10-Q 1 wrb331201310q.htm 10-Q WRB 3.31.2013 10Q
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
(Mark one)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2013
or
o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the Transition Period from                      to                     .
Commission File Number 1-15202

W. R. BERKLEY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
22-1867895
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
475 Steamboat Road, Greenwich, Connecticut
 
06830
(Address of principal executive offices)
 
(Zip Code)
 
(203) 629-3000
 
 
(Registrant’s telephone number, including area code)
 
 
 
 
 
None
 
Former name, former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ
Number of shares of common stock, $.20 par value, outstanding as of April 30, 2013: 136,036,887
 



TABLE OF CONTENTS



Part I — FINANCIAL INFORMATION
Item 1.
Financial Statements
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
 
March 31,
2013
 
December 31,
2012
 
(Unaudited)
 
 
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities
$
11,665,117

 
$
11,943,956

Equity securities
399,386

 
376,022

Arbitrage trading account
701,223

 
329,077

Investment funds
793,603

 
809,689

Loans receivable
456,533

 
401,961

Real estate
588,777

 
606,735

Total investments
14,604,639

 
14,467,440

Cash and cash equivalents
945,492

 
905,670

Premiums and fees receivable
1,504,535

 
1,440,752

Due from reinsurers
1,441,389

 
1,450,348

Accrued investment income
126,577

 
127,230

Prepaid reinsurance premiums
345,329

 
316,309

Deferred policy acquisition costs
425,070

 
404,047

Real estate, furniture and equipment
271,012

 
267,227

Goodwill
107,529

 
87,865

Trading account receivables from brokers and clearing organizations
28,720

 
446,873

Other assets
320,342

 
242,135

Total assets
$
20,120,634

 
$
20,155,896

 
 
 
 
Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Reserves for losses and loss expenses
$
9,809,843

 
$
9,751,086

Unearned premiums
2,635,995

 
2,474,847

Due to reinsurers
298,557

 
316,388

Trading account securities sold but not yet purchased
79,965

 
121,487

Federal and foreign income taxes - current and deferred
104,810

 
82,801

Other liabilities
844,297

 
959,080

Junior subordinated debentures
243,258

 
243,206

Senior notes and other debt
1,693,279

 
1,871,535

Total liabilities
15,710,004

 
15,820,430

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, 136,028,287 and 136,017,732 shares, respectively
47,024

 
47,024

Additional paid-in capital
949,926

 
945,166

Retained earnings
4,922,178

 
4,817,807

Accumulated other comprehensive income
428,592

 
465,631

Treasury stock, at cost, 99,089,631and 99,100,186 shares, respectively
(1,969,179
)
 
(1,969,411
)
Total stockholders’ equity
4,378,541

 
4,306,217

Noncontrolling interests
32,089

 
29,249

Total equity
4,410,630

 
4,335,466

Total liabilities and equity
$
20,120,634

 
$
20,155,896


See accompanying notes to interim consolidated financial statements.


1



W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share data)

 
For the Three Months Ended
 
March 31
 
2013
 
2012
REVENUES:
 
 
 
Net premiums written
$
1,376,966

 
$
1,203,526

Change in net unearned premiums
(144,847
)
 
(103,875
)
Net premiums earned
1,232,119

 
1,099,651

Net investment income
135,929

 
157,619

Insurance service fees
26,736

 
23,877

 Net investment gains
19,969

 
43,477

Change in valuation allowance, net of other-than-temporary impairments

 
4,014

Revenues from wholly-owned investees
91,735

 
49,675

Other income
281

 
392

Total revenues
1,506,769

 
1,378,705

OPERATING COSTS AND EXPENSES:
 
 
 
Losses and loss expenses
744,679

 
679,472

Other operating costs and expenses
481,604

 
431,779

Expenses from wholly-owned investees
89,152

 
51,330

Interest expense
31,111

 
28,821

Total operating costs and expenses
1,346,546

 
1,191,402

Income before income taxes
160,223

 
187,303

Income tax expense
(43,625
)
 
(52,071
)
Net income before noncontrolling interests
116,598

 
135,232

Noncontrolling interests
17

 
86

Net income to common stockholders
$
116,615

 
$
135,318

 
 
 
 
NET INCOME PER SHARE:
 
 
 
Basic
$
0.86

 
$
0.98

Diluted
0.83

 
0.94


See accompanying notes to interim consolidated financial statements.





2


W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands)
 
For the Three Months Ended
 
March 31
 
2013
 
2012
Net income before noncontrolling interests
$
116,598

 
$
135,232

Other comprehensive income (loss):
 
 
 
Change in unrealized translation adjustments
(46,623
)
 
15,583

Change in unrealized investment gains (losses), net of taxes
7,810

 
22,024

Change in net pension asset, net of taxes
1,814

 
824

Other comprehensive income (loss)
(36,999
)
 
38,431

Comprehensive income
79,599

 
173,663

Comprehensive (income) loss to the noncontrolling interest
(23
)
 
63

Comprehensive income to common stockholders
$
79,576

 
$
173,726


See accompanying notes to interim consolidated financial statements.

3


W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(Dollars in thousands)
 
For the Three Months Ended
 
March 31
 
2013
 
2012
COMMON STOCK:
 
 
 
Beginning and end of period
$
47,024

 
$
47,024

ADDITIONAL PAID-IN CAPITAL:
 
 
 
Beginning of period
$
945,166

 
$
941,109

Stock options exercised and restricted stock units issued, net of tax
(233
)
 
(10,139
)
Restricted stock units expensed
4,993

 
7,447

End of period
$
949,926

 
$
938,417

RETAINED EARNINGS:
 
 
 
Beginning of period
$
4,817,807

 
$
4,491,162

Net income to common stockholders
116,615

 
135,318

Dividends
(12,244
)
 
(11,041
)
End of period
$
4,922,178

 
$
4,615,439

ACCUMULATED OTHER COMPREHENSIVE INCOME:
 
 
 
Unrealized investment gains:
 
 
 
Beginning of period
$
517,658

 
$
430,419

Unrealized gains on securities not other-than-temporarily impaired
7,047

 
20,868

Unrealized gains on other-than-temporarily impaired securities
723

 
1,133

End of period
525,428

 
452,420

Currency translation adjustments:
 
 
 
Beginning of period
(36,676
)
 
(61,239
)
Net change in period
(46,623
)
 
15,583

End of period
(83,299
)
 
(45,656
)
Net pension asset:
 
 
 
Beginning of period
(15,351
)
 
(14,329
)
Net change in period
1,814

 
824

End of period
(13,537
)
 
(13,505
)
Total accumulated other comprehensive income
$
428,592

 
$
393,259

TREASURY STOCK:
 
 
 
Beginning of period
$
(1,969,411
)
 
$
(1,880,790
)
Stock exercised/vested
232

 
20,099

Stock repurchased

 
(6,532
)
End of period
$
(1,969,179
)
 
$
(1,867,223
)
NONCONTROLLING INTERESTS:
 
 
 
Beginning of period
$
29,249

 
$
7,526

Contributions
2,817

 
1,076

Net income
(17
)
 
(86
)
Other comprehensive income, net of tax
40

 
23

End of period
$
32,089

 
$
8,539

See accompanying notes to interim consolidated financial statements.

4


W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
 
For the Three Months Ended
 
March 31,
 
2013
 
2012
CASH FROM OPERATING ACTIVITIES:
 
 
 
Net income to common stockholders
$
116,615

 
$
135,318

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Net investment gains
(19,969
)
 
(47,491
)
Depreciation and amortization
20,910

 
22,212

Noncontrolling interests
(17
)
 
(86
)
Investment funds
(10,934
)
 
(27,624
)
Stock incentive plans
4,989

 
7,447

Change in:
 
 
 
Arbitrage trading account
4,485

 
(2,946
)
Premiums and fees receivable
(76,268
)
 
(97,077
)
Reinsurance accounts
(34,039
)
 
(16,857
)
Deferred policy acquisition costs
(23,608
)
 
(11,483
)
Income taxes
22,471

 
48,160

Reserves for losses and loss expenses
84,569

 
47,443

Unearned premiums
174,229

 
115,434

Other
(148,321
)
 
(98,688
)
Net cash from operating activities
115,112

 
73,762

CASH FROM (USED IN) INVESTING ACTIVITIES:
 
 
 
Proceeds from sale of fixed maturity securities
463,388

 
295,134

Proceeds from sale of equity securities
38,248

 
32,575

Distributions from (contributions to) investment funds
(22,072
)
 
24,744

Proceeds from maturities and prepayments of fixed maturity securities
667,711

 
408,647

Purchase of fixed maturity securities
(896,378
)
 
(872,588
)
Purchase of equity securities
(35,486
)
 
(68,652
)
Real estate purchased
(10,301
)
 
(5,611
)
Change in loans receivable
(53,405
)
 
(93,934
)
Net additions to real estate, furniture and equipment
(13,042
)
 
(15,055
)
Change in balances due to security brokers
43,325

 
16,146

Payment for business purchased, net of cash acquired
(38,556
)
 

Net cash from (used in) investing activities
143,432

 
(278,594
)
CASH FROM (USED IN) FINANCING ACTIVITIES:
 
 
 
Repayment of senior notes and other debt
(206,280
)
 
(1,684
)
Net proceeds from issuance of debt

 
354,315

Net proceeds from stock options exercised

 
3,428

Other, net
7,638

 
10,446

Net cash from (used in) financing activities
(198,642
)
 
366,505

Net impact on cash due to change in foreign exchange rates
(20,080
)
 
8,992

Net change in cash and cash equivalents
39,822

 
170,665

Cash and cash equivalents at beginning of year
905,670

 
911,742

Cash and cash equivalents at end of period
$
945,492

 
$
1,082,407

See accompanying notes to interim consolidated financial statements.

5


W. R. Berkley Corporation and Subsidiaries
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) General
The accompanying unaudited consolidated financial statements of W. R. Berkley Corporation and its subsidiaries (the “Company”) have been prepared in accordance with 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. The preparation of financial statements requires the use of management estimates. For further information related to a description of 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, 2012. Reclassifications have been made in the 2012 financial statements as originally reported to conform to the presentation of the 2013 financial statements.
The income tax provision has been computed based on the Company’s estimated annual effective tax rate. The effective tax rate for the quarter differs from the federal income tax rate of 35% principally because of tax-exempt investment income.

(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. Diluted EPS is based upon the weighted average number of common 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. Stock options for which the exercise price exceeds the average market price over the period have an anti-dilutive effect on EPS and, accordingly, are excluded from the calculation.
The weighted average number of common shares used in the computation of basic and diluted earnings per share was as follows:
(In thousands)
 
For the Three Months Ended
 
 
March 31,
 
 
2013
 
2012
Basic
 
136,025

 
137,814

Diluted
 
141,223

 
143,411


(3) Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (FASB) issued ASU 2013-02 relating to disclosures about items reclassified out of accumulated other comprehensive income. The Company’s adoption of the updated guidance effective January 1, 2013 resulted in a change in the disclosures for accumulated other comprehensive income in the Company’s consolidated financial statements but did not have any impact on the Company’s results of operations, financial position or liquidity.
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) Acquisitions

In 2012, the Company acquired a 49% interest in a worldwide supplier of after-market original equipment manufacturer (OEM) parts, systems and custom logistic support services for military aircraft operations for $43 million. In January 2013, the Company acquired the remaining 51% of this business for $43 million. The estimated useful lives of the intangible assets acquired range from 2 years to 15 years, with approximately $3 million having an indefinite life.

6


The following table summarizes the estimated fair value of net assets acquired and liabilities assumed at the date of acquisition:
(In thousands)
Acquired in 2013
 
 
Cash and cash equivalents
$
3,911

Real estate, furniture and equipment
898

Goodwill
19,664

Intangible assets
44,800

Other assets
60,661

Total assets acquired
129,934

Debt
(27,612
)
Other liabilities assumed
(17,076
)
  Net assets acquired
$
85,246


(5) Statement of Comprehensive Income (Loss)

The following table presents the components of the changes in accumulated other comprehensive income (loss) (AOCI) as of and for the three months ended March 31, 2013:
 
Unrealized Investment gains
 
Currency translation adjustments
 
Net pension asset
 
Accumulated other comprehensive income (loss)
(In thousands)
 
 
 
 
 
 
 
Changes in AOCI
 
 
 
 
 
 
Beginning of period
$
517,658

 
$
(36,676
)
 
$
(15,351
)
 
$
465,631

Other comprehensive income (loss) before reclassifications
20,989

 
(46,623
)
 

 
(25,634
)
Amounts reclassified from AOCI
(13,179
)
 

 
1,814

 
(11,365
)
Other comprehensive income (loss)
7,810

 
(46,623
)
 
1,814

 
(36,999
)
Unrealized investment gain related to non-controlling interest
(40
)
 

 

 
(40
)
Ending balance
$
525,428

 
$
(83,299
)
 
$
(13,537
)
 
$
428,592

Amounts reclassified from AOCI
 
 
 
 
 
 
 
Pre-tax
$
(20,075
)
(1
)
$

 
$
2,792

(3
)
$
(17,283
)
Tax effect
6,896

(2
)

 
(978
)
(2
)
5,918

After-tax amounts reclassified
$
(13,179
)
 
$

 
$
1,814

 
$
(11,365
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
Pre-tax
$
12,015

 
$
(46,623
)
 
$
2,792

 
$
(31,816
)
Tax effect
(4,205
)
 

 
(978
)
 
(5,183
)
Other comprehensive income (loss)
$
7,810

 
$
(46,623
)
 
$
1,814

 
$
(36,999
)
_______________
(1) Net investment gains in the consolidated statements of operations.
(2) Income tax expense in the consolidated statements of operations.
(3) Other operating costs and expenses in the consolidated statements of operations.

(6) Statements of Cash Flow
Interest payments were $53,691,000 and $45,358,000 and income taxes paid were $23,850,000 and $3,249,000 in the three months ended March 31, 2013 and 2012, respectively.

7



(7) Investments in Fixed Maturity Securities
At March 31, 2013 and December 31, 2012, investments in fixed maturity securities were as follows:
 
(In thousands)
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
Carrying
Value
Gains
 
Losses
 
March 31, 2013
 
 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
 
 
State and municipal
$
66,125

 
$
17,675

 
$

 
$
83,800

 
$
66,125

Residential mortgage-backed
31,181

 
4,977

 

 
36,158

 
31,181

Corporate
4,997

 
555

 

 
5,552

 
4,997

Total held to maturity
102,303

 
23,207

 

 
125,510

 
102,303

Available for sale:
 
 
 
 
 
 
 
 
 
U.S. government and government agency
807,341

 
68,429

 
(58
)
 
875,712

 
875,712

State and municipal
4,110,714

 
308,121

 
(9,219
)
 
4,409,616

 
4,409,616

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Residential (1)
1,293,875

 
48,550

 
(6,878
)
 
1,335,547

 
1,335,547

Commercial
203,260

 
6,504

 
(398
)
 
209,366

 
209,366

Corporate
3,370,627

 
210,832

 
(10,380
)
 
3,571,079

 
3,571,079

Foreign
1,065,472

 
96,381

 
(359
)
 
1,161,494

 
1,161,494

Total available for sale
10,851,289

 
738,817

 
(27,292
)
 
11,562,814

 
11,562,814

Total investments in fixed maturity securities
$
10,953,592

 
$
762,024

 
$
(27,292
)
 
$
11,688,324

 
$
11,665,117

December 31, 2012
 
 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
 
 
State and municipal
$
65,190

 
$
18,529

 
$

 
$
83,719

 
$
65,190

Residential mortgage-backed
32,764

 
5,286

 

 
38,050

 
32,764

Corporate
4,997

 
605

 

 
5,602

 
4,997

Total held to maturity
102,951

 
24,420

 

 
127,371

 
102,951

Available for sale:
 
 
 
 
 
 
 
 
 
U.S. government and government agency
827,591

 
72,532

 
(1,660
)
 
898,463

 
898,463

State and municipal
4,449,238

 
328,974

 
(9,693
)
 
4,768,519

 
4,768,519

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Residential (1)
1,395,739

 
53,846

 
(7,456
)
 
1,442,129

 
1,442,129

Commercial
268,671

 
5,641

 
(744
)
 
273,568

 
273,568

Corporate
3,144,480

 
214,322

 
(12,083
)
 
3,346,719

 
3,346,719

Foreign
1,029,284

 
83,347

 
(1,024
)
 
1,111,607

 
1,111,607

Total available for sale
11,115,003

 
758,662

 
(32,660
)
 
11,841,005

 
11,841,005

Total investments in fixed maturity securities
$
11,217,954

 
$
783,082

 
$
(32,660
)
 
$
11,968,376

 
$
11,943,956

___________
(1)
Gross unrealized losses for residential mortgage-backed securities include $1,925,000 and $3,037,000 as of March 31, 2013 and December 31, 2012, respectively, related to the non-credit portion of other-than-temporary impairments (“OTTI”) recognized in other comprehensive income.


8


The amortized cost and fair value of fixed maturity securities at March 31, 2013, 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
$
798,683

 
$
826,292

Due after one year through five years
3,482,465

 
3,673,747

Due after five years through ten years
2,536,987

 
2,806,448

Due after ten years
2,607,141

 
2,800,766

Mortgage-backed securities
1,528,316

 
1,581,071

Total
$
10,953,592

 
$
11,688,324

At March 31, 2013, there were no investments, other than investments in United States government and government agency securities, which exceeded 10% of common stockholders’ equity.

(8) Investments in Equity Securities
At March 31, 2013 and December 31, 2012, investments in equity securities were as follows:
 
(In thousands)
Cost
 
Gross Unrealized
 
Fair
Value
 
Carrying
Value
Gains
 
Losses
 
March 31, 2013
 
 
 
 
 
 
 
 
 
Common stocks
$
224,378

 
$
71,995

 
$
(1,342
)
 
$
295,031

 
$
295,031

Preferred stocks
82,600

 
23,340

 
(1,585
)
 
104,355

 
104,355

Total
$
306,978

 
$
95,335

 
$
(2,927
)
 
$
399,386

 
$
399,386

December 31, 2012
 
 
 
 
 
 
 
 
 
Common stocks
$
222,671

 
$
60,102

 
$
(707
)
 
$
282,066

 
$
282,066

Preferred stocks
85,504

 
10,103

 
(1,651
)
 
93,956

 
93,956

Total
$
308,175

 
$
70,205

 
$
(2,358
)
 
$
376,022

 
$
376,022


(9) Arbitrage Trading Account
At March 31, 2013 and December 31, 2012, the fair value and carrying value of the arbitrage trading account were $701 million and $329 million, respectively. The primary focus of the trading account is merger arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Arbitrage investing differs from other types of investing in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less). The Company believes that this makes arbitrage investments less vulnerable to changes in general financial market conditions.


9


(10) Net Investment Income
Net investment income consists of the following: 
 
For the Three Months Ended
 
March 31,
(In thousands)
2013
 
2012
Investment income earned on:
 
 
 
Fixed maturity securities, including cash and cash equivalents and loans receivable
$
117,836

 
$
119,288

Investment funds
10,934

 
27,623

Arbitrage trading account
3,783

 
6,481

Equity securities available for sale
2,247

 
3,150

Real estate
3,141

 
2,176

Gross investment income
137,941

 
158,718

Investment expense
(2,012
)
 
(1,099
)
Net investment income
$
135,929

 
$
157,619


(11) Investment Funds
Investment funds consist of the following:
 
Carrying Value
as of
 
Income (Losses)
from Investment Funds
 
March 31
 
December 31,
 
For the Three Months Ended March 31,
(In thousands)
2013
 
2012
 
2013
 
2012
Real estate
$
379,006

 
$
373,259

 
$
(2,001
)
 
$
8,655

Energy
147,383

 
146,325

 
9,466

 
17,938

Arbitrage
63,462

 
63,920

 
(458
)
 
1,770

Other
203,752

 
226,185

 
3,927

 
(740
)
Total
$
793,603

 
$
809,689

 
$
10,934


$
27,623


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

Investment in real estate represents directly owned property held for investment, as follows:    
 
Carrying value as of
 
March 31,
 
December 31,
(In thousands)
2013
 
2012
Properties in operation
$
264,755

 
$
282,899

Properties under development
324,022

 
323,836

Total
$
588,777

 
$
606,735


Properties in operation represent an office building in London and a long-term ground lease in Washington D.C. These properties are net of accumulated depreciation and amortization of $11,397,000 and $10,354,000, as of March 31, 2013 and December 31, 2012, respectively. Related depreciation expense was $1,757,000 and $2,105,000 for the three months ended March 31, 2013 and 2012, respectively. Future minimum rental income expected on operating leases relating to real estate held for investment is $1,099,000 in 2013, $1,504,000 in 2014, $1,549,000 in 2015, $1,596,000 in 2016, $1,644,000 in 2017 and $329,013,000 thereafter.

Properties under development represent an office building in London, a mixed-use project in Washington D.C. and an office complex in New York City. The Company expects to fund further development costs for these projects with a combination of its own funds and external financing.

10


(13) Loans Receivable
Loans receivable are as follows:
 
 
 
 
(In thousands)
March 31, 2013
 
December 31, 2012
Loans receivable
$
456,533

 
$
401,961

 
 
 
 
Valuation allowance:
 
 
 
  Specific
$
3,500

 
$
3,000

  General
2,682

 
2,620

  Total
$
6,182

 
$
5,620

 
 
 
 
Impaired loans:
 
 
 
  With a specific valuation allowance
$
3,003

 
$
1,775

  Without a valuation allowance
30,000

 
31,023

  Unpaid principal balance
36,003

 
35,872

 
 
 
 
 
For the Three Months Ended March 31,
 
2013
 
2012
  Increase (decrease) in valuation allowance
$
62

 
$
(6,896
)
  Loans receivable charged off
463

 
85


Loans receivable in non-accrual status were $3 million at both March 31, 2013 and December 31, 2012. If these loans had been current, additional interest income of $0.7 million and $0.2 million would have been recognized in accordance with their original terms for the three months ended March 31, 2013 and 2012, 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 Company's six largest loans receivable, which have an aggregate amortized cost of $243 million and an aggregate fair value of $250 million at March 31, 2013, are secured by commercial real estate located primarily in New York City, California, Hawaii and Chicago. These loans earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through August 2025.
The Company utilizes an internal risk rating system to assign a risk to each of its commercial loans. The loan rating system takes into consideration credit quality indicators including loan to value ratios, which compare the outstanding loan amount to the estimated value of the property, the borrower's financial condition and performance with respect to loan terms, the Company's position in the capital structure, and the overall leverage in the capital structure. Based on this rating system, one loan with an aggregate cost basis of $30 million was considered to be impaired at March 31, 2013. A determination was made as to the amount of loss in the event of a default and whether the loss is probable. The results of the determination were considered in connection with the valuation allowance noted above.


11


(14) Realized and Unrealized Investment Gains

 Realized and unrealized investment gains and losses are as follows:
 
For the Three Months Ended March 31,
(In thousands)
2013
 
2012
Realized investment gains and losses:
 

 
 

Fixed maturity securities:
 

 
 

Gains
$
10,996

 
$
14,955

Losses
(5,966
)
 
(543
)
Equity securities available for sale
15,245

 
26,238

Investment funds
194

 
1,310

Other
(500
)
 
1,517

    Total
19,969

 
43,477

 
 
 
 
Change in valuation allowance, net other-than-temporary impairments:
 
 
 
Decrease in valuation allowance

 
6,998

 Other-than-temporary impairments

 
(2,984
)
    Total

 
4,014

 
 
 
 
Net investment gains
19,969

 
47,491

Income tax expense
(6,989
)
 
(16,409
)
    Total after-tax investment gains and losses
$
12,980

 
$
31,082

Change in unrealized investment gains and losses:
 

 
 

Fixed maturity securities
$
(15,589
)
 
$
19,422

Previously impaired fixed maturity securities
1,112

 
1,743

Equity securities available for sale
24,561

 
11,595

Investment funds
(3,268
)
 
1,677

Total change in unrealized investment gains and losses
6,816

 
34,437

Income tax benefit (expense)
994

 
(12,413
)
Noncontrolling interests
(40
)
 
(23
)
    Total after-tax unrealized gains and losses
$
7,770

 
$
22,001

            


12


(15) Securities in an Unrealized Loss Position
The following table summarizes all securities in an unrealized loss position at March 31, 2013 and December 31, 2012 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
March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
24,203

 
$
58

 
$

 
$

 
$
24,203

 
$
58

State and municipal
133,592

 
1,830

 
100,664

 
7,389

 
234,256

 
9,219

Mortgage-backed securities
451,452

 
4,235

 
44,419

 
3,041

 
495,871

 
7,276

Corporate
348,050

 
2,425

 
66,309

 
7,955

 
414,359

 
10,380

Foreign
91,803

 
309

 
3,221

 
50

 
95,024

 
359

Fixed maturity securities
1,049,100

 
8,857

 
214,613

 
18,435

 
1,263,713

 
27,292

Common stocks
31,119

 
1,342

 

 

 
31,119

 
1,342

Preferred stocks
386

 
235

 
24,324

 
1,350

 
24,710

 
1,585

Equity securities
31,505

 
1,577

 
24,324

 
1,350

 
55,829

 
2,927

Total
$
1,080,605

 
$
10,434

 
$
238,937

 
$
19,785

 
$
1,319,542

 
$
30,219

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
69,551

 
$
1,660

 
$

 
$

 
$
69,551

 
$
1,660

State and municipal
152,694

 
1,639

 
135,967

 
8,054

 
288,661

 
9,693

Mortgage-backed securities
484,731

 
3,629

 
58,292

 
4,571

 
543,023

 
8,200

Corporate
371,781

 
2,964

 
70,537

 
9,119

 
442,318

 
12,083

Foreign
95,623

 
996

 
11,210

 
28

 
106,833

 
1,024

Fixed maturity securities
1,174,380

 
10,888

 
276,006

 
21,772

 
1,450,386

 
32,660

Common stocks
46,725

 
707

 

 

 
46,725

 
707

Preferred stocks

 

 
39,812

 
1,651

 
39,812

 
1,651

Equity securities
46,725

 
707

 
39,812

 
1,651

 
86,537

 
2,358

Total
$
1,221,105

 
$
11,595

 
$
315,818

 
$
23,423

 
$
1,536,923

 
$
35,018

Fixed Maturity Securities – A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at March 31, 2013 is presented in the table below.  
($ in thousands)
Number of
Securities
 
Aggregate
Fair Value
 
Gross
Unrealized
Loss
Unrealized loss greater than $5 million:

 
$


$

Unrealized loss less than $5 million:
 
 
 
 
 
Mortgage-backed securities
12

 
54,367

 
2,925

Corporate
9

 
28,242

 
3,172

State and municipal
2

 
24,654

 
1,264

        Foreign
1

 
11,513

 
7

Total
24

 
$
118,776

 
$
7,368


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 three months ended March 31, 2013 and 2012, there were no changes in the portion of impairments recognized in earnings for those securities that have been impaired due to both credit factors and non-credit factors.
 
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

13


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 and does not consider any of these securities to be OTTI.
Preferred Stocks – At March 31, 2013, there were two preferred stocks in an unrealized loss position, with an aggregate fair value of $25 million and a gross unrealized loss of $2 million. One of those preferred stocks with a gross unrealized loss of $0.2 million was rated non-investment grade. Based upon management’s view of the underlying value of these securities, the Company does not consider either of these preferred stocks to be OTTI.
Common Stocks – At March 31, 2013, the Company owned two common stocks in an unrealized loss position with an aggregate fair value of $31 million and an aggregate unrealized loss of $1 million. The Company does not consider these common stocks to be OTTI.

(16) Fair Value Measurements
The Company’s fixed maturity and equity securities available for sale 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. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available.
Because many fixed maturity securities do not trade on a daily basis, the Company utilizes pricing models and processes which may include benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Market inputs used to evaluate securities include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Quoted prices are often unavailable for recently issued securities, securities that are infrequently traded or securities that are only traded in private transactions. For publicly traded securities for which quoted prices are unavailable, the Company determines fair value based on independent broker quotations and other observable market data. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial projections, credit quality and business developments of the issuer and other relevant information.



14


The following tables present the assets and liabilities measured at fair value, on a recurring basis, as of March 31, 2013 and December 31, 2012 by Level:
 
(In thousands)
Total
 
Level 1
 
Level 2
 
Level 3
March 31, 2013
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Fixed maturity securities available for sale:
 
 
 
 
 
 
 
U.S. government and agency
$
875,712

 
$

 
$
875,712

 
$

State and municipal
4,409,616

 

 
4,409,616

 

Mortgage-backed securities
1,544,913

 

 
1,544,913

 

Corporate
3,571,079

 

 
3,515,310

 
55,769

Foreign
1,161,494

 

 
1,161,494

 

Total fixed maturity securities available for sale
11,562,814

 

 
11,507,045

 
55,769

Equity securities:
 
 
 
 
 
 
 
Common stocks
295,031

 
293,793

 

 
1,238

Preferred stocks
104,355

 

 
103,969

 
386

Total equity securities
399,386

 
293,793

 
103,969

 
1,624

Arbitrage trading account
701,223

 
236,670

 
463,456

 
1,097

Total
$
12,663,423

 
$
530,463

 
$
12,074,470

 
$
58,490

Liabilities:
 
 
 
 
 
 
 
Securities sold but not yet purchased
$
79,965

 
$
70,580

 
$
9,383

 
$
2

December 31, 2012
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Fixed maturity securities available for sale:
 
 
 
 
 
 
 
U.S. government and agency
$
898,463

 
$

 
$
898,463

 
$

State and municipal
4,768,519

 

 
4,768,519

 

Mortgage-backed securities
1,715,697

 

 
1,715,697

 

Corporate
3,346,719

 

 
3,287,654

 
59,065

Foreign
1,111,607

 

 
1,111,607

 

Total fixed maturity securities available for sale
11,841,005

 

 
11,781,940

 
59,065

Equity securities:
 
 
 
 
 
 
 
Common stocks
282,066

 
280,658

 

 
1,408

Preferred stocks
93,956

 

 
93,335

 
621

Total equity securities
376,022

 
280,658

 
93,335

 
2,029

Arbitrage trading account
329,077

 
233,603

 
94,546

 
928

Total
$
12,546,104

 
$
514,261

 
$
11,969,821

 
$
62,022

Liabilities:
 
 
 
 
 
 
 
Securities sold but not yet purchased
$
121,487

 
$
114,909

 
$
6,558

 
$
20

There were no significant transfers between Levels 1 and 2 during the three months ended March 31, 2013 or during the year ended December 31, 2012.








15


The following tables summarize changes in Level 3 assets and liabilities for the three months ended March 31, 2013 and for the year ended December 31, 2012:
 
  
 
 
Gains (Losses) Included in
 
 
(In thousands)
Beginning
Balance
 
Earnings
 
Other
Comprehensive
Income
 
Purchases
 
(Sales)
 
Maturities
 
Transfer in
 
Ending
Balance
Three months ended March 31, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
$
59,065

 
$
(15
)
 
$
144

 
$
14,297

 
$
(14,255
)
 
$
(3,467
)
 
$

 
$
55,769

Total
59,065

 
(15
)
 
144

 
14,297

 
(14,255
)
 
(3,467
)
 

 
55,769

Equity securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
1,408

 

 

 

 
(170
)
 

 

 
1,238

Preferred stocks
621

 

 
(235
)
 

 

 

 

 
386

Total
2,029

 

 
(235
)
 

 
(170
)
 

 

 
1,624

Arbitrage trading account
928

 
169

 





 

 

 
1,097

Total
$
62,022

 
$
154

 
$
(91
)
 
$
14,297

 
$
(14,425
)
 
$
(3,467
)
 
$

 
$
58,490

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities sold but not yet purchased
$
20

 
$
(18
)
 
$

 
$

 
$

 
$

 
$

 
$
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the year ended December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
$
67,828

 
$
(1,497
)
 
$
9,622

 
$
283

 
$

 
$
(17,171
)
 
$

 
$
59,065

Total
67,828

 
(1,497
)
 
9,622

 
283

 

 
(17,171
)
 

 
59,065

Equity securities available for sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
1,559

 

 

 

 
(151
)
 

 

 
1,408

Preferred stocks
12,303

 
1,126

 
(1,737
)
 

 
(11,071
)
 

 

 
621

Total
13,862

 
1,126

 
(1,737
)
 

 
(11,222
)
 

 

 
2,029

Arbitrage trading account
851

 
(3,534
)
 
3,570

 

 
(52
)
 

 
93

 
928

Total
$
82,541

 
$
(3,905
)
 
$
11,455

 
$
283

 
$
(11,274
)
 
$
(17,171
)
 
$
93

 
$
62,022

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities sold but not yet purchased
$
21

 
$
(1
)
 
$

 
$

 
$

 
$

 
$

 
$
20

There were no significant transfers in or out of Level 3 during the three months ended March 31, 2013 or during the year ended December 31, 2012.


16


(17) Reinsurance
The following is a summary of reinsurance financial information:
  
 
For the Three Months Ended
 
 
March 31,
(In thousands)
 
2013
 
2012
Written premiums:
 
 
 
 
Direct
 
$
1,400,412

 
$
1,201,019

Assumed
 
231,209

 
200,507

Ceded
 
(254,655
)
 
(198,000
)
Total net premiums written
 
$
1,376,966

 
$
1,203,526

 
 
 
 
 
Earned premiums:
 
 
 
 
Direct
 
$
1,240,562

 
$
1,103,956

Assumed
 
214,016

 
179,518

Ceded
 
(222,459
)
 
(183,823
)
Total net premiums earned
 
$
1,232,119

 
$
1,099,651

 
 
 
 
 
Ceded losses incurred
 
$
110,551

 
$
85,277

The Company reinsures a portion of its exposures principally to reduce its net liability on individual risks and to protect against catastrophic losses. The Company also cedes premiums to state assigned risk plans and captive insurance companies. Estimated amounts due from reinsurers are reported net of reserves for uncollectible reinsurance of $2 million as of March 31, 2013 and December 31, 2012.

(18) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:
 
  
March 31, 2013
 
December 31, 2012
(In thousands)
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets:
 
 
 
 
 
 
 
Fixed maturity securities
$
11,665,117

 
$
11,688,324

 
$
11,943,956

 
$
11,968,376

Equity securities available for sale
399,386

 
399,386

 
376,022

 
376,022

Arbitrage trading account
701,223

 
701,223