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EX-31.2 - CERTIFICATION OF CFO - BERKLEY W R CORPwrb3312015ex312.htm
EX-31.1 - CERTIFICATION OF CEO - BERKLEY W R CORPwrb3312015ex311.htm

 
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 March 31, 2015
or
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the Transition Period from                      to                     .
Commission File Number 1-15202

W. R. BERKLEY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
22-1867895
(State or other jurisdiction of
 
(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 April 30, 2015: 124,840,371
 



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)
 
March 31,
2015
 
December 31,
2014
 
(Unaudited)
 
(Audited)
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities
$
12,652,269

 
$
12,705,160

Investment funds
1,214,272

 
1,211,401

Real estate
761,856

 
731,612

Arbitrage trading account
972,629

 
450,648

Loans receivable
280,769

 
322,012

Equity securities
174,709

 
170,991

Total investments
16,056,504

 
15,591,824

Cash and cash equivalents
614,695

 
674,441

Premiums and fees receivable
1,706,823

 
1,651,088

Due from reinsurers
1,519,530

 
1,503,441

Deferred policy acquisition costs
507,509

 
488,525

Prepaid reinsurance premiums
410,359

 
395,748

Trading account receivables from brokers and clearing organizations

 
371,034

Property, furniture and equipment
327,231

 
332,098

Goodwill
150,551

 
150,944

Accrued investment income
139,689

 
120,367

Federal and foreign income taxes

 
30,171

Other assets
414,161

 
369,558

Total assets
$
21,847,052

 
$
21,679,239

 
 
 
 
Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Reserves for losses and loss expenses
$
10,474,954

 
$
10,369,701

Unearned premiums
3,128,637

 
3,026,732

Due to reinsurers
218,443

 
237,270

Trading account securities sold but not yet purchased
99,299

 
106,079

Trading account payable to brokers and clearing organizations
165,420

 

Federal and foreign income taxes
20,957

 

Other liabilities
673,724

 
859,736

Senior notes and other debt
2,112,456

 
2,115,527

Subordinated debentures
340,125

 
340,060

Total liabilities
17,234,015

 
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, 124,933,275 and 126,748,836 shares, respectively
47,024

 
47,024

Additional paid-in capital
998,005

 
991,512

Retained earnings
5,836,968

 
5,732,410

Accumulated other comprehensive income
152,058

 
183,550

Treasury stock, at cost, 110,184,643 and 108,369,082 shares, respectively
(2,455,433
)
 
(2,364,551
)
Total stockholders’ equity
4,578,622

 
4,589,945

Noncontrolling interests
34,415

 
34,189

Total equity
4,613,037

 
4,624,134

Total liabilities and equity
$
21,847,052

 
$
21,679,239


See accompanying notes to interim consolidated financial statements.

1



W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)

 
For the Three Months
 
Ended March 31,
 
2015
 
2014
REVENUES:
 
 
 
Net premiums written
$
1,575,402

 
$
1,525,880

Change in net unearned premiums
(103,389
)
 
(162,268
)
Net premiums earned
1,472,013

 
1,363,612

Net investment income
124,239

 
168,711

Insurance service fees
36,518

 
28,703

Net realized investment gains
19,044

 
52,754

Revenues from wholly-owned investees
92,606

 
92,840

Other income
259

 
286

Total revenues
1,744,679

 
1,706,906

OPERATING COSTS AND EXPENSES:
 
 
 
Losses and loss expenses
900,708

 
822,095

Other operating costs and expenses
551,046

 
515,166

Expenses from wholly-owned investees
89,670

 
91,730

Interest expense
34,538

 
30,330

Total operating costs and expenses
1,575,962

 
1,459,321

Income before income taxes
168,717

 
247,585

Income tax expense
(50,273
)
 
(77,901
)
Net income before noncontrolling interests
118,444

 
169,684

Noncontrolling interests
(137
)
 
(11
)
Net income to common stockholders
$
118,307

 
$
169,673

 
 
 
 
NET INCOME PER SHARE:
 
 
 
Basic
$
0.94

 
$
1.31

Diluted
$
0.89

 
$
1.25


See accompanying notes to interim consolidated financial statements.





2


W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
 
For the Three Months
 
Ended March 31,
 
2015
 
2014
Net income before noncontrolling interests
$
118,444

 
$
169,684

Other comprehensive income (loss):
 
 
 
Change in unrealized currency translation adjustments
(47,805
)
 
(4,025
)
Change in unrealized investment gains (loss), net of taxes
16,291

 
72,944

Change in net pension asset, net of taxes

 
591

Other comprehensive income (loss)
(31,514
)
 
69,510

Comprehensive income
86,930

 
239,194

Comprehensive (income) to the noncontrolling interest
(115
)
 
(29
)
Comprehensive income to common stockholders
$
86,815

 
$
239,165


See accompanying notes to interim consolidated financial statements.

3


W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(In thousands)
 
For the Three Months
 
Ended March 31,
 
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
(1,678
)
 
(3,338
)
Stock units expensed
8,171

 
6,203

End of period
$
998,005

 
$
970,305

RETAINED EARNINGS:
 
 
 
Beginning of period
$
5,732,410

 
$
5,265,015

Net income to common stockholders
118,307

 
169,673

Dividends
(13,749
)
 
(12,775
)
End of period
$
5,836,968

 
$
5,421,913

ACCUMULATED OTHER COMPREHENSIVE INCOME:
 
 
 
Unrealized investment gains:
 
 
 
Beginning of period
$
306,199

 
$
256,566

Unrealized gains on securities not other-than-temporarily impaired
16,308

 
72,563

Unrealized gains on other-than-temporarily impaired securities
5

 
363

End of period
322,512

 
329,492

Currency translation adjustments:
 
 
 
Beginning of period
(122,649
)
 
(60,524
)
Net change in period
(47,805
)
 
(4,025
)
End of period
(170,454
)
 
(64,549
)
Net pension asset:
 
 
 
Beginning of period

 
(6,651
)
Net change in period

 
591

End of period

 
(6,060
)
Total accumulated other comprehensive income
$
152,058

 
$
258,883

TREASURY STOCK:
 
 
 
Beginning of period
$
(2,364,551
)
 
$
(2,132,835
)
Stock exercised/vested
331

 
3,322

Stock repurchased
(91,213
)
 
(192,668
)
End of period
$
(2,455,433
)
 
$
(2,322,181
)
NONCONTROLLING INTERESTS:
 
 
 
Beginning of period
$
34,189

 
$
33,359

Contributions
111

 
1,526

Net income
137

 
11

Other comprehensive income (loss), net of tax
(22
)
 
18

End of period
$
34,415

 
$
34,914

See accompanying notes to interim consolidated financial statements.

4


W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
For the Three Months
 
Ended March 31,
 
2015
 
2014
CASH FROM OPERATING ACTIVITIES:
 
 
 
Net income to common stockholders
$
118,307

 
$
169,673

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Net investment gains
(19,044
)
 
(52,754
)
Depreciation and amortization
19,203

 
25,236

Noncontrolling interests
137

 
11

Investment funds
(6,061
)
 
(58,906
)
Stock incentive plans
8,171

 
6,187

Change in:
 
 
 
Arbitrage trading account
7,692

 
42

Premiums and fees receivable
(71,181
)
 
(99,306
)
Reinsurance accounts
(46,260
)
 
(49,583
)
Deferred policy acquisition costs
(21,314
)
 
(24,066
)
Income taxes
44,618

 
70,070

Reserves for losses and loss expenses
152,925

 
148,204

Unearned premiums
117,403

 
198,933

Other
(243,584
)
 
(190,577
)
Net cash from operating activities
61,012

 
143,164

CASH FROM (USED IN) INVESTING ACTIVITIES:
 
 
 
Proceeds from sale of fixed maturity securities
466,276

 
328,371

Proceeds from sale of equity securities
9,785

 
6,457

Distributions from (contributions to) investment funds
(9,363
)
 
158,808

Proceeds from maturities and prepayments of fixed maturity securities
655,349

 
546,838

Purchase of fixed maturity securities
(1,094,439
)
 
(1,131,612
)
Purchase of equity securities
(8,882
)
 
(19,274
)
Additions to real estate
(44,162
)
 
(35,613
)
Change in loans receivable
41,244

 
(29,568
)
Net additions to property, furniture and equipment
(7,680
)
 
(9,862
)
Change in balances due to security brokers
(2,652
)
 
51,557

Payment for business purchased, net of cash acquired

 
(97
)
Net cash from (used in) investing activities
5,476

 
(133,995
)
CASH USED IN FINANCING ACTIVITIES:
 
 
 
Repayment of senior notes and other debt
(3,240
)
 
(125
)
Cash dividends to common stockholders
(13,749
)
 
(12,775
)
Purchase of common treasury shares
(91,213
)
 
(192,668
)
Other, net
(1,187
)
 
1,677

Net cash used in financing activities
(109,389
)
 
(203,891
)
Net impact on cash due to change in foreign exchange rates
(16,845
)
 
(1,441
)
Net change in cash and cash equivalents
(59,746
)
 
(196,163
)
Cash and cash equivalents at beginning of year
674,441

 
839,738

Cash and cash equivalents at end of period
$
614,695

 
$
643,575

See accompanying notes to interim consolidated financial statements.

5


W. R. Berkley Corporation and Subsidiaries
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) General
The accompanying unaudited consolidated financial statements of W. R. Berkley Corporation and 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
 
Ended March 31,
(In thousands)
2015
 
2014
Basic
125,969

 
129,873

Diluted
132,484

 
135,429


(3) Recent Accounting Pronouncements

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


6



(4) Acquisitions/Dispositions

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


(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 three months ended March 31, 2015:
 
 
 
 
 
 
Changes in AOCI
 
 
 
 
 
 
Beginning of period
$
306,199

 
$
(122,649
)
 
$

 
$
183,550

Other comprehensive income (loss) before reclassifications
24,592

 
(47,805
)
 

 
(23,213
)
Amounts reclassified from AOCI
(8,301
)
 

 

 
(8,301
)
Other comprehensive income (loss)
16,291

 
(47,805
)
 

 
(31,514
)
Unrealized investment gain related to non-controlling interest
22

 

 

 
22

End of period
$
322,512

 
$
(170,454
)
 
$

 
$
152,058

Amounts reclassified from AOCI
 
 
 
 
 
 
 
Pre-tax
$
(12,771
)
(1)
$

 
$

 
$
(12,771
)
Tax effect (3)
4,470

 

 

 
4,470

After-tax amounts reclassified
$
(8,301
)
 
$

 
$

 
$
(8,301
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
Pre-tax
$
24,536

 
$
(47,805
)
 
$

 
$
(23,269
)
Tax effect
(8,245
)
 

 

 
(8,245
)
Other comprehensive income (loss)
$
16,291

 
$
(47,805
)
 
$

 
$
(31,514
)

7


 
Unrealized Investment Gains (Losses)
 
Currency Translation Adjustments
 
Net Pension Asset
 
Accumulated Other Comprehensive Income (Loss)
(In thousands)
 
 
 
 
 
 
 
As of and for the three months ended March 31, 2014:
 
 
 
 
 
 
Changes in AOCI
 
 
 
 
 
 
Beginning of period
$
256,566

 
$
(60,524
)
 
$
(6,651
)
 
$
189,391

Other comprehensive income (loss) before reclassifications
77,443

 
(4,025
)
 

 
$
73,418

Amounts reclassified from AOCI
(4,499
)
 

 
591

 
$
(3,908
)
Other comprehensive income (loss)
72,944

 
(4,025
)
 
591

 
$
69,510

Unrealized investment loss related to non-controlling interest
(18
)
 

 

 
$
(18
)
End of period
$
329,492

 
$
(64,549
)
 
$
(6,060
)
 
$
258,883

Amounts reclassified from AOCI
 
 
 
 
 
 
 
Pre-tax
$
(6,921
)
(1)
$

 
$
909

(2)
$
(6,012
)
Tax effect (3)
2,422

 

 
(318
)
 
$
2,104

After-tax amounts reclassified
$
(4,499
)
 
$

 
$
591

 
$
(3,908
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
Pre-tax
$
112,290

 
$
(4,025
)
 
$
909

 
$
109,174

Tax effect
(39,346
)
 

 
(318
)
 
$
(39,664
)
Other comprehensive income (loss)
$
72,944

 
$
(4,025
)
 
$
591

 
$
69,510

_______________
(1) Net investment gains in the consolidated statements of income.
(2) Other operating costs and expenses in the consolidated statements of income.
(3) Income tax expense in the consolidated statements of income.

(6) Statements of Cash Flow
Interest payments were $56,632,000 and $48,587,000 and income taxes paid were $4,769,000 and $7,490,000 in the three months ended March 31, 2015 and 2014, respectively.


8



(7) Investments in Fixed Maturity Securities
At March 31, 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
 
March 31, 2015
 
 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
 
 
State and municipal
$
73,974

 
$
17,820

 
$

 
$
91,794

 
$
73,974

Residential mortgage-backed
22,300

 
3,049

 

 
25,349

 
22,300

Corporate
4,999

 
215

 

 
5,214

 
4,999

Total held to maturity
101,273

 
21,084

 

 
122,357

 
101,273

Available for sale:
 
 
 
 
 
 
 
 
 
U.S. government and government agency
719,947

 
34,349

 
(1,829
)
 
752,467

 
752,467

State and municipal
4,220,797

 
232,353

 
(4,446
)
 
4,448,704

 
4,448,704

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Residential (1)
1,100,122

 
32,147

 
(6,687
)
 
1,125,582

 
1,125,582

Commercial
71,083

 
1,867

 
(66
)
 
72,884

 
72,884

Corporate
5,022,705

 
209,711

 
(19,776
)
 
5,212,640

 
5,212,640

Foreign
892,006

 
64,854

 
(18,141
)
 
938,719

 
938,719

Total available for sale
12,026,660

 
575,281

 
(50,945
)
 
12,550,996

 
12,550,996

Total investments in fixed maturity securities
$
12,127,933

 
$
596,365

 
$
(50,945
)
 
$
12,673,353

 
$
12,652,269

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
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

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 $1,088,067 and $1,095,671 as of March 31, 2015 and December 31, 2014, respectively, related to the non-credit portion of other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income.

9


The amortized cost and fair value of fixed maturity securities at March 31, 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
$
811,966

 
$
814,139

Due after one year through five years
4,060,941

 
4,247,879

Due after five years through ten years
3,612,480

 
3,816,097

Due after ten years
2,449,041

 
2,571,423

Mortgage-backed securities
1,193,505

 
1,223,815

Total
$
12,127,933

 
$
12,673,353

At March 31, 2015, there were no investments, other than investments in United States government and government agency securities, which exceeded 10% of common stockholders’ equity.

(8) Investments in Equity Securities
At March 31, 2015 and December 31, 2014, investments in equity securities were as follows:
 
(In thousands)
Cost
 
Gross Unrealized
 
Fair
Value
 
Carrying
Value
Gains
 
Losses
 
March 31, 2015
 
 
 
 
 
 
 
 
 
Common stocks
$
70,483

 
$

 
$
(9,383
)
 
$
61,100

 
$
61,100

Preferred stocks
100,377

 
17,102

 
(3,870
)
 
113,609

 
113,609

Total
$
170,860

 
$
17,102

 
$
(13,253
)
 
$
174,709

 
$
174,709

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 March 31, 2015 and December 31, 2014, the carrying value of the arbitrage trading account was $973 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
 
Ended March 31,
(In thousands)
2015
 
2014
Investment income earned on:
 
 
 
Fixed maturity securities, including cash and cash equivalents and loans receivable
$
108,129

 
$
106,898

Investment funds
6,061

 
53,799

Arbitrage trading account
8,979

 
5,519

Equity securities available for sale
1,180

 
1,946

Real estate
2,767

 
3,102

Gross investment income
127,116

 
171,264

Investment expense
(2,877
)
 
(2,553
)
Net investment income
$
124,239

 
$
168,711



10


(11) Investment Funds
Investment funds consist of the following:
 
Carrying Value as of
 
Income (Loss) from Investment Funds
 
March 31,
 
December 31,
 
For the Three Months Ended March 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Real estate
$
481,822

 
$
466,703

 
$
26,012

 
$
12,295

Energy
119,813

 
152,056

 
(21,868
)
 
8,601

Arbitrage
281,462

 
282,335

 
(873
)
 
5,107

Other funds
331,175

 
310,307

 
2,790

 
27,796

Total
$
1,214,272

 
$
1,211,401

 
$
6,061


$
53,799


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 funds include 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 March 31, 2015 is 28.1% with a fair value of $385 million and a carrying value of $46 million.

(12) Real Estate

Investment in real estate represents directly owned property held for investment, as follows:    
 
Carrying Value
 
March 31,
 
December 31,
(In thousands)
2015
 
2014
Properties in operation
$
200,010

 
$
196,980

Properties under development
561,846

 
534,632

Total
$
761,856

 
$
731,612


Properties in operation included a long-term ground lease in Washington, D.C. and an office building in West Palm Beach, Florida. Properties in operation are net of accumulated depreciation and amortization of $4,113,000 and $1,609,000 as of March 31, 2015 and December 31, 2014, respectively. Related depreciation expense was $2,543,000 and $1,813,000 as of March 31, 2015 and 2014, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $8,575,000 in 2015, $11,457,000 in 2016, $11,500,000 in 2017, $10,833,000 in 2018, $7,839,000 in 2019 and $336,653,000 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. The Company expects to fund further development costs for these projects with a combination of its own funds and external financing.












(13) Loans Receivable

11


Loans receivable are as follows:
(In thousands)
March 31, 2015
 
December 31, 2014
Amortized cost:
 
 
 
  Real estate loans
$
203,558

 
$
243,407

  Commercial loans
77,211

 
78,605

  Total
$
280,769

 
$
322,012

 
 
 
 
Fair value:
 
 
 
  Real estate loans
$
206,626

 
$
245,112

  Commercial loans
77,210

 
80,107

  Total
$
283,836

 
$
325,219

 
 
 
 
Valuation allowance:
 
 
 
  Specific
$
76

 
$
115

  General
2,363

 
2,371

  Total
$
2,439

 
$
2,486

 
 
 
 
 
For the Three Months
 
 Ended March 31,
 
2015
 
2014
  Increase (decrease) in valuation allowance
$
(47
)
 
$
463

  Loans receivable charged off

 

Loans receivable in non-accrual status were $12.9 million and $14.2 million as of March 31, 2015 and December 31, 2014, respectively, primarily resulting from the transfer of such loans to held-for-sale.
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, Illinois, Maryland, New York, North Carolina, Texas and Virginia. 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 March 31, 2015, and accordingly, the Company determined that a specific valuation allowance was not required.







(14) Realized and Unrealized Investment Gains (Losses)

12



 Realized and unrealized investment gains (losses) are as follows:
 
For the Three Months Ended March 31,
(In thousands)
2015
 
2014
Realized investment gains (losses):
 
 
 
Fixed maturity securities:
 
 
 
Gains
$
4,146

 
$
2,062

Losses
(1,077
)
 
(1,598
)
Equity securities available for sale
9,702

 
6,457

Investment funds
(1,511
)
 
45,833

Real estate

 

Other
7,784

 

    Total
19,044

 
52,754

Income tax expense
(6,665
)
 
(18,465
)
    Total after-tax realized investment gains
$
12,379

 
$
34,289

Change in unrealized investment gains (losses):
 
 
 
Fixed maturity securities
$
42,480

 
$
91,638

Previously impaired fixed maturity securities
8

 
559

Equity securities available for sale
(6,845
)
 
26,203

Investment funds
(11,107
)
 
(6,110
)
Total change in unrealized investment gains (losses)
24,536

 
112,290

Income tax expense
(8,245
)
 
(39,346
)
Noncontrolling interests
22

 
(18
)
    Total after-tax unrealized gains
$
16,313

 
$
72,926

            


13


(15) Securities in an Unrealized Loss Position
The following tables summarize all securities in an unrealized loss position at March 31, 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
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$
57,281

 
$
340

 
$
71,103

 
$
1,489

 
$
128,384

 
$
1,829

State and municipal
310,510

 
1,753

 
112,892

 
2,693

 
423,402

 
4,446

Mortgage-backed securities
76,098

 
219

 
225,870

 
6,534

 
301,968

 
6,753

Corporate
1,013,347

 
5,917

 
172,712

 
13,859

 
1,186,059

 
19,776

Foreign
39,512

 
3,518

 
61,375

 
14,623

 
100,887

 
18,141

Fixed maturity securities
1,496,748

 
11,747

 
643,952

 
39,198

 
2,140,700

 
50,945

Common stocks
48,645

 
9,383

 

 

 
48,645

 
9,383

Preferred stocks
4,017

 
834

 
22,637

 
3,036

 
26,654

 
3,870

Equity securities
52,662

 
10,217

 
22,637

 
3,036

 
75,299

 
13,253

Total
$
1,549,410

 
$
21,964

 
$
666,589

 
$
42,234

 
$
2,215,999

 
$
64,198

 
 
 
 
 
 
 
 
 
 
 
 
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 March 31, 2015 is presented in the table below:  
($ in thousands)
Number of
Securities
 
Aggregate
Fair Value
 
Gross
Unrealized
Loss
Mortgage-backed securities
9

 
$
26,168

 
$
1,658

Corporate
5

 
2,965

 
420

Total
14

 
$
29,133

 
$
2,078


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 three months ended March 31, 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.
 
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.

14


Equity Securities – At March 31, 2015, there were seven equity securities in an unrealized loss position, with an aggregate fair value of $75.3 million and a gross unrealized loss of $13.2 million. Three of these equity securities are preferred stocks that are rated non-investment grade, and none are delinquent. Based upon management’s view of the underlying value of these securities, the Company does not consider these equity securities to be OTTI.
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 March 31, 2015 and December 31, 2014, respectively.

(16) Fair Value Measurements
The Company’s fixed maturity and equity securities available for sale and its arbitrage trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available.
Because many fixed maturity securities do not trade on a daily basis, the Company utilizes pricing models and processes, which may include benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Market inputs used to evaluate securities include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Quoted prices are often unavailable for recently issued securities, securities that are infrequently traded or securities that are only traded in private transactions. For publicly traded securities for which quoted prices are unavailable, the Company determines fair value based on independent broker quotations and other observable market data. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial projections, credit quality and business developments of the issuer and other relevant information.



15


The following tables present the assets and liabilities measured at fair value, on a recurring basis, as of March 31, 2015 and December 31, 2014 by level:
 
(In thousands)
Total
 
Level 1
 
Level 2
 
Level 3
March 31, 2015
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Fixed maturity securities available for sale:
 
 
 
 
 
 
 
U.S. government and government agency
$
752,467

 
$

 
$
752,467

 
$

State and municipal
4,448,704

 

 
4,448,704

 

Mortgage-backed securities
1,198,466

 

 
1,198,466

 

Corporate
5,212,640

 

 
5,210,710

 
1,930

Foreign government
938,719

 

 
938,719

 

Total fixed maturity securities available for sale
12,550,996

 

 
12,549,066

 
1,930

Equity securities available for sale:
 
 
 
 
 
 
 
Common stocks
61,100

 
52,205

 

 
8,895

Preferred stocks
113,609

 

 
109,944

 
3,665

Total equity securities available for sale
174,709

 
52,205

 
109,944

 
12,560

Arbitrage trading account
972,629

 
269,697

 
630,316

 
72,616

Total
$
13,698,334

 
$
321,902

 
$
13,289,326

 
$
87,106

Liabilities:
 
 
 
 
 
 
 
Securities sold but not yet purchased
$
99,299

 
$
99,299

 
$

 
$

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 three months ended March 31, 2015 or during the year ended December 31, 2014.








16


The following tables summarize changes in Level 3 assets and liabilities for the three months ended March 31, 2015 and for the year ended December 31, 2014:
 
  
 
 
Gains (Losses) Included in
 
 
(In thousands)
Beginning
Balance
 
Earnings
 
Other
Comprehensive
Income
 
Purchases
 
(Sales)
 
Maturities
 
Transfer in (out)
 
Ending
Balance
Three months ended March 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
$
20,765

 
$
15

 
$
180

 
$

 
$

 
$
(1,673
)
 
$
(17,357
)
 
$
1,930

Total
20,765

 
15

 
180

 

 

 
(1,673
)
 
(17,357
)
 
1,930

Equity securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
10,741

 

 
(1,846
)
 

 

 

 

 
8,895

Preferred stocks
3,713

 
(48
)
 

 

 

 

 

 
3,665

Total
14,454

 
(48
)
 
(1,846
)
 

 

 

 

 
12,560

Arbitrage trading account
720

 
(277
)
 

 
72,173

 

 

 

 
72,616

Total
$
35,939

 
$
(310
)
 
$
(1,666
)
 
$
72,173

 
$

 
$
(1,673
)
 
$
(17,357
)
 
$
87,106

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
)