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, 20182019
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

Commission File Number1-15202

W. R. BERKLEY CORPORATIONCORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-1867895
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
incorporation or organization)Identification No.)
   
475 Steamboat Road Greenwich, ConnecticutGreenwichConnecticut06830
(Address of principal executive offices) (Zip Code)
(203)629-3000
(Registrant’s telephone number, including area 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.
Securities registered pursuant to Section 12(b) of the Act:
TitleTrading SymbolName
Common Stock, par value $.20 per shareWRBNew York Stock Exchange
5.625% Subordinated Debentures due 2053WRB BNew York Stock Exchange
5.9% Subordinated Debentures due 2056WRB CNew York Stock Exchange
5.75% Subordinated Debentures due 2056WRB DNew York Stock Exchange
5.70% Subordinated Debentures due 2058WRB ENew York Stock Exchange
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 every Interactive Data File required to be submitted 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 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 filerþ
 
Accelerated filero
Non-accelerated filero
 
Smaller reporting companyo
   
Emerging growth companyo
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 5, 2018: 122,124,2434, 2019: 183,674,708
 






TABLE OF CONTENTS
 
 
 
 
 
 
 
 
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.     Financial Statements


W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30,
2018
 December 31,
2017
September 30,
2019
 December 31,
2018
(Unaudited) (Audited)(Unaudited) (Audited)
Assets      
Investments:      
Fixed maturity securities$13,572,402
 $13,551,250
$14,086,075
 $13,606,812
Real estate1,917,250
 1,469,601
2,102,391
 1,957,092
Investment funds1,251,748
 1,155,677
1,227,298
 1,332,818
Arbitrage trading account678,321
 617,649
641,993
 452,548
Equity securities325,254
 576,647
443,654
 279,006
Loans receivable96,590
 79,684
92,285
 94,813
Total investments17,841,565
 17,450,508
18,593,696
 17,723,089
Cash and cash equivalents819,366
 950,471
812,550
 817,602
Premiums and fees receivable1,872,460
 1,773,844
2,009,294
 1,807,762
Due from reinsurers1,859,917
 1,783,200
2,079,525
 1,932,291
Deferred policy acquisition costs513,092
 507,549
527,390
 497,629
Prepaid reinsurance premiums497,285
 472,009
547,352
 498,880
Trading account receivables from brokers and clearing organizations191,394
 189,280
209,061
 347,228
Property, furniture and equipment424,754
 422,960
416,966
 416,372
Goodwill171,095
 178,945
169,652
 173,037
Accrued investment income148,646
 136,597
144,488
 144,481
Federal and foreign income taxes37,196
 

 36,193
Other assets478,879
 434,554
708,537
 501,413
Total assets$24,855,649
 $24,299,917
$26,218,511
 $24,895,977
      
Liabilities and Equity      
Liabilities:      
Reserves for losses and loss expenses$11,872,162
 $11,670,408
$12,396,955
 $11,966,448
Unearned premiums3,454,955
 3,290,180
3,691,312
 3,359,991
Due to reinsurers231,197
 246,460
336,547
 256,917
Trading account securities sold but not yet purchased112,355
 64,358
68,976
 38,120
Federal and foreign income taxes
 98,091
15,279
 
Other liabilities1,008,145
 981,987
1,267,221
 1,005,184
Senior notes and other debt1,790,498
 1,769,052
1,434,725
 1,882,028
Subordinated debentures907,304
 728,218
908,053
 907,491
Total liabilities19,376,616
 18,848,754
20,119,068
 19,416,179
Equity:      
Preferred stock, par value $.10 per share:   
Authorized 5,000,000 shares; issued and outstanding - none
 
Common stock, par value $.20 per share:      
Authorized 500,000,000 shares, issued and outstanding, net of treasury shares, 122,117,763 and 121,514,852 shares, respectively47,024
 47,024
Authorized 500,000,000 shares, issued and outstanding, net of treasury shares, 183,674,147 and 182,993,640 shares, respectively70,535
 70,535
Additional paid-in capital1,058,074
 1,048,283
1,045,448
 1,039,633
Retained earnings7,505,706
 6,956,882
7,971,019
 7,558,619
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)
Accumulated other comprehensive loss(322,100) (510,470)
Treasury stock, at cost, 169,002,617 and 169,683,237 shares, respectively(2,708,606) (2,720,466)
Total stockholders’ equity5,437,848
 5,411,344
6,056,296
 5,437,851
Noncontrolling interests41,185
 39,819
43,147
 41,947
Total equity5,479,033
 5,451,163
6,099,443
 5,479,798
Total liabilities and equity$24,855,649
 $24,299,917
$26,218,511
 $24,895,977
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
Ended September 30,
 For the Nine Months
Ended September 30,
For the Three Months
Ended September 30,
 For the Nine Months
Ended September 30,
  
2018 2017 2018 20172019 2018 2019 2018
REVENUES:              
Net premiums written$1,624,214
 $1,571,183
 $4,913,656
 $4,782,272
$1,749,906
 $1,624,214
 $5,202,971
 $4,913,656
Change in net unearned premiums(20,729) 10,317
 (161,709) (62,028)(73,096) (20,729) (286,464) (161,709)
Net premiums earned1,603,485
 1,581,500
 4,751,947
 4,720,244
1,676,810
 1,603,485
 4,916,507
 4,751,947
Net investment income186,124
 142,479
 514,419
 426,601
161,692
 186,124
 508,279
 514,419
Net realized and unrealized gains on investments22,334
 183,959
 140,429
 276,760
1,465
 22,334
 143,691
 140,429
Revenues from non-insurance businesses95,168
 89,786
 242,037
 225,033
101,880
 95,168
 283,005
 242,037
Insurance service fees30,782
 33,612
 91,175
 100,475
23,681
 30,782
 71,440
 91,175
Other income9
 6
 59
 695
188
 9
 3,200
 59
Total revenues1,937,902
 2,031,342
 5,740,066
 5,749,808
1,965,716
 1,937,902
 5,926,122
 5,740,066
OPERATING COSTS AND EXPENSES:              
Losses and loss expenses1,017,720
 1,081,174
 2,954,575
 3,025,475
1,041,471
 1,017,720
 3,058,950
 2,954,575
Other operating costs and expenses577,648
 600,822
 1,781,230
 1,821,155
581,045
 577,648
 1,760,961
 1,781,230
Expenses from non-insurance businesses93,463
 86,412
 238,198
 221,389
101,743
 93,463
 280,141
 238,198
Interest expense39,848
 36,821
 116,608
 110,419
38,475
 39,848
 119,913
 116,608
Total operating costs and expenses1,728,679
 1,805,229
 5,090,611
 5,178,438
1,762,734
 1,728,679
 5,219,965
 5,090,611
Income before income taxes209,223
 226,113
 649,455
 571,370
202,982
 209,223
 706,157
 649,455
Income tax expense(44,780) (63,295) (136,661) (174,305)(37,831) (44,780) (141,965) (136,661)
Net income before noncontrolling interests164,443
 162,818
 512,794
 397,065
165,151
 164,443
 564,192
 512,794
Noncontrolling interests(2,523) (764) (4,402) (2,560)57
 (2,523) (1,554) (4,402)
Net income to common stockholders$161,920
 $162,054
 $508,392
 $394,505
$165,208
 $161,920
 $562,638
 $508,392
              
NET INCOME PER SHARE:              
Basic$1.28
 $1.29
 $4.02
 $3.17
$0.87
 $0.85
 $2.95
 $2.68
Diluted$1.26
 $1.26
 $3.96
 $3.05
$0.85
 $0.84
 $2.91
 $2.64


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
Ended September 30,
 For the Nine Months
Ended September 30,
For the Three Months
Ended September 30,
 For the Nine Months
Ended September 30,
  
2018 2017 2018 20172019 2018 2019 2018
Net income before noncontrolling interests$164,443
 $162,818
 $512,794
 $397,065
$165,151
 $164,443
 $564,192
 $512,794
Other comprehensive (loss) income:              
Change in unrealized currency translation adjustments15,686
 28,592
 (75,970) 71,574
(36,682) 15,686
 (31,414) (75,970)
Change in unrealized investment (losses) gains, net of taxes(94,842) (8,168) (253,056) 26,598
(24,745) (94,842) 219,679
 (253,056)
Other comprehensive (loss) income(79,156) 20,424
 (329,026) 98,172
(61,427) (79,156) 188,265
 (329,026)
Comprehensive income85,287
 183,242
 183,768
 495,237
103,724
 85,287
 752,457
 183,768
Noncontrolling interests(2,463) (731) (4,316) (2,541)(66) (2,463) (1,659) (4,316)
Comprehensive income to common stockholders$82,824
 $182,511
 $179,452
 $492,696
$103,658
 $82,824
 $750,798
 $179,452


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 Months
Ended September 30,
For the Three Months
Ended September 30,
 For the Nine Months
Ended September 30,
2018
20172019 2018 2019
2018
COMMON STOCK:          
Beginning and end of period$47,024
 $47,024
$70,535
 $70,535
 $70,535
 $70,535
ADDITIONAL PAID-IN CAPITAL:          
Beginning of period$1,048,283
 $1,037,446
$1,058,416
 $1,036,796
 $1,039,633
 $1,024,772
Restricted stock units issued(16,690) (27,047)(28,155) (11,048) (30,659) (16,690)
Restricted stock units expensed26,481
 30,176
15,187
 8,815
 36,474
 26,481
End of period$1,058,074
 $1,040,575
$1,045,448
 $1,034,563
 $1,045,448
 $1,034,563
RETAINED EARNINGS:          
Beginning of period$6,956,882
 $6,595,987
$7,826,015
 $7,423,162
 $7,558,619
 $6,956,882
Cumulative effect adjustment resulting from changes in accounting principles215,939
 

 
 
 215,939
Net income to common stockholders508,392
 394,505
165,208
 161,920
 562,638
 508,392
Dividends(175,507) (110,430)
Dividends ($0.11, $0.43, $0.82 and $0.96 per share, respectively)(20,204) (79,376) (150,238) (175,507)
End of period$7,505,706
 $6,880,062
$7,971,019
 $7,505,706
 $7,971,019
 $7,505,706
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME:   
Unrealized investment (losses) gains:   
ACCUMULATED OTHER COMPREHENSIVE LOSS:       
Unrealized investment gains (losses):       
Beginning of period$375,421
 $427,154
$152,915
 $2,694
 $(91,491) $375,421
Cumulative effect adjustment resulting from changes in accounting principles(214,539) 

 
 
 (214,539)
Change in unrealized (losses) gains on securities not other-than-temporarily impaired(252,974) 25,712
(25,005) (94,775) 219,388
 (252,974)
Change in unrealized gains on other-than-temporarily impaired securities4
 905
Change in unrealized gains (losses) on other-than-temporarily impaired securities383
 (7) 396
 4
End of period(92,088) 453,771
128,293
 (92,088) 128,293
 (92,088)
Currency translation adjustments:          
Beginning of period(306,880) (371,586)(413,711) (398,536) (418,979) (306,880)
Net change in period(75,970) 71,574
(36,682) 15,686
 (31,414) (75,970)
End of period(382,850) (300,012)(450,393) (382,850) (450,393) (382,850)
Total accumulated other comprehensive (loss) income$(474,938) $153,759
Total accumulated other comprehensive loss$(322,100) $(474,938) $(322,100) $(474,938)
TREASURY STOCK:          
Beginning of period$(2,709,386) $(2,688,817)$(2,717,410) $(2,708,534) $(2,720,466) $(2,709,386)
Stock exercised/vested17,478
 25,584
8,804
 10,515
 11,308
 17,478
Stock repurchased(6,799) (28,378)
 
 
 (6,799)
Stock issued689
 727

 1
 552
 689
End of period$(2,698,018) $(2,690,884)$(2,708,606) $(2,698,018) $(2,708,606) $(2,698,018)
NONCONTROLLING INTERESTS:          
Beginning of period$39,819
 $33,926
$43,318
 $39,510
 $41,947
 $39,819
(Distributions) contributions(2,950) 3,646
Net income4,402
 2,560
Distributions(237) (788) (459) (2,950)
Net (loss) income(57) 2,523
 1,554
 4,402
Other comprehensive income (loss), net of tax(86) (19)123
 (60) 105
 (86)
End of period$41,185
 $40,113
$43,147
 $41,185
 $43,147
 $41,185
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 Months
Ended September 30,
For the Nine Months
Ended September 30,
2018 20172019 2018
CASH FROM OPERATING ACTIVITIES:      
Net income to common stockholders$508,392
 $394,505
$562,638
 $508,392
Adjustments to reconcile net income to net cash from operating activities:   
Adjustments to reconcile net income to net cash from (used in) operating activities:   
Net realized and unrealized gains on investments(140,429) (276,760)(143,691) (140,429)
Depreciation and amortization76,541
 78,137
42,007
 76,541
Noncontrolling interests4,402
 2,560
1,554
 4,402
Investment funds(94,075) (51,907)(77,284) (94,075)
Stock incentive plans28,528
 31,883
38,440
 28,528
Change in:      
Arbitrage trading account(14,795) (2,835)(20,422) (14,795)
Premiums and fees receivable(107,347) (112,420)(206,867) (107,347)
Reinsurance accounts(114,298) (42,319)(116,359) (114,298)
Deferred policy acquisition costs(7,466) 4,483
(30,537) (7,466)
Income taxes(99,945) (15,451)(16,449) (99,945)
Reserves for losses and loss expenses230,112
 422,657
443,454
 230,112
Unearned premiums176,736
 121,583
336,664
 176,736
Other(103,832) (32,258)(18,104) (103,832)
Net cash from operating activities342,524
 521,858
795,044
 342,524
CASH USED IN INVESTING ACTIVITIES:      
Proceeds from sale of fixed maturity securities2,841,642
 3,081,619
1,341,688
 2,841,642
Proceeds from sale of equity securities449,388
 137,062
40,709
 449,388
(Contributions to) distributions from investment funds(3,505) 265,371
Distributions from (contributions to) investment funds187,321
 (3,505)
Proceeds from maturities and prepayments of fixed maturity securities1,957,724
 2,860,678
2,278,264
 1,957,724
Purchase of fixed maturity securities(5,187,501) (6,530,466)(3,853,108) (5,187,501)
Purchase of equity securities(87,059) (17,049)(66,305) (87,059)
Real estate purchased(454,410) (159,006)(176,538) (454,410)
Change in loans receivable(14,345) 32,574
3,156
 (14,345)
Net additions to property, furniture and equipment(35,582) (74,268)(1,802) (35,582)
Change in balances due to security brokers5,601
 39,978
54,620
 5,601
Cash received in connection with business disposition8,664
 

 8,664
Payment for business purchased net of cash acquired(6,637) (70,570)
 (6,637)
Other(443) 
45
 (443)
Net cash used in investing activities(526,463) (434,077)(191,950) (526,463)
CASH FROM (USED IN) FINANCING ACTIVITIES:   
CASH (USED IN) FROM FINANCING ACTIVITIES:   
Repayment of senior notes and other debt(23) (1,788)(448,409) (23)
Net proceeds from issuance of debt198,905
 

 198,905
Cash dividends to common stockholders(96,131) (93,371)(130,035) (96,131)
Purchase of common treasury shares(6,799) (28,378)
 (6,799)
Other, net(4,238) (3,835)(20,750) (4,238)
Net cash from (used in) financing activities91,714
 (127,372)
Net cash (used in) from financing activities(599,194) 91,714
Net impact on cash due to change in foreign exchange rates(38,880) 18,303
(8,952) (38,880)
Net change in cash and cash equivalents(131,105) (21,288)(5,052) (131,105)
Cash and cash equivalents at beginning of year950,471
 795,285
817,602
 950,471
Cash and cash equivalents at end of period$819,366
 $773,997
$812,550
 $819,366
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, 2017. 2018.
Reclassifications have been made in the 20172018 financial statements as originally reported to conform to the presentation of the 20182019 financial statements. Shares outstanding and per share amounts have been adjusted to reflect the 3-for-2 common stock split effected on April 2, 2019. Additionally, commencing with the first quarter of 2019, the Company renamed the Reinsurance segment to Reinsurance & Monoline Excess, and reclassified the monoline excess business from the Insurance segment. The reclassified business includes operations that solely retain risk on an excess basis.
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 21% principally because of tax-exempt investment income, as well astax benefits related to equity-based compensation, and tax on income from foreign jurisdictions with different tax 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 4,847,3037,389,781 and 4,087,7317,270,954 common shares held in a grantor trust as of September 30, 20182019 and 2017,2018, 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
Ended September 30,
 For the Nine Months
Ended September 30,
  
(In thousands)2019 2018 2019 2018
Basic190,862
 190,241
 190,593
 189,862
Diluted193,589
 192,842
 193,557
 192,606
 For the Three Months
Ended September 30,
 For the Nine Months
Ended September 30,
  
(In thousands)2018 2017 2018 2017
Basic126,827
 125,818
 126,575
 124,363
Diluted128,561
 128,944
 128,404
 129,289



(3) Recent Accounting Pronouncements
Recently adopted accounting pronouncements:
In May 2014,February 2016, the Financial Accounting Standards Board ("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 are 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, was effective for public business entities for annual and interim reporting periods beginning after December 15, 2017. The Company adopted this guidance on January 1, 2018 on a prospective basis. The impact of applying this guidance prospectively was a cumulative effect adjustment that increased retained earnings, a component of 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 in net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee).  The updated guidance was effective for public business entities for annual reporting periods beginning after December 15, 2017 and interim periods within those years. The Company adopted this updated guidance on January 1, 2018 on a prospective basis. The impact of applying this guidance prospectively was a cumulative effect adjustment that increased retained earnings and decreased accumulated other comprehensive incomeAccounting Standards Update ("AOCI"ASU") by offsetting amounts of $291 million, resulting in no net 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 beare 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 iswas effective for reporting periods beginning after December 15, 2018, and can be2018. As permitted by the rules, the Company 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,for the quarter ended March 31, 2019. The Company is currently evaluatingelected to use the impact thatpractical expedient permitted by the transition guidance which allowed companies to not reassess existing lease classifications for already effective leases. The adoption of this guidance willresulted in the recognition of a right-of-use asset of $185 million and a lease liability of $215 million (prior to adoption the Company had a $30 million deferred rent liability recognized) reported within other assets and other liabilities, respectively, in the consolidated balance sheet. The adoption of this guidance did not have an impact on itsthe Company's results of operations financial positionor liquidity.

All other accounting and liquidity.reporting standards that have become effective in 2019 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 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.cost, such as reinsurance recoverables. The updated guidance is effective for reporting periods beginning after December 15, 2019.

Based on current information as of September 30, 2019, the credit losses associated with operating assets, such as premium receivables and reinsurance recoverables, should not have a material effect on results of operations, financial position or liquidity.  The Company will not be able to determineis finalizing its methodology and implementation for investments and the impact on adoption as it relates to the adoption of this guidance will have on itsCompany’s results of operations, financial position or liquidity until the year the guidance becomes effective.will depend on investments held and market conditions at such time.


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) Consolidated Statement of Comprehensive Income (Loss)


The following table presents the components of the changes in accumulated other comprehensive income (loss) income ("AOCI"):
(In thousands)
Unrealized Investment
Gains (Losses)
 Currency Translation Adjustments 
Accumulated Other Comprehensive
(Loss) Income
As of and for the nine months ended September 30, 2019    
Changes in AOCI    
Beginning of period$(91,491) $(418,979) $(510,470)
Other comprehensive income (loss) before reclassifications218,592
 (31,414) 187,178
Amounts reclassified from AOCI1,087
 
 1,087
Other comprehensive income (loss)219,679
 (31,414) 188,265
Unrealized investment loss related to noncontrolling interest105
 
 105
End of period$128,293
 $(450,393) $(322,100)
Amounts reclassified from AOCI     
Pre-tax$1,376
(1)$
 $1,376
Tax effect(289)(2)
 (289)
After-tax amounts reclassified$1,087
 $
 $1,087
Other comprehensive income (loss)     
Pre-tax$287,739
 $(31,414) $256,325
Tax effect(68,060) 
 (68,060)
Other comprehensive income (loss)$219,679
 $(31,414) $188,265
As of and for the three months ended September 30, 2019    
Changes in AOCI    
Beginning of period$152,915
 $(413,711) $(260,796)
Other comprehensive loss before reclassifications(27,023) (36,682) (63,705)
Amounts reclassified from AOCI2,278
 
 2,278
Other comprehensive loss(24,745) (36,682) (61,427)
Unrealized investment losses related to noncontrolling interest123
 
 123
Ending balance$128,293
 $(450,393) $(322,100)
Amounts reclassified from AOCI     
Pre-tax$2,884
(1)$
 $2,884
Tax effect(606)(2)
 (606)
After-tax amounts reclassified$2,278
 $
 $2,278
Other comprehensive loss     
Pre-tax$(28,592) $(36,682) $(65,274)
Tax effect3,847
 
 3,847
Other comprehensive loss$(24,745) $(36,682) $(61,427)
_________________________
(In thousands)
Unrealized Investment
Gains (Losses)
 Currency Translation Adjustments 
Accumulated Other Comprehensive
(Loss) Income
As of and for the nine months ended September 30, 2018    
Changes in AOCI    
Beginning of period$375,421
 $(306,880) $68,541
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(10,112) 
 (10,112)
Other comprehensive loss(253,056) (75,970) (329,026)
Unrealized investment loss related to noncontrolling interest86
 
 86
End of period$(92,088) $(382,850) $(474,938)
Amounts reclassified from AOCI     
Pre-tax$(12,800)(1)$
 $(12,800)
Tax effect2,688
(2)
 2,688
After-tax amounts reclassified$(10,112) $
 $(10,112)
Other comprehensive loss     
Pre-tax$(298,164) $(75,970) $(374,134)
Tax effect45,108
 
 45,108
Other comprehensive loss$(253,056) $(75,970) $(329,026)
As of and for the three months ended September 30, 2018    
Changes in AOCI    
Beginning of period$2,694
 $(398,536) $(395,842)
Other comprehensive loss before reclassifications(95,312) 15,686
 (79,626)
Amounts reclassified from AOCI470
 
 470
Other comprehensive loss(94,842) 15,686
 (79,156)
Unrealized investment loss related to noncontrolling interest60
 
 60
End of period$(92,088) $(382,850) $(474,938)
Amounts reclassified from AOCI     
Pre-tax$595
(1)$
 $595
Tax effect(125)(2)
 (125)
After-tax amounts reclassified$470
 $
 $470
Other comprehensive loss     
Pre-tax$(96,828) $15,686
 $(81,142)
Tax effect1,986
 
 1,986
Other comprehensive loss$(94,842) $15,686
 $(79,156)
_________________________
(1) Net realized 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 (Loss) IncomeUnrealized Investment (Losses) Gains 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 gain related to noncontrolling 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, 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) income before reclassifications(95,312) 15,686
 (79,626)
Amounts reclassified from AOCI(28,136) 
 (28,136)470
 
 470
Other comprehensive income(8,168) 28,592
 20,424
Unrealized investment gain related to noncontrolling interest33
 
 33
End of period$453,771
 $(300,012) $153,759
Other comprehensive (loss) income(94,842) 15,686
 (79,156)
Unrealized investment loss related to noncontrolling interest60
 
 60
Ending balance$(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
 $
 $470
Other comprehensive income    
Other comprehensive (loss) income    
Pre-tax$(8,563) $28,592
 $20,029
$(96,828) $15,686
 $(81,142)
Tax effect395
 
 395
1,986
 
 1,986
Other comprehensive income$(8,168) $28,592
 $20,424
Other comprehensive (loss) income$(94,842) $15,686
 $(79,156)
_________________________
(1) Net realized and unrealized gains on investments in the consolidated statements of income.
(2) Income tax expense in the consolidated statements of income.







(5) Statements of Cash FlowFlows
Interest payments were $137,789,000$145,930,000 and $134,291,000$137,789,000 and income taxes paid were $127,282,000 and $173,000,000 and $182,487,000 infor the nine months ended September 30, 20182019 and 2017,2018, respectively.


(6) Investments in Fixed Maturity Securities
At September 30, 20182019 and December 31, 2017,2018, investments in fixed maturity securities were as follows:
 
(In thousands)
Amortized
Cost
 Gross Unrealized 
Fair
Value
 
Carrying
Value
Gains Losses 
September 30, 2019         
Held to maturity:         
State and municipal$69,662
 $13,657
 $
 $83,319
 $69,662
Residential mortgage-backed8,838
 1,009
 
 9,847
 8,838
Total held to maturity78,500
 14,666
 
 93,166
 78,500
Available for sale:         
U.S. government and government agency800,656
 16,493
 (1,035) 816,114
 816,114
State and municipal:         
Special revenue2,371,953
 70,012
 (3,091) 2,438,874
 2,438,874
State general obligation340,252
 24,773
 (18) 365,007
 365,007
Pre-refunded280,272
 20,053
 (121) 300,204
 300,204
Corporate backed243,982
 7,561
 (563) 250,980
 250,980
Local general obligation426,071
 35,987
 (477) 461,581
 461,581
Total state and municipal3,662,530
 158,386
 (4,270) 3,816,646
 3,816,646
Mortgage-backed securities:         
Residential (1)1,323,941
 27,309
 (4,002) 1,347,248
 1,347,248
Commercial356,480
 7,301
 (706) 363,075
 363,075
Total mortgage-backed securities1,680,421
 34,610
 (4,708) 1,710,323
 1,710,323
Asset-backed2,758,752
 10,979
 (21,475) 2,748,256
 2,748,256
Corporate:         
Industrial2,298,887
 75,313
 (8,677) 2,365,523
 2,365,523
Financial1,397,768
 34,979
 (5,156) 1,427,591
 1,427,591
Utilities306,104
 16,279
 (323) 322,060
 322,060
Other19,852
 1,280
 (38) 21,094
 21,094
Total corporate4,022,611
 127,851
 (14,194) 4,136,268
 4,136,268
Foreign government841,142
 18,241
 (79,415) 779,968
 779,968
Total available for sale13,766,112
 366,560
 (125,097) 14,007,575
 14,007,575
Total investments in fixed maturity securities$13,844,612
 $381,226
 $(125,097) $14,100,741
 $14,086,075
(In thousands)
Amortized
Cost
 Gross Unrealized 
Fair
Value
 
Carrying
Value
Gains Losses 
September 30, 2018         
Held to maturity:         
State and municipal$67,513
 $11,081
 $
 $78,594
 $67,513
Residential mortgage-backed11,276
 1,171
 
 12,447
 11,276
Total held to maturity78,789
 12,252
 
 91,041
 78,789
Available for sale:         
U.S. government and government agency490,679
 4,258
 (7,895) 487,042
 487,042
State and municipal:         
Special revenue2,486,490
 23,982
 (32,046) 2,478,426
 2,478,426
State general obligation380,200
 8,917
 (2,742) 386,375
 386,375
Pre-refunded427,429
 15,213
 (55) 442,587
 442,587
Corporate backed294,243
 4,833
 (2,596) 296,480
 296,480
Local general obligation403,879
 13,988
 (3,841) 414,026
 414,026
Total state and municipal3,992,241
 66,933
 (41,280) 4,017,894
 4,017,894
Mortgage-backed securities:         
Residential (1)1,237,787
 4,400
 (33,896) 1,208,291
 1,208,291
Commercial345,826
 670
 (6,565) 339,931
 339,931
Total mortgage-backed securities1,583,613
 5,070
 (40,461) 1,548,222
 1,548,222
Asset-backed2,556,499
 10,753
 (17,378) 2,549,874
 2,549,874
Corporate:         
Industrial2,303,206
 16,555
 (41,783) 2,277,978
 2,277,978
Financial1,436,530
 16,786
 (21,688) 1,431,628
 1,431,628
Utilities303,260
 2,222
 (6,010) 299,472
 299,472
Other56,474
 6
 (389) 56,091
 56,091
Total corporate4,099,470
 35,569
 (69,870) 4,065,169
 4,065,169
Foreign838,834
 10,427
 (23,849) 825,412
 825,412
Total available for sale13,561,336
 133,010
 (200,733) 13,493,613
 13,493,613
Total investments in fixed maturity securities$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, 2017         
December 31, 2018         
Held to maturity:                  
State and municipal$65,882
 $14,499
 $
 $80,381
 $65,882
$67,891
 $11,549
 $
 $79,440
 $67,891
Residential mortgage-backed13,450
 1,227
 
 14,677
 13,450
10,744
 1,259
 
 12,003
 10,744
Total held to maturity79,332
 15,726
 
 95,058
 79,332
78,635
 12,808
 
 91,443
 78,635
Available for sale:                  
U.S. government and government agency372,748
 8,824
 (3,832) 377,740
 377,740
697,931
 9,219
 (4,910) 702,240
 702,240
State and municipal:                  
Special revenue2,663,245
 53,512
 (10,027) 2,706,730
 2,706,730
2,396,089
 30,507
 (19,790) 2,406,806
 2,406,806
State general obligation439,358
 16,087
 (711) 454,734
 454,734
335,626
 11,951
 (1,103) 346,474
 346,474
Pre-refunded436,241
 22,701
 (9) 458,933
 458,933
408,141
 16,568
 (30) 424,679
 424,679
Corporate backed375,268
 10,059
 (860) 384,467
 384,467
272,440
 4,319
 (2,350) 274,409
 274,409
Local general obligation417,955
 23,242
 (967) 440,230
 440,230
403,219
 18,350
 (1,339) 420,230
 420,230
Total state and municipal4,332,067
 125,601
 (12,574) 4,445,094
 4,445,094
3,815,515
 81,695
 (24,612) 3,872,598
 3,872,598
Mortgage-backed securities:                  
Residential (1)1,043,629
 9,304
 (13,547) 1,039,386
 1,039,386
1,264,376
 7,729
 (20,225) 1,251,880
 1,251,880
Commercial261,652
 1,521
 (2,628) 260,545
 260,545
345,070
 1,304
 (3,708) 342,666
 342,666
Total mortgage-backed securities1,305,281
 10,825
 (16,175) 1,299,931
 1,299,931
1,609,446
 9,033
 (23,933) 1,594,546
 1,594,546
Asset-backed2,111,132
 11,024
 (10,612) 2,111,544
 2,111,544
2,462,303
 10,131
 (33,687) 2,438,747
 2,438,747
Corporate:                  
Industrial2,574,400
 52,210
 (7,718) 2,618,892
 2,618,892
2,295,778
 15,355
 (53,312) 2,257,821
 2,257,821
Financial1,402,161
 37,744
 (5,138) 1,434,767
 1,434,767
1,502,427
 7,178
 (45,683) 1,463,922
 1,463,922
Utilities284,886
 11,316
 (1,248) 294,954
 294,954
330,326
 2,997
 (4,148) 329,175
 329,175
Other40,560
 5
 (66) 40,499
 40,499
60,238
 322
 (167) 60,393
 60,393
Total corporate4,302,007
 101,275
 (14,170) 4,389,112
 4,389,112
4,188,769
 25,852
 (103,310) 4,111,311
 4,111,311
Foreign819,345
 32,018
 (2,866) 848,497
 848,497
Foreign government822,093
 11,753
 (25,111) 808,735
 808,735
Total available for sale13,242,580
 289,567
 (60,229) 13,471,918
 13,471,918
13,596,057
 147,683
 (215,563) 13,528,177
 13,528,177
Total investments in fixed maturity securities$13,321,912

$305,293
 $(60,229) $13,566,976
 $13,551,250
$13,674,692

$160,491
 $(215,563) $13,619,620
 $13,606,812
____________
(1) Gross unrealized gains (losses) for residential mortgage-backed securities include $81,006$341,322 and $76,467$(55,090) as of September 30, 20182019 and December 31, 2017,2018, 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, 2018,2019, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay obligations.
(In thousands)
Amortized
Cost
 
Fair
Value
Due in one year or less$886,582
 $870,937
Due after one year through five years5,013,048
 5,072,203
Due after five years through ten years3,220,188
 3,360,359
Due after ten years3,035,535
 3,077,072
Mortgage-backed securities1,689,259
 1,720,170
Total$13,844,612
 $14,100,741
(In thousands)
Amortized
Cost
 
Fair
Value
Due in one year or less$948,532
 $948,471
Due after one year through five years4,526,907
 4,523,008
Due after five years through ten years2,958,685
 2,959,406
Due after ten years3,611,112
 3,593,100
Mortgage-backed securities1,594,889
 1,560,669
Total$13,640,125
 $13,584,654

At September 30, 20182019 and December 31, 2017,2018, there were no investments that exceeded 10% of common stockholders' equity, other than investments in United States government and government agency securities.







(7) Investments in Equity Securities
At September 30, 20182019 and December 31, 20172018, investments in equity securities were as follows:
(In thousands)Cost Gross Unrealized 
Fair
Value
 
Carrying
Value
Gains Losses 
September 30, 2019         
Common stocks$166,689
 $14,839
 $(33,467) $148,061
 $148,061
Preferred stocks111,014
 188,489
 (3,910) 295,593
 295,593
Total$277,703
 $203,328
 $(37,377) $443,654
 $443,654
          
December 31, 2018         
Common stocks$113,576
 $4,335
 $(19,719) $98,192
 $98,192
Preferred stocks115,201
 72,364
 (6,751) 180,814
 180,814
Total$228,777
 $76,699
 $(26,470) $279,006
 $279,006

(In thousands)Cost Gross Unrealized (1) 
Fair
Value
 
Carrying
Value
Gains Losses 
September 30, 2018         
Common stocks$117,880
 $56,869
 $(7,811) $166,938
 $166,938
Preferred stocks117,101
 44,262
 (3,047) 158,316
 158,316
Total$234,981
 $101,131
 $(10,858) $325,254
 $325,254
December 31, 2017         
Common stocks$81,855
 $272,309
 $(1,960) $352,204
 $352,204
Preferred stocks124,150
 102,890
 (2,597) 224,443
 224,443
Total$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.



(8) Arbitrage Trading Account
At September 30, 20182019 and December 31, 20172018, the fair and carrying values of the arbitrage trading account were $678$642 million and $618$453 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 and 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, 2018,2019, the fair value of long option contracts outstanding was $89$380 thousand (notional amount of $16.4$12.3 million) and the fair value of short option contracts outstanding was $278$359 thousand (notional amount of $28.8$12.5 million). Other than with respect to the use of these trading account securities, the Company does not make use of derivatives.




(9) Net Investment Income
Net investment income consistsconsisted of the following:
 For the Three Months
Ended September 30,
 For the Nine Months
Ended September 30,
  
(In thousands)2019 2018 2019 2018
Investment income earned on:       
Fixed maturity securities, including cash and cash equivalents and loans receivable$125,957
 $131,836
 $386,978
 $384,748
Investment funds19,033
 41,005
 77,284
 94,075
Arbitrage trading account8,400
 7,632
 26,184
 21,156
Real estate7,987
 5,597
 17,468
 15,339
Equity securities1,392
 1,004
 3,984
 2,208
Gross investment income162,769
 187,074
 511,898
 517,526
Investment expense(1,077) (950) (3,619) (3,107)
Net investment income$161,692
 $186,124
 $508,279
 $514,419




 For the Three Months
Ended September 30,
 For the Nine Months
Ended September 30,
  
(In thousands)2018 2017 2018 2017
Investment income earned on:       
Fixed maturity securities, including cash and cash equivalents and loans receivable$131,836
 $118,834
 $384,748
 $347,976
Investment funds41,005
 15,200
 94,075
 50,744
Arbitrage trading account7,632
 4,418
 21,156
 16,235
Real estate5,597
 5,042
 15,339
 14,894
Equity securities1,004
 604
 2,208
 1,845
Gross investment income187,074
 144,098
 517,526
 431,694
Investment expense(950) (1,619) (3,107) (5,093)
Net investment income$186,124
 $142,479
 $514,419
 $426,601





(10) Investment Funds
The Company evaluates whether it is an investor in a variable interest entity ("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 $324$263 million as of September 30, 2018.2019.
Investment funds consisted of the following:
 Carrying Value as of 
Income (Loss) from
Investment Funds
 September 30, December 31, For the Nine Months
Ended September 30,
(In thousands)2019 2018 2019 2018
Real estate$437,000
 $642,137
 $17,279
 $50,044
Financial services282,630
 195,706
 36,516
 8,201
Energy173,508
 183,627
 (10,342) 14,088
Transportation146,264
 136,640
 12,222
 11,270
Other funds187,896
 174,708
 21,609
 10,472
Total$1,227,298
 $1,332,818
 $77,284

$94,075

 Carrying Value as of 
Income (Loss) from
Investment Funds
 September 30, December 31, For the Nine Months
Ended September 30,
(In thousands)2018 2017 2018 2017
Real estate$632,618
 $606,995
 $50,044
 $30,661
Energy79,559
 82,882
 408
 (12,763)
Other funds539,571
 465,800
 43,623
 32,846
Total$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.


(11) Real Estate
Investment in real estate represents directly owned property held for investment, as follows:
 Carrying Value
 September 30, December 31,
(In thousands)2019 2018
Properties in operation$1,310,281
 $1,279,584
Properties under development792,110
 677,508
Total$2,102,391
 $1,957,092

 Carrying Value
 September 30, December 31,
(In thousands)2018 2017
Properties in operation$757,573
 $451,691
Properties under development1,159,677
 1,017,910
Total$1,917,250
 $1,469,601


In 2018,2019, properties in operation included a long-term ground lease in Washington, D.C., a hotel in Memphis, Tennessee, two office complexes in New York City, and office buildings in West Palm Beach and Palm Beach, Florida.Florida, and an office building in London. Properties in operation are net of accumulated depreciation and amortization of $40,623,000$53,527,000 and $25,646,000$46,250,000 as of September 30, 20182019 and December 31, 2017,2018, respectively. Related depreciation expense was $15,175,000$8,871,000 and $5,382,000$15,175,000 for the nine months ended September 30, 20182019 and 2017,2018, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $12,632,005 in 2018, $52,014,542$19,992,859 in 2019, $50,145,388$71,328,260 in 2020, $49,267,711$73,423,409 in 2021, $51,048,893$73,077,521 in 2022, $42,435,018$66,630,376 in 2023, $64,408,124 in 2024 and $501,089,126$671,711,807 thereafter.


Properties under development include anThe Company borrowed $101,750,000 through a non-recourse loan secured by the West Palm Beach office building in London2018. The loan matures in November 2028 and carries a fixed interest rate of 4.21%. The carrying value does not reflect the outstanding financing, but rather is reflected within senior notes and other debt on the Company's consolidated balance sheet.

A mixed-use project in Washington, D.C. has been under development in 2019 and 2018.






(12) Loans Receivable
Loans receivable are as follows:
(In thousands)September 30, 2019 December 31, 2018
Amortized cost (net of valuation allowance):   
Real estate loans$58,780
 $62,289
Commercial loans33,505
 32,524
Total$92,285
 $94,813
    
Fair value:   
Real estate loans$60,147
 $63,047
Commercial loans35,008
 34,026
Total$95,155
 $97,073
    
Valuation allowance:   
Specific$165
 $1,200
General1,981
 2,183
Total$2,146
 $3,383
    
 For the Three Months
Ended September 30,
 
 2019 2018
  Change in valuation allowance$(144) $
    
 For the Nine Months
Ended September 30,
 
 2019 2018
  Change in valuation allowance$(1,237) $
(In thousands)September 30, 2018 December 31, 2017
Amortized cost (net of valuation allowance):   
Real estate loans$62,775
 $66,057
Commercial loans33,815
 13,627
Total$96,590
 $79,684
    
Fair value:   
Real estate loans$63,561
 $66,917
Commercial loans35,317
 15,130
Total$98,878
 $82,047
    
Valuation allowance:   
Specific$1,200
 $1,200
General2,183
 2,183
Total$3,383
 $3,383
    
 For the Three Months Ended
September 30,
 
 2018 2017
  Change in valuation allowance$
 $
    
 For the Nine Months
Ended September 30,
 
 2018 2017
  Decrease in valuation allowance$
 $(14)

Loans receivable in non-accrual status were $1.5$0.2 million and $4.3$1.2 million as of September 30, 20182019 and December 31, 2017, respectively.2018.
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, 2018,2019, and accordingly, the Company determined that a specific valuation allowance was not required.






(13) Net Realized and Unrealized Gains (Losses) on Investments
 Net realizedrealized and unrealized gains (losses) on investments are as follows:
 For the Three Months
Ended September 30,
 For the Nine Months
Ended September 30,
(In thousands)2019 2018 2019 2018
Net realized and unrealized gains (losses) on investments in earnings:     
  
Fixed maturity securities:     
  
Gains$2,100
 $2,152
 $10,503
 $23,412
Losses(4,984) (2,747) (11,879) (10,612)
Equity securities (1):       
Net realized (losses) gains on investment sales(11) 149,562
 23,328
 391,305
Change in unrealized gains (losses)4,226
 (131,513) 115,722
 (280,370)
Investment funds(456) (30) (398) (264)
Real estate417
 4,518
 6,184
 12,114
Loans receivable
 449
 (970) 2,508
Other173
 (57) 1,201
 2,336
Net realized and unrealized gains on investments in earnings before OTTI1,465
 22,334
 143,691
 140,429
Other-than-temporary impairments
 
 
 
Net realized and unrealized gains on investments in earnings1,465
 22,334
 143,691
 140,429
Income tax expense(308) (4,690) (30,175) (29,490)
After-tax net realized and unrealized gains on investments in earnings$1,157
 $17,644
 $113,516
 $110,939

 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 (losses) gains of available for sale securities:     
  
Fixed maturity securities$(12,178) $(100,490) $308,945
 $(297,065)
Previously impaired fixed maturity securities384
 (7) 396
 4
Investment funds(16,798) 3,669
 (21,602) (1,103)
Total change in unrealized investment (losses) gains(28,592) (96,828) 287,739
 (298,164)
Income tax benefit (expense)3,847
 2,086
 (68,060) 45,280
Noncontrolling interests123
 60
 105
 86
After-tax change in unrealized investment (losses) gains of available for sale securities$(24,622) $(94,682) $219,784
 $(252,798)
Change in unrealized investment (losses) gains of available for sale securities:     
  
Fixed maturity securities$(100,490) $(10,627) $(297,065) $84,214
Previously impaired fixed maturity securities(7) 61
 4
 905
Equity securities available for sale (3)
 (2,126) 
 (44,812)
Investment funds3,669
 4,129
 (1,103) 9,841
Total change in unrealized investment (losses) gains(96,828) (8,563) (298,164) 50,148
Income tax benefit (expense)2,086
 423
 45,280
 (23,550)
Noncontrolling interests60
 5
 86
 19
After-tax change in unrealized investment (losses) gains of available for sale securities$(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 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.
(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 result of this guidance. Refer to Note 3 for further information.





(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, 20182019 and December 31, 20172018 by the length of time those securities have been continuously in an unrealized loss position:
  Less Than 12 Months 12 Months or Greater Total
(In thousands)
Fair
Value
 
Gross
Unrealized Losses
 
Fair
Value
 
Gross
Unrealized Losses
 
Fair
Value
 
Gross
Unrealized Losses
September 30, 2019           
U.S. government and government agency$55,881
 $216
 $65,949
 $819
 $121,830
 $1,035
State and municipal206,046
 1,841
 159,899
 2,429
 365,945
 4,270
Mortgage-backed securities159,413
 567
 261,330
 4,141
 420,743
 4,708
Asset-backed securities778,080
 8,233
 621,547
 13,242
 1,399,627
 21,475
Corporate199,465
 2,707
 157,374
 11,487
 356,839
 14,194
Foreign government133,430
 23,751
 103,985
 55,664
 237,415
 79,415
Fixed maturity securities$1,532,315
 $37,315
 $1,370,084
 $87,782
 $2,902,399
 $125,097
            
December 31, 2018           
U.S. government and government agency$195,359
 $933
 $130,815
 $3,977
 $326,174
 $4,910
State and municipal701,700
 6,874
 744,905
 17,738
 1,446,605
 24,612
Mortgage-backed securities334,063
 2,911
 712,595
 21,022
 1,046,658
 23,933
Asset-backed securities1,687,665
 28,965
 342,855
 4,722
 2,030,520
 33,687
Corporate1,730,513
 54,181
 954,763
 49,129
 2,685,276
 103,310
Foreign government246,273
 24,197
 80,004
 914
 326,277
 25,111
Fixed maturity securities$4,895,573
 $118,061
 $2,965,937
 $97,502
 $7,861,510
 $215,563

  
Less Than 12 Months 12 Months or Greater Total
(In thousands)
Fair
Value
 
Gross
Unrealized Losses
 
Fair
Value
 
Gross
Unrealized Losses
 
Fair
Value
 
Gross
Unrealized Losses
September 30, 2018           
U.S. government and government agency$241,467
 $2,712
 $118,054
 $5,183
 $359,521
 $7,895
State and municipal1,553,827
 25,957
 423,785
 15,323
 1,977,612
 41,280
Mortgage-backed securities834,782
 15,777
 541,015
 24,684
 1,375,797
 40,461
Asset-backed securities1,740,632
 14,562
 300,633
 2,816
 2,041,265
 17,378
Corporate2,045,819
 50,487
 369,248
 19,383
 2,415,067
 69,870
Foreign government299,444
 21,830
 111,195
 2,019
 410,639
 23,849
Fixed maturity securities$6,715,971
 $131,325
 $1,863,930
 $69,408
 $8,579,901
 $200,733
            
December 31, 2017           
U.S. government and government agency$92,167
 $1,491
 $72,055
 $2,341
 $164,222
 $3,832
State and municipal735,972
 5,944
 345,755
 6,630
 1,081,727
 12,574
Mortgage-backed securities480,435
 5,110
 373,956
 11,065
 854,391
 16,175
Asset-backed securities1,127,309
 8,298
 167,412
 2,314
 1,294,721
 10,612
Corporate1,103,747
 8,224
 170,858
 5,946
 1,274,605
 14,170
Foreign government244,139
 2,615
 25,824
 251
 269,963
 2,866
Fixed maturity securities$3,783,769
 $31,682
 $1,155,860
 $28,547
 $4,939,629
 $60,229
A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at September 30, 20182019 is presented in the table below:
($ in thousands)
Number of
Securities
 
Aggregate
Fair Value
 
Gross
Unrealized Loss
Foreign government21
 $78,110
 $78,281
Corporate12
 32,900
 5,606
Asset-backed securities6
 1,311
 192
Mortgage-backed securities4
 290
 10
Total43
 $112,611
 $84,089
($ 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.


(15)Fair Value Measurements
The Company’s fixed maturity available for sale securities, equity securities and its arbitrage trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, 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, 20182019 and December 31, 20172018 by level:
(In thousands)Total Level 1 Level 2 Level 3
September 30, 2019       
Assets:       
Fixed maturity securities available for sale:       
U.S. government and government agency$816,114
 $
 $816,114
 $
State and municipal3,816,646
 
 3,816,646
 
Mortgage-backed securities1,710,323
 
 1,710,323
 
Asset-backed securities2,748,256
 
 2,748,256
 
Corporate4,136,268
 
 4,136,268
 
Foreign government779,968
 
 779,968
 
Total fixed maturity securities available for sale14,007,575
 
 14,007,575
 
Equity securities:       
Common stocks148,061
 139,194
 
 8,867
Preferred stocks295,593
 
 289,066
 6,527
Total equity securities443,654
 139,194
 289,066
 15,394
Arbitrage trading account641,993
 475,313
 166,680
 
Total$15,093,222
 $614,507
 $14,463,321
 $15,394
Liabilities:       
Trading account securities sold but not yet purchased$68,976
 $68,773
 $203
 $
        
        
December 31, 2018       
Assets:       
Fixed maturity securities available for sale:       
U.S. government and government agency$702,240
 $
 $702,240
 $
State and municipal3,872,598
 
 3,872,598
 
Mortgage-backed securities1,594,546
 
 1,594,546
 
Asset-backed securities2,438,747
 
 2,438,648
 99
Corporate4,111,311
 
 4,111,311
 
Foreign government808,735
 
 808,735
 
Total fixed maturity securities available for sale13,528,177
 
 13,528,078
 99
Equity securities:       
Common stocks98,192
 89,596
 
 8,596
Preferred stocks180,814
 
 176,869
 3,945
Total equity securities279,006
 89,596
 176,869
 12,541
Arbitrage trading account452,548
 353,335
 81,905
 17,308
Total$14,259,731
 $442,931
 $13,786,852
 $29,948
Liabilities:       
Trading account securities sold but not yet purchased$38,120
 $37,327
 $
 $793

(In thousands)Total Level 1 Level 2 Level 3
September 30, 2018       
Assets:       
Fixed maturity securities available for sale:       
U.S. government and government agency$487,042
 $
 $487,042
 $
State and municipal4,017,894
 
 4,017,894
 
Mortgage-backed securities1,548,222
 
 1,548,222
 
Asset-backed securities2,549,874
 
 2,549,773
 101
Corporate4,065,169
 
 4,065,169
 
Foreign government825,412
 
 825,412
 
Total fixed maturity securities available for sale13,493,613
 
 13,493,512
 101
Equity securities:       
Common stocks166,938
 157,855
 
 9,083
Preferred stocks158,316
 
 154,521
 3,795
Total equity securities325,254
 157,855
 154,521
 12,878
Arbitrage trading account678,321
 475,684
 202,637
 
Total$14,497,188
 $633,539
 $13,850,670
 $12,979
Liabilities:       
Trading account securities sold but not yet purchased$112,355
 $112,355
 $
 $
        
        
December 31, 2017       
Assets:       
Fixed maturity securities available for sale:       
U.S. government and government agency$377,740
 $
 $377,740
 $
State and municipal4,445,094
 
 4,445,094
 
Mortgage-backed securities1,299,931
 
 1,299,931
 
Asset-backed securities2,111,544
 
 2,111,372
 172
Corporate4,389,112
 
 4,389,112
 
Foreign government848,497
 
 848,497
 
Total fixed maturity securities available for sale13,471,918
 
 13,471,746
 172
Equity securities:       
Common stocks352,204
 342,834
 
 9,370
Preferred stocks224,443
 
 213,600
 10,843
Total equity securities576,647
 342,834
 213,600
 20,213
Arbitrage trading account617,649
 471,420
 146,229
 
Total$14,666,214
 $814,254
 $13,831,575
 $20,385
Liabilities:       
Trading account securities sold but not yet purchased$64,358
 $64,358
 $
 $
There were no significant transfers between Levels 1 and 2 during the nine months ended September 30, 2018 or during the year ended December 31, 2017.



The following tables summarize changes in Level 3 assets and liabilities for the nine months ended September 30, 20182019 and for the year ended December 31, 2017:2018:
   
                        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, 2019                 
 Assets:                 
 Fixed maturities securities available for sale:                 
 Asset-backed securities$99
 $(26) $61
 $
 $
 $(134) $
 $
 $
 Total99
 (26) 61
 
 
 (134) 
 
 
 Equity securities:                 
 Common stocks8,596
 12
 1,807
 
 
 (1,548) 
 
 8,867
 Preferred stocks3,945
 (20) 
 
 2,602
 
 
 
 6,527
 Total12,541
 (8) 1,807
 
 2,602
 (1,548) 
 
 15,394
 Arbitrage trading account17,308
 (8,731) 
 
 14,767
 (38,233) 
 14,889
 
 Total$29,948
 $(8,765) $1,868
 $
 $17,369
 $(39,915) $
 $14,889
 $15,394
                   
 Liabilities:                 
 Trading account securities sold but not yet purchased$793
 $133
 $
 $
 $7,609
 $(8,535) $
 $
 $
 Year Ended
December 31, 2018
                 
 Assets:                 
 Fixed maturities securities available for sale:                 
 Asset-backed securities$172
 $(2) $46
 $
 $
 $(117) $
 $
 $99
 Total172
 (2) 46
 
 
 (117) 
 
 99
 Equity securities:                 
 Common stocks9,370
 (548) 
 
 
 (227) 
 1
 8,596
 Preferred stocks10,843
 100
 
 
 


 (6,998) 
 
 3,945
 Total20,213
 (448) 
 
 
 (7,225) 
 1
 12,541
 Arbitrage trading account
 (6) 
 
 11,523
 (11) 
 5,802
 17,308
 Total$20,385
 $(456) $46
 $
 $11,523
 $(7,353) $
 $5,803
 $29,948
 Liabilities:                 
 Trading account securities sold but not yet purchased$
 $(67) $
 $
 $860
 $
 $
 $
 $793

   
                        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, 2018, one common stock in the arbitrage trading account was transferred out ofTransfers into Level 3 as the security becamerepresent cases where a publicly traded onprice was no longer available for a stock exchange. For the year ended December 31, 2017, there were no transfers out of Level 3.particular investment.






(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"). 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)2019 2018
Net reserves at beginning of period$10,248,883
 $10,056,914
Net provision for losses and loss expenses:   
Claims occurring during the current year (1)3,007,364
 2,917,231
Increase in estimates for claims occurring in prior years (2) (3)22,340
 5,262
Loss reserve discount accretion29,246
 32,082
Total3,058,950
 2,954,575
Net payments for claims: 
  
Current year767,945
 597,859
Prior years1,907,979
 2,106,394
Total2,675,924
 2,704,253
Foreign currency translation(49,455) (101,071)
Net reserves at end of period10,582,454
 10,206,165
Ceded reserves at end of period1,814,501
 1,665,997
Gross reserves at end of period$12,396,955
 $11,872,162
 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$15 million and $17$19 million for the nine months ended September 30, 20182019 and 2017, respectively.2018.
(2) The increase (decrease)change 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 increased by $12 million and decreased by $2 million and $31 million for the nine months ended September 30, 20182019 and 2017,2018, 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$17 million and $31$27 million for the nine months ended September 30, 2019 and 2018, respectively.
During the nine months ended September 30, 2019, favorable prior year development (net of additional and return premiums) of $17.2 million included $18.2 million of favorable development for the Insurance segment, partially offset by $1.0 million of adverse development for the Reinsurance & Monoline Excess segment.
The overall favorable development for the Insurance segment was primarily attributable to favorable development on workers’ compensation business, partially offset by adverse development on general liability, professional liability, and commercial auto liability business. The favorable workers’ compensation development was mainly attributable to accident years 2014 through 2018, and 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). The adverse general liability development was mainly related to accident years 2015 through 2017 respectively.and was driven by a higher than expected number of large losses being reported in the period. The adverse professional liability development was mainly from accident years 2013 through 2016 and was driven by an increased frequency of large losses relating to lawyers professional and directors and officers liability. The adverse commercial auto liability development was primarily related to accident years 2015 through 2018 (with most in 2018), and was driven by a higher than expected number of large losses.
The year to date development for the Reinsurance & Monoline Excess segment was not material.
During the nine months ended September 30, 2018, favorable prior year development (net of additional and return premiums) of $27$26.6 million included $35$22.9 million of favorable development for the Insurance segment partially offset by $8and $3.7 million of adversefavorable development for the Reinsurance & Monoline Excess segment. The favorable development for the Insurance segment was primarily attributable to workers'the workers’ compensation business. The favorable workers'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'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 adversefavorable 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& Monoline Excess segment was primarily attributable to workers'the excess 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 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.





(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, 2019 December 31, 2018
(In thousands)Carrying Value Fair Value Carrying Value Fair Value
Assets:       
Fixed maturity securities$14,086,075
 $14,100,741
 $13,606,812
 $13,619,620
Equity securities443,654
 443,654
 279,006
 279,006
Arbitrage trading account641,993
 641,993
 452,548
 452,548
Loans receivable92,285
 95,155
 94,813
 97,073
Cash and cash equivalents812,550
 812,550
 817,602
 817,602
Trading account receivables from brokers and clearing organizations209,061
 209,061
 347,228
 347,228
Liabilities:       
Due to broker75,207
 75,207
 20,144
 20,144
Trading account securities sold but not yet purchased68,976
 68,976
 38,120
 38,120
Subordinated debentures908,053
 955,426
 907,491
 840,002
Senior notes and other debt1,434,725
 1,597,911
 1,882,028
 1,968,996
  
September 30, 2018 December 31, 2017
(In thousands)Carrying Value Fair Value Carrying Value Fair Value
Assets:       
Fixed maturity securities$13,572,402
 $13,584,654
 $13,551,250
 $13,566,976
Equity securities325,254
 325,254
 576,647
 576,647
Arbitrage trading account678,321
 678,321
 617,649
 617,649
Loans receivable96,590
 98,878
 79,684
 82,047
Cash and cash equivalents819,366
 819,366
 950,471
 950,471
Trading account receivables from brokers and clearing organizations191,394
 191,394
 189,280
 189,280
Liabilities:       
Due to broker21,478
 21,478
 15,920
 15,920
Trading account securities sold but not yet purchased112,355
 112,355
 64,358
 64,358
Subordinated debentures907,304
 913,344
 728,218
 769,060
Senior notes and other debt1,790,498
 1,876,579
 1,769,052
 1,945,313

The estimated fair values of the Company’s fixed maturity securities, equity securities and arbitrage trading account securities are based on various valuation techniques that rely on fair value measurements as described in Note 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.

During third quarter of 2019, the Company repaid at maturity $441 million aggregate principal amount of senior notes.

(18) Reinsurance
The following is a summary of reinsurance financial information:
 For the Three Months
Ended September 30,
 For the Nine Months
Ended September 30,
  
(In thousands)2019 2018 2019 2018
Written premiums:       
Direct$1,853,881
 $1,746,197
 $5,566,728
 $5,318,698
Assumed239,169
 181,587
 662,412
 536,582
Ceded(343,144) (303,570) (1,026,169) (941,624)
Total net premiums written$1,749,906
 $1,624,214
 $5,202,971
 $4,913,656
        
Earned premiums:       
Direct$1,797,726
 $1,735,576
 $5,294,773
 $5,115,403
Assumed209,094
 177,996
 595,946
 547,372
Ceded(330,010) (310,087) (974,212) (910,828)
Total net premiums earned$1,676,810
 $1,603,485
 $4,916,507
 $4,751,947
        
Ceded losses and loss expenses incurred$172,009
 $186,538
 $584,323
 $586,607
Ceded commissions earned$76,001
 $68,938
 $220,110
 $201,216

 For the Three Months
Ended September 30,
 For the Nine Months
Ended September 30,
  
(In thousands)2018 2017 2018 2017
Written premiums:       
Direct$1,746,197
 $1,679,389
 $5,318,698
 $5,127,465
Assumed181,587
 194,769
 536,582
 570,052
Ceded(303,570) (302,975) (941,624) (915,245)
Total net premiums written$1,624,214
 $1,571,183
 $4,913,656
 $4,782,272
        
Earned premiums:       
Direct$1,735,576
 $1,692,453
 $5,115,403
 $4,972,755
Assumed177,996
 202,972
 547,372
 605,281
Ceded(310,087) (313,925) (910,828) (857,792)
Total net premiums earned$1,603,485
 $1,581,500
 $4,751,947
 $4,720,244
        
Ceded losses and loss expenses incurred$186,538
 $247,104
 $586,607
 $424,905
Ceded commissions earned$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, 20182019 and December 31, 20172018.






(19) Restricted Stock Units
Pursuant to its stock incentive plan, the Company may issue restricted stock units ("RSUs") to employees of the Company and its subsidiaries. The RSUs generally vest three to five years from the award date and are subject to other vesting and forfeiture provisions contained in the award agreement. RSUs are expensed pro-ratably over the vesting period. RSU expenses were $26$36 million and $3026 million for the nine months ended September 30, 20182019 and 20172018, respectively. A summary of RSUs issued in the nine months ended September 30, 20182019 and 20172018 follows:
($ in thousands)Units Fair Value
2019839,263
 $59,435
20181,135,941
 $57,796

($ in thousands)Units Fair Value
2018757,294
 $57,796
2017855,051
 $58,712


(20) Litigation and Contingent Liabilities
In the ordinary course of business, the Company is subject to disputes, litigation and arbitration arising from its insurance and reinsurance businesses. These matters are generally related to insurance and reinsurance claims and are considered in the establishment of loss and loss expense reserves. In addition, the Company may also become involved in legal actions which seek extra-contractual damages, punitive damages or penalties, including claims alleging bad faith in handling of insurance claims. The Company expects its ultimate liability with respect to such matters will not be material to its financial condition. However, adverse outcomes on such matters are possible, from time to time, and could be material to the Company’s results of operations in any particular financial reporting period.


(21) Leases
As described in note 3, the Company prospectively adopted ASU 2016-02, Leases, for the quarter ended March 31, 2019, which requires lessees to recognize a right-of-use asset and a lease liability for leases with terms of more than 12 months on the balance sheet. All leases disclosed within this footnote are classified as operating leases. Recognized right-of-use asset and lease liability are reported within other assets and other liabilities, respectively, in the consolidated balance sheet. Lease expense is reported in other operating costs and expenses in the consolidated statement of income and accounted for on a straight-line basis over the lease term.
To determine the discount rate used to calculate present value of future minimum lease payments, the Company uses its incremental borrowing rate during the lease commencement period in line with the respective lease duration. In certain cases, the Company has the option to renew the lease. Lease renewal future payments are included in the present value of the future minimum lease payments when the Company determines it is reasonably certain to renew.
The main leases entered into by the Company are for office space used by the Company’s operating units across the world. Additionally, the Company, to a lesser extent, has equipment leases mainly for office equipment. Further information relating to operating lease expense and other operating lease information are as follows:
 For the Three Months Ended
September 30, 2019
 For the Nine Months Ended September 30, 2019
 
(In thousands) 
Leases:   
Lease cost$10,734
 $32,969
Cash paid for amounts included in the measurement of lease liabilities reported in operating cash flows$11,241
 $34,030
Right-of-use assets obtained in exchange for new lease liabilities$23,211
 $31,095

($ in thousands)September 30, 2019
Right-of-use assets$194,553
Lease liabilities$226,291
Weighted-average remaining lease term7.23 years
Weighted-average discount rate5.97%




Contractual maturities of the Company’s future minimum lease payments are as follows:
(In thousands)September 30, 2019
Contractual Maturities: 
2019$12,982
202044,692
202143,117
202237,931
202334,299
Thereafter103,569
Total undiscounted future minimum lease payments276,590
Less: Discount impact(50,299)
Total lease liability$226,291



(22) Business Segments
The Company’s reportable segments include the following two2 business segments, plus a corporate segment:
Insurance - predominantly commercial insurance business, including excess and surplus lines, admitted lines and 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.
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.
Insurance - predominantly commercial insurance business, including excess and surplus lines, admitted lines and 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.
Reinsurance & Monoline Excess - 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, as well as monoline excess business in the United States.
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    Revenues    
(In thousands)
Earned
Premiums
 
Investment
Income 
 Other Total (1) 
Pre-Tax
Income
(Loss)
 
Net Income
(Loss) to Common Stockholders
Earned
Premiums (1)
 
Investment
Income 
 Other Total (2) 
Pre-Tax
Income
(Loss)
 
Net Income
(Loss) to Common Stockholders
Three months ended September 30, 2019Three months ended September 30, 2019          
Insurance$1,493,854
 $99,628
 $11,611
 $1,605,093
 $202,390
 $162,994
Reinsurance & Monoline Excess182,956
 43,768
 
 226,724
 46,863
 38,240
Corporate, other and eliminations (3)
 18,296
 114,138
 132,434
 (47,736) (37,184)
Net realized and unrealized gains on investments
 
 1,465
 1,465
 1,465
 1,158
Total$1,676,810
 $161,692
 $127,214
 $1,965,716
 $202,982
 $165,208
Three months ended September 30, 2018Three months ended September 30, 2018          Three months ended September 30, 2018          
Insurance$1,488,658
 $146,319
 $19,447
 $1,654,424
 $226,856
 $178,571
$1,447,628
 $124,774
 $19,447
 $1,591,849
 $193,588
 $152,396
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)
Reinsurance & Monoline Excess155,857
 45,371
 
 201,228
 48,060
 37,742
Corporate, other and eliminations (3)
 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

 
 22,334
 22,334
 22,334
 17,644
Total$1,603,485
 $186,124
 $148,293
 $1,937,902
 $209,223
 $161,920
$1,603,485
 $186,124
 $148,293
 $1,937,902
 $209,223
 $161,920
Three months ended September 30, 2017          
Nine months ended September 30, 2019Nine months ended September 30, 2019          
Insurance$1,433,729
 $105,924
 $
 $1,539,653
 $171,478
 $123,240
$4,396,071
 $332,072
 $38,542
 $4,766,685
 $612,777
 $488,228
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)
Reinsurance & Monoline Excess520,436
 127,791
 
 648,227
 144,353
 115,630
Corporate, other and eliminations (3)
 48,416
 319,103
 367,519
 (194,664) (154,736)
Net realized and unrealized gains on investments
 
 183,959
 183,959
 183,959
 119,573

 
 143,691
 143,691
 143,691
 113,516
Total$1,581,500
 $142,479
 $307,363
 $2,031,342
 $226,113
 $162,054
$4,916,507
 $508,279
 $501,336
 $5,926,122
 $706,157
 $562,638
Nine months ended September 30, 2018Nine months ended September 30, 2018          Nine months ended September 30, 2018          
Insurance$4,377,003
 $396,514
 $57,123
 $4,830,640
 $653,936
 $516,397
$4,254,497
 $332,814
 $57,123
 $4,644,434
 $555,697
 $438,822
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)
Reinsurance & Monoline Excess497,450
 134,299
 
 631,749
 148,926
 117,580
Corporate, other and eliminations (3)
 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

 
 140,429
 140,429
 140,429
 110,939
Total$4,751,947
 $514,419
 $473,700
 $5,740,066
 $649,455
 $508,392
$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)Certain amounts included in earned premiums of each segment are related to inter-segment transactions.
(2)Revenues for Insurance from foreign countries for the three months ended September 30, 2019 and 2018 and 2017 were $176$185 million and $166$176 million, and for the nine months ended September 30, 2019 and 2018 and 2017 were both $535 million and $513 million, respectively.million. Revenues for Reinsurance & Monoline Excess from foreign countries for the three months ended September 30, 2019 and 2018 and 2017 were $51$65 million and $49$51 million, and for the nine months ended September 30, 2019 and 2018 were $186 million and 2017 were $163 million, and $150 million, respectively.
(2)(3)Corporate, other and eliminations represent corporate revenues and expenses that are not allocated to business segments.
Identifiable Assets
(In thousands)September 30,
2018
 December 31,
2017
September 30,
2019
 December 31,
2018
Insurance$19,511,126
 $19,263,193
$19,778,100
 $18,214,293
Reinsurance2,940,606
 3,169,731
Reinsurance & Monoline Excess4,615,591
 4,371,151
Corporate, other and eliminations2,403,917
 1,866,993
1,824,820
 2,310,533
Consolidated$24,855,649
 $24,299,917
$26,218,511
 $24,895,977






Net premiums earned by major line of business are as follows:
 For the Three Months
Ended September 30,
 For the Nine Months
Ended September 30,
  
(In thousands)2019 2018 2019 2018
Insurance:       
Other liability$527,253
 $482,254
 $1,523,534
 $1,421,144
Workers’ compensation321,872
 337,969
 979,059
 999,943
Short-tail lines (1)310,423
 299,780
 905,365
 883,127
Commercial automobile191,136
 185,069
 560,340
 536,079
Professional liability143,170
 142,556
 427,773
 414,204
Total Insurance1,493,854
 1,447,628
 4,396,071
 4,254,497
        
Reinsurance & Monoline Excess:       
Casualty reinsurance106,532
 87,039
 292,471
 264,450
Monoline excess (2)40,639
 41,029
 119,020
 122,506
Property reinsurance35,785
 27,789
 108,945
 110,494
Total Reinsurance & Monoline Excess182,956
 155,857
 520,436
 497,450
        
Total$1,676,810
 $1,603,485
 $4,916,507
 $4,751,947
 For the Three Months
Ended September 30,
 For the Nine Months
Ended September 30,
  
(In thousands)2018 2017 2018 2017
Insurance:       
Other liability$482,255
 $466,616
 $1,421,144
 $1,378,505
Workers’ compensation378,922
 378,529
 1,122,217
 1,106,616
Short-tail lines (1)299,856
 276,737
 883,359
 856,150
Commercial automobile185,069
 174,400
 536,079
 514,570
Professional liability142,556
 137,447
 414,204
 406,644
Total Insurance1,488,658
 1,433,729
 4,377,003
 4,262,485
        
Reinsurance:       
Casualty87,039
 94,478
 264,450
 282,430
Property27,788
 53,293
 110,494
 175,329
Total Reinsurance114,827
 147,771
 374,944
 457,759
        
Total$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.

(2) Monoline excess includes operations that solely retain risk on an excess basis.





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 20182019 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; the impact of climate change, which may increase the frequency and severity of catastrophe events; 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 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;2015 ("TRIPRA"), and TRIPRA's potential expiration; the ability or willingness 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;cyber security issues; 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 20182019 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.     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 segments of the property and casualty business: Insurance and Reinsurance.Reinsurance & Monoline Excess. 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 have been at historically low levels for an extended period, although recently interest rates have increased.period.
The Company also 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.
ThroughOn April 2, 2019, a 3-for-2 common stock split was paid in the secondform of a stock dividend to holders of record as of March 14, 2019. Shares outstanding and per share amounts in this Form 10-Q reflect this 3-for-2 common stock split effected on April 2, 2019.
Commencing with the first quarter of 2018,2019, the Company usedrenamed the Argentine peso (“ARS”) as its functional currency for itsReinsurance segment to Reinsurance & Monoline Excess, and reclassified the monoline excess business in Argentina and translatedfrom the financial statements of its Argentine operations into U.S. dollars ("USD"). Exchange rate movements through the second quarter of 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 concluded 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 ArgentineInsurance segment. The reclassified business includes 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. Refersolely retain risk on an excess basis. Reclassifications have been made to Note 3 in the financial statements for further information on the accounting guidance and impact of their adoption on the Company's results and2018 financial position.information to conform with this presentation.


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


elapse between the occurrence of an insured loss, the report of the loss to the insurer, the ultimate determination of the cost of the loss and the insurer’s payment of that loss.
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 2017:2018:
(In thousands)Frequency (+/-)Frequency (+/-)
Severity (+/-)1% 5% 10%1% 5% 10%
1%$79,667
 $239,794
 $439,953
$78,922
 $237,553
 $435,840
5%239,794
 406,263
 614,349
237,553
 402,465
 608,606
10%439,953
 614,349
 832,344
435,840
 608,606
 824,563
Our net reserves for losses and loss expenses of approximately $10.2$10.6 billion as of September 30, 20182019 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 $1.6$2.5 billion, or 16%24%, of the Company’s net loss reserves as of September 30, 20182019 relate to the Reinsurance & Monoline Excess segment. There is a higher degree of uncertainty and greater variability regarding estimates of excess workers' compensation and assumed reinsurance loss reserves because thosereserves. In the case of excess workers’ compensation, our policies generally attach at $1 million or higher. The claims which reach our layer therefore tend to involve the most serious injuries and many remain open for the lifetime of the claimant, which extends the claim settlement tail. These claims also occur less frequently but tend to be larger than primary claims, which increases claim variability. In the case of assumed reinsurance our loss reserve 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 also extended. Management considers the impact of delayed reporting and the extended tail in its selection of assumed loss development factors.factors for these lines of business.
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,
2018
 December 31,
2017
September 30,
2019
 December 31,
2018
Insurance$8,613,278
 $8,341,622
$8,091,552
 $7,727,447
Reinsurance1,592,887
 1,715,292
Reinsurance & Monoline Excess2,490,902
 2,521,436
Net reserves for losses and loss expenses10,206,165
 10,056,914
10,582,454
 10,248,883
Ceded reserves for losses and loss expenses1,665,997
 1,613,494
1,814,501
 1,717,565
Gross reserves for losses and loss expenses$11,872,162
 $11,670,408
$12,396,955
 $11,966,448
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
Reported Case
Reserves
 
Incurred But
Not Reported
 Total
September 30, 2018     
September 30, 2019     
Other liability$1,325,565
 $2,309,225
 $3,634,790
$1,404,319
 $2,451,678
 $3,855,997
Workers’ compensation (1)1,556,809
 1,262,943
 2,819,752
936,879
 972,920
 1,909,799
Professional liability307,793
 642,323
 950,116
379,885
 688,957
 1,068,842
Commercial automobile355,611
 286,825
 642,436
402,716
 303,983
 706,699
Short-tail lines (2)275,180
 291,004
 566,184
274,614
 275,601
 550,215
Total Insurance3,820,958
 4,792,320
 8,613,278
3,398,413
 4,693,139
 8,091,552
Reinsurance (1)878,508
 714,379
 1,592,887
Reinsurance & Monoline Excess (1) (3)1,459,545
 1,031,357
 2,490,902
Total$4,699,466
 $5,506,699
 $10,206,165
$4,857,958
 $5,724,496
 $10,582,454
          
December 31, 2017     
December 31, 2018     
Other liability$1,261,957
 $2,189,596
 $3,451,553
$1,307,068
 $2,329,659
 $3,636,727
Workers’ compensation (1)1,543,379
 1,242,501
 2,785,880
962,664
 955,711
 1,918,375
Professional liability295,269
 618,107
 913,376
306,018
 659,596
 965,614
Commercial automobile364,900
 269,942
 634,842
365,253
 290,217
 655,470
Short-tail lines (2)297,777
 258,194
 555,971
294,122
 257,139
 551,261
Total Insurance3,763,282
 4,578,340
 8,341,622
3,235,125
 4,492,322
 7,727,447
Reinsurance (1)919,497
 795,795
 1,715,292
Reinsurance & Monoline Excess (1) (3)1,479,604
 1,041,832
 2,521,436
Total$4,682,779
 $5,374,135
 $10,056,914
$4,714,729
 $5,534,154
 $10,248,883
___________
(1) Reserves for workers’ compensation and reinsuranceReinsurance & Monoline Excess are net of an aggregate net discount of $571$539 million and $591$563 million as of September 30, 20182019 and December 31, 2017,2018, 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.
(3) Reinsurance & Monoline Excess includes property and casualty reinsurance, as well as operations that solely retain risk on an excess basis.
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, 20182019 and 20172018 are as follows:
(In thousands)2018 20172019 2018
Net (increase) decrease in prior year loss reserves$(5,262) $7,648
Net increase in prior year loss reserves$(22,340) $(5,262)
Increase in prior year earned premiums31,880
 22,940
39,567
 31,880
Net favorable prior year development$26,618
 $30,588
$17,227
 $26,618
During the nine months ended September 30, 2019, favorable prior year development (net of additional and return premiums) of $17.2 million included $18.2 million of favorable development for the Insurance segment, partially offset by $1.0 million of adverse development for the Reinsurance & Monoline Excess segment.

The overall favorable development for the Insurance segment was primarily attributable to favorable development on workers’ compensation business, partially offset by adverse development on general liability, professional liability, and commercial auto liability business. The favorable workers’ compensation development was mainly attributable to accident years 2014 through 2018, and 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). The adverse general liability development was mainly related to accident years 2015 through 2017 and was driven by a higher than expected number of large losses being reported in the period. The adverse professional liability development was mainly from accident years 2013 through 2016 and was driven by an increased frequency of large losses relating to lawyers professional and directors and officers liability. The adverse commercial auto liability development was primarily related to accident years 2015 through 2018 (with most in 2018), and was driven by a higher than expected number of large losses.

The year to date development for the Reinsurance & Monoline Excess segment was not material.
During the nine months ended September 30, 2018, favorable prior year development (net of additional and return premiums) of $27$26.6 million included $35$22.9 million of favorable development for the Insurance segment partially offset by $8and $3.7 million of adversefavorable development for the Reinsurance & Monoline Excess segment. The favorable development for the Insurance segment was primarily attributable to workers'the workers’ compensation business. The favorable workers'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'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 adversefavorable 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& Monoline Excess segment was primarily attributable to workers'the excess 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 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.
Reserve Discount. The Company discounts its liabilities for certain workers’ compensation reserves. The amount of workers’ compensation reserves that were discounted was $1,814$1,745 million and $1,855$1,793 million at September 30, 20182019 and December 31, 2017,2018, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $571$539 million and $591$563 million at September 30, 20182019 and December 31, 2017,2018, respectively. At September 30, 2018,2019, discount rates by year ranged from 2.0% to 6.5%, with a weighted average discount rate of 3.8%3.7%.
Substantially all of the workers’ compensation discount (97% of total discounted reserves at September 30, 2018)2019) 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, 2018)2019), 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 $45$39 million at September 30, 20182019 and $56$41 million at


December 31, 2017.2018. 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.
The Company classifies its fixed maturity securities 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, 2018:2019:
($ 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 cost1,175
 $8,547,309
 $187,215
454
 $2,831,246
 $44,440
Unrealized loss of 20% or greater of amortized cost:          
Less than twelve months17
 32,589
 13,514
18
 17,577
 24,488
Twelve months and longer2
 3
 4
12
 53,576
 56,169
Total1,194
 $8,579,901
 $200,733
484
 $2,902,399
 $125,097
A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at September 30, 20182019 is presented in the table below:
($ in thousands)
Number of
Securities
 
Aggregate
Fair Value
  Gross Unrealized Loss
Number of
Securities
 
Aggregate
Fair Value
  Gross Unrealized Loss
Foreign government20
 $172,462
 $20,688
21
 $78,110
 $78,281
Corporate14
 80,945
 6,547
12
 32,900
 5,606
Asset-backed securities7
 10,930
 156
6
 1,311
 192
Mortgage-backed securities4
 3,270
 30
4
 290
 10
Total45
 $267,607
 $27,421
43
 $112,611
 $84,089


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.
Loans Receivable – The Company monitors the performance of its loans receivable, including current market conditions for each loan and the ability to collect principal and interest. For loans where the Company determines it is probable that the contractual terms will not be met, an analysis is performed and a valuation reserve is established, if necessary, with a


charge to earnings. Loans receivable are reported net of a valuation reserve of $2 million and $3 million at bothas of September 30, 20182019 and December 31, 2017.2018, respectively.
The Company monitors the performance of its loans receivable and assesses the ability of each borrower to pay principal and interest based upon loan structure, underlying property values, cash flow and related financial and operating performance of the property and market conditions. Loans receivable with a potential for default are further assessed using discounted cash flow analysis and comparable cost and sales methodologies, if appropriate.
Fair Value Measurements. The Company’s fixed maturity available for sale securities, equity securities, and its arbitrage trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available. 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, 2018:2019:
($ in thousands)
Carrying
Value
 
Percent
of Total
Carrying
Value
 
Percent
of Total
Pricing source:      
Independent pricing services$13,324,779
 98.8%$13,810,022
 98.6%
Syndicate manager34,846
 0.2
35,091
 0.3
Directly by the Company based on:      
Observable data133,887
 1.0
162,462
 1.1
Cash flow model101
 
Total$13,493,613
 100.0%$14,007,575
 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, 2018,2019, 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, 20182019 and 20172018
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 nine months ended September 30, 20182019 and 2017.2018. 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 20172019 2018
Insurance:      
Gross premiums written$5,453,303
 $5,233,692
$5,565,862
 $5,298,564
Net premiums written4,561,370
 4,364,638
4,601,077
 4,420,019
Net premiums earned4,377,003
 4,262,485
4,396,071
 4,254,497
Loss ratio61.8% 61.7%62.3% 62.3%
Expense ratio32.5% 32.8%31.3% 32.6%
GAAP combined ratio94.3% 94.5%93.6% 94.9%
Reinsurance:   
Reinsurance & Monoline Excess:   
Gross premiums written$401,977
 $463,825
$663,279
 $556,716
Net premiums written352,286
 417,634
601,894
 493,637
Net premiums earned374,944
 457,759
520,436
 497,450
Loss ratio67.1% 86.1%61.6% 60.9%
Expense ratio38.2% 37.1%35.2% 36.2%
GAAP combined ratio105.3% 123.2%96.8% 97.1%
Consolidated:      
Gross premiums written$5,855,280
 $5,697,517
$6,229,141
 $5,855,280
Net premiums written4,913,656
 4,782,272
5,202,971
 4,913,656
Net premiums earned4,751,947
 4,720,244
4,916,507
 4,751,947
Loss ratio62.2% 64.1%62.2% 62.2%
Expense ratio33.0% 33.2%31.7% 33.0%
GAAP combined ratio95.2% 97.3%93.9% 95.2%
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, 20182019 and 2017:2018:
(In thousands, except per share data)2018 20172019 2018
Net income to common stockholders$508,392
 $394,505
$562,638
 $508,392
Weighted average diluted shares128,404
 129,289
193,557
 192,606
Net income per diluted share$3.96
 $3.05
$2.91
 $2.64
The Company reported net income to common stockholders of $563 million in 2019 compared to $508 million in 2018 compared to $395 million in 2017.2018. The 29%11% increase in net income was primarily due to an after-tax increase in underwriting income of $82$53 million, a decrease of $6 million in tax expense, an after-tax increase in foreign currency gains of $6 million, an after-tax increase in net investment gains of $3 million, an increase of $3 million in income of $69 million mainly driven by growth in the fixed maturity security portfolio, higherfrom minority interest rates and an after-tax increase of $2 million in investment funds, a $29 million increase in after-tax foreign currency gains, and a $52 million decrease in tax expense primarily due to the reduction of the federal corporate tax rate from 35% to 21%,other income, partially offset by aan after-tax increase in corporate expenses of $5 million, an after-tax decrease in after-tax net investment gainsincome of $108$5 million, an after-tax decrease in profit from insurance service businesses of $5 million and an after-tax increase in interest expense of $5 million, an after-tax increase in corporate expenses of $3 million, and an after-tax reduction in insurance service fee income of $2 million. The number of weighted average diluted shares decreased slightly primarilyincreased for the nine months ended September 30, 2019 and 2018 mainly due to share repurchases.shares granted through an equity compensation based plan.
Premiums. Gross premiums written were $6,229 million in 2019, an increase of 6% from $5,855 million in 2018, an increase of 3% from $5,698 million in 2017.2018. The increase was due to ana $267 million increase in the Insurance segment of $220and an $107 million partially offset by a decreaseincrease in the Reinsurance segment& Monoline Excess segment. Approximately 78.8% of $62 million. The renewal retention rate was approximatelypolicies expiring in 2019 were renewed, and 77.7% forof policies expiring in 2018 and 2017.were renewed.
Average renewal premium rates for insurance and facultative reinsurance increased 2.5%4.3% in 20182019 when adjusted for changechanges in exposures, and increased 4.1%6.2% excluding workers' compensation.



A summary of gross premiums written in 20182019 compared with 20172018 by line of business within each business segment follows:
Insurance - gross premiums increased 4% to $5,453 million in 2018 from $5,234 million in 2017. Gross premiums increased $106 million (7%) for other liability, $58 million (10%) for professional liability, $53 million (4%) for short-tail lines, and $46 million (8%) for commercial auto and decreased $44 million (3%) for workers' compensation.
Reinsurance - gross premiums decreased 13% to $402 million in 2018 from $464 million in 2017. Gross premiums decreased $35 million (22%) for property lines and $27 million (9%) for casualty lines.
Insurance - gross premiums increased 5% to $5,566 million in 2019 from $5,299 million in 2018. Gross premiums increased $176 million (10%) for other liability, $105 million (17%) for professional liability, $57 million (5%) for short-tail lines and $28 million (4%) for commercial auto, and decreased $99 million (9%) for workers' compensation.
Reinsurance & Monoline Excess - gross premiums increased 19% to $663 million in 2019 from $557 million in 2018. Gross premiums increased $81 million (29%) for casualty reinsurance, $21 million (17%) for property reinsurance and $4 million (3%) for monoline excess.
Net premiums written were $5,203 million in 2019, an increase of 6% from $4,914 million in 2018, an increase of 3% from $4,782 million in 2017.2018. Ceded reinsurance premiums as a percentage of gross written premiums were 16% in both 20182019 and 2017.2018.
Premiums earned increased less than 1%3% to $4,917 million in 2019 from $4,752 million in 2018 from $4,720 million in 2017.2018. 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 20182019 are related to business written during both 20182019 and 2017.2018. Audit premiums were $149 million in 2018 compared with $137 million in 2017.both 2019 and 2018.
Net Investment Income. Following is a summary of net investment income for the nine months ended September 30, 20182019 and 2017:2018:
Amount 
Average Annualized
Yield
Amount 
Average Annualized
Yield
($ in thousands)2018 2017 2018 20172019 2018 2019 2018
Fixed maturity securities, including cash and cash equivalents and loans receivable$384,748
 $347,976
 3.6% 3.3%$386,978
 $384,748
 3.5% 3.6%
Investment funds94,075
 50,744
 10.3
 5.5
77,284
 94,075
 7.5
 10.3
Arbitrage trading account21,156
 16,235
 4.4
 4.0
26,184
 21,156
 8.0
 4.4
Real estate15,339
 14,894
 1.1
 1.6
17,468
 15,339
 1.1
 1.1
Equity securities2,208
 1,845
 1.3
 1.2
3,984
 2,208
 2.1
 1.3
Gross investment income517,526
 431,694
 3.8
 3.3
511,898
 517,526
 3.6
 3.8
Investment expenses(3,107) (5,093) 
 
(3,619) (3,107) 
 
Total$514,419
 $426,601
 3.8% 3.3%$508,279
 $514,419
 3.5% 3.8%
Net investment income increased 21%decreased 1% to $508 million in 2019 from $514 million in 2018 from $427 million in 2017 due primarily to a $43$17 million increasedecrease in income from investment funds mainly due to decreased income from real estate and energy and aviation funds a $37 millionpartially offset by an increase in income from fixed maturity securities mainly drivenother investment funds. The investment fund decrease was partly offset by growth in the fixed maturity security portfolio and higher interest rates, a $5 million increase from the arbitrage trading account, a $2 million increase in fixed maturity securities, a $2 million increase from real estate and a $2 million decrease in investment expenses.increase from equity securities. 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.react quickly to changes in the current environment. Average invested assets, at cost (including cash and cash equivalents), were $19.1 billion in 2019 and $18.3 billion in 2018 and $17.4 billion in 2017.2018.
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 $71 million in 2019 from $91 million in 2018. The decrease is primarily due to the sale of a third party administration business in third quarter of 2018 from $100 million in 2017.and a reduction of assigned risk plan business.
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 $144 million in 2019 compared with $140 million in 2018 compared with $277 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).2018. The gains of $140$144 million in 20182019 reflect net realized gains on investment sales of $420$28 million reduced by a changeand an increase in unrealized gains on equity securities of $280$116 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 $283 million in 2019 and $242 million in 2018 and $225 million in 2017.2018. The increase mainly relates to growth in revenues from the textileaviation-related businesses and the purchase of a promotional merchandise business purchased in March 2017.the second half of 2018.
Losses and Loss Expenses. Losses and loss expenses decreasedincreased to $3,059 million in 2019 from $2,955 million in 2018 from $3,025 million in 2017.2018. The consolidated loss ratio was 62.2% in 2018both 2019 and 64.1% in 2017.2018. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $70 million in 2019 and $60 million in 2018 and $167 million in 2017. The more significant 2017 catastrophe losses largely related to hurricanes Harvey, Irma and Maria, along with two earthquakes in Mexico.2018. Favorable prior year reserve development (net of premium offsets) was $17 million in 2019 and $27 million in 2018 and $31 million in 2017.2018. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.3 points towas 61.2% in 2019 and 61.5% in 2018 from 61.2% in 2017.2018.
A summary of loss ratios in 20182019 compared with 20172018 by business segment follows:
Insurance - The loss ratio was 62.3% in both 2019 and 2018. Catastrophe losses were $54 million in 2019 compared with $49 million in 2018. Favorable prior year reserve development was $18 million in 2019 and $23 million in 2018. The loss ratio excluding catastrophe losses and prior year reserve development decreased 0.1 points to 61.5% in 2019 from 61.6% in 2018.
Reinsurance & Monoline Excess - The loss ratio was 61.6% in 2019 and 60.9% in 2018. Catastrophe losses were $16 million in 2019 compared with $11 million in 2018. Adverse prior year reserve development was $1 million in 2019 and favorable prior year reserve development was $4 million in 2018. The loss ratio excluding catastrophe losses and prior year reserve development decreased 1.2 points to 58.3% in 2019 from 59.5% in 2018.
Insurance - The loss ratio was 61.8% in 2018 and 61.7% in 2017. Catastrophe losses were $50 million in 2018 compared with $94 million in 2017. Favorable prior year reserve development was $35 million in 2018 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 $31 million in 2017. The 2017 adverse development largely related to the impact of the change in the Ogden discount rate in the U.K. and the U.S. facultative casualty excess of loss business. The loss ratio excluding catastrophe losses and prior year reserve development decreased 0.9 points to 62.4% in 2018 from 63.3% in 2017.
Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses:
($ in thousands)2018 20172019 2018
Policy acquisition and insurance operating expenses$1,566,473
 $1,567,359
$1,560,350
 $1,566,473
Insurance service expenses90,970
 97,308
77,513
 90,970
Net foreign currency (gains) losses(22,033) 14,255
Net foreign currency gains(29,084) (22,033)
Other costs and expenses145,820
 142,233
152,182
 145,820
Total$1,781,230
 $1,821,155
$1,760,961
 $1,781,230
Policy acquisition and insurance operating expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. The percentage change of policyPolicy acquisition and insurance operating expenses remained flatdecreased less than 1% and net premiums earned increased less than 1%3% from 2017.2018. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 31.7% in 2019 and 33.0% in 20182018. The improvement is primarily attributable to higher net premiums earned and 33.2% in 2017.lower expenses.
Service expenses, which represent the costs associated with the fee-based businesses, decreased to $78 million in 2019 from $91 million in 2018. The decrease is primarily due to the sale of a third party administration business in third quarter of 2018 from $97 million in 2017.and a reduction of assigned risk plan business.
Net foreign currency (gains) lossesgains result from transactions denominated in a currency other than a company's operating functional currency. Net foreign currency gains were $29 million in 2019 compared to $22 million in 2018, compared to losses of $14 million in 2017,mainly resulting from the continued 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. Thein relation to the Argentine economy was determined to be highly inflationary under GAAP requiring the change in functional currency beginning with the third quarter of 2018.Peso.
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 $152 million in 2019 from $146 million in 2018, from $142 million in 2017.primarily due to non-recurring performance-based compensation costs.
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 $280 million in 2019 compared to $238 million in 2018 compared to $221 million in 2017.2018. The increase mainly relates to expenses from the textilea promotional merchandise business purchased in March 2017.the second half of 2018 and growth from the aviation-related businesses.



Interest Expense. Interest expense was $120 million in 2019 compared with $117 million in 2018 compared with $110 million in 2017.2018. 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.$116 million, which was primarily attributable to a non-recourse mortgage loan on a real estate property in Florida. During third quarter of 2019, the Company repaid at maturity $441 million aggregate principal amount of senior notes.
Income Taxes. The effective income tax rate was 20.1% in 2019 and 21.0% in 2018 and 30.5% in 2017.2018. The decrease in the effective income tax rate in 2018differs from 2017 was primarily due to the Tax Cuts and Jobs Act of 2017, which reduced the federal corporateincome tax rate of 21% primarily because of tax-exempt income, tax benefits related to equity-based compensation and tax on income from 35% to 21%.foreign jurisdictions with different tax rates.
The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $60$94 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. In 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, 20182019 and 2017
2018
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, 20182019 and 2017.2018. 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 20172019 2018
Insurance:      
Gross premiums written$1,794,104
 $1,718,552
$1,850,012
 $1,740,318
Net premiums written1,504,792
 1,432,334
1,529,113
 1,455,342
Net premiums earned1,488,658
 1,433,729
1,493,854
 1,447,628
Loss ratio63.0% 63.2%61.8% 63.6%
Expense ratio31.9% 32.4%31.2% 32.0%
GAAP combined ratio94.9% 95.6%93.0% 95.6%
Reinsurance:   
Reinsurance & Monoline Excess:   
Gross premiums written$133,681
 $155,606
$243,038
 $187,467
Net premiums written119,422
 138,849
220,793
 168,872
Net premiums earned114,827
 147,771
182,956
 155,857
Loss ratio69.3% 118.7%64.6% 62.1%
Expense ratio38.6% 34.9%33.7% 36.2%
GAAP combined ratio107.9% 153.6%98.3% 98.3%
Consolidated:      
Gross premiums written$1,927,785
 $1,874,158
$2,093,050
 $1,927,785
Net premiums written1,624,214
 1,571,183
1,749,906
 1,624,214
Net premiums earned1,603,485
 1,581,500
1,676,810
 1,603,485
Loss ratio63.5% 68.4%62.1% 63.5%
Expense ratio32.4% 32.6%31.5% 32.4%
GAAP combined ratio95.9% 101.0%93.6% 95.9%
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, 20182019 and 2017:2018:
(In thousands, except per share data)2018 20172019 2018
Net income to common stockholders$161,920
 $162,054
$165,208
 $161,920
Weighted average diluted shares128,561
 128,944
193,589
 192,842
Net income per diluted share$1.26
 $1.26
$0.85
 $0.84
The Company reported net income to common stockholders of $165 million in 2019 compared to $162 million in both 2018 and 2017.2018. The changes2% increase in net income werewas primarily due to an after-tax increase in underwriting income of $65$33 million, a decrease in tax expense of $6 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 $12of $4 million, decreasean increase of $3 million in tax expense due primarily to the reduction of the federal corporate tax rateincome from 35% to 21%,minority interest and an after-tax decrease in corporate expensesinterest expense of $2$1 million, partially offset by aan after-tax decrease in net investment income of $20 million mainly due to investment funds, an after-tax decrease in net investment gains of $127$17 million, an after-tax decrease in insurance service fee income of $5 million, an after-tax decrease in profits from non-insurance businesses of $1 million and an after-tax increase in interest expensecorporate expenses of $2$1 million. The number of weighted average diluted shares decreased slightly primarilyincreased for the three months ended September 30, 2019 and 2018 mainly due to share repurchases.shares granted through an equity compensation based plan.
Premiums.Premiums. Gross premiums written were $2,093 million in 2019, an increase of 9% from $1,928 million in 2018, an increase of 3% from $1,874 million in 2017.2018. The increase was due to an $110 million increase in the Insurance segment of $76and a $55 million partially offset by a decreaseincrease in the Reinsurance segment& Monoline Excess segment. Approximately 78.1% of $22 million. Approximatelypolicies expiring in 2019 were renewed, and 77.4% of policies expiring in 2018 were renewed, compared with a 77.5% renewal retention rate for policies expiring in 2017.renewed.


Average renewal premium rates for insurance and facultative reinsurance increased 2.3%5.1% in 20182019 when adjusted for changechanges in exposures, and increased 3.9%7.3% excluding workers' compensation.



A summary of gross premiums written in 20182019 compared with 20172018 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.
Insurance - gross premiums increased 6% to $1,850 million in 2019 from $1,740 million in 2018. Gross premiums increased $75 million (13%) for other liability, $37 million (17%) for professional liability, $26 million (6%) for short-tail lines, and $10 million (5%) for commercial auto, and decreased $38 million (11%) for workers' compensation.
Reinsurance & Monoline Excess - gross premiums increased 30% to $243 million in 2019 from $187 million in 2018. Gross premiums increased $40 million (41%) for casualty reinsurance, $13 million (35%) for property reinsurance and $3 million (6%) for monoline excess.
Net premiums written were $1,750 million in 2019, an increase of 8% from $1,624 million in 2018, an increase of 3% from $1,571 million in 2017.2018. Ceded reinsurance premiums as a percentage of gross written premiums were 16% in both 20182019 and 2017.2018.
Premiums earned increased 1%5% to $1,677 million in 2019 from $1,603 million in 2018 from $1,582 million in 2017.2018. 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 20182019 are related to business written during both 20182019 and 2017.2018. Audit premiums were $49 million in 2019 compared with $51 million in 2018 compared with $46 million in 2017.2018.
Net Investment Income. Following is a summary of net investment income for the three months ended September 30, 20182019 and 2017: 2018:
Amount 
Average Annualized
Yield
Amount 
Average Annualized
Yield
($ in thousands)2018 2017 2018 20172019 2018 2019 2018
Fixed maturity securities, including cash and cash equivalents and loans receivable$131,836
 $118,834
 3.6% 3.4%$125,957
 $131,836
 3.4% 3.6%
Investment funds41,005
 15,200
 13.1
 5.2
19,033
 41,005
 5.7
 13.1
Arbitrage trading account7,632
 4,418
 5.1
 3.5
8,400
 7,632
 7.1
 5.1
Real estate5,597
 5,042
 1.2
 1.5
7,987
 5,597
 1.5
 1.2
Equity securities1,004
 604
 1.7
 1.2
1,392
 1,004
 2.1
 1.7
Gross investment income187,074
 144,098
 4.0
 3.3
162,769
 187,074
 3.4
 4.0
Investment expenses(950) (1,619) 
 
(1,077) (950) 
 
Total$186,124
 $142,479
 4.0% 3.2%$161,692
 $186,124
 3.4% 4.0%
Net investment income increased 31%decreased 13% to $162 million in 2019 from $186 million in 2018 from $142 million in 2017 due primarily to a $26$22 million increasedecrease in income from investment funds duepartly attributable to real estate energyfunds and aviation funds, a $13$6 million increasedecrease in income from fixed maturity securities, mainly drivenpartially offset 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 fromin real estate and equity securities and decreased investment expenses.an $1 million increase in arbitrage trading account. 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.react quickly to changes in the current environment. Average invested assets, at cost (including cash and cash equivalents), were $19.2 billion in 2019 and $18.5 billion in 2018 and $17.6 billion in 2017.2018.
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 $24 million in 2019 from $31 million in 2018. The decrease is primarily due to the sale of a third party administration business in third quarter of 2018 from $34 million in 2017.and a reduction of assigned risk plan business.
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 $1 million in 2019 compared with $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).2018. The gains of $22$1 million in 20182019 reflect net realized gainslosses on investment sales of $154$3 million reduced by a changeand an increase in unrealized gains on equity securities of $132$4 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 $102 million in 2019 and $95 million in 2018 and $90 million2018. The increase mainly relates to revenues from a promotional merchandise business purchased in 2017.the second half of 2018.
Losses and Loss Expenses. Losses and loss expenses decreasedincreased to $1,041 million in 2019 from $1,018 million in 2018 from $1,081 million in 2017.2018. The consolidated loss ratio was 62.1% in 2019 and 63.5% in 2018 and 68.4% in 2017.2018. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $31 million in 2019 and $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.2018. Favorable prior year reserve development (net of premium offsets) was $4 million in 2019 and $7 million in 2018 and 2017.2018. The loss ratio excluding catastrophe losses and prior year reserve development was 60.4% in 2019 and 61.5% in 2018 and 61.3% in 2017.2018.
A summary of loss ratios in 20182019 compared with 20172018 by business segment follows:
Insurance - The loss ratio was 61.8% in 2019 and 63.6% in 2018. Catastrophe losses were $15 million in 2019 compared with $29 million in 2018. Favorable prior year reserve development was $1 million in 2019 and $4 million in 2018. The loss ratio excluding catastrophe losses and prior year reserve development decreased 0.7 points to 60.9% in 2019 from 61.6% in 2018.
Reinsurance & Monoline Excess - The loss ratio was 64.6% in 2019 and 62.1% in 2018. Catastrophe losses were $16 million in 2019 compared with $10 million in 2018. Favorable prior year reserve development was $3 million in both 2019 and 2018. The loss ratio excluding catastrophe losses and prior year reserve development decreased 0.5 points to 57.3% in 2019 from 57.8% in 2018.
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 $6 million in 2017. The loss ratio excluding catastrophe losses and prior year reserve development decreased 5.2 points to 60.9% in 2018 from 66.1% in 2017.
Other Operating Costs and Expenses.Expenses. Following is a summary of other operating costs and expenses:
($ in thousands)2018 20172019 2018
Policy acquisition and insurance operating expenses$519,380
 $516,243
$528,399
 $519,380
Insurance service expenses27,268
 32,451
26,171
 27,268
Net foreign currency (gains) losses(17,267) 1,779
Net foreign currency gains(22,590) (17,267)
Other costs and expenses48,267
 50,349
49,065
 48,267
Total$577,648
 $600,822
$581,045
 $577,648
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 increased 2% and net premiums earned both increased 1%.5% from 2018. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 31.5% in 2019 and 32.4% in 20182018. The improvement is primarily attributable to higher net premiums earned and 32.6%a reduction in 2017.certain operating expenses in relation to premium production.
Service expenses, which represent the costs associated with the fee-based businesses, decreased to $26 million in 2019 from $27 million in 2018. The decrease is primarily due to the sale of a third party administration business in third quarter of 2018 from $32 million in 2017.and a reduction of assigned risk plan business.
Net foreign currency (gains) lossesgains result from transactions denominated in a currency other than a company's operating functional currency. Net foreign currency gains were $23 million in 2019 compared to $17 million in 2018, compared to losses of $2 million in 2017,mainly resulting from the continued 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. Thein relation to the Argentine economy was determined to be highly inflationary under GAAP requiring the change in functional currency beginning with the third quarter of 2018.peso.
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 $49 million in 2019 from $48 million in 2018 from $50 million in 2017.2018.
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 $102 million in 2019 compared to $93 million in 2018 compared2018. The increase mainly relates to $86 millionexpenses from a promotional merchandise business purchased in 2017.the second half of 2018.


Interest Expense. Interest expense was $38 million in 2019 compared with $40 million in 2018 and $37 million in 2017.2018. 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.$116 million, which was primarily attributable to a non-recourse mortgage loan on a real estate property in Florida. During third quarter of 2019, the Company repaid at maturity $441 million aggregate principal amount of senior notes.


Income Taxes. The effective income tax rate was 18.6% in 2019 and 21.4% in 2018 and 28.0% in 2017.2018. The effective income tax rate differs from the federal income tax rate of 21% primarily because of tax-exempt investment income, tax benefits related to equity-based compensation 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 $60$94 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the 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 2.92.8 years at both September 30, 20182019 and 3.0 years at December 31, 2017.2018. The Company’s fixed maturity investment portfolio and investment-related assets as of September 30, 20182019 were as follows:
($ in thousands)
Carrying
Value
 
Percent
of Total
Carrying
Value
 
Percent
of Total
Fixed maturity securities:      
U.S. government and government agencies$487,042
 2.6%$816,114
 4.1%
State and municipal:      
Special revenue2,497,499
 13.4
2,457,938
 12.6
Local general obligation466,969
 2.4
State general obligation404,875
 2.1
Pre-refunded (1)448,308
 2.4
305,546
 1.6
State general obligation424,078
 2.3
Local general obligation419,042
 2.2
Corporate backed296,480
 1.6
250,980
 1.3
Total state and municipal4,085,407
 21.9
3,886,308
 20.0
Mortgage-backed securities:      
Agency900,744
 4.8
912,782
 4.7
Residential-Prime408,412
 2.1
Commercial339,931
 1.8
363,075
 1.9
Residential-Prime278,614
 1.5
Residential-Alt A40,209
 0.2
34,892
 0.2
Total mortgage-backed securities1,559,498
 8.4
1,719,161
 8.9
Asset-backed securities2,549,874
 13.7
2,748,256
 14.2
Corporate:      
Industrial2,277,978
 12.2
2,365,523
 12.2
Financial1,431,628
 7.7
1,427,591
 7.4
Utilities299,472
 1.6
322,060
 1.7
Other56,091
 0.3
21,094
 0.1
Total corporate4,065,169
 21.8
4,136,268
 21.4
Foreign government and foreign government agencies825,412
 4.4
779,968
 4.0
Total fixed maturity securities13,572,402
 72.6
14,086,075
 72.6
Equity securities:      
Preferred stocks295,593
 1.5
Common stocks166,938
 0.9
148,061
 0.8
Preferred stocks158,316
 0.9
Total equity securities325,254
 1.8
443,654
 2.3
Real estate1,917,250
 10.3
2,102,391
 10.8
Investment funds1,251,748
 6.7
1,227,298
 6.3
Cash and cash equivalents819,366
 4.4
812,550
 4.2
Arbitrage trading account678,321
 3.6
641,993
 3.3
Loans receivable96,590
 0.6
92,285
 0.5
Total investments$18,660,931
 100.0%$19,406,246
 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.
Equity Securities. Equity securities primarily represent investments in common and preferred stocks in companies with potential growth opportunities in different sectors, including healthcare andmainly in the financial institutions.institutions sector.
Investment Funds. At September 30, 2018,2019, the carrying value of investment funds was $1,252$1,227 million, including investments in real estate funds of $633$437 million, financial services funds of $283 million, energy funds of $173 million, transportation funds of $146 million and other funds of $539 million and energy funds of $80$188 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, 2018,2019, real estate properties in operation included a long-term ground lease in Washington D.C., a hotel in Memphis, Tennessee, two office complexes in New York City, and office buildings in West Palm Beach and Palm Beach, Florida. In addition, there are two properties under development:Florida, and an office building in London andLondon. In addition, there is a mixed-use project in Washington D.C. under development. The Company expects to fund further development costs for these projectsthe project 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 $97$92 million and an aggregate fair value of $99$95 million at September 30, 2018.2019. The amortized cost of loans receivable is net of a valuation allowance of $3$2 million as of September 30, 2018.2019. Loans receivable include real estate loans of $63$59 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 $34$33 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 2.92.8 years at both September 30, 20182019 and 3.0 years at December 31, 2017.2018.
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 was $343$795 million in the first nine months of 20182019 as compared to $522$343 million provided from operating activities in the first nine months of 2017.2018. The reductionincrease is primarily due to the timing ofan increase in net premium receipts and reduced loss and loss expense payments, certain long-term incentive plan payments and payments to taxing authorities.payments.
The Company's insurance subsidiaries' principal sources of cash are premiums, investment income, service fees and proceeds from sales and maturities of portfolio investments. The principal uses of cash are payments for claims, taxes, operating expenses and dividends. The Company expects its insurance subsidiaries to fund the payment of losses with cash received from premiums, investment income and fees. The Company targets an average duration for its investment portfolio that is within one year of the average duration of its liabilities so that portions of its investment portfolio mature throughout the claim cycle and are available for the payment of claims if necessary. In the event operating cash flow and proceeds from maturities and prepayments of fixed income securities are not sufficient to fund claim payments and other cash requirements, the remainder of the Company's cash and investments is available to pay claims and other obligations as they become due. The Company's investment portfolio is highly liquid, with approximately 77% invested in cash, cash equivalents and marketable fixed maturity securities as of September 30, 2018.2019. 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, 2018,2019, the Company had senior notes, subordinated debentures and other debt outstanding with a carrying value of $2,698$2,343 million and a face amount of $2,735$2,378 million. During third quarter of 2019, the Company repaid at maturity $441 million aggregate principal amount of senior notes. The maturities of the outstanding debt are $453$3 million in 2019, $320$310 million in 2020, $1 million in 2021, $427 million in 2022, $102 million in 2028, $250 million in 2037, $350 million in 2044, $350 million in 2053, $400 million in 2056, and $185 million in 2058.
During 2018, the Company issued $175 million aggregate principal amount of 5.70% subordinated debentures due 2058 in March 2018, and another $10 million principal amount of such debentures in April 2018. Additionally in 2018, the Company issued subsidiary debt of $20 million.
Equity. At September 30, 2018,2019, total common stockholders’ equity was $5.4$6.1 billion, common shares outstanding were 122,117,763183,674,147 and stockholders’ equity per outstanding share was $44.53. The Company repurchased 101,000 common shares for $6.8 million during the nine months ended September 30, 2018. During the three months ended September 30, 2018, the Company did not repurchase any shares of its common stock.$32.97. 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 $8.1$8.4 billion at September 30, 2018.2019. The percentage of the Company’s capital attributable to senior notes, subordinated debentures and other debt was 33%28% at September 30, 20182019 and 32%34% at December 31, 2017.2018.


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


Item 4.Controls and Procedures
Disclosure Controls and Procedures. The Company’s management, including its Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14 as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company has in place effective controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, and the rules thereunder, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Changes in Internal Control over Financial Reporting. During the quarter ended September 30, 2018,2019, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.







PART II — OTHER INFORMATION
Item 1.Legal Proceedings
Please see Note 20 to the notes to the interim consolidated financial statements.


Item 1A.Risk Factors
There have been no material changes from the risk factors previously disclosed in the Company's annual report on From 10-K for the fiscal year ended December 31, 2017.2018.




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


The Company did not repurchase any of its shares during the threenine months ended September 30, 2018,2019, and accordingly the number of shares authorized for purchase by the Company remains 9,167,997.13,367,095.


Item 6.Exhibits


Number   
Form of 2018 Performance-Based Restricted Stock Unit Agreement Under the W. R. Berkley Corporation 2018 Stock Incentive Plan
.
W. R. Berkley Corporation Deferred Compensation Plan for Officers as amended and restated November 2, 2016
 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a).
   
 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/ 15d-14(a).
   
 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, 20187, 2019/s/ W. Robert Berkley, Jr.
  W. Robert Berkley, Jr.
  President and Chief Executive Officer 
   
Date:November 8, 20187, 2019/s/ Richard M. Baio
  Richard M. Baio
  Senior
Executive Vice President -
Chief Financial Officer and Treasurer


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