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

Form 10-Q
(Mark one)
þQUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 20172018
or
oTransition 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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)
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 November 6, 2017: 121,794,7585, 2018: 122,124,243
 


TABLE OF CONTENTS
Part I — FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3. Quantitative and Qualitative Disclosure About Market Risk
 
Item 4. Controls and Procedures
PART II — OTHER INFORMATION
 
Item 1. Legal Proceedings
 
Item 1A. Risk Factors
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 6. Exhibits
SIGNATURES
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT


Part I — FINANCIAL INFORMATION
Item 1.
Item 1.     Financial Statements

Financial Statements
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30,
2017		 December 31,
2016		September 30,
2018		 December 31,
2017
(Unaudited) (Audited)(Unaudited) (Audited)
Assets      
Investments:      
Fixed maturity securities$13,873,690
 $13,190,668
$13,572,402
 $13,551,250
Real estate1,917,250
 1,469,601
Investment funds1,119,907
 1,198,146
1,251,748
 1,155,677
Real estate1,391,274
 1,184,981
Arbitrage trading account488,238
 299,999
678,321
 617,649
Equity securities available for sale

614,025
 669,200
Equity securities325,254
 576,647
Loans receivable74,229
 106,798
96,590
 79,684
Total investments17,561,363
 16,649,792
17,841,565
 17,450,508
Cash and cash equivalents773,997
 795,285
819,366
 950,471
Premiums and fees receivable1,818,836
 1,701,854
1,872,460
 1,773,844
Due from reinsurers1,739,835
 1,743,980
1,859,917
 1,783,200
Deferred policy acquisition costs534,091
 537,890
513,092
 507,549
Prepaid reinsurance premiums473,766
 413,140
497,285
 472,009
Trading account receivables from brokers and clearing organizations297,208
 484,593
191,394
 189,280
Property, furniture and equipment399,924
 349,432
424,754
 422,960
Goodwill173,422
 144,513
171,095
 178,945
Accrued investment income139,864
 127,047
148,646
 136,597
Federal and foreign income taxes37,196
 —
Other assets423,770
 402,550
478,879
 434,554
Total assets$24,336,076
 $23,350,076
$24,855,649
 $24,299,917
      
Liabilities and Equity      
Liabilities:      
Reserves for losses and loss expenses$11,654,346
 $11,197,195
$11,872,162
 $11,670,408
Unearned premiums3,409,628
 3,283,300
3,454,955
 3,290,180
Due to reinsurers228,539
 213,128
231,197
 246,460
Trading account securities sold but not yet purchased44,937
 51,179
112,355
 64,358
Federal and foreign income taxes116,608
 119,597
—
 98,091
Other liabilities923,369
 916,318
1,008,145
 981,987
Senior notes and other debt1,759,929
 1,760,595
1,790,498
 1,769,052
Subordinated debentures728,071
 727,630
907,304
 728,218
Total liabilities18,865,427
 18,268,942
19,376,616
 18,848,754
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, 121,769,109 and 121,193,599 shares, respectively47,024
 47,024
Authorized 500,000,000 shares, issued and outstanding, net of treasury shares, 122,117,763 and 121,514,852 shares, respectively47,024
 47,024
Additional paid-in capital1,040,575
 1,037,446
1,058,074
 1,048,283
Retained earnings6,880,062
 6,595,987
7,505,706
 6,956,882
Accumulated other comprehensive income153,759
 55,568
Treasury stock, at cost, 113,348,809 and 113,924,319 shares, respectively(2,690,884) (2,688,817)
Accumulated other comprehensive (loss) income(474,938) 68,541
Treasury stock, at cost, 113,000,155 and 113,603,066 shares, respectively(2,698,018) (2,709,386)
Total stockholders’ equity5,430,536
 5,047,208
5,437,848
 5,411,344
Noncontrolling interests40,113
 33,926
41,185
 39,819
Total equity5,470,649
 5,081,134
5,479,033
 5,451,163
Total liabilities and equity$24,336,076
 $23,350,076
$24,855,649
 $24,299,917
See accompanying notes to interim consolidated financial statements.



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

For the Three Months For the Nine MonthsFor the Three Months
Ended September 30,		 For the Nine Months
Ended September 30,
Ended September 30, Ended September 30, 
2017 2016 2017 20162018 2017 2018 2017
REVENUES:              
Net premiums written$1,571,183
 $1,607,365
 $4,782,272
 $4,913,656
$1,624,214
 $1,571,183
 $4,913,656
 $4,782,272
Change in net unearned premiums10,317
 (21,421) (62,028) (240,584)(20,729) 10,317
 (161,709) (62,028)
Net premiums earned1,581,500
 1,585,944
 4,720,244
 4,673,072
1,603,485
 1,581,500
 4,751,947
 4,720,244
Net investment income142,479
 145,668
 426,601
 404,850
186,124
 142,479
 514,419
 426,601
Net realized investment gains183,959
 175,738
 276,760
 207,508
Other-than-temporary impairments—
 —
 —
 (18,114)
Net realized and unrealized gains on investments22,334
 183,959
 140,429
 276,760
Revenues from non-insurance businesses89,786
 80,242
 225,033
 305,787
95,168
 89,786
 242,037
 225,033
Insurance service fees33,612
 32,135
 100,475
 109,437
30,782
 33,612
 91,175
 100,475
Other income6
 —
 695
 —
9
 6
 59
 695
Total revenues2,031,342
 2,019,727
 5,749,808
 5,682,540
1,937,902
 2,031,342
 5,740,066
 5,749,808
OPERATING COSTS AND EXPENSES:              
Losses and loss expenses1,081,174
 965,856
 3,025,475
 2,852,339
1,017,720
 1,081,174
 2,954,575
 3,025,475
Other operating costs and expenses600,822
 606,348
 1,821,155
 1,770,450
577,648
 600,822
 1,781,230
 1,821,155
Expenses from non-insurance businesses86,412
 78,865
 221,389
 291,127
93,463
 86,412
 238,198
 221,389
Interest expense36,821
 37,043
 110,419
 104,019
39,848
 36,821
 116,608
 110,419
Total operating costs and expenses1,805,229
 1,688,112
 5,178,438
 5,017,935
1,728,679
 1,805,229
 5,090,611
 5,178,438
Income before income taxes226,113
 331,615
 571,370
 664,605
209,223
 226,113
 649,455
 571,370
Income tax expense(63,295) (110,952) (174,305) (214,789)(44,780) (63,295) (136,661) (174,305)
Net income before noncontrolling interests162,818
 220,663
 397,065
 449,816
164,443
 162,818
 512,794
 397,065
Noncontrolling interests(764) (13) (2,560) (689)(2,523) (764) (4,402) (2,560)
Net income to common stockholders$162,054
 $220,650
 $394,505
 $449,127
$161,920
 $162,054
 $508,392
 $394,505
              
NET INCOME PER SHARE:              
Basic$1.29
 $1.80
 $3.17
 $3.66
$1.28
 $1.29
 $4.02
 $3.17
Diluted$1.26
 $1.72
 $3.05
 $3.50
$1.26
 $1.26
 $3.96
 $3.05

See accompanying notes to interim consolidated financial statements.







W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
For the Three Months For the Nine MonthsFor the Three Months
Ended September 30,		 For the Nine Months
Ended September 30,
Ended September 30, Ended September 30, 
2017 2016 2017 20162018 2017 2018 2017
Net income before noncontrolling interests$162,818
 $220,663
 $397,065
 $449,816
$164,443
 $162,818
 $512,794
 $397,065
Other comprehensive income (loss):       
Other comprehensive (loss) income:       
Change in unrealized currency translation adjustments28,592
 (19,470) 71,574
 (77,389)15,686
 28,592
 (75,970) 71,574
Change in unrealized investment gains (losses), net of taxes(8,168) (47,676) 26,598
 134,213
Other comprehensive income (loss):20,424
 (67,146) 98,172
 56,824
Change in unrealized investment (losses) gains, net of taxes(94,842) (8,168) (253,056) 26,598
Other comprehensive (loss) income(79,156) 20,424
 (329,026) 98,172
Comprehensive income183,242
 153,517
 495,237
 506,640
85,287
 183,242
 183,768
 495,237
Noncontrolling interests(731) 44
 (2,541) (623)(2,463) (731) (4,316) (2,541)
Comprehensive income to common stockholders$182,511
 $153,561
 $492,696
 $506,017
$82,824
 $182,511
 $179,452
 $492,696

See accompanying notes to interim consolidated financial statements.


W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(In thousands)
For the Nine MonthsFor the Nine Months
Ended September 30,
Ended September 30,
2017
20162018
2017
COMMON STOCK:      
Beginning and end of period$47,024
 $47,024
$47,024
 $47,024
ADDITIONAL PAID-IN CAPITAL:      
Beginning of period$1,037,446
 $1,005,455
$1,048,283
 $1,037,446
Restricted stock units issued(27,047) (3,421)(16,690) (27,047)
Restricted stock units expensed30,176
 25,431
26,481
 30,176
End of period$1,040,575
 $1,027,465
$1,058,074
 $1,040,575
RETAINED EARNINGS:      
Beginning of period$6,595,987
 $6,178,070
$6,956,882
 $6,595,987
Cumulative effect adjustment resulting from changes in accounting principles215,939
 —
Net income to common stockholders394,505
 449,127
508,392
 394,505
Dividends(110,430) (107,661)(175,507) (110,430)
End of period$6,880,062
 $6,519,536
$7,505,706
 $6,880,062
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)   
Unrealized investment gains:   
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME:   
Unrealized investment (losses) gains:   
Beginning of period$427,154
 $180,695
$375,421
 $427,154
Unrealized gains on securities not other-than-temporarily impaired25,712
 133,866
Unrealized gains on other-than-temporarily impaired securities905
 413
Cumulative effect adjustment resulting from changes in accounting principles(214,539) —
Change in unrealized (losses) gains on securities not other-than-temporarily impaired(252,974) 25,712
Change in unrealized gains on other-than-temporarily impaired securities4
 905
End of period453,771
 314,974
(92,088) 453,771
Currency translation adjustments:      
Beginning of period(371,586) (247,393)(306,880) (371,586)
Net change in period71,574
 (77,389)(75,970) 71,574
End of period(300,012) (324,782)(382,850) (300,012)
Total accumulated other comprehensive income (loss)$153,759
 $(9,808)
Total accumulated other comprehensive (loss) income$(474,938) $153,759
TREASURY STOCK:      
Beginning of period$(2,688,817) $(2,563,605)$(2,709,386) $(2,688,817)
Stock exercised/vested25,584
 5,023
17,478
 25,584
Stock repurchased(28,378) (99,870)(6,799) (28,378)
Stock incentive plans expensed727
 —
Stock issued689
 727
End of period$(2,690,884) $(2,658,452)$(2,698,018) $(2,690,884)
NONCONTROLLING INTERESTS:      
Beginning of period$33,926
 $32,962
$39,819
 $33,926
Contributions3,646
 2,474
(Distributions) contributions(2,950) 3,646
Net income2,560
 689
4,402
 2,560
Other comprehensive loss, net of tax(19) (66)
Other comprehensive income (loss), net of tax(86) (19)
End of period$40,113
 $36,059
$41,185
 $40,113
See accompanying notes to interim consolidated financial statements.


W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
For the Nine MonthsFor the Nine Months
Ended September 30,
Ended September 30,
2017 20162018 2017
CASH FROM OPERATING ACTIVITIES:      
Net income to common stockholders$394,505
 $449,127
$508,392
 $394,505
Adjustments to reconcile net income to net cash from operating activities:      
Net investment gains(276,760) (189,394)
Net realized and unrealized gains on investments(140,429) (276,760)
Depreciation and amortization78,137
 69,153
76,541
 78,137
Noncontrolling interests2,560
 689
4,402
 2,560
Investment funds(51,907) (60,387)(94,075) (51,907)
Stock incentive plans31,883
 27,033
28,528
 31,883
Change in:      
Arbitrage trading account(2,835) (4,777)(14,795) (2,835)
Premiums and fees receivable(112,420) (92,372)(107,347) (112,420)
Reinsurance accounts(42,319) (154,939)(114,298) (42,319)
Deferred policy acquisition costs4,483
 (51,795)(7,466) 4,483
Income taxes(15,451) 89,007
(99,945) (15,451)
Reserves for losses and loss expenses422,657
 440,486
230,112
 422,657
Unearned premiums121,583
 269,287
176,736
 121,583
Other(32,258) (64,608)(103,832) (32,258)
Net cash from operating activities521,858
 726,510
342,524
 521,858
CASH USED IN INVESTING ACTIVITIES:      
Proceeds from sale of fixed maturity securities3,081,619
 1,074,630
2,841,642
 3,081,619
Proceeds from sale of equity securities137,062
 123,187
449,388
 137,062
Distributions from investment funds265,371
 5,630
(Contributions to) distributions from investment funds(3,505) 265,371
Proceeds from maturities and prepayments of fixed maturity securities2,860,678
 2,189,365
1,957,724
 2,860,678
Purchase of fixed maturity securities(6,530,466) (4,280,457)(5,187,501) (6,530,466)
Purchase of equity securities(17,049) (127,303)(87,059) (17,049)
Real estate purchased(159,006) (207,829)(454,410) (159,006)
Change in loans receivable32,574
 159,128
(14,345) 32,574
Net additions to property, furniture and equipment(74,268) (37,895)(35,582) (74,268)
Change in balances due to security brokers39,978
 102,981
5,601
 39,978
Cash received in connection with business disposition—
 250,216
8,664
 —
Payment for business purchased net of cash aquired(70,570) (53,524)
Payment for business purchased net of cash acquired(6,637) (70,570)
Other(443) —
Net cash used in investing activities(434,077) (801,871)(526,463) (434,077)
CASH (USED IN) FROM FINANCING ACTIVITIES:   
CASH FROM (USED IN) FINANCING ACTIVITIES:   
Repayment of senior notes and other debt(1,788) (70,567)(23) (1,788)
Net proceeds from issuance of debt—
 386,848
198,905
 —
Cash dividends to common stockholders(93,371) (30,654)(96,131) (93,371)
Purchase of common treasury shares(28,378) (99,870)(6,799) (28,378)
Other, net(3,835) (1,376)(4,238) (3,835)
Net cash (used in) from financing activities(127,372) 184,381
Net cash from (used in) financing activities91,714
 (127,372)
Net impact on cash due to change in foreign exchange rates18,303
 413
(38,880) 18,303
Net change in cash and cash equivalents(21,288) 109,433
(131,105) (21,288)
Cash and cash equivalents at beginning of year795,285
 763,631
950,471
 795,285
Cash and cash equivalents at end of period$773,997
 $873,064
$819,366
 $773,997
See accompanying notes to interim consolidated financial statements.



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, 2016.2017. Reclassifications have been made in the 20162017 financial statements as originally reported to conform to the presentation of the 20172018 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%21% principally because of tax-exempt investment income, as well as the new requirement in 2017 to recognize tax benefits for stock compensation inon income from foreign jurisdictions with different tax expense.rates.

(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 (including 4,847,303 and 4,087,731 common shares held in a grantor trust established in March 2017)as of September 30, 2018 and 2017, respectively). The common shares held in the grantor trust are for delivery upon settlement of vested but mandatorily deferred restricted stock units ("RSUs"). Shares held by the grantor trust do not affect diluted shares outstanding since the shares deliverable under vested RSUs were already included in diluted shares outstanding. Diluted EPS is based upon the weighted average number of basic and common equivalent shares outstanding during the period and is calculated using the treasury stock method for stock incentive plans. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect.
The weighted average number of common shares used in the computation of basic and diluted earnings per share was as follows:
For the Three Months For the Nine MonthsFor the Three Months
Ended September 30,		 For the Nine Months
Ended September 30,
Ended September 30, Ended September 30, 
(In thousands)2017 2016 2017 20162018 2017 2018 2017
Basic125,818
 122,562
 124,363
 122,652
126,827
 125,818
 126,575
 124,363
Diluted128,944
 128,556
 129,289
 128,501
128,561
 128,944
 128,404
 129,289

(3) Recent Accounting Pronouncements

Recently adopted accounting pronouncements:

In May 2015,2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. The Company adopted this updated guidance on January 1, 2016 with regard to the annual requirements and on January 1, 2017 with regard to the interim requirements. The amendments in ASU 2015-09 are 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 did not impact our financial condition or results of operations, but did result in additional disclosures.



In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 includes provisions intended to simplify various previous provisions related to how share-based payments are accounted for and presented in the financial statements. Under the new guidance, excess tax benefits (deductions for share based payment awards for tax purposes that exceed the compensation cost recognized for financial reporting purposes) are reported within the income tax expense financial statement line item. Previously, excess tax benefits were reported within additional paid in capital. The Company adopted this updated guidance on January 1, 2017 prospectively. The adoption of this guidance did not have a material impact on the Company's financial condition or results of operations.

All other accounting and reporting standards that became effective in 2017 were either not applicable to the Company or their adoption did not have a material impact on the Company. 

Accounting and reporting standards that are not yet effective:

In May 2014, the FASB issued ASU 2014-09, Revenue from Customers. ASU 2014-09 clarifies the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company’s insurance service fee revenue and non-insurance business revenue will beare subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The updated guidance, as amended by ASU 2015-14, iswas effective for public business entities for annual and interim reporting periods beginning after December 15, 2017. The adoption ofCompany adopted this guidance is not expected to haveon January 1, 2018 on a materialprospective basis. The impact of applying this guidance prospectively was a cumulative effect on the Company’s financial condition or resultsadjustment that increased retained earnings, a component of operations.stockholders' equity, by $1 million after-tax.



In January 2016, the FASB issued ASU 2016-01, Financial Instruments.  ASU 2016-01 amends the accounting guidance for financial instruments to require all equity investments with readily determinable fair values to be measured at fair value with changes in the fair value recognized throughin net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee).  The updated guidance iswas effective for public business entities for annual reporting periods beginning after December 15, 2017 and interim periods within those years. The adoptionCompany adopted this updated guidance on January 1, 2018 on a prospective basis. The impact of applying this guidance is not expected to haveprospectively was a materialcumulative effect on the Company’s financial condition upon adoption, but will impact results of operations after adoption of this guidance as unrealized gainsadjustment that increased retained earnings and losses on equity securities will no longer be reported directly indecreased accumulated other comprehensive income (AOCI), but will instead be reported("AOCI") by offsetting amounts of $291 million, resulting in no net income.impact to total stockholders' equity. Following the adoption, the Company reports changes in fair value related to equity securities within net realized and unrealized gains on investments.

In February 2018, the FASB issued ASU 2018-02, Reporting Comprehensive Income, which amends previous guidance to allow a reclassification to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The amount of the reclassification includes the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of the enactment of the Tax Act related to items in AOCI. The updated guidance will be effective for reporting periods beginning after December 15, 2018, and is eligible for early adoption. The Company adopted this updated guidance on January 1, 2018. The impact of applying this guidance was a cumulative effect adjustment that decreased retained earnings and increased AOCI by offsetting amounts of $76 million, resulting in no net impact to total stockholders' equity.

All other accounting and reporting standards that have become effective in 2018 were either not applicable to the Company or their adoption did not have a material impact on the Company. 
Accounting and reporting standards that are not yet effective:
In February 2016, the FASB issued ASU 2016-02, Leases, which amends the accounting and disclosure guidance for leases.  This guidance retains the two classifications of a lease, as either an operating or finance lease, both of which will require lessees to recognize a right-of-use asset and a lease liability for leases with terms of more than 12 months. The right-of-use asset and the lease liability will be determined based upon the present value of cash flows. Finance leases will reflect the financial arrangement by recognizing interest expense on the lease liability separately from the amortization expense of the right-of-use asset. Operating leases will recognize lease expense (with no separate recognition of interest expense) on a straight-line basis over the term of the lease. The accounting by lessors is not significantly changed by the updated guidance.  The updated guidance is effective for reporting periods beginning after December 15, 2018, and can be adopted prospectively or will require that the earliest comparative period presented include the measurement and recognition of existing leases with an adjustment to equity as if the updated guidance had always been applied. The Company will adopt the new guidance prospectively as of January 1, 2019. The Company is currently evaluating the impact that the adoption of this guidance will have on its results of operations, financial position and liquidity.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which amends the accounting guidance for credit losses on financial instruments. The updated guidance amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. This guidance also applies a new current expected credit loss model for determining credit-related impairments for financial instruments measured at amortized cost.  The updated guidance is effective for reporting periods beginning after December 15, 2019. The Company will not be able to determine the impact the adoption of this guidance will have on its results of operations, financial position or liquidity until the year the guidance becomes effective.

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.





(4) Acquisitions/Disposition

In March 2017, the Company acquired an 89.5% ownership interest for $73.3 million in a company engaged in providing textile solutions world-wide. The fair value of the assets acquired and liabilities assumed have been estimated based on a third party valuation.

The following table summarizes the estimated fair value of net assets acquired and liabilities assumed for the business combination completed in 2017:
(In thousands)2017
  
Cash and cash equivalents$2,721
Real estate, furniture and equipment7,042
Goodwill28,522
Intangible assets32,395
Other assets9,862
Total assets acquired80,542
  
Other liabilities assumed(2,251)
Noncontrolling interest(5,000)
  Net assets acquired$73,291

In February 2016, the Company acquired an 85% ownership interest for $42.3 million in a company engaged in the distribution of promotional merchandise.


(5) Consolidated Statement of Comprehensive Income

The following table presents the components of the changes in accumulated other comprehensive (loss) income ("AOCI"):
(In thousands)Unrealized Investment Gains (Losses)                              Currency Translation Adjustments Accumulated Other Comprehensive Income
Unrealized Investment
Gains (Losses)
 Currency Translation Adjustments 
Accumulated Other Comprehensive
(Loss) Income
As of and for the nine months ended September 30, 2017:    
As of and for the nine months ended September 30, 2018As of and for the nine months ended September 30, 2018    
Changes in AOCIChanges in AOCI    Changes in AOCI    
Beginning of period$427,154
 $(371,586) $55,568
$375,421
 $(306,880) $68,541
Other comprehensive income before reclassifications109,277
 71,574
 180,851
Cumulative effect adjustment resulting from changes in accounting principles(214,539) —
 (214,539)
Restated beginning of period160,882
 (306,880) (145,998)
Other comprehensive loss before reclassifications(242,944) (75,970) (318,914)
Amounts reclassified from AOCI(82,679) —
 (82,679)(10,112) —
 (10,112)
Other comprehensive income26,598
 71,574
 98,172
Unrealized investment loss related to non-controlling interest19
 —
 19
Other comprehensive loss(253,056) (75,970) (329,026)
Unrealized investment loss related to noncontrolling interest86
 —
 86
End of period$453,771
 $(300,012) $153,759
$(92,088) $(382,850) $(474,938)
Amounts reclassified from AOCI          
Pre-tax$(127,198)(1)$—
 $(127,198)$(12,800)(1)$—
 $(12,800)
Tax effect44,519
(2)—
 44,519
2,688
(2)—
 2,688
After-tax amounts reclassified$(82,679) $—
 $(82,679)$(10,112) $—
 $(10,112)
Other comprehensive income     
Other comprehensive loss     
Pre-tax$50,148
 $71,574
 $121,722
$(298,164) $(75,970) $(374,134)
Tax effect(23,550) —
 (23,550)45,108
 —
 45,108
Other comprehensive income$26,598
 $71,574
 $98,172
     
As of and for the three months ended September 30, 2017:    
Other comprehensive loss$(253,056) $(75,970) $(329,026)
As of and for the three months ended September 30, 2018As of and for the three months ended September 30, 2018    
Changes in AOCIChanges in AOCI    Changes in AOCI    
Beginning of period$461,906
 $(328,604) $133,302
$2,694
 $(398,536) $(395,842)
Other comprehensive income before reclassifications19,968
 28,592
 48,560
Other comprehensive loss before reclassifications(95,312) 15,686
 (79,626)
Amounts reclassified from AOCI(28,136) —
 (28,136)470
 —
 470
Other comprehensive (loss) income(8,168) 28,592
 20,424
Unrealized investment loss related to non-controlling interest33
 —
 33
Other comprehensive loss(94,842) 15,686
 (79,156)
Unrealized investment loss related to noncontrolling interest60
 —
 60
End of period$453,771
 $(300,012) $153,759
$(92,088) $(382,850) $(474,938)
Amounts reclassified from AOCI          
Pre-tax$(43,286)(1)$—
 $(43,286)$595
(1)$—
 $595
Tax effect15,150
(2)—
 15,150
(125)(2)—
 (125)
After-tax amounts reclassified$(28,136) $—
 $(28,136)$470
 $—
 $470
Other comprehensive (loss) income     
Other comprehensive loss     
Pre-tax$(8,563) $28,592
 $20,029
$(96,828) $15,686
 $(81,142)
Tax effect395
 —
 395
1,986
 —
 1,986
Other comprehensive (loss) income$(8,168) $28,592
 $20,424
     
Other comprehensive loss$(94,842) $15,686
 $(79,156)
_________________________
(1) Net investmentrealized and unrealized gains on investments in the consolidated statements of income.
(2) Income tax expense in the consolidated statements of income.



(In thousands)Unrealized Investment Gains (Losses)            Currency Translation Adjustments Accumulated Other Comprehensive Income (Loss)Unrealized Investment Gains (Losses)            Currency Translation Adjustments Accumulated Other Comprehensive (Loss) Income
As of and for the nine months ended September 30, 2016:    
As of and for the nine months ended September 30, 2017As of and for the nine months ended September 30, 2017    
Changes in AOCIChanges in AOCI    Changes in AOCI    
Beginning of period$180,695
 $(247,393) $(66,698)$427,154
 $(371,586) $55,568
Other comprehensive income (loss) before reclassifications170,824
 (77,389) 93,435
Other comprehensive income before reclassifications109,277
 71,574
 180,851
Amounts reclassified from AOCI(36,611) —
 (36,611)(82,679) —
 (82,679)
Other comprehensive income (loss)134,213
 (77,389) 56,824
Unrealized investment loss related to non-controlling interest66
 —
 66
Other comprehensive income26,598
 71,574
 98,172
Unrealized investment gain related to noncontrolling interest19
 —
 19
End of period$314,974
 $(324,782) $(9,808)$453,771
 $(300,012) $153,759
Amounts reclassified from AOCI         
Pre-tax$(56,325)(1)$—
 $(56,325)$(127,198)(1)$—
 $(127,198)
Tax effect19,714
(2)—
 19,714
44,519
(2)—
 44,519
After-tax amounts reclassified$(36,611) $—
 $(36,611)$(82,679) $—
 $(82,679)
Other comprehensive income (loss)     
Other comprehensive income    
Pre-tax$198,808
 $(77,389) $121,419
$50,148
 $71,574
 $121,722
Tax effect(64,595) —
 (64,595)(23,550) —
 (23,550)
Other comprehensive income (loss)$134,213
 $(77,389) $56,824
     
As of and for the three months ended September 30, 2016:    
Other comprehensive income$26,598
 $71,574
 $98,172
As of and for the three months ended September 30, 2017As of and for the three months ended September 30, 2017    
Changes in AOCIChanges in AOCI    Changes in AOCI   

Beginning of period$362,593
 $(305,312) $57,281
$461,906
 $(328,604) $133,302
Other comprehensive loss before reclassifications(20,968) (19,470) (40,438)
Other comprehensive income before reclassifications19,968
 28,592
 48,560
Amounts reclassified from AOCI(26,708) —
 (26,708)(28,136) —
 (28,136)
Other comprehensive loss(47,676) (19,470) (67,146)
Unrealized investment loss related to non-controlling interest57
 —
 57
Other comprehensive income(8,168) 28,592
 20,424
Unrealized investment gain related to noncontrolling interest33
 —
 33
End of period$314,974
 $(324,782) $(9,808)$453,771
 $(300,012) $153,759
Amounts reclassified from AOCI         
Pre-tax$(41,090)(1)$—
 $(41,090)$(43,286)(1)$—
 $(43,286)
Tax effect14,382
(2)—
 14,382
15,150
(2)—
 15,150
After-tax amounts reclassified$(26,708) $—
 $(26,708)$(28,136) $—
 $(28,136)
Other comprehensive loss     
Other comprehensive income    
Pre-tax$(72,188) $(19,470) $(91,658)$(8,563) $28,592
 $20,029
Tax effect24,512
 —
 24,512
395
 —
 395
Other comprehensive loss$(47,676) $(19,470) $(67,146)
     
Other comprehensive income$(8,168) $28,592
 $20,424
________________________________________
(1) Net investmentrealized and unrealized gains on investments in the consolidated statements of income.
(2) Income tax expense in the consolidated statements of income.





(6)(5) Statements of Cash Flow
Interest payments were $134,291,000$137,789,000 and $124,791,000$134,291,000 and income taxes paid were $182,487,000$173,000,000 and $99,161,000$182,487,000 in the nine months ended September 30, 2018 and 2017, and 2016, respectively.

(7)(6) Investments in Fixed Maturity Securities
At September 30, 20172018 and December 31, 2016,2017, investments in fixed maturity securities were as follows:
 
(In thousands)
Amortized
Cost
 Gross Unrealized 
Fair
Value
 
Carrying
Value
Amortized
Cost
 Gross Unrealized 
Fair
Value
 
Carrying
Value
Gains Losses Gains Losses 
September 30, 2017         
September 30, 2018         
Held to maturity:                  
State and municipal$65,372
 $15,212
 $—
 $80,584
 $65,372
$67,513
 $11,081
 $—
 $78,594
 $67,513
Residential mortgage-backed14,024
 1,452
 —
 15,476
 14,024
11,276
 1,171
 —
 12,447
 11,276
Total held to maturity79,396
 16,664
 —
 96,060
 79,396
78,789
 12,252
 —
 91,041
 78,789
Available for sale:                  
U.S. government and government agency402,901
 10,828
 (2,124) 411,605
 411,605
490,679
 4,258
 (7,895) 487,042
 487,042
State and municipal:                  
Special revenue2,730,653
 80,144
 (5,469) 2,805,328
 2,805,328
2,486,490
 23,982
 (32,046) 2,478,426
 2,478,426
State general obligation481,070
 21,377
 (565) 501,882
 501,882
380,200
 8,917
 (2,742) 386,375
 386,375
Pre-refunded282,488
 21,052
 (173) 303,367
 303,367
427,429
 15,213
 (55) 442,587
 442,587
Corporate backed380,351
 11,775
 (499) 391,627
 391,627
294,243
 4,833
 (2,596) 296,480
 296,480
Local general obligation384,930
 26,566
 (531) 410,965
 410,965
403,879
 13,988
 (3,841) 414,026
 414,026
Total state and municipal4,259,492
 160,914
 (7,237) 4,413,169
 4,413,169
3,992,241
 66,933
 (41,280) 4,017,894
 4,017,894
Mortgage-backed securities:                  
Residential (1)1,064,705
 12,696
 (8,860) 1,068,541
 1,068,541
1,237,787
 4,400
 (33,896) 1,208,291
 1,208,291
Commercial251,387
 1,641
 (1,450) 251,578
 251,578
345,826
 670
 (6,565) 339,931
 339,931
Total mortgage-backed securities1,316,092
 14,337
 (10,310) 1,320,119
 1,320,119
1,583,613
 5,070
 (40,461) 1,548,222
 1,548,222
Asset-backed2,389,187
 9,836
 (10,405) 2,388,618
 2,388,618
2,556,499
 10,753
 (17,378) 2,549,874
 2,549,874
Corporate:                  
Industrial2,569,673
 70,054
 (2,842) 2,636,885
 2,636,885
2,303,206
 16,555
 (41,783) 2,277,978
 2,277,978
Financial1,335,101
 43,636
 (4,716) 1,374,021
 1,374,021
1,436,530
 16,786
 (21,688) 1,431,628
 1,431,628
Utilities255,478
 12,760
 (907) 267,331
 267,331
303,260
 2,222
 (6,010) 299,472
 299,472
Other42,183
 2
 (48) 42,137
 42,137
56,474
 6
 (389) 56,091
 56,091
Total corporate4,202,435
 126,452
 (8,513) 4,320,374
 4,320,374
4,099,470
 35,569
 (69,870) 4,065,169
 4,065,169
Foreign909,608
 32,889
 (2,088) 940,409
 940,409
838,834
 10,427
 (23,849) 825,412
 825,412
Total available for sale13,479,715
 355,256
 (40,677) 13,794,294
 13,794,294
13,561,336
 133,010
 (200,733) 13,493,613
 13,493,613
Total investments in fixed maturity securities$13,559,111
 $371,920
 $(40,677) $13,890,354
 $13,873,690
$13,640,125
 $145,262
 $(200,733) $13,584,654
 $13,572,402


(In thousands)Amortized
Cost		 Gross Unrealized Fair
Value		 Carrying
Value		Amortized
Cost		 Gross Unrealized Fair
Value		 Carrying
Value
Gains LossesGains Losses
December 31, 2016         
December 31, 2017         
Held to maturity:                  
State and municipal$72,582
 $12,453
 $—
 $85,035
 $72,582
$65,882
 $14,499
 $—
 $80,381
 $65,882
Residential mortgage-backed15,944
 1,693
 —
 17,637
 15,944
13,450
 1,227
 —
 14,677
 13,450
Total held to maturity88,526
 14,146
 —
 102,672
 88,526
79,332
 15,726
 —
 95,058
 79,332
Available for sale:                  
U.S. government and government agency496,187
 20,208
 (2,593) 513,802
 513,802
372,748
 8,824
 (3,832) 377,740
 377,740
State and municipal:                  
Special revenue2,791,211
 58,559
 (26,315) 2,823,455
 2,823,455
2,663,245
 53,512
 (10,027) 2,706,730
 2,706,730
State general obligation524,682
 16,964
 (5,139) 536,507
 536,507
439,358
 16,087
 (711) 454,734
 454,734
Pre-refunded356,535
 19,181
 (165) 375,551
 375,551
436,241
 22,701
 (9) 458,933
 458,933
Corporate backed410,933
 6,172
 (6,452) 410,653
 410,653
375,268
 10,059
 (860) 384,467
 384,467
Local general obligation360,022
 15,682
 (2,367) 373,337
 373,337
417,955
 23,242
 (967) 440,230
 440,230
Total state and municipal4,443,383
 116,558
 (40,438) 4,519,503
 4,519,503
4,332,067
 125,601
 (12,574) 4,445,094
 4,445,094
Mortgage-backed securities:                  
Residential (1)1,034,301
 15,431
 (12,950) 1,036,782
 1,036,782
1,043,629
 9,304
 (13,547) 1,039,386
 1,039,386
Commercial155,540
 304
 (2,981) 152,863
 152,863
261,652
 1,521
 (2,628) 260,545
 260,545
Total mortgage-backed securities1,189,841
 15,735
 (15,931) 1,189,645
 1,189,645
1,305,281
 10,825
 (16,175) 1,299,931
 1,299,931
Asset-backed1,913,830
 5,971
 (11,941) 1,907,860
 1,907,860
2,111,132
 11,024
 (10,612) 2,111,544
 2,111,544
Corporate:                  
Industrial2,315,567
 71,007
 (7,174) 2,379,400
 2,379,400
2,574,400
 52,210
 (7,718) 2,618,892
 2,618,892
Financial1,369,001
 39,543
 (11,270) 1,397,274
 1,397,274
1,402,161
 37,744
 (5,138) 1,434,767
 1,434,767
Utilities229,154
 10,801
 (2,411) 237,544
 237,544
284,886
 11,316
 (1,248) 294,954
 294,954
Other54,073
 299
 (63) 54,309
 54,309
40,560
 5
 (66) 40,499
 40,499
Total corporate3,967,795
 121,650
 (20,918) 4,068,527
 4,068,527
4,302,007
 101,275
 (14,170) 4,389,112
 4,389,112
Foreign858,773
 46,794
 (2,762) 902,805
 902,805
819,345
 32,018
 (2,866) 848,497
 848,497
Total available for sale12,869,809
 326,916
 (94,583) 13,102,142
 13,102,142
13,242,580
 289,567
 (60,229) 13,471,918
 13,471,918
Total investments in fixed maturity securities$12,958,335

$341,062
 $(94,583) $13,204,814
 $13,190,668
$13,321,912

$305,293
 $(60,229) $13,566,976
 $13,551,250
____________
(1)
Gross unrealized gains and (losses) for residential mortgage-backed securities include $85,907 and $(818,691)
(1) Gross unrealized gains for residential mortgage-backed securities include $81,006 and $76,467 as of September 30, 2018 and December 31, 2017, and December 31, 2016, respectively, related to securities with the non-credit portion of other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income.

The amortized cost and fair value of fixed maturity securities at September 30, 2017,2018, 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
Amortized
Cost
 
Fair
Value
Due in one year or less$745,010
 $750,479
$948,532
 $948,471
Due after one year through five years5,089,768
 5,210,268
4,526,907
 4,523,008
Due after five years through ten years3,248,254
 3,396,461
2,958,685
 2,959,406
Due after ten years3,145,963
 3,197,551
3,611,112
 3,593,100
Mortgage-backed securities1,330,116
 1,335,595
1,594,889
 1,560,669
Total$13,559,111
 $13,890,354
$13,640,125
 $13,584,654
At September 30, 20172018 and December 31, 2016,2017, there were no investments that exceeded 10% of common stockholders' equity, other than investments in United States government and government agency securities.




(8)(7) Investments in Equity Securities Available for Sale
At September 30, 20172018 and December 31, 20162017, investments in equity securities were as follows:
 
(In thousands)Cost Gross Unrealized 
Fair
Value
 
Carrying
Value
Cost Gross Unrealized (1) 
Fair
Value
 
Carrying
Value
Gains Losses Gains Losses 
September 30, 2017         
September 30, 2018         
Common stocks$83,709
 $339,297
 $(3,486) $419,520
 $419,520
$117,880
 $56,869
 $(7,811) $166,938
 $166,938
Preferred stocks125,076
 71,147
 (1,718) 194,505
 194,505
117,101
 44,262
 (3,047) 158,316
 158,316
Total$208,785
 $410,444
 $(5,204) $614,025
 $614,025
$234,981
 $101,131
 $(10,858) $325,254
 $325,254
December 31, 2016         
December 31, 2017         
Common stocks$94,998
 $351,906
 $(1,046) $445,858
 $445,858
$81,855
 $272,309
 $(1,960) $352,204
 $352,204
Preferred stocks125,589
 101,392
 (3,639) 223,342
 223,342
124,150
 102,890
 (2,597) 224,443
 224,443
Total$220,587
 $453,298
 $(4,685) $669,200
 $669,200
$206,005
 $375,199
 $(4,557) $576,647
 $576,647
______________________
(1) Effective January 1, 2018, the Company adopted new accounting guidance that requires all equity investments with readily determinable fair values (subject to certain exceptions) to be measured at fair value with changes in the fair value recognized through net income. Refer to Note 3 for additional information.


(9)(8) Arbitrage Trading Account
At September 30, 20172018 and December 31, 20162017, the fair and carrying values of the arbitrage trading account were $488$678 million and $300$618 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 September 30, 2017,2018, the fair value of long option contracts outstanding was $1 million$89 thousand (notional amount of $33$16.4 million) and the fair value of short option contracts outstanding was $1 million$278 thousand (notional amount of $54$28.8 million). Other than with respect to the use of these trading account securities, the Company does not make use of derivatives.


(10)(9) Net Investment Income
Net investment income consists of the following: 
For the Three Months For the Nine MonthsFor the Three Months
Ended September 30,		 For the Nine Months
Ended September 30,
Ended September 30, Ended September 30, 
(In thousands)2017 2016 2017 20162018 2017 2018 2017
Investment income earned on:              
Fixed maturity securities, including cash and cash equivalents and loans receivable$118,834
 $114,271
 $347,976
 $331,448
$131,836
 $118,834
 $384,748
 $347,976
Investment funds15,200
 25,293
 50,744
 60,385
41,005
 15,200
 94,075
 50,744
Arbitrage trading account4,418
 6,441
 16,235
 12,883
7,632
 4,418
 21,156
 16,235
Real estate5,042
 585
 14,894
 4,552
5,597
 5,042
 15,339
 14,894
Equity securities available for sale604
 1,069
 1,845
 3,217
Equity securities1,004
 604
 2,208
 1,845
Gross investment income144,098
 147,659
 431,694
 412,485
187,074
 144,098
 517,526
 431,694
Investment expense(1,619) (1,991) (5,093) (7,635)(950) (1,619) (3,107) (5,093)
Net investment income$142,479
 $145,668
 $426,601
 $404,850
$186,124
 $142,479
 $514,419
 $426,601



(11)
(10) Investment Funds
The Company evaluates whether it is an investor in a variable interest entity (VIE)("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


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 investment 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 its unfunded commitments, which were $442$324 million as of September 30, 2017.2018.
Investment funds consisted of the following:
Carrying Value as of Income (Loss) from Investment FundsCarrying Value as of 
Income (Loss) from
Investment Funds
September 30, December 31, For the Nine Months Ended September 30,September 30, December 31, For the Nine Months
Ended September 30,
(In thousands)2017 2016 2017 20162018 2017 2018 2017
Real estate$614,508
 $641,783
 $30,661
 $33,028
$632,618
 $606,995
 $50,044
 $30,661
Energy85,817
 91,448
 (12,763) 7,174
79,559
 82,882
 408
 (12,763)
Hedge equity—
 73,913
 (1,164) 791
Other funds419,582
 391,002
 34,010
 19,392
539,571
 465,800
 43,623
 32,846
Total$1,119,907
 $1,198,146
 $50,744

$60,385
$1,251,748
 $1,155,677
 $94,075

$50,744

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.

(12)(11) Real Estate

Investment in real estate represents directly owned property held for investment, as follows:
Carrying ValueCarrying Value
September 30, December 31,September 30, December 31,
(In thousands)2017 20162018 2017
Properties in operation$451,669
 $457,237
$757,573
 $451,691
Properties under development939,605
 727,744
1,159,677
 1,017,910
Total$1,391,274
 $1,184,981
$1,917,250
 $1,469,601

In 2017,2018, properties in operation included a long-term ground lease in Washington, D.C., a hotel in Memphis, Tennessee, antwo office complexcomplexes in New York City and office buildings in West Palm Beach and Palm Beach, Florida. Properties in operation are net of accumulated depreciation and amortization of $20,378,000$40,623,000 and $14,996,000$25,646,000 as of September 30, 20172018 and December 31, 2016,2017, respectively. Related depreciation expense was $5,382,000$15,175,000 and $4,117,000$5,382,000 for the nine months ended September 30, 20172018 and 2016,2017, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $4,966,133 in 2017, $28,251,980$12,632,005 in 2018, $30,174,146$52,014,542 in 2019, $29,415,103$50,145,388 in 2020, $30,054,813$49,267,711 in 2021, $29,966,679$51,048,893 in 2022, $42,435,018 in 2023 and $467,192,215$501,089,126 thereafter.

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



(13)(12) Loans Receivable
Loans receivable are as follows:
(In thousands)September 30, 2017 December 31, 2016September 30, 2018 December 31, 2017
Amortized cost (net of valuation allowance):      
Real estate loans$59,487
 $92,415
$62,775
 $66,057
Commercial loans14,742
 14,383
33,815
 13,627
Total$74,229
 $106,798
$96,590
 $79,684
      
Fair value:      
Real estate loans$60,372
 $92,415
$63,561
 $66,917
Commercial loans16,243
 15,884
35,317
 15,130
Total$76,615
 $108,299
$98,878
 $82,047
      
Valuation allowance:      
Specific$1,200
 $1,200
$1,200
 $1,200
General2,183
 2,197
2,183
 2,183
Total$3,383
 $3,397
$3,383
 $3,383
      
For the Three Months Ended September 30,For the Three Months Ended
September 30,
2017 20162018 2017
Increase in valuation allowance$—
 $467
Change in valuation allowance$—
 $—
      
For the Nine Months Ended September 30,For the Nine Months
Ended September 30,
2017 20162018 2017
(Decrease) increase in valuation allowance$(14) $1,128
Decrease in valuation allowance$—
 $(14)
Loans receivable in non-accrual status were $4.5$1.5 million and $5.4$4.3 million as of September 30, 20172018 and December 31, 2016,2017, 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 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 primarily earn interest on a fixed basis and have varying maturities generally 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 September 30, 2017,2018, and accordingly, the Company determined that a specific valuation allowance was not required.



(14)(13) Net Realized and Unrealized Investment Gains (Losses) on Investments

Realized Net realized and unrealized investment gains (losses) on investments are as follows:
 For the Three Months Ended September 30, For the Nine Months Ended September 30,
(In thousands)2017 2016 2017 2016
Realized investment gains (losses):     
  
Fixed maturity securities:     
  
Gains$8,763
 $33,798
 $21,795
 $66,972
Losses(197) (1,150) (4,162) (5,570)
Equity securities available for sale34,720
 8,441
 109,566
 13,037
Investment funds (1)124,228
 (3,788) 125,383
 (9,041)
Real estate1,956
 687
 4,892
 5,247
Other (2)
 
14,489
 137,750
 19,286
 136,863
Net realized gains on investments sales183,959
 175,738
 276,760
 207,508
Other-than-temporary impairments (3)—
 —
 —
 (18,114)
   Net investment gains183,959
 175,738
 276,760
 189,394
Income tax expense(64,386) (61,508) (96,866) (66,288)
    After-tax net realized investment gains$119,573
 $114,230
 $179,894
 $123,106
 For the Three Months
Ended September 30,		 For the Nine Months
Ended September 30,
(In thousands)2018 2017 2018 2017
Net realized and unrealized gains (losses) on investments in earnings     
  
Fixed maturity securities:     
  
Gains$2,152
 $8,763
 $23,412
 $21,795
Losses(2,747) (197) (10,612) (4,162)
Equity securities (1):       
Net realized gains on investment sales149,562
 34,720
 391,305
 109,566
Change in unrealized gains(131,513) —
 (280,370) —
Investment funds (2)(30) 124,228
 (264) 125,383
Real estate4,518
 1,956
 12,114
 4,892
Loans receivable449
 —
 2,508
 —
Other(57) 14,489
 2,336
 19,286
Net realized and unrealized gains on investments in earnings before OTTI22,334
 183,959
 140,429
 276,760
Other-than-temporary impairments—
 —
 —
 —
Net realized and unrealized gains on investments in earnings22,334
 183,959
 140,429
 276,760
Income tax expense(4,690) (64,386) (29,490) (96,866)
After-tax net realized and unrealized gains on investments in earnings$17,644
 $119,573
 $110,939
 $179,894
Change in unrealized investment gains of available for sale securities:     
  
Change in unrealized investment (losses) gains of available for sale securities:     
  
Fixed maturity securities$(10,627) $(45,388) $84,214
 $169,933
$(100,490) $(10,627) $(297,065) $84,214
Previously impaired fixed maturity securities61
 (1,406) 905
 413
(7) 61
 4
 905
Equity securities available for sale(3)(2,126) (28,517) (44,812) 12,433
—
 (2,126) —
 (44,812)
Investment funds4,129
 3,143
 9,841
 16,028
3,669
 4,129
 (1,103) 9,841
Total change in unrealized investment gains(8,563) (72,168) 50,148
 198,807
Total change in unrealized investment (losses) gains(96,828) (8,563) (298,164) 50,148
Income tax benefit (expense)423
 24,493
 (23,550) (64,594)2,086
 423
 45,280
 (23,550)
Noncontrolling interests5
 57
 19
 66
60
 5
 86
 19
After-tax change in unrealized investment gains of available for sale securities$(8,135) $(47,618) $26,617
 $134,279
After-tax change in unrealized investment (losses) gains of available for sale securities$(94,682) $(8,135) $(252,798) $26,617
______________________
(1) The net realized gains or losses on investment sales represent the total gains or losses from the purchase dates of the equity securities. The change in unrealized gains consists of two components: (i) the reversal of the gain or loss recognized in previous periods on equity securities sold and (ii) the change in unrealized gain or loss resulting from mark-to-market adjustments on equity securities still held.
(2) Investment funds includes a gain of $124.3$124 million from the sale of an investment in an office building located in Washington, D.C. for the three and nine months ended September 30, 2017.

(2) Other includes(3) Effective January 1, 2018, the Company adopted new accounting guidance that requires all equity investments with readily determinable fair values (subject to certain exceptions) to be measured at fair value with changes in the fair value recognized in net income. The Company recorded an adjustment of $291 million to opening AOCI net of tax as a gainresult of $134.9 million from the sale of Aero Precision Industries and certain related aviation services businessthis guidance. Refer to Note 3 for the three and nine months ended September 30, 2016.

(3) There were no other than temporary impairments (OTTI) for the three and nine months ended September 30, 2017, or for the three months ended September 30, 2016. OTTI for the nine months ended September 30, 2016 of $18.1 million were related to common stock.





further information.



(15)(14) Fixed Maturity Securities in an Unrealized Loss Position
The following tables summarize all fixed maturity securities in an unrealized loss position at September 30, 20172018 and December 31, 20162017 by the length of time those securities have been continuously in an unrealized loss position:
Less Than 12 Months 12 Months or Greater TotalLess 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
Fair
Value
 
Gross
Unrealized Losses
 
Fair
Value
 
Gross
Unrealized Losses
 
Fair
Value
 
Gross
Unrealized Losses
September 30, 2017           
September 30, 2018           
U.S. government and government agency$118,066
 $1,048
 $48,880
 $1,076
 $166,946
 $2,124
$241,467
 $2,712
 $118,054
 $5,183
 $359,521
 $7,895
State and municipal650,353
 5,797
 119,087
 1,440
 769,440
 7,237
1,553,827
 25,957
 423,785
 15,323
 1,977,612
 41,280
Mortgage-backed securities527,034
 5,000
 221,923
 5,310
 748,957
 10,310
834,782
 15,777
 541,015
 24,684
 1,375,797
 40,461
Asset-backed securities1,116,878
 8,033
 130,734
 2,372
 1,247,612
 10,405
1,740,632
 14,562
 300,633
 2,816
 2,041,265
 17,378
Corporate651,373
 5,395
 57,557
 3,118
 708,930
 8,513
2,045,819
 50,487
 369,248
 19,383
 2,415,067
 69,870
Foreign government220,860
 2,072
 1,599
 16
 222,459
 2,088
299,444
 21,830
 111,195
 2,019
 410,639
 23,849
Fixed maturity securities3,284,564
 27,345
 579,780
 13,332
 3,864,344
 40,677
$6,715,971
 $131,325
 $1,863,930
 $69,408
 $8,579,901
 $200,733
Common stocks4,678
 3,095
 9,387
 391
 14,065
 3,486
Preferred stocks—
 —
 23,957
 1,718
 23,957
 1,718
Equity securities available for sale4,678
 3,095
 33,344
 2,109
 38,022
 5,204
Total$3,289,242
 $30,440
 $613,124
 $15,441
 $3,902,366
 $45,881
                      
December 31, 2016           
December 31, 2017           
U.S. government and government agency$112,709
 $1,252
 $35,450
 $1,341
 $148,159
 $2,593
$92,167
 $1,491
 $72,055
 $2,341
 $164,222
 $3,832
State and municipal1,562,614
 35,553
 133,034
 4,885
 1,695,648
 40,438
735,972
 5,944
 345,755
 6,630
 1,081,727
 12,574
Mortgage-backed securities625,903
 11,103
 109,066
 4,828
 734,969
 15,931
480,435
 5,110
 373,956
 11,065
 854,391
 16,175
Asset-backed securities1,010,836
 5,340
 201,693
 6,601
 1,212,529
 11,941
1,127,309
 8,298
 167,412
 2,314
 1,294,721
 10,612
Corporate1,035,245
 13,448
 65,147
 7,470
 1,100,392
 20,918
1,103,747
 8,224
 170,858
 5,946
 1,274,605
 14,170
Foreign government213,246
 1,985
 24,820
 777
 238,066
 2,762
244,139
 2,615
 25,824
 251
 269,963
 2,866
Fixed maturity securities4,560,553
 68,681
 569,210
 25,902
 5,129,763
 94,583
$3,783,769
 $31,682
 $1,155,860
 $28,547
 $4,939,629
 $60,229
Common stocks336
 22
 8,755
 1,024
 9,091
 1,046
Preferred stocks—
 —
 22,034
 3,639
 22,034
 3,639
Equity securities available for sale336
 22
 30,789
 4,663
 31,125
 4,685
Total$4,560,889
 $68,703
 $599,999
 $30,565
 $5,160,888
 $99,268
Fixed Maturity Securities – A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at September 30, 20172018 is presented in the table below:
($ in thousands)
Number of
Securities
 
Aggregate
Fair Value
 
Gross Unrealized
Loss
Foreign government9
 $55,292
 $462
Mortgage-backed securities6
 5,975
 150
Corporate3
 2,852
 211
Asset-backed securities3
 1,331
 115
Total21
 $65,450
 $938






($ in thousands)
Number of
Securities
 
Aggregate
Fair Value
 
Gross
Unrealized Loss
Foreign government20
 $172,462
 $20,688
Corporate14
 80,945
 6,547
Asset-backed securities7
 10,930
 156
Mortgage-backed securities4
 3,270
 30
Total45
 $267,607
 $27,421
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 is 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.
 
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 September 30, 2017, there was one preferred stock in an unrealized loss position, with a fair value of $24.0 million and a gross unrealized loss of $1.7 million. Based upon management’s view of the underlying value of the security, the Company does not consider the equity security to be OTTI. For the nine months ended September 30, 2017 and 2016, there was no OTTI for preferred stocks.
Common Stocks – At September 30, 2017, there were threecommon stocks in an unrealized loss position, with an aggregate fair value of $14.1 million and a gross unrealized loss of $3.5 million. Based upon management's view of the underlying value of these securities, the Company does not consider these equity securities to be OTTI. There was no OTTI of common stocks for the nine months ended September 30, 2017. For the nine months ended September 30, 2016, OTTI for common stocks was $18.1 million.

(16)(15) Fair Value Measurements

The Company’s fixed maturity andsecurities, equity securities classified as available for sale and itsarbitrage 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.



The following tables present the assets and liabilities measured at fair value on a recurring basis as of September 30, 20172018 and December 31, 20162017 by level:
(In thousands)Total Level 1 Level 2 Level 3Total Level 1 Level 2 Level 3
September 30, 2017       
September 30, 2018       
Assets:              
Fixed maturity securities available for sale:              
U.S. government and government agency$411,605
 $—
 $411,605
 $—
$487,042
 $—
 $487,042
 $—
State and municipal4,413,169
 —
 4,413,169
 —
4,017,894
 —
 4,017,894
 —
Mortgage-backed securities1,320,119
 —
 1,320,119
 —
1,548,222
 —
 1,548,222
 —
Asset-backed securities2,388,618
 —
 2,388,444
 174
2,549,874
 —
 2,549,773
 101
Corporate4,320,374
 —
 4,320,374
 —
4,065,169
 —
 4,065,169
 —
Foreign government940,409
 —
 940,409
 —
825,412
 —
 825,412
 —
Total fixed maturity securities available for sale13,794,294
 —
 13,794,120
 174
13,493,613
 —
 13,493,512
 101
Equity securities available for sale:       
Equity securities:       
Common stocks419,520
 410,133
 —
 9,387
166,938
 157,855
 —
 9,083
Preferred stocks194,505
 —
 190,649
 3,856
158,316
 —
 154,521
 3,795
Total equity securities available for sale614,025
 410,133
 190,649
 13,243
Total equity securities325,254
 157,855
 154,521
 12,878
Arbitrage trading account488,238
 275,818
 212,420
 —
678,321
 475,684
 202,637
 —
Total$14,896,557
 $685,951
 $14,197,189
 $13,417
$14,497,188
 $633,539
 $13,850,670
 $12,979
Liabilities:              
Trading account securities sold but not yet purchased$44,937
 $44,851
 $86
 $—
$112,355
 $112,355
 $—
 $—
              
December 31, 2016       
       
December 31, 2017       
Assets:              
Fixed maturity securities available for sale:              
U.S. government and government agency$513,802
 $—
 $513,802
 $—
$377,740
 $—
 $377,740
 $—
State and municipal4,519,503
 —
 4,519,503
 —
4,445,094
 —
 4,445,094
 —
Mortgage-backed securities1,189,645
 —
 1,189,645
 —
1,299,931
 —
 1,299,931
 —
Asset-backed securities1,907,860
 —
 1,907,677
 183
2,111,544
 —
 2,111,372
 172
Corporate4,068,527
 —
 4,068,527
 —
4,389,112
 —
 4,389,112
 —
Foreign government902,805
 —
 902,805
 —
848,497
 —
 848,497
 —
Total fixed maturity securities available for sale13,102,142
 —
 13,101,959
 183
13,471,918
 —
 13,471,746
 172
Equity securities available for sale:       
Equity securities:       
Common stocks445,858
 429,647
 7,457
 8,754
352,204
 342,834
 —
 9,370
Preferred stocks223,342
 —
 219,680
 3,662
224,443
 —
 213,600
 10,843
Total equity securities available for sale669,200
 429,647
 227,137
 12,416
Total equity securities576,647
 342,834
 213,600
 20,213
Arbitrage trading account299,999
 224,623
 75,376
 —
617,649
 471,420
 146,229
 —
Total$14,071,341
 $654,270
 $13,404,472
 $12,599
$14,666,214
 $814,254
 $13,831,575
 $20,385
Liabilities:              
Trading account securities sold but not yet purchased$51,179
 $51,089
 $90
 $—
$64,358
 $64,358
 $—
 $—
There were no significant transfers between Levels 1 and 2 during the nine months ended September 30, 20172018 or during the year ended December 31, 20162017.





The following tables summarize changes in Level 3 assets and liabilities for the nine months ended September 30, 20172018 and for the year ended December 31, 2016:
2017:
  Gains (Losses) Included in:
(In thousands)
Beginning
Balance
 Earnings (Losses) 
Other
Comprehensive
Income (Loss)
 Impairments Purchases (Sales) Paydowns / Maturities Transfers 
Ending
Balance
In / (Out)
Nine months ended September 30, 2017:                 
Assets:                 
Fixed maturities securities available for sale:                 
Asset-backed securities$183
 $2
 $32
 $—
 $—
 $(43) $—
 $—
 $174
Corporate—
 —
 —
 —
 —
 —
 —
 —
 —
Total183
 2
 32
 —
 —
 (43) —
 —
 174
Equity securities available for sale:                 
Common stocks8,754
 —
 633
 —
 —
 —
 —
 —
 9,387
Preferred stocks3,662
 19
 —
 —
 175
 —
 —
 —
 3,856
Total12,416
 19
 633
 —
 175
 —
 —
 —
 13,243
Arbitrage trading account—
 8
 —
 —
 —
 (8) —
 —
 —
Total$12,599
 $29
 $665
 $—
 $175
 $(51) $—
 $—
 $13,417
                  
                  
Year ended December 31, 2016:                 
Assets:                 
Fixed maturities securities available for sale:                 
Asset-backed securities$199
 $3
 $16
 $—
 $—
 $—
 $(35) $—
 $183
Corporate154
 177
 —
 —
 ���
 (331) —
 —
 —
Total353
 180
 16
 —
 —
 (331) (35) —
 183
Equity securities available for sale:                 
Common stocks7,829
 —
 160
 —
 765
 —
 —
 —
 8,754
Preferred stocks3,624
 38
 —
 —
 —
 —
 —
 —
 3,662
Total11,453
 38
 160
 —
 765
 —
 —
 —
 12,416
Arbitrage trading account176
 (176) —
 —
 —
 —
 —
 —
 —
Total$11,982
 $42
 $176
 $—
 $765
 $(331) $(35) $—
 $12,599
   
                        Gains (Losses) Included in:
 (In thousands)
Beginning
Balance
 Earnings (Losses) 
Other
Comprehensive
Income (Loss)
 Impairments Purchases (Sales) Paydowns / Maturities Transfers In / (Out) 
Ending
Balance
 
 Nine Months Ended September 30, 2018                 
 Assets:                 
 Fixed maturities securities available for sale:                 
 Asset-backed securities$172
 $(2) $46
 $—
 $10
 $(125) $—
 $—
 $101
 Total172
 (2) 46
 —
 10
 (125) —
 —
 101
 Equity securities:                 
 Common stocks9,370
 (288) —
 —
 —
 —
 —
 1
 9,083
 Preferred stocks10,843
 (50) —
 —
 —
 (6,998) —
 —
 3,795
 Total20,213
 (338) —
 —
 —
 (6,998) —
 1
 12,878
 Arbitrage trading account—
 (29) —
 —
 3,882
 (11) —
 (3,842) —
 Total$20,385
 $(369) $46
 $—
 $3,892
 $(7,134) $—
 $(3,841) $12,979
                   
 Year Ended
December 31, 2017		                 
 Assets:                 
 Fixed maturities securities available for sale:                 
 Asset-backed securities$183
 $3
 $34
 $—
 $—
 $(48) $—
 $—
 $172
 Total183
 3
 34
 —
 —
 (48) —
 —
 172
 Equity securities:                 
 Common stocks8,754
 —
 616
 —
 —
 —
 —
 —
 9,370
 Preferred stocks3,662
 8
 —
 —
 7,173
 —
 —
 —
 10,843
 Total12,416
 8
 616
 —
 7,173
 —
 —
 —
 20,213
 Arbitrage trading account—
 8
 —
 —
 —
 (8) —
 —
 —
 Total$12,599
 $19
 $650
 $—
 $7,173
 $(56) $—
 $—
 $20,385
During the nine months ended September 30, 2017 and for2018, one common stock in the arbitrage trading account was transferred out of Level 3 as the security became publicly traded on a stock exchange. For the year ended December 31, 2016,2017, there were no transfers out of Level 3.






(17)(16) Reserves for Loss and Loss Expenses

The Company's reserves for losses and loss expenses are comprised of case reserves and incurred but not reported liabilities (IBNR)("IBNR"). When a claim is reported, a case reserve is established for the estimated ultimate payment based upon known information about the claim. As more information about the claim becomes available over time, case reserves are adjusted up or down as appropriate. Reserves are also established on an aggregate basis to provide for IBNR liabilities and expected loss reserve development on reported claims.

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. 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” 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.

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 priced and 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.

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.










The table below provides a reconciliation of the beginning and ending reserve balances:
 September 30,
(In thousands)2017 2016
Net reserves at beginning of year$9,590,265
 $9,244,872
Net provision for losses and loss expenses:   
Claims occurring during the current year (1)2,998,687
 2,838,777
Decrease in estimates for claims occurring in prior years (2) (3)(7,648) (23,518)
Loss reserve discount accretion34,436
 37,080
Total3,025,475
 2,852,339
Net payments for claims: 
  
Current year628,078
 612,615
Prior year1,996,977
 1,931,454
Total2,625,055
 2,544,069
Foreign currency translation57,789
 (6,266)
Net reserves at end of period10,048,474
 9,546,876
Ceded reserve at end of period1,605,872
 1,550,954
Gross reserves at end of period$11,654,346
 $11,097,830
 September 30,
(In thousands)2018 2017
Net reserves at beginning of year$10,056,914
 $9,590,265
Net provision for losses and loss expenses:   
Claims occurring during the current year (1)2,917,231
 2,998,687
Increase (decrease) in estimates for claims occurring in prior years (2) (3)5,262
 (7,648)
Loss reserve discount accretion32,082
 34,436
Total2,954,575
 3,025,475
Net payments for claims: 
  
Current year597,859
 628,078
Prior year2,106,394
 1,996,977
Total2,704,253
 2,625,055
Foreign currency translation(101,071) 57,789
Net reserves at end of period10,206,165
 10,048,474
Ceded reserves at end of period1,665,997
 1,605,872
Gross reserves at end of period$11,872,162
 $11,654,346

(1) Claims occurring during the current year are net of loss reserve discounts of $19 million and $17 million for the nine months ended September 30, 2018 and 2017, respectively.
(1)Claims occurring during the current year are net of loss reserve discounts of $16,787,000 and $12,085,000
(2) The increase (decrease) in estimates for claims occurring in prior years is net of loss reserve discount. On an undiscounted basis, the estimates for claims occurring in prior years decreased by $2 million and $31 million for the nine months ended September 30, 2018 and 2017, respectively.
(3) For certain retrospectively rated insurance policies and reinsurance agreements, reserve development is offset by additional or return premiums. Favorable development, net of additional and return premiums, was $27 million and $31 million for the nine months ended September 30, 2018 and 2017, respectively.
During the nine months ended September 30, 2018, favorable prior year development (net of additional and return premiums) of $27 million included $35 million of favorable development for the Insurance segment, partially offset by $8 million of adverse development for the Reinsurance segment. The favorable development for the Insurance segment was primarily attributable to workers' compensation business. The favorable workers' compensation development was spread across many accident years, including prior to 2008, but was most significant in accident years 2015 through 2017. The favorable workers' compensation development reflects a continuation of the benign loss cost trends experienced during recent years, particularly the favorable claim frequency trends (i.e., number of reported claims per unit of exposure). It also reflects claims management initiatives implemented during the past few years. The adverse development for the Reinsurance segment was mainly driven by US casualty facultative business from accident years 2008 and prior related to construction projects.
During the nine months ended September 30, 2017 and 2016, respectively.
(2)The decrease in estimates for claims occurring in prior years is net of loss reserve discount. On an undiscounted basis, the estimates for claims occurring in prior years decreased by $30,609,000 and $45,813,000 for the nine months ended September 30, 2017 and 2016, respectively.
(3)For certain retrospectively rated insurance policies and reinsurance agreements, reserve development is offset by additional or return premiums. Favorable development, net of additional and return premiums, was $31 million and $42 million for the nine months ended September 30, 2017 and 2016, respectively.

In 2017, favorable prior year development (net of additional and return premiums) of $31 million included $62 million of favorable development for the Insurance segment, partially offset by $31 million of adverse development for the Reinsurance segment. The favorable development for the Insurance segment was primarily attributable to workers' compensation business (including excess workers' compensation). The favorable workers' compensation development was spread across many accident years, including prior to 2008, but was most significant in accident years 2014 and 2015. The favorable workers' compensation development reflects a continuation of the benign loss cost trends experienced during 2016, particularly the favorable claim frequency trends (i.e., number of reported claims per unit of exposure). The adverse development for the Reinsurance segment was due to reserve strengthening associated with claims impacted by the change in the Ogden discount rate in the U.K., as well as adverse development in the U.S. facultative casualty excess of loss business. The Ogden rate is the discount rate used to calculate lump-sum bodily injury payouts in the U.K., and was reduced by the U.K. Ministry of Justice from +2.5% to -0.75%; the. The adverse development mostly related to U.K. motor bodily injury claims which we reinsured on an excess of loss basis in accident years 2012 through 2016. The adverse development on U.S. facultative casualty business related to construction-related risks in accident years 2008 and prior.

In 2016, favorable prior year development (net of additional and return premiums) of $42 million included $38 million for the Insurance segment and $4 million for the Reinsurance segment. The favorable development for the Insurance segment was primarily attributable to workers' compensation business, partially offset by adverse development for commercial auto liability and medical and other professional liability. The favorable development for workers' compensation stems from accident years 2003 through 2015, but is concentrated in accident years 2014 and 2015; it reflects claims frequency trends (i.e., number of reported claims per unit of exposure) that continue to be better than we expected. The unfavorable development for commercial auto liability was driven by higher large loss activity than expected in accident years 2014 and 2015, and the


unfavorable development for medical professional liability was primarily in accident years prior to 2013 and stemmed from a class of medical professional liability business that we discontinued writing in 2013.

(18)(17) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:
September 30, 2017 December 31, 2016September 30, 2018 December 31, 2017
(In thousands)Carrying Value Fair Value Carrying Value Fair ValueCarrying Value Fair Value Carrying Value Fair Value
Assets:              
Fixed maturity securities$13,873,690
 $13,890,354
 $13,190,668
 $13,204,814
$13,572,402
 $13,584,654
 $13,551,250
 $13,566,976
Equity securities available for sale614,025
 614,025
 669,200
 669,200
Equity securities325,254
 325,254
 576,647
 576,647
Arbitrage trading account488,238
 488,238
 299,999
 299,999
678,321
 678,321
 617,649
 617,649
Loans receivable74,229
 76,615
 106,798
 108,299
96,590
 98,878
 79,684
 82,047
Cash and cash equivalents773,997
 773,997
 795,285
 795,285
819,366
 819,366
 950,471
 950,471
Trading account receivables from brokers and clearing organizations297,208
 297,208
 484,593
 484,593
191,394
 191,394
 189,280
 189,280
Liabilities:              
Due to broker58,973
 58,973
 19,416
 19,416
21,478
 21,478
 15,920
 15,920
Trading account securities sold but not yet purchased44,937
 44,937
 51,179
 51,179
112,355
 112,355
 64,358
 64,358
Subordinated debentures728,071
 728,291
 727,630
 687,504
907,304
 913,344
 728,218
 769,060
Senior notes and other debt1,759,929
 1,946,700
 1,760,595
 1,914,727
1,790,498
 1,876,579
 1,769,052
 1,945,313
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.15. 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.

(19)(18) Reinsurance

The following is a summary of reinsurance financial information:
For the Three Months For the Nine MonthsFor the Three Months
Ended September 30,		 For the Nine Months
Ended September 30,
Ended September 30, Ended September 30, 
(In thousands)2017 2016 2017 20162018 2017 2018 2017
Written premiums:              
Direct$1,679,389
 $1,643,870
 $5,127,465
 $5,061,646
$1,746,197
 $1,679,389
 $5,318,698
 $5,127,465
Assumed194,769
 224,979
 570,052
 702,265
181,587
 194,769
 536,582
 570,052
Ceded(302,975) (261,484) (915,245) (850,255)(303,570) (302,975) (941,624) (915,245)
Total net premiums written$1,571,183
 $1,607,365
 $4,782,272
 $4,913,656
$1,624,214
 $1,571,183
 $4,913,656
 $4,782,272
              
Earned premiums:              
Direct$1,692,453
 $1,647,033
 $4,972,755
 $4,824,768
$1,735,576
 $1,692,453
 $5,115,403
 $4,972,755
Assumed202,972
 216,758
 605,281
 635,443
177,996
 202,972
 547,372
 605,281
Ceded(313,925) (277,847) (857,792) (787,139)(310,087) (313,925) (910,828) (857,792)
Total net premiums earned$1,581,500
 $1,585,944
 $4,720,244
 $4,673,072
$1,603,485
 $1,581,500
 $4,751,947
 $4,720,244
              
Ceded losses and loss expenses incurred$247,104
 $213,065
 $424,905
 $507,258
$186,538
 $247,104
 $586,607
 $424,905
Ceded commissions earned$63,222
 $47,315
 $177,524
 $143,809
$68,938
 $63,222
 $201,216
 $177,524
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 both September 30, 20172018 and December 31, 20162017.


(20)
(19) Restricted Stock Units
Pursuant to its stock incentive plan, the Company may issue restricted stock units (RSUs)("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 $30$26 million and $2530 million for the nine months ended September 30, 20172018 and 20162017, respectively. A summary of RSUs issued in the nine months ended September 30, 20172018 and 20162017 follows:
($ in thousands)Units Fair ValueUnits Fair Value
2018757,294
 $57,796
2017855,051
 $58,712
855,051
 $58,712
2016990,487
 $57,959

(21)(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.

(22)(21) Business Segments
The Company’s reportable segments include the following two business segments, plus a corporate segment:
Insurance - primarilypredominantly commercial insurance business, including excess and surplus lines, and admitted lines inand specialty personal lines throughout the United States, as well as insurance business in the United Kingdom, Continental Europe, South America, Canada, Mexico, Scandinavia, Asia and Australia; andAustralia.
Reinsurance - reinsurance business on a facultative and treaty basis, primarily in the United States, the United Kingdom, Continental Europe, Australia, the Asia-Pacific Region and South Africa.
Commencing with the first quarter of 2017, the Company reclassified two businesses from the Insurance Segment to the Reinsurance segment. Reclassifications have been made to the Company's 2016 financial information to conform with this 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.


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 (1) 
Pre-Tax
Income
(Loss)
 
Net Income
(Loss) to Common Stockholders
Three months ended September 30, 2017          
Insurance$1,433,729
 $105,924
 $—
 $1,539,653
 $171,478
 $123,240
Reinsurance147,771
 21,528
 —
 169,299
 (57,643) (35,074)
Corporate, other and eliminations (2)—
 15,027
 123,404
 138,431
 (71,681) (45,685)
Net investment gains—
 —
 183,959
 183,959
 183,959
 119,573
  Total$1,581,500
 $142,479
 $307,363
 $2,031,342
 $226,113
 $162,054
Three months ended September 30, 2016          
Insurance$1,423,635
 $111,300
 $—
 $1,534,935
 $210,498
 $140,730
Reinsurance162,309
 27,567
 —
 189,876
 27,321
 18,725
Corporate, other and eliminations (2)—
 6,801
 112,377
 119,178
 (81,942) (53,035)
Net investment gains—
 —
 175,738
 175,738
 175,738
 114,230
  Total$1,585,944
 $145,668
 $288,115
 $2,019,727
 $331,615
 $220,650
Nine months ended September 30, 2017:          
Insurance$4,262,485
 320,552
 $—
 $4,583,037
 $557,605
 $381,736
Reinsurance457,759
 67,798
 —
 525,557
 (38,279) (20,801)
Corporate, other and eliminations (2)—
 38,251
 326,203
 364,454
 (224,716) (146,324)
Net investment gains—
 —
 276,760
 276,760
 276,760
 179,894
  Total$4,720,244
 $426,601
 $602,963
 $5,749,808
 $571,370
 $394,505
Nine months ended September 30, 2016:          
Insurance$4,180,985
 $304,904
 $—
 $4,485,889
 $586,651
 $394,746
Reinsurance492,087
 77,119
 —
 569,206
 79,215
 54,885
Corporate, other and eliminations (2)—
 22,827
 415,224
 438,051
 (190,655) (123,610)
Net investment gains—
 —
 189,394
 189,394
 189,394
 123,106
  Total$4,673,072
 $404,850
 $604,618
 $5,682,540
 $664,605
 $449,127



  
Revenues    
(In thousands)
Earned
Premiums
 
Investment
Income 
 Other Total (1) 
Pre-Tax
Income
(Loss)
 
Net Income
(Loss) to Common Stockholders
Three months ended September 30, 2018          
Insurance$1,488,658
 $146,319
 $19,447
 $1,654,424
 $226,856
 $178,571
Reinsurance114,827
 23,826
 —
 138,653
 14,792
 11,567
Corporate, other and eliminations (2)—
 15,979
 106,512
 122,491
 (54,759) (45,862)
Net realized and unrealized gains on investments—
 —
 22,334
 22,334
 22,334
 17,644
Total$1,603,485
 $186,124
 $148,293
 $1,937,902
 $209,223
 $161,920
Three months ended September 30, 2017          
Insurance$1,433,729
 $105,924
 $—
 $1,539,653
 $171,478
 $123,240
Reinsurance147,771
 21,528
 —
 169,299
 (57,643) (35,074)
Corporate, other and eliminations (2)—
 15,027
 123,404
 138,431
 (71,681) (45,685)
Net realized and unrealized gains on investments—
 —
 183,959
 183,959
 183,959
 119,573
Total$1,581,500
 $142,479
 $307,363
 $2,031,342
 $226,113
 $162,054
Nine months ended September 30, 2018          
Insurance$4,377,003
 $396,514
 $57,123
 $4,830,640
 $653,936
 $516,397
Reinsurance374,944
 70,599
 —
 445,543
 50,687
 40,005
Corporate, other and eliminations (2)—
 47,306
 276,148
 323,454
 (195,597) (158,949)
Net realized and unrealized gains on investments—
 —
 140,429
 140,429
 140,429
 110,939
Total$4,751,947
 $514,419
 $473,700
 $5,740,066
 $649,455
 $508,392
Nine months ended September 30, 2017          
Insurance$4,262,485
 $320,552
 $—
 $4,583,037
 $557,605
 $381,736
Reinsurance457,759
 67,798
 —
 525,557
 (38,279) (20,801)
Corporate, other and eliminations (2)—
 38,251
 326,203
 364,454
 (224,716) (146,324)
Net realized and unrealized gains on investments—
 —
 276,760
 276,760
 276,760
 179,894
Total$4,720,244
 $426,601
 $602,963
 $5,749,808
 $571,370
 $394,505
_________________
(1)Revenues for Insurance from foreign countries for the three months ended September 30, 2018 and 2017 were $176 million and 2016 were $166 million, and $187 million, respectively, and for the nine months ended September 30, 2018 and 2017 and 2016 were $513$535 million and $546$513 million, respectively. Revenues for Reinsurance from foreign countries for the three months ended September 30, 2018 and 2017 were $51 million and 2016 were $49 million, and $48 million, respectively, and for the nine months ended September 30, 2018 and 2017 were $163 million and 2016 were $150 million, and $153 million, respectively.
(2) Corporate, other and eliminations represent corporate revenues and expenses that are not allocated to business segments.
(2)Corporate, other and eliminations represent corporate revenues and expenses that are not allocated to business segments.
Identifiable Assets
(In thousands)September 30, 2017 December 31, 2016September 30,
2018		 December 31,
2017
Insurance$19,136,776
 $19,137,758
$19,511,126
 $19,263,193
Reinsurance3,243,610
 2,524,338
2,940,606
 3,169,731
Corporate, other and eliminations1,955,690
 1,687,980
2,403,917
 1,866,993
Consolidated$24,336,076
 $23,350,076
$24,855,649
 $24,299,917



Net premiums earned by major line of business are as follows:
For the Three Months For the Nine MonthsFor the Three Months
Ended September 30,		 For the Nine Months
Ended September 30,
Ended September 30, Ended September 30, 
(In thousands)2017 2016 2017 20162018 2017 2018 2017
Insurance:              
Other liability$466,616
 $455,841
 $1,378,505
 $1,302,841
$482,255
 $466,616
 $1,421,144
 $1,378,505
Workers’ compensation378,529
 354,185
 1,106,616
 1,042,503
378,922
 378,529
 1,122,217
 1,106,616
Short-tail lines (1)287,860
 312,865
 887,791
 962,435
299,856
 276,737
 883,359
 856,150
Commercial automobile163,277
 164,540
 482,929
 481,249
185,069
 174,400
 536,079
 514,570
Professional liability137,447
 136,204
 406,644
 391,957
142,556
 137,447
 414,204
 406,644
Total Insurance1,433,729
 1,423,635
 4,262,485
 4,180,985
1,488,658
 1,433,729
 4,377,003
 4,262,485
              
Reinsurance:              
Casualty94,478
 97,153
 282,430
 301,571
87,039
 94,478
 264,450
 282,430
Property53,293
 65,156
 175,329
 190,516
27,788
 53,293
 110,494
 175,329
Total Reinsurance147,771
 162,309
 457,759
 492,087
114,827
 147,771
 374,944
 457,759
              
Total$1,581,500
 $1,585,944
 $4,720,244
 $4,673,072
$1,603,485
 $1,581,500
 $4,751,947
 $4,720,244
______________
(1) Short-tail lines include commercial multi-peril (non-liability), inland marine, accident and health, fidelity and surety, boiler and machinery and other lines.





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 20172018 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 (including those associated with the United Kingdom's expected withdrawal from the European Union, or "Brexit") 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 20172018 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.


Item 2.
Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 worldwide in two business segments:segments of the property and casualty business: 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 healthcare, cyber security, energy and agriculture, and on growing international markets, including the Asia-Pacific region, South America and Mexico.
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.
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 arehave been at historically low levels.levels for an extended period, although recently interest rates have increased.
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.
DuringThrough the thirdsecond quarter of 2017, catastrophe losses were $119 million, including $107 million related to Hurricanes Harvey, Irma,2018, the Company used the Argentine peso (“ARS”) as its functional currency for its business in Argentina and Maria and two earthquakes in Mexico.
Commencing withtranslated the firstfinancial statements of its Argentine operations into U.S. dollars ("USD"). Exchange rate movements through the second quarter of 2017,2018 between the ARS and USD had been recorded as a currency translation gain or loss, which is a component of AOCI. Based on recent ARS inflation rate movements, the Company reclassified two businessesconcluded that, effective July 1, 2018, the Argentine economy is considered highly inflationary under GAAP. This conclusion required the Company to change the functional currency of its Argentine operations to USD commencing July 1, 2018, and accordingly, the Company recognized foreign exchange gains and losses in earnings for any transactions in the Argentine operations that are not USD denominated.
Effective January 1, 2018, the Company adopted new accounting standards including ASU 2014-09, Revenue from Customers, ASU 2016-01, Financial Instruments and ASU 2018-02, Reporting Comprehensive Income. Refer to Note 3 in the Insurance segment tofinancial statements for further information on the Reinsurance segment. Reclassifications have been made toaccounting guidance and impact of their adoption on the Company's 2016results and financial information to conform with this presentation.position.

Critical Accounting Estimates
The following presents a discussion of accounting policies and estimates relating to reserves for losses and loss expenses, assumed premiums and other-than-temporary impairments of investments. Management believes these policies and estimates are the most critical to its operations and require the most difficult, subjective and complex judgments.
Reserves for Losses and Loss Expenses. To recognize liabilities for unpaid losses, either known or unknown, insurers establish reserves, which is a balance sheet account representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. Estimates and assumptions relating to reserves for losses and loss expenses are based on complex and subjective judgments, often including the interplay of specific uncertainties with related accounting and actuarial measurements. Such estimates are also susceptible to change as significant periods of time may


elapse between the occurrence of an insured loss, the report of the loss to the insurer, the ultimate determination of the cost of the loss and the insurer’s payment of that loss.
In general, when a claim is reported, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment based upon known information about the claim at that time. The estimate represents an informed judgment based on general reserving practices and reflects the experience and knowledge of the claims personnel regarding the nature and value of the specific type of claim. Reserves are also established on an aggregate basis to provide for losses incurred but not reported (“IBNR”) to the insurer, potential inadequacy of case reserves and the estimated expenses of settling claims, including legal and 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 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 2016:2017:
(In thousands)Frequency (+/-)Frequency (+/-)
Severity (+/-)1% 5% 10%1% 5% 10%
1%$76,915
 $231,511
 $424,755
$79,667
 $239,794
 $439,953
5%231,511
 392,229
 593,126
239,794
 406,263
 614,349
10%424,755
 593,126
 803,590
439,953
 614,349
 832,344
Our net reserves for losses and loss expenses of approximately $10.0$10.2 billion as of September 30, 20172018 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 $1.8$1.6 billion, or 17%16%, of the Company’s net loss reserves as of September 30, 20172018 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.


Following is a summary of the Company’s reserves for losses and loss expenses by business segment:
(In thousands)September 30, 2017 December 31, 2016September 30,
2018		 December 31,
2017
Insurance$8,291,708
 $7,913,074
$8,613,278
 $8,341,622
Reinsurance1,756,766
 1,677,191
1,592,887
 1,715,292
Net reserves for losses and loss expenses10,048,474
 9,590,265
10,206,165
 10,056,914
Ceded reserves for losses and loss expenses1,605,872
 1,606,930
1,665,997
 1,613,494
Gross reserves for losses and loss expenses$11,654,346
 $11,197,195
$11,872,162
 $11,670,408
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
September 30, 2018     
Other liability$1,325,565
 $2,309,225
 $3,634,790
Workers’ compensation (1)1,556,809
 1,262,943
 2,819,752
Professional liability307,793
 642,323
 950,116
Commercial automobile355,611
 286,825
 642,436
Short-tail lines (2)275,180
 291,004
 566,184
Total Insurance3,820,958
 4,792,320
 8,613,278
Reinsurance (1)878,508
 714,379
 1,592,887
Total$4,699,466
 $5,506,699
 $10,206,165
      
December 31, 2017     
Other liability$1,261,957
 $2,189,596
 $3,451,553
Workers’ compensation (1)1,543,379
 1,242,501
 2,785,880
Professional liability295,269
 618,107
 913,376
Commercial automobile364,900
 269,942
 634,842
Short-tail lines (2)297,777
 258,194
 555,971
Total Insurance3,763,282
 4,578,340
 8,341,622
Reinsurance (1)919,497
 795,795
 1,715,292
Total$4,682,779
 $5,374,135
 $10,056,914

(In thousands)
Reported Case
Reserves
 
Incurred But
Not Reported
 Total
September 30, 2017     
Other liability$1,243,208
 $2,162,031
 $3,405,239
Workers’ compensation (1)1,530,194
 1,246,084
 2,776,278
Professional liability299,418
 584,606
 884,024
Commercial automobile341,998
 267,136
 609,134
Short-tail lines (2)309,692
 307,341
 617,033
Total Insurance3,724,510
 4,567,198
 8,291,708
Reinsurance (1)909,690
 847,076
 1,756,766
Total$4,634,200
 $5,414,274
 $10,048,474
      
December 31, 2016     
Other liability$1,159,082
 $2,061,966
 $3,221,048
Workers’ compensation (1)1,453,318
 1,228,774
 2,682,092
Professional liability264,188
 542,539
 806,727
Commercial automobile344,143
 252,978
 597,121
Short-tail lines (2)322,872
 283,214
 606,086
Total Insurance3,543,603
 4,369,471
 7,913,074
Reinsurance (1)823,516
 853,675
 1,677,191
Total$4,367,119
 $5,223,146
 $9,590,265
___________
(1) Reserves for workers’ compensation and reinsurance are net of an aggregate net discount of $599$571 million and $640
$591 million as of September 30, 20172018 and December 31, 2016,2017, 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.

Net prior year development (i.e. the sum of prior year reserve changes and prior year earned premiums changes) for the nine months ended September 30, 20172018 and 20162017 are as follows:
(In thousands)2017 20162018 2017
Net decrease in prior year loss reserves$7,648
 $23,518
Net (increase) decrease in prior year loss reserves$(5,262) $7,648
Increase in prior year earned premiums22,940
 18,039
31,880
 22,940
Net favorable prior year development$30,588
 $41,557
$26,618
 $30,588
    
In

During the nine months ended September 30, 2018, favorable prior year development (net of additional and return premiums) of $27 million included $35 million of favorable development for the Insurance segment, partially offset by $8 million of adverse development for the Reinsurance segment. The favorable development for the Insurance segment was primarily attributable to workers' compensation business. The favorable workers' compensation development was spread across many accident years, including prior to 2008, but was most significant in accident years 2015 through 2017. The favorable workers' compensation development reflects a continuation of the benign loss cost trends experienced during recent years, particularly the favorable claim frequency trends (i.e., number of reported claims per unit of exposure). It also reflects claims management initiatives implemented during the past few years. The adverse development for the Reinsurance segment was mainly driven by US casualty facultative business from accident years 2008 and prior related to construction projects.
During the nine months ended September 30, 2017, favorable prior year development (net of additional and return premiums) of $31 million included $62 million of favorable development for the Insurance segment, partially offset by $31 million of adverse development for the Reinsurance segment. The favorable development for the Insurance segment was primarily attributable to workers' compensation business (including excess workers' compensation). The favorable workers' compensation development was spread across many accident years, including prior to 2008, but was most significant in accident years 2014 and 2015. The favorable workers' compensation development reflects a continuation of the benign loss cost trends experienced during 2016, particularly the favorable claim frequency trends (i.e., number of reported claims per unit of exposure). The adverse development for the Reinsurance segment was due to reserve strengthening associated with claims impacted by the change in


the Ogden discount rate in the U.K., as well as adverse development onin the U.S. facultative casualty excess of loss business. The Ogden rate is the discount rate used to calculate lump-sum bodily injury payouts in the U.K., and was reduced by the U.K. Ministry of Justice from +2.5% to -0.75%; the. The adverse development mostly related to U.K. motor bodily injury claims which we reinsured on an excess of loss basis in accident years 2012 through 2016. The adverse development on U.S. facultative casualty business was duerelated to construction-related risks in accident years 2008 and prior.
In 2016, favorable prior year development (net of additional and return premiums) of $42 million included $38 million for the Insurance segment and $4 million for the Reinsurance segment. The favorable development for the Insurance segment was primarily attributable to workers' compensation business, partially offset by adverse development for commercial auto liability and medical and other professional liability. The favorable development for workers' compensation stems from accident years 2003 through 2015, but is concentrated in accident years 2014 and 2015; it reflects claims frequency trends (i.e., number of reported claims per unit of exposure) that continue to be better than we expected. The unfavorable development for commercial auto liability was driven by higher large loss activity than expected in accident years 2014 and 2015, and the unfavorable development for medical professional liability was primarily in accident years prior to 2013 and stemmed from a class of medical professional liability business that we discontinued writing in 2013.
Reserve Discount. The Company discounts its liabilities for certain workers’ compensation reserves. The amount of workers’ compensation reserves that were discounted was $1,849$1,814 million and $1,907$1,855 million at September 30, 20172018 and December 31, 2016,2017, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $599$571 million and $640$591 million at September 30, 20172018 and December 31, 2016,2017, respectively. At September 30, 2017,2018, discount rates by year ranged from 2.0% to 6.5%, with a weighted average discount rate of 3.8%.

Substantially all of the workers’ compensation discount (97% of total discounted reserves at September 30, 2017)2018) 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 3% of total discounted reserves at September 30, 2017)2018), 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 $56$45 million at September 30, 20172018 and $68$56 million at December 31, 2016.2017. 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 average of the credit ratings assigned, unless in limited situations the Company’s own analysis indicates an internal 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 September 30, 2017:2018:
($ in thousands)
Number of
Securities
 
Aggregate
Fair Value
 
Gross Unrealized
Loss
Number of
Securities
 
Aggregate
Fair Value
  Gross Unrealized Loss
Unrealized loss less than 20% of amortized cost592
 $3,864,164
 $40,565
1,175
 $8,547,309
 $187,215
Unrealized loss of 20% or greater of amortized cost:          
Less than twelve months17
 32,589
 13,514
Twelve months and longer3
 180
 112
2
 3
 4
Total595
 $3,864,344
 $40,677
1,194
 $8,579,901
 $200,733
A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at September 30, 20172018 is presented in the table below:
($ in thousands)
Number of
Securities
 
Aggregate
Fair Value
 Gross Unrealized
Loss
Number of
Securities
 
Aggregate
Fair Value
  Gross Unrealized Loss
Foreign government9
 $55,292
 $462
20
 $172,462
 $20,688
Mortgage-backed securities6
 5,975
 150
Corporate3
 2,852
 211
14
 80,945
 6,547
Asset-backed securities3
 1,331
 115
7
 10,930
 156
Mortgage-backed securities4
 3,270
 30
Total21
 $65,450
 $938
45
 $267,607
 $27,421
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 September 30, 2017, there was one preferred stock in an unrealized loss position, with a fair value of $24.0 million and a gross unrealized loss of $1.7 million. Based upon management's view of the underlying value of the security, the Company does not consider the equity security to be OTTI. For the nine months ended September 30, 2017 and 2016, there was no OTTI for preferred stocks.
Common Stocks – At September 30, 2017, there were three common stocks in an unrealized loss position, with an aggregate fair value of $14.1 million and a gross unrealized loss of $3.5 million. Based upon management’s view of the underlying value of these securities, the Company does not consider these equity securities to be OTTI. There was no OTTI of common stocks for the nine months ended September 30, 2017. For the nine months ended September 30, 2016, OTTI for common stocks was $18.1 million.


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 at both September 30, 20172018 and December 31, 2016.2017.
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 securities, equity securities, 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 September 30, 2017:2018:
($ in thousands)
Carrying
Value
 
Percent
of Total
Carrying
Value
 
Percent
of Total
Pricing source:      
Independent pricing services$13,570,457
 98.4%$13,324,779
 98.8%
Syndicate manager43,196
 0.3
34,846
 0.2
Directly by the Company based on:      
Observable data180,467
 1.3
133,887
 1.0
Cash flow model174
 —
101
 —
Total$13,794,294
 100.0%$13,493,613
 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 based on observable market data in active markets (e.g., broker quotes and prices observed for comparable securities). The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company reviews the prices provided by pricing services for reasonableness based upon current trading levels for


similar securities. If the prices appear unusual to the Company, they are re-examined and the value is either confirmed or revised. In addition, the Company periodically performs independent price tests of a sample of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of September 30, 2017,2018, 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.




Results of Operations for the Nine Months Ended September 30, 20172018 and 20162017
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”)GAAP combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the nine months ended September 30, 20172018 and 2016.2017. 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)2017 20162018 2017
Insurance:      
Gross premiums written$5,233,692
 $5,184,033
$5,453,303
 $5,233,692
Net premiums written4,364,638
 4,386,944
4,561,370
 4,364,638
Net premiums earned4,262,485
 4,180,985
4,377,003
 4,262,485
Loss ratio61.7% 61.1%61.8% 61.7%
Expense ratio32.8% 32.3%32.5% 32.8%
GAAP combined ratio94.5% 93.4%94.3% 94.5%
Reinsurance:      
Gross premiums written$463,825
 $579,878
$401,977
 $463,825
Net premiums written417,634
 526,712
352,286
 417,634
Net premiums earned457,759
 492,087
374,944
 457,759
Loss ratio86.1% 60.5%67.1% 86.1%
Expense ratio37.1% 39.1%38.2% 37.1%
GAAP combined ratio123.2% 99.6%105.3% 123.2%
Consolidated:      
Gross premiums written$5,697,517
 $5,763,911
$5,855,280
 $5,697,517
Net premiums written4,782,272
 4,913,656
4,913,656
 4,782,272
Net premiums earned4,720,244
 4,673,072
4,751,947
 4,720,244
Loss ratio64.1% 61.0%62.2% 64.1%
Expense ratio33.2% 33.1%33.0% 33.2%
GAAP combined ratio97.3% 94.1%95.2% 97.3%
Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the nine months ended September 30, 20172018 and 2016:2017:
(In thousands, except per share data)2017 20162018 2017
Net income to common stockholders$394,505
 $449,127
$508,392
 $394,505
Weighted average diluted shares129,289
 128,501
128,404
 129,289
Net income per diluted share$3.05
 $3.50
$3.96
 $3.05
The Company reported net income to common stockholders of $508 million in 2018 compared to $395 million in 2017 compared to $449 million in 2016.2017. The 12% decrease29% increase in net income was primarily due to an after-tax decreaseincrease in underwriting income of $97$82 million, mainly driven by increased catastrophe losses from Hurricanes Harvey, Irma and Maria, as well as two earthquakes in Mexico, an after-tax increase in net investment income of $69 million mainly driven by growth in the fixed maturity security portfolio, higher interest rates and an increase in investment funds, a $29 million increase in after-tax foreign currency losses of $17gains, and a $52 million and an after-tax decrease in incometax expense primarily due to the reduction of the federal corporate tax rate from non-insurance businesses of $7 million,35% to 21%, partially offset by an increasea decrease in after-tax net investment gains of $57$108 million, an after-tax increase in interest expense of $5 million, an after-tax increase in corporate expenses of $3 million, and an after-tax increasereduction in investmentinsurance service fee income of $14$2 million. The number of weighted average diluted shares remained relatively unchanged for the nine months ended September 30, 2017 and 2016.decreased slightly primarily due to share repurchases.
Premiums. Gross premiums written were $5,855 million in 2018, an increase of 3% from $5,698 million in 2017, a decrease of 1% from $5,764 million in 2016.2017. The decreaseincrease was due to an increase in the Insurance segment of $220 million, partially offset by a decrease in the Reinsurance segment of $116 million, partially offset by an increase in the Insurance segment of $50$62 million. Approximately 77.7% of policies expiring in 2017 were renewed, compared with a 77.8%The renewal retention rate was approximately 77.7% for policies expiring in 2016.2018 and 2017.
Average renewal premium rates for insurance and facultative reinsurance increased 1.0%2.5% in 20172018 when adjusted for change in exposures.


exposures, and increased 4.1% excluding workers' compensation.


A summary of gross premiums written in 20172018 compared with 20162017 by line of business within each business segment follows:
Insurance - gross premiums increased 1%4% to $5,453 million in 2018 from $5,234 million in 2017 from $5,184 million in 2016.2017. Gross premiums increased $25$106 million (5%(7%) for other liability, $58 million (10%) for professional liability, $19$53 million (4%) for commercial auto, $8 million (1%) for workers' compensation, and $2 million (less than 1%) for short-tail lines, and decreased $4$46 million (less than 1%(8%) for other liability.commercial auto and decreased $44 million (3%) for workers' compensation.
Reinsurance - gross premiums decreased 20%13% to $402 million in 2018 from $464 million in 2017 from $580 million in 2016.2017. Gross premiums decreased $87$35 million (35%(22%) for property lines and $29$27 million (9%) for casualty lines.
Net premiums written were $4,914 million in 2018, an increase of 3% from $4,782 million in 2017, a decrease of 3% from $4,914 million in 2016.2017. Ceded reinsurance premiums as a percentage of gross written premiums were 16% in 2017both 2018 and 15% in 2016.2017.
Premiums earned increased less than 1% to $4,752 million in 2018 from $4,720 million in 2017 from $4,673 million in 2016.2017. 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 20172018 are related to business written during both 20172018 and 2016.2017. Audit premiums were $149 million in 2018 compared with $137 million in 2017 compared with $116 million in 2016.2017.
Net investmentInvestment Income. Following is a summary of net investment income for the nine months ended September 30, 20172018 and 2016:2017:
Amount 
Average Annualized
Yield
Amount 
Average Annualized
Yield
($ in thousands)2017 2016 2017 20162018 2017 2018 2017
Fixed maturity securities, including cash and cash equivalents and loans receivable$347,976
 $331,448
 3.3% 3.3%$384,748
 $347,976
 3.6% 3.3%
Investment funds50,744
 60,385
 5.5
 6.6
94,075
 50,744
 10.3
 5.5
Arbitrage trading account16,235
 12,883
 4.0
 4.4
21,156
 16,235
 4.4
 4.0
Real estate14,894
 4,552
 1.6
 0.6
15,339
 14,894
 1.1
 1.6
Equity securities available for sale1,845
 3,217
 1.2
 2.2
Equity securities2,208
 1,845
 1.3
 1.2
Gross investment income431,694
 412,485
 3.3
 3.3
517,526
 431,694
 3.8
 3.3
Investment expenses(5,093) (7,635)    (3,107) (5,093) —
 —
Total$426,601
 $404,850
 3.3% 3.3%$514,419
 $426,601
 3.8% 3.3%
Net investment income increased 5%21% to $514 million in 2018 from $427 million in 2017 from $405 million in 2016 due primarily to a $16$43 million increase in income from investment funds mainly from real estate, energy and aviation funds, a $37 million increase in income from fixed maturity securities mainly driven by growth in the fixed maturity security portfolio and higher interest rates, a $10 million increase from real estate, a $3$5 million increase from the arbitrage trading account and a reduction of investment expenses of $3 million, partially offset by a $10$2 million decrease fromin investment funds.expenses. The Company has maintained a shortened duration of its fixed maturity security portfolio. This has reduced the potential impact of mark-to-market on the portfolio and positioned the Company to take advantage of rising interest rates. Average invested assets, at cost (including cash and cash equivalents), were $18.3 billion in 2018 and $17.4 billion in 2017 and $16.6 billion in 2016.2017.
Insurance Service Fees. The Company earns fees from an insurance distribution business, a third-party administrator and as a servicing carrier of workers' compensation assigned risk plans for certain states. ServiceInsurance service fees decreased to $91 million in 2018 from $100 million in 2017 from $109 million in 2016.2017.
Net Realized and Unrealized Gains on Investment SalesInvestments. The Company buys and sells securities and other investment assets on a regular basis in order to maximize its total return on investments. Decisions to sell securities and other investment assets are based on management’s view of the underlying fundamentals of specific investments as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net realized and unrealized gains on investment salesinvestments were $140 million in 2018 compared with $277 million in 2017 compared2017. Effective January 1, 2018, the Company adopted new accounting guidance that requires all equity investments with $208readily determinable fair values to be measured at fair value with changes in the fair value recognized through net income (other than those equity securities accounted for under the equity method of accounting or those that result in consolidation of the investee). The gains of $140 million in 2016. The nine months ended September 30, 2017 include a gain of $124 million from the sale of an investment in an office building located in Washington D.C. The nine months ended September 30, 2016 include a gain of $135 million from the sale of Aero Precision Industries and certain related aviation services business.
Other-Than-Temporary Impairments. There were no impairments in 2017. Other-than-temporary impairments of $18.1 million in 2016 related to common stocks.
Revenues from Non-Insurance Businesses. Revenues from non-insurance businesses were derived from businesses engaged in the distribution of promotional merchandise, world-wide textile solutions and 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 $225 million in 2017 and $306 million in 2016. The decrease was primarily related to the sale of Aero Precision Industries in August 2016, partially offset by revenues from the textile business purchased in March 2017.
Losses and Loss Expenses. Losses and loss expenses increased to $3,025 million in 2017 from $2,852 million in 2016. The consolidated loss ratio was 64.1% in 2017 and 61.0% in 2016. Catastrophe losses,2018 reflect net of reinsurance recoveries and reinstatement premiums, were $167 million in 2017 and $68 million in 2016. Hurricanes Harvey, Irma and Maria, along with two earthquakes in Mexico, resulted in catastrophe losses of $107 million. Favorable prior year reserve development (net of premium offsets) was $31 million in 2017 and $42 million in 2016. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.8 points to 61.2% in 2017 from 60.4% in 2016.
A summary of loss ratios in 2017 compared with 2016 by business segment follows:
Insurance - The loss ratio was 61.7% in 2017 and 61.1% in 2016. Catastrophe losses were $94 million in 2017 compared with $58 million in 2016. Favorable prior year reserve development was $62 million in 2017 and $38 million in 2016. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.4 points to 61.0% in 2017 from 60.6% in 2016.
Reinsurance - The loss ratio of 86.1% in 2017 was 25.6 points higher than the loss ratio of 60.5% in 2016. Catastrophe losses were $73 million in 2017 compared with $10 million in 2016. Adverse prior year reserve development was $31 million in 2017 largely due to the impact of the change in the Ogden discount rate in the U.K. and adverse development related to the U.S. facultative casualty excess of loss business, compared with favorable prior year development of $4 million in 2016. The loss ratio excluding catastrophe losses and prior year reserve development increased 4.1 points to 63.3% in 2017 from 59.2% in 2016.
Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses:
($ in thousands)2017 2016
Policy acquisition and operating insurance expenses$1,567,359
 $1,544,792
Insurance service expenses97,308
 103,868
Net foreign currency (gains) losses14,255
 (11,547)
Other costs and expenses142,233
 133,337
Total$1,821,155
 $1,770,450

Policy acquisition and operating insurance expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Policy acquisition and operating insurance expenses increased 1% compared with an increase in net premiums earned of 1%. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 33.2% and 33.1% for the nine months ended September 30, 2017 and 2016, respectively.
Service expenses, which represent the costs associated with the fee-based businesses, decreased to $97 million in 2017 from $104 million in 2016.
Net foreign currency (gains) losses result from transactions denominated in a currency other than a company's operating functional currency. Net foreign currency losses were $14 million in 2017 compared to gains of $12 million in 2016.
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 and new business ventures. Other costs and expenses increased to $142 million in 2017 from $133 million in 2016 primarily because of startup costs for new business ventures.
Expenses from Non-Insurance Businesses. Expenses from non-insurance businesses represent costs associated with businesses engaged in the distribution of promotional merchandise, world-wide textile solutions and 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 $221 million in 2017 compared to $291 million in 2016. The decline mainly relates to the sale of Aero Precision Industries in August 2016, partially offset by the expense from the textile business purchased in March 2017.


Interest Expense. Interest expense was $110 million in 2017 compared with $104 million in 2016. During 2017, the Company repaid $2 million of debt compared to $83 million in 2016, mainly in connection with the sale of Aero Precision Industries. In February 2016, the Company issued $110 million of 5.9% subordinated debentures maturing in 2056, and in May 2016, the Company issued $290 million of 5.75% subordinated debentures maturing in 2056.
Income Taxes. The effective income tax rate was 31% in 2017 and 32% in 2016. 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 $40 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 $4 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.

Results of Operations for the Three Months Ended September 30, 2017 and 2016
Business Segment Results
Following is a summary of gross and net premiums written, net premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and United States Generally Accepted Accounting Principles (“GAAP”) combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the three months ended September 30, 2017 and 2016. 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)2017 2016
Insurance:   
Gross premiums written$1,718,552
 $1,688,712
Net premiums written1,432,334
 1,443,986
Net premiums earned1,433,729
 1,423,635
Loss ratio63.2% 60.9%
Expense ratio32.4% 32.3%
GAAP combined ratio95.6% 93.2%
Reinsurance:   
Gross premiums written$155,606
 $180,137
Net premiums written138,849
 163,379
Net premiums earned147,771
 162,309
Loss ratio118.7% 61.3%
Expense ratio34.9% 38.9%
GAAP combined ratio153.6% 100.2%
Consolidated:   
Gross premiums written$1,874,158
 $1,868,849
Net premiums written1,571,183
 1,607,365
Net premiums earned1,581,500
 1,585,944
Loss ratio68.4% 60.9%
Expense ratio32.6% 33.0%
GAAP combined ratio101.0% 93.9%
Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the three months ended September 30, 2017 and 2016:
(in thousands, except per share data)2017 2016
Net income to common stockholders$162,054
 $220,650
Weighted average diluted shares128,944
 128,556
Net income per diluted share$1.26
 $1.72
The Company reported net income of $162 million in 2017 compared to $221 million in 2016. The 27% decrease in net income was primarily due to an after-tax decrease in underwriting income of $73 million mainly driven by increased catastrophe losses from Hurricanes Harvey, Irma and Maria, as well as two earthquakes in Mexico, partially offset by an $11


million benefit related to stock compensation tax benefits being recognized within income tax expense starting in 2017 and an after-tax increase in net investment gains of $5 million. The number of weighted average diluted shares remained relatively unchanged for the three months ended September 30, 2017 and 2016.
Premiums. Gross premiums written were $1,874 million in 2017, an increase of less than 1% from $1,869 million in 2016. Approximately 77.5% of policies expiring in 2017 were renewed, compared with a 77.7% renewal retention rate for policies expiring in 2016.
Average renewal premium rates for insurance and facultative reinsurance increased 0.7% in 2017 when adjusted for change in exposures.
     A summary of gross premiums written in 2017 compared with 2016 by line of business within each business segment follows:
Insurance - gross premiums increased 2% to $1,719 million in 2017 from $1,689 million in 2016. Gross premiums increased $13 million (3%) for short tail lines, $12 million (3%) for workers' compensation, $6 million (3%) for commercial auto and $4 million (2%) for professional liability and decreased $5 million (1%) for other liability.
Reinsurance - gross premiums decreased 14% to $156 million in 2017 from $180 million in 2016. Gross premiums decreased $26 million (34%) for property lines and increased $2 million (2%) for casualty lines.
Net premiums written were $1,571 million in 2017, a decrease of 2% from $1,607 million in 2016. Ceded reinsurance premiums as a percentage of gross written premiums were 16% in 2017 and 14% in 2016.
Premiums earned decreased less than 1% to $1,582 million in 2017 from $1,586 million in 2016. Insurance premiums (including the impact of rate changes) are generally earned evenly over the policy term. Premiums earned in 2017 are related to business written during both 2017 and 2016. Audit premiums were $46 million in 2017 compared with $35 million in 2016.
Net Investment Income. Following is a summary of net investment income for the three months ended September 30, 2017 and 2016:
 Amount 
Average Annualized
Yield
($ in thousands)2017 2016 2017 2016
Fixed maturity securities, including cash and cash equivalents and loans receivable$118,834
 $114,271
 3.4% 3.3%
Investment funds15,200
 25,293
 5.2
 8.1
Arbitrage trading account4,418
 6,441
 3.5
 5.6
Real estate5,042
 585
 1.5
 0.2
Equity securities available for sale604
 1,069
 1.2
 2.0
Gross investment income144,098
 147,659
 3.3
 3.5
Investment expenses(1,619) (1,991)    
Total$142,479
 $145,668
 3.2% 3.4%
Net investment income decreased 2% to $142 million in 2017 from $146 million in 2016 due primarily to a $10 million decrease from investment funds and a $2 million decrease from the arbitrage trading account, partially offset by a $4 million increase from fixed maturity securities and an increase of $4 million in income from real estate. Average invested assets, at cost (including cash and cash equivalents), were $17.6 billion in 2017 up from $17.0 billion in 2016.
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 $34 million in 2017 from $32 million in 2016.
Net Realized Gains on Investment Sales. The Company buys and sells securities and other investment assets on a regular basis in order to maximize its total return on investments. Decisions to sell securities and other investment assets are based on management’s view of the underlying fundamentals of specific investments as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net realized gains on investment sales were $184of $420 million reduced by a change in 2017 compared with $176 million in 2016. The three months ended September 30, 2017 include a gainunrealized gains on equity securities of $124 million from the sale of an investment in an office building located in Washington D.C. The three months ended$280 million.


September 30, 2016 include a gain of $135 million from the sale of Aero Precision Industries and certain related aviation services business.
Other-Than-Temporary Impairments. There were no other-than-temporary impairments during the three months ended September 30, 2017 and 2016.
Revenues from Non-Insurance Businesses. Revenues from non-insurance businesses were derived from businesses engaged in the distribution of promotional merchandise, world-wide textile solutions and 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 $90$242 million in 20172018 and $80$225 million in 2016.2017. The increase was primarily relatedmainly relates to revenues from the textile business purchased in March 2017.
Losses and Loss Expenses. Losses and loss expenses increaseddecreased to $1,081$2,955 million in 20172018 from $966$3,025 million in 2016.2017. The consolidated loss ratio was 68.4%62.2% in 20172018 and 60.9%64.1% in 2016.2017. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $119$60 million in 20172018 and $12$167 million in 2016. Hurricanes2017. The more significant 2017 catastrophe losses largely related to hurricanes Harvey, Irma and Maria, along with two earthquakes in Mexico, resulted in catastrophe losses of $107 million.Mexico. Favorable prior year reserve development (net of premium offsets) was $7$27 million in 20172018 and $13$31 million in 2016.2017. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.4increased 0.3 points to 61.3%61.5% in 20172018 from 60.9%61.2% in 2016.2017.
A summary of loss ratios in 20172018 compared with 20162017 by business segment follows:
Insurance - The loss ratio of 63.2%was 61.8% in 2017 was 2.3 points higher than the loss ratio of 60.9%2018 and 61.7% in 2016.2017. Catastrophe losses were $47$50 million in 2017 and $92018 compared with $94 million in 2016.2017. Favorable prior year reserve development was $13$35 million in both2018 and $62 million in 2017. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.4 points to 61.4% in 2018 from 61.0% in 2017.
Reinsurance - The loss ratio of 67.1% in 2018 was 19 points lower than the loss ratio of 86.1% in 2017. Catastrophe losses were $10 million in 2018 compared with $73 million in 2017. Adverse prior year reserve development was $8 million in 2018 and $31 million in 2017. The 2017 adverse development largely related to the impact of the change in the Ogden discount rate in the U.K. and 2016.the U.S. facultative casualty excess of loss business. The loss ratio excluding catastrophe losses and prior year reserve development decreased 0.40.9 points to 60.8%62.4% in 20172018 from 61.2%63.3% in 2016.2017.
Reinsurance - The loss ratio of 118.7% in 2017 was 57.4 points higher than the loss ratio of 61.3% in 2016. Catastrophe losses were $72 million in 2017 compared with $3 million in 2016. Adverse prior year reserve development was $6 million in 2017 compared with favorable prior year reserve development of $0.2 million in 2016. The loss ratio, excluding catastrophe losses and prior year reserve development, increased 6.9 points to 66.1% in 2017 from 59.2% in 2016 largely due to increased attritional losses.
Other Operating Costs and ExpensesExpenses.. Following is a summary of other operating costs and expenses:
(In thousands)2017 2016
Policy acquisition and operating insurance expenses$516,243
 $523,254
($ in thousands)2018 2017
Policy acquisition and insurance operating expenses$1,566,473
 $1,567,359
Insurance service expenses32,451
 32,441
90,970
 97,308
Net foreign currency (gains) losses1,779
 (2,193)(22,033) 14,255
Other costs and expenses50,349
 52,846
145,820
 142,233
Total$600,822
 $606,348
$1,781,230
 $1,821,155
Policy acquisition and insurance operating insurance expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. PolicyThe percentage change of policy acquisition and insurance operating insurance expenses decreased 1% compared with a decrease inremained flat and net premiums earned ofincreased less than 1%. from 2017. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) decreased to 32.6% fromwas 33.0% in 2016.

2018 and 33.2% in 2017.
Service expenses, which represent the costs associated with the fee-based businesses, remained flat at $32decreased to $91 million for 2017 and 2016.in 2018 from $97 million in 2017.
Net foreign currency (gains) losses result from transactions denominated in a currency other than a company's operating functional currency. Net foreign currency gains were $22 million in 2018 compared to losses were $2of $14 million in 2017, comparedresulting from the strengthening U.S. dollar and the change of functional currency for the Company's Argentine operations to gainsthe U.S. dollar as of $2 millionJuly 1, 2018. The Argentine economy was determined to be highly inflationary under GAAP requiring the change in 2016.functional currency beginning with the third quarter of 2018.
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 and new business ventures. Other costs and expenses decreasedincreased to $50$146 million in 20172018 from $53$142 million in 2016.2017.
Expenses from Non-Insurance Businesses. Expenses from non-insurance businesses represent costs associated with businesses engaged in the distribution of promotional merchandise, world-wide textile solutions and 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 $86$238 million in 20172018 compared to $79$221 million in 2016.2017. The increase was primarily relatedmainly relates to expenses from the textile business purchased in March 2017.


Interest Expense. Interest expense was $37$117 million in both 2017 and 2016. During 2017,2018 compared with $110 million in 2017. In March 2018, the Company repaid $2issued $175 million aggregate principal amount of 5.70% subordinated debentures due 2058, and in April 2018, the Company issued another $10 million principal amount of such debentures. Additionally in 2018, the Company issued subsidiary debt compared to $83 million in 2016, mainly in connection with the sale of Aero Precision Industries.$20 million.
Income Taxes. The effective income tax rate was 28%21.0% in 20172018 and 33%30.5% in 2016.2017. The decrease in the effective income tax rate differsin 2018 from 2017 was primarily due to the Tax Cuts and Jobs Act of 2017, which reduced the federal incomecorporate tax rate offrom 35% primarily because of tax-exempt investment income, as well as the new requirement in 2017 to recognize tax benefits for stock compensation in income tax expense.21%.
The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $40$60 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. However, inIn the future, if such earnings were distributed the Company projects that the incremental tax, if any, will be immaterial.



Results of Operations for the Three Months Ended September 30, 2018and 2017
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 GAAP combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the three months ended September 30, 2018 and 2017. 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)2018 2017
Insurance:   
Gross premiums written$1,794,104
 $1,718,552
Net premiums written1,504,792
 1,432,334
Net premiums earned1,488,658
 1,433,729
Loss ratio63.0% 63.2%
Expense ratio31.9% 32.4%
GAAP combined ratio94.9% 95.6%
Reinsurance:   
Gross premiums written$133,681
 $155,606
Net premiums written119,422
 138,849
Net premiums earned114,827
 147,771
Loss ratio69.3% 118.7%
Expense ratio38.6% 34.9%
GAAP combined ratio107.9% 153.6%
Consolidated:   
Gross premiums written$1,927,785
 $1,874,158
Net premiums written1,624,214
 1,571,183
Net premiums earned1,603,485
 1,581,500
Loss ratio63.5% 68.4%
Expense ratio32.4% 32.6%
GAAP combined ratio95.9% 101.0%
Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the three months ended September 30, 2018 and 2017:
(In thousands, except per share data)2018 2017
Net income to common stockholders$161,920
 $162,054
Weighted average diluted shares128,561
 128,944
Net income per diluted share$1.26
 $1.26
The Company reported net income to common stockholders of $162 million in both 2018 and 2017. The changes in net income were primarily due to an after-tax increase in underwriting income of $65 million, an after-tax increase in net investment income of $34 million mainly driven by growth in the fixed maturity security portfolio and higher interest rates as well as increased investment fund income, a $15 million increase in after-tax foreign currency gains, a $12 million decrease in tax expense due primarily to the reduction of the federal corporate tax rate from 35% to 21%, and an after-tax decrease in corporate expenses of $2 million, offset by a decrease in after-tax net investment gains of $127 million and an after-tax increase in interest expense of $2 million. The number of weighted average diluted shares decreased slightly primarily due to share repurchases.
Premiums. Gross premiums written were $1,928 million in 2018, an increase of 3% from $1,874 million in 2017. The increase was due to an increase in the Insurance segment of $76 million, partially offset by a decrease in the Reinsurance segment of $22 million. Approximately 77.4% of policies expiring in 2018 were renewed, compared with a 77.5% renewal retention rate for policies expiring in 2017.
    Average renewal premium rates for insurance and facultative reinsurance increased 2.3% in 2018 when adjusted for change in exposures, and increased 3.9% excluding workers' compensation.



A summary of gross premiums written in 2018 compared with 2017 by line of business within each business segment follows:
Insurance - gross premiums increased 4% to $1,794 million in 2018 from $1,719 million in 2017. Gross premiums increased $40 million (7%) for other liability, $22 million (12%) for professional liability, $19 million (10%) for commercial auto and $12 million (3%) for short-tail lines and decreased $17 million (4%) for workers' compensation.
Reinsurance - gross premiums decreased 14% to $134 million in 2018 from $156 million in 2017. Gross premiums decreased $14 million (28%) for property lines and $8 million (7%) for casualty lines.
Net premiums written were $1,624 million in 2018, an increase of 3% from $1,571 million in 2017. Ceded reinsurance premiums as a percentage of gross written premiums were 16% in both 2018 and 2017.
Premiums earned increased 1% to $1,603 million in 2018 from $1,582 million in 2017. 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 2018 are related to business written during both 2018 and 2017. Audit premiums were $51 million in 2018 compared with $46 million in 2017.
Net Investment Income. Following is a summary of net investment income for the three months ended September 30, 2018 and 2017: 
 Amount 
Average Annualized
Yield
($ in thousands)2018 2017 2018 2017
Fixed maturity securities, including cash and cash equivalents and loans receivable$131,836
 $118,834
 3.6% 3.4%
Investment funds41,005
 15,200
 13.1
 5.2
Arbitrage trading account7,632
 4,418
 5.1
 3.5
Real estate5,597
 5,042
 1.2
 1.5
Equity securities1,004
 604
 1.7
 1.2
Gross investment income187,074
 144,098
 4.0
 3.3
Investment expenses(950) (1,619) —
 —
Total$186,124
 $142,479
 4.0% 3.2%
Net investment income increased 31% to $186 million in 2018 from $142 million in 2017 due primarily to a $26 million increase in income from investment funds due to real estate, energy and aviation funds, a $13 million increase in income from fixed maturity securities mainly driven by growth in the fixed maturity security portfolio and higher interest rates, a $3 million increase from the arbitrage trading account and a $2 million increase from real estate and equity securities and decreased investment expenses. The Company has maintained a shortened duration of its fixed maturity security portfolio. This has reduced the potential impact of mark-to-market on the portfolio and positioned the Company to take advantage of rising interest rates. Average invested assets, at cost (including cash and cash equivalents), were $18.5 billion in 2018 and $17.6 billion in 2017.
Insurance Service Fees. The Company earns fees from an insurance distribution business, a third-party administrator and as a servicing carrier of workers' compensation assigned risk plans for certain states. Insurance service fees decreased to $31 million in 2018 from $34 million in 2017.
Net Realized and Unrealized Gains on Investments. The Company buys and sells securities and other investment assets on a regular basis in order to maximize its total return on investments. Decisions to sell securities and other investment assets are based on management’s view of the underlying fundamentals of specific investments as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net realized and unrealized gains on investments were $22 million in 2018 compared with $184 million in 2017. Effective January 1, 2018, the Company adopted new accounting guidance that requires all equity investments with readily determinable fair values to be measured at fair value with changes in the fair value recognized through net income (other than those equity securities accounted for under the equity method of accounting or those that result in consolidation of the investee). The gains of $22 million in 2018 reflect net realized gains on investment sales of $154 million reduced by a change in unrealized gains on equity securities of $132 million.


Revenues from Non-Insurance Businesses. Revenues from non-insurance businesses were derived from businesses engaged in the distribution of promotional merchandise, world-wide textile solutions and 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 $95 million in 2018 and $90 million in 2017.
Losses and Loss Expenses. Losses and loss expenses decreased to $1,018 million in 2018 from $1,081 million in 2017. The consolidated loss ratio was 63.5% in 2018 and 68.4% in 2017. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $39 million in 2018 and $119 million in 2017. The more significant 2017 catastrophe losses largely related to hurricanes Harvey, Irma and Maria, along with two earthquakes in Mexico. Favorable prior year reserve development (net of premium offsets) was $7 million in 2018 and 2017. The loss ratio excluding catastrophe losses and prior year reserve development was 61.5% in 2018 and 61.3% in 2017.
A summary of loss ratios in 2018 compared with 2017 by business segment follows:
Insurance - The loss ratio was 63.0% in 2018 and 63.2% in 2017. Catastrophe losses were $30 million in 2018 compared with $47 million in 2017. Favorable prior year reserve development was $8 million in 2018 and $13 million in 2017. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.8 points to 61.6% in 2018 from 60.8% in 2017.
Reinsurance - The loss ratio of 69.3% in 2018 was 49.4 points lower than the loss ratio of 118.7% in 2017. Catastrophe losses were $9 million in 2018 and $72 million in 2017. Adverse prior year reserve development was $1 million in 2018 and $6 million in 2017. The loss ratio excluding catastrophe losses and prior year reserve development decreased 5.2 points to 60.9% in 2018 from 66.1% in 2017.
Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses:
($ in thousands)2018 2017
Policy acquisition and insurance operating expenses$519,380
 $516,243
Insurance service expenses27,268
 32,451
Net foreign currency (gains) losses(17,267) 1,779
Other costs and expenses48,267
 50,349
Total$577,648
 $600,822
Policy acquisition and insurance operating expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Policy acquisition and insurance operating expenses and net premiums earned both increased 1%. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 32.4% in 2018 and 32.6% in 2017.
Service expenses, which represent the costs associated with the fee-based businesses, decreased to $27 million in 2018 from $32 million in 2017.
Net foreign currency (gains) losses result from transactions denominated in a currency other than a company's operating functional currency. Net foreign currency gains were $17 million in 2018 compared to losses of $2 million in 2017, resulting from the strengthening U.S. dollar and the change of functional currency for the Company's Argentine operations to the U.S. dollar as of July 1, 2018. The Argentine economy was determined to be highly inflationary under GAAP requiring the change in functional currency beginning with the third quarter of 2018.
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 and new business ventures. Other costs and expenses decreased to $48 million in 2018 from $50 million in 2017.
Expenses from Non-Insurance Businesses. Expenses from non-insurance businesses represent costs associated with businesses engaged in the distribution of promotional merchandise, world-wide textile solutions and 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 $93 million in 2018 compared to $86 million in 2017.
Interest Expense. Interest expense was $40 million in 2018 and $37 million in 2017. In March 2018, the Company issued $175 million aggregate principal amount of 5.70% subordinated debentures due 2058, and in April 2018, the Company issued another $10 million principal amount of such debentures. Additionally in 2018, the Company issued subsidiary debt of $20 million.


Income Taxes. The effective income tax rate was 21.4% in 2018 and 28.0% in 2017. The effective income tax rate differs from the federal income tax rate of 21% primarily because of tax-exempt investment income and tax on income from foreign jurisdictions with different tax rates. The decrease in the effective tax rate in 2018 from 2017 was primarily due to the Tax Cuts and Jobs Act of 2017, which reduced the federal corporate tax rate from 35% to 21%.
The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $4$60 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 whichof its non-U.S. subsidiaries since these earnings are no longer intended to be permanently reinvested in the foreign subsidiary.non-U.S. subsidiaries. In the future, if such earnings were distributed the Company projects that the incremental tax, if any, will be immaterial.





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 2.9 years at September 30, 2017, down from 3.12018 and 3.0 years at December 31, 2016.2017. The Company’s fixed maturity investment portfolio and investment-related assets as of September 30, 20172018 were as follows:
($ in thousands)
Carrying
Value
 
Percent
of Total
Carrying
Value
 
Percent
of Total
Fixed maturity securities:      
U.S. government and government agency$411,605
 2.2%
U.S. government and government agencies$487,042
 2.6%
State and municipal:      
Special revenue2,829,795
 15.4
2,497,499
 13.4
Pre-refunded (1)448,308
 2.4
State general obligation537,537
 2.9
424,078
 2.3
Local general obligation415,635
 2.3
419,042
 2.2
Corporate backed391,627
 2.1
296,480
 1.6
Pre-refunded (1)303,947
 1.8
Total state and municipal4,478,541
 24.4
4,085,407
 21.9
Mortgage-backed securities:      
Agency832,993
 4.5
900,744
 4.8
Commercial251,578
 1.4
339,931
 1.8
Residential-Prime226,274
 1.2
278,614
 1.5
Residential-Alt A23,298
 0.2
40,209
 0.2
Total mortgage-backed securities1,334,143
 7.2
1,559,498
 8.4
Asset-backed securities2,388,618
 13.0
2,549,874
 13.7
Corporate:      
Industrial2,636,885
 14.4
2,277,978
 12.2
Financial1,374,021
 7.5
1,431,628
 7.7
Utilities267,331
 1.5
299,472
 1.6
Other42,137
 0.2
56,091
 0.3
Total corporate4,320,374
 23.6
4,065,169
 21.8
Foreign government and foreign government agencies940,409
 5.1
825,412
 4.4
Total fixed maturity securities13,873,690
 75.7
13,572,402
 72.6
Equity securities available for sale:   
Equity securities:   
Common stocks419,520
 2.3
166,938
 0.9
Preferred stocks194,505
 1.1
158,316
 0.9
Total equity securities available for sale614,025
 3.4
Total equity securities325,254
 1.8
Real estate1,391,274
 7.5
1,917,250
 10.3
Investment funds1,119,907
 6.0
1,251,748
 6.7
Cash and cash equivalents773,997
 4.2
819,366
 4.4
Arbitrage trading account488,238
 2.7
678,321
 3.6
Loans receivable74,229
 0.5
96,590
 0.6
Total investments$18,335,360
 100.0%$18,660,931
 100.0%
________________________
(1) Pre-refunded securities are securities for which an escrow account has been established to fund the remaining payments of principal and interest through maturity. Such escrow accounts are funded almost exclusively with U.S. Treasury and U.S. government agency securities.


Fixed Maturity Securities. The Company’s investment policy with respect to fixed maturity securities is generally to purchase instruments with the expectation of holding them to their maturity. However, management of the available for sale


portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as a result of changes in financial market conditions and tax considerations.
The Company’s philosophy related to holding or selling fixed maturity securities is based on its objective of maximizing total return. The key factors that management considers in its investment decisions as to whether to hold or sell fixed maturity securities are its view of the underlying fundamentals of specific securities as well as its expectations regarding interest rates, credit spreads and currency values. In a period in which management expects interest rates to rise, the Company may sell longer duration securities in order to mitigate the impact of an interest rate rise on the fair value of the portfolio. Similarly, in a period in which management expects credit spreads to widen, the Company may sell lower quality securities, and in a period in which management expects certain foreign currencies to decline in value, the Company may sell securities denominated in those foreign currencies. The sale of fixed maturity securities in order to achieve the objective of maximizing total return may result in realized gains; however, there is no reason to expect these gains to continue in future periods.
At September 30, 2017, investments in foreign government fixed maturity securities (which are generally held by the Company's foreign operations) were as follows:
(In thousands)Carrying Value
Argentina$259,720
Australia217,397
Canada175,816
United Kingdom84,894
Brazil53,547
Germany48,794
Supranational (1)40,591
Singapore25,326
Norway9,930
Mexico9,490
Colombia7,696
Uruguay7,208
 Total$940,409
________
(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 common and preferred stocks in companies with potential growth opportunities in different sectors, including healthcare and financial institutions.
Investment Funds. At September 30, 2017,2018, the carrying value of investment funds was $1,120$1,252 million, including investments in real estate funds of $615$633 million, other funds of $539 million and energy funds of $86 million, and other funds of $419$80 million. Investment funds are generally reported on a one-quarter lag.
Real Estate. Real estate is directly owned property held for investment. At September 30, 2017,2018, real estate properties in operation included a long-term ground lease in Washington, D.C., a hotel in Memphis, Tennessee, antwo office complexcomplexes in New York City and office buildings in West Palm Beach and Palm Beach, Florida. In addition, there are two properties under development: an office building in London and a mixed-use project in Washington, D.C. 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 $74$97 million and an aggregate fair value of $77$99 million at September 30, 2017.2018. The amortized cost of loans receivable is net of a valuation allowance of $3 million as of September 30, 20172018. Loans receivable include real estate loans of $59$63 million that are secured by commercial real estate located primarily in 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 $15$34 million that are secured by business assets and have fixed interest rates and floating LIBOR-based 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 2.9 years at September 30, 20172018, down from 3.1 and 3.0 years at December 31, 20162017.
In addition, the fair value of the Company’s international investments is subject to currency risk. The Company attempts to manage its currency risk by matching its foreign currency assets and liabilities where considered appropriate.




Liquidity and Capital Resources
Cash Flow. Cash flow provided from operating activities decreased to $522was $343 million in the first nine months of 20172018 as compared to $522 million provided from $727 millionoperating activities in the comparable period in 2016,first nine months of 2017. The reduction is primarily due to the timing of loss and loss expense payments, certain long-term incentive plan payments and payments to taxing authorities.
The Company's insurance subsidiaries' principal sources of cash are premiums, investment income, service fees and proceeds from sales and maturities of portfolio investments. The principal uses of cash are payments for claims, taxes, operating expenses and dividends. The Company expects its insurance subsidiaries to fund the payment of losses with cash received from premiums, investment income and fees. The Company targets an average duration for its investment portfolio that is within one year of the average duration of its liabilities so that portions of its investment portfolio mature throughout the claim cycle and are available for the payment of claims if necessary. In the event operating cash flow and proceeds from maturities and prepayments of fixed income securities are not sufficient to fund claim payments and other cash requirements, the remainder of the Company's cash and investments is available to pay claims and other obligations as they become due. The Company's investment portfolio is highly liquid, with approximately 80%77% invested in cash, cash equivalents and marketable fixed maturity securities as of September 30, 2017.2018. If the sale of fixed maturity securities were to become necessary, a realized gain or loss equal to the difference between the cost and sales price of securities sold would be recognized.
Debt. At September 30, 2017,2018, the Company had senior notes, subordinated debentures and other debt outstanding with a carrying value of $2,488$2,698 million and a face amount of $2,521$2,735 million. The maturities of the outstanding debt are $442$453 million in 2019, $302$320 million in 2020, $427 million in 2022, $250 million in 2037, $350 million in 2044, $350 million in 2053, and $400 million in 2056.2056, and $185 million in 2058.

In February 2016,During 2018, the Company issued $110$175 million aggregate principal amount of its 5.9%5.70% subordinated debentures due 2056,2058 in March 2018, and another $10 million principal amount of such debentures in May 2016,April 2018. Additionally in 2018, the Company issued $290 million aggregate principal amountsubsidiary debt of its 5.75% subordinated debentures due 2056. During 2017, the Company repaid $2 million of debt compared to $83 million of debt in 2016 mainly in connection with the sale of Areo Precision Industries.$20 million.
Equity. At September 30, 2017,2018, total common stockholders’ equity was $5.4 billion, common shares outstanding were 121,769,109122,117,763 and stockholders’ equity per outstanding share was $44.60.$44.53. The Company repurchased 441,119101,000 common shares for $28.4$6.8 million during the nine months ended September 30, 2018. During the three months ended September 30, 2017.2018, the Company did not repurchase any shares of its common stock. The number of common shares outstanding excludes shares held in a grantor trust established by the Company for delivery upon settlement of vested but mandatorily deferred RSUs.
Total Capital.Total capitalization (equity, debt and subordinated debentures) was $7.9$8.1 billion at September 30, 2017.2018. The percentage of the Company’s capital attributable to senior notes, subordinated debentures and other debt was 31%33% at September 30, 20172018 and 33%32% at December 31, 2016.2017.


Item 3.3.     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 ProceduresProcedures.. 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 ReportingReporting.. During the quarter ended September 30, 2017,2018, 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 2120 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 From 10-K for the fiscal year ended December 31, 2016.2017.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds    

Set forth below is a summaryThe Company did not repurchase any of theits shares repurchased by the Company during the three months ended September 30, 20172018, and accordingly the number of shares remaining authorized for purchase by the Company:
 Total number
of shares purchased		 Average price
paid per share		 Total number of shares purchased
as part of publicly announced plans or programs		 Maximum number of
shares that may yet be purchased under the plans or programs
July 2017—
 —
 —
 6,851,086
August 2017—
 —
 —
 
10,000,000 (1)

September 2017441,119
 $64.333
 441,119
 9,558,881

(1) The Company's repurchase authorization was increased to 10,000,000 shares on August 8, 2017.

Company remains 9,167,997.

Item 6. Exhibits

Number   
(10.1)
 
Form of 20172018 Performance-Based Restricted Stock Unit Agreement Under the W. R. Berkley Corporation 20122018 Stock Incentive Plan
.
(10.2)
W. R. Berkley Corporation Deferred Compensation Plan for Officers as amended and restated November 2, 2016
   
(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.


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
  
W. R. BERKLEY CORPORATION
 
Date:November 8, 20172018/s/ W. Robert Berkley, Jr.
  W. Robert Berkley, Jr.
  President and Chief Executive Officer 
   
Date:November 8, 20172018/s/ Richard M. Baio
  Richard M. Baio
  Senior Vice President - Chief Financial Officer and Treasurer

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