BERKLEY W R CORP - FORM 10-Q - May 4, 2015

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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
)
 
—

 
—

 
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 three months ended March 31, 2015, one security was 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.


17

(17) Reinsurance
The following is a summary of reinsurance financial information:
  
For the Three Months
 
Ended March 31,
(In thousands)
2015
 
2014
Written premiums:
 
 
 
Direct
$
1,647,341

 
$
1,565,188

Assumed
204,464

 
240,079

Ceded
(276,403
)
 
(279,387
)
Total net premiums written
$
1,575,402

 
$
1,525,880

 
 
 
 
Earned premiums:
 
 
 
Direct
$
1,524,736

 
$
1,381,572

Assumed
203,342

 
225,762

Ceded
(256,065
)
 
(243,722
)
Total net premiums earned
$
1,472,013

 
$
1,363,612

 
 
 
 
Ceded losses incurred
$
118,391

 
$
100,684

Ceded commissions earned
$
43,651

 
$
37,170

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 March 31, 2015 and December 31, 2014.

(18) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:
  
March 31, 2015
 
December 31, 2014
(In thousands)
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets:
 
 
 
 
 
 
 
Fixed maturity securities
$
12,652,269

 
$
12,673,353

 
$
12,705,160

 
$
12,725,806

Equity securities available for sale
174,709

 
174,709

 
170,991

 
170,991

Arbitrage trading account
972,629

 
972,629

 
450,648

 
450,648

Loans receivable
280,769

 
283,836

 
322,012

 
325,219

Cash and cash equivalents
614,695

 
614,695

 
674,441

 
674,441

Trading account receivables from brokers and clearing organizations
—

 
—

 
371,034

 
371,034

Liabilities:
 
 
 
 
 
 
 
Due to broker
18,260

 
18,260

 
23,133

 
23,133

Trading account payable to brokers and clearing organizations
165,420

 
165,420

 
—

 
—

Trading account securities sold but not yet purchased
99,299

 
99,299

 
106,079

 
106,079

Subordinated debentures
340,125

 
354,480

 
340,060

 
332,640

Senior notes and other debt
2,112,456

 
2,388,949

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

18

(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 $8 million and $6 million for the three months ended March 31, 2015 and 2014, respectively. A summary of RSUs issued in the three months ended March 31, 2015 and 2014 follows:
 
($ in thousands)
Units
 
Fair Value
Three months ended March 31,
 
 
 
2015
10,000

 
$
503

2014
16,950

 
$
689


(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.

19

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 March 31, 2015:
 
 
 
 
 
 
 
 
 
 
Insurance-Domestic
$
1,117,542

 
$
82,652

 
$
25,575

 
$
1,225,769

 
$
166,866

 
$
114,910

Insurance-International
193,734

 
16,432

 
—

 
210,166

 
21,303

 
15,129

Reinsurance-Global
160,737

 
17,041

 
—

 
177,778

 
20,262

 
14,500

Corporate and eliminations (1)
—

 
8,114

 
103,808

 
111,922

 
(58,758
)
 
(38,611
)
Net investment gains
—

 
—

 
19,044

 
19,044

 
19,044

 
12,379

  Total
$
1,472,013

 
$
124,239

 
$
148,427

 
$
1,744,679

 
$
168,717

 
$
118,307

Three months ended March 31, 2014:
 
 
 
 
 
 
 
 
 
 
Insurance-Domestic
$
1,003,507

 
$
118,137

 
$
28,766

 
$
1,150,410

 
$
202,185

 
$
138,036

Insurance-International
185,324

 
16,652

 
—

 
201,976

 
17,747

 
12,468

Reinsurance-Global
174,781

 
27,578

 
—

 
202,359

 
32,074

 
22,392

Corporate and eliminations (1)
—

 
6,344

 
93,063

 
99,407

 
(57,175
)
 
(37,513
)
Net investment gains
—

 
—

 
52,754

 
52,754

 
52,754

 
34,290

  Total
$
1,363,612

 
$
168,711

 
$
174,583

 
$
1,706,906

 
$
247,585

 
$
169,673

________
(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)
March 31, 2015
 
December 31, 2014
Insurance-Domestic
$
16,011,219

 
$
16,036,513

Insurance-International
1,817,696

 
1,876,347

Reinsurance-Global
2,607,238

 
2,708,090

Corporate and eliminations
1,410,899

 
1,058,289

  Total
$
21,847,052

 
$
21,679,239


    



















20


Net premiums earned by major line of business are as follows:
 
 
For the Three Months
 
Ended March 31,
(In thousands)
2015
 
2014
  Insurance-Domestic:
 
 
 
Other liability
$
372,039

 
$
339,633

Workers’ compensation
292,617

 
263,032

Short-tail lines
227,726

 
204,766

Commercial automobile
134,957

 
124,368

Professional liability
90,203

 
71,708

Total
1,117,542

 
1,003,507

 
 
 
 
  Insurance-International:
 
 
 
Other liability
24,865

 
19,375

Workers’ compensation
22,121

 
17,325

Short-tail lines
95,364

 
96,274

Commercial automobile
30,603

 
27,593

Professional liability
20,781

 
24,757

Total
193,734

 
185,324

 
 
 
 
  Reinsurance-Global:
 
 
 
Casualty
112,816

 
125,603

Property
47,921

 
49,178

Total
160,737

 
174,781

 
 
 
 
Total
$
1,472,013

 
$
1,363,612



21


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.

22

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview
W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in the United States and operates in three business segments: Insurance-Domestic, Insurance-International and Reinsurance-Global. Our decentralized structure provides us with the flexibility to respond quickly and efficiently to local or specific market conditions and to pursue specialty business niches. It also allows us to be closer to our customers in order to better understand their individual needs and risk characteristics. While providing our business units with certain operating autonomy, our structure allows us to capitalize on the benefits of economies of scale through centralized capital, investment, reinsurance and enterprise risk management, and actuarial, financial and corporate legal staff support. The Company’s primary sources of revenues and earnings are its insurance operations and its investments.
An important part of our strategy is to form new operating units to capitalize on various business opportunities. Since 2006, the Company 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 has increasingly invested 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.
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

23

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

24

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

 
358,322

 
541,853

10%
388,037

 
541,853

 
734,123

Our net reserves for losses and loss expenses of approximately $9 billion as of March 31, 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 16%, of the Company’s net loss reserves as of March 31, 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 March 31, 2015 and December 31, 2014:
 
(In thousands)
2015
 
2014
Insurance-Domestic
$
6,875,226

 
$
6,767,374

Insurance-International
737,889

 
750,613

Reinsurance-Global
1,444,997

 
1,452,654

Net reserves for losses and loss expenses
9,058,112

 
8,970,641

Ceded reserves for losses and loss expenses
1,416,842

 
1,399,060

Gross reserves for losses and loss expenses
$
10,474,954

 
$
10,369,701


25

Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of March 31, 2015 and December 31, 2014:
 
(In thousands)
Reported Case
Reserves
 
Incurred But
Not Reported
 
Total
March 31, 2015
 
 
 
 
 
Other liability
$
1,037,025

 
$
1,817,434

 
$
2,854,459

Workers’ compensation (1)
1,632,649

 
1,207,815

 
2,840,464

Professional liability
320,807

 
447,972

 
768,779

Commercial automobile
325,213

 
216,869

 
542,082

Short-tail lines
326,884

 
280,447

 
607,331

Total primary
3,642,578

 
3,970,537

 
7,613,115

Reinsurance (1)
610,189

 
834,808

 
1,444,997

Total
$
4,252,767

 
$
4,805,345

 
$
9,058,112

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 excess and assumed workers’ compensation business are net of an aggregate net discount of $736 million and $746 million as of March 31, 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 each of the three months ended March 31, 2015 and 2014 are as follows:
 
(In thousands)
2015
 
2014
Net decrease in prior year loss reserves
$
2,499

 
$
19,035

Increase in prior year earned premiums
9,304

 
5,865

Net favorable prior year development
$
11,803

 
$
24,900

     
Favorable prior year development (net of additional and return premiums) was $12 million in the three months ended March 31, 2015, compared with $25 million in 2014. Overall, the reported emergence of losses on prior accident years during the first quarter of 2015 was close to our expectations.
Substantially all of the favorable development in 2015 related to the Insurance-Domestic segment. The Insurance-Domestic segment experienced favorable development for the other liability, workers' compensation and property lines of business, which was partially offset by unfavorable development in commercial automobile liability. The other liability favorable development resulted from the continuation of favorable claim frequency trends (i.e., number of reported claims per unit of exposure) and related primarily to accident years 2009 through 2014. The property favorable development related mainly to accident year 2014 and resulted from the resolution of a number of claims during the quarter. The workers'

26

compensation favorable development related to better than expected loss emergence for the 2014 accident year as well as the settlement of several excess claims from accident years 2005 and prior. The adverse commercial auto liability development resulted from a higher than expected number of large losses, particularly for long-haul trucking business, related to accident years 2011 through 2014.
The favorable prior year development in 2014 was primarily related to the Insurance-Domestic segment and was driven by excess and surplus lines casualty business for accident years 2007 through 2013.
Reserve Discount. The Company discounts its liabilities for excess and assumed workers’ compensation business because of the long period of time over which losses are paid. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject to discounting was derived from the Company’s loss payout experience. For non-proportional business, reserves for losses and loss expenses have been discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. For proportional business, reserves for losses and loss expenses have been discounted at the statutory rate of 2.0%. As of March 31, 2015, the aggregate blended discount rates ranged from 2.0% to 6.5%, with a weighted average discount rate of 4.2%. The aggregate net discount, after reflecting the effects of ceded reinsurance, was $736 million and $746 million as of March 31, 2015 and December 31, 2014, respectively.
Assumed Reinsurance Premiums. The Company estimates the amount of assumed reinsurance premiums that it will receive under treaty reinsurance agreements at the inception of the contracts. These premium estimates are revised as the actual amount of assumed premiums is reported to the Company by the ceding companies. As estimates of assumed premiums are made or revised, the related amount of earned premiums, commissions and incurred losses associated with those premiums are recorded. Estimated assumed premiums receivable were approximately $85 million at both March 31, 2015 and 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, 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.

27


The following table provides a summary of fixed maturity securities in an unrealized loss position as of March 31, 2015:
(Dollars in thousands)
Number of
Securities
 
Aggregate
Fair Value
 
Unrealized
Loss
Unrealized loss less than 20% of amortized cost
314

 
$
2,078,607

 
$
29,710

Unrealized loss of 20% or greater of amortized cost:
 
 
 
 
 
Less than twelve months
2

 
3,484

 
1,151

Twelve months and longer
12

 
58,609

 
20,084

Total
328

 
$
2,140,700

 
$
50,945

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:
(Dollars in thousands)
Number of
Securities
 
Aggregate
Fair Value
 
Unrealized
Loss
Mortgage-backed securities
9

 
$
26,168

 
$
1,658

Corporate
5

 
2,965

 
420

Total
14

 
$
29,133

 
$
2,078

    
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.
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.
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 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

28

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 March 31, 2015:
 
(In thousands)
Carrying
Value
 
Percent
of Total
Pricing source:
 
 
 
Independent pricing services
$
12,357,001

 
98.5
%
Syndicate manager
73,828

 
0.6

Directly by the Company based on:
 
 
 
Observable data
118,236

 
0.9

Cash flow model
1,931

 
* -
Total
$
12,550,996

 
100.0
%
_______
*Less than 0.1%.
Independent pricing services –The vast majority of the Company’s fixed maturity securities available for sale were priced by independent pricing services (generally one U.S. pricing service plus additional pricing services with respect to a limited number of foreign securities held by the Company). The prices provided by the independent pricing services are generally based on observable market data in active markets (e.g., broker quotes and prices observed for comparable securities). The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company reviews the prices provided by pricing services for reasonableness based upon current trading levels for similar securities. If the prices appear unusual to the Company, they are re-examined and the value is either confirmed or revised. In addition, the Company periodically performs independent price tests of a sample of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of March 31, 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. 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.



29

Results of Operations for the Three Months Ended March, 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 March 31, 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
$
1,409,177

 
$
1,342,942

Net premiums written
1,193,631

 
1,126,381

Net premiums earned
1,117,542

 
1,003,507

Loss ratio
61.6
%
 
59.7
%
Expense ratio
31.2
%
 
32.5
%
GAAP combined ratio
92.8
%
 
92.2
%
Insurance-International:
 
 
 
Gross premiums written
$
283,226

 
$
277,186

Net premiums written
231,508

 
225,821

Net premiums earned
193,734

 
185,324

Loss ratio
57.9
%
 
59.2
%
Expense ratio
39.1
%
 
40.1
%
GAAP combined ratio
97.0
%
 
99.3
%
Reinsurance-Global:
 
 
 
Gross premiums written
$
159,402

 
$
185,139

Net premiums written
150,263

 
173,678

Net premiums earned
160,737

 
174,781

Loss ratio
62.2
%
 
64.6
%
Expense ratio
35.8
%
 
32.8
%
GAAP combined ratio
98.0
%
 
97.4
%
Consolidated:
 
 
 
Gross premiums written
$
1,851,805

 
$
1,805,267

Net premiums written
1,575,402

 
1,525,880

Net premiums earned
1,472,013

 
1,363,612

Loss ratio
61.2
%
 
60.3
%
Expense ratio
32.7
%
 
33.6
%
GAAP combined ratio
93.9
%
 
93.9
%

30


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 March 31, 2015 and 2014:
(In thousands, except per share data)
2015
 
2014
Net income to common stockholders
$
118,307

 
$
169,673

Weighted average diluted shares
132,484

 
135,429

Net income per diluted share
$
0.89

 
$
1.25

The Company reported net income of $118 million in 2015 compared to $170 million in 2014. The 30% decrease in net income was primarily due to decreases in after-tax net investment income of $29 million and in after-tax net investment gains of $22 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 $1,852 million in 2015, an increase of 3% from $1,805 million in 2014. The growth was due primarily to rate increases. Approximately 79.2% of policies expiring in 2015 were renewed, compared with a 78.6% renewal retention rate for policies expiring in 2014.
Average renewal premium rates (adjusted for change in exposures) increased 3.1% 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.
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 $1,409 million in 2015 from $1,343 million in 2014. Gross premiums increased $24 million (25%) for professional liability, $19 million (5%) for other liability, $16 million (6%) for short-tail lines, $4 million (3%) for commercial auto and $3 million (1%) for workers' compensation.
•
Insurance-International gross premiums increased 2% to $283 million in 2015 from $277 million in 2014. Gross premiums increased $11 million (39%) for other liability, $5 million (30%) for workers' compensation and $2 million (7%) for commercial auto. Insurance-International gross premiums decreased $9 million (5%) for short-tail lines and $3 million (12%) for professional liability. In local currency terms, international gross premiums increased 14% in 2015.
•
Reinsurance-Global gross premiums decreased 14% to $159 million in 2015 from $185 million in 2014, due to increasingly competitive conditions. Gross premiums written decreased $14 million (11%) for casualty lines and $12 million (20%) for property lines.
Net premiums written were $1,575 million in 2015, an increase of 3% from $1,526 million in 2014. Ceded reinsurance premiums as a percentage of gross written premiums were 15% in 2015 and 2014.
Premiums earned increased 8% to $1,472 million in 2015 from $1,364 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 $37 million in 2015 compared with $30 million in 2014.

31

Net Investment Income. Following is a summary of net investment income for the three months ended March 31, 2015 and 2014: 
 
Amount
 
Average Annualized
Yield
(In thousands)
2015
 
2014
 
2015
 
2014
Fixed maturity securities, including cash and cash equivalents and loans receivable
$
108,129

 
$
106,898

 
3.3
%
 
3.4
%
Investment funds
6,061

 
53,799

 
2.0

 
21.1

Arbitrage trading account
8,979

 
5,519

 
6.8

 
4.6

Real estate
2,767

 
3,102

 
1.5

 
1.7

Equity securities available for sale
1,180

 
1,946

 
2.9

 
3.7

Gross investment income
127,116

 
171,264

 
3.2

 
4.5

Investment expenses
(2,877
)
 
(2,553
)
 
 
 
 
Total
$
124,239

 
$
168,711

 
3.1

 
4.5

Net investment income decreased 26% to $124 million in 2015 from $169 million in 2014 due to a $48 million decrease in income from investment funds. The decrease in investment income from investment funds (reported on a one-quarter lag) was primarily due to losses from energy funds, partially offset by higher earnings from real estate funds. Average invested assets, at cost (including cash and cash equivalents) were $16.0 billion in 2015 and $15.1 billion in 2014.
Insurance Service Fees. The Company is a servicing carrier of workers' compensation assigned risk plans for 20 states and provides insurance program management services to self-insureds, captives, governmental entities, risk retention groups, and insurance companies. Service fees increased to $37 million in 2015 from $29 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 $19 million in 2015 compared with $53 million in 2014. The realized gains in 2014 included a gain of $45 million from the sale of an investment in commercial real estate investment fund.
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 $93 million in both 2015 and 2014.
Losses and Loss Expenses. Losses and loss expenses increased to $901 million in 2015 from $822 million in 2014. The consolidated loss ratio was 61.2% in 2015 and 60.3% in 2014. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $14 million in 2015 and 2014. Favorable prior year reserve development (net of premium offsets) was $12 million in 2015 compared with $25 million in 2014, a difference of 1.0 loss ratio point. The loss ratio excluding catastrophe losses and prior year reserve development decreased 0.1 point to 61.0% in 2015 from 61.1% in 2014. A summary of loss ratios in 2015 compared with 2014 by business segment follows:
•
Insurance-Domestic - The loss ratio of 61.6% in 2015 was 1.9 points higher than the loss ratio of 59.7% in 2014. Catastrophe losses were $14 million in 2015 compared with $13 million in 2014. Favorable prior year reserve development was $12 million in 2015 compared with $28 million in 2014. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.2 points to 61.4% in 2015 from 61.2% in 2014.
•
Insurance-International - The loss ratio of 57.9% in 2015 was 1.3 points lower than the loss ratio of 59.2% in 2014. There were no catastrophe losses in 2015 compared with $1 million in 2014, a difference of 0.5 loss ratio points. There was no change in prior year reserve development in 2015 compared with an increase in prior year reserves of $2 million in 2014, a difference of 1.6 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.8 points to 57.9% in 2015 from 57.1% in 2014.
•
Reinsurance-Global - The loss ratio of 62.2% in 2015 was 2.4 points lower than the loss ratio of 64.6% in 2014. There was no change in prior year reserves in 2015 compared with an increase in prior year reserves of $1 million in 2014, a difference of 0.4 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development decreased 2.0 points to 62.3% in 2015 from 64.3% in 2014.

32


Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses:
(In thousands)
2015
 
2014
Underwriting expenses
$
482,060

 
$
458,138

Service expenses
31,084

 
22,257

Net foreign currency gains
(567
)
 
(334
)
Other costs and expenses
38,469

 
35,105

Total
$
551,046

 
$
515,166

Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Underwriting expenses increased 5% compared with an increase in net premiums earned of 8%. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 32.7% in 2015, down from 33.6% in 2014, primarily due to higher earned premiums and to the impact of expense reduction initiatives.
Service expenses, which represent the costs associated with the fee-based businesses, increased to $31 million in 2015 from $22 million in 2014 as a result of the acquisition of a specialty property and casualty insurance distribution company in late 2014.
Foreign currency gains and losses result from transactions denominated in a currency other than a company's operating functional currency. Net foreign currency gains were $0.6 million in 2015 and $0.3 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 increased to $38 million in 2015 from $35 million in 2014 due primarily to higher compensation costs, including costs relating to long-term incentive plans.
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 $90 million in 2015 compared to $92 million in 2014.
Interest Expense. Interest expense was $35 million in 2015 compared with $30 million in 2014. In August 2014, the Company issued $350 million of 4.75% senior notes due 2044. A portion of the proceeds will be used to repay $200 million of 5.60% senior notes that are due on May 15, 2015.
Income Taxes. The effective income tax rate was 30% in 2015 compared to 31% in 2014. The effective income tax rate differs from the federal income tax rate of 35% primarily because interest on the Company's state and local bonds is taxed at a lower rate. The decrease in the effective tax rate in 2015 compared with 2014 is due to lower income from investment funds and investment gains, which are generally taxed at the 35% federal income tax rate.
The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $58.7 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 $3.2 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.


33


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 has increasingly invested 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 March 31, 2015 and December 31, 2014. The Company’s fixed maturity investment portfolio and investment-related assets as of March 31, 2015 were as follows:
($ in thousands)
Carrying
Value
 
Percent
of Total
Fixed maturity securities:
 
 
 
U.S. government and government agencies
$
752,467

 
4.5
%
State and municipal:
 
 
 
Special revenue
2,491,791

 
14.9

State general obligation
714,723

 
4.3

Pre-refunded (1)
556,195

 
3.3

Corporate backed
418,080

 
2.5

Local general obligation
341,889

 
2.1

Total state and municipal
4,522,678

 
27.1

Mortgage-backed securities:
 
 
 
Agency
963,796

 
5.8

Residential-Prime
116,486

 
0.7

Commercial
72,884

 
0.4

Residential-Alt A
67,600

 
0.4

Total mortgage-backed securities
1,220,766

 
7.3

Corporate:
 
 
 
Asset-backed
1,934,916

 
11.6

Industrial
1,780,211

 
10.7

Financial
1,203,139

 
7.2

Utilities
195,297

 
1.2

Other
104,076

 
0.6

Total corporate
5,217,639

 
31.3

Foreign government and foreign government agencies
938,719

 
5.6

Total fixed maturity securities
12,652,269

 
75.8

Equity securities
 
 
 
Preferred stocks
113,609

 
0.7

Common stocks
61,100

 
0.4

Total equity securities
174,709

 
1.1

Investment funds
1,214,272

 
7.3

Arbitrage trading account
972,629

 
5.8

Real estate
761,856

 
4.6

Cash and cash equivalents
614,695

 
3.7

Loans receivable
280,769

 
1.7

Total investments
$
16,671,199

 
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.

34

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 March 31, 2015, investments in foreign government fixed maturity securities were as follows:
(In thousands)
Carrying Value
Australia
$
246,168

United Kingdom
181,002

Canada
165,311

Argentina
144,529

Germany
54,802

Brazil
53,160

Supranational (1)
47,729

Norway
36,351

Singapore
6,204

Uruguay
3,463

 Total
$
938,719

________
(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 March 31, 2015, the carrying value of investment funds was $1,214 million, including investments in real estate funds of $482 million, arbitrage funds of $281 million and energy funds of $120 million. Investment funds are primarily reported on a one-quarter lag.
Real Estate. Real estate is directly owned property held for investment. At March 31, 2015, real estate properties in operation included a long-term ground lease in Washington D.C. and an office building in West 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 $280.8 million and an aggregate fair value of $283.8 million at March 31, 2015. The amortized cost of loans receivable is net of a valuation allowance of $2.4 million as of March 31, 2015. Loans receivable include real estate loans of $203.6 million that are secured by commercial real estate located primarily in Arizona, Illinois, Maryland, New York, North Carolina, Texas and Virginia. Real estate loans receivable 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 $77 million that are secured by business assets and have fixed interest rates with varying maturities not exceeding 10 years.

35

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 March 31, 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 decreased to $61 million in the first three months of 2015 from $143 million in the comparable period in 2014, primarily due to the timing of 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 81% invested in cash, cash equivalents and marketable fixed maturity securities as of March 31, 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 March 31, 2015, the Company had senior notes, subordinated debentures and other debt outstanding with a carrying value of $2,453 million and a face amount of $2,477 million. The maturities of the outstanding debt are $274 million in 2015, $30 million in 2016, $44 million in 2017, $450 million in 2019, $300 million in 2020, $427 million in 2022, $2 million in 2029, $250 million in 2037, $350 million in 2044 and $350 million in 2053.

In August 2014, the Company issued $350 million of 4.75% senior notes due 2044. A portion of the proceeds will be used to repay $200 million of 5.60% senior notes that are due on May 15, 2015. In addition, in 2014 the Company assumed $71 million of debt in conjunction with the purchase of an office building in West Palm Beach, Florida, that matures in August 2015.
Equity. At March 31, 2015, total common stockholders’ equity was $4.6 billion, common shares outstanding were approximately 125 million and stockholders’ equity per outstanding share was $36.65. During the three months ended March 31, 2015, the Company repurchased 1,830,490 shares of its common stock for $91 million.
Total Capital. Total capitalization (equity, debt and subordinated debentures) was $7 billion at March 31, 2015. The percentage of the Company’s capital attributable to debt and subordinated debentures was 35% at March 31, 2015 and 32% at December 31, 2014.

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 March 31, 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.


36

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 March 31, 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
January 2015
9,400

 
$
49.77

 
9,400

 
7,176,717

February 2015
1,248,549

 
49.79

 
1,248,549

 
5,928,168

March 2015
572,541

 
49.93

 
572,541

 
5,355,627



Item 6. Exhibits

Number 
 
 
(10.1)
 
Form of 2015 Performance Unit Award Agreement under the W. R. Berkley Corporation 2014 Long-Term 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.

37

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:
May 4, 2015
/s/ William R. Berkley  
 
 
William R. Berkley 
 
 
Chairman of the Board and Chief Executive Officer 
 
 
 
Date:
May 4, 2015
/s/ Eugene G. Ballard  
 
 
Eugene G. Ballard 
 
 
Senior Vice President - Chief Financial Officer 

38

BERKLEY W R CORP Reports

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