W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in the United States and operates in five business segments: Specialty, Regional, Alternative Markets, Reinsurance and International. Our decentralized structure provides us with the flexibility to respond quickly and efficiently to local or specific market conditions and to pursue specialty business niches. It also allows us to be closer to our customers in order to better understand their individual needs and risk characteristics. While providing our business units with certain operating autonomy, our structure allows us to capitalize on the benefits of economies of scale through centralized capital, investment reinsurance and enterprise risk management, and actuarial, financial and corporate legal staff support. The Company’s primary sources of revenues and earnings are its insurance operations and its investments.
Other-Than-Temporary Impairments (OTTI) of Investments. The cost of securities is adjusted where appropriate to include a provision for decline in value which is considered to be other-than-temporary. An other-than-temporary decline is considered to occur in investments where there has been a sustained reduction in fair value and where the Company does not expect the fair value to recover prior to the time of sale or maturity. Since equity securities do not have a contractual cash flow or maturity, the Company considers whether the price of an equity security is expected to recover within a reasonable period of time.
Alternative Markets gross premiums increased 18% to $827 million in 2011 from $703 million in 2010. Excluding assigned risk plans, which are fully reinsured, gross premiums increased 6% to $676 million in 2011 from $636 million in 2010. Gross premiums increased $51 million (68%) for accident and health products, $29 million (11%) for primary workers’ compensation and $13 million (38%) for other liability and decreased $4 million (7%) for other lines. Gross premiums decreased $48 million (24%) for excess workers’ compensation. Fully reinsured assigned risk premiums increased $84 million (including the $36 million transferred from the Regional segment) to $151 million in 2011.
The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $98 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. However, in the future, if such earnings were distributed to the Company, taxes of approximately $8 million, assuming all tax credits are realized, would be payable on such undistributed earnings and would be reflected in the tax provision for the year in which these earnings are no longer intended to be permanently reinvested in the foreign subsidiary.
The following table presents the credit quality of amounts due from reinsurers as of December 31, 2012. Amounts due from reinsurers are net of reserves for uncollectible reinsurance of $2 million in the aggregate.
At December 31, 2012 and 2011, investments in equity securities available for sale were as follows:
For certain retrospectively rated insurance polices and reinsurance agreements, reserve development is offset by additional or return premiums. Favorable reserve development, net of additional and return premiums, was $103 million, $182 million and $234 million in 2012, 2011 and 2010, respectively.
For the year ended December 31, 2012, estimates for claims occurring in prior years (net of additional and return premiums) decreased by $103 million. The favorable reserve development in 2012 was primarily attributable to accident years 2008 through 2010. 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.
At December 31, 2012, the Company had commitments to invest up to $167 million in certain investment funds.