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, 2011

or

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

For the Transition Period from to .

Commission File Number 1-15202

W. R. BERKLEY CORPORATION

(Exact name of registrant as specified in its charter)

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

	(203) 629-3000
	(Registrant’s telephone number, including area code)
	None
Former name, former address and former fiscal year, if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ     No o

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

Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ

Number of shares of common stock, $.20 par value, outstanding as of November 1, 2011: 137,102,059

TABLE OF CONTENTS

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

Part I — FINANCIAL INFORMATION

Item 1. Financial Statements

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

	September 30, 2011			December 31, 2010
	(Unaudited)
Assets
Investments:
Fixed maturity securities	$	11,230,770		$	11,209,154
Equity securities available for sale	438,465			561,053
Arbitrage trading account	327,883			359,192
Investment in arbitrage funds	56,606			60,660
Investment funds	610,513			451,751
Loans receivable	283,560			353,583
Real estate	346,015			—
Total investments	13,293,812			12,995,393
Cash and cash equivalents	866,130			642,952
Premiums and fees receivable	1,195,018			1,087,208
Due from reinsurers	1,187,344			1,070,256
Accrued investment income	133,940			138,384
Prepaid reinsurance premiums	275,479			215,816
Deferred policy acquisition costs	450,552			405,942
Real estate, furniture and equipment	263,689			254,720
Deferred federal and foreign income taxes	—			65,492
Goodwill	90,581			90,581
Trading account receivables from brokers and clearing organizations	380,887			339,235
Current federal and foreign income taxes	2,863			23,605
Other assets	190,526			198,963
Total assets	$	18,330,821		$	17,528,547
Liabilities and Equity
Liabilities:
Reserves for losses and loss expenses	$	9,261,584		$	9,016,549
Unearned premiums	2,214,954			1,953,721
Due to reinsurers	254,117			215,723
Trading account securities sold but not yet purchased	60,973			53,494
Other liabilities	924,667			836,001
Junior subordinated debentures	242,945			242,784
Senior notes and other debt	1,501,773			1,500,419
Total liabilities	14,461,013			13,818,691
Equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares; issued and outstanding - none	—			—
Common stock, par value $.20 per share:
Authorized 500,000,000 shares, issued and outstanding, net of treasury shares, 137,082,096 and 141,009,834 shares	47,024			47,024
Additional paid-in capital	927,348			935,099
Retained earnings	4,439,287			4,194,684
Accumulated other comprehensive income	335,741			276,563
Treasury stock, at cost, 98,035,822 and 94,108,084 shares	(1,887,007		)	(1,750,494		)
Total stockholders’ equity	3,862,393			3,702,876
Noncontrolling interests	7,415			6,980
Total equity	3,869,808			3,709,856
Total liabilities and equity	$	18,330,821		$	17,528,547

See accompanying notes to interim consolidated financial statements.

1

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(Dollars in thousands, except per share data)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
REVENUES:
Net premiums written	$	1,126,139		$	986,706		$	3,266,857		$	2,932,010
Change in net unearned premiums	(70,316		)	(19,409		)	(211,293		)	(86,024		)
Net premiums earned	1,055,823			967,297			3,055,564			2,845,986
Net investment income	114,063			119,143			409,261			392,435
Insurance service fees	22,279			22,175			69,487			64,050
Net investment gains (losses):
Net realized gains on investment sales	21,238			6,327			73,812			26,355
Other-than-temporary impairments	—			(1,123		)	(400		)	(3,705		)
Net investment gains	21,238			5,204			73,412			22,650
Revenues from wholly-owned investees	65,922			61,983			175,943			166,488
Other income	406			310			1,364			1,118
Total revenues	1,279,731			1,176,112			3,785,031			3,492,727
OPERATING COSTS AND EXPENSES:
Losses and loss expenses	683,980			597,907			1,965,351			1,718,355
Other operating costs and expenses	405,850			369,217			1,193,040			1,108,007
Expenses from wholly-owned investees	64,388			60,963			174,059			159,871
Interest expense	28,068			26,725			84,317			78,780
Total operating costs and expenses	1,182,286			1,054,812			3,416,767			3,065,013
Income before income taxes	97,445			121,300			368,264			427,714
Income tax expense	(20,176		)	(27,631		)	(91,485		)	(105,040		)
Net income before noncontrolling interests	77,269			93,669			276,779			322,674
Noncontrolling interests	39			(50		)	98			(238		)
Net income to common stockholders	$	77,308		$	93,619		$	276,877		$	322,436
NET INCOME PER SHARE:
Basic	$	0.56		$	0.64		$	1.97		$	2.14
Diluted	0.53			0.61			1.89			2.05

See accompanying notes to interim consolidated financial statements.

2

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(Dollars in thousands)

	For the Nine Months Ended
	September 30,
	2011			2010
COMMON STOCK:
Beginning and end of period	$	47,024		$	47,024
ADDITIONAL PAID-IN CAPITAL:
Beginning of period	$	935,099		$	926,359
Stock options exercised and restricted units issued, net of tax	(26,914		)	(12,239		)
Restricted stock units expensed	18,855			18,772
Stock issued to directors	308			198
End of period	$	927,348		$	933,090
RETAINED EARNINGS:
Beginning of period	$	4,194,684		$	3,785,187
Net income to common stockholders	276,877			322,436
Dividends	(32,274		)	(29,826		)
End of period	$	4,439,287		$	4,077,797
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Unrealized investment gains (losses):
Beginning of period	$	334,747		$	219,394
Unrealized gains on securities not other-than-temporarily impaired	79,435			230,804
Unrealized gains (losses) on other-than-temporarily impaired securities	(1,271		)	437
End of period	412,911			450,635
Currency translation adjustments:
Beginning of period	(42,488		)	(40,371		)
Net change in period	(21,104		)	765
End of period	(63,592		)	(39,606		)
Net pension asset:
Beginning of period	(15,696		)	(15,816		)
Net change in period	2,118			1,681
End of period	(13,578		)	(14,135		)
Total accumulated other comprehensive income	$	335,741		$	396,894
TREASURY STOCK:
Beginning of period	$	(1,750,494	)	$	(1,325,710	)
Stock exercised/vested	40,571			17,054
Stock repurchased	(177,648		)	(319,293		)
Stock issued to directors	564			536
End of period	$	(1,887,007	)	$	(1,627,413	)
NONCONTROLLING INTERESTS:
Beginning of period	$	6,980		$	5,879
Contributions	522			581
Net income (loss)	(98		)	238
Other comprehensive income, net of tax	11			11
End of period	$	7,415		$	6,709

See accompanying notes to interim consolidated financial statements.

3

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Net income before noncontrolling interests	$	77,269		$	93,669		$	276,779		$	322,674
Other comprehensive income (loss):
Change in unrealized foreign exchange gains (losses)	(30,957		)	17,985			(21,104		)	765
Unrealized holding gains on investment securities arising during the period, net of taxes	39,031			125,329			125,085			245,908
Reclassification adjustment for net investment losses included in net income, net of taxes	(13,784		)	(3,364		)	(46,910		)	(14,656		)
Change in unrecognized pension obligation, net of taxes	707			561			2,118			1,681
Other comprehensive income (loss)	(5,003		)	140,511			59,189			233,698
Comprehensive income	72,266			234,180			335,968			556,372
Comprehensive income (loss) to the noncontrolling interest	40			(53		)	87			(249		)
Comprehensive income to common stockholders	$	72,306		$	234,127		$	336,055		$	556,123

See accompanying notes to interim consolidated financial statements.

4

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

	For the Nine Months Ended
	September 30,
	2011			2010
CASH FROM OPERATING ACTIVITIES:
Net income to common stockholders	$	276,877		$	322,436
Adjustments to reconcile net income to net cash from operating activities:
Net investment gains	(73,412		)	(22,650		)
Depreciation and amortization	57,332			64,063
Noncontrolling interests	(98		)	238
Investment funds	(15,290		)	30,879
Stock incentive plans	19,727			20,357
Change in:
Securities trading account	31,309			(6,426		)
Investment in arbitrage funds	4,054			23,293
Trading account receivables from brokers and clearing organizations	(41,626		)	71,036
Trading account securities sold but not yet purchased	7,477			(78,009		)
Premiums and fees receivable	(111,411		)	(21,559		)
Due from reinsurers	(117,685		)	(44,694		)
Accrued investment income	4,265			(12,303		)
Prepaid reinsurance premiums	(59,663		)	16,780
Deferred policy acquisition costs	(45,531		)	(20,819		)
Deferred income taxes	27,137			19,655
Other assets	13,516			(19,716		)
Reserves for losses and loss expenses	250,393			7,371
Unearned premiums	264,681			72,580
Due to reinsurers	40,156			2,630
Other liabilities	(46,965		)	(34,425		)
Net cash from operating activities	485,243			390,717
CASH FROM INVESTING ACTIVITIES:
Proceeds from sales, excluding trading account:
Fixed maturity securities	1,129,377			1,264,497
Equity securities	112,760			79,344
Return of capital from investment funds	31,585			26,643
Proceeds from maturities and prepayments of fixed maturity securities	1,190,751			922,453
Cost of purchases, excluding trading account:
Fixed maturity securities	(2,118,556		)	(1,944,374		)
Equity securities	(49,932		)	(123,623		)
Real estate	(347,602		)	—
Contributions to investment funds	(180,122		)	(45,151		)
Change in loans receivable	71,803			22,251
Net additions to real estate, furniture and equipment	(37,405		)	(36,688		)
Change in balances due to security brokers	122,447			56,129
Payment for business purchased, net of cash acquired	(8,579		)	—
Net cash from investing activities	(83,473		)	221,481
CASH FROM FINANCING ACTIVITIES:
Purchase of common treasury shares	(177,648		)	(319,293		)
Net proceeds from issuance of debt	309			305,637
Cash dividends to common stockholders	(32,272		)	(30,947		)
Bank deposits received	16,858			8,649
Repayments to federal home loan bank	(600		)	(8,300		)
Net proceeds from stock options exercised	13,757			4,720
Repayment of debt	—			(165,160		)
Other, net	558			(236		)
Net cash from financing activities	(179,038		)	(204,930		)
Net impact on cash due to change in foreign exchange rates	446			(500		)
Net change in cash and cash equivalents	223,178			406,768
Cash and cash equivalents at beginning of year	642,952			515,430
Cash and cash equivalents at end of period	$	866,130		$	922,198

See accompanying notes to interim consolidated financial statements.

5

W. R. Berkley Corporation and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) General

The accompanying unaudited consolidated financial statements of W. R. Berkley Corporation and its subsidiaries (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all the information and notes required by GAAP for annual financial statements. The unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring items, which are necessary to present fairly the Company’s financial position and results of operations on a basis consistent with the prior audited consolidated financial statements. Operating results for interim periods are not necessarily indicative of the results that may be expected for the year. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements requires the use of management estimates. For further information related to a description of areas of judgment and estimates and other information necessary to understand the Company’s financial position and results of operations, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Reclassifications have been made in the 2010 financial statements as originally reported to conform to the presentation of the 2011 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.

Real estate held for investment purposes is initially recorded at the purchase price, which is generally fair value, and is subsequently reported at cost less accumulated depreciation. Buildings are depreciated on a straight-line basis over the estimated useful lives of the building. Rental income is recognized on a straight-line basis over the lease term and is reported, net of rental expenses, as net investment income. The carrying value of real estate is reviewed for impairment and an impairment loss is recognized if the estimated undiscounted cash flows from the use and disposition of the property are less than the carrying value of the property. Future minimum rental income expected on operating leases relating to real estate held for investment is $350,964 for the remainder of 2011, $1,421,405 in 2012, $1,464,047 in 2013, $1,507,969 in 2014, $1,553,208 in 2015 and $340,365,393 thereafter.

In January 2011, the Company acquired an inactive insurance company for $23 million in cash. The acquired company had cash and investments of $21 million and no net loss reserves. Approximately $2 million of the purchase price was allocated to intangible assets.

Acquisition costs incurred in writing insurance and reinsurance business (primarily commissions and premium taxes) are deferred and amortized ratably over the terms of the related contracts. Ceding commissions received on reinsurance contracts are netted against acquisition costs and are recognized ratably over the life of the contract. Deferred policy acquisition costs are presented net of unearned ceding commissions. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income and, if not, are charged to expense. The recoverability of deferred policy acquisition costs is evaluated separately by each of our operating companies for each of their major lines of business. Future investment income is taken into account in measuring the recoverability of deferred policy acquisition costs.

Loans receivable represent commercial real estate mortgage loans and bank loans and are carried at amortized cost. The Company monitors the performance of its loans receivable and establishes an allowance for loan losses for loans where the Company determines it is probable that the contractual terms will not be met, with a corresponding charge to earnings. For loans that are evaluated individually and deemed to be impaired, the Company establishes a specific allowance based on a discounted cash flow analysis and comparable cost and sales methodologies, if appropriate. Individual loans that are not considered impaired and smaller-balance homogeneous loans are evaluated collectively and a general allowance is established if it is considered probable that a loss has been incurred.

The accrual of interest on loans receivable is discontinued if the loan is 90 days past due based on contractual terms of the loan, unless the loan is adequately secured and in process of collection. In general, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. Interest on these loans is accounted for on a cash-basis until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

(2) Per Share Data

The Company presents both basic and diluted net income per share (“EPS”) amounts. Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the period and is calculated using the

6

treasury stock method for stock incentive plans. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation.

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

	For the Three Months Ended		For the Nine Months Ended
	September 30,		September 30,
	2011	2010	2011	2010
Basic	138,816	147,079	140,535	150,556
Diluted	144,538	154,160	146,553	157,054

(3) Recent Accounting Pronouncements

In October 2010, the FASB issued guidance regarding the treatment of costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of the types of costs that can be capitalized and specifies that the costs must be directly related to the successful acquisition of a new or renewed insurance contract. This guidance is effective for periods beginning after December 15, 2011. The Company is evaluating the impact of the adoption of this guidance and does not expect it to have a material impact on the Company’s results of operations or financial position.

In April 2011, the FASB issued updated guidance to clarify whether a modification or restructuring of a receivable is considered a troubled debt restructuring. A modification or restructuring that is considered a troubled debt restructuring will require the creditor to account for the receivable as being impaired and will also require additional disclosure of the creditors’ troubled debt restructuring activities. The updated guidance was effective July 1, 2011. The adoption of this guidance did not have a material impact on the Company’s results of operations or financial position.

In May 2011, the FASB issued updated guidance that changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and disclosing information about fair value measurements to improve consistency in the application and description of fair value between GAAP and International Financial Reporting Standards (“IFRS”). The updated guidance does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it already is required or permitted under IFRS or U.S. GAAP. This guidance is effective prospectively for interim and annual periods beginning after December 15, 2011. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations or current financial position.

In June 2011, the FASB issued updated guidance to increase the prominence of items reported in other comprehensive income by eliminating the option of presenting components of comprehensive income as part of the statement of changes in stockholders' equity. The updated guidance requires that all nonowner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance is to be applied retrospectively and is effective for interim and annual periods beginning after December 15, 2011. This guidance will not result in a change in the presentation of the Company’s financial statements and will not have any impact on the Company’s results of operations or current financial position.

In September 2011, the FASB issued updated guidance that modifies the manner in which the two-step impairment test of goodwill is applied. Under the updated guidance, an entity may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if the entity concludes otherwise, then it is required to perform the quantitative impairment test. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations or current financial position.

(4) Statements of Cash Flow

Interest payments were $100,840,000 and $92,531,000 and income taxes paid were $42,797,000 and $80,113,000 in the nine months ended September 30, 2011 and 2010, respectively.

7

(5) Investments in Fixed Maturity Securities

At September 30, 2011 and December 31, 2010, investments in fixed maturity securities were as follows:

(Dollars in thousands)	Amortized Cost		Gross Unrealized					Fair Value		Carrying Value
			Gains		Losses
September 30, 2011
Held to maturity:
State and municipal	$	73,282	$	10,920	$	—		$	84,202	$	73,282
Residential mortgage-backed	36,500		6,061		—			42,561		36,500
Corporate	4,996		746		—			5,742		4,996
Total held to maturity	114,778		17,727		—			132,505		114,778
Available for sale:
U.S. government and government agency	995,463		78,618		(344		)	1,073,737		1,073,737
State and municipal	5,019,033		286,782		(19,277		)	5,286,538		5,286,538
Mortgage-backed securities:
Residential (1)	1,383,414		77,663		(14,067		)	1,447,010		1,447,010
Commercial	53,966		2,791		(1,480		)	55,277		55,277
Corporate	2,613,879		136,728		(35,156		)	2,715,451		2,715,451
Foreign	512,708		27,520		(2,249		)	537,979		537,979
Total available for sale	10,578,463		610,102		(72,573		)	11,115,992		11,115,992
Total investments in fixed maturity securities	$	10,693,241	$	627,829	$	(72,573	)	$	11,248,497	$	11,230,770
December 31, 2010
Held to maturity:
State and municipal	$	71,998	$	3,440	$	(1,129	)	$	74,309	$	71,998
Residential mortgage-backed	39,002		3,667		—			42,669		39,002
Corporate	4,995		185		—			5,180		4,995
Total held to maturity	115,995		7,292		(1,129		)	122,158		115,995
Available for sale:
U.S. government and government agency	1,289,669		58,658		(452		)	1,347,875		1,347,875
State and municipal	5,302,513		203,221		(44,288		)	5,461,446		5,461,446
Mortgage-backed securities:
Residential (1)	1,319,289		52,165		(13,278		)	1,358,176		1,358,176
Commercial	57,057		2,207		(5,594		)	53,670		53,670
Corporate	2,307,987		102,306		(30,031		)	2,380,262		2,380,262
Foreign	460,683		31,283		(236		)	491,730		491,730
Total available for sale	10,737,198		449,840		(93,879		)	11,093,159		11,093,159
Total investments in fixed maturity securities	$	10,853,193	$	457,132	$	(95,008	)	$	11,215,317	$	11,209,154

___________

(1) Gross unrealized losses for residential mortgage-backed securities include $6,020,000 and $4,064,000 as of September 30, 2011 and December 31, 2010, respectively, related to the non-credit portion of other-than-temporary impairments (“OTTI”) recognized in other comprehensive income.

8

The amortized cost and fair value of fixed maturity securities at September 30, 2011, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay obligations:

(Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	707,725	$	718,688
Due after one year through five years	3,220,365		3,373,391
Due after five years through ten years	2,552,147		2,748,995
Due after ten years	2,739,124		2,862,575
Mortgage-backed securities	1,473,880		1,544,848
Total	$	10,693,241	$	11,248,497

At September 30, 2011, there were no investments, other than investments in United States government and government agency securities, which exceeded 10% of common stockholders’ equity.

(6) Investments in Equity Securities Available for Sale

At September 30, 2011 and December 31, 2010, investments in equity securities available for sale were as follows:

(Dollars in thousands)	Cost		Gross Unrealized					Fair Value		Carrying Value
			Gains		Losses
September 30, 2011
Common stocks	$	203,435	$	119,804	$	(12,301	)	$	310,938	$	310,938
Preferred stocks	137,972		4,605		(15,050		)	127,527		127,527
Total	$	341,407	$	124,409	$	(27,351	)	$	438,465	$	438,465
December 31, 2010
Common stocks	$	188,949	$	128,096	$	(989	)	$	316,056	$	316,056
Preferred stocks	215,286		40,386		(10,675		)	244,997		244,997
Total	$	404,235	$	168,482	$	(11,664	)	$	561,053	$	561,053

(7) Arbitrage Trading Account and Arbitrage Funds

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

(Dollars in thousands)	September 30, 2011			December 31, 2010
Arbitrage trading account	$	327,883		$	359,192
Investment in arbitrage funds	56,606			60,660
Related assets and liabilities:
Receivables from brokers	380,887			339,235
Securities sold but not yet purchased	(60,973		)	(53,494		)

9

(8) Net Investment Income

Net investment income consists of the following:

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2011			2010			2011			2010
Investment income earned on:
Fixed maturity securities, including cash and cash equivalents, loans receivable and real estate	$	123,100		$	122,617		$	370,557		$	373,375
Equity securities available for sale	2,795			2,723			9,544			8,716
Investment funds	(7,699		)	(19,044		)	23,836			(12,786		)
Arbitrage trading account and funds	(3,467		)	13,651			7,929			26,005
Gross investment income	114,729			119,947			411,866			395,310
Investment expense	(666		)	(804		)	(2,605		)	(2,875		)
Net investment income	$	114,063		$	119,143		$	409,261		$	392,435

(9) Loans Receivable

Loans receivable are as follows (dollars in thousands):

	September 30, 2011			December 31, 2010
Loans receivable, at cost	$	283,560		$	353,583
Loans receivable in nonaccrual status, at cost	4,079			4,985
Loans receivable with a specific valuation allowance, at cost	29,268			31,855
Specific valuation allowance	18,797			18,865
Three months ended September 30,	2011			2010
Decrease in valuation allowance	$	(9	)	$	—
Loans receivable charged off	9			—
Nine months ended September 30,	2011			2010
Increase in valuation allowance	$	541		$	6,090
Loans receivable charged off	9			—

The Company monitors the performance of its loans receivable and assesses the ability of the borrower to pay principal and interest based upon loan structure, underlying property values, cash flow and related financial and operating performance of the property and market conditions. Loans receivable with a potential for default are further assessed using discounted cash flow analysis and comparable cost and sales methodologies, if appropriate. Interest on loans that are 90 days past due is discontinued.

The Company's seven largest loans receivable, which have an aggregate amortized cost of $208 million and an aggregate fair value of $188 million at September 30, 2011, are secured by commercial real estate located primarily in New York City, California, Hawaii and Boston. These loans earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through March 2016. As part of the evaluation process, the Company reviews certain credit quality indicators for these loans. The primary credit quality indicator is the debt service coverage ratio, which compares a property's net operating income to the borrower's principal and interest payments on the Company's loan and senior loans, if any. At September 30, 2011, the debt service coverage ratio for each of these loans was 1.5 times or greater.

10

(10) Realized and Unrealized Investment Gains (Losses)

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

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2011			2010			2011			2010
Realized investment gains:
Fixed maturity securities:
Gains	$	10,212		$	5,669		$	25,049		$	27,519
Losses	(2,207		)	(2,956		)	(4,716		)	(6,214		)
Equity securities available for sale	12,318			2,974			50,539			3,765
Other	—			—			—			224
Sales of investment funds	915			640			2,940			1,061
Provision for OTTI	—			(1,123		)	(400		)	(3,705		)
Less investment impairments recognized in other comprehensive income	—			—			—			—
Total net investment gains before income taxes	21,238			5,204			73,412			22,650
Income tax expense	(7,454		)	(1,840		)	(26,502		)	(7,994		)
Total net investment gains	$	13,784		$	3,364		$	46,910		$	14,656

Change in unrealized gains (losses) of available for sale securities:
Fixed maturity securities	$	115,933		$	163,180		$	187,851		$	341,502
Less non-credit portion of OTTI recognized in other comprehensive income	(1,300		)	(826		)	(1,956		)	673
Equity securities available for sale	(65,861		)	23,570			(59,760		)	11,300
Investment funds	(9,257		)	1,707			(5,067		)	2,006
Total change in unrealized gains (losses) before income taxes and noncontrolling interests	39,515			187,631			121,068			355,481
Income tax expense	(14,268		)	(65,666		)	(42,893		)	(124,229		)
Noncontrolling interests	1			(3		)	(11		)	(11		)
Total change in unrealized gains	$	25,248		$	121,962		$	78,164		$	231,241

11

(11) Securities in an Unrealized Loss Position

The following table summarizes all securities in an unrealized loss position at September 30, 2011 and December 31, 2010 by the length of time those securities have been continuously in an unrealized loss position:

	Less Than 12 Months				12 Months or Greater				Total
(Dollars in thousands)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
September 30, 2011
U.S. government and agency	$	19,422	$	262	$	5,108	$	82	$	24,530	$	344
State and municipal	195,770		2,279		218,058		16,998		413,828		19,277
Mortgage-backed securities	96,672		2,343		94,319		13,204		190,991		15,547
Corporate	573,666		11,944		122,770		23,212		696,436		35,156
Foreign	61,939		2,249		—		—		61,939		2,249
Fixed maturity securities	947,469		19,077		440,255		53,496		1,387,724		72,573
Common stocks	87,614		12,301		—		—		87,614		12,301
Preferred stocks	13,339		855		45,859		14,195		59,198		15,050
Equity securities	100,953		13,156		45,859		14,195		146,812		27,351
Total	$	1,048,422	$	32,233	$	486,114	$	67,691	$	1,534,536	$	99,924
December 31, 2010
U.S. government and agency	$	60,228	$	420	$	6,973	$	32	$	67,201	$	452
State and municipal	951,119		26,577		156,617		18,840		1,107,736		45,417
Mortgage-backed securities	116,194		2,809		174,163		16,063		290,357		18,872
Corporate	409,604		7,233		155,259		22,798		564,863		30,031
Foreign	43,514		236		—		—		43,514		236
Fixed maturity securities	1,580,659		37,275		493,012		57,733		2,073,671		95,008
Common stocks	58,979		989		—		—		58,979		989
Preferred stocks	27,010		2,368		76,890		8,307		103,900		10,675
Equity securities	85,989		3,357		76,890		8,307		162,879		11,664
Total	$	1,666,648	$	40,632	$	569,902	$	66,040	$	2,236,550	$	106,672

Fixed Maturity Securities – A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at September 30, 2011 is presented in the table below.

(Dollars in thousands)	Number of Securities	Aggregate Fair Value		Gross Unrealized Loss
Unrealized loss less than $5 million:
Mortgage-backed securities	14	$	104,165	$	6,369
Corporate	15	65,293		3,537
State and municipal	4	31,736		4,830
Foreign	4	8,953		165
Unrealized loss $5 million or more:
Mortgage-backed securitiy (1)	1	17,365		5,549
Total	38	$	227,512	$	20,450

_______________

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

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

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(Dollars in thousands)	2011		2010		2011		2010
Beginning balance of amounts related to credit losses	$	4,261	$	5,661	$	4,261	$	5,661
Additions for amounts related to credit losses	—		—		—		—
Ending balance of amounts related to credit losses	$	4,261	$	5,661	$	4,261	$	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 under financial covenants. Based on its assessment of these issuers, the Company expects them to continue to meet their contractual payment obligations as they become due and does not consider any of these securities to be OTTI.

Preferred Stocks – At September 30, 2011, there were six preferred stocks in an unrealized loss position, with an aggregate fair value of $59 million and a gross unrealized loss of $15 million. Three of those preferred stocks with an aggregate fair value of $13 million and a gross unrealized loss of $5 million were rated non-investment grade. Based upon management’s view of the underlying value of these securities, the Company does not consider any of the preferred stocks to be OTTI.

Common Stocks – At September 30, 2011, the Company owned eleven common stocks in an unrealized loss position with an aggregate fair value of $88 million and an aggregate unrealized loss of $12 million. The Company does not consider these common stocks to be OTTI.

Loans Receivable – The Company monitors the performance of its loans receivable, including current market conditions for each loan and the ability to collect principal and interest. For loans where the Company determines it is probable that the contractual terms will not be met, an analysis is performed and a valuation reserve is established, if necessary, with a charge to earnings. (See note 9, Loans Receivable).

(12)Fair Value Measurements

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

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

13

The following tables present the assets and liabilities measured at fair value, on a recurring basis, as of September 30, 2011 and December 31, 2010 by level:

(Dollars in thousands)	Total		Level 1		Level 2		Level 3
September 30, 2011
Assets:
Fixed maturity securities available for sale:
U.S. government and agency	$	1,073,737	$	—	$	1,073,737	$	—
State and municipal	5,286,538		—		5,286,538		—
Mortgage-backed securities	1,502,287		—		1,502,287		—
Corporate	2,715,451		—		2,640,447		75,004
Foreign	537,979		—		537,979		—
Total fixed maturity securities available for sale	11,115,992		—		11,040,988		75,004
Equity securities available for sale:
Common stocks	310,938		253,396		55,983		1,559
Preferred stocks	127,527		—		109,437		18,090
Total equity securities available for sale	438,465		253,396		165,420		19,649
Arbitrage trading account	327,883		133,939		192,927		1,017
Total	$	11,882,340	$	387,335	$	11,399,335	$	95,670
Liabilities:
Securities sold but not yet purchased	$	60,973	$	60,941	$	12	$	20
December 31, 2010
Assets:
Fixed maturity securities available for sale:
U.S. government and agency	$	1,347,875	$	—	$	1,347,875	$	—
State and municipal	5,461,446		—		5,461,446		—
Mortgage-backed securities	1,411,846		—		1,411,846		—
Corporate	2,380,262		—		2,292,199		88,063
Foreign	491,730		—		491,730		—
Total fixed maturity securities available for sale	11,093,159		—		11,005,096		88,063
Equity securities available for sale:
Common stocks	316,056		204,749		109,748		1,559
Preferred stocks	244,997		—		155,551		89,446
Total equity securities available for sale	561,053		204,749		265,299		91,005
Arbitrage trading account	359,192		162,292		193,713		3,187
Total	$	12,013,404	$	367,041	$	11,464,108	$	182,255
Liabilities:
Securities sold but not yet purchased	$	53,494	$	51,672	$	1,822	$	—

There were no significant transfers between Levels 1 and 2 during the three or nine months ended September 30, 2011, or during the year ended December 31, 2010.

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The following tables summarize changes in Level 3 assets for the nine months ended September 30, 2011 and for the year ended December 31, 2010:

			Gains (Losses) Included in
(Dollars in thousands)	Beginning Balance		Earnings			Other Comprehensive Income				Purchases			(Sales)			Maturities			Transfer out			Ending Balance
For the nine months ended September 30, 2011:
Fixed maturity securities available for sale:
Corporate	$	88,063	$	20		$	(386	)		$	8,195		$	(3,952	)	$	(16,936	)	$	—		$	75,004
Total	88,063		20			(386		)		8,195			(3,952		)	(16,936		)	—			75,004
Equity securities available for sale:
Common stocks	1,559		—			—				—			—			—			—			1,559
Preferred stocks	89,446		27,338			(29,641		)		—			(69,053		)	—			—			18,090
Total	91,005		27,338			(29,641		)		—			(69,053		)	—			—			19,649
Arbitrage trading account	3,187		795			—			—	269		—	(3,234		)	—			—			1,017
Total	$	182,255	$	28,153		$	(30,027	)		$	8,464		$	(76,239	)	$	(16,936	)	$	—		$	95,670
For the year ended December 31, 2010
Fixed maturity securities available for sale:
Mortgage-backed securities	$	25,900	$	—		$	—			$	—		$	—		$	—		$	(25,900	)	$	—
Corporate	90,160		(850		)	1,558				19,632			(5,324		)	(17,113		)	—			88,063
Total	116,060		(850		)	1,558				19,632			(5,324		)	(17,113		)	(25,900		)	88,063
Equity securities available for sale:
Common stocks	1,559		—			—				—			—			—			—			1,559
Preferred stocks	54,713		23,535			31,633				19,542			(39,977		)	—			—			89,446
Total	56,272		23,535			31,633				19,542			(39,977		)	—			—			91,005
Arbitrage trading account	353		(353		)	—				3,187			—			—			—			3,187
Total	$	172,685	$	22,332		$	33,191			$	42,361		$	(45,301	)	$	(17,113	)	$	(25,900	)	$	182,255

During the year ended December 31, 2010, a mortgage-backed security was transferred from Level 3 to Level 2 as the Company was able to obtain a quotation from a third party broker dealer.

15

(13) Reinsurance

The following is a summary of reinsurance financial information:

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2011			2010			2011			2010
Written premiums:
Direct	$	1,114,494		$	962,872		$	3,286,220		$	2,854,951
Assumed	191,806			158,523			535,214			506,033
Ceded	(180,161		)	(134,689		)	(554,577		)	(428,974		)
Total net premiums written	$	1,126,139		$	986,706		$	3,266,857		$	2,932,010
Earned premiums:
Direct	$	1,070,279		$	947,314		$	3,063,410		$	2,779,044
Assumed	165,208			162,783			489,020			482,628
Ceded	(179,664		)	(142,800		)	(496,866		)	(415,686		)
Total net premiums earned	$	1,055,823		$	967,297		$	3,055,564		$	2,845,986
Ceded losses incurred	$	134,027		$	88,928		$	329,139		$	315,580

The Company reinsures a portion of its exposures principally to reduce its net liability on individual risks and to protect against catastrophic losses. Estimated amounts due from reinsurers are reported net of reserves for uncollectible reinsurance of $3 million as of September 30, 2011 and December 31, 2010.

(14) Fair Value of Financial Instruments

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

	September 30, 2011				December 31, 2010
(Dollars in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Fixed maturity securities	$	11,230,770	$	11,248,497	$	11,209,154	$	11,215,317
Equity securities available for sale	438,465		438,465		561,053		561,053
Arbitrage trading account	327,883		327,883		359,192		359,192
Investment in arbitrage funds	56,606		56,606		60,660		60,660
Loans receivable	283,560		265,998		353,583		312,515
Cash and cash equivalents	866,130		866,130		642,952		642,952
Trading account receivables from brokers and clearing organizations	380,887		380,887		339,235		339,235
Liabilities:
Trading account securities sold but not yet purchased	60,973		60,973		53,494		53,494
Due to broker	127,792		127,792		5,318		5,318
Junior subordinated debentures	242,945		249,900		242,784		249,900
Senior notes and other debt	1,501,773		1,616,634		1,500,419		1,570,057

The estimated fair values of the Company’s fixed maturity securities, equity securities available for sale and arbitrage trading account securities are based on various valuation techniques, as described in note 12 above. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available. The fair value of loans receivable are estimated by using current institutional purchaser yield requirements for loans with similar credit characteristics. The fair value of the senior

16

notes and other debt and the junior subordinated debentures is based on spreads for similar securities.

(15) Restricted Stock Units

Pursuant to its stock incentive plan, the Company may issue restricted stock units (RSUs) to officers of the Company and its subsidiaries. The RSUs generally vest five years from the award date and are subject to other vesting and forfeiture provisions contained in the award agreement. Grants of RSUs are made periodically, generally twice within a five-year period. A summary of RSUs issued in 2011 and 2010 follows (dollars in thousands):

	Units	Fair Value
Nine months ended September 30:
2011	53,250	$	1,674
2010	2,226,650	$	58,456

(16) Industry Segments

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

Our specialty segment underwrites complex and sophisticated third-party liability risks, principally within the excess and surplus lines. The primary lines of business are premises operations, property, professional liability, products liability and commercial automobile. 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 based on markets served, which provides them with the flexibility to adapt to local market conditions, while enjoying the superior administrative capabilities and financial strength of the Company.

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

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

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

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

17

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

	Revenues
(Dollars in thousands)	Earned Premiums		Investment Income		Other		Total		Pre-Tax Income (Loss)			Net Income (Loss)
For the three months ended September 30, 2011:
Specialty	$	367,417	$	37,438	$	664	$	405,519	$	71,046		$	51,502
Regional	267,142		16,099		1,207		284,448		(10,700		)	(4,669		)
Alternative markets	156,820		25,931		20,408		203,159		33,076			25,185
Reinsurance	103,906		18,641		—		122,547		16,134			13,165
International	160,538		10,741		—		171,279		14,182			9,874
Corporate and eliminations (1)	—		5,213		66,328		71,541		(47,531		)	(31,533		)
Net investment gains	—		—		21,238		21,238		21,238			13,784
Consolidated	$	1,055,823	$	114,063	$	109,845	$	1,279,731	$	97,445		$	77,308
For the three months ended September 30, 2010:
Specialty	$	326,239	$	40,814	$	765	$	367,818	$	61,989		$	45,268
Regional	268,089		18,413		782		287,284		22,946			17,159
Alternative markets	148,830		28,136		20,631		197,597		42,007			30,734
Reinsurance	103,126		19,779		—		122,905		26,508			19,641
International	121,013		8,722		—		129,735		12,712			8,217
Corporate and eliminations (1)	—		3,279		62,290		65,569		(50,066		)	(30,764		)
Net investment gains	—		—		5,204		5,204		5,204			3,364
Consolidated	$	967,297	$	119,143	$	89,672	$	1,176,112	$	121,300		$	93,619
For the nine months ended September 30, 2011:
Specialty	$	1,047,567	$	138,868	$	2,065	$	1,188,500	$	238,979		$	171,806
Regional	795,423		59,459		3,377		858,259		(1,381		)	6,154
Alternative markets	454,156		96,072		64,049		614,277		116,285			86,979
Reinsurance	315,220		72,230		—		387,450		66,857			52,024
International	443,198		32,692		—		475,890		28,208			18,925
Corporate and eliminations (1)	—		9,940		177,303		187,243		(154,096		)	(105,921		)
Net investment gains	—		—		73,412		73,412		73,412			46,910
Consolidated	$	3,055,564	$	409,261	$	320,206	$	3,785,031	$	368,264		$	276,877
For the nine months ended September 30, 2010:
Specialty	$	955,705	$	133,027	$	2,383	$	1,091,115	$	212,836		$	154,559
Regional	798,387		60,995		2,448		861,830		90,415			66,205
Alternative markets	458,842		90,658		59,228		608,728		138,563			101,117
Reinsurance	308,316		75,210		—		383,526		91,085			68,373
International	324,736		25,105		—		349,841		19,671			13,631
Corporate and eliminations (1)	—		7,440		167,597		175,037		(147,506		)	(96,105		)
Net investment gains	—		—		22,650		22,650		22,650			14,656
Consolidated	$	2,845,986	$	392,435	$	254,306	$	3,492,727	$	427,714		$	322,436

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Identifiable assets by segment are as follows:

(Dollars in thousands)	September 30, 2011		December 31, 2010
Specialty	$	6,025,982	$	5,854,256
Regional	2,571,864		2,616,238
Alternative markets	4,039,786		3,801,597
Reinsurance	2,856,670		2,972,988
International	1,518,326		1,391,604
Corporate, other and eliminations (1)	1,318,193		891,864
Consolidated	$	18,330,821	$	17,528,547

___________

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

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

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
(Dollars in thousands)	2011		2010		2011		2010
Specialty
Premises operations	$	119,496	$	98,699	$	331,457	$	286,458
Property	59,578		56,525		174,690		156,447
Professional liability	58,739		52,092		167,748		147,129
Commercial automobile	36,440		30,056		102,055		98,684
Products liability	24,954		23,870		71,856		87,106
Other	68,210		64,997		199,761		179,881
Total specialty	367,417		326,239		1,047,567		955,705
Regional
Commercial multiple peril	98,200		97,642		292,030		290,755
Commercial automobile	72,537		75,082		217,021		226,719
Workers’ compensation	55,133		53,788		163,602		160,466
Other	41,272		41,577		122,770		120,447
Total regional	267,142		268,089		795,423		798,387
Alternative Markets
Primary workers’ compensation	70,172		64,421		199,768		192,393
Excess workers’ compensation	40,038		53,485		126,940		169,536
Other	46,610		30,924		127,448		96,913
Total alternative markets	156,820		148,830		454,156		458,842
Reinsurance
Casualty	75,917		82,273		228,529		230,418
Property	27,989		20,853		86,691		77,898
Total reinsurance	103,906		103,126		315,220		308,316
International
Professional liability	24,982		20,207		69,875		63,978
Property	38,452		24,189		106,038		53,001
Reinsurance	26,330		20,791		68,779		51,691
Automobile	18,428		18,313		53,425		52,996
Workers’ compensation	18,884		14,555		54,480		41,606
Other liability	16,323		10,822		41,785		30,868
Other	17,139		12,136		48,816		30,596
Total international	160,538		121,013		443,198		324,736
Total	$	1,055,823	$	967,297	$	3,055,564	$	2,845,986

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(17) Commitments, Litigation and Contingent Liabilities

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

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SAFE HARBOR STATEMENT

This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. This document may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of the forward-looking statements can be identified by the use of forward-looking words such as "believes,” “expects,” “potential,” “continued,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” or the negative version of those words or other comparable words. Any forward-looking statements contained herein, including statements related to our outlook for the industry and for our performance for the year 2011 and beyond, are based upon the Company’s historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information is not and should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. They are subject to various risks and uncertainties, including but not limited to: the cyclical nature of the property casualty industry; the long-tail and potentially volatile nature of the insurance and reinsurance business; product demand and pricing; claims development and the process of estimating reserves; investment risks, including those of our portfolio of fixed maturity securities and investments in equity securities, including investments in financial institutions, municipal bonds, mortgage-backed securities, loans receivable, investment funds, real estate, merger arbitrage and private equity investments; the impact of significant competition; the uncertain nature of damage theories and loss amounts; natural and man-made catastrophic losses, including as a result of terrorist activities; general economic and market activities, including inflation, interest rates and volatility in the credit and capital markets; the impact of the economic downturn, and the potential effect of any legislative, regulatory, accounting or other initiatives taken in response to it, on our results and financial condition; continued availability of capital and financing; the success of our new ventures or acquisitions and the availability of other opportunities; the availability of reinsurance; our retention under the Terrorism Risk Insurance Program Reauthorization Act of 2007; the ability of our reinsurers to pay reinsurance recoverables owed to us; foreign currency and political risks relating to our international operations; other legislative and regulatory developments, including those related to business practices in the insurance industry; changes in the ratings assigned to us or our insurance company subsidiaries by rating agencies; the availability of dividends from our insurance company subsidiaries; our ability to attract and retain key personnel and 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 2011 and beyond to differ materially from those expressed in any forward-looking statement we make. Any projections of growth in our revenues would not necessarily result in commensurate levels of earnings. Our future financial performance is dependent upon factors discussed in our Annual Report on Form 10-K, elsewhere in this Form 10-Q and our other SEC filings. Forward-looking statements speak only as of the date on which they are made. Except to the extent required by applicable laws, the Company does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

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

Overview

W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in the United States and operates in five business segments: specialty, regional, alternative markets, reinsurance and international. Our decentralized structure provides us with the flexibility to respond to local or specific market conditions and to pursue specialty business niches. It also allows us to be closer to our customers in order to better understand their individual needs and risk characteristics. While providing our business units with certain operating autonomy, our structure allows us to capitalize on the benefits of economies of scale through centralized capital, investment and reinsurance management, and actuarial, financial and corporate legal staff support. The Company’s primary sources of revenues and earnings are its insurance operations and its investments.

Twenty-one of our operating units have been formed since 2006 to capitalize on various business opportunities. These newer units are focused on important parts of the economy in the U.S., including healthcare, energy and agriculture, and on growing international markets, including Norway, Australia, Southeast Asia and South America.

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

Beginning in 2005, the property casualty insurance market became more competitive and insurance rates decreased across most business lines. Increased competition and the impact of the current economic downturn also put pressure on policy terms and conditions. While prices began to increase in 2011, loss costs are also increasing and current market price levels for certain lines of business remain below the prices required for the Company to achieve its return objectives. Price changes are reflected in the Company’s results over time as premiums are earned.

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

Critical Accounting Estimates

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

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

In general, when a claim is reported, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment. 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 based

22

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 provide assurance that its current reserves will prove adequate in light of subsequent events.

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

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

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

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

23

controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations.

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

The key assumptions used in calculating the most recent estimate of the loss reserves are reviewed each quarter and adjusted, to the extent necessary, to reflect historical changes, current trends and other factors observed. If the actual level of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s estimate. The following table reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity on our loss estimate for claims occurring in 2010, the most recent full year of loss data (dollars in thousands):

	Frequency (+/-)
Severity (+/-)	1%	5%	10%
1%	50,450	151,851	278,603
5%	151,851	257,268	389,040
10%	278,603	389,040	527,086

Our net reserves for losses and loss expenses of approximately $8.1 billion as of September 30, 2011, relate to multiple accident years. Therefore, the impact of changes in frequency or severity for more than one accident year could be higher or lower than the amounts reflected above.

Approximately $1.5 billion, or 18%, of the Company’s net loss reserves as of September 30, 2011 relate to our reinsurance segment. There is a higher degree of uncertainty and greater variability regarding estimates of assumed loss reserves because those estimates are based, in part, upon information received from ceding companies. If information received from ceding companies is not timely or correct, the Company’s estimate of ultimate losses may not be accurate. Furthermore, due to delayed reporting of claim information by ceding companies, the claim settlement tail for assumed reinsurance is extended. Management considers the impact of delayed reporting in its selection of assumed loss development factors.

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

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Following is a summary of the Company’s reserves for losses and loss expenses by business segment as of September 30, 2011 and December 31, 2010:

(Dollars in thousands)	September 30, 2011		December 31, 2010
Specialty	$	2,883,638	$	2,883,823
Regional	1,299,937		1,285,004
Alternative markets	1,964,666		1,867,470
Reinsurance	1,455,184		1,507,353
International	525,974		455,871
Net reserves for losses and loss expenses	8,129,399		7,999,521
Ceded reserves for losses and loss expenses	1,132,185		1,017,028
Gross reserves for losses and loss expenses	$	9,261,584	$	9,016,549

Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of September 30, 2011 and December 31, 2010:

(Dollars in thousands)	Reported Case Reserves		Incurred But Not Reported		Total
September 30, 2011
General liability	$	884,810	$	2,001,597	$	2,886,407
Workers’ compensation	1,308,728		988,649		2,297,377
Commercial automobile	272,792		183,726		456,518
International	275,383		250,591		525,974
Other	220,987		286,952		507,939
Total primary	2,962,700		3,711,515		6,674,215
Reinsurance	604,251		850,933		1,455,184
Total	$	3,566,951	$	4,562,448	$	8,129,399
December 31, 2010
General liability	$	873,553	$	2,038,814	$	2,912,367
Workers’ compensation	1,188,117		1,022,331		2,210,448
Commercial automobile	325,686		173,247		498,933
International	195,981		259,890		455,871
Other	158,794		255,755		414,549
Total primary	2,742,131		3,750,037		6,492,168
Reinsurance	639,997		867,356		1,507,353
Total	$	3,382,128	$	4,617,393	$	7,999,521

Reserves for primary and excess workers’ compensation business are net of an aggregate net discount of $902 million and $898 million as of September 30, 2011 and December 31, 2010, respectively.

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

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
(Dollars in thousands)	2011		2010			2011			2010
Favorable (adverse) reserve development:
Specialty	$	35,489	$	13,461		$	96,625		$	70,511
Regional	10,268		19,264			25,277			68,892
Alternative markets	5,057		6,931			(2,088		)	17,485
Reinsurance	4,312		8,852			18,674			39,247
International	709		(661		)	3,611			2,826
Total favorable reserve development	55,835		47,847			142,099			198,961
Premium offsets (1):
Specialty	76		2,525			321			211
Alternative markets	136		499			(20		)	75
Reinsurance	—		(330		)	—			(19,363		)
Net development	$	56,047	$	50,541		$	142,400		$	179,884

 _____________

(1) Represents portion of reserve development offset by premium adjustments.

For the nine months ended September 30, 2011 estimates for claims occurring in prior years decreased by $142 million. The favorable reserve development in 2011 was primarily attributable to accident years 2007 through 2009. The changes in prior year loss reserve estimates are generally the result of ongoing analysis of recent loss development trends. Original estimates are increased or decreased as additional information becomes known regarding individual claims and aggregate claim trends.

Specialty - The majority of the favorable reserve development for the specialty segment during the first nine months of 2011 and 2010 was associated with excess and surplus (“E&S”) business. E&S insurers are free from rate and form regulation and generally charge higher rates for business than those that are charged in the “standard” market. Beginning in 2003, the E&S business began to experience improved claim frequency (i.e., a lower number of reported claims per unit of exposure). One reason for the lower number of claims was the Company’s introduction of more restrictive policy language which included additional exclusions that eliminated claims that would have previously been covered, particularly for the Company’s building contractor business. In addition, as standard carriers tightened their underwriting criteria, the Company benefited from an influx of accounts from the standard market to the E&S market during these years. The more restrictive policy language and the influx of standard market business resulted in an improved risk profile within the E&S business and a reduction in loss costs that was not expected at the time loss reserves were initially established. We began to recognize those trends in 2007 and have continued to reduce our estimates of ultimate claim costs since then as the magnitude of the frequency trends has become more evident. The favorable reserve development in 2011 was primarily attributable to accident years 2007 through 2009.

Regional - The favorable reserve development for the regional segment during the first nine months of 2011 was primarily related to the general liability portion of commercial multi-peril business and to commercial automobile liability business. The favorable reserve development resulted mainly from lower loss emergence on known case reserves relative to historical levels. The favorable reserve development was primarily attributable to accident years 2007 through 2009.

Alternative Markets - The unfavorable reserve development for the alternative markets segment during the first nine months of 2011 was related to an increase in prior year reserves for excess workers’ compensation business, partially offset by a decrease in prior year reserves for primary workers’ compensation business and for medical excess business. The increase in loss reserves for excess workers’ compensation business was related primarily to increased medical and pharmaceutical costs associated with certain long-term disability claims. The majority of favorable reserve development for primary workers’ compensation was related to California business, where the impact of legislative reforms continues to be reflected in improved loss trends.

Reinsurance - The favorable development for the reinsurance segment during the first nine months of 2011 was primarily related to certain facultative program business and to business written through Lloyd’s of London. The favorable development for the segment was spread across underwriting years 2005 through 2010 and resulted from lower than expected reported losses.

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Loss Reserve Discount - The Company discounts its liabilities for excess and assumed workers’ compensation business because of the long period of time over which losses are paid. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from the Company’s loss payout experience. For non-proportional business, reserves for losses and loss expenses have been discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. For proportional business, reserves for losses and loss expenses have been discounted at the statutory rate permitted by the Department of Insurance of the State of Delaware of 2.5%. As of September 30, 2011, the aggregate blended discount rates ranged from 2.5% to 6.5%, with a weighted average discount rate of 4.3%. The aggregate net discount, after reflecting the effects of ceded reinsurance, was $902 million and $898 million as of September 30, 2011 and December 31, 2010, respectively.

Assumed Reinsurance Premiums. The Company estimates the amount of assumed reinsurance premiums that it will receive under treaty reinsurance agreements at the inception of the contracts. These premium estimates are revised as the actual amount of assumed premiums is reported to the Company by the ceding companies. As estimates of assumed premiums are made or revised, the related amount of earned premiums, commissions and incurred losses associated with those premiums are recorded. Estimated assumed premiums receivable were approximately $70 million and $58 million at September 30, 2011 and December 31, 2010, respectively. The assumed premium estimates are based upon terms set forth in reinsurance agreements, information received from ceding companies during the underwriting and negotiation of agreements, reports received from ceding companies and discussions and correspondence with reinsurance intermediaries. The Company also considers its own view of market conditions, economic trends and experience with similar lines of business. These premium estimates represent management’s best estimate of the ultimate amount of premiums to be received under its assumed reinsurance agreements.

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

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

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

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

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

27

The following table provides a summary of all fixed maturity securities in an unrealized loss position as of September 30, 2011:

(Dollars in thousands)	Number of Securities	Aggregate Fair Value		Unrealized Loss
Unrealized loss less than 20% of amortized cost	184	$	1,337,317	$	51,803
Unrealized loss of 20% or greater of amortized cost:
Twelve months and longer	11	50,407		20,770
Total	195	$	1,387,724	$	72,573

A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at September 30, 2011 is presented in the table below.

(Dollars in thousands)	Number of Securities	Aggregate Fair Value		Gross Unrealized Loss
Unrealized loss less than $5 million:
Mortgage-backed securities	14	$	104,165	$	6,369
Corporate	15	65,293		3,537
State and municipal	4	31,736		4,830
Foreign	4	8,953		165
Unrealized loss $5 million or more
Mortgage-backed security (1)	1	17,365		5,549
Total	38	$	227,512	$	20,450

_______________

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

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

Preferred Stocks – At September 30, 2011, there were six preferred stocks in an unrealized loss position, with an aggregate fair value of $59 million and a gross unrealized loss of $15 million. Three of those preferred stocks with an aggregate fair value of $13 million and a gross unrealized loss of $5 million are rated non-investment grade. Based upon management’s view of the underlying value of these securities, the Company does not consider any of the preferred stocks to be OTTI.

Common Stocks – At September 30, 2011, the Company owned eleven common stocks in an unrealized loss position with an aggregate fair value of $88 million and an aggregate unrealized loss of $12 million. The Company does not consider these common stocks to be OTTI.

Loans Receivable – The Company monitors the performance of its loans receivable, including current market conditions for each loan and the ability to collect principal and interest. For loans where the Company determines it is probable that the contractual terms will not be met, an analysis is performed and a valuation reserve is established, if necessary, with a charge to earnings. Loans receivable are reported net of a valuation reserve of $20 million at September 30, 2011 and December 31, 2010.

The Company monitors the performance of its loans receivable and assesses the ability of the borrower to pay principal and interest based upon loan structure, underlying property values, cash flow and related financial and operating performance of the property and market conditions. Loans receivable with a potential for default are further assessed using discounted cash flow analysis and comparable cost and sales methodologies, if appropriate.

28

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

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

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

The following table summarizes pricing methods for fixed maturity securities available for sale as of September 30, 2011 (dollars in thousands):

	Carrying Value		Percent of Total
Pricing source:
Independent pricing services	$	10,527,923	94.7	%
Syndicate manager	104,766		0.9	%
Directly by the Company based on:
Observable data	409,299		3.7	%
Cash flow model	74,004		0.7	%
Total	$	11,115,992	100.0	%

Independent pricing services - The vast majority of the Company’s fixed maturity securities available for sale were priced by independent pricing services (generally one U.S. pricing service plus additional pricing services with respect to a limited number of foreign securities held by the Company). The prices provided by the independent pricing services are generally based on observable market data in active markets (e.g., broker quotes and prices observed for comparable securities). The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company reviews the prices provided by pricing services for reasonableness based upon current trading levels for similar securities. If the prices appear unusual to the Company, they are re-examined and the value is either confirmed or revised. In addition, the Company periodically performs independent price tests of a sample of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of September 30, 2011, 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.

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

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

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

30

Results of Operations for the Nine Months Ended September 30, 2011 and 2010

Business Segment Results

Following is a summary of gross and net premiums written, premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and United States Generally Accepted Accounting Principles (“GAAP”) combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the nine months ended September 30, 2011 and 2010. The GAAP combined ratio represents a measure of underwriting profitability, excluding investment income. A GAAP combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.

(Dollars in thousands)	2011			2010
Specialty
Gross premiums written	$	1,344,139		$	1,131,216
Net premiums written	1,146,091			975,188
Premiums earned	1,047,567			955,705
Loss ratio	57.8		%	59.0		%
Expense ratio	32.7		%	32.7		%
GAAP combined ratio	90.5		%	91.7		%
Regional
Gross premiums written	$	881,224		$	889,362
Net premiums written	817,380			802,691
Premiums earned	795,423			798,387
Loss ratio	71.5		%	60.7		%
Expense ratio	36.0		%	35.5		%
GAAP combined ratio	107.5		%	96.2		%
Alternative Markets
Gross premiums written	$	656,062		$	572,518
Net premiums written	497,117			479,565
Premiums earned	454,156			458,842
Loss ratio	71.9		%	65.9		%
Expense ratio	26.7		%	25.8		%
GAAP combined ratio	98.6		%	91.7		%
Reinsurance
Gross premiums written	$	337,696		$	323,800
Net premiums written	319,524			304,832
Premiums earned	315,220			308,316
Loss ratio	60.9		%	53.3		%
Expense ratio	40.7		%	41.4		%
GAAP combined ratio	101.6		%	94.7		%
International
Gross premiums written	$	602,313		$	444,088
Net premiums written	486,745			369,734
Premiums earned	443,198			324,736
Loss ratio	61.6		%	62.8		%
Expense ratio	39.7		%	40.9		%
GAAP combined ratio	101.3		%	103.7		%
Consolidated
Gross premiums written	$	3,821,434		$	3,360,984
Net premiums written	3,266,857			2,932,010
Premiums earned	3,055,564			2,845,986
Loss ratio	64.3		%	60.4		%
Expense ratio	34.5		%	34.3		%
GAAP combined ratio	98.8		%	94.7		%

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Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the nine months ended September 30, 2011 and 2010 (amounts in thousands, except per share data):

	2011		2010
Net income to common stockholders	$	276,877	$	322,436
Weighted average diluted shares	146,553		157,054
Net income per diluted share	$	1.89	$	2.05

The Company reported net income of $277 million in 2011 compared to $322 million in 2010. The decrease in net income was primarily due to a decline in underwriting income, partially offset by an increase in investment income and net investment gains. The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2010 and 2011.

Premiums. Gross premiums written were $3,821 million in 2011, an increase of 14% from $3,361 million in 2010. The increase in gross premiums written was primarily due to growth in our specialty and international business segments as a result of expansion into new markets. Approximately 80% of policies expiring in the first nine months of 2011 were renewed, compared with a 77% renewal retention rate for policies expiring in full year 2010. The average rate (i.e., average premium adjusted for change in exposures) for policies that renewed in 2011 increased by 1.7%.

Beginning in 2005, the property casualty insurance market became more competitive and insurance rates decreased across most business lines. While prices increased in 2011, loss costs are also increasing and current market price levels for certain lines of business remain below the prices required for the Company to achieve its return objectives. A summary of gross premiums written in 2011 compared with 2010 by line of business within each business segment follows:

• Specialty gross premiums increased 19% to $1,344 million in 2011 from $1,131 million in 2010 primarily due to increased business in the energy and environmental markets. Gross premiums written increased 29% for commercial automobile and other liability, 21% for property lines, 11% for products liability and 9% for professional liability.

• Regional gross premiums decreased 1% to $881 million in 2011 from $889 million in 2010. Gross premiums written decreased 2% for commercial automobile, and increased 6% for workers’ compensation and 3% for commercial multiple peril. Gross premiums written in 2010 included $27 million of assigned risk premiums that were transferred to the alternative markets segment in 2011 (see below).

• Alternative markets gross premiums increased 15% to $656 million in 2011 from $573 million in 2010. The increase was primarily due to an increase in assigned risk premiums, including assigned risk premiums transferred from the regional segment as described above. Gross premiums for assigned risk plans, which are fully reinsured, were $114 million in 2011 and $51 million in 2010. For the remainder of the alternative markets segment, gross premiums written increased 4% to $542 million in 2011 from $522 million in 2010. This includes increases of 70% for accident and health products and 10% for primary workers’ compensation and a decrease of 22% for excess workers’ compensation.

• Reinsurance gross premiums increased 4% to $338 million in 2011 from $324 million in 2010. Gross premiums written increased 19% to $106 million for property business and decreased 1% to $232 million for casualty business.

• International gross premiums increased 36% to $602 million in 2011 from $444 million in 2010. The increase is primarily due to an increase in business written by our Lloyd’s operation, our companies in South America, and new insurance branches in Germany, Norway and Canada. Gross premiums written increased 62% for property lines, 57% for liability lines, 30% for workers’ compensation, 31% for reinsurance assumed, 8% for automobile and 32% for professional liability. In addition, three percentage points of the 36% increase in gross premiums written resulted from changes in foreign exchange rates.

Net premiums written were $3,267 million in 2011, an increase of 11% from $2,932 million in 2010. Ceded reinsurance premiums as a percentage of gross written premiums increased to 15% in 2011 from 13% in 2010. The increase in the percentage of business ceded was due to the increase in premiums written by new companies, which cede a higher portion of their gross premiums, and to growth in premiums written by assigned risk plans, which cede 100% of their gross premiums.

Premiums earned increased 7% to $3,056 million in 2011 from $2,846 million in 2010. Insurance premiums are generally earned evenly over the policy term, and premiums earned in 2011 are related to business written during both 2011 and 2010.

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Net Investment Income. Following is a summary of net investment income for 2011 and 2010:

	Amount						Average Annualized Yield
(Dollars in thousands)	2011			2010			2011		2010
Fixed maturity securities, including cash and cash equivalents, loans receivable and real estate	$	370,557		$	373,375		4.0	%	4.1	%
Investment funds	23,836			(12,786		)	6.1	%	(4.0	)%
Arbitrage trading account and funds	7,929			26,005			2.6	%	7.3	%
Equity securities available for sale	9,544			8,716			3.5	%	3.7	%
Gross investment income	411,866			395,310			4.0	%	4.0	%
Investment expenses	(2,605		)	(2,875		)
Total	$	409,261		$	392,435		4.0	%	3.9	%

Net investment income increased 4% to $409 million in 2011 from $392 million in 2010. The increase in investment income was due to an increase in income from investment funds, partially offset by a decrease in investment income from arbitrage. The increase in investment income from investment funds, which are reported on a one-quarter lag, was primarily due to higher income from energy and real estate funds. Average invested assets, at cost (including cash and cash equivalents) were $13.6 billion in 2011 and $13.3 billion in 2010.

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. Service fees increased to $69 million in 2011 from $64 million in 2010 due to an increase in fees received for administering assigned risk plans.

Net Investment Gains. 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, values and general economic conditions. Net realized gains on investment sales were $74 million in 2011 compared with $26 million in 2010.

Other-Than-Temporary Impairments. The cost of securities is adjusted where appropriate to include a provision for decline in value which is considered to be other-than-temporary. Other-than-temporary impairments were $0.4 million in 2011 compared with $4 million in 2010.

Revenues from Wholly-Owned Investees. These revenues were derived from aviation-related businesses that provide services to the general aviation market, including fuel and line service, aircraft sales and maintenance, avionics and engineering services and parts fabrication. Revenues from wholly-owned investees were $176 million in 2011 compared with $166 million in 2010 due to increased aircraft sales.

Losses and Loss Expenses. Losses and loss expenses increased to $1,965 million in 2011 from $1,718 million in 2010. The consolidated loss ratio of 64.3% in 2011 was 3.9 points higher than the loss ratio of 60.4% in 2010. Catastrophe losses, which were primarily from hurricanes and severe wind and hail storms in the United States and the Japanese earthquake, were $139 million in 2011 compared with $75 million in 2010, an increase of 1.9 loss ratio points. Favorable prior year reserve development was $142 million in 2011 compared with $180 million in 2010, a difference of 1.7 loss ratio points. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 0.3 points to 64.4% in 2011 from 64.1% in 2010. A summary of loss ratios in 2011 compared with 2010 by business segment follows:

• Specialty - The loss ratio of 57.8% in 2011 was 1.2 points lower than the loss ratio of 59.0% in 2010. Catastrophe losses were $16 million in 2011 compared with none in 2010, an increase of 1.5 loss ratio points. Favorable prior year reserve development was $97 million in 2011 compared with $71 million in 2010, a difference of 1.9 loss ratio points. The loss ratio excluding catastrophe losses and favorable prior year reserve development decreased 0.8 points to 65.6% in 2011 from 66.4% in 2010.

• Regional - The loss ratio of 71.5% in 2011 was 10.8 points higher than the loss ratio of 60.7% in 2010. Catastrophe losses were $85 million in 2011 compared with $67 million in 2010, an increase of 2.3 loss ratio points. Favorable prior year reserve development was $25 million in 2011 compared with $69 million in 2010, a difference of 5.5 loss ratio points. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 3.0 points to 64.0% in 2011 from 61.0% in 2010 due to earned pricing and loss cost trends.

33

• Alternative markets - The loss ratio of 71.9% in 2011 was 6.0 points higher than the loss ratio of 65.9% in 2010. Catastrophe losses were $1.5 million in 2011 compared with none in 2010, an increase of 0.3 loss ratio points. Prior year reserves increased by $2 million in 2011 compared with a decrease of $17 million in 2010, a difference of 4.3 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development increased 1.4 points to 71.1% in 2011 from 69.7 in 2010.

• Reinsurance - The loss ratio of 60.9% in 2011 was 7.6 points higher than the loss ratio of 53.3% in 2010. Catastrophe losses were $18 million in 2011 compared with $4 million in 2010, an increase of 4.3 loss ratio points. Favorable prior year reserve development was $19 million in 2011 and $20 million in 2010, a difference of 0.5 loss ratio points. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 2.7 points to 61.2% in 2011 from 58.5% in 2010.

• International - The loss ratio was 61.6% in 2011 was 1.2 points lower than the loss ratio of 62.8% in 2010. Catastrophe losses were $19 million in 2011 compared with $4 million in 2010, and increase of 3.0 loss ratio points. Favorable prior year reserve development was $3 million in 2011 and $3 million in 2010. The loss ratio excluding catastrophe losses and favorable prior year reserve development decreased 4.2 points to 58.2% in 2011 from 62.4%.

Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses for 2011 and 2010:

(Dollars in thousands)	2011			2010
Underwriting expenses	$	1,055,589		$	975,542
Service expenses	55,764			54,442
Net foreign currency gains	(2,171		)	(5,627		)
Other costs and expenses	83,858			83,650
Total	$	1,193,040		$	1,108,007

Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) increased to 34.5% in 2011 from 34.3% in 2010.

Service expenses, which represent the costs associated with the fee-based businesses, were $56 million in 2011 and $54 million in 2010.

Net foreign currency gains result from transactions denominated in a currency other than the operating unit’s functional currency. The gains were primarily attributable to foreign operating units holding assets denominated in U.S. dollars.

Other costs and expenses, which represent corporate expenses, were $84 million in 2011 and 2010.

Expenses from Wholly-Owned Investees. These expenses represent costs associated with aviation-related businesses that include cost of goods sold related to aircraft and other sales sales, labor and equipment costs related to repairs and other services and general and administrative expenses. Expenses from wholly-owned investees were $174 million in 2011 compared to $160 million in 2010, due to an increase in aircraft sales and related cost of goods sold.

Interest Expense. Interest expense increased 7% to $84 million primarily due to the issuance of $300 million of 5.375% senior notes in September 2010, partially offset by the repayment of $150 million of 5.125% senior notes in September 2010.

Income Taxes. The effective income tax rate was 25% in 2011 and in 2010. The effective income tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income.

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Results of Operations for the Three Months Ended September 30, 2011 and 2010

Business Segment Results

Following is a summary of gross and net premiums written, premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and GAAP combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the three months ended September 30, 2011 and 2010. The GAAP combined ratio represents a measure of underwriting profitability, excluding investment income. A GAAP combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.

(Dollars in thousands)	2011			2010
Specialty
Gross premiums written	$	454,560		$	383,877
Net premiums written	382,541			330,985
Premiums earned	367,417			326,239
Loss ratio	58.3		%	61.6		%
Expense ratio	32.7		%	32.0		%
GAAP combined ratio	91.0		%	93.6		%
Regional
Gross premiums written	$	301,542		$	300,010
Net premiums written	277,177			272,116
Premiums earned	267,142			268,089
Loss ratio	74.2		%	62.6		%
Expense ratio	35.7		%	35.6		%
GAAP combined ratio	109.9		%	98.2		%
Alternative Markets
Gross premiums written	$	222,423		$	184,568
Net premiums written	174,744			152,068
Premiums earned	156,820			148,830
Loss ratio	70.9		%	68.0		%
Expense ratio	26.7		%	26.0		%
GAAP combined ratio	97.6		%	94.0		%
Reinsurance
Gross premiums written	$	118,266		$	102,785
Net premiums written	113,620			98,428
Premiums earned	103,906			103,126
Loss ratio	61.5		%	53.7		%
Expense ratio	40.9		%	39.5		%
GAAP combined ratio	102.4		%	93.2		%
International
Gross premiums written	$	209,509		$	150,155
Net premiums written	178,057			133,109
Premiums earned	160,538			121,013
Loss ratio	60.0		%	60.1		%
Expense ratio	38.9		%	38.3		%
GAAP combined ratio	98.9		%	98.4		%
Consolidated
Gross premiums written	$	1,306,300		$	1,121,395
Net premiums written	1,126,139			986,706
Premiums earned	1,055,823			967,297
Loss ratio	64.8		%	61.8		%
Expense ratio	34.3		%	33.6		%
GAAP combined ratio	99.1		%	95.4		%

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Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the three months ended September 30, 2011 and 2010 (amounts in thousands, except per share data):

	2011		2010
Net income to common stockholders	$	77,308	$	93,619
Weighted average diluted shares	144,538		154,160
Net income per diluted share	$	0.53	$	0.61

The Company reported net income of $77 million in 2011 compared to $94 million in 2010. The decrease in net income was primarily due to a decline in underwriting income. The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2010 and 2011.

Premiums. Gross premiums written were $1,306 million in 2011, an increase of 16% from $1,121 million in 2010. The increase in gross premiums written was primarily due to growth in our specialty and international business segments as a result of expansion into new markets. Approximately 79% of policies expiring in the third quarter of 2011 were renewed, compared with a 77% renewal retention rate for policies expiring in full year 2010. The average rate (i.e., average premium adjusted for change in exposures) for policies that renewed in 2011 increased by approximately 3%.

Beginning in 2005, the property casualty insurance market became more competitive and insurance rates decreased across most business lines. While prices increased in 2011, loss costs are also increasing and current market price levels for certain lines of business remain below the prices required for the Company to achieve its return objectives. A summary of gross premiums written in 2011 compared with 2010 by line of business within each business segment follows:

• Specialty gross premiums increased 18% to $455 million in 2011 from $384 million in 2010 primarily due to increased business in the energy and environmental markets. Gross premiums written increased 25% for commercial automobile, 31% for other liability, 17% for property lines, 9% for professional liability and 19% for products liability.

• Regional gross premiums increased 1% to $302 million in 2011 from $300 million in 2010. Gross premiums written increased 7% for workers’ compensation and 6% for commercial multiple peril and decreased 2% for commercial automobile. Gross premiums written in 2010 included $8 million of assigned risk plan premiums that were transferred to the alternative markets segment in 2011 (see below).

• Alternative markets gross premiums increased 21% to $222 million in 2011 from $185 million in 2010. The increase was primarily due to an increase in assigned risk premiums, including assigned risk premiums transferred from the regional segment as described above. Gross premiums for assigned risk plans, which are fully reinsured, were $31 million in 2011 and $15 million in 2010. For the remainder of the alternative markets segment, gross premiums increased 12% to $191 million in 2011 from $170 million in 2010. This includes increases of 84% for accident and health products and 11% for primary workers’ compensation and decreased by 22% for excess workers’ compensation.

• Reinsurance gross premiums increased 15% to $118 million in 2011 from $103 million in 2010. Gross premiums written decreased 3% to $82 million for casualty business and increased 105% to $36 million for property business.

• International gross premiums increased 40% to $210 million in 2011 from $150 million in 2010. The increase was primarily due to an increase in business written by our Lloyd’s operation, our companies in South America, and new insurance branches in Germany and Norway. Gross premiums written increased 75% for property lines, 21% for liability lines, 29% for workers’ compensation, 52% for reinsurance assumed, 11% for automobile and 41% for professional liability. In addition, three percentage points of the 40% increase in gross premiums written resulted from changes in foreign exchange rates.

Net premiums written were $1,126 million in 2011, an increase of 14% from $987 million in 2010. Ceded reinsurance premiums as a percentage of gross written premiums increased to 14% in 2011 from 12% in 2010. The increase in the percentage of business ceded was due to the increase in premiums written by new companies, which cede a higher portion of their gross premiums, and to growth in premiums written by assigned risk plans, which cede 100% of their gross premiums.

Premiums earned increased 9% to $1,056 million in 2011 from $967 million in 2010. Insurance premiums are generally earned evenly over the policy term, and premiums earned in 2011 are related to business written during both 2011 and 2010.

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Net Investment Income. Following is a summary of net investment income for 2011 and 2010:

	Amount						Average Annualized Yield
(Dollars in thousands)	2011			2010			2011		2010
Fixed maturity securities, including cash and cash equivalents, loans receivable and real estate	$	123,100		$	122,617		4.0	%	4.0	%
Investment funds	(7,699		)	(19,044		)	(5.6	)%	(18.3	)%
Arbitrage trading account and funds	(3,467		)	13,651			(3.5	)%	11.2	%
Equity securities available for sale	2,795			2,723			3.2	%	3.4	%
Gross investment income	114,729			119,947			3.4	%	3.6	%
Investment expenses	(666		)	(804		)
Total	$	114,063		$	119,143		3.3	%	3.6	%

Net investment income decreased 4% to $114 million in 2011 from $119 million in 2010. The decrease in investment income was due to a decrease in income from arbitrage was partially offset by a decrease in losses from investment funds. Average invested assets, at cost (including cash and cash equivalents) were $13.7 billion in 2011 and $13.4 billion in 2010.

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. Service fees were $22 million in 2011 and 2010.

Net Investment Gains. The Company buys and sells securities on a regular basis in order to maximize its total return on investments. Decisions to sell securities are based on management’s view of the underlying fundamentals of specific securities as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net realized gains on investment sales were $21 million in 2011 compared with $6 million in 2010.

Other-Than-Temporary Impairments. The cost of securities is adjusted where appropriate to include a provision for decline in value which is considered to be other-than-temporary. There were no other-than-temporary impairments in 2011 compared with $1 million in 2010.

Revenues from Wholly-Owned Investees. These revenues were derived from aviation-related businesses that provide services to the general aviation market, including fuel and line service, aircraft sales and maintenance, avionics and engineering services and parts fabrication. Revenues from wholly-owned investees were $66 million in 2011 compared with $62 million in 2010.

Losses and Loss Expenses. Losses and loss expenses increased to $684 million in 2011 from $598 million in 2010. The consolidated loss ratio of 64.8% in 2011 was 3.0 points higher than the loss ratio of 61.8% in 2010. Catastrophe losses, which were primarily from hurricanes and severe wind and hail storms in the United States, were $51 million in 2011 compared with $22 million in 2010, an increase of 2.6 loss ratio points. Favorable prior year reserve development was $56 million in 2011 compared with $51 million in 2010. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 0.6 points to 65.3% in 2011 from 64.7% in 2010. A summary of loss ratios in 2011 compared with 2010 by business segment follows:

• Specialty - The loss ratio of 58.3% in 2011 was 3.3 points lower than the loss ratio of 61.6% in 2010. Catastrophe losses were $6 million in 2011 compared with none in 2010, an increase of 1.7 loss ratio points. Favorable prior year reserve development was $36 million in 2011 compared with $16 million in 2010, a difference of 4.8 loss ratio points. The loss ratio excluding catastrophe losses and favorable prior year reserve development decreased 0.3 points to 66.2% in 2011 from 66.5% in 2010.

• Regional - The loss ratio was 74.2% in 2011 was 11.6 points higher than the loss ratio of 62.6% in 2010. Catastrophe losses were $32 million in 2011 compared with $22 million in 2010, an increase of 3.8 loss ratio points. Favorable prior year reserve development was $10 million in 2011 compared with $19 million in 2010, a difference of 3.3 loss ratio points. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 4.5 points to 66.1% in 2011 from 61.6% in 2010 due to earned pricing and loss cost trends.

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• Alternative markets - The loss ratio of 70.9% in 2011 was 2.9 points higher than the loss ratio of 68.0% in 2010. Catastrophe losses were $1.2 million in 2011 compared with none in 2010, an increase of 0.7 loss ratio points. Prior year reserves decreased by $5 million in 2011 compared with $8 million in 2010, a difference of 1.7 loss ratio points. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 0.5 point to 73.5% in 2011 from 73.0% in 2010.

• Reinsurance - The loss ratio of 61.5% in 2011 was 7.8 points higher than the loss ratio of 53.7% in 2010. Catastrophe losses were $6 million in 2011 compared with none in 2010, an increase of 6.1 loss ratio points. Prior year reserves decreased by $4 million in 2011 compared with $9 million in 2010, a difference of 4.1 loss ratio points. The loss ratio excluding catastrophe losses and favorable prior year reserve development decreased 2.5 points to 59.5% in 2011 from 62.0% in 2010.

• International - The loss ratio of 60.0% in 2011 was 0.1 points lower than the loss ratio of 60.1% in 2010. Catastrophe losses were $5 million in 2011 compared with none in 2010, an increase of 3.2 loss ratio points. Prior year reserves were $1 million in 2011 and in 2010, a difference of 1.0 loss ratio points. The loss ratio excluding catastrophe losses and favorable prior year reserve development decreased 2.4 points to 57.2% in 2011 from 59.6% in 2010 due to improved profitability for our businesses in South America and Australia.

Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses for 2011 and 2010:

(Dollars in thousands)	2011			2010
Underwriting expenses	$	362,590		$	325,340
Service expenses	18,873			17,487
Net foreign currency gains	(2,700		)	(1,916		)
Other costs and expenses	27,087			28,306
Total	$	405,850		$	369,217

Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 34.3% in 2011 compared with 33.6% in 2010 due to increases in internal underwriting costs.

Service expenses, which represent the costs associated with the fee-based businesses, increased 8% to $19 million. The increase was due to an increase in general and administrative expenses.

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

Other costs and expenses, which represent corporate expenses were $27 million in 2011 compared with $28 million in 2010.

Expenses from Wholly-Owned Investees. These expenses represent costs associated with aviation-related businesses that include cost of goods sold related to aircraft and other sales, labor and equipment costs related to repairs and other services and general and administrative expenses. Expenses from wholly-owned investees were $64 million in 2011 compared to $61 million in 2010.

Interest Expense. Interest expense was $28 million in 2011 compared with $27 million in 2010.

Income Taxes. The effective income tax rate was 21% in 2011 as compared to 23% in 2010. The effective income tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income. Tax exempt investment income comprised a higher portion of the 2011 pre-tax income and as such had a higher impact on the effective tax rate for 2011 compared with 2010.

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Investments

As part of its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities that, combined with expected cash flow, it believes is adequate to meet its payment obligations.

The Company also attempts to maintain an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities (i.e., policy claims and debt obligations). The average duration of the investment portfolio was 3.5 years at September 30, 2011 and 3.6 years at December 31, 2010. The Company’s investment portfolio and investment-related assets as of September 30, 2011 were as follows:

(Dollars in thousands)	Carrying Value		Percent of Total
Fixed maturity securities:
U.S. government and government agencies	$	1,073,737	8	%
State and municipal:
Special revenue	2,114,164		16	%
Pre-refunded (1)	1,361,871		10	%
State general obligation	965,393		7	%
Corporate backed	480,074		4	%
Local general obligation	438,318		3	%
Total state and municipal	5,359,820		40	%
Mortgage-backed securities:
Agency	1,155,843		9	%
Residential-Prime	243,817		2	%
Residential-Alt A	83,850		1	%
Commercial	55,277		—	%
Total mortgage-backed securities	1,538,787		12	%
Corporate:
Industrial	1,281,946		10	%
Financial	810,086		6	%
Asset-backed	323,099		2	%
Utilities	198,627		1	%
Other	106,689		1	%
Total corporate	2,720,447		20	%
Foreign government and foreign government agencies	537,979		4	%
Total fixed maturity securities	11,230,770		84	%
Equity securities available for sale:
Common stocks	310,938		2	%
Preferred stocks	127,527		1	%
Total equity securities available for sale	438,465		3	%
Investment funds	610,513		5	%
Real estate	346,015		3	%
Arbitrage trading account	327,883		2	%
Loans receivable	283,560		2	%
Investment in arbitrage funds	56,606		—	%
Total investments	$	13,293,812	100	%

 ______________

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

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Fixed Maturity Securities. The Company’s investment policy with respect to fixed maturity securities is generally to purchase instruments with the expectation of holding them to their maturity. However, management of the available for sale portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as a result of changes in financial market conditions and tax considerations.

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

Equity Securities Available for Sale. Equity securities available for sale primarily represent investments in high-dividend yielding common and preferred stocks issued by large market capitalization companies.

Investment Funds. At September 30, 2011, the carrying value of investment funds was $611 million, including investments in real estate funds of $364 million and investments in energy funds of $111 million.

Real Estate. Real estate investments are comprised of an operating commercial office building in London, a commercial land lease in Washington D.C. and a commercial property under development in London.

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

Loans Receivable. Loans receivable, which are carried at amortized cost, have an aggregate cost of $284 million and an aggregate fair value of $266 million at September 30, 2011. Amortized cost of these loans is net of a valuation allowance of $20 million as of September 30, 2011. The seven largest loans have an aggregate amortized cost of $208 million and an aggregate fair value of $188 million as of such date and are secured by commercial real estate. These loans earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through March 2016. The loans are secured by office buildings (89%) and hotels (11%) located primarily in New York City, California, Hawaii and Boston.

Investment in Arbitrage Funds. Investment in arbitrage funds represents investments in limited partnerships that specialize in merger arbitrage and relative value arbitrage. 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.

Market Risk. The fair value of the Company’s investments is subject to risks of fluctuations in credit quality and interest rates. The Company uses various models and stress test scenarios to monitor and manage interest rate risk. As noted above, the Company attempts to manage its interest rate risk by maintaining an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities (i.e., policy claims and debt obligations). The average duration for the fixed maturity portfolio was 3.5 years at September 30, 2011 and 3.6 years at December 31, 2010. In addition, the fair value of the Company’s international investments is subject to currency risk. The Company attempts to manage its currency risk by matching its foreign currency assets and liabilities where considered appropriate.

Liquidity and Capital Resources

Cash Flow. Cash flow provided from operating activities was $485 million and $391 million for the nine months ended September 30, 2011 and 2010, respectively. The increase in cash flow was due primarily to an increase in premium collections and a decrease in income taxes paid, partially offset by a increase in underwriting expenses and paid claims.

The Company’s insurance subsidiaries’ principal sources of cash are premiums, investment income, service fees and proceeds from sales and maturities of portfolio investments. The principal uses of cash are payments for claims, taxes, operating expenses and dividends. The Company expects its insurance subsidiaries to fund the payment of losses with cash received from premiums, investment income and fees. The Company targets an average duration for its investment portfolio that is within one year of the average duration of its liabilities so that portions of its investment portfolio mature throughout the claim cycle and are available for the payment of claims if necessary. In the event operating cash flow and proceeds from maturities and prepayments of fixed income securities are not sufficient to fund claim payments and other cash requirements,

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the remainder of the Company’s cash and investments is available to pay claims and other obligations as they become due. The Company’s investment portfolio is highly liquid, with approximately 84% invested in cash, cash equivalents and marketable fixed maturity securities as of September 30, 2011. If the sale of fixed maturity securities were to become necessary, a realized gain or loss equal to the difference between the cost and sales price of securities sold would be recognized.

Debt. At September 30, 2011, the Company had senior notes, junior subordinated debentures and other debt outstanding with a carrying value of $1,745 million and a face amount of $1,762 million. The maturities of the outstanding debt are $6 million in 2011, $2 million in 2012, $200 million in 2013, $25 million in 2014, $200 million in 2015, $2 million in 2016, $450 million in 2019, $300 million in 2020, $76 million in 2022, $1 million in 2023, $250 million in 2037 and $250 million in 2045.

Equity. At September 30, 2011, total common stockholders’ equity was $3.9 billion, common shares outstanding were 137,082,096, and stockholders’ equity per outstanding share was $28.18.

Total Capital.Total capitalization (equity, senior notes and other debt and junior subordinated debentures) was $5.6 billion at September 30, 2011. The percentage of the Company’s capital attributable to senior notes, junior subordinated debentures and other debt was 31% at September 30, 2011 and 32% at December 31, 2010.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

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

Item 4. Controls and Procedures

Disclosure Controls and Procedures. The Company’s management, including its Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14 as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company has in place effective controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 and the rules thereunder, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Control over Financial Reporting. During the quarter ended September 30, 2011, 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, 2010.

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

Set forth below is a summary of the shares repurchased by the Company during the three months ended September 30, 2011 and the number of shares remaining authorized for purchase by the Company.

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	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may yet be purchased under the plans or programs
July 2011	826,000	$	31.20	826,000	8,046,438
August 2011	2,735,829	29.43		2,735,829	5,310,609
September 2011	428,106	$	28.47	428,106	4,882,503

The Company’s repurchase authorization was increased to 10,000,000 shares by its board of directors on November 3, 2011.

Item 6.Exhibits

Number
(31.1)	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a).
(31.2)	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/ 15d-14(a).
(32.1)	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

		W. R. BERKLEY CORPORATION
Date:	November 7, 2011	/s/ William R. Berkley
		William R. Berkley
		Chairman of the Board and Chief Executive Officer
Date:	November 7, 2011	/s/ Eugene G. Ballard
		Eugene G. Ballard
		Senior Vice President - Chief Financial Officer

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