BERKLEY W R CORP - Quarter Report: 2014 June (Form 10-Q)

($ in thousands)

Fair Value

Six months ended June 30,

UNITED STATES 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 June 30, 2014



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		(I.R.S. Employer
incorporation or organization)		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 þ 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.



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 July 30, 2014: 127,530,366

Table of Contents

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
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

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Part I — FINANCIAL INFORMATION


Item 1.	Financial Statements

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



	June 30, 2014			December 31, 2013
	(Unaudited)			(Audited)
Assets
Investments:
Fixed maturity securities	$	12,088,055		$	11,616,844
Equity securities	257,059			283,338
Arbitrage trading account	732,279			522,128
Investment funds	984,836			1,067,495
Loans receivable	655,691			343,583
Real estate	530,239			715,242
Total investments	15,248,159			14,548,630
Cash and cash equivalents	842,671			839,738
Premiums and fees receivable	1,748,916			1,557,480
Due from reinsurers	1,464,003			1,533,103
Accrued investment income	123,168			118,329
Prepaid reinsurance premiums	431,933			367,803
Deferred policy acquisition costs	483,714			452,101
Property, furniture and equipment	335,741			339,448
Federal and foreign income taxes	—			44,857
Goodwill	103,565			110,146
Trading account receivables from brokers and clearing organizations	57,454			304,936
Other assets	327,870			335,225
Total assets	$	21,167,194		$	20,551,796

Liabilities and Equity
Liabilities:
Reserves for losses and loss expenses	$	10,256,219		$	10,080,941
Unearned premiums	3,081,888			2,781,437
Due to reinsurers	272,455			276,755
Trading account securities sold but not yet purchased	111,991			162,278
Federal and foreign income taxes	24,779			—
Other liabilities	728,337			848,749
Junior subordinated debentures	339,930			339,800
Senior notes and other debt	1,697,037			1,692,442
Total liabilities	16,512,636			16,182,402
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, 127,613,325 and 132,233,167 shares, respectively	47,024			47,024
Additional paid-in capital	974,794			967,440
Retained earnings	5,587,824			5,265,015
Accumulated other comprehensive income	333,899			189,391
Treasury stock, at cost, 107,504,593 and 102,884,751 shares, respectively	(2,323,828		)	(2,132,835		)
Total stockholders’ equity	4,619,713			4,336,035
Noncontrolling interests	34,845			33,359
Total equity	4,654,558			4,369,394
Total liabilities and equity	$	21,167,194		$	20,551,796

See accompanying notes to interim consolidated financial statements.

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W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands, except per share data)



	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2014			2013			2014			2013
REVENUES:
Net premiums written	$	1,489,776		$	1,341,898		$	3,015,656		$	2,718,864
Change in net unearned premiums	(72,131		)	(59,383		)	(234,399		)	(204,230		)
Net premiums earned	1,417,645			1,282,515			2,781,257			2,514,634
Net investment income	138,729			143,737			307,440			279,666
Insurance service fees	26,922			27,652			55,625			54,388
Net investment gains	109,168			33,058			161,922			53,027
Revenues from wholly-owned investees	104,285			83,775			197,125			175,510
Other income	240			225			526			506
Total revenues	1,796,989			1,570,962			3,503,895			3,077,731
OPERATING COSTS AND EXPENSES:
Losses and loss expenses	867,778			805,470			1,689,873			1,550,149
Other operating costs and expenses	534,150			494,286			1,049,316			975,890
Expenses from wholly-owned investees	101,296			81,293			193,026			170,445
Interest expense	30,311			31,207			60,641			62,318
Total operating costs and expenses	1,533,535			1,412,256			2,992,856			2,758,802
Income before income taxes	263,454			158,706			511,039			318,929
Income tax expense	(83,277		)	(43,579		)	(161,178		)	(87,204		)
Net income before noncontrolling interests	180,177			115,127			349,861			231,725
Noncontrolling interests	(216		)	830			(227		)	847
Net income to common stockholders	$	179,961		$	115,957		$	349,634		$	232,572

NET INCOME PER SHARE:
Basic	$	1.41		$	0.85		$	2.72		$	1.71
Diluted	$	1.35		$	0.82		$	2.60		$	1.65

See accompanying notes to interim consolidated financial statements.

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W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In thousands)



	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2014			2013			2014			2013
Net income before noncontrolling interests	$	180,177		$	115,127		$	349,861		$	231,725
Other comprehensive income (loss):
Change in unrealized currency translation adjustments	24,815			(23,156		)	20,790			(69,779		)
Change in unrealized investment gains, net of taxes	48,200			(197,060		)	121,144			(189,250		)
Change in net pension asset, net of taxes	2,020			1,814			2,611			3,628
Other comprehensive income (loss)	75,035			(218,402		)	144,545			(255,401		)
Comprehensive income (loss)	255,212			(103,275		)	494,406			(23,676		)
Comprehensive (income) loss to the noncontrolling interest	(235		)	865			(264		)	842
Comprehensive income (loss) to common stockholders	$	254,977		$	(102,410	)	$	494,142		$	(22,834	)

See accompanying notes to interim consolidated financial statements.

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W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(In thousands)



	For the Six Months
	Ended June 30,
	2014			2013
COMMON STOCK:
Beginning and end of period	$	47,024		$	47,024
ADDITIONAL PAID-IN CAPITAL:
Beginning of period	$	967,440		$	945,166
Options exercised and restricted stock units issued, net of tax	(5,692		)	(311		)
Restricted stock units expensed	12,455			10,694
Stock issued to directors	591			535
End of period	$	974,794		$	956,084
RETAINED EARNINGS:
Beginning of period	$	5,265,015		$	4,817,807
Net income to common stockholders	349,634			232,572
Dividends	(26,825		)	(25,814		)
End of period	$	5,587,824		$	5,024,565
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Unrealized investment gains (losses):
Beginning of period	$	256,566		$	517,658
Unrealized gains (losses) on securities not other-than-temporarily impaired	120,618			(189,594		)
Unrealized gains on other-than-temporarily impaired securities	489			339
End of period	377,673			328,403
Currency translation adjustments:
Beginning of period	(60,524		)	(36,676		)
Net change in period	20,790			(69,779		)
End of period	(39,734		)	(106,455		)
Net pension asset:
Beginning of period	(6,651		)	(15,351		)
Net change in period	2,611			3,628
End of period	(4,040		)	(11,723		)
Total accumulated other comprehensive income	$	333,899		$	210,225
TREASURY STOCK:
Beginning of period	$	(2,132,835	)	$	(1,969,411	)
Stock exercised/vested	5,667			882
Stock repurchased	(197,254		)	(31,362		)
Stock issued to directors	594			597
End of period	$	(2,323,828	)	$	(1,999,294	)
NONCONTROLLING INTERESTS:
Beginning of period	$	33,359		$	29,249
Contributions	1,222			(1,356		)
Net income (loss)	227			(847		)
Other comprehensive income, net of tax	37			5
End of period	$	34,845		$	27,051

See accompanying notes to interim consolidated financial statements.

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W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)



	For the Six Months
	Ended June 30,
	2014			2013
CASH FROM OPERATING ACTIVITIES:
Net income to common stockholders	$	349,634		$	232,572
Adjustments to reconcile net income to net cash from operating activities:
Net investment gains	(161,922		)	(53,027		)
Depreciation and amortization	50,832			50,617
Noncontrolling interests	227			(847		)
Investment funds	(84,385		)	(33,057		)
Stock incentive plans	13,615			12,395
Change in:
Arbitrage trading account	(12,956		)	1,590
Premiums and fees receivable	(197,004		)	(162,853		)
Reinsurance accounts	(57		)	(67,447		)
Deferred policy acquisition costs	(31,527		)	(34,039		)
Income taxes	7,742			(46,642		)
Reserves for losses and loss expenses	172,759			221,525
Unearned premiums	297,721			269,931
Other	(150,056		)	(76,786		)
Net cash from operating activities	254,623			313,932
CASH FROM (USED IN) INVESTING ACTIVITIES:
Proceeds from sale of fixed maturity securities	513,281			555,694
Proceeds from sale of equity securities	112,590			66,969
Distributions from (contributions to) investment funds	211,974			(60,000		)
Proceeds from maturities and prepayments of fixed maturity securities	1,214,221			1,561,236
Purchase of fixed maturity securities	(2,034,009		)	(2,214,201		)
Purchase of equity securities	(48,484		)	(111,540		)
Real estate purchased	(63,919		)	(13,390		)
Real estate sold	343,723			—
Change in loans receivable	(312,071		)	(46,854		)
Net additions to property, furniture and equipment	(22,555		)	(43,446		)
Change in balances due to security brokers	28,313			(6,167		)
Net cash from businesses sold (purchased)	15,548			(59,964		)
Net cash from (used in) investing activities	(41,388		)	(371,663		)
CASH USED IN FINANCING ACTIVITIES:
Repayment of senior notes and other debt	—			(486,297		)
Net proceeds from issuance of debt	4,988			371,923
Net proceeds from options exercised	53			51
Cash dividends to common stockholders	(26,825		)	(12,243		)
Purchase of common treasury shares	(197,254		)	(31,362		)
Other, net	1,365			7,273
Net cash used in financing activities	(217,673		)	(150,655		)
Net impact on cash due to change in foreign exchange rates	7,371			(38,445		)
Net change in cash and cash equivalents	2,933			(246,831		)
Cash and cash equivalents at beginning of year	839,738			905,670
Cash and cash equivalents at end of period	$	842,671		$	658,839

See accompanying notes to interim consolidated financial statements.

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W. R. Berkley Corporation and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) General

The accompanying unaudited consolidated financial statements of W. R. Berkley Corporation and its subsidiaries (the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all the information and notes required by GAAP for annual financial statements. The unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring items, which are necessary to present fairly the Company’s financial position and results of operations on a basis consistent with the prior audited consolidated financial statements. Operating results for interim periods are not necessarily indicative of the results that may be expected for the year. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements requires the use of management estimates. For further information related to a description of areas of judgment and estimates and other information necessary to understand the Company’s financial position and results of operations, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Reclassifications have been made in the 2013 financial statements as originally reported to conform to the presentation of the 2014 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.

(2) Per Share Data

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

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



	For the Three Months		For the Six Months
	Ended June 30,		Ended June 30,
(In thousands)	2014	2013	2014	2013
Basic	127,668	135,894	128,765	135,959
Diluted	133,304	141,274	134,323	141,257

(3) Recent Accounting Pronouncements

In January 2014, the Financial Accounting Standards Board issued guidance relating to Accounting for Investments in Qualified Affordable Housing Projects. This guidance modified the amortization method on these investments and the statement of operations classification as pre-adoption amounts were presented in both pre-tax income and income tax expense while post adoption all impacts are recorded in income tax expense. The Company adopted this guidance effective January 1, 2014, and the impact of applying this guidance was immaterial.

All recently issued but not yet effective accounting and reporting standards are either not applicable to the Company or are not expected to have a material impact on the Company.

(4) Acquisitions/Dispositions

In June 2014, the Company sold an aviation-related business for $16 million. The business had a net carrying value of $15 million, including $7 million of goodwill.

In 2012, the Company acquired a 49% interest in a worldwide supplier of after-market original equipment manufacturer (OEM) parts, systems and custom logistic support services for military aircraft operations for $43 million. In January 2013, the Company acquired the remaining 51% of this business for $43 million. The estimated useful lives of the intangible assets acquired range from 2 years to 15 years, with approximately $3 million having an indefinite life.

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The following table summarizes the estimated fair value of net assets acquired and liabilities assumed at the date of acquisition:



(In thousands)

Cash and cash equivalents	$	3,911
Real estate, furniture and equipment	898
Goodwill	19,664
Intangible assets	44,800
Other assets	60,661
Total assets acquired	129,934
Debt	(27,612		)
Other liabilities assumed	(17,076		)
Net assets acquired	$	85,246

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(5) Statement of Comprehensive Income (Loss)

The following table presents the components of the changes in accumulated other comprehensive income (loss) ("AOCI"):



(In thousands)	Unrealized Investment Gains (Losses)				Currency Translation Adjustments			Net Pension Asset				Accumulated Other Comprehensive Income (Loss)
As of and for the six months ended June 30, 2014:
Changes in AOCI
Beginning of period	$	256,566			$	(60,524	)	$	(6,651	)		$	189,391
Other comprehensive income (loss) before reclassifications	140,289				20,790			—				161,079
Amounts reclassified from AOCI	(19,145		)		—			2,611				(16,534		)
Other comprehensive income (loss)	121,144				20,790			2,611				144,545
Unrealized investment gain (loss) related to non-controlling interest	(37		)		—			—				(37		)
End of period	$	377,673			$	(39,734	)	$	(4,040	)		$	333,899
Amounts reclassified from AOCI
Pre-tax	$	(29,454	)	(1)	$	—		$	4,017		(2)	$	(25,437	)
Tax effect (3)	10,309				—			(1,406		)		8,903
After-tax amounts reclassified	$	(19,145	)		$	—		$	2,611			$	(16,534	)
Other comprehensive income (loss)
Pre-tax	$	188,680			$	20,790		$	4,017			$	213,487
Tax effect	(67,536		)		—			(1,406		)		(68,942		)
Other comprehensive income (loss)	$	121,144			$	20,790		$	2,611			$	144,545

As of and for the three months ended June 30, 2014:
Changes in AOCI
Beginning of period	$	329,492			$	(64,549	)	$	(6,060	)		$	258,883
Other comprehensive income (loss) before reclassifications	62,846				24,815			—				87,661
Amounts reclassified from AOCI	(14,646		)		—			2,020				(12,626		)
Other comprehensive income (loss)	48,200				24,815			2,020				75,035
Unrealized investment gain (loss) related to non-controlling interest	(19		)		—			—				(19		)
End of period	$	377,673			$	(39,734	)	$	(4,040	)		$	333,899
Amounts reclassified from AOCI
Pre-tax	$	(22,532	)	(1)	$	—		$	3,108		(2)	$	(19,424	)
Tax effect (3)	7,886				—			(1,088		)		6,798
After-tax amounts reclassified	$	(14,646	)		$	—		$	2,020			$	(12,626	)
Other comprehensive income (loss)
Pre-tax	$	76,390			$	24,815		$	3,108			$	104,313
Tax effect	(28,190		)		—			(1,088		)		(29,278		)
Other comprehensive income (loss)	$	48,200			$	24,815		$	2,020			$	75,035

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	Unrealized Investment Gains				Currency Translation Adjustments			Net Pension Asset				Accumulated Other Comprehensive Income (Loss)
(In thousands)
As of and for the six months ended June 30, 2013:
Changes in AOCI
Beginning of period	$	517,658			$	(36,676	)	$	(15,351	)		$	465,631
Other comprehensive income (loss) before reclassifications	(161,945		)		(69,779		)	—				(231,724		)
Amounts reclassified from AOCI	(27,305		)		—			3,628				(23,677		)
Other comprehensive income (loss)	(189,250		)		(69,779		)	3,628				(255,401		)
Unrealized investment gain related to non-controlling interest	(5		)		—			—				(5		)
End of period	$	328,403			$	(106,455	)	$	(11,723	)		$	210,225
Amounts reclassified from AOCI
Pre-tax	$	(42,008	)	(1)	$	—		$	5,582		(2)	$	(36,426	)
Tax effect (3)	14,703				—			(1,954		)		12,749
After-tax amounts reclassified	$	(27,305	)		$	—		$	3,628			$	(23,677	)
Other comprehensive income (loss)
Pre-tax	$	(291,154	)		$	(69,779	)	$	5,582			$	(355,351	)
Tax effect	101,904				—			(1,954		)		99,950
Other comprehensive income (loss)	$	(189,250	)		$	(69,779	)	$	3,628			$	(255,401	)

As of and for the three months ended June 30, 2013:
Changes in AOCI
Beginning of period	$	525,428			$	(83,299	)	$	(13,537	)		$	428,592
Other comprehensive income (loss) before reclassifications	(182,934		)		(23,156		)	—				(206,090		)
Amounts reclassified from AOCI	(14,126		)		—			1,814				(12,312		)
Other comprehensive income (loss)	(197,060		)		(23,156		)	1,814				(218,402		)
Unrealized investment gain related to non-controlling interest	35							—				35
End of period	$	328,403			$	(106,455	)	$	(11,723	)		$	210,225
Amounts reclassified from AOCI
Pre-tax	$	(21,933	)	(1)	$	—		$	2,790		(2)	$	(19,143	)
Tax effect (3)	7,807				—			(976		)		6,831
After-tax amounts reclassified	$	(14,126	)		$	—		$	1,814			$	(12,312	)
Other comprehensive income (loss)
Pre-tax	$	(303,169	)		$	(23,156	)	$	2,790			$	(323,535	)
Tax effect	106,109				—			(976		)		105,133
Other comprehensive income (loss)	$	(197,060	)		$	(23,156	)	$	1,814			$	(218,402	)

(1) Net investment gains in the consolidated statements of operations.

(2) Other operating costs and expenses in the consolidated statements of operations.

(3) Income tax expense in the consolidated statements of operations.

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(6) Statements of Cash Flow

Interest payments were $59,811,000 and $65,365,000 and income taxes paid were $152,439,000 and $137,618,000 in the six months ended June 30, 2014 and 2013, respectively.

(7) Investments in Fixed Maturity Securities

At June 30, 2014 and December 31, 2013, investments in fixed maturity securities were as follows:



(In thousands)	Amortized Cost		Gross Unrealized					Fair Value		Carrying Value
			Gains		Losses
June 30, 2014
Held to maturity:
State and municipal	$	70,956	$	16,135	$	—		$	87,091	$	70,956
Residential mortgage-backed	25,398		3,182		—			28,580		25,398
Corporate	4,998		314		—			5,312		4,998
Total held to maturity	101,352		19,631		—			120,983		101,352
Available for sale:
U.S. government and government agency	839,914		34,766		(7,553		)	867,127		867,127
State and municipal	4,004,308		221,995		(5,563		)	4,220,740		4,220,740
Mortgage-backed securities:
Residential (1)	1,209,584		29,930		(13,765		)	1,225,749		1,225,749
Commercial	74,378		6,056		(47		)	80,387		80,387
Corporate	4,436,526		206,290		(18,492		)	4,624,324		4,624,324
Foreign	917,558		68,553		(17,735		)	968,376		968,376
Total available for sale	11,482,268		567,590		(63,155		)	11,986,703		11,986,703
Total investments in fixed maturity securities	$	11,583,620	$	587,221	$	(63,155	)	$	12,107,686	$	12,088,055
December 31, 2013
Held to maturity:
State and municipal	$	68,929	$	11,172	$	—		$	80,101	$	68,929
Residential mortgage-backed	27,393		3,311		—			30,704		27,393
Corporate	4,998		417		—			5,415		4,998
Total held to maturity	101,320		14,900		—			116,220		101,320
Available for sale:
U.S. government and government agency	858,319		34,522		(7,982		)	884,859		884,859
State and municipal	4,085,791		162,330		(29,837		)	4,218,284		4,218,284
Mortgage-backed securities:
Residential (1)	1,248,693		25,895		(25,941		)	1,248,647		1,248,647
Commercial	76,454		5,670		(988		)	81,136		81,136
Corporate	4,076,585		156,256		(30,100		)	4,202,741		4,202,741
Foreign	844,469		51,674		(16,286		)	879,857		879,857
Total available for sale	11,190,311		436,347		(111,134		)	11,515,524		11,515,524
Total investments in fixed maturity securities	$	11,291,631	$	451,247	$	(111,134	)	$	11,631,744	$	11,616,844

___________


(1)	Gross unrealized losses for residential mortgage-backed securities include $1,208,000 and $1,961,000 as of June 30, 2014 and December 31, 2013, respectively, related to the non-credit portion of other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income.

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The amortized cost and fair value of fixed maturity securities at June 30, 2014, 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.



(In thousands)	Amortized Cost		Fair Value
Due in one year or less	$	886,256	$	896,523
Due after one year through five years	3,860,527		4,039,960
Due after five years through ten years	3,035,251		3,229,746
Due after ten years	2,492,226		2,606,741
Mortgage-backed securities	1,309,360		1,334,716
Total	$	11,583,620	$	12,107,686

At June 30, 2014, there were no investments, other than investments in United States government and government agency securities, which exceeded 10% of common stockholders’ equity.

(8) Investments in Equity Securities

At June 30, 2014 and December 31, 2013, investments in equity securities were as follows:



(In thousands)	Cost		Gross Unrealized					Fair Value		Carrying Value
(In thousands)	Cost		Gains		Losses			Fair Value		Carrying Value
June 30, 2014
Common stocks	$	75,167	$	28,360	$	—		$	103,527	$	103,527
Preferred stocks	92,797		63,740		(3,005		)	153,532		153,532
Total	$	167,964	$	92,100	$	(3,005	)	$	257,059	$	257,059
December 31, 2013
Common stocks	$	118,536	$	42,239	$	—		$	160,775	$	160,775
Preferred stocks	85,091		43,791		(6,319		)	122,563		122,563
Total	$	203,627	$	86,030	$	(6,319	)	$	283,338	$	283,338

(9) Arbitrage Trading Account

At June 30, 2014 and December 31, 2013, the carrying value of the arbitrage trading account was $732 million and $522 million, respectively. The primary focus of the trading account is merger arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Arbitrage investing differs from other types of investing in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less). The Company believes that this makes merger arbitrage investments less vulnerable to changes in general financial market conditions.

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(10) Net Investment Income

Net investment income consists of the following:



	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
(In thousands)	2014			2013			2014			2013
Investment income earned on:
Fixed maturity securities, including cash and cash equivalents and loans receivable	$	107,760		$	111,203		$	214,658		$	229,039
Investment funds	22,356			22,576			76,155			33,510
Arbitrage trading account	6,942			4,990			12,461			8,773
Equity securities available for sale	2,103			3,634			4,049			5,881
Real estate	3,063			3,116			6,165			6,257
Gross investment income	142,224			145,519			313,488			283,460
Investment expense	(3,495		)	(1,782		)	(6,048		)	(3,794		)
Net investment income	$	138,729		$	143,737		$	307,440		$	279,666

(11) Investment Funds

Investment funds consist of the following:



	Carrying Value as of				Income (Loss) from Investment Funds
	June 30,		December 31,		For the Six Months Ended June 30,
(In thousands)	2014		2013		2014		2013
Real estate	$	280,255	$	378,435	$	16,482	$	1,260
Energy	159,645		155,026		12,596		25,199
Arbitrage	279,806		271,575		8,231		1,731
Other	265,130		262,459		38,846		5,320
Total	$	984,836	$	1,067,495	$	76,155	$	33,510

The Company's share of the earnings or losses of investment funds is generally reported on a one-quarter lag in order to facilitate the timely completion of the Company's consolidated financial statements.

(12) Real Estate

Investment in real estate represents directly owned property held for investment, as follows:



	Carrying Value
	June 30,		December 31,
(In thousands)	2014		2013
Properties in operation	$	47,617	$	283,393
Properties under development	482,622		431,849
Total	$	530,239	$	715,242

The primary property in operation is a long-term ground lease in Washington, D.C. Properties in operation are net of accumulated depreciation and amortization of $78,000 and $17,827,000 as of June 30, 2014 and December 31, 2013, respectively. Related depreciation expense was $3,219,000 and $3,420,000 for the six months ended June 30, 2014 and 2013, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $760,000 in 2014, $1,549,000 in 2015, $1,596,000 in 2016, $1,644,000 in 2017, $1,693,000 in 2018 and $327,320,000 thereafter.

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The properties under development are an office building in London, a mixed-use project in Washington, D.C. and an office complex in New York City.

In June 2014, the Company sold an office building in London for $67 million in cash and a $270 million, 2% bridge loan, which was repaid in July 2014. The carrying value of the building at the time of sale was $251 million.

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(13) Loans Receivable

Loans receivable are as follows:



(In thousands)	June 30, 2014		December 31, 2013
Amortized cost:
Real estate loans	$	569,530	$	282,357
Commercial loans	86,161		61,226
Total	$	655,691	$	343,583

Fair value:
Real estate loans	$	571,520	$	284,017
Commercial loans	87,663		62,729
Total	$	659,183	$	346,746

Valuation allowance:
Specific	$	—	$	—
General	2,566		2,087
Total	$	2,566	$	2,087

	For the Three Months
	Ended June 30,
	2014		2013
Increase (decrease) in valuation allowance	$	16	$	(30	)
Loans receivable charged off	—		—

	For the Six Months
	Ended June 30,
	2014		2013
Increase in valuation allowance	$	479	$	65
Loans receivable charged off	—		—

There were no loans receivable in non-accrual status as of June 30, 2014 and December 31, 2013.

The Company monitors the performance of its loans receivable and assesses the ability of the borrower to pay principal and interest based upon loan structure, underlying property values, cash flow and related financial and operating performance of the property and market conditions. Loans receivable with a potential for default are further assessed using discounted cash flow analysis and comparable cost and sales methodologies, if appropriate.

The real estate loans are secured by commercial real estate primarily located in Arizona, California, Hawaii, Illinois, New York, North Carolina and Texas. These loans generally earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through August 2025. The commercial loans are with small business owners who have secured the related financing with the assets of the business. These loans generally earn interest on a fixed basis and have varying maturities not exceeding 10 years.

The Company utilizes an internal risk rating system to assign a risk to each of its real estate loans. The loan rating system takes into consideration credit quality indicators including loan to value ratios, which compare the outstanding loan amount to the estimated value of the property, the borrower’s financial condition and performance with respect to loan terms, the Company’s position in the capital structure, and the overall leverage in the capital structure. Based on this rating system, none of the real estate loans were considered to be impaired at June 30, 2014, and accordingly, the Company determined that a specific valuation allowance was not required.

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(14) Realized and Unrealized Investment Gains (Losses)

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



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(In thousands)	2014			2013			2014			2013
Realized investment gains (losses):
Fixed maturity securities:
Gains	$	1,941		$	9,147		$	4,003		$	20,143
Losses	(464		)	(5,500		)	(2,062		)	(11,466		)
Equity securities available for sale	23,124			18,086			29,581			33,331
Investment funds	(1,076		)	10,843			44,757			11,037
Real estate	85,643			—			85,643			—
Other	—			482			—			(18		)
Total	109,168			33,058			161,922			53,027
Change in valuation allowance, net of other-than-temporary impairments:
Decrease in valuation allowance	—			—			—			—
Other-than-temporary impairments	—			—			—			—
Total	—			—			—			—
Net investment gains	109,168			33,058			161,922			53,027
Income tax expense	(38,208		)	(11,570		)	(56,673		)	(18,559		)
Total after-tax realized investment gains	$	70,960		$	21,488		$	105,249		$	34,468



Change in unrealized investment gains (losses):
Fixed maturity securities	$	87,882		$	(277,791	)	$	179,520		$	(293,380	)
Previously impaired fixed maturity securities	194			(590		)	753			522
Equity securities available for sale	(17,870		)	(16,191		)	8,333			8,370
Investment funds	6,184			(5,906		)	74			(9,174		)
Total change in unrealized investment gains (losses)	76,390			(300,478		)	188,680			(293,662		)
Income tax benefit (expense)	(28,190		)	103,418			(67,536		)	104,412
Noncontrolling interests	(19		)	35			(37		)	(5		)
Total after-tax unrealized gains (losses)	$	48,181		$	(197,025	)	$	121,107		$	(189,255	)

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(15) Securities in an Unrealized Loss Position

The following tables summarize all securities in an unrealized loss position at June 30, 2014 and December 31, 2013 by the length of time those securities have been continuously in an unrealized loss position:



	Less Than 12 Months				12 Months or Greater				Total
(In thousands)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
June 30, 2014
U.S. government and government agency	$	191,360	$	4,176	$	74,427	$	3,377	$	265,787	$	7,553
State and municipal	136,081		1,796		185,605		3,767		321,686		5,563
Mortgage-backed securities	129,004		725		341,219		13,087		470,223		13,812
Corporate	549,991		7,099		285,261		11,393		835,252		18,492
Foreign	183,837		7,461		101,882		10,274		285,719		17,735
Fixed maturity securities	1,190,273		21,257		988,394		41,898		2,178,667		63,155
Common stocks	—		—		—		—		—		—
Preferred stocks	—		—		25,714		3,005		25,714		3,005
Equity securities	—		—		25,714		3,005		25,714		3,005
Total	$	1,190,273	$	21,257	$	1,014,108	$	44,903	$	2,204,381	$	66,160

December 31, 2013
U.S. government and government agency	$	260,882	$	7,927	$	2,163	$	55	$	263,045	$	7,982
State and municipal	899,613		24,503		87,345		5,334		986,958		29,837
Mortgage-backed securities	578,603		17,964		140,648		8,965		719,251		26,929
Corporate	1,013,373		17,066		105,074		13,034		1,118,447		30,100
Foreign	320,215		16,286		—		—		320,215		16,286
Fixed maturity securities	3,072,686		83,746		335,230		27,388		3,407,916		111,134
Common stocks	—		—		—		—		—		—
Preferred stocks	13,291		513		19,868		5,806		33,159		6,319
Equity securities	13,291		513		19,868		5,806		33,159		6,319
Total	$	3,085,977	$	84,259	$	355,098	$	33,194	$	3,441,075	$	117,453

Fixed Maturity Securities – A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at June 30, 2014 is presented in the table below.



($ in thousands)	Number of Securities	Aggregate Fair Value		Gross Unrealized Loss
Mortgage-backed securities	11	$	44,646	$	1,772
Corporate	8	18,070		633
Foreign	3	21,374		1,463
Total	22	$	84,090	$	3,868

For OTTI of fixed maturity securities that management does not intend to sell or, more likely than not, would not be required to sell, the portion of the decline in value considered to be due to credit factors is recognized in earnings and the portion of the decline in value considered to be due to non-credit factors is recognized in other comprehensive income. For the six months ended June 30, 2014 and 2013, there were no changes in the portion of impairments recognized in earnings for those securities that have been impaired due to both credit factors and non-credit factors.

The Company has evaluated its fixed maturity securities in an unrealized loss position and believes the unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors. None of these securities are delinquent or in default under financial covenants. Based on its assessment of these issuers, the Company expects them to

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continue to meet their contractual payment obligations as they become due and does not consider any of these securities to be OTTI.

Preferred Stocks – At June 30, 2014, there were two preferred stocks in an unrealized loss position, with an aggregate fair value of $26 million and a gross unrealized loss of $3 million. Based upon management’s view of the underlying value of these securities, the Company does not consider these preferred stocks to be OTTI.

Common Stocks – At June 30, 2014, the Company did not own any common stocks in an unrealized loss position.

(16) Fair Value Measurements

The Company’s fixed maturity and equity securities available for sale and its arbitrage trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available.

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

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The following tables present the assets and liabilities measured at fair value, on a recurring basis, as of June 30, 2014 and December 31, 2013 by level:



(In thousands)	Total		Level 1		Level 2		Level 3
June 30, 2014
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency	$	867,127	$	—	$	867,127	$	—
State and municipal	4,220,740		—		4,220,740		—
Mortgage-backed securities	1,306,136		—		1,306,136		—
Corporate	4,624,324		—		4,587,282		37,042
Foreign government	968,376		—		968,376		—
Total fixed maturity securities available for sale	11,986,703		—		11,949,661		37,042
Equity securities available for sale:
Common stocks	103,527		102,762		—		765
Preferred stocks	153,532		—		149,763		3,769
Total equity securities available for sale	257,059		102,762		149,763		4,534
Arbitrage trading account	732,279		255,073		474,524		2,682
Total	$	12,976,041	$	357,835	$	12,573,948	$	44,258
Liabilities:
Securities sold but not yet purchased	$	111,991	$	111,986	$	5	$	—
December 31, 2013
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency	$	884,859	$	—	$	884,859	$	—
State and municipal	4,218,284		—		4,218,284		—
Mortgage-backed securities	1,329,783		—		1,329,783		—
Corporate	4,202,741		—		4,159,877		42,864
Foreign government	879,857		—		879,857		—
Total fixed maturity securities available for sale	11,515,524		—		11,472,660		42,864
Equity securities available for sale:
Common stocks	160,775		159,537		—		1,238
Preferred stocks	122,563		—		118,811		3,752
Total equity securities available for sale	283,338		159,537		118,811		4,990
Arbitrage trading account	522,128		192,281		328,067		1,780
Total	$	12,320,990	$	351,818	$	11,919,538	$	49,634
Liabilities:
Securities sold but not yet purchased	$	162,278	$	162,126	$	152	$	—

There were no significant transfers between Levels 1 and 2 during the six months ended June 30, 2014 or during the year ended December 31, 2013.

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The following tables summarize changes in Level 3 assets and liabilities for the six months ended June 30, 2014 and for the year ended December 31, 2013:



			Gains (Losses) Included in
(In thousands)	Beginning Balance		Earnings			Other Comprehensive Income		Purchases		(Sales)			Maturities			Transfer in (out)			Ending Balance
Six months ended June 30, 2014:
Assets:
Fixed maturities available for sale:
Corporate	$	42,864	$	43		$	144	$	84	$	(5,247	)	$	(846	)	$	—		$	37,042
Total	42,864		43			144		84		(5,247		)	(846		)	—			37,042
Equity securities available for sale:
Common stocks	1,238		—			—		—		(473		)	—			—			765
Preferred stocks	3,752		39			—		—		(22		)	—			—			3,769
Total	4,990		39			—		—		(495		)	—			—			4,534
Arbitrage trading account	1,780		(1,429		)	—		2,539		(9,230		)	—			9,022			2,682
Total	$	49,634	$	(1,347	)	$	144	$	2,623	$	(14,972	)	$	(846	)	$	9,022		$	44,258

Year ended December 31, 2013:
Assets:
Fixed maturities available for sale:
Corporate	$	59,065	$	677		$	309	$	170	$	(4,753	)	$	(12,604	)	$	—		$	42,864
Total	59,065		677			309		170		(4,753		)	(12,604		)	—			42,864
Equity securities available for sale:
Common stocks	1,408		—			—		—		(170		)	—			—			1,238
Preferred stocks	621		(299		)	—		3,430		—			—			—			3,752
Total	2,029		(299		)	—		3,430		(170		)	—			—			4,990
Arbitrage trading account	928		1,458			730		824		(853		)	—			(1,307		)	1,780
Total	$	62,022	$	1,836		$	1,039	$	4,424	$	(5,776	)	$	(12,604	)	$	(1,307	)	$	49,634

Liabilities:
Securities sold but not yet purchased	$	20	$	(4	)	$	—	$	4	$	(20	)	$	—		$	—		$	—

During the six months ended June 30, 2014, one security was transferred into Level 3 where the quoted price was no longer available. This security was subsequently sold during the second quarter of 2014. There were no significant transfers in or out of Level 3 during the year ended December 31, 2013.

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(17) Reinsurance

The following is a summary of reinsurance financial information:



	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
(In thousands)	2014			2013			2014			2013
Written premiums:
Direct	$	1,580,639		$	1,405,183		$	3,145,827		$	2,805,595
Assumed	191,762			212,753			431,841			443,962
Ceded	(282,625		)	(276,038		)	(562,012		)	(530,693		)
Total net premiums written	$	1,489,776		$	1,341,898		$	3,015,656		$	2,718,864

Earned premiums:
Direct	$	1,449,152		$	1,301,702		$	2,830,724		$	2,542,264
Assumed	224,916			217,517			450,678			431,533
Ceded	(256,423		)	(236,704		)	(500,145		)	(459,163		)
Total net premiums earned	$	1,417,645		$	1,282,515		$	2,781,257		$	2,514,634

Ceded losses incurred	$	89,569		$	142,360		$	190,253		$	252,911

The Company reinsures a portion of its insurance exposures in order to reduce its net liability on individual risks and catastrophe losses. The Company also cedes premiums to state assigned risk plans and captive insurance companies. Estimated amounts due from reinsurers are reported net of reserves for uncollectible reinsurance of $2 million as of June 30, 2014 and $1 million as of December 31, 2013.

(18) Fair Value of Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:



	June 30, 2014				December 31, 2013
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Fixed maturity securities	$	12,088,055	$	12,107,686	$	11,616,844	$	11,631,744
Equity securities available for sale	257,059		257,059		283,338		283,338
Arbitrage trading account	732,279		732,279		522,128		522,128
Loans receivable	655,691		659,183		343,583		346,746
Cash and cash equivalents	842,671		842,671		839,738		839,738
Trading account receivables from brokers and clearing organizations	57,454		57,454		304,936		304,936
Due from broker	—		—		17,735		17,735
Liabilities:
Due to broker	18,850		18,850		8,273		8,273
Trading account securities sold but not yet purchased	111,991		111,991		162,278		162,278
Junior subordinated debentures	339,930		325,500		339,800		288,540
Senior notes and other debt	1,697,037		1,939,000		1,692,442		1,861,898

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 that rely on fair value measurements as described in Note 16 above. The fair value of loans receivable are estimated by using current institutional purchaser yield requirements for loans with similar credit characteristics, which is considered a Level 2 input. The fair value of the senior notes and other debt and the junior subordinated debentures is based on spreads for similar securities, which is considered a Level 2 input.

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(19) Restricted Stock Units

Pursuant to its stock incentive plan, the Company may issue restricted stock units (RSUs) to employees of the Company and its subsidiaries. The RSUs generally vest five years from the award date and are subject to other vesting and forfeiture provisions contained in the award agreement. RSUs are expensed pro-ratably over the vesting period. RSU expenses were $12 million and $11 million for the six months ended June 30, 2014 and 2013, respectively. A summary of RSUs issued in the six months ended June 30, 2014 and 2013 follows:

(20) Litigation and Contingent Liabilities

In the ordinary course of business, the Company is subject to disputes, litigation and arbitration arising from its insurance and reinsurance businesses. These matters are generally related to insurance and reinsurance claims and are considered in the establishment of loss and loss expense reserves. In addition, the Company may also become involved in legal actions which seek extra-contractual damages, punitive damages or penalties, including claims alleging bad faith in handling of insurance claims. The Company expects its ultimate liability with respect to such matters will not be material to its financial condition. However, adverse outcomes on such matters are possible, from time to time, and could be material to the Company’s results of operations in any particular financial reporting period.

(21) Business Segments

The Company’s financial results are presented for the following reportable business segments, plus a corporate segment:


•	Insurance-Domestic - commercial insurance business, including excess and surplus lines and admitted lines, primarily throughout the United States;


•	Insurance-International - insurance business primarily in the United Kingdom, Continental Europe, South America, Canada, Scandinavia, and Australia; and


•	Reinsurance-Global - reinsurance business on a facultative and treaty basis, primarily in the United States, United Kingdom, Continental Europe, Australia, and the Asia-Pacific Region.

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.

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Summary financial information about the Company's business segments is presented in the following tables.



	Revenues
(In thousands)	Earned Premiums		Investment Income			Other		Total		Pre-Tax Income (Loss)			Net Income (Loss) to Common Stockholders
Three months ended June 30, 2014:
Insurance-Domestic	$	1,041,745	$	103,073		$	26,985	$	1,171,803	$	176,855		$	121,834
Insurance-International	201,868		11,276			—		213,144		11,510			8,253
Reinsurance-Global	174,032		17,608			—		191,640		25,866			18,025
Corporate and eliminations (1)	—		6,772			104,462		111,234		(59,945		)	(39,110		)
Net investment gains	—		—			109,168		109,168		109,168			70,959
Total	$	1,417,645	$	138,729		$	240,615	$	1,796,989	$	263,454		$	179,961
Three months ended June 30, 2013:
Insurance-Domestic	$	925,997	$	107,562		$	27,652	$	1,061,211	$	152,334		$	106,478
Insurance-International	180,192		13,171			—		193,363		12,583			9,092
Reinsurance-Global	176,326		23,036			—		199,362		24,752			17,681
Corporate and eliminations (1)	—		(32		)	84,000		83,968		(64,021		)	(38,782		)
Net investment gains	—		—			33,058		33,058		33,058			21,488
Total	$	1,282,515	$	143,737		$	144,710	$	1,570,962	$	158,706		$	115,957
Six months ended June 30, 2014:
Insurance-Domestic	$	2,045,252	$	221,210		$	55,751	$	2,322,213	$	379,040		$	259,870
Insurance-International	387,192		27,928			—		415,120		29,257			20,721
Reinsurance-Global	348,813		45,186			—		393,999		57,940			40,417
Corporate and eliminations (1)	—		13,116			197,525		210,641		(117,120		)	(76,623		)
Net investment gains	—		—			161,922		161,922		161,922			105,249
Total	$	2,781,257	$	307,440		$	415,198	$	3,503,895	$	511,039		$	349,634
Six months ended June 30, 2013:
Insurance-Domestic	$	1,810,375	$	205,359		$	54,388	$	2,070,122	$	293,684		$	205,886
Insurance-International	351,311		25,232			—		376,543		34,965			24,569
Reinsurance-Global	352,948		45,535			—		398,483		62,693			44,075
Corporate and eliminations (1)	—		3,540			176,016		179,556		(125,440		)	(76,426		)
Net investment gains	—		—			53,027		53,027		53,027			34,468
Total	$	2,514,634	$	279,666		$	283,431	$	3,077,731	$	318,929		$	232,572

___________

(1) Corporate and eliminations represent corporate revenues and expenses that are not allocated to business segments.

Identifiable assets by segment are as follows:



(In thousands)	June 30, 2014		December 31, 2013
Insurance-Domestic	$	15,565,600	$	15,247,807
Insurance-International	1,963,689		1,516,310
Reinsurance-Global	2,767,108		3,103,193
Corporate and eliminations	870,797		684,486
Total	$	21,167,194	$	20,551,796

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



	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
(In thousands)	2014		2013		2014		2013
Insurance-Domestic:
Other liability	$	362,074	$	307,444	$	701,707	$	603,032
Workers’ compensation	270,212		241,191		533,244		470,202
Short-tail lines	215,506		192,938		420,272		371,687
Commercial automobile	127,102		119,900		251,470		236,022
Professional liability	66,851		64,524		138,559		129,432
Total	1,041,745		925,997		2,045,252		1,810,375

Insurance-International:
Other liability	22,956		15,070		42,331		30,288
Workers’ compensation	17,241		21,746		34,566		44,635
Short-tail lines	106,428		84,301		202,702		156,424
Commercial automobile	29,649		32,392		57,242		67,031
Professional liability	25,594		26,683		50,351		52,933
Total	201,868		180,192		387,192		351,311

Reinsurance-Global:
Casualty	124,550		122,117		250,153		243,444
Property	49,482		54,209		98,660		109,504
Total	174,032		176,326		348,813		352,948

Total	$	1,417,645	$	1,282,515	$	2,781,257	$	2,514,634

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(22) Subsequent Event

On August 6, 2014, the Company issued $350 million of 4.75% senior notes due 2044.

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SAFE HARBOR STATEMENT

This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein, including statements related to our outlook for the industry and for our performance for the year 2014 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 impact of significant competition, including new alternative entrants to the industry; the long-tail and potentially volatile nature of the insurance and reinsurance business; product demand and pricing; claims development and the process of estimating reserves; investment risks, including those of our portfolio of fixed maturity securities and investments in equity securities, including investments in financial institutions, municipal bonds, mortgage-backed securities, loans receivable, investment funds, real estate, merger arbitrage and private equity investments; the effects of emerging claim and coverage issues; the uncertain nature of damage theories and loss amounts; natural and man-made catastrophic losses, including as a result of terrorist activities; general economic and market activities, including inflation, interest rates, and volatility in the credit and capital markets; the impact of the conditions in the financial markets and the global economy, and the potential effect of legislative, regulatory, accounting or other initiatives taken in response to it, on our results and financial condition; foreign currency and political risks relating to our international operations; our ability to attract and retain key personnel and qualified employees; continued availability of capital and financing; the success of our new ventures or acquisitions and the availability of other opportunities; the availability of reinsurance; our retention under the Terrorism Risk Insurance Act of 2002, as amended ("TRIA"), and the potential expiration of TRIA; the ability of our reinsurers to pay reinsurance recoverables owed to us; other legislative and regulatory developments, including those related to business practices in the insurance industry; credit risk related to our policyholders, independent agents and brokers; changes in the ratings assigned to us or our insurance company subsidiaries by rating agencies; the availability of dividends from our insurance company subsidiaries; potential difficulties with technology and/or data security; the effectiveness of our controls to ensure compliance with guidelines, policies and legal and regulatory standards; and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission. These risks and uncertainties could cause our actual results for the year 2014 and beyond to differ materially from those expressed in any forward-looking statement we make. Any projections of growth in our revenues would not necessarily result in commensurate levels of earnings. Our future financial performance is dependent upon factors discussed 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. Except to the extent required by applicable laws, the Company does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

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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 three business segments: Insurance-Domestic, Insurance-International and Reinsurance-Global. 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.

An important part of our strategy is to form new operating units to capitalize on various business opportunities. Since 2006, the Company formed 24 new operating units that are focused on important parts of the economy in the U.S., including healthcare, energy and agriculture, and on growing international markets, including Scandinavia, Australia, the Asia-Pacific region and South America.

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

From 2005 through 2010, the property casualty insurance market was very competitive and insurance rates decreased across most business lines. Although prices have generally increased since the beginning of 2011, the current market is increasingly competitive and price levels for certain lines of business remain below the prices required for the Company to achieve its long-term return objectives. Part of the Company's strategy is to selectively reduce its business in areas where it believes returns are not adequate. Price changes are reflected in the Company’s results over time as premiums are earned.

The Company’s profitability is also affected by its investment income and investment gains. 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, as well as the credit quality and duration of the securities. Returns available on fixed maturity investments are at historically low levels. The Company's investment income has been negatively impacted by the low fixed maturity investment returns, and will be further impacted if investment returns remain at this level.

The Company also increasingly invests in equity securities, merger arbitrage, private equity investments, investment funds, loans receivable and real estate. The Company's investments in investment funds have experienced, and the Company expects to continue to experience, greater fluctuations in investment income.

Critical Accounting Estimates

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

Reserves for Losses and Loss Expenses. To recognize liabilities for unpaid losses, either known or unknown, insurers establish reserves, which is a balance sheet account representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. Estimates and assumptions relating to reserves for losses and loss expenses are based on complex and subjective judgments, often including the interplay of specific uncertainties with related accounting and actuarial measurements. Such estimates are also susceptible to change as significant periods of time may elapse between the occurrence of an insured loss, the report of the loss to the insurer, the ultimate determination of the cost of the loss and the insurer’s payment of that loss.

In general, when a claim is reported, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment based upon known information about the claim at that time. The estimate represents an informed judgment based on general reserving practices and reflects the experience and knowledge of the claims personnel regarding the nature and value of the specific type of claim. Reserves are also established on an aggregate basis to provide for losses incurred but

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not reported (“IBNR”) to the insurer, potential inadequacy of case reserves and the estimated expenses of settling claims, including legal and other fees and general expenses of administrating the claims adjustment process. Reserves are established based upon the then current legal interpretation of coverage provided.

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

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 trends in claims severity and frequency, judicial theories of liability and other factors, including the actions of third parties which are beyond the Company’s control. These variables are affected by external and internal events, such as inflation and economic volatility, judicial and litigation trends, reinsurance coverage, legislative changes and claim handling and reserving practices, which make it more difficult to accurately predict claim costs. The inherent uncertainties of estimating reserves are greater for certain types of liabilities where long periods of time elapse before a definitive determination of liability is made. Because setting reserves is inherently uncertain, the Company cannot provide assurance that its current reserves will prove adequate in light of subsequent events.

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

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

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

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

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

The key assumptions used in calculating the most recent estimate of the loss reserves are reviewed each quarter and adjusted, to the extent necessary, to reflect historical changes, current trends and other factors observed. If the actual level of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s estimate. The following table reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity, relative to our assumptions, on our loss estimate for claims occurring in 2013:



(In thousands)	Frequency (+/-)
Severity (+/-)	1%		5%		10%
1%	$	64,750	$	194,893	$	357,572
5%	194,893		330,191		499,313
10%	357,572		499,313		676,488

Our net reserves for losses and loss expenses of approximately $9 billion as of June 30, 2014 relate to multiple accident years. Therefore, the impact of changes in frequency or severity for more than one accident year could be higher or lower than the amounts reflected above.

Approximately $1.5 billion, or 17%, of the Company’s net loss reserves as of June 30, 2014 relate to the Reinsurance-Global segment. There is a higher degree of uncertainty and greater variability regarding estimates of assumed loss reserves because those estimates are based, in part, upon information received from ceding companies. If information received from ceding companies is not timely or correct, the Company’s estimate of ultimate losses may not be accurate. Furthermore, due to delayed reporting of claim information by ceding companies, the claim settlement tail for assumed reinsurance is extended. Management considers the impact of delayed reporting in its selection of assumed loss development factors.

Information received from ceding companies is used to set initial expected loss ratios, to establish case reserves and to estimate reserves for incurred but not reported losses on assumed reinsurance business. This information, which is generally provided through reinsurance intermediaries, is gathered through the underwriting process and from periodic claim reports and other correspondence with ceding companies. The Company performs underwriting and claim audits of selected ceding companies to determine the accuracy and completeness of information provided to the Company. The information received from the ceding companies is supplemented by the Company’s own loss development experience with similar lines of business as well as industry loss trends and loss development benchmarks.

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Following is a summary of the Company’s reserves for losses and loss expenses by business segment as of June 30, 2014 and December 31, 2013:



(In thousands)	June 30,		December 31,
	2014		2013
Insurance-Domestic	$	6,665,943	$	6,493,401
Insurance-International	726,588		592,709
Reinsurance-Global	1,493,163		1,597,687
Net reserves for losses and loss expenses	8,885,694		8,683,797
Ceded reserves for losses and loss expenses	1,370,525		1,397,144
Gross reserves for losses and loss expenses	$	10,256,219	$	10,080,941

Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of June 30, 2014 and December 31, 2013:



(In thousands)	Reported Case Reserves		Incurred But Not Reported		Total
June 30, 2014
Other liability	$	969,646	$	1,815,023	$	2,784,669
Workers’ compensation (1)	1,543,128		1,204,866		2,747,994
Professional liability	328,708		406,562		735,270
Commercial automobile	267,945		204,983		472,928
Short-tail lines	336,797		314,873		651,670
Total primary	3,446,224		3,946,307		7,392,531
Reinsurance (1)	608,590		884,573		1,493,163
Total	$	4,054,814	$	4,830,880	$	8,885,694
December 31, 2013
Other liability	$	937,168	$	1,852,779	$	2,789,947
Workers’ compensation (1)	1,462,849		1,206,244		2,669,093
Professional liability	320,579		344,232		664,811
Commercial automobile	267,701		205,404		473,105
Short-tail lines	258,459		230,696		489,155
Total primary	3,246,756		3,839,355		7,086,111
Reinsurance (1)	679,108		918,578		1,597,686
Total	$	3,925,864	$	4,757,933	$	8,683,797

(1) Reserves for excess and assumed workers’ compensation business are net of an aggregate net discount of $816 million

and $837 million as of June 30, 2014 and December 31, 2013, respectively.

The Company evaluates reserves for losses and loss adjustment expenses on a quarterly basis. Changes in estimates of prior year losses are reported when such changes are made. 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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Certain of the Company's insurance and reinsurance contracts are loss sensitive, whereby the Company collects more or less premiums based on the level of loss activity. For those contracts, changes in loss and loss adjustment expenses for prior years may be offset by additional or return premiums. Net prior year development for each of the six months ended June 30, 2014 and 2013 are as follows:



(In thousands)	2014		2013
Decrease in prior year loss reserves	$	43,225	$	42,015
Increase in prior year earned premiums	6,003		—
Net favorable prior year development	$	49,228	$	42,015

Net favorable prior year development was approximately $49 million in the first six months of 2014 compared with $42 million in 2013. In 2014, the domestic segment reported favorable reserve development of $54 million, which was partially offset by unfavorable development of $5 million for the international segment.

Favorable development in 2014 for the domestic segment was driven primarily by excess and surplus lines casualty business for accident years 2007 through 2013. Reported losses for these years continue to be below our initial expectations at the time the business was written, largely as a result of persistent improvement in claim frequency trends. As these accident years have matured, the weighting of actuarial methods has shifted from methods based on initial expected losses to methods based on actual reported losses. We believe the favorable claim frequency trends during this time period for excess and surplus casualty business is due to changes in the mix of business written and to the general slowdown in the economy. Unfavorable development in 2014 for the international segment was driven primarily by professional liability business (accident years 2009-2013) and surety business (accident year 2013) in Europe, which experienced a greater than expected number of large losses.

Reserve Discount - The Company discounts its liabilities for excess and assumed workers’ compensation business because of the long period of time over which losses are paid. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from the Company’s loss payout experience. For non-proportional business, reserves for losses and loss expenses have been discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. For proportional business, reserves for losses and loss expenses have been discounted at the statutory rate of 2.2%. As of June 30, 2014, the aggregate blended discount rates ranged from 2.1% to 6.5%, with a weighted average discount rate of 4.2%. The aggregate net discount, after reflecting the effects of ceded reinsurance, was $816 million and $837 million as of June 30, 2014 and December 31, 2013, respectively.

Assumed Reinsurance Premiums. The Company estimates the amount of assumed reinsurance premiums that it will receive under treaty reinsurance agreements at the inception of the contracts. These premium estimates are revised as the actual amount of assumed premiums is reported to the Company by the ceding companies. As estimates of assumed premiums are made or revised, the related amount of earned premiums, commissions and incurred losses associated with those premiums are recorded. Estimated assumed premiums receivable were approximately $73 million and $69 million at June 30, 2014 and December 31, 2013, respectively. The assumed premium estimates are based upon terms set forth in reinsurance agreements, information received from ceding companies during the underwriting and negotiation of agreements, reports received from ceding companies and discussions and correspondence with reinsurance intermediaries. The Company also considers its own view of market conditions, economic trends and experience with similar lines of business. These premium estimates represent management’s best estimate of the ultimate amount of premiums to be received under its assumed reinsurance agreements.

Other-Than-Temporary Impairments (OTTI) of Investments. The cost of securities is adjusted where appropriate to include a provision for decline in value which is considered to be other-than-temporary. An other-than-temporary decline is considered to occur in investments where there has been a sustained reduction in fair value and where the Company does not expect the fair value to recover prior to the time of sale or maturity. Since equity securities do not have a contractual cash flow or maturity, the Company considers whether the price of an equity security is expected to recover within a reasonable period of time.

The Company classifies its fixed maturity securities and preferred stocks by credit rating, primarily based on ratings assigned by credit rating agencies. For purposes of classifying securities with different ratings, the Company uses the lower rating if two ratings were assigned and the middle rating if three ratings were assigned, unless the Company’s own analysis indicates that the lower rating is more appropriate. Securities that are not rated by a rating agency are evaluated and classified by the Company on a case-by-case basis.

Fixed Maturity Securities – For securities that we intend to sell or, more likely than not, would be required to sell, a decline in value below amortized cost is considered to be OTTI. The amount of OTTI is equal to the difference between

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amortized cost and fair value at the balance sheet date. For securities that we do not intend to sell or expect to be required to sell, a decline in value below amortized cost is considered to be an OTTI if we do not expect to recover the entire amortized cost basis of a security (i.e., the present value of cash flows expected to be collected is less than the amortized cost basis of the security).

The portion of the decline in value considered to be a credit loss (i.e., the difference between the present value of cash flows expected to be collected and the amortized cost basis of the security) is recognized in earnings. The portion of the decline in value not considered to be a credit loss (i.e., the difference in the present value of cash flows expected to be collected and the fair value of the security) is recognized in other comprehensive income.

Impairment assessments for structured securities, including mortgage-backed securities and asset-backed securities, collateralized debt obligations and corporate debt, are generally evaluated based on the performance of the underlying collateral under various economic and default scenarios that may involve subjective judgments and estimates by management. Modeling these securities involves various factors, such as projected default rates, the nature and realizable value of the collateral, if any, the ability of the issuer to make scheduled payments, historical performance and other relevant economic and performance factors. If an OTTI determination is made, a discounted cash flow analysis is used to ascertain the amount of the credit impairment.

The following table provides a summary of fixed maturity securities in an unrealized loss position as of June 30, 2014:



($ in thousands)	Number of Securities	Aggregate Fair Value		Unrealized Loss
Unrealized loss less than 20% of amortized cost	377	$	2,177,100	$	62,410
Unrealized loss of 20% or greater of amortized cost:
Twelve months and longer	5	1,567		745
Total	382	$	2,178,667	$	63,155

A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at June 30, 2014 is presented in the table below.



($ in thousands)	Number of Securities	Aggregate Fair Value		Gross Unrealized Loss
Mortgage-backed securities	11	$	44,646	$	1,772
Corporate	8	18,070		633
Foreign government	3	21,374		1,463
Total	22	$	84,090	$	3,868

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

Preferred Stocks – At June 30, 2014, there were two preferred stocks in an unrealized loss position, with an aggregate fair value of $26 million and a gross unrealized loss of $3 million. Based upon management's view of the underlying value of these securities, the Company does not consider these preferred stocks to be OTTI.

Common Stocks – At June 30, 2014, the Company did not own any common stocks in an unrealized loss position.

Loans Receivable – The Company monitors the performance of its loans receivable, including current market conditions for each loan and the ability to collect principal and interest. For loans where the Company determines it is probable that the contractual terms will not be met, an analysis is performed and a valuation reserve is established, if necessary, with a charge to earnings. Loans receivable are reported net of a valuation reserve of $3 million at June 30, 2014 and $2 million at December 31, 2013.

The Company monitors the performance of its loans receivable and assesses the ability of each borrower to pay principal and interest based upon loan structure, underlying property values, cash flow and related financial and operating performance

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of the property and market conditions. Loans receivable with a potential for default are further assessed using discounted cash flow analysis and comparable cost and sales methodologies, if appropriate.

Fair Value Measurements. The Company’s fixed maturity and equity securities available for sale and its trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available. The fair value of the vast majority of the Company’s portfolio is based on observable data (other than quoted prices) and, accordingly, is classified as Level 2.

In classifying particular financial securities in the fair value hierarchy, the Company uses its judgment to determine whether the market for a security is active and whether significant pricing inputs are observable. The Company determines the existence of an active market by assessing whether transactions occur with sufficient frequency and volume to provide reliable pricing information. The Company determines whether inputs are observable based on the use of such information by pricing services and external investment managers, the uninterrupted availability of such inputs, the need to make significant adjustments to such inputs and the volatility of such inputs over time. If the market for a security is determined to be inactive or if significant inputs used to price a security are determined to be unobservable, the security is categorized in Level 3 of the fair value hierarchy.

Because many fixed maturity securities do not trade on a daily basis, the Company utilizes pricing models and processes which may include benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Market inputs used to evaluate securities include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Quoted prices are often unavailable for recently issued securities 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 is a summary of pricing sources for the Company's fixed maturity securities available for sale as of June 30, 2014:



($ in thousands)	Carrying Value		Percent of Total
Pricing source:
Independent pricing services	$	10,610,835	88.5	%
Syndicate manager	78,155		0.7
Directly by the Company based on:
Observable data	1,260,671		10.5
Cash flow model	37,042		0.3
Total	$	11,986,703	100.0	%

Independent pricing services - The vast majority of the Company’s fixed maturity securities available for sale were priced by independent pricing services (generally one U.S. pricing service plus additional pricing services with respect to a limited number of foreign securities held by the Company). The prices provided by the independent pricing services are generally based on observable market data in active markets (e.g., broker quotes and prices observed for comparable securities). The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company reviews the prices provided by pricing services for reasonableness based upon current trading levels for similar securities. If the prices appear unusual to the Company, they are re-examined and the value is either confirmed or revised. In addition, the Company periodically performs independent price tests of a sample of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of June 30, 2014, 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.

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Syndicate manager – The Company has a 15% participation in a Lloyd’s syndicate, and the Company’s share of the securities owned by the syndicate is priced by the syndicate’s manager. The majority of the securities are liquid, short duration fixed maturity securities. The Company reviews the syndicate manager’s pricing methodology and audited financial statements and holds discussions with the syndicate manager as necessary to confirm its understanding and agreement with security prices. Based upon the Company’s review of the methodologies used by the syndicate manager, these securities were classified as Level 2.

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

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

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Results of Operations for the Six Months Ended June 30, 2014 and 2013

Business Segment Results

Following is a summary of gross and net premiums written, net premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and United States Generally Accepted Accounting Principles (“GAAP”) combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the six months ended June 30, 2014 and 2013. The GAAP combined ratio represents a measure of underwriting profitability, excluding investment income. A GAAP combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.



($ in thousands)	2014			2013
Insurance-Domestic:
Gross premiums written	$	2,694,566		$	2,365,908
Net premiums written	2,250,224			1,953,964
Net premiums earned	2,045,252			1,810,375
Loss ratio	60.4		%	62.7		%
Expense ratio	32.4		%	32.8		%
GAAP combined ratio	92.8		%	95.5		%
Insurance-International:
Gross premiums written	$	542,386		$	493,313
Net premiums written	448,443			406,580
Net premiums earned	387,192			351,311
Loss ratio	60.0		%	58.5		%
Expense ratio	39.4		%	38.4		%
GAAP combined ratio	99.4		%	96.9		%
Reinsurance-Global:
Gross premiums written	$	340,716		$	390,336
Net premiums written	316,989			358,320
Net premiums earned	348,813			352,948
Loss ratio	64.0		%	59.4		%
Expense ratio	32.4		%	35.7		%
GAAP combined ratio	96.4		%	95.1		%
Consolidated:
Gross premiums written	$	3,577,668		$	3,249,557
Net premiums written	3,015,656			2,718,864
Net premiums earned	2,781,257			2,514,634
Loss ratio	60.8		%	61.6		%
Expense ratio	33.4		%	34.0		%
GAAP combined ratio	94.2		%	95.6		%

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Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the six months ended June 30, 2014 and 2013.



(In thousands, except per share data)	2014		2013
Net income to common stockholders	$	349,634	$	232,572
Weighted average diluted shares	134,323		141,257
Net income per diluted share	$	2.60	$	1.65

The Company reported net income of $350 million in 2014 compared to $233 million in 2013. The 50% increase in net income was primarily due to increases in after-tax net investment gains of $71 million, after-tax underwriting income of $35 million and after-tax net investment income of $11 million. The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2014 and 2013.

Premiums. Gross premiums written were $3,578 million in 2014, an increase of 10% from $3,250 million in 2013. The growth was due to a combination of rate increases and increased exposures. Average renewal premium rates (adjusted for change in exposures) increased 4.2% in 2014 and 7.2% in 2013. However, overall loss costs are also increasing, and current market price levels for certain lines of business remain below the prices required for the Company to achieve its long-term return objectives.

A summary of gross premiums written in 2014 compared with 2013 by line of business within each business segment follows:


•	Insurance-Domestic gross premiums increased 14% to $2,695 million in 2014 from $2,366 million in 2013. Gross premiums increased $114 million (17%) for workers' compensation, $102 million (14%) for other liability, $59 million (11%) for short-tail lines, $33 million (19%) for professional liability and $21 million (8%) for commercial auto.

•

Insurance-International gross premiums increased 10% to $542 million in 2014 from $493 million in 2013. Gross premiums increased $62 million (23%) for short-tail lines and $8 million (19%) for other liability, and decreased by $10 million (23%) for workers' compensation, $6 million (8%) for commercial auto and $5 million (9%) for professional liability. In local currency terms, gross premiums increased 16%.


•	Reinsurance-Global gross premiums decreased 13% to $341 million in 2014 from $390 million in 2013, as we faced increasingly competitive conditions. Gross premiums written decreased $24 million (9%) for casualty lines and $25 million (19%) for property lines.

Net premiums written were $3,016 million in 2014, an increase of 11% from $2,719 million in 2013. Ceded reinsurance premiums as a percentage of gross written premiums were 16% in 2014 and in 2013.

Premiums earned increased 11% to $2,781 million in 2014 from $2,515 million in 2013. Insurance premiums (including the impact of rate changes) are generally earned evenly over the policy term, and accordingly we expect recent rate increases will be earned over the upcoming quarters. Premiums earned in 2014 are related to business written during both 2014 and 2013. Audit premiums were $60 million in 2014 compared with $57 million in 2013.

Net Investment Income. Following is a summary of net investment income for the six months ended June 30, 2014 and 2013:



	Amount						Average Annualized Yield
(In thousands)	2014			2013			2014		2013
Fixed maturity securities, including cash and cash equivalents and loans receivable	$	214,658		$	229,039		3.4	%	3.7	%
Investment funds	76,155			33,510			15.2		8.5
Arbitrage trading account	12,461			8,773			4.6		3.6
Real estate	6,165			6,257			1.8		2.1
Equity securities available for sale	4,049			5,881			4.0		3.7
Gross investment income	313,488			283,460			4.1		3.9
Investment expenses	(6,048		)	(3,794		)
Total	$	307,440		$	279,666		4.0		3.8

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Net investment income increased 10% to $307 million in 2014 from $280 million in 2013 due to an increase in income from investment funds partially offset by a decrease in income from fixed maturity securities, due to the lower interest rate environment and to a shorter portfolio duration. The increase in investment income from investment funds was primarily related to funds that invest in real estate, energy, aviation and railcars. The average annualized yield for fixed maturity securities declined from 3.7% to 3.4% due to lower long-term reinvestment yields available in the market. Average invested assets, at cost (including cash and cash equivalents) were $15.2 billion in 2014 and $14.7 billion in 2013.

Insurance Service Fees. The Company is a servicing carrier of workers' compensation assigned risk plans for 20 states and provides insurance program management services to self-insureds, captives, governmental entities, risk retention groups, and insurance companies. Service fees were $56 million in 2014, up from $54 million in 2013, primarily as a result of an increase in fees from assigned risk plans.

Net Realized Gains on Investment Sales. The Company buys and sells securities on a regular basis in order to maximize its total return on investments. Decisions to sell securities are based on management’s view of the underlying fundamentals of specific securities as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net realized gains on investment sales were $162 million in 2014 compared with $53 million in 2013. The gains in 2014 were primarily related to the sale of a commercial office building in London, England, which generated an $86 million gain.

Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were derived from aviation-related businesses that provide services to the general aviation market, including fuel and line service, aircraft sales and maintenance, avionics and engineering services and parts fabrication. Revenues from wholly-owned investees increased to $197 million in 2014 from $176 million in 2013 primarily due to higher aircraft and aircraft parts sales.

Losses and Loss Expenses. Losses and loss expenses increased to $1,690 million in 2014 from $1,550 million in 2013. The consolidated loss ratio was 60.8% in 2014 and 61.6% in 2013. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $54 million in 2014 compared with $39 million in 2013, an increase of 0.4 loss ratio points. Favorable prior year reserve development (net of premium offsets) was $49 million in 2014 compared with $42 million in 2013, a difference of 0.1 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development decreased 1.1 points to 60.6% in 2014 from 61.7% in 2013. A summary of loss ratios in 2014 compared with 2013 by business segment follows:

•

Insurance-Domestic - The loss ratio of 60.4% in 2014 was 2.3 points lower than the loss ratio of 62.7% in 2013. Catastrophe losses were $51 million in 2014 compared with $30 million in 2013, an increase of 0.8 loss ratio points. Favorable prior year reserve development was $54 million in 2014 compared with $28 million in 2013. The loss ratio excluding catastrophe losses and prior year reserve development decreased 1.9 points to 60.6% in 2014 from 62.5% in 2013.

•

Insurance-International - The loss ratio of 60.0% in 2014 was 1.5 points higher than the loss ratio of 58.5% in 2013. Catastrophe losses were $2 million in 2014 compared with $3 million in 2013, a decrease of 0.6 loss ratio points. Adverse prior year reserve development was $5 million in 2014 compared with $2 million in 2013, a difference of 0.8 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development increased 1.3 points to 58.3% in 2014 from 57.0% in 2013.

•

Reinsurance-Global - The loss ratio of 64.0% in 2014 was 4.6 points higher than the loss ratio of 59.4% in 2013. Catastrophe losses were $1 million in 2014 compared with $6 million in 2013, a decrease of 1.2 loss ratio points. There was no adverse prior year reserve development in 2014 compared with favorable development of $16 million in 2013, a difference of 4.7 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development increased 1.1 points to 63.6% in 2014 from 62.5% in 2013.

Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses:



(In thousands)	2014		2013
Underwriting expenses	$	928,434	$	855,484
Service expenses	45,864		45,441
Debt extinguishment costs	—		6,709
Net foreign currency (gains) losses	1,659		(4,771		)
Other costs and expenses	73,359		73,027
Total	$	1,049,316	$	975,890

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Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Underwriting expenses increased 9% compared with an increase in net premiums earned of 11%. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 33.4% in 2014 down from 34.0% in 2013, primarily due to higher overall premiums and to the impact of expense reductions for the reinsurance segment. We expect our expense ratio to further improve if insurance prices continue to increase at current levels.

Service expenses, which represent the costs associated with the fee-based businesses, were $46 million in 2014 and $45 million in 2013.

Foreign currency gains and losses result from transactions denominated in a currency other than a company's operating functional currency. Net foreign currency losses were $2 million in 2014, and net foreign currency gains were $5 million in 2013.

Other costs and expenses represent general and administrative expenses of the parent company and other expenses not allocated to business segments, including the cost of certain long-term incentive plans. Other costs and expenses were $73 million in 2014 and 2013.

Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees represent costs associated with aviation-related businesses that include cost of goods sold related to aircraft and other sales, labor and equipment costs related to repairs and other services and general and administrative expenses. Expenses from wholly-owned investees were $193 million in 2014 compared to $170 million in 2013.

Interest Expense. Interest expense was $61 million in 2014 compared with $62 million in 2013. The Company repaid $200 million of 5.875% senior notes that matured in February 2013. In May 2013, the Company issued $350 million of 5.625% subordinated debentures due 2053 and prepaid $250 million of 6.750% subordinated debentures that were due in 2045. In August 2014, the Company issued $350 million of 4.75% senior notes due 2044, the proceeds of which it expects to use to repay at maturity its $200 million of senior notes due May 15, 2015, with the balance for general corporate purposes.

Income Taxes. The effective income tax rate was 32% in 2014 compared to 27% in 2013. The effective income tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income. As a result of higher income from underwriting activities and from realized gains, tax exempt investment income comprised a lower portion of the 2014 pre-tax income. Therefore, tax-exempt income had a lesser impact on the effective tax rate for 2014 compared with 2013.

The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $90 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 $7 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.

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Results of Operations for the Three Months Ended June 30, 2014 and 2013

Business Segment Results

Following is a summary of gross and net premiums written, net premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and United States Generally Accepted Accounting Principles (“GAAP”) combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the three months ended June 30, 2014 and 2013. The GAAP combined ratio represents a measure of underwriting profitability, excluding investment income. A GAAP combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.



($ in thousands)	2014			2013
Insurance-Domestic:
Gross premiums written	$	1,351,624		$	1,186,186
Net premiums written	1,123,843			967,784
Net premiums earned	1,041,745			925,997
Loss ratio	60.9		%	62.9		%
Expense ratio	32.3		%	32.5		%
GAAP combined ratio	93.2		%	95.4		%
Insurance-International:
Gross premiums written	$	265,200		$	241,738
Net premiums written	222,622			201,445
Net premiums earned	201,868			180,192
Loss ratio	60.7		%	61.0		%
Expense ratio	38.8		%	38.9		%
GAAP combined ratio	99.5		%	99.9		%
Reinsurance-Global:
Gross premiums written	$	155,577		$	190,012
Net premiums written	143,311			172,669
Net premiums earned	174,032			176,326
Loss ratio	63.4		%	63.9		%
Expense ratio	31.9		%	35.1		%
GAAP combined ratio	95.3		%	99.0		%
Consolidated:
Gross premiums written	$	1,772,401		$	1,617,936
Net premiums written	1,489,776			1,341,898
Net premiums earned	1,417,645			1,282,515
Loss ratio	61.2		%	62.8		%
Expense ratio	33.2		%	33.8		%
GAAP combined ratio	94.4		%	96.6		%

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Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the three months ended June 30, 2014 and 2013.



(In thousands, except per share data)	2014		2013
Net income to common stockholders	$	179,961	$	115,957
Weighted average diluted shares	133,304		141,274
Net income per diluted share	$	1.35	$	0.82

The Company reported net income of $180 million in 2014 compared to $116 million in 2013. The 55% increase in net income was primarily due to increases in after-tax net investment gains of $49 million and after-tax underwriting income of $23 million, partially offset by a decrease in after-tax net investment income of $6 million. The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2014 and 2013.

Premiums. Gross premiums written were $1,772 million in 2014, an increase of 10% from $1,618 million in 2013. The growth was due to a combination of rate increases and increased exposures. Average renewal premium rates (adjusted for change in exposures) increased 3.5% in 2014 and 6.2 % in 2013. However, overall loss costs are also increasing, and current market price levels for certain lines of business remain below the prices required for the Company to achieve its long-term return objectives.

A summary of gross premiums written in 2014 compared with 2013 by line of business within each business segment follows:


•	Insurance-Domestic gross premiums increased 14% to $1,352 million in 2014 from $1,186 million in 2013. Gross premiums increased $59 million (20%) for workers' compensation, $52 million (13%) for other liability, $28 million (10%) for short-tail lines, $16 million (17%) for professional liability and $11 million (9%) for commercial auto.

•

Insurance-International gross premiums increased 10% to $265 million in 2014 from $242 million in 2013. Gross premiums increased $29 million (22%) for short-tail lines and $4 million (20%) for other liability, and decreased by $5 million (21%) for workers' compensation, $2 million (5%) for commercial auto and $3 million (10%) for professional liability. In local currency terms, gross premiums increased 14%.


•	Reinsurance-Global gross premiums decreased 18% to $156 million in 2014 from $190 million in 2013, as we faced increasingly competitive conditions. Gross premiums written decreased $18 million (15%) for casualty lines and $16 million (24%) for property lines.

Net premiums written were $1,490 million in 2014, an increase of 11% from $1,342 million in 2013. Ceded reinsurance premiums as a percentage of gross written premiums were 16% in 2014 and 17% in 2013. The decrease in the percentage of business ceded was due to changes in reinsurance terms and costs.

Premiums earned increased 11% to $1,418 million in 2014 from $1,283 million in 2013. Insurance premiums (including the impact of rate changes) are generally earned evenly over the policy term, and accordingly we expect recent rate increases will be earned over the upcoming quarters. Premiums earned in 2014 are related to business written during both 2014 and 2013. Audit premiums were $29 million in both 2014 and 2013.

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Net Investment Income. Following is a summary of net investment income for the three months ended June 30, 2014 and 2013:



	Amount						Average Annualized Yield
(In thousands)	2014			2013			2014		2013
Fixed maturity securities, including cash and cash equivalents and loans receivable	$	107,760		$	111,203		3.3	%	3.6	%
Investment funds	22,356			22,576			9.1		11.2
Arbitrage trading account	6,942			4,990			4.6		3.5
Real estate	3,063			3,116			1.9		2.1
Equity securities available for sale	2,103			3,634			4.4		4.4
Gross investment income	142,224			145,519			3.7		4.0
Investment expenses	(3,495		)	(1,782		)
Total	$	138,729		$	143,737		3.6		3.9

Net investment income decreased 3% to $139 million in 2014 from $144 million in 2013 due to an decrease in income from fixed maturity securities, due to the lower interest rate environment and to a shorter portfolio duration. The average annualized yield for fixed maturity securities declined from 3.6% to 3.3% due to lower long-term reinvestment yields available in the market. Average invested assets, at cost (including cash and cash equivalents) were $15.3 billion in 2014 and $14.7 billion in 2013.

Net Realized Gains on Investment Sales. The Company buys and sells securities on a regular basis in order to maximize its total return on investments. Decisions to sell securities are based on management’s view of the underlying fundamentals of specific securities as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net realized gains on investment sales were $109 million in 2014 compared with $33 million in 2013. The gains in 2014 were primarily related to the sale of a commercial office building in London, England, which generated a gain of $86 million.

Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were derived from aviation-related businesses that provide services to the general aviation market, including fuel and line service, aircraft sales and maintenance, avionics and engineering services and parts fabrication. Revenues from wholly-owned investees increased to $104 million in 2014 from $84 million in 2013 primarily due to higher aircraft and aircraft parts sales.

Losses and Loss Expenses. Losses and loss expenses increased to $868 million in 2014 from $805 million in 2013. The consolidated loss ratio was 61.2% in 2014 and 62.8% in 2013. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $40 million in 2014 compared with $34 million in 2013, an increase of 0.1 loss ratio points. Favorable prior year reserve development (net of premium offsets) was $24 million in 2014 compared with $18 million in 2013, a difference of 0.2 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development decreased 1.5 points to 60.1% in 2014 from 61.6% in 2013. A summary of loss ratios in 2014 compared with 2013 by business segment follows:

•

Insurance-Domestic - The loss ratio of 60.9% in 2014 was 2.0 points lower than the loss ratio of 62.9% in 2013. Catastrophe losses were $38 million in 2014 compared with $26 million in 2013. Favorable prior year reserve development was $26 million in 2014 compared with $24 million in 2013. The loss ratio excluding catastrophe losses and prior year reserve development decreased 2.7 points to 59.8% in 2014 from 62.5% in 2013.

•

Insurance-International - The loss ratio of 60.7% in 2014 was 0.3 points lower than the loss ratio of 61.0% in 2013. Catastrophe losses were $1 million in 2014 compared with $3 million in 2013, an decrease of 1.6 loss ratio points. Adverse prior year reserve development was $3 million in 2014 compared with $6 million in 2013, a difference of 1.6 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development increased 2.9 points to 59.3% in 2014 from 56.4% in 2013.


•	Reinsurance-Global - The loss ratio of 63.4% in 2014 was 0.5 points lower than the loss ratio of 63.9% in 2013. Catastrophe losses were $1 million in 2014 compared with $5 million in 2013 a difference of 1.7 loss ratio points.

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Adverse prior year reserve development was $1 million in 2014 compared with none in 2013. The loss ratio excluding catastrophe losses and prior year reserve development increased 1.2 points to 62.8% in 2014 from 61.6% in 2013.

Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses:



(In thousands)	2014		2013
Underwriting expenses	$	470,296	$	433,271
Service expenses	23,607		23,136
Debt extinguishment costs	—		6,709
Net foreign currency (gains) losses	1,993		(6,718		)
Other costs and expenses	38,254		37,888
Total	$	534,150	$	494,286

Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Underwriting expenses increased 9% compared with an increase in net premiums earned of 11%. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 33.2% in 2014, down from 33.8% in 2013, primarily due to the higher overall premiums and to the impact of expense reductions for the reinsurance segment. We expect our expense ratio to further improve if insurance prices continue to increase at current levels.

Service expenses, which represent the costs associated with the fee-based businesses, were $24 million in 2014 and $23 million 2013.

Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees represent costs associated with aviation-related businesses that include cost of goods sold related to aircraft and other sales, labor and equipment costs related to repairs and other services and general and administrative expenses. Expenses from wholly-owned investees were $101 million in 2014 compared to $81 million in 2013.

Interest Expense. Interest expense was $30 million in 2014 compared with $31 million in 2013. In May 2013, the Company issued $350 million of 5.625% subordinated debentures due 2053 and prepaid $250 million of 6.750% subordinated debentures that were due in 2045.

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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 is adequate to meet its 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). The average duration of the fixed maturity portfolio was 3.1 years at June 30, 2014 down from 3.3 years at December 31, 2013. The Company’s fixed maturity investment portfolio and investment-related assets as of June 30, 2014 were as follows:



($ in thousands)	Carrying Value		Percent of Total
Fixed maturity securities:
U.S. government and government agencies	$	867,127	5.7	%
State and municipal:
Special revenue	2,219,350		14.5
State general obligation	715,219		4.7
Pre-refunded (1)	604,868		4.0
Corporate backed	443,660		2.9
Local general obligation	308,599		2.0
Total state and municipal	4,291,696		28.1
Mortgage-backed securities:
Agency	1,005,318		6.6
Residential-Prime	163,031		1.1
Residential-Alt A	82,798		0.5
Commercial	80,387		0.5
Total mortgage-backed securities	1,331,534		8.7
Corporate:
Industrial	1,564,582		10.2
Asset-backed	1,608,080		10.5
Financial	1,164,931		7.6
Utilities	194,196		1.3
Other	97,533		0.6
Total corporate	4,629,322		30.2
Foreign government and foreign government agencies	968,376		6.5
Total fixed maturity securities	12,088,055		79.2
Equity securities
Common stocks	103,527		0.7
Preferred stocks	153,532		1.0
Total equity securities	257,059		1.7

Investment funds	984,836		6.5
Real estate	530,239		3.5
Arbitrage trading account	732,279		4.8
Loans receivable	655,691		4.3
Total investments	$	15,248,159	100.0	%

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(1)	Pre-refunded securities are securities for which an escrow account has been established to fund the remaining payments of principal and interest through maturity. Such escrow accounts are funded almost exclusively with U.S. Treasury and U.S. government agency securities.

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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.

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

At June 30, 2014, investments in foreign government fixed maturity securities were as follows:



(In thousands)	Carrying Value
Australia	$	258,187
United Kingdom	188,303
Canada	171,353
Argentina	114,038
Brazil	68,431
Germany	66,485
Norway	52,320
Supranational (1)	39,105
Singapore	6,768
Uruguay	3,386
Total	$	968,376

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(1) Supranational represents investments in the North American Development Bank, European Investment Bank and Inter- American Development Bank.

Equity Securities. Equity securities primarily represent investments in high-dividend yielding common and preferred stocks issued by large market capitalization companies.

Investment Funds. At June 30, 2014, the carrying value of investment funds was $985 million, including investments in real estate funds of $280 million and investments in energy funds of $160 million.

Real Estate. Real estate is directly owned property held for investment. At June 30, 2014, the primary real estate properties are three office buildings under development and a ground lease. The Company expects to fund further development costs for these projects with a combination of its own funds and external financing.

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.

Loans Receivable. Loans receivable, which are carried at amortized cost, had an aggregate cost of $656 million and an aggregate fair value of $659 million at June 30, 2014, which amounts include a $270 million bridge loan that was repaid in July 2014. Amortized cost of these loans is net of a valuation allowance of $3 million as of June 30, 2014. These loans (other then such repaid bridge loan) earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through August 2025. The loans are secured by commercial real estate located primarily in Arizona, California, Hawaii, Illinois, New York, North Carolina and Texas.

Market Risk. The fair value of the Company’s investments is subject to risks of fluctuations in credit quality and interest rates. The Company uses various models and stress test scenarios to monitor and manage interest rate risk. The Company attempts to manage its interest rate risk by maintaining an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities (i.e., policy claims and debt obligations). The average duration for the fixed maturity portfolio was 3.1 years at June 30, 2014 down from 3.3 years at December 31, 2013. In

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addition, the fair value of the Company’s international investments is subject to currency risk. The Company attempts to manage its currency risk by matching its foreign currency assets and liabilities where considered appropriate.

Liquidity and Capital Resources

Cash Flow. Cash flow provided from operating activities decreased to $255 million in the first six months of 2014 from $314 million in the comparable period in 2013.

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 79% invested in cash, cash equivalents and marketable fixed maturity securities as of June 30, 2014. If the sale of fixed maturity securities were to become necessary, a realized gain or loss equal to the difference between the cost and sales price of securities sold would be recognized.

Debt. At June 30, 2014, the Company had senior notes, junior subordinated debentures and other debt outstanding with a carrying value of $2,037 million and a face amount of $2,058 million. The maturities of the outstanding debt are $4 million in 2014, $241 million in 2015, $34 million in 2016, $450 million in 2019, $300 million in 2020, $427 million in 2022, $1 million in 2023, $1 million in 2029, $250 million in 2037 and $350 million in 2053.

On August 6, 2014, the Company issued $350 million of 4.75% senior notes due 2044. Net proceeds from this offering will be used for the repayment at maturity of $200 million of the Company's 5.60% senior notes due on May 15, 2015, and the remainder will be used for general corporate purposes.

Equity. At June 30, 2014, total common stockholders’ equity was $4.6 billion, common shares outstanding were approximately 128 million and stockholders’ equity per outstanding share was $36.20. During the first six months of 2014, the Company repurchased 4,908,701 shares of its common stock for $197 million.

Total Capital. Total capitalization (equity, debt and junior subordinated debentures) was $6.7 billion at June 30, 2014. The percentage of the Company’s capital attributable to debt and junior subordinated debentures was 31% at June 30, 2014 and 32% at December 31, 2013.


Item 3.	Quantitative and Qualitative Disclosure About Market Risk

Reference is made to the information under “Investments - Market Risk” under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q.


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 of 1934 and the rules thereunder, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Control over Financial Reporting. During the quarter ended June 30, 2014, 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

Please see Note 20 to the notes to the interim consolidated financial statements.

Item 1A. Risk Factors

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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, 2013.

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 three months ended June 30, 2014 and the number of shares remaining authorized for purchase by the Company.



	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may yet be purchased under the plans or programs
April 2014	—	$	—	—	8,194,398
May 2014	—	—		—	8,194,398
June 2014	100,514	45.62		100,514	8,093,884

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:	August 7, 2014	/s/ William R. Berkley
		William R. Berkley
		Chairman of the Board and Chief Executive Officer

Date:	August 7, 2014	/s/ Eugene G. Ballard
		Eugene G. Ballard
		Senior Vice President - Chief Financial Officer