Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

W. R. Berkley Corporation:

We have audited the accompanying consolidated balance sheets of W. R. Berkley Corporation and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of W. R. Berkley Corporation and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), W. R. Berkley Corporation's internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2014 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

/s/ KPMG LLP

New York, New York

February 28, 2014

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31,
(In thousands, except per share data)201320122011
REVENUES:
Net premiums written$5,500,173$4,898,539$4,357,368
Change in net unearned premiums(273,636)(225,023)(196,501)
Net premiums earned5,226,5374,673,5164,160,867
Net investment income544,291586,763526,351
Insurance service fees107,513103,13392,843
Net investment gains:
Net realized gains on investment sales127,586201,451125,881
Other-than-temporary impairments and change in valuation allowance(6,042)9,014(400)
Net investment gains121,544210,465125,481
Revenues from wholly-owned investees407,623247,113248,678
Other income1,0262,5641,764
Total revenues6,408,5345,823,5545,155,984
OPERATING COSTS AND EXPENSES:
Losses and loss expenses3,197,0242,948,4792,658,365
Other operating costs and expenses2,000,6841,799,6231,626,526
Expenses from wholly-owned investees388,761247,222245,495
Interest expense123,177126,302112,512
Total operating costs and expenses5,709,6465,121,6264,642,898
Income before income taxes698,888701,928513,086
Income tax expense(193,587)(191,285)(121,945)
Net income before noncontrolling interests505,301510,643391,141
Noncontrolling interests(5,376)(51)70
Net income to common stockholders$499,925$510,592$391,211
NET INCOME PER SHARE:
Basic$3.69$3.72$2.80
Diluted$3.55$3.56$2.69

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31,
(In thousands)201320122011
Net income before noncontrolling interests$505,301$510,643$391,141
Other comprehensive income:
Change in unrealized translation adjustments(23,848)24,563(18,751)
Change in unrealized investment gains (losses), net of taxes(261,064)87,31695,617
Change in unrecognized pension obligation, net of taxes8,700(1,022)1,367
Other comprehensive income(276,212)110,85778,233
Comprehensive income229,089621,500469,374
Comprehensive income (loss) to the noncontrolling interest(5,404)(128)125
Comprehensive income to common shareholders$223,685$621,372$469,499

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,
(In thousands, except share data)20132012
Assets
Investments:
Fixed maturity securities$11,616,844$11,943,956
Equity securities available for sale283,338376,022
Arbitrage trading account522,128329,077
Investment funds1,067,495809,689
Loans receivable343,583401,961
Real estate715,242606,735
Total investments14,548,63014,467,440
Cash and cash equivalents839,738905,670
Premiums and fees receivable1,557,4801,440,752
Due from reinsurers1,533,1031,450,348
Accrued investment income118,329127,230
Prepaid reinsurance premiums367,803316,309
Deferred policy acquisition costs452,101404,047
Property, furniture and equipment339,448267,227
Goodwill110,14687,865
Trading account receivable from brokers and clearing organizations304,936446,873
Deferred federal and foreign income taxes20,120—
Current federal and foreign income taxes24,737—
Other assets335,225242,135
Total assets$20,551,796$20,155,896
Liabilities and Equity
Liabilities:
Reserves for losses and loss expenses$10,080,941$9,751,086
Unearned premiums2,781,4372,474,847
Due to reinsurers276,755316,388
Trading account securities sold but not yet purchased162,278121,487
Deferred federal and foreign income taxes—60,255
Other liabilities848,749981,626
Junior subordinated debentures339,800243,206
Senior notes and other debt1,692,4421,871,535
Total liabilities16,182,40215,820,430
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, 132,233,167 and 136,017,732 shares, respectively47,02447,024
Additional paid-in capital967,440945,166
Retained earnings5,265,0154,817,807
Accumulated other comprehensive income189,391465,631
Treasury stock, at cost, 102,884,751 and 99,100,186 shares, respectively(2,132,835)(1,969,411)
Total common stockholders’ equity4,336,0354,306,217
Noncontrolling interests33,35929,249
Total equity4,369,3944,335,466
Total liabilities and equity$20,551,796$20,155,896

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended December 31,
(In thousands)201320122011
COMMON STOCK:
Beginning and end of period$47,024$47,024$47,024
ADDITIONAL PAID IN CAPITAL:
Beginning of period$945,166$941,109$935,099
Stock options exercised and restricted units issued including tax benefit(1,143)(22,125)(20,601)
Restricted stock units expensed22,88125,72826,303
Stock issued536454308
End of period$967,440$945,166$941,109
RETAINED EARNINGS:
Beginning of period$4,817,807$4,491,162$4,143,207
Net income to common stockholders499,925510,592391,211
Dividends(52,717)(183,947)(43,256)
End of period$5,265,015$4,817,807$4,491,162
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Unrealized investment gains (losses):
Beginning of period$517,658$430,419$334,747
Unrealized gains (losses) on securities not other-than-temporarily impaired(261,791)84,22998,015
Unrealized gains (losses) on other-than-temporarily impaired securities6993,010(2,343)
End of period256,566517,658430,419
Currency translation adjustments:
Beginning of period(36,676)(61,239)(42,488)
Net change in period(23,848)24,563(18,751)
End of period(60,524)(36,676)(61,239)
Net pension asset:
Beginning of period(15,351)(14,329)(15,696)
Net change in period8,700(1,022)1,367
End of period(6,651)(15,351)(14,329)
Total accumulated other comprehensive income$189,391$465,631$354,851
TREASURY STOCK:
Beginning of period$(1,969,411)$(1,880,790)$(1,750,494)
Stock exercised/vested2,45245,25356,303
Stock issued597581564
Stock repurchased(166,473)(134,455)(187,163)
End of period$(2,132,835)$(1,969,411)$(1,880,790)
NONCONTROLLING INTERESTS:
Beginning of period$29,249$7,526$6,980
Acquisition of noncontrolling interest(1,294)21,595671
Net (income) loss5,37651(70)
Other comprehensive income (loss), net of tax2877(55)
End of period$33,359$29,249$7,526

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,
(In thousands)201320122011
CASH FROM OPERATING ACTIVITIES:
Net income to common stockholders$499,925$510,592$391,211
Adjustments to reconcile net income to net cash from operating activities:
Net investment gains(121,544)(210,465)(125,481)
Depreciation and amortization103,090103,41988,012
Noncontrolling interests5,37651(70)
Investment funds(67,712)(77,015)1,751
Stock incentive plans23,78426,76327,175
Change in:
Arbitrage trading account(10,324)(1,424)(8,106)
Premiums and fees receivable(138,027)(228,756)(122,468)
Reinsurance accounts(171,263)(216,968)(161,070)
Deferred policy acquisition costs(52,124)(38,656)(38,541)
Deferred income taxes56,28113,24043,340
Reserves for losses and loss expenses372,002406,763325,758
Unearned premiums323,160279,986238,499
Other(2,826)107,92810,269
Net cash from operating activities819,798675,458670,279
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Proceeds from sale of fixed maturity securities1,344,707838,5761,293,876
Proceeds from sale of equity securities267,554409,610159,827
Distributions from (contributions to) investment funds(236,580)77,930(113,913)
Proceeds from maturities and prepayments of fixed maturity securities2,718,1562,291,1051,697,144
Purchase of fixed maturity securities(4,198,135)(3,617,002)(2,815,340)
Purchase of equity securities(156,557)(284,991)(97,986)
Real estate purchased(107,352)(256,386)(96,552)
Change in loans receivable(30,974)(124,776)92,176
Net additions to property, furniture and equipment(63,150)(40,556)(45,320)
Change in balances due from security brokers(26,155)(25,799)(16,194)
Payment for business purchased, net of cash acquired(56,878)(42,779)(261,992)
Net cash used investing activities(545,364)(775,068)(204,274)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of debt346,822369,291—
Net proceeds from stock options exercised537,66021,963
Repayment of senior notes and other debt(465,389)—(1,310)
Cash dividends to common stockholders(52,717)(183,947)(43,253)
Purchase of common treasury shares(166,473)(127,663)(187,163)
Other7,44231,85114,550
Net cash from (used in) financing activities(330,262)97,192(195,213)
Net impact on cash due to change in foreign exchange rates(10,104)(3,654)(2,002)
Net increase (decrease) in cash and cash equivalents(65,932)(6,072)268,790
Cash and cash equivalents at beginning of year905,670911,742642,952
Cash and cash equivalents at end of year$839,738$905,670$911,742

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2013, 2012 and 2011

(1) Summary of Significant Accounting Policies

(A) Principles of consolidation and basis of presentation

The 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"). All significant intercompany transactions and balances have been eliminated. Reclassifications have been made in the 2012 and 2011 financial statements to conform to the presentation of the 2013 financial statements. 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. The most significant items on our balance sheet that involve a greater degree of accounting estimates that are subject to change in the future are the valuation of investments, other-than-temporary impairments, loss and loss adjustment expense reserves and premium estimates. Actual results could differ from those estimates.

(B) Revenue recognition

Insurance premiums are recognized as written at the inception of the policy. Reinsurance premiums are estimated based upon information received from ceding companies, and subsequent differences from such estimates are recorded in the period they are determined. Insurance and reinsurance premiums are primarily earned on a pro rata basis over the policy term. Fees for services are earned over the period that the services are provided.

Audit premiums are recognized when they are reliably determinable. The change in accruals for earned but unbilled audit premiums increased net premiums written and premiums earned by $12 million, $7 million and $1 million in 2013, 2012 and 2011, respectively.

Revenues from wholly-owned investees are derived from services provided to the general aviation market, including fuel and line service, aircraft sales and maintenance, avionics and engineering services and parts fabrication. Revenue is recognized upon delivery of aircraft, delivery of fuel, shipment of parts and upon completion of services.

(C) Cash and cash equivalents

Cash equivalents consist of funds invested in money market accounts and investments with an effective maturity of three months or less when purchased.

(D) Investments

Fixed maturity securities classified as available for sale are carried at estimated fair value, with unrealized gains and losses, net of applicable income taxes, excluded from earnings and reported as a component of comprehensive income and a separate component of stockholders' equity. Fixed maturity securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Investment income from fixed maturity securities is recognized based on the constant effective yield method. Premiums and discounts on mortgage-backed securities are adjusted for the effects of actual and anticipated prepayments on a retrospective basis.

Equity securities classified as available for sale are carried at estimated fair value, with unrealized gains and losses, net of applicable income taxes, excluded from earnings and reported as a component of comprehensive income and a separate component of stockholders' equity.

Equity securities that the Company purchased with the intent to sell in the near-term are classified as trading account securities and are reported at estimated fair value. Realized and unrealized gains and losses from trading activity are reported as net investment income and are recorded at the trade date. Short sales and short call options are presented as trading securities sold but not yet purchased. Unsettled trades and the net margin balances held by the clearing broker are presented as a trading account receivable from brokers and clearing organizations.

Investment funds are carried under the equity method of accounting. For certain investment funds, the Company's share of the earnings or losses is reported on a one-quarter lag in order to facilitate the timely completion of the Company's consolidated financial statements.

Loans receivable represent commercial real estate mortgage loans and bank loans and are carried at amortized cost. The Company monitors the performance of its loans receivable and establishes an allowance for loan losses for loans where the Company determines it is probable that the contractual terms will not be met, with a corresponding charge to earnings. For loans that are evaluated individually and deemed to be impaired, the Company establishes a specific allowance based on a discounted cash flow analysis and comparable cost and sales methodologies, if appropriate. Individual loans that are not considered impaired and smaller-balance homogeneous loans are evaluated collectively and a general allowance is established if it is considered probable that a loss has been incurred.

The accrual of interest on loans receivable is discontinued if the loan is 90 days past due based on the contractual terms of the loan unless the loan is adequately secured and in process of collection. In general, loans are placed on non-accrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. Interest on these loans is accounted for on a cash basis until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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.” Fair value of investments is determined based on a fair value hierarchy that prioritizes the use of observable inputs over the use of unobservable inputs and requires the use of observable inputs when available. (See Note 13 of the Notes to Consolidated Financial Statements.)

Realized gains or losses represent the difference between the cost of securities sold and the proceeds realized upon sale and are recorded at the trade date. The Company uses primarily the first-in, first-out method to determine the cost of securities sold.

The cost of securities is adjusted where appropriate to include a provision for a 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 to recover the cost basis of the investment prior to the time of sale or maturity. Since equity securities do not have a contractual cash flow or a maturity, the Company considers whether the price of an equity security is expected to recover within a reasonable period of time.

For fixed maturity securities that the Company intends to sell or, more likely than not, would be required to sell, a decline in value below amortized cost is considered to be an other-than-temporary impairment (“OTTI”). The amount of OTTI is equal to the difference between amortized cost and fair value at the balance sheet date. For fixed maturity securities that the Company does not intend to sell or believes that it is more likely than not it would not be required to sell, a decline in value below amortized cost is considered to be an OTTI if the Company does 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.

Real estate held for investment purposes is initially recorded at the purchase price, which is generally fair value, and is subsequently reported at cost less accumulated depreciation. Real estate taxes, interest and other costs incurred during development and construction are capitalized. Buildings are depreciated on a straight-line basis over the estimated useful lives of the building. Minimum rental income is recognized on a straight-line basis over the lease term. Income and expenses from

real estate are reported as net investment income. The carrying value of real estate is reviewed for impairment and an impairment loss is recognized if the estimated undiscounted cash flows from the use and disposition of the property are less than the carrying value of the property.

(E) 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 weighted average number of common shares outstanding during the year. Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the year and is calculated using the treasury stock method for stock incentive plans. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation.

(F) Deferred policy acquisition costs

Acquisition costs associated with the successful acquisition of new and renewed insurance and reinsurance contracts are deferred and amortized ratably over the terms of the related contracts. Ceding commissions received on reinsurance contracts are netted against acquisition costs and are recognized ratably over the life of the contract. Deferred policy acquisition costs are presented net of unearned ceding commissions. Deferred policy acquisition costs are comprised primarily of commissions, as well as employment-related underwriting costs and premium taxes. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income and, if not, are charged to expense. The recoverability of deferred policy acquisition costs is evaluated separately by each of our operating companies for each of their major lines of business. Future investment income is taken into account in measuring the recoverability of deferred policy acquisition costs.

(G) Reserves for losses and loss expenses

Reserves for losses and loss expenses are an accumulation of amounts determined on the basis of (1) evaluation of claims for business written directly by the Company; (2) estimates received from other companies for reinsurance assumed by the Company; and (3) estimates for losses incurred but not reported (based on Company and industry experience). These estimates are periodically reviewed and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments are reflected in the statements of income in the period in which they are determined. The Company discounts its reserves for excess and assumed workers' compensation claims using a risk-free or statutory rate. (See Note 14 of Notes to Consolidated Financial Statements.)

(H) Reinsurance ceded

The unearned portion of premiums ceded to reinsurers is reported as prepaid reinsurance premiums and earned ratably over the policy term. The estimated amounts of reinsurance recoverable on unpaid losses are reported as due from reinsurers. To the extent any reinsurer does not meet its obligations under reinsurance agreements, the Company must discharge its liability. Amounts due from reinsurers are reflected net of funds held where the right of offset is present. The Company has provided reserves for estimated uncollectible reinsurance.

(I) Deposit accounting

Contracts that do not meet the risk transfer requirements of GAAP are accounted for using the deposit accounting method. Under this method, an asset or liability is recognized at the inception of the contract based on consideration paid or received. The amount of the deposit asset or liability is adjusted at subsequent reporting dates using the interest method with a corresponding credit or charge to interest income or expense. Deposit liabilities for assumed reinsurance contracts were $72 million and $75 million at December 31, 2013 and 2012, respectively.

(J) Federal and foreign income taxes

The Company files a consolidated income tax return in the U.S. and foreign tax returns in countries where it has overseas operations. The Company's method of accounting for income taxes is the asset and liability method. Under this method, deferred tax assets and liabilities are measured using tax rates currently in effect or expected to apply in the years in which those temporary differences are expected to reverse. Interest and penalties, if any, are reported as income tax expense.

The Company believes there are no tax positions that would require disclosure under GAAP. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will not be realized.

(K) Foreign currency

Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity's functional currency) are reported on the statements of income as other operating costs and expenses. Unrealized gains or losses resulting from translating the results of non-U.S. dollar denominated operations are reported in accumulated other comprehensive income. Revenues and expenses denominated in currencies other than U.S. dollars are translated at the weighted average exchange rate during the year. Assets and liabilities are translated at the rate of exchange in effect at the balance sheet date.

(L) Property, furniture and equipment

Property, furniture and equipment are carried at cost less accumulated depreciation. Depreciation is calculated using the estimated useful lives of the respective assets. Depreciation expense was $38 million, $38 million and $40 million for 2013, 2012 and 2011, respectively.

(M) Comprehensive income

Comprehensive income encompasses all changes in stockholders' equity (except those arising from transactions with stockholders) and includes net income, net unrealized holding gains or losses on available for sale securities, unrealized foreign currency translation adjustments and changes in unrecognized pension obligations.

(N) Goodwill and other intangible assets

Goodwill and other intangible assets are tested for impairment on an annual basis and at interim periods where circumstances require. The Company's impairment test as of December 31, 2013 indicated that there were no impairment losses related to goodwill and other intangible assets. Intangible assets of $72 million and $31 million are included in other assets as of December 31, 2013 and 2012, respectively.

(O) Stock options

The costs resulting from all share-based payment transactions with employees are recognized in the consolidated financial statements using a fair-value-based measurement method.

(P) Statements of cash flows

Interest payments were $125 million, $119 million and $111 million in 2013, 2012 and 2011, respectively. Income taxes paid were $186 million, $133 million and $48 million in 2013, 2012 and 2011, respectively. Other non-cash items include acquisitions, unrealized investment gains and losses and pension expense. (See Note 2, Note 11 and Note 26 of Notes to Consolidated Financial Statements.)

(Q) Change in accounting

In October 2010, the Financial Accounting Standards Board ("FASB") issued guidance regarding the treatment of costs associated with acquiring or renewing insurance contracts. This guidance modified the definition of the types of costs that can be capitalized and specifies that the costs must be directly related to the successful acquisition of a new or renewed insurance contract. The Company adopted this guidance effective January 1, 2012 and retrospectively adjusted its previously issued financial statements. The impact of applying this guidance retrospectively was a reduction in stockholders' equity of $49 million as of January 1, 2010.

A summary of the impact of the adoption of this new guidance is shown below:

(In thousands, except per share amounts)Previously ReportedAs Adjusted
For the Year Ended December 31, 2011
Other operating costs and expenses$1,621,329$1,626,526
Income before income taxes518,283513,086
Federal and foreign income taxes(123,550)(121,945)
Net income394,803391,211
Basic net income per share$2.83$2.80
Diluted net income per share2.712.69

Information has been restated as a result of the adoption of this new guidance throughout these consolidated financial statements and notes, where applicable.

(R) Recent accounting pronouncements

In February 2013, the Financial Accounting Standards Board (FASB) issued guidance relating to disclosures about items reclassified out of accumulated other comprehensive income ("AOCI"). The Company’s adoption of the updated guidance effective January 1, 2013 resulted in a change in the disclosures for AOCI in the Company’s consolidated financial statements but did not have any impact on the Company’s results of operations, financial position or liquidity.

In January 2014, the FASB issued ASU 2014-01 relating to Accounting for Investments in Qualified Affordable Housing Projects. The guidance must be applied retrospectively for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted and can be applied retrospectively in reporting periods for which financial statements have not yet been issued. The Company is currently evaluating the impact of this guidance on the Company’s results of operations, financial position and liquidity, which is not expected to be material.

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.

(2) Acquisitions

In 2012, the Company acquired a 49% interest in a worldwide supplier of after-market original equipment manufacturer (OEM) parts, systems and custom logistic support services for military aircraft operations for $43 million. In January 2013, the Company acquired the remaining 51% of this business for $43 million. The estimated useful lives of the intangible assets acquired range from 2 years to 15 years, with approximately $3 million having an indefinite life.

In 2011, the Company acquired a business that owned an office building in London for $251 million in cash and an inactive insurance company for $23 million in cash. Approximately $2 million of the aggregate purchase price for these acquisitions was allocated to intangible assets.

The following table summarizes the estimated fair value of net assets acquired and liabilities assumed at the date of acquisition:

(In thousands)20132012
Fixed maturity securities$—$3,213
Real estate—256,209
Cash and cash equivalents3,91112,172
Real estate, furniture and equipment898—
Goodwill19,664251
Intangible assets44,800—
Other assets60,6616,566
Total assets acquired129,934278,411
Debt(27,612)—
Other liabilities assumed(17,076)(4,247)
Net assets acquired$85,246$274,164

(3) Consolidated Statement of Comprehensive Income (Loss)

The following table presents the components of the changes in accumulated other comprehensive income (loss) (AOCI) as of and for the year ended December 31, 2013:

(In thousands)Unrealized Investment gains (losses)Currency translation adjustmentsNet pension assetAccumulated other comprehensive income (loss)
Changes in AOCI
Beginning of period$517,658(36,676)(15,351)$465,631
Other comprehensive income (loss) before reclassifications(193,188)(23,848)—(217,036)
Amounts reclassified from AOCI(67,876)—8,700(59,176)
Other comprehensive income (loss)(261,064)(23,848)8,700(276,212)
Unrealized investment gain related to non-controlling interest(28)——(28)
Ending balance$256,566$(60,524)$(6,651)$189,391
Amounts reclassified from AOCI
Pre-tax(104,425)(1)—13,387(3)$(91,038)
Tax effect36,549(2)—(4,687)(2)31,862
After-tax amounts reclassified$(67,876)$—$8,700$(59,176)
Other comprehensive income (loss)
Pre-tax(401,637)(23,848)13,387$(412,098)
Tax effect140,573—(4,687)135,886
Other comprehensive income (loss)$(261,064)$(23,848)$8,700$(276,212)

(1) Net investment gains in the consolidated statements of operations.

(2) Income tax expense in the consolidated statements of operations.

(3) Other operating costs and expenses in the consolidated statements of income.

(4) Investments in Fixed Maturity Securities

At December 31, 2013 and 2012, investments in fixed maturity securities were as follows:

(In thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesFair ValueCarrying Value
December 31, 2013
Held to maturity:
State and municipal$68,929$11,172$—$80,101$68,929
Residential mortgage-backed securities27,3933,311—30,70427,393
Corporate4,998417—5,4154,998
Total held to maturity101,32014,900—116,220101,320
Available for sale:
U.S. government and government agency858,31934,522(7,982)884,859884,859
State and municipal4,085,791162,330(29,837)4,218,2844,218,284
Mortgage-backed securities:
Residential(1)1,248,69325,895(25,941)1,248,6471,248,647
Commercial76,4545,670(988)81,13681,136
Corporate4,076,585156,256(30,100)4,202,7414,202,741
Foreign government844,46951,674(16,286)879,857879,857
Total available for sale11,190,311436,347(111,134)11,515,52411,515,524
Total investment in fixed maturity securities$11,291,631$451,247$(111,134)$11,631,744$11,616,844
December 31, 2012
Held to maturity:
State and municipal$65,190$18,529$—$83,719$65,190
Residential mortgage-backed securities32,7645,286—38,05032,764
Corporate4,997605—5,6024,997
Total held to maturity102,95124,420—127,371102,951
Available for sale:
U.S. government and government agency827,59172,532(1,660)898,463898,463
State and municipal4,449,238328,974(9,693)4,768,5194,768,519
Mortgage-backed securities:
Residential(1)1,395,73953,846(7,456)1,442,1291,442,129
Commercial268,6715,641(744)273,568273,568
Corporate3,378,884235,289(12,525)3,601,6483,601,648
Foreign government794,88062,380(582)856,678856,678
Total available for sale11,115,003758,662(32,660)11,841,00511,841,005
Total investment in fixed maturity securities$11,217,954$783,082$(32,660)$11,968,376$11,943,956
(1)Gross unrealized losses for mortgage-backed securities include $1,961,247 and $3,037,000, as of December 31, 2013 and 2012, respectively, related to the non-credit portion of OTTI recognized in other comprehensive income.

The amortized cost and fair value of fixed maturity securities at December 31, 2013, 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 CostFair Value
Due in one year or less$926,865$935,322
Due after one year through five years3,411,0333,548,043
Due after five years through ten years3,046,7563,191,387
Due after ten years2,554,4372,596,505
Mortgage-backed securities1,352,5401,360,487
Total$11,291,631$11,631,744

At December 31, 2013 and 2012, there were no investments, other than investments in United States government and government agency securities, which exceeded 10% of common stockholders’ equity. At December 31, 2013, investments with a carrying value of $1,017 million were on deposit in custodial or trust accounts, of which $745 million was on deposit with state insurance departments, $211 million was on deposit in support of the Company’s underwriting activities at Lloyd’s, $48 million was on deposit as security for reinsurance clients and $13 million was on deposit as security for letters of credit issued in support of the Company’s reinsurance operations.

(5)Investments in Equity Securities Available for Sale

At December 31, 2013 and 2012, investments in equity securities available for sale were as follows:

(In thousands)CostGross Unrealized GainsGross Unrealized LossesFair ValueCarrying Value
December 31, 2013
Common stocks$118,536$42,239$—$160,775$160,775
Preferred stocks85,09143,791(6,319)122,563122,563
Total$203,627$86,030$(6,319)$283,338$283,338
December 31, 2012
Common stocks$222,671$60,102$(707)$282,066$282,066
Preferred stocks85,50410,103(1,651)93,95693,956
Total$308,175$70,205$(2,358)$376,022$376,022

(6) Arbitrage Trading Account

At December 31, 2013 and 2012, the fair value and carrying value of the arbitrage trading account were $522 million and $329 million, respectively. The primary focus of the trading account is merger arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Arbitrage investing differs from other types of investing in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less). The Company believes that this makes arbitrage investments less vulnerable to changes in general financial market conditions.

The Company uses put options, call options and swap contracts in order to mitigate the impact of potential changes in market conditions on the merger arbitrage trading account. These options and contracts are reported at fair value. As of December 31, 2013, the fair value of long option contracts outstanding was $2 million (notional amount of $28 million) and the fair value of short option contracts outstanding was $2 million (notional amount of $22 million). Other than with respect to the use of these trading account securities, the Company does not make use of derivatives.

(7)Net Investment Income

Net investment income consists of the following:

(In thousands)201320122011
Investment income earned on:
Fixed maturity securities, including cash and cash equivalents and loans receivable$442,287$479,035$483,905
Equity securities available for sale11,38016,41912,416
Investment funds67,71277,0159,452
Arbitrage trading account20,4318,28616,576
Real estate12,49812,0977,471
Gross investment income554,308592,852529,820
Investment expense(10,017)(6,089)(3,469)
Net investment income$544,291$586,763$526,351

(8) Investment Funds

Investment funds consist of the following:

Carrying Value as of December 31,Income (Losses)
(In thousands)20132012201320122011
Real estate$378,435$373,259$9,315$30,196$14,527
Energy155,026146,32529,73933,146(6,101)
Hedged equity271,57563,9207,6555,912(1,366)
Other funds262,459226,18521,0037,7612,392
Total$1,067,495$809,689$67,712$77,015$9,452
(9)Real Estate

Investment in real estate represents directly owned property held for investment, as follows:

As of December 31,
(In thousands)20132012
Properties in operation$283,393$282,899
Properties under development431,849323,836
Total$715,242$606,735

Properties in operation represent an office building in London and a long-term ground lease in Washington D.C. These properties are net of accumulated depreciation and amortization of $17,827,000 and $10,354,000, as of December 31, 2013 and 2012, respectively. Related depreciation expense was $7,474,000, $7,583,000 and $2,770,000 for the years ended December 31, 2013, 2012 and 2011, respectively. Future minimum rental income expected on operating leases relating to real estate held for investment is $1,504,000 in 2014, $1,549,000 in 2015, $1,596,000 in 2016, $1,644,000 in 2017, $1,693,000 in 2018 and $327,320,000 thereafter.

Properties under development represent the following: an office building in London, a mixed-use project in Washington D.C. and an office complex in New York City. The Company expects to fund further development costs for these projects with a combination of its own funds and external financing.

(10) Loans Receivable

Loans receivable are as follows:

As of December 31,
(In thousands)20132012
Amortized cost:
Real estate loans$282,357$336,533
Commercial loans61,22665,428
Total$343,583$401,961
Fair value:
Real estate loans$284,017$339,079
Commercial loans62,72967,364
Total$346,746$406,443
Valuation allowance:
Specific$—$3,000
General2,0872,620
Total$2,087$5,620
Impaired loans:
With a specific valuation allowance$—$1,775
Without a valuation allowance—31,023
Unpaid principal balance—35,872
For the Year Ended December 31,
20132012
Increase (decrease) in valuation allowance$308$(14,118)
Loans receivable charged off—463

There were no loans receivable in non-accrual status December 31, 2013, compared to $3 million at December 31, 2012. If these loans had been current at December 31, 2012, additional interest income of $498,000 would have been recognized in accordance with their original terms for the year ended December 31, 2012.

The Company monitors the performance of its loans receivable and assesses the ability of the borrower to pay principal and interest based upon loan structure, underlying property values, cash flow and related financial and operating performance of the property and market conditions. Loans receivable with a potential for default are further assessed using discounted cash flow analysis and comparable cost and sales methodologies, if appropriate.

The real estate loans are secured by commercial real estate primarily located in Arizona, California, Hawaii, Illinois, New York and Texas. These loans generally earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through August 2025. The commercial loans are with small business owners who have secured the related financing with the assets of the business. These loans generally earn interest on a fixed basis and have varying maturities not exceeding 10 years.

The Company utilizes an internal risk rating system to assign a risk to each of its real estate loans. The loan rating system takes into consideration credit quality indicators including loan to value ratios, which compare the outstanding loan amount to the estimated value of the property, the borrower’s financial condition and performance with respect to loan terms, the Company’s position in the capital structure, and the overall leverage in the capital structure. Based on this rating system, none of the real estate loans were considered to be impaired at December 31, 2013, and accordingly, the Company determined that a specific valuation allowance was not required.

(11)Realized and Unrealized Investment Gains and Losses

Realized and unrealized investment gains and losses are as follows:

(In thousands)201320122011
Realized investment gains and losses:
Fixed maturity securities:
Gains$48,860$34,295$37,595
Losses(14,670)(6,436)(5,499)
Equity securities available for sale70,23597,30090,023
Investment funds10,97674,7773,762
Other gains12,1851,515—
Net realized gains on investments sales127,586201,451125,881
Net other-than-temporary impairments:
Other-than-temporary impairments(6,042)(4,984)(400)
Decrease in valuation allowance—13,998—
Net other-than-temporary impairments(6,042)9,014(400)
Total net investment gains121,544210,465125,481
Income tax expense(47,426)(73,663)(43,834)
$74,118$136,802$81,647
Change in unrealized gains and losses of available for sales securities:
Fixed maturity securities$(401,812)$162,220$209,467
Previously impaired fixed maturity securities1,0764,631(3,604)
Equity securities available for sale11,864(33,199)(55,772)
Investment funds(10,250)1,630(2,093)
Total change in unrealized gains(399,122)135,282147,998
Income tax expense138,058(47,966)(52,381)
Noncontrolling interests(28)(77)55
$(261,092)$87,239$95,672

(12) Securities in an Unrealized Loss Position

The following table summarizes all securities in an unrealized loss position at December 31, 2013 and 2012 by the length of time those securities have been continuously in an unrealized loss position.

Less Than 12 Months12 Months or GreaterTotal
(In thousands)Fair ValueGross Unrealized LossesFair ValueGross Unrealized LossesFair ValueGross Unrealized Losses
December 31, 2013
U.S. government and government agency$260,882$7,927$2,163$55$263,045$7,982
State and municipal899,61324,50387,3455,334986,95829,837
Mortgage-backed securities578,60317,964140,6488,965719,25126,929
Corporate1,013,37317,066105,07413,0341,118,44730,100
Foreign government320,21516,286——320,21516,286
Fixed maturity securities3,072,68683,746335,23027,3883,407,916111,134
Common stocks——————
Preferred stocks13,29151319,8685,80633,1596,319
Equity securities available for sale13,29151319,8685,80633,1596,319
Total$3,085,977$84,259$355,098$33,194$3,441,075$117,453
December 31, 2012
U.S. government and government agency$69,551$1,660$—$—$69,551$1,660
State and municipal152,6941,639135,9678,054288,6619,693
Mortgage-backed securities484,7313,62958,2924,571543,0238,200
Corporate398,5953,40670,5379,119469,13212,525
Foreign government68,80955411,2102880,019582
Fixed maturity securities1,174,38010,888276,00621,7721,450,38632,660
Common stocks46,725707——46,725707
Preferred stocks——39,8121,65139,8121,651
Equity securities available for sale46,72570739,8121,65186,5372,358
Total$1,221,105$11,595$315,818$23,423$1,536,923$35,018

Fixed Maturity Securities — A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at December 31, 2013 is presented in the table below:

(Dollars in thousands)Number of SecuritiesAggregate Fair ValueGross Unrealized Loss
Mortgage-backed securities13$66,658$3,748
Corporate931,5791,005
Foreign government223,603844
Total24$121,840$5,597

For OTTI of fixed maturity securities that management does not intend to sell or, more likely than not, would not be required to sell, the portion of the decline in value considered to be due to credit factors is recognized in earnings and the portion of the decline in value considered to be due to non-credit factors is recognized in other comprehensive income. The table below provides a roll-forward of the portion of impairments recognized in earnings for those securities that have been impaired due to both credit factors and non-credit factors.

(In thousands)20132012
Beginning balance of amounts related to credit losses$4,261$4,261
Additions for amounts related to credit losses——
Deductions for amounts related to credit loss sales——
Ending balance of amounts related to credit losses$4,261$4,261

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 on financial covenants. Based on its assessment of these issuers, the Company expects them to continue to meet their contractual payment obligations as they become due and does not consider any of these securities to be OTTI.

Preferred Stocks – At December 31, 2013, there were three preferred stocks in an unrealized loss position, with an aggregate fair value of $33 million and a gross unrealized loss of $6 million. None of those preferred stocks are rated non-investment grade, and none are delinquent or in default. Management believes the unrealized losses are due primarily to market and sector related factors and does not consider these to be OTTI.

Common Stocks – At December 31, 2013, there were no common stocks in an unrealized loss position.

(13) Fair Value Measurements

The Company’s fixed maturity, equity securities available for sale and its trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available.

Because many fixed maturity securities do not trade on a daily basis, the Company utilizes pricing models and processes which may include benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Market inputs used to evaluate securities include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Quoted prices are often unavailable for recently issued securities, securities that are infrequently traded or securities that are only traded in private transactions. For publicly traded securities for which quoted prices are unavailable, the Company determines fair value based on independent broker quotations and other observable market data. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial projections, credit quality and business developments of the issuer and other relevant information.

The following tables present the assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and 2012 by level:

(In thousands)TotalLevel 1Level 2Level 3
December 31, 2013
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency$884,859$—$884,859$—
State and municipal4,218,284—4,218,284—
Mortgage-backed securities1,329,783—1,329,783—
Corporate4,202,741—4,159,87742,864
Foreign government879,857—879,857—
Total fixed maturity securities available for sale11,515,524—11,472,66042,864
Equity securities available for sale:
Common stocks160,775159,537—1,238
Preferred stocks122,563—118,8113,752
Total equity securities available for sale283,338159,537118,8114,990
Arbitrage trading account522,128192,281328,0671,780
Total$12,320,990$351,818$11,919,538$49,634
Liabilities:
Securities sold but not yet purchased$162,278$162,126$152$—
December 31, 2012
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency$898,463$—$898,463$—
State and municipal4,768,519—4,768,519—
Mortgage-backed securities1,715,697—1,715,697—
Corporate3,601,648—3,542,58359,065
Foreign government856,678—856,678—
Total fixed maturity securities available for sale11,841,005—11,781,94059,065
Equity securities available for sale:
Common stocks282,066280,658—1,408
Preferred stocks93,956—93,335621
Total equity securities available for sale376,022280,65893,3352,029
Arbitrage trading account329,077233,60394,546928
Total$12,546,104$514,261$11,969,821$62,022
Liabilities:
Securities sold but not yet purchased$121,487$114,909$6,558$20

There were no transfers between Levels 1 and 2 for the years ended December 31, 2013 and 2012.

The following tables summarize changes in Level 3 assets and liabilities for the years ended December 31, 2013 and 2012:

Gains (Losses) Included in:
(In thousands)Beginning BalanceEarningsOther Comprehensive IncomePurchasesSalesPaydowns/MaturitiesInOutEnding Balance
Year ended December 31, 2013
Assets:
Fixed maturity securities available for sale:
Corporate$59,065$677$309$170$(4,753)$(12,604)$—$—$42,864
Total59,065677309170(4,753)(12,604)——42,864
Equity securities available for sale:
Common stocks1,408———(170)———1,238
Preferred stocks621(299)—3,430————3,752
Total2,029(299)—3,430(170)———4,990
Arbitrage trading account9281,458730824(853)—22(1,329)1,780
Total$62,022$1,836$1,039$4,424$(5,776)$(12,604)$22$(1,329)$49,634
Liabilities:
Securities sold but not yet purchased20$(4)—$4$(20)———$—
Year ended December 31, 2012
Fixed maturity securities available for sale:
Corporate$67,828$(1,497)$9,622$283$—$(17,171)$—$—$59,065
Total67,828(1,497)9,622283—(17,171)——59,065
Equity securities available for sale:
Common stocks1,559———(151)———1,408
Preferred stocks12,3031,126(1,737)—(11,071)———621
Total13,8621,126(1,737)—(11,222)———2,029
Arbitrage trading account851(3,534)3,570—(52)—93—928
Total$82,541$(3,905)$11,455$283$(11,274)$(17,171)$93$—$62,022
Liabilities:
Securities sold but not yet purchased21(1)$———$—$—$—$20

There were no significant transfers in or out of Level 3 during the years ended December 31, 2013 or 2012.

(14)Reserves for Losses and Loss Expenses

The table below provides a reconciliation of the beginning and ending reserve balances:

(In thousands)201320122011
Net reserves at beginning of year$8,411,851$8,172,112$7,999,521
Net provision for losses and loss expenses:
Claims occuring during the current year(1)3,221,3932,997,9952,791,860
Decrease in estimates for claims occurring in prior years(2)(3)(78,810)(102,571)(181,282)
Loss reserve discount accretion54,44153,05547,787
Total3,197,0242,948,4792,658,365
Net payments for claims:
Current year822,787698,834765,440
Prior year2,055,2842,010,1011,721,558
Total2,878,0712,708,9352,486,998
Foreign currency translation(47,007)1951,224
Net reserves at end of year8,683,7978,411,8518,172,112
Ceded reserve at end of year1,397,1441,339,2351,165,022
Gross reserves at end of year$10,080,941$9,751,086$9,337,134
(1)Claims occurring during the current year are net of loss reserve discounts of $22,680,000, $26,078,000 and $43,286,000 in 2013, 2012 and 2011, respectively.
(2)The decrease in estimates for claims occurring in prior years is net of loss reserve discount. On an undiscounted basis, the estimates for claims occurring in prior years decreased by $77,430,000, $100,667,000 and $182,937,000 in 2013, 2012 and 2011, respectively.
(3)For certain retrospectively rated insurance polices and reinsurance agreements, reserve development is offset by additional or return premiums. Favorable reserve development, net of additional and return premiums, was $98 million, $103 million and $182 million in 2013, 2012 and 2011, respectively.

For the year ended December 31, 2013, estimates for claims occurring in prior years (net of additional and return premiums) decreased by $98 million. The favorable reserve development in 2013 was primarily attributable to accident years 2008 through 2010. 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.

Environmental and Asbestos — To date, known environmental and asbestos claims have not had a material impact on the Company’s operations, because its subsidiaries generally did not insure large industrial companies that are subject to significant environmental or asbestos exposures prior to 1986 when an absolute exclusion was incorporated into standard policy language.

The Company’s net reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $36 million and $34 million at December 31, 2013 and 2012, respectively. The Company’s gross reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $59 million and $56 million at December 31, 2013 and 2012, respectively. Increases in net incurred losses and loss expenses for reported asbestos and environmental claims were approximately $5 million, $2 million and $1 million in 2013, 2012 and 2011, respectively. Net paid losses and loss expenses for asbestos and environmental claims were approximately $3 million in 2013, $2 million in 2012 and $3 million in 2011. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make an actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential effect of significant unresolved legal matters, including coverage issues, as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties are highly uncertain.

Discounting — The Company discounts its liabilities for excess and assumed workers’ compensation business because of the long period of time over which losses are paid. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting the liabilities. The expected losses and loss expense payout pattern subject

to discounting was derived from the Company’s loss payout experience. For non-proportional business, reserves for losses and loss expenses have been discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. At December 31, 2013, the discount rates by year ranged from 2.1% to 6.5% with a weighted average discount rate of 4.1%. For proportional business, reserves for losses and loss expenses have been discounted at the statutory rate permitted by the Department of Insurance of the State of Delaware of 2.2%. The aggregate net discount, after reflecting the effects of ceded reinsurance, was $837 million, $867 million and $892 million at December 31, 2013, 2012 and 2011, respectively.

(15)Reinsurance

The Company reinsures a portion of its insurance exposures in order to reduce its net liability on individual risks and catastrophe losses. Reinsurance coverage and retentions vary depending on the line of business, location of the risk and nature of loss. The Company’s reinsurance purchases include the following: property reinsurance treaties that reduce exposure to large individual property losses and catastrophe events; casualty reinsurance treaties that reduce its exposure to large individual casualty losses, workers’ compensation catastrophe losses and casualty losses involving multiple claimants or insureds; and facultative reinsurance that reduces exposure on individual policies or risks for losses that exceed treaty reinsurance capacity. Depending on the operating unit, the Company purchases specific additional reinsurance to supplement the above programs.

The following is a summary of reinsurance financial information:

(In thousands)201320122011
Written premiums:
Direct$5,626,172$4,964,069$4,370,092
Assumed884,919815,810707,221
Ceded(1,010,918)(881,340)(719,945)
Total net written premiums$5,500,173$4,898,539$4,357,368
Earned premiums:
Direct$5,328,955$4,723,882$4,164,277
Assumed857,119770,981669,593
Ceded(959,537)(821,347)(673,003)
Total net earned premiums$5,226,537$4,673,516$4,160,867
Ceded losses incurred$556,108$528,018$458,249

The Company reinsures a portion of its exposures principally to reduce its net liability on individual risks and to protect against catastrophic losses. Estimated amounts due from reinsurers are reported net of reserves for uncollectible reinsurance of $1,385,000, $1,680,000 and $3,169,000 as of December 31, 2013, 2012 and 2011, respectively. The following table presents the amounts due from reinsurers as of December 31, 2013:

(In thousands)
Munich Re$193,405
Lloyd’s of London117,059
Swiss Re104,096
Alleghany Group96,348
Partner Re67,116
Axis Capital65,580
Berkshire Hathaway53,118
Ace Group46,413
Hannover Re Group35,607
Everest Re29,253
Arch Capital Group25,782
Other reinsurers less than $20,000230,825
Subtotal1,064,602
Residual market pools468,501
Total$1,533,103
(16)Senior Notes and Other Debt

Senior notes and other debt consist of the following as of December 31, 2013 (the difference between the face value and the carrying value is unamortized discount):

(In thousands)Interest RateFace Value2013 Carrying Value2012 Carrying Value
Senior notes due on:
February 15, 2013$—$—$199,959
May 15, 20155.6%200,000199,744199,559
August 15, 20196.15%150,000149,199149,057
September 15, 20197.375%300,000298,546298,292
September 15, 20205.375%300,000297,738297,401
January 1, 20228.70%76,50376,00475,962
March 15, 20224.625%350,000346,581346,163
February 15, 20376.25%250,000247,457247,347
Subsidiary debt (1)Various77,17377,17357,795
Total debt$1,703,676$1,692,442$1,871,535

(1) Subsidiary debt is due as follows: $5 million in 2014, $40 million in 2015, $30 million in 2016 and $2 million thereafter.

(17)Junior Subordinated Debentures

In 2013, the Company issued $350,000,000 aggregate principal amount of 5.625% Subordinated Debentures due April 2053 (the “Debentures”). At December 31, 2013, the carrying value of the Debentures, net of unamortized discount, was $339,800,000. The net proceeds of the offering was primarily used to repay the $250 million aggregate principal amount of the Company's 6.750% Subordinated Debentures due 2045. The Company realized a loss from the early redemption of $7 million.

(18)Income Taxes

Income tax expense consists of:

(In thousands)Current ExpenseDeferred ExpenseTotal
December 31, 2013
Domestic$116,802$47,370$164,172
Foreign22,3627,05329,415
Total expense$139,164$54,423$193,587
December 31, 2012
Domestic$156,339$11,448$167,787
Foreign23,02946923,498
Total expense$179,368$11,917$191,285
December 31, 2011
Domestic$60,420$37,176$97,596
Foreign22,0112,33824,349
Total expense$82,431$39,514$121,945

Income before income taxes from domestic operations was $598 million, $624 million and $469 million for the years ended December 31, 2013, 2012 and 2011, respectively. Income before income taxes from foreign operations was $101 million, $78 million and $49 million for the years ended December 31, 2013, 2012 and 2011, respectively.

A reconciliation of the income tax expense and the amounts computed by applying the Federal and foreign income tax rate of 35% to pre-tax income are as follows:

(In thousands)201320122011
Computed “expected” tax expense$244,611$245,675$179,580
Tax-exempt investment income(40,679)(50,665)(57,246)
Change in valuation allowance——(2,328)
Impact of lower foreign tax rates(4,851)(5,234)(3,199)
State and local taxes2,906(753)2,355
Other, net(8,400)2,2622,783
Total expense$193,587$191,285$121,945

At December 31, 2013 and 2012, the tax effects of differences that give rise to significant portions of the deferred tax asset and deferred tax liability are as follows:

(In thousands)20132012
Deferred tax asset:
Loss reserve discounting$87,394$119,547
Unearned premiums149,107132,014
Other-than-temporary impairments49,48362,187
Restricted stock units52,67149,553
Other92,69883,740
Gross deferred tax asset431,353447,041
Less valuation allowance——
Deferred tax asset431,353447,041
Deferred tax liability:
Amortization of intangibles11,88612,458
Deferred policy acquisition costs136,635120,532
Unrealized investment gains148,215274,497
Other114,49799,809
Deferred tax liability411,233507,296
Net deferred tax asset (liability)$20,120$(60,255)

The Company had current tax receivables of $24,737,000 and a current tax payables of $22,546,000 at December 31, 2013 and 2012, respectively. at December 31, 2013, the Company had foreign net operating loss carryforwards of $870,000, which expire beginning in 2014. The Company had provided a valuation allowance against the unutilized foreign tax credits which were fully utilized in the 2010 federal tax return. The reduction in the valuation relates primarily to the full utilization of the foreign tax credit carryforward. At December 31, 2013 and 2012, the Company had no deferred tax assets for which a valuation allowance is required. The statute of limitations has closed for the Company’s tax returns through December 31, 2009.

The realization of the deferred tax asset is dependent upon the Company’s ability to generate sufficient taxable income in future periods. Based on historical results and the prospects for future current operations, management anticipates that it is more likely than not that future taxable income will be sufficient for the realization of this asset.

(19)Dividends from Subsidiaries and Statutory Financial Information

The Company’s insurance subsidiaries are restricted by law as to the amount of dividends they may pay without the approval of regulatory authorities. The Company’s lead insurer, Berkley Insurance Company (BIC), directly or indirectly owns all of the Company’s other insurance companies. During 2014, the maximum amount of dividends that can be paid by BIC without such approval is approximately $491 million.

BIC’s net income and statutory capital and surplus, as determined in accordance with statutory accounting practices (SAP), are as follows:

(In thousands)201320122011
Net income$680,418$490,119$417,441
Statutory capital and surplus$4,908,010$4,671,922$4,107,745

The significant variances between SAP and GAAP are that for statutory purposes bonds are carried at amortized cost, acquisition costs are charged to income as incurred, deferred Federal income taxes are subject to limitations, excess and assumed workers’ compensation reserves are discounted at different discount rates and certain assets designated as “non-admitted assets” are charged against surplus. The Commissioner of Insurance of the State of Delaware has allowed BIC to discount non-tabular workers' compensation loss reserves, which is a permitted practice that differs from SAP. The effect of using this permitted practice was to increase BIC’s statutory capital and surplus by $282 million at December 31, 2013.

The National Association of Insurance Commissioners (“NAIC”) has risk-based capital (“RBC”) requirements that require insurance companies to calculate and report information under a risk-based formula which measures statutory capital and surplus needs based on a regulatory definition of risk in a company’s mix of products and its balance sheet. This guidance is used to calculate two capital measurements: Total Adjusted Capital and RBC Authorized Control Level. Total Adjusted Capital is equal to the Company’s statutory capital and surplus excluding capital and surplus derived from the use of permitted practices that differ from statutory accounting practices. RBC Authorized Control Level is the capital level used by regulatory authorities to determine whether remedial action is required. Generally, no remedial action is required if Total Adjusted Capital is 200% or more of the RBC Authorized Control Level. At December 31, 2013, BIC’s Total Adjusted Capital of 4.6 billion was 4.53% of its RBC Authorized Control Level.

See Note 4, Investments in Fixed Maturity Securities, for a description of assets held on deposit as security.

(20)Common Stockholders’ Equity

The weighted average number of shares used in the computation of net income per share was as follows:

201320122011
Basic135,304,752137,097,162139,687,546
Diluted140,742,922143,314,544145,672,211

Treasury shares have been excluded from average outstanding shares from the date of acquisition. The difference in calculating basic and diluted net income per share is attributable entirely to the dilutive effect of stock-based compensation plans.

Changes in shares of common stock outstanding, net of treasury shares, are presented below. Shares of common stock issued and outstanding do not include shares related to unissued restricted stock units and unexercised stock options.

201320122011
Balance, beginning of year136,017,732137,520,019141,009,834
Shares issued139,7902,114,1682,702,303
Shares repurchased(3,924,355)(3,616,455)(6,192.118)
Balance, end of year132,233,167136,017,732137,520,019

The amount of dividends paid is dependent upon factors such as the receipt of dividends from our subsidiaries, our results of operations, cash flow, financial condition and business needs, the capital and surplus requirements of our subsidiaries, and applicable insurance regulations that limit the amount of dividends that may be paid by our regulated insurance subsidiaries.

(21)Fair Value of Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments as of December 31, 2013 and 2012:

20132012
(In thousands)Carrying ValueFair ValueCarrying ValueFair Value
Assets:
Fixed maturity securities$11,616,844$11,631,744$11,943,956$11,968,376
Equity securities available for sale283,338283,338376,022376,022
Arbitrage trading account522,128522,128329,077329,077
Loans receivable343,583346,746401,961406,443
Cash and cash equivalents839,738839,738905,670905,670
Trading accounts receivable from brokers and clearing organizations304,936304,936446,873446,873
Due from broker17,73517,73514,44914,449
Liabilities:
Trading account securities sold but not yet purchased162,278162,278121,487121,487
Junior subordinated debentures339,800288,540243,206252,000
Senior notes and other debt1,692,4421,861,8981,871,5352,190,173

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

(22) Lease Obligations

The Company and its subsidiaries use office space and equipment under leases expiring at various dates. These leases are considered operating leases for financial reporting purposes. Some of these leases have options to extend the length of the leases and contain clauses for cost of living, operating expense and real estate tax adjustments. The Company also has an investment in a commercial office building that has a long-term land lease. Future minimum lease payments, without provision for sublease income, are: $42,586,000 in 2014; $39,218,000 in 2015; $34,009,000 in 2016; $29,573,000 in 2017 and $213,046,000 thereafter. Rental expense was $44,752,000, $38,179,000 and $33,003,000 for 2013, 2012 and 2011, respectively.

(23) Commitments, 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.

At December 31, 2013, the Company had commitments to invest up to $249 million in certain investment funds.

(24) Stock Incentive Plan

The Company has not issued any stock options under its stock incentive plans since 2004. The following table summarizes stock option information:

201320122011
SharesPrice(1)SharesPrice(1)SharesPrice(1)
Outstanding at beginning of year3,375$15.171,314,057$11.043,503,384$10.42
Exercised3,37515.171,310,68211.032,185,95210.05
Canceled————3,37510.07
Outstanding at year end—$—3,375$15.171,314,057$11.04
(1)Weighted average exercise price.

Pursuant to the stock incentive plan, the Company may also issue restricted stock units (RSUs) to officers of the Company and its subsidiaries. The RSUs generally vest five years from the award date and are subject to other vesting and forfeiture provisions contained in the award agreement. The following table summarizes RSU information for the three years ended December 31, 2013:

201320122011
RSUs granted and unvested at beginning of period:4,701,1204,370,9754,945,375
Granted108,4002,161,220107,500
Vested(146,250)(1,704,625)(576,050)
Cancelled(171,750)(126,450)(105,850)
RSUs granted and unvested at end of period:4,491,5204,701,1204,370,975

Upon vesting, shares of the Company’s common stock equal to the number of vested RSUs are issued or deferred to a later date, depending on the terms of the specific award agreement. As of December 31, 2013, 3,643,804 shares related to vested RSUs had been deferred.

The fair value of RSUs at the date of grant are recorded as unearned compensation, a component of stockholders’ equity, and expensed over the vesting period. Following is a summary of changes in unearned compensation for the three years ended December 31, 2013:

(In thousands)201320122011
Unearned compensation at beginning of year$93,653$57,315$76,139
RSUs granted, net of cancellations4,40673,2552,832
RSUs expensed(22,881)(25,728)(26,303)
RSUs forfeiture adjustment(1,973)(11,189)4,647
Unearned compensation at end of year$73,205$93,653$57,315
(25)Compensation Plans

The Company and its subsidiaries have profit sharing plans in which substantially all employees participate. The plans provide for minimum annual contributions of 5% of eligible compensation; contributions above the minimum are discretionary and vary with each participating subsidiary’s profitability. Employees become eligible to participate in the profit sharing plans on the first day of the month following the first full three months in which they are employed. The plans provide that 40% of the contributions vest immediately and that the remaining 60% vest at varying percentages based upon years of service. The Company’s foreign subsidiaries provide pension benefits in accordance with local regulations. Profit sharing expense was $34 million, $31 million, and $27 million in 2013, 2012 and 2011, respectively.

The Company has a Long-Term Incentive Compensation Plan (“LTIP”) that provides for incentive compensation to key executives based on the growth in the Company’s book value per share over a five year period. There are 211,250 units outstanding from the 2013 grant with a maximum value of $52.8 million, of which $7.4 million was earned by December 31, 2013. There are 183,100 units outstanding from the 2011 grant with a maximum value of $45.8 million, of which $19.7 million was earned by December 31, 2013. The 2008 grant, which earned $23.0 million during the five years ended December 31, 2012, was paid in 2013.

The following table summarizes the LTIP expense for the three years ended December 31, 2013:

(In thousands)201320122011
2008 grant$—$5,742$4,600
2011 grant6,7417,3655,620
2013 grant7,386——
Total$14,127$13,107$10,220

(26) Retirement Benefits

The Company has an unfunded noncontributory defined benefit plan that covers its chief executive officer and chairman of the board. The discount rate used to derive the projected benefit obligation and related retirement expense was 0% in 2013 and 3.39% in 2012. The discount rate assumption used to determine the benefit obligation is based on a yield curve approach. Under this approach, a weighted average yield is determined from a hypothetical portfolio of AA rated bonds. A summary of the change in benefit obligation, which is required to be distributed on or before March 28, 2015, is as follows:

(In thousands)20132012
Projected benefit obligation at beginning of year$64,632$56,787
Interest cost2,1912,476
Benefits paid(285)(1,426)
Actuarial loss(2,221)6,795
Benefit obligation at end of year$64,317$64,632

Following is a summary of the amounts recognized in accumulated other comprehensive income as of December 31, 2013 and 2012:

(In thousands)20132012
Net actuarial loss$4,242$14,605
Prior service cost5,9889,012
Net pension asset$10,230$23,617

The components of net periodic pension benefit cost are as follows:

(In thousands)201320122011
Components of net periodic benefit cost:
Interest cost$2,191$2,476$2,716
Amortization of unrecognized:
Prior service costs3,0233,0233,023
Net actuarial loss8,1432,1971,330
Net periodic pension cost$13,357$7,696$7,069

The changes in plan assets and projected benefit obligation recognized in other comprehensive income are as follows:

(In thousands)20132012
Changes in plan assets and projected benefit obligation:
Net actuarial (gain) loss$(2,221)$6,795
Amortization of:
Net actuarial loss(8,143)(2,197)
Prior service costs(3,023)(3,023)
Total recognized in other comprehensive income$(13,387)$1,575

The net after tax periodic pension cost of $7 million will be amortized from accumulated other comprehensive income into periodic benefit cost during 2014.

(27) Supplemental Financial Statement Data

Other operating costs and expenses consist of the following:

(In thousands)201320122011
Amortization of deferred policy acquisition costs$991,070$917,583$785,118
Other underwriting expenses780,058675,163653,011
Service company expenses88,66284,98675,231
Net foreign currency losses(10,120)(6,092)(1,884)
Other costs and expenses151,014127,983115,050
Total$2,000,684$1,799,623$1,626,526
(28)Industry Segments

During the first quarter of 2013, the Company changed the aggregation of its business segments. The Company’s reportable segments include the following three business segments, plus a corporate segment:

Insurance-Domestic - commercial insurance business, including excess and surplus lines and admitted lines, primarily throughout the United States;

•Insurance-International - insurance business primarily in the United Kingdom, Continental Europe, South America, Canada, Scandinavia, and Australia; and
•Reinsurance-Global - reinsurance business on a facultative and treaty basis, primarily in the United States, United Kingdom, Continental Europe, Australia, and the Asia-Pacific Region.

All domestic insurance operating companies, previously included in the Specialty, Regional and Alternative Markets segments, were aggregated into the Insurance-Domestic segment; all reinsurance operating companies were aggregated into the Reinsurance-Global segment; and all international insurance companies were aggregated into the Insurance-International segment. The segment disclosures for prior periods have been revised to be consistent with the new reportable business segment presentation. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Income tax expense and benefits are calculated based upon the Company’s overall effective tax rate.

Summary financial information about the Company’s operating segments is presented in the following table. Income (loss) before income taxes by segment includes allocated investment income. Identifiable assets by segment are those assets used in or allocated to the operation of each segment.

Revenues
(In thousands)Earned PremiumsInvestment IncomeOtherTotalPre-Tax Income (Loss)Net Income (Loss)
December 31, 2013:
Insurance-Domestic$3,782,416$404,280$107,517$4,294,213$648,740$449,981
Insurance-International723,15147,039—770,19056,92240,292
Reinsurance-Global720,97089,090—810,060110,42578,013
Corporate, other and eliminations(1)—3,882408,645412,527(238,743)(142,479)
Net investment gains——121,544121,544121,54474,118
Consolidated$5,226,537$544,291$637,706$6,408,534$698,888$499,925
December 31, 2012:
Insurance-Domestic$3,417,022$424,787$103,133$3,944,942$578,500$397,942
Insurance-International631,84145,796—677,63751,63935,928
Reinsurance-Global624,653106,932—731,585103,69072,916
Corporate, other and eliminations(1)—9,248249,677258,925(242,366)(132,996)
Net investment gains——210,465210,465210,465136,802
Consolidated$4,673,516$586,763$563,275$5,823,554$701,928$510,592
December 31, 2011:
Insurance-Domestic$3,121,281$372,053$92,847$3,586,181$467,126$345,399
Insurance-International508,50936,958—545,46736,91228,142
Reinsurance-Global531,07797,795—628,87285,27166,405
Corporate, other and eliminations(1)—19,545250,438269,983(201,704)(130,382)
Net investment gains——125,481125,481125,48181,647
Consolidated$4,160,867$526,351$468,766$5,155,984$513,086$391,211
Identifiable Assets
(In thousands)December 31, 2013December 31, 2012
Insurance-Domestic$15,247,807$14,661,476
Insurance-International1,516,3101,541,365
Reinsurance-Global3,103,1933,337,937
Corporate, other and eliminations(1)684,486615,118
Consolidated$20,551,796$20,155,896
(1)Corporate, other and eliminations represent corporate revenues and expenses and other items that are not allocated to business segments.

Net premiums earned by major line of business are as follows:

(In thousands)201320122011
Insurance-Domestic
Other liability$1,259,376$1,104,369$1,003,080
Workers' compensation995,047869,042785,454
Short-tail lines774,809733,239665,575
Commercial automobile486,759455,988437,891
Professional liability266,425254,384229,281
Total Insurance-Domestic3,782,4163,417,0223,121,281
Insurance-International
Other liability65,52844,06549,800
Workers' compensation84,63782,06673,823
Short-tail lines336,814276,599183,447
Commercial automobile130,020125,927110,568
Professional liability106,152103,18490,871
Total Insurance-International723,151631,841508,509
Reinsurance-Global
Casualty507,790456,376389,557
Property213,180168,277141,520
Total Reinsurance-Global720,970624,653531,077
Total$5,226,537$4,673,516$4,160,867
(29)Quarterly Financial Information (Unaudited)

The following is a summary of quarterly financial data:

(In thousands. except per share data)2013
Three months endedMarch 31June 30September 30December 31
Revenues$1,506,769$1,570,962$1,634,124$1,696,679
Net income116,615115,957136,974130,379
Net income per share(1)
Basic0.860.851.010.97
Diluted0.830.820.970.93
2012
Three months endedMarch 31June 30September 30December 31
Revenues$1,378,705$1,415,747$1,420,501$1,608,601
Net income135,318108,838100,947165,489
Net income per share(1)
Basic0.980.790.741.22
Diluted0.940.760.711.17
(1)Net income per share (“EPS”) in each quarter is computed using the weighted-average number of shares outstanding during that quarter, while EPS for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters EPS does not necessarily equal the full-year EPS.

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