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, 2014 and 2013, 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, 2014. 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, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, 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, 2014, 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 27, 2015 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

/S/ KPMG LLP

New York, New York

February 27, 2015

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31,
(In thousands, except per share data)201420132012
REVENUES:
Net premiums written$5,996,947$5,500,173$4,898,539
Change in net unearned premiums(252,529)(273,636)(225,023)
Net premiums earned5,744,4185,226,5374,673,516
Net investment income600,885544,291586,763
Insurance service fees117,443107,513103,133
Net investment gains:
Net realized gains on investment sales254,852127,586201,451
Other-than-temporary impairments and change in valuation allowance—(6,042)9,014
Net investment gains254,852121,544210,465
Revenues from wholly-owned investees410,022407,623247,113
Other income1,3081,0262,564
Total revenues7,128,9286,408,5345,823,554
OPERATING COSTS AND EXPENSES:
Losses and loss expenses3,490,5673,197,0242,948,479
Other operating costs and expenses2,157,4562,000,6841,799,623
Expenses from wholly-owned investees400,535388,761247,222
Interest expense128,174123,177126,302
Total operating costs and expenses6,176,7325,709,6465,121,626
Income before income taxes952,196698,888701,928
Income tax expense(302,593)(193,587)(191,285)
Net income before noncontrolling interests649,603505,301510,643
Noncontrolling interests(719)(5,376)(51)
Net income to common stockholders$648,884$499,925$510,592
NET INCOME PER SHARE:
Basic$5.07$3.69$3.72
Diluted$4.86$3.55$3.56

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31,
(In thousands)201420132012
Net income before noncontrolling interests$649,603$505,301$510,643
Other comprehensive income:
Change in unrealized translation adjustments(62,125)(23,848)24,563
Change in unrealized investment gains (losses), net of taxes49,666(261,064)87,316
Change in unrecognized pension obligation, net of taxes6,6518,700(1,022)
Other comprehensive income (loss)(5,808)(276,212)110,857
Comprehensive income643,795229,089621,500
Comprehensive income to the noncontrolling interest(752)(5,404)(128)
Comprehensive income to common shareholders$643,043$223,685$621,372

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31,
(In thousands, except share data)20142013
Assets
Investments:
Fixed maturity securities$12,705,160$11,616,844
Investment funds1,211,4011,067,495
Real estate731,612715,242
Arbitrage trading account450,648522,128
Loans receivable322,012343,583
Equity securities available for sale170,991283,338
Total investments15,591,82414,548,630
Cash and cash equivalents674,441839,738
Premiums and fees receivable1,651,0881,557,480
Due from reinsurers1,503,4411,533,103
Deferred policy acquisition costs488,525452,101
Prepaid reinsurance premiums395,748367,803
Trading account receivable from brokers and clearing organizations371,034304,936
Property, furniture and equipment332,098339,448
Goodwill150,944110,146
Accrued investment income120,367118,329
Deferred federal and foreign income taxes—20,120
Current federal and foreign income taxes67,62324,737
Other assets369,558335,225
Total assets$21,716,691$20,551,796
Liabilities and Equity
Liabilities:
Reserves for losses and loss expenses$10,369,701$10,080,941
Unearned premiums3,026,7322,781,437
Due to reinsurers237,270276,755
Trading account securities sold but not yet purchased106,079162,278
Deferred federal and foreign income taxes37,452—
Other liabilities859,736848,749
Senior notes and other debt2,115,5271,692,442
Subordinated debentures340,060339,800
Total liabilities17,092,55716,182,402
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, 126,748,836 and 132,233,167 shares, respectively47,02447,024
Additional paid-in capital991,512967,440
Retained earnings5,732,4105,265,015
Accumulated other comprehensive income183,550189,391
Treasury stock, at cost, 108,369,082 and 102,884,751 shares, respectively(2,364,551)(2,132,835)
Total common stockholders’ equity4,589,9454,336,035
Noncontrolling interests34,18933,359
Total equity4,624,1344,369,394
Total liabilities and equity$21,716,691$20,551,796

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended December 31,
(In thousands)201420132012
COMMON STOCK:
Beginning and end of period$47,024$47,024$47,024
ADDITIONAL PAID IN CAPITAL:
Beginning of period$967,440$945,166$941,109
Stock options exercised and restricted units issued including tax benefit(4,485)(1,143)(22,125)
Restricted stock units expensed27,96622,88125,728
Stock issued591536454
End of period$991,512$967,440$945,166
RETAINED EARNINGS:
Beginning of period$5,265,015$4,817,807$4,491,162
Net income to common stockholders648,884499,925510,592
Dividends(181,489)(52,717)(183,947)
End of period$5,732,410$5,265,015$4,817,807
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Unrealized investment gains (losses):
Beginning of period$256,566$517,658$430,419
Unrealized gains (losses) on securities not other-than-temporarily impaired49,071(261,791)84,229
Unrealized gains on other-than-temporarily impaired securities5626993,010
End of period306,199256,566517,658
Currency translation adjustments:
Beginning of period(60,524)(36,676)(61,239)
Net change in period(62,125)(23,848)24,563
End of period(122,649)(60,524)(36,676)
Net pension asset:
Beginning of period(6,651)(15,351)(14,329)
Net change in period6,6518,700(1,022)
End of period—(6,651)(15,351)
Total accumulated other comprehensive income$183,550$189,391$465,631
TREASURY STOCK:
Beginning of period$(2,132,835)$(1,969,411)$(1,880,790)
Stock exercised/vested6,6232,45245,253
Stock issued594597581
Stock repurchased(238,933)(166,473)(134,455)
End of period$(2,364,551)$(2,132,835)$(1,969,411)
NONCONTROLLING INTERESTS:
Beginning of period$33,359$29,249$7,526
Acquisition of noncontrolling interest78(1,294)21,595
Net income7195,37651
Other comprehensive income, net of tax332877
End of period$34,189$33,359$29,249

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,
(In thousands)201420132012
CASH FROM OPERATING ACTIVITIES:
Net income to common stockholders$648,884$499,925$510,592
Adjustments to reconcile net income to net cash from operating activities:
Net investment gains(254,852)(121,544)(210,465)
Depreciation and amortization88,836103,090103,419
Noncontrolling interests7195,37651
Investment funds(131,649)(67,712)(77,015)
Stock incentive plans28,06823,78426,763
Change in:
Arbitrage trading account(50,817)(10,324)(1,424)
Premiums and fees receivable(104,174)(138,027)(228,756)
Reinsurance accounts(33,445)(171,263)(216,968)
Deferred policy acquisition costs(42,789)(52,124)(38,656)
Current income taxes(40,935)(45,613)5,914
Deferred income taxes30,81256,28113,240
Reserves for losses and loss expenses376,617372,002406,763
Unearned premiums277,826323,160279,986
Other(58,254)42,787102,014
Net cash from operating activities734,847819,798675,458
CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from sale of fixed maturity securities633,4591,344,707838,576
Proceeds from sale of equity securities113,251267,554409,610
Distributions from (contributions to) investment funds69,319(236,580)77,930
Proceeds from maturities and prepayments of fixed maturity securities2,605,8392,718,1562,291,105
Purchase of fixed maturity securities(4,292,165)(4,198,135)(3,617,002)
Purchase of equity securities(31,207)(156,557)(284,991)
Real estate purchased(213,159)(107,352)(256,386)
Proceeds from sale of real estate343,723——
Change in loans receivable21,608(30,974)(124,776)
Net additions to property, furniture and equipment(41,958)(63,150)(40,556)
Change in balances due from security brokers32,617(26,155)(25,799)
Cash distributed in connection with business15,783——
Payment for business purchased, net of cash acquired(65,421)(56,878)(42,779)
Net cash used in investing activities(808,311)(545,364)(775,068)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of debt354,012346,822369,291
Net proceeds from stock options exercised—537,660
Repayment of senior notes and other debt(3,700)(465,389)—
Cash dividends to common stockholders(181,489)(52,717)(183,947)
Purchase of common treasury shares(238,933)(166,473)(127,663)
Other3377,44231,851
Net cash from (used in) financing activities(69,773)(330,262)97,192
Net impact on cash due to change in foreign exchange rates(22,060)(10,104)(3,654)
Net decrease in cash and cash equivalents(165,297)(65,932)(6,072)
Cash and cash equivalents at beginning of year839,738905,670911,742
Cash and cash equivalents at end of year$674,441$839,738$905,670

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2014, 2013 and 2012

(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 2013 and 2012 financial statements to conform to the presentation of the 2014 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 $9 million, $12 million and $7 million in 2014, 2013 and 2012, respectively.

Revenues from wholly-owned investees are derived from aircraft services provided to the general, commercial and military aviation markets. These services include (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. Revenue is recognized upon the shipment of parts, the delivery of aircraft, the delivery of fuel, 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 and fixed maturity 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 primarily 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 $68 million and $72 million at December 31, 2014 and 2013, 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 $44 million, $38 million and $38 million for 2014, 2013 and 2012, 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, 2014 indicated that there were no impairment losses related to goodwill and other intangible assets. Intangible assets of $96 million and $72 million are included in other assets as of December 31, 2014 and 2013, 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 $120 million, $125 million and $119 million in 2014, 2013 and 2012, respectively. Income taxes paid were $314 million, $186 million and $133 million in 2014, 2013 and 2012, respectively. Other non-cash items include acquisitions, unrealized investment gains and losses and pension expense. (See Note 2, Note 11 and Note 25 of Notes to Consolidated Financial Statements.)

(Q) Recent accounting pronouncements

In January 2014, the Financial Accounting Standards Board issued guidance relating to Accounting for Investments in Qualified Affordable Housing Projects. This guidance modified the amortization method on these investments and the statement of operations classification as pre-adoption amounts were presented in both pre-tax income and income tax expense while post adoption all impacts are recorded in income tax expense. The Company adopted this guidance effective January 1, 2014, and the impact of applying this guidance was immaterial.

All recently issued but not yet effective accounting and reporting standards are either not applicable to the Company or are not expected to have a material impact on the Company.

(2) Acquisitions / Dispositions

In 2014, the Company acquired a specialty property and casualty insurance distribution company for $83 million. The fair values of the assets acquired and liabilities assumed have been estimated based on a valuation prepared by a third party. The estimated useful lives of the intangible assets acquired range from 7 years to 15 years, with approximately $10 million having an indefinite life.

In 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 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 2014, the Company sold an aviation-related business for $16 million. The business had a net carrying value of $15 million, comprised of $7 million of goodwill, $6 million of other assets, $4 million of furniture and equipment and $2 million of liabilities.

The following table summarizes the estimated fair value of net assets acquired and liabilities assumed for business combinations completed in 2014 and 2013:

(In thousands)20142013
Cash and cash equivalents$17,457$3,911
Real estate, furniture and equipment669898
Goodwill and other intangibles assets79,64664,464
Premium and service fee receivable24,432—
Other assets2,59060,661
Total assets acquired124,794129,934
Deferred federal income tax(7,107)—
Debt—(27,612)
Other liabilities assumed(34,809)(17,076)
Net assets acquired$82,878$85,246

(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, 2014:

(In thousands)Unrealized investment gains (losses)Currency translation adjustmentsNet pension assetAccumulated other comprehensive income (loss)
Changes in AOCI
Beginning of period$256,566$(60,524)$(6,651)$189,391
Other comprehensive income (loss) before reclassifications98,294(62,125)—36,169
Amounts reclassified from AOCI(48,628)—6,651(41,977)
Other comprehensive income (loss)49,666(62,125)6,651(5,808)
Unrealized investment gain related to non-controlling interest(33)——(33)
Ending balance$306,199$(122,649)$—$183,550
Amounts reclassified from AOCI
Pre-tax$(74,812)(1)$—$10,232(3)$(64,580)
Tax effect26,184(2)—(3,581)(2)22,603
After-tax amounts reclassified$(48,628)$—$6,651$(41,977)
Other comprehensive income (loss)
Pre-tax$72,889$(62,125)$10,232$20,996
Tax effect(23,223)—(3,581)(26,804)
Other comprehensive income (loss)$49,666$(62,125)$6,651$(5,808)

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 income.

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

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

(4) Investments in Fixed Maturity Securities

At December 31, 2014 and 2013, investments in fixed maturity securities were as follows:

(In thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesFair ValueCarrying Value
December 31, 2014
Held to maturity:
State and municipal$72,901$17,501$—$90,402$72,901
Residential mortgage-backed securities23,2782,854—26,13223,278
Corporate4,998291—5,2894,998
Total held to maturity101,17720,646—121,823101,177
Available for sale:
U.S. government and government agency773,19233,353(3,157)803,388803,388
State and municipal4,137,866229,150(4,020)4,362,9964,362,996
Mortgage-backed securities:
Residential(1)1,201,92427,124(9,449)1,219,5991,219,599
Commercial74,4791,610(52)76,03776,037
Corporate5,036,958187,960(24,781)5,200,1375,200,137
Foreign government897,66862,223(18,065)941,826941,826
Total available for sale12,122,087541,420(59,524)12,603,98312,603,983
Total investment in fixed maturity securities$12,223,264$562,066$(59,524)$12,725,806$12,705,160
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
(1)Gross unrealized losses for mortgage-backed securities include $1,095,671 and $1,961,247, as of December 31, 2014 and 2013, 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, 2014, 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$884,831$895,004
Due after one year through five years3,953,0034,119,946
Due after five years through ten years3,600,1553,790,402
Due after ten years2,485,5942,598,686
Mortgage-backed securities1,299,6811,321,768
Total$12,223,264$12,725,806

At December 31, 2014 and 2013, 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, 2014, investments with a carrying value of $1,151 million were on deposit in custodial or trust accounts, of which $906 million was on deposit with state insurance departments, $188 million was on deposit in support of the Company’s underwriting activities at Lloyd’s, $44 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, 2014 and 2013, investments in equity securities available for sale were as follows:

(In thousands)CostGross Unrealized GainsGross Unrealized LossesFair ValueCarrying Value
December 31, 2014
Common stocks$69,870$11,929$(5,453)$76,346$76,346
Preferred stocks90,4258,385(4,165)94,64594,645
Total$160,295$20,314$(9,618)$170,991$170,991
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

(6) Arbitrage Trading Account

At December 31, 2014 and 2013, the fair value and carrying value of the arbitrage trading account were $451 million and $522 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, 2014, the fair value of long option contracts outstanding was $8 million (notional amount of $133 million) and the fair value of short option contracts outstanding was $2 million (notional amount of $106 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)201420132012
Investment income earned on:
Fixed maturity securities, including cash and cash equivalents and loans receivable$439,489$442,287$479,035
Equity securities available for sale6,72611,38016,419
Investment funds131,64967,71277,015
Arbitrage trading account22,43820,4318,286
Real estate10,22812,49812,097
Gross investment income610,530554,308592,852
Investment expense(9,645)(10,017)(6,089)
Net investment income$600,885$544,291$586,763

(8) Investment Funds

Investment funds consist of the following:

Carrying Value as of December 31,Income
(In thousands)20142013201420132012
Real estate$466,703$378,435$26,233$9,315$30,196
Energy152,056155,02612,79729,73933,146
Hedged equity282,335271,57510,7607,6555,912
Other funds310,307262,45981,85921,0037,761
Total$1,211,401$1,067,495$131,649$67,712$77,015

Other funds include private equity investments carried on the equity method of accounting, which includes a publicly traded common stock investment in HealthEquity, Inc. (HQY). Our ownership interest in HQY as of December 31, 2014 is 28.1%, with a fair value of $392 million and a carrying value of $45 million.

(9)Real Estate

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

As of December 31,
(In thousands)20142013
Properties in operation$196,980$283,393
Properties under development534,632431,849
Total$731,612$715,242

In 2014, properties in operation included a long-term ground lease in Washington, D.C. and an office building in West Palm Beach, Florida. Properties in operation in 2013 included an office building located in London which was sold during 2014. Properties in operation are net of accumulated depreciation and amortization of $1,609,000 and $17,827,000 as of December 31, 2014 and 2013, respectively. Related depreciation expense was $4,808,000 and $7,474,000 for the years ended December 31, 2014 and 2013, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $11,379,000 in 2015, $11,457,000 in 2016, $11,500,000 in 2017, $10,833,000 in 2018, $7,839,000 in 2019 and $336,653,000 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)20142013
Amortized cost:
Real estate loans$243,407$282,357
Commercial loans78,60561,226
Total$322,012$343,583
Fair value:
Real estate loans$245,112$284,017
Commercial loans80,10762,729
Total$325,219$346,746
Valuation allowance:
Specific$115$—
General2,3712,087
Total$2,486$2,087
For the Year Ended December 31,
20142013
Increase in valuation allowance$398$308

Loans receivable in non-accrual status as of December 31, 2014 was $14.2 million, primarily resulting from the transfer of such loans to held-for-sale.

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, Illinois, Maryland, New York, North Carolina, Texas and Virginia. 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 a risk rating system to assign a risk to each of its real estate loans. The loan rating system takes into consideration credit quality indicators including loan to value ratios, which compare the outstanding loan amount to the estimated value of the property, the borrower’s financial condition and performance with respect to loan terms, the Company’s position in the capital structure, and the overall leverage in the capital structure. Based on this rating system, none of the real estate loans were considered to be impaired at December 31, 2014, 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)201420132012
Realized investment gains and losses:
Fixed maturity securities:
Gains$39,113$48,860$34,295
Losses(4,420)(14,670)(6,436)
Equity securities available for sale38,29670,23597,300
Investment funds96,20410,97674,777
Real estate85,659——
Other gains—12,1851,515
Net realized gains on investments sales254,852127,586201,451
Net other-than-temporary impairments:
Other-than-temporary impairments—(6,042)(4,984)
Decrease in valuation allowance——13,998
Net other-than-temporary impairments—(6,042)9,014
Total net investment gains254,852121,544210,465
Income tax expense(89,198)(47,426)(73,663)
$165,654$74,118$136,802
Change in unrealized gains and losses of available for sales securities:
Fixed maturity securities$155,765$(401,812)$162,220
Previously impaired fixed maturity securities8651,0764,631
Equity securities available for sale(69,016)11,864(33,199)
Investment funds(14,725)(10,250)1,630
Total change in unrealized gains72,889(399,122)135,282
Income tax benefit (expense)(23,223)138,058(47,966)
Noncontrolling interests(33)(28)(77)
$49,633$(261,092)$87,239

(12) Securities in an Unrealized Loss Position

The following table summarizes all securities in an unrealized loss position at December 31, 2014 and 2013 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, 2014
U.S. government and government agency$84,750$522$84,850$2,635$169,600$3,157
State and municipal158,594631150,2843,389308,8784,020
Mortgage-backed securities75,739332312,9229,169388,6619,501
Corporate1,586,2388,697214,62816,0841,800,86624,781
Foreign government76,4713,90785,02514,158161,49618,065
Fixed maturity securities1,981,79214,089847,70945,4352,829,50159,524
Common stocks15,9295,453——15,9295,453
Preferred stocks27,1261,13922,6483,02649,7744,165
Equity securities available for sale43,0556,59222,6483,02665,7039,618
Total$2,024,847$20,681$870,357$48,461$2,895,204$69,142
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

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, 2014 is presented in the table below:

(Dollars in thousands)Number of SecuritiesAggregate Fair ValueGross Unrealized Loss
Mortgage-backed securities9$28,537$1,699
Corporate1024,528742
Foreign government211,177247
Total21$64,242$2,688

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 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, 2014, there were six preferred stocks in an unrealized loss position, with an aggregate fair value of $49.8 million and a gross unrealized loss of $4.2 million. Four of these preferred stocks are rated non-investment grade, and none are delinquent. 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, 2014, there were two common stocks in an unrealized loss position, with an aggregate fair value of $15.9 million and a gross unrealized loss of $5.5 million. Based on management's view on the underlying securities, the Company does not consider the common stocks to be OTTI.

Loans Receivable – The Company monitors the performance of its loans receivable, including current market conditions for each loan and the ability to collect principal and interest. For loans where the Company determines it is probable that the contractual terms will not be met, an analysis is performed and a valuation reserve is established, if necessary, with a charge to earnings. Loans receivable are reported net of a valuation reserve of $3 million and $2 million at December 31, 2014 and 2013, respectively.

(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, 2014 and 2013 by level:

(In thousands)TotalLevel 1Level 2Level 3
December 31, 2014
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency$803,388$—$803,388$—
State and municipal4,362,996—4,362,996—
Mortgage-backed securities1,295,636—1,295,636—
Corporate5,200,137—5,179,37220,765
Foreign government941,826—941,826—
Total fixed maturity securities available for sale12,603,983—12,583,21820,765
Equity securities available for sale:
Common stocks76,34665,605—10,741
Preferred stocks94,645—90,9323,713
Total equity securities available for sale170,99165,60590,93214,454
Arbitrage trading account450,648295,047154,881720
Total$13,225,622$360,652$12,829,031$35,939
Liabilities:
Securities sold but not yet purchased$106,079$106,074$5$—
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$152$—

There were no transfers between Levels 1 and 2 for the years ended December 31, 2014 and 2013.

The following tables summarize changes in Level 3 assets and liabilities for the years ended December 31, 2014 and 2013:

Gains (Losses) Included in:
(In thousands)Beginning BalanceEarningsOther Comprehensive IncomePurchasesSalesPaydowns/MaturitiesInOutEnding Balance
Year ended December 31, 2014
Assets:
Fixed maturity securities available for sale:
Corporate$42,864$47$(3,711)$238$(15,244)$(3,429)$—$—$20,765
Total42,86447(3,711)238(15,244)(3,429)——20,765
Equity securities available for sale:
Common stocks1,238—(911)11,343(929)———10,741
Preferred stocks3,752(17)—3,430(3,452)———3,713
Total4,990(17)(911)14,773(4,381)———14,454
Arbitrage trading account1,7802,274—4,942(14,073)—9,064(3,267)720
Total$49,634$2,304$(4,622)$19,953$(33,698)$(3,429)$9,064$(3,267)$35,939
Liabilities:
Securities sold but not yet purchased$—$(20)$—$31$(11)$—$—$—$—
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 purchased$20$(4)$—$4$(20)$—$—$—$—

There were no significant transfers in or out of Level 3 during the years ended December 31, 2014 or 2013.

(14) Reserves for Losses and Loss Expenses

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

(In thousands)201420132012
Net reserves at beginning of year$8,683,797$8,411,851$8,172,112
Net provision for losses and loss expenses:
Claims occuring during the current year(1)3,495,8253,221,3932,997,995
Decrease in estimates for claims occurring in prior years(2)(3)(75,764)(78,810)(102,571)
Loss reserve discount accretion(4)70,50654,44153,055
Total3,490,5673,197,0242,948,479
Net payments for claims:
Current year898,944822,787698,834
Prior year2,216,2832,055,2842,010,101
Total3,115,2272,878,0712,708,935
Foreign currency translation(88,496)(47,007)195
Net reserves at end of year8,970,6418,683,7978,411,851
Ceded reserve at end of year1,399,0601,397,1441,339,235
Gross reserves at end of year$10,369,701$10,080,941$9,751,086
(1)Claims occurring during the current year are net of loss reserve discounts of $21,306,000, $22,680,000, and $26,078,000 in 2014, 2013 and 2012, 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 $116,866,000, $77,430,000 and $100,667,000 in 2014, 2013 and 2012, 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 $85 million, $98 million and $103 million in 2014, 2013 and 2012, respectively.
(4)In 2014, the Company entered into a commutation agreement that resulted in a reduction in prior year workers' compensation reserves of $30 million on an undiscounted basis and $12 million on a discounted basis.

For the year ended December 31, 2014, estimates for claims occurring in prior years (net of additional and return premiums) decreased by $85 million. The favorable reserve development in 2014 was primarily attributable to domestic other liability business for accident years 2006 through 2010, primarily related to excess and surplus lines casualty business. 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.

Favorable development in 2013 was primarily attributable to accident years 2006 through 2012 and included favorable development of $39 million for other liability business, $32 million for reinsurance assumed liability business, $22 million for workers’ compensation, $18 million for commercial property and $24 million for other lines of business. The 2013 favorable development was partially offset by unfavorable development of $23 million for commercial automobile business and $14 million for products liability business.

Favorable reserve development in 2012 was primarily attributable to improved claim frequency (i.e., number of reported claims per unit of exposure), especially in the excess and surplus casualty business.

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 was $36 million at December 31, 2014 and 2013. The Company’s gross reserves for losses and loss adjustment expenses relating to asbestos and environmental claims were $56 million and $59 million at December 31, 2014 and 2013, respectively. Increases in net incurred losses and loss expenses for reported asbestos and environmental claims were approximately $4 million, $5

million and $2 million in 2014, 2013 and 2012, respectively. Net paid losses and loss expenses for asbestos and environmental claims were approximately $3 million in 2014, $3 million in 2013 and $2 million in 2012. 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, 2014, the discount rates by year ranged from 2.0% to 6.5% with a weighted average discount rate of 4.2%. 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%. The aggregate net discount, after reflecting the effects of ceded reinsurance, was $746 million, $837 million and $867 million at December 31, 2014, 2013 and 2012, 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)201420132012
Written premiums:
Direct$6,185,242$5,626,172$4,964,069
Assumed877,596884,919815,810
Ceded(1,065,891)(1,010,918)(881,340)
Total net written premiums$5,996,947$5,500,173$4,898,539
Earned premiums:
Direct$5,889,021$5,328,955$4,723,882
Assumed886,063857,119770,981
Ceded(1,030,666)(959,537)(821,347)
Total net earned premiums$5,744,418$5,226,537$4,673,516
Ceded losses and loss expenses incurred$475,802$556,108$528,018
Ceded commission earned$160,215$137,449$121,089

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 $1,144,000, $1,385,000 and $1,680,000 as of December 31, 2014, 2013 and 2012, respectively. The following table presents the amounts due from reinsurers as of December 31, 2014:

(In thousands)
Munich Re$141,489
Allegany Grp109,976
Lloyd’s of London101,308
Swiss Re97,300
Partner Re70,756
Axis Capital63,352
Berkshire Hathaway48,804
Ace Group44,215
Everest Re43,207
Hannover Re Group41,749
Arch Capital Group23,453
Other reinsurers less than $20,000212,270
Subtotal997,879
Residual market pools505,562
Total$1,503,441
(16)Indebtedness

Indebtedness consisted of the following as of December 31, 2014 (the difference between the face value and the carrying value is unamortized discount):

(In thousands)Interest RateFace Value2014 Carrying Value2013 Carrying Value
Senior notes due on:
May 15, 20155.6%$200,000$199,930$199,744
August 15, 20196.15%150,000149,342149,199
September 15, 20197.375%300,000298,800298,546
September 15, 20205.375%300,000298,074297,738
January 1, 20228.7%76,50376,04876,004
March 15, 20224.625%350,000346,999346,581
February 15, 20376.25%250,000247,566247,457
August 1, 20444.75%350,000344,545—
Subsidiary debt (1)Various153,549154,22377,173
Total senior notes and other debt$2,130,052$2,115,527$1,692,442
Subordinated debentures5.625%$350,000$340,060$339,800

(1) Subsidiary debt is due as follows: $76 million in 2015, $33 million in 2016, $42 million in 2017 and $3 million thereafter.

In 2013, the Company issued $350 million aggregate principal amount of 5.625% Subordinated Debentures due April 2053. At December 31, 2014, the carrying value of the debentures, net of unamortized discount, was $340 million.

(17)Income Taxes

Income tax expense consists of:

(In thousands)Current ExpenseDeferred ExpenseTotal
December 31, 2014
Domestic$258,337$28,029$286,366
Foreign12,9693,25816,227
Total expense$271,306$31,287$302,593
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

Income before income taxes from domestic operations was $910 million, $598 million and $624 million for the years ended December 31, 2014, 2013 and 2012, respectively. Income before income taxes from foreign operations was $42 million, $101 million and $78 million for the years ended December 31, 2014, 2013 and 2012, 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)201420132012
Computed “expected” tax expense$333,269$244,611$245,675
Tax-exempt investment income(38,757)(40,679)(50,665)
Change in valuation allowance1,335——
Impact of foreign tax rates6,239(4,851)(5,234)
State and local taxes2,3752,906(753)
Other, net(1,868)(8,400)2,262
Total expense$302,593$193,587$191,285

At December 31, 2014 and 2013, 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)20142013
Deferred tax asset:
Loss reserve discounting$77,216$87,394
Unearned premiums165,075149,107
Other-than-temporary impairments45,36749,483
Restricted stock units60,06152,671
Other101,13192,698
Gross deferred tax asset448,850431,353
Less valuation allowance(1,335)—
Deferred tax asset447,515431,353
Deferred tax liability:
Amortization of intangibles22,74711,886
Deferred policy acquisition costs152,001136,635
Unrealized investment gains175,111148,215
Other135,108114,497
Deferred tax liability484,967411,233
Net deferred tax asset (liability)$(37,452)$20,120

The Company had current tax receivables of $67,623,000 and $24,737,000 at December 31, 2014 and 2013, respectively. At December 31, 2014, the Company had foreign net operating loss carryforwards of $559 thousand that expire beginning in 2015, $6 million that expire beginning in 2031, and an additional $12 million that have no expiration date. At December 31, 2014, the Company had a valuation allowance of $1,335,000, as compared to none at December 31, 2013. The Company has provided a valuation allowance against losses for certain foreign non-insurance related business. The statute of limitations has closed for the Company’s tax returns through December 31, 2010.

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.

(18)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 2015, the maximum amount of dividends that can be paid by BIC without such approval is approximately $631 million.

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

(In thousands)201420132012
Net income$753,260$469,354$482,457
Statutory capital and surplus$5,438,064$4,908,010$4,671,979

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 $251 million at December 31, 2014.

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, 2014, BIC’s Total Adjusted Capital of $5.187 billion was 465% of its RBC Authorized Control Level.

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

(19)Common Stockholders’ Equity

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

201420132012
Basic127,873,708135,304,752137,097,162
Diluted133,651,855140,742,922143,314,544

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.

201420132012
Balance, beginning of year132,233,167136,017,732137,520,019
Shares issued332,137139,7902,114,168
Shares repurchased(5,816,468)(3,924,355)(3,616,455)
Balance, end of year126,748,836132,233,167136,017,732

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.

(20)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, 2014 and 2013:

20142013
(In thousands)Carrying ValueFair ValueCarrying ValueFair Value
Assets:
Fixed maturity securities$12,705,160$12,725,806$11,616,844$11,631,744
Equity securities available for sale170,991170,991283,338283,338
Arbitrage trading account450,648450,648522,128522,128
Loans receivable322,012325,219343,583346,746
Cash and cash equivalents674,441674,441839,738839,738
Trading accounts receivable from brokers and clearing organizations371,034371,034304,936304,936
Due from broker——17,73517,735
Liabilities:
Due to broker23,13323,1338,2738,273
Trading account securities sold but not yet purchased106,079106,079162,278162,278
Subordinated debentures340,060332,640339,800288,540
Senior notes and other debt2,115,5272,344,2921,692,4421,861,898

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, other debt and the subordinated debentures is based on spreads for similar securities, which is considered a Level 2 input.

(21) 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. Future minimum lease payments, without provision for sublease income, are: $41,210,000 in 2015; $36,547,000 in 2016; $32,336,000 in 2017; $27,012,000 in 2018; $23,344,000 in 2019 and $78,517,000 thereafter. Rental expense was $45,198,000, $44,752,000 and $38,179,000 for 2014, 2013 and 2012, respectively.

(22) 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, 2014, the Company had commitments to invest up to $242 million in certain investment funds.

(23) Stock Incentive Plan

The Company has not issued any stock options under its stock incentive plans since 2004, and there were no outstanding options at December 31, 2014. The following table summarizes stock option information:

20132012
SharesPrice(1)SharesPrice(1)
Outstanding at beginning of year3,375$15.171,314,057$11.04
Exercised3,37515.171,310,68211.03
Canceled————
Outstanding at year end—$—3,375$15.17
(1)Weighted average exercise price.

Pursuant to the 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. The following table summarizes RSU information for the three years ended December 31, 2014:

201420132012
RSUs granted and unvested at beginning of period:4,491,5204,701,1204,370,975
Granted1,154,950108,4002,161,220
Vested(81,500)(146,250)(1,704,625)
Cancelled(234,525)(171,750)(126,450)
RSUs granted and unvested at end of period:5,330,4454,491,5204,701,120

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, 2014, 3,417,918 RSUs had been deferred. Accordingly, we have not included in the issued and outstanding common stock any shares relating to RSUs that have been granted but remain unvested or to issued RSUs that are vested and have 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, 2014:

(In thousands)201420132012
Unearned compensation at beginning of year$73,205$93,653$57,315
RSUs granted, net of cancellations51,5754,40673,255
RSUs expensed(27,966)(22,881)(25,728)
RSUs forfeitures(8,799)(1,973)(11,189)
Unearned compensation at end of year$88,015$73,205$93,653

(24) 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 will become eligible to participate in the Plan on the first day of the calendar quarter following the first full calendar quarter after the Employee's date of hire provided the Employee has completed 250 hours of service during the calendar quarter. The plans provide that 40% of the contributions vest immediately and that the remaining 60% vest at varying percentages based upon years of service. Profit sharing expense was $38 million, $34 million, and $31 million in 2014, 2013 and 2012, 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.

The following table is a summary of the outstanding LTIP awards as of December 31, 2014:

Units OutstandingMaximum ValueInception to date earned through December 31, 2014 on outstanding units
2011 grant175,100$43,775,000$27,307,000
2013 grant208,00052,000,00016,665,000
2014 grant220,00022,000,0003,663,000

The following table summarizes the LTIP expense for each of the three years ended December 31, 2014:

(In thousands)201420132012
2008 grant$—$—$4,283
2011 grant9,8556,9396,822
2013 grant9,4937,231—
2014 grant3,663——
Total$23,011$14,170$11,105

The 2008 grant, which earned $23.0 million during the five years ended December 31, 2012, was paid in 2013.

(25) Retirement Benefits

The Company and its chairman of the board and chief executive officer entered into an unfunded supplemental benefit agreement (SBA) in 2004. On March 28, 2013, the Company agreed to terminate and distribute the retirement benefit of the SBA. As a result, the Company distributed retirement benefits of $0.3 million and $4.6 million in 2013 and 2014, respectively. The final retirement benefit of $59.4 million, which is fully accrued at December 31, 2014, will be distributed during the first quarter of 2015. Net retirement benefit expense was $7,696,000, $13,357,000 and $9,994,000 in 2012, 2013 and 2014, respectively.

Following is a summary of retirement benefit disclosures for prior years:

(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
Net actuarial loss$4,242$14,605
Prior service cost5,9889,012
Net pension asset$10,230$23,617
Interest cost$2,191$2,476
Amortization of unrecognized:
Prior service costs3,0233,023
Net actuarial loss8,1432,197
Net periodic pension cost$13,357$7,696
Net actuarial (gain) loss$(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

(26) Supplemental Financial Statement Data

Other operating costs and expenses consist of the following:

(In thousands)201420132012
Amortization of deferred policy acquisition costs$1,053,397$991,070$917,583
Other underwriting expenses843,133780,058675,163
Service company expenses102,72688,66284,986
Net foreign currency gains(27)(10,120)(6,092)
Other costs and expenses158,227151,014127,983
Total$2,157,456$2,000,684$1,799,623
(27)Industry 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.

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 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, 2014:
Insurance-Domestic$4,271,933$428,632$106,853$4,807,418$796,309$539,461
Insurance-International802,37555,407—857,78229,77922,182
Reinsurance-Global670,11088,821—758,931115,67779,720
Corporate, other and eliminations(1)—28,025421,920449,945(244,421)(158,133)
Net investment gains——254,852254,852254,852165,654
Consolidated$5,744,418$600,885$783,625$7,128,928$952,196$648,884
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
Identifiable Assets
(In thousands)December 31, 2014December 31, 2013
Insurance-Domestic$16,065,409$15,247,807
Insurance-International1,879,4381,516,310
Reinsurance-Global2,713,5543,103,193
Corporate, other and eliminations(1)1,058,290684,486
Consolidated$21,716,691$20,551,796
(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)201420132012
Insurance-Domestic
Other liability$1,449,425$1,259,376$1,104,369
Workers' compensation1,126,704995,047869,042
Short-tail lines875,898774,809733,239
Commercial automobile526,344486,759455,988
Professional liability293,562266,425254,384
Total Insurance-Domestic4,271,9333,782,4163,417,022
Insurance-International
Other liability92,41165,52844,065
Workers' compensation71,99784,63782,066
Short-tail lines415,123336,814276,599
Commercial automobile116,369130,020125,927
Professional liability106,475106,152103,184
Total Insurance-International802,375723,151631,841
Reinsurance-Global
Casualty487,264507,790456,376
Property182,846213,180168,277
Total Reinsurance-Global670,110720,970624,653
Total$5,744,418$5,226,537$4,673,516
(28)Quarterly Financial Information (Unaudited)

The following is a summary of quarterly financial data:

(In thousands. except per share data)2014
Three months endedMarch 31June 30September 30December 31
Revenues$1,706,906$1,796,989$1,840,605$1,784,428
Net income169,673179,961188,539110,711
Net income per share(1)
Basic1.311.411.480.87
Diluted1.251.351.420.83
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
(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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