Item 1. Financial Statements

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Item 1. Financial Statements

W. R. BERKLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	September 30, 2021		December 31, 2020
	(Unaudited)		(Audited)
Assets
Investments:
Fixed maturity securities (amortized cost of $15,809,028 and $13,755,858; allowance for expected credit losses of $17,283 and $2,580 at September 30, 2021 and December 31, 2020, respectively)	$	16,073,135	$	14,159,369
Real estate	1,842,400		1,960,914
Investment funds	1,400,932		1,309,430
Arbitrage trading account	860,339		341,473
Equity securities	818,738		625,667
Loans receivable (net of allowance for expected credit losses of $1,737 and $5,437 at September 30, 2021 and December 31, 2020, respectively)	115,495		84,913

Total investments	21,111,039		18,481,766
Cash and cash equivalents	2,069,029		2,372,366
Premiums and fees receivable (net of allowance for expected credit losses of $23,676 and $22,883 at September 30, 2021 and December 31, 2020, respectively)	2,524,109		2,167,799
Due from reinsurers (net of allowance for expected credit losses of $7,277 and $7,801 at September 30, 2021 and December 31, 2020, respectively)	2,792,811		2,424,502
Deferred policy acquisition costs	662,636		556,168
Prepaid reinsurance premiums	670,913		648,376
Trading account receivables from brokers and clearing organizations	221,165		524,727
Property, furniture and equipment	419,941		405,930
Goodwill	169,652		169,652
Accrued investment income	126,245		120,464
Current and deferred federal and foreign income taxes	63,654		—

Other assets	713,094		700,215
Total assets	$	31,544,288	$	28,571,965

Liabilities and Equity
Liabilities:
Reserves for losses and loss expenses	$	14,919,576	$	13,784,430
Unearned premiums	4,769,313		4,073,191
Due to reinsurers	557,478		426,124
Trading account securities sold but not yet purchased	739		10,048

Current and deferred federal and foreign income taxes	—		48,495
Other liabilities	1,367,353		1,178,546
Senior notes and other debt	2,258,646		1,623,025
Subordinated debentures	1,007,472		1,102,309
Total liabilities	24,880,577		22,246,168
Equity:
Preferred stock, par value $0.10 per share:
Authorized 5,000,000 shares; issued and outstanding - none	—		—
Common stock, par value $0.20 per share:
Authorized 750,000,000 shares, issued and outstanding, net of treasury shares, 176,638,884 and 177,825,150 shares, respectively	70,535		70,535
Additional paid-in capital	1,018,300		1,012,483
Retained earnings	8,920,334		8,348,381
Accumulated other comprehensive loss	(190,862)		(62,172)
Treasury stock, at cost, 176,037,616 and 174,851,350 shares, respectively	(3,169,866)		(3,058,425)
Total stockholders’ equity	6,648,441		6,310,802
Noncontrolling interests	15,270		14,995
Total equity	6,663,711		6,325,797
Total liabilities and equity	$	31,544,288	$	28,571,965

See accompanying notes to interim consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands, except per share data)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,

	2021		2020		2021		2020
REVENUES:
Net premiums written	$	2,325,138	$	1,879,316	$	6,587,357	$	5,464,980
Change in net unearned premiums	(244,120)		(130,395)		(684,759)		(347,727)
Net premiums earned	2,081,018		1,748,921		5,902,598		5,117,253
Net investment income	179,851		142,650		506,615		402,844
Net investment gains (losses):
Net realized and unrealized gains (losses) on investments	17,187		(7,772)		89,407		(89,404)

Change in allowance for expected credit losses on investments	2,314		46,750		(11,003)		29,093
Net investment gains (losses)	19,501		38,978		78,404		(60,311)
Revenues from non-insurance businesses	120,374		87,495		316,927		256,966
Insurance service fees	21,467		21,635		69,531		67,256
Other income	2,072		140		3,163		2,446
Total revenues	2,424,283		2,039,819		6,877,238		5,786,454


OPERATING COSTS AND EXPENSES:
Losses and loss expenses	1,298,392		1,114,632		3,623,630		3,357,011
Other operating costs and expenses	643,045		593,969		1,907,020		1,753,142
Expenses from non-insurance businesses	115,465		85,036		308,453		256,032
Interest expense	35,100		39,768		109,846		114,874
Total operating costs and expenses	2,092,002		1,833,405		5,948,949		5,481,059
Income before income taxes	332,281		206,414		928,289		305,395
Income tax expense	(64,963)		(54,048)		(191,577)		(84,900)
Net income before noncontrolling interests	267,318		152,366		736,712		220,495
Noncontrolling interests	(6,021)		(688)		(8,652)		(1,975)
Net income to common stockholders	$	261,297	$	151,678	$	728,060	$	218,520

NET INCOME PER SHARE:
Basic	$	1.41	$	0.82	$	3.93	$	1.17
Diluted	$	1.40	$	0.81	$	3.89	$	1.15

See accompanying notes to interim consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(In thousands)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,

	2021		2020		2021		2020
Net income before noncontrolling interests	$	267,318	$	152,366	$	736,712	$	220,495
Other comprehensive (loss) income:
Change in unrealized currency translation adjustments	(32,822)		40,194		(26,235)		(36,553)
Change in unrealized investment (losses) gains, net of taxes	(35,596)		38,273		(102,454)		98,016

Other comprehensive (loss) income	(68,418)		78,467		(128,689)		61,463
Comprehensive income	198,900		230,833		608,023		281,958
Noncontrolling interests	(6,021)		(685)		(8,651)		(1,973)
Comprehensive income to common stockholders	$	192,879	$	230,148	$	599,372	$	279,985

See accompanying notes to interim consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(In thousands, except per share data)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,

	2021		2020		2021		2020
COMMON STOCK:
Beginning and end of period	$	70,535	$	70,535	$	70,535	$	70,535
ADDITIONAL PAID-IN CAPITAL:
Beginning of period	$	1,035,166	$	1,076,043	$	1,012,482	$	1,056,042
Restricted stock units issued	(28,741)		(23,387)		(28,668)		(26,773)
Restricted stock units expensed	11,875		12,063		34,486		35,450

End of period	$	1,018,300	$	1,064,719	$	1,018,300	$	1,064,719
RETAINED EARNINGS:
Beginning of period	$	8,682,088	$	7,927,280	$	8,348,381	$	7,932,372
Cumulative effect adjustment resulting from changes in accounting principles	—		—		—		(30,514)
Net income to common stockholders	261,297		151,678		728,060		218,520
Dividends ( $0.13, $0.12, $0.88 and $0.35 per share, respectively)	(23,051)		(21,402)		(156,107)		(62,822)
End of period	$	8,920,334	$	8,057,556	$	8,920,334	$	8,057,556
ACCUMULATED OTHER COMPREHENSIVE LOSS:
Unrealized investment gains (losses):
Beginning of period	$	222,855	$	209,210	$	289,714	$	124,514
Cumulative effect adjustment resulting from changes in accounting principles	—		—		—		24,952
Change in unrealized (losses) gains on securities without an allowance for expected credit losses	(35,707)		35,111		(112,852)		77,537
Change in unrealized gains on securities with an allowance for expected credit losses	111		3,159		10,397		20,477
End of period	187,259		247,480		187,259		247,480
Currency translation adjustments:
Beginning of period	(345,299)		(458,560)		(351,886)		(381,813)
Net change in period	(32,822)		40,194		(26,235)		(36,553)
End of period	(378,121)		(418,366)		(378,121)		(418,366)




Total accumulated other comprehensive loss	$	(190,862)	$	(170,886)	$	(190,862)	$	(170,886)
TREASURY STOCK:
Beginning of period	$	(3,087,069)	$	(3,023,392)	$	(3,058,425)	$	(2,726,711)
Stock exercised/vested	9,946		9,537		10,985		11,758
Stock repurchased	(92,743)		(12,957)		(122,426)		(311,859)

End of period	$	(3,169,866)	$	(3,026,812)	$	(3,169,866)	$	(3,026,812)
NONCONTROLLING INTERESTS:
Beginning of period	$	9,678	$	44,275	$	14,995	$	43,403
Distributions	(429)		(400)		(8,376)		(816)
Net income	6,021		688		8,652		1,975
Other comprehensive income (loss), net of tax	—		(3)		(1)		(2)
End of period	$	15,270	$	44,560	$	15,270	$	44,560

See accompanying notes to interim consolidated financial statements.

W. R. BERKLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


	For the Nine Months Ended September 30,

	2021		2020
CASH FROM OPERATING ACTIVITIES:
Net income to common stockholders	$	728,060	$	218,520
Adjustments to reconcile net income to net cash from operating activities:
Net investment (gains) losses	(78,404)		60,311
Depreciation and amortization	101,330		96,195
Noncontrolling interests	8,652		1,975
Investment funds	(169,538)		(1,260)
Stock incentive plans	36,486		37,842
Change in:
Arbitrage trading account	(224,613)		(40,487)
Premiums and fees receivable	(365,092)		(175,636)
Reinsurance accounts	(255,126)		(204,396)
Deferred policy acquisition costs	(108,131)		(43,955)
Income taxes	(81,574)		(56,955)

Reserves for losses and loss expenses	1,164,594		879,277
Unearned premiums	707,658		407,227
Other	60,092		(41,713)
Net cash from operating activities	1,524,394		1,136,945
CASH (USED IN) FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed maturity securities	1,631,849		3,525,926
Proceeds from sale of equity securities	100,366		66,850
Distributions from investment funds	124,892		83,935
Proceeds from maturities and prepayments of fixed maturity securities	4,672,562		2,876,642
Purchase of fixed maturity securities	(8,442,260)		(6,074,429)
Purchase of equity securities	(340,424)		(77,840)
Real estate sold (purchased)	182,998		(42,405)

Change in loans receivable	(27,764)		1,202
Net purchases of property, furniture and equipment	(53,558)		(31,047)
Change in balances due to security brokers	110,752		36,561


Other	14		65
Net cash (used in) from investing activities	(2,040,573)		365,460
CASH FROM FINANCING ACTIVITIES:
Repayment of senior notes and other debt	(503,914)		(302,453)

Net proceeds from issuance of debt	1,032,404		747,399
Cash dividends to common stockholders	(156,107)		(62,822)
Purchase of common treasury shares	(122,426)		(311,859)
Other, net	(27,941)		(18,465)
Net cash from financing activities	222,016		51,800
Net impact on cash due to change in foreign exchange rates	(9,174)		(6,468)
Net change in cash and cash equivalents	(303,337)		1,547,737
Cash and cash equivalents at beginning of period	2,372,366		1,023,710
Cash and cash equivalents at end of period	$	2,069,029	$	2,571,447

See accompanying notes to interim consolidated financial statements.

W. R. Berkley Corporation and Subsidiaries

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) General

The unaudited 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”) for interim financial information. Accordingly, they do not include all the information and notes required by GAAP for annual financial statements. The unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring items, which are necessary to present fairly the Company’s financial position and results of operations on a basis consistent with the prior audited consolidated financial statements. Operating results for interim periods are not necessarily indicative of the results that may be expected for the year. All significant intercompany accounts and transactions have been eliminated. Reclassifications have been made in the 2020 financial statements as originally reported to conform to the presentation of the 2021 financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the revenues and expenses reflected during the reporting period. For further information related to areas of judgment and estimates and other information necessary to understand the Company’s financial position and results of operations, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

The income tax provision has been computed based on the Company’s estimated annual effective tax rate. The effective income tax rate differs from the federal income tax rate of 21% principally because of tax-exempt investment income and tax benefits related to equity-based compensation, which was partially offset by state and foreign income taxes.

(2) 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 the weighted average number of common shares outstanding during the period (including 7,767,874 and 7,575,168 common shares held in a grantor trust as of September 30, 2021 and 2020, respectively). 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 period 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.

The weighted average number of common shares used in the computation of basic and diluted earnings per share was as follows:


	For the Three Months Ended September 30,		For the Nine Months Ended September 30,

(In thousands)	2021	2020	2021	2020
Basic	185,031	185,765	185,127	187,338
Diluted	186,742	187,717	187,060	189,515

(3) Recent Accounting Pronouncements and Accounting Policies

Recently adopted accounting pronouncements:

All accounting and reporting standards that have become effective in 2021 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:

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

(4) Consolidated Statements of Comprehensive Income

The following table presents the components of the changes in accumulated other comprehensive (loss) income ("AOCI"):


(In thousands)	Unrealized Investment Gains (Losses)			Currency Translation Adjustments		Accumulated Other Comprehensive (Loss) Income
As of and for the nine months ended September 30, 2021
Changes in AOCI
Beginning of period	$	289,714		$	(351,886)	$	(62,172)


Other comprehensive (loss) income before reclassifications	(120,695)			(26,235)		(146,930)
Amounts reclassified from AOCI	18,241			—		18,241
Other comprehensive (loss) income	(102,454)			(26,235)		(128,689)
Unrealized investment gain related to noncontrolling interest	(1)			—		(1)
End of period	$	187,259		$	(378,121)	$	(190,862)
Amounts reclassified from AOCI
Pre-tax	$	23,091	(1)	$	—	$	23,091
Tax effect	(4,850)		(2)	—		(4,850)
After-tax amounts reclassified	$	18,241		$	—	$	18,241
Other comprehensive (loss) income
Pre-tax	$	(130,201)		$	(26,235)	$	(156,436)
Tax effect	27,747			—		27,747
Other comprehensive (loss) income	$	(102,454)		$	(26,235)	$	(128,689)
As of and for the three months ended September 30, 2021
Changes in AOCI
Beginning of period	$	222,855		$	(345,299)	$	(122,444)


Other comprehensive (loss) income before reclassifications	(36,249)			(32,822)		(69,071)
Amounts reclassified from AOCI	653			—		653
Other comprehensive (loss) income	(35,596)			(32,822)		(68,418)
Unrealized investment gain related to noncontrolling interest	—			—		—
Ending balance	$	187,259		$	(378,121)	$	(190,862)
Amounts reclassified from AOCI
Pre-tax	$	827	(1)	$	—	$	827
Tax effect	(174)		(2)	—		(174)
After-tax amounts reclassified	$	653		$	—	$	653
Other comprehensive (loss) income
Pre-tax	$	(45,270)		$	(32,822)	$	(78,092)
Tax effect	9,674			—		9,674
Other comprehensive (loss) income	$	(35,596)		$	(32,822)	$	(68,418)



As of and for the nine months ended September 30, 2020
Changes in AOCI
Beginning of period	$	124,514		$	(381,813)	$	(257,299)
Cumulative effect adjustment resulting from changes in accounting principles	24,952			—		24,952
Restated beginning of period	149,466			(381,813)		(232,347)
Other comprehensive income (loss) before reclassifications	76,474			(36,553)		39,921
Amounts reclassified from AOCI	21,542			—		21,542
Other comprehensive income (loss)	98,016			(36,553)		61,463
Unrealized investment gain related to noncontrolling interest	(2)			—		(2)
End of period	$	247,480		$	(418,366)	$	(170,886)
Amounts reclassified from AOCI
Pre-tax	$	27,268	(1)	$	—	$	27,268
Tax effect	(5,726)		(2)	—		(5,726)
After-tax amounts reclassified	$	21,542		$	—	$	21,542
Other comprehensive income (loss)
Pre-tax	$	111,756		$	(36,553)	$	75,203
Tax effect	(13,740)			—		(13,740)
Other comprehensive income (loss)	$	98,016		$	(36,553)	$	61,463
As of and for the three months ended September 30, 2020
Changes in AOCI
Beginning of period	$	209,210		$	(458,560)	$	(249,350)


Other comprehensive income (loss) before reclassifications	39,488			40,194		79,682
Amounts reclassified from AOCI	(1,215)			—		(1,215)
Other comprehensive income (loss)	38,273			40,194		78,467
Unrealized investment gain related to noncontrolling interest	(3)			—		(3)
Ending balance	$	247,480		$	(418,366)	$	(170,886)
Amounts reclassified from AOCI
Pre-tax	$	(1,538)	(1)	$	—	$	(1,538)
Tax effect	323		(2)	—		323
After-tax amounts reclassified	$	(1,215)		$	—	$	(1,215)
Other comprehensive income (loss)
Pre-tax	$	48,980		$	40,194	$	89,174
Tax effect	(10,707)			—		(10,707)
Other comprehensive income (loss)	$	38,273		$	40,194	$	78,467

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

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

(5) Statements of Cash Flows

Interest payments were $119,381,000 and $126,932,000 for the nine months ended September 30, 2021 and 2020, respectively. Income taxes were $244,029,000 and $96,000,000 for the nine months ended September 30, 2021 and 2020, respectively.

(6) Investments in Fixed Maturity Securities

At September 30, 2021 and December 31, 2020, investments in fixed maturity securities were as follows:


(In thousands)	Amortized Cost			Allowance for Expected Credit Losses (1)		Gross Unrealized				Fair Value		Carrying Value
Gains			Losses
September 30, 2021
Held to maturity:
State and municipal	$	68,920		$	(396)	$	10,548	$	—	$	79,072	$	68,524
Residential mortgage-backed	5,250			—		774		—		6,024		5,250
Total held to maturity	74,170			(396)		11,322		—		85,096		73,774
Available for sale:
U.S. government and government agency	506,703			—		12,137		(507)		518,333		518,333
State and municipal:
Special revenue	2,019,757			—		74,682		(2,967)		2,091,472		2,091,472
State general obligation	376,534			—		26,967		(629)		402,872		402,872
Pre-refunded	209,547			—		16,933		(917)		225,563		225,563
Corporate backed	170,962			—		8,271		(1,317)		177,916		177,916
Local general obligation	400,760			—		31,267		(505)		431,522		431,522
Total state and municipal	3,177,560			—		158,120		(6,335)		3,329,345		3,329,345
Mortgage-backed:
Residential	835,729			—		14,156		(7,185)		842,700		842,700
Commercial	125,768			—		4,979		(110)		130,637		130,637
Total mortgage-backed	961,497			—		19,135		(7,295)		973,337		973,337
Asset-backed	4,660,976			—		8,780		(14,201)		4,655,555		4,655,555
Corporate:
Industrial	3,057,258			(12)		85,049		(9,933)		3,132,362		3,132,362
Financial	1,657,059			—		44,534		(1,753)		1,699,840		1,699,840
Utilities	402,952			—		17,228		(1,327)		418,853		418,853
Other	173,504			—		154		(649)		173,009		173,009
Total corporate	5,290,773			(12)		146,965		(13,662)		5,424,064		5,424,064
Foreign government	1,137,349			(16,875)		12,864		(34,611)		1,098,727		1,098,727
Total available for sale	15,734,858			(16,887)		358,001		(76,611)		15,999,361		15,999,361
Total investments in fixed maturity securities	$	15,809,028		$	(17,283)	$	369,323	$	(76,611)	$	16,084,457	$	16,073,135

(1) Represents the amount of impairment that has resulted from credit-related factors. The change in the allowance for expected credit losses is recognized in the consolidated statements of income. Amount excludes unrealized losses relating to non-credit factors.


(In thousands)	Amortized Cost		Allowance for Expected Credit Losses (1)		Gross Unrealized				Fair Value		Carrying Value
	Gains		Losses
December 31, 2020
Held to maturity:
State and municipal	$	67,117	$	(798)	$	13,217	$	—	$	79,536	$	66,319
Residential mortgage-backed	6,455		—		1,043		—		7,498		6,455

Total held to maturity	73,572		(798)		14,260		—		87,034		72,774
Available for sale:
U.S. government and government agency	586,020		—		18,198		(347)		603,871		603,871
State and municipal:
Special revenue	2,137,162		—		96,924		(714)		2,233,372		2,233,372
State general obligation	417,397		—		33,407		—		450,804		450,804
Pre-refunded	250,081		—		21,472		(162)		271,391		271,391
Corporate backed	206,356		—		8,755		(638)		214,473		214,473
Local general obligation	410,583		—		40,596		(555)		450,624		450,624
Total state and municipal	3,421,579		—		201,154		(2,069)		3,620,664		3,620,664
Mortgage-backed:
Residential	813,187		—		24,664		(5,238)		832,613		832,613
Commercial	181,105		—		6,725		(113)		187,717		187,717
Total mortgage-backed securities	994,292		—		31,389		(5,351)		1,020,330		1,020,330
Asset-backed	3,218,048		—		10,035		(33,497)		3,194,586		3,194,586
Corporate:
Industrial	2,456,516		(518)		115,926		(7,449)		2,564,475		2,564,475
Financial	1,513,943		—		62,947		(987)		1,575,903		1,575,903
Utilities	389,267		—		31,931		(33)		421,165		421,165
Other	109,353		—		696		(11)		110,038		110,038
Total corporate	4,469,079		(518)		211,500		(8,480)		4,671,581		4,671,581
Foreign government	993,268		(1,264)		28,007		(44,448)		975,563		975,563
Total available for sale	13,682,286		(1,782)		500,283		(94,192)		14,086,595		14,086,595
Total investments in fixed maturity securities	$	13,755,858	$	(2,580)	$	514,543	$	(94,192)	$	14,173,629	$	14,159,369

(1) Represents the amount of impairment that has resulted from credit-related factors. The change in the allowance for expected credit losses, excluding the cumulative effect adjustment resulting from changes in accounting principles, is recognized in the consolidated statements of income. Amount excludes unrealized losses relating to non-credit factors.

The following table presents the rollforward of the allowance for expected credit losses for state and municipal held to maturity securities for the nine months ended September 30, 2021 and 2020:


(In thousands)	2021		2020
Allowance for expected credit losses, beginning of period	$	798	$	—
Cumulative effect adjustment resulting from changes in accounting principles	—		69
Provision for expected credit losses	(402)		802
Allowance for expected credit losses, end of period	$	396	$	871

The following table presents the rollforward of the allowance for expected credit losses for state and municipal held to maturity securities for the three months ended September 30, 2021 and 2020:


(In thousands)	2021		2020
Allowance for expected credit losses, beginning of period	$	453	$	948
Provision for expected credit losses	(57)		(77)
Allowance for expected credit losses, end of period	$	396	$	871

The following table presents the rollforward of the allowance for expected credit losses for available for sale securities for the nine months ended September 30, 2021 and 2020:


	2021						2020
(In thousands)	Foreign Government		Corporate		Total		Foreign Government		Corporate		Total
Allowance for expected credit losses, beginning of period	$	1,264	$	518	$	1,782	$	—	$	—	$	—
Cumulative effect adjustment resulting from changes in accounting principles	—		—		—		35,645		—		35,645
Expected credit losses on securities for which credit losses were not previously recorded	19,072		16		19,088		12,494		7,058		19,552
Expected credit losses on securities for which credit losses were previously recorded	(2,967)		(517)		(3,484)		295		(3,767)		(3,472)
Reduction due to disposals	(494)		(5)		(499)		(47,344)		(2,685)		(50,029)
Allowance for expected credit losses, end of period	$	16,875	$	12	$	16,887	$	1,090	$	606	$	1,696

The following table presents the rollforward of the allowance for expected credit losses for available for sale securities for the three months ended September 30, 2021 and 2020:


	2021						2020
(In thousands)	Foreign Government		Corporate		Total		Foreign Government		Corporate		Total
Allowance for expected credit losses, beginning of period	$	18,899	$	12	$	18,911	$	44,769	$	724	$	45,493
Expected credit losses on securities for which credit losses were not previously recorded	82		—		82		—		261		261
Expected credit losses on securities for which credit losses were previously recorded	(2,106)		—		(2,106)		(252)		(9)		(261)
Reduction due to disposals	—		—		—		(43,427)		(370)		(43,797)
Allowance for expected credit losses, end of period	$	16,875	$	12	$	16,887	$	1,090	$	606	$	1,696

During the nine months ended September 30, 2021, the Company increased the allowance for expected credit losses for available for sale securities utilizing its credit loss assessment process and inputs used in its credit loss model, primarily due

to foreign government securities that had no reserve in prior periods. During the nine months ended September 30, 2020, the Company decreased the allowance for expected credit losses for available for sale securities primarily due to the disposition of securities which previously had an allowance recorded.

The amortized cost and fair value of fixed maturity securities at September 30, 2021, 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 (1)		Fair Value
Due in one year or less	$	1,620,333	$	1,622,938
Due after one year through five years	6,835,525		6,974,341
Due after five years through ten years	4,183,230		4,263,746
Due after ten years	2,202,797		2,244,071
Mortgage-backed securities	966,747		979,361
Total	$	15,808,632	$	16,084,457

(1) Amortized cost is reduced by the allowance for expected credit losses of $396 thousand related to held to maturity securities.

At September 30, 2021 and December 31, 2020, there were no investments that exceeded 10% of common stockholders' equity, other than investments in United States government and government agency securities.

(7) Investments in Equity Securities

At September 30, 2021 and December 31, 2020, investments in equity securities were as follows:


(In thousands)	Cost			Gross Unrealized				Fair Value		Carrying Value
Gains			Losses
September 30, 2021
Common stocks	$	549,015		$	73,087	$	(12,163)	$	609,939	$	609,939
Preferred stocks	221,887			8,702		(21,790)		208,799		208,799
Total	$	770,902		$	81,789	$	(33,953)	$	818,738	$	818,738

December 31, 2020
Common stocks	$	335,617		$	28,742	$	(14,178)	$	350,181	$	350,181
Preferred stocks	180,397			95,581		(492)		275,486		275,486
Total	$	516,014		$	124,323	$	(14,670)	$	625,667	$	625,667

(8) Arbitrage Trading Account

At September 30, 2021 and December 31, 2020, the fair and carrying values of the arbitrage trading account were $860 million and $341 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 September 30, 2021, the fair value of short option contracts outstanding was $(273) thousand (notional amount of $11.3 million). Other than with respect to the use of these trading account securities, the Company does not make use of derivatives.

(9) Net Investment Income

Net investment income consisted of the following:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,

(In thousands)	2021		2020		2021		2020
Investment income earned on:
Fixed maturity securities, including cash and cash equivalents and loans receivable	$	93,031	$	97,080	$	284,704	$	330,941
Investment funds	69,292		18,235		169,538		1,260
Arbitrage trading account	7,187		19,543		30,176		51,985
Equity securities	8,462		1,907		21,854		6,194
Real estate	3,485		7,666		5,517		18,807

Gross investment income	181,457		144,430		511,789		409,187
Investment expense	(1,606)		(1,780)		(5,174)		(6,343)
Net investment income	$	179,851	$	142,650	$	506,615	$	402,844

(10) 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 investment 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, which were $458 million as of September 30, 2021.

Investment funds consisted of the following:


	Carrying Value as of				Income (Loss) from Investment Funds
	September 30,		December 31,		For the Nine Months Ended September 30,
(In thousands)	2021		2020		2021		2020
Financial services	408,630		$	434,437	$	83,455	$	3,303
Transportation	340,721		190,125		31,805		(3,521)
Real Estate	263,079		310,783		18,497		2,140
Energy	150,414		140,935		14,065		(13,689)
Other funds	238,088		233,150		21,716		13,027
Total	$	1,400,932	$	1,309,430	$	169,538	$	1,260

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

Financial services investment funds include the Company’s minority investment in Lifson Re, a Bermuda reinsurance company. Effective January 1, 2021, Lifson Re participates on a fully collateralized basis in a majority of the Company’s reinsurance placements for a 22.5% share of placed amounts. This pertains to all traditional reinsurance/retrocessional placements for both property and casualty business where there is more than one open market reinsurer participating. For the nine months ended September 30, 2021, the Company has ceded approximately $182 million of written premiums to Lifson Re.

(11) Real Estate

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


	Carrying Value
	September 30,		December 31,
(In thousands)	2021		2020
Properties in operation	$	1,617,524	$	1,738,144
Properties under development	224,876		222,770
Total	$	1,842,400	$	1,960,914

As of September 30, 2021, properties in operation included a long-term ground lease in Washington, D.C., an office complex in New York City, an office building in London, U.K., and the completed portion of a mixed-use project in Washington D.C. Properties in operation are net of accumulated depreciation and amortization of $68,026,000 and $86,970,000 as of September 30, 2021 and December 31, 2020, respectively. Related depreciation expense was $14,412,000 and $19,818,000 for the nine months ended September 30, 2021 and 2020, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $14,397,620 in 2021, $59,304,963 in 2022, $53,608,253 in 2023, $52,738,386 in 2024, $50,218,665 in 2025, $47,171,116 in 2026 and $596,395,513 thereafter.

During the second quarter of 2021, the Company sold two office buildings in Palm Beach and West Palm Beach, Florida. One of these sales also resulted in a $102 million reduction of the Company's non-recourse debt that was supporting the property.

A mixed-use project in Washington, D.C. has been under development in 2021 and 2020, with the completed portion reported in properties in operation as of September 30, 2021.

(12) Loans Receivable

At September 30, 2021 and December 31, 2020, loans receivable were as follows:


(In thousands)	September 30, 2021		December 31, 2020
Amortized cost (net of allowance for expected credit losses):
Real estate loans	$	89,635	$	51,910
Commercial loans	25,860		33,003
Total	$	115,495	$	84,913

Fair value:
Real estate loans	$	91,064	$	53,593
Commercial loans	25,859		33,003
Total	$	116,923	$	86,596

The real estate loans are secured by commercial and residential real estate primarily located in New York. These loans generally earn interest at fixed or stepped interest rates and have maturities through 2026. The commercial loans are with small business owners who have secured the related financing with the assets of the business. Commercial loans primarily earn interest on a fixed basis and have varying maturities generally not exceeding 10 years.

Loans receivable in non-accrual status were both $0.2 million as of September 30, 2021 and December 31, 2020.

The following table presents the rollforward of the allowance for expected credit losses for loans receivable for the nine months ended September 30, 2021 and 2020:


	2021						2020
(In thousands)	Real Estate Loans		Commercial Loans		Total		Real Estate Loans		Commercial Loans		Total
Allowance for expected credit losses, beginning of period	$	1,683	$	3,754	$	5,437	$	1,502	$	644	$	2,146
Cumulative effect adjustment resulting from changes in accounting principles	—		—		—		(905)		548		(357)
Provision for expected credit losses	(254)		(3,446)		(3,700)		1,162		2,892		4,054
Allowance for expected credit losses, end of period	$	1,429	$	308	$	1,737	$	1,759	$	4,084	$	5,843

During the nine months ended September 30, 2021, the Company reduced the allowance primarily due to the disposal of certain loans.

The following table presents the rollforward of the allowance for expected credit losses for loans receivable for the three months ended September 30, 2021 and 2020:


	2021						2020
(In thousands)	Real Estate Loans		Commercial Loans		Total		Real Estate Loans		Commercial Loans		Total
Allowance for expected credit losses, beginning of period	$	1,501	$	469	$	1,970	$	4,318	$	4,401	$	8,719
Provision for expected credit losses	(72)		(161)		(233)		(2,559)		(317)		(2,876)
Allowance for expected credit losses, end of period	$	1,429	$	308	$	1,737	$	1,759	$	4,084	$	5,843

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.

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.

(13) Net Investment Gains (Losses)

Net investment gains (losses) were as follows:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(In thousands)	2021		2020		2021		2020
Net investment gains (losses):
Fixed maturity securities:
Gains	$	2,943	$	3,811	$	16,623	$	23,586
Losses	(1,124)		(39,162)		(5,431)		(53,243)
Equity securities (1):
Net realized gains on investment sales	2		(176)		14,830		5,551
Change in unrealized (losses) gains	(19,244)		30,693		(61,818)		(61,859)
Investment funds	2,526		203		49,897		31,299
Real estate	33,364		3,841		95,765		(3,983)
Loans receivable	—		—		(881)		—
Other	(1,280)		(6,982)		(19,578)		(30,755)
Net realized and unrealized gains (losses) on investments in earnings before allowance for expected credit losses	17,187		(7,772)		89,407		(89,404)
Change in allowance for expected credit losses on investments:
Fixed maturity securities	2,081		43,874		(14,703)		33,147
Loans receivable	233		2,876		3,700		(4,054)
Change in allowance for expected credit losses on investments	2,314		46,750		(11,003)		29,093
Net investment gains (losses)	19,501		38,978		78,404		(60,311)
Income tax expense	(4,266)		(8,855)		(15,417)		13,622
After-tax net investment gains (losses)	$	15,235	$	30,123	$	62,987	$	(46,689)


Change in unrealized investment (losses) gains on available for sale securities:
Fixed maturity securities without allowance for expected credit losses	$	(41,041)	$	46,164	$	(135,099)	$	89,363
Fixed maturity securities with allowance for expected credit losses	111		5,036		10,397		30,027

Investment funds	(4,098)		(198)		(4,355)		(3,632)
Other	(242)		(2,022)		(1,144)		(4,002)
Total change in unrealized investment (losses) gains	(45,270)		48,980		(130,201)		111,756
Income tax benefit (expense)	9,674		(10,707)		27,747		(13,740)
Noncontrolling interests	—		(3)		(1)		(2)
After-tax change in unrealized investment (losses) gains of available for sale securities	$	(35,596)	$	38,270	$	(102,455)	$	98,014

(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 (losses) 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.

(14) Fixed Maturity Securities in an Unrealized Loss Position

The following tables summarize all fixed maturity securities in an unrealized loss position at September 30, 2021 and December 31, 2020 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
September 30, 2021
U.S. government and government agency	$	61,386	$	394	$	17,342	$	113	$	78,728	$	507
State and municipal	353,630		4,345		28,562		1,990		382,192		6,335
Mortgage-backed	318,897		4,502		84,883		2,793		403,780		7,295
Asset-backed	3,373,100		12,389		105,823		1,812		3,478,923		14,201
Corporate	1,465,027		11,044		54,678		2,618		1,519,705		13,662
Foreign government	371,164		7,249		47,331		27,362		418,495		34,611
Fixed maturity securities	$	5,943,204	$	39,923	$	338,619	$	36,688	$	6,281,823	$	76,611





December 31, 2020
U.S. government and government agency	$	47,649	$	347	$	17	$	—	$	47,666	$	347
State and municipal	147,754		1,165		20,528		904		168,282		2,069
Mortgage-backed	212,388		5,121		23,943		230		236,331		5,351
Asset-backed	1,389,133		6,563		656,877		26,934		2,046,010		33,497
Corporate	612,177		6,721		39,985		1,759		652,162		8,480
Foreign government	143,729		22,871		6,218		21,577		149,947		44,448
Fixed maturity securities	$	2,552,830	$	42,788	$	747,568	$	51,404	$	3,300,398	$	94,192

Substantially all of the securities in an unrealized loss position are rated investment grade, except for the securities in the foreign government classification. A significant amount of the unrealized loss on foreign government securities is the result of changes in currency exchange rates.

A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at September 30, 2021 is presented in the table below:


($ in thousands)	Number of Securities	Aggregate Fair Value		Gross Unrealized Loss
Foreign government	31	$	119,141	$	32,048
Corporate	13	49,623		1,879
State and municipal	2	39,693		335
Mortgage-backed	4	249		16
Asset-backed	1	94		3
Total	51	$	208,800	$	34,281

For fixed maturity securities that management does not intend to sell or to be required to sell, the portion of the decline in value that is considered to be due to credit factors is recognized in earnings, and the portion of the decline in value that is considered to be due to non-credit factors is recognized in other comprehensive income.

The Company has evaluated its fixed maturity securities in an unrealized loss position and believes the unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors. None of these securities are delinquent or in default under 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.

(15) Fair Value Measurements

The Company’s fixed maturity available for sale securities, equity securities and its arbitrage 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 on a recurring basis as of September 30, 2021 and December 31, 2020 by level:


(In thousands)	Total		Level 1		Level 2		Level 3
September 30, 2021
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency	$	518,333	$	—	$	518,333	$	—
State and municipal	3,329,345		—		3,329,345		—
Mortgage-backed	973,337		—		973,337		—
Asset-backed	4,655,555		—		4,655,555		—
Corporate	5,424,064		—		5,424,064		—
Foreign government	1,098,727		—		1,098,727		—
Total fixed maturity securities available for sale	15,999,361		—		15,999,361		—
Equity securities:
Common stocks	609,939		600,672		—		9,267
Preferred stocks	208,799		—		199,466		9,333
Total equity securities	818,738		600,672		199,466		18,600
Arbitrage trading account	860,339		837,237		23,102		—
Total	$	17,678,438	$	1,437,909	$	16,221,929	$	18,600
Liabilities:
Trading account securities sold but not yet purchased	$	739	$	739	$	—	$	—


December 31, 2020
Assets:
Fixed maturity securities available for sale:
U.S. government and government agency	$	603,871	$	—	$	603,871	$	—
State and municipal	3,620,664		—		3,620,664		—
Mortgage-backed	1,020,330		—		1,020,330		—
Asset-backed	3,194,586		—		3,194,586		—
Corporate	4,671,581		—		4,670,581		1,000
Foreign government	975,563		—		975,563		—
Total fixed maturity securities available for sale	14,086,595		—		14,085,595		1,000
Equity securities:
Common stocks	350,181		340,966		—		9,215
Preferred stocks	275,486		—		266,155		9,331
Total equity securities	625,667		340,966		266,155		18,546
Arbitrage trading account	341,473		298,359		43,114		—
Total	$	15,053,735	$	639,325	$	14,394,864	$	19,546
Liabilities:
Trading account securities sold but not yet purchased	$	10,048	$	10,048	$	—	$	—

The following tables summarize changes in Level 3 assets and liabilities for the nine months ended September 30, 2021 and for the year ended December 31, 2020:


	Gains (Losses) Included in:
(In thousands)	Beginning Balance		Earnings (Losses)		Other Comprehensive Income		Impairments		Purchases		(Sales)		Paydowns / Maturities		Transfers In / (Out)		Ending Balance

Nine Months Ended September 30, 2021
Assets:
Fixed maturities securities available for sale:
Asset-backed securities	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Corporate	$	1,000	$	—	$	—	$	—	$	—	$	(1,000)	$	—	$	—	$	—
Total	1,000		—		—		—		—		(1,000)		—		—		—
Equity securities:
Common stocks	$	9,215	$	613	$	—	$	—	$	—	$	(561)	$	—	$	—	$	9,267
Preferred stocks	9,331		2		—		—		—		—		—		—		9,333
Total	18,546		615		—		—		—		(561)		—		—		18,600
Arbitrage trading account	—		8		—		—		—		(8)		—		—		—
Total	$	19,546	$	623	$	—	$	—	$	—	$	(1,569)	$	—	$	—	$	18,600



Year Ended December 31, 2020
Assets:
Fixed maturities securities available for sale:
Asset-backed securities	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Corporate	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	1,000	$	1,000
Total	—		—		—		—		—		—		—		1,000		1,000
Equity securities:
Common stocks	9,053		1,228		—		—		—		(1,066)		—		—		9,215
Preferred stocks	6,505		(174)		—		—		3,000		—		—		—		9,331
Total	15,558		1,054		—		—		3,000		(1,066)		—		—		18,546
Arbitrage trading account	—		19		—		—		—		(19)		—		—		—
Total	$	15,558	$	1,073	$	—	$	—	$	3,000	$	(1,085)	$	—	$	1,000	$	19,546

For the nine months ended September 30, 2021, there were no securities transferred into or out of Level 3. For the year ended December 31, 2020, a fixed maturity security was transferred from Level 2 into Level 3 as a result of observable valuation inputs no longer being available.

(16) Reserves for Loss and Loss Expenses

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

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

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

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

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

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

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

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


	September 30,
(In thousands)	2021		2020
Net reserves at beginning of period	$	11,620,393	$	10,697,998
Cumulative effect adjustment resulting from changes in accounting principles	—		5,927
Restated net reserves at beginning of period	11,620,393		10,703,925
Net provision for losses and loss expenses:
Claims occurring during the current year (1)	3,598,969		3,328,827
Increase in estimates for claims occurring in prior years (2) (3)	1,552		849
Loss reserve discount accretion	23,109		27,335
Total	3,623,630		3,357,011
Net payments for claims:
Current year	547,082		570,924
Prior years	2,161,877		2,077,945
Total	2,708,959		2,648,869
Foreign currency translation	(53,935)		(21,003)
Net reserves at end of period	12,481,129		11,391,064
Ceded reserves at end of period	2,438,447		2,068,295
Gross reserves at end of period	$	14,919,576	$	13,459,359

(1) Claims occurring during the current year are net of loss reserve discounts of $16 million and $8 million for the nine months ended September 30, 2021 and 2020, 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 decreased by $13 million and $19 million for the nine months ended September 30, 2021 and 2020, respectively.

(3) For certain retrospectively rated insurance policies and reinsurance agreements, reserve development is offset by additional or return premiums. Favorable development, net of additional and return premiums, was $5 million and $12 million for the nine months ended September 30, 2021 and 2020, respectively.

The COVID-19 global pandemic has impacted, and may further impact, the Company’s results through its effect on claim frequency and severity. Loss cost trends have been impacted and may be further impacted by COVID-19-related claims in certain lines of business. Losses incurred from COVID-19-related claims have been offset, to a certain extent, by lower claim frequency in certain lines of our businesses; however, as the economy and legal systems have reopened, the benefit of lower claim frequency has begun to abate. Although as populations have continued to be vaccinated against the virus and the effects of the pandemic have receded in many jurisdictions, most particularly the United States, it remains too early to determine the ultimate net impact of COVID-19 on the Company. New variants of the COVID-19 virus, including the “Delta” variant, and the slowing of vaccination rates among certain populations continue to create risks with respect to loss costs and the potential for renewed impact of the other effects of COVID-19 associated with economic conditions, inflation, and social distancing and work from home rules.

Most of the COVID-19-related claims reported to the Company to date involve certain short-tailed lines of business, including contingency and event cancellation, business interruption, and film production delay. The Company has also received COVID-19-related claims for longer-tailed casualty lines of business such as workers’ compensation and other liability; however, the estimated incurred loss impact for these reported claims are not material at this time. Given the continuing uncertainty regarding the pandemic's pervasiveness, the future impact that the pandemic may have on claim frequency and severity remains uncertain at this time.

The Company has estimated the potential COVID-19 impact to its contingency and event cancellation, workers’ compensation, and other lines of business under a number of possible scenarios; however, due to COVID-19’s continued evolving impact, there remains a high degree of uncertainty around the Company’s COVID-19 reserves. In addition, should the pandemic continue or worsen as a result of new COVID-19 variants or otherwise, governments in the jurisdictions where we operate may renew their efforts to expand policy coverage terms beyond the policy’s intended coverage. Accordingly, losses arising from these actions, and the other factors described above, could exceed the Company’s reserves established for those related policies.

As of September 30, 2021, the Company had recognized losses for COVID-19-related claims activity, net of reinsurance, of approximately $256 million, of which $220 million relates to the Insurance segment and $36 million relates to

the Reinsurance & Monoline Excess segment. Such $256 million of COVID-19-related losses included $219 million of reported losses and $37 million of IBNR. For the nine months ended September 30, 2021, the Company recognized current accident year losses for COVID-19-related claims activity, net of reinsurance, of approximately $46 million, of which $43 million relates to the Insurance segment and $3 million relates to the Reinsurance & Monoline Excess segment.

During the nine months ended September 30, 2021, favorable prior year development (net of additional and return premiums) of $5 million included $8 million of favorable development for the Insurance segment, partially offset by $3 million of adverse development for the Reinsurance & Monoline Excess segment.

The overall favorable development for the Insurance segment was primarily attributable to favorable development on the 2020 accident year, partially offset by adverse development on the 2016 through 2019 accident years. The favorable development on the 2020 accident year was largely concentrated in the commercial auto liability and other liability lines of business including commercial multi-peril liability. During 2020 the Company achieved larger rate increases in these lines of business than were contemplated in our budget and in our initial loss ratio selections. The Company also experienced significantly lower reported claim frequency in these lines in 2020 relative to historical averages, and lower reported incurred losses relative to our expectations. We believe that the lower claim frequency and lower reported incurred losses were caused by the impacts of the COVID-19 pandemic, for example, lockdowns, reduced driving and traffic, work from home, and court closures. However, due to the uncertainty regarding the ultimate impacts of the pandemic on accident year 2020 incurred losses, the Company elected not to react to these lower reported trends during 2020. As more information becomes available and the 2020 accident year continues to mature, during 2021 we have started to recognize favorable accident year 2020 development in response to the continuing favorable reported loss experience relative to our expectations. The adverse development on the 2016 through 2019 accident years is concentrated largely in the other liability line of business including commercial multi-peril liability, but is also seen to a lesser extent in commercial auto liability. The adverse development on these years is driven by a higher than expected number of large losses reported, and particularly impacted the directors and officers liability and excess and surplus lines casualty classes of business. We also believe that increased social inflation is contributing to the increased number of large losses.

The overall adverse development for the Reinsurance & Monoline Excess segment was driven by adverse development in the other liability and non-proportional reinsurance assumed liability lines of business, related primarily to accident years 2017 through 2019, partially offset by favorable development in excess workers’ compensation which was spread across many prior accident years. The adverse development was driven by higher than expected reported losses on excess of loss treaties written in the U.S. and U.K.

During the nine months ended September 30, 2020, favorable prior year development (net of additional and return premiums) of $12 million included $19 million of favorable development for the Insurance segment, partially offset by $7 million of adverse development for the Reinsurance & Monoline Excess segment.

The overall favorable development for the Insurance segment was primarily attributable to favorable development on workers’ compensation business, partially offset by adverse development on professional liability business. The favorable workers’ compensation development was spread across many prior accident years, including prior to 2010, but was especially significant in accident year 2019. The favorable workers’ compensation development reflects a continuation of the benign loss cost trends experienced during recent years, particularly the favorable claim frequency trends. Our ongoing workers’ compensation claims management efforts, including active medical case management and use of networks and specialty vendors to control medical and pharmaceutical benefit costs, have also added to the favorable workers’ compensation prior year development. The adverse professional liability development was mainly concentrated in accident years 2016 through 2018 and was largely driven by higher than expected large losses being reported in the directors and officers and lawyers professional liability lines of business.

The adverse development for the Reinsurance & Monoline Excess segment was mainly driven by non-proportional reinsurance assumed liability business written in the U.K. for accident years 2016 through 2018, partially offset by favorable development on excess workers’ compensation business. The adverse development was driven by a greater than expected number of reported large losses.

(17) Fair Value of Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:


	September 30, 2021				December 31, 2020
(In thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Fixed maturity securities	$	16,073,135	$	16,084,457	$	14,159,369	$	14,173,629
Equity securities	818,738		818,738		625,667		625,667
Arbitrage trading account	860,339		860,339		341,473		341,473
Loans receivable	115,495		116,923		84,913		86,596
Cash and cash equivalents	2,069,029		2,069,029		2,372,366		2,372,366
Trading account receivables from brokers and clearing organizations	221,165		221,165		524,727		524,727
Due from broker	—		—		2,585		2,585
Liabilities:
Due to broker	107,435		107,435		—		—
Trading account securities sold but not yet purchased	739		739		10,048		10,048
Senior notes and other debt	2,258,646		2,502,912		1,623,025		1,892,444
Subordinated debentures	1,007,472		1,104,166		1,102,309		1,202,842

The estimated fair values of the Company’s fixed maturity securities, equity securities and arbitrage trading account securities are based on various valuation techniques that rely on fair value measurements as described in Note 15. The fair value of loans receivable are estimated by using current institutional purchaser yield requirements for loans with similar credit characteristics, which is considered a Level 2 input. The fair value of the senior notes and other debt and the subordinated debentures is based on spreads for similar securities, which is considered a Level 2 input.

(18) Premiums and Reinsurance Related Information

The following is a summary of insurance and reinsurance financial information:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,

(In thousands)	2021		2020		2021		2020
Written premiums:
Direct	$	2,490,875	$	2,018,530	$	7,063,151	$	5,875,379
Assumed	296,623		244,015		870,295		750,784
Ceded	(462,360)		(383,229)		(1,346,089)		(1,161,183)
Total net premiums written	$	2,325,138	$	1,879,316	$	6,587,357	$	5,464,980

Earned premiums:
Direct	$	2,276,173	$	1,877,234	$	6,430,957	$	5,511,791
Assumed	273,808		237,815		792,515		699,025
Ceded	(468,963)		(366,128)		(1,320,874)		(1,093,563)
Total net premiums earned	$	2,081,018	$	1,748,921	$	5,902,598	$	5,117,253

Ceded losses and loss expenses incurred	$	318,283	$	209,706	$	872,186	$	677,761
Ceded commissions earned	$	113,523	$	89,104	$	322,037	$	255,742

The following table presents the rollforward of the allowance for expected credit losses for premiums and fees receivable for the nine months ended September 30, 2021 and 2020:


(In thousands)	2021		2020
Allowance for expected credit losses, beginning of period	$	22,883	$	19,823
Cumulative effect adjustment resulting from changes in accounting principles	—		1,270
Provision for expected credit losses	793		1,940
Allowance for expected credit losses, end of period	$	23,676	$	23,033

The following table presents the rollforward of the allowance for expected credit losses for premiums and fees receivable for the three months ended September 30, 2021 and 2020:


(In thousands)	2021		2020
Allowance for expected credit losses, beginning of period	$	24,808	$	22,106
Provision for expected credit losses	(1,132)		927
Allowance for expected credit losses, end of period	$	23,676	$	23,033

The Company reinsures a portion of its insurance exposures in order to reduce its net liability on individual risks and catastrophe losses. The Company also cedes premiums to state assigned risk plans and captive insurance companies. Estimated amounts due from reinsurers are reported net of an allowance for expected credit losses.

The following table presents the rollforward of the allowance for expected credit losses associated with due from reinsurers for the nine months ended September 30, 2021 and 2020:


(In thousands)	2021		2020
Allowance for expected credit losses, beginning of period	$	7,801	$	690
Cumulative effect adjustment resulting from changes in accounting principles	—		5,927
Provision for expected credit losses	(524)		1,124
Allowance for expected credit losses, end of period	$	7,277	$	7,741

The following table presents the rollforward of the allowance for expected credit losses associated with due from reinsurers for the three months ended September 30, 2021 and 2020:


(In thousands)	2021		2020
Allowance for expected credit losses, beginning of period	$	7,283	$	7,175
Provision for expected credit losses	(6)		566
Allowance for expected credit losses, end of period	$	7,277	$	7,741

(19) Restricted Stock Units

Pursuant to its 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. RSUs are expensed pro-ratably over the vesting period. RSU expenses were $34 million and $35 million for the nine months ended September 30, 2021 and 2020 respectively. A summary of RSUs issued in the nine months ended September 30, 2021 and 2020 follows:


($ in thousands)	Units	Fair Value

2021	847,119	$	62,981
2020	953,519	$	59,683

(20) 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.

(21) Leases

Lessees are required 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 footnote 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 are as follows:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,

(In thousands)	2021		2020		2021		2020
Leases:
Lease cost	$	11,741	$	11,016	$	34,434	$	33,130
Cash paid for amounts included in the measurement of lease liabilities reported in operating cash flows	$	11,212	$	11,560	$	34,509	$	33,869
Right-of-use assets obtained in exchange for new lease liabilities	$	31,249	$	1,344	$	31,098	$	5,639


	As of September 30,
($ in thousands)	2021			2020
Right-of-use assets	$	170,729		$	172,473
Lease liabilities	$	207,636		$	211,808
Weighted-average remaining lease term	7.3 years			6.7 years
Weighted-average discount rate	4.96		%	5.93		%

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


(In thousands)	September 30, 2021
Contractual Maturities:
2021	$	11,387
2022	42,708
2023	41,574
2024	35,935
2025	26,941
Thereafter	86,940
Total undiscounted future minimum lease payments	245,485
Less: Discount impact	(37,849)
Total lease liability	$	207,636

(22) Business 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, the 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 tables. Income (loss) before income taxes by segment includes allocated investment income. Identifiable assets by segment are those assets used in or allocated to the operation of each segment.


	Revenues
(In thousands)	Earned Premiums (1)		Investment Income		Other		Total (2)		Pre-Tax Income (Loss)		Net Income (Loss) to Common Stockholders
Three months ended September 30, 2021
Insurance	$	1,819,071	$	118,770	$	7,289	$	1,945,130	$	314,000	$	252,333
Reinsurance & Monoline Excess	261,947		48,504		—		310,451		52,742		41,964
Corporate, other and eliminations (3)	—		12,577		136,624		149,201		(53,962)		(48,235)
Net investment gains	—		—		19,501		19,501		19,501		15,235
Total	$	2,081,018	$	179,851	$	163,414	$	2,424,283	$	332,281	$	261,297
Three months ended September 30, 2020
Insurance	$	1,531,093	$	87,828	$	9,463	$	1,628,384	$	178,971	$	130,266
Reinsurance & Monoline Excess	217,828		40,306		—		258,134		61,532		49,070
Corporate, other and eliminations (3)	—		14,516		99,807		114,323		(73,067)		(57,781)
Net investment gains	—		—		38,978		38,978		38,978		30,123
Total	$	1,748,921	$	142,650	$	148,248	$	2,039,819	$	206,414	$	151,678
Nine months ended September 30, 2021
Insurance	$	5,151,253	$	340,710	$	23,780	$	5,515,743	$	862,399	$	681,354
Reinsurance & Monoline Excess	751,345		133,092		—		884,437		196,185		155,770
Corporate, other and eliminations (3)	—		32,813		365,841		398,654		(208,699)		(172,051)
Net investment gains	—		—		78,404		78,404		78,404		62,987
Total	$	5,902,598	$	506,615	$	468,025	$	6,877,238	$	928,289	$	728,060
Nine months ended September 30, 2020
Insurance	$	4,481,092	$	255,392	$	25,953	$	4,762,437	$	431,464	$	315,733
Reinsurance & Monoline Excess	636,161		101,477		—		737,638		110,611		88,947
Corporate, other and eliminations (3)	—		45,975		300,715		346,690		(176,369)		(139,471)
Net investment losses	—		—		(60,311)		(60,311)		(60,311)		(46,689)
Total	$	5,117,253	$	402,844	$	266,357	$	5,786,454	$	305,395	$	218,520

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

(2) Revenues for Insurance from foreign countries for the three months ended September 30, 2021 and 2020 were $220 million and $183 million, respectively, and for the nine months ended September 30, 2021 and 2020 were $638 million and $500 million, respectively. Revenues for Reinsurance & Monoline Excess from foreign countries for the three months ended September 30, 2021 and 2020 were $100 million and $77 million, respectively, and for the nine months ended September 30, 2021 and 2020 were $278 million and $212 million, respectively.

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

Identifiable Assets


(In thousands)	September 30, 2021		December 31, 2020
Insurance	$	23,745,201	$	21,702,328
Reinsurance & Monoline Excess	4,857,288		4,654,158
Corporate, other and eliminations	2,941,799		2,215,479
Consolidated	$	31,544,288	$	28,571,965

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


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,

(In thousands)	2021		2020		2021		2020
Insurance:
Other liability	$	682,362	$	561,595	$	1,922,669	$	1,653,189
Short-tail lines (1)	347,835		326,019		1,012,465		917,466
Workers' compensation	286,474		271,802		845,394		852,101
Commercial automobile	257,314		203,047		715,519		583,024
Professional liability	245,086		168,630		655,206		475,312
Total Insurance	1,819,071		1,531,093		5,151,253		4,481,092

Reinsurance & Monoline Excess:
Casualty reinsurance	164,095		130,186		466,264		383,375
Monoline excess (2)	52,361		43,577		146,481		126,800
Property reinsurance	45,491		44,065		138,600		125,986
Total Reinsurance & Monoline Excess	261,947		217,828		751,345		636,161

Total	$	2,081,018	$	1,748,921	$	5,902,598	$	5,117,253

(1) Short-tail lines include commercial multi-peril (non-liability), inland marine, accident and health, fidelity and surety, boiler and machinery and other lines.

(2) Monoline excess includes operations that solely retain risk on an excess basis.

SAFE HARBOR STATEMENT

This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein, including statements related to our outlook for the industry and for our performance for the year 2021 and beyond, are based upon the Company’s historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. They are subject to various risks and uncertainties, including but not limited to: the cyclical nature of the property casualty industry; the impact of significant competition, including new entrants to the industry; the long-tail and potentially volatile nature of the insurance and reinsurance business; product demand and pricing; claims development and the process of estimating reserves; investment risks, including those of our portfolio of fixed maturity securities and investments in equity securities, including investments in financial institutions, municipal bonds, mortgage-backed securities, loans receivable, investment funds, including real estate, merger arbitrage, energy related and private equity investments; the effects of emerging claim and coverage issues; the uncertain nature of damage theories and loss amounts, including claims for cybersecurity-related risks; natural and man-made catastrophic losses, including as a result of terrorist activities; the ongoing COVID-19 pandemic; the impact of climate change, which may alter the frequency and increase the severity of catastrophe events; general economic and market activities, including inflation, interest rates, and volatility in the credit and capital markets; the impact of the conditions in the financial markets and the global economy, and the potential effect of legislative, regulatory, accounting or other initiatives taken in response, on our results and financial condition; foreign currency and political risks (including those associated with the United Kingdom's withdrawal from the European Union, or "Brexit") relating to our international operations; our ability to attract and retain key personnel and qualified employees; continued availability of capital and financing; the success of our new ventures or acquisitions and the availability of other opportunities; the availability of reinsurance; our retention under the Terrorism Risk Insurance Program Reauthorization Act of 2019; the ability or willingness of our reinsurers to pay reinsurance recoverables owed to us; other legislative and regulatory developments, including those related to business practices in the insurance industry; credit risk related to our policyholders, independent agents and brokers; changes in the ratings assigned to us or our insurance company subsidiaries by rating agencies; the availability of dividends from our insurance company subsidiaries; potential difficulties with technology and/or cyber security issues; the effectiveness of our controls to ensure compliance with guidelines, policies and legal and regulatory standards; and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission.

These risks and uncertainties could cause our actual results for the year 2021 and beyond to differ materially from those expressed in any forward-looking statement we make. Any projections of growth in our revenues would not necessarily result in commensurate levels of earnings. Our future financial performance is dependent upon factors discussed in our Annual Report on Form 10-K, elsewhere in this Form 10-Q and our other SEC filings. Forward-looking statements speak only as of the date on which they are made. Except to the extent required by applicable laws, the Company does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

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