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

To the Stockholders and Board of Directors

W. R. Berkley Corporation:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of W. R. Berkley Corporation and Subsidiaries (the “Company”) as of December 31, 2017 and 2016, 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, 2017, and the related notes and financial statement schedules II to VI (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, 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) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/S/ KPMG LLP

We have served as the Company’s auditor since 1972.

New York, New York

February 23, 2018

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME



	Year Ended December 31,
(In thousands, except per share data)	2017			2016			2015
REVENUES:
Net premiums written	$	6,260,508		$	6,423,913		$	6,189,515
Change in net unearned premiums	50,911			(130,565		)	(148,906		)
Net premiums earned	6,311,419			6,293,348			6,040,609
Net investment income	575,788			564,163			512,645
Net investment gains:
Net realized gains on investment sales	335,858			285,119			125,633
Other-than-temporary impairments	—			(18,114		)	(33,309		)
Net investment gains	335,858			267,005			92,324
Revenues from non-insurance businesses	326,165			390,348			421,102
Insurance service fees	134,729			138,944			139,440
Other income	805			376			337
Total revenues	7,684,764			7,654,184			7,206,457
OPERATING COSTS AND EXPENSES:
Losses and loss expenses	4,002,348			3,845,800			3,656,270
Other operating costs and expenses	2,436,932			2,395,619			2,289,750
Expenses from non-insurance businesses	325,417			375,431			397,461
Interest expense	147,297			140,896			130,946
Total operating costs and expenses	6,911,994			6,757,746			6,474,427
Income before income taxes	772,770			896,438			732,030
Income tax expense	(219,433		)	(292,953		)	(227,923		)
Net income before noncontrolling interests	553,337			603,485			504,107
Noncontrolling interests	(4,243		)	(1,569		)	(413		)
Net income to common stockholders	$	549,094		$	601,916		$	503,694
NET INCOME PER SHARE:
Basic	$	4.40		$	4.91		$	4.06
Diluted	$	4.26		$	4.68		$	3.87

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Year Ended December 31,
(In thousands)	2017			2016			2015
Net income before noncontrolling interests	$	553,337		$	603,485		$	504,107
Other comprehensive gain (loss):
Change in unrealized translation adjustments	64,706			(124,193		)	(124,744		)
Change in unrealized investment (losses) gains, net of taxes	(51,752		)	246,518			(125,542		)
Other comprehensive gain (loss)	12,954			122,325			(250,286		)
Comprehensive income	566,291			725,810			253,821
Comprehensive loss (income) to the noncontrolling interest	4,262			1,510			(375		)
Comprehensive income to common shareholders	$	570,553		$	727,320		$	253,446

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	December 31,
(In thousands, except share data)	2017			2016
Assets
Investments:
Fixed maturity securities	$	13,551,250		$	13,190,668
Investment funds	1,155,677			1,198,146
Real estate	1,469,601			1,184,981
Arbitrage trading account	617,649			299,999
Loans receivable	79,684			106,798
Equity securities available for sale	576,647			669,200
Total investments	17,450,508			16,649,792
Cash and cash equivalents	950,471			795,285
Premiums and fees receivable	1,773,844			1,701,854
Due from reinsurers	1,783,200			1,743,980
Deferred policy acquisition costs	507,549			537,890
Prepaid reinsurance premiums	472,009			413,140
Trading account receivable from brokers and clearing organizations	189,280			484,593
Property, furniture and equipment	422,960			349,432
Goodwill	178,945			144,513
Accrued investment income	136,597			127,047
Current federal and foreign income taxes	—			14,768
Other assets	434,554			402,550
Total assets	$	24,299,917		$	23,364,844
Liabilities and Equity
Liabilities:
Reserves for losses and loss expenses	$	11,670,408		$	11,197,195
Unearned premiums	3,290,180			3,283,300
Due to reinsurers	246,460			213,128
Trading account securities sold but not yet purchased	64,358			51,179
Current federal and foreign income taxes	11,327			—
Deferred federal and foreign income taxes	86,764			134,365
Other liabilities	981,987			916,318
Senior notes and other debt	1,769,052			1,760,595
Subordinated debentures	728,218			727,630
Total liabilities	18,848,754			18,283,710
Equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares; issued and outstanding — none	—			—
Common stock, par value $.20 per share:
Authorized 500,000,000 shares, issued and outstanding, net of treasury shares, 121,514,852 and 121,193,599 shares, respectively	47,024			47,024
Additional paid-in capital	1,048,283			1,037,446
Retained earnings	6,956,882			6,595,987
Accumulated other comprehensive income	68,541			55,568
Treasury stock, at cost, 113,603,066 and 113,924,319 shares, respectively	(2,709,386		)	(2,688,817		)
Total common stockholders’ equity	5,411,344			5,047,208
Noncontrolling interests	39,819			33,926
Total equity	5,451,163			5,081,134
Total liabilities and equity	$	24,299,917		$	23,364,844

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY



	Year Ended December 31,
(In thousands)	2017			2016			2015
COMMON STOCK:
Beginning and end of period	$	47,024		$	47,024		$	47,024
ADDITIONAL PAID IN CAPITAL:
Beginning of period	$	1,037,446		$	1,005,455		$	991,512
Restricted stock units issued	(27,959		)	(3,594		)	(16,748		)
Restricted stock units expensed	38,796			35,585			30,691
End of period	$	1,048,283		$	1,037,446		$	1,005,455
RETAINED EARNINGS:
Beginning of period	$	6,595,987		$	6,178,070		$	5,732,410
Net income to common stockholders	549,094			601,916			503,694
Dividends	(188,199		)	(183,999		)	(58,034		)
End of period	$	6,956,882		$	6,595,987		$	6,178,070
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized investment gains (losses):
Beginning of period	$	427,154		$	180,695		$	306,199
Unrealized (losses) gains on securities not other-than-temporarily impaired	(52,628		)	246,872			(125,391		)
Unrealized gains (losses) on other-than-temporarily impaired securities	895			(413		)	(113		)
End of period	375,421			427,154			180,695
Currency translation adjustments:
Beginning of period	(371,586		)	(247,393		)	(122,649		)
Net change in period	64,706			(124,193		)	(124,744		)
End of period	(306,880		)	(371,586		)	(247,393		)
Total accumulated other comprehensive income (loss)	$	68,541		$	55,568		$	(66,698	)
TREASURY STOCK:
Beginning of period	$	(2,688,817	)	$	(2,563,605	)	$	(2,364,551	)
Stock exercised/vested	26,511			6,495			23,975
Stock issued	727			685			623
Stock repurchased	(47,807		)	(132,392		)	(223,652		)
End of period	$	(2,709,386	)	$	(2,688,817	)	$	(2,563,605	)
NONCONTROLLING INTERESTS:
Beginning of period	$	33,926		$	32,962		$	34,189
Contributions (distributions)	1,631			(546		)	(1,602		)
Net income	4,243			1,569			413
Other comprehensive income (loss), net of tax	19			(59		)	(38		)
End of period	$	39,819		$	33,926		$	32,962

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Year Ended December 31,
(In thousands)	2017			2016			2015
CASH FROM OPERATING ACTIVITIES:
Net income to common stockholders	$	549,094		$	601,916		$	503,694
Adjustments to reconcile net income to net cash from operating activities:
Net investment gains	(335,858		)	(267,005		)	(92,324		)
Depreciation and amortization	112,956			86,051			85,139
Noncontrolling interests	4,243			1,569			413
Investment funds	(69,333		)	(99,301		)	(62,228		)
Stock incentive plans	40,490			37,174			32,123
Change in:
Arbitrage trading account	(4,896		)	(10,633		)	(7,173		)
Premiums and fees receivable	(67,752		)	(60,403		)	(60,942		)
Reinsurance accounts	(66,542		)	(235,455		)	(31,930		)
Deferred policy acquisition costs	30,343			(25,912		)	(29,860		)
Current income taxes	25,859			42,632			20,428
Deferred income taxes	(16,893		)	9,012			47,260
Reserves for losses and loss expenses	438,530			572,196			397,685
Unearned premiums	4,160			149,683			142,699
Other	66,482			46,852			(63,680		)
Net cash from operating activities	710,883			848,376			881,304
CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from sale of fixed maturity securities	4,035,162			2,440,310			1,388,680
Proceeds from sale of equity securities	195,270			143,042			15,833
Distributions from investment funds	247,404			142,601			177,424
Proceeds from maturities and prepayments of fixed maturity securities	3,556,744			2,189,365			2,999,339
Purchase of fixed maturity securities	(7,940,957		)	(5,541,202		)	(4,455,223		)
Purchase of equity securities	(27,522		)	(202,736		)	(29,526		)
Real estate purchased	(236,039		)	(299,123		)	(222,659		)
Change in loans receivable	27,135			166,327			48,909
Net additions to property, furniture and equipment	(115,719		)	(50,829		)	(63,562		)
Change in balances due from security brokers	(4,372		)	20,992			(22,666		)
Cash received in connection with business disposition	—			250,216			—
Payment for business purchased, net of cash acquired	(70,570		)	(53,451		)	(7,312		)
Net cash used in investing activities	(333,464		)	(794,488		)	(170,763		)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Net proceeds from issuance of debt	6,983			388,769			9,056
Repayment of senior notes and other debt	(20		)	(75,487		)	(281,086		)
Cash dividends to common stockholders	(188,199		)	(183,999		)	(58,034		)
Purchase of common treasury shares	(47,807		)	(132,392		)	(223,652		)
Other, net	(6,043		)	(3,823		)	(1,602		)
Net cash used in financing activities	(235,086		)	(6,932		)	(555,318		)
Net impact on cash due to change in foreign exchange rates	12,853			(15,302		)	(66,033		)
Net increase in cash and cash equivalents	155,186			31,654			89,190
Cash and cash equivalents at beginning of year	795,285			763,631			674,441
Cash and cash equivalents at end of year	$	950,471		$	795,285		$	763,631

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2017, 2016 and 2015

(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 2016 and 2015 financial statements to conform to the presentation of the 2017 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 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 $8 million, $8 million and $3 million in 2017, 2016 and 2015, respectively.

Revenues from non-insurance businesses are derived from a business engaged in the distribution of promotional merchandise, world-wide textile solutions, and aircraft services provided to the general, commercial and military aviation markets. These aircraft 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 products and parts, the delivery of aircraft, the delivery of fuel, and upon completion of services.

Insurance service fee revenue represents servicing fees for program administration and claims management services provided by the Company, including workers' compensation assigned risk plans, as well as insurance brokerage and risk management services. Fees for program administration, claims management and risk management services are primarily recognized ratably over the related contract period for which the underlying services are rendered. Commissions for insurance brokerage are generally recognized when the underlying insurance policy is effective.

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. The Company's share of the earnings or losses of investment funds is primarily 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 (including 4,847,303 common shares held in a grantor trust established in March 2017). The common shares held in the grantor trust are for delivery upon settlement of vested but mandatorily deferred restricted stock units ("RSUs"). Shares held by the grantor trust do not affect diluted shares outstanding since the shares deliverable under vested RSUs were already included in diluted shares outstanding. Diluted EPS is based upon the weighted average number of basic and common equivalent shares outstanding during the 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.

(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 $47 million and $51 million at December 31, 2017 and 2016, 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 $50 million, $47 million and $45 million for 2017, 2016 and 2015, 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 and unrealized foreign currency translation adjustments.

(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, 2017 indicated that there were no material impairment losses related to goodwill and other intangible assets. Intangible assets of $107 million and $82 million are included in other assets as of December 31, 2017 and 2016, respectively.

(O) Restricted stock units

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. Compensation cost is recognized for financial reporting purposes over the period in which the employee is required to provide service in exchange for the award (generally the vesting period).

(P) Statements of cash flows

Interest payments were $145 million, $137 million and $130 million in 2017, 2016 and 2015, respectively. Income taxes paid were $207 million, $232 million and $165 million in 2017, 2016 and 2015, respectively. Other non-cash items include unrealized investment gains and losses. (See Note 11 of Notes to Consolidated Financial Statements.)

(Q) Recent accounting pronouncements

Recently adopted accounting pronouncements:

In May 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-09, Disclosures about Short-Duration Contracts. ASU 2015-09 requires companies that issue short duration insurance contracts to disclose additional information, including: (i) incurred and paid claims development tables; (ii) frequency and severity of claims; and (iii) information about material changes in judgments made in calculating the liability for unpaid claim adjustment expenses, including reasons for the change and the effects on the financial statements. The Company adopted this updated guidance on January 1, 2016 with regard to the annual requirements and on January 1, 2017 with regard to the interim requirements. The amendments in ASU 2015-09 are applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period. As the requirements are disclosure only, the adoption of this guidance did not impact our financial condition or results of operations, but did result in additional disclosures.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 includes provisions intended to simplify various previous provisions related to how share-based payments are accounted for and presented in the financial statements. Under the new guidance, excess tax benefits (deductions for share

based payment awards for tax purposes that exceed the compensation cost recognized for financial reporting purposes) are reported within the income tax expense financial statement line item. Previously, excess tax benefits were reported within additional paid in capital. The Company adopted this updated guidance on January 1, 2017 prospectively. The adoption of this guidance did not have a material impact on the Company's financial condition or results of operations.

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

Accounting and reporting standards that are not yet effective:

In May 2014, the FASB issued ASU 2014-09, Revenue from Customers. ASU 2014-09 clarifies the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company’s insurance service fee revenue and non-insurance business revenue will be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The updated guidance, as amended by ASU 2015-14, is effective for public business entities for annual and interim reporting periods beginning after December 15, 2017. The Company determined that the adoption of this guidance on January 1, 2018 will not have a material effect on the Company’s financial condition or results of operations.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments. ASU 2016-01 amends the accounting guidance for financial instruments to require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The updated guidance is effective for public business entities for annual reporting periods beginning after December 15, 2017 and interim periods within those years. The adoption of this guidance is not expected to have a material effect on the Company’s financial condition upon adoption, but will impact results of operations after adoption of this guidance as unrealized gains and losses on equity securities will no longer be reported directly in accumulated other comprehensive income (AOCI), but will instead be reported in net income.

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

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

In February 2018, the FASB issued ASU 2018-02, Reporting Comprehensive Income, which amends previous guidance to allow a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The amount of the reclassification would include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of the enactment of the Tax Act related to items in AOCI. The updated guidance is effective for reporting periods beginning after December 15, 2018, and is eligible for early adoption. The Company expects to adopt the updated guidance in 2018, which should not impact its results of operations or financial position.

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 / Dispositions

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

The following table summarizes the estimated fair value of net assets acquired and liabilities assumed for the business combination completed in 2017:



(In thousands)	2017
Cash and cash equivalents	$	2,721
Real estate, furniture and equipment	7,042
Goodwill	28,522
Intangible Assets	32,395
Other assets	9,862
Total assets acquired	80,542

Other liabilities assumed	(2,251		)
Non controlling interest	(5,000		)
Net assets acquired	$	73,291

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

(3) Consolidated Statement of Comprehensive Income (Loss)

The following tables present the components of the changes in accumulated other comprehensive income (loss) (AOCI) as of and for the years ended December 31, 2017 and 2016:



(In thousands)
December 31, 2017	Unrealized investment gains (losses)				Currency translation adjustments			Accumulated other comprehensive income (loss)
Changes in AOCI
Beginning of period	$	427,154			$	(371,586	)	$	55,568
Other comprehensive income before reclassifications	63,567				64,706			128,273
Amounts reclassified from AOCI	(115,319		)		—			(115,319		)
Other comprehensive income (loss)	(51,752		)		64,706			12,954
Unrealized investment gain related to non-controlling interest	19				—			19
Ending balance	$	375,421			$	(306,880	)	$	68,541
Amounts reclassified from AOCI
Pre-tax	$	(177,414	)	(1)	$	—		$	(177,414	)
Tax effect	62,095			(2)				62,095
After-tax amounts reclassified	$	(115,319	)		$	—		$	(115,319	)
Other comprehensive income (loss)
Pre-tax	$	(69,425	)		$	64,706		$	(4,719	)
Tax effect	17,673				—			17,673
Other comprehensive income (loss)	$	(51,752	)		$	64,706		$	12,954



(In thousands)
December 31, 2016	Unrealized investment gains (losses)				Currency translation adjustments			Accumulated other comprehensive income (loss)
Changes in AOCI
Beginning of period	$	180,695			$	(247,393	)	$	(66,698	)
Other comprehensive income (loss) before reclassifications	286,734				(124,193		)	162,541
Amounts reclassified from AOCI	(40,216		)		—			(40,216		)
Other comprehensive income (loss)	246,518				(124,193		)	122,325
Unrealized investment gain related to non-controlling interest	(59		)		—			(59		)
Ending balance	$	427,154			$	(371,586	)	$	55,568
Amounts reclassified from AOCI
Pre-tax	$	(61,871	)	(1)	$	—		$	(61,871	)
Tax effect	21,655			(2)	—			21,655
After-tax amounts reclassified	$	(40,216	)		$	—		$	(40,216	)
Other comprehensive income (loss)
Pre-tax	$	379,258			$	(124,193	)	$	255,065
Tax effect	(132,740		)		—			(132,740		)
Other comprehensive income (loss)	$	246,518			$	(124,193	)	$	122,325

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

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

(4) Investments in Fixed Maturity Securities

At December 31, 2017 and 2016, investments in fixed maturity securities were as follows:



(In thousands)	Amortized Cost			Gross Unrealized					Fair Value		Carrying Value
Gains			Losses
December 31, 2017
Held to maturity:
State and municipal	$	65,882		$	14,499	$	—		$	80,381	$	65,882
Residential mortgage-backed	13,450			1,227		—			14,677		13,450
Total held to maturity	79,332			15,726		—			95,058		79,332
Available for sale:
U.S. government and government agency	372,748			8,824		(3,832		)	377,740		377,740
State and municipal:
Special revenue	2,663,245			53,512		(10,027		)	2,706,730		2,706,730
State general obligation	439,358			16,087		(711		)	454,734		454,734
Pre-refunded	436,241			22,701		(9		)	458,933		458,933
Corporate backed	375,268			10,059		(860		)	384,467		384,467
Local general obligation	417,955			23,242		(967		)	440,230		440,230
Total state and municipal	4,332,067			125,601		(12,574		)	4,445,094		4,445,094
Mortgage-backed securities:
Residential (1)	1,043,629			9,304		(13,547		)	1,039,386		1,039,386
Commercial	261,652			1,521		(2,628		)	260,545		260,545
Total mortgage-backed securities	1,305,281			10,825		(16,175		)	1,299,931		1,299,931
Asset-backed securities	2,111,132			11,024		(10,612		)	2,111,544		2,111,544
Corporate:
Industrial	2,574,400			52,210		(7,718		)	2,618,892		2,618,892
Financial	1,402,161			37,744		(5,138		)	1,434,767		1,434,767
Utilities	284,886			11,316		(1,248		)	294,954		294,954
Other	40,560			5		(66		)	40,499		40,499
Total corporate	4,302,007			101,275		(14,170		)	4,389,112		4,389,112
Foreign government	819,345			32,018		(2,866		)	848,497		848,497
Total available for sale	13,242,580			289,567		(60,229		)	13,471,918		13,471,918
Total investments in fixed maturity securities	$	13,321,912		$	305,293	$	(60,229	)	$	13,566,976	$	13,551,250



(In thousands)	Amortized Cost			Gross Unrealized					Fair Value		Carrying Value
Gains			Losses
December 31, 2016
Held to maturity:
State and municipal	$	72,582		$	12,453	$	—		$	85,035	$	72,582
Residential mortgage-backed	15,944			1,693		—			17,637		15,944
Total held to maturity	88,526			14,146		—			102,672		88,526
Available for sale:
U.S. government and government agency	496,187			20,208		(2,593		)	513,802		513,802
State and municipal:
Special revenue	2,791,211			58,559		(26,315		)	2,823,455		2,823,455
State general obligation	524,682			16,964		(5,139		)	536,507		536,507
Pre-refunded	356,535			19,181		(165		)	375,551		375,551
Corporate backed	410,933			6,172		(6,452		)	410,653		410,653
Local general obligation	360,022			15,682		(2,367		)	373,337		373,337
Total state and municipal	4,443,383			116,558		(40,438		)	4,519,503		4,519,503
Mortgage-backed securities:
Residential (1)	1,034,301			15,431		(12,950		)	1,036,782		1,036,782
Commercial	155,540			304		(2,981		)	152,863		152,863
Total mortgage-backed securities	1,189,841			15,735		(15,931		)	1,189,645		1,189,645
Asset-backed securities	1,913,830			5,971		(11,941		)	1,907,860		1,907,860
Corporate:
Industrial	2,315,567			71,007		(7,174		)	2,379,400		2,379,400
Financial	1,369,001			39,543		(11,270		)	1,397,274		1,397,274
Utilities	229,154			10,801		(2,411		)	237,544		237,544
Other	54,073			299		(63		)	54,309		54,309
Total corporate	3,967,795			121,650		(20,918		)	4,068,527		4,068,527
Foreign government	858,773			46,794		(2,762		)	902,805		902,805
Total available for sale	12,869,809			326,916		(94,583		)	13,102,142		13,102,142
Total investments in fixed maturity securities	$	12,958,335		$	341,062	$	(94,583	)	$	13,204,814	$	13,190,668

(1) Gross unrealized gain (losses) for mortgage-backed securities include $76,467 and ($818,691) as of December 31, 2017 and 2016, 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, 2017, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay obligations.



(In thousands)	Amortized Cost		Fair Value
Due in one year or less	$	673,946	$	679,822
Due after one year through five years	4,961,661		5,051,288
Due after five years through ten years	3,247,109		3,360,452
Due after ten years	3,120,465		3,160,806
Mortgage-backed securities	1,318,731		1,314,608
Total	$	13,321,912	$	13,566,976

At December 31, 2017 and 2016, 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, 2017, investments with a carrying value of $1,353 million were on deposit in custodial or trust accounts, of which $995 million was on deposit with state insurance departments, $308 million was on deposit in support of the Company’s underwriting activities at Lloyd’s, $46 million was on deposit as security for reinsurance clients and $4 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, 2017 and 2016, investments in equity securities available for sale were as follows:



(In thousands)	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Carrying Value
December 31, 2017
Common stocks	$	81,855	$	272,309	$	(1,960	)	$	352,204	$	352,204
Preferred stocks	124,150		102,890		(2,597		)	224,443		224,443
Total	$	206,005	$	375,199	$	(4,557	)	$	576,647	$	576,647

December 31, 2016
Common stocks	$	94,998	$	351,906	$	(1,046	)	$	445,858	$	445,858
Preferred stocks	125,589		101,392		(3,639		)	223,342		223,342
Total	$	220,587	$	453,298	$	(4,685	)	$	669,200	$	669,200

(6) Arbitrage Trading Account

At December 31, 2017 and 2016, the fair value and carrying value of the arbitrage trading account were $618 million and $300 million, respectively. The primary focus of the trading account is merger arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Arbitrage investing differs from other types of investing in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less).

The Company uses put options, call options and swap contracts in order to mitigate the impact of potential changes in market conditions on the merger arbitrage trading account. These options and contracts are reported at fair value. As of December 31, 2017, the fair value of long option contracts outstanding was $1 million (notional amount of $136 million) and the fair value of short option contracts outstanding was $8 million (notional amount of $135 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)	2017			2016			2015
Investment income earned on:
Fixed maturity securities, including cash and cash equivalents and loans receivable	$	473,101		$	444,247		$	428,325
Investment funds	68,169			99,301			62,228
Arbitrage trading account	19,145			18,693			16,891
Real estate	19,975			7,054			11,294
Equity securities available for sale	2,350			4,028			4,624
Gross investment income	582,740			573,323			523,362
Investment expense	(6,952		)	(9,160		)	(10,717		)
Net investment income	$	575,788		$	564,163		$	512,645

(8) Investment Funds

The Company evaluates whether it is an investor in a variable interest entity (VIE). Such entities do not have sufficient equity at risk to finance their activities without additional subordinated financial support, or the equity investors, as a group, do not have the characteristics of a controlling financial interest (primary beneficiary). The Company determines whether it is the primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE's capital structure, contractual terms, nature of the VIE's operations and purpose, and the Company's relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE and on an ongoing basis. The Company is not the primary beneficiary in any of its investment funds, and accordingly, carries its interests in investments funds under the equity method of accounting.

The Company’s maximum exposure to loss with respect to these investments is limited to the carrying amount reported on the Company’s consolidated balance sheet and its unfunded commitments of $406.2 million as of December 31, 2017.

Investment funds consist of the following:



	Carrying Value as of December 31,				Income (Losses)
(In thousands)	2017		2016		2017			2016		2015
Real estate	$	606,995	$	641,783	$	45,068		$	50,415	$	58,032
Energy	82,882		91,448		(15,764		)	19,747		(37,373		)
Hedged equity	—		73,913		(1,164		)	3,334		(2,762		)
Other funds	465,800		391,002		40,029			25,805		44,331
Total	$	1,155,677	$	1,198,146	$	68,169		$	99,301	$	62,228

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

(9) Real Estate

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



	As of December 31,
(In thousands)	2017		2016
Properties in operation	$	451,691	$	457,237
Properties under development	1,017,910		727,744
Total	$	1,469,601	$	1,184,981

In 2017, properties in operation included a long-term ground lease in Washington, D.C., a hotel in Memphis, Tennessee, an office complex in New York City and office buildings in West Palm Beach and Palm Beach, Florida. Properties in operation are net of accumulated depreciation and amortization of $25,646,000 and $16,425,000 as of December 31, 2017 and 2016, respectively. Related depreciation expense was $9,212,000 and $6,940,000 for the years ended December 31, 2017 and 2016, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $28,175,755 in 2018, $33,653,067 in 2019, $33,435,418 in 2020, $33,878,321 in 2021, $33,885,797 in 2022 and $517,372,272 thereafter.

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

(10) Loans Receivable

Loans receivable are as follows:



	As of December 31,
(In thousands)	2017			2016
Amortized cost (net of valuation allowance):
Real estate loans	$	66,057		$	92,415
Commercial loans	13,627			14,383
Total	$	79,684		$	106,798

Fair value:
Real estate loans	$	66,917		$	92,415
Commercial loans	15,130			15,884
Total	$	82,047		$	108,299

Valuation allowance:
Specific	$	1,200		$	1,200
General	2,183			2,197
Total	$	3,383		$	3,397

	For the Year Ended December 31,
	2017			2016
Increase (decrease) in valuation allowance	$	(14	)	$	1,303

Loans receivable in non-accrual status were $4.3 million and $5.4 million as of December 31, 2017 and 2016, respectively.

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

The real estate loans are secured by commercial real estate primarily located in Georgia and New York. These loans generally earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through August 2025. The commercial loans are with small business owners who have secured the related financing with the assets of the business. Commercial loans generally earn interest on a fixed basis and have varying maturities not exceeding 15 years.

In evaluating the real estate loans, the Company considers their credit quality indicators, including loan to value ratios, which compare the outstanding loan amount to the estimated value of the property, the borrower’s financial condition and performance with respect to loan terms, the position in the capital structure, the overall leverage in the capital structure and other market conditions. Based on these considerations, none of the real estate loans were considered to be impaired at December 31, 2017, and accordingly, the Company determined that a specific valuation allowance was not required.

(11) Realized and Unrealized Investment Gains (Losses)

Realized and unrealized investment gains (losses) are as follows:



(In thousands)	2017			2016			2015
Realized investment gains (losses):
Fixed maturity securities:
Gains	$	28,217		$	72,215		$	23,755
Losses	(5,342		)	(6,434		)	(4,065		)
Equity securities available for sale	154,539			14,201			9,639
Investment funds (1)	125,423			58,861			93,529
Real estate	12,880			7,757			—
Other (2)	20,141			138,519			2,775
Net realized gains on investments sales	335,858			285,119			125,633
Other-than-temporary impairments (3)	—			(18,114		)	(33,309		)
Net investment gains	335,858			267,005			92,324
Income tax expense	(117,550		)	(93,452		)	(32,313		)
After-tax realized investment gains	$	218,308		$	173,553		$	60,011



Change in unrealized gains (losses) of available for sales securities:
Fixed maturity securities	$	(2,192	)	$	(107,094	)	$	(144,445	)
Previously impaired fixed maturity securities	895			451			(174		)
Equity securities available for sale	(77,971		)	465,727			(27,809		)
Investment funds	9,843			12,631			(19,758		)
Total change in unrealized investment gains (losses)	(69,425		)	371,715			(192,186		)
Income tax benefit (expense)	17,673			(125,315		)	66,644
Noncontrolling interests	19			59			38
After-tax change in unrealized investment gains (losses) of available for sale securities	$	(51,733	)	$	246,459		$	(125,504	)

(1) Investment funds includes a gain of $124.3 million from the sale of an investment in an office building located in Washington, D.C. for the year ended December 31, 2017.

(2) Other includes a gain of $134.9 million from the sale of Aero Precision Industries and certain related aviation services business for the year ended December 31, 2016.

(3) There were no other than temporary impairments (OTTI) for the year ended December 31, 2017. For the year ended December 31, 2016, OTTI related to equity securities was $18.1 million. For the year ended December 31, 2015, OTTI related to equity securities was $24.3 million and related to fixed maturity securities was $9.0 million.

(12) Securities in an Unrealized Loss Position

The following tables summarize all securities in an unrealized loss position at December 31, 2017 and 2016 by the length of time those securities have been continuously in an unrealized loss position.



	Less Than 12 Months				12 Months or Greater				Total
(In thousands)	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
December 31, 2017
U.S. government and government agency	$	92,167	$	1,491	$	72,055	$	2,341	$	164,222	$	3,832
State and municipal	735,972		5,944		345,755		6,630		1,081,727		12,574
Mortgage-backed securities	480,435		5,110		373,956		11,065		854,391		16,175
Asset-backed securities	1,127,309		8,298		167,412		2,314		1,294,721		10,612
Corporate	1,103,747		8,224		170,858		5,946		1,274,605		14,170
Foreign government	244,139		2,615		25,824		251		269,963		2,866
Fixed maturity securities	3,783,769		31,682		1,155,860		28,547		4,939,629		60,229
Common stocks	9,244		1,211		9,387		749		18,631		1,960
Preferred stocks	—		—		23,077		2,597		23,077		2,597
Equity securities available for sale	9,244		1,211		32,464		3,346		41,708		4,557
Total	$	3,793,013	$	32,893	$	1,188,324	$	31,893	$	4,981,337	$	64,786

December 31, 2016
U.S. government and government agency	$	112,709	$	1,252	$	35,450	$	1,341	$	148,159	$	2,593
State and municipal	1,562,614		35,553		133,034		4,885		1,695,648		40,438
Mortgage-backed securities	625,903		11,103		109,066		4,828		734,969		15,931
Asset-backed securities	1,010,836		5,340		201,693		6,601		1,212,529		11,941
Corporate	1,035,245		13,448		65,147		7,470		1,100,392		20,918
Foreign government	213,246		1,985		24,820		777		238,066		2,762
Fixed maturity securities	4,560,553		68,681		569,210		25,902		5,129,763		94,583
Common stocks	336		22		8,755		1,024		9,091		1,046
Preferred stocks	—		—		22,034		3,639		22,034		3,639
Equity securities available for sale	336		22		30,789		4,663		31,125		4,685
Total	$	4,560,889	$	68,703	$	599,999	$	30,565	$	5,160,888	$	99,268

Fixed Maturity Securities — A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at December 31, 2017 is presented in the table below:



($ in thousands)	Number of Securities	Aggregate Fair Value		Gross Unrealized Loss
Foreign government	11	$	96,741	$	1,197
Corporate	7	54,590		2,725
Mortgage-backed securities	6	5,368		138
State and municipal	1	3,662		1
Asset-backed securities	3	441		116
Total	28	$	160,802	$	4,177

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.

For the years ended December 31, 2017 and 2016, there were no OTTI recognized in earnings for fixed maturity securities.

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, 2017, there was one preferred stock in an unrealized loss position, with an aggregate fair value of $23.1 million and a gross unrealized loss of $2.6 million. The preferred stock is rated investment grade. Management believes the unrealized loss is due primarily to market and sector related factors and does not consider it to be OTTI. For the year ended December 31, 2017 and 2016, there were no OTTI for preferred stocks.

Common Stocks – At December 31, 2017, there were three common stocks in an unrealized loss position, with an aggregate fair value of $18.6 million and a gross unrealized loss of $2.0 million. Based on management's view of these securities, the Company does not consider the common stocks to be OTTI. For the year ended December 31, 2017, there were no OTTI for common stocks. OTTI for common stocks for the year ended December 31, 2016 were $18.1 million.

(13) Fair Value Measurements

The Company’s fixed maturity and equity securities classified as available for sale and its trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 - Quoted prices for similar assets or valuations based on inputs that are observable.

Level 3 - Estimates of fair value based on internal pricing methodologies using unobservable inputs. Unobservable inputs are only used to measure fair value to the extent that observable inputs are not available.

Substantially all of the Company’s fixed maturity securities were priced by independent pricing services. The prices provided by the independent pricing services are estimated based on observable market data in active markets utilizing pricing models and processes, which may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, sector groupings, matrix pricing and reference data. The pricing services may prioritize inputs differently on any given day for any security based on market conditions, and not all inputs are available for each security evaluation on any given day. The pricing services used by the Company have indicated that they will only produce an estimate of fair value if objectively verifiable information is available. The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company reviews the prices provided by pricing services for reasonableness and periodically performs independent price tests of a sample of securities to ensure proper valuation.

If prices from independent pricing services are not available for fixed maturity securities, the Company estimates the fair value. For Level 2 securities, the Company utilizes pricing models and processes which may include benchmark yields, sector groupings, matrix pricing, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, bids, offers and reference data. Where broker quotes are used, the Company generally requests two or more quotes and sets a price within the range of quotes received based on its assessment of the credibility of the quote and its own evaluation of the security. The Company generally does not adjust quotes received from brokers. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial projections, credit quality and business developments of the issuer and other relevant information.

For Level 3 securities, the Company generally uses a discounted cash flow model to estimate the fair value of fixed maturity securities. The cash flow models are based upon assumptions as to prevailing credit spreads, interest rate and interest rate volatility, time to maturity and subordination levels. Projected cash flows are discounted at rates that are adjusted to reflect illiquidity, where appropriate.

The following tables present the assets and liabilities measured at fair value as of December 31, 2017 and 2016 by level:



(In thousands)	Total		Level 1		Level 2		Level 3
December 31, 2017
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency	$	377,740	$	—	$	377,740	$	—
State and municipal	4,445,094		—		4,445,094		—
Mortgage-backed securities	1,299,931		—		1,299,931		—
Asset-backed securities	2,111,544		—		2,111,372		172
Corporate	4,389,112		—		4,389,112		—
Foreign government	848,497		—		848,497		—
Total fixed maturity securities available for sale	13,471,918		—		13,471,746		172
Equity securities available for sale:
Common stocks	352,204		342,834		—		9,370
Preferred stocks	224,443		—		213,600		10,843
Total equity securities available for sale	576,647		342,834		213,600		20,213
Arbitrage trading account	617,649		471,420		146,229		—
Total	$	14,666,214	$	814,254	$	13,831,575	$	20,385
Liabilities:
Trading account securities sold but not yet purchased	$	64,358	$	64,358	$	—	$	—

December 31, 2016
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency	$	513,802	$	—	$	513,802	$	—
State and municipal	4,519,503		—		4,519,503		—
Mortgage-backed securities	1,189,645		—		1,189,645		—
Asset-backed securities	1,907,860		—		1,907,677		183
Corporate	4,068,527		—		4,068,527		—
Foreign government	902,805		—		902,805		—
Total fixed maturity securities available for sale	13,102,142		—		13,101,959		183
Equity securities available for sale:
Common stocks	445,858		429,647		7,457		8,754
Preferred stocks	223,342		—		219,680		3,662
Total equity securities available for sale	669,200		429,647		227,137		12,416
Arbitrage trading account	299,999		224,623		75,376		—
Total	$	14,071,341	$	654,270	$	13,404,472	$	12,599
Liabilities:
Trading account securities sold but not yet purchased	$	51,179	$	51,089	$	90	$	—

There were no significant transfers between Levels 1 and 2 for the years ended December 31, 2017 and 2016.

The following tables summarize changes in Level 3 assets and liabilities for the years ended December 31, 2017 and 2016:



	Gains (Losses) Included in:
(In thousands)	Beginning Balance		Earnings (Losses)			Other Comprehensive Income (Losses)		Impairments		Purchases		Sales			Paydowns/Maturities			Transfers In / Out		Ending Balance
Year ended December 31, 2017
Assets:
Fixed maturity securities available for sale:
Asset-backed securities	$	183	$	3		$	34	$	—	$	—	$	(48	)	$	—		$	—	$	172
Corporate	—		—			—		—		—		—			—			—		—
Total	183		3			34		—		—		(48		)	—			—		172
Equity securities available for sale:
Common stocks	8,754		—			616		—		—		—			—			—		9,370
Preferred stocks	3,662		8			—		—		7,173		—			—			—		10,843
Total	12,416		8			616		—		7,173		—			—			—		20,213
Arbitrage trading account	—		8			—		—		—		(8		)	—			—		—
Total	$	12,599	$	19		$	650	$	—	$	7,173	$	(56	)	$	—		$	—	$	20,385

Year ended December 31, 2016
Assets:
Fixed maturity securities available for sale:
Asset-backed securities	$	199	$	3		$	16	$	—	$	—	$	—		$	(35	)	$	—	$	183
Corporate	154		177			—		—		—		(331		)	—			—		—
Total	353		180			16		—		—		(331		)	(35		)	—		183
Equity securities available for sale:
Common stocks	7,829		—			160		—		765		—			—			—		8,754
Preferred stocks	3,624		38			—		—		—		—			—			—		3,662
Total	11,453		38			160		—		765		—			—			—		12,416
Arbitrage trading account	176		(176		)	—		—		—		—			—			—		—
Total	$	11,982	$	42		$	176	$	—	$	765	$	(331	)	$	(35	)	$	—	$	12,599

During the years ended December 31, 2017 and 2016, there were no securities transferred out of Level 3.

(14) Reserves for Losses and Loss Expenses

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

Loss reserves included in the Company’s financial statements represent management’s best estimates based upon an actuarially derived point estimate and other considerations. The Company uses a variety of actuarial techniques and methods to derive an actuarial point estimate for each operating unit. These methods include paid loss development, incurred loss development, paid and incurred Bornhuetter-Ferguson methods and frequency and severity methods. In circumstances where one actuarial method is considered more credible than the others, that method is used to set the point estimate. The actuarial point estimate may also be based on a judgmental weighting of estimates produced from each of the methods considered. Industry loss experience is used to supplement the Company’s own data in selecting “tail factors” in areas where the Company’s own data is limited. The actuarial data is analyzed by line of business, coverage and accident or policy year, as appropriate, for each operating unit.

The establishment of the actuarially derived loss reserve point estimate also includes consideration of qualitative factors that may affect the ultimate losses. These qualitative considerations include, among others, the impact of re-underwriting initiatives, changes in the mix of business, changes in distribution sources and changes in policy terms and conditions.

The key assumptions used to arrive at the best estimate of loss reserves are the expected loss ratios, rate of loss cost inflation, and reported and paid loss emergence patterns. Expected loss ratios represent management’s expectation of losses at the time the business is priced and written, before any actual claims experience has emerged. This expectation is a significant determinant of the estimate of loss reserves for recently written business where there is little paid or incurred loss data to consider. Expected loss ratios are generally derived from historical loss ratios adjusted for the impact of rate changes, loss cost trends and known changes in the type of risks underwritten. Expected loss ratios are estimated for each key line of business within each operating unit. Expected loss cost inflation is particularly important for the long-tail lines, such as excess casualty, and claims with a high medical component, such as workers’ compensation. Reported and paid loss emergence patterns are used to project current reported or paid loss amounts to their ultimate settlement value. Loss development factors are based on the historical emergence patterns of paid and incurred losses, and are derived from the Company’s own experience and industry data. The paid loss emergence pattern is also significant to excess and assumed workers’ compensation reserves because those reserves are discounted to their estimated present value based upon such estimated payout patterns.

Loss frequency and severity are measures of loss activity that are considered in determining the key assumptions described in our discussion of loss and loss expense reserves, including expected loss ratios, rate of loss cost inflation and reported and paid loss emergence patterns. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations.

Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to the Company. The length of the loss reporting lag affects our ability to accurately predict loss frequency (loss frequencies are more predictable for lines with short reporting lags) as well as the amount of reserves needed for incurred but not reported losses (less IBNR is required for lines with short reporting lags). As a result, loss reserves for lines with short reporting lags are likely to have less variation from initial loss estimates. For lines with short reporting lags, which include commercial automobile, primary workers’ compensation, other liability (claims-made) and property business, the key assumption is the loss emergence pattern used to project ultimate loss estimates from known losses paid or reported to date. For lines of business with long reporting lags, which include other liability (occurrence), products liability, excess workers’ compensation and liability reinsurance, the key assumption is the expected loss ratio since there is often little paid or incurred loss data to consider. Historically, the Company has experienced less variation from its initial loss estimates for lines of businesses with short reporting lags than for lines of business with long reporting lags.

The key assumptions used in calculating the most recent estimate of the loss reserves are reviewed each quarter and adjusted, to the extent necessary, to reflect the latest reported loss data, current trends and other factors observed.

A claim may be defined as an event, as a claimant (number of parties claiming damages from an event) or by exposure type (e.g., an event may give rise to two parties, each claiming loss for bodily injury and property damage).

The most commonly used claim count method is by event. Most of the Company's operating units use the number of events to define and quantify the number of claims. However, in certain lines of business, where it is common for multiple parties to claim

damages arising from a single event, an operating unit may quantify claims on the basis of the number of separate parties involved in an event. This may be the case with businesses writing substantial automobile or transportation exposure.

Claim counts for assumed reinsurance will vary based on whether the business is written on a facultative or treaty basis. Further variability as respects treaty claim counts may be reflective of the nature of the treaty, line of business coverage, and type of participation such as quota share or excess of loss contracts. Accordingly, the claim counts have been excluded from the below Reinsurance segment tables due to this variability.

The claim count information set forth in the tables presented below may not provide an accurate reflection of ultimate loss payouts by product line.

The following tables present undiscounted incurred and paid claims development as of December 31, 2017, net of reinsurance, as well as cumulative claim frequency and the total of incurred but not reported liabilities (IBNR). The information about incurred and paid claims development for the years ended December 31, 2008 to 2016 is presented as supplementary information. To enhance the comparability of the loss development data, the Company has removed the impact of foreign exchange rate movements by using the December 31, 2017 exchange rate for all periods. Beginning with accident year 2012, the Company's U.K. and European insurance business is included in the Insurance segment's tables for Other Liability, Professional Liability, Commercial Automobile and Short-Tail Lines. Prior to 2012, the actuarial analysis for its U.K. and European insurance business was performed on an underwriting year basis and accident year data is not available for those years.

Insurance

Other Liability

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2017
For the Year Ended December 31,
	Unaudited
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017		IBNR		Cumulative Number of Reported Claims
2008	$	830,091	$	798,785	$	744,614	$	707,274	$	687,619	$	678,552	$	651,784	$	642,430	$	644,303	$	638,545	$	24,822	26
2009	—		689,758		656,915		625,068		598,641		589,618		561,674		557,634		552,954		546,645		27,261		23
2010	—		—		612,630		616,196		590,160		591,042		577,714		575,030		573,865		571,623		39,109		23
2011	—		—		—		665,768		674,139		660,240		659,214		653,945		649,035		645,149		45,208		23
2012	—		—		—		—		688,924		703,226		703,984		710,395		714,301		724,641		65,037		24
2013	—		—		—		—		—		752,373		793,662		786,676		786,122		807,181		101,487		26
2014	—		—		—		—		—		—		848,794		851,216		849,147		854,008		180,513		27
2015	—		—		—		—		—		—		—		953,009		988,661		963,803		344,421		26
2016	—		—		—		—		—		—		—		—		1,019,961		1,012,783		545,372		23
2017	—		—		—		—		—		—		—		—		—		1,065,756		783,578		18
Total																			$	7,830,134



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	46,976	$	133,238	$	244,557	$	348,162	$	436,866	$	497,134	$	530,419	$	559,727	$	580,845	$	597,586
2009	—		44,802		122,851		214,500		311,444		384,999		429,062		470,787		486,793		500,851
2010	—		—		45,196		128,959		246,657		336,249		417,172		461,464		491,098		508,308
2011	—		—		—		48,852		141,225		266,761		379,801		470,886		524,250		556,043
2012	—		—		—		—		57,604		158,774		299,938		418,145		513,849		581,195
2013	—		—		—		—		—		63,754		189,747		333,221		474,304		590,435
2014	—		—		—		—		—		—		79,128		191,385		339,111		482,059
2015	—		—		—		—		—		—		—		82,822		211,177		383,425
2016	—		—		—		—		—		—		—		—		69,414		209,350
2017	—		—		—		—		—		—		—		—		—		77,941
Total																			$	4,487,193
	Reserves for loss and loss adjustment expenses before 2008, net of reinsurance																		126,966
	Reserves for loss and loss adjustment expenses, net of reinsurance																		$	3,469,907

Primary Workers' Compensation

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2017
For the Year Ended December 31,
	Unaudited
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017		IBNR		Cumulative Number of Reported Claims
2008	$	377,794	$	347,423	$	345,605	$	345,413	$	388,558	$	388,472	$	389,343	$	391,788	$	393,932	$	396,505	$	12,292	47
2009	—		327,537		332,303		326,766		386,870		392,791		394,303		392,287		395,288		398,994		12,171		43
2010	—		—		358,734		361,808		409,237		420,604		426,622		429,952		429,762		427,698		19,659		45
2011	—		—		—		419,364		442,550		457,134		470,026		472,087		474,076		475,729		24,400		46
2012	—		—		—		—		499,752		501,810		503,956		503,863		509,167		512,707		36,929		48
2013	—		—		—		—		—		552,570		547,295		546,995		543,238		547,000		48,953		53
2014	—		—		—		—		—		—		639,436		637,307		627,767		617,242		71,042		57
2015	—		—		—		—		—		—		—		712,800		690,525		650,997		117,187		58
2016	—		—		—		—		—		—		—		—		702,716		696,339		175,332		57
2017	—		—		—		—		—		—		—		—		—		762,094		370,138		53
Total																			$	5,485,305



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	94,385	$	203,079	$	261,867	$	296,667	$	320,169	$	335,030	$	344,892	$	352,539	$	360,799	$	366,741
2009	—		93,647		197,736		257,972		297,079		318,349		333,793		344,771		352,516		360,289
2010	—		—		107,742		214,034		279,226		320,154		344,631		362,078		374,013		382,665
2011	—		—		—		106,157		234,694		309,509		355,909		385,759		408,304		420,945
2012	—		—		—		—		114,998		255,063		339,560		387,368		419,588		437,196
2013	—		—		—		—		—		117,900		277,538		363,028		414,160		447,894
2014	—		—		—		—		—		—		148,405		319,743		412,611		471,235
2015	—		—		—		—		—		—		—		139,320		323,744		421,734
2016	—		—		—		—		—		—		—		—		142,998		338,835
2017	—		—		—		—		—		—		—		—		—		153,456
Total																			$	3,800,990
			Reserves for loss and loss adjustment expenses before 2008, net of reinsurance																157,868
			Reserves for loss and loss adjustment expenses, net of reinsurance																$	1,842,183

Excess Workers' Compensation

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2017
For the Year Ended December 31,
	Unaudited
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017		IBNR		Cumulative Number of Reported Claims
2008	$	186,116	$	181,072	$	154,566	$	152,830	$	150,429	$	150,493	$	146,093	$	147,105	$	140,155	$	139,869	$	30,534	1
2009	—		168,762		153,766		153,912		148,223		147,556		138,765		142,768		134,716		129,249		26,998		1
2010	—		—		135,639		123,497		120,272		116,422		100,331		104,732		100,065		94,986		20,772		1
2011	—		—		—		88,650		93,993		95,714		87,064		85,299		83,850		78,246		23,339		1
2012	—		—		—		—		72,366		71,301		71,780		73,653		72,441		67,878		16,278		1
2013	—		—		—		—		—		62,767		48,493		46,025		42,419		38,551		19,501		1
2014	—		—		—		—		—		—		63,465		57,558		49,478		45,758		27,746		1
2015	—		—		—		—		—		—		—		69,977		57,897		50,099		32,693		—
2016	—		—		—		—		—		—		—		—		72,657		70,281		43,421		—
2017	—		—		—		—		—		—		—		—		—		76,702		48,784		1
Total																			$	791,619



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	2,213	$	2,607	$	5,909	$	9,111	$	13,648	$	19,725	$	27,350	$	31,434	$	36,485	$	41,921
2009	—		5,060		8,402		11,037		14,138		20,176		25,272		29,150		33,573		37,817
2010	—		—		2,867		4,003		5,571		6,533		9,084		11,699		14,261		18,821
2011	—		—		—		2,593		4,848		4,759		12,104		15,684		18,638		20,164
2012	—		—		—		—		1,127		4,815		9,480		11,167		13,234		15,738
2013	—		—		—		—		—		249		630		2,158		3,008		3,396
2014	—		—		—		—		—		—		358		1,729		3,354		4,175
2015	—		—		—		—		—		—		—		2,069		2,481		3,272
2016	—		—		—		—		—		—		—		—		2,498		4,783
2017	—		—		—		—		—		—		—		—		—		6,282
Total																			$	156,369
	Reserves for loss and loss adjustment expenses before 2008, net of reinsurance																		689,657
	Reserves for loss and loss adjustment expenses, net of reinsurance																		$	1,324,907

Professional Liability

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2017
For the Year Ended December 31,
	Unaudited
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017		IBNR		Cumulative Number of Reported Claims
2008	$	113,409	$	120,203	$	116,836	$	111,535	$	110,337	$	107,829	$	107,369	$	109,291	$	108,554	$	109,325	$	439	2
2009	—		135,534		140,038		145,950		149,172		148,318		150,690		151,013		153,673		152,880		816		3
2010	—		—		147,301		166,172		179,693		178,381		177,127		172,918		175,180		178,122		1,984		4
2011	—		—		—		180,633		166,044		188,095		191,194		178,071		174,328		177,622		4,735		4
2012	—		—		—		—		242,306		245,732		268,793		253,392		241,616		247,513		14,511		8
2013	—		—		—		—		—		274,510		251,267		246,318		252,347		270,285		29,840		8
2014	—		—		—		—		—		—		257,362		250,131		263,782		246,980		44,937		8
2015	—		—		—		—		—		—		—		262,607		261,500		278,281		81,813		10
2016	—		—		—		—		—		—		—		—		313,907		328,108		150,631		11
2017	—		—		—		—		—		—		—		—		—		336,325		254,118		9
Total																			$	2,325,441



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	10,002	$	37,844	$	66,198	$	85,623	$	96,621	$	97,834	$	100,399	$	105,346	$	106,428	$	108,894
2009	—		12,613		52,612		85,960		117,802		127,879		139,030		144,109		144,883		147,768
2010	—		—		14,857		58,980		108,713		129,916		144,645		160,799		165,223		171,539
2011	—		—		—		18,833		62,659		103,404		135,095		151,388		159,555		167,847
2012	—		—		—		—		22,234		87,943		129,442		160,493		191,963		216,476
2013	—		—		—		—		—		24,784		64,525		120,431		178,821		208,169
2014	—		—		—		—		—		—		19,778		84,580		140,094		179,300
2015	—		—		—		—		—		—		—		20,616		86,116		140,660
2016	—		—		—		—		—		—		—		—		28,935		103,632
2017	—		—		—		—		—		—		—		—		—		36,958
Total																			$	1,481,243
	Reserves for loss and loss adjustment expenses before 2008, net of reinsurance																		3,100
	Reserves for loss and loss adjustment expenses, net of reinsurance																		$	847,298

Commercial Automobile

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2017
For the Year Ended December 31,
	Unaudited
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017		IBNR		Cumulative Number of Reported Claims
2008	$	432,629	$	444,941	$	430,453	$	426,543	$	425,600	$	422,999	$	422,309	$	423,258	$	421,829	$	422,919	$	313	50
2009	—		362,302		345,139		340,967		335,851		337,922		336,861		334,654		335,091		334,979		535		39
2010	—		—		311,322		320,306		330,432		329,109		333,028		331,865		330,586		330,297		703		37
2011	—		—		—		314,028		322,724		330,125		335,024		343,701		341,200		342,094		1,781		37
2012	—		—		—		—		314,309		326,831		342,588		355,609		355,461		355,598		2,391		34
2013	—		—		—		—		—		327,514		349,136		368,894		366,305		356,664		6,069		34
2014	—		—		—		—		—		—		364,018		385,364		395,013		392,373		13,596		36
2015	—		—		—		—		—		—		—		390,101		390,734		395,956		31,536		38
2016	—		—		—		—		—		—		—		—		388,050		389,025		62,834		38
2017	—		—		—		—		—		—		—		—		—		391,617		131,197		32
Total																			$	3,711,522



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	175,402	$	270,421	$	334,078	$	377,643	$	402,882	$	413,411	$	417,598	$	420,553	$	420,596	$	422,236
2009	—		136,433		209,553		257,326		291,925		312,903		328,845		331,484		333,144		333,607
2010	—		—		136,054		208,790		263,639		295,355		313,262		324,997		326,804		327,240
2011	—		—		—		135,350		211,756		262,685		296,370		321,814		333,987		338,325
2012	—		—		—		—		136,844		215,214		273,446		312,342		335,805		346,961
2013	—		—		—		—		—		142,929		218,596		267,253		312,470		333,420
2014	—		—		—		—		—		—		155,630		237,802		306,618		342,988
2015	—		—		—		—		—		—		—		160,316		242,185		300,071
2016	—		—		—		—		—		—		—		—		156,753		240,395
2017	—		—		—		—		—		—		—		—		—		159,100
Total																			$	3,144,343
			Reserves for loss and loss adjustment expenses before 2008, net of reinsurance																2,464
			Reserves for loss and loss adjustment expenses, net of reinsurance																$	569,643

Short-tail lines

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2017
For the Year Ended December 31,
	Unaudited
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017		IBNR		Cumulative Number of Reported Claims
2008	$	395,651	$	384,606	$	377,287	$	371,053	$	368,063	$	368,207	$	367,802	$	367,594	$	368,044	$	367,969	$	737	23
2009	—		346,902		335,950		326,460		318,124		318,454		314,914		314,140		314,068		316,279		1,063		19
2010	—		—		385,650		370,134		358,292		355,579		345,866		346,338		346,700		346,280		1,105		19
2011	—		—		—		477,005		470,151		461,561		456,871		455,005		450,427		449,639		1,511		21
2012	—		—		—		—		533,643		542,372		543,923		539,180		519,459		518,398		4,358		40
2013	—		—		—		—		—		582,165		594,296		585,661		569,888		568,276		7,802		47
2014	—		—		—		—		—		—		715,483		722,317		694,942		692,591		11,939		53
2015	—		—		—		—		—		—		—		748,981		764,638		763,735		28,878		59
2016	—		—		—		—		—		—		—		—		822,176		825,812		48,073		54
2017	—		—		—		—		—		—		—		—		—		796,305		150,489		42
Total																			$	5,645,284



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	244,633	$	338,299	$	351,580	$	361,024	$	360,380	$	365,069	$	366,388	$	366,389	$	366,953	$	366,991
2009	—		212,521		291,338		304,648		306,020		309,939		310,453		311,105		311,386		311,687
2010	—		—		245,042		325,176		337,696		346,630		340,075		342,783		343,909		344,897
2011	—		—		—		303,067		417,818		436,817		441,058		445,356		447,042		447,647
2012	—		—		—		—		283,339		458,412		510,142		520,989		509,941		511,253
2013	—		—		—		—		—		316,603		494,148		544,245		546,651		553,970
2014	—		—		—		—		—		—		375,623		607,174		641,364		660,618
2015	—		—		—		—		—		—		—		398,077		640,637		699,528
2016	—		—		—		—		—		—		—		—		448,522		715,192
2017	—		—		—		—		—		—		—		—		—		470,935
Total																			$	5,082,718
	Reserves for loss and loss adjustment expenses before 2008, net of reinsurance																		3,033
	Reserves for loss and loss adjustment expenses, net of reinsurance																		$	565,599

Reinsurance

Casualty

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2017
For the Year Ended December 31,
	Unaudited
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017		IBNR
2008	$	361,062	$	346,045	$	325,890	$	306,513	$	295,266	$	291,214	$	298,891	$	299,336	$	294,775	$	296,277	$	21,314
2009	—		336,295		329,565		328,313		310,178		302,380		293,983		282,968		288,634		282,130		22,883
2010	—		—		292,363		299,988		289,984		278,155		267,279		255,738		252,537		250,224		24,961
2011	—		—		—		293,319		312,388		306,928		302,166		309,707		306,560		297,910		30,716
2012	—		—		—		—		335,219		339,253		334,435		327,145		336,407		338,715		41,215
2013	—		—		—		—		—		322,691		273,677		276,773		286,997		295,688		47,285
2014	—		—		—		—		—		—		323,796		324,199		323,384		334,922		84,802
2015	—		—		—		—		—		—		—		262,424		234,938		233,590		58,408
2016	—		—		—		—		—		—		—		—		244,028		256,175		119,654
2017	—		—		—		—		—		—		—		—		—		234,749		178,718
Total																			$	2,820,380



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	11,649	$	37,063	$	72,647	$	111,515	$	144,701	$	171,747	$	191,656	$	207,639	$	226,964	$	241,572
2009	—		21,364		53,704		85,860		124,248		155,372		182,225		197,070		211,456		221,467
2010	—		—		18,121		45,931		77,589		106,937		129,700		150,021		165,773		181,311
2011	—		—		—		17,950		52,544		98,028		134,896		169,147		192,900		208,935
2012	—		—		—		—		22,476		62,438		112,445		152,453		187,599		220,422
2013	—		—		—		—		—		28,982		64,072		109,664		143,904		177,890
2014	—		—		—		—		—		—		21,365		69,422		116,894		156,564
2015	—		—		—		—		—		—		—		17,878		48,784		91,987
2016	—		—		—		—		—		—		—		—		19,962		62,099
2017	—		—		—		—		—		—		—		—		—		16,509
Total																			$	1,578,756
	Reserves for loss and loss adjustment expenses before 2008, net of reinsurance																		391,051
			Reserves for loss and loss adjustment expenses, net of reinsurance																$	1,632,676

Property

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2017
For the Year Ended December 31,
	Unaudited
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017		IBNR
2008	$	56,494	$	51,978	$	45,195	$	44,412	$	44,733	$	45,175	$	44,259	$	43,803	$	43,771	$	43,758	369
2009	—		48,283		43,508		42,622		38,899		38,327		37,709		37,119		36,462		35,444		350
2010	—		—		58,979		55,995		52,866		51,767		51,809		51,296		51,182		51,007		344
2011	—		—		—		95,697		88,316		85,466		86,876		85,304		85,028		84,747		455
2012	—		—		—		—		104,273		95,094		86,742		85,784		84,212		84,218		1,168
2013	—		—		—		—		—		142,043		113,039		114,430		112,217		112,855		1,906
2014	—		—		—		—		—		—		113,838		97,363		97,876		100,604		2,697
2015	—		—		—		—		—		—		—		127,716		118,016		132,382		5,778
2016	—		—		—		—		—		—		—		—		168,661		174,989		14,581
2017	—		—		—		—		—		—		—		—		—		207,088		84,116
Total																			$	1,027,092



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	11,280	$	29,300	$	34,456	$	36,773	$	37,200	$	38,845	$	39,193	$	40,490	$	42,585	$	43,007
2009	—		9,823		22,045		28,392		29,612		31,438		31,427		32,730		34,953		34,172
2010	—		—		23,882		37,996		42,676		44,165		45,102		46,701		49,353		49,610
2011	—		—		—		31,558		59,067		73,612		76,281		78,838		82,040		82,592
2012	—		—		—		—		15,705		51,967		64,471		70,924		77,786		79,349
2013	—		—		—		—		—		36,654		74,732		92,836		101,794		104,593
2014	—		—		—		—		—		—		39,050		67,255		82,651		88,871
2015	—		—		—		—		—		—		—		53,496		89,384		109,393
2016	—		—		—		—		—		—		—		—		79,015		133,856
2017	—		—		—		—		—		—		—		—		—		72,187
Total																			$	797,630
	Reserves for loss and loss adjustment expenses before 2008, net of reinsurance																		1,369
	Reserves for loss and loss adjustment expenses, net of reinsurance																		$	230,831

The reconciliation of the net incurred and paid claims development tables to the reserves for loss and loss adjustment expenses in the consolidated balance sheet is as follows:



(In thousands)		December 31, 2017
Undiscounted reserves for loss and loss expenses, net of reinsurance:
	Other liability	$	3,469,907
	Primary workers' compensation	1,842,183
	Excess workers' compensation	1,324,907
	Professional liability	847,298
	Commercial automobile	569,643
	Short-tail lines	565,599
	Other	164,433
	Insurance	8,783,970
	Casualty	1,632,774
	Property	230,831
	Reinsurance	1,863,604
Total undiscounted reserves for loss and loss expenses, net of reinsurance		$	10,647,575



(In thousands)		December 31, 2017
Due from reinsurers on unpaid claims:
	Other liability	$	392,159
	Primary workers' compensation	434,824
	Excess workers' compensation	37,088
	Professional liability	305,294
	Commercial automobile	6,662
	Short-tail lines	275,607
	Other	27,001
	Insurance	1,478,636
	Casualty	113,443
	Property	21,415
	Reinsurance	134,858
Total due from reinsurers on unpaid claims		$	1,613,494



(In thousands)		December 31, 2017
Loss reserve discount:
	Other liability	$	—
	Primary workers' compensation	—
	Excess workers' compensation	(442,349		)
	Professional liability	—
	Commercial automobile	—
	Short-tail lines	—
	Other	—
	Insurance	(442,349		)
	Casualty	(148,312		)
	Property	—
	Reinsurance	(148,312		)
Total loss reserve discount		$	(590,661	)
Total gross reserves for loss and loss expenses		$	11,670,408

The following is supplementary information regarding average historical claims duration as of December 31, 2017:



Insurance
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years	1		2		3		4		5		6		7		8		9		10
Other liability	7.9	%	14.1	%	18.3	%	16.8	%	13.9	%	8.6	%	5.7	%	3.5	%	2.9	%	2.6	%
Primary workers' compensation	22.5	%	27.3	%	15.4	%	9.4	%	6.0	%	4.0	%	2.7	%	2.0	%	2.0	%	1.5	%
Excess workers' compensation	3.1	%	2.3	%	2.7	%	3.1	%	3.2	%	3.7	%	3.3	%	3.7	%	3.4	%	3.9	%
Professional liability	9.0	%	23.9	%	22.3	%	16.9	%	9.6	%	6.4	%	3.2	%	2.9	%	2.7	%	2.3	%
Commercial automobile	40.3	%	21.7	%	15.4	%	10.4	%	6.3	%	3.5	%	0.9	%	0.4	%	0.1	%	0.4	%
Short-tail lines	60.2	%	29.1	%	5.9	%	1.7	%	—	%	0.6	%	0.3	%	0.1	%	0.1	%	—	%

Reinsurance
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years	1		2		3		4		5		6		7		8		9		10
Casualty	7.0	%	12.3	%	14.3	%	12.3	%	10.8	%	8.9	%	5.9	%	5.6	%	5.0	%	4.9	%
Property	34.8	%	33.2	%	14.7	%	5.2	%	3.6	%	2.5	%	2.6	%	3.2	%	1.3	%	1.0	%

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



(In thousands)	2017			2016			2015
Net reserves at beginning of year	$	9,590,265		$	9,244,872		$	8,970,641
Net provision for losses and loss expenses:
Claims occurring during the current year (1)	3,963,543			3,826,620			3,653,561
Decrease in estimates for claims occurring in prior years (2)	(5,165		)	(29,904		)	(46,713		)
Loss reserve discount accretion	43,970			49,084			49,422
Total	4,002,348			3,845,800			3,656,270
Net payments for claims:
Current year	1,027,405			1,052,452			914,637
Prior year	2,562,550			2,401,722			2,342,378
Total	3,589,955			3,454,174			3,257,015
Foreign currency translation	54,256			(46,233		)	(125,024		)
Net reserves at end of year	10,056,914			9,590,265			9,244,872
Ceded reserve at end of year	1,613,494			1,606,930			1,424,278
Gross reserves at end of year	$	11,670,408		$	11,197,195		$	10,669,150


(1)	Claims occurring during the current year are net of loss reserve discounts of $22,064,000, $18,929,000 and $20,357,000 in 2017, 2016, and 2015, 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 $32,132,000, $59,175,000 and $64,971,000 in 2017, 2016 and 2015, respectively.

Favorable prior year development (net of additional and return premiums) was $37 million in 2017.

Insurance - Reserves for the Insurance segment developed favorably by $68 million in 2017. The favorable development was primarily attributable to workers' compensation business, and was partially offset by unfavorable development for professional liability business.

For workers' compensation, the favorable development was related to both primary and excess business and was spread across many accident years, including those prior to 2008, but was most significant in accident years 2014 through 2016. The favorable workers' compensation development reflects a continuation during 2017 of the generally benign loss cost trends experienced in recent years, particularly the favorable claim frequency trends (i.e. number of reported claims per unit of exposure). Reported workers' compensation losses in 2017 continued to be below our expectations at most of our operating units, and were below the assumptions underlying our previous reserve estimates. The favorable severity trends were also impacted by our continued investment in medical case management services and the higher usage of preferred provider networks. The long term trend of declining workers' compensation frequency can be attributed to improved workplace safety.

For professional liability business, adverse development was primarily related to unexpected large directors & officers ("D&O") liability losses at one of our U.S. operating units, and large professional indemnity and D&O losses in the U.K. The adverse development stemmed mainly from accident years 2013 through 2016 in the U.S. and 2011 through 2016 in the U.K.

Reinsurance - Reserves for the Reinsurance segment developed unfavorably by $31 million in 2017. This adverse development was due to reserve strengthening associated with claims impacted by the change in the Ogden discount rate in the U.K., as well as adverse development on the U.S. facultative casualty excess of loss business. The Ogden rate is the discount rate used to calculate lump-sum bodily injury payouts in the U.K., and was reduced by the U.K. Ministry of Justice from +2.5% to -0.75% in 2017; the adverse development mostly related to U.K. motor bodily injury claims which we reinsured on an excess of loss basis in accident years 2012 through 2016. The adverse development on U.S. facultative casualty business was due to construction related risks in accident years 2008 and prior.

Favorable prior year development (net of additional and return premiums) was $59 million in 2016.

Insurance - Reserves for the Insurance segment developed favorably by $53 million in 2016. The favorable development was primarily related to workers' compensation business, and was partially offset by unfavorable development for medical professional liability business.

For workers' compensation, the favorable development was related to both primary and excess business and to many accident years, including those prior to 2007. During 2016, reported workers' compensation losses continued to be below our expectations at most of our operating units. Loss frequency and severity trends continued to be better than the assumptions underlying our previous reserve estimates. Loss severity trends also benefited from our continued investment in medical case management services and from our preferred provider networks. The long term trend of declining workers' compensation frequency can be attributed to improved workplace safety.

For medical professional liability business, unfavorable development was primarily related to a class of business that has been discontinued. The adverse development for that business stemmed mainly from accident years 2010 through 2015.

Reinsurance - Reserves for the Reinsurance segment developed favorably by 6 million in 2016. The favorable development was primarily related to direct facultative reinsurance business and to accident years 2008 through 2014.

Favorable prior year development (net of additional and return premiums) was $63 million in 2015.

Insurance - Reserves for the Insurance segment developed favorably by $52 million in 2015. The favorable development was primarily related to workers' compensation, other liability business and commercial property, and was partially offset by unfavorable development for commercial automobile liability business and professional indemnity business.

For workers' compensation, the favorable development was related to both primary and excess business and to many accident years, including those prior to 2007. In 2015, reported workers' compensation losses were below our expectations for many of our operating units. In addition, overall loss frequency and severity trends emerged better than the assumptions underlying our previous reserve estimates. The long term trend of declining workers' compensation claim frequency continued in 2015. The improvement is attributable to better workplace safety and to benign medical severity trends as we continue to invest in medical case management services and higher usage of preferred provider networks.

For other liability business, favorable development was concentrated in accident years 2007 through 2013. The favorable development was primarily related to our excess and surplus lines casualty business that has benefited from a persistent improvement in claim frequency trends over the past several years.

For commercial property business, favorable development was attributable to accident years 2012 through 2014 and was driven by favorable frequency and severity trends on property business written in Lloyd's.

For commercial automobile business, adverse development was primarily related to large losses for long-haul trucking business and to accident years 2011 through 2014. The higher loss cost trends for the commercial automobile industry are attributable, in part, to the increase in miles driven as the economy improved and fuel prices declined over the past several years.

For professional indemnity business in the U.K., adverse development was primarily for accident years 2006 through 2013.

Reinsurance - Reserves for the Reinsurance segment developed favorably by $11 million in 2015. The favorable development was primarily related to direct facultative reinsurance business and to accident years 2005 through 2013. Loss reserves developed favorably for umbrella business and for other liability coverage for contractors.

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 expenses relating to asbestos and environmental claims on policies written before adoption of the absolute exclusion was $30 million at December 31, 2017 and $31 million at December 31, 2016. 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 certain workers’ compensation reserves. The amount of workers’ compensation reserves that were discounted was $1,855 million and $1,907 million at December 31, 2017 and December 31, 2016, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $591 million and $640 million at December 31, 2017 and 2016, respectively. At December 31, 2017, discount rates by year ranged from 2.0% to 6.5%, with a weighted average discount rate of 3.8%.

Substantially all discounted workers’ compensation reserves (97% of total discounted reserves at December 31, 2017) are excess workers’ compensation reserves. In order to properly match loss expenses with income earned on investment securities supporting the liabilities, reserves for excess workers’ compensation business are discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. These rates are determined annually based on the weighted average rate for the period. Once established, no adjustments are made to the discount rate for that period, and any increases or decreases in loss reserves in subsequent years are discounted at the same rate, without regard to when any such adjustments are recognized. The expected loss and loss expense payout patterns subject to discounting are derived from the Company’s loss payout experience.

The Company also discounts reserves for certain other long-duration workers’ compensation reserves (representing approximately 3% of total discounted reserves at December 31, 2017), including reserves for quota share reinsurance and reserves related to losses regarding occupational lung disease. These reserves are discounted at statutory rates permitted by the Department of Insurance of the State of Delaware.

(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)	2017			2016			2015
Written premiums:
Direct	$	6,726,029		$	6,647,600		$	6,412,533
Assumed	750,934			896,101			837,460
Ceded	(1,216,455		)	(1,119,788		)	(1,060,478		)
Total net written premiums	$	6,260,508		$	6,423,913		$	6,189,515

Earned premiums:
Direct	$	6,661,046		$	6,492,240		$	6,245,714
Assumed	812,309			900,570			845,735
Ceded	(1,161,936		)	(1,099,462		)	(1,050,840		)
Total net earned premiums	$	6,311,419		$	6,293,348		$	6,040,609

Ceded losses and loss expenses incurred	$	601,769		$	707,336		$	501,999
Ceded commission earned	$	241,983		$	201,957		$	173,288

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 $1,010,000, $1,049,000 and $1,020,000 as of December 31, 2017, 2016 and 2015, respectively.

The following table presents the amounts due from reinsurers as of December 31, 2017:



(In thousands)
Munich Re	$	156,368
Lloyd’s of London	152,934
Alleghany Group	152,468
Swiss Re	129,369
Partner Re	87,491
Axis Capital	82,803
Hannover Re Group	64,011
Berkshire Hathaway	56,892
Everest Re	50,387
Korean Re	44,072
Chubb Limited	30,977
Renaissance Re	27,095
Liberty Mutual	22,629
Arch Capital Group	21,310
Other reinsurers less than $20,000	293,134
Subtotal	1,371,940
Residual market pools	411,260
Total	$	1,783,200

(16) Indebtedness

Indebtedness consisted of the following as of December 31, 2017 (the difference between the face value and the carrying value is unamortized discount and debt issuance costs):



				Carrying Value
(In thousands)	Interest Rate	Face Value		2017		2016
Senior notes due on:
August 15, 2019	6.15%	$	140,651	$	140,434	$	140,301
September 15, 2019	7.375%	300,000		299,562		299,308
September 15, 2020	5.375%	300,000		299,083		298,747
January 1, 2022	8.7%	76,503		76,210		76,151
March 15, 2022	4.625%	350,000		348,252		347,834
February 15, 2037	6.25%	250,000		247,896		247,786
August 1, 2044	4.75%	350,000		345,099		344,914
Subsidiary debt (1)	Various	12,517		12,516		5,554
Total senior notes and other debt		$	1,779,671	$	1,769,052	$	1,760,595
Subordinated debentures due on:
April 30, 2053	5.625%	$	350,000	$	340,838	$	340,579
March 1, 2056	5.9%	110,000		106,055		105,952
June 1, 2056	5.75%	290,000		281,325		281,099
Total subordinated debentures		$	750,000	$	728,218	$	727,630

(1) Subsidiary debt is due as follows: $2 million in 2019, $11 million in 2020, and $0.03 million in 2022.

(17) Income Taxes

Income tax expense (benefits) consists of:



(In thousands)	Current Expense (Benefit)			Deferred (Benefit) Expense			Total
December 31, 2017
Domestic	$	225,694		$	(27,601	)	$	198,093
Foreign	8,803			12,537			21,340
Total expense	$	234,497		$	(15,064	)	$	219,433

December 31, 2016
Domestic	$	259,539		$	3,355		$	262,894
Foreign	23,634			6,425			30,059
Total expense	$	283,173		$	9,780		$	292,953

December 31, 2015
Domestic	$	179,150		$	31,145		$	210,295
Foreign	(2,318		)	19,946			17,628
Total expense	$	176,832		$	51,091		$	227,923

Income before income taxes from domestic operations was $797 million, $837 million and $689 million for the years ended December 31, 2017, 2016 and 2015, respectively. Income (loss) before income taxes from foreign operations was ($25) million, $59 million and $43 million for the years ended December 31, 2017, 2016 and 2015, 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)	2017			2016			2015
Computed “expected” tax expense	$	270,470		$	313,753		$	256,210
Tax-exempt investment income	(37,209		)	(37,379		)	(39,283		)
Change in valuation allowance	11,161			1,420			2,702
Impact of foreign tax rates	3,508			1,984			4,447
State and local taxes	1,644			7,748			940
Impact of change in U.S. tax rate	(30,531		)	—			—
Other, net	390			5,427			2,907
Total expense	$	219,433		$	292,953		$	227,923

At December 31, 2017 and 2016, 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)	2017			2016
Deferred tax asset:
Loss reserve discounting	$	70,206		$	86,659
Unearned premiums	110,854			187,522
Net operating losses	33,043			6,179
Other-than-temporary impairments	8,204			26,139
Employee compensation plans	59,037			90,998
Other	49,346			79,842
Gross deferred tax asset	330,690			477,339
Less valuation allowance	(16,619		)	(5,457		)
Deferred tax asset	314,071			471,882
Deferred tax liability:
Amortization of intangibles	12,826			21,192
Deferred policy acquisition costs	100,020			173,481
Unrealized investment gains	151,162			238,232
Property, furniture and equipment	31,865			34,857
Investment funds	41,104			85,075
Other	63,858			53,410
Deferred tax liability	400,835			606,247
Net deferred tax liability	$	86,764		$	134,365

The Company had a current tax payable of $11,327,000 and a receivable of $14,768,000 at December 31, 2017 and 2016, respectively. At December 31, 2017, the Company had foreign net operating loss carryforwards of $6.3 million that expire beginning in 2027, and an additional $156.6 million that have no expiration date. At December 31, 2017, the Company had a valuation allowance of $16.6 million, as compared to $5.5 million at December 31, 2016. The Company has provided a valuation allowance against future tax benefits of certain foreign operations. The statute of limitations has closed for the Company’s U.S. Federal tax returns through December 31, 2013.

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.

The Tax Cuts and Jobs Act of 2017 (the Tax Act) was enacted on December 22, 2017. The Tax Act provides for a reduction of the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. The Tax Act also provides for a mandatory repatriation of foreign earnings, which requires companies to pay a one-time tax on the unremitted accumulated earnings of their foreign subsidiaries.

The Company has calculated the effects of the Tax Act as of December 31, 2017 and has included in its financial statements provisional estimates of its impact. The Company anticipates further guidance will be forthcoming and will continue to review and refine its calculations as guidance is provided and additional analysis of the Company's information is completed.

In 2017, the Company reported a net tax benefit related to the Tax Act in the amount of $20.7 million. This included a tax benefit due to the reduction of the tax rate as applied to the net U.S. deferred tax liability in the amount of $30.5 million. Offsetting this tax benefit, the Company recorded a provisional charge of $9.8 million on the deemed repatriation of earnings and related impact of utilization of foreign losses. The charge may be adjusted as the applicable earnings related to the foreign subsidiaries are finalized for the purpose of the mandatory repatriation inclusion computation.

As noted above, as a result of the mandatory repatriation provision of the Tax Act, the Company recognized a tax on the undistributed earnings of its foreign subsidiaries. The Company intends to continue its policy to permanently reinvest the undistributed earnings of its foreign subsidiaries.

The U.S. tax law requires insurance reserves to be discounted and new guidance on the appropriate discount rates required by the Tax Act has not yet been published. The Company has not included a provisional amount for the impact of the Tax Act on the tax deductible insurance reserves.

(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 2018, the maximum amount of dividends that can be paid by BIC without such approval is approximately $699 million.

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



(In thousands)	2017		2016		2015
Net income	$	698,862	$	702,830	$	813,303
Statutory capital and surplus	$	5,479,603	$	5,493,044	$	5,296,435

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 an increase to BIC’s statutory capital and surplus by $277 million at December 31, 2017.

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, 2017, BIC’s Total Adjusted Capital of $5.203 billion was 397% 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:



	2017	2016	2015
Basic	124,843,240	122,650,997	124,040,313
Diluted	129,017,613	128,552,838	130,188,866

Treasury shares have been excluded from average outstanding shares from the date of acquisition. The weighted average number of basic shares outstanding includes the impact of 4,847,303 common shares held in a grantor trust established in March 2017. The common shares held in the grantor trust are for delivery upon settlement of vested but mandatorily deferred restricted stock units ("RSUs"). Shares held by the grantor trust do not affect diluted shares outstanding since shares deliverable under vested RSUs were already included in diluted shares outstanding. 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 (including shares held in the grantor trust).



	2017		2016		2015
Balance, beginning of year	121,193,599		123,307,837		126,748,836
Shares issued	1,052,256		281,654		1,061,026
Shares repurchased	(731,003	)	(2,395,892	)	(4,502,025)
Balance, end of year	121,514,852		121,193,599		123,307,837

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, 2017 and 2016:



	2017				2016
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Fixed maturity securities	$	13,551,250	$	13,566,976	$	13,190,668	$	13,204,814
Equity securities available for sale	576,647		576,647		669,200		669,200
Arbitrage trading account	617,649		617,649		299,999		299,999
Loans receivable	79,684		82,047		106,798		108,299
Cash and cash equivalents	950,471		950,471		795,285		795,285
Trading accounts receivable from brokers and clearing organizations	189,280		189,280		484,593		484,593

Liabilities:
Due to broker	15,920		15,920		19,416		19,416
Trading account securities sold but not yet purchased	64,358		64,358		51,179		51,179
Subordinated debentures	728,218		769,060		727,630		687,504
Senior notes and other debt	1,769,052		1,945,313		1,760,595		1,914,727

The estimated fair values of the Company’s fixed maturity securities, equity securities available for sale and arbitrage trading account securities are based on various valuation techniques that rely on fair value measurements as described in Note 13 above. The fair value of loans receivable is estimated by using current institutional purchaser yield requirements for loans with similar credit characteristics, which is considered a Level 2 input. The fair value of the senior notes and other debt and the subordinated debentures is based on spreads for similar securities, which is considered a Level 2 input.

(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: $50,117,000 in 2018; $41,326,000 in 2019; $38,721,000 in 2020; $34,982,000 in 2021, 29,720,000 in 2022 and $92,086,000 thereafter. Rental expense was $52,925,000, $47,453,000, and $46,271,000 for 2017, 2016, and 2015 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, 2017, the Company had commitments to invest up to $406.2 million and $359.7 million in certain investment funds and real estate construction projects, respectively.

(23) Stock Incentive Plan

Pursuant to the Company's 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, 2017:



	2017		2016		2015
RSUs granted and unvested at beginning of period:	4,862,098		4,158,325		5,330,445
Granted	855,984		1,000,559		997,522
Vested	(1,993,507	)	(77,250	)	(1,938,000	)
Canceled	(246,594	)	(219,536	)	(231,642	)
RSUs granted and unvested at end of period:	3,477,981		4,862,098		4,158,325

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, 2017, 5,027,614 RSUs had been deferred. RSUs that have not yet vested and vested RSUs that have been deferred are not considered to be issued and outstanding shares.

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, 2017:



(In thousands)	2017			2016			2015
Unearned compensation at beginning of year	$	115,965		$	103,538		$	88,015
RSUs granted, net of cancellations	52,897			52,697			50,442
RSUs expensed	(38,796		)	(35,585		)	(30,691		)
RSUs forfeitures	(7,156		)	(4,685		)	(4,228		)
Unearned compensation at end of year	$	122,910		$	115,965		$	103,538

(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 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 $42 million, $39 million and $42 million in 2017, 2016 and 2015, respectively.

The Company has a long-term incentive compensation plan ("LTIP") that provides for compensation to key executives based on the growth in the Company's book value per share over a five year period.

The following table summarizes the outstanding LTIP awards as of December 31, 2017:



	Units Outstanding	Maximum Value		Inception to date earned through December 31, 2017 on outstanding units
2013 grant	194,250	$	48,562,500	$	38,958,780
2014 grant	207,000	20,700,000		12,916,800
2015 grant	208,500	20,850,000		10,800,300
2016 grant	229,250	22,925,000		7,581,298
2017 grant	227,000	22,700,000		3,162,110

The following table summarizes the LTIP expense for each of the three years ended December 31, 2017:



(In thousands)	2017		2016			2015
2011 grant	$	—	$	(82	)	$	7,397
2013 grant	7,667		8,918			7,336
2014 grant	3,167		3,503			2,935
2015 grant	3,667		4,072			3,205
2016 grant	3,601		4,002			—
2017 grant	3,162		—			—
Total	$	21,264	$	20,413		$	20,873

(25) Supplemental Financial Statement Data

Other operating costs and expenses consist of the following:



(In thousands)	2017		2016			2015
Amortization of deferred policy acquisition costs	$	1,111,489	$	1,155,954		$	1,102,492
Insurance operating expenses	989,535		933,249			903,006
Insurance service expenses	129,776		138,908			127,365
Net foreign currency losses (gains)	15,267		(11,904		)	400
Other costs and expenses	190,865		179,412			156,487
Total	$	2,436,932	$	2,395,619		$	2,289,750

(26) Industry Segments

The Company’s reportable segments include the following two business segments, plus a corporate segment:

Insurance - predominantly commercial insurance business, including excess and surplus lines, admitted lines and specialty personal lines throughout the United States, as well as insurance business in the United Kingdom, Continental Europe, South America, Canada, Mexico, Scandinavia, Asia and Australia.
Reinsurance - reinsurance business on a facultative and treaty basis, primarily in the United States, United Kingdom, Continental Europe, Australia, the Asia-Pacific region and South Africa.

Commencing with the first quarter of 2017, the Company reclassified two businesses from the Insurance segment to the Reinsurance segment. Reclassifications have been made to the Company's prior periods financial information to conform with this presentation.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Income tax expense and benefits are calculated based upon the Company’s overall effective tax rate.

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



	Revenues
(In thousands)	Earned Premiums		Investment Income		Other		Total (1)		Pre-Tax Income (Loss)			Net Income (Loss) to Common Stockholders
December 31, 2017
Insurance (2)	$	5,706,443	$	436,178	$	86,864	$	6,229,485	$	756,153		$	535,186
Reinsurance	604,976		91,146		—		696,122		(15,276		)	(5,131		)
Corporate, other and eliminations (3)	—		48,464		374,835		423,299		(303,965		)	(199,269		)
Net investment gains	—		—		335,858		335,858		335,858			218,308
Consolidated	$	6,311,419	$	575,788	$	797,557	$	7,684,764	$	772,770		$	549,094

December 31, 2016
Insurance	$	5,618,842	$	431,489	$	97,879	$	6,148,210	$	799,139		$	534,613
Reinsurance	674,506		102,617		—		777,123		98,277			68,400
Corporate, other and eliminations (3)	—		30,057		431,789		461,846		(267,983		)	(174,650		)
Net investment gains	—		—		267,005		267,005		267,005			173,553
Consolidated	$	6,293,348	$	564,163	$	796,673	$	7,654,184	$	896,438		$	601,916

December 31, 2015
Insurance	$	5,393,166	$	386,801	$	96,487	$	5,876,454	$	748,515		$	512,426
Reinsurance	647,443		97,882		—		745,325		122,930			86,487
Corporate, other and eliminations (3)	—		27,962		464,392		492,354		(231,739		)	(155,230		)
Net investment gains	—		—		92,324		92,324		92,324			60,011
Consolidated	$	6,040,609	$	512,645	$	653,203	$	7,206,457	$	732,030		$	503,694



Identifiable Assets
(In thousands)	December 31,
	2017		2016
Insurance	$	19,263,193	$	19,026,658
Reinsurance	3,169,731		2,635,438
Corporate, other and eliminations(2)	1,866,993		1,702,748
Consolidated	$	24,299,917	$	23,364,844

(1) Revenues for Insurance includes $688.2 million, $733.3 million and $786.9 million in 2017, 2016 and 2015, respectively, from foreign countries. Revenues for Reinsurance includes $201.3 million, $200.5 million and $223.4 million in 2017, 2016 and 2015, respectively, from foreign countries.

(2) Net income (loss) to common stockholders for 2017 within the Insurance segment includes a net $21 million benefit related to tax reform.

(3) 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)	2017		2016		2015
Insurance
Other liability	$	1,843,826	$	1,761,748	$	1,614,453
Workers' compensation	1,481,507		1,402,611		1,355,631
Short-tail lines	1,184,799		1,280,091		1,277,538
Commercial automobile	650,441		642,452		674,078
Professional liability	545,870		531,940		471,466
Total Insurance	5,706,443		5,618,842		5,393,166
Reinsurance
Casualty	377,650		405,470		438,800
Property	227,326		269,036		208,643
Total Reinsurance	604,976		674,506		647,443
Total	$	6,311,419	$	6,293,348	$	6,040,609

(27) Quarterly Financial Information (Unaudited)

The following is a summary of quarterly financial data:



(In thousands, except per share data)	2017
Three months ended	March 31		June 30		September 30		December 31
Revenues	$	1,870,418	$	1,848,049	$	2,031,342	$	1,934,956
Net income	123,447		109,004		162,054		154,589
Net income per share (1)
Basic (2)	1.01		0.87		1.29		1.22
Diluted	0.96		0.85		1.26		1.21



	2016
Three months ended	March 31		June 30		September 30		December 31
Revenues	$	1,807,211	$	1,855,914	$	2,019,727	$	1,971,333
Net income	119,511		108,967		220,650		152,790
Net income per share (1)
Basic	0.97		0.89		1.80		1.26
Diluted	0.93		0.85		1.72		1.20

(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.

(2) Basic shares outstanding includes shares held in a grantor trust established in March 2017.

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