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EX-31.2 - CERTIFICATION OF CFO - BERKLEY W R CORPwrb6302015ex312.htm
EX-31.1 - CERTIFICATION OF CEO - BERKLEY W R CORPwrb6302015ex311.htm
EX-32.1 - CERTIFICATION OF CEO AND CFO - BERKLEY W R CORPwrb6302015ex321.htm
EX-10.1 - DIVIDEND-EQUIVALENT RIGHTS AWARD AGREEMENT - BERKLEY W R CORPwrb6302015ex101.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 June 30, 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 July 31, 2015: 123,366,093
 



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)
 
June 30,
2015
 
December 31,
2014
 
(Unaudited)
 
(Audited)
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities
$
12,395,810

 
$
12,705,160

Investment funds
1,123,829

 
1,211,401

Real estate
820,257

 
731,612

Arbitrage trading account
830,212

 
450,648

Loans receivable
259,411

 
322,012

Equity securities
153,513

 
170,991

Total investments
15,583,032

 
15,591,824

Cash and cash equivalents
756,368

 
674,441

Premiums and fees receivable
1,766,654

 
1,651,088

Due from reinsurers
1,533,267

 
1,503,441

Deferred policy acquisition costs
521,312

 
488,525

Prepaid reinsurance premiums
415,672

 
395,748

Trading account receivables from brokers and clearing organizations
41,576

 
371,034

Property, furniture and equipment
332,015

 
332,098

Goodwill
150,682

 
150,944

Accrued investment income
129,364

 
120,367

Federal and foreign income taxes
29,135

 
30,171

Other assets
430,732

 
369,558

Total assets
$
21,689,809

 
$
21,679,239

 
 
 
 
Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Reserves for losses and loss expenses
$
10,622,374

 
$
10,369,701

Unearned premiums
3,190,144

 
3,026,732

Due to reinsurers
225,213

 
237,270

Trading account securities sold but not yet purchased
155,484

 
106,079

Other liabilities
776,207

 
859,736

Senior notes and other debt
1,843,865

 
2,115,527

Subordinated debentures
340,190

 
340,060

Total liabilities
17,153,477

 
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, 122,481,580 and 126,748,836 shares, respectively
47,024

 
47,024

Additional paid-in capital
1,003,567

 
991,512

Retained earnings
5,945,305

 
5,732,410

Accumulated other comprehensive income
86,055

 
183,550

Treasury stock, at cost, 112,636,338 and 108,369,082 shares, respectively
(2,579,764
)
 
(2,364,551
)
Total stockholders’ equity
4,502,187

 
4,589,945

Noncontrolling interests
34,145

 
34,189

Total equity
4,536,332

 
4,624,134

Total liabilities and equity
$
21,689,809

 
$
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
 
For the Six Months
 
Ended June 30,
 
Ended June 30,
 
2015
 
2014
 
2015
 
2014
REVENUES:
 
 
 
 
 
 
 
Net premiums written
$
1,543,925

 
$
1,489,776

 
$
3,119,327

 
$
3,015,656

Change in net unearned premiums
(50,884
)
 
(72,131
)
 
(154,273
)
 
(234,399
)
Net premiums earned
1,493,041

 
1,417,645

 
2,965,054

 
2,781,257

Net investment income
127,583

 
138,729

 
251,822

 
307,440

Insurance service fees
35,942

 
26,922

 
72,460

 
55,625

Net realized investment gains
27,557

 
109,168

 
46,601

 
161,922

Revenues from wholly-owned investees
105,596

 
104,285

 
198,202

 
197,125

Other income
46

 
240

 
305

 
526

Total revenues
1,789,765

 
1,796,989

 
3,534,444

 
3,503,895

OPERATING COSTS AND EXPENSES:
 
 
 
 
 
 
 
Losses and loss expenses
906,235

 
867,778

 
1,806,943

 
1,689,873

Other operating costs and expenses
573,582

 
534,150

 
1,124,628

 
1,049,316

Expenses from wholly-owned investees
98,730

 
101,296

 
188,400

 
193,026

Interest expense
33,031

 
30,311

 
67,569

 
60,641

Total operating costs and expenses
1,611,578

 
1,533,535

 
3,187,540

 
2,992,856

Income before income taxes
178,187

 
263,454

 
346,904

 
511,039

Income tax expense
(55,138
)
 
(83,277
)
 
(105,411
)
 
(161,178
)
Net income before noncontrolling interests
123,049

 
180,177

 
241,493

 
349,861

Noncontrolling interests
(14
)
 
(216
)
 
(151
)
 
(227
)
Net income to common stockholders
$
123,035

 
$
179,961

 
$
241,342

 
$
349,634

 
 
 
 
 
 
 
 
NET INCOME PER SHARE:
 
 
 
 
 
 
 
Basic
$
0.99

 
$
1.41

 
$
1.93

 
$
2.72

Diluted
$
0.95

 
$
1.35

 
$
1.84

 
$
2.60


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
 
For the Six Months
 
Ended June 30,
 
Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income before noncontrolling interests
$
123,049

 
$
180,177

 
$
241,493

 
$
349,861

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in unrealized currency translation adjustments
33,627

 
24,815

 
(14,178
)
 
20,790

Change in unrealized investment gains (loss), net of taxes
(99,620
)
 
48,200

 
(83,329
)
 
121,144

Change in net pension asset, net of taxes

 
2,020

 

 
2,611

Other comprehensive income (loss)
(65,993
)
 
75,035

 
(97,507
)
 
144,545

Comprehensive income
57,056

 
255,212

 
143,986

 
494,406

Comprehensive (income) to the noncontrolling interest
(24
)
 
(235
)
 
(139
)
 
(264
)
Comprehensive income to common stockholders
$
57,032

 
$
254,977

 
$
143,847

 
$
494,142


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 Six Months
 
Ended June 30,
 
2015

2014
COMMON STOCK:
 
 
 
Beginning and end of period
$
47,024

 
$
47,024

ADDITIONAL PAID-IN CAPITAL:
 
 
 
Beginning of period
$
991,512

 
$
967,440

Restricted stock units issued, net of tax
(2,295
)
 
(5,692
)
Stock incentive plans expensed
14,350

 
13,046

End of period
$
1,003,567

 
$
974,794

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

 
$
5,265,015

Net income to common stockholders
241,342

 
349,634

Dividends
(28,447
)
 
(26,825
)
End of period
$
5,945,305

 
$
5,587,824

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

 
$
256,566

Unrealized gains (losses) on securities not other-than-temporarily impaired
(83,332
)
 
120,618

Unrealized gains on other-than-temporarily impaired securities
15

 
489

End of period
222,882

 
377,673

Currency translation adjustments:
 
 
 
Beginning of period
(122,649
)
 
(60,524
)
Net change in period
(14,178
)
 
20,790

End of period
(136,827
)
 
(39,734
)
Net pension asset:
 
 
 
Beginning of period

 
(6,651
)
Net change in period

 
2,611

End of period

 
(4,040
)
Total accumulated other comprehensive income
$
86,055

 
$
333,899

TREASURY STOCK:
 
 
 
Beginning of period
$
(2,364,551
)
 
$
(2,132,835
)
Stock exercised/vested
2,296

 
5,667

Stock repurchased
(218,132
)
 
(197,254
)
Stock incentive plans expensed
623

 
594

End of period
$
(2,579,764
)
 
$
(2,323,828
)
NONCONTROLLING INTERESTS:
 
 
 
Beginning of period
$
34,189

 
$
33,359

Contributions (distributions)
(183
)
 
1,222

Net income
151

 
227

Other comprehensive income (loss), net of tax
(12
)
 
37

End of period
$
34,145

 
$
34,845

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 Six Months
 
Ended June 30,
 
2015
 
2014
CASH FROM OPERATING ACTIVITIES:
 
 
 
Net income to common stockholders
$
241,342

 
$
349,634

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Net investment gains
(46,601
)
 
(161,922
)
Depreciation and amortization
42,267

 
50,832

Noncontrolling interests
151

 
227

Investment funds
(27,912
)
 
(84,385
)
Stock incentive plans
14,973

 
13,615

Change in:
 
 
 
Arbitrage trading account
(702
)
 
(12,956
)
Premiums and fees receivable
(133,227
)
 
(197,004
)
Reinsurance accounts
(60,595
)
 
(57
)
Deferred policy acquisition costs
(34,245
)
 
(31,527
)
Income taxes
48,929

 
7,742

Reserves for losses and loss expenses
285,204

 
172,759

Unearned premiums
174,108

 
297,721

Other
(170,809
)
 
(150,056
)
Net cash from operating activities
332,883

 
254,623

CASH FROM (USED IN) INVESTING ACTIVITIES:
 
 
 
Proceeds from sale of fixed maturity securities
794,106

 
513,281

Proceeds from sale of equity securities
23,547

 
112,590

Distributions from investment funds
129,181

 
211,974

Proceeds from maturities and prepayments of fixed maturity securities
1,534,982

 
1,214,221

Purchase of fixed maturity securities
(2,168,400
)
 
(2,034,009
)
Purchase of equity securities
(8,543
)
 
(48,484
)
Additions to real estate
(84,826
)
 
(63,919
)
Real estate sold

 
343,723

Change in loans receivable
62,601

 
(312,071
)
Net additions to property, furniture and equipment
(23,504
)
 
(22,555
)
Change in balances due to security brokers
18,298

 
28,313

Net cash from business sold

 
15,548

Net cash from (used in) investing activities
277,442

 
(41,388
)
CASH USED IN FINANCING ACTIVITIES:
 
 
 
Repayment of senior notes and other debt
(275,788
)
 

Net proceeds from issuance of debt
3,749

 
4,988

Net proceeds from options exercised
1

 
53

Cash dividends to common stockholders
(28,447
)
 
(26,825
)
Purchase of common treasury shares
(218,132
)
 
(197,254
)
Other, net
(92
)
 
1,365

Net cash used in financing activities
(518,709
)
 
(217,673
)
Net impact on cash due to change in foreign exchange rates
(9,689
)
 
7,371

Net change in cash and cash equivalents
81,927

 
2,933

Cash and cash equivalents at beginning of year
674,441

 
839,738

Cash and cash equivalents at end of period
$
756,368

 
$
842,671

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
 
For the Six Months
 
Ended June 30,
 
Ended June 30,
(In thousands)
2015
 
2014
 
2015
 
2014
Basic
123,781

 
127,668

 
124,869

 
128,765

Diluted
129,988

 
133,304

 
131,228

 
134,323


(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




7



(5) Statement of Comprehensive Income (Loss)

The following table presents the components of the changes in accumulated other comprehensive income (loss) ("AOCI"):
(In thousands)
Unrealized Investment Gains (Losses)
 
Currency Translation Adjustments
 
Net Pension Asset
 
Accumulated Other Comprehensive Income (Loss)
As of and for the six months ended June 30, 2015:
 
 
 
 
 
 
Changes in AOCI
 
 
 
 
 
 
Beginning of period
$
306,199

 
$
(122,649
)
 
$

 
$
183,550

Other comprehensive income (loss) before reclassifications
(73,021
)
 
(14,178
)
 

 
(87,199
)
Amounts reclassified from AOCI
(10,308
)
 

 

 
(10,308
)
Other comprehensive income (loss)
(83,329
)
 
(14,178
)
 

 
(97,507
)
Unrealized investment gain related to non-controlling interest
12

 

 

 
12

End of period
$
222,882

 
$
(136,827
)
 
$

 
$
86,055

Amounts reclassified from AOCI
 
 
 
 
 
 
 
Pre-tax
$
(15,858
)
(1)
$

 
$

 
$
(15,858
)
Tax effect (2)
5,550

 

 

 
5,550

After-tax amounts reclassified
$
(10,308
)
 
$

 
$

 
$
(10,308
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
Pre-tax
$
(127,455
)
 
$
(14,178
)
 
$

 
$
(141,633
)
Tax effect
44,126

 

 

 
44,126

Other comprehensive income (loss)
$
(83,329
)
 
$
(14,178
)
 
$

 
$
(97,507
)
 
 
 
 
 
 
 
 
As of and for the three months ended June 30, 2015:
 
 
 
 
 
 
Changes in AOCI
 
 
 
 
 
 
Beginning of period
$
322,512

 
$
(170,454
)
 
$

 
$
152,058

Other comprehensive income (loss) before reclassifications
(97,613
)
 
33,627

 

 
(63,986
)
Amounts reclassified from AOCI
(2,007
)
 

 

 
(2,007
)
Other comprehensive income (loss)
(99,620
)
 
33,627

 

 
(65,993
)
Unrealized investment gain related to non-controlling interest
(10
)
 

 

 
(10
)
End of period
$
222,882

 
$
(136,827
)
 
$

 
$
86,055

Amounts reclassified from AOCI
 
 
 
 
 
 
 
Pre-tax
$
(3,087
)
(1)
$

 
$

 
$
(3,087
)
Tax effect (2)
1,080

 

 

 
1,080

After-tax amounts reclassified
$
(2,007
)
 
$

 
$

 
$
(2,007
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
Pre-tax
$
(151,991
)
 
$
33,627

 
$

 
$
(118,364
)
Tax effect
52,371

 

 

 
52,371

Other comprehensive income (loss)
$
(99,620
)
 
$
33,627

 
$

 
$
(65,993
)
 
 
 
 
 
 
 
 

8


 
Unrealized Investment Gains (Losses)
 
Currency Translation Adjustments
 
Net Pension Asset
 
Accumulated Other Comprehensive Income (Loss)
(In thousands)
 
 
 
 
 
 
 
As of and for the six months ended June 30, 2014:
 
 
 
 
 
 
Changes in AOCI
 
 
 
 
 
 
Beginning of period
$
256,566

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

Other comprehensive income (loss) before reclassifications
140,289

 
20,790

 

 
161,079

Amounts reclassified from AOCI
(19,145
)
 

 
2,611

 
(16,534
)
Other comprehensive income (loss)
121,144

 
20,790

 
2,611

 
144,545

Unrealized investment loss related to non-controlling interest
(37
)
 

 

 
(37
)
End of period
$
377,673

 
$
(39,734
)
 
$
(4,040
)
 
$
333,899

Amounts reclassified from AOCI
 
 
 
 
 
 
 
Pre-tax
$
(29,454
)
(1)
$

 
$
4,017

(3)
$
(25,437
)
Tax effect (2)
10,309

 

 
(1,406
)
 
8,903

After-tax amounts reclassified
$
(19,145
)
 
$

 
$
2,611

 
$
(16,534
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
Pre-tax
$
188,680

 
$
20,790

 
$
4,017

 
$
213,487

Tax effect
(67,536
)
 

 
(1,406
)
 
(68,942
)
Other comprehensive income (loss)
$
121,144

 
$
20,790

 
$
2,611

 
$
144,545

 
 
 
 
 
 
 
 
As of and for the three months ended June 30, 2014:
 
 
 
 
 
 
Changes in AOCI
 
 
 
 
 
 
Beginning of period
$
329,492

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

Other comprehensive income (loss) before reclassifications
62,846

 
24,815

 

 
87,661

Amounts reclassified from AOCI
(14,646
)
 

 
2,020

 
(12,626
)
Other comprehensive income (loss)
48,200

 
24,815

 
2,020

 
75,035

Unrealized investment loss related to non-controlling interest
(19
)
 

 

 
(19
)
End of period
$
377,673

 
$
(39,734
)
 
$
(4,040
)
 
$
333,899

Amounts reclassified from AOCI
 
 
 
 
 
 
 
Pre-tax
$
(22,532
)
(1)
$

 
$
3,108

(3)
$
(19,424
)
Tax effect (2)
7,886

 

 
(1,088
)
 
6,798

After-tax amounts reclassified
$
(14,646
)
 
$

 
$
2,020

 
$
(12,626
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
Pre-tax
$
76,390

 
$
24,815

 
$
3,108

 
$
104,313

Tax effect
(28,190
)
 

 
(1,088
)
 
(29,278
)
Other comprehensive income (loss)
$
48,200

 
$
24,815

 
$
2,020

 
$
75,035

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



9



(6) Statements of Cash Flow
Interest payments were $67,786,000 and $59,811,000 and income taxes paid were $54,324,000 and $152,439,000 in the three months ended June 30, 2015 and 2014, respectively.

(7) Investments in Fixed Maturity Securities
At June 30, 2015 and December 31, 2014, investments in fixed maturity securities were as follows:
 
(In thousands)
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Carrying
Value
Gains
 
Losses
 
June 30, 2015
 
 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
 
 
State and municipal
$
75,066

 
$
15,029

 
$

 
$
90,095

 
$
75,066

Residential mortgage-backed
21,241

 
2,655

 

 
23,896

 
21,241

Corporate
4,999

 
142

 

 
5,141

 
4,999

Total held to maturity
101,306

 
17,826

 

 
119,132

 
101,306

Available for sale:
 
 
 
 
 
 
 
 
 
U.S. government and government agency
691,250

 
27,672

 
(3,555
)
 
715,367

 
715,367

State and municipal:
 
 
 
 
 
 
 
 
 
Special revenue
2,345,401

 
91,768

 
(8,386
)
 
2,428,783

 
2,428,783

State general obligation
640,845

 
25,694

 
(6,113
)
 
660,426

 
660,426

Pre-refunded
444,165

 
28,606

 
(133
)
 
472,638

 
472,638

Corporate backed
419,572

 
13,850

 
(998
)
 
432,424

 
432,424

Local general obligation
283,988

 
21,023

 
(431
)
 
304,580

 
304,580

Total state and municipal
4,133,971

 
180,941

 
(16,061
)
 
4,298,851

 
4,298,851

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Residential (1)
1,085,961

 
24,498

 
(10,514
)
 
1,099,945

 
1,099,945

Commercial
68,378

 
1,053

 
(93
)
 
69,338

 
69,338

Total mortgage-backed securities
1,154,339

 
25,551

 
(10,607
)
 
1,169,283

 
1,169,283

Corporate:
 
 
 
 
 
 
 
 
 
Asset-backed
1,644,366

 
17,816

 
(10,027
)
 
1,652,155

 
1,652,155

Industrial
1,780,193

 
96,890

 
(10,238
)
 
1,866,845

 
1,866,845

Financial
1,296,370

 
32,050

 
(10,412
)
 
1,318,008

 
1,318,008

Utilities
182,282

 
10,412

 
(2,212
)
 
190,482

 
190,482

Other
116,146

 
756

 
(539
)
 
116,363

 
116,363

Total corporate
5,019,357

 
157,924

 
(33,428
)
 
5,143,853

 
5,143,853

Foreign
918,738

 
65,344

 
(16,932
)
 
967,150

 
967,150

Total available for sale
11,917,655

 
457,432

 
(80,583
)
 
12,294,504

 
12,294,504

Total investments in fixed maturity securities
$
12,018,961

 
$
475,258

 
$
(80,583
)
 
$
12,413,636

 
$
12,395,810


10


(In thousands)
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Carrying
Value
Gains
 
Losses
December 31, 2014
 
 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
 
 
State and municipal
$
72,901

 
$
17,501

 
$

 
$
90,402

 
$
72,901

Residential mortgage-backed
23,278

 
2,854

 

 
26,132

 
23,278

Corporate
4,998

 
291

 

 
5,289

 
4,998

Total held to maturity
101,177

 
20,646

 

 
121,823

 
101,177

Available for sale:
 
 
 
 
 
 
 
 
 
U.S. government and government agency
773,192

 
33,353

 
(3,157
)
 
803,388

 
803,388

State and municipal:
 
 
 
 
 
 
 
 
 
Special revenue
2,264,210

 
111,841

 
(2,084
)
 
2,373,967

 
2,373,967

State general obligation
674,022

 
37,615

 
(787
)
 
710,850

 
710,850

Pre-refunded
504,778

 
35,619

 
(289
)
 
540,108

 
540,108

Corporate backed
413,234

 
18,976

 
(855
)
 
431,355

 
431,355

Local general obligation
281,622

 
25,099

 
(5
)
 
306,716

 
306,716

Total state and municipal
4,137,866

 
229,150

 
(4,020
)
 
4,362,996

 
4,362,996

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Residential (1)
1,201,924

 
27,124

 
(9,449
)
 
1,219,599

 
1,219,599

Commercial
74,479

 
1,610

 
(52
)
 
76,037

 
76,037

Total mortgage-backed securities
1,276,403

 
28,734

 
(9,501
)
 
1,295,636

 
1,295,636

Corporate:
 
 
 
 
 
 
 
 
 
Asset-backed
2,019,032

 
18,868

 
(11,974
)
 
2,025,926

 
2,025,926

Industrial
1,606,724

 
117,206

 
(5,131
)
 
1,718,799

 
1,718,799

Financial
1,140,801

 
38,080

 
(7,673
)
 
1,171,208

 
1,171,208

Utilities
184,107

 
12,436

 
(1
)
 
196,542

 
196,542

Other
86,294

 
1,370

 
(2
)
 
87,662

 
87,662

Total corporate
5,036,958

 
187,960

 
(24,781
)
 
5,200,137

 
5,200,137

Foreign
897,668

 
62,223

 
(18,065
)
 
941,826

 
941,826

Total available for sale
12,122,087

 
541,420

 
(59,524
)
 
12,603,983

 
12,603,983

Total investments in fixed maturity securities
$
12,223,264

 
$
562,066

 
$
(59,524
)
 
$
12,725,806

 
$
12,705,160

____________
(1)
Gross unrealized losses for residential mortgage-backed securities include $1,073,002 and $1,095,671 as of June 30, 2015 and December 31, 2014, respectively, related to the non-credit portion of other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income.

The amortized cost and fair value of fixed maturity securities at June 30, 2015, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay obligations. 
(In thousands)
Amortized
Cost
 
Fair Value
Due in one year or less
$
818,912

 
$
825,584

Due after one year through five years
3,934,376

 
4,091,220

Due after five years through ten years
3,612,449

 
3,754,639

Due after ten years
2,477,644

 
2,549,014

Mortgage-backed securities
1,175,580

 
1,193,179

Total
$
12,018,961

 
$
12,413,636

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

11








(8) Investments in Equity Securities
At June 30, 2015 and December 31, 2014, investments in equity securities were as follows:
 
(In thousands)
Cost
 
Gross Unrealized
 
Fair
Value
 
Carrying
Value
Gains
 
Losses
 
June 30, 2015
 
 
 
 
 
 
 
 
 
Common stocks
$
69,860

 
$

 
$
(10,669
)
 
$
59,191

 
$
59,191

Preferred stocks
86,583

 
12,022

 
(4,283
)
 
94,322

 
94,322

Total
$
156,443

 
$
12,022

 
$
(14,952
)
 
$
153,513

 
$
153,513

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 June 30, 2015 and December 31, 2014, the carrying value of the arbitrage trading account was $830 million and $451 million, respectively. The primary focus of the trading account is merger arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Arbitrage investing differs from other types of investing in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less). The Company believes that this makes merger arbitrage investments less vulnerable to changes in general financial market conditions.

(10) Net Investment Income
Net investment income consists of the following: 
 
For the Three Months
 
For the Six Months
 
Ended June 30,
 
Ended June 30,
(In thousands)
2015
 
2014
 
2015
 
2014
Investment income (loss) earned on:
 
 
 
 
 
 
 
Fixed maturity securities, including cash and cash equivalents and loans receivable
$
105,030

 
$
107,760

 
$
213,159

 
$
214,658

Investment funds
21,851

 
22,356

 
27,912

 
76,155

Arbitrage trading account
(117
)
 
6,942

 
8,862

 
12,461

Equity securities available for sale
1,224

 
2,103

 
2,404

 
4,049

Real estate
2,114

 
3,063

 
4,881

 
6,165

Gross investment income
130,102

 
142,224

 
257,218

 
313,488

Investment expense
(2,519
)
 
(3,495
)
 
(5,396
)
 
(6,048
)
Net investment income
$
127,583

 
$
138,729

 
$
251,822

 
$
307,440



12



(11) Investment Funds
Investment funds consist of the following:
 
Carrying Value as of
 
Income (Loss) from Investment Funds
 
June 30,
 
December 31,
 
For the Six Months Ended June 30:
(In thousands)
2015
 
2014
 
2015
 
2014
Real estate
$
506,774

 
$
466,703

 
$
42,337

 
$
16,482

Energy
113,779

 
152,056

 
(27,484
)
 
12,596

Arbitrage
72,752

 
282,335

 
(590
)
 
8,231

Other funds
430,524

 
310,307

 
13,649

 
38,846

Total
$
1,123,829

 
$
1,211,401

 
$
27,912


$
76,155


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 June 30, 2015 is 25.8% with a fair value of $457 million and a carrying value of $45 million.

(12) Real Estate

Investment in real estate represents directly owned property held for investment, as follows:    
 
Carrying Value
 
June 30,
 
December 31,
(In thousands)
2015
 
2014
Properties in operation
$
209,219

 
$
196,980

Properties under development
611,038

 
534,632

Total
$
820,257

 
$
731,612


Properties in operation include 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 $5,834,000 and $1,609,000 as of June 30, 2015 and December 31, 2014, respectively. Related depreciation expense was $4,264,000 and $3,219,000 for the six months ended June 30, 2015 and 2014, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $5,741,234 in 2015, $11,456,555 in 2016, $11,499,945 in 2017, $10,832,715 in 2018, $7,839,368 in 2019, $5,867,788 in 2020 and $330,727,579 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.














13


(13) Loans Receivable
Loans receivable are as follows:
(In thousands)
June 30, 2015
 
December 31, 2014
Amortized cost:
 
 
 
  Real estate loans
$
174,719

 
$
243,407

  Commercial loans
84,692

 
78,605

  Total
$
259,411

 
$
322,012

 
 
 
 
Fair value:
 
 
 
  Real estate loans
$
177,648

 
$
245,112

  Commercial loans
84,693

 
80,107

  Total
$
262,341

 
$
325,219

 
 
 
 
Valuation allowance:
 
 
 
  Specific
$
75

 
$
115

  General
2,311

 
2,371

  Total
$
2,386

 
$
2,486

 
 
 
 
 
 For the Three Months
Ended June 30,
 
 
2015
 
2014
  Increase (decrease) in valuation allowance
$
(53
)
 
$
16

  Loans receivable charged off

 

 
 
 
 
 
For the Six Months
 Ended June 30,
 
 
2015
 
2014
  Increase (decrease) in valuation allowance
$
(100
)
 
$
479

  Loans receivable charged off

 

Loans receivable in non-accrual status were $9.5 million and $14.2 million as of June 30, 2015 and December 31, 2014, respectively.
The Company monitors the performance of its loans receivable and assesses the ability of the borrower to pay principal and interest based upon loan structure, underlying property values, cash flow and related financial and operating performance of the property and market conditions. Loans receivable with a potential for default are further assessed using discounted cash flow analysis and comparable cost and sales methodologies, if appropriate.
The real estate loans are secured by commercial real estate primarily located in Arizona, Maryland, New York and Texas. These loans generally earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through August 2025. The commercial loans are with small business owners who have secured the related financing with the assets of the business. 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 June 30, 2015, and accordingly, the Company determined that a specific valuation allowance was not required.

14




(14) Realized and Unrealized Investment Gains (Losses)

 Realized and unrealized investment gains (losses) are as follows:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30:
(In thousands)
2015
 
2014
 
2015
 
2014
Realized investment gains (losses):
 
 
 
 
 

 
 

Fixed maturity securities:
 
 
 
 
 

 
 

Gains
$
3,612

 
$
1,941

 
$
7,759

 
$
4,003

Losses
(484
)
 
(464
)
 
(1,561
)
 
(2,062
)
Equity securities available for sale
(42
)
 
23,124

 
9,660

 
29,581

Investment funds
23,684

 
(1,076
)
 
22,173

 
44,757

Real estate

 
85,643

 

 
85,643

Other
787

 

 
8,570

 

    Total
27,557

 
109,168

 
46,601

 
161,922

Income tax expense
(9,645
)
 
(38,208
)
 
(16,311
)
 
(56,673
)
    Total after-tax realized investment gains
$
17,912

 
$
70,960

 
$
30,290

 
$
105,249

Change in unrealized investment gains (losses):
 
 
 
 
 

 
 

Fixed maturity securities
$
(147,792
)
 
$
87,882

 
$
(105,312
)
 
$
179,520

Previously impaired fixed maturity securities
15

 
194

 
23

 
753

Equity securities available for sale
(6,779
)
 
(17,870
)
 
(13,624
)
 
8,333

Investment funds
2,566

 
6,184

 
(8,541
)
 
74

Total change in unrealized investment gains (losses)
(151,990
)
 
76,390

 
(127,454
)
 
188,680

Income tax benefit (expense)
52,370

 
(28,190
)
 
44,125

 
(67,536
)
Noncontrolling interests
(10
)
 
(19
)
 
12

 
(37
)
    Total after-tax unrealized gains (losses)
$
(99,630
)
 
$
48,181

 
$
(83,317
)
 
$
121,107

            


15


(15) Securities in an Unrealized Loss Position
The following tables summarize all securities in an unrealized loss position at June 30, 2015 and December 31, 2014 by the length of time those securities have been continuously in an unrealized loss position: 
  
Less Than 12 Months
 
12 Months or Greater
 
Total
(In thousands)
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$
72,300

 
$
1,656

 
$
73,593

 
$
1,899

 
$
145,893

 
$
3,555

State and municipal
873,578

 
12,783

 
108,782

 
3,278

 
982,360

 
16,061

Mortgage-backed securities
222,473

 
2,903

 
212,426

 
7,704

 
434,899

 
10,607

Corporate
1,669,868

 
18,973

 
159,708

 
14,455

 
1,829,576

 
33,428

Foreign
131,227

 
4,036

 
48,528

 
12,896

 
179,755

 
16,932

Fixed maturity securities
2,969,446

 
40,351

 
603,037

 
40,232

 
3,572,483

 
80,583

Common stocks
47,359

 
10,669

 

 

 
47,359

 
10,669

Preferred stocks
13,584

 
1,267

 
22,658

 
3,016

 
36,242

 
4,283

Equity securities
60,943

 
11,936

 
22,658

 
3,016

 
83,601

 
14,952

Total
$
3,030,389

 
$
52,287

 
$
625,695

 
$
43,248

 
$
3,656,084

 
$
95,535

 
 
 
 
 
 
 
 
 
 
 
 
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 June 30, 2015 is presented in the table below:  
($ in thousands)
Number of
Securities
 
Aggregate
Fair Value
 
Gross
Unrealized
Loss
Mortgage-backed securities
7

 
$
24,150

 
$
1,605

Corporate
13

 
90,216

 
2,486

Total
20

 
$
114,366

 
$
4,091


For OTTI of fixed maturity securities that management does not intend to sell or, more likely than not, would not be required to sell, the portion of the decline in value considered to be due to credit factors is recognized in earnings and the portion of the decline in value considered to be due to non-credit factors is recognized in other comprehensive income. For the six months ended June 30, 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.

16


Equity Securities – At June 30, 2015, there were eight equity securities in an unrealized loss position, with an aggregate fair value of $83.6 million and a gross unrealized loss of $15 million. Three of these equity securities are preferred stocks that are rated non-investment grade with an aggregate fair value of $3.6 million and a gross unrealized loss of $1.2 million. 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 June 30, 2015 and December 31, 2014, respectively.

(16) Fair Value Measurements

The Company’s fixed maturity and equity securities classified as available for sale and its trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.  
Level 2 - Quoted prices for similar assets or valuations based on inputs that are observable.
Level 3 - Estimates of fair value based on internal pricing methodologies using unobservable inputs. Unobservable inputs are only used to measure fair value to the extent that observable inputs are not available.
Substantially all of the Company’s fixed maturity securities were priced by independent pricing services. The prices provided by the independent pricing services are estimated based on observable market data in active markets utilizing pricing models and processes, which may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, sector groupings, matrix pricing and reference data. The pricing services may prioritize inputs differently on any given day for any security based on market conditions, and not all inputs are available for each security evaluation on any given day. The pricing services used by the Company have indicated that they will only produce an estimate of fair value if objectively verifiable information is available. The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company reviews the prices provided by pricing services for reasonableness and periodically performs independent price tests of a sample of securities to ensure proper valuation.
If prices from independent pricing services are not available for fixed maturity securities, the Company estimates the fair value. For Level 2 securities, the Company utilizes pricing models and processes which may include benchmark yields, sector groupings, matrix pricing, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, bids, offers and reference data. Where broker quotes are used, the Company generally requests two or more quotes and sets a price within the range of quotes received based on its assessment of the credibility of the quote and its own evaluation of the security. The Company generally does not adjust quotes received from brokers. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial projections, credit quality and business developments of the issuer and other relevant information.
For Level 3 securities, the Company generally uses a discounted cash flow model to estimate the fair value of fixed maturity securities. The cash flow models are based upon assumptions as to prevailing credit spreads, interest rate and interest rate volatility, time to maturity and subordination levels. Projected cash flows are discounted at rates that are adjusted to reflect illiquidity, where appropriate.


17


The following tables present the assets and liabilities measured at fair value, on a recurring basis, as of June 30, 2015 and December 31, 2014 by level:
 
(In thousands)
Total
 
Level 1
 
Level 2
 
Level 3
June 30, 2015
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Fixed maturity securities available for sale:
 
 
 
 
 
 
 
U.S. government and government agency
$
715,367

 
$

 
$
715,367

 
$

State and municipal
4,298,851

 

 
4,298,851

 

Mortgage-backed securities
1,169,283

 

 
1,169,283

 

Corporate
5,143,853

 

 
5,143,699

 
154

Foreign government
967,150

 

 
967,150

 

Total fixed maturity securities available for sale
12,294,504

 

 
12,294,350

 
154

Equity securities available for sale:
 
 
 
 
 
 
 
Common stocks
59,191

 
50,172

 

 
9,019

Preferred stocks
94,322

 

 
90,647

 
3,675

Total equity securities available for sale
153,513

 
50,172

 
90,647

 
12,694

Arbitrage trading account
830,212

 
387,575

 
441,580

 
1,057

Total
$
13,278,229

 
$
437,747

 
$
12,826,577

 
$
13,905

Liabilities:
 
 
 
 
 
 
 
Securities sold but not yet purchased
$
155,484

 
$
155,428

 
$
56

 
$

 
 
 
 
 
 
 
 
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 six months ended June 30, 2015 or during the year ended December 31, 2014.







18



The following tables summarize changes in Level 3 assets and liabilities for the six months ended June 30, 2015 and for the year ended December 31, 2014:
 
  
Gains (Losses) Included in:
(In thousands)
Beginning
Balance
 
Earnings
 
Other
Comprehensive
Income
 
Purchases
 
(Sales)
 
Paydowns/ Maturities
 
Transfers
 
Ending
Balance
In
 
Out
Six months ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
$
20,765

 
$
15

 
$
180

 
$

 
$

 
$
(1,673
)
 
$

 
$
(19,133
)
 
$
154

Total
20,765

 
15

 
180

 

 

 
(1,673
)
 

 
(19,133
)
 
154

Equity securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
10,741

 

 
(1,722
)
 

 

 

 

 

 
9,019

Preferred stocks
3,713

 
(38
)
 

 

 

 

 

 

 
3,675

Total
14,454

 
(38
)
 
(1,722
)
 

 

 

 

 

 
12,694

Arbitrage trading account
720

 
(437
)
 

 
72,640

 
(71,866
)
 

 

 

 
1,057

Total
$
35,939

 
$
(460
)
 
$
(1,542
)
 
$
72,640

 
$
(71,866
)
 
$
(1,673
)
 
$

 
$
(19,133
)
 
$
13,905

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
)
 

 
9,064

 
(3,267
)
 
720

Total
$
49,634

 
$
2,304

 
$
(4,622
)
 
$
19,953

 
$
(33,698
)
 
$
(3,429
)
 
$
9,064

 
$
(3,267
)
 
$
35,939

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities sold but not yet purchased
$

 
$
(20
)
 
$

 
$
31

 
$
(11
)
 
$

 
$

 
$

 
$

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


19


(17) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:
  
June 30, 2015
 
December 31, 2014
(In thousands)
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets:
 
 
 
 
 
 
 
Fixed maturity securities
$
12,395,810

 
$
12,413,636

 
$
12,705,160

 
$
12,725,806

Equity securities available for sale
153,513

 
153,513

 
170,991

 
170,991

Arbitrage trading account
830,212

 
830,212

 
450,648

 
450,648

Loans receivable
259,411

 
262,341

 
322,012

 
325,219

Cash and cash equivalents
756,368

 
756,368

 
674,441

 
674,441

Trading account receivables from brokers and clearing organizations
41,576

 
41,576

 
371,034

 
371,034

Liabilities:
 
 
 
 
 
 
 
Due to broker
39,795

 
39,795

 
23,133

 
23,133

Trading account securities sold but not yet purchased
155,484

 
155,484

 
106,079

 
106,079

Subordinated debentures
340,190

 
338,660

 
340,060

 
332,640

Senior notes and other debt
1,843,865

 
2,025,469

 
2,115,527

 
2,344,292

The estimated fair values of the Company’s fixed maturity securities, equity securities available for sale and arbitrage trading account securities are based on various valuation techniques that rely on fair value measurements as described in Note 16 above. The fair value of loans receivable are estimated by using current institutional purchaser yield requirements for loans with similar credit characteristics, which is considered a Level 2 input. The fair value of the senior notes and other debt and the subordinated debentures is based on spreads for similar securities, which is considered a Level 2 input.

(18) Reinsurance
The following is a summary of reinsurance financial information:
  
For the Three Months
 
For the Six Months
 
Ended June 30,
 
Ended June 30,
(In thousands)
2015
 
2014
 
2015
 
2014
Written premiums:
 
 
 
 
 
 
 
Direct
$
1,603,899

 
$
1,580,639

 
$
3,251,240

 
$
3,145,827

Assumed
207,499

 
191,762

 
411,963

 
431,841

Ceded
(267,473
)
 
(282,625
)
 
(543,876
)
 
(562,012
)
Total net premiums written
$
1,543,925

 
$
1,489,776

 
$
3,119,327

 
$
3,015,656

 
 
 
 
 
 
 
 
Earned premiums:
 
 
 
 
 
 
 
Direct
$
1,545,983

 
$
1,449,152

 
$
3,070,719

 
$
2,830,724

Assumed
211,352

 
224,916

 
414,694

 
450,678

Ceded
(264,294
)
 
(256,423
)
 
(520,359
)
 
(500,145
)
Total net premiums earned
$
1,493,041

 
$
1,417,645

 
$
2,965,054

 
$
2,781,257

 
 
 
 
 
 
 
 
Ceded losses incurred
$
131,928

 
$
89,569

 
$
250,319

 
$
190,253

Ceded commissions earned
$
40,169

 
$
38,055

 
$
83,820

 
$
75,226

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 June 30, 2015 and December 31, 2014.



20




(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 $15 million and $12 million for the six months ended June 30, 2015 and 2014, respectively. A summary of RSUs issued in the six months ended June 30, 2015 and 2014 follows:
 
($ in thousands)
Units
 
Fair Value
Six months ended June 30,
 
 
 
2015
22,011

 
$
1,102

2014
25,950

 
$
1,079


(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.

21


Summary financial information about the Company's business segments is presented in the following tables:
  
Revenues
 
 
 
 
(In thousands)
Earned
Premiums
 
Investment
Income 
 
Other
 
Total
 
Pre-Tax
Income
(Loss)
 
Net
Income
(Loss) to Common Stockholders
Three months ended June 30, 2015:
 
 
 
 
 
 
 
 
 
 
Insurance-Domestic
$
1,159,653

 
$
93,114

 
$
24,385

 
$
1,277,152

 
$
175,953

 
$
120,578

Insurance-International
191,729

 
10,150

 

 
201,879

 
7,517

 
5,518

Reinsurance-Global
141,659

 
18,066

 

 
159,725

 
27,122

 
18,827

Corporate and eliminations (1)

 
6,253

 
117,199

 
123,452

 
(59,962
)
 
(39,799
)
Net investment gains

 

 
27,557

 
27,557

 
27,557

 
17,911

  Total
$
1,493,041

 
$
127,583

 
$
169,141

 
$
1,789,765

 
$
178,187

 
$
123,035

Three months ended June 30, 2014:
 
 
 
 
 
 
 
 
 
 
Insurance-Domestic
$
1,041,745

 
$
103,073

 
$
26,985

 
$
1,171,803

 
$
176,855

 
$
121,834

Insurance-International
201,868

 
11,276

 

 
213,144

 
11,510

 
8,253

Reinsurance-Global
174,032

 
17,608

 

 
191,640

 
25,866

 
18,025

Corporate and eliminations (1)

 
6,772

 
104,462

 
111,234

 
(59,945
)
 
(39,110
)
Net investment gains

 

 
109,168

 
109,168

 
109,168

 
70,959

  Total
$
1,417,645

 
$
138,729

 
$
240,615

 
$
1,796,989

 
$
263,454

 
$
179,961

Six months ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
Insurance-Domestic
$
2,277,195

 
$
175,766

 
$
49,960

 
$
2,502,921

 
$
342,819

 
$
235,488

Insurance-International
385,463

 
26,582

 

 
412,045

 
28,820

 
20,647

Reinsurance-Global
302,396

 
35,107

 

 
337,503

 
47,384

 
33,327

Corporate and eliminations (1)

 
14,367

 
221,007

 
235,374

 
(118,720
)
 
(78,410
)
Net investment gains

 

 
46,601

 
46,601

 
46,601

 
30,290

  Total
$
2,965,054

 
$
251,822

 
$
317,568

 
$
3,534,444

 
$
346,904

 
$
241,342

Six months ended June 30, 2014:
 
 
 
 
 
 
 
 
 
 
Insurance-Domestic
$
2,045,252

 
$
221,210

 
$
55,751

 
$
2,322,213

 
$
379,040

 
$
259,870

Insurance-International
387,192

 
27,928

 

 
415,120

 
29,257

 
20,721

Reinsurance-Global
348,813

 
45,186

 

 
393,999

 
57,940

 
40,417

Corporate and eliminations (1)

 
13,116

 
197,525

 
210,641

 
(117,120
)
 
(76,623
)
Net investment gains

 

 
161,922

 
161,922

 
161,922

 
105,249

  Total
$
2,781,257

 
$
307,440

 
$
415,198

 
$
3,503,895

 
$
511,039

 
$
349,634

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

Identifiable assets by segment are as follows:
(In thousands)
June 30, 2015
 
December 31, 2014
Insurance-Domestic
$
16,105,299

 
$
16,036,513

Insurance-International
1,854,074

 
1,876,347

Reinsurance-Global
2,532,001

 
2,708,090

Corporate and eliminations
1,198,435

 
1,058,289

  Total
$
21,689,809

 
$
21,679,239


    


22


Net premiums earned by major line of business are as follows:
 
 
For the Three Months
 
For the Six Months
 
Ended June 30,
 
Ended June 30,
(In thousands)
2015
 
2014
 
2015
 
2014
  Insurance-Domestic:
 
 
 
 
 
 
 
Other liability
$
379,445

 
$
362,074

 
$
751,484

 
$
701,707

Workers’ compensation
325,123

 
270,212

 
617,740

 
533,244

Short-tail lines
229,167

 
215,506

 
456,893

 
420,272

Commercial automobile
138,511

 
127,102

 
273,468

 
251,470

Professional liability
87,407

 
66,851

 
177,610

 
138,559

Total
1,159,653

 
1,041,745

 
2,277,195

 
2,045,252

 
 
 
 
 
 
 
 
  Insurance-International:
 
 
 
 
 
 
 
Other liability
21,929

 
22,956

 
46,794

 
42,331

Workers’ compensation
22,673

 
17,241

 
44,794

 
34,566

Short-tail lines
93,992

 
106,428

 
189,356

 
202,702

Commercial automobile
31,498

 
29,649

 
62,101

 
57,242

Professional liability
21,637

 
25,594

 
42,418

 
50,351

Total
191,729

 
201,868

 
385,463

 
387,192

 
 
 
 
 
 
 
 
  Reinsurance-Global:
 
 
 
 
 
 
 
Casualty
98,448

 
124,550

 
211,264

 
250,153

Property
43,211

 
49,482

 
91,132

 
98,660

Total
141,659

 
174,032

 
302,396

 
348,813

 
 
 
 
 
 
 
 
Total
$
1,493,041

 
$
1,417,645

 
$
2,965,054

 
$
2,781,257



23



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.

24


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

Overview
W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in the United States and operates in three business segments: Insurance-Domestic, Insurance-International and Reinsurance-Global. Our decentralized structure provides us with the flexibility to respond quickly and efficiently to local or specific market conditions and to pursue specialty business niches. It also allows us to be closer to our customers in order to better understand their individual needs and risk characteristics. While providing our business units with certain operating autonomy, our structure allows us to capitalize on the benefits of economies of scale through centralized capital, investment, reinsurance, enterprise risk management, and actuarial, financial and corporate legal staff support. The Company’s primary sources of revenues and earnings are its insurance operations and its investments.
An important part of our strategy is to form new operating units to capitalize on various business opportunities. Since 2006, the Company has formed 24 new operating units that are focused on important parts of the economy in the U.S., including healthcare, energy and agriculture, and on growing international markets, including Scandinavia, Australia, the Asia-Pacific region and South America.
The profitability of the Company’s insurance business is affected primarily by the adequacy of premium rates. The ultimate adequacy of premium rates is not known with certainty at the time an insurance policy is issued because premiums are determined before claims are reported. The ultimate adequacy of premium rates is affected mainly by the severity and frequency of claims, which are influenced by many factors, including natural and other disasters, regulatory measures and court decisions that define and change the extent of coverage and the effects of economic inflation on the amount of compensation for injuries or losses. General insurance prices are also influenced by available insurance capacity, i.e., the level of statutory capital and surplus employed in the industry, and the industry’s willingness to deploy that capital.
From 2005 through 2010, the property casualty insurance market was very competitive and insurance rates decreased across most business lines. Although prices have generally increased since the beginning of 2011, the current market is highly competitive and price levels for certain lines of business remain below the prices required for the Company to achieve its long-term return objectives. Part of the Company's strategy is to selectively reduce its business in areas where it believes returns are not adequate. Price changes are reflected in the Company’s results over time as premiums are earned.
The Company’s profitability is also affected by its investment income and investment gains. The Company’s invested assets, which are derived from its own capital and cash flow from its insurance business, are invested principally in fixed maturity securities. The return on fixed maturity securities is affected primarily by general interest rates, as well as the credit quality and duration of the securities. Returns available on fixed maturity investments are at historically low levels. The Company's investment income has been negatively impacted by the low fixed maturity investment returns, and will be further impacted if investment returns remain at this level.
The Company has increasingly invested in equity securities, merger arbitrage securities, investment funds (including energy related funds), private equity, loans and real estate related assets. The Company's investments in investment funds and its other alternative investments have experienced, and the Company expects to continue to experience, greater fluctuations in investment income.
Critical Accounting Estimates
The following presents a discussion of accounting policies and estimates relating to reserves for losses and loss expenses, assumed premiums and other-than-temporary impairments of investments. Management believes these policies and estimates are the most critical to its operations and require the most difficult, subjective and complex judgments.
Reserves for Losses and Loss Expenses. To recognize liabilities for unpaid losses, either known or unknown, insurers establish reserves, which is a balance sheet account representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. Estimates and assumptions relating to reserves for losses and loss expenses are based on complex and subjective judgments, often including the interplay of specific uncertainties with related accounting and actuarial measurements. Such estimates are also susceptible to change as significant periods of time may elapse between the occurrence of an insured loss, the report of the loss to the insurer, the ultimate determination of the cost of the loss and the insurer’s payment of that loss.
In general, when a claim is reported, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment based upon known information about the claim at that time. The estimate represents an informed judgment based on general reserving practices and reflects the experience and knowledge of the claims personnel regarding the nature and value of the specific type of claim. Reserves are also established on an aggregate basis to provide for losses incurred but not reported (“IBNR”) to the insurer, potential inadequacy of case reserves and the estimated expenses of settling claims, including legal and

25


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

26


reported and paid loss emergence patterns. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations.
Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to the Company. The length of the loss reporting lag affects our ability to accurately predict loss frequency (loss frequencies are more predictable for lines with short reporting lags) as well as the amount of reserves needed for incurred but not reported losses (less IBNR is required for lines with short reporting lags). As a result, loss reserves for lines with short reporting lags are likely to have less variation from initial loss estimates. For lines with short reporting lags, which include commercial automobile, primary workers’ compensation, other liability (claims-made) and property business, the key assumption is the loss emergence pattern used to project ultimate loss estimates from known losses paid or reported to date. For lines of business with long reporting lags, which include other liability (occurrence), products liability, excess workers’ compensation and liability reinsurance, the key assumption is the expected loss ratio since there is often little paid or incurred loss data to consider. Historically, the Company has experienced less variation from its initial loss estimates for lines of businesses with short reporting lags than for lines of business with long reporting lags.
The key assumptions used in calculating the most recent estimate of the loss reserves are reviewed each quarter and adjusted, to the extent necessary, to reflect historical changes, current trends and other factors observed. If the actual level of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s estimate. The following table reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity, relative to our assumptions, on our loss estimate for claims occurring in 2014:
(In thousands)
Frequency (+/-)
Severity (+/-)
1%
 
5%
 
10%
1%
$
70,266

 
$
211,497

 
$
388,037

5%
211,497

 
358,222

 
541,853

10%
388,037

 
541,853

 
734,123

Our net reserves for losses and loss expenses of approximately $9.2 billion as of June 30, 2015 relate to multiple accident years. Therefore, the impact of changes in frequency or severity for more than one accident year could be higher or lower than the amounts reflected above.
Approximately $1.4 billion, or 15.6%, of the Company’s net loss reserves as of June 30, 2015 relate to the Reinsurance-Global segment. There is a higher degree of uncertainty and greater variability regarding estimates of assumed loss reserves because those estimates are based, in part, upon information received from ceding companies. If information received from ceding companies is not timely or correct, the Company’s estimate of ultimate losses may not be accurate. Furthermore, due to delayed reporting of claim information by ceding companies, the claim settlement tail for assumed reinsurance is extended. Management considers the impact of delayed reporting in its selection of assumed loss development factors.
Information received from ceding companies is used to set initial expected loss ratios, to establish case reserves and to estimate reserves for incurred but not reported losses on assumed reinsurance business. This information, which is generally provided through reinsurance intermediaries, is gathered through the underwriting process and from periodic claim reports and other correspondence with ceding companies. The Company performs underwriting and claim audits of selected ceding companies to determine the accuracy and completeness of information provided to the Company. The information received from the ceding companies is supplemented by the Company’s own loss development experience with similar lines of business as well as industry loss trends and loss development benchmarks.
Following is a summary of the Company’s reserves for losses and loss expenses by business segment as of June 30, 2015 and December 31, 2014:
 
(In thousands)
2015
 
2014
Insurance-Domestic
$
6,991,634

 
$
6,767,374

Insurance-International
760,617

 
750,613

Reinsurance-Global
1,434,021

 
1,452,654

Net reserves for losses and loss expenses
9,186,272

 
8,970,641

Ceded reserves for losses and loss expenses
1,436,102

 
1,399,060

Gross reserves for losses and loss expenses
$
10,622,374

 
$
10,369,701


27


Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of June 30, 2015 and December 31, 2014:
 
(In thousands)
Reported Case
Reserves
 
Incurred But
Not Reported
 
Total
June 30, 2015
 
 
 
 
 
Other liability
$
1,030,060

 
$
1,838,108

 
$
2,868,168

Workers’ compensation (1)
1,643,869

 
1,235,054

 
2,878,923

Professional liability
323,044

 
464,222

 
787,266

Commercial automobile
335,626

 
227,491

 
563,117

Short-tail lines
349,103

 
305,674

 
654,777

Total primary
3,681,702

 
4,070,549

 
7,752,251

Reinsurance (1)
625,335

 
808,686

 
1,434,021

Total
$
4,307,037

 
$
4,879,235

 
$
9,186,272

 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
Other liability
$
1,035,442

 
$
1,785,598

 
$
2,821,040

Workers’ compensation (1)
1,603,310

 
1,201,117

 
2,804,427

Professional liability
308,887

 
453,557

 
762,444

Commercial automobile
319,700

 
203,085

 
522,785

Short-tail lines
330,010

 
277,281

 
607,291

Total primary
3,597,349

 
3,920,638

 
7,517,987

Reinsurance (1)
603,851

 
848,803

 
1,452,654

Total
$
4,201,200

 
$
4,769,441

 
$
8,970,641

___________
(1) Reserves for workers’ compensation and reinsurance are net of an aggregate net discount of $727 million and $746 million as of June 30, 2015 and December 31, 2014, respectively.

The Company evaluates reserves for losses and loss adjustment expenses on a quarterly basis. Changes in estimates of prior year losses are reported when such changes are made. The changes in prior year loss reserve estimates are generally the result of ongoing analysis of recent loss development trends. Original estimates are increased or decreased as additional information becomes known regarding individual claims and aggregate claim trends.

Certain of the Company's insurance and reinsurance contracts are retrospectively rated, whereby the Company collects more or less premiums based on the level of loss activity. For those contracts, changes in loss and loss adjustment expenses for prior years may be fully or partially offset by additional or return premiums.

Net prior year development (i.e, the sum of prior year reserve changes and prior year earned premiums changes) for the six months ended June 30, 2015 and 2014 are as follows:
 
(In thousands)
2015
 
2014
Net decrease in prior year loss reserves
$
27,478

 
$
43,225

Increase in prior year earned premiums
6,645

 
6,003

Net favorable prior year development
$
34,123

 
$
49,228

     
In 2015, favorable prior year development (net of additional and return premiums) was $34 million, and included $28 million for the Insurance-Domestic segment, $3 million for the Insurance-International segment and $3 million for the Reinsurance-Global segment. The favorable development for the Insurance-Domestic segment was primarily attributable to excess and surplus lines business and to accident years 2007 through 2010. The favorable development for excess and surplus lines reflects the continuation of favorable claim frequency trends (i.e., number of reported claims per unit of exposure).
In 2014, favorable reserve development (net of additional and return premiums) of $49 million was primarily related to the Insurance-Domestic segment and was also driven by excess and surplus lines casualty business.

28


Reserve Discount. The Company discounts its liabilities for certain workers’ compensation reserves. The amount of workers’ compensation reserves that were discounted was $2,064 million and $2,187 million at June 30, 2015 and December 31, 2014, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $727 million and $746 million at June 30, 2015 and December 31, 2014, respectively. At June 30, 2015, discount rates by year ranged from 2.0% to 6.5%, with a weighted average discount rate of 4.0%.

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

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

Assumed Reinsurance Premiums. The Company estimates the amount of assumed reinsurance premiums that it will receive under treaty reinsurance agreements at the inception of the contracts. These premium estimates are revised as the actual amount of assumed premiums is reported to the Company by the ceding companies. As estimates of assumed premiums are made or revised, the related amount of earned premiums, commissions and incurred losses associated with those premiums are recorded. Estimated assumed premiums receivable were approximately $65 million at June 30, 2015 and $85 million at December 31, 2014. The assumed premium estimates are based upon terms set forth in reinsurance agreements, information received from ceding companies during the underwriting and negotiation of agreements, reports received from ceding companies and discussions and correspondence with reinsurance intermediaries. The Company also considers its own view of market conditions, economic trends and experience with similar lines of business. These premium estimates represent management’s best estimate of the ultimate amount of premiums to be received under its assumed reinsurance agreements.
Other-Than-Temporary Impairments (OTTI) of Investments. The cost of securities is adjusted where appropriate to include a provision for decline in value which is considered to be other-than-temporary. An other-than-temporary decline is considered to occur in investments where there has been a sustained reduction in fair value and where the Company does not expect the fair value to recover prior to the time of sale or maturity. Since equity securities do not have a contractual cash flow or maturity, the Company considers whether the price of an equity security is expected to recover within a reasonable period of time.
The Company classifies its fixed maturity securities and preferred stocks by credit rating, primarily based on ratings assigned by credit rating agencies. For purposes of classifying securities with different ratings, the Company uses the lower rating if two ratings were assigned and the middle rating if three ratings were assigned, unless the Company’s own analysis indicates that the lower rating is more appropriate. Securities that are not rated by a rating agency are evaluated and classified by the Company on a case-by-case basis.
Fixed Maturity Securities – For securities that we intend to sell or, more likely than not, would be required to sell, a decline in value below amortized cost is considered to be OTTI. The amount of OTTI is equal to the difference between amortized cost and fair value at the balance sheet date. For securities that we do not intend to sell or expect to be required to sell, a decline in value below amortized cost is considered to be an OTTI if we do not expect to recover the entire amortized cost basis of a security (i.e., the present value of cash flows expected to be collected is less than the amortized cost basis of the security).
The portion of the decline in value considered to be a credit loss (i.e., the difference between the present value of cash flows expected to be collected and the amortized cost basis of the security) is recognized in earnings. The portion of the decline in value not considered to be a credit loss (i.e., the difference in the present value of cash flows expected to be collected and the fair value of the security) is recognized in other comprehensive income.
Impairment assessments for structured securities, including mortgage-backed securities and asset-backed securities, collateralized debt obligations and corporate debt, are generally evaluated based on the performance of the underlying collateral under various economic and default scenarios that may involve subjective judgments and estimates by management. Modeling these securities involves various factors, such as projected default rates, the nature and realizable value of the collateral, if any,

29


the ability of the issuer to make scheduled payments, historical performance and other relevant economic and performance factors. If an OTTI determination is made, a discounted cash flow analysis is used to ascertain the amount of the credit impairment.

The following table provides a summary of fixed maturity securities in an unrealized loss position as of June 30, 2015:
($ in thousands)
Number of
Securities
 
Aggregate
Fair Value
 
Unrealized
Loss
Unrealized loss less than 20% of amortized cost
451

 
$
3,522,678

 
$
62,691

Unrealized loss of 20% or greater of amortized cost:
 
 
 
 
 
Less than twelve months
1

 
342

 
169

Twelve months and longer
13

 
49,463

 
17,723

Total
465

 
$
3,572,483

 
$
80,583

A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at June 30, 2015 is presented in the table below:
($ in thousands)
Number of
Securities
 
Aggregate
Fair Value
 
Unrealized
Loss
Mortgage-backed securities
7

 
$
24,150

 
$
1,605

Corporate
13

 
90,216

 
2,486

Total
20

 
$
114,366

 
$
4,091

    
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 June 30, 2015, there were eight equity securities in an unrealized loss position, with an aggregate fair value of $83.6 million and a gross unrealized loss of $15.0 million. Three of these equity securities are preferred stocks that are rated non-investment grade with an aggregate fair value of $3.6 million and a gross unrealized loss of $1.2 million. 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 June 30, 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

30


pricing information. The Company determines whether inputs are observable based on the use of such information by pricing services and external investment managers, the uninterrupted availability of such inputs, the need to make significant adjustments to such inputs and the volatility of such inputs over time. If the market for a security is determined to be inactive or if significant inputs used to price a security are determined to be unobservable, the security is categorized in Level 3 of the fair value hierarchy.
Because many fixed maturity securities do not trade on a daily basis, the Company utilizes pricing models and processes which may include benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Market inputs used to evaluate securities include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Quoted prices are often unavailable for recently issued securities that are infrequently traded or securities that are only traded in private transactions. For publicly traded securities for which quoted prices are unavailable, the Company determines fair value based on independent broker quotations and other observable market data. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial data, projections and business developments of the issuer and other relevant information.
The following is a summary of pricing sources for the Company's fixed maturity securities available for sale as of June 30, 2015:
 
(In thousands)
Carrying
Value
 
Percent
of Total
Pricing source:
 
 
 
Independent pricing services
$
12,030,267

 
97.9
%
Syndicate manager
93,214

 
0.7

Directly by the Company based on:
 
 
 
Observable data
170,869

 
1.4

Cash flow model
154

 
* -
Total
$
12,294,504

 
100.0
%
_______
*Less than 0.1%.
Independent pricing services – Substantially all of the Company’s fixed maturity securities available for sale were priced by independent pricing services (generally one U.S. pricing service plus additional pricing services with respect to a limited number of foreign securities held by the Company). The prices provided by the independent pricing services are generally based on observable market data in active markets (e.g., broker quotes and prices observed for comparable securities). The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company reviews the prices provided by pricing services for reasonableness based upon current trading levels for similar securities. If the prices appear unusual to the Company, they are re-examined and the value is either confirmed or revised. In addition, the Company periodically performs independent price tests of a sample of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of June 30, 2015, the Company did not make any adjustments to the prices provided by the pricing services. Based upon the Company’s review of the methodologies used by the independent pricing services, these securities were classified as Level 2.
Syndicate manager – The Company has a 15% participation in a Lloyd’s syndicate, and the Company’s share of the securities owned by the syndicate is priced by the syndicate’s manager. The majority of the securities are liquid, short duration fixed maturity securities. The Company reviews the syndicate manager’s pricing methodology and audited financial statements and holds discussions with the syndicate manager as necessary to confirm its understanding and agreement with security prices. Based upon the Company’s review of the methodologies used by the syndicate manager, these securities were classified as Level 2.
Observable data – If independent pricing is not available, the Company prices the securities directly. Prices are based on observable market data where available, including current trading levels for similar securities and non-binding quotations from brokers. The Company generally requests two or more quotes. If more than one quote is received, the Company sets a price within the range of quotes received based on its assessment of the credibility of the quote and its own evaluation of the security. 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

31


and subordination levels. Discount rates are adjusted to reflect illiquidity where appropriate. These securities were classified as Level 3.



32


Results of Operations for the Six Months Ended June, 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 six months ended June 30, 2015 and 2014. The GAAP combined ratio represents a measure of underwriting profitability, excluding investment income. A GAAP combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.
($ in thousands)
2015
 
2014
Insurance-Domestic:
 
 
 
Gross premiums written
$
2,831,099

 
$
2,694,566

Net premiums written
2,396,219

 
2,250,224

Net premiums earned
2,277,195

 
2,045,252

Loss ratio
61.6
%
 
60.4
%
Expense ratio
31.4
%
 
32.4
%
GAAP combined ratio
93.0
%
 
92.8
%
Insurance-International:
 
 
 
Gross premiums written
$
520,258

 
$
542,386

Net premiums written
429,998

 
448,443

Net premiums earned
385,463

 
387,192

Loss ratio
58.7
%
 
60.0
%
Expense ratio
40.3
%
 
39.4
%
GAAP combined ratio
99.0
%
 
99.4
%
Reinsurance-Global:
 
 
 
Gross premiums written
$
311,846

 
$
340,716

Net premiums written
293,110

 
316,989

Net premiums earned
302,396

 
348,813

Loss ratio
58.8
%
 
64.0
%
Expense ratio
37.1
%
 
32.4
%
GAAP combined ratio
95.9
%
 
96.4
%
Consolidated:
 
 
 
Gross premiums written
$
3,663,203

 
$
3,577,668

Net premiums written
3,119,327

 
3,015,656

Net premiums earned
2,965,054

 
2,781,257

Loss ratio
60.9
%
 
60.8
%
Expense ratio
33.1
%
 
33.4
%
GAAP combined ratio
94.0
%
 
94.2
%

33



Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the six months ended June 30, 2015 and 2014:
(In thousands, except per share data)
2015
 
2014
Net income to common stockholders
$
241,342

 
$
349,634

Weighted average diluted shares
131,228

 
134,323

Net income per diluted share
$
1.84

 
$
2.60

The Company reported net income of $241 million in 2015 compared to $350 million in 2014. The 31% decrease in net income was primarily due to a decrease in after-tax net investment gains of $75 million and a decrease in after-tax net investment income of $38 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 $3,663 million in 2015, an increase of 2% from $3,578 million in 2014. The growth was due primarily to rate increases. Approximately 79.2% of policies expiring in 2015 were renewed, compared with a 79.3% renewal retention rate for policies expiring in 2014.
Average renewal premium rates (adjusted for change in exposures) increased 1.9% 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 $2,831 million in 2015 from $2,695 million in 2014. Gross premiums increased $47 million (6%) for workers' compensation, $41 million (20%) for professional liability, $24 million (3%) for other liability, $19 million (3%), for short-tail lines and $5 million (2%) for commercial auto.
Insurance-International gross premiums decreased 4% to $520 million in 2015 from $542 million in 2014. Gross premiums increased $16 million (29%) for other liability, $11 million (31%) for workers' compensation and $4 million (7%) for commercial auto. Insurance-International gross premiums decreased $49 million (15%) for short-tail lines and $4 million (8%) for professional liability. In local currency terms, international gross premiums increased 6% in 2015.
Reinsurance-Global gross premiums decreased 9% to $312 million in 2015 from $341 million in 2014, due to increasingly competitive conditions. Gross premiums written decreased $20 million (9%) for casualty lines and $9 million (8%) for property lines.
Net premiums written were $3,119 million in 2015, an increase of 3% from $3,016 million in 2014. Ceded reinsurance premiums as a percentage of gross written premiums were 15% in 2015 and 16% in 2014.
Premiums earned increased 7% to $2,965 million in 2015 from $2,781 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 $73 million in 2015 compared with $60 million in 2014.

34


Net Investment Income. Following is a summary of net investment income for the six months ended June 30, 2015 and 2014: 
 
Amount
 
Average Annualized
Yield
(In thousands)
2015
 
2014
 
2015
 
2014
Fixed maturity securities, including cash and cash equivalents and loans receivable
$
213,159

 
$
214,658

 
3.2
%
 
3.4
%
Investment funds
27,912

 
76,155

 
4.6

 
15.2

Arbitrage trading account
8,862

 
12,461

 
2.9

 
4.6

Real estate
4,881

 
6,165

 
1.3

 
1.8

Equity securities available for sale
2,404

 
4,049

 
2.9

 
4.0

Gross investment income
257,218

 
313,488

 
3.2

 
4.1

Investment expenses
(5,396
)
 
(6,048
)
 
 
 
 
Total
$
251,822

 
$
307,440

 
3.2

 
4.0

Net investment income decreased 18% to $252 million in 2015 from $307 million in 2014 due primarily 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 $15.9 billion in 2015 and $15.2 billion in 2014.
Insurance Service Fees. The Company earns fees from an insurance distribution business and as a servicing carrier of workers' compensation assigned risk plans for certain states. Service fees increased to $72 million in 2015 from $56 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 $47 million in 2015 compared with $162 million in 2014. The realized gains in 2014 included a gain of $86 million from the sale of an investment in a 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 $198 million in 2015 and $197 million in 2014.
Losses and Loss Expenses. Losses and loss expenses increased to $1,807 million in 2015 from $1,690 million in 2014. The consolidated loss ratio was 60.9% in 2015 and 60.8% in 2014. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $39 million in 2015 and $54 million in 2014. Favorable prior year reserve development (net of premium offsets) was $34 million in 2015 compared with $49 million in 2014, a difference of 0.6 loss ratio point. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.1 points to 60.7% in 2015 from 60.6% in 2014. A summary of loss ratios in 2015 compared with 2014 by business segment follows:
Insurance-Domestic - The loss ratio of 61.6% in 2015 was 1.2 points higher than the loss ratio of 60.4% in 2014. Catastrophe losses were $37 million in 2015 compared with $51 million in 2014. Favorable prior year reserve development was $29 million in 2015 compared with $54 million in 2014, a difference of 1.4 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.7 points to 61.3% in 2015 from 60.6% in 2014.
Insurance-International - The loss ratio of 58.7% in 2015 was 1.3 points lower than the loss ratio of 60.0% in 2014. Catastrophe losses were $1 million in 2015 compared with $2 million in 2014. Favorable prior year reserve was $2 million in 2015 compared with unfavorable prior year development of $5 million in 2014, a difference of 2.0 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development increased 1.0 points to 59.3% in 2015 from 58.3% in 2014.
Reinsurance-Global - The loss ratio of 58.8% in 2015 was 5.2 points lower than the loss ratio of 64.0% in 2014. Favorable prior year development was $3 million 2015 compared with no change in 2014, a difference of 1.0 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development decreased 4.5 points to 59.1% in 2015 from 63.6% in 2014.

35


Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses:
(In thousands)
2015
 
2014
Underwriting expenses
$
982,294

 
$
928,434

Service expenses
63,458

 
45,864

Net foreign currency loss
2,509

 
1,659

Other costs and expenses
76,367

 
73,359

Total
$
1,124,628

 
$
1,049,316

Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Underwriting expenses increased 6% compared with an increase in net premiums earned of 7%. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 33.1% in 2015, down from 33.4% 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 $63 million in 2015 from $46 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 losses were $3 million in 2015 compared to a net foreign currency loss of $2 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 $76 million in 2015 from $73 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 $188 million in 2015 compared to $193 million in 2014.
Interest Expense. Interest expense was $68 million in 2015 compared with $61 million in 2014. In August 2014, the Company issued $350 million of 4.75% senior notes due 2044. A portion of the proceeds were used to repay $200 million of 5.60% senior notes at maturity on May 15, 2015.
Income Taxes. The effective income tax rate was 30% in 2015 compared to 32% 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 $55 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 $2.6 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.


36


Results of Operations for the Three Months Ended June, 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 June 30, 2015 and 2014. The GAAP combined ratio represents a measure of underwriting profitability, excluding investment income. A GAAP combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit.
($ in thousands)
2015
 
2014
Insurance-Domestic:
 
 
 
Gross premiums written
$
1,421,922

 
$
1,351,624

Net premiums written
1,202,588

 
1,123,843

Net premiums earned
1,159,653

 
1,041,745

Loss ratio
61.6
%
 
60.9
%
Expense ratio
31.5
%
 
32.3
%
GAAP combined ratio
93.1
%
 
93.2
%
Insurance-International:
 
 
 
Gross premiums written
$
237,032

 
$
265,200

Net premiums written
198,490

 
222,622

Net premiums earned
191,729

 
201,868

Loss ratio
59.5
%
 
60.7
%
Expense ratio
41.6
%
 
38.8
%
GAAP combined ratio
101.1
%
 
99.5
%
Reinsurance-Global:
 
 
 
Gross premiums written
$
152,444

 
$
155,577

Net premiums written
142,847

 
143,311

Net premiums earned
141,659

 
174,032

Loss ratio
54.9
%
 
63.4
%
Expense ratio
38.7
%
 
31.9
%
GAAP combined ratio
93.6
%
 
95.3
%
Consolidated:
 
 
 
Gross premiums written
$
1,811,398

 
$
1,772,401

Net premiums written
1,543,925

 
1,489,776

Net premiums earned
1,493,041

 
1,417,645

Loss ratio
60.7
%
 
61.2
%
Expense ratio
33.5
%
 
33.2
%
GAAP combined ratio
94.2
%
 
94.4
%

37



Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the three months ended June 30, 2015 and 2014:
(In thousands, except per share data)
2015
 
2014
Net income to common stockholders
$
123,035

 
$
179,961

Weighted average diluted shares
129,988

 
133,304

Net income per diluted share
$
0.95

 
$
1.35

The Company reported net income of $123 million in 2015 compared to $180 million in 2014. The 32% decrease in net income was primarily due to decreases in after-tax net investment gains of $53 million and in after-tax net investment income of $9 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 $1,811 million in 2015, an increase of 2% from $1,772 million in 2014. The growth was due primarily to rate increases. Average renewal premium rates (adjusted for change in exposures) increased 1.1% 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 $1,422 million in 2015 from $1,352 million in 2014. Gross premiums increased $43 million (12%) for workers' compensation, $18 million (16%) for professional liability, $5 million (1%) for other liability, $3 million (1%) for short-tail lines and $1 million (1%) for commercial auto.
Insurance-International gross premiums decreased 11% to $237 million in 2015 from $265 million in 2014. Gross premiums increased $6 million (33%) for workers' compensation, $5 million (20%) for other liability and $2 million (7%) for commercial auto. Insurance-International gross premiums decreased $40 million (25%) for short-tail lines and $1 million (3%) for professional liability. In local currency terms, international gross premiums decreased 2% in 2015.
Reinsurance-Global gross premiums decreased 2% to $152 million in 2015 from $156 million in 2014, due to increasingly competitive conditions. Gross premiums written decreased $7 million (6%) for casualty lines and increased $3 million (6%) for property lines.
Net premiums written were $1,544 million in 2015, an increase of 4% from $1,490 million in 2014. Ceded reinsurance premiums as a percentage of gross written premiums were 15% in 2015 and 16% in 2014.
Premiums earned increased 5% to $1,493 million in 2015 from $1,418 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 $36 million in 2015 compared with $29 million in 2014.

38


Net Investment Income. Following is a summary of net investment income for the three months ended June 30, 2015 and 2014: 
 
Amount
 
Average Annualized
Yield
(In thousands)
2015
 
2014
 
2015
 
2014
Fixed maturity securities, including cash and cash equivalents and loans receivable
$
105,030

 
$
107,760

 
3.2
 %
 
3.3
%
Investment funds
21,851

 
22,356

 
7.3

 
9.1

Arbitrage trading account
(117
)
 
6,942

 
(0.1
)
 
4.6

Real estate
2,114

 
3,063

 
1.1

 
1.9

Equity securities available for sale
1,224

 
2,103

 
3.0

 
4.4

Gross investment income
130,102

 
142,224

 
3.3

 
3.7

Investment expenses
(2,519
)
 
(3,495
)
 
 
 
 
Total
$
127,583

 
$
138,729

 
3.2

 
3.6

Net investment income decreased 8% to $128 million in 2015 from $139 million in 2014 due primarily to a $7 million decrease in income from the arbitrage trading account. Average invested assets, at cost (including cash and cash equivalents) were $15.9 billion in 2015 and $15.3 billion in 2014.
Insurance Service Fees. The Company earns fees from an insurance distribution business and as a servicing carrier of workers' compensation assigned risk plans for certain states. Service fees increased to $36 million in 2015 from $27 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 $28 million in 2015 compared with $109 million in 2014. The realized gains in 2014 included a gain of $86 million from the sale of an investment in a 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 $106 million in 2015 and $104 million in 2014.
Losses and Loss Expenses. Losses and loss expenses increased to $906 million in 2015 from $868 million in 2014. The consolidated loss ratio was 60.7% in 2015 and 61.2% in 2014. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $24 million in 2015 and $40 million in 2014. Favorable prior year reserve development (net of premium offsets) was $22 million in 2015 compared with $24 million in 2014, a difference of 0.2 loss ratio point. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.4 point to 60.5% in 2015 from 60.1% 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 0.7 points higher than the loss ratio of 60.9% in 2014. Catastrophe losses were $22 million in 2015 compared with $38 million in 2014. Favorable prior year reserve development was $17 million in 2015 compared with $26 million in 2014, a difference of 1.1 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development increased 1.4 points to 61.2% in 2015 from 59.8% in 2014.
Insurance-International - The loss ratio of 59.5% in 2015 was 1.2 points lower than the loss ratio of 60.7% in 2014. There were no catastrophe losses in 2015 compared with $1 million in 2014. Favorable prior year reserve development was $3 million in 2015 compared to unfavorable prior year reserve development of $3 million in 2014, a difference of 2.6 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development increased 1.3 points to 60.6% in 2015 from 59.3% in 2014.
Reinsurance-Global - The loss ratio of 54.9% in 2015 was 8.5 points lower than the loss ratio of 63.4% in 2014. Prior year reserves decreased $2 million in 2015 compared with no change in 2014, a difference of 1.7 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development decreased 7.4 points to 55.4% in 2015 from 62.8% in 2014.

39



Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses:
(In thousands)
2015
 
2014
Underwriting expenses
$
500,234

 
$
470,296

Service expenses
32,374

 
23,607

Net foreign currency loss
3,076

 
1,993

Other costs and expenses
37,898

 
38,254

Total
$
573,582

 
$
534,150

Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Underwriting expenses increased 6% compared with an increase in net premiums earned of 5%. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 33.5% in 2015, up from 33.2% in 2014, primarily due to an increase in commission expenses for certain reinsurance business.
Service expenses, which represent the costs associated with the fee-based businesses, increased to $32 million in 2015 from $24 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 losses were $3 million in 2015 compared to a net foreign currency loss of $2 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 were $38 million in 2015 and 2014.
Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees represent costs associated with aviation-related businesses that include (i) cost of goods sold related to aircraft and products sold and services provided, and (ii) general and administrative expenses. Expenses from wholly-owned investees were $99 million in 2015 compared to $101 million in 2014.
Interest Expense. Interest expense was $33 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 were used to repay $200 million of 5.60% senior notes at maturity on May 15, 2015.
Income Taxes. The effective income tax rate was 31% in 2015 compared to 32% 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.
    

















40


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 3.3 years at June 30, 2015 and 3.2 years at December 31, 2014. The Company’s fixed maturity investment portfolio and investment-related assets as of June 30, 2015 were as follows:
($ in thousands)
Carrying
Value
 
Percent
of Total
Fixed maturity securities:
 
 
 
U.S. government and government agencies
$
715,367

 
4.4
%
State and municipal:
 
 
 
Special revenue
2,450,825

 
15.0

State general obligation
691,871

 
4.2

Pre-refunded (1)
473,708

 
2.9

Corporate backed
432,424

 
2.6

Local general obligation
325,089

 
2.0

Total state and municipal
4,373,917

 
26.8

Mortgage-backed securities:
 
 
 
Agency
918,826

 
5.6

Residential-Prime
138,329

 
0.9

Commercial
69,338

 
0.4

Residential-Alt A
64,031

 
0.4

Total mortgage-backed securities
1,190,524

 
7.3

Corporate:
 
 
 
Industrial
1,866,845

 
11.4

Asset-backed
1,652,155

 
10.1

Financial
1,323,007

 
8.1

Utilities
190,482

 
1.2

Other
116,363

 
0.7

Total corporate
5,148,852

 
31.5

Foreign government and foreign government agencies
967,150

 
5.9

Total fixed maturity securities
12,395,810

 
75.8

Equity securities:
 
 
 
Preferred stocks
94,322

 
0.6

Common stocks
59,191

 
0.4

Total equity securities
153,513

 
1.0

Investment funds
1,123,829

 
6.9

Arbitrage trading account
830,212

 
5.1

Real estate
820,257

 
5.0

Cash and cash equivalents
756,368

 
4.6

Loans receivable
259,411

 
1.6

Total investments
$
16,339,400

 
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.

41


Fixed Maturity Securities. The Company’s investment policy with respect to fixed maturity securities is generally to purchase instruments with the expectation of holding them to their maturity. However, management of the available for sale portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as a result of changes in financial market conditions and tax considerations.
The Company’s philosophy related to holding or selling fixed maturity securities is based on its objective of maximizing total return. The key factors that management considers in its investment decisions as to whether to hold or sell fixed maturity securities are its view of the underlying fundamentals of specific securities as well as its expectations regarding interest rates, credit spreads and currency values. In a period in which management expects interest rates to rise, the Company may sell longer duration securities in order to mitigate the impact of an interest rate rise on the fair value of the portfolio. Similarly, in a period in which management expects credit spreads to widen, the Company may sell lower quality securities, and in a period in which management expects certain foreign currencies to decline in value, the Company may sell securities denominated in those foreign currencies. The sale of fixed maturity securities in order to achieve the objective of maximizing total return may result in realized gains; however, there is no reason to expect these gains to continue in future periods.
At June 30, 2015, investments in foreign government fixed maturity securities (which are generally held by the Company's foreign operations) were as follows:
(In thousands)
Carrying Value
Australia
$
244,374

United Kingdom
188,127

Canada
162,441

Argentina
160,430

Germany
59,330

Brazil
54,477

Supranational (1)
48,312

Norway
32,770

Singapore
6,316

Colombia
6,830

Uruguay
$
3,743

 Total
$
967,150

________
(1) Supranational represents investments in the North American Development Bank, European Investment Bank and Inter-American Development Bank.
Equity Securities. Equity securities primarily represent investments in high-dividend yielding common and preferred stocks issued by large market capitalization companies.
Investment Funds. At June 30, 2015, the carrying value of investment funds was $1,124 million, including investments in real estate funds of $507 million, energy funds of $114 million and arbitrage funds of $73 million. Investment funds are primarily reported on a one-quarter lag.
Real Estate. Real estate is directly owned property held for investment. At June 30, 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 $259 million and an aggregate fair value of $262 million at June 30, 2015. The amortized cost of loans receivable is net of a valuation allowance of $2 million as of June 30, 2015. Loans receivable include real estate loans of $175 million that are secured by commercial real estate located primarily in Arizona, Maryland, New York and Texas. Real estate loans receivable generally earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through August 2025. Loans

42


receivable include commercial loans of $84 million that are secured by business assets and have fixed interest rates with varying maturities not exceeding 10 years.
Market Risk. The fair value of the Company’s investments is subject to risks of fluctuations in credit quality and interest rates. The Company uses various models and stress test scenarios to monitor and manage interest rate risk. The Company attempts to manage its interest rate risk by maintaining an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities (i.e., policy claims and debt obligations). The average duration for the fixed maturity portfolio was 3.3 years at June 30, 2015 and 3.2 years at December 31, 2014. In addition, the fair value of the Company’s international investments is subject to currency risk. The Company attempts to manage its currency risk by matching its foreign currency assets and liabilities where considered appropriate.

Liquidity and Capital Resources
        Cash Flow. Cash flow provided from operating activities increased to $333 million in the first six months of 2015 from $255 million in the comparable period in 2014, primarily due to the timing of tax payments, premium collections and expense payments.
The Company's insurance subsidiaries' principal sources of cash are premiums, investment income, service fees and proceeds from sales and maturities of portfolio investments. The principal uses of cash are payments for claims, taxes, operating expenses and dividends. The Company expects its insurance subsidiaries to fund the payment of losses with cash received from premiums, investment income and fees. The Company targets an average duration for its investment portfolio that is within one year of the average duration of its liabilities so that portions of its investment portfolio mature throughout the claim cycle and are available for the payment of claims if necessary. In the event operating cash flow and proceeds from maturities and prepayments of fixed income securities are not sufficient to fund claim payments and other cash requirements, the remainder of the Company's cash and investments is available to pay claims and other obligations as they become due. The Company's investment portfolio is highly liquid, with approximately 81% invested in cash, cash equivalents and marketable fixed maturity securities as of June 30, 2015. If the sale of fixed maturity securities were to become necessary, a realized gain or loss equal to the difference between the cost and sales price of securities sold would be recognized.
Debt. At June 30, 2015, the Company had senior notes, subordinated debentures and other debt outstanding with a carrying value of $2,184 million and a face amount of $2,208 million. The maturities of the outstanding debt are $2 million in 2015, $37 million in 2016, $40 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 was used to repay $200 million of 5.60% senior notes at maturity on May 15, 2015. In addition, in May 2015 the Company repaid $71 million of debt that it had assumed in 2014 in conjunction with the purchase of an office building in West Palm Beach, Florida.
Equity. At June 30, 2015, total common stockholders’ equity was $4.5 billion, common shares outstanding were approximately 122 million and stockholders’ equity per outstanding share was $36.76. During the six months ended June 30, 2015, the Company repurchased 4,395,912 shares of its common stock for $218 million.
In June 2015, the Board of Directors increased the Company's share repurchase authorization to 10 million shares of common stock, of which 9,353,091 remain available as of June 30, 2015. Repurchases may be made by the Company from time to time at prevailing prices in the open market in privately negotiated transactions, subject to market conditions and other factors.
Total Capital. Total capitalization (equity, debt and subordinated debentures) was $6.7 billion at June 30, 2015. The percentage of the Company’s capital attributable to debt and subordinated debentures was 33% at June 30, 2015 and 35% at December 31, 2014.

43




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 June 30, 2015, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Please see Note 20 to the notes to the interim consolidated financial statements.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2014.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Set forth below is a summary of the shares repurchased by the Company during the three months ended June 30, 2015 and the number of shares remaining authorized for purchase by the Company.
 
Total number
of shares
purchased
 
Average price
paid per share
 
Total number of shares purchased
as part of publicly announced
plans
or programs
 
Maximum number of
shares that may yet be
purchased under the
plans or programs
April 2015
274,211

 
$
49.480

 
274,211

 
5,081,416

May 2015
1,519,302

 
49.527

 
1,519,302

 
3,562,114

June 2015
771,909

 
49.365

 
771,909

 
9,353,091



Item 6. Exhibits

Number 
 
 
(10.1)
 
Form of Dividend Equivalent Rights Award Agreement Under the W. R. Berkley Corporation 2012 Stock Incentive Plan.
 
 
 
(31.1)
 
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a).
 
 
 
(31.2)
 
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/ 15d-14(a).
 
 
 
(32.1)
 
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
W. R. BERKLEY CORPORATION
 
Date:
August 6, 2015
/s/ William R. Berkley  
 
 
William R. Berkley 
 
 
Chairman of the Board and Chief Executive Officer 
 
 
 
Date:
August 6, 2015
/s/ Eugene G. Ballard  
 
 
Eugene G. Ballard 
 
 
Executive Vice President - Chief Financial Officer 

45