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, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2019, 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, 2019, 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 20, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 10 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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Assessment of the estimate of the reserves for losses and loss expenses

As discussed in Notes 1 and 13 to the consolidated financial statements, the Company estimates the reserves for losses and loss expenses (reserves) using a variety of actuarial techniques and methods based on expected loss ratios, rate of

loss cost inflation, reported and paid loss emergence patterns, loss frequency and severity, and the loss reporting lag. Such amounts are adjusted for certain qualitative factors. The reserves as of December 31, 2019 were $12,583 million.

We identified the assessment of the estimate of reserves as a critical audit matter because it involved significant measurement uncertainty, which required complex auditor judgment. Specialized actuarial expertise was required to evaluate the actuarial method or methods and assumptions used. Assumptions included loss development factors; the weighting of actuarial methods when more than one was used; the impact of qualitative factors; and whether payments are fixed and reliably determinable for certain reserves subject to discounting.

The primary procedures we performed to address the critical audit matter included the following. We tested certain internal controls over the Company’s reserving process, including controls over the Company’s process to develop the Company’s best estimate of reserves based on actuarial methodologies and assumptions employed by the Company’s actuaries. We involved actuarial professionals with specialized skills and knowledge, who assisted in:


–	Examining the Company’s actuarial methodologies for compliance with Actuarial Standards of Practice;


–	Evaluating the Company’s actuarial point estimate by performing independent actuarial analyses for certain of the larger, more complex operating units;


–	Evaluating the Company’s actuarial point estimate by examining the Company actuaries’ procedures, and certain key assumptions for the remaining operating units;


–	Developing an independent range of reserves based on actuarial methodologies and assumptions and comparing to the Company’s reserves;


–	Evaluating the Company’s reserves and year-over-year movements of the Company’s reserves relative to, and within, the independently developed range of reserves; and


–	Evaluating the Company’s ability to discount certain reserves by comparing the expected payout pattern of claims paid to actual claims paid.

/S/ KPMG LLP

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

New York, New York

February 20, 2020

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME



	Year Ended December 31,
(In thousands, except per share data)	2019			2018			2017
REVENUES:
Net premiums written	$	6,863,499		$	6,433,227		$	6,260,508
Change in net unearned premiums	(230,211		)	(61,722		)	50,911
Net premiums earned	6,633,288			6,371,505			6,311,419
Net investment income	645,614			674,235			575,788
Net realized and unrealized gains on investments:
Net realized and unrealized gains before OTTI	120,703			160,175			335,858
Other-than-temporary impairments ("OTTI")	—			(5,687		)	—
Net realized and unrealized gains on investments	120,703			154,488			335,858
Revenues from non-insurance businesses	406,541			372,985			326,165
Insurance service fees	92,680			117,757			134,729
Other income	3,370			681			805
Total revenues	7,902,196			7,691,651			7,684,764
OPERATING COSTS AND EXPENSES:
Losses and loss expenses	4,131,116			3,974,702			4,002,348
Other operating costs and expenses	2,362,082			2,383,221			2,436,932
Expenses from non-insurance businesses	402,669			364,449			325,417
Interest expense	153,409			157,185			147,297
Total operating costs and expenses	7,049,276			6,879,557			6,911,994
Income before income taxes	852,920			812,094			772,770
Income tax expense	(168,935		)	(163,028		)	(219,433		)
Net income before noncontrolling interests	683,985			649,066			553,337
Noncontrolling interests	(2,041		)	(8,317		)	(4,243		)
Net income to common stockholders	$	681,944		$	640,749		$	549,094
NET INCOME PER SHARE:
Basic	$	3.58		$	3.37		$	2.93
Diluted	$	3.52		$	3.33		$	2.84

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Year Ended December 31,
(In thousands)	2019			2018			2017
Net income before noncontrolling interests	$	683,985		$	649,066		$	553,337
Other comprehensive gain (loss):
Change in unrealized translation adjustments	37,166			(112,099		)	64,706
Change in unrealized investment gains (losses), net of taxes	215,902			(252,327		)	(51,752		)
Other comprehensive gain (loss)	253,068			(364,426		)	12,954
Comprehensive income	937,053			284,640			566,291
Comprehensive income to the noncontrolling interest	(2,144		)	(8,271		)	(4,262		)
Comprehensive income to common stockholders	$	934,909		$	276,369		$	562,029

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	December 31,
(In thousands, except share data)	2019			2018
Assets
Investments:
Fixed maturity securities	$	14,180,961		$	13,606,812
Investment funds	1,213,535			1,332,818
Real estate	2,105,950			1,957,092
Arbitrage trading account	400,809			452,548
Equity securities	480,620			279,006
Loans receivable	91,799			94,813
Total investments	18,473,674			17,723,089
Cash and cash equivalents	1,023,710			817,602
Premiums and fees receivable	1,997,186			1,807,762
Due from reinsurers	2,133,683			1,932,291
Deferred policy acquisition costs	517,364			497,629
Prepaid reinsurance premiums	567,595			498,880
Trading account receivable from brokers and clearing organizations	423,543			347,228
Property, furniture and equipment	422,091			416,372
Goodwill	169,652			173,037
Accrued investment income	138,789			144,481
Current federal and foreign income taxes	13,398			703
Deferred federal and foreign income taxes	—			35,490
Other assets	762,743			501,413
Total assets	$	26,643,428		$	24,895,977
Liabilities and Equity
Liabilities:
Reserves for losses and loss expenses	$	12,583,249		$	11,966,448
Unearned premiums	3,656,507			3,359,991
Due to reinsurers	360,314			256,917
Trading account securities sold but not yet purchased	36,143			38,120
Deferred federal and foreign income taxes	17,706			—
Other liabilities	1,244,888			1,005,184
Senior notes and other debt	1,427,575			1,882,028
Subordinated debentures	1,198,704			907,491
Total liabilities	20,525,086			19,416,179
Equity:
Preferred stock, par value $.10 per share:
Authorized 5,000,000 shares; issued and outstanding — none	—			—
Common stock, par value $.20 per share:
Authorized 500,000,000 shares, issued and outstanding, net of treasury shares, 183,411,907 and 182,993,640 shares, respectively	70,535			70,535
Additional paid-in capital	1,056,042			1,039,633
Retained earnings	7,932,372			7,558,619
Accumulated other comprehensive loss	(257,299		)	(510,470		)
Treasury stock, at cost, 169,264,857 and 169,683,237 shares, respectively	(2,726,711		)	(2,720,466		)
Total common stockholders’ equity	6,074,939			5,437,851
Noncontrolling interests	43,403			41,947
Total equity	6,118,342			5,479,798
Total liabilities and equity	$	26,643,428		$	24,895,977

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY



	Year Ended December 31,
(In thousands, except per share data)	2019			2018			2017
COMMON STOCK:
Beginning and end of period	$	70,535		$	70,535		$	70,535
ADDITIONAL PAID IN CAPITAL:
Beginning of period	$	1,039,633		$	1,024,772		$	1,013,935
Restricted stock units issued	(32,370		)	(19,547		)	(27,959		)
Restricted stock units expensed	48,779			34,408			38,796
End of period	$	1,056,042		$	1,039,633		$	1,024,772
RETAINED EARNINGS:
Beginning of period	$	7,558,619		$	6,956,882		$	6,595,987
Cumulative effect adjustment resulting from changes in accounting principles	—			215,939			—
Net income to common stockholders	681,944			640,749			549,094
Dividends ($1.68, $1.39, and $1.03 per share, respectively)	(308,191		)	(254,951		)	(188,199		)
End of period	$	7,932,372		$	7,558,619		$	6,956,882
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME:
Unrealized investment gains (losses):
Beginning of period	$	(91,491	)	$	375,421		$	427,154
Cumulative effect adjustment resulting from changes in accounting principles	—			(214,539		)	—
Unrealized gains (losses) on securities not other-than-temporarily impaired	215,636			(252,241		)	(52,628		)
Unrealized gains (losses) on other-than-temporarily impaired securities	369			(132		)	895
End of period	124,514			(91,491		)	375,421
Currency translation adjustments:
Beginning of period	(418,979		)	(306,880		)	(371,586		)
Net change in period	37,166			(112,099		)	64,706
End of period	(381,813		)	(418,979		)	(306,880		)
Total accumulated other comprehensive (loss) income	$	(257,299	)	$	(510,470	)	$	68,541
TREASURY STOCK:
Beginning of period	$	(2,720,466	)	$	(2,709,386	)	$	(2,688,817	)
Stock exercised/vested	11,431			12,981			26,511
Stock issued	549			689			727
Stock repurchased	(18,225		)	(24,750		)	(47,807		)
End of period	$	(2,726,711	)	$	(2,720,466	)	$	(2,709,386	)
NONCONTROLLING INTERESTS:
Beginning of period	$	41,947		$	39,819		$	33,926
(Distributions) contributions	(688		)	(6,143		)	1,631
Net income	2,041			8,317			4,243
Other comprehensive income (loss), net of tax	103			(46		)	19
End of period	$	43,403		$	41,947		$	39,819

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Year Ended December 31,
(In thousands)	2019			2018			2017
CASH FROM OPERATING ACTIVITIES:
Net income to common stockholders	$	681,944		$	640,749		$	549,094
Adjustments to reconcile net income to net cash from operating activities:
Net realized and unrealized gains on investments	(120,703		)	(154,488		)	(335,858		)
Depreciation and amortization	113,387			131,108			112,956
Noncontrolling interests	2,041			8,317			4,243
Investment funds	(69,194		)	(109,349		)	(69,333		)
Stock incentive plans	49,274			36,591			40,490
Change in:
Arbitrage trading account	(26,553		)	(19,093		)	(4,896		)
Premiums and fees receivable	(189,151		)	(43,813		)	(67,752		)
Reinsurance accounts	(165,898		)	(165,287		)	(66,542		)
Deferred policy acquisition costs	(20,057		)	7,788			30,343
Current income taxes	(12,530		)	(11,950		)	25,859
Deferred income taxes	7,130			(74,761		)	(16,893		)
Reserves for losses and loss expenses	612,254			339,015			438,530
Unearned premiums	301,355			84,142			4,160
Other	(19,506		)	(48,770		)	66,482
Net cash from operating activities	1,143,793			620,199			710,883
CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from sale of fixed maturity securities	2,093,271			3,525,149			4,035,162
Proceeds from sale of equity securities	79,963			497,989			195,270
Distributions (contributions) from investment funds	194,663			(79,635		)	247,404
Proceeds from maturities and prepayments of fixed maturity securities	2,933,980			2,676,455			3,556,744
Purchase of fixed maturity securities	(5,352,886		)	(6,677,753		)	(7,940,957		)
Purchase of equity securities	(172,978		)	(85,610		)	(27,522		)
Real estate purchased	(146,752		)	(514,064		)	(236,039		)
Change in loans receivable	3,481			(13,204		)	27,135
Net additions to property, furniture and equipment	(60,457		)	(49,860		)	(115,719		)
Change in balances due from security brokers	2,844			4,262			(4,372		)
Cash received in connection with business disposition	—			8,664			—
Payment for business purchased, net of cash acquired	—			(6,637		)	(70,570		)
Net cash used in investing activities	(424,871		)	(714,244		)	(333,464		)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Net proceeds from issuance of debt	290,974			294,562			6,983
Repayment of senior notes and other debt	(456,360		)	(4,524		)	(20		)
Cash dividends to common stockholders	(308,191		)	(254,951		)	(188,199		)
Purchase of common treasury shares	(18,225		)	(24,750		)	(47,807		)
Other, net	(21,391		)	(17,740		)	(6,043		)
Net cash used in financing activities	(513,193		)	(7,403		)	(235,086		)
Net impact on cash due to change in foreign exchange rates	379			(31,421		)	12,853
Net increase (decrease) in cash and cash equivalents	206,108			(132,869		)	155,186
Cash and cash equivalents at beginning of year	817,602			950,471			795,285
Cash and cash equivalents at end of year	$	1,023,710		$	817,602		$	950,471

See accompanying notes to consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2019**,** 2018 and 2017

(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. 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, reserves for losses and loss expenses and premium estimates. Actual results could differ from those estimates.

Reclassifications have been made in the 2018 and 2017 financial statements as originally reported to conform to the presentation of the 2019 financial statements. Shares outstanding and per share amounts have been adjusted to reflect the 3-for-2 common stock split effected on April 2, 2019. Additionally, commencing with the first quarter of 2019, the Company renamed the Reinsurance segment as Reinsurance & Monoline Excess, and reclassified the monoline excess business from the Insurance segment to such renamed segment. The reclassified business includes operations that solely retain risk on an excess basis.

(B) Revenue recognition

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

Audit premiums are recognized when they are reliably determinable. The change in accruals for earned but unbilled audit premiums increased (decreased) net premiums written and premiums earned by $4 million, $(4) million and $8 million in 2019, 2018 and 2017, 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.

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 7,575,168 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 $41 million and $45 million at December 31, 2019 and 2018, 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, $54 million and $50 million for 2019, 2018 and 2017, 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, 2019 indicated that there were no material impairment losses related to goodwill and other intangible assets. Intangible assets of $99 million and $104 million are included in other assets as of December 31, 2019 and 2018, 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 $160 million, $155 million and $145 million in 2019, 2018 and 2017, respectively. Income taxes paid were $125 million, $186 million and $207 million in 2019, 2018 and 2017, 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 February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 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 are determined based upon the present value of cash flows. Finance leases 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 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 was effective for reporting periods beginning after December 15, 2018. As permitted by the rules, the Company adopted the new guidance prospectively effective January 1, 2019. The Company elected to use the practical expedient permitted by the transition guidance which allowed companies to not reassess existing lease classifications for already effective leases. The adoption of this guidance resulted in the recognition of a right-of-use asset of $185 million and a lease liability of $215 million (prior to adoption the Company had a $30 million

deferred rent liability recognized) reported within other assets and other liabilities, respectively, in the consolidated balance sheet. The adoption of this guidance did not have an impact on the Company's results of operations or liquidity.

All other accounting and reporting standards that became effective in 2019 were either not applicable to the Company or their adoption did not have a material impact on the Company.

Accounting and reporting standards that are not yet effective:

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which amends the accounting guidance for credit losses on financial instruments. The updated guidance amends the current other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. This guidance also applies a new current expected credit loss model for determining credit-related impairments for financial instruments measured at amortized cost, such as reinsurance recoverables. The updated guidance is effective for reporting periods beginning after December 15, 2019.

The adoption of this guidance will result in the recognition of an allowance for credit loss in connection with operating assets (such as premiums and fees receivable and due from reinsurers) of less than 0.25% of these assets and a corresponding cumulative effect adjustment that will decrease common stockholders' equity. Certain investments (primarily fixed maturity securities available for sale) will also establish an allowance for credit loss of approximately 0.25% of these assets, with a cumulative effect adjustment decreasing retained earnings and increasing AOCI by offsetting amounts, resulting in no impact to total common stockholders' equity.

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, 2019 and 2018:



(In thousands)
December 31, 2019	Unrealized investment gains (losses)				Currency translation adjustments			Accumulated other comprehensive (loss) income
Changes in AOCI
Beginning of period	$	(91,491	)		$	(418,979	)	$	(510,470	)
Other comprehensive gains before reclassifications	224,011				37,166			261,177
Amounts reclassified from AOCI	(8,109		)		—			(8,109		)
Other comprehensive gain	215,902				37,166			253,068
Unrealized investment gain related to non-controlling interest	103				—			103
Ending balance	$	124,514			$	(381,813	)	$	(257,299	)
Amounts reclassified from AOCI
Pre-tax	$	(10,265	)	(1)	$	—		$	(10,265	)
Tax effect	2,156			(2)	—			2,156
After-tax amounts reclassified	$	(8,109	)		$	—		$	(8,109	)
Other comprehensive gain
Pre-tax	$	261,970			$	37,166		$	299,136
Tax effect	(46,068		)		—			(46,068		)
Other comprehensive gain	$	215,902			$	37,166		$	253,068



(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 income 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	)

(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, 2019 and 2018, investments in fixed maturity securities were as follows:



(In thousands)	Amortized Cost			Gross Unrealized					Fair Value		Carrying Value
Gains			Losses
December 31, 2019
Held to maturity:
State and municipal	$	70,312		$	13,000	$	—		$	83,312	$	70,312
Residential mortgage-backed	8,371			994		—			9,365		8,371
Total held to maturity	78,683			13,994		—			92,677		78,683
Available for sale:
U.S. government and government agency	775,157			13,249		(1,475		)	786,931		786,931
State and municipal:
Special revenue	2,343,209			64,586		(4,152		)	2,403,643		2,403,643
State general obligation	359,298			22,074		(97		)	381,275		381,275
Pre-refunded	364,571			20,342		(128		)	384,785		384,785
Corporate backed	255,230			7,232		(903		)	261,559		261,559
Local general obligation	432,333			32,684		(647		)	464,370		464,370
Total state and municipal	3,754,641			146,918		(5,927		)	3,895,632		3,895,632
Mortgage-backed securities:
Residential (1)	1,298,145			23,230		(5,155		)	1,316,220		1,316,220
Commercial	304,506			5,214		(346		)	309,374		309,374
Total mortgage-backed securities	1,602,651			28,444		(5,501		)	1,625,594		1,625,594
Asset-backed securities	2,802,588			9,532		(21,490		)	2,790,630		2,790,630
Corporate:
Industrial	2,260,073			72,900		(3,800		)	2,329,173		2,329,173
Financial	1,447,589			37,681		(4,118		)	1,481,152		1,481,152
Utilities	325,762			15,281		(402		)	340,641		340,641
Other	5,219			230		—			5,449		5,449
Total corporate	4,038,643			126,092		(8,320		)	4,156,415		4,156,415
Foreign government	924,284			16,465		(93,673		)	847,076		847,076
Total available for sale	13,897,964			340,700		(136,386		)	14,102,278		14,102,278
Total investments in fixed maturity securities	$	13,976,647		$	354,694	$	(136,386	)	$	14,194,955	$	14,180,961



(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

(1) Gross unrealized gains (losses) for mortgage-backed securities include $314,347 and ($55,090) as of December 31, 2019 and 2018, 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, 2019, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay obligations.



(In thousands)	Amortized Cost		Fair Value
Due in one year or less	$	959,583	$	917,059
Due after one year through five years	5,010,862		5,087,806
Due after five years through ten years	3,391,154		3,511,621
Due after ten years	3,004,026		3,043,510
Mortgage-backed securities	1,611,022		1,634,959
Total	$	13,976,647	$	14,194,955

At December 31, 2019 and 2018, 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, 2019, investments with a carrying value of $1,639 million were on deposit in custodial or trust accounts, of which $1,219 million was on deposit with insurance regulators, $380 million was on deposit in support of the Company’s underwriting activities at Lloyd’s, $36 million was on deposit as security for reinsurance clients and $4 million was on deposit as security for letters of credit issued in support of the Company’s reinsurance operations.

(4) Investments in Equity Securities

At December 31, 2019 and 2018, investments in equity securities were as follows:



(In thousands)	Cost			Gross Unrealized					Fair Value		Carrying Value
Gains			Losses
December 31, 2019
Common stocks	$	175,928		$	16,967	$	(26,090	)	$	166,805	$	166,805
Preferred stocks	169,171			148,243		(3,599		)	313,815		313,815
Total	$	345,099		$	165,210	$	(29,689	)	$	480,620	$	480,620

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

(5) Arbitrage Trading Account

At December 31, 2019 and 2018, the fair value and carrying value of the arbitrage trading account were $401 million and $453 million, respectively. The primary focus of the trading account is merger arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Arbitrage investing differs from other types of investing in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less).

The Company uses put options and call options in order to mitigate the impact of potential changes in market conditions on the merger arbitrage trading account. These options are reported at fair value. As of December 31, 2019, the fair value of long option contracts outstanding was $9 thousand (notional amount of $15.5 million) and the fair value of short option contracts outstanding was $56 thousand (notional amount of $17.1 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)	2019			2018			2017
Investment income earned on:
Fixed maturity securities, including cash and cash equivalents and loans receivable	$	517,925		$	519,269		$	473,101
Investment funds	69,194			109,349			68,169
Arbitrage trading account	34,585			28,157			19,145
Real estate	24,218			18,591			19,975
Equity securities	5,439			3,230			2,350
Gross investment income	651,361			678,596			582,740
Investment expense	(5,747		)	(4,361		)	(6,952		)
Net investment income	$	645,614		$	674,235		$	575,788

(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 $232 million as of December 31, 2019.

Investment funds consist of the following:



	Carrying Value as of December 31,				Income (Losses)
(In thousands)	2019		2018		2019			2018		2017
Real estate	$	412,275	$	642,137	$	19,154		$	61,453	$	45,068
Financial services	280,705		195,706		29,005			11,044		3,762
Energy	156,869		183,627		(18,136		)	7,084		6,147
Transportation	147,034		136,640		14,193			15,390		1,686
Other funds	216,652		174,708		24,978			14,378		11,506
Total	$	1,213,535	$	1,332,818	$	69,194		$	109,349	$	68,169

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)	2019		2018
Properties in operation	$	1,351,249	$	1,279,584
Properties under development	754,701		677,508
Total	$	2,105,950	$	1,957,092

In 2019, properties in operation included a long-term ground lease in Washington, D.C., a hotel in Memphis, Tennessee, two office complexes in New York City, office buildings in West Palm Beach and Palm Beach, Florida, and an office building in London, U.K. Properties in operation are net of accumulated depreciation and amortization of $59,832,000 and $44,340,000 as of December 31, 2019 and 2018, respectively. Related depreciation expense was $15,033,000 and $20,644,000 for the years ended December 31, 2019 and 2018, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $59,975,701 in 2020, $62,145,941 in 2021, $62,734,252 in 2022, $56,477,620 in 2023, $54,281,781 in 2024 and $573,636,251 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 2019 and 2018.

(9) Loans Receivable

Loans receivable are as follows:



	As of December 31,
(In thousands)	2019			2018
Amortized cost (net of valuation allowance):
Real estate loans	$	58,541		$	62,289
Commercial loans	33,258			32,524
Total	$	91,799		$	94,813

Fair value:
Real estate loans	$	59,853		$	63,047
Commercial loans	34,760			34,026
Total	$	94,613		$	97,073

Valuation allowance:
Specific	$	165		$	1,200
General	1,981			2,183
Total	$	2,146		$	3,383

	For the Year Ended December 31,
	2019			2018
Decrease in valuation allowance	$	(1,237	)	$	—

Loans receivable in non-accrual status were $0.2 million and $1.2 million as of December 31, 2019 and 2018, 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, 2019, 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)	2019			2018			2017
Net realized and unrealized gains (losses) on investments in earnings
Fixed maturity securities:
Gains	$	23,900		$	26,752		$	28,217
Losses	(13,636		)	(13,733		)	(5,342		)
Equity securities (1):
Net realized gains on investment sales	23,306			435,150			154,539
Change in unrealized gains (losses)	85,292			(320,413		)	—
Investment funds (2)	(2,825		)	(212		)	125,423
Real estate	5,965			27,816			12,880
Loans receivable	(970		)	2,838			—
Other	(329		)	1,977			20,141
Net realized and unrealized gains on investments in earnings before OTTI	120,703			160,175			335,858
Other-than-temporary impairments (3)	—			(5,687		)	—
Net realized and unrealized gains on investments in earnings	120,703			154,488			335,858
Income tax expense	(25,348		)	(32,442		)	(117,550		)
After-tax net realized and unrealized gains on investments in earnings	$	95,355		$	122,046		$	218,308



Change in unrealized investment gains (losses) of available for sales securities:
Fixed maturity securities	$	271,825		$	(297,084	)	$	(2,192	)
Previously impaired fixed maturity securities	369			(132		)	895
Equity securities available for sale (4)	—			—			(77,971		)
Investment funds	(2,299		)	(5,672		)	10,179
Other	(7,925		)	151			(336		)
Total change in unrealized investment gains (losses)	261,970			(302,737		)	(69,425		)
Income tax (expense) benefit	(46,068		)	50,410			17,673
Noncontrolling interests	103			(46		)	19
After-tax change in unrealized investment gains (losses) of available for sale securities	$	216,005		$	(252,373	)	$	(51,733	)

(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) There were no OTTI for the years ended December 31, 2019 and 2017. For the year ended December 31, 2018, OTTI related to fixed maturity securities was $6 million.

(4) Effective January 1, 2018, the Company adopted 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.

(11) Securities in an Unrealized Loss Position

The following tables summarize all fixed maturity securities in an unrealized loss position at December 31, 2019 and 2018 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, 2019
U.S. government and government agency	$	83,837	$	618	$	53,089	$	857	$	136,926	$	1,475
State and municipal	365,184		4,245		127,210		1,682		492,394		5,927
Mortgage-backed securities	301,358		2,281		180,148		3,220		481,506		5,501
Asset-backed securities	755,259		2,307		774,508		19,183		1,529,767		21,490
Corporate	307,367		3,148		121,470		5,172		428,837		8,320
Foreign government	164,536		32,028		107,266		61,645		271,802		93,673
Fixed maturity securities	$	1,977,541	$	44,627	$	1,363,691	$	91,759	$	3,341,232	$	136,386

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

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, 2019 is presented in the table below:



($ in thousands)	Number of Securities	Aggregate Fair Value		Gross Unrealized Loss
Foreign government	21	$	79,747	$	92,369
Corporate	14	65,710		4,319
Asset-backed securities	5	437		113
Mortgage-backed securities	5	954		17
Total	45	$	146,848	$	96,818

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, 2019, there were no OTTI recognized in earnings for fixed maturity securities. For the year ended December 31, 2018, there were $6 million of OTTI recognized 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. 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, 2019 and 2018 by level:



(In thousands)	Total		Level 1		Level 2		Level 3
December 31, 2019
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency	$	786,931	$	—	$	786,931	$	—
State and municipal	3,895,632		—		3,895,632		—
Mortgage-backed securities	1,625,594		—		1,625,594		—
Asset-backed securities	2,790,630		—		2,790,630		—
Corporate	4,156,415		—		4,156,415		—
Foreign government	847,076		—		847,076		—
Total fixed maturity securities available for sale	14,102,278		—		14,102,278		—
Equity securities:
Common stocks	166,805		157,752		—		9,053
Preferred stocks	313,815		—		307,310		6,505
Total equity securities	480,620		157,752		307,310		15,558
Arbitrage trading account	400,809		381,061		19,748		—
Total	$	14,983,707	$	538,813	$	14,429,336	$	15,558
Liabilities:
Trading account securities sold but not yet purchased	$	36,143	$	36,143	$	—	$	—

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

The following tables summarize changes in Level 3 assets and liabilities for the years ended December 31, 2019 and 2018:



	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, 2019
Assets:
Fixed maturity securities available for sale:
Asset-backed securities	$	99	$	(26	)	$	61	$	—	$	—	$	(134	)	$	—	$	—	$	—
Total	99		(26		)	61		—		—		(134		)	—		—		—
Equity securities:
Common stocks	8,596		2,005					—		—		(1,548		)	—		—		9,053
Preferred stocks	3,945		(42		)	—		—		2,602		—			—		—		6,505
Total	12,541		1,963			—		—		2,602		(1,548		)	—		—		15,558
Arbitrage trading account	17,308		(8,731		)	—		—		14,767		(38,233		)	—		14,889		—
Total	$	29,948	$	(6,794	)	$	61	$	—	$	17,369	$	(39,915	)	$	—	$	14,889	$	15,558
Liabilities:
Trading account securities sold but not yet purchased	$	793	$	133		$	—	$	—	$	7,609	$	(8,535	)	$	—	$	—	$	—

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
Liabilities:
Trading account securities sold but not yet purchased	$	—	$	(67	)	$	—	$	—	$	860	$	—		$	—	$	—	$	793

For the year ended December 31, 2019, there were two common stocks transferred into Level 3 in the arbitrage trading account where publicly traded prices were no longer available, and both were sold by year end. 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.

(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 may 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 claims handling procedures, 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 & Monoline Excess 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, 2019, 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, 2010 to 2018 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, 2019 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, 2019
For the Year Ended December 31,
	Unaudited
Accident Year	2010		2011		2012		2013		2014		2015		2016		2017		2018		2019		IBNR		Cumulative Number of Reported Claims
2010	$	612,467	$	616,023	$	589,921	$	588,602	$	575,528	$	572,785	$	571,637	$	569,440	$	564,873	$	561,579	$	19,742	22
2011	—		665,420		671,537		657,679		656,976		651,973		647,091		643,195		632,382		642,774		22,746		23
2012	—		—		691,803		700,539		701,144		707,326		711,287		721,460		715,996		714,020		32,727		23
2013	—		—		—		750,054		790,314		782,260		782,039		802,908		809,250		803,856		49,079		25
2014	—		—		—		—		847,034		848,641		846,644		851,044		863,899		870,017		83,500		26
2015	—		—		—		—		—		951,028		986,655		961,441		964,598		966,662		134,615		25
2016	—		—		—		—		—		—		1,018,009		1,010,984		1,019,893		1,031,150		245,835		25
2017	—		—		—		—		—		—		—		1,066,362		1,100,127		1,122,209		377,307		25
2018	—		—		—		—		—		—		—		—		1,104,631		1,131,202		606,500		23
2019	—		—		—		—		—		—		—		—		—		1,237,276		937,110		20
Total																			$	9,080,745



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2010		2011		2012		2013		2014		2015		2016		2017		2018		2019
2010	$	45,194	$	128,948	$	246,647	$	334,054	$	414,945	$	459,478	$	489,077	$	506,283	$	522,939	$	531,085
2011	—		48,830		141,192		265,071		377,769		469,004		522,369		554,152		573,236		591,990
2012	—		—		57,568		157,316		298,095		415,890		511,601		578,617		620,507		651,000
2013	—		—		—		63,293		188,240		330,928		471,648		587,102		647,891		693,306
2014	—		—		—		—		78,921		190,876		338,365		480,418		594,488		680,436
2015	—		—		—		—		—		82,712		210,773		382,185		538,071		676,037
2016	—		—		—		—		—		—		69,477		208,991		390,231		558,539
2017	—		—		—		—		—		—		—		80,037		255,849		453,389
2018	—		—		—		—		—		—		—		—		86,858		264,392
2019	—		—		—		—		—		—		—		—		—		88,260
Total																			$	5,188,434
	Reserves for loss and loss adjustment expenses before 2010, net of reinsurance																		106,200
	Reserves for loss and loss adjustment expenses, net of reinsurance																		$	3,998,511

Workers' Compensation

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2019
For the Year Ended December 31,
	Unaudited
Accident Year	2010		2011		2012		2013		2014		2015		2016		2017		2018		2019		IBNR		Cumulative Number of Reported Claims
2010	$	352,138	$	355,305	$	411,527	$	420,604	$	426,622	$	429,952	$	429,762	$	427,698	$	424,374	$	424,195	$	13,552	45
2011	—		413,429		444,887		457,134		470,026		472,087		474,076		475,729		471,471		473,766		17,276		46
2012	—		—		501,681		501,810		503,956		503,863		509,167		512,707		508,169		506,730		24,736		48
2013	—		—		—		552,570		547,295		546,995		543,238		547,000		542,274		541,926		29,205		53
2014	—		—		—		—		639,436		637,307		627,767		617,242		615,435		604,029		44,633		57
2015	—		—		—		—		—		712,800		690,525		650,997		641,169		626,431		60,862		58
2016	—		—		—		—		—		—		702,716		696,339		684,700		660,508		71,710		57
2017	—		—		—		—		—		—		—		762,093		733,505		689,559		107,981		57
2018	—		—		—		—		—		—		—		—		778,964		724,463		153,587		55
2019	—		—		—		—		—		—		—		—		—		783,244		372,381		50
Total																			$	6,034,851



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2010		2011		2012		2013		2014		2015		2016		2017		2018		2019
2010	$	108,675	$	215,882	$	281,280	$	320,154	$	344,631	$	362,078	$	374,013	$	382,665	$	388,405	$	392,672
2011	—		106,899		236,207		309,509		355,909		385,759		408,304		420,945		428,811		436,905
2012	—		—		115,536		255,063		339,560		387,368		419,588		437,196		451,991		459,119
2013	—		—		—		117,900		277,538		363,028		414,160		447,894		466,580		479,104
2014	—		—		—		—		148,405		319,743		412,611		471,235		503,915		521,141
2015	—		—		—		—		—		139,320		323,744		421,734		477,541		512,933
2016	—		—		—		—		—		—		142,998		338,835		446,072		504,850
2017	—		—		—		—		—		—		—		153,456		362,299		468,817
2018	—		—		—		—		—		—		—		—		171,006		397,464
2019	—		—		—		—		—		—		—		—		—		184,715
Total																			$	4,357,720
			Reserves for loss and loss adjustment expenses before 2010, net of reinsurance																193,837
			Reserves for loss and loss adjustment expenses, net of reinsurance																$	1,870,968

Professional Liability

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2019
For the Year Ended December 31,
	Unaudited
Accident Year	2010		2011		2012		2013		2014		2015		2016		2017		2018		2019		IBNR		Cumulative Number of Reported Claims
2010	$	147,632	$	165,689	$	179,344	$	177,951	$	176,653	$	172,493	$	174,796	$	177,757	$	182,717	$	182,860	$	62	4
2011	—		179,818		165,291		187,074		189,988		176,936		173,309		176,606		175,689		176,230		2,187		4
2012	—		—		238,978		242,541		265,690		251,230		239,458		245,945		244,730		245,338		7,091		5
2013	—		—		—		269,993		248,080		243,887		249,797		271,469		280,018		285,262		14,062		6
2014	—		—		—		—		253,992		247,373		260,498		244,454		239,982		258,781		26,194		6
2015	—		—		—		—		—		260,216		258,780		275,608		276,842		292,401		37,634		7
2016	—		—		—		—		—		—		311,099		325,241		361,996		402,929		56,934		8
2017	—		—		—		—		—		—		—		333,758		332,864		339,021		112,457		9
2018	—		—		—		—		—		—		—		—		335,728		322,952		168,475		9
2019	—		—		—		—		—		—		—		—		—		337,228		259,157		9
Total																			$	2,843,002



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2010		2011		2012		2013		2014		2015		2016		2017		2018		2019
2010	$	14,806	$	58,851	$	108,438	$	129,619	$	144,336	$	160,466	$	164,894	$	171,206	$	178,756	$	179,865
2011	—		18,726		62,305		102,898		134,253		150,487		158,678		166,949		168,526		170,205
2012	—		—		21,697		86,734		128,245		159,285		190,584		214,821		223,988		232,160
2013	—		—		—		23,939		63,951		119,567		177,525		207,020		249,005		258,394
2014	—		—		—		—		19,446		83,694		138,678		176,134		199,337		216,228
2015	—		—		—		—		—		20,415		85,470		139,835		187,664		216,575
2016	—		—		—		—		—		—		28,631		102,661		201,854		255,841
2017	—		—		—		—		—		—		—		36,579		96,456		163,003
2018	—		—		—		—		—		—		—		—		28,231		99,789
2019	—		—		—		—		—		—		—		—		—		31,790
Total																			$	1,823,850
	Reserves for loss and loss adjustment expenses before 2010, net of reinsurance																		15,104
	Reserves for loss and loss adjustment expenses, net of reinsurance																		$	1,034,256

Commercial Automobile

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2019
For the Year Ended December 31,
	Unaudited
Accident Year	2010		2011		2012		2013		2014		2015		2016		2017		2018		2019		IBNR		Cumulative Number of Reported Claims
2010	$	310,591	$	320,098	$	330,224	$	328,901	$	332,748	$	331,615	$	330,586	$	330,297	$	329,976	$	329,768	$	144	37
2011	—		312,224		320,920		328,320		331,732		341,394		341,200		342,094		343,566		343,433		964		37
2012	—		—		314,309		326,831		342,588		355,609		364,084		364,328		366,541		365,806		807		37
2013	—		—		—		327,514		349,136		368,894		376,860		367,264		366,822		365,953		1,592		39
2014	—		—		—		—		363,913		385,251		418,161		416,123		413,589		413,424		4,385		42
2015	—		—		—		—		—		389,660		417,053		423,180		431,376		432,415		7,808		46
2016	—		—		—		—		—		—		431,261		430,911		442,210		443,268		18,162		45
2017	—		—		—		—		—		—		—		430,768		428,708		430,499		31,607		41
2018	—		—		—		—		—		—		—		—		442,788		462,756		67,700		40
2019	—		—		—		—		—		—		—		—		—		483,206		162,432		37
Total																			$	4,070,528



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2010		2011		2012		2013		2014		2015		2016		2017		2018		2019
2010	$	136,029	$	208,790	$	263,639	$	295,355	$	313,262	$	324,997	$	326,804	$	327,240	$	327,863	$	328,006
2011	—		135,350		211,756		262,685		296,370		321,814		333,987		338,325		340,360		340,799
2012	—		—		136,844		215,214		273,446		312,342		344,326		355,631		360,681		361,755
2013	—		—		—		142,929		218,596		267,253		322,441		343,556		353,424		362,152
2014	—		—		—		—		155,572		237,665		328,125		365,376		394,063		402,013
2015	—		—		—		—		—		160,024		265,083		324,976		370,037		397,666
2016	—		—		—		—		—		—		184,516		279,381		341,423		390,359
2017	—		—		—		—		—		—		—		180,755		267,587		327,135
2018	—		—		—		—		—		—		—		—		180,162		281,651
2019	—		—		—		—		—		—		—		—		—		185,344
Total																			$	3,376,880
			Reserves for loss and loss adjustment expenses before 2010, net of reinsurance																4,313
			Reserves for loss and loss adjustment expenses, net of reinsurance																$	697,961

Short-tail lines

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2019
For the Year Ended December 31,
	Unaudited
Accident Year	2010		2011		2012		2013		2014		2015		2016		2017		2018		2019		IBNR		Cumulative Number of Reported Claims
2010	$	385,319	$	370,080	$	358,254	$	355,602	$	345,937	$	346,380	$	346,493	$	346,074	$	345,777	$	345,546	$	233	19
2011	—		478,520		471,678		463,253		460,030		457,182		450,325		449,529		451,410		451,064		649		21
2012	—		—		529,564		537,716		538,141		533,491		507,509		506,464		508,354		507,416		2,229		28
2013	—		—		—		576,784		586,382		577,353		553,680		552,192		548,673		546,766		3,405		30
2014	—		—		—		—		707,121		712,320		664,718		663,342		664,169		664,416		4,366		34
2015	—		—		—		—		—		743,454		731,950		728,186		726,748		718,506		10,676		37
2016	—		—		—		—		—		—		773,945		777,270		764,278		758,881		12,383		40
2017	—		—		—		—		—		—		—		753,512		753,803		748,451		18,189		46
2018	—		—		—		—		—		—		—		—		760,474		750,780		33,738		52
2019	—		—		—		—		—		—		—		—		—		726,820		168,528		42
Total																			$	6,218,646



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2010		2011		2012		2013		2014		2015		2016		2017		2018		2019
2010	$	245,037	$	325,163	$	337,688	$	346,622	$	340,066	$	342,773	$	343,899	$	344,887	$	344,908	$	344,989
2011	—		303,016		417,730		436,718		440,937		445,234		446,944		447,538		450,352		450,439
2012	—		—		281,830		454,731		504,954		515,520		498,207		499,355		503,614		504,342
2013	—		—		—		314,122		488,140		536,630		531,474		538,304		539,553		540,158
2014	—		—		—		—		372,670		599,119		613,530		632,796		648,072		655,332
2015	—		—		—		—		—		395,440		612,369		668,012		690,037		699,770
2016	—		—		—		—		—		—		417,424		671,219		712,815		728,122
2017	—		—		—		—		—		—		—		445,560		690,029		718,949
2018	—		—		—		—		—		—		—		—		415,206		662,185
2019	—		—		—		—		—		—		—		—		—		405,213
Total																			$	5,709,499
	Reserves for loss and loss adjustment expenses before 2010, net of reinsurance																		1,019
	Reserves for loss and loss adjustment expenses, net of reinsurance																		$	510,166

Reinsurance & Monoline Excess

Casualty

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2019
For the Year Ended December 31,
	Unaudited
Accident Year	2010		2011		2012		2013		2014		2015		2016		2017		2018		2019		IBNR
2010	$	290,438	$	298,265	$	288,146	$	276,049	$	265,455	$	256,271	$	252,900	$	250,596	$	249,599	$	249,472	$	14,322
2011	—		290,770		309,836		304,352		299,244		307,969		304,780		296,280		292,762		299,130		16,563
2012	—		—		331,991		335,867		330,882		325,224		333,982		336,492		334,588		331,270		17,481
2013	—		—		—		319,491		270,382		275,539		285,032		293,686		299,224		303,568		25,073
2014	—		—		—		—		320,579		320,226		319,573		331,339		325,497		324,941		34,043
2015	—		—		—		—		—		259,922		232,272		230,856		252,959		293,718		43,622
2016	—		—		—		—		—		—		241,533		253,501		246,019		268,508		51,973
2017	—		—		—		—		—		—		—		232,010		221,769		239,788		85,671
2018	—		—		—		—		—		—		—		—		222,100		211,227		109,087
2019	—		—		—		—		—		—		—		—		—		237,412		196,623
Total																			$	2,759,034



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2010		2011		2012		2013		2014		2015		2016		2017		2018		2019
2010	$	17,814	$	45,338	$	76,845	$	105,912	$	128,476	$	150,665	$	166,361	$	181,857	$	191,532	$	198,822
2011	—		17,812		52,231		97,476		133,808		169,219		192,724		208,347		220,566		232,452
2012	—		—		22,329		62,037		111,538		152,590		187,196		219,637		241,318		257,010
2013	—		—		—		28,910		63,718		110,306		144,405		178,174		205,716		226,083
2014	—		—		—		—		21,280		68,992		115,873		155,207		198,196		227,684
2015	—		—		—		—		—		17,866		48,445		91,198		141,348		178,657
2016	—		—		—		—		—		—		19,895		61,787		100,262		140,411
2017	—		—		—		—		—		—		—		16,473		40,138		69,465
2018	—		—		—		—		—		—		—		—		11,092		41,018
2019	—		—		—		—		—		—		—		—		—		14,574
Total																			$	1,586,176
	Reserves for loss and loss adjustment expenses before 2010, net of reinsurance																		383,199
			Reserves for loss and loss adjustment expenses, net of reinsurance																$	1,556,057

Monoline Excess

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2019
For the Year Ended December 31,
	Unaudited
Accident Year	2010		2011		2012		2013		2014		2015		2016		2017		2018		2019		IBNR
2010	$	135,639	$	123,497	$	120,272	$	118,712	$	102,424	$	104,732	$	100,065	$	94,986	$	95,374	$	99,944	$	15,731
2011	—		88,650		93,993		98,051		89,031		85,299		83,850		78,246		74,109		72,091		14,075
2012	—		—		72,366		73,230		73,670		73,653		72,441		67,878		69,361		67,205		11,249
2013	—		—		—		63,995		50,355		46,025		42,419		38,551		35,120		31,752		12,626
2014	—		—		—		—		63,561		57,558		49,478		45,758		41,671		42,541		15,347
2015	—		—		—		—		—		69,977		57,897		50,099		45,115		39,682		19,040
2016	—		—		—		—		—		—		72,657		70,281		71,404		64,957		23,676
2017	—		—		—		—		—		—		—		76,701		80,508		70,749		29,999
2018	—		—		—		—		—		—		—		—		77,820		72,505		36,930
2019	—		—		—		—		—		—		—		—		—		78,929		48,526
Total																			$	640,355



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2010		2011		2012		2013		2014		2015		2016		2017		2018		2019
2010	$	2,867	$	4,003	$	5,571	$	8,701	$	11,260	$	11,699	$	14,261	$	18,821	$	22,355	$	28,431
2011	—		2,593		4,848		6,395		14,042		15,684		18,638		20,164		21,463		23,686
2012	—		—		1,127		6,097		10,815		11,167		13,234		15,738		17,982		20,004
2013	—		—		—		647		1,897		2,158		3,008		3,396		4,418		5,349
2014	—		—		—		—		377		1,729		3,354		4,175		5,808		7,595
2015	—		—		—		—		—		2,069		2,481		3,272		4,099		4,416
2016	—		—		—		—		—		—		2,498		4,783		5,573		5,928
2017	—		—		—		—		—		—		—		6,282		12,810		15,356
2018	—		—		—		—		—		—		—		—		6,141		8,230
2019	—		—		—		—		—		—		—		—		—		6,241
Total																			$	125,236
	Reserves for loss and loss adjustment expenses before 2010, net of reinsurance																		765,323
	Reserves for loss and loss adjustment expenses, net of reinsurance																		$	1,280,442

Property

(In thousands)



Loss and Loss Expenses Incurred, Net of Reinsurance																					As of December 31, 2019
For the Year Ended December 31,
	Unaudited
Accident Year	2010		2011		2012		2013		2014		2015		2016		2017		2018		2019		IBNR
2010	$	58,367	$	55,399	$	52,306	$	51,186	$	51,230	$	50,694	$	50,571	$	50,398	$	50,630	$	50,362	$	208
2011	—		95,201		87,837		84,914		86,326		84,791		84,522		84,246		84,651		84,432		490
2012	—		—		103,833		94,661		86,330		85,334		83,814		83,822		84,746		84,555		1,032
2013	—		—		—		141,563		112,684		114,123		111,945		112,579		111,895		109,699		643
2014	—		—		—		—		113,126		96,636		97,279		100,011		99,250		98,912		1,685
2015	—		—		—		—		—		127,259		117,563		131,755		130,391		129,492		2,478
2016	—		—		—		—		—		—		168,129		174,570		181,757		181,002		4,891
2017	—		—		—		—		—		—		—		206,672		200,510		199,497		11,224
2018	—		—		—		—		—		—		—		—		108,342		112,152		19,159
2019	—		—		—		—		—		—		—		—		—		103,240		52,334
Total																			$	1,153,343



Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
	Unaudited
Accident Year	2010		2011		2012		2013		2014		2015		2016		2017		2018		2019
2010	$	23,424	$	37,483	$	42,153	$	43,634	$	44,550	$	46,141	$	48,745	$	49,001	$	49,749	$	49,690
2011	—		31,402		58,702		73,142		75,778		78,357		81,560		82,094		83,169		83,250
2012	—		—		15,663		51,641		64,098		70,524		77,412		78,971		81,673		82,541
2013	—		—		—		36,578		74,573		92,619		101,539		104,326		106,045		107,606
2014	—		—		—		—		38,803		66,869		82,172		88,317		91,452		93,160
2015	—		—		—		—		—		53,477		89,153		109,090		118,603		122,621
2016	—		—		—		—		—		—		78,936		133,576		157,491		168,605
2017	—		—		—		—		—		—		—		72,132		141,389		171,745
2018	—		—		—		—		—		—		—		—		34,004		65,193
2019	—		—		—		—		—		—		—		—		—		23,051
Total																			$	967,462
	Reserves for loss and loss adjustment expenses before 2010, net of reinsurance																		798
	Reserves for loss and loss adjustment expenses, net of reinsurance																		$	186,679

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



(In thousands)		December 31, 2019
Undiscounted reserves for loss and loss expenses, net of reinsurance:
	Other liability	$	3,998,511
	Workers' compensation	1,870,968
	Professional liability	1,034,256
	Commercial automobile	697,961
	Short-tail lines	510,166
	Other	92,495
	Insurance	8,204,357
	Casualty	1,556,057
	Monoline excess	1,280,442
	Property	186,679
	Reinsurance & Monoline Excess	3,023,178
Total undiscounted reserves for loss and loss expenses, net of reinsurance		$	11,227,535



(In thousands)		December 31, 2019
Due from reinsurers on unpaid claims:
	Other liability	$	518,759
	Workers' compensation	300,966
	Professional liability	509,828
	Commercial automobile	24,486
	Short-tail lines	243,333
	Other	46,197
	Insurance	1,643,569
	Casualty	113,332
	Monoline excess	38,384
	Property	89,966
	Reinsurance & Monoline Excess	241,682
Total due from reinsurers on unpaid claims		$	1,885,251



(In thousands)		December 31, 2019
Loss reserve discount:
	Other liability	$	—
	Workers' compensation	(10,976		)
	Professional liability	—
	Commercial automobile	—
	Short-tail lines	—
	Other	—
	Insurance	(10,976		)
	Casualty	(107,929		)
	Monoline excess	(410,632		)
	Property	—
	Reinsurance & Monoline Excess	(518,561		)
Total loss reserve discount		$	(529,537	)
Total gross reserves for loss and loss expenses		$	12,583,249

The following is supplementary information regarding average historical claims duration as of December 31, 2019:



Insurance
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years	1		2		3		4		5		6		7		8		9		10
Other liability	7.8	%	14.4	%	18.4	%	16.6	%	14.0	%	8.6	%	5.4	%	3.4	%	2.9	%	1.5	%
Workers' compensation	23.1	%	28.7	%	15.8	%	9.3	%	6.0	%	3.7	%	2.7	%	1.7	%	1.5	%	1.0	%
Professional liability	8.7	%	21.6	%	21.3	%	15.2	%	9.9	%	8.9	%	3.5	%	2.6	%	3.8	%	0.6	%
Commercial automobile	39.3	%	21.6	%	15.5	%	10.8	%	6.8	%	3.0	%	1.4	%	0.3	%	0.2	%	—	%
Short-tail lines	58.8	%	30.9	%	5.7	%	1.8	%	0.1	%	0.5	%	0.4	%	0.4	%	—	%	—	%

Reinsurance & Monoline Excess
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
Years	1		2		3		4		5		6		7		8		9		10
Casualty	6.8	%	12.3	%	14.2	%	13.1	%	11.4	%	8.9	%	6.2	%	5.0	%	3.9	%	2.9	%
Monoline excess	4.5	%	3.9	%	2.8	%	3.1	%	2.3	%	3.1	%	2.7	%	3.1	%	3.3	%	6.1	%
Property	34.9	%	31.8	%	14.6	%	5.9	%	3.6	%	2.4	%	2.6	%	0.9	%	0.8	%	—	%

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



(In thousands)	2019			2018			2017
Net reserves at beginning of year	$	10,248,883		$	10,056,914		$	9,590,265
Net provision for losses and loss expenses:
Claims occurring during the current year (1)	4,057,989			3,926,489			3,963,543
Increase (decrease) in estimates for claims occurring in prior years (2)	34,079			6,831			(5,165		)
Loss reserve discount accretion	39,048			41,382			43,970
Total	4,131,116			3,974,702			4,002,348
Net payments for claims:
Current year	985,599			964,808			1,027,405
Prior year	2,673,803			2,700,077			2,562,550
Total	3,659,402			3,664,885			3,589,955
Foreign currency translation	(22,599		)	(117,848		)	54,256
Net reserves at end of year	10,697,998			10,248,883			10,056,914
Ceded reserve at end of year	1,885,251			1,717,565			1,613,494
Gross reserves at end of year	$	12,583,249		$	11,966,448		$	11,670,408

Net change in premiums and losses occurring in prior years:
(Increase) decrease in estimates for claims occurring in prior years (2)	$	(34,079	)	$	(6,831	)	$	5,165
Retrospective premium adjustments for claims occurring in prior years (3)	53,511			45,638			32,162
Net favorable premium and reserve development on prior years	$	19,432		$	38,807		$	37,327


(1)	Claims occurring during the current year are net of loss reserve discounts of $20 million, $24 million and $22 million in 2019, 2018, and 2017, respectively.


(2)	The change in estimates for claims occurring in prior years is net of loss reserve discount. On an undiscounted basis, the estimates for claims occurring in prior years increased by $19 million in 2019, and decreased $4 million and $32 million in 2018 and 2017, respectively.


(3)	For certain retrospectively rated insurance polices and reinsurance agreements, changes in loss and loss expenses for prior years are offset by additional or return premiums.

Favorable prior year development (net of additional and return premiums) was $19 million in 2019**.**

Insurance - Reserves for the Insurance segment developed favorably by $21 million in 2019 (net of additional and return premiums). This overall favorable development resulted from more significant favorable development on workers’ compensation business, which was largely offset by unfavorable development on professional liability and general liability business.

For workers’ compensation, the favorable development was spread across many accident years, including prior to 2010, but was most significant in accident years 2014 through 2018, and particularly 2017 and 2018. The favorable workers’ compensation development reflects a continuation during 2019 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 and pharmacy benefit managers. Our initial loss ratio “picks” for this line of business over the past few accident years have contemplated an increase in loss cost trends and reflect decreasing premium rates in the marketplace; reported workers’ compensation losses in 2019 continued to be below our expectations at most of our operating units, and were below the assumptions underlying our initial loss ratio picks and our previous reserve estimates.

For professional liability business, the unfavorable development was driven mainly by an increase in the number of large losses reported in the lawyers professional liability and directors and officers (“D&O”) liability lines of business. Many of the lawyers large losses involved claims made against insured law firms relating to work performed on matters stemming from the 2008 financial crisis. These claims affected mainly accident years 2013 through 2016. In addition, for both of these lines of business, we

have seen evidence of social inflation in the form of higher jury awards on cases which go to trial, and corresponding higher demands from plaintiffs and higher values required to reach settlement on cases which do not go to trial. The unfavorable development for D&O affected mainly accident years 2014 through 2017.

For general liability business, most of the unfavorable development emanated from our excess and surplus lines (E&S) businesses, and was driven by an increase in the number of large losses reported. Many of these large losses were from construction and contracting classes of business, which have also been impacted by social inflation. The general liability unfavorable development impacted mainly accident years 2015 through 2018.

Reinsurance & Monoline Excess - Reserves for the Reinsurance & Monoline Excess segment developed unfavorably by $2 million in 2019. The unfavorable development in the segment was driven by non-proportional assumed liability business in both the U.S. and U.K., and was largely offset by favorable development on excess workers’ compensation business. The unfavorable non-proportional assumed liability development was concentrated in accident years 2015 through 2018, and included an adjustment for the Ogden discount rate in the U.K.

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

Insurance - Reserves for the Insurance segment developed favorably by $19 million in 2018. 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 spread across many accident years, 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 below 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 & Monoline Excess - Reserves for the Reinsurance & Monoline Excess segment developed favorably by $20 million in 2018. The favorable development was primarily due to excess workers’ compensation business, and was spread across many accident years, including years prior to 2009. This favorable excess workers’ compensation development was partially offset by unfavorable development on U.S. casualty facultative assumed business from accident years 2009 and prior related to construction projects.

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

Insurance - Reserves for the Insurance segment developed favorably by $30 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 spread across many accident years but was most significant in accident years 2014 through 2016. The favorable workers’ compensation development reflects a continuation during 2017 of the benign loss cost trends experienced in recent years, particularly the favorable claim frequency trends (i.e., number of reported claims per unit of exposure). Reported workers’ compensation losses in 2017 continued to be below our expectations at most of our operating units, and were below the assumptions underlying our previous reserve estimates. The favorable severity trends were also impacted by our continued investment in medical case management services and the higher usage of preferred provider networks. The long term trend of declining workers’ compensation frequency can be attributed to improved workplace safety.

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

Reinsurance & Monoline Excess - Reserves for the Reinsurance & Monoline Excess segment developed favorably by $7 million in 2017. This favorable development was primarily due to excess workers’ compensation business, and was spread across

many accident years, including years prior to 2008. The favorable excess workers’ compensation development resulted due to the same causes discussed above for workers’ compensation in the Insurance segment.

The favorable excess workers’ compensation development was largely offset by adverse development on U.K. assumed casualty reinsurance, as well as on U.S. facultative casualty excess of loss business. The adverse development on the U.K. casualty reinsurance was due to reserve strengthening associated with claims impacted by the change in the Ogden discount rate in the U.K. The Ogden rate is the discount rate used to calculate lump-sum bodily injury payouts in the U.K., and was reduced by the U.K. Ministry of Justice from +2.5% to -0.75%; the adverse development mostly related to U.K. motor bodily injury claims which we reinsured on an excess of loss basis in accident years 2012 through 2016. The adverse development on U.S. facultative casualty business was due to construction related risks in accident years 2008 and prior.

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 $24 million at December 31, 2019 and $28 million at December 31, 2018. 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 $1,731 million and $1,793 million at December 31, 2019 and 2018, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $530 million and $563 million at December 31, 2019 and 2018, respectively. At December 31, 2019, discount rates by year ranged from 2.0% to 6.5%, with a weighted average discount rate of 3.7%.

Substantially all discounted workers’ compensation reserves (97% of total discounted reserves at December 31, 2019) 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, 2019), 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)	2019			2018			2017
Written premiums:
Direct	$	7,386,759		$	6,973,216		$	6,726,029
Assumed	875,459			729,278			750,934
Ceded	(1,398,719		)	(1,269,267		)	(1,216,455		)
Total net written premiums	$	6,863,499		$	6,433,227		$	6,260,508

Earned premiums:
Direct	$	7,141,427		$	6,851,795		$	6,661,046
Assumed	820,705			755,759			812,309
Ceded	(1,328,844		)	(1,236,049		)	(1,161,936		)
Total net earned premiums	$	6,633,288		$	6,371,505		$	6,311,419

Ceded losses and loss expenses incurred	$	836,831		$	829,742		$	601,769
Ceded commission earned	$	314,191		$	268,037		$	241,983

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 $690,127, $946,965 and $1,010,000 as of December 31, 2019, 2018 and 2017, respectively.

The following table presents the amounts due from reinsurers as of December 31, 2019:



(In thousands)

Munich Re	$	243,021
Lloyd’s of London	201,092
Swiss Re	179,274
Alleghany Group	169,185
Partner Re	127,638
Hannover Re Group	95,486
Axis Capital	93,547
Berkshire Hathaway	82,882
Renaissance Re	79,954
Korean Re	64,464
Everest Re	55,431
Liberty Mutual	49,346
Arch Capital Group	27,116
Qatar Re	22,477
Chubb Limited	15,199
Other reinsurers less than $20,000	308,404
Subtotal	1,814,515
Residual market pools	319,168
Total	$	2,133,683

(15) Indebtedness

Indebtedness consisted of the following as of December 31, 2019 (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		2019		2018
Senior notes due on:
August 15, 2019	6.15%	$	—	$	—	$	140,568
September 15, 2019	7.375%	—		—		299,816
September 15, 2020	5.375%	300,000		299,756		299,420
January 1, 2022	8.7%	76,503		76,343		76,273
March 15, 2022	4.625%	350,000		349,088		348,670
February 15, 2037	6.25%	250,000		248,116		248,006
August 1, 2044	4.75%	350,000		345,467		345,283
Subsidiary debt (1) (2)	Various	108,804		108,805		123,992
Total senior notes and other debt		$	1,435,307	$	1,427,575	$	1,882,028
Subordinated debentures due on:
April 30, 2053	5.625%	$	350,000	$	341,356	$	341,097
March 1, 2056	5.9%	110,000		106,262		106,159
June 1, 2056	5.75%	290,000		281,777		281,551
March 30, 2058	5.70%	185,000		178,845		178,684
December 30, 2059	5.1%	300,000		290,464		—
Total subordinated debentures		$	1,235,000	$	1,198,704	$	907,491

(1) Subsidiary debt is due as follows: $6 million in 2020, $1 million in 2021, 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		Deferred Expense (Benefit)			Total
December 31, 2019
Domestic	$	124,231	$	27,616		$	151,847
Foreign	9,030		8,058			17,088
Total expense	$	133,261	$	35,674		$	168,935

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

Income before income taxes from domestic operations was $739 million, $755 million and $797 million for the years ended December 31, 2019, 2018 and 2017, respectively. Income (loss) before income taxes from foreign operations was $114 million, $57 million and $(25) million for the years ended December 31, 2019, 2018 and 2017, respectively.

A reconciliation of the income tax expense and the amounts computed by applying the Federal and foreign income tax rate of 21% for 2019 and 2018 and 35% for 2017 to pre-tax income are as follows:



(In thousands)	2019			2018			2017
Computed “expected” tax expense	$	179,113		$	170,540		$	270,470
Tax-exempt investment income	(14,666		)	(18,833		)	(37,209		)
Change in valuation allowance	(1,945		)	18,576			11,161
Impact of foreign tax rates	7,700			7,683			3,508
State and local taxes	4,842			3,901			1,644
Impact of change in U.S. tax rate	—			(10,950		)	(30,531		)
Other, net	(6,109		)	(7,889		)	390
Total expense	$	168,935		$	163,028		$	219,433

At December 31, 2019 and 2018, 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)	2019			2018
Deferred tax asset:
Loss reserve discounting	$	136,100		$	130,513
Unearned premiums	120,246			112,190
Net operating losses	37,147			37,463
Other-than-temporary impairments	8,049			9,910
Employee compensation plans	60,552			56,027
Other	63,633			58,809
Gross deferred tax asset	425,727			404,912
Less valuation allowance	(33,250		)	(35,195		)
Deferred tax asset	392,477			369,717
Deferred tax liability:
Amortization of intangibles	12,832			13,641
Loss reserve discounting - transition rule	29,697			41,088
Deferred policy acquisition costs	103,947			99,293
Unrealized investment gains	93,330			35,430
Property, furniture and equipment	47,082			39,239
Investment funds	73,083			51,712
Other	50,212			53,824
Deferred tax liability	410,183			334,227
Net deferred tax liability (asset)	$	17,706		$	(35,490	)

The Company had a current tax receivable of $13.4 million and $0.7 million at December 31, 2019 and 2018, respectively. At December 31, 2019, the Company had foreign net operating loss carryforwards of $9.0 million that expire beginning in 2027, and an additional $169.0 million that have no expiration date. At December 31, 2019, the Company had a valuation allowance of $33.3 million, as compared to $35.2 million at December 31, 2018. 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") provided for a reduction of the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. 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. During 2019, the IRS updated the revised discount factors. This modified the increase in the beginning of year 2018 deferred tax asset for loss reserve discounting to $40 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 Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $124 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 2020, the maximum amount of dividends that can be paid by BIC without such approval is approximately $601 million.

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



(In thousands)	2019		2018		2017
Net income	$	601,564	$	1,099,953	$	698,862
Statutory capital and surplus	$	6,013,062	$	5,587,930	$	5,479,603

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 recognize a non-tabular discount on certain 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 $268 million at December 31, 2019*.*

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, 2019, BIC’s Total Adjusted Capital of $5.746 billion was 396% 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:



(In thousands)	2019	2018	2017
Basic	190,722	190,048	187,265
Diluted	193,521	192,395	193,527

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 7,575,168 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).



	2019		2018		2017
Balance, beginning of year	182,993,640		182,272,278		181,790,399
Shares issued	687,339		1,257,762		1,578,384
Shares repurchased	(269,072	)	(536,400	)	(1,096,505)
Balance, end of year	183,411,907		182,993,640		182,272,278

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, 2019 and 2018:



	2019				2018
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Fixed maturity securities	$	14,180,961	$	14,194,955	$	13,606,812	$	13,619,620
Equity securities	480,620		480,620		279,006		279,006
Arbitrage trading account	400,809		400,809		452,548		452,548
Loans receivable	91,799		94,613		94,813		97,073
Cash and cash equivalents	1,023,710		1,023,710		817,602		817,602
Trading accounts receivable from brokers and clearing organizations	423,543		423,543		347,228		347,228

Liabilities:
Due to broker	27,116		27,116		20,144		20,144
Trading account securities sold but not yet purchased	36,143		36,143		38,120		38,120
Senior notes and other debt	1,427,575		1,582,290		1,882,028		1,968,996
Subordinated debentures	1,198,704		1,274,088		907,491		840,002

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) 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, 2019, the Company had commitments to invest up to $232 million and $114 million in certain investment funds and real estate construction projects, respectively.

(21) Leases

As described in Note 1, the Company prospectively adopted ASU 2016-02, Leases, effective January 1, 2019, which requires lessees to recognize a right-of-use asset and a lease liability for leases with terms of more than 12 months on the balance sheet. All leases disclosed within this note are classified as operating leases. Recognized right-of-use asset and lease liability are reported within other assets and other liabilities, respectively, in the consolidated balance sheet. Lease expense is reported in other operating costs and expenses in the consolidated statement of income and accounted for on a straight-line basis over the lease term.

To determine the discount rate used to calculate present value of future minimum lease payments, the Company uses its incremental borrowing rate during the lease commencement period in line with the respective lease duration. In certain cases, the Company has the option to renew the lease. Lease renewal future payments are included in the present value of the future minimum lease payments when the Company determines it is reasonably certain to renew.

The main leases entered into by the Company are for office space used by the Company’s operating units across the world. Additionally, the Company, to a lesser extent, has equipment leases mainly for office equipment. Further information relating to operating lease expense and other operating lease information is as follows:



	Twelve Months Ended December 31, 2019

(In thousands)
Leases:
Lease cost	$	44,107
Cash paid for amounts included in the measurement of lease liabilities reported in operating cash flows	$	40,083
Right-of-use assets obtained in exchange for new lease liabilities	$	32,881



($ in thousands)	December 31, 2019
Right-of-use assets	$	193,311
Lease liabilities	$	230,338
Weighted-average remaining lease term	7.11 years
Weighted-average discount rate	5.97		%

Contractual maturities of the Company’s future minimum lease payments are as follows:



(In thousands)	December 31, 2019
Contractual Maturities:
2020	$	49,293
2021	47,107
2022	41,652
2023	37,510
2024	31,152
Thereafter	78,820
Total undiscounted future minimum lease payments	285,534
Less: Discount impact	(55,196		)
Total lease liability	$	230,338

(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, 2019:



	2019		2018		2017
RSUs granted and unvested at beginning of period:	5,062,661		5,216,972		7,293,147
Granted	840,796		1,140,048		1,283,976
Vested	(1,447,522	)	(900,254	)	(2,990,261	)
Canceled	(331,675	)	(394,105	)	(369,890	)
RSUs granted and unvested at end of period:	4,124,260		5,062,661		5,216,972

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, 2019, 7,532,977 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, 2019:



(In thousands)	2019			2018			2017
Unearned compensation at beginning of year	$	129,669		$	122,910		$	115,965
RSUs granted, net of cancellations	53,583			52,204			52,897
RSUs expensed	(47,329		)	(34,408		)	(38,796		)
RSUs forfeitures	(7,533		)	(11,037		)	(7,156		)
Unearned compensation at end of year	$	128,390		$	129,669		$	122,910

(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 operating unit'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 $47 million, $42 million and $42 million in 2019, 2018 and 2017, 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, 2019:



	Units Outstanding	Maximum Value		Inception to date earned through December 31, 2019 on outstanding units
2015 grant	179,250	$	17,925,000	$	17,925,000
2016 grant	199,500	19,950,000		15,243,000
2017 grant	210,000	21,000,000		10,938,900
2018 grant	215,250	21,525,000		7,501,463
2019 grant	228,750	22,875,000		3,068,338

The following table summarizes the LTIP expense for each of the three years ended December 31, 2019:



(In thousands)	2019			2018			2017
2013 grant	$	—		$	(1,124	)	$	7,667
2014 grant	(558		)	3,227			3,167
2015 grant	3,319			5,170			3,667
2016 grant	3,548			5,148			3,601
2017 grant	3,432			4,700			3,162
2018 grant	3,310			4,317			—
2019 grant	3,068			—			—
Total	$	16,119		$	21,438		$	21,264

(24) Supplemental Financial Statement Data

Other operating costs and expenses consist of the following:



(In thousands)	2019			2018			2017
Amortization of deferred policy acquisition costs	$	1,001,611		$	915,246		$	1,111,489
Insurance operating expenses	1,088,690			1,183,635			989,535
Insurance service expenses	101,317			118,357			129,776
Net foreign currency (gains) losses	(30,715		)	(27,067		)	15,267
Other costs and expenses	201,179			193,050			190,865
Total	$	2,362,082		$	2,383,221		$	2,436,932

(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 & Monoline Excess - 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, as well as operations that solely retain risk on an excess basis.

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 (1)		Investment Income		Other		Total (2)		Pre-Tax Income (Loss)			Net Income (Loss) to Common Stockholders
Year ended December 31, 2019
Insurance	$	5,919,819	$	429,405	$	47,850	$	6,397,074	$	814,862		$	650,510
Reinsurance & Monoline Excess	713,469		164,082		—		877,551		189,188			152,046
Corporate, other and eliminations (3)	—		52,127		454,741		506,868		(271,833		)	(215,967		)
Net investment gains	—		—		120,703		120,703		120,703			95,355
Consolidated	$	6,633,288	$	645,614	$	623,294	$	7,902,196	$	852,920		$	681,944

Year ended December 31, 2018
Insurance	$	5,702,073	$	433,490	$	72,727	$	6,208,290	$	717,154		$	571,381
Reinsurance & Monoline Excess	669,432		179,534		—		848,966		201,001			160,791
Corporate, other and eliminations (3)	—		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	$	5,549,403	$	366,862	$	86,865	$	6,003,130	$	623,746		$	437,953
Reinsurance & Monoline Excess	762,016		160,462		—		922,478		117,131			90,358
Corporate, other and eliminations (3)	—		48,464		374,834		423,298		(303,965		)	(197,525		)
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



Identifiable Assets
(In thousands)	December 31,
	2019		2018
Insurance	$	20,003,202	$	18,214,293
Reinsurance & Monoline Excess	4,709,724		4,371,151
Corporate, other and eliminations (3)	1,930,502		2,310,533
Consolidated	$	26,643,428	$	24,895,977

(1) Certain amounts included in earned premiums of each segment are related to inter-segment transactions.

(2) Revenues for Insurance includes $725.4 million, $714.2 million, and $688.2 million in 2019, 2018, and 2017, respectively, from foreign countries. Revenues for Reinsurance & Monoline Excess includes $249.6 million, $228.1 million, and $201.3 million in 2019, 2018 and 2017, respectively, from foreign countries.

(3) Corporate, other and eliminations represent corporate revenues and expenses and other items that are not allocated to business segments.

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



(In thousands)	2019		2018		2017
Insurance
Other liability	$	2,063,401	$	1,912,071	$	1,843,826
Workers' compensation	1,301,980		1,327,206		1,324,801
Short-tail lines	1,223,902		1,184,447		1,184,465
Commercial automobile	750,051		722,236		650,441
Professional liability	580,485		556,113		545,870
Total Insurance	5,919,819		5,702,073		5,549,403
Reinsurance & Monoline Excess
Casualty	405,063		362,886		377,650
Monoline Excess	160,071		162,908		157,039
Property	148,335		143,638		227,327
Total Reinsurance & Monoline Excess	713,469		669,432		762,016
Total	$	6,633,288	$	6,371,505	$	6,311,419

(26) Quarterly Financial Information (Unaudited)

The following is a summary of quarterly financial data:



(In thousands, except per share data)	2019
Three months ended	March 31		June 30		September 30		December 31
Revenues	$	1,937,022	$	2,023,384	$	1,965,716	$	1,976,074
Net income	180,722		216,709		165,208		119,306
Net income per share (1)
Basic (2)	0.95		1.14		0.87		0.62
Diluted	0.94		1.12		0.85		0.62



	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)	0.88		0.95		0.85		0.69
Diluted	0.87		0.93		0.84		0.69

(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.

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