10-K 1 wrb1231201210k.htm 10-K WRB 12.31.2012 10K


 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

(Mark One)
 
       [x]
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______.

Commission file number 1-15202

W. R. BERKLEY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
22-1867895
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification Number)
475 Steamboat Road, Greenwich, CT
(Address of principal executive offices)
 
06830
(Zip Code)
Registrant’s telephone number, including area code: (203) 629-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
 
 
 
Common Stock, par value $.20 per share
 
New York Stock Exchange
6.75% Trust Originated Preferred Securities
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 
 Yes S No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. 
 Yes  o   No S
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 S   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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes S     No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K. S
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer S
 
 
Accelerated filer o
 
 
 
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No S
The aggregate market value of the voting and non-voting common stock held by non-affiliates (computed by reference to the price at which the common stock was last sold) as of the last business day of the registrant’s most recently completed second fiscal quarter was $4,336,925,500.
Number of shares of common stock, $.20 par value, outstanding as of February 14, 2013: 136,023,412
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2012, are incorporated herein by reference in Part III.
 





 
 
 
Page
 
 
PART I
 
ITEM
1.
ITEM
1A.
ITEM
1B.
ITEM
2.
ITEM
3.
ITEM
4.
MINE SAFETY DISCLOSURES
 
 
PART II
ITEM
5.
ITEM
6.
ITEM
7.
ITEM
7A.
ITEM
8.
ITEM
9.
ITEM
9A.
ITEM
9B.
 
 
PART III
 
ITEM
10.
ITEM
11.
ITEM
12.
ITEM
13.
ITEM
14.
 
 
PART IV
 
ITEM
15.
EX-23
 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
EX-31.1
 
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a)
 
EX-31.2
 
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a)
 
EX-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
 
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
 




SAFE HARBOR STATEMENT
UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995

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 in this report including statements related to our outlook for the industry and for our performance for the year 2013 and beyond, are based upon our historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us that the future plans, estimates or expectations contemplated by us will be achieved. They are subject to various risks and uncertainties, including but not limited to:

the cyclical nature of the property casualty industry;
the impact of significant competition;
the long-tail and potentially volatile nature of the insurance and reinsurance business;
product demand and pricing;
claims development and the process of estimating reserves;
investment risks, including those of our portfolio of fixed maturity securities and investments in equity securities, including investments in financial institutions, municipal bonds, mortgage-backed securities, loans receivable, investment funds, real estate, merger arbitrage and private equity investments;
the effects of emerging claim and coverage issues;
the uncertain nature of damage theories and loss amounts;
natural and man-made catastrophic losses, including as a result of terrorist activities;
general economic and market activities, including inflation, interest rates and volatility in the credit and capital markets;
the impact of conditions in the financial markets and the global economy, and the potential effect of legislative, regulatory, accounting or other initiatives taken in response to it, on our results and financial condition;
foreign currency and political risks relating to our international operations;
our ability to attract and retain key personnel and qualified employees;
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 Act of 2002, as amended;
the ability of our reinsurers to pay reinsurance recoverables owed to us;
other legislative and regulatory developments, including those related to business practices in the insurance industry;
credit risk relating to our policyholders, independent agents and brokers;
changes in the ratings assigned to us or our insurance company subsidiaries by rating agencies;
the availability of dividends from our insurance company subsidiaries;
potential difficulties with technology and/or data security;
the effectiveness of our controls to ensure compliance with guidelines, policies and legal and regulatory standards; and
other risks detailed in this Form 10-K and from time to time in our other filings with the Securities and Exchange Commission (“SEC”).




We describe these risks and uncertainties in greater detail in Item 1A, Risk Factors. These risks and uncertainties could cause our actual results for the year 2013 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 elsewhere in this Form 10-K and our other SEC filings. Forward-looking statements speak only as of the date on which they are made.




PART I
ITEM 1. BUSINESS

W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in the United States. It operates in the following segments of the property casualty insurance business:
 
Specialty, including excess and surplus lines and admitted specialty lines;
Regional commercial lines property casualty;
Alternative Markets, including excess workers' compensation, monoline workers' compensation, accident and health, and insurance services;
Reinsurance, on both a facultative and treaty basis and participating in business written through Lloyd's of London; and    
International business in selected regions throughout the world.

Each of our five business segments is composed of individual operating units that serve a market defined by geography, products, services or types of customers. Each of our operating units is positioned close to its customer base and participates in a niche market requiring specialized knowledge about a territory or product. This strategy of decentralized operations allows each of our units to identify and respond quickly and effectively to changing market conditions and local customer needs, while capitalizing on the benefits of centralized capital, investment and reinsurance management, and corporate actuarial, financial, enterprise risk management and legal staff support.

Our business approach is focused on meeting the needs of our customers, maintaining a high quality balance sheet, and allocating capital to our best opportunities. New businesses are started when opportunities are identified and when the right talent and expertise are found to lead a business. Of our 48 operating units, 41 have been organized and developed internally and seven have been added through acquisition. Of these units, 23 have been formed since 2006.

    Our Specialty insurance and Reinsurance operations are conducted throughout the United States, and, on a limited basis, outside the United States. Regional insurance operations are conducted across the continental United States in six regions: the Midwest, Northeast, Southwestern, Southeastern (excluding Florida and Louisiana), Mid Atlantic, and North Pacific regions. Alternative Markets operations are conducted throughout the United States. Our International operations are conducted primarily in the United Kingdom, Continental Europe, South America, Australia, the Asia Pacific region, Scandinavia and Canada.

Net premiums written, as reported based on United States generally accepted accounting principles (“GAAP”), for each of our operating segments for each of the past five years were as follows:
 
Year Ended December 31,
 (In thousands)
2012

 
2011

 
2010

 
2009

 
2008

Net premiums written:
 

 
 

 
 

 
 

 
 

Specialty
$
1,747,687

 
$
1,554,516

 
$
1,311,831

 
$
1,260,451

 
$
1,453,778

Regional
1,119,274

 
1,064,507

 
1,044,347

 
1,081,100

 
1,211,096

Alternative Markets
702,922

 
619,097

 
582,045

 
589,637

 
622,185

Reinsurance
477,252

 
430,329

 
401,239

 
423,425

 
435,108

International
851,404

 
688,919

 
511,464

 
375,482

 
311,732

Total
$
4,898,539

 
$
4,357,368

 
$
3,850,926

 
$
3,730,095

 
$
4,033,899


1



 
Year Ended December 31,
 
2012

 
2011
 
2010
 
2009
 
2008
Percentage of net premiums written:
 

 
 

 
 

 
 

 
 

Specialty
35.7
%
 
35.7
%
 
34.1
%
 
33.7
%
 
36.1
%
Regional
22.9

 
24.4

 
27.1

 
29.0

 
30.0

Alternative Markets
14.3

 
14.2

 
15.1

 
15.8

 
15.4

Reinsurance
9.7

 
9.9

 
10.4

 
11.4

 
10.8

International
17.4

 
15.8

 
13.3

 
10.1

 
7.7

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

Twenty-six of our twenty-seven insurance company subsidiaries rated by A.M. Best Company, Inc. (“A.M. Best”) have ratings of A+ (Superior) (the second highest rating out of 15 possible ratings), and one is rated A (Excellent) (the third highest rating). A.M. Best's ratings are based upon factors of concern to policyholders, insurance agents and brokers and are not directed toward the protection of investors. A.M. Best states: “The Financial Strength Rating opinion addresses the relative ability of an insurer to meet its ongoing insurance obligations. The ratings are not assigned to specific insurance policies or contracts and do not address any other risk.” A.M. Best reviews its ratings on a periodic basis, and its ratings of the Company's subsidiaries are therefore subject to change.

The twenty-three insurance company subsidiaries rated by Standard & Poor's (“S&P”) have financial strength ratings of A+ (the seventh highest rating out of twenty-seven possible ratings).

Our Moody's ratings are A2 for Berkley Insurance Company, Berkley Regional Insurance Company and Admiral Insurance Company (the sixth highest rating out of twenty-one possible ratings).

The following sections describe our reporting segments and their operating units in greater detail. These operating units underwrite on behalf of one or more affiliated insurance companies within the group. Certain operating units are identified by us herein for descriptive purposes only and are not legal entities. Unless otherwise indicated, all references in this Form 10-K to “W. R. Berkley,” “we,” “us,” “our,” the “Company” or similar terms refer to W. R. Berkley Corporation together with its subsidiaries. W. R. Berkley Corporation is a Delaware corporation formed in 1970.

SPECIALTY

Our Specialty lines companies underwrite risks within the excess and surplus lines market and on an admitted basis. The risks are highly complex, often unique exposures that typically fall outside the underwriting guidelines of the standard insurance market or are best served by specialized knowledge of a particular industry. The Specialty lines of business include premises operations, commercial automobile, property, products liability and professional liability lines. The customers in this segment are highly diverse. Business is conducted through the following 22 operating units, each delivering their products through a variety of distribution channels, depending on the customer base and particular risks insured:
    
Admiral Insurance provides excess and surplus lines coverage for commercial risks that generally consist of hard-to- place, specialized risks that involve moderate to high degrees of hazard. Its lines of business include general liability, professional liability, property, and excess and umbrella coverage. Admiral's expanding professional liability and program operations include special coverages for technology, ambulatory surgery centers, chiropractors and concierge physicians. Its products are distributed exclusively by wholesale brokers.

American Mining Insurance offers workers' compensation insurance as well as general liability, automobile, and excess liability coverages to a broad range of firms within the mining and aggregate industries in the U.S. It also serves as a third-party administrator of workers' compensation mining claims for clients in several states.
        
Berkley Asset Protection Underwriters provides products designed to protect a broad spectrum of high-value commercial and personal assets, including coverage for fine art risks such as museums, galleries and corporate and private collections; fidelity/crime for commercial and public entity risks; jewelers block for wholesale, retail, manufacturing and mining risks; cash-in-transit carriers and certain inland marine risks. Package coverages include property, general liability, umbrella and workers' compensation.

2



Berkley Aviation offers a wide range of aviation insurance products, including coverage for airlines, helicopters, miscellaneous general aviation operations, non-owned aircraft, fixed-base operations, control towers, airports and other specialized niche programs. It places its business on an admitted and non-admitted basis nationwide.

Berkley Custom Insurance focuses on the excess casualty insurance market and offers umbrella liability, pollution liability, excess liability, construction wrap-ups and completed operations coverages to wholesalers, retailers, manufacturers, insurance companies, financial institutions and construction companies.
    
Berkley Life Sciences offers a comprehensive spectrum of property casualty products to the life sciences industry on a global basis, including primary and excess liability coverage and commercial insurance. It serves pharmaceutical and biologic/biotech companies, medical device companies, dietary supplement manufacturers, medical and research software developers, contract service organizations, research institutions and organizations, and other related businesses.
    
Berkley Offshore Underwriting Managers is a specialist global underwriter of energy and marine risks. Its three divisions provide specialty insurance products in the energy upstream, energy liability and marine sectors.
    
Berkley Oil & Gas Specialty Services provides property casualty products and risk services to the U.S. energy sector. Its customer base includes risks of any size that work in the oil patch, including operators, drillers, geophysical contractors, well-servicing contractors, and manufacturers/distributors of oil field products.
    
Berkley Professional Liability specializes in professional liability insurance for large publicly-traded and private entities based in the United States and Canada. Its liability coverages include directors and officers, fiduciary, employment practices, and sponsored insurance agents.

Berkley Public Entity specializes in public entities and intergovernmental pools or trusts. Products include general liability, auto, property, crime and liability for law enforcement, public officials, educators, employment practices, incidental medical and miscellaneous professionals.

Berkley Select specializes in underwriting professional liability insurance with a particular emphasis on large law firms, accounting firms and medical institution facilities. Its products are distributed nationwide through a limited number of brokers.
    
Berkley Specialty Underwriting Managers has two underwriting divisions. Its entertainment and sports division underwrites property casualty insurance products, both on an admitted and non-admitted basis, for the entertainment industry and sports-related organizations. The environmental division underwrites specialty insurance products for environmental customers such as contractors, consultants and owners of sites and facilities.
    
Berkley Technology Underwriters provides a broad range of first and third-party insurance programs for technology exposures and technology industries on both a local and global basis.

Berkley Underwriting Partners is a program management company offering both admitted and non-admitted insurance support on a nationwide basis for commercial casualty and inland marine program administrators with specialized insurance expertise. Its book is built around blocks of homogeneous business, or programs, allowing for efficient processes, effective oversight of existing programs and sound implementation of new programs.
    
Carolina Casualty Insurance provides commercial insurance products and services to the transportation industry with an emphasis on intermediate and long-haul trucking and various classes of business and public automobile coverage. It underwrites on an admitted basis in all 50 states and the District of Columbia.

Clermont Specialty Managers is a provider of package insurance programs for high-end cooperative, condominium, and quality rental apartment buildings and upscale restaurants in the New York, New Jersey and Chicago metropolitan markets.
    
FinSecure serves the insurance needs of financial institutions, credit unions, mortgage lenders, mortgage servicers and trust managers. It offers a comprehensive range of property, casualty, professional liability, and specialty lines insurance products and loss control services, including financial institution-specific commercial package policies, workers' compensation, umbrella, commercial auto, management liability coverages, and financial institution bonds.
    

3



Gemini Transportation Underwriters is a national provider of excess liability insurance for various domestic surface transportation industry businesses. It underwrites liability insurance policies for the railroad industry as well as excess liability policies for the trucking, busing and other industries that use rubber-wheeled vehicles for over-the-road use.
    
Monitor Liability Managers provides executive and professional liability insurance to small to middle-market risks on a nationwide basis. Its primary professional liability products are directors and officers, employment practices and fiduciary coverages for public and private companies and nonprofit organizations, and errors and omissions policies for accounting and law firms.
    
Nautilus Insurance insures excess and surplus lines risks for small to medium-sized commercial risks with low to moderate susceptibility to loss. It writes commercial excess and surplus lines business nationwide and admitted lines commercial business in a limited number of states. A substantial portion of Nautilus' business is written through its close, long-standing network of general agents, who are chosen on a highly selective basis.
    
Vela Insurance Services specializes in commercial casualty insurance on an excess and surplus lines basis. Its primary focus is on general liability insurance for construction, manufacturing and general casualty clients as well as products liability and miscellaneous professional liability coverages distributed through wholesale insurance brokers.

Verus Underwriting Managers offers general liability, professional liability and property coverages for small to mid-sized commercial risks in the excess and surplus lines insurance market through a select group of appointed wholesale brokers and agents.

The following table sets forth the percentage of gross premiums written by each Specialty operating unit:
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
Berkley Specialty Underwriting Managers
16.3
%
 
14.8
%
 
12.0
%
 
8.5
%
 
9.6
%
Nautilus Insurance
12.8

 
13.9

 
15.9

 
16.8

 
17.5

Admiral Insurance
12.6

 
14.2

 
16.7

 
20.4

 
24.0

Berkley Oil & Gas Specialty Services
6.7

 
4.5

 
0.9

 

 

Monitor Liability Managers
6.4

 
8.2

 
10.1

 
10.4

 
8.6

Berkley Select
6.1

 
5.5

 
5.6

 
5.3

 
2.9

Carolina Casualty Insurance
4.8

 
4.9

 
5.0

 
9.3

 
14.8

Vela Insurance Services
4.6

 
4.5

 
4.9

 
4.4

 
5.6

Berkley Offshore Underwriting Managers
4.5

 
4.1

 
3.7

 
2.7

 

Berkley Underwriting Partners
3.7

 
6.5

 
6.8

 
6.2

 
6.8

Clermont Specialty Managers
3.2

 
3.5

 
4.1

 
4.0

 
3.7

Berkley Aviation
3.0

 
3.6

 
3.9

 
3.6

 
3.3

Berkley Professional Liability
2.5

 
2.2

 
2.4

 
2.1

 
0.1

Gemini Transportation Underwriters
2.2

 
2.0

 
1.9

 
1.2

 

Berkley Asset Protection Underwriters
2.0

 
1.8

 
1.5

 
1.1

 
0.3

American Mining Insurance
1.8

 
2.1

 
2.3

 
2.2

 
2.1

Berkley Life Sciences
1.7

 
1.3

 
1.1

 
1.2

 
0.7

FinSecure
1.6

 
1.6

 
1.2

 
0.6

 

Verus Underwriting Managers
1.4

 
0.8

 

 

 

Berkley Custom Insurance
1.4

 

 

 

 

Berkley Public Entity
0.4

 

 

 

 

  Berkley Technology Underwriters
0.3

 

 

 

 

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

4



The following table sets forth the percentages of gross premiums written, by line, by our Specialty insurance operations:
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
Other liability
31.5
%
 
31.1
%
 
29.0
%
 
29.5
%
 
32.8
%
Property
20.9

 
20.7

 
20.4

 
19.0

 
15.1

Professional liability
16.0

 
16.6

 
18.3

 
18.1

 
12.9

Workers' compensation
9.2

 
8.0

 
7.7

 
5.7

 
4.8

Commercial automobile
8.6

 
8.9

 
8.2

 
10.4

 
16.0

Products liability
5.4

 
5.6

 
6.0

 
7.5

 
10.2

Other
8.4

 
9.1

 
10.4

 
9.8

 
8.2

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

REGIONAL

Our Regional companies provide insurance products and services that meet the specific needs of each regionally differentiated customer base by developing expertise in the niches that drive local communities. They provide commercial insurance products to customers primarily in 45 states and the District of Columbia. Key clients of this segment are small-to-mid-sized businesses and state and local governmental entities. The Regional business is sold through a network of non-exclusive independent agents who are compensated on a commission basis. Our Regional operating units are organized geographically in order to provide them with the flexibility to adapt quickly to local market conditions and customer needs.

Acadia Insurance is a Northeast regional property casualty underwriter offering a broad portfolio of products exclusively through local independent agents in Connecticut, Maine, Massachusetts, New Hampshire, New York and Vermont. In addition to its general offerings, Acadia has specialized expertise in insuring regional businesses and industries such as construction, lumber and fishing.

Berkley Mid-Atlantic Group provides commercial property casualty coverages to a wide variety of businesses in Delaware, the District of Columbia, Maryland, Ohio, Pennsylvania, and Virginia. Focusing on middle market accounts, it complements its standard writings with specialized products in areas such as social services, nonprofit organizations and inland marine.
    
Berkley North Pacific provides local underwriting, claims and risk management services from its home office in Seattle, Washington and branch offices in Boise, Idaho, Spokane, Washington and Salt Lake City, Utah. The company partners with a select group of agents in Washington, Oregon, Idaho, Montana and Utah to sell and service property and casualty policies for larger middle-market standard businesses and the specialty lines of agribusiness, motor carrier, petroleum distribution and construction.
    
Berkley Regional Specialty provides excess and surplus lines coverage on a national basis to small to medium-sized insureds with low to moderate insurance risk. Its product lines include general liability, liquor liability and some property and inland marine coverage. It serves a limited distribution channel consisting of select W. R. Berkley Corporation member company agents.
    
Berkley Southeast was formed as a separate operating unit in January 2013 to serve the Southeastern states. Based in Atlanta, Georgia, the company offers a wide array of commercial lines products in six southeastern states: Mississippi, Alabama, Georgia, Tennessee, North Carolina and South Carolina.

Berkley Surety provides a broad array of surety products for contract and commercial surety risks, including specialty niches such as environmental and secured credit for small contractors, through an independent agency and broker platform across a nationwide network of 16 field offices.

Continental Western Group is a Midwest regional property and casualty insurance company based in Des Moines, Iowa, providing underwriting and risk management services to a broad array of regional businesses in thirteen Midwest states. In addition to its generalist portfolio, Continental Western offers specialty underwriting solutions for diversified agriculture, construction, light manufacturing, transportation, volunteer fire departments, rural utilities, collector cars, public entity and implement dealers. Through its subsidiary, Berkley Agribusiness Risk Specialists, the company offers insurance for larger

5



commercial risks across the United States for clients involved in the supply, storage, handling, processing and distribution of commodities related to the agriculture and food industries.

Regional Excess Underwriters is a full service excess and surplus lines brokerage and general agent offering commercial coverages to agents contracted with W. R. Berkley Corporation member companies and select other agents and brokers throughout the continental United States. Surplus lines risks are placed either within the W. R. Berkley group of insurance companies, or by drawing upon the resources of other non-admitted insurance carriers.

Union Standard offers preferred commercial property and casualty insurance products and services to a wide range of small to medium size commercial entities through independent agents in Arizona, Arkansas, New Mexico, Oklahoma and Texas. Union Standard's strategy is built around relationships and service.
    
The following table sets forth the percentage of gross premiums written by each Regional operating unit:
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
Acadia Insurance
30.0
%
 
29.3
%
 
26.4
%
 
25.1
%
 
23.8
%
Continental Western
22.5

 
23.2

 
23.9

 
26.3

 
27.2

Union Standard
18.5

 
18.1

 
18.5

 
18.5

 
17.7

Berkley Mid-Atlantic
17.0

 
17.7

 
17.9

 
16.9

 
15.6

Berkley North Pacific
6.2

 
5.1

 
4.0

 
3.0

 
5.3

Berkley Surety
4.5

 
5.2

 
5.0

 
3.6

 
2.9

Berkley Regional Specialty
1.3

 
1.2

 
1.2

 
1.2

 
1.2

Assigned risk plans (1)

 

 
3.1

 
5.4

 
6.3

 Other

 
0.2

 

 

 

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
_____________
(1) Assigned risk plans were transferred to the Alternative Markets segment in 2011.

The following table sets forth the percentages of gross premiums written, by line, by our Regional insurance operations:
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
Commercial multi-peril
38.7
%
 
37.4
%
 
35.8
%
 
34.7
%
 
34.3
%
Automobile
24.1

 
24.9

 
25.3

 
25.3

 
25.5

Workers’ compensation
19.4

 
19.1

 
18.0

 
18.1

 
18.2

Assigned risk plans (1)

 

 
3.1

 
5.4

 
6.3

Other
17.8

 
18.6

 
17.8

 
16.5

 
15.7

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
_____________
(1) Assigned risk plans were transferred to the Alternative Markets segment in 2011.


6



The following table sets forth the percentages of direct premiums written by our Regional insurance operations by state:
 
Year Ended December 31,
State
2012

 
2011
 
2010
 
2009
 
2008
Massachusetts
7.9
%
 
7.8
%
 
7.2
%
 
6.8
%
 
6.8
%
Pennsylvania
6.5

 
6.5

 
6.7

 
6.3

 
5.7

Texas
6.4

 
6.9

 
7.1

 
7.1

 
6.7

Maine
6.1

 
6.1

 
5.7

 
5.3

 
4.7

New Hampshire
5.9

 
5.8

 
5.3

 
5.0

 
4.9

Mississippi
4.2

 
3.9

 
3.6

 
3.5

 
3.2

Connecticut
4.1

 
3.6

 
2.9

 
3.1

 
3.0

Washington
3.7

 
3.2

 
2.4

 
1.8

 
2.8

North Carolina
3.6

 
3.8

 
4.2

 
3.6

 
3.3

Vermont
3.4

 
3.3

 
3.4

 
3.1

 
3.0

New York
3.0

 
3.2

 
3.1

 
2.8

 
2.3

Virginia
2.9

 
3.1

 
2.8

 
2.6

 
2.4

Iowa
2.8

 
3.1

 
3.6

 
4.0

 
4.2

Kansas
2.6

 
2.9

 
3.2

 
5.3

 
5.8

Nebraska
2.6

 
2.8

 
3.0

 
3.9

 
3.8

Minnesota
2.5

 
2.6

 
2.8

 
3.0

 
3.2

Wisconsin
2.4

 
2.3

 
2.8

 
2.4

 
2.5

Arkansas
2.2

 
2.1

 
2.3

 
2.3

 
2.3

Maryland
2.1

 
2.4

 
2.2

 
2.4

 
2.1

Missouri
2.1

 
2.3

 
2.4

 
2.6

 
2.8

Colorado
2.1

 
2.0

 
2.2

 
3.2

 
3.7

Oklahoma
1.7

 
1.8

 
1.6

 
1.7

 
1.5

South Dakota
1.7

 
1.7

 
1.8

 
2.4

 
2.3

Tennessee
1.4

 
1.4

 
1.5

 
1.4

 
1.5

Illinois
1.3

 
1.4

 
2.3

 
2.5

 
2.7

Arizona
1.3

 
1.1

 
1.1

 
0.9

 
0.7

Alabama
1.3

 
1.3

 
1.2

 
1.2

 
1.1

New Mexico
1.2

 
1.3

 
1.3

 
1.2

 
1.2

South Carolina
1.2

 
1.2

 
1.3

 
1.3

 
1.3

North Dakota
1.2

 
1.2

 
1.1

 
1.0

 
0.9

Oregon
1.1

 
0.9

 
0.8

 
0.6

 
1.2

Idaho
1.1

 
0.8

 
0.8

 
0.7

 
1.1

Indiana
0.7

 
0.7

 
1.1

 
0.9

 
0.9

Other
5.7

 
5.5

 
5.2

 
4.1

 
4.4

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

ALTERNATIVE MARKETS

Often, alternative methods of risk management result in our customers choosing to retain more risk than they might otherwise retain in the traditional insurance market. Our Alternative Markets operating units offer insurance products, analytical tools and risk management services such as loss control and claims management that enable clients to select their risk tolerance and manage it appropriately. These units specialize in insuring, reinsuring and administering self-insurance programs and other alternative risk transfer mechanisms for clients such as commercial and governmental entity employers, employer groups, insurers, and other groups or entities seeking alternative ways to manage their exposure to risks. In addition to providing insurance products, the Alternative Markets segment also provides a wide variety of fee-based services, including claims, administrative and consulting services.

    


7



Berkley Accident and Health underwrites accident and health insurance and reinsurance products in four primary areas: medical stop loss, managed care, special risk and group captive. It has a diversified product and service portfolio serving a range of clients from small employers, health care organizations, and membership groups to Fortune 500 companies.
    
Berkley Medical Excess Underwriters insures healthcare organizations such as hospitals and clinics that retain a portion of their risk exposure through a self-funded mechanism and seek to maximize the effectiveness and efficiency of their excess risk financing program.
    
Berkley Net Underwriters focuses on niche insurance products for small and medium-sized commercial risks, using a web-based system to allow producers to quote, bind and service workers' compensation insurance products on behalf of W. R. Berkley Corporation member companies.
    
Berkley Risk Administrators provides insurance program management services to a variety of organizations, including self-insureds, captives, governmental entities, risk retention groups, and insurance companies. It is also a nationwide third-party claims administrator and is the nation's third largest servicing carrier for workers' compensation assigned risk plans, serving plans in 20 states.
    
Key Risk Insurance is a provider of workers' compensation insurance products and services for employers in the public and private sectors throughout the Eastern United States. It focuses on middle-market accounts in specialty niches and on larger self-insured entities, with a special emphasis on expert claims and managed-care services. Additionally, Key Risk's affiliate, Key Risk Management Services, provides third party administration of self-insured workers' compensation programs.
    
Midwest Employers Casualty provides excess workers' compensation insurance products to individual employers, groups and workers' compensation insurance companies across the United States. Its workers' compensation excess of loss products include self-insured excess of loss coverages, large deductible policies and reinsurance. Through its relationship with Berkley Net Underwriters, Midwest Employers Casualty also offers multi-state coverage for group self-insureds. It has developed sophisticated, proprietary analytical tools and risk management services that help their insureds lower their total cost of risk.

Preferred Employers Insurance focuses exclusively on workers' compensation products and services for businesses in California. It serves over 12,000 customers covering a broad spectrum of industries throughout the state.

Riverport Insurance Services provides property casualty insurance coverages to human services organizations, including nonprofit and for-profit organizations, public entities, sports and recreational organizations, and self-insured companies, associations and purchasing groups. Its product offerings include traditional primary coverages, as well as alternative market solutions for clients who wish to retain a larger share of their own risk.
    
The following table sets forth the percentages of gross premiums written by each Alternative Markets operating unit:
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
Berkley Accident and Health
16.0
%
 
15.2
%
 
10.6
%
 
6.1
%
 
4.6
%
Berkley Net Underwriters
15.3

 
11.3

 
10.4

 
10.6

 
6.7

Midwest Employers Casualty
14.7

 
20.3

 
30.7

 
38.3

 
42.1

Key Risk Insurance
14.1

 
14.3

 
16.1

 
17.7

 
18.8

Preferred Employers Insurance
8.6

 
8.5

 
8.9

 
8.2

 
8.3

Riverport Insurance Services
6.3

 
7.6

 
8.2

 
10.2

 
9.3

Berkley Medical Excess Underwriters
3.8

 
4.6

 
5.6

 
5.2

 
4.4

Assigned risk plans (1)
21.2

 
18.2

 
9.5

 
3.7

 
5.8

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
__________
(1) Assigned risk premiums are written on behalf of assigned risk plans managed by the Company. Assigned risk premiums are 100% reinsured by the respective state-sponsored assigned risk pools.
    



8




The following table sets forth percentages of gross premiums written, by line, by our Alternative Markets operations:
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
Primary workers' compensation
38.9
%
 
34.8
%
 
36.9
%
 
38.5
%
 
35.6
%
Accident and health
16.0

 
15.2

 
10.6

 
6.1

 
4.6

Excess workers' compensation
13.5

 
18.9

 
29.1

 
36.5

 
40.4

Other liability
4.7

 
5.7

 
4.8

 
5.3

 
4.7

Other
5.7

 
7.2

 
9.1

 
9.9

 
8.9

Assigned risk plans
21.2

 
18.2

 
9.5

 
3.7

 
5.8

  Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
REINSURANCE

We provide other insurance companies and self-insureds with assistance in managing their net risk through reinsurance on either a portfolio basis, through treaty reinsurance, or on an individual basis, through facultative reinsurance.

Berkley Re America is a specialty reinsurance underwriter with an emphasis on providing solutions for insurance companies, or units within insurance companies, that have a successful business model built upon specialization in the products they underwrite. Its lines of business include general and products liability, environmental liability, professional liability, medical malpractice, automobile, umbrella and excess liability, workers' compensation, and property.
    
B F Re Underwriters is a direct casualty facultative reinsurance underwriter serving clients through a nationwide network of regional offices. Its facultative reinsurance products include automatic, semi-automatic and individual risk assumed reinsurance. B F Re Underwriters also provides its customers value-added services across its lines, including underwriting, claims and actuarial consultation.

Facultative ReSources is a broker market casualty, professional liability and property facultative underwriter based in Stamford, Connecticut with branch offices in Chicago, Atlanta and Los Angeles. It provides expertise across many lines of facultative business, and has recently broadened its expertise in a number of specialized areas, including professional liability and property hazards in emerging technologies.

Lloyd's Reinsurance represents the Company's minority participation in a Lloyd's syndicate that writes a broad range of mainly short-tail classes of business.

The following table sets forth the percentages of gross premiums written by each Reinsurance operating unit:
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
Berkley Re America
64.6
%
 
66.1
%
 
60.3
%
 
52.4
%
 
51.0
%
Lloyd’s Reinsurance
14.8

 
13.9

 
15.9

 
18.8

 
14.7

Facultative ReSources
11.8

 
10.5

 
14.2

 
19.4

 
22.1

B F Re Underwriters
8.8

 
9.5

 
9.6

 
9.4

 
12.2

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 


9



The following table sets forth the percentages of gross premiums written, by property versus casualty business, by our Reinsurance operations:
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
Casualty
64.3
%
 
69.3
%
 
67.8
%
 
70.2
%
 
82.8
%
Property
35.7

 
30.7

 
32.2

 
29.8

 
17.2

   Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

INTERNATIONAL

Through our International operating units, we write business in almost 40 countries worldwide, with branches or offices in 15 locations outside the United States, including the United Kingdom, Continental Europe, South America, Australia, the Asia Pacific region, Scandinavia and Canada. In each of our operating territories, we have built decentralized structures that allow products and services to be tailored to each regional customer base. Our businesses are managed by teams of professionals with expertise in local markets and knowledge of regional environments.
    
Berkley Canada underwrites specialty, casualty and surety lines of business on behalf of the Canadian branch of Berkley Insurance Company. It specializes in commercial casualty and professional liability, and offers a broad portfolio of risk products that include commercial general liability, umbrella, professional liability, directors' and officers', commercial property and surety, in addition to niche products for specific industries such as technology and life sciences.
    
Berkley Latinoamérica is a leading provider of property, casualty, automobile, surety, group life and health and workers' compensation products and services in its operating territories of Argentina, Brazil and Uruguay. Its largest operation, Berkley International Seguros, offers a wide range of property casualty products in Argentina, where it is a leading provider of surety, engineering, cargo and personal accident coverages. Berkley International ART, Berkley International Latinoamérica's workers' compensation carrier in Argentina, is focused on small to medium-sized risks in its operating territories. Berkley International Seguros do Brasil provides surety products to small and medium-sized risks throughout Brazil, and Berkley International Seguros (Uruguay) is a provider of customized property casualty insurance products and services to small and medium-sized businesses in Uruguay.
    
Berkley Re Asia Pacific, which comprises the Australian, Hong Kong and Singapore branches of Berkley Insurance Company, provides property and casualty reinsurance to the Asia Pacific marketplace. With offices in Brisbane, Sydney, Hong Kong and Singapore, each branch focuses on excess of loss reinsurance, targeting both property and casualty treaty and facultative contracts, through multiple distribution channels.
    
Berkley Re UK writes international property casualty treaty accounts. Its territorial scope includes reinsured clients domiciled in the United Kingdom, Europe, Africa, the Middle East and the Caribbean.
    
W. R. Berkley Insurance (Europe) is based in the United Kingdom with offices in Spain, Australia, Ireland, Norway and Germany. Its product offering includes professional indemnity, directors' and officers' liability, medical malpractice, general liability, personal accident and travel, engineering and construction. It also offers expertise in marine, cargo, and commercial property and casualty packages.

W. R. Berkley Syndicate 1967 at Lloyd's focuses on lines of business more global in nature where access to the Lloyd's distribution platform allows us to further expand our international reach. It works actively with select W. R. Berkley Corporation member companies to access business for which the Lloyd's platform is best suited. Syndicate 1967's book of business includes accident and commercial property and a specialized book of marine business.

    

10



The following table sets forth the percentages of gross premiums written by our International operating units:
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
W. R. Berkley Insurance (Europe)
30.2
%
 
29.1
%
 
30.4
%
 
33.2
%
 
40.1
%
Berkley Latinoamérica
27.7

 
31.4

 
36.9

 
41.0

 
51.8

W. R. Berkley Syndicate 1967
17.8

 
17.6

 
13.8

 
5.9

 

Berkley Re Asia Pacific
15.7

 
17.7

 
15.6

 
17.8

 
8.1

Berkley Re UK
5.0

 
0.2

 

 

 

Berkley Canada
3.6

 
4.0

 
3.3

 
2.1

 

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%


Results by Industry Segment

Summary financial information about our segments is presented on a GAAP basis in the following table:
 
Year Ended December 31,
 (In thousands)
2012
 
2011
 
2010
 
2009
 
2008
Specialty
 

 
 

 
 

 
 

 
 

Revenue
$
1,835,817

 
$
1,620,741

 
$
1,471,566

 
$
1,483,266

 
$
1,810,813

Income before income taxes
261,856

 
290,937

 
294,825

 
220,005

 
374,738

Regional
 

 
 

 
 

 
 

 
 

Revenue
1,178,258

 
1,145,491

 
1,152,447

 
1,177,126

 
1,317,796

Income before income taxes
122,211

 
30,529

 
115,828

 
105,122

 
107,979

Alternative Markets
 

 
 

 
 

 
 

 
 

Revenue
930,867

 
819,949

 
810,673

 
768,683

 
831,622

Income before income taxes
194,433

 
145,660

 
178,485

 
162,708

 
201,740

Reinsurance
 

 
 

 
 

 
 

 
 

Revenue
543,062

 
517,879

 
522,435

 
487,016

 
635,763

Income before income taxes
93,268

 
83,150

 
129,449

 
86,400

 
117,866

International
 

 
 

 
 

 
 

 
 

Revenue
866,160

 
656,460

 
485,534

 
351,947

 
322,016

Income before income taxes
62,061

 
39,033

 
20,719

 
22,349

 
52,551

Other(1)
 

 
 

 
 

 
 

 
 

Revenue
469,390

 
395,464

 
281,414

 
163,140

 
(209,202
)
Loss before income taxes
(31,901
)
 
(76,223
)
 
(140,396
)
 
(216,706
)
 
(530,594
)
Total
 

 
 

 
 

 
 

 
 

Revenue
5,823,554

 
5,155,984

 
4,724,069

 
4,431,178

 
4,708,808

Income before income taxes
701,928

 
513,086

 
598,910

 
379,878

 
324,280

_______________________________________
(1)
Represents corporate revenues, corporate expenses, net investment gains and losses, and revenues and expenses from investments in wholly-owned, non-insurance subsidiaries that are consolidated for financial reporting purposes.

11



The table below represents summary underwriting ratios on a GAAP basis for our segments. Loss ratio is losses and loss expenses incurred expressed as a percentage of net premiums earned. Expense ratio is underwriting expenses expressed as a percentage of net premiums earned. Underwriting expenses do not include expenses related to insurance services or unallocated corporate expenses. Combined ratio is the sum of the loss ratio and the expense ratio. The combined ratio represents a measure of underwriting profitability, excluding investment income. A number in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit:
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
Specialty
 

 
 

 
 

 
 

 
 

Loss ratio
62.8
%
 
59.4
%
 
58.3
%
 
61.9
%
 
60.1
%
Expense ratio
32.7
%
 
32.6
%
 
32.9
%
 
31.1
%
 
28.5
%
Combined ratio
95.5
%
 
92.0
%
 
91.2
%
 
93.0
%
 
88.6
%
Regional
 

 
 

 
 

 
 

 
 

Loss ratio
59.6
%
 
68.0
%
 
60.7
%
 
61.4
%
 
65.4
%
Expense ratio
36.5
%
 
36.1
%
 
36.0
%
 
34.3
%
 
32.4
%
Combined ratio
96.1
%
 
104.1
%
 
96.7
%
 
95.7
%
 
97.8
%
Alternative Markets
 

 
 

 
 

 
 

 
 

Loss ratio
71.4
%
 
72.3
%
 
67.6
%
 
63.4
%
 
62.7
%
Expense ratio
25.9
%
 
26.7
%
 
25.6
%
 
25.8
%
 
24.3
%
Combined ratio
97.3
%
 
99.0
%
 
93.2
%
 
89.2
%
 
87.0
%
Reinsurance
 

 
 

 
 

 
 

 
 

Loss ratio
60.5
%
 
61.6
%
 
52.5
%
 
57.9
%
 
64.7
%
Expense ratio
40.1
%
 
40.5
%
 
41.1
%
 
39.1
%
 
34.8
%
Combined ratio
100.6
%
 
102.1
%
 
93.6
%
 
97.0
%
 
99.5
%
International
 

 
 

 
 

 
 

 
 

Loss ratio
62.9
%
 
60.5
%
 
61.8
%
 
59.9
%
 
61.7
%
Expense ratio
37.2
%
 
40.2
%
 
40.5
%
 
40.4
%
 
39.0
%
Combined ratio
100.1
%
 
100.7
%
 
102.3
%
 
100.3
%
 
100.7
%
Total
 

 
 

 
 

 
 

 
 

Loss ratio
63.1
%
 
63.9
%
 
60.2
%
 
61.4
%
 
62.7
%
Expense ratio
34.1
%
 
34.6
%
 
34.4
%
 
32.9
%
 
30.4
%
Combined ratio
97.2
%
 
98.5
%
 
94.6
%
 
94.3
%
 
93.1
%



12



Investments
Investment results, before income taxes, were as follows:
 
Year Ended December 31,
(In thousands) 
2012
 
2011
 
2010
 
2009
 
2008
Average investments, at cost(1)
$
14,545,371

 
$
13,631,552

 
$
13,356,380

 
$
12,918,039

 
$
12,939,843

Net investment income(1)
$
586,763

 
$
526,351

 
$
530,525

 
$
379,008

 
$
533,480

Percent earned on average investments(1)
4.0
%
 
3.9
%
 
4.0
%
 
3.0
%
 
4.2
%
Net investment gains (losses)(2)
$
210,465

 
$
125,481

 
$
56,581

 
$
(38,408
)
 
$
(356,931
)
Change in unrealized investment gains (losses)(3)
$
135,282

 
$
147,998

 
$
176,588

 
$
557,444

 
$
(302,211
)
_______________________________________

(1)
Includes investments, cash and cash equivalents, trading accounts receivable from brokers and clearing organizations, trading account securities sold but not yet purchased and unsettled purchases.
(2)
Represents realized gains and losses on investments not classified as trading account securities.
(3)
Represents the change in unrealized investment gains (losses) for available for sale securities.
For comparison, the following are the coupon returns for the Barclays U.S. Aggregate Bond Index and the dividend returns for the S&P 500® Index:
 
Year Ended December 31,
 
2012

 
2011
 
2010
 
2009
 
2008
Barclays U.S. Aggregate Bond Index
3.5
%
 
4.0
%
 
4.2
%
 
4.9
%
 
5.4
%
S&P 500® Index
2.5
%
 
2.1
%
 
2.3
%
 
3.0
%
 
1.5
%

The percentages of the fixed maturity portfolio categorized by contractual maturity, based on fair value, on the dates indicated, are set forth below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay certain obligations.
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
1 year or less
5.8
%
 
6.6
%
 
6.7
%
 
5.3
%
 
3.2
%
Over 1 year through 5 years
30.7

 
28.3

 
27.3

 
27.2

 
22.9

Over 5 years through 10 years
23.4

 
25.3

 
25.9

 
27.2

 
29.9

Over 10 years
25.5

 
25.5

 
27.1

 
26.0

 
26.6

Mortgage-backed securities
14.6

 
14.3

 
13.0

 
14.3

 
17.4

Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%

At December 31, 2012, the fixed maturity portfolio had an average duration of 3.4 years.

13



Loss and Loss Adjustment Expense Reserves
To recognize liabilities for unpaid losses, either known or unknown, insurers establish reserves, which is a balance sheet account representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. Estimates and assumptions relating to reserves for losses and loss expenses are based on complex and subjective judgments, often including the interplay of specific uncertainties with related accounting and actuarial measurements. Such estimates are also susceptible to change as significant periods of time may elapse between the occurrence of an insured loss, the report of the loss to the insurer, the ultimate determination of the cost of the loss and the insurer’s payment of that loss.
In general, when a claim is reported, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment based upon known information about the claim at that time. The estimate represents an informed judgment based on general reserving practices and reflects the experience and knowledge of the claims personnel regarding the nature and value of the specific type of claim. Reserves are also established on an aggregate basis to provide for losses incurred but not reported (“IBNR”) to the insurer, potential inadequacy of case reserves and the estimated expenses of settling claims, including legal and other fees and general expenses of administrating the claims adjustment process. Reserves are established based upon the then current legal interpretation of coverage provided.
In examining reserve adequacy, several factors are considered in estimating the ultimate economic value of losses. These factors include, among others, historical data, legal developments, changes in social attitudes and economic conditions, including the effects of inflation. The actuarial process relies on the basic assumption that past experience, adjusted judgmentally for the effects of current developments and anticipated trends, is an appropriate basis for predicting future outcomes. Reserve amounts are necessarily based on management’s informed estimates and judgments using currently available data. As additional experience and other data become available and are reviewed, these estimates and judgments may be revised. This may result in reserve increases or decreases that would be reflected in our results in periods in which such estimates and assumptions are changed.
The risk and complexity of estimating loss reserves are greater when economic conditions are uncertain. 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 earnings 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 the reserves are well tested over time, some of the major assumptions about anticipated loss emergence patterns are subject to unanticipated fluctuation. These estimates, which generally involve actuarial projections, are based on management’s assessment of facts and circumstances then known, as well as estimates of trends in claims severity and frequency, judicial theories of liability and other factors, including the actions of third parties, which are beyond the Company’s control. These variables are affected by external and internal events, such as inflation and economic volatility, judicial and litigation trends, reinsurance coverage, legislative changes and claim handling and reserving practices, which make it more difficult to accurately predict claim costs. The inherent uncertainties of estimating reserves are greater for certain types of liabilities where long periods of time elapse before a definitive determination of liability is made. Although the loss reserves included in the Company’s financial statements represent management’s best estimates, setting reserves is inherently uncertain and the Company cannot provide assurance that its current reserves will prove adequate in light of subsequent events.
We discount our liabilities for excess workers’ compensation business and the workers’ compensation portion of our reinsurance 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. At December 31, 2012, the discount rates by year ranged from 2.1% to 6.5% with a weighted average discount rate of 4.2%. 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 2.2%. The aggregate net discount, after reflecting the effects of ceded reinsurance, is $867 million, $892 million and $898 million at December 31, 2012, 2011 and 2010, respectively.
To date, known asbestos and environmental claims at our insurance company subsidiaries have not had a material impact on our operations. These claims have not materially impacted us because these subsidiaries generally did not insure the larger industrial companies which were subject to significant asbestos or environmental exposures prior to 1986 when an absolute pollution exclusion was incorporated into standard policy language.
Our net reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $34 million at both December 31, 2012 and 2011. The Company’s gross reserves for losses and loss adjustment expenses relating to asbestos

14



and environmental claims were $56 million and $59 million at December 31, 2012 and 2011, respectively. Net incurred losses and loss expenses for reported asbestos and environmental claims increased by approximately $2 million, $1 million and $2 million in 2012, 2011 and 2010, respectively. Net paid losses and loss expenses for reported asbestos and environmental claims were approximately $2 million, $3 million and $2 million in 2012, 2011 and 2010, respectively. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make a reasonable actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential effect of significant unresolved legal matters, including coverage issues as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties are highly uncertain.
The table below provides a reconciliation of the beginning of year and end of year property casualty reserves for the indicated years:
(In thousands)
2012
 
2011
 
2010
Net reserves at beginning of year
$
8,172,112

 
$
7,999,521

 
$
8,147,782

Net provision for losses and loss expenses:
 

 
 

 
 

Claims occurring during the current year(1)
2,997,995

 
2,791,860

 
2,509,933

Decrease in estimates for claims occurring in prior years(2)(3)
(102,571
)
 
(181,282
)
 
(253,248
)
Loss reserve discount amortization
53,055

 
47,787

 
53,182

Total
2,948,479

 
2,658,365

 
2,309,867

  Net payments for claims:
 

 
 

 
 

Current year
698,834

 
765,440

 
641,570

Prior years
2,010,101

 
1,721,558

 
1,811,507

Total
2,708,935

 
2,486,998

 
2,453,077

Foreign currency translation
195

 
1,224

 
(5,051
)
Net reserves at end of year
8,411,851

 
8,172,112

 
7,999,521

Ceded reserves at end of year
1,339,235

 
1,165,022

 
1,017,028

Gross reserves at end of year
$
9,751,086

 
$
9,337,134

 
$
9,016,549

____________________________________
(1)
Claims occurring during the current year are net of discounts of $26,078,000, $43,286,000 and $67,763,000 in 2012, 2011 and 2010, respectively.
(2)
The decrease in estimates for claims occurring in prior years is net of discounts. On an undiscounted basis, the estimates for claims occurring in prior years decreased by $100,667,000 in 2012, $182,937,000 in 2011, and $246,941,000 in 2010.
(3)
For certain retrospectively rated insurance polices and reinsurance agreements, reserve development is offset by additional or return premiums. Favorable reserve development, net of additional and return premiums, was $103 million, $182 million and $234 million in 2012, 2011 and 2010, respectively.
Also, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information regarding the decrease in estimates for claims occurring in prior years.

A reconciliation between the reserves as of December 31, 2012 as reported in the accompanying consolidated GAAP financial statements and those reported on the basis of statutory accounting principles (“SAP”) in the Company’s U.S. regulatory filings is as follows:
(In thousands)
 
Net reserves reported in U.S. regulatory filings on a SAP basis
$
7,519,283

Reserves for non-U.S. companies
595,166

Loss reserve discounting(1)
294,760

Ceded reserves
1,339,235

Other
2,642

Gross reserves reported in the consolidated GAAP financial statements
$
9,751,086


(1) For statutory purposes, the Company discounts its workers’ compensation reinsurance reserves at 2.2% as permitted by the Department of Insurance of the State of Delaware. In its GAAP financial statements, the

15



Company discounts excess workers’ compensation reserves at the risk-free rate and assumed workers’ compensation reserves at the statutory rate.
The following table presents the development of net reserves for 2002 through 2012. The top line of the table shows the estimated reserves for unpaid losses and loss expenses recorded at the balance sheet date for each of the indicated years. This represents the estimated amount of losses and loss expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not reported to us. The upper portion of the table shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years.
The “cumulative redundancy (deficiency)” represents the aggregate change in the estimates over all prior years. The impact on the results of operations of the past three years of changes in reserve estimates is shown in the reconciliation tables above. It should be noted that the table presents a “run off” of balance sheet reserves, rather than accident or policy year loss development. Therefore, each amount in the table includes the effects of changes in reserves for all prior years. For example, assume a claim that occurred in 2002 is reserved for $2,000 as of December 31, 2002. Assuming this claim estimate was changed in 2012 to $2,300, and was settled for $2,300 in 2012, the $300 deficiency would appear as a deficiency in each year from 2002 through 2011.
(In millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year Ended December 31,
 
2002
 
2003
 
2004
 
2005
 
2006
 
2007
 
2008
 
2009
 
2010
 
2011
 
2012
Net reserves, discounted
 
$
2,323

 
$
3,505

 
$
4,723

 
$
5,867

 
$
6,948

 
$
7,823

 
$
8,123

 
$
8,148

 
$
8,000

 
$
8,172

 
$
8,412

Reserve discount
 
293

 
393

 
503

 
575

 
700

 
788

 
846

 
877

 
898

 
892

 
867

Net reserves, undiscounted
 
$
2,616

 
$
3,898

 
$
5,226

 
$
6,442

 
$
7,648

 
$
8,611

 
$
8,969

 
$
9,025

 
$
8,898

 
$
9,064

 
$
9,279

Net reserves re-estimated as of:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

One year later
 
$
2,889

 
$
4,220

 
$
5,440

 
$
6,499

 
$
7,560

 
$
8,431

 
$
8,737

 
$
8,778

 
$
8,715

 
$
8,963

 
 

Two years later
 
3,242

 
4,552

 
5,588

 
6,578

 
7,494

 
8,239

 
8,560

 
8,596

 
8,624

 
 

 
 

Three years later
 
3,611

 
4,720

 
5,763

 
6,592

 
7,363

 
8,192

 
8,420

 
8,543

 
 

 
 

 
 

Four years later
 
3,769

 
4,949

 
5,816

 
6,556

 
7,370

 
8,137

 
8,433

 
 

 
 

 
 

 
 

Five years later
 
3,982

 
5,041

 
5,834

 
6,636

 
7,376

 
8,195

 
 

 
 

 
 

 
 

 
 

Six years later
 
4,069

 
5,082

 
5,929

 
6,677

 
7,437

 
 

 
 

 
 

 
 

 
 

 
 

Seven years later
 
4,112

 
5,176

 
5,983

 
6,755

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Eight years later
 
4,187

 
5,222

 
6,041

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Nine years later
 
4,224

 
5,276

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ten years later
 
4,278

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Cumulative redundancy (deficiency), undiscounted
 
$
(1,662
)
 
$
(1,378
)
 
$
(815
)
 
$
(313
)
 
$
211

 
$
416

 
$
536

 
$
482

 
$
274

 
$
101

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative amount of net liability paid through:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

One year later
 
$
599

 
$
930

 
$
1,174

 
$
1,341

 
$
1,437

 
$
1,663

 
$
1,751

 
$
1,812

 
$
1,722

 
$
2,010

 
 

Two years later
 
1,216

 
1,750

 
2,106

 
2,363

 
2,636

 
2,935

 
3,106

 
3,052

 
3,118

 
 

 
 

Three years later
 
1,792