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/ 15d-14(a).

	(32.1)			Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	W. R. BERKLEY CORPORATION
Date: ~~November 9, 2009~~May 7, 2010	/s/ William R. Berkley
	William R. Berkley
	Chairman of the Board and Chief Executive Officer


Date: ~~November 9, 2009~~May 7, 2010	/s/ Eugene G. Ballard
	Eugene G. Ballard
	Senior Vice President — Chief Financial Officer