W. R. Berkley
Annual Report 2015

Plain-text annual report

W. R. Berkley Corporation 2015 Annual Report Always do right. This will gratify some people and astonish the rest. Mark Twain On the Cover: Norfolk & Western: “The Pocahontas” Alderson MaGee W. R. Berkley Corporation 475 Steamboat Road Greenwich, CT 06830 203.629.3000 www.wrberkley.com @WRBerkleyCorp © Copyright 2016 W. R. Berkley Corporation. All rights reserved. W . R . B e r k l e y C o r p o r a t i o n 2 0 1 5 A n n u a l R e p o r t 80793in_cvr.indd 1-3 4/8/16 12:25 PM The Annual Meeting of Stockholders of W. R. Berkley Corporation will be held at 1:00 p.m. on May 25, 2016 at the offices of W. R. Berkley Corporation, 475 Steamboat Road, Greenwich, Annual Meeting Common Stock of W. R. Berkley Corporation is traded on the Connecticut 06830. Shares Traded New York Stock Exchange. Symbol: WRB Transfer Agent and Registrar Wells Fargo Bank, N.A. Shareowner Services 1110 Centre Pointe Curve, Suite 101 Mendota Heights, MN 55120-4100 Tel: (800) 468 9716 www.shareowneronline.com For additional information, including press releases, visit our internet site at: http://www.wrberkley.com Follow us on Twitter @WRBerkleyCorp Website Auditors KPMG LLP, New York, New York Willkie Farr & Gallagher LLP, New York, New York Outside Counsel The W. R. Berkley Corporation 2015 Annual Report editorial sections are printed on recycled paper made from fiber sourced from well-managed forests and other controlled wood sources and is independently certified to the Forest Stewardship Council® (FSC®) standards. © Copyright 2016 W. R. Berkley Corporation. All rights reserved. 2015 Financial Highlights 2015 Financial Highlights By taking advantage of challenging opportunities and bringing together talented people and capital, we feel confident we will be able to continue to deliver outstanding returns. By taking advantage of challenging opportunities and bringing together talented people and capital, we feel confident we will be able to continue to deliver outstanding returns. over the past 5 years. over the past 5 years. 39 .7Combined ratio averaged 95.7% 39.7Combined ratio averaged 95.7% % % % % 119.0 119.0 $37. 31 $37. 31 billion 7. billion7. $ 2 $2 Table of Contents 03 Table of Contents 03 Five year cumulative total return – stock price plus dividends. Five year cumulative total return – stock price plus dividends. Book value per share grew 44% over the past 5 years. Book value per share grew 44% over the past 5 years. Total revenues increased 49% over the past 5 years. Total revenues increased 49% over the past 5 years. Board of Directors and Officers Board of Directors and Officers Segment Overview Segment Overview Chairman’s Letter Chairman’s Letter Operating Units Operating Units Our Business Our Business Investments Investments Form 10-K Form 10-K 125 133 125 133 11 12 05 11 12 05 15 15 Corporate Information Corporate Information IBC IBC Annual Meeting The Annual Meeting of Stockholders of W. R. Berkley Corporation will be held at 1:00 p.m. on May 25, 2016 at the offices of W. R. Berkley Corporation, 475 Steamboat Road, Greenwich, Common Stock of W. R. Berkley Corporation is traded on the Connecticut 06830. Shares Traded New York Stock Exchange. Symbol: WRB Transfer Agent and Registrar Wells Fargo Bank, N.A. Shareowner Services 1110 Centre Pointe Curve, Suite 101 Mendota Heights, MN 55120-4100 Tel: (800) 468 9716 www.shareowneronline.com Website For additional information, including press releases, visit our internet site at: http://www.wrberkley.com Follow us on Twitter @WRBerkleyCorp Auditors KPMG LLP, New York, New York Outside Counsel Willkie Farr & Gallagher LLP, New York, New York The W. R. Berkley Corporation 2015 Annual Report editorial sections are printed on recycled paper made from fiber sourced from well-managed forests and other controlled wood sources and is independently certified to the Forest Stewardship Council® (FSC®) standards. © Copyright 2016 W. R. Berkley Corporation. All rights reserved. 4/8/16 12:25 PM 80793in_cvr.indd 4-139 80793in_cvr.indd 4-139 4/8/16 12:25 PM Relative Stock Price Performance 1 W. R. Berkley Corporation S&P 500® Cumulative Growth: 6,266% 1,122% 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 In thousands, except per share data Years ended December 31, Total revenues Net premiums written Net investment income Insurance service fees Net income to common stockholders Net income per common share: 2015 2014 2013 2012 2011 $ 7,206,457 $ 7,128,928 $ 6,408,534 $ 5,823,554 $ 5,155,984 6,189,515 5,996,947 5,500,173 4,898,539 4,357,368 512,645 139,440 503,694 600,885 117,443 648,884 544,291 586,763 526,351 107,513 103,133 92,843 499,925 510,592 391,211 Basic 4.06 Diluted 3.87 5.07 4.86 3.69 3.55 3.72 3.56 2.80 2.69 Return on common stockholders’ equity 11.0% 15.0% 11.6% 12.9% 10.7% At Year End Total assets $ 21,730,967 $ 21,716,691 $ 20,551,796 $ 20,155,896 $ 18,403,873 Total investments 15,351,467 15,591,824 14,548,630 14,467,440 13,439,518 Reserves for losses and loss expenses 10,669,150 10,369,701 10,080,941 9,751,086 9,337,134 Common stockholders’ equity 4,600,246 4,336,035 4,306,217 3,953,356 4,589,945 Common shares outstanding 123,308 126,749 132,233 136,018 137,520 Common stockholders’ equity per share 37.31 36.21 32.79 31.66 28.75 W. R. Berkley Corporation 2015 Annual Report 80793in_txt.indd 1 4/5/16 9:16 PM 2 At A Glance Total Revenues (Dollars in billions) Investments (Market Value – Dollars in billions) Reserves for Losses and Loss Expenses (Dollars in billions) Common Stockholders’ Equity* (Dollars in billions) 7.1 7.2 6.4 5.8 5.2 15.6 15.4 9.3 14.5 14.5 13.4 10.7 10.4 10.1 9.8 4.6 4.6 4.3 4.3 4.0 11 12 13 14 15 11 12 13 14 15 11 12 13 14 15 11 12 13 14 15 *Net of $1.0 billion in shares repurchased from 2011-2015 W. R. Berkley Corporation, founded in 1967, is one of the nation’s premier commercial lines property casualty insurance providers. Each of the operating units in the W. R. Berkley Insurance Group participates in a niche market requiring specialized knowledge about a territory or product. Our competitive advantage lies in our long-term strategy of decentralized operations, allowing each of our units to identify and respond quickly and effectively to changing market conditions and local customer needs. This decentralized structure provides financial accountability and incentives to local management and enables us to attract and retain the highest caliber professionals. We have the expertise and resources to utilize our strengths in the present environment, and the flexibility to anticipate, innovate and respond to whatever opportunities and challenges the future may hold. How we are different: Accountability The business is operated with an ownership perspective and a clear sense of fiduciary responsibility to shareholders. People-Oriented Strategy New businesses are started when opportunities are identified and, most importantly, when the right talent is found to lead a business. Of the Company’s 51 operating units, 44 were developed internally and seven were acquired. Responsible Financial Practices Risk exposures are managed proactively. A strong balance sheet, including a high-quality investment portfolio, ensures ample resources to grow the business profitably whenever there are opportunities to do so. Risk-Adjusted Returns Management company-wide is focused on obtaining the best potential returns with a real understanding of the amount of risk being assumed. Superior risk-adjusted returns are generated over the insurance cycle. Transparency Consistent and objective standards are used to measure performance — and, the same standards are used regardless of the environment. 80793in_txt.indd 2 4/11/16 3:23 PM Our Business 3 Today, as yesterday and tomorrow, the combined expertise of underwriting, risk management, claims handling and investing will deliver outstanding risk-adjusted returns. Insurance-Domestic The Insurance-Domestic units underwrite commercial insurance business, including excess and surplus lines and admitted lines, primarily throughout the United States. 2015 Results: Total revenues were $5.1 billion. Pre-tax income was $725 million. Insurance-International The Insurance-International units underwrite insurance business primarily in the United Kingdom, Continental Europe, South America, Canada, Scandinavia and Australia. 2015 Results: Total revenues were $824 million. Pre-tax income was $52 million. Reinsurance-Global The Reinsurance-Global units write reinsurance business on a facultative and treaty basis, primarily in the United States, United Kingdom, Continental Europe, Australia, the Asia-Pacific Region and South Africa. 2015 Results: Total revenues were $683 million. Pre-tax income was $95 million. 80793in_txt.indd 3 4/7/16 8:22 PM W. R. Berkley Corporation 2015 Annual Report 4 W. R. Berkley Corporation’s Performance vs. the S&P 500 ® Annual Percentage Change In Per-Share Book Value of W. R. Berkley Corporation with Dividends Included (1) In S&P 500® with Dividends Included (2) Relative Results (1)-(2) Year 50.0% -26.4% 76.4% 1974 12.5% 37.2% -24.7% 1975 29.6% 23.6% 6.0% 1976 28.6% -7.4% 36.0% 1977 24.4% 6.4% 18.0% 1978 18.2% 18.2% 0.0% 1979 9.4% 32.3% -22.9% 1980 -5.0% 19.5% 14.5% 1981 1982 -9.0% 21.4% -30.4% 1983 -11.6% 22.4% -34.0% 1984 -16.9% 6.1% -23.0% 1985 59.6% 31.6% 28.0% 1986 106.8% 18.6% 88.2% 23.5% 5.1% 18.4% 1987 22.5% 16.6% 5.9% 1988 13.2% 31.7% -18.5% 1989 7.8% -3.1% 10.9% 1990 20.8% 30.5% -9.7% 1991 13.5% 7.6% 5.9% 1992 1993 16.7% 10.1% 6.6% 1994 -10.8% 1.3% -12.1% 34.5% 37.6% -3.1% 1995 7.9% 23.0% -15.1% 1996 15.9% 33.4% -17.5% 1997 1998 1.9% 28.6% -26.7% 1999 -18.1% 21.0% -39.1% 17.1% -9.1% 26.2% 2000 7.6% -11.9% 19.5% 2001 31.2% -22.1% 53.3% 2002 26.7% 28.7% -2.0% 2003 25.6% 10.9% 14.7% 2004 21.9% 4.9% 17.0% 2005 30.1% 15.8% 14.3% 2006 16.3% 5.5% 10.8% 2007 -4.1% -37.0% 32.9% 2008 23.3% 26.5% -3.2% 2009 15.4% 15.1% 0.3% 2010 12.2% 2.1% 10.1% 2011 14.8% 16.0% -1.2% 2012 4.8% 32.4% -27.6% 2013 14.8% 13.7% 1.1% 2014 4.3% 1.4% 3.0% 2015 Average Annual Gain — 1974–2015 17.3% 10.8% 6.6% Overall Gain — 1973–2015 45,208% 7,218% Overall gain 1973–2015 with dividends compounded = 51,681% W. R. Berkley Corporation S&P 500® 60,000% 40,000% 20,000% 0% 51,681% 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2015 Notes: W. R. Berkley Corporation’s book value per share has been adjusted for stock dividends paid from 1975 to 1983. Stock dividends were 6% in each year from 1975 to 1978, 14% in 1979, and 7% in each year from 1980 to 1983. The Company has paid cash dividends each year since 1978. 80793in_txt.indd 4 4/5/16 9:16 PM Chair man’s Letter 5 Left to Right: W. Robert Berkley, Jr., President and Chief Executive Officer William R. Berkley, Executive Chairman To Our Shareholders: 2015 was a good year by almost every measure. We reported an 11% after-tax return on equity, driven by a 93.7% combined ratio and positive investment returns. We started six new businesses or divisions and added some outstanding people to our team. After 49 years, we successfully completed a seamless CEO transition. However, in a year with such a great list of accomplishments, we still did not achieve our targeted return, in part because the realization of investment gains is not consistent from year to year. The timing of realized gains will cause the annual variability of returns to continue, but the amount of gains is likely to enhance results and assist us in meeting our long-term targets. Our business model is designed to achieve long-term risk-adjusted returns of 15% after-tax. We are constantly adjusting our model to adapt to the ever- changing environment and maintain an optimal balance of leverage, underwriting profitability and investment returns. 80793in_txt.indd 5 4/5/16 9:16 PM W. R. Berkley Corporation 2015 Annual Report 6 % 1410 Year Average Return on Shareholders’ Equity Underwriting profitability remains the core focus of our Company, and today, it is the driving force in our success. With a targeted combined ratio in the low 90s, we are able to generate excellent underwriting results. The challenge in the current environment is attaining satisfactory investment returns. As interest rates declined in recent years, it became difficult to maintain a high-quality portfolio with a duration that reflects the average life of our liabilities, and still obtain adequate yields. The variables under our control are the quality, duration and liquidity of the fixed-income portfolio. We were neither prepared to reduce the quality of our portfolio, nor were we willing to extend the duration since that could exacerbate our potential exposure to inflation. Thus we felt we had two alternatives. The first was to marginally reduce short-term liquidity by buying securities that might not provide immediate liquidity, but were of the highest quality. The second was to expand our investments in private equity, limited partnerships and real estate to improve returns. We have experience in all of these areas, and they have delivered excellent returns over many years. Investments in these areas now represent an amount equal to approximately half of our shareholders’ equity. So far, this strategy has proven to be rewarding. Although the income is not reported in as consistent a manner as income from bonds, the internal rate of return is well above the 3-4% we would have received from fixed-income securities, and we have not sacrificed quality or increased risk. In addition, because accounting rules require us to carry many of these investments under the equity method, there is a significant amount of unrealized gains embedded in our portfolio that is not recognized on our balance sheet. The single most visible investment of this type is Health Equity (HQY), which we took public in 2014. If we were to sell our interest in any of these projects in any given year, our ROE would be positively impacted. In general, 2015 benefited from a lack of catastrophic losses and a continued low level of inflation. The domestic property casualty industry had one of its best years in the past twenty. Yet, several large insurers recorded meaningful reserve charges, while consolidation continued among both midsize and small companies. Additionally, several global players continued rearranging the deck 80793in_txt.indd 6 4/5/16 9:16 PM 7 chairs to find their optimal position. This type of environment provides tremendous opportunities for a stable enterprise – and it is the type of environment in which the Company has excelled. Much of the Company’s long-term success is a reflection of our recognition that the property casualty business is a long-term business. Short-term profitability can be misleading, and at times, may even be inaccurate, especially in an environment with less predictability than usual. We are required to price our product before we know the actual cost, so the quality of our earnings is a reflection of the accuracy of our loss cost estimates. Implicit in these estimates are assumptions about inflation and other variables. We have a rigorous process for establishing accurate reserves. In managing our business each day, we attempt to examine not just the profitability, but also the inherent risk and volatility or predictability of the business we underwrite. All returns are not created equal, and one needs to be conscious of the risk embedded in achieving those returns. We believe increased risk, including volatility, requires us to obtain higher returns. We avoid entering businesses where the return might be extremely attractive for one year and negative in the subsequent year. Our preference is to expand where the marginal returns are equal to or greater than our existing return. As such, we recognize that growth is a desirable goal, but not axiomatic with success. As responsible stewards of our shareholders’ capital, we are diligent in evaluating the best times and places to grow. This drives decisions regarding whether to use capital or return it to shareholders in the form of stock buybacks or dividends. We do not believe the size of an enterprise in and of itself should be the driving force in measuring success. Our strategy seems quite simple; however, it is based on real economics, not necessarily on accounting. Thus, as we grow our business, the choice is often to Our focus on long-term risk-adjusted returns has enabled us to deliver on our fundamental objective of building book value per share and creating shareholder value for 49 years. 80793in_txt.indd 7 4/7/16 8:36 PM W. R. Berkley Corporation 2015 Annual Report 8 We will still succeed by differentiating ourselves with the best underwriters, claims professionals and policies that meet the real or perceived needs of our customers. build from within. Acquisitions often times have a more immediate impact on reported earnings, but inherently bring about questions of balance sheet risk and cultural fit. We are constantly on the lookout for new specialty opportunities that allow us to decommoditize the product. Projects that require expertise and attract customers who are willing to pay a premium to the commodity-based price in order to obtain a better designed product or a better quality of service are particularly attractive. Having more satisfied customers leads to a more profitable business. When you build such an enterprise, costs generally result in modest losses for the first few years of the start-up. But the real economic return is far greater than would be achieved from an acquisition. Of our 51 operating units, we started all but seven. We continue to invest in such start-up ventures and the current year was no exception. We started six new companies or divisions and we have several new ventures on the horizon. While building in a controlled way drives up our expenses in the short run, it creates internal growth for the future and long- term value. Our focus on long-term risk-adjusted returns has enabled us to deliver on our fundamental objective of building book value per share and creating shareholder value for 49 years. In 2015, we executed a smooth CEO transition. The board implemented a plan over five years ago to create a seamless transition for shareholders, employees and customers. Over that time, Rob has taken on increasing responsibilities for our operations and will continue to do so for virtually the entire Company. As executive chairman, I will remain fully engaged in the Company’s activities, focusing however on its strategy and investment activities. As we look to the future, Rob and I see structural changes on the horizon that present challenges to the fundamental methodology of delivering risk amelioration products to the ultimate customer. In addition, expertise 80793in_txt.indd 8 4/11/16 3:23 PM 9 continues to be in short supply in all areas of the property casualty business. As an industry, the property casualty business has not attracted its share of talented young people. This continues to be a challenge in part because the very nature of the industry is not exciting for young people who want to be given responsibility at a rapid pace. In the parts of the business where we participate, it takes time to gain experience and develop expertise. We continue to actively support insurance education. In the context of this environment, rating agencies and regulators work to protect insurance buyers. They have attempted to keep up with changing times by paying attention to evolving capital models and implementing more robust evaluation frameworks. However, as the nature and source of capital evolves from permanent, dedicated capital owned and controlled by the insurance company to more temporary third-party capital, we are faced with new and greater uncertainties. Insurers not only need to be able to pay their claims, but they need to be willing to pay them. The unforeseen event that no one expected or modeled could call that willingness into serious question, as the separation of the insurer and capital could present unanticipated challenges. At the same time, the distribution system is evolving. Customers are gradually relying more on automated systems to select the company they use and the coverages they buy. However, the property casualty industry, which is a cornerstone to financial stability in our economy, has historically been a slow moving business. Change comes slowly. Even in the most commoditized and easily understood parts of our industry, customers have been very slow to accept online policy origination and issuance. As technology becomes second nature to our customers, the pace of this change will accelerate, and a greater number of economic decisions will be based on numerical analysis. Unfortunately, although the numerical analysis may give us the best price for a % 44Five Year Growth in Book Value Per Share specific coverage, it doesn’t always give us the best type of coverage. There are times when the subtleties of knowledge provided by an agent or broker – a human being – can add substantial value. The combination of these changing forms of capital and new entrants into the business with lower-cost automated distribution might result in less satisfied customers. But the cornerstone issues of providing protection against loss and peace of mind will remain. W. R. Berkley Corporation 2015 Annual Report 80793in_txt.indd 9 4/7/16 8:36 PM 10 We continue to believe that expertise combined with capital, delivered with good advice, is the best way to deliver value to most customers. Even as these changes occur, we will still succeed by differentiating ourselves with the best underwriters, claims professionals and policies that meet the real or perceived needs of our customers. We have been successful in doing this for nearly five decades. We have the skills and foresight to adapt our competitive advantages to the changing world in a way that is most relevant to our customers and creates the most value for our shareholders. The more uncertainty that exists and the more financial concerns that arise, the more valuable it is to have a dependable insurance company at your side. We provide that service through our distribution partners and our employees. We continue to believe that expertise combined with capital, delivered with good advice, is the best way to deliver value to most customers. Our Company has been built to last with a culture and focus that ensures we will fully meet our responsibilities to all of our constituencies. The past 49 years have been extraordinary. Ultimately, the support of a large number of people – investors, mentors, colleagues, customers and even regulators – has helped us get from the starting line to where we are today. We tell people we are a large, publicly-owned, “family” Company. We take our values seriously. We try to do what is right based on our judgment and our assessment of the facts and the truth as we perceive it. We expect the future to be even brighter and believe that it offers more opportunities today than ever before. We hope you continue with us on our journey. On a personal basis, I would like to especially thank our board of directors and the many long-term shareholders that have entrusted us with their capital. Our success would not have been possible without the commitment and dedication of our employees, and I sincerely thank all of them. William R. Berkley Executive Chairman 80793in_txt.indd 10 4/7/16 8:36 PM Investments 11 Over the past few years, we have shortened the duration of our fixed-income portfolio to 3.3 years to manage the yield curve as well as the impact of potential inflation. These changes have reduced the potential impact of mark-to-market on our portfolio and positioned us to take advantage of rising interest rates when they occur. In addition, due to the prolonged low interest rate environment, we have allocated a portion of our portfolio to investments designed to generate capital gains. Breakdown of Fixed Maturity Securitie s (Including cash) U.S. Government and Government Agency Bonds Cash and Cash Equivalents Foreign Bonds 6% Mortgage-backed Securities Asset-backed Securities 6% 9% 13% State and Municipal Bonds 35% 5% 26% Investment Data (Dollars in millions) Cash and invested assets: Invested assets Cash and cash equivalents Total Net investment income Net realized gains on investment sales Corporate Bonds 2015 $15,351 2014 $15,592 $ 764 $ 674 $16,115 $16,266 $ 513 $ $ 126 $ 601 255 W. R. Berkley Corporation 2015 Annual Report 80793in_txt.indd 11 4/11/16 10:15 AM 12 Segment Overview Each of our three business segments — Insurance- Domestic, Insurance-International and Reinsurance- Global — comprises individual operating units that serve a market defined by geography, products, services, or types of customers. Our growth is based on meeting the needs of customers, maintaining a high-quality balance sheet, and allocating capital to our best opportunities. We combine capital with outstanding people and wrap it all in a culture that is focused on optimizing risk- adjusted returns. It creates a permanent competitive advantage that can only be acquired over many years with consistent discipline. 80793in_txt.indd 12 4/7/16 8:42 PM 2015 Segment Data 13 2015 Assets and Reserves (Dollars in Billions) Insurance-Domestic Assets Reserves $7.2 $16.4 Insurance-International Assets Reserves $1.7 $0.7 Reinsurance-Global Assets Reserves $2.4 $1.4 2015 Revenues 2015 Pre-tax Income Insurance- International Reinsurance- Global 10 % 13% Insurance- International Reinsurance- Global 6% 11 % 77% Insurance- Domestic 83% Insurance- Domestic W. R. Berkley Corporation 2015 Annual Report 80793in_txt.indd 13 4/5/16 9:16 PM 14 Comparison of Cumulative Total Returns W. R. Berkley Corporation S&P 500® Index S&P 500® Property & Casualty Insurance Index Assumes initial investment of $100 on January 01, 2011, 2006, and 2001, respectively, with dividends reinvested $250 $200 $150 $100 $50 $0 5 Year 2010 2011 2012 2013 2014 2015 W. R. Berkley Corporation S&P 500® Index S&P 500® Property & Casualty Insurance Index Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 $100.00 $126.85 $144.09 $167.19 $203.32 $219.10 $100.00 $102.11 $118.45 $156.82 $178.28 $180.75 $100.00 $99.74 $119.80 $165.67 $191.75 $210.03 10 Year $250 $200 $150 $100 $50 $0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 W. R. Berkley Corporation $100.00 $109.21 $94.94 $99.61 $79.98 $89.78 $113.88 $129.36 $150.10 $182.53 $196.10 S&P 500® Index $100.00 $115.79 $122.16 $76.96 $97.33 $111.99 $114.35 $132.65 $175.62 $199.66 $202.42 S&P 500® Property & Casualty Insurance Index $100.00 $112.83 $97.94 $69.11 $77.55 $84.70 $84.48 $101.47 $140.32 $162.41 $177.89 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 $800 $700 $600 $500 15 Year $400 $300 $200 $100 $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 W. R. Berkley Corporation S&P 500® Index $100.00 $115.13 $128.61 $171.66 $233.21 $355.04 $387.72 $337.08 $353.64 $283.95 $318.74 $404.33 $459.27 $532.90 $648.06 $698.36 $100.00 $88.11 $68.64 $88.33 $97.94 $102.75 $118.98 $125.52 $79.08 $100.01 $115.07 $117.50 $136.31 $180.45 $205.15 $207.99 S&P 500® Property & Casualty Insurance Index $100.00 $91.95 $81.81 $103.41 $114.21 $131.46 $148.33 $128.75 $90.86 $101.95 $111.35 $111.06 $133.39 $184.47 $213.51 $233.86 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 The S&P 500® Property and Casualty Insurance Index consists of ACE Ltd., Allstate Corporation, The Chubb Corporation, Cincinnati Financial Corporation, Progressive Corporation, The Travelers Companies, Inc., and XL Group, plc. Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980–2016. Index Data: Copyright Standard and Poor’s Inc. Used with permission. All rights reserved. 80793in_txt.indd 14 4/7/16 8:46 PM SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT [x] OF 1934 For the fiscal year ended December 31, 2015 OR [ ] 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 (I.R.S. Employer Identification Number) (State or other jurisdiction of incorporation or organization) 475 Steamboat Road, Greenwich, CT 06830 (Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (203) 629-3000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock, par value $.20 per share New York Stock Exchange 5.625% Subordinated Debentures due 2053 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No x 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 x No 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K. x 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. (Check one): Large accelerated filer x Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company 80793in_10k.indd 1 3/14/16 5:48 PM Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No x The aggregate market value of the voting and non-voting common stock held by non-affiliates (computed by reference to the price at which the common stock was last sold) as of the last business day of the registrant’s most recently completed second fiscal quarter was $5,048,029,512. Number of shares of common stock, $.20 par value, outstanding as of February 17, 2016: 122,586,752 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company’s definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2015, are incorporated herein by reference in Part III. 80793in_10k.indd 2 3/14/16 5:48 PM SAFE HARBOR STATEMENT SAFE HARBOR STATEMENT SAFE HARBOR STATEMENT SAFE HARBOR STATEMENT SAFE HARBOR STATEMENT SAFE HARBOR STATEMENT PART I PART I PART I PART I PART I PART I SAFE HARBOR STATEMENT ITEM 1. BUSINESS ITEM 1. BUSINESS ITEM 1. BUSINESS ITEM 1. BUSINESS ITEM 1. BUSINESS ITEM 1. BUSINESS ITEM ITEM ITEM ITEM ITEM ITEM 1A. RISK FACTORS 1A. RISK FACTORS 1A. RISK FACTORS 1A. RISK FACTORS 1A. RISK FACTORS 1A. RISK FACTORS PART I ITEM 1B. UNRESOLVED STAFF COMMENTS ITEM 1B. UNRESOLVED STAFF COMMENTS ITEM 1B. UNRESOLVED STAFF COMMENTS ITEM 1B. UNRESOLVED STAFF COMMENTS ITEM 1B. UNRESOLVED STAFF COMMENTS ITEM 1B. UNRESOLVED STAFF COMMENTS ITEM 1. BUSINESS ITEM I T E M 2 . PROPERTIES I T E M 2 . PROPERTIES I T E M 2 . PROPERTIES I T E M 2 . PROPERTIES I T E M 2 . PROPERTIES I T E M 2 . PROPERTIES 1A. RISK FACTORS ITEM 3. LEGAL PROCEEDINGS 3. LEGAL PROCEEDINGS ITEM 3. LEGAL PROCEEDINGS ITEM 3. LEGAL PROCEEDINGS ITEM 3. LEGAL PROCEEDINGS ITEM 3. LEGAL PROCEEDINGS ITEM ITEM 1B. UNRESOLVED STAFF COMMENTS I T E M 2 . PROPERTIES ITEM 4. MINE SAFETY DISCLOSURES ITEM 4. MINE SAFETY DISCLOSURES ITEM 4. MINE SAFETY DISCLOSURES ITEM 4. MINE SAFETY DISCLOSURES ITEM 4. MINE SAFETY DISCLOSURES ITEM 4. MINE SAFETY DISCLOSURES ITEM 3. LEGAL PROCEEDINGS PART II PART II PART II PART II PART II PART II ITEM 4. MINE SAFETY DISCLOSURES ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES PURCHASES OF EQUITY SECURITIES PURCHASES OF EQUITY SECURITIES PURCHASES OF EQUITY SECURITIES PURCHASES OF EQUITY SECURITIES PURCHASES OF EQUITY SECURITIES PART II ITEM 6. SELECTED FINANCIAL DATA ITEM 6. SELECTED FINANCIAL DATA ITEM 6. SELECTED FINANCIAL DATA ITEM 6. SELECTED FINANCIAL DATA ITEM 6. SELECTED FINANCIAL DATA ITEM 6. SELECTED FINANCIAL DATA ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF PURCHASES OF EQUITY SECURITIES OPERATIONS OPERATIONS OPERATIONS OPERATIONS OPERATIONS OPERATIONS ITEM 6. SELECTED FINANCIAL DATA ITEM ITEM ITEM ITEM ITEM ITEM ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OPERATIONS 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL ITEM DISCLOSURE DISCLOSURE DISCLOSURE DISCLOSURE DISCLOSURE DISCLOSURE ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9A. CONTROLS AND PROCEDURES ITEM 9A. CONTROLS AND PROCEDURES ITEM 9A. CONTROLS AND PROCEDURES ITEM 9A. CONTROLS AND PROCEDURES ITEM 9A. CONTROLS AND PROCEDURES ITEM 9A. CONTROLS AND PROCEDURES ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ITEM 9B. OTHER INFORMATION ITEM 9B. OTHER INFORMATION ITEM 9B. OTHER INFORMATION ITEM 9B. OTHER INFORMATION ITEM 9B. OTHER INFORMATION ITEM 9B. OTHER INFORMATION ITEM 9A. CONTROLS AND PROCEDURES PART III PART III PART III PART III PART III PART III ITEM 9B. OTHER INFORMATION ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE PART III 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED ITEM 11. EXECUTIVE COMPENSATION ITEM 11. EXECUTIVE COMPENSATION ITEM 11. EXECUTIVE COMPENSATION ITEM 11. EXECUTIVE COMPENSATION ITEM 11. EXECUTIVE COMPENSATION ITEM 11. EXECUTIVE COMPENSATION ITEM ITEM ITEM ITEM ITEM ITEM ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE STOCKHOLDER MATTERS STOCKHOLDER MATTERS STOCKHOLDER MATTERS STOCKHOLDER MATTERS STOCKHOLDER MATTERS STOCKHOLDER MATTERS ITEM 11. EXECUTIVE COMPENSATION ITEM ITEM ITEM ITEM ITEM ITEM ITEM STOCKHOLDER MATTERS ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE PART IV PART IV PART IV PART IV PART IV PART IV ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES EX-23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EX-23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EX-23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EX-23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EX-23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EX-23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES EX-31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a) EX-31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a) EX-31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a) EX-31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a) EX-31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a) EX-31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a) EX-23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EX-31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a) EX-31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a) EX-31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a) EX-31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a) EX-31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a) EX-31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a) EX-32.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT EX-32.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT EX-32.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT EX-32.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT EX-32.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT EX-32.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT EX-31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a) EX-31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) /15d-14(a) TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 OF 2002 OF 2002 OF 2002 OF 2002 OF 2002 EX-32.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT EX-101 INSTANCE DOCUMENT EX-101 INSTANCE DOCUMENT EX-101 INSTANCE DOCUMENT EX-101 INSTANCE DOCUMENT EX-101 INSTANCE DOCUMENT EX-101 INSTANCE DOCUMENT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 EX-101 SCHEMA DOCUMENT EX-101 SCHEMA DOCUMENT EX-101 SCHEMA DOCUMENT EX-101 SCHEMA DOCUMENT EX-101 SCHEMA DOCUMENT EX-101 SCHEMA DOCUMENT P a g e P a g e P a g e P a g e P a g e P a g e P a g e 1 1 1 1 1 1 2 0 2 0 2 0 2 0 2 0 2 0 2 7 2 7 2 7 2 7 2 7 2 7 1 2 8 2 8 2 8 2 8 2 8 2 8 2 0 2 8 2 8 2 8 2 8 2 8 2 8 2 7 2 8 2 8 2 8 2 8 2 8 2 8 2 8 2 8 2 8 2 9 2 9 2 9 2 9 2 9 2 9 3 0 3 0 3 0 3 0 3 0 3 0 2 9 3 1 3 1 3 1 3 1 3 1 3 1 3 0 5 4 5 4 5 4 5 4 5 4 5 4 3 1 5 5 5 5 5 5 5 5 5 5 5 5 8 9 8 9 8 9 8 9 8 9 8 9 5 4 5 5 9 0 9 0 9 0 9 0 9 0 9 0 8 9 9 3 9 3 9 3 9 3 9 3 9 3 9 0 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 9 3 EX-101 INSTANCE DOCUMENT EX-101 CALCULATION LINKBASE DOCUMENT EX-101 CALCULATION LINKBASE DOCUMENT EX-101 CALCULATION LINKBASE DOCUMENT EX-101 CALCULATION LINKBASE DOCUMENT EX-101 CALCULATION LINKBASE DOCUMENT EX-101 CALCULATION LINKBASE DOCUMENT EX-101 SCHEMA DOCUMENT EX-101 LABELS LINKBASE DOCUMENT EX-101 LABELS LINKBASE DOCUMENT EX-101 LABELS LINKBASE DOCUMENT EX-101 LABELS LINKBASE DOCUMENT EX-101 LABELS LINKBASE DOCUMENT EX-101 LABELS LINKBASE DOCUMENT EX-101 CALCULATION LINKBASE DOCUMENT EX-101 PRESENTATION LINKBASE DOCUMENT EX-101 PRESENTATION LINKBASE DOCUMENT EX-101 PRESENTATION LINKBASE DOCUMENT EX-101 PRESENTATION LINKBASE DOCUMENT EX-101 PRESENTATION LINKBASE DOCUMENT EX-101 PRESENTATION LINKBASE DOCUMENT EX-101 LABELS LINKBASE DOCUMENT EX-101 DEFINITION LINKBASE DOCUMENT EX-101 DEFINITION LINKBASE DOCUMENT EX-101 DEFINITION LINKBASE DOCUMENT EX-101 DEFINITION LINKBASE DOCUMENT EX-101 DEFINITION LINKBASE DOCUMENT EX-101 DEFINITION LINKBASE DOCUMENT EX-101 PRESENTATION LINKBASE DOCUMENT EX-101 DEFINITION LINKBASE DOCUMENT 80793in_10k.indd 3 3/14/16 5:48 PM SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. This document may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of the forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “potential,” “continued,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of those words or other comparable words. Any forward-looking statements contained in this report including statements related to our outlook for the industry and for our performance for the year 2016 and beyond, are based upon our 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 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 alternative 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; natural and man-made catastrophic losses, including as a result of terrorist activities; general economic and market activities, including inflation, interest rates and volatility in the credit and capital markets; the impact of conditions in the financial markets and the global economy, and the potential effect of legislative, regulatory, accounting or other initiatives taken in response to it, on our results and financial condition; foreign currency and political risks 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 2015 ("TRIPRA"); 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 relating 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 data security; the effectiveness of our controls to ensure compliance with guidelines, policies and legal and regulatory standards; and 80793in_10k.indd 4 3/14/16 5:48 PM • other risks detailed in this Form 10-K and from time to time in our other filings with the Securities and Exchange Commission (“SEC”). We describe these risks and uncertainties in greater detail in Item 1A, Risk Factors. These risks and uncertainties could cause our actual results for the year 2016 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 elsewhere in this Form 10-K and our other SEC filings. Forward-looking statements speak only as of the date on which they are made. 80793in_10k.indd 5 3/14/16 5:48 PM PART I PART I ITEM 1. BUSINESS ITEM 1. BUSINESS PART I ITEM 1. BUSINESS W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in the United States. It operates in the following segments of the property casualty insurance business: the United States. It operates in the following segments of the property casualty insurance business: the United States. It operates in the following segments of the property casualty insurance business: • Insurance-Domestic - commercial insurance business, including excess and surplus lines and admitted lines, • Insurance-Domestic - commercial insurance business, including excess and surplus lines and admitted lines, • Insurance-Domestic - commercial insurance business, including excess and surplus lines and admitted lines, primarily throughout the United States; primarily throughout the United States; primarily throughout the United States; • Insurance-International - insurance business primarily in the United Kingdom, Continental Europe, South • Insurance-International - insurance business primarily in the United Kingdom, Continental Europe, South • Insurance-International - insurance business primarily in the United Kingdom, Continental Europe, South America, Canada, Scandinavia, Asia, and Australia; and America, Canada, Scandinavia, Asia, and Australia; and America, Canada, Scandinavia, Asia, and Australia; and • Reinsurance-Global - reinsurance business on a facultative and treaty basis, primarily in the United States, • Reinsurance-Global - reinsurance business on a facultative and treaty basis, primarily in the United States, • Reinsurance-Global - reinsurance business on a facultative and treaty basis, primarily in the United States, United Kingdom, Continental Europe, Australia, the Asia-Pacific Region, and South Africa. United Kingdom, Continental Europe, Australia, the Asia-Pacific Region, and South Africa. United Kingdom, Continental Europe, Australia, the Asia-Pacific Region, and South Africa. Each of our three business segments is composed of individual operating units that serve a market defined by Each of our three business segments is composed of individual operating units that serve a market defined by Each of our three business segments is composed of individual operating units that serve a market defined by geography, products, services or types of customers. Each of our operating units is positioned close to its customer base and geography, products, services or types of customers. Each of our operating units is positioned close to its customer base and geography, products, services or types of customers. Each of our operating units is positioned close to its customer base and participates in a niche market requiring specialized knowledge about a territory or product. This strategy of decentralized participates in a niche market requiring specialized knowledge about a territory or product. This strategy of decentralized participates in a niche market requiring specialized knowledge about a territory or product. This strategy of decentralized operations allows each of our units to identify and respond quickly and effectively to changing market conditions and local operations allows each of our units to identify and respond quickly and effectively to changing market conditions and local operations allows each of our units to identify and respond quickly and effectively to changing market conditions and local customer needs, while capitalizing on the benefits of centralized capital, investment and reinsurance management, and customer needs, while capitalizing on the benefits of centralized capital, investment and reinsurance management, and customer needs, while capitalizing on the benefits of centralized capital, investment and reinsurance management, and corporate actuarial, financial, enterprise risk management and legal staff support. corporate actuarial, financial, enterprise risk management and legal staff support. corporate actuarial, financial, enterprise risk management and legal staff support. Our business approach is focused on meeting the needs of our customers, maintaining a high quality balance sheet, Our business approach is focused on meeting the needs of our customers, maintaining a high quality balance sheet, Our business approach is focused on meeting the needs of our customers, maintaining a high quality balance sheet, and allocating capital to our best opportunities. New businesses are started when opportunities are identified and when the and allocating capital to our best opportunities. New businesses are started when opportunities are identified and when the and allocating capital to our best opportunities. New businesses are started when opportunities are identified and when the right talent and expertise are found to lead a business. Of our 51 operating units, 44 have been organized and developed right talent and expertise are found to lead a business. Of our 51 operating units, 44 have been organized and developed right talent and expertise are found to lead a business. Of our 51 operating units, 44 have been organized and developed internally and seven have been added through acquisition. internally and seven have been added through acquisition. internally and seven have been added through acquisition. Net premiums written, as reported based on United States generally accepted accounting principles (“GAAP”), for Net premiums written, as reported based on United States generally accepted accounting principles (“GAAP”), for Net premiums written, as reported based on United States generally accepted accounting principles (“GAAP”), for each of our operating segments for each of the past five years were as follows: each of our operating segments for each of the past five years were as follows: each of our operating segments for each of the past five years were as follows: (In thousands) 2015 2014 2013 2012 2011 (In thousands) 2015 2014 2013 2012 2011 (In thousands) 2015 2014 2013 2012 2011 Year Ended December 31, Year Ended December 31, Year Ended December 31, Net premiums written: Net premiums written: Net premiums written: Insurance-Domestic Insurance-Domestic Insurance-Domestic Insurance-International Insurance-International Insurance-International Reinsurance-Global Reinsurance-Global Reinsurance-Global Total Total Total $ 4,812,830 $ 4,517,587 $ 3,994,387 $ 3,569,883 $ 3,238,120 $ 4,812,830 $ 4,517,587 $ 3,994,387 $ 3,569,883 $ 3,238,120 $ 4,812,830 $ 4,517,587 $ 3,994,387 $ 3,569,883 $ 3,238,120 778,567 778,567 598,118 598,118 778,567 598,118 828,076 828,076 651,284 651,284 828,076 651,284 756,185 756,185 749,601 749,601 756,185 749,601 664,459 664,459 664,197 664,197 664,459 664,197 551,910 551,910 567,338 567,338 551,910 567,338 $ 6,189,515 $ 5,996,947 $ 5,500,173 $ 4,898,539 $ 4,357,368 $ 6,189,515 $ 5,996,947 $ 5,500,173 $ 4,898,539 $ 4,357,368 $ 6,189,515 $ 5,996,947 $ 5,500,173 $ 4,898,539 $ 4,357,368 2015 2015 2015 Year Ended December 31, Year Ended December 31, Year Ended December 31, 2013 2013 2013 2014 2014 2014 2012 2012 2012 2011 2011 2011 Percentage of net premiums written: Percentage of net premiums written: Percentage of net premiums written: Insurance-Domestic Insurance-Domestic Insurance-Domestic Insurance-International Insurance-International Insurance-International Reinsurance-Global Total Reinsurance-Global Total Reinsurance-Global Total Total Total Total 77.7% 77.7% 77.7% 75.3% 75.3% 75.3% 72.6% 72.6% 72.6% 72.8% 72.8% 72.8% 74.3% 74.3% 74.3% 12.6 12.6 12.6 9.7 9.7 9.7 13.8 13.8 10.9 10.9 13.8 10.9 13.8 13.8 13.6 13.6 13.8 13.6 13.6 13.6 13.6 13.6 13.6 13.6 12.7 12.7 13.0 13.0 12.7 13.0 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Twenty-seven of our twenty-eight insurance company subsidiaries rated by A.M. Best Company, Inc. (“A.M. Best”) Twenty-seven of our twenty-eight insurance company subsidiaries rated by A.M. Best Company, Inc. (“A.M. Best”) Twenty-seven of our twenty-eight insurance company subsidiaries rated by A.M. Best Company, Inc. (“A.M. Best”) have ratings of A+ (Superior) (the second highest rating out of 15 possible ratings), and one is rated A (Excellent) (the third have ratings of A+ (Superior) (the second highest rating out of 15 possible ratings), and one is rated A (Excellent) (the third have ratings of A+ (Superior) (the second highest rating out of 15 possible ratings), and one is rated A (Excellent) (the third highest rating). A.M. Best's ratings are based upon factors of concern to policyholders, insurance agents and brokers and are not highest rating). A.M. Best's ratings are based upon factors of concern to policyholders, insurance agents and brokers and are not highest rating). A.M. Best's ratings are based upon factors of concern to policyholders, insurance agents and brokers and are not directed toward the protection of investors. A.M. Best states: “The Financial Strength Rating opinion addresses the relative directed toward the protection of investors. A.M. Best states: “The Financial Strength Rating opinion addresses the relative directed toward the protection of investors. A.M. Best states: “The Financial Strength Rating opinion addresses the relative ability of an insurer to meet its ongoing insurance obligations. The ratings are not assigned to specific insurance policies or ability of an insurer to meet its ongoing insurance obligations. The ratings are not assigned to specific insurance policies or ability of an insurer to meet its ongoing insurance obligations. The ratings are not assigned to specific insurance policies or contracts and do not address any other risk.” A.M. Best reviews its ratings on a periodic basis, and its ratings of the Company's contracts and do not address any other risk.” A.M. Best reviews its ratings on a periodic basis, and its ratings of the Company's contracts and do not address any other risk.” A.M. Best reviews its ratings on a periodic basis, and its ratings of the Company's subsidiaries are therefore subject to change. subsidiaries are therefore subject to change. subsidiaries are therefore subject to change. The twenty-four insurance company subsidiaries rated by Standard & Poor's (“S&P”) have financial strength ratings of The twenty-four insurance company subsidiaries rated by Standard & Poor's (“S&P”) have financial strength ratings of The twenty-four insurance company subsidiaries rated by Standard & Poor's (“S&P”) have financial strength ratings of A+ (the seventh highest rating out of twenty-seven possible ratings). A+ (the seventh highest rating out of twenty-seven possible ratings). A+ (the seventh highest rating out of twenty-seven possible ratings). Our Moody's ratings are A2 for Berkley Insurance Company, Berkley Regional Insurance Company and Admiral Our Moody's ratings are A2 for Berkley Insurance Company, Berkley Regional Insurance Company and Admiral Our Moody's ratings are A2 for Berkley Insurance Company, Berkley Regional Insurance Company and Admiral Insurance Company (the sixth highest rating out of twenty-one possible ratings). Insurance Company (the sixth highest rating out of twenty-one possible ratings). Insurance Company (the sixth highest rating out of twenty-one possible ratings). 1 1 1 1 80793in_10k.indd 1 3/14/16 5:48 PM The following sections describe our reporting segments and their operating units in greater detail. These operating units underwrite on behalf of one or more affiliated insurance companies within the group. Certain operating units are identified by us herein for descriptive purposes only and are not legal entities. Unless otherwise indicated, all references in this Form 10-K to “W. R. Berkley,” “we,” “us,” “our,” the “Company” or similar terms refer to W. R. Berkley Corporation together with its subsidiaries and operating units. W. R. Berkley Corporation is a Delaware corporation formed in 1970. Insurance-Domestic The Insurance-Domestic operating units underwrite commercial insurance business primarily throughout the United States, although many units offer coverage globally, focusing on the following general areas: Excess & Surplus Lines: A number of our Insurance-Domestic operating units are dedicated to the excess and surplus lines market. They serve a highly diverse group of customers that often have complex risk or unique exposures that typically fall outside the underwriting guidelines of the standard insurance market. Lines of business underwritten by our excess and surplus lines operating units include premises operations, commercial automobile, property, products liability and professional liability lines. Products are generally distributed through wholesale agents and brokers. Industry Specialty: Certain other operating units focus on providing specialty coverages to customers within a particular industry that are best served by underwriters and claims professionals with specialized knowledge of that industry. They offer multiple lines of business with policies tailored to address these unique exposures, often with the flexibility of providing coverages on either an admitted or a non-admitted basis. Each operating unit delivers its products through one or more distribution channels, including retail and wholesale agents, brokers, and managing general agents (MGAs), depending on the customer and the particular risks insured. Product Specialty: Other operating units in this segment specialize in providing specific lines of insurance coverage, such as workers’ compensation or professional liability, to a wide range of customers. They offer insurance products, analytical tools and risk management services such as loss control and claims management that enable clients to manage their risk appropriately. Business is typically written on an admitted basis, although some units may offer non-admitted products. Independent agents and brokers are the primary means of distribution. Regional: Certain Insurance-Domestic operating units offer standard insurance products and services through operating units focused on meeting the specific needs of a regionally differentiated customer base. Key clients of these units are small-to-midsized businesses. These regionally focused operating units provide a broad array of commercial insurance products to customers primarily in 45 states and the District of Columbia and have developed expertise in niches that drive local communities. They are organized geographically in order to provide them with the flexibility to adapt quickly to local market conditions and customer needs. Business is sold through non-exclusive independent agents who are compensated on a commission basis. In addition to providing insurance products, certain operating units also provide a wide variety of fee-based services, including claims, administrative and consulting services. Operating units comprising the Insurance-Domestic segment are as follows: Acadia Insurance is a Northeast regional property casualty underwriter offering a broad portfolio of products exclusively through local independent agents in Connecticut, Maine, Massachusetts, New Hampshire, New York and Vermont. In addition to its general offerings, Acadia has specialized expertise in insuring regional businesses and industries such as construction, lumber and fishing. Admiral Insurance provides excess and surplus lines coverage for commercial risks that generally consist of hard-to- place, specialized risks that involve moderate to high degrees of hazard. Its lines of business include general liability, professional liability, property, and excess and umbrella coverage. Admiral's professional liability and program operations include special coverages for technology, ambulatory surgery centers, chiropractors and concierge physicians. Its products are distributed exclusively by wholesale brokers. American Mining Insurance offers workers' compensation insurance as well as general liability, automobile, and excess liability coverages to a broad range of firms within the mining and aggregate industries in the United States. Berkley Accident and Health underwrites accident and health insurance and reinsurance products in four primary areas: medical stop loss, managed care, special risk and group captive. It has a diversified product and service portfolio serving a range of clients from small employers, health care organizations, and membership groups to Fortune 500 companies. Berkley Agribusiness Risk Specialists offers insurance for larger commercial risks across the United States involved in the supply, storage, handling, processing and distribution of commodities related to the agriculture and food industries. 2 2 80793in_10k.indd 2 3/14/16 5:48 PM Berkley Alliance Managers specializes in professional liability for the design professional, construction professional and certified public accounting industries. The Berkley Design Professional division specializes in architects, engineers and consultants. In addition to professional liability, the Berkley Construction Professional division provides pollution liability and protective coverages to contractors and owners across all forms of non-environmental construction. Berkley Aviation offers a wide range of aviation insurance products on a global basis, including coverage for airlines, airplanes, helicopters, miscellaneous general aviation operations, non-owned aircraft, fixed-base operations, control towers, airports and other specialized niche programs. In the U.S., it places its business on an admitted and non-admitted basis nationwide. Berkley Custom Insurance focuses on the excess casualty insurance market and offers umbrella liability, pollution liability, excess liability, construction wrap-ups and completed operations coverages to wholesalers, retailers, manufacturers, insurance companies, financial institutions and construction companies. Berkley FinSecure serves the insurance needs of financial institutions, credit unions, mortgage lenders, mortgage servicers and trust managers. It offers a comprehensive range of property, casualty, professional liability, and specialty lines insurance products and loss control services, including financial institution-specific commercial package policies, workers' compensation, umbrella, commercial auto, management liability and crime coverages, and financial institution bonds. Berkley Fire & Marine offers a broad range of preferred inland marine and related property risks and services to customers throughout the United States, both regionally and nationwide. Products are distributed through independent agents and brokers. Berkley Global Product Recall Management provides worldwide insurance protection and technical assistance to help clients with the prevention, management and indemnification of product recall and contamination events. Berkley Healthcare Professional provides customized, comprehensive professional liability solutions for the full spectrum of healthcare providers. Berkley Life Sciences offers a comprehensive spectrum of property casualty products to the life sciences industry on a global basis, including primary and excess liability coverage and commercial insurance. It serves pharmaceutical and biologic/ biotech companies, medical device companies, dietary supplement manufacturers, medical and research software developers, contract service organizations, research institutions and organizations, and other related businesses. Berkley Medical Excess insures healthcare organizations such as hospitals and clinics that retain a portion of their risk exposure through a self-funded mechanism and seek to maximize the effectiveness and efficiency of their excess risk financing program. Berkley Mid-Atlantic Group provides commercial property casualty coverages to a wide variety of businesses in Delaware, the District of Columbia, Maryland, Ohio, Pennsylvania, and Virginia. Focusing on middle market accounts, it complements its standard writings with specialized products in areas such as construction. Berkley Net Underwriters focuses on small and medium-sized commercial risks, using a web-based system to allow producers to quote, bind and service workers' compensation insurance products on behalf of W. R. Berkley Corporation member companies. Berkley North Pacific provides local underwriting, claims and risk management services from its home office in Seattle, Washington and branch offices in Boise, Idaho, Spokane, Washington and Salt Lake City, Utah. It operates with a select group of agents in Idaho, Montana, Oregon, Utah and Washington to sell and service property and casualty policies for larger middle-market standard businesses and specialty lines, such as construction. Berkley Offshore Underwriting Managers is a specialist global underwriter of energy and marine risks. Its three divisions provide specialty insurance products in the energy upstream, energy liability and marine sectors. Berkley Oil & Gas provides property casualty products and risk services to the United States energy sector. Its customer base includes risks of any size that work in the oil patch, including operators, drillers, geophysical contractors, well- servicing contractors, and manufacturers/distributors of oil field products, as well as those in the renewable energy sector. Berkley Professional Liability specializes in professional liability insurance for publicly-traded and private entities based on a worldwide basis. Its liability coverages include directors and officers, fiduciary, employment practices, and sponsored insurance agents. Berkley Program Specialists is a program management company offering both admitted and non-admitted insurance support on a nationwide basis for commercial casualty and inland marine program administrators with specialized insurance expertise. Its book is built around blocks of homogeneous business, or programs, allowing for efficient processes, effective oversight of existing programs and sound implementation of new programs. 3 3 80793in_10k.indd 3 3/14/16 5:48 PM Berkley Public Entity specializes in providing excess coverage and services to individual governmental and scholastic entities and intergovernmental risk sharing groups. Products include general liability, automobile liability, law enforcement liability, public officials and educator's legal liability, employment practices liability, incidental medical, property and crime. Berkley Regional Specialty provides excess and surplus lines coverage on a national basis to small to medium-sized insureds with low to moderate insurance risk. Its product lines include general liability, liquor liability and some property and inland marine coverage. It serves a limited distribution channel consisting of select W. R. Berkley Corporation member company agents. Berkley Risk Administrators provides insurance program management services to a variety of organizations, including self-insureds, captives, governmental entities, risk retention groups, and insurance companies. It is also a nationwide third-party claims administrator and is the nation's third largest servicing carrier for workers' compensation assigned risk plans, serving plans in 20 states. Berkley Select specializes in underwriting professional liability insurance with a particular emphasis on large law firms, accounting firms and medical institution facilities. Its products are distributed nationwide through a limited number of brokers. Berkley Southeast offers a wide array of commercial lines products in six southeastern states: Alabama, Georgia, Mississippi, North Carolina, South Carolina and Tennessee. Berkley Specialty Underwriting Managers has two underwriting divisions. Its entertainment and sports division underwrites property casualty insurance products, both on an admitted and non-admitted basis, for the entertainment industry and sports-related organizations. The environmental division underwrites specialty insurance products for environmental customers such as contractors, consultants and owners of sites and facilities. Berkley Surety provides a broad array of surety products for contract and commercial surety risks in the U.S. and Canada, including specialty niches such as environmental and secured credit for small contractors, through an independent agency and broker platform across a network of 16 field offices. Berkley Technology Underwriters provides a broad range of first and third-party insurance programs for technology exposures and technology industries on both a local and global basis. Carolina Casualty Insurance provides commercial insurance products and services to the transportation industry with an emphasis on intermediate and long-haul trucking and various classes of business and public automobile coverage. It underwrites on an admitted basis in all 50 states and the District of Columbia. Clermont Specialty Managers provides package insurance programs for high-end cooperative, condominium, and quality rental apartment buildings and upscale restaurants in the New York, New Jersey, Chicago and Washington, D.C. metropolitan markets, as well as other select markets. Continental Western Group is a Midwest regional property and casualty insurance operation based in Des Moines, Iowa, providing underwriting and risk management services to a broad array of regional businesses in thirteen Midwest states. In addition to its generalist portfolio, Continental Western offers specialty underwriting solutions for diversified agriculture, construction, light manufacturing, transportation, volunteer fire departments, rural utilities, public entity and implement dealers. Gemini Transportation is a national provider of excess liability insurance for various domestic surface transportation businesses. It underwrites liability insurance policies for the railroad industry as well as excess liability policies for the trucking, busing and other industries that use rubber-wheeled vehicles for over-the-road use. Key Risk Insurance is a provider of workers' compensation insurance products and services for employers in the public and private sectors in select Eastern and Southeastern states. It focuses on middle-market accounts in specialty niches and on larger self-insured entities, with a special emphasis on expert claims and managed-care services. Additionally, Key Risk's affiliate, Key Risk Management Services, provides third party administration of self-insured workers' compensation programs. Midwest Employers Casualty provides excess workers' compensation insurance products to individual employers, groups and workers' compensation insurance companies across the United States. Its workers' compensation excess of loss products include self-insured excess of loss coverages, large deductible policies and reinsurance. Through its relationship with Berkley Net Underwriters, Midwest Employers Casualty also offers multi-state coverage for group self-insureds. It has developed sophisticated, proprietary analytical tools and risk management services that help its insureds lower their total cost of risk. Monitor Liability Managers provides executive and professional liability insurance to small to middle-market risks on a nationwide basis. Its primary professional liability products are management liability, employment practices and fiduciary coverages for private companies and nonprofit organizations, and errors and omissions policies for accounting and law firms. 4 4 80793in_10k.indd 4 3/14/16 5:48 PM Nautilus Insurance Group insures excess and surplus lines risks for small to medium-sized commercial risks with low to moderate susceptibility to loss. It writes commercial excess and surplus lines business nationwide and admitted lines commercial business in a limited number of states. A substantial portion of Nautilus' business is written through its close, long- standing network of general agents, who are chosen on a highly selective basis. Preferred Employers Insurance focuses exclusively on workers' compensation products and services for businesses in California. It serves over 12,000 customers covering a broad spectrum of industries throughout the state. Riverport Insurance Services provides property casualty insurance coverages to human services organizations, including nonprofit and for-profit organizations, public schools and sports and recreational organizations. Riverport also insures special events. Its product offerings include traditional primary coverages and risk purchasing groups, as well as alternative market solutions for clients who wish to retain a larger share of their own risk. Union Standard offers preferred commercial property and casualty insurance products and services to a wide range of small to medium size commercial entities through independent agents in Arizona, Arkansas, New Mexico, Oklahoma and Texas. Union Standard's strategy is built around relationships and service. Vela Insurance Services specializes in commercial casualty insurance on an excess and surplus lines basis. Its primary focus is on general liability insurance for construction, manufacturing and general casualty clients as well as products liability and miscellaneous professional liability coverages distributed through wholesale insurance brokers. Verus Underwriting Managers offers general liability, professional liability and property coverages for small to mid- sized commercial risks in the excess and surplus lines insurance market through a select group of appointed wholesale brokers and agents. 5 5 80793in_10k.indd 5 3/14/16 5:48 PM The following table sets forth the percentage of gross premiums written by each Insurance-Domestic operating unit: Year Ended December 31, 2015 2014 2013 2012 2011 Acadia Insurance Admiral Insurance American Mining Insurance Berkley Accident and Health Berkley Agribusiness Risk Specialists Berkley Alliance Managers Berkley Aviation Berkley Custom Insurance Berkley FinSecure Berkley Fire and Marine Berkley Global Product Recall Managers Berkley Healthcare Professional Berkley Life Sciences Berkley Medical Excess Berkley Mid-Atlantic Group Berkley Net Underwriters Berkley North Pacific Berkley Offshore Underwriting Managers Berkley Oil & Gas Berkley Professional Liability Berkley Program Specialists Berkley Public Entity Berkley Regional Specialty Berkley Risk Administrators Berkley Select Berkley Southeast Berkley Specialty Underwriting Managers Berkley Surety Berkley Technology Underwriters Carolina Casualty Insurance Clermont Specialty Managers Continental Western Group Gemini Transportation Key Risk Insurance Midwest Employers Casualty Monitor Liability Managers Nautilus Insurance Group Preferred Employers Insurance Riverport Insurances Services Union Standard Vela Insurance Services Verus Underwriting Managers Other Total 8.4% 6.2 0.8 3.4 1.1 0.1 1.0 2.8 0.8 0.2 — 0.2 1.1 0.8 2.8 4.3 1.9 2.0 4.1 2.1 1.4 0.4 0.4 4.6 2.1 3.0 6.2 1.4 0.5 2.2 1.5 4.5 1.1 3.5 2.9 2.6 5.5 2.5 0.7 3.1 3.7 0.9 8.2% 5.9 0.8 3.0 — — 1.0 2.8 0.9 — — — 1.1 0.9 4.4 4.0 1.8 2.3 3.9 1.3 1.5 0.4 0.4 4.9 2.7 — 6.6 1.3 0.3 2.4 1.5 5.9 1.0 3.3 2.9 3.1 5.8 2.1 0.8 5.2 3.5 1.0 8.6% 6.1 0.9 3.6 — — 1.5 0.7 0.8 — — — 0.8 0.9 4.9 3.5 1.8 2.2 3.2 1.2 1.8 0.2 0.4 4.8 2.9 — 7.9 1.3 0.1 2.3 1.6 6.4 1.1 3.2 3.4 3.1 6.2 2.0 1.4 5.3 2.2 0.7 9.0% 6.8 1.0 3.3 — — 1.7 0.8 — — — 0.6 1.0 5.4 2.5 1.5 2.0 2.2 1.1 3.1 — 0.4 4.0 2.6 — 7.0 1.6 — 2.3 1.7 7.0 1.0 3.1 4.4 3.9 6.6 1.9 1.7 5.5 2.1 0.4 1.2 100.0% 1.1 100.0% 1.0 100.0% 0.8 100.0% 7.8% 5.7 0.9 4.3 1.0 0.8 1.4 3.3 1.2 0.4 — 0.2 0.9 0.9 2.1 4.6 1.9 1.6 3.7 2.0 1.4 0.5 0.4 4.6 1.8 2.7 6.6 1.4 0.6 1.4 1.5 4.6 1.3 3.3 2.8 2.8 5.5 2.8 0.7 3.0 3.9 1.0 0.7 100.0% 6 6 80793in_10k.indd 6 3/14/16 5:48 PM The following table sets forth percentages of gross premiums written, by line, by our Insurance-Domestic operations: The following table sets forth percentages of gross premiums written, by line, by our Insurance-Domestic operations: The following table sets forth percentages of gross premiums written, by line, by our Insurance-Domestic operations: Other liability Other liability Other liability Workers' compensation Workers' compensation Workers' compensation Short-tail lines (1) Short-tail lines (1) Short-tail lines (1) Commercial auto Commercial auto Commercial auto Professional liability Professional liability Professional liability Total Total Total Year Ended December 31, Year Ended December 31, Year Ended December 31, 2015 2015 2015 31.8% 31.8% 31.8% 27.9 27.9 27.9 21.2 21.2 21.2 9.7 9.7 9.7 9.4 9.4 9.4 2014 2014 2014 31.9% 31.9% 31.9% 2013 2013 2013 32.4% 32.4% 32.4% 2012 2012 2012 30.7% 30.7% 30.7% 2011 2011 2011 31.2% 31.2% 31.2% 27.2 27.2 27.2 21.8 21.8 21.8 10.4 10.4 10.4 8.7 8.7 8.7 27.0 27.0 27.0 22.0 22.0 22.0 10.7 10.7 10.7 7.9 7.9 7.9 26.8 26.8 26.8 23.5 23.5 23.5 11.2 11.2 11.2 7.8 7.8 7.8 25.3 25.3 25.3 23.5 23.5 23.5 12.1 12.1 12.1 7.9 7.9 7.9 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% (1) Short-tail lines include commercial multi-peril (non-liability), inland marine, accident and health, fidelity and surety, (1) Short-tail lines include commercial multi-peril (non-liability), inland marine, accident and health, fidelity and surety, (1) Short-tail lines include commercial multi-peril (non-liability), inland marine, accident and health, fidelity and surety, boiler and machinery and other lines. boiler and machinery and other lines. boiler and machinery and other lines. Insurance-International Insurance-International Insurance-International Through our Insurance-International operating units, we write business in more than 60 countries worldwide, with Through our Insurance-International operating units, we write business in more than 60 countries worldwide, with Through our Insurance-International operating units, we write business in more than 60 countries worldwide, with branches or offices in 19 locations outside the United States, including the United Kingdom, Continental Europe, South branches or offices in 19 locations outside the United States, including the United Kingdom, Continental Europe, South branches or offices in 19 locations outside the United States, including the United Kingdom, Continental Europe, South America, Canada, Scandinavia, Asia, and Australia. In each of our operating territories, we have built decentralized structures America, Canada, Scandinavia, Asia, and Australia. In each of our operating territories, we have built decentralized structures America, Canada, Scandinavia, Asia, and Australia. In each of our operating territories, we have built decentralized structures that allow products and services to be tailored to each regional customer base. Our businesses are managed by teams of that allow products and services to be tailored to each regional customer base. Our businesses are managed by teams of that allow products and services to be tailored to each regional customer base. Our businesses are managed by teams of professionals with expertise in local markets and knowledge of regional environments. professionals with expertise in local markets and knowledge of regional environments. professionals with expertise in local markets and knowledge of regional environments. Operating units comprising the Insurance-International Segment are as follows: Operating units comprising the Insurance-International Segment are as follows: Operating units comprising the Insurance-International Segment are as follows: Berkley Canada underwrites specialty, casualty and surety lines of business on behalf of the Canadian branch of Berkley Canada underwrites specialty, casualty and surety lines of business on behalf of the Canadian branch of Berkley Canada underwrites specialty, casualty and surety lines of business on behalf of the Canadian branch of Berkley Insurance Company. It specializes in commercial casualty and professional liability, and offers a broad portfolio of Berkley Insurance Company. It specializes in commercial casualty and professional liability, and offers a broad portfolio of Berkley Insurance Company. It specializes in commercial casualty and professional liability, and offers a broad portfolio of risk products that include commercial general liability, umbrella, professional liability, directors and officers, commercial risk products that include commercial general liability, umbrella, professional liability, directors and officers, commercial risk products that include commercial general liability, umbrella, professional liability, directors and officers, commercial property and surety, in addition to niche products for specific industries such as technology and life sciences. property and surety, in addition to niche products for specific industries such as technology and life sciences. property and surety, in addition to niche products for specific industries such as technology and life sciences. Berkley Latinoamérica is a leading provider of property, casualty, automobile, surety, group life and health and workers' Berkley Latinoamérica is a leading provider of property, casualty, automobile, surety, group life and health and workers' Berkley Latinoamérica is a leading provider of property, casualty, automobile, surety, group life and health and workers' compensation products and services in its operating territories of Argentina, Brazil, Colombia and Uruguay. Its largest operation, compensation products and services in its operating territories of Argentina, Brazil, Colombia and Uruguay. Its largest operation, compensation products and services in its operating territories of Argentina, Brazil, Colombia and Uruguay. Its largest operation, Berkley International Seguros, offers a wide range of property casualty products in Argentina, where it is a leading provider of Berkley International Seguros, offers a wide range of property casualty products in Argentina, where it is a leading provider of Berkley International Seguros, offers a wide range of property casualty products in Argentina, where it is a leading provider of surety, engineering, cargo and personal accident coverages. Berkley International ART, Berkley Latinoamérica's workers' surety, engineering, cargo and personal accident coverages. Berkley International ART, Berkley Latinoamérica's workers' surety, engineering, cargo and personal accident coverages. Berkley International ART, Berkley Latinoamérica's workers' compensation carrier in Argentina, is focused on small to medium-sized risks in its operating territories. Berkley International compensation carrier in Argentina, is focused on small to medium-sized risks in its operating territories. Berkley International compensation carrier in Argentina, is focused on small to medium-sized risks in its operating territories. Berkley International Seguros do Brasil provides surety products to small and medium-sized risks throughout Brazil. Berkley International Seguros Seguros do Brasil provides surety products to small and medium-sized risks throughout Brazil. Berkley International Seguros Seguros do Brasil provides surety products to small and medium-sized risks throughout Brazil. Berkley International Seguros Uruguay and Berkley International Seguros Colombia are providers of customized property casualty insurance products and Uruguay and Berkley International Seguros Colombia are providers of customized property casualty insurance products and Uruguay and Berkley International Seguros Colombia are providers of customized property casualty insurance products and services to small and medium-sized businesses in Uruguay and Colombia, respectively. services to small and medium-sized businesses in Uruguay and Colombia, respectively. services to small and medium-sized businesses in Uruguay and Colombia, respectively. Lloyd's Syndicate 2791 Participation represents the Company's minority participation in a Lloyd's syndicate that Lloyd's Syndicate 2791 Participation represents the Company's minority participation in a Lloyd's syndicate that Lloyd's Syndicate 2791 Participation represents the Company's minority participation in a Lloyd's syndicate that writes a broad range of mainly short-tail classes of business. writes a broad range of mainly short-tail classes of business. writes a broad range of mainly short-tail classes of business. W. R. Berkley Europe is comprised of specialist operating units offering a focused range of insurance products to W. R. Berkley Europe is comprised of specialist operating units offering a focused range of insurance products to W. R. Berkley Europe is comprised of specialist operating units offering a focused range of insurance products to markets in Continental Europe and Nordic countries. markets in Continental Europe and Nordic countries. markets in Continental Europe and Nordic countries. W. R. Berkley Insurance Asia is expected to commence operations in 2016 and intends to underwrite general insurance W. R. Berkley Insurance Asia is expected to commence operations in 2016 and intends to underwrite general insurance W. R. Berkley Insurance Asia is expected to commence operations in 2016 and intends to underwrite general insurance business in Asia, including professional liability, specialty casualty, accident and marine business for companies of all sizes. business in Asia, including professional liability, specialty casualty, accident and marine business for companies of all sizes. business in Asia, including professional liability, specialty casualty, accident and marine business for companies of all sizes. W. R. Berkley Insurance Australia underwrites general insurance business in Australia, including W. R. Berkley Insurance Australia underwrites general insurance business in Australia, including W. R. Berkley Insurance Australia underwrites general insurance business in Australia, including professional indemnity insurance for companies of all sizes. professional indemnity insurance for companies of all sizes. professional indemnity insurance for companies of all sizes. W / R / B Underwriting provides a broad range of leading insurance products to the European marketplace, with a W / R / B Underwriting provides a broad range of leading insurance products to the European marketplace, with a W / R / B Underwriting provides a broad range of leading insurance products to the European marketplace, with a concentration in specialist classes of business including property, marine, professional indemnity, crisis management, aviation, concentration in specialist classes of business including property, marine, professional indemnity, crisis management, aviation, concentration in specialist classes of business including property, marine, professional indemnity, crisis management, aviation, personal accident and asset protection. The unit was established in 2015 by combining W. R. Berkley Syndicate 1967 with the personal accident and asset protection. The unit was established in 2015 by combining W. R. Berkley Syndicate 1967 with the personal accident and asset protection. The unit was established in 2015 by combining W. R. Berkley Syndicate 1967 with the U.K. and Irish branches of W. R. Berkley Insurance (Europe) Limited under a single brand. U.K. and Irish branches of W. R. Berkley Insurance (Europe) Limited under a single brand. U.K. and Irish branches of W. R. Berkley Insurance (Europe) Limited under a single brand. 7 7 7 7 80793in_10k.indd 7 3/14/16 5:48 PM The following table sets forth the percentages of gross premiums written by our Insurance-International operating units: Berkley Canada Berkley Latinoamérica W. R. Berkley Europe W. R. Berkley Insurance Australia W / R / B Underwriting Lloyd's Syndicate 2791 Participation Total 2015 4.5% 33.6 13.5 5.7 38.9 3.8 Year Ended December 31, 2013 2014 2012 4.4% 3.4% 4.6% 29.5 15.4 8.3 39.4 4.0 32.6 15.9 8.6 38.5 — 34.8 15.5 5.3 39.7 0.1 2011 4.9% 38.3 13.1 4.1 39.6 — 100.0% 100.0% 100.0% 100.0% 100.0% The following table sets forth percentages of gross premiums written, by line, by our Insurance-International operations: Short-tail lines (1) Commercial auto Professional liability Other liability Workers' compensation Total 2015 Year Ended December 31, 2012 2013 2014 50.1% 15.0 9.5 15.2 10.2 55.1% 13.1 12.8 11.7 7.3 51.8% 15.5 12.9 10.4 9.4 49.4% 18.0 15.1 7.2 10.3 2011 41.4% 19.8 17.6 10.3 10.9 100.0% 100.0% 100.0% 100.0% 100.0% (1) Short-tail lines include commercial multi-peril (non-liability), inland marine, accident and health, fidelity and surety, boiler and machinery and other lines. Reinsurance-Global We provide other insurance companies and self-insureds with assistance in managing their net risk through reinsurance on either a portfolio basis, through treaty reinsurance, or on an individual basis, through facultative reinsurance. Operating units comprising the Reinsurance-Global Segment are as follows: Berkley Re America provides treaty and facultative reinsurance solutions on a variety of product lines through reinsurance brokers to companies whose primary operations are within the United States and Canada. Berkley Re Asia Pacific provides property and casualty reinsurance to the Asia Pacific marketplace. With offices in Brisbane, Sydney, Hong Kong and Singapore, each branch focuses on excess of loss reinsurance, targeting both property and casualty treaty and facultative contracts, through multiple distribution channels. Berkley Re Direct is a direct casualty facultative reinsurance underwriter serving clients through a nationwide network of regional offices. Its facultative reinsurance products include automatic, semi-automatic and individual risk assumed reinsurance. Berkley Re Direct also provides its customers value-added services across its lines, including underwriting, claims and actuarial consultation. Berkley Re UK writes international property casualty treaty accounts. Its territorial scope includes reinsured clients domiciled in the United Kingdom, Europe, Africa, the Middle East and the Caribbean. 8 8 80793in_10k.indd 8 3/14/16 5:48 PM The following table sets forth the percentages of gross premiums written by each Reinsurance-Global operating unit: Berkley Re America Berkley Re Asia Pacific Berkley Re Direct Berkley Re UK Other Total 2015 64.2% 16.4 8.6 10.8 — 100.0% Year Ended December 31, 2014 60.4% 21.2 7.2 11.2 — 100.0% 2013 52.2% 24.9 6.5 9.1 7.3 100.0% 2012 54.3% 22.1 6.2 6.9 10.5 100.0% 2011 57.8% 24.4 7.2 0.2 10.4 100.0% The following table sets forth the percentages of gross premiums written, by property versus casualty business, by our Reinsurance-Global operations: Casualty Property Total Results by Industry Segment Year Ended December 31, 2015 2014 2013 2012 2011 66.7% 33.3 66.9% 33.1 65.6% 34.4 66.9% 33.1 70.7% 29.3 100.0% 100.0% 100.0% 100.0% 100.0% Summary financial information about our segments is presented on a GAAP basis in the following table: (In thousands) Year Ended December 31, 2015 2014 2013 2012 2011 Insurance-Domestic Revenue Income before income taxes Insurance-International Revenue Income before income taxes Reinsurance-Global Revenue Income before income taxes Other (1) Revenue Income (loss) before income taxes Total Revenue Income before income taxes $ 5,114,781 $ 4,807,418 $ 4,294,213 $ 3,944,942 $ 3,586,181 724,667 796,309 648,740 578,500 467,126 823,663 51,926 857,782 29,779 770,190 56,922 677,637 51,639 545,467 36,912 683,335 94,852 758,931 115,677 810,060 110,425 731,585 103,690 628,872 85,271 584,678 (139,415) 704,797 10,431 534,071 (117,199) 469,390 (31,901) 395,464 (76,223) 7,206,457 5,155,984 $ 732,030 $ 952,196 $ 698,888 $ 701,928 $ 513,086 6,408,534 7,128,928 5,823,554 (1) Represents corporate revenues, corporate expenses, net investment gains and losses, and revenues and expenses from investments in wholly-owned, non-insurance subsidiaries that are consolidated for financial reporting purposes 9 9 80793in_10k.indd 9 3/14/16 5:48 PM The table below represents summary underwriting ratios on a GAAP basis for our segments. Loss ratio is losses and loss expenses incurred expressed as a percentage of net premiums earned. Expense ratio is underwriting expenses expressed as a percentage of net premiums earned. Underwriting expenses do not include expenses related to insurance services or unallocated corporate expenses. Combined ratio is the sum of the loss ratio and the expense ratio. The combined ratio represents a measure of underwriting profitability, excluding investment income. A number in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit: Insurance Domestic Loss ratio Expense ratio Combined ratio Insurance-International Loss ratio Expense ratio Combined ratio Reinsurance-Global Loss ratio Expense ratio Combined ratio Total Loss ratio Expense ratio Combined ratio Year Ended December 31, 2015 2014 2013 2012 2011 61.2% 31.2 60.2% 31.6 61.3% 32.7 63.5% 32.5 64.9% 32.6 92.4% 91.8% 94.0% 96.0% 97.5% 58.2% 41.4 62.8% 59.4% 59.7% 57.4% 40.0 39.0 40.2 42.7 99.6% 102.8% 98.4% 99.9% 100.1% 58.4% 38.2 96.6% 60.5% 33.2 62.0% 34.0 96.0% 62.2% 34.8 64.3% 36.3 64.3% 38.0 97.0% 100.6% 102.3% 60.8% 33.0 61.2% 33.9 63.1% 34.1 63.9% 34.6 93.7% 93.8% 95.1% 97.2% 98.5% Investments Investment results, before income taxes, were as follows: (In thousands) Average investments, at cost(1) 2015 2014 2013 2012 2011 $ 15,970,931 $ 15,560,335 $ 14,848,386 $ 14,545,371 $ 13,631,552 Year Ended December 31, Net investment income(1) Percent earned on average investments(1) Net investment gains (2) Change in unrealized investment gains (losses) (3) $ $ $ 512,645 $ 600,885 3.9% 254,852 72,889 3.2% 92,324 $ (192,186) $ $ $ 544,291 3.7% 121,544 $ $ $ $ (399,122) 586,763 $ 526,351 4.0% 3.9% 10,465 $ 125,481 135,282 $ 147,998 __________________________ (1) Includes investments, cash and cash equivalents, trading accounts receivable from brokers and clearing organizations, trading account securities sold but not yet purchased and unsettled purchases. (2) Represents realized gains on investments not classified as trading account securities. (3) Represents the change in unrealized investment gains (losses) for available for sale securities. For comparison, the following are the coupon returns for the Barclays U.S. Aggregate Bond Index and the dividend returns for the S&P 500® Index: Barclays U.S. Aggregate Bond Index S&P 500® Index 10 10 Year Ended December 31, 2015 3.0% 2.1 2014 3.2% 2.1 2013 3.1% 2.4 2012 3.5% 2.5 2011 4.0% 2.1 80793in_10k.indd 10 3/14/16 5:48 PM The percentages of the fixed maturity portfolio categorized by contractual maturity, based on fair value, on the dates indicated, are set forth below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay certain obligations. 1 year or less Over 1 year through 5 years Over 5 years through 10 years Over 10 years Mortgage-backed securities 2015 5.8% 33.6 30.5 20.3 9.8 32.4 29.8 20.4 10.4 Year Ended December 31, 2014 7.0% 2013 8.0% 2012 5.8% 30.5 27.5 22.3 11.7 100.0% 30.7 23.4 25.5 14.6 2011 6.6% 28.3 25.3 25.5 14.3 Total 100.0% 100.0% 100.0% 100.0% At December 31, 2015, the fixed maturity portfolio had an effective duration of 3.3 years including cash and cash equivalents. Loss and Loss Expense Reserves To recognize liabilities for unpaid losses, either known or unknown, insurers establish reserves, which is a balance sheet account representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. Estimates and assumptions relating to reserves for losses and loss expenses are based on complex and subjective judgments, often including the interplay of specific uncertainties with related accounting and actuarial measurements. Such estimates are also susceptible to change as significant periods of time may elapse between the occurrence of an insured loss, the report of the loss to the insurer, the ultimate determination of the cost of the loss and the insurer’s payment of that loss. In general, when a claim is reported, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment based upon known information about the claim at that time. The estimate represents an informed judgment based on general reserving practices and reflects the experience and knowledge of the claims personnel regarding the nature and value of the specific type of claim. Reserves are also established on an aggregate basis to provide for losses incurred but not reported (“IBNR”) to the insurer, potential inadequacy of case reserves and the estimated expenses of settling claims, including legal and other fees and general expenses of administrating the claims adjustment process. Reserves are established based upon the then current legal interpretation of coverage provided. In examining reserve adequacy, several factors are considered in estimating the ultimate economic value of losses. These factors include, among others, historical data, legal developments, changes in social attitudes and economic conditions, including the effects of inflation. The actuarial process relies on the basic assumption that past experience, adjusted judgmentally for the effects of current developments and anticipated trends, is an appropriate basis for predicting future outcomes. Reserve amounts are necessarily based on management’s informed estimates and judgments using currently available data. As additional experience and other data become available and are reviewed, these estimates and judgments may be revised. This may result in reserve increases or decreases that would be reflected in our results in periods in which such estimates and assumptions are changed. The risk and complexity of estimating loss reserves are greater when economic conditions are uncertain. It is especially difficult to estimate the impact of inflation on loss reserves given the current economic environment and related government actions. Whereas a slowing economy would generally lead to lower inflation or even deflation, increased government spending would generally lead to higher inflation. A change in our assumptions regarding inflation would result in reserve increases or decreases that would be reflected in our earnings in periods in which such assumptions are changed. Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what management expects the ultimate settlement and claim administration will cost. While the methods for establishing the reserves are well tested over time, some of the major assumptions about anticipated loss emergence patterns are subject to unanticipated fluctuation. These estimates, which generally involve actuarial projections, are based on management’s assessment of facts and circumstances then known, as well as estimates of trends in claims severity and frequency, judicial theories of liability and other factors, including the actions of third parties, which are beyond the Company’s control. These variables are affected by external and internal events, such as inflation and economic volatility, judicial and litigation trends, reinsurance coverage, legislative changes and claim handling and reserving practices, which make it more difficult to accurately predict claim costs. The inherent uncertainties of estimating reserves are greater for certain types of liabilities where long periods of time elapse 11 11 80793in_10k.indd 11 3/14/16 5:48 PM before a definitive determination of liability is made. Although the loss reserves included in the Company’s financial statements represent management’s best estimates, setting reserves is inherently uncertain and the Company cannot provide assurance that its current reserves will prove adequate in light of subsequent events. The Company discounts its liabilities for certain workers’ compensation reserves. The amount of workers’ compensation reserves that were discounted was $2,308 million and $2,187 million at December 31, 2015 and 2014, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $699 million and $746 million at December 31, 2015 and 2014, respectively. At December 31, 2015, discount rates by year ranged from 2.0% to 6.5%, with a weighted average discount rate of 3.9%. Substantially all of discounted workers’ compensation reserves (98% of total discounted reserves at December 31, 2015) are excess workers’ compensation reserves. In order to properly match loss expenses with income earned on investment securities supporting the liabilities, reserves for excess workers’ compensation business are discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. These rates are determined annually based on the weighted average rate for the period. Once established, no adjustments are made to the discount rate for that period, and any increases or decreases in loss reserves in subsequent years are discounted at the same rate, without regard to when any such adjustments are recognized. The expected loss and loss expense payout patterns subject to discounting are derived from the Company’s loss payout experience. The Company also discounts reserves for certain other long-duration workers’ compensation reserves (representing approximately 2% of total discounted reserves at December 31, 2015), including reserves for quota share reinsurance and reserves related to losses regarding occupational lung disease. These reserves are discounted at statutory rates permitted by the Department of Insurance of the State of Delaware. To date, known environmental and asbestos claims have not had a material impact on the Company’s operations, because its subsidiaries generally did not insure large industrial companies that are subject to significant environmental or asbestos exposures prior to 1986 when an absolute exclusion was incorporated into standard policy language. The Company’s net reserves for losses and loss expenses relating to asbestos and environmental claims was $33 million at December 31, 2015 and $36 million at December 31, 2014. The Company’s gross reserves for losses and loss expenses relating to asbestos and environmental claims were $51 million and $56 million at December 31, 2015 and 2014, respectively. Net incurred losses and loss expenses for reported asbestos and environmental claims decreased approximately $2 million in 2015 and increased by approximately $4 million and $5 million in 2014 and 2013, respectively. Net paid losses and loss expenses for asbestos and environmental claims were approximately $2 million in 2015, $3 million in 2014 and $3 million in 2013. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make an actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential effect of significant unresolved legal matters, including coverage issues, as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties are highly uncertain. 12 12 80793in_10k.indd 12 3/14/16 5:48 PM The table below provides a reconciliation of the beginning of year and end of year property casualty reserves for the indicated years: (In thousands) Net reserves at beginning of year Net provision for losses and loss expenses: Claims occurring during the current year (1) Decrease in estimates for claims occurring in prior years (2)(3) Loss reserve discount amortization (4) Total Net payments for claims: Current year Prior years Total Foreign currency translation Net reserves at end of year Ceded reserves at end of year Gross reserves at end of year 2015 8,970,641 $ 8,683,797 $ 8,411,851 2014 2013 $ 3,653,561 (46,713) 3,495,825 (75,764) 3,221,393 (78,810) 49,422 70,506 54,441 3,656,270 3,490,567 3,197,024 914,637 898,944 822,787 2,342,378 2,216,283 2,055,284 3,257,015 (125,024) 9,244,872 1,424,278 3,115,227 (88,496) 8,970,641 1,399,060 2,878,071 (47,007) 8,683,797 1,397,144 $ 10,669,150 $10,369,701 $10,080,941 Net change in premiums and losses occurring in prior years: Decrease in estimates for claims occurring in prior years (2) Retrospective premium adjustments for claims occurring in prior years (3) Net favorable premium and reserve development on prior years $ $ 46,713 $ 16,730 75,764 $ 9,088 78,810 19,046 63,443 $ 84,852 $ 97,856 (1) Claims occurring during the current year are net of discounts of $20,357,000, $21,306,000 and $22,680,000 in 2015, 2014 and 2013, respectively. (2) The decrease in estimates for claims occurring in prior years is net of discounts. On an undiscounted basis, the estimates for claims occurring in prior years decreased by $64,971,000 in 2015, $116,866,000 in 2014 and $77,430,000 in 2013. (3) For certain retrospectively rated insurance policies and reinsurance agreements, changes in loss and loss expenses for prior years are offset by additional or return premiums. (4) In 2014, the Company entered into a commutation agreement that resulted in a reduction in prior year workers' compensation reserves of $30 million on an undiscounted basis and $12 million on a discounted basis. Also, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information regarding the decrease in estimates for claims occurring in prior years. A reconciliation between the reserves as of December 31, 2015 as reported in the accompanying consolidated GAAP financial statements and those reported on the basis of statutory accounting principles (“SAP”) in the Company’s U.S. regulatory filings is as follows: (In thousands) Net reserves reported in U.S. regulatory filings on a SAP basis Reserves for non-U.S. companies Loss reserve discounting(1) Ceded reserves $ 8,760,986 649,117 (165,231) 1,424,278 Gross reserves reported in the consolidated GAAP financial statements $ 10,669,150 (1) For statutory purposes, the Company discounts its workers’ compensation reinsurance reserves at 2.7% as permitted by the Department of Insurance of the State of Delaware. In its GAAP financial statements, the Company discounts excess workers’ compensation reserves at the risk-free rate and assumed workers’ compensation reserves at the statutory rate. 13 13 80793in_10k.indd 13 3/14/16 5:48 PM The following table presents the development of net reserves for 2005 through 2015. The top line of the table shows the estimated reserves for unpaid losses and loss expenses recorded at the balance sheet date for each of the indicated years. This represents the estimated amount of losses and loss expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not reported to us. The upper portion of the table shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The “cumulative redundancy” represents the aggregate change in the estimates over all prior years. The impact on the results of operations of the past three years of changes in reserve estimates is shown in the reconciliation tables above. It should be noted that the table presents a “run off” of balance sheet reserves, rather than accident or policy year loss development. Therefore, each amount in the table includes the effects of changes in reserves for all prior years. For example, assume a claim that occurred in 2005 is reserved for $2,000 million as of December 31, 2005. Assuming this claim estimate was changed in 2015 to $2,300 million, and was settled for $2,300 million in 2015, the $300 million deficiency would appear as a deficiency in each year from 2005 through 2015. (In millions) Year Ended December 31, 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Net reserves, discounted Reserve discount Net Reserves, undiscounted Net Reserves re-estimated as of: One year later Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Ten years later Cumulative redundancy (deficiency), undiscounted Cumulative amount of net liability paid through: One year later Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Ten years later $ 5,867 575 $ 6,948 $ 7,823 $ 8,123 $ 8,148 $ 8,000 $ 8,172 $ 8,412 $ 8,684 $ 8,971 $ 9,245 700 788 846 877 898 892 867 837 746 699 $ 6,442 $ 7,648 $ 8,611 $ 8,969 $ 9,025 $ 8,898 $ 9,064 $ 9,279 $ 9,521 $ 9,717 $ 9,944 9,652 $ 9,202 9,140 9,085 9,404 9,345 $ 7,560 7,494 $ 8,431 8,239 $ 8,737 8,560 $ 8,778 8,596 $ 8,715 8,624 $ 8,963 8,866 8,772 8,722 8,504 8,400 8,356 8,543 8,460 8,388 8,355 8,420 8,433 8,373 8,343 8,326 8,192 8,137 8,195 8,144 8,135 8,120 7,363 7,370 7,376 7,437 7,421 7,428 7,418 $ 6,499 6,578 6,592 6,556 6,636 6,677 6,755 6,762 6,780 6,763 $ (321) $ 230 $ 491 $ 643 $ 670 $ 542 $ 342 $ 194 $ 176 $ 65 $ — $ 1,341 $ 1,437 $ 1,663 $ 1,751 $ 1,812 $ 1,722 $ 2,010 $ 2,055 $ 2,216 $ 2,342 3,778 3,598 4,702 2,363 2,636 2,935 3,106 3,052 3,118 3,409 4,495 5,298 3,219 3,558 3,956 4,039 4,066 4,105 4,896 5,478 3,856 4,279 4,616 4,786 4,802 5,413 5,874 4,327 4,733 5,152 5,337 5,815 6,183 4,649 5,116 5,565 5,943 6,241 4,937 5,424 5,719 5,962 5,163 5,392 5,576 For certain retrospectively rated insurance policies and reinsurance agreements, changes in loss and loss expenses for prior years are offset by additional or return premiums. Such premiums are not reflected in the above table. 14 14 80793in_10k.indd 14 3/14/16 5:48 PM The following table presents the development of gross reserves for 2005 through 2015. (In millions) Year Ended December 31, Net reserves, discounted Ceded reserves Gross reserves, undiscounted Reserve discount Gross reserves, undiscounted Gross reserves re-estimated as of: One year later Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Ten Years later 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 $ 5,867 $ 6,947 837 845 $ 7,823 855 $ 8,123 877 $ 8,148 924 $ 8,000 1,017 $ 8,172 1,165 $ 8,412 $ 1,339 8,684 1,397 $ 8,971 1,399 $ 9,245 1,424 6,712 7,784 8,678 9,000 9,072 9,017 9,337 9,751 10,081 10,370 10,669 654 761 867 944 944 968 953 924 888 811 759 $ 7,366 $ 8,545 $ 9,545 $ 9,944 $10,016 $ 9,985 $10,290 $10,675 $ 10,969 $11,181 $11,428 $ 10,823 $11,081 10,732 $ 7,406 $ 8,509 $ 9,396 $ 9,696 $ 9,810 $ 9,879 $10,179 $10,673 10,573 10,479 9,749 10,141 10,029 9,947 9,681 9,540 9,477 9,662 9,580 9,539 9,433 9,384 9,566 9,445 9,427 9,386 9,310 9,267 9,178 9,163 9,081 9,109 9,082 9,029 8,988 7,529 8,454 7,561 8,300 8,335 8,316 8,360 8,358 8,315 8,275 7,508 7,617 7,635 7,699 7,716 7,694 7,652 Gross cumulative redundancy (deficiency) $ (286) $ 270 $ 557 $ 677 $ 632 $ 508 $ 343 $ 196 $ 237 100 — For certain retrospectively rated insurance policies and reinsurance agreements, changes in loss and loss expenses for prior years are offset by additional or return premiums. Such premiums are not reflected in the above table. Reinsurance We follow a common industry practice of reinsuring a portion of our exposures and paying to reinsurers a portion of the premiums received on the policies that we write. Reinsurance is purchased principally to reduce net liability on individual risks and to protect against catastrophic losses. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policies, it does make the assuming reinsurer contractually liable to the insurer to the extent of the reinsurance coverage. We monitor the financial condition of our reinsurers and attempt to place our coverages only with substantial, financially sound carriers. As a result, generally the reinsurers who reinsure our casualty insurance must have an A.M. Best rating of “A (Excellent)” or better with at least $1 billion in policyholder surplus and the reinsurers who cover our property insurance must have an A.M. Best rating of “A- (Excellent)” or better with at least $1 billion in policyholder surplus. Regulation U.S. Regulation Our U.S. insurance subsidiaries are subject to varying degrees of regulation and supervision in the jurisdictions in which they do business. Overview. Our domestic insurance subsidiaries are subject to statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. This regulation relates to such matters as the standards of solvency which must be met and maintained; the licensing of insurers and their agents; the nature of and limitations on investments; deposits of securities for the benefit of policyholders; approval of certain policy forms and premium rates; periodic examination of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; establishment and maintenance of reserves for unearned premiums, loss expenses and losses; and requirements regarding numerous other matters. Our property casualty subsidiaries, other than excess and surplus and reinsurance subsidiaries, must generally file all rates with the insurance department of each state in which they operate. Our excess and surplus and reinsurance subsidiaries generally operate free of rate and form regulation. Holding Company Statutes. In addition to regulatory supervision of our insurance subsidiaries, we are subject to state statutes governing insurance holding company systems. Under the terms of applicable state statutes, any person or entity desiring to purchase more than a specified percentage (commonly 10%) of our outstanding voting securities would be required 15 15 80793in_10k.indd 15 3/14/16 5:48 PM to obtain prior regulatory approval of the purchase. Typically, such statutes require that we periodically file information with the appropriate state insurance commissioner, including information concerning our capital structure, ownership, financial condition and general business operations. In addition, effective 2015, we must annually submit to our lead state regulator an “enterprise risk management report” which identifies the activities and circumstances of any affiliated company that might have a material adverse effect on the financial condition of our group or our U.S. licensed insurers. States have also adopted changes to the holding company act that authorize U.S. insurance regulators to lead or participate in the group-wide supervision of certain international insurance groups. National standard setters, such as the International Association of Insurance Supervisors, are developing capital standards for international groups, and U.S. insurance regulators are currently working on U.S. group capital standards for insurance groups. It is unclear how the development of group capital measures will interact with existing capital requirements for insurance companies in the United States and with international capital standards. It is possible that we may be required to hold additional capital as a result of these developments. The National Association of Insurance Commissioners (“NAIC”) adopted the Risk Management and Own Risk Solvency Assessment Model Act (the “ORSA Model Act”). Most states have adopted the ORSA Model Act, which requires an insurance holding company system’s chief risk officer to submit annually to its lead state insurance regulator an Own Risk and Solvency Assessment Summary Report (“ORSA”). The ORSA is a confidential internal assessment of the material and relevant risks associated with an insurer’s current business plan and the sufficiency of capital resources to support those risks. Under ORSA, we are required to: • • • regularly, no less than annually, conduct an ORSA to assess the adequacy of our risk management framework, and current and estimated projected future solvency position; internally document the process and results of the assessment; and provide a confidential high-level ORSA Summary Report annually to the lead state commissioner if the insurer is a member of an insurance group and, upon request, by the domiciliary state regulator. We cannot predict the impact, if any, that these holding company statutes and compliance with the ORSA Model Act will have on our business, financial condition or results of operations. Risk Based Capital Requirements. The NAIC utilizes a Risk Based Capital (“RBC”) formula that is designed to measure the adequacy of an insurer's statutory surplus in relation to the risks inherent in its business. The RBC formula develops a risk adjusted target level of adjusted statutory capital by applying certain factors to various asset, premium and reserve items. The NAIC RBC Model Law provides for four incremental levels of regulatory attention for insurers whose surplus is below the calculated RBC target. These levels of attention range in severity from requiring the insurer to submit a plan for corrective action to actually placing the insurer under regulatory control. The RBC of each of our domestic insurance subsidiaries was above any RBC action level as of December 31, 2015. Insurance Regulatory Information System. The NAIC also has developed a set of 13 financial ratios referred to as the Insurance Regulatory Information System (“IRIS”). On the basis of statutory financial statements filed with state insurance regulators, the NAIC annually calculates these IRIS ratios to assist state insurance regulators in monitoring the financial condition of insurance companies. The NAIC has established an acceptable range for each of the IRIS financial ratios. Guaranty Funds. Our U.S. insurance subsidiaries are also subject to assessment by state guaranty funds when an insurer in a particular jurisdiction has been judicially declared insolvent and the liquidated company's available funds are insufficient to pay policyholders and claimants the amounts to which they are entitled. The protection afforded under a state's guaranty fund to policyholders of the insolvent insurer varies from state to state. Generally, all licensed property casualty insurers are considered to be members of the fund, and assessments are based upon their pro rata share of direct written premiums in that state. The NAIC Model Post-Assessment Guaranty Fund Act, which many states have adopted, limits assessments to an insurer to 2% of its subject premium and permits recoupment of assessments through rate setting. Likewise, several states (or underwriting organizations of which our insurance subsidiaries are required to be members) have limited assessment authority with regard to deficits in certain lines of business. Additionally, state insurance laws and regulations require us to participate in mandatory property-liability “shared market,” “pooling” or similar arrangements that provide certain types of insurance coverage to individuals or others who otherwise are unable to purchase coverage voluntarily provided by private insurers. Shared market mechanisms include assigned risk plans and fair access to insurance requirement or “FAIR” plans. In addition, some states require insurers to participate in reinsurance pools for claims that exceed specified amounts. Our participation in these mandatory shared market or pooling mechanisms generally is related to the amount of our direct writings for the type of coverage written by the specific arrangement in the applicable state. 16 16 80793in_10k.indd 16 3/14/16 5:48 PM Dividends. We receive funds from our insurance company subsidiaries in the form of dividends and management fees for certain management services. Annual dividends in excess of maximum amounts prescribed by state statutes may not be paid without the approval of the insurance commissioner of the state in which an insurance subsidiary is domiciled. See “Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.” Trade Practices. State insurance laws and regulations include numerous provisions governing trade practices and the marketplace activities of insurers, including provisions governing marketing and sales practices, policyholder services, claims management and complaint handling. State regulatory authorities generally enforce these provisions through periodic market conduct examinations. Investment Regulation. Investments by our domestic insurance companies must comply with applicable laws and regulations which prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate and certain other investments, subject to specified limits and certain other qualifications. Investments that do not comply with these limits and qualifications are deducted in our insurance subsidiaries' calculation of their statutory capital and surplus. Terrorism Risk Insurance. The Terrorism Risk Insurance Act of 2002 established a Federal program that provides for a system of shared public and private compensation for insured losses resulting from acts of terrorism. Pursuant to the Terrorism Risk Insurance Program Reauthorization Act of 2015 (“TRIPRA”), the program has been extended for a six year period ending on December 31, 2020. TRIPRA provides a federal backstop to all U.S. based property and casualty insurers for insurance related losses resulting from any act of terrorism on U.S. soil or against certain U.S. air carriers, vessels or foreign missions. TRIPRA is applicable to almost all commercial lines of property and casualty insurance but excludes commercial auto, burglary and theft, surety, professional liability and farm owners' multi-peril insurance. Insurers with direct commercial property and casualty insurance exposure in the United States are required to participate in the program and make available coverage for certified acts of terrorism. TRIPRA's definition of certified acts includes domestic terrorism. Federal participation will be triggered under TRIPRA when the Secretary of Treasury certifies an act of terrorism. Under the program, the federal government will currently pay 84% of an insurer's covered losses in excess of the insurer's applicable deductible. This amount will decrease to 80% on a pro-rata basis over five years, beginning in 2016. The insurer's deductible is based on 20% percent of earned premium for the prior year for covered lines of commercial property and casualty insurance. Based on our 2015 earned premiums, our aggregate deductible under TRIPRA during 2016 will be approximately $850 million. The federal program will not pay losses for certified acts unless such losses exceed $100 million industry-wide. This threshold will increase to $200 million on a pro-rata basis over five years beginning in 2016. TRIPRA limits the federal government's share of losses at $100 billion for a program year. In addition, an insurer that has satisfied its deductible is not liable for the payment of losses in excess of the $100 billion cap. Excess and Surplus Lines. The regulation of our U.S. subsidiaries' excess and surplus lines insurance business differs significantly from the regulation of our admitted business. Our surplus lines subsidiaries are subject to the surplus lines regulation and reporting requirements of the jurisdictions in which they are eligible to write surplus lines insurance. Although the surplus lines business is generally less regulated than admitted business, principally with respect to rates and policy forms, strict regulations apply to surplus lines placements in the laws of every state and the regulation of surplus lines insurance may undergo changes in the future. Federal or state measures may be introduced to increase the oversight of surplus lines insurance in the future. Federal Regulation. Although the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal initiatives could have an impact on our business in a variety of ways. In July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which effected sweeping changes to financial services regulation in the United States. The Dodd-Frank Act created two new federal government bodies, the Federal Insurance Office (the “FIO”) and the Financial Stability Oversight Council (the “FSOC”), which may impact the regulation of insurance. Although the FIO has preemption authority over state insurance laws that conflict with certain international agreements, it does not have general supervisory or regulatory authority over the business of insurance. The FIO has authority to represent the United States in international insurance matters and is authorized to monitor the U.S. insurance industry and identify potential regulatory gaps that could contribute to systemic risk. The FIO has a particular role in connection with international insurance matters. The FIO represents the U.S. at the International Association of Insurance Supervisors (“IAIS”); in 2012, the FIO participated in IAIS’s Financial Stability Committee and joined IAIS’s Executive Committee. The Dodd-Frank Act authorizes the Secretary of the Treasury and U.S. Trade Representative to enter into international agreements of mutual recognition regarding the prudential regulation of insurance or reinsurance (a “Covered Agreement”). On November 20, 2015, the FIO and the U.S. Trade Representative advised Congress that they intend to initiate negotiations to enter into a Covered Agreement with the European Union. We are monitoring public reports on these negotiations which may affect our U.S. and EU domiciled insurance and reinsurance 17 17 80793in_10k.indd 17 3/14/16 5:48 PM business. Significantly, the FIO is authorized to preempt state measures that (i) are inconsistent with a Covered Agreement and (ii) disfavor non-U.S. insurers subject to a Covered Agreement. The FIO is required to report to Congress annually on the insurance industry and any preemption actions regarding any Covered Agreement. On December 12, 2013, the FIO delivered a report to Congress on how to modernize and improve the system of insurance regulation in the U.S. The report recommended that, in the short term, the U.S. system of insurance regulation can be modernized through state-based improvements combined with certain federal actions. The report identified areas for direct federal involvement in international standard setting, the FIO participation in supervisory colleges which monitor the regulation of large national and internationally active insurance groups and federal pursuit of international covered agreements to afford nationally uniform treatment of reinsurance collateral requirements. The report also made several recommendations for state reform of insurance regulation including changes to the state regulation of insurance company solvency, group supervision and corporate governance. The FIO report stated that the system of U.S. insurance regulation can be modernized and improved in the short-term, while warning that if the states do not act in the near term to effectively regulate matters on a consistent and cooperative basis, in the FIO’s view there will be a greater role for federal regulation of insurance. The FIO also can recommend to the FSOC that it designate an insurer as an entity posing risks to the United States financial stability in the event of the insurer's material financial distress or failure, i.e., a "systemically important financial institution." An insurer so designated by FSOC will be subject to Federal Reserve supervision and heightened prudential standards. As of December 31, 2015, three insurance groups had been so designated. Based upon our current business model and balance sheet, we do not believe that we will be designated by the FSOC as such an institution. Although the potential impacts of the Dodd-Frank Act on the U. S. insurance industry is not clear, our business could be affected by changes to the U.S. system of insurance regulation or our designation or the designation of insurers or reinsurers with which we do business as systemically significant non-bank financial companies. International Regulation Our insurance subsidiaries based in the United Kingdom are regulated by the Prudential Regulation Authority ("PRA") and the Financial Conduct Authority ("FCA"). The PRA's primary objectives with regard to insurers are to promote the safety and soundness of insurers and to contribute to the securing of an appropriate degree of protection for current and future policyholders, while the FCA has three operational objectives: (i) to secure an appropriate degree of protection for consumers, (ii) to protect and enhance the integrity of the United Kingdom financial system, and (iii) to promote effective competition in the interests of consumers in the financial services markets. The PRA and FCA employ a variety of regulatory tools to achieve their objectives, including periodic auditing and reporting requirements, risk assessment reviews, minimum solvency margins and individual capital assessment requirements, dividend restrictions, in certain cases, approval requirements governing the appointment of key officers, approval requirements governing controlling ownership interests and various other requirements. Our Lloyd's managing agency is also regulated by the PRA, FCA and Lloyd's, and the Lloyd's syndicate business is subject to Lloyd's supervision. Through Lloyd's, we are licensed to write business in various countries throughout the world by virtue of Lloyd's international licenses. In each such country, we are subject to the laws and insurance regulation of that country. Additionally, PRA and FCA regulations also impact us as “controller” (a PRA/FCA defined term) of our U.K.-regulated subsidiaries, whereby we are required to notify the PRA/FCA about significant events relating to the U.K.-regulated subsidiaries' controllers (i.e. persons or entities which have certain levels of direct or indirect voting power or economic interests in the regulated entities) as well as changes of control, and to submit an annual report regarding their controllers. As well, the PRA/FCA's Senior Insurance Managers Regime provides a regulatory framework for standards of fitness and propriety, conduct and accountability to be applied to individuals in positions of responsibility at insurers. In addition, certain employees are individually registered at Lloyd's. In the European Union, a new insurance regulatory regime governing, among other things, capital adequacy and risk management called “Solvency II” became effective on January 1, 2016. Lloyd’s applies a capital adequacy test to all Lloyd’s syndicates, including our syndicate, that is based on Solvency II principles. Solvency II provides for the supervision of group solvency. Under Solvency II, it is possible that the U.S. parent of a European Union subsidiary could be subject to certain Solvency II requirements if the U.S. company is not already subject to regulations deemed “equivalent” to Solvency II. Currently, the U.S. system of insurance regulation relating to group supervision is not deemed "equivalent" to Solvency II by European Union authorities. However, we have received a one-year waiver from the PRA, subject to conditions, with respect to the PRA's supervision of our group, which waives the requirement on us to maintain a group solvency capital requirement as calculated under Solvency II rules. Our international underwriting subsidiaries are also subject to varying degrees of regulation in certain countries in Scandinavia, Continental Europe, South America, Australia, Southeast Asia and Canada. Generally, our subsidiaries must satisfy local regulatory requirements. While each country imposes licensing, solvency, auditing and financial reporting requirements, the type and extent of the requirements differ substantially. Key areas where country regulations may differ 18 18 80793in_10k.indd 18 3/14/16 5:48 PM include: (i) the type of financial reports to be filed; (ii) a requirement to use local intermediaries; (iii) the amount of reinsurance permissible; (iv) the scope of any regulation of policy forms and rates; and (v) the type and frequency of regulatory examinations. Competition The property casualty insurance and reinsurance businesses are highly competitive, with many insurance companies of various sizes, as well as other entities offering risk alternatives such as self-insured retentions or captive programs, transacting business in the United States and internationally. We compete directly with a large number of these companies. Competition in our industry is largely measured by the ability to provide insurance and services at a price and on terms that are reasonable and acceptable to the customer. Our strategy in this highly fragmented industry is to seek specialized areas or geographic regions where our insurance subsidiaries can gain a competitive advantage by responding quickly to changing market conditions. Our subsidiaries establish their own pricing practices based upon a Company-wide philosophy to price products with the intent of making an underwriting profit. Although insurance prices have generally increased for most lines of business since 2011, the rate of increase has declined in more recent years. Loss costs have also increased over that period of time. With the low level of interest rates available, current price levels for certain lines of business remain below the prices required for the Company to achieve its long-term return objectives. Competition for Insurance-Domestic business comes from other specialty insurers, regional carriers, large national multi- line companies and reinsurers. Our specialty operating units compete with excess and surplus insurers as well as standard carriers. Other regional units compete with mutual and other regional stock companies as well as national carriers. Additionally, direct writers of property casualty insurance compete with our regional units by writing insurance through their salaried employees, generally at a lower acquisition cost than through independent agents such as those used by the Company. Our Insurance-International operations compete with native insurance operations both large and small, which in some cases are related to government entities, as well as with branches or local subsidiaries of multinational companies. Competition for the Reinsurance-Global business, which is especially strong, comes from domestic and foreign reinsurers, which produce their business either on a direct basis or through the broker market. These competitors include Swiss Re, Munich Re, Berkshire Hathaway, Transatlantic Reinsurance, Partner Re and others. In recent years, various institutional investors have increasingly sought to participate in the property and casualty insurance and reinsurance industries. Well-capitalized new entrants to the property and casualty insurance and reinsurance industries, or existing competitors that receive substantial infusions of capital, provide increasing competition, which may adversely impact our business and profitability. Further, an expanded supply of reinsurance capital may lower costs for insurers that rely on reinsurance and, as a consequence, those insurers may be able to price their products more competitively. Additionally, competition from insurers and reinsurers based in tax-advantaged jurisdictions continues to increase, including from domestic based subsidiaries of foreign-based entities in the excess and surplus lines businesses. Employees As of January 30, 2016, we employed 7,621 individuals. Of this number, our subsidiaries employed 7,481 persons and the remaining persons were employed at the parent company. Other Information about the Company's Business We maintain an interest in the acquisition and startup of complementary businesses and continue to evaluate possible acquisitions and new ventures on an ongoing basis. In addition, our insurance subsidiaries develop new coverages or lines of business to meet the needs of insureds. Seasonal weather variations and other events affect the severity and frequency of losses sustained by the insurance and reinsurance subsidiaries. Although the effect on our business of catastrophes such as tornadoes, hurricanes, hailstorms, earthquakes and terrorist acts may be mitigated by reinsurance, they nevertheless can have a significant impact on the results of any one or more reporting periods. We have no customer which accounts for 10 percent or more of our consolidated revenues. Compliance by W. R. Berkley and its subsidiaries with federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to protection of the environment, has not had a material effect upon our capital expenditures, earnings or competitive position. The Company's internet address is www.wrberkley.com. The information on our website is not incorporated by reference in this annual report on Form 10-K. The Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities 19 19 80793in_10k.indd 19 3/14/16 5:48 PM Exchange Act and other reports filed by us or with respect to our securities by others are accessible free of charge through this website as soon as reasonably practicable after they have been electronically filed with or furnished to the SEC. ITEM 1A. RISK FACTORS Our businesses face significant risks. If any of the events or circumstances described as risks below occur, our businesses, results of operations and/or financial condition could be materially and adversely affected. In addition to those described below, our businesses may also be adversely affected by risks and uncertainties not currently known to us or that we currently consider immaterial. Risks Relating to Our Industry Our results may fluctuate as a result of many factors, including cyclical changes in the insurance and reinsurance industry. The results of companies in the property casualty insurance industry historically have been subject to significant fluctuations and uncertainties in demand and pricing, causing cyclical changes in the insurance and reinsurance industry. The demand for insurance is influenced primarily by general economic conditions, while the supply of insurance is often directly related to available capacity or the perceived profitability of the business. In recent years, we have faced increased competition in our business, as a result of new entrants and existing insurers seeking to gain market share, resulting in decreased premium rates and less favorable contract terms and conditions for certain lines of business. The adequacy of premium rates is affected mainly by the severity and frequency of claims, which are influenced by many factors, including natural disasters, regulatory measures and court decisions that define and expand the extent of coverage and the effects of economic inflation on the amount of compensation due for injuries or losses. In addition, investment rates of return have impacted rate adequacy, with interest rates remaining at historic lows. These factors can have a significant impact on ultimate profitability because a property casualty insurance policy is priced before its costs are known as premiums usually are determined long before claims are reported. These factors could produce results that would have a negative impact on our results of operations and financial condition. We face significant competitive pressures in our businesses, which have reduced premium rates in certain areas and could harm our ability to maintain or increase our profitability and premium volume. We compete with a large number of other companies in our selected lines of business. We compete, and will continue to compete, with major U.S. and non-U.S. insurers and reinsurers, other regional companies, as well as mutual companies, specialty insurance companies, underwriting agencies and diversified financial services companies. Competitiveness in our businesses is based on many factors, including premium charges, ratings assigned by independent rating agencies, commissions paid to producers, the perceived financial strength of the company, other terms and conditions offered, services provided (including ease of doing business over the internet), speed of claims payment and reputation and experience in the lines to be written. In recent years, the insurance industry has undergone increasing consolidation, which may further increase competition. Some of our competitors, particularly in the Reinsurance-Global business, have greater financial and/or marketing resources than we do. These competitors within the reinsurance segment include Swiss Re, Munich Re, Berkshire Hathaway, Transatlantic Reinsurance, and Partner Re. We expect that perceived financial strength, in particular, will become more important as customers seek high quality reinsurers. Certain of our competitors operate from Bermuda or other tax advantaged or less regulated jurisdictions that may provide them with additional competitive and pricing advantages. Over the past several years, we have faced increased competition in our business, as increased supply has led to reduced prices and, at times, less favorable terms and conditions. Our specialty operating units have also encountered competition from admitted companies seeking to increase market share. Although insurance prices have generally increased for most lines of business since 2011, the rate of increase has declined in more recent years. Loss costs have also increased over that period of time. With the low level of interest rates available, current price levels for certain lines of business remain below the prices required for us to achieve our long-term return objectives. We expect to continue to face strong competition in these and our other lines of business and as a result could experience renewed pressure on pricing and policy terms and conditions. In recent years, various institutional investors have increasingly sought to participate in the property and casualty insurance and reinsurance industries. Well-capitalized new entrants to the property and casualty insurance and reinsurance industries, or existing competitors that receive substantial infusions of capital, provide increasing competition, which may adversely impact our business and profitability. Further, an expanded supply of reinsurance capital may lower costs for insurers that rely on reinsurance and, as a consequence, those insurers may be able to price their products more competitively. This intense competition could cause the supply and/or demand for insurance or reinsurance to change, which could affect our ability to price our products at attractive rates and retain existing business or write new products at adequate rates or on 20 2 0 80793in_10k.indd 20 3/14/16 5:48 PM terms and conditions acceptable to us. If we are unable to retain existing business or write new business at adequate rates or on terms and conditions acceptable to us, our results of operations could be materially and adversely affected. Our actual claims losses may exceed our reserves for claims, which may require us to establish additional reserves. Our gross reserves for losses and loss expenses were approximately $10.7 billion as of December 31, 2015. Our loss reserves reflect our best estimates of the cost of settling claims and related expenses with respect to insured events that have occurred. Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what management expects the ultimate settlement and claims administration will cost for claims that have occurred, whether known or unknown. The major assumptions about anticipated loss emergence patterns are subject to unanticipated fluctuation. These estimates, which generally involve actuarial projections, are based on management's assessment of facts and circumstances then known, as well as estimates of future trends in claims severity and frequency, inflation, judicial theories of liability, reinsurance coverage, legislative changes and other factors, including the actions of third parties, which are beyond our control. The inherent uncertainties of estimating reserves are greater for certain types of liabilities, where long periods of time elapse before a definitive determination of liability is made and settlement is reached. In periods with increased economic volatility, it becomes more difficult to accurately predict claim costs. It is especially difficult to estimate the impact of inflation on loss reserves given the current economic environment and related government actions. Both inflation overall and medical cost inflation, which has historically been greater than inflation overall, can have an adverse impact. Reserve estimates are continually refined in an ongoing process as experience develops and further claims are reported and settled. Adjustments to reserves are reflected in the results of the periods in which such estimates are changed. Because setting reserves is inherently uncertain, we cannot assure that our current reserves will prove adequate in light of subsequent events. Should we need to increase our reserves, our pre-tax income for the reporting period would decrease by a corresponding amount. We discount our reserves for excess and assumed workers' compensation business because of the long period of time over which losses are paid. Discounting is intended to appropriately match losses and loss expenses to income earned on investment securities supporting liabilities. The expected loss and loss expense payout pattern subject to discounting is derived from our loss payout experience. Changes in the loss and loss expense payout pattern are recorded in the period they are determined. If the actual loss payout pattern is shorter than anticipated, the discount will be reduced and pre-tax income will decrease by a corresponding amount. The effects of emerging claim and coverage issues on our business are uncertain. As industry practices and economic, legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claim and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. Examples of emerging claims and coverage issues include, but are not limited to: • • judicial expansion of policy coverage and the impact of new theories of liability; plaintiffs targeting property and casualty insurers, including us, in purported class action litigation relating to claims- handling and other practices; • medical developments that link health issues to particular causes, resulting in liability claims; • • claims relating to unanticipated consequences of current or new technologies, including cyber security related risks; and claims relating to potentially changing climate conditions. In some instances, these emerging issues may not become apparent for some time after we have issued the affected insurance policies. As a result, the full extent of liability under our insurance policies may not be known until many years after the policies are issued. In addition, the potential passage of new legislation designed to expand the right to sue, to remove limitations on recovery, to extend the statutes of limitations or otherwise to repeal or weaken tort reforms could have an adverse impact on our business. The effects of these and other unforeseen emerging claim and coverage issues are difficult to predict and could harm our business and materially and adversely affect our results of operations. 21 2 1 80793in_10k.indd 21 3/14/16 5:48 PM As a property casualty insurer, we face losses from natural and man-made catastrophes. Property casualty insurers are subject to claims arising out of catastrophes that may have a significant effect on their results of operations, liquidity and financial condition. Catastrophe losses have had a significant impact on our results. For example, catastrophe losses were $58 million in 2015, $87 million in 2014, $65 million in 2013, $80 million in 2012 and $153 million in 2011. Similarly, man-made catastrophes can also have a material impact on our financial results. Catastrophes can be caused by various events, including hurricanes, windstorms, earthquakes, tsunamis, hailstorms, explosions, severe winter weather and fires, as well as terrorist and other man-made activities, including drilling, mining and other industrial accidents or terrorist activities. The incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Some catastrophes are restricted to small geographic areas; however, hurricanes, earthquakes, tsunamis and other disasters may produce significant damage in large, heavily populated areas. Catastrophes can cause losses in a variety of our property and casualty lines, and most of our past catastrophe-related claims have resulted from severe storms. Seasonal weather variations or the impact of climate change may affect the severity and frequency of our losses. Insurance companies are not permitted to reserve for a catastrophe until it has occurred. It is therefore possible that a catastrophic event or multiple catastrophic events could produce significant losses and have a material adverse effect on our results of operations and financial condition. Changing climate conditions may adversely affect our financial condition or profitability. There is an emerging scientific view that the earth is getting warmer. Climate change, to the extent it produces rising temperatures and changes in weather patterns, may affect the frequency and severity of storms and other weather events as well as the affordability, availability and underwriting results of commercial property insurance, and, if frequency and severity patterns increase, could negatively affect our financial results. Conditions in the financial markets and the global economy have had and may continue to have a negative impact on our results of operations and financial condition, particularly if such conditions continue. The significant volatility and uncertainty experienced in financial markets around the world during the past several years and the effect of the economic downturn have continued. Although the U.S. and various foreign governments have taken various actions to try to stabilize the financial markets, the ultimate effectiveness of such actions remains unclear. Therefore, volatility and uncertainty in the financial markets and the resulting negative economic impact may continue for some time. For example, financial markets have been affected by concerns over U.S. fiscal policy as well as the related concern regarding the need to reduce the federal deficit. These issues, together with the slowing of the global economy generally, could send the U.S. into a new recession, further exacerbate concerns over sovereign debt of other countries and disrupt economic activity in the U.S. and elsewhere. Similarly, concerns about the solvency of certain European Union member states, and of financial institutions that have significant direct or indirect exposure to debt issued by them, has created market volatility that continues to affect the performance of various asset classes, and likely will continue until there is an ultimate resolution of these sovereign debt related concerns. While we monitor conditions in the financial markets, we cannot predict future conditions or their impact on our results of operations and financial condition. Depending on conditions in the financial markets, we could incur additional realized and unrealized losses in our investment portfolio in future periods, and financial market volatility and uncertainty and an economic downturn could have a significant negative impact on third parties that we do business with, including insureds and reinsurers. We, as a primary insurer, may have significant exposure for terrorist acts. To the extent an act of terrorism, whether a domestic or foreign act, is certified by the Secretary of Treasury, we may be covered under the Terrorism Risk Insurance Program Reauthorization Act of 2015 (“TRIPRA”), for up to 84% of our losses for certain property/casualty lines of insurance. However, any such coverage would be subject to a mandatory deductible based on 20% of earned premium for the prior year for the covered lines of commercial property and casualty insurance. Based on our 2015 earned premiums, our aggregate deductible under TRIPRA during 2016 is approximately $850 million. TRIPRA is currently in effect through December 31, 2020. In addition, the coverage provided under TRIPRA does not apply to reinsurance that we write. We are subject to extensive governmental regulation, which increases our costs and could restrict the conduct of our business. We are subject to extensive governmental regulation and supervision in both the United States and foreign jurisdictions. Most insurance regulations are designed to protect the interests of policyholders rather than stockholders and other investors. This system of regulation, generally administered in the United States by a department of insurance in each state in which we do business, relates to, among other things: 22 2 2 80793in_10k.indd 22 3/14/16 5:48 PM • • • • • • • standards of solvency, including risk-based capital measurements; restrictions on the nature, quality and concentration of investments; requirements pertaining to certain methods of accounting; evaluating enterprise risk to an insurer; rate and form regulation pertaining to certain of our insurance businesses; potential assessments for the provision of funds necessary for the settlement of covered claims under certain policies provided by impaired, insolvent or failed insurance companies; and involvement in the payment or adjudication of catastrophe or other claims beyond the terms of the policies. State insurance departments conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies, holding company issues and other matters. Our Insurance-International business is also generally subject to a similar regulatory scheme in each of the jurisdictions where we conduct operations. Federal financial services modernization legislation and legislative and regulatory initiatives taken or which may be taken in response to the current conditions in the financial markets and the recent economic downturn may lead to additional federal regulation of the insurance industry in the coming years. In July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which effected sweeping changes to financial services regulation in the United States. The Dodd-Frank Act established the Financial Stability Oversight Council (“FSOC”), which is authorized to recommend that certain systemically significant non-bank financial companies, including insurance companies, be regulated by the Board of Governors of the Federal Reserve. The Dodd-Frank Act also established a Federal Insurance Office (“FIO”) which is authorized to study, monitor and report to Congress on the U.S. insurance industry and the significance of global reinsurance to the U.S. insurance market. The FIO also can recommend to the FSOC that it designate an insurer as an entity posing risks to the United States financial stability in the event of the insured's material financial distress or failure. The potential impact of the Dodd-Frank Act on the U.S. insurance business is not clear. Our business could be affected by changes, whether as a result of the Dodd-Frank Act or otherwise, to the U.S. system of insurance regulation or our designation or the designation of insurers or reinsurers with which we do business as systemically significant non-bank financial companies. FSOC has designated four non-bank financial companies, including three insurance groups, as systematically significant. Although state regulation is the primary form of regulation of insurance and reinsurance in the United States, in addition to the changes brought about by the Dodd-Frank Act, Congress has considered over the past years various proposals relating to the creation of an optional federal charter, repeal of the insurance company antitrust exemption from the McCarran-Ferguson Act, and tax law changes. We may be subject to potentially increased federal oversight as a financial institution. With respect to international measures, Solvency II, the EU directive concerning the capital adequacy, risk management and regulatory reporting for insurers and reinsurers may affect our insurance businesses. Implementation of Solvency II in EU member states occurred on January 1, 2016, and may require us to utilize a significant amount of resources to ensure compliance. In addition, despite the one-year waiver of the Solvency II group capital requirements we received, Solvency II may have the effect of increasing the capital requirements of our EU domiciled insurers. Additionally, our capital requirements and compliance requirements may be adversely affected if the EU commission finds that the insurance regulatory regimes of the jurisdictions outside the EU in which we have insurance or reinsurance companies domiciled are not "equivalent" to the requirements of Solvency II. We may be unable to maintain all required licenses and approvals and our business may not fully comply with the wide variety of applicable laws and regulations or the relevant authority's interpretation of the laws and regulations. Also, some regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or monetarily penalize us. Also, changes in the level of regulation of the insurance industry, whether federal, state or foreign, or changes in laws or regulations themselves or interpretations by regulatory authorities, may further restrict the conduct of our business. 23 2 3 80793in_10k.indd 23 3/14/16 5:48 PM Risks Relating to Our Business Our international operations expose us to investment, political and economic risks, including foreign currency and credit risk. Our expanding international operations in the United Kingdom, Continental Europe, South America, Canada, Scandinavia, the Asia-Pacific region, Africa and Australia expose us to increased investment, political and economic risks, including foreign currency and credit risk. Changes in the value of the U.S. dollar relative to other currencies could have an adverse effect on our results of operations and financial condition. Our investments in non-U.S.-denominated securities are subject to fluctuations in non-U.S. securities and currency markets, and those markets can be volatile. Non-U.S. currency fluctuations also affect the value of any dividends paid by our non-U.S. subsidiaries to their parent companies in the U.S. We may be unable to attract and retain key personnel and qualified employees. We depend on our ability to attract and retain key personnel, including our Executive Chairman, our President and CEO, senior executive officers, presidents of our operating units, experienced underwriters and other skilled employees who are knowledgeable about our business. If the quality of our underwriting team and other personnel decreases, we may be unable to maintain our current competitive position in the specialized markets in which we operate, and be unable to expand our operations into new markets. We cannot guarantee that our reinsurers will pay in a timely fashion, if at all, and, as a result, we could experience losses. We purchase reinsurance by transferring part of the risk that we have assumed, known as ceding, to a reinsurance company in exchange for part of the premium we receive in connection with the risk. Although reinsurance makes the reinsurer contractually liable to us to the extent the risk is transferred or ceded to the reinsurer, it does not relieve us, the reinsured, of our liability to our policyholders. Our reinsurers may not pay the reinsurance recoverables that they owe to us or they may not pay such recoverables on a timely basis. Accordingly, we bear credit risk with respect to our reinsurers, and if our reinsurers fail to pay us, our financial results would be adversely affected. Underwriting results and investment returns of some of our reinsurers may affect their future ability to pay claims. As of December 31, 2015, the amount due from our reinsurers was approximately $1,533 million, including amounts due from state funds and industry pools where it was intended that we would bear no risk. Certain of these amounts due from reinsurers are secured by letters of credit or by funds held in trust on our behalf. We are subject to credit risk relating to our policyholders, independent agents and brokers. In addition to exposure to credit risk related to our reinsurance recoverables and investment portfolio, we are exposed to credit risk in several other areas of our business, including credit risk relating to policyholders, independent agents and brokers. For example our policyholders, independent agents or brokers may not pay a part of or the full amount of premiums owed to us or our brokers or other third party claim administrators may not deliver amounts owed on claims under our insurance and reinsurance contracts for which we have provided funds. As credit risk is generally a function of the economy, we face a greater credit risk in an economic downturn. While we attempt to manage credit risks through underwriting guidelines, collateral requirements and other oversight mechanisms, our efforts may not be successful. For example, to reduce such credit risk, we require certain third parties to post collateral for some or all of their obligations to us. In cases where we receive pledged securities and the applicable counterparty is unable to honor its obligations, we may be exposed to credit risk on the securities pledged and/or the risk that our access to that collateral may be stayed as a result of bankruptcy. In cases where we receive letters of credit from banks as collateral and one of our counterparties is unable to honor its obligations, we are exposed to the credit risk of the banks that issued the letters of credit. We are rated by A.M. Best, Standard & Poor's, and Moody's, and a decline in these ratings could affect our standing in the insurance industry and cause our sales and earnings to decrease. Ratings have become an increasingly important factor in establishing the competitive position of insurance companies. Certain of our insurance company subsidiaries are rated by A.M. Best, Standard & Poor's and Moody's. Our ratings are subject to periodic review, and we cannot assure you that we will be able to retain our current or any future ratings. If our ratings are reduced from their current levels by A.M. Best, Standard & Poor's or Moody's, our competitive position in the insurance industry could suffer and it would be more difficult for us to market our products. A ratings downgrade could also adversely limit our access to capital markets, which may increase the cost of debt. A significant downgrade could result in a substantial loss of business as policyholders move to other companies with higher claims-paying and financial strength ratings. 24 2 4 80793in_10k.indd 24 3/14/16 5:48 PM If market conditions cause reinsurance to be more costly or unavailable, we may be required to bear increased risks or reduce the level of our underwriting commitments. As part of our overall risk and capacity management strategy, we purchase reinsurance for certain amounts of risk underwritten by our insurance company subsidiaries, especially catastrophe risks and those risks with relatively high policy limits. We also purchase reinsurance on risks underwritten by others which we reinsure. Market conditions beyond our control determine the availability and cost of the reinsurance protection we seek to purchase, which may affect the level of our business and profitability. Our reinsurance contracts are generally subject to annual renewal, and we may be unable to maintain our current reinsurance contracts or to obtain other reinsurance contracts in adequate amounts and at favorable rates. In addition, we may be unable to obtain reinsurance on terms acceptable to us relating to certain lines of business that we intend to begin writing. If we are unable to renew our expiring contracts or to obtain new reinsurance contracts, either our net exposures would increase or, if we are unwilling to bear an increase in net exposures, we would have to reduce the level of our underwriting commitments, especially catastrophe exposed risks. Depending on conditions in the financial markets and the general economy, we may be unable to raise debt or equity capital if needed. If conditions in the financial markets and the general economy are unfavorable, which may result from disruptions, uncertainty or volatility in the capital and credit markets, we may be unable to access debt or equity capital on acceptable terms if needed, which could have a negative impact on our ability to invest in our insurance company subsidiaries and/or to take advantage of opportunities to expand our business, such as possible acquisitions and the creation of new ventures, and inhibit our ability to refinance our existing indebtedness if we desire to do so, on terms acceptable to us. We may not find suitable acquisition candidates or new insurance ventures and even if we do, we may not successfully integrate any such acquired companies or successfully invest in such ventures. As part of our present strategy, we continue to evaluate possible acquisition transactions and the start-up of complementary businesses on an ongoing basis, and at any given time we may be engaged in discussions with respect to possible acquisitions and new ventures. We cannot assure you that we will be able to identify suitable acquisition targets or insurance ventures, that such transactions will be financed and completed on acceptable terms or that our future acquisitions or start-up ventures will be successful. The process of integrating any companies we do acquire or investing in new ventures may have a material adverse effect on our results of operations and financial condition. If we experience difficulties with our information technology, telecommunications or other computer systems, our ability to conduct our business could be negatively or severely impacted. Our business is highly dependent upon our employees' ability to perform necessary business functions in an efficient and uninterrupted fashion. A shut-down of, or inability to access, one or more of our facilities, a power outage or a failure of one or more of our information technology, telecommunications or other computer systems could significantly impair our employees' ability to perform such functions on a timely basis. In the event of a disaster such as a natural catastrophe, terrorist attack or industrial accident, or the infection of our systems by a malicious computer virus, our systems could be inaccessible for an extended period of time. In addition, because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials or failures of controls if demand for our service exceeds capacity or a third-party system fails or experiences an interruption. If our business continuity plans or system security does not sufficiently address such a business interruption, system failure or service denial, our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner or perform other necessary business functions could be significantly impaired and our business could be harmed. Failure to maintain the security of our networks and confidential data may expose us to liability. Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. Computer viruses, hackers, employee misconduct and other external hazards could expose our data systems to security breaches. In addition, we routinely transmit and receive personal, confidential and proprietary information by email and other electronic means. Our outsourcing of certain technology and business process functions to third parties may expose us to enhanced risk related to data security. While we attempt to develop secure data transmission capabilities with these third-party vendors and others with whom we do business, we may be unable to put in place such secure capabilities with all of such vendors and third parties and, in addition, these third parties may not have appropriate controls in place to protect the confidentiality of the sensitive information being transferred. Our failure to protect sensitive personal and our proprietary information, whether owing to breaches of our own systems or those of our vendors, could result in significant monetary and reputational damages. These increased risks, and expanding regulatory requirements regarding data security, could expose us to data loss, monetary and reputational damages and significant increases in compliance costs. As a result, our ability to conduct our business could be materially and adversely affected. 25 2 5 80793in_10k.indd 25 3/14/16 5:48 PM We could be adversely affected if our controls to ensure compliance with guidelines, policies and legal and regulatory standards are not effective. Our business is highly dependent on our ability to engage on a daily basis in a large number of insurance underwriting, claim processing and investment activities, many of which are highly complex. These activities often are subject to internal guidelines and policies, as well as legal and regulatory standards, including those related to privacy, anti-corruption, anti- bribery and global finance and insurance matters. Our continued expansion into new international markets has brought about additional requirements. A control system, no matter how well designed and operated, can provide only reasonable assurance that the control system's objectives will be met. If our controls are not effective, it could lead to financial loss, unanticipated risk exposure (including underwriting, credit and investment risk) or damage to our reputation. Risks Relating to Our Investments A significant amount of our assets is invested in fixed maturity securities and is subject to market fluctuations. Our investment portfolio consists substantially of fixed maturity securities. As of December 31, 2015, our investment in fixed maturity securities was approximately $12.4 billion, or 77.3% of our total investment portfolio, including cash and cash equivalents. As of that date, our portfolio of fixed maturity securities consisted of the following types of securities: U.S. Government securities (5.4%); state and municipal securities (36.5%); corporate securities (27.9%); asset-backed securities (13.7%); mortgage-backed securities (9.8%) and foreign government (6.7%). The fair value of these assets and the investment income from these assets fluctuate depending on general economic and market conditions. The fair value of fixed maturity securities generally decreases as interest rates rise. If significant inflation or an increase in interest rates were to occur, the fair value of our fixed maturity securities would be negatively impacted. Conversely, if interest rates decline, investment income earned from future investments in fixed maturity securities will be lower. Some fixed maturity securities, such as mortgage-backed and other asset-backed securities, also carry prepayment risk as a result of interest rate fluctuations. Additionally, given the historically low interest rate environment, we may not be able to successfully reinvest the proceeds from maturing securities at yields commensurate with our target performance goals. The value of investments in fixed maturity securities is subject to impairment as a result of deterioration in the credit worthiness of the issuer, default by the issuer (including states and municipalities) in the performance of its obligations in respect of the securities and/or increases in market interest rates. To a large degree, the credit risk we face is a function of the economy; accordingly, we face a greater risk in an economic downturn or recession. During periods of market disruption, it may be difficult to value certain of our securities, particularly if trading becomes less frequent and/or market data becomes less observable. There may be certain asset classes that were in active markets with significant observable data that become illiquid due to the current financial environment. In such cases, more securities may require additional subjectivity and management judgment. Although the historical rates of default on state and municipal securities have been relatively low, our state and municipal fixed maturity securities could be subject to a higher risk of default or impairment due to declining municipal tax bases and revenue. The economic downturn has resulted in many states and municipalities operating under deficits or projected deficits, the severity and duration of which could have an adverse impact on both the valuation of our state and municipal fixed maturity securities and the issuer's ability to perform its obligations thereunder. Additionally, our investments are subject to losses as a result of a general decrease in commercial and economic activity for an industry sector in which we invest, as well as risks inherent in particular securities. Although we attempt to manage these risks through the use of investment guidelines and other oversight mechanisms and by diversifying our portfolio and emphasizing preservation of principal, our efforts may not be successful. Impairments, defaults and/or rate increases could reduce our net investment income and net realized investment gains or result in investment losses. Investment returns are currently, and will likely continue to remain, under pressure due to the significant volatility experienced in the financial markets, economic uncertainty, more generally, and the shape of the yield curve. As a result, our exposure to the risks described above could materially and adversely affect our results of operations. We have invested a portion of our assets in equity securities, merger arbitrage securities, investment funds, private equity, loans and real estate related assets, which are subject to significant volatility and may decline in value. We invest a portion of our investment portfolio in equity securities, merger arbitrage securities, investment funds, private equity, loans and real estate related assets. At December 31, 2015, our investment in these assets was approximately $2.9 billion, or 18.0%, of our investment portfolio, including cash and cash equivalents. 26 2 6 80793in_10k.indd 26 3/14/16 5:48 PM Merger and arbitrage trading securities were $376.7 million, or 2.3% of our investment portfolio, including cash and cash equivalents at December 31, 2015. Merger arbitrage involves investing in the securities of publicly held companies that are the targets in announced tender offers and mergers. Merger arbitrage differs from other types of investments 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. Our merger arbitrage positions are exposed to the risk associated with the completion of announced deals, which are subject to regulatory as well as political and other risks. Real estate related investments, including directly owned, investment funds and loans receivable, were $2.4 billion, or 14.8% of our investment portfolio, including cash and cash equivalents at December 31, 2015. We also invest in aviation and rail equipment funds, hedged equity and energy and other investment funds. The values of these investments are subject to fluctuations based on changes in the economy and interest rates in general and the related asset valuations in particular. In addition, our investments in real estate related assets and other alternative investments are less liquid than our other investments. These investments are subject to significant volatility as a result of the conditions in the financial and commodity markets and the global economy. Risks Relating to Purchasing Our Securities We are an insurance holding company and, therefore, may not be able to receive dividends in needed amounts. As an insurance holding company, our principal assets are the shares of capital stock of our insurance company subsidiaries. We have to rely on dividends from our insurance company subsidiaries to meet our obligations for paying principal and interest on outstanding debt obligations, paying dividends to stockholders and repurchasing our shares and paying corporate expenses. The payment of dividends by our insurance company subsidiaries is subject to regulatory restrictions and will depend on the surplus and future earnings of these subsidiaries. During 2016, the maximum amount of dividends that can be paid without regulatory approval is approximately $684 million. As a result, in the future we may not be able to receive dividends from these subsidiaries at times and in amounts necessary to meet our obligations, pay dividends or repurchase shares. Laws and regulations of the jurisdictions in which we conduct business could delay, deter or prevent an attempt to acquire control of us that stockholders might consider to be desirable, and may restrict a stockholder's ability to purchase our common stock. Generally, United States insurance holding company laws require that, before a person can acquire control of an insurance company, prior written approval must be obtained from the insurance regulatory authorities in the state in which that insurance company is domiciled. Pursuant to applicable laws and regulations, “control” over an insurer is generally presumed to exist if any person, directly or indirectly, owns, controls, holds the power to vote, or holds proxies representing 10% or more of the voting securities of that insurer. Indirect ownership includes ownership of the shares of our common stock. Thus, the insurance regulatory authorities of the states in which our insurance operating units are domiciled are likely to apply these restrictions on acquisition of control to any proposed acquisition of our common stock. Some states require a person seeking to acquire control of an insurer licensed but not domiciled in that state to make a filing prior to completing an acquisition if the acquirer and its affiliates, on the one hand, and the target insurer and its affiliates, on the other hand, have specified market shares in the same lines of insurance in that state. Additionally, many foreign jurisdictions where we conduct business impose similar restrictions and requirements. While these provisions may not require acquisition approval, they can lead to the imposition of conditions on an acquisition that could delay or prevent its consummation. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change in control of us through transactions, and in particular unsolicited transactions, that some or all of our stockholders might consider to be desirable. Certain provisions in our organizational documents may have the effect of hindering, delaying or preventing third party takeovers and thus may prevent our stockholders from receiving premium prices for their shares in an unsolicited takeover or make it more difficult for third parties to replace our current management. Provisions of our Restated Certificate of Incorporation and By-Laws, as well as state insurance statutes, may hinder, delay or prevent unsolicited acquisitions or changes of our control. These provisions may also have the effect of making it more difficult for third parties to cause the replacement of our current management without the concurrence of our board of directors. These provisions include: • our classified board of directors and the ability of our board to increase its size and to appoint directors to fill newly created directorships; 27 2 7 80793in_10k.indd 27 3/14/16 5:48 PM • • the requirement that 80% of our stockholders must approve mergers and other transactions between us and the holder of 5% or more of our shares, unless the transaction was approved by our board of directors prior to such holder's acquisition of 5% of our shares; and the need for advance notice in order to raise business or make nominations at stockholders' meetings. These provisions may discourage potential acquisition proposals and may delay, deter or prevent a change in control of us through transactions, and in particular unsolicited transactions, that some or all of our stockholders might consider to be desirable. ITEM 1B. UNRESOLVED STAFF COMMENTS There are no unresolved written comments that were received from the SEC staff 180 days or more before the end of our fiscal year relating to our periodic or current reports under the Securities Exchange Act of 1934. ITEM 2. PROPERTIES W. R. Berkley and its subsidiaries own or lease office buildings or office space suitable to conduct their operations. At December 31, 2015, the Company had aggregate office space of 3,892,994 square feet, of which 1,066,705 were owned and 2,826,288 were leased. Rental expense for the Company's operations was approximately $46,271,000, $45,198,000 and $44,752,000 for 2015, 2014 and 2013, respectively. Future minimum lease payments, without provision for sublease income, are $42,470,000 in 2016, $39,443,000 in 2017 and $200,636,000 thereafter. ITEM 3. LEGAL PROCEEDINGS The Company's subsidiaries are subject to disputes, including litigation and arbitration, arising in the ordinary course of their insurance and reinsurance businesses. The Company's estimates of the costs of settling such matters are reflected in its aggregate reserves for losses and loss expenses, and the Company does not believe that the ultimate outcome of such matters will have a material adverse effect on its financial condition or results of operations. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 28 2 8 80793in_10k.indd 28 3/14/16 5:48 PM PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The common stock of the Company is traded on the New York Stock Exchange under the symbol “WRB”. 2015: Fourth Quarter Third Quarter Second Quarter First Quarter 2014: Fourth Quarter Third Quarter Second Quarter First Quarter __________________________ Price Range High Low Dividends Declared Per Share $ 57.27 $ 52.36 51.91 58.46 53.40 51.78 48.72 47.45 $0.12 0.12 0.12 0.11 $ 54.14 $ 46.79 8.94 46.36 43.35 44.30 40.56 37.82 $1.11 (1) 0.11 0.11 0.10 (1) Includes a special dividend of $1.00 per share paid in December 2014. The closing price of the common stock on February 18, 2016 as reported on the New York Stock Exchange was $52.17 per share. The approximate number of record holders of the common stock on February 17, 2016 was 364. The Company did not repurchase any of its shares during the fourth quarter of 2015. The maximum number of shares the Company is authorized to repurchase as of December 31, 2015 under its current share repurchase program is 9,246,978. 29 2 9 80793in_10k.indd 29 3/14/16 5:48 PM ITEM 6. SELECTED FINANCIAL DATA (In thousands, except per share data) 2015 2014 2013 2012 2011 Year Ended December 31, Net premiums written Net premiums earned Net investment income Insurance service fees Net investment gains Revenues from wholly-owned investees Total revenues Interest expense Income before income taxes Income tax expense Noncontrolling interests Net income to common stockholders Data per common share: Net income per basic share Net income per diluted share Common stockholders’ equity Cash dividends declared Weighted average shares outstanding: $6,189,515 6,040,609 $5,996,947 5,744,418 $5,500,173 5,226,537 $4,898,539 4,673,516 $4,357,368 4,160,867 512,645 139,440 92,324 421,102 7,206,457 130,946 732,030 (227,923) (413) 503,694 4.06 3.87 37.31 0.47 600,885 117,443 254,852 410,022 7,128,928 128,174 952,196 (302,593) (719) 648,884 5.07 4.86 36.21 1.43 544,291 107,513 121,544 407,623 6,408,534 123,177 698,888 (193,587) (5,376) 499,925 3.69 3.55 32.79 0.39 586,763 103,133 210,465 247,113 5,823,554 126,302 701,928 (191,285) (51) 510,592 3.72 3.56 31.66 1.35 526,351 92,843 125,481 248,678 5,155,984 112,512 513,086 (121,945) 70 391,211 2.80 2.69 28.75 0.31 Basic Diluted Investments Total assets 124,040 130,189 127,874 133,652 135,305 140,743 137,097 143,315 139,688 145,672 $15,351,467 21,730,967 $15,591,824 21,716,691 $14,548,630 20,551,796 $14,467,440 20,155,896 $13,439,518 18,403,873 Reserves for losses and loss expenses Senior notes and other debt Subordinated debentures Common stockholders’ equity 10,669,150 1,844,621 340,320 4,600,246 10,369,701 2,115,527 340,060 4,589,945 10,080,941 1,692,442 339,800 4,336,035 9,751,086 1,871,535 243,206 4,306,217 9,337,134 1,500,503 242,997 3,953,356 30 3 0 80793in_10k.indd 30 3/14/16 5:48 PM ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in the United States and operates in three business segments: Insurance-Domestic, Insurance-International and Reinsurance-Global. Our decentralized structure provides us with the flexibility to respond quickly and efficiently to local or specific market conditions and to pursue specialty business niches. It also allows us to be closer to our customers in order to better understand their individual needs and risk characteristics. While providing our business units with certain operating autonomy, our structure allows us to capitalize on the benefits of economies of scale through centralized capital, investment, reinsurance and enterprise risk management, and actuarial, financial and corporate legal staff support. Our primary sources of revenues and earnings are its insurance operations and its investments. An important part of our strategy is to form new operating units to capitalize on various business opportunities. Over the years, the Company has formed numerous new operating units that are focused on important parts of the economy in the U.S., including healthcare, energy and agriculture, and on growing international markets, including Scandinavia, Australia, the Asia- Pacific region and South America. The profitability of the Company’s insurance business is affected primarily by the adequacy of premium rates. The ultimate adequacy of premium rates is not known with certainty at the time an insurance policy is issued because premiums are determined before claims are reported. The ultimate adequacy of premium rates is affected mainly by the severity and frequency of claims, which are influenced by many factors, including natural and other disasters, regulatory measures and court decisions that define and change the extent of coverage and the effects of economic inflation on the amount of compensation for injuries or losses. General insurance prices are also influenced by available insurance capacity, i.e., the level of statutory capital and surplus employed in the industry, and the industry’s willingness to deploy that capital. Although insurance prices have generally increased for most lines of business since 2011, the rate of increase has declined in more recent years. Loss costs have also increased over that period of time. With the low level of interest rates available, current price levels for certain lines of business remain below the prices required for the Company to achieve its long-term return objectives. Part of the Company's strategy is to selectively reduce its business in areas where it believes returns are not adequate. Price changes are reflected in the Company’s results over time as premiums are earned. The Company’s profitability is also affected by its investment income and investment gains. The Company’s invested assets are invested principally in fixed maturity securities. The return on fixed maturity securities is affected primarily by general interest rates, as well as the credit quality and duration of the securities. Returns available on fixed maturity investments are at historically low levels. The Company's investment income has been negatively impacted by the low fixed maturity investment returns, and will be further impacted if investment returns remain at this level. The Company invests in equity securities, merger arbitrage securities, investment funds (including energy related funds), private equity, loans and real estate related assets. The Company's investments in investment funds and its other alternative investments have experienced, and the Company expects to continue to experience, greater fluctuations in investment income. 31 3 1 80793in_10k.indd 31 3/14/16 5:48 PM Critical Accounting Estimates The following presents a discussion of accounting policies and estimates relating to reserves for losses and loss expenses, assumed premiums and other-than-temporary impairments of investments. Management believes these policies and estimates are the most critical to its operations and require the most difficult, subjective and complex judgments. Reserves for Losses and Loss Expenses. To recognize liabilities for unpaid losses, either known or unknown, insurers establish reserves, which is a balance sheet account representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. Estimates and assumptions relating to reserves for losses and loss expenses are based on complex and subjective judgments, often including the interplay of specific uncertainties with related accounting and actuarial measurements. Such estimates are also susceptible to change as significant periods of time may elapse between the occurrence of an insured loss, the report of the loss to the insurer, the ultimate determination of the cost of the loss and the insurer’s payment of that loss. In general, when a claim is reported, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment based upon known information about the claim at that time. The estimate represents an informed judgment based on general reserving practices and reflects the experience and knowledge of the claims personnel regarding the nature and value of the specific type of claim. Reserves are also established on an aggregate basis to provide for losses incurred but not reported (“IBNR”) to the insurer, potential inadequacy of case reserves and the estimated expenses of settling claims, including legal and other fees and general expenses of administrating the claims adjustment process. Reserves are established based upon the then current legal interpretation of coverage provided. In examining reserve adequacy, several factors are considered in estimating the ultimate economic value of losses. These factors include, among other things, historical data, legal developments, changes in social attitudes and economic conditions, including the effects of inflation. The actuarial process relies on the basic assumption that past experience, adjusted judgmentally for the effects of current developments and anticipated trends, is an appropriate basis for predicting future outcomes. Reserve amounts are based on management’s informed estimates and judgments using currently available data. As additional experience and other data become available and are reviewed, these estimates and judgments may be revised. This may result in reserve increases or decreases that would be reflected in our results in periods in which such estimates and assumptions are changed. Reserves do not represent a certain calculation of liability. Rather, reserves represent an estimate of what management expects the ultimate settlement and claim administration will cost. While the methods for establishing reserves are well tested over time, the major assumptions about anticipated loss emergence patterns are subject to uncertainty. These estimates, which generally involve actuarial projections, are based on management’s assessment of facts and circumstances then known, as well as estimates of trends in claims severity and frequency, judicial theories of liability and other factors, including the actions of third parties which are beyond the Company’s control. These variables are affected by external and internal events, such as inflation and economic volatility, judicial and litigation trends, reinsurance coverage, legislative changes and claim handling and reserving practices, which make it more difficult to accurately predict claim costs. The inherent uncertainties of estimating reserves are greater for certain types of liabilities where long periods of time elapse before a definitive determination of liability is made. Because setting reserves is inherently uncertain, the Company cannot provide assurance that its current reserves will prove adequate in light of subsequent events. 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. For example, the paid loss and incurred loss development methods rely on historical paid and incurred loss data. For new lines of business, where there is insufficient history of paid and incurred claims data, or in circumstances where there have been significant changes in claim practices, the paid and incurred loss development methods would be less credible than other actuarial methods. 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” and 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. Examples of changes in terms and conditions that can have a significant impact on reserve levels are the use of aggregate policy limits, the expansion of coverage exclusions, whether or not defense costs are within policy limits, and changes in deductibles and attachment points. 32 3 2 80793in_10k.indd 32 3/14/16 5:48 PM 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. Management believes the estimates and assumptions it makes in the reserving process provide the best estimate of the ultimate cost of settling claims and related expenses with respect to insured events which have occurred; however, different assumptions and variables could lead to significantly different reserve estimates. 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. If the actual level of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s estimate. The following table reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity, relative to our assumptions, on our loss estimate for claims occurring in 2015: (In thousands) Severity (+/-) 1% 5% 10% 1% $ 73,437 221,040 405,545 Frequency (+/-) 5% $ 221,040 374,490 566,302 10% $ 405,545 566,302 767,248 Our net reserves for losses and loss expenses of approximately $9.2 billion as of December 31, 2015 relate to multiple accident years. Therefore, the impact of changes in frequency or severity for more than one accident year could be higher or lower than the amounts reflected above. The impact of such changes would likely be manifested gradually over the course of many years, as the magnitude of the changes became evident. Approximately $1.4 billion, or 15%, of the Company’s net loss reserves as of December 31, 2015 relate to the Reinsurance-Global segment. There is a higher degree of uncertainty and greater variability regarding estimates of assumed loss reserves because those estimates are based, in part, upon information received from ceding companies. If information received from ceding companies is not timely or correct, the Company’s estimate of ultimate losses may not be accurate. Furthermore, due to delayed reporting of claim information by ceding companies, the claim settlement tail for assumed reinsurance is extended. Management considers the impact of delayed reporting in its selection of assumed loss development factors. 33 3 3 80793in_10k.indd 33 3/14/16 5:48 PM Information received from ceding companies is used to set initial expected loss ratios, to establish case reserves and to estimate reserves for incurred but not reported losses on assumed reinsurance business. This information, which is generally provided through reinsurance intermediaries, is gathered through the underwriting process and from periodic claim reports and other correspondence with ceding companies. The Company performs underwriting and claim audits of selected ceding companies to determine the accuracy and completeness of information provided to the Company. The information received from the ceding companies is supplemented by the Company’s own loss development experience with similar lines of business as well as industry loss trends and loss development benchmarks. Following is a summary of the Company’s reserves for losses and loss expenses by business segment as of December 31, 2015 and 2014: (In thousands) Insurance-Domestic Insurance-International Reinsurance-Global Net reserves for losses and loss expenses Ceded reserves for losses and loss expenses Gross reserves for losses and loss expenses 2015 2014 $ 7,169,640 $ 706,553 1,368,679 9,244,872 1,424,278 6,767,374 750,613 1,452,654 8,970,641 1,399,060 $ 10,669,150 $ 10,369,701 Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business as of December 31, 2015 and 2014: (In thousands) December 31, 2015 Other liability Workers’ compensation (1) Professional liability Commercial automobile Short-tail lines (2) Total primary Reinsurance (1) Total December 31, 2014 Other liability Workers’ compensation (1) Professional liability Commercial automobile Short-tail lines (2) Total primary Reinsurance (1) Total Reported Case Reserve Incurred But Not Reported $ 1,079,641 1,655,726 256,783 352,208 317,375 3,661,733 631,666 $ 4,293,399 $ 1,035,442 1,603,310 308,887 319,700 330,010 3,597,349 603,851 $ 4,201,200 $ $ $ $ 1,947,637 1,263,508 478,796 242,071 282,448 4,214,460 737,013 4,951,473 1,785,598 1,201,117 453,557 203,085 277,281 3,920,638 848,803 4,769,441 Total 3,027,278 2,919,234 735,579 594,279 599,823 7,876,193 1,368,679 9,244,872 2,821,040 2,804,427 762,444 522,785 607,291 7,517,987 1,452,654 8,970,641 $ $ $ $ (1) Reserves for excess and assumed workers’ compensation business are net of an aggregate net discount of $699 million and $746 million as of December 31, 2015 and 2014, respectively. (2) Short-tail lines include commercial multi-peril (non-liability), inland marine, accident and health, fidelity and surety, boiler and machinery and other lines. 34 3 4 80793in_10k.indd 34 3/14/16 5:48 PM The Company evaluates reserves for losses and loss expenses on a quarterly basis. Changes in estimates of prior year losses are reported when such changes are made. The changes in prior year loss reserve estimates are generally the result of ongoing analysis of recent loss development trends. Original estimates are increased or decreased as additional information becomes known regarding individual claims and aggregate claim trends. Certain of the Company's insurance and reinsurance contracts are retrospectively rated, whereby the Company collects more or less premiums based on the level of loss activity. For those contracts, changes in loss and loss expenses for prior years may be fully or partially offset by additional or return premiums. Net prior year development (i.e, the sum of prior year reserve changes and prior year earned premiums changes) for each of the three years ended December 31, 2015 are as follows: (In thousands) Decrease in prior year loss reserves Increase in prior year earned premiums Net favorable prior year development 2014 2013 2015 $ 46,713 $ 16,730 75,764 $ 9,088 $ 63,443 $ 84,852 $ 78,810 19,046 97,856 Favorable prior year development (net of additional and return premiums) was $63 million in 2015. Insurance-Domestic - Reserves for the Insurance-Domestic segment developed favorably by $47 million in 2015. The favorable development was primarily related to workers' compensation and other liability business, and was partially offset by unfavorable development for commercial automobile liability business. For workers' compensation, the favorable development was related to both primary and excess business and to many accident years, including those prior to 2006. In 2015, reported workers' compensation losses were below our expectations for many of our operating units. In addition, overall loss frequency and severity trends emerged better than the assumptions underlying our previous reserve estimates. The long term trend of declining workers' compensation claim frequency continued in 2015. The improvement is attributable to better workplace safety and to benign medical severity trends as we continue to invest in medical case management services and higher usage of preferred provider networks. For other liability business, favorable development was concentrated in accident years 2007 through 2013. The favorable development was primarily related to our excess and surplus lines casualty business that has benefited from a persistent improvement in claim frequency trends over the past several years. For commercial automobile business, adverse development was primarily related to large losses for long-haul trucking business and to accident years 2011 through 2014. The higher loss cost trends for the commercial automobile industry are attributable, in part, to the increase in miles driven as the economy has improved and fuel prices have declined over the past several years. Reinsurance-Global - Reserves for the Reinsurance-Global segment developed favorably by $11 million in 2015. The favorable development was primarily related to direct facultative reinsurance business and to accident years 2005 through 2013. Loss reserves developed favorably for umbrella business and for other liability coverage for contractors. Insurance-International - Reserves for the Insurance-International segment developed favorably by $5 million in 2015. The favorable development was related primarily to commercial property. The favorable commercial property development was attributable to accident years 2012 through 2014 and was driven by favorable frequency and severity trends on property business written in Lloyd's. The favorable property development was partially offset by unfavorable development for professional indemnity business in the U.K., primarily for accident years 2006 through 2013. Favorable prior year development (net of additional and return premiums) was $85 million in 2014. For the Insurance-Domestic segment, favorable development in 2014 of $92 million was driven primarily by other liability business for accident years 2006 through 2010, primarily related to our excess and surplus lines casualty business. Reported losses during these years continued to be below our initial expectations at the time the business was written, largely as a result of persistent improvement in claim frequency trends (i.e., number of reported claims per unit of exposure). As these accident years have matured, the weighting of actuarial methods has shifted from methods based on initial expected losses to 35 3 5 80793in_10k.indd 35 3/14/16 5:48 PM methods based on actual reported losses. We believe the favorable claim frequency trends we have seen during this time period are due to changes in the mix of business written and to the general slowdown in the economy. Commercial automobile reported unfavorable development primarily as a result of large losses for long-haul trucking business in 2012 and 2013. For the Reinsurance-Global segment, favorable reserve development in 2014 of $16 million was driven primarily by assumed professional liability excess of loss and umbrella treaty business, as well as direct facultative business. This was partially offset by adverse development on brokerage facultative business caused by completed operations losses associated with construction projects in accident years prior to 2009. For the Insurance-International segment, adverse reserve development in 2014 of $23 million was driven primarily by unexpected large losses from accident years 2009-2012 in the professional indemnity line of business in the United Kingdom. Favorable prior year reserve development (net of additional and return premiums) was $98 million in 2013. Favorable development in 2013 was primarily attributable to accident years 2006 through 2012 and included favorable development of $39 million for other liability business, $32 million for reinsurance assumed liability business, $22 million for workers’ compensation, $18 million for commercial property and $24 million for other lines of business. The favorable development in 2013 was largely driven by loss cost trends, which were more favorable than originally anticipated. In particular, loss frequency trends have been more favorable than expected for excess & surplus lines casualty business, workers' compensation and excess of loss professional and other liability business. The 2013 favorable development was partially offset by unfavorable development of $23 million for commercial automobile business and $14 million for products liability business. Commercial automobile development was driven by large losses for long-haul trucking business in 2011 and 2012. Product liability development stemmed from completed operations losses associated with construction projects in accident years prior to 2009. Reserve Discount. The Company discounts its liabilities for certain workers’ compensation reserves. The amount of workers’ compensation reserves that were discounted was $2,308 million and $2,187 million at December 31, 2015 and 2014, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $699 million and $746 million at December 31, 2015 and 2014, respectively. At December 31, 2015, discount rates by year ranged from 2.0% to 6.5%, with a weighted average discount rate of 3.9%. Substantially all of discounted workers’ compensation reserves (98% of total discounted reserves at December 31, 2015) are excess workers’ compensation reserves. In order to properly match loss expenses with income earned on investment securities supporting the liabilities, reserves for excess workers’ compensation business are discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. These rates are determined annually based on the weighted average rate for the period. Once established, no adjustments are made to the discount rate for that period, and any increases or decreases in loss reserves in subsequent years are discounted at the same rate, without regard to when any such adjustments are recognized. The expected loss and loss expense payout patterns subject to discounting are derived from the Company’s loss payout experience. The Company also discounts reserves for certain other long-duration workers’ compensation reserves (representing approximately 2% of total discounted reserves at December 31, 2015), including reserves for quota share reinsurance and reserves related to losses regarding occupational lung disease. These reserves are discounted at statutory rates permitted by the Department of Insurance of the State of Delaware. Assumed Reinsurance Premiums. The Company estimates the amount of assumed reinsurance premiums that it will receive under treaty reinsurance agreements at the inception of the contracts. These premium estimates are revised as the actual amount of assumed premiums is reported to the Company by the ceding companies. As estimates of assumed premiums are made or revised, the related amount of earned premiums, commissions and incurred losses associated with those premiums are recorded. Estimated assumed premiums receivable were approximately $62 million and $85 million at December 31, 2015 and December 31, 2014, respectively. The assumed premium estimates are based upon terms set forth in reinsurance agreements, information received from ceding companies during the underwriting and negotiation of agreements, reports received from ceding companies and discussions and correspondence with reinsurance intermediaries. The Company also considers its own view of market conditions, economic trends and experience with similar lines of business. These premium estimates represent management’s best estimate of the ultimate amount of premiums to be received under its assumed reinsurance agreements. Other-Than-Temporary Impairments (OTTI) of Investments. The cost of securities is adjusted where appropriate to include a provision for decline in value which is considered to be other-than-temporary. An other-than-temporary decline is considered to occur in investments where there has been a sustained reduction in fair value and where the Company does not expect the fair value to recover prior to the time of sale or maturity. Since equity securities do not have a contractual cash flow 36 3 6 80793in_10k.indd 36 3/14/16 5:48 PM or maturity, the Company considers whether the price of an equity security is expected to recover within a reasonable period of time. or maturity, the Company considers whether the price of an equity security is expected to recover within a reasonable period of time. The Company classifies its fixed maturity securities and preferred stocks by credit rating, primarily based on ratings The Company classifies its fixed maturity securities and preferred stocks by credit rating, primarily based on ratings assigned by credit rating agencies. For purposes of classifying securities with different ratings, the Company uses the lower assigned by credit rating agencies. For purposes of classifying securities with different ratings, the Company uses the lower rating if two ratings were assigned and the middle rating if three ratings were assigned, unless the Company’s own analysis rating if two ratings were assigned and the middle rating if three ratings were assigned, unless the Company’s own analysis indicates that the lower rating is more appropriate. Securities that are not rated by a rating agency are evaluated and classified indicates that the lower rating is more appropriate. Securities that are not rated by a rating agency are evaluated and classified by the Company on a case-by-case basis. by the Company on a case-by-case basis. Fixed Maturity Securities – For securities that we intend to sell or, more likely than not, would be required to sell, a Fixed Maturity Securities – For securities that we intend to sell or, more likely than not, would be required to sell, a decline in value below amortized cost is considered to be OTTI. The amount of OTTI is equal to the difference between amortized cost and fair value at the balance sheet date. For securities that we do not intend to sell or expect to be required to sell, a decline in value below amortized cost is considered to be an OTTI if we do not expect to recover the entire amortized cost basis of a security (i.e., the present value of cash flows expected to be collected is less than the amortized cost basis of the security). decline in value below amortized cost is considered to be OTTI. The amount of OTTI is equal to the difference between amortized cost and fair value at the balance sheet date. For securities that we do not intend to sell or expect to be required to sell, a decline in value below amortized cost is considered to be an OTTI if we do not expect to recover the entire amortized cost basis of a security (i.e., the present value of cash flows expected to be collected is less than the amortized cost basis of the security). The portion of the decline in value considered to be a credit loss (i.e., the difference between the present value of cash The portion of the decline in value considered to be a credit loss (i.e., the difference between the present value of cash flows expected to be collected and the amortized cost basis of the security) is recognized in earnings. The portion of the decline in value not considered to be a credit loss (i.e., the difference in the present value of cash flows expected to be collected and the fair value of the security) is recognized in other comprehensive income. flows expected to be collected and the amortized cost basis of the security) is recognized in earnings. The portion of the decline in value not considered to be a credit loss (i.e., the difference in the present value of cash flows expected to be collected and the fair value of the security) is recognized in other comprehensive income. Impairment assessments for structured securities, including mortgage-backed securities and asset-backed securities, Impairment assessments for structured securities, including mortgage-backed securities and asset-backed securities, collateralized debt obligations and corporate debt, are generally evaluated based on the performance of the underlying collateral collateralized debt obligations and corporate debt, are generally evaluated based on the performance of the underlying collateral under various economic and default scenarios that may involve subjective judgments and estimates by management. Modeling under various economic and default scenarios that may involve subjective judgments and estimates by management. Modeling these securities involves various factors, such as projected default rates, the nature and realizable value of the collateral, if any, these securities involves various factors, such as projected default rates, the nature and realizable value of the collateral, if any, the ability of the issuer to make scheduled payments, historical performance and other relevant economic and performance the ability of the issuer to make scheduled payments, historical performance and other relevant economic and performance factors. If an OTTI determination is made, a discounted cash flow analysis is used to ascertain the amount of the credit factors. If an OTTI determination is made, a discounted cash flow analysis is used to ascertain the amount of the credit impairment. impairment. The following table provides a summary of fixed maturity securities in an unrealized loss position as of December 31, The following table provides a summary of fixed maturity securities in an unrealized loss position as of December 31, 2015: 2015: (Dollars in thousands) Unrealized loss less than 20% of amortized cost Unrealized loss of 20% or greater of amortized cost: (Dollars in thousands) Unrealized loss less than 20% of amortized cost Unrealized loss of 20% or greater of amortized cost: Less than twelve months Twelve months and longer Less than twelve months Twelve months and longer Total Total Number of Securities Number of Securities 543 $ 543 $ Aggregate Fair Value Aggregate Fair Value 4,015,415 $ 4,015,415 $ Unrealized Loss Unrealized Loss 58,570 58,570 10 15 10 15 56,158 50,013 56,158 50,013 568 $ 568 $ 4,121,586 $ 4,121,586 $ 17,144 15,692 17,144 15,692 91,406 91,406 A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at December 31, 2015 is presented in the table below. A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at December 31, 2015 is presented in the table below. (Dollars in thousands) (Dollars in thousands) Mortgage-backed securities Mortgage-backed securities Asset-backed securities Asset-backed securities Corporate Corporate Foreign government Foreign government Total Total Number of Securities Number of Securities 8 $ 7 12 1 28 $ 8 $ 7 12 1 28 $ Aggregate Fair Value 23,370 $ 19,535 128,716 13,956 185,577 $ Aggregate Fair Value 23,370 $ 19,535 128,716 13,956 185,577 $ Unrealized Loss 1,790 264 6,717 3,766 12,537 1,790 264 6,717 3,766 12,537 Unrealized Loss The Company has evaluated its fixed maturity securities in an unrealized loss position and believes the unrealized loss The Company has evaluated its fixed maturity securities in an unrealized loss position and believes the unrealized loss is due primarily to temporary market and sector-related factors rather than to issuer-specific factors. None of these securities are is 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 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 continue to meet their contractual payment obligations as they become due and does not consider any of these securities to be OTTI. For the year ended December 31, 2015, OTTI for fixed maturities recognized in earnings were $9.0 million, all of OTTI. For the year ended December 31, 2015, OTTI for fixed maturities recognized in earnings were $9.0 million, all of 37 3 7 3 7 80793in_10k.indd 37 3/14/16 5:48 PM which were considered due to credit factors. There were no OTTI of fixed maturity securities for the year ended December 31, 2014. Preferred Stocks – At December 31, 2015, there was 1 preferred stock in an unrealized loss position, with an aggregate fair value of $22.3 million and a gross unrealized loss of $3.4 million. The preferred stock is rated investment grade. Management believes the unrealized loss is due primarily to market and sector related factors and does not consider it to be OTTI. For the year ended December 31, 2015, OTTI for preferred stocks were $13.4 million. There were no OTTI for preferred stocks for the year ended December 31, 2014. Common Stocks – At December 31, 2015, there were two common stocks in an unrealized loss position with an aggregate fair value of $26.5 million and a gross unrealized loss of $19.2 million. Based on management's view of the underlying securities, the Company does not consider the common stocks to be OTTI. For the year ended December 31, 2015, OTTI for common stocks were $10.9 million. There were no OTTI for common stocks for the year ended December 31, 2014. Loans Receivable – The Company monitors the performance of its loans receivable, including current market conditions for each loan and the ability to collect principal and interest. For loans where the Company determines it is probable that the contractual terms will not be met, an analysis is performed and a valuation reserve is established, if necessary, with a charge to earnings. Loans receivable are reported net of a valuation reserve of $2 million and $3 million at December 31, 2015 and 2014, respectively. The Company monitors the performance of its loans receivable and assesses the ability of each 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. Fair Value Measurements. The Company’s fixed maturity and equity securities available for sale and its trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. 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. The fair value of the vast majority of the Company’s portfolio is based on observable data (other than quoted prices) and, accordingly, is classified as Level 2. In classifying particular financial securities in the fair value hierarchy, the Company uses its judgment to determine whether the market for a security is active and whether significant pricing inputs are observable. The Company determines the existence of an active market by assessing whether transactions occur with sufficient frequency and volume to provide reliable pricing information. The Company determines whether inputs are observable based on the use of such information by pricing services and external investment managers, the uninterrupted availability of such inputs, the need to make significant adjustments to such inputs and the volatility of such inputs over time. If the market for a security is determined to be inactive or if significant inputs used to price a security are determined to be unobservable, the security is categorized in Level 3 of the fair value hierarchy. 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 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 data, projections and business developments of the issuer and other relevant information. 38 3 8 80793in_10k.indd 38 3/14/16 5:48 PM The following is a summary of pricing sources for the Company's fixed maturity securities available for sale as of December 31, 2015: (In thousands) Pricing source: Independent pricing services Syndicate manager Directly by the Company based on: Observable data Cash flow model Total Carrying Value Percent of Total $ 12,132,829 64,758 150,187 353 $ 12,348,127 98.3% 0.5 1.2 — 100.0% Independent pricing services - Substantially all of the Company’s fixed maturity securities available for sale were priced by independent pricing services (generally one U.S. pricing service plus additional pricing services with respect to a limited number of foreign securities held by the Company). The prices provided by the independent pricing services are generally based on observable market data in active markets (e.g., broker quotes and prices observed for comparable securities). 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 based upon current trading levels for similar securities. If the prices appear unusual to the Company, they are re-examined and the value is either confirmed or revised. In addition, the Company periodically performs independent price tests of a sample of securities to ensure proper valuation and to verify our understanding of how securities are priced. As of December 31, 2015, the Company did not make any adjustments to the prices provided by the pricing services. Based upon the Company’s review of the methodologies used by the independent pricing services, these securities were classified as Level 2. Syndicate manager – The Company has a 15% participation in a Lloyd’s syndicate, and the Company’s share of the securities owned by the syndicate is priced by the syndicate’s manager. The majority of the securities are liquid, short duration fixed maturity securities. The Company reviews the syndicate manager’s pricing methodology and audited financial statements and holds discussions with the syndicate manager as necessary to confirm its understanding and agreement with security prices. Based upon the Company’s review of the methodologies used by the syndicate manager, these securities were classified as Level 2. Observable data – If independent pricing is not available, the Company prices the securities directly. Prices are based on observable market data where available, including current trading levels for similar securities and non-binding quotations from brokers. The Company generally requests two or more quotes. If more than one quote is received, the Company 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 obtained from brokers. Since these securities were priced based on observable data, they were classified as Level 2. Cash flow model – If the above methodologies are not available, the Company prices securities using a discounted cash flow model based upon assumptions as to prevailing credit spreads, interest rates and interest rate volatility, time to maturity and subordination levels. Discount rates are adjusted to reflect illiquidity where appropriate. These securities were classified as Level 3. 39 3 9 80793in_10k.indd 39 3/14/16 5:48 PM Results of Operations for the Years Ended December 31, 2015 and 2014 Business Segment Results Following is a summary of gross and net premiums written, net premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of net premiums earned), expense ratios (underwriting expenses expressed as a percentage of net premiums earned) and GAAP combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the years ended December 31, 2015 and 2014. The GAAP combined ratio represents a measure of underwriting profitability, excluding investment income. A GAAP combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit. (In thousands) Insurance-Domestic Gross premiums written Net premiums written Net premiums earned Loss ratio Expense ratio GAAP combined ratio Insurance-International Gross premiums written Net premiums written Net premiums earned Loss ratio Expense ratio GAAP combined ratio Reinsurance-Global Gross premiums written Net premiums written Net premiums earned Loss ratio Expense ratio GAAP combined ratio Consolidated Gross premiums written Net premiums written Net premiums earned Loss ratio Expense ratio GAAP combined ratio 2015 2014 $ 5,684,188 $ 4,812,830 4,659,359 61.2% 31.2 92.4 5,383,679 4,517,587 4,271,933 60.2% 31.6 91.8 $ 923,304 $ 778,567 772,141 58.2% 41.4 99.6 $ 642,501 $ 598,118 609,109 58.4% 38.2 96.6 984,271 828,076 802,375 62.8% 40.0 102.8 694,888 651,284 670,110 62.0% 34.0 96.0 $ 7,249,993 $ 6,189,515 6,040,609 60.5% 33.2 93.7 7,062,838 5,996,947 5,744,418 60.8% 33.0 93.8 Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the years ended December 31, 2015 and 2014. (In thousands, except per share data) Net income to common stockholders Weighted average diluted shares Net income per diluted share 2015 2014 $ $ 503,694 $ 130,189 3.87 $ 648,884 133,652 4.86 The Company reported net income of $504 million in 2015 compared to $649 million in 2014. The 22% decrease in net income was primarily due to decreases in after-tax net investment gains of $106 million and after-tax net investment income of $60 million partially offset by an increase in after-tax underwriting income of $14 million. The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2015 and 2014. Premiums. Gross premiums written were $7,250 million in 2015, an increase of 3% from $7,063 million in 2014. The growth was due to a combination of increased exposures and higher rates. Approximately 77% of policies expiring in 2015 were renewed, compared with a 79% renewal retention rate for policies expiring in 2014. 40 4 0 80793in_10k.indd 40 3/14/16 5:48 PM Average renewal premium rates (adjusted for change in exposures) increased 6.5% in 2013, 3.4% in 2014 and 1.2% in 2015. However, overall loss costs are also increasing, and current market price levels for certain lines of business remain below the prices required for the Company to achieve its long-term return objectives. A summary of gross premiums written in 2015 compared with 2014 by line of business within each business segment follows: • • Insurance-Domestic gross premiums increased 6% to $5,684 million in 2015 from $5,384 million in 2014. Gross premiums increased $120 million (8%) for workers' compensation, $86 million (5%) for other liability, $70 million (15%) for professional liability and $29 million (2%) for short-tail lines and decreased $5 million (1%) for commercial auto. Insurance-International gross premiums decreased 6% to $923 million in 2015 from $984 million in 2014. Gross premiums decreased $81 million (15%) for short-tail lines and $38 million (30%) for professional liability and increased $26 million (23%) for other liability, $22 million (31%) for workers' compensation and $10 million (7%) for commercial auto. In local currency terms, gross premiums increased 4%. • Reinsurance-Global gross premiums decreased 8% to $643 million in 2015 from $695 million in 2014. Gross premiums written decreased $36 million (8%) for casualty lines and $16 million (7%) for property lines. Net premiums written were $6,190 million in 2015, an increase of 3% from $5,997 million in 2014. Ceded reinsurance premiums as a percentage of gross written premiums were 15% in 2015 and 2014. Premiums earned increased 5% to $6,041 million in 2015 from $5,744 million in 2014. Insurance premiums (including the impact of rate changes) are generally earned evenly over the policy term, and accordingly recent rate increases will be earned over the upcoming quarters. Premiums earned in 2015 are related to business written during both 2015 and 2014. Audit premiums were $153 million in 2015 compared with $118 million in 2014. Net Investment Income. Following is a summary of net investment income for the years ended December 31, 2015 and 2014: (In thousands) Fixed maturity securities, including cash and cash equivalents and loans receivable Investment funds Arbitrage trading account Real estate Equity securities available for sale Gross investment income Investment expenses Total Amount Average Annualized Yield 2015 2014 2015 2014 $ 428,325 $ 439,489 3.2% 3.4% 62,228 16,891 11,294 4,624 523,362 (10,717) $ 512,645 $ 131,649 22,438 10,228 6,726 610,530 (9,645) 600,885 5.2 3.3 1.4 2.7 3.3 12.7 3.9 1.5 3.7 3.9 3.2% 3.9% Net investment income decreased 15% to $513 million in 2015 from $601 million in 2014 primarily due to a decrease in income from energy investment funds. Investment funds are reported on a one quarter lag. The average annualized yield for fixed maturity securities declined to 3.2% from 3.4% due to lower long-term reinvestment yields available in the market. The effective duration of the fixed maturity portfolio was 3.3 years at December 31, 2015 compared with 3.2 years at December 31, 2014. Average invested assets, at cost (including cash and cash equivalents), were $16.0 billion in 2015 and $15.6 billion in 2014. Insurance Service Fees. The Company earns fees from an insurance distribution business and as a servicing carrier of workers' compensation assigned risk plans for certain states. Service fees increased 19% to $139 million in 2015 from $117 million in 2014 primarily as a result of an increase in fees from assigned risk plans. Net Realized Gains on Investment Sales. The Company buys and sells securities on a regular basis in order to maximize its total return on investments. Decisions to sell securities are based on management’s view of the underlying fundamentals of specific securities as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net realized gains on investment sales were $126 million in 2015 compared with $255 million in 2014. In 2015, realized gains were primarily related to sales of some shares of a publicly traded common stock held by one of the 41 4 1 80793in_10k.indd 41 3/14/16 5:48 PM Company's investment funds. In 2014, realized gains included an $86 million gain from the sale of a commercial office building in London, England and a $39 million gain resulting from the initial public offering by the above public company. Other-Than-Temporary Impairments. The cost of securities is adjusted where appropriate to include a provision for a decline in value that is considered to be other-than-temporary. Other-than-temporary impairments of $33 million in 2015 were primarily related to equity securities. There were no other-than-temporary impairments in 2014. Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were derived from aviation-related businesses that provide services to aviation markets, including (i) the distribution, manufacturing, repair and overhaul of aircraft parts and components, (ii) the sale of new and used aircraft, and (iii) avionics, fuel, maintenance, storage and charter services. Revenues from wholly-owned investees increased to $421 million in 2015 from $410 million in 2014. Losses and Loss Expenses. Losses and loss expenses increased to $3,656 million in 2015 from $3,491 million in 2014. The consolidated loss ratio was 60.5% in 2015 and 60.8% in 2014. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $58 million in 2015 compared with $87 million in 2014, a decrease of 0.4 loss ratio points. Favorable prior year reserve development (net of premium offsets) was $63 million in 2015 compared with $85 million in 2014, a difference of 0.3 loss ratio points (see "- Critical Accounting Estimates - Reserves for Losses and Loss Expenses"). The loss ratio excluding catastrophe losses and prior year reserve development decreased 0.2 points to 60.6% in 2015 from 60.8% in 2014. A summary of loss ratios in 2015 compared with 2014 by business segment follows: • • Insurance-Domestic - The loss ratio of 61.2% in 2015 was 1.0 point higher than the loss ratio of 60.2% in 2014. Catastrophe losses were $50 million in 2015 compared with $65 million in 2014, a decrease of 0.4 loss ratio points. Favorable prior year reserve development was $47 million in 2015 compared with $92 million in 2014, a difference of 1.1 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.3 points to 61.1% in 2015 from 60.8% in 2014. Insurance-International - The loss ratio of 58.2% in 2015 was 4.6 points lower than the loss ratio of 62.8% in 2014. Catastrophe losses were $5 million in 2015 compared with $20 million in 2014, a decrease of 1.9 loss ratio points. Favorable prior year reserve development was $5 million in 2015 compared with adverse development of $23 million in 2014, a difference of 3.7 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development increased 1.0 points to 58.4% in 2015 from 57.4% in 2014. • Reinsurance-Global - The loss ratio of 58.4% in 2015 was 3.6 points lower than the loss ratio of 62.0.% in 2014. Catastrophe losses were $3 million in 2015 compared with $2 million in 2014, an increase of 0.2 loss ratio points. Favorable prior year reserve development was $11 million in 2015 compared with $16 million in 2014, a difference of 0.6 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development decreased 4.4 points to 59.7% in 2015 from 64.1% in 2014. Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses: (In thousands) Underwriting expenses Service expenses Net foreign currency losses (gains) Other costs and expenses Total 2015 $ 2,005,498 $ 127,365 400 156,487 $ 2,289,750 $ 2014 1,896,530 102,726 (27) 158,227 2,157,456 Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Underwriting expenses increased 6%, compared with an increase in net premiums earned of 5%. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) increased to 33.2% in 2015 from 33.0% in 2014 due primarily to lower earned premiums for the Insurance-International and Reinsurance-Global business segments. Service expenses, which represent the costs associated with the fee-based businesses, increased 24% to $127 million, as a result of the acquisition of a specialty property and casualty insurance distribution company in late 2014. Net foreign currency losses (gains) result from transactions denominated in a currencies other than an operating unit’s functional currency. Other costs and expenses represent general and administrative expenses of the parent company and other expenses not allocated to business segments, including the cost of certain long-term incentive plans. Other costs and expenses decreased to $156 million in 2015 from $158 million in 2014. 42 4 2 80793in_10k.indd 42 3/14/16 5:48 PM Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees represent costs associated with aviation-related businesses that include (i) cost of goods sold related to aircraft and products sold and services provided, and (ii) general and administrative expenses. Expenses from wholly-owned investees were $397 million in 2015 compared to $401 million in 2014. Interest Expense. Interest expense was $131 million in 2015 compared with $128 million in 2014. In August 2014, the Company issued $350 million of 4.75% senior notes due 2044. A portion of the proceeds was used to repay $200 million of 5.60% senior notes on May 15, 2015. Income Taxes. The effective income tax rate was 31% in 2015 compared to 32% in 2014. The lower tax rate in 2015 was due, in part, to the utilization of foreign tax credits. The effective income tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income. The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $79 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. However, in the future, if such earnings were distributed to the Company, taxes of approximately $9.8 million, assuming all tax credits are realized, would be payable on such undistributed earnings and would be reflected in the tax provision for the year in which these earnings are no longer intended to be permanently reinvested in the foreign subsidiary. 43 4 3 80793in_10k.indd 43 3/14/16 5:48 PM Results of Operations for the Years Ended December 31, 2014 and 2013 Business Segment Results Following is a summary of gross and net premiums written, net premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of net premiums earned), expense ratios (underwriting expenses expressed as a percentage of net premiums earned) and GAAP combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the years ended December 31, 2014 and 2013. The GAAP combined ratio represents a measure of underwriting profitability, excluding investment income. A GAAP combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit. (In thousands) Insurance-Domestic Gross premiums written Net premiums written Net premiums earned Loss ratio Expense ratio GAAP combined ratio Insurance-International Gross premiums written Net premiums written Net premiums earned Loss ratio Expense ratio GAAP combined ratio Reinsurance-Global Gross premiums written Net premiums written Net premiums earned Loss ratio Expense ratio GAAP combined ratio Consolidated Gross premiums written Net premiums written Net premiums earned Loss ratio Expense ratio GAAP combined ratio 2014 2013 $ 5,383,679 $ 4,517,587 4,271,933 60.2% 31.6 91.8 $ 984,271 $ 828,076 802,375 62.8% 40.0 102.8 $ 694,888 $ 651,284 670,110 62.0% 34.0 96.0 4,803,753 3,994,387 3,782,416 61.3% 32.7 94.0 898,776 756,185 723,151 59.4% 39.0 98.4 808,562 749,601 720,970 62.2% 34.8 97.0 $ $ 7,062,838 5,996,947 5,744,418 60.8% 33.0 93.8 6,511,091 5,500,173 5,226,537 61.2% 33.9 95.1 Net Income to Common Stockholders. The following table presents the Company’s net income to common stockholders and net income per diluted share for the years ended December 31, 2014 and 2013. (In thousands, except per share data) Net income to common stockholders Weighted average diluted shares Net income per diluted share 2014 2013 $ $ 648,884 $ 133,652 4.86 $ 499,925 140,743 3.55 The Company reported net income of $649 million in 2014 compared to $500 million in 2013. The 30% increase in net income was primarily due to increases in after-tax net investment gains of $92 million, after-tax underwriting income of $64 million and after-tax net investment income of $16 million. The number of weighted average diluted shares decreased as a result of the Company’s repurchases of its common stock in 2014 and 2013. Premiums. Gross premiums written were $7,063 million in 2014, an increase of 8% from $6,511 million in 2013. The growth was due to a combination of rate increases and increased exposures. Approximately 79% of policies expiring in 2014 were renewed, compared with a 76% renewal retention rate for policies expiring in 2013. 44 4 4 80793in_10k.indd 44 3/14/16 5:48 PM Average renewal premium rates (adjusted for change in exposures) increased 6.8% in 2012, 6.5% in 2013 and 3.4% in 2014. However, overall loss costs are also increasing, and current market price levels for certain lines of business remain below the prices required for the Company to achieve its long-term return objectives. A summary of gross premiums written in 2014 compared with 2013 by line of business within each business segment follows: • • Insurance-Domestic gross premiums increased 12% to $5,384 million in 2014 from $4,804 million in 2013. Gross premiums increased $169 million (13%) for workers' compensation, $160 million (10%) for other liability, $120 million (11%) for short-tail lines, $85 million (22%) for professional liability and $46 million (9%) for commercial auto. Insurance-International gross premiums increased 10% to $984 million in 2014 from $899 million in 2013. Gross premiums increased $77 million (16%) for short-tail lines, $21 million (23%) for other liability and $10 million (9%) for professional liability and decreased $13 million (15%) for workers' compensation and $10 million (8%) for commercial auto. In local currency terms, gross premiums increased 17%. • Reinsurance-Global gross premiums decreased 14% to $695 million in 2014 from $809 million in 2013. Gross premiums written decreased $66 million (12%) for casualty lines and $48 million (17%) for property lines. Net premiums written were $5,997 million in 2014, an increase of 9% from $5,500 million in 2013. Ceded reinsurance premiums as a percentage of gross written premiums were 15% in 2014 and 16% in 2013. The decrease in the percentage of business ceded was due to changes in the reinsurance terms and costs. Premiums earned increased 10% to $5,744 million in 2014 from $5,227 million in 2013. Insurance premiums (including the impact of rate changes) are generally earned evenly over the policy term, and accordingly we expect recent rate increases will be earned over the upcoming quarters. Premiums earned in 2014 are related to business written during both 2014 and 2013. Audit premiums were $118 million in 2014 compared with $120 million in 2013. Net Investment Income. Following is a summary of net investment income for the years ended December 31, 2014 and 2013: (In thousands) Fixed maturity securities, including cash and cash equivalents and loans receivable Investment funds Arbitrage trading account Real estate Equity securities available for sale Gross investment income Investment expenses Total Amount Average Annualized Yield 2014 2013 2014 2013 $ 439,489 $ 442,287 3.4% 3.5% 131,649 22,438 10,228 6,726 610,530 (9,645) $ 600,885 67,712 20,431 12,498 11,380 554,308 (10,017) 544,291 $ 12.7 3.9 1.5 3.7 3.9 8.0 4.2 2.0 3.8 3.7 3.9% 3.7% Net investment income increased 10% to $601 million in 2014 from $544 million in 2013 primarily due to an increase in income from investment funds, including aviation and rail equipment funds, real estate funds and energy funds. Investment funds are reported on a one quarter lag. The average annualized yield for fixed maturity securities declined to 3.4% from 3.5% due to lower long-term reinvestment yields available in the market. The effective duration of the fixed maturity portfolio was 3.2 years at December 31, 2014 compared with 3.3 years at December 31, 2013. Average invested assets, at cost (including cash and cash equivalents), were $15.6 billion in 2014 and $14.8 billion in 2013. Insurance Service Fees. The Company earns fees from an insurance distribution business and as a servicing carrier of workers' compensation assigned risk plans for certain states. Service fees increased to $117 million in 2014 from $108 million in 2013 primarily as a result of an increase in fees from assigned risk plans. Net Realized Gains on Investment Sales. The Company buys and sells securities on a regular basis in order to maximize its total return on investments. Decisions to sell securities are based on management’s view of the underlying fundamentals of specific securities as well as management’s expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net realized gains on investment sales were $255 million in 2014 compared with $128 million in 2013. Realized gains in 2014 were related primarily to the sale of real estate, investment funds and fixed income and equity securities 45 4 5 80793in_10k.indd 45 3/14/16 5:48 PM and included an $86 million gain from the sale of a commercial office building in London, England and a gain of $39 million and included an $86 million gain from the sale of a commercial office building in London, England and a gain of $39 million resulting from an initial public offering by one of the Company's private equity investees. resulting from an initial public offering by one of the Company's private equity investees. and included an $86 million gain from the sale of a commercial office building in London, England and a gain of $39 million resulting from an initial public offering by one of the Company's private equity investees. Other-Than-Temporary Impairments. The cost of securities is adjusted where appropriate to include a provision for a Other-Than-Temporary Impairments. The cost of securities is adjusted where appropriate to include a provision for a Other-Than-Temporary Impairments. The cost of securities is adjusted where appropriate to include a provision for a decline in value that is considered to be other-than-temporary. There were no other-than-temporary impairments in 2014 compared with $6 million in 2013. decline in value that is considered to be other-than-temporary. There were no other-than-temporary impairments in 2014 decline in value that is considered to be other-than-temporary. There were no other-than-temporary impairments in 2014 compared with $6 million in 2013. compared with $6 million in 2013. Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were derived from aviation-related Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were derived from aviation-related Revenues from Wholly-Owned Investees. Revenues from wholly-owned investees were derived from aviation-related businesses that provide services to aviation markets, including (i) the distribution, manufacturing, repair and overhaul of businesses that provide services to aviation markets, including (i) the distribution, manufacturing, repair and overhaul of businesses that provide services to aviation markets, including (i) the distribution, manufacturing, repair and overhaul of aircraft parts and components, (ii) the sale of new and used aircraft, and (iii) avionics, fuel, maintenance, storage and charter aircraft parts and components, (ii) the sale of new and used aircraft, and (iii) avionics, fuel, maintenance, storage and charter aircraft parts and components, (ii) the sale of new and used aircraft, and (iii) avionics, fuel, maintenance, storage and charter services. Revenues from wholly-owned investees increased to $410 million in 2014 from $408 million in 2013. services. Revenues from wholly-owned investees increased to $410 million in 2014 from $408 million in 2013. services. Revenues from wholly-owned investees increased to $410 million in 2014 from $408 million in 2013. Losses and Loss Expenses. Losses and loss expenses increased to $3,491 million in 2014 from $3,197 million in 2013. Losses and Loss Expenses. Losses and loss expenses increased to $3,491 million in 2014 from $3,197 million in 2013. Losses and Loss Expenses. Losses and loss expenses increased to $3,491 million in 2014 from $3,197 million in 2013. The consolidated loss ratio was 60.8% in 2014 and 61.2% in 2013. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $87 million in 2014 compared with $65 million in 2013, an increase of 0.3 loss ratio points. Favorable prior year reserve development (net of premium offsets) was $85 million in 2014 compared with $98 million in 2013, a difference of 0.3 loss ratio points (see "- Critical Accounting Estimates - Reserves for Losses and Loss Expenses"). The loss ratio excluding catastrophe losses and prior year reserve development decreased 1.0 points to 60.8% in 2014 from 61.8% in 2013. A summary of loss ratios in 2014 compared with 2013 by business segment follows: The consolidated loss ratio was 60.8% in 2014 and 61.2% in 2013. Catastrophe losses, net of reinsurance recoveries and The consolidated loss ratio was 60.8% in 2014 and 61.2% in 2013. Catastrophe losses, net of reinsurance recoveries and reinstatement premiums, were $87 million in 2014 compared with $65 million in 2013, an increase of 0.3 loss ratio points. reinstatement premiums, were $87 million in 2014 compared with $65 million in 2013, an increase of 0.3 loss ratio points. Favorable prior year reserve development (net of premium offsets) was $85 million in 2014 compared with $98 million in Favorable prior year reserve development (net of premium offsets) was $85 million in 2014 compared with $98 million in 2013, a difference of 0.3 loss ratio points (see "- Critical Accounting Estimates - Reserves for Losses and Loss Expenses"). 2013, a difference of 0.3 loss ratio points (see "- Critical Accounting Estimates - Reserves for Losses and Loss Expenses"). The loss ratio excluding catastrophe losses and prior year reserve development decreased 1.0 points to 60.8% in 2014 from The loss ratio excluding catastrophe losses and prior year reserve development decreased 1.0 points to 60.8% in 2014 from 61.8% in 2013. A summary of loss ratios in 2014 compared with 2013 by business segment follows: 61.8% in 2013. A summary of loss ratios in 2014 compared with 2013 by business segment follows: • • • • • Insurance-Domestic - The loss ratio of 60.2% in 2014 was 1.1 points lower than the loss ratio of 61.3% in 2013. Insurance-Domestic - The loss ratio of 60.2% in 2014 was 1.1 points lower than the loss ratio of 61.3% in 2013. Catastrophe losses were $65 million in 2014 compared with $38 million in 2013, an increase of 0.5 loss ratio points. Catastrophe losses were $65 million in 2014 compared with $38 million in 2013, an increase of 0.5 loss ratio points. Favorable prior year reserve development was $92 million in 2014 compared with $71 million in 2013, a difference of Favorable prior year reserve development was $92 million in 2014 compared with $71 million in 2013, a difference of 0.3 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development decreased 1.4 0.3 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development decreased 1.4 points to 60.8% in 2014 from 62.2% in 2013. points to 60.8% in 2014 from 62.2% in 2013. Insurance-Domestic - The loss ratio of 60.2% in 2014 was 1.1 points lower than the loss ratio of 61.3% in 2013. Catastrophe losses were $65 million in 2014 compared with $38 million in 2013, an increase of 0.5 loss ratio points. Favorable prior year reserve development was $92 million in 2014 compared with $71 million in 2013, a difference of 0.3 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development decreased 1.4 points to 60.8% in 2014 from 62.2% in 2013. • Insurance-International - The loss ratio of 62.8% in 2014 was 3.4 points higher than the loss ratio of 59.4% in 2013. Insurance-International - The loss ratio of 62.8% in 2014 was 3.4 points higher than the loss ratio of 59.4% in 2013. Catastrophe losses were $20 million in 2014 compared with $11 million in 2013, an increase of 0.9 loss ratio points. Catastrophe losses were $20 million in 2014 compared with $11 million in 2013, an increase of 0.9 loss ratio points. Adverse prior year reserve development was $23 million in 2014 compared with $12 million in 2013, a difference of Adverse prior year reserve development was $23 million in 2014 compared with $12 million in 2013, a difference of 1.2 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development increased 1.3 1.2 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development increased 1.3 points to 57.4% in 2014 from 56.1% in 2013. points to 57.4% in 2014 from 56.1% in 2013. Insurance-International - The loss ratio of 62.8% in 2014 was 3.4 points higher than the loss ratio of 59.4% in 2013. Catastrophe losses were $20 million in 2014 compared with $11 million in 2013, an increase of 0.9 loss ratio points. Adverse prior year reserve development was $23 million in 2014 compared with $12 million in 2013, a difference of 1.2 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development increased 1.3 points to 57.4% in 2014 from 56.1% in 2013. • Reinsurance-Global - The loss ratio of 62.0% in 2014 was 0.2 points lower than the loss ratio of 62.2% in 2013. • Reinsurance-Global - The loss ratio of 62.0% in 2014 was 0.2 points lower than the loss ratio of 62.2% in 2013. • Reinsurance-Global - The loss ratio of 62.0% in 2014 was 0.2 points lower than the loss ratio of 62.2% in 2013. Catastrophe losses were $2 million in 2014 compared with $16 million in 2013, a decrease of 1.9 loss ratio points. Catastrophe losses were $2 million in 2014 compared with $16 million in 2013, a decrease of 1.9 loss ratio points. Favorable prior year reserve development was $16 million in 2014 compared with $39 million in 2013, a difference of Favorable prior year reserve development was $16 million in 2014 compared with $39 million in 2013, a difference of 3.0 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development decreased 1.3 3.0 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development decreased 1.3 points to 64.1% in 2014 from 65.4% in 2013. points to 64.1% in 2014 from 65.4% in 2013. Catastrophe losses were $2 million in 2014 compared with $16 million in 2013, a decrease of 1.9 loss ratio points. Favorable prior year reserve development was $16 million in 2014 compared with $39 million in 2013, a difference of 3.0 loss ratio points. The loss ratio excluding catastrophe losses and prior year reserve development decreased 1.3 points to 64.1% in 2014 from 65.4% in 2013. Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses: Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses: Other Operating Costs and Expenses. Following is a summary of other operating costs and expenses: (In thousands) (In thousands) (In thousands) Underwriting expenses Underwriting expenses Underwriting expenses Service expenses Service expenses Service expenses Net foreign currency gains Net foreign currency gains Net foreign currency gains Debt extinguishment costs Debt extinguishment costs Debt extinguishment costs Other costs and expenses Other costs and expenses Other costs and expenses Total Total Total 2014 2014 $ 1,896,530 $ $ 1,896,530 $ $ 1,896,530 $ 2014 102,726 102,726 102,726 (27) (27) (27) — — — 158,227 158,227 158,227 $ 2,157,456 $ $ 2,157,456 $ $ 2,157,456 $ 2013 2013 2013 1,771,128 1,771,128 1,771,128 88,662 88,662 88,662 (10,120) (10,120) (10,120) 6,709 6,709 6,709 144,305 144,305 144,305 2,000,684 2,000,684 2,000,684 Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments Underwriting expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Underwriting expenses increased 7% compared with an increase in net premiums earned of 10%. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 33.0% in 2014, down from 33.9% in 2013, primarily due to higher earned premiums and to the impact of expense reduction initiatives. and internal underwriting costs. Underwriting expenses increased 7% compared with an increase in net premiums earned of and internal underwriting costs. Underwriting expenses increased 7% compared with an increase in net premiums earned of 10%. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 33.0% in 2014, down from 10%. The expense ratio (underwriting expenses expressed as a percentage of premiums earned) was 33.0% in 2014, down from 33.9% in 2013, primarily due to higher earned premiums and to the impact of expense reduction initiatives. 33.9% in 2013, primarily due to higher earned premiums and to the impact of expense reduction initiatives. Service expenses, which represent the costs associated with the fee-based businesses, increased 16% to $103 million. The Service expenses, which represent the costs associated with the fee-based businesses, increased 16% to $103 million. The Service expenses, which represent the costs associated with the fee-based businesses, increased 16% to $103 million. The increase was due to an increase in general and administrative expenses and to additional costs associated with new programs. increase was due to an increase in general and administrative expenses and to additional costs associated with new programs. increase was due to an increase in general and administrative expenses and to additional costs associated with new programs. Net foreign currency gains of $27,000 in 2014 (compared with $10 million in 2013) resulted from transactions Net foreign currency gains of $27,000 in 2014 (compared with $10 million in 2013) resulted from transactions Net foreign currency gains of $27,000 in 2014 (compared with $10 million in 2013) resulted from transactions denominated in a currencies other than an operating unit’s functional currency. denominated in a currencies other than an operating unit’s functional currency. denominated in a currencies other than an operating unit’s functional currency. Debt extinguishment costs of $7 million in 2013 related to the prepayment of subordinated debentures that were due in Debt extinguishment costs of $7 million in 2013 related to the prepayment of subordinated debentures that were due in Debt extinguishment costs of $7 million in 2013 related to the prepayment of subordinated debentures that were due in 2045 and were prepaid in May 2013. 2045 and were prepaid in May 2013. 2045 and were prepaid in May 2013. 46 4 6 4 6 4 6 80793in_10k.indd 46 3/14/16 5:48 PM Other costs and expenses represent general and administrative expenses of the parent company and other expenses not allocated to business segments, including the cost of certain long-term incentive plans. Other costs and expenses increased to $158 million in 2014 from $144 million in 2013 due primarily to an increase in general and administrative expenses, including employment costs and benefits. Expenses from Wholly-Owned Investees. Expenses from wholly-owned investees represent costs associated with aviation-related businesses that include (i) cost of goods sold related to aircraft and products sold and services provided, and (ii) general and administrative expenses. Expenses from wholly-owned investees were $401 million in 2014 compared to $389 million in 2013, primarily due to start-up costs from a new business operation. Interest Expense. Interest expense was $128 million in 2014 compared with $123 million in 2013. In May 2013, the Company issued $350 million of 5.625% subordinated debentures due 2053 and prepaid $250 million of 6.750% subordinated debentures that were due in 2045. In August 2014, the Company issued $350 million of 4.75% senior notes due 2044. A portion of the proceeds was used to repay $200 million of 5.60% senior notes on May 15, 2015. In addition, the Company assumed $71 million of debt in conjunction with the acquisition of an office building in West Palm Beach, Florida, that matured in August 2015. Income Taxes. The effective income tax rate was 32% in 2014 compared to 28% in 2013. The lower tax rate in 2013 was due, in part, to the utilization of foreign tax credits. The effective income tax rate differs from the federal income tax rate of 35% primarily because of tax-exempt investment income. Tax exempt investment income comprised a lower portion of the 2014 pre-tax income and as such had a lesser impact on the effective tax rate for 2014 compared with 2013. The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $58 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. However, in the future, if such earnings were distributed to the Company, taxes of approximately $3.1 million, assuming all tax credits are realized, would be payable on such undistributed earnings and would be reflected in the tax provision for the year in which these earnings are no longer intended to be permanently reinvested in the foreign subsidiary. 47 4 7 80793in_10k.indd 47 3/14/16 5:48 PM Investments As part of its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities that, combined with expected cash flow, it believes is adequate to meet its payment obligations. Due to the historically low fixed maturity investment returns, the Company invests in equity securities, merger arbitrage securities, investment funds, private equity, loans and real estate related assets. The Company's investments in investment funds and its other alternative investments have experienced, and the Company expects to continue to experience, greater fluctuations in investment income. The Company also attempts to maintain an appropriate relationship between the effective duration of the investment portfolio and the approximate duration of its liabilities (i.e., policy claims and debt obligations). The effective duration of the investment portfolio was 3.3 years and 3.2 years at December 31, 2015 and 2014, respectively. The Company’s investment portfolio and investment-related assets as of December 31, 2015 were as follows: ($ in thousands) Fixed maturity securities: U.S. government and government agencies State and municipal: Special revenue State general obligation Pre-refunded (1) Corporate backed Local general obligation Total state and municipal Mortgage-backed securities: Agency Residential-Prime Commercial Residential-Alt A Total mortgage-backed securities Asset-backed securities Corporate: Industrial Financial Utilities Other Total corporate Foreign government Total fixed maturity securities Equity securities available for sale: Preferred stocks Common stocks Total equity securities available for sale Cash and cash equivalents Investment funds Real estate Arbitrage trading account Loans receivable Total investments Carrying Value Percent of Total $ 670,419 4.2% 2,632,626 641,790 472,697 402,541 387,654 4,537,308 855,195 245,611 65,722 52,469 1,218,997 1,705,172 2,021,534 1,173,021 198,651 81,832 3,475,038 837,460 12,444,394 113,593 37,273 150,866 763,631 1,170,040 936,367 376,697 273,103 $ 16,115,098 16.4 4.0 2.9 2.5 2.4 28.2 5.4 1.5 0.4 0.3 7.6 10.6 12.5 7.3 1.2 0.5 21.5 5.2 77.3 0.7 0.2 0.9 4.7 7.3 5.8 2.3 1.7 100.0% (1) Pre-refunded securities are securities for which an escrow account has been established to fund the remaining payments of principal and interest through maturity. Such escrow accounts are funded almost exclusively with U.S. Treasury and U.S. government agency securities. 48 4 8 80793in_10k.indd 48 3/14/16 5:48 PM Fixed Maturity Securities. The Company’s investment policy with respect to fixed maturity securities is generally to purchase instruments with the expectation of holding them to their maturity. However, management of the available for sale portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as a result of changes in financial market conditions and tax considerations. The Company’s philosophy related to holding or selling fixed maturity securities is based on its objective of maximizing total return. The key factors that management considers in its investment decisions as to whether to hold or sell fixed maturity securities are its view of the underlying fundamentals of specific securities as well as its expectations regarding interest rates, credit spreads and currency values. In a period in which management expects interest rates to rise, the Company may sell longer duration securities in order to mitigate the impact of an interest rate rise on the fair value of the portfolio. Similarly, in a period in which management expects credit spreads to widen, the Company may sell lower quality securities, and in a period in which management expects certain foreign currencies to decline in value, the Company may sell securities denominated in those foreign currencies. The sale of fixed maturity securities in order to achieve the objective of maximizing total return may result in realized gains; however, there is no reason to expect these gains to continue in future periods. At December 31, 2015, investments in foreign government fixed maturity securities were as follows: (In thousands) Australia United Kingdom Canada Argentina Germany Brazil Supranational (1) Norway Singapore Colombia Uruguay Total Carrying Value $ 230,036 165,114 150,501 105,428 51,759 51,405 36,090 31,656 6,101 5,502 3,868 $ 837,460 (1) Supranational represents investments in the North American Development Bank, European Investment Bank and International Bank for Reconstruction & Development. Equity Securities Available for Sale. Equity securities available for sale primarily represent investments in high-dividend yielding common and preferred stocks issued by large market capitalization companies. Investment Funds. At December 31, 2015, the carrying value of investment funds was $1,170 million, including investments in real estate funds of $581 million, energy funds of $94 million and hedged equity funds of $71 million. Investment funds are primarily reported on a one-quarter lag. Real Estate. Real estate is directly owned property held for investment. At December 31, 2015, real estate properties in operation included a long-term ground lease in Washington D.C. and office buildings in West Palm Beach and Palm Beach, Florida. In addition, there are three properties under development: 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. Arbitrage Trading Account. The arbitrage trading account is comprised of direct investments in arbitrage securities. Merger arbitrage is the business of investing in the securities of publicly held companies that are the targets in announced tender offers and mergers. Loans Receivable. Loans receivable, which are carried at amortized cost, had an amortized cost of $273 million and an aggregate fair value of $276 million at December 31, 2015. The amortized cost of loans receivable is net of a valuation allowance of $2 million as of December 31, 2015. Loans receivable include real estate loans of $200 million that are secured by commercial real estate located primarily in Arizona, Maryland, New York, and Tennessee. Real estate loans receivable generally earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through August 2025. Loans receivable include commercial loans of $73 million that are secured by business assets. Commercial loans have fixed interest rates and varying maturities not exceeding 10 years. 49 4 9 80793in_10k.indd 49 3/14/16 5:48 PM Liquidity and Capital Resources Cash Flow. Cash flow provided from operating activities increased to $881 million in 2015 from $735 million in 2014. The increase in cash flow was due primarily to an increase in cash flow from underwriting activities and a decrease in income taxes paid. Paid losses as a percent of earned premiums were 54% in both 2015 and 2014. As a holding company, the Company derives cash from its subsidiaries in the form of dividends, tax payments and management fees. Maximum amounts of dividends that our insurance companies can pay without regulatory approval are prescribed by statute. During 2016, the maximum amount of dividends which can be paid without regulatory approval is approximately $684 million. The ability of the holding company to service its debt obligations is limited by the ability of its insurance subsidiaries to pay dividends. In the event dividends, tax payments and management fees available to the holding company were inadequate to service its debt obligations, the Company would need to raise capital, sell assets or restructure its debt obligations. The Company's insurance subsidiaries' principal sources of cash are premiums, investment income, service fees and proceeds from sales and maturities of portfolio investments. The principal uses of cash are payments for claims, taxes, operating expenses and dividends. The Company expects its insurance subsidiaries to fund the payment of losses with cash received from premiums, investment income and fees. The Company generally has targeted an effective duration for its investment portfolio that is within one year of the average duration of its liabilities so that portions of its investment portfolio mature throughout the claim cycle and are available for the payment of claims if necessary. In the event operating cash flow and proceeds from maturities and prepayments of fixed income securities are not sufficient to fund claim payments and other cash requirements, the remainder of the Company's cash and investments is available to pay claims and other obligations as they become due. The Company's investment portfolio is highly liquid, with approximately 80% invested in cash, cash equivalents and marketable fixed income securities as of December 31, 2015. If the sale of fixed maturity securities were to become necessary, a realized gain or loss equal to the difference between the cost and sales price of securities sold would be recognized. Debt. At December 31, 2015, the Company had senior notes, subordinated debentures and other debt outstanding with a carrying value of $2,185 million and a face amount of $2,208 million. The maturities of the outstanding debt are $43 million in 2016, $37 million in 2017, $450 million in 2019, $300 million in 2020, $426 million in 2022, $2 million in 2029, $250 million in 2037, $350 million in 2044 and $350 million in 2053. In August 2014, the Company issued $350 million of 4.75% senior notes due 2044. A portion of the proceeds was used to repay $200 million of 5.60% senior notes on May 15, 2015. Equity. The Company repurchased 4,502,025, 5,816,468, and 3,924,355 shares of its common stock in 2015, 2014 and 2013, respectively. The aggregate cost of the repurchases was $224 million in 2015, $239 million in 2014, and $166 million in 2013. At December 31, 2015, total common stockholders’ equity was $4.6 billion, common shares outstanding were 123,307,837 and stockholders’ equity per outstanding share was $37.31. Total Capital. Total capitalization (equity, senior notes and other debt and subordinated debentures) was $6.8 billion at December 31, 2015. The percentage of the Company’s capital attributable to senior notes, subordinated debentures and other debt was 32% at December 31, 2015 and 35% at December 31, 2014. Federal and Foreign Income Taxes The Company files a consolidated income tax return in the U.S. and foreign tax returns in each of the countries in which it has overseas operations. At December 31, 2015, the Company had a deferred gross tax asset (net of valuation allowance) of $452 million (which primarily relates to loss and loss expense reserves and unearned premium reserves) and a gross deferred tax liability of $459 million (which primarily relates to deferred policy acquisition costs and unrealized investment gains). The realization of the deferred tax asset is dependent upon the Company's ability to generate sufficient taxable income in future periods. Based on historical results and the prospects for future operations, management anticipates that it is more likely than not that future taxable income will be sufficient for the realization of this asset. The Company has not provided U.S. deferred income taxes on the undistributed earnings of approximately $79 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. However, in the future, if such earnings were distributed to the Company, taxes of approximately $9.8 million, assuming all tax credits are realized, would be payable on such undistributed earnings and would be reflected in the tax provision for the year in which these earnings are no longer intended to be permanently reinvested in the foreign subsidiary. 50 5 0 80793in_10k.indd 50 3/14/16 5:48 PM Reinsurance The Company follows customary industry practice of reinsuring a portion of its exposures in exchange for paying reinsurers a part of the premiums received on the policies it writes. Reinsurance is purchased by the Company principally to reduce its net liability on individual risks and to protect it against catastrophic losses. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policies, it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance coverage. The Company monitors the financial condition of its reinsurers and attempts to place its coverages only with substantial and financially sound carriers. Reinsurance coverage and retentions vary depending on the line of business, location of the risk and nature of loss. The Company’s reinsurance purchases include the following: • Property reinsurance treaties - The Company purchases property reinsurance to reduce its exposure to large individual property losses and catastrophe events. Following is a summary of significant property reinsurance treaties in effect as of January 1, 2016: The Company’s property per risk reinsurance generally covers losses between $2.5 million and $50 million. The Company’s catastrophe excess of loss reinsurance program provides protection for net losses between $30 million and $305 million for the majority of business written by its U.S. companies. The Company has separate catastrophe excess of loss reinsurance for business written through its Lloyd’s Syndicate that provides protection for losses between $15 million and $55 million for events in North America. For North American losses greater than $55 million, the business written through the company's Lloyd's Syndicate is protected within the U.S. program up to $305 million. The Company’s catastrophe reinsurance agreements are subject to certain limits, exclusions and reinstatement premiums. • Casualty reinsurance treaties - The Company purchases casualty reinsurance to reduce its exposure to large individual casualty losses, workers’ compensation catastrophe losses and casualty losses involving multiple claimants or insureds for the majority of business written by its U.S. companies. A significant casualty treaty in effect as of January 1, 2016 provides protection for losses between $2.5 million and $70 million from single events with claims involving two or more claimants or insureds. The treaty also covers casualty contingency losses in excess of $5 million and up to $70 million. For losses involving two or more claimants for primary workers’ compensation business, coverage is generally in place for losses between $5 million and $170 million. For excess workers’ compensation business, such coverage is generally in place for losses between $25 million and $245 million. • Facultative reinsurance - The Company also purchases facultative reinsurance on certain individual policies or risks that are in excess of treaty reinsurance capacity. • Other reinsurance - Depending on the operating unit, the Company purchases specific additional reinsurance to supplement the above programs. The Company places most of its significant casualty treaties on a “risk attaching” basis. Under risk attaching treaties, all claims from policies incepting during the period of the reinsurance contract are covered even if they occur after the expiration date of the reinsurance contract. If the Company is unable to renew or replace its existing reinsurance coverage, protection for unexpired policies would remain in place until their expiration. In such case, the Company could revise its underwriting strategy for new business to reflect the absence of reinsurance protection. Property catastrophe and workers’ compensation catastrophe reinsurance is generally placed on a “losses occurring basis,” whereby only claims occurring during the period are covered. If the Company is unable to renew or replace this reinsurance coverage, unexpired policies would not be protected. Following is a summary of earned premiums and loss and loss expenses ceded to reinsurers for each of the three years ended December 31, 2015: (In thousands) Earned premiums $ 1,050,840 $ 1,030,666 $ 959,537 556,108 Losses and loss expenses 501,999 475,802 2015 2013 Years Ended December 31, 2014 Ceded earned premiums increased 2% in 2015 to $1,051 million, less than the increase in direct and assumed earned premiums of 5%. The ceded losses and loss expenses ratio increased 2 points to 48% in 2015 from 46% in 2014. 51 5 1 80793in_10k.indd 51 3/14/16 5:48 PM The following table presents the credit quality of amounts due from reinsurers as of December 31, 2015. Amounts due from reinsurers are net of reserves for uncollectible reinsurance of $1 million in the aggregate. (In thousands) Reinsurer Amounts due in excess of $20 million: Alleghany Group Munich Re Swiss Re Lloyd's of London Axis Capital Partner Re Hannover Re Group Everest Re Berkshire Hathaway Chubb Limited (2) Arch Capital Group Other reinsurers: Rated A- or better Secured (3) All others Subtotal Residual market pools (4) Total Rating (1) Amount A+ AA- AA- A+ A+ A+ AA- A+ AA+ AA A+ $ 138,163 121,661 115,215 92,635 69,840 65,793 48,675 47,945 47,309 45,645 23,273 140,608 48,399 24,162 1,029,323 503,506 $ 1,532,829 (1) S&P rating, or if not rated by S&P, A.M. Best rating. (2) Includes the aggregate recoverables from Ace Group and Chubb Group. (3) Secured by letters of credit or other forms of collateral. (4) Many states require licensed insurers that provide workers' compensation insurance to participate in programs that provide workers' compensation to employers that cannot procure coverage from an insurer on a voluntary basis. Insurers can fulfill this residual market obligation by participating in pools where results are shared by the participating companies. The Company acts as a servicing carrier for workers' compensation pools in certain states. As a servicing carrier, the Company writes residual market business directly and then cedes 100% of this business to the respective pool. As a servicing carrier, the Company receives fee income for its services. The Company does not retain underwriting risk, and credit risk is limited as ceded balances are jointly shared by all the pool members. 52 5 2 80793in_10k.indd 52 3/14/16 5:48 PM Contractual Obligations Contractual Obligations Following is a summary of the Company's contractual obligations as of December 31, 2015: Following is a summary of the Company's contractual obligations as of December 31, 2015: (In thousands) (In thousands) Estimated Payments By Periods Estimated Payments By Periods Gross reserves for losses Gross reserves for losses Operating lease obligations Operating lease obligations Purchase obligations Purchase obligations $ Subordinated debentures Subordinated debentures Debt maturities Debt maturities Interest payments Interest payments Other long-term liabilities Other long-term liabilities Total Total $ 2018 2016 $ 2,749,845 $ 42,470 152,857 2016 2017 2,749,845 $ 1,920,659 42,470 39,443 152,857 76,819 2017 1,920,659 39,443 76,819 2019 2019 2020 1,017,821 $ $ 1,407,275 $ 1,017,821 $ 743,291 30,941 35,286 30,941 28,584 39,124 47,362 39,124 38,600 $ 1,407,275 $ 35,286 47,362 2018 2020 743,291 28,584 38,600 Thereafter $ 3,589,395 105,825 12,000 Thereafter $ 3,589,395 105,825 12,000 — 42,794 — 36,908 122,988 — 36,908 122,988 — 42,794 124,409 4,807 124,409 4,807 3,117,182 $ 3,117,182 4,377 $ 2,201,194 4,377 $ 2,201,194 $ 1,616,335 $ 4,033 4,033 — — — — — 450,000 — — 450,000 300,000 — 350,000 300,000 1,028,553 350,000 1,028,553 122,379 122,379 112,466 3,678 112,466 3,678 86,326 3,387 86,326 3,387 2,034,162 29,170 2,034,162 29,170 $ 1,616,335 $ 1,654,030 1,654,030 $1,200,188 $1,200,188 $ 7,149,105 $ 7,149,105 The estimated payments for reserves for losses and loss expenses in the above table represent the projected (undiscounted) The estimated payments for reserves for losses and loss expenses in the above table represent the projected (undiscounted) payments for gross loss and loss expense reserves related to losses incurred as of December 31, 2015. The estimated payments in the above table do not consider payments for losses to be incurred in future periods. These amounts include reserves for reported losses and reserves for incurred but not reported losses. Estimated amounts recoverable from reinsurers are not reflected. The estimated payments by year are based on historical loss payment patterns. The actual payments may differ from the estimated amounts due to changes in ultimate loss reserves and in the timing of the settlement of those reserves. In addition, at December 31, 2015, the Company had commitments to invest up to $117 million and $485 million in certain investment funds and real estate construction projects, respectively. These amounts are not included in the above table. payments for gross loss and loss expense reserves related to losses incurred as of December 31, 2015. The estimated payments in the above table do not consider payments for losses to be incurred in future periods. These amounts include reserves for reported losses and reserves for incurred but not reported losses. Estimated amounts recoverable from reinsurers are not reflected. The estimated payments by year are based on historical loss payment patterns. The actual payments may differ from the estimated amounts due to changes in ultimate loss reserves and in the timing of the settlement of those reserves. In addition, at December 31, 2015, the Company had commitments to invest up to $117 million and $485 million in certain investment funds and real estate construction projects, respectively. These amounts are not included in the above table. The Company utilizes letters of credit to back certain reinsurance payments and obligations. Outstanding letters of credit The Company utilizes letters of credit to back certain reinsurance payments and obligations. Outstanding letters of credit were $15 million as of December 31, 2015. The Company has made certain guarantees to state regulators that the statutory capital were $15 million as of December 31, 2015. The Company has made certain guarantees to state regulators that the statutory capital of certain subsidiaries will be maintained above certain minimum levels. of certain subsidiaries will be maintained above certain minimum levels. Off-Balance Sheet Arrangements Off-Balance Sheet Arrangements An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or that engages in leasing, hedging or research and development arrangements with the Company. The Company has no arrangements of these types that management believes may have a material current or future effect on our financial condition, liquidity or results of operations. unconsolidated entity under which a company has (1) made guarantees, (2) a retained or contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or that engages in leasing, hedging or research and development arrangements with the Company. The Company has no arrangements of these types that management believes may have a material current or future effect on our financial condition, liquidity or results of operations. 53 5 3 5 3 80793in_10k.indd 53 3/14/16 5:48 PM ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk. The fair value of the Company’s investments is subject to risks of fluctuations in credit quality and interest rates. The Company uses various models and stress test scenarios to monitor and manage interest rate risk. The Company attempts to manage its interest rate risk by maintaining an appropriate relationship between the effective duration of the investment portfolio and the approximate duration of its liabilities (i.e., policy claims and debt obligations). The effective duration for the fixed maturity portfolio (including cash and cash equivalents) was 3.3 years and 3.2 years at December 31, 2015 and 2014, respectively. In addition, the fair value of the Company’s international investments is subject to currency risk. The Company attempts to manage its currency risk by matching its foreign currency assets and liabilities where considered appropriate. The following table outlines the groups of fixed maturity securities and their effective duration at December 31, 2015: (Dollars in thousands) Cash and cash equivalents U. S. government and governmental agencies State and municipal Asset-backed securities Corporate Foreign government Mortgage-backed securities Loans receivable Total Effective Duration (Years) — $ 3.0 4.5 1.1 3.7 2.7 3.2 2.1 3.3 Fair Value 763,631 670,419 4,553,554 1,705,172 3,475,038 837,460 1,221,204 275,747 13,502,225 Duration is a common measure of the price sensitivity of fixed maturity securities to changes in interest rates. The Company determines the estimated change in fair value of the fixed maturity securities, assuming parallel shifts in the yield curve for treasury securities while keeping spreads between individual securities and treasury securities static. The estimated fair value at specified levels at December 31, 2015 would be as follows: (In thousands) Change in interest rates: 300 basis point rise 200 basis point rise 100 basis point rise Base scenario 100 basis point decline 200 basis point decline 300 basis point decline Estimated Fair Value $12,360,508 12,719,858 13,100,237 13,502,225 13,925,214 14,364,165 14,824,542 Change in Fair Value $ (1,141,717) (782,367) (401,988) — 422,989 861,940 1,322,317 Arbitrage investing differs from other types of investments in that its focus is 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 stock market conditions. Potential changes in market conditions are also mitigated by the implementation of hedging strategies, including short sales. Additionally, the arbitrage positions are generally hedged against market declines by purchasing put options, selling call options or entering into swap contracts. The Company's merger arbitrage securities are primarily exposed to the risk of completion of announced deals, which are subject to regulatory as well as transactional and other risks. 54 5 4 80793in_10k.indd 54 3/14/16 5:48 PM ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders W. R. Berkley Corporation: We have audited the accompanying consolidated balance sheets of W. R. Berkley Corporation and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of W. R. Berkley Corporation and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), W. R. Berkley Corporation's internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 22, 2016 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. New York, New York February 22, 2016 /S/ KPMG LLP 55 55 80793in_10k.indd 55 3/14/16 5:48 PM W. R. BERKLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) REVENUES: Net premiums written Change in net unearned premiums Net premiums earned Net investment income Insurance service fees Net investment gains: Net realized gains on investment sales Other-than-temporary impairments Net investment gains Revenues from wholly-owned investees Other income Total revenues OPERATING COSTS AND EXPENSES: Losses and loss expenses Other operating costs and expenses Expenses from wholly-owned investees Interest expense Total operating costs and expenses Income before income taxes Income tax expense Net income before noncontrolling interests Noncontrolling interests Net income to common stockholders NET INCOME PER SHARE: Basic Diluted Years Ended December 31, 2015 2014 2013 $ 6,189,515 (148,906) 6,040,609 512,645 139,440 125,633 (33,309) 92,324 421,102 337 $ 5,996,947 (252,529) $ 5,500,173 (273,636) 5,744,418 5,226,537 600,885 117,443 544,291 107,513 254,852 — 254,852 410,022 1,308 127,586 (6,042) 121,544 407,623 1,026 7,206,457 7,128,928 6,408,534 3,656,270 2,289,750 397,461 130,946 6,474,427 732,030 (227,923) 504,107 (413) 3,490,567 2,157,456 400,535 128,174 6,176,732 952,196 3,197,024 2,000,684 388,761 123,177 5,709,646 698,888 (302,593) (193,587) 649,603 (719) 505,301 (5,376) $ 503,694 $ 648,884 $ 499,925 $ 4.06 $ 5.07 $ $ 3.87 $ 4.86 $ 3.69 3.55 See accompanying notes to consolidated financial statements. 56 5 6 80793in_10k.indd 56 3/15/16 1:05 PM W. R. BERKLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Net income before noncontrolling interests Other comprehensive income: Change in unrealized translation adjustments Change in unrealized investment gains (losses), net of taxes Change in unrecognized pension obligation, net of taxes Other comprehensive loss Comprehensive income Comprehensive income to the noncontrolling interest Comprehensive income to common shareholders Years Ended December 31, 2015 2014 2013 $ 504,107 $649,603 $ 505,301 (124,744) (125,542) (62,125) (23,848) 49,666 (261,064) — 6,651 8,700 (250,286) (5,808) (276,212) 253,821 (375) 643,795 (752) 229,089 (5,404) $ 253,446 $643,043 $ 223,685 See accompanying notes to consolidated financial statements. 57 5 7 80793in_10k.indd 57 3/14/16 5:48 PM W. R. BERKLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) Assets Investments: Fixed maturity securities Investment funds Real estate Arbitrage trading account Loans receivable Equity securities available for sale Total investments Cash and cash equivalents Premiums and fees receivable Due from reinsurers Deferred policy acquisition costs Prepaid reinsurance premiums Trading account receivable from brokers and clearing organizations Property, furniture and equipment Goodwill Accrued investment income Current federal and foreign income taxes Other assets Total assets Liability and Equity Liabilities: Reserves for losses and loss expenses Unearned premiums Due to reinsurers Trading account securities sold but not yet purchased Deferred federal and foreign income taxes Other liabilities Senior notes and other debt Subordinated debentures Total liabilities 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, 123,307,837 and 126,748,836 shares, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Treasury stock, at cost, 111,810,081 and 108,369,082 shares, respectively Total common stockholders’ equity Noncontrolling interests Total equity Total liabilities and equity See accompanying notes to consolidated financial statements. 58 5 8 December 31, 2015 2014 1,170,040 936,367 376,697 273,103 150,866 $12,444,394 $12,705,160 1,211,401 731,612 450,648 322,012 170,991 15,351,467 15,591,824 674,441 1,651,088 1,503,441 488,525 395,748 371,034 332,098 150,944 120,367 67,623 369,558 $21,730,967 $21,716,691 763,631 1,669,186 1,532,829 513,128 394,387 383,115 348,224 153,291 123,164 55,763 442,782 $10,669,150 $10,369,701 3,026,732 237,270 106,079 37,452 859,736 2,115,527 340,060 17,097,759 17,092,557 3,137,133 224,752 37,035 6,811 837,937 1,844,621 340,320 — — 47,024 1,005,455 6,178,070 (66,698) (2,563,605) 4,600,246 32,962 4,633,208 47,024 991,512 5,732,410 183,550 (2,364,551) 4,589,945 34,189 4,624,134 $21,730,967 $21,716,691 80793in_10k.indd 58 3/14/16 5:48 PM W. R. BERKLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) COMMON STOCK: Beginning and end of period ADDITIONAL PAID IN CAPITAL: Beginning of period Stock options exercised and restricted units issued including tax benefit Restricted stock units expensed Stock issued End of period RETAINED EARNINGS: Beginning of period Net income to common stockholders Dividends End of period ACCUMULATED OTHER COMPREHENSIVE INCOME: Unrealized investment gains (losses): Beginning of period Years Ended December 31, 2014 2015 2013 $ 47,024 $ 47,024 $ 47,024 $ 991,512 $ 967,440 $ 945,166 (17,456) 30,691 708 (4,485) 27,966 591 (1,143) 22,881 536 $ 1,005,455 $ 991,512 $ 967,440 $ 5,732,410 $ 5,265,015 $ 4,817,807 503,694 (58,034) 648,884 (181,489) 499,925 (52,717) $ 6,178,070 $ 5,732,410 $ 5,265,015 $ 306,199 $ 256,566 $ 517,658 Unrealized gains (losses) on securities not other-than-temporarily impaired (113) 49,071 (261,791) Unrealized gains (losses) on other-than-temporarily impaired securities (125,391) 562 699 End of period Currency translation adjustments: Beginning of period Net change in period End of period Net pension asset: Beginning of period Net change in period End of period 180,695 306,199 256,566 (122,649) (124,744) (60,524) (62,125) (247,393) (122,649) (36,676) (23,848) (60,524) — — — (6,651) 6,651 (15,351) 8,700 — (6,651) Total accumulated other comprehensive income (loss) $ (66,698) $ 183,550 $ 189,391 TREASURY STOCK: Beginning of period Stock exercised/vested Stock issued Stock repurchased End of period NONCONTROLLING INTERESTS: Beginning of period Acquisition (sale) of noncontrolling interest Net income Other comprehensive income, net of tax End of period $ (2,364,551) $ (2,132,835) $ (1,969,411) 23,975 623 6,623 594 2,452 597 (223,652) (238,933) (166,473) $ (2,563,605) $ (2,364,551) $ (2,132,835) $ 34,189 $ 33,359 $ (1,602) 413 (38) 78 719 33 29,249 (1,294) 5,376 28 $ 32,962 $ 34,189 $ 33,359 See accompanying notes to consolidated financial statements. 59 5 9 80793in_10k.indd 59 3/14/16 5:48 PM W. R. BERKLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) CASH FROM OPERATING ACTIVITIES: Net income to common stockholders Adjustments to reconcile net income to net cash from operating activities: Net investment gains Depreciation and amortization Noncontrolling interests Investment funds Stock incentive plans Change in: Arbitrage trading account Premiums and fees receivable Reinsurance accounts Deferred policy acquisition costs Current income taxes Deferred income taxes Reserves for losses and loss expenses Unearned premiums Other Net cash from operating activities CASH FLOWS USED IN INVESTING ACTIVITIES: Proceeds from sale of fixed maturity securities Proceeds from sale of equity securities Distributions from (contributions to) investment funds Proceeds from maturities and prepayments of fixed maturity securities Purchase of fixed maturity securities Purchase of equity securities Real estate purchased Proceeds from sale of real estate Change in loans receivable Net additions to property, furniture and equipment Change in balances due from security brokers Cash distributed in connection with business Payment for business purchased, net of cash acquired Net cash used in investing activities CASH FLOWS USED IN FINANCING ACTIVITIES: Net proceeds from issuance of debt Net proceeds from stock options exercised Repayment of senior notes and other debt Cash dividends to common stockholders Purchase of common treasury shares Other Net cash used in financing activities Net impact on cash due to change in foreign exchange rates Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Years Ended December 31, 2014 2013 2015 $ 503,694 $ 648,884 $ 499,925 (92,324) 85,139 413 (62,228) 32,123 (7,173) (60,942) (31,930) (29,860) 20,428 47,260 397,685 142,699 (63,680) 881,304 (254,852) 88,836 719 (131,649) 28,068 (50,817) (104,174) (33,445) (42,789) (40,935) 30,812 376,617 277,826 (58,254) 734,847 (121,544) 103,090 5,376 (67,712) 23,784 (10,324) (138,027) (171,263) (52,124) (45,613) 56,281 372,002 323,160 42,787 819,798 1,388,680 15,833 177,424 2,999,339 (4,455,223) 633,459 113,251 69,319 2,605,839 (4,292,165) 1,344,707 267,554 (236,580) 2,718,156 (4,198,135) (29,526) (222,659) — 48,909 (63,562) (22,666) — (7,312) (170,763) 9,056 — (281,086) (58,034) (223,652) (1,602) (555,318) (66,033) 89,190 674,441 $ 763,631 $ (31,207) (213,159) 343,723 21,608 (41,958) 32,617 15,783 (65,421) (808,311) 354,012 — (3,700) (181,489) (238,933) 337 (69,773) (22,060) (165,297) 839,738 674,441 $ (156,557) (107,352) — (30,974) (63,150) (26,155) — (56,878) (545,364) 346,822 53 (465,389) (52,717) (166,473) 7,442 (330,262) (10,104) (65,932) 905,670 839,738 See accompanying notes to consolidated financial statements. 60 6 0 80793in_10k.indd 60 3/14/16 5:48 PM W. R. BERKLEY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 2015, 2014 and 2013 (1) Summary of Significant Accounting Policies (A) Principles of consolidation and basis of presentation The consolidated financial statements, which include the accounts of W. R. Berkley Corporation and its subsidiaries (the "Company"), have been prepared on the basis of U.S. generally accepted accounting principles ("GAAP"). All significant intercompany transactions and balances have been eliminated. Reclassifications have been made in the 2014 and 2013 financial statements to conform to the presentation of the 2015 financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the revenues and expenses reflected during the reporting period. The most significant items on our balance sheet that involve a greater degree of accounting estimates that are subject to change in the future are the valuation of investments, other-than-temporary impairments, loss and loss expense reserves and premium estimates. Actual results could differ from those estimates. (B) Revenue recognition Insurance premiums are recognized as written at the inception of the policy. Reinsurance premiums are estimated based upon information received from ceding companies, and subsequent differences from such estimates are recorded in the period they are determined. Insurance and reinsurance premiums are primarily earned on a pro rata basis over the policy term. Fees for services are earned over the period that the services are provided. Audit premiums are recognized when they are reliably determinable. The change in accruals for earned but unbilled audit premiums increased net premiums written and premiums earned by $3 million, $9 million and $12 million in 2015, 2014 and 2013, respectively. Revenues from wholly-owned investees are derived from aircraft services provided to the general, commercial and military aviation markets. These services include (i) the distribution, manufacturing, repair and overhaul of aircraft parts and components, (ii) the sale of new and used aircraft, and (iii) avionics, fuel, maintenance, storage and charter services. Revenue is recognized upon the shipment of parts, the delivery of aircraft, the delivery of fuel, and upon completion of services. Insurance service fee revenue represents servicing fees for program administration and claims management services provided by the Company, including workers compensation assigned risk plans, as well as insurance brokerage and risk management services. Fees for program administration, claims management and risk management services are primarily recognized ratably over the related contract period for which the underlying services are rendered. Commissions for insurance brokerage are generally recognized when the underlying insurance policy is effective. (C) Cash and cash equivalents Cash equivalents consist of funds invested in money market accounts and investments with an effective maturity of three months or less when purchased. (D) Investments Fixed maturity securities classified as available for sale are carried at estimated fair value, with unrealized gains and losses, net of applicable income taxes, excluded from earnings and reported as a component of comprehensive income and a separate component of stockholders' equity. Fixed maturity securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost. Investment income from fixed maturity securities is recognized based on the constant effective yield method. Premiums and discounts on mortgage-backed securities are adjusted for the effects of actual and anticipated prepayments on a retrospective basis. Equity securities classified as available for sale are carried at estimated fair value, with unrealized gains and losses, net of applicable income taxes, excluded from earnings and reported as a component of comprehensive income and a separate component of stockholders' equity. 61 6 1 80793in_10k.indd 61 3/14/16 5:48 PM Equity and fixed maturity securities that the Company purchased with the intent to sell in the near-term are classified as trading account securities and are reported at estimated fair value. Realized and unrealized gains and losses from trading activity are reported as net investment income and are recorded at the trade date. Short sales and short call options are presented as trading securities sold but not yet purchased. Unsettled trades and the net margin balances held by the clearing broker are presented as a trading account receivable from brokers and clearing organizations. Investment funds are carried under the equity method of accounting. For certain investment funds, the Company's share of the earnings or losses is reported on a one-quarter lag in order to facilitate the timely completion of the Company's consolidated financial statements. Loans receivable primarily represent commercial real estate mortgage loans and bank loans and are carried at amortized cost. The Company monitors the performance of its loans receivable and establishes an allowance for loan losses for loans where the Company determines it is probable that the contractual terms will not be met, with a corresponding charge to earnings. For loans that are evaluated individually and deemed to be impaired, the Company establishes a specific allowance based on a discounted cash flow analysis and comparable cost and sales methodologies, if appropriate. Individual loans that are not considered impaired and smaller-balance homogeneous loans are evaluated collectively and a general allowance is established if it is considered probable that a loss has been incurred. The accrual of interest on loans receivable is discontinued if the loan is 90 days past due based on the contractual terms of the loan unless the loan is adequately secured and in process of collection. In general, loans are placed on non-accrual status or charged off at an earlier date if collection of principal or interest is considered doubtful. Interest on these loans is accounted for on a cash basis until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Fair value of investments is determined based on a fair value hierarchy that prioritizes the use of observable inputs over the use of unobservable inputs and requires the use of observable inputs when available. (See Note 13 of the Notes to Consolidated Financial Statements.) Realized gains or losses represent the difference between the cost of securities sold and the proceeds realized upon sale and are recorded at the trade date. The Company uses primarily the first-in, first-out method to determine the cost of securities sold. The cost of securities is adjusted where appropriate to include a provision for a decline in value which is considered to be other than temporary. An other-than-temporary decline is considered to occur in investments where there has been a sustained reduction in fair value and where the Company does not expect to recover the cost basis of the investment prior to the time of sale or maturity. Since equity securities do not have a contractual cash flow or a maturity, the Company considers whether the price of an equity security is expected to recover within a reasonable period of time. For fixed maturity securities that the Company intends to sell or, more likely than not, would be required to sell, a decline in value below amortized cost is considered to be an other-than-temporary impairment (“OTTI”). The amount of OTTI is equal to the difference between amortized cost and fair value at the balance sheet date. For fixed maturity securities that the Company does not intend to sell or believes that it is more likely than not it would not be required to sell, a decline in value below amortized cost is considered to be an OTTI if the Company does not expect to recover the entire amortized cost basis of a security (i.e., the present value of cash flows expected to be collected is less than the amortized cost basis of the security). The portion of the decline in value considered to be a credit loss (i.e., the difference between the present value of cash flows expected to be collected and the amortized cost basis of the security) is recognized in earnings. The portion of the decline in value not considered to be a credit loss (i.e., the difference in the present value of cash flows expected to be collected and the fair value of the security) is recognized in other comprehensive income. Impairment assessments for structured securities, including mortgage-backed securities and asset-backed securities, collateralized debt obligations and corporate debt, are generally evaluated based on the performance of the underlying collateral under various economic and default scenarios that may involve subjective judgments and estimates by management. Modeling these securities involves various factors, such as projected default rates, the nature and realizable value of the collateral, if any, the ability of the issuer to make scheduled payments, historical performance and other relevant economic and performance factors. If an OTTI determination is made, a discounted cash flow analysis is used to ascertain the amount of the credit impairment. 62 6 2 80793in_10k.indd 62 3/14/16 5:48 PM Real estate held for investment purposes is initially recorded at the purchase price, which is generally fair value, and is subsequently reported at cost less accumulated depreciation. Real estate taxes, interest and other costs incurred during development and construction are capitalized. Buildings are depreciated on a straight-line basis over the estimated useful lives of the building. Minimum rental income is recognized on a straight-line basis over the lease term. Income and expenses from real estate are reported as net investment income. The carrying value of real estate is reviewed for impairment and an impairment loss is recognized if the estimated undiscounted cash flows from the use and disposition of the property are less than the carrying value of the property. (E) Per share data The Company presents both basic and diluted net income per share (“EPS”) amounts. Basic EPS is calculated by dividing net income by weighted average number of common shares outstanding during the year. Diluted EPS is based upon the weighted average number of common and common equivalent shares outstanding during the year and is calculated using the treasury stock method for stock incentive plans. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. 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. (F) Deferred policy acquisition costs Acquisition costs associated with the successful acquisition of new and renewed insurance and reinsurance contracts are deferred and amortized ratably over the terms of the related contracts. Ceding commissions received on reinsurance contracts are netted against acquisition costs and are recognized ratably over the life of the contract. Deferred policy acquisition costs are presented net of unearned ceding commissions. Deferred policy acquisition costs are comprised primarily of commissions, as well as employment-related underwriting costs and premium taxes. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income and, if not, are charged to expense. The recoverability of deferred policy acquisition costs is evaluated separately by each of our operating companies for each of their major lines of business. Future investment income is taken into account in measuring the recoverability of deferred policy acquisition costs. (G) Reserves for losses and loss expenses Reserves for losses and loss expenses are an accumulation of amounts determined on the basis of (1) evaluation of claims for business written directly by the Company; (2) estimates received from other companies for reinsurance assumed by the Company; and (3) estimates for losses incurred but not reported (based on Company and industry experience). These estimates are periodically reviewed and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Such adjustments are reflected in the statements of income in the period in which they are determined. The Company discounts its reserves for excess and assumed workers' compensation claims using a risk-free or statutory rate. (See Note 14 of Notes to Consolidated Financial Statements.) (H) Reinsurance ceded The unearned portion of premiums ceded to reinsurers is reported as prepaid reinsurance premiums and earned ratably over the policy term. The estimated amounts of reinsurance recoverable on unpaid losses are reported as due from reinsurers. To the extent any reinsurer does not meet its obligations under reinsurance agreements, the Company must discharge its liability. Amounts due from reinsurers are reflected net of funds held where the right of offset is present. The Company has provided reserves for estimated uncollectible reinsurance. (I) Deposit accounting Contracts that do not meet the risk transfer requirements of GAAP are accounted for using the deposit accounting method. Under this method, an asset or liability is recognized at the inception of the contract based on consideration paid or received. The amount of the deposit asset or liability is adjusted at subsequent reporting dates using the interest method with a corresponding credit or charge to interest income or expense. Deposit liabilities for assumed reinsurance contracts were $54 million and $68 million at December 31, 2015 and 2014, respectively. 6 3 63 80793in_10k.indd 63 3/14/16 5:48 PM (J) Federal and foreign income taxes The Company files a consolidated income tax return in the U.S. and foreign tax returns in countries where it has overseas operations. The Company's method of accounting for income taxes is the asset and liability method. Under this method, deferred tax assets and liabilities are measured using tax rates currently in effect or expected to apply in the years in which those temporary differences are expected to reverse. Interest and penalties, if any, are reported as income tax expense. The Company believes there are no tax positions that would require disclosure under GAAP. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will not be realized. (K) Foreign currency Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity's functional currency) are reported on the statements of income as other operating costs and expenses. Unrealized gains or losses resulting from translating the results of non-U.S. dollar denominated operations are reported in accumulated other comprehensive income. Revenues and expenses denominated in currencies other than U.S. dollars are translated at the weighted average exchange rate during the year. Assets and liabilities are translated at the rate of exchange in effect at the balance sheet date. (L) Property, furniture and equipment Property, furniture and equipment are carried at cost less accumulated depreciation. Depreciation is calculated using the estimated useful lives of the respective assets. Depreciation expense was $45 million, $44 million and $38 million for 2015, 2014 and 2013, respectively. (M) Comprehensive income Comprehensive income encompasses all changes in stockholders' equity (except those arising from transactions with stockholders) and includes net income, net unrealized holding gains or losses on available for sale securities, unrealized foreign currency translation adjustments and changes in unrecognized pension obligations. (N) Goodwill and other intangible assets Goodwill and other intangible assets are tested for impairment on an annual basis and at interim periods where circumstances require. The Company's impairment test as of December 31, 2015 indicated that there were no impairment losses related to goodwill and other intangible assets. Intangible assets of $94 million and $96 million are included in other assets as of December 31, 2015 and 2014, respectively. (O) Stock options The costs resulting from all share-based payment transactions with employees are recognized in the consolidated financial statements using a fair-value-based measurement method. Compensation cost is recognized for financial reporting purposes over the period in which the employee is required to provide service in exchange for the award (generally the vesting period). (P) Statements of cash flows Interest payments were $130 million, $120 million and $125 million in 2015, 2014 and 2013, respectively. Income taxes paid were $165 million, $314 million and $186 million in 2015, 2014 and 2013, respectively. Other non-cash items include acquisitions, unrealized investment gains and losses and pension expense. (See Note 2, Note 11 and Note 25 of Notes to Consolidated Financial Statements.) 64 6 4 80793in_10k.indd 64 3/14/16 5:48 PM (Q) Recent accounting pronouncements The accounting and reporting standards that became effective in 2015 were either not applicable to the Company or their adoption did not have a material impact on the Company. Accounting and reporting standards that are not yet effective: In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014- 09, Revenue from Customers. ASU 2014-09 clarifies the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company’s insurance service fee revenue will be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The updated guidance, as amended by ASU 2015-14, is effective for public business entities for annual and interim reporting periods beginning after December 15, 2017. The adoption of this guidance is not expected to have a material effect on the Company’s financial condition or results of operations. In February 2015, the FASB issued ASU 2015-02, Consolidation. ASU 2015-02 makes targeted amendments to the current consolidation accounting guidance, in response to accounting complexity concerns. The guidance simplifies consolidation accounting by reducing the number of approaches to consolidation. The updated guidance is effective for annual and interim reporting periods beginning after December 15, 2015. The adoption of this guidance is not expected to have a material effect on the Company’s financial condition or results of operations, but will result in additional disclosures. In May 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts. ASU 2015-09 requires companies that issue short duration insurance contracts to disclose additional information, including: (i) incurred and paid claims development tables; (ii) frequency and severity of claims; and (iii) information about material changes in judgments made in calculating the liability for unpaid claim adjustment expenses, including reasons for the change and the effects on the financial statements. ASU 2015-09 is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. The amendments in ASU 2015-09 should be applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period. As the requirements of this literature are disclosure only, the adoption of this guidance will not impact our financial condition or results of operations. In January 2016, the FASB issued ASU 2016-01, Financial Instruments. ASU 2016-01 amends the accounting guidance for financial instruments to require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The updated guidance is effective for public business entities for annual reporting periods beginning after December 15, 2017 and interim periods within those years. The adoption of this guidance is not expected to have a material effect on the Company’s financial condition upon adoption, but will impact results of operations after adoption of this guidance as unrealized gains and losses on equity securities will no longer be reported directly in AOCI, but will instead be reported in net income. All other recently issued but not yet effective accounting and reporting standards are either not applicable to the Company or are not expected to have a material impact on the Company. 65 6 5 80793in_10k.indd 65 3/14/16 5:48 PM (2) Acquisitions / Dispositions In 2015, the Company acquired an aviation systems company for $8 million. In 2014, the Company acquired a specialty property and casualty insurance distribution company for $83 million. The fair values of the assets acquired and liabilities assumed have been estimated based on a valuation prepared by a third party. The estimated useful lives of the intangible assets acquired range from 7 years to 15 years, with approximately $10 million having an indefinite life. In 2014, the Company sold an aviation-related business for $16 million. The business had a net carrying value of $15 million, comprised of $7 million of goodwill, $6 million of other assets, $4 million of furniture and equipment and $2 million of liabilities. The following table summarizes the estimated fair value of net assets acquired and liabilities assumed for the business combination completed in 2014: (In thousands) Cash and cash equivalents Real estate, furniture and equipment Goodwill and other intangibles assets Premium and service fee receivable Other assets Total assets acquired Deferred federal income tax Debt Other liabilities assumed Net assets acquired 2014 $ 17,457 669 79,646 24,432 2,590 124,794 (7,107) (34,809) $ 82,878 (3) Consolidated 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 year ended December 31, 2015: (In thousands) Changes in AOCI Beginning of period Other comprehensive income (loss) before reclassifications Amounts reclassified from AOCI Other comprehensive income (loss) Unrealized investment gain related to non- controlling interest Ending balance Amounts reclassified from AOCI Pre-tax Tax effect After-tax amounts reclassified Other comprehensive income (loss) Pre-tax Tax effect Other comprehensive income (loss) Unrealized investment gains (losses) Currency translation adjustments Net pension asset Accumulated other comprehensive income (loss) $ 306,199 $ (122,649) $ — $ 183,550 (119,994) (5,548) (125,542) (124,744) — (124,744) — — — (244,738) (5,548) (250,286) 38 $ 180,695 — $ (247,393) $ — — 38 $ (66,698) $ (8,535) (1) $ 2,987 (2) $ (5,548) — $ — — — $ — $ — $ (8,535) 2,987 (5,548) $ $ (192,186) 66,644 $ (124,744) $ — — — $ (125,542) $ (124,744) $ — $ (316,930) 66,644 (250,286) $ 66 6 6 80793in_10k.indd 66 3/14/16 5:48 PM The following table presents the components of the changes in accumulated other comprehensive income (loss) (AOCI) as of and for the year ended December 31, 2014: The following table presents the components of the changes in accumulated other comprehensive income (loss) (AOCI) as of and for the year ended December 31, 2014: (In thousands) (In thousands) Changes in AOCI Changes in AOCI Unrealized investment gains (losses) Unrealized investment gains (losses) Currency translation adjustments Currency translation adjustments Net pension asset Net pension asset Accumulated other comprehensive income (loss) Accumulated other comprehensive income (loss) Beginning of period Beginning of period $ Other comprehensive income (loss) before Other comprehensive income (loss) before reclassifications reclassifications Amounts reclassified from AOCI Amounts reclassified from AOCI Other comprehensive income (loss) Other comprehensive income (loss) Unrealized investment gain related to non- controlling interest Ending balance Unrealized investment gain related to non- controlling interest Ending balance $ Amounts reclassified from AOCI Amounts reclassified from AOCI Pre-tax Pre-tax Tax effect Tax effect After-tax amounts reclassified After-tax amounts reclassified Other comprehensive income (loss) Pre-tax Tax effect Other comprehensive income (loss) Other comprehensive income (loss) Pre-tax Tax effect Other comprehensive income (loss) $ $ $ $ 256,566 $ 256,566 $ (60,524) $ $ (6,651) (60,524) $ (6,651) $ $ 189,391 189,391 98,294 (48,628) 49,666 (33) $ 306,199 98,294 (48,628) 49,666 (62,125) — (62,125) (62,125) — (62,125) — 6,651 6,651 (33) — 306,199 $ — $ — (122,649) $ — (122,649) $ — 6,651 6,651 — — $ $ (74,812) (1) 26,184 (2) (74,812) (1) $ 26,184 (2) — (48,628) $ $ — $ $ — $ 10,232 (3) — $ 10,232 (3) (3,581) (2) (3,581) (2) 6,651 $ — $ 6,651 — $ 36,169 (41,977) (5,808) 36,169 (41,977) (5,808) (33) $ 183,550 (33) 183,550 $ (64,580) 22,603 $ (41,977) (64,580) 22,603 (41,977) (62,125) $ 72,889 $ (23,223) — 49,666 $ $ — $ 10,232 (62,125) $ (3,581) (62,125) $ 6,651 (62,125) $ 10,232 $ (3,581) 6,651 $ $ 20,996 (26,804) $ (5,808) 20,996 (26,804) (5,808) $ (48,628) 72,889 $ (23,223) $ 49,666 (1) Net investment gains in the consolidated statements of income. (2) Income tax expense in the consolidated statements of income. (3) Other operating costs and expenses in the consolidated statements of income. (1) Net investment gains in the consolidated statements of income. (2) Income tax expense in the consolidated statements of income. (3) Other operating costs and expenses in the consolidated statements of income. 6 7 67 6 7 80793in_10k.indd 67 3/14/16 5:48 PM (4) Investments in Fixed Maturity Securities At December 31, 2015 and 2014, investments in fixed maturity securities were as follows: (In thousands) December 31, 2015 Held to maturity: State and municipal Residential mortgage-backed Corporate Total held to maturity Available for sale: Amortized Cost Gross Unrealized_____ Losses Gains Fair Value Carrying Value $ 77,129 $ 19,138 — 96,267 16,246 2,207 18,453 — $ $ — — — — — 114,720 93,375 $ 77,129 19,138 21,345 — 96,267 U.S. government and government agency State and municipal: Special revenue State general obligation Pre-refunded Corporate backed Local general obligation Total state and municipal Mortgage-backed securities: Residential (1) Commercial Total mortgage-backed securities Asset-backed securities 645,092 27,660 (2,333) 670,419 670,419 2,510,816 583,456 439,772 388,904 342,158 4,265,106 1,126,382 64,975 1,191,357 1,706,694 102,909 28,068 32,056 14,039 24,270 201,342 (3,737) (2,070) (31) (402) 2,609,988 609,454 471,797 402,541 (29) 366,399 (6,269) 4,460,179 875 18,935 (11,180) (128) 19,810 (11,308) 12,892 (14,414) 1,134,137 65,722 1,199,859 1,705,172 2,609,988 609,454 471,797 402,541 366,399 4,460,179 1,134,137 65,722 1,199,859 1,705,172 Corporate: Industrial Financial Utilities Other Total corporate Foreign Total available for sale Total investments in fixed maturity securities 75,168 31,744 8,321 245 115,478 1,976,393 1,153,096 192,857 81,607 3,403,953 2,021,534 2,021,534 1,173,021 1,173,021 198,651 198,651 81,832 81,832 3,475,038 3,475,038 837,460 799,839 50,310 (12,689) 837,460 12,012,041 427,492 (91,406) 12,348,127 12,348,127 $ (91,406) $12,462,847 $ 12,444,394 $ 12,108,308 $ 445,945 (30,027) (11,819) (2,527) (20) (44,393) 68 6 8 80793in_10k.indd 68 3/14/16 5:48 PM (In thousands) December 31, 2014 Held to maturity: State and municipal Residential mortgage-backed Corporate Total held to maturity Available for sale: U.S. government and government agency State and municipal: Special revenue State general obligation Pre-refunded Corporate backed Local general obligation Total state and municipal Mortgage-backed securities: Residential (1) Commercial Total mortgage-backed securities Asset-backed securities Corporate: Industrial Financial Utilities Other Total corporate Foreign Total available for sale Total investments in fixed maturity securities ______________________ Amortized Cost Gross Unrealized Losses Gains Fair Value Carrying Value $ $ 72,901 23,278 4,998 101,177 — $ 17,501 $ 2,854 291 20,646 — — — 90,402 $ 26,132 5,289 121,823 72,901 23,278 4,998 101,177 773,192 33,353 (3,157) 803,388 803,388 2,264,210 674,022 504,778 413,234 281,622 4,137,866 1,201,924 74,479 1,276,403 2,019,032 111,841 37,615 35,619 18,976 25,099 229,150 (2,084) (787) (289) (855) (5) (4,020) 2,373,967 710,850 540,108 431,355 306,716 4,362,996 2,373,967 710,850 540,108 431,355 306,716 4,362,996 27,124 1,610 28,734 18,868 (9,449) (52) (9,501) (11,974) 1,219,599 76,037 1,295,636 2,025,926 1,219,599 76,037 1,295,636 2,025,926 1,606,724 1,140,801 184,107 86,294 3,017,926 117,206 38,080 12,436 (5,131) (7,673) 1,718,799 1,171,208 (2) 196,542 1,370 (1) 87,662 (12,807) 3,174,211 897,668 62,223 (18,065) 941,826 12,122,087 541,420 (59,524) 12,603,983 169,092 1,718,799 1,171,208 196,542 87,662 3,174,211 941,826 12,603,983 $ 12,223,264 $ 562,066 (59,524) $12,725,806 $ 12,705,160 $ (1) Gross unrealized losses for mortgage-backed securities include $1,269,491 and $1,095,671, as of December 31, 2015 and 2014, respectively, related to the non-credit portion of OTTI recognized in other comprehensive income. The amortized cost and fair value of fixed maturity securities at December 31, 2015, 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) Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Mortgage-backed securities Total Amortized Cost $ 711,642 $ 4,056,450 3,653,308 2,476,413 1,210,495 $ 12,108,308 $ Fair Value 717,075 4,185,436 3,795,614 2,543,518 1,221,204 12,462,847 At December 31, 2015 and 2014, there were no investments, other than investments in United States government and government agency securities, which exceeded 10% of common stockholders’ equity. At December 31, 2015, investments with a carrying value of $1,201 million were on deposit in custodial or trust accounts, of which $963 million was on deposit with state insurance departments, $182 million was on deposit in support of the Company’s underwriting activities at Lloyd’s, $41 million was on deposit as security for reinsurance clients and $15 million was on deposit as security for letters of credit issued in support of the Company’s reinsurance operations. 69 6 9 80793in_10k.indd 69 3/14/16 5:48 PM (5) Investments in Equity Securities Available for Sale At December 31, 2015 and 2014, investments in equity securities available for sale were as follows: (In thousands) December 31, 2015 Common stocks Preferred stocks Total December 31, 2014 Common stocks Preferred stocks Total (6) Arbitrage Trading Account Unrealized Unrealized Gross Gains Gross Losses Cost Fair Value Carrying Value $ 56,462 $ — $ (19,189) $ 37,273 $ 37,273 108,730 8,216 (3,353) 113,593 113,593 $ 165,192 $ 8,216 $ (22,542) $ 150,866 $ 150,866 $ 69,870 $ 11,929 $ (5,453) $ 76,346 $ 76,346 90,425 8,385 (4,165) 94,645 94,645 $ 160,295 $ 20,314 $ (9,618) $ 170,991 $ 170,991 At December 31, 2015 and 2014, the fair value and carrying value of the arbitrage trading account were $377 million and $451 million, respectively. The primary focus of the trading account is merger arbitrage. Merger arbitrage is the business of investing in the securities of publicly held companies which are the targets in announced tender offers and mergers. Arbitrage investing differs from other types of investing in its focus on transactions and events believed likely to bring about a change in value over a relatively short time period (usually four months or less). The Company uses put options, call options and swap contracts in order to mitigate the impact of potential changes in market conditions on the merger arbitrage trading account. These options and contracts are reported at fair value. As of December 31, 2015, the fair value of long option contracts outstanding was $3 million (notional amount of $52 million) and the fair value of short option contracts outstanding was $1 million (notional amount of $62 million). Other than with respect to the use of these trading account securities, the Company does not make use of derivatives. (7) Net Investment Income Net investment income consists of the following: (In thousands) Investment income earned Fixed maturity securities, including cash and cash equivalents and loans receivable Equity securities available for sale Investment funds Arbitrage trading account Real estate Gross investment income Investment expense Net investment income 2015 2014 2013 $ 428,325 $ 439,489 $ 442,287 4,624 62,228 16,891 11,294 523,362 (10,717) 6,726 131,649 22,438 10,228 610,530 (9,645) 11,380 67,712 20,431 12,498 554,308 (10,017) $ 512,645 $ 600,885 $ 544,291 70 7 0 80793in_10k.indd 70 3/14/16 5:48 PM (8) Investment Funds Investment funds consist of the following: (In thousands) Real estate Energy Hedged equity Other funds Total $ Carrying Value as of December 31, 2014 2015 466,703 $ 580,830 $ 152,056 93,719 70,580 424,911 282,335 310,307 Income (Losses) 2014 2015 58,032 $ (37,373) (2,762) 44,331 26,233 $ 12,797 10,760 81,859 2013 9,315 29,739 7,655 21,003 $ 1,170,040 $ 1,211,401 $ 62,228 $ 131,649 $ 67,712 Other funds include private equity investments carried on the equity method of accounting, which includes a publicly traded common stock investment in HealthEquity, Inc. (HQY). Our ownership interest in HQY as of December 31, 2015 is approximately 21% with a fair value of $300.1 million and a carrying value of $45.4 million. (9) Real Estate Investment in real estate represents directly owned property held for investment, as follows: (In thousands) Properties in operation Properties under development Total As of December 31, 2015 2014 $ 226,055 $ 710,312 $ 936,367 $ 196,980 534,632 731,612 In 2015, properties in operation included a long-term ground lease in Washington, D.C. and office buildings in West Palm Beach and Palm Beach, Florida. Properties in operation are net of accumulated depreciation and amortization of $9,073,000 and $1,609,000 as of December 31, 2015 and 2014, respectively. Related depreciation expense was $7,425,000 and $4,808,000 for the years ended December 31, 2015 and 2014, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $13,141,756 in 2016, $15,483,248 in 2017, $14,623,307 in 2018, $11,967,190 in 2019, $9,584,128 in 2020 and $352,328,662 thereafter. Properties under development represent the following: an office building in London, a mixed-use project in Washington D.C. and an office complex in New York City. 71 7 1 80793in_10k.indd 71 3/14/16 5:48 PM (10) Loans Receivable Loans receivable are as follows: (In thousands) Amortized cost: Real estate loans Commercial loans Total Fair value: Real estate loans Commercial loans Total As of December 31, 2015 2014 $ 200,499 $ 72,604 $ 273,103 $ 243,407 78,605 322,012 $ 201,641 $ 74,106 $ 275,747 $ 245,112 80,107 325,219 Valuation allowance: Specific $ General Total $ — $ 2,094 2,094 $ 115 2,371 2,486 For the Year Ended December 31, 2015 2014 (Decrease) increase in valuation allowance $ (392) $ 398 Loans receivable in non-accrual status were $3.1 million and $14.2 million as of December 31, 2015 and 2014, respectively, primarily resulting from the sale of such loans. The Company monitors the performance of its loans receivable and assesses the ability of the borrower to pay principal and interest based upon loan structure, underlying property values, cash flow and related financial and operating performance of the property and market conditions. Loans receivable with a potential for default are further assessed using discounted cash flow analysis and comparable cost and sales methodologies, if appropriate. The real estate loans are secured by commercial real estate primarily located in Arizona, Maryland, New York and Tennessee. These loans generally earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through August 2025. The commercial loans are with small business owners who have secured the related financing with the assets of the business. These loans generally earn interest on a fixed basis and have varying maturities not exceeding 10 years. The Company utilizes a risk rating system to assign a risk to each of its real estate 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, none of the real estate loans were considered to be impaired at December 31, 2015, and accordingly, the Company determined that a specific valuation allowance was not required. 72 7 2 80793in_10k.indd 72 3/14/16 5:48 PM (11) Realized and Unrealized Investment Gains and Losses Realized and unrealized investment gains and losses are as follows: (In thousands) Realized investment gains and losses: Fixed maturity securities: Gains Losses Equity securities available for sale Investment funds Real estate Other gains 2015 2014 2013 $ 23,755 $ 39,113 $ 48,860 (4,065) 9,639 93,529 — 2,775 (4,420) (14,670) 38,296 96,204 85,659 — 70,235 10,976 — 12,185 Net realized gains on investments sales 125,633 254,852 127,586 Net other-than-temporary impairments: Other-than-temporary impairments Net other-than-temporary impairments Total net investment gains Income tax expense After-tax realized investment gain and losses Change in unrealized gains and losses of available for sales securities: Fixed maturity securities Previously impaired fixed maturity securities Equity securities available for sale Investment funds Total change in unrealized gains Income tax benefit (expense) Noncontrolling interests (33,309) — (33,309) — 254,852 92,324 (32,313) (89,198) (6,042) (6,042) 121,544 (47,426) $ 60,011 $ 165,654 $ 74,118 $ (144,445) $ 155,765 $ (401,812) (174) 865 (27,809) (69,016) 1,076 11,864 (19,758) (14,725) (10,250) (192,186) 72,889 (399,122) 66,644 (23,223) 138,058 38 (33) (28) After-tax change in unrealized investment gain and losses of available for sale securities $ (125,504) $ 49,633 $ (261,092) OTTI recognized in earnings were $33.3 million and $6 million for the years ended December 31, 2015 and December 31, 2013, respectively. There were no OTTI for the year ended December 31, 2014. For the year ended December 31, 2015, OTTI related to equity securities were $24.3 million and related to fixed maturity securities were $9 million. For the year ended December 31, 2013, OTTI related to equity securities. 73 7 3 80793in_10k.indd 73 3/14/16 5:48 PM (12) Securities in an Unrealized Loss Position The following table summarizes all securities in an unrealized loss position at December 31, 2015 and 2014 by the length of time those securities have been continuously in an unrealized loss position. (In thousands) Less Than 12 Months Gross Unrealized Losses Fair Value 12 Months or Greater Fair Value Gross Unrealized Losses Total Gross Fair Value Unrealized Losses December 31, 2015 U.S. government and government agency $ State and municipal 101,660 $ 501,952 Mortgage-backed securities Asset-backed securities Corporate Foreign government Fixed maturity securities Common stocks Preferred stocks Equity securities available for sale 381,986 1,091,078 1,232,940 169,190 3,478,806 18,641 — 18,641 487 $ 64,500 $ 4,404 3,639 7,703 35,406 8,822 60,461 18,005 — 18,005 106,681 184,807 190,467 76,797 19,528 642,780 7,829 22,320 30,149 1,846 $ 1,865 166,160 $ 608,633 7,669 6,711 8,987 3,867 30,945 1,184 3,353 4,537 566,793 1,281,545 1,309,737 188,718 4,121,586 26,470 22,320 48,790 2,333 6,269 11,308 14,414 44,393 12,689 91,406 19,189 3,353 22,542 Total $3,497,447 $ 78,466 $ 672,929 $ 35,482 $ 4,170,376 $ 113,948 December 31, 2014 U.S. government and government agency $ State and municipal Mortgage-backed securities Asset-backed securities Corporate Foreign government Fixed maturity securities Common stocks Preferred stocks Equity securities available for sale 84,750 $ 522 $ 84,850 $ 2,635 $ 169,600 $ 158,594 75,739 1,186,097 400,141 76,471 1,981,792 15,929 27,126 43,055 631 332 6,217 2,480 3,907 14,089 5,453 1,139 6,592 150,284 312,922 30,818 183,810 85,025 847,709 — 22,648 22,648 3,389 9,169 5,757 10,327 14,158 45,435 — 3,026 3,026 308,878 388,661 1,216,915 583,951 161,496 2,829,501 15,929 49,774 65,703 3,157 4,020 9,501 11,974 12,807 18,065 59,524 5,453 4,165 9,618 Total $ 2,024,847 $ 20,681 $ 870,357 $ 48,461 $ 2,895,204 $ 69,142 Fixed Maturity Securities — A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at December 31, 2015 is presented in the table below: (Dollars in thousands) Mortgage-backed securities Asset-backed securities Corporate Foreign government Total Number of Securities Aggregate Fair Value Gross Unrealized Loss 8 $ 7 23,370 $ 19,535 12 1 128,716 13,956 1,790 264 6,717 3,766 28 $ 185,577 $ 12,537 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. 74 7 4 80793in_10k.indd 74 3/14/16 5:48 PM For the year ended December 31, 2015, OTTI for fixed maturities recognized in earnings were $9.0 million, all of which was considered due to credit factors. There were no OTTI of fixed maturity securities for the year ended December 31, 2014. The Company has evaluated its fixed maturity securities in an unrealized loss position and believes the unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors. None of these securities are delinquent or in default on financial covenants. Based on its assessment of these issuers, the Company expects them to continue to meet their contractual payment obligations as they become due and does not consider any of these securities to be OTTI. Preferred Stocks – At December 31, 2015, there was one preferred stock in an unrealized loss position, with an aggregate fair value of $22.3 million and a gross unrealized loss of $3.4 million. The preferred stock is rated investment grade. Management believes the unrealized loss is due primarily to market and sector related factors and does not consider it to be OTTI. For the year ended December 31, 2015, OTTI for preferred stocks were $13.4 million. There were no OTTI of preferred stocks for the year ended December 31, 2014. Common Stocks – At December 31, 2015, there were two common stocks in an unrealized loss position, with an aggregate fair value of $26.5 million and a gross unrealized loss of $19.2 million. Based on management's view on the underlying securities, the Company does not consider the common stocks to be OTTI. For the year ended December 31, 2015, OTTI for common stocks were $10.9 million. There were no OTTI of common stocks for the year ended December 31, 2014. Loans Receivable – The Company monitors the performance of its loans receivable, including current market conditions for each loan and the ability to collect principal and interest. For loans where the Company determines it is probable that the contractual terms will not be met, an analysis is performed and a valuation reserve is established, if necessary, with a charge to earnings. Loans receivable are reported net of a valuation reserve of $2 million and $3 million at December 31, 2015 and 2014, respectively. (13) Fair Value Measurements The Company’s fixed maturity and equity securities classified as available for sale and its trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows: Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. Level 2 - Quoted prices for similar assets or valuations based on inputs that are observable. Level 3 - Estimates of fair value based on internal pricing methodologies using unobservable inputs. Unobservable inputs are only used to measure fair value to the extent that observable inputs are not available. Substantially all of the Company’s fixed maturity securities were priced by independent pricing services. The prices provided by the independent pricing services are estimated based on observable market data in active markets utilizing pricing models and processes, which may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, sector groupings, matrix pricing and reference data. The pricing services may prioritize inputs differently on any given day for any security based on market conditions, and not all inputs are available for each security evaluation on any given day. The pricing services used by the Company have indicated that they will only produce an estimate of fair value if objectively verifiable information is available. The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company reviews the prices provided by pricing services for reasonableness and periodically performs independent price tests of a sample of securities to ensure proper valuation. If prices from independent pricing services are not available for fixed maturity securities, the Company estimates the fair value. For Level 2 securities, the Company utilizes pricing models and processes which may include benchmark yields, sector groupings, matrix pricing, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, bids, offers and reference data. Where broker quotes are used, the Company generally requests two or more quotes and sets a price within the range of quotes received based on its assessment of the credibility of the quote and its own evaluation of the security. The Company generally does not adjust quotes received from brokers. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial projections, credit quality and business developments of the issuer and other relevant information. 75 7 5 80793in_10k.indd 75 3/14/16 5:48 PM For Level 3 securities, the Company generally uses a discounted cash flow model to estimate the fair value of fixed 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 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 rate volatility, time to maturity and subordination levels. Projected cash flows are discounted at rates that are adjusted to reflect illiquidity, where appropriate. illiquidity, where appropriate. The following tables present the assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 The following tables present the assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 and 2014 by level: and 2014 by level: (In thousands) (In thousands) December 31, 2015 December 31, 2015 Assets: Assets: Fixed maturity securities available for sale: Fixed maturity securities available for sale: U.S. government and government agency U.S. government and government agency State and municipal State and municipal Mortgage-backed securities Mortgage-backed securities Asset-backed securities Asset-backed securities Corporate Corporate Foreign government Foreign government Total fixed maturity securities available for sale Total fixed maturity securities available for sale Equity securities available for sale: Equity securities available for sale: Common stocks Common stocks Preferred stocks Preferred stocks Total equity securities available for sale Total equity securities available for sale Arbitrage trading account Arbitrage trading account Total Total Liabilities: Liabilities: Trading account securities sold but not yet purchased Trading account securities sold but not yet purchased December 31, 2014 December 31, 2014 Assets: Assets: Fixed maturity securities available for sale: Fixed maturity securities available for sale: U.S. government and government agency U.S. government and government agency State and municipal State and municipal Mortgage-backed securities Mortgage-backed securities Asset-backed securities Asset-backed securities Corporate Corporate Foreign government Foreign government Total fixed maturity securities available for sale Total fixed maturity securities available for sale Equity securities available for sale: Equity securities available for sale: Common stocks Common stocks Preferred stocks Preferred stocks Total equity securities available for sale Total equity securities available for sale Arbitrage trading account Arbitrage trading account Total Total Liabilities: Liabilities: Trading account securities sold but not yet purchased Trading account securities sold but not yet purchased Total Total Level 1 Level 1 Level 2 Level 2 Level 3 Level 3 $ $ 670,419 $ — — 4,460,179 4,460,179 — 1,199,859 1,199,859 — 1,705,172 1,705,172 — 3,475,038 3,475,038 — 837,460 837,460 — 12,348,127 12,348,127 670,419 $ — — — — — — — $ $ 670,419 $ — — — 670,419 $ — 4,460,179 4,460,179 — 1,199,859 1,199,859 — 1,704,973 1,704,973 3,474,884 3,474,884 837,460 837,460 12,347,774 12,347,774 — — 199 154 199 154 353 353 37,273 37,273 113,593 113,593 150,866 150,866 376,697 376,697 $ 12,875,690 $ $ 12,875,690 $ $ $ 37,035 $ 37,035 $ — — 29,444 29,444 — — 109,969 109,969 109,969 29,444 109,969 29,444 256,914 119,607 256,914 119,607 286,358 $ 12,577,350 286,358 $ 12,577,350 $ $ 7,829 7,829 3,624 3,624 11,453 11,453 176 176 11,982 11,982 35,559 35,559 $ $ 1,476 $ — 1,476 $ — $ $ 803,388 $ — — 4,362,996 4,362,996 — 1,295,636 1,295,636 — 2,025,926 2,025,926 — 3,174,211 3,174,211 — 941,826 941,826 — 12,603,983 12,603,983 803,388 $ — — — — — — — $ $ 803,388 $ — 803,388 $ — — — 4,362,996 4,362,996 — — 1,295,636 1,295,636 20,611 2,005,315 20,611 2,005,315 154 3,174,057 3,174,057 154 941,826 941,826 12,583,218 12,583,218 — — 20,765 76,346 76,346 94,645 94,645 170,991 170,991 450,648 450,648 $ 13,225,622 $ $ 13,225,622 $ — — 65,605 65,605 — — 90,932 90,932 90,932 65,605 65,605 90,932 295,047 154,881 295,047 154,881 360,652 $ 12,829,031 $ 360,652 $ 12,829,031 $ $ $ 106,079 $ 106,079 $ 106,074 106,074 $ $ 5 $ — 5 $ — — 20,765 — — 10,741 10,741 — 3,713 3,713 — 14,454 14,454 720 720 35,939 35,939 There were no significant transfers between Levels 1 and 2 for the years ended December 31, 2015 and 2014. There were no significant transfers between Levels 1 and 2 for the years ended December 31, 2015 and 2014. 7 6 76 7 6 80793in_10k.indd 76 3/14/16 5:48 PM The following tables summarize changes in Level 3 assets and liabilities for the years ended December 31, 2015 and The following tables summarize changes in Level 3 assets and liabilities for the years ended December 31, 2015 and 2014: 2014: Gains (Losses) Included in: Gains (Losses) Included in: Beginning Balance Beginning Balance Other Other Comprehensive Comprehensive Income (Losses) Income (Losses) Earnings (Losses) Earnings (Losses) Impairements Impairements Purchases Purchases Paydowns/ Maturities Paydowns/ Maturities Transfers In/Out Transfers In/Out Ending Balance Ending Balance Sales Sales $ $ 20,611 $ 154 20,765 $ $ 19 $ 19 $ 20,611 191 - - 154 - $ 191 $ 19 $ 19 20,765 $ - $ - - $ $ - - $ $ 191 - $ $ - - - - - - - $ $ - $ $ - $ $ - $ - - - $ 191 (1,820) $ - (1,820) $ $ (1,820) - $ (1,820) (18,802) $ - (18,802) $ $ (18,802) - $ (18,802) 199 154 353 $ $ 199 154 353 $ 10,741 $ 3,713 $ 14,454 720 35,939 $ 10,741 3,713 $ 14,454 720 $ 35,939 (273) $ $ (273) $ - $ - $ - - (89) (89) $ (273) $ (273) $ $ (89) (89) - (799) - (799) $ $ (82) (869) $ $ (82) (869) (2,331) $ - (2,331) $ - (2,331) $ $ - $ - $ (2,331) - - - $ $ $ - - (2,331) - 72,640 72,640 $ 72,640 $ 72,640 (2,331) (308) $ - $ (308) (71,921) (72,229) $ $ - $ - - $ $ (308) - $ - - - - - $ $ $ $ - $ - - - (308) (464) - (71,921) (464) - $ $ (19,266) $ $ (1,820) $ (19,266) (1,820) (72,229) 7,829 $ 3,624 $ 11,453 176 11,982 $ 7,829 3,624 11,453 176 11,982 $ $ $ $ - - $ - $ - - $ $ - - $ $ - - $ $ - - $ $ - - $ $ - - $ $ - - $ $ - $ (In thousands) Year Ended December 31, 2015 Assets: Fixed maturity securities available for sale (In thousands) Year Ended December 31, 2015 Assets: Fixed maturity securities available for sale Asset-backed securities Corporate Total Asset-backed securities Corporate Total Equity securities available for sale: Equity securities available for sale: Common stocks Preferred stocks Common stocks Preferred stocks Total Total Arbitrage trading account Arbitrage trading account Total Total Liabilities: Liabilities: Trading account securities sold but Trading account securities sold but not yet purchased not yet purchased Year ended December 31, 2014 Year ended December 31, 2014 Assets: Assets: Fixed maturity securities available for sale Fixed maturity securities available for sale Asset-backed securities Asset-backed securities 2014: Corporate Corporate Total Total The following tables summarize changes in Level 3 assets and liabilities for the years ended December 31, 2015 and $ $ 20,611 $ - $ - (3,711) - - 154.00 - 20,765 $ $ $ - $ - (3,711) $ $ 47 $ 47 42,710 - 154 - $ $ 47 $ 47 42,864 $ $ - $ - (3,429) - - - $ $ - $ - (3,429) (3,711) $ - (3,711) $ $ 238 - 238 $ $ (15,244) - (15,244) $ $ (15,244) - $ (15,244) $ 42,710 154 42,864 $ $ 238 - $ 238 $ (3,429) - (3,429) $ $ $ 20,611 154.00 20,765 Equity securities available for sale: Equity securities available for sale: Total Arbitrage trading account Arbitrage trading account Common stocks Preferred stocks Common stocks Preferred stocks Total (In thousands) Total Total Year Ended December 31, 2015 Assets: Liabilities Liabilities Fixed maturity securities available for sale Trading account securities sold but Trading account securities sold but not yet purchased not yet purchased Asset-backed securities Corporate Total $ $ $ 1,238 3,752 4,990 $ 1,780 49,634 $ 1,238 3,752 4,990 Beginning 1,780 Balance 49,634 - $ - $ $ (17) (17) $ (17) (17) $ Earnings 2,274 2,274 (Losses) $ 2,304 $ 2,304 $ $ (911) $ (911) $ $ - $ - $ 11,343 11,343 $ (929) Gains (Losses) Included in: - - - - $ 3,430 3,430 $ (3,452) Other (911) $ $ $ - $ (911) $ - 14,773 $ 14,773 (4,381) $ Comprehensive (14,073) 4942 - - 4942 - - Purchases Impairements Income (Losses) $ $ $ $ (33,698) $ - 19,953 - $ (4,622) $ (4,622) 19,953 $ $ $ - $ - - $ (929) - - - - - (3,452) $ $ $ - $ - $ - - (4,381) Paydowns/ 5,797 - 5,797 - (14,073) Sales Maturities $ $ $ 5,797 $ (33,698) (3,429) 5,797 (3,429) $ 10,741 3713.00 14,454 $ Transfers 720 In/Out $ 35,939 10,741 3713.00 14,454 720 Ending Balance 35,939 $ $ $ $ - $ 191 $ 19 $ 20,611 $ - $ 31 $ - - - $ $ (20) - $ (20) $ $ $ - $ - - - 154 $ - $ 191 $ 19 20,765 $ $ - $ (11) $ 31 - $ - $ (18,802) $ (1,820) $ - $ $ - $ - $ - - - $ (11) - $ - - - (18,802) (1,820) $ - $ $ $ $ 199 154 353 Equity securities available for sale: During the year ended December 31, 2015, five securities were transferred out of Level 3 as an observable price was During the year ended December 31, 2015, five securities were transferred out of Level 3 as an observable price was $ - $ - Common stocks available. During the year ended December 31, 2014, two securities were transferred into Level 3 as quoted prices were no available. During the year ended December 31, 2014, two securities were transferred into Level 3 as quoted prices were no - (89) Preferred stocks longer available. longer available. - (89) $ Total (464) (799) (19,266) (869) (273) - (273) - $ (82) $ - - - $ 72,640 72,640 $ - - - $ - (1,820) (308) - (308) (71,921) (72,229) (2,331) - (2,331) - (2,331) 10,741 3,713 14,454 720 35,939 Arbitrage trading account $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 7,829 3,624 11,453 176 11,982 $ $ Total Liabilities: Trading account securities sold but not yet purchased $ - $ - $ - $ - $ - $ - $ - $ - $ - Year ended December 31, 2014 Assets: Fixed maturity securities available for sale Asset-backed securities Corporate Total Equity securities available for sale: Common stocks Preferred stocks Total Arbitrage trading account Total Liabilities Trading account securities sold but not yet purchased $ $ 42,710 154 42,864 47 $ - $ 47 $ $ $ $ 1,238 3,752 4,990 1,780 49,634 $ - $ (17) (17) 7 7 2,274 $ 2,304 $ $ $ 77 7 7 $ (3,711) - (3,711) (911) - (911) - (4,622) - $ - $ - - $ - $ - - $ - $ $ 238 - 238 (15,244) - (15,244) $ $ (3,429) - (3,429) - $ - $ - $ $ 20,611 154.00 20,765 $ $ $ $ $ 11,343 3,430 14,773 4942 19,953 $ $ $ (929) (3,452) (4,381) (14,073) (33,698) $ - $ - $ - - (3,429) $ - $ - $ - 5,797 5,797 $ $ 10,741 3713.00 14,454 720 35,939 $ $ $ - $ (20) $ - $ - $ 31 $ (11) $ - $ - $ - 80793in_10k.indd 77 During the year ended December 31, 2015, five securities were transferred out of Level 3 as an observable price was available. During the year ended December 31, 2014, two securities were transferred into Level 3 as quoted prices were no 3/16/16 4:35 PM longer available. 7 7 (14) Reserves for Losses and Loss Expenses The table below provides a reconciliation of the beginning and ending reserve balances: (In thousands) 2015 2014 2013 Net reserves at beginning of year Net provision for losses and loss expenses: Claims occuring during the current year(1) Decrease in estimates for claims occurring in prior years(2)(3) Loss reserve discount accretion(4) Total Net payments for claims: Current year Prior year Total Foreign currency translation Net reserves at end of year Ceded reserve at end of year Gross reserves at end of year $ 8,970,641 $ 8,683,797 $ 8,411,851 3,653,561 3,495,825 3,221,393 (46,713) (75,764) (78,810) 49,422 70,506 54,441 3,656,270 3,490,567 3,197,024 914,637 898,944 822,787 2,342,378 2,216,283 2,055,284 3,257,015 (125,024) 9,244,872 1,424,278 3,115,227 (88,496) 8,970,641 1,399,060 2,878,071 (47,007) 8,683,797 1,397,144 $ 10,669,150 $ 10,369,701 $ 10,080,941 (1) Claims occurring during the current year are net of loss reserve discounts of $20,357,000, $21,306,000, and $22,680,000 in 2015, 2014 and 2013, respectively. (2) The decrease in estimates for claims occurring in prior years is net of loss reserve discount. On an undiscounted basis, the estimates for claims occurring in prior years decreased by $64,971,000, $116,866,000 and $77,430,000 in 2015, 2014 and 2013, respectively. (3) For certain retrospectively rated insurance polices and reinsurance agreements, reserve development is offset by additional or return premiums. Favorable reserve development, net of additional and return premiums, was $63 million, $85 million and $98 million in 2015, 2014 and 2013, respectively. (4) In 2014, the Company entered into a commutation agreement that resulted in a reduction in prior year workers' compensation reserves of $30 million on an undiscounted basis and $12 million on a discounted basis. Favorable prior year development (net of additional and return premiums) was $63 million in 2015. Insurance-Domestic - Reserves for the Insurance-Domestic segment developed favorably by $47 million in 2015. The favorable development was primarily related to workers' compensation and other liability business, and was partially offset by unfavorable development for commercial automobile liability business. For workers' compensation, the favorable development was related to both primary and excess business and to many accident years, including those prior to 2006. In 2015, reported workers' compensation losses were below our expectations for many of our operating units. In addition, overall loss frequency and severity trends emerged better than the assumptions underlying our previous reserve estimates. The long term trend of declining workers' compensation claim frequency continued in 2015. The improvement is attributable to better workplace safety and to benign medical severity trends as we continue to invest in medical case management services and higher usage of preferred provider networks. For other liability business, favorable development was concentrated in accident years 2007 through 2013. The favorable development was primarily related to our excess and surplus lines casualty business that has benefited from a persistent improvement in claim frequency trends over the past several years. For commercial automobile business, adverse development was primarily related to large losses for long-haul trucking business and to accident years 2011 through 2014. The higher loss cost trends for the commercial automobile industry are attributable, in part, to the increase in miles driven as the economy has improved and fuel prices have declined over the past several years. 78 7 8 80793in_10k.indd 78 3/14/16 5:48 PM Reinsurance-Global - Reserves for the Reinsurance-Global segment developed favorably by $11 million in 2015. The favorable development was primarily related to direct facultative reinsurance business and to accident years 2005 through 2013. Loss reserves developed favorably for umbrella business and for other liability coverage for contractors. Insurance-International - Reserves for the Insurance-International segment developed favorably by $5 million in 2015. The favorable development was related primarily to commercial property. The favorable commercial property development was attributable to accident years 2012 through 2014 and was driven by favorable frequency and severity trends on property business written in Lloyd's. The favorable property development was partially offset by unfavorable development for professional indemnity business in the U.K., primarily for accident years 2006 through 2013. Favorable prior year development (net of additional and return premiums) was $85 million in 2014. For the Insurance-Domestic segment, favorable development in 2014 of $92 million was driven primarily by other liability business for accident years 2006 through 2010, primarily related to our excess and surplus lines casualty business. Reported losses during these years continued to be below our initial expectations at the time the business was written, largely as a result of persistent improvement in claim frequency trends (i.e., number of reported claims per unit of exposure). As these accident years have matured, the weighting of actuarial methods has shifted from methods based on initial expected losses to methods based on actual reported losses. We believe the favorable claim frequency trends we have seen during this time period are due to changes in the mix of business written and to the general slowdown in the economy. Commercial automobile reported unfavorable development primarily as a result of large losses for long-haul trucking business in 2012 and 2013. For the Reinsurance-Global segment, favorable reserve development in 2014 of $16 million was driven primarily by assumed professional liability excess of loss and umbrella treaty business, as well as direct facultative business. This was partially offset by adverse development on brokerage facultative business caused by completed operations losses associated with construction projects in accident years prior to 2009. For the Insurance-International segment, adverse reserve development in 2014 of $23 million was driven primarily by unexpected large losses from accident years 2009-2012 in the professional indemnity line of business in the United Kingdom. Favorable prior year reserve development (net of additional and return premiums) was $98 million in 2013. Favorable development in 2013 was primarily attributable to accident years 2006 through 2012 and included favorable development of $39 million for other liability business, $32 million for reinsurance assumed liability business, $22 million for workers’ compensation, $18 million for commercial property and $24 million for other lines of business. The favorable development in 2013 was largely driven by loss cost trends, which were more favorable than originally anticipated. In particular, loss frequency trends have been more favorable than expected for excess & surplus lines casualty business, workers' compensation and excess of loss professional and other liability business. The 2013 favorable development was partially offset by unfavorable development of $23 million for commercial automobile business and $14 million for products liability business. Commercial automobile development was driven by large losses for long-haul trucking business in 2011 and 2012. Product liability development stemmed from completed operations losses associated with construction projects in accident years prior to 2009. Environmental and Asbestos — To date, known environmental and asbestos claims have not had a material impact on the Company’s operations, because its subsidiaries generally did not insure large industrial companies that are subject to significant environmental or asbestos exposures prior to 1986 when an absolute exclusion was incorporated into standard policy language. The Company’s net reserves for losses and loss expenses relating to asbestos and environmental claims was $33 million at December 31, 2015 and $36 million at December 31, 2014. The Company’s gross reserves for losses and loss expenses relating to asbestos and environmental claims were $51 million and $56 million at December 31, 2015 and 2014, respectively. Net incurred losses and loss expenses for reported asbestos and environmental claims decreased approximately $2 million in 2015 and increased by approximately $4 million and $5 million in 2014 and 2013, respectively. Net paid losses and loss expenses for asbestos and environmental claims were approximately $2 million in 2015, $3 million in 2014 and $3 million in 2013. The estimation of these liabilities is subject to significantly greater than normal variation and uncertainty because it is difficult to make an actuarial estimate of these liabilities due to the absence of a generally accepted actuarial methodology for these exposures and the potential effect of significant unresolved legal matters, including coverage issues, as well as the cost of litigating the legal issues. Additionally, the determination of ultimate damages and the final allocation of such damages to financially responsible parties are highly uncertain. Discounting — The Company discounts its liabilities for certain workers’ compensation reserves. The amount of workers’ compensation reserves that were discounted was $2,308 million and $2,187 million at December 31, 2015 and 79 7 9 80793in_10k.indd 79 3/14/16 5:48 PM December 31, 2014, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $699 million and $746 million at December 31, 2015 and December 31, 2014, respectively. At December 31, 2015, discount rates by year ranged from 2.0% to 6.5%, with a weighted average discount rate of 3.9%. Substantially all of discounted workers’ compensation reserves (98% of total discounted reserves at December 31, 2015) are excess workers’ compensation reserves. In order to properly match loss expenses with income earned on investment securities supporting the liabilities, reserves for excess workers’ compensation business are discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. These rates are determined annually based on the weighted average rate for the period. Once established, no adjustments are made to the discount rate for that period, and any increases or decreases in loss reserves in subsequent years are discounted at the same rate, without regard to when any such adjustments are recognized. The expected loss and loss expense payout patterns subject to discounting are derived from the Company’s loss payout experience. The Company also discounts reserves for certain other long-duration workers’ compensation reserves (representing approximately 2% of total discounted reserves at December 31, 2015), including reserves for quota share reinsurance and reserves related to losses regarding occupational lung disease. These reserves are discounted at statutory rates permitted by the Department of Insurance of the State of Delaware. (15) Reinsurance The Company reinsures a portion of its insurance exposures in order to reduce its net liability on individual risks and catastrophe losses. Reinsurance coverage and retentions vary depending on the line of business, location of the risk and nature of loss. The Company’s reinsurance purchases include the following: property reinsurance treaties that reduce exposure to large individual property losses and catastrophe events; casualty reinsurance treaties that reduce its exposure to large individual casualty losses, workers’ compensation catastrophe losses and casualty losses involving multiple claimants or insureds; and facultative reinsurance that reduces exposure on individual policies or risks for losses that exceed treaty reinsurance capacity. Depending on the operating unit, the Company purchases specific additional reinsurance to supplement the above programs. The following is a summary of reinsurance financial information: (In thousands) Written premiums: Direct Assumed Ceded Total net written premiums Earned premiums: Direct Assumed Ceded Total net earned premiums Ceded losses and loss expenses incurred Ceded commission earned 2015 2014 2013 $ 6,412,533 $ 6,185,242 $ 5,626,172 837,460 (1,060,478) 877,596 (1,065,891) 884,919 (1,010,918) $ 6,189,515 $ 5,996,947 $ 5,500,173 $ 6,245,714 $ 5,889,021 $ 5,328,955 845,735 (1,050,840) 886,063 (1,030,666) 857,119 (959,537) $ 6,040,609 $ 5,744,418 $ 5,226,537 $ 501,999 $ 475,802 $ 556,108 $ 129,766 $ 160,215 $ 137,449 The Company reinsures a portion of its exposures principally to reduce its net liability on individual risks and to protect against catastrophic losses. Estimated amounts due from reinsurers are reported net of reserves for uncollectible reinsurance of $1,020,000, $1,144,000 and $1,385,000 as of December 31, 2015, 2014 and 2013, respectively. 80 8 0 80793in_10k.indd 80 3/14/16 5:48 PM The following table presents the amounts due from reinsurers as of December 31, 2015: (In thousands) Allegany Group Munich Re Swiss Re Lloyd’s of London Axis Capital Partner Re Hannover Re Group Everest Re Berkshire Hathaway Chubb Limited (1) Arch Capital Group Other reinsurers less than $20,000 Subtotal Residual market pools Total $ $ 138,163 121,661 115,215 92,635 69,840 65,793 48,675 47,945 47,309 45,645 23,273 213,169 1,029,323 503,506 1,532,829 (1) Includes the aggregate recoverables from Ace Group and Chubb Group. (16) Indebtedness Indebtedness consisted of the following as of December 31, 2015 (the difference between the face value and the carrying value is unamortized discount): (In thousands) Senior notes due on: May 15, 2015 August 15, 2019 September 15, 2019 September 15, 2020 January 1, 2022 March 15, 2022 February 15, 2037 August 1, 2044 Subsidiary debt (1) Interest Rate Face Value 2015 Carrying Value 2014 Carrying Value 5.6% $ — $ — $ 199,930 6.15% 7.375% 5.375% 8.7% 4.625% 6.25% 4.75% Various 150,000 300,000 300,000 76,503 350,000 250,000 350,000 81,752 149,484 299,054 298,411 76,097 347,417 247,676 344,730 81,752 149,342 298,800 298,074 76,048 346,999 247,566 344,545 154,223 Total senior notes and other debt Subordinated debentures, due on April, 30, 2053 $ $ 1,858,255 $ 1,844,621 $ 2,115,527 350,000 $ 340,320 $ 340,060 (1) Subsidiary debt is due as follows: $43 million in 2016, $37 million in 2017 and $2 million thereafter. 81 81 80793in_10k.indd 81 3/14/16 5:48 PM (17) Income Taxes Income tax expense consists of: (In thousands) December 31, 2015 Domestic Foreign Total expense December 31, 2014 Domestic Foreign Total expense December 31, 2013 Domestic Foreign Total expense Current Expense Deferred Expense Total $ 179,150 $ 31,145 $ 210,295 (2,318) 19,946 17,628 $ 176,832 $ 51,091 $ 227,923 $ 258,337 $ 28,029 $ 286,366 12,969 3,258 16,227 $ 271,306 $ 31,287 $ 302,593 $ 116,802 $ 47,370 $ 164,172 22,362 7,053 29,415 $ 139,164 $ 54,423 $ 193,587 Income before income taxes from domestic operations was $689 million, $910 million and $598 million for the years ended December 31, 2015, 2014 and 2013, respectively. Income before income taxes from foreign operations was $43 million, $42 million and $101 million for the years ended December 31, 2015, 2014 and 2013, respectively. A reconciliation of the income tax expense and the amounts computed by applying the Federal and foreign income tax rate of 35% to pre-tax income are as follows: (In thousands) Computed “expected” tax expense Tax-exempt investment income Change in valuation allowance Impact of foreign tax rates State and local taxes Other, net Total expense 2015 2014 2013 $ 256,210 $ (39,283) 333,269 $ (38,757) 244,611 (40,679) — (4,851) 2,906 (8,400) 2,702 4,447 940 2,907 1,335 6,239 2,375 (1,868) $ 227,923 $ 302,593 $ 193,587 82 8 2 80793in_10k.indd 82 3/14/16 5:48 PM At December 31, 2015 and 2014, the tax effects of differences that give rise to significant portions of the deferred tax asset and deferred tax liability are as follows: (In thousands) Deferred tax asset: Loss reserve discounting Unearned premiums Other-than-temporary impairments Restricted stock units Other Gross deferred tax asset Less valuation allowance Deferred tax asset Deferred tax liability: Amortization of intangibles Deferred policy acquisition costs Unrealized investment gains Other Deferred tax liability Net deferred tax asset (liability) 2015 2014 $ 100,806 $ 77,216 176,465 26,509 62,442 89,761 455,983 (4,037) 451,946 20,316 162,344 115,499 160,598 165,075 45,367 60,061 101,131 448,850 (1,335) 447,515 22,747 152,001 175,111 135,108 458,757 $ (6,811) $ 484,967 (37,452) The Company had current tax receivables of $55,763,000 and $67,623,000 at December 31, 2015 and 2014, respectively. At December 31, 2015, the Company had foreign net operating loss carryforwards $6.1 million that expire beginning in 2031, and an additional $43.2 million that have no expiration date. At December 31, 2015, the Company had a valuation allowance of $4.0 million, as compared to $1.3 million at December 31, 2014. The Company has provided a valuation allowance against future tax benefits of certain foreign operations. The statute of limitations has closed for the Company’s tax returns through December 31, 2011. The realization of the deferred tax asset is dependent upon the Company’s ability to generate sufficient taxable income in future periods. Based on historical results and the prospects for future current operations, management anticipates that it is more likely than not that future taxable income will be sufficient for the realization of this asset. (18) Dividends from Subsidiaries and Statutory Financial Information The Company’s insurance subsidiaries are restricted by law as to the amount of dividends they may pay without the approval of regulatory authorities. The Company’s lead insurer, Berkley Insurance Company (BIC), directly or indirectly owns all of the Company’s other insurance companies. During 2016, the maximum amount of dividends that can be paid by BIC without such approval is approximately $684 million. BIC’s combined net income and statutory capital and surplus, as determined in accordance with statutory accounting practices (SAP), are as follows: (In thousands) Net income Statutory capital and surplus 2015 $ 813,303 $ 468,850 $ 5,296,435 $ 5,438,063 $ 4,908,010 2014 757,010 $ 2013 The significant variances between SAP and GAAP are that for statutory purposes bonds are carried at amortized cost, acquisition costs are charged to income as incurred, deferred Federal income taxes are subject to limitations, excess and assumed workers’ compensation reserves are discounted at different discount rates and certain assets designated as “non- admitted assets” are charged against surplus. The Commissioner of Insurance of the State of Delaware has allowed BIC to discount non-tabular workers' compensation loss reserves, which is a permitted practice that differs from SAP. The effect of using this permitted practice was to increase BIC’s statutory capital and surplus by $294 million at December 31, 2015. 83 8 3 80793in_10k.indd 83 3/14/16 5:48 PM The National Association of Insurance Commissioners (“NAIC”) has risk-based capital (“RBC”) requirements that require insurance companies to calculate and report information under a risk-based formula which measures statutory capital and surplus needs based on a regulatory definition of risk in a company’s mix of products and its balance sheet. This guidance is used to calculate two capital measurements: Total Adjusted Capital and RBC Authorized Control Level. Total Adjusted Capital is equal to the Company’s statutory capital and surplus excluding capital and surplus derived from the use of permitted practices that differ from statutory accounting practices. RBC Authorized Control Level is the capital level used by regulatory authorities to determine whether remedial action is required. Generally, no remedial action is required if Total Adjusted Capital is 200% or more of the RBC Authorized Control Level. At December 31, 2015, BIC’s Total Adjusted Capital of $5.002 billion was 456% of its RBC Authorized Control Level. See Note 4, Investments in Fixed Maturity Securities, for a description of assets held on deposit as security. (19) Common Stockholders’ Equity The weighted average number of shares used in the computation of net income per share was as follows: Basic Diluted 2015 124,040,313 130,188,866 2014 127,873,708 133,651,855 2013 135,304,752 140,742,922 Treasury shares have been excluded from average outstanding shares from the date of acquisition. The difference in calculating basic and diluted net income per share is attributable entirely to the dilutive effect of stock-based compensation plans. Changes in shares of common stock outstanding, net of treasury shares, are presented below. Shares of common stock issued and outstanding do not include shares related to unissued restricted stock units and unexercised stock options. Balance, beginning of year Shares issued Shares repurchased Balance, end of year 2015 2014 2013 126,748,836 1,061,026 132,233,167 332,137 136,017,732 139,790 (4,502,025) (5,816,468) (3,924,355) 123,307,837 126,748,836 132,233,167 The amount of dividends paid is dependent upon factors such as the receipt of dividends from our subsidiaries, our results of operations, cash flow, financial condition and business needs, the capital and surplus requirements of our subsidiaries, and applicable insurance regulations that limit the amount of dividends that may be paid by our regulated insurance subsidiaries. 84 8 4 80793in_10k.indd 84 3/14/16 5:48 PM (20) Fair Value of Financial Instruments The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments as of December 31, 2015 and 2014: (In thousands) Assets: Fixed maturity securities Equity securities available for sale Arbitrage trading account Loans receivable Cash and cash equivalents Trading accounts receivable from brokers and clearing organizations Due from broker Liabilities: Due to broker Trading account securities sold but not yet purchased Subordinated debentures Senior notes and other debt 2015 2014 Carrying Value Fair Value Carrying Value Fair Value $ 12,444,394 $ 12,462,847 $ 12,705,160 $ 12,725,806 170,991 450,648 325,219 674,441 170,991 450,648 322,012 674,441 150,866 376,697 273,103 763,631 150,866 376,697 275,747 763,631 383,115 1,713 383,115 1,713 371,034 — 371,034 — — 37,035 340,320 1,844,621 — 37,035 355,880 2,029,572 23,133 106,079 340,060 2,115,527 23,133 106,079 332,640 2,344,292 The estimated fair values of the Company’s fixed maturity securities, equity securities available for sale and arbitrage trading account securities are based on various valuation techniques that rely on fair value measurements as described in Note 13 above. The fair value of loans receivable 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. (21) Lease Obligations The Company and its subsidiaries use office space and equipment under leases expiring at various dates. These leases are considered operating leases for financial reporting purposes. Some of these leases have options to extend the length of the leases and contain clauses for cost of living, operating expense and real estate tax adjustments. Future minimum lease payments, without provision for sublease income, are: $42,470,000 in 2016; $39,443,000 in 2017; $35,286,000 in 2018; $30,941,000 in 2019; $28,584,000 in 2020 and $105,825,000 thereafter. Rental expense was $46,271,000, $45,198,000 and $44,752,000 for 2015, 2014 and 2013, respectively. (22) Commitments, Litigation and Contingent Liabilities In the ordinary course of business, the Company is subject to disputes, litigation and arbitration arising from its insurance and reinsurance businesses. These matters are generally related to insurance and reinsurance claims and are considered in the establishment of loss and loss expense reserves. In addition, the Company may also become involved in legal actions which seek extra-contractual damages, punitive damages or penalties, including claims alleging bad faith in handling of insurance claims. The Company expects its ultimate liability with respect to such matters will not be material to its financial condition. However, adverse outcomes on such matters are possible, from time to time, and could be material to the Company’s results of operations in any particular financial reporting period. At December 31, 2015, the Company had commitments to invest up to $117 million and $485 million in certain investment funds and real estate construction projects, respectively. 85 8 5 80793in_10k.indd 85 3/14/16 5:48 PM (23) Stock Incentive Plan The Company has not issued any stock options under its stock incentive plans since 2004, and there were no outstanding options at December 31, 2015 and December 31, 2014. Pursuant to the stock incentive plan, the Company may issue restricted stock units (RSUs) to employees of the Company and its subsidiaries. The RSUs generally vest three to five years from the award date and are subject to other vesting and forfeiture provisions contained in the award agreement. The following table summarizes RSU information for the three years ended December 31, 2015: RSUs granted and unvested at beginning of period: Granted Vested Canceled RSUs granted and unvested at end of period: 2015 2014 2013 5,330,445 4,491,520 4,701,120 997,522 1,154,950 108,400 (1,938,000) (231,642) (81,500) (234,525) (146,250) (171,750) 4,158,325 5,330,445 4,491,520 Upon vesting, shares of the Company’s common stock equal to the number of vested RSUs are issued or deferred to a later date, depending on the terms of the specific award agreement. As of December 31, 2015, 4,275,474 RSUs had been deferred. RSUs that have not yet vested and vested RSUs that have been deferred are not considered to be issued and outstanding shares. The fair value of RSUs at the date of grant are recorded as unearned compensation, a component of stockholders’ equity, and expensed over the vesting period. Following is a summary of changes in unearned compensation for the three years ended December 31, 2015: (In thousands) Unearned compensation at beginning of year RSUs granted, net of cancellations RSUs expensed RSUs forfeitures Unearned compensation at end of year (24) Compensation Plans 2015 2014 2013 $ 88,015 $ 50,442 (30,691) (4,228) 73,205 $ 51,575 93,653 4,406 (27,966) (8,799) (22,881) (1,973) $ 103,538 $ 88,015 $ 73,205 The Company and its subsidiaries have profit sharing plans in which substantially all employees participate. The plans provide for minimum annual contributions of 5% of eligible compensation; contributions above the minimum are discretionary and vary with each participating subsidiary’s profitability. Employees will become eligible to participate in the plan on the first day of the calendar quarter following the first full calendar quarter after the employee's date of hire provided the employee has completed 250 hours of service during the calendar quarter. The plans provide that 40% of the contributions vest immediately and that the remaining 60% vest at varying percentages based upon years of service. Profit sharing expense was $42 million, $38 million, and $34 million in 2015, 2014 and 2013, respectively. The Company has a long-term incentive compensation plan ("LTIP") that provides for incentive compensation to key executives based on the growth in the company's book value per share over a five year period. The following table summarizes the outstanding LTIP awards as of December 31, 2015: 2011 grant 2013 grant 2014 grant 2015 grant Units Outstanding Maximum Value Inception to date earned through December 31, 2015 on outstanding units 172,850 $ 43,212,500 204,500 51,125,000 216,750 213,250 86 8 6 21,675,000 21,325,000 $ 34,331,000 23,804,000 6,559,000 3,205,000 80793in_10k.indd 86 3/14/16 5:48 PM The following table summarizes the LTIP expense for each of the three years ended December 31, 2015: (In thousands) 2011 grant 2013 grant 2014 grant 2015 grant Total (25) Retirement Benefits 2015 2014 2013 $ 7,397 $ 7,336 2,935 3,205 $ 20,873 $ 9,855 $ 9,493 3,663 6,939 7,231 — — — 14,170 23,011 $ The Company and its executive chairman of the board entered into an unfunded supplemental benefit agreement (SBA) in 2004. On March 28, 2013, the Company agreed to terminate and distribute the retirement benefit of the SBA. As a result, the Company distributed retirement benefits of $0.3 million and $4.6 million in 2013 and 2014, respectively. The final retirement benefit of $59.4 million, which was fully accrued at December 31, 2014, was distributed in 2015. Net retirement benefit expense was $13,357,000, $9,994,000 and none in 2013, 2014, and 2015 respectively. (26) Supplemental Financial Statement Data Other operating costs and expenses consist of the following: (In thousands) Amortization of deferred policy acquisition costs Other underwriting expenses Service company expenses Net foreign currency losses (gains) Other costs and expenses Total (27) Industry Segments 2015 $ 1,102,492 903,006 127,365 400 2014 $ 1,053,397 $ 843,133 102,726 (27) 2013 991,070 780,058 88,662 (10,120) 156,487 $ 2,289,750 158,227 151,014 $ 2,157,456 $ 2,000,684 The Company’s reportable segments include the following three business segments, plus a corporate segment: • Insurance-Domestic - commercial insurance business, including excess and surplus lines and admitted lines, primarily throughout the United States; • Insurance-International - insurance business primarily in the United Kingdom, Continental Europe, South America, Canada, Scandinavia, Asia, and Australia; • Reinsurance-Global - reinsurance business on a facultative and treaty basis, primarily in the United States, United Kingdom, Continental Europe, Australia, the Asia-Pacific Region, and South Africa. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Income tax expense and benefits are calculated based upon the Company’s overall effective tax rate. Summary financial information about the Company’s reporting segments is presented in the following table. Income (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. 87 8 7 80793in_10k.indd 87 3/14/16 5:48 PM (In thousands) December 31, 2015: Insurance-Domestic Insurance-International Reinsurance-Global Corporate, other and eliminations(1) Net investment gains Consolidated December 31, 2014: Insurance-Domestic Insurance-International Reinsurance-Global Corporate, other and eliminations(1) Net investment gains Consolidated December 31, 2013: Insurance-Domestic Insurance-International Reinsurance-Global Corporate, other and eliminations (1) Net investment gains Consolidated (In thousands) Insurance-Domestic Insurance-International Reinsurance-Global Corporate, other and eliminations(1) Consolidated Revenues Earned Premiums Investment Income Other Total Pre-Tax Income (Loss) Net Income (Loss) $ 4,659,359 $ 358,935 $ 96,487 $ 5,114,781 $ 724,667 $ 495,082 772,141 609,109 — — 51,522 74,226 27,962 — — — 464,392 92,324 823,663 683,335 492,354 92,324 51,926 94,852 37,204 66,627 (231,739) (155,230) 92,324 60,011 $ 6,040,609 $ 512,645 $ 653,203 $ 7,206,457 $ 732,030 $ 503,694 $ 4,271,933 $ 428,632 $ 106,853 $ 4,807,418 $ 796,309 $ 539,461 802,375 670,110 — — 55,407 88,821 28,025 — — — 421,920 254,852 857,782 758,931 449,945 254,852 29,779 115,677 22,182 79,720 (244,421) (158,133) 254,852 165,654 $ 5,744,418 $ 600,885 $ 783,625 $ 7,128,928 $ 952,196 $ 648,884 $ 3,782,416 $ 404,280 $ 107,517 $ 4,294,213 $ 648,740 $ 449,981 723,151 720,970 — — 47,039 89,090 3,882 — — — 408,645 121,544 770,190 810,060 412,527 121,544 56,922 110,425 (238,743) 121,544 40,292 78,013 (142,479) 74,118 $ 5,226,537 $ 544,291 $ 637,706 $ 6,408,534 $ 698,888 $ 499,925 Identifiable Assets December 31, 2015 December 31, 2014 $ 16,351,737 $ 1,711,993 2,441,340 1,225,897 16,065,409 1,879,438 2,713,554 1,058,290 $ 21,730,967 $ 21,716,691 (1) Corporate, other and eliminations represent corporate revenues and expenses and other items that are not allocated to business segments. 88 8 8 80793in_10k.indd 88 3/14/16 5:48 PM Net premiums earned by major line of business are as follows: (In thousands) Insurance-Domestic Other liability Workers' compensation Short-tail lines Commercial automobile Professional liability Total Insurance-Domestic Insurance-International Other liability Workers' compensation Short-tail lines Commercial automobile Professional liability Total Insurance-International Reinsurance-Global Casualty Property Total Reinsurance-Global Total 2015 2014 2013 $ 1,546,157 $ 1,449,425 $ 1,259,376 1,269,785 925,468 1,126,704 875,898 548,450 369,499 526,344 293,562 995,047 774,809 486,759 266,425 4,659,359 4,271,933 3,782,416 103,974 93,728 373,415 125,628 75,396 772,141 92,411 71,997 415,123 116,369 106,475 802,375 65,528 84,637 336,814 130,020 106,152 723,151 421,811 187,298 609,109 487,264 182,846 670,110 507,790 213,180 720,970 $ 6,040,609 $ 5,744,418 $ 5,226,537 (28) Quarterly Financial Information (Unaudited) The following is a summary of quarterly financial data: (In thousands. except per share data) Three months ended Revenues Net income Net income per share(1) Basic Diluted Three months ended Revenues Net income Net income per share(1) Basic Diluted 2015 March 31 June 30 September 30 December 31 $ 1,744,679 $ 118,307 1,789,765 $ 123,035 1,860,957 $ 152,607 1,811,056 109,745 0.94 0.89 0.99 0.95 2014 1.24 1.18 0.89 0.85 March 31 June 30 September 30 December 31 $ 1,706,906 $ 169,673 1,796,989 $ 179,961 1,840,605 $ 188,539 1,784,428 110,711 1.31 1.25 1.41 1.35 1.48 1.42 0.87 0.83 (1) Net income per share (“EPS”) in each quarter is computed using the weighted-average number of shares outstanding during that quarter, while EPS for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters EPS does not necessarily equal the full-year EPS. 89 8 9 80793in_10k.indd 89 3/14/16 5:48 PM ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No ne. ITEM 9A. CONTROLS AND PROCEDURES The Company's management, including its Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this annual report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company has in place effective controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act and the rules thereunder, is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. During the quarter ended December 31, 2015, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 90 9 0 80793in_10k.indd 90 3/14/16 5:48 PM Management's Report On Internal Control Over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2015. 91 9 1 80793in_10k.indd 91 3/14/16 5:48 PM Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders W. R. Berkley Corporation: We have audited W. R. Berkley Corporation's internal control over financial reporting as of December 31, 2015 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). W. R. Berkley Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, W. R. Berkley Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of W. R. Berkley Corporation as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2015, and our report dated February 22, 2016 expressed an unqualified opinion on those consolidated financial statements. New York, New York February 22, 2016 /S/ KPMG LLP 92 92 80793in_10k.indd 92 3/14/16 5:48 PM ITEM 9B. OTHER INFORMATION None. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE PART III Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2015, and which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2015, and which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS (a) Security ownership of certain beneficial owners Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2015, and which is incorporated herein by reference. (b) Security ownership of management Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2015, and which is incorporated herein by reference. (c) Changes in control Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2015, and which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2015, and which is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Reference is made to the registrant's definitive proxy statement, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2015, and which is incorporated herein by reference. ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Index to Financial Statements PART IV The schedules to the consolidated financial statements listed below should be read in conjunction with the consolidated financial statements included in this Annual Report on Form 10-K. Financial statement schedules not included in this Annual Report on Form 10-K have been omitted because they are not applicable or required information is shown in the financial statements or notes thereto. 93 9 3 80793in_10k.indd 93 3/14/16 5:48 PM Index to Financial Statement Schedules Independent Registered Public Accountants’ Report on Schedules Schedule II — Condensed Financial Information of Registrant Schedule III — Supplementary Insurance Information Schedule IV — Reinsurance Schedule V — Valuation and Qualifying Accounts Schedule VI — Supplementary Information Concerning Property — Casualty Insurance Operations ( b ) Exhib its The exhibits filed as part of this report are listed on pages 96 - 99 hereof. Page 100 101 105 106 107 108 94 9 4 80793in_10k.indd 94 3/14/16 5:48 PM Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES W. R. BERKLEY CORPORATION By /s/ W. Robert Berkley, Jr. W. Robert Berkley, Jr., President and Chief Executive Officer February 22, 2016 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ William R. Berkley William R. Berkley Executive Chairman of the Board of Directors February 22, 2016 /s/ W. Robert Berkley, Jr. W. Robert Berkley, Jr. President, Chief Executive Officer and Director (Principal executive officer) /s/ Christopher L. Augostini Christopher L. Augostini /s/ Ronald E. Blaylock Ronald E. Blaylock /s/ Mark E. Brockbank Mark E. Brockbank /s/ George G. Daly George G. Daly /s/ Mary C. Farrell Mary C. Farrell /s/ Jack H. Nusbaum Jack H. Nusbaum /s/ Mark L. Shapiro Mark L. Shapiro /s/ Eugene G. Ballard Eugene G. Ballard Director Director Director Director Director Director Director Executive Vice President and Chief Financial Officer (Principal financial officer and principal accounting officer) 95 9 5 February 22, 2016 February 22, 2016 February 22, 2016 February 22, 2016 February 22, 2016 February 22, 2016 February 22, 2016 February 22, 2016 February 22, 2016 80793in_10k.indd 95 3/14/16 5:48 PM ITEM 15. (b) EXHIBITS N u mb e r (3.1) (3.2) (3.3) The Company’s Restated Certificate of Incorporation, as amended through May 10, 2004 (incorporated by reference to Exhibits 3.1 and 3.2 of the Company’s Quarterly Report on Form 10-Q (File No. 1-15202) filed with the Commission on August 6, 2003). Amendment, dated May 11, 2004, to the Company’s Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.2 of the Company’s Quarterly report on Form 10-Q (File No. 1-15202) filed with the Commission on August 5, 2004). Amendment, dated May 16, 2006, to the Company’s Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K (File No. 1-15202) filed with the Commission on May 17, 2006). (3.4) Amended and Restated By-Laws (incorporated by reference to Exhibit 3 (ii) of the Company’s Current Report on Form 8-K (File No. 1-15202) filed with the Commission on August 5, 2015). (4.1) (4.2) (4.3) (4.4) (4.5) (4.6) (4.7) Indenture, dated as of February 14, 2003, between the Company and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.1 of the Company’s Annual Report on Form 10-K (File No. 1-15202) filed with the Commission of March 31, 2003). Third Supplemental Indenture, dated as of August 24, 2004, between the Company and The Bank of New York, as Trustee, relating to $150,000,000 principal amount of the Company’s 6.150% Senior Notes due 2019, including form of the Notes as Exhibit A (incorporated by reference to Exhibit 4.4 of the Company’s Annual Report on Form 10-K (File No. 1-15202) filed with the Commission on March 14, 2005). Fifth Supplemental Indenture, dated as of February 9, 2007, between the Company and The Bank of New York, as Trustee, relating to $250,000,000 principal amount of the Company’s 6.25% Senior Notes due 2037, including form of the Notes as Exhibit A (incorporated by reference to Exhibit 4.7 of the Company’s Annual Report on Form 10-K (File No. 1-15202) filed with the Commission on March 1, 2007). Sixth Supplemental Indenture, dated as of September 14, 2009, between the Company and The Bank of New York Mellon, as Trustee, relating to $300,000,000 principal amount of the Company’s 7.375% Senior Notes due 2019, including form of the Notes as Exhibit A (incorporated by reference to Exhibit 4.7 of the Company’s Annual Report on Form 10-K (File No. 1-15202) filed with the Commission on February 26, 2010). Seventh Supplemental Indenture, dated as of September 16, 2010, between the Company and The Bank of New York Mellon, as Trustee, relating to $300,000,000 principal amount of the Company’s 5.375% Senior Notes due 2020, including form of the Notes as Exhibit A (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K (File No. 1-15202) filed with the Commission on September 16, 2010). Eighth Supplemental Indenture, dated as of March 16, 2012, between the Company and The Bank of New York Mellon, as Trustee, relating to $350,000,000 principal amount of the Company’s 4.625% Senior Notes due 2022, including form of the Notes as Exhibit A (incorporated by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K (File No. 1-15202) filed with the Commission on March 16, 2012). Ninth Supplemental Indenture, dated as of August 6, 2014, between the Company and The Bank of New York Mellon, as Trustee, relating to $350,000,000 principal amount of the Company’s 4.75% Senior Notes due 2044, including form of the Notes as Exhibit A (incorporated by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K (File No. 1-15202) filed with the Commission on August 6, 2014). (4.8) Subordinated Indenture, dated as of May 2, 2013, between the Company and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.1 of the Company's Current Report on Form 8-K (File No. 1-15202) filed with the Commission on May 2, 2013). 96 9 6 80793in_10k.indd 96 3/14/16 5:48 PM (4.90) First Supplemental Indenture, dated as of May 2, 2013, between the Company and The Bank of New York Mellon, as Trustee, relating to $350,000,000 principal amount of the Company's 5.625% Subordinated Debentures due 2053, including the form of the Securities as Exhibit A (incorporated by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K (File No. 1-15202) filed with the Commission on May 2, 2013). (4.10) The instruments defining the rights of holders of the other long term debt securities of the Company are omitted pursuant to Section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Company agrees to furnish supplementally copies of these instruments to the Commission upon request. (10.1) W. R. Berkley Corporation 2003 Stock Incentive Plan (incorporated by reference to Annex A of the Company’s 2003 Proxy Statement (File No. 1-15202) filed with the Commission on April 14, 2003). (10.2) W. R. Berkley Corporation 2012 Stock Incentive Plan (incorporated by reference to Annex A of the Company’s 2015 Proxy Statement (File No. 1-15202) filed with the Commission on April 20, 2015). (10.3) Form of 2014 Performance-Based Restricted Stock Unit Agreement under the W. R. Berkley Corporation 2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q (File No. 1-15202) filed with the Commission on November 7, 2014). (10.4) Form of 2015 Performance-Based Restricted Stock Unit Agreement under the W. R. Berkley Corporation 2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q (File No. 1-15202) filed with the Commission on November 9, 2015). (10.5) Form of Restricted Stock Unit Agreement under the W. R. Berkley Corporation 2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q (File No. 1-15202) filed with the Commission on November 8, 2012). (10.6) Form of Restricted Stock Unit Agreement under the W. R. Berkley Corporation 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q (File No. 1-15202) filed with the Commission on May 3, 2005). (10.7) Form of Restricted Stock Unit Agreement under the W. R. Berkley Corporation 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q (File No. 1-15202) filed with the Commission on August 6, 2010). (10.8) Form of Restricted Stock Unit Agreement for grant of April 4, 2003 (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q (File No. 1-15202) filed with the Commission on August 6, 2003). (10.9) W. R. Berkley Corporation Deferred Compensation Plan for Officers as amended and restated effective December 3, 2007 (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K (File No. 1-15202) filed with the Commission on December 19, 2007). (10.10) W. R. Berkley Corporation Deferred Compensation Plan for Directors as amended and restated effective December 3, 2007 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K (File No. 1-15202) filed with the Commission on December 19, 2007). (10.11) W. R. Berkley Corporation 2007 Annual Incentive Compensation Plan (incorporated by reference to Annex A of the Company’s 2006 Proxy Statement (File No. 1-15202) filed with the Commission on April 18, 2006). (10.12) W. R. Berkley Corporation 2009 Long-Term Incentive Plan (incorporated by reference to Annex A of the Company’s 2009 Proxy Statement (File No. 1-15202) filed with the Commission on April 17, 2009). (10.13) Form of 2011 Performance Unit Award Agreement under the W. R. Berkley Corporation 2009 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.12 of the Company's Annual Report on Form 10-K (File No. 1-15202) filed with the Commission on February 28, 2012). 97 9 7 80793in_10k.indd 97 3/14/16 5:48 PM (10.14) W. R. Berkley Corporation 2014 Long-Term Incentive Plan (incorporated by reference to Annex A of the Company’s 2014 Proxy Statement (File No. 1-15202) filed with the Commission on April 7, 2014). (10.15) Form of 2014 Performance Unit Award Agreement under the W. R. Berkley Corporation 2014 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q (File No. 1- 15202) filed with the Commission on May 12, 2014). (10.16) Form of 2015 Performance Unit Award Agreement under the W. R. Berkley Corporation 2014 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q (File No. 1- 15202) filed with the Commission on May 4, 2015). (10.17) W. R. Berkley Corporation 2009 Directors Stock Plan (incorporated by reference to Annex B of the Company’s 2015 Proxy Statement (File No. 1-15202) filed with the Commission on April 20, 2015). (10.18) Supplemental Benefits Agreement between William R. Berkley and the Company as amended and restated as of December 21, 2011 (incorporated by reference to Exhibit 10.14 of the Company's Annual Report on Form 10-K (File No. 1-15202) filed with the Commission on February 28, 2012). (10.19) Form of Dividend Equivalent Rights Award Agreement Under the W. R. Berkley Corporation 2012 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q (File No. 1-15202) filed with the Commission on August 7, 2015). (14) Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14 of the Company’s Annual Report on Form 10-K (File No. 1-15202) filed with the Commission on March 14, 2005). (21) Following is a list of the Company’s significant subsidiaries and other operating entities. Subsidiaries of subsidiaries are indented and the parent of each such corporation owns 100% of the outstanding voting securities of such corporation except as noted below. 98 9 8 80793in_10k.indd 98 3/14/16 5:48 PM  Berkley International, LLC (2) Queen's Island Insurance Company, Ltd. Signet Star Holdings, Inc. Berkley Insurance Company Admiral Insurance Company Admiral Indemnity Company Carolina Casualty Insurance Company Clermont Insurance Company Nautilus Insurance Company Berkley Assurance Company Berkley Life and Health Insurance Company Berkley London Holdings, Inc. W. R. Berkley London Holdings, Limited W. R. Berkley Insurance (Europe), Limited W. R. Berkley Europe AG Berkley National Insurance Company Berkley Regional Insurance Company Acadia Insurance Company American Mining Insurance Company Berkley Regional Specialty Insurance Company Continental Western Insurance Company Firemen’s Insurance Company of Washington, D.C. Tri-State Insurance Company of Minnesota Union Insurance Company Gemini Insurance Company Great Divide Insurance Company Key Risk Insurance Company Midwest Employers Casualty Company Preferred Employers Casualty Company Riverport Insurance Company StarNet Insurance Company Jurisdiction of Incorporation New York Bermuda Delaware Delaware Delaware Delaware Iowa Iowa Arizona Iowa Iowa Delaware United Kingdom United Kingdom Liechtenstein Iowa Delaware New Hampshire Iowa Delaware Iowa Delaware Iowa Iowa Delaware North Dakota North Carolina Delaware California Iowa Delaware Percentage owned by the Company (1) 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% (1) W. R. Berkley Corporation is the ultimate parent. The subsidiary of a direct parent is indicated by an indentation, and its percentage ownership is as indicated in this column. (2) Berkley International, LLC is held by W. R. Berkley Corporation and its subsidiaries as follows: W. R. Berkley Corporation (2%), Berkley Regional Insurance Company (14%) and Berkley Insurance Company (84%). (23) Consent of Independent Registered Public Accounting Firm. (31.1) Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a). (31.2) Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/ 15d-14(a). (32.1) Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99 9 9 80793in_10k.indd 99 3/14/16 5:48 PM Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders W. R. Berkley Corporation: Under date of February 22, 2016, we reported on the consolidated balance sheets of W. R. Berkley Corporation and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2015, which are included in the Annual Report on Form 10-K for the year ended December 31, 2015. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules II through VI. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /S/ KPMG LLP New York, New York February 22, 2016 100 100 80793in_10k.indd 100 3/14/16 5:48 PM W. R. Berkley Corporation Condensed Financial Information of Registrant Balance Sheets (Parent Company) (In thousands) Assets: Cash and cash equivalents Fixed maturity securities available for sale at fair value (cost $201,256 and $272,283 at December 31, 2015 and 2014, respectively) Equity securities available for sale, at fair value (cost $3,430 in 2015 and $3,738 in 2014) Investment in subsidiaries Deferred Federal income taxes Current Federal income taxes Property, furniture and equipment at cost, less accumulated depreciation Other assets Total assets Liabilities and stockholders’ equity Liabilities: Due to subsidiaries Other liabilities Deferred Federal income taxes Subordinated debentures Senior notes Total liabilities Stockholders’ equity: Preferred stock Common stock Additional paid-in capital Retained earnings (including accumulated undistributed net income of subsidiaries of $4,746,934 and $4,700,821 at December 31, 2015 and 2014, respectively) Accumulated other comprehensive income (loss) Treasury stock, at cost Total stockholders’ equity Total liabilities and stockholders’ equity Schedule II December 31, 2015 2014 $ 195,658 $ 90,693 201,738 3,430 6,454,065 37,135 51,512 13,150 6,153 $ 6,962,841 $ 273,773 3,738 6,693,731 — 62,882 9,852 6,978 7,141,647 $ 143,669 $ 115,737 — 340,320 87,540 162,648 149 340,060 1,762,869 1,961,305 2,362,595 2,551,702 — 47,024 1,005,455 — 47,024 991,512 6,178,070 (66,698) (2,563,605) 5,732,410 183,550 (2,364,551) 4,600,246 4,589,945 $ 6,962,841 $ 7,141,647 See accompanying Report of Independent Registered Public Accounting Firm and note to condensed financial statements. 101 101 80793in_10k.indd 101 3/14/16 5:48 PM W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued Statements of Income (Parent Company) Schedule II, Continued (In thousands) Management fees and investment income including dividends from subsidiaries of $642,421, $503,483, and $269,626 for the years ended December 31, 2015, 2014 and 2013, respectively Net investment gains Years Ended December 31, 2015 2014 2013 $ 655,318 $ 696 515,775 $ 5,487 277,223 24,550 Other income Total revenues Operating costs and expense Interest expense Income before federal income taxes Federal income taxes: 348 656,362 143,391 128,248 384,723 450 521,712 148,288 125,352 248,072 Federal income taxes provided by subsidiaries on a separate return basis Federal income tax expense on a consolidated return basis Net expense Income before undistributed equity in net income of subsidiaries Equity in undistributed net income of subsidiaries Net income 272,180 (199,322) 72,858 457,581 366,721 (273,310) 93,411 341,483 46,113 503,694 $ 307,401 648,884 $ $ 223 301,996 122,562 120,066 59,368 225,845 (154,928) 70,917 130,285 369,640 499,925 See accompanying Report of Independent Registered Public Accounting Firm and note to condensed financial statements. 102 102 80793in_10k.indd 102 3/14/16 5:48 PM W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued Statements of Cash Flows (Parent Company) Schedule II, Continued (In thousands) Cash flows from (used in) from operating activities: Net income Adjustments to reconcile net income to net cash from operating activities: Net investment gains Depreciation and amortization Equity in undistributed earnings of subsidiaries Tax payments received from subsidiaries Federal income taxes provided by subsidiaries on a separate return basis Stock incentive plans Change in: Federal income taxes Other assets Other liabilities Accrued investment income Net cash from (used in) operating activities Cash from (used in) investing activities: Proceeds from sales of fixed maturity securities Proceeds from maturities and prepayments of fixed maturity securities Proceeds from sales of equity securities Cost of purchases of fixed maturity securities Cost of purchases of equity securities Cost of acquired companies Investments in and advances to subsidiaries, net Change in balance due to security broker Net additions to real estate, furniture & equipment Net cash from (used in) investing activities Cash from (used in) financing activities: Net proceeds from issuance of senior notes Net proceeds from stock options exercised Repayment of senior notes Purchase of common treasury shares Cash dividends to common stockholders Net cash from (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Years Ended December 31, 2015 2014 2013 $ 503,694 $ 648,884 $ 499,925 (696) 2,693 (46,113) 311,482 (272,180) 29,725 51,772 301 (92,752) 524 488,450 (5,487) 2,916 (307,401) 462,809 (366,721) 28,068 (15,239) (364) (39,780) (820) 406,865 (24,550) 10,397 (369,640) 77,305 (225,845) 23,784 21,866 (821) (15,470) 967 (2,082) 380,986 123,639 308 289,683 103,646 7,356 (605,768) 230,854 68,918 23,395 (79,132) (4,668) — (82,879) — (58,454) 6,918 (432,645) — 34,191 (2,151) — 30,338 — (4,425) (1,615) (1,896) 98,201 (257,537) 185,935 — — (200,000) (223,652) (58,034) (481,686) 104,965 344,472 — — (238,933) (181,489) (75,950) 73,378 339,627 53 (450,000) (166,473) (52,717) (329,510) (145,657) 90,693 17,315 162,972 $ 195,658 $ 90,693 $ 17,315 See accompanying Report of Independent Registered Public Accounting Firm and note to condensed financial statements. 103 103 80793in_10k.indd 103 3/14/16 5:48 PM W. R. Berkley Corporation Condensed Financial Information of Registrant, Continued December 31, 2015 Note to Condensed Financial Statements (Parent Company) The accompanying condensed financial statements should be read in conjunction with the notes to consolidated financial statements included elsewhere herein. Reclassifications have been made in the 2014 and 2013 financial statements as originally reported to conform them to the presentation of the 2015 financial statements. The Company files a consolidated federal tax return with the results of its domestic insurance subsidiaries included on a statutory basis. Under present Company policy, federal income taxes payable by subsidiary companies on a separate-return basis are paid to W. R. Berkley Corporation, and the Company pays the tax due on a consolidated return basis. 104 104 80793in_10k.indd 104 3/14/16 5:48 PM a c c o m p a n y i n g R e p o r t o f I n d e p e n d e n t R e g i s t e r e d P u b l i c A c c o u n t i n g F i r m . 1 0 5 S e e T o t a l R e i n s u r a n c e - G l o b a l I n s u r a n c e - I n t e r n a t i o n a l C o r p o r a t e a n d a d j u s t m e n t s T o t a l I n s u r a n c e - D o m e s t i c D e c e m b e r 3 1 , 2 0 1 3 R e i n s u r a n c e - G l o b a l I n s u r a n c e - D o m e s t i c I n s u r a n c e - I n t e r n a t i o n a l D e c e m b e r 3 1 , 2 0 1 4 C o r p o r a t e a n d a d j u s t m e n t s T o t a l R e i n s u r a n c e - G l o b a l I n s u r a n c e - I n t e r n a t i o n a l C o r p o r a t e a n d a d j u s t m e n t s ( I n t h o u s a n d s ) I n s u r a n c e - D o m e s t i c D e c e m b e r 3 1 , 2 0 1 5 $ 4 5 2 , 1 0 1 $ 1 0 , 0 8 0 , 9 4 1 $ 2 , 7 8 1 , 4 3 7 $ 5 , 2 2 6 , 5 3 7 $ 5 4 4 , 2 9 1 $ 3 , 1 9 7 , 0 2 4 $ 9 9 1 , 0 7 0 $ 1 , 0 0 9 , 6 1 4 $ 5 , 5 0 0 , 1 7 3 8 4 , 8 8 6 6 0 , 7 5 1 — 1 , 6 9 3 , 8 0 8 6 7 2 , 0 0 9 — 3 5 5 , 9 7 8 3 1 7 , 6 9 1 — 7 2 0 , 9 7 0 7 2 3 , 1 5 1 — 3 , 8 8 2 8 9 , 0 9 0 4 7 , 0 3 9 4 4 8 , 5 8 3 4 2 9 , 9 0 0 — 1 8 6 , 7 0 3 1 5 2 , 8 4 3 — 1 4 9 , 4 5 4 1 2 4 , 4 9 7 6 4 , 5 6 7 7 4 9 , 6 0 1 7 5 6 , 1 8 5 — $ 3 0 6 , 4 6 4 $ 7 , 7 1 5 , 1 2 4 $ 2 , 1 0 7 , 7 6 8 $ 3 , 7 8 2 , 4 1 6 $ 4 0 4 , 2 8 0 $ 2 , 3 1 8 , 5 4 1 $ 6 5 1 , 5 2 4 $ 6 7 1 , 0 9 6 $ 3 , 9 9 4 , 3 8 7 $ $ $ $ 4 8 8 , 5 2 5 $ 1 0 , 3 6 9 , 7 0 1 $ 3 , 0 2 6 , 7 3 2 $ 5 , 7 4 4 , 4 1 8 $ 6 0 0 , 8 8 5 $ 3 , 4 9 0 , 5 6 7 $ 1 , 0 5 3 , 3 9 7 $ 1 , 1 0 4 , 0 5 9 $ 5 , 9 9 6 , 9 4 7 8 0 , 3 6 4 6 0 , 9 0 0 — 1 , 5 1 2 , 9 8 6 8 5 5 , 8 5 2 — 2 9 9 , 4 7 5 3 4 2 , 7 4 6 — 6 7 0 , 1 1 0 8 0 2 , 3 7 5 — 2 8 , 0 2 5 8 8 , 8 2 1 5 5 , 4 0 7 4 1 5 , 5 6 0 5 0 3 , 9 9 7 — 1 6 9 , 3 7 9 1 7 3 , 8 7 7 — 1 6 5 , 6 5 7 1 5 0 , 1 2 9 5 8 , 3 1 5 6 5 1 , 2 8 4 8 2 8 , 0 7 6 — 3 4 7 , 2 6 1 $ 8 , 0 0 0 , 8 6 3 $ 2 , 3 8 4 , 5 1 1 $ 4 , 2 7 1 , 9 3 3 $ 4 2 8 , 6 3 2 $ 2 , 5 7 1 , 0 1 0 $ 7 1 0 , 1 4 1 $ 7 2 9 , 9 5 8 $ 4 , 5 1 7 , 5 8 7 5 1 3 , 1 2 8 $ 1 0 , 6 6 9 , 1 5 0 $ 3 , 1 3 7 , 1 3 3 $ 6 , 0 4 0 , 6 0 9 $ 5 1 2 , 6 4 5 $ 3 , 6 5 6 , 2 7 0 $ 1 , 1 0 2 , 4 9 2 $ 1 , 1 8 7 , 2 5 8 $ 6 , 1 8 9 , 5 1 5 8 2 , 4 6 4 6 2 , 6 8 7 — 1 , 4 2 0 , 8 4 4 7 9 8 , 1 1 6 — 2 8 2 , 6 7 2 3 2 4 , 5 3 0 — 6 0 9 , 1 0 9 7 7 2 , 1 4 1 — 2 7 , 9 6 2 7 4 , 2 2 6 5 1 , 5 2 2 3 5 5 , 9 8 7 4 4 9 , 1 4 7 — 1 7 2 , 5 1 0 1 6 9 , 9 6 2 — 1 9 5 , 6 8 6 1 5 2 , 6 2 9 5 9 , 9 8 6 5 9 8 , 1 1 8 7 7 8 , 5 6 7 — 3 6 7 , 9 7 7 $ 8 , 4 5 0 , 1 9 0 $ 2 , 5 2 9 , 9 3 1 $ 4 , 6 5 9 , 3 5 9 $ 3 5 8 , 9 3 5 $ 2 , 8 5 1 , 1 3 6 $ 7 6 0 , 0 2 0 $ 7 7 8 , 9 5 7 $ 4 , 8 1 2 , 8 3 0 W R . . B e r k l e y C o r p o r a t i o n a n d S u b s i d i a r i e s C o s t A c q u i s i t i o n P o l i c y D e f e r r e d E x p e n s e s L o s s L o s s e s a n d R e s e r v e f o r D e c e m b e r 3 1 , 2 0 1 5 , 2 0 1 4 a n d 2 0 1 3 S u p p l e m e n t a r y I n s u r a n c e I n f o r m a t i o n N e t N e t P r e m u m i s U n e a r n e d E a r n e d P r e m i u m s I n c o m e I n v e s t m e n t E x p e n s e s L o s s L o s s a n d C o s t A c q u i s i t i o n P o l i c y D e f e r r e d o f A m o r t i z a t i o n E x p e n s e s a n d C o s t O p e r a t i n g O t h e r W r i t t e n P r e m i u m s N e t S c h e d u l e I I I 80793in_10k.indd 105 3/14/16 5:48 PM W. R. Berkley Corporation and Subsidiaries Reinsurance Years ended December 31, 2015, 2014 and 2013 Schedule IV (In thousands, other than percentages) Year ended December 31, 2015: Insurance-Domestic Insurance-International Reinsurance-Global Total Year ended December 31, 2014: Insurance-Domestic Insurance-International Reinsurance-Global Total Year ended December 31, 2013: Insurance-Domestic Insurance-International Reinsurance-Global Total Premiums Written Direct Amount Ceded to Other Companies Assumed from Other Companies Net Amount Percentage of Amount Assumed to Net $ $ $ 5,521,447 $ 871,358 $ 162,741 $ 4,812,830 874,359 16,727 144,737 44,383 48,945 625,774 778,567 598,118 6,412,533 $ 1,060,478 $ 837,460 $ 6,189,515 5,214,849 $ 927,799 866,092 $ 156,195 168,830 $ 56,472 4,517,587 828,076 42,594 43,604 652,294 651,284 $ 6,185,242 $ 1,065,891 $ 877,596 $ 5,996,947 $ 4,699,348 $ 809,368 $ 104,407 $ 3,994,387 887,027 39,797 142,591 58,959 11,749 768,763 756,185 749,601 $ 5,626,172 $ 1,010,918 $ 884,919 $ 5,500,173 3.4% 6.3% 104.6% 13.5% 3.7% 6.8% 100.2% 14.6% 2.6% 1.6% 102.6% 16.1% See accompanying Report of Independent Registered Public Accounting Firm. 106 106 80793in_10k.indd 106 3/14/16 5:48 PM W. R. Berkley Corporation and Subsidiaries Valuation and Qualifying Accounts Years ended December 31, 2015, 2014 and 2013 Schedule V (In thousands) Year ended December 31, 2015: Premiums and fees receivable Due from reinsurers Opening Balance Additions- Charged to Expense Deduction- Amounts Written Off Ending Schedule V Balance W. R. Berkley Corporation and Subsidiaries Valuation and Qualifying Accounts Years ended December 31, 2015, 2014 and 2013 1,144 $ 21,446 $ 6,281 $ (24) (5,203) $ (100) 22,524 1,020 Deferred federal and foreign income taxes Loan loss reserves Total (In thousands) Year ended December 31, 2014: Year ended December 31, 2015: Premiums and fees receivable Premiums and fees receivable Due from reinsurers Due from reinsurers Deferred federal and foreign income taxes Deferred federal and foreign income taxes Loan loss reserves Loan loss reserves Total Total Year ended December 31, 2013: Year ended December 31, 2014: Premiums and fees receivable Premiums and fees receivable Due from reinsurers Due from reinsurers Loan loss reserves Deferred federal and foreign income taxes Loan loss reserves Total Year ended December 31, 2013: Premiums and fees receivable Due from reinsurers Loan loss reserves Total 1,335 2,486 2,702 Additions- (392) Charged to 8,567 $ Expense — Deduction- Amounts Written Off (5,303) $ 4,037 2,094 Ending Balance 29,675 Opening Balance $ 26,411 $ $ 20,951 $ $ 21,446 $ 1,385 1,144 — 1,335 2,087 2,486 $ 24,423 $ $ 26,411 $ $ 22,919 $ $ 20,951 $ 1,680 1,385 5,620 — 2,087 $ 30,219 $ 5,944 $ 6,281 $ 301 (24) 1,335 2,702 399 (392) 7,979 $ 8,567 $ 3,133 $ 5,944 $ 186 301 308 1,335 399 3,627 $ (5,449) $ (5,203) $ (542) (100) — — — 21,446 22,524 1,144 1,020 1,335 4,037 2,486 2,094 (5,991) $ (5,303) $ 26,411 29,675 (5,101) $ (5,449) $ (481) (542) (3,841) — — (9,423) $ 20,951 21,446 1,385 1,144 2,087 1,335 2,486 24,423 7,979 $ (5,991) $ 26,411 $ 22,919 $ 1,680 5,620 $ 30,219 $ 3,133 $ 186 308 3,627 $ (5,101) $ (481) (3,841) (9,423) $ 20,951 1,385 2,087 24,423 Total See accompanying Report of Independent Registered Public Accounting Firm. $ 24,423 $ See accompanying Report of Independent Registered Public Accounting Firm. 107 107 107 80793in_10k.indd 107 3/14/16 5:48 PM W. R. Berkley Corporation and Subsidiaries Supplementary Information Concerning Property-Casualty Insurance Operations Years Ended December 31, 2015, 2014 and 2013 Schedule VI (In thousands) Deferred policy acquisition costs Reserves for losses and loss expenses Unearned premium Net premiums earned Net investment income Losses and loss expenses incurred: Current year Prior years Loss reserve discount accretion Amortization of deferred policy acquisition costs Paid losses and loss expenses Net premiums written 2015 2014 2013 $ 513,128 $ 10,669,150 3,137,133 6,040,609 488,525 $ 10,369,701 3,026,732 5,744,418 452,101 10,080,941 2,781,437 5,226,537 512,645 600,885 544,291 3,653,561 (46,713) 49,422 1,102,492 3,257,015 6,189,515 3,495,825 (75,764) 70,506 1,053,397 3,115,227 5,996,947 3,221,393 (78,810) 54,441 991,070 2,878,071 5,500,173 See accompanying Report of Independent Registered Public Accounting Firm. 108 108 80793in_10k.indd 108 3/14/16 5:48 PM This Page Intentionally Left Blank 80793in_10k.indd 109 4/7/16 9:07 PM Operating Units 125 Berkley Insurance Company 475 Steamboat Road Greenwich, Connecticut 06830 Tel: (203) 542 3800 William R. Berkley, Chairman W. Robert Berkley, Jr., President Insurance-Domestic Acadia Insurance Group One Acadia Commons Westbrook, Maine 04092 Tel: (207) 772 4300 www.acadiainsurance.com Douglas M. Nelson, President Albany, New York Bedford, New Hampshire Marlborough, Massachusetts Rocky Hill, Connecticut South Burlington, Vermont Syracuse, New York Tel: (800) 773 4300 Tel: (800) 224 8850 Tel: (888) 665 1170 Tel: (866) 382 0036 Tel: (800) 224 8847 Tel: (866) 811 7722 Admiral Insurance Company 1000 Howard Boulevard, Suite 300 P. O. Box 5430 Mount Laurel, New Jersey 08054 Tel: (856) 429 9200 www.admiralins.com Steven Zeitman, President and Chief Executive Officer Atlanta, Georgia Austin, Texas Chicago, Illinois Seattle, Washington Tel: (770) 476 1561 Tel: (512) 795 0766 Tel: (312) 368 1124 Tel: (206) 467 6511 American Mining Insurance Group 3490 Independence Drive Birmingham, Alabama 35209 Tel: (205) 870 3535 www.americanmining.com Chandler F. Cox, Jr., President and Chief Executive Officer Bettendorf, Iowa Johnstown, Pennsylvania Las Vegas, Nevada Lexington, Kentucky Tel: (563) 345 6311 Tel: (814) 255 0200 Tel: (702) 754 5800 Tel: (859) 971 1955 Berkley Accident and Health 2445 Kuser Road, Suite 201 Hamilton Square, New Jersey 08690 Tel: (609) 584 6990 www.berkleyah.com Christopher C. Brown, President and Chief Executive Officer Accident Special Risk Division 757 Third Avenue, 10th Floor New York, New York 10017 Tel: (212) 822 3333 Susan M. Clark, President Atlanta, Georgia Charlotte, North Carolina Chicago, Illinois Cleveland, Ohio Dallas, Texas Denver, Colorado Hamilton Square, New Jersey Kansas City, Kansas Marlborough, Massachusetts Minneapolis, Minnesota Philadelphia, Pennsylvania Seattle, Washington Walnut Creek, California Tel: (678) 387 1823 Tel: (980) 214 1353 Tel: (312) 485 9249 Tel: (440) 728 1805 Tel: (972) 849 7406 Tel: (303) 667 5198 Tel: (973) 616 0685 Tel: (913) 515 7374 Tel: (508) 573 6102 Tel: (303) 667 5198 Tel: (908) 415 2711 Tel: (425) 401 4246 Tel: (480) 529 6787 Berkley Agribusiness Risk Specialists 11201 Douglas Avenue Urbandale, Iowa 50322 Tel: (800) 382 7314 www.berkleyag.com Michael Ekiss, President Berkley Alliance Managers 30 South Pearl Street, 6th Floor Albany, New York 12138 Tel: (518) 407 0088 Stephen L. Porcelli, President Berkley Construction Professional Underwriters Tel: (678) 387 1816 www.berkleycp.com Berkley Design Professional Underwriters Tel: (405) 805 6635 www.berkleydp.com 80793in_txt.indd 125 4/7/16 9:17 PM W. R. Berkley Corporation 2015 Annual Report 126 Berkley Aviation 1101 Anacapa Street, Suite 200 Santa Barbara, California 93101 Tel: (805) 898 7640 www.berkleyaviation.com Peter Jarrett, President, Global Aviation Practice Leader Atlanta, Georgia Boston, Massachusetts London, England Tel: (678) 987 1754 Tel: (617) 310 8227 Tel: (44) 207 088 1967 Berkley Custom Insurance Three Stamford Plaza 301 Tresser Boulevard, 8th Floor Stamford, Connectcut 06901 Tel: (203) 905 7561 www.berkleycustom.com Michael P. Fujii, President and Chief Executive Officer Berkley Custom Insurance Services, LLC Los Angeles, California Tel: (213) 417 5430 BXM Insurance Services, Inc. Chicago, Illinois Los Angeles, California Tel: (312) 368 1107 Tel: (213) 891 9259 Berkley FinSecure 849 Fairmount Avenue, Suite 301 Towson, Maryland 21286 Tel: (866) 539 3995 www.berkleyfinsecure.com Michael P. Dandini, President Niles, Michigan Ext. 6325 Tel: (866) 539 3995 Berkley Crime Tel: (844) 44 CRIME www.berkleycrime.com Berkley Fire & Marine Underwriters 425 North Martingale Road, Suite 1520 Schaumburg, Illinois 60173 Tel: (972) 719 2406 www.berkleymarine.com John T. Geary, President Berkley Global Product Recall Management 80 Broad Street, 32nd Floor New York, New York 10004 Tel: (212) 413 2450 Louis Lubrano, President Dallas, Texas Los Angeles, California San Francisco, California London, England Tel: (972) 552 6100 Tel: (213) 372 1727 Tel: (415) 417 5950 Tel: (44) 207 088 1900 Berkley Healthcare Professional Underwriters Berkley Healthcare Professional Insurance Services, LLC 220 Petaluma Avenue, Suite A Sebastopol, California 95472 Tel: (707) 829 4740 www.berkleyhpl.com Collin J. Suttie, President Berkley Latin America and Caribbean Managers 600 Brickell Avenue, Suite 3900 Miami, Florida 33131 Tel: (305) 921 6200 Eduardo I. Llobet, President and Chief Executive Officer Berkley Insurance Company (representative office in Colombia) Carrera 11 No 77ª-49/65, Oficina 202 110231 Bogotá Tel: (57) 1 744 4015 Jaime Aramburo, Director Berkley Life Sciences 200 PrincetonSouth, Corporate Center, Suite 250 Ewing, New Jersey 08628 Tel: (609) 844 7800 www.berkleyls.com Jill E. Wadlund, President Naperville, Illinois Tel: (630) 210 0369 Berkley LS Insurance Solutions, LLC Walnut Creek, California Tel: (925) 472 8190 BerkleyMed 16305 Swingley Ridge Road, Suite 450 Chesterfield, Missouri 63017 Tel: (800) 523 3815 www.berkleymed.com Collin J. Suttie, President Berkley Mid-Atlantic Group 4820 Lake Brook Drive, Suite 300 Glen Allen, Virginia 23060 Tel: (804) 285 2700 www.wrbmag.com Susan N. Grady, President 80793in_txt.indd 126 4/7/16 9:17 PM 127 Columbus, Ohio Glen Allen, Virginia Harrisburg, Pennsylvania Pittsburgh, Pennsylvania Tel: (800) 283 1153 Tel: (800) 283 1153 Tel: (800) 283 1153 Tel: (800) 283 1153 BerkleyNet 12701 Marblestone Drive, Suite 250 Woodbridge, Virginia 22192 Tel: (703) 586 6300 www.berkleynet.com James B. Gilbert, President Berkley North Pacific Group 13920 SE Eastgate Way, Suite 120 Bellevue, Washington 98005 Tel: (877) 316 9038 www.berkleynpac.com Jeffrey R. Dehn, President Meridian, Idaho Portland, Oregon Salt Lake City, Utah Tel: (800) 480 2942 Tel: (800) 480 2942 Tel: (800) 480 2942 Berkley Offshore Underwriting Managers 757 Third Avenue, 10th Floor New York, New York 10017 Tel: (212) 618 2950 www.berkleyoffshore.com Frank A. Costa, President Houston, Texas Tel: (832) 547 2900 Berkley Offshore Underwriting Managers UK, Limited 40 Lime Street, 7th Floor London EC3M 7AW Tel: (44) 207 337 1400 R. Christian Walker, Executive Vice President Berkley Oil & Gas 10375 Richmond Avenue, Suite 1900 Houston, Texas 77042 Tel: (877) 972 2264 www.berkleyoil-gas.com Carol A. Randall, President Berkley Renewable Energy 230 W Monroe, Suite 220 Chicago, Illinois 60606 Tel: (312) 752 7222 www.berkleyrenewable.com Marie Gwin, Vice President Berkley Professional Liability 757 Third Avenue, 10th Floor New York, New York 10017 Tel: (212) 618 2900 www.berkleypro.com John R. Benedetto, President London, England Schaumburg, Illinois Toronto, Ontario Tel: (44) 207 088 1960 Tel: (630) 237 3650 Tel: (416) 304 1178 Berkley Program Specialists 1250 East Diehl Road, Suite 200 Naperville, Illinois 60563 Tel: (630) 210 0360 www.berkley-ps.com Wayne H. Carter, III, President Berkley Equine & Cattle Division 3655 North Point Parkway, Suite 625 Alpharetta, Georgia 30005 Tel: (866) 298 5525 www.berkleyequine.com Berkley Classics Division P.O. Box 500 Luverne, Minnesota 56156 Tel: (800) 603 3330 www.berkleyclassics.com Berkley Recreational Marine Division 3655 North Point Parkway, Suite 625 Alpharetta, Georgia 30005 Tel: (855) 558 3843 www.berkleyrecmarine.com Berkley Public Entity Managers 30 South 17th Street, Suite 820 Philadelphia, Pennsylvania 19103 Tel: (215) 553 7384 www.bpem.com Richard B. Vincelette, President Minneapolis, Minnesota New York, New York Tel: (612) 766 3827 Tel: (212) 922 9458 Berkley Regional Specialty Insurance Company 14902 North 73rd Street Scottsdale, Arizona 85260 Tel: (480) 444 5950 www.brsic.com Paul S. McAuliffe, President W. R. Berkley Corporation 2015 Annual Report 80793in_txt.indd 127 4/7/16 9:17 PM 128 Charlotte, North Carolina Denver, Colorado Des Moines, Iowa Glen Allen, Virginia Lawrenceville, Georgia Meridian, Idaho Naperville, Illinois Scottsdale, Arizona Tel: (704) 759 7016 Tel: (303) 357 2631 Tel: (515) 473 3464 Tel: (804) 237 5273 Tel: (678) 533 3459 Tel: (208) 898 5168 Tel: (630) 210 0363 Tel: (866) 412 7742 BerkleyRisk 222 South Ninth Street, Suite 1300 Minneapolis, Minnesota 55402 Tel: (612) 766 3300 www.berkleyrisk.com John M. Goodwin, President Bedford, New Hampshire Boise, Idaho Charlotte, North Carolina Columbia, South Carolina Council Bluffs, Iowa Indianapolis, Indiana Las Vegas, Nevada Little Rock, Arkansas Minneapolis, Minnesota Nashville, Tennessee Overland Park, Kansas Pierre, South Dakota Rocky Hill, Connecticut Rolling Meadows, Illinois St. Paul, Minnesota Scottsdale, Arizona Wauwatosa, Wisconsin Tel: (800) 611 8535 Tel: (800) 449 7707 Tel: (800) 611 8535 Tel: (800) 611 8535 Tel: (800) 832 0137 Tel: (317) 585 2799 Tel: (702) 415 2970 Tel: (913) 385 4961 Tel: (800) 449 7707 Tel: (615) 493 7777 Tel: (913) 385 4960 Tel: (605) 945 2144 Tel: (800) 611 8535 Tel: (866) 738 3243 Tel: (651) 281 1200 Tel: (602) 992 8844 Tel: (262) 784 3568 Berkley Risk Services of Colorado Denver, Colorado Tel: (303) 357 2600 Southwest Risk Services Scottsdale, Arizona Berkley Select 250 South Wacker Drive, Suite 700 Chicago, Illinois 60606 Tel: (312) 881 1330 www.berkleyselect.com Joseph G. Shores, President Berkley Southeast Insurance Group 1745 North Brown Road, Suite 400 Lawrenceville, Georgia 30043 Tel: (678) 533 3400 www.berkleysig.com Dennis L. Barger, President Birmingham, Alabama Charlotte, North Carolina Tel: (855) 610 4545 Tel: (855) 610 4545 Lawrenceville, Georgia Meridian, Mississippi Brentwood, Tennessee Tel: (855) 610 4545 Tel: (855) 610 4545 Tel: (855) 610 4545 Berkley Specialty Underwriting Managers Two Ravinia Drive, Suite 1100 Atlanta, Georgia 30346 Tel: (404) 443 2040 www.berkleysum.com Kenneth J. Berger, President Entertainment and Sports Division 600 East Colinas Boulevard, Suite 1400 Irving, Texas 75039 Tel: (972) 819 8863 Cindy Broschart, President Environmental Division 101 Hudson Street, Suite 2550 Jersey City, New Jersey 07302 Tel: (201) 748 3100 Kenneth J. Berger, President Atlanta, Georgia Boston, Massachusetts Chicago, Illinois Philadelphia, Pennsylvania Tel: (404) 443 2117 Tel: (857) 265 7495 Tel: (404) 443 2082 Tel: (215) 533 7360 Berkley Managers Insurance Services, LLC Walnut Creek, California Tel: (925) 472 8210 Berkley Surety Group 412 Mt. Kemble Avenue, Suite 310N Morristown, New Jersey 07960 Tel: (973) 775 5024 www.berkleysurety.com Tel: (973) 775 5086 Arlington, Virginia Tel: (678) 624 1818 Atlanta, Georgia Tel: (972) 385 1140 Dallas, Texas Tel: (973) 775 5082 Danvers, Massachusetts Tel: (303) 357 2616 Denver, Colorado Tel: (973) 775 5021 Morristown, New Jersey Tel: (630) 210 0360 Naperville, Illinois Tel: (629) 999 4010 Nashville, Tennessee Tel: (212) 867 2650 New York, New York Tel: (407) 867 4595 Orlando, Florida Tel: (973) 775 5096 Radnor, Pennsylvania Tel: (714) 338 0860 Santa Ana, California Tel: (206) 223 5842 Seattle, Washington Tel: (813) 870 2077 Tampa, Florida Tel: (416) 304 1178 Toronto, Ontario Urbandale, Iowa Tel: (800) 456 5486 Westbrook, Maine Tel: (207) 228 1922 Tel: (602) 996 8810 Andrew M. Tuma, President 80793in_txt.indd 128 4/7/16 9:17 PM 129 Berkley Technology Underwriters 222 South Ninth Street, Suite 2550 Minneapolis, Minnesota 55402 Tel: (612) 344 4550 www.berkley-tech.com Matthew A. Mueller, President San Francisco, California Irvine, California Tel: (415) 216 2207 Tel: (714) 243 6522 Carolina Casualty 5011 Gate Parkway Building 200, Suite 200 Jacksonville, Florida 32256 Tel: (904) 363 0900 www.carolinacas.com Jeffrey M. Hafter Berkley Fleet Services 11907 Kingston Pike, Suite 101 Knoxville, Tennessee 37934 Tel: (844) 237 5669 www.berkleyfleetservices.com Clermont Specialty Managers 301 Route 17 North, Suite 900 Rutherford, New Jersey 07070 Tel: (201) 518 2500 www.clermont.wrberkley.com William J. Johnston, President Chicago, Illinois Tel: (312) 881 1456 Continental Western Group 11201 Douglas Avenue Urbandale, Iowa 50322 Tel: (515) 473 3000 www.cwgins.com Michael G. Connor, President Denver, Colorado Lincoln, Nebraska Luverne, Minnesota Columbus, Ohio Tel: (800) 533 9013 Tel: (800) 456 7688 Tel: (800) 533 0303 Tel: (855) 327 5906 Gemini Transportation Underwriters 99 Summer Street, Suite 1800 Boston, Massachusetts 02110 Tel: (617) 310 8200 www.geminiunderwriters.com Rocco P. Modafferi, President Key Risk P.O. Box 49129 Greensboro, North Carolina 27419 Tel: (336) 668 9050 www.keyrisk.com Robert W. Standen, President Alpharetta, Georgia Baltimore, Maryland Charlotte, North Carolina Columbia, South Carolina Harrisburg, Pennsylvania Nashville, Tennessee Richmond, Virginia Tel: (770) 751 8901 Tel: (410) 864 2600 Tel: (704) 329 9550 Tel: (803) 252 1777 Tel: (800) 942 0225 Tel: (800) 942 0225 Tel: (804) 288 2660 Midwest Employers Casualty Group 14755 North Outer Forty Drive, Suite 300 Chesterfield, Missouri 63017 Tel: (636) 449 7000 www.mwecc.com Timothy F. Galvin, President Monitor Liability Managers 233 South Wacker Drive, Suite 3900 Chicago, Illinois 60606 Tel: (312) 800 6200 www.monitorliability.com Joseph G. Shores, President Nautilus Insurance Group 7233 East Butherus Drive Scottsdale, Arizona 85260 Tel: (480) 951 0905 www.nautilusinsgroup.com Thomas M. Kuzma, President and Chief Executive Officer Duluth, Georgia Tel: (480) 951 0905 Nautilus Excess Insurance Agency, LLC Corona, California Tel: (480) 951 0905 Preferred Employers Insurance 9797 Aero Drive, Suite 200 San Diego, California 92123 Tel: (888) 472 9001 www.peiwc.com Steven A. Gallacher, President Riverport Insurance Services 222 South Ninth Street, Suite 2500 Minneapolis, Minnesota 55402 Tel: (612) 766 3100 www.riverportinsurance.com Roger M. Nulton, President W. R. Berkley Corporation 2015 Annual Report 80793in_txt.indd 129 4/7/16 9:17 PM 130 Union Standard Insurance Group 222 Las Colinas Boulevard W, Suite 1300 Irving, Texas 75039 Tel: (972) 719 2400 www.usic.com B. Keith Mitchell, President Tel: (480) 281 3949 Albuquerque, New Mexico Dallas, Texas Tel: (972) 719 2431 Little Rock, Arkansas Tel: (501) 707 6543 Oklahoma City, Oklahoma Tel: (501) 707 6543 Phoenix, Arizona Tel: (480) 281 3949 Tel: (972) 719 2431 San Antonio, Texas Vela Insurance Services 311 South Wacker Drive, Suite 3600 Chicago, Illinois 60606 Tel: (312) 553 4413 www.vela-ins.com David A. Jordan, President Atlanta, Georgia Tel: (678) 987 1701 Tel: (312) 553 4413 Chicago, Illinois Denver, Colorado Tel: (720) 360 3517 Glastonbury, Connecticut Tel: (860) 652 9291 Hamilton Square, New Jersey Tel: (609) 584 4605 Tel: (213) 417 5452 Los Angeles, California Marlborough, Massachusetts Tel: (312) 725 7676 Tel: (212) 822 3377 New York, New York Omaha, Nebraska Tel: (402) 492 8352 Radnor, Pennsylvania Tel: (610) 688 4275 Tel: (805) 693 0839 Solvang, California St. Paul, Minnesota Tel: (651) 406 5630 Walnut Creek, California Tel: (925) 472 8220 Verus Underwriting Managers 4820 Lake Brook Drive, Suite 100 Glen Allen, Virginia 23060 Tel: (804) 525 1360 www.verusins.com Dale H. Pilkington, President Reinsurance-Global Berkley Re America Three Stamford Plaza 301 Tresser Boulevard, 7th Floor Stamford, Connecticut 06901 Tel: (203) 905 4444 www.berkleyreamerica.com Joseph L. Sullivan, President Berkley Re Asia Pacific K. Grant Robson, President and Chief Executive Officer Berkley Re Asia (Hong Kong) Suite 6708, Central Plaza 18 Harbour Road Wan Chai, Hong Kong Tel: (852) 3120 7000 Berkley Re Asia (Singapore) China Square Central, Unit 09-04, 9th Floor 18 Cross Street Singapore 048423 Tel: (65) 6671 2070 Berkley Re Australia Level 27, Australia Square 264 George Street Sydney, NSW, 2000, Australia Tel: 61 (2) 8117 2100 Level 21, 12 Creek Street Brisbane, QLD, 4000, Australia Tel: 61 (7) 3175 0200 Level 40, 140 Williams Street Melbourne, VIC, 3000, Australia Tel: 61 (3) 9607 8404 Berkley Re Direct Three Stamford Plaza 301 Tresser Boulevard, 9th Floor Stamford, Connecticut 06901 Tel: (203) 975 7739 www.berkleyredirect.com Gregory A. Douglas, President Tel: (312) 553 4707 Chicago, Illinois Tel: (614) 766 4316 Dublin, Ohio Irving, Texas Tel: (972) 580 9950 Johns Creek, Georgia Tel: (770) 814 7531 Philadelphia, Pennsylvania Tel: (215) 568 3570 Walnut Creek, California Tel: (925) 472 8030 Berkley Re UK Limited 37-39 Lime Street, 2nd Floor London EC3M 7AY, England Tel: (44) 20 7398 1000 www.berkleyreuk.com Richard Fothergill, Chief Executive Officer 80793in_txt.indd 130 4/7/16 9:17 PM 131 Insurance-International Tel: 54 (11) 4378 8100 www.berkley.com.ar Berkley International, LLC 475 Steamboat Road Greenwich, Connecticut 06830 Tel: (203) 629 3000 William R. Berkley, Chairman and Chief Executive Officer W. Robert Berkley, Jr., Vice Chairman and President Berkley Canada 145 King Street West, Suite 1000 Toronto, Ontario M5H 1J8 Tel: (416) 304 1178 www.berkleycanada.com 1002, Rue Sherbrooke Ouest, Bureau 2220 Montreal, Quebec H3A 3L6 Tel: (514) 842 5587 885 West Georgia Street Vancouver, British Colombia V6C 3E8 Tel: (604) 235 1080 Andrew Steen, President Berkley Insurance Asia China Square Central, Unit 09-04, 9th Floor 18 Cross Street Singapore 048423 Tel: (65) 6671 2070 Shasi Gangadharan, Chief Executive Officer Berkley Insurance Australia Level 23, 31 Market Street Sydney, NSW 2000, Australia Tel: (61) 2 9275 8500 www.berkleyinaus.com.au Tony Wheatley, Chief Executive Officer Level 7, 300 Ann Street Brisbane, QLD, 4000, Australia Tel: (61) 7 3220 9900 Level 6, 114 Williams Street Melbourne, VIC, 3000, Australia Tel: (61) 3 8622 2000 Suite 5, 531 Hay Street Subiaco, WA, 6080, Australia Tel: (61) 8 9380 8327 24 Divett Place Adelaide, SA, 5000, Australia Tel (61) 8 8232 2767 Berkley International Latinoamérica S.A. Carlos Pellegrini 1023, 8th Floor C1009ABU Buenos Aires, Argentina Eduardo I. Llobet, President and Chief Executive Officer Berkley International Seguros S.A. Bartolomé Mitre 699 S2000COM Rosario, Argentina Tel: 54 (34) 1410 4200 Carlos Pellegrini 1023, 2nd Floor C1009ABU Buenos Aires, Argentina Tel: 54 (11) 4378 8100 Berkley Argentina De Reaseguros S.A. Carlos Pellegrini 1023, 8th Floor C1009ABU Buenos Aires, Argentina Berkley International Aseguradora De Riesgos Del Trabajo S.A. Carlos Pellegrini 1023, 3rd Floor C1009ABU Buenos Aires, Argentina Berkley International Do Brasil Seguros S.A. Rua Olimpíadas 242, 7th Floor 04551-000 Vila Olímpia, São Paulo, Brazil Tel: 55 (11) 3848 8622 www.berkley.com.br José Marcelino Risden, President Berkley International Seguros Colombia S.A. Carrera 7 # 71 – 21 Torre B Oficina 1002 110231 Bogotá, Colombia Tel: (571) 357 2727 www.berkley.com.co Sylvia Luz Rincón, President and Chief Executive Officer Berkley International Seguros S.A. (Uruguay) Rincón 391, 5th Floor 11100 Montevideo, Uruguay Tel: (598) 2916 6998 www.berkley.com.uy Eduardo I. Llobet, President W. R. Berkley Europe AG Städtle 35A, P.O. Box 835 9490 Vaduz, Liechtenstein Tel: (423) 237 27 41 Hans-Peter Naef, General Manager Berkley Insurance Norway NUF Henrik Ibsens Gate 100 N-0230 Oslo, Norway Tel: 47 (23) 27 24 00 Jan Tinus Larsen, Managing Director — Nordic W. R. Berkley Corporation 2015 Annual Report 80793in_txt.indd 131 4/11/16 2:02 PM 132 Berkley Insurance Sweden, Svensk Filial Birger Jarlsgatan 22 Stockholm, Sweden Tel: (46) 8 463 1042 Martin Spangenberg, Branch Manager - Sweden W. R. Berkley Europe AG, Niederlassung für Deutschland Kaiser-Wilhelm-Ring 27-29 50672 Köln, Germany Tel: 49 (2)1 99386-102 Michael Grassée, Managing Director — Germany W. R. Berkley Europe AG, Sucursal En España Paseo de la Castellana, 149 28046 Madrid, Spain Tel: 34 (9)1 449 2646 Leonardo Liguès, Branch Manager — Spain W / R / B Underwriting www.wrbunderwriting.com Alastair Blades, Chief Executive Officer W. R. Berkley Syndicate Management Limited Syndicate 1967 At Lloyd’s W. R. Berkley UK Limited 4th Floor, 34 Lime Street London EC3M 7AT, England Tel: (44) 207 088 1900 W. R. Berkley Insurance (Europe), Limited 2nd Floor, 40 Lime Street London, EC3M 7AW, England Tel: (44) 207 088 1900 3rd Floor, 55 King Street Manchester, M2 4LQ, England Tel: (44) 161 817 3440 Berkley Asset Protection 757 Third Avenue, 10th Floor New York, New York 10017 Tel: (212) 497 3700 www.berkleyassetpro.com Joseph P. Dowd, President Service Operations Berkley Capital, LLC 600 Brickell Avenue, 39th Floor Miami, Florida 33131 Tel: (786) 450 5510 Frank T. Medici, President Berkley Dean & Company, Inc. 475 Steamboat Road Greenwich, Connecticut 06830 Tel: (203) 629 3000 James G. Shiel, President Berkley Technology Services LLC 101 Bellevue Parkway Wilmington, Delaware 19809 Tel: (302) 439 2000 Mike P. Sciole, Executive Vice President Des Moines, Iowa Tel: (515) 564 2300 W. R. Berkley Corporation’s operating units conduct business through the following insurance entities: Acadia Insurance Company; Admiral Indemnity Company; Admiral Insurance Company; American Mining Insurance Company; Berkley Argentina de Reaseguros S.A.; Berkley Assurance Company; Berkley Insurance Company; Berkley International Aseguradora de Riesgos del Trabajo S.A.; Berkley International do Brasil Seguros S.A.; Berkley International Seguros S.A.; Berkley International Seguros S.A. (Uruguay); Berkley Life and Health Insurance Company; Berkley National Insurance Company; Berkley Regional Insurance Company; Berkley Regional Specialty Insurance Company; Carolina Casualty Insurance Company; Clermont Insurance Company; Continental Western Insurance Company; East Isles Reinsurance, Ltd.; Firemen’s Insurance Company of Washington, D.C.; Gemini Insurance Company; Great Divide Insurance Company; Greenwich Knight Insurance Company, Ltd.; Key Risk Insurance Company; Midwest Employers Casualty Company; Nautilus Insurance Company; Preferred Employers Insurance Company; Queen’s Island Insurance Company, Ltd.; Riverport Insurance Company; StarNet Insurance Company; Syndicate 1967 at Lloyd’s; Tri-State Insurance Company of Minnesota; Union Insurance Company; Union Standard Lloyds; W. R. Berkley Europe AG; W. R. Berkley Insurance (Europe), Limited 80793in_txt.indd 132 4/7/16 9:17 PM 133 Directors William R. Berkley Executive Chairman W. Robert Berkley, Jr. President and Chief Executive Officer Christopher L. Augostini Senior Vice President and Chief Operating Officer Georgetown University Ronald E. Blaylock Managing Partner GenNx360 Capital Partners Mark E. Brockbank Retired Chief Executive XL Brockbank Ltd. George G. Daly Professor and Former Dean McDonough School of Business Georgetown University Mary C. Farrell President, The Howard Gilman Foundation Retired Managing Director, Chief Investment Strategist UBS Wealth Management USA Jack H. Nusbaum Senior Partner Willkie Farr & Gallagher LLP Mark L. Shapiro Private Investor Officers William R. Berkley Executive Chairman W. Robert Berkley, Jr. President and Chief Executive Officer Eugene G. Ballard Executive Vice President – Chief Financial Officer Ira S. Lederman Executive Vice President – Secretary Lucille T. Sgaglione Executive Vice President James G. Shiel Executive Vice President – Investments James P. Bronner Senior Vice President Kevin H. Ebers Senior Vice President – Business Shared Services J. Michael Foley Senior Vice President – Information Technology John K. Goldwater Senior Vice President Robert W. Gosselink Senior Vice President Jeffrey M. Hafter Senior Vice President Paul J. Hancock Senior Vice President – Chief Corporate Actuary Robert C. Hewitt Senior Vice President Gillian James Senior Vice President – Enterprise Risk Management Peter L. Kamford Senior Vice President Carol J. LaPunzina Senior Vice President – Human Resources C. Fred Madsen Senior Vice President Matthew M. Ricciardi Senior Vice President – General Counsel William M. Rohde, Jr. Senior Vice President Kenneth P. Sroka Senior Vice President Robert D. Stone Senior Vice President Nelson Tavares Senior Vice President – Claims Steven W. Taylor Senior Vice President Kathleen M. Tierney Senior Vice President 80793in_txt.indd 133 4/5/16 9:16 PM W. R. Berkley Corporation 2015 Annual Report 134 Philip S. Welt Senior Vice President Richard K. Altorelli Vice President – Investment Controller Richard M. Baio Vice President – Treasurer Harry J. Berkley Vice President – Information Technology Thomas P. Boyle Vice President – Corporate Actuarial Trish Conway Vice President – Enterprise Risk Management Michele Fleckenstein Vice President – Internal Audit Dana R. Frantz Vice President – Corporate Actuary Josephine A. Raimondi Vice President – Senior Counsel and Assistant Secretary Robert E. Sabio Vice President – Corporate Catastrophe Analysis Scott A. Siegel Vice President – Taxes Jessica L. Somerfeld Vice President – Corporate Actuary David S. Atkinson Assistant Vice President – Corporate Actuary Tatiana Connolly Assistant Vice President – Counsel Arthur Gurevitch Assistant Vice President – Analytics David D. Hudson Assistant Vice President – Corporate Data Manager Laura Goodall Vice President – Insurance Risk Management Naomi B. Kinderman Assistant Vice President – Counsel Karen A. Horvath Vice President – External Financial Communications Suzette A. Lemson Assistant Vice President – Office of the Executive Chairman Joan E. Kapfer Vice President Andrea C. Kanefsky Vice President – Corporate Controller Jonathan M. Levine Vice President – Chief Marketing Officer Edward F. Linekin Vice President – Investments John M. Littzi Vice President – Senior Counsel Robert L. McPherson Vice President – Analytics Steven J. Malawer Vice President – Senior Counsel Jamie L. Martin Assistant Vice President – Finance Nancy Micale Assistant Vice President – Human Resources Raymond J. O’Brien Assistant Vice President – Director of Internal Audit Srinivas R. Somayajula Assistant Vice President – Corporate Actuary Bryan V. Spero Assistant Vice President – Corporate Actuary Laura A. Stevens Assistant Vice President – Corporate Actuary Craig D. Stevens Assistant Vice President – International Controller A. Scott Mansolillo Vice President – Chief Compliance Officer Bruce I. Weiser Assistant Vice President – Counsel Jane B. Parker Vice President – Senior Counsel Clement P. Patafio Vice President 80793in_txt.indd 134 4/11/16 2:02 PM 2015 Financial Highlights 2015 Financial Highlights By taking advantage of challenging opportunities and bringing together talented people and capital, we feel confident we will be able to continue to deliver By taking advantage of challenging opportunities and Annual Meeting The Annual Meeting of Stockholders of W. R. Berkley Corporation bringing together talented people and capital, we feel W. R. Berkley Corporation, 475 Steamboat Road, Greenwich, will be held at 1:00 p.m. on May 25, 2016 at the offices of Connecticut 06830. confident we will be able to continue to deliver outstanding returns. % 39 .7Combined ratio averaged 95.7% over the past 5 years. $37. 31 Book value per share grew 44% over the past 5 years. Table of Contents 03 Our Business 05 Chairman’s Letter 11 Investments 12 Segment Overview 15 Form 10-K 125 Operating Units 133 Board of Directors and Officers IBC Corporate Information % 119.0 Five year cumulative total return – stock price plus dividends. billion7. $ 2 49% over the past 5 years. Total revenues increased Shares Traded outstanding returns. New York Stock Exchange. Common Stock of W. R. Berkley Corporation is traded on the Symbol: WRB Tel: (800) 468 9716 Shareowner Services Wells Fargo Bank, N.A. www.shareowneronline.com Mendota Heights, MN 55120-4100 1110 Centre Pointe Curve, Suite 101 Transfer Agent and Registrar 39 .7Combined ratio averaged 95.7% For additional information, including press releases, visit our Willkie Farr & Gallagher LLP, New York, New York internet site at: http://www.wrberkley.com Follow us on Twitter @WRBerkleyCorp KPMG LLP, New York, New York Outside Counsel over the past 5 years. Auditors Website % $37. 31 Book value per share grew 44% over the past 5 years. Table of Contents 03 Our Business 12 Segment Overview standards. 15 Form 10-K 125 Operating Units 133 Board of Directors and Officers IBC Corporate Information % 119.0 Five year cumulative total return – stock price plus dividends. billion7. $ 2 49% over the past 5 years. Total revenues increased Annual Meeting The Annual Meeting of Stockholders of W. R. Berkley Corporation will be held at 1:00 p.m. on May 25, 2016 at the offices of W. R. Berkley Corporation, 475 Steamboat Road, Greenwich, Connecticut 06830. Shares Traded Common Stock of W. R. Berkley Corporation is traded on the New York Stock Exchange. Symbol: WRB Transfer Agent and Registrar Wells Fargo Bank, N.A. Shareowner Services 1110 Centre Pointe Curve, Suite 101 Mendota Heights, MN 55120-4100 Tel: (800) 468 9716 www.shareowneronline.com Website For additional information, including press releases, visit our internet site at: http://www.wrberkley.com Follow us on Twitter @WRBerkleyCorp Auditors KPMG LLP, New York, New York Outside Counsel Willkie Farr & Gallagher LLP, New York, New York 05 Chairman’s Letter The W. R. Berkley Corporation 2015 Annual Report editorial sections are printed on 11 Investments recycled paper made from fiber sourced from well-managed forests and other controlled wood sources and is independently certified to the Forest Stewardship Council® (FSC®) The W. R. Berkley Corporation 2015 Annual Report editorial sections are printed on recycled paper made from fiber sourced from well-managed forests and other controlled wood sources and is independently certified to the Forest Stewardship Council® (FSC®) standards. © Copyright 2016 W. R. Berkley Corporation. All rights reserved. © Copyright 2016 W. R. Berkley Corporation. All rights reserved. 80793in_cvr.indd 4-139 80793in_cvr.indd 4-139 4/8/16 12:25 PM 4/8/16 12:25 PM W. R. Berkley Corporation 2015 Annual Report Always do right. This will gratify some people and astonish the rest. Mark Twain On the Cover: Norfolk & Western: “The Pocahontas” Alderson MaGee W. R. Berkley Corporation 475 Steamboat Road Greenwich, CT 06830 203.629.3000 www.wrberkley.com @WRBerkleyCorp © Copyright 2016 W. R. Berkley Corporation. All rights reserved. W . R . B e r k l e y C o r p o r a t i o n 2 0 1 5 A n n u a l R e p o r t 80793in_cvr.indd 1-3 4/8/16 12:25 PM 

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