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EX-31.2 - CERTIFICATION OF CFO - BERKLEY W R CORPwrb3312016ex312.htm
EX-32.1 - CERTIFICATION OF CEO AND CFO - BERKLEY W R CORPwrb3312016ex321.htm
EX-31.1 - CERTIFICATION OF CEO - BERKLEY W R CORPwrb3312016ex311.htm
EX-10.1 - FORM OF 2016 LTIP AWARD - BERKLEY W R CORPwrb3312016ex101.htm

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
(Mark one)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2016
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 May 4, 2016: 122,602,882
 



TABLE OF CONTENTS



Part I — FINANCIAL INFORMATION
Item 1.
Financial Statements
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
March 31,
2016
 
December 31,
2015
 
(Unaudited)
 
(Audited)
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities
$
12,745,436

 
$
12,444,394

Investment funds
1,179,310

 
1,170,040

Real estate
986,810

 
936,367

Arbitrage trading account
384,519

 
376,697

Loans receivable
149,388

 
273,103

Equity securities
141,699

 
150,866

Total investments
15,587,162

 
15,351,467

Cash and cash equivalents
837,515

 
763,631

Premiums and fees receivable
1,749,273

 
1,669,186

Due from reinsurers
1,558,749

 
1,532,829

Deferred policy acquisition costs
547,519

 
513,128

Prepaid reinsurance premiums
429,058

 
394,387

Trading account receivables from brokers and clearing organizations
373,833

 
383,115

Property, furniture and equipment
346,471

 
348,224

Goodwill
153,747

 
153,291

Accrued investment income
130,380

 
123,164

Federal and foreign income taxes

 
48,952

Other assets
517,227

 
442,782

Total assets
$
22,230,934

 
$
21,724,156

 
 
 
 
Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Reserves for losses and loss expenses
$
10,788,342

 
$
10,669,150

Unearned premiums
3,314,676

 
3,137,133

Due to reinsurers
256,838

 
224,752

Trading account securities sold but not yet purchased
35,956

 
37,035

Federal and foreign income taxes
31,291

 

Other liabilities
754,292

 
837,937

Senior notes and other debt
1,814,998

 
1,844,621

Subordinated debentures
446,485

 
340,320

Total liabilities
17,442,878

 
17,090,948

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, 122,599,552 and 123,307,837 shares, respectively
47,024

 
47,024

Additional paid-in capital
1,013,572

 
1,005,455

Retained earnings
6,282,870

 
6,178,070

Accumulated other comprehensive income (loss)
8,124

 
(66,698
)
Treasury stock, at cost, 112,518,366 and 111,810,081 shares, respectively
(2,600,377
)
 
(2,563,605
)
Total stockholders’ equity
4,751,213

 
4,600,246

Noncontrolling interests
36,843

 
32,962

Total equity
4,788,056

 
4,633,208

Total liabilities and equity
$
22,230,934

 
$
21,724,156


See accompanying notes to interim consolidated financial statements.

1



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

 
For the Three Months
 
Ended March 31,
 
2016
 
2015
REVENUES:
 
 
 
Net premiums written
$
1,663,722

 
$
1,575,402

Change in net unearned premiums
(136,387
)
 
(103,389
)
Net premiums earned
1,527,335

 
1,472,013

Net investment income
130,133

 
124,239

Insurance service fees
40,362

 
36,518

Net realized investment gains
25,457

 
19,044

Other-than-temporary impairments
(18,114
)
 

Revenues from non-insurance businesses
101,780

 
92,606

Other income
258

 
259

Total revenues
1,807,211

 
1,744,679

OPERATING COSTS AND EXPENSES:
 
 
 
Losses and loss expenses
922,321

 
900,708

Other operating costs and expenses
582,459

 
551,046

Expenses from non-insurance businesses
95,531

 
89,670

Interest expense
32,224

 
34,538

Total operating costs and expenses
1,632,535

 
1,575,962

Income before income taxes
174,676

 
168,717

Income tax expense
(54,428
)
 
(50,273
)
Net income before noncontrolling interests
120,248

 
118,444

Noncontrolling interests
(737
)
 
(137
)
Net income to common stockholders
$
119,511

 
$
118,307

 
 
 
 
NET INCOME PER SHARE:
 
 
 
Basic
$
0.97

 
$
0.94

Diluted
$
0.93

 
$
0.89


See accompanying notes to interim consolidated financial statements.





2


W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
 
 
For the Three Months
 
 
Ended March 31,
 
 
2016
 
2015
Net income before noncontrolling interests
 
$
120,248

 
$
118,444

Other comprehensive income (loss):
 
 
 
 
Change in unrealized currency translation adjustments
 
(2,047
)
 
(47,805
)
Change in unrealized investment gains, net of taxes
 
76,855

 
16,291

Other comprehensive income (loss)
 
74,808

 
(31,514
)
Comprehensive income
 
195,056

 
86,930

Comprehensive (income) to the noncontrolling interest
 
(723
)
 
(115
)
Comprehensive income to common stockholders
 
$
194,333

 
$
86,815


See accompanying notes to interim consolidated financial statements.

3


W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(In thousands)
 
For the Three Months
 
Ended March 31,
 
2016

2015
COMMON STOCK:
 
 
 
Beginning and end of period
$
47,024

 
$
47,024

ADDITIONAL PAID-IN CAPITAL:
 
 
 
Beginning of period
$
1,005,455

 
$
991,512

Stock options exercised and restricted stock units issued including tax benefit
(652
)
 
(1,678
)
Restricted stock units expensed
8,769

 
8,171

End of period
$
1,013,572

 
$
998,005

RETAINED EARNINGS:
 
 
 
Beginning of period
$
6,178,070

 
$
5,732,410

Net income to common stockholders
119,511

 
118,307

Dividends
(14,711
)
 
(13,749
)
End of period
$
6,282,870

 
$
5,836,968

ACCUMULATED OTHER COMPREHENSIVE INCOME:
 
 
 
Unrealized investment gains:
 
 
 
Beginning of period
$
180,695

 
$
306,199

Unrealized gains on securities not other-than-temporarily impaired
76,904

 
16,308

Unrealized gains (losses) on other-than-temporarily impaired securities
(35
)
 
5

End of period
257,564

 
322,512

Currency translation adjustments:
 
 
 
Beginning of period
$
(247,393
)
 
$
(122,649
)
Net change in period
(2,047
)
 
(47,805
)
End of period
(249,440
)
 
(170,454
)
Total accumulated other comprehensive income
$
8,124

 
$
152,058

TREASURY STOCK:
 
 
 
Beginning of period
$
(2,563,605
)
 
$
(2,364,551
)
Stock exercised/vested
652

 
331

Stock repurchased
(37,424
)
 
(91,213
)
End of period
$
(2,600,377
)
 
$
(2,455,433
)
NONCONTROLLING INTERESTS:
 
 
 
Beginning of period
$
32,962

 
$
34,189

Contributions
3,158

 
111

Net income
737

 
137

Other comprehensive (loss), net of tax
(14
)
 
(22
)
End of period
$
36,843

 
$
34,415

See accompanying notes to interim consolidated financial statements.

4


W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
For the Three Months
 
Ended March 31,
 
2016
 
2015
CASH FROM OPERATING ACTIVITIES:
 
 
 
Net income to common stockholders
$
119,511

 
$
118,307

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Net investment gains
(7,343
)
 
(19,044
)
Depreciation and amortization
30,245

 
19,203

Noncontrolling interests
737

 
137

Investment funds
(16,636
)
 
(6,061
)
Stock incentive plans
8,766

 
8,171

Change in:
 
 
 
Arbitrage trading account
383

 
7,692

Premiums and fees receivable
(79,531
)
 
(71,181
)
Reinsurance accounts
(26,319
)
 
(46,260
)
Deferred policy acquisition costs
(33,466
)
 
(21,314
)
Income taxes
46,780

 
44,618

Reserves for losses and loss expenses
108,057

 
152,925

Unearned premiums
171,553

 
117,403

Other
(181,969
)
 
(243,584
)
Net cash from operating activities
140,768

 
61,012

CASH FROM (USED IN) INVESTING ACTIVITIES:
 
 
 
Proceeds from sale of fixed maturity securities
381,732

 
466,276

Proceeds from sale of equity securities
1,880

 
9,785

Distributions from investment funds
15,788

 
(9,363
)
Proceeds from maturities and prepayments of fixed maturity securities
455,463

 
655,349

Purchase of fixed maturity securities
(1,032,129
)
 
(1,094,439
)
Purchase of equity securities
(1,108
)
 
(8,882
)
Real estate purchased
(53,781
)
 
(44,162
)
Change in loans receivable
123,737

 
41,244

Net additions to property, furniture and equipment
(12,461
)
 
(7,680
)
Change in balances due to security brokers
69,642

 
(2,652
)
Payment for business purchased net of cash aquired
(54,313
)
 

Net cash from (used in) investing activities
(105,550
)
 
5,476

CASH FROM (USED IN) FINANCING ACTIVITIES:
 
 
 
Repayment of senior notes and other debt
(33,721
)
 
(3,240
)
Net proceeds from issuance of debt
110,093

 

Cash dividends to common stockholders
(14,711
)
 
(13,749
)
Purchase of common treasury shares
(37,424
)
 
(91,213
)
Other, net
3,158

 
(1,187
)
Net cash from (used in) financing activities
27,395

 
(109,389
)
Net impact on cash due to change in foreign exchange rates
11,271

 
(16,845
)
Net increase (decrease) in cash and cash equivalents
73,884

 
(59,746
)
Cash and cash equivalents at beginning of year
763,631

 
674,441

Cash and cash equivalents at end of period
$
837,515

 
$
614,695

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 unaudited consolidated financial statements, which include the accounts of W. R. Berkley Corporation and its subsidiaries (the “Company”) have been prepared on the basis of 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 in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the revenues and expenses reflected during the reporting period. 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, 2015. Reclassifications have been made in the 2015 financial statements as originally reported to conform to the presentation of the 2016 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. Stock options for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation.
The weighted average number of common shares used in the computation of basic and diluted earnings per share was as follows:
 
For the Three Months
 
Ended March 31,
(In thousands)
2016
 
2015
Basic
122,780

 
125,969

Diluted
128,529

 
132,484


(3) Recent Accounting Pronouncements

In February 2015, the Financial Accounting Standards Board ("FASB") issued ASU 2015-02, Consolidation. ASU 2015-02 makes targeted amendments to the current consolidation accounting guidance, in response to accounting complexity concerns. The guidance simplifies consolidation accounting by reducing the number of approaches to consolidation. The Company adopted this updated guidance on January 1, 2016. This adoption did not have a material effect on the Company's financial condition or results of operations, but did result in additional disclosures.

In May 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts.   ASU 2015-09 requires companies that issue short duration insurance contracts to disclose additional information, including: (i) incurred and paid claims development tables; (ii) frequency and severity of claims; and (iii) information about material changes in judgments made in calculating the liability for unpaid claim adjustment expenses, including reasons for the change and the effects on the financial statements. ASU 2015-09 is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. The amendments in ASU 2015-09 should be applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period. As the requirements are disclosure only, the adoption of this guidance will not impact our financial condition or results of operations.

All other 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 February 2016, the Company acquired an 85% ownership interest for $42.3 million in a company engaged in the distribution of promotional merchandise. The fair value of the assets acquired and liabilities assumed have been estimated based on a preliminary valuation. The fair values of the assets and liabilities will be adjusted, as needed, following completion of the final valuation.

The following table summarizes the initial estimated fair value of net assets acquired and liabilities assumed for the business combination completed in 2016:
(In thousands)
2016
 
 
Cash and cash equivalents
$
1,072

Real estate, furniture and equipment
701

Goodwill and other intangibles assets
40,282

Premiums and service fees receivable
3,845

Other assets
5,166

Total assets acquired
51,066

 
 
Other liabilities assumed
(4,931
)
Noncontrolling interest
(3,850
)
  Net assets acquired
$
42,285



7


(5) Consolidated 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
 
Accumulated Other Comprehensive Income (Loss)
As of and for the three months ended March 31, 2016:
 
 
 
 
Changes in AOCI
 
 
 
 
Beginning of period
$
180,695

 
$
(247,393
)
 
$
(66,698
)
Other comprehensive income (loss) before reclassifications
78,242

 
(2,047
)
 
76,195

Amounts reclassified from AOCI
(1,387
)
 

 
(1,387
)
Other comprehensive income (loss)
76,855

 
(2,047
)
 
74,808

Unrealized investment gain related to non-controlling interest
14

 

 
14

End of period
$
257,564

 
$
(249,440
)
 
$
8,124

Amounts reclassified from AOCI
 
 
 
 
 
Pre-tax
$
(2,134
)
(1)
$

 
$
(2,134
)
Tax effect
747

(2)

 
747

After-tax amounts reclassified
$
(1,387
)
 
$

 
$
(1,387
)
Other comprehensive income (loss)
 
 
 
 
 
Pre-tax
$
114,390

 
$
(2,047
)
 
$
112,343

Tax effect
(37,535
)
 

 
(37,535
)
Other comprehensive income (loss)
$
76,855

 
$
(2,047
)
 
$
74,808

 
 
 
 
 
 
As of and for the three months ended March 31, 2015:
 
 
 
 
Changes in AOCI
 
 
 
 
Beginning of period
$
306,199

 
$
(122,649
)
 
$
183,550

Other comprehensive income (loss) before reclassifications
24,592

 
(47,805
)
 
(23,213
)
Amounts reclassified from AOCI
(8,301
)
 

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

 
(47,805
)
 
(31,514
)
Unrealized investment gain related to non-controlling interest
22

 

 
22

End of period
$
322,512

 
$
(170,454
)
 
$
152,058

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

 
$
(12,771
)
Tax effect
4,470

(2)

 
4,470

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

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

 
$
(47,805
)
 
$
(23,269
)
Tax effect
(8,245
)
 

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

 
$
(47,805
)
 
$
(31,514
)
 
 
 
 
 
 
_______________
(1) Net investment (gains) losses in the consolidated statements of income.
(2) Income tax expense in the consolidated statements of income.



8



(6) Statements of Cash Flow
Interest payments were $56,968,000 and $56,632,000 and income taxes paid were $5,644,000 and $4,769,000 in the three months ended March 31, 2016 and 2015, respectively.



(7) Investments in Fixed Maturity Securities
At March 31, 2016 and December 31, 2015, investments in fixed maturity securities were as follows:
 
(In thousands)
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Carrying
Value
Gains
 
Losses
 
March 31, 2016
 
 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
 
 
State and municipal
$
78,264

 
$
17,340

 
$

 
$
95,604

 
$
78,264

Residential mortgage-backed
18,405

 
2,470

 

 
20,875

 
18,405

Total held to maturity
96,669

 
19,810

 

 
116,479

 
96,669

Available for sale:
 
 
 
 
 
 
 
 
 
U.S. government and government agency
571,330

 
27,602

 
(981
)
 
597,951

 
597,951

State and municipal:
 
 
 
 
 
 
 
 
 
Special revenue
2,613,723

 
120,174

 
(2,047
)
 
2,731,850

 
2,731,850

State general obligation
595,465

 
30,624

 
(1,817
)
 
624,272

 
624,272

Pre-refunded
407,586

 
32,630

 

 
440,216

 
440,216

Corporate backed
388,408

 
15,034

 
(618
)
 
402,824

 
402,824

Local general obligation
356,266

 
29,357

 
(17
)
 
385,606

 
385,606

Total state and municipal
4,361,448

 
227,819

 
(4,499
)
 
4,584,768

 
4,584,768

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Residential (1)
1,067,877

 
27,520

 
(5,548
)
 
1,089,849

 
1,089,849

Commercial
65,138

 
778

 
(616
)
 
65,300

 
65,300

Total mortgage-backed securities
1,133,015

 
28,298

 
(6,164
)
 
1,155,149

 
1,155,149

Asset-backed
1,855,301

 
11,949

 
(22,846
)
 
1,844,404

 
1,844,404

Corporate:
 
 
 
 
 
 
 
 
 
Industrial
2,007,460

 
106,650

 
(20,538
)
 
2,093,572

 
2,093,572

Financial
1,176,238

 
39,566

 
(13,664
)
 
1,202,140

 
1,202,140

Utilities
197,336

 
10,771

 
(1,958
)
 
206,149

 
206,149

Other
66,289

 
426

 

 
66,715

 
66,715

Total corporate
3,447,323

 
157,413

 
(36,160
)
 
3,568,576

 
3,568,576

Foreign
849,800

 
54,580

 
(6,461
)
 
897,919

 
897,919

Total available for sale
12,218,217

 
507,661

 
(77,111
)
 
12,648,767

 
12,648,767

Total investments in fixed maturity securities
$
12,314,886

 
$
527,471

 
$
(77,111
)
 
$
12,765,246

 
$
12,745,436


9


(In thousands)
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Carrying
Value
Gains
 
Losses
December 31, 2015
 
 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
 
 
State and municipal
$
77,129

 
$
16,246

 
$

 
$
93,375

 
$
77,129

Residential mortgage-backed
19,138

 
2,207

 

 
21,345

 
19,138

Total held to maturity
96,267

 
18,453

 

 
114,720

 
96,267

Available for sale:
 
 
 
 
 
 
 
 
 
U.S. government and government agency
645,092

 
27,660

 
(2,333
)
 
670,419

 
670,419

State and municipal:
 
 
 
 
 
 
 
 
 
Special revenue
2,510,816

 
102,909

 
(3,737
)
 
2,609,988

 
2,609,988

State general obligation
583,456

 
28,068

 
(2,070
)
 
609,454

 
609,454

Pre-refunded
439,772

 
32,056

 
(31
)
 
471,797

 
471,797

Corporate backed
388,904

 
14,039

 
(402
)
 
402,541

 
402,541

Local general obligation
342,158

 
24,270

 
(29
)
 
366,399

 
366,399

Total state and municipal
4,265,106

 
201,342

 
(6,269
)
 
4,460,179

 
4,460,179

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Residential (1)
1,126,382

 
18,935

 
(11,180
)
 
1,134,137

 
1,134,137

Commercial
64,975

 
875

 
(128
)
 
65,722

 
65,722

Total mortgage-backed securities
1,191,357

 
19,810

 
(11,308
)
 
1,199,859

 
1,199,859

Asset-backed
1,706,694

 
12,892

 
(14,414
)
 
1,705,172

 
1,705,172

Corporate:
 
 
 
 
 
 
 
 
 
Industrial
1,976,393

 
75,168

 
(30,027
)
 
2,021,534

 
2,021,534

Financial
1,153,096

 
31,744

 
(11,819
)
 
1,173,021

 
1,173,021

Utilities
192,857

 
8,321

 
(2,527
)
 
198,651

 
198,651

Other
81,607

 
245

 
(20
)
 
81,832

 
81,832

Total corporate
3,403,953

 
115,478

 
(44,393
)
 
3,475,038

 
3,475,038

Foreign
799,839

 
50,310

 
(12,689
)
 
837,460

 
837,460

Total available for sale
12,012,041

 
427,492

 
(91,406
)
 
12,348,127

 
12,348,127

Total investments in fixed maturity securities
$
12,108,308


$
445,945

 
$
(91,406
)
 
$
12,462,847

 
$
12,444,394

____________
(1)
Gross unrealized losses for residential mortgage-backed securities include $1,324,214 and $1,269,491 as of March 31, 2016 and December 31, 2015, 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 March 31, 2016, 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
$
812,491

 
$
822,851

Due after one year through five years
4,360,294

 
4,522,431

Due after five years through ten years
3,482,275

 
3,659,124

Due after ten years
2,508,406

 
2,584,816

Mortgage-backed securities
1,151,420

 
1,176,024

Total
$
12,314,886

 
$
12,765,246

At March 31, 2016 and 2015, there were no investments that exceeded 10% of common stockholder's equity, other than investments in United States government and government agency securities.








10


(8) Investments in Equity Securities Available for Sale
At March 31, 2016 and December 31, 2015, investments in equity securities were as follows:
 
(In thousands)
Cost
 
Gross Unrealized
 
Fair
Value
 
Carrying
Value
Gains
 
Losses
 
March 31, 2016
 
 
 
 
 
 
 
 
 
Common stocks
$
38,686

 
$
424

 
$
(1,539
)
 
$
37,571

 
$
37,571

Preferred stocks
106,990

 
7,582

 
(10,444
)
 
104,128

 
104,128

Total
$
145,676

 
$
8,006

 
$
(11,983
)
 
$
141,699

 
$
141,699

December 31, 2015
 
 
 
 
 
 
 
 
 
Common stocks
$
56,462

 
$

 
$
(19,189
)
 
$
37,273

 
$
37,273

Preferred stocks
108,730

 
8,216

 
(3,353
)
 
113,593

 
113,593

Total
$
165,192

 
$
8,216

 
$
(22,542
)
 
$
150,866

 
$
150,866




(9) Arbitrage Trading Account
At March 31, 2016 and December 31, 2015, the fair and carrying values of the arbitrage trading account were $385 million and $377 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 uses put options, call options and swap contracts in order to mitigate the impact of potential changes in market conditions on the merger arbitrage trading account. These options and contracts are reported at fair value. As of March 31, 2016, the fair value of long option contracts outstanding was $0.5 million (notional amount of $6.7 million) and the fair value of short option contracts outstanding was $0.4 million (notional amount of $12.7 million). Other than with respect to the use of these trading account securities, the Company does not make use of derivatives.



(10) Net Investment Income
Net investment income consists of the following: 
 
For the Three Months
 
Ended March 31,
(In thousands)
2016
 
2015
Investment income earned on:
 
 
 
Fixed maturity securities, including cash and cash equivalents and loans receivable
$
108,835

 
$
108,129

Investment funds
16,636

 
6,061

Arbitrage trading account
3,190

 
8,979

Equity securities available for sale
868

 
1,180

Real estate
2,717

 
2,767

Gross investment income
132,246

 
127,116

Investment expense
(2,113
)
 
(2,877
)
Net investment income
$
130,133

 
$
124,239



(11) Investment Funds
The Company evaluates whether it is an investor in a variable interest entities (VIE).  Such entities do not have sufficient equity at risk to finance their activities without additional subordinated financial support, or the equity investors, as a group, do not have the characteristics of a controlling financial interest (primary beneficiary).  The Company determines whether it is the

11


primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE's capital structure, contractual terms, nature of the VIE's operations and purpose, and the Company's relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE and on an ongoing basis.  The Company is not the primary beneficiary in any of its investment funds, and accordingly, carries its interests in investments funds under the equity method of accounting.

The Company’s maximum exposure to loss with respect to these investments is limited to the carrying amount reported on the Company’s consolidated balance sheet and any unfunded commitment.
Investment funds consist of the following:
 
Carrying Value as of
 
Income (Loss) from Investment Funds
 
March 31,
 
December 31,
 
Three months ended March 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Real estate
$
597,380

 
$
580,830

 
$
17,037

 
$
26,012

Energy
95,849

 
93,719

 
(3,924
)
 
(21,868
)
Hedge equity
67,728

 
70,580

 
(2,852
)
 
(873
)
Other funds
418,353

 
424,911

 
6,375

 
2,790

Total
$
1,179,310

 
$
1,170,040

 
$
16,636


$
6,061


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

Other funds include private equity investments carried on the equity method of accounting, which includes a publicly traded common stock investment in HealthEquity, Inc. (HQY). Our ownership interest in HQY as of March 31, 2016 is approximately 21% with a fair value of $295.3 million and a carrying value of $46.3 million.



(12) Real Estate

Investment in real estate represents directly owned property held for investment, as follows:    
 
Carrying Value
 
March 31,
 
December 31,
(In thousands)
2016
 
2015
Properties in operation
$
239,476

 
$
226,055

Properties under development
747,334

 
710,312

Total
$
986,810

 
$
936,367


In 2016, properties in operation included a long-term ground lease in Washington, D.C., a hotel in Memphis, Tennessee and office buildings in West Palm Beach and Palm Beach, Florida. Properties in operation are net of accumulated depreciation and amortization of $10,896,000 and $9,073,000 as of March 31, 2016 and December 31, 2015, respectively. Related depreciation expense was $1,668,000 and $2,543,000 for the three months ended March 31, 2016 and 2015, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $9,614,350 in 2016, $15,791,035 in 2017, $14,793,678 in 2018, $11,822,103 in 2019, $9,830,091 in 2020, $9,591,819 in 2021 and $343,543,992 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.




12


(13) Loans Receivable
Loans receivable are as follows:
(In thousands)
March 31, 2016
 
December 31, 2015
Amortized cost (net of valuation allowance):
 
 
 
  Real estate loans
$
121,861

 
$
200,499

  Commercial loans
27,527

 
72,604

  Total
$
149,388

 
$
273,103

 
 
 
 
Fair value:
 
 
 
  Real estate loans
$
124,393

 
$
201,641

  Commercial loans
27,527

 
74,106

  Total
$
151,920

 
$
275,747

 
 
 
 
Valuation allowance:
 
 
 
  Specific
$
555

 
$

  General
2,107

 
2,094

  Total
$
2,662

 
$
2,094

 
 
 
 
 
2016
 
2015
  Increase (decrease) in valuation allowance
$
568

 
$
(47
)
 
 
 
 
Loans receivable in non-accrual status were $6.7 million and $3.1 million as of March 31, 2016 and December 31, 2015, 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 Delaware, Maryland, and New York. 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.
In evaluating the real estate loans, the Company considers their 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 position in the capital structure, the overall leverage in the capital structure and other market conditions. Based on these considerations, none of the real estate loans were considered to be impaired at March 31, 2016, and accordingly, the Company determined that a specific valuation allowance was not required.










13


(14) Realized and Unrealized Investment Gains (Losses)

 Realized and unrealized investment gains (losses) are as follows:
 
For the Three Months Ended March 31,
(In thousands)
2016
 
2015
Realized investment gains (losses):
 

 
 

Fixed maturity securities:
 

 
 

Gains
$
23,064

 
$
4,146

Losses
(2,940
)
 
(1,077
)
Equity securities available for sale
125

 
9,702

Investment funds
(460
)
 
(1,511
)
Real estate
5,024

 

Other
644

 
7,784

Net realized gains on investments sales
25,457

 
19,044

Other-than-temporary impairments (1)
(18,114
)
 

   Net investment gains
7,343

 
19,044

Income tax expense
(2,570
)
 
(6,665
)
    After-tax net realized investment gains
$
4,773

 
$
12,379

Change in unrealized investment gains and losses of available for sale securities:
 

 
 

Fixed maturity securities
$
92,428

 
$
42,480

Previously impaired fixed maturity securities
(55
)
 
8

Equity securities available for sale
13,137

 
(6,845
)
Investment funds
8,880

 
(11,107
)
Total change in unrealized investment gains (losses)
114,390

 
24,536

Income tax benefit (expense)
(37,535
)
 
(8,245
)
Noncontrolling interests
14

 
22

        After-tax change in unrealized investment gains and losses of available for sale securities
$
76,869

 
$
16,313

(1) Other than temporary impairments (OTTI) for the three months ended March 31, 2016 were $18.1 million related to common stock.
            




















14


(15) Securities in an Unrealized Loss Position
The following tables summarize all securities in an unrealized loss position at March 31, 2016 and December 31, 2015 by the length of time those securities have been continuously in an unrealized loss position: 
  
Less Than 12 Months
 
12 Months or Greater
 
Total
(In thousands)
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$
24,911

 
$
79

 
$
43,226

 
$
902

 
$
68,137

 
$
981

State and municipal
210,419

 
1,903

 
171,433

 
2,596

 
381,852

 
4,499

Mortgage-backed securities
135,022

 
1,748

 
155,445

 
4,416

 
290,467

 
6,164

Asset-backed securities
1,207,153

 
14,032

 
230,979

 
8,814

 
1,438,132

 
22,846

Corporate
362,296

 
25,162

 
79,582

 
10,998

 
441,878

 
36,160

Foreign
41,278

 
3,964

 
25,672

 
2,497

 
66,950

 
6,461

Fixed maturity securities
1,981,079

 
46,888

 
706,337

 
30,223

 
2,687,416

 
77,111

Common stocks

 

 
7,474

 
1,539

 
7,474

 
1,539

Preferred stocks
35,241

 
6,512

 
27,657

 
3,932

 
62,898

 
10,444

Equity securities available for sale
35,241

 
6,512

 
35,131

 
5,471

 
70,372

 
11,983

Total
$
2,016,320

 
$
53,400

 
$
741,468

 
$
35,694

 
$
2,757,788

 
$
89,094

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
U.S. government and government agency
$
101,660

 
$
487

 
$
64,500

 
$
1,846

 
$
166,160

 
$
2,333

State and municipal
501,952

 
4,404

 
106,681

 
1,865

 
608,633

 
6,269

Mortgage-backed securities
381,986

 
3,639

 
184,807

 
7,669

 
566,793

 
11,308

Asset-backed securities
1,091,078

 
7,703

 
190,467

 
6,711

 
1,281,545

 
14,414

Corporate
1,232,940

 
35,406

 
76,797

 
8,987

 
1,309,737

 
44,393

Foreign
169,190

 
8,822

 
19,528

 
3,867

 
188,718

 
12,689

Fixed maturity securities
3,478,806

 
60,461

 
642,780

 
30,945

 
4,121,586

 
91,406

Common stocks
18,641

 
18,005

 
7,829

 
1,184

 
26,470

 
19,189

Preferred stocks

 

 
22,320

 
3,353

 
22,320

 
3,353

Equity securities available for sale
18,641

 
18,005

 
30,149

 
4,537

 
48,790

 
22,542

Total
$
3,497,447

 
$
78,466

 
$
672,929

 
$
35,482

 
$
4,170,376

 
$
113,948

Fixed Maturity Securities – A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at March 31, 2016 is presented in the table below:  
($ in thousands)
Number of
Securities
 
Aggregate
Fair Value
 
Gross
Unrealized
Loss
Mortgage-backed securities
12

 
$
35,540

 
$
1,866

Asset-backed securities
7

 
26,322

 
261

Corporate
15

 
92,666

 
10,780

Foreign government
5

 
22,414

 
3,011

Total
39

 
$
176,942

 
$
15,918


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

15



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.
Preferred Stocks– At March 31, 2016, there were five preferred stocks in an unrealized loss position, with an aggregate fair value of $62.9 million and a gross unrealized loss of $10.4 million. Based upon management’s view of the underlying value of these securities, the Company does not consider these equity securities to be OTTI.
Common Stocks - At March 31, 2016, there was one common stock in an unrealized loss position, with a fair value of $7.5 million and a gross unrealized loss of $1.5 million. Based on management's view of the underlying security, the Company does not consider the equity security 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 $3 million and $2 million at March 31, 2016 and December 31, 2015, 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.


16


The following tables present the assets and liabilities measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015 by level:
 
(In thousands)
Total
 
Level 1
 
Level 2
 
Level 3
March 31, 2016
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Fixed maturity securities available for sale:
 
 
 
 
 
 
 
U.S. government and government agency
$
597,951

 
$

 
$
597,951

 
$

State and municipal
4,584,768

 

 
4,584,768

 

Mortgage-backed securities
1,155,149

 

 
1,155,149

 

Asset-backed securities
1,844,404

 

 
1,844,207

 
197

Corporate
3,568,576

 

 
3,568,576

 

Foreign government
897,919

 

 
897,919

 

Total fixed maturity securities available for sale
12,648,767

 

 
12,648,570

 
197

Equity securities available for sale:
 
 
 
 
 
 
 
Common stocks
37,571

 
30,097

 

 
7,474

Preferred stocks
104,128

 

 
100,488

 
3,640

Total equity securities available for sale
141,699

 
30,097

 
100,488

 
11,114

Arbitrage trading account
384,519

 
244,647

 
139,742

 
130

Total
$
13,174,985

 
$
274,744

 
$
12,888,800

 
$
11,441

Liabilities:
 
 
 
 
 
 
 
Trading account securities sold but not yet purchased
$
35,956

 
$
35,956

 
$

 
$

 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Fixed maturity securities available for sale:
 
 
 
 
 
 
 
U.S. government and government agency
$
670,419

 
$

 
$
670,419

 
$

State and municipal
4,460,179

 

 
4,460,179

 

Mortgage-backed securities
1,199,859

 

 
1,199,859

 

Asset-backed securities
1,705,172

 

 
1,704,973

 
199

Corporate
3,475,038

 

 
3,474,884

 
154

Foreign government
837,460

 

 
837,460

 

Total fixed maturity securities available for sale
12,348,127

 

 
12,347,774

 
353

Equity securities available for sale:
 
 
 
 
 
 
 
Common stocks
37,273

 
29,444

 

 
7,829

Preferred stocks
113,593

 

 
109,969

 
3,624

Total equity securities available for sale
150,866

 
29,444

 
109,969

 
11,453

Arbitrage trading account
376,697

 
256,914

 
119,607

 
176

Total
$
12,875,690

 
$
286,358

 
$
12,577,350

 
$
11,982

Liabilities:
 
 
 
 
 
 
 
Trading account securities sold but not yet purchased
$
37,035

 
$
35,559

 
$
1,476

 
$

There were no significant transfers between Levels 1 and 2 during the three months ended March 31, 2016 or during the year ended December 31, 2015.




17


The following tables summarize changes in Level 3 assets and liabilities for the three months ended March 31, 2016 and for the year ended December 31, 2015:
 
  
Gains (Losses) Included in:
(In thousands)
Beginning
Balance
 
Earnings (Losses)
 
Other
Comprehensive
Income (Loss)
 
Impairments
 
Purchases
 
(Sales)
 
Paydowns / Maturities
 
Transfers
 
Ending
Balance
In / (Out)
Three months ended March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
199

 
$
1

 
$
1

 
$

 
$

 
$

 
$
(4
)
 
$

 
$
197

Corporate
154

 
177

 

 

 

 
(331
)
 

 

 

Total
353

 
178

 
1

 

 

 
(331
)
 
(4
)
 

 
197

Equity securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
7,829

 

 
(355
)
 

 

 

 

 

 
7,474

Preferred stocks
3,624

 
16

 

 

 

 

 

 

 
3,640

Total
11,453

 
16

 
(355
)
 

 

 

 

 

 
11,114

Arbitrage trading account
176

 
(46
)
 

 

 

 

 

 

 
130

Total
$
11,982

 
$
148

 
$
(354
)
 
$

 
$

 
$
(331
)
 
$
(4
)
 
$

 
$
11,441

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
20,611

 
$
19

 
$
191

 
$

 
$

 
$

 
$
(1,820
)
 
$
(18,802
)
 
$
199

Corporate
154

 

 

 

 

 

 

 

 
154

Total
20,765

 
19

 
191

 

 

 

 
(1,820
)
 
(18,802
)
 
353

Equity securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
10,741

 

 
(273
)
 
(2,331
)
 

 
(308
)
 

 

 
7,829

Preferred stocks
3,713

 
(89
)
 

 

 

 

 

 

 
3,624

Total
14,454

 
(89
)
 
(273
)
 
(2,331
)
 

 
(308
)
 

 

 
11,453

Arbitrage trading account
720

 
(799
)
 

 

 
72,640

 
(71,921
)
 

 
(464
)
 
176

Total
$
35,939

 
$
(869
)
 
$
(82
)
 
$
(2,331
)
 
$
72,640

 
$
(72,229
)
 
$
(1,820
)
 
$
(19,266
)
 
$
11,982

During the three months ended March 31, 2016, there were no transfers out of Level 3. During the year ended December 31, 2015, five securities were transferred out of Level 3 as an observable price became available.


18


(17) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:
  
March 31, 2016
 
December 31, 2015
(In thousands)
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets:
 
 
 
 
 
 
 
Fixed maturity securities
$
12,745,436

 
$
12,765,246

 
$
12,444,394

 
$
12,462,847

Equity securities available for sale
141,699

 
141,699

 
150,866

 
150,866

Arbitrage trading account
384,519

 
384,519

 
376,697

 
376,697

Loans receivable
149,388

 
151,920

 
273,103

 
275,747

Cash and cash equivalents
837,515

 
837,515

 
763,631

 
763,631

Trading account receivables from brokers and clearing organizations
373,833

 
373,833

 
383,115

 
383,115

       Due from broker

 

 
1,713

 
1,713

Liabilities:
 
 
 
 
 
 
 
Due to broker
71,024

 
71,024

 

 

Trading account securities sold but not yet purchased
35,956

 
35,956

 
37,035

 
37,035

Subordinated debentures
446,485

 
462,256

 
340,320

 
355,880

Senior notes and other debt
1,814,998

 
2,018,282

 
1,844,621

 
2,029,572

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
 
Ended March 31,
(In thousands)
2016
 
2015
Written premiums:
 
 
 
Direct
$
1,709,129

 
$
1,647,341

Assumed
246,568

 
204,464

Ceded
(291,975
)
 
(276,403
)
Total net premiums written
$
1,663,722

 
$
1,575,402

 
 
 
 
Earned premiums:
 
 
 
Direct
$
1,568,067

 
$
1,524,736

Assumed
218,367

 
203,342

Ceded
(259,099
)
 
(256,065
)
Total net premiums earned
$
1,527,335

 
$
1,472,013

 
 
 
 
Ceded losses and loss expenses incurred
$
126,929

 
$
118,391

Ceded commissions earned
$
47,973

 
$
43,651

The Company reinsures a portion of its insurance exposures in order to reduce its net liability on individual risks and catastrophe losses. The Company also cedes premiums to state assigned risk plans and captive insurance companies. Estimated amounts due from reinsurers are reported net of reserves for uncollectible reinsurance of $1 million as of March 31, 2016 and December 31, 2015.


19


(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 $9 million and $8 million for the three months ended March 31, 2016 and 2015, respectively. A summary of RSUs issued in the three months ended March 31, 2016 and 2015 follows:
 
($ in thousands)
Units
 
Fair Value
Three months ended March 31,
 
 
 
2016
5,580

 
$
286

2015
10,000

 
$
503




(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) Industry Segments
The Company’s reportable segments include the following two business segments:
Insurance - primarily commercial insurance business, including excess and surplus lines and admitted lines in the United States, United Kingdom, Continental Europe, South America, Canada, Scandinavia, Asia and Australia; and
Reinsurance - reinsurance business on a facultative and treaty basis, primarily in the United States, United Kingdom, Continental Europe, Australia, the Asia-Pacific Region, and South Africa.
Commencing with the first quarter of 2016, the Company changed the aggregation of its business segments. Insurance-Domestic operating units and Insurance-International operating units, previously reported separately, have been aggregated into the Insurance segment. The segment disclosures for prior periods have been revised to be consistent with the new reportable business segment presentation. The segment disclosures for the years ended December 31, 2015, 2014 and 2013, and as of December 31, 2015 and 2014, have also been included herein, revised for the new reportable business segment presentation.
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.


20


Summary financial information about the Company's reporting segments is presented in the following tables. Income (loss) before income taxes by segment includes allocated investment income. Identifiable assets by segment are those assets used in or allocated to the operation of each segment.
  
Revenues
 
 
 
 
(In thousands)
Earned
Premiums
 
Investment
Income 
 
Other
 
Total
 
Pre-Tax
Income
(Loss)
 
Net Income
(Loss) to Common Stockholders
Three months ended March 31, 2016:
 
 
 
 
 
 
 
 
 
 
Insurance
$
1,375,358

 
$
105,229

 
$
26,793

 
$
1,507,380

 
$
205,915

 
$
139,270

Reinsurance
151,977

 
18,401

 

 
170,378

 
21,797

 
15,117

Corporate, other and eliminations (1)

 
6,503

 
115,607

 
122,110

 
(60,379
)
 
(39,649
)
Net investment gains

 

 
7,343

 
7,343

 
7,343

 
4,773

  Consolidated
$
1,527,335

 
$
130,133

 
$
149,743

 
$
1,807,211

 
$
174,676

 
$
119,511

Three months ended March 31, 2015:
 
 
 
 
 
 
 
 
 
 
Insurance
$
1,311,276

 
$
99,084

 
$
25,575

 
$
1,435,935

 
$
188,169

 
$
130,039

Reinsurance
160,737

 
17,041

 

 
177,778

 
20,262

 
14,500

Corporate, other and eliminations (1)

 
8,114

 
103,808

 
111,922

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

 

 
19,044

 
19,044

 
19,044

 
12,379

  Consolidated
$
1,472,013

 
$
124,239

 
$
148,427

 
$
1,744,679

 
$
168,717

 
$
118,307

Twelve months ended December 31, 2015:
 
 
 
 
 
 
 
 
 
 
Insurance
$
5,431,500

 
$
410,457

 
$
96,487

 
$
5,938,444

 
$
776,593

 
$
532,286

Reinsurance
609,109

 
74,226

 

 
683,335

 
94,852

 
66,627

Corporate, other and eliminations (1)

 
27,962

 
464,392

 
492,354

 
(231,739
)
 
(155,230
)
Net investment gains

 

 
92,324

 
92,324

 
92,324

 
60,011

  Consolidated
$
6,040,609

 
$
512,645

 
$
653,203

 
$
7,206,457

 
$
732,030

 
$
503,694

Twelve months ended December 31, 2014
 
 
 
 
 
 
 
 
 
 
Insurance
$
5,074,308

 
$
484,039

 
$
106,853

 
$
5,665,200

 
$
826,088

 
$
561,643

Reinsurance
670,110

 
88,821

 

 
758,931

 
115,677

 
79,720

Corporate, other and eliminations (1)

 
28,025

 
421,920

 
449,945

 
(244,421
)
 
(158,133
)
Net investment gains

 

 
254,852

 
254,852

 
254,852

 
165,654

  Consolidated
$
5,744,418

 
$
600,885

 
$
783,625

 
$
7,128,928

 
$
952,196

 
$
648,884

Twelve months ended December 31, 2013
 
 
 
 
 
 
 
 
 
 
Insurance
$
4,505,567

 
$
451,319

 
$
107,517

 
$
5,064,403

 
$
705,662

 
$
490,273

Reinsurance
720,970

 
89,090

 

 
810,060

 
110,425

 
78,013

Corporate, other and eliminations (1)

 
3,882

 
408,645

 
412,527

 
(238,743
)
 
(142,479
)
Net investment gains

 

 
121,544

 
121,544

 
121,544

 
74,118

  Consolidated
$
5,226,537

 
$
544,291

 
$
637,706

 
$
6,408,534

 
$
698,888

 
$
499,925

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









21


Identifiable Assets
(In thousands)
March 31, 2016
 
December 31, 2015
 
December 31, 2014
Insurance
$
18,232,365

 
$
18,063,730

 
$
17,944,847

Reinsurance
2,595,231

 
2,441,340

 
2,713,554

Corporate, other and eliminations
1,403,338

 
1,219,086

 
1,058,290

  Consolidated
$
22,230,934

 
$
21,724,156

 
$
21,716,691


    

Net premiums earned by major line of business are as follows:
 
 
For the Three Months
 
Ended March 31,
(In thousands)
2016
 
2015
  Insurance:
 
 
 
Other liability
$
422,956

 
$
396,904

Workers’ compensation
345,503

 
314,738

Short-tail lines
331,857

 
323,090

Commercial automobile
156,817

 
165,560

Professional liability
118,225

 
110,984

Total Insurance
1,375,358

 
1,311,276

 
 
 
 
  Reinsurance:
 
 
 
Casualty
100,334

 
112,816

Property
51,643

 
47,921

Total Reinsurance
151,977

 
160,737

 
 
 
 
Total
$
1,527,335

 
$
1,472,013



22



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 2016 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, 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 Program Reauthorization Act of 2015; 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 2016 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.

23


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 two business segments: Insurance and Reinsurance. 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. Over the years, the Company has formed numerous operating units that are focused on important parts of the economy in the U.S., including high net worth personal lines, 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.
Although insurance prices have generally increased for most lines of business since 2011, the rate of increase has declined in more recent years. Loss costs have also increased over that period of time. With the low level of interest rates available, current 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 are invested principally in fixed maturity securities. The return on fixed maturity securities is affected primarily by general interest rates, as well as the credit quality and duration of the securities. Returns available on fixed maturity investments are at historically low levels. The Company's investment income has been negatively impacted by the low fixed maturity investment returns, and will be further impacted if investment returns remain at this level.
The Company invests in equity securities, merger arbitrage securities, investment funds (including energy related funds), private equity, loans and real estate related assets. The Company's investments in investment funds and its other alternative investments have experienced, and the Company expects to continue to experience, greater fluctuations in investment income.
Commencing with the first quarter of 2016, the Company changed the aggregation of its business segments. Insurance-Domestic operating units and Insurance-International operating units, previously reported separately, have been aggregated into the Insurance segment. The segment disclosures for prior periods have been revised to be consistent with the new reportable business segment presentation.

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.

24


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 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 uncertainty. 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

25


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 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 the latest reported loss data, 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 2015:
(In thousands)
Frequency (+/-)
Severity (+/-)
1%
 
5%
 
10%
1%
$
73,437

 
$
221,040

 
$
405,545

5%
221,040

 
374,490

 
566,302

10%
405,545

 
566,302

 
767,248

Our net reserves for losses and loss expenses of approximately $9.4 billion as of March 31, 2016 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. The impact of such changes would likely be manifested gradually over the course of many years, as the magnitude of the changes became evident.
Approximately $1.4 billion, or 15%, of the Company’s net loss reserves as of March 31, 2016 relate to the Reinsurance 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.

26


Following is a summary of the Company’s reserves for losses and loss expenses by business segment:
 
(In thousands)
March 31, 2016
 
December 31, 2015
Insurance
$
7,937,268

 
$
7,876,193

Reinsurance
1,435,168

 
1,368,679

Net reserves for losses and loss expenses
9,372,436

 
9,244,872

Ceded reserves for losses and loss expenses
1,415,906

 
1,424,278

Gross reserves for losses and loss expenses
$
10,788,342

 
$
10,669,150

Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business:
 
(In thousands)
Reported Case
Reserves
 
Incurred But
Not Reported
 
Total
March 31, 2016
 
 
 
 
 
Other liability
$
1,107,501

 
$
1,946,085

 
$
3,053,586

Workers’ compensation (1)
1,610,777

 
1,301,373

 
2,912,150

Professional liability
250,468

 
475,044

 
725,512

Commercial automobile
361,386

 
253,886

 
615,272

Short-tail lines (2)
334,239

 
296,509

 
630,748

Total Insurance
3,664,371

 
4,272,897

 
7,937,268

Reinsurance (1)
677,120

 
758,048

 
1,435,168

Total
$
4,341,491

 
$
5,030,945

 
$
9,372,436

 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
Other liability
$
1,079,641

 
$
1,947,637

 
$
3,027,278

Workers’ compensation (1)
1,655,726

 
1,263,508

 
2,919,234

Professional liability
256,783

 
478,796

 
735,579

Commercial automobile
352,208

 
242,071

 
594,279

Short-tail lines (2)
317,375

 
282,448

 
599,823

Total Insurance
3,661,733

 
4,214,460

 
7,876,193

Reinsurance (1)
631,666

 
737,013

 
1,368,679

Total
$
4,293,399

 
$
4,951,473

 
$
9,244,872

___________
(1) Reserves for workers’ compensation and reinsurance are net of an aggregate net discount of $689 million and $699 million as of March 31, 2016 and December 31, 2015, respectively.
(2) Short-tail lines include commercial multi-peril (non-liability), inland marine, accident and health, fidelity and surety, boiler and machinery and other lines.

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.


27


Net prior year development (i.e, the sum of prior year reserve changes and prior year earned premiums changes) for the three months ended March 31, 2016 and 2015 are as follows:
 
(In thousands)
2016
 
2015
Net decrease in prior year loss reserves
$
5,601

 
$
2,499

Increase in prior year earned premiums
6,687

 
9,304

Net favorable prior year development
$
12,288

 
$
11,803

     
In 2016, favorable prior year development (net of additional and return premiums) of $12.3 million included $11.6 million for the Insurance segment and $0.7 million for the Reinsurance segment. The favorable development for the Insurance segment was primarily attributable to workers' compensation business from accident years 2010 through 2015, partially offset by adverse development for commercial auto liability from accident years 2011 through 2014. The favorable development for workers' compensation reflects favorable claim frequency trends (i.e., number of reported claims per unit of exposure), while the unfavorable development for commercial auto liability was driven by higher large loss activity than expected.
In 2015, favorable reserve development (net of additional and return premiums) of $12 million was primarily related to the excess and surplus lines casualty business within the Insurance segment, partially offset by adverse development in commercial auto liability. The favorable development for excess and surplus lines reflected the continuation of favorable claim frequency trends (i.e., number of reported claims per unit of exposure), while the unfavorable development for commercial auto liability was driven by higher large loss activity.
Reserve Discount. The Company discounts its liabilities for certain workers’ compensation reserves. The amount of workers’ compensation reserves that were discounted was $1,982 million and $2,308 million at March 31, 2016 and December 31, 2015, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $689 million and $699 million at March 31, 2016 and December 31, 2015, respectively. At March 31, 2016, discount rates by year ranged from 2.0% to 6.5%, with a weighted average discount rate of 3.9%.

Substantially all of the workers’ compensation discount (98% at March 31, 2016) relates to 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 March 31, 2016), 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 $69 million at March 31, 2016 and $62 million at December 31, 2015. 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

28


rating if two ratings were assigned and the middle rating if three ratings were assigned, unless the Company’s own analysis indicates that the lower rating is more appropriate. Securities that are not rated by a rating agency are evaluated and classified by the Company on a case-by-case basis.
Fixed Maturity Securities – For securities that we intend to sell or, more likely than not, would be required to sell, a decline in value below amortized cost is considered to be OTTI. The amount of OTTI is equal to the difference between amortized cost and fair value at the balance sheet date. For securities that we do not intend to sell or expect to be required to sell, a decline in value below amortized cost is considered to be an OTTI if we do not expect to recover the entire amortized cost basis of a security (i.e., the present value of cash flows expected to be collected is less than the amortized cost basis of the security).
The portion of the decline in value considered to be a credit loss (i.e., the difference between the present value of cash flows expected to be collected and the amortized cost basis of the security) is recognized in earnings. The portion of the decline in value not considered to be a credit loss (i.e., the difference in the present value of cash flows expected to be collected and the fair value of the security) is recognized in other comprehensive income.
Impairment assessments for structured securities, including mortgage-backed securities and asset-backed securities, collateralized debt obligations and corporate debt, are generally evaluated based on the performance of the underlying collateral under various economic and default scenarios that may involve subjective judgments and estimates by management. Modeling these securities involves various factors, such as projected default rates, the nature and realizable value of the collateral, if any, the ability of the issuer to make scheduled payments, historical performance and other relevant economic and performance factors. If an OTTI determination is made, a discounted cash flow analysis is used to ascertain the amount of the credit impairment.

The following table provides a summary of fixed maturity securities in an unrealized loss position as of March 31, 2016:
($ in thousands)
Number of
Securities
 
Aggregate
Fair Value
 
Unrealized
Loss
Unrealized loss less than 20% of amortized cost
351

 
$
2,631,606

 
$
55,136

Unrealized loss of 20% or greater of amortized cost:
 
 
 
 
 
Less than twelve months
4

 
14,143

 
7,584

Twelve months and longer
5

 
41,667

 
14,391

Total
360

 
$
2,687,416

 
$
77,111

A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at March 31, 2016 is presented in the table below:
($ in thousands)
Number of
Securities
 
Aggregate
Fair Value
 
Unrealized
Loss
Mortgage-backed securities
12

 
$
35,540

 
$
1,866

Asset-backed securities
7

 
26,322

 
261

Corporate
15

 
92,666

 
10,780

Foreign government
5

 
22,414

 
3,011

Total
39

 
$
176,942

 
$
15,918

    
The Company has evaluated its fixed maturity securities in an unrealized loss position and believes the unrealized loss is due primarily to temporary market and sector-related factors rather than to issuer-specific factors. None of these securities are delinquent or in default under financial covenants. Based on its assessment of these issuers, the Company expects them to continue to meet their contractual payment obligations as they become due and does not consider any of these securities to be OTTI.
Preferred Stocks - At March 31, 2016, there were five preferred stocks in an unrealized loss position, with an aggregate fair value of $62.9 million and a gross unrealized loss of $10.4 million. Based on management's view of the underlying value of these securities, the Company does not consider these equity securities to be OTTI.
Common Stocks – At March 31, 2016, there was one common stock in an unrealized loss position, with fair value of $7.5 million and a gross unrealized loss of $1.5 million. Based upon management’s view of the underlying value of this security, the Company does not consider the equity security to be OTTI. For the three months ended March 31, 2016, the

29


Company reported OTTI for common stocks of $18.1 million. There were no OTTI of common stocks for the three months ended March 31, 2015.
Loans Receivable – The Company monitors the performance of its loans receivable, including current market conditions for each loan and the ability to collect principal and interest. For loans where the Company determines it is probable that the contractual terms will not be met, an analysis is performed and a valuation reserve is established, if necessary, with a charge to earnings. Loans receivable are reported net of a valuation reserve of $3 million and $2 million at March 31, 2016 and December 31, 2015, respectively.
The Company monitors the performance of its loans receivable and assesses the ability of each borrower to pay principal and interest based upon loan structure, underlying property values, cash flow and related financial and operating performance of the property and market conditions. Loans receivable with a potential for default are further assessed using discounted cash flow analysis and comparable cost and sales methodologies, if appropriate.
Fair Value Measurements. The Company’s fixed maturity and equity securities available for sale and its trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available. The fair value of the vast majority of the Company’s portfolio is based on observable data (other than quoted prices) and, accordingly, is classified as Level 2.

In classifying particular financial securities in the fair value hierarchy, the Company uses its judgment to determine whether the market for a security is active and whether significant pricing inputs are observable. The Company determines the existence of an active market by assessing whether transactions occur with sufficient frequency and volume to provide reliable pricing information. The Company determines whether inputs are observable based on the use of such information by pricing services and external investment managers, the uninterrupted availability of such inputs, the need to make significant adjustments to such inputs and the volatility of such inputs over time. If the market for a security is determined to be inactive or if significant inputs used to price a security are determined to be unobservable, the security is categorized in Level 3 of the fair value hierarchy.
Because many fixed maturity securities do not trade on a daily basis, the Company utilizes pricing models and processes which may include benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Market inputs used to evaluate securities include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Quoted prices are often unavailable for recently issued securities that are infrequently traded or securities that are only traded in private transactions. For publicly traded securities for which quoted prices are unavailable, the Company determines fair value based on independent broker quotations and other observable market data. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial data, projections and business developments of the issuer and other relevant information.
The following is a summary of pricing sources for the Company's fixed maturity securities available for sale as of March 31, 2016:
($ in thousands)
Carrying
Value
 
Percent
of Total
Pricing source:
 
 
 
Independent pricing services
$
12,403,307

 
98.1
%
Syndicate manager
65,588

 
0.5

Directly by the Company based on:
 
 
 
Observable data
179,675

 
1.4

Cash flow model
197

 

Total
$
12,648,767

 
100.0


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

30


based on observable market data in active markets (e.g., broker quotes and prices observed for comparable securities). The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company reviews the prices provided by pricing services for reasonableness based upon current trading levels for similar securities. If the prices appear unusual to the Company, they are re-examined and the value is either confirmed or revised. In addition, the Company periodically performs independent price tests of a sample of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of March 31, 2016, the Company did not make any adjustments to the prices provided by the pricing services. Based upon the Company’s review of the methodologies used by the independent pricing services, these securities were classified as Level 2.
Syndicate manager – The Company has a 15% participation in a Lloyd’s syndicate, and the Company’s share of the securities owned by the syndicate is priced by the syndicate’s manager. The majority of the securities are liquid, short duration fixed maturity securities. The Company reviews the syndicate manager’s pricing methodology and audited financial statements and holds discussions with the syndicate manager as necessary to confirm its understanding and agreement with security prices. Based upon the Company’s review of the methodologies used by the syndicate manager, these securities were classified as Level 2.
Observable data – If independent pricing is not available, the Company prices the securities directly. Prices are based on observable market data where available, including current trading levels for similar securities and non-binding quotations from brokers. The Company generally requests two or more quotes. If more than one quote is received, the Company sets a price within the range of quotes received based on its assessment of the credibility of the quote and its own evaluation of the security. The Company generally does not adjust quotes obtained from brokers. Since these securities were priced based on observable data, they were classified as Level 2.
Cash flow model – If the above methodologies are not available, the Company prices securities using a discounted cash flow model based upon assumptions as to prevailing credit spreads, interest rates and interest rate volatility, time to maturity and subordination levels. Discount rates are adjusted to reflect illiquidity where appropriate. These securities were classified as Level 3.



31


Results of Operations for the Three Months Ended March 31, 2016 and 2015
 
Business Segment Results
Following is a summary of gross and net premiums written, net premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and United States Generally Accepted Accounting Principles (“GAAP”) combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the three months ended March 31, 2016 and 2015. 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)
2016
 
2015
Insurance:
 
 
 
Gross premiums written
$
1,763,070

 
$
1,692,403

Net premiums written
1,488,737

 
1,425,139

Net premiums earned
1,375,358

 
1,311,276

Loss ratio
60.5
%
 
61.1
%
Expense ratio
32.5
%
 
32.4
%
GAAP combined ratio
93.0
%
 
93.5
%
Reinsurance:
 
 
 
Gross premiums written
$
192,627

 
$
159,402

Net premiums written
174,985

 
150,263

Net premiums earned
151,977

 
160,737

Loss ratio
59.6
%
 
62.2
%
Expense ratio
38.2
%
 
35.8
%
GAAP combined ratio
97.8
%
 
98.0
%
Consolidated:
 
 
 
Gross premiums written
$
1,955,697

 
$
1,851,805

Net premiums written
1,663,722

 
1,575,402

Net premiums earned
1,527,335

 
1,472,013

Loss ratio
60.4
%
 
61.2
%
Expense ratio
33.1
%
 
32.7
%
GAAP combined ratio
93.5
%
 
93.9
%
Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the three months ended March 31, 2016 and 2015:
(In thousands, except per share data)
2016
 
2015
Net income to common stockholders
$
119,511

 
$
118,307

Weighted average diluted shares
128,529

 
132,484

Net income per diluted share
$
0.93

 
$
0.89

The Company reported net income of $120 million in 2016 compared to $118 million in 2015. The 1% increase in net income was primarily due to an increase in after-tax underwriting income of $7 million and an increase in after-tax net investment income of $2 million, largely offset by a net decrease in after-tax net investment gains and other than temporary impairments of $7 million. The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2016 and 2015.
Premiums. Gross premiums written were $1,956 million in 2016, an increase of 6% from $1,852 million in 2015. The growth was due primarily to an increase in new business of 7%. Approximately 77.8% of policies expiring in 2016 were renewed, compared with a 79.2% renewal retention rate for policies expiring in 2015.
Average renewal premium rates for insurance and facultative reinsurance increased 1% in 2016 when adjusted for change in exposures. 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.

32


A summary of gross premiums written in 2016 compared with 2015 by line of business within each business segment follows:
Insurance - gross premiums increased 4% to $1,763 million in 2016 from $1,692 million in 2015. Gross premiums increased $49 million (10%) for other liability, $32 million (7%) for workers' compensation and $11 million (8%) for professional liability, and decreased $11 million (3%) for short-tail lines and $10 million (6%) for commercial auto.
Reinsurance - gross premiums increased 21% to $193 million in 2016 from $159 million in 2015. Gross premiums increased $39 million (82%) for property lines and decreased $5 million (5%) for casualty lines. The increase in property premiums was primarily due to growth in structured property reinsurance.
Net premiums written were $1,664 million in 2016, an increase of 6% from $1,575 million in 2015. Ceded reinsurance premiums as a percentage of gross written premiums were 15% in 2016 and in 2015.
Premiums earned increased 4% to $1,527 million in 2016 from $1,472 million in 2015. 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 2016 are related to business written during both 2016 and 2015. Audit premiums were $41 million in 2016 compared with $37 million in 2015.
Net Investment Income. Following is a summary of net investment income for the three months ended March 31, 2016 and 2015: 
 
Amount
 
Average Annualized
Yield
($ In thousands)
2016
 
2015
 
2016
 
2015
Fixed maturity securities, including cash and cash equivalents and loans receivable
$
108,835

 
$
108,129

 
3.2
%
 
3.3
%
Investment funds
16,636

 
6,061

 
5.5

 
2.0

Arbitrage trading account
3,190

 
8,979

 
3.7

 
6.8

Real estate
2,717

 
2,767

 
1.1

 
1.5

Equity securities available for sale
868

 
1,180

 
2.2

 
2.9

Gross investment income
132,246

 
127,116

 
3.3

 
3.2

Investment expenses
(2,113
)
 
(2,877
)
 
 
 
 
Total
$
130,133

 
$
124,239

 
3.2
%
 
3.1
%
Net investment income increased 4.7% to $130 million in 2016 from $124 million in 2015 due primarily to a $10 million increase in income from investment funds partially offset by a decrease in the arbitrage trading account of $6 million. The increase in investment income from investment funds (reported on a one-quarter lag) was primarily due to improvement in the performance for energy funds. Average invested assets, at cost (including cash and cash equivalents), were $16.2 billion in 2016 and $16.0 billion in 2015.
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 $40 million in 2016 from $37 million in 2015.
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 $25 million in 2016 compared with $19 million in 2015.
Other-Than-Temporary Impairments. Other-than-temporary impairments of $18 million in 2016, were related to common stocks. There were no impairments in 2015.
Revenues from Non-Insurance Businesses. Revenues from non-insurance businesses 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 non-insurance businesses were $102 million in 2016 and $93 million in 2015.
Losses and Loss Expenses. Losses and loss expenses increased to $922 million in 2016 from $901 million in 2015. The consolidated loss ratio was 60.4% in 2016 and 61.2% in 2015. Catastrophe losses, net of reinsurance recoveries and

33


reinstatement premiums, were $16 million in 2016 and $14 million in 2015. Favorable prior year reserve development (net of premium offsets) was $12 million in both 2016 and 2015. The loss ratio excluding catastrophe losses and prior year reserve development decreased 0.8 points to 60.2% in 2016 from 61.0% in 2015.
A summary of loss ratios in 2016 compared with 2015 by business segment follows:
Insurance - The loss ratio of 60.5% in 2016 was 0.6 points lower than the loss ratio of 61.1% in 2015. Catastrophe losses were $15 million in 2016 compared with $14 million in 2015. Favorable prior year reserve development was $12 million in both 2016 and 2015. The loss ratio excluding catastrophe losses and prior year reserve development decreased 0.7 points to 60.2% in 2016 from 60.9% in 2015.
Reinsurance - The loss ratio of 59.6% in 2016 was 2.6 points lower than the loss ratio of 62.2% in 2015. Catastrophe losses were $0.5 million in 2016 compared with none in 2015. Favorable prior year reserve development was $0.7 million in 2016 compared with $0.2 million in 2015. The loss ratio excluding catastrophe losses and prior year reserve development decreased 2.6 points to 59.7% in 2016 from 62.3% in 2015.
Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses:
(In thousands)
2016
 
2015
Underwriting expenses
$
505,255

 
$
482,060

Service expenses
33,798

 
31,084

Net foreign currency losses (gains)
3,728

 
(567
)
Other costs and expenses
39,678

 
38,469

Total
$
582,459

 
$
551,046

Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Underwriting expenses increased 4.8% compared with an increase in net premiums earned of 3.8%. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) increased to 33.1% from 32.7% in 2015 due, in part, to expenses associated with new business initiatives.
Service expenses, which represent the costs associated with the fee-based businesses, increased to $34 million in 2016 from $31 million in 2015.
Net foreign currency losses (gains) result from transactions denominated in a currency other than a company's operating functional currency. Net foreign currency losses were $3.7 million in 2016 compared to gain of $0.6 million in 2015.
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 $39.7 million in 2016 from $38.5 million in 2015.
Expenses from Non-Insurance Businesses. Expenses from non-insurance businesses 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 non-insurance businesses were $96 million in 2016 compared to $90 million in 2015.
Interest Expense. Interest expense was $32 million in 2016 compared with $35 million in 2015. The Company repaid $200 million of 5.60% senior notes at maturity on May 15, 2015. In February 2016, the Company issued $110 million of junior subordinated debentures.
Income Taxes. The effective income tax rate was 31.1% in 2016 and 29.8% in 2015. The higher tax rate in 2016 was due, in part, to the higher overall effective tax rate related to the Company's foreign operations. The effective income tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income.
The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $72 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 $9 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.



34


Investments
As part of its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities that, combined with expected cash flow, it believes is adequate to meet its payment obligations. Due to the historically low fixed maturity investment returns, the Company invests in equity securities, merger arbitrage securities, investment funds, private equity, loans and real estate related assets. The Company's investments in investment funds and its other alternative investments have experienced, and the Company expects to continue to experience, greater fluctuations in investment income.
The Company also attempts to maintain an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities (i.e., policy claims and debt obligations). The average duration of the fixed maturity portfolio, including cash and cash equivalents, was 3.1 years at March 31, 2016, down from 3.3 years at December 31, 2015. The Company’s fixed maturity investment portfolio and investment-related assets as of March 31, 2016 were as follows:
($ in thousands)
Carrying
Value
 
Percent
of Total
Fixed maturity securities:
 
 
 
U.S. government and government agencies
$
597,951

 
3.6
%
State and municipal:
 
 
 
Special revenue
2,754,797

 
16.8

State general obligation
657,062

 
4.0

Pre-refunded (1)
441,106

 
2.7

Local general obligation
407,243

 
2.5

Corporate backed
402,824

 
2.5

Total state and municipal
4,663,032

 
28.5

Mortgage-backed securities:
 
 
 
Agency
832,541

 
5.1

Residential-Prime
227,355

 
1.4

Commercial
65,300

 
0.4

Residential-Alt A
48,358

 
0.3

Total mortgage-backed securities
1,173,554

 
7.2

 Asset-backed securities
1,844,404

 
11.2

Corporate:
 
 
 
Industrial
2,093,572

 
12.7

Financial
1,202,140

 
7.3

Utilities
206,149

 
1.3

Other
66,715

 
0.4

Total corporate
3,568,576

 
21.7

Foreign government and foreign government agencies
897,919

 
5.5

Total fixed maturity securities
12,745,436

 
77.7

Equity securities available for sale:
 
 
 
Preferred stocks
104,128

 
0.6

Common stocks
37,571

 
0.2

Total equity securities available for sale
141,699

 
0.8

Investment funds
1,179,310

 
7.2

Real estate
986,810

 
6.0

Cash and cash equivalents
837,515

 
5.1

Arbitrage trading account
384,519

 
2.3

Loans receivable
149,388

 
0.9

Total investments
$
16,424,677

 
100.0
%
 


35


(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.
Fixed Maturity Securities. The Company’s investment policy with respect to fixed maturity securities is generally to purchase instruments with the expectation of holding them to their maturity. However, management of the available for sale portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as a result of changes in financial market conditions and tax considerations.
The Company’s philosophy related to holding or selling fixed maturity securities is based on its objective of maximizing total return. The key factors that management considers in its investment decisions as to whether to hold or sell fixed maturity securities are its view of the underlying fundamentals of specific securities as well as its expectations regarding interest rates, credit spreads and currency values. In a period in which management expects interest rates to rise, the Company may sell longer duration securities in order to mitigate the impact of an interest rate rise on the fair value of the portfolio. Similarly, in a period in which management expects credit spreads to widen, the Company may sell lower quality securities, and in a period in which management expects certain foreign currencies to decline in value, the Company may sell securities denominated in those foreign currencies. The sale of fixed maturity securities in order to achieve the objective of maximizing total return may result in realized gains; however, there is no reason to expect these gains to continue in future periods.
At March 31, 2016, 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
$
250,641

Argentina
161,778

Canada
158,180

United Kingdom
157,261

Germany
52,226

Supranational (1)
36,421

Norway
33,904

Brazil
31,388

Singapore
6,483

Colombia
5,798

Uruguay
3,839

 Total
$
897,919

________
(1) Supranational represents investments in the North American Development Bank, European Investment Bank and International Bank for Reconstruction and Development.
Equity Securities. Equity securities primarily represent investments in high-dividend yielding common and preferred stocks issued by large market capitalization companies.
Investment Funds. At March 31, 2016, the carrying value of investment funds was $1,179 million, including investments in real estate funds of $597 million, energy funds of $96 million and hedge equity funds of $68 million. Investment funds are generally reported on a one-quarter lag.
Real Estate. Real estate is directly owned property held for investment. At March 31, 2016, real estate properties in operation included a long-term ground lease in Washington D.C., a hotel in Memphis, Tennessee and office buildings in West Palm Beach and Palm Beach, Florida. In addition, there are three properties under development: an office building in London, a mixed-use project in Washington D.C. and an office complex in New York City. The Company expects to fund further development costs for these projects with a combination of its own funds and external financing.
Arbitrage Trading Account. The arbitrage trading account is comprised of direct investments in arbitrage securities. Merger arbitrage is the business of investing in the securities of publicly held companies that are the targets in announced tender offers and mergers.
Loans Receivable. Loans receivable, which are carried at amortized cost, had an aggregate cost of $149 million and an aggregate fair value of $152 million at March 31, 2016. The amortized cost of loans receivable is net of a valuation allowance

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of $3 million as of March 31, 2016. Loans receivable include real estate loans of $122 million that are secured by commercial real estate located primarily in Delaware, Maryland, and New York. Real estate loans receivable generally earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through August 2025. Loans receivable include commercial loans of $27 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 effective duration of the investment portfolio and the approximate duration of its liabilities (i.e., policy claims and debt obligations). The effective duration for the fixed maturity portfolio (including cash and cash equivalents) was 3.1 years at March 31, 2016, down from 3.3 years at December 31, 2015.
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 $141 million in the first three months of 2016 from $61 million in the comparable period in 2015, 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 83% invested in cash, cash equivalents and marketable fixed maturity securities as of March 31, 2016. If the sale of fixed maturity securities were to become necessary, a realized gain or loss equal to the difference between the cost and sales price of securities sold would be recognized.
Debt. At March 31, 2016, the Company had senior notes, subordinated debentures and other debt outstanding with a carrying value of $2,261 million and a face amount of $2,288 million. The maturities of the outstanding debt are $23 million in 2016, $36 million in 2017, $441 million in 2019, $300 million in 2020, $426 million in 2022, $250 million in 2037, $350 million in 2044, $352 million in 2053 and $110 million in 2056.

In March 2016, the Company issued $110 million aggregate principal amount of its 5.9% junior subordinated debentures due 2056. In May 2015, the Company repaid $200 million of 5.60% senior notes at maturity and $71 million of mortgage loans.
Equity. At March 31, 2016, total common stockholders’ equity was $4.8 billion, common shares outstanding were approximately 123 million and stockholders’ equity per outstanding share was $38.75. During the three months ended March 31, 2016, the Company repurchased 734,055 shares of its common stock for $37 million.
Total Capital. Total capitalization (equity, debt and subordinated debentures) was $7 billion at March 31, 2016. The percentage of the Company’s capital attributable to debt and subordinated debentures was 32% at March 31, 2016 and December 31, 2015.

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Item 3.
Quantitative and Qualitative Disclosure About Market Risk
Reference is made to the information under “Investments - Market Risk” under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q.

Item 4.
Controls and Procedures
          Disclosure Controls and Procedures. The Company’s management, including its Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14 as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company has in place effective controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, and the rules thereunder, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Changes in Internal Control over Financial Reporting. During the quarter ended March 31, 2016, 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, 2015.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Set forth below is a summary of the shares repurchased by the Company during the three months ended March 31, 2016 and the number of shares remaining authorized for purchase by the Company.
 
Total number
of shares
purchased
 
Average price
paid per share
 
Total number of shares purchased
as part of publicly announced
plans
or programs
 
Maximum number of
shares that may yet be
purchased under the
plans or programs
January
299,831

 
$
52.52

 
299,831

 
8,947,147

February
434,224

 
$
49.92

 
434,224

 
8,512,923

March

 
$

 

 
8,512,923

 
 
 
 
 
 
 
 

Item 6. Exhibits

Number 
 
 
 
 
 
(10.1)
 
Form of 2016 Performance Unit Award Agreement under the W. R. Berkley Corporation 2014 Long-Term Incentive Plan.
 
 
 
(31.1)
 
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a).
 
 
 
(31.2)
 
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/ 15d-14(a).
 
 
 
(32.1)
 
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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:
May 10, 2016
/s/ W. Robert Berkley, Jr. 
 
 
W. Robert Berkley, Jr.
 
 
President and Chief Executive Officer 
 
 
 
Date:
May 10, 2016
/s/ Eugene G. Ballard  
 
 
Eugene G. Ballard 
 
 
Executive Vice President - Chief Financial Officer 

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