UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2011

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 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  x    No  ¨

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  x    No  ¨

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	x		Accelerated filer	¨
Non-accelerated filer	¨	(Do not check if a smaller reporting company)	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  ¨    No  x

Number of shares of common stock, $.20 par value, outstanding as of July 29, 2011: 140,132,364

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

	June 30, 2011			December 31, 2010
	(Unaudited)
Assets
Investments:
Fixed maturity securities	$	11,279,509		$	11,209,154
Equity securities available for sale		511,052			561,053
Arbitrage trading account		474,787			359,192
Investment in arbitrage funds		59,728			60,660
Investment funds		606,291			451,751
Loans receivable		311,663			353,583
Real estate		117,873			—
Total investments		13,360,903			12,995,393
Cash and cash equivalents		794,881			642,952
Premiums and fees receivable		1,241,298			1,087,208
Due from reinsurers		1,130,040			1,070,256
Accrued investment income		139,994			138,384
Prepaid reinsurance premiums		275,826			215,816
Deferred policy acquisition costs		440,644			405,942
Real estate, furniture and equipment		254,792			254,720
Deferred federal and foreign income taxes		14,957			65,492
Goodwill		90,581			90,581
Trading account receivables from brokers and clearing organizations		242,720			339,235
Current federal and foreign income taxes		15,630			23,605
Other assets		192,858			198,963
Total assets	$	18,195,124		$	17,528,547
Liabilities and Equity
Liabilities:
Reserves for losses and loss expenses	$	9,195,675		$	9,016,549
Unearned premiums		2,166,032			1,953,721
Due to reinsurers		264,929			215,723
Trading account securities sold but not yet purchased		68,255			53,494
Other liabilities		835,529			836,001
Junior subordinated debentures		242,893			242,784
Senior notes and other debt		1,501,739			1,500,419
Total liabilities		14,275,052			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, 140,911,472 and 141,009,834 shares		47,024			47,024
Additional paid-in capital		923,995			935,099
Retained earnings		4,372,978			4,194,684
Accumulated other comprehensive income		340,743			276,563
Treasury stock, at cost, 94,206,446 and 94,108,084 shares		(1,771,933	)		(1,750,494	)
Total stockholders’ equity		3,912,807			3,702,876
Noncontrolling interests		7,265			6,980
Total equity		3,920,072			3,709,856
Total liabilities and equity	$	18,195,124		$	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 June 30,						For the Six Months Ended June 30,
	2011			2010			2011			2010
REVENUES:
Net premiums written	$	1,057,415		$	961,354		$	2,140,718		$	1,945,304
Change in net unearned premiums		(40,171	)		(13,226	)		(140,977	)		(66,615	)
Net premiums earned		1,017,244			948,128			1,999,741			1,878,689
Net investment income		149,072			129,731			295,198			273,292
Insurance service fees		25,035			20,390			47,208			41,875
Net investment gains (losses):
Net realized gains on investment sales		23,290			11,534			52,574			20,028
Other-than-temporary impairments		(400	)		—			(400	)		(2,582	)
Net investment gains		22,890			11,534			52,174			17,446
Revenues from wholly-owned investees		56,134			52,929			110,021			104,505
Other income		574			356			958			808
Total revenues		1,270,949			1,163,068			2,505,300			2,316,615
OPERATING COSTS AND EXPENSES:
Losses and loss expenses		674,276			570,475			1,281,371			1,120,448
Other operating costs and expenses		402,359			370,823			787,190			738,790
Expenses from wholly-owned investees		55,855			49,934			109,671			98,908
Interest expense		28,132			26,014			56,249			52,055
Total operating costs and expenses		1,160,622			1,017,246			2,234,481			2,010,201
Income before income taxes		110,327			145,822			270,819			306,414
Income tax expense		(27,309	)		(35,598	)		(71,309	)		(77,409	)
Net income before noncontrolling interests		83,018			110,224			199,510			229,005
Noncontrolling interests		64			(17	)		59			(188	)
Net income to common stockholders	$	83,082		$	110,207		$	199,569		$	228,817
NET INCOME PER SHARE:
Basic	$	0.59		$	0.73		$	1.41		$	1.50
Diluted	$	0.56		$	0.70		$	1.35		$	1.44

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 Six Months Ended June 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		(23,936	)		(11,168	)
Restricted stock units expensed		12,524			11,017
Stock issued to directors		308			198
End of period	$	923,995		$	926,406
RETAINED EARNINGS:
Beginning of period	$	4,194,684		$	3,785,187
Net income to common stockholders		199,569			228,817
Dividends		(21,275	)		(19,638	)
End of period	$	4,372,978		$	3,994,366
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Unrealized investment gains (losses):
Beginning of period	$	334,747		$	219,394
Unrealized gains on securities not other-than-temporarily impaired		53,342			108,305
Unrealized gains (losses) on other-than-temporarily impaired securities		(426	)		974
End of period		387,663			328,673
Currency translation adjustments:
Beginning of period		(42,488	)		(40,371	)
Net change in period		9,853			(17,220	)
End of period		(32,635	)		(57,591	)
Net pension asset:
Beginning of period		(15,696	)		(15,816	)
Net change in period		1,411			1,120
End of period		(14,285	)		(14,696	)
Total accumulated other comprehensive income	$	340,743		$	256,386
TREASURY STOCK:
Beginning of period	$	(1,750,494	)	$	(1,325,710	)
Stock exercised/vested		37,156			15,058
Stock repurchased		(59,159	)		(231,704	)
Stock issued to directors		564			536
End of period	$	(1,771,933	)	$	(1,541,820	)
NONCONTROLLING INTERESTS:
Beginning of period	$	6,980		$	5,879
Contributions		332			373
Net income (loss)		(59	)		188
Other comprehensive income, net of tax		12			8
End of period	$	7,265		$	6,448

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 June 30,						For the Six Months Ended June 30,
	2011			2010			2011			2010
Net income before noncontrolling interests	$	83,018		$	110,224		$	199,510		$	229,005
Other comprehensive income:
Change in unrealized foreign exchange gains (losses)		(1,007	)		(4,941	)		9,853			(17,220	)
Unrealized holding gains on investment securities arising during the period, net of taxes		92,271			76,667			86,054			120,579
Reclassification adjustment for net investment losses included in net income, net of taxes		(14,336	)		(7,449	)		(33,126	)		(11,292	)
Change in unrecognized pension obligation, net of taxes		707			561			1,411			1,120
Other comprehensive income		77,635			64,838			64,192			93,187
Comprehensive income		160,653			175,062			263,702			322,192
Comprehensive income (loss) to the noncontrolling interests		(4	)		(19	)		47			(196	)
Comprehensive income to common stockholders	$	160,649		$	175,043		$	263,749		$	321,996

See accompanying notes to interim consolidated financial statements.

4

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

	For the Six Months Ended June 30,
	2011			2010
CASH FROM OPERATING ACTIVITIES:
Net income to common stockholders	$	199,569		$	228,817
Adjustments to reconcile net income to net cash from operating activities:
Net investment gains		(52,174	)		(17,446	)
Depreciation and amortization		33,179			42,468
Noncontrolling interests		(59	)		188
Investment funds		(26,150	)		22,197
Stock incentive plans		13,026			12,367
Change in:
Securities trading account		(115,595	)		(32,585	)
Investment in arbitrage funds		932			24,856
Trading account receivables from brokers and clearing organizations		96,515			126,867
Trading account securities sold but not yet purchased		14,761			(95,049	)
Premiums and fees receivable		(148,144	)		(69,028	)
Due from reinsurers		(59,061	)		(41,365	)
Accrued investment income		(1,307	)		(4,531	)
Prepaid reinsurance premiums		(60,010	)		10,697
Deferred policy acquisition costs		(32,852	)		(19,793	)
Deferred income taxes		21,839			14,195
Other assets		11,205			(12,191	)
Reserves for losses and loss expenses		163,604			5,748
Unearned premiums		203,515			53,049
Due to reinsurers		47,184			13,845
Other liabilities		(93,585	)		(76,636	)
Cash from operating activities		216,392			186,670
CASH FROM (USED IN) INVESTING ACTIVITIES:
Proceeds from sales, excluding trading account:
Fixed maturity securities		707,598			1,016,514
Equity securities		100,837			64,962
Return of capital from investment funds		30,921			37,235
Proceeds from maturities and prepayments of fixed maturity securities		774,127			628,898
Cost of purchases, excluding trading account:
Fixed maturity securities		(1,419,857	)		(1,341,503	)
Equity securities		(44,736	)		(31,262	)
Real estate		(117,893	)
Contributions to investment funds		(155,122	)		(60,675	)
Change in loans receivable		43,700			6,161
Net additions to real estate, furniture and equipment		(18,679	)		(20,307	)
Change in balances due to security brokers		73,311			55,446
Payment for business purchased, net of cash acquired		(8,579	)		—
Cash from (used in) investing activities		(34,372	)		355,469
CASH USED IN FINANCING ACTIVITIES:
Purchase of common treasury shares		(59,159	)		(231,704	)
Cash dividends to common stockholders		(21,273	)		(29,196	)
Bank deposits received		22,779			9,715
Repayments to federal home loan bank		(500	)		(7,500	)
Net proceeds from stock options exercised		13,217			3,821
Debt proceeds (repayment)		624			(10,775	)
Other, net		356			(232	)
Cash used in financing activities		(43,956	)		(265,871	)
Change in foreign exchange rates		13,865			(10,235	)
Increase in cash and cash equivalents		151,929			266,033
Cash and cash equivalents at beginning of year		642,952			515,430
Cash and cash equivalents at end of period	$	794,881		$	781,463

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 $1,343,366 in 2011, $1,421,405 in 2012, $1,464,104 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 reasonable assured.

6

(2) Per Share Data

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

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2011		2010		2011		2010
Basic		141,637		151,215		141,408		152,324
Diluted		147,677		157,461		147,614		158,539

(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 adoption of this guidance is not expected 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 (“TDR”). A modification or restructuring that is considered a troubled debt restructuring will result in the creditor having to account for the receivable as being impaired and will also result in additional disclosure of the creditors’ troubled debt restructuring activities. The updated guidance is effective for the first interim period beginning on or after June 15, 2011 with early adoption permitted. For purposes of TDR disclosures, this ASU applies retrospectively to restructurings occurring on or after the beginning of the annual period of adoption. However, any changes in the method used to measure impairment apply prospectively. The adoption of this guidance is not expected to have a material impact on the Company’s results of operations or financial position.

(4) Statements of Cash Flow

Interest payments were $56,171,000 and $51,347,000 and income taxes paid were $37,516,000 and $94,389,000 in the six months ended June 30, 2011 and 2010, respectively.

7

(5) Investments in Fixed Maturity Securities

At June 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
June 30, 2011
Held to maturity:
State and municipal	$	74,086	$	6,272	$	—		$	80,358	$	74,086
Residential mortgage-backed		37,151		5,577		—			42,728		37,151
Corporate		4,995		728		—			5,723		4,995
Total held to maturity		116,232		12,577		—			128,809		116,232
Available for sale:
U.S. government and government agency		1,115,586		62,294		(591	)		1,177,289		1,177,289
State and municipal		5,178,823		233,040		(25,249	)		5,386,614		5,386,614
Mortgage-backed securities:
Residential (1)		1,339,725		56,022		(12,258	)		1,383,489		1,383,489
Commercial		54,076		2,208		(186	)		56,098		56,098
Corporate		2,524,002		109,208		(23,925	)		2,609,285		2,609,285
Foreign		521,681		29,102		(281	)		550,502		550,502
Total available for sale		10,733,893		491,874		(62,490	)		11,163,277		11,163,277
Total investments in fixed maturity securities	$	10,850,125	$	504,451	$	(62,490	)	$	11,292,086	$	11,279,509
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 $4,720,000 and $4,064,000 as of June 30, 2011 and December 31, 2010, respectively, related to the non-credit portion of other-than-temporary impairments (“OTTI”) recognized in other comprehensive income.

The amortized cost and fair value of fixed maturity securities at June 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	$	730,457	$	741,743
Due after one year through five years		3,144,418		3,295,379
Due after five years through ten years		2,750,416		2,911,151
Due after ten years		2,793,882		2,861,498
Mortgage-backed securities		1,430,952		1,482,315
Total	$	10,850,125	$	11,292,086

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

8

(6) Investments in Equity Securities Available for Sale

At June 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
June 30, 2011
Common stocks	$	202,928	$	147,115	$	(1,784	)	$	348,259	$	348,259
Preferred stocks		145,205		24,747		(7,159	)		162,793		162,793
Total	$	348,133	$	171,862	$	(8,943	)	$	511,052	$	511,052
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)	June 30, 2011			December 31, 2010
Arbitrage trading account	$	474,787		$	359,192
Investment in arbitrage funds		59,728			60,660
Related assets and liabilities:
Receivables from brokers		242,720			339,235
Securities sold but not yet purchased		(68,255	)		(53,494	)

(8) Net Investment Income

Net investment income consists of the following:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(Dollars in thousands)	2011			2010			2011			2010
Investment income earned on:
Fixed maturity securities, including cash	$	125,344		$	125,649		$	247,457		$	250,758
Equity securities available for sale		3,485			2,628			6,749			5,993
Investment funds		17,028			1,540			31,535			6,258
Arbitrage trading account		4,301			1,131			11,396			12,354
Gross investment income		150,158			130,948			297,137			275,363
Investment expense		(1,086	)		(1,217	)		(1,939	)		(2,071	)
Net investment income	$	149,072		$	129,731		$	295,198		$	273,292

9

(9) Loans Receivable

The amortized cost of loans receivable was $312 million and $354 million at June 30, 2011 and December 31, 2010, respectively. Amortized cost is net of a valuation allowance of $20 million for the stated periods. The eight largest loans have an aggregate amortized cost of $233 million and an aggregate fair value of $205 million and are secured by commercial real estate. These loans earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) between August 2011 and June 2014. The loans are secured by office buildings (90%) and hotels (10%), with properties located primarily in New York City, California, Hawaii, Boston and Philadelphia.

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.

(10) Realized and Unrealized Investment Gains

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

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(Dollars in thousands)	2011			2010			2011			2010
Realized investment gains:
Fixed maturity securities:
Gains	$	8,957		$	12,342		$	14,837		$	21,850
Losses		(1,016	)		(2,165	)		(2,509	)		(3,258	)
Equity securities available for sale		14,289			637			38,221			791
Other		—			224			—			224
Sales of investment funds		1,060			496			2,025			421
Provision for OTTI		(400	)		—			(400	)		(2,582	)
Less investment impairments recognized in other comprehensive income		—			—			—			—
Total net investment gains before income taxes		22,890			11,534			52,174			17,446
Income tax expense		(8,554	)		(4,085	)		(19,048	)		(6,154	)
Total net investment gains	$	14,336		$	7,449		$	33,126		$	11,292
Change in unrealized gains (losses) of available for sale securities:
Fixed maturity securities	$	101,205		$	124,287		$	71,918		$	178,322
Less non-credit portion of OTTI recognized in other comprehensive income		(900	)		789			(656	)		1,499
Equity securities available for sale		18,486			(15,538	)		6,101			(12,270	)
Investment funds		816			(3,358	)		4,190			299
Total change in unrealized gains (losses) before income taxes and noncontrolling interests		119,607			106,180			81,553			167,850
Income tax (expense) benefit		(41,672	)		(36,962	)		(28,625	)		(58,563	)
Noncontrolling interests		(68	)		(2	)		(12	)		(8	)
Total change in unrealized gains	$	77,867		$	69,216		$	52,916		$	109,279

10

(11) Securities in an Unrealized Loss Position

The following table summarizes all securities in an unrealized loss position at June 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
June 30, 2011
U.S. government and agency	$	41,724	$	584	$	6,804	$	7	$	48,528	$	591
State and municipal		518,152		9,036		175,520		16,213		693,672		25,249
Mortgage-backed securities		158,616		3,174		105,793		9,270		264,409		12,444
Corporate		386,850		5,804		124,011		18,121		510,861		23,925
Foreign		18,354		281		—		—		18,354		281
Fixed maturity securities		1,123,696		18,879		412,128		43,611		1,535,824		62,490
Common stocks		33,219		1,784		—		—		33,219		1,784
Preferred stocks		12,585		415		57,885		6,744		70,470		7,159
Equity securities		45,804		2,199		57,885		6,744		103,689		8,943
Total	$	1,169,500	$	21,078	$	470,013	$	50,355	$	1,639,513	$	71,433
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 June 30, 2011 is presented in the table below. There were no securities with an unrealized loss greater than $5 million at that date.

(Dollars in thousands)	Number of Securities		Aggregate Fair Value		Gross Unrealized Loss
Mortgage-backed securities		16	$	119,296	$	8,370
Corporate		10		73,135		3,778
State and municipal		4		37,552		3,590
Total		30	$	229,983	$	15,738

11

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

	For the Three Months Ended June 30,				For the Six Months Ended June 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 June 30, 2011, there were five preferred stocks in an unrealized loss position, with an aggregate fair value of $70 million and a gross unrealized loss of $7 million. One of those preferred stocks with an aggregate fair value of $12 million and a gross unrealized loss of $2 million is 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 June 30, 2011, the Company owned four common stocks in an unrealized loss position with an aggregate fair value of $33 million and an aggregate unrealized loss of $2 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 net investment losses. Loans receivable are reported net of a valuation reserve of $20 million at June 30, 2011 and December 31, 2010.

(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.

12

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

(Dollars in thousands)	Total		Level 1		Level 2		Level 3
June 30, 2011
Assets:
Fixed maturity securities available for sale:
U.S. government and agency	$	1,177,289	$	—	$	1,177,289	$	—
State and municipal		5,386,614		—		5,386,614		—
Mortgage-backed securities		1,439,587		—		1,439,587		—
Corporate		2,609,285		—		2,534,716		74,569
Foreign		550,502		—		550,502		—
Total fixed maturity securities available for sale		11,163,277		—		11,088,708		74,569
Equity securities available for sale:
Common stocks		348,259		290,956		55,744		1,559
Preferred stocks		162,793		—		136,594		26,199
Total equity securities available for sale		511,052		290,956		192,338		27,758
Arbitrage trading account		474,787		231,120		242,569		1,098
Total	$	12,149,116	$	522,076	$	11,523,615	$	103,425
Liabilities:
Securities sold but not yet purchased	$	68,255	$	48,759	$	19,495	$	1
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 six months ended June 30, 2011, or during the year ended December 31, 2010.

13

The following tables summarize changes in Level 3 assets for the six months ended June 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 six months ended June 30, 2011
Fixed maturity securities available for sale:
Corporate	$	88,063	$	(41	)	$	1,255		$	180	$	(952	)	$	(13,936	)	$	—		$	74,569
Total		88,063		(41	)		1,255			180		(952	)		(13,936	)		—			74,569
Equity securities available for sale:
Common stocks		1,559		—			—			—		—			—			—			1,559
Preferred stocks		89,446		26,165			(23,917	)		—		(65,495	)		—			—			26,199
Total		91,005		26,165			(23,917	)		—		(65,495	)		—			—			27,758
Arbitrage trading account		3,187		850			—			267		(3,206	)		—			—			1,098
Total	$	182,255	$	26,974		$	(22,662	)	$	447	$	(69,653	)	$	(13,936	)	$	—		$	103,425
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.

14

(13) Reinsurance

The following is a summary of reinsurance financial information:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(Dollars in thousands)	2011			2010			2011			2010
Written premiums:
Direct	$	1,094,879		$	953,755		$	2,171,726		$	1,892,079
Assumed		150,397			159,714			343,408			347,510
Ceded		(187,861	)		(152,115	)		(374,416	)		(294,285	)
Total net premiums written	$	1,057,415		$	961,354		$	2,140,718		$	1,945,304
Earned premiums:
Direct	$	1,020,606		$	926,387		$	1,993,131		$	1,831,730
Assumed		161,942			160,459			323,812			319,845
Ceded		(165,304	)		(138,718	)		(317,202	)		(272,886	)
Total net premiums earned	$	1,017,244		$	948,128		$	1,999,741		$	1,878,689
Ceded losses incurred	$	80,287		$	135,245		$	195,112		$	226,652

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 June 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:

	June 30, 2011				December 31, 2010
(Dollars in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Fixed maturity securities	$	11,279,509	$	11,292,086	$	11,209,154	$	11,215,317
Equity securities available for sale		511,052		511,052		561,053		561,053
Arbitrage trading account		474,787		474,787		359,192		359,192
Investment in arbitrage funds		59,728		59,728		60,660		60,660
Loans receivable		311,663		284,666		353,583		312,515
Cash and cash equivalents		794,881		794,881		642,952		642,952
Trading account receivables from brokers and clearing organizations		242,720		242,720		339,235		339,235
Liabilities:
Trading account securities sold but not yet purchased		68,255		68,255		53,494		53,494
Due to broker		78,629		78,629		5,318		5,318
Junior subordinated debentures		242,893		250,800		242,784		249,900
Senior notes and other debt		1,501,739		1,631,197		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 notes and other debt and the junior subordinated debentures is based on spreads for similar securities.

15

(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
Six months ended June 30:
2011		42,000	$	1,328
2010		754,500	$	19,693

(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, professional liability, commercial automobile, products liability and property lines. The companies within the segment are divided along the different customer bases and product lines that they serve. The specialty units deliver their products through a variety of distribution channels depending on the customer base and particular risks insured. The customers in this segment are highly diverse.

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

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

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

Our international segment offers personal and commercial property casualty insurance in South America; commercial property casualty insurance in the United Kingdom 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 and benefits are calculated based upon the Company’s overall effective tax rate.

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

16

	Revenues
(Dollars in thousands)	Earned Premiums		Investment Income and Funds		Other		Total		Pre-Tax Income (Loss)			Net Income (Loss)
For the three months ended June 30, 2011:
Specialty	$	349,943	$	51,144	$	691	$	401,778	$	77,564		$	56,013
Regional		266,764		21,853		1,149		289,766		(15,579	)		(7,735	)
Alternative markets		148,999		35,386		23,196		207,581		41,579			30,898
Reinsurance		105,836		26,311		—		132,147		25,361			19,362
International		145,702		11,393		—		157,095		11,511			6,966
Corporate, other and eliminations (1)		—		2,985		56,707		59,692		(52,999	)		(36,758	)
Net investment gains		—		—		22,890		22,890		22,890			14,336
Consolidated	$	1,017,244	$	149,072	$	104,633	$	1,270,949	$	110,327		$	83,082
For the three months ended June 30, 2010:
Specialty	$	316,513	$	42,979	$	820	$	360,312	$	75,177		$	54,138
Regional		266,629		19,641		739		287,009		25,505			18,989
Alternative markets		155,227		29,675		18,834		203,736		45,571			33,262
Reinsurance		105,632		26,838		—		132,470		30,157			22,894
International		104,127		9,286		—		113,413		6,586			1,761
Corporate, other and eliminations (1)		—		1,312		53,282		54,594		(48,708	)		(28,286	)
Net investment gains		—		—		11,534		11,534		11,534			7,449
Consolidated	$	948,128	$	129,731	$	85,209	$	1,163,068	$	145,822		$	110,207
For the six months ended June 30, 2011:
Specialty	$	680,150	$	101,430	$	1,401	$	782,981	$	167,933		$	120,304
Regional		528,281		43,360		2,170		573,811		9,319			10,823
Alternative markets		297,336		70,141		43,641		411,118		83,209			61,794
Reinsurance		211,314		53,589		—		264,903		50,723			38,859
International		282,660		21,951		—		304,611		14,026			9,051
Corporate, other and eliminations (1)		—		4,727		110,975		115,702		(106,565	)		(74,388	)
Net investment gains		—		—		52,174		52,174		52,174			33,126
Consolidated	$	1,999,741	$	295,198	$	210,361	$	2,505,300	$	270,819		$	199,569
For the six months ended June 30, 2010:
Specialty	$	629,466	$	92,213	$	1,618	$	723,297	$	150,847		$	109,291
Regional		530,298		42,582		1,666		574,546		67,469			49,046
Alternative markets		310,012		62,522		38,597		411,131		96,556			70,383
Reinsurance		205,190		55,431		—		260,621		64,577			48,732
International		203,723		16,383		—		220,106		6,959			5,414
Corporate, other and eliminations (1)		—		4,161		105,307		109,468		(97,440	)		(65,341	)
Net investment gains		—		—		17,446		17,446		17,446			11,292
Consolidated	$	1,878,689	$	273,292	$	164,634	$	2,316,615	$	306,414		$	228,817

Identifiable assets by segment are as follows:

(Dollars in thousands)	June 30, 2011		December 31, 2010
Specialty	$	6,036,066	$	5,854,256
Regional		2,637,212		2,616,238
Alternative markets		3,946,019		3,801,597
Reinsurance		2,967,140		2,972,988
International		1,493,235		1,391,604
Corporate, other and eliminations (1)		1,115,452		891,864
Consolidated	$	18,195,124	$	17,528,547

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

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

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
(Dollars in thousands)	2011		2010		2011		2010
Specialty
Premises operations	$	110,651	$	99,819	$	211,961	$	187,759
Property		60,718		49,143		115,112		99,922
Professional liability		55,497		48,442		109,009		95,037
Commercial automobile		34,168		32,647		65,615		68,628
Products liability		23,500		24,449		46,902		63,236
Other		65,409		62,013		131,551		114,884
Total specialty		349,943		316,513		680,150		629,466
Regional
Commercial multiple peril		97,123		97,043		193,830		193,113
Commercial automobile		72,355		75,672		144,484		151,637
Workers’ compensation		54,902		53,707		108,469		106,678
Other		42,384		40,207		81,498		78,870
Total regional		266,764		266,629		528,281		530,298
Alternative Markets
Primary workers’ compensation		65,421		65,054		129,596		127,972
Excess workers’ compensation		43,169		57,723		86,902		116,051
Other		40,409		32,450		80,838		65,989
Total alternative markets		148,999		155,227		297,336		310,012
Reinsurance
Casualty		75,926		76,222		152,612		148,145
Property		29,910		29,410		58,702		57,045
Total reinsurance		105,836		105,632		211,314		205,190
International
Professional liability		21,591		19,624		44,893		43,771
Property		35,943		17,086		67,586		28,812
Reinsurance		21,622		16,020		42,449		30,900
Automobile		17,028		17,293		34,997		34,683
Workers’ compensation		18,258		13,482		35,596		27,051
Other liability		14,156		10,989		25,462		20,046
Other		17,104		9,633		31,677		18,460
Total international		145,702		104,127		282,660		203,723
Total	$	1,017,244	$	948,128	$	1,999,741	$	1,878,689

(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 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; 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; 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 net premiums written and management fees would not necessarily result in commensurate levels of underwriting and operating profits. Our future financial performance is dependent upon factors discussed in our Annual Report on Form 10-K, elsewhere in this Form 10-Q and our other SEC filings. Forward-looking statements speak only as of the date on which they are made.

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

Overview

W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in the United States and operates in five business segments: specialty, 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 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 became more competitive and insurance rates decreased across most business lines. Increased competition and the impact of the economic downturn also put pressure on policy terms and conditions. While prices began to increase slightly 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 and real estate related investments.

Critical Accounting Estimates

The following presents a discussion of accounting policies and estimates relating to reserves for losses and loss expenses, assumed premiums and 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.

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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 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

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estimate of the ultimate cost of settling claims and related expenses with respect to insured events which have occurred; however, different assumptions and variables could lead to significantly different reserve estimates.

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

Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to the Company. The length of the loss reporting lag affects our ability to accurately predict loss frequency (loss frequencies are more predictable for lines with short reporting lags) as well as the amount of reserves needed for incurred but not reported losses (less IBNR is required for lines with short reporting lags). As a result, loss reserves for lines with short reporting lags are likely to have less variation from initial loss estimates. For lines with short reporting lags, which include commercial automobile, primary workers’ compensation, 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 June 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 June 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 June 30, 2011 and December 31, 2010:

(Dollars in thousands)	June 30, 2011		December 31, 2010
Specialty	$	2,878,529	$	2,883,823
Regional		1,288,393		1,285,004
Alternative markets		1,945,033		1,867,470
Reinsurance		1,473,877		1,507,353
International		530,125		455,871
Net reserves for losses and loss expenses		8,115,957		7,999,521
Ceded reserves for losses and loss expenses		1,079,718		1,017,028
Gross reserves for losses and loss expenses	$	9,195,675	$	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 June 30, 2011 and December 31, 2010:

(Dollars in thousands)	Reported Case Reserves		Incurred But Not Reported		Total
June 30, 2011
General liability	$	867,430	$	2,020,981	$	2,888,411
Workers’ compensation		1,295,287		978,889		2,274,176
Commercial automobile		279,775		186,293		466,068
International		254,615		275,510		530,125
Other		195,634		287,666		483,300
Total primary		2,892,741		3,749,339		6,642,080
Reinsurance		609,840		864,037		1,473,877
Total	$	3,502,581	$	4,613,376	$	8,115,957
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 $916 million and $898 million as of June 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 June 30,						For the Six Months Ended June 30,
(Dollars in thousands)	2011			2010			2011			2010
Favorable (adverse) reserve development:
Specialty	$	22,792		$	31,827		$	61,136		$	57,050
Regional		5,948			29,560			15,009			49,628
Alternative markets		(3,537	)		5,481			(7,145	)		10,554
Reinsurance		9,289			8,880			14,362			30,395
International		460			864			2,902			3,487
Total favorable reserve development		34,952			76,612			86,264			151,114
Premium offsets (1):
Specialty		114			(2,205	)		245			(2,314	)
Alternative markets		459			279			(156	)		(424	)
Reinsurance		—			(7,311	)		—			(19,033	)
Net development	$	35,525		$	67,375		$	86,353		$	129,343

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

For the six months ended June 30, 2011, estimates for claims occurring in prior years decreased by $86 million. The favorable reserve development in 2011 was primarily attributable to accident years 2007 through 2009, partially offset by unfavorable reserve development in 2000 and prior years. 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 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 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 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 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 June 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 $916 million and $898 million as of June 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 $69 million and $58 million at June 30, 2011 and December 31, 2010, respectively. The assumed premium estimates are based upon terms set forth in the reinsurance agreement, information received from ceding companies during the underwriting and negotiation of the agreement, reports received from ceding companies and discussions and correspondence with reinsurance intermediaries. The Company also considers its own view of market conditions, economic trends and experience with similar lines of business. These premium estimates represent management’s best estimate of the ultimate amount of premiums to be received under its assumed reinsurance agreements.

Other-Than-Temporary Impairments (OTTI) of Investments. The cost of securities is adjusted where appropriate to include a provision for decline in value which is considered to be other-than-temporary. An other-than-temporary decline is considered to occur in investments where there has been a sustained reduction in 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.

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

(Dollars in thousands)	Number of Securities		Aggregate Fair Value		Unrealized Loss
Unrealized loss less than 20% of amortized cost		172	$	1,498,433	$	48,215
Unrealized loss of 20% or greater:
Twelve months and longer		7		37,391		14,275
Total		179	$	1,535,824	$	62,490

A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at June 30, 2011 is presented in the table below. There were no securities with an unrealized loss greater than $5 million at that date.

(Dollars in thousands)	Number of Securities		Aggregate Fair Value		Gross Unrealized Loss
Mortgage-backed securities		16	$	119,296	$	8,370
Corporate		10		73,135		3,778
State and municipal		4		37,552		3,590
Total		30	$	229,983	$	15,738

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 June 30, 2011, there were five preferred stocks in an unrealized loss position, with an aggregate fair value of $70 million and a gross unrealized loss of $7 million. One of those preferred stocks with an aggregate fair value of $12 million and a gross unrealized loss of $2 million is 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 June 30, 2011, the Company owned four common stocks in an unrealized loss position with an aggregate fair value of $33 million and an aggregate unrealized loss of $2 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 net investment losses. Loans receivable are reported net of a valuation reserve of $20 million at June 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.

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.

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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 June 30, 2011 (dollars in thousands):

	Carrying Value		Percent of Total
Pricing source:
Independent pricing services	$	10,590,563		94.9	%
Syndicate manager		115,342		1.0	%
Directly by the Company based on:
Observable data		382,803		3.4	%
Cash flow model		74,569		0.7	%
Total	$	11,163,277		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 June 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.

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.

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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.

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Results of Operations for the Six Months Ended June 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 six months ended June 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	$	889,579		$	747,339
Net premiums written		763,550			644,203
Premiums earned		680,150			629,466
Loss ratio		57.5	%		57.6	%
Expense ratio		32.8	%		33.2	%
GAAP combined ratio		90.3	%		90.8	%
Regional
Gross premiums written	$	579,682		$	589,352
Net premiums written		540,203			530,575
Premiums earned		528,281			530,298
Loss ratio		70.1	%		59.7	%
Expense ratio		36.2	%		35.5	%
GAAP combined ratio		106.3	%		95.2	%
Alternative Markets
Gross premiums written	$	433,639		$	387,950
Net premiums written		322,373			327,497
Premiums earned		297,336			310,012
Loss ratio		72.4	%		64.9	%
Expense ratio		26.7	%		25.8	%
GAAP combined ratio		99.1	%		90.7	%
Reinsurance
Gross premiums written	$	219,430		$	221,015
Net premiums written		205,904			206,404
Premiums earned		211,314			205,190
Loss ratio		60.7	%		53.1	%
Expense ratio		40.6	%		42.4	%
GAAP combined ratio		101.3	%		95.5	%
International
Gross premiums written	$	392,804		$	293,933
Net premiums written		308,688			236,625
Premiums earned		282,660			203,723
Loss ratio		62.5	%		64.4	%
Expense ratio		40.1	%		42.4	%
GAAP combined ratio		102.6	%		106.8	%
Consolidated
Gross premiums written	$	2,515,134		$	2,239,589
Net premiums written		2,140,718			1,945,304
Premiums earned		1,999,741			1,878,689
Loss ratio		64.1	%		59.6	%
Expense ratio		34.7	%		34.6	%
GAAP combined ratio		98.8	%		94.2	%

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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 six months ended June 30, 2011 and 2010 (amounts in thousands, except per share data):

	2011		2010
Net income to common stockholders	$	199,569	$	228,817
Weighted average diluted shares		147,614		158,539
Net income per diluted share	$	1.35	$	1.44

The Company reported net income of $200 million in 2011 compared to $229 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 $2,515 million in 2011, an increase of 12% from $2,240 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 six months of 2011 were renewed, compared with a 78% 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 1.2%.

Beginning in 2005, the property casualty insurance market became more competitive and insurance rates decreased across most business lines. While prices began to increase slightly 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 by 19% to $890 million in 2011 from $747 million in 2010 primarily due to increased business in the energy and environmental markets. Gross premiums written increased 32% for commercial automobile, 28% for other liability, 23% for property lines, 8% for professional liability and 8% for products liability.

• Regional gross premiums decreased by 2% to $580 million in 2011 from $589 million in 2010. Gross premiums written decreased 2% for commercial automobile and increased 5% for workers’ compensation and 1% for commercial multiple peril. Gross premiums written in 2010 include $19 million of assigned risk premiums that were transferred to the alternative markets segment in 2011 (see below).

• Alternative markets gross premiums increased by 12% to $434 million in 2011 from $388 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 $82 million in 2011 and $36 million in 2010. For the remainder of the alternative markets segment, gross premiums written decreased 22% for excess workers’ compensation and increased by 9% for primary workers’ compensation.

• Reinsurance gross premiums decreased by 1% to $219 million in 2011 from $221 million in 2010. Gross premiums written were unchanged at $149 million for casualty business and decreased 2% to $70 million for property business.

• International gross premiums increased by 34% to $393 million in 2011 from $294 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 57% for property lines, 74% for liability lines, 31% for workers’ compensation, 14% for reinsurance assumed, 6% for auto and 28% for professional liability.

Net premiums written were $2,141 million in 2011, an increase of 10% from $1,945 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 gross premiums ceded is primarily related to increase in premiums ceded to assigned risk pools, as described above.

Premiums earned increased 6% to $2,000 million in 2011 from $1,879 million in 2010. Insurance premiums are primarily earned on a pro rata basis ratably 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	$	247,457		$	250,758			4.1	%		4.1	%
Investment funds		31,535			6,258			12.4	%		3.0	%
Arbitrage trading account and funds		11,396			12,354			5.4	%		5.3	%
Equity securities available for sale		6,749			5,993			3.6	%		3.9	%
Gross investment income		297,137			275,363			4.4	%		4.1	%
Investment expenses		(1,939	)		(2,071	)
Total	$	295,198		$	273,292			4.4	%		4.1	%

Net investment income increased 8% to $295 million in 2011 from $273 million in 2010. The increase in investment income is due to an increase in income from investment funds, which are reported on a one-quarter lag. The increase in investment income from investment funds is primarily due to higher income from energy and real estate funds. Average invested assets, at cost (including cash and cash equivalents) were $13.5 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 $47 million in 2011 from $42 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 $53 million in 2011 compared with $20 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 $3 million in 2010.

Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were $110 million in 2011 compared with $105 million in 2010. 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.

Losses and Loss Expenses. Losses and loss expenses increased to $1,281 million in 2011 from $1,120 million in 2010. The consolidated loss ratio was 64.1% in 2011 and 59.6% in 2010. The increase in the loss ratio of 4.5 points was primarily due to a decrease of 2.6 points in favorable prior year reserve development and an increase of 1.6 points in catastrophe losses. Favorable prior year reserve development was $86 million compared with $129 million in 2010. Catastrophe losses were $88 million in 2011 compared with $53 million in 2010. Catastrophe losses in 2011 were primarily related to a series of severe tornadoes and hail storms in the United States in April and May as well as from the earthquake in Japan in March. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 0.3 points to 64.0% in 2011 from 63.7% in 2010. A summary of loss ratios in 2011 compared with 2010 by business segment follows:

• Specialty’s loss ratio was 57.5% in 2011 compared with 57.6% in 2010. The loss ratio excluding catastrophe losses and favorable prior year reserve development decreased 1.1 points to 65.2% in 2011 from 66.3% in 2010. Catastrophe losses were $9.2 million in 2011 compared with none in 2010. Favorable prior year reserve development was $61 million in 2011 compared with $55 million in 2010.

• Regional’s loss ratio was 70.1% in 2011 compared with 59.7% in 2010. The increase of 10.4 points was due primarily to a decrease of 6.5 points in favorable reserve development and an increase of 1.6 points in catastrophe losses. Favorable prior year reserve development was $15 million in 2011 compared with $50 million in 2010. Catastrophe losses were $53 million in 2011 compared with $45 million in 2010. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 2.3 points to 62.9% in 2011 from 60.6% in 2010.

• Alternative markets’ loss ratio was 72.4% in 2011 compared with 64.9% in 2010. The increase of 7.5 points was due primarily to a 5.7 point change in the impact of prior year reserve development. Prior year reserves increased by $7

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million in 2011 compared with a decrease of $10 million in 2010. Catastrophe losses were $0.4 million in 2011 compared with none in 2010. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 1.6 points to 69.8% in 2011 from 68.2% in 2010.

• Reinsurance’s loss ratio was 60.7% in 2011 compared with 53.1% in 2010. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 5.5 points to 62.2% in 2011 from 56.7% in 2010 due to changes in the mix of business and to changes in reinsurance contract structures that included a partially offsetting decrease in ceding commissions paid to reinsured companies. Catastrophe losses were $11 million in 2011 compared with $4 million in 2010. Favorable prior year reserve development was $14 million in 2011 and $11 million in 2010.

• International’s loss ratio was 62.5% in 2011 compared with 64.4% in 2010. The loss ratio excluding catastrophe losses and favorable prior year reserve development decreased 5.4 points to 58.7% in 2011 from 64.1 in 2010 due to growth in earned premiums and improving profitability of our new Lloyd’s syndicate as well as our business in Australia. Catastrophe losses were $14 million in 2011 compared with $4 million in 2010. Favorable prior year reserve development was $3 million in 2011 and in 2010.

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	$	692,999	$	650,202
Service expenses		36,891		36,955
Net foreign currency (gains) losses		529		(3,711	)
Other costs and expenses		56,771		55,344
Total	$	787,190	$	738,790

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 34.7% in 2011 from 34.6% in 2010.

Service expenses, which represent the costs associated with the fee-based businesses, were unchanged at $37 million.

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

Other costs and expenses, which represent corporate expenses, increased 3% to $57 million due to an increase in general and administrative costs.

Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees were $110 million in 2011 compared to $99 million in 2010, due to an increase in aircraft sold. 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.

Interest Expense. Interest expense increased 8% to $56 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 26% in 2011 as compared to 25% 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 smaller portion of the 2011 pre-tax income and as such had a lower impact on the effective tax rate for 2011 compared with 2010.

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Results of Operations for the Three Months Ended June 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 June 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	$	473,849		$	404,407
Net premiums written		405,433			342,275
Premiums earned		349,943			316,513
Loss ratio		60.6	%		57.2	%
Expense ratio		31.9	%		32.7	%
GAAP combined ratio		92.5	%		89.9	%
Regional
Gross premiums written	$	280,841		$	286,711
Net premiums written		260,579			258,543
Premiums earned		266,764			266,629
Loss ratio		77.6	%		62.2	%
Expense ratio		36.3	%		35.5	%
GAAP combined ratio		113.9	%		97.7	%
Alternative Markets
Gross premiums written	$	178,792		$	146,599
Net premiums written		121,819			117,092
Premiums earned		148,999			155,227
Loss ratio		72.2	%		65.2	%
Expense ratio		27.4	%		26.0	%
GAAP combined ratio		99.6	%		91.2	%
Reinsurance
Gross premiums written	$	106,866		$	114,646
Net premiums written		99,550			107,633
Premiums earned		105,836			105,632
Loss ratio		58.8	%		55.7	%
Expense ratio		42.0	%		41.0	%
GAAP combined ratio		100.8	%		96.7	%
International
Gross premiums written	$	204,928		$	161,106
Net premiums written		170,034			135,811
Premiums earned		145,702			104,127
Loss ratio		58.7	%		61.1	%
Expense ratio		41.1	%		41.2	%
GAAP combined ratio		99.8	%		102.3	%
Consolidated
Gross premiums written	$	1,245,276		$	1,113,469
Net premiums written		1,057,415			961,354
Premiums earned		1,017,244			948,128
Loss ratio		66.3	%		60.2	%
Expense ratio		34.8	%		34.2	%
GAAP combined ratio		101.1	%		94.4	%

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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 June 30, 2011 and 2010 (amounts in thousands, except per share data):

	2011		2010
Net income to common stockholders	$	83,082	$	110,207
Weighted average diluted shares		147,677		157,461
Net income per diluted share	$	0.56	$	0.70

The Company reported net income of $83 million in 2011 compared to $110 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 $1,245 million in 2011, an increase of 12% from $1,113 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 81% of policies expiring in the first three months of 2011 were renewed, compared with a 78% 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 2%.

Beginning in 2005, the property casualty insurance market became more competitive and insurance rates decreased across most business lines. While prices began to increase slightly 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 by 17% to $474 million in 2011 from $404 million in 2010 primarily due to increased business in the energy and environmental markets. Gross premiums written increased 22% for commercial automobile, 28% for other liability, 20% for property lines, 7% for professional liability and 13% for products liability.

• Regional gross premiums decreased by 2% to $281 million in 2011 from $287 million in 2010. Gross premiums written decreased 4% for commercial automobile, increased 3% for workers’ compensation and was unchanged for commercial multiple peril. Gross premiums written in 2010 include $9 million of assigned risk plan premiums that were transferred to the alternative markets segment in 2011 (see below).

• Alternative markets gross premiums increased by 22% to $179 million in 2011 from $147 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 $44 million in 2011 and $20 million in 2010. For the remainder of the alternative markets segment, gross premiums increased 7% to $135 million in 2011 from $127 million in 2010. This includes increases of 65% for accident and health products and 9% for primary workers’ compensation, partially offset by a decrease of 25% for excess workers’ compensation.

• Reinsurance gross premiums decreased by 7% to $107 million in 2011 from $115 million in 2010. Gross premiums written decreased 7% to $70 million for casualty business and decreased 7% to $37 million for property business.

• International gross premiums increased by 27% to $205 million in 2011 from $161 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 and Norway. Gross premiums written increased 50% for property lines, 40% for liability lines, 34% for workers’ compensation, 14% for reinsurance assumed, 7% for auto and 14% for professional liability.

Net premiums written were $1,057 million in 2011, an increase of 10% from $961 million in 2010. Ceded reinsurance premiums as a percentage of gross written premiums increased to 15% in 2011 from 14% in 2010. The increase in the percentage of gross premiums ceded is primarily related to increase in premiums ceded to assigned risk pools, as described above.

Premiums earned increased 7% to $1,017 million in 2011 from $948 million in 2010. Insurance premiums are primarily earned on a pro rata basis ratably 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	$	125,344		$	125,649			4.1	%		4.2	%
Investment funds		17,028			1,540			12.9	%		1.5	%
Arbitrage trading account and funds		4,301			1,131			3.9	%		0.9	%
Equity securities available for sale		3,485			2,628			3.9	%		3.5	%
Gross investment income		150,158			130,948			4.4	%		3.9	%
Investment expenses		(1,086	)		(1,217	)
Total	$	149,072		$	129,731			4.4	%		3.9	%

Net investment income increased 15% to $149 million in 2011 from $130 million in 2010. The increase in investment income was due to an increase in income from investment funds, which are reported on a one-quarter lag. The increase in income from investment funds 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 $25 million in 2011 from $20 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, currency values and general economic conditions. Net realized gains on investment sales were $23 million in 2011 compared with $12 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 none in 2010.

Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were $56 million in 2011 compared with $53 million in 2010. 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.

Losses and Loss Expenses. Losses and loss expenses increased to $674 million in 2011 from $570 million in 2010. The consolidated loss ratio was 66.3% in 2011 compared with 60.2% in 2010. The increase of 6.1 points in the loss ratio was due to an increase of 3.1 points in catastrophe losses and a decrease of 3.6 points in favorable reserve development. Catastrophe losses were $63 million in 2011 compared with $30 million in 2010. Catastrophe losses in 2011 were primarily related to a series of severe tornadoes and hail storms in the United States in April and May. Favorable prior year reserve development was $36 million in 2011 compared with $67 million in 2010. The loss ratio excluding catastrophe losses and favorable prior year reserve development decreased 0.6 points to 63.6% in 2011 from 64.2% in 2010. A summary of loss ratios in 2011 compared with 2010 by business segment follows:

• Specialty’s loss ratio was 60.6% in 2011 compared with 57.2% in 2010. The increase of 3.4 points in the loss ratio was due to an increase of 2.6 points in the catastrophe losses and a decrease of 2.8 points in favorable reserve development. Catastrophe losses were $9 million in 2011 compared with none in 2010. Favorable prior year reserve development was $23 million in 2011 compared with $30 million in 2010. The loss ratio excluding catastrophe losses and favorable prior year reserve development decreased 2.1 points to 64.5% in 2011 from 66.6% in 2010.

• Regional’s loss ratio was 77.6% in 2011 compared with 62.2% in 2010. The increase of 15.4 points in the loss ratio was due to an increase of 5.5 points in catastrophe losses and a decrease of 8.9 points in favorable reserve development. Catastrophe losses were $44 million in 2011 compared with $30 million in 2010. Favorable prior year reserve development was $6 million in 2011 compared with $30 million in 2010. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 1.0 point to 63.2% in 2011 from 62.2% in 2010.

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• Alternative markets’ loss ratio was 72.2% in 2011 compared with 65.2% in 2010. The increase of 7.0 points in the loss ratio was due to a 5.7 point change of in the impact of prior year reserve development and an increase of 0.3 points in catastrophe losses. Prior year reserves increased by $3 million in 2011 compared with a decrease of $6 million in 2010. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 1.0 point to 69.9% in 2011 from 68.9% in 2010.

• Reinsurance’s loss ratio was 58.8% in 2011 compared with 55.7% in 2010. The loss ratio excluding catastrophe losses and favorable prior year reserve development increased 4.0 points to 61.2% in 2011 from 57.2% in 2010 due to changes in the mix of business. Catastrophe losses were $7 million in 2011 compared with none in 2010. Prior year reserves decreased by $9 million in 2011 compared with $1 million in 2010.

• International’s loss ratio was 58.7% in 2011 compared with 61.1% in 2010. The loss ratio excluding catastrophe losses and favorable prior year reserve development decreased 4.9 points to 57.2% in 2011 from 61.9% in 2010 due to improved profitability for our businesses in South America and Australia. Catastrophe losses were $3 million in 2011 compared with none in 2010. Prior year reserves decreased by $0.5 million in 2011 and $0.9 million in 2010.

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	$	353,814	$	324,599
Service expenses		19,562		18,411
Net foreign currency losses		9		1,316
Other costs and expenses		28,974		26,497
Total	$	402,359	$	370,823

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 34.8% in 2011 compared with 34.2% in 2010.

Service expenses, which represent the costs associated with the fee-based businesses, increased 6% to $20 million. The increase was due to an increase in general and administrative expenses.

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

Other costs and expenses, which represent corporate expenses, increased 9% to $29 million due to an increase in general and administrative costs.

Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees were $56 million in 2011 compared to $50 million in 2010. 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.

Interest Expense. Interest expense increased 8% to $28 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 as compared to 24% 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 smaller portion of the 2011 pre-tax income and as such had a lower impact on the effective tax rate for 2011 compared with 2010.

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.

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

(Dollars in thousands)	Carrying Value		Percent of Total
Fixed maturity securities:
U.S. government and government agencies	$	1,177,289		8.8	%
State and municipal:
Special revenue		2,129,715		15.9	%
Pre-refunded (1)		1,419,472		10.6	%
State general obligation		996,628		7.5	%
Local general obligation		415,706		3.1	%
Corporate backed		499,179		3.7	%
Total state and municipal		5,460,700		40.9	%
Mortgage-backed securities:
Agency		1,104,024		8.3	%
Residential-Prime		266,080		2.0	%
Residential-Alt A		50,536		0.4	%
Commercial		56,098		0.4	%
Total mortgage-backed securities		1,476,738		11.1	%
Corporate:
Industrial		1,211,591		9.1	%
Financial		775,776		5.8	%
Utilities		205,924		1.5	%
Asset-backed		308,666		2.3	%
Other		112,323		0.9	%
Total corporate		2,614,280		19.7	%
Foreign government and foreign government agencies		550,502		4.1	%
Total fixed maturity securities		11,279,509		84.4	%
Equity securities available for sale:
Preferred stocks		162,793		1.2	%
Common stocks		348,259		2.6	%
Total equity securities available for sale		511,052		3.8	%
Arbitrage trading account		474,787		3.6	%
Investment in arbitrage funds		59,728		0.4	%
Investment funds		606,291		4.5	%
Loans receivable		311,663		2.3	%
Real estate		117,873		0.9	%
Total investments	$	13,360,903		100.0	%

(1) Pre-funded 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 almost exclusively comprised of U.S. Treasury and U.S. government agency securities.

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

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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.

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

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

Investment Funds. At June 30, 2011 and December 31, 2010, the Company’s carrying value in investment funds was $606 million and $452 million, respectively, including investments in real estate funds of $350 million and $230 million, respectively, and investments in energy funds of $126 million and $97 million, respectively.

Loans Receivable. Loans receivable, which are carried at amortized cost, have an aggregate cost of $312 million and an aggregate fair value of $285 million at June 30, 2011. Amortized cost of these loans is net of a valuation allowance of $20 million as of June 30, 2011. The eight largest loans have an aggregate amortized cost of $233 million and an aggregate fair value of $205 million and are secured by commercial real estate. These loans earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) between August 2011 and June 2014. The loans are secured by office buildings (90%) and hotels (10%) located primarily in New York City, California, Hawaii, Boston and Philadelphia.

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 June 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

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Cash Flow. Cash flow provided from operating activities was $216 million and $187 million for the six months ended June 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, 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 85% invested in cash, cash equivalents and marketable fixed maturity securities as of June 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 June 30, 2011, the Company had senior notes, junior subordinated debentures and other debt outstanding with a carrying value of $1,744 million and a face amount of $1,763 million. The maturities of the outstanding debt are $9 million in 2011, $25 million in 2012, $200 million in 2013, $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 June 30, 2011, total common stockholders’ equity was $3.9 billion, common shares outstanding were 140,911,472, and stockholders’ equity per outstanding share was $27.77.

Total Capital. Total capitalization (equity, senior notes and other debt and junior subordinated debentures) was $5.7 billion at June 30, 2011. The percentage of the Company’s capital attributable to senior notes, junior subordinated debentures and other debt was 31% at June 30, 2011 and 32% at December 31, 2010.

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

Reference is made to the information under “Market Risk” under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 4. Controls and Procedures

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

Changes in Internal Control over Financial Reporting. During the quarter ended June 30, 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 quarter and the number of shares remaining authorized for purchase by the Company.

	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
April 2011		—		—		—		10,000,000	(1)
May 2011		24,137	$	32.00		—		9,975,863
June 2011		1,103,427	$	31.80		—		8,872,436

(1) The Company’s repurchase authorization was increased to 10,000,000 shares by its board of directors on February 25, 2011.

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Item 5. Other Information

On August 2, 2011, the board of directors of the Company amended certain provisions of the Company’s Amended and Restated By-Laws as follows:

• Article II, Section 1: moving the place where meetings of the stockholders for the election of directors shall be held from the “. . . City of New York, State of New York, at such place as may be fixed from time to time by the board of directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the board of directors and stated in the notice of the meeting.” to the “. . . Town of Greenwich, State of Connecticut, at such place as may be fixed from time to time by the board of directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the board of directors and stated in the notice of the meeting.”;

• Article II, Section 2: changing the date and time that the annual meeting of stockholders shall be held from “. . . on the first day of April if not a legal holiday, and if a legal holiday, then on the next secular day following, at 2:00 p.m., or at such other date and time as shall be designated from time to time by the board of directors . . .” to “. . . on the first day of May if not a legal holiday, then on the next secular day following, at 1:00 p.m., or at such other date and time as shall be designated from time to time by the board of directors. . .”;

• Article IV, Section 1: modifying the permissible additional methods of giving notices to directors from “Notice to directors may also be given by telegram.” to “Notices to directors may also be given by facsimile, overnight delivery or electronically.”; and

• Article V, Section 2: revising the officers to be chosen annually by the board from “The board of directors at its first meeting after each annual meeting of stockholders shall choose a president, one or more vice-presidents, a secretary and a treasurer.” to “The board of directors shall annually choose a president, one or more vice-presidents, a secretary, a treasurer and such other officers as they may determine.”

The Amended and Restated By-Laws, as amended as indicated above, are attached hereto as Exhibit 3 and are incorporated by reference herein.

Item 6. Exhibits

Number
(3)	Amended and Restated By-Laws as of August 2, 2011.
(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 Office 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.
(101.INS)	XBRL Instance Document
(101.SCH)	XBRL Taxonomy Extension Schema Document
(101.CAL)	XBRL Taxonomy Extension Calculation Linkbase Document
(101.DEF)	XBRL Taxonomy Extension Definition Linkbase
(101.LAB)	XBRL Taxonomy Extension Label Linkbase Document
(101.PRE)	XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

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

	W. R. BERKLEY CORPORATION
Date: August 5, 2011		/s/ William R. Berkley
		William R. Berkley
		Chairman of the Board and Chief Executive Officer
Date: August 5, 2011		/s/ Eugene G. Ballard
		Eugene G. Ballard
		Senior Vice President - Chief Financial Officer

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