BERKLEY W R CORP - Quarter Report: 2015 September (Form 10-Q)

($ in thousands)

Fair Value

Nine months ended September 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 September 30, 2015



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 October 30, 2015: 123,285,762

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-10.1
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

Table of Contents

Part I — FINANCIAL INFORMATION


Item 1.	Financial Statements

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



	September 30, 2015			December 31, 2014
	(Unaudited)			(Audited)
Assets
Investments:
Fixed maturity securities	$	12,368,319		$	12,705,160
Investment funds	1,140,218			1,211,401
Real estate	873,909			731,612
Arbitrage trading account	351,179			450,648
Loans receivable	286,273			322,012
Equity securities	177,877			170,991
Total investments	15,197,775			15,591,824
Cash and cash equivalents	879,934			674,441
Premiums and fees receivable	1,720,637			1,651,088
Due from reinsurers	1,559,277			1,503,441
Deferred policy acquisition costs	524,269			488,525
Prepaid reinsurance premiums	400,392			395,748
Trading account receivables from brokers and clearing organizations	401,941			371,034
Property, furniture and equipment	336,825			332,098
Goodwill	153,281			150,944
Accrued investment income	128,140			120,367
Federal and foreign income taxes	2,021			30,171
Other assets	434,074			369,558
Total assets	$	21,738,566		$	21,679,239

Liabilities and Equity
Liabilities:
Reserves for losses and loss expenses	$	10,661,054		$	10,369,701
Unearned premiums	3,198,009			3,026,732
Due to reinsurers	230,008			237,270
Trading account securities sold but not yet purchased	33,360			106,079
Other liabilities	820,278			859,736
Senior notes and other debt	1,838,965			2,115,527
Subordinated debentures	340,255			340,060
Total liabilities	17,121,929			17,055,105
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, 123,267,846 and 126,748,836 shares, respectively	47,024			47,024
Additional paid-in capital	989,547			991,512
Retained earnings	6,083,120			5,732,410
Accumulated other comprehensive income	28,111			183,550
Treasury stock, at cost, 111,850,072 and 108,369,082 shares, respectively	(2,564,536		)	(2,364,551		)
Total stockholders’ equity	4,583,266			4,589,945
Noncontrolling interests	33,371			34,189
Total equity	4,616,637			4,624,134
Total liabilities and equity	$	21,738,566		$	21,679,239

See accompanying notes to interim consolidated financial statements.

Table of Contents

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands, except per share data)



	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2015			2014			2015			2014
REVENUES:
Net premiums written	$	1,571,037		$	1,525,382		$	4,690,364		$	4,541,038
Change in net unearned premiums	(39,479		)	(64,578		)	(193,752		)	(298,977		)
Net premiums earned	1,531,558			1,460,804			4,496,612			4,242,061
Net investment income	133,214			179,225			385,036			486,665
Insurance service fees	35,192			26,345			107,652			81,970
Net realized investment gains	66,419			72,258			113,020			234,180
Other-than-temporary impairments	(12,515		)	—			(12,515		)	—
Revenues from wholly-owned investees	107,059			101,568			305,261			298,693
Other income	30			405			335			931
Total revenues	1,860,957			1,840,605			5,395,401			5,344,500
OPERATING COSTS AND EXPENSES:
Losses and loss expenses	926,355			887,123			2,733,298			2,576,996
Other operating costs and expenses	573,541			544,303			1,698,169			1,593,619
Expenses from wholly-owned investees	100,500			97,797			288,900			290,823
Interest expense	31,641			32,929			99,210			93,570
Total operating costs and expenses	1,632,037			1,562,152			4,819,577			4,555,008
Income before income taxes	228,920			278,453			575,824			789,492
Income tax expense	(76,184		)	(89,662		)	(181,595		)	(250,840		)
Net income before noncontrolling interests	152,736			188,791			394,229			538,652
Noncontrolling interests	(129		)	(252		)	(280		)	(479		)
Net income to common stockholders	$	152,607		$	188,539		$	393,949		$	538,173

NET INCOME PER SHARE:
Basic	$	1.24		$	1.48		$	3.17		$	4.20
Diluted	$	1.18		$	1.42		$	3.02		$	4.02

See accompanying notes to interim consolidated financial statements.

Table of Contents

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In thousands)



	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2015			2014			2015			2014
Net income before noncontrolling interests	$	152,736		$	188,791		$	394,229		$	538,652
Other comprehensive income (loss):
Change in unrealized currency translation adjustments	(62,535		)	(49,380		)	(76,713		)	(28,590		)
Change in unrealized investment gains (losses), net of taxes	4,497			(12,912		)	(78,832		)	108,232
Change in net pension asset, net of taxes	—			2,020			—			4,631
Other comprehensive income (loss)	(58,038		)	(60,272		)	(155,545		)	84,273
Comprehensive income	94,698			128,519			238,684			622,925
Comprehensive (income) to the noncontrolling interest	(35		)	(334		)	(174		)	(598		)
Comprehensive income to common stockholders	$	94,663		$	128,185		$	238,510		$	622,327

See accompanying notes to interim consolidated financial statements.

Table of Contents

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(In thousands)



	For the Nine Months
	Ended September 30,
	2015			2014
COMMON STOCK:
Beginning and end of period	$	47,024		$	47,024
ADDITIONAL PAID-IN CAPITAL:
Beginning of period	$	991,512		$	967,440
Restricted stock units issued, net of tax	(25,394		)	(6,383		)
Stock incentive plans expensed	23,429			21,047
End of period	$	989,547		$	982,104
RETAINED EARNINGS:
Beginning of period	$	5,732,410		$	5,265,015
Net income to common stockholders	393,949			538,173
Dividends	(43,239		)	(40,782		)
End of period	$	6,083,120		$	5,762,406
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Unrealized investment gains:
Beginning of period	$	306,199		$	256,566
Unrealized gains (losses) on securities not other-than-temporarily impaired	(78,773		)	107,501
Unrealized gains on other-than-temporarily impaired securities	47			612
End of period	227,473			364,679
Currency translation adjustments:
Beginning of period	(122,649		)	(60,524		)
Net change in period	(76,713		)	(28,590		)
End of period	(199,362		)	(89,114		)
Net pension asset:
Beginning of period	—			(6,651		)
Net change in period	—			4,631
End of period	—			(2,020		)
Total accumulated other comprehensive income	$	28,111		$	273,545
TREASURY STOCK:
Beginning of period	$	(2,364,551	)	$	(2,132,835	)
Stock exercised/vested	23,044			6,384
Stock repurchased	(223,652		)	(230,319		)
Stock incentive plans expensed	623			594
End of period	$	(2,564,536	)	$	(2,356,176	)
NONCONTROLLING INTERESTS:
Beginning of period	$	34,189		$	33,359
Contributions (distributions)	(992		)	614
Net income	280			479
Other comprehensive income (loss), net of tax	(106		)	119
End of period	$	33,371		$	34,571

See accompanying notes to interim consolidated financial statements.

Table of Contents

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)



	For the Nine Months
	Ended September 30,
	2015			2014
CASH FROM OPERATING ACTIVITIES:
Net income to common stockholders	$	393,949		$	538,173
Adjustments to reconcile net income to net cash from operating activities:
Net investment gains	(100,505		)	(234,180		)
Depreciation and amortization	65,384			63,415
Noncontrolling interests	280			479
Investment funds	(50,838		)	(150,502		)
Stock incentive plans	24,052			21,549
Change in:
Arbitrage trading account	(4,157		)	1,781
Premiums and fees receivable	(99,541		)	(125,319		)
Reinsurance accounts	(62,272		)	12,967
Deferred policy acquisition costs	(40,216		)	(44,087		)
Income taxes	80,587			11,092
Reserves for losses and loss expenses	362,854			277,542
Unearned premiums	198,534			345,521
Other	(147,776		)	(143,645		)
Net cash from operating activities	620,335			574,786
CASH FROM (USED IN) INVESTING ACTIVITIES:
Proceeds from sale of fixed maturity securities	765,764			546,970
Proceeds from sale of equity securities	23,778			109,928
Distributions from investment funds	198,489			285,233
Proceeds from maturities and prepayments of fixed maturity securities	2,727,635			1,887,252
Purchase of fixed maturity securities	(3,387,648		)	(3,098,477		)
Purchase of equity securities	(37,754		)	(28,606		)
Additions to real estate	(150,940		)	(253,007		)
Real estate sold	—			343,723
Change in loans receivable	35,739			320
Net additions to property, furniture and equipment	(40,262		)	(30,797		)
Change in balances due to security brokers	43,429			68,411
Cash distributed in connection with business disposition	—			15,612
Payment for business purchased net of cash aquired	(7,156		)	(65,423		)
Net cash from (used in) investing activities	171,074			(218,861		)
CASH FROM (USED IN) FINANCING ACTIVITIES:
Repayment of senior notes and other debt	(279,204		)	(1,829		)
Net proceeds from issuance of debt	1,891			431,409
Cash dividends to common stockholders	(43,239		)	(40,782		)
Purchase of common treasury shares	(223,652		)	(236,703		)
Other, net	(3,345		)	913
Net cash from (used in) financing activities	(547,549		)	153,008
Net impact on cash due to change in foreign exchange rates	(38,367		)	(6,386		)
Net change in cash and cash equivalents	205,493			502,547
Cash and cash equivalents at beginning of year	674,441			839,738
Cash and cash equivalents at end of period	$	879,934		$	1,342,285

See accompanying notes to interim consolidated financial statements.

Table of Contents

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, 2014. Reclassifications have been made in the 2014 financial statements as originally reported to conform to the presentation of the 2015 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 Nine Months
	Ended September 30,		Ended September 30,
(In thousands)	2015	2014	2015	2014
Basic	123,163	127,165	124,294	128,225
Diluted	128,947	133,001	130,563	133,886

(3) Recent Accounting Pronouncements

The Financial Accounting Standards Board issued ASC 2015-09, Financial Services – Insurance (Topic 944) – Disclosures about Short-Duration Contracts in 2015, which amended the disclosure required for insurance companies that issue short-duration contracts. This Accounting Standards Update is effective for annual periods beginning after December 15, 2015 and interim periods within annual reporting periods beginning after December 15, 2016.

Table of Contents

(4) Acquisitions/Dispositions

In 2015, the Company acquired an aviation systems company for $8.0 million.

In 2014, the Company acquired a specialty property and casualty insurance distribution company for $83 million. The fair values of the assets acquired and liabilities assumed have been estimated based on a valuation prepared by a third party. The estimated useful lives of the intangible assets acquired range from 7 years to 15 years, with approximately $10 million having an indefinite life.

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

The following table summarizes the estimated fair value of net assets acquired and liabilities assumed for business combinations completed in 2014:



(In thousands)	2014

Cash and cash equivalents	$	17,457
Real estate, furniture and equipment	669
Goodwill and other intangibles assets	79,646
Premium and service fee receivable	24,432
Other assets	2,590
Total assets acquired	124,794
Deferred federal income tax	(7,107		)
Debt	—
Other liabilities assumed	(34,809		)
Net assets acquired	$	82,878

Table of Contents

(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 nine months ended September 30, 2015:
Changes in AOCI
Beginning of period	$	306,199			$	(122,649	)	$	—	$	183,550
Other comprehensive income (loss) before reclassifications	(69,078		)		(76,713		)	—		(145,791		)
Amounts reclassified from AOCI	(9,754		)		—			—		(9,754		)
Other comprehensive income (loss)	(78,832		)		(76,713		)	—		(155,545		)
Unrealized investment gain related to non-controlling interest	106				—			—		106
End of period	$	227,473			$	(199,362	)	$	—	$	28,111
Amounts reclassified from AOCI
Pre-tax	$	(15,006	)	(1)	$	—		$	—	$	(15,006	)
Tax effect (2)	5,252				—			—		5,252
After-tax amounts reclassified	$	(9,754	)		$	—		$	—	$	(9,754	)
Other comprehensive income (loss)
Pre-tax	$	(135,186	)		$	(76,713	)	$	—	$	(211,899	)
Tax effect	56,354				—			—		56,354
Other comprehensive income (loss)	$	(78,832	)		$	(76,713	)	$	—	$	(155,545	)

As of and for the three months ended September 30, 2015:
Changes in AOCI
Beginning of period	$	222,882			$	(136,827	)	$	—	$	86,055
Other comprehensive income (loss) before reclassifications	3,943				(62,535		)	—		(58,592		)
Amounts reclassified from AOCI	554				—			—		554
Other comprehensive income (loss)	4,497				(62,535		)	—		(58,038		)
Unrealized investment gain related to non-controlling interest	94				—			—		94
End of period	$	227,473			$	(199,362	)	$	—	$	28,111
Amounts reclassified from AOCI
Pre-tax	$	852		(1)	$	—		$	—	$	852
Tax effect (2)	(298		)		—			—		(298		)
After-tax amounts reclassified	$	554			$	—		$	—	$	554
Other comprehensive income (loss)
Pre-tax	$	(7,731	)		$	(62,535	)	$	—	$	(70,266	)
Tax effect	12,228				—			—		12,228
Other comprehensive income (loss)	$	4,497			$	(62,535	)	$	—	$	(58,038	)

Table of Contents



	Unrealized Investment Gains (Losses)				Currency Translation Adjustments			Net Pension Asset				Accumulated Other Comprehensive Income (Loss)
(In thousands)
As of and for the nine months ended September 30, 2014:
Changes in AOCI
Beginning of period	$	256,566			$	(60,524	)	$	(6,651	)		$	189,391
Other comprehensive income (loss) before reclassifications	143,388				(28,590		)	—				114,798
Amounts reclassified from AOCI	(35,156		)		—			4,631				(30,525		)
Other comprehensive income (loss)	108,232				(28,590		)	4,631				84,273
Unrealized investment loss related to non-controlling interest	(119		)		—			—				(119		)
End of period	$	364,679			$	(89,114	)	$	(2,020	)		$	273,545
Amounts reclassified from AOCI
Pre-tax	$	(54,086	)	(1)	$	—		$	7,125		(3)	$	(46,961	)
Tax effect (2)	18,930				—			(2,494		)		16,436
After-tax amounts reclassified	$	(35,156	)		$	—		$	4,631			$	(30,525	)
Other comprehensive income (loss)
Pre-tax	$	163,651			$	(28,590	)	$	7,125			$	142,186
Tax effect	(55,419		)		—			(2,494		)		(57,913		)
Other comprehensive income (loss)	$	108,232			$	(28,590	)	$	4,631			$	84,273

As of and for the three months ended September 30, 2014:
Changes in AOCI
Beginning of period	$	377,673			$	(39,734	)	$	(4,040	)		$	333,899
Other comprehensive income (loss) before reclassifications	3,099				(49,380		)	—				(46,281		)
Amounts reclassified from AOCI	(16,011		)		—			2,020				(13,991		)
Other comprehensive income (loss)	(12,912		)		(49,380		)	2,020				(60,272		)
Unrealized investment loss related to non-controlling interest	(82		)		—			—				(82		)
End of period	$	364,679			$	(89,114	)	$	(2,020	)		$	273,545
Amounts reclassified from AOCI
Pre-tax	$	(24,632	)	(1)	$	—		$	3,108		(3)	$	(21,524	)
Tax effect (2)	8,621				—			(1,088		)		7,533
After-tax amounts reclassified	$	(16,011	)		$	—		$	2,020			$	(13,991	)
Other comprehensive income (loss)
Pre-tax	$	(25,029	)		$	(49,380	)	$	3,108			$	(71,301	)
Tax effect	12,117				—			(1,088		)		11,029
Other comprehensive income (loss)	$	(12,912	)		$	(49,380	)	$	2,020			$	(60,272	)

_______________

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

(2) Income tax expense in the consolidated statements of income.

(3) Other operating costs and expenses in the consolidated statements of income.

Table of Contents

(6) Statements of Cash Flow

Interest payments were $124,632,000 and $108,688,000 and income taxes paid were $96,364,000 and $238,030,000 in the three months ended September 30, 2015 and 2014, respectively.

(7) Investments in Fixed Maturity Securities

At September 30, 2015 and December 31, 2014, investments in fixed maturity securities were as follows:



(In thousands)	Amortized Cost		Gross Unrealized					Fair Value		Carrying Value
			Gains		Losses
September 30, 2015
Held to maturity:
State and municipal	$	76,065	$	15,824	$	—		$	91,889	$	76,065
Residential mortgage-backed	20,025		2,637		—			22,662		20,025
Corporate	5,000		65		—			5,065		5,000
Total held to maturity	101,090		18,526		—			119,616		101,090
Available for sale:
U.S. government and government agency	641,696		32,748		(1,476		)	672,968		672,968
State and municipal:
Special revenue	2,476,539		104,030		(4,848		)	2,575,721		2,575,721
State general obligation	602,995		28,828		(4,511		)	627,312		627,312
Pre-refunded	442,026		34,132		—			476,158		476,158
Corporate backed	385,972		13,156		(709		)	398,419		398,419
Local general obligation	321,376		24,968		(197		)	346,147		346,147
Total state and municipal	4,228,908		205,114		(10,265		)	4,423,757		4,423,757
Mortgage-backed securities:
Residential (1)	1,038,903		27,601		(7,084		)	1,059,420		1,059,420
Commercial	67,003		1,236		(35		)	68,204		68,204
Total mortgage-backed securities	1,105,906		28,837		(7,119		)	1,127,624		1,127,624
Corporate:
Industrial	1,888,762		80,342		(17,257		)	1,951,847		1,951,847
Asset-backed	1,634,056		17,722		(11,681		)	1,640,097		1,640,097
Financial	1,264,970		35,728		(11,980		)	1,288,718		1,288,718
Utilities	187,325		10,549		(1,549		)	196,325		196,325
Other	80,796		446		(18		)	81,224		81,224
Total corporate	5,055,909		144,787		(42,485		)	5,158,211		5,158,211
Foreign	854,313		46,433		(16,077		)	884,669		884,669
Total available for sale	11,886,732		457,919		(77,422		)	12,267,229		12,267,229
Total investments in fixed maturity securities	$	11,987,822	$	476,445	$	(77,422	)	$	12,386,845	$	12,368,319

Table of Contents



(In thousands)	Amortized Cost		Gross Unrealized					Fair Value		Carrying Value
			Gains		Losses
December 31, 2014
Held to maturity:
State and municipal	$	72,901	$	17,501	$	—		$	90,402	$	72,901
Residential mortgage-backed	23,278		2,854		—			26,132		23,278
Corporate	4,998		291		—			5,289		4,998
Total held to maturity	101,177		20,646		—			121,823		101,177
Available for sale:
U.S. government and government agency	773,192		33,353		(3,157		)	803,388		803,388
State and municipal:
Special revenue	2,264,210		111,841		(2,084		)	2,373,967		2,373,967
State general obligation	674,022		37,615		(787		)	710,850		710,850
Pre-refunded	504,778		35,619		(289		)	540,108		540,108
Corporate backed	413,234		18,976		(855		)	431,355		431,355
Local general obligation	281,622		25,099		(5		)	306,716		306,716
Total state and municipal	4,137,866		229,150		(4,020		)	4,362,996		4,362,996
Mortgage-backed securities:
Residential (1)	1,201,924		27,124		(9,449		)	1,219,599		1,219,599
Commercial	74,479		1,610		(52		)	76,037		76,037
Total mortgage-backed securities	1,276,403		28,734		(9,501		)	1,295,636		1,295,636
Corporate:
Asset-backed	2,019,032		18,868		(11,974		)	2,025,926		2,025,926
Industrial	1,606,724		117,206		(5,131		)	1,718,799		1,718,799
Financial	1,140,801		38,080		(7,673		)	1,171,208		1,171,208
Utilities	184,107		12,436		(1		)	196,542		196,542
Other	86,294		1,370		(2		)	87,662		87,662
Total corporate	5,036,958		187,960		(24,781		)	5,200,137		5,200,137
Foreign	897,668		62,223		(18,065		)	941,826		941,826
Total available for sale	12,122,087		541,420		(59,524		)	12,603,983		12,603,983
Total investments in fixed maturity securities	$	12,223,264	$	562,066	$	(59,524	)	$	12,725,806	$	12,705,160

____________


(1)	Gross unrealized losses for residential mortgage-backed securities include $1,023,313 and $1,095,671 as of September 30, 2015 and December 31, 2014, respectively, related to the non-credit portion of other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income.

The amortized cost and fair value of fixed maturity securities at September 30, 2015, 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	$	872,912	$	884,845
Due after one year through five years	3,896,880		4,043,852
Due after five years through ten years	3,572,074		3,706,649
Due after ten years	2,520,025		2,601,213
Mortgage-backed securities	1,125,931		1,150,286
Total	$	11,987,822	$	12,386,845

At September 30, 2015, there were no investments that exceeded 10% of common stockholders’ equity, other than investments in United States government and government agency securities,

Table of Contents

(8) Investments in Equity Securities

At September 30, 2015 and December 31, 2014, 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
September 30, 2015
Common stocks	$	64,382	$	—	$	(22,254	)	$	42,128	$	42,128
Preferred stocks	118,783		20,756		(3,790		)	135,749		135,749
Total	$	183,165	$	20,756	$	(26,044	)	$	177,877	$	177,877
December 31, 2014
Common stocks	$	69,870	$	11,929	$	(5,453	)	$	76,346	$	76,346
Preferred stocks	90,425		8,385		(4,165		)	94,645		94,645
Total	$	160,295	$	20,314	$	(9,618	)	$	170,991	$	170,991

(9) Arbitrage Trading Account

At September 30, 2015 and December 31, 2014, the carrying value of the arbitrage trading account was $351 million and $451 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.

(10) Net Investment Income

Net investment income consists of the following:



	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
(In thousands)	2015			2014			2015			2014
Investment income earned on:
Fixed maturity securities, including cash and cash equivalents and loans receivable	$	104,936		$	117,289		$	318,095		$	331,947
Investment funds	22,926			59,077			50,838			135,232
Arbitrage trading account	2,608			47			11,470			12,508
Equity securities available for sale	1,109			1,369			3,513			5,418
Real estate	4,389			3,042			9,270			9,207
Gross investment income	135,968			180,824			393,186			494,312
Investment expense	(2,754		)	(1,599		)	(8,150		)	(7,647		)
Net investment income	$	133,214		$	179,225		$	385,036		$	486,665

Table of Contents

(11) Investment Funds

Investment funds consist of the following:



	Carrying Value as of				Income (Loss) from Investment Funds
	September 30,		December 31,		For the Nine Months Ended September 30:
(In thousands)	2015		2014		2015			2014
Real estate	$	534,854	$	466,703	$	51,467		$	24,341
Energy	108,830		152,056		(25,124		)	18,136
Arbitrage	69,417		282,335		(3,925		)	15,270
Other	427,117		310,307		28,420			77,485
Total	$	1,140,218	$	1,211,401	$	50,838		$	135,232

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.

Other includes private equity investments carried on the equity method of accounting, which includes a publicly traded common stock investment in HealthEquity, Inc. (HQY). Our ownership interest in HQY as of September 30, 2015 is 21% with a fair value of $353.7 million and a carrying value of $44.2 million.

(12) Real Estate

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



	Carrying Value
	September 30,		December 31,
(In thousands)	2015		2014
Properties in operation	$	226,930	$	196,980
Properties under development	646,979		534,632
Total	$	873,909	$	731,612

Properties in operation include a long-term ground lease in Washington, D.C. and office buildings in West Palm Beach and Palm Beach, Florida. Properties in operation are net of accumulated depreciation and amortization of $7,561,000 and $1,609,000 as of September 30, 2015 and December 31, 2014, respectively. Related depreciation expense was $5,991,000 and $3,228,000 for the nine months ended September 30, 2015 and 2014, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $3,119,438 in 2015, $12,259,281 in 2016, $12,210,962 in 2017, $11,224,190 in 2018, $8,177,750 in 2019, $6,111,665 in 2020 and $330,978,082 thereafter.

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

Table of Contents

(13) Loans Receivable

Loans receivable are as follows:



(In thousands)	September 30, 2015			December 31, 2014
Amortized cost:
Real estate loans	$	203,064		$	243,407
Commercial loans	83,209			78,605
Total	$	286,273		$	322,012

Fair value:
Real estate loans	$	204,350		$	245,112
Commercial loans	84,711			80,107
Total	$	289,061		$	325,219

Valuation allowance:
Specific	$	75		$	115
General	2,330			2,371
Total	$	2,405		$	2,486

	For the Three Months Ended September 30,
	For the Three Months Ended September 30,
	2015			2014
Increase (decrease) in valuation allowance	$	19		$	(24	)
Loans receivable charged off	—			—

	For the Nine Months Ended September 30,
	For the Nine Months Ended September 30,
	2015			2014
Increase (decrease) in valuation allowance	$	(81	)	$	455
Loans receivable charged off	—			—

Loans receivable in non-accrual status were $5.7 million and $14.2 million as of September 30, 2015 and December 31, 2014, respectively.

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, Maryland, New York and Tennessee. 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. Commercial loans generally earn interest on a fixed basis and have varying maturities not exceeding 10 years.

The Company utilizes a 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 September 30, 2015, and accordingly, the Company determined that a specific valuation allowance was not required.

Table of Contents

(14) Realized and Unrealized Investment Gains (Losses)

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



	For the Three Months Ended September 30,						For the Nine Months Ended September 30:
(In thousands)	2015			2014			2015			2014
Realized investment gains (losses):
Fixed maturity securities:
Gains	$	1,341		$	13,803		$	8,178		$	17,263
Losses	(2,171		)	(2,208		)	(2,810		)	(3,727		)
Equity securities available for sale	(21		)	9,729			9,639			39,310
Investment funds	70,648			50,919			92,821			95,675
Real estate	—			15			—			85,659
Other	(3,378		)	—			5,192			—
Total	66,419			72,258			113,020			234,180
Net of other-than-temporary impairments:
Other-than-temporary impairments	(12,515		)	—			(12,515		)	—
Income tax expense	(18,866		)	(25,290		)	(35,177		)	(81,963		)
Total after-tax realized investment gains	$	35,038		$	46,968		$	65,328		$	152,217



Change in unrealized investment gains (losses):
Fixed maturity securities	$	2,449		$	10,722		$	(102,863	)	$	190,242
Previously impaired fixed maturity securities	50			188			73			941
Equity securities available for sale	(2,353		)	(27,548		)	(15,977		)	(19,215		)
Investment funds	(7,876		)	(8,391		)	(16,417		)	(8,317		)
Total change in unrealized investment gains (losses)	(7,730		)	(25,029		)	(135,184		)	163,651
Income tax benefit (expense)	12,229			12,117			56,354			(55,419		)
Noncontrolling interests	94			(82		)	106			(119		)
Total after-tax unrealized gains (losses)	$	4,593		$	(12,994	)	$	(78,724	)	$	108,113

OTTI recognized in earnings were $12.5 million for the three and nine months ended September 30, 2015. There was no OTTI for the three and nine months ended September 30, 2014. OTTI related to common stocks and fixed maturity securities were $3.5 million and $9.0 million, respectively.

Table of Contents

(15) Securities in an Unrealized Loss Position

The following tables summarize all securities in an unrealized loss position at September 30, 2015 and December 31, 2014 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
September 30, 2015
U.S. government and government agency	$	18,390	$	222	$	68,963	$	1,254	$	87,353	$	1,476
State and municipal	543,568		7,670		110,634		2,595		654,202		10,265
Mortgage-backed securities	115,152		889		200,490		6,230		315,642		7,119
Corporate	1,782,625		28,626		155,263		13,859		1,937,888		42,485
Foreign	96,348		11,117		22,355		4,960		118,703		16,077
Fixed maturity securities	2,556,083		48,524		557,705		28,898		3,113,788		77,422
Common stocks	24,109		21,352		8,112		902		32,221		22,254
Preferred stocks	4,791		396		22,280		3,394		27,071		3,790
Equity securities	28,900		21,748		30,392		4,296		59,292		26,044
Total	$	2,584,983	$	70,272	$	588,097	$	33,194	$	3,173,080	$	103,466

December 31, 2014
U.S. government and government agency	$	84,750	$	522	$	84,850	$	2,635	$	169,600	$	3,157
State and municipal	158,594		631		150,284		3,389		308,878		4,020
Mortgage-backed securities	75,739		332		312,922		9,169		388,661		9,501
Corporate	1,586,238		8,697		214,628		16,084		1,800,866		24,781
Foreign	76,471		3,907		85,025		14,158		161,496		18,065
Fixed maturity securities	1,981,792		14,089		847,709		45,435		2,829,501		59,524
Common stocks	15,929		5,453		—		—		15,929		5,453
Preferred stocks	27,126		1,139		22,648		3,026		49,774		4,165
Equity securities	43,055		6,592		22,648		3,026		65,703		9,618
Total	$	2,024,847	$	20,681	$	870,357	$	48,461	$	2,895,204	$	69,142

Fixed Maturity Securities – A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at September 30, 2015 is presented in the table below:



($ in thousands)	Number of Securities	Aggregate Fair Value		Gross Unrealized Loss
Mortgage-backed securities	7	$	23,109	$	1,530
Corporate	17	147,430		9,428
Foreign government	4	26,277		5,305
Total	28	$	196,816	$	16,263

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 nine months ended September 30, 2015 and 2014, 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.

For the three and nine months ended September 30, 2015, OTTI for fixed maturity securities recognized in earnings was $9.0 million, all of which was considered due to credit factors. There were no OTTI of fixed maturity securities for the three and nine months ended September 30, 2014.

Table of Contents

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

Equity Securities – At September 30, 2015, there were six equity securities in an unrealized loss position, with an aggregate fair value of $59.3 million and a gross unrealized loss of $26.0 million. Two of these equity securities are preferred stocks that are rated non-investment grade with an aggregate fair value of $4.8 million and a gross unrealized loss of $0.4 million. Based upon management’s view of the underlying value of these securities, the Company does not consider these equity securities to be OTTI. For the three and nine months ended September 30, 2015, OTTI for common stocks was $3.5 million. There were no OTTI of common stocks for the three and nine months ended September 30, 2014.

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 $2 million and $3 million at September 30, 2015 and December 31, 2014, respectively.

(16) Fair Value Measurements

The Company’s fixed maturity and equity securities classified as 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, as follows:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 - Quoted prices for similar assets or valuations based on inputs that are observable.

Level 3 - Estimates of fair value based on internal pricing methodologies using unobservable inputs. Unobservable inputs are only used to measure fair value to the extent that observable inputs are not available.

Substantially all of the Company’s fixed maturity securities were priced by independent pricing services. The prices provided by the independent pricing services are estimated based on observable market data in active markets utilizing pricing models and processes, which may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, sector groupings, matrix pricing and reference data. The pricing services may prioritize inputs differently on any given day for any security based on market conditions, and not all inputs are available for each security evaluation on any given day. The pricing services used by the Company have indicated that they will only produce an estimate of fair value if objectively verifiable information is available. 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 and periodically performs independent price tests of a sample of securities to ensure proper valuation.

If prices from independent pricing services are not available for fixed maturity securities, the Company estimates the fair value. For Level 2 securities, the Company utilizes pricing models and processes which may include benchmark yields, sector groupings, matrix pricing, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, bids, offers and reference data. Where broker quotes are used, the Company generally requests two or more quotes and 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 received from brokers. 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.

For Level 3 securities, the Company generally uses a discounted cash flow model to estimate the fair value of fixed maturity securities. The cash flow models are based upon assumptions as to prevailing credit spreads, interest rate and interest rate volatility, time to maturity and subordination levels. Projected cash flows are discounted at rates that are adjusted to reflect illiquidity, where appropriate.

Table of Contents

The following tables present the assets and liabilities measured at fair value, on a recurring basis, as of September 30, 2015 and December 31, 2014 by level:



(In thousands)	Total		Level 1		Level 2		Level 3
September 30, 2015
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency	$	672,968	$	—	$	672,968	$	—
State and municipal	4,423,757		—		4,423,757		—
Mortgage-backed securities	1,127,624		—		1,127,624		—
Corporate	5,158,211		—		5,158,057		154
Foreign government	884,669		—		884,669		—
Total fixed maturity securities available for sale	12,267,229		—		12,267,075		154
Equity securities available for sale:
Common stocks	42,128		33,709		—		8,419
Preferred stocks	135,749		—		132,125		3,624
Total equity securities available for sale	177,877		33,709		132,125		12,043
Arbitrage trading account	351,179		226,115		124,464		600
Total	$	12,796,285	$	259,824	$	12,523,664	$	12,797
Liabilities:
Securities sold but not yet purchased	$	33,360	$	33,336	$	24	$	—

December 31, 2014
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency	$	803,388	$	—	$	803,388	$	—
State and municipal	4,362,996		—		4,362,996		—
Mortgage-backed securities	1,295,636		—		1,295,636		—
Corporate	5,200,137		—		5,179,372		20,765
Foreign government	941,826		—		941,826		—
Total fixed maturity securities available for sale	12,603,983		—		12,583,218		20,765
Equity securities available for sale:
Common stocks	76,346		65,605		—		10,741
Preferred stocks	94,645		—		90,932		3,713
Total equity securities available for sale	170,991		65,605		90,932		14,454
Arbitrage trading account	450,648		295,047		154,881		720
Total	$	13,225,622	$	360,652	$	12,829,031	$	35,939
Liabilities:
Securities sold but not yet purchased	$	106,079	$	106,074	$	5	$	—

There were no significant transfers between Levels 1 and 2 during the nine months ended September 30, 2015 or during the year ended December 31, 2014.

Table of Contents

The following tables summarize changes in Level 3 assets and liabilities for the nine months ended September 30, 2015 and for the year ended December 31, 2014:



	Gains (Losses) Included in:
(In thousands)	Beginning Balance		Earnings			Other Comprehensive Income			Impairments			Purchases		(Sales)			Paydowns / Maturities			Transfers			Ending Balance
(In thousands)	Beginning Balance		Earnings			Other Comprehensive Income			Impairments			Purchases		(Sales)			Paydowns / Maturities			In / (Out)			Ending Balance
Nine months ended September 30, 2015
Assets:
Fixed maturities available for sale:
Corporate	$	20,765	$	15		$	180		$	—		$	—	$	—		$	(1,673	)	$	(19,133	)	$	154
Total	20,765		15			180			—			—		—			(1,673		)	(19,133		)	154
Equity securities available for sale:
Common stocks	10,741		—			9			(2,331		)	—		—			—			—			8,419
Preferred stocks	3,713		(89		)	—			—			—		—			—			—			3,624
Total	14,454		(89		)	9			(2,331		)	—		—			—			—			12,043
Arbitrage trading account	720		(375		)	—			—			72,640		(71,921		)	—			(464		)	600
Total	$	35,939	$	(449	)	$	189		$	(2,331	)	$	72,640	$	(71,921	)	$	(1,673	)	$	(19,597	)	$	12,797

Liabilities:
Securities sold but not yet purchased	$	—	$	—		$	—		$	—		$	—	$	—		$	—		$	—		$	—

Year ended December 31, 2014:
Assets:
Fixed maturities available for sale:
Corporate	$	42,864	$	47		$	(3,711	)	$	—		$	238	$	(15,244	)	$	(3,429	)	$	—		$	20,765
Total	42,864		47			(3,711		)	—			238		(15,244		)	(3,429		)	—			20,765
Equity securities available for sale:
Common stocks	1,238		—			(911		)	—			11,343		(929		)	—			—			10,741
Preferred stocks	3,752		(17		)	—			—			3,430		(3,452		)	—			—			3,713
Total	4,990		(17		)	(911		)	—			14,773		(4,381		)	—			—			14,454
Arbitrage trading account	1,780		2,274			—			—			4,942		(14,073		)	—			5,797			720
Total	$	49,634	$	2,304		$	(4,622	)	$	—		$	19,953	$	(33,698	)	$	(3,429	)	$	5,797		$	35,939

Liabilities:
Securities sold but not yet purchased	$	—	$	(20	)	$	—		$	—		$	31	$	(11	)	$	—		$	—		$	—

During the nine months ended September 30, 2015, five securities were transferred out of Level 3 where an observable price was available. During the year ended December 31, 2014, two securities were transferred into Level 3 where the quoted prices were no longer available. One of these securities was sold during the second quarter of 2014.

Table of Contents

(17) Fair Value of Financial Instruments

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



	September 30, 2015				December 31, 2014
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Fixed maturity securities	$	12,368,319	$	12,386,845	$	12,705,160	$	12,725,806
Equity securities available for sale	177,877		177,877		170,991		170,991
Arbitrage trading account	351,179		351,179		450,648		450,648
Loans receivable	286,273		289,061		322,012		325,219
Cash and cash equivalents	879,934		879,934		674,441		674,441
Trading account receivables from brokers and clearing organizations	401,941		401,941		371,034		371,034
Liabilities:
Due to broker	64,343		64,343		23,133		23,133
Trading account securities sold but not yet purchased	33,360		33,360		106,079		106,079
Subordinated debentures	340,255		343,000		340,060		332,640
Senior notes and other debt	1,838,965		2,047,134		2,115,527		2,344,292

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 subordinated debentures is based on spreads for similar securities, which is considered a Level 2 input.

(18) Reinsurance

The following is a summary of reinsurance financial information:



	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
(In thousands)	2015			2014			2015			2014
Written premiums:
Direct	$	1,601,344		$	1,553,493		$	4,852,584		$	4,699,319
Assumed	221,237			225,863			633,200			657,704
Ceded	(251,544		)	(253,974		)	(795,420		)	(815,985		)
Total net premiums written	$	1,571,037		$	1,525,382		$	4,690,364		$	4,541,038

Earned premiums:
Direct	$	1,575,624		$	1,505,738		$	4,646,343		$	4,336,463
Assumed	217,668			216,889			632,362			667,566
Ceded	(261,734		)	(261,823		)	(782,093		)	(761,968		)
Total net premiums earned	$	1,531,558		$	1,460,804		$	4,496,612		$	4,242,061

Ceded losses incurred	$	123,765		$	128,903		$	374,084		$	319,156
Ceded commissions earned	$	45,946		$	40,821		$	129,766		$	116,047

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 $1 million as of September 30, 2015 and December 31, 2014.

Table of Contents

(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 three to 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 $23 million and $20 million for the nine months ended September 30, 2015 and 2014, respectively. A summary of RSUs issued in the nine months ended September 30, 2015 and 2014 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.

Table of Contents

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 September 30, 2015:
Insurance-Domestic	$	1,181,923	$	93,394	$	23,021	$	1,298,338	$	191,582		$	130,445
Insurance-International	197,578		13,595		—		211,173		12,527			9,001
Reinsurance-Global	152,057		19,468		—		171,525		22,413			15,807
Corporate and eliminations (1)	—		6,757		119,260		126,017		(51,506		)	(37,684		)
Net investment gains	—		—		53,904		53,904		53,904			35,038
Total	$	1,531,558	$	133,214	$	196,185	$	1,860,957	$	228,920		$	152,607
Three months ended September 30, 2014:
Insurance-Domestic	$	1,093,554	$	125,792	$	26,408	$	1,245,754	$	228,359		$	154,718
Insurance-International	205,529		19,957		—		225,486		12,603			9,217
Reinsurance-Global	161,721		26,916		—		188,637		29,005			20,207
Corporate and eliminations (1)	—		6,560		101,910		108,470		(63,772		)	(42,571		)
Net investment gains	—		—		72,258		72,258		72,258			46,968
Total	$	1,460,804	$	179,225	$	200,576	$	1,840,605	$	278,453		$	188,539
Nine months ended September 30, 2015
Insurance-Domestic	$	3,459,118	$	269,160	$	72,981	$	3,801,259	$	534,401		$	365,933
Insurance-International	583,041		40,177		—		623,218		41,347			29,648
Reinsurance-Global	454,453		54,575		—		509,028		69,797			49,134
Corporate and eliminations (1)	—		21,124		340,267		361,391		(170,226		)	(116,094		)
Net investment gains	—		—		100,505		100,505		100,505			65,328
Total	$	4,496,612	$	385,036	$	513,753	$	5,395,401	$	575,824		$	393,949
Nine months ended September 30, 2014:
Insurance-Domestic	$	3,138,806	$	347,002	$	82,159	$	3,567,967	$	607,399		$	414,588
Insurance-International	592,721		47,885		—		640,606		41,860			29,938
Reinsurance-Global	510,534		72,102		—		582,636		86,945			60,624
Corporate and eliminations (1)	—		19,676		299,435		319,111		(180,892		)	(119,194		)
Net investment gains	—		—		234,180		234,180		234,180			152,217
Total	$	4,242,061	$	486,665	$	615,774	$	5,344,500	$	789,492		$	538,173

________

(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)	September 30, 2015		December 31, 2014
Insurance-Domestic	$	16,298,153	$	16,036,513
Insurance-International	1,821,712		1,876,347
Reinsurance-Global	2,482,325		2,708,090
Corporate and eliminations	1,136,376		1,058,289
Total	$	21,738,566	$	21,679,239

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

Table of Contents



	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
(In thousands)	2015		2014		2015		2014
Insurance-Domestic:
Other liability	$	395,400	$	368,818	$	1,146,884	$	1,070,525
Workers’ compensation	322,896		291,297		940,636		824,541
Short-tail lines	230,733		222,561		687,626		642,833
Commercial automobile	138,483		134,197		411,951		385,667
Professional liability	94,411		76,681		272,021		215,240
Total	1,181,923		1,093,554		3,459,118		3,138,806

Insurance-International:
Other liability	22,733		27,705		69,527		70,036
Workers’ compensation	24,849		18,012		69,643		52,578
Short-tail lines	96,624		100,417		285,980		303,119
Commercial automobile	32,177		29,076		94,278		86,318
Professional liability	21,195		30,319		63,613		80,670
Total	197,578		205,529		583,041		592,721

Reinsurance-Global:
Casualty	103,198		122,741		314,462		372,894
Property	48,859		38,980		139,991		137,640
Total	152,057		161,721		454,453		510,534

Total	$	1,531,558	$	1,460,804	$	4,496,612	$	4,242,061

Table of Contents

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 2015 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, including real estate, merger arbitrage, energy related 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"); 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 2015 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.

Table of Contents


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, 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 has 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 highly 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 invests in equity securities, merger arbitrage securities, investment funds (including energy related funds), private equity, loans and real estate related assets. The Company's investments in investment funds and its other alternative investments 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 not reported (“IBNR”) to the insurer, potential inadequacy of case reserves and the estimated expenses of settling claims, including legal and

Table of Contents

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.

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

Table of Contents

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 2014:



(In thousands)	Frequency (+/-)
Severity (+/-)	1%		5%		10%
1%	$	70,266	$	211,497	$	388,037
5%	211,497		358,222		541,853
10%	388,037		541,853		734,123

Our net reserves for losses and loss expenses of approximately $9.2 billion as of September 30, 2015 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 $1.4 billion, or 15%, of the Company’s net loss reserves as of September 30, 2015 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.

Following is a summary of the Company’s reserves for losses and loss expenses by business segment as of September 30, 2015 and December 31, 2014:



(In thousands)	2015		2014
Insurance-Domestic	$	7,086,421	$	6,767,374
Insurance-International	743,905		750,613
Reinsurance-Global	1,395,795		1,452,654
Net reserves for losses and loss expenses	9,226,121		8,970,641
Ceded reserves for losses and loss expenses	1,434,933		1,399,060
Gross reserves for losses and loss expenses	$	10,661,054	$	10,369,701

Table of Contents

Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of September 30, 2015 and December 31, 2014:



(In thousands)	Reported Case Reserves		Incurred But Not Reported		Total
September 30, 2015
Other liability	$	1,065,529	$	1,854,890	$	2,920,419
Workers’ compensation (1)	1,654,042		1,266,311		2,920,353
Professional liability	293,527		477,608		771,135
Commercial automobile	344,095		244,143		588,238
Short-tail lines	334,200		295,981		630,181
Total primary	3,691,393		4,138,933		7,830,326
Reinsurance (1)	615,198		780,597		1,395,795
Total	$	4,306,591	$	4,919,530	$	9,226,121

December 31, 2014
Other liability	$	1,035,442	$	1,785,598	$	2,821,040
Workers’ compensation (1)	1,603,310		1,201,117		2,804,427
Professional liability	308,887		453,557		762,444
Commercial automobile	319,700		203,085		522,785
Short-tail lines	330,010		277,281		607,291
Total primary	3,597,349		3,920,638		7,517,987
Reinsurance (1)	603,851		848,803		1,452,654
Total	$	4,201,200	$	4,769,441	$	8,970,641

___________

(1) Reserves for workers’ compensation and reinsurance are net of an aggregate net discount of $718 million and $746 million as of September 30, 2015 and December 31, 2014, 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.

Certain of the Company's insurance and reinsurance contracts are retrospectively rated, 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 fully or partially offset by additional or return premiums.

Net prior year development (i.e, the sum of prior year reserve changes and prior year earned premiums changes) for the nine months ended September 30, 2015 and 2014 are as follows:



(In thousands)	2015		2014
Net decrease in prior year loss reserves	$	39,095	$	55,219
Increase in prior year earned premiums	9,733		7,098
Net favorable prior year development	$	48,828	$	62,317

In 2015, favorable prior year development (net of additional and return premiums) was $49 million, and included $36 million for the Insurance-Domestic segment, $5 million for the Insurance-International segment and $8 million for the Reinsurance-Global segment. The favorable development for the Insurance-Domestic segment was primarily attributable to excess and surplus lines casualty business from accident years 2009 through 2014, partially offset by adverse development in commercial auto liability from accident years 2011 through 2014. The favorable development for excess and surplus lines reflects the continuation of favorable claim frequency trends (i.e., number of reported claims per unit of exposure), while the unfavorable development for commercial auto liability is driven by higher large loss activity.

In 2014, favorable reserve development (net of additional and return premiums) of $62 million was primarily related to the Insurance-Domestic segment and was also driven by excess and surplus lines casualty business.

Table of Contents

Reserve Discount. The Company discounts its liabilities for certain workers’ compensation reserves. The amount of workers’ compensation reserves that were discounted was $2,052 million and $2,187 million at September 30, 2015 and December 31, 2014, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $718 million and $746 million at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015, discount rates by year ranged from 2.0% to 6.5%, with a weighted average discount rate of 4.0%.

Substantially all of discounted workers’ compensation reserves (98% of total discounted reserves at September 30, 2015) are excess workers’ compensation reserves. In order to properly match loss expenses with income earned on investment securities supporting the liabilities, reserves for excess workers’ compensation business are discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. These rates are determined annually based on the weighted average rate for the period. Once established, no adjustments are made to the discount rate for that period, and any increases or decreases in loss reserves in subsequent years are discounted at the same rate, without regard to when any such adjustments are recognized. The expected loss and loss expense payout patterns subject to discounting are derived from the Company’s loss payout experience.

The Company also discounts reserves for certain other long-duration workers’ compensation reserves (representing approximately 2% of total discounted reserves at September 30, 2015), including reserves for quota share reinsurance and reserves related to losses regarding occupational lung disease. These reserves are discounted at statutory rates permitted by the Department of Insurance of the State of Delaware.

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 $66 million at September 30, 2015 and $85 million at December 31, 2014. 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 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,

Table of Contents

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 September 30, 2015:



($ in thousands)	Number of Securities	Aggregate Fair Value		Unrealized Loss
Unrealized loss less than 20% of amortized cost	400	$	3,048,625	$	55,882
Unrealized loss of 20% or greater of amortized cost:
Less than twelve months	7	10,177		4,402
Twelve months and longer	20	54,986		17,138
Total	427	$	3,113,788	$	77,422

A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at September 30, 2015 is presented in the table below:



($ in thousands)	Number of Securities	Aggregate Fair Value		Unrealized Loss
Mortgage-backed securities	7	$	23,109	$	1,530
Corporate	17	147,430		9,428
Foreign government	4	26,277		5,305
Total	28	$	196,816	$	16,263

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. For the three and nine months ended September 30, 2015, OTTI for fixed maturity securities recognized in earnings was $9.0 million, all of which was considered due to credit factors. There were no OTTI of fixed maturity securities for the three and nine months ended September 30, 2014.

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 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

Table of Contents

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 September 30, 2015:



(In thousands)	Carrying Value		Percent of Total
Pricing source:
Independent pricing services	$	12,023,492	98.0	%
Syndicate manager	58,198		0.5
Directly by the Company based on:
Observable data	185,385		1.5
Cash flow model	154		* -
Total	$	12,267,229	100.0	%

_______

*Less than 0.1%.

Independent pricing services – Substantially all 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 September 30, 2015, the Company did not make any adjustments to the prices provided by the pricing services. Based upon the Company’s review of the methodologies used by the independent pricing services, these securities were classified as Level 2.

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

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.

Table of Contents

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.

Table of Contents

Results of Operations for the Nine Months Ended September 30, 2015 and 2014

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 nine months ended September 30, 2015 and 2014. 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)	2015			2014
Insurance-Domestic:
Gross premiums written	$	4,289,042		$	4,087,752
Net premiums written	3,644,959			3,432,803
Net premiums earned	3,459,118			3,138,806
Loss ratio	61.5		%	60.2		%
Expense ratio	31.2		%	32.0		%
GAAP combined ratio	92.7		%	92.2		%
Insurance-International:
Gross premiums written	$	713,561		$	747,639
Net premiums written	593,585			620,025
Net premiums earned	583,041			592,721
Loss ratio	58.2		%	60.9		%
Expense ratio	41.4		%	39.9		%
GAAP combined ratio	99.6		%	100.8		%
Reinsurance-Global:
Gross premiums written	$	483,181		$	521,633
Net premiums written	451,820			488,210
Net premiums earned	454,453			510,534
Loss ratio	58.9		%	64.2		%
Expense ratio	37.8		%	32.9		%
GAAP combined ratio	96.7		%	97.1		%
Consolidated:
Gross premiums written	$	5,485,784		$	5,357,024
Net premiums written	4,690,364			4,541,038
Net premiums earned	4,496,612			4,242,061
Loss ratio	60.8		%	60.7		%
Expense ratio	33.2		%	33.2		%
GAAP combined ratio	94.0		%	93.9		%

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 nine months ended September 30, 2015 and 2014:



(In thousands, except per share data)	2015		2014
Net income to common stockholders	$	393,949	$	538,173
Weighted average diluted shares	130,563		133,886
Net income per diluted share	$	3.02	$	4.02

The Company reported net income of $394 million in 2015 compared to $538 million in 2014. The 27% decrease in net income was primarily due to a decrease in after-tax net investment gains of $87 million and a decrease in after-tax net investment income of $72 million. The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2015 and 2014.

Premiums. Gross premiums written were $5,486 million in 2015, an increase of 2% from $5,357 million in 2014. The growth was due primarily to rate increases. Approximately 79% of policies expiring in each of 2015 and 2014 were renewed. Average renewal premium rates (adjusted for change in exposures) increased 1.5% in 2015. However, overall loss costs are

Table of Contents

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 2015 compared with 2014 by line of business within each business segment follows:


•	Insurance-Domestic gross premiums increased 5% to $4,289 million in 2015 from $4,088 million in 2014. Gross premiums increased $81 million (7%) for workers' compensation, $57 million (4%) for other liability, $43 million (12%) for professional liability, $16 million (2%) for short-tail lines and $4 million (1%) for commercial auto.

•

Insurance-International gross premiums decreased 5% to $714 million in 2015 from $748 million in 2014. Gross premiums increased $18 million (34%) for workers' compensation, $10 million (11%) for other liability and $7 million (7%) for commercial auto. Insurance-International gross premiums decreased $52 million (12%) for short-tail lines and $17 million (19%) for professional liability. In local currency terms, Insurance-International gross premiums increased 7% in 2015.


•	Reinsurance-Global gross premiums decreased 7% to $483 million in 2015 from $522 million in 2014, due to increasingly competitive conditions. Gross premiums written decreased $31 million (9%) for casualty lines and $7 million (4%) for property lines.

Net premiums written were $4,690 million in 2015, an increase of 3% from $4,541 million in 2014. Ceded reinsurance premiums as a percentage of gross written premiums were 14% in 2015 and 15% in 2014.

Premiums earned increased 6% to $4,497 million in 2015 from $4,242 million in 2014. Insurance premiums (including the impact of rate changes) are generally earned evenly over the policy term, and accordingly recent rate increases will be earned over the upcoming quarters. Premiums earned in 2015 are related to business written during both 2015 and 2014. Audit premiums were $112 million in 2015 compared with $85 million in 2014.

Net Investment Income. Following is a summary of net investment income for the nine months ended September 30, 2015 and 2014:



	Amount						Average Annualized Yield
(In thousands)	2015			2014			2015		2014
Fixed maturity securities, including cash and cash equivalents and loans receivable	$	318,095		$	331,947		3.3	%	3.5	%
Investment funds	50,838			135,232			5.6		18.0
Arbitrage trading account	11,470			12,508			2.7		2.8
Real estate	9,270			9,207			1.6		1.5
Equity securities available for sale	3,513			5,418			2.8		3.8
Gross investment income	393,186			494,312			3.3		4.3
Investment expenses	(8,150		)	(7,647		)
Total	$	385,036		$	486,665		3.2		4.3

Net investment income decreased 21% to $385 million in 2015 from $487 million in 2014 due primarily to a $84 million decrease in income from investment funds, as well as lower yields on our fixed maturity securities. The decrease in investment income from investment funds (reported on a one-quarter lag) was primarily due to a loss of $25 million from energy funds in 2015 compared with a profit of $18 million in 2014, as well as to lower earnings from aviation and arbitrage funds, partially offset by higher earnings from real estate funds. Based on information received from energy fund managers, the Company expects to report an after-tax loss from energy funds of approximately $9 million in the fourth quarter of 2015. Average invested assets, at cost (including cash and cash equivalents), were $15.9 billion in 2015 and $15.4 billion in 2014.

Insurance Service Fees. The Company earns fees from an insurance distribution business and as a servicing carrier of workers' compensation assigned risk plans for certain states. Service fees increased to $108 million in 2015 from $82 million in 2014 as a result of the acquisition of a specialty property and casualty insurance distribution company in late 2014.

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 $113 million in 2015 compared with $234 million in 2014.

Table of Contents

The realized gains in 2014 included a gain of $86 million from the sale of an investment in a commercial real estate investment fund.

Other-Than-Temporary Impairments. Other-than-temporary impairments were $12 million in 2015; no such impairments were taken in 2014.

Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were derived from aviation-related businesses that provide services to aviation markets, including (i) the distribution, manufacturing, repair and overhaul of aircraft parts and components, (ii) the sale of new and used aircraft, and (iii) avionics, fuel, maintenance, storage and charter services. Revenues from wholly-owned investees was $305 million in 2015 and $299 million in 2014.

Losses and Loss Expenses. Losses and loss expenses increased to $2,733 million in 2015 from $2,577 million in 2014. The consolidated loss ratio was 60.8% in 2015 and 60.7% in 2014. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $46 million in 2015 and $69 million in 2014. Favorable prior year reserve development (net of premium offsets) was $49 million in 2015 compared with $62 million in 2014, a difference of 0.4 loss ratio point. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.3 points to 60.9% in 2015 from 60.6% in 2014. A summary of loss ratios in 2015 compared with 2014 by business segment follows:

•

Insurance-Domestic - The loss ratio of 61.5% in 2015 was 1.3 points higher than the loss ratio of 60.2% in 2014. Catastrophe losses were $41 million in 2015 compared with $59 million in 2014. Favorable prior year reserve development was $36 million in 2015 compared with $72 million in 2014, a difference of 1.3 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.7 points to 61.3% in 2015 from 60.6% in 2014.

•

Insurance-International - The loss ratio of 58.2% in 2015 was 2.7 points lower than the loss ratio of 60.9% in 2014. Catastrophe losses were $2 million in 2015 compared with $9 million in 2014. Favorable prior year reserve development was $5 million in 2015 compared with unfavorable prior year development of $10 million in 2014, a difference of 2.6 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.9 points to 58.7% in 2015 from 57.8% in 2014.

•

Reinsurance-Global - The loss ratio of 58.9% in 2015 was 5.3 points lower than the loss ratio of 64.2% in 2014. Catastrophe losses were $3 million in 2015 compared with $2 million in 2014. Favorable prior year reserve development was $8 million in 2015 compared with $0.5 million in 2014, a difference of 1.6 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development decreased 4.0 points to 60.0% in 2015 from 64.0% in 2014.

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



(In thousands)	2015			2014
Underwriting expenses	$	1,491,109		$	1,407,608
Service expenses	93,314			69,130
Net foreign currency gains	(3,234		)	(1,018		)
Other costs and expenses	116,980			117,899
Total	$	1,698,169		$	1,593,619

Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Underwriting expenses increased 5.9% compared with an increase in net premiums earned of 6.0%. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 33.2% in both 2015 and 2014.

Service expenses, which represent the costs associated with the fee-based businesses, increased to $93 million in 2015 from $69 million in 2014 as a result of the acquisition of a specialty property and casualty insurance distribution company in late 2014.

Foreign currency gains result from transactions denominated in a currency other than a company's operating functional currency. Net foreign currency gains were $3 million in 2015 compared to $1 million in 2014.

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 decreased to $117 million in 2015 from $118 million in 2014.

Table of Contents

Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees represent costs associated with aviation-related businesses that include (i) cost of goods sold related to aircraft and products sold and services provided, and (ii) general and administrative expenses. Expenses from wholly-owned investees were $289 million in 2015 compared to $291 million in 2014.

Interest Expense. Interest expense was $99 million in 2015 compared with $94 million in 2014. In August 2014, the Company issued $350 million of 4.75% senior notes due 2044. A portion of the proceeds were used to repay $200 million of 5.60% senior notes at maturity on May 15, 2015.

Income Taxes. The effective income tax rate was 32% in 2015 and 2014. The effective income tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income.

The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $43 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 $1 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.

Table of Contents

Results of Operations for the Three Months Ended September 30, 2015 and 2014

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 September 30, 2015 and 2014. 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)	2015			2014
Insurance-Domestic:
Gross premiums written	$	1,457,943		$	1,393,186
Net premiums written	1,248,740			1,182,579
Net premiums earned	1,181,923			1,093,554
Loss ratio	61.2		%	59.8		%
Expense ratio	30.8		%	31.1		%
GAAP combined ratio	92.0		%	90.9		%
Insurance-International:
Gross premiums written	$	193,303		$	205,253
Net premiums written	163,587			171,582
Net premiums earned	197,578			205,529
Loss ratio	57.0		%	62.7		%
Expense ratio	43.4		%	40.7		%
GAAP combined ratio	100.4		%	103.4		%
Reinsurance-Global:
Gross premiums written	$	171,335		$	180,917
Net premiums written	158,710			171,221
Net premiums earned	152,057			161,721
Loss ratio	59.1		%	64.5		%
Expense ratio	39.0		%	34.2		%
GAAP combined ratio	98.1		%	98.7		%
Consolidated:
Gross premiums written	$	1,822,581		$	1,779,356
Net premiums written	1,571,037			1,525,382
Net premiums earned	1,531,558			1,460,804
Loss ratio	60.5		%	60.7		%
Expense ratio	33.2		%	32.8		%
GAAP combined ratio	93.7		%	93.5		%

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 September 30, 2015 and 2014:



(In thousands, except per share data)	2015		2014
Net income to common stockholders	$	152,607	$	188,539
Weighted average diluted shares	128,947		133,001
Net income per diluted share	$	1.18	$	1.42

The Company reported net income of $153 million in 2015 compared to $189 million in 2014. The 19% decrease in net income was primarily due to decreases in after-tax net investment income of $34 million and in after-tax net investment gains of $12 million. The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2015 and 2014.

Premiums. Gross premiums written were $1,823 million in 2015, an increase of 2% from $1,779 million in 2014. Average renewal premium rates (adjusted for change in exposures) increased 0.8% in 2015. 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.

Table of Contents

A summary of gross premiums written in 2015 compared with 2014 by line of business within each business segment follows:


•	Insurance-Domestic gross premiums increased 5% to $1,458 million in 2015 from $1,393 million in 2014. Gross premiums increased $34 million (10%) for workers' compensation, $33 million (8%) for other liability and $1 million (1%) for professional liability, and decreased $2 million (1%) for short-tail lines and $1 million (1%) for commercial auto.

•

Insurance-International gross premiums decreased 6% to $193 million in 2015 from $205 million in 2014. Gross premiums increased $7 million (39%) for workers' compensation and $2 million (8%) for commercial auto. Insurance-International gross premiums decreased $12 million (39%) for professional liability, $6 million (18%) for other liability and $3 million (3%) for short-tail lines. In local currency terms, Insurance-International gross premiums increased 7% in 2015.


•	Reinsurance-Global gross premiums decreased 5% to $171 million in 2015 from $181 million in 2014, due to increasingly competitive conditions. Gross premiums written decreased $12 million (9%) for casualty lines and increased $2 million (4%) for property lines.

Net premiums written were $1,571 million in 2015, an increase of 3% from $1,525 million in 2014. Ceded reinsurance premiums as a percentage of gross written premiums were 14% in 2015 and 2014.

Premiums earned increased 5% to $1,532 million in 2015 from $1,461 million in 2014. Insurance premiums (including the impact of rate changes) are generally earned evenly over the policy term, and accordingly recent rate increases will be earned over the upcoming quarters. Premiums earned in 2015 are related to business written during both 2015 and 2014. Audit premiums were $39 million in 2015 compared with $32 million in 2014.

Net Investment Income. Following is a summary of net investment income for the three months ended September 30, 2015 and 2014:



	Amount						Average Annualized Yield
(In thousands)	2015			2014			2015		2014
Fixed maturity securities, including cash and cash equivalents and loans receivable	$	104,936		$	117,289		3.2	%	3.6	%
Investment funds	22,926			59,077			7.9		23.3
Arbitrage trading account	2,608			47			2.1		—
Real estate	4,389			3,042			2.1		0.8
Equity securities available for sale	1,109			1,369			2.6		3.3
Gross investment income	135,968			180,824			3.4		4.6
Investment expenses	(2,754		)	(1,599		)
Total	$	133,214		$	179,225		3.3		4.6

Net investment income decreased 26% to $133 million in 2015 from $179 million in 2014 due primarily to a $36 million decrease in income from investment funds, as well as lower yields on our fixed maturity securities. The decline in investment fund earnings was due primarily to lower earnings from aviation funds. Earnings from energy funds were $2 million in 2015 compared with $5 million in 2014. Based on information received from energy fund managers, the Company expects to report an after-tax loss from energy funds of approximately $9 million in the fourth quarter of 2015. Average invested assets, at cost (including cash and cash equivalents), were $15.9 billion in 2015 and $15.8 billion in 2014.

Insurance Service Fees. The Company earns fees from an insurance distribution business and as a servicing carrier of workers' compensation assigned risk plans for certain states. Service fees increased to $35 million in 2015 from $26 million in 2014 as a result of the acquisition of a specialty property and casualty insurance distribution company in late 2014.

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 $66 million in 2015 compared with $72 million in 2014.

Other-Than-Temporary Impairments. Other-than-temporary impairments were $12 million in 2015; no such impairments were taken in 2014.

Table of Contents

Losses and Loss Expenses. Losses and loss expenses increased to $926 million in 2015 from $887 million in 2014. The consolidated loss ratio was 60.5% in 2015 and 60.7% in 2014. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $7 million in 2015 and $15 million in 2014. Favorable prior year reserve development (net of premium offsets) was $15 million in 2015 compared with $13 million in 2014, a difference of 0.1 loss ratio point. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.4 points to 61.0% in 2015 from 60.6% in 2014. A summary of loss ratios in 2015 compared with 2014 by business segment follows:

•

Insurance-Domestic - The loss ratio of 61.2% in 2015 was 1.4 points higher than the loss ratio of 59.8% in 2014. Catastrophe losses were $4 million in 2015 compared with $8 million in 2014. Favorable prior year reserve development was $7 million in 2015 compared with $18 million in 2014, a difference of 1.0 loss ratio point. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.7 points to 61.4% in 2015 from 60.7% in 2014.

•

Insurance-International - The loss ratio of 57.0% in 2015 was 5.7 points lower than the loss ratio of 62.7% in 2014. Catastrophe losses were $2 million in 2015 compared with $7 million in 2014. Favorable prior year reserve development was $3 million in 2015 compared to unfavorable prior year reserve development of $5 million in 2014, a difference of 3.7 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.5 points to 57.5% in 2015 from 57.0% in 2014.

•

Reinsurance-Global - The loss ratio of 59.1% in 2015 was 5.4 points lower than the loss ratio of 64.5% in 2014. Catastrophe losses were $1 million in each of 2015 and 2014. Favorable prior year reserve development was $5 million in 2015 compared with $0.8 million in 2014, a difference of 2.8 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development decreased 3.0 points to 61.8% in 2015 from 64.8% in 2014.

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



(In thousands)	2015			2014
Underwriting expenses	$	508,815		$	479,174
Service expenses	29,856			23,266
Net foreign currency gains	(5,743		)	(2,677		)
Other costs and expenses	40,613			44,540
Total	$	573,541		$	544,303

Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Underwriting expenses increased 6.2% compared with an increase in net premiums earned of 4.8%. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 33.2% in 2015, up from 32.8% in 2014, primarily due to an increase in commission expenses for certain reinsurance business.

Service expenses, which represent the costs associated with the fee-based businesses, increased to $30 million in 2015 from $23 million in 2014 as a result of the acquisition of a specialty property and casualty insurance distribution company in late 2014.

Foreign currency gains result from transactions denominated in a currency other than a company's operating functional currency. Net foreign currency gains were $6 million in 2015 compared to $3 million in 2014.

Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees represent costs associated with aviation-related businesses that include (i) cost of goods sold related to aircraft and products sold and services provided, and (ii) general and administrative expenses. Expenses from wholly-owned investees were $101 million in 2015 compared to $98 million in 2014.

Table of Contents

Interest Expense. Interest expense was $32 million in 2015 compared with $33 million in 2014. In August 2014, the Company issued $350 million of 4.75% senior notes due 2044. A portion of the proceeds were used to repay $200 million of 5.60% senior notes at maturity on May 15, 2015.

Income Taxes. The effective income tax rate was 33% in 2015 compared to 32% in 2014. The effective income tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income.

Table of Contents

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. Due to the historically low fixed maturity investment returns, the Company invests in equity securities, merger arbitrage securities, investment funds, private equity, loans and real estate related assets. The Company's investments in investment funds and its other alternative investments have experienced, and the Company expects to continue to experience, greater fluctuations in investment income.

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 3.2 years at September 30, 2015 and December 31, 2014. The Company’s fixed maturity investment portfolio and investment-related assets as of September 30, 2015 were as follows:



($ in thousands)	Carrying Value		Percent of Total
Fixed maturity securities:
U.S. government and government agencies	$	672,968	4.2	%
State and municipal:
Special revenue	2,598,060		16.1
State general obligation	659,199		4.1
Pre-refunded (1)	477,118		3.0
Corporate backed	398,419		2.5
Local general obligation	367,026		2.3
Total state and municipal	4,499,822		28.0
Mortgage-backed securities:
Agency	876,970		5.5
Residential-Prime	142,439		0.9
Commercial	68,204		0.4
Residential-Alt A	60,036		0.4
Total mortgage-backed securities	1,147,649		7.2
Corporate:
Industrial	1,951,847		12.1
Asset-backed	1,640,097		10.2
Financial	1,293,718		8.0
Utilities	196,325		1.2
Other	81,224		0.5
Total corporate	5,163,211		32.0
Foreign government and foreign government agencies	884,669		5.5
Total fixed maturity securities	12,368,319		76.9
Equity securities:
Preferred stocks	135,749		0.8
Common stocks	42,128		0.3
Total equity securities	177,877		1.1
Investment funds	1,140,218		7.1
Cash and cash equivalents	879,934		5.5
Real estate	873,909		5.4
Arbitrage trading account	351,179		2.2
Loans receivable	286,273		1.8
Total investments	$	16,077,709	100.0	%

(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.

Table of Contents

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 September 30, 2015, investments in foreign government fixed maturity securities (which are generally held by the Company's foreign operations) were as follows:



(In thousands)	Carrying Value
Australia	$	223,787
United Kingdom	167,601
Canada	151,572
Argentina	136,293
Germany	67,030
Brazil	48,030
Supranational (1)	36,986
Norway	30,354
Singapore	6,079
Colombia	5,270
Netherlands	4,515
Austria	3,643
Uruguay	3,509
Total	$	884,669

________

(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 September 30, 2015, the carrying value of investment funds was $1,140 million, including investments in real estate funds of $535 million, energy funds of $109 million and arbitrage funds of $69 million. Investment funds are primarily reported on a one-quarter lag.

Real Estate. Real estate is directly owned property held for investment. At September 30, 2015, real estate properties in operation included a long-term ground lease in Washington D.C. and office buildings in West Palm Beach and Palm Beach, Florida. In addition, there are three properties under development: an office building in London, a mixed-use project in Washington D.C. and an office complex in New York City. 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 $286 million and an aggregate fair value of $289 million at September 30, 2015. The amortized cost of loans receivable is net of a valuation allowance of $2 million as of September 30, 2015. Loans receivable include real estate loans of $203 million that are secured by commercial real estate located primarily in Arizona, Maryland, New York and Tennessee. Real estate loans receivable

Table of Contents

generally earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through August 2025. Loans receivable include commercial loans of $83 million that are secured by business assets and have fixed interest rates with varying maturities not exceeding 10 years.

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 3.2 years at September 30, 2015 and December 31, 2014. In addition, the fair value of the Company’s international investments is subject to currency risk. The Company attempts to manage its currency risk by matching its foreign currency assets and liabilities where considered appropriate.

Liquidity and Capital Resources

Cash Flow. Cash flow provided from operating activities increased to $620 million in the first nine months of 2015 from $575 million in the comparable period in 2014, primarily due to the timing of tax payments, premium collections and expense payments.

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 80% invested in cash, cash equivalents and marketable fixed maturity securities as of September 30, 2015. 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 September 30, 2015, the Company had senior notes, subordinated debentures and other debt outstanding with a carrying value of $2,179 million and a face amount of $2,203 million. The maturities of the outstanding debt are $1 million in 2015, $37 million in 2016, $36 million in 2017, $450 million in 2019, $300 million in 2020, $423 million in 2022, $2 million in 2029, $250 million in 2037, $350 million in 2044 and $340 million in 2053.

In August 2014, the Company issued $350 million of 4.75% senior notes due 2044. A portion of the proceeds was used to repay $200 million of 5.60% senior notes at maturity on May 15, 2015. In addition, in May 2015 the Company repaid $71 million of debt that it had assumed in 2014 in conjunction with the purchase of an office building in West Palm Beach, Florida.

Equity. At September 30, 2015, total common stockholders’ equity was $4.6 billion, common shares outstanding were approximately 123 million and stockholders’ equity per outstanding share was $37.18. During the nine months ended September 30, 2015, the Company repurchased 4,502,025 shares of its common stock for $224 million.

Total Capital. Total capitalization (equity, debt and subordinated debentures) was $6.8 billion at September 30, 2015. The percentage of the Company’s capital attributable to debt and subordinated debentures was 32% at September 30, 2015 and 35% at December 31, 2014.

Table of Contents


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, as amended, 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 September 30, 2015, 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

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, 2014.

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 September 30, 2015 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
July 2015	—	$	—	—	9,353,091
August 2015	106,113	52.018		106,113	9,246,978
September 2015	—	—		—	9,246,978

Item 6. Exhibits



Number
(10.1)		Form of 2015 Performance-Based Restricted Stock Unit Agreement Under the W. R. Berkley Corporation 2012 Stock Incentive Plan

(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.

Table of Contents

SIGNATURES

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



		W. R. BERKLEY CORPORATION
Date:	November 9, 2015	/s/ W. Robert Berkley, Jr.
		W. Robert Berkley, Jr.
		President and Chief Executive Officer

Date:	November 9, 2015	/s/ Eugene G. Ballard
		Eugene G. Ballard
		Executive Vice President - Chief Financial Officer