SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)

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

For the Quarterly Period Ended September 30, 2009

or

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

For the Transition Period from                      to                      .

Commission File Number 1-15202

W. R. BERKLEY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	22-1867895
(State or other jurisdiction of 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 þ   No o

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

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

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

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

Number of shares of common stock, $.20 par value, outstanding as of October 30, 2009: 160,748,345

TABLE OF CONTENTS

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

Part I — FINANCIAL INFORMATION

Item 1. Financial Statements

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

	September 30,			December 31,
	2009			2008
	(Unaudited)
Assets
Investments:
Fixed maturity securities	$	11,189,826		$	9,689,896
Equity securities available for sale		398,295			383,750
Arbitrage trading account		536,721			119,485
Investment in arbitrage funds		82,225			73,435
Investment funds		368,733			495,533
Loans receivable		391,268			381,182
Total investments		12,967,068			11,143,281
Cash and cash equivalents		736,392			1,134,835
Premiums and fees receivable		1,082,770			1,056,096
Due from reinsurers		970,261			931,115
Accrued investment income		125,678			122,461
Prepaid reinsurance premiums		218,584			181,462
Deferred policy acquisition costs		409,749			394,807
Real estate, furniture and equipment		244,503			260,522
Deferred federal and foreign income taxes		156,249			329,417
Goodwill		109,318			107,564
Trading account receivable from brokers and clearing organizations		201,639			128,883
Due from broker		—			138,411
Current federal and foreign income taxes		21,302			76,491
Other assets		149,001			115,813
Total assets	$	17,392,514		$	16,121,158
Liabilities and Equity
Liabilities:
Reserves for losses and loss expenses	$	9,115,137		$	8,999,596
Unearned premiums		2,040,239			1,966,150
Due to reinsurers		163,531			114,974
Trading account securities sold but not yet purchased		115,389			23,050
Other liabilities		759,636			694,255
Junior subordinated debentures		249,742			249,584
Senior notes and other debt		1,340,295			1,021,869
Total liabilities		13,783,969			13,069,478
Equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares; issued and outstanding — none		—			—
Common stock, par value $.20 per share:
Authorized 500,000,000 shares, issued and outstanding, net of treasury shares, 160,734,463 and 161,467,131 shares		47,024			47,024
Additional paid-in capital		925,746			920,241
Retained earnings		3,660,451			3,514,531
Accumulated other comprehensive income (loss)		191,060			(228,959	)
Treasury stock, at cost, 74,383,455 and 73,650,787 shares		(1,221,236	)		(1,206,518	)
Total common stockholders’ equity		3,603,045			3,046,319
Noncontrolling interests		5,500			5,361
Total equity		3,608,545			3,051,680
Total liabilities and equity	$	17,392,514		$	16,121,158

See accompanying notes to interim consolidated financial statements.

2

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

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2009			2008			2009			2008
Revenues:
Net premiums written	$	969,329		$	996,333		$	2,901,713		$	3,145,447
Change in unearned premiums		(26,189	)		58,908			(28,193	)		108,814
Net premiums earned		943,140			1,055,241			2,873,520			3,254,261
Net investment income		141,029			122,345			411,380			423,449
Income (losses) from investment funds		(25,657	)		31,057			(178,552	)		28,389
Insurance service fees		22,039			25,628			73,879			77,501
Net investment gains (losses):
Net realized gains on sales of investments		9,594			8,080			72,210			80,946
Other-than-temporary investment impairments		(5,316	)		(228,110	)		(139,448	)		(329,113	)
Portion of impairments reclassified to (from) other comprehensive income		(195	)		—			8,409			—
Net investment gains (losses)		4,083			(220,030	)		(58,829	)		(248,167	)
Revenues from wholly-owned investees		51,201			40,496			132,046			92,515
Other income		474			893			1,584			2,025
Total revenues		1,136,309			1,055,630			3,255,028			3,629,973
Expenses:
Losses and loss expenses		585,964			694,254			1,793,676			2,056,998
Other operating costs and expenses		353,122			358,580			1,075,983			1,115,002
Expenses from wholly-owned investees		49,849			39,337			126,594			90,615
Interest expense		21,599			20,251			62,036			64,391
Total expenses		1,010,534			1,112,422			3,058,289			3,327,006
Income (loss) before income taxes		125,775			(56,792	)		196,739			302,967
Income tax (expense) benefit		(27,987	)		28,964			(21,803	)		(61,915	)
Net income (loss) before noncontrolling interests		97,788			(27,828	)		174,936			241,052
Noncontrolling interests		(66	)		(52	)		(173	)		(237	)
Net income (loss) to common shareholders	$	97,722		$	(27,880	)	$	174,763		$	240,815
Earnings (loss) per share:
Basic	$	0.61		$	(0.17	)	$	1.09		$	1.43
Diluted	$	0.59		$	(0.17	)	$	1.05		$	1.37

See accompanying notes to interim consolidated financial statements.

3

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

	For the Nine Months
	Ended September 30,
	2009			2008
Common stock:
Beginning and end of period	$	47,024		$	47,024
Additional paid-in capital:
Beginning of period	$	920,241		$	907,016
Stock options exercised and restricted units issued, including tax benefits		(12,706	)		(9,093	)
Restricted stock units expensed		18,080			17,381
Stock options expensed		9			160
Stock issued		122			292
End of period	$	925,746		$	915,756
Retained earnings:
Beginning of period	$	3,514,531		$	3,248,762
Net income		174,763			240,815
Dividends		(28,843	)		(28,283	)
End of period	$	3,660,451		$	3,461,294
Accumulated other comprehensive income (loss), net of tax:
Unrealized investment gains (losses):
Beginning of period	$	(142,216	)	$	52,497
Unrealized gain (losses) on securities not other-than-temporarily impaired		399,510			(206,973	)
Unrealized losses on other-than-temporarily impaired securities		(8,221	)		—
End of period		249,073			(154,476	)
Currency translation adjustments:
Beginning of period		(72,475	)		18,060
Net change in period		27,255			(28,477	)
End of period		(45,220	)		(10,417	)
Net pension asset:
Beginning of period		(14,268	)		(17,356	)
Net change in period		1,475			1,483
End of period		(12,793	)		(15,873	)
Total accumulated other comprehensive income (loss)	$	191,060		$	(180,766	)
Treasury stock:
Beginning of period	$	(1,206,518	)	$	(686,228	)
Stock repurchased		(31,842	)		(534,584	)
Stock options exercised and restricted units issued		16,494			26,146
Stock issued		630			799
End of period	$	(1,221,236	)	$	(1,193,867	)
Noncontrolling interests:
Beginning of period	$	5,361		$	35,496
Purchase of subsidiary shares from noncontrolling interest		—			(30,444	)
Net income		173			237
Other comprehensive loss, net of tax		(34	)		(41	)
End of period	$	5,500		$	5,248

See accompanying notes to interim consolidated financial statements.

4

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

	For the Nine Months
	Ended September 30,
	2009			2008
Net income	$	174,763		$	240,815
Adjustments to reconcile net income to net cash flows from operating activities:
Realized investment losses		58,829			248,167
Depreciation and amortization		56,167			60,359
Noncontrolling interests		173			237
Equity in undistributed income (losses) of investment funds		179,761			(26,327	)
Stock incentive plans		18,709			18,190
Change in:
Arbitrage trading account		(417,236	)		38,399
Investment in arbitrage funds		(8,790	)		(1,478	)
Trading account receivable from brokers and clearing organizations		(72,756	)		14,535
Trading account securities sold but not yet purchased		92,339			(10,119	)
Premiums and fees receivable		(17,380	)		35,832
Due from reinsurers		(36,996	)		(42,939	)
Accrued investment income		(2,730	)		20,239
Prepaid reinsurance premiums		(33,097	)		(10,495	)
Deferred policy acquisition costs		(12,882	)		18,157
Deferred income taxes		(35,973	)		(40,794	)
Other assets		7,472			8,328
Reserves for losses and loss expenses		88,199			428,373
Unearned premiums		57,168			(97,987	)
Due to reinsurers		39,331			5,556
Other liabilities		30,226			(120,892	)
Net cash from operating activities		165,297			786,156
Cash used in investing activities:
Proceeds from sales, excluding trading account:
Fixed maturity securities		1,907,866			765,460
Equity securities		123,693			132,731
Distributions from partnerships and affiliates		4,239			191,082
Proceeds from maturities and prepayments of fixed maturity securities		932,945			1,005,827
Cost of purchases, excluding trading account:
Fixed maturity securities and loans receivable		(3,889,392	)		(1,712,391	)
Equity securities		(21,158	)		(185,561	)
Investments in partnerships and affiliates		(50,372	)		(119,460	)
Change in loans receivable		(11,994	)		(46,279	)
Change in balances due to/from security brokers		201,119			(25,006	)
Net additions to real estate, furniture and equipment		(17,107	)		(29,098	)
Payment for business purchased, net of cash acquired		(33,812	)		(47,622	)
Net cash used in investing activities		(853,973	)		(70,317	)
Cash from (used in) financing activities:
Purchase of common shares		(31,842	)		(534,584	)
Net proceeds from issuance of debt		321,171			3,000
Repayment of senior notes		(3,590	)		(103,484	)
Bank deposits received		18,497			15,657
Advances from Federal Home Loan Bank		1,515			7,450
Net proceeds from stock options exercised		2,640			12,629
Cash dividends to common stockholders		(28,843	)		(37,897	)
Other, net		(76	)		77
Net cash from (used in) financing activities		279,472			(637,152	)
Net impact on cash due to foreign exchange rates		10,761			(26,675	)
Net change in cash and cash equivalents		(398,443	)		52,012
Cash and cash equivalents at beginning of year		1,134,835			951,863
Cash and cash equivalents at end of period	$	736,392		$	1,003,875
Supplemental disclosure of cash flow information:
Interest paid	$	69,827		$	74,300
Federal and foreign income taxes paid (received), net	$	(451	)	$	171,693

See accompanying notes to interim consolidated financial statements.

5

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

1. GENERAL

     The accompanying unaudited consolidated financial statements of W. R. Berkley Corporation and subsidiaries (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. The unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring items, which are necessary to present fairly the Company’s financial position and results of operations on a basis consistent with the prior audited consolidated financial statements. Operating results for the nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ended December 31, 2009. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements requires the use of management estimates. For further information related to a description of areas of judgment and estimates and other information necessary to understand the Company’s financial position and results of operations, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. Reclassifications have been made in the 2008 financial statements as originally reported to conform to the presentation of the 2009 interim financial statements.

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

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

2. PER SHARE DATA

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

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

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2009		2008		2009		2008
Basic		160,468		162,675		160,520		168,826
Diluted (1)		166,736		162,675		166,765		175,369

(1) For the three months ended September 30, 2008, the anti-dilutive effects of 6,086 potential common shares outstanding were excluded from the outstanding diluted shares due to the third quarter 2008 net loss.

6

3. RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, FASB Accounting Standards Codification (ASC) and the Hierarchy of Generally Accepted Accounting Principles — A Replacement of FASB Statement No. 162. This guidance establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative GAAP for nongovernmental entities. The Codification supersedes all existing non-SEC accounting and reporting standards. Rules and interpretive releases of the SEC under authority of federal securities laws will remain authoritative GAAP for SEC registrants. This guidance is effective for financial statements issued for interim and annual periods ending after September 15, 2009. As the Codification will not change existing GAAP, the adoption of this guidance did not have an impact on our financial condition or results of operations.

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

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

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

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

7

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

     In June 2009, the FASB issued ASC 810 Consolidations (Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. (46) (“FAS 167”)). This guidance requires the reporting entity to perform a qualitative analysis that results in a variable interest entity (“VIE”) being consolidated if the reporting entity: (i) has the power to direct activities of the VIE that significantly impact the VIE’s financial performance; and (ii) has an obligation to absorb losses or receive benefits that may be significant to the VIE. This guidance further requires enhanced disclosures, including disclosure of significant judgments and assumptions as to whether a VIE must be consolidated, and how involvement with a VIE affects the Company’s financial statements. This guidance is effective for fiscal years beginning after November 15, 2009. The Company is currently evaluating the impact that the adoption of this guidance may have on the Company’s consolidated financial statements.

4. COMPREHENSIVE INCOME (LOSS)

     The following is a reconciliation of comprehensive income (loss) (dollars in thousands):

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2009			2008			2009			2008
Net income (loss) before noncontrolling interests	$	97,788		$	(27,828	)	$	174,936		$	241,052
Other comprehensive income (loss):
Change in unrealized foreign exchange gains (losses)		(1,800	)		(33,433	)		27,255			(28,477	)
Unrealized holding gains (losses) on investment securities arising during the period, net of taxes		220,353			(261,610	)		353,105			(368,342	)
Reclassification adjustment for realized gains (losses) included in net income (loss), net of taxes		(2,653	)		143,020			38,150			161,328
Change in unrecognized pension obligation, net of taxes		492			495			1,475			1,483
Other comprehensive income (loss)		216,392			(151,528	)		419,985			(234,008	)
Comprehensive income (loss)		314,180			(179,356	)		594,921			7,044
Comprehensive loss to the noncontrolling interests		(73	)		(70	)		(139	)		(196	)
Comprehensive income (loss) to common shareholders	$	314,107		$	(179,426	)	$	594,782		$	6,848

8

5. INVESTMENTS AND OTHER FINANCIAL INSTRUMENTS

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

	Amortized		Gross Unrealized					Fair		Carrying
	Cost		Gains		Losses			Value		Value
September 30, 2009
Held to maturity:
State and municipal	$	69,884	$	8,959	$	(582	)	$	78,261	$	69,884
Residential mortgage-backed		45,584		3,068		—			48,652		45,584
Corporate		4,994		40		—			5,034		4,994
Total held to maturity		120,462		12,067		(582	)		131,947		120,462
Available for sale:
United States government and government agency		1,422,327		52,047		(681	)		1,473,693		1,473,693
State and municipal (1)		5,506,815		284,155		(41,505	)		5,749,465		5,749,465
Mortgage-backed securities:
Residential (2)		1,477,168		42,348		(50,843	)		1,468,673		1,468,673
Commercial		69,470		—		(15,349	)		54,121		54,121
Corporate		1,946,586		64,456		(40,875	)		1,970,167		1,970,167
Foreign		338,474		14,885		(114	)		353,245		353,245
Total available for sale		10,760,840		457,891		(149,367	)		11,069,364		11,069,364
Total investment in fixed maturity securities	$	10,881,302	$	469,958	$	(149,949	)	$	11,201,311	$	11,189,826
December 31, 2008
Held to maturity:
State and municipal	$	68,876	$	742	$	(3,693	)	$	65,925	$	68,876
Residential mortgage-backed		50,039		4,390		—			54,429		50,039
Corporate		4,993		301		—			5,294		4,993
Total held to maturity		123,908		5,433		(3,693	)		125,648		123,908
Available for sale:
United States government and government agency		1,083,677		46,713		(3,706	)		1,126,684		1,126,684
State and municipal		5,591,712		136,804		(136,751	)		5,591,765		5,591,765
Mortgage-backed securities:
Residential		1,632,954		27,747		(81,142	)		1,579,559		1,579,559
Commercial		74,517		—		(22,656	)		51,861		51,861
Corporate		1,095,414		9,398		(136,332	)		968,480		968,480
Foreign		238,877		12,283		(3,521	)		247,639		247,639
Total available for sale		9,717,151		232,945		(384,108	)		9,565,988		9,565,988
Total investment in fixed maturity securities	$	9,841,059	$	238,378	$	(387,801	)	$	9,691,636	$	9,689,896

(1)	Gross unrealized losses for state and municipal securities includes $605 related to the non-credit portion of other-than-temporary impairments recognized in other comprehensive income.
(2)	Gross unrealized losses for residential mortgage-backed securities includes $7,617 related to the non-credit portion of other-than-temporary impairments recognized in other comprehensive income.

9

     The amortized cost and fair value of fixed maturity securities at September 30, 2009, 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		Fair
	Cost		Value
Due in one year or less	$	502,151	$	513,112
Due after one year through five years		2,958,810		3,072,172
Due after five years through ten years		3,132,728		3,307,840
Due after ten years		2,695,391		2,736,741
Mortgage-backed securities		1,592,222		1,571,446
Total	$	10,881,302	$	11,201,311

     At September 30, 2009 and December 31, 2008, investments in equity securities were as follows (dollars in thousands):

	Amortized		Gross Unrealized					Fair		Carrying
	Cost		Gains		Losses			Value		Value
September 30, 2009
Equity securities
Common stocks	$	27,362	$	102,213	$	(2,317	)	$	127,258	$	127,258
Preferred stocks		289,475		8,116		(26,554	)		271,037		271,037
Total	$	316,837	$	110,329	$	(28,871	)	$	398,295	$	398,295
December 31, 2008
Equity securities
Common stocks	$	39,343	$	49,333	$	(7,833	)	$	80,843	$	80,843
Preferred stocks		399,451		95		(96,639	)		302,907		302,907
Total	$	438,794	$	49,428	$	(104,472	)	$	383,750	$	383,750

     At September 30, 2009 and December 31, 2008, the carrying values and estimated fair values of other financial instruments were as follows (dollars in thousands):

	September 30,				December 31,
	2009				2008
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Assets:
Arbitrage trading account	$	536,721	$	536,721	$	119,485	$	119,485
Loans receivable		391,268		287,689		381,182		328,868
Cash and cash equivalents		736,392		736,392		1,134,835		1,134,835
Trading accounts receivable from brokers and clearing organizations		201,639		201,639		128,883		128,883
Due from broker		—		—		138,411		138,411
Liabilities:
Trading account securities sold but not yet purchased		115,389		115,389		23,050		23,050
Due to broker		64,607		64,607		—		—
Junior subordinated debentures		249,742		243,017		249,584		188,717
Senior notes and other debt		1,340,295		1,322,109		1,021,869		836,914

10

     Loans receivable include loans with an aggregate amortized cost of $307 million and an aggregate fair value of $201 million secured by commercial real estate. These loans earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) between August 2011 and January 2013. The loans are secured by office buildings (60%), hotels (27%) and senior living facilities (13%) with properties located primarily in New York City, California, Hawaii, Boston and Philadelphia. The Company recognized an impairment of $3 million and a corresponding valuation allowance against these loans as of September 30, 2009.

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

11

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

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

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2009			2008			2009			2008
Net investment gains (losses):
Fixed maturity securities:
Gains	$	9,847		$	11,335		$	36,468		$	18,062
Losses		(1,173	)		(1,430	)		(2,751	)		(2,951	)
Equity securities available for sale		156			(1,925	)		36,180			(3,866	)
Investment funds		764			100			2,313			69,701
Other-than-temporary investment impairments		(5,316	)		(228,110	)		(139,448	)		(329,113	)
Less investment impairments recognized in other comprehensive income		(195	)		—			8,409			—
Net investment gains (losses)		4,083			(220,030	)		(58,829	)		(248,167	)
Income tax (expense) benefit		(1,430	)		69,417			20,679			79,246
Total	$	2,653		$	(150,613	)	$	(38,150	)	$	(168,921	)
Change in unrealized investment gains (losses) of available for sale securities:
Fixed maturity securities	$	229,544		$	(146,250	)	$	468,096		$	(277,134	)
Less investment impairments recognized in other comprehensive income		195			—			(8,409	)		—
Equity securities available for sale		99,090			(36,665	)		136,502			(26,017	)
Investment funds		5,416			(1,440	)		9,648			(17,574	)
Cash and cash equivalents		—			—			(76	)		—
Total change in unrealized gains (losses)		334,245			(184,355	)		605,761			(320,725	)
Income tax (expense) benefit		(108,290	)		65,746			(206,170	)		113,517
Noncontrolling interests		(8,262	)		1			(8,302	)		235
Total	$	217,693		$	(118,608	)	$	391,289		$	(206,973	)

12

7. SECURITIES IN AN UNREALIZED LOSS POSITION

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

	Less Than 12 Months				12 Months or Greater				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
September 30, 2009
U.S. government and agency	$	81,297	$	470	$	19,188	$	211	$	100,485	$	681
State and municipal		170,660		12,679		506,897		29,408		677,557		42,087
Mortgage-backed securities		100,398		4,018		352,289		62,174		452,687		66,192
Corporate		184,248		3,158		272,223		37,717		456,471		40,875
Foreign		41,435		114		—		—		41,435		114
Fixed maturity securities		578,038		20,439		1,150,597		129,510		1,728,635		149,949
Common stocks		7,761		2,317		—		—		7,761		2,317
Preferred stocks		64,414		828		154,222		25,726		218,636		26,554
Total	$	650,213	$	23,584	$	1,304,819		155,236	$	1,955,032	$	178,820
December 31, 2008
U.S. government and agency	$	25,031	$	3,494	$	8,197	$	212	$	33,228	$	3,706
State and municipal		1,081,558		65,944		485,805		74,500		1,567,363		140,444
Mortgage-backed securities		327,563		57,032		211,762		46,766		539,325		103,798
Corporate		377,313		83,277		228,738		53,055		606,051		136,332
Foreign		17,519		3,521		—		—		17,519		3,521
Fixed maturity securities		1,828,984		213,268		934,502		174,533		2,763,486		387,801
Common stocks		5,952		7,833		—		—		5,952		7,833
Preferred stocks		123,930		44,062		109,103		52,577		233,033		96,639
Total	$	1,958,866	$	265,163	$	1,043,605	$	227,110	$	3,002,471	$	492,273

     A summary of the Company’s non-investment grade fixed maturity securities at September 30, 2009 is presented in the table below (dollars in thousands):

	Number of		Aggregate		Unrealized
	Securities		Fair Value		Loss
Mortgage-backed securities		11	$	82,327	$	31,989
Corporate		11		52,808		6,862
State and municipal		5		35,032		6,329
Foreign		1		484		21
Total		28	$	170,651	$	45,201

13

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

Commercial mortgage security (fair value of $23 million and unrealized loss of $14 million)- The investment is secured by mortgages and cash flow pledges on 99 properties comprising approximately 30 million square feet of office space located primarily in Boston, Northern California and Los Angeles. The current debt maturity of February 2010 can be extended at the borrower’s option through February 2012 provided that there is no continuing default and that the borrower provides interest protection for LIBOR above 6¹/2%. The Company believes the amount of outstanding debt for the Company’s debt layer and all debt layers senior to the Company’s debt layer to be below the current market values for the underlying properties. Based on the portfolio’s stable performance (e.g., occupancy rates, lease terms and debt service coverage) and on there being substantial subordinate capital, the Company does not consider the investment to be other-than-temporarily impaired.

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

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

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

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

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

14

     Preferred Stocks — At September 30, 2009, the Company owned two non-investment grade preferred stocks in an unrealized loss position with an aggregate fair value of $55 million and an aggregate unrealized loss of $1 million. The Company does not consider either of these investments to be other-than-temporarily impaired.

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

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

8. FAIR VALUE MEASUREMENTS

     The Company’s fixed maturity and equity securities available for sale and its trading account securities are carried at fair value following the guidance in FASB ASC 820, Fair Value Measurement and Disclosures, (Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”)). The guidance defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available.

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

15

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

	Total		Level 1		Level 2		Level 3
September 30, 2009
Assets:
Fixed maturity securities available for sale:
U.S. government and agency	$	1,473,693	$	—	$	1,473,693	$	—
State and municipal		5,749,465		13,546		5,735,919		—
Mortgage-backed securities		1,522,794		—		1,499,447		23,347
Corporate		1,970,167		—		1,880,622		89,545
Foreign		353,245		—		353,245		—
Total fixed maturity securities available for sale		11,069,364		13,546		10,942,926		112,892
Equity securities available for sale:
Common stocks		127,258		24,221		101,478		1,559
Preferred stocks		271,037		—		217,869		53,168
Total equity securities available for sale		398,295		24,221		319,347		54,727
Arbitrage trading account		536,721		536,368		—		353
Total	$	12,004,380	$	574,135	$	11,262,273	$	167,972
Liabilities:
Securities sold but not yet purchased	$	115,389	$	115,389	$	—	$	—
December 31, 2008
Assets:
Fixed maturity securities available for sale:
U.S. government and agency	$	1,126,684	$	—	$	1,126,684	$	—
State and municipal		5,591,765		—		5,550,093		41,672
Mortgage-backed securities		1,631,420		—		1,608,958		22,462
Corporate		968,480		—		883,975		84,505
Foreign		247,639		—		247,639		—
Total fixed maturity securities available for sale		9,565,988		—		9,417,349		148,639
Equity securities available for sale:
Common stocks		80,843		19,829		2,280		58,734
Preferred stocks		302,907		—		252,421		50,486
Total equity securities available for sale		383,750		19,829		254,701		109,220
Arbitrage trading account		119,485		115,723		3,409		353
Total	$	10,069,223	$	135,552	$	9,675,459	$	258,212
Liabilities:
Securities sold but not yet purchased	$	23,050	$	23,050	$	—	$	—

16

     The following table summarizes changes in Level 3 assets for the three and nine months ended September 30, 2009 (dollars in thousands):

			Gains (Losses) Included in:
					Other			Purchases
	Beginning				Comprehensive			(Sales)			Transfers			Ending
	Balance		Earnings		Income			Maturities			In/ (Out)			Balance
For the Three Months Ended September 30, 2009
Fixed maturity securities available for sale:
State and municipal	$	—	$	—	$	—		$	—		$	—		$	—
Mortgage-backed securities		23,354		—		(7	)		—			—			23,347
Corporate		75,268		289		6,306			(11,644	)		19,326			89,545
Total		98,622		289		6,299			(11,644	)		19,326			112,892
Equity securities available for sale:
Common stocks		46,762		—		—			—			(45,203	)		1,559
Preferred stocks		48,915		—		4,204			—			49			53,168
Total		95,677		—		4,204			—			(45,154	)		54,727
Arbitrage trading account		353		—		—			—			—			353
Total	$	194,652	$	289	$	10,503		$	(11,644	)	$	(25,828	)	$	167,972
For the Nine Months Ended September 30, 2009
Fixed maturity securities available for sale:
State and municipal	$	41,672	$	—	$	—		$	—		$	(41,672	)	$	—
Mortgage-backed securities		22,462		—		885			—			—			23,347
Corporate		84,505		246		9,807			(15,075	)		10,062			89,545
Total		148,639		246		10,692			(15,075	)		(31,610	)		112,892
Equity securities available available for sale:
Common stocks		58,734		—		712			—			(57,887	)		1,559
Preferred stocks		50,486		—		(626	)		3,259			49			53,168
Total		109,220		—		86			3,259			(57,838	)		54,727
Arbitrage trading account		353		—		—			—			—			353
Total	$	258,212	$	246	$	10,778		$	(11,816	)	$	(89,448	)	$	167,972

17

9. REINSURANCE CEDED

     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 $3.9 million and $4.9 million as of September 30, 2009 and December 31, 2008, respectively. The following amounts arising under reinsurance ceded contracts have been deducted in arriving at the amounts reflected in the statements of operations (dollars in thousands):

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

10. INDUSTRY SEGMENTS

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

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

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

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

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

     Our international segment offers personal and commercial property casualty insurance in South America and commercial insurance and reinsurance in the United Kingdom, Continental Europe, Canada, Australia and Hong Kong as well as on a worldwide basis through a Lloyd’s syndicate.

     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.

18

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

	Revenues
			Investment								Pre-tax			Net
	Earned		Income and					Total			Income			Income
(dollars in thousands)	Premiums		Funds		Other			Revenues			(Loss)			(Loss)
For the three months ended September 30, 2009:
Specialty	$	326,645	$	40,439	$	964		$	368,048		$	56,211		$	42,953
Regional		276,369		18,505		804			295,678			30,287			22,625
Alternative markets		149,606		26,221		20,334			196,161			42,713			31,634
Reinsurance		107,045		22,742		—			129,787			26,261			20,348
International		83,475		4,069		—			87,544			9,496			4,147
Corporate and eliminations (1)		—		3,396		51,612			55,008			(43,276	)		(26,638	)
Realized investment gains		—		—		4,083			4,083			4,083			2,653
Consolidated	$	943,140		115,372	$	77,797		$	1,136,309		$	125,775		$	97,722
For the three months ended September 30, 2008:
Specialty	$	389,967	$	54,512	$	901		$	445,380		$	87,147		$	63,886
Regional		306,892		23,594		—			330,486			17,894			14,764
Alternative markets		157,149		30,526		24,730			212,405			51,800			37,722
Reinsurance		124,710		33,675		—			158,385			29,540			23,674
International		76,523		9,657		—			86,180			13,440			8,221
Corporate and eliminations (1)		—		1,438		41,386			42,824			(36,583	)		(25,534	)
Realized investment losses		—		—		(220,030	)		(220,030	)		(220,030	)		(150,613	)
Consolidated	$	1,055,241	$	153,402	$	(153,013	)	$	1,055,630		$	(56,792	)	$	(27,880	)

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

19

	Revenues
			Investment								Pre-tax			Net
	Earned		Income and					Total			Income			Income
(dollars in thousands)	Premiums		Funds		Other			Revenues			(Loss)			(Loss)
For the nine months ended September 30, 2009:
Specialty	$	1,030,625	$	75,115	$	2,737		$	1,108,477		$	149,875		$	115,559
Regional		843,888		34,355		2,057			880,300			60,329			47,511
Alternative markets		452,908		51,706		69,154			573,768			110,108			84,057
Reinsurance		306,925		45,661		—			352,586			50,488			43,844
International		239,174		18,806		—			257,980			16,384			10,050
Corporate and eliminations (1)		—		7,185		133,561			140,746			(131,616	)		(88,108	)
Realized investment losses		—		—		(58,829	)		(58,829	)		(58,829	)		(38,150	)
Consolidated	$	2,873,520	$	232,828	$	148,680		$	3,255,028		$	196,739		$	174,763
For the nine months ended September 30, 2008:
Specialty	$	1,228,720	$	160,852	$	2,921		$	1,392,493		$	308,662		$	221,493
Regional		927,585		68,909		—			996,494			80,973			61,570
Alternative markets		468,243		88,730		74,589			631,562			165,480			119,070
Reinsurance		408,911		99,132		—			508,043			96,473			75,565
International		220,802		28,007		—			248,809			31,365			18,934
Corporate and eliminations (1)		—		6,208		94,531			100,739			(131,819	)		(86,896	)
Realized investment losses		—		—		(248,167	)		(248,167	)		(248,167	)		(168,921	)
Consolidated	$	3,254,261	$	451,838	$	(76,126	)	$	3,629,973		$	302,967		$	240,815

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

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

	September 30,		December 31,
	2009		2008
Specialty	$	5,584,554	$	5,391,602
Regional		2,778,894		2,615,674
Alternative markets		3,654,306		3,464,953
Reinsurance		3,166,208		2,849,119
International		1,082,816		879,271
Corporate and eliminations		1,125,736		920,539
Consolidated	$	17,392,514	$	16,121,158

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

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2009		2008		2009		2008
Premises operations	$	104,313	$	139,579	$	344,062	$	458,254
Commercial automobile		45,046		67,785		148,469		203,017
Property		48,811		47,295		149,574		156,834
Products liability		30,065		43,172		103,829		142,047
Professional liability		44,020		38,221		126,457		116,418
Other		54,390		53,915		158,234		152,150
Specialty		326,645		389,967		1,030,625		1,228,720
Commercial multiple peril		100,691		111,492		307,571		341,028
Commercial automobile		80,014		91,153		243,321		272,989
Workers’ compensation		55,850		61,795		174,661		188,593
Other		39,814		42,452		118,335		124,975
Regional		276,369		306,892		843,888		927,585
Excess workers’ compensation		63,965		73,327		194,179		214,594
Primary workers’ compensation		59,204		60,473		181,265		183,055
Other		26,437		23,349		77,464		70,594
Alternative markets		149,606		157,149		452,908		468,243
Casualty		79,018		109,294		247,387		350,145
Property		28,027		15,416		59,538		58,766
Reinsurance		107,045		124,710		306,925		408,911
International		83,475		76,523		239,174		220,802
Total	$	943,140	$	1,055,241	$	2,873,520	$	3,254,261

11. 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 2009 and beyond, are based upon the Company’s historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. They are subject to various risks and uncertainties, including but not limited to: the cyclical nature of the property casualty industry; the long-tail and potentially volatile nature of the insurance and reinsurance business; product demand and pricing; claims development and the process of estimating reserves; the potential impact of the current conditions in the financial markets and the ongoing economic downturn on our results and financial condition, particularly if such conditions continue; the potential impact of current legislative, regulatory, accounting and other initiatives taken or which may be taken in response to the current conditions in the financial markets and the ongoing economic downturn; investment risks, including investments in financial institutions, municipal bonds, mortgage-backed securities, loans receivable, investment funds, merger arbitrage and private equity investments; the uncertain nature of damage theories and loss amounts; natural and man-made catastrophic losses, including as a result of terrorist activities; the impact of significant and increasing competition; the success of our new ventures or acquisitions and the availability of other opportunities; the availability of reinsurance; exposure as to coverage for terrorist acts; our retention under the Terrorism Risk Insurance Program Reauthorization Act of 2007; the ability of our reinsurers to pay reinsurance recoverables owed to us; the impact of current conditions in the financial markets and the ongoing economic downturn on our ability to raise debt or equity capital if needed; foreign currency and political risks relating to our international operations; other legislative and regulatory developments, including those related to alleged anti-competitive or other improper business practices in the insurance industry; changes in the ratings assigned to us or our insurance company subsidiaries by rating agencies; the availability of dividends from our insurance company subsidiaries; our ability to attract and retain qualified employees; and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”). These risks and uncertainties could cause our actual results for the year 2009 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 insurance, regional property casualty insurance, alternative markets, reinsurance and international. The Company’s primary sources of revenues and earnings are its insurance operations and its investments.

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

          Available insurance capacity has increased in recent years, increasing competition in the industry and putting downward pressure on pricing and terms and conditions. In 2007, we saw increased competition and decreased prices across most of our business segments. This trend of increased competition and decreased prices continued in 2008. These trends moderated somewhat in the first nine months of 2009, and we expect continued improvement over the balance of the year. Price changes are reflected in our results over time as premiums are earned.

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

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

Critical Accounting Policies and Estimates

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

          Reserves for Losses and Loss Expenses. 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.

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

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

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

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

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

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The actuarial data is analyzed by line of business, coverage and accident or policy year, as appropriate, for each operating unit.

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

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

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

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

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

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lines with long reporting lags. For the latest accident year ended December 31, 2008, initial loss estimates were $1.7 billion for lines with short reporting lags and $1.1 billion for lines 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 2008 (dollars in thousands):

	Frequency (+/-)
Severity (+/-)	1%		5%		10%
1%		56,881		171,208		314,116
5%		171,208		290,062		438,631
10%		314,116		438,631		594,274

          Our net reserves for losses and loss expenses of $8.2 billion as of September 30, 2009 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 $1.7 billion, or 21%, of the Company’s net loss reserves as of September 30, 2009 relate to assumed reinsurance business. 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.

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

	September 30,		December 31,
	2009		2008
Specialty	$	2,986,799	$	2,973,824
Regional		1,357,200		1,329,697
Alternative markets		1,756,216		1,691,678
Reinsurance		1,740,143		1,842,848
International		347,362		284,539
Net reserves for losses and loss expenses		8,187,720		8,122,586
Ceded reserves for losses and loss expenses		927,417		877,010
Gross reserves for losses and loss expenses	$	9,115,137	$	8,999,596

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

	Reported Case		Incurred But Not
	Reserves		Reported		Total
September 30, 2009
General liability	$	841,757	$	2,207,924	$	3,049,681
Workers’ compensation		1,072,502		1,011,694		2,084,196
Commercial automobile		375,630		210,369		585,999
International		131,665		215,697		347,362
Other		147,158		233,181		380,339
Total primary		2,568,712		3,878,865		6,447,577
Reinsurance		708,700		1,031,443		1,740,143
Total	$	3,277,412	$	4,910,308	$	8,187,720
December 31, 2008
General liability	$	800,059	$	2,227,257	$	3,027,316
Workers’ compensation		988,714		1,014,524		2,003,238
Commercial automobile		393,035		210,562		603,597
International		129,351		155,188		284,539
Other		145,010		216,038		361,048
Total primary		2,456,169		3,823,569		6,279,738
Reinsurance		770,247		1,072,601		1,842,848
Total	$	3,226,416	$	4,896,170	$	8,122,586

          The following table presents favorable development in our estimate of claims occurring in prior years (dollars in thousands):

	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2009			2008		2009			2008
Specialty	$	18,707		$	31,325	$	58,026		$	91,855
Regional		13,936			331		28,376			22,475
Alternative markets		11,071			4,782		35,352			29,636
Reinsurance		11,174			9,296		33,780			3,382
International		4,962			3,046		8,592			7,205
Total development		59,850			48,780		164,126			154,553
Premium offsets (1)
Specialty		(5,285	)		—		(5,285	)		—
Alternative markets		(2,287	)		—		(2,287	)		—
Reinsurance		(5,269	)		—		(22,103	)		—
Net development	$	47,009		$	48,780	$	134,451		$	154,553

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

          For the nine months ended September 30, 2009, estimates for claims occurring in prior years decreased by $164 million before premium offsets and by $134 million net of premium offsets. On an accident year basis, the change in prior year reserves for 2009 is comprised of an increase in estimates for claims occurring in accident years 2002 and prior of $40 million and a decrease in estimates for claims occurring in accident years 2003 through 2008 of $204 million. 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.

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

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

          Alternative Markets — The favorable reserve development for the alternative markets segment during 2009 and 2008 was primarily related to workers’ compensation business written in California. From 2003 to 2005, the State of California enacted various legislative reforms, whose impact on workers’ compensation costs was uncertain at the time. As actual claims data have emerged, and interpretation of the reforms through case law has evolved, it has become clear that the impact of the reforms was greater than initially expected, resulting in favorable reserve development.

          Loss Reserve Discount. The Company discounts its liabilities for excess and assumed workers’ compensation business because of the long period of time over which losses are paid. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from the Company’s loss payout experience. For non-proportional business, reserves for losses and loss expenses have been discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. As of September 30, 2009, these discount rates ranged from 2.5% to 6.5%, with a weighted average discount rate of 4.5%. For proportional business, reserves for losses and loss expenses have been discounted at the statutory rate permitted by the Department of Insurance of the State of Delaware of 2.5%. The aggregate net discount, after reflecting the effects of ceded reinsurance, was $872 million and $847 million as of September 30, 2009 and December 31, 2008, respectively.

          Assumed Reinsurance Premiums. The Company estimates the amount of assumed reinsurance premiums that it will receive under treaty reinsurance agreements at the inception of the contracts. These premium estimates are revised as the actual amount of assumed premiums is reported to the Company by the ceding companies. As estimates of assumed premiums are made or revised, the related amount of earned premium, commissions and incurred losses associated with those premiums are recorded. Estimated assumed premiums receivable were approximately $64 million and $49 million at September 30, 2009 and December 31, 2008, 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

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estimates represent management’s best estimate of the ultimate amount of premiums to be received under its assumed reinsurance agreements.

          Other-Than-Temporary Declines in the Value of Investments.

          The cost of securities is adjusted where appropriate to include a provision for decline in value which is considered to be other-than-temporary. Management regularly reviews securities that have a fair value less than amortized cost to determine whether an other-than-temporary impairment (“OTTI”) has occurred.

          The Company evaluates its fixed maturity securities and preferred stocks by credit rating, primarily based on ratings assigned by credit rating agencies. For purposes of classifying securities with different ratings, the Company uses the lower rating if two ratings were assigned and the middle rating if three ratings were assigned, unless the Company’s own analysis indicates that the lower rating is more appropriate. Securities that are not rated by a rating agency are evaluated and classified by the Company on a case-by-case basis. Unrated securities with an aggregate fair value of $13 million were classified as investment grade at September 30, 2009.

          Fixed Maturity Securities — For securities that we intend to sell or, more likely than not, would be required to sell, a decline in value below amortized cost is considered to be an other-than-temporary impairment. The amount of other-than-temporary impairment is equal to the difference between amortized cost and fair value at the balance sheet date.

          For securities that we do not intend to sell or expect to be required to sell, a decline in value below amortized cost is considered to be an other-than-temporary impairment 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, the ability of the security 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 as of September 30, 2009, by the length of time those securities have been continuously in an unrealized loss position (dollars in thousands):

					Gross
	Number of		Aggregate		Unrealized
Fixed maturity securities	Securities		Fair Value		Losses
Unrealized loss less than 20% of amortized cost		164	$	1,512,104	$	58,570
Unrealized loss of 20% or greater:
Less than six months		4		27,475		9,403
Twelve months or greater		18		189,056		81,976
Total		186	$	1,728,635	$	149,949

          A summary of the Company’s non-investment grade fixed maturity securities at September 30, 2009 is presented in the table below (dollars in thousands):

					Gross
	Number of		Aggregate		Unrealized
	Securities		Fair Value		Loss
Mortgage-backed securities		11	$	82,327	$	31,989
Corporate		11		52,808		6,862
State and municipal		5		35,032		6,329
Foreign bonds		1		484		21
Total		28	$	170,651	$	45,201

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

Commercial mortgage security (fair value of $23 million and unrealized loss of $14 million)- The investment is secured by mortgages and cash flow pledges on 99 properties comprising approximately 30 million square feet of office space located primarily in Boston, Northern California and Los Angeles. The current debt maturity of February 2010 can be extended at the borrower’s option through February 2012 provided that there is no continuing default and that the borrower provides interest protection for LIBOR above 6¹/2%. The Company believes the amount of outstanding debt for the Company’s debt layer and all debt layers senior to the Company’s debt layer to be below the current market values for the underlying properties. Based on the portfolio’s stable performance (e.g., occupancy rates, lease terms and debt service coverage) and on there being substantial subordinate capital, the Company does not consider the investment to be other-than-temporarily impaired.

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

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

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

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

					Gross
	Number of		Aggregate		Unrealized
Preferred Stocks (1)	Securities		Fair Value		Losses
Unrealized loss less than 20% of amortized cost		39	$	185,293	$	14,543
Unrealized loss of 20% or greater in an unrealized loss position for twelve months or greater		2		33,343		12,011
Total		41	$	218,636	$	26,554

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

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

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

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

Fair Value Measurements

          The Company’s fixed maturity and equity securities available for sale and its trading account securities are carried at fair value following the guidance in ASC 820 Fair Value Measurements and Disclosures. The statement defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. 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 vast majority of the Company’s portfolio is based on observable data (other than quoted prices) and, accordingly, is classified as Level 2.

          In classifying particular financial securities in the fair value hierarchy, the Company uses its judgment to determine whether the market for a security is active and whether significant pricing inputs are observable. The Company determines the existence of an active market by assessing whether transactions occur with sufficient frequency and volume to provide reliable pricing information. The

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Company determines whether inputs are observable based on the use of such information by pricing services and external investment managers, the uninterrupted availability of such inputs, the need to make significant adjustments to such inputs and the volatility of such inputs over time. If the market for a security is determined to be inactive or if significant inputs used to price a security are determined to be unobservable, the security is categorized in Level 3 of the fair value hierarchy.

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

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

The following table summarizes pricing methods for fixed maturity securities available for sale as of September 30, 2009 (dollars in thousands):

	Carrying		Percent
	Value		of Total
Pricing source
Independent pricing services	$	10,491,662		94.8	%
Syndicate manager		109,283		1.0	%
Directly by the Company based on:
Observable data		391,544		3.5	%
Par value		1,250		0.0	%
Cash flow		75,625		0.7	%
Total	$	11,069,364		100.0	%

          Independent pricing services — The vast majority of the Company’s fixed maturity securities available for sale were priced by independent pricing services (generally one U.S. pricing service plus additional pricing services with respect to a limited number of foreign securities held by the Company). The prices provided by the independent pricing services are generally based on observable market data in active markets (e.g., broker quotes and prices observed for comparable securities). The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company conducts interviews with the pricing services to gain an understanding of how different types of securities are priced. The Company reviews the prices provided by pricing services for reasonableness based upon current trading levels for similar securities. If the prices appear unusual to the Company, they are re-examined and the value is either confirmed or revised. In addition, the Company periodically performs independent price tests of a sample of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of September 30, 2009, 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

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majority of the securities are liquid, short duration fixed maturity securities. The Company reviews the syndicate manager’s pricing methodology and audited financial statements and holds discussions with the syndicate manager as necessary to confirm its understanding and agreement with security prices. Based upon the Company’s review of the methodologies used by the syndicate manager, these securities were classified as Level 2.

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

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

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

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

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

	For the Nine Months
	Ended September 30,
(dollars in thousands)	2009			2008
Specialty
Gross premiums written	$	1,112,155		$	1,207,800
Net premiums written		961,752			1,109,508
Premiums earned		1,030,625			1,228,720
Loss ratio		62.2	%		59.9	%
Expense ratio		30.6	%		28.2	%
Combined ratio		92.8	%		88.1	%
Regional
Gross premiums written	$	951,676		$	1,077,644
Net premiums written		836,862			938,368
Premiums earned		843,888			927,585
Loss ratio		63.4	%		66.8	%
Expense ratio		33.5	%		31.9	%
Combined ratio		96.9	%		98.7	%
Alternative Markets
Gross premiums written	$	554,327		$	590,592
Net premiums written		494,415			517,447
Premiums earned		452,908			468,243
Loss ratio		64.1	%		62.2	%
Expense ratio		25.4	%		23.8	%
Combined ratio		89.5	%		86.0	%
Reinsurance
Gross premiums written	$	355,852		$	367,555
Net premiums written		330,851			347,960
Premiums earned		306,925			408,911
Loss ratio		59.1	%		66.1	%
Expense ratio		39.3	%		34.3	%
Combined ratio		98.4	%		100.4	%
International
Gross premiums written	$	325,549		$	276,526
Net premiums written		277,833			232,164
Premiums earned		239,174			220,802
Loss ratio		61.1	%		63.6	%
Expense ratio		39.1	%		37.7	%
Combined ratio		100.2	%		101.3	%
Consolidated
Gross premiums written	$	3,299,559		$	3,520,117
Net premiums written		2,901,713			3,145,447
Premiums earned		2,873,520			3,254,261
Loss ratio		62.4	%		63.2	%
Expense ratio		32.3	%		30.0	%
Combined ratio		94.7	%		93.2	%

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

	2009		2008
Net income to common shareholders	$	174,763	$	240,815
Weighted average diluted shares		166,765		175,369
Net income per diluted share	$	1.05	$	1.37

          The Company reported net income of $175 million in 2009 compared to $241 million in 2008. The decrease in net income is primarily a result of losses from investment funds (losses from investment funds were $179 million in 2009 compared with income from investment funds of $28 million in 2008). This was partially offset by a reduction in other-than-temporary impairments ($139 million in 2009 compared with $329 million in 2008). The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2008 and 2009.

          Gross Premiums Written. Gross premiums written were $3.3 billion in 2009, down 6% from 2008. The decrease in gross premiums is the result of lower economic activity and less new business production, partially offset by higher premiums written by companies that began operations since 2006 ($405 million in 2009 compared to $211 million in 2008). The average price of policies renewed in 2009 decreased 1%. The Company has experienced increased competition and downward pressure on pricing since 2004, although the pressure has recently moderated somewhat.

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

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

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

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

• Reinsurance gross premiums decreased by 3% to $356 million in 2009 from $368 million in 2008. The decline was due to non-renewals and lower new business volume as a result of business lost to competitors or retained by ceding companies partially offset by new property business. Casualty gross premiums written decreased 15% to $261 million, and property gross premiums written increased 54% to $94 million.

• International gross premiums increased by 18% to $326 million in 2009 from $277 million in 2008. The increase is primarily due to business written by our new Lloyd’s syndicate, which began writing business on June 1, 2009, and to an in increase in business written in Australia and southeast Asia.

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

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

							Average Annualized
	Amount						Yield
	2009			2008			2009			2008
Fixed maturity securities, including cash	$	368,343		$	378,847			4.3	%		4.6	%
Arbitrage trading account and funds		29,841			16,782			8.1	%		2.7
Equity securities available for sale		15,724			31,296			6.2	%		5.5
Gross investment income		413,908			426,925			4.5	%		4.6
Investment expenses		(2,528	)		(3,476	)
Total	$	411,380		$	423,449			4.4	%		4.5	%

          Net investment income decreased 3% to $411 million in 2009 from $423 million in 2008 primarily due to lower short-term interest rates, partially offset by higher returns for the arbitrage trading account. Average invested assets, at cost (including cash and cash equivalents) were $12.4 billion in 2009 and $12.5 billion in 2008.

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

	2009			2008
Real estate funds	$	(153,525	)	$	(14,848	)
Energy funds		(21,760	)		35,581
Other funds		(3,267	)		(3,041	)
Kiln Ltd		—			10,697
Total	$	(178,552	)	$	28,389

          Losses from investment funds were $179 million in 2009 compared to income of $28 million in 2008, primarily as a result of losses from real estate funds. The real estate funds, which had an aggregate carrying value of $167 million at September 30, 2009, invest in commercial loans and securities as well as direct property ownership. Asset values were impacted by general deterioration of real estate fundamentals coupled with the absence of a refinancing market and an increase in non-performing assets. In addition, in an environment of falling values and stricter underwriting standards, a large number of real estate projects are over-leveraged and facing near-term refinancing pressure. The energy funds reported a loss of $22 million in 2009 due to a decrease in the fair value of energy related investments held by the funds. The Company sold its interest in Kiln Ltd in March 2008.

          Insurance Service Fees. Insurance service fees consists of fee-based services to help clients develop and administer self-insurance programs, primarily for workers’ compensation coverage as well as brokerage services. Service fees were $74 million in 2009 and $78 million in 2008.

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

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          Net investment losses were $59 million in 2009 and were primarily the result of other-than- temporary impairments of $131 million, partially offset by realized gains of $72 million. The impairment charge in 2009 was primarily related to debt and preferred stock of major financial institutions that experienced adverse credit events and ratings downgrades during the period, including write-downs of debt issued by Thornburg Mortgage, Inc. and preferred stock issued by Citibank and Bank of America.

          Net investment losses were $248 million in 2008 and were the result of other-than-temporary impairments of financial sector equity securities of $329 million partially offset by net realized gains from the sale of securities of $81 million. The impairments charge in 2008 was primarily related to the impairment of investments in Fannie Mae, Freddie Mac and other financial institutions. Net realized investment gains from the sale of securities included a gain of $70 million from the sale of the Company’s interest in Kiln Ltd in 2008.

          Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were $132 million in 2009 compared with $93 million in 2008. These revenues were derived from aviation related businesses that were separately purchased in 2007, 2008 and 2009. These companies provide services to the general aviation market, including fuel and line service, aircraft sales and maintenance, avionics and engineering services and parts fabrication. The 2009 and 2008 revenues are not comparable since all of the companies were not owned for the nine months ended September 30, 2008.

          Losses and Loss Expenses. Losses and loss expenses decreased to $1,794 million in 2009 from $2,057 million in 2008 due to lower earned premium. The consolidated loss ratio was 62.4% in 2009 compared with 63.2% in 2008. Weather-related losses were $59 million in 2009 compared with $99 million in 2008. Favorable prior year reserve development, net of related premium adjustments, was $134 million in 2009 and $155 million in 2008. A summary of loss ratios in 2009 compared with 2008 by business segment follows:

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

• The regional loss ratio decreased to 63.4% in 2009 from 66.8% in 2008. Weather-related losses were $59 million in 2009 compared with $80 million in 2008. Net favorable prior year development was $28 million in 2009 compared with $23 million in 2008.

• Alternative markets’ loss ratio increased to 64.1% in 2009 from 62.2% in 2008 due to pricing and loss cost trends and to the use of lower discount rates used to discount excess workers’ compensation reserves. Net favorable prior year development, net of related premium adjustments, was $33 million in 2009 and $30 million in 2008.

• The reinsurance loss ratio decreased to 59.1% in 2009 from 66.1% in 2008. Net favorable prior year development, net of related premium adjustments, was $11 million in 2009 compared with $3 million in 2008.

• The international loss ratio decreased to 61.1% in 2009 from 63.6% in 2008. Net favorable prior year development was $9 million in 2009 compared with $7 million in 2008.

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

	2009		2008
Underwriting expenses	$	927,544	$	976,598
Service expenses		62,330		66,009
Net foreign currency (gains) losses		1,328		(7,345	)
Other costs and expenses		84,781		79,740
Total	$	1,075,983	$	1,115,002

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          Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. The consolidated expense ratio (underwriting expenses expressed as a percentage of premiums earned) increased to 32.3% in 2009 from 30.0% in 2008 primarily due to the decline in earned premiums.

          Service expenses, which represent the costs associated with the fee-based businesses, decreased 6% to $62 million due to lower employment costs.

          Other costs and expenses, which represent corporate expenses, increased 6% to $85 million due to an increase in incentive compensation costs.

          Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees were $127 million in 2009 compared to $91 million in 2008. These expenses represent costs associated with aviation related businesses that were separately purchased in 2007, 2008 and 2009. These include cost of goods sold related to aircraft and other sales, labor and equipment costs related to repairs and other services and general and administrative expenses. The 2009 and 2008 expenses are not comparable since the companies were not all owned for the nine months ended September 30, 2008.

          Interest Expense. Interest expense decreased 4% to $62 million primarily due to the repayment of $89 million of 9.875% senior notes in May 2008, slightly offset by the issuance of $300 million of 7.375% senior notes in September 2009.

          Income Taxes. The effective income tax rate for the first nine months was 11% in 2009 as compared to 20% in 2008. The effective income tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income.

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

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

	For the Three Months
	Ended September 30,
(dollars in thousands)	2009			2008
Specialty
Gross premiums written	$	352,372		$	373,078
Net premiums written		300,512			335,782
Premiums earned		326,645			389,967
Loss ratio		63.8	%		62.9	%
Expense ratio		31.5	%		28.8	%
Combined ratio		95.3	%		91.7	%
Regional
Gross premiums written	$	311,430		$	343,016
Net premiums written		277,097			299,504
Premiums earned		276,369			306,892
Loss ratio		62.6	%		69.3	%
Expense ratio		33.1	%		32.5	%
Combined ratio		95.7	%		101.8	%
Alternative Markets
Gross premiums written	$	191,493		$	201,347
Net premiums written		169,214			178,634
Premiums earned		149,606			157,149
Loss ratio		63.9	%		64.8	%
Expense ratio		26.6	%		24.2	%
Combined ratio		90.5	%		89.0	%
Reinsurance
Gross premiums written	$	131,779		$	104,507
Net premiums written		122,963			99,368
Premiums earned		107,045			124,710
Loss ratio		57.1	%		68.9	%
Expense ratio		39.7	%		33.7	%
Combined ratio		96.8	%		102.6	%
International
Gross premiums written	$	109,666		$	98,186
Net premiums written		99,543			83,045
Premiums earned		83,475			76,523
Loss ratio		57.4	%		63.3	%
Expense ratio		41.0	%		36.7	%
Combined ratio		98.4	%		100.0	%
Consolidated
Gross premiums written	$	1,096,740		$	1,120,134
Net premiums written		969,329			996,333
Premiums earned		943,140			1,055,241
Loss ratio		62.1	%		65.8	%
Expense ratio		32.9	%		30.3	%
Combined ratio		95.0	%		96.1	%

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

	2009		2008
Net income (loss) to common shareholders	$	97,722	$	(27,880	)
Weighted average diluted shares		166,736		162,675
Net income (loss) per diluted share	$	0.59	$	(0.17	)

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

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

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

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

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

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

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

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

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

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

							Average Annualized
	Amount						Yield
	2009			2008			2009			2008
Fixed maturity securities, including cash	$	125,745		$	119,322			4.3	%		4.4	%
Arbitrage trading account and funds		12,242			(2,571	)		7.5			(1.3	)
Equity securities available for sale		3,650			7,387			4.6			4.5
Gross investment income		141,637			124,138			4.5			4.0
Investment expenses		(608	)		(1,793	)
Total	$	141,029		$	122,345			4.5	%		4.0	%

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

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

	2009			2008
Real estate funds	$	(20,697	)	$	(1,733	)
Energy funds		(3,343	)		34,282
Other funds		(1,617	)		(1,492	)
Total	$	(25,657	)	$	31,057

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

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

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

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

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          Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were $51 million in 2009 compared with $40 million in 2008. These revenues were derived from aviation related businesses that were separately purchased in 2007, 2008 and 2009. These companies provide services to the general aviation market, including fuel and line service, aircraft sales and maintenance, avionics and engineering services and parts fabrication. The 2009 and 2008 revenues are not comparable since all of the companies were not owned for the three months ended September 30, 2008.

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

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

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

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

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

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

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

	2009			2008
Underwriting expenses	$	310,618		$	320,184
Service expenses		19,770			21,513
Net foreign currency losses		(4,631	)		(4,021	)
Other costs and expenses		27,365			20,904
Total	$	353,122		$	358,580

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

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

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

          Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees were $50 million in 2009 compared to $39 million in 2008. These expenses represent costs associated with aviation related businesses that were separately purchased in 2007, 2008 and 2009. These include cost of goods sold related to aircraft and other sales, labor and equipment costs related to repairs and other services and general and administrative expenses. The 2009 and 2008 expenses are not comparable since the companies were not all owned for the three months ended September 30, 2008.

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          Interest Expense. Interest expense increased 7% to $22 million primarily due to the issuance of $300 million of 7.375% senior notes in September 2009.

          Income Taxes. The effective income tax rate reported for the three months ended September 30, 2009 was an expense of 22% as compared to a benefit of 51% for the same period in 2008. The effective income tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income.

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Investments

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

          The Company’s investment portfolio and investment-related assets as of September 30, 2009 were as follows (in thousands):

	Cost		Carrying Value
Fixed maturity securities:
United States government and government agencies	$	1,422,327	$	1,473,693
State and municipal		5,576,699		5,819,349
Mortgage-backed securities:
Agency		943,198		981,857
Residential-Prime		491,998		452,882
Residential-Alt A		87,556		79,518
Commercial		69,470		54,121
Total mortgage-backed securities		1,592,222		1,568,378
Corporate:
Financial		882,435		890,086
Industrial		585,296		616,433
Asset-backed		185,240		161,349
Utilities		184,993		192,359
Other		113,616		114,934
Total corporate		1,951,580		1,975,161
Foreign government and foreign government agencies		338,474		353,245
Total fixed maturity securities		10,881,302		11,189,826
Equity securities available for sale:
Preferred stocks:
Financial		113,240		102,628
Real estate		119,834		118,038
Utilities		56,401		50,371
Total preferred stocks		289,475		271,037
Common stocks		27,362		127,258
Total equity securities available for sale		316,837		398,295
Arbitrage trading account		536,721		536,721
Investment in arbitrage funds		82,225		82,225
Investment funds		373,480		368,733
Loans receivable		391,268		391,268
Total investments	$	12,581,833	$	12,967,068

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          Fixed Maturity Securities. The Company’s investment policy with respect to fixed maturity securities is generally to purchase instruments with the expectation of holding them to their maturity. However, management of the available for sale portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as a result of changes in financial market conditions and tax considerations. At September 30, 2009 (as compared to December 31, 2008), the fixed maturity securities portfolio mix was as follows: U.S. government securities were 13% (12% in 2008); state and municipal securities were 52% (58% in 2008); corporate securities were 18% (10% in 2008); mortgage-backed securities were 14% (17% in 2008); and foreign government bonds were 3% (3% in 2008).

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

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

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

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

          Investment Funds. At September 30, 2009 and December 31, 2008, the Company’s investment in investment funds was $369 million and $496 million, respectively, and included investments in real estate funds of $167 million and $292 million, respectively.

          Loans Receivable. Loans receivable, which are carried at amortized cost, have an aggregate cost of $391 million and an aggregate fair value of $288 million at September 30, 2009. This includes loans with an aggregate amortized cost of $307 million and an aggregate fair value of $201 million secured by commercial real estate. These loans earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) between August 2011 and January 2013. The loans are secured by office buildings (60%), hotels (27%) and senior living facilities (13%) located primarily in New York City, California, Hawaii, Boston and Philadelphia.

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Liquidity and Capital Resources

          Cash Flow. Cash from operating activities was $165 million in 2009 compared to $786 million in 2008. The decline is primarily due to cash transfers to the trading account of $383 million in 2009 compared with cash transfers from the trading account of $50 million in 2008.

          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 86% invested in cash, cash equivalents and marketable fixed maturity securities as of September 30, 2009. If the sale of fixed maturity securities were to become necessary, a realized gain or loss equal to the difference between the cost and sales price of securities sold would be recognized.

          Financing Activity

          During the first nine months of 2009, the Company repurchased 1,636,200 shares of its common stock for $32 million. In July 2009, a subsidiary of the Company entered into a $28 million line of credit, of which $18 million was outstanding as of September 30, 2009. In September 2009, the Company issued $300 million of 7.375% Senior Notes due 2019.

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

          At September 30, 2009, equity was $3.6 billion and total capitalization (equity, senior notes and other debt and junior subordinated debentures) was $5.2 billion. The percentage of the Company’s capital attributable to senior notes, junior subordinated debentures and other debt was 31% at September 30, 2009 and 29% at December 31, 2008.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

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

          The duration of the investment portfolio was 3.4 years at September 30, 2009 and 3.1 years at December 31, 2008. The overall market risk relating to the Company’s portfolio has remained similar to the risk at December 31, 2008.

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Item 4. Controls and Procedures

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

          Changes in Internal Control over Financial Reporting. During the quarter ended September 30, 2009, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

          There have been no material changes from the risk factors previously disclosed in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2008.

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

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

							Maximum number of
	Total				Total number of shares		shares that may
	number of		Average price		purchased as part of		yet be purchased
	shares		paid per		publicly announced plans		under the plans or
	purchased		share		or programs		programs (1)
July 2009		—		—		—		6,473,700
August 2009		—		—		—		10,000,000
September 2009		—		—		—		10,000,000

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

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Item 6. Exhibits 

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

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SIGNATURES

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

	W. R. BERKLEY CORPORATION
Date: November 9, 2009	/s/ William R. Berkley
	William R. Berkley
	Chairman of the Board and Chief Executive Officer
Date: November 9, 2009	/s/ Eugene G. Ballard
	Eugene G. Ballard
	Senior Vice President — Chief Financial Officer

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