SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

Commission file number 1-15202

 

W. R. BERKLEY CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (203) 629-3000

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o     No þ

 

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K. 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):

 

(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 Act).  Yes o     No þ

 

The aggregate market value of the voting and non-voting common stock held by non-affiliates (computed by reference to the price at which the common stock was last sold) as of the last business day of the Registrant’s most recently completed second fiscal quarter was $2,900,441,493.

 

Number of shares of common stock, $.20 par value, outstanding as of February 19, 2010: 152,811,920

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Company’s 2009 Annual Report to Stockholders for the year ended December 31, 2009 are incorporated herein by reference in Part II, and portions of the registrant’s definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2009, are incorporated herein by reference in Part III.

 

 

W. R. BERKLEY CORPORATION

 

ANNUAL REPORT ON FORM 10-K

 

December 31, 2009

 

 

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 2010 and beyond, are based upon our historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us that the future plans, estimates or expectations contemplated by us will be achieved. They are subject to various risks and uncertainties, including but not limited to:

 

 

We describe these risks and uncertainties in greater detail in Item 1A, Risk Factors. These risks and uncertainties could cause our actual results for the year 2010 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 elsewhere in this Form 10-K and our other SEC filings. Forward-looking statements speak only as of the date on which they are made.

 

 

W. R. Berkley Corporation, a Delaware corporation, is an insurance holding company that is among the largest commercial lines writers in the United States and operates in five segments of the property casualty insurance business:

 

 

Our holding company structure provides us with the flexibility to respond to local or specific market conditions and to pursue specialty business niches. It also allows us to be closer to our customers in order to better understand their individual needs and risk characteristics. Our structure allows us to capitalize on the benefits of economies of scale through centralized capital, investment and reinsurance management, and actuarial, financial and corporate legal staff support. Since 2006, we have formed 18 new operating units to capitalize on various business opportunities.

 

Unless otherwise indicated, all references in this Form 10-K to “W. R. Berkley,” “we,” “us,” “our,” the “Company” or similar terms refer to W. R. Berkley Corporation together with its subsidiaries.

 

Our specialty insurance and reinsurance operations are conducted throughout the United States, and, on a limited basis, outside the United States. Regional insurance operations are conducted primarily in the Midwest, Northeast, Southern (excluding Florida and Louisiana), Mid Atlantic, and North Pacific regions of the United States. Alternative markets operations are conducted throughout the United States. Our international operations are conducted primarily in the United Kingdom, Continental Europe, South America, Australia, Southeast Asia and Canada.

Net premiums written, as reported based on United States generally accepted accounting principles (“GAAP”), for each of the past five years were as follows:

 

 

The following sections describe our insurance segments and their operating units. These operating units underwrite on behalf of one or more affiliated insurance companies within the group pursuant to underwriting management agreements. Certain operating units are identified by us for descriptive purposes only and are not legal entities.

 

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

 

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

 

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

 

SPECIALTY

 

Our specialty segment underwrites complex and sophisticated third-party liability risks, within excess and surplus lines and on an admitted basis. Excess and surplus lines differ from standard market lines in that excess and surplus lines are generally free of rate and form regulation and provide coverage for more complex and hard-to-place risks. The specialty lines of business include premises operations, commercial automobile, property, products liability and professional liability lines. The specialty business is conducted through 18 operating units. 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.

Admiral Insurance Company (“Admiral”) provides excess and surplus lines coverage that generally involves a moderate to high degree of hazard due to the nature of the class of coverage or type of business insured. Admiral concentrates on general liability, professional liability, property, and excess and umbrella liability lines of business. Admiral’s products are distributed by wholesale brokers. Admiral writes relatively larger risks, with average annual premiums in excess of $18,500 per policy.

 

Nautilus Insurance Company (“Nautilus”) insures excess and surplus risks for small to medium-sized commercial risks with low to moderate susceptibility to loss. Admitted business is also written through an affiliate, Great Divide Insurance Company. A substantial portion of Nautilus’ business is written on a binding authority basis, subject to certain contractual limitations. Nautilus writes relatively smaller risks, with average annual premiums less than $2,500 per policy.

 

Monitor Liability Managers, Inc. (“Monitor”) specializes in professional liability insurance, including directors’ and officers’ liability, employment practices liability, lawyers’ professional liability, management liability, non-profit directors’ and officers’ liability and accountants’ professional liability.

 

Carolina Casualty Insurance Company (“Carolina”) provides commercial insurance products and services to the transportation industry with an emphasis on intermediate and long-haul trucking and various classes of business and public auto. Carolina operates as an admitted carrier in all 50 states and the District of Columbia.

 

Berkley Specialty Underwriting Managers LLC (“Berkley Specialty”) has three underwriting divisions. The specialty casualty division underwrites excess and surplus lines general liability coverage with an emphasis on products liability. The entertainment and sports division underwrites property casualty insurance products, both on an admitted and non-admitted basis, for the entertainment industry and sports-related organizations. The environmental division underwrites specialty insurance products to environmental customers such as contractors, consultants and owners of sites and facilities.

 

Berkley Underwriting Partners, LLC (“Berkley Underwriting Partners”) underwrites specialty insurance products through program administrators and managing general underwriters. Berkley Underwriting Partners underwrites business nationwide on an admitted and non-admitted basis.

 

Berkley Select, LLC (“Select”), which began operations in 2007, specializes in underwriting professional liability insurance with a particular emphasis on lawyers, accountants, medical facilities and miscellaneous E&O exposures. Select’s products are distributed through a limited number of brokers.

 

Vela Insurance Services, Inc. (“Vela”) underwrites excess and surplus lines casualty business with a primary focus on contractors along with a portfolio of miscellaneous professional liability. Vela underwrites a variety of classes nationwide through a network of appointed excess and surplus lines brokers. Vela also underwrites wrap-up policies for large residential projects, primarily in California, through a managing general agency. Vela writes relatively larger risks, with average annual premiums in excess of $18,800 per policy.

 

Clermont Specialty Managers, Ltd. (“Clermont”) underwrites package insurance programs, including workers’ compensation, for luxury condominium, cooperative and rental apartment buildings and restaurants in the New York City and Chicago metropolitan areas.

 

Berkley Aviation, LLC (“Aviation”) underwrites general and specialty aviation insurance. It underwrites coverage for airlines, helicopters, miscellaneous general aviation operations, non-owned aircraft, fixed-base operations, control towers, airports and related businesses.

 

Berkley Offshore Underwriting Managers, LLC (“BOUM”), which began operations in 2008, underwrites property insurance for oil and gas exploration and production operations worldwide.

 

American Mining Insurance Company, Inc. (“American Mining”), which was acquired in 2007, specializes in writing workers’ compensation insurance for the mining industry and administers state and workers’ compensation funds.

 

Berkley Professional Liability, LLC (“Berkley Pro”), which began operations in 2008, underwrites professional liability products including directors’ and officers’ liability insurance.

Berkley Life Sciences, LLC (“Berkley Life Science”), which began operations in 2007, underwrites casualty products to the life science marketplace, including medical devices, biotechnology and pharmaceutical companies.

 

Gemini Transportation Underwriters (“Gemini”), which began operations in February 2009, underwrites excess liability insurance for the railroad and commercial trucking industries.

 

Berkley Asset Protection Underwriters, LLC (“Berkley Asset”), which began operations in 2008, underwrites coverage for fine arts, jewelers block, fidelity, crime and related risks.

 

FinSecure, LLC (“FinSecure”), which began operations in 2008, underwrites property and liability insurance coverages for financial institutions and financial services firms, including mortgage impairment property coverage.

 

Berkley Oil & Gas Speciality Services, LLC (“Berkley Oil & Gas”), which was formed in September 2009, underwrites a multi-line insurance product offering and provides risk control services in the domestic energy sector.

 

The following table sets forth the percentage of gross premiums written by each specialty unit:

 

 

The following table sets forth the percentages of gross premiums written, by line, by our specialty insurance operations:

 

REGIONAL

 

Our regional companies provide commercial insurance products to customers primarily in 45 states and the District of Columbia. Key clients of this segment are small-to-mid-sized businesses and state and local governmental entities. The regional business is sold through a network of non-exclusive independent agents who are compensated on a commission basis. The regional companies are organized geographically in order to provide them with the flexibility to adapt quickly to local market conditions.

 

Continental Western Group (“Continental Western Group”) is based in Des Moines, Iowa and operates in 18 states in the Midwest and Pacific Northwest.

 

Acadia Insurance Company (“Acadia”) is based in Westbrook, Maine and operates in 8 states in the Northeast.

 

Union Standard Insurance Group (“Union Standard”) is based in Irving, Texas and operates in 9 southern states other than Florida and Louisiana.

 

Berkley Mid Atlantic Group (“BMAG”) is based in Glen Allen, Virginia and operates in 7 states in the Mid Atlantic region and the District of Columbia.

 

Berkley Surety Group, Inc. (“Berkley Surety”) offers surety bonds on a nationwide basis through a network of thirteen regional and branch offices.

 

Berkley North Pacific Group, LLC (“Berkley North Pacific”), formerly a branch of Continental Western Group, became a separate operating unit in August 2009. Berkley North Pacific is based in Seattle, Washington, has an office in Boise Idaho, and operates primarily in the Pacific Northwest region.

 

Berkley Regional Specialty Insurance Company (“BRSIC”) offers the availability of excess and surplus lines products to independent agents in our regional territories.

 

Regional Excess Underwriters, LLC (“REU”) is a full service excess and surplus lines brokerage offering commercial coverages through contracted agents throughout the continental United States.

 

The following table sets forth the percentage of gross premiums written by each region:

 

 

 

 

The following table sets forth the percentages of gross premiums written, by line, by our regional insurance operations:

 

 

The following table sets forth the percentages of direct premiums written by our regional insurance operations by state:

 

ALTERNATIVE MARKETS

 

Our alternative markets operations specialize in insuring, reinsuring and administering self-insurance programs and other alternative risk transfer mechanisms. Our clients include commercial and governmental entity employers, employer groups, insurers, and other groups or entities seeking alternative ways to manage their exposure to risks. Often, alternative methods of risk management result in our customers choosing to retain more of this risk than they might otherwise retain in the traditional insurance market. In addition to providing insurance products, the alternative markets segment also provides a wide variety of fee-based services, including claims, administrative and consulting services.

 

Midwest Employers Casualty Company (“MECC”) provides excess workers’ compensation coverage and risk management services to self-insured employers and groups as well as to insurance companies in the workers’ compensation business. Excess workers’ compensation is coverage above an amount retained, or self-insured, by the employer or group and includes large deductible and reinsurance programs.

 

Key Risk Insurance Company (“Key Risk”) offers primary workers’ compensation insurance principally in the southeastern United States. Key Risk focuses on middle-market accounts in specialty niches and on larger self-insured entities, with a special emphasis on managed care services. An affiliate, Key Risk Management Services, Inc., provides third party administration of self-insured workers’ compensation programs.

 

Berkley Net Underwriters, LLC (“Berkley Net”) uses a web-based system to allow producers to quote, bind and service insurance policies. Its initial focus is on the workers’ compensation market.

 

Riverport Insurance Company(“Riverport”) provides property and casualty insurance products and services for human services organizations, governmental and other specialty entities, self-insured companies, associations and purchasing groups.

 

Preferred Employers Insurance Company (“Preferred Employers”) offers workers’ compensation insurance in California with an emphasis on owner-managed small employers.

 

Berkley Accident and Health, LLC (“Berkley A&H”) underwrites accident and health insurance and reinsurance products through four primary business segments: medical stop loss, managed care, special risk and group captive.

 

Berkley Medical Excess Underwriters, LLC (“Medical Excess”) underwrites medical malpractice excess insurance and reinsurance coverage and provides services to hospitals and hospital associations.

 

Berkley Risk Administrators Company, LLC (“BRAC”) services include third-party claims administration, underwriting risk management, accounting services, loss control and safety consulting, management information systems, regulatory compliance and alternative markets program management.

 

The following table sets forth the percentages of gross premiums written by each alternative markets unit:

 

 

 

 

The following table sets forth service fees for insurance services business conducted by BRAC and Key Risk Management Services, Inc. (amounts in thousands):

 

 

REINSURANCE

 

Our reinsurance operations consist of five operating units, which specialize in underwriting property casualty reinsurance on both a treaty and a facultative basis on behalf of Berkley Insurance Company. Treaty reinsurance is the reinsurance of all or a specified portion or category of risks underwritten by the ceding company during the term of the agreement. Facultative reinsurance is the reinsurance of individual risks whereby a reinsurer generally has the opportunity to analyze and separately underwrite a risk prior to agreeing to be bound.

 

Signet Star Re, LLC (“Signet Star”) focuses on underwriting specialty lines of business, including professional liability, umbrella, workers’ compensation, commercial automobile and trucking. Signet Star emphasizes casualty excess of loss treaties and seeks significant participations in order to have greater influence over the terms and conditions of coverage. Our treaty business is produced through reinsurance brokers or intermediaries.

 

Facultative ReSources, Inc. (“Fac Re”) specializes in underwriting individual certificate and program facultative business developed through reinsurance brokers or intermediaries. Its experienced underwriters seek to offset the underwriting and pricing cycles in the underlying insurance business by working closely with ceding company clients to develop appropriate underwriting criteria and through superior risk selection.

 

Lloyd’s Reinsurance (“Lloyd’s reinsurance”) represents a broad range of mainly short-tail classes of business, which are written through Lloyd’s of London.

 

B F Re Underwriters, LLC (“BF Re”) is a facultative casualty reinsurance underwriting manager that serves clients through a nationwide network of regional offices. Its business is written directly with ceding companies. BF Re’s primary lines of business are professional liability, excess and surplus, umbrella and medical malpractice.

 

Berkley Risk Solutions, Inc. (“Berkley Risk Solutions”) underwrites insurance and reinsurance-based financial coverages for insurance companies and self-insured entities.

 

The following table sets forth the percentages of gross premiums written by each reinsurance unit:

 

 

 

 

The following table sets forth the percentages of gross premiums written, by property versus casualty business, by our reinsurance operations:

 

 

INTERNATIONAL

 

Our international segment has operations in the United Kingdom, Continental Europe, South America, Australia, Southeast Asia, and Canada. We apply the same long-term strategies that that we use in our domestic operations — decentralized structures with products and services tailored to the local environments.

 

Berkley International Latinoamérica S.A. (“BILSA”) provides commercial and personal property casualty insurance primarily in Argentina, Brazil and Uruguay.

 

W. R. Berkley Insurance (Europe), Limited (“Berkley Europe”) is a London-based specialty casualty insurer that writes professional indemnity, directors’ and officers’ liability, medical malpractice, general liability, construction risks and personal accident and travel business principally in the United Kingdom and through its branch offices in Spain, Ireland, Norway and Australia.

 

Berkley Re Australia (“Australia”), which began operations in 2007, provides property and casualty reinsurance on a treaty and facultative basis in Australia and through its division in Hong Kong.

 

W. R. Berkley Syndicate Limited(“Syndicate 1967”), which began operations in 2009, underwrites property and accident classes of business through Lloyd’s of London on a worldwide basis.

 

Berkley Underwriting Managers Canada, Ltd. (“Berkley Canada”), which began operations in 2008, underwrites specialty casualty commercial insurance products, including general liability, products liability and other commercial lines in the Canadian provinces.

 

The following table sets forth the percentages of gross premiums written for our international operations:

 

 

 

 

Results by Industry Segment

 

Summary financial information about our operating segments is presented on a GAAP basis in the following table:

 

 

 

 

The table below represents summary underwriting ratios on a GAAP basis for our insurance segments. The combined ratio represents a measure of underwriting profitability, excluding investment income. A number in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit:

 

Investments

 

Investment results, before income taxes, were as follows:

 

 

 

 

For comparison, the following are the coupon returns for selected bond indices and the dividend returns for the S&P 500^® Index:

 

 

 

 

The percentages of the fixed maturity portfolio categorized by contractual maturity, based on fair value, on the dates indicated, are set forth below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay certain obligations.

 

 

Loss and Loss Adjustment Expense Reserves

 

To recognize liabilities for unpaid losses, either known or unknown, insurers establish reserves, which is a balance sheet account representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. Estimates and assumptions relating to reserves for losses and loss expenses are based on complex and subjective judgments, often including the interplay of specific uncertainties with related accounting and actuarial measurements. Such estimates are also susceptible to change as significant

periods of time may elapse between the occurrence of an insured loss, the report of the loss to the insurer, the ultimate determination of the cost of the loss and the insurer’s payment of that loss.

 

In general, when a claim is reported, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment. 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 earnings in periods in which such assumptions are changed.

 

Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what management expects the ultimate settlement and claim administration will cost. While the methods for establishing the reserves are well tested over time, some of the major assumptions about anticipated loss emergence patterns are subject to unanticipated fluctuation. These estimates, which generally involve actuarial projections, are based on management’s assessment of facts and circumstances then known, as well as estimates of 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.

 

We discount our liabilities for excess workers’ compensation business and the workers’ compensation portion of our reinsurance business because of the long period of time over which losses are paid. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from the Company’s loss payout experience. For non-proportional business, reserves for losses and loss expenses have been discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. These discount rates range from 2.7% to 6.5% with a weighted average discount rate of 4.4%. 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 2.7%. The aggregate net discount, after reflecting the effects of ceded reinsurance, is $877,305,000, $846,748,000 and $787,988,000 at December 31, 2009, 2008 and 2007, respectively. The increase in the aggregate discount from 2008 to 2009 and from 2007 to 2008 resulted from the increase in workers’ compensation gross reserves.

 

To date, known asbestos and environmental claims at our insurance company subsidiaries have not had a material impact on our operations. These claims have not materially impacted us because these subsidiaries generally did not insure the larger industrial companies which are subject to significant environmental exposures.

Our net reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $36,525,000 and $39,646,000 at December 31, 2009 and 2008, respectively. The Company’s gross reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $53,986,000 and $56,957,000 at December 31, 2009 and 2008, respectively. Net incurred losses and loss expenses for reported asbestos and environmental claims were approximately $(614,000), $440,000 and $7,029,000 in 2009, 2008 and 2007, respectively. Net paid losses and loss expenses for reported asbestos and environmental claims were approximately $2,508,000, $2,384,000 and $2,912,000 in 2009, 2008 and 2007, respectively. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make a reasonable actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential affect of significant unresolved legal matters, including coverage issues as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties are highly uncertain.

 

The table below provides a reconciliation of the beginning of year and end of year property casualty reserves for the indicated years (amounts in thousands):

 

 

 

 

Also, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information regarding the decrease in estimates for claims occurring in prior years.

A reconciliation between the reserves as of December 31, 2009 as reported in the accompanying consolidated GAAP financial statements and those reported on the basis of statutory accounting principles (“SAP”) is as follows (amounts in thousands):

 

 

 

 

The following table presents the development of net reserves for 1999 through 2009. The top line of the table shows the estimated reserves for unpaid losses and loss expenses recorded at the balance sheet date for each of the indicated years. This represents the estimated amount of losses and loss expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not reported to us. The upper portion of the table shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years.

 

The “cumulative redundancy (deficiency)” represents the aggregate change in the estimates over all prior years. For example, the 1999 reserves have developed a $688 million deficiency over ten years. That amount has been reflected in income over the ten years. The impact on the results of operations of the past three years of changes in reserve estimates is shown in the reconciliation tables above. It should be noted that the table presents a “run off” of balance sheet reserves, rather than accident or policy year loss development. Therefore, each amount in the table includes the effects of changes in reserves for all prior years. For example, assume a claim that occurred in 1999 is reserved for $2,000 as of December 31, 1999. Assuming this claim estimate was changed in 2009 to $2,300, and was settled for $2,300 in 2008, the $300 deficiency would appear as a deficiency in each year from 1999 through 2009.