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, 2018 and 2017, 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2018, 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, 2018, 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 22, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for equity investments 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) effective January 1, 2018 due to the adoption of ASU 2016-01, Financial Instruments.

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 22, 2019

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME



	Year Ended December 31,
(In thousands, except per share data)	2018			2017			2016
REVENUES:
Net premiums written	$	6,433,227		$	6,260,508		$	6,423,913
Change in net unearned premiums	(61,722		)	50,911			(130,565		)
Net premiums earned	6,371,505			6,311,419			6,293,348
Net investment income	674,235			575,788			564,163
Net realized and unrealized gains on investments:
Net realized and unrealized gains before OTTI	160,175			335,858			285,119
Other-than-temporary impairments ("OTTI")	(5,687		)	—			(18,114		)
Net realized and unrealized gains on investments	154,488			335,858			267,005
Revenues from non-insurance businesses	372,985			326,165			390,348
Insurance service fees	117,757			134,729			138,944
Other income	681			805			376
Total revenues	7,691,651			7,684,764			7,654,184
OPERATING COSTS AND EXPENSES:
Losses and loss expenses	3,974,702			4,002,348			3,845,800
Other operating costs and expenses	2,383,221			2,436,932			2,395,619
Expenses from non-insurance businesses	364,449			325,417			375,431
Interest expense	157,185			147,297			140,896
Total operating costs and expenses	6,879,557			6,911,994			6,757,746
Income before income taxes	812,094			772,770			896,438
Income tax expense	(163,028		)	(219,433		)	(292,953		)
Net income before noncontrolling interests	649,066			553,337			603,485
Noncontrolling interests	(8,317		)	(4,243		)	(1,569		)
Net income to common stockholders	$	640,749		$	549,094		$	601,916
NET INCOME PER SHARE:
Basic	$	5.06		$	4.40		$	4.91
Diluted	$	5.00		$	4.26		$	4.68

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Year Ended December 31,
(In thousands)	2018			2017			2016
Net income before noncontrolling interests	$	649,066		$	553,337		$	603,485
Other comprehensive (loss) gain:
Change in unrealized translation adjustments	(112,099		)	64,706			(124,193		)
Change in unrealized investment (losses) gains, net of taxes	(252,327		)	(51,752		)	246,518
Other comprehensive (loss) gain	(364,426		)	12,954			122,325
Comprehensive income	284,640			566,291			725,810
Comprehensive income to the noncontrolling interest	(8,271		)	(4,262		)	(1,510		)
Comprehensive income to common stockholders	$	276,369		$	562,029		$	724,300

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	December 31,
(In thousands, except share data)	2018			2017
Assets
Investments:
Fixed maturity securities	$	13,606,812		$	13,551,250
Investment funds	1,332,818			1,155,677
Real estate	1,957,092			1,469,601
Arbitrage trading account	452,548			617,649
Equity securities	279,006			576,647
Loans receivable	94,813			79,684
Total investments	17,723,089			17,450,508
Cash and cash equivalents	817,602			950,471
Premiums and fees receivable	1,807,762			1,773,844
Due from reinsurers	1,932,291			1,783,200
Deferred policy acquisition costs	497,629			507,549
Prepaid reinsurance premiums	498,880			472,009
Trading account receivable from brokers and clearing organizations	347,228			189,280
Property, furniture and equipment	416,372			422,960
Goodwill	173,037			178,945
Accrued investment income	144,481			136,597
Current federal and foreign income taxes	703			—
Deferred federal and foreign income taxes	35,490			—
Other assets	501,413			434,554
Total assets	$	24,895,977		$	24,299,917
Liabilities and Equity
Liabilities:
Reserves for losses and loss expenses	$	11,966,448		$	11,670,408
Unearned premiums	3,359,991			3,290,180
Due to reinsurers	256,917			246,460
Trading account securities sold but not yet purchased	38,120			64,358
Current federal and foreign income taxes	—			11,327
Deferred federal and foreign income taxes	—			86,764
Other liabilities	1,005,184			981,987
Senior notes and other debt	1,882,028			1,769,052
Subordinated debentures	907,491			728,218
Total liabilities	19,416,179			18,848,754
Equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares; issued and outstanding — none	—			—
Common stock, par value $.20 per share:
Authorized 500,000,000 shares, issued and outstanding, net of treasury shares, 121,995,760 and 121,514,852 shares, respectively	47,024			47,024
Additional paid-in capital	1,063,144			1,048,283
Retained earnings	7,558,619			6,956,882
Accumulated other comprehensive (loss) income	(510,470		)	68,541
Treasury stock, at cost, 113,122,158 and 113,603,066 shares, respectively	(2,720,466		)	(2,709,386		)
Total common stockholders’ equity	5,437,851			5,411,344
Noncontrolling interests	41,947			39,819
Total equity	5,479,798			5,451,163
Total liabilities and equity	$	24,895,977		$	24,299,917

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY



	Year Ended December 31,
(In thousands)	2018			2017			2016
COMMON STOCK:
Beginning and end of period	$	47,024		$	47,024		$	47,024
ADDITIONAL PAID IN CAPITAL:
Beginning of period	$	1,048,283		$	1,037,446		$	1,005,455
Restricted stock units issued	(19,547		)	(27,959		)	(3,594		)
Restricted stock units expensed	34,408			38,796			35,585
End of period	$	1,063,144		$	1,048,283		$	1,037,446
RETAINED EARNINGS:
Beginning of period	$	6,956,882		$	6,595,987		$	6,178,070
Cumulative effect adjustment resulting from changes in accounting principles	215,939			—			—
Net income to common stockholders	640,749			549,094			601,916
Dividends	(254,951		)	(188,199		)	(183,999		)
End of period	$	7,558,619		$	6,956,882		$	6,595,987
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME:
Unrealized investment (losses) gains:
Beginning of period	$	375,421		$	427,154		$	180,695
Cumulative effect adjustment resulting from changes in accounting principles	(214,539		)	—			—
Unrealized (losses) gains on securities not other-than-temporarily impaired	(252,241		)	(52,628		)	246,872
Unrealized (losses) gains on other-than-temporarily impaired securities	(132		)	895			(413		)
End of period	(91,491		)	375,421			427,154
Currency translation adjustments:
Beginning of period	(306,880		)	(371,586		)	(247,393		)
Net change in period	(112,099		)	64,706			(124,193		)
End of period	(418,979		)	(306,880		)	(371,586		)
Total accumulated other comprehensive (loss) income	$	(510,470	)	$	68,541		$	55,568
TREASURY STOCK:
Beginning of period	$	(2,709,386	)	$	(2,688,817	)	$	(2,563,605	)
Stock exercised/vested	12,981			26,511			6,495
Stock issued	689			727			685
Stock repurchased	(24,750		)	(47,807		)	(132,392		)
End of period	$	(2,720,466	)	$	(2,709,386	)	$	(2,688,817	)
NONCONTROLLING INTERESTS:
Beginning of period	$	39,819		$	33,926		$	32,962
(Distributions) contributions	(6,143		)	1,631			(546		)
Net income	8,317			4,243			1,569
Other comprehensive (loss) income, net of tax	(46		)	19			(59		)
End of period	$	41,947		$	39,819		$	33,926

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Year Ended December 31,
(In thousands)	2018			2017			2016
CASH FROM OPERATING ACTIVITIES:
Net income to common stockholders	$	640,749		$	549,094		$	601,916
Adjustments to reconcile net income to net cash from operating activities:
Net realized and unrealized gains on investments	(154,488		)	(335,858		)	(267,005		)
Depreciation and amortization	131,108			112,956			86,051
Noncontrolling interests	8,317			4,243			1,569
Investment funds	(109,349		)	(69,333		)	(99,301		)
Stock incentive plans	36,591			40,490			37,174
Change in:
Arbitrage trading account	(19,093		)	(4,896		)	(10,633		)
Premiums and fees receivable	(43,813		)	(67,752		)	(60,403		)
Reinsurance accounts	(165,287		)	(66,542		)	(235,455		)
Deferred policy acquisition costs	7,788			30,343			(25,912		)
Current income taxes	(11,950		)	25,859			42,632
Deferred income taxes	(74,761		)	(16,893		)	9,012
Reserves for losses and loss expenses	339,015			438,530			572,196
Unearned premiums	84,142			4,160			149,683
Other	(48,770		)	66,482			46,852
Net cash from operating activities	620,199			710,883			848,376
CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from sale of fixed maturity securities	3,525,149			4,035,162			2,440,310
Proceeds from sale of equity securities	497,989			195,270			143,042
(Contributions) distributions from investment funds	(79,635		)	247,404			142,601
Proceeds from maturities and prepayments of fixed maturity securities	2,676,455			3,556,744			2,189,365
Purchase of fixed maturity securities	(6,677,753		)	(7,940,957		)	(5,541,202		)
Purchase of equity securities	(85,610		)	(27,522		)	(202,736		)
Real estate purchased	(514,064		)	(236,039		)	(299,123		)
Change in loans receivable	(13,204		)	27,135			166,327
Net additions to property, furniture and equipment	(49,860		)	(115,719		)	(50,829		)
Change in balances due from security brokers	4,262			(4,372		)	20,992
Cash received in connection with business disposition	8,664			—			250,216
Payment for business purchased, net of cash acquired	(6,637		)	(70,570		)	(53,451		)
Net cash used in investing activities	(714,244		)	(333,464		)	(794,488		)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Net proceeds from issuance of debt	294,562			6,983			388,769
Repayment of senior notes and other debt	(4,524		)	(20		)	(75,487		)
Cash dividends to common stockholders	(254,951		)	(188,199		)	(183,999		)
Purchase of common treasury shares	(24,750		)	(47,807		)	(132,392		)
Other, net	(17,740		)	(6,043		)	(3,823		)
Net cash used in financing activities	(7,403		)	(235,086		)	(6,932		)
Net impact on cash due to change in foreign exchange rates	(31,421		)	12,853			(15,302		)
Net (decrease) increase in cash and cash equivalents	(132,869		)	155,186			31,654
Cash and cash equivalents at beginning of year	950,471			795,285			763,631
Cash and cash equivalents at end of year	$	817,602		$	950,471		$	795,285

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2018**,** 2017 and 2016

(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 2017 and 2016 financial statements to conform to the presentation of the 2018 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 (decreased) increased net premiums written and premiums earned by $(4) million, $8 million and $8 million in 2018, 2017 and 2016, respectively.

Revenues from non-insurance businesses are derived from businesses 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 over the completion period 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.

(C) Cash and cash equivalents

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

(D) Investments

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

Equity securities with readily determinable fair values are measured at fair value, with changes in the fair value recognized in net income within net realized and unrealized gains on investments. (See (Q) Recent accounting pronouncements.)

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 12 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.

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 4,926,521 common shares held in a grantor trust). 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. 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 13 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 $45 million and $47 million at December 31, 2018 and 2017, 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 generally 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 $54 million, $50 million and $47 million for 2018, 2017 and 2016, 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, 2018 indicated that there were no material impairment losses related to goodwill and other intangible assets. Intangible assets of $104 million and $107 million are included in other assets as of December 31, 2018 and 2017, 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 $155 million, $145 million and $137 million in 2018, 2017 and 2016, respectively. Income taxes paid were $186 million, $207 million and $232 million in 2018, 2017 and 2016, respectively. Other non-cash items include unrealized investment gains and losses. (See Note 10 of Notes to Consolidated Financial Statements.)

(Q) Recent accounting pronouncements

Recently adopted accounting pronouncements:

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

In January 2016, the FASB issued ASU 2016-01, Financial Instruments. ASU 2016-01 amends the accounting guidance for financial instruments to require all equity investments with readily determinable fair values to be measured at fair value with changes in the fair value recognized in net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The updated guidance was effective for public business entities for annual reporting periods beginning after December 15, 2017 and interim periods within those years. The Company adopted this updated guidance on January 1, 2018 on a prospective basis. The impact of applying this guidance prospectively was a cumulative effect adjustment that increased retained earnings and decreased accumulated other comprehensive income ("AOCI") by offsetting amounts of $291 million, resulting in no net impact to total stockholders' equity. Following the adoption, the Company reports changes in fair value related to equity securities within net realized and unrealized gains on investments.

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

All other accounting and reporting standards that became effective in 2018 were either not applicable to the Company or their adoption did not have a material impact on the Company.

Accounting and reporting standards that are not yet effective:

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

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

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

(2) Consolidated Statement of Comprehensive (Loss) Income

The following tables present the components of the changes in accumulated other comprehensive (loss) income ("AOCI") as of and for the years ended December 31, 2018 and 2017:



(In thousands)
December 31, 2018	Unrealized investment (losses) gains				Currency translation adjustments			Accumulated other comprehensive (loss) income
Changes in AOCI
Beginning of period	$	375,421			$	(306,880	)	$	68,541
Cumulative effect adjustment resulting from changes in accounting principles	(214,539		)		—			(214,539		)
Restated beginning of period	160,882				(306,880		)	(145,998		)
Other comprehensive loss before reclassifications	(246,535		)		(112,099		)	(358,634		)
Amounts reclassified from AOCI	(5,792		)		—			(5,792		)
Other comprehensive loss	(252,327		)		(112,099		)	(364,426		)
Unrealized investment loss related to non-controlling interest	(46		)		—			(46		)
Ending balance	$	(91,491	)		$	(418,979	)	$	(510,470	)
Amounts reclassified from AOCI
Pre-tax	$	(7,332	)	(1)	$	—		$	(7,332	)
Tax effect	1,540			(2)	—			1,540
After-tax amounts reclassified	$	(5,792	)		$	—		$	(5,792	)
Other comprehensive loss
Pre-tax	$	(302,737	)		$	(112,099	)	$	(414,836	)
Tax effect	50,410				—			50,410
Other comprehensive loss	$	(252,327	)		$	(112,099	)	$	(364,426	)



(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 (loss) income	(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

(1) Net realized and unrealized gains on investments in the consolidated statements of income.

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

(3) Investments in Fixed Maturity Securities

At December 31, 2018 and 2017, investments in fixed maturity securities were as follows:



(In thousands)	Amortized Cost			Gross Unrealized					Fair Value		Carrying Value
Gains			Losses
December 31, 2018
Held to maturity:
State and municipal	$	67,891		$	11,549	$	—		$	79,440	$	67,891
Residential mortgage-backed	10,744			1,259		—			12,003		10,744
Total held to maturity	78,635			12,808		—			91,443		78,635
Available for sale:
U.S. government and government agency	697,931			9,219		(4,910		)	702,240		702,240
State and municipal:
Special revenue	2,396,089			30,507		(19,790		)	2,406,806		2,406,806
State general obligation	335,626			11,951		(1,103		)	346,474		346,474
Pre-refunded	408,141			16,568		(30		)	424,679		424,679
Corporate backed	272,440			4,319		(2,350		)	274,409		274,409
Local general obligation	403,219			18,350		(1,339		)	420,230		420,230
Total state and municipal	3,815,515			81,695		(24,612		)	3,872,598		3,872,598
Mortgage-backed securities:
Residential (1)	1,264,376			7,729		(20,225		)	1,251,880		1,251,880
Commercial	345,070			1,304		(3,708		)	342,666		342,666
Total mortgage-backed securities	1,609,446			9,033		(23,933		)	1,594,546		1,594,546
Asset-backed securities	2,462,303			10,131		(33,687		)	2,438,747		2,438,747
Corporate:
Industrial	2,295,778			15,355		(53,312		)	2,257,821		2,257,821
Financial	1,502,427			7,178		(45,683		)	1,463,922		1,463,922
Utilities	330,326			2,997		(4,148		)	329,175		329,175
Other	60,238			322		(167		)	60,393		60,393
Total corporate	4,188,769			25,852		(103,310		)	4,111,311		4,111,311
Foreign government	822,093			11,753		(25,111		)	808,735		808,735
Total available for sale	13,596,057			147,683		(215,563		)	13,528,177		13,528,177
Total investments in fixed maturity securities	$	13,674,692		$	160,491	$	(215,563	)	$	13,619,620	$	13,606,812



(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

(1) Gross unrealized (losses) gains for mortgage-backed securities include ($55,090) and $76,467 as of December 31, 2018 and 2017, 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, 2018, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay obligations.



(In thousands)	Amortized Cost		Fair Value
Due in one year or less	$	935,354	$	935,894
Due after one year through five years	4,666,934		4,669,502
Due after five years through ten years	3,037,450		3,045,868
Due after ten years	3,414,764		3,361,807
Mortgage-backed securities	1,620,190		1,606,549
Total	$	13,674,692	$	13,619,620

At December 31, 2018 and 2017, 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, 2018, investments with a carrying value of $1,700 million were on deposit in custodial or trust accounts, of which $1,332 million was on deposit with insurance regulators, $328 million was on deposit in support of the Company’s underwriting activities at Lloyd’s, $37 million was on deposit as security for reinsurance clients and $3 million was on deposit as security for letters of credit issued in support of the Company’s reinsurance operations.

(4) Investments in Equity Securities

At December 31, 2018 and 2017, investments in equity securities were as follows:



(In thousands)	Cost			Gross Unrealized (1)					Fair Value		Carrying Value
Gains			Losses
December 31, 2018
Common stocks	$	113,576		$	4,335	$	(19,719	)	$	98,192	$	98,192
Preferred stocks	115,201			72,364		(6,751		)	180,814		180,814
Total	$	228,777		$	76,699	$	(26,470	)	$	279,006	$	279,006

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

(1) Effective January 1, 2018, the Company adopted new accounting guidance that requires all equity investments with readily determinable fair values (subject to certain exceptions) to be measured at fair value, with changes in the fair value recognized through net income within net realized and unrealized gains on investments. Refer to Note 1 for additional information.

(5) Arbitrage Trading Account

At December 31, 2018 and 2017, the fair value and carrying value of the arbitrage trading account were $453 million and $618 million, respectively. The primary focus of the trading account is merger arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Arbitrage investing differs from other types of investing in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less).

The Company uses put options, call options and swap contracts in order to mitigate the impact of potential changes in market conditions on the merger arbitrage trading account. These options and contracts are reported at fair value. As of December 31, 2018, the fair value of long option contracts outstanding was $37 thousand (notional amount of $18.4 million) and the fair value of short option contracts outstanding was $58 thousand (notional amount of $11.6 million). Other than with respect to the use of these trading account securities, the Company does not make use of derivatives.

(6) Net Investment Income

Net investment income consists of the following:



(In thousands)	2018			2017			2016
Investment income earned on:
Fixed maturity securities, including cash and cash equivalents and loans receivable	$	519,269		$	473,101		$	444,247
Investment funds	109,349			68,169			99,301
Arbitrage trading account	28,157			19,145			18,693
Real estate	18,591			19,975			7,054
Equity securities	3,230			2,350			4,028
Gross investment income	678,596			582,740			573,323
Investment expense	(4,361		)	(6,952		)	(9,160		)
Net investment income	$	674,235		$	575,788		$	564,163

(7) 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 $270.2 million as of December 31, 2018.

Investment funds consist of the following:



	Carrying Value as of December 31,				Income (Losses)
(In thousands)	2018		2017		2018		2017			2016
Real estate	$	642,137	$	606,995	$	61,453	$	45,068		$	50,415
Energy	75,213		82,882		645		(15,764		)	19,747
Other funds	615,468		465,800		47,251		38,865			29,139
Total	$	1,332,818	$	1,155,677	$	109,349	$	68,169		$	99,301

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.

(8) Real Estate

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



	As of December 31,
(In thousands)	2018		2017
Properties in operation	$	1,279,584	$	451,691
Properties under development	677,508		1,017,910
Total	$	1,957,092	$	1,469,601

In 2018, properties in operation included a long-term ground lease in Washington, D.C., a hotel in Memphis, Tennessee, two office complexes in New York City, office buildings in West Palm Beach and Palm Beach, Florida, and an office building in London, U.K. The office building in London, previously under development, transferred to properties in operation in 2018. Properties in operation are net of accumulated depreciation and amortization of $44,340,000 and $25,646,000 as of December 31, 2018 and 2017, respectively. Related depreciation expense was $20,644,000 and $9,212,000 for the years ended December 31, 2018 and 2017, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $61,458,048 in 2019, $62,141,471 in 2020, $61,325,176 in 2021, $61,077,419 in 2022, $54,362,011 in 2023 and $584,592,072 thereafter.

The Company borrowed $101,750,000 through a non-recourse loan secured by the West Palm Beach office building in 2018. The loan matures in November 2028 and carries a fixed interest rate of 4.21%. The carrying value does not reflect the outstanding financing, but rather is reflected in subsidiary debt referenced in Note 15, Indebtedness.

A mixed-use project in Washington, D.C. has been under development in 2017 and 2018.

(9) Loans Receivable

Loans receivable are as follows:



	As of December 31,
(In thousands)	2018		2017
Amortized cost (net of valuation allowance):
Real estate loans	$	62,289	$	66,057
Commercial loans	32,524		13,627
Total	$	94,813	$	79,684

Fair value:
Real estate loans	$	63,047	$	66,917
Commercial loans	34,026		15,130
Total	$	97,073	$	82,047

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

	For the Year Ended December 31,
	2018		2017
Increase (decrease) in valuation allowance	$	—	$	(14	)

Loans receivable in non-accrual status were $1.2 million and $4.3 million as of December 31, 2018 and 2017, respectively.

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

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

In evaluating the real estate loans, the Company considers their credit quality indicators, including loan to value ratios, which compare the outstanding loan amount to the estimated value of the property, the borrower’s financial condition and performance with respect to loan terms, the position in the capital structure, the overall leverage in the capital structure and other market conditions. Based on these considerations, none of the real estate loans were considered to be impaired at December 31, 2018, and accordingly, the Company determined that a specific valuation allowance was not required.

(10) Net Realized and Unrealized Gains (Losses) on Investments

Net realized and unrealized gains (losses) on investments are as follows:



(In thousands)	2018			2017			2016
Net realized and unrealized gains (losses) on investments in earnings
Fixed maturity securities:
Gains	$	26,752		$	28,217		$	72,215
Losses	(13,733		)	(5,342		)	(6,434		)
Equity securities (1):
Net realized gains on investment sales	435,150			154,539			14,201
Change in unrealized gains	(320,413		)	—			—
Investment funds (2)	(212		)	125,423			58,861
Real estate	27,816			12,880			7,757
Loans receivable	2,838			—			—
Other (3)	1,977			20,141			138,519
Net realized and unrealized gains on investments in earnings before OTTI	160,175			335,858			285,119
Other-than-temporary impairments (4)	(5,687		)	—			(18,114		)
Net realized and unrealized gains on investments in earnings	154,488			335,858			267,005
Income tax expense	(32,442		)	(117,550		)	(93,452		)
After-tax net realized and unrealized gains on investments in earnings	$	122,046		$	218,308		$	173,553



Change in unrealized investment (losses) gains of available for sales securities:
Fixed maturity securities	$	(297,084	)	$	(2,192	)	$	(107,094	)
Previously impaired fixed maturity securities	(132		)	895			451
Equity securities available for sale (5)	—			(77,971		)	465,727
Investment funds	(5,521		)	9,843			12,631
Total change in unrealized investment (losses) gains	(302,737		)	(69,425		)	371,715
Income tax benefit (expense)	50,410			17,673			(125,315		)
Noncontrolling interests	(46		)	19			59
After-tax change in unrealized investment (losses) gains of available for sale securities	$	(252,373	)	$	(51,733	)	$	246,459

(1) The net realized gains or losses on investment sales represent the total gains or losses from the purchase dates of the equity securities. The change in unrealized gains consists of two components: (i) the reversal of the gain or loss recognized in previous periods on equity securities sold and (ii) the change in unrealized gain or loss resulting from mark-to-market adjustments on equity securities still held.

(2) Investment funds includes a gain of $124 million from the sale of an investment in an office building located in Washington, D.C. for the year ended December 31, 2017.

(3) Other includes a gain of $135 million from the sale of Aero Precision Industries and certain related aviation services business for the year ended December 31, 2016.

(4) For the year ended December 31, 2018, OTTI related to fixed maturity securities was $6 million. There were no OTTI for the year ended December 31, 2017. For the year ended December 31, 2016, OTTI related to equity securities was $18 million.

(5) Effective January 1, 2018, the Company adopted new accounting guidance that requires all equity investments with readily determinable fair values (subject to certain exceptions) to be measured at fair value with changes in the fair value recognized in net income. The Company recorded an adjustment of $291 million to opening AOCI net of tax as a result of this guidance. Refer to Note 1 for further information.

(11) Securities in an Unrealized Loss Position

The following tables summarize all fixed maturity securities in an unrealized loss position at December 31, 2018 and 2017 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, 2018
U.S. government and government agency	$	195,359	$	933	$	130,815	$	3,977	$	326,174	$	4,910
State and municipal	701,700		6,874		744,905		17,738		1,446,605		24,612
Mortgage-backed securities	334,063		2,911		712,595		21,022		1,046,658		23,933
Asset-backed securities	1,687,665		28,965		342,855		4,722		2,030,520		33,687
Corporate	1,730,513		54,181		954,763		49,129		2,685,276		103,310
Foreign government	246,273		24,197		80,004		914		326,277		25,111
Fixed maturity securities	$	4,895,573	$	118,061	$	2,965,937	$	97,502	$	7,861,510	$	215,563

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

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, 2018 is presented in the table below:



($ in thousands)	Number of Securities	Aggregate Fair Value		Gross Unrealized Loss
Foreign government	13	$	140,854	$	21,411
Corporate	13	120,078		13,111
Asset-backed securities	5	14,662		2,593
Mortgage-backed securities	5	8,741		69
Total	36	$	284,335	$	37,184

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 year ended December 31, 2018, OTTI recognized in earnings for fixed maturity securities was $6 million. For the year ended December 31, 2017, there were no OTTI on 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.

(12) 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, 2018 and 2017 by level:



(In thousands)	Total		Level 1		Level 2		Level 3
December 31, 2018
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency	$	702,240	$	—	$	702,240	$	—
State and municipal	3,872,598		—		3,872,598		—
Mortgage-backed securities	1,594,546		—		1,594,546		—
Asset-backed securities	2,438,747		—		2,438,648		99
Corporate	4,111,311		—		4,111,311		—
Foreign government	808,735		—		808,735		—
Total fixed maturity securities available for sale	13,528,177		—		13,528,078		99
Equity securities:
Common stocks	98,192		89,596		—		8,596
Preferred stocks	180,814		—		176,869		3,945
Total equity securities	279,006		89,596		176,869		12,541
Arbitrage trading account	452,548		353,335		81,905		17,308
Total	$	14,259,731	$	442,931	$	13,786,852	$	29,948
Liabilities:
Trading account securities sold but not yet purchased	$	38,120	$	37,327	$	—	$	793

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:
Common stocks	352,204		342,834		—		9,370
Preferred stocks	224,443		—		213,600		10,843
Total equity securities	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	$	—	$	—

The following tables summarize changes in Level 3 assets and liabilities for the years ended December 31, 2018 and 2017:



	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, 2018
Assets:
Fixed maturity securities available for sale:
Asset-backed securities	$	172	$	(2	)	$	46	$	—	$	—	$	(117	)	$	—	$	—	$	99
Total	172		(2		)	46		—		—		(117		)	—		—		99
Equity securities:
Common stocks	9,370		(548		)			—		—		(227		)	—		1		8,596
Preferred stocks	10,843		100			—		—				(6,998		)	—		—		3,945
Total	20,213		(448		)	—		—		—		(7,225		)	—		1		12,541
Arbitrage trading account	—		(6		)	—		—		11,523		(11		)	—		5,802		17,308
Total	$	20,385	$	(456	)	$	46	$	—	$	11,523	$	(7,353	)	$	—	$	5,803	$	29,948

Year ended December 31, 2017
Assets:
Fixed maturity securities available for sale:
Asset-backed securities	$	183	$	3		$	34	$	—	$	—	$	(48	)	$	—	$	—	$	172
Total	183		3			34		—		—		(48		)	—		—		172
Equity securities:
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

For the year ended December 31, 2018, one common stock in the arbitrage trading account was transferred into Level 3 and one common stock was transferred out of Level 3. In the case of the transfer into Level 3, a publicly traded price was no longer available and in the case of the transfer out, a publicly traded price became available. For the year ended December 31, 2017, there were no transfers in or out of Level 3.

(13) 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, 2018, 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, 2009 to 2017 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, 2018 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, 2018
For the Year Ended December 31,
	Unaudited
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		IBNR		Cumulative Number of Reported Claims
2009	$	689,634	$	656,788	$	624,991	$	599,235	$	589,659	$	561,784	$	557,661	$	553,058	$	546,746	$	542,568	$	18,690	23
2010	—		612,210		615,797		592,117		590,818		577,679		574,780		573,532		571,305		566,695		26,658		23
2011	—		—		665,035		673,730		660,023		659,026		653,864		649,055		645,123		634,264		30,381		24
2012	—		—		—		693,447		702,342		703,118		709,026		713,266		723,610		718,166		47,001		24
2013	—		—		—		—		751,544		792,464		784,906		784,342		805,288		811,592		78,784		26
2014	—		—		—		—		—		847,207		848,947		847,008		851,503		864,157		128,856		26
2015	—		—		—		—		—		—		951,041		986,792		961,289		964,415		217,570		26
2016	—		—		—		—		—		—		—		1,018,454		1,011,368		1,019,749		375,609		25
2017	—		—		—		—		—		—		—		—		1,067,376		1,100,243		567,982		23
2018	—		—		—		—		—		—		—		—		—		1,104,518		837,548		18
Total																			$	8,326,367



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	44,801	$	122,850	$	214,498	$	311,979	$	385,068	$	429,128	$	470,830	$	486,893	$	500,953	$	510,474
2010	—		45,193		128,946		248,698		336,243		417,166		461,442		491,104		508,359		525,016
2011	—		—		48,825		142,713		266,780		379,845		470,849		524,314		556,110		575,194
2012	—		—		—		58,108		158,869		299,842		417,686		513,644		580,750		622,687
2013	—		—		—		—		63,868		189,936		332,871		473,933		589,564		650,428
2014	—		—		—		—		—		79,078		191,394		338,961		481,039		595,024
2015	—		—		—		—		—		—		82,829		210,940		382,498		538,502
2016	—		—		—		—		—		—		—		69,620		209,212		390,552
2017	—		—		—		—		—		—		—		—		80,174		256,448
2018	—		—		—		—		—		—		—		—		—		87,075
Total																			$	4,751,400
	Reserves for loss and loss adjustment expenses before 2009, net of reinsurance																		121,405
	Reserves for loss and loss adjustment expenses, net of reinsurance																		$	3,696,372

Primary Workers' Compensation

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2018
For the Year Ended December 31,
	Unaudited
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		IBNR		Cumulative Number of Reported Claims
2009	$	327,537	$	332,303	$	326,766	$	386,870	$	392,158	$	394,303	$	392,287	$	395,288	$	398,994	$	401,431	$	10,693	43
2010	—		358,734		361,808		409,237		418,315		426,622		429,952		429,762		427,698		424,374		13,958		45
2011	—		—		419,364		442,550		454,797		470,026		472,087		474,076		475,729		471,471		17,942		46
2012	—		—		—		499,752		499,882		503,956		503,863		509,167		512,707		508,169		26,626		48
2013	—		—		—		—		551,342		547,295		546,995		543,238		547,000		542,274		35,177		53
2014	—		—		—		—		—		639,436		637,307		627,767		617,242		615,435		57,455		57
2015	—		—		—		—		—		—		712,800		690,525		650,997		641,169		83,941		58
2016	—		—		—		—		—		—		—		702,716		696,339		684,700		117,425		57
2017	—		—		—		—		—		—		—		—		762,093		733,505		191,034		57
2018	—		—		—		—		—		—		—		—		—		778,964		359,337		53
Total																			$	5,801,492



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	93,647	$	197,736	$	257,972	$	297,079	$	317,796	$	333,793	$	344,771	$	352,516	$	360,289	$	364,712
2010	—		107,742		214,034		279,226		317,986		344,631		362,078		374,013		382,665		388,405
2011	—		—		106,157		234,694		307,873		355,909		385,759		408,304		420,945		428,811
2012	—		—		—		114,998		253,781		339,560		387,368		419,588		437,196		451,991
2013	—		—		—		—		117,502		277,538		363,028		414,160		447,894		466,580
2014	—		—		—		—		—		148,405		319,743		412,611		471,235		503,915
2015	—		—		—		—		—		—		139,320		323,744		421,734		477,541
2016	—		—		—		—		—		—		—		142,998		338,835		446,072
2017	—		—		—		—		—		—		—		—		153,456		362,299
2018	—		—		—		—		—		—		—		—		—		171,006
Total																			$	4,061,332
			Reserves for loss and loss adjustment expenses before 2009, net of reinsurance																170,897
			Reserves for loss and loss adjustment expenses, net of reinsurance																$	1,911,057

Excess Workers' Compensation

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2018
For the Year Ended December 31,
	Unaudited
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		IBNR		Cumulative Number of Reported Claims
2009	$	168,762	$	153,766	$	153,912	$	148,223	$	148,189	$	138,765	$	142,768	$	134,716	$	129,249	$	130,790	$	21,734	1
2010	—		135,639		123,497		120,272		118,712		100,331		104,732		100,065		94,986		95,374		14,497		1
2011	—		—		88,650		93,993		98,051		87,064		85,299		83,850		78,246		74,109		17,280		1
2012	—		—		—		72,366		73,230		71,780		73,653		72,441		67,878		69,361		16,293		1
2013	—		—		—		—		63,995		48,493		46,025		42,419		38,551		35,120		16,473		1
2014	—		—		—		—		—		63,465		57,558		49,478		45,758		41,671		18,448		1
2015	—		—		—		—		—		—		69,977		57,897		50,099		45,115		25,425		—
2016	—		—		—		—		—		—		—		72,657		70,281		71,404		37,500		—
2017	—		—		—		—		—		—		—		—		76,701		80,508		42,652		1
2018	—		—		—		—		—		—		—		—		—		77,820		46,840		1
Total																			$	721,272



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	5,060	$	8,402	$	11,037	$	14,138	$	20,729	$	25,272	$	29,150	$	33,573	$	37,817	$	41,243
2010	—		2,867		4,003		5,571		8,701		9,084		11,699		14,261		18,821		22,355
2011	—		—		2,593		4,848		6,395		12,104		15,684		18,638		20,164		21,463
2012	—		—		—		1,127		6,097		9,480		11,167		13,234		15,738		17,982
2013	—		—		—		—		647		630		2,158		3,008		3,396		4,418
2014	—		—		—		—		—		358		1,729		3,354		4,175		5,808
2015	—		—		—		—		—		—		2,069		2,481		3,272		4,099
2016	—		—		—		—		—		—		—		2,498		4,783		5,573
2017	—		—		—		—		—		—		—		—		6,282		12,810
2018	—		—		—		—		—		—		—		—		—		6,141
Total																			$	141,892
	Reserves for loss and loss adjustment expenses before 2009, net of reinsurance																		740,877
	Reserves for loss and loss adjustment expenses, net of reinsurance																		$	1,320,257

Professional Liability

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2018
For the Year Ended December 31,
	Unaudited
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		IBNR		Cumulative Number of Reported Claims
2009	$	134,784	$	139,091	$	145,515	$	148,899	$	147,994	$	150,452	$	150,783	$	153,492	$	152,711	$	157,451	$	1,087	3
2010	—		147,649		165,755		179,383		177,957		176,723		172,585		174,883		177,844		182,818		1,807		4
2011	—		—		179,875		165,233		186,918		190,096		177,128		173,545		176,865		175,963		3,185		4
2012	—		—		—		238,233		241,944		264,808		250,457		238,704		245,076		243,893		9,507		7
2013	—		—		—		—		269,280		247,320		242,792		248,974		270,449		279,092		15,395		7
2014	—		—		—		—		—		253,284		246,668		259,964		243,936		239,555		19,315		8
2015	—		—		—		—		—		—		259,569		258,251		274,950		276,406		47,934		9
2016	—		—		—		—		—		—		—		310,678		324,979		361,929		90,872		10
2017	—		—		—		—		—		—		—		—		333,803		333,194		178,091		9
2018	—		—		—		—		—		—		—		—		—		335,751		260,095		9
Total																			$	2,586,052



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	12,604	$	52,583	$	85,902	$	117,683	$	127,728	$	138,876	$	143,950	$	144,713	$	147,599	$	151,499
2010	—		14,832		58,916		108,566		129,757		144,474		160,598		165,018		171,330		178,879
2011	—		—		18,779		62,442		103,097		134,608		150,840		159,014		167,286		168,874
2012	—		—		—		21,875		87,008		128,281		159,183		190,295		214,315		223,424
2013	—		—		—		—		24,232		64,030		119,552		177,343		206,655		248,520
2014	—		—		—		—		—		19,545		83,856		138,753		176,181		199,245
2015	—		—		—		—		—		—		20,478		85,561		139,952		187,767
2016	—		—		—		—		—		—		—		28,702		102,853		202,131
2017	—		—		—		—		—		—		—		—		36,733		96,814
2018	—		—		—		—		—		—		—		—		—		28,307
Total																			$	1,685,460
	Reserves for loss and loss adjustment expenses before 2009, net of reinsurance																		4,198
	Reserves for loss and loss adjustment expenses, net of reinsurance																		$	904,790

Commercial Automobile

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2018
For the Year Ended December 31,
	Unaudited
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		IBNR		Cumulative Number of Reported Claims
2009	$	362,302	$	345,139	$	340,967	$	335,851	$	337,915	$	336,855	$	334,652	$	335,089	$	334,977	$	334,926	$	398	39
2010	—		310,591		320,098		330,190		328,854		332,716		331,581		330,552		330,263		329,942		372		37
2011	—		—		312,224		320,898		328,269		331,694		341,362		341,162		342,052		343,524		1,232		37
2012	—		—		—		314,073		326,585		342,379		355,433		364,175		364,437		366,662		1,539		40
2013	—		—		—		—		326,789		348,513		368,318		376,569		366,976		366,565		3,013		42
2014	—		—		—		—		—		363,308		384,692		418,215		416,194		413,697		6,431		45
2015	—		—		—		—		—		—		389,101		417,403		423,601		431,857		18,247		50
2016	—		—		—		—		—		—		—		431,633		431,680		443,030		35,867		49
2017	—		—		—		—		—		—		—		—		430,352		428,601		70,289		44
2018	—		—		—		—		—		—		—		—		—		442,862		145,744		39
Total																			$	3,901,666



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	136,433	$	209,553	$	257,326	$	291,925	$	312,902	$	328,843	$	331,482	$	333,143	$	333,605	$	333,677
2010	—		136,029		208,790		263,639		295,347		313,253		324,963		326,770		327,206		327,829
2011	—		—		135,350		211,756		262,659		296,332		321,786		333,949		338,283		340,319
2012	—		—		—		136,844		215,078		273,277		312,178		344,428		355,740		360,799
2013	—		—		—		—		142,480		218,005		266,694		322,141		343,274		353,159
2014	—		—		—		—		—		155,065		237,118		328,156		365,424		394,147
2015	—		—		—		—		—		—		159,679		265,396		325,369		370,450
2016	—		—		—		—		—		—		—		185,045		280,146		342,214
2017	—		—		—		—		—		—		—		—		180,627		267,469
2018	—		—		—		—		—		—		—		—		—		180,213
Total																			$	3,270,276
			Reserves for loss and loss adjustment expenses before 2009, net of reinsurance																2,482
			Reserves for loss and loss adjustment expenses, net of reinsurance																$	633,872

Short-tail lines

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2018
For the Year Ended December 31,
	Unaudited
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		IBNR		Cumulative Number of Reported Claims
2009	$	346,870	$	335,921	$	326,440	$	318,111	$	318,349	$	314,290	$	314,117	$	314,010	$	316,220	$	317,098	$	550	18
2010	—		385,541		370,291		358,373		355,916		346,226		346,719		346,885		346,463		346,172		833		19
2011	—		—		478,556		471,555		463,006		459,814		457,011		450,115		449,320		451,211		1,093		21
2012	—		—		—		526,312		535,500		535,885		531,729		507,646		506,705		508,565		3,083		25
2013	—		—		—		—		572,103		583,603		575,582		553,621		552,137		548,730		5,740		26
2014	—		—		—		—		—		701,335		709,832		664,303		663,282		664,350		6,562		30
2015	—		—		—		—		—		—		743,872		731,468		727,677		726,606		15,079		32
2016	—		—		—		—		—		—		—		771,416		774,514		761,891		20,857		34
2017	—		—		—		—		—		—		—		—		750,786		752,193		34,275		38
2018	—		—		—		—		—		—		—		—		—		759,340		161,107		36
Total																			$	5,836,156



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	212,521	$	291,338	$	304,634	$	306,020	$	309,916	$	310,428	$	311,079	$	311,357	$	311,655	$	315,966
2010	—		245,036		325,156		337,686		346,768		340,210		342,918		344,102		345,085		345,106
2011	—		—		303,012		417,701		436,585		440,777		445,073		446,745		447,342		450,155
2012	—		—		—		281,456		453,157		503,364		513,733		498,506		499,446		503,738
2013	—		—		—		—		312,945		486,692		534,939		531,386		538,158		539,443
2014	—		—		—		—		—		371,194		596,829		613,621		633,020		648,373
2015	—		—		—		—		—		—		396,086		612,335		667,846		689,875
2016	—		—		—		—		—		—		—		416,144		669,029		710,618
2017	—		—		—		—		—		—		—		—		444,407		688,821
2018	—		—		—		—		—		—		—		—		—		415,206
Total																			$	5,307,301
	Reserves for loss and loss adjustment expenses before 2009, net of reinsurance																		2,362
	Reserves for loss and loss adjustment expenses, net of reinsurance																		$	531,217

Reinsurance

Casualty

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2018
For the Year Ended December 31,
	Unaudited
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		IBNR
2009	$	334,804	$	328,321	$	327,236	$	309,228	$	301,495	$	293,275	$	282,411	$	288,115	$	281,592	$	279,372	$	17,086
2010	—		290,285		298,300		288,141		276,234		265,771		254,550		251,308		249,062		248,145		18,428
2011	—		—		290,635		309,621		304,409		299,628		306,911		303,867		295,576		292,162		21,264
2012	—		—		—		331,603		335,661		331,006		324,014		332,932		335,636		333,889		25,536
2013	—		—		—		—		319,159		270,221		273,528		283,580		292,447		298,061		33,269
2014	—		—		—		—		—		320,250		320,176		319,855		331,836		326,251		49,301
2015	—		—		—		—		—		—		259,609		232,203		231,020		253,264		30,511
2016	—		—		—		—		—		—		—		241,282		253,450		246,235		62,140
2017	—		—		—		—		—		—		—		—		231,826		221,820		122,752
2018	—		—		—		—		—		—		—		—		—		221,945		184,317
Total																			$	2,721,144



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	21,332	$	53,636	$	85,761	$	124,030	$	155,124	$	181,946	$	196,775	$	211,143	$	221,141	$	228,990
2010	—		17,964		45,626		77,191		106,381		129,041		149,322		165,027		180,544		190,295
2011	—		—		17,876		52,365		97,702		134,285		168,244		191,864		207,692		220,011
2012	—		—		—		22,390		62,198		111,928		151,635		186,483		219,106		240,926
2013	—		—		—		—		28,920		63,849		109,202		143,268		177,101		204,820
2014	—		—		—		—		—		21,306		69,134		116,266		155,764		198,993
2015	—		—		—		—		—		—		17,865		48,593		91,548		141,834
2016	—		—		—		—		—		—		—		19,923		61,930		100,587
2017	—		—		—		—		—		—		—		—		16,493		40,338
2018	—		—		—		—		—		—		—		—		—		11,152
Total																			$	1,577,946
	Reserves for loss and loss adjustment expenses before 2009, net of reinsurance																		369,801
			Reserves for loss and loss adjustment expenses, net of reinsurance																$	1,512,999

Property

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2018
For the Year Ended December 31,
	Unaudited
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		IBNR
2009	$	48,029	$	43,193	$	42,352	$	38,711	$	38,124	$	37,505	$	36,913	$	36,263	$	35,293	$	35,763	$	—
2010	—		58,576		55,647		52,561		51,448		51,500		50,971		50,871		50,699		50,932		201
2011	—		—		95,217		87,970		85,118		86,544		85,006		84,739		84,471		84,882		314
2012	—		—		—		103,744		94,720		86,426		85,451		83,925		83,938		84,875		626
2013	—		—		—		—		141,298		112,590		114,063		111,915		112,555		111,876		1,192
2014	—		—		—		—		—		112,987		96,668		97,363		100,148		99,410		1,739
2015	—		—		—		—		—		—		127,039		117,582		131,777		130,452		4,367
2016	—		—		—		—		—		—		—		167,989		174,562		181,858		11,130
2017	—		—		—		—		—		—		—		—		206,604		200,535		24,102
2018	—		—		—		—		—		—		—		—		—		108,281		40,135
Total																			$	1,088,864



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2009		2010		2011		2012		2013		2014		2015		2016		2017		2018
2009	$	9,766	$	21,945	$	28,226	$	29,444	$	31,248	$	31,238	$	32,540	$	34,759	$	34,027	$	35,158
2010	—		23,654		37,739		42,413		43,898		44,824		46,419		49,048		49,303		50,053
2011	—		—		31,478		58,875		73,359		76,010		78,577		81,780		82,322		83,401
2012	—		—		—		15,675		51,774		64,238		70,672		77,540		79,099		81,808
2013	—		—		—		—		36,609		74,602		92,646		101,553		104,333		106,051
2014	—		—		—		—		—		38,919		67,000		82,329		88,507		91,646
2015	—		—		—		—		—		—		53,498		89,228		109,187		118,686
2016	—		—		—		—		—		—		—		78,969		133,653		157,622
2017	—		—		—		—		—		—		—		—		72,157		141,458
2018	—		—		—		—		—		—		—		—		—		34,125
Total																			$	900,008
	Reserves for loss and loss adjustment expenses before 2009, net of reinsurance																		776
	Reserves for loss and loss adjustment expenses, net of reinsurance																		$	189,632

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, 2018
Undiscounted reserves for loss and loss expenses, net of reinsurance:
	Other liability	$	3,696,372
	Primary workers' compensation	1,911,057
	Excess workers' compensation	1,320,257
	Professional liability	904,790
	Commercial automobile	633,872
	Short-tail lines	531,217
	Other	111,779
	Insurance	9,109,344
	Casualty	1,512,999
	Property	189,632
	Reinsurance	1,702,631
Total undiscounted reserves for loss and loss expenses, net of reinsurance		$	10,811,975



(In thousands)		December 31, 2018
Due from reinsurers on unpaid claims:
	Other liability	$	451,073
	Primary workers' compensation	374,805
	Excess workers' compensation	37,405
	Professional liability	344,958
	Commercial automobile	15,405
	Short-tail lines	293,376
	Other	34,260
	Insurance	1,551,282
	Casualty	116,782
	Property	49,501
	Reinsurance	166,283
Total due from reinsurers on unpaid claims		$	1,717,565



(In thousands)		December 31, 2018
Loss reserve discount:
	Other liability	$	—
	Primary workers' compensation	—
	Excess workers' compensation	(434,302		)
	Professional liability	—
	Commercial automobile	—
	Short-tail lines	—
	Other	—
	Insurance	(434,302		)
	Casualty	(128,790		)
	Property	—
	Reinsurance	(128,790		)
Total loss reserve discount		$	(563,092	)
Total gross reserves for loss and loss expenses		$	11,966,448

The following is supplementary information regarding average historical claims duration as of December 31, 2018:



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	8.0	%	14.4	%	18.4	%	16.8	%	13.8	%	8.2	%	5.9	%	3.0	%	2.8	%	1.8	%
Primary workers' compensation	22.5	%	27.6	%	15.6	%	9.4	%	5.9	%	4.0	%	2.8	%	1.9	%	1.6	%	1.1	%
Excess workers' compensation	3.8	%	3.3	%	2.7	%	3.1	%	3.0	%	3.3	%	2.7	%	3.3	%	3.5	%	2.6	%
Professional liability	8.7	%	22.7	%	22.3	%	16.6	%	9.4	%	9.1	%	3.5	%	1.6	%	4.3	%	2.5	%
Commercial automobile	39.7	%	21.6	%	15.6	%	10.7	%	6.8	%	3.5	%	1.0	%	0.4	%	0.2	%	—	%
Short-tail lines	59.6	%	29.8	%	5.8	%	1.6	%	0.1	%	0.3	%	0.4	%	0.3	%	—	%	1.4	%

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	7.2	%	12.5	%	14.6	%	13.3	%	11.2	%	9.0	%	5.9	%	5.2	%	3.8	%	2.8	%
Property	35.3	%	32.3	%	14.8	%	5.5	%	3.9	%	2.0	%	3.2	%	2.7	%	—	%	3.2	%

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



(In thousands)	2018			2017			2016
Net reserves at beginning of year	$	10,056,914		$	9,590,265		$	9,244,872
Net provision for losses and loss expenses:
Claims occurring during the current year (1)	3,926,489			3,963,543			3,826,620
Increase (decrease) in estimates for claims occurring in prior years (2)	6,831			(5,165		)	(29,904		)
Loss reserve discount accretion	41,382			43,970			49,084
Total	3,974,702			4,002,348			3,845,800
Net payments for claims:
Current year	964,808			1,027,405			1,052,452
Prior year	2,700,077			2,562,550			2,401,722
Total	3,664,885			3,589,955			3,454,174
Foreign currency translation	(117,848		)	54,256			(46,233		)
Net reserves at end of year	10,248,883			10,056,914			9,590,265
Ceded reserve at end of year	1,717,565			1,613,494			1,606,930
Gross reserves at end of year	$	11,966,448		$	11,670,408		$	11,197,195


(1)	Claims occurring during the current year are net of loss reserve discounts of $24,381,000, $22,064,000 and $18,929,000 in 2018, 2017, and 2016, respectively.


(2)	The increase (decrease) in estimates for claims occurring in prior years is net of loss reserve discount. On an undiscounted basis, the estimates for claims occurring in prior years decreased by $3,738,000, $32,132,000 and $59,175,000 in 2018, 2017 and 2016, respectively.

Favorable prior year development (net of additional and return premiums) was $39 million in 2018**.**

Insurance - Reserves for the Insurance segment developed favorably by $43 million in 2018. The favorable development was primarily attributable to workers' compensation business, partially offset by unfavorable development for professional liability business.

For workers' compensation, the favorable development was spread across many accident years, including prior to 2009, but was most significant in accident years 2015 through 2017. The favorable workers' compensation development reflects a continuation during 2018 of the benign loss cost trends experienced during recent years, particularly the favorable claim frequency trends (i.e., number of reported claims per unit of exposure). The long term trend of declining workers' compensation frequency can be attributable to improved workplace safety. Loss severity trends were also aided by our continued investment in claims handling initiatives such as medical case management services and vendor savings through usage of preferred provider networks. Reported workers' compensation losses in 2018 continued to be better than our expectations at most of our operating units, and were below the assumptions underlying our previous reserve estimates.

For professional liability business, adverse development was primarily related to unexpected large directors and officers (“D&O”) liability losses at one of our U.S. operating units, as well as lawyers professional liability losses at another operating unit. The adverse development stemmed primarily from accident years 2015 and 2016, and was driven by a higher frequency of large losses than we had experienced in previous years.

Reinsurance - Reserves for the Reinsurance segment developed unfavorably by $4 million in 2018. The unfavorable development was primarily due to U.S. casualty facultative business from accident years 2009 and prior related to construction projects, and was largely offset by favorable development on assumed excess of loss workers compensation business.

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 better than 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 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 better than 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.

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 $28 million at December 31, 2018 and $30 million at December 31, 2017. 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 $1,793 million and $1,855 million at December 31, 2018 and 2017, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $563 million and $591 million at

December 31, 2018 and 2017, respectively. At December 31, 2018, 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, 2018) 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, 2018), including reserves for quota share reinsurance and reserves related to losses regarding occupational lung disease. These reserves are discounted at statutory rates prescribed or permitted by the Department of Insurance of the State of Delaware.

(14) 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)	2018			2017			2016
Written premiums:
Direct	$	6,973,216		$	6,726,029		$	6,647,600
Assumed	729,278			750,934			896,101
Ceded	(1,269,267		)	(1,216,455		)	(1,119,788		)
Total net written premiums	$	6,433,227		$	6,260,508		$	6,423,913

Earned premiums:
Direct	$	6,851,795		$	6,661,046		$	6,492,240
Assumed	755,759			812,309			900,570
Ceded	(1,236,049		)	(1,161,936		)	(1,099,462		)
Total net earned premiums	$	6,371,505		$	6,311,419		$	6,293,348

Ceded losses and loss expenses incurred	$	829,742		$	601,769		$	707,336
Ceded commission earned	$	268,037		$	241,983		$	201,957

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 $946,965, $1,010,000 and $1,049,000 as of December 31, 2018, 2017 and 2016, respectively.

The following table presents the amounts due from reinsurers as of December 31, 2018:



(In thousands)

Lloyd’s of London	$	215,370
Munich Re	164,131
Alleghany Group	150,438
Swiss Re	150,280
Partner Re	103,837
Berkshire Hathaway	87,314
Axis Capital	85,377
Hannover Re Group	77,351
Everest Re	62,113
Korean Re	52,746
Renaissance Re	39,944
Liberty Mutual	32,118
Qatar Re GRP	27,731
Chubb Limited	24,628
Arch Capital Group	21,260
Other reinsurers less than $20,000	289,305
Subtotal	1,583,943
Residual market pools	348,348
Total	$	1,932,291

(15) Indebtedness

Indebtedness consisted of the following as of December 31, 2018 (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		2018		2017
Senior notes due on:
August 15, 2019	6.15%	$	140,651	$	140,568	$	140,434
September 15, 2019	7.375%	300,000		299,816		299,562
September 15, 2020	5.375%	300,000		299,420		299,083
January 1, 2022	8.7%	76,503		76,273		76,210
March 15, 2022	4.625%	350,000		348,670		348,252
February 15, 2037	6.25%	250,000		248,006		247,896
August 1, 2044	4.75%	350,000		345,283		345,099
Subsidiary debt (1) (2)	Various	123,992		123,992		12,516
Total senior notes and other debt		$	1,891,146	$	1,882,028	$	1,769,052
Subordinated debentures due on:
April 30, 2053	5.625%	$	350,000	$	341,097	$	340,838
March 1, 2056	5.9%	110,000		106,159		106,055
June 1, 2056	5.75%	290,000		281,551		281,325
March 30, 2058	5.70%	185,000		178,684		—
Total subordinated debentures		$	935,000	$	907,491	$	728,218

(1) Subsidiary debt is due as follows: $7 million in 2019, $15 million in 2020, and $102 million in 2028.

(2) Includes non-recourse loan in the amount of $102 million secured by an office building. See Note 8, Real Estate, for more details.

(16) Income Taxes

Income tax expense (benefit) consists of:



(In thousands)	Current Expense (Benefit)		Deferred Expense (Benefit)			Total
December 31, 2018
Domestic	$	188,712	$	(63,134	)	$	125,578
Foreign	13,963		23,487			37,450
Total expense (benefit)	$	202,675	$	(39,647	)	$	163,028

December 31, 2017
Domestic	$	225,694	$	(27,601	)	$	198,093
Foreign	8,803		12,537			21,340
Total expense (benefit)	$	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

Income before income taxes from domestic operations was $755 million, $797 million and $837 million for the years ended December 31, 2018, 2017 and 2016, respectively. Income (loss) before income taxes from foreign operations was $57 million, ($25) million and $59 million for the years ended December 31, 2018, 2017 and 2016, respectively.

A reconciliation of the income tax expense and the amounts computed by applying the Federal and foreign income tax rate of 21% for 2018 and 35% for 2017 and 2016 to pre-tax income are as follows:



(In thousands)	2018			2017			2016
Computed “expected” tax expense	$	170,540		$	270,470		$	313,753
Tax-exempt investment income	(18,833		)	(37,209		)	(37,379		)
Change in valuation allowance	18,576			11,161			1,420
Impact of foreign tax rates	7,683			3,508			1,984
State and local taxes	3,901			1,644			7,748
Impact of change in U.S. tax rate	(10,950		)	(30,531		)	—
Other, net	(7,889		)	390			5,427
Total expense	$	163,028		$	219,433		$	292,953

At December 31, 2018 and 2017, 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)	2018			2017
Deferred tax asset:
Loss reserve discounting	$	130,513		$	70,206
Unearned premiums	112,190			110,854
Net operating losses	37,463			33,043
Other-than-temporary impairments	9,910			8,204
Employee compensation plans	56,027			59,037
Other	58,809			49,346
Gross deferred tax asset	404,912			330,690
Less valuation allowance	(35,195		)	(16,619		)
Deferred tax asset	369,717			314,071
Deferred tax liability:
Amortization of intangibles	13,641			12,826
Loss reserve discounting - transition rule	41,088			—
Deferred policy acquisition costs	99,293			100,020
Unrealized investment gains	35,430			151,162
Property, furniture and equipment	39,239			31,865
Investment funds	51,712			41,104
Other	53,824			63,858
Deferred tax liability	334,227			400,835
Net deferred tax (asset) liability	$	(35,490	)	$	86,764

The Company had a current tax receivable of $0.7 million and a payable of $11.3 million at December 31, 2018 and 2017, respectively. At December 31, 2018, the Company had foreign net operating loss carryforwards of $8.8 million that expire beginning in 2027, and an additional $181.0 million that have no expiration date. At December 31, 2018, the Company had a valuation allowance of $35.2 million, as compared to $16.6 million at December 31, 2017. The Company has provided a valuation allowance against the utilization of foreign tax credits and the future net operating loss carryforward 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. In 2018, the Company reported a net tax rate reduction benefit in the amount of $11.0 million. Additionally, the U.S. tax law requires insurance reserves to be discounted for tax purposes. The Tax Act modified this computation. At the end of 2018, the IRS issued revised discount factors to be applied to the 2017 reserves. This increased the beginning of year 2018 deferred tax asset for loss reserve discounting by $47 million. Under the related transition rule, a deferred tax liability was established which will be included in taxable income over eight years beginning in 2018.

The Tax Act included a global intangible low-taxed income tax ("GILTI"). The Company has made an accounting policy election to treat any GILTI taxes as a current period expense when incurred (the "period cost method"). The 2018 tax provision includes a GILTI tax of $2.8 million as a current tax expense.

The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $70 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. In the future, if such earnings were distributed the Company projects that the incremental tax, if any, will be immaterial.

(17) 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 2019, the maximum amount of dividends that can be paid by BIC without such approval is approximately $1.1 billion.

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



(In thousands)	2018		2017		2016
Net income	$	1,099,953	$	698,862	$	702,830
Statutory capital and surplus	$	5,587,930	$	5,479,603	$	5,493,044

The significant variances between SAP and GAAP are that for statutory purposes bonds are carried at amortized cost, unrealized gains and losses on equity securities are recorded in surplus, 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 $282 million at December 31, 2018*.*

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, 2018, BIC’s Total Adjusted Capital of $5.306 billion was 384% of its RBC Authorized Control Level.

See Note 3, Investments in Fixed Maturity Securities, for a description of assets held on deposit as security.

(18) Common Stockholders’ Equity

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



	2018	2017	2016
Basic	126,698,927	124,843,240	122,650,997
Diluted	128,263,558	129,017,613	128,552,838

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 4,926,521 common shares held in a grantor trust. 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).



	2018		2017		2016
Balance, beginning of year	121,514,852		121,193,599		123,307,837
Shares issued	838,508		1,052,256		281,654
Shares repurchased	(357,600	)	(731,003	)	(2,395,892)
Balance, end of year	121,995,760		121,514,852		121,193,599

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.

(19) 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, 2018 and 2017:



	2018				2017
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Fixed maturity securities	$	13,606,812	$	13,619,620	$	13,551,250	$	13,566,976
Equity securities	279,006		279,006		576,647		576,647
Arbitrage trading account	452,548		452,548		617,649		617,649
Loans receivable	94,813		97,073		79,684		82,047
Cash and cash equivalents	817,602		817,602		950,471		950,471
Trading accounts receivable from brokers and clearing organizations	347,228		347,228		189,280		189,280

Liabilities:
Due to broker	20,144		20,144		15,920		15,920
Trading account securities sold but not yet purchased	38,120		38,120		64,358		64,358
Subordinated debentures	907,491		840,002		728,218		769,060
Senior notes and other debt	1,882,028		1,968,996		1,769,052		1,945,313

The estimated fair values of the Company’s fixed maturity securities, equity securities available for sale and arbitrage trading account securities are based on various valuation techniques that rely on fair value measurements as described in Note 12 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.

(20) 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: $46,592,000 in 2019; $43,504,000 in 2020; $39,061,000 in 2021; $34,444,000 in 2022, $30,881,000 in 2023 and $75,740,000 thereafter. Rental expense was $45,778,000, $52,925,000, and $47,453,000 for 2018, 2017, and 2016 respectively.

(21) 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, 2018, the Company had commitments to invest up to $270.2 million and $253.4 million in certain investment funds and real estate construction projects, respectively.

(22) 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, 2018:



	2018		2017		2016
RSUs granted and unvested at beginning of period:	3,477,981		4,862,098		4,158,325
Granted	760,032		855,984		1,000,559
Vested	(600,169	)	(1,993,507	)	(77,250	)
Canceled	(263,411	)	(246,594	)	(219,536	)
RSUs granted and unvested at end of period:	3,374,433		3,477,981		4,862,098

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, 2018, 4,709,318 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, 2018:



(In thousands)	2018			2017			2016
Unearned compensation at beginning of year	$	122,910		$	115,965		$	103,538
RSUs granted, net of cancellations	52,204			52,897			52,697
RSUs expensed	(34,408		)	(38,796		)	(35,585		)
RSUs forfeitures	(11,037		)	(7,156		)	(4,685		)
Unearned compensation at end of year	$	129,669		$	122,910		$	115,965

(23) 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, $42 million and $39 million in 2018, 2017 and 2016, 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, 2018:



	Units Outstanding	Maximum Value		Inception to date earned through December 31, 2018 on outstanding units
2014 grant	181,750	$	18,175,000	$	15,328,795
2015 grant	194,750	19,475,000		15,272,295
2016 grant	217,500	21,750,000		12,371,400
2017 grant	223,250	22,325,000		7,822,680
2018 grant	222,750	22,750,000		4,316,895

The following table summarizes the LTIP expense for each of the three years ended December 31, 2018:



(In thousands)	2018			2017		2016
2011 grant	$	—		$	—	$	(82	)
2013 grant	(1,124		)	7,667		8,918
2014 grant	3,227			3,167		3,503
2015 grant	5,170			3,667		4,072
2016 grant	5,148			3,601		4,002
2017 grant	4,700			3,162		—
2018 grant	4,317			—		—
Total	$	21,438		$	21,264	$	20,413

(24) Supplemental Financial Statement Data

Other operating costs and expenses consist of the following:



(In thousands)	2018			2017		2016
Amortization of deferred policy acquisition costs	$	915,246		$	1,111,489	$	1,155,954
Insurance operating expenses	1,183,635			989,535		933,249
Insurance service expenses	118,357			129,776		138,908
Net foreign currency (gains) losses	(27,067		)	15,267		(11,904		)
Other costs and expenses	193,050			190,865		179,412
Total	$	2,383,221		$	2,436,932	$	2,395,619

(25) 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.

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
Year ended December 31, 2018
Insurance	$	5,864,981	$	518,733	$	72,727	$	6,456,441	$	856,011		$	682,028
Reinsurance	506,524		94,291		—		600,815		62,144			50,144
Corporate, other and eliminations (2)	—		61,211		418,696		479,907		(260,549		)	(213,469		)
Net investment gains	—		—		154,488		154,488		154,488			122,046
Consolidated	$	6,371,505	$	674,235	$	645,911	$	7,691,651	$	812,094		$	640,749

Year ended December 31, 2017
Insurance	$	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 (2)	—		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

Year ended 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 (2)	—		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



Identifiable Assets
(In thousands)	December 31,
	2018		2017
Insurance	$	19,634,329	$	19,263,193
Reinsurance	2,951,115		3,169,731
Corporate, other and eliminations (2)	2,310,533		1,866,993
Consolidated	$	24,895,977	$	24,299,917

(1) Revenues for Insurance includes $714.2 million, $688.2 million and $733.3 million in 2018, 2017 and 2016, respectively, from foreign countries. Revenues for Reinsurance includes $228.1 million, $201.3 million and $200.5 million in 2018, 2017 and 2016, respectively, from foreign countries.

(2) 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)	2018		2017		2016
Insurance
Other liability	$	1,912,071	$	1,843,826	$	1,761,748
Workers' compensation	1,489,805		1,481,507		1,402,611
Short-tail lines	1,184,755		1,149,977		1,237,917
Commercial automobile	722,236		685,263		684,626
Professional liability	556,114		545,870		531,940
Total Insurance	5,864,981		5,706,443		5,618,842
Reinsurance
Casualty	362,886		377,650		405,470
Property	143,638		227,326		269,036
Total Reinsurance	506,524		604,976		674,506
Total	$	6,371,505	$	6,311,419	$	6,293,348

(26) Quarterly Financial Information (Unaudited)

The following is a summary of quarterly financial data:



(In thousands, except per share data)	2018
Three months ended	March 31		June 30		September 30		December 31
Revenues	$	1,891,247	$	1,910,916	$	1,937,902	$	1,951,586
Net income	166,397		180,075		161,920		132,357
Net income per share (1)
Basic (2)	1.32		1.42		1.28		1.04
Diluted	1.30		1.40		1.26		1.03



	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

(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.

(27) Subsequent Event

On February 21, 2019, the Company announced that its Board of Directors approved a 3-for-2 common stock split to be paid in the form of a stock dividend to holders of record on March 14, 2019. The additional shares are expected to be issued on April 2, 2019.

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